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ANNUAL
REPORT
of the Secretary of the Treasury
on the State of the Finances
F m THE FISCAL YEMK EmED MME 30, W B
ANNUAL
REPORT
of tbe Seeretary cif the Treasury
on the State of the FinanGes
r..
FOR THE HSCAL YEAR ENDED JUNE 30, 1973
V
DEPARTMENT OF THE TREASURY
D O C U M E N T N O . 3260
Secretary
U.S. GOVERNMENT PRINTING OFFICE, WASHINGTON : 1973
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402 - Price $3.80 (paper)
Stock Number 4804-00681
fir
/D
/f73'
DEPARTMENT OF THE TREASURY,
Washington, October 26,1973,
SIRS:
I have the honor to transmit herewith the annual report on the state
of the finances of the United States Government for the fiscal year
encled June 30, 1973. This submission is in accordance with 31 U.S.C.
1027.
GEORGE P. SHULTZ,
Secretary of the ITreasury,
T O THE PRESIDENT OF THE SENATE, PRO TEMPORE.
To THE SPEAKER OF THE HOUSE OF REPRESENTATIVES.
The statistical tables to this Annual Report will be published in a
separate S T A T I S T I C A L A P P E N D I X .
CONTENTS
Page
Introduction
xix
REVIEW OF TREASURY OPERATIONS
Financial Operations
Summary
Receipts
Outlays
Cash and monetary assets
Corporations and other business-type activities of the Federal Government
„__
Government-wide financial management
Domestic Economic Policy
Federal Debt Management
Enforcement, Tariff and Trade Affairs, and Operations
Taxation Developments
International Financial Affairs
3
3
4
5
6
7
8
9
11
24
33
14
ADMINISTRATIVE REPORTS
Administrative Management
Alcohol, Tobacco and Firearms, Bureau of
Comptroller of the Currency, Office of the
Consolidated Federal Law Enforcement Training Center
Director of Practice, Office of
Domestic Gold and Silver Operations, Office of
Engraving and Printing, Bureau of
Equal Opportunity Program, Office 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
Mint, Bureau of the
Revenue Sharing, Office of
United States Customs Service
United States Savings Bonds Division
United States Secret Service
71
78
88
93
96
97
99
104
108
115
118
125
127
139
144
145
157
163
;.
EXHIBITS
Public Debt Operations, Regulations, and Legislation
1. Treasury notes
2. Treasury bonds
3. Treasury biUs_-
175
182
189
REGULATIONS
4. Department Circular No. 653, December 12, 1969, Eighth Revision,
Supplement No. 3, offering of United States savings bonds. Series E...
5. Department Circular No. 905, December 12, 1969, Fifth Revision,
Supplement No. 2, offering of United States savings bonds, Series H._
V
196
202
VI
CONTENTS
6. Department Circular, Public Debt Series No. 3-67, June 19, 1968, Page
Revised, Supplement No. 2, offering of United States savings notes___
204
7. Department Circular, Public Debt Series No. 3-72, November 21, 1972,
Revised, regulations governing United States Treasury certificates of
indebtedness—State and local government series, United States
Treasury notes^State and local government series, and United
States Treasury bonds—^State and local government series
^
204:
: 8. Department Circular, Pubhc Debt Series No. 3-72, November 21, 1972,
Revised, Amendment No. 1, regulations governing United States
Treasury certificates of indebtedness—State and local government
series, TJnited States Treasury notes—State and local government
series. United States Treasury bonds-^State and local government
series
207
9. Department Circular No. 653, December 12, 1969, Eighth Revision,
Supplement No. 4, offering of United States savings bonds. Series £l- _ 208
10. Department Circular No. 300, March 9, 1973, Fourth Revision, general
regulations with respect to United States securities
214
11. Department Circular No. 853, April 11, 1973, Second Revision, restrictive endorsements of United States bearer securities __-__
.
246
12. Department Circular No. 905, December 12, 1969, Fifth Revision,
Supplement No. 3, offering of United States savings bonds, Series Hl_
249
LEGISLATION
13. An act to provide for a 4-month extension of the present temporary
level in the public debt limitation
.
14. An act to provide for a temporary increase in the public debt limit__ __ _
Economic and Financial Policy
15. Statement by Secretary Shultz, July 25, 1972, before the Joint Economic Committee
16. Excerpts from address by General Counsel Pierce, October 12, 1972,
before the 45th annual convention of the National Bankers Association Convention, Houston, Tex., on the minority bank deposit
program_
.
17. Remarks of Assistant Secretary Fiedler, November 15, 1972, before
the National Economists Club Seminar, Washington, D.C, on ''The
ImppuCt of Controls"
•..
:
18. Remarks of Assistant Secretary Fiedler, November 30, 1972, before
the National Association of Regulatory Utility Commissioners, New
Orleans, La., on ''Economic Directions for Regulated Industry" _ . 1 . .
19. Excerpt from remarks by General Counsel Pierce, March 22,. 1973, at
the New Orleans Cost of Living Council Regional Conference on
Phase III, New Orleans, La_
____:_
20. Article by Assistant Secretary Fiedler, printed in The Wall Street
Journal, April 19, 1973, entitled "The Case Against Rigid Controls" _
21. Excerpts from remarks by Assistant Secretary Fiedler, April 25, 1973,
before the Tri-State Conference conducted by the Cost of Living
Council, St. Louis, Mo
__•__'
22. Statement by Deputy Under Secretary Bennett, May 2, 1973, before
the Subcommittee on Production and Stabilization of the Senate
Banking, Housing, and Urban Affairs Committee
..
23. A description of the depositary system of the U.S. Government,
June 1973
24. Other Treasury testimony published in hearings before congressional
committees, July 1, 1972-June 30, 1973__,
.
Energy Policy
25. Statement by Deputy Secretary Simon, April 18, 1973, on the oil
import program
26. Statement by Deputy Secretary Simon, May 10, 1973, befpre the
Senate.Banking, Housing, and Urban Affairs Committee on possible
shortages of gasoline and other petroleum products _
250
250
,
'251
•
253
-258
266
'
272
275
277
•
278
282
285
285
292
CONTENTS
VII
Federal Debt Management
27. Statement by Secretary Shultz, October 11, 1972, before the. Senate
Finance Committee on the public debt limit
.....
28. Statement by Under Secretary for Mpnetary Affairs Volcker, March 1,
1973, before the House Ways and Means Committee on the proposed Federal financing bank
...
29. Statement by Secretary Shultz, June 4, 1973, before the House Ways
and Means Committee on the public debt limit
30. Other Treasury testimony in hearings before congressional committees _
Law Enforcement Developments
31. Statement by Assistant Secretary Rossides, September 6, 1972,
before the New York County Lawyers Association, New York,:
on the administration's antinarcotics program
: :__
32. Remarks of Assistant Secretary Rossides, September 13, 1972, before
the Federal Bar Association and other sponsors of the Symposium
on International Trade, Washington, D . C , on "Antidumping and
Countervailing Duty Laws: Instruments for Freer Trade, and the
Development of a Doctrine of Fairness in International Trade" . . . . .
33. Excerpt from remarks by Assistant Secretary Rossides, September
24, 1972, before the National Officer Installation Dinner of Bnai
Zion, New York, N.Y
34. Excerpts from remarks of Assistant Secretary Rossides, October 17,
1972, before the 79th annual conference bf the International
Association of Chiefs of Police, Inc., Salt Lake City, Utah_ _ _ _.
;,
35. Press release, November 17, 1972, announcing exemptions and interpretations relating to the regulations issued under Public Law 9 1 508, the Currency and Foreign Transactions Reporting Act.
36.. Amendments, effective January 17, 1973, to the regulations on
financial recordkeeping and reporting of currency and foreign
transactions
L
-i
^i-37. Excerpt from remarks by Assistant Secretary Morgan, May 21, 1973,
before the Los Angeles Air Cargo Association, Los Angeles,.Calif.,
on "International Trade in the Years Ahead"_^
.......-.,.!
38.
39.
40.
41.
42.
43.
44.
45.
46.
Taxation Developments
Statement by Under Secretary Cohen, July 21, 1972, before the Joint
Economic Committee.Statement by Secretary Shultz, August 14, 1972, before the House
Ways and Means Committee on title II of H.R. 16141, allowing a
tax credit for parents of students in nonpublic elementary and
secondary schools
;
_Remarks of General Counsel Pierce, Diecember 1, 1972, before the
13th Southwestern Ohio Tax Institute Seminar, Cincinnatij Ohio,
on tax shelters
^
-_.____
Statement by Under Secretary for Monetary Atfairs Volcker, January 30, 1973, before the House Ways and Means Committee on the
extension of the interest equalization tax
....
Statement by Under Secretary for Monetary Affairs Volcker, March 7,
1973, before the Senate Committee on Finance on the extension of the
interest equahzation tax
Statement by Secretary Shultz, April 30, 1973, before the House Ways
and Means Committee on the administration's tax proposals
Statement by Assistant Secretary Hickman, May 10, 1973, before the
House Ways and Means Committee
..
Remarks by Deputy Secretary Simon, May 19, 1973, before the Section of Taxation,. American Bar Association, Washington, D.C, on
tax reform
Statement of Deputy Assistant Secretary Hall, June 13, 1973, before
the General Subcommittee on Labor of the House Committee on
Education and.Labor, on proposals for a Government-sponsored
system of insuring pension plan benefits against, losses on plan
termination. _ _ _ _;
__
.
Page
300
306
309
314
314
318
322
325
327
33 2
336
338
353
354
357
360
366
380
386
391
vni
CONTENTS
International Financial and Monetary Developments
47. Address by President Nixon, September 25, 1972, at the joint annual
meetings of the Boards of Governors of the International Monetary
Fund and the International Bank for Reconstruction and Development and its affiliates
48. Statement by Secretary Shultz as Governor for the United States, September 26, 1972, at the joint annual meetings of the Boards of Governors of the International Monetary Fund and the International
Bank for Reconstruction and Development and its affiliates
49. Statement by Secretary Shultz, December 21, 1972, on meat import
policy for 1973
50. Excerpt from statement by Secretary Shultz, February 7, 1973, before
the Joint Economic Committee
51. Statement by Secretary Shultz, February 12, 1973, on foreign economic
policy
^
'52. Letter of transmittal from Secretary Shultz to the Speaker of the
House, February 19, 1973, proposing legislation to devalue the
dollar by 10 percent by amending the Par Value Modification Act
of 1972. (A similar letter was transmitted to the President of the
Senate.)
.
53. Background material on proposed modification of par value of the
dollar
54. Statement by Secretary Shultz as Governor for the United States,
May 8, 1973, at the I4th annual meeting of the Board of Governors
of the Inter-American Development Bank, Kingston, Jamaica
55. Statement by Secretary Shultz, May 9, 1973, before the House Ways
and Means Committee
56. Statement by Secretary Shultz, June 6, 1973, at the American Bankers
Association International Monetary Conference, Paris, France
57. Statement by Secretary Shultz, June 6, 1973, at the annual meeting
of the Council at Ministerial Level of the Organization for Economic
Cooperation and Development, Paris, France
58. Statement by Under Secretary for Monetary Affairs Volcker, September 11, 1972, before the Subcommittee on International Exchange
and Payments of the Joint Economic Committee
59. Remarks of Under Secretary for Monetary Affairs Volcker, October 27, 1972, at the annual meeting of the Minnesota Economic
Association at the College of St. Thomas, St. Paul, Minn., on
"International Monetary Reform: A Discussion of the Recent
U.S. Proposals"
60. Remarks of Under Secretary for Monetary Affairs Volcker, November 13, 1972, at the International Finance and Monetary Reform
Session of the 59th National Foreigii Trade Convention sponsored
by the National Foreign Trade Council, Inc. at the Waldorf-Astoria Hotel, New York, N.Y
61. Statement by Under Secretary for Monetary Affairs Volcker, February 27, 1973j before the Senate Banking, Housing, and Urban
Affairs Committee
.
L
62. Statement by Under Secretary for Monetary Affairs Volcker, February 28, 1973, before the House Foreign Affairs Committee
on recent international monetary developments and their foreign
policy implications
63. Statement by Under Secretary for Monetary Affairs Volcker, March 6,
1973, before the Subcommittee on International Finance of the
House Banking and Currency Committee
64. Statement by Under Secretary for Monetary Affairs Volcker, March 19,
1973, before the Senate Committee on Appropriations
65. Statement by Under Secretary for Monetary Affairs Volcker, March 21,
1973, before the Subcommittee on International Finance of the
House Banking and Currency Committee
66. Statement by Under Secretary for Monetary Affairs Volcker as
Temporary Alternate Governor for; the United States, April 26,
1973, before the sixth annual meeting of the Board of Governors
of the Asian Development Bank, Manila, Philippines
Page
397
400
404
405
406
409
414
437
440.
445
449
454
456
461
465
470
472
474
478
481
CONTENfTS
IX
67. Statement by Under Secretary for Monetary Affairs Volcker, May 11,
1973, before the Foreign Operations Subcommittee of the Senate
Appropriations Committee on fiscal year 1974 appropriations for Page
international financial institutions
485
68. Resume of remarks by Under Secretary for Monetary Affairs Volcker,
June 7, 1973, at a session on "Issues of International Monetary
Reform" at the 1973 International Monetary Conference of the
American Bankers Association, Paris, France
489
69. Statement by Under Secretary for Monetary Affairs Volcker, June 26,
1973, before the Subcommittee on International Economics of the
Joint Economic Committee
492
70. Statement by Deputy Under Secretary Bennett, June 5, 1973, before
the Subcommittee on International Finance and Resources, Senate
Committee on Finance
496
71. Statement by Assistant Secretary Hennessy, September 21, 1972,
before the Latin American Subcommittee of the House Foreign
Affairs Committee
_ 502
72. Statement of Assistant Secretary Hennessy, October 10, 1972, before
the Foreign Operations and Government Information Subcommittee
of the House Committee on Government Operations
505
73. Statement by Assistant Secretary Hennessy, March 1, 1973, before
the Foreign Operations and Government Information Subcommittee
of the House Committee on Government Operations
507
74. Statement by Assistant Secretary Hennessy, March 28, 1973, before
the Subcommittee on Multinational Corporations of the Senate
Foreign Relations Committee
510
75. Statement by Assistant Secretary Hennessy, April 5, 1973, before
the Foreign Operations Subcommittee of the House Appropriations
Committee
..
512
76. Remarks by Assistant Secretary Hennessy, May 15, 1973, before the
Propeller Club of Port of Charleston, Charleston, S.C
517
77. Communique of the Ministerial Meeting of the Committee of Twenty,
March 26-27, 1973, Washington, D.C
521
78. Press release, April 25, 1973, announcing joint letter from Secretary of
the Treasury Shultz and Secretary of Commerce Dent to presidents
of firms in the United States which file regular statistical reports to
one or both Departments
522
79. U.S. paper entitled "Quantitative Indicators from the Point of View
of the Overall Operation of the System" made available to the
Deputies of the Committee of Twenty at their meeting in Washington, D . C , in May 1973
524
80. Remarks by General Counsel Pierce, September 28, 1972, at the
sixth annual meeting of the International Centre for Settlement of
Investment Disputes, Washington, D.C
527
Organization and Procedure
81. Secretaries, Deputy Secretary, Under Secretaries, General Counsels,
Assistant Secretaries and Deputy Under Secretaries for Monetary
Affairs serving in the Treasury Department from September 11,
1789, to January 20, 1973, and the Presidents under whom they
served
82. Treasury Department orders relating to organization and procedure __
528
538
Advisory Committees
83. Advisory committees utilized by the Department of the Treasury
545
INDEX
563
-
STATISTICAL APPENDIX
The tables io this Annual Report will be published in the separate Statistical
Appendix.
NOTE.—Details of figures may not add to totals because of rounding.
Secretary, Deputy Secretary, Under Secretaries, General Counsels, Assistant
Secretaries and Deputy Under Secretary for Monetary Affairs, serving in the
Department of the Treasury from January 21, 1973, through June 30, 1973 ^
Term of service
From
Officials
To
June 12, 1972
___^
Jan. 22,1973
Jan. 27, 1969
June 12, 1972
July
June
Apr.
Dec.
June
Aug.
Jan.
Mar. 17, 1973
1, 1970 June
2, 1973
1, 1969
12,1971
12, 1972
18, 1972
22,1973
Sept. 23, 1971
June 15, 1962
1, 1973
Jan. 21, 1973
.__
_
^
Apr. 11,1972
Secretary of the Treasury:
George P. Shultz, New York.
Deputy Secretary:
WilUam E. Simon, New Jersey.
Under Secretary for Monetary Affairs:
Paul A. Volcker, New Jersey.
Under Secretary (Counselor):
Edwin S. Cohen, Virginia.
General Counsels:
Samuel R. Pierce, Jr., New York.
Edward C Schmults, New York.
Assistant Secretaries:
Eugene T. Rossides, New York.
Edgar R. Fiedler, Maryland.
John M. Hennessy, Massachusetts.
Frederic W. Hickman, Illinois.
Edward L. Morgan, Arizona.
Deputy Under Secretary for Monetary Affairs:
Jack F. Bennett, Connecticut.
Fiscal Assistant Secretary:
John K. Carlock, Arizona.
Assistant Secretary for Administration:
Warren F. Brecht, Michigan.
' For officials from September 11, 1789, to January 20,1973, see exhibit 81.
PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS OF THE
DEPARTMENT OF THE TREASURY AS OF JUNE 30, 1973
Secretary of the Treasury
Deputy Secretary of the Treasury
Under Secretary for Monetary Affairs
Under Secretary
General Counsel
Office, Secretary of the Treasury:
Executive Assistant to the Secretary
Director, Executive Secretariat
_
Confidential Assistant to the Secretary
Office, Deputy Secretary of the Treasury:
Executive Assistant to the Deputy Secretary
Special Assistant to the Deputy Secretary
.__
Special Assistant to the Deputy Secretary
Deputy Under Secretary
Energy Advisor to the Deputy Secretary
Director, Office of Revenue Sharing
Office, General Counsel:
Deputy General Counsel
Assistant General Counsel and Chief Counsel,
IRS
:
Assistant General Counsel
.
Assistant General Counsel
,
Assistant General Counsel
Assistant General Counsel
Special Assistant to the General Counsel
Director of Practice
Director, Office of Equal Opportunity Program.
Assistant Secretary (Tax Policy)
:
.
Deputy Assistant Secretary (Tax Legislation)
Deputy Assistant Secretary (Tax Analysis) and
Director, Office of Tax Analysis
Associate Director, Offi'ce of Tax Analysis
Deputy to the Assistant Secretary (International
Tax Policy)
.
Tax Legislative Counsel
Deputy Tax Legislative Counsel
Associate Tax Legislative Counsel____
International Tax Counsel
'.
Deputy International Tax Counsel.
XII
George P. Shultz
William E. Simon
Paul A. Volcker
(Vacancy)
Edward C. Schmults
Ronald B. Brooks
Gina Price (acting)
Barbara M. Otis
Gerald L. Parsky
Wm. Howard Beasley
III
R. David Ranson
James E. Smith
William A. Johnson
Graham W. Watt
Donald L. E. Ritger
(acting)
Lawrence B. Gibbs
(acting)
Charlotte Tuttle
Lloyd
Michael Bradfield
Hugo A. Ranta
Donald L. B. Ritger
Elting Arnold
Leslie S. Shapiro
David A. Sawyer
Frederic W. Hickman
John H. Hall
Martin J. Bailey
Emil M. Sunley, Jr.
(acting)
Nathan N. Gordon
Ernest S. Christian,
Jr.
(Vacancy)
Dale S. Collinson
(acting)
Robert J. Patrick, Jr.
(Vacancy)
PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS
Assistant Secretary (Enforcement, Tariff and Trade
Affairs, and Operations)
Deputy Assistant Secretary
Director, Office of Operations
Deputy Assistant Secretary (Enforcement) and
Director, Office of Law Enforcement—
^_
Chief Interpol (National Central Bureau)—
Deputy to the Assistant Secretary (Tariff and Trade
Affairs) and Director, Office of Tariff and Trade
Affairs
Special Assistant to the Assistant Secretary
(Gustoms Cooperation Council)
Special Assistant to the Secretary
(Secret
Service)
Director, Office of Foreign Assets Control
Assistant Secretary for Administration
_
Deputy Assistant Secretary and Director, Office of
Management and Organization
Deputy to the Assistant Secretary
Director, Office of Administrative Programs
Director, Office of Audit
Director, Office of Budget and Finance
Director, Office of Personnel
Director, Office of Automatic Data Processing Management and Operations
XIII
Edward L. Morgan
James B. Clawson
William F. Hausman
Brent F. Moody
Kenneth S. Giannoules
Matthew J. Marks
Robert V. Mclntyre
Kenneth E. Balge
Stanley L. Sommerfield (acting)
Warren F. Brecht
J, Elton Greenlee
John C. Gartland
Robert R. Fredlund
Wilbur R. DeZerne
Edward J. Widmayer
(Vacancy)
Bruce R. Riggs
(acting)
Special Assistant to the Secretary (National Security). John L. Hart
Deputy Special Assistant to the Secretary
Gerald W. Nensel
Special Consultant to the Secretary for Public
Affairs
Joseph A. Loftus
Special Assistant to the Secretary (Public Affairs)
(Vacancy)
Deputy Special Assistant to the Secretary
Alan B. Wade
Assistant to the Secretary for Legislative Affairs
William L. Gifford
Deputy Assistant to the Secretary
James H. Hogue
Senior Consultant
Henry C. Wallich
Office, Under Secretary for Monetary Affairs:
Deputy Under Secretary for Monetary Affairs
Jack F. Bennett
Special Assistant to the Secretary (Debt Management)
^
Edward M. Roob
Director, Office of Debt Analysis
Edward P. Snyder
Assistant to the Under Secretary
Oscar M. Mackour
Fiscal Assistant Secretary
John K. Carlock
Deputy Fiscal Assistant Secretary
David Mosso
Assistant Fiscal Assistant Secretary
Sidney Gox
Director, Operations Planning and Research
Lester W. Plumly
Assistant Secretary (International Affairs)
John M. Hennessy
Deputy Assistant Secretary for International Monetary and Investment Affairs
Sam Y. Cross
Deputy Assistant Secretary for Developing Nations
Finance
Richard E. Larsen
Deputy Assistant Secretary for Trade
Howard L. Worthington
Deputy Assistant Secretary for Research and Balance of Payments Analysis
Thomas D. Willett
Deputy to the Assistant Secretary for International
Monetary Affairs
George H. Willis
Inspector General for International Finance
Ralph Hirschtritt
Director, NAC Secretariat
Frederick L. Springborn
XIV
PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS
Assistant Secretary (Economic Policy)
'-—
Deputy to the Assistant Secretary
_:
.L_.
Director, Office of Domestic Gold and Silver Operations
:
Director, Office of Financial Analysis
.-.-
Edgar R. Fiedler
Jay N. Woodworth
Thomas W. Wolfe
John H. Auten
BUREAU OF ACCOUNTS
Commissioner
-.
!._- David Mosso
Comptroller
'.
L— Steve L. Comings
Chief Disbursing Officer
-.
_.H James C. Abbott
Director, Division of Government Financial Operations. Gerald Murphy
Director, Division of Cash Management
.
1
Sebastian Fama
BUREAU OF ALCOHOL, TOBACCO AND F I R E A R M S
Director
Deputy Director
Assistant Director (Administration)
Assistant Director (Criminal Enforcement)
.,._
...
i..
Assistant Director (Inspections)
1..
Assistant Director (Regulatory Enforcement).
_._
Assistant Director (Technical and Scientific Services)..
CMef Counsel
^...
^.-.
Rex D. Davis
John L. West
William J. Rhodes
William N. Griffin
(acting)
William R. Thompson
Lawrence Carlson
A. Atley Peterson
Matthew J. Werneth
BUREAU OF ENGRAVING AND P R I N T I N G
Director
.
Deputy Director
;
.
^._
±
James A. Conlon
Donald C. Tolson
Director
.
Deputy Director
Assistant Director (Administration)
...
...
.
Assistant Director (Public Services)
Assistant Director (Production)
Assistant Director (Technology)
...
^
1__
Mrs. Mary T. Brooks
Frank H. MacDonald
Francis B. Frere
(acting)
Roy C. Gaboon
George G. Ambrose
Alan J. Goldman
BUREAU OF T H E M I N T
.
BUREAU OF T H E P U B L I C DEBT
Commissioner
Deputy Commissioner
Assistant Commissioner
Chief Counsel
.
.
.
...
.
4.-
H. J. Hintgen
J. J. Lubeley
M. E. McGeoghegan
Thomas J. Winston,
Jr.
CONSOLIDATED FEDERAL L A W E N F O R C E M E N T T R A I N I N G
Director
Deputy Director
.
:
.
4..
^_.
CENTER
William B. Butler
Robert G. Efteland
I N T E R N A L REVENUE SERVICE;
Commissioner
.
Deputy Commissioner
Assistant Commissioner (Administration)
:__
...
[..
Assistant Commissioner (Inspection)
Assistant Commissioner (Compliance)
:
Assistant Commissioner (Accounts, Collection,
Taxpayer Service)
•.
.
Assistant Commissioner (Stabilization)
Assistant Commissioner (Planning and Research)
...
i..
and
. . . Dean J. Barron
:
Edward F. Preston
•.— Lancelot W. Armstrong (acting)
i— Peter P. Weidenbruch,
Jr.
.— Lawrence B. Gibbs
(acting)
Assistant Commissioner (Technical)
Chief Counsel
Donald C. Alexander
Raymond F. Harless
Joseph T. Davis
(acting)
Francis I. Geibel
John F. Planlon
PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS
XV
OFFICE OF T H E COMPTROLLER OF T H E CURRENCY
Comptroller of the Currency
First Deputy Comptroller
Deputy Comptroller
Deputy Comptroller
.___.
Deputy Comptroller;
:
Deputy Gomptroller (Economics)
Chief National Bank Examiner
:
Deputy Comptroller (Mergers and Branches)
Deputy Comptroller (Trusts)
Deputy Oomptroller (FDIO Affairs)
Deputy Comptroller (International Division)
Chief Counsel
'.
Justin T. Watson
(acting)
Justin T. Watson
W. A. Howland, Jr.
Thomas G. DeShazo
John D. Gwin
.— David C. Motter
Kenneth W. Leaf
R. J. Blanchard
.— Dean E. Miller
Albert J. Faulstich
Robert A. Mullin
Robert Bloom
OFFICE OF T H E TREASURER OF T H E U N I T E D
Treasurer of the United States
Mrs. Romana Acosta
Banuelos
Dario A. Pagliai (acting)
Deputy Treasurer
U N I T E D STATES C U S T O M S
STATES
SERVICE
Commissioner of Customs
Deputy Commissioner of Customs
Assistant Commissioner, Office of Administration
Assistant Oommissioner, Office of Investigations
Assistant Commissioner, Office of Operations
Assistant Commissioner, Office of Regulation and
Rulings
Assistant Commissioner, Office of Security and Audit
Chief Counsel
Vernon D. Acree
Edwin F . Rains
John A. Hurley
Harold F. Smith
Glenn R. Dickerson
Leonard Lehman
William A. Magee, Jr.
Saul Slomiak
U N I T E D STATES SAVINGS BONDS DIVISION
National Director
Deputy National Director
Director of Sales
Director of Advertising and Promotion
_ . Jesse L. Adams, Jr.
(acting)
Jesse L. Adams, Jr.
Walter P. Johnson
.
Edmund J. Linehan
UNITED STATES SECRET SERVICE
Director
Deputy Director
Assistant Director
Assistant Director
Assistant Director
Assistant Director
Assistant Director
(Administration)
(Inspection)
(Investigations)
(Protective Forces)
(Protective Intelligence)
James J. Rowley
Lilburn E. Boggs
H. Stuart Knight
Jackson N. Krill
Burrill A. Peterson
Clinton J. Hill
Thomas J. Kelley
ORGANIZATION OF THE DEPARTIVIENT OF THE TREASURY
DEPUTY
SECRETARY
Assistants to the Deputy Secretaiy
UNDER SECRETARY
MONETARY AFFAIRS
UNDER SECRETARY
GENERAL COUNSEL
Deputy Under S e c r e t a r y
Deputy Under Secretaty
legal Division
OHice of Energy Advisoi
Special
Oiiice ol Equal Opportunity
Legislative
Assistant
Secretary
Management)
Oflice ol Debt Analysis
e ol Revenue Shaiing
Assistant Secretary
(Enloicement. Taiill and
Tiade Allaits. and Opeialions)
OHice o l Law Enloic ement
oiiice ol Tax Analysis
Secretary
(Debt
Affairs
(Tax Policy)
Assistant
t o ttie
Special Assts. to the Secretary
N a t i o n a l Security
Public A f f a i r s
OHice ol Operations
Assistant
for
Secretary
Fiscal A s s i s t a n t Secretary
Administration
Assistant
Secretary
Assistant Secretary
I Economic Policy)
(Inleinalional Allalis)
OHice oi
Bureau ol Accounts
Administiallve Piogiar
Deputy Assislam Secreiary
oi
Indusliial Naiions Finance
OHice ol Tarili and Tiade
Allaiis
OHice ol
foieignAs
els
Oepuly Assislam Secieiaiy Ioi
Conliol
M
Buieau of the Public Debt
Developmeni Finance
Oepuly Assislam Secretaiy Ioi
OHice o l Budget & Finance
ol Ihe Uniied Slates
Tiade and Investmenl
Buieau ol Customs
Oepuly Assislam Scciciaiy
OHice ol Management &
Research
U.S. Savings Bonds Olvisii
Compliollei o l the Cuiiency
oi
INTRODUCTION
This brief introduction reviews the major eeonomic developments,
both domestic and international, which affected Treasury areas of
interest and responsibility during the course of fiscal 1973. More detailed information on the operating and administrative activities of
the Department of the Treasury is provided in the main text of the report and its supporting exhibits. Further information is contained in a
separate Statistical Appendix.
Domestic Economic Expansion
Fiscal 1973 was a year of strong domestic economic expansion. Impressive gains were scored in production, employment^ and real income.
By the end of the year, more Americans were employed at higher levels
of income than at any time in the past. The Federal budget moved
closer to balance, and ample supplies of private credit were available
throughout the year at relatively stable long-term rates of interest.
Unfortunately, the rate of inflation, which had subsided by the close
of calendar 1972, rose explosively after January 1973, primarily because of rising food prices. As the price upsurge continued in the
spring of 1973, it became increasingly apparent that further policy actions were required to contain inflation. On June 13, President Nixon
announced the reimposition of a temporary price freeze of up to 60
days' duration while a new Phase IV set of controls was being
developed.
In terms of the broadest statistical measure of economic activity—
gross national product at current prices—fiscal 1973 was a year of
very strong expansion. GNP rose by more than 11 percent compared
with about 9 percent in fiscal 1972. Real growth was substantial,
averaging more than 6 percent for the year, about the same as the
1972 pace. On the other hand, price performance was irregular—
relatively good in the first half of the fiscal year, but bad thereafter.
For example, the comprehensive GNP deflator rose at about a 3percent annual rate in the first half of the fiscal year and at more
than a 6i^-percent annual rate in the second half. For the year as a
whole, the GNP price deflator was up 4.8 percent in contrast to 2.8
percent in fiscal 1972. Because special factors were largely responsible for the resurgence of inflation, the continuation of appropriate
fiscal and monetary policies coupled with the new Phase IV program
was expected to lead, in,time, to much better price performance.
XX
1973 REPORT OF THE SECRETARY OF THE TREASURY
During the fisoal year, total employment rose by 2.9 million, the
civilian labor force increased by 2.3 million, and unemployment fell
by nearly 600,000. As a consequence, the unemployment rate averaged
a shade below 5 percent in the closing months of the fiscal year in
contrast to the 5.7-percent rate averaged in the final quarter of fiscal
1972. During the period of approximately 2 years from the initiation of the President's new economic program in August 1971 to the
end of fiscal 1973, more than five million new civilian jobs were
created—the largest such increase in our history.
The strong rise in production and employment during the fiscal
year was associated with sizable gains in real income, despite the inroads made by inflation. Income per person, after taxes and adjustment for inflation, rose on the average by 5 percent between the second
quarters of 1972 and 1973. Wiiile the rise was accentuated by a change
in the pattern of income tax refunds, it basically reflected the underlying strength of the economic expansion. i
It was clear, however, that growth in real output could not be
expected to continue indefinitely at the high rates that were characteristic of much of fiscal 1973. During the fourth quarter of calendar
1972 and the first quarter of calendar 1973, GNP at constant prices
was expanding at an 8-percent annual rate^ and the remaining margins of unutilized capacity were narrowing rapidly. Inevitably the
real growth rate would have to come down iio something closer to the
longrun potential of 4 percent or so.
The question was whether the continued! application of fiscal and
monetary restraint would ac'Meve a "soft landing" or whether a more
abrupt adjustment was in prospect. By the close of the fiscal year,
with real growth continuing at a reduced but substantial rate, and
with most forward indicators of economic at^tivity showing considerable strength, the odds appeared strongly in favor of a gradual
rather than an abrupt adj ustment.
Inflation and the June 13 Measures
By January 1973, the annual rate of increase in consumer prices
had been reduced to the neighborhood of 3 percent. For the entire
period of Phases I and I I (from August 1971 to January 1973), the
rate of inflation had averaged 3.3 percent, down from 6 percent in
1969 and 51/^ percent in 1970. Against this background of fairly
steady progress in reducing the rate of inflation, some modest relaxation of the wage-price control program was a natural step to take.
After an extensive consultation process and a review of experience under Phases I and II, Phase I I I of the stabilization program
was announced on January 11, 1973. The objective was to achieve a
INTRODUCTION
XXI
continuing contribution to the anti-inflation effoit with less danger
of injury to the economy. A major feature of Phase I I I was its
greater reliance on self-administration within the standards set by
the Government. Special programs were maintained for food, health
service, construction, and interest and dividends.
I t had been recognized at an early stage of the planning for Phaise
I I I that the behavior of food prices would be an important factor
determining the success or failure of the program. During 1972, due to
bad harvests around the world, food prices had risen much more
rapidly than other prices, and by the end of the year adverse weather
had begun to affect crop prospects in 1973. Therefore, a number of
important steps were taken in 1972 and 1973 to increase domestic agricultural supplies and hold down food prices. The steps taken included
removal of meat import quotas, release of up to 50 million acres of
farmland for grain production, and sale of Government-owned grain
stocks. While these and related steps would eventually lead to an
increase in agricultural supplies, it was understood that they could
only be expected to yield their results after some lag in time.
Meanwhile, adverse weather conditions combined with rising domestic and foreign demand to drive food prices sharply higher at both
wholesale and retail levels. Between January and June 1973, wholesale
prices of farm products, processed foods, and feeds rose at nearly a
50-percent annual rate. The wholesale prices of consumer foods rose
at about a 25-percent annual rate and retail food prices at a 22-percent
annual rate. I n response, the Consumer Price Index for all items rose
at an 8-percent annual rate between January and June 1973 in contrast
to the 3-percent rates characteristic of immediately preceding months.
The resurgence of inflation was not confined exclusively to food and
raw material prices, although that was the main problem area. I n addition, retail prices of consumer goods, excluding foods, rose at about
a 12-percent annual rate during Phase I I I . Increases on such a scale
were to be expected for a month or two in the normal process of moving
to the self-administered standards of Phase I I I , but the continuation
of rapid increases beyond that point was particularly disturbing since
it suggested that some prices were being raised in anticipation of a
return to a tighter control program. This was, to some degree, a selffulfilling prophecy.
Wage pressures were far from intense at the time. Indeed, the
annual rate of increase in current-dollar earnings of nonf arm production workers averaged close to 6 percent during Phase I I I in contrast
to roughly 7 percent during Phase I I . But the indefinite continuation of high rates of increase in consumer prices would inevitably begin
to undercut the prospects for continued wage restraint.
XXII
19 7 3 REPORT OF T H E .SECRETARY OF T H E
TREASURY
On June 13, 1973, President Nixon announced an immediate freeze
on prices to last for a maximum of 60 da^s. H e pointed out that the
greatest part of the unacceptably high rate of inflation was due to
rising food prices. This, in turn, was "caused in large measure by increased demand at home and abroad, by crop failures abroad, and by
some of the worst weather for crops and livestock here in America
that we have ever experienced."
I t was clearly the case that Phase I I I had been bedeviled by difAcuities which lay beyond the scope of the program, or for that matter,
beyond the scope of the Phase I I program from which it had evolved.
The fact remained that Phase I I I had been a disappointment. I n the
situation that developed by June 1973, a price freeze had the very great
advantage of breaking the inflationary momentum and gaining the
time during which an effective Phase I V program could be developed
and installed. On the other hand, continuation of a freeze for more
than a relatively brief period of time could create problems and distortions of its own. By the close of fiscal 1973, planning for Phase I V
was well underway.
Budget and Fiscal Developments
There was a significant shift toward fiscal restraint during 1973 and
progressive improvement in the Federal budgetary position. I n the
January 1973 budget message. President Nixon presented a detailed
plan for expenditure reductions and program terminations which
would hold fiscal 1973 Federal spending to $250 billion and fiscal 1974
spending to $269 billion. As a result, it was estimated that the fullernployment budget on the unified basis would be in deficit by only
$2.3 biliiQn in fiscal 1973 and in approximate balance in fiscal 1974.
Actual, budget deficits were projected to be'$24.8 billion in fiscal 1973
and $12.7 billion in fiscal 1974.
;
Late in the fiscal year, anticipated tax receipts, were running appreciably above the January estimates. Accordingly, the 1973 deficit
was reestimated at $17.8 billion and the 1974 deficit at $2.7 billion,
with the clear possibility that the 1974 budget might be in balance.
The actual budget deficit in fiscal 1973 turned out t o b e $14.3 billion
and there was a small surplus on the full-employment basis.
There was still a need for close restraint over Federal expenditures
despite the improving budgetary situation. P a r t of the rise in receipts
simply reflected the excessive pace of inflation in the economy. The
fiscal restraint being applied was essential if additional inflation were
to be avoided. Monetary restraint had also been applied during the
fiscal year and there were signs.that the economic expansion, while
still rapid, was beginning to slow down to a safer and more sustain-
INTRODUCTION
XXIII
able pace. From all indications, however, a combination of fiscal and
monetary restraint would be necessary into fiscal 1974.
Domestic Finances
A large volume of funds—some $190 billion—was raised in private
money and capital markets during the fiscal year. Credit demands were
concentrated in the short-term area and there was a marked rise in
short-term interest rates—normal for a period of cyclical.expansion.
I n the long-term area, there was a large increase in mortgage credit,
reflecting the housing boom, but corporations and State and local governments borrowed at a reduced pace. Long-term interest rates remained relatively stable despite rising short-term rates.
Federal Reserve policy moved in a restraining direction during the
course of the year. The money supply (currency and demand deposits)
rose by about 71^ percent, and there was a sizable expansion of banl^
credit. However, by the end of the fiscal year, money market rates were
well above the levels of a year earlier, the Federal Reserve had taken
a number of restraining actions, and somewhat slower growth of the
monetary aggregates seemed a likely prospect.
Federal financing requirements during the fiscal year were reduced
by the improving budgetary situation. Total borrowing from the
public totaled $19.3 billion for the fiscal year, down slightly from $19.4
billion in fiscal 1972. More than $17 billion of this borrowing took
place in the first half of fiscal 1973. After that point, the rise in tax
receipts, both seasonal and because of economic expansion, reduced
the Treasury's need to borrow despite large income tax refunds due
to overwithholding in the previous year. The reduced Treasury demands on the market were largely offset by the increased credit needs
of Government-sponsored enterprises and Government-guaranteed
borrowers.
Borrowing from the public includes sales of public debt to foreigii
as well as domestic purchasers. I n recent years, foreign monetary authorities have acquired dollars, on balance, in their foreign exchange
operations and have, in turn, invested in U.S. Treasury securities. In
both fiscal years 1971 and 1972, this borrowing from abroad was so
sizable that domestic private holdings of public debt actually declined
despite sizable budget deficits. During fiscal 1973, borrowing from
abroad was again important but did not reach the 1971-72 scale, and
net borrowing from the domestic public increased as would normally
be expected with a budget deficit.
Treasury debt management operations, which include large refunding operations as well as any net borrowing requirements, proceeded
routinely during the fiscal year. The bulk of the market financing was
XXIV
19 73 REPORT OF THE SECRETARY ; OF THE TREASURY
done at short and medium term, but significant use was made of the
authority granted by the Congress to issue up to $10 billion of bonds
with interest coupons in excess of 4 ^ percent. I n August 1972, a $2.4
billion, 12-year bond issue was sold at par with a 6%-percent coupon.
I n January and May 1973, 20- and 25-year feonds were sold by use of
the uniform-price technique whereby all accepted bids are awarded
at the lowest accepted price. The total amount raised in these two
auctions was $1.3 billion, not a particularly large sum by Federal
financing standards.
At the close of fiscal 1973, the total interest-bearing public debt
amounted to $456.4 billion, an increase of $31.0 billion during the year.
The computed annual interest rate at the clbse of the year was 5.872
percent, up from 5.093 percent at the end of fiscal 1972. The average
length of the privately held marketable interest-bearing public debt
shortened to 3 years 1 month from 3 years 3 months at the close of
fiscal 1972.
'
Proposals for T a x Change
On April 30, 1973, Secretary Shultz presented to the House Committee on Ways and Means a further set of tax change recommendations building on the work accomplished by the legislation of 1969 and
1971. The Secretary's statenient ^ to the committee expressed three
basic goals toward which the recommendations were directed:
Tax equity. The need for a system which most of the public
accepts as fair.
Simplification, Further streamlining of the inordinately complicated provisions of tax law that affect large numbers of individual taxp>ayers.
Economic growth, Preservatioii of certain features of the tax
law which stimulate economic growth.
i
The proposals include:
Measures to remove the spectacle of high-income individuals who
pay little or no tax by parlaying tax deductions and exclusions or
by using tax preferences to "shelter" their regular income from tax.
A new, more comprehensible tax returnl"form 1040-S" designed
for the average taxpayer who cannot use the "short" form 1040-A,
possibly because he owns his own home and itemizes his deductions.
An investment credit for exploratory oil and gas drilling to help
meet the national energy needs.
'
A refundable property tax credit to provide major tax relief for
elderly homeowners.
1 See exhibit 43.
INTRODUCTION
XXV
A refundable income tax credit for nonpublic elementary and
secondary school tuition to help preserve the vital nonpublic school
system.
An interest subsidy on State and local authority bonds on which
the issuer has elected to pay federally taxable interest, to enable
State and local governments to compete for funds more effectively
when market interest rates are high.
Amendments in law to tax U.S. shareholders on the earnings
(prior to repatriation) from new investments in countries which
offer "holidays" from local taxes or other inducements to attract
investment.
Reform of Financial Institutions
Events during the latter part of the 1960's showed that U.S. financial markets are ill-equipped to deal with periods of credit restraint.
As interest rates rose, thrift institutions faced a severe liquidity crisis
and a profit squeeze which threatened both the solvency of the institutions and the availability of funds for housing.
Attempts to alleviate the crisis by regulation (mainly the imposition
of ceilings on the amounts financial institutions could pay for funds)
limited competition for funds among institutions but failed to keep
funds flowing into the institutions at previous levels. Interest ceilings
adversely affected the public directly and indirectly. I n their role
as savers, for whom the thrift institution was a major place at which
to save, consumers were denied a market rate of return on their mpney.
Moreover, financial institutions reduced in a disproportionate manner
the availability of fimds to consumers and small business firms.
Less direct, but equally costly to the public, deposit interest ceilings,
which caused a reduction in deposits at thrift institutions, contributed
to severe setbacks in efforts to meet our housing objectives, and helped
make the Federal Reserve's attempt to combat inflation with monetary
policy needlessly costly and complicated.
On August 2, 1973, the President presented to the Congress legislative proposals that had been developed during fiscal 1973 by a Treasury-led team of administration officials. The proposals were designed
essentially to correct these defects in U.S. financial markets. As the
Treasury report^ pointed out, current efforts to fight inflation and
preserve the value of the dollar a t home and abroad require strong
financial institutions. Without them, there is every reason to believe
that the burdens of credit restraint will be even greater than before.
Under the administration's reform plans, financial institutions are
to be strengthened by eliminating regulation Q after a 5-year period.
a Recommendations for Change in the U.S. Financial System, Department of the Treasury,
August 3,1973, from which these paragraphs are adapted.
XXVI
19 73 REPORT OF THE SECRETARY OF THE TREASURY
permitting all federally chartered banks and thrift institutions to
offer a full range of checking and savings accounts, and permitting
federally chartered. thrift institutions to offer consumer and real
estate related loans in competition with banks. Housing finance will
be further strengthened by the elimination of Federal Plousing Administration and Veterans Administration interest ceilings and b}^ a
tax credit to all taxpayers investing in residential mortgages which
will make possible greater participation by commercial banks in the
mortgage market.
.The dual banking system will be preserved and strengthened. Federal Reserve requirements on checking accounts will apply only to
members of the Federal Reserve and Federal Home Loan Bank Systems. Federal charters will be available for stock thrift institutions
and for savings banks. Credit unions are to be strengthened by broadened asset and liability powers and by access to a new source of
liquidity administered by the National Credit Union Administration.
Revenue S h a r i n g
The State and Local Fiscal Assistance Act (Public Law 92-512),
establishing general revenue sharing, was signed into law by President Nixon on October 20, 1972. Within 2 months, a very small staff
had assembled data, prepared the necessary computer programs, and
allocated more than $2 billion to approximately 38,000 States, counties,
cities, towns, townships, Indian tribes, and Alaskan native villages.
By the end of the fiscal year, $6.6 billion had been distributed, data
collection and verification processes developed, and a recipient liaison
program begun. A competent staff of about 40 professional and clerical
personnel is administering general revenue sharing.
E n e r g y Policy
Executive Order No. 11703 of February 7, 1973, designated the
Deputy Secretary of the Treasury as the Chairman of the Oil Policy
Committee. To support the Deputy Secretary in this capacity, the
Secretary created the Office of the Energy Advisor. The Office is
headed by an Energy Advisor who reports directly to the Deputy
Secretary.
Following the appointment of Deputy Secretary Simon as Chairman of the Oil Policy Comniittee, inajor changes in U.S. oil policy
were initiated. One major policy change involved a complete revision
of the mandatory oil import prograni, which had remained substantial!}'^ unchanged for 13 years."^ This action followed an intensive
study of the Nation's oil import policies relative to current domestic
3 See exhibit 25.
INTRODUCTION
XXVH
supplies of crude oil and petroleum refinery capacity, and the national
security interest of the Nation. The study, conducted by an interagency
task force under the direction of the Chairman of the Oil Policy
Committee, found that the mandatory oil import prograni no longer
provided the proper climate to support a vigorous domestic petroleum'
industry. I t found that the program was neither adequate to alleviate'
the threat of near-term crude oil and product shortages, nor adequate
to provide longer term incentives for increased investment in domestic
exploration and production, and new refinery construction and
expansion.
Beginning May 1,1973, all volumetric controls on oil imports were
terniinated and a license fee systeni was instituted in place of existing
duties on crude oil and refinery products. I n order to provide an
equitable transition from tKe current program to the new license fee
system, certain crude oil and product iniports were exempted from
license fees for a limited period after May 1, 1973. These exemptions
will be phased out over a 7-year period.
Another initiative taken involved the allocation of petroleum and
petroleum products.* The Economic Stabilization Act Amendments
of 1973 provided the authority to set priorities for use and allocation
of petroleum products. Pursuant to this authority, a voluntary allocation program was announced on May 10,1973, calling for suppliers to
make available to their customers the same percentage of products
that they supplied in the corresponding quarter of the base period
(October 1971 to September 1972). I t also provided that suppliers of
priority customers who could not obtain needed supplies under their
prograni allocation could apply to the Interior Department's Office of
Oil and Gas for help in securing additional crude oil.
Public hearings were held on the voluntary fuel allocation program
June 11-14. These hearings were designed to provide industry and
other public reaction to the voluntary program and to determine
whether a mandatory fuel allocation program was needed. Drawing
heavily on the public hearings of June 11-14, a proposed draft of a
mandatory allocation program was published by the Energy Policy
Office for public review. The Office of the Energy Advisor played a
prominent role in all stages of the design, implementation, and review
of the voluntary fuel allocation prograni.
The Office has, in addition, engaged in a wide variety of projects
designed to assess the domestic energy situation and to offer appropriate policy recommendations. Studies pertaining to domestic energy
supplies include analyses of oil shale, propane, naphtha-based syngas
plants, emergency capacity (storage), next winter's fuel supplies and
* See exhibit 26.
XXVIII 1973 REPORT OF THE SECRETARY OF THE TREASURY
possible relaxation of air quality standards to enable use of highsulfur fuel oil, the refinery siting problem (survey to determine those
refineries not built because of local or environmental objections), and
crude requirements of deleaded gasoline. Other studies examine the
effects of Government controls on domestic energy supplies including
a gasoline tax and an investigation of the Federal Trade Commission
study of possible divestiture of the major oil companies. Another important area of inquiry concerns energy conservation.
Law Enforcement Operations
I n fiscal 1973, Treasury strengthened its enforcement activities on
many fronts.
Treasury's campaign against drug abuse was carried forward by
the U.S. Customs Service, which established new records in seizures
of illicit drugs and arrests of drug smugglers, and by the Internal
Revenue Service, which targeted over 800 drug traffickers and financiers for tax investigations, indicted 102, and convicted 45, with many
investigations still pending. I n the I R S program, $95 million in taxes
and penalties were assessed and $14 million in cash and property
were seized.
Enforcement emphasis in another area was increased by the formation on July 1,1972, of the Bureau of Alcohol, Tobacco and Firearms
from a division with the same name in the Internal Revenue Service
and by placing it under the supervision of the Assistant Secretary for
Enforcement, Tariff and Trade Affairs, and Operations. The Assistant
Secretary coordinated the Bureau's enforcement of the Gun Control
Act of 1968 so as to direct it against targets in the narcotics trafficker
program.
The Secret Service removed from circulation or seized prior to circulation greater quantities of counterfeit currency than ever before. Demands on the Secret Service for Presidential, candidate, and foreign
dignitary protection were the highest, in the history of the Service, due
to the Presidential nominating conventions and election campaign and
the rise in terrorist attacks against U.S. and foreign dignitaries.
Cases and (messages processed by the Washington National Central
Bureau of Interpol rose dramatically, with growing use of the Bureau's facilities by law enforcement authorities at Federal, State, and
local levels.
The "sky marshal" program, under which Customs Service had
provided as many as 1,270 uniformed customs security officers (CSO's)
at the Nation's major airports to screen embarking passengers and
arrest persons threatening the safety of commercial air flights, was
being phased out as the Federal Aviation Administration required
INTRODUCTION
XXIX
airlines and airports to perform these functions. Down to 487 by the
end of the year, the CSO force, over its 2i/^-year existence, had seized
2,523 dangerous weapons, made 770 arrests of persons threatening air
safety, and prevented the skyjacking of any aircraft screened by it.
In other operational areas, the Customs Service intensified its program to improve the security of international cargo at ports and terminals ; the Bureau of the Mint moved toward construction of a new
mint in Denver, Colo., by 1978; and Treasury studied potential sites
for construction of a new facility for the Bureau of Engraving and
Printing.
Tariff and Trade Affairs
During fiscal 1973, Treasury gave increased attention to measures
to prevent unfair price discrimination, subsidies, and other practices
affecting importations into the United States.
By accelerating the processing of complaints under the antidumping
statute. Treasury made this law a more effective instrument in defending the United States against unfair competition. In fiscal 1973, the
average time needed to complete antidumping investigations was reduced by more than one-half since 1968. During 1973, the average completion time was 270 days while the average time in 1968 was 560 days.
Activity under the act continued at a high level with an increase of 17
percent in the number of final decisions published by Treiasury.
New antidumping regulations became effective in January 1973
which clarify and further tighten the procedures of the Antidumping
Act.
Considerable emphasis has also been focused on problems involving
countervailing duty, classification, value and marking determinations, quota administration, and coastwise trade exemptions.
International Affairs
The fiscal year ending in June 1973 was characterized by extraordinary developments affecting the international monetary system and
the exchange markets. The process of correcting the structural imbalances in world payments that had accumulated over 20 years, a
process begun in August 1971, continued during the year.
The longer term project of revising the principles and practices of
the international monetary system was also actively pursued in the
Committee of the Board of Governors of the IMF on Reform of the
International Monetary System and Related Issues (Committee of
Twenty).
In the sphere of international trade policy, the enlargement of the
European Communities and their special arrangements with non-
XXX
19 73 REPORT OF THE SECRETARY OF THE TREASURY
member countries led to negotiations to protect our own trading ppsi
tion. Preparations were going forward for the longer term multilateral trade negotiations in the G A T T , while the administration'^
trade bill was taken up in the Congress.
Initial steps in the normalization of U.S. economic and trade rela
tions with the Soviet Union resulted in a grains ag:reement anc
separate agreements on trade, maritime relations, and repayment oJ
the Soviet lend-lease debt. The Soviet Union and Poland also became
eligible for credits and financial guarantees extended by the ExportImport Bank.
Along with the multilateral work underway in the monetary anc
trade areas, discussions were initiated in the Organization for Eco
nomic Cooperation and Development (OECD) on a broad range oi
international issues associated with investment. These discussions wil
be continuing with the objective of seeking to formulate proposals foi
possible international understandings among O E C D members on matters affecting investment.
Exchange markets.—H\)j^ pattern of exchange rates established, al
the Smithsonian Institution in December 1971 came under speculative
pressure in January 1973, after surviving a brief but heavy run or
sterling in June 1972 which caused the British authorities to allow the
pound sterling to float. A long period of capital outflow from Italy
associated with the internal political and economic situation, tooi
place late in the year 1972 and early 1973, despite a very strong current account surplus. This led the Italian authorities to establish s
separate financial market for the lira in January 1973. The Swiss
authorities, to avoid accumulating more reserves, soon suspended official purchases of foreign exchange. Following this action, massive
amounts of mobile capital moved out of dollars, particularly into yer
and deutsche marks. Urgent international negotiations, in whicl:
Under Secretary Volcker took a leading role, resulted in a second
multilateral realignment of currencies on February 13. At that time
the United States announced its intention to devalue the dollar by IC
percent.
However, powerful upward pressure on the deutsche mark reappeared late in February, and official.intervention was suspended from
March 2 through March 19 in most leading exchange markets. Wher
the European authorities returned,to the market, they did not resume
pegging their currencies to the dollar, but introduced a joint float
of seven continental countries, with margins among this,group oJ
countries being maintained by official intervention. The Italian, Japanese, Canadian, and United Kingdom currencies also floated against the
dollar with varying degrees of official intervention. As the fiscal yeai
INTRODUCTION
XXXI
neared its close, the deutsche mark was revalued again, making a
cumulative revaluation against the dollar of nearly 75 percent, including the first revaluation in 1961. At the end of the fiscal year, the
average value of the dollar in terms of other major currencies,
weighted by our trading pattern, stood at about 83 percent of the
April 1971 level, as compared with 91 percent on June 30, 1972.
U,S, balance of payments,—The underlying competitive position of
the United States, as measured by the balance on current account
(excluding Government grants and loans), in calendar year 1972
showed a deficit at over $6 billion, dominated by a trade deficit of $7
billion. However, the current account deficit peaked in the quarter
ending June 30, 1972, and fell toward the $5 billion annual level in
the first two quarters of this fiscal year. I n January-June 1973, there
was an unexpectedly large further drop i n t h e deficit to an approximate
balance. Unusual trade developments, especially an extremely steep
rise in the volume and value of net agricultural exports (mainly grain
and soybeans) brought this sharp improvement. However, there were
also indications that the long upward trend in U.S. net imports of
manufactured consumer goods was leveling off. The outlook for the
future was, therefore, promising though new uncertainties for our
trade had arisen from domestic ancl worldwide shortages of food and
petroleum products.
Private long-term capital movements in calendar year 1972 and the
first quarter of 1973 were roughly in balance, with a deficit at an annual
rate of about $1 billion in J a n u a r y - J u n e 1973. Government grants and
capital continued at the rate of about $3.5 billion a year.
Under the conditions of inconvertibility prevailing in the final
quarter of this fiscal year, the net outflow of dollars on official reserve
transactions was halted, as any tendency toward outflow of dollars
quickly caused the rates of floating foreign currencies to rise. This
was a marked change from the January-March quarter, when successive waves of mobile funds had moved out of the United States,
creating an overall deficit in official reserve transactions of over $10
billion. This figure had raised the cumulative deficit since the end of
1969 to about $50 billion, illustrating the massive strain on the international nionetary system of this period of long-delayed adjustment.
International financial developments,—These large outpourings of
dollars into foreign reserves, together with some growth of foreign
reserves held outside the United States, had caused global reserves to
rise from $78 billion at the end of 1969 to $175 billion at the end of
March 1973. Because of the two devaluations of the dollar, in 1971
and 1973, the rise in reserves in terms of special drawing rights
(SDR's) in the I M F was considerably less, at $67 billion.
XXXII
19 73 REPORT OF THE ,SECRETARY OF THE TREASURY
The value of world trade continued to rise faster than the advance
of most national economies despite the nionetary and exchange adjustments taking place. I t appears to be determined essentially by the rate
of growth in the major national economies. I n calendar year 1972,
the rise in terms of constant prices was estimated at about 7-8 percent,
as compared with 5-6 percent in calendar year 1971. Despite the very
large additions to world reserves in recent years, the ratio of global
reserves to the value of world imports in the fourth quarter of 1972,
at 37.5 percent, was about the same as the corresponding figure for
the full year 1966.
During the year there was growing concern throughout the world
regarding persistent and accelerating inflationary pressures. I n nearly
all indsutrial countries the rate of increase in consumer prices during
the preceding 12 months was higher in June 1973 than in June 1972.
A t 5.9 percent, the U.S. figure was still well below that of other industrial countries, though it it had risen from 2.9 percent in June 1972.
International monetary reform,—^At the annual meeting of the
International Monetary Fund in Septeniber 1972, the reform of the
international monetary systeni received new impetus. Secretary Shultz,
on behalf of the United States, put forward "certain specific and interrelated ideas" looking toward a workable international agreement.
Recognizing that most countries prefer to have a "central" or "par"
value as a fixed point of reference, it was suggested that provision also
needed to be made for countries which decide to float their currencies.
A modified SDR could replace gold as the formal "numeraire" of the
system, and the monetary role of gold would diminish. A more effective
and more symmetrical adjustment process would be established, based
in part upon disproportionate movements in reserves as an indicator
The prospect was held out that, after a transitional period, the United
States would be prepared to undertake an obligation to convert official
foreign dollar holdings into other reserve assets as a part of a satisfactory system assuring effective and equitable operation of the adjustment process. The United States would, however, have to reach a
demonstrated capacity to meet the obligation of convertibility in terms
of its reserve and balance of payments position.
This U.S. initiative was well received, and a number of other Governors also expressed their views on the desiderata to be pursued in
monetary reform, generally in less specific terms. At the annual meeting, the Committee of Twenty held its first organizing meeting under
the chairmanship of the Governor for Indonesia, Mr. Aii Wardhana.
The Deputies of the Committee held four meetings during the fiscal
year in Paris and Washington, and the Ministers met once in Washington at the end of March. The United States set forth its proposals
INTRODUCTION
XXXIII
in more detailed form, and explained the reasons for them, in a memorandum for the Deputies which was subsequently published as a supplement to chapter 5 of the Annual Report of the Council of Economic
Advisers to the President.^
So far, essential clarification of views has takeii place, and a number of important issues have been brought to light and examined. I t has
beconie clear to all that on some questions there are quite strong differences of emphasis. The United States has continued to urge that it is
essential to have a much stronger and more effective adjustment
process, applicable to both deficit and surplus countries. This is
essential to make it practical and sensible to reestablish a form of convertibility into a revised SDR as the new international reserve asset.
Others look toward reserve asset settlement systems of various types
which focus the adjustment pressures more sharply on deficit countries.
Other aspects of the system are being examined, such as defining the
value and specifying the characteristics of the new SDR, the role of
gold and reserve currencies in the future, the treatment of existing
balances of reserve currencies, the desire of developing countries for
special treatment in SDR allocations, the handling of massive mobile
capital flows, the exchange rate policies and practices in the future,
and any changes in the structure and role of the International Monetary Fund. All this will require time and patience to sort out. Each
part of the system is interrelated with others. Participants do not generally feel able to negotiate on parts of the overall picture in isolation
from the whole. Progress is being made, however, as mutual understanding of major issues and points of view is spreading among the
individual members of the Committee.
Growing world energy requirements,—ThQ> transportation and industrial output needs of the world cannot be supported without large
inputs of energy. Under current technology, the bulk of such energy
must be met by the fossil fuels, particularly petroleum and natural gas.
For the foreseeable future, these resources will have to be furnished by
a relatively few energy-exporting countries. As a consequence of these
rapidly growing needs for energy and expected increases in revenues
per barrel of oil, the gross income of petroleum-producing countries
will be vast.
Some energy-producing countries have large unmet needs for manufactured consumer and oapital goods. Some feel they must obtaiii additional equipment for their defense. Countries such as Venezuela, Iran,
Algeria, Nigeria, and Indonesia have traditionally used increases in
oil revenues for immediate expenditure and investment to improve the
living standards of their people. The monies those nations earn can be
e See exhibit 79.
506-171—73
3
XXXIV
1973 REPORT OF THE SECRETARY OF THE TREASURY
expected to continue to be spent in the industrial nations. I n eff'ect, oil
will be exchanged for goods which will benefit those in the producing
lands.
Another group of producers, primarily those of the Arabian peninsula plus Libya, have small pox^ulations, less developed social infrastructures, and liniited short-term potential industrial development
outside the oil sector. Their combined imports were about $3 billion in
1972, and are expected to reach $6 billion at most by 1975 and perhaps
$10 billion in 1980.
Accumulated official reserves of this latter group of countries reportedly reac^hed about $8.5 billion by the end of 1972. They may
be receiving oil revenues of $10 billion amiually by 1975 and up to
$20 billion or more annually b}^ 1980. As expenditures for investment and consumption are not expected to keep pace with their oil
earnings, official reserves and foreign investments should mount
rapidly, reaching perhaps more than $75 billion by 1980.
As their earnings increase, the problem of what to do with oil profits will grow. Countries will require stable, secure, and profitable
investment opportunities over an extended number of years. Some
investnients will be in the form of new plants in their own countries,
but they will also be looking to investnients in the world financial
markets. They will in effect be looking to protect future income by
transforming a natural depletable asset into a permanent source of
income.
I n developing its proposals for international nionetary reform, the
United States has introduced special provisions to allow for the large
accumulations of foreign currencies which some oil-producing countries will have available for investment and which differ from normal
reserve accumulations in other countries in important respects.
Trade negotiations and legislation.-—Work also proceeded during
fiscal 1973 on reform of the world trading system. A t the 28th session
of the G A T T contracting paities (CP's) in November 1972, tha
United States, the European Community, and Japan were joined by
the other CP's in a statement of intent to undertake comprehensive
multilateral trade negotiations beginning in September 1973. The
CP's also set up a preparatory committee to meet periodically to prepare for a Ministerial meeting in September 1973. I n addition, the
normal work programs of the G A T T and the O E C D in the trade area
were geared during fiscal 1973 to lay the groundwork for the
negotiations.
Prior to participation in these multilateral trade negotiations, the
administration subniitted to Congress on April 10, 1973, the proposed Trade Reform Act of 1973. The bill would provide the neces-
INTRODUCTION
XXXV
sary authorit}^ for the United States to join in negotiating a more
open and equitable world trading systeni. I t contains provisions to
allow the President to raise and lower tariffs and to negotiate on nontariff barriers; to deal effectively with rapid increases of imports that
disrupt domestic markets and displace American workers; to
strengthen our ability to meet unfair competitive practices; to manage our trade policy more effectively; to take extraordinary trade
measures to deal with domestic inflation or balance of payments problems ; to normalize our relations with the nonmarket econoniy countries by permitting the President to grant them most-favored-nation
status; and to assist developing countries by implementing a generalized systeni of preferences.
Finally, in order to start the negotiations with all of the developed
countries on a more or less equal footing and to safeguard U.S. trade
interests, we have continued to hold Article X X I V talks in the G A T T
with the Europeans. I n February 1973, the United States initiated
consultations in the G A T T on the E C - E F T A arrangements, and in
Jklarch we agreed tp put aside our ongoing discussions with the Europeans on the consistency of the enlarged E C with the G A T T in
order to begin item-by-item renegotiations ( G A T T Article X X I V : 6 )
on the many bound itenis in the tariff schedules of the acceding countries which have increased or will increase as a result of enlargement.
The United States has made clear to the parties concerned in both
cases that we expect these negotiations to be completed before the
commencement of the multilateral trade negotiations and that, if we
do not receive satisfaction in the G A T T discussions, we will reserve
our rights to offset damage to our trade.
The President's visits to the Soviet Union, Poland, and the People's
Republic of China in early 1972 opened the way for the improvement
of our economic and trade relations with nonmarket econoniy countries during fiscal 1973. Initial steps toward this normalization featured major trade negotiations with the Soviet Union resulting in the
successful conclusion of a grains agreement in July and, in October,
agreements on trade, maritime shipping, and repayment of the Soviet
lend-lease debt. The Soviet Union also becanie eligible for. ExportImport Bank credits and financial guarantees in October, and Poland
in November 1972. Trade with the Soviet Union, the Eastern European
countries, and the People's Republic of China improved markedly
during fiscal 1973. Total U.S. exports to these countries were $1.7
billion for the fiscal year, compared with $455 million in fiscal 1972,
U.S. imports from these countries rose moderately to $455 million,
for a trade surplus in this area of approximately $1.3 billion.
International investm^ent.—During fiscal 1973 there were a number
of developments which have had and will continue to have considerable
XXXVI
19 73 REPORT OF THE SECRETARY OF THE TREASURY
impact on the nature, direction, and magnitude of capital flows and
international investment.
Secretary Shultz in his September 1972 address at the annual meeting of the International Monetary Fund and later at the June 1973
meeting of the OECD Ministers pointed out the need to supplement
negotiations in the monetary and trade areas with international discussions on policies and practices affecting investment. These discussions have been initiated in the OECD and are mainly centered in the
OECD's new Executive Committee in special session, which held its
first meeting in December 1972. The OECD's work program on investment issues has the objective of seeking to develop new understandings and procedures for reducing actual and potential conflicts among
developed countries arising from policies affecting investment.
I n February 1973, Secretary Shultz, in announcing changes in the
exchange rate relationships, stated that the current U.S. restraints
on outward capital flows would be phased out by the end of 1974. The
phaseout is appropriate in the light of the administration's broad
objective of reducing governmental control over private investment
and is based on the confidence that the termination will coincide with
a noticeable iniprovement in our balance of payments position.
International financial institutions,—An important part of our foreign economic policy concerns our relations with the developing countries and in particular the programs of the international financial
institutions, which are of vital importance to these countries.
During fiscal 1973, substantial but belated U.S. contributions were
made to two of the institutions of which the United States is a member—$320 million to the International Development Association
( I D A ) and $418.4 million to the Inter-American Development Bank
( I D B ) . These efforts covered the first installment of the U.S. contribution to the third replenishment of I D A , originally scheduled
for fiscal 1972, and increases in the Ordinary Capital and the Fund
for Special Operations of the I D B . The I D B contributions only covered half of the amounts requested in the fiscal 1973 budget.
Discussions also began in fiscal 1973 on a fourth replenishment of
the I D A. and a new unified Special F u n d for the Asian Development
Bank ( A D B ) . As of J u n e 30, no agreement had yet been reached on
levels of funding for either institution, but contributions from all
donors of $4.5 billion to I D A and $525 million to the A D B Special
Fund for a 3-year commitment period were being discussed.
Conclusion
A strong domestic economic expansion continued during fiscal 1973.
Gains in employment and real income were sizable and welcome. The
Federal budget moved closer to balance and ample supplies of private
INTRODUCTION
XXXVII
credit were available throughout the year. Unfortunately, there was
a temporary setback in the effort to bring inflation under better control. Special factors led to a sharp and unexpected rise in food and
raw material prices. By the end of the fiscal year, planning for a
new, strengthened stabilization effort was well underway, and the
outlook for better price performance had improved.
I n the sphere of international finance, a second multilateral exchange rate adjustment took place in February, involving a 10-percent
depreciation of the U.S. dollar. Since March, however, mobile capital
flows and unsettled exchange market conditions have led most major
industrial countries to permit their currencies to float in terms of the
dollar, with discretionary official intervention. The United States
contributed specific suggestions for long-range monetary reform to
the Committee of Twenty, emphasizing a symmetrical adjustment
process for both surplus and deficit countries. Meanwhile, the administration is also going forward with preparations for longer term
multilateral trade negotiations in the GATT.
Discussions on international investment issues have been initiated
within the O E C D as the United States strives in cooperation with
our major trading partners to design equitable and broadly supported
understandings on investment policies.
During the fiscal year there was a major expansion in U.S. trade
with the Soviet Union, Eastern Europe, and the People's Republic of
China. Increasing attention was also devoted to the current and the
longer term problems resulting from the rapid expansion in world
demand for energy, particularly in the form of petroleum.
R E V I E W OF T R E A S U R Y
OPERATIONS
Financial Operations
Summary
On the unified budget basis the deficit for fiscal 1973 was $14.3 billion. Net receipts for fiscal 1973 amounted to $232.2 billion ($23.6
billion over 1972) and outlays totaled $246.5 billion ($14.7 billion over
1972).
Borrowing from the public amounted to $19.3 billion as a result
of (1) the $14.3 billion deficit, (2) a $0.8 billion decrease in cash and
monetary assets, (3) a $3.1 billion decrease in deposit fund and other
liabilities, and (4) a net $1.1 billion decrease in all other financing.
As of June 30, 1973, Federal securities outstanding totaled $469
billion, comprised of $458 billion in public debt securities and $11
billion in agency securities. Of the $469 billion, $343 billion represented borrowing from the public. The Government's fiscal operations
in fiscal years 1972-73 are summarized as follows:
[In billions of dollars]
1972
208. 6
231. 9
Budget deficit ( - )
Means of financing:
Borrowing from the public—increase, or decrease ( —)
Reduction of cash and monetary assets—increase ( —),
or decrease
Other means
Total budget
financing
,
232. 2
246. 5
-23. 2
Budget receipts and outlays:
Receipts
Outlays
1973
-14. 3
19. 4
19. 3
—2.5
6. 3
—0.8
— 4. 1
23. 2
14. 3
4
19 7 3 REPORT OF T H E iSECRETARY OF T H E
TREASURY
THE BUDGET
)m
fm^ %m
i$?i
nn
wz
Receipts
Total budget receipts amounted to $232.2 billion in fiscal 1973, $23.6
billion, or approximately 11 percent, above the fiscal 1972 figure of
$208.6 billion. Although receipts from estate and gift taxes and customs duties were somewhat less than in fiscal 1972, receipts from all
other categories were sharply increased, primarily reflecting expanding
incomes and profits.
A comparison of net budget receipts by major sources for fiscal years
1972 and 1973 is shown in the table below.
[In inillions of dollars]
Source of receipts
Individual income taxes
Corporation income taxes.
_
Employment taxes and contributions
Unemployment insurance
Contributions for other insurance and retirementExcise taxes
Estate and gift taxes.
Customs duties
Miscellaneous receipts.Total budget receipts
1972
:...
_._
.
....
1973
Increase, or
decrease (—)
94,737
32,166
46,120
4,357
3,437
15,477
5,436
3,287
3,633
103,246
36,153
54,876
6,051
3,614
16,260
4,917
3,188
3,921
8,509
3,987
8,757
1,695
177
783
-519
-99
288
208,649
232,225
23,577
Projected estimates of receipts to future years, required of the Secretary of the Treasury, are shown and explained in the President's
budget.
Individual income taxes.—Individual income taxes equaled $103.2
billion in fiscal 1973, $8.5 billion more than in fiscal 1972. The increase
reflected a sharp rise in incomes and would have been even larger if not
REVIEV^ OF TREASURY OPEiRATIONS
5
for tax reduction legislation enacted in 1969 and 1971. Also, refunds
paid in the first half of calendar year 1973 were uncommonly large
as a result of taxpayers' failure to adjust to the new withholding
system in calendar year 1972. This added to the dampening effect of
tax legislation.
Corporation income taxes.—Fiscal 1973 corporate income tax receipts rose to $36.2 billion, $4.0 billion, or better than 12 percent, above
the corresponding fiscal 1972 amount. The increase reflected rising
profits offset to some degree by liberalized depreciation guidelines and
by the 1971 legislation permitting a new investnient credit.
Employment taxes,—Employment taxes amounted to $54.9 billion
in fiscal 1973, $8.8 billion above such receipts in fiscal 1972. The 19percent rise is attributable to expanding payrolls and number of
people employed, as well as to the effects of increases in the social
security taxable earnings base and tax rate, both effective January 1,
1973. Also, the full effect of the January 1, 1972, base increase was not
realized until fiscal 1973.
Unemployment insurance,—These receipts totaled $6.1 billion in fiscal 1973, $1.7 billion, or 39 percent, above the 1972 figure. The increase
resulted from changes in employment experience within States and,
to a lesser degree, from higher unemployment tax rates.
Contributions for other insurance and retirement.—Such contributions amounted to $3.6 billion in fiscal 1973, $0.2 billion more than
in 1972.
Excise taxes.—Excise taxes increased from $15.5 billion in fiscal
1972 to $16.3 billion in fiscal 1973. The growth in excises was dampened
by the year-to-year reduction in the general telephone tax rate.
Estate and gift taxes.—Estate and gift tax receipts amounted to
$4.9 billion in fiscal 1973, less than in 1972. Fiscal 1972 receipts were
abnormally large due to an acceleration of tax paynients in that year.
Customs duties.—Cnstoms duties decreased by $0.1 billion in fiscal
1973, totaling $3.2 billion. The fiscal 1972 figure was unusually large
because of the temporary import surcharge, which was not continued
into fiscal 1973.
Miscellaneous receipts.—^Miscellaneous receipts grew to $3.9 billion
in fiscal 1973, rising $0.3 billion. The increase was primarily due to
larger deposits of earnings by the Federal Reserve Systeni.
Outlays
Total outlays in fiscal 1973 were $246.5 billion (compared with
$231.9 billion for 1972). Outlays for fiscal 1973, by major agency, are
compared to those of 1972 in the following table. For details see the
Statistical Appendix.
1973 REPORT OF THE SECRETARY OF THE TREASURY
[In millions of dollars]
1972
Funds appropriated to the President
,
Agriculture Department
Defense Department
Health, Education, and Welfare Department
Housing and Urban Development Department..
Labor Department
Transportation Department
Treasury Department
Atomic Energy Commission
_
National Aeronautics and Space Administration.,
Veterans Administration
Other
Undistributed intrabudgetary transactions
1973
Increase, or
decrease (—)
3,733
10,028
75, 000
82,042 .
3,592
. 8,639
8,183
30,983
2,393
3,311
11,968
16, 031
-8,378
231,876
Total outlays.
4,269
10,943
76,679
71,779 .
3,642
10,033
7,531
22,124
2,392
3,422
10, 710
16,208
-7,858
246,526
-536
-914
-1,679
10,263
-50
. -1,395
652
8,859
1
-111
1,258
-1,177
-521
14, 650
Cash and monetary assets
On J u n e 30, 1973, cash and monetary assets amounted to $18,392
million, an increase of $846 million over fiscal 1972. The balance consisted of $13,854 million in the general account of the Treasurer of
the United States (this balance was $2,068 million more than J u n e 30,
1972, and included $112 million net transactions in transit as of
J u n e 3 0 ) ; $3,973 million with other Governnient officers ..(^l?^'^^
million less than 1972); and $566 million with the International Monetary F u n d ($50 million more than 1972). F o r a discussion of the assets
and liabilities of the Treasurer's account see page 120. The transactions
affecting the account in fiscal 1973 follow:
Transactions affecting the account of ihe Treasurer of the United Staies, fiscal 1973
[In millions of dollars]
Balance June 30, 1972
Less: In transit at June 30, 1972
Excess of deposits, or withdrawals ( — ); budget, trust, and
other accounts:
Deposits
Withdrawals ( - )
:__
.....^
Excess of deposits, or withdrawals ( —), public debt accounts:
Increase in gross public debt
Deduct:
Excess of Government agencies' investments in public debt issues
12,460
Accruals on savings and retirement plan
'
securities and Treasury bills (included in increase in gross public
debt above).
8,236
Certain public debt redemptions (included above in withdrawals, budget,
trust, and other accounts)
—5,694
Net deductions
__^_
11,785
476
253,207
276,736
-23,529
30,881
15,002
Excess of sales of Government agencies' securities in the market.
Net transactions in clearing accounts (documents not. received or
classified by the Office of the Treasurer)
Net transactions in transit
Balance June 30, 1973
15,879
7,717
2,365
112
13,854
REVIEW OF TREASURY OPERATIONS
7
Corporations and other business-type activities of the Federal Government
The business-type programs which Governnient corporations and
agencies administer are financed by various means: Appropriations
(made available directly or in exchange for capital stock), borrowings
from either the U.S. Treasury or the public, or by revenues derived
from their own operations.
Corporations or agencies having legislative authority to borrow
from the Treasury issue their formal securities to the Secretary of
the Treasury. Aniounts so borrowed are reported as liabilities in the
periodic financial statements of the Government corporations and
agencies. I n fiscal 1973, borrowings from the Treasury, exclusive of
refinancing transactions, totaled $10,711 million, repayments were
$10,412 million, and outstanding loans on June 30,1973, totaled $34,237
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 of the securities to be
offered approved by the Secretary.
During fiscal 1973, Congress granted new authority to borrow from
the Treasury in the total amount of $1,883 million, and reduced existing authority by $47 million, a net increase of $1,836 million. The
status of borrowing authority and the amount of corporation and
agency securities outstanding as of June 30, 1973, are ^hown in the
Statistical Appendix.
Unless otherwise specifically fixed by law, the Treasury determines
interest rates on its loans to agencies by considering the Government's
cost for its borrowings in the current market, as reflected by prevailing
market yields on Government securities which have maturities comparable with the Treasury loans to the agencies. A description of the
Federal agency securities held by the Treasury on June 30, 1973, is
shown in the Statistical Appendix.
During fiscal 1973, the Treasury received from agencies a total,of
$1,337 million in interest, dividends, and similar payments. (See the
Statistical Appendix.)
As required by Circular No. 966, revised in fiscal 1973, semiannual
statements of financial condition, and income and retained earnings
are submitted to the Treasury by Government corporations and
business-type agencies (all other activities report on an annual basis).
Annual statements of commitments 'and contingencies are also submitted. These statements serve as the basis for the combined financial
statements compiled by the Treasury which, together with the individual statements, are published periodically in the Treasury Bulletin.
Summary statements of the financial condition°of Government corporations and other business-type activities, as of June 30, 1973, are
shown in the Statistical Appendix.
8
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Government-wide financial management
Accrual reporting concepts.—During the year, the central financial
agencies stressed the use of accnial accounting and productivity measures in agency management. Treasury staff' continued its efforts to compile reliable Government-wide financial information on the accrual
basis. The General Accounting Office revised its accounting principles
and standards during the year, and at yearend revised regulations on
reporting accrued expenditures to Treasury were being readied for
publication.
Legislative Reorganization Act of 1970,—^The Legislative Reorganization Act of 1970 (Public Law 91-510) deals primarily with operations of the legislative branch of the Federal Governnient but also
places several new requirements upon the executive branch. Title I I
of the act directs the Secretary of the Treasury and the Director of the
Office of Management and Budget ( 0 M B ) , in cooperation with the
Comptroller General, t o : (1) Develop a standardized information and
data processing systeni for budgetary and fiscal data; (2) develop a
standardized classificatioii structure for programs, activities, receipts,
and expenditures of Federal agencies; and (3) determine the location,
nature, and availability to Congress of budgetary, fiscal, and related
data in the various Federal agencies.
A second annual progress report was submitted to the Congress
August 31, 1972. Based on the congressional information needs set
forth in GAO reports of February 17,1972, and November 10,1972, it
is apparent that the scope of the systeni as envisaged by the Congress
is substantially larger, and the level of information much more detailed, than that initially perceived by 0 M B and Treasury.
During the year. Treasury was active on three broad fronts. First, an
in-house group was established to develop methodologies for fund
structure and organization structure codes. The emphasis here was on
providing for suitable interfacing with the presently established Government-wide Treasury/OMB financial accounting and reporting network. Second, an advisory group of officials from the central agencies
( 0 M B , Treasury, and GAO) was established to provide direction and
top-level guidance to the joint efforts. Third, Treasury assigned two
senior professionals on a full-time basis to a six-man task group established June 1, 1973. This group, chaired by 0 M B , will identify shortrange improvement opportmiities and develop recommended plans for
their implementation as well as longer range system improvements.
The task group will work closely with the GAO and the Congress as
necessary to gain a full miderstanding of specific information needs.
Joint Financial Management Improvement Program,—^With the
transfer of a number of financial management functions from 0 M B
REVIEW OF TREASURY OPERATIONS
9
to the General Services Adniinistration ( G S A ) , the J F M I P principals have invited the Administrator of GSA to beconie a principal of
the Joint Prograni. Plans are underway to hire a full-time executive
director, in addition to the executive secretary who was hired in September 1969, to increase the effectiveness of the Joint Prograni. Additional full-time staff committed by central agencies and other
changes in structure and operations of the Joint Prograni are being
considered.
The second annual Financial Management Conference was held on
January 31,1973. Its theme was "Productivity in the Federal Sector."
Admiral Hyman Rickover was the luncheon speaker. The Financial
Management Achievement Awards were,presented to Robert C. Moot,
Comptroller of the Department of Defense, and Richard Miller, Associate Assistant Secretary for Administration, Departnient of Labor.
Seminars on different aspects of productivity were held in the afternoon.
The J F M I P , implementing a suggestion by the Internal Revenue
Service, developed and published a directory of agencies' financial
management personnel. The directory shows the names, titles, addresses, and telephone numbers of the heads of each financial management organization by agency.
A model financial management intern prograni was developed by a
J F M I P team under the leadership of the Civil Service Commission.
This model training program may be used by agencies in forming their.
OAvn individual programs to develop future financial managers.
On May 31,1973, the General Accounting Office held a 1-day seminar
on establishing closer working relationships between program managers and financial managers in the Governnient.
Domestic Economic Policy
The Secretary of the Treasury is the chief Government adviser to
the President on fiscal and financial affairs and thus plays a key role
in the formulation and execution of domestic economic policy. I n discharging these responsibilities, the Secretary obtains primary assistance from the Assistant Secretary for Economic Policy.
The Assistant Secretary for Economic Policy informs the Secretary and other top policy officials of current and prospective economic
developments and assists in determination of appropriate economic
policies. I n addition to his own immediate staff, the Assistant Secretary calls on the services of several Treasury offices including the
Office of Financial Analysis and the Office of Domestic Gold and Silver
Operations, w^hicli are under his direct supervision, as well as the Offices of Debt Analysis and Tax Analysis.
10
19 73 REPORT OF THE SECRETARY OF THE TREASURY
The Assistant Secretary for Economic Policy participates with the
Secretary in the "Troika" which develops the official economic projections and advises the President on alternative courses of action. Other
Troika members are the Council of Economic Advisers and the Office
of Management and Budget. Within Treasury, the staff support for
Troika activities in the general economic area is provided by the Office
of Financial Analysis and in the tax area by the Office of Tax Analysis.
The economic projection for calendar 1973 developed within the
Troika and described in the January 1973 Economic Report of the
President called for an increase in the aggregate demand for goods
and services of about 10 percent from 1972 levels. Of this increase,
roughly 6% percent was expected to be a rise in the physical value
of economic activity and 3 percent to be inflation. By the closing
months of fiscal 1973, it became apparent that the original projection
was too low, primarily because of more inflation than had been anticipated. I n early June, the projected increase in calendar year GNP
was raised from 10 percent to some II14 percent, and tax receipts were
reestimated by the Treasury on the new basis for use in the midsession
review of the 1974 budget and to support a request that the Congress
increase the temporary debt limit.
Aside from a more rapid rate of inflation than had been anticipated
in January 1973, economic developments conformed fairly close to
expectation. Real growth averaged about a 5i/^-percent annual rate
in the la.st half of fiscal 1973, down from an 8-percent 'annual rate in
the first half. This reduction in real growth toward a sustainable longrun path was highly desirable and had been a primary goal of fiscal
and monetary policy.
Progress toward the goal of reasonably stable prices was unsatisfactory. During the first half of fiscal 1973, it appeared that a smooth
transition to lower rates of inflation might be achieved while the
comprehensive controls over prices and wages were gradually relaxed.
The Phase I I I program, announced on January 11, placed more
reliance on self-administered standards while retaining some mandatory elements. But very soon the new program was faced with an
inflationary upsurge with which it—or for that matter the Phase I I
program—was incapable of dealing. The prices of farm commodities
and a wide range of industrial raw materials rose sharply in both
domestic and world markets because of rising world demand, crop
failures, and special factors. On June 13, President Nixon announced
the reimposition of a temporary freeze on prices, and intensive planning began for a Phase I V effort to help regain control over the price
level.
The Secretary of the Treasury serves as Chairman of the Cost of
Living Council, which has primary responsibility for administering
REVIEW OF TREASURY OPERATIONS
11
the economic stabilization program. The Assistant Secretary for Economic Policy has participated in the determination of Cost of Living
Council policies through its Senior Review Group and other committees formed to consider stabilization program issues. Also, the Internal
Revenue Service has been the primary operational unit of the Cost
of Living Council in carrying out information and enforcement activities through the I R S field offices.
The Assistant Secretary for Economic Policy, or his delegate^
regularly represents the Treasury on a variety of interagency groups
and occasionally at meetings of the Organization for Economic Cooperation and Development in Paris, supervises the analysis within
Treasury of economic and financial trends, and participates in the
decisionmaking process on Treasury debt management operations.
There are two offices under the direct supervision pf the Assistant
Secretary for Economic Policy. The Office of Financial Analysis is
responsible for the review and analysis of current and prospective
developments in the economy and financial markets and undertakes a
range of special projects. The Office of Domestic Gold and Silver
Operations participates in the formulation, execution, and coordination of policies and programs relating to gold and silver in both their
monetary and commercial aspects.
F e d e r a l Debt Management
Federal debt management policies in fiscal 1973 supported the general efforts of the administration to reduce the stiniulative impact of
the Federal sector as the economy expanded, the rate of unemployment declined, and price pressures remained persistent and troublesome. At the beginning of the fiscal year, the adniinistration stressed
the need to limit Government expenditures to $250 billion. This limitation was desired both to avoid an inflationary stimulus from the Federal sector and to encourage the Congress and the administration to
look carefully at Federal expenditures and to avoid the waste and
excesses which often occurred in the past.
The Treasury's net cash financing requirements were reduced during
the fiscal year by rising tax revenues generated by economic expansion
and inflation. The actual budget deficit for the fiscal year was $14.3
billion, compared with the estimate in the 1974 budget of just under
$25 billion and a May 1 estimate of nearly $20 billion.
Market financing requirements were further reduced by a large inflow of funds to the Treasury from foreign central banks which invested the dollars acquired in foreign exchange market interventions
in special nonmarketable Treasury securities.
As in fiscal 1972, the Treasury continued to rely primarily on auction sales of coupon securities. I n January, the Treasury introduced
506-171—73
4
12
19 7 3 REPORT OF T H E iSECRETARY OF T H E TREASURY
use of the uniform-price auction, in whiph all successful bidders are
awarded securities at the lowest accepted price. This type of auction
was introduced primarily for selling long-term securities to investors
who may be less willing to bid competitively in an ordinary auction
in which awards are made at tender prices. In January, a 25-year,
6%-percent bond was sold in this type of auction; and in May a 25year, 7-perceiit bond, callable in 20 years, was auctioned in the same
way.
I n September 1972, the Treasury instituted two other financing
changes. The first was the conversion of the end-of-month 1-year cycle
bills to a 52-week bill cycle with offerings to be made every 4 weeks.
This was coupled with the phasing-out ofthe 9-month bill cycle which
had not been an important market instrument. Both changes were made
to make it possible to increase the amomit of larger bills outstanding
without increasing the size of the individual offerings.
The second new financing operation instituted in the fall was the auction in October of the fir^t of an anticipated regular cycle of 2-year
notes. The second of these notes was auctioned at the end of December 1972. Because of the substantial Treasury cash position in the second half of the fiscal year due largely to foreigii purchases of special
nonmarketable issues, no other 2-year notes were sold in fiscal 1973.
Over the year as a whole, $5.4 billion of new cash was raised through
the bill market; an additional $356 million was raised through couponbearing issues; and another $9.5 billion from the sale of special nonmarketable issues to foreign central banks. The savings bonds program
continued to grow with net sales over the fiscal year totaling $3.5
billion.
m m m j yiELos AT COKSTARIT wATUBmES' m m m z
REVIEW OF TREASURY OPERATIONS
13
Changes in Federal securities
The term "Federal securities" includes the obligations issued by Federal Government agencies which are part of the unified budget totals
and in which there is an element of Federal ownership, along with the
marketable and nonmarketable obligations of the Department of the
Treasury. Federal agency securities include the participation certificates of the Government National Mortgage Association, the debt issues of the Export-Import Bank and the Tennessee Valley Authority,
Postal Service bonds. Defense family housing mortgages, and the various guaranteed issues of the Federal Housing Administration. At the
end of fiscal 1973, outstanding public debt securities totaled $458.1 billion, an increase of $30.9 billion from the end of fiscal 1972. Federal
agency securities showed an increase of $200 million over the year compared with a decline of $1.3 billion during fiscal 1972. Federal agency
securities outstanding totaled $11.1 billion on June 30,1973. All Federal securities outstanding totaled $469.3 billion at the end of fiscal
1973, $31.1 billion above the fiscal 1972 level of $438.2 billion.
Federal debt and Government-sponsored agency debt
[In billions of dollavsl
Class of debt
June 30, June 30, June 30, Increase, or
1971
1972
1973 decrease ( - )
Public debt securities:
Marketable public issues by maturity class:
Within 1 year..
lto5years
6to20years
Over20years
Nonmarketable public issues:
Series E and H savings bonds
U.S. savings notesi...
Investment series bonds
Foreign series securities
Foreign currency securities..
Treasury certificates, Eurodollar series 2
Other nonmarketable debt
122.8
88.2
45.6
6.4
0.9
-.8
9.4
-3.7
257.2
263.0
5.8
53.0
55.9
.6
.6
2.3
2.3
7.6
16.9
1.7
2.1
2.0 .__
_
.8
.8
:
89.6
101.7
12.1
1.9
1.8
—.1
427.3
468.1
30.9
4.9
1.8
1.9
1.6
.8
4.5
2.2
2.3
1.5
.7
—.4
.4
.4
—.1
10.9
11.1
.2
410.3
Total Federal debt
82.8
12.2
Total Federal agency debt
13.1
6.0
2.6
1.4
1.7
.5
Federal agency securities:
Government National Mortgage Association
Export-Import Bank
Tennessee Valley Authority..
Defense family housing..
Other
.1
91.6
398.1
Total gross public debt
.9
78.6
1.8
Specialissues to Government accounts (nonmarketable)..
Non-interest-bearing debt
69.4
.5
2.3
26.8
1.7
68.0
Total nonmarketable public issues
Government-sponsored agency securities:
Federal home loan banks
Federal National Mortgage Association
Federal land banks
Federal intermediate credit banks
Banks for cooperatives
Goverimient-sponsored agency debt
121.9
89.0
36.2
10.1
245.5
...
Total marketable issues...
112.8
89.1
33.0
10.7
438.2
469.3
31.1
7.7
15.0
6.8
5.7
1.8
36.9
7.8
18.6
7.5
6.1
1.8
41.9
12.1
20.4
9.1
6.7
2.3
50.6
4.3
1.8
1.5
.5
.5
8.7
(*)
(*)
(*)
3.5
9.9
—.3
1 U.S. savings notes first offered in May 1967; sales discontinued after June 30,1970.
2 Treasury certificates, Eurodollar series, first ofiered to foreign branches of American commercial banks
in April 1971.
*Less than $50 million.
14
19 73 REPORT OF THE' SECRETARY OF THE TREASURY
Total marketable public debt securities outstanding on June 30,1973,
amounted to $263.0 billion. The marketable public debt rose by $5.8
billion in fiscal 1973 compared with an increase of $11.7 billion in the
previous fiscal year. Of the new cash borrowing, $5.4 billion represented additions to the volume of outstanding Treasury bills. The ,remaining increase in marketable issues was a $356 million increase i n
Treasury notes and bonds. The Treasury also refunded $6.9 billion of
maturing securities into issues with maturities over 5 years. However,
the average maturity of the interest-bearing public debt declined by
1 month over the year and on June 30, 1973, was at 3 years 2 months.
~ Of the increase in public d^bt securities in fiscal 1973, $13.1 billion
was due to the sale of nonmarketable issues; $9.5 billion represented
sales of special nonmarketable securities to foreigii investors. The remainder was produced by a $3.5 billion! increase in outstanding U.S.
savings bonds over the year. The Treasury also issues special nonmarketable securities to Governmeht accounts, which are made up of a
variety of trust funds, the largest of which are the social security trust
funds. Goyernment account holdings of special issues increased approximately $12 billion.
Government-sponsored agencies are excluded from the Federal budget totals and their obligations are not part of the Federal debt. However, these privately owned and managed institutions are subject to
some form of Federal supervision. Government-sponsored debt increased $8.7 billion to $50.6 billion at the end of fiscal 1973.
nrmmmmiM fmmm. $Emmim
mmw
FEDERAL AGENCY SECURITIES
j ^
im
j «
1870
1971 1S72
fkta\ YsafS
im nn im
Ownership
Of the total Federal debt issues outstanding at the end of fiscal
1973, $268.7 billion, or 57.3 percent, of the total was held by private
REVIEW OF TREASURY OPERATIONS
15
investors. The Federal Reserve System and Government accounts held
$200.6 billion. Federally sponsored agency securities held by private
investors totaled $49.4 billion, while $1.2 billion was held by the Federal Reserve and Government accounts.
Borrowing from the public, including the Federal Reserve System
and foreign investors, in fiscal 1973 was $19.3 billion, about the same
as in fiscal years 1971 and 1972. The Federal Reserve acquired $3.8 billion of these obligations. Private investors increased their holdings by
$15.5 billion—$10.3 billion by foreign investors and $5.2 billion by
domestic investors.
Private holdings of Government-sponsored agency securities increased $8.5 billion in fiscal 1973.
Individuals,—During fiscal 1973, individuals increased their holdings of U.S. savings bonds by $3.5 billion, but decreased their holdings
of other public debt securities by $1.6 billion. On June 30, 1973, individual holdings of marketable public debt issues totaled $16.4 billion
compared with $18.0 billion in fiscal 1972. Combined holdings of series
E and H savings bonds and U.S. savings notes totaled $59.5 billion at
the end of the fiscal year. Individuals held $75.9 billion of public debt
securities on June 30, 1973, representing an increase of $1.8 billion
during the year.
Insurance com^pan^es,—Insurance companies decreased their holdings of public debt securities by $0.5 billion to $5.7 billion. Insurance
company holdings of Federal agency securities also declined slightly
during the year. On June 30, 1973, insurance companies held approximately $0.4 billion of aigency securities.
Savings institutions,—Savings and loan associations decreased theirholdings of public debt obligations by $36 million, while increasing
their holdings of Government agency securities. At the end of fiscal
1973, savings and loans held $5.7 billion of public debt securities and
$0.5 billion of Federal agency obligations.
On June 30, 1973, mutual savings banks held $2.4 billion of public
debt securities, a decline of $300 million from the previous year. Their
holdings of Federal agency securities increased, however, by $137
million to a level of $675 million.
State and local governments,—StSitQ and local governments held
public debt securities, totaling $28.3 billion at the end of the fiscal
year. This amounted to an increase of $2.4 billion, an increase substantially above the previous fiscal year's increase of $400 million.
State and local governments also increased their holdings of Federal
agency securities during the year to $3.3 billion.
Foreign and international,—Of total private investors, foreign investors were the largest purchasers of public debt securities during the
fiscal year, holding $60.2 billion of Treasury securities, an increase
16
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Estimated ownersMp of public debt securities on selected dates 1963-73
[Dollar a m o u n t s in billions]
Change
during
fiscal
1973
June 30, June 30, June 30, June 30,
1963
1971
1972
1973
Estimated ownership by:
Private nonbank investors:
Individuals: 1
Series E and H savings bonds
U.S. savings notes 2
Other securities
46.0
20.1
62.5
.6
23.0
55.4
.6
18.0
68.9
.5
16.4
Total individuals
66.1
76.2
74.0
75.9
1.8
Insurance companies..
Mutual savings banks
Savings and loan associations
State and local governments
Foreign and international..
Corporations
Miscellaneous investors 3
10.9
6.0
6.1
21.4
15.8
18. 7.
8.9
6.6
2.9
6.4
25.5
32.7
10.1
8.4
8.2
2.7
5.7
25.9
60.0
10.3
'9.1
5.7
2.4
5.7
28.3
60.2
12.0
11.7
-.5
-.3
163.9
168.7
> 183.9
•
201. 8
17.9
64.3
32.0
55. 6
61.0
65.5
102.9
^60.5
71.4
111.5
57.9
76.0
123.4
-2.6
3.7
11.9
305.9
398.1
427.3
458.1
30.9
Total private nonbank investors
Commercial banks
Federal Reserve banks
Government accounts.
Total gross debt outstanding
(*)
(*) 2.4
10.3
1. 7
2.5
Percent
Percent owned by:
Individuals
Other private nonbank investors
Commercial banks
Federal Reserve banks
Government accounts
Total gross debt outstanding.
_
22
28
21
11
18
20
23
15
16
26
17
26
14
17
26
17
27
13
16
27
.
.
.
.
.
100
100
100
100.
' Revised.
1 Including partnerships and personal trust accounts.
2 U.S. savings notes first offered in May 1967; sales discontinued after June 30,1970.
3 Includes nonprofit institutions, corporate pension trust funds, nonbank Government security dealers
and Federal-oriented agencies not included in Goverimient accounts.
* Less than $50 million.
of more than $10 billion. The largest increase in foreign holdings came
in the area of special nonmarketaible issues, which increased $9.5
billion. Foreign holdings of marketable public debt securities increased
by $.7 billion. Their holdings of Treasury notes and bonds increased
$3.6 billion, while holdings of bills declined by nearly $3 billion.
Foreign holdings of Government agency securities decreased by $25
million to $465 million at yearend.
Nonfinancial corporations,—Corporations added to their holdings
of both public debt and agency securities. Corporate holdings of public
debt securities increased by $1.7 billion over the fiscal year to $12.0
billion. Holdings of agency issues increased by $0.1 billion to $0.2
billion.
Other private nonbank investors,—Holdings of public debt securities by private nonbank investors increased by $2.5 billion during fiscal
1973, compared with an increase of $.7 billion in the previous year.
Those investors, including nonprofit associations, corporate pension
REVIEW OF TREASURY OPERATIONS
17
funds, and dealers and brokers, held $11.7 billion of Treasury securities
on June 30,1973.
Commercial banks,—Commercial bank holdings of Treasury securities declined for the second year. Commercial bank holdings
amounted to $57.9 billion, a decline of $2.6 billion. A t the end of the
year, banks held agency securities totaling $1.7 billion.
Federal Reserve System,—The Federal Reserve System acquired
$3.7 billion of public debt securities during the year increasing their
total holdings to $75 billion. Federal Reserve holdings of Government
agency securities also increased. At yearend, the Systeni held $160
million of agency securities, an increase of $90 million.
Government accounts,—Government accounts increased their holdings of public debt securities by almost $12 billion. The majority of
the increase was in their holdings of special nonmarketables which
increased by $11.7 billion. Government account holdings of marketable
public debt securities increased by slightly more than $200 million.
Government accounts decreased their holdings of agency securities
by $104 million. At the fiscal yearend they held almost $2 billion of
agency issues.
owKeisHi? O immki mmmn, mm m \%n
F
Total
Av
m
Accounts
300
Private
Nonbank Investors
20Q
Banks
Individuals
Savings
Instit.
^
Corps.
Financing operations
Although nearly $51/^ billion of marketable debt was retired between mid-May and June 30, the Treasury ended fiscal 1972 with .an
operating balance of $10.1 billion. Despite the size of the cash balance,
however, niarket participants anticipated heavy Treasury demands
on security markets during the first half of the fiscal year.
18
1973 REPORT OF THE SECRETARY OF THE TREASURY
As the summer progressed, the Treasury's operating balance continued to benefit from larger-than-expected tax receipts and the success of the adniinistration in holding expenditures to target levels.
Renewed disturbances in foreign exchange markets in the summer
resulted in the issuance of nearly $4.5 billion of Treasury nonmarketable issues to foreign central banks. I n addition, $200 million of new
cash was raised each week through the weekly bill auctions from midJuly through mid-August when the cycle was completed.
With the Treasury's operating balance remaining strong and interest
rates tending to move lower, by mid-July security market participants
had begun to anticipate the possibility of an advance refunding in
connection with the Treasury's August refinancing operation.
On July 26, the Treasury amiounced an extensive refunding operation, which included the prerefunding of issues maturing during the
remainder of 1972 as well as the advance refunding of the note and the
bond due on November 15, 1974, and the two notes maturing on February 15, 1975. I n total, nine outstanding issues, for which public
holdings totaled $19.7 billion, were involved in the exchange. Holders
of the five issues of notes and bonds maturing in 1972 were offered
the option of exchanging into a 5%-percent note due February 1976,
priced to yield 5.96 percent; a 6i/^-percent, 7-year note priced at p a r ;
or a 6%-percent, 12-year bond priced to yield 6.45 percent. Holders
of the November 1974 and February 1975 issues were offered the option
of exchanging into either of the two longer securities. The 12-year
bond was also offered to individuals for cash in amounts not to exceed
$10,000. Subscription books closed on August 2.
I n announcing the terms of the August refunding, the Treasury
said that it would not undertake any cash financing immediately
following the exchange and that a cash financing would be unlikely
until early September. The absence of a very short option in the financing and the postponement of any cash financing until later in the fall
elicited a strong response to financing. Approximately 42 percent of
the issues eligible for exchange by the public were exchanged for new
issues. Of the $2.3 billion privately held securities maturing on August
15,1972, all but $600 million was exchanged.
To meet September cash needs, the Treasury announced, after the
August refunding, plans to restructure the monthly bills. I t said it
would increase the monthly bill auctions at the end of August, September, and October by $600 million each. At the same time, it would shift
the annual bill cycle to a 52-week cycle ahd discontinue sale of 9-month
bills after October. Markets reacted defensively to this announcement
and long-term bill rates as well as yields on shorter maturity Treasury
notes and bonds moved higher. The impetus to higher rates for short-
REVIEW OF TREASURY OPERATIONS
19
term instruments was strengthened by further increases in the commercial bank prime lending rate which had moved steadily higher
from the 514-percent level of early summer to 5% percent at some
banks in early September.
As the fall progressed, market interest rates responded to the ebb
and flow of Vietnam peace rumors and to fluctuating movements in
general economic indicators. By early October, however, the market
focused on the possibility of the Treasury's satisfying its October cash
needs through the auction of a 2-year note instead of through further
cash financing in the bill market. These expectations were confirmed
when on October 5 the Treasury announced that it would auction $2
billion of 6-percent notes on October 11. These notes would mature on
September 30,1974. I n its announcement, the Treasury also said that it
contemplated issuing additional 2-year notes at quarterly intervals
as a part of its overall program for raising cash during the fiscal year
and indicated that a further issue was planned for December or early
January. A total of $4.8 billion of tenders were received in the auction.
The average price for accepted tenders was 100.25 for an approximate
yield of 5.86 percent. A total of $300 million of noncompetitive tenders were accepted at the average price. Commercial banks were allowed full tax and loan account credit in payment of their
subscriptions.
Commercial banks took the larger portion of the new note in the
first instance. Other investor demand subsequently proved disappointing, and the market turned cautious. Bank selling of the new notes was
not heavy, however, and dealers were generally willing to absorb the
supply as it came into the market.
As the month proceeded, peace rumors once again dominated the
market. As a result, yields stabilized and even tended to recede somewhat for longer maturities. I n this atmosphere, the Treasury announced on October 24 that it would meet a portion of its forthcoming
cash needs through additions of $100 million to each of the 13- and 26week bill auctions beginning with the auction on October 30. The
market received this news routinely, and there was little upward rate
adjustment to the anticipated additional supply of bills.
On October 25, the Treasury announced that it would sell at auction
an additional $3 billion of 614-percent notes to mature on November
15,1976. These notes would be used to pay off the $1.3 billion of notes
maturing November 15 and to raise an additional amount of new cash.
At the same time, the Treasury indicated', including the amounts
needed to pay off the November maturities and $1.4 billion of bonds
maturing Deceniber 15, that borrowing in the neighborhood of $12
billion might be needed through the latter weeks of 1972 and the early
20
197 3 REPORT OF THE SECRETARY OF THE TREASURY
weeks of 1973. The $3 billion of new 614-perceiit notes would provide
a part of that amount.
The 4-year notes were auctioned on November 1 at an average price
of 100.18, equivalent to a yield of 6.20 percent. Banks were allowed
to make payment for up to 75 percent of their own and their customers' accepted tenders by credit to Treasury tax and loan accounts.
Noncompetitive tenders of up to $400,000 were accepted at the average
price. A total of $7.1 billion of tenders were received, including $500
million of noncompetitive tenders.
In line with the earlier statenient that a sizable portion of its financing in the remainder of the year would be in the bill area, the Treasury
announced on Noveniber 10 the sale of $4.5 billion of tax anticipation
bills—$2 billion of April bills to be auctioned on November 17 and
$2.5 billion of Jmie bills for auction on Noveniber 29. Both issues
could be paid for by banks through credit to tax and loan accounts.
The Treasury's announcement strengthened the intermediate- and
long-term coupon markets and by the November 15 payment date
for the November refunding, the 6i/4-percent notes had risen by
about one-half point over their auction price. The auction of the
April tax bills elicited about $6.4 billion of bids including $339 million
of noncompetitive bids. The average price of 98.072 was equivalent
to a discount rate of 4.722 percent per annum. Distribution of the bills
was accomplished fairly routinely, although pressure from foreign
sales of bills and the further upward adjustment of the commercial
bank prime rate led to some increases in bill rates. The $2.5 billion of
June tax bills were auctioned at an average price of 97.187, a rate of
discount of 5.089 percent per annum. Approximately $5 billion of bids
for this issue were received, including $377 million noncompetitive
tenders which were accepted in full at the average price. Following
the sale of the June tax anticipation bills, the increased supply of bills
in an atmosphere of only moderate investor demand pushed rates on
the bill market steadily higher.
On December 14, the Treasury announced the auction on December 20 of $2 billion of 5%-percent notes to mature December 31,
1974. This was the second in the Treasury's program for establishing
a 2-year note cycle which was announced in mid-October. Full pa}^ment for awards to comniercial banks for their own and customer
accounts could be made through credit to tax and loan accounts. Noncompetitive tenders, to be awarded in full at the average price, were
accepted in amounts not to exceed $200,000. There was considerable
interest in the new notes, in part because of their end-of-year maturity date, and accepted tenders were in a relatively narrow range
around the average price of 100.09, equivalent to a 5.83-perceiit 3;ield.
REVIEW OF TREASURY OPERATIONS
21
On December 27, the Treasury announced the details of the longterm bond which it had earlier announced would be sold in early
Januar}^ A total of $625 million of 6%-percent, 20-year bonds were
to be auctioned on January 4, 1973. These bonds were the longest
securities to be offered by the Treasury since 1965 and formed part of
the Treasury's continuing effort to improve the maturity structure of
the debt reestablish a viable market for long-term Treasury obligations, and finance Treasury's cash requirements in a manner supportive of the administration's economic policies.
The procedure under which awards were made in this auction differed from that customarily used in auctions for shorter term securities. All accepted tenders were awarded at the price of the lowest
accepted tender. As in the usual auctions, the Treasury accepted bids
staiting with the highest price bid and ranging downward to the bid
which provided a total of $625 million. (The Secretary of the Treasury
reserved the right, of course, to accept less than $625 million of tenders.) This procedure provided investors an incentive to bid at prices
sufficiently high to be sure of an award, while also assuring each
bidder that, if he bid at a price within the range of accepted prices, he
would be awarded bonds at the same price as every other bidder.
The sale of longer term bonds at auction ^yith the uniform-price
method of niaking awards continued the Treasury's search for more
efficient means of marketing various categories of Federal securities.
I n the bond auction, a total of $1.7 billion of bids were received, and
awards were made at a price of 99.50, to yield 6.79 percent. Noncompetitive awards, which were accepted in aniounts up to $250,000,
totaled $81 million.
At the beginning of calendar 1973 the Treasury's operating cash
balance stood at $11.1 billion. Interest rates were rising slowly, but
much of the movement resulted from anticipation of tighter credit
conditions in the near future, despite action taken by the Federal
Reserve to ease monetary strains.
Despite the high end-December operations balance, revenue-sharing
paynients and normal seasonal outflows rapidly drained cash. There
was also concern that larger-than-usual tax refunds from earlier
overwithholding would put additional strains on the Treasury's
cash position.
To supplement its cash balance, therefore, the Treasury announced
at the beginning of January, in addition to the $627 million raised
by the long-term bond sale and the continuing $100 million additions
to the year bills, that it would increase each of the 13- and 26-week
bill auctions in January by $100 million, raising a total of $800
million in new cash.
22
1973 REPORT OF THE SECRETARY OF THE TREASURY
On January 11, Phase I I I of the new economic program was
announced, and on the 12tli the discount rate was raised from 4i/^
to 5 percent, as monetary policy joined actively in the fight to halt
the inflation. By the time of the regular February financing announcement, a pattern of sharply rising short-term yields accompanied by some moderate long-term increases was already evident.
The February financing, announced on January 31, consisted of
an exchange offering of 6%-percent notes maturing August 13, 1976,
priced at 99.70, to yield 6.60 percent, for the $4.7 billion publicly held
Treasury notes maturing February 15 and $1.0 billion of 6%-percent
notes maturing November 15, 1979, offered in a cash auction
February 7.
I n the exchange, 52 percent, or $2.5 billion, of the maturing 4%-percent and 6i/^-percent notes were exchanged for the new 6i/2-percent
securities. Tenders in the auction totaled $1.7 billion, of which $1.0
billion was accepted at an average price of 99.40, to yield 6.74 percent.
Noncompetitive tenders of $400,000 or less were accepted in full and
totaled $88 million.
Beginning in late January, massive speculation against the U.S.
dollar erupted in foreign exchange markets. This continued with
increasing intensity until a second devaluation of the U.S. dollar, by
10 percent, on February 12. As a result of this speculation, foreign
central banks acquired very large amounts of U.S. dollars in defending existing exchange rates and, to invest these dollars, bought
both marketable and special nonmarketable Treasury securities. I n
February, outstanding nonmarketable special issues increased by $5
billion and a further rise of nearly $3 billion of such issues was realized in March.
These sales of special nonmarketable issues increased the Treasury
balance and alleviated other cash-raising operations in the spring
months. Thus, sale of the third note in the 2-year note cycle, which
would have probably taken place in late March, was postponed. At
the end of March, the Treasury's operating balance stood at nearly
$13 billion and the Treasury was able to meet its early April cash demands and to pay off the $2 billion of maturing tax bills with no difficulty. Throughout this period, $100 million was added monthly to the
Treasury's cash position as $1.7 billion of annual bills matured and
$1.8 billion of new bills in the 52-week cycle were sold.
The Treasury's operating balance continued to improve through
the month of April as revenues increased from the high level of economic activity and overwithholding of personal income taxes continued. There were also large receipts from proprietary asset sales. As
23
REVIEW OF TREASURY OPEEATIONS
Offerings of marketable Treasury securities excluding refunding of regular bills,
fiscal 191S
[In millions of dollars]
Cash ofierings
Date
1972
Apr. 1.
Aug. 15
Aug. 15
Aug. 16
Oct. 1.
Oct. 19
Nov. 15
Dec. 28
1973
Jan. 10
Feb. 15
Feb. 1 5 . _ . . .
Apr. 1
May 15
May 15
Description
For new For remoney funding
Exchange ofierings
For
maturing
issues
In
advance
refunding
Total
NOTES AND BONDS
iM-percent note, Apr. 1, 1977 i_.
5>g-percent note, Feb. 16, 1976...
6j^-percent note, Aug. 16, 1979..
6H-percent bond, Aug. 16, 1984..
13^-percent note, Oct. 1,19771...
6-percent note, Sept. 30,1974 2_..
6>i-percent note, Nov. 15, 1976 3.
5J^-percent note, Dec. 31,1974 *..
6^-percent bond, Feb. 16,1993 «.
6Ji-percent note, Aug. 15, 1976 e.
65^-percent note, Nov. 15,1979 ' .
IH-percent note, Apr. 1,19781. _
63^-percent note. May 16, 1980 8..
7-percent bond. May 15, 1993-98 »
Total notes and bonds.
2 ,
2,413
735
268
17 .
2,632
3,824
2,044
2,060 .
1,715
2,102 .
627
3,883
1,604
15
7,265
692
627 .
3,883
595
15
6,221
40
1,009
2,044 .
652 .
10,260
1,326
13.189
2
4,945
4,569
2,353
17
2,060
3,041
2,102
.
.
.
.
.
8,400
33,165
BILLS (MATURITY VALUE)
1972
197S
Increase in ofierings of regular bills:
July-September
October-December
January-March
April-June
Total increase in regular bills..
1972
Nov. 24..
Dec. 6.
Tax anticipation bill offerings:
4.721 percent, 147-day, maturing Apr. 20,
1973.
5.089 percent, 199-day, maturing June 22,
1973.
Total tax anticipation offerings
Total offerings
1,715
2,985
1,121
-408
.
.
.
.
1,715
2,985
1,121
-408
5,413
5,413
2,012 .
2,012
2,510 .
2,510
4,522
4,622
20,185
1,326
13,189
8,400
43,100
1 Issued in exchange for 2^-percent Treasury bonds, investment series B - 1975-80;
2 Auctioned at an average yield of 5.88 percent.
3 Auctioned at an average yield of 6.20 percent.
4 Auctionisd at an average yield of 6.83 percent.
5 All accepted bids awarded at a yield of 6.79 percent.
6 $1,392 million was allotted to the Federal Reserve System and Government accounts.
' Auctioned at an average yield of 6.74 percent. $595 million was allotted to the Federal Reserve System
and Goverimient accounts at the average price in exchange for maturing notes.
8 Auctioned at an average yield of 7.01 percent, $5,275 million was allotted to the Federal Reserve System
and to Govemment accounts.
•All accepted bids awarded at a yield of 7.11 percent. The Federal Reserve System and Govemment
accounts were allotted $140 million of the bonds at a yield of 7.11 percent. .
a result, the Treasury ended April with an operating cash balance of
$14.2 billion.
In these conditions, the Treasury announced on April 25 that it
would sell to the public at auction up to $2 billion of 6%-pGrcent notes
to mature in May 1980 and up to $650 million of 7-percent Treasury
bonds maturing in May 1998 but callable after May 15, 1993. These
new issues were intended to refund partially the $4.3 billion of Treasury notes maturing on May 15; the balance of maturing issues, $1.7
biUion, was to be retired out of available cash balances.
24
19 73 REPORT OF THE iSECRETARY OF THE TREASURY
Disposition of marketable Treasury securities excluding regular bills, fiscal 1973
[In millions of dollars]
Date of re*
funding or
retirement
1972
Aug. 15
Aug. 15
Aug. 15
Aug. 15
Aug. 15
Aug. 15
Aug. 15
Aug. 15
Aug. 15
Sept. 15
Oct. 1
Nov. 15
Dec. 15
Securities
Description and maturing date
Issue date
Redeemed Exchanged for new
for cash
issue
or canied
Total
to matured
At
In addebt
niaturity vance refunding
NOTES AND BONDS
5-percent note, Aug. 15, 1972
4-percent bond, Aug. 15, 1972
2i.i-percent bond, Sept. 15, 1972
6-percent note, NOV. 15,1972
2>^-percent bond, Dec. 15,1972
5H-percent note, NOV. 15, 1974
33^-pcrcent bond, Nov. 15, 1974
534-percent note, Dec. 15,1974
53^-percent note, Feb. 15, 1975
2>^2-percent bond Sept. 15, 1972
13^-percent note, Oct. 1,1972
6-percent note, Nov. 16, 1972
2i.i-percent bond, Dec. 15, 1972
May 15,1971
Sept. 15,1962
Oct. 20,1941
June 29,1971
Nov. .15,1945
Nov. 15,1967
Dec. 2,1957
Feb. 15,1968
Oct. 22,1971
Oct. 20,1941
Oct. 1,1967
. . . . June 29,1971
Nov. 15,1945
232
379
2,342
1,074
i 1,499
i960
i 1,193
i 1,770
i 1,021
1 1,134
1 823
.
:
..
454
33
1,326
1,354
,
2,574
1,453
1,499
960
1,193
1,770
1,021
1,134
823
454
33
1,326
1,354
1973
Feb. 15
6y2-percent note, Feb. 15,1973
Feb. 15 . . . 43^-percent note, Feb. 15, 1973
A p r . l . . . l>^-percent note, Apr. 1,1973
May 15'
. 73/i-percent note. May 15, 1973
Mavis
4.M-percent note. May 15, 1973
Aug.
Nov.
Apr.
Oct.
May
Total coupon securities
1973
A.pr. 20 .
June22
16,1971
15,1971
1,1968
1,1969
15,1972
. . . 2,663
. . . 2,598
10,491
.
1,089
1,215
-.34
3,181
1,194
. . . 1,425
. . . 3,053
13,155
2,514
4,268
34
5,844
3,792
8,400
32,046
TAX ANTICIPATION BILLS 2
. 4.721-percent (tax anticipation)
5.089-percent (tax anticipation)
Total tax anticipation bills.-Total securities
Nov. 24,1972
2,012
2,012
Dec.
2,510
2,510
5,1972
.....1
4,522
...
15,013
..
13,155
4,522
8,400
36,568
1 Included in August 1972 refunding.
2 Including tax anticipation issues redeemed for taxes in the amounts of $912 million in April 1973 and
$1,687 million in Jmie 1973.
Tenders for the 67/8-percent note totaled $3.2 billion, of which $2
billion were accepted at an average price of 99.29, equivalent to a ^deld
of 7.01 percent. Noncompetitive tenders were accepted at the average
price up to an amount of $400,000 and totaled $325 million.
The 7-percent bond, which was sold with the uniform-price auction
technique, elicited $1.2 billion of tenders. Awards totaling $652 million were made at a price of 98.75 (7.11 percent) and included $23
million of noncompetitive tenders.
Despite the repayment of debt in the May financing, the Treasury's
cash balance remained high and the Treasury reduced its offerings of
weekly bills by $100 million from mid-May through the end of the
fiscal year. I n June, the $2.5 billion of maturing tax bills were repaid
out of existing cash holdings, and the Treasury ended the fiscal year
with an operating cash balance of $11.1 billion.
Enforcementj Tariff and Trade, Affairs, and Operations
The programs and operations of six bureaus of the Department of
the Treasury are grouped under one Assistant Secretary who utilizes
REVIEW OF TREASURY OPERATIONS
25
three deputies and three staff offices (Offices of Law Enforcement,
Tariff and Trade Affairs, and Operations) to supervise them. The
bureaus are Custonis Service, Engraving and Printing, Mint, Secret
Service, Consolidated Federal Law Enforcement Training Center,
and Alcohol, Tobacco and Firearms. Enforcement aspects of the responsibilities of the Internal Eevenue Service also receive the Assistant Secretary's coordinating supervision. During fiscal 1973, activities
in these areas continued to increase.
LAW ENFORCEMENT AND OPERATIONS
The Deputy Assistant Secretary for Enforcement and Director,
Office of Law Enforcement, developed and reviewed the policy and
strategy of Treasury law enforcement activities, with particular attention to application of new concepts, technology, and tactics; coordination between bureaus; coordination of Treasury's contributions
to interdepartmental law enforcement efforts; interaction of strategy
with other departments, agencies, and governments; and impact on
public affairs. He had primary cognizance over the Secret Service,
the Bureau of Alcohol, Tobacco and Firearms, the Consolidated
Federal Law Enforcement Training Center, the antinarcotics traffic
programs of I R S and Customs Service, the Office of Foreign Assets
Control, and the Interpol National Central Bureau.
The Director, Office of Operations, under the supervision of the
principal Deputy Assistant Secretary, maintained oversight of bureau
activities for effective design and execution of programs, efficiency of
management and organization, and econoniy of operations, with particular attention to coordination of personnel and logistics aspects of
ongoing programs withiii Treasury and with other departments, review of senior personnel appointments, development and review of
management information reports and budget proposals, and, for nonenforcement activities, adequacy of long-range planning. The Deputy
Assistant Secretary had primary cognizance over Customs, Mint, and
Engraving and Printing.
Antinarcotics program
During fiscal 1973, Treasury maintained the momentum of President Nixon's high-priority prograni to combat illegal drug trafficking.^
A supplemental appropriation of $4.5 million permitted Treasury
to increase its efforts in the I R S narcotics trafficker program, which
expanded to 82 cities in 46 States and the District of Columbia.
IRS's systematic, nationally coordinated program subjects middle
and upper echelon distributors and financiers in the illicit drugtraffic to intensive tax investigations. The objective is to disrupt the
narcotics distribution system by prosecuting those guilty of criminal
1 See exhibit 31.
26
1 9 7 3 REPORT OF T H E iSECRETARY OF T H E
TREASURY
violations and by siphoning off' working capital and drastically
reducing profits. Targeting for this program involved the Custonis
Service and the Justice Department's narcotics agencies, with other
Federal, State, and local enforcement agencies also cooperating in
investigations and in seizures of funds.
During fiscal 1973, the second year of operation, 829 additional
major narcotics traffickers, smugglers, and financiers were identified
for intensive tax investigation; another 1,700 lesser traffickers were
under tax scrutiny. As a result, $94.5 million in proposed taxes and
penalties was assessed during fiscal 1973, with $11 million being
collected. An additional $14.2 million in cash and valued property
was seized. During the fiscal year, 102 major narcotics traffickers
Avere indicted on criminal tax and related charges and 45 were convicted. Criminal tax investigations were completed with respect to
another 83 major drug distributors. I n each of these cases prosecution was recommended.
I t is anticipated that during fiscal 1974 this ongoing program will
subject an additional 650 significant narcotics traffickers to full-scale
I R S investigation.
A budget increase of $8 million in fiscal 1973 enabled Customs also
to increase its forces interdicting illicit drug importations at ports
and borders. New records for numbers,of arrests and seizures directly
by U.S. Customs were established, and amounts of illicit drugs
seized substantially exceeded those of the previous year in most categories although amounts of heroin seized declined sharply.
Customs role in combating the illicit narcotics traffic was greatly
curtailed at the end of the year with the transfer of all its antinarcotics investigative and intelligence functions, personnel, and funding to the newly formed Drug Enforcement Administration under
President Nixon's Reorganization Plan No. 2.
Treasury continued its participation in activities of the Cabinet
Committee on International Narcotics Control, helping to update
narcotics control action plans in 58 countries and to develop for those
countries customs-to-customs programs for advising and training
foreign customs border control officials.
Organized crime
Treasury agencies continued to contribute manpower and resources
directly to the joint strike force program operating against organized
crime in 18 major cities throughout the country. Treasury established
the Treasury Organized Crime Council to provide policy oversight
and interagency coordination for this program led by the Depart-
REVIEW OF TREASURY OPERATIONS
27
ment of Justice. I n addition. Treasury's own programs supported the
organized crime drive through:
(1). The narcotics programs of I R S and Customs;
(2) Action against major counterfeiting and bond forgery operations by the Secret Service;
(3) The cargo security program of Customs; and
(4) The attack on illicit liquor traffic and the suppression of
illegal use of firearms and explosives by the Bureau of Alcohol,
Tobacco and Firearms.
Air security program
Under the program to provide security for commercial air flights
which is managed by the Federar Aviation Administration, customs
security officers (CSO's) continued to provide all uniformed Federal
law enforcement support at the Nation's major airports. Beginning
in February 1973, F A A regulations required airlines to inspect embarking passengers and airports td furnish enforcement support. This
effectively eliminated the need for CSO's except for 110 on duty at the
two Federal airports, Dulles International and Washington National,
and several hundred continuing tb servfe on a reimbursable basis at
nine other airports which could npt immediately obtain the required
local enforcement personnel.
By the fiscal yearend, the CSO force had declined from a high of
1,270 to 487. There had still been no skyjacking of any aircraft for
which CSO's provided preembarkation screening.
From the beginning of the program in January 1971 to the end of
fiscal 1973, CSO's had made 48 arrests aboard aircraft, 722 on the
ground for possession of weapons or niaking threats, and 1,423 for
possession of drugs, with an additional 1,401 apprehended as illegal
aliens. Weapons seized totaled 2,523 plus 66,434 detained and returned
after flight.
Counterfeiting
I n fiscal 1973, counterfeiters continued to produce large volumes of
counterfeit currency, but with less, success in introducing it into circulation. The Secret Service found that $3.3 million had been entered
into circulation and seized an additional $22 million prior to circulation. Loss to the public was reduced over $1.5 million, or 31 percent,
from the comparable period last year. Throughout fiscal 1973 there
was a continuing do wii ward trend in the amount of counterfeit currency passed.
"
Presidential, candidate, and foreign dignitary protection
Demands on the Secret Service for protective efforts continued to
increase in fiscal 1973. Permanent details were maintained with the
506-171—73
6
28
19 73 REPORT OF THE SECRETARY OF THE TREASURY
President, First Family, Vice President, former Presidents, Kennedy
children, and Mrs. Mamie Eisenhower. After former Presidents Truman and Johnson died, protection to their widows continued.
Protective problems were increased by activities of the President,
members of his immediate family, and the Vice President during the
1972 election campaign.
During the campaign, a total of 13 pandidates/nominees from the
Democratic, American Independent, and Peoples Parties were protected. Extraordinary manpower, logistical, and other problems confronted the Service in providing protectioii during the two major
nominating conventions in Miami Beach, Fla. Security measures for
the 1973 Inauguration required maximum utilization not only of
Secret Service personnel but also of Treasury agents in other bureaus.
I n fiscal 1973, protection was provided for over 40 heads of state or
govermnent and over 70 other foreign dignitaries. The latter category
grew by 300 percent over fiscal 1972 when only 17 dignitaries of this
type were protected. I n addition, 33 official representatives of the
United States performing special missions abroad were protected at
the direction of the President.
;
Treasury enforcement communication system (TECS)
I n December 1972, T E C S was established to provide a computerized
network of communication links among law enforcement personnel of
the Custonis Service, the Bureau of Alcohol, Tobacco and Firearms,
and the Intelligence and Security Divisions of the Internal Revenue
Service, both in the field and at national headquarters. The systein
permits all participants access to commonly indexed Treasury law enforcement information as well as to F B I National Crime Information Center (NCIC) data.
The backbone of the system is the computer facility of the former
custonis automated intelligence network ( C A D P I N ) , which was
phased out in March 1973. T E C S will operate about 500 terminals
(compared with 320 initially authorized for the C A D P I N system) at
major airports, seaports, and border stations and at regional and
district offices of the member bureaus.
Anti-terrorism
Treasury, as a member of the Cabinet Committee to Combat Terrorism, contributed to the development of President Nixon's program
to thwart international terrorism and tb establish emergency plans for
coping with terrorist incidents.^ The Office of the Secretary, the U.S.
Secret Service, the U.S. Customs Service, and the Bureau of Alcohol,
1 See exhibit 33.
REVIEW OF TREASURY OPERATIONS
29
Tobacco and Firearms joined to intensify both intelligence and security measures aimed at preventing terrorist incidents.
Interpol
I n fiscal 1973, the U.S. National Central Bureau of the International
Criminal Police Organization processed a total of 3,912 cases, representing a 69-percent increase over fiscal 1972 and a threefold increase since fiscal 1969. Of these cases, 1,098 were referrals for foreign
investigation on behalf of U.S. enforcement agencies. I n contact with
^39 other countries, Interpol Washington transmitted 3,390 messages
and received 3,428.
I n September 1972, Treasury led the U.S. delegation to the 40tli
Interpol General Assembly in Frankfurt, Germany, which adopted
substantive resolutions and proposals concerning Interpol's participation in antiterrorist activities and in curbing drug abuse.
Illustrating police cooperation through Interpol was a request from
the Santa Clara County, Calif., district attorney's office for assistance
in locating a suspect indicted on 12 counts of grand theft. Queries to
Interpol bureaus in Australia, New Zealand, Hong Kong, and Singapore produced information from Interpol Melbourne in February 1973
which enabled the California authorities to extradite the subject from
Mexico.
Also, in March of 1972, Interpol Caracas advised Interpol Washington that a Cuban citizen, arrested in Caracas, had implicated himself
in the killing of a Colombian citizen in Miami, Fla., in 1969. Subsequent assistance by Interpol Washington resulted in Dade County,
Fla., Department of Public Safety officers being dispatched to return
from Caracas with the subject on August 16,1972.
Financial recordkeeping
The Financial Recordkeeping and Reporting Regulations (part 103,
title 31 C F R ) , which were issued by Treasury to implement Public
Law 91-508 and became effective July 1,1972, were primarily designed
to ensure that financial institutions maintain certain records that have
been determined to be highly useful in the investigation of tax, regulatory, and criminal matters.^ The regulations also required reports of
unusual currency transactions, the international transportation of
monetary instruments, and interests in foreign financial accounts, with
the objective of deterring the use of foreign bank accounts by U.S.
persons for illegal purposes.
Responsibility for ensuring compliance was delegated to the bank
supervisory agencies, the Securities and Exchange Commission, the
1 See exhibits 35 and 36.
30
1973 REPORT OF THE SECRETARY OF THE TREASURY
U.S. Customs Service, and the Internal Revenue Service, with the
Assistant Secretary of the Treasury ( E T T O ) having overall responsibility for coordinating the procedures and efforts of those agencies.
The regulations and the underlying law were challenged in U.S.
District Court of the Northern District of California by the California
Bankers Association and Mr. Fortney H. Stark, J r . The matter is now
pending before the U.S. Supreme Court, I n the meantime, the Treasury
is restrained from enforcing those provisions of the regulations that
require reports of unusual currency transactions.
International financial crimes and frauds
The United States and Switzerland signed a Treaty on Mutual Assistance in Criminal Matters on May 25,, 1973, representing the first
such major agreement for the United States. The treaty culminated
negotiations over a period of 4 years in which Treasury played a
leading role.
,
.:
. The treaty provides for broad assistance between the two countries
and special assistance where organized, crime is involved, and overcomes the Swiss concept of bank.secrecy in specifically delineated
cases. Tax crimes are excluded from the treaty.
.
Gun and explosives control program
As a part of the oversight of the Bureau of Alcohol, Tobacco and
Firearms, t h e Office of Law Enforcement coordinated A T F ' s support
of the narcotics trafficker program through enforcement of the criminal sanctions of the Gun Control Act of 1968 against targets in the
antidrug program. The Office of Law Enforcement also assisted in
negotiating guidelines agreed upon by Treasury for A T F , the Department of Justice for the F B I , and the Postal Service for the Postal
Inspection Service with respect to investigative jurisdiction over
crimes involving the use of explosives or bombs as set forth in title X I
of the Organized Crime Control Act of 1970.
Cargo security program
The Office of Operations continued Treasury's cooperation with the
Department of Transportation and other departnients and agencies
in President Nixon's program to suppress theft of cargo.
The Customs Service, as the unique agency with Federal officials
physically present at all ports of entry and border crossings where
international cargo arrives and at terminals where international cargo
is cleared, extended and intensified its cargo security program during
the year. Additional field personnel were given technical training in
security standards and procedures, more detailed surveys of deficient
REVIEW OF TREASURY OPERATIONS
31
piers and terminals were made, and additional Customs patrol officers
Avere assigned to ports of entry.
Treasury-sponsored legislation to fill out Custonis authority in this
field (the Custonis Port Security Act) passed both Houses of Congress but failed in conference because of a controversial rider.
Automated merchandise processing system (AMPS)
Customs A M P S program to automate the examination, classification, appraisal, and liquidation of entries of imported merchandise
was given new direction and fresh impetus through an early implementation orientation. The Seattle field test, which was to lead to a
completely integrated systems design by 1975, was cancelled in favor
of a program that would give actual operating assistance in selected
functions to hard-pressed customs officials at ports and border crossings in 1974.
Management information system
The system of monthly and quarterly management reports initiated
by the Office of Operations in the previous year was in full operation
for all bureaus in fiscal 1973. Converting of tabular information into
graphic displays and equipping of a management briefing room were
begun.
Engraving and printing
Three important contract studies affecting future developments for
the Bureau of Engraving and Printing were completed and reviewed
by the Office of Operations: (1) A study of potential sites in the
interior of the United States for construction of an additional facility
by 1980; (2) a study of the Bureau's system of charges to customers
for its products and of methods to generate funds for acquisition of
new production equipment; and (3) a study of recruiting and career
planning for management personnel to ensure the availability of qualified candidates for top management in the 1970's and 1980's.
Additional mint capacity
Steadily increasing requirements for coinage dictate construction
of a new mint by 1978. A site in downtown Denver was selected and,
in December 1972, the City of Denver informed the Treasury that
the city council had taken all steps necessary to make the site available
on terms stipulated by the Federal Govemment.
TARIFF AND TRADE AFFAIRS
The Office of Tariff and Trade Affairs was established in 1971 to
provide policy direction and review of actions and recommendations
32
19 7 3 REPORT OF T H E iSECRETARY OF T H E
TREASURY
by the Customs Service on administration of the Antidumping Act and
the countervailing duty law. These statutes represent the sword-point
in the administration's efforts to combat unfair trade practices by
foreign companies and governments.^ The office is also responsible for
policy review in other actions under the tariff laws, including classification, value, marking, and quota regulations.
Amended Antidumping Regulations, effective in January 1973,
contained new provisions to promote improved administration of the
Antidumping Act. Detailed reporting requirements were established
in discontinued investigations so that prices of the foreigii merchandise in question can be properly monitored to ensure adherence to
price assurances. I n addition, if the price assurances are violated, new
procedures permit a reopening of the investigation with an immediate
withholding of appraisement. Other new provisions in the Regulations
concern time limits for processing antidumping cases, the investigation of merchandise sold in a condition different from that in which it
was imported, and revisions to the teclniical adjustments in the comparison of home market and export prices.
Increased emphasis on the administration of the Antidumping
Act yielded substantial results. The revisions in the Regulations and
expansion of professional staff assigned to investigations helped
reduce the time to process antidumping cases. The average number of
days to complete an investigation in 1968 was 560, with some cases
taking 2 years or longer. During 1973, however, the average completion
time was reduced to 270 days. This expeditious processing of cases
is advantageous to all persons concerned. The doniestic industry is
ensured of quick defense against the possibility of an injurious price
discrimination, and the importer and foreign interests are relieved
of the burden of uncertainty during lengthy investigations.
Activity under the act continued at a high level in fiscal 1973 with
an increase of 17 percent in the nuniber of final decisions published
by Treasury. Due to a decline in the number of complaints received,
however, the number of cases initiated dropped from 39 to 27. The
42 final actions taken by Treasury in 1973 niarked the highest number
of such decisions made in the last 7 years.
The countervailing duty law is designed to offset the harmful effects
of subsidies by foreign governments for products entering the United
States. If the subsidy is found to be a "bounty or grant" within the
meaning of the statute, an additional duty equivalent to the amount
of the subsidy is assessed on the imported merchandise. After years
of inactivity under this law (no actions betweeii 1959 and 1967),
1 See exhibit 32.
REVIEW OF TREASURY OPERATIONS
33
Treasury has countervailed 13 times since 1968. There were two such
actions in fiscal 1973.
Subsidies paid by foreign governments to encourage expansion of
productivity and export sales are becoming an increasing problem in
the maintenance of a fair trading s^^stem. The countervailing duty
law will be utilized more frequently as harmful subsidy practices that
permit unfair competition in U.S. markets are uncovered.
The Trade Analysis Section has done research regarding foreign
price discrimination and dumping, foreign subsidies on exports, and
countervailing duty policy, as well as balance of trade implications
of 1971 currency revaluations. Quantitative research has involved
survey design and multivariate analysis of surve}^ data, with application of time-series econometric techniques.
Special efforts were focused on the defining of trade data requirements for Treasury as a whole and on securing special trade data tapes
from the Bureau of the Census.
Classification and value cases before the Customs Service, countryof-origin marking cases, and the administration of mandatory quota
restraints were reviewed for overall trade impact. Studies of the system
of Brussels Tariff Nomenclature for classification of imported merchandise, of the Brussels Definition of Value, and of techniques for
reporting trade statistics on n c.i.f. (cost, insurance, and freight) basis
continued.
Taxation Developments
I n his budget message on January 29, 1973, the President urged
the Congress to avoid further inflation and higher taxes by holding
down Federal spending. I n his state of the Union message of February 22, 1973, the President reemphasized the point that controlling
Federal spending would avoid tax increases. The President also
urged prompt congressional action on his tax recommendations,
including alleviation of property tax burdens for older Americans,
provision of an income tax credit for tuition paid to nonpublic elementary^ and secondary schools, and improvement of the private pension
system. I n addition, the President urged prompt action on his economic programs.
Tax reform
On April 30, 1973, Secretary Shultz presented the administration's
proposals for tax changes in testimony before the House Committee
on Wavs and Means.^ The proposals were intended to provide greater
tax equitv, to simplify the tax structure, and to improve economic
growth. The Secretary stated that the recommendations were essen' See exhibit 43.
34
19 7 3 REPORT OF T H E iSECRETARY OF T H E
TREASURY
tially neutral in their budgetary effect. No specific recommendations
were made on the taxation of political contributions and activities or
on the taxation of estates and gifts. The Secretary urged the committee to consider the important question of the taxation of political
contributions and activities and expressed the Treasury's willingness
to work with the committee on matters relating to estate and gift
taxation.
The major recommendations of the administration's tax program
are as follows: ^
(1) To achieve a more equitable and efficient tax system, a new
minimum taxable income concept and a limitation on artificial accounting losses were proposed. These proposals would apply to individuals. The existing minimum tax on individuals would be repealed.
(2) To simplify the task of taxpayers in preparing their tax returns, a new simplified individual income tax form was proposed
along with recommended revisions to achieve further simplification of
the tax law pertaining to the child care expense allowance, the retirement income credit, the medical expense and casualty loss deduction,
the deduction of miscellaneous employee expenses, etc., the dividend
exclusion, the sick pay exclusion, and the tax tables.
(3) To provide property tax relief for low- and middle-income
elderly homeowners, a refundable property tax credit under the income tax was proposed. An equivalent credit was proposed for the
low- and middle-income elderly who rent their homes.
(4) To help preserve the national benefits of the nonpublic school
system and to provide needed tax relief for low- and middle-income
families who bear a large part of the cost, a refundable income tax
credit for tuition paid for nonpublic elementary and secondary school
education was proposed.^
(•5) To help meet the national energy needs, a new investment tax
credit for domestic exploratory drilling of oil and gas was proposed.
(6) To increase the financing capabilities of State and local governments and to reduce the amount of tax-exempt interest, a Federal
interest subsidy was recomniended for State and local obligations to
be issued on a taxable basis at the option of those governments.
(7) To prevent windfall profits from arbitrage activities in the
advance refunding of tax-exempt State and local obligations, certain
restrictions were proposed.
(8) To provide for greater responsibility by tax return preparers
for the returns they prepare, provisions relating to liability and control were proposed.
1 See exhibit 45.
a See exhibit 39.
REVIEW OF TREASURY OPERATIONS
35
(9) Revisions in the taxation of foreigii source income were proposed to neutralize the impact of foreigii income tax incentives to
attract U.S. investment.
The House Ways and Means Comniittee began hearings on tax
reform on February 5, 1973. Subsequent to Secretary Shultz' testimony on April 30,1973, the committee considered trade legislation for
the remainder of the fiscal year.
Environmental taxation
I n accordance with the President's state of the Union message of
February 15, 1973, there was transmitted to the Congress on February 19, 1973, a draft bill designed to encourage the restoration of
historic buildings and the rehabilitation of older buildings, to preserve
coastal wetlands, and to encourage gifts of land to be used for conservation purposes. Tax measures incorporated in the draft bill are:
Accelerated depreciation methods for the building restoration proposals ; reduction of tax benefits related to investments and improvements in coastal wetlands; and treatment as a charitable contribution
of certaiii gifts of partial interests in land to be used for conservation
purposes. H.R. 5584, introduced on March 14,1973, included the provisions of the draft bill.
Federal collection of State income taxes
Title I I of Public Law 92-512, approved on October 20,1972, is cited
as the Federal-State Tax Collection Act of 1972. The act authorizes the
Department of the Treasury to enter into agreements with States for
Federal collection of State income taxes on individuals, estates, and
trusts. I t excludes Federal collection of State corporate income taxes.This voluntary program is popularly referred to as the "piggyback"
system, and its objective is to obtain more efficiency in tax administration -and reduce the costs of taxpayer compliance. To make Federal
administration feasible, the act requires existing procedural and administrative provisions of the Internal Revenue Code generally to be applied to Federal collection of State taxes in the same manner as if such
taxes were imposed by the Federal Government.
Pension reform^
The President's pension ref orm message of April 11,1973, called for
enactment of 'his recommendations to strengthen the private piension
system. The major recommendations included: (1) A minimum vesting standard for preserving the retirement rights of employees who
leave their jobs before retirement; (2) a minimum funding standard
~ 1 See exhibit 46.
36
1973 REPORT OF THE SECRETARY OF THE TREASURY
for vested benefits under employer-financed defined benefit pension
plans; (3) a deduction on individual income tax returns of aniounts set
aside by employees for their retirement if not covered by an employer
plan and by covered employees in employer plans with inadequate benefits ; (4) a larger tax deduction for self-employed persons who invest in
pension plans for themselves and for their employees; and (5) tax
deferment until retirement on lump-sum payments from pension plans
received by workers who leave a job before retirement if he reinvests
the funds in a qualified individual retirement account. S. 1631 was
introduced which incorporated these recomniendations. On May 22,
1973, Secretary Shultz testified before the Senate Finance Committee
on the President's pension proposals.
Social security
Public Law 92-336, approved July 1,1972, an act to provide for an
extension of the temporary level in the public debt limitation, included
several amendments to the Social Security Act. The legislation authorized a 20-percent increase in cash retirement and disability benefits,
effective Septeniber 1972. The benefit increase is financed by an increase
in the limit on the taxable earnings base from $9,000 to $10,800, effective January 1,1973, and a further increase to $12,000, effective January 1,1974. The employee and employer social security taxes are each
increased from 5.2 percent to 5.5 percent, effective January 1, 1973The law also provided for automatic increases in benefits and the taxable earnings base. Benefits would be automatically increased if the
Consumer Price Index increased by at least 3 percent during a year
and no benefit increases had been enacted or become effective in the previous year. I n any year in which an automatic benefit increase becomes
effective, the taxable earnings base would be automatically increased
according to the rise in the average wages covered under social security.
Automatic increases are effective only after 1974.
Public Law 92-603, approved October 30, 1972, revised the benefits
structure, including, for example, higher benefits for aged widows and
widowers, higher minimum benefits for low earners, and liberalization
of the retirement test by raising the anhual amount of exempt earnings from $1,680 to $2,100 with future automatic adjustments to keep
pace with increases in earnings levels.
The increased costs of the cash benefits and hospital insurance
programs are financed by higher social security taxes. For 1973, the
employee and employer tax rate is increased from the previously
scheduled 5.5 percent each to 5.85 percent each. The maximum earnings
base enacted under Public Law 92-336 was retained.
At the close of the fiscal year^ amendments affecting social security
had been added to the Renegotiation Act Extension (H.R. 7445). Included was an across-the-board benefit increase of 5.6 percent, effective
REVIEW OF TREASURY OPERATIONS
37
in June 1974. The raise was regarded as an acceleration of the automatic cost-of-living adjustments first scheduled to become effective
under Public Law 92-336. The benefit increase was based on the cost-ofliving increase betweeii June 1972 and June 1973. I n addition, the retirement test would be liberalized. The annual earnings limitation
would be increased from $2,100 to $2,400, effective January 1974. For
earnings in excess of this amount, benefits would be reduced by $1 for
every $2 of earnings. The maximum earnings base would be increased
to $12,600 in 1974, rather than the $12,000 scheduled under Public Law
92-336.
Unemployment insurance
On April 12, 1973, the President sent a message to the Congress
proposing reform of the unemployment insurance system. The President requested establishment of minimum benefit standards for the
States, providing at least 50 percent of a covered worker's average
weekly wage, up to a State maximum of at least two-thirds of the
average wage for covered workers in the State. Also requested were
the extension of unemployment insurance coverage to farm employees
and the prohibition of the payment of benefits to strikers or denial of
benefits to nonstrikers.
These recommendations, plus an increase in the net Federal unemployment tax, were incorporated in a draft bill sent to the Congress
on May 7, 1973, by the Secretary of Labor. Public Law 92-329, approved June 30, 1972, had provided a temporary increase in the net
Federal unemployment tax from 0.5 percent to 0.58 percent for calendar year 1973 only. The draft legislation would extend the 0.58-percent
increase for 1973 to 1974 and 1975.
Federal tax expenditures
Estimates of Federal tax expenditures for tax years 1967 through
1972 were prepared by the Treasury staff in cooperation with the staff
of the J o m t Committee on Internal Revenue Taxation. The House
Committee on Ways and Means made these estimates available to
the public on June 1,1973.
International tax matters
Legislation^ regulations^ and administrative procedures,—In his
April 10, 1973, trade message, the President urged enactment of his
recommendations on taxation of foreign source income.^ These proposals, which were submitted to the House Committee on Ways and
Means on April 30,1973, provided t h a t :
(1) U.S. shareholders would be taxed currently on future earnings,
whether or not distributed, of a controlled foreign corporation engaged
1 See exhibit 44.
38
1973 REPORT OF THE SECRETARY OF THE TREASURY
in manufacturing or processing activities where the corporation makes
new or additional investment and is allowed a foreign "tax holiday" or
similar tax incentive with respect to such investment; (2) U.S. shareholders would be taxed on the future earnings, whether or not distributed, of a controlled foreign corporation where the corporation
makes new or additional foreign investment in manufacturing or processing of products exported to the U.S. market, if the income from
such investment is subject to foreigii corporate tax significantly lower
than in the United States; and (3) where a U.S. taxpayer has deducted
foreign losses against U.S. income, such losses would be taken into
account to reduce the amount of foreign tax credit claimed by such
taxpayer on foreign earnings in later years.
The Treasury issued on June 11, 1973, more details of the April 30,
1973, proposals related to foreigii tax haven manufacturing corporations. The proposals deal with tax inducements of foreign countries
Avliich attract American capital abroad. Major tax inducements include
income tax exemptions of manufacturing and processing income for a
number of years, partial exemption or lower rates under a corporate
income tax, and grants of cash or property which could be treated as a
cost recovery benefit, depreciation investment allowances, and investments credits which used singly or in combination provide a substantially greater cost recovery than obtained under U.S. tax law.
Pursuant to a Treasury request,^ the interest equalization tax was
extended by the Congress, with a numberof minor amendments, beyond
its expiration date of March 31,1973, until June 30,1974.
Prior to the end of 1972, issuance of proposed regulations was completed with respect to the D I S C legislation enacted as part of the
Revenue Act of 1971. This legislation permits deferral of income taxation on a portion of the income of domestic corporations engaged in
exporting. Public hearings on the proposed regulations were held in
March 1973. By the end of June 1973, more than 4,000 D I S C elections
had been filed with the Internal Revenue Service.
The Treasury developed a number of regulations under previously
enacted laws, including revised regulations for allocation of income
and deductions for the determination of foreign and domestic source
income, the definition of the Continental Shelf, and the application of
estate and gift tax rules to nonresident aliens.
Ta^ treaties,—A new income tax treaty with Norway, to replace the
1949 treaty, was approved by the U.S. Senate on August 11,1972, and
instruments of ratification were excliang:ed on September 29.
Negotiations with the Soviet Union were beguii during the year and
concluded with the signing of an income tax treaty on June 20, 1973.
1 See exhibits 41 and 42.
REVIEW OF TREASURY OPERATIONS
39
The new income tax treaty with Belgium was brought into force by
the exchange of instruments of ratification on September 13,1972. The
provisions of the new treaty have effect as of January 1, 1971.
During the fiscal year, draft treaties were initiated with the Governments of Morocco (November 4, 1972), Korea (March 28, 1973),
Iceland (May 18, 1973), and Kenya (June 18, 1973). Negotiations
continued with Jamaica, Indonesia, and the Republic of China for new
income tax treaties, and preliminary negotiations were held with the
Governments of Poland and Romania. Discussions were also held with
the Netherlands for revision of the present income tax treaty. In
response to changes in the internal tax laws of the United Kingdom
and Canada, negotiations were begun with those countries for revision
of the respective treaties.
International organiBations.—Treasury representatives participated
in the work of the Committee on Fiscal Affairs of the Organization for
Economic Cooperation and Development ( O E C D ) . Treasury representatives were members of a number of working parties of the Committee. A Treasury representative was chairman of the Committee.
Treasury representatives also participated in a meeting of the
United Nations Group of Experts on Tax Treaties between developed
and developing countries which continue to work on designing appropriate provisions for treaties between developed and developing
countries.
Administration, interpretation, and clarification of tax laws
The Department of the Treasury, during fiscal 1973, issued 77 final
regulations, 8 temporary regulations, and 52 notices of proposed rule
making relating to matters other than alcohol, tobacco, and firearms
taxes. Of the above, 36 of the final regulations and 10 notices of proposed rule niaking covered projects under the Tax Reform Act of
1969. Eleven final regulations, 18 notices of proposed rule making,
and 2 temporary regulations covered projects under the Revenue Act
of 1971. I n addition to the above, there were four final regulations and
seven notices of proposed rule making relating to alcohol, tobacco,
and firearms taxes.
Among the subjects dealt with in Treasury decisions and notices of
proposed rule making published during the fiscal year were the treatment of corporations qualified as Domestic International Sales Corporations ( D I S C ) , estate and gift taxation of nonresident aliens,
charitable remainder trusts, charitable contributions, private foundations, arbitrage bonds, advance payments, long-term contracts, inventory costs, real estate investment trusts, depreciation, accumulation
trusts, and political contributions.
40
1973 REPORT OF THE SECRETARY OF THE TREASURY
Other tax developments
Public Law 92-336, approved July 1, 1972, an act to increase the
temporary debt ceiling, included a provision that allows losses attributable to a disaster that occurs during the first 6 months after a
taxable year to be claimed as a casualty loss deduction in the preceding
taxable year. The amendment applies to disasters occurring after
December 31, 1971.
Public Law 92-418, approved August 29, 1972, places veterans organizations in a special category of exempt organizations and allows
losses attributable to a disaster after December 31, 1971, to be claimed
as a casualty loss in the preceding taxable year.
Public Law 92-512, approved October 20, 1972, increases the jurisdictional amount for the Small Claims Division of the U.S. Tax Court
from $1,000 to $1,500, effective January 1,1974.
Public Law 92-558, approved October 25, 1972, imposes an 11-percent excise tax on manufacturers and importers of bows and arrows
and related equipment, eff'ective July 1,1974.
Public Law 92-580, approved October 27, 1972, permits American
Samoans to qualify for more than one personal exemption; provides
an exclusion from the gross estate for estate tax purposes of any interest in certain types of employee plans or contracts held at the death
of a nonemployee spouse in a community property State; and provides
that where the rate of a State or local sales tax on motor vehicles is
higher than the general sales tax rate, that part of the tax paid which
is equal to a tax imposed at the general sales tax rate will be deductible.
Public Law 92-606, approved October 31, 1972, coordinates the
individual income taxes of the United States and Guam.
Proposed legislative programs
The sulphur oxides emissions charge, which would be a special
financial charge by the Federal Government on those who produce
sulphur oxide emissions, was proposed to the 91st Congress in February 1972 and was recommended by the President in his state of the
Union message on February 15,1973.
P O W - M I A legislation was sent to Congress by Secretary Shultz
on February 21,1973. The proposal would resolve income tax problems
faced by returning prisoners of war and the families of some men who
have been listed as missing in action.
Treasury proposed amendments to the military pension system,
which were incorporated in H.R. 4200, passed by the House of. Representatives on June 22, 1973. The technical amendments continued
favorable tax treatment for survivor benefits.
REVIEW OF TREASURY OPERATIONS
41
I n t e r n a t i o n a l Financial Affairs
International monetary reform
As discussed in the following sectioii on foreign exchange developments and operations, fiscal year 1973, particularly the latter half,
was a period of major exchange rate developments and much activity
in the foreign exchange markets. The year also witnessed the launching .
of formal negotiations on fundamental reform of the international
monetary system. This section discusses the scope and purpose of
those negotiations, the U.S. approach to reform, and the status and
outlook for the reform discussions at the end of the fiscal year.
The membership of the International Monetary Fund voted in
July 1972 to establish a Governors Committee on Reform of the
International Monetary System and Related Issues. With the strong
support of the United States, the Committee was given broad terms of
reference: To "advise and report to the Board of Governors with
respect to all aspects of reform of the international monetary system"
and, in considering and reporting on those matters, to "give full attention to the interrelation between these matters and existing or prospective arrangements among countries, including those that involve
international trade, the flow of capital, investment, or development
assistance, that would affect attainment of the purposes of the Fund
under the present or amended Articles."
This broad mandate for the Committee, encompassing not only
monetary but closely related areas of trade and investment as well,
recognizes that a comprehensive approach to reform is needed in
order to assure development of a viable and equitable economic system
in the future; that, as stated by President Nixon in an address before
the I M F annual meetings in September 1972, monetary reform is but
"one vital part of a total reform of international economic affairs,
encompassing trade and investment opportunity as well." I n some
instances, the relationships are so close that they must be dealt with
on a highly integrated basis—for example, questions relating to the
use of trade or capital restrictive measures for balance of payments
purposes. I n other instances, negotiations should be separate in order
to make progress. For example, negotiations on liberalization of
specific trade restraints, or on specific capital restrictions need not
wait on monetary reform, nor should comprehensive reform await
those more liniited negotiations. I t is essential, however, that the negotiations in the various spheres be conducted from a common view
and with a common approach; and that the results of the various
negotiations stand up to the tests of consistency, and to the extent
possible, be mutually reinforcing.
42
1973 REPORT OF THE SECRETARY OF THE TREASURY
At the annual meeting of the International Monetary Fund in
Washington in Septeniber 1972, Secretary Shultz outlined comprehensive U.S. proposals for reform of the international monetary system.^ The U.S. proposals were subsequently elaborated further in a
series of papers submitted to the C-20. (Two of these papers have
been published, as exhibit 79 of this report, and as a supplement to
chapter V of the 1973 report of the President's Council of Economic
Advisers.)
The fundamental objective of long-range monetary reform is to
develop the agreed codes of conduct that are necessary for governing
behavior in an interdependent world. Each nation naturally likes to
retain for itself as much freedom of action as possible. But where a
country's actions impinge on others, it is essential to assure that those
actions are consistent with the requirements of the system as a whole.
The ultimate failure of the Bretton Woods system was that while
its sustainability depended on a broad measure of international
financial and economic equilibrium, it was not able to assure that
needed equilibrium. I n the U.S. view, the main practical objective of
reform should be to develop a system which can assure balance and
avoid the disruptive disequilibria of the past. The process of balance
of payments adjustment must be made more efficient; and the pattern
of disciplines, rights, and obligations relating to adjustment must be
made more symmetrical and equitable. The system should be as free as
possible from reliance on controls, should support progress toward a
more liberal trade and payments order, and should afford governments the maximum freedom of choice and action consistent with the
needs of the system as a whole.
Guidelines for balance of payments adjustment.—ThM^ the establishment of clear, agreed adjustment rules and criteria is central to the
U.S. reform proposals. Without such rules, there is a danger that adjustment decisions by individual countries will be delayed too long,
that adjustment burdens will not fall symmetrically on deficit and surplus countries alike, and that the international community will fail
either to note the emergence of significant disequilibria or to bring to
bear appropriate disciplines and pressures on countries to take corrective action when it is needed.
The United States has proposed specifically that disproportionate
movements in a nation's reserves, as the most comprehensive and readily available indicator of balance of paynients disequilibria, be used as
an objective criterion to point to a need to adjust and to create a presumption that corrective action would be taken. Adjustment, of whatever form, would not automatically follow the indicator's movement;
1 See exhibit 4,'8.
REVIEW OF TREASURY OPERATIONS
43
the international community would have authority to "override" the
indicator if it were judged to be wrong. But the system would establish
a bias toward equilibrium and more efficient payments adjustment, to
replace the bias toward disequilibrium of the past. I n addition, it
would provide a needed assurance that pressures to adjust will apply
more evenhandedly as between countries in surplus and those in deficit.
I n developing its proposals, the United States assumed that most
countries would want to maintain established values for their currencies—par values or central riates—supported by convertibility of currencies into primary reserve assets (SDR's, reserve positions in the
I M F , and gold). I n a convertibility system, there is a danger that
such pressures to adjust as do exist will fall asymmetrically on countries in deficit: Deficit countriies are ultimately forced to take action as
. their stocks of reserves are depleted, whereas there are no equivalent
limitations on the ability of countries in surplus to accuinulate reserves. Thus, in accepting a system of convertibility for the future, the
United States has proposed use of a reserve indicator as a symmetrical
extension of the convertibility mechanism—disproportionate reserve
accumulations would create pressures for surplus countries to adjust,
just as in a convertibility system reserve losses naturally create pressures for adjustment by deficit countries.
The U.S. proposal for a reserve indicator provides a rigorous framework for assuring that the system's tolerance for payments imbalance—and a reasonable degree of tolerance for imbalance is needed—
is consistent with the supply of international reserves available to
.finance such imbalances. If countries generally wish to have, substantial freedom to run imbalances before having to adjust, this will
become clear in decisions on the placement of the reserve indicator
points. They must then be willing to create international reserves on a
scale consistent with the desired scope for imbalance. Too few reserves would invite a destabilizing and ultimately fruitless competition for scarce reserves. Too many reserA^es could unduly relax the system's disciplines and proniote inflationary tendencies.
As part of a more effective and equitable structure of adjustment
rules, the United States has also proposed that the international community be afforded the means to induce countries in deficit or surplus
to undertake adjustment Avlien that was needed. Such inducements
might take the form, for example, of a loss of scheduled SDR allocations, a refusal to provide credit, or, as has also been suggested, a
penalty rate of interest on excessive reserve accumulations. Also, the
United States has proposed that in extreme cases, countries should be
able to protect their interests against the behavior of a chronic surplus
506-171—'73
6
44
1973 REPORT OF THE SECRETARY OF THE TREASURY
country that did not adjust in accordance with agreed rules, by imposing a surcharge on imports from that country.
The expectation, of course, is that in practice such pressures would
rarely if ever need to be used. Once the system were agreed upon,
countries would be expected to operate their policies in accordance
with the basic principle of payments equilibrium—too frequent a use
of severe international pressures would indicate a failure of the system. Nonetheless, the system should be capable ultimately of applying
such pressures, both to make the operating rules more forceful and
meaningful and to safeguard against refusal of a country to live by
the agreed "rules of the game."
Adjustment policies.—It is clear that no international economic
system can function smoothly in the absence of basic stability in the
domestic economies that comprise it. Sound domestic management is
an essential ingredient of a sound international economy, and countries should be expected to follow responsible domestic policies. At the
same time, countries must be allowed the freedom to pursue their
legitimate domestic objectives, having concern for the international
repercussions of the domestic policies they undertake. Nations should
not be expected to undertake policies inappropriate to their domestic
needs—such as, policies to exacerbate a recession or an inflation—in
lieu of alternative adjustment measures.
Within the general framework of freedom of policy choice, howover, the United States has also proposed that use of certain measures
should be made more acceptable than in the past, and that use of others
should be more circumscribed in the new rules.
First, the exchange rate imedhanism must be made more flexible and
accessible as an instrument of adjustment than it was in the Bretton
Woods systeni up to 1971. I t is widely agreed that undue exchange rate
rigidity was a major contributor to the accumulation of huge imbalances in the past. The excessive rigidity of the past is reflected in
the need for two major and unprecedented multilateral realignments
of exchange rates in 1971 and 1973, to provide a rate structure consistent with economic realities and to create a reasonable prospect for
international payments equilibrium. Thus, while the system would be
centered on par values—which themselves should be adjusted promptly
if they became no longer appropriate^—countries should also be allowed to float their currencies in accordance with appropriate standards and under international surveillance, if that were best suited to
t.lieir needs. The United States also proposes that wider margins for
exchange rate fluctuation above and below established par values—on
the order of the margiiis agreed provisionally at the Smithsonian
Institution in 1971—be made a permanent feature of the system, and
REVIEW OF TREASURY OPERATIONS
45
that intervention arrangements be modified to afford the exchange rate
of the U.S. dollar the same ability to fluctuate within the margins that
other currencies enjoy.
Second, the United States believes that the system should be strongly
oriented toward maximum freedom from governmental restraint or
inducement for international trade and investnient. Thus adjustment
in a liberalizing direction, e.g., unilateral reduction of trade restraints
by surplus countries, would be welcomed. And there should be a presumption against use of artificial barriers as a means of payments
adjustment. An equilibrium based on restraints is not really an equilibrium at all. We have proposed specifically that countries should not
be expected to impose controls in lieu of other, more basic, adjustment
measures, and that they should not impose or maintain controls in
order to preserve an inappropriate exchange rate.
Reserve assets.—^The United States has proposed that special drawing rights (SDR's) assume a greatly enhanced role in the future;
specifically that instrument would take on the roles of numeraire (or
unit of account) and central reserve asset in the new system. We have
proposed a number of modifications to the present rules relating to
the SDR to make it a more "streamlined," usable, and attractive asset.
The United States also proposes that the diminishing trend in the
official monetary role of gold be continued, and approaches toward
that end have been discussed. The U.S. position is based on the view
that the liinited supply of gold and competing private demand result
in an availability of gold for official reserves which is wholly unrelated to the system's needs, and that provision of liquidity by means of
official price changes would be inherently destabilizing and would
provide disproportionate benefits to a few without consideration of
the overall needs of the system. The speculative pressures and recent
price gyrations in private markets are further evidence that gold, or
any other commodity, cannot provide a satisfactory and stable basis
for the monetary system.
Finally, the United States envisages a continuing, but diminished
role for currencies in the system. The U.S. plans seek no privileged
or special role for the dollar, and our proposals as a whole would mean
full acceptance by the United States and by all countries of identical
rights and identical obligations. Intervention, and foreign exchange
accruals, might no longer be centered on the dollar and one or two
other currencies, but spread more evenly across a range of currencies.
And the U.S. proposals recognize that possible arrangements to deal
with large existing balances of dollars in foreign official reserves are a
legitiniate subject for the reform discussions.
Nevertheless, provision of some continued scope for currencies in
the systeni would be desirable for two reasons. First, there is no need
46
19 73 REPORT OF THE SECRETARY OF THE TREASURY
for the system to try to eliminate all freedom of reserve portfolio management. Second, allowance for some currency holdings in reserves
can provide elasticity in global and individual countries' reserves,
which may be needed to help cope with large movements of volatile
capital. Without such elasticity of currency holdings, and in the absence of exceptionally large availabilities of "primary" reserves, the
system might easily break again under the strain of speculative disturbances or large movements attributable to other causes.
Institutional arrangements.—While' the United States has as yet not
put forward detailed suggestions for institutional {Change, we have expressed the views that the structure of the International Monetary
Fund should be modified, and that the relations betweeii the Fund and
other organizations with international economic responsibilities should
be closer, more consistent, and better coordinated.
With the considerably stronger international disciplines for adjustment we have, proposed, the Fund—and the international rules
that embody its Articles of Agreement-r-would take on a more influential role. Balance of payments adjustment, through whatever nieans, is
a difficult and politically sensitive matter. I t is the U.S. view that the
activities of the Fund in this critical area, if they are .to be effective,
must involve participation by politically responsive and responsible
officials from the Fund's inember governments. Suggestions for ways
of moving in this direction have been put forward.
Similarly, and in accord with its view of the need for a comprehensive reform of the international econoniy, the United States believes provision must be made for closer ties and better coordination
between the Fund and the institutions having primary responsibility
for the developnient and administration of rules regarding trade and
investment—the General Agreenient on Tariffs and Trade (GATT)
and the Organization for Economic Cooperation and Development
( O E C D ) . Again, the United States has not made,specific proposals for
changes in institutional arrangements, and the questions in this area
have not yet received a great deal of international attention or discussion. This is natural, for the basic issues of substance—^tlie new
codes of behavior—must be decided before institutional questions
relating to the administration of those codes are decided. But it is clear
that the various institutions need to be; brought into closer harmony
if the reformed system is to be coherent and sustainable. . ^
Negotiations on reform—status and outlook.—The proposals put
forward by Secretary Shultz last September and elaiborated subsequently in the Committee of Twenty, prpvided a major focus for the
C-20's work. During the course of the period under review, the Committee met at the Ministerial level twice, and at the level of Deputies
to Ministers on five occasions.
REVIEW OF TREASURY OPERATIONS!
47
The earlier meetings of Deputies were devoted to organization of
their work and identification and clarification of key issues-—^^a process
that at times seems tedious and yields few visible results. Yet the
process is an inevitable and necessary part of the reform effort, for the
issues at stake affect the basic national interests of all countries
involved.
At a meeting in late March, the C)-20 Ministers released a press
communique noting their discussion of some of the broad principles
of a reformed system, pointing to certain areas deserving priority
study and endorsing a more intensive work program by their Deputies.^
Specifically, there was .a broad consensus on the followmg:
(1) The need for a more effective adjustment process with adequate methods to ensure timely and effective adjustment by both surplus and deficit countries (this process to be assisted by improved
consultation in the Fund including the use. of objective indicators) ;
(2) An exchange rate regime based on. stable but„ adjustable par
values, with recognition that floating rates ban provide a useful technique in particular situations;
(3) The need for better management of global liquidity, with the
role of currencies being reduced and the SDR beconiing the principal
reserve asset of the ref ormed system;
(4) The desirability of a strong presumption against the use of
trade controls for balance of payments purposes.
Important as these broad principles are, considerable work remained to define them with precision and make them operative. Following ithis March meeting, the Deputies established several technical
groups to study indicators in the adjustment process, disequilibrating
capital flows, and proposals for creation of a link between the SDR and
development finance. The Deputies met intensively for 5 da^ys, in late
May and again shortly after the end of the fiscal year, in preparation
for a further meeting of Ministers in late July.,
At the close of the fiscal year, many issues of principle, and a number of technical questions of detail having major implications for the
operations of the system, had been defined and expressed, by the Deputies with sufficient precision and clarity that they could be put forward for Ministerial consideration. Following the Ministers meeting
at the end of July, prospects appeared to be good that the Committee
could reach agreement on some of the main principles oi reform at
the September 1973 annual meetings of the I M F in Nairobi. I t is
recognized on all sides, however, that a completed agreement could
not be negotiated until some time beyond the Nairobi meetings and
that, in any event, a considerable further period would be needed to
1 See exhibit 77.
48
1973 REPORT OF THE SECRETARY OF THE TREASURY
work out details of implementation and to obtain necessary legislative
ratification in the member countries.
Foreign exchange developments and operations
The withdrawal by the British of sterling from the Smithsonian exchange rate realignment agreement and the decision by the authorities
to allow sterling to float in late June of 1972 raised questions as to
whether other countries might also decide to cease support for their
currencies at the agreed level. As this fiscal year began, there was considerable speculation that the other E E C countries might allow their
currencies to float separately or as a bloc. In view of the continuing
adverse balance of payments position of the United States, such a move
would have resulted in most cases in an appreciation of these currencies
against the dollar.
As a result, the dollar came under heavy speculative pressure in the
first 2 weeks of July, with over $6 billion being absorbed by various
foreign central banks, primarily the Gerinan, Swiss, Japanese, Dutch,
and French. By mid-month the crisis abated as the market became
convinced that these monetary authorities were prepared to support
the Smithsonian rate structure.
The U.S. authorities decided that the turn in the niarket would be
given a firmer base and enhanced if the United States also demonstrated a willingness to intervene in support of the dollar. I t was announced that the United States was willing to intervene in the exchange
markets upon occasion when it feels it desirable to help deal with speculative forces and reiterated its view that the speculative pressures
growing out of the British decision to float sterling need not affect the
basic exchange rate structure. I t was also noted that use might be made
of the swap facilities, which had been suspended since August 15,1971,
if needed in connection with U.S. exchange niarket operations.
The first such operation, on July 19, was undertaken in deutsche
marks with offerings being made by the Federal Reserve Bank of New
York over a period of a few days. I n August, operations were also
undertaken in Belgian francs. All sales of foreign currencies, either
from preexisting U.S. holdings or frpm small swap drawings, were
soon fully covered by market purchases as the dollar strengthened on
the exchanges.
The total sales in both currencies amounted to $31.5 million, although offerings to the market were larger.
Following the disturbance at the beginning of the year the exchange
markets settled down and the following 6 months were uneventful.
During the period the dollar tended stronger. The proposals for monetary reform made by the United States at the annual meeting of the
I M F and I B R D at the end of September were well received.
REVIEW OF TREASURY OPERATIONS
49
The U.S. balance of payments and trade balance remained in substantial deficit. Even though it was generally well recognized that exchange rate adjustments take a considerable time to make themselves
apparent in balance of payments changes, there was growing concern
that the rate realignment agreed u^Don at the Smithsonian in Deceniber
1971 was not working sufficiently or with sufficient speed. I n this climate, a relatively unimportant event set in motion a chain of events
leading to a new crisis and ultimately to a transitionar regime of essentially fioating exchange rates.
I n January, Italy, with growing downward pressure on the lira,
decided to split its exchange niarket into two tiers, one for capital transactions, which would float, and the other primarily for trade. There
had been a persistent, and at times large, capital outflow from Italy
that stemmed primarily from political uncertainties rather than basic
balance of payments trends. I n this situation, a two-tier systeni similar
to those the French and Belgians had adopted much earlier was considered by the Italian authorities to be desirable. The institution of
this system and the depreciating trend of the financial lira served,
however, to direct some additional capital outflow to Switzerland.
The Swiss franc was already strong and could have been expected
to strengthen further as domestic liquidity was tightened to combat
inflationary trends. These developments moved the Swiss franc to its
ceiling level and generated speculation from other sources and required
the Swiss National Bank to intervene and purchase several hundred
million dollars. I n the face of this influx, the Swiss decided to float the
franc, which promptly appreciated by several percentage points.
The floating and appreciation of the Swiss franc again called into
question the will of the other monetary authorities to maintaiii the
Smithsonian parities and the soundness of these parities. Pressures
grew and in the period of February 1 through 9 over $9 billion was
acquired in support operations by various central banks, of which the
Germans alone absorbed about $6 billion. The United States also intervened in the market by selling $315 million of DM obtained from
Treasury and Federal Reserve balances and by a $105 million drawing
by the Federal Reserve oil its swap line.
Discussions between the United States, Japan, and several European
countries resulted in the closing of markets on February 12 and 13
and announcement by the United States on the evening of Februaiy 12
that a further devaluation of the dollar, amounting to 10 percent,
was proposed and had been agreed. The Japanese yen was to be allowed
to float, as would both tiers of the Italian lira, and the Swiss franc and
British pound would continue their floats. The other major European
countries promptly adjusted their niarket intervention rates to reflect
this proposed devaluation of the dollar.
50
1973 REPORT OF THE SECRETARY OF THE TREASURY
The second devaluation of the dollar in only slightly over 1 year's
time came as a consideraible shock to the market. The credibility of
fixed parities and the will of nionetary authorities to support them
was severely questioned. Although there was general belief that this
further realignment of exchange rates should in time amply restore
the U.S. balance of payments position, there were strong doubts as t o
the maintenance of parities in the face of pressure. After a $1 billion,
reflow out of Germany, the mark climbed to its new ceiling, and there,
was extremely heavy intervention on March 1 by Germany and to a.
lesser extent by other European countries. Markets were again closed;
that is, the central banks withdrew and the currencies were effectively
lefttofloat.
.I
. ,
, .
I n the ensuing weeks the E E C countries of Belgium, ,D!enmark,
France, Germany, and the Netherlands, joined by Norway ..and Sweden,,
agreed that they would resume maintenance of their central rates in
relationship to each other in the 214 band and float jointly against the
dollar and other currencies. Germany had revalued the mark a, further
3 percent and Sweden had devalued by 5 percent in addition to the.
adjustmentsmadeby the proposed dollar devaluation.
.,
The joint float began on March 19, and the dollar strengthened
against other currencies so that until mid-May they traded within the
same range as that which would have been required had the agreed
central rates or parities been maintained. The DM was frequently a t
the bottom of the joint float band and below its now notional central
rate level with the dollar.
^
The relationship between the dollar and the currencies of its two
largest trading partners, Canada and Japan, remained quite stable
throughout the remainder of the fiscal year. I n fact, the yen tended to
weaken and was supported by the Bank of Japan through considerable
dollar sales at the level it had quickly reached when allowed to floatsome 16 percent above its Smithsonian parity. Sterling, which had
depreciated sharply following its flotation the previous year, returned
to trade close to its Smithsonian parity, as did the Italian lira, which
continued to be subjected to speculative outflows.
The European joint floaters began, however, to show an appreciation
of their currencies around mid-May, and by the end of the fiscal year
and after some erratic adjustments, were trading about 10 percent
above the central or parity levels agreed earlier in the year, or well
over 20 percent above the Smithsonian rates.
Strong anti-inflationary measures in Germany caused the DM in
particular to show strength, and by late June it traded at the top
of the joint float band requiring considerable intervention to maintain
the joint float relationship and pulling other currencies in the joint
float upward against the dollar. T h e intervention was undertaken in
REVIEW OF TREASURY OPERATIONS!
51
the currencies of the countries concerned and not in dollars. To alleviate the strain on the joint float and also abate the inflow of funds
to Germany, which ran counter to their monetary policy, Germany,
on June 29, revalued the DM by 5.5 percent.
The price of gold in the private markets had reached around $65
per ounce at the beginning of the fiscal year, climbed to $70 in early
August and returned to $65 at the end of December, after falling at
times to $60. Not much change was evident in January, but beginning
in February the price began to move upward, reaching a high at the
London fixing of $89 late in the month. Prices of around $90 continued
to be maintained until the second week of May, when there was another
sharp advance. A high of $127 was reached on May 5, after which the
price subsided somewhat to finish the year around $123 per ounce, an
increase of $62, nearly double the price of a year earlier.
To a large extent the movement in the gold price paralleled activity
in the exchange markets. The general uncertainties concerning the
future exchange rates of all currencies encouraged speculation and investment in gold, as did the tight exchange controls imposed by many
countries designed to inhibit inflows and which made speculation in
those currencies more difficult. The rise in the gold price and the appreciation of some European currencies against the dollar had a
ratcheting effect on each other, tending to move both aJbove levels they
would probably otherwise have attained.
International Monetary Fund^
Fiscal 1973 was a period of relatively little activity in the IMF's
financial accounts. With the continuation of strong reserve and balance
of paynients positions in most major countries, and the introduction of
floating exchange rates by a number of countries in March 1973,
most of the industrial nations did not require recourse to I M F credit
duringtheyear.
Purchases of currency (drawings) by I M F members totaled the
equivalent of $1.4 billion, somewhat below the level of the preceding
year. A large drawing was made by the United Kingdom in July 1972,
amounting to the equivalent of $704 million or half of total drawings
from the Fund during the entire year. Principal currencies drawn
were the German mark (in the equivalent of $370.6 million) ; the
French franc ($181.4 million) ; and the Japanese yen ($140.9 million).
Special drawing rights were drawn in the amount of $365 million
equivalent. The U.S. balance of payments was in deficit throughout
much of the period, and no drawings were made in U.S. dollars.
1 Legislation to devalue the dollar (exhibit 52) was pending at the end of the fiscal year.
The figures used in this section are reported in dollars having the new par value which will
result from this legislation.
52
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Currency repurchases (repayments) totaled the equivalent of $597.0
million, well below the large repayments recorded in fiscal 1972.
Repurchases were concentrated in the currencies of Germany, France,
and Belgium, and in SDR's. I M F holdings of dollars exceeded 75
percent of the U.S. quota in the I M F throughout the period, and,
consequently, dollars were not eligible for use in repurchases.
As of June 30, 1973, cumulative drawings from the beginning of
I M F operations amounted to the equivalent of $31.1 billion, of which
$9.5 billion was in U.S. dollars; cumulative repurchases amounted to
the equivalent of $18.9 billion, of which $5.6 billion was in U.S.
dollars.
No transactions were conducted under the General Arrangements to
Borrow (GAB) during the year. As of June 30, 1973, amounts available under the GAB totaled the equivalent of $7.1 billion.
As a result of various minor transactions, the U.S. reserve position
in the I M F increased by a sniall amount during the period. As of
June 30, 1973, the U.S. reserve position amounted to $522 million,
consisting of the balance of the U.S. gold tranche position.
Organization for Economic Cooperation and Development
Secretary Shultz led the U.S. delegation to the 12th Ministerial
Council meeting of the O E C D in Paris June 6-8, 1973.' With inflation widespread throughout the world economy, a primary focus
of the meeting was on action nations could take to reinforce their
efforts to reduce price pressures. The Ministers also reaffirmed the appropriateness of the exchange rate structure negotiated earlier in the
year while pointing to their intention to maintain orderly exchange
markets in the transition period leading to a reformed monetary
system. The OECD's role in reform of the international economic
system was reviewed, and the Executive Committee of the Organization was instructed to press forward with its work on international
investment. Ministers also considered cooperative measures that niight
be undertaken to respond to the long-term energy problem and to
assure adequate energy supplies.
During the 3^ear, the O E C D was intensively involved in efforts to
reform the international economie systeni. Recognizing the significant impact of international investment on trade and monetary relations, the Executive Committee meeting in special sessioii developed
a work j)rogram for examining the issues related to international investment including the operations of multinational companies. The
role of trade safeguards and problems associated with agriculture will
also be considered by the Executive Committee as part of the reform
1 See exhibit 57.
REVIEW OF • TREASURY OPERATIONS
53
effort. Deputy Under Secretary Bennett represented the De]3artment
of the Treasury on the U.S. delegation to the Executive Committee
special sessions.
During fiscal 1973, the O E C D Council agreed to terminate the European Monetary Agreement ( E M A ) , effective December 31, 1972, in
recognition of the fact that its main purpose—to facilitate the return
to external convertibility in Western Europe—^had been achieved. As
a result, assets totaling $355.5 million were returned to the United
States, representing the U.S. contribution to the EMiA of $271.6
million, plus $84 million in earnings on our contribution. Of the total
returned, $118 million was in the form of liquid assets, $123.5 million
involved the cancellation of an undrawn E M A account with the U.S.
Government, and $114 million took the form of a long-term claim on
Turkey which had been consolidated by the O E C D prior to transfer
to the United States. Arrangements between European members of
the E M A for guaranteeing the exchange value of foreign exchange
working balances were continued, and a new O E C D Conimittee for
Monetary and Foreign Exchange Matters was established to replace
consultative arrangements provided for in the EMA.
The Economic Policy Committee's working party on balance of
paynients matters ( W P - 3 ) met periodically during the year to consider problems of the transition to, and prospects for, a more balanced
world payments position resulting from the Smithsonian and February 1973 exchange rate realignments. The decisions in March by major
industrial countries to float their currencies (either individually or
jointly) raised new issues for the working party's consideration. The
Treasury, represented by Deputy Under Secretary Bennett, continued
to lead the U.S. delegation, as well as serve on the U.S. delegation to
the Economic Policy Committee itself. Treasury officials played leading roles in the work of the Economic Policy Committee's Working
Group on Short-Term Economic Prospects and in an experts group
established by W P - 3 to consider problems of adjusting balance of
payments figures to take into account cyclical developments.
Treasury involvement in O E C D affairs remained at a high level in
fiscal 1973. I n addition to the activities alread}^ mentioned, a Treasury
official continued as chairman of the Committee on Fiscal Affairs as
it undertook a broad work prograni in the tax area, covering the impact of depreciation rules, taxation of multinational corporations and
a revised model tax convention. Treasury also headed the U.S. delegation to the Group on Export Credit and Credit Guarantees in which
attention was focused on export financing terras for commercial aircraft, nuclear power stations, and ground satellite facilities. The Committee on Financial Markets, with Treasury participation, continued
54
1973 REPORT OF THE SECRETARY OF THE TREASURY
its review of problems and trends in international financial, including
Euro-, markets. As part of its task of iniproving caj)ital markets, it is
engaged in examining disclosure requirements for securities, national
policies regarding housing finance, and the adequacy of financial statistics. A Treasury official served as a member of the Committee for
Invisible Transactions. A major restructuring of the Economic Policy
Committee's Working P a r t y 2 on Economic Growth occurred in fiscal
1973, with greater emphasis being placed on resource allocation among
competing economic objectives. Treasury officials are participating in
efforts to develop common international expenditures, statistics as a
first step in the new work program contemplated for the working
party.
Treasury, officials are continuing to work closely with other agencies
in the work of the OECD Trade Committee and the Development Assistance Committee. Much of the work of the Trade Committee in the
past year was related to trade issues raised in the Executive Committee
in special session. The Trade Committee has discussed internal measures that affect trade, outlines of an international safegnards system,
and problems of international trade in agriculture. I n addition, the
Trade Committee Working Party on Government Procurement developed draft guidelines which were sent to the Trade Committee for
its consideration. The Development Assistance Committee devoted a
considerable amount of its attention during the fiscal year to the problems posed for the developing countries,by their external indebtedness.
U.S. balance of payments
All of the commonly used measures of the U.S. payments balance
for fiscal 1973 showed improvement over their fiscal 1972 levels. The
improvement actually shown in the balances with broadest coverage—
the official settlements and liquidity balances—amounted to $6.0 billion and $2.4 billipn, respectively. However, these balances were
strongly affected by speculative capital flows which obscured the underlying developments. The annual balances also obscure the differences of the trends in the more basic categories of transactions
which indicate a considerable strengthening in the U.S. payments
position between the first and second halves of fiscal 1973.
During the first half of the fiscal year, both the trade balance and
the various measures of overall balance were in substantial deficit,
though somewhat improved from their levels during the latter half of
fiscal 1972. There were several significant sources of improvement during the period, including substantial increases in agricultural exports.
The improvement in the trade balance on nonagricultural foods, however, may have been retarded somewhat by the fact that our major
trading partners, though embarked oh a cyclical expansion, had not
REVIEW OF TREASURY OPEiRATIONS
55
yet approached peak levels of demand, while the United States was
well along in its strong domestic expansion.
Other sources of' improvement during the first half of the fiscal
year included a substantial increase in foreign purchases of U.S. securities, especially stocks, and a large increase in U.S. receipts of income from foreign diriect investments. The rise in foreigii purchases
of U.S. stocks was in part related to recovery in the New York Stock
. Exchange. The growth in investnient income receipts came largely in
the October-December quarter, and relate in part to the rapid rise in
earnings from foreign investments reported by U.S. oil companies. A
negative factor during the October-December quarter was a substantial increase in U.S. bank loans to foreigners, which was repeated in
the following quarter.
The drastic deterioration in the liquidity and official reserve transactions balances during the third (January-March) quarter of fiscal
1973 was largely due to capital flows in conjunction with the February
1973 exchange crisis. Thus $10 billion of the year's $16 billion official
transactions deficit came in this quarter. The causes for the February
crisis are, of course, complex. I t appears that it was started by
developments abroad which were not related to_the.U.S. balance of
payments, but the slow recovery in the U.S. payments position in the
second half of last year relative to observers' hopes or expectations
probably contributed to the intensity of the crisis, which was fed by a
large outflow of U.S. funds and of foreign funds previously, invested
in liquid assets in the United States. Notwithstanding these large outflows of capital, the favorable trends in exports (especially agricultural products) and in investment incomes continued. Foreign purchases of investment securities, which were still very high i n January,
declined in the following months.
The period after March, when the requirement to maintain the exchange rate of the dollar with major currencies ..within specified margins was suspended, saw substantial continued iniprovement in the
U.S. trade and other transactions. The trade account continued to
strengthen during the April-June quarter, with further increases in
exports coming not only in the agricultural sector but also in industrial products and finished manufactures. I n addition, U.S. import
growth slackened somewhat. These developments were undoubtedly
stimulated by cyclically strong demand conditions in the economies
of our major trading partners. The changes in the exchange rate of the
dollar also contributed to the improvement in the trade balance although these changes are not likely to have shown.their full effect because, for the first time in the post-World W a r I I period, simultaneous
high levels of capacity utilization in all major industrial countries may
56
19 73 REPORT OF THE SECRETARY OF THE TREASURY
have limited opportunities or incentives for suppliers to compete with
each other.
Investment income receipts also continued at high levels during the
last 3 months of the fiscal year. I n addition, there were substantial reflows of liquid funds back to the United States, presumably in part reflecting an unwinding of earlier outflows in conjunction with the February exchange crisis. Also benefiting the capital account was a decline
in direct investment outflows.
Significant negative elements during the fourth quarter of the fiscal
year included a decline in foreign purchases of U.S. securities, and
a high level of capital outflows in the form of bank loans. Such loans
peaked in the January-March quarter, but remained very large during
the April-June period.
As a net result of these developments during the fiscal year, the
two balances perhaps the most frequently watched as indicators of the
underlying strength of the dollar^—the trade balance and the balance
on current and long-term capital account—showed substantial improvement over the course of the fiscal year.
Treasury foreign exchange reporting system
The international monetary disturbances that occurred during the
early part of calendar 1973 were accompanied by large movements
of funds out of the United States and from the dollar into foreign currencies. A large part of these movements appeared likely to escape
the established statistical reporting systems for the balance of payments. I n view of the need for an adequate explanation of these
events, the Departments of the Treasury and Commerce took steps to
ensure that the capital movements statistics for the first quarter of
1973 would be as complete and accurate as possible, and to obtain a
more complete understanding of the nature of these movements of
funds.
On April 23, 1973, Secretary Shultz and Secretary of Commerce
Dent sent a joint letter to the presidents of business firms in the United
States which file regular statistical reports on their international
capital transactions with either or both of the Departments for use
in the U.S. balance of payments statistics.^ The letter requested that
the companies undertake a policy level review of the statistical data
reported on the Treasury and Commerce forms for the first quarter
of 1973, to ensure their completeness, consistency, and accuracy.
Toward the end of the fiscal year, a second letter was sent by Secretary Shultz and Secretary Dent to a sniall nuniber of representative
companies, proposing joint meetings between senior experts of the
1 See exhibit 78.
REVIEW OF TREASURY OPERATIONS
''••
57
U.S. Mlance of payments, fiscal years 1972-73'^[In millions of dollars]
Fiscall972 Fiscall973
Trade (balanceof payments basis)!
Exports
Imports
_
2d half
-5,504
-
-_-
Travel...---.
-
-4,508
-3,318
44,299
57,642
25,575
32,067
-49,803 ' -62,150
---:
-1,190"
-28,893
-33,257
-1,064
-1,945
Payments...
Dividends, interest and branch profits
-2,476
-2,671
-3,262
-1,710
-1,552
1,524
.
1,607
-5,147
1,349
549
-4,905
Receipts
' 1,382
-3,381
Military
-1,094
2,989
-4,549
Payments
-2,158
2,604
Receipts
-4,611
-2,259
-2,352
3,137
5,484
Payments
-
--.
Balance on goods and services "
^
Private remittances, Government pensions, and other
transfers
-U.S. Government economic g r a n t s . . - - . .
.--.
Balance on current account
U.S. Government capital, net3
..U.S. direct investment abroad-—-.
Purchases and sales of foreign securi ties-U.S. long-term bank and nonbank claims.
Total transactions in long-term U.S. capital invested abroad
Total long-term foreign capital invested in the
United States 4
Balance on current account and long-term capital
Nonliciuid short-term capitals
SD R allocation
Errors and omissions
.Net liquidity balance ^
.
Change in net hquid liabilities to private foreigners
Balance on official reserve transactions...
Changes in reserve asset s (-|-=decrease):
Gold
-—
..SDR's
Convertible cmTcncies
=---;3-IMF gold tranche position
_
Changes in U.S. habihties to foreign official agencies (+ =
increase)
-
3,014
13,173
6,100
-5,409
.-
6,151
10,893
Receipts....
Other services
Fiscal 1973
1st half
-7,022
800
7,073
-3,086
-3,936
1,435
2,266
2,734
1,299
-3,080
—1,043
—1,809
-1,580
-2,263
—6,923
-1,182
-3,830
—1,017
-1,222
-1,580
-1,927
—4,550
-2,053
-5,102
92
-1,646
-802
-1,033
—3,644
-1,136
-1,919
169
-859 .
-778
-894
—906
-917
-3,183
—77
-787
-7,251
-8,709
-3,745
-4,964
3,369
—10,805
-1,563
714
-7,440
-19,094
—3,015
-22,109
7,322
—5,937
-4,259
354
-6,808
-16,650
519
-16,131
3,181
—4,208
-1,412
354
-3,116
-8,382
2,374
-6,008
4,141
—1,729
-2,847
-3,692
-8,268
—1,855
-10,123
845
-560
-107
1,027
3
-345
449
-36
.3
-354
216
-31
9
233
-5
20,904
16,060
6,174
9,886
766
* All data are based on seasonally adjusted quarterly data.
1 Differences between these figm-es and those published by the Bureau of the Census are due to adjustments for valuations, timing, coverage, and to the exclusion of DOD miUtary export sales and military
import purchases.
2 Equal to net exports of goods and services in national income and product accounts of the United States.
3 Includes nonscheduled debt repayments to the United States.
4 Includes U.S. Govermnent nonliquid habihties to other than foreign official reserve agencies.
5 Includes certain U.S. short-term bank and nonbank claims and all short-term habilities of nonbanks.
6 Differs from old liquidity basis by treating some short-term bank and nonbank claims and "nonliquid"
Uabilities to foreign official reserve agencies as below the line items.
Sou;rce: Department of Commerce, "The U.S. Balance of Payments: Revised Presentation," Survey of
Cm-rent Business, June and September 1973.
58
1973 REPORT OF THE SECRETARY OF THE TREASURY
Departments of the Treasury and Commerce and the Federal Eeser^^s*^
System, and representatives of the companies, to discuss the reporting
of international capital transactions in greater depth and detail and to
explore ways in which the statistical systems niight be improved.
Trade policy
Fiscal 1973 has been marked by a number of significant events in
the trade policy area. A variety of new issues demanded attention—
the entry into force of the treaties implementing the enlarged European Communities and the E C - E F T A arrangements, the movement
in the G A T T to prepare for a new round of trade negotiations, and
presentation to Congress by the administration of a major new trade
bill. I n addition, work has continued in a number of areas discussed
in this report last year, notably in East-West trade and in discussions
Avith the Japanese concerning liberalization of their trading systeni.
Much attention has been focused on the enlargement of the E C from
six to nine members on January 1, 1973, and the entry into force of
the EC-EFTA-nonapplicant arrangement on April 1, 1973,* because
it is feared tlita these events will have a negative effect on our trade
balance and, more broadly, on the optimal distribution of the world's
resources. Consequently, in February 1973 the United States initiated
consultations in the G A T T on the E C - E F T A arrangements, and in
March we agreed to put aside our ongoing discussions with the Europeans on the consistency of the enlarged E C with the G A T T in order
to begin item-by-item renegotiations ( G A T T Article 23:6) on. the
many bound items in the tariff schedules of the acceding countries
which have increased or will increase as a result of enlargement. The
United States has made clear to the parties concerned in both cases
that if we do not receive satisfaction in the G A T T discussions, we will
reserve our rights to offset damage to our trade.
Fiscal 1973 also saw the continuation of the series of bilateral consultations begun in 1971 to encourage the Japanese to remove the
structural impediments to foreign participation in the Japanese trading system and to liberalize Japanese import restrictions and internal
barriers to imported products. Although much progress remains to
be made, the Japanese did unilaterally lower the bulk of their tariffs,
set schedules for lowering and/or phasing out most of their industrial import quotas, and undertake a broad capital liberalization
program.
The United States has also continued to work for increased trade
with the nonmarket economy countries in the belief that the normalization of these relations is essential in our increasingly interdependent
•This includes all of the EFTA members which did not join the EC with the exception of
Norway, scheduled to join on July 1, 1973, and Finland, which has initialed but not signed
an agreement.
REVIEW OF TREASURY OPERATIONS
59
world. The most notable of our actions takeii in this field in fiscal
1973 was the conclusion of a trade agreement in October 1972 between
the United States and the U.S.S.R. The agreement includes provisions
for most-favored-nation treatment and a tripling of our bilateral trade
over fhe next 3 years. Congress must, however, enact legislation giving
the President authority to extend niost-favored-nation status before
this trade agreement can enter into force. Such enabling authority
is included in the administration's Trade Reform Act of 1973. I n
addition, in June 1973, additional ]3rotocols were signed with the
U.S.S.R. concerning agricultural cooperation and the promotion of
commercial relations between the two countries.
All of these actions are expected to lead to the more efficient and
equitable operation of the world trading systeni. I n the longer term,
however, ref orm of the trading system must parallel changes in the
nionetary area. Fiscal 1973 saw substantial, progress in preparing for
the new round of trade negotiations intended to achieve these broader
reforms. A t the 28th session of the G A T T contracting parties in November 1972 the United States, the E C , and J a p a n were joined by the
other contracting parties in a statement of intent to undertake such
negotiations beginning in September 1973. They also set up a preparatory comniittee which met periodically to prepare for a Ministerial
meeting in September. The negotiations, to begin formally at the
September meeting, are expected to result not only in further tariff
reductipns but also in progress toward liberalizing nontariff barriers
to trade in both the industrial and agricultural sectors. Finally, the
negotiations are to examine the adequacy of the rules of the current
trading systeni. All of these subjects, particularly nontariff barriers,
were the focus of the G A T T work program in fiscal 1973.
I n order for the United States to participate in the negotiations, the
administration submitted to Congress on April 10, 1973, the Trade
Reform Act of 1973. The bill would provide,the necessary authority
to allow the United States to join in negotiating a more open and
equitable world trading system. I t contains provisions to allow the
President to raise ahd lower tariffs and to negotiate nontariff barriers;
to deal effectively with rapid increases of imports that disrupt domestic
markets and displacfe; American workers; to strengthen our ability to
meet mifair competitive practices; to manage our trade policy more
effectively; t o take extraordinary trade measures to deal with domestic
inflation or balance of payments problems; to normalize our relations
with the nonmarket econoniy countries by permitting the President
to grant them most-favored-nation status; and to assist developing
countries by implementing a generalized system of preferences.^
1 See exhibit 55(.
506-171—73-
60
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Fiscal 1973 was, thus, a very active year in the trade field. There was
also evidence during this period of a reversal in the negative trend in
our trade account. The last 6 months of fiscal 1973 saw a trade deficit
of $810 million as compared with $5.5 billion of the same period of
fiscal 1972. Although much of this improvement came from the increased value of agricultural commodities which comprised an increasingly large proportion of our exports, we hope that the figures also
reflect the increased competitiveness of U.S. goods as the result of the
exchange rate changes of the past 2 years.
International investment and capital flows
I n fiscal 1973 there were, several notable developments which have
had and will continue to have considerable impact on the nature, direction, and magnitude of capital flows and international investment.
International examination of investment issues,—In his September 1972 address at the annual meeting of the International Monetary
Fund, Secretary Shultz emphasized the interrelation between monetary, trade, and investment aspects of efforts to reform the international monetary system.^
The President, in his April 10,1973, message to Congress proposing
the Trade Ref orm Act of 1973, voiced the U.S. position on international investment by encouraging an open system, "one which eliminates artificial incentives or impediments here and abroad." The President further urged that Congress refrain from enacting broad changes
in U.S. laws governing direct foreign investment until it is clear what
agreements emerge from multilateral discussions.
Following on this theme. Secretary Shultz at the June 1973 meeting
of the O E C D Ministers reiterated the need to supplement negotiations
in the monetary and trade areas with international discussions on policies and practices w:hich affect international investments.^ H e emphasized in his address t h a t :
We need new principles, new mechanisms, new information
systems, in short, international guidelines for investment which
will alert us to conflicts of dnterpst among government policies
affecting investment, iand which will provide standards by which
these policies can be assessed and conflicts reduced.
This has become increasingly necessary due to the actual and potential
spreading of investment policies, such as, incentives and subsidy programs, which may distort the patterns of international trade, production, and hivestment. I n the absence of appropriate international understandings and cooperation, their continued use and expansion could
lead to conflicts among the economic policies of many countries.
1 See exhibit 48.
a See exhibit 57.
REVIEW OF TREASURY OPERATIONS
61
'The O E C D Ministers at their meeting in June 1973 instructed the
OECD's Executive Committee in special session to press forward with
its work on international investment, including the multinational corporations. The United States strongly supports this examination of
investment policies as an integral part of a broad effort to improve the
international economic system as a whole.
The phaseout of U,S, capital control programs,—Perhaps the most
important operative policy decision during the past year regarding
capital flows was the decision to phase out U.S. programs that restrain
the outflow of capital. I n Secretary Shultz' statement on foreign economic policy on February 12, 1973,^ which announced changes in the
dollar exchange rate relationship, the Secretary stated t h a t :
. . . in coordination with the Secretary of Commerce, we shall
phase out the interest equalization tax and the controls of the Office
of Foreign Direct Investment. Both controls will be terminated
at the latest by December 31,1974.
I am advised that the Federal Reserve Board will consider
comparable steps for their voluntary foreign credit restraint
program.
The phasing-out of the restraints on capital flows is appropriate in the
light of the administration's broad objective of reducing governmental control over private investment and is based on the confidence
that the eventual termination will coincide with a noticeable improvement in our balance of payments position.
The Secretary's announcement was further amplified in the communique of the Ministerial meeting of the Group of Ten and the European Economic Community released in Paris on March 16, 1973,^
which stated t h a t : "The United States authorities emphasized that the
phasing out of their controls of longer-term capital outflows by the
end of 1974: was intended to coincide with strong improvement in the
United States balance of payments position. Any step taken during the
interim period toward the elimination of these controls would take due
account of exchange-market conditions and the balance of paynients
trends." Additionally, the communique noted that ". . . United States
authorities are also reviewing actions that may be appropriate to remove inhibitions on the inflow of capital into the United States."
The interest equalization tax {lET),—Although the administration
had announced that it would phase out the capital control programs by
the end of 1974, the specific steps for implementing this action were
not immediately formulated. I n fact, faced with the impending expiration of the l E T legislation on March 31,1973, Under Secretary Volc1 See exhibit 51.
« See exhibit 65.
62
1973 REPORT OF THE SECRETARY OF THE TREASURY
ker appeared before the Senate Committee oh Finance on March 7
to propose the extension of the l E T for 2 years. He had earlier testified
before the House Ways and Means Committee in support of the same
proposal.^
Mr. Volcker emphasized that the Gbvernment is pursuing policies
at home and internationally to bring an end to the balance of payments
deficit and that the two exchange rate realignments had produced a
realistic base for repairing the trade and payments position, which,
however, would take time. As the beneficial effects of the exchange
rate realignments worked themselves out and as the administration
took other steps such as trade negotiations and domestic economic
action to restore our basic balance of payments position and to maintain our competitive edge, it was iinportant that these objectives not
be hampered by a precipitous dismantling of the l E T and the other
capital restraint programs. I t was for this reason that the administration asked for an extension of the l E T even though its ultimate
phaseout had already been announced.
Congress approved the extension until June 30, 1974. The l E T Extension Act, which was signed on April 10,1973, included several new
amendments, the most im^Dortant of which are: (1) Elimination of
U.S. estate tax on debt obligations sold to foreigners by U.S. corporations that elect to have such issues subject to l E T when sold to Americans; (2) exemption from l E T (under certain conditions) of stocks
or bonds issued by foreigners for the purpose of providing a portion
of financing for foreign direct investment into the United States;
and (3) elimination from the less developed countries' exemption from
the l E T of obligations issued by shipping companies located in the
less developed countries.
International development banks
During fiscal 1973, substantial but belated U.S. contributions were
made to two of the institutions of which the United States is a member—$320 million to the International Development Association
(IDA) and $418.4 million to the Inter-American Development Bank
( I D B ) . These efforts covered the first installment of the U.S. contribution to the third replenishment of IDA, originally scheduled for
fiscal 1972, and increases in the Ordinary Capital and the Fund for
Special Operations (FSO) of the I D B . The I D B contributions, however, only covered half of the amounts requested in the fiscal 1973
budget. As a result of this and previous failures to appropriate requested contributions to the several international development institutions, the United States was behind schedule on such contributions
at the end of fiscal 1973 by close to $1.5 billion.
1 See exhibits 41 and 42.
REVIEW OF TREASURY OPERATIONS
63
Lending activity by the several institutions continued to expand
during fiscal 1973—from $3.9 billion in 1972 to $4.6 billion. The largest
increases were on the part of the I D A and the IDB's F S O .
The World Bank group
The I B R D and its affiliates, the I D A and the I F C , committed a total
of $3.6 billion during the fiscal year—15 percent more than in fiscal
1972—for financing economic development projects in the member
countries. The I B R D made new loans to its members totaling $2,051
million, $85 million more than in the previous fiscal year. While the
bulk of its lending operations continued to be for physical infrastructure and industry, there was a sharp increase in loans for agriculture
and education. I D A credits increased sharply from $1 billion in 1972
to $1.36 billion, with agriculture and transportatioii the major lending
sectors. I F C investnients in equity and loans, to the private sector
without government guarantee, totaled $147 million, largely for manufacturing.
The loan operations pf the World Bank are financed by paid-in
capital subscriptions, funds borrowed in capital markets, sales of
participations, principal repayments on loans, aiid earnings on loans
and investments; but borrowed funds are now by far the most important source. During the year the Bank's outstanding funded debt
increased by $1,931 million, of which $1,005 million reflected the results of exchange realignments, to the equivalent of $8,882 million. The
d^bt is denominated chiefly in U.S. dollars ($3,481.9 million), deutsche
marks ($2,590.8 million equivalent), Japanese yen ($1,769.3 million
equivalent), and Swiss francs ($586.0 million equivalent).
The World Bank's borrowings during the year totaled $1,723 million
equivalent, compared with $1,744 million in 1972 and $1,368 million in
1971. J a p a n was the largest source, providing the equivalent of $605
million. Borrowings in Germany amounted to the equivalent of $371
million and borrowings in Kuwait to $122 million equivalent. There
were no borrowings in the United States.
The $1,723 million borrowed by the World Bank in fiscal 1973
included $1,208 million equivalent sold to raise new funds and $518
million equivalent of refundings. I n addition, the Bank signed a loan
agreement with the Bank of J a p a n to borrow up to Y135,000 million
over the period from February 1973 to February 1974, but had borrowed only Y40,000 million ($144.4 million equivalent), of this as of
June 30,1973.
The Bank's obligations are marketed widely, as is indicated by the
estimated division of holdings by investors as of June 30,1973—about
27 percent in the United States, 29 percent in Germany, 16 percent in
Japan, 5 percent in Switzerland, and 4 percent in Kuwait. The remain-
64
19 73 REPORT OF THE SECRETARY OF THE TREASURY
ing 19 j)erceiit is held largely by central banks and other governmental
accounts.
During the fiscal year, subscriptions to the Bank's capital stock increased by the equivalent of $691.1 million in 1944 dollars. Of this,
$383.9 million represented further special increases under a resolution
passed by the Bank's Board of Governors in fiscal 1971. If fully subscribed, the selective increases would raise the subscribed capital of
the Bank by the equivalent of $2,222 million in 1944 dollars to about
$25.8 billion (in current dollars, about $31.1 billion). The U.S. share
of the increase, $246.1 million, was authorized by Congress in fiscal
1971 but only half was ap^oropriated. The U.S. payment of this portioii
as well as a payment for maintenance of value was made early in fiscal
1973.
I D A credits are funded largely by member subscriptions and contributions and grants from the net earnings of the World Bank. IDA's
usable resources, cumulative to June 30, 1973, amounted to $7,133
million of which part I (developed) countries had contributed $6,133
million and I B R D grants supplied $702 million. Earnings and repayments on outstanding credits, together with contributions of part I I
(developing) and nonmember countries and exchange profits, made
u]3 the balance. As of June 30, 1973, $6,167 million of these resources
had been committed, leaving a balance of approximately $966 million
available for lending. These resources are expected to be fully committed by June 30,1974.
The third replenishment of IDA's resources, approved by the Board
of Governors on February 17, 1971, to cover the 3-year period beginning with fiscal 1972, becanie effective on September 22, 1972, when
the United States formally notified the Association that it would participate. Legislation to authorize the U.S. contribution of $960 million
had been subniitted to Congress in May 1971 and approved in March
1972, but payment of the first installment was not authorized until
September 1972.
As of June 30,1973, a fourth replenishiment was under discussion but
there had been no agreement on the level of replenishment or the U.S.
share.
Inter-American Development Bank
During fiscal 1973, the I D B committed a total of $730.9 million
from its two windows, almost $200 million more than during the previous fiscal year. Of this, $285.8 million was loaned on hard terms from
Ordinary Capital resources and $445.1 million on soft terms from the
Fund for Special Operations. I n addition, the I D B committed $7
million in administered funds.
REVIEW OF TREASURY OPERATIONS
65
As of June 30, 1973, cumulative lending by the I D B from its own
resources totaled $5.1 billion. Of this, $2.3 billion had been loaned from
the Ordinary Capital and $2.8 billion from the Fund for Special
Operations. I n addition, the I D B had lent $591 million from funds it
was administering. These loans served to mobilize resources from local
contributions in member countries a;lmost two times greater than their
own level.
During fiscal 1973, three sectors—transportation, iiower, and agriculture—received most of the funds committed. About 26 percent,
$191.0 million, went to power. The agriculture and transportatioii
sectors received $141.5 million and $105.0 million, respectively. On a
cumulative basis, agriculture has received the largest amount of funds,
$1,230.3 million (24 percent) ; power is second, with $947.1 million
(18 percent).
The subscribed capital of the I D B totaled $5,139.3 million equivalent
on June 30, 1973, of which $4,300.9 million was callable capital. The
resources of the Bank's Fund for Special Operations totaled $4,096.7
million equivalent on June 30,1973.
I n fiscal 1973, the I D B borrowed $119 million net, with new resources obtained from Europe, Latin America, and Japan. This compares with $97 million in the preceding fiscal year. Borrowings (gross)
included $41.7 million from Germany, $27.9 million from Switzerland, $24.4 million from France, $13.8 million from Spain, and $11.3
million from Japan. Additionally, $53.4 million of 2-year bonds was
sold to Latin American countries. The IDB's funded debt on June 30,
1973, amounted to the equivalent of $1,287 million.
At the l l t h amiual meeting (April 1970) in Punta del Este, Uruguay, the Governors had agreed to intensify their efforts to bring other
developed countries into a closer relationship with the Bank. A number
of developed countries are expected to join as nonregional members.
During the fiscal year, Congress authorized payment of half the
amounts requested in the budget, or $193 million for Ordinary Capital
and $225 million for the Fund for Special Operations.
The 14th annual meeting was held in Kingston, Jamaica, May 7 10, 1973. The U.S. delegation was headed by Secretary Shultz.^
The Asian Development Bank
During fiscal 1973, the A D B committed a total of $357.3 million,
$235.9 million from Ordinary Capital and $121.4 million from Special
Funds. This brought the Bank's cumulative total of loans to $1,045.0
million—$799.0 million from Ordinary Capital and $246.0 million
from Special Funds. As of June 30, 1973, the Bank had also undertaken 105 technical assistance projects.
1 See exhibit 54.
66
19 73 REPORT OF THE SECRETARY OF THE TREASURY
111 the last quarter of calendar 1972,, an increase became effective in
the capital stock of the Bank by 150 percent to nearly $3 billion (current dollars). Authorization for a U.S. contribution to this increase
of $363 million is being requested, and the first of three annual installments of $121 million is included in the fiscal 1974 budget.
With the accession to membership bf Bangladesh, Burma, and the
British Solomon Islands, the Bank's membership reached 4 0 ^ 2 6
regional and 14 nonregional—with subscriptions totaling the equivalent of $2,324 million.^ Of this, 32 percent was paid-in capital.
During fiscal 1973, the Bank did not enter the U.S. capital market
but borrowed $42.0 million outside the United States. Total funded
debt at the end of the fiscal year was $209.1 million.
As of March 31,1973, 9 countries have contributed $250.6 million to
the Bank's Special Funds (apart from technical assistance) ; in addition, $29.6 million has been set aside from Ordinary Capital resources for such lending.
On January 26, 1971, President Mxon forwarded a message to the
Congress urging authorization of a $100 million U.S. contribution to
the Bank's Special Funds. This contribution was authorized on March
10,1972, but appropriations are still pending before the Congress.
At the end of the fiscal year, the A D B was in the process of refining
a proposal for a new unified Special; Fund. Under this proposal, a
fund of $525 million would be established for a 3-year commitment
period with contributions on the basis of an agreed formula. The
suggested U.S. share would be $150 million;.the already authprized
$100 million voluntary contribution would be accepted toward this
share.
I
The sixth annual meeting of the Bank's Board of Governors was
held in Manila, Philippines, April 26-28, 1973. Under Secretary
Volcker headed the U.S. delegation.^
Debt rescheduling
The Department of the Treasury has recently taken an increasingly
active role in shaping and presenting the U.S. position in bilateral and
multilateral debt reschedulings. At the direction of the President,
Treasury headed the U.S. delegations to discussions on Chile debt rescheduling in fiscal years 1972 and 1973.
I n fiscal 1973, there were multilateral debt discussions on the Chile,
Ghana, India, and Pakistan/Bangladesh debt situations. N'o debt
agreements were signed.
1 As of J u n e 30. 1972, subscriptions had not been adjusted to reflect the exchange realignments under the Smithsonian agreement.
2,See exhibit 66.
REVIEW OF TREASURY OPERATIONS
67
Investment security
President Nixon's policy statement on expropriation of January 19,
1972, and the Gonzalez amendment to authorizmg legislation for the
multilateral developnient banks, adopted in March 1972, which defined
U.S. Governnient responses in investment security situations, served
in fiscal 1973 as the basis for U.S. positions taken in the I F I ' s on loans
to countries which have expropriated or unfairly treated U.S.-owned
interests without providing for prompt, adequate, and effective compensation. An Interagency Committee, on Expropriation, whose
membership includes the Departnients of State, Treasury, and Commerce, was established under the Council on International Economic
Policy to implement these new policies. This Committee has continuously monitored investment security situations and met five times
in.fiscal 1973 to consider actual and potential investment problems.
Assistant Secretary for International Affairs Hennessy represented
the Department of the Treasury on this Committee during fiscal 1973.
Expropriations involving significant U.S. interests, most notably
in Chile,.Peru, Iraq, Lebanon, and Syria, required extensive Treasury
analysis during the past fiscal year.^
Bilateral assistance
The Department of the Treasury participates in the U.S. Government development finance program through its menibership in the
National Advisory Council on International Monetary and Financial
Policies, on the Overseas Private Investment Corporation ( O P I C )
Board of Directors, and on the interagency committees designed to
coordinate economic assistance programs. Treasury's principal con^cern is to relate the various foreign economic assistance programs to
overall U.S. balance of paynients and international development
objectives.
The. three principal institutions responsible for U.S. bilateral assistance programs are the Agency for International Development
( A I D ) ; the Department of Agriculture, which administers the Public
Law 480 food-f or-peace program; and O P I C .
.
, The loan and guaranty activity of these three institutions is summarized below.
U.S. Mlateral assistance of selected institutipns
[In milhons of dollars]
;
.
.
;Institutipn/Program
AID/Development loans
.Agriculture/PubUc Law 480, food-for-peace
OPIC/Insurance, issued
OPIC/Guarantees and direct lending...
1 See exhibit 74.
'
.__
_
_
Fiscal 1972
604.1
790.0
636.0
23.9
Fiscal 1973
600.0
753.3
649.3
17.7
68
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Agency for International Development,—As a member of the Development Loan Conimittee of A I D , Treasury i^rimarily focuses on
the balance of payments impact of A I D developnient lending and on
the financial characteristics of each developnient loan.
During fiscal 1973, A I D authorized new development loans totaling
$600.0 million—$219.0 million were program loans, $288.3 million were
in the form of project loans, and $92.7 million were sector loans.
Public Law ^80,—^Treasury is represented on the Interagency Staff
Comniittee, which reviews all Public Law 480 proposals, and is mainly
concerned with the U.S. balance of payments returns associated with
the program. During fiscal 1973, Title I sales agreements and amendments were signed with participating governments and private trade
entities for a total export market value of $753.3 million. This was a
slight reduction from fiscal 1972 levels of approximately $790 million.
The terms of Public Law 480 credits have gradually hardened in recent
years Avitli a favorable effect on the balance of payments.
The Overseas Private Investment Corporation,—JJnder Secretary
for Monetary Affairs Volcker represented the Department of the Treasury on OPIC's 11-man public/private Board of Directors during fiscal
1973. O P I C administers two main incentive programs to encourage
U.S. investment in the developing countries: Investment insurance
against the political risks of expropriation, inconvertibility, and war,
revolution, and insurrection; and investment finance which provides
both direct loans and commercial risk guarantees.
O P I C issued $649 million in investnient insurance in fiscal 1973, a
slight rise from the $636 million issued in fiscal 1972. The financing
program guaranteed $5 million of new investnient in the developing
countries and extended $12.7 million in direct lending during fiscal
1973. I n fiscal 1972, $20 million guarantees and $3.9 million in direct
loans were signed.
Local currency management,—^The Secretary made the annual determination of the foreign currencies in the possession of the United
States which are in excess of normal requirements for fiscal 1974 and
1975. They were the currencies of Burma, Egypt, Guinea, India, Pakistan, Poland, Tunisia, and Yugoslavia (through December 31, 1973).
Treasury's primary objective in the management of these currencies
is to maximize the balance of payments benefits accruing to the United
States from their use. I n fiscal 1972, the latest data available, the U.S.
Government reduced the balance of paynients effect of its operations
abroad by $280 million through the use of local currencies held in
Treasury accounts.
ADMINISTRATIVE
REPORTS
ADMINISTRATIVE MANAGEMENT
Management by objectives
The Department has takeii the initial steps in adopting management by objectives as the framework for assuring accomplishment of
its basic missions, identifying program priorities, achieving specific
improvement objectives, and providing selective program or project
emphasis. Work, has been started on identifying a limited number of
significant policy and operational objectives of potential Presidential
interest for possible tracking by the Office of Management and Budget.
Similarly, Treasury bureaus and Office of the Secretary officials have
commenced identifying key objectives for the special attention of the
Secretary and his principal assistants. Through this approach, thd
Department will seek to provide positive direction for the key elements
of its overall mission and keep track of progress and performance.
Special studies, projects, and programs
The management and planning staffs of the Office of the Assistant
Secretary fot Administratipn completed numerous studies and projects
and initiated new programs a t the departmental level to strengthen
analytic capability and administrative control, to improve the operation of Treasury activities, and to respond to new responsibilities.
Office of the Assistant Secretary for Administration,—^The Office of
the Assistant Secretary for Adniinistration was reorganized to provide
a more effective and efficient organization in support of the Office of
the Secretary.
The Office of Automatic Data Processing Management and Operations was established. Fmictions of the new office, which will be implemented on a time-phased basis, include development and operation of
a departmental computer center, development of specialized software
and common data bases, and coordination of Treasury A D P activities.
The Office pf Central Services was disestablished, and responsibilities for the adniinistrative and support functions for the Office of the
Secretary (except personnel management and fiscal accounting) were
reassigned to the Office of Administrative Programs. The Personnel
Operations Division was retitled "Office of the Secretary Personnel
Division" and reassigned to the Deputy Assistant Secretary for Administration, and a complete staffing, organization, and program analysis of this division led to new program emphases in personnel management and more effective management control and employee utilization.
The accounting responsibilities for the Office of the Secretary appropriated funds, the working capital fund, the trust account for revenue
sharing, and the Economic Stabilization Act appropriated funds were
reassigned into a newly created Financial Management Division reporting to the Deputy Assistant Secretary for Administration. The
functions of the Office of the Secretary Financial Manager were also
71
72
1973 REPORT OF THE' SECRETARY OF THE TREASURY
incorporated into the Financial Management Division, as well as
budget and accounting functions for the Exchange Stabilization Fund.
The Administrative Office of the Assistant Secretary (International
Affairs) was disestablished and its functions distributed to the appropriate organizational elements under the Assistant Secretary for
Administration, thereby centralizing in the Office of the Assistant
Secretary for Administration administrative support for all components of the Office of the Secretary.
Office of the Secretary,—The Office of Eevenue Sharing was organized to administer the State and Local Fiscal Assistance Act of
1972, and the Office of Energy Advisor was established to support the
Deputy Secretary in his capacity as Chairman of the Oil Policy Committee. Supervision of the functions of the Office of Industrial Economics was transferred from the Commissioner of Internal Eevenue
to the Assistant Secretary (Tax Policy), providing a more effective
organizational arrangement for departmental tax analysis functions;
and a manpower survey and organizational review of the components
of the Office of the Assistant Secretary (Tax Policy) resulted in internal organizational changes and management improvements, to the
general benefit of the policymaking process.
An analysis of Office of the Secretary positions was made to determine those performing functions appropriate for funding by the Exchange Stabilization Fund, and a study was made of Office of the
Secretary procedures for handling incoming classified information
of international economic import.
Departmental.—Improvements were made in the long-range planning system of the Department to integrate it more closely into the
established management processes; to improve the usability of the
system's information outputs; and to better relate projected resource
requirements for each operating program of the Department. Fifteen
low-priority departmental programs were identified for potential reduction or abolishment.
I n addition, management staff led or participated in a study of the
production of clad strip by the Bureau of the Mint, which affirmed
that ill-house strip manufacture is economically preferable to outside
production; an Internal Eevenue Service review of administrative
functions; and a study evaluating alternative sites for expansion of
Bureau of Engraving and Printing production facilities.
« Advisory committee management,—^As a result of the enactment of
Public Law 92-463, Federal Advisory Committee Act, effective January 5, 1973, new requirements and procedures were established for
controlling the establishment and operation of advisory committees
within the Department, under the direction of the Assistant Secretary
for Administration.
Environmental quality program,—During fiscal 1973, the Assistant
Secretary for Administration was designated as the Departmental
Environmental Quality Officer with overall responsibility for Treasury's environmental quality program. Under his direction the existing
program was strengthened by development of day-to-day working relationships with the Council on Environmental Quality, the Environmental Protectioii Agency, and other agencies. Work was also begun
ADMINISTRATIVE REPORTS
73
on a new version of the departmental procedures for environmental
impact statements.
Technical assistance to foreign governments and officials,—Treasury
continues to participate extensively in the technical cooperation programs of the Agency for International Development. Currently, teams
of customs and tax advisors are at work in 14 developing nations
throughout the world. I n addition, during fiscal 1973 more than 100
man-days of orientation and training programs were arranged for
foreign visitors coming to Treasury under the auspices of A I D and
other agencies.
Emergency preparedness
As a result of a new continuity of Government concept directed by
the Office of Emergency Preparedness, the emergency assignments of
key personnel and headquarters plans were completely revised. Under
the new concept three executive teams have been established to function at three separate locations in the event of an emergency. Coincidental with the revision of emergency plans, a review and determination was made of the essential functions to be performed by
Treasury bureaus and the Office of the Secretary during an emergency.
To overcome problems resulting from the classification of defense
conditioii notifications, a new internal alerting system was developed
in accordance with guidelines provided by O E P . The system will alert
key personnel of an impending emergency without violating security
restrictions.
An in-house review was made of Treasury'^s plan for war-loss sharing. A proposed new concept was developed and circulated for consideration by the staff offices concerned.
Internal auditing
As a result of a review of intemal auditing activities at the Bureau
of Customs, proposals were made to accompany recent improvements
in the audit scope and approach with a centrally coordinated longrange audit planning system and strengthening of the audit staff.
Proposals were also made on the scope, staffing, organization, and intemal review of a new audit organization responsible for regulatory
audits of customhouse brokers and other third parties. I n addition,
the Bureau of the Mint accepted a recommendation to relocate members of its internal audit staff to major field installations.
The Office of Audit provided audit coverage of the administrative
activities of the Cost of Living Council and conducted audits of Office
of the Secretary activities, a survey of operating and administrative
functions of the Office of Eevenue Sharing, and examinations of process accounting procedures for coinage metals at Mint facilities in
Denver and San Francisco. A member of the staff chaired the committee auditing the Exchange Stabilization Fund, and the onsite portion of an audit at the Consolidated Federal Law lEnforcement Training Center was completed. A review of internal auditing activities in
the Bureau of Accounts was also completed.
Supplementing programmed and more formal work, the Office of
Audit helped Treasury bureaus locate a number of highly qualified
auditors and provided advisory assistance on a variety of financial and
audit matters. The staff participated, for example, in meetings on
74
1973 REPORT OF THE SECRETARY OF THE TREASURY
revenue sharing and assisted in several pilot surveys at nearby local
governments receiving entitlement funds.
Substantial benefits were realized as a result of audits at two Government contractors, and costs were questioned on a third contract.
Treasury bureaus were encouraged through an administrative bulletin
and other means to utilize audit services more fully in the administration of negotiated, cost reimbursable, aiid other contracts.
ADP management
The Department used 109 computer systems, 24,600 man-years, and
$297 million in its automatic data processing operations during fiscal
1973. These resources continue to provide such benefits as support for
implementation of general revenue sharing, improving tax administration, and support of debt management and payinent systems.
Financial management
Budgeting.—Budget staff continued to develop policies and procedures and to direct and coordinate the formulation, justification, and
presentation of appropriations for budget estimates which totaled over
$34 billion in fiscal 1973. The amount includes $1.7 billion for operating
appropriations, over $24 billion for public debt and other interest accounts, and $8.3 billion for general revenue sharing.
During fiscal 1973, the budget staff:
(1) Established and maintained controls on expenditures, number
of personnel on the roll, and motor vehicle fleet to comply with limitations and directives prescribed by the Office of Management and
Budget.
(2) Gave special budgetar}^ consideration and emphasis—including
the preparation of requests for budget amendments,. supplemental
appropriations, reprogramming actions or reimbursements—;to pro,^Tams and items of special concern tp the administration and the
Department. These included \he reprogramming of funds appropriated to Customs to facilitate that bureau's occupancy of the World
Trade Center in N'ew York, establishment and transfer of the Treasury
computer center from the Bureau of the Public Debt to the Office of
the Secretary, and the transfer of the drug investigation functions
from Treasury to Justice as proposed in the President's Eeorganization Plan No. 2.
/
,
(3) Participated in meetings with representatives of Office of Management and Budget and Office of Emergency Preparedness ctilminating in the orderly transfer of funds and positions from the Office
of Emergency Preparedness to Treasury to support the Deputy Secretary of the Treasury as Chairman of the Oil Policy Committee.
(4) Prepared the budget justification niaterial leading to the establishment of the Environmental Financing Authority. The purpose
of this new authority is to assure that the national program for the
construction of essential municipal waste treatment facilities will not
be interrupted due to lack of funds. '
(5) Held the supplemental appropriation request for the cost of pay
increases taking effect under Public Law 91-656, Public Law 92-410,
wage board actions and administrative actions to $1.75 million,/although the costs totaled $39.3 million. A total of $37.5 million of. the
ADMINISTRATIVE REPORTS
75
increased costs was absorbed by application of management savings,
reimbursements, use of budgetary reserves, curtailment of selected operations, and transfers between appropriations.
(6) Assisted in the preparation and presentation of budget requests
for funds totaling over $3.4 billion to be appropriated to the President
for the U.S. share of contributions to the international financial institutions of which the Secretary of the Treasury serves as a Governor.
Of this total, $2.25 billion represented a request for an additional appropriation necessary for maintaining the value of the holdings of
U.S. dollars by these institutions under the proposed 1973 revaluation
of the dollar.
AccoumMng systems.—Efforts to maintain and strengthen the administrative accounting systems of the Department were continued,
primarily by assisting the several relatively new bureaus on problems
relating to accounting organizations, accounting system design, and
coordination with General Accounting Office s^^stems review activities.
During the year, administrative accounting systems for the Internal
Eevenue Service and the Bureau of Custonis were approved. The administrative accounting system for the Consolidated Federal Law Enforcement Training Center was approved by the Comptroller General
on June 29,1973, with two other systems (the working capital fund—
Office of the Secretary, and Bureau of Alcohol, Tobacco and Firearms)
actually under design and being documented for submission to GAO
early in fiscal 1974.
Personnel management
The Secretary issued a statement expressing his personal interest
in the labor relations program as well as his concern that the Department's managers give labor relations a high priority. I n accordance
with the wishes of the President, the Department issued detailed
guidelines for managing and organizin.ir the Deiiartment's responsibilities under the Federal labor management relations program. Also,
a Personnel Manual chapter was issued to gaiide bureaus in establishing effective systems for intr am anagement communication.
Emphasis during the year continued to be given to average grade
control and effective position management in line with Presidential
policy. At yearend, the Treasury had substantially achieved its 0 M B established goals.
Implementation of the central personnel data file received special
emphasis. The file, installed at the Civil Service Commission, was
established to provide a data base capable of satisfying minimum
essential statistical data needs for central management agencies and
the public. I t covers most Federal emplo3^ees and is based on personnel actions submitted directly to CSC by agency personnel processing
offices. When fully operational, it will not be necessary for departments and agencies to submit most of the personnel reports now required. Statistics necessary for personnel management planning, management decisions, and persomiel operations will be available to all
departments.
A comprehensive executive and management developnient program
was launched, providing for the identification of midlevel managers
with high potential and the preparation of annual individual de506-171—73
8
76
1973 REPORT OF THE SECRETARY OF THE TREASURY
velopment programs for these managers and all other personnel at the
supergrade level.
An extensive supergrade management system was developed and instituted to assure the most effective utilization of supergrade positions
on a Department-wide basis.
The new Federal Wage System was implemented throughout the
Department except for the Bureau of Engraving and Printing. The
.Federal Wage System legislation (Public Law 92-392) exempts Engraving and Printing from Federal Wage System coverage. The new
system differs from the superseded Coordinated Federal Wage System insofar as Treasury is concerned in two major respects: (1) Night
differential pay practices, and (2) increase in the number of wi thingrade steps for nonsupervisory, regular pay schedules from three to
five.
Treasury Department winners of major awards during fisoal 1973
Avere: Mrs. Charlotte Tuttle Lloyd, Assistant General Counsel—the
National Civil Service League's Career Service Award for Sustained
Excellence; Edward F . Preston, Assistant Commissioner (Stabilization) , IES—the National Civil Ser\n*ce League's Career Service Award
for Special Achievement; Vernon D. Acree, Commissioner of Customs—^a Eockefeller Public Service Award; Glenn E. Dickerson, Assistant Commissioner of Customs for Administration, and Fred E.
Boyett, Eegional Commissioner of Customs, New York, N.Y.—Presidential Management Improvement Awards for accomplishments in
reorganizing Customs Eegion I I .
Procurement
The negotiation of 44 blanket purchase agreements for office machines and miscellaneous supplies for use by all Treasury bureaus
provided a savings in excess of $162,000. The consolidation of Treasury
requirements for 623 undercover law enforcement vehicles, procured
through the General Services Administration, resulted in an improved
quality of vehicle, while the average price per vehicle remained below
the $3,000 cost limit authorized by Congress.
Property management
Treasury's personal property program was given special emphasis
in fiscal 1973, and transactions during the year included the reassignment within Treasury of property valued at $487,950; transfer of personal property valued at $989,368 to other Federal agencies for their
use; and the donation of personal property valued at $656,371 no
longer needed by the Federal Government for use by State organizations and nonprofit groups. Treasury also obtained, without reimbursement, personal property valued at over $1.6 million from other Federal
agencies.
Printing
During fiscal 1973, the Bureau of the Public Debt, Bureau of Accounts, and the Office of the Treasurer, U.S., consolidated their printing
plants and relocated in the Treasury Annex basement. The new facility was established to accommodate all of the printing needs for the
ADMINISTRATIVE REPORTS
77
three Fiscal Service bureaus and to conform with the Joint Committee on Printing regulations on centralizing facilities.
The Bureau of Accounts was assisted in obtaining authorization
from the Joint Committee on Printing to purchase 13 check-wrapping,
envelope-printing, die-cutting, inserting and collating systeins for a
total cost of $1,560,000. Following installation of these systems, beginning with fiscal 1977, it is estimated that savings will be in excess
of $1 million annually.
Paperwork management
Late in the year, the Department launched a new, broader paperwork management program designed to obtaiii full compliance with
all statutory and regulatory standards within the next 2 fiscal years
and full use of paperwork management in a total systems approach
to improving Department operations and generating savings for use
in higher priority activities.
The annual summary of the Department's records holdings for
the year showed a total of 889,596 cubic feet in office space, an increase
of 39,297 over the previous year. Seventy-seven percent of the Department's holdings are now in records centers, as compared with
the Government-wide goal of 50 percent.
Telecommunications
Telecommunications fmictions at the departmental level have been
consolidated and a Treasury Advisory Council for Telecommunications (TACT) has been established with two working groups which
are developing recommendations on how to reduce Treasury F T S costs
and how Centrex can be integrated into the Treasury telecommunications system. I t is anticipated that these efforts will result in better
programming with emphasis on total system planning.
National Security Agency (NSA) has agreed to set aside almost $2
million in research and development money for a communications
security device which will satisfy Treasury's requirement to protect its
law enforcement radio systems.
The Treasury telecommunications staff coordinated the expansion
of the customs automated data processing intelligence network
( C A D P I N ) system into the Treasury enforcement communication
system ( T E C S ) working closely with the Office of Law Enforcement
and the bureaus involved. T E C S provides an immediate response to
law enforcement inquiries from the I E S Intelligence Division, I E S
Inspection Division, Bureau of Alcohol, Tobacco and Firearms,
U.S. Customs Service, and the U.S. Secret Service terminals.
The Main Treasury Telecommunications Center (MTTC) has expanded so that it is now able to handle additional information from
NSA and C I A of particular interest to the Secretary and his top advisors. Also, a classified line to the U.S. Secret Service was established.
Safety
Treasury continued to maintain a low disabling injury frequency
rate during 1972. The Department's rate, based upon intemal reports,
was 2.3 injuries per million man-hours worked. This compared favorably with the all-Federal rate of 6.0.
78
1973 REPORT OF THE SECRETARY OF THE TREASURY
Physical security
Pursuant to Executive Order 11652 and the National Security
Council directive of May 17, 1972, Treasury Orders dealing with
"National Security Information" and "Safeguarding Officially
Limited Information" were distributed throughout the Department.
A booklet entitled "Security Do's and Don'ts in the Department of
the Treasury" was prepared and disseminated throughout the
Department.
Space
The Department has been successful in acquiring a major-size office
building, the U.S. Postal Service headquarters, in downtown Washington, D.C. This centrally located 510,000-square foot instaUation,
after a planned renovation and when fully occupied, is expected to
resolve certain critical space shortages, allow for the consolidation
of organizational elements from 12 locations, and release 6 leased
buildings.
Efforts to consolidate Public Debt's Chicago and Parkersburg activities nioved closer with the groundbreaking for a 240,000-square
foot, multistory office complex. The facility will be located in the Parkersburg, W. Va., urban renewal area, and is expected to be completed
by November 1974. An award has been made for construction of a
25,000-square foot microfilm depository in Eavenswood, W. Va. This
facility will replace the present depository in Wisconsin and serve the
new consolidated Public Debt operations.
Efforts to acquire a site for construction of the new Denver Mint
were consummated when the mayor of Denver signed the letter of
agreement conveying approximately 38 acres on the west bank of the
South Platte Eiver to the Government.
BUREAU OF ALCOHOL, TOBACCO
AND FIREARMS
The Bureau of Alcohol, Tobacco and Firearms completed its first
year as a separate bureau withiii the Department of the Treasury. I n
addition to its law enforcement responsibilities, A T F is concerned
with Federal regulation of the legal alcohol, tobacco, firearms, and
explosives industries, and is charged with protection of both consumers
and the environment with respect to these regulated industries. Also,
during the past fiscal year, A T F collected over $7.2 billion in excise
taxes on alcohol and tobacco products.
On the law enforcement side, A T F enforces the Federal laws relating to firearms, explosives, and illicit liquor. Of the nearly 4,000
employees in the Bureau, approximately 1,600 are special agents, with
investigative and arrest authority, stationed at 240 posts throughout
the United States and Puerto Eico.
ADMINISTRATIVE REPORTS
79
The law enforcement and revenue protection authority currently
exercised by the Bureau originated in 1863, when the first Commissioner of Internal Eevenue appointed two detectives to ferret out those
persons making whiskey without paying the Federal excise tax. The
first hundred years were devoted mainly to suppressing the illicit liquor
traffic which defrauded the Government of millions of tax dollars each
year. At the same time, procedures for regulating the legitimate alcoholic beverage industry were developed.
The first Federal gun law was enacted in 1934 when Congress employed a manufacturing and transfer tax system to control the machine
guns, sawed-off shotguns, and short-barreled rifles frequently used by
gangsters. I t was not until 1942, however, that A T F was given investigatory responsibility for the National Firearms Act of 1934 and the
Federal Firearms Act of 1938. I n 1951, A T F assumed the regulatory
responsibility for these acts.
Because of this experience A T F , functioning as a division of the
Internal Eevenue Service, was charged with enforcing and administering the Gun Control Act of 1968, which amended the National
Firearms Act and expanded the other Federal firearms laws. Sole
responsibility for regulating the legitimate explosives industry and
joint jurisdiction with the Federal Bureau of Investigation for investigating the misuse of explosive materials were assigned to A T F
with the passage of the Organized Crime Control Act of 1970.
On July 1, 1972, the new Bureau was formed, and these functions
were transferred to it from the Internal Eevenue Service.
Plistorically, A T F has a long tradition of close cooperation with
other law enforcement agencies. Under the laws enacted in the past 3
or 4 years on firearms and explosive materials, the Bureau has deepened its commitment to assisting law enforcement officials at all levels.
Criminal enforcement
The A T F criminal enforcement activity has four principal areas of
responsibility: (1) Investigation and apprehension of violators of the
Federal firearms statutes, (2) investigation of bombings and explosions and apprehension of violators of the Federal explosive materials
laws, (3) enforcement of the Federal laws relating to the production
and sale of illicit distilled spirits, and (4) providing assistance to
State and local officers in their fight against crime through the sharing of manpower and facilities where there are joint interests.
Firearms programs.—The Gun Control Act of 1968 caused A T F to
direct a large part of its investigative manpower to the task of licensing the approximately 155,000 firearms dealers and collectors. While
this briefly limited the perfecting of criminal cases for gun violations,
it accomplished two important steps toward keeping guns out of the
hands of criminals ensuring (1) that only legitimate and responsible
dealers were licensed, and (2) that those dealers would keep complete
and accurate records.
A T F special agents and inspectors made approximately 25,000
dealer compliance investigations last year in order to ensure that
dealers understand the law and are complying with it. The bulk of this
work is now being shifted from investigative personnel to those who
work in regulatory enforcement, thus freeing special agents for more
80
1973 REPORT OF THE SECRETARY OF THE TREASURY
direct work on criminals. While less than one-tenth of 1 percent of the
licensed dealers checked were found to be in such serious violation of
the law as to warrant prosecution, the value of such investigations is
illustrated by five cases made in the last 3 years in South Carolina
against licensed dealers involving the illegal sale of nearly 40,000
small, cheap handguns. The dealers were falsifying their sales records, selling the guns in bulk lots to unlicensed individuals who sold
the guns on the streets of cities in New York and New Jersey. I n the
latest case, the dealer disposed of about 3,600 handguns, 122 of which
were seized by New York City police in connection with crimes of
murder, armed robbery, and assault.
Accurate dealer records are important for A T F gun-tracing activities, which increased dramatically over the last 2 years. Eequests for
firearms tracing now number over 1,000 per month and are increasing
by 10 percent per month.
The majority of these requests stemmed from the recovery of a firearm at the crime scene by local law enforcement agencies. Tracings
were over 63 percent successful, some of them beins: completed within
hours of the commission of a crime and receipt of the trace renuest.
Eirfit hundred local and 15 Federal law enforcement agencies utilized
A T F ' s service, which significantly aided crime solving. This success
was made possible by the full cooperation of the firearms industrv; at
their reouest, the Bureau moved toward the goal of performing all gun
tracing in order to reduce expense to the industry from time wasted
because of incomplete descriptions of the guns by police officers who
are not totally knowledgeable in gun-tracins: techniques.
One gun trace durin;or the year involved the Euger .44 caliber rifle
found on the roof of the HowR.rd Johnson's Motel in New Orleans
beside a dead man who had held the New Orleans police; at bay after
killinfif several persons. A T F received the request to trace the firearm
at 6:30 p.m. and 27 minutes later had traced the gun from the factory
to a man who lived in Emporia. Kans. His mother in Emporia told
A T F a<?ents that her son was living in N'ew Orleans with another individual. NTew Orleans police were furnished this information and
the address of the apartment.
During: fiscal 1973, A T F special agents investigated over 67,000 individual purchases of firearms where there was reason to suspect that
the person purchasing the gun was a felon or had used false identification in m akin.Qf the purchase.
Complete firearms cases referred to the appropriate U.S. attorney
with a recommendation for prosecution totaled 2,840 in 1973, and onthe-spot arrests of 2,258 persons were made for these violations. Additional arrests will be made as the result of grand jury consideration
of the cases. The present A T F statistical reporting system does not
permit it to record the total number of investigations made during the
course of the vear. Prosecutions for firearms violations are 78 percent
successful, with the majority of defendants enterins: pleas of guilty.
Illustrative of the tvpes of cases bein^r made bv the Bureau are:
On Aus*ust 3, 1972, in E l Paso, Tex., A T F special assents arrested 2
men and seized 15 machine guns, 49 handguns, and 4 shotguns. The
firearms had been shipped from California to the E l Paso area where
they were to be smuggled into Mexico.
ADMINISTRATIVE REPORTS
81
On December 7,1972, in Gary, Ind., A T F special agents, assisted by
Office of Drug Abuse Law Enforcement ( D A L E ) agents, executed
a Federal search warrant on the premises of a convicted felon suspected of possessing an M-1 carbine in violation of the Gun Control
Act. During the search the agents found and seized over 600 packages
of heroin along with the carbine. Four persons were arrested.
On October 20, 1972, A T F special agents arrested three men from
Baltimore for violation of the Gun Control Act and seized 98 handguns. Working on information supplied by a licensed dealer that the
three men were involved in a gmi-rumiing scheme, the agents placed
them under surveillance. After weeks of work, it was determined they
were obtaining firearms from a dealer and transporting them to New
York City to sell on the streets at a much higher price. One of these
men was an alien who was in the country illegally.
The number of murders committed in 1971 involving guns was 66
percent of total murders committed. Armed robberies increased 175
percent from 1966 through 1971. Special surveys indicate that approximately 63 percent of all armed robberies are committed with a firearm.
Thus, considerable A T F investigative manpower, equipment, and materials will continue to be required to assist State and local law enf orcement agencies in combating crime.
Explosives program.—^^Since 1934, Federal law has required that
machine guns, sawed-off shotguns, short-barreled rifles, and silencers
be registered with the Federal Government, and has vested responsibility for maintaining the National Firearms Eegistry in the Bureau.
The Gun Control Act added "destructive devices," including bombs of
all types, to the registration requirements. Although A T F has over
182,000 gangster-type weapons and destructive devices registered in
its files, there is no record of any incendiary, or criminal-type, bomb
having been registered; therefore, possession of such a bomb is a violation of the National Firearms Act.
Since December 1968, when the Bureau began investigating bombings, A T F has developed an expertise in making such investigations
while, at the same time, working alongside State and local officials.
The headquarters laboratory in Washington has built one of the
world's finest libraries on explosive materials and has developed techniques for examining minute particles of explosion scene debris to
identify the type of explosive.
I n fiscal 1973 A T F arrested 282 persons for explosives violations as
compared with 280 for the previous year.
The enactment of title X I , Eegulation of Explosives, for the Safe
Streets Act of 1970, placed primary responsibility for control of explosive materials in interstate and foreign commerce on A T F and
provided, in six subsections of the statute, for joint investigative
authority between the Secretary of the Treasury and the Attorney
General. A working agreement between A T F and the F B I on each
Bureau's responsibility under those six subsections has reduced duplication of effort and helped State and local officers understand which
Federal agency they should turn to for help in a given situation.
The increasing frequency of bombings led A T F to develop a national incident-reporting systeni to supply intelligence to field personnel and permit analysis of trends in this type of criminal activity.
82
19 73 REPORT OF THE SECRETARY OF THE TREASURY
"Campus" bombings declined and the bulk of A T F bomb investigations during the last 6 months was in the labor field.
A T F special agents investigated several bombings where the targets
were State or Federal witnesses to a crime. The most significant of
these caused the death of a school teacher in Oklahoma when a bomb
exploded in a pickup truck she started. The truck was usually used by
her husband, who was a prosecution witness in a pending case against
a well-known Oklahoma gangster. After extensive investigation, the
gangster was convicted in State court for the teacher's murder and
sentenced to life imprisonment. Six months later a second man was
arrested for helping set the bomb. Pie was convicted on Federal charges
and sentenced to 10 years in prison.
I n New Mexico, two men attempted to induce an A T F undercover
agent to kill a local truck driver with homemade bombs. The two
men were convicted in August 1972 for unlawful possession of the
bombs and received maximum 10-year prison sentences.
Many A T F investigations of bombings result in charges being filed
in State court. I n Carteret County, N.C., eight persons were charged
under State laws in the bombing of the county high school and several
other buildings. A T F special agents, working with State and local
officers, spearheaded the investigation, which resulted in the conviction
of the ringleader and his sentencing to 20 years in State prison.
The enactment of title X I of the Safe Streets Act of 1970, which required the licensing of dealers in explosives and placed restrictions on
the sale of explosive materials, has forced those who would misuse the
most common of explosives—dynamite—to resort to theft to acquire a
supply. I n Sacramento, Calif., A T F special agents watched as three
men associated with the Hell's Angels motorcycle gang burglarized an
explosives storage bunker. The men, all heavily armed, were arrested
by A T F special agents in a safe area after they had left the storage
bunker. At the time of arrest, they had 5 tons of dynamite, 17 cases of
detonating cord, and over 100 electric blasting caps.
Illicit liquor,—In fiscal 1973, A T F special agents participated in
the seizure of 1,693 illicit distilleries, approximately 95 percent of these
in the seven Southern States and the fringe areas of Virginia,
Kentucky, Arkansas, eastern Oklahoma, and northeastern Texas.
Many other distilleries were seized by State and local officers.
Distilleries seized had an average lifespan of 30 days and during
that time produced 1,682,458 proof gallons of illicit liquor. This represents a Federal tax loss of $17.7 million, plus an accompanying loss
in State taxes. Had these distilleries been allowed to go undetected, the
yearly Federal tax loss would have approached a quarter of a billion
dollars.
During the 1960's, A T F conducted a program called "Operation
D r y - U p " in South Carolina, Georgia, and Alabama. Basically, it increased investigative personnel in the States and mounted an all-put
public information campaign to overcome the apathy of the law-abiding citizen toward "moonshining," since these people made up the juries which tried the moonshiner. I n those three States, the legal liquor
industry documented the success of the program by increased sales of
taxpaid distilled spirits in direct correlation with the enforcement
ADMINISTRATIVE REPORTS
83
effort. Over $100 million in additional revenue has accrued to the
Federal Government since the inception of the program.
While there was a definite decrease in the illicit production of
whiskey as compared with 15 or 20 j^^ears ago, the problem still requires
Federal attention. The Southern bootlegger no longer confines his
illegal activities to moonshine whiskey, but has branched into counterfeiting and narcotics. On January 16, 1973, a large-scale liquor law
violator in the Atlanta area who entered a plea of guilty to Federal
charges of'possessing and selling nontaxpaid whiskey was sentenced
to 2 years in prison to be served concurrently with a 6-year sentence
for possession and sale of heroin. Another major liquor violator from
the Gainesville, Ga., area received an 8-year State prison sentence on
drug charges. Local officers have long found the sale of illegal whiskey
to be contributory to crime in the community.
Assistance to local authorities,—ATF assistance to State and local
agencies, in addition to actual joint criminal investigations, included
2-week training courses and shorter schooling on bombs and bomb
investigations. Training is conducted at sites selected by the requesting
agency and sometimes includes police officers from several small departments who have joined together for the instruction. During fiscal
1973, A T F provided training for over 45,000 police officers. Some funds
for these A T F courses were provided by the Law Enforcement Assistance Administration.
The Bureau assists State and local officers but does not take over
their investigations. Many joint investigations were prosecuted in
State courts when the State laws paralleled the Federal firearms
statutes. Typical of A T F assistance was an incident in Champaign,
111., where police requested help in the apprehension of a convicted
felon who was the major suspect in a series of armed robberies in two
of which the victims were shot. A T F special agents arrested the man
on charges of possessing a firearm in violation of Federal laws and the
robberies in the Champaign area stopped.
I n another case in Michigan, the State police asked A T F help in an
° investigation relating to stolen property, including firearms. An A T F
agent in an undercover role bought six guns from the suspect. The joint
investigation resulted in the officers obtaining State search warrants
for several locations in the Detroit area and recovering stolen property
estimated at $300,000 in value.
I n Salon, Ohio, local police officers asked A T F for assistance in the
investigation of a bombing that occurred on a golf course. Three individuals arrested for the bombing admitted committing 30 burglaries,
with stolen nierchandise valued at approximately $250,000. They also
admitted having committed three arson violations.
Other enforcement activities.—Nineteen A T F special agents were
attached to organized crime strike forces established by the Department of Justice in 17 major cities. The Department of Justice selected
A T F to coordinate the intelligence on organized crime gathered by all
Federal agencies participating in the strike force program. A group
of experienced A T F agents provided much of the in-house instruction
and training necessary for this coordination.
A T F strike force agents also investigated the activities of mobsters,
racketeers, and underworld hirelings for violations ofthe Federal laws
84
19 73 REPORT OF THE' SECRETARY OF THE TREASURY
relating to firearms, liquor, and explosives. Since the inception of the
strike force program, the Bureau has developed cases which led to the
indictment of 398 members of organized crime.
One such case saw A T F assisting the Cook Countyj 111., State's
attorney's office in an investigation resulting in murder indictments
against three organized crime figures. One of those indicted ranks high
in Chicago organized crime lists, and a firearm seized from his home on
Federal gun charges is to be used as evidence.
I n another case, when the reputed boss of the Eochester, N.Y.,
organized crime syndicate traveled to Arizona, A T F gathered evidence
for a Federal indictment for unlawful interstate transportation of
firearms. Also, in Newark, N.J., an A T F special agent, acting in an
undercover capacity, bought guns from a man who was a known
fence for firearms and ammunition being hijacked by a New York
organized crime family. Agents arrested him and seized 60 guns, including automatic weapons.
I n fiscal 1973, A T F participated in the Federal drive against drug
abuse by assigning 41 agents in 33 cities to full-time duty with the
D A L E project under the directioii of the Department of Justice.
Within its own jurisdiction, A T F applied its knowledge of the
close correlation between firearms and narcotics violations to a pilot
project to combat drug traffickers in Miami, Fla. Working closely with
the Bureau of Narcotics and Dangerous Drugs, the IJ.S. Customs
Service, D A L E officials, the Intelligence Division of the Intemal
Eevenue Service, and local officials, A T F placed several agents in
undercover roles. Equipped with a target list of over a hundred persons known to be involved in the narcotics traffic, they sought to link
those persons with gun violations. Eesults were excellent. Not only
were violations of ATF-controlled laws uncovered, but intelligence on
straight narcotics activity was gathered and forwarded to the appropriate agency.
I n addition, over 100 A T F special agents assisted the Secret Service
in maintaining security at each of the national political conventions
this past year and in protecting Government dignitaries and visiting
foreign officials at the United Nations.
Regulatory enforcement
I n fiscal 1973, the Bureau collected $71^ billion from commodit}^
taxes on distilled spirits, beer, wine, and tobacco products at a cost of
approximately $17.6 million, or only $2.32 for each $1,000 collected.
Over 1.1 billion tax gallons of spirits with a potential tax revenue of
$11.6 billion were stored in bonded warehouses at the close of fiscal
1973.
Eegulatory enforcement consists of two basic programs—revenue
protection and consumer protection—which occupy over 900 inspectors
in the field. These inspectors spent 71 percent of their time on revenue
protection, through revenue audits and compliance inspections, and
29 percent on consumer protection, ensuring that products were properly labeled and represented and that fair trade practices were
employed.
At latest count, there were over one-half million establishments
(permittee or licensed premises) in the United States under Bureau
ADMINISTRATIVE REPORTS
85
regulation. Of this number, about 405,000 are engaged in the production, distribution, storage, or use of alcohol, wine, and beer. The remainder are in the tobacco, firearms, and explosives industries. Eegulation of the latter two is being shifted to the Office of Eegulatory
Enforcement as soon as resources permit.
Trade practice enforcement,—Congress, in passing the Federal Alcohol Administration Act of 1935, stated that its purpose was to curtail
the corruption which existed in the liquor industry under prohibition.
But even after the repeal of prohibition, the criminal element continued to engage in the illicit production and distribution of alcohol.
Therefore, Bureau inspectors subject each individual desiring to enter
the liquor industry, from the producer down through the wholesaler,
to an intensive background investigation, and thoroughly investigate
each application for a permit to do business in the liquor industry.
A report on organized crime filed by the President's Commission on
Law Enforcement and Administration of Justice stated that "law
enforcement is not the only weapon that governments have to control
organized crime. Eegulatory activity can have a great effect." The
report also said, "Governinent at various levels has not explored the
regulatory devices available to thwart the activities of criminal groups,
especially in the area of infiltration of legitimate business. These techniques are especially valuable because they require a less rigid standard of proof of violation than the guilt-beyond-a-reasonable-doubt requirement of criminal law." The Bureau used this approach in its strike
force activity during fiscal 1973 in Baltimore, New Orleans, Chicago,
Pittsburgh, and Atlantic City, where retail liquor outlets with suspected organized crime ownership were inspected by teams of Bureau
inspectors and special agents. Hidden ownership of the premises by
(U'ganized crime figures was uncovered in many instances and appropriate action under Federal or local statutes was taken.
A T F increased its attention to unfair trade practices from about 5
man-years to 20 man-years during 1973. I n a case in an eastern State
where 12 firms were found in violation, offers in compromise totaling
$365,000 were submitted by these firms in lieu of criminal and civil
action.
Consumer protection,—This program ranged from checking a formula on a new perfume or the label on a new product to ensuring that
a fiftii of whiskey, when filled, contained a full fifth. I t also included
a check of the actual beverage being sold in a bar, because it is not uncommon to .find a retail outlet engaged in a "refill violation," substituting a cheap whiskey for a more expensive brand.
To guard against consumer deception, every label for an alcoholic
beverage, including imported beverages, must have A T F approval.
A T F had pending several cases of varietal wine mislabeling wherein
the bottled wine was not that stated on the label. Because of increased
demands by consuniers to know the ingredients of the products they
use, A T F , at the end of the fiscal year, was drafting proposed regulations requiring all labels of alcoholic beverages to show a complete listing of components.
I n fiscal 1973, distributors of malt liquors engaged in an advertising
campaign touting the alcoholic strength of malt liquor. The law prohibits implications of alcoholic strength in malt liquor advertising
86
1973 REPORT OF THE SECRETARY OF THE TREASURY
since it is held under the statute to be a drink of moderation and not
to be sold on the basis of alcoholic content. A T F required such advertising to be reinoved from the niarket.
Each doniestic formula for wine and beer is compared by A T F with
Food and Drug Adniinistration requirements to ensure there are no
ingredients which might be harmful. Last year, after A T F inspectors
found traces of asbestos in an alcoholic beverage being distributed in
the Midwest, the Bureau required that every bottle be recalled and
taken off the market.
A T F officers also frequently inspected bars and retail outlets for unfair competitive practices to ensure that the consumer was given a full
choice of products.
Environmental protection.—^Under the Federal Water Pollution
Control Act, the Bureau must ensure that each of its regulated industries which, in its production processes, discharges waste into navigable
waters has a certificate of compliance issued by the proper State authorities before A T F issues or renews a license or permit. Under the
National Environmental Policy Act of 1969, the Bureau must also give
appropriate consideration to all environmental aspects of any proposed
action or decision.
Tobacco products,—Taxes paid on tobacco products, amounting to
$2,207,273 during' fiscal 1973, came from the industry through a selfassessment system, with periodic on-premises checks by A T F
inspectoi'S.
The classification for tax purposes of "little cigars" provoked considerable public controversy during the year. A T F continued to tax
some of these as cigars, but warned manufacturers to conform packaging and marketing of the product, as well as its advertising, to standards consistent with that tax category. Liaison in this matter was maintained with the Department of Justice, Federal Trade Commission, and
Federal Communications Commission because of their interrelated
statutory responsibilities.
Technical and scientific services
ScientifiG services.—Bureau laboratories provided support to the
Bureau's activities as well as those of State and local law enforcement
agencies.
A T F laboratory personnel pioneered the use of neutron activation
analysis in law enforcement work. The first acceptance of the technique
in Federal court was in New York City where it was used to prove
that a truckload of moonshine whiskey seized in New York had originated on the farm of a bootlegger in Georgia. Neutron activation analysis today is the most sensitive and specific method known for detecting
gunshot residue and this, too, is a technique developed in the A T F lab,
which processed 1,200 cases of this type in 1973 for local law enforcement agencies. Laboratories are located at headquarters, Philadelphia,
Atlanta, and Cincinnati.
The A T F laboratory also performed over 1,000 bomb debris examinations during the year.
A complete A T F ink library of approximately 2,500 domestic and
European ink standards helped identify inks on questioned docunients
involved in investigations conducted by A T F and other Federal agencies, including I E S , the Securities and Exchange Commission, and the
Department of Justice. A large percentage of the approximately 150
ADMINISTRATIVE REPORTS
87
analyses involved tax fraud and organized crime drive cases. The
International Association of Identification, one of the world's largest
professional forensic organizations, presented its Dondaro Award to
an A T F forensic chemist for his outstanding contribution to the field
of ink identification.
A T F firearms and toolmark examiners completed over 250 cases
coming from all over the country. One A T F examiner testified in
California State court in the Juan Corona case, identifying tire tracks
at the gravesite as the same type tire as was on Corona's vehicle. This
same examiner also testified for the State of California as an expert
witness in the mass murder case involving members of the Charles
Manson family.
A T F laboratories also offered a wide range of document examination services, such as handwriting and typewriting identification,
watermark examination, and deciphering of obliterated writing. During 1973 A T F examined over 10,000 documents. One A T F expert testified that the list of victims written in a ledger book found in Juan
Corona's belongings was in the handwriting of Corona.
Alcoholic beverages were checked for fill of containers, additives,
and harmful ingredients, such as lead in canned cocktails, asbestos
fibers, and antifermentation chemicals in wines. Imported wines were
examined to ensure that overcarbonated wines were taxed at the
champagne rate. Coloring in alcoholic beverages was analyzed for
conformity to Food and Drug Administration standards, and contents
of alcoholic beverages, including artificial flavoring, for conformity
with labels.
A T F also ensured that denatured alcohol articles (toilet preparations and industrial alcoholic products) were properly labeled as
to place of origin (French perfumes) and contained sufficient additional ingredients to prevent recovery of beverage alcohol.
Tobacco was tested to assist in distinguishing between cigars and
cigarettes for tax purposes and to protect consumers. Lubricants, filled
cheeses, and other articles subject to tax were examined for tax
classification.
I n addition to the above programs, A T F laboratories were active in
fingerprint examination and photography and are developing a voiceprint identification capability.
The laboratories also assisted regulatory enforcement activities in
protecting the revenue, the consumer, and the environment through
sample analysis and technical advice.
Total regulatory enforcement samples received for analysis in fiscal
1973 exceeded 16,000. The headquarters laboratory received more than
4,850 formulas for nonbeverage drawback products (internal medicinal products, fiavors, and alcoholic foods); 4,195 formulas for specially denatured alcohol products (toiletries, etc.); and 7,893 labels
for toilet preparations.
A D P functions,—^The Bureau utilized little automated data processing. Functions which could be computerized, such as licensing, permitting, criminal case recordkeeping, criminal intelligence, firearms tracing, and personnel recordkeeping, were performed manually in the
seven regions and at headquarters. However, the Bureau readied a 5year plan for installing a national A T F computer center to handle
these functions.
88
1973 REPORT OF THE- SECRETARY OF THE TREASURY
Technical services,—^Under the Mutual Security Act of 1954, A T F
registered importers and controlled importations of all implements of
war, ranging from battleships to nerve gas. The Bureau also acted on
applications to import fireairms and ammunition under the Gun Control Act of 1968. Since 1968, over 95,000 import permits covering 4 million firearms have been approved, with disapproval of approximately
4,000 applications covering 640,000 firearms valued in excess of $9
million.
A T F also examined a wide range of professional and industrial
devices utilizing explosives and/or projectiles, such as rivet guns used
in construction and tranquilizer hypodermic guns used in veterinary
work, for classification as firearms under the 1968 act.
A firearms reference collection of over 1,600 different models of
firearms was used by the Bureau and other Federal agencies for research purposes. For example, the Federal Aviation Administration
utilized this collection for testing proposed metal-detection devices in
its antiskyjacking program.
A T F exercised control over the manufacture and transfer between
owners of all firearms defined by the National Firearms Act, including
sawed-off shotguns, machine guns, short-barreled rifles, bombs, and
grenades, maintaining a national firearms registration and transfer
record of all such weapons.
The Bureau also maintained "The Explosives List," published annually and used principally by the chemical and explosives industries.
A T F provided scientific and technical information r d a t i n g to safety
to Government agencies engaged in the transportation and use of explosives. Eesearch and development in the explosives industry was
monitored and evaluated to help industry comply with the laws without retarding technological progress. A T F personnel performed practical demonstrations and conducted seminars on explosives throughout the United States for local law enforcement agencies.
Bureau support services
Steady progress was made in 1973 in establishing self-supporting
administrative operations covering personnel, procurement, budgeting, accounting, training, and related functions.
I n addition, an Office of Inspection was created to assist in maintaining the integrity of the Bureau and in evaluating the Bureau's
enforcement and regulatory programs.
OFFICE OF THE COMPTROLLER OF
THE CURRENCY
The Comptroller of the Currency, as the Administrator of the
National Banking System, is charged with the responsibility of maintaining the public's confidence in the Systeni by sustaining the banks'
solvency and liquidity. An equally important public objective is to
ADMESriSTRATIVE REPORTS
89
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 econoniy.
Office operations
During fiscal 1973, a continuing overview of adniinistrative procedures provided opportunities for improvements in regional and headquarters staff operations. Eefinement of procedures and scheduling
was achieved, resulting in more efficient examinatioii of national banks.
Continued review of space management resulted in the opening of
two subregional offices and relocation of four others. Additionally, a
new subregional office was established in London because of the growth
in foreign branch banks opened in Europe. Tliis office, the first of the
Comptroller's offices located overseas, was established September 1,
1972. A considerable reduction in foreign expenditures is being experienced as a result, and better, more efficient service is being provided to the banking community.
To consolidate different organizational units under a single roof,
a new building has been selected and approved which will house the
entire Office. A move in the spring of 1974 is planned. Consolidated
operations should provide many opportunities to refine administrative
procedures and achieve a more effective organization.
Personnel
Personnel administration placed emphasis on two major hiring programs which increased the size of the examiner force by more than 15
percent since May 1972. There are now over 150 employees in the
work-study financial intern program. Increased hiring has been necessary to keep pace with the rise in the number of national banks and
branches. Additionally, over 85 summer college and disadvantaged
youths were hired.
The equal employment opportunity objective of a 10-percent increase
in both the number of minority and women professional employees
was surpassed. Progress has been made in filling supervisory positions
with minority group employees and women, including two positions
in the Washington office.
The Office exceeded its established goal of a reduction of one-tenth
of 1 percent in the average grade for fiscal 1973, largely by hiring at
trainee rather than j ourneyman levels.
Uniform and more equitable programs were developed for appointing, testing, and promoting examiners and interns. An extensive review
of inprocessing forms resulted in a new and more efficient preappointment package..
Eenewed emphasis was applied to the training and development of
examiners during the year because of the increased level of hiring.
Courses in electronic data processing, trust schools, and national bank
examiner schools, and correspondence courses were offered. A supervisory handbook, developed during the last fiscal year, was used in
seyeral courses.
The personnel management evaluation program provided opportunities for trained personnel specialists from the Washington office
to visit regional offices and discuss firsthand personnel programs in
90
1973 REPORT OF THE SECRETARY OF THE TREASURY
the region. These visits also gave i-egional staff involved in personnel
administration professional assistance in policy matters and specific
operational problems. This program has fostered an improved working relationdiip betweeii headquarters and regional personnel staffs.
Fiscal management
Fiscal 1973 proved to be exceptionally challenging to the Fiscal
Management Division in view of the general economic environment.
The cost of operating the Office continued to be a matter of concern
to management, causing increased emphasis to be placed on cost control and assessment procedures. As a result, expenses for calendar year
1972 rose only 6.65 percent over 1971, significantly below the previous
year-to-year increases of 11.03 percent and 18.84 percent.
The innovative change in the method of investing assessment funds,
first used in fiscal 1972, produced additional interest income of
$108,000.
Automation of the fixed asset record and the record of total branches
by bank enabled the Fiscal Management Division to provide more
comprehensive, accurate data than was possible when using manual
records.
Through a reorganization at the beginning of the fiscal year, the
travel expense voucher payment and audit functions were combined
to provide more efficient and expeditious processing of travel claims.
Information services program
The purpose of this continuing prograni is to make the policies and
procedures of the Office of the Comptroller of the Currency better
known and to facilitate communications among the Office, the banking
industry, and the general public.
Basic publications available to employees, banks, and other interested
paities are: Comptroller's Manual for National Banks, Comptroller's
Manual for Eepresentatives in Trusts, and the monthly Summary of
Actions. The Directory also is published and contains the address, and
telephone number of every decisionmaking official in the Office together
with his picture and a biographical sketch. The Annual Eeport of the
Comptroller of the Currency is available to interested parties and
contains a general statement of policy, descriptions of the state of,the
National Banking System, of OfBce operations, and reprints of selected
Office documents relating to crucial public issues in banking.
Status of national banks
The total assets of the 4,631 national banks increased by $57.7 billion,
or 14.7 percent, during fiscal 1973, reaching $449.9 billion at June 30,
1973. This compared with the 11.1-percent increase during fiscari972.
Total loans of national banks stood at $254.2 billion at the end of fiscal
1973, an increase during the fiscal year pf $46.8 billion, or 22.0 percent.
The spurt in loans contrasted sharply with the relatively small increase
in. total securities holdings of $2.9 billion, or about 3 percent. I n both
fiscal 1972 and fiscal 1973, the increase in time and savings deposits
was about triple the increase in demand deposits of national banks.
I n 1973, the respective figures were $31.8 billion and $10.1 billion.
ADMINISTRATIVE REPORTS
91
Numher of national hanks and hanking offices, hy States, June SO, 1973
National banks
state
Unit
Total
United States
With
branches
Nuniber of 1
branches
oflaces
4,631
2,843
1,788
14,157
18 788
90
5
3
71
56
41
0
1
29
6
49
5
2
42
50
234
58
244
103
324
63
247
174
2,561
2,617
126
24
5
11
254
110
6
3
0
264
15
18
2
11
0
16
237
4
76
0
140
261
9
87
254
61
2
6
416
122
19
1
2
333
43
42
1
4
83
79
261
10
118
83
394
322
12
124
499
516
100
171
80
60
19
67
138
31
11
3
43
33
49
39
16
66
33
166
207
114
166
204
246
267
133
39
80
106
200
39
10
16
26
194
6
29
64
80
6
34
290
461
634
10
164
329
641
740
210
203
104
64
122
4
48
66
51
95
1
20
39
41
3
28
67
68
145
57
150
71
116
122
33
163
26
43
19
5
52
6
31
103
28
111
20
12
216
193
8
270
6
60
144
1
111
0
156
49
7
159
6
19
32
73
646
10
4
22
15
10
13
546
6
60
0
6
23
98
23
93
127
10
17
6
91
88
Wyoming
Virgin Islands
Puerto Rico
42
1
1
District of Columbia (all)
14
Alabania—
Alaska
Arizona
Arkansas.
California
--
---
Colorado
Connecticut
Delaware.—
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
-
-
-
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
--
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
--
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
-
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
-
-
•
3
27
3
28
829
91
951
124
1,438
1,601
699
12
724
55
839
49
277
1,064
1,169
1,429
112
117
273
66
317
0
82
292
97
390
646
92
13
81
17
2
39
41
558
481
2
75
64
666
604
96
202
42
0
1
0
1
0
0
8
0
42
9
1
0
14
113
127
242
285
1 Includes national and nonnational banks in the District of Columbia, all of which are supervised by the
Comptroller of the Currency.
506-lTl—73
9
92
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Assets, liahilities, and capiial of naiional hanks, selected dates
[In millions of dollars ]
June 30, 1972
(4,607 banks)
Dec. 31, 1972
(4,614 banks)
June 30, 1973
(4,631 banks)
Cash, balances with other banks, and cash items in process
of collection..
60,197
67,401
61,356
U.S. Goverimient securities '
Obligations of States and political subdivisions ^
Other securities 1
42,893
61,033
2,884
47,866
52,717
3,154
43,428
63,277
2,995
96, 810
103,737
99,700
12, 756
207,414
6,975
2,080
4,959
16,672
1,073
230,456
7,333
2,007
6,268
16,072
1,330
254,211
7,668
2,730
6,857
392,163
434,947
449,924
111,974
130,376
121,004
147,298
6,025
30,445
157,663
7,062
33,445
171, 523
6,681
35,143
3,658
16,737
6,248
4,362
20, 526
5,993
5,514
18,731
6,640
ASSETS
Total securities i
Federal funds sold and securities purchased under agreements to resell
Direct lease financing
Loans and discounts '
Fixed assets
.-.
Customers' liability on acceptances outstanding
Other assets
Total assets
972
LIABILITIES
Deniand deposits of individuals, partnerships, and corporations
Time and savings deposits of individuals, partnersliips, and
corporations
Deposits of U.S. Government
Deposits of States and political subdivisions.
Deposits of foreign governments and official institutions,
central banks, and international institutions
Deposits of commercial banks
Certified and oflficers' checks, etc
Total deposits
.. .
Demand deposits
Time and savings deposits.
Federal funds purchased and securities sold under agreements to repurchase
Liabilities for borrowed nioney
Acceptances executed by or for account of reporting banks
and outstanding
.
Other liabilities
, 322,385
359,427
364, 236
21,541
1,288
24,349
2,370
30,643
3,191
2,149
12,118
2,063
12,207
2,834
12,846
369,481
400,416
413,750
4,101
4,221
83
78
76
3,962
4,179
4,297
1,902
..-
172,565.
186,862
3,879
Total liabilities
149, 877
172, 608
2,129
2,093
43
42
38
7,153
12,171
6,989
7,458
12,717
7,524
7,668
13,161
8,434
159,959
204,277
RESERVES ON LOANS AND SECURITIES
Reserves on loans
Reserves on secmities.
Total reserves on loans and securities
CAPITAL ACCOUNTS
Capital notes and debentures
Preferred stock
Common stock
Surplus
Undivided profits
Reserves.
.-.
Total capital accounts
Total IiabiUties and capital accounts
1 Gross, reserves not deducted.
462
482
483
28,720
30,352
31,877
392,163
434,947
449,924
ADMINISTRATIVE REPORTS
93
CONSOLIDATED FEDERAL LAW ENFORCEMENT
TRAINING CENTER
The Consolidated Federal Law Enforcement Training Center
( C F L E T C ) was formally established July 1,1970, as an entity within
the Departnient of the Treasury, to function as an interagency training facility under the supervision of the Assistant Secretary (Enforcement, Tariff and Tracie Affairs, and Operations).
The Department of the Treasury is the lead agency for operating
the Center and serves as the point of authority for implementation of
Federal regulations and policies having Govemment-wide application.
The Center's Board of Directors is comprised of representatives at the
Assistant Secretary level from the major executive departments which
have paiticipating agencies and from the Office of Management and
Budget and the Civil Service Commission. The Board has final
authority over training policy, programs, criteria, and standards of
the Center and for resolving conflicting training requirements.
The C F L E T C provides necessary facilities, ec^uipment, and support
services for conducting recruit, advanced, specialized, and refresher
law enforcement training for personnel of participating Federal agencies. Training is restricted to police officers and criminal investigators
who carry firearms, have explicit arrest authority as Federal officers,
and are primarily concerned with the prevention of crime and with
criminal investigations. At present, 22 Federal agencies from 9 executive departments and independent agencies participate in the Center's
program. I n fiscal 1973, the Department of Agriculture (U.S. Forest
Service rangers and investigators) and the General Services Administration (Federal Protective Service investigators) were added as
participating agencies.
The Center also provides support, administrative, and educational
personnel for common training courses to (1) consolidate requirements of participating agencies and develop proposed curricula, (2)
develop content and teaching techniques for courses, and (3) instruct
and evaluate students. These functions. are administered through the
Police School and the Criminal Investigator School.
Criminal Investigator School
I n fiscal 1973 the Criminal Investigator School trained 839 agents
in 22 classes in its basic criminal investigation course, including 87
students from non-Treasury agencies. I n addition, 49 students were
graduated from the Center's Advanced Law Enforcement Photography School. The reduction in number of persons trained as opposed
to the preceding year was due mainly to budget restrictions placed on
all Federal agencies in fiscal 1973. I t is expected that the number of
graduates will increase substantially in fiscal 1974, but the reduced
student load has permitted more individualized training and allowed
participation in the Center by additional Federal agencies.
Police School
On July 10,1972, the Police School began full operation, thereby expanding the concept of the C F L E T C . The school provicies basic re-
94
19 73 REPORT OF THE SECRETARY OF THE TREASURY
cruit training for uniformed officers and has ensured quality training
for the Federal police officers of participating agencies. The largest
contingents have been sent by the National Park Service of the Department of the Interior and the U.S. Marshals Service of the Department
of Justice, thus strengthening the consolidated and interagency aspects of the Center.
I n its first year of operation the Police School graduated 397 officers from eight agencies, seven of which were non-Treasury. This
total also was below that originally projected due to severe budget
restrictions on the agencies. Addition of more participating agencies
and revised estimates of workload indicate a heavy schedule for training in the Police School for fiscal 1974.
Due to lack of legislative authority by the Center to pay personnel
on the police schedules, instructors for the Police School during this
first year were provided on detail by agencies participating in the
program, on both reimbursable and npnreimbursable bases. By the
end of the year, however, four permanent supervisory instructors
were employed on the Police School staff. At the close of the year, the
entire problem of instructor staffing was being studied by the C F L E T C
Interagency Working Group.
Staff reorganization
A major staff reorganization was implemented to improve operational effectiveness as the Center expanded. An Office of Administration and an Office of Educational Support were created out of existing units of the staff, and the Basic Police School and the Treasury
Law Enforcement School were, respectively, renamed Police School
and Criminal Investigator School.
Personnel management, financial management, and administrative
services were placed under an Assistant Director (Administration),
while curriculum development and learning resources were placed
under an Assistant Director (Educational Support). Heads of the
two schools were designated Assistant Director (Police Training)
and Assistant Director (Investigator Training). These changes have
improved management of the Center as the staff has increased from 54
to 76.
Physical facilities
I n fiscal 1973 the Center expanded its facilities at 1310 L Street,
NlV., Washington, D . C , by over 22,000 square feet. Three 45-man,
seven 15-man, and three 8-man classrooms were constructed, and 6,200
square feet was utilized for additional office space.
Tentative drawings fpr both the centra!structure and the accessory
structures of the permanent plant at Beltsville, Md., were approved by
the National Capital Planning Commission on January 4, 1973. The
architects were then directed to prepare the final working drawings
which Avere presented to the Center on May 28. These drawings excluded only audiovisual and telecommunications capabilities, furniture, and casework and equipment for the P X , snack bar, mailroom,
and related facilities. I n addition, an architect's scale model of the
proposed new facility was constructed and placed in the lobby of the
west entrance of the Main Treasury Building for public viewing.
ADMINISTRATIVE REPORTS
95
Architect's model of the Consolidated Federal Law Enforcement Training Center.
A court action brought by the Maryland-National Capital P a r k
and Planning Commission and the Prince George's County Council,
based on provisions of the National Environmental Policy Act, had
effectively halted construction at the Beltsville site. I n response to this
action, a draft environmental impact statement was filed August 1,
1972, with the Council on Environmental Quality (CEQ) for the
express purpose of soliciting comments from the Environmental Protection Agency and other interested Federal, State, and local agencies
and private parties. A final impact statement, incorporating submitted
comments, was filed with the C E Q on November 24,1972, along with
a recommendation from the Director of the Center that the proposed
new facility be constructed at the Beltsville site. On January 4, 1973,
the Board of Directors of the C F L E T C concurred in the recommendation and on January 5, the Assistant Secretary (Enforcement, Tariff
and Trade Affairs, and Operations), having considered both the environmental and nonenvironmental factors pertinent to the question
of locating the Center a t Beltsville, issued a decisional memorandum
instructing the Center Director to proceed with the project.
I n light of this decision, the Center filed a motion for summary
judgment for dismissal of the lawsuit on grounds that it had conformed to the provisions of the National Environmental Policy Act.
That motion was granted by the U.S. District Court for the District
of Columbia on May 11, 1973, and the Center proceeded immediately
thereafter to award the first contract on the construction schedule.
On June 8, notice of appeal of the District Court's decision was filed
by the plaintiffs in the suit, but at the close of the fiscal year no injunction or restraining order pending appeal had been sought; so, on
96
1973 REPORT OF THE SECRETARY OF THE TREASURY
June 18, construction was resumed with clearing and grubbing of the
site for the central structure.
A second factor delaying construction was the lack of sewage facilities for the new Center. The Washington Suburban Sanitary Commission had previously denied a C F L E T C request to connect to its
sewage facilities, and the Office of Management and Budget rejected
approval for apportionment of construction funds until adequate facilities cpuld be secured. Subsequent to a directive from the Potomac
River Enforcement Conference to the Department of Agriculture to
improve and expand the tertiai^y plant at the Agricultural Research
Center, the C F L E T C offered to contribute $106,000 to the planning
and construction of that plant if allowed to tie in to it. The Department of Agriculture accepted the Center's offer and 0 M B later
approved a request for funds to let the first contract.
E n d of year estimates on expected occupancy of the new facility
at Beltsville centered on the latter part of fiscal 1977.
OFFICE OF DIRECTOR^ OF PRACTICE
The Office of Director of Practice is part of the Office of the Secretary of the Treasury and is under the immediate supervision of the
General Counsel. Pursuant to the provisions of 31 CFR, part 10
(Treasury Department Circular No. 230), the Director of Practice institutes and provides for the conduct of disciplinary proceedings
against attorneys, certified public accountants," and enrolled agents who
are alleged to have violated the rules and regulations governing practice before the Internal Revenue Service. He also acts on appeals from
decisions of the Commissioner of Internal Revenue denying applications for enrollment to practice before the Internal Revenue Service
made under 31 CFR, section 10.4.
On July 1, 1972, there were 104 derogatory information cases pending in the Office under active review and evaluation, 3 of which were
awaiting presentation to or decision by an administrative law judge.
During the fiscal year, 145 cases were added to the case inventory of the
Office. Disciplinary action was taken in 74 cases by the Office or by order of an administrative law judge. Those actions were comprised of
1 order of disbarment, 42 suspensions (either by order of an administrative law judge or by consent of the practitioner), 26 reprimands,
and 5 resignations. The actions affected 17 attorneys, 25 certified public
accountants, and 32 enrolled agents. Eighty-one cases were removed
from the Office case inventory during fiscal 1973 after review and evaluation showed that the allegations of misconduct did not state sufficient grounds to maintain disciplinary proceedings under 31 CFR,
part 10. As of June 30, 1973, there were 94 derogatory inforniation
cases under consideratioii in the Office.
During the fiscal year, three certified public accountants petitioned
the Director of Practice for reinstatement of their eligibility to practice before the Internal Revenue Service. Favorable consideration was
given to each petition and reinstatement was granted. I n addition,
there was one decision on an appeal from a denial by the Commis
ADMINISTRATIVE REPORTS
97
sioner of Internal Revenue of an application for enrollment to practice before the Internal Revenue Service. The decision affirmed the
denial.
Ten administrative proceedings for disbarment or suspension were
initiated against practitioners before the Internal Revenue Service
during fiscal 1973. Together with the 3 cases remaining on the administrative law judge docket on July 1, 1972, 13 cases were before an administrative law judge during the year. One of those cases resulted in
the acceptance of an ofl-er of consent to voluntary suspension pursuant
to 31 CFR, section 10.55 (b) prior to reaching hearing. Initial decisions
imposing disciplinary actions were rendered in six of the cases. In one
case, the initial decision of the administrative law judge was that the
respondent be disbarred from further practice before the Internal
Revenue Service. Suspensions from practice before the Internal Revenue Service, were invoked in the remaining five cases. On June 30,
1973, six cases were pending on the docket awaiting presentation to
or decision by an administrative law judge.
Under authority of 31 CFR, section 10.71, one case resulted in an appeal to the Secretary from the initial decision for suspension rendered
by the administrative law judge. The decision on appeal was an affirmation of the suspension. Such suspension subsequently was nullified by operation of the terms of the decision on appeal. I n addition,
two decisions Avere issued by the Secretary on appeals from initial
decisions by a hearing examiner (now administrative law judge)
pending on July 1,1972. I n both appeals, the terms of suspension from
practice before the Internal Revenue Service ordered by the hearingexaminer were increased.
OFFICE OF DOMESTIC GOLD AND SILVER .
OPERATIONS
The Office of Domestic Gold and Silver Operations, in the Office of
the Under Secretary for Monetary Affairs, assists the Under Secretary
and the Assistant Secretary (Economic Policy) 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 Department of the Treasury gold regulations relating
to the purchase, sale, and control of industrial gold and gold coin; issues licenses and other authorization for the use, import, and export
of gold and for the importation and exportation of gold coin; receives
and examines reports of operations; and investigates and supervises
the activities of users of gold. Investigations into possible violations
of the gold regulations are coordinated with the U.S. Secret Service,
the U.S. Customs Service, and other enforcement agencies.
Use of gold for industrial purposes
Estimated net industrial use of gold in the United States during
the calendar year 1972 was 7,285,000 ounces as compared with 6,933,000
ounces in 1971, an increase of 5 percent. The 1972 increase in purchases was due mainly to increased production of gold products. Gold
98
1973 REPORT OF THE SECRETARY OF THE TREASURY
inventories increased only slightly, under 1 percent. The estimated
total purchases of gold and allocation of purchases by industry group
for the years 1967-1972 are shown in table 1.
TABLE 1.—Estimated industrial use of gold in the Uniied States, calendar years
1967-72
[Thousands of fine troy ounces]
1967
Estimated total purchases of gold by U.S.
.
industry
Converted into fabricated products
_.
Increase in inventories
Allocation of purchases by industry group
Jewelry and arts
_
Dental
_
Industrial, including space and defense _ _.
1968
1969
1970
1971
1972
6,294
6,604
,^7,109
5,973
6,933
7,285
5,942
352
6,073
531
6/568
541
6,148
-175
6,542
391
7,253
32
6,294
6,604
3,840
566
1,888
3,908
771
1,925
7,109
5,973
6,933
7,285
3,839
3,340
4,299
4,344
710
658
2,560
1,975
750
1,884
750
2,191
Sources of gold
Sales of gold by the Treasury for industrial use and purchases from
the private market were terminated on March 18,1968. Since that date,
gold used in industry, profession, and art in the United States has
come from new domestic production and from imports. Of the
7,285,000 fine troy ounces used in 1972,1,603,000 ounces came from U.S.
mine production and 5,682,000 ounces were imported. Countries from
which the gold was imported are shown in table 2.
TABLE 2.—Exports and imports of gold into the United States for industrial use,
calendar year 1972
[Thousands of fine troy ounces]
Country
Belgium
Canada
_
Switzerland
United Eangdom.West Germany
Other countries
Austria 1
Philippines 2. __
South Africa 3
Total
Net imports of gold
Exports
-
Iinports
77
105
231
74
14
2,991
2,901
18
i3
32
83
145
_
-
501
6,183
5,682
1 Purchased from the account ofthe Austrian National Bank at the Federal Reserve Bank of New York.
2 Recovered from base bullion imported from the Philippines.
3 Purchased from the account of the South African Reserve Bank at the Federal Reserve Bank of New
York.
NOTE.—Imports are shown from country of final export as reported by Department of the Treasury gold
licensees and do not indicate prior shipment from country in which the gold was produced.
Trading in gold on exchanges
On July 24,1971, the regulations were amended to prohibit the trading of gold in any form on commodity exchanges and the acquisition
of American or foreign gold coins of any description for speculative
purposes. The purpose of the amendment was to clarify the intent of
the gold regulations that gold coins may be held only for numismatic
purposes.
.ADMINISTRATIVE REPORTS
99
Gold coins
Licenses are required to import gold coins minted during or after
1934. Licenses are issued only for coins of recognized special value to
collectors of rare and unusual coin. Gold coins minted after January 1,
1960, may not be imported unless the particular coin had been licensed
for importation prior to April 30,1969.
Licensing of gold dealers
The Office continued licensing banks and commodity firms to acquire
and import gold for sale to domestic industrial users with 10 such
licenses outstanding at the end of the fiscal year.
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;
sudh as, postage and internal revenue stamps and food coupons. I n
addition, the Bureau prints commissions, certificates of award, permits,
and a variety of miscellaneous items. The Bureau also executes certain
printings for territories administered by the United States.
The Bureau conducts extensive research and development programs
for improving the quality of its products, reducing manufacturing
costs, and strengthening deterrents to the counterfeiting of Government securities. I t manufactures ink and gum used for its products;
purchases materials, supplies, and equipment; provides maintenance
services for its buildings, plants, machinery, and equipment; and
stores and delivers its products in accordance with requirements of
customer agencies.
Finances
The Bureau was granted $3 million of the $6 million appropriation
requested for fiscal 1973 to carry out phase I I of its 3-year modernization program (1972-1974). I n reporting out the 1973 Treasury, Postal
Service, and General Government appropriation bill, the House Subcommittee on Appropriations directed the Bureau and the Department to review the pricing policies for services with the objective of
establishing prices which would, at least over the relatively long range,
generate sufficient funds to cover direct and indirect costs of operations
as well as accumulate an adequate reserve for replacement of capital
equipment.
To attain this objective, the Bureau is proposing to include in the
price of its products a surcharge for financing future capital improvements. Its specific amount would be calculated annually after computing the amount of cash to be generated internally by normal depreciation of equipment already on hand in the Bureau. The additional funds
required in each program category (currency, postage stamps, and "all
other" which covers the manufacture of Treasury bonds, revenue
stamps, and various other items) would be divided by the projected
production costs of each program to arrive at the percentage rate of
the surcharge to be assessed to each product within a given program.
100
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Meanwhile, in order to obtaiii maximum benefit from the $3 million
appropriated for fiscal 1973, there is currently in process a Bureau
proposal to enter into lease-purchase contracts to obtaiii as much productivity-enhancing equipment as it can at the earliest possible time.
Congress is being asked to permit the Bureau to (a) use as much of
the appropriated funds as is necessary for a reserve to support any
liquidated damages clause which may be invoked by a lessor as a guarantee for payment of damages resulting either from termination or
nonexercise of any renewal option, and (b) as an interim measure,
to utilize any part of the appropriation not needed as contingency
funds for the purchase of equipment to augment the working capital.
Comparative financial statements for fiscal years 1972 and 1973 appear
in the Statistical Appendix.
Currency program
Delivered in fiscal 1973 were 3.1 billion currency notes, the same
quantity as in the previous fiscal year.
The Bureau program for modernization of its currency manufacturing operations has particularly focused on (a) the replacement of
those presses installed in 1957 which are fully depreciated and technologically obsolete, and (b) the acquisition of production models of
the currency overprinting and processing equipment which are
designed to mechanize certain of the finishing operations.
Currently, the Bureau's working capital is insufficient for direct
purchase of this equipment. Therefore, the Bureau is investigating
the feasibility of acquiring it under monthly lease-purchase agreements. Any contract for a lease with option tp purchase would contain the usual clause reserving the right of the Government to terminate the contract at any time.
With such a termination clause on equipment which is custom
designed, lessors might well insist on guarantees for payment of liquidated damages resulting either from the termination or nonexercise of
any renewal option. This would require that sufficient funds be available and earmarked. However, the Director of the Bureau, in informal
discussions with the suppliers of this specialized equipment, is attempting to eliminate the liquidated damages clause from any contract
since the equipment acquired represents the latest in the state of the
art and would not be replaced during the period of the contract inasmuch as to do so would cancel the substantial savings in manpower and
production costs associated with its installation.
At the end of the fiscal year, plans Avere underway to issue invitations to bid to prospective suppliers for the lease-purchase of currency
presses, and to conduct negotiations with the existing contractor of the
currency overprinting and processing equipment for the acquisition of
production models of that machine.
During fiscal 1972, the Bureau contracted with a private concern
to determine the feasibility of equipment which would automatically
examine plate-printed currency sheets (prior to overprinting) and
identify any note which might be defective. Phase I of this study concluded that such equipment was within the state of the art. This conclusion was not verified by phase I I of the study .which disclosed that
certain technical problems required further study. Three alternative
approaches are being considered prior to attempting to build a model
ADMINISTRATIVE REPORTS
101
machine. Other proposals developed by interested parties from private
industry are also being studied.
Food coupon program
Approximately 1.9 billion coupons were delivered during fiscal 1973,
the same quantity as in the previous fiscal year. To relieve existing
equipment and space constraints as well as to reduce abnormal overtime work, the Bureau continued contracting with a private banknote
company for the $2 and $3 value booklets and late in the year added
$10 booklets to the contract. By the close of fiscal 1974, to further ease
staff and space requirements, the remaining food coupons will be contracted out to the private sector.
Postage stamp program
Deliveries of U.S. postage stamps were 26.6 billion pieces in fiscal
1973 compared with 26.7 billion in 1972.
To meet the U.S. Postal Service's increasing requirement for complex multicolor stamps, a contract was awarded "in November 1971 for
a combined rotogi*avure line-intaglio web press at a cost of approximately $2 million. This press, in transit at the end of this year and due
to be installed in fiscal 1974, will, after extensive evaluation, be used
to print postage stamps in multicolor sheet form. A second press for
printing multicolor coil stamps by the intaglio process, costing $1
million, was installed late in fiscal 1973 and will be placed in production by January 1974. The need for these two presses was the basis for
the $3 million appropriation by the Congress for fiscal 1972.
Procurement of necessary engraving equipment associated with the
rotogravure press will be spread over 4 years; commercial services will
be utilized in the interim. Chrome-plating equipment for the rotogravure cylinders 'was ordered in fiscal 1972. Orders for photographic
and auxiliary equipment to make the negative and positive film required for the etching of cylinders were placed in fiscal 1973. Cylindermaking equipment will be ordered in fiscal 1975. These acquisitions
will enable the Bureau to perform in-house the necessary preparatory
work and the finishing of engraved cylinders.
New issues of postage stamps delivered in fiscal 1973 are. shown in
the Statistical Appendix.
Improved service to the public
Throughout the year, the Bureau conducted an active program designed to improve communications with, and services to, the public
and, at the same time, to advance the Bureau's goal for increased public
awareness of the security characteristics of genuine currency. The
Bureau furnished exhibit materials for 32 numismatic or philatelic
events. I n some instances. Bureau participation included live demonstrations of the techniques of the intaglio process used in the production of currency, postage stamps, and other securities. Public response
has been most enthusiastic.
I n addition, the Bureau produced five distinctive souvenir cards
for the following major philatelic and nuniismatic exhibitions: The
Associated Stamp Clubs and Society of Philatelic Americans Exhibition in Philadelphia; the National Postage Stamp Show in New York
City; the International Postage Stamp Exposition in San Francisco;
the 15tli International Stamp iSxhibition in New York City;"and the
102
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Combined Philatelic Exhibition of Chicagoland in Chicago. Sales of
these souvenir items not only responded to longstanding recommendations of philatelists and numismatists, but also defrayed the cost of
Bureau participation in such exhibits.
During fiscal 1973,794,221 visitors took the self-guided tour through
the Bureau. Other tours, geared to technical needs and particular interests, were conducted on an individual basis for special visitors, such
as agents of the U.S. Secret Service, representatives of foreign governments, domestic and foreign firms in the printing industry, and news
media personnel.
Internal audit
The Bureau continued to conduct intensive scheduled and unscheduled audits, both fiscal and operational. Forty-one reports of audit,
containing 180 recommendations for improvements, were released for
management consideration and action.
Training program
During fiscal 1973, 687 employees completed Bureau and departmental training courses; 164 completed interagency training courses;
and 79 attended specialized seminars, training classes, conferences,
and exhibits sponsored by non-Govemment organizations. A general
education development (GED) program was announced and 204
employees have registered to participate. Over 100 employees are
presently active in the program; half < of these are in self-study
(programmed instruction) classes while the other half are involved in
remedial reading, English, and arithmetic classes.
Training has been supplied at all levels, 'with special emphasis on
supervisory and executive development. An 80-hour supervisory program is offered on a continuous basis. Immediately upon promotion
to a supervisory position, an employee is scheduled to attend a 56hour basic program, covering supervisory responsibilities, communication skills,, human relations, and job instruction. Later each new
supervisor attends a 24-hour program covering techniques of supervising lower level employees. Additional courses include on-the-job
and refresher training for current needs, developmental training in
anticipation of future needs, training to develop unavailable skills, and
training to develop underutilized and disadvantaged employees.
Labor-management relations
^ I t has been a longstanding policy of the Bureau to foster constructive and harmonious relationships with its employees and labor organizations representing them. Special emphasis and attention have been
directed foward the conduct of all labor-management dealings within
the spirit and intent of Executive Order 11491 as amended by Executive Order 11616 of August 26, 1971. A t the close of the fiscal year,
there existed within the Bureau grants of exclusive recognition to
16 A F L - C I O affiliate unions covering 25 craft units, 1 noncraft unit,
and 1 guard unit. Further, there are 11 approved substantive labormanagement agreements. The unions function as a dynamic part of the
Bureau and are a major factor in management considerations.
Safety program
Employee safety, because of the industrial character of the Bureau's
operations, continues to be of vital management concern. Employee
ADMINISTRATIVE REPORTS
103
safety and health standards, as prescribed in the Occupational Safety
and Health Act, are receiving increased emphasis in their application
to conditions and activities within the Bureau. The issue and use of
protective clothing and equipment, such as protective headgear, noise
suppressors, respirators, gloves, and safety shoes are carefully monitored. The responsibilities of Bureau safety committees are being reemphasized through meetings, publication of safety circulars, and
other activities. I n addition, increased emphasis has been placed on
housekeeping throughout the Bureau to minimize unsafe conditions
and potential fire hazards.
Equal employment opportunity program
The equal employment opportunity program continued to show
steady progress in the advancement of minorities and females. Formal complaints of discrimination increased this year; however, this
probably was the result of a new Civil Service Commission regulation
which affords probationary employees, terminated for any reason, the
right to file E E O complaints. I n addition, further contacts were made
to improve employment opportunities in the Bureau for Spanishspeaking citizens.
Employee committees for E E O continue to function as a viable
communications link between management and employees at the working level. Monthly meetings provide a forum for the discussion of E E O
and any other matters affecting the employment, treatment, and advancement of employees. Members of the E E O and Personnel Staffs
were actively involved in community action programs that affect employment and employability. This included extensive work with the
District of Columbia Public Schools, the Washington Urban League,
Spanish-speaking Advisory Committee, and others. A member of the
E E O Staff received an award from the Washington Urban League for
participation in one of its programs resulting in the hiring of over 90
high school graduates in fiscal 1972 and 1973.
A review of minority statistics shows steady progress in the advancement of minorities and females in apprentice, journeyman, and
higher General Schedule positions. Improvement in the economic
status of minorities and females was noted, and 36 of them in supervisory positions now earn annual salaries over $10,000. Seventy-nine
percent of the superior work performance and other awards were to
minority and female employees.
I n summary, the equal opportunity program at the Bureau continues
to establish a climate of credibility among the work force by involving
the rank-and-file employees in all management actions that affect the
well-being and careers of all employees.
Awards program
During fiscal 1973, 771 employees received special achievement
awards and 48 received high-quality pay increases.
Nonrecurring savings of $164,370 were realized in fiscal 1973 from
the superior work performance phase of the incentive awards program. Under the employee suggestions phase of the program, 195 suggestions were received and 94 adopted, from which the Bureau will
realize estimated annual recurring savings of $17,854. Of the suggestions processed during this fiscal year, 48 percent were adopted.
104
19 73 REPORT OF THE SECRETARY OF THE TREASURY
OFFICE OF EQUAL OPPORTUNITY PROGRAM
The Office of Equal Opportunity Program operates within the Office
of the Secretary and is under the immediate supervision of the General
Counsel. I t assists the Secretary and General Counsel in the formulation, execution, and coordination of policies related to equal opportunity for Treasury employees (implementing the Equal Employment Opportunity Act of 1972 governing equal employment in the
Federal Government) and to employment policies and programs of
banks, savings and loan associations, savings banks, and other financial
institutions that are Federal depositaries or issuing and paying agents
of U.S. savings bonds and savings notes (implementing Executive
Order 11246 and Treasury Regulations governing equal employment
for Government contractors).
Federal emplojment
The Office guides and oversees the implementation of the Department's equal employment program and action plans of all of the
bureaus, provides consultative services on equal opportunity inatters,
and reviews and approves action plans promulgated in each bureau.
I t reviews and adjudicates all investigations of complaints alleging
discrimination because of race, color, religion, sex, or national origin.
The Office provides guidance to Treasury officials and all its field activities through its equal employment management review evaluations
(onsite reviews began in summer of 1972) concerning the employment and utilization of minority group persons and women in each
bureau.
I n fiscal 1973, Treasury's E E O complaint processing system was
completely revised to comply with the provisions of the Equal Employment Opportunity Act of 1972. New guidance was issued for all
bureaus as an additional effort to assure the timely and expeditious
processing and resolution of all complaints coming to their attention.
The operation of the system has been greatly enhanced by greater
decentralized operating authority. Although investigative and other
program administration resources are still limited, a greater quality
of work has been achieved in both the processing and resolutionadjustment phases of this system.
Progress in the administration of the Treasury's equal employment
opportunity program during fiscal 1973 was marked mainly by increased Department emphasis on the upward mobility program. Federal women's program, and the President's 16-point program for
Spanish-surnamed Americans, and the inclusion of these programs in
all of Treasurer's affirmative action plans.
Treasury's new affirmative action program and plan systeni was
completed in November 1972 and now comprises 134 separate affirmative action plans designed to give greater decentralized direction to
the total program and greater benefits to employees located in the
United States and overseas. To implement the plans, the Department
issued guidance on how to complete skills inventories and utilization
analysis, whereby female and minority grOup goals and timetables can
be established where deficient areas are identified. To assist the bureaus in their utilization analysis, a Department-wide and centralized
105
ADMESnSTRATrVE REPORTS
automated system for reporting of employment statistics in Treasury
( E E S T ) was implemented in fiscal 1973 from which data can be
produced on the distribution of employment by minority group designation, sex, series, grade, and geographical location in various
formats. Such information is now being used by the Department and
the bureaus in developing the fiscal 1974 national, regional, district and
facility affirmative action plans.
There is every indication that the centralized automated system
in conjunction with the multiaffirmative action plan system has enabled managers to assess employment and training needs in a manner
that has been beneficial and gives evidence of an increase in the rate
of hiring and upgrading of minorities as indicated by the following
charted employment statistics from 1968 through November 1972.
Department of the Treasury full-time employment hy minority group status
1968
Comparison
1971-1972
1971
1969
No.
No.
Percent
8,256
1.73
20,658
25.2
11,777 12,251 13,234 13,954
1,052
1,116
1,489
1,754
79
85
104
107
482
505
596
687
68,765 71,678 72,928 78,055
15,619 1,665
2,24:7
493
21
128
126
813
84, 006 5, 951
11.93
28.10
19.62
18.34
7.62
3,842
1,195
49
331
15, 241
32.6
113.6
62.0
68.7
22.2
19,120
T o t a l employees*.
82,155
Negro...
Spanish-American
American Indian
Oriental
Other
G S 1-4:
Total
Negro...
Spanish-American..
American Indian. Oriental
Other
G S 5-8:
Total
Percent
Comparison
1968-1972
88,351
94,557 102,813
18,867
19,493
24,126
4,633
23.77
5,006
26.2
4,947
4,948
5,156
255
300
398
25
26
33
80
87
96
13,813 14,318 13,184
4,993
502
36
125
13,837
5,904
791
45
159
17,227
911
289
9
34
3,390
18.25
57.56
25.00,
27.20
24.49
957
536
20
79
3,414
19.4
210.2
80.0
98.8
24.7
19,480
.-
19,679
27,601
1,107
4.17
8,121
41.7
4,290
551
35
249
22,476
434
104
4
60
505
11.25
23.26
12.90
31.74
2.29
1,582
287
9 '
108
6,135
68.4
108.7
34.6
76.6
37.5
28,893
G S 9-12:
Total
26,494
2,708 3,077
3,467
3,856
264
281
422
447
26
24
30
31
141
139
183
189
16,341 18,082 19,724 21,971
:.
Negro.
Span ish-Ameri can
American Indian
OrientalOther
Negro
Spanish-American
American I n d i a n . . .
Oriental
Other
85,635
21,603
23,826
28,960
30,436
32,321
1,8
1,144
1,257
1,283
...
332
316
389
21
27
30
186
179
203
27,210 26,958 27,055
1,457
450
30
213
28,286
1,587
519
34
222
29,959
130
69
4
9
1,673
.
"
11,642
12,037
.395
G S 13-18:
Total.......
Negro...
Spanish-American
American I n d i a n . _
Oriental..
Other
28,737
9,491
9,839
10,665
151
35
3
55
9,247
167
218
38.
54
4
5
70
67
9,560 10,321
271
72
5
77
11,217
307
88.
8
90
11,544
36
16
3
13
327
6.19 • 3,428
8.92
15.33
13.33
4.22
5.91
443
18713
36
2,749
3.39
11.9
38.7
56.3
61.9
19.3
10.1
2,546
13.28
; 22.22
60.00
16.88
2.92
156
53
5
35
2,297
103.3
151.4
166.7
63.6
24.8
* T h e totals i n c l u d e wage b o a r d personnel. G r a d e comparisons are for G S series only.
The U.S. Civil Service Comniission gave final fiscal 1973 affirmative
action plan approval to Treasury and five other agencies of Government (Tennessee Valley Authority, Civil Service Commission, Department of Transportation, Department of Labor, and the National
106
1973 REPORT OF THE SECRETARY OF THE TREASURY
Aeronautics and Space Administration). This is a notable achievement
in view of the fact t h a t few agency plans fully met the particular
requirements of the Equal Employment Opportunity Act of 1972.
With the hiring of a full-time coordinator for the 16-point program
for the Spanish-surnamed and a coordinator for the Federal women's
program, greater progress in fiscal 1974 should be evidenced in the
employment and upgrading of women and Spanish-surnamed Americans. Fiscal 1974 will also be marked by increased equal employment
opportunity program operation emphasis, with particular attention
being given to implementing the goals and procedures of the Equal
Opportunity Operations Manual (FPM-713) to achieve a more effective program administration in all Treasury bureaus and field facilities
and at all equal employment opportunity operating levels.
Financial institutions
Approximately 500 onsite compliance reviews were conducted at
banks this year with an additional 300 offsite reviews at headquarters.
(Offsite reviews are explained in detail below.) A compliance review
is an examination of a bank's personnel policies and programs and entails the negotiation of agreements for aiffirmative action programs,
providing technical assistance to assure compliance with Treasury
requirements, and the conciliation of grievances, misunderstandings,
and allegations concerning discrimination often made by individuals,
civil rights organizations, and other government agencies. The number
of compliance reviews conducted during the year fell below the anticipated projection of approximately 1,000 in an effort to conserve
restricted travel funds.
The Department's guidelines on affirmative action are continually
reviewed and revised and have been reissued to financial institutions
to assure accurate understanding of Treasury's expectations and to
assist in gaining compliance with the various equal employment regulations of. the Department, Office of Federal Contract Compliance,
Department of Labor, and various State and local equal opportunity
commissions and guidelines of the Equal Employment Opportunity
Commission, which administers Title V I I of the Civil Eights Act of
1964. These guidelines have helped financial institutions achieve
meaningful, result-getting equal employment and upward mobility
programs. These guidelines continue to be widely distributed and commented upon and supported by the various trade associations (American Bankers Association, United States Savings and Loan League,
National Association of Mutual Savings Banks and various State trade
associations of the industry), and continue to be reported upon, highly
commended, and used as reference materials in issuances by numerous
trade and management publications such as Prentice-Hall Eeports,
Bank Wage and Hour Eeports, U.S. Savings and Loan News, and
Banking Magazine.
During the past year, full staffing has been completed for all authorized positions at the four regional offices in Houston, Atlanta, Los
Angeles, and Chicago. These offices have each been assigned a geographical area for compliance surveillance activities and for continuity, follow-up, and providing technical assistance. I t is anticipated
that, with these offices now operational and in closer proximity to
ADMINISTRATIVE REPORTS
107
financial institutions under their jurisdiction, more significant employment gains and upward mobility opportunities will be attained by
minorities and women in the employment at these institutions.
The Department had greater impact in its contract compliance activities during the last quarter of this year through a system of offsite compJiance reviews as it implemented the revised Order No. 14 of the Office
of Federal Contract Compliance, Department of Labor. Under this
S3^stem, a two-phase program was initiated; namely, the offsite review
followed by an onsite compliance review where deemed necessary.
Financial institutions, on a priority scheduling basis, are requested
to forward their equal employment affirmative action programs and
various support data for departmental offsite review and evaluation,
after which a determination is made in a more effective and specific
maimer as to whether banks require onsite reviews and where as a result
the greatest impact for minority employment gains and female upward
mobility can be made. This system has permitted the Department to
review the equal employment programs of a significant number of
financial institutions with less manpower and a reduced per unit expenditure and in many instances has obviated an onsite review. It is
anticipated that using this system approximately 2,500 offsite and 1,000
onsite reviews will be accomplished during this next year.
The Department continues to be impressed with the exceptional
cooperation and eagerness of the banking and savings industries and
their leadership in complying with Treasury regulations and the national policy and laws governing equal employment and also by their
cooperation and desire to effect meaningful equal employment opportunity programs. A recent Department study of employment in approximately 2,400 banks, whose total employment is approximately
650,000, disclosed that minority employment has continued to increase
significantly. In a comparison for the 61/^ years, mid-1966 through
1972, Negro employment increased from 22,581 to 68,000; Spanishsurnamed from 12,587 to 29,000; Oriental from 4,892 to 11,000; and
American Indian from 433 to 1,100. These data disclose increases from
40,493 minorities in 1966 to 88,085 in 1970 and 109,100 in 1972 and
demonstrate an increase of 250 percent in minority utilization and
employment by these banks during this cited period.
Studies by the Office of Federal Contract Compliance, Department
of Labor, in both 1971 and 1972 indicate the largest gains made by any
industry in the country in the hiring and utilization of minorities has
been by banking. Of the many industries studied, banking shows the
greatest progress and penetration of minorities in the important
endeavor to achieve compliance with the national policy and laws
governing equal employment opportunity. These studies have predicted
parity in the hiring and utilization of minorities by the banking industry before the end of this decade. This prediction is regarded as a
pace setter for other industries studied and as a signal tribute attesting
the value of the Department's program. These significant data have
disclosed the need by banks for renewed emphasis on increasing opportunities for minorities and women in terms of upward mobility
programs and efforts leading to management-type positions. The Department anticipates that affirmative action promotion by both the
Government and the industries involved and the programs of Depart506-171-^73
^10
108
1973 REPORT OF THE SECRETARY OF THE TREASURY
ment surveillance and technical assistance during this next year will
result in numerical increases (industrywide) for minorities and
women in the significant white collar, managerial, and technical job
categories.
I n a continuing effort to assure that banks are complying with technical requirements, the Departnient receives from bank examiners of
the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Federal Eeserve banks reports of deficiencies found in their
examinations with regard to the filing of Federal equal employment
opportunity reports and the availability of a written affirmative action
program. Negative reports filed with Treasury are handled in a
manner that assures the compliance of these two aspects usually within
a 30-day period without travel, special reviews, etc. This cooperative
endeavor with these bank examiners has obviated considerable expense
and requirements for additional staffing.
FISCAL SERVICE
Effective July 1, 1972, a planning organization was established in
the Fiscal Service entitled ^'Operations Planning and Eesearch Staff."
The staff provides a vital service to the entire Fiscal Service in its many
technical roles and missions which have interbureau. Department-wide,
and Government-wide implications. The new staff provides leadership
on technological research of all kinds having potential effect on one
or more major organizational units of the Fiscal Service.
B u r e a u of Accounts
The functions of the Bureau are Gpvernment-wide in scope. They
include central accounting and financial reporting relating to the Government as a whole; disbursing for virtually all civilian agencies;
supervising the Government's depositary system and agency cash
management practices; 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, international claims and indebtedness, and liquidation of the Postal Savings Systeni; and Treasury staff representation in the Joint Financial Management Improvement Program.
Personnel
Despite Bureau-wide restraints on appointments and promotions
during this year, the Bureau carried out its college recruitment efforts
in six Eastern colleges. Fifteen accounting trainees, five of whom are
females, were recruited for the Bureau's career development program.
Additionally, 20 professional management and computer systems analysts were added to the headquarters rolls, the majority of whom were
initially assigned to the Operations Planning and Eesearch Staff.
ADMINISTRATIVE REPORTS
109
Youth.—During the summer, 34 summer aide, 11 sunimer employment exam student, 6 vocational office trainee, and 2 Federal junior
fellowship appointments were effected. These statistics reflect 19 student appointments in excess of the assigned quota of 34.
Veterans,—A total of 81 veterans preference eligibles were appointed during the year, 70 of whom are Vietnam-era veterans. This
is approximately 5.5 percent above the Government's average.
Women,—Significant achievements in support of the advancement
of women within the Bureau were witnessed during the year when
women advanced to such responsible positions as Special Assistant to
the Comnlissioner, Deputy Chief Disbursing Officer, Assistant Personnel Officer, Assistant Director/Division of Cash Management, Bureau Classification Specialist, and Assistant Chief/Financial Services
Branch. Approximately 45 women were promoted or assigned to professional, technical, supervisory, and staff positions at or above the
grade GS-7 level.
Upward mobility,—^The Bureau conducted its annua!program for
progress, reviewing and evaluating each employee's past and recent
experience and education in order to identify present skills, to develop
full potential, and to recommend supervisory and occupational skills
training.
Spanish surnamed,—^As in past years, the Bureau effected an increase in the total number of Spanish-surnamed employees, the majority of whom are employed in Austin and San Francisco, cities with
concentrated Spanish populations. Between 1968 and the present, the
Bureau has employed, respectively, 8, 22, 25, 27, and 47 Spanishsurnamed persons. Continued and more concerted efforts on behalf of
this program will result in a more representative number of Spanishsurnamed employees on the rolls.
Labor-management relations,—Three disbursing centers continued
as the only Bureau segments with exclusive recognition granted to
local union chapters, one of which (Austin) remains without a negotiated contract. Additional union activity is anticipated during the
next year at the Philadelphia Disbursing Center.
Systems improvement
The U.S. Civil Service Commission became interested in billing
under the simplified intragovernmental billing and collection system
due to an increasing workload involving collection of training and
investigative fees from other Government agencies. Procedures have
been developed by Bureau staff, and it is anticipated that the system,
with the CSC as the billing agency, will be implemented in fiscal 1974.
Efforts are continuing to expand the system by adding new billing
agencies; e.g.. General Services Administration (billings to civilian
agencies), U.S. Postal Service, and the Government Printing Office.
During fiscal 1973, the Departments of Agriculture and Treasury
established a joint task force to study and improve procedures for
depositing and reporting proceeds from the sale of food stamps. The
proposed system utilizes a standard 80-coluinn data card that readily
lends itself to automated systems. Federal Eeserve banks would consolidate the card forms iiito a single certificate of deposit. The original
certificate of deposit would flow to Treasury through normal channels
110
1973 REPORT OF THE SECRETARY OF THE TREASURY
and a copy, along with supporting card forms, would be furnished to
the Department of Agriculture, Food and Nutrition Service. The system is presently being tested by the Federal Eeserve Bank of Eichmond and is expected to be implemented nationwide in fiscal 1974.
Procedural requirements were prescribed for Government agencies
concerning: (1) Eeporting foreign grants, loans, and credits;» (2)
composite check procedures; (3) State tax agreements; (4) agency
operations under continuing resolutions; (5) EAM- or computergenerated monthly statements of transactions; (6) business-type financial statements; (7) reporting fidelity losses sustained by the United
States; (8) requirements for social security account numbers on savings bonds; (9) disbursing; (10) agreements of indemnity in connection with the replacement of checks; (11) regulations for the experimental withholding of city income taxes for three cities; and (12)
other fiscal matters including revised regulations for letters of credit.
Central accounting and reporting
Bureau staff continued efforts toward the implementation of accrual
basis financial reporting from agencies. Treasury reporting instructions will be revised to coordinate with principles and standards recently issued by the General Accounting Office. An analytic survey will
be made in fiscal 1974 of agency accounting systems capability.regarding grant accruals and constructive delivery accruals. Upon completion of the survey. Government-wide accrual data will be published in
the Treasury Bulletin.
Departnient Circular No. 966, concerning preparation of businesstype financial statements, was revised on December 20, 1972. The circular and procedural instructions issued in the Treasury Fiscal Eequirements Manual cover all assets (except cash of accountable officers), liabilities, and equities relating to all programs and activities
under an agency's control. The new reports stress bureauwide reporting for management purposes in addition to fund-type reporting.
Agencies began reporting under the new instructions for the period
ending December 31,1972.
The fiscal 1972 Combined Statement of Eeceipts, Expenditures, and
Balances of the U.S. Government was released in January under a new
format. Major changes for the expenditure chapters included use of a
one-column vertical balance sheet format to replace a five-colunm ending balance analysis, and presentation of ending balances of fund resources and equities previously shown only for the beginning balances.
Publication dates were accelerated for major Government-wide
financial reports including the Monthly Treasury Statement, the Combined Statement, the Annual Eeport of the Secretary of the Treasury
on the State of the Finances, the Statistical Appendix to the Annual
Eeport, and the Federal Aid to States report. Eelease dates for the
latter two reports were the earliest in history and the Secretary's
Annual Eeport was published earlier than it has been in over 20 years.
Auditing
During fiscal 1973, the Audit Staff conducted 21 financial and operational audits (17 in central office and 4 in regional offices). An evaluation of a middle management training program was also performed.
ADMINISTRATIVE REPORTS
111
Additionally, management surveys and operational reviews were performed in four regional offices.
The annual examination of the financial statements and supporting
data of surety companies holding certificates of authority as acceptable sureties on bonds running in favor of the United States (6 U.S.C.
8) was performed. Certificates are renewable each July 1, and a list of
approved companies (Department Circular 570, Eevised) is published
annually in the Federal Eegister for the information of Federal bondapproving officers and persons required to give bonds to the United
States. As of June 30,1973, a total of 275 companies held certificates.
Disbursing operations
The 11 disbursing offices of the Division of Disbursement produced
a total of 538.3 million checks and savings bonds during fiscal 1973 at
an average unit cost of $0.0294, in payment of Government obligations
for over 1,300 civilian offices. Almost 98 percent of these payments were
produced by computers. I n addition, more than 95 million computergenerated Federal tax deposit forms were produced.
Performance of the diversified activities of Treasury's centralized
disbursing system by computerized methods continued to result.in
increased productivity and afforded the Division of Disbursement with
the means to provide services which benefited Government agencies and
the general public. As in past years, a number of small Government
agency offices received automated payroll accounting services provided
by disbursing centers.
Significant achievements realized during fiscal 1973 are as follows:
1. The prototype check-wrapping system designed for use in enclosing checks in envelopes was installed in the Philadelphia Disbursing Center during the week of February 26, 1973. Acceptance testing
of the prototype model during Mav 1973 resulted in enclosing an
average of 28,000 checks per hour, with minimal check spoilage. Orders
will provide for delivery of 13 production models in Philadelphia and
other disbursing centers through fiscal 1976. Delivery of the first production model system in Philadelphia is planned for December 1974.
Projected annual savings upon installation of all systems is estimated
at more than $1 million.
2. An optical character recognition (OCE) system was installed in
the Washington Disbursing Center on June 1, 1973. The equipment,
which reads data appearing on voucher schedules for issuance of onetime payments, will lead to estimated savings of $160,000 in that office,
when the system is fully operational by July 1,1974.
3. Based on the success obtained from the semiautomation of Social
Security Administration claims in the Chicago Disbursing Center,
plans have been made to extend the procedure to all recurring benefits
and tax refunds in fiscal 1974, with annual recurring savings projected
at $50,000.
4. To assist victims of flood disasters inflicted by Hurricane Agnes,
emergency branch disbursing offices were established in July 1972 in
Eichmond, Va., Elmira, N.Y., and Harrisburg, Pa., near each of three
major disaster sites, to make emergency payments for the Small Business Administration and the Department of Housing and Urban Development. The offices were discontinued in the spring of 1973 by which
112
1973 REPORT OF THE SECRETARY OF THE TREASURY
time 180,252 emergency payments, totaling $896,601,807, had been
issued. Special payment operations continued for these emergency
programs at the regular disbursing centers.
5. Various agencies automated their-accounts payable which allows
the use of magnetic tape for check issuance of vendor and miscellaneous
payments. As a facet of this payment system, notice-to-recipient cards
are mailed with related checks to identify the purpose of the check
and provide a permanent payment record for the payee.
6. Approval was obtained for acquisition and installation by October 1973 of third-generation computer equipment for the Chicago,
Birminghani, and San Francisco Disbursing Centers. Additional computer equipment for other disbursing centers will be acquired under
a formal 5-year schedule.
7. The Departnient of Agriculture has requested assistance in printing and mailing approximately 600,000 food coupon remittance cards
to 6,000 distribution points each year. This activity was previously
coordinated by the Office of the Treasurer, U.S. The initial full mailing of the cards is scheduled for August 1973.
8. A new building for the Birmingham Disbursing Center was dedicated on July 10, 1972. The Kansas City Disbursing Center will also
occupy a new building by November 1^ 1973, which will be similar to
those presently housing the Austin and Birmingham centers.
9. The supplemental security insurance (SSI) program, which provides for the federalization of welfare payments to the aged, blind,
and disabled, will be initiated in January 1974. The program will have
a major impact on manpower and equipment needs in disbursing
centers due to an increased yearly workload of an estimated 90 million
checks.
The table shown below is a comparison of the workloads for fiscal
years 1972 and 1973.
i:
Volume
Classification
1972
Operations financed by appropriated funds:
Checks:
Social security benefitsVeterans benefits
Income tax refunds
-^
Veterans national service life insiuance dividends program
Other.
Savings bonds
J
Adjustments and transfers....
:
1973
Operations financed by reimbursements:
Railroad Retirement Board
Bureau of the Public Debt (General Electric Co. bond prograni).....
Total workload—reimbm'sable i t e m s . . .
Total .workload
309,679,143
78,393,185
63,410,762
1,742,327
62,084,181
7,558,533
299,109
499,770,797
...'
294,664,438
76,912,925
55,517,958
5,185,754
59,715,385
7,473,003
301,334
523,167, 230
14,586,411999,822
14,085,444
1,070,522
15,586,233
15,155,966
515,357,030
538,323,196
Federal depositary system^
The types of depositary services provided and the number of depositaries for each of the authorized services as of June 30, 1072 and
i973, are shown in the following table:
1 See exhibit 23.
. '
ADMINISTRATIVE REPORTS
113
Type of service provided by depositaries
Receive deposits from taxpayers and purchasers of public debt securities for
credit in Treasm'y tax and loan accounts.
Receive deposits from Government officers for credit in Treasurer's general
accounts
Maintain checking accoimts for Governnient disbursing officers and for quasipublic funds
Furnish bank drafts to Government officers in exchange for collections
Maintain State unemployment compensation benefit payment and clearing
accounts
Operate hmited banking facihties:
I n t h e United States and its outlying areas
In foreign areas
1972
1973
13,049
13,283
1,153
.
1,158
7,566
1,213
7,561
908
54
48
209
249
210
231
Investments
The Secretary of the Treasury, under specific provisions of law, is
responsible for investing various Government trust funds. The Department also furnishes investment services for other funds of Government agencies. A t the end of fiscal 1973, Governinent trust funds and
accounts held public debt securities (including special securities issued
for purchase by the major trust funds as authorized by law), Government agency securities, and securities of privately owned Governmentsponsored enterprises. See the Statistical Appendix for table showingthe investment holdings by Government agencies and accounts.
Loans by the Treasury
The Bureau administers loan agreements with those corporations
and agencies that have authority to borrow from the Treasury. See the
Statistical Appendix for tables showing the status of Treasury loans
to Government corporations and agencies as of June 30, 1973.
Foreign indebtedness
World War I,—^The Governments of Finland and Greece made payments during fiscal 1973 of $352,705 and $328,898.02, respectively. For
status of World W a r I indebtedness to the United States, see the Statistical Appendix.
Credit to the Vnited Kingdom,—The Government of the United
Kingdom made a principal payment of $67.2 million and an interest
payment of $63.1 million on December 31, 1972, under the Financial
Aid Agreement of December 6, 1945, as amended March 6, 1957. The
interest payment included $10.9 million representing interest on principal and interest installments previously deferred. Through June 30,
1973, cumulative payments totaled $2,181.4 million, of which $1,198.9
million was interest. A principal balance of $2,767.5 million remains
outstanding; interest installments of $319.9 million which have been
deferred by agreement also were outstanding at the fiscal yearend.
Japan,, postwar economic assistance,—The Government of Japan
made final payment in fiscal 1973 of $152.8 million in principal including a credit of $6.9 million and $3.9 million in interest on its indebtedness arising from postwar economic assistance. Cumulative payments
through June 30,1973, totaled $490 million principal and $83.8 million
interest which liquidated the account in full.
Indonesia., consolidation of debts.—The Government of the Eepublic
of Indonesia made payments in fiscal 1973 of $3,048, 680.10 in principal
and $335,020.67 in interest on deferred principal installments in ac-
114
19 73 REPORT OF THE SECRETARY OF THE TREASURY
cordance with the Indonesian Bilateral Agreement of March 16,1971.
The normal payment of interest on principal is not due until June 11,
1985.
Payment of claims against foreigri governments
The 13th installment of $2 millipri was received from the Polish
Government under the agreement of July 16, 1960, and pro rata payments on each unpaid award were authorized.
A claims agreement between Hungary and the United States was
concluded on March 6,1973. Under the agreement, Hungary will make
20 annual installments of $945,000. The initial installment of $945,000
has been received by the Department of the Treasury. Before any payment can be made on the Hungarian awards, the Foreign Claims Settlement Commission will have to adjudicate and certify new awards.
The agreement also released the blocking controls over all Hungarian
accounts, and the accounts which were divested and held in blocked
accounts by the Department of the Treasury are being released to the
persons entitled.
See Statistical Appendix for more details.
Defense lending
Defense Production Act,—Loans outstanding were reduced from
$5.6 to $2.9 million during fiscal 1973. Further transfers of $3.6 million 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 $32.8 million.
Liquidation of Reconstruction Finance Corporation assets,—The
Secretary of the Treasury's responsibilities in the liquidation of EFC
assets relate to completing the liquidation of business loans and securities with individual balances of $250,000 or more as of June 30, 1957,
and securities of and loans to railroads and financial institutions. Net
income and proceeds of liquidation amounting to $56.5 million have
been paid into Treasury as miscellaneous receipts since July 1,1957.
Total unliquidated assets as of June 30, 1973, had a gross book value
of $6.5 million.
Liquidation of Postal Savings System
Effective July 1, 1967, pursuant to, the act of March 28, 1966, the
unpaid deposits of the Postal Savings System were required to be transferred to the Secretary of the Treasury for liquidation purposes. As of
June 30, 1970, a total amount of $65,139,269.29 representing principal
and accrued interest on deposits had been transferred for payment of
depositor accounts. All deposits are held in trust by the Secretary pending proper application for payment. Through fiscal 1973, payments
totaling $56,762,139.47 had been made including $737,470.41 during
fiscal 1973.
Public Law 92-117, approved August 13,1971, provided for the periodic pro rata distribution among the 50 States, the District of Columbia, Puerto Eico, the Virgin Islands, and Guam of the available
amounts of unclaimed Postal Savings deposits. A distribution of $1,000,230 was made to the States and the other jurisdictions during fiscal
1973.
ADMINISTRATIVE REPORTS
115
Federal tax deposits
The Federal tax deposit system is used for the collection of individual and corporate income tax, social security tax, railroad retirement
tax, unemployment tax, and Federal excise tax. The Bureau of Accounts prepares and mails Federal tax deposit forms quarterly to private enterprises. During fiscal 1973, the disbursing centers issued more
than 95 million forms. The following table shows the volume of deposits processed by Federal Eeserve banks for fiscal years 1960-73.
Fiscal year
1960
1961
1962
1963
1964
1965.__.
1966
1967
1968
1969
1970
1971
1972
1973
Individual
income and
social security
taxes
Railroad
retirement
taxes
9,469,057
9,908,068
10,477,119
11,161,897
11,729,243
12,012,385
12,518,436
15,007,304
17,412,921
23,939,080
26,612,484
28,714,587
32,336,751
34,606,495
10,625
10,724
10,262
9,937
9,911
9,859
9,986
10,551
14,596
12,479
11,622
12,367
15,080
11,202
Federal
excise
taxes
598,881 .
618,971 .
610,026 .
619,519 _
633,437 .
644, 753 .
259,952 .
236,538
233,083
272,048
296,487
323, 730
364,556
398,624
Corporate
income
taxes
22,783 .
394,792 .
1,297,052 .
1,235,452
1,249,034
1,309,668
1,495,260
Unemployment taxes
192,905
956,201
1,409,527
1,978,266
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
18,055,392
25,520,659
28,348,950
31,255,919
35,435,582
38,489,847
NOTE.—Comparable data for 1944-59 will be found in the 1962 Annual Report, p. 141.
Government losses in shipment
Claims totaling $294,152.91 were paid from the fund established by
the Govemment Losses in Shipment Act, as amended. Details of operations under this act are shown in the Statistical Appendix.
Donations and contributions
During the year, the Bureau of Accounts received "conscience fund"
contributions totaling $51,894.68 and other unconditional donations
totaling $343,088.32. Other Government agencies received conscience
fund contributions and unconditional donations amounting to
$7,841.59 and $42,801, respectively. Conditional gifts to further the
defense effort amounted to $241. Gifts of money and the proceeds of
real or personal property donated in fiscal 1973 for reducing the public
debt amounted to $11,505.43.
B u r e a u of t h e Public Debt
The Bureau of the Public Debt, in support of the management of
the public debt, prepares Department of the Treasury circulars offering public debt securities; directs the handling of subscriptions and
making of allotments; formulates instructions and regulations pertaining to security issues; and conducts or directs the conduct of transactions in outstanding securities. The Bureau performs the final audit
of retired securities and interest coupons; maintains accounting control over public debt receipts and expenditures, securities, and interest
costs; keeps individual accounts of owners of registered securities and
authorizes the issue of checks in paynient of interest thereon; and ad-
116
1973 REPORT OF THE SECRETARY OF THE TREASURY
judicates 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, 111., and Parkersburg,
W.Va., whei-e most Bureau operations related to U.S. savings bonds
and U.S. savings notes are handled. Under Bureau supervision many
transactions in public debt securities are conducted by the Federal
Eeserve banks and their branches as fiscal agents of the United States.
Approximately 18,600 private financial institutions, industrial organizations, selected post offices, and others cooperate in the issuance of
savings bonds, and approximately 17,100 financial institutions act as
paying agents for savings bonds.
Management improvement
The Division of A D P Services planned for and directed construction
of a new data processing center in the Washington office to house a
large-scale Univac 1108 computer S3^stem, and supervised the installation of the equipment in Februaiy 1973. Management of the center will
be turned over to the Office of the Secretary during the first half of
fiscal 1974. I n addition to servicing the Bureau of the Public Debt, the
center will provide data processing services to several other Treasury
organizations. The Division of A D P Services also completed a major
undertaking by converting all 15 computer applications for the Washington office from the Honeywell 200 systeni to the Univac 1108 system.
A major project was initiated in fiscal 1972 to develop an automated
system for maintaining the accounts of owners of registered Treasury
and agency securities and for preparing check issue data. A full master
record is now maintained on magnetic tape for each registered security
from initial printing, through inscription and issuance, to eventual
retirement. I n addition, the necessary information as to registered interest is maintained for each registered owner, and regular interest
payment authorizations are being generated from the computerized
system. Conversion to the automated system was completed in October
1972. Parallel operations of the old semiautomated system and the new
fully automated system began m July 1972 and will be completed
early in fiscal 1974. The first interest checks under the automated
systeni were issued in July 1973. The systeni will reduce operating
costs, decrease processing time, improve the accuracy of the records,
and generally enhance the efficiency of operations.
I n its continuing efforts to furnish mvestigative agencies with information concerning missing securities, the Bureau has completed
arrangements for the entry of data pertaining to bearer Treasury securities into the National Crime Information Center computer system
maintained by the Federal Bureau of Investigation. The data, which
includes a complete description of each security reported lost, stolen,
or destroyed, will be updated on a daily basis. I t is planned to enter
information relating to registered securities during fiscal 1974.
The Bureau petitioned the National Archives and Eecords Service
for authorit}?- to destroy accumulated retired registered securities, some
of which were issued as long ago as 1836. Authority was granted for
the destructioii of such securities 6 years after the maturity date or
ADMINISTRATIVE REPORTS
117
date of call for redemption, or 6 years after receipt in the Department,
whichever is later. Destruction of the securities was begun, and eventually approximately 6,000 square feet of floor-space used for storage
of securities will be freed for other uses.
I n the Washington office, the Division of Management Services was
established by consolidating the Office Facilities Branch, Printing and
Procurement Branch, Directives Branch, Management Analysis Office,
and the Destruction Conimittee under central direction. The new division has the responsibility for planning, coordinating, and directing
administrative and management improvement programs in the Bureau
and providing related services in the Washington office.
The word processing center in the Correspondence and Clainis
Branch of the Division of Securities Operations successfully began
operation. The facility utilizes a central dictation system and automatic typewriters to link more than 20 correspondents and supervisors
at individual dictating stations to a series of endless loop recorders.
The system, with its capability for simultaneous recording and transcribing, is yielding a reduction of approximately two-thirds in the
time required for the preparation of correspondence.
Treasury will require that the social security nuniber of the owner
or first-named co owner be included in the inscription on all series E
savings bonds with issue dates of October 1, 1973, or later. This will
enable the Bureau to establish a system of ownership records based
on account numbers, which will be more efficient and permit more
timely and accurate servicing of inquiries and claims than the present
system which is based on name and address information. Similarity of
names and multiple changes of address often hamper the identification of bond holdings and the expeditious processing of requests for
information or claims for the replacement of lost, stolen, or destroyed
bonds. The Bureau has developed plans for installing the new system
for bonds issued after the requirement becomes effective.
The program to have large-volume bond issuing agents report series E savings bond sales on magnetic tape in lieu of registration stubs
was further expanded to include one Defense Department installation
and four private companies. Additionally, the number of payrolls
serviced was expanded at one Defense Department installation and
three Federal Eeserve banks. There are now 29 issuing agents participating in the issues-on-tape program.
The move to consolidate all savings bond functions of the Chicago
and Parkersburg offices into one office in Parkersburg is continuing in
an orderly manner. Ground was broken in Parkersburg on June 9,
1973, for a new building expected to be completed in fiscal 1975.
Bureau operations
During the year, 36,301 individual accounts covering publicly held
registered securities other than savings bonds, savings notes, and retirement plan bonds were opened and 48,937 were closed. This decreased the number of open accounts to 257,315 covering registered
securities in the principal amount of $9,396 million. There were 434,020
interest checks with a value of $365 million issued during the year.
118
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Eedeemed and canceled securities other than savings bonds, savings
notes, and retirement plan bonds received for audit included 4,709,976
bearer securities and 327,911 registered securities. Coupons totaling
14,477,717 were received.
,
During the year, 31,842 registration stubs of retirement plan bonds
and 11,110 retirement plan bonds were received for audit.
A summary of public debt operations handled by the Bureau appears on pages 17-24 of this report and in the Statistical Appendix.
U,S, savings bonds,—The issuance and retirement of savings bonds
result in a heavy administrative burden for the Bureau of the Public
Debt, including auditing and classifying all sales and redemptions;
establishing and maintaining registration and status records for.all
bonds; servicing requests from bond owners and others for information; and adjudicating claims for lost, stolen, and destroyed bonds.
Detailed information on sales, accrued discount, and redemptions of
savings bonds will be found in the Statistical Appendix.
There were 143 million stubs or records on magnetic tape and microfilm representing the issuance of series E savings bonds received for
registration, niaking a grand total of 3,646 million, including reissues,
received through June 30,1973. All registration stubs of series E bonds
and all retired series E bonds are microfilmed, audited, and destroyed,
after required permanent record data are prepared by an E D P system
in the Parkersburg office.
Of the 109.6 million series A - E savings bonds and savings notes redeemed and charged to the Bureau during the year, 106.8 million (97
percent) were redeemed by authorized paying agents. For these redemptions the agents were reimbursed quarterly at the rate of 15 cents
each for the first 1,000 bonds and notes paid and 10 cents each for all
over the first 1,000 for a total of $13,907,450 and an average of 13.02
cents per bond and note.
Interest checks issued on current income-type savings bonds (series
H ) during the year totaled 4,208,504 with a value of $398 million. New
accounts established for series H bonds totaled 138,112 while accounts
closed totaled 115,106, an increase of 23,006 accounts.
Applications received during the year for the issue of duplicates of
savings bonds and savings notes lost, stolen, or destroyed after receipt
by the registered owner or his agent totaled 51,386. I n 31,050 of such
cases the issuance of duplicate bonds was authorized. I n addition,
11,482 applications for relief were received in cases where the original
bonds were reported as not being received after having been mailed to
the registered owner or his agent.
Office of t h e T r e a s u r e r of t h e United S t a t e s
The Office of the Treasurer of the United States was created by the
act of September 2, 1789 (1 Stat. 65; 31 U.S.C. 141), for the purpose
of receiving, holding, and paying out the public moneys for the Federal Governnient. The Office maintains accounts of the source, location, and disposition of these funds.
The Treasury checks issued to pay virtually all of the Federal Gov-
ADMINISTRATIVE REPORTS
119
eriiment's obligations are drawn on the Treasurer, and upon their
presentment for payment are examined by the Treasurer's Office and
reconciled against the records of the issuing officers. I n fiscal 1973,
almost 651 million checks were issued from 1,838 disbursing stations.
Clainis for checks that are lost in the mails, or which bear forged
endorsements, are paid by the Treasurer by issuing or authorizing the
issuance of new checks. The Treasurer also handles claims for partially destroyed paper currency.
Most of the Federal Government's operating cash is held in accounts of the Treasurer maintained in the 36 Federal Eeserve banks
and branches. These banks have been designated, pursuant to law, ias
fiscal agents of the United States. Tax and customs receipts, public
debt borrowings, and other incoming moneys are credited to those accounts, and checks drawn on the Treasurer are charged to those accounts after they have been endorsed by the payees and enter the
banking system for payment by the Treasurer. The Federal Eeserve
banks make daily reports of these transactions to the Treasurer, who
keeps cash accounts of the Federal Government's receipts and disbursements and publishes daily financiaLl reports.
Eepresentatives of the Treasurer make regular inspections of the
procedures employed by Federal Eeserve banks in verifying and destroying paper currency of the United States which has become worn
out and will be replaced. Unfit currency in the Washington, D . C , area
is verified and destroyed by the Treasury.
The Treasurer is vault custodian of a quantity of securities iand
other valuables deposited with the Treasury by many Government
agencies.
I n the Washington, D . C , area, the Treasurer supplies coin and currency to local banks, cashes checks drawn on the Treasurer, and issues
and redeems Government bonds and other securities. I n other parts
of the country, these functions are performed by Federal Eeserve
banks and branches.
Management improvements
A D P management,—^During fiscal 1973, work performed for other
agencies by the Treasurer's Office required the services of A D P personnel valued at $318,248. A total of $4,418 was deposited in the general fund of the Treasury on account of reimbursements for computer
usage.
Automation,—The major nianagement improvement project is in
the area of automating check claims operations on third-generation
computers. This involves improving certain clerical processes as well
as accelerating the production of reports, such as check payment and
reconciliation reports, directly related to claims operations. Definitive
progress in this area is expected to be reported next year.
Survey in mutilated check area,—An extensive review of checks
classified as mutilated and forwarded to the Office of the Treasurer,
U.S., by the Federal Eeserve banks was conducted. The survey proved
that a large percentage of checks are not in that classification but are
actually fit for processing. The banks were asked to make a more care-
120
19 73 REPORT OF THE SECRETARY OF THE TREASURY
ful analysis of checks to determine those to be processed as mutilated.
The result has been a significant decrease in the number of such checks
being forwarded to the Treasurer's Office to be reconstructed.
Review of check reconciliation operations,—During fiscal 1973,
Governnient check reconciliation operations were reviewed at all levels
to find and eliminate reasons for the increasing backlog of unbalanced blocks of checks. Several methods of improvement were suggested to disbursing officers, prmcipally by providing them with a list
of deficiencies in their check issue reports. These actions have resulted
in iniproving the quality of the work received from the disbursing
officers iand reducing the reconciliation backlog in the bureau.
Destruction of unfit paper currency.—During fiscal 1973, the Treasurer's Office conducted five more tests of different kinds of pulverizing
equipment to see whether they would satisfactorily destroy currency
unfit for circulation. The objectives are to reduce the use of incineration, the predominant method now used to destroy unfit currency, and
to recycle the high-quality currency paper. As of June 30,1973, seven
Federal Eeserve banks and branches had been authorized to obtain
pulverizing equipment previously approved by the Fiscal Assistant
Secretary, and four of them have installed and are using the equipment.
Internal auditing,-—Audits of the various activities in the Office of
the Treasurer provide the surveillance necessary to assure management that established policies and procedures are being followed and
that assets are propeiiy accounted for. Unannounced audits made of
cash, negotiable securities, bond stock, and check stock are a deterrent to misappropriation of funds. Visits were made to 33 Federal
Eeserve banks and branches to review operations pertaining to canceling, verifying, and destroying unfit paper currency.
As a result of fiscal 1973 audits, internal controls were strengthened
in the processing and recordkeeping of currency, coin, and Government securities. Internal audit work also assisted management in developing more efficient, effective, and econoniical operating niethods.
The audit staff was strengthened by the addition of four auditors
to help meet expanding audit requirements. Professional development
of the staff included attendance by various members at 15 daytime
seminars ranging in length from 2 to 5 days, and completion of 16
semester-length evening courses at local universities. The subject matter ranged from operational auditing, financial management, labor
relations, nianagement and organization, C P A coaching, and fiscal
policy.
Training.—During fiscal 1973 the Treasurer's Office Training
Branch set a record for the bureau. I t not only participated in a far
wider range of programs than ever before, but spent over $34,000
in the process, resulting in marked improvement in both efficiency and
production.
Assets and liabilities in the Treasurer's account
A statement of the assets and liabilities in the Treasurer's account
at the close of the fiscal years 1972 and 1973 appears in the Statistical
Appendix. Balances shown in that statement, which is on a final ac-
ADMINISTRATIVE REPORTS
121
counting basis, may differ somewhat from balances mentioned herein
on'the daily Treasury statement basis. The assets of the Treasurer
consist of gold bullion, coin, coinage nietal, paper currency, deposits
in Federal Eeserve banks, and deposits in comniercial banks designated as Government depositaries.
Gold,—There were only minor changes in the Treasurer's gold stock
during fiscal 1973. The beginning balance of $10,410.1 million was increased by purchases of $0.4 million and reduced by sales of $0.3 million, leaving a balance of $10,410.2 million at yearend. These values
are stated at $38 per fine troy ounce in accordance with the P a r Value
Modification Act approved March 31,1972. Following the further devaluation of the dollar in February 1973 the Treasury proposed legislation which would revalue the gold stock at $42.22 + per ounce, but
this had not been enacted as the year ended.^
Coinage metal,—Stocks of coinage metal stood at $216.8 million
at the beginning of fiscal 1973 and at $320.9 million as the year ended.
Such stocks include silver, copper, nickel, zinc, and alloys of these
metals which are not yet in the form of finished coins.
Balances with depositaries,—The number of depositaries of each
type and the balances on June 30, 1973, on the daily Treasury statement basis, are showii in the following table:
Deposits to the
credit of the
Treasurer of the
United States
Jmie 30, 1973
Number of
accounts \vlth
depositaries ^
Federal Reserve banks and branches
Other depositaries reporting directly to the Treasurer:
Special demand accounts
Other:
Domestic
Foreign 3
Depositaries reporting through Federal Reserve banks:
General depositaries, etc
Special depositaries, Treasury tax and loan accounts.
Total
36
2 $4, 281,154,438
8
16,925,077
24, 245,424
1,989
13,283
.
105,515,000
20
48
74,464, 006
8,432, 667, 281
15,384
12,934,971,226
1 Includes only depositaries having balances with the Treasurer of the United States on June 30, 1973.
Excludes depositaries designated to fm^nish official checking account facihties or other services to Government officers, 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 $243,385,713 in process of coUection.
8 Principally branches of U.S. banks and of the American Express International Banking Corp.
Bureau operations
Receiving and disbursing public moneys,—Government officers deposit moneys which they have collected to the credit of the Treasurer
of the United States. Such deposits may be made with the Treasurer
in Washington, D . C , or at Federal Eeserve banks, or at designated
Government depositaries, domestic or foreign. Certain taxes are also
deposited directly by the employers or manufacturers who withhold
or pay them. All payments are withdrawn from the Treasurer's account. Moneys deposited and withdrawn in the fiscal years 1972 and
1 See exhibit 52.
122
19 73 REPORT OF THE SECRETARY OF THE TREASURY
1973, exclusive of certain intragovernmental transactions, are shown
in the following table on the daily Treasury statement basis:
Deposits, withdrawals, and balances in the Treasurer's account
Balance at beginning of fiscal year
_
1972
1973
.—
Total withdrawals
$11,309,647,071
228,285,455,364
466,356,112,806
253,206,887,142
497,556,268,758
6,660,949,840
117,118,702,447
25,964,803,130
8,236,440,346
137,503,631,324
28,057,892,802
633,080,977,032
244,879,617,807
437,225,396,321
276,735,923,600
466,675,124,386
5,462,501,032
108,133,198,963
21,286,237,625
5,693,504,307
125,044,047,256
20,341,007,521
589,795,551,759
Total deposits
Cash withdrawals:
Budget and trust accounts, etc
Public debt redemptions 1
—_—
Less:
Redemptions included in budget and trust accounts
Redemptions by Goverrunent agencies 2
Redemptions of securities of Government agencies in market 2
$9,910,720,039
596,826,719,012
Cash deposits:
Internal revenue, customs, trust fund, and other collections
Public debt receipts i_-_
_.._
Less:
Accruals on savings bonds and notes, retirement plan
bonds and Treasm-y biUs
Purchases by Government agencies 2
____
3 of securities of Government agencies in market 2
633,014,503,944
Change in clearing accounts (checks outstanding, deposits in transit,
imclassified transactions, etc.), net deposits, or withdrawals (—)—
—5,632,240,221
2,365,186,714
Balance at close of fiscal year
11,309,647,071
13,741,306,873
_
__
^ For details see Statistical Appendix.
2 "Government agencies," as here used, includes certain enterprises which have been converted to private
ownership.
Issuing and redeeming paper currency,—^The Treasury is required
by law (31 U.S.C. 404) to issue U.S. notes in amounts equal to those
redeemed. To comply with this requirement in the most economical
manner, U.S. notes are issued only in the $100 denomination in the
Washington, D . C , area. I n the course of trade, they also appear in
other areas of the country. U.S. notes represent only a very small
percentage of the paper currency in circulation.
Federal Eeserve notes constitute nearly 99 percent of the total
amount of currency. The Bureau of Engraving and Printing prints
these notes, holds them in a reserve vault for the account of the Comptroller of the Currenc}^, and ships them to Federal Eeserve banks as
needed. To obtain notes for issuance to the commercial banking system, the Federal Eeserve banks must first deposit equivalent amounts
of collateral with their respective Federal Eeserve agents.
As the notes become unfit for further circulation, they are retired
under procedures prescribed by the Fiscal Assistant Secretary. Approximately 97 percent of the notes retired are verified and destroyed
at the Federal Eeserve banks. The remainder are verified and destroyed
at the Treasury in Washington, D.C.
The Treasurer's Office accounts for Federal Eeserve notes from the
time that they are delivered by the Bureau of Engraving and Printing
until 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 Eeserve agent, or issued and outstanding.
The Treasurer's Office retires unfit paper currency of all types received locally in Washington and from the Government officers abroad.
ADMINISTRATIVE REPORTS
123
and handles all claims involving burned or mutilated currency. During fiscal 1973, paynients totaling $5.7 million were made to 51,273
such claimants.
A comparison of the amounts of paper currency of all classes, issued,
redeemed, and outstanding during fiscal years 1972 and 1973 follows:
Fiscal year 1972
Pieces
Outstanding July 1
Issues during year
Redemptions dui-mg year
Outstanding June 30
_._-.
5,613,768,498
2,715,007,699
2,330,529,038
5,998,247,159
Amount
$55,114,602,017.
16,841,876,620
13,054,507,197
58,901,971,440
Fiscal year 1973
Pieces
5,998,247,159
2,868,515,604
2,608,389,304
6,258,373,459
Amomit
$58,901,971,440
19,307,752,400
13,942,985,697
64,266,738,143
Details of the issues and redemptions for fiscal year 1973 and of the
amounts outstanding at the end of the year are given by class of currency and by denomination in a table in the Statistical Appendix.
Other tables in that volume give further information on the stock and
circulation of money in the United States.
Processing Federal tax deposits,—Under provisions of Treasury
Department Circular No. 1079, tax withholders and certain taxpayers
are supplied with partially punched cards which they forward to their
banks with their tax pa37ments. The cards are then routed to Federal
Eeserve banks which complete the punching and forward them to the
Treasurer's Office in Washington. The Treasurer's Office enters the
data from the cards on magnetic tapes which are furnished to the
Internal Eevenue Service for reconciliation with taxpayers' returns.
This procedure obviates any handling of tax remittances in the Department and expedites the crediting of tax payments in the
Treasurer's account.
The types of tax payments which are collected in this manner include withheld individual income and social security taxes, corporation income taxes, certain excise taxes, railroad retirement taxes, and
Federal unemployment taxes. Collections received under this procedure in fiscal 1973 totaled $184,041 million and required the
processing of 38.6 million cards, compared with $159,889 million collected and 32.4 million cards processed in the previous year.
Paying grants through letters of credit,—^Treasury Department
Circular No. 1075, dated May 28,1964, established a procedure to preclude withdrawals from the Treasury any sooner than necessary in
cases where Federal programs are financed by grants or other paynients
to State or local governments or to educational or other institutions.
Under this procedure. Government departments and agencies issue
letters of credit which permit grantees to make withdrawals from the
account of the Treasurer of the United States as they need funds to
accomplish the object for which a grant has been awarded.
By the close of fiscal 1973, 84 Government agency accounting stations were making disbursements through letters of credit. During the
year the Treasurer's Office processed 83,953 withdrawal transactions,
aggregating $35,802 million, compared with 76,569 transactions, totaling $34,658.2 million, in fiscal 1972.
Checking accounts of disbursing officers and agencies,—As of
June 30,1973, the Treasurer maintained 1,838 checking accounts, com506-171—73
11
124
19 73 REPORT OF THE SECRETARY OF THE TREASURY
pared with 1,808 the year before. The nuniber of checks paid by categories of disbursing officers during fiscal 1972 and 1973 follow:
N u m b e r of checks paid
1972
Treasury
Air Force
Army
Navy
..
Other
1973
517,684,629
30,403,130
36,516,872
36,332,907
33,587,763
. .
-
-
-
--.
Total
520,053,169
28,404,826
36,665,847
35,767,193
29,887,097
654,525,301
.
650, 778,132
Settling check claims,—During fiscal 1973, the Treasurer processed
781,000 requests to stop payment on Govemment checks and 50,000
requests for removal of stoppage of payments. This resulted in 511,000
paid check claims acted upon during the year, including 48,000 referred to the U.S. Secret Service for investigation because of forgery,
alteration, counterfeiting, or fraudulent issuance and negotiation.
Eeclamation was requested from those having liability to the United
States on 75,000 claims with a value of $12.9 million. During the ye:ar
51,000 paid check clainis totaling $20.7 million were settled. I n addition, claims by payees and others involving 182,000 outstanding
checks were acted upon. Of these, 170,000 were certified for issuance
of substitute checks valued at $91.3 million 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 the proceeds of 30,000 unavailable outstanding
checks, totaling $15.9 million.
Collecting checks deposited,—Government offices during the year
deposited 7.8 million commercial checks, drafts, money orders, etc.,
with the Treasurer's Cash Division in Washington for collection.
Custody of securities,—The face value of securities held in the
custody of the Treasurer as of June 30, 1972, and June 30, 1973, is
shown below.
June 3
Purpose for which held
1973
As collateral:
To secure deposits of public moneys in depositary banks.
In heu of sureties
In custody for governmient officers and others:
For the Secretary of the Treasury 1
. For the Comptroller of the Currency
For the Federal Deposit Insurance Corporation
..:
For the Rm^al Electrification Administration
.
Forthe District of Columbia
_._._
:.....•.
Forthe Commissioner of Indian Affairs
Foreign obhgations 2.._
....
Others
.
For government secui'ity transactions:
Unissued bearer securities.
Total
:
$33,626,100 ,
6,855,950
'
•
_
38,896,504,840
11,493,000
245,000,000
183,314,400
500,800,202
1,746,125
12,024,056,451
117,852,334
. $25,119,000
5,422,750
45,530,896,365
11,741,000
245, 000, 000
207,081,400
592,037, 596
952,325
12,019, 828,451
140,617,334
1,611,914,150
1, 634,618,500
53,633,163,552
60,413,314,721
1 Includes those securities hsted in table 107 in the Statistical Appendix as in custody of the Treasury.
2 Issued by foreign governments to the United States for indebtedness aiising from World War I.
3 Licludes U.S. savings bonds in safekeeping for individuals.
ADMINISTRATH^E REPORTS
125
Servicing securities for Federal agencies and Government-sponsored
enterprises.—In accordance with agreements between the Secretary
of the Treasury and the enterprises listed below, the Treasurer of the
United States acts as special agent for the payment of principal and
interest on their securities. A comparison of these payments during
the fiscal years 1972 and 1973, on the daily Treasury statement basis,
is as follows:
Payment made for
Principal
redeemed
Banks for cooperatives
District of Columbia Armory Board
Export-Import Bankof the United states.
Federal home loan banks
.
Federal Home Loan Mortgage Corp
Federal Housing Administration.
Federal intermediate credit banks.
Federal land banks
Federal National Mortgage Associations...
Government National Mortgage Association
..-.:
Tennessee Valley Authority
^
U.S. Postal Service
Washington MetropoUtan Area Transit
Authority
Others
Total
Interest
paid
$3,452,060,000
:
0)
2,355,760,000
. i})
54,127,500
6,486,720,000
1,989,039,700
3,653,214,000
0)
0)
128,425
17,991,049,625
Principal
redeemed
$93,423,813 $3,708,695,000
1,112,622
(i)
402,158,721
566,423,590 2,111,331,000
(i)
175,825,000
20,084,087
86,426,000
313,430,614 6,520, 995,000
455,650,761 2,373,510,500
1,038,847,492 2,945,583,000
.
(1)
$95,898,133
770,259
77,875,366
493,303,838
66,052,353
20,752, 285
311,597,393
504,705,990
1,086,926,620
143,300
112,932,962
.......
8,522,601
,• '
4,098,950
12,351
2,488,991,166 19,639,532,521
2,783,449,100
0)
18,189
374,865,000
940,000,000.
Interest
paid
1 Prior to Nov. 17,1972, payments of principal and interest on these securities were accomplished through
special arrangements with certain Federal Reserve banks.
2 Until Nov. 17, 1972, payments include only the Association's secondary market debentures; thereafter
they also include its capital debentures and mortgage-backed bonds.
OFFICE OF FOREIGN ASSETS CONTROL
The Office of Foreign Assets Control administers the Department of
the Treasury's freezing controls. The Foreign Assets Control Eegulations and the Cuban Assets Control Eegulations prohibit, unless licensed, trade and financial transactions with North Korea, North
Vietnam, Cuba, and their nationals, and block assets in the United
States of such countries and their nationals. Under general licenses,
all transactions with the People's Eepublic of China are authorized
with the exception of transactions abroad by foreigii firms owned or
controlled by Americans involving shipment to the People's Eepublic
of China of • internationally controlled merchandise, imless licensed
under the Transaction Control Eegulations (see below), and with the
exceptions of transactions in Chinese assets blocked in the United
States as of May 6,1971.
The Office of Foreign Assets Control also administers the Transaction Control Eegulations 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.E. These regulations
126
1973 REPORT OF THE SECRETARY OF THE TREASURY
prohibit, unless licensed, the purchase or sale or the arranging of the
purchase or sale of strategic merchandise located outside the United
States for ultimate delivery to Communist countries of Eastern Europe, the U.S.S.E., Mainland China, North Korea, and North Vietnam. The prohibitions apply not only to domestic American companies
but also to foreign firms owned or controlled by persons within the
United States. A general license permits sales of these commodities to
countries other than North Korea and North Vietnam, providing
shipment is made from and licensed by a COCOM member country.
(COCOM is a NATO entity.)
The Cuban Assets Control Eegulations were administered without
change.
The administration of assets remaining blocked under the World
W a r I I Foreign Funds Control Eegulations was continued. The regulations were amended on March 27,1973, to remove the remaining controls on Hungarian property. This action was taken in connection with
the Settlement of Claims Agreement between the United States and
Hungary signed March 6,1973. These regulations continue to apply to
assets blocked under Executive Order 8389, as amended, of Czechoslovakia, Estonia, Latvia, Lithuania, East Germany, and nationals thereof
who were, on December 7,1945, in Czechoslovalda, Latvia, Lithuania,
or Estonia, or on December 31,1946, in East Germany.
The Office continued administration of the Ehodesian Sanctions
Eegulations. By means of these regulations, the Department of the
Treasury performs its functions and responsibilities under the Executive orders which implement the United Nations Eesolutions calling
upon meiriber countries to impose mandatory sanctions on Southern Ehodesia. An exception to the prohibition against imports of
merchandise of Southern Ehodesian origin is authorized by general
license for certain strategic and critical materials, pursuant to section
503 of the Military Procurement Act of 1971.^
Under the Foreign Assets Control Eegulations and the Transaction Control Eegulations the number of specific license applications
received during fiscal 1973 (including applications reopened) was 144.
During that period 144 applications were acted on.
Applications for licenses and requests for reconsideration under the
Cuban Assets Control Eegulations totaled 361 during fiscal 1973; 367
applications were acted on.
During the same period, 278 applications (including applications
reopened) were received under the Ehodesian Sanctions Eegulations.
A total of 275 applications were acted on.
Comparable figures under the Foreign Funds Control Eegulations
were 146 applications (including reopened) received, and 149 acted on.
Certain broad categories of transactions are authorized by general
licenses set forth in the regulations, and such transactions may be
engaged in by interested parties without the need for securing specific
licenses.
During fiscal 1973, criminal case actions by the Department of Justice involving violations of the regulations administered by this Office
resulted in convictions in two cases and (a) criminal court fines total1 See exhibit 24.
ADMINISTRATIVE REPORTS
127
ing $700, (b) forfeiture of merchandise valued at $537,568, and (c)
civil penalties of $146, 191. The total of criminal fines, civil penalties
and merchandise forfeited amounted to $684,459. The total value of
merchandise under seizures at the end of the fiscal year amounted to
$2,265,100.
INTERNAL REf^^ENUE SERVICE'
The Internal Eevenue Service administers the internal revenue laws
embodied in the Internal Eevenue Code (title 26 U . S . C ) and. certain
other statutes, including the Economic Stabilization Act of 1970, as
amended (Public Law 92-210,85 Stat. 743).
Receipts, refunds, and returns filed
I n 1973, gross collections expanded at a rapid pace, rising to a record $238.1 billion. The increase over last year of $28.3 billion was the
second largest in history. A strong upward trend in personal income
and corporate profits, and excess withholding, were factors influencing this year's revenue picture.
Individual income tax receipts of $125.1 billion showed a $16.2
billion (14.9 percent) increase over last year.
Corporate income tax collections of $39.1 billion, up $14.1 billion
(11.8 percent), reflected higher corporate profits generated by economic expansion which began in calendar year 1971.
Employment tax collections amounted to $52.5 billion, an increase
of more than 20 percent over 1972. The growth of salaries and wages,
higher rates, and increases in the taxable wage base were major factors,
in increased collections. Effective January 1, 1973, the combined employer-employee social security ( F I C A ) rate increased from 10.4 to
11.7 percent, the self-employment (SECA) rate from 7.5 to 8.0 percent, and the railroad retirement rate from 19.9 to 21.2 percent. The
taxable earnings base went up from $9,000 to $10,800 on January
1, 1973.
More than 63 million Americans received refunds in 1973. The 25.8
billion refunded was a record high.
More than 116 million returns of all types were filed in 1973. Individuals filed 79 million returns with 22 million (28 percent) using
the simplified form 1040-A.
Informing and assisting taxpayers
The Service recognizes its obligation to help taxpayers in reporting and computing their tax liabilities. Taxpayer assistance teams in
each district office answered questions and provided tax materials to
taxpayers. Service personnel issued regulations, rulings, simplified tax
1 Additional information will be found in the separate Annual Report of the Commissioner
of Internal Revenue.
128
19 73 REPORT OF THE' SECRETARY OF THE TREASURY
guides, and forms to increase public knowledge and understanding of
tax laws and procedural requirements.
Last year, millions of Americans found answers to many of their
tax questions through weekly question-and-answer columns prepared
by the I E S and published in thousands of daily and weekly newspapers across the Nation. I E S spot announcements were carried by
more than 4,800 radio stations, and over 800 television stations broadcast film spots for taxpayers. Broadcasters aired the spot announcements free of charge, as a public service. They also assisted area I E S
offices by presenting tax inforination programs tailored to local interests and needs. Eesidents of rural areas learned about farmers' tax
problems, while urban area dwellers saw tax presentations for wage
earners and small businesses.
.: Field offices issued nearly 8,000 information releases to the media.
Tliey also answered more than 2,400 inquiries from local newspapers
and broadcasters.
The Service responded to more than 54 million inquiries for assistance with tax matters in 1973, some 12 million more than in 1972. Over
36 million persons telephoned; about 18 million visited Service offices
where approximately 3.8 million returns were prepared; and more
than 250,000 wrote.
Throughout the filing season, the Service extended office hours, pre^
pared individual returns on request, offered toll-free telephone service
in 30 districts, established satellite offices, used "taxmobiles" and information, centers to reach senior citizens and low-income groups, expended cooperative efforts with military installations, and arranged
visits in some areas to nursing homes, hospitals, and other institutions.
Over 9,000. returns were prepared by minicomputers at four test
sites during the 1973 filing period. While the taxpayer waited. Service
employees put basic data into computers which then calculated the tax
liability and printed out a completed 1040-A ready for signature.
Taxpayer reaction Avas very favorable.
;
.
The Service continued the program^ of providing tax information
in Spanish. Districts with a high concentration of Spanish-speaking
taxpayers employed Spanish-speaking taxpayer service representatives
at 77 posts of duty. News releases and information publications printed
in Spanish received wide distribution.
Again this year the Service offered various taxpayer education
I)rograms.
Seven hundred thousand taxpayers received.free assistance through
the volunteer income tax assistance ( V I T A ) program. The program
is designed to train volunteers from civic, community, church, senior
citizens', and students' groups to help lower income and disadvantaged
citizens by providing better understanding of the income tax laws,
enabling them to prepare their own returns, or providing assistance
in the actual preparation of returns. With the increased involvement
of various retirement organizations, particularly the Institute of Lifetime Learning, over 175,000 elderly and retired taxpayers were assisted, more than triple that of last year. Junior chambers of commerce
cooperated to sponsor V I T A nationwide.
Service personnel conducted 850 V I T A classes, training 22,500 vol-
ADMINISTRATIVE REPORTS
129
unteer assistants. Many colleges placed the program in their curricula,
offering students academic credit for their volunteer work.
The Service provided tax material to over 23,000 high schools,
teaching approximately 4,300,000 students to prepare their own returns. I n addition, over 50,000 taxpayers in adult education classes
benefited from a program on how to prepare their own returns.
More than 67,000 tax practitioners attended training programs on
filing requirements and changes in the law.
An estimated 3,300,000 taxpayers viewed or listened to educational
T V and radio programs mostly emphasizing the new short form
1040-A.
Several new programs were added, including a volunteer assistance
program for Spanish-speaking taxpayers, and a fundamentals of tax
preparation course for colleges and universities. More than 600 schools
offered this course to about 41,000 enrollees.
Training personnel developed a new curriculum for newly hired
taxpayer service representatives featuring 6 weeks of classroom training. The Service also developed new courses for all temporary taxpayer service representatives as well as for employees detailed from
other I E S functions during the filing period. A 2-week advanced
tax law course was offered to all incumbent taxpayer service
representatives.
The Service provides many booklets and pamphlets explaining the
tax laws in nontechnical language.
•
Special publications help taxpayers faced with uncommon problems.
For example, when Congress enacted new tax relief provisions in the
wake of Hurricane Agnes, the Service produced a special edition of
Publication 547, "Tax Information on Disasters and Casualty Losses
and Thefts." On announcement of the Vietnam cease-fire, the Service
issued Publication 815, "Tax Inforniation for Returning P O W ' s " and
Publication 816, "Tax Information for Families and Executors of,
Missing Servicemen."
Other new tax guides released in 1973 were Publication 581, "Questions and Answers Eegarding Original Issue Discount on Savings
Deposit Arrangements," and Publication 583, "Federal Use Tax on
Civil Aircraft."
Enforcement activities
The Service carries out enforcement activities to encourage and
achieve maximum compliance, the heart of the Ainerican system of
self-assessment. Through the examination program, the Service seeks
to assure correctness in reporting income and claiming deductions.
This, in turn, builds public confidence that taxpayers are treated alike,
which generates voluntary compliance.
Investigation of return preparers.-—Disclosure of a high percentage
of incorrect and fraudulent returns prepared by incompetent and unscrupulous commercial return preparers resulted in a nationwide coordinated return preparer compliance program in 1972. This program
continued in 1973. Following development of more sophisticated methods of identifying suspect preparer returns, the number of audit
examinations and intelligence investigations of fraudulent return preparers increased.
130 ° 1973 REPORT OF THE SECRETARY OF THE TREASURY
During the 1973 filing period, the Service issued press releases
cautioning taxpayers to choose their tax return preparer carefully.
I n addition, it announced that agents would anonymously visit hundreds of return preparers with income and deduction data and withholding forms to have returns prepared. A total of 4,977 tax returns
were prepared for Service employees posing as clients, and 1,112, or
22 percent, of these returns appear fraudulent. From January 1972
through June 1973, the Intelligence Division arrested or obtained indictments against 420 tax return preparers. So far, 209 have been convicted or have pleaded guilty.
As of June 30, 1973, the Audit Division had examined 234,938 returns under the program resulting in additional tax and penalties' of
more than $43.8 million for an average of $187 per return examined.
Approximately 4,200 preparers of these returns were identified during
the 1973 program.
Courts are dealing more severely with convicted return preparers.
More than 53 percent have received prison terms. During March 1973,
five of six return preparers sentenced receiyed prison terms varying
from 3 months to 3 years.
The following are examples of 1973 convictions:
A self-proclaimed tax expert was sentenced to 3 years in prison
after being convicted of preparing fraudulent tax returns. His fradulent claims included a gasoline tax deduction for a person unable to
drive, and business telephone expenses for a person who did not have
a phone.
A man was indicted on 22 counts of aiding and assisting in preparing false income tax returns. His clients testified at the trial that he
had, without their knowledge or consent, falsely claimed itemized
deductions, personal exemptions, and employee business expenses on
their returns. Many of his clients could neither read nor write English,
and he frequently diverted to his own use nioney intended to pay his
clients' tax liabilities. He was comdcted on all counts and sentenced
to 9 years in prison, with 6 years' probation to follow imprisonment.
Another was found guilty of 18 counts of preparin.cr false returns
and sentenced to 3 years in prison. A total of 271 clients had been
misled.
Computer selection of returns and assistance in aduits.—^The Service uses computers programmed with mathematical formulas to identify returns having the highest probability of tax error. Through the
system, the Service has reduced the number of taxuavers contacted
whose audit would result in no tax change, and identified returns most
in need of examination. This year corporation returns with assets
under $1 million Avere added to the computerized systeni for selecting
returns for audit.
Machine-sensible records are becoming available in more audits
where accounting records are processed through automatic data processing: systems. The Service has evaluated several thousand A D P
installations and advised taxpayers concerning the records they should
retain for audit purposes. These machine-sensible records permit rapid
retrieval, analysis, and calculation of data. Another advantage is that
the computer checks great masses of data that would be impractical
to do manually and prints only data of audit interest. The technique
ADMINISTRATIVE REPORTS
131
results in substantial savings in manpower and nioney for the Service
and the taxpayer.
Results of audit activity,—The Service examined 1,770,971 returns
in 1973. Additional tax and penalties recommended amounted to $5.1
billion—^^an alltime high, and an increase of $1.7 billion over 1972.
Three of every four examinations involved individual income tax
returns. These returns accounted for $1.1 billion in tax deficiency
recommendations. Corporate returns, representing 6.9 percent of total
examinations produced recommendations for assessment of an additional $3.1 billion.
Not all examinations resulted in an increase in tax liability. I n
1973, Service examinations disclosed overassessments on many returns, resulting in refmids of $275.7 million.
Administrative appeals system,—Historically, the Service has encouraged resolving tax disputes through the administrative appeals
system rather than through litigation. The Service provides the taxpayer who disagrees with a proposed adjustment to his tax liability
with an opportunity for an early, independent review of his case at
one of the 58 district offices or 40 regional appellate offices throughout
the country. As need arises, the Service also provides conferences at
other locations where it is not feasible to maintain a full-time conference staff. A t both district and regional appellate offices, a conference is offered soon after the case is received, to the extent possible
at a date, time, and place convenient to the taxpayer.
Informal proceedings prevail. Taxpayers may represent themselves
or be represented by counsel. I n either case, they are given every
opportunity to present their views. If the case is not settled, the taxpayer is informed of his further appeal rights and options available
to him. I n a large majority of cases, taxpayers and Eevenue Service
conferees at district or regional level reach a mutually acceptable
basis for resolving disputes. The result is that relatively few cases
actually go to trial.
I n 1973, the appeals function disposed of 54,351 cases by agreement;
the Tax Court decided 1,293 cases and the U.S. district courts and
Court of Claims decided 445 cases. •
Tax fraud investigation^,—The Intelligence Division enforces the
criminal tax statutes by investigating instances of tax fraud including suspected income and excise tax evasion, failure to file returns,
false withholding exemption statements ( W - 4 ) , false claims for refunds, false estimated tax credits, perjury, failure to remit trust funds
collected, and evasion of wagering taxes.
Improved techniques helped produce a record number of prosecution
recommendations this year. The Intelligence Division completed 8,601
investigations and reconimended prosecution in 2,555 cases. Grand
juries indicted 1,186 taxpayers. Prosecution was successfully completed in 1,104 cases. Of these, 914 taxpayers entered guilty pleas and
190 were convicted after trial. Acquittals and dismissals totaled 55
and 112, respectively.
Tax fraud is not confined to any occupational or social group. This
year, the Service recommended prosecution of taxpayers engaged in
250 different industries and occupations. The following cases illustrate
the Service's efforts to maintain balanced coverage. •
132
1973 REPORT OF THE^ SECRETARY OF THE TREASURY
A nationally knowii businessman and financier Avas indicted for
failing to report more than $6 million in income from stock transactions. An investigation disclosed that he evaded $1,443,231 in taxes.
This is one of the largest individual tax cases in I E S history.
The owner of a large court-reporting service in the Midwest was
found guilty of failing to file income tax returns for 1965, 1966, and
1967. He was sentenced to serve 1 year in prison and fined $10,000,
in addition to taxes and penalties assessed. The judge, upon learning
that he had failed to file returns for the years 1955 through 1967,
declared that his was "the most flagrant case of Avillful failure to file
that I have been able to find in the lawbooks."
A world-renowned surgeon was indicted on five counts of willfully
attempting to evade his income tax. Investigation of his tax returns
disclosed that he failed to report a substantial part of his fees and
income from other sources, and that he claimed personal expenditures
as professional expenditures. He was convicted on all counts and received a 6-month suspended sentence (upon the condition that he work
free of charge in an Army hospital), 5 years' probation, and fined the
maximum amount of $50,000. The remaining civil settlement involves
approximately $500,000 in taxes and penalties.
A gambler was convicted on each count of a 15-count indictment
charging him with willfully attempting to evade payment of Federal
excise tax on wagers. He receiA-ed a 5-year prison term on each count,
to be served concurrently. Betting records seized by the local fire department during a fire at his handbook premises led to his conviction.
A tile setter pleaded guilty to three counts of preparing and presenting fraudulent claims against the Government for the years 1967,
1968, and 1969. H e used A^arious schemes including filing a joint return
when he was not married, claiming credit for income taxes withheld
when none were, and failure to report income received. H e was sentenced to 1 year in prison and placed on 2i/^ years' probation.
Delinquency investigations.—Although most taxpayers comply with
filing requirements, the SerAdce has a continuing program to ensure
that those taxpayers who do not fulfill their obligation are identified
and appropriately assessed. Stepped-up enforcement efforts in 1973
produced 873,000 delinquent returns, an increase of 116,000 over the
preceding year. Assessed tax penalties and interest on these delinquent
returns totaled $453,000, some $72 million more than last 3^ear. Service
enforcement personnel also collected $2.4 billion in delinquent accounts, $115 million above last year.
Organized crime and strike forces,—The Internal Eevenue Service
joined the Federal coordinated drive on organized crime in 1966 and
has since expanded its efforts to 18 key locations throughout the United
States. Each strike force is organized by the Department of Justice
,with Federal investigative agencies participating under the leadership of a strike force attorney-in-charge. The Service has been the
maj or contributor of investigative manpower.
Since inception of the strike force concept, 238 organized crime
members and their associates have been convicted or have pleaded
guilty to various tax charges. More than $500 million in additional
taxes and penalties have been proposed for assessment.
The following are examples of strike force activities.
ADMINISTRATH^E REPORTS
133
Approximately 100 Service agents swept the Boston area in a drive
to collect an estimated $3.5 million in unpaid excise taxes from 62
bookies. Eevenue officers seized bank accounts, autos, and other personal effects.
The Service filed tax liens totaling $1.8 million on the personal
property of five Hartford, Conn., men who allegedly ran an $18 niillion-a-year bookmaking operation.
A Miami strike force investigation resulted in a conviction Avith a
15-year prison sentence and $60,000 fine. The investigation disclosed
extortion and interference with interstate commerce. An associate
Avas sentenced to 10 years' imprisonment and fined $5,000.
A New York crime figure was sentenced to 5 years in prison and
fined $15,000 for income tax evasion. He is reputed to be the heir-apparent to organized crime's "boss of bosses." While the trial was in
progress, there were attempts to intimidate Avitnesses, and one key
witness was relocated because of possible retaliation.
I n Las Vegas, tAvo pleaded guilty to charges of conspiring to evade
the income taxes of the Flamingo Hotel and for conspiring to violate
the interstate gambling statutes. Both were sentenced to 1 year in
prison and fined $20,000.
International IRS activity
The SerAdce has a broad overseas program consisting of three functions : Administration of tax laws as they apply to U.S. citizens living abroad, nonresident aliens, and foreigii corporations; assistance to
developing countries in improving their systems of tax administration;
and participation in the negotiation of tax conventions or treaties with
foreign countries to prcA^ent double taxation.
Tax administration abroad.—The Service operates 10 foreign posts
to provide a link between U:S. citizens and businesses abroad aiid the
domestic tax program. The posts are located in Bonn, London, Manila,
Mexico City, Ottawa, Paris, Eome, Saigon, Sao Paulo, and Tokyo.
Heading each post is a Eevenue Service representative responsible for
carrying out Service compliance actiAdties Avithin a designated geographical area. In addition, he handles requests for information from
foreign tax authorities in resolAdng double taxation cases or other inequities originating under tax treaties and furnishes information and
assistance to U.S. citizens having tax problems.
This year, the SerAdce again expanded its overseas enforcement
efforts by detailing teams of revenue agents and tax auditors to foreign
posts. Each agent-auditor team is stationed abroad for 6 months and
is replaced by another team to ensure year-round compliance coverage.
The agents and auditors travel throughout the post territory examining returns and performing related work at the post headquarters.
Also, 20 specially trained Service personnel, including three taxpa3^er
service representatives, visited 102 cities in 60 countries where they
assisted 36,371 persons in filing their U.S. tax returns.
Tax seminars held in 57 foreign cities broadened the base of the overseas tax assistance program. The seminars are group oriented and
structured to allow time for a discussion of tax rules, questions and
answers, and preparation of returns.
134
1973 REPORT OF THE SECRETARY OF THE TREASURY
Approximately 900 military personnel received classroom income
tax instruction at 31 military bases overseas, after which they assisted
numerous other members of the military community. For the first time
women made up part of the I E S instructor team.
Technical assistance in tax administration.—The Tax Administration Advisory Staff provides technical assistance in tax administration
to foreign governments. State governments, and international organizations. Assistance is provided in the following ways: (1) Assigning
full-time resident advisors for long terms; (2) assigning short-term
advisors for specific purposes; (3) developing and presenting training
programs in specific areas of tax administration; (4) arranging discussions and visits to I E S facilities; and (5) coordinating and supporting other international tax administration organizations.
The I E S international advisory program began in 1963 under an
agreement with the Agency for International Development, with five
advisors assigned to three countries. By 1967, the number of advisors
had increased to 82 men in 21 countries. A t the close of 1972, 24 advisors remained on assignment in Bolivia, Colombia, E l Salvador,
Guatemala, Guyana, Jamaica, Paraguay, Trinidad-Tobago, Uruguay,
and Vietnam.
I n fiscal 1973, advisory services included audit, collection, data processing, and public information. Internal support areas, such as, organization and methods studies, training, long-range planning, and
budgeting also received attention.
Furnishing technical aid and locating retired I E S employees to
serve as consultants are among the ways the advisory staff assists a
number of international organizations that provide assistance in tax
administration. Eetirees serve in Botswana, Africa, under an Agency
for International DcA^elopment contract; in Panama, with the InterAmerican Center for Tax Administration; in Malaysia, with the
International Executive SerAdce Corps; in Lebanon, with the Ford
Foundation; and in Ethiopia, with the International Monetary Fund.
Under the Intergovernmental Personnel Act, I E S advisors now provide teclinical assistance to State administration agencies. These assignments range from a few weeks to several months, and contribute to
increased cooperation between I E S and the State tax authority. The
I E S also furnished technical assistance to Guam and Puerto Eico.
Tax treaties.—Tax treaty programs include exchange of information to eliminate tax avoidance and periodic meetings between competent authorities to develop new avenues of cooperation, to eliminate
double taxation, and to clarify application and interpretation of treaties. During the past year Treasury renegotiated tax treaties with Belgium, Japan, and Norway. I n addition, an income tax treaty with the
Soviet Union was signed and aAvaits Senate ratification.
Planning activities
Eecent legislation on revenue sharing and Federal collection of State
income tax played a key role in the Service's planning activities in
1973. Service planners also assisted the Office of the Secretary in several legislative proposals, the most important relating to measures to
curb abuses among tax return preparers, and to reforms in estate and
gift taxes, employment taxes, and employee benefits (pension plans).
ADMINISTRATIVE REPORTS
135
The Service also submitted recommendations to alleviate administrative problems encountered in enforcement of existing laws.
I n the second session. Congress enacted nine bills with varying
degrees of impact on the Internal Eevenue Code. Among these were
Public Law 92-512, which included the State and Local Fiscal Assistance Act of 1972 establisliing the general revenue-sharing program;
and the Federal-State Tax Collection Act of 1972, which authorized
Federal collection of State individual income taxes.
The State and Local Fiscal Assistance Act of 1972 authorizes the
inclusion of information about place of residence on individual returns.
The Service has provided certain tax return information, coded by taxpayer place of residence, to the Bureau of the Census for estimating
population and per capita income for all governmental units eligible
for revenue sharing.
The Federal-State Tax Collection Act of 1972 authorizes the SerAdce
to enter into agreements with States to collect State individual income
taxes. Under the law, a State would have to conform its individual income tax law closely to Federal tax law. The procedures would also
require redesign of some I E S systems, modification of tax returns and
instructions, and changes in regulations and master file systems. Federal collection of State individual income taxes can go into effect only
after two or more States (representing 5 percent or more of the Federal
individual income tax returns) request the Federal Government to collect their income taxes. No requests had been made by the end of the
fiscal year.
Taxpayer compliance measurement program,—The taxpayer compliance measurenient program (TCMP) uses statistical techniques to
determine how well taxpayers comply with tax laws. T C M P provides
data that enables the Service to allocate audit resources most efficiently
among classes of taxpayers and to develop the most effective delinquent accounts and returns program. T C M P information is also used
to develop formulas for computer selection of returns with the highest
probability of tax change for audit. The SerAdce updates formulas
based on the most recent T C M P survey results. During 1973, new
formulas, based on a T C M P survey of corporations with assets of less
than $1 million, were used in screening small corporate income tax
returns for audit.
Tax forms activity
During fiscal 1973, the Service took a number of steps to simplify its
forms and form letters. Most notable was the reintroduction of the
short form individual return, form 1040-A, after an absence of 3 years.
Several recent changes in law, such as the increase in the standard
deduction and an increase in the ceiling of the optional tax tables to
$10,000, made it feasible to bring back the short form. Over 22 million
of the country's 78 million filers used this abbreviated return.
The Service also developed form 4875, used by more than 2,420,000
individual tax filers to designate $1 to the Presidential election campaign fund. This form was designed as a separate attachnient to protect
the taxpayer's privacy with respect to his designation of political
affiliation.
Other significant forms developed during the year to comply with
136
19 73 REPORT OF THE SECRETARY OF THE TREASURY
the Eevenue Act of 1971 Avere form i r 2 0 - D I S C , a return for Doinestic
International Sales Corporations, and form 4874, which taxpayers use
to compute the tax credits available to employers who hire under the
work incentive ( W I N ) prograni.
Inspection programs
Through internal audit and internal security programs. Service
managers are assisted in maintaining high standards of integrity and
operational effectiveness.
The Internal Audit Division reviews Service operations to be sure
they are carried out properly and efficiently.
. The Internal Security Division conducts background investigations
on applicants and investigates complaints of misconduct or irregularities concerning Service employees. The Division also investigates persons outside the Service who attempt to corrupt Service employees
through bribery or other means.
The Internal Security Division assumed jurisdiction over assaults
and threats against I E S employees in March 1972. During the fiscal
year employees reported 488 assaults or threat complaints, resulting
in 53 prosecution actions and 17 convictions.
Actions by management on problem areas detected during internal
audits result in increased operating efficiency, strengthened internal
controls, and improved taxpayer service, and generally foster a climate
of integrity and responsibility within the Service. Many improvements
and long-term benefits cannot be measured monetarily. I n areas that
can be measured, savings and additional revenue, averaging over $30
million per year in recent years, exceeded $40 million in fiscal 1973.
Participation in the economic stabilization program
The Internal Eevenue Service has played a key role in administering
the economic stabilization program since its inception in August 1971.
During the 90-day freeze (August 15 through November 13,1971) the
Service operated local information and compliance centers under the
direction of the Office of Emergency Preparedness.
On November 14, 1971, Phase I I began, featuring a set of controls
on prices, wages, and rents designed to hold the yearly rise in prices
to 2.5 percent, and wage increases to 5.5 percent. The Service also took
over responsibility for directing adniinistrative activities. Policy direction was received from three bodies—the Cost of Living Council,
the Price Commission, and the P a y Board.
While Phase I I I , which began January 11, 1973, placed mandatory
controls on about 850 of the Nation's largest firms and on certain problem industries, its primar}^ emphasis wks on voluntary adherence to
price and wage guidelines. The Cost of Living Council became the sole
policymaking body, and the Pay Board and Price Comniission were
abolished.
.The Service's role in the economic stabilization program has varied
with the changes in emphasis. During Phase I, I E S used most of its
3,000-man stabilization work force to ansAver questions posed by the
public and to investigate complaints. During Phase I I , I E S was the
principal contact point with the public on stabilization matters and
was charged with three major functions: (1) Providing the public
ADMINISTRATIVE REPORTS
137
with information needed to comply with regulations, (2) serving as
the initial contact on citizens' requests for exceptions or exemptions
and handling appeals from judgments or interpretations, and (3)
investigating complaints of alleged violations.
I n Phase I I I , I E S responsibilities were: (1) Providing investigative support to the Cost of Living Council, (2]) monitoring the economic activity of selected industries, (3) answering inquiries and providing information to the public, and (4) acting on exception requests,
and hearing appeals from health and food processing industries.
With Phase I I I wage and price guidelines operating mainly on a
A^oluntary basis, compliance and enforcement assumed a different perspective. The Cost of Living Council was responsible for determining
if violations had occurred and ordering rollbacks and refunds. The
Service's function becanie mainly that of a factfinder for the Cost of
LiAdng Council.
The Service established a nationwide industry monitoring system
to proAdde information about pricing trends in selected industries, to
identify apparent violations of Phase I I I guidelines, and to create a
nationwide compliance presence.
The Service's primary mission in the price area has been to investigate the pricing practices of the approximately 850 firms with sales
of $50 million to $250 million.
A special 3-month survey was conducted of 450 of the Nation's
larger firms designed to remind the business community of its obligation to maintain certain records and to voluntarily support Phase I I I .
Service personnel contacted 27,000 retailers, wholesalers, and
packers to assure compliance with pricing and posting requirements.
On June 13,1973, President Nixon ordered a 60-day freeze on most
prices. The Cost of Living Council and Internal Eevenue SerAdce were
given the responsibility for enforcing the freeze regulations, answering inquiries, and processing requests for exceptions. I E S field offices
were fully prepared for freeze operations by June 15. I n some areas
office hours were extended to better serve the public.
Major management improvements
The Service has given renewed emphasis to Government-wide efforts
to reduce costs. I n the first year of a 2-year program, average GS grade
was reduced from 7.8 to 7.5 for a savings of approximately $11 million
in payroll costs.
The grade deescalation program has encouraged I E S managers to
seek new methods to accomplish savings in their personnel resources.
For example, I E S executives have taken advantage of the favorable
labor market by recruiting college graduates at lower grades where
possible; have increased use of paraprofessionals; have established
firmer controls over the filling of vacancies; and have revised work
methods and assignments to assure concentration of work at existing
grade levels.
Management careers programs.—A new servicewide management
careers program covers National Office, regional, and district managerial positions within Accounts, Collection and Taxpayer SerAdce
( A C T S ) , Compliance, and Administration. The major aspects of this
program include: (1) Eequired training for first-line supervisors se-
138
1973 REPORT OF THE SECRETARY OF THE TREASURY
lected under the program, before they take over their supervisory
positions; and (2) district, regional, and National Office boards to
oversee the development and advancement of employees. I n conjunction with this program, the SerAdce set up an ongoing supervisory
assessment center which appraised approximately 800 applicants for
first-line superAdsory j obs.
The Service is launching a new career program to fill lower level
management positions in service centers and the Detroit Data Center.
Major features include: Establishment of a career board, thereby
placing reliance on collective judgment; a comprehensive selection
and development process; national guidelines with provision for local
flexibility; option to select in advance of vacancies, with opportunity
for training before assuming new duties; and continued emphasis on
career development and training of those new in management jobs.
The Service continued its executive selection and development program and selected 31 persons for the 1974 class.
Multiumt agreement xoith NAIRE,—A second multiunit agreement
with the National Association of Internal Eevenue Employees
( N A I E E ) was signed on April 13,1973. This agreement covers about
26,000 employees of nine service centers, the National Computer Center, and the I E S Data Center. Important provisions of the agreement
deal with promotions, performance evaluations, grieA^ances and disciplinaiy proceedings, layoff and recall of seasonal employees, and
written agreenient that the union will take action to prevent strikes.
Because of the expansion in union activity, the Service has increased contract administration and labor relations training for managers, supervisors, and personnel officers;
Recruitment efforts,—In July 1972, the Civil Service Commission
took away the special salary rates for intemal revenue agents and
special agents Avhich had been in effect for several years. I n spite of
this, the Service was successful in meeting its fiscal 1973 recruitment
goals. Service offices hired some 1,200 internal revenue agents, 890
revenue officers, 500 tax auditors, 350 special agents, and 160 estate
tax attorneys. Late in the fiscal year, after revicAV of labor market and
economic conditions aff'ecting the supply of accountants, the Civil
Service Comniission reestablished special higher salary rates for entrance-level accountants and internal revenue agents. The rate changes
came in time to aid spring recruiting for fiscal 1974 advance attrition
hiring.
Realistic performance evaluation,—The N A I E E / I E S Multi-District Contract requires a series of task forces to develop new job-related
performance evaluation criteria for five major occupational areas:
Eevenue agent, revenue officer, estate tax attorney, clerk, and secretary.
The Service established new performance evaluation procedures
providing for better communication between an employee and his
supervisor.
Egual employment opportunity {EEO) activities,—The Equal Employment Opportunity Act of 1972 reinforced the Federal Government's responsibility to assure equal employment opportunity.for all
Federal employees and applicants for employment. The law requires
Federal agencies to prepare E E O affiririative action plans on a national
and local basis for Civil Service Commission approval. Eegional of
ADMINISTRATIVE REPORTS
139
fices, districts, and service centers prepared plans under the new regulations for the first time this fiscal year. The scope and format required for the plans were so radically different from those of the past
that many initial difficulties occurred in trying to meet the requirements of the new law and gain approval by the Commission. However,
at the end of the fiscal year, virtually all affirmative action plans were
approved and in operation across the country.
Protection of facilities.—The Service continued to strengthen the
physical security of its data processing activities to ensure uninterrupted operation of the revenue collection function. Intimidations
against Service operations were handled without major incident.
While the number of bomb warnings did not change from the previous year, the number of man-hours lost by building evacuation did
increase significantly due largely to a mass evacuation at one facility.
Data Center moved to new location,—The I E S Data Center moved
to a new building in downtown Detroit. The building was especially
constructed to meet the Center's needs and provides about 200,000
square feet of space. This move gives the Data Center excellent office
space for a 20-year lease period and a degree of permanence the employees had not previously enjoyed.
The George S, Boutwell Auditorium dedicated,—^Witli the assistance
of the General Services Administration, the Service completed a muchneeded auditorium on the seventh floor of the National Office Building.
Named after the first Commissioner, the facility seats 204 people and
affords improved conference and hearing accommodations for large
groups of employees and officials from Government and private
industry.
BUREAU OF THE MINT^
The Mint became an operating bureau of the Department of the
Treasury in 1873, pursuant to 31 U.S.C. 251. All U.S. coins are manufactured at U.S. Mint institutions. The Bureau of the Mint distributes
coins to the Federal Eeserve banks and branches, which in turn release
them, as required, to commercial banks. In addition, the Mint maintains phj^sical custody qf Treasury monetary stocks of gold and silver;
refines and processes silver bullion; handles various deposit transactions including intermint transfers of bullion; and moves, places into
storage, and releases values from its custody for such purposes as
authorized.
Functions performed by the Mint on a reimbursable basis in fiscal
1973 included: The manufacture and sale of numismatic Eisenhower
dollars; the production and sale of proof coin sets and uncirculated coin
sets; the manufacture and sale of medals of a national character; and,
as scheduling permitted, the manufacture of foreign coins.
1 Additional information is contained in the separate Annual Report of the Director of
the Mint.
506-171—73
^12
140
1973 REPORT OF THE SECRETARY OF THE TREASURY
The Bureau of the Mint headquarters is located in Washington,
D.C. Operations of the Mint are performed at six field facilities. Mints
are located in Philadelphia, Pa., and in DeuA^er, Colo.; assay offices
are in New York, N.Y., and San Francisco, Calif.; ^ bullion depositories are situated at Fort Knox, Ky. (for gold) and at West Point,
N.Y. (for silver). The West Point Depository is an adjunct of the New
York Assay Office.
The Mint reorganization implemented during the prcAdous fiscal
year was further refined by the appointment of an Assistant Director
for West Coast Operations early in fiscal 1973. During the year that
office assumed supervision of the Data Center Division and the West
Coast Special Coinage and Medals Division, Avliile actively participating in restoration of the Old San Francisco Mint, where the Office
of West Coast Operations is physically situated.
The Mint's Internal Audit Staff conducted audits of selected financial, operational, and protection areas where potential for improvement seemed to exist. Late in the fiscai year it Avas determined that the
audit function would be more effective if the staff were decentralized.
Accordingly, plans were initiated to place resident auditore in the
field to permit more onsite audit time at Mint institutions outside of
Washington. This will result in a reduction in travel costs as Avell as a
reduction in the persoimel strength of the headquarter's audit staff.
The Bureau of the Mint deposited $446,613,699 into the general fund
of the Treasury during fiscal 1973. Seigniorage on U.S. coins accounted
for $395,132,528 of the deposit.
Bureau of the Mint operations, fiscal years 1972 and 1973
Fiscal year
Selected items
1973
Newly minted U.S. C3ins issued: 1
1 dollar
50 cents—
25cents.__10"cents
L.
_
5 cents
Icent
60,060,027
228,029,973
498,060,832
814,244,006
582,808,890
6,523,487,520
7,737,660,235
8,706,681,248
740,343,393
588,151,751
._._.
_
Total...
Inventories of coins in Mints, June 30.
Electrolytic refinery production:
Gold—fine ounces
Silver—fine ounces
Balances in Mint, Jmie 30:
Gold bullion—fine ounces
Silver bullion—fine ounces
A^isitors touring mint exhibit areas.-..
1.
206,144,905
320,858,262
356,575,753
460,775,885
464,548,068
5,928,757,362
_.__
__„
.
.
..
.
i
4,576,251.270
_..
,
./
5,029,331.790
267,007,869
47,416,220
796,682
" 267,011,102
45,791,428
801,901
1 For general circulation only.
Domestic coinage
During fiscal 1973, U.S. mints produced cuxoronickel-clad dollars,
half dollars, quarters, and dimes; cupronickel 5-cent pieces; and 1-cent
pieces composed of 95 percent copper, 5 percent zinc for general circulation. The Philadelphia Mint manufactured 4,409,751,056 coins
AAdth a face value of $251,536,356; the Denver Mint produced
2 The San Francisco facility also operates as a mint.
ADMINISTRATIVE REPORTS
141
3,865,662,294 coins Avith a face value of $215,821,958; and the San Francisco Assay Office made 277,795,008 1-ceiit pieces with a face value of
$2,777,950.08. Thus, a total pf 8,553,208,358 coins were manufactured
for general circulation, an increase of approximately 306 million coins
from fiscal 1972.
The Bureau of the Mint delivered 8,706,681,248 coins to the Federal
Eeserve banks and branches and the Offic.e of the Treasurer of the
United States during the fiscal year. Total shipments exceeded total
production, reducing Mint inventories to approximately 588 million
coins at the fiscal year's end.
U.S. coins manufactured, fiscal year 1978
General circulation
Denomination
1 dollar:
Cupronickel
Silver-clad
50 cents
25 cents
10 cents
5 cents
Icent
Total
Nimiber of
pieces
Face value
55,551,342 $55,551,342.00
215,687,700 107,843,850.00
556,264,608 139,066,152.00
740,993,700 74,099,370.00
593,211,000 29,660,550.00
6,391,500,008 63,915,000.08
Numismatic ^ "
Total coinage
Number of
Number of
pieces
Face value
pieces.
Face value
814,677 $814,677.00
56,366,019 56,366,019.00
2 4,004,151 4,004,151.00
4,004,151
4,004,151.00
3,018,002 1,509,001.00
218,705,702 109,352,851.00
3,018,002
754,500.50
559,282,610 139,820,652.50
3,018,002
301,800.20
744,011,702 74,401,170.20
3,018,002
150,900.10
596,229,002 29,811,450.10
3,018,002
30,180.02 6,394,518,010 63,945,180.10
8,553,208,358 470,136,264.08 19,908,838 7,565,209.82 8,573,117,196 477,701,473.90
1 All numismatic coins were manufactured in the U.S. Assay Oflice at San Francisco and include 2,203,325
proof sets dated 1972 and 814,677 sets dated 1973. The 1973 sets contain six coins (a cupronickel dollar was
added).
2 Consists of 2,193,056 silver-clad Eisenhower dollars of the uncirculated variety (bearing the date 1972)
and 1,811,095 proof dollars, all of which were sold to the public at premium prices.
NOTE.—All dollars, half dollai'S, quarters, and dimes for general circulation are three-layer composite
coins—outer cladding 75 percent copper, 25 percent nickel, bonded to a core of pure copper. The proof coins,
except for the silver-clad numismatic Eisenhower doUars, are of the same metallic composition as those for
general issue. The numismatic silver-clad doUars are three-layer composite coins with an outer cladding 800
parts silver, 200 parts copper, bonded to a core of approximately 215 parts silver and 785 parts copper.
Foreign coinage
The Mint is authorized to produce coinage for foreign countries on a
reimbursable basis provided it does not interfere Avith production of
U.S. coinage. During fiscal 1973, the Denver Mint manufactured
297,218,500 coins for the Philippines and 5,000,000 pieces for Honduras. The Mint facility at San Francisco made 90 million coins for
the Philippines, 37 million for E l Salvador, and 2,100,000 for Haiti,
all for general circulation. San Francisco also produced proof and
uncirculated coinage for Panania (170,073 pieces), Liberia (29,196
pieces), and Nepal (27,601 pieces). A total of 431,545,370 foreign coins
Avere struck during the period.
Technology
The scope and effectiveness of quality control operations Avere increased at all Mint manufacturing facilities. Die inspection standards
and procedures Avere greatly improved. The first automated coin inspector was placed in operation at the Philadelphia Mint.
To upgrade the Mint's production capabilities and coinage quality,
several new four-strike presses and proof coin presses were installed.
Treasury, through the Bureau of the Mint's Laboratory in Washington, D . C , acts as technical authority on the authenticity of U.S. coins.
142
1973 REPORT OF THE SECRETARY OF THE TREASURY
The Laboratory examined 8,092 questioned coins relative to 129 cases
submitted by the U.S. Secret Service. A member of the Mint Technical
Staff testified in six court cases pertaining to the authenticity of U.S.
coinage. In addition, the Laboratory continued to verify coins for the
Office of Domestic Gold and Silver Operations, U.S. Customs SerAdce,
and the Federal Bureau of Investigation. The Laboratory also performed quality assurance studies on foreigii coins produced by U.S.
Mints, subjecting them, for the first time in recent years, to the same
rigorous tests that are applied to U.S. coinage.
Production
During fiscal 1973, coinage strip was produced at the Philadelphia
Mint for 49 percent of the institution's coin production, the highest
amount of coinage strip produced in-house in the history of the Mint.
The metal yielded 1.7 billion cents, 169 million nickels, and 295 million
dimes and quarters.
The Denver Mint fabricated bronze strip in-house for the production of 503 million 1-cent coins. In addition, strip was produced at
Denver for coins struck there for the Philippines.
On a Mint-wide basis, 31 percent of the domestic coins produced
during the fiscal year were derived from in-house strip.
Old San Francisco Mint
Eestoration work on the famous granite structure of the Old San
Francisco Mint, begun just as fiscal 1972 ended, continued throughout
fiscal 1973.
The first-floor rooms in the front of the Old Mint have been authentically restored to their original appearance. Other historical and educational exhibits have been installed in the museum area, which is
being expanded to include exhibits relating to the settlement and
growth of California and the West and the Mint's role in the development of the region.
The Mint data center began active operation of the new IBM
370-155 computer system in April. The 3-million-data-base numismatic coin operations system (NUCOS) for mail order special coins
and sets was transferred to the Mint data center. GAO auditors reviewed operations of the system in June.
The Old Mint was reopened to the public by the Director of the
Mint, Mrs. Mary Brooks, on Jmie 16, 1973. The reopening makes this
the first building in the country to comply with Public Law 92-362,
enacted August 4,1972, providing for the adaptive use of surplus historic structures.
Public services
Liaison with Federal Reserve,—Treasury, through the Mint, continued to work closely with the Federal Eeserve in determining coin
requirements. The demand for coins increased to approximately 8.7
billion pieces during the fiscal year. More than 75 percent of the demand was for pennies.
Special coins and medals,—^The Eisenhower dollar program, the
manufacture and sale of silver-clad proof and uncirculated dollar coins
to the public at premium prices, was continued during fiscal 1973. A
ADMINISTRATIVE REPORTS
•:; ^i^s^
^'.^^....^^^^
Old San Francisco Mint at the turn of the century.
total of 4,004,151 of these special coins were manuf actured—2,193,056
of the uncirculated variety and 1,811,095 of the proofs.
The Mint again offered sets of proof coins for sale to the public
during fiscal 1973. These sets, through calendar 1972, consisted of one
each of the five denominations of fractional coins; 2,203,325 of these
proof sets 'bearing the date 1972 were made during the fiscal year. The
proof sets for 1973 were enlarged to include one proof cupronickel
Eisenhower dollar coin, with the cost increased to $7 to cover that
coin and the attractive, newly designed self-standing package. Approximately 815,000 were manufactured before the fiscal yearend. All
proof coins and the uncirculated silver-clad Eisenhower dollars were
manufactured at the San Francisco Assay Office.
The first of the medals commemorating the American Eevolutionary
Bicentennial, as authorized by Public Law 92-228, February 15,1972,
was released on July 4, 1972. These medals were part of a Philatelic
Numismatic Combination (PNC) package (consisting of the AEBC
medal and a commemorative postage stamp, postmarked on July 4,
1972, at Williamsburg, Va.). Approximately 790,700 were sold to the
public. In addition, 666,897 of the "unique" packages (a similar medal
dated 1972, in an individual, attractive, self-standing case) were sold
to the public during the fiscal year. Both of these medals were struck,
packaged, and mailed by the Philadelphia Mint.
Public Law 92-384, enacted August 14, 1972, authorized the Secretary of the Treasury to strike and deliver not more than 100,000 medals
commemorating the 175th anniversary of the launching of the U.S.
frigate Constellation, These medals were sold by the Constellation
Committee of the Star Spangled Banner Flag House Association, Inc.,
at premium prices, to raise funds for the restoration of the Constella
144
1973 REPORT OF THE SECRETARY OF THE TREASURY
tion. Approximately 12,000 medals had been manufactured by fiscal
year's end.
Public Law 93-33, enacted on May 14, 1973, authorized the manufacture of one gold and not more than 200,000 duplicate medals in
commemoration of Eoberto Walker Clemente. The Engraving Department of the Philadelphia Mint and the Office of Technology Avere
developing the design of the medal at the end of the fiscal year.
Eight new national medals were produced and offered for sale to
the public. Small medals were made of: the Treasury Building; the
New York Assay Office; the U.S. Bullion Depository, West Point,
N.Y.; the U.S. Bullion Depository, Fort Knox, Ky.; the Old San
Francisco Mint; the New Orleans Mint; and President Nixon's second
term. A regular 3-iiicli bronze medal was also struck to commemorate
the President's second term as well as one of the same size honoring
Secretary Shultz.
The Mint continued to manufacture national "List" medals, in both
the traditional 3-inch size and the "mini" medals of l^/^Q-inoh diameter. These were available to the public at the Exhibit Eoom in the
Main Treasury Building in Washington and in the sales areas of
the Denver and Philadelphia Mints and in San Francisco.
OFFICE OF REVENUE SHARING
Title I of the State and Local Fiscal Assistance Act of 1972 (Public
Law 92-512) establishes general revenue sharing. Signed by President
Nixon in Philadelphia on October 20, 1972, the act authorizes the
Secretary of the Treasury to administer the return of $30.2 billion to
State and local jurisdictions over a 5-year period.
As of June 30, 1973, more than $6.6 billion had been returned to
States, cities, counties, towns, townships, Indian tribes, and Alaskan
native villages.
.. The Office of Eevenue Sharing was created within the Office of the
Secretary to administer the revenue-sharing program. Staff, now numbering 41, has been assembled; and the Office is located at 1900 Pennsylvania Avenue, Washington, D.C.
I n closest cooperation with the Bureau of the Census, more than
250,000 elements of data on population, income, and tax effort have
been compiled and recorded on computer tapes for use in allocating
entitlement payments to the more than 38,000 units of general purpose government qualified to receive general revenue-sharing funds.
The Office of Eevenue Sharing and the Bureau of the Census are
working continually to verify and update these data.
Staff haA^e participated in hundreds of meetings and workshops held
all over the country to familiarize State and local officials with the detp.ils of the general revenue-sharing program. Literally thousands of
mail and telephone inquiries have been processed, and the workload
in this area continues to be high.
ADMINISTRATIVE REPORTS
145
Interim regulations, final regulations, and amendments to the final
regulations have been published after consultation with representatives of associations of State, county, and municipal officials, civil
rights groups, the Advisory Conimission on Intergovernmental Relations, the Office of Management and Budget, and the General Accounting Office. Copies of these regulations have been sent tb all of the
recipients of shared revenues.
All jurisdictions have been advised individually of the data elements used by the Office of Eevenue Sharing to compute their entitlements. Approximately 3,500 requests for changes Avere made in response to a request for comments. About 1,300 of these resulted in
data changes, 2,050 were advised by the Office of Eevenue Sharing that
no change was warranted, and 130 are still under review..Of 600 appeals for further review, 250 have been rejected and 350 referred to
the Bureau of the Census.
Each recipient has provided Treasury with assurance, in writing,
that it will comply with the requirements of the State and Local Fiscal
Assistance Act. These requirements include, for example, the provision
that no general revenue-sharing funds be used in any discriminatory
manner or project; a prohibition against using shared revenues to
match other Federal funds; and a provision requiring payment of
federally established minimum wage rates on construction projects
funded largely with revenue-sharing money.
The Office is developing the compliance system needed to carry out
the audit and CA^aluation responsibilities established by the Congress.
An Audit Guide has been prepared to be distributed to all recipients.
One hundred and three of the jurisdictions receiving the largest
amounts of revenue-sharing funds have been visited, personally, by
members of the staff to revieAV audit and compliance procedures.
Management information systems to produce data needed to assess
the quality of the program are being initiated.
The effort to improve information flow to and from, the recipient
governments is continuous. Efforts to broaden general knowledge of
the general revenue-sharing program's purposes and philosophy are
made as well.
I n the first 8 months of the program's existence, an inordinate
amount of work Avas accomplished by a very small staff. The work has
been characterized by a very high quality. The establishment of the
program has been accomplished and its administration is proceeding
efficiently and effectively.
UNITED STATES CUSTOMS SERVICE'
The U.S. Customs Service, established by the First Congress on
July 31,1789, is one of the oldest agencies of the Federal Governnient,
IThe Bureau of Customs was designated "United States Customs Service" by Treasury
Department Order No. 165-23, AprU 4, 1973. See exhibit 82.
146
1973 REPORT OF THE SECRETARY OF THE TREASURY
antedating the Department of the Treasury of which it is a part. During its first century, revenue collected by Custonis was virtually the
only source of funds for the operation of the Government. Down
through the years the functions and responsibilities assigned to Customs have steadily increased.
The mission of the Customs Service is to collect the revenue from
imports and enforce custonis and related laws. Customs administers
the Tariff Act of 1930, as amended, and other laws. Among the responsibilities with which Customs is specifically charged are: Properly
assessing and collecting customs duties, excise taxes, fees, and penalties
due on imported merchandise; interdicting and seizing contraband,
including narcotics and illegal drugs; processing persons, baggage,
cargo, and mail; administering certain navigation laws; detecting and
apprehending persons engaged in fraudulent practices designed to
circumvent customs and related laws; protecting American business
and labor by enforcing statutes and regulations such as the Antidumping Act, countervailing duty law, copyright, patent, and trademark
provisions, quotas, marking requirements for imported merchandise,
etc.; protecting the general welfare and security of the United States
by enforcing import and export restrictions and prohibitions; cooperating with, and enforcing regulations of, numerous other Government agencies relating to international trade; and collecting import
and export data for compilation of international trade statistics.
The U.S. Customs Service achieved record levels of activity during
fiscal 1973. Nearly 252 million persons were cleared by Customs;
almost $4.1 billion in revenue was collected on $61 billion of imported
merchandise; and illicit drugs valued at over $432 million were confiscated in more than 21,000 seizures by customs officers.
There was a rise of 6.3 percent in the number of people crossing U.S.
borders during the year. This total exceeded the population of the
United States by 42 million.
The total value of all goods processed by Customs rose by nearly 22
percent, from $50 billion to $61 billion. This involved the processing
of over 19 million transactions during the year, up 6 percent.
More than 73 million carriers—ships, aircraft, autos, trucks—used
in bringing people and goods to the United States were cleared by
Custonis, an increase of 4.3 percent over last year's total.
Total revenue collected was slightly below fiscal 1972. However, last
year's total reflected the 10-percent import surcharge imposed by President Nixon from August 15 to December 20, 1971. (The surcharge
accounted for more than two-thirds of the increased revenues reported
in fiscal 1972.) Additionally, tariff negotiations provided for declining
rates of duty on most imports in fiscal 1973. Excluding the surcharge
from the year-to-year comparison, fiscal 1973 collections actually rose
more than 10 percent over the previous year.
Drug seizures climbed by more than 8,500 to a total of 21,964 for the
year, a jump of 64 percent over 1972. The estimated street value of
the seized drugs was up $25 million over last year to a total of $432.3
million. Arrests for narcotic violations climbed from 7,860 to 9,555,
up 22 percent, while convictions for Federal narcotic offenses went
from 2,202 to 3,846, a rise of 75 percent.
ADMESriSTRATIVE REPORTS
147
111 still another area of Customs antinarcotic interdiction activity,
the Service's 60 specially trained drug detector dogs participated in
1,450 productive "hits," or drug seizures, up from a total of 1,198 last
year.
The Customs cargo security program, which aims at curbing the
theft and pilferage of international cargo from the Nation's 300 ports
of entry, resulted in 496 arrests and apprehensions, approximately
the same number as in 1972.
I n the area of commercial fraud investigations, 3,752 cases were
closed during the year, an increase of 26 percent oA^^er the 1972 total of
2,964. At the same time, another 2,769 cases were carried over into the
new fiscal year, up from 1,951 cases last year at the same point.
Customs security officers, more familiarly known as "sky marshals,"
seized or detained 68,946 weapons and other dangerous articles from
commercial airline passengers during the period from January 1971
to the end of fiscal 1973.
Merchandise and passenger processing
Antidumping and cou/ntervailing duty.—^Amendments to the regulations relating to antidumping which became effective January 8,
1973, impose time limits on the conduct of an antidumping investigation. Generally, antidumping proceeding notices must now be published in the Federal Eegister 30 days after receipt of a complaint
in proper form. A tentative determination (withholding of appraisement notice, notice of tentative negative determination, or notice of
tentative discontinuance of antidumping investigation) must generally
be published in the Federal Eegister within 6 months or, in more complicated investigations, within 9 months. New procedures instituted by
the Customs Service are accomplishing initiation and completion of
most cases within the prescribed limits.
Three countervailing duty cases were closed, two proceeding notices
were published, and three countervailing duty orders were published
during fiscal 1973.
Twenty-seven dumping cases were initiated in fiscal 1973 and 42 cases
were closed. Twenty-four cases were referred to the Tariff Commission. Nine findings of dumping were issued during the year. At yearend, 23 cases remained on hand.
Automated merchandise processing system (AMPS),—As the result
of a progress evaluation study, emphasis in the A M P S program to
automate merchandise processing was shifted from an extended planning stage with long-range implementation to earlier implementation
of priority modules of the full-scale system. This promises to produce
the benefits of automation in critical areas of paperwork processing
without delaying implementation of the overall system.
Carriers and persons entering,—A total of 251,653,170 persons entered the United States in fiscal 1973—an increase of 6.3 percent over
the prcAdous year. Customs processed 73,838,532 aircraft, ground vehicles, and vessels, an increase of 4.3 percent over fiscal 1972. A detailed
breakout of arrivals is found in the Statistical Appendix.
Collections.—Eevenue collected by Customs during fiscal 1973 totaled almost $4.1 billion, as compared with $4.2 billion last year. However, fiscal 1972's collections included almost a half billion dollars
148
19 73 REPORT OF THEr SECRETARY OF THE TREASURY
collected under the now-discontinued 10-percent import surcharge program. Excluding the surcharge collections, fiscal 1973 collections
actually increased about 10 percent over fiscal 1972. Collections and
payments by Customs regions and districts, as well as the major classes
of all collections made by Customs, are contained in the Statistical
Appendix. The cost of collecting $100 was $5.32.
Drawback,—Two major improvements in the drawback system were
implemented during fiscal 1973. The first of these, announced in Treasury Decision 72-310, changed the method of establishing proof of
export for drawback by allowing the claimant to furnish documentary
evidence such as the bill of lading or airway bill. The second, announced in the Federal Eegister on December 22, 1972, as Treasury
Decision 73-3, provided for accelerated payment of drawback claims
The total drawback allowance paid during fiscal 1973 was
$48,176,168. Drawback allowance on the exportation of merchandise
manufactured from imported materials amounts to 99 percent of the
customs duties paid at the time the goods are imported.
Entrance and clearance of vessels,—^The following table compares
entrances and clearances of vessels for fiscal years 1972 and 1973.
A'^essel movements ^
1972
Entrances:
Direct from foreign ports.
Via other domestic ports.
1973
Percentage
increase
9.7
16.9
. ;
78,037
87,881
12.6
. I
-
Clearances:
Direct to foreign ports _ -.
Via other domestic ports.
50,926
36,955
45,679
30,676
53,076
36,872
16.2
20.2
76,355
Total-
46,421
31,616
89,948
17.8
Total
1 Excluding Puerto Rico and Virgin Islands.
Entries of merchandise,—There were 3,239,813 formal entries of
merchandise in fiscal 1973—an increase of 13.1 percent over fiscal 1972.
A breakout of entries by type appears in the Statistical Appendix.
Foreign trade zones,—Customs duties and internal revenue taxes
collected during fiscal 1973 from the eight zones in operation amounted
to $7,368,517. The following table summarizes foreign trade zone
operations during fiscal 1973.
Trade zone
Number
of
entries
New Orleans
San Francisco...
San Francisco (subzone)
Seattle
Mavac uez
Toledo
Honolulu
Honolulu (subzonc).-.
Total
Received in zone '
Long tons
A-alue
Delivered from zone
Long tons
A-alue
Duties and
internal
taxes
coUected
3,777
902
31,347
4,826
$44,476,231
6,493,903
33,048
3,202
$47,173,979
4,246,547
$2,087,766
358,329
106
200
1,658
84
8,671
256
11
567
3,093
40,434
5,070
1,392
103,257
2,814,363
6,732,703
28,395,i976
11,712,801
30,462,289
14
1,363
3,283.
42,233
4,314
1,509
121,693
4,264,880
11,001,082
26,987,535
9,775,118
45,445,150
23,937
461,671
429,829
1,606,825
2,323,877
77,294
15, 654
86,740
130,190, 523
88,956
149,015,984
7.368. 517
ADMINISTRATIVE REPORTS
149
Laboratory operatio'}%s,—Samples tested in Custonis laboratories
during fiscal 1973 totaled 169,792.
Advances in technology have resulted in the development of more
sophisticated merchandise entering the United States. The entry of
complex merchandise requires an ever greater degree of sophistication
for the analysis of samples submitted. During the past year, major
purchases of laboratory equipment included an automatic sampling
systeni for gas chromatographj^, a disc mill, and an atomic absorption
spectrophotometer.
Although the laboratory system must devote a major part of its
time to the solution of problems that arise in actual tariff classification
or enforcement cases, these solutions are frequently of value to scientists outside Customs as they advance the state of the art in analytical
methodology. Customs has encouraged the publication of scientific
communications whenever feasible to enhance both the professional
standing of Customs laboratory personnel and the Customs image.
During the past year seveii scientific papers were published or accepted
for publication in scientific journals.
. Mail operations.—Approximately 100 million pieces of foreign mail
Avere diverted from postal channels for custonis examination, principally at the Port of NCAV York, N.Y. Approximately 30,000 pieces
contained lottery materials redelivered to postal authorities for disposition, approximately 20,000 pieces contained obscene niatter, and
approximately 5,000 pieces contained narcotics.
Eevenue collected from mail operations during fiscal 1973 was
$22,487,857, an increase of 2.5 percent over fiscal 1972, Avith a gross rcA^enue of $21,928,483. With the ncAv dual-processing program and mechanization of entry production scheduled for fiscal 1974, a substantial
increase in revenue collections from the mail operations can be
expected.
All surface mail operations at New York will be consolidated in the
huge, new, highly automated postal facility at Secaucus, N.J., scheduled to open in September 1973. New York Customs will then be able
to process all incoming foreigii surface mail, destined for delivery to
the 50 States, at the point of its initial arrival in the United States.
This will eliminate duplicate handling of mail by Customs and the
Postal Service, reduce transportation costs, conserve critically needed
manpoAver, and accelerate delivery of mail to its final destination.
During the last half of fiscal 1973, two additional X-ray machines
were installed in the mail units at New York and Los Angeles. Accelerated development of a profile for suspect parcels led to more
than 5,500 seizures of narcotics and other contraband during fiscal
1973. Three additional X-ray machines are scheduled for fiscal 1974.
Quota operations,—During fiscal 1973, Customs administered 153
tariff-rate and absolute quotas imposed under proclamations, legislation, and agreements.
I n addition, 115 directiA^es from the Committee for the Implementation of Textiles Agreements resulted in the administration of 471
quotas on cotton, wool, and manmade fiber textile products and 8 prohibitions involving 27 foreign countries.
Visa requirements for textile products from Hong Kong were canceled while those on wool and manmade fiber textile products were
150
1973 REPORT OF THE SECRETARY OF THE TREASURY
extended to Taiwan. Visa requirements are now being enforced on
textiles produced in 10 foreign countries.
Regulations,—As part of the general revision of Customs Eegulations, an additional 16 parts were adopted during fiscal 1973, and 19
parts are in various stages of preparation.
I n addition, 17 Treasury Decisions were prepared during fiscal 1973.
These amendments dealt with ports of entry, pollution of coastal
and navigable waters, duty-free fuel for aircraft, revocation of international airport status, restrictions on the domestic use of foreign
railroad cars, customhouse brokers signing petitions for relief, and
import quotas. Two amendments were incorporated in the Customs
Manual. TAventy-three other amendments are in preparation.
Tariff classification.—Classification guidelines were established on
nontextile ornamentation of textile fabrics and articles. These were
published as Treasury Decision 73-71 and will help to eliminate problems in the interpretation of the definition of "ornamentation" in the
Tariff Schedules of the United States.
Trademarks^ copyrights., and patents,—^A total of 249 trademarks,
serAdce marks, renewals, assignments and name changes, and 110 copyrights were recorded. Ten patent surveys or renewals were lapproved.
A grand total of $54,400 in recordation and related fees was collected
for these services.
Enforcement
Seizures of narcotics,—Customs oontinued to place emphasis on the
interdiction of illicit narcotics and dangerous drugs entering the
United States. The following table shows in detail the amount of narcotics and dangerous drugs seized in fiscal 1973, as compared with
those seized in fiscal 1972.
Fiscal years
Narcotics and dangerous dmgs
1972
Heroin:
Pounds
Number of seizures
Opium:
Pounds
Number of seizures
Cocaine:
Pounds
Number of seizures
Other narcotics:
Pounds
Number of seizures
Hashish:
Pounds
_
Number of seizures
Marijuana:
Pounds
Number of seizures
Dangerous drugs:
5-grain units
Number of seizures
1973
Percentage
increase, or
decrease (—)
634.81
611
-60.1
-5.2
50.59
121
135.65
119
168.1
-1.7
-_._
378.58
405
733.84
929
93.8
129.4
__
__
253.09
579
240.80
264
45.31
281
-81.2
6.4
9,456.29
2,519
9,072.65
3,700
-4.2
46.9
291,887.40
7,889
508,062.30
14,137
74.1
79.2
16,240,449
1,615
15,802,258
2,219
-2.7
37.4
._..
_
_
_
Arrests,—There were 9,555 narcotics arrests during fiscal 1973, as
compared with 7,860 in fiscal 1972. These arrests resulted in 3,846
convictions under U.S. statutes compared with 2,202 in the prcAdous
year, an increase of 74.7 percent.
ADMINISTRATIVE REPORTS
Activity
Arrests (narcotics)..
_
Nolle prosequi ^
Convictions under U.S. statutes
r)iSTnissa,ls a,nd acquittals
Cases closed
151
Percentage
Fiscal years
1972
7,860
2,961
2,202
711
39,392
1973
9,555
3,046
3,846
1,171
40,276
decrease (—)
21.6
2.9
74.7
64.7
2.2
1 Includes declinations and not indicted.
Detector dog program,—Detector dogs continue to b e a n effective enforcement tool at international mailrooms, cargo docks and terminals,
and ports of entry along the Mexican and Canadian borders. At yearend, there were 38 handlers and 60 dogs permanently assigned to field
operations. Thirty-eight of these dogs are trained in detection of
heroin and cocaine as well as marijuana. I n fiscal 1973, dogs accounted
for 1,450 seizures. Fiscal 1974 plans call for a significant expansion
of the program.
Military predeparture inspection program.—^The military overseas
predeparture inspection program was expanded to include the entire
Pacific Command, where three customs adAdsors provide training and
advisory assistance to military enforcement officials in seven commands. A fourth advisor worked with the European Command to establish an improved program there. As a result, seizures of narcotics
from military transportation and postal channels remained at a low
level.
Treasury enforcement corrmiunication system {TECS),—TECS was
established to proAdde the U.S. Customs SerAdce, the Bureau of Alcohol,
Tobacco and Firearms, and the Internal Eevenue Service with the
following capabilities: (1) A central index for records of common interest to the participating Treasury enforcement agencies, (2) an administrative message-switching capability between the participating
agencies, and (3) access to the F B I ' s National Crime Information
Center ( N C I C ) .
T E C S provides customs enforcement officers with the most effective arsenal of enforcement tools available through modern computer/communications technology. I t replaced the customs automated
data processing intelligence network ( C A D P I N ) .
The Customs Service has approximately 450 terminals located at
ports of entry in the United States. Customs inspectors are the primary users of the system, with 350 terminals assigned to the Inspection and Control Division. F o r fiscal 1973, this equipment provided the
information which resulted in 722 seizures and/or arrests.
Through T E C S , the Customs Service now has access to five million
NCIC records. NCIC is a computerized index of criminal information on wanted felons, firearms, and stolen vehicles, license plates,
boats, securities, etc. Based on the results obtained from a test conducted at four major ports of entry during a 60-day period, mid-January to mid-March 1973, a decision was made to expand this equipment
to other major ports of entry. Customs officers at 48 ports of entry
have now been trained and are using NCIC. During the first 6 months
of 1973, including the test period when only four ports had NCIC
152
19 73 REPORT OF THE SEORETARY OF THE TREASURY
capability, 133 "hits" were made, resulting in 117 arrests for such
crimes as murder, armed robbery, and auto theft.
T E C S terminals to assist in passenger processing at airports were
first placed in operation on January 15, 1973, at Miami Airport and
were then expanded to six additional major airports. The recording
of queries also develops statistics on peak passenger traffic periods
for more effective manpower utilization.
Air security.—FolloAving the changes in Federal Aviation Administration regulations at mid-year. Customs provided laAv enforcement
support at selected airports while airline personnel engaged in physically searching hand-carried baggage and screening passengers.
Of major concern to Customs was the outplacement of customs security officers (CSO's) into other positions within the Customs Service
or elsewhere within the Federal Government. At the end of the fiscal
year, 624 CSO's had been transferred to other Customs positions and
107 to other Federal agencies. CSO's at phased-out airports were used
to bring air security personnel at operational airports up to necessary
strength through temporary duty assignments. When not employed
on air security work, CSO's augmented the Customs patrol officer force
to increase vessel searches, 24-hour patrols, vessel and aircraft surveillances, and cargo security.
During fiscal 1973, the Customs air security program was responsible for 1,325 weapon seizures, 113 hard narcotic seizures, and 1,075
marijuana and dangerous drug seizures. Some 17,815 weapons and/or
dangerous articles were temporarily detained from boarding passengers ; arrests totaled 2,180.
Custonis can again be proud that, as of the end of fiscal 1973, there
were no incidents of aircraft hijacking where passengers had received
predeparture checks by CSO's.
. Cargo security and quantity control programs,—A comprehensive
training seminar for Customs personnel on the cargo security and
quantity control programs Avas conducted in eight of the nine regions.
These gave field personnel increased technical knowledge in the field
of cargo security and enabled them t o prepare more meaningful
surveys for Customs and industry.
Fraud.—During fiscal 1973, 699 cases of fraud were investigated
and processed, 26 of which resulted in criminal prosecutions. Merchandise valued at $489,415,273 was seized or forfeited, with a potential loss of revenue of $7.4 million.
Neutrality violations.—In fiscal 1973, 202 cases were investigated,
resulting in 8 arrests and 5 convictions.
One such case involving a conspiracy to export 13,500 pounds of
C-4 plastic explosives resulted in the arrest of seven persons in Louisiana and Texas. The explosives, along with 2,600 electric blasting caps
and 25 electric detonators, valued at $430,000, were seized aboard an
aircraft prior to its scheduled departure for Mexico. The individuals
involved were indicted for conspiracy and violation of the Munitions
Control Act.
Penalties.—During fiscal 1973, headquarters received, reviewed, and
prepared legal decisions concerning violations of custonis and related
laAvs, and clainis for liquidated damages assessed under customs bonds.
Although there was a slight decrease from fiscal 1972 iii the number
ADMINISTRATIVE REPORTS
153
of penalty cases and the full statutory liability of violators in these
cases, the net liability imposed by penalty decisions in fiscal 1973
increased by more than 40 percent from that of fiscal 1972.
Penalty cases, fiscal 1973
Type of case
Penalty and forfeiture
Liquidated damages
Total —---
Full statutory
liability of
violators
Number
_ ..
-.--
..
976
217
$204,163,640
4,759,913
--
1,193
208,923,553
Net liahility imposed hy penalty decisions. 1972 and 1973
Type of case
1972
Penalty and forfeiture
Liquidated damages
Total
1973
$4, 291,098
358,186
-
$6,337,024
310,184
4,649, 284
6,647, 208
Restricted merchandise,—^Headquarters, with Department of Justice participation, reviewed under the obscenity provisions of section
1305, title 19, U . S . C , seven seized commercial feature-length films,
•three of which Avere referred to the U.S. attorney for judicial forfeiture
proceedings.
On Noveniber 7, 1972, the U.S. Supreme Court heard rearguments
in the Customs obscenity litigation. United States v. 12 200-Foot Reels
of Super-Eight Millimeter Film., involving a Customs seizure at the
Port of Los Angeles from baggage clainied to be solely for the private
personal use of the declarant. This litigation was originally docketed
in the Court in the October term 1971. Conclusion of this litigation
Avill haA^^e direct bearing on the continuation or noncontinuation of
t h e Customs obscenity prograni under 19 U . S . C 1305 with respect
to importation of obscene matter for or to individuals for strictly
noncommercial private use. The Court decided this case on June 21,
1973, upholding the position of the Government.
Administration and organization
- Accounting.—The General Accounting Office approved the Customs
accounting system in November 1972, culminating several years of
close collaboration between Customs and representatives of the GAO.
Delinquent accounts receivable were reduced to an acceptable level
by increasing the control by each financial management office, primarily through (1) centralizing the payment of Customs bills at
regional financial management offices, and (2) placing delinquent
debtors on a cash basis for reimbursable services.
Equal opportu/nity,—In special-emphasis areas under the equal
opportunity program, coordinators were appointed for the Federal
women's program and the 16-point program for Spanish-surnamed
persons.
154
19 73 REPORT OF THE SECRETARY OF THE TREASURY
During fiscal 1973, 30 cases involAdng complaints of discrimination
were closed. Several of these required corrective action.
A full-time equal opportunity officer was appointed for Customs
headquarters. Full-time equal opportunity officers are planned for all
regions.
Employment,—The following table shoAvs man-years employment
data in fiscal years 1972 and 1973.
Man-years
Operation
.
1972
Regular c u s t o m s operations:
Nonreimbursable
Reimbursable ^
Total employment
1973
decrease (—)
11,116
427
.
11,756
494
11,543
T o t a l regular c u s t o m s e m p l o y m e n t
Export control-.A d d i t i o n a l inspection for D e p a r t m e n t of Agriculture
Air security p r o g r a m
Percentage
.
5.8
15.7
12,250
6.1
132
241
1,310
52
242
1,083
-60.6
0.1
-17.3
13,226
13,627
3.0
1 Salai'ies reimbm'sed to the Government by the private firms who received the exclusive services of these
employees.
Facilities management,—^The first automobile exhaust pollution
control system at a U.S. Customs border station was installed at
Laredo, Tex., and operated satisfactorily. Design was completed for a
similar system in E l Paso, with the contract awarded to a minorityowned firm.
Collocation of Customs regional offices to promote improved communications and greater adherence to the management team concept
was accomplished in Chicago and in Houston. Collocation of Eegion
I I , New York offices, into the World Trade Center is planned for early
fiscal 1974.
Labor-management relations,—In compliance with the President's
instructions to make la;bor relations programs more effective, Custonis
increased utilization of the bilateral relationship with unions to facilitate management policy and program implementation.
During fiscal 1973, two customs regions granted exclusive recognition to a union for the first time. Employees in all nine customs regions
are now represented by a Federal union.
Management analysis,—^A servicewide files and records management
system Avas established to give better control over the daily use, storage, and destruction of files and records.
During fiscal 1973, Customs emphasized management rcAdews of
problem areas and concentrated improvement efforts on priority issues.
Central coordination and reference for all management reviews was
established.
The Office of Planning and Eesearch was abolished, with responsibility for the development of new and expanded systems and for
special studies being transferred to each principal headquarters office.
The Office of the Assistant to the Conimissioner (Equal Employment Opportunity) and Assistant to the Commissioner (Public I n formation) were transferred to the Office of Administration and estab-
ADMINISTRATIVE REPORTS
155
lished as divisions. The Office of the Assistant to the Commissioner
(International Aff'airs) was established as a division in the Office of
Operations. The Office of the Assistant to the Commissioner (Priority
Correspondence) was abolished, its functions being assumed by the
Office of the Conimissioner.
The field structure of the Office of Investigations was realigned so
that the boundaries of the Investigations district offices conform to
the boundaries of custonis regions. This realignment reduced the number of field managers in each customs region Avho must coordinate Avitli
one another.
Personnel management.—Selection authority for positions through
grade GS-14 was delegated to Eegional Commissioners and Assistant
Eegional Conimissioners, Avith eff'orts continuing to redelegate selection authority to lower supervisory levels.
Eegional personnel management evaluations were conducted in the
Baltimore region in February, the Boston region in May, and the
Houston region in June.
A customs supervisory inspector course, aimed at first-line supervisors, updated supervisors on the present programs offered at the
National Training Center, presented refresher material in technical
areas, analyzed management principles and techniques through use of
pertinent case studies, and established a forum for discussion and
resolution of topical issues.
Public information,—Major information programs covered Customs
efforts against the smuggling of illicit narcotics; Bicentennial activities; advice to international travelers and commercial importers of
changing rules and regulations; production of films for training purposes and for distribution to ncAvs media; cargo security; and a series
of field operations along the Mexican border to foster better relations
between Customs employees, travelers, and residents and to improve
employee morale.
,
'
Public service announcements were recorded and distributed to approximately 5,500 radio and 800 television stations to inform the
traveling public of Customs drive to combat drug smuggling and of
regulations that affect international travelers. Twelve celebrities joined
Avith Commissioner Acree to record the spot announcements.
A total of 294 news releases, speech texts, factsheets, testimonies,
etc., were distributed during the year; major articles appeared in 55
publications. Customs officials made some 20 speeches and presentations and were involved in 14 interviews, briefing sessions, and press
conferences.
Security and audit.—Offices of security and audit were established
in four additional regions during fiscal 1973—at Boston, Baltimore,
New Orleans, and Los Angeles.
The program to computerize all security clearances Avas fully implemented in fiscal 1973 and has resulted in substantial savings. This
is the only such system in use in the Department and has been examined with interest by other agencies.
Customs processed 869 full field investigations, substantially less
than during the preceding year. The reduced number in 1973 more
clearly reflects the normal workload.
506-171—'73
13
156
1973 REPORT OF THE SEORETARY OF THE TREASURY
Significant progress Avas made in the long-range program to expand audit activities from compliance verification to a management
or operational-type audit.
International operations
Customs participation in international conferences increased duringfiscal 1973, the greater percentage of meetings being those sponsored by
the Customs Cooperation Council. Included among them were the sessions of the Permanent Technical Committee, the study group to develop a harmonized commodity description and coding system, the
29th sessioii of the Nomenclature Committee, and the Working Party
on the Origin of Goods.
Customs representatives were among the delegates to the Facilitation Committee of the Intergovernmental Maritime Consultative Organization (IMCO) which held its seventh session in London during
the second week of April 1973. I n March, Customs participated in
the eighth session of the Facilitation Division of the International
Civil Aviation Organization ( I C A O ) , held in Dubrovnik, Yugoslavia.
At the May sessions of the Customs Cooperation Council held in
Kyoto, the Council gave formal approval to development of a harmonized commodity description and coding system for use in international trade. Customs is expected to play a key role in the projects as
the agency responsible for coordinating U.S. interests at the Federal
level through the Interagency Advisory Conimittee on Customs Cooperation Council matters.
I n June, U.S. Customs Service representatives met in Bonn with
German officials and concluded a draft agreement on mutual administrative assistance with the Federal Eepublic of Germany. The final
signing of the agreement is expected to take part in Washington in
the near future.
Uiider the auspices of the Cabinet Committee on International
Narcotics Control (CCINC), the U.S. Customs Service conducted
training both overseas and in the United States for a nmnber of officers
of foreign customs and related agencies. The overseas classes of 2
weeks' duration were given to groups of approximately 25 students
per class. The training, designed to improve basic customs enforcement operations with the goal of narcotics smuggling interdiction, was
conducted i n : Panama (two classes), Argentina (two), Venezuela,
Brazil (four), Chile (two), Barbados, Bulgaria (two), Greece (two),
Iran (two), and Pakistan (two).
' Two classes were conducted in the United States for midmanagenient personnel of foreign custonis. The course consisted of 3 weeks
of classroom training in Washington, and 2 weeks of observational
training at selected ports of entry. The first class was composed of
25 officers from 5 Latin American countries, and the second of a similar
number from the Southeast Asia area.
I n addition to the CCINC-sponsored courses, a general customs
course of 8 weeks' duration was giA^^en to 20 participants from 6 of the
developing countries. The course coA^ered all substantive areas of customs operations and administration.
The U.S. Customs Advisory Team completed its seventh year in the
Eepublic of Vietnam under A I D auspices. During the year, the team
ADMINISTRATIVE REPORTS
157
organized a training course for custonis operations officers, a new concept for Vietnam; developed a management inipro Atement system for
custonis supervisors; organized a program for Customs control of
newl}^ created postwar export processing zones; assisted in the revision
of the Vietnam Customs Code; and helped to test and verify large
quantities of seized opium and heroin designated for public burning.
I n Laos, a six-man team completed its first year of operation, having
assisted the Eoyal Laotian Customs Service in seizing more than 500
pounds of opium and heroin, increasing penalties from seizures by
more than 70 percent, and almost doubling the custonis revenue
collections.
A survey Avas made of the enforcement capabilities of the Customs
Service of Thailand, and an advisory project is underAvay for that
country beginning in fiscal 1974.
ElseAvhere, a two-man adAdsory effort continued in Ethiopia to improve customs management practices, institute a uniform entry
processing system, and improve document controls over iniported
merchandise.
The senior custonis advisor in Afghanistan assisted in the preparation of a neAV customs code and regulations, the adaptation of the
Afghan tariff to the Brussels Tariff Nomenclature, the developnient
of an enforcement unit to audit customs operations, and the adoption
of a decree to place all customhouses under the direct control of the
Customs Director.
Surveys were made of the customs enforcement capabilities of
Uruguay, Bolivia, Ecuador, Turkey, Hungary, Yugoslavia, and Bulgaria. An adAdsory project is planned for Ecuador during fiscal 1974.
Custonis also participated with A I D and the B N D D in narcotics enforcement surveys in various other Latin Americaii and Middle
Eastern countries.
Top-lcA^el custonis and border patrol officials from Afghanistan,
Italy, Hong Kong, Turkey, Hungary, Jamaica, and the Eepublic of
China were given obserAration training in U.S. customs ports, ranging
from 1 week to 1 month. A cross-training program was initiated with
Mexico, beginning with the exchange for a period of 45 days of two
iiiiddle-leA^el customs supervisors.
UNITED STATES SAVINGS BONDS DIVISION
The U.S. Savings Bonds Division promotes the sale and retention
of U.S. savings bonds. This medium of savings makes possible the
widespread distribution of the national debt through its ownership by
a substantial part of the Nation's citizenry; it proAddes a stabilizing
influence on the economy insofar as the average life of the E and H
bonds is over 7 years, and therefore constitutes a long-term underwriting of the Treasury's debt structure.
158
1973 REPORT OF THE SECRETARY OF THE TREASURY
The program is carried out by a comparatiA^ely small staff assisted
by thousands of dedicated A-olunteers in financial, media, business,
labor, and agricultural institutions and civic-minded groups of all
kinds. Their volunteer services assist in the promotion and sale of savings bonds through banks, savings and loan associations, credit unions,
some few post offices, and over 40,000 business establishments and other
employers cooperating in the operation of the payroll savings plan
and OA-er-the-counter sales.
Sales of series E and H savings bonds totaled $6,512 million in fiscal
1973. Participants in the payroll savings plan as of June 30, ,1973,
totaled about 9i/^ million. There Avere $59.9 billion savings bonds and
savings notes held at the close of fiscal 1973, 22 percent of the privately
held portion of the public debt. U.S. savings notes were AvithdraAAm
from sale on June 30, 1970, but the aniount outstanding is included in
the total. During fiscal 1973, holders of these savings vehicles receiA-ed
over $3 billion in interest.
Promotional activities
During fiscal 1973, the payroll savings plan again received major
program emphasis and was promoted among employees in private industry ; Federal, State, and local governments; as well as the military
services.
The leader of the 1973 natiouAvide payroll savings campaign in industry is William M. Batten, chairman of the board, J. C. Penny Co.,
Inc., and chairman of the U.S. Industrial Payroll Savings Comniittee.
The 1973 campaign Avas launched in Washington, D . C , on January
11, 1973, Avith the annual meeting of the Committee. Serving on the
Committee Avith Mr. Batten are 10 foriner chairmen and 49 top executives of the Nation's major corporations. Mr. Batten's immediate predecessors as chairmen were Donald S. MacNaughton, chairman and
chief executive officer, The Prudential Insurance Co. of America, the
1972 chairman, and B. E. Dorsey, chairman of the board. Gulf Oil
Corp., the 1971 chairman. Mr. Batten has traveled around the entire
country to spur on the campaign and addressed 18 meetings of business
leaders to help Committee members get campaigns underway in their
areas and industries. Mr. Batten won the support of the members of
the Business Council when he addressed that group of prominent business leaders in Washington on February 15,1973, to urge them to conduct campaigns in their respective companies. On April 2, 1973, Mr.
Batten appeared on NBC's national television network "Today"
sliOAv. Eighty-three NBC stations also presented their local volunteer
campaign leaders to further publicize the campaign. Mr. Batten provided a number of sales tools for the volunteer and staff workers in the
campaign, among them a brochure for top executives and a sound motion picture in color entitled "Take Stock in America."
The Comniittee has been the principal force in raising the sale of
E bonds in the $25 to $200 denominations to more than $1.5 billion a
year-higher than they were before the; Committee was organized in
early 1963. This is dramatically portrayed by the accompanying chart
shoAving the series E bond sales of $25,to $200 denoniinations (those
sales influenced principally by payroll savings) since 1957.
ADMINISTRATIVE
REPORTS
SERIES E BOND SALES $25 TO $200 DO
(Sales influenced principally by Payroll Savings)
Since organization of U.S.
Pre-U.S. Industrial
Industrial Payroll Savings
Payroll Savings Committee
Committee, January 16, 1963
BILLIONS)
159
160
1973 REPORT OF THE SECRETARY OF THE TREASURY
On January 2,1973, the U.S. Industrial Payroll Savings Committee
was given a charter in recognition of its service to the Nation and the
Treasury in providing "the most effective continuing framework for
involving industrial top management in the U.S. savings bonds payroll savings program." The charter calls upon the Committee to continue to implement "suitable approaches toward expanding the payroll
savings plan with their industrial peers." This the Committee members
are doing by conducting top management meetings, urging the chief
executives in their areas and industries to conduct payroll savings
drives, and setting strong examples by the campaigns they conduct in
their own companies. At the end of June, with half of the 1973 campaign over, 14 Committee members had completed their company campaigns and had enrolled nearly 330,000 employees either as ncAv savers
or for increased allotments.
Agriculture Secretary Earl L. Butz again served as chairman of the
Inter-departmental Savings Bonds Comniittee. The Federal kickoff
rally took place at the Departmental Auditorium in Washington, D . C ,
on April 12, 1973, with Elmer B. Staats, Comptroller General of the
United States, as the principal speaker. The Federal savings bonds program represents over 25 percent of the total payroll savings sales. As
in previous years. Federal agencies conducted an intensive campaign
during May and June to sign up new payroll savers among Federal
personnel worldAvide. The total civilian and military participation in
the program amounted to 2.5 million for fiscal 1973.
Chairmen of State saAdngs bonds committees and members of the
American Bankers Association savings bonds committee met with
Treasury officials during their amiual conference in Washington, D . C ,
on March 8 and 9. Sessions Avere presided over by North Carolina chairman Bland Worley and A B A chairman Douglas E. Smith of Washington, D.C. Featured topics on the agenda included the findings of a
recent survey by the University of Michigaii Survey Eesearch Center
oh "Attitudes Towards U.S. Savings Bonds," results achieved and
promotional methods used in Take-Stock-in-America campaigns in
some 80 cities, and exchange df ideas on fhe leadership.role of National,
State, and local volunteers. Banking discussions centered on the enthusiastic response of bank personnel to the bond teller training
seminars inaugurated in 1972; ways of implementing a future I'equirement for including social security numbers in the registration of savings bonds; and the broad topic "What more banks can do to assist
the Treasury in the promotion of savings bonds."
A highlight of the annual conference was a ceremony at Avhich
Vice President Agnew presented special 30-year citations to eight
distinguished volunteers on behalf of Secretary Shultz.
During the fiscal year, eight new State chainnen were appointed
for 2-year terms, six were reappointed, and one was named Chairman
Emeritus'.
All newly elected State Governors accepted appointment as honorary chairmen of the State savings bonds committees, and incumbents
continued to serve in that capacity.. .
,
.
The national organizations program was revamped Avitli the development of a five-point program for the executive offices of national
organizations and a seven-point program for their local units. The
ADMINISTRATIVE REPORTS
161
program at both levels was tailored to give greater flexibility in terms
of the extent and tliinst of the effort on behalf of the bond program.
More than 27,336 individual pieces of promotional material were
requested from local units, a strong indication of interest in the program. National and State publications of the organizations published
advertisements, articles, cartoons, and testimonials. Special presentations were made by the Division to the American Hospital Association,
Optimist International, the General Federation of Women's Clubs,
and the American Legion Auxiliary for their promotion of the bond
prograni. The National Organizations Committee continued under
the chairmanship of Hugh Cranford, executive secretary of Optimist
International.
Once again, the Savings Bonds Division hosted a representative
from Girls Nation (sponsored by the American Legion Auxiliary) as
counterpart to the National Director. She Was Cynthia Hawkins from
Kentucky, who was named "Miss Savings Bonds" for that State.
Organized labor continued its strong sanction of the program under
the direction of George Meany, President of the A F L - C I O , acting in
the volunteer capacity of National Labor Chairman. Active labor
backing also included resolutions of support adopted by conventions
of statewide labor bodies, and statements of support by National and
State labor officials. Much of this Avas communicated to the membership by the labor press through its use of literally hundreds of savings
bonds ads and editorials.
The advertising industry, under the leadership of the Advertising
Council and with the cooperation of media, advertisers, and agencies,
continued to give outstanding support to the bond campaign. The
A-alue of its contribution is estimated at $60 million annually. McCannErickson, Inc., the volunteer task force for radio and television, retired
from the campaign in June 1973 after 20 years of outstanding service.
Its assignment has been assumed by the Leo Burnett Co., which has
handled all other phases of the consumer advertising campaign since
1958. A new weekly radio series, "The Grammy Treasure Chest," produced in cooperation with the National Academy of Eecording Arts
and Sciences and the American Federation of Musicians, was introduced in January and has thus far built a request list of nearly 1,200
stations.
A new training film for payroll savings canvassers, titled "The AllStar Spangled Mission," was produced by Paramount Pictures and
has been widely shown in industry and government during the 1973
campaign. I t features Sandy Duncan and includes the stars of five
leading T V series.
The stars of the "Bridget Loves Bernie" T V series, Meredith Baxter
and David Birney, were featured at the kickoff rally for the 1973 payroll savings campaign in the Federal Government, and were named
honorary cochairmen of the drive. They also appeared in a film trailer
sponsored by the motion picture industry and widely shown in theaters
during the campaign period.
The Office of Public Affairs developed and distributed a series of
packages for use by A-arious segments of the media. They included
copy starters for news media, distributed in March; speech sampler
for suggested use by volunteers; speech sampler for government
162
1973 REPORT OF THE SECRETARY OF THE TREASURY
speaker use; editorial extracts, a weekly press copy pack; copy themes
for associations and societies; press association pack for suggested
relay by heads of State press associations to their member-newspapers,
distributed in April; copy briefs for business and financial writers,
distributed in May. The Office of Public Affairs updated and revised
two publications, "Legal Aspects" and "U.S. Savings Bonds—A QuickEeference Guide."
•Continued collaboration Avitli the staffs of U.S. NCAVS & World Eeport, Changing Times, and other spejsial-interest publications, and
Avith syndicated financial columnists—including Sylvia Porter, Martha
Patton, Sam Shulsky, Donald G. Campbell, and Merle Dowd—led to
significant coverage in magazines and ncAvspapers. During the last
quarter of fiscal 1973, the Office of Public Affairs responded to approximately 4,000 inquiries stimulated by Sam Shulsky articles, published in April.
Management improvement
In fiscal 1973, the Division cpntinued the redeployment of positions
to. areas needing better manpoAver coverage and the reduction of coverage in such geographic areas that did not merit it by reason of poor
sales potential. A study was undertaken to streamline both field and
headquarters operations and results will be implemented in 1974.
The Division made a study of its accounting machine procedures
and equipnient and purchased replacement machinery for delivery late
in the fiscal year. Installation will be completed and the machines will
be made fully operative for fiscal 1974. The new equipnient will permit budgetary and financial reporting in full accord with all accrual
accounting principles Avhich could not have been as readily performed
with the old equipment. Furthermore, this equipment makes possible
more effective coordination with the financial recording and reporting
of the Bureau of the Public Debt than otherwise could have been
achieved.
Internal aiidit program
During fiscal 1973, operational surveys were made in two States,
New York and Pennsylvania. Under its arrangement with the Bureau
of the Public Debt, the Bureau's audit staff made a comprehensive
audit of the administrative accounts fdr fiscal years 1970, 1971, and
1972.
Program planning
At yearend, the number of reporting units (companies that operate
the payroll savings plan) on the E D P tapes was 39,189, which represents 21,165 interstate units (including"branches of companies) and
18,024 intrastate companies. Total employment in these companies is
shown as 26,063,484. Number of employees signed up to buy savings
bonds in these companies is 6,593,444, or 25.3 percent.
In addition to the report on on-plan companies, the Office of Program Planning updated its list of no-plan (prospect) companies (of
250 employees or more). The list comprises 3,410 units (673 interstate
companies and branches and 2,737 intrastate companies). This compares Avitli 3,778 units a year ago, a reduction of 368.
ADMINISTRATIVE REPORTS
163
The Office of Program Planning continued its program of E D P
seminars for both clerical ahd promotional personnel by conducting
comprehensive 1-day seminars in Detroit and Dallas.
Staff development
The Division is in the second year of a 3-year program to recruit and
move young persons up through the ranks. Through an Anierican
Management Association prepared course, ^'Principles of Professional
Salesmanship," and on-the-job training assignments, young college
graduates are trained for key sales promotion, managerial, and administrative positions. An intensive 2-week indoctrination seminar was
held for new promotional staff members in June 1973. A line management training program entitled "How to Improve Individual Management Performance," prepared by the American Management Association, Avas continued in fiscal 1973.
'.
UNITED STATES SECRET SERVICE
The major responsibilities of the U.S. Secret Service are defined in
section 3056, title 18, United States Code. The protective responsibilities are to protect the President of the United States; the members of
his immediate family; the President-elect; the Vice President or other
officer next in order of succession to the office of the President; the Vice
President-elect; the person of a former President and his wife during
his lifetime; the person of the widow of a former President until her
death or remarriage; minor children of a former President until they
reach 16 years of age, unless such protectioii is declined; persons who
are determined. from time to time by the Secretary of the Treasury,
after consultation with the advisory conimittee, as being major Presidential and Vice Presidential candidates, unless such protection is
declined; the person of a visiting head of a foreign state or foreign
governnient and, at the direction of the President, other distinguished
foreign visitors to the United States and official representatives of the
United States performing special missions abroad.
'
'
The investigative responsibilities are to detect and arrest persons
committing any offense against the laws of the United States relating
to coins, obligations, and securities of the United States and of foreign
governments; and to detect and arrest persons violating certain laws
relating to the Federal Deposit Insurance Corporation, Federal land
banks, and Federal land bank associations.
Protective responsibilities
I n fiscal 1973, in addition to the permanent protective requirements
that again increased in terms of man-hours expended, several major
special protective efforts were generated.
Extraordinary manpower, logistical, and other problems were encountered in planning and executing protection during the two Presi-
164
1973 REPORT OF THE SECRETARY OF THE TREASURY
dential nominating conventions in Miami Beach, Fla. Protection Avas
authorized and extended to Presidential and Vice Presidential candidates and nominees of the Democratic, American Independent^ and
Peoples Parties. A total of 13 candidates/nominees Avere protected by
the Secret Service.
The protection of foreign dignitaries increased dramatically in fiscal
1973, with protection provided for over 40 heads of state or gOA-ernment and 70 other foreign dignitaries^ in contrast to over 17 dignitaries in the latter category in fiscal 1972. This increase is largely
attributable to terrorism and general Avorldwide security problems. In
addition, 33 official representatives of this country performing special
missions abroad Avere protected by the Secret Service at the direction of
the President.
The 1973 PresidiBntial Inauguration demanded extensive protective
preparations and required employment of virtually the entire field
force of the Secret Service in addition to support by other agencies.
The Executive Protective Service provides protectioii for the White
House, buildings housing Presidential offices, and foreign diplomatic
missions located in the metropolitan area of the District of Columbia.
I n addition, protection is offered at the direction of the President on a
case-by-case basis for foreign diplomatic missions located in other areas
of the United States, its territories, and possessions.
Protective intelligence
A large new computer was installed in fiscal 1973 to meet expanding
protective support requirements for online access to intelligence files.
Since it is compatible Avith a previously; installed computer, except for
memory capacity, immediate emergency backup capability is achieved,
plus allowing one system to be dedicated to protective support operations while the other is utilized for expanding administrative and law
enforcement applications.
During fiscal 1973, the Technical Security Division assumed responsibility for installation and maintenance of the new low-light-level television system within the White House complex. The White House
alarm system was also updated to operate with a computer storage
capability.
Information about bomb incidents and explosive devices was entered
into the Secret Service computer, which provides the protective advance agent with a current readout on bomb incidents in any area of
the United States.
I n the area of communications, a new minicomputer teletype message switcher^ interconnecting each field and protective office with headquarters and Avith the National Crime Inforniation Center, provides
automated message switching.
Investigative responsibilities
Total production of counterfeit currency during fiscal 1973 reached
$25.3 million, a decrease of only 9 percent from fiscal 1972. Almost $22
million, or 87 percent, of this was seized before it could be placed into
circulation, with 72 plant sources responsible for producing $18 million
put out of operation. Losses to the public, the real measure of the Service's success or failure, were reduced to $3.3 million, a significant
decrease of 31 percent from the past fiscal year.
ADMINISTRATIVE REPORTS
165
Arrests for counterfeiting violations totaled 1,557, a decrease of 33
percent from the past fiscal year. HoAvever, since many of the arrests
were effected at the plant source or distributor level, the flow of notes
Avas stopped before they reached the level of the passer where the
highest volume of arrests usually occurs. I n effect, while the quantity
of arrests decreased, the quality increased.
During January of 1973, Secret Service agents effected the largest
single seizure in the Service's history, over $6.2 million in counterfeit
$20 Federal Eeserve notes. I n this case, seven conspirators first formulated their plans in the fall of 1972 and leased printing equipment
from several supply houses in Florida. During late November, the
equipment was installed at the residence of one of the conspirators outsi de Kannapolis, N . C , where the first attempt to produce suitable
photographic negatives failed. On December 1, one of the conspirators
placed an order for 50,000 sheets of high-grade paper with a Charlotte supply house. The local Secret Service office was notified, and one
of the principals was identified through the license number of the A-ehicle used to make the paper pickup. Efforts to locate the suspect in
the Kannapolis area were unsuccessful; the conspirators had immediately moved their operation to Soddy, Tenn. On^December 18, the
Nashville office received a report of a suspicious purchase from a local
supply house. The license number on the vehicle involved was registered to the same suspect involved in the paper purchase at Charlotte.
Efforts to locate the suspect in the Nashville area were intensified but
again proved fruitless.
On December 22, the first specimens of a ncAv issue of counterfeit $20
Federal Eeserve notes were passed in Atlanta. On Christmas Day, the
. Cincinnati office received a report from local authorities near Crittendon, Ky., that the prime suspect and another conspirator had been
questioned and later released following the pass of one of the Atlanta
notes at a local truckstop. The vehicle involved was the same one used
in the supply house purchases. Finally, on January 3,1973, the second
partner involved in the Crittendon incident was apprehended at Mankato, Minn. A telephone number found in his possession Avas traced to
a residence at Soddy, Tenn., where agents located the vehicle belonging to the prime suspect. Search and arrest warrants Avere obtained
and the premises were raided on the night of January 4. The prime
suspect and four other conspirators were arrested at the plant site.
The last remaining conspirator Avas arrested in Florida several days
later. The seven defendants have since received sentences ranging from
2 years' probation to 8 years' imprisonment. Of the $6.2 million in
counterfeit currenc}- produced by this group, only $160 was successfully placed into circulation.
During March of 1973, the owner of a North Little Eock, Ark., printing firm was arrested while in the act of delivering $200,000 in counterfeit notes. Thirty-four other individuals were arrested for passing
counterfeits stemming from this operation. A total of $1.25 million of
counterfeit currency was seized before it could be placed into circulation Avhile only $30,000 was successfully passed on the public.
During May of 1972, a new counterfeit $10 Federal Eeserve note
was passed for the fii-st time at four retail stores in Conway, Ark.
None of the victims could provide a description of the passer and no
166
1973 REPORT OF THE SECRETARY OF THE TREASURY
additional notes of that type were passed during the following 6
nionths. Then, in mid-November, workers engaged in underwater construction near the Bear Creek Bridge at Dundalk, Md., (approximately 1,100 miles from Conway) recovered several plastic bags containing over $300,000 in the Conway notes. Two weeks later in Denver, ^
Colo., three persons were arrested for passing the Conway notes at a
local nightclub. Within a week an undercover agent was negotiating
for a purchase from the individual who had supplied the trio's notes.
The suspect Avas arrested on December 14 as he was delivering over
$430,000 in counterfeits to the undercover agent. H e and a fellow conspirator had produced the initial counterfeit plates at two Denver
printing shops where they ran off a small quantity of notes. After the
passes in Conway, the prime conspirator had journeyed tp Baltimore
where he had produced over $800,000 in counterfeits using a stolen
press installed at his sister's reside ace in Dundalk. Dissatisfied with
the quality of the notes, he had thrown a quantity into Bear Creek.
Both defendants are aAvaiting judicial action. Total seizures in this
case amounted to nearly $830,000. Only 12 notes Avere placed into
circulation.
Check forgery
During fiscal 1973, 59,004 checks were received by the Secret Service
for investigation, a decrease of 16 percent over fiscal 1972. With the
Department of the Treasury having issued 650.7 million checks during
fiscal 1973, only 1 check required investigation for every 11,076 checks
paid.
An increase in the manpower available for this investigative activity
reduced the backlog of pending check cases to 30,7()0 from a high of
43,600 in May 1971, and raised the solved cases rate to 52 percent in
fiscal 1973 as compared with 40 percent for fiscal 1972. Check forgery
arrests increased to 4,591 in fiscal 1973 from 3,751 in fiscal 1972.
The improvement in forgery statistics can also be attributed t o the
continuation of the forgery squad system in the major offices and
priority emphasis on investigation of those who forge and negotiate
two or more checks. Early identification and arrest of multiple forgers
is significant regarding volume in view of their potential if not apprehended.
The volume of cases is expected to increase in the upcoming fiscal
year as federalization of certain welfare payments begins in January
1974. Approximately 7 million checks per nionth Avill be issued in those
areas of the program scheduled to begin at that time. The Forgery
Division is instituting a revised original check custody and control
system to provide more ready availability of the original checks for
laboratory examination, judicial proceedings, and general investigative needs. This innovation was arranged through the cooperation of
the Office of thje Treasurer.
Check cases
• The following check forgery investigations are representative.
On February 22, 1972, the Washington field office received an. inquiry from the McLachlen National Bank, Washington, D . C , regarding a U.S. Treasury check payable to the Mansimni Co., Washington,
ADMINISTRATIVE REPORTS
167
D . C , in the aniount of $202,601.26. Although the company had an open
account, bank officials suspected the check might be counterfeit. Investigation initiated on the same date determined that a Federal agency
had authorized issuance of the check. Bank records disclosed that the
Mansimni Co.'s account had two earlier large deposits in the form of
Treasury checks, one in excess of $18,000 and the other in excess of
$86,000. Further, a check for $4,500 had been draAvn on the account payable to the White Oak Aero Club for the purchase of a private airplane, and the bank had recently learned from an investment
company that the depositor was seeking to purchase $100,000 in Puerto
Eican municipal bonds.
Agents soon determined that the Mansimm Co. had never performed
any serA-ices fdr the authorizing Government agency but that the depositor of the check was employed at the Government agency as a
supervisor and financial accountant. I n that position, he was an authorized certifying officer, which enabled him to approve payment
schedules resulting in the issuance of Treasury checks by the Department of the Treasury. H e was not at work on February 22 and had
submitted his resignation, effective in March, after being advised that
an audit had been scheduled because of discrepancies in his records.
Investigating agents found the suspect was not residing at his official
residence address in Silver Spring, Md., but at the check address iii
Washington, D . C , where from time to time he placed the Mansimni
Co.'s name over his name on the mailbox. On the evening of JFebruary 22, the same day the investigation Avas initiated, he Avas arrested
at his estranged wife's residence in Sih-er Spring. At his apartment,
$5,400 in cash, check blanks and account books associated with the
Mansimm Co., firearms, and a quantity of marijuana were seized.
I n his position as a certifying officer, he had caused three Treasury
checks to be issued to the spurious Mansimm Co.—one for $18,417.89,
another for $86,571.28, and a third for $202,601.26—totaling $307,590.43. On October 19, 1972, the defendant, who graduated from the
University of Maryiand with a B.S. degree in accounting and who was
a second-year law student at Georgetown University, Avas sentenced
to 1 year and 1 day imprisonment and fined $5,000.
A trusted deputy comptroller employed by a large corporation obtained possession of the corporation's tax refund check in the amount
of $191,044.60. Through his knowledge of the vulnerability of the corporation's accounting system, he was able to take possession of the
check without question arising as to its apparent nonreceipt. H e then
deposited the check into a fictitious corporation account in a small
bank in another State, Avhich he drew down to a balance of $1,000 before the account became inactiA-e.
Nearly a year later, the corporation subinitted a claim to the Treasury Department alleging nonreceipt and forgery of their tax refund
check. The complex investigation Avliich identified the forger also disclosed this same defendant had embezzled approximately $500,000
by his manipulation of the corporation's legitim.ate bank accounts.
Following a plea of guilty, he was sentenced April 6,1973, in Federal
court to 8 years' imprisonment.
I n October 1972, a man and a woman with extensive narcotic
violation records, who had been operating as a check forgery team
168
1973 REPORT OF THE SECRETARY OF THE TREASURY
for approximately 2 years, Avere arrested at Houston, Tex. Approximately 150 Treasury checks, amounting to $18,000, were identified as
forged and cashed by them. The majority of their check violations
occurred initially in the Los Angeles area and later in the Houston
area. Most of the checks, which they usually stole from post office
boxes, were forged and cashed at markets while purchasing groceries.
On January 16, 1973, after having entered guilty pleas, both defendants were sentenced in Federal court to serve 5 years for their
multiple offenses.
Bond forgery
Bond forgery investigations decreased for the second consecutive
year, from 22,991 in fiscal 1971 and 16,559 in fiscal 1972 to 13,849 in the
current year.
U.S. savings bonds are stolen through various means, including bank
burglary and robbery, house burglary, mail theft, and purse snatching. Many of the stolen bonds pass through the hands of fences and
forgers, primarily in New York City, Philadelphia, Boston, NcAvark,
Chicago, Los Angeles, San Francisco, and Detroit.
Factors contributing to the decrease in bond forgery include the
identification and arrest of key multiple forgers and knoAA-n fences of
bonds throughout the country; the seizure of a record number of stolen
U.S. savings bonds prior to redeniption by forgers; an increasing
awareness by forgers that bonds are being entered into the National
Crime Information Center (NCIC) by the Service when reported
stolen; and an increasing utilization of the NCIC systeni by banks
(paying agents) when confronted by questionable redemptions.
During fiscal 1973, the Secret Service entered the records of 540,000
stolen savings bonds into N C I C At the end of the year there were approximately 550,000 stolen savings bonds in the NCIC, each a potential
loss to the Government if presented for redemption. During the year,,
11,027 stolen U.S. savings bonds having a face value of $1,178,950
were recovered through field investigations prior to redemption. This
represents an increase of 45 percent in recoveries over fiscal 1972, the
previous high year. One hundred eighty-seven persons Avere arrested
for bond forgery.
Bond forgery investigations
A major case prosecuted in fiscal 1973 involved bonds stolen from
the office of the Public Administrator of Denver, Colo. The office vault
had been opened in a highly professional manner, with the holes that
had been drilled to open the vault refilled and painted to delay detection of the burglary. Stolen were 236 savings bonds, with a redemption
value in excess of $63,600, belonging to 10 registered owners. Over a
year later a forger redeemed 14 of the stolen bonds—redemption value
$23,530—depositing $18,000 into a newly opened bank account i n
Phoenix, Ariz. Within 3 days he attempted to Avithdraw the $1'8,000,
causing the bank to become suspicious and contact the Treasury. The
suspect, arrested in the bank by an agent from the Phoenix office, Avas
later determined to have redeemed an additional 14 bonds in the Los
Angeles and Denver areas.
Meanwhile, an informant advised the Denver office that attempts
ADMINISTRATIVE REPORTS
169
Avere being made by three suspects in the burglary to redeem the rest
of the bonds in the Colorado Springs, Denver, and Boulder, Colo.,
areas by establishing fraudulent accounts at local banks. When the
banks in these areas Avere canvassed, it AA-as determined that numerous
bonds had already been redeemed. Descriptions of the forgers, a man
and a woman, matched one of the male suspects and the wife of another
suspect. Subsequently, a bank in Boulder notified the Denver office
when a suspicious account was opened with what appeared to be a
counterfeit driver's license by a woman matching the description of the
female suspect. The name on the account was one of the registered
owners' names on the stolen bonds. Later, the female suspect, accompanied by the three male suspects, returned to the Boulder bank and
presented two $1,000 bonds, with a redemption value of $2,831.60. Acting as if the transaction were acceptable, the bank paid the money
and alloAved her to return to the parking lot, where she was arrested
with the other suspects. The money paid by the bank was recovered
along with six additional $1,000 savings bonds. On August 28, 1972,
the four suspects arrested in Denver were convicted in a jury trial for
forgery and conspiracy to forge and Avere sentenced 2 to 3 years and 2
to 4 years in prison. The suspect arrested in Phoenix was placed on 5
years' probation and ordered to make full restitution to the Government for the bonds he redeemed.
I n December 1971, 36 bonds with a face value of $25,650 were stolen
in a house burglary in St. Paul, Minn. Shortly, bonds from this burglary were presented for redemption in Minneapolis, Los Angeles, and
Chicago. One forger was identified through a handwriting comparison as the same person that was arrested a month earlier in Pipestone,
Minn., and released on bond pending court appearances. Two associates
who resided in Florida were arrested within the year. The latter led
investigators to two well-known fences in Minneapolis who were placed
under arrest for conspiracy to forge and utter U.S. savings bonds.
Seventeen bonds with a face A-alue of $6,650 Avere recoA-ered. Three of
the defendants entered guilt}- pleas and were placed on probation. Both
fences pleaded guilty; one died before sentencing and the other was
sentenced to 3 years in prison to be served after serving 740 days for
parole violation on a narcotics charge.
I n February 1972, three $1,000 savings bonds were presented for
redemption at a bank in Orange, Calif. The teller became suspicious
because the driver's license the suspect used appeared counterfeit.
The suspect fled before the police arrived, leaving the bonds and the
license, which contained his photograph, in the bank. Identified as a
well-known forger and securities dealer, the suspect was spotted by
an agent in a parking lot and placed under arrest. The bonds recovered were part of a group of 25 $1,000 bonds stolen in December of
1970 in Omaha, Nebr., during a house burglary. SeA-en of the bonds had
been recoyered by the F B I and the Service during a joint investigation
resulting in the search of a well-known fence's house in Salt Lake City,
Utah, in June of 1971. While released on bail, the defendant attempted
to sell the remaining bonds to an undercover agent posing as a dishonest bank employee. The bonds Avere delivered by a third suspect
from Salt Lake City to the Los Angeles area, where a fourth person
assisted in the delivery of the bonds to the undercover agent. All were
170
1973 REPORT OF THE ^SECRETARY OF THE TREASURY
arrested and charged with conspiracy to forge, interstate transportation of stolen securities, receipt of stolen property transported interstate, aiding and abetting, and false impersonation of a Federal creditor. Sentences ranged from 6 months' to 7 years' imprisonment. .
Treasury Security Force
The Treasury Security Force, a specially trained, uniformed division of the U.S. Secret Service responsible for protecting the Main
Treasury Building and Treasury Annex, continued an intensive inservice training program of over 3,000 man-hours during fiscal 1973.
Training was conducted at the Consolidated Federal Law Enforcement
Training Ceinter, U.S. Secret Service Training Division, and the F B I
National Academy.
Forty-nine felony arrests were made by Treasury Security Force
officers at the Main Treasury Building. Most of these occurred ih the
main cash room as individuals attempted to cash forged checks valued
at nearly $12,000.
Identification Branch
The Identification Branch of the Special Investigations and Security Division provided increased scientific and technical assistance in
criminal investigations to Secret Service field offices. Its Questioned
Document and Fingerprint Sections, augmented by a complete Forensic Photography Unit, provided investigative support through examinations of handwriting, handprinting, fingerprints, palmprints,
typewriting, striations, photographs, and other forensic analyses.
These examinations related to both the protective and investigative
responsibilities of the Secret Service. Violations of laws affecting
these responsibilities often include the writing, manufacture, or al^
teration of docunients, and solutions to such problems often hinge
on examinations conducted by the Identification Branch.
During the 12 months ending May 31, 1973, the Fingerprint and
Questioned Document Sections closed 4,699 criminal cases. This was
an increase of 1,293 cases over fiscal 1972. A total of 633,246 exhibits
were examined, resulting in 1,722 identifications of individuals. Identification Branch personnel appeared in courts throughout the Nation
on .227 occasions to furnish testimony in support of their findings.
Organized crime
The Secret Service participates in the organized crime strike force
effort of the Department of Justice. Eighteen special agents are assigned to operating strike forces throughout the country and one intelligence analyst coordinates and disseminates intelligence from
Washington, D . C I n conjunction Avith the Department of Justice^
this iritelligence analyst controls the "racketeer profile" submitted by
Secret Service agents.
These agents are currently involved in 76 separate organized crime
cases. During fiscal 1973, Secret Service personnel expended more than
106,000 man-hours, or approximately 51 man-years in this category.
Training
There were 119,033 man-hours of training conducted by the Secret
Service Office of Training for personnel engaged in investigative,
ADMINISTRATIVE REPORTS
171
protective, and administrative functions. I n addition, 56,972 manhours of interbureau training, 9,980 man-hours of interagency training,
and 6,730 man-hours of nongoA-ernme^ntal training were completed.
A total of 192,715 man-hours Avere completed by. Service, personnel
during fiscal 1973.
The Office of Training provided firearms training to students of
the Consolidated Federal LaAv Enforcement Training Center (788
from the Criminal Investigator School and 341 from the Police
School). I n addition, firearms training was provided to 134 special
agents of the Bureau of Alcohol, Tobacco and Firearms; 92 Customs
patrol officers; 40 U.S. P a r k rangers; 3 special agents f rom^ the Department of Commerce; 3 special agents from the U.S. Information
Agency; 391 U.S. P a r k Police officers; and enforcement personnel of
the Secret Service.
There were 177 participants from State, local, and other Federal
agencies who attended Secret Service briefings on protection operations. Fifty-two participants from State and local police agencies attended the questioned document course.
Inservice courses were established for agents assigned to protective
details as Avell as agents assigned to field offices. Supervisory seminars were also conducted for all field offices and protective detail
supervisors.
Keeping abreast Avith technological adA-ahcements, the Office of
Training installed a group student response system and is developing
a student learning center. The former allows for more individual
student participation than do traditional training methods. The student learning center will contain carrels, which will enable students to
Avork independently at their own pace. I t will be used for employee
self-development and will support formal classroom instruction conducted at the Office of Training.
Administration
I n fiscal 1973, special attention was given to position description
management. A study of the special officer position, unique to the
Secret Service, clearly identified positions, distinct functions, and appropriate grade structures and career ladder assignments.
A comprehensive, automated financial accounting system Avas completed and readied for implementation in fiscal 1973. Capacity for
improved financial analysis and more timely and effective accounting
reports are features of the new system. This improvement will greatly
facilitate budget formulation and execution processes. The need for
manually kept records and files in support of the budget will be significantly reduced. Special studies and analyses, previously requiring
tedious work and the diversion of manpower resources, will be possible through rapid review and sampling of computer-based data. Accurate measurement of the consumption of financial resources by major
programs Avill alloAv a better correlation of costs to the consumption
of manpower resources and to performance areas.
An extensive on-the-job training prograni and selective recruiting
of new personnel upgraded technical capabilities Avithin the financial
management and rexDorting system.
506-171—73
^14
172
1973 REPORT OF THE SECRETARY OF THE TREASURY
I n the area of administrative operations, substantial dollar savings
were achieved by establishing more sources for procurement. This
increase in conipetition was made possible through the addition of
procurement personnel and acceleration of formal training for the
employees.
During fiscal 1973, major steps were taken to automate the nonexpendable property system, saving many man-hours and ensuring
more effective and efficient management of Secret Service property.
Also during fiscal 1973, the concept of "office excellence," a system
of eliminating costly ceiling-high partitions and substituting movable
panels, was introduced in the Louisville field office. This concept will
be extended to other offices.
Directives management and records disposition planning Avere also
improved. A more formal systeni of directives management is ready
for adoption at the beginning of calendar 1974. I n addition, a major
updating of the records disposal program and refinements to forms
and reports management will be completed by the end of calendar
1974.
Inspection and internal audit
Developmental supervisory training for the position of assistant
inspector, created during the year, significantly expedited inspections. Also, the internal audit staff Avas enlarged to increase the frequency of audits.
During fiscal 1973, inspectors represented the Director in many
high-level policy projects ahd surveys. /
EXHIBITS
Public Debt O.perations, Regulations, and Legislation
During fiscal year 1973 there were no offerings of. marketable
certificates of indebtedness. .
Treasury
E x h i b i t 1.—Treasury notes
Two Treasury circulars—one containing an excliange offering and. one covering
an a u c t i o n . f o r cash with prices established through competitive bidding—are
reproduced in this exhibit. Circulars pertaining t o t h e other note offerings during
fiscal 1973 a r e similar in form and therefore a r e not reproduced in this report.
However, essential details for each offering a r e summarized in the table in tliis
exhibit, and allotment d a t a for the note's will be shown in table 37 in the Statistical Appendix.
., '
.. ;
.
,
,.
DEPARTMENT
CIRCULAR
NO. 8-72. P U B L I C
DEBT
DEPARTMENT OF T H E TREASURY,
Washington, J u l y 27, 1972.
I . OFFERING OF NOTES
1.; The Secretary of the Treasury, p u r s u a n t to tlie authority of t h e Second
Liberty Bond Act, as amended, offers notes of the United States, designated
61/4 percent Treasury Notes of Series A-1979, a t par, in exchange for the following securities, singly or in combinations aggregating $1,000 or multiples thereof:
(1) - 5 percent Treasury Notes of Series E-1972, dated May 15, 1971, due
•
August 15, 1972;
•
•
^
' • ••
(2) 4 percent Treasury Bonds of 1972, dated September 15, 1962,: due
• August 15, 1972;
•
.
(3) 23/2 percent Treasury Bonds of 1967-72, dated October 20, 1941, due
•• September 15, 1972, with a cash payment of $1.12220 per $1,000 to the
• ' • United S t a t e s ;
•
•
• (4) 6 percent Treasury Notes of Series F-1972, dated J u n e 29, 1971, due
November 15, 1972, with a cash payment of $4.20838 per $1,000 to
' subscribers;
(5) 2 % percent Treasury Bonds of 1967-72, dated November 15, 1945, due
December 15, 1972, with a cash payment of $6.00915 per $1,000 to the
United S t a t e s ;
'
•^
, .
(6) 5 % percent Treasury Notes of Series A-1974, dated November 15, 1967,
due November 15, 1974, with a cash.payment of $6.10880 per $1,000 to
subscribers;
.
.
"(7) 3 % p e r c e n t - T r e a s u r y Bonds of 1974, dated December 2, 1957, due
November; 15, 1974,,with a cash payment of $30.23856 per $i;000 to the
;; Ilnited S t a t e s ;
"
"
'
. ( 8 ) • 5% "percent T r e a s u r y Notes of Series A-1975, dated F e b r u a r y 15, 1968,
due F e b r u a r y 15, 1975, with a cash payment of $3.06136 per $1,000 to
, .
subscribers ; or :
,
(9) , 5 % percent T r e a s u r y Notes of Series E - i 9 7 5 , dated October 22, 1971,
. .due F e b r u a r y 15, 1975, with a c a s h . p a y m e n t of $5.^1659 per $.1,000 to
' subscribers.
.
I n t e r e s t will be adjusted a s of August 15,..1972, on the securities due subsequent
to t h a t date. P a y m e n t s on account of accrued interest a n d cash adjustments will
be m a d e 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 until 5 :00 p.m., local time, August 2,1972, for the receipt of subscriptions,
except t h a t individuals exchanging registered securities will be permitted to
submit subscriptions until 5:00 p.m., local tiine, August 4,1972.
'"'' '
' '
'
'
'
• 175'
176
19 73 REPORT OF THE SECRETARY OF THE TREASURY
2. In addition,
(a) holders of all of the securities enumerated in Paragraph 1 of this
section are offered the privilege of exchanging all or any part of them
for 6% percent Treasury Bonds of 1984, which offering is set forth in
Department Circular, Public Debt Series—-No. 9-72, and
(b) holders of the securities maturing in 1972, are offered the privilege of
exchanging all or any part of them for 5% percent Treasury Notes of
Series F-1976, which offering is set forth in Department Circular,
PubUc Debt Series—No. 7-72.
These two circulars are being issued simultaneously with this circular.
3. Optional ^recognition of gain or loss for Federal income tax purposes on
securities due in 1974 and 1975.—Pursuant to the provisions of section 1037(a)
of the Internal Revenue Code of 1954, the Secretary of the Treasury hereby
declares that gain or loss for Federal income tax purposes upon the exchange with
the United States of the securities due in 1974 and 1975 enumerated in Paragraph 1 of this section solely for the 6 ^ percent Treasury Notes of Series A-1979
may he recognized either—
(1) in the taxable year of the exchange, or
(2) in the taxable year of disposition or redemption of the new obligations.
In the case of either option, any gain realized on the exchange to the extent that
money (other than as an interest adjustment) is received by the security holder
in connection with the exchange must be recognized as gain for the taxable year
of the exchange.
II, DESCRIPTION OF NOTES
1. The notes Avill be dated August 15, 1972, and will bear interest from that
date at the rate of 6^4 percent per annum, payable semiannually on February 15
and August 15 in each year until the principal amount becomes payable. They
will mature August 15, 1979, and Avill 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 Avill
not be acceptable in payment of taxes.
4. Bearer notes with interest coupons attached, and notes registered as to
principal and interest, will be issued in denominations of $1,000, $5,000, $10,000,
$100,000 and $1,000,000. Provision wiU 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 he subject to the general regulations of the Department of
the Treasury, now or hereafter prescribed, governing United States notes.
III.
SUBSCRIPTION AND ALLOTMENT
1. Subscriptions accepting the offer made \ by this circular will be received
at the Federal iReserve Banks and Branches and at the Office of the Treasurer
of the United States, Washington, D.C. 20222. Banking institutions generally
may submit subscriptions for account of customers, but only the Federal Reserve
Banks and the Department of the Treasury 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 August 15, 1972, or on later allotment, and may be made only in a like
face amount of securities of the issues enumerated in Paragraph 1 of Section
I hereof, which should accompany the subscription. Payment will not be deemed
E.XHIBITS
177
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. Payments due to subscribers
(paragraphs 3, 4, 6, 8 and 9 below) 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. Payments due from subscribers (paragraphs 5 and 7 below)
should accompany the subscription.
2. 5 peixent notes of Series E-1972 and 4 percent honds of 1972.—When payment is made with securities in bearer form, coupons dated August 15, 1972,
should be detached and cashed wheh due.^
3. 2^2 percent honds of Septemher 15, 1967-72.—When payment is made with
bonds in bearer form, coupons dated September 15, 1972, must be attached to the
bonds when surrendered. Accrued interest from March 15 to August 15, 1972
($10.39402 per $1,000) will be credited, the payment due the United States
($1.12220 per $1,000) wiU be charged, and the difference ($9.27182 per $1,000)
will be paid to subscribers.
4. 6 percent notes of Series F-1972.—When payment is made with notes in
bearer form, coupons dated November 15, 1972, must be attached to the notes
when surrendered. Accrued interest from May 15 to August 15, 1972 ($15.00000
per $1,000) plus the cash payment ($4.20838 per $1,000), a total of $19.20838
per $1,000, willbe paid to subscribers.
5. 2y2 percent honds of Decemher 15, 1967-72.—W^hen payment is made with
bonds in bearer form, coupons dated December 15, 1972, must be attached to the
bonds when surrendered. Accrued interest from June 15 to August 15, 1972
($4.16667 per $1,000) will be credited, the payment due the United States
($6.00915 per $1,000) will be charged, and the difference ($1.84248 per $1,000)
must he paid to the United States.
6. 5% percent notes of Series A-1974.—When payment is made with notes in
bearer form, coupons dated November 15, 1972, and all subsequent coupons, must
be attached to the notes when surrendered. Accrued interest from May 15 to
August 15, 1972 ($14.37500 per $1,000) plus the cash payment ($6.10880 per
$1,000), a total of $20.48380 per $1,000, wUl be paid to subscribers.
7. S% percent honds of 1974-—When payment is made with bonds in bearer
form, coupons dated November 15, 1972, and all subsequent coupons, must be
attached to the bonds when surrendered. Accrued interest from May 15 to August 15, 1972 ($9.68750 per $1,000) wiU be credited, the payment due the United
States ($30.23856 per $1,000) wiU be charged, and the difference ($20.55106 per
$1,000) must be paid to the United States.
8. 5% pe7'cent notes of Series A-1975.—When payment is made with notes in
bearer form, coupons dated February 15, 1973, and all subsequent coupons, must
be attached (August 15,1972, coupons should be detached ^) to the notes when surrendered. A cash payment of $3.06136 per $1,000 will be paid to subscribers.
9. 5% percent notes of Series E-1975.—When payment is made with notes in
bearer form, coupons dated February 15, 1973, and all subsequent coupons, must
be attached (August 15, 1972, coupons should be detached^) to the notes when
surrendered. A cash payment of $5.81659 per $1,000 will be paid to subscribers.
V. ASSIGNMENT OF REGISTERED SECURITIES
1. Registered securities 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 Department of the Treasury governing assignments for transfer or exchange, 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 Office of the Treasurer of the United States, Washington, D.C. 20220. The securities must be delivered at the expense and risk of the
1 I n t e r e s t due on August 15, 1972, on registered securities will be paid by issue of
interest cheeks in regular course to holders of record on J u l y 14, 1972, the date the
transfer books closed.
178
1973 REPORT OF THE
OF THE TREASURY
SE€RET!ARY
holder. If the 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 61^ percent Treasury Notes of Series A-1979" ; if the notes are desired
registered in another name; the assignment should be to "The Secretary of the
Treasury for exchange for 6% percent Treasury Notes of Series A-1979 in.the
name Of
: :_____
^__
______:.__--_
^_____: _--__;" ;
if notes in coupon form are desired, the assignment should be to "The Secretary
of the Treasury for exchange for 6% percent Treasury Notes of Series A-1979
in coupon form to be delivered to_ — !
il
L___>i:_ ::.«_i.___
".
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 deliyery of.notes on full-paid subscriptions allotted, and they may issue interini receipts pending delivery of the
definitive notes.
i,
.. ,
'
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; Ba.nks.
•
GEORGE P.
.
SHULTZ, .
Secretary of the Treasury.
DEPARTMENT CIRCULAR NO. 2-73. PUBLIC DEBT
.
•
D E P A R T M E N T . OF ' TiiE
'
TREASURY,
Washington, Fehruary 1\ 1973.
I. OFFERING OF N O T E S
1. The Secretary of the Treasury, pursuant to the authority of = the Second
Liberty Bond Act, as amended, invites tenders at a price not less than. 98.51 percent of their face A-alue for $1,000,000,000, or thereabouts, of notes of the United
States, designated 6% percent Treasury Notes of Series B-1979. An additional
amount of the notes will be allotted by the Secretary of the Treasury to Government accounts and Federal Reserve Banks at the average price of accepted
tenders in exchange for Treasury notes maturing February 15, 1973. Tenders
will be received up to 1:30 p.m.. Eastern Standard time, Wednesday, February 7,
1973, under competitive and noncompetitive bidding, as set forth in.Section III
hereof. The 6 ^ percent Treasury Notes of Series C-1973 and 4% percent Treasury Notes of Series D-1973, maturing February 15, 1973, will be accepted at-par.
in payment, in whole or in part, to the extent tenders are allotted by the Treasury.
II. DESCRIPTION OF NOTES
1. The notes will be dated February 15, 1973, and will bear interest from that
date at the rate of 6% percent per annum^ payable on a semiannual basis on
May 15 and November 15, 1973, and thereafter on May 15 and November 15 in
each year until the principal amount becomes payable. They will mature November 15, 1979, and will not be subject to call for redemptiori prior to maturity.
2. The income derived from the notes is subject to all taxes imposed under
the Intemal Revenue Code of 1954. The notes are subject to estate, inheritance,
gift or other excise taxes, whether Federal or State, but are exempt from, all
taxation now or hereafter imposed on the principal or interest thereof by any
State, or any of the possessions of the United States, or by any local taxing
authority.
•
; .
3. The notes will be acceptable to secure deposits of public moneys. They will
not be acceptable in payment of taxes.
^
4. Bearer notes with interest coupons attached, and notes registered as to
principal and interest, will be issued in denominations of $1,000, $5,000, $10,000,
$100,000 and $1,000,000. Provision will be made for the interchange of notes of
different denominations and of coupon and registered notes, and for the transfer
EXHIBITS
179
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 Department of
the Treasury, now or hereafter prescribed, governing United States notes.
IIL TENDERS AND ALLOTMENTS
1. Tenders will be received at Federal Reserve Banks and Branches and at
the Office of, the Treasurer of the United States, Washington, D.C. 20220, up to
the closing hour, 1:30 p.m.. Eastern Standard time, Wednesday, February 7,1973.
Each tender must state the face amount of notes bid for, which must be $1,000
or a multiple thereof, and the price offered, except that in the case of noncompetitive tenders the term "noncompetitive" should be used in lieu of a price. In
the case of competitive tenders, the price must be expressed on the basis of 100,
Avith two decimals, e.g., 100.00. Tenders at a price less than 98.51 will not be accepted. Fractions may not be used. Noncompetitive tenders from any one bidder
may not exceed $400,000.
2. Commercial banks, which for this purpose are defined as banks accepting
demand deposits, may submit tenders for account of customers provided the
names of the customers are set forth in such tenders. Others than commercial
banks will not be permitted to submit tenders except for their own account.
Tenders will be received without deposit from banking institutions for their own
account. Federally-insured savings and loan associations. States, political subdivisions or instrumentalities thereof, public pension and retirement and other
public funds, international organizations in which the United States holds membership, foreign central banks arid foreign States, dealers who make primary
markets in Government securities and report daily to the Federal Reserve Bank
of New York their positions with respect to Government securities and borrowings thereon, and Government accounts. Tenders from others must be accompanied by payment (in cash or the securities referred to in Section I which will be
accepted at par) of 5 percent of the face amount of notes applied for.
3. Immediately after the closing hour tenders will be opened, following which
public announcement will be made by the Department of the Treasury of the
amount and price range of accepted iDids. Those submitting tenders will be advised of the acceptance or rejection thereof. In considering the acceptance of tenders, those at the highest prices will be accepted to the extent required to attain
the amount offered. Tenders at the lowest accepted price will be prorated if
necessary. 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 two decimals) of accepted competitive tenders.
4. 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 notes
of this issue at a specific rate or price, until after 1:30 p.m.. Eastern Standard
time, Wednesday, February 7,1973.
5. Commercial banks in submitting tenders will be required to certify that they
have no beneficial interest in any of the tenders they enter for the account of their
customers, and that their customers have no beneficial interest in the banks'
tenders for their own account.
IV. PAYMENT
1. Settlement for accepted tenders in accordance with the bids must be made
or completed on or before February 15, 1973, at the Federal Reserve Bank or
Branch or at the Office of the Treasurer of the United States, Washington, D.C.
20222, in cash, securities referred to in Section I (interest coupons dated February 15,1973, should be detached) or other funds immediately available by that
date. Payment will not be deemed to have been completed where registered notes
are requested if the appropriate identifying number as required on tax returns
and other documents submitted to the Internal Revenue Service (an individual's
social security number or an employer identification number) is not furnished.
In every case where full payment is not completed, the payment with the tender
up to 5 percent of the amount of notes allotted shall, upon declaration made by
•Average price may be at, or more or less than 100.00.
180
1973 REPORT OF THE SECRETARY OF THE TREASURY
the Secretary of the Treasury in his discretion, be forfeited to the United States.
When payment is made with securities, a cash adjustment will be made to or required of the bidder for any difference between the face amount of securities
submitted and the amount payable on the notes allotted.
v. A S S I G N M E N T O F REGISTlilRED SECURITIES
1. Registered securities tendered as deposits and in payment for notes allotted
hereunder should be assigned by the registei'ed payees or assignees thereof, in
accordance with the general regulations of the Department of the Treasury, in
one of the forms hereafter set forth. Securities tendered in payment should be
surrendered at the Federal Reserve Bank or Branch or at the Office of the Treasurer of the United States, Washington, D.C. 20222. The securities must be delivered at the expense and risk of the holder. If the notes are desired registered
in the same name as the securities surrendered, the assignment should be to "The
Secretary of the Treasury for 6% percent Treasury Notes of Series B-1979";
if the notes are desired registered in another name, the assignment should be to
"The Secretary of the Treasury for 6% percent Treasury Notes of Series B-1979
in the name of
"; if notes in coupon form are desired, the
assignment should be to "The Secretary of the Treasury for 6% percent Treasury Notes of Series B-1979 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 tenders, 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 tenders allotted,
and they may issue interim receipts pending delivery of the definitive notes.
2. The Secretary of the Treasury may at any time, or from time to time, prescribe supplemental or amendatory rules and regulations governing the offering,
which will be communicated promptly to the Federal Reserve Banks.
GEORGE P. SHULTZ,
Secretary of the Treasury.
Date of
prehni- Department
inary
circular
announce- No.
Date
ment
1972
July 26
Concurrent
offering
circular
No.
Date of
issue
Treasury notes issued for exchange or for cash
8-72,9-72 bVs percent Series F-1976 at 99.75 in exchange for....
•
5 percent Series E-1972 notes maturing August 15,1972
4 percent bonds maturing August 15, 1972
23^ percent bonds maturing September 15,1972 2
6 percent Series F-1972 notes maturing November 15, 1972 3
23^ percent bonds maturing December 15,1972 *
July 26 8-72 July 27 7-72,9-72 6M percent Series A-1979 at par in exchange for *.._
5 percent Series E-1972.notes maturing August 15, 1972
4 percent bonds maturing August 15,1972
2 ^ percent bonds maturing September 15,1972
6 percent Series F-1972 notes maturing November 15,1972
21^ percent bonds maturing December 15,1972
5% percent Series A-1974 notes maturing November 15, 1974
ZJ4 percent bonds maturing November 15,1974
5 ^ percent Series A-1975 notes maturing February 15,1975
5>g percent Series E-1975 notes maturing February 15,1975
6 percent Series E-1974 at 100.25 (average) for cash s 7
Oct. 5 10-72 Oct., 6 .
Dec. 14 12-72 Dec. 15
1973
1973
Jan. 31 1-73 Feb. 1
Jan. 31
Apr. 25
2-73 Feb. 1
3-73 Apr. 26
M
Oct. 19 •Sept.
1971
Sept. S^o Nov.
1972
.— Dec. 28 Dec.
1973
Feb. 15 Aug.
5J^ percent Series F-1974 at 100.09 (average) for cash 6 n
2-73
1 Individuals exchanging registered securities were permitted to submit subscriptions
until Aug. 4.
2 Subscribers exchanging these bonds were credited with accrued interest on the bonds
from-Mar. 15 to Aug. 15, 1972 ($10.39402 per $1,000) plus the discount ($2.50 per $1,000)
on the notes, and charged $1.2220 per $1,000 to adjust for the market value of the bonds.
3 Subscribers exchanging these notes were paid accrued interest on the notes from May
15, to Aug. 15,1972 ($15.00 per $1,000), the discount of $2.50 per $1,000, and $21.70838 per
$1,000 to adjust for the market value of the 6 percent notes.
4 Subscribers exchanging these bonds were credited with accrued interest on the bonds
from June 15 to Aug. 15, 1972 ($4.16667 per $1,000) plus the discount ($2.50 per $1,000)
on the notes, and charged $6.00915 per $1,000 to adjust for the market value of the bonds.
5 See Department Circular No. 8-72 in this exhibit for provisions regarding payment
and optional recognition of gain or loss for Federal income tax purposes.
6 Noncompetitive tenders for $200,000 or less were accepted in full at the average price
Aug. 16 Aug. 15,1979 Aug. 21 Aug. 15
&H percent Series D-1976 at 10018 (average) for cash « K...
6K percent'Series G-1976 at 99.70 in exchange for
&}4 percent Series C-1973 notes maturing February 15,1973
43^ percent Series D-1973 notes maturing February 15, 1973
1-73 6H percent Series B-1979 at 99.40 (average) for cash i2i3__
4r-73 63^ percent Series A-1980 at 99.29 (average) for cash 1214
AUotment
payment
date on
or before (or
on later
allotment)
1972
1972
1972
Aug. 15 Feb. 15,1976 Aug. 21 Aug. 15
1972
7-72 July 27
Oct. 25 11-72 Oct. 26
Date of
matmity
Date
subscription
books
closed
or tenders received
_
___
30,1974 Oct. 11 Oct.
w
19
W
15,1976 Nov. 1 Nov. 15
31,1974 Dec. 20 Dec. 28
1973
1973
15,1976 Feb. 7 Feb. 15
Feb. 15 Nov. 15,1979 Feb. 7 Feb.
May 15 May 15,1980 May 1 May
,
15
15
of accepted competitive tenders. Qualifled depositaries were permitted to make settlement by credit in their Treasm-y tax and loan account.
^ These notes were sold at auction at prices ranging from 100.41 to 100.20.
8 Noncompetitive tenders for $400,000 or less were accepted in full at the average price
of accepted competitive tenders. Qualifled depositaries were permitted to make settlement for 75 percent of the notes allotted by credit in their Treasury tax and loan account.
9 These notes were sold at auction at prices ranging from 100.31 to 100.14.
10 Interest was payable from Nov. 15,1972.
11 These notes were sold at auction at prices ranging from 100.29 to 100.05.
12 Noncompetitive tenders for $400,000 or less were accepted in full at the average
price of accepted tenders. Payment could riot be made through Treasury tax and loan
accounts.
13 These notes were sold at auction atprices ranging from 99.88 to 99.21.
1 These notes were sold at auction at'prices ranging from 100.10 to 99.05.
4
(X)
182
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 2.—Treasury bonds
Two Treasury circulars—one containing an exchange offering and one covering
an auction for cash with the piice established through competitive bidding—
are reproduced in this exhibit. Another circular pertaining to an auction is
similar in form and therefore is not reproduced in this report. However, essential details for each offering are summarized in the table in this exhibit, and
allotment data for the bonds will be shown in table 38 in the Statistical Appendix.
DEPARTMENT CIRCULAR NO, 9-72. PUBLIC DEBT
•
DEPARTMENT OF THE TREASURY,
Washington, July 27,1972.
I. OFFERING OF BONDS
1. The Secretary of the Treasury, pursuant to the authority of the Second
Liberty Bond Act, as amended, offers bonds of the United States, designated
6% percent Treasury Bonds of 1984, at 99.40 percent of their face value, in excliange for the following securities, singly or in combinations aggregating $1,000
or multiples thereof:
(1) 5 percent Treasury Notes of Series E-1972, dated May 15, 1971, due
August 15, 1972;
(2) 4 percent Treasury Bonds of 1972, dated September 15, 1962, due August 15,1972;
(3) 21/2 percent Treasury Bonds of 1967-72, dated October 20, 1941, due
September 15, 1972, with a cash payment of $1.12220 per $1,000 to the
United States;
(4) 6 percent Treasury Notes of Series F-1972, dated June 29, 1971, due
November 15, 1972, with a cash payment of $4.20838 per $1,000 to
subscribers;
(5) 2^!, percent Treasury Bonds of 1967-72, dated November 15, 1945, due
December 15, 1972, with a cash payment of $6.00915 per $1,000 to the
United States;
(6) 5% percent Treasury Notes of Series A-1974, dated November 15, 1967,
due Noveniber 15, 1974, with a cash payment of $6.10880 per $1,000
to subscribers;
;
'.
(7) 3ys percent Treasury Bonds of. 1974, dated December 2, 1957, due
November 15, 1974, with a cash payment of $30.23856 per $1,000 to the
United States;
(8) 5% percent Treasury Notes of Series A-1975, dated February 15, 1968,
due February 15, 1975, with a cash payment of $3.06136 per $1,000 to
subscribers; or
(9) 5ys percent Treasury Notes of Series E-1975, dated October 22, 1971,
due February 15, 1975, with a cash payment of $5.81659 per $1,000 to
subscribers.
Interest will be adjusted as of August 15, 1972, on the securities due subsequent
to that date. Payments on account of accrued interest and cash adjustments will
be made as set forth in Section IV hereof. In addition, the Secretary of the Treasury offers the bonds to natural persons in their own right for cash, not to exceed $10,000 to any one person. The books will be open until 5 :00 p.m., local time,
August 2, 1972, for the receipt of subscriptions, except that individuals subscribing for cash, or exchanging registered securities, will be permitted to submit subscriptions until 5:00 p.m., local time, August 4, 1972.
In addition,
(a) holders of all of the securities enumerated in Paragraph 1 of this section are offered the privilege of exchanging all or any part of them for
6% percent Treasury Notes of Series A-1979, which offering is set
forth in Department Circular, Public Debt Series—No. 8-72, and
(b) holders of the securities maturing iri 1972, are offered the privilege of
exchanging all or any part of them for 5% percent Treasury Notes of
Series F-1976, which offering is set forth in Department Circular,
PubUc Debt Series—No. 7-72.
These circulars are being issued simultaneously with this circular.
3. Optional recognition of gain or loss for Federal income tax purposes on securities due in 1974 (^'^d 1975.—Pursuant to the provisions of section 1037(a) of
. EXHIBITS
183
the Internal Revenue Code of 1954, the Secretary of the Treasury hereby declares
that gain or loss for Federal income tax purposes upon the exchange with the
United States of the securities due in 1974 and 1975 enumerated in Paragraph 1
of this section solely for the 6% percent Treasury Bonds of 1984 may be recognized either—
(1) in the taxable year of the exchange, or
(2) in the taxable year of disposition or redemption of the new obligations.
In the case of either option, any gain realized on the exchange to the extent
that nioney (other than as an interest adjustment) is received by the security
holder in connection with the exchange must be recognized as gain for the taxable
year of the exchange.
I I . DESCRIPTION OF BONDS
1. The bonds will be dated August 15,1972, and will bear interest from that date
at the rate of 6% percent per annum, payable semiannually on February 15 and
August 15 in each year until the principal amount becomes payable. They will
mature August 15, 1984, and will not be subject to call for redemption prior to
maturity.
2. The income derived from the bonds is subject to all taxes imposed under the
Internal Revenue Code of 1954. The bonds are subject to estate, inheritance,
gift or other excise taxes, whether Federal or State, but are exenipt from all taxation now or hereafter imposed on the principal or interest thereof by any State,
or any of the possessions of the United States, or by any local taxing authority.
3. The bonds will be acceptable to secure deposits of public moneys. They will
not be acceptable in payment of taxes.
4. Bearer bonds with interest coupons attached, and bonds registered as to
principal and interest, will be issued in denominations of $1,000, $5,000, $10,000,
$100,000 and $1,000,000. Provision wiU be made for the interchange of bonds of
diff'erent denominations and of coupon and registered bonds, and for the transfer
of registered bonds, under rules and regulations prescribed by the Secretary of
the Treasury.
5. The bonds will be subject to the general regulations of the Department of
the Treasury, now or hereafter prescribed, governing United States bonds.
I I I . SUBSCRIPTION AND A L L O T M E N T
1. Subscriptions accepting the off'er made by this circular will be received at
the Federal Reserve Banks and Branches and at the Office of the Treasurer of
the United States, Washington, D.C. 20222. Only the Federal Reserve Banks and
the Department of the Treasury are authorized to act as official agencies. Banking institutions generally may submit subscriptions for account of customers,
provided the names of customers subscribing for cash are set forth in such subscriiDtions. Others than banking institutions will not be permitted to enter cash
subscriptions except for their own account.
2. Cash subscriptions, which may not exceed $10,000 from any one person, must
be accompanied by payment of 10 percent of the face amount of bonds applied for.
3. Banking institutions in submitting cash subscriptions for customers Avill be
required to certify that they have no beneficial interest in any such subscriptions.
4. 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 bonds 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 aniount of bonds allotted hereunder in exchange for
securities of the issues enumerated in Paragraph 1 of Section I hereof, must be
made on or before August 15, 1972, or on later allotment, and may be made only
in a like face amount of such securities, which should accompany the subscription. On cash subscriptions payment at 99.40 percent of their face value and
accrued interest, if any, for bonds allotted hereunder, must be completed on or
before August 15, 1972, in cash or other funds fully collectible by that date. In
184
1 9 3 REPORT OF THE SECRETARY OF THE TREASURY
-7
every case where full payment is not completed, the payment with the application up to 10 percent of the amount of bonds allotted shall, upon declaration
made by the Secretary of the Treasury in his discretion, be forfeited to the United
States. Paynient will not be deemed to have been completed where registered
bonds are requested if the appropriate identifying number as required on tax
returns and other docunients submitted to the Internal Revenue Service (an individual's social security number or an employer identification number) is not
furnished. Payments due to subscribers (paragraphs 2, 3, 4, 5, 6, 8 and 9 below)
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. Payments due from subscribers (paragraph 7 below) should accompany the subscription.
2. 5 percent notes of Series E-1972 and 4 P^'^cent honds of 1972.—When payment is made with securities in bearer form, coupons dated August 15, 1972,
should be detached and cashed when due.^ A cash payment of'$6.00 per $1,000 on
account of the issue price of the new bonds will be made to subscribers.
3. 2^2 percent honds of Septemher 15, 1967-72.—When payment is made with
bonds in bearer form, coupons dated Septeinber 15, 1972, must be attached to
the bonds when surrendered. Accrued interest from March 15 to August 15, 1972
($10.39402 per $1,000) plus the payment on account of the issue price of the new
bonds ($6.00 per $1,000) wiU be credited, the payment ($1.12220 per $1,000) due
the United States wiU be charged, and the difference ($15.27182 per $1,000) wiU
be'iDaid to subscribers.
4. 6 percent notes of Series F-1972.—When payment is made with notes in
bearer form, coupons dated November 15, 1972, must be attached to the notes
when surrendered. Accrued interest from May 15 to August 15, 1972 ($15.00000
per $1,000), the payment on account of the issue price of the new bonds ($6.00
per $1,000) and the cash payment ($4.20838 per $1,000), a total of $25.20838 per
$1,000, will be paid to subscribers.
5. 2y2 percent honds of Decemher 15, 1967-72.—When payment is made with
bonds in bearer form, coupons dated December 15, 1972, must be attached to the
bonds when surrendered. Accrued interest from June 15 to August 15, 1972
($4.16667 per $1,000) plus the payment on account of the issue price of the new
bonds ($6.00 per $1,000) will be credited, the payment due the United States
($6.00915 per $1,000) will be charged, and the difference ($4.15752 per $1,000)
will be paid to subscribers.
6. 5% percent notes of Series A-1974.—When payment is made with notes in
bearer form, coupons dated Noveniber 15, 1972, and all subsequent coupons, must
be attached to the notes when surrendered. Accrued interest from May 15 to
August 15, 1972 ($14.37500 per $1,000), the paynient on account of the issue
price of the new bonds ($6.00 per $1,000) and the cash payment ($6.10880 per
$1,000), a total of $26.48380 per $1,000, wiU be paid to subscribers.
7. 5% percent honds of 1974.—When payment is made with bonds in bearer
form, coupons dated November 15, 1972, and all subsequent coupons, must be
attached to the bonds when surrendered. Accrued interest from May 15, to
August 15, 1972 ($9.68750 per $1,000) plus the payment on account of the is.sue
price of the new bonds ($6.00 per $1,000) wiU be credited, the payment ($30.23856
per $1,000) due the United States wiU be charged, and the difference ($14.55106
per $1,000) must be paid by subscribers.
8. 5% percent notes of Series A-1975.—When payment is made with notes in
bearer form, coupons dated February 15, 1973, and all subsequent coupons, must
be attached (August 15,1972, coupons should be detached ^) to the notes when surrendered. The payment on account of the issue price of the new bonds ($6.00 per
$1,000) plus the casii payment ($3.06136 per $1,000), a total of $9.06136 per
$1,000, will be paid to subscribers.
9. 5% percent notes of Series E-1975.—When payment is made with notes in
bearer form, coupons dated February 15, 1973, and all subsequent coupons, must
be attached (August 15, 1972, coupons should be detached^) to the notes when
surrendered. The payment on account of the issue price of the new bonds ($6.00
1 I n t e r e s t due on August 15, 1972, on registered securities will be paid by Issue of
interest checks In regular course to holders of record on July 14, 1972, the date the
transfer books closed.
EXHIBITS
185
per $1,000) plus the cash payment ($5.81659 per $1,000), a total of $11.81659 per
$1,000, will be paid to subscribers.
v.
A S S I G N M E N T OF REGISTERED S E C U R I T I E S
1. Registered securities tendered in payment for bonds offered hereunder
should be assigned by the registered payees or assignees thereof, in accordance
v^^ith the general regulations of T h e Department of the Treasury governing assignments for transfer or exchange, 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 Office of the T r e a s u r e r of the United States, Washington, D.C. 20222. The securities must be delivered a t the expense and risk of the
holder. If the bonds a r e desired registered in the same name as the securities
surrendered, the assignment should be to "The Secretary of t h e Treasury for
exchange for 6% percent T r e a s u r y Bonds of 1984"; if t h e bonds a r e desired
registered in another name, the assignment should be to "The Secretary of the
Treasury for exchange for 6% percent Treasury Bonds of 1984 in t h e name of
^
" ; if bonds in coupon form a r e desired, the
assignment should be to ''The Secretary of t h e Treasury for exchange for 6%
percent Treasury Bonds of 1984 in coupon form to be delivered to
VI.
GENERAL PROVISIONS
1. As fiscal agents of t h e United States, Federal Reserve Banks a r e authorized
and requested to receive subscriptions, to m a k e 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 m a k e delivery of bonds on full-paid subscriptions allotted, a n d they may issue interim receipts pending delivery of the
definitive bonds.
2. The Secretary of the T r e a s u r y may a t any time, or from time to time, prescribe supplemental or amendatory rules and regulations governing the offering,
which will be communicated promptly to the Federal Reserve Banks.
GEORGE P.
SHULTZ,
Secretary of the Treasury.
D E P A R T M E N T CIRCULAR NO. 4-73. P U B L I C D E B T
DEPARTMENT OF T H E
TREASURY,
Washington, April 26,1973.
I.
OFFERING OF
BONDS
1. The Secretary of the Treasury, p u r s u a n t to the authority of t h e Second
Liberty Bond Act, as amended, invites tenders for $650,000,000, or thereabouts, of
bonds of the United States, designated 7 percent Treasury Bonds of 1993-98. An
additional amount of t h e bonds may be allotted by the Secretary of t h e Treasury
to Government accounts and Federal Reserve Banks in exchange for Treasury
notes m a t u r i n g May 15, 1973. Tenders on a competitive or noncompetitive basis
will be received up to 1:30 p.m.. E a s t e r n Daylight Saving time, Wednesday,
May 2, 1973. T h e price for the bonds will be established as set forth in Section I I I
hereof. T h e 7% percent Treasury Notes of Series A-1973 and 4 % percent Treasury Notes of Series E-1973, m a t u r i n g May 15, 1973, will be accepted a t p a r in
payment, in whole or in part, to the extent tenders are allotted by the Treasury.
II.
DESCRIPTION OF BONDS
1. The bonds will be dated May 15, 1973, and will bear interest from t h a t date
at t h e r a t e of 7 percent per annum, payable semiannually on November 15, 1973,
and thereafter on May 15 and November 15 in each year until the principal
amount becomes payable. They will m a t u r e May 15, 1998, but may be redeemed
a t t h e option of the United States on and after May 15,1993, in whole or in part,
a t p a r and accrued interest, on any interest day or days, on 4 months' notice of
redemption given in such m a n n e r as the Secretary of the T r e a s u r y shall prescribe. I n case of p a r t i a l redemption, the bonds to be redeemed will be determined
186
1973 REPORT OF THE SECRETARY OF THE TREASURY
by such method as may be prescribed by the Secretary of the Treasury. From
the date of redemption designated in any such notice, interest on the bonds called
for redemption shall cease.
2. The income derived from the bonds is subject to all taxes imposed under the
Internal Revenue Code of 1954. The bonds are subject to estate, inheritance, gift
or other excise taxes, whether Federal or State, but are exempt from all taxation
now or hereafter imposed on the principal or interest thereof by any State, or
any of the possessions of the United States, or by any local taxing authority.
3. The bonds will be acceptable to secure deposits of public moneys. They will
not be acceptable in payment of taxes.
.
4. Bearer bonds with interest coupons attached, and bonds registered as to
principal and interest, will be issued in denoniinations of $1,000, $5,000, $10,000,
$100,000 and $1,000,000. Provision wiU be made for the interchange of bonds of
different denominations and of coupon and registered bonds, and for the transfer
of registered bonds, under rules and iregulations prescribed by the Secretary of
theTreasury.
5. The bonds will be subject to the general regulations of the Department of
the Treasury, now or hereafter prescribed, governing United. States bonds.
III.
TENDERS AND
ALLOTMENTS
1. Tenders will be received at Federal Reserve Banks and Branches and at the
Office of the Treasurer of the United States, Washington, D.C. 20222, up to the
closing hour, 1:30 p.m., Eastern Daylight Saving time, Wednesday, May 2, 1973.
Each tender must state the face amount of bonds bid for, which must be $1,000
or a multiple thereof, and the price offered except that in the case of noncompetitive tenders the term "noncompetitive" should be used in lieu of a price. In the
case of competitive tenders, the price must be expressed on the basis of 100,
with two decimals in a multiple of .05, e.g., 100.10, 100.05, 100.00, 99.95, etc. Fractions may not be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes marked ''Tender for Treasury Bonds", which
will be supplied by Federal Reserve Banks on application therefor.
2. Commerical banks, which for this purpose are defined as banks accepting
demand deposits, may submit tenders for account of customers provided the
names of the custohaers are set forth in such tenders. Others than commercial
banks will not be permitted to submit tenders except for their own account.
Tenders will be received without deposit from banking institutions for their
own account, Federally-insured savings and loan associations, States, political
subdivisions or instrumentalities thereof, public pension and retirement and other
public funds, international organizations in :which the United States holds membership, foreign central banks and foreign States, dealers who make primary
markets in Government securities and report daily to the Federal Reserve Bank
of New York their positions with respect to Government securities and borrowings thereon, and Government accounts. Tenders from others must be accompanied by payment (in cash or the securities referred to in Section I which will be
accepted at par) of 5 percent of the face amount of bonds applied for.
3. In considering the acceptance of tenders, those at the highest prices will be
accepted in full to the extent required to attain the amount offered; provided,
however, that tenders a t the lowest of such accepted prices will be prorated if
necessary. All tenders so accepted will be allotted at the price of the lowest accepted tender. Those submitting tenders will be advised of the acceptance, and
awarded price, or the rejection of their bids. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all tenders, in whole or in
part, including the right to accept less than $650 million of tenders, and his action
in any such respect shall be final. Subject to these reservations noncompetitive
tenders for $250,000 or less will be accepted in full at the same price as accepted
competitive tenders. The price may be 100.00, or more or less than 100.00.
4. 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
bonds of this issue at a specific rate or price, until after 1:30 p.m.. Eastern Daylight Saving time, Wednesday, May 2,1973.
5. Commercial banks in submitting tenders will be required to certify that
they have no beneficial interest in any of the tenders they enter for the account of
their customers, and that their customers have no beneficial interest in the banks'
tenders for their own account.
EXHIBITS
187
IV. P A Y M E N T
1. Payment for accepted tenders must be made or completed on or before
May 15, 1973, at the Federal Reserve Bank or Branch or at the Office of the
Treasurer of the United States, Washington, D.C. 20222, in cash, securities referred to in Section. I (interest coupons dated May 15, 1973, should be detached)
or other funds immediately available by that date. Paynient will not be deemed to
have been completed where registered bonds are requested if the appropriate
identifying number as required on tax returns and other documents submitted
to the Internal Revenue Service (an individual's social security number or an
employer identification number) is not furnished. In every case where full payment is not completed, the payment with the tender up to 5 percent of the
amount of bonds allotted shall, upon declaration made by the Secretary of the
Treasury in his discretion, be forfeited to the United States. When paynient is
made with securities, a cash adjustment will be made to or required of the bidder
for any diff'erence between the face amount of securities submitted and the
amount payable on the bonds allotted,
v . A S S I G N M E N T OF REGISTERED
SECURITIES
1. Registered securities tendered as deposits and in payment for bonds allotted
hereunder are not required to be assigned if the bonds are to be registered in the
same names and forms as appear in the registrations or assignments of the securities surrendered. Specific instructions for the issuance and delivery of the
bonds, signed by the owner or his authorized representative, must accompany the
securities presented. Otherwise, the securities should be assigned by the registered payees or assignees thereof in accordance with the general regulations
governing United States securities, as hereinafter set forth. Bonds to be registered in names and forms different from those in the inscriptions or assignments
of the securities presented should be assigned to "The Secretary of the Treasury
for 7 percent Treasury Bonds of 1993-98 in the name of (name and taxpayer
identifying number)." If bonds in coupon form are desired, the assignment should
be to "The Secretary of the Treasury for 7 percent coupon Treasury Bonds of
1993-98 to be delivered to
" Securities tendered in payment should be surrendered to the Federal Reserve Bank or Branch or to the
Office of the Treasurer of the United States, Securities Division, Washington,
D.C. 20222. The 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 tenders, 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 bonds on full-paid tenders allotted, and
they may issue interim receipts pending delivery of the definitive bonds.
2. The Secretary of the Treasury may at any time, or from time to time, prescribe supplemental or. amendatory rules and regulations governing the offering,
which will be communicated promptly to the Federal Reserve Banks.
GEORGE P. SHULTZ,
Secretary of the Treasury.
506-171—73
15
00
GO
Summary of inforination pertaining io Treasury honds issued during fiscal year 1973
Date of
preliminary
announcement
July 26
Concurrent
offering
- circular
No.
Date
Department
circular
9-72 July 27
Dec. 28 13-72 Dec. 29 .
1973
Apr. 25
1973
4-73 Apr. 26
Treasury bonds issued for exchange or for cash
7-72,8-72 63^ percent of 1984 at 99.40 for cash i and in exchange for 2...
5 percent Series E-1972 notes matming Aug. 15,1972
4 percent bonds maturing Aug. 15,1972
2K percent bonds matming Sept. 15,1972
6 percent Series F-1972 notes maturing Nov. 15,1972
2}^ percent bonds matming Dec. 15,1972
b% percent Series A-1974 notes matming Nov. 15,1974
3J>^ percent bonds maturing Nov. 15,1974
~
5M percent Series A-1975 notes matming.Feb. 15,1975
bVs percent Series E-1975 notes matming Feb. 15,1975
&% percent of 1993 at 99.50 for cash ^..
3-73 7 percent of 1993-98. at 98.75 for cash s.
1 Cash subscriptions for $10,000 or less were accepted only from natural persons in
their own right.
2 See Department Circular No. 9-72 in this exhibit for provisions regarding payment
and optional recognition of gain or loss for Federal income tax pm-poses.
3 Individuals exchanging registered securities were permitted tosubmit subscriptions
until Aug. 4.
Date of
issue
Date of
matmity
Date
subscription
books
closed
or tenders received
Allotment
payment
date on
or before (or
on later
allotraient)
O
•o
1972
1972
1972
Aug. 15 Aug. 15,1984 Aug. 23 Aug. 15
tn.
a,
o
> •
1973.
1973
1973
. Jan. 10' Feb. 15,1993 Jan. 4 Jan. 10
May 15 May 15,19986 May" 2 May
o
15
4 Provisions for tenders, allotments, pricing and pajmient were similar to Department Circular No. 4-73 reproduced in this exhibit.
5 See Department Circular No, 4-73 in this exhibit for provisions regarding tenders,
allotments, pricing and payment.
6 Callable on and after May 16,1993.
(72
i
EXHIBITS
189
ExMbit 3.—Treasury bills
During the fiscal year there were 52 weekly issues of 13-week and 26-week bills
(the 13-week bills represent additional amounts of bills with an original maturity of 26 weeks), 11 monthly issues with maturities from 341 to 365 days, and
four 9-nionth issues (the 9-niontli bills represent additional amounts of bills with
a n original niaturity of 1 y e a r ) , a n d two issues of t a x anticipation series. A press
release inviting tenders is reproduced in this exhibit and is representative of all
such releases. Also reproduced is a press release which is representative of
releases announcing the results of offerings. Following the press releases is a
table of d a t a for each issue during the fiscal year.
P R E S S R E L E A S E OF J U N E 5, 1973
The Treasury Department, by this public notice, invites tenders for two series
of Treasury bills to the aggregate amount of $4,200,000,000, or thereabouts, fo^*
cash a n d in exchange for Treasury bills m a t u r i n g J u n e 14, 1973, in the amount
of $4,302,365,000 as follows :
91-day bills (to niaturity d a t e ) to be issued J u n e 14, 1973, in the amount,
of $2,500,000,000, or thereabouts, representing an additional aniount of bills
dated March 15,1973, and to m a t u r e Septeniber 13,1973 (CUSIP No. 912793 RIJ2)
originally issued in the amount of $1,801,040,000, the additional and original
bills to be freely interchangeable.
182-day biUs, for $1,700,000,000, or thereabouts, to be dated J u n e 14, 1973and to m a t u r e December 13,1973 ( C U S I P No. 912793 S H O ) .
The bills of both series will be issued on a discount basis under competitive
and noncompetitive bidding a s hereinafter provided, and at niaturity their face
amount will be payable without interest. They will be issued in bearer form only,
a n d in denoniinations of $10,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000
(niaturity v a l u e ) .
Tenders will be received a t F e d e r a l Reserve Banks and Branches up to the closing hour, one-thirty p.m., E a s t e r n Daylight Saving time, Monday, J u n e 11, 1973.
Tenders will not be received a t the Treasury Department, Washington. Each tender must be for a minimum of $10,000. Tenders over $10,000 must be in multiples
of $5,000. I n 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. I t is urged t h a t 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 (iwn
account. Tenders will be received without deposit from incorporated banks and
t r u s t companies and from responsible and recognized dealers in investment
securities. Tenders from others must be accompanied by paynient of 2 percent
of the face amount of Treasury bills applied for, unless the tenders a r e accompanied by an express g u a r a n t y of payment by an incorporated bank, or trust
company.
Immediately after the closing hour, tenders will be opened a t the Federal
Reserve Banks and Branches, following which public announcement will be made
by the Treasury D e p a r t m e n t of the aniount and price range of accepted bids.
Only those submitting competitive tenders will be advised of the acceptance or
rejection thereof. The Secretary of the Treasury expressly reserves the right to
accept or reject any or all tenders, in whole or in part, and his action in any
such respect shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stat.ed price from any one bidder will
be accepted in full a t 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
J u n e 14, 1973, in cash or other immediately available funds or in a like face
amount of Treasury bills m a t u r i n g J u n e 14, 1973. Cash and exchange tenders will
receive equal treatment. Cash adjustments will be made for differences between
the p a r value of m a t u r i n g bills accepted in exchange and the issue price of the
new bills.
Under Sections 454(b) and 1221(5) of the I n t e r n a l Revenue Code of 1954
the amount of discount a t which bills issued hereunder are sold is considered to
190
1973 REPORT OF THE SECRETARY OF THE TREASURY
accrue when the bills are sold, redeemed or otherwise disposed of, and the bills
are excluded from consideration as capital assets. Accordingly, the owner of
Treasury bills (other- than life insurance companies) issued hereunder must
include in his income tax return, as ordinary gain or loss, the difference between
the price paid for the bills, whether on original issue or on subsequent purchase,
and the amount actually received either upon sale or redemption at maturity
during the taxable year for which the return is made.
Treasury Departnient 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 Reserve Bank or Branch.
PRESS RELEASE OF JUNE 11,1973
The Treasury Departnient announced that the tenders for two series of Treasury bills, one series to be an additional issue of the bills dated March 15, 1973,
and the other series^ to be dated June 14, 1973, which were invited on June 5,1973,
were opened at the Federal Reserve Banks today. Tenders were invited for
$2,500,000,000, or thereabouts, of 91-day bills and for $1,700,000,000, or thereabouts, of 182-day bills. The details of the two series are as follows :
91-day T r e a s u r y bills
m a t m i n g Sept. 13, 1973
182-day T r e a s u r y bills
m a t u r i n g D e c . 13, 1973
R a n g e of accepted c o m p e t i t i v e b i d s
Approximate •
equivalent
anjiual r a t e
Price
High
Low
Average
-.-.
.
.....
•
..
1 98.213
98.186
3 gg. 198
Percent
7.069
7.176
4 7.129
Price
Approximate
equivalent
amiual r a t e
Percent
' 7.137
7.184
4 7.172
2 96. 392
96. 368
5 96. 374
1 E x c e p t one t e n d e r of $1,320,000.
2 E x c e p t one t e n d e r of $200,000.
3 37 percent of t h e a m o u n t of 91-day bills bid for at t h e low price w a s accepted.
4 T h e s e rates are on a b a n k discount basis. T h e e q u i v a l e n t coupon yields are 7.36 percent for t h e 91-day
bills, a n d 7.55 percent for t h e lS2-day bills.
s 67 percent of t h e a m o u n t of 182-day bills bid for a t t h e low price w a s accepted.
Total tenders applied for and accepted hy Federal Reserve districts
District
l:Joston
NewYork
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. L o u i s . . .
Minneapolis.
.Kansas C i t y
Dallas
San Francisco
A p p l i e d for
....
;..
Total-.
$32,460,000
2,927,170,000
42,260,000
31,320,000
28,715,000
24,655,000
213,370,000
39,085,000
13,465,000
55,925,000
38,805,000
130,890,000
3,578,100,000
Accepted
Applied for
$22,460,000
2,038, 740, 000
27,260,000
31,320,000
' 15,455,000
24,655,000
156,905,'000
31,565,000
11,465,000
43,925,000
18,730,000
78.390,000
$15, 050, 000
2,618, 860, 000
26,315, 000
49,110, 000
16,795; 000
15,515,000
205,325,000
67,015,000
13,810,000
32,100,000
31,155,000
122,890,000
I 2,500,870, 000
3,213, 940, 000
1 I n c l u d e s $281,150,000 n o n c o m p e t i t i v e tenders accepted a t t h e average price of 98.198.
2 I n c l u d e s $150,315,000 n o n c o m p e t i t i v e tenders accepted a t t h e average price of 96.374.
Accepted
$5,045,000
1,484,840,000
6,315, 000
29,110, 000
9,395,000
14, 715, 000
59,565,000
21,515,000
8,950,000
19,525,000
12,830,000
28, 550,000
2 1,700,355,000
Summary of information pertaining to Treasury hills issued during ihe fiscal year 1973
[Dollar amounts in thousands]
Maturity value
Date of
issue
Date of
matmity
Days
to
maturity 1
Prices and rates
Tenders accepted
Total
appUed for
Total
accepted
On
competitive
basis
Total bids accepted
On noncompetitive
basis
Average
price
per
hundred
Equivalent
average
rate
(percent)
Competitive bids accepted
High
Price per
hundred
Low
Equivalent rate
(percent)
Price per
hundred
(percent)
Equivalent rate
(percent)
Amount
maturing
on issue
date of
new
offering
REGULAR W E E K L Y
1972
6 Oct. 5, 1972
91
6 Jan. 4, 1973
182
13 Oct. 12, 1972
91
13 Jan. 11, 1973
182
20 Oct. 19, 1972
91
20 Jan. 18, 1973
182
27 Oct. 26, 1972
91
27 Jan. 25, 1973
182
Aug. 3 Nov. 2, 1972
91
3 Feb. 1, 1973
182
10 Nov. 9, 1972
91
10 Feb. 8, 1973
182
17 Nov. 16, 1972
91
17 Feb. 15, 1973
182
24 Nov. 24, 1972
92
24 Feb. 22, 1973
182
31 Nov. 30, 1972
91
31 Mar. 1, 1973
182
Sept. 7 Dec. 7, 1972
91
7 Mar. 8, 1973
182
14 Dec. 14, 1972
91
14 Mar. 15, 1973
182
21 Dec. 21, 1972
91
21 Mar. 22, 1973
182
28 Dec. 28, 1972
91
28 Mar. 29, 1973
182
See footnotes at end of table.
July
$3,774,430
3,316,355
3, 523, 685
3,040, 265
3,844, 525
3,049, 705
3, 722,880
3, 707,480
3, 617,995
3,159,860
3, 741, 855
3,070,810
3,891, 280
3,201, 605
3, 660,975
3,337, 740
3, 751, 615
3,484, 300
3, 657, 770
3, 682,865
4,391,480
3,391,875
4,113,940
3, 659,415
4, 246, 980
3, 551, 750
$2, 297,430
1, 799,115
2,300,876
1,801,425
2,300,550
1, 799,955
2,301,210
1,800,400
2,301,125
1,800,035
2.299, 060
1, 800,830
2,301,145
1,800,285
2,301, 775
1.800, 540
2.301, 295
1.801, 810
2,422, 520
1,801,200
2.302, 200
1,800,810
2,300,860
1,801,825
2.300, 670
1,800, 615
12,140, 645
1, 716,440
2,120, 615
1, 703, 715
2,116, 620
1, 718,120
2,132, 720
1,710,005
2,141, 280
1, 716, 095
2,136,320
1, 726,440
2,129, 060
1, 728,660
2,137, 780
1, 735, 655
2,136,890
1, 728,860
2, 270,355
1, 732,945
2,097,860
1, 714, 725
2, 098, 210
1, 701, 220
2,112,405
1, 711, 720
$156, 785
82,675
180,260
97, 710
183, 930
81,835
168,490
90,395
159,845
83,940
162, 740
74,390
172,085
71,625
163,995
64,875
164,405
72,950
162,165
68,255
204,340
86,085
202,640
100,605
188,165
88.895
98. 954
97. 630
98. 963
97. 672
99. 002
97. 748
98. 977
97. 682
99. 041
97. 827
99. 007
97. 760
99.000
97. 743
98. 963
97. 663
98. 905
97. 564
98. 845
97. 504
98. 797
97.435
98. 829
97.423
98. 826
97.353
4.139
4.689
4.103
4.605
3. 949
4.455
4.046
4.586
3.795
4. 298
3.928
4.431
3.955
4.465
4.056
4.624
4.331
4.819
4.567
4. 937
4.759
6. 074
4.632
5.098
4.644
5.236
2 98. 971
97. 716
98. 974
97. 699
2 99. 015
2 97. 774
98. 990
97. 688
99. 053
97. 848
99. 026
2 97. 782
99. 010
2 97. 754
98. 983
2 97. 693
2 89. 918
97. 584
2 98. 856
97. 513
2 98.805
97.449
98. 847
97.460
98.831
97. 370
4.071
4.518
4.059
4.551
3.897
4.403
3.996
4.573
3.746
4.257
3.853
4.387
3.916
4.443
3.980
4.563
4.280
4.779
4.526
4.919
4.724
5.046
4.561
5.024
4.625
5.202
98. 943
97. 612
98. 954
97. 654
98. 996
97. 730
98. 973
97. 673
99.032
97. 810
99. 001
97. 748
98. 994
97. 725
98. 953
97. 646
98.894
97. 546
98.832
97. 486
98. 794
97. 421
98. 824
97. 415
98. 820
97.345
4.182
4.724
4.138
4.640
3. 972
4.490
4.063
4.603
3.829
4.332
3.952
4.455
3. 980
4.500
4.097
4.656
4.375
4.854
4.621
4.973
4. 771
5.101
4.652
5.113
4.668
5.252
3 $2, 301, 380
1, 601, 305
2,301, 305
1,600,200
2,301,100
1, 600,815
2,300,102
1, 603,210
2,301, 260
1, 600,025
2, 300, 750
1, 600,175
2, 300, 596
1, 800,540
2, 299,670
1, 802, 700
2,301, 555
1, 796,105
2,301,440
1, 800,315
2, 300, 540
1, 800,670
2, 300, 725
1,800,975
2,300,415
1, 804,906
CO
CO
to
Summary of information pertaining to Treasury hills issued during the fiscal year 1973—Continued
[Dollar amounts in thousands]
Maturity value
Date of
issue
Date of
maturity
Days
to
maturity 1
Prices and rates
Tenders accepted
Total
applied for
Total
accepted
On
competitive
basis
Total bids accepted
On noncompetitive
basis
Average
price
per
hundred
Equivalent
average
rate
(percent)
Amount
maturing
Competitive bids accepted
High
Price per
hundred
Low
Equivalent rate
(percent)
Price per
hundred
Equivalent rate
(percent)
date of
new
offering
o
o
REGULAR WEEKLY
Oct. 5
5
12
12
19
19
26
26
Nov. 2
2
9
9
16
16
24
24
30
30
Dec. 7
7
14
- 14
21
21
28
28
1973Jan.
Apr.
Jan.
Apr.
Jan.
Apr.
Jan.
Apr.
Feb.
May
Feb.
May
Feb.
May
Feb.
May
Mar.
May
Mar.
Jrnie
Mar.
June
Mar.
June
Mar.
June
in
4
5
11
12 .
18
19
25
26
1
3
8
10
15
17
22
24
1
31
8
7
15
15
22
21
29
28
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
$3, 638,330
3,682,200
3, 804,250
4, 070,176
4,111,070
3,762,905
3, 741,595
3, 653, 055
4,036, 260
3,863, 605
3,885, 615
3, 875, 695
3,926,025
3, 906, 720
3, 671, 610
3,806, 620
4,261,230
3,510,850
3, 686,365
3,362,960
4,470,185
3, 251,900
3, 700,560
3, 623,830
3, 702,175
3, 546,130
$2,300,265
1,800,476
2,301,905
1,802,170
2,280, 635
1,800,300
2,300,800
1,800, 705
2,400, 740
1,901,176
2,400,715
1,901,370
2,402,290
1,901, 200
2, 401,660
1,900,550
2,399,875
1,902,736
2,404,31,5
1,896,515
2,402,045
1,901,63;o
2,405,4i0
1,906,870
2,404,505
1,903,160
$2,122,250
1, 699, 230
2,139,016
1, 712,955
2,087,250
1, 687, 675
2,131,015
1, 712, 645
2,223,345
1,810,215
2,232,490
1,814,326
2,232, 200
1,808,700
2, 241,020
1,811,595
2, 243, 790
1,802,400
2,226,670
1^, 798, 586
2,2111, 630
1, 782,410
2,239, 690
1, 797,985
2, 222, 785
1, 798, 560
$178,015
101, 245
162, 890
89, 215
193,385
112, 626
169, 785
88, 060
177, 395
90, 980
168, 225
87, 045
170, 090
92, 500
160,530
88,955
166, 085
100,335
177,645
- 97,930
190,415
119, 220
165,720
107,885
181, 720
104,600
98.837
97.431
98.801
97. 392
98.782
97.408
98.809
97. 419
98. 795
97. 401
98.820
97. 494
98. 793
97. 437
98.803
97. 461
98. 766
97.382
98. 750
97. 356
98. 711
97.316
98. 714
97.322
98. 708
97.314
4. 599
6.081
4.743
5.159
4.817
5.128
4.712
5.106
4.766
6.141
4.670
4.958
4. 774
6.070
4.775
5.060
4. 885
5.179
4.944
5.229
5.100
5.309
5.089
5.298
5.111
5.312
98.852
97. 434
2 98. 819
97. 406
98.790
97.418
98.819
2 97. 428
98. 802
2 97. 410
98. 832
2 97. 509
98. 802
97. 450
98.817
97. 482
98. 776
2 97. 390
98. 762
97.378
98. 713
2 97.326
98. 723
97.346
98. 712
2 97. 332
4.542
5.076
4.672
5.131
4.787
5.107
4.672
5.087
4. 739
5.123
4.621
4.927
4. 739
5. 044
4.732
5.008
4.842
5.163
4.898
5.186
5.091
5.289
5.062
6.250
5. 095
5.277
98.831
97.420
98. 797
97. 388
98. 777
97.397
98.803
97.412
98. 789
97. 393
98. 814
97. 482
98. 789
97. 431
98. 801
97. 453
98. 760
97. 372
98. 743
97. 349
98. 707
97. 304
98. 709
97. 316
98. 701
97.309
4.625
5.103
4.769
6.167
4.838
5.149
4.735
5.119
4.791
6.157
4. 692
4.981
4.791
5.082
4.793
5.068
4. 905
5.198
4.973
6.244
5.115
5.333
6.107
6.309
5.139
5. 323
$2,297,430
1,800,340
2,300,875
1, 800, 826
2,300,550
1,800,855
2,301, 210
1,800, 500
2,301,125
1,800,630
2, 299,080
1, 800, 365
2,301,145
1,800,580
2,30.1,775
1,800,905
2,301,296
1,801,496
'2,422, 520
1,800,205
2,302,200
1,801, 695
2,300,855
1,802,075
2,300, 570
1. 799, 460
o
>
o
>
d
Jan.
4
4
11
11
18
18
25
25
Feb. 1
1
Mar.
16
15
22
22
29
29
Apr. 5
5
12
12
19
19
26
26
May 3
3
10
10
17
17
24
24
31
31
Apr.
July
Apr.
July
Apr.
July
Apr.
July
May
Aug.
May
Aug.
May
Aug.
May
Aug.
May
Aug.
June
Sept.
June
Sept.
June
Sept.
June
Sept.
July
Oct.
July
Oct.
July
Oct.
July
Oct.
Aug.
Nov.
Aug.
Nov.
Aug.
Nov.
Aug.
Nov.
Aug.
Nov.
5
5
12
12
19
19
26
26
3
2
10
9
17
16
24
23
31
30
7
6
14
13
21
20
28
27
5
4
12
11
19
18
26
26
2
1
9
8
16
16
23
23
30
29
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91
182
91.
182
91
182
2,402,315
3,639,375
3,248, 515
1,901,105
3, 762,440
2,402,790
3,581,855
1,901, 780
3,512,325,
2,401,150
3,674,820
1,902,100
3,961,550
2,400,125
3,953,265
1,901,115
2,401,976
3, 778,090
4, 645,525
1,800,886
3,822,895
2,401,900
3, 516, 790
1,800,965
3,513, 695
2,403,135
3,167,170
1,802,910
3,268,770
2,400,690
2, 799. 225
1,801,175
3,471, 725
2,401,115
3,086, 985
1,800,425
3, 610,375
2,390,855
3,255, 296
1,800,490
3,416, 675
2,400, 736
2,802, 560
1,801, 040
3,467,400
2,400,445
4, 686, 605 . 1,801,355
3, 657, 630
2,401,830
4, 624,340
1,806, 600
3,891,420
2,401,420
4, 239,430
1,800,975
4,099,440
2,400,800
3,431,386
1,800,695
4,172,125
2,402,215
3,760,020
1,800,340
3,471, 670
2,398,610
3,839,075
1,799,345
3,862,100
2,501,000
3,615,790
1,800,645
4,375,950
2,504,460
3, 619,070
1,801,695
3,788,720
2,500,660
3, 552, 260
1, 692,666
3,454,085
2,501,105
3,262,990
1,700,965
3, 452,155
2, 501,980
3, 564,460
1,702,030
2,234,620
1,819,190
2, 217,935
1, 799,880
2, 209,180
1, 795, 700
2, 204,970
1, 796, 205
2,206,335
1, 702,205
2, 202,950
1, 712,980
2, 236,080
1,729,620
2,228,520
1, 733, 715
2,217, 570
1, 707, 780
2,191,770
1, 707,976
2,184,005
1, 688,430
2,184, 230
1, 684, 885
2,179,120
1, 683, 265
2,171,320
1,664,015
2,168,455
1,639,180
2,178,125
1,678,840
2,188,140
1,691,700
2, 276,930
1,687,720
2, 280, 235
1,696,120
2,300,680^
1, 586,836
2, 279,855
1,603,036
2, 294,935
1, 590,625
167,695
81,915
184,855
101,900
191,970
106,400
196,155
104,910
195,640
98,680
198,950
87,986
167,055
73, 290
172,170
67,460
183,545
92,645
199,085
92,515
216, 730
112, 610
216,215
116,470
222, 710
123,335
230,100
146,960
232,345
161,615
224,090
121, 500
210,470
107,646
224,070
112,925
224, 225
106, 675
199,980
106,830
221, 250
97,920
207,046
111,405
98. 695
97. 272
98.697
97. 264
98. 665
97.199
98. 576
97.088
98.662,
97.032
98.568
97.043
98. 629
97.167
98. 621
97.142
98.631
96. 944
98. 514
96. 829
98. 484
96. 744
98. 399
96.583
98. 420
96.647
98. 349
96.555
98. 436
96.831
98.436
96.770
98. 420
96.648
98. 413
96. 676
98.449
96. 749
98.438
96. 736
98.369
96. 570
98.308
96. 530
5.164
6.397
6.154
5.413
6. 277
5.541
6.634
6. 759
6.688
5.870
5.665
6.849
5.423
5.623
6.457
5.654
6.812
6.044
5.879
6.272
5.998
6.441
6. 333
6.760
6. 252
6.633
6.630
6.815
6.187
6.269
6.187
6.388
6.250
6.631
6.277
6.574
6.136
6.431
6.180
6.457
6.453
6.747
6.693
6.864
98. 703
97. 294
98. 705
97. 274
98. 678
97. 206
98. 589
2 97. 094
2 98.668
97.038
98. 678
97.058
98. 647
2 97.182
98. 640
97.170
2 98. 546
2 96.970
98. 534
2 96. 872
98. 609
2 96. 778
2 98. 414
96.690
98.430
96. 657
98. 367
96.585
98. 452
96.854
98.443
2 96. 778
98. 435
2 96. 664
98.433
96. 700
98.455
96. 758
98. 462
2 96.761
2 98. 395
2 96. 602
98. 332
2 96. 654
5.119
5.353
5.123
6.392
5.230
5.527
5.582
5.748
5.665
5.869
5.625
5. 819
6.363
5.574
5.380
5.598
5.766
5.993
6.800
6.187
6.893
6.373
6.274
6.745
6.211
6.613
6.460
6.755
6.124
6.223
6.160
6.373
6.191
6.599
6.199
6. 527
6.112
6.413
6.124
6.407
6.349
6. 685
6.599
6.816
98. 687
97. 260
98. 693
97.253
98.656
97.182
98.572
97.081
98.558
97. 030
98. 561
97. 030
98. 617
97.140
98. 697
97. 098
98. 522
96. 927
98. 495
96.807
98. 468
96. 715
98. 388
96. 679
98.410
96. 644
98. 341
96.548
98. 430
96. 816
98.432
96.765
98.408
96.639
98. 406
96.670
98.448
96.741
98.433
96.730
98. 368
96. 558
98. 289
96. 518
5.194
5.420
5.171
5.434
5.321
6.574
5.649
5.774
5.706
5.875
5.693
5.876
5. 471
5.667
5.550
6.740
5.847
6.078
6.964
6.316
6.061
6.498
6.377
6.787
6.290
6.638
6.563
6.828
6.211
6.298
6.203
6. 399
6. 298
6.648
6.306
6.587
6.140
6.446
" 6.199
6.468
6.496
6.771
6. 769
6.887
2,300,266
1,799,116
2,301,905
1,801,425
2,280, 636
1, 799,955
2,300,800
. 1,800,400
2,400, 740
1,800,035
2,400, 715
1,800,830.
2,402,290
1,800, 285.
2,401, 550
1,800,540
2,399,875
1, 801, 810
2, 404,316
1,801, 200
2,402,045
1, 800,810
2, 405, 410
1, 801, 825
2,404, 505
1,800, 615
2,402,316
1,800,475
2,402,790
1,802,170
2,401,150
1,800,300
2,400,125
1,800,706
2,401,975
1,901,175
2,401,900
1,901,370
. 2,403,135
1,901,200
2,400,690
1,900,560
2,401,116
1,902,735
H
O
Q
See footnotes a t end of table.
CD
CO
CO
Summary of information pertaining to Treasury hills issued during the fiscal year 1973—Continued
O
[Dollar a m o u n t s irI thousands]
W
H
Maturity value
D a t e of
issue
D a t e of
maturity
Days
to
• maturity .
Prices a n d r a t e s
T o t a l bids accepted
T e n d e r s accepted
Total
applied for
Total
accepted
On
competitive
basis
O n noncompetitive
basis
Average
price
per
hundred
Equivalent
average
rate
(percent)
C o m p e t i t i v e bids accepted
High
Price per
hundred
Low
Equivalent rate
(percent)
P r i c e per
hundred
Equivalent rate
(percent)
Amount
maturing
on issue
d a t e of
new
offering
2
w
H
i
Q
S3
REGULAR W E E K L Y
>
1973
J u n e 7 Sept.
7 Dec.
14 Sept.
14 D e c .
21 Sept.
21 D e c .
28 Sept.
28 D e c .
6
6
13
13
20
20
27
27
91
182
91
182
91
182
91
182
$3,423,545
3,398,700
3,579,595
3, 214,425
4,165,340
3,773,900
4,022,145
3,776,320
$2,501,005
1,707,440
2,602,366
1,700,840
2,501,065
1,700,870
2,503,195
1,701,130
$2,250,805
1,580,090
2, 219,720
1,660,040
2, 227,185
1, 567,795
2, 230,615
1, 556,690
$260, 200
127,360
282,646
150,800
273,880
133,075
272,580
144,440
98.197
96. 355
98.198
96.374
98.164
96. 332
98.173
96. 310
7.132
7.211
7.127
7.172
7.265
7.255
7.229
7.299
2 98. 229
2 96.386
2 98. 213
2 96. 392
2 98.177
2 96. 362
98.182
2 96. 320
7.006
7.149
7.069
7.137
7.212
7.216
7.192
7. 279
98.185
96. 350
98.186
96. 368
98.160
96.328
98.167
96. 304
7.180
7.220
7.176
7.184
7.279
7.263
7.251
7.311
$2,390,855
1,896,515
2,400,735
1,901,630
2,400,445
1,906,870
2,401,830
1,903,160
O
^
H.
^
W
fel
R E G U L A R MONTHLY
1972
J u l y 31
31
A u g . 31
31
1973
A p r . 30
J u l y 31
M a y 31
A u g . 28
273
366
273
362
$1, 525, 670
2,849,760
1,888,895
4,913, 625
$500,180
1, 200,980
600,950
1,803,370
$484,115
1,169,830
484, 275
1,770. 540
$16, 065
31,150
16, 675
32,830
96. 412
95. 014
96.178
94. 793
4. 731
4.918
5.040
5.178
96. 428
95. 043
96. 210
2 94. 831
4. 710
4. 889
4.998
5.140
96.392
95. 003
96.174
94. 771
4.758
4.929
5. 046
.5.200
$500,190
1,202,455
600, 275
1,199,890
>
w
d
^
Oct.
2 J u n e 30
2 Sept. 25
31 J u l y 31
31 Oct. 23
N o v . 30 N o v . 20
271
360
273
357
355
1,547,446
4,144, 670
1,811,040
3,342,525
3,801,035
499,895
1,800, 510
500,540
1,802,480
1,802,060
486,020
1,748,430
487,785
1,773, 295
1,772,625
13,875
52,080
12,755
29,185
29,425
95. 976
94.471
96. 039
94.726
94.847
5.346
5.529
5.223
5.318
5.226
1973
Jan.
2 Dec.
352
3,176,750
1,800,470
1,770,005
30,465
94. 782
349
349
346
344
341
3,072, 225
3, 264,740
3,011,350
3,353,400
3,936, 560
2
F e b . 28
Apr. 2
30
M a y 31
Jan.
Feb.
Mar.
Apr.
May
18
95.964
94. 450
96. 023
94. 695
94. 8'24
5.361
5.550
5.244
5.350
5.249
501,300
1, 200,730
499,905
1, 200, 265
1,700,735
96. 997
94. 523
96. 068
94.744
94. 872
5.318
5.477
5.185
6.300
5. 200
5.337
2 94.794
5.324
94.735
5.385
1,701,030
5.986
6.050
6.616
6.598
6.818
2 94. 261
94.203
93. 741
2 93. 765
93. 687
5.920
5.980
6.512
6.535
6.770
94.144
94.107
93. 606
93. 674
93. 512
6.041
6.079
6.653
6.620
6.850
1,700,320
1,700,665
1,701,930
1,700,030
1,701,130
4.721
5.089
2 98. 085
97. 236
4.690
5.000
98. 062
97.167
4.746
5.125
T/y/
15
12
12
9
7
1,803,975
1,801,085
1,790, 265
1,801,775'
1,800,435
1,760,075'
1,773,000
1,745,710
1,760,010
1,764,000
43,900
28,085
44,655
41,765
36,435
94.197
94.134
93. 642
93. 695
93.542
TAX ANTICIPATION
1972
1973
N o v . 24 A p r . 20
D e c . 5 J u n e 22
147
199
$6,366,696
5,079,135
$2,012,465
2,509,836
$1,659, 540
2,124, 250
$352,925
386,585
1 The 13-week bills are additional issues of bills with an original maturity of 26 weeks
except that when the date of matuiity of either a 13-week or a 26-week issue is on the last
day of a month, the bills are additional issues of bills with an original maturity of 1 year.
The 9-month bills are additional issues of bills with an original maturity of 1 year.
2 Relatively small amounts 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 misrepresentative.
3 In addition $204,310,000 of a strip of bills issued Mar. 6,1972, matured.
NOTE.—The usual timing with respect to weekly issues of Treasury bills is: Press
release inviting tenders, 9 days before date ofissue; and closing date for the receipt of
tenders and press release announcing results of auction, 3 days before date ofissue.
98. 072
97.187
Figures are final and may differ from those shown in the press release announcing preliminary results.
For each issue of regular weekly and monthly bills noncompetitive tenders for $200,000
or less from an y one bidder were accepted in full at the average price of accepted competitive bids. For tax anticipation bills the maximum amount for noncompetitive tenders
was $300,000 for the issue of Nov. 24 and $400,000 for the issue of Dec. 6.
All equivalent rates of discount are on a bank discount basis.
Qualified depositaries were permitted to make payment by credit in Treasury tax and
loan accounts for both issues of tax anticipation bills. Payment by such credit was not
permitted for regular weekly and regular monthly issues.
W
CO
196
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Regulations
Exhibit 4.—Department Circular No. 653, December 12, 1969, Eighth Revision,
Supplement No. 3, offering of United States savings bonds. Series E
DEPARTMENT OF TECE TREASURY,
Washington, July 19,1972.
The tables to Department Circular No. 653, Eighth Revision, dated December 12, 1969, as amended (31 CFR Part 316), are hereby supplemented by the
addition of Tables 7-A, 30-A, 31-A, 75-A and 77-x\, as set forth below.
JOHN K . CARLOCK,
Fiscal Assistant Secretary.
TABLE 7—A
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 D E C E M B E R 1, 1942, T H R O U G H M A Y 1. 1943 i
I s s u e price
Denomination..
$18.75
25.00
$37.50
50.00
$75.00
100.00
$375.00
500.00
$750.00
1,000.00
(1) R e d e m p t i o n values during each half-year period
(values increase on first d a y of period shown)
Period after second extended m a t u r i t y
(beginning 30 years after issue date)
THIRD
. First ^ y e a r . ,
2 (12/1/72)
Mto lyear
•.
(6/1/73)
I t o 13^ years
(12/1/73)
lHto2years
....(6/1/74)
2 to 2M years
(12/1/74)
2 H to 3 years
(6/1/75)
3 to 3M years
..(12/1/76)
3Hto4years
(6/1/76)
4to4Myears
(12/1/76)
4 H t o 5years
....(6/1/77)
5 t o 53^ years
(12/1/77)
5Hto6years
...(6/1/78)
6to6Myears
(12/1/78)
6>4to7years
(6/1/79)
7 to 73^ years
(12/1/79)
7M to 8 years
(6/1/80)
8 to 8 H years
...-.
(12/1/80)
83^to 9years
(6/1/81)
9 to 9M years
(12/1/81)
9 M t o 10 years
(6/1/82)
T H I R D E X T E N D E D M A T U R I T Y V A L U E (40
yearsfrom issue d a t e ) . . .
......(12/1/82)
EXTENDED
MATURITY
(2) F r o m beginning
of t h i r d extended
- m a t u r i t y period to
beginning of
each half-year
period
(3) F r o m beginning of each
half-year period
to t:'eginning of
next hall-year
period
(4) F r o m beginning of each
half-year period
to t h i r d
extended
maturity
Percent
0.00
5.49
5.51
5.50
5.50
5.50
5.50
5.60
5.50
5.50
5.50
5.50
5.50
5.60
5.60
5.50
5.50
5.50
5.50
5.50
Percent
5.49
5.52
5.48
5.61
5.60
5.48
5.50
5.51
5.51
5.48
5.51
5.50
5.49
5.50
5.51
5.49
5.49
5.51
5.50
5.49
Percent
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50 •
5.50
5.60
• 5.50
5.50
5.50
5.50
5.50
5.50
5.49
$52.86
54.31
56.81
57.34
68.92
60.64
62.20
63.91
65.67
67.48
69.33
71.24
73.20
76.21
77.28
79.41
81.59
83.83
86.14
88.51
$105.72
108.62
111.62
114.68
117.84
121.08
124.40
127.82
131.34
134.96
138.66
142.48
146.40
150.42
15^1.56
158.82
163.18
167.66
172.28
177.02
$211.44
217. 24
223. 24
229. 36
235. 68
242.16
248. 80
266. 64
262. 68
269. 92
277. 32
284.96
292. 80
300. 84
309.12
317. 61
326. 36
335. 32
344.56
354. 04
$1, 057. 20
1,086. 20
1,116.20
1,146.80
1,178. 40
1, 210. 8b
1, 244. 00
1, 278. 20
1,313.40
1,349. 60
1,386. 60
1,424.80
1, 464. 00
1, 504. 20
1, 546. 60
1, 588. 20
1,631.80
1,676.60
1, 722. 80
1, 770. 20
$2,114.40
2,172. 40
2, 232. 40
2, 293. 60
2,356. 80
2,421. 60
2,488. 00
2, 556. 40
2, 626. 80
2, 699. 20
2, 773. 20
2,849. 60
2, 928. 00
3, 008. 40
3,091. 20
3. 176. 40
3, 263. 60
3,363. 20
3, 446. 60
3, 540. 40
90.94
181.88
363.76
1,818.80
3.637.60
1 T h i s table does not a p p l y if t h e prevailing rate for Series E b o n d s being issued a t
t h e t i m e t h e t h i r d extension begins is different from 6.60 percent.
2 M o n t h , d a y , a n d year on which issues of Dec. 1, 1942, enter each period. F o r
s u b s e q u e n t issue m o n t h s a d d t h e a p p r o p r i a t e n u m b e r of m o n t h s .
PERIOD
A p p r o x i m a t e i n v e s t m e n t yield
(annual percentage rate)
X
35.50 .
3 Yield on p u r c h a s e price from issue d a t e t o t h i r d extended m a t u r i t y d a t e is 3.99
percent.
. .
CO
CD
00
TABLE 30—A
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 D E C E M B E R 1, 1952. T H R O U G H M A R C H 1. 1953'
I s s u e price
Denomination
,
S18.75
25.00
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750. 00
1,000.00
(1) R e d e m p t i o n values during each half-year period
(values increase on first d a y of period shown)
P e r i o d after first extended m a t u r i t y (beginn i n g 19 years 8 m o n t h s after issue date)
SECOND E X T E N D E D MATURITY
PERIOD
S7,500
10,000
A p p r o x i m a t e i n v e s t m e n t yield
(annual percentage rate)
(2) F r o m beginning
of second extended
- m a t u r i t y period to
beginning of
each half-year
period
(3) F r o m beginning of each
half-year period
to beginning of
next half-year
period
Percent
0.00
5.48
5.51
5.60
6.50
5.50
5.50
5.50
5.60
5.50
5.50
5.50
. 5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
Percent
5.48
5.54
5.49
5.48
6.52
5.51
5.49
5.47
- 5. 50 5:51
6.52
5. 49
5.49
5.53
5.48
5.51
5.50
5.61
5.49
6.50
(4) F r o m beginning ofeach
half-year period
to second
extended
maturity
o
o
"^
F i r s t 3^ y e a r
....2(8/1/72)
3^ to l y e a r - . . . .
(2/1/73)
•1 to I H years
-(8/1/73)
I M to 2 years
(2/1/74)
2 to 2M years
(8/1/74)
2M to 3 years
...(2/1/75)
3 to 3M y e a r s . (8/1/76)
3M to 4 years
(2/1/76)
4 to 4M y e a r s . - - . . . . - - . . . . = . . - . . . . . ( 8 / 1 / 7 6 )
4 H to 6 years
(2/1/77)
5 to 5M years
(8/1/77)
5M to 6 years
(2/1/78)
6 to 6M y e a r s (8/1/78)
6M to 7 y e a r s (2/1/79)
7 to 7M years
-.
(8/1/79)
7M to 8 years
.
(2/1/80)
8 to 8M years
(8/1/80)
8Mto9years-i
(2/1/81)
9 to 9 H years
(8/1/81)
9 H to 10 years
(2/1/82)
SECOND
EXTENDED
MATURITY
V A L U E (29 years a n d 8 m o n t h s from i s s u e
date)
(8/1/82)
$38. 67
39.73
40.83
41.95
43.10
44.29
45.51
46.76
48.04
49.36
60.72
52.12
53.55
55.02
56.54
58.09
59.69
61.33
63.02
64.75
$77.34
79.46
81.66
83.90
86.20
88.58
91.02
93.52
96.08
98. 72
101. 44
104. 24
107. 10
110.04
113. 08
116.18
119. 38
122. 66
126.04
129. 50
$154.68
158. 92
163. 32
167. 80
172. 40
177.16
182.04
187.04
192.16
197. 44
202. 88
208. 48
214. 20
220. 08
226.16
232.36
238. 76
245. 32
262. 08
259. 00
$309.36
317.84
326.64
335. 60
344. 80
354. 32
364.08
374. 08
384.32
394. 88
406. 76
416. 96
428. 40
440.16
452. 32
464. 72
477. 52
490.64
504.16
518. 00
$773. 40
794. 60
816. 60
839. 00
862. 00
885. 80
910. 20
935. 20
- 960. 80
987. 20
1, 014. 40
1,042. 40
1, 071.
1,100.
1,130.
1,161.
1,193.
1, 226.
1, 260.
1, 295.
$1, 546. 80
1, 589. 20
1, 633. 20
1, 678. 00
1, 724. 00
1, 771. 60
1, 820. 40
1, 870. 40
1, 921. 60
1, 974. 40
2, 028. 80
2, 084. 80
142. 00
200. 80
261. 60
323. 60
387. 60
453. 20
520. 80
590. 00
$15, 468
15,892
16, 332
16, 780
17, 240
17, 716
18,204
18,704
19,216
19,744
20, 288
20, 848
21,420
22,008
22, 616
23, 236
23, 876
24, 532
25, 208
25, 900
66.53
133.06
266.12
532.24
1,330.60
2,661.20
26,612
1 T h i s table does not a p p l y if t h e prevailing rate for Series E b o n d s being Issued
a t t h e t i m e t h e second extension begins is different from 6.50 percent.
2 M o n t h , d a y , and year on which issues of Dec. 1, 1952, enter each period. F o r
s u b s e q u e n t issue m o n t h s a d d t h e a p p r o p r i a t e n u m b e r of m o n t h s .
Percent
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.49
5.50
3 5.50 .
3 Y^ield on p u r c h a s e price from issue d a t e to second extended m a t u r i t y d a t e is 4.31
percent.
H
HH
CO
Q
>
O
TABLE 31~-A
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 A P R I L 1, T H R O U G H M A Y 1. 1953 i
I s s u e price
Denomination
$18.75
25.00
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1,000.00
(1) R e d e m p t i o n values d u r i n g each half-year period
(values increase on first day of period shown)
P e r i o d after first extended m a t u r i t y ( b e g i n n i n g 19 years 8 m o n t h s after issue date)
F i r s t H year
H to l y e a r
1 t o IM years
I M t o 2 years
2 to 2M years
2M to 3 years
3 t o 3M years
3M t o 4 y e a r s
4 to 4M years
4M to 5 years
6 to 5M years
5M to 6 years
6 t o 6M years
6M to 7 years
7 to 7M years
7M to 8 years
8 to 8M years
8M t o 9 y e a r s . . . . .
9 to 9M years
9M to 10 years
SECOND E X T E N D E D MATURITY
2 (12/1/72)
(6/1/73)
(12/1/73)
(6/1/74)
(12/1/74)
(6/1/75)
(12/1/76)
(6/1/76)
(12/1/76)
(6/1/77)
(12/1/77)
(6/1/78)
(12/1/78)
(6/1/79)
(12/1/79)
(6/1/80)
(12/1/80)
(6/1/81)
(12/1/81)
(6/1/82)
$38. 96
40.03
41.13
42.26
43.43
44.62
45.85
47.11
48.40
49.73
61.10
52.51
53.95
65.43
56.96
58.53
60.14
61.79
63.49
65.23
$77. 92
80.06
82.26
84.52
86.86
89.24
91.70
94.22
96.80
99.46
102. 20
105. 02
107.90
l i e . 86
113. J l
117. 06
120.28
123. 58
126. 98
130. 46
$165.84
160.12
164.62
169. 04
173. 72
178. 48
183.40
188.44
193.60
198. 92
204.40
210. 04
215. 80
221.72
227.84
234.12
240. 56
247.16
263. 96
260. 92
$311. 68
320.24
329. 04
338. 08
347.44
366. 96
366. 80
376.88
387. 20
397. 84
408.80
420. 08
431. 60
443. 44
456.68
468.24
481.12
494.32
507. 92
521. 84
SECOND
EXTENDED
MATURITY
V A L U E (29 years a n d 8 m o n t h s from
issue date)
(12/1/82)
67.03
134.06
268.12
536.24
:
i T h i s table does n o t a p p l y if t h e prevailing rate for Series E b o n d s being issued a t
t h e t i m e t h e second extension begins is different from 5,60 percent.
2 M o n t h , d a y , a n d year on w h i c h issues of A p r . 1, 1963, enter each period. F o r
s u b s e q u e n t issue m o n t h s a d d t h e a p p r o p r i a t e n u m b e r of m o n t h s .
PERIOD
$779. 20 $1, 558.40
800.60 1,601. 20
822.60 1,645. 20
845. 20 . 1,690.40
868.60 1, 737. 20
892. 40 1,784. 80
917. 00 1,834. 00
942. 20 1,884.40
968.00 1,936. 00
994.60 1, 989. 20
1,022.00 2,044.00
1,050. 20 2,100. 40
1,079. 00 2,158. 00
1,108. 60 2,217. 20
1,139. 20 2,278. 40
1,170. 60 2,341. 20
1, 202. 80 2,406. 60
1, 235. 80 2,471. 60
1,269. 80 2, 539. 60
1,304. 60 2,609.20
1,340.60
2.681.20
A p p r o x i m a t e i n v e s t m e n t yield
(armual percentage rate)
$7,500
10,000
(2) F r o m beginning
of second e x t e n d e d
- m a t u r i t y period to
b e g i n i n n g of
each half-year
period
$15, 684
16, 012
16,452
16,904
17,372
17,848
18,340
18,844
19,360
19,892
20,440
21,004
21,580
22,172
22,784
23,412
24,066
24,716
26,398
26,092
26.812
(3) F r o m beginning of each
half-year period
to b e g i n n i n g of
next half-year
period
Percent
5.49
5.50
5.49
5.54
5.48
5.51
5.50
5.48
5.50
5.61
5.52
5.48
6.49
5.62
5.61
5.50
5.49
5.50
5.48
5.52
Percent
0.00
6.49
5.49
5.49
5.51
5.50
5.50
5.50
5.50
5.5a
5.50
5.50
5.50
5.50
\50
5.50
5.50
5.50
5.50
5.50
(4) F r o m b e g i n ning of each
half-year p e r i o d
to second
extended
maturity
Percent
5.50
5.50
5.50
5.50
5.50
6.50
6.50
5.50
5.60
5.50
5.50
5.60
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.62
02
35.50 .
3 Yield on p u r c h a s e price from issue d a t e to second extended m a t u r i t y d a t e is 4.34
percent.
CO
CO
O
o
TABLE 75—A
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 D E C E M B E R 1. 1964, T H R O U G H M A Y 1, 1965 i
I s s u e price
Denomination. _
$18.75
25.50
$37.50
50.00
$56.25.
75.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1,000.00
(2) F r o m beginning of e x t e n d e d
- m a t u r i t y period to
beginning of
each half-year
period
EXTENDED MATURITY
$26. 25
26.97
27.71
28.48
29.26
30.06
30.89
31. 74
32.61
33.61
34. 43
36.38
36.35
37.35
38.38
39.43
40.52
41.63
42.78
43.95
$52. 50
53.94
56.42
56.96
58.62
60.12
61.78
63.48
65.22
67. 02
68.86
70.76
72.70
74.70
76.76
78.86
81.04
83.26
86.66
87.90
45.16
90.32
$78. 75 $105. 00 $210. 00
107. 88
215. 76
80.91
221. 68
83.13
110. 84
86.44
113. 92
227. 84
234. 08
117.04
87.78
120. 24
240. 48
90.18
247.12
92.67
123. 56
96.22
126. 96
263. 92
130. 44
260. 88
97.83
134. .4
100.53
268. 08
137. 72
275. 44
103. 29
283.04
106.14
141. 52
109. 05
145. 40
290. 80
112. 05
298. 80
149.40
115.14
163. 52
307. 04
157.-72
315. 44
118. 29
121. 66
162. 08
324.16
333. 04
124. 89
166. 52
342. 24
171.12
128.34
131. 85
361. 60
175.80
135.48
180.64
361.28
1 T h i s table does n o t a p p l y if t h e prevailing rate for Series E b o n d s being issued a t
t h e t i m e t h e extension begins is different from 6.60 percent.
2 M o n t h , d a y a n d year on w h i c h issues of Dec. 1, 1964, enter each period. F o r s u b s e q u e n t issue m o n t h s a d d t h e a p p r o p r i a t e n u m b e r of m o n t h s .
PERIOD
$625. 00 $1, 050. 00
639. 40 1, 078. 80
564. 20 1,108. 40
569. 60 1,139. 20
585. 20 1,170. 40
601. 20 1,202. 40
617. 80 1,235. 60
634. 80 1,269. 60
652. 20 1,304. 40
670.20 1,340.40
688. 60 1,377. 20
707. 60 1,415. 20
727. 00 1,454. 00
747. 00 1,494.00
767. 60 1,535. 20
788. 60 1,577. 20
810. 40 1,620.80
832. 60 1,665.20
855. 60 1,711.20
879. 00 1,758.00
903.20
1,806.40
(3) F r o m beginn i n g of each halfy e a r period to
beginning of
n e x t half-year
period
(4) F r o m beginning ofeach halfyear period t o
extended m a t u r i t y
Percent
(1) R e d e m p t i o n values d u r i n g each half-year period
(values increase on first d a y of period shown)
P e r i o d after original m a t u r i t y
(beginning 7 years 9 m o n t h s
after issue date)
F i r s t i-^year
2(9/1/72)
^^ to l y e a r
(3/1/73)
1 to m years
(9/1/73)
1'^ to 2 years
(3/1/74)
2 to 21,^ years
(9/1/74)
2^^ to 3 y e a r s (3/1/76)
3 to 31,^ years
(9/1/75)
3ir^ to 4 y e a r s
(3/1/76)
4 to 41,^ y e a r s (9/1/76)
4yi to 5 years
(3/1/77)
5 t o 5 H years (9/1/77)
5]r^ to 6 years
(3/1/78)
6 to 6^^ years
(9/1/78)
61.^ t o 7 y e a r s - (3/1/79)
7 to 7}-^ years
(9/1/79)
71.^ to 8 years
(3/1/80)
8 to S H years
(9/1/80)
8}^i to 9 y e a r s (3/1/81)
9 to 91.^ years
(9/1/81)
9}.^ to 10 years
(3/1/82)
EXTENDED MATURITY
V A L U E (17 years a n d 9 m o n t h s
from i s s u e d a t e )
(9/1/82)
A p p r o x i m a t e i n v e s t m e n t yield
(annual percentage rate)
$7,500
10,000
Percent
5.49
5.49
5.56
5.48
5.47
5.62
5.60
5.48
5.62
.5.49 •
5.52
5.48
5.60
5.62
5.47
5.53
5.48
5.52
5.47
5.51
Percent
5.60
5.50
5.50
5.50
5.60
5.50
5.50
6.50
5.50
5. 50
5.50
5.50
5.60
5.60
5.50
5.50
5.49
5.50
5.49
5.51
510, 500
10, 788
11,084
11,392
11,704
12,024
12,366
12,696
13,044
13,404
13,772
14,152
14,540
14,940
15,352
15,772
16,208
16,652
17,112
17,580
18,064
0.00
5.49
5.49
6.61
5.60
5.60
5.60
5.60
5.60
5.50
5.60
5.60
5.50
5.50
5.50
5.60
5.50
5.60
5.50
5.50
O
O
35.50
3 Yield on p u r c h a s e price from issue d a t e t o e x t e n d e d raaturity d a t e is 5.01 p e r c e n t .
w
Q
>
O
>
TABLE 77—A
BONDS BEARING ISSUE DATES FROM DECEMBER 1, 1965 THROUGH MAY 1, 1966 i
Issue price
Denomination _ -
$18.75
25.00
$37.50
50.00
$56.25
75.00
$75.00
100.00
$150.00
200.00
$375.00 $750.00
500.00 1,000.00
$7,500
10,000
(2) From beginning of extended
- maturity period to
beginning of
each half-year
period
(1) Redemption values during each half-year period
(values increase on first day of period shown)
Period after original maturity (beginning 7 years after issue date)
E X T E N D E D MATURITY P E R I O D
First M year
2 (12/1/72)
M to 1 year
....(6/1/73)
1 to IM years
(12/1/73)
IM to 2 years
(6/1/74)
2 to 2M years
(12/1/74)
2M to 3 years
(6/1/76)
3 to 3M years
(12/1/76)
3,H to 4 years
(6/1/76)
4 to 4M years
(12/1/76)
4M to 5 years
(6/1/77)
5 to 5M years
(12/1/77)
5M to 6 years
-(6/1/78)
6 to 6M years
(12/1/78)
6M to 7 vears
(6/1/79)
7 to 7M years
(12/1/79)
7M to 8 years
(6/1/80)
8 to 8M years
(12/1/80)
8M to 9 years
(6/1/81)
9 to 9M years
(12/1/81)
9Mto 10 years.
(6/1/82)
EXTENDED MATURITY
VALUE (17 years from
issue date)
(12/1/82)
$25. 78
26.49
27.22
27.97
28.73
29.63
30.34
31.17
32.03
32.91
33.81
34.74
35.70
36.68
37.69
38.73
39.79
40.89
42.01
43.17
44.35
$51. 66
$77.34
62.98
79.47
54.44
81.66
66. 94 • 83.91
57.46
86.19
59.06
88.59
60.68
91.02
62.34
93. 51
64.06
96.09
66.82
98.73
67.62
101. 43
69.48
104. 22
71.40
107.10
73.36
110.04
75.38
113. 07
77.46
116.19
79.68
119. 37
81.78
122. 67
84.02
126. 03
86.34
129. 51
8.70
133.05
$103.12
106. 96
108. 88
111.88
114. 92
118.12
121. 36
124.68
128.12
131. 64
136. 24
138. 96
142. 80
146. 72
150. 76
154. 92
169.16
163. 66
168. 04
172. 68
177.40
$206. 24
211. 92
217. 76
223. 76
229.84
236. 24
242. 72
249.36
266. 24
263. 28
270. 48
277. 92
285. 60
293. 44
301. 52
309. 84
318. 32
327.12
336. 08
346. 36
354.80
1 This table does not apply if the prevailing rate for Series E bonds being issued at
the time the extension begins is different from 5.60 percent.
2 Month, day, and year on which issues of Dec. 1. 1965, enter each period. For
subsequent issue months add the appropriate number of months.
Approximate investment yield
(annual percentage rate)
(3) From beginning of each halfyear period to
beginning of
next half-year
period
(4) From beginning of each halfyear period to
extended maturity
Percent
0.00
6.61
5.51
5.51
6.49
5.51
5.50
5.50
6.60
5.60
5.60
5.60
5.50
5.60
5.50
5.50
5.60
6.60
5.50
5.50
Percent
5.51
5.51
5.51
5.43
5.57
5.49
5.47
5.52
5.49
5.47
5.50
5.53
5.49
5.51
5.52
5.47
5.53
5.48
5.52
5,47
Percent
5.60
6.50
5.60
5.50
5.50
5.50
5.50
5.50
5.50
6.60
5.50
5.50
5.50
5.60
5.50
5.49
6.50
5.49
5.49
5.47
$515. 60 $1,031. 20 $10, 312
529. 80 1,059.60
10, 596
644. 40 1,088. 80
10,888
559. 40 1,118. 80
11,188
574. 60 1,149. 20
11, 492
590. 60 1,181. 20
11,812
606. 80 1,213. 60
12,136
623. 40 1, 246. 80 12,468
640. 60 1, 281. 20 12,812
658. 20 1,316. 40
13,164
676. 20 1,352. 40
13, 624
694. 80 1,389. 60
13,896
714.00 1,428.00
14,280
733. 60 1,467. 20
14,672
763. 80 1, 607. 60 16,076
774. 60 1, 549. 20 15,492
795. 80 1, 591. 60 16, 916
817. 80 1, 636. 60 16, 356
840. 20 1, 680.40
16,804
863. 40 1, 726. 80 17, 268
887.00 1,774.00
17,740
H-l
?/2
35.50
3 Yield on purchase price from issue date to extended maturity date is 5.13 percent.
to
o
202
1973 REPORT OF THE SECRETARY OF THE TREASURY
E x h i b i t 5.—Department C i r c u l a r No. 905, D e c e m b e r 12, 1969, Fifth Revision,
S u p p l e m e n t No. 2, offering of U n i t e d S t a t e s savings bonds, Series H
DEPARTMENT OF T H E TREASURY,
Washington, J u l y 19,1972.
T h e tables to D e p a r t m e n t Circular No. 905, F i f t h Revision, d a t e d December 12,
1969, a s amended (31 C F R P a r t 332), a r e hereby supplemented by t h e addition
of Tables 4-A a n d 25-A, as set forth below.
J O H N K . CARLOCK,
F i s c a l A s s i s t a n t Secretary.
TABLE
4-A
BONDS BEARING ISSUE DATES FROM APRIL 1 THROUGH SEPTEMBER 1,1953 i
[Issue price
Face value< Redemption and ma[ turity value.
$500
500
$1,000
1,000
$5,000 $10,000
5,000 10,000
(1) Amounts of interest checks for
each denomination
Period of time bond is held after •
extended maturity date
Myear
2(6/1/73)
lyear
(12/1/73)
IM years
(6/1/74)
2 years
..-(12/1/74)
2M years
--..(6/1/75)
3 years..
(12/1/76)
3M years..-...(6/1/76)
4 years.
(12/1/76)
4M years...
(6/1/77)
6 years.
(12/1/77)
5M years
(6/1/78)
6 years
-(12/1/78)
6M years
(6/1/79)
7 years—
(12/1/79)
7M years
(6/1/80)
8 years
(12/1/80)
8M years..
(6/1/81)
9 years
(12/1/81)
9M years
(6/1/82)
10 years (second extended
maturity) 3
(12/1/82)
SECOND E X T E N D E D
MATURITY P E R I O D
$13. 76
13.75
13.75
13.76
13.75
13.75
13.75
13.75
13.75
13.75
13.75
13.75
13.76
13.76
13.75
13.75
13.75
13.75
13.75
13.75
$27. 60 $137. 50 $275. 00
27.50 137. 50. 276. 00
27.50 137.50' 275.00
27.50 137. 60 276.00
27.60 137. 60 275. 00
27.50 137. 60 275.00
27.50 137. 50 275. 00
27. 50 137. 50 275. 00
27.50 137. 50 . 276. 00
27.60 137. 50 275. 00
27.60 137. 60 275. 00
27. 60 137. 60 275. 00
27.50 137. 60 276. 00
27.50 137.50 276. 00
27.60 137. 50 276. 00
27.50 137. 50, 276. 00
27.50 137. 60 276.00
27.50 137. 60 276.00
27.50 137.60 276. 00
27.50
137.50
275.00
Approximate investment yield
(annual percentage rate)
(2) From
(4) From
beginning (3) For
of second half-year each interest payperiod
extended
maturity preceding ment date
to second
period to
interest
each in- payment extended
maturity
terest paydate
ment date
Percent
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.60
5.60
5.60
5.50
5.50
5.50
5.50
5.60
5.50
5.50
5.60
6.50
Percent
5.60
5.60
5.60
5.50
5.50
5.50
5.60
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
<5.50
Percent
5.60
5.50
5.50
5.50
5.50
5.50
5.60
5.50
5.50
5.50
5.50
5.50
• 5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
I This table does not apply if the prevailing rate for I ^ies H bonds behig issued at the time second
extension begins is different from 6.60 percent.
^•'^
ntfi
2 Month, day, and year on which interest check is payable on issues of Apr. 1,1953. For subsequent issue
months add the appropriate number of months.
3 29 years and 8 months after issue date.
4 Yield on purchase price from issue date to second extended matmity date on bonds dated: Apr
May 1,1953 is 4.02 percent; June 1 through Sept. 1,1963 is 4.03 percent.
203
EXHIBITS
TABLE 25-A
BONDS BEARING ISSUE DATES FROM DECEMBER 1, 1962 THROUGH MAY 1, 19631
Issue price
Redemption and maturity value.
(
$500
500
$1,000
1,000
$5,000 $10,000 Approximate investment yield
5,000 10,000
(annual percentage rate)
(2) F r o m
beginning
(4) F r o m
(3) F o r
of e x t e n d e d half-year each i n t e r (1) A m o u n t s of i n t e r e s t checks for m a t u r i t y
period
est p a y Period of time bond is held after
each d e n o m i n a t i o n
period t o preceding m e n t d a t e
each
interest to extended
maturity date
E X T E N D E D MATURITY P E R I O D
maturity
payment
interest
payment
date
date
Myear-—.....
lyear
IM years..-.
2 years
2M years...3 years..
3M years
4 years
4M years
5 years
5M years
6 years
6M years.
7 years
7M years
8 years
8M years
9 years
9M years...
10 years (extended
maturity) 3
2(6/1/73) $13. 75
.-(12/1/73)
13.75
.-(6/1/74)
13.75
(12/1/74)
13.76
...-(6/1/75)
13.76
(12/1/75)
13.75
...(6/1/76)
13.75
(12/1/76) -, 13. 76
.-(6/1/77)
13.75
...(12/1/77)
13.76
(6/1/78)
13.76
...(12/1/78)
13.75
.-(6/1/79)
13.75
.(12/1/79)
13.75
(6/1/80)
13.75
(12/1/80)
13.75
(6/1/81)
13.75
(12/1/81)
13.75
(6/1/82)
13.75
(12/1/82)
13.75
$27. 50 $137. 50 $275. 00
27.50 137. 50 275. 00
27.50 137. 60 275. 00
27.50
137. 50 275. 00
27.50
137. 50 275. 00
27.50 137. 50 275. 00
27.50 137. 50 276. 00
27.50 137. 50 276. 00
27.50 137. 50 275. 00
27.50
137. 50 276. 00
27. 60 137. 60 276. 00
27.60 137. 50 276. 00
27.60
137. 50 275. 00
27.60
137. 50 275. 00
27.50
137. 50 275. 00
27.50
137. 60 275. 00
27.50
137. 60 276. 00
27.50
137. 60 276. 00
27.60
137. 50 276. 00
27.50
137.50
275.00
Percent
5.50
5.50
5.60
5.50
5.50
6.60
5.60
5.60
5.60
5.50
5.60
5.50
5.50
5.60
5.60
5.60
5.50
5.50
5.60
Percent
5.50
5.50
5.60
6.60
5.50
5.50
5.50
5.50
5.60
6.50
5.50
6.50
5.60
5.60
6.60
5.50
5.50
5.60
5.50
4 5.50
Percent
5.50
5.60
6.60
5.50
5.60
6.50
5.50
6.50
6.50
5.50
5.50
6.50
5.60
5.60
5.60
5.60
6.50
6.50
5.50
5.50
1 This table does not apply if the prevailing rate for Series H bonds being issued at the time the extension
begins is different from 5.50 percent.
2 Month, day, and year on which interest check is payable on issues of Dec. 1,1962. For subsequent issue
months add the appropriate number of months.
3 20 years after issue date.
4 Y'ield on purchase price from issue date to extended maturity is 4.71 percent.
506-171—73-
-16
204
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 6.—Department Circular, Public Debt Series No. 3-67, June 19, 1968,
Revised, Supplement No. 2, offering of United States savings notes
DEPARTMENT OF THE TREASURY,
;
Washington, July 19,1972.
Table 1, of Department Circular No. 3-67, Revised, dated June 19, 1968, as
amended (31 CFR Part 342), is hereby supplemented by the addition of Table
1-A, as set forth below.
JOHN K . CARLOCK,
Fiscal Assistant Secretary.
TABLE 1-A
NOTES BEARING ISSUE DATES FROM JUNE 1, 1968 THROUGH JUNE 1, 1970 i
Denomination
Issue price
.-
Period after original maturity
(beginning 4 years 6 months
after issue date)
$25.00' $50.00
20.25
40.50
$75.00 $100.00
60.75 81.00
Approximate investment yield
(aimual percentage rate)
(2) F r o m
beginning
(1) R e d e m p t i o n values d u r i n g each of extended
half-year period (values ncrease m a t u r i t y
on first d a y of period shown)
period t o
beginning
E X T E N D E D MATURITY PERIOD
of each
half-year
period
First M year
2(12/1/72)
Mto lyear
(6/1/73)
1 to IM years-. - (12/1/73)
IM to 2 years--(6/1/74)
2-to-2Myears..-.:(12/1/74)
2M to 3 years- u - - . . . - -. (6/1/75)
3 to 3M years
(12/1/75)
3M to 4 years
- 1 . . - (6/1/76)
4 to 4M years
(12/1/76)
4M to 6 years-—
- (6/1/77)
5 to 5M years
(12/1/77)
5M to 6 years
(6/1/78)
6 to 6M years
(12/1/78)
6M to 7 years (6/1/79)
7 to 7M years
(12/1/79)
7M to 8 years
(6/1/80)
8 to 8M years-(12/1/80)
8M to 9 years- (6/1/81)
9 to 9M years
(12/1/81)
M to 10 years
- . - (6/1/82)
$25. 29
25.99
26. 70
27.43
28.19
28.96
29.76
30.58
31.42
32.28
33.17
34.08
35. 02
35.98
36.97
37.99
39.04
40.11
41.21
42.36
$50.58
51.98
63.40
64.86
56.38
57.92
69.52
61.16
62.84
64.56
66.34
68.16
70.04
71.96
73.94
75.98
78.08
80.22
82.42
84.70
EXTENDED
MATURITY
VALUE (14 years and 6 months
from issue date)
(12/1/82)
43.51
87.02
$76.87: $101.16
77.97
103. 96
80.10
106.80
82.29
109. 72
84.57
112. 76
86.88- 115.84
89.28
119. 04
91.74
122.32
94.26
125. 68
96.84
129.12
99.61
132. 68
102. 24 136.32
105. 06 140. 08
107. 94 143. 92
110. 91 147.88
113. 97 151. 96
117 12 156.16
120. 33 160.44
164.84
123.63
127. 05 169. 40
130.53
174.04
(3) F r o m
beginning
of each
half-year
period t o
begiiming
of next
half-year
period
Percent
.00
6.54
5.60 .
5.49
5.60
5.49.
5.50
5.50
5.60
5.50
5.60
5.60
5.60
5.50
5.50
5.50
5.50
5.50
5.60
5.50
(4) F r o m
begiiming
of each
half-year
period to
extended
maturity
Percent
- 6.54
6.46
.6.47
5.64
5.46
5.52
5.51
5.49
5.47
5.51
5.49
5.52
5.48
5.50
5.52
5.53
5.48
6.48
5.53
5.48
Percent
5.50
5.50
5.50
5.60
5.60
.6.50
5.50
5.50
6.60
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.49
5.50
5.61
5.48
3 5.50 .
1 This table does not apply if the prevailing rate for Scries E bonds being issued at the tmie the extension
begins is different from 5.60 percent.
2 Month, day, and year on which issues of June 1, 1968, enter each period. For subsequent issue months
add the appropriate number of months.
3 Y^ield on purchase price from issue date to extended maturit^'^ date is 5.34 percent.
Exhibit 7.—Department Circular, Public Debt Series No. 3-72, November 21,
1972, Revised, regulations governing United States Treasury certificates of
indebtedness—State and local government series. United States Treasury
notes—State and local government series^ and United States Treasury bonds—
State and local government series
DEPARTMENT OF THE TREASURY,
Washington, Novemher 21,1972.
The regulations in Department of the Treasury Circular, Public Debt Series
No. 3-72, as amended (31 CFR Part 344), have been retitled and further amended,
as set forth below. The changes were effected under the authority of 26 U.S.C.
EXHIBITS
205.
103(d), 83 Stat. 656; 31 U.S.C. 753, 754, 754b, and 5 U.S.C. 301. Notice and
public procedures thereon are unnecessary as they relate to the fiscal policy of
the United States.
JOHN K . CARLOCK,
Fiscal Assistant Secretary.
Department of the Treasury Circular, Public Debt Series No. 3-72, dated
May 22, 1972, as amended (31 CFR Part 344), is hereby further amended and
issued as Department of the Treasury Circular, Public Debt Series No. 3-72,
Revised.
Sec.
344.0 Offering of securities.
344.1 Description of securities.
344.2 Subscription for purchase.
344.3 Issue date and payment.
344.4 Redemption.
344.5 General provisions.
SEC. 344.0 Offering of securities.—In order to provide States, municipalities
and other government bodies described in section 103(a) (1) of the Internal
Revenue Code of 1954 and the regulations thereunder with investments tailored
to their needs under those provisions, the Secretary of the Treasury offers, under the authority of the Second Liberty Bond Act, as amended—
(1) United States Treasury Certificates of Indebtedness—State and Local
Government Series,
(2) United States Treasury Notes—State and Local Government Series,
and
(3) United States Treasury Bonds—State and Local Government Series,
for sale to those entities. The term "government body" as used herein refers to
any one of these entities. The term "securities" herein refers jointly to the
certificates, notes, and bonds. This offering will continue until terminated by the
Secretary of the Treasury.
'
.
SEC. 344.1 Description of securities.
(a) General. The securities will be issued in book-entry form on the books of
the Department of the Treasury, Bureau of the Public Debt, Washington, D.C.
20226. They may not be transferred by sale, exchange, assignment or pledge, or
otherwise.
{h) 2'erms and rates of interest.
(1) Certificates of indehtedness.—^The certificates will be issued in multiples of
$5,000 with periods of maturity fixed, at the option of the government body, for
(i) 3 months, (ii) 6 months, (iii) 9 months, or (iv) 1 year. Each certificate will
bear such rate of interest as the government body may designate, provided that
it shall not be more than the current Treasury rate on a comparable maturity,
reduced by one-eighth of 1 percent, on the date the subscription is submitted.
The applicable Treasury rates will be determined by the Treasury not less often
than monthly, and will be available at Federal Reserve Banks and Branches.
Interest on the certificates will be computed on an annual basis and will be payable at maturity VTith the principal amount.
(2) Notes.—The notes will be issued in multiples of $5,000 with periods of
maturity fixed, at the option of the governmeht body, from 1 year.6 months up
to and including 7 years, or for any intervening half-yearly period. Each note
will bear such rate of interest as the government body may designate, provided
that it shall not be more than the current Treasury rate on a comparable maturity, reduced by one-eighth of 1 percent, on the date the. subscription is submitted. The applicable Treasury rates will be determined by the Treasury not less
often than monthly, and will be available at Federal Reserve Banks and Branches.
Interest on the notes will be payable on a semiannual basis by Treasury check
on June 1 and December 1, and at maturity if other than June 1 or December 1.
Final interest will be paid with the principal.
(3) Bonds.—The bonds will be issued in multiples of $5,000 with periods of
maturitj^ fixed, at the option of the government body, from .7 years 6 months
UJ) to and including 10 years, or for any intervening half-yearly period. Each
bond will bear such rate of interest as the government body may designate, provided that it shall not be more than the current Treasury rate on a comparable
maturity, reduced by one-eighth of 1 percent, on the date the subscription is
206
19 73 REPORT OF THE SECRETARY OF THE TREASURY
submitted. The applicable Treasury rates will be determined by the Treasury
not less often than monthly, and will be available at Federal Reserve Banks
and Branches. Interest on the bonds will be payable on a semiannual basis
by Treasury check on June 1 and December 1, and at maturity if other than
June 1 or December 1. Final interest will be paid with the principal.
SEC. 344.2 Suhscription for purchase.—A government body may purchase a
security under this offering by submitting a subscription and making payment
to a Federal Reserve Bank or Branch. The subscription, dated and signed by
an ofiicial authorized to make the purchase, must state the amount, issue date,
maturity and interest rate of the security desired, and must give the title of the
designated oflacial authorized to redeem it. Separate subscriptions must be
submitted for certificates, notes, and bonds, and for securities of each maturity
and each interest rate. A commercial bank may act on behalf of a government
body in submitting subscriptions.
SEC. 344.3 Issue date and payment.—The issue date of a security will be the
date requested by the subscriber, provided that date is not more than three weeks
after the date of the subscription, and provided funds in full payment are available on that date at the Federal Reserve Bank or Branch to which the subscription was submitted.
SEC 344.4 Redemption.
(SL) At maturity. A security may not be called for redemption by the Secretary of the Treasury prior to maturity. Upon the maturity of a security, the
Treasury will make payment of the principal amount and interest to the owner
thereof by Treasury check, or in accordance with other prior arrangements made
by the government body with the Bureau of the Public Debt.
(b) Prior to maturity. Securities may be redeemed at the owner's option on
two days' notice after one month from the issue date in the case of certificates,
and after one year from the issue date in the case of notes and bonds. Where
redemption prior to maturity occurs, the interest for the entire period the security
was outstanding shall be calculated on the basis of the lesser of (i) the original
interest rate at which the security was issued, or (ii) an adjusted interest rate
reflecting both the shorter period during which the security was actually outstanding and a penalty. The adjusted interest rate is the Treasury rate which
would have been in effect on the date of issuance for a marketable Treasury
certificate, note, or bond maturing on the quarterly maturity date prior to redemption (in the case of certificates), or on the semiannual maturity period prior
to redemption (in the case of notes and bonds), reduced in either case by a
penalty which shall be the lesser of (i) one-eighth of 1 percent times the number
of months from the date of issuance to original maturity, divided by the number of
full months elapsed from^ the date of issue to redemption, or (ii) one-fourth of 1
percent. There shall be deducted from the redemption proceeds, if necessary, any
overpayment of interest resulting from previous payments made at a higher rate
based on the original longer period to maturity. A schedule showing the adjusted
interest rates that apply to securities redeemed prior to their maturity dates will
be available at the time of issuance of the securities. A notice to redeem a security
prior to the maturity date must be given by the oflficial authorized to redeem it, as
shown in the subscription for purchase, to the Bureau of the Public Debt, Division of Securities Operations, Washington, D.C. 20226, by letter, wire, or telex, or
by telephone confirmed by wire or telex. The telephone number is 202-964-7(107,
and the telex number is 892428.
SEC 344.5 General provisions.
(a) Regulations. United States Treasury Certificates of Indebtedness—State
and Local Government Series, and United States Treasury Notes—State and
Local Government Series, and United States Treasury Bonds—State and
Local Government Series, shall be subject to the general regulations with respect to United States securities, which are set forth in the Department of the
Treasury Circular No. 300, current revision (31 CFR Part 306), to the extent
applicable. Copies of the circular may be obtained from the Bureau of the Public
Debt, Division of Securities Operations, Washington, D.C. 20226, or a Federal
Reserve Bank or Branch.
(b) 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 purchase of, and
transactions in, the securities.
EXHIBITS
207
(c) Reservations. The Secretary of the Treasury reserves the right to reject any application for the purchase of securities hereunder, in whole or in
part, and to refuse to issue or permit to be issued any such securities in any
case or any class or classes of cases if he deems such action to be in the public interest, and his action in any such respect shall be final. The Secretary of the
Treasury may also at any time, or from time to time, supplement or amend the
terms of these regulations, or of any amendments or supplements thereto.
Exhibit 8.—-Department Circular, Public Debt Series No. 3-72, November 21,
1972, Revised, Amendment No. 1, regulations governing United States Treasury
certificates of indebtedness—State and local government series, United States
Treasury notes—State and local government series, and United States
Treasury borids—State and local government series
DEPARTMENT OF THE TREASURY,
Washington, January 12,1973.
DESCRIPTION AND SUBSCRIPTION
Sections 344.1(b) (2) and (3) and 344.2 of Department of the Treasury Circular, Public Debt Series No. 3-72, Revised, dated November 21, 1972 (31 CFR
Part 344), have been amended and revised to read as follows :
§ 344.1 Description of securities.
^::
.i«
ff
i}i
lii
i'f
sjc
(b) Terms and rates of interest. * * *
(2) Notes. The notes will be issued in multiples of $5,000 with periods of maturity fixed, at the option of the government body, from 1 year 6 months up to and
including 7 years, or for any intervening half-yearly period. Each note will bear
such rate of interest as the government body may designate: Provided, That it
shall not be more than the current Treasury rate on a comparable maturity, reduced by one-eighth of 1 percent on the date the subscription is submitted. The
applicable Treasury rates will be determined by the Treasury not less often than
monthly, and will be available at Federal Reserve Banks and Branches. Interest
on the notes during the term to maturity will be payable on a semiannual basis
on interest payment dates requested in the subscription form. Final interest will
be paid with the principal.
(3) Bonds. The bonds will be issued in multiples of $5,000 with periods of
maturity fixed, at the option of the government body, from 7 years 6 months up
to and including 10 years, or for any intervening half-yearly period. Each bond
will bear such rate of interest as the government body may designate: Provided,
That it shall not be more than the current Treasury rate on a comparable maturity, reduced by one-eighth of 1 percent, on the date the subscription is submitted. The applicable Treasury rates will be determined by the Treasury not
less often than monthly, and will be available at Federal Reserve Banks and
Branches. Interest on the bonds will be paid beginning on any interest payment
date requested in the subscription form, and on a semiannual basis thereafter to
maturity. Final interest will be paid with the principal.
§ 344.2 Subscription for purchase.
A government body may purchase a security under this offering by submitting
a subscription and making payment to a Federal Reserve Bank or Branch. The
subscription, dated and signed by an ofl&cial authorized to make the purchase,
must state the amount, issue date, maturity and interest rate of the security
desired, the semiannual interest payment dates (in the case of notes and bonds),
and the title of the designated official authorized to redeem it. Separate sul3scriptions must be submitted for certificates, notes, and bonds, and for securities
of each maturity and each interest rate. A commercial bank may act on behalf
of a government body in submitting subscriptions.
The foregoing amendments were effected under authority of 26 U.S.C. 103(d)
83 Stat. 656; 31 U.S.C. 752, 753, 754, 754b, and 5 U.S.C. 301. Notice and public
procedures thereon are unnecessary as they relate to the fiscal policy of the
United States.
JOHN K . CARLOCK,
Fiscal Assistant Secreta/ry,
208
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 9.—Department Circular No. 653, December 12, 1969, Eighth Revision,
Supplement No. 4, offering of United States savings bonds. Series E
DEPARTMENT OF THE TREASURY,
Washington, Jamiary 18, 1973.
The purpose of this supplement is to show the redemption values and investment yields for the next extended maturity period for U.S. Savings Bonds of
Series E bearing issue dates of June 1 through November 1, 1943, June 1 through
September 1, 1953, October 1 through November 1, 1953, June 1 through November 1, 1965, and June 1 through November 1, 1966. Accordingly, the tables
to Department Circular No. 653, Eighth Revision, dated December 12, 1969, as
amended (31 CFR Part 316), are hereby supplemented by the addition of Tables
8-A, 32-A,. 33-A, 76-A, and 78-A, as set forth below.
JOHN K . CARLOCK,
Fiscal Assistant Secretary.
TABLE 8 A
BONDS BEARING ISSUE DATES FROM JUNE 1 THROUGH NOVEMBER 1, 1943 i
Issue price
Denomination
- -
...
'
Period after second extended niaturity
(beginning 30 years after issue date)
First Myear
2 (6/1/73)
3r^ to l y e a r
1
(12/1/73)
I t o IM years
_•.
:
(6/1/74)
IM to 2 years
(12/1/74)
2 to 2M years
(6/1/75)
2M to 3 years
...(12/1/75)
3 t o 3 M years
.:
(6/1/76)
3Mto4years——--.....:.:......:
(12/1/76)
4 t o 4 M years
V..".:....
(6/1/77)
4M to 5 years
-(12/1/77)
5 to 5M years
(6/1/78)
5M to 6 years
(12/1/78)
6 to 6M years
(6/1/79)
6M to 7 years
(12/1/79)
7 to 7M years
......-:.
(6/1/80)
7M to 8 years
(12/1/80)
8 to 8M years
_...(6/1/81)
8M to 9 years
(12/1/81)
9 to 9M years
(6/1/82)
9M to 10 years
..•.
(12/1/82)
THIRD EXTENDED MATURITY VALUE (40 yeiars from issue
date).:..---.:
:
(6/1/83)
. $18.75
25.00
$75.00 "
•
100.00
$375.00
500.00
$750.00
1,000.00
Approximate investment yield
(annual percentage rate)
(2) From
(3) From
beginning of
beginning of
(4) From
(1) Redemption values during each half-year period third extended each half-year beginning of
(values increase on first day of period shown)
maturity
period to
each half-year
—'•
period to
beginning of
period to
beginning of next half-year third extended
T H I R D E X T E N D E D M A T U R I T Y P E R I O D each half-year
period
maturity
period
$53.42 $106.84
109. 78
54.89
112.80
56.40
115.90
57.95
119.08
59.54
122. 36
61.18
62.86 ' 125.72
129.18
64.59
132.74
66.37
136.38
68.19
140.14
70.07
144.00
72.00
147.96
73.98
152.02
76.01
156.20
78.10
160.50
80.25
164.90
82.45
169.44
84.72
174.10
87.05
178.90
89.45
91.91
1 This table does not apply if the prevaiUng rate for Series E bonds being issued at
the time the second extension begins is different from 5.50 percent.
2 Month, day, and year on which issues of June 1, 1943, enter each period. For
subsequent issue months add the appropriate number of months.
$37.50.
50.00
183.82
$213.68
219.56
225. 60
231.80
238.16
244.72
251.44
258.36
265. 48
272.76
280.28
288.00
295.92
304. 04
312.40
321.00
329. 80
338.88
348.20
357.80
$1068. 40
1097. 80
1128. 00
1159.00
1190.80
1223. 60
1257. 20
1291.80
1327.40
1363.80
1401.40
1440.00
1479.60
1520.20
1562.00
1605.00
1649.00
1694.40
1741.00
1789.00
$2136. 80
2195. 60
2256.00
2318.00
2381. 60
2447. 20
2514.40
2583. 60
2654. 80
2727. 60
2802. 80
2880.00
2959.20
3040.40
3124.00
3210.00
3298.00
3388. 80
3482.00
3578.00
367.64
1838.20
3676.40
Percent
0.00
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50 •
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
Percent
5.50
5.50
5.50
5.49
5.51
5.49
5.50
5.51
5.48
5.51
5.51
5.50
5.49
5.50
5.51
5.48
5.51
5.50
5.51
5.50
Percent
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50 •
5.50 •
5.50
5.50
5.51
5.50
5.51
5.50
w
t—i
cr2
35.50
3 Yield on purchase price from issue date to third extended maturity date is 4.01
percent.
to
O
CO
o
TABLE 32 A
BONDS BEARING ISSUE DATES FROM JUNE 1 THROUGH SEPTEMBER 1, 1953 •
Issue price
Denomination-
-.
-
$18.75
25.00
$37.50
50.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
SECOND E X T E N D E D MATURITY
$39.05
$78.10
40.12
80.24
41.23
82.46
42.36
84.72
43.53
87.06
44.72 • 89.44
45.95
91.90
.47.2294.44
48.51
97.02
49.85
99.70
51.22
102.44
52.63
105.26
54.08
108.16
55.56
111.12
57.09
114.18
58.66
117.32
60.27
120.54
61.93
123.86
63.63
127.26
65.38
130.76
67.18
134.36
Approximate investment yield
(annual percentage rate)
(2) F r o m
(3) F r o m
beginning of
beginning of
second
each halfextended
year period
m a t u r i t y period to beginning
to beginning
of next
of each halfhalf-year
year period
period
PERIOD
$156.20
160.48
164.92
169.44
174.12
178.88
183.80
188.88
194.04
199.40
204.88
210.52
216.32
222.24
228.36
234.64
241.08
247.72
254.52
261.52
$312.40
320. 96
329. 84
338. 88
348. 24
357. 76
367. 60
377.76
388.08
398. 80
409. 76
421. 04
432. 64
444. 48
456. 72
469. 28
482.16
495. 44
509. 04
523. 04
$781. 00
802. 40
824. 60
847. 20
• 870. 60
894. 40
919. 00
944.40
970.20
997. 00
1024. 40
1052. 60
1081. 60
1111.20
1141. 80
1173. 20
1205. 40
1238. 60
1272. 60
1307. 60
$1562. 00
1604. 80
1649. 20
1694. 40
1741. 20
1788. 80
1838. 00
4888. 80
1940. 40
1994. 00
2048. 80
2105. 20
2163. 20
2222. 40
2283. 60
2346. 40
2410. 80
2477. 20
2545. 20
2615. 20
.19404
19940
20488
21052
21632
22224
22836
. 23464
24108
24772
25452
26152
268.72
537.44
1343.60
2687.20
26872
1 T h i s t a b l e does n o t a p p l y if t h e prevailing r a t e for Series E b o n d s being issued
a t t h e t i m e t h e second extension begins is different from 5.50 percent.
2 M o n t h , d a y , a n d year on w h i c h issues of J u n e 1, 1953, enter each period. F o r
$7,500
10,000
(1) R e d e m p t i o n values d u r i n g each half-year period
(values increase on first d a y of period shown)
P e r i o d after extended m a t u r i t y (beginning 19 years
8 m o n t h s after issue date)
FirstMyear
2(2/1/73)
Mto lyear
(8/1/73)
1 to I M years
(2/1/74)
i M to 2 years
(8/1/74)
2 to 2M years
.
.'.(2/1/75)
2M t o 3 years
(8/1/75)
3 to 3M years
(2/1/76)
3Mto:4 y e a r s . . . . : . . . . .
.......(8/1/76)
4 to 4M years
...'.
1
(2/1/77)
4M to 5 years
(8/1/77)
5 to 5M years
(2/1/78)
5M to 6 y e a r s . .
(8/1/78)
6 to 6M years
(2/1/79)
6M to 7 years
-(8/1/79)
7 to 7M years
(2/1/80)
7M to 8 years
.....(8/1/80)
8 to 8M years
(2/1/81)
8M to 9 years
(8/1/81)
9 to 9M years
(2/1/82)
9M to 10 y e a r s . .
...•
..._(8/l/82)
SECOND
EXTENDED
MATURITY
VALUE
(29 years a n d 8 m o n t h s from i s s u e d a t e )
(2/1/83)
. $750.00
1,000.00
$15620
16048
16492
16944
17412
17888
.18380
Percent
0.00
5.48
5.51
5.50
5.50
5.50
5.50
5.50 •
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
Percent
5.48
5.53
5.48
5.52
5.47
5.50
5. 53
5.46 .
5.52
5.50
5.51
5.51
5.47
5.51
5.50
5.49
5.51
5.49
5.50
5.51
(4) F r o m
b e g i n n i n g of
each halfyear period
to second
extended
maturity
Percent
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5. 50, .
5.50
5.50
5.50
5.50
5.50
5.50
5.5)
5.50
5.50
5.50
5.50
5.51
35.50
O
o
a
i
>
o
>
U2
s u b s e q u e n t issue m o n t h a d d t h e a p p r o p r i a t e n u m b e r of m o n t h s .
3 Yield on p u r c h a s e price from issue d a t e to second extended m a t u r i t y d a t e is
4.35 p e r c e n t .
TABLE 33 A
BONDS BEARING ISSUE DATES FROM OCTOBER 1 THROUGH NOVEMBER 1, 1953 1
Issue price
Denomination.
$18.75
25.00
$37.50
50.00
$75.OO- $150.00
IOO. 00
200.00
$375.00
500.00
$750.00
1,000.00
(1) Redemption values during each half-year period
(values increase on first day of period shown)
Period after extended maturity
(beginning 19 years 8 months after issue date)
SECOND E X T E N D E D M A T U R I T Y P E R I O D
First Myear
...2(6/1/73)
3^ to lyear
(12/1/73)
1 to IM years
....(6/1/74)
lMto2years
(12/1/74)
2 to 2M years
(6/1/75)
2M to 3 years....
(12/1/75)
3 to 3M years
(6/1/76)
3M to 4 years
(12/1/76)
4 to 4M years
....(6/1/77)
4M to 5 years
(12/1/77)
5 to 5M years
(6/1/78)
5M to 6 years
..(12/1/78)
0 to 6M years
.....(6/1/79)
6M to 7 years
(12/1/79)
7 to 7M years
-(6/1/80)
7M to 8 years.....
.(12/1/80)
8 to 8M years
(6/1/81)
8M to 9 years
..(12/1/81)
9.to9M years
--(6/1/82)
9M to 10 years
1
(12/1/82)
SECOND EXTENDED MATURITY VALUE (29
years and 8 months from issue date)
(6/1/83)
Approximate investment yield
(annual percentage rate)
• (2) From begin- (3) From begin- (4) From beginning of second ning of each
ning df each
extended
half-year period half-year period
maturity period to beginning of
to second
to beginning of next half-year
extended
each half-year
period
jnaturity
period
Percent
$39.35
40. 43
41.54
42.69
43.86
45.07
46.31
47.58
48.89
50.23
51.61
53.03
54.49
55.99
57. 53
59.11
60.74
62. 41
64.12
65.89
$78. 70
80.86
.S3. 08
85. 38
87.72
90.14
92. 62
95.16
97. 78
100. 46
103. 22
106.06
108. 98
111.98
115.06
118. 22
121.48
124. 82
128. 24
131.78
$157. 40
161.72
166.16
170. 76
175. 44
180. 28
185. 24
190.32
195.56
200. 92
206. 44
212.12
217. 96
223. 96
230.12
236. 44
242. 96
249. 64
256. 48
263. 56
$314. 80
323. 44
332. 32
341. 52
350. 88
360. 56
370. 48
380. 64
391.12
401. 84
412. 88
424. 24
435. 92
447. 92
460. 24
472. 88
485. 92
499. 28
512. 96
527.12
$787. 00
808. 60
830. 80
853. 80
877.20
901.40
926. 20
951. 60
977. 80
1004. 60
1032. 20
1060. 60
1089. 80
1119. 80
1150. 60
1182. 20
1214. 80
1248. 20
1282.40
1317. 80
$1574. 00
1617. 20
1661. 60
1707. 60
1754. 40
1802. 80
1852. 40
1903. 20
1955. 60
2009. 20
2064. 40
2121. 20
2179. 60
2239. 60
2301. 20
2364. 40
2429. 60
2496. 40
2564. 80
2635. 60
67.70
135.40
270.80
541.€0
1354.00
2708.00
1 This table does not apply if the prevaihng rate for Series E bonds being issued
at the time the second extension begins is different from 5.50 percent. •
2 Month, day, and year on which issues of Oct. 1, 1953, enter each period. For
subsequent issue months add the appropriate number of months.
$7,500
10,000
$15740
16172
16616
17076
17544
18028
18524
19032
19556
20092
20644
21212
21796
22396
23012
23644
24296
24964
25648
26356
27080
0.00
5.49
5.49
5.51
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
Percent
5.49
5:49
5.54
5:48
5.52
5.50"
5.48
5.51
5.48
.5.49
5.50
5.51
5.51
5. 50
5.49
5. 52 •
5.50
•5.48
5.52
5.49
Percent
5.50
5:50
5.50'
5.50
5.50
5.50
5.50
5.50
5:50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.51
5.49
X
s
w
9
1^
w
3 5.50
3 Yield on purchase price from issue date to second extended maturity date is 4.37
percent.
bO
to
TABLE 76 A
BONDS BEARING ISSUE DATES FROM JUNE 1 THROUGH NOVEMBER 1. 1965 i
Issue price
Denomination
-
$18.75
25.00
$37.50
50.00
$56.25
75.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1,000.00
$7,500
10,000
(1) R e d e m p t i o n values dlu i n g each half-year p e r i o d
(values increase on first d a y of period shown)
(2) F r o m b e ginning of
extended m a t u r i t y period
to beginning
of each halfyear period
Period after original maturity (beginning
7 years 9 months after issue date)
EXTENDED MATURITY
Tirst Myear
...-..2 (3/1/73) $26.40
.Mto l y e a r
...(9/1/73)
27.13
27. 87
1 to IM years..... -".•'--.. -"(37l/74y
28.64
•IM to 2 years
(9/1/74)
29.43
2 to 2M years.
,(3/1/75)
30.24
2M to 3 years.(9/1/75)
31.07
3 to 3M years
-.
(3/1/76)
3M to -4 years.. --..,......... -...-.(9/1/76), 31.92
32.80
4 to 4M years
'
".
(3/1/77)
33.70
4M to 5 years
(9/1/77)
34.63
5 to 5M years..
(3/1/78)
35.58
6M to 6 years
(9/1/78)
36.56
6 to 6M years
....(3/1/79)
37.56
6M to 7 years...-(9/1/79)
38.60
7 to 7M years
-(3/1/80)
39,66
7M to 8 years
J
(9/1/80)
40.75
8 to 8M years
-..
(3/1/81)
41.87
8M to 9 years
(9/1/81)
43.02
9 to 9M years
(3/1/82)
44.20
9M to 10 years
(9/1/82)
EXTENDED MATURITY VALUE ( 7
1
years and 9 months from issue date)
(3/1/83)
45.42
$52.80
54.26
55.74
57.28
58. 86
60.48
62.14
,63.84
' 65. 60
67.40
69.26
71.16
73.12
75.12
77.20
79.32
8L50
83.74
86.04
88.40
90.84
$79. 20
81.39
83.61
85.92
88.29
90.72
93.21
95.76
98.40 -^
101.10
103. 89
106.74
109. 68
112.68
115. 80
118.98
122. 25
125. 61
129.06'
132. 60
136.26
PERIOD
(3) F r o m b e g i n n i n g of
each half-year
period to beg i n n i n g of
next half-year
period
(4) F r o m b e ginning of
each half-year
period t o
extended
maturity
Percent
5.53
5.46
5.53
5.52
5.60
6.49
6.47
6.51
5.49
6.62
5.49
5.61
5.47
5.54
5.49
5.60
5.60
5.49
5.49
6.52
Percent
5.50
5.50
5.50
5.50
5.50
6.50
5.50
6.50
5.60
5.50
5.50
5.50
5.60
5.50
5.60
6.60
5.60
6.60
6.50
$105. 60
108.52
111.48
114.56
117.72
120. 96
124. 28
127. 68
131. 20
134. 80
138. 52
142.32
146. 24
150. 24
154.40
158.64
163.00
167.48
172. 08
176.80
$2n.20
217.04
222.96
229.12
235. 44
241. 92
248. 56
255.36
262.40
269. 60
277. 04
284.64
292.48
300.48
308. 80
317. 28
326.00
334. 96
344.16
353. 60
$528.00
542.60
557.40
572. 80
588.60
604.80
621. 40
638.40
656. 00
674. 00
692. 60
711. 60
731. 20
751. 20
772.00
793. 20
815.00
837.40
860.40
884.00
$1056.00
1085. 20
1114.80
1145. 60
1177. 20
1209. 60
1242. 80
1276.80
1312.00
1348. 00
1385. 20
1423. 20
1462.40
1502.40
1544.00
1586.40
1630. 00
1674. 80
1720. 80
1768. 00
$10560
10852
11148
11456
11772
12096
12428
12768
13120
13480
13852
14232
14624
15024
15440
15864
16300
16748
17208
17680
Percent
0.00
•5.53
5.49
5.50
5.51
5.51
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
6.50
5.50
5.50
5.50
5.60
181.68
363.36
908.40
1816.80
18168
3 5.50
1 This table does not apply if the prevailing rate for Series E bonds being issued at
the time the extension begins is different from 6.50 percent.
3 Month, day, and year on which issues of June 1,1965, enter each period. For sub-
Approximate investment yield
(annual percentage rate)
6.62
sequent issue months add the appropriate number of months.
3 Yield on purchase price from issue date to extended maturity date is 5.05 percent.
*n
O
SI
O
*^
W
W
o
>
o
SI
>
TABLE 78 A
BOND BEARING ISSUE DATES FROM JUNE 1 THROUGH NOVEMBER 1, 1966 1
Issue priceDenomination
$18.75
25.00
-
$37.50
50.00
$56.25
75.00
$75.00
100.00
$150.00
200.00
$375.00
500.00
$750.00
1,000.00
$7,500
10,000
(1) Redemption values during each half-year period
(values increase on first day of period shown)
Period after original maturity (beginning
7 years after issue date)
First Myear
2(6/1/73)
Mto lyear
(12/1/73)
I t o IM years.(6/1/74)
IM to 2 years.(12/1/74)
2 to 2M years
(6/1/75)
2M to 3 years
(12/1/75)
3 to 3M years
(6/1/76)
3M to 4 years
(12/1/76)
4 to 4M years
(6/1/77)
4M to 5 years
(12/1/77)
5 to 5M years
(6/1/78)
5M to 6 years. - . . . (12/1/78)
6to6M years
--(6/1/79)
6Mto7 years
(12/1/79)
7 to 7M years..
(6/1/80)
7M to 8 years
:
(12/1/80)
8 to 8M years
--(6/1/81)
8M to 9 years
(12/1/81)
9 to 9M years
(6/1/82)
9M to 10 years...
(12/1/82)
EXTENDED MATURITY VALUE (17
years from issue date)....
(6/1/83)
$51. 84
53.26
54.74
56. 24
57.78
59.38
61.00
62.68
64.40
66.18
68.00
69.86
71.78
73.76
75.78
77.88
80.02
82. 22
84.48
86. 80
$77. 76
79.89
82.11
84.36
86.67
89.07
91.50
94.02
96.60
99.27
102. 00
104.79
107. 67
110. 64
113. 67
116. 82
120.03
123. 33
126. 72
130. 20
44.59
89.18
133.77
$103. 68 $207.36
213.04
106. 52
218. 96
109.48
224. 96
112.48
231.12
115.56
237. 52
118. 76
244. 00
122.00
250. 72
125. 36
257. 60
128. 80
264. 72
132. 36
272. 00
136.00
279.44
139.72
287.12
143.56
295.04
147. 52
303.12
151.56
311.52
155. 76
320. 08
160.04
328. 88
164.44
337. 92
168. 96
347. 20
173.60
178.36
1 This table does not apply if the prevailing rate for Series E bonds being issued at
the time the extension begins is different from 5.50 percent.
2 Month, day, and year on which issues of June 1, 1966, enter each period. For
subsequent issue months add the appropriate number of months.
(4) From
(2) From
(3) From
beginning of
beginning of
beginning of
extended
each half-year each half-year
period to
maturity
period to
period to
extended
beginning of
beginning of next half-year
maturity
each half-year
period
period
EXTENDED MATURITY PERIOD
$25.92
26.63
27.37
28.12
28.89
29.69 ,
30.50
31.34
32.20
33.09
34.00
34.93
35.89
36.88
37.89
38. 94
40.01
41.11
42.24
43.40
356.72
Approximate investment yield
(annual percentage rate)
$518.40
532. 60
547. 40
562. 40
677. 80
593. 80
610.00
626. 80
644.00
661. 80
680. 00
698. 60
717. 80
737. 60
757.80
778. 80
800.20
822.20
844.80
868. 00
$1036.80
1065. 20
1094. 80
1124.80
1155.60
1187. 60
1220.00
1253. 60
1288. 00
132^. 60
1360. 00
1397. 20
1435. 60
1475. 20
1515. 60
1557. 60
1600.40
1644.40
1689. 60
1736. 00
$10368
10652
10948
11248
11556
11876
12200
12536
12880
13236
13600
13972
14356
14752
15156
15576
16004
16444
16896
17360
Percent
0.00
5.48
5.52
5.51
5.50
5.51
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
891.80
1783.60
17836
35.53
Percent
5.48
5.56
5.48
. 5.48
5.54
5.46
5.51
5.49
5.53
5.50
5.4.7
5.50
. 5.52
5.48
5.54
5.50
5.50
5.50
5.49
5.48
Percent
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.49
5.49
5.49
5.49
5.48
^
3 Yield on purchase price from issue date to extended maturity date is 5.16 percent.
to
CO
214
1973 REPORT OF THE SECRETARY" OF THE TREASURY
Exhibit 10.—Department Circular No. 300, M a r c h 9, 1973, F o u r t h Revision,
general regulations with respect to United S t a t e s securities
DEPARTMENT OF T H E TREASURY,
Washi7igton, March 9, 1973.
' Department of t h e Treasury Circular No. 300, T h i r d Revision, d a t e d December 23, 1964 (31 C F R P a r t 300), as amended, is hereby further amended and
issued a s the F o u r t h Revision.
AUTHORITY: R.S. 3706; 40 Stat. 288, 502, 844, 1309; 42 Stat. 3 2 1 ; 46 Stat. 2 0 ;
48 Stat. 343;; 49 Stat. 2 0 ; 50 Stat. 4 8 1 ; 52 Stat. 477; 53 Stat. 1359; 56 Stat. 189;
73 Stat. 622; and 85 Stat. 5, 74 (31 U.S.C. 738a, 739, 752, 752a, 753, 754, 754a, and
754b) ; 5 U.S.C. 301.
SUBPART A
GENERAL INFORMATION
§ 306.0 Applicability of regulations.
These regulations apply t o all U.S. transferable a n d nontransferable securities,^ other t h a n U.S. Savings Bonds' a h d U.S. Savings Notes, to the extent specified in these regulations, the offering circulars or special regulations governing
such securities.
§306.1 Official agencies.
( a ) Suhscriptions—tenders—hids. Securities subject to these regulations a r e
issued from time to time p u r s u a n t to public offerings by t h e Secretary of the
Treasury, through the Federal Reserve banks, fiscal agents of the United States,
and t h e T r e a s u r e r of t h e United States. Only t h e Federal Reserve banks and
branches and t h e D e p a r t m e n t of t h e Treasury a r e authorized to a c t a s official
agencies, a n d subscriptions or tenders for Treasury securities, a n d bids, t o t h e
extent provided in t h e regulations governing t h e sale of Treasury securities
through competitive bidding, may be made direct to them. Hov^ever, tenders for
Treasury bills a r e not received a t the Department.
(b) Transactions after issue. T h e B u r e a u of the Public Debt of the Department of the Treasury is charged with m a t t e r s relating to transactions in securities. Correspondence concerning transactions in securities and requests for appropriate foi-ms m a y be addressed to (1) t h e Federal Reserve bank or branch
of the district in which the correspondent is located, or (2) the B u r e a u of the
Public Debt, Division of Securities Operations, Washington, D.C. 20226, or (3)
the Office of the T r e a s u r e r of the United States, Securities Division, Washington,
D.C. 20222, except where specific instructions a r e otherwise given in these regulations. The addresses of the Federal Reserve banks and branches a r e :
Federal Reserve B a n k of Boston, Boston, Mass. 02106.
Federal Reserve B a n k of New York,
New York, N.Y. 10045.
Buffalo Branch, Buffalo, N.Y.
14240.
Federal Reserve Bank of Philadelphia,
Philadelphia, P a . 19101.
Federal Reserve B a n k of Cleveland,
Cleveland, Ohio 44101.
Cincinnati Branch, Cincinnati,
Ohio 45201.
Pittsburgh Branch, Pittsburgh,
Pa. 15230.
Federal Reserve B a n k of Richmond,
Richmond, Va. 23261.
Baltimore Branch, Baltimore, Md.
21203.
Charlotte Branch, Charlotte, N.C.
28201.
Federal Reserve B a n k of Atlanta, Atlanta, Ga. 30303.
Birmingham Branch, Birmingham, Ala. 25202.
Jacksonville Branch, Jacksonville,
Fla. 32203.
Nashville
Branch,
Nashville,
Tenn. 37203.
New Orleans Branch, New Orleans, La. 70160.
Miami Office, Miami, Fla. 33152.
Federal Reserve Bank of Chicago, Chicago, III. 60609.
; Detroit Branch, Detroit, Mich.
48231.
Federal Reserve B a n k of St. Louis, St.
Louis, Mo. 63166.
Little Rock Branch, Little Rock,
Ark. 72203.
Louisville Branch, Louisville, Ky.
40201.
Memphis Branch, Memphis, Tenn.
38101.
.
1 These regulations may also be applied to securities issued by certain agencies of the
United States and certain Government and Government-sponsored corporations.
EXHIBITS
215
F e d e r a l Reserve Bank of Minneapolis,
Houston Branch, Houston, Tex.
Minneapolis, Minn. 55480.
. 77001.
Helena Branch, Helena, Mont.
San Antonio Branch, San ALutonio,
59601.
Tex. 7.8295.
Federal Reserve B a n k of K a n s a s City,
Federal Reserve B a n k of San FranIvansas City, Mo. 64198.
cisco, San iTrancisco, Calif. 94120.
Denver Branch, Denver, Colo.
Los Angeles Branch, Los Angeles,
80217.
Calif. 90051,
Oklahoma City Branch, Oklahoma
P o r t l a n d Branch, iPortland, Oreg.
City, Okla. 73125..
97208.
Omaha Branch, Omaha, Nebr.
Salt Lake City Branch, Salt Lake
68102.
City, U t a h 84110.
F e d e r a l Reserve B a n k of Dallas, DalSeattle Branch, Seattle, Wash.
. las, Tex. 75222.
'
98124.
El P a s o Branch, E l Paso, Tex.
79999.
§ 306.2 Definitions of words and terms as used in these regulations.
( a ) "Advance refunding offer" is an offer to a holder of a security, usually a
year or more in advance of its call or m a t u r i t y date, to exchange i t for another
security.
(b) .A "bearer" security is payable on its face a t m a t u r i t y or call for redemption before m a t u r i t y in accordance with i t s terms to "bearer." T h e ownership is
aot recorded. Title to such a security may pass by. delivery without endorsement a n d without notice. A "coupon" security is a bearer, security w i t h interest
coupons attached.
(c) " B u r e a u " refers to t h e B u r e a u of t h e Public Debt, Division df Securities
Operations, Washington, D.C, 20226.
(d) "Call d a t e " or "date of call" is the date fixed iil the officialnotice of call
published in t h e F e d e r a l Register as the date on which, t h e obligor will make payment of the security before m a t u r i t y in accordance with its terms. .
(e) "Court" means one which h a s jurisdiction over t h e parties and t h e subject m a t t e r .
...
. ( f ) " D e p a r t m e n t " refers to t h e D e p a r t m e n t of t h e Treasury.
(g) " F a c e m a t u r i t y d a t e " is t h e payment date specified in t h e t e x t of a
security.
(h) "Incompetent" refers to a. person under any legal disability except
minority.
.
.
(i) "Joint owner" a n d "joint ownership" refer to any permitted form of ownership by two or more persons* .
(j) "Nontransferable securities" a r e those issued only in registered form
which according to their t e r m s a r e payable only to t h e registered owners or
•recognized successors in title, to t h e extent a n d in t h e m a n n e r provided in the
offering circulars or special applicable regulations.
(k) " P a y m e n t " a n d "redemption," unless otherwise indicated by the context,
are used interchangeably for payment a t niaturity or payment before m a t u r i t y
p u r s u a n t to a call for redemption in accordance with t h e terms of the secui:ities.
(I) "Prerefunding Offer" is an. offer to a holder of a security, usually within
the year preceding its call or m a t u r i t y date, to exchange i t for another security.
(m) "Redemption-exchange" is any authorized redemption of securities for
the. purpose of applying t h e proceeds in paynient for other securities offered in
exchange.
(n) A "registered" security refers to a security t h e ownership of which is
registered on the books of t h e Department. I t is payable a t m a t u r i t y or call for
redemption before m a t u r i t y in accordance with its terms to the person i n whose
name it is inscribed, or his assignee.
(o) "Securities assigned in .blank" pr "securities so assigned as to become in
effect payable to bearer" refers to registered securities which a r e assigned by
the owner or his authorized representative without designating t h e assignee.
Registered. securities assigned simply to "The Secretary of t h e T r e a s u r y " or in
the case of Treasury Bonds, Investment Series B-1975-80, to "The Secretary of
the Treasury for exchange for t h e current Series E A or EO Treasury notes" a r e
considered to be. so assigned as to become in effect payable to bearer.
(p) " T a x p a y e r identifying-number" means t h e appropriate identifying number a s required on t a x r e t u r n s and other documents submitted to the I n t e r n a l
216
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Revehue Service, i.e., an individual's social security account nuinber or an employer identification nuniber. A social security account number is composed
of nine digits separated by two hyphens, for example, 123-45-6789; an employer
identification number is coinposed of nine digits separated by one hyphen, for
example, 12-3456789. The hyphens are an essential part of the numbers and
must be included.
(q) "Transferable securities," which may be in either registered or bearer
form, refers to securities which may be sold on the market and transfer of title
accomplished by assignment and delivery if in registered form, or by delivery
only if in bearer form.
(r) "Treasurer's Office" refers to the Office of the Treasurer of the United
States, Securities Division, Washington, D.C. 20222.
(s) "Treasury securities," "Treasury bonds," "Treasury notes," "Treasury certificates of indebtedness," and "Treasury bills," or simply "securities," "bonds,"
"notes," certificates," and "bills," unless otherwise indicated by the context,
refer only to transferable securities.
§ 306.3 Transportation charges and risks in the shipment of securities.
The following rules will govern transportation to, from, and between the Department and the Federal Reserve banks and branches of securities issued on
or presented for authorized transactions :
(a) The securities may be presented or received by the owners or their agents
in person.
(b) Securities issued on original issue, unless delivered in person, will be de' livered by registered mail or by other means at the risk' and expense of the
United States.
(c) The United States will assume the risk and expense of any transportation
of securities which may be necessary between the Federal Reserve banks and
branches and the Treasury.
(d) Securities submitted for any transaction after original issue, if not
presented in person, must be forwarded at the owner's risk and expense.
(e) Bearer securities issued on transactions other than original issue will be
delivered by registered mail, covered by insurance, at the owner's risk and expense, unless called for in person by the owner or his agent. Registered securities issued on such transactions will be delivered by registered mail af the risk
of, but without expense to, the registered owner. Should delivery by other means
be desired, advance arrangements should be made with the official agency to
which the original securities were presented.
SUBPART B—REGISTRATION
§306.10 General.
The registration used must express the actual ownership of a security and
may not include any restriction on the authority of the owner to dispose of it
in any manner, except as otherwise specifically provided in these regulations.
The Treasury Department reserves the right to treat the registration as conclusive of ownership. Requests for registration should be clear, accurate, and
complete, conform with one of the forms set forth in this subpart, and include
appropriate taxpayer identifying numbers.^ The registration of all bonds owned
by the same person, organization, or fiduciary should be uniform with respect
to the name of the owner and, in the case of a fiduciary, the description of the
fiduciary capacity. Individual owners should be designated by the names by
which they are ordinarily known or under which they do business, preferably
including at least one full given name. The name of an individual may be preceded by any applicable title, as, for example, "Mrs.," "Miss," "Ms.," "Dr.," "Rev.,"
or followed by a designation such as "M.D.," "D.D.," "Sr." or ".Jr." Any other
similar suffix should be included when ordinarily used or when necessary
to distinguish the owner from a member of his family. A married woman's own
given name, not that of her husband, miist be used, for example, "Mrs. Mary A.
Jones," not "Mrs. Frank B. Jones." The address should include, where appropriate, the number and street, route, or any other local feature and the Zip Code.
2 Taxpayer identifying numbers are not required for foreign governments, nonresident
aliens not engaged in t r a d e or business witliin the United States, international organizations
and foreign corporations not engaged in trade or business and not having an office or place
of business or a financial or paying agent within t h e United States, and other persons or
organizations as may be exempted from furnishing such numbers under regulations of the
I n t e r n a l Revenue Service.
EiXHIBITS
217
§ 306.11 Forms of registration for transferable securities.
The forms of registration described below are authorized for- transferable
securities:
(a) Natural persons in their own right. In the names of natural persons who
are not under any legal disability, in their own right, substantially as follows:
(1) One person. In the name of one individual. Examples:
John A. Doe (123-45-6789).
Mrs. Mary C. Doe (123-45-6789).
Miss Elizabeth Jane Doe (123-45-6789).
An individual who is sole proprietor of a business conducted under a trade
name may include a reference to the trade name. Examples :
John A. Doe, doing business as Doe's Home Appliance Store (12-3456789).
or
John A. Doe (123^5-6789), doing business as Doe's Home Appliance Store.
(2) T'wo or more persons—general. Securities will not be registered in the
name of one person payable on death to another, or in any form which purports to
authorize transfer by less than all the persons named in the registration (or
all the survivors).^ Securities will not be registered in the forms "John A. Doe
and Mrs. Mary C. Doe, or either of them" or "William C. Doe or Henry J. Doe,
or either of them" and securities so assigned will be treated as though the
words "or either of them" do not appear in the assignments. The taxpayer
identifying number of any of the joint owners may be shown on securities registered in joint ownership form.
(i) With right of survivorship. In the names of two or more individuals
with right of survivorship. Examples :
John A. Doe (123-45-6789) or Mrs. Mary C. Doe or the survivor.
John A. Doe (123-45-6789) or Mrs. Mary C. Doe or Miss Mary Ann Doe or
the survivors or survivor.
John A. Doe (123-45-6789) or Mrs. Mary C. Doe.
John A. Doe (123-45-6789) and Mrs. Mary C. Doe.
John A. Doe (123-45-6789) and Mrs. Mary C. Doe as joint tenants with right
of survivorship and not as tenants in common.
Limited to husband and wife:
John A. Doe (123-45-6789) and Mrs. Mary C. Doe, as tenants by the
entireties,
(ii) Without right of survivorship. In the names of two or more individuals
in such manner as to preclude the right of survivorship. Examples:
John A. Doe (123-4t5-6789) and William B. Doe as tenants in common.
John A. Jones as natural guardian of Henry B. Jones, a minor, and Robert C.
Jones (123-45-6789), without right of survivorship.
Limited to husband and wife:
Chaiies H. Brown (123-45-6789) and Ann R. Brown, as partners in
community.
(b) Minors and incompetents—(1) Natural guardians of minors. A security
may be registered in the name of a natural guardian of a minor for whose estate
no legal guardian or similar representative has legally qualified. Example:
John R. Jones as natural guardian of Henry M. Jones, a minor (123-456789).
Either parent with whom the minor resides, or if he does not reside with either
parent, the person who furnishes his chief support, will be recognized as his
natural guardian and will be considered a fiduciary. Registration in the name
of a minor in his own right as owner or as joint owner is not authorized. Securities so registered, upon qualification of the natural guardian, will be treated
as though registered in the name of the natural guardian in that capacity.
(2) Custodian under statute authorizing gifts to minors. A security may be
purchased as a gift to a minor under a gifts to minors statute in effect in the
State in which either the donor or the minor resides. The security should be
3 'Warning. Difference Between Transferable Treasury Securities Registered in the Names
of Two or More Persons a n d United S t a t e s Savings Bonds in Coownership Form. The eflfect
of registering Treasury securities to which these regulations apply in the names of two or
more persons differs decidedly from regisitration of savings bonds in coownership form.
Savings bonds are virtually redeemable on demand a t the option of either coowner on his
signature alone. Transferable Treasury securities,are redeemable only a t m a t u r i t y or upon
prior call by the Secretary of the Treasury.
218
19 73 REPORT OF THE SECRETARY OF THE TREASURY
registered as provided in the statute,, with an identifying reference to .the statute
if the registration does not clearly identify it. Examples :
William C. Jones, as custodian for John A. Smith, a minor (123-45-6789),
under the California Uniform Gifts to Minors Act.
Robert C. Smith, as custodian for Henry L.. Brown, a minor (123^5-6789),
under the laws of Georgia ;.Ch. 48-3, Code.of Ga. Anno.
(3) Incompetents not under guardianship.'B:egistration in the form. "John A.
Brown, an incompetent (123-45-6789), under voluntary guardianship," is permitted only on reissue after a voluntary guardian has qualified for the purpose of
collecting interest. (S.ee §§ 306.37(c) (2) and 306,57(c) (2).) Otherwise, registration in the name of an incompetent not under legal guardianship is hot
authorized.
(c) Executors, administrators, guardians, and similar representatives or fiduciaries. A security may be registered in the names of legally qualified executors,
administrators, guardians, conservators, or similar representatives or fiduciaries
of a single estate. The names and capacities of alLthe representatives or fiduciaries, as shown in their letters of appointment; must be included in the registration and must be followed by an adequate identifying reference to the estate.
Example:
John Smith,'executor of will (or administrator of estate) of Henry J. Jones,
deceased (12-3456789).
William (?. Jones, guardian' (or conservator, etc.) of estate of James D.
Brown, a minor (or an incompetent) (123-45-6789).
(d) Life tenant under will. A security may be registered in the name of a life
tenant followed by an adequate identifying reference to the will. Example:
' Anne B. Smith, life tenant under the will'of Adam A. Smith, deceased (123456789).
...i.
The life tenant will be considered a'fiduciary. . '
(e) Private trust estates. A.secuvity may be registered in the name and title
of the trustee or trustees of a single duly constituted private tru.st, followed by
an adequate identifying reference to the authority governing the ; trust.
Examples:
•«
-: •). ^' ".'•
John Jones and'Blank Trust Co., Albany,/N.Y., trustees under will of Sarah
Jones, deceased (12-3456789).
"
John Doe and Richard Roe, trustees under agreement' with Henry Jones
dated February 9,1970 •.(.12-3456789.).
. ^
The names of all trustees, in the form used in the trust instrument, must be included in the registration, except as follows: ^ =
(1) If there are several trustees designated as a board or authorized to act
as a unit, their names should be omitted and the; words "Board of Trustees" substituted for the word "trustees." •.Example:.
; ..'
Board of Trustees of Blank Co. Retirement Fund, under collective bargaining agreement dated June 30,1970 (12-3456789). . . - ••
.
(2) If the trustees do not constitute-a board or otherwise act as a unit, and
are either too numerous to be designated in the inscription by names; and title,
or serve for limited terms, some or all of the. names may be omitted. . Examples :
John Smith, Henry Jones' et al., trustees under .will of Henry J. Smith, deceased (12-3456789).
•• . .
<.
.
:
Trustees under will of Henry J. Smith, deceased (12-3456789).
Trustees of Retirement Fund of Industrial Manufacturing Co., under directors'resolution of June 30,1950 (12-3456789).
.
(f) Private organizations (corporations, unincorporated associations and partnerships). A security may be registered in the name Of any priviate Corporation,
unincorporated associatio.n,.Or partnership,, including a nominee, which for purposes of these. i:egulations is treated as the owner. The full legal name of the organization, as set forth in its charter, articles of iricprporation, constitution, partnership agreement, or other authority .from,^hichats powers are derived, must
be included in the registration and may be.followed, if desired, b y a reference to
a particular account or fund, other than a trust fund, in accordance with the
rules and examples given below:
- ...
.
.
{!) A corporatioii. The name of a business, fraternal, religious, or other
private corporation must be followed by descriptive words, indicating the corporate status unless the term "corporation" dr the abbreviation "Inc." is part of
the name or the name is that of a corporation or ^association organized under
EXPIIBITS
219
Federal law, such as a national bank or Federal savings and loan association.
Examples:
Smith Manufacturing Co., a corporation (12-3456789).
The Standard Manufacturing Corp. (12-3456789).
Jones & Brown, Inc.—Depreciation Acct. (12-3456789).
First National Bank of Albemarle (12-3456789).
Abco & Co., Inc., a nominee corporation (12-3456789).
(2) An unincorporated association. The name of a lodge, club, labor union, veterans' organization, religious society, dr similar self-governing organization
which is not incorporated (whether or not it is chartered by or affiliated with a
parent organization which is incorporated) must be followed by the words "an
unincorporated association." Examples:
American Legion Post No.
, Department of the D.C, an unincorporated
association (12-3456789).
Local Union No. 100, Brotherhood of Locomotive Engineers, an unincorporated association (12-3456789).
Securities should not be registered in the name of an unincorporated association
if the legal title to its property in general, or the legal title to the funds with
which the securities are to be purchased, is held by trustees. In such a case the
securities should be registered in the title of the trustees in accordance with paragraph (e) of this section. The tei-m "unincorporated association" should not be
used to describe a trust fund, a partnership or a business conducted under a trade
name.
(3) A partnership. The name of a partnership must be followed by the words
"a partnership." Examples:
Smith & Brown, a partnership (12-3456789).
Acme Novelty Co., a limited partnership (12-3456789).
Abco & Co., a nominee partnership (12-3456789).
(g) States, puhlic hodies, and corporations and puhlic officers. A security may
be registered in the name of a State or county, city, town, village, school district,
or other political entity, public body or corporation established by law (including
a board, commission, administration, authority or agency) which is the owner
or official custodian of public funds, other than trust funds, or in the full legal
title of the public officer having custody. Examples :
State of Maine.
Town of Rye, N.Y.
Maryland State Highway Administration.
Treasurer, City of Springfield, 111.
Treasurer of Rhode Island—State Forestry Fund,
(h) States, puhlic officers, corporations or hodies as trustees. A security may
be registered in the title of a public officer or in the name of a State or county
or a public corporation or public body acting as trustee under express authority
of law. An appropriate reference to the statute creating the trust may be included in the registration. Examples :
Insurance Commissioner of Pennsylvania, trustee for benefit of policyholders
, of Blank Insurance Co. (12-3456789), under Sec.
, Pa. Stats.
Rhode Island Investment Commission, trustee of General Sinking Fund
under Ch. 35, Gen. Laws of R.I.
State of Colorado in trust for Colorado Surplus Property Agency.
§ 306.12 Errors in registration.
If an erroneously inscribed security is received, it should not be altered in any
respect, but the Bureau, a Federal Reserve bank or branch, or the Treasurer's
Office should be furnished full particulars concerning the error and asked to furnish instructions.
§ 306.13 Nontransferable securities.
Upon authorized reissue. Treasury Bonds, Investment Series B—1975-80,
may be registered in the forms set forth in § 306.11.
SUBPART
C—TRANSFERS,
EXCHANGES
AND
REISSUES
§ 306.15 Transfers and exchanges of securities—closed periods.
(a) General. The transfer of registered securities should be made by assignment in accordance with Subpart F of this part. Transferable registered secu506-171—73
17
•
.'
220
1973 REPORT OF THE SECRETARY OF THE TREASURY
rities are eligible for denominational exchange and exchange for bearer securities. Bearer securities are eligible for denominational exchange, and when so
provided in the offering circular, are eligible for exchange for registered securities. Specific instructions for issuance and delivery of the new securities, signed
by the owner or his authorized representative, mu,st accompany the securities
presented. (Form PD 3905 or PD 1827, as appropriate, may be used.) Denominational exchanges, exchanges of Treasury Bonds, Investment Series B—197580, for the current series of EA or EO 1^/^ percent 5-year Treasury notes, and
optional redemption of bonds at par as provided in § 306.28 may be made at any
time. Securities presented for transfer or for exchange for bearer securities of
the same issue must be received by the Bureau not less than 1 full month before
the date on which the securities mature or become redeemable pursuant to a call
for redemption before maturity. Any security so presented which is received too
late to comply with this provision will be accepted for payment only.
(b) Closing of transfer hooks. The transfer books are closed for 1 full month
preceding interest payment dates and call or maturity dates. If the date set for
closing of the transfer books falls on Saturday, Sunday, or a legal holiday, the
books will be closed as of the close of business on the last business day preceding that date. The books are reopened on the first business day following the
date on which interest falls due. Registered seciirities which have not matured
or been called, submitted for transfer, reissue, or exchange for coupon securities,
and coupon securities which have not matured or been called, submitted for exchange for registered securities, which are received during the period the books
for that loan are closed, will be processed on or after the date such books are
reopened. If registered securities are received for transfer or exchange for bearer
securities, or coupon securities are received for exchange for registered securities,
during the time the books are closed for payment of final interest at maturity or
call, unless otherwise provided in the offering circular or notice of call, the
following action will be taken:
(1) Payment of final interest will be made to the registered owner of record
on the date the books were closed.
(2) Payment of principal will be made to (i) the assignee under a proper
assignment of the securities, or (ii) if the securities have been assigned for
exchange for bearer securities, to the registered owner of record on the date the
books were closed.
§ 306.16 Exchanges of registered securities.
No assignments will be required for (a) authorized denominational exchanges
of registered securities for like securities in the same names and forms of
registration and (b) redemption-exchanges, or prerefundings, or advance refundings in the same names and forms as appear in the registration or assignments of the securities surrendered.
§ 306.17 Exchanges of registered securities for coupon securities.
Registered securities submitted for exchange for coupon securities should
be assigned to "The Secretary of the Treasury for exchange for coupon securities
to be delivered to (inserting the name and address of. the person to whom delivery of the coupon securities is to be made)." Assignments to "The Secretary of
the Treasury for exchange for coupon securities," or assignments in blank will
also be accepted. The coupon securities issued upon exchange will have all unmatured coupons attached.
§ 306.18 Exchanges of coupon securities for registered securities.
Coupon securities presented for exchange for registered securities should
have all matured interest coupons detached. All unmatured coupons should be
attached, except that if presented when the transfer books are closed (in which
case the exchange wiil be effected on or after the date on which the books are
reopened), the next maturing coupons should be detached and held for collection
in ordinary course when due. If any coupons which should be attached are missing, the securities must be accompanied by a remittance in an amount equal to
the face amount of the missing coupons. The new registered securities will bear
interest from the interest payment date next preceding the date on which the
exchange is made.
EiXHIBITS
221
§ 306.19 Denominational exchanges of coupon securities.
All matured interest coupons and all unmatured coupons likely to mature
before an exchange can be completed should be detached from securities presented for denominational exchange. All unmatured coupons should be attached.
If any are missing, the securities must be accompanied by a remittance in an
amount equal to the face amount of the missing coupons. The new coupon
securities will have all unmatured coupons attached.
§ 306.20 Reissue of registered transferable securities.
Assignments are not required for reissue of registered transferable securities
in the name(s) of (a) the surviving joint owner(s) of securities registered in
the names of or assigned to two or more persons, unless the registration or assignment includes words which preclude the right of survivorship, (b) a succeeding fiduciary or other lawful successor, (c) a remainderman, upon termination
of a life estate, (d) an individual, corporation or unincorporated association
whose name has been legally changed, (e) a corporation or unincorporated association which is the lawful successor to another corporation or unincorporated
association, and (f) a successor in title to a public officer or body. Evidence of
survivorship, succession, or change of name, as appropriate, must be furnished.
The appropriate taxpayer identifying number also must be furnished if the registration of the securities submitted does not include such number for the person or
organization to be named on the reissued securities.
§ 306.21 Reissue of nontransferable securities.
Treasury Bonds, Investment Series B-1975-80, may be reissued only in the
names of (a) lawful successors in title, (b) the legal representatives or distributees of a deceased owner's estate, or the distributees of a trust estate,
and (c) State supervisory authorities in pursuance of any pledge required of the
owner under State law, or upon termination of the pledge in the names of the
pledgors or their successors. Bonds presented for reissue must be accompanied
by evidence of entitlement.
§ 306.22 Exchange of Treasury Bonds, Investment Series B-1975-80.
Bonds of this series presented for exchange for 1% percent 5-year Treasury
notes must bear duly executed assignments to "The Secretary of the Treasury for
exchange for the current series of EA or EO Treasury notes to be delivered to
(inserting the name and address of the person to whom the notes are to be
delivered)." The notes will bear the April 1 or October 1 date next preceding
the date the bonds, duly assigned with supporting evidence, if necessary, are
received by the Bureau or a Federal Reserve Bank or Branch. Interest accrued
at the rate of 2% percent on the bonds surrendered from the next preceding
interest payment date to the date of exchange will be credited, and interest
at the rate of 1% percent on the notes for the same period will be charged and the
difference will be paid to the owner.
SUBPART D — R E D E M P T I O N
OR P A Y M E N T
§ 306.25 Presentation and surrender.
(a) General. Securities, whether in registered or bearer form, are payable
in regular course of business at maturity unless called for redemption before
maturity in accordance with their terms, in which case they will be payable in
regular course of business on the date of call. The Secretary of the Treasury
may provide for the exchange of maturing or called securities, or in advance of
call or maturity, may afford owners the opportunity of exchanging a security
for another security pursuant to a prerefunding or an advance refunding offer.
Registered securities should be presented and surrendered for redemption to
the Bureau, a Federal Reserve bank or branch, or the Treasurer's Office, and
bearer securities to a Federal Reserve bank or branch or the Treasurer's Office.*
No assignments or evidence in support of assignments will be required by or on
behalf of the registered owner or assignee for redemption for his or its account,
or for redemption-exchange, or exchange pursuant to a prerefunding or an advance refunding offer, if the new securities are to be registered in exactly the same
names and forms as appear in the registrations or assignments of the securities
* See § 306.28 for presentation and surrender of bonds eligible for use in payment of
Pederal estate taxes.
222
19 73 REPORT OF THE SECRETARY OF THE TREASURY
surrendered. To the extent appropriate, these rules also apply to securities registered in the titles of public officers who are official custodians of public funds,
(b) ''Overdue'' securities. If a bearer security or a registered security assigned
in blank, or to bearer, or so assigned as to become in effect payable to bearer, is
presented and surrendered for redemption after it has become overdue, the
Secretary of the Treasury will ordinarily reciuire satisfactory proof of ownership. (Form PD 1071 may be used.) A security shall be considered to be overdue
after the lapse of the following periods of time from its face maturity :
(1) One month for securities issued for a term of 1 year or less.
(2) Three months for securities issued for a term of more than 1 year but
not in excess of 7 years.
(3) Six months for securities issued for a term of more than 7 years.
§ 306.26 Redemption of registered securities at maturity, upon prior call, or
for prerefunding or advance refunding.
Registered securities presented and surrendered for redemption at maturity
or pursuant to a call for redemption before maturity need not be assigned, unless the owner desires that payment be made to some other person, in which case
assignments should be made to "The Secretary of the Treasury for redemption
for the account of (inserting name and address of person to whom payment is
to be made)." Specific instructions for the issuance and delivery of the redemption check, signed by the owner or his authorized representative, must accompany the secui'ities, unless included in the assignment. (Form PD 3905 may be
used.) Payment of the principal will be made either (a) by check drawn on the
Treasurer of the United States to the order of the person entitled and mailed
in accordance with the instructions received, or (b) upon appropriate request,
by crediting the amount in a member bank's account with the Federal Reserve
Bank of its District. Securities presented for 'i)rerefunding or advance refunding
should be assigned as provided in the prerefunding or advance refunding offer.
§ 306.27 Redemption of bearer securities at maturity, upon prior call, or for
advance refunding or prerefunding.
All interest coupons due and payable on or before the date of maturity or
date fixed in the call for redemption before maturity should be detached from
coupon securities presented for redemption and should be collected separately
in regular course. All coupons bearing dates subsequent to the date fixed in a call
for redemption, or offer of prefundiug or advance refunding, should be left attached to the securities. If any such coupons are missing, the full face amount
thereof will be deducted from the payment to be made upon redemption or the
prerefunding or advance refunding adjustment unless satisfactory evidence of
their destruction is submitted. Any amounts so deducted will be held in the
Department to provide for adjustments or refunds in the event it should be determined that the missing coupons were subsequently presented or their destruction is later satisfactorily established. In the absence of other instructions,
payment of bearer securities will be made by check drawn to the order of the
person presenting and surrendering the securities and mailed to him at his
address, as given in the advice accompanying the securities. (Form PD 3905 may
be used.) A Federal Reserve bank, upon appropriate request, may make payment
to a member bank from which bearer securities are received by crediting the
amount of the proceeds of redemption to the member bank's account.
§ 306.28 Optional redemption of Treasury bonds at par (before maturity or
call redemption date) and application of the proceeds in payment of Federal
estate taxes,
(a) General. Treasury bonds to be redeemed at par for the purpose of applying the entire amount of principal and accrued interest to payment of the Federal
estate tax on a decedent's estate ^ must be presented and surrendered to a Federal Reserve bank or branch or to the Bureau. They should be accompanied by
Form PD 1782, fully completed and duly executed in accordance with the instructions on the form, and evidence as described therein. Redemption will be made
at par plus accrued interest from the last preceding interest payment date to the
s Certain issues of Treasury bonds are redeemable a t p a r and accrued interest upon t h e
death of the owner, a t the option of the representative of, or if none, the persons entitled to,
his estate, for the purpose of having t h e entire proceeds applied in payment of t h e Federal
estate tax on the decedent's estate, in accordance with the terms of the offering circulars
cited on t h e face of t h e bonds. A c u r r e n t list of eligible issues may be obtained from any
Federal Reserve b?mlj or brariph, t h e Bureau of the Public Debt, or the Treasurer's Office,
EXHIBITS
223
date of redemption, except that if registered bonds are received by a Federal
Reserve bank or branch or the Bureau within 1 month preceding an interest payment date for redemption before that date, a deduction will be made for interest
from the date of redemption to the interest payment date, and a check for the
full 6 months' interest "will be paid in due course. The proceeds of redemption
will be deposited to the credit of the Internal Revenue Service Center designated
in form PD 1782, and the representative of the estate will be notified of the
deposit. A formal receipt may be obtained upon request addressed to the Center.
(b) Conditions. The bonds presented for redemption under this section must
have (1) been owned by the decedent at the time of his death and (2) thereupon
constituted part of his estate, as determined by the following rules in the case
of joint ownership, partnership, and trust holdings :
(i) Joint ownerships. Bonds held by the decedent at the time of his death
in joint ownership with another person or persons will be deemed to have met
the above conditions either {a) to the extent to which the bonds actually became
the property of the decedent's estate, or (&) in an amount not to exceed the
amount of the Federal estate tax which the surviving joint owner or owners is
required to pay on account of such bonds and other jointly held property.®
(ii) Partnerships. Bonds held at the time of the decedent's death by a partnership in which he had an interest will be deemed to have met the above conditions to the extent of his fractional share of the bonds so held proportionate
to his interest in the assets of the partnership.
(iii) Trusts. Bonds held in trust at the time of the decedent's death will be
deemed to have met the above conditions in an amount not to exceed the amount
of the Federal estate tax (a) if the trust actually terminated in favor of the decedent's estate, or (&) if the trustee is required to pay the decedent's Federal
estate tax under the terms of the trust instrument or otherwise, or (c) to the
extent the debts of the decedent's estate, including costs of administration, State
inheritance and Federal estate taxes, exceed the assets of his estate without regard to the trust estate.
(c) Transactions after owner's death. No transactions involving changes of
ownership may be conducted after an owner's death without affecting the eligibility of the bonds for redemption at par for application of the proceeds to payment of the Federal estate tax. Transactions involving no changes of ownership
which may be conducted without affecting eligibility are (1) exchange of bonds
for those of lower denominations where the bonds exceed the amount of the tax
and are not in the lowest authorized denominations, (2) exchange of registered
bonds for coupon bonds, (3) exchange of coupon bonds for bonds registered in
the names of the representatives of the estate, (4) transfer of bonds from the
owner or his nominee to the names of the representatives of the owner's estate,
and (5) purchases by or for the account of an owner prior to his death, held in
book-entry form, and thereafter converted to definitive bonds. However, any such
transaction must be explained on Form PD 1782 or in a supplemental statement.
J
SUBPART E
INTEREST
§ 306.35 Computation of interest.
The interest on Treasury securities accrues and is payable on a semiannual
basis unless otherwise provided in the circular offering them for sale or exchange. If the period of accrual is an exact 6 months, the interest accrual is
an exact one-half year's interest without regard to the number of days in the
period. If the period of accrual is less than an exact 6 months, the accrued
interest is computed by determining the daily rate of accrual on the basis of the
exact number of days in the full interest period and multiplying the daily rate by
the exact number of days in the fractional period for which interest has actually accrued. A full interest period does not include the day as of which the securities were issued or the day on which the last preceding interest became due,
but does include the day on which the next succeeding interest payment is due.
A fractional part of an interest period does not include the day a.s of which the
securities were issued or the day on which the last preceding interest payment became due, but does include the day as of which the transaction termi® Substantially the same rule applies to community property except that upon the death
of either spouse bonds which constitute part of the community estate are deemed to meet
the required conditions to the extent of one-half of each loan and issue of bonds.
224
19 73 REPORT OF THE SECRETARY OF THE TREASURY
nating the accrual of interest is effected. The 29th of February in a leap year is
included whenever it falls within either a full interest period or a fractional part
thereof."^
';
§ 306.36 Termination of interest.
Securities will cease to bear interest on the date of their maturity unless they
have been called for redemption before maturity in accordance with their terms,
or are presented and surrendered for redemption-exchange or exchange pursuant to! an advance refunding or prerefunding offer, in which case they will
cease to bear interest on the date of call, or the exchange date, as the case may be.
§306.37 Interest on registered securities.
(a) Method of payment. The interest on registered securities is payable by
checks drawn on the Treasurer of the United States to the order, of the registered owners, except as otherwise provided herein. Interest checks are prepared by the Department in advance of the interest payment date and are ordinarily mailed in time to reach the addressees on that date. Interest on a registered secuiity which has not matured or been called and which is presented for
any transaction during the period the books for that loan are closed will be
paid by check drawn to the order of the registered owner of record. Upon receipt
of notice of the death or incompetency of an individual named as registered
owner, a change in the name or in the status of a partnership, corporation, or
unincorporated association, the removal, resignation, succession, or death of a
fiduciary or trustee, delivery of interest checks will be withheld pending receipt
and approval of evidence showing who is entitled to receive the interest checks.
If the inscriptions on securities do not clearly identify the owners, delivery of
interest checks will be withheld pending reissue of the securities in the correct
registration. The final installment of interest, unless otherwise provided in the
offering circular or notice of call, will be paid by check drawn to the order of the
registered owner of record and mailed in advance of the interest payment date in
time to reach the addressee on or about that date. Interest on securities presented for prerefunding or advance refunding will be adjusted as provided in
the prerefunding or advance refunding offer.
(b) Change of address. To assure timely delivery of interest checks, owners
should promptly notify the Bureau of any change of address. (Form PD 345
may be used.) The notification must be signed by the registered owner or a joint
owner or an authorized representative, and should show the owner's taxpayer
identifying number, the old and new addresses, the serial number and denomination of each security, the titles of the securities (for example: 4% percent
Treasury Bonds of 1987-92, dated August 15, 1962), and the registration of
each security. Notifications by attorneys in fact, trustees, or by the legal representatives of the estates of deceased, incompetent, or minor owners should be
supported by proof of their authority, unless, in the case of trustees or legal
representatives, they are named in the registration.
(c) Collection of interest checks—(1) General. Interest checks may be collected
in accordance with the regulations governing the endorsement and payment of
Government warrants and checks, which are contained in the current revision of
Department Circular No. 21 (Part 360 of this chapter).
(2) By voluntary guardians of incompetents. Interest checks drawn to the
order of a person who has become incompetent and for whose estate no legal
guardian or similar representative has been appointed should be returned to the
Bureau with a full explanation of the circumstances. For collection of interest,
the Department will recognize the relative responsible for the incompetent's care
and support or some other person as voluntary guardian for the incompetent.
(Application may be made on Form PD 1461.)
(d) Nonreceipt, loss, theft, or destruction of interest checks. If an interest
check is not received within a reasonable period after an interest payment date,
the Bureau should be notified. Should a check be lost, stolen, or destroyed after
receipt, the Office of the Treasurer of the United States, Check Claims Division,
Washington, D.C. 20227, should be notified. Notification should include the name
and address of the owner, his taxpayer identifying number, and the serial num• The appendix to this subpart contains a complete explanation of the method of com^
puting interest on a semiannual basis on Treasury bonds, notes, and certificates of- indebtedness, and an outline of the method of computing the discount rates on Treasury bills. Also
included are tables of computation of interest on semiannual and annual bases.
EXHIBITS
225
ber, denomination, and title of the security upon which the interest was payable.
If the check is subsequently received or recovered, the latter office should also
be advised.
§ 306.38 Interest on bearer securities.
Unless the offering circular and notice of call provide otherwise, interest on
coupon securities is payable in regular course of business upon presentation and
surrender of the interest coupons as they mature. Such coupons are payable at
any JPederal Reserve bank or branch, or the Treasurer'.s Office.^ Interest on Treasury bills, and any other bearer securities which may be sold and issued on a discount basis and which are payable at par at maturity, is represented by the
difference between the purchase price and the par value, and no coupons are
attached.
SUBPART F—^ASSIGNMENTS OF REGISTERED SECURITIES—GENERAL
§ 306.40 Execution of assignments or special endorsements.
(a) Execution of assignments. The assignment of a registered security should
be executed by the owner or his authorized representative in the presence of an
officer authorized to certify assignments. All assignments must be made on the
backs of the securities, unless otherwise authorized by the Bureau, a Federal
Reserve bank or branch, or the Treasurer of the United States. An assignment
by mark (X) must be witnessed not only by a certifying officer but also by at
least one other person, who should add an endorsement substantially as follows:
"Witness to signature by mark," followed by his signature and address.
(b) Special endorsement in lieu of assignments. A security may be presented
without assignment for any authorized transaction by a financial institution
which is (1) a member of the Federal Reserve System, (2) a member of the
Federal Home Loan Bank System, or (3) insured by the Federal Deposit Insurance Corporation, provided full instructions are furnished as to the transaction
desired and the security bears the endorsement, under the official seal of the
institution, as follows :
'
Presented in accordance with instructions of the owner (s).
Absence of assignment guaranteed.
(Name of financial institution)
By
_
_
(Signature and title of oflicer)
("Date")
This form of endorsement of a security will be an unconditional guarantee to
the Department of the Treasury that the institution is acting as attorney in fact
for the registered owner, or his assignee, under proper authorization and that the
officer is duly authorized to act.
§ 306.41 Form of assignment.
Registered securities may be assigned in blank, to bearer, to a specified transferee, to the Secretary of the Treasury for exchange for coupon securities, or to
the Secretary of the Treasury for redemption or for exchange for other securities
offered at maturity, upon call or pursuant to an advance refunding or prerefunding offer. Assignments to "The Secretary of the Treasury," "The Secretary
of the Treasury for tran,sfer," or "The Secretary of the Treasury for exchange'*
will not be accepted unless supplemented by specific instructions by or in behalf
of the owner.
§ 306.42 Alterations and erasures.
If an alteration or erasure has been made in an assignment, the assignor
should appear before an authorized certifying officer and execute a new assignment to the same assignee. If the new assignment is to other than the assignee
whose name has been altered or erased, a disclaimer from the first-named as8 Banking institutions will usually cash the coupons without charge as an accommodation
to their customers.
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19 73 REPORT OF THE SECRETARY OF THE TREASURY
signee should be obtained. Otherwise, an affidavit of explanation by the person
responsible for the alteration or erasure should be submitted for consideration.
§ 306.43 Voidance of assignments.
An assignment of a security to or for the account of another person, not completed by delivery, may be voided by a disclaimer of interest from that person.
This disclaimer should be executed in the presence of an officer authorized to
certify assignments of securities. Unless otherwise authorized by the Bureau, a
Federal Reserve bank or branch, or the Treasurer of the United States, the disclaimer must be written, typed, or stamped on the back of the security in substantially the following form:
The undersigned as assignee of this security hereby disclaims any interest
herein.
(Signature)
I certify that the above-named person as described, whose identity is well
known or proved to me, personally appeared before me the
__ day of
at
(Month and year)
.
(SEAL)
-
(Place)
and signed the above disclaimer of interest.
(Signature and official designation of
certifying officer)
In the absence of a disclaimer, an affidavit or affidavits should be submitted for
consideration explaining why a disclaimer cannot be obtained, reciting all other
material facts and circumstances relating to the transaction, including whether
or not the security was delivered to the person named as assignee and whether
or not the affiants know of any basis for the assignee claiming any right, title,
or interest in the security. After an assignment has been voided, in order to dispo.se of the security, an assignment by or on behalf of the owner will be required.
§ 306.44 Discrepancies in names.
The Department will ordinarily require an explanation of discrepancies in the
names which appear in inscriptions, assignments, supporting evidence or in the
signatures to any assignments. (Forms PD 385 may be used for this purpose.)
Plowever, where the variations in the name of the registered owner, as inscribed
on securities of the same or different issues, are such that both may properly
represent the same person, for example, "J. T. Smith," and "John T. Smith," no
proof of identity will be required if the assignments are signed exactly as the
securities are inscribed and are duly certified by the same certifying officer.
§ 306.45 Officers authorized to certify assignments.
(a) Officers atithorized generally. The following persons are authorized to act
as certifying officers for the purpose of certifying assignments .of, or forms with.
respect to, securities:
(1) Officers and employees of banks and trust companies incorporated in the
United States, its territories or possessions, or the Commonwealth of Puerto
Rico, Federal Savings and Loan Associations, or other organizations which are
members of the Federal Home Loan Bank System, who have been authorized to:
(i) Generally bind their respective institutions by their acts, (ii) unqualifiedly
guarantee signatures to assignments of securities, or (iii) expressly certify assignments of securities.
(2) Officers of Federal Reserve banks and branches.
(3) Officers of Federal Land Banks, Federal Intermediate Credit Banks and
Banks for Cooperatives, the Central Bank for Cooperatives, and Federal Home
•Loan Banks.
(4) U.S. Attorneys, Collectors of Customs, and Regional Commissioners, District Directors, and Service Center Directors, Internal Revenue Service.
(5) Judges and Clerks of U.S. Courts.
(b) Aiithorized officers in foreign countries. The following are authorized to
certify assignments in foreign countries :
(1) U.S. diplomatic or consular representatives.
EXHIBITS
227.
(2) Managers, assistant managers and other officers of foreign branches of
banks or trust companies incorporated in the United States, its territories or
possessions, or the Commonwealth of Puerto Rico.
(3) Notaries public and other officers authorized to administer oaths. The official position and authority of any such officer must be certified by a U.S. diplomatic or consular representative under seal of his office.
(c) Officers having Umited authority. The following are authorized to certify
assignments to the extent set forth in connection with each class of officers: .
(1) Postmasters, acting postmasters, assistant postmasters, inspectors in
charge, chief and assistant chief accountants, and superintendents of stations of
any post office, notaries public and justices of the peace in the United States,
its territories and possessions, the Commonwealth of Puerto Rico' and the Canal
Zone, but only for assignment of securities for redemption for the account of the
assignor, or for redemption exchange, or pursuant to an advance refunding or
prerefunding offer for other securities to be registered in his name, or in his
name with a joint owner. The signature of any post office official, other than a
postmaster, must be in the following form: "John A. Doe, Postmaster, by Richard B. Roe, Superintendent of Station."
(2) Commissioned officers and warrant officers of the Armed Forces of the
United States for assignment of securities of any class for any authorized transaction, but only with respect to assignments executed by: (i) Armed Forces personnel and civilian field employees, and (ii) members of the families of such personnel or civilian employees.
(d) Special provisions for certifying assignments. The Commissioner of the
Public Debt, the Chief of the Division of Securities Operations, any Federal
Reserve bank or branch, or the Treasurer of the United States, is authorized to
make special provisions for any case or class of cases.
§ 306.46 Duties and responsibilities of certifying officer.
A certifying officer must require execution of an assignment, or a form with
respect to securities, in his presence after he has established the identity of
the assignor and before he certifies the signature. He must then complete the
certification. An employee who is not an officer should insert "Authorized signature" in the space provided for the title. However, an assignment of a security
need not be executed in the presence of the certifying officer if he unqualifiedly
guarantees the signature thereto, in which case he must place his endorsement
on the security, following the signature, in the form "Signature guaranteed.
First National Bank of Jonesville, Jonesville, N.H., by A. B. Doe, President,"
and add the date. The certifying officer and, if he is an officer or employe of an
organization, the organization will be held responsible for any loss the United
States may suffer as the result of his fault or negligence.
§ 306.47 Evidence of certifying officer's authority.
The authority of an individual to act as a certifying officer is established
by affixing to a certification of an assignment, or a form with respect to securities, or an unqualified guarantee of a signature to an assignment, either:
(a) The official seal of the organization, or (b) a legible imprint of the issuing
agent's dating stamp, if the organization is an authorized issuing agent for
U.S. Savings Bonds of Series E. Use of such stamp shall result in the same
responsibility on the part of the organization as if its official seal were used. A
certification which does not bear a seal or issuing agent's dating stamp will not
be accepted. Any post office official must use the official stamp of his office. A
commissioned or warrant officer of any of the Armed Forces of the United
States should indicate his rank and state that the person executing the assignment is one of the class whose signature he is authorized to certify. A judge
or clerk of court must use the seal of the court. Any other certifying officer must
use his official seal or stamp, if any, but, if he has neither, his official position
and a specimen of his signature must be certified by some other authorized
officer under official seal or stamp or otherwise proved to the satisfaction of
the Department.
§ 306.48 Interested persons not to act as certifying officer or witness.
Neither the assignor, the assignee, nor any person having an interest in a security may act as a certifying officer, or as a witness to an assignment by mark.
However, a bank officer may certify an assignment to the bank, or an assignment executed by another officer in its behalf.
228
1973 REPORT OF THE SECRETARY OF THE TREASURY
§ 306.49 Nontransferable securities.
The provisions of this subpart, so far as applicable, govern transactions in
Treasury Bonds, Investment Series B-1975-80.
SUBPART G
A S S I G N M E N T S B Y OR IN BEHALF OF INDIVIDUALS
§ 306.55 Signatures, minor errors and change of name.
The owner's .signature to an assignment should be in the form in which the
security is inscribed or assigned, unless such inscription or assignment is incorrect or the name has since been changed. In case of a change of name, the
signature to the assignment should show both names and the manner in which
the change was made, for example, "John Young, changed by order of court from
Hans Jung." Evidence of the change will be required. However, no evidence is
required to support an assignment if the change resulted from marriage and the
signature, which must be duly certified by an authorized officer, is written to
show that fact, for example, "Mrs. Mary J. Brown, changed by marriage from
Miss Mary Jones."
§ 306:56 Assignment of securities registered in the names of or assigned to two
or more persons.
(a) Transfer or exchange. Securities registered in the names of or a,ssigned
to two or more persons may be transferred or exchanged for coupon bonds during
the lives of all the joint owners only upon assignments by all or on their behalf
by authorized representatives. Upon proof of the death of one, the Department
will accept an assignment by or in behalf of the survivor or survivors, unless the
form of registration or assignment includes words which precludes the right
of survivorship.'* In the latter case, in addition to assignment by or in behalf of the survivor or survivors, an assignment in behalf of the decedent';s
estate will be required.
(b) Advance refimding or prerefunding offers. No assignments are required
for exchange of securities registered in the names of or assigned to two or more
persons if the securities to be received in the exchange are to be registered in the
same names and form. If bearer securities or securities in a different form are
to be issued, all persons named must assign, except that in case of death paragraph
(a) of this section shall apply.
(c) Redemption or redemption-exchange. (1) Alternative registration or assignment. Securitie.s registered in the names of or assigned to two or more persons in the alternative, for example, "John B. Sniith or Mrs. Mary J. Smith"
or "John B. Smith or Mrs. Mary J. Smith or the survivor," may be assigned
by one of them at maturity or upon call, for redemption or redemption-exchange,
for his own account or otherwise, whether or not the other joint owner or owners
are deceased.
(2) Joint registration or assignment. Securities registered in the names of or
assigned to two or more persons jointly, for example, "John B. Smith and Mrs.
Mary J. Smith," or "John B. Smith and Mrs. Mary J. Smith as tenants in common," or "John B. Smith and Mary J. Smith as partners in community," may be
assigned by one of them during the lives of all only for redemption at maturity or
upon call, and then only for redemption for the account of all. No as.signments are
required for redemption-exchange for securities to be registered in the same names
and forms as appear in the registration or assignment of the securities surrendered. Upon proof of the death of a joint owner, the survivor or survivors may
assign .securities so registered or assigned for redemption or redemption-exchange
for any account, except that, if words which preclude the right of survivorship *
*
appear in the registration or assignment, assignment in behalf of the decedent's
estate also will be required.
§ 306.57 Minors and incompetents.
(a) Assigmnents hy natural guardian of securities registered in name of
minor. Securities registered in the name of a minor for whose estate no legal
guardian or similar representative has qualified may be assigned by the natural
guardian upon qualification. (Form PD 2481 may be used for this purpose.)
»See § 306.11(a) (2) for forms of registration expressing or precluding survivorship.
EXHIBITS
229
(b) Assignments of securities registered in name of natural guardian of minor.
Securities registered in the name of a natural guardian of a minor may be assigned by the natural guardian for any authorized transaction except one for the
apparent benefit of the natural guardian. If the natural guardian in whose name
the securities are registered is deceased or is no longer qualified to act as natural
guardian, the securities may be assigned by the person then acting as natural
guardian. The assignment by the new natural guardian should be supported by
, proof of the death or disqualification of the former natural guardian and by evidence of his own status as natural guardian. (Form PD 2481 may be used for this
purpose.) No a,ssignment by a natural guardian will be accepted after re'ceipt of
notice of the minor's attainment of majority, removal of his disability of minority, disqualification of the natural guardian to act as such, qualification of a
legal guardian or similar representative, or the death of the minor.
(c) Assignments hy voluntary guardians of incompetents. Registered securities belonging to an incompetent for whose estate no legal guardian or similar
representative is legally qualified may be assigned by the relative responsible for
his care and support or some other person as voluntary guardian:
(1) For redemption or exchange for bearer securities, if the proceeds of the
securities are needed to pay expenses already incurred, or to be incurred during
any 90-day period, for the care and support of the incompetent or his legal
dependents.
(2) For redemption-exchange, if the securities are matured or have been
called, or pur.suant to an advance refunding or prerefunding offer, for reinvestment in other securities to be registered in the form "A, an incompetent (12345-6789) under voluntary guardianship."
An application on Form PD 1461 by the person seeking authority to act as
voluntary guardian will be required.
d) Assignments hy legal guardians of minors or incompetents. Securities
registered in the name and title of the legal guardian or similar representative
of the estate of a m.inor or incompetent may be assigned by the representative
for any authorized transaction without proof of his qualification. Assignments
by a representative of any other securities belonging to a minor or incompetent
must be supported by properly certified evidence of qualification. The evidence
must be dated not more than 1 year before the date of the assignments and must
contain a statement showing the appointment is in full force unless (1) it shows
the appointment was made not more than 1 year before the date of the assignment, or (2) the representative or a corepresentative is a corporation. An assignment by the representative will not be accepted after receipt of notice of termination of the guardianship, except for transfer to the former ward.
§ 306.58 Nontransferable securities.
The provisions of this subpart, so far as applicable, govern transactions in
Treasury Bonds, Investment Series B-1975-80.
S U B P A R T H—ASSIGNMENTS IN BEHALF OF ESTATES OF DECEASED OWNERS
§ 306.65 Special provisions applicable to small amounts of securities, interest
checks or redemption checks.
Entitlement to, or the authority to dispose of, a small amount of securities and
checks issued in payment thereof or in payment of interest thereon, belonging to
the estate of a decedent, may be established through the use of certain short
forms, according to the aggregate amount of securities and checks involved
(excluding checks representing interest on the securities), as indicated by the
following table:
Amount
Circumstances
$100 No administration
500 Estate being administered
500 Estate settled
Form
P D 2216
P D 2488
P D 2458-1
'
To be executed by—
Person who paid burial expenses.
Executor or administrator.
Former executor or administrator, attorneys or other qualifled person.
230
19 73 REPORT OF THE SECRETARY OF THE TREASURY
§. 306.66 Estates—administration.
(a) Temporally or special administrators. Temporary or special administrators may assign securities for any authorized transaction within the scope
of their authority. The assignments must be supported by :
(1) Temporary administrators. A certificate, under court seal, showing the
appointment in full force within thirty days preceding the date of receipt of
the securities.
(2) Special administrators. A certificate, under court seal, showing the ap- ,
pointment in full force within 6 months preceding' the date of receipt of the
securities.
Authority for assignments for transactions not within the scope of appointment must be established by a duly certified copy of a .special order of court.
(b) In course of administration. A security belonging to the estate of a decedent which is being administered by a duly qualified executor or general administrator will be accepted for any authorized transaction upon assignment by
such representative. (See § 306.77.) Unless the security is registered in the name
of and shows the capacity of the representative, the assignment must be supported by a certificate or a copy of the letters of appointment, certified under
court seal. The certificate or certification, if required, must be dated not more than
6 months before the date of the assignment and must contain a statement that
the appointment is in full force, unless (1) it shows the appointment was made
not more than 1 year before the date of the assignment, or (2) the representative
or a corepresentative is a corporation, or (3) redemption is being made for application of the proceeds in payment of Federal estate taxes as provided by
§ 306.28.
(c) After settlement through court proceedings. Securities belonging to the
estate of a decedent which has been settled in court will be accepted for any
authorized transaction upon assignments by the person or persons entitled, as determined by the court. The assignments should be supported by a copy, certified
under court seal, of the decree of distribution, the representative's final account
as approved by the court, or other pertinent court records.
§ 306.67 Estates not administered.
(a) Special provisions under State laws. If, under State law, a person has
been recognized or appointed to receive or distribute the assets of a decedent's
estate without regular administration, his assignment of securities belonging to
the estate will be accepted provided he submits appropriate evidence of his authority.
(b) Agreement of persons entitled. When it appears that no legal representative of a decedent's estate has been or is to be appointed, securities belonging
to the estate may be duly disposed of pursuant to an agreement and assignment by all persons entitled to share in the decedent's personal estate. (Form
PD* 1646 may be used.) However, all debts of the decedent and his estate must
be paid or provided for and the interests of any minors or incompetents must be
protected.
§ 306.68 Nontransferable securities.
The provisions of this subpart, so far as applicable, govern transactions in
Treasury Bonds, Investment Sei-ies B-1975-80.
S U B P A R T I—ASSIGNMENTS BY OR IN BEHALF OF TRUSTEES AND SIMILAR FIDUCIARIES
§ 306.75 Individual fiduciaries.
(a) General. Securities registered in, or assigned to, the names and titles of
individual fiduciaries will be accepted for any authorized transaction upon assignment by the designated fiduciaries without proof of their qualification.s. If
the fiduciaries in whose names the securities are registered, or to whom they
have been assigned, have been succeeded by other fiduciaries, evidence of successorship must be furnished. If the appointment of a successor is not required
under the terms of the trust instrument or otherwise and is not contemplated,
assignments by the .surviving remaining fiduciary or fiduciaries must be supported by appropriate proof. This requires (1) proof of the death, resignation,
removal or disqualification of the former fiduciary and (2) evidence that the surviving or remaining fiduciary or fiduciaries are fully qualified to administer the
^(iuciary estate, which may be in th^ toxm ot a certificate b^ them showing
EXHIBITS
231
the appointment of a successor has not been applied for, is not contemplated and
is not necessary under the terms of the trust instrument or otherwise. Assignments of securities, registered in the titles, without the names of the fiduciaries, for example, "Trustees of the George E. White Memorial Scholarship
Fund under deed of trust dated 11/10/40, executed by John W. White," must be
supported by proof that the assignors are the qualified and acting trustees of
the designated trust estate, unless they are empowered to act as a unit in which
case the provisions of §306.76 shall apply. (Form PD 2446 may be used to
furnish proof of incumbency of fiduciaries.) Assignments by fiduciaries of
securities not registered or assigned in such manner as to show that they belong
to the estate for which the assignors are acting must also be supported by evidence
that the estate is entitled to the securities.
(b) Life tenants. Upon termination of a life estate by reason of the death of the
life tenant in whose name a security is registered, or to whom it has been assigned, the security will be accepted for any authorized transaction upon assignment by the remainderman, supported by evidence of entitlement.
§ 306.76 Fiduciaries acting as a unit.
Securities registered in the name of or assigned to a board, committee or other
body authorized to act as a unit for any public or private trust estate may be
assigned for any authorized transaction by anyone authorized to act in behalf of
such body. Except as otherwise provided in this section, the assignments must be
supported by a copy of a resolution adopted by the body, properly certified under
its seal, or, if none, sworn to by a member of the"body having access to its records.
(Form PD 2495 may be used.) If the person assigning is designated in the resolution by title only, his incumbency must be duly certified by another member of
the body. (Form PD 2446 may be used.) If the fiduciaries of any trust estate are
empowered to act as a unit, although not designated as a board, committee or
other body, securities registered in their names or assigned to them as such, or
in their titles without their names, may be assigned by anyone authorized by the
group to act in its behalf. Such assignments may be supported by a sworn copy
of a resolution adopted by the group in accordance with the terms of the trust
iustrument, and proof of their authority to act as a unit may be required. As
an alternative, assignments by all the fiduciaries, supported by proof of their
incumbency, if not named on the securities, will be accepted.
§ 306.77 Corepresentatives and fiduciaries.
If there are two or more executors, administrators, guardians or similar representatives, or trustees of an estate, all must unite in the assignment of any securities belonging to the estate. Plowever, when a statute, a decree of court, or
the instrument under which the representatives or fiduciaries are acting provides otherwise, assignments in accordance with their authority will be accepted.
If the securities have matured or been called and are submitted for redemption
for the account of all, or for redemption-exchange or pursuant to an advance
refunding or prerefunding offer, and the securities offered in exchange are to be
registered in the names of all, no assignment is required.
§ 306.78 Nontransferable securities.
The provisions of this subpart, so far as applicable, govern assignments of.
Treasury Bonds, Investment Series B-1975-80.
SUBPART J
ASSIGNMENTS
IN
B E H A L F OF PRIVATE OR P U B L I C
ORGANIZATIONS
§ 306.85 Private coi-porations and unincorporated associations (including
nominees.)
Securities registered in the name of, or assigned to, an unincorporated association, or a private corporation in its own right or in a representative or fiduciary
capacity, or as nominee, may be assigned in its behalf for any authorized transaction by any duly authorized officer or officers. Evidence, in the form of a resolution of the governing body, authorizing the assigning officer to assign, or to sell,
or to otherwise dispose of the securities will ordinarily be required. Resolutions
may relate to any or all registered securities owned by the organization or held
by it in a representative or fiduciary capacity. (Form PD 1010, or any substantially similar form, may be used when the authority relates to specific securities ; Form PD 1011, or any substantially similar form, may be used for securities generally.) If the officer derives his authority from a charter, constitu-
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1973 REPORT OF THE SECRETARY OF THE TREASURY
tion or bylaws, a copy, or a pertinent extract therefrom, properly certified, will
be required in lieu of a resolution. If the resolution or other supporting document shows the title of an authorized officer, without his name, it must be supplemented by a certificate of incumbency. (Form PD 1014 may be used.)
§ 306.86 Change of name and succession of private organizations.
If a private corporation or unincorporated association changes its name or
is lawfully succeeded by another corporation or unincorporated association, its
securities may be assigned in behalf of the organization in its new name or that
of its successor by an authorized officer in accordance with § 306.85. The assignment must be supported by evidence of the change of name or successorship.
§306.87 Partnerships (including nominee partnerships).
An assignment of a security registered in the name of or assigned to a partnership must be executed by a general partner. Upon dissolution of a partnership,
assignment by all living partners and by the persons entitled to assign in behalf
of any deceased partner's estate will be required unless the laws of the jurisdiction authorize a general partner to bind the partnership by any act appropriate
for winding up partnership affairs. In those cases where assignments by or in
behalf of all partners are required this fact must be sworn in the assignment;
otherwise, an affidavit by a former general partner must be furnished identifying all the persons who had been partners immediately prior to dissolution. Upon
voluntary dissolution, for any jurisdiction where a general partner may not act
in winding up partnership affairs, an assignment by a liquidating partner, as
such, must be supported by a duly executed agreement among the partners appointing the liquidating partner.
§ 306.88 Political entities and public corporations.
Securities registered in the name of, or assigned to, a State, county, city, town,
village, school district or other political entity, public body or corporation, may
be assigned by a duly authorized officer, supported by evidence of his authority.
§ 306.89 Public officers.
Securities registered in the name of, or assigned to, a public officer designated
by title may be assigned by such officer, supported by evidence of incumbency.
Assignments for the officer'.s own apparent individual benefit will not be
recognized.
§ 806.90 Nontransferable securities.
The provisions of this subpart apply to Treasury Bonds, Investment Series
B-1975-80.
SUBPART
K—^ATTORNEYS
IN
FACT
§ 306.95 Attorneys in fact.
(a) General. Assignments by an attorney in fact will be recognized if supported by an adequate power of attorney. Every power must be executed in the
presence of an authorized certifying officer under the conditions set out in § 306.45
for certification of assignments. Powers need not be submitted to support redemption-exchanges or exchanges pursuant to advance refunding or prerefunding
offers where the securities to be issued are to be registered in the same names
and form,s as appear in the inscriptions or assignments of the securities surrendered. In all other cases, the original power, or a photocopy showing the
grantor's autograph signature, properly certified, must be submitted, together
with the security assigned on the owner's behalf by the attorney in fact. An
assignment by a substitute attorney in fact must be supported by an authorizing
power of attorney and power of substitution. An assignment by an attorney in
fact or a substitute attorney in fact for the apparent benefit of either will not be
accepted unless expressly authorized. (Form PD 1001 or 1003, as appropriate,
may be used to appoint an attorney in fact. An attomey in fact may use Porm
PD 1006 or 1008 to appoint a substitute. However, any form sufficient in substance may be used.) If there are two or more joint attorneys in fact or substitutes, all must unite in an assignment, unless the power authorizes less than all
to act. A power of attorney or of substitution not coupled with an interest will be
recognized until the Bureau receives proof of revocation or proof of the grantor's
death or incompetency.
EXHIBITS
233
(b) For legal representatives and fiduciaries. Assignments by an attomey in
fact or substitute attorney in fact for a legal representative or fiduciary, in
addition to the power of attorney and of substitution, must be supported by
evidence, if any, as required by §§ 306.57(d), 306.66(b), 306.75, and 306.76.
Powers must specifically designate the securities to be assigned.
(c) For corporations or unincorporated associations. Assignments by an attorney in fact or a substitute attorney in fact in behalf of a corporation or unincorporated association, in addition to the power of attomey and power of substitution, must be supported by one of the following documents certified under seal
of the organization, or, if it has no seal, sworn to by an officer who has access to
the records:
(1) A copy of the resolution of the governing body authorizing ah officer to
appoint an attorney in fact, with power of substitution, if pertinent, to assign, or
to sell, or to otherwise dispose of, the securities, or
(2) A copy of the charter, constitution, or bylaws, or a pertinent extract therefrom, showing the authority of an officer to appoint an attomey in fact, or
(3) A copy of the resolution of the governing body directly appointing an attorney in fact.
If the resolution or other supporting document shows only the title of the authorized officer, without his name, a certificate of incumbency must al,so be furnished. (Form PD 1014 may be used.) The power may not be broader than the
resolution or other authority.
(d) For puhlic corporations. A general power of attorney in behalf of a public
corporation will be recognized only if it is authorized by statute.
§ 306.96 Nontransferable securities.
The provisions of this subpart shall apply to nontransferable securities, subject only to the limitations imposed by the terms of the particular issues.
SUBPART L—TRANSFER THROUGH JUDICIAL PROCEEDINGS
§ 306.100 Transferable securities.
The Department will recognize valid judicial proceedings affecting the ownership of or interest in transferable securities, upon presentation of the secunties
together with evidence of the proceedings. In the case of securities registered in
the names of two or more persons, the extent of their respective interests in the
securities must be determined by the court in proceedings to which they are parties or must otherwise be validly established.^"
§ 306.101 Evidence required.
Copies of a final judgment, decree, or order of court and of any necessary sup^
plementary proceedings must be submitted. Assignments by a trustee in bankruptcy or a receiver of an insolvent's estate must be supported by evidence of
his qualification. Assignments by a receiver in equity or a similar court officer
must be supported by a copy of an order authorizing him to assign, or to sell, or
to otherwise dispose of, the securities. Where the documents are dated more
than 6 months prior to presentation of the securities, there must also be submitted a certificate dated within 6 months of presentation of the securities, showing the judgment, decree, or order, or evidence of qualification, is in full force.
Any such evidence must be certified under court seal.
§ 306.102 Nontransferable securities.
The provisions of this subpart shall apply to Treasury Bonds, Investment
Series B-1975-80, except that prior to maturity any reference to assignments
shall be deemed to refer to assignments of the bonds for exchange for the current
series of 1^/^ percent 5-year EA or EO Treasury notes.
SUBPART M—BEQUESTS FOR SUSPENSION OF TRANSACTIONS
§ 306.105 Requests for suspension of transactions in registered securities^.
(a) Timely notice. If prior to the time a registered security bearing an apparently valid assignment has been functioned, a claim is received from the owner
^0 Title in a finder claiming ownership of a registered security will not be recognized.
A finder claiming ownership of a bearer security or a registered security assigned in blank
or so assigned as to become in effect payable to bearer must perfect his title in accordance
with the provisions of S t a t e law. If there a r e no such provisions, t h e D e p a r t m e n t will not
recognize his title to t h e security.
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19 73 REPORT OF THE SECRETARY OF TPIE TREASURY
or his authorized representative showing that (1) the security was lost, stolen,
or destroyed and that it was unassigned, or not so assigned as to have become
in effect payable to bearer, or (2) the assignment was affected by fraud, the
transaction for which the security was received will be suspended. The interested parties will be given a reasonable period of time in which to effect settlement of their interests by agreement, or to institute judicial proceedings.
(b) Late notice. If, after a registered security has been transferred, exchanged, or redeemed in reliance on an apparently valid assignment, an owner
notifies the Bureau that the assignment was affected by fraud or that the security
had been lost or stolen, the Department will undertake only to furnish available
information.
(c) Forged assignments. A claim that an assignment of a registered security
is a forgery will be investigated. If it is established that the assignment was in
fact forged and that the owner did not authorize or ratify it, or receive any
benefit therefrom, the Department will recognize his ownership and grant appropriate relief.
§ 306.106 Requests for suspension of transactions in bearer securities.
(a) Securities not overdue. Neither the Department nor any of its agents will
accept notice of any claim or of pending judicial proceedings by any person for
the purpose of suspending transactions in bearer securities, or registered securities so assigned as to become in effect payable to bearer which are not overdue
as defined in § 306.25. ^^ However, if the securities are received and retired, the
Department will undertake to notify persons who appear to be entitled to any
available information concerning the source from which the securities were
received.
(b) Overdue securities. Reports that bearer securities, or registered securities so assigned as to become in effect payable to bearer, were lost, stolen, or possibly destroyed after they became overdue as defined in § 306.25 will be accepted
by the Bureau for the purpose of suspending redemption of the securities if
the claimant establishes his interest. If the securities are presented, their redemption will be suspended and the presenter and the claimant will each be given an
opportunity to establish ownership.
SUBPART N — B E L I E F FOR LOSS, T H E F T , DESTRUCTION,
OF S E C U R I T I E S
MUTILATION,
OR DEFACEMENT
§ 306.110 Statutory authority and requirements.
Relief is authorized, under certain conditions, for the loss, theft, destruction,
mutilation or defacement of U.S. securities, whether before, at, or after maturity.
A bond of indemnity, in such form and with such surety, sureties or security
as may be required to protect the interests of the United States, is required as a
condition of relief on account of any bearer security or any registered security
assigned in blank or so assigned as to become in effect payable to bearer, and is
ordinarily required in the case of unassigned registered securities.
§ 306.111 Procedure for applying for relief.
Prompt report of the loss, theft, destruction, mutilation or defacement of
. a security should be made to the Bureau. The report should include :
(a) The name and present address of the owner and his address at the time
the security was issued, and, if the report is made by some other person, the capacity in which he represents the owner.
(b) The identity of the security by title of loan, issue date, interest rate,
serial number and denomination, and in the case of a registered security, the
^ I t has been t h e longstanding policy of t h e Department to assume no responsibility for
the protection of bearer securities not in the possession of persons claiming rights therein
and to give no effect to any notice of such claims. This policy was formalized on April 27,
1867, when the Secretary of the Treasury issued t h e following s t a t e m e n t :
" I n consequence of t h e increasing trouble, wholly without practical beneflt, arising from
notices which are constantly received a t the Department respecting t h e loss of coupon bonds,
which are payable to bearer, and of Treasury notes issued and remaining in blank a t the
time of loss, it becomes necessary to give this public notice, t h a t t h e Government cannot
protect and will not undertake to protect the owners of such bonds and notes against the
consequences of their own fault or misfortune.
"Hereafter all bonds, notes, and coupons, payable to bearer, and Treasury notes issued
and remaining in blank, will be paid to the p a r t y presenting them in pursuance of the
re£:ulations of t h e Department, in t h e course of regular business ; and no a t t e n t i o n will be
paid to caveats which may be filed for t h e purpose of preventing such payment."
EXHIBITS
235
exact form of inscription and a full description of any assignment, endorsement or other writing.
(c) A full statement of the circumstances.
All available portions of a mutilated, defaced or partially destroyed security must
also be submitted.
§306.112 Type of relief granted.
(a) Prior to call or maturity. After a claim on account of the loss, theft, destruction, mutilation, or defacement of a security which has not matured or been
called has been satisfactorily established and the conditions for granting relief
have been met, a security of like description will be issued to replace the original
security.
(b) At or afte?^ call or maturity. Payment will be made on account of the loss,
theft, destruction, mutilation, or defacement of a called or matured security
after the claim has been satisfactorily established and the conditions for granting relief have been met.
(c) Interest coupons. Where relief has been authorized on account of a destroyed, mutilated, or defaced coupon security which has not matured or been
called, the replacement security will have attached all unmatured interest coupons
if it is established to the satisfaction of the Secretary of the Treasury that the
coupons were attached to the original security at the time of its destruction,
mutilation or defacement. In every other case only those unmatured interest coupons for which the Department has received payment will be attached. The
price of the coupons will be their value as determined by the Department at the
time relief is authorized using interest rate factors based on then current market yields on Treasury securities of comparable maturities.
§ 306.113 Cases not requiring bonds of indemnity.
A bond of indemnity will not be required as a condition of relief for the
loss, theft, destruction, mutilation, or defacement of registered securities in any
of the following classes of cases unless the Secretary of the Treasury deems it
essential in the public interest:
(a) If the loss, theft, destruction, mutilation, or defacement, as the case
may be, occurred while the security was in the custody or control of the United
States, or a duly authorized agent thereof (not including the Postal Service
when acting solely in its capacity as public carrier of the mails), or while in
the course of shipment effected under regulations issued pursuant to the Government Losses in Shipment Act (Parts 260, 261, and 262 of this chapter).
(b) If substantially the entire security is presented and surrendered and the
Secretary of the Treasury is satisfied as to the identity of the security and that
any missing portions are .not sufficient to form the basis of a valid claim against
the United States.
(c) If the security is one which by the provisions of law or by the terms of its
issue is nontransferable or is transferable only by operation of law.
(d) Jf the owner or holder is the United States, a Federal Reserve bank, a Federal Govemment corporation, a State, the District of Columbia, a territory or possession of the United States, a municipal corporation, or, if applicable, a political
subdivision of any of the foregoing, or a foreign government.
SUBPART O—BOOK-ENTRY PROCEDURE
§ 306.115 Definition of terms.
In this subpart, unless the context otherwise requires or indicates :
(a) "Reserve Bank" means a Federal Reserve bank and its branches acting as
Fiscal agent of the United States and when indicated acting in its individual
capacity.
(b) "Treasury security" means a Treasury bond, note, certificate of indebtedness, or bill issued under the Second Liberty Bond Act, as amended, in the
form of a definitive Treasury security or a book-entry Treasury security.
(c) "Definitive Treasury security" means a Treasury bond, note, certificate
of indebtedness, or bill issued under the Second Liberty Bond Act, as amended in
engraved or printed form.
(d) "Book-entry Treasury security" means a Treasury bond, note, certificate
of indebtedness, or bill issued under the Second Liberty Bond Act, as amended, in
506-171—73
18
236
1973 REPORT OF THE SECRETARY OF THE TREASURY
the form of an entry made as prescribed in this subpart on the records of a Reserve Bank.
(e) "Pledge" includes a pledge of, or any other security interest in Treasury
securities as collateral for loans or advances or to secure deposits of public
monies or the performance of an obligation.
(f) "Date of call" (see § 306.2) is "the date fixed in the official notice of call
published in the Federal Register * * * on which the obligor will make payment
of the security before maturity in accordance with its terms."
(g) "Member bank" means any national bank. State bank or bank or trust
company which is a member of a Reserve Bank.
§ 306.116 Authority of Reserve Banks.
Each Reserve Bank is hereby authorized, in accordance with the provisions of
this subpart, to (a) issue book-entry Treasury securities by means of entries
on its records which shall include the name of the depositor, the amount, the
loan title (or series) and maturity date; (b) effect conversions between bookentry Treasury securities and definitive Treasury securities ; (c) otherwise service
and maintain book-entry Treasury securities; and (d) issue a confirmation of
transaction in the form of a written advice (serially numbered or otherwise)
which specifies the amount and description of any securities, that is, loan title
(or series) and maturity date, sold or transferred and the date of the transaction.
§ 306.117 Scope and effect of book-entry procedure.
(a) A Reserve bank as fiscal agent of the United States may apply the bookentry procedure provided for in this subpart to any Treasury securities which
have been or are hereafter deposited for any purpose in accounts with it in its
individual capacity under terms and conditions which indicate that the
Reserve bank will continue to maintain such deposit accounts in its individual
capacity, notwithstanding application of the book-entry procedure to such securities. Tliis paragraph is applicable, but not limited, to securities deposited:"
(1) As collateral pledged to a Reserve bank (in its individual capacity) for advances by i t ;
(2) By a member bank for its sole account;
(3) By a member bank held for the account of its customers ;
(4) In connection with deposits in a member bank of funds of States, municipalities, or other political subdivisions; or
(5) In connection with the performance of an obligation or duty under Federal, State, municipal, or local law, or judgments or decrees of courts.
The application of the book-entry procedure under this paragraph shall not
derogate from or adversely affect the relationships that would otherwise exist
between a Reserve bank in its individual capacity and its depositors concerning
any deposits under this paragraph. Whenever the book-entry procedure is
applied to such Treasury securities, the Reserve bank is authorized to take all
action necessary in respect of the book-entry procedure to enable such Reserve
bank in its individual capacity to performs its obligations as depositary with
respect to such Treasury securities.
(b) A Reserve bank, as fiscal agent of the United States, shall apply the bookentry procedure to Treasury securities deposited as collateral pledged to the
United States under current revisions of Department of the Treasury Circulars
Nos. 92 and 176 (Parts 203 and 202 of this chapter), and may apply the book-entry
procedure, with the approval of the Secretary of the Treasury, to any other Treasury securities deposited with a Reserve bank as fiscal agent of the United States.
(c) Any person having an interest in Treasury securities which are deposited
with a Reserve bank (in either its individual capacity or as fiscal agent) for
any purpose shall be deemed to have consented to their conversion to book-entry
Treasury securities pursuant to the provisions of this subpart, and in the manner and under the procedures prescribed by the Reserve bank.
(d) No deposits shall be accepted under this section on or after the date of
maturity or call of the securities.
§ 306.118 Transfer or pledge.
(a) A transfer or a pledge of book-entry Treasury securities to a Reserve
bank (in its individual capacity or as fiscal agent of the United States), or to
^ The appendix to this subpart contains rules of identification of book-entry securities
for Federal income tax purposes.
EXHIBITS
237
the United States, or to any transferee or pledgee eligible to maintain an appropriate book-entry account in its name with a Reserve bank under this subpart,
is effected and perfected, notwithstanding any provision of law to the contrary,
by a Reserve bank making an appropriate entry in its records of the securities transferred or pledged. The making of such an entry in the records of a
Reserve bank shall (1) have the effect of a delivery in bearer form of definitive
Treasury securities; (2) have the effect of a taking of delivery by the transferee
or pledgee; (3) constitute the transferee or pledgee a holder; and (4) if a pledge,
effect a perfected security interest therein in favor of the pledgee. A transfer or
pledge of book-entry Treasury securities effected under this paragraph shall have
priority over any transfer, pledge, or other interest, theretofore or thereafter effected or perfected under paragraph (b) of this section or in any other manner.
(b) A transfer or a pledge of transferable Treasury securities, or any interest
therein, which is maintained by a Reserve bank (in its individual capacity or
as fiscal agent of the United States) in a book-entry account under this subpart,
including securities in book-entry form under § 306.117(a) (3), is effected, and
a pledge is perfected, by any means that would be effective under applicable law
to eff'ect a transfer or to effect and perfect a pledge of the Treasury securities, or
any interest therein, if the securities were maintained by the Reserve bank in
bearer definitive form. For purposes of transfer or pledge hereunder, book-entry
Treasury securities maintained by a Reserve bank shall, notwithstanding any provision of law to the contrary, be deemed to be maintained in bearer definitive
form. A Reserve bank maintaining book-entry Treasury securities either in its
individual capacity or as fiscal agent of the United States is not a bailee for purposes of notification of pledges of those securities under this subsection, or a
third person in possession for purposes of acknowledgment of transfers thereof
under this subsection. Where transferable Treasury securities are recorded on
the books of a depositary (a bank, banking institution, financial firm, or similar
party, which regularly accepts in the course of its business Treasury securities
as a custodial service for customers, and maintains accounts in the names of
such customers reflecting ownership of or interest in such securities) for account
of the pledgor or transferor thereof and such securities are on deposit with a
Reserve bank in a book-entry account hereunder, such depositary shall, for purposes of perfecting a pledge of such securities or effecting delivery of such
securities to a purchaser under applicable provisions of law, be the bailee to
which notification of the pledge of the securities may be given or the third
person in possession from which acknowledgment of the holding of the securities for the purchaser may be obtained. A Reserve bank will not accept notice
or advice of a transfer or pledge effected or perfected under this subsection,
and any such notice or advice shall have no effect. A Reserve bank may continue to deal with its depositor in accordance with the provisions of this subpart, not withstanding any transfer or pledge effected or perfected under this
subsection.
(c) No filing or recording with a public recording office or officer shall be necessary or effective with respect to any transfer or pledge of book-entry Treasury
securities or any interest therein.
(d) A Reserve bank shall, upon receipt of appropriate instructions, convert
book-entry Treasury securities into definitive Treasury securities and deliver
them in accordance with such instructions; no such conversion shall affect existing interests in such Treasury securities.
*
(e) A transfer of book-entry Treasury securities within a Reserve bank shall
be made in accordance with procedures established by the bank not inconsistent
with this subpart. The transfer of book-entry Treasury securities by a Reserve
bank may be made through a telegraphic transfer procedure.
(f) All requests for transfer or withdrawal must be made prior to the maturity or date of call of the securities.
§ 306.119 Withdrawal of Treasury securities.
(a) A depositor of book-entry Treasury securities may withdraw them from
a Reserve bank by requesting delivery of like definitive Treasury securities to
itself or on its order to a transferee.
(b) Treasury securities which are actually to be delivered upon withdrawal
may be issued either in registered or in bearer form, except that Treasury billsi
and EA and EO series of Treasury notes will be issued in bearer fonn only.
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1973 REPORT OF THE SECRETARY OF THE TREASURY
§ 306.120 Delivery of Treasury securities.
A Reserve bank which has received Treasury securities and effected pledges,
made entries regarding them, or transferred or delivered them according to the
instructions of its dei30sitor is not liable for conversion or for participation in
breach of fiduciary duty even though the depositor had no right to dispose of or
take other action in respect of the securities. A Reserve bank shall be fully discharged of its obligations under this subpart by the delivery of Treasury securities in definitive form to its depositor or upon the order of such depositor.
Customers of a member bank or other depositary (other than a Reserve bank)
may obtain Treasury securities in definitive form only by causing the depositor
of the Reserve bank to order the withdrawal thereof from the Reserve bank.
§ 306.121 Registered bonds and notes.
No formal assignment shall be required for the conversion to book-entry Treasury securities of registered Treasury securities held by a Reserve bank (in either
its individual capacity or as fiscal agent) on the effective date of this subpart
for any purpose specified in § 306.117(a). Registered Treasury securities deposited thereafter with a Reserve bank for any purpose specified in § 306.117 shall
be assigned for conversion to book-entry Treasury securities. The assignment,
which shall be executed in accordance with the provisions of Subpart F of this
part, so far as applicable, shall be to "Federal Reserve Bank of
, as
fiscal agent of the United States, for conversion to book-entry Treasury securities."
§ 306.122 Servicing book-entry Treasury securities; payment of interest, payment at maturity or upon call.
Interest becoming due on book-entry Treasury securities shall be charged in
the Treasurer's account on the interest-due date and remitted or credited in accordance with the depositor's instructions. Such securities shall be redeemed
and charged in the Treasurer's account on the date of maturity or call, and the
redemption proceeds, principal and interest, shall be disposed of in accordance
with the depositor's instructions.
SUBPART P — M I S C E L L A N E O U S
PROVISIONS
§ 306.125 Additional requirements.
•In any case or any class of cases arising under these regulations the Secretary of the Treasury may require such additional evidence and a bond of indemnity, with or without surety, as may in his judgment be necessary for the
protection of the interests of the United States.
§ 306.126 Waiver of regulations.
The Secretary of the Treasury reserves the right, in his discretion, to waive or
modify any provision or provisions of these regulations in any particular case
or class of cases for the convenience of the United States or in order to relieve
any person or persons of unnecessary hardship, if such action is not inconsistent with law, does not impair any existing rights, and he is satisfied that such
action would not subject the United States to any substantial expense or liability.
§ 306.127 Preservation of existing rights.
Nothing contained in these regulations shall limit or restrict existing rights
which holders of securities heretofore issued may have acquired under the circulars offering such securities for sale or under the regulations in force at the
time of acquisition.
§ 306.128 Supplements, amendments or revisions.
The Secretary of the Treasury may at any time, or from time to time, prescribe
additional supplemental, amendatory or revised regulations with respect to U.S.
securities.
APPENDIX TO SUBPART E—INTEREST—COMPUTATION OF INTEREST ON TREASURY
BONDS, TREASURY NOTES, AND TREASURY CERTIFICATES OF INDEBTEDNESS,
AND COMPUTATION OF DISCOUNT ON TREASURY BILLS—INTEREST TABLES
COMPUTATION OF INTEREST ON ANNUAL BASIS
One Day's Interest Is 1/365 or 1/366 of 1-Year's Interest
Computation of interest on Treasury bonds, notes, and certificates of indebtedness will be made on an annual basis in all cases where interest is payable in
EXHIBITS
239
one amount for the full term of the security, unless such term is an exact halfyear (6 months), and it is provided that interest shall be computed on a semiannual basis.
If the term of the securities is exactly 1 year, the interest is computed for the
full period at the specified rate regardless of the number of days in such period.
If the term of the securities is less than 1 full year, the annual interest period
for purposes of computation is considered to be the full year from but not including the date of issue to and including the anniversary of such date.
If the term of the securities is more than 1 full year, computation is made on
the basis of one full annual interest period, ending with the maturity date, and
a fractional part of the preceding full annual interest period.
The computation of interest for any fractional part of an annual interest
period is made on the basis of 365 actual days in such period, or 366 days if
February 29 falls within such annual period.
COMPUTATION OF INTEREST ON SEMIANNUAL BASIS
One Day's Interest Is 1/181,1/182,1/183 or 1/184 of y^ Year's Interest
Computation of interest on Treasury bonds, notes, and certificates of indebtedness will be made on a semiannual basis in all cases where interest is payable for
one or more full half-year (6 months) periods, or for one or more full-year
periods and a fractional part of a half-year period. A semiannual interest period
is an exact half-year or 6 months, for computation purposes, and may comprise
181,182,183 or 184 actual days.
An exact half-year's interest at the specified rate is computed for each full
period of exactly 6 months, irrespective of the actual number of days in the
half-year.
If the initial interest covers a fractional part of a half-year, computation is
made on the basis of the actual number of days in the half-year (exactly 6
months) ending on the day such initial interest becomes due. If the initial interest covers a period in excess of 6 months, computation is made on the basis of
one full half-year period, ending with the interest due date, and a fractional
part of the preceding full half-year period.
Interest for any fractional part of a full half-year period is computed on the
basis of the exact number of days in the full period, including February 29 whenever it falls within such a period.
The number of days in any half-year period is shown in the following table:
For the half-year
Beginning and ending days are Beginning and ending days are
1st or 15th of months listed
last days of months listed under
under interest period (number
interest period (number of days)
of days)
Interest period
Regular year
January to J u l y - February to August
March to September.April to OctoberMay to November
June to December
July to January
August to February
September to March
October to April
November to M a y .
December to J u n e .
-
1 year (any 2 consecutive halfyears)
-
Leap year
Regular year
Leap year
181
181
184
183
184
183
184
184
181
182
181
182
182
182
184
183
184
183
184
184
182
183
182
183
181
184
183
184
183
184
184
181
182
181
182
181
182
184
183
184
183
184
184
1.82
183
182
183
182
365
366
365
366
240
1973 REPORT OF THE SECRETARY OF THE TREASURY
The following are dates for end-of-the-month interest computations.
When interest period
Interest-comptitation period will he from, hut
ends on—
loill not include—
Jan. 31
July 31.
Feb. 28 in 365-day year
Aug. 31.
Feb. 29
Do.
Mar. 30, 31^
Sept. 30.
Apr. 30
Oct. 31.
May 30, 3 1 —
Nov. 30.
June 30
i.
Dec. 31.
July 31
Jan. 31.
Aug. 29, 30 or 31
Feb. 28 in 365-day year.
Feb. 29 in leap year.
Sept. 30
Mar. 31.
Oct. 30, 31
Apr. 30.
Nov. 30
May 31.
Dec. 30, 31
June 30.
U S E OF I N T E R E S T
TABLED
In the appended tables decimals are set forth for use in computing interest for
fractional parts of interest periods. The decimals cover interest on $1,000 for 1
day in each possible semiannual (Table I ) , and annual (Table II) interest
period, at all rates of interest in steps of % percent, from % to 9 percent. The
amount of interest accruing on any date (for a fractional part of an interest period) on $1,000 face amount of any issue of Treasury bonds. Treasury notes, or
Treasury certificates of indebtedness may be ascertained in the following way:
(1) The date of issue, the dates for the payment of interest, the basis (semiannual or annual) upon which interest is computed, and the rate of interest
(percent per annum) may be determined from the text of the security or from
the official circular governing the issue.
(2) Determine the interest period of which the fraction is a part, and calculate the number of days in the full period to determine the proper column to
be used in selecting the decimal for 1 day's interest.
(3) Calculate the actual number of days in the fractional period from.but
not including the date of issue or the day on which the last preceding interest
payment was made, to and including the day on which the next succeeding interest payment is due or the day as of which the transaction which terminates
the accrual of additional interest is effected.
(4) Multiply the appropriate decimal (1 day's interest on $1,000') by the
number of days in the fractional part of the interest period. The appropriate
decimal will be found in the appended table for interest payable semiannually
or annually, as the case may be, opposite the rate borne by the security, and in the
column showing the full interest period of which the fractional period is a part.
(For interest on any other amount, multiply the amount of interest on $1,000 by
the other amount expressed as a decimal of $1,000.)
EXHIBITS
241
TREASURY B I L L S
The methods of computing discount rates on U.S. Treasury bills are given
below:
Computation will be made on an annual basis in all cases. The annual period
for bank discount is a year of 360 days, and all computations of such discount
will be made on that basis. The annual period for true discount is 1 full year
from but not including the date of issue to and including the anniversary of such
date. Computation of true discount for a fractional part of a year will be made on
the basis of 365 days in the year, or 366 days if February 29 falls within the year.
BANK
DISCOUNT
The bank discount rate on a Treasury bill may be ascertained by (1) subtracting the sale price of the bill from its face value to obtain the amount of
discount; (2) dividing the amount of discount by the number of days the bill
is to run to obtain the amount of discount per day; (3) multiplying the amount
of discount per day by 360 (the number of days in a commercial year of 12 months
of 30 days each) to obtain the amount of discount per year; and (4) dividing
the amount of discount per year by the face value of the bill to obtain the bank
discount rate.
For example:
91-day biU:
Principal amount—maturity value
$100. 00
Price at issue—amount received
99. 50
Amount of discount
. 50
$0.50-f-91x360-f-$100=.01978 or 1.978 percent
TRUE DISCOUNT
The true discount rate on a Treasury bill of not more than one-half year in
length may be ascertained by (1 and 2) obtaining the amount of discount per
day by following the first two steps described under "Bank Discount"; (3)
multiplying the amount of discount per day by the actual number of days in the
year from date of issue (365 ordinarily, but 366 if February 29 falls within
the year from date of issue) to obtain the amount of discount per year; and
(4) dividing the amount of discount per year by the sale price of the bill to obtain
the true discount rate.
For example:
91-day bill:
Principal amount—maturity value
$100. 00
Price at issue—amount received
99. 50
Amount of discount
$0.50-^91 X365^$99.50=.02016 or 2.016 percent
. 50
242
19 7 3 REPORT OF TPTE SECRETARY OF TPIE
TREASURY
T A B L E I.—Decimal for 1 day's interest on $1,000 at various rates^of interest,
payahle semiannually or on a semiannual hasis, in regular years of 365 days and
in leap year's of 366 days {to determine applicable numher of days, see '^computation of interest on semiannual hasis")
R a t e per a n n u m
(percent)
MK '.
-
-
:
M
^^
-
•:—
-
'H
H
Vs
Half-year of 184
days
-
-
—
iVs
IK
——-
m
n^
-
1^:::::::--::
VA-...
2
2M
2K
2H
23^
—
-
-
2^..
2M-2K
—-
3
3K
BH
SH
-
3J/2
ZVs
3M
SVs
-
-
4
iVs
4^
m
-
43^
4M
4H
4^
5
5V^
5H
6^
6}^^
bVs
5K
5J^
.—
-
-
6 ..
$0,003 396 739
.006 793 478
.010 190 217
.013 586 967
.016 983 696
.020 380 435
.023 777 174
.027 173 913
.030 570 652
.033 967 391
.037 364 130
.040 760 870
.044 157 609
.047 654 348
.050 951087
.054 347 826
.057 744 565
.061 141 304
.004 538 043
.067 934 783
.071331522
.074 728 261
.078 126 000
.081 621 739
.084 918 478
.088 316 217
.091711967
.096 108 696
.098 606 436
.101902 174
.106 298 913
.108 695 652
.112 092 391
.115 489 130
.118 885 870
.122 282 609
.125 679 348
.129 076 087
.132 472 826
.136 869 666
.139 266 304
.142 663 043
.146 059 783
.149 466 622
.162 853 261
.156 260 000
.169 646 739
.163 043 478
Half-year of 183
days
$0.003 416 301
. 006 830 601
. 010 245 902
.013 661 202
. 017 076 603
. 020 491 803
. 023 907 104
. 027 322 404
. 030 737 706
. 034 153 006
.037 668 306
. 040 983 607
. 044 398 907
.047 814 208
. 051 229 508
. 054 644 809
. 658 060 109
.061 476 410
.064 890 710
. 068 306 o n
. 071 721 311
.076 136 612
. 078 651 913
. 081 967 213
. 086 382 614
.088 797 814
.092 213 115
. 095 628 415
.099 043 716
. 102 469 016
.106 874 317
.109 289 617
.112 704 918
. 116 120 219
. 119 535 619
. 122 950 820
.126 366 120
.129 781 421
.133 196 721
.136 612 022
.140 027 322
.143 442 623
.146 867 923
.160 273 224
.153 688 625
.157 103 825
. 160 519 126
.163 934 426
Half-year of 182
days
$0.003 434 066
.006 868 132
. 010 302 198
.013 736 264
. 017 170 330
. 020 604 396
. 024 038 462
. 027 472 527
.030 906 693
. 034 340 669
. 037 774 725
. 041 208 791
.044 642 867
.048 076 923 •
.061 510 989
. 054 945 055
. 058 379 121
.061 813 187
.066 247 263
.068 681 319
. 072 116 385
. 075 649 451
. 078 983 616
. 082 417 682
. 086 861 648
. 089 285 714
. 092 719 780
.096 163 846
.099 687 912
. 103 021 978
.106 466 044
.109 890 110
.113 324 176
.116 768 242
.120 192 308
.123 626 374
.127 060 440
.130 494 506
.133 928 571
.137 362 637
. 140 796 703
.144 230 769
.147 664 835
. 161 098 901
.154 632 967
. 157 967 033
.161 401 099
.164 835 165
Half-year of 181
days
$0.003 453 039
. 006 906 077
. 010 359 116
.013 812 156
.017 266 193
. 020 718 232
. 024 171 271
. 027 624 309
.031 077 348
. 034 630 387
.037 983 426
.041 436 464
.044 889 603
. 048 342 641
. 061 795 680
. 055 248 619
. 068 701 667
.062 154 696
. 066 607 735
. 069 060 773
. 072 613 812
. 075 966 861
. 079 419 890
. 082 872 928
.086 326 967
. 089 779 006
. 093 232 044
. 096 686 083
. 100 138 122
. 103 691 160
.107 044 199
.110 497 238
.113 960 276
.117 403 315
. 120 856 364
. 124 309 392
. 127 762 431
. 131 215 470
.134 668 508
.138 121 547
. 141 674 586
. 145 027 624
.148 480 663
.151 933 702
.155 386 740
.158 839 779
.162 292 818
.165 746 856
EXHIBITS
243
TABLE II.—Decimal for 1 day's inierest on $1,000 at various rates of interest,
payahle annually or on an annual basis, in regular years of 365 clays and in leap
years of 366 days
Rate per annum (percent)
K-
-
-
Y
A
H
Yi
y&.
M
%
1.
lY
IK
lYz
IY2
1^
IM
VA
2.
23^
2K
2%
2Y2
2^
2M
2Ys—.
3—
3H
3J4
3H
3H
ZYz
3M
VYs
4
43^4M
4H
4M
4^
AH
VYs
5
5Y?,
bA
Y
bYs
—
5H
bYi
bYi
bYs...6
-
-
Regular year,
365 days
-
-..--
-
-
-
-
-
-
-
—
-
-
..-
-
.-
-
-
--
-
-
-
--
-
-
-
-
-
-
-
— -
-----
--
---
-
-
-
-
-
-
-
-
-
—-
-
-
--
---
Leap year,
366 days
$0,003 424 658
.006 849 315
010 273 973
013 698 630
017 123 288
.020 547 945
023 972 603
027 397 260
030 821 918
034 246 575
.037 671 233
.041 095 890
.044 520 548
047 945 205
.051 369 863
054 794 521
058 219 178
061 643 836
.065 068 493
068 493 151
071 917 808
075 342 466
.078 767 123
082 191 781
085 616 438
089 041 096
.092 465 753
095 890 411
099 315 068
102 739 726
106 164 384
109 589 041
113 013 699
.116 438 356
119 863 014
.123 287 671
126 712 329
130 136 986
.133 561 644
.136 986 301
140 410 959
143 835 616
.147 260 274
150 684 932
154 109 589
.157 534 247
160 958 904
164 383 562
$0,003 415 301
.006 830 601
.010 245 902
.013 661 202
.017 076 503
.020 491 803
.023 907 104
.027 322 404
.030 737 705
.034 153 005
.037 568 306
.040 983 607
.044 398 907
.047 814 208
.051 229 508
.054 644 809
.058 060 109
.061 475 410
.064 890 710
.068 306 Oil
.071 721 311
.075 136 612
.078 551 913
.081 967 213
.085 382 514
'.088 797 814
.092 213 115
.095 628 415
.099 043 716
.102 459 016
.105 874 317
.109 289 617
.112 704 918
.116 120 219
.119 535 519
.122 950 820
.126 366 120
.129 781 421
.133 196 721
.136 612 022
.140 027 322
.143 442 623
.146 857 923
.150 273 224
.153 688 525
.157 103 825
.160 519 126
.163 934 426
APPENDIX TO SUBPART O—BOOK-ENTRY PROCEDURE
RECORDS FOR FEDERAL INCOME TAX PURPOSES
There are attached three documents in connection with the book-entry procedure which simplify recordkeeping for Federal income tax purposes. They
apply to transferable Treasury bonds, notes, certificates of indebtedness, or bills
issued under the Second Liberty Bond Act, as amended, and to "any other security of the United States." The quoted term is defined to include a bond, note,
certificate of indebtedness, bill, debenture, or similar obligation which is subject to the provisions of 31 CFR Part 306, or other comparable Federal regulations and which is issued by any department or agency of the Government of
the United States, or the Federal National Mortgage Association, the Federal
Home Loan Banks, the Federal Land Banks, the Federal Intermediate Credit
Banks, the Banks for Cooperatives, or the Tennessee Valley Authority.
The three documents are:
(1) The substance of Treasury Department Decision 7081, published in the
Federal Register on December 31,1970; ^
1 Piled as p a r t of the original dpcument. See 26 CFR 1.1012-1 (c) ( 7 ) .
244
19 73 REPORT OF THE SECRETARY OF THE TREASURY
(2) Revenue Ruling 71-21, published in Internal Revenue Bulletin 1971-3,
dated January 18,1971; and
(3) Revenue Ruling 71-15, published in Internal Revenue Bulletin 1971-3,
dated January 18, 1971.
The first document modifies the tax identification rules regarding the determination of basis and holding period of securities held as investments. It applies to the sale or transfer of book-entry securities pursuant to a written instruction by a taxpayer. It permits the taxpayer in its written instruction to its
bank or to the person through whom the taxpayer makes the sale or transfer
to identify the securities being sold or transferred by specifying the unique
lot number which he has assigned to the lot containing them.
The taxpayer may make the specification either—(a) in the written instruction, or (b) in the case of a taxpayer having a book-entry account at a Reserve
bank, or by his bank or any other person through whom the taxpayer makes the
books of the Reserve bank sold or transferred by him on that date: Pi^ovided,
The list is mailed to or received by the Reserve bank on or before the latter's
next business day.
These provisions apply only if the taxpayer assigns lot numbers in numerical
sequence to successive purchases of securities in the same loan title (series) and
maturity date, except that securities of the same loan title (series) and maturity date which are purchased at the same price on the same date may be included within the same lot.
The written advice of transaction furnished to the taxpayer by the Reserve
bank, or by his bank or any other person through whom the taxpayer makes the
sale or transfer, which specifies the amount and the description of the securities
sold or transferred and the date of the transaction is sufficient confirmation. The
Reserve bank need not use or refer to the lot number.
The second document concerns an owner of securities who has assigned sequential numbers to his successive purchases. The owner retains full interest in
the securities but transfers them to a bank which has a book-entry account with
a Reserve bank, or to another party whicli^ transfers them to a bank v/hich has a
book-entry account with a Reserve bank.
When at a later date the bank instructs the Reserve bank to sell or transfer
securities held in book entry for its customer, the bank need not refer to the
sequential number which had been assigned on the owner's books.
The tax identification requirements are satisfied if the owner's written instruction to his bank or to the person through whom the taxpayer makes the
sale or transfer sufficiently identifies the securities to be sold or transferred
and refers to the lot number assigned to them in the owner's books. The bank's
instruction to the Reserve bank will not refer to lot numbers; the Reserve bank
will confirm the sale to the bank in the manner it deems appropriate. The member
bank will confirm the sale or transfer to its customer by furnishing a written
advice of transaction specifying the amount and description of the securities
sold and the date of sale. The confirmation need not refer to lot number.
This document also permits substantially the same kind of identification and
confirmation procedures when securities are purchased through the book-entry
account for the bank's customers.
The third document provides that a dealer, who propeiiy holds securities in
inventory in accordance with § 1.471-5 of the Income Tax Regulations and proposes to transfer them to a book-entry system in a Reserve bank, will continue
to maintain his books and records for Federal income tax purposes with respect
to such securities in accordance with § 1.471-5 of the regulations and not § 1.1012-1
of the regulations.
SECTION 1012—BASIS OF PROPERTY—COST
26 CFR 1.1012.1 Basis of property. Rev. Rul. 71-21^ A taxpayer owns as
investments Treasury securities and certain other securities described in the
new § 1.1012-1 (c) (7) (iii) (c;^) of the Income Tax Regulations. The taxpayer
owner will assign a lot number to the securities in his books. The numbers will be
assigned in numerical sequence to successive purchases of the same loan title (series) and maturity date, except that securities of the same loan title (series) and
lAlso released as Technical Information Release 1063, dated Dec. 30, 1970.
EXHIBITS
245
maturity date which are purchased at the same price on the same date may be
included in the same lot. .
The owner proposes to retain full interest in the securities but he will transfer possession of them to a bank. That bank will not keep records of the securities
by use of the above-described lot numbers. The bank will also take possession of
like securities for other taxpayers.
The bank will transfer all of these securities to a book-entry system of a Federal Reserve bank. The securities will be entries in the book-entry account of the
bank and, as such, the securities will no longer exist in definitive form. That
account will not reflect the fact that the bank holds securities for several
taxpayers.
When the owner wishes to sell certain securities, he will so instruct the bank
in writing. The owner's instruction will sufficiently identify the securities to be
sold, and will also refer to the lot number assigned in the books of the owner
to the securities to be sold. The bank will then instruct, in writing; the Federal
Reserve bank to transfer the securities. The latter instruction will not refer to
the pertinent lot number. The Federal Reserve bank will confirm the sale to the
bank in the manner it deems appropriate. The bank will confirm the sale to the
owner by furnishing a written advice of transaction specifying the amount and
description of the securities sold and the date of the sale. The confirmation will
not refer to lot numbers.
When the owner desires to buy additional securities as investments of the kind
described in the new § 1.1012-1 (c) (7) (iii) (a) of the regulations, he will order
the bank to purchase them. The bank will instruct the Federal Reserve bank
to obtain the securities and to put them in the bank's book-entry account. The
confirmation of the purchase from the Federal Reserve bank to the bank and from
the bank to the owner will be of the nature used for the sale of securities. The
owner will assign lot numbers in the manner described above to these purchased
securities:
Held, the above procedure is consistent with the tax record requirements of
new § 1.1012-1 (c) (7) of the regulations. This procedure exemplifies the tax
record requirements when securities are transferred by parties to a bank who has
an account in the book-entry system of a Federal Reserve bank. The tax record
requirements in the case of a bank who puts its own investment securities in the
book-entry system are set forth in new § 1.1012-1 (c) (7) of the regulations.
SECTION 471—GENERAL RULE FOR INVENTORIES
26 CFR 1.471-5 Inventories hy dealers in Rev. Rul. 71-15 ^ securities. (Also sectioii 1012; 1.1012-1.) A dealer, 'as defined in section 1.471-5 of the Income Tax
Regulations, holds Treasury securities and other securities of the United States.
"Other securities of the United States" means a transferable bond, note, certificate of indebtedness, bill, debenture, or similar obligation which is subject to the
provisions of 31 CFR Part 306 or other comparable Federal regulations and
which is issued by (1) any department or agency of the Government of the
United States, or (2) the Federal National Mortgage Association, the Federal
Home Loan Bank, the Federal Land Banks, the Federal Intermediate Credit
Banks, the Banks for Cboperatives, or the Tennessee Valley Authority.
The dealer properly holds such securities in inventory in accordance with
§ 1.471-5 of the Income Tax Regulations. He proposes to transfer those securities
to a book-entry system maintained by a Federal Reserve bank. The dealer will
continue to maintain his books and records for Federal income tax purposes with
respect to such securities in accordance with §1.471-5 of the regulations.
Held, the dealer is not subject to the provisions of § 1.1012-1 of the regulations
relating to identification of property with respect to such securities. Such a
dealer must, however, comply with the provisions of § 1.471-5 of the regulations
relating to inventory by dealers in securities.
JOHN K. CARLOCK,
Fiscal Assistant Secretary.
1 Also released as Technical Information Release 1064, dated Jan. 14, 1971.
246
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 11.—Department Circular No. 853, April 11, 1973, Second Revision,
restrictive endorsements of United States bearer securities
DEPARTMENT OF THE TREASURY,
Washington, April 11,1973.
The regulations in 31 CFR part 328 have been amended for the purpose of
reducing costs of shipping definitive bearer securities submitted for conversion
to book-entry securities or for redemptions or exchanges.
Notice and public procedures are minecessary and are dispensed with as the
fiscal policy of the United States is involved. The changes were effected under
authority of R.S. 3706; -^0 Stat. 288, 502, 1309; 46 Stat. 20; 48 Stat. 343; 49 Stat.
20; 56 Stat. 189; 73 Stat. 622; 85 Stat. 5, 74 (31 U.S.C. 738a, 739, 752, 752a, 753,
754, 754a and 754b) ; and 5 U.S.C. 301.
JOHN K . CARLOCK,
Fiscal Assistant Secretary.
Department of the Treasury Circular No. 853, Revised, dated December 4, 1964,
is hereby further amended and revised and issued as Department of the Treasury Circular No. 853, Second Revision, effective April 11,1973.
§ 328.1 Scope of regulations.
The regulations in this part are applicable only to U.S. bearer securities^ presented (a) by or through banks for payment at or after their maturity or call
date, or in exchange for any securities under any exchange offering, (b) by
banks for conversion to book-entry securities, (c) by or through banks at any
time prior to their maturity or call date for redemption at par and application
of the entire proceeds in payment of Federal estate taxes, provided said securities
by the terms of their issue are eligible for such redemption, and (d) by Service
Center Directors and District Directors, Internal Revenue Service, for redemption, with the proceeds to be applied in payment of taxes (other than securities
presented under paragraph (c) of this section). These regulations do not apply
to bearer securities presented for any other transactions, or to registered securities assigned in blank, or to bearer, or so assigned as to become, in effect,
payable to bearer.
§ 328.2 Definitions.
Certain words and terms, as used in these regulations, are defined as follows:
(a) "Banks" refer to, and include, incorporated banks (i.e., banks doing a general commercial banking business), incorporated trust companies (i.e., trust
companies doing either a general banking business or a general trust business),
and savings and loan associations, building and loan associations, and such other
financial institutions as may be designated by the Federal Reserve banks. This
definition is limited to institutions incorporated within the United States, its
territories and possessions, the Commonwealth of Puerto Rico and the Canal
Zone.
(b) "Bearer securities" or "securities" are those which are payable on their
face to "bearer," the ownership of which is hot recorded. They include "Treasury
bonds," "Treasury notes," "Treasury certificates of indebtedness," and "Treasury bills."
§ 328.3 Authorization for restrictive endorsements.
(a) By hanks.—Banks are authorized, under the conditions and in the form
hereinafter provided, to place restrictive endorsements upon the face of bearer
securities owned by themselves or their customers for the purpose of presentation
to Federal Reserve banks or branches, or to the Treasurer of the United States.,
as follows:
r
(1) For payment or redemption—at any.time within 1 calendar month prior
to their maturity date, or the date on which they become payable pursuant to
a call for redemption, or at any time after their maturity or call date;
(2) For exchange—during any period for their presentation pursuant to an
exchange offering;
(3) For redemption at par in payment of Federal estate taxes (only eligible
securities)—at any time prior to their maturity or call redemption date; and
1 Certain agencies of the United States and certain Government and Government-sponsored
corporations also authorize the restrictive endorsement of bearer securities.
EXHIBITS
247
(4) For conversion to book-entry securities under subpart O of part 306 of this
chapter—at any time prior to their maturity or call redemption date.
(b) By Servi.ce Center Directors and District Directors, Intemal Revenue
Service.—Service Center Directors and District Directors, Internal Revenue
Service, are authorized, under the conditions and in the form hereinafter provided, to place restrictive endorsements upon the face of bearer securities for the
purpose of presentation to Federal Reserve banks or branches, or to the Treasurer of the United States, for redemption and application of the proceeds in
payment of taxes (other than securities presented for redemption at par and
application of the proceeds in payment of Federal estate taxes).
(c) Instructions from Federal Reserve banks.—Federal Reserve banks will
inform eligible banks and Service Center Directors and District Directors,
Internal Revenue Service, in their respective districts as to the procedure to
be followed under the authority granted by these regulations. Restrictive endorsements shall not be placed on securities until such information is received
from the Federal Reserve banks.
§ 328.4 Effect of restrictive endorsements.
Bearer securities bearing restrictive endorsements as herein provided will
thereafter be nonnegotiable and payment, redemption, or exchange will be made
only as provided in such endorsements.
§ 328.5 Forms of endorsement.
(a) When presented hy hanks—(1) For payment or exchange.—The endorsement placed on a bearer security presented for payment or exchange by a bank
should be in the following form :
For presentation to the Federal Reserve Bank of
, Fiscal
Agent of the United States, for redemption or in exchange for securities
of a new issue, in accordance with written instructions submitted by
(Insert name of presenting bank)
(2) For redemption at par.—The endorsement placed on a bearer security
presented for redemption at par in payment of Federal estate taxes should be
in the following form :
For presentation to the Federal Reserve Bank of
, Fiscal Agent
of the United States, for redemption at par in payment of Federal
estate taxes, in accordance with written instructions submitted by
(Insert name of presenting bank)
(b) For conversion to hook-e^itry securities.—The endorsement placed on a
bearer security presented for conversion to a book-entry security shall be in the
following form:
For presentation to the Federal Reserve Bank of
, Fiscal Agent
of the United States for conversion to book-entry securities by
(Insert name of presenting bank)
(c) When presented hy Service Center Directors or District Directoirs, Internal Revenue Service.—The endorsement placed on a bearer security by a
Service Center Director or a District Director, Internal Revenue Service, should
be in the following form :
For presentation to the Federal Reserve Bank of
, Fiscal Agent
of the United States, for redemption, the proceeds to be credited to the
account of the Service Center Director, Internal Revenue Service, at
, for credit on the Federal
taxes due from
(Income, gifts, or other)
(Name and address)
§ 328.6 Requirements for endorsement.
(a) On hearer securities.—The endorsement must be imprinted in the lefthand portion of the face of each security with the first line thereof parallel to the
left edge of the security and in such manner as to be clearly legible and in such
position that it will not obscure the serial number, series designation, or other
identifying data, and cover the smallest possible portion of the text on the face
of the security. The dimensions of the endorsement should be approximately
4 inches iri width and IV^ inches in height, and must be imprinted by stamp or
?
248
1973 REPORT OF THE SECRETARY OF THE TREASURY
plate of such character as will render the endorsement substantially ineradicable.
The name of the Federal Reserve bank of the district must appear on the plate
or stamp used for the imprinting of the endorsement, and presentation to the
appropriate branch of the Federal Reserve bank named will be considered as
presentation to the bank. When securities are to be presented to the Treasurer
of the United States, the words "Treasurer of the United States" should be
used in lieu of the words "Federal Reserve Bank of
, Fiscal Agent
of the United States." No subsequent endorsement will be recognized. If the
form of endorsement on a security is different than that prescribed in § 328.5,
the pro^dsions of §§ 328.7 and 328.8 shall not apply to the security.
(b) On coupons.—Unmatured coupons attached to restrictively endorsed
securities should be canceled by imprinting the prescribed endorsement in such
manner that a substantial portion of thef endorsement will appear on each such
coupon. If any such coupons are missing, deduction of their face amount will
be made in cases of redemption, and in cases of exchange, remittance equal to
the face amount of the missing coupons must accompany the securities. All matured coupons, including coupons which will mature on or before the date of redemption or exchange (except as otherwise specifically provided in an announcement of an exchange offering), should be detached from securities upon which
restrictive endorsements are to be imprinted.
§ 328.7 Shipment of securities.
Securities bearing restrictive endorsements may be shipped, at the risk and
expense of the shipper, by registered mail, messenger, armored car service, or
express to the Federal Reserve bank of the district in which the presenting
bank, the Service Center Director, or the District Director, Internal Revenue Service, is located, or to the appropriate branch of such Federal Reserve bank. Shipments to the Treasurer of the United States, Washington, D.C, should be made
by messenger or armored car.
§ 328.8 Loss, theft or destruction of securities bearing restrictive endorsements.
(a) General.—Relief will be provided on' account of securities bearing restrictive endorsements proved to have been lost, stolen, or destroyed, upon the owner's application, in the same manner as registered securities which have not been
assigned. (See subpart N of the current revision of Department Circular No. 300,
the general regulations governing United States securities.) Except for bearer securities submitted for redemption at par in payment of Federal estate taxes, a
bani? will be considered the owner of securities handled on behalf of customers
unless it otherwise requests. The application for relief (Form PD 2211) and instructions will be furnished by the Federal Reserve banks.
(b) Bond of indemnity.—Where securities bearing restrictive endorsements
shipped by a bank have been lost, stolen, or destroyed, a bond of indemnity with
surety satisfactory to the Secretary of the Treasury will be required from the
owner. If such bond is executed by a bank or other corporation, the execution
must be authorized by general or special resolution of the board of directors,
or other body exercising similar functions under its bylaws. Ordinarily, no
surety will be required on a bond executed by a presenting bank. The Secretary
of the Treasury reserves the right, however, to require 'a surety in any case
in which he considers such action necessary for the protection of the United
States.
§ 328.9 Miscellaneous.
The provisions of this circular are subject to the current revision of Department Circular No. 300. The Secretary of the Treasury reserves the right at any
time to amend, supplement, or withdraw any or all of the provisions of these
regulations.
249
EXHIBITS
Exhibit 12.—Department Circular No. 905, December 12, 1969, Fifth, Revision,
Supplement No. 3, offering of United S t a t e s savings bonds, Series H
DEPARTMENT
OF T H E
TREASURY,
Washington, April 25,1973.
The purpose of this supplement is to show the ainounts of the interest checks
and the investment yields for the next extended m a t u r i t y period for U.S. Savings
Bonds of Series H bearing issue dates of October 1, 1953, through March 1, 1954,
and J u n e 1 through November 1, 1963. Accordingly, the tables to D e p a r t m e n t
Circular No. 905, fifth revision, dated December 12, 1969, as amended (31 C F R
p a r t 332), a r e hereby supplemented by the addition of tables 5-A and 26-A, as
set forth below.
J O H N K . CARLOCK,
Fiscal Assistant Secretary.
T A B L E 5 - A . — B o n d s hearing issue dates from Ociober 1,1953, through March 1, 1954 ^
(Issue price
F a c e valuer R e d e m p t i o n a n d maturity
i value
Period of t i m e b o n d is held after
extencled m a t u r i t y d a t e
$500 $1,000
500
1,000
$5,000 $10,000 A p p r o x i m a t e i n v e s t m e n t yield
( a n n u a l percentage rate)
5,000
10,000
(2) F r o m
(1) A m o u n t s of interest checks for beginning (3) F o r
each d e n o m i n a t i o n
of second half-year
extended
period
;
m a t u r i t y preceding
period to interest
SECOND E X T E N D E D
each i n t e r - p a y m e n t
MATURITY PERIOD
est p a y date
ment date
i^year.......
'.
2(12/1/73) $13.75 $27.50 $137.50 $275.00
lyear
(6/1/74)
13.75 27.50 137.50 275.00
1)^ years
(12/1/74)
13.76 27.50 137.50 275.00
2 years
(6/1/75)
13.75 27.50 137.60 276.00
2>^years
(12/1/75)
13.75 27.60 137.50 275.00
3 years
(6/1/76)
13.75 27.50 137.50 275.00
3M years
(12/1/76)
13.75 27.60 137.50 275.00
4 years
...(6/1/77)
13.75 27.50 137.60 276.00
43^ years
...(12/1/77)
13.75 27.50 137.50 275.00
5 years
(6/1/78)
13.75 27.50 137.50 275.00
5M years
(12/1/78)
13.76 27.50 137.60 276.00
6 years
(6/1/79)
13.76 27.50 137.50 276.00
6M years
...(12/1/79)
13.75 27.60 137.60 276.00
7 years
(6/1/80)
13.76 27.60 137.60 276.00
7M years
(12/1/80)
13.75 27.60 137.60 275.00
8 years
(6/1/81)
13.75 27.50 137.60 275.00
8K years...(12/1/81)
13.75 27.50 137.60 276.00
9 years
(6/1/82)
13.76 27.50 137.50 275.00
9M years
(12/1/82)
13.75 27.50 137.50 275.00
1 0 y e a r s ( 2 d e x t e n d e d maturity) 3.(6/1/83) 13.75 27.50
137.50 -275.00
Percent
5.50
5.50
5.50
6.50
5.50
5.50
6.60
6.50
6.50
6.60
5.50
6.60
6.60
5.50
5.50
6.50
6.60
5.50
5.50
45.50
(4) F r o m
each
interest
payment
d a t e to
second
extended
maturity
Percent
Percent
6.60
6. 50
6.50
5.50
5.60
6.50
6.50
5.60
5.60
6.50
6.50
5.60
6.50
5.60
6.60
5.60
5.50
6.50
5.50
6.60
6.60
6.50
6.50
5.50
6.50
5.50
5.60
6.60
6.60
6.50
5.60
5.50
6.60
6.50
5.50
5.50
5.50
6.50
5.50.
1 T h i s t a b l e does n o t a p p l y if t h e prevailing r a t e for Series H b o n d s being issued a t t h e t i m e t h e second
extension begins is different from 5.50 percent.
2 M o n t h , d a y , a n d year o n which interest check is p a y a b l e o n issues of Oct. 1,1953. F o r s u b s e q u e n t issue
m o n t h s a d d t h e a p p r o p r i a t e n u m b e r of m o n t h s .
3 T w e n t y - n i n e years a n d 8 m o n t h s after issue d a t e .
4 Yield from issue d a t e to second extended m a t u r i t y d a t e o n b o n d s d a t e d : Oct. 1 a n d N o v . 1,1953 is 4.05
percent; D e c . 1,1953 t h r o u g h Mar. 1,1954 is 4.06 percent.
250
19 73 REPORT OF THE SECRETARY OF THE TREASURY
TABLE 26-A:—Bonds hearing issue dates from June 1 through November 1, 1963 ^
(Issue price...
Face value< Redemption and maturity
1 value.
Peiiod of time bond is held after
maturity date
>^year
2 (12/1/73)
1 year..
( 6/1/74)
I M years
(12/1/74)
2 years.
( 6/1/75)
23^ years..
-(12/1/75)
3 years
.( 6/1/76)
3 M years
(12/1/76)
4 years
-.
( 6/1/77)
4 M years
(12/1/77)
5 years.
( 6/1/78)
5 M years
(12/1/78)
6 years
( 6/1/79)
6 k years....
(12/1/79)
7 years
( 6/1/80)
7 3^ years
(12/1/80)
8 years.
'.
.( 6/1/81)
8 K years
(12/1/81)
9 years
( 6/1/82)
9 3^ years..
(12/1/82)
10 years (extended maturity) 3.,( 6/1/83)
$500 $1,000
500
1,000
$5,000 $10,000 Approxmiate investment yield
(amiual percentage rate)
5,000 10,000
(2) From (3) For
(1) Amounts of interest checks for beginning half-year
each denomination
ofextended period
—
matmity preceding
period to interest
E X T E N D E D MATURITY each inter- payment
PERIOD
est paydate .
ment date
Percent
$13. 76 $27. 50 $137.50 $275.00
13.75
27.50
137. 50 275.00
13.75
27.60
137.50
275.00
13.75
27.50
137.60
275.00
137. 50 276.00
13.75
27.50
13.75
27.50
137. 50 275.00
13.75
27.50
137.50
275.00
13.75
27.50
137.50
275.00
13.75
27.50
137. 50 275.00
13.75
27.50
137.50
275.00
13.75
27.50
137.50
275.00
13.75
27.50
137. 50 275.00
13.75
27.50
137.50
275.00
13.75
27.50
137.50
275.00
13.75
27.50
137.50
275.00
13.75
27.60
137. 50 . 275.00
13.75
27.60
137.50
275.00
13.75
27.50
137.50
275. 00
13.75
27.50
137. 50 275. 00
13.75
27.50
137.50
275.00
5.50
5.50
5.50
6.50
5.50
5.50
5.50
5.50
5.50
5.50
6.60
5.50
5.50
6.50
5.50
6.50
5.50
5.50 .
6.50
45.50
(4) From
each
interest
pa3niient
date to
extended
maturity
Percent
5.50
5.50
6.60
5.50
5.50
5.50
5.60
6.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50 . -
Percent
5.60
5.50
5.50
5.60
6.50
6.50
6.50
5.50
5.60
5.50
5.60
5.50
5.50
6.60
6.50
6.60
6.50
5.50
5.50
1 This table does not apply if the prevailing rate for Series H bonds being issued at the time the extension
begins is different from 6.60 percent.
2 Month, day, and year on which interest check is payable on issues of June 1,1963. For subsequent issue
months add the appropriate number of months.
3 Twenty years after issue date.
4 Yield on purchase price from issue date to extended maturity is 4.75 percent.
Exhibit 13.—An act to provide for a 4-month extension of the present temporary
level in the public debt limitation
[Public Law 92-336, 92d Congress, I-I.R. 15390, July 1, 1972]
Be it enacted hy the Senate and House of Representatives of
the United States of America in Congress assemhled. That Public
Law 92-250 and section 2 (a) of Public Law 92-5 are each amended
by striking out "June 30, 1972," and inserting in b'eu thereof "October 31, 1972,".
Ante, p. 63 ;
85 Stat. 5.
Exhibit 14.—An act to provide for a temporary increase in the public debt limit
[Public Law 92-599, 92d Congress, I-I.R. 16810, October 27,1972]
Be it enacted hy the Senate and House of Representatives of the
United States of America in Congress assemhled, That during the
period beginning on November 1, 1972, and ending on June 30, 1973,
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 $65,000,000,000.
Public debt
limit.
Teraporary
increase.
Ante, p. 63.
'•
, ;
EXHIBITS
251
Economic and Financial Policy
Exhibit 15.—Statement by Secretary Shultz, July 25, 1972, before the Joint
Economic Committee
The view is now widespread that the economy is expanding with strength and
in a cumulative fashion. This- view also holds that the upward movement in the
general level of prices is moderating, as increased productivity and smaller
increases in average hourly earnings lead to a slower growth in unit costs; and
that the average household has over the past 18 months seen the results of this
process refiected in a sharp upward movement in real spendable earnings, after
7 years in which this crucial measure of well-being failed to rise. The general
view seems also to be that these favorable trends will continue. At the same
time, many people are anxious about 1973 and 1974 insofar as the reemergence
of inflation is concerned.
I agree with this widespread assessment of the current situation and the
outlook. I also agree that the problem of inflation must remain in the forefront
of our thinking as we approach issues of economic policy. This is especially so
since we must work constantly to see that all those who want a job have an
opportunity to have one. Encouraging as are recent indicators of economic expansion, we are nevertheless still short of attaining that important goal!
The Council of Economic Advisers has prepared for you a detailed midyear
review of economic developments. Therefore, it is unnecessary for me to provide
yet another recitation of what you already know, pleasant as it might be to
dwell on recent developments.
Rather, I would like to call attention to certain aspects of policy and analysis,
suggesting thereby some lessons from recent experience that we might appropriately apply in our continuing effort for peacetime prosperity with reasonably
stable prices.
The need for budget discipline
The unified Federal budget has been kept at roughly full-employment balance
for fiscal years 1969, 1970, 1971, and 1972, following the rising and large deficits
in 1966, 1967, and 1968. There are many factors other than fiscal policy involved
in controlling the economy. They include monetary policy and, in the last 11
months, the system of wage and price controls. This exercise in budget discipline
has nevertheless been a powerful force in moving the rate of inflation down from
6.1 percent in 1969 to 5.5 percent in 1970, to 3.8 percent in 1971 prior to the
freeze, to 2.7 percent in the 10 succeeding months as measured by the Consumer
Price Index.
As we move into fiscal year 1973 and look ahead to the year following, will we
be able to maintain this discipline? Recent actions by the Congress certainly
leave the issue in doubt. There will be many actions on appropriations and contract authority taken in the next few weeks.
I urge the Congress to act with restraint on spending.
I urge the Congress to act favorably on the President's proposal for a firm
ceiling on spending, one that would bind the legislative as well as the executive
branch.
Otherwise I fear that we may return to the budget excesses of 1966, 1967, and
1968, with the relentless pressure these excesses put on the price level.
The contribution of industrial peace
The country has benefited greatly this year from a level of strike activity
far below that of other recent years. In fact, in May 1972, the number of workers
involved in new strikes was the lowest for any May in 30 years.
This remarkable degree of industrial peace is a tribute to labor and management and shows what can be done by the system of free collective bargaining.
There have been many noteworthy achievements, including the settlement last
week of two most difiicult issues affecting the railroads and a record of settlements without strikes of many tough cases in the construction industry. The
record in construction, noted and notable on the side of the levels of wage settlements, is as much so on the side of industrial peace.
I know that, in aii exacting scholarly sense, it will not be possible to show
just what contribution relative industrial peace has made to the strength of the
506-171—73
19
252
1973 REPORT OF THE SECRETARY OF TPIE TREASURY
economy this year. It is my belief, however, that freedom from the disruptions
of widespread strikes has contributed significantly to the expansion.
The Secretary of Labor and the Director of the Mediation Service and their
coworkers have worked hard to encourage free collective bargaining. The basic
achievement, however, is one of labor and management together. They deserve
our understanding and encouragement. They also deserve recognition for their
contribution to the economy. I salute them for the record of free collective
bargaining in 1972.
The impact of tax changes
The tax structure has undergone massive change in the last 2i/^ years, and a
further change, in the form of revenue sharing, is currently under review in the
Senate.
The tax burden on individual incomes has been reduced, with the reductions
benefiting low-income earners jproportidnately inore. These reductions' have undoubtedly helped the. expansion and account in some measure for the strong
recent increases in personal consumption expenditures.
The highly regressive tax on youth derived from a combination of the draft
with low pay in the Armed Forces has been replaced by strong movement toward
a volunteer Armed Force.
Greater incentives for new investment, which creates jobs now and low costs
for the future, have resulted from clearing the uncertainty surrounding the
asset depreciation range system last year and by passage of the job development
tax credit. While it is always difiicult to disentangle cause and effect, it is
worth noting that private spending on new investment has picked up sharply
this year, adding pace and quality to the expansion. This shows up not only in
the well-known data on plant and equipment spending by businesses but also
in farm equipment, where outlays are up by one-fifth over a year ago, and in
trucks, buses and trailers, which are up by one-third.
Much has recently been accomplished by way of tax reform. The President
is determined to carry these efforts further, to simplify the tax system, to make
it more equitable, and,to so arrange it that it contributes as much as possible
to the solution of our econoinic .problems. It is an immensely complicated subject, and changes must be made with care and with an understanding of the
results of changes recently made. As we in the Treasury work on this subject,
we welcome the discussion of.it stimulated by this committee, as well as by the
committees directly concerned.
International economic developments
Last August 15, the United States embarked on a program to restore its external economic strength and to reform the international monetary system in the
context of an open and liberal world trading order.
As I pointed, out earlier, our economy is now growing vigorously. In contrast, many of our major competitors are in a period of relatively slow expansion.
As their economies pick up, as they, expect, so should foreign demand for our
exports. Meanwhile, the relative price performance of the United States is helping to reinforce the effects of the recent exchange rate realignment. We are not
satisfied with Our performance—but it is improving, and better than others.
We are determined to make additional progress in the future.
Many factors suggest that our balance of payments position should improve
in the period ahead. But I believe it is evident we cannot afford to relax in the
thought that the changes made so far provide an assured and lasting solution.
To take advantage of the opportunity afforded, we must manage our economy
properly, we must increase its vigor and competitiveness, we must reduce barriers abroad to our exports. We must obtain structural changes in our international economic relationships to better reflect the present balance of power
and responsibility.
In recent months there have.been periods of calm and periods of speculation
in foreign exchange markets. There was sporadic market uncertainty through
early March—during what was an inevitable period of testing of the Smithsonian;
agreement. Markets then remained calm for 31/2 months. During this period, a
gradual unwinding of speculative positions and a reflux of short-term' funds
roughly offset—or more than offset—the continuing deficit in our trade and
other accounts.
EXHIBITS
253
This calm was disturbed in the latter part of June, when strong speculative
concerns reemerged at the time of the U.K. decision to float the pound. We and
other parties to the Smithsonian agreement judged—and announced—that the
speculation associated with the British move need not affect the basic exchange
rate structure established at the Smithsonian. That continues to be our firm view.
Consistent with our view of the validity of the Smithsonian rates, we decided
that some intervention from time to time in the exchange markets could provide a helpful deterrent to unwarranted speculation and to demonstrate the
firmness of our view. This action does not in any way restore the convertibility of
the dollar. Our basic policy approach toward monetary reform and the necessary
efforts to achieve sustainable equilibrium in our balance of payments is unchanged.
These market developments emphasize—if emphasis were needed—the urgency
of moving ahead Avith monetary reform. We must get on with this important
work, and we must get the job done correctly.
Negotiations on reform of the monetary system have in a real sense been underway for some time. A process of discussion:—much of it informal—among national
governments has provided an opportunity to exchange views on the objectives
of reform, and to clarify some of the major issues. Through this process, we
gain understanding and lay the groundwork for developing the necessary consensus on. which lasting reform must be based.
To handle the more formal negotiations of monetary reform, nations are now
in substantial agreement on the formation of a "Committee of Twenty" under
the general auspices of the IMF. The United States has played a major role in
establishing the new Committee. We believe that with its representative membership and its breadth of approach enabling it to consider trade, interrelated
investment and development, as well as monetary questions, it is well-equipped
for the challenging task of monetary reform. We expect the Committee to begin
its work at the time of the annual meetings of the IMF in September.
If we are to find workable and lasting solutions to the diflicult problems of
international monetary reform, we will have to deal with fundamental issues
of importance to the national interest of the United States and other countries.
Too often the smooth functioning of the monetary system is seen as simply a
technical problem, involving nothing more than a search for efficient monetary
devices. But discussion of these devices, important as they are, must not distract our focus from the basic issues.
As we come to grips with these important problems in the negotiations ahead,
we intend to exercise our leadership to ensure that the monetary system which
emerges will be sound and durable and fully meets the needs of a growing and
changing world economy.
Exhibit 16.—Excerpts from address by General Counsel Pierce, October 12, 1972,
before the 45th annual convention of the National Bankers Association Convention, Houston, Tex., on the minority bank deposit program
I welcome this opportunity to address the National Bankers Association for
several very cogent reasons. As a founder and former director of one of your member banks—Freedom National Bank of New York—I believe I have an understanding of and a feeling for many of the problems that face minority-owned or
controlled banks. In addition, through the years, I have gotten to know a number
of the ofiicers and directors of this association and of its member banlis, and this
engagement gives me a chance to renew old acquaintances. I also welcome this
opportunity because it brings me to the wonderful city of Plouston. It is one.of
my favorite cities, and one of the truly great cities of the United States. .
I. Reflections and a progress report on the minority bank deposit program
Essential to the substantial growth of any bank is the growth of its deposits.
In the past, a minority-controlled bank located in a black, Spanish-speaking, or
Indian community has generally experienced difiiculty in securing deposits in
sufliciently large amounts to permit it to grow strong enough to have a truly great
impact on the economic development of its community. This is .understandable because the people in minority communities are often relatively poor and many of
the businesses located in these communities are quite small and relatively weak
financially—to say nothing of the prejudices a minority bank may face and the
competition it may receive from white banking institutions,
254
1973 REPORT OF THE SECRETARY OF THE TREASURY
Deposits are not the only ingredient necessary for a small bank to grow into
a much larger and stronger one. Sufiicient capital growth as well as constant
improvement in management and staff are also essential to the growth of a bank.
Flowever, without a significant growth rate in its deposits—which are the raw
material of banking—the expansion of a small bank would be severely limited.
As I previously mentioned, in addition to deposits, adequate capital and skilled
personnel are important ingredients in the growth of a bank. Last week I talked
with William Camp, the Comptroller of the Currency, about the capital and personnel problems of minority banks. Pie said that minority banks were improving
in both categories; that, on the whole, they were securing the necessary capital
to permit them to grow on a sound basis; and that their management and staff
personnel had shown definite and constant improvement. He did say, however,
that the problem of getting good people was tougher than the problem of securing additional capital, but added that this was true for all banks, not just
minority banks.
As deposits in minority banks are growing at a remarkable rate, and as they
are acquiring the necessary capital to grow on a sound basis, and their management and staff are constantly improving, it is reasonable to conclude that in
general the minority banks of this country should grow and prosper. The extent
to which they expand and the degree of their profitability will not only depend
upon those factors I have already discussed, but also—in substantial measure—
upon the condition of the American economy.
III. Sensitivity to community needs
It seems clear that in general the future for minority banks is quite good. They
are accumulating deposits rapidly; securing the necessary capital to maintain a
sound growth rate; improving their personnel; and operating in a favorable
economic climate. As a result, minority banks can be expected to grow and prosper.
Sometimes when business concerns become large, wealthy, and economically
independent, they also become less sensitive and more impersonal. Their objectives
become more material than human. The profit motive becomes far more important than the motive for helping one's fellow man.
I hope I live to see the day when some of the banks currently referred to as
minority banks grow so large and powerful that their histories can be compared
with the Bank of America, the largest bank in the world, which at one time could
have appropriately been called a "minority bank." However, I hope none of the
members of this association will ever forget the communities that spawned them,
nor their obligation to be sensitive to the needs of those communities, and their
responsibility to help those communities grow and develop both economically
and socially.
Governor Andrew Brimmer of the Federal Reserve Board stated in a report
on black banking released on July 31, 1972, that black banks only loaned 41.1
percent of their total deposits, while the loans of all other insured banks represented 64.5 percent of their deposits. Dr. Brimmer concluded that black banks
had clearly demonstrated their ability to attract capital, but were experiencing
difficulties in finding reasonably secure outlets for their funds in the black
communities.
There may be good and substantial reasons—other than difficulty in securing
loans in their communities—for black banks having such a low loan ratio. For
example, a large percentage of the deposits of black banks may be in tax and
loan accounts or other Federal Government accounts which may be drawn upon
on short notice, thereby preventing the banks from making long-term loans with
those deposits.
Nevertheless, the point made by Dr. Brimmer makes one wonder whether black
banks as well as other minority banks are being as creative as they should in
their efforts to serve the needs of their communities. I am certainly not being
critical, but I do want to urge most strongly that the directors and oflicers of
every minority bank give substantial thought to the question of whether their
bank is truly sensitive to community needs and is doing its utmost to be creative
and imaginative in serving the needs of its community.
I do not believe minority banks are solely in business to make money. Their
commitment is much broader than that. I think that when most minority banks
were founded—particularly those foundecl within the past 10 years, which repre-
EXHIBITS
255
sents about two-thirds of the minority banks in existence today—they were
founded more in the spirit of dedication than in the spirit of free enterprise.
I know when a group of us founded Freedom National Bank our hopes and
aspirations went beyond the profit motive. W^e had dreams that some day the
bank would not only make money for its shareholders, but would be of vital
importance in the economic growth and development of the black community in
New York City. We realized that, to some degree, bank profits might well have
to be sacrificed to fulfill an obligation we believed we had to the community.
I feel certain that the founders of most minority banks had similar thoughts
when they started their banks. That is why I believe there is an unwritten, but
moral, obligation on the part of minority banks to be highly sensitive to community needs and to respond to those needs through creative, imaginative, and
reasonably bold action. To me, this obligation w^ill remain until such time that
there is no further need for minority banks because all people will have respect
for each other as human beings ; prejudice and bigotry will have disappeared ; and
everyone will have the same opportunity to achieve according to his or her
ability. It will be the day—to paraphrase the words of the late and great
Dr. Martin Luther King—when minorities are free at last, free at last—Great
God Almighty when they are free at last!
It was with these factors in mind that the Nixon administration in October
1970 embarked upon its minority bank deposit program. Agencies of government
and businesses in the private sector have been urged by the administration to
participate in this program by making deposits in minority-owned or -controlled
banks. It was and still is believed that by assisting these banks to secure substantial increases in their deposits, they eventually will grow strong enough to
become vital and key instruments in the economic growth and development of
minority communities.
This program refiects part of the administration's eff'ort and desire to see to
it that progress is made in fulfilling the expectations that blacks and other
minorities have to enjoy their just share of the economic fruits of this Nation;
to see to it that they get "a piece of the action"—a phrase used by the President
in referring to his intention to help minorities realize their economic aspirations.
The program has been and continues to be successful. When Dr. Charls
Walker, Deputy Secretary of the Treasury, addressed your association in July
of this year, he reported that as of June 30, 1972, the minority banks in this
country had deposits totaling $825,406,000, an increase of $429 million, or 108 percent, since the Nixon administration launched its minority bank deposit program
in October 1970.
In order to have the latest figures on the growth of minority bank deposits by
the time of this meeting, I had telephone calls made last week to all of the
minority banks to find out what their deposits were as of September 30,1972.1 am
happy to announce today that as of September 30, the 43 minority banks in the
United States had a total of $874,225,000 in deposits, an increase of $477,710,000,
or 120 percent, since the minority bank deposit program was initiated 2 years
ago.*
During the third quarter of this year, the deposits of minority banks increased
by almost $50 million or approximately 12 percent. With some luck and a great
deal of hard work the landmark of $1 billion in deposits may still be attained by
the end of 1972.
*Two tables are attached. Table I shows the growth of total deposits of all banks
participating in t h e program on a quarterly basis since the program was initiated. Table I I
shows the total deposits of each bank in the program as of September 30, 1972.
256
19 73 REPORT OF THE SECRETARY OF THE TREASURY
TABLE I.— Total deposits of banks participating in the administration's minority
bank deposit program
[In rounded thousands of dollars]
31 b a n k s
originally o n
roster
Date
Sept. 30, 1970.
Dec. 31, 1970
Sept. 30, 1971
Dec. 31,1971
June 30, 19723
Sept. 30, 1972 3
.-.-.
396, 615
443. 324
543, 509
618,747
698.721
720,170
B a n k s s u b s e q u e n t l y a d d e d to roster
Total
New banks i
8,493
16, 885
32, 627
44, 276
Existing b a n k s 2
61, 930
94,158
109,779
396,615
443,324
552,002
687, 562
825,406
.4 874, 225
1 At Sept. 30, 1971: Pan American National Bank, Union City, N.J., Banco del Pueblo, Santa Ana
Calif., North Milwaukee State Bank, Milwaukee, Wis., and Atlantic National Bank, Norfolk, Va. At
Dec. 31, 1971: The above and Greensboro National Bank, Greensboro, N.C. At June 30, 1972: The above,
Vanguard National Bank, Hempstead, N.Y., and Lumbee Bank, Pembroke, N.C. At Sept. 30,1972: The
above and First Enterprise Bank, Oakland, Calif.
2 At Dec. 31, 1971: Repubhc National Bank, Miami, Fla., Highland Community Bank, Chicago, 111.,
and American State Bank, Tulsa, Okla. At Jmie 30, 1972, and Sept. 30, 1972: The above and Fidehty
National Bank, Miami, Fla.
3 Figures obtained from banks by phone; may differ shghtly from published figures.
* Includes: 27 State banks with total deposits of $552,533.
16 National banks with total deposits of $321,692.
31 black and multiracial banks with total deposits of $494,761.
11 Spanish-American banks with total deposits of $377,672.
1 American Indian bank with deposits of $1,792.
257
EXHIBITS
TABLE IL—Total deposits of minority-owned banks ai Septemher 30, 1972
[In tliousands of dollars]
Bank
.
Bank of Finance, Los Angeles..
'
Pan American National Bank, Los Angeles
First Enterprise Bank, Oakland
_.
Banco de Pueblo, Santa Ana
•.
Industrial Bank, Washington, D.C
:
United Community National Bank, Washington, D.C
The Bank of ]\Iiami
Fidehty National Bank of South Miami
Republic National Bank of Miami.
Citizens Trust Company, Atlanta
Carver State Bank, Savannah.._
Highland Community Bank, Chicago
Independence Bank, Chicago.
_..
Seaway National Bank, Chicago
Douglass State Bank, Kansas City, Kans..
Unity Bank& Trust Co., Roxbury, Mass
,
.
1st Independence National Bank, Detroit
1st Plymouth National Bank, Minneapolis
Swope Parkway National Bank, Kansas City, Mo
Gateway National Bank, St. Louis
Pan American National Bank, Union City, N.J
Centinel Bank of Taos, N. Mex
Vanguaxd National Bank, Hempstead, N.Y
Banco Credito y Ahorro Ponceno, New York City 2
Banco de Ponce, NewYork City 2._
Banco Popular de Puerto Rico 2
Freedom National Bank, New York City
Mechanics &.Farmers Bank, Durham, N.C.3
Greensboro National Bank, Greensboro, N.C
Lumbee Bank, Pembroke, N . C . . .
'.
Unity State Bank, Dayton.
-...
American State Bank, Tulsa
Freedom Bank of Finance, Portland, Oreg
...
Victory Savings Bank, Columbia, S.C
Tri-State Bank, Memphis
Citizeus Savings Bank & Trust Co., Nashville
Pan American National Bank, Houston
Riverside National Bank, Houston
First StateBank, Danville, Va.
Atlantic NationalBank, Norfolk
Consohdated Bank & Trust Co., Richmond
.
Liberty Bank of Seattle
North Milwaukee State Bank, Milwaukee.
Total
.
.
.:
:..
...
...
.
..-..
i
..
.
•
..
...
•.
•
.
1
.
....^
.
1
.
1
-.
-
1 Deposits reported via phone; may difier slightly from pubhsher! figures.
2 New York City ofiices only.
3 Includes offices in Chai'lotte and Raleigh.
•Estimated, exact figures not readily available in bank.
:
....
.
.
..
:
^...
:.:........
..
..
Total
deposits i
28,745
17,752
3,155
6,310
35,959
16,774
44,325
29,565
66, 679
30,852
5,859
9,963
39,592
41,071
15,960
12,800
23,942
13,3,37
9,500
15,192
7,763
6,880
8,016
19,398
97,525
e75,000
45,647
33,273
2,696
1,792
5,418
3,672
" 7,654
4,865
16,570
8,689
6,575
10,295
7,101
6,989
17,434
6,286
7.556
874,225
258
197 3 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 17.—Remarks of Assistant Secretary Fiedler, November 15, 1972, before
the National Economists Club Seminar, Washington, D.C, on "The Impact of
Controls"
The rate of infiation has diminished. My family and my noneconomist friends
would seriously question that statement, and understandably so, but among
economists and others who watch the statistics closely there is wide agreement
that both prices and wages are increasing at a slower rate than before the controls were put in place 15 months ago today.
Inflation scoreboard
Most statistical series on prices and wages reveal the slowdown, as shown in
table 1 'and charts 1 and 2, attached. The most decisive evidence is found in the
broadest price measures we have, those from the GNP data, which show a cutback in the rate of infiation to about 2% percent in the first year of the stabilization program, compared to about a 5-percent rate from 1969 through early 1971.
The Consumer Price Index also shows a pronounced but more gradual deceleration of infiation over these years. The slowdown is less decisive as measured by
the Wholesale Price Index, which is narrower in coverage and historically more
volatile than the others.
On the wage side, the adjusted hourly earnings index has increased at a rate
of 6.1 percent during the stabilization program, compared to about 7 percent
previously. Wage increases in major collective bargaining settlements (which
data provide very narrow coverage relative to the hourly earnings series) have
averaged 6.6 percent in the first three quarters of 1972, compared to over 8 percent
in 1971 prior to the controls.
Thus, the evidence shows a clear, but not uniform, deceleration in the rate of
inflation. Price inflation has been cut by perhaps 2 percentage points. The growth
of wage rates appears to have been slowed by a percentage point or more. On
balance, it seems fair to conclude that we have gone from about a 5-percent
inflation world to a 3-percent inflation world.
259
EXHIBITS
CHART
1
Percent15
5.0
Price Deflator, Private Gross Product
6/
^5
5.0
25
2.8
0
Consumer Price Index
15
5.0
2.5
32
0
Wholesale Price Index
15
5.0
25
0-
22
1969
1970
SEE NOTES TO TABLE 1.
EarlylQJI
Stabilization
Program fo Date
260
1973 REPORT OP THE- SECRETARY OF THE TREASTJRY
CHART 2
Percent
fCOrHourly Earnings
Negotiated Wa^e Changes
1969
1910
SEE NOTES TO TABLE 1.
Early1971
Sfabilizaf/or}
Program fo Date
EXHIBITS
261
TABLE 1.—Measures of price and wage inflation hefore and during the economic
stabilization program
[Seasonally adjusted percent changes at aimual rates]
1969 a
ONP Price Deflators
Total
Private, flxed weights
.Consumer Price Index
All items
Food
—
---Conunodities less food._.
Services d
Rentd
Wholesale Price Index
All commodities
^^
Farm products, processed foods, feeds
Industrial commodities
Consumer commodities, excluding food.
Producer finished goods
hitermediate materials, excluding food
Crude materials, excluding food
Wages
Hourly earnings e
Negotiated wage changes '
Early
1971 b
1970 a
Stabihzation
prograni to
date 0
5.3
5.1
...
6.1
6.0
P2.6
P2.8
6.1
7.2
4.5
7.4
3.8
-
6.3
4.5
6.5
2.2
4.8
8.2
4.5
3.8
5.0
2.9
4.6
4.3
3.2
4.2
2.3
3.4
3.3
4.8
7.6
3.9
2.9
4.6
3.8
10.3
2.2
-1.4
3.6
4.0
4.9
3.1
4.6
5.2
6.5
4.7
2.2
3.7
6.9
2.8
4.0
7.7
2.6
1.6
1.5
3.1
8.1
6.5
7.6
6.8
8.9
7.1
8.6
6.1
6.6
a For monthly series, December to December; for quarterly series, fourth quarter to fourth quarter.
b For monthly series, December 1970 to August 1971; for quarterly series, fourth quarter 1970 to second
quarter 1971.
0 For consumer prices, August 1971 to September 1972; for wholesale prices and hourly earnings, August
1971 to October 1972; for GNP series, third quarter 1971 to third quarter 1972 (prehminary); for negotiated
wage changes, first three quarters of 1972.
d Not seasonally adjusted; data contain almost no seasonal movements.
e Earnings of private nonfarm production workers, adjusted for interindustry shifts and for overtime in
manufacturing.
« Average wage change over hfe of contract in collective bargaining agreements covering 1,000 or more
employees—decisions reached during 1969,1970, fhrst half of 1971 and first three quarters of 1972 (not seasonally adjusted).
The comparisons mentioned thus far have treated the first year or so of the
stabilization program as a single period of time. It is possible, of course, to
separate out the various phases of the stabilization program—the freeze,
the postfreeze bulge, and the subsequent period. However, there does not appear
to be any analytical pay dirt in doing so. The freeze did stop the upward movement of prices and wages almost completely for 90 days. The expected postfreeze bulge occurred on the wage side, though little evidence of it appears
in the price series. (Evidently, the postfreeze bulge in prices was diffused
through all of Phase II.) Subsequently, the data settled down and, during the
8 months or so since the postfreeze bubble, do not reveal any patterns—within
that time period—that would appear to be analytically interesting.
Contribution of the controls
The fact that the pace of price and wage inflation has been cut back since
the stabilization program was put in place, coupled with the fact that the deceleration was abrupt and coterminous with the onset of the program, has led
many analysts to the conclusion that the controls, by themselves, were primarily
responsible for that deceleration. Others have challenged this view, in particular
by pointing to the economic slack in the utilization of our manpower and capital
resources. Some have even concluded that the economic slack accounts for
all of the slowdown in inflation, and that the controls have been a pointless
exercise.
My own view is that there have been three important factors that jointly
account for the inflation slowdown: The controls, the economic slack, and the
improved cost picture that was brought about by accelerated growth.
That the economic slack—underutilized equipment and jobless workers—is
exerting some downward pressures on prices and wages is apparent from several
sources. There are many reports that price increases approved by the Price
Commission have not been put into effect because of competitive pressures.
262
19 73 REPORT OF THE SECRETARY OP THE TREASURY
Moreover, a close look within the Wholesale Price Index reveals that 36 different
product classes—13 percent of the total—experienced an actual decline in prices
during the first 12 montlis of the stabilization program. Similarly, many wage
settlements are totaling less than the general Pay Board standard of 5.5/6.2
percent. Pay Board data show that one-sixth of their approvals call for a wage
increase of 3 percent or less, and more than 40 percent involve an increase that
is below 5 percent. These several pieces of evidence suggest that economic slack
has played a part in slowing the rate of both price and wage inflation.
The third factor, the impact of economic growth on the cost structure of
business, has received little attention to date. The process, a familiar one to
business cycle analysts but not otherwise well-known, i s : (1) an acceleration of
the growth in economic output takes place, (2) with this faster output growth
comes an upswing in the rate of productivity growth (in fact, cause and effect
run both ways, with each factor reinforcing the other), (3) the better productivity performance produces a slower rise in unit costs, (4) which in turn
reduces the upward pressure on prices.
That this process has taken place over the past year is clearly demonstrated
in chart 3. That it has played a role in the deceleration of inflation is suggested
by the evidence that price inflation has slowed more than wage inflation.
I want to emphasize my view that the inflation slowdown was the joint
product of the three factors. I doubt very much—based on the past record of
incomes policies here and abroad—that the stabilization program could have
made signiflcant headway in the absence of economic slack. The slack, however,
had not shown much effectiveness in putting the brakes on inflation before
August 1971. And the acceleration of output growth, which brought with it the
improved cost performance, was strongly helped by the fact that inflation slowed
down. Thus, the three factors—controls, slack, and output growth—reinforced
one another in bringing about the slowdown in inflation.
Other effects of the controls
Slowing inflation was and is the name of the game, so the stabilization program must be rated a success for having contributed significantly to that achievement. At the same time, we want to know what other effects, if any, the program
may have had on the economy.
Clearly the program has had other effects, some undesirable and some beneficial. For example, the inflationary expectations of businessmen and workers
have been brought down this past year, along with the rate of inflation itself.
Another beneficial eff'ect is that the economic importance of productivity
has become much more widely known. The relationship between the general
standard of the Pay Board and the overall infiation goal of the Price Commission has made the role of productivity much raore widely understood than before.
The explicit requirement by the Price Commission that the industry's trend
rate of productivity growth be taken into account on an application for price
increases has focused the attention of business managements on the productivity
growth achieved by their own firm. This increased attention and understanding
of a crucial economic concept is all to the good, not only in the fight against inflation but in other ways as well.
Still another beneficial effect of the program is the improvement that it has
brought about in the real earnings of workers. From 1965 to 1970, real earnings
increased very slowly as the large increases in nominal wages were substantially chewed away by rising prices. In the past couple of years, however, the
average worker has seen the purchasing power of his paycheck make headway again, despite the fact that his nominal wage gains are not as large as
before. The better price performance has meant that the real purchasing power of
his pay has increased sharply.
This improvement in real earnings is one argument, and the reduction in
infiationary expectations is another, against the reemergence of excessively large
wage settlements in 1973. It has become conventional wisdom recently that—
leaving aside the controls program for the moment—next year's heavy bargaining
calendar, which includes some especially prominent unions, and a reduction of
the unemployment rate to below 5 percent will bring on a new round of large
wage settlements. These large union settlements, it is said, will be emulated
throughout the economy and will thereby set off a new inflationary spiral. I
263
EXHIBITS
CHART
3
CHANGES m OUTPUT PRODUaiVlTY
Percent—
Output
155.0
25
f.f
2.3
0.5
0
15
_
Productivity
5.0
25
n.
1.5
^.3
31
21
-^
8.1
I lni+
1 1
^>^
11
1 nKnr
1.» M
L/WI
TAQ+Q
KJ' \ J * J 1 *•'
5.0 —
4f/
25
0
aa
\ 1.3 \
1968W/969 m
1969W1970 m
IQIOW- 1971111mim
i972mp
264
19 73 REPORT OF THE SECRETARY OF THE TREASURY
believe, however, that the sharp upswing in real earnings will reduce considerably the pressures for particularly large wage gains.
A second factor that should reduce such pressures is the fact that the large
unions that will be bargaining next, year— e.g., auto workers, electrical workers,
teamsters—have achieved a signiflcant catchup in their wages relative to other
workers over the past 3 years. Generally speaking, the wage increases under
long-term contracts negotiated by these unions in earlier years did not fully
anticipate the subsequent rate of inflation and the continuing acceleration of
wage settlements. As a result, traditional wage rela.tionships got out of line.
In 1970, therefore, these unions, despite the existence of substantial economic
slack, won very large catchup settlements.
Since 1970, however, the rate of inflation has been cut sharply and the level
of wage settlements has been reduced. This has restored the relative wage
position of workers in the 1970-to-73 bargaining cychi vis-a-vis the rest of the
economy. Accordingly, there is much less reason now for these unions to demand
above-average wage increases than in the last round of bargataing.
In addition, it is arguable how instrumental out-of-line settlements in these
industries would be in setting off a renewed wage-price spiral. While the collective bargaining calendar is heavier in 1973 than this year, the number of
workers included in next year's major negotiations still represents only about
5 percent of the total work force. Although there is clearly emulation in wage
settlements from one union to another and between the union and nonunion
sectors, the vast majority of all wage determination in our economy is carried
on in informal ''negotiations," often just between individuals and their supervisors. In the past, out-of-line settlements achieved by prominent unions, either
larger or smaller than average, have not set an unbreakable pattern for the
rest of the economy. Some analysts have argued, furthermore, that union settlements trailed rather than led the acceleration of price and wage inflation during
the 1965-1970 period. Consequently, there is no reason to believe that the prominent 1973 negotiations will 'automatically set the pace for all of the work force.
Dislocations
One of the most common worries about any system of price and wage controls
is that tliey will disrupt the normal operations of the economy—that they will
create resource misallocations and distort the judgment and decisions of managers to the point of creating serious economic inefficicmcies. In an economy as
complex as ours, some distortions are inevitable in any system of wage and
price controls.
A rigid control system like the wage-price freeze of August to November 1971
is sure to create serious distortions if continued for very long. It was for this
reason that the freeze was limited to 3 months duration. In planning Phase II,
a conscious effort was made to provide sufficient flexibility to avoid economic
misallocations and distortions. The most important result of this eff'ort was the
general principle adopted by the Price Commission that price increases were to
be based on the passthrough of cost increases. Another example was the termlimit-pricing rule adopted by the Price Commission. On the pay side, the Pay
Board provided for a variety of exceptions to its general wage standard.
For the most part, the Phase II controls appear to have generated few important economic distortions. Some undesirable changes in business practices
have been reported, but most of these have been of little significance. Where they
were significant, the stabilization authorities have made an effort to correct the
situation.
One way of testing the proposition that there has been sufiicient fiexibility
built into the control system is to examine the behavior of prices and wages in
detail, and to compare the pattern of changes during the controls period against
the pattern in previous years. For example, an examination of wage changes in
major collective bargaining agreements during the first three quarters of 1972
shows a widely varying pattern with many increases above the general standard
and many below—a pattern that is not dissimilar to the patterns of wage settlements recorded for 1970 and 1971.
Similarly, a look at the detail within the Wholesale Price Index by 271 different
product classes also shows a wide dispersion of price changes tliat is not dissimilar to precontrol years. If the price movements of individual product
classes during the freeze had been concentrated in a much narrower range than
in earlier years, we might have concluded that the stabilization program was
EXHIBITS
265
disrupting the normal pricing practices of business firms in a serious way. However, since both prices and wages show a pattern for 1972 that is similar to earlier
years, we may conclude, albeit rather tentatively, that widespread, serious economic distortions have thus far not developed.
Signs of demand pull
In the analysis of the various components of the Wholesale Price Index, a second interesting point emerged. When the subgroups of the Wholesale Price Index
are listed in order of their price increases during the first year of the controls
program, 20 commodity subgroups are seen to have experienced an increase of 6
percent or more^—ranging from hides and skins at 112 percent down to live
poultry at 6 percent (see table 2, attached). Seventeen of these 20 subgroups are
concentrated in just three areas: Raw agricultural commodities and related
processed foods; hides and leather; and lumber. The other three subgroups are
wastepaper, gas fuels, and railroad equipment.
In almost every case it appears that strong increases in demand or supply
shortages are responsible for the sharp runup in prices. Of. these 20 groupsi, only
gas fuels and railroad equipment are in industries where "administered pricing"
is sometimes alleged (and the price increase for gas fuels can quite possibly be
traced to a rise in demand because of environmental considerations). In every
other case, I believe, there would be general agreement among economists that
highly competitive markets exist.
The nature of this list—i.e., the fact that almost all of these price increases
are traceable to supply-demand imbalances, the kind of infiation that the stabilization program was not designed to deal with—suggests two conclusions.
First, it suggests again that the stabilization program, by allowing the passthrough of cost increases, and by exempting raw agricultural products and used
products such as wastepaper, has provided a flexibility that permits the price
system to carry out its traditional functions of rationing and resource allocation. Second, the nature of the list raises a question about the eflacacy of the
controls program during some future period—e.g., when full employment is
approached—when demand-pull inflationary pressures become more widespread.
TABLE 2.—Largest increases in subgroups of the Wholesale Price Index, Augus
1971 to August 1972
Subgroup
Hides and skins.._
Plant and animal
Wastepaper..
Leathir
Livestock
Fresh and dried fruits and vegetables
Other farm products
Plywood...
.
Meats, poultry, and
fish
,
Lumber.
.
Other leather and related products
Cotton products
Wool products
Footwear
Grains
_..
Manufactured animal feeds
....'.
Gas fuels...
Other wood products
Railroad equipment
^
Live poultry
fibers
.
:
,
.
..^.-
'......:
.-
Percene
increast
112.0
29.1
23.1
. . 22.9
^
22.1
19.8
..
18.2
12.8
. . . _ . . 12.4
11.9
9.7
..9.2
9.1
....8.0
._....:._.
._ 7.5
.-,:.....
6.7
..-6.6
6.6
^
__ 6.3
.._ 6.0
Pioblem sectors
Although economic distortions do not currently appear to be numerous, there
is one major sector of the economy where significant distortions are reported:
Softwood lumber, which is under heavy demand-pull pressure from the extraordinary boom in homebuilding. It is widely reported by industry sources' that—
Lumber production is being held 5 to 10 percent below levels that would
be achieved in the absence of controls, primarily to avoid violation of the Price
Commission's profit margin rule.
Minor operations are being performed on standard cuts of lumber to create
"new products" that are exempt from price control.
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19 73 REPORT OF THE SECRETARY OF THE TREASURY
Railroad cars full • of lumber are being shipped around the country from
middleman to middleman, accumulating markups (which are individually legal)
but not getting the lumber to, the final user.
Phony export and reimport transactions are being recorded—the paperwork
is there but no lumber ever leaves the country—to circumvent the Price Commission's regulations.
There may be similar problems in the medical field, although in this case the
evidence is thin. In the past year, the rate of increase in medical care prices as
recorded in the Consumer Price Index has been cut very sharply. Hospital service charges have increased at a 4.8-percent annual rate during the stabilization
program, compared to a rate of about 12 percent earlier. Physicians' fees have
increased at a 2.3-percent rate during the program, compared to about 7 percent
previously. At the same time, however, total hospital expenses per patient day
have been increasing at a rate of about 111^ percent over the past year, only
slightly lower than in previous years.
This suggests the possibility that the number of medical care services provided to each patient has been increased sharply. It suggests, for example, that
patients are having their blood tested more frequently than in previous years,
and that other services are being provided more frequently. It raises the question
of whether the hospitals are circumventing the price regulations by providing a
greater volume of unnecessary sei-vices in order to raise the total cost to the
patient. The evidence here is only circumstantial, but it is enough to indicate
the possibility that the control program is significantly distorting the provision
of medical care services.
Summing up
The basic goal of the Cost of Living Council was to reduce the rate of inflation to below 3 percent by the end of 1972. The stabilization program, operating in conjunction with a moderate degree of economic slack and an improved
cost picture arising from the acceleration of economic growth, appears to have
achieved this goal—or at least come very close to it. It has done so despite the
emergence of strong demand-pull inflationary forces in such major industries
as food, lumber, and leather.
The stabilization program also produced a number of side effects, some of
them beneficial, others detrimental. The program has focused increased attention on and understanding of the economic role of productivity. It has reduced
inflationary expectations and increased the purchasing power of workers' paychecks, thus setting the stage for less inflationary price and wage decisions in
the future. The program has provided considerable flexibility for the economy,
thereby allowing the price system to continue its functions of rationing and
resource allocation. By and large, few major inefllciencies and inequitiesshave
appeared, except perhaps for lumber and, possibly, medical care.
^
Taking all the pieces together, the stabilization program has made an important
contribution to the achievement of a major goal of economic policy, and it has
done so without inflicting much economic injury. If the controls were to be continued indeflnitely, however, major inefliciencies and inequities would develop.
Exhibit 18.—Remarks of Assistant Secretary Fiedler, November 30, 1972, before
the National Association of Regulatory Utility Commissioners, New Orleans,
La., on "Economic Directions for Regulated Industry"
We talk a lot about the "regulated industries" today, but when we do we can't
quite think of them as we used to. Regulated industries used to be the "natural
monopolies." But today we don't have just a few regulated industries; every industry is regulated—and that is the second thought that kept coming to me. We
have wage and price controls. There seems to be quite a strong acceptance of wage
and price controls throughout the country—and that bothers me. It implies that
there is a demand for permanent wage and price controls and I have some doubts
about that, so I want to discuss that a little bit.
Let me start with the costs of regulation. I suppose of all the many types of
costs there are, there are basically two types:
First, the fundamental sort of misallocation of resources: the basic waste and
inefficiency that results in higher total costs to the economy.
EXHIBITS
267
Second, a great variety of inequities in the form of different costs to different
people, different costs from what most people would regard as a "fair" distribution of costs or prices. What this really adds up to is discrimination.
The prominent examples of these costs are familiar to everyone, but they are
worth repeating. Let me start with the natural gas industry, where there is a
very serious shortage presently. You heard about this the other day from the
Chairman of the FPC. I saw the headlines this morning in The New York Times :
"3 Percent Shortage Expected This Year"—^which is really quite a serious matter.
In this industry we have a situation where the prices of natural gas at the wellhead have been regulated in such a way as to keep them so low that exploration,
and development of new supplies were inhibited. In recent years, this has become quite obvious as the new supplies, the new reserves, have been exceeded by
a wide margin by the volume of con'sumption.
So the basic cost of this kind of regulation, i.e., this negative aspect of regulation, is that this cost (the shortage) is borne by those users of natural gas who
were prevented from buying the volume of natural gas that they wanted. They
just weren't able to get as much as they wanted, or they weren't able to get a
supply at all because of the basic shortage. In effect, the process of regulation had
interfered with the freedom of choice that consumers should have as to what
type of energy they use. Specifically, the freedom of choice to choose natural gas
was interfered with by making it unavailable.
There is also a cost involved here when people who have been using natural
gas all along now find themselves cut off when a shortage develops (industrial
users, mostly). They must bear the expenses of shifting to another fuel. It seems
to me, however, that this is a cost of small magnitude relative to the cost borne
by those people who want but just cannot get natural gas.
Another cost of regulation is the inequity that develops between various types
of consumers. In the 1960's, there was a shift from residential to industrial users.
In effect, the residential consumers who wanted natural gas were unable to get it.
More recently it has been the other way, with industrial users being pushed aside.
This is purely and simply a form of discrimination, an inequity between types
of users.
There is also an inequity between old and new customers. Those who already
have natural gas coming into their homes hkve an assured supply. But people who
are building new houses can't get hooked up; they can't buy any natural gas.
This is, in effect, a "windfall gain" for the "old" homeowner who has a supply
of natural gas, and a "windfall loss" for the guy who is building now and can't
get it. I might add that there is another kind of cost here. Along the way, as
this shortage developed, the FPC allowed the price to creep up. They did what is
known as "vintaging" : They allowed the new gas supplies coming onto the market
to be sold at a higher price than the old gas, because they had a natural reluctance
to permit a "windfall profit" to those companies that had already found gas
reserves and brought them to the market at the earlier, lower price. Well, what
happens then, of course, is that an inequity exists between those customers receiving old or vintage gas who pay lower prices, as compared to those customers that
received the new supplies and paid higher prices—another kind of discrimination.
Next, there is the difference between interstate versus intrastate gas sales. Intrastate gas sales are not regulated. The price is higher, but there is an assured
supply. Consumers can get all they want, while the regulated sales—the interstate
sales—are regulated at a lower price. There are two kinds of discrimination here.
The first is that tlie interstate customers had the advantage of a lower price, but
they couldn't get all the gas they wanted, while the intrastate customers could. If
you were a natural gas user in some State outside the gas-producing area, and
even if you were willing to outbid the' intrastate customer, you just could not get
it. You were discriminated against, but the local customers were not.
The second aspect to this kind of discrimination, this differential between intrastate and interstate gas, is that other benefits redound to the gas-producing
States. The example I am thinking of is Armco Steel locating a plant in Texas
because they could be assured of an uninterrupted supply of gas. They made that
decision in spite of the fact that they would pay a higher price for the gas. What
that did was to discriminate in favor of Texans against people in other States.
That is, workers in Texas had more job opportunities to choose from, and thus
received higher wages, than they would have had otherwise. Likewise, the owners of business services, equipment manufacturers, and contractors in Texas had
506-171-^73
20
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19 73 REPORT OF THE SECRETARY OF THE TREASURY
a benefit accruing to them, whereas the people in Ohio—'or wherever else Armco
Steel might have located this plant—were at a disadvantage.
Another discrimination is that between gas users on the one hand and oil and
coal users on the other. It is sometimes alleged that keeping the price of natural
gas low would result in lower prices for competing sources of energy, such as oil
or coal. That may be true i/ the siipply is there; but if there isn't a full supply, if
there is a shortage rather than a full availability of supply, it is going to result in
more demand for oil and coal and less for gas, which will drive up the price of oil
and coal above what they would otherwise be. Therefore, people who use oil and
coal are discriminated against as compared to those users of natural gas that
got it at a cheaper price.
Let me mention one more cost in this natural gas area. It is, perhaps, the most
pernicious cost of all: The environmental cost. Natural gas is the cleanest fuel
we have. In the process of electric power generation, in those plants that do not
have air emission controls, natural gas produces 91 percent less air pollution than
coal and 85 percent less pollution than residual fuel oil. Even if these electric
utility plants are fitted with the air emission controls, natural gas is still 58 percent less polluting than coal and 7 percent less polluting than oil. What you have
here is a situation where the most efficient fuel we have, from the standpoint of
keeping the environment clean, is being suppressed in terms of its total supply,
while the dirtier fuels are taking a bigger share of the total energy market. From
the standpoint of the environment, it ought to be the other way around.
There is also a geographic aspect to this. Geographic discrimination exists if
you think of the fact that States like Texas, Oklahoma, and Louisiana get a large
amount of their electric power from natural gas. This happens in part because
of the intrastate versus interstate difference in regulation. The incentives are to
use the gas locally, but those States in the South and Southwest are places where
it is easier to meet the basic environmental cleanliness standards. There's less
need to use natural gas there. Instead, we should have that gas being used for
electric power generation in the big metropolitan areas of the Northeast and other
areas where air pollution is much more serious. The way it is, you have a kind of
perverse geographic discrimination arising from regulation.
That is my list of the costs. It is not a complete list by any means, but it is
complete enough for me—complete enough to persuade me that energy costs our
economy more than it should through these unnecessary inefficiencies of regulation, and also to convince me that there are serious inequities between different
types of customers—some are being discriminated against while others are receiving "windfall gains."
Let me cite a couple more examples from another regulated sector of the
economy, from freight transportation. There has been a lot written about this,
and I think it is clear that there has been a waste of resources, an inefficiency
in the freight transportation industry for many years now because we are regulating a sector of the economy that may not need regulation any longer.
There was probably good reason for regulation a century ago when we started
the ICC. That is hardly true now. The railroads had a monopoly then; they don't
now. The truckers and the barge lines are now thriving industries and there is
really quite a lot of competition. There is not a clear case—in fact I don't think
there is a case at all—that economies of scale are important, particularly in the
trucking area. The case for regulation now is much less strong than it used to be.
At least we don't need as much regulation as we once did in this area.
The cost of this regulation is illustrated by a couple of examples. In trucking,
agricultural products have always been exempt from regulation. In the 1950's,
fresh dressed and frozen poultry and frozen fruits and vegetables were declared
agricultural products. They were added to. the list of agricultural commodities
that were exempt. They had been controlled and now they are exempt. This
resulted in rate decreases in shipping these products. For poultry the tariff went
down 30 percent, and the price of shipping frozen fruits and vegetables went
down 20 percent. At the same time, the shippers reported an increased quality
of service that they received. This strongly suggests that the costs of regulation
are not "peanuts" but are measured in the billions of dollars.
Another example is unregulated intrastate air travel in California, specifically
between Los Angeles and San Francisco. The fares there are 40 percent lower
than they are in comparable situations elsewhere in the United States. This is
another indication that the costs of regulation or the cost of having a regulated
industry are considerable.
EXHIBITS
269
What are these inefficiencies? One is the various restrictions on services, e.g.,
the fact that motor carriers are limited to certain cities and can't serve other
cities. Some truckers are limited to what commodities they can carry. Both of
these limitations result in empty backhauls: Trucker A will carry goods from
Chicago to Milwaukee, and trucker B will carry them from Milwaukee to Chicago,
and they will both come back with empty trucks. One study showed that almost
50 percent of the shippers had less than full loads in both directions. Without
such restrictions presumably that figure would be a lot lower. We would then
need fewer trucks, fewer drivers; which would mean lower costs and lower prices
for the goods that are carried.
Another kind of inefficiency is the result of the fact that the rates aren't
always based on cost. The rates don't really correlate well with costs. It is wellestablished that railroads are the most efficient carriers and have a definite cost
advantage for large shipments and bulk shipments on long hauls, and that trucks
are the most efficient for short hauls and small loads. In the case of some commodities, the rates don't reflect these differences and, therefore, the trucks end up
making a lot of long hauls. A very large percent of the 10-20-ton shipments of 200
miles or more go by truck, and as much as 20 percent of some 40-ton commodity
shipments of more than 200 miles go by truck. For these kinds of shipments, there
is an obvious advantage to the railroads, but through unenlightened regulation
we are losing that advantage.
Another regulatory cost is the inhibitions that regulation puts on the introduction of new technology. Innovation in surface freight transportation is scarce and
slow, but part of the reason, I believe, is regulation. The best example I have
picked up is the Southern Railway, which developed the "Big John" car for
carrying grain. They wanted to induce grain shippers to use those big cars and to
achieve that they wanted to give the shippers a much lower tariff. Well, it took
4 years of effort, including litigation, at the ICC, in the courts, and finally in the
Supreme Court, before they won the right to offer lower rates on those "Big John"
cars. And that delay was a significant cost to the industry and to the consumer.
There are restrictions on entry of new firms into the industry that also have a
cost. That these costs can be substantial is suggested by an example from a different part of the transportation market—^^taxicabs. Compare taxi service in New
York City with the District of Columbia and you will see some of the cost. In
New York there are 11,700 cabs with medallions. Entry there is restricted. There
hasn't been a medallion granted since 1937. That works out to about 1^/^ cabs per
thousand population. In the District of Columbia, where there are no restrictions
on entry, there are 11 cabs per thousand population. As a result, per capita ridership in Washington, D.C, is twice what it is in New York, and the cost per trip
is less than half. I am not going to tell you that the conditions and costs of everything else involved in the taxi business are the same in New York as they are in
Washington. Having lived in both places, I am familiar with it. But I am suggesting that there are significant costs to the public arising from the restrictions that
are put on the entry of new firms into business.
Well, neither this example nor any of the other examples I have given are
conclusive. There are always many factors that you can't take into account. The
figures are always suspect in making comparisons between one situation and
another, but I think they add up to very significant costs that have to be assigned
to the fact that the transportation industry is regulated.
Now, as an alternative, a free market would not eliminate all these costs. We
never get perfect competition—what the economists call pure competition. As I
said earlier, I believe in regulation of the so-called natural monopolies; but some
regulation obviously goes too far, and it seems to me that the best example of that
is surface freight transportation. The Nixon administration has a bill before
Congress to reduce this regulation very substantially. I believe enactment of that
bill would reduce these costs that I have been talking about and would save all of
us consumers a lot of money. Furthermore, we would strengthen the freight transportation industry. The railroads are particularly in need of strengthening at this
time, and very quickly, and I think it is important to pass this bill.
Let me go on in the few minutes that I have left and talk about the effects of
permanent wage and price controls. This is another kind of regulatory issue:
Whether the wage and price controls that we now have on virtually all industries
should be continued indefinitely.
I would say that these controls have a pretty good record; that is, they have
contributed to reducing both wage and price inflation. That of course does not say
270
1973 REPORT OF THE SECRETARY OF THE TREASURY
whether we do or do not want them continuously and permanently in the economy.
This is a fundamental question of public policy that the administration, tlie Congress, and the Nation will have to face in 1973.
Most of the Nation seems to have endorsed the controls program and found it
valuable. Whether you look at the public opinion surveys or whatever—businessmen certainly—the Nation has endorsed the program, which suggests that maybe
it should be given permanent status.
The view of the President and certainly all of the people in the administration
that I know of is that direct wage and price controls should not be a permanent
part of the economic landscape. Why not? Several reasons. First of all, the fundamental source of inflation is to be found in monetary and fiscal policy. Controls
may buy you some time by speeding the reaction of the economy to the situation
that originally came about because of monetary and fiscal policy, but they don't
buy you anything more. They don't do anything about the fundamental source of
inflation.
Second, if controls were extended for a long time, they would break down. They
would not do the job. I think this is especially true as we approach full employment. We are in a strong economic upswing now, and we are moving back toward
a position of full resource utilization at a rapid rate.
The third point that I would make is the way that our economy works. The way
it really operates, there is serious doubt that permanent controls are needed. There
are many economists that don't agree with that statement^—who say we should
look at the concentration ratios in some of the major industries like automobiles,
steel, and others. Then they jump from there to the idea that monopoly power
exists. They argue that this monopoly power is not subject to restraint from general monetary and fiscal policy, and they assume, therefore, that the classical
forces of competition are suppressed and that it is necessary to superimpose direct
wage and price controls on a permanent basis to prevent full exploitation of this
priyate market power over prices and wages.
Some of the more extravagant statements of this kind are easy to refute. When
Professor Galbraith tells us that large corporations are absolute monarchs who
can contrive to make consumers buy what best suits the pursuit of business profit
and corporate power, it is easy to demonstrate that such power simply does not
exist—even in the most concentrated industries and even where advertising techniques are most highly developed. If such power did exist, could the Edsel have
failed? Of course not. What about Swan soap? With all the expertise and effort
and ballyhoo that accompanied the entry of Swan soap onto the market, why
don't we see it on retailers' shelves anymore ? And look about you at the clothes
women are wearing. If business has control over the tastes of consumers, why
don't we see many maxiskirts ?
There are many other examples. If the establishment is as unassailably established as we are told, how is it that foreign-make cars account for 15 percent or
so of automobile sales in the United States? Whatever happened to Look and
Colliers? Why is it that Duz doesn't do everything for us anymore?
The answer to these questions is, of course, that in our society the consumer is
not a subjugated robot. Not by quite a margin. He is, rather, a powerful force—
the most important single influence on what is produced in the economy.
But to answer the extravagant claims of the Galbraiths and Naders does not
tell us that a workable incomes policy, if one could be found, would not be a
useful addition to our anti-inflation efforts. It is clear that market power does
exist in the United States. No one would argue that pure or perfect competition
is the prevailing modus operandi, that corporate managers have no control over
prices and that union leaders cannot influence wages.
The real question is how much power over the market do our large economic
institutions have? Plow widespread is it? Plow enduring? Those who most
vociferously support authoritarian incomes policies rarely come forward with
hard statistical evidence that market power is effectively used by large corporations and large unions. Certainly if such power were a significant force in the
determination of prices and wages in the United States, it would show up in many
areas of the statistical record.
We would expect to find, for example, that wage rates rise more rapidly in
those industries marked by strong union organization than elsewhere in the
economy (as, indeed, we have seen happen in the construction industry in recent
years).
EXHIBITS
271
If market power over prices were widespread throughout industry, we would
expect to see prices increase more rapidly than costs and, consequently, to see
profit rates of return rise persistently over time.
If this pricing power existed only in certain industries—in the concentrated
industries, presumably—we would expect to see prices in those industries rise
more rapidly than elsewhere in the economy, and we would expect to find that
the profitability of those industries was above average and persistently rising.
The statistical record, however, does not produce patterns of this kind. On
the labor side, the rate of increase in wages over the past 15 to 20 years is very
consistent from industry to industry, suggesting that for the most part our labor
markets work in a reasonably competitive way.
On the corporate side, profit rates of return (although they fluctuate widely
from year to year) tend to be stable over the long term, reflecting the tendency
for real wages to parallel closely the trend of national productivity. Further,
we find that changes in prices tend to coiTclate with changes in unit costs from
industry to industry. Correspondingly, we find that price changes are correlated
inversely with productivity changes, indicating that productivity differentials are
shared throughout the economy. We find also that price changes are not correlated, industry by industry, with either high levels of profitability or with
increasing rates of return over the long term.
All of these trends and relationships are "competitive characteristics." In the
long run, these data are telling us, the economy seems to work in a way that
the textbooks tell us that a reasonably competitive economy would work.
That is my basic conclusion, and it leads me to believe that permanent price
and wage controls are not necessary in the American economy, unless there has
somehow been a massive change in the structure of the U.S. economy in recent
years from what it was in the 1950's and 1960's.
There can be substantial costs, then—the same kind of costs that I referred to
earlier—to permanent wage and price controls. Those cost should be avoided
whenever possible. I think we can and should avoid them. The prime regulator
of prices and wages in this country is and always has been the interplay of competitive forces operating in a reasonably free market. Monetary and fiscal
policies are used to be sure that the total economy operates reasonably close to^—
but neither far below nor far above—^^its full potential.
In some sectors of the economy—the "natural" monopolies that I mentioned—
direct and permanent regulation of prices is required. For most parts of the
economy, however, I doubt that permanent controls are needed.
What will happen in the future on this? I must say, I don't know. There are
opposing, conflicting trends here—more and more industrialized countries are
turning to direct controls over wages and prices. The success of the stabilization
program here in the United States this past year will probably reinforce that
trend. At the same time, there are more and more attempts to insert government
presence one way or another into our economic life—pollution, consumer safety,
etc. Most of these are very beneficial, and some are very necessary.
But it is very possible that this trend toward more regulation of the "private"
lives of our citizens, and in particular of the economy, will go too far. This point
is gaining recognition. There is a growing realization of the problems of too much
reliance on government. Some of you may be familiar with the Brookings Study,
headed by Charlie Schultze, formerly Director of the Bureau of the Budget, which
came to the very strong conclusion that there is a limit to what government can
do to resolve the important problems of this Nation. The United States has a
tendency to tlirow Federal money at its problems. The Brookings Study pointed
out that that just doesn't work. Our manpower problems are a great example. I
can't think of anything that is more needed than effective manpower programs,
but I can't think of anything that is more frustrating in terms of the lack of
results from most of what we've done.
The Hunt Commission report is an example of the recognition that the Government's role in the financial area is in need of restructuring. The report did not
call for the elimination of regulation; instead it called for a streamlining of the
whole system to removing some of the inconsistencies that have characterized it
for so long.
The administration bill to reduce transportation regulation is another example.
The current discussion of natural gas, the strong feelings that now exist to
remove regulation at the wellhead, is another, AU of these are examples of a
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19 73 REPORT OF THE SECRETARY OF THE TREASURY
greater realization of the problems of regulation and of the kind of improvement that is necessary.
Looking ahead, I am hopeful that we will learn to regulate well those industries where regulation is required, and that we will learn to avoid regulation, and
therefore will avoid the excess costs of regulation, wherever the competitive market will do the job better without regulation. Thank you very much.
Exhibit 19.—Excerpt from remarks by General Counsel Pierce, March 22,1973, at
the New Orleans Cost of Living Council Regional Conference on Phase III,
New Orleans, La.
During Phase II, as compared to the prefreeze period, the rate of inflation
decreased, total employment rose, the rate of unemployment dropped, and real
spendable eamings rose. In general, the program received wide public acceptance and voluntary cooperation.
The effectiveness of Phases I and II is clearly shown by the leading economic
indicators. At the time Phase I become effective the annual rate of inflation as
measured by the Cost of Living Index was 4.8 percent. By the end of Phase II,
it had dipped to 3.3 percent. Real GNP was 1.4 percent at the beginning oj^
Phase I, and by the end of Phase II, it had risen to 7.5 percent. During the same
period, real spendable earnings rose from 1.2 percent to 3.8 percent, and the
level of unemployment had fallen from 6.1 percent to 5 percent.
One may appropriately ask, "If Phase II was operating so well, why did the
Government shift to Phase III ?"
Development of the rationale for Phase III
While Phase II was generally successful, it did have problems that would
eventually require a change in the system. This became very clear to the Cost of
Living Council and others responsible for the economic stabilization program
after Phase II was carefully analyzed during December 1972 and early January
1973. Consultation meetings were held with labor, management, consumers.
Members of Congress, and the members of the various boards and organizations
serving the economic stabilization program. After reviewing the results of this
consultation process and the experience gained from operating Phase II, it was
clear that the burdens of the Phase II controPsystem would mount in the coming
year.
It was found that redtape and administrative burdens, both for the Government and the public, would expand. Delays and interferences with the normal
conduct of business would become more serious. Inequities in the treatment of
different individuals and businesses would multiply. Incentives to efficiency and
investment would be weakened.
It was believed that if the present system continued for long unchanged, these
difficulties V70uid become so overwhelming that the system would become ineffective. Therefore, the system had to be modified to achieve its continuing
contribution to the anti-infiation effort with less danger of injury to the economy,
and with greater equity in the treatment of the individuals and businesses
covered by the system.
During this iDattle against inflation—^^both in the prefreeze and postfreeze
periods—the administration learned a number of lessons. Those of us involved
with economic stabilization were greatly impressed with the power of competition. In industries where there were lots of firms and excess capacity, so that
firms were really fighting for business, competition was probably more effective
than our control system in holding down prices. There were many instances
during the operation of Phase II when firms met all of the necessary requirements and received price increase approvals, but were not able to implement
those approvals because of the competition in their industries.
We also learned that with public cooperation, a voluntary, self-administered
controlled system can, in general, operate effectively in reducing inflation. There
are, however, certain areas of the economy where, for a variety of reasons,
inanda.tory controls become necessary.. At the preseut time, with rapidly rising
EXHIBITS
273
food prices, food processing and retailing industries must be subject to mandatory controls. The health care and construction industries also present problems
which—for the present time at least—can be better handled with the aid of
mandatory controls.
We also realize that our economy is extremely dynamic and other situations
may develop in the future where voluntary restraints are not achieved, and
mandatory controls will become necessary. Therefore, in any control system, it
is necessary to retain the power to impose mandatory controls whenever it is
considered imperative to attain the goals of the program.
Finally, we know that no wage-price system, regardless of how ingeniously
devised, can be successful and produce substantial results unless certain fundamental economic principles are adhered to. Most fundamental among these is
sound fiscal policy. Without strong fiscal discipline. Federal spending may be
so pumped up that the same forces are released that caused the earlier inflation.
The administration will vigorously resist this danger. That is why it intends to
hold Federal spending for fiscal year 1973 within $250 billion. The administration submitted a budget for fiscal year 1974 in which expenditures are not to
exceed $268.7 billion, and which will not exceed the tax revenues that would be
generated by a fully employed economy. It is imperative that Federal spending
be kept within these bounds if two very important goals to the American people
are to be achieved, namely, further reduction of infiation, and np. increase in
Federal income taxes.
It was against this background that the Phase I I I program was formulated.
The Phase III program
Phase I I I became effective on January 11, 1973. The Cost of Living,Council
was continued. The Price Commission and Pay Board and all advisory committees that existed under Phase II were terminated, and the authority of the
Commission and Board as well as their staffs was transferred to the COLO.
Rental units are excluded from the program, but landlords are expected to
exercise restraint. Regulated industries will be guided by the general criteria
listed in present Price Commission regulations, and restraint is expected to be
refiected in their actions and the actions of regulatory agencies.
Generally speaking, except for the food, health, and construction industries,,
Phase III will be a voluntary, self-administered program. As a general guide for
prices, increases in prices above presently authorized levels should not exceed
increases in costs. Even where costs have inci:eased prices should not be increased if the firm's profit margin exceeds the firm's base-profit margin. Alternatively, a firm may increase prices to reflect increased cost without regard to
its profit margin if the firm's average price increases would not exceed 1.5 percent in a year. Moreover, the base period for calculation of the profit margin
guide has been revised to permit inclusion of any fiscal year that has been concluded since August 15,1971..
The existing general standards of the Pay Board can be taken for the present
as a guide to appropriate maximum wage increases unless and until they are
modified. A labor-management advisory committee has been established to advise the Cost of Living Council on whether the standards should be modified
and, if so, how.
In general, with the exception of firms in the food, health, and construction
industries, all firms with sales of more than $50 million (approximately 3,500
firms) are required to keep records of profit margin changes as well as price
changes which will permit the computation of weighted average price increases.
Firms will have the obligation of producing these upon request. All firms With
sales of $250 million or more (approximately 800 firms) are required to file
quarterly reports concerning any weighted average price change and their profit
margin.
Generally speaking, with the exception of employee units in the food, health,
and construction industries, all employee units of 1,000 or more will be required
to keep records of wage rate changes, and all employee units of 5,000 or more
will be required to file reports with the Cost of Living Council indicating wage
rate changeSo
The Cost of Living Council staff and the Intiemar Revenue Service, under the
direction of the COLC, will inonitor performance through reviewing reports
received from firms and employee units; spot checking and auditing the records
of firms; and using various government and trade data. Tiiere will be a reduction
274
19 73 REPORT OF THE SECRETARY OF THE TREASURY
in the number of Internal Revenue Service agents working on economic stabilization from the 3,000 used in Phase II to approximately 1,500.
The Economic Stabilization Act of 1970, as amended, is sufficient to give the
Council the authority to invoke mandatory controls and punitive sanctions when
necessary. That is why the act did not have to be further amended, except to
provide for a 1-year extension. The Cost of Living Council has the authority to
establish mandatory standards where it is necessary to assure that future action
in a particular industry is consistent with the national goal of further reducing
inflation. Also, if it learns that an action has been or is about to be taken that
is inconsistent with the standards or goals of the program, the Council can issue
a temporary order setting interim price and wage levels. In short, as has often
been stated by officials connected with the economic stabilization program, the
COLC has a "big stick in the closet" which it can use if there is any breakdown
in the system of voluntary restraint. Recently, for example, the Council took
its big stick out of the closet and hit certain oil companies with it by limiting
their price increases, canceling their term limit pricing authorizations, and by
imposing upon them certain reporting requirements.
The food, health, and construction industries will be under mandatory controls.
Special rules have been or will be devised for each of these industries.
Food processors will be required mandatorily to comply with present regulations, somewhat modified, including prenotification and approval of cost-justified
price increases. Food retailers will be held to present margin markups. Pay units
in the food processing and retailing industries will continue to be covered by
present regulations. A committee drawn from the Cost of Living Council has
been established to review and recommend appropriate changes in Government
policies having an adverse effect on food prices. There will also be established
a food industry advisory committee which will be composed of people from the
private sector appointed by the President to advise the Council on the operation
of the economic stabilization program in the food industry and other matters
related to food costs and prices.
The Federal Government has also taken certain steps to increase the supply
of food with the expectation that these actions will help reduce the cost of food.
For example, the administration has suspended all quotas on meat imports for
1973; and the Department of Agriculture has temporarily suspended quotas on
imported, nonfat dry milk, has eliminated the mandatory set-aside requirement
under the 1973 wheat program, and has terminated direct export subsidies for
lard, broilers, and fiour.
The present controls applicable to the health care industry will continue until
appropriate modifications are made by the Cost of Living Council. A committee
drawn from the Cost of Living Council will be established to review and make
recommendations concerning changes in Government programs that could lessen
the rise of health costs. Also, an advisory committee composed of knowledgeable
individuals outside the Federal Government will be established to advise the Cost
of Living Council generally on the problem of health costs. This committee will
also work to mobilize insurance companies and other third-party payers to use
their influence to curb the rise in health costs.
The Construction Industry Stabilization Committee, which existed under
Phase II, will continue its work with the twin goals of improving the bargaining
structure in the industry and achieving additional progress in bringing the rate
of wage growth in this sector into line with the general wage growth in the
economy. Rules are provided to ensure that modifications in the wage growth rate
can be reflected by adjustments in construction prices.
The Committee on Interest and Dividends, which was established under Phase
II, and chaired by the Chairman of the Board of Governors of the Federal Reserve System, will be continued. This Committee, subject to review by the COLC,
is charged with formulating and executing a program for obtaining voluntary
restraints on interest rates and dividends.
Will Phase III be successful?
By the end of 1972 the rate of inflation had been reduced to 3.3 percent. When
he announced Phase III, the President stated that a goal of the program was to
further reduce the rate of inflation to 2i^ percent by the end. of 1973. Can this
goal be attained along with a further substantial reduction in unemployment, a
considerable increase in GNP for 1973, and an increase in real spendable earnings ? If this question is eventually answered in the affirmative, then Phase III
will have been a success.
EXHIBITS
275
In my opinion, the success of Phase III will depend on three factors: (1)
Whether Federal spending is held within the budgetary limits recommended by
the administration; (2) whether food costs are brought under control; and
(3) whether the public will voluntarily comply with the standards for wage and
price increases set by the COLC during Phase III. To the extent these things are
done, Phase I I I will be a success. To the extent they are not. Phase II will be a
failure.
Thank you so much for your attention.
Exhibit 20.—Article by Assistant Secretary Fiedler, printed in The Wall Street
Journal, April 19, 1973, entitled "The Case Against Rigid Controls"
Why not impose more rigid controls on prices and wages ?
Prices are surging upward in a number of economic sectors; doesn't that call
for more stringent controls? The changeover to the "self-administered" Phase III
has been widely regarded as a failure; doesn't that call for a new system
of tighter controls ? Certainly there is a great demand for tougher controls—from
consumer groups, from organized labor, and from other sources. And although the
Congress decisively rejected proposals to reinstitute a freeze and to broaden
it to encompass other sectors of the economy, there is a sizable minority of
Congressmen who are demanding more comprehensive, more rigid, and more
permanent controls over prices and wages.
Well, why not?
There are, I think, two fundamental reasons for resisting the call for tighter
controls. One reason is liberty—the old-fashioned principle that the individual
is the important unit in our society, that his freedom is something to be cherished,
and that the Government's power over him should be limited. To me, this
principle is a persuasive reason for opposing a move to inflexible, permanent
controls.
The second fundamental reason is economic efficiency. Our economy is so
complex and changes so rapidly that a system of strict controls on prices and
wages applied over a long period of time would damage it seriously. History
tells us that a comprehensive system of controls would require a gigantic
bureaucracy here in Washington and would produce endless ribbons of redtape
throughout the economy. History also tells us that the major economic impact
of controls would be inefficiency and inequity.
Those of us who remember World War HI know what the comprehensive wage
and price controls of that era produced. We remember the restrictions against
changing jobs and the shortages and rationing of meat, sugar, gasoline, and many
other products. We remember also the black markets and other illegal efforts
to circumvent the controls.
Those World War II controls produced great waste in the economy and great
inconvenience for the public. But we put up with such problems for patriotic
reasons; we were willing to make the sacrifice to help the war effort.
I think it is obvious that today the public would not accept the problems
that rigid controls inevitably create. There are no patriotic or other reasons
that would lead people to put up with, for example, shortages of basic consumer
goods.
The Phase II record
But the World War II experience may not be completely applicable to 1972
and 1973. What, then, can we say about the present controls? Have they done
any damage during the year and a half that they've been in effect? Plave they
hurt productive efficiency and created other problems?
The answer to that is, in the broad general sweep of things, no, but in many
specific cases, yes, very definitely. When we look at the economy as a whole,
we do not find that productivity growth has been slowed, or any other substantial evidence that the controls have done widespread damage. There are two
reasons for this: First, the control system in Phase II was designed wherever
possible to be flexible, and, second, the economy was operating with considerable
slack. These conditions minimized the troublesome effects of the program.
But while the stabilization program did not produce widespread economic
distortions during 1972, it did produce many individual instances of inequity
and inefficiency. And the economy was growing so fast that more and more
of - these difficulties were beginning to show up. Had we continued Phase II
276
1973 REPORT OF THE SECRETARY OF THE TREASURY
through the current year, with its rapid growth pushing many industries close
to full utilization of capacity, these dislocations would have become numerous
and serious enough to injure the economy as a whole. To demonstrate that this
is' not just a "bogeyman in the closet," let me cite a few examples of what
happened during 1972.
1. The most disturbing and most wasteful difficulties created by the controls
program were in the lumber and plywood industry, which was under heavy
demand pressure from the boom in homebuilding. There were numerous reports
that production was held 5 to 10 percent below maximum, primarily to avoid
violating the Price Commission's profit margin rule. Sawmills were performing
minor operations on standard cuts of lumber to create "new products" that were
exempt from price control. Phony export and reimport transactions were
recorded, without any lumber ever leaving the country. Tricks like these kept
the Internal Revenue Service working overtime tracking down violators. And
in another effort to circumvent the controls, railroad cars full of lumber were
being shipped around the country from one middleman to another, accumulating
markups, which were individually legal, but not getting the lumber to the final
user.
2. Despite the fairly high levels of unemployment that prevailed during 1972,
we heard a number of complaints from businessmen that their employees were
being lured away by higher wages to a competitor's plant down the road, and that
they were prevented by the controls from raising wages to meet the competition
in order to stop the pirating of their work force. When businessmen complain
that the wages they pay are too low, well, tliat's a pretty sure sign' that the
controls are interfering with the efficient operation Of the labor market.
3. Another inefficiency that was becoming more significant as the program
progressed was the redtape that both labor and business found themselves
tangled up in. By the end of 1972, for any pay or price request that was at all
more than routine, the waiting lines at the Pay Board and Price Commission
were getting longer and longer.
4. The controls had a perverse impact on petroleum refining, creating an
incentive to distill less fuel oil than necessary and more of some other products.
This helped make the fuel oil shortage last winter a little worse than it otherwise
would have been.
5. The controls also produced serious difficulties for commodities that are
traded in international markets. When the world price rises above the ceiling
price of domestic producers, a powerful incentive is created to ship all domestic production out of the country, irrespective of the need for it at home. This
situation developed for soybean meal and phosphate fertilizer late in 1972 and
threatened to create severe shortages of those commodities here in the United
States.
6. The Phase II profit margin limitation created a special kind of problem in
some industries. One company, for reasons unrelated to its major product line,
would be up against its profit margin limit and would be unable to raise prices oh
any product. The pressure of competition would, then, prevent other firms in the
industry from raising their prices, despite the fact that their costs had
increased sharply.
The classic example of this problem is the wine industry, where the Gallo
Company had recently developed a very profitable new line of fruit-based wines.
Because Gallo was up against its profit margin ceiling, it could not raise prices
on its grape wines, despite the fact that a poor crop had sent the price of grapes
up some 50 percent. This increase in costs was not too hard on Gallo, but it did
hurt other vintners badly. These other vintners generally produce only grape
wines and thus would have been justified in raising prices because of the increased costs, but they could not do so because Of competition from Gallo.. These
other vintners, then, saw their profits disappear very quickly and turn to.
losses. This same situation developed in a number of other industries, including
baking, brewer's yeast, linens, pool tables, and others.
The six examples described above are only a few of the many economic distortions and wasteful changes in normal business practices that the controls produced during 1972. We heard endless complaints from labor, business, and
consumers about their troubles, and the complaints were growing in frequency
and intensity as the year progressed. Moreover, these difficulties mounted despite
our best efforts to maintain a flexible and equitable program, and despite the
fact that farm products, interest rates, most rents, wages of low-income workers.
EXHIBITS
277
and many other sectors of the economy were exempt altogether from the
regulations.
Miseducating the people
The storm of protest over Phase III and the great demand that exists to move
toward across-the-board price controls indicates that the freeze and Phase II
have had a profound effect on the attitudes of the American people. It tells us
that what the entire stabilization eff'ort has done, more than anything else, is to
miseducate the public to believe that controls are the way to solve the problem
of inflation.
That is a distressing result. To me, it is clear that a comprehensive system of
rigid price and wage controls applied over an extended period would wreak
havoc on the basic structure of our economy.
Exhibit 21.—Excerpts from remarks by Assistant Secretary Fiedler, April 25,
1973, before the Tri-State Conference conducted by the Cost of Living Council,
St. Louis, Mo.
The eruption of price increases in the past 2 months has raised questions about
the prospect of keeping inflation in check over the long term. There is serious
concern that this spurt will set off a new spiral of accelerating pri^e-wage-price
inflation comparable to the pattern of 1965-1970.
Public discussion of this issue—of what was responsible for the burst of price
increases and what should be done about it—has focused almost exclusively on
Phase III of the price and wage controls. This emphasis on the controls is worrisome, since it threatens to divert our attention from the basic causes of the
situation and from the main targets of economic policy.
Our present system of flexible price and wage controls can make an important contribution to the anti-inflation effort,, as it did during 1972. But what
happens to inflation during 1973 and 1974 does not depend solely or even predominantly on the controls program. What it does depend on, fundamentally, is
the economic pressure of demand upon supply.
Most of our recent inflation has been of this nature. Demand for foodstuffs—
especially red meats—has climbed sharply because of rising incomes, but supply
did not increase. Under those conditions, a temporary upsurge in food prices was
inevitable.
The importance of the spurt in food prices over the past 2 months—both the
public perception of this spurt and the impact of food on the price indexes themselves—can hardly be overstated. The public is always sensitive to rising prices,
but especially food prices because the shopper comes face to face with them a
couple of times a week. And although food represents only about one-fourth of
the total weight in both the Consumer Price Index and the Wholesale Price
Index, it has accounted for almost two-thirds of the rise in these indexes since
January.
To be sure, there have also been many price increases among industrial commodities. The most important of these have also followed the pattern of food;
that is, they have been in economic sectors characterized by rapidly increasing
demand and/or limited supply. For example, the largest price increases have
come in lumber (due to the homebuilding boom), petroleum (the fuel oil shortage), and nonferrous metals (the vigorous business expansion here and abroad).
The fact that these three industrial sectors, together with food, account for
the dominant part of the rise in wholesale prices over the past couple of months
points up the need to pursue economic policies that get at the fundamentals, and
not just the symptoms, of the inflation problem:
To expand food supplies by increasing cropland acreage, selling Governmentowned stocks of grains, suspending meat import quotas, and making other major
changes in fai-m policies;
To increase the available supply of nonferrous metals and other commodities by selling excess inventories from Government stockpiles ;
To increase gasoline and fuel oil supplies by ending oil import quotas;
To maintain a tight rein on the budget to keep the economy from running
away with itself. Of all the policy steps taken, this is the most important. We
must not repeat the mistakes of 1965-68 when, at a time of full employment,
massive budget deficits in combination with an excessively easy monetary policy
278
19 73 REPORT OF TPIE SECRETARY OF THE TREASURY
created a runaway infiation. To prevent that unhappy pattern from taking place
again. President Nixon is determined to resist the many pressures for increased
Pederal spending and to hold the budget to noninflationary levels.
Finding the right combination of economic policies to keep the economy on a
stable growth path without excessive infiation is not a simple matter. No safe
or sure or painless or instantaneous solution is available. But we can be confident that the policies now in place—the resolute ijosture on fiscal and monetary
policies, the substantial actions to increase supplies of commodities with shortages, and the flexible but forceful controls over prices and wages—will prevent
the present temporary spurt in prices from becoming an endless inflationary
spiral.
Exhibit 22.—Statement by Deputy Under Secretary Bennett, May 2, 1973, before
the Subcommittee on Production and Stabilization of the Senate Banking,
Housing, and Urban Affairs Committee
Mr. Chairman, I welcome this opportunity to present the administration's view
on proposed legislation to allow unregulated ownership of gold by Americans.
I am here to oppose it. The time may well come when U.S. regulations can and
should treat gold just like any other industrial metal. But that time is not now.
It would not be wise to assume now that the time will be on December Slst of
this year.
Government restrictions on the freedom of American citizens should be imposed only on the basis of clear-cut justiflcation. And regulations in force should
be carefully reviewed periodically—as you are doing today—to ensure that they
continue to be justifled under changing conditions. Obviously circumstances today
are markedly different from those of 1933 when the existing regulations had
their beginnings. The problem then was that prices in the United States had been
falling. There are, however, as I shall attempt to explain, strong reasons relating to our current circumstances why the regulations should be kept in force at
this time.
These existing regulations do not ration or limit the amount of gold which
can be used in the United States for customary industrial or artistic uses. Individuals and business firms requiring gold for these purposes may acquire all
they need under Treasury license. All that the regulations prohibit is the acquisition of gold for speculative or investment purposes.
It is also important to emphasize that the regulations have never restricted
domestic producers of gold from selling their production at the prevailing market prices. Domestic producers of gold today are free to sell to licensed industrial users in the United States or to export without restriction for whatever
price the market brings. In recent weeks that price has fluctuated around $90
per ounce.
Americans may also hold without restriction any amount of gold jewelry or
fabricated gold in any form. They can also acquire and trade without license
in rare U.S. or foreign gold coins, deflned as those minted before 1934, for numismatic purposes. In essence, then, when we speak of the U.S. restrictions on
the private ownership of gold we are speaking only of restrictions on investment
or speculation in gold bullion.
Americans are not the only ones subject to such restrictions. Practice in this
respect varies widely among nations, but a list prepared on the basis of International Monetary Fund data shows 75 countries which maintain restrictions
and 44 which do not. The United Kingdom has such restrictions; Canada doesn't.
Australia has such restrictions; Japan doesn't. On the continent of Europe, Denmark and Norway have such restrictions; Germany and France don't. In those
countries where the unrestricted private holding of gold is permitted, there are
wide variations in the extent to which the citizens avail themselves of the
opportunity.
Under the circumstances, there is no way in which I can make a precise forecast as to how much gold Americans would buy in the near future if the controls
were suddenly removed. Yet I do. know that the dollar has experienced two
effective devaluations relative to foreign currencies in the last year and a half.
My own judgment is that the dollar is now more likely to go up than down in
relation to other currencies. At the same time, I think we must realize that the
confidence of many may have been shaken. For this reason we should take
EXHIBITS
279
into account the real possibility that removal of the controls would be followed by
a substantial surge of new demand against the limited market supply. The result
could be a sudden large jump in the free market price of gold. Later on the price
could fall back sharply again, but meanwhile, the price of gold could display an
even greater instability than we have seen in the recent past.
Logically such instability in the price of gold need cause no instability for
the value of the dollar in terms of other currencies. But to place any reliance
on that fact would be to place too much reliance on logic in an area where irrationality often enters in. Today we are only a few weeks away from the recent
period of intense international monetary uncertainty. If in the near future there
were a sharp reduction in the value of the dollar in terms of gold in the private
market, there could well develop as a consequence a sharp drop in confidence in
the dollar in terms of other currencies on purely psychological grounds quite
apart from any developments relating to the real fiows of our international trade
and investment.
At the same time, however, there could develop a seriously adverse real increase in our already serious trade deficit. Gold imports could rise significantly.
Yet gold imports are already a costly component of our import bill. As you can
see from the first chart attached to the copies you have of my written presentation, U.S. consumption of gold has long surpassed by far our domestic production.
Last year, for example, U.S. consumption was more than four times U.S. production, and the trend of consumption was up while the trend of production—even at
the new higher prices—was down. The excess of consumption was about 6 million
ounces. Purchases of that amount from foreigners again this year would cost us
about $540 million at the present price of gold. If the regulations were rescinded
we might have to pay out a lot more, not only for additional imports but in
higher costs for our basic industrial needs as well. Our trade position which now
at last seems to be improving could be knocked into reverse. The real deterioration of our trade position and the psychological impact of the instability in the
gold price could conceivably reinforce each other to the extent of undermining
the dollar and creating new turmoil in international monetary affairs. I can't say
for sure this would happen. I can say it is a real risk we need not and should
not take. Even if the risk is only 1 out of 20 it should be taken seriously. A return
again so soon after our recent experience to an international monetary crisis
could do more than just handicap the efforts of our international traders and
investors. It could seriously damage our effort to fight inflation at home. It could
undermine our prestige and influence abroad to the extent of damaging our
national security.
In view of these dire possibilities, I might well be asked whether it would not
be possible for us, after removing present restrictions on private ownership, to
sell enough gold from the Treasury's present gold holdings to avoid any increase
in price and to avoid any increases in our gold imports in the near future. The
answer, in a i^hysical sense, is "Yes." Our gold stock is probably big enough for
that purpose. Such an operation would, however, bring with it disadvantages
which I sincerely hope you would find unacceptable.
In the first place, the U.S. Government is now party to an understanding with
other major nations that sales of official holdings of gold into the private market
will not be made. That understanding was entered into in 1968 at the time the
so-called two-tier gold market system was established. Yet even if that obstacle
Avere overcome, would you wish to require us to use our gold reserves for this
purpose when the shape of the future international monetary system is not clear?
AVould you think it wise for us to take unilateral action when major negotiations have begun—with our strong encouragement—to seek widespread international agreement on a future cooperative international monetary system? That
would hardly seem the way to gain international cooperation in the future.
In those negotiations we have made clear that we believe that the role of gold
should be diminished; it should not have a central role in the international
monetary system. Those negotiations are progressing. My boss, Paul Volcker, is
off this week discussing the subject with governments in Asia. I returned late
last night from several days of discussions with the experts of the European
governments. We don't have an agreement, but a good faith effort is underway
to reach one. I hope the Congress will not negate this effort by jumping the gun.
My belief is that the wisest course would be for the Congress not to legislate
at this time either a removal of the restrictions on private ownership of gold or
a requirement of gold sales by the Treasury. If the Congress should nonetheless.
280
1973 REPORT OF THE SECRETARY OF THE TREASURY
decide now to indicate that private ownership should be permitted as the progress
of reform and other developments allows such action, then I would still strongly
urge that the timing of such action should be left for determination by the
President. Yet even on that basis, Mr. Chairman, such legislation would not
advance our national interest. The most helpful thing the Congress could do
would be to complete action promptly on the Par Value Modification Act to
ensure that long delay does not give rise to unwarranted suspicions abroad as to
U.S. intentions.
Meanwhile, I can assure you that we are pushing vigorously for. international
monetary reform and for improvement in our trade position. New legislation to
change the rules on gold at this time could only hamper these efforts.
Thank you.
EXHIBITS
and Consympll@n
1968
1969
Deportment of the Treasury
Office of Domestic Gold and Silver Operations
1970
281
282
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Loodon Gold Prices
98
-
92
-
86
-
80
I 68
|\
-
Jan. n, 1973
Ni
a
« 62
o
-8 56
\
]
•
50
r^
44
38
/ v - y --^^v^
•
/
Rug. 15,
' ! > "
^^ ^ ^ - ^ " ^
32
1968
1969
1970
1971
1972
1973
1974
Exhibit 23.—A description of the depositary system of the U.S. Government,
June 1973
The depositary system encompasses all aspects of the deposit of public moneys
of the United States with financial institutions. The term "public moneys of the
United States" has a broad connotation based on its statutory definition as
"Any funds of the United States or any funds the deposit of which is subject to
control or regulation hy Oovernment agencies or officers." As implied by the italics
in the definition, the term embodies two distinct classes of funds, for which the
following explanations may be helpful.
I CASH ASSETS OF THE PEDERAL GOVERNMENT
.
In category I are all the moneys which, in balance sheet terms, have the
common characteristic of being cash assets of the Government, all representing
credits to the Government's accounts for revenues or appropriations and funds
(including trust funds) or accounts for deposit funds which the Government is
holding in a banking capacity. By the same token, all of the cash assets have the
common characteristic of being incorporated in the central accounts of the Government on the books of the Bureau of Accounts in the Treasury's Fiscal Service
on the basis of the official accounts rendered by all accountable officers of the
Government for audit and settlement.
A. Treasurer of the United States.
By and large, the Government's cash assets are in the Treasury within the
accountability of the Treasurer of the United States, and most of that money,
by far, is in the form of demand account balances. The primary demand accounts
are those (a) for day-to-day Treasury operations at the Federal Reserve banl^
(including also funds in process of collection at the Federal Reserve banks),
and (b) for the fiow of most of the Government's cash into the Treasury through
the tax and loan accounts of most of the Nation's commercial banks. The portions of the Treasurer's cash accountability that are in the form of deposits in
commercial banks consist of:
(1) Treasury tax and loan accounts. Most of the receipts of the Government
flow into the Treasury through Treasury tax and loan accounts.. As business
EXHIBITS
283
concerns pay their withholding taxes, corporation taxes, and other types of
Federal taxes, and as banks subscribe for new issues of designated Treasury
securities (for their own or customers* accounts), the funds are transferred
on the bank's books from its account with the payer to its account with the
Treasury (the tax and loan account). The Treasury then draws on the tax and
loan account balances as it actually needs the funds to cover its disbursements,
thereby matching the flow of collections and payments with minimum disruption
of bank reserves and with no undue impact on the money market. All incorporated
banks and trust companies (some 14,000) are eligible to have a tax and loan account with the Treasury, and some 13,000 banks do. They all compete for handling
tax payments and subscribing for Government securities for their customers and
themselves. The incentive—to avoid unnecessary contraction of bank reserves—
is built into the system. Whatever flows through a bank's tax and loan account,
whether a large or small bank, is the result of the bank's own business operations.
(2) Treasurer's general accounts—domestic. The funds for various classes
of collections deposited by Government officers throughout the country reach the
Treasury's operating accounts at the Federal Reserve banks either directly or
through about 1,100 so-called Treasurer's general accounts at commercial banks
designated to provide these local facilities. These are entirely "flow-through"
bank accounts in which, with a few exceptions, there are no balances at the close
of each day's business, because the banks transfer the funds every day to the
respective Federal Reserve banks. About 30 of these accounts serve the same
flow-through function but they are special collection accounts (primarily for
voluminous deposits by Internal Revenue Service offices) under arrangements
permitting the funds to be transferred to the Federal Reserve banks as the
commercial bank collects the proceeds (with the conventional distinction between funds immediately available, 1-day, and 2-day deferred availabilities).
Therefore, whatever the balance of any such special collection account happens
to be at the close of any day, that balance simply represents funds in process of
collection.
(3) Treasurer's general accounts—foreign. Some relatively minor demand
accounts, as checking accounts, needed for day-to-day operations through a few
commercial banks are maintained overseas; and
(4) Compensating halances. Some deposits are placed solely for the purpose
of compensating banks for specific depositary services authorized by the Treasury.
Periodically, the Treasury adjusts these balances to permit each bank to earn
on its balance an income equivalent to what it is entitled to charge for its services. These services include such things as (I) processing deposits made by all
Government officers through the Treasurer's general accounts referred to in item
(2) above; (II) operating military banking facilities, both stateside and overseas; (III) handling special bank accounts for State unemployment compensation payments; (IV) furnishing bank drafts to Government officers in special
situations where this technique gives the Government advantages in the handling
of individual collection instructions; and (V) meeting the currency and coin
needs of certain Government installations. These Treasury balances placed in
banks for compensation purposes are of two types: (a) Time deposits, which
apply to virtually all of the banks; and (b) Special demand deposits, which apply
to just a few banks under special arrangements advantageous to the Government.
Prior to 1972, these deposits were mainly in the preceding time deposit category ; their conversion to demand account status was especially arranged to
permit more prompt recall into the Treasury's operating cash balance as and
when desirable in managing the Treasury's cash position.
B. Other accountable officers.
With relatively minor exceptions, all accountable officers who serve as Government disbursing and collecting officers deposit all of their collections into the
Treasury and draw checks on the Treasury for their disbursements. Of necessity,
disbursing officers operating in foreign countries are largely an exception insofar
as they have to draw checks on checking accounts with local banks, for payments in foreign ciirrencies or denominated in military payment certificates.
Some accountable officers operating within the United States are authorized, for
specified purposes, to have funds temporarily outside the Treasury, including
money on deposit in commercial banks at levels commensurate with authorized
needs.
506-171—73-
21
284
19 73 REPORT OF THE SECRETARY OF THE TREASURY
(1) The largest single class of deposits in U.S. banks in this category consists of
Indian tribal funds and individual Indian moneys in the custody of accountable
officers pf the Bureau of Indian Affairs serving as agents of the tribes, all such
funds being in interest-bearing accounts with banks (including certificates of
deposit).
(2) Other funds authorized to be on deposit in demand (checking) accounts
or interest-bearing accounts in banks include: (a) Postmasters' checking accounts throughout the country, largely for the flow of their collections into the
Treasury (to a minor extent also for certain small purchases best handled
locally) ; (b) Checking accounts of the Veterans Canteen Service, similar to
item (a) above; (c) Registry funds temporarily in checking accounts of clerks
of the U.S. courts (to the extent that the clerks of the U.S. courts do not deposit
such funds directly with the Treasury) ; and (d) Checking accounts and
interest-bearing accounts required under local operating conditions by a few
agencies.
II. 0THE3R FUNDS INCLUDED IN PUBLIC MONEYS OF THE
UNITED STATES
All moneys in category II have the common characteristic of not being part
of the Government's cash assets. They are not included in the official accounts
rendered by any accountable officer for audit and settlement and are not for
credit to any of the Government's accounts for revenues, appropriations and
funds (including trust funds) or deposit funds. The only thing they have in
common with actual Government money in category I is that they, too, fall within
the statutory definition of "public moneys of the United States" because they are
subject to certain control or regulations by certain Government agencies or
officers. By virtue of being such public moneys the Government's interest extends
to requiring the deposits in commercial banks to be secured by collateral, for
category II as well as category I money, to the extent exceeding the protection
covered by the Federal Deposit Insurance Corporation ($20,000 per depositor).
In that connection, the Treasury keeps a special set of records (entirely outside
the formal financial system) representing solely the authorized maximum limits
of individual bank accounts (each authorization is the amount of collateral
the bank has pledged to secure the maximum amount that may be on deposit
in the account at any time in excess of the Federal Deposit Insurance Corporation's coverage). They do not represent amounts actually on deposit in hank accounts at any time. All moneys in category II, entirely on deposit in commercial
banks, fall into two groups, as follows:
A. Certain nonappropriated funds.
For the most part, these nonappropriated funds are moneys under the control
of personnel of military organizations serving in the capacity of club treasurers,
mess officers, exchange officers, etc. Relatively small amounts of nonappropriated
funds pertain also to moneys in the custody of produce and commodity committees and boards under the administrative control of the Consumer and Marketing Services of the Department of Agriculture. These accounts in commercial
banks are both:
(1) Demand {checking) accounts, with balances at levels needed for current
operations (in some foreign banks as well as in U.S. banks) ; and
(2) Interest-hearing accounts (including certificates of deposit) for amounts
not needed for current operations.
B. Funds of certain private entities.
With respect to certain Federal programs for which the statutory definition
of "public moneys of the United States" is applicable, the Government makes
disbursements which are deposited directly to checking accounts that private
entities maintain, in their own names, in their own commercial banks. These
are accounts of some grantees, certain contractors, and other private organizations which the Government funds through grants and other advances. The
public moneys definition applies only because the Government agency administering the particular program has imposed restrictions on these private accounts,
Apart from the protection this affords in the form of collateral, the Government's
interest in these particular accounts also extends to providing assurance that
money funding current operations of the private entities involved will be with-
EXHIBITS
285
drawn from the Treasury and credited to the private checking accounts as
closely as possible to the time actually needed for disbursement by the private
organizations. This is accomplished by a variety of devices, including extensive
use of letters of credit (a technique which, incidentally, applies also to grant
programs for which the statutory definition of "public moneys of the United
States" is not applicable). The private checking accounts in this category
(based upon the Treasury's records of pledged collateral) are funded by disbursements made in programs administered by the agencies identified in the
following:
(1) Accounts of private insurance carriers serving as intermediaries for
making payments under the medicare program, for which advances are authorized by the Social Security Administration, Department of Health, Education, and Welfare; and
(2) Accounts of grantees and contractors funded through programs of: (a)
Atomic Energy Commission; (b) Department of Labor, Manpower Administration (which includes Neighborhood Youth Corps) ; and (c) Department of
Agriculture, Farmers Plome Administration.
Exhibit 24.—Other Treasury testimony published in hearings before congressional committees, July 1, 1972-June 30, 1973
Secretary Shultz
Statement on the Economic Stabilization Program, before the Senate Committee on Banking, Plousing, and Urban Affairs, January 29,1973.
Statement on the Federal budget, before the House Committee on Appropriations, February 5,1973.
Statement on the Federal budget, before the Senate Committee on Appropriations, February 20,1973.
Statement on the Treasury budget, before the Plouse Subcommittee on Appropriations, March 5, 1973.
Statement, together with John T. Dunlop, Director, Cost of Living Council,
in support of the extension of the Economic Stabilization Act, before the House
Committee on Banking and Currency, April 2,1973.
Statement on food and farm prices, before the Subcommittee on Production
and Stabilization of the Senate Committee on Banking, Housing and Urban
Affairs, April 5,1973.
Statement on the Treasury budget, before the Senate Subcommittee on Appropriations, May 3, 1973.
Under Secretary for Monetary Affairs Volcker
Statement on the devaluation of the dollar, before the Senate Committee on
Appropriations, March 19, 1973.
Assistant Secretary for International Affairs Hennessy
Statement given May 17, 1973, and to be published in hearings before the Subcommittee on Africa of the House Foreign Affairs Committee, 93d Congress,
1st Session, providing information with respect to the transfer of funds to
Rhodesia ; the funding of the Rhodesian Information Office in the United States ;
and U.S. fulfillment of obligations under pertinent United Nations Resolutions.
Energy Policy
Exhibit 25.—Statement by Deputy Secretary Simon, April 18, 1973, on the oil
import program
President Nixon today signed a proclamation which terminates volumetric
quotas on oil imports beginning May 1, 1973. The proclamation substitutes a
system of license fees on imports of petroleum and petroleum products into the
United States.
Today's action follows an intensive study of the Nation's oil import policies
relative to current domestic supplies of crude oil and petroleum refinery capacity
and the national security interest of the Nation. The study was conducted by
286
1973 REPORT OF THE SECRETARY OF THE TREASURY
an interagency task force under my direction as Chairman of the Oil Policy
Committee.
License fee program
An explanation of the new license fee program is attached. In essence, however, as of May 1, 1973, there no longer are any volumetric controls on oil
imports, and the existing duties on crude oil and refinery product imports are
suspended. Any person or company wanting to import crude oil and/or refinery
products may do so after obtaining an import license from the Office of Oil and
Gas at the Department of Interior and after paying the license fees in force at
the time.
In order to provide an equitable transition from the current program to the
new license fee system, certain crude oil and product imports will be exempt
from license fees for a limited period after May 1, 1973. These exemptions,
however, will be phased out over a 7-year period.
Demand and supply
In recent years, the United States has seen its surplus supply of crude oil
and refinery capacity rapidly dwindle into a deepening deficit, as demand for
petroleum products has spiraled upward arid discoveries of new reserves and
construction of new refineries in this country have failed to keep pace. Increasing reliance on imports of foreign supplies has raised serious questions with regard to the Nation's balance of payments position and national security requirements. In addition, the difficulty in satisfying the Nation's home heating oil
requirements this past winter and the threat of a gasoline shortage this summer
underscored the imminent need to reconsider national oil policy, and an investigation of current policies was begun in February by the oil import task force
under my direction.
Mandatory oil import program
The task force found that the mandatory oil import program no longer provided the proper climate to support a vigorous domestic petroleum industry,
which is essential to the national security and the economic welfare of the Nation.
It found that the program was neither adequate to alleviate the threat of nearterm crude oil and product shortages, nor adequate to provide longer term incentives for increased investment in domestic exploration and production and new
refinery construction and expansion.
The task force found that the program was not so much a failure as it was
obsolete. It was established at a time when domestic production was in excess of
demand and it was founded on the premise that it was necessary to restrict imports of cheap foreign oil to encourage the domestic petroleum industry in the
interest of national security. The conditions which gave rise to this policy no
longer exist.
Further, the original purpose of quotas was to provide reasonable self-sufficiency by encouraging the development of domestic production and refining
capacity. This clearly has not happened.
Companies were induced to explore and produce abroad in order to benefit both
from lower foreign producing costs and the assurance of a large higher priced
market at home. Imports now account for 30 percent of production and are expected to climb to the 50 percent level in a few years.
The task force found that these unintended developments are inherent in the
quota system, and have not been corrected by the stop-gap measures used to
shore up the program over the past years.
Lately refinery capacity has also begun to move abroad. Although other factors
have contributed to this development, including environmental restrictions which
have blocked refinery plant sitings, the uncertainties of the quota system have
had an adverse effect on long-range investments for new refinery construction
as well as investments for additional exploration and production in this country. This uncertainty developed because:
1. Import allocations are subject to annual realignment;
2. In recent years the program has been altered frequently, making it a
patchwork of special provisions and exceptions ; and
3. General dissatisfaction with the program both in industry and the Governinent has fostered the expectation that it would be abandoned shortly.
Basis for policy recommendation
Based on this assessment of the mandatory oil import program we launched
a full-scale effort to develop recommendations to restructure import policies.
EXHIBITS
287
We recognized the need to get the Federal Government out of the business of regulating oil imports, since the Government does not have the forecasting capability
to predict exactly what import levels will be each year. Our objective was to design a program that would assure the oil industry fiexibility to import oil to
satisfy the short-term needs of U.S. refiners and consumers while, at the same
time, provide longer term stability and additional incentives for increased domestic exploration and production and new refinery construction and expansion.
We knew that in designing this new program the special provisions, exceptions,
and subsidies in the MOIP would have to be ended. We realized that this could
not be done abruptly, but would have to be done gradually to avoid putting an
unfair economic hardship on the numerous persons and companies that together
have invested many millions of dollars in the domestic oil industry based on the
policies under the MOIP.
We also realized that our new policy recommendations would have to satisfy
consumer interests in reasonable prices and sufficient supplies without straining
or disrupting the complex mechanism known as the oil industry. We knew, that
each segment of the industry must continue to be viable in order to meet the
supply needs of the Nation both in the near and longer term. The formidability
of this task is obvious when you realize that the oil industry is composed of
companies that vary in size from global to local and from integrated majors to
independent producers, refiners, marketers, and jobbers.
We further recognized that our policy recommendations would have to be
compatible with other Government policies and prograhas, in particular the economic stabilization program.
We knew that in order to be more attractive for oil companies—or for that
matter anyone—to build new refineries and explore for more oil in this country,
prices in this country for foreign petroleum products would have to be, higher
than the prices for domestic products. Only in this situation would it be more
profitable to manufacture those products here than to make them somewhere
else and import them into this country. There had to be clear advantages to
producing crude oil in this country rather than producing it somewhere else and
in turn selling it in this country. Therefore, we have set a license fee on imports
of crude oil and even higher license fees on imports of residual fuel oil, distillates, gasoline, unfinished oils, and other products. Various changes in these incentives are spelled out in advance so that the oil industry will have a reasonable degree of certainty under which to make major new investments in U.S.
exploration and development and refinery construction.
Independent refiners
Implementation of the new license fees on May 1, 1973, will give value to unused 1973 import licenses, providing landlocked independent refiners with some
additional leverage to bargain for domestic "sweet" (low sulfur) crude oil.
Import licenses, in general, now have no exchange value because the landed
prices of foreign crudes—especially sweet crudes—are roughly equivalent to or
above domestic crude prices. An increase in the value of independents' licenses
by the differential of 10% cents per barrel initially should help independent
refiners bargain for additional sweet crude supplies. Moreover, the ability of the
independent refiner to obtain license fee-exempt tickets from the Oil Import
Appeals Board will, hopefully, enable them to obtain a sufficient number of tickets
to allow them to bargain for adequate crude oil supplies under present-day price
relationships.
Under the new license fee program, the exemption of 1973 allocations for all
refiners will be phased out over 7 years. The intent is to provide refiners both
the time and the incentive to adapt their refineries to run available "sour" crudes
or to develop or contract for adequate sweet crude supplies for the long term.
Independent marketers and jobbers
Today's action also gives value to the 1973 import allocations issued by the
Oil Import Appeals Board to independent marketers and jobbers, enhancing their
ability to bargain for products. The OIAB will continue to hear appeals from
this sector of the industry to make certain that no undue hardships occur as a
result of tight product supplies. In the long run, the license fee program will further benefit independent jobbers and marketers by encouraging additional refinery capacity, which will make products more readily accessible.
288
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Prices
The impact of today's action on oil prices is expected to be gradual over the
long term and minimal in 1973. Imports subject to the new license fees during
1973 are expected to be such a small percentage of the Nation's total oil requirements as to have little, if any, impact on consumer prices. The Cost of Living
Council has advised us that there is adequate fiexibility under the current oil
price controls to allow such price movements should they be necessary to meet
the supply needs of the Nation.
Today's action also gives all importers the opportunity to negotiate long-term
contracts, and thereby lower prices, for their crude oil and product supplies. This
should be especially beneficial to deepwater terminal operators in PAD District I.
Conclusion
The program announced today by the President deals equitably with the many
and varied aspects of oil import policy, while satisfying the national security interest by assuring the oil industry the fiexibility, certainty, and incentives to
meet the growing petroleum needs of the Nation through domestic expansion at
all levels of the production and distribution system.
Today's action suspends oil import quota restrictions without abandoning the
mandatory oil import program. It opens the way for foreign imports to alleviate
potential shortages of crude oil and finished products, without foreclosing the
option of reimposing mandatory controls at any time in the future, should that
ever again become necessary or desirable. The intent is to maintain import control and accountability without restricting the fiow of essential oil into the United
States.
The license fee approach gives the President the flexibility to satisfy shortterm needs of consumers without destroying long-term incentive, namely, domestic exploration and production of crude oil, and construction and expansion
of domestic refineries.
Caution: The following text is meant to clarify the Presidential proclamation
concerning changes in the modified oil import program. It does not have any
legal effect in the interpretation of the regulations to be published shortly.
SUMMARY OF THE MODIFIED OIL IMPORT PROGRAM
As it is currently structured, the mandatory oil import program has neither
prevented near-term crude oil and product shortages nor provided adequate longer
term incentives for increased investment in domestic exploration and production
and new refinery construction and expansion. The program is not so much a failure as it is obsolete. It was established at a time when domestic production was
in excess of demand and it was founded on the premise that it was necessary to
restrict imports of cheap foreign oil to encourage the domestic petroleum industry in the interests of national security. Today foreign oil prices are roughly
equivalent to or above domestic prices, and this country must import ever
larger amounts of foreign oil to supplement its inadequate domestic production.
Not only does the program provide little benefit now, it has the very real potential of aggravating tight supply conditions. Unexpected increases in the demand for imports could lead to a situation in which there is. insufficient import
tickets, creating the possibility of a shortage that otherwise could have been
avoided.
Probably the greatest shortcoming of the current program, however, is the
uncertainty inherent in its operation. This uncertainty has an adverse effect on
long-range investment planning for new refinery construction and drilling. It is
created because:
1. Import allocations are subject to annual realignment;
2. In recent years the program has been altered frequently, making it a
patchwork of special provisions and exceptions; and,
3. General dissatisfaction with the program both in industry and Government
is fostering the expectation that it will be abandoned shortly.
Therefore, it is recommended that the program be modified to meet current
needs and objectives. The program must be restructured to assure the oil industry the fiexibility to import oil to satisfy the short-term needs of U.S. refiners and
consumers while, at the same time, providing longer term stability and additional
incentives for increased domestic exploration and production and new refinery
EXHIBITS
289
construction and expansion. We believe the program recommended below will
achieve these objectives.
There are built into the program a number of exemptions to license fees during
the next 7 years. This is done to provide a period of transition during which both
producers and consumers will be able to adjust to the hew system. In the long
run, however, each of these exemptions will be phased out of existence in order
to create a simpler and more uniform program than now exists.
Plan of action
1. Volumetric quotas now established under the mandatory oil import
program are being eliminated and a system of license fees established to regulate
the level of crude oil and product imports. This change will help to assure adequate supplies of crude oil and refinery products in the short run and sufficient
incentives to domestic drilling and construction of refineries in the long run.
The legal basis for these changes is provided by section 232 of the Trade Expansion Act of 1962.
2. Effective May 1, 1973, any person or company wishing to import crude
oil and petroleum products may do so simply by applying for an import license to
the Department of the Interior, Office of Oil and Gas, and by paying the appropriate license fee.
3. Also effective May 1, 1973, existing tariffs on crude oil and refinery
products will be suspended. In their place, license fees will be imposed on imports
equal, in the long run, to % cent per gallon of crude and 1% cents per gallon for
unfinished oils and all refinery products. Fees will be paid to the Office of Oil
and Gas at the time of application for an import license.
4. These long-term fees will take effect at the end of 1975. In the meantime, license fees will be stepped-up over time. The following schedule of fees
will apply to all but exempt imports.
Schedule of license fees
[Cents per barrel]
Product
Mayl Nov.l Mayl Nov.l Mayl
1973
1973
1974
1974
1975
Crude oil
Residual fuel oil, unfinished oUs, distillates and refinery
products other than gasoline
_
Gasoline
Nov.l
1975
lOM
13
15K
18
21
21
15
52
20
30
57
42
52
63
63
63
^m
593^-
5. License fees will be reassessed from time to time to assure that the primary objectives of the program are being met; namely, to provide adequate incentives to domestic exploration and drilling for crude oil and construction and
expansion of domestic refineries, while not imposing unnecessary burdens on
the American consumer.
6. All import licenses outstanding as of May 1, 1973, will be honored by
the U.S. Government license fee-exempt.
7. Certain crude oil a.nd product imports will also be exempt from license
fees for a limited period of time after May 1, 1973. Current program participants
will be granted yearly allocations, exempt from license fees, equal to import
levels in effect as of April 1, 1973, for residual fuel oil and quota levels in effect
as of January 1, 1973, for crude oil and petroleum products other than residual fuel oil. The exempt allocations will be granted through April 30, 1974,
after which the level upon which allocations are based will be reduced by a
fraction of the original level each year for the next 7 years. No allocations will
be granted license fee-exempt beyond April 30, 1980. The schedule by which
exemptions will be phased out i s :
Percentage of initial allocation exempt from license fees
After April SO
1973
1974
1975 .
1976
1977
1978
1979
1980
Percent
100
90
80
65
50
35
20
0
290
19 73 REPORT OF THE SECRETARY OF THE TREASURY
8. Crude oil import licenses not subject to license fees will continue to be
convertible to unfinished oils and finished products at existing rates (15 and 1
percent, respectively) until January 1, 1974. Crude oil licenses subject to license
fees will not be convertible.
\
9. Current participants in the mandatory oil import program are :
a. Refiners.
b. Petrochemical plant operators.
c. Deepwater terminal operators in District I.
d. Asphalt marketers or consumers in Districts I-I V.
e. Recipients of grants from the Oil Import Appeals Board.
Persons or groups other than those currently participating in the program would
also be allowed to import crude oil and products, subject to the license fee schedule indicated in section 4.
10. The Oil Import Appeals Board will assume primary responsibility for
assuring adequate supplies of oil for the independent segment of the industry.
To this end, the OIAB will be authorized to distribute fee-exempt licenses to
established independent refiners and marketers experiencing exceptional bard- .
ship or emergency. The OIAB will also advice the Oil Policy Committee about
other ways to assist the independent segment of the industry. Integrated oil
companies with special hardship or emergency needs will also be permitted to
apply to the OIAB for assistance. However, those companies with a domestic
crude oil production capability will be required to demonstrate their inability
to obtain by exchange import licenses from those already distributed by the
U.S. Government and their willingness to supply established independent refiners
with 1972 allocations of crude oil and established independent marketers with
1972 allocations of refinery products. Specific guidelines for the OIAB will be
issued shortly after the proclamation. The OIAB will on all matters report to
the Chairman of the Oil Policy Committee. The OIAB's power to distribute
license fee-exempt import licenses will expire on April 30,1980.
11. Fee-exempt import licenses may, as at present, be exchanged for domestically produced crude oil at a rate negotiated by the parties involved in the
exchange. In any exchange, licenses not subject to a license fee would retain
their license fee-exempt status.
12. Imports of ethane, propane, and butane will be exempt from license fees.
License fees will also be refunded on qualities of imported crude used to produce
asphalt.
13. Companies building new refineries or petrochemical plants or expanding
existing refineries or petrochemical plants coming onstream after April 30, 1973,
will be granted license fee-exempt allocations equal to 75 percent of their
additional inputs for their first 5 years of operation. Throughput earning
exempt allocations under these provisions will not be counted as certified refinery
inputs in estimating exempt allocations.
;
14. License fee exemption of existing petrochemical plants using heavy
feedstocks will be considered by the Oil Policy Committee at a later date.
15. Deepwater terminal operators in District I currently under the program
will be allowed to import 50,000 barrels per day of No. 2 fuel oil exempt from
license fee. ALfter May 1, 1973, these imports of No. 2 fuel oil must be produced
from Westem Hemisphere crude oil unless otherwise exempted. The Western
Hemisphere preference requirement will apply only if the Chairman of the Oil
Policy Committee determines that imports from the Western Hemisphere are
available. If they are not available, license fee-exempt imports will be permitted
from other sources. The Chairman of the Oil Policy Committee shall determine
whether, because of supply, price, and other considerations, the Western Hemisphere restriction is unduly restrictive and may suspend or reimpose this
restriction as needed.
16. Import licenses for crude oil and products produced in all Western
Hemisphere countries will be subject to license fees unless otherwise exempted.
The fee-exempt volume of imports for all Canadian and Mexican crude oil and
products will be established at the average daily volume of imports into the
United States under the existing quotas or during the first quarter of 1973,
whichever is higher. The State Department will advise the OPC from time to
time of any changes in the license fees on these imports which it deems to be in
the security interests of the United States. Product imports for which no
quota now exists will be allowed into the country under the license fee schedule
presented in section 4.
EXHIBITS
291
17. To integrate Puerto Rican imports more fully into the U.S. program,
imports of crude oil and finished products to Puerto Rico will be subject to the
same license fees after May 1, 1973, as the mainland and will be allowed from
anywhere in the world.
a. All finished products refined in Puerto Rico will be shipped to the mainland license fee-exempt.
b. All license fees on Puerto Rican imports of oil will revert to the
Commonwealth of Puerto Rico.
c. Imports of crude oil and unfinished oils now governed by contractual
agreements between Puerto Rico and the U.S. Government will be exempt
from license fees for the remainder of the terms of these contracts. Upon
expiration of these contracts, the exemption will be phased out according to the schedule in paragraph 7.
d. Imports of crude oil and unfinished oils used to manufacture finished
products shipped to the mainland under the historical classification based
on shipments prior to 1965 will be exempt from license fees and that
exemption will be phased out over the same schedule provided for exempt
refinery allocations.
e. Finally, the Commonwealth will be allowed to impose restrictions on
shipments to the mainland of petrochemical intermediates and products
necessary to assure continued growth of the downstream petrochemical
industry in Puerto Rico. However, ultimate responsibility for determining
import policy will reside with the Chairman of the Oil Policy Committee.
18. Imports of crude oil and finished products into the Virgin Islands and
free trade zones would be exempt from license fees after May 1, 1973. Exports
from the Virgin Islands and entries from free trade zones into the United States
will be subject to fees. Plowever, the existing refinery in the Virgin Islands may
continue to export to the United States license fee-exempt those products governed by contract with the U.S. Government for the term of that contract.
19. All imports from possessions outside the U.S. customs territory will be
subject to license charges.
20. Imports under existing allocations to the Department of Defense will be
allowed license fee-exempt. These allocations will be phased out over the same
period allowed for exempt allocations.
21. Whatever customs drawbacks apply to existing tariffs or the import-forexport provisions that apply to existing petrochemical programs will similarly
apply to license fees.
22. The Oil Policy Committee will explore ways to use the license fee program as an incentive for investment in domestic storage capability and desulfurization of crude oil.
23. Applications for import allocations exempt from license fees will continue to be submitted and allocations assigned according to the current annual
cycle. Applications for import allocations subject to license fees will be accepted
and processed by the Department of the Interior at any time.
24. After termination of the various temporary exemptions, there will be no
differences in license fees or import restrictions for the various petroleum districts in the United States.
What these changes will accomplish
1. These changes would suspend oil import quota restrictions without abandoning the mandatory oil import program. They open the way for foreign imports
to alleviate potential shortages of crude oil and finished products, without foreclosing the option of reimposing mandatory controls at some time in the future.
Nor do they foreclose the option of auctioning some portion of import allocations
should that become desirable. The intent is to maintain import control and accountability without restricting the flow of essential oil into the United States.
2. These changes provide for the implementation of a permanent oil import
program that leaves no uncertainty as to the U.S. Government's longrun policy
intent to assure the availability of adequate supplies of crude oil and finished
products while, at the same time, providing the incentive for increased investment in domestic exploration and production and refinery construction. To do
this, the program establishes over time a clear differential between the prices of
domestic and foreign petroleum in the United States that favors U.S. oil pro-
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19 73 REPORT OF THE .SECRETARY OF THE TREASURY
duction and refining. Various changes in these incentives are spelled out in advance so that the oil industry will have a reasonable degree of certainty under
which to make major new investments in U.S. drilling and refinery construction.
These incentives will be assessed from time to time and, if necessary, increased
to assure that they are sufficient to encourage domestic investment.
3. This approach minimizes the impact on oil prices during the next 2 years.
The license fees will be increased over time. In any event, imports subject to
the proposed license fees during 1973 are expected to be such a small percentage
of the Nation's total oil requirements as to have little, if any,, impact on consumer prices. Moreover, there is adequate flexibility under current oil price controls to allow such price movements should they be necessary.
The trend toward increased prices will begin in 1974, when the Nation is expected to require an additional 1 million barrels per day of petroleum to satisfy
its demand. Should price controls be extended in any form, adequate and timely
consideration could be given to the potential impact of license fees on prices
and the impact; of continuation of price controls on the effectiveness of the
changes discussed here.
There may be some upward price movement for distillate fuels related to
license fee charges in 1973. Because the Nation does not have the reflnery capacity to satisfy its requirements for both gasoline this summer and heating
oil next winter, under the license fee approach domestic refiners could be expected to maximize gasoline output over the next several months in favor of increased distillate imports. There are several reasons for this:
a. Distillates are more likely to be available from overseas due to foreign
refinery yield patterns, although foreign supplies may not satisfy the sulfur
specifications of U.S. environmental restrictibns.
b. Prices for foreign distillates will be seasonally low over the next several
months, whereas gasoline prices will not be.
c. Maximizing domestic gasoline output maximizes a refiner's dollar return.
4. Implementation of license fees on May 1, 1973, would help to give value to
unused 1973 import tickets, providing landlocked independent refiners with
some leverage to bargain for domestic sweet crude oil. The current worldwide
shortage of sweet crudes, coupled with rising foreign prices, has wiped out, the
value of the independent refiners' tickets and has led to many small refiners cutting back production for lack of refinery feedstock. Import licenses, in general,
now have no exchange value because the landed price of foreign cru'des is roughly
equivalent or above domestic crude prices. Raising the value of independents'
unused licenses should help the independents to bargain for additional sweet
crude supplies. Moreover, the ability of the independent refiner to obtain additional fee-exempt licenses from the OIAB would, hopefully, enable him to obtain
an adequate number of tickets necessary to arrange exchanges with the majors
under present-day price relationships.
5. Under the proposed license fee program, the subsidy provided by exemption
of 1973 allocations for all refiners would be phased out over 7 years with the initial reduction coming in the second year. The intent is to pr6vide refiners both the
time and the incentive to retool their refineries to run sour crudes or to develop
or contract for adequate sweet crude supplies for the long term.
6. This approach also gives value to 1973 iraport allocations issued by the Oil
Import Appeals Board to independent jobbers and marketers, enhancing, their
ability to bargain for products. The OIAJB will continue to hear appeals from this
sector of the industry to make certain that no undue hardships occur as a result
of tight product supplies. In the long run, the,license fee approach will further
benefit independent jobbers and marketers by encouraging additional refinery
capacity, which will make products more readily accessible.
7. This approach also gives all importers the opportunity to negotiate longterm contracts, and thereby lower prices, for their crude oil and product supplies. This should be especially beneficial to deepwater terminal operators in
Districti.
Exhibit 26.—Statement by Deputy Secretary Simon, May 10, 1973; before the
Senate Banking, Housing, and Urban Affairs Committee on possible shortages
of gasoline and other petroleum products
I am delighted to appear before you today to discuss the possible shortages of
gasoline and other petroleum products. As such, I would like to focus on the
following:
EXHIBITS
293
(1) The causes behind these shortages;
(2) The effect of these shortages;
(3) The impact that gasoline shortages will have on other products for
the remainder of this year and on home heating oil supplies next winter;
(4) The effect of the new mandatory oil import program; and
(5) What steps are being taken to prevent such shortages and their reoccurrence.
. . .
The growth of demand for energy
The first thing to understand is that the demand for energy has been increasing
continually while our supply has not. With 6 percent of the world's population, we
are consuming 33 percent of the world's energy. Furthermore, the demand for
energy in this country is growing at an annual rate of about 4 percent and by
1990, our energy needs will be double that of 1970.
Futher, demand for gasoline in the United States has been growing faster in
the past several years than at any other time in recent history. Since 1968, gasoline demand has risen at an annual rate of about 5 percent. During the past 2
years the rate of increase has been about 6 percent per year. Part of this rise
in demand can be explained by growth in the population, growth in the economy,
and the increasing number of cars on the road.
But .demand has also risen significantly because of the many power-using devices added to cars. These include automatic transmissions, air conditioning,
various safety features, and the changes made in automobiles since 1970 in compliance with EPA regulations issued under the mandate of the Clean Air Act.
Producers' compliance with these regulations has led to substantially reduced
engine efficiency. As more vehicles come on the road equipped with safety, emission control, and physical comfort devices, average mileage per gallon will decrease further. An automobile that once got 14 miles per gallon now gets 8 or 9
miles, and it may get only 6 or 7 miles per gallon if present trends continue.
Because new automobiles are not getting the gasoline mileage obtained by their
counterparts 5 and 10 years ago, and because we are driving more, gasoline consumption has risen. We are using 300,000 barrels per day more of gasoline this
year than last year.
Failure to build refiheries
While gasoline demand has been growing at about 6 percent per year, the volume of crude oil processed by refiners has risen only 3 percent per year. We are
now extremely short of refinery capacity and, at the time of the President's
energy message, which announced the new oil import program, no new refineries
were under construction. Furthermore, expansion of existing refineries had
ceased. Growth.in the capacity of the industry had come to an end because the
industry found that it was more profitable to invest abroad than in the United
States.
.
•
.
. One reason for this is that environmental restrictions have made it increas, ingly difficult to find acceptable sites for new refineries in this country. Because
of resistance to refinery siting, it may take 3 years to obtain site approvals today,
in addition to the 3 years required for construction. Yet modern refineries can be
designed so that they do not significantly pollute the environment. In this regard,
I would mention a recent trip which you. Chairman Mclntyre, made to inspect
a new refinery in the State of Washington. I understand that you were impressed
by the cleanliness of this refinery and have urged your fellow Senators from New
.England to support, such a refinery in their area. I wholeheartedly agree with
you.
Another reason why the industry has located new refineries abroad is that U.S.
oil import restrictions, in the past, created uncertainty as to whether new domestic refineries. could obtain sufficient imported supplies of crude oil. As long as
the Government set import quotas on a year-to-year and, in some cases, on a
month-to-month basis, no company was assured of the stability of supply necessary tp encourage domestic refinery construction. This impediment ended on
April 18 when we terminated volumetric quotas on oil imports.
Finally, the tax and other economic benefits available to refiners in the Caribbean and in Canada have been more lucrative than similar provisions available
in the United States. For all these reasons, U.S. refinery construction has been
standing still while U.S. demand for refinery products has been growing.
To meet the growing demand for gasoline, refiners have been changing their
mix of products to increase their yield of gasoline. The average yield of gasoline
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1973 REPORT OF THE SECRETARY OF THE TREASURY
per barrel of crude oil rose from 43.8 in 1968 to 46.9 percent in 1972. This means,
of course, that the yi^ld of other products, such as fuel oil, has been reduced. It
is also a short-term expedient at best. Whatever the product mix, it will be necessary to increase substantially our overall imports of refinery products to avert
both a gasoline shortage this summer and a fuel oil shortage next winter.
Our growing lack of refinery products was driven home to the public late in
1972 with shortages of distillates and other heating fuels in various parts of the
country. Refineries had to increase their percentage of distillate production and,
correspondingly, reduce gasoline production. As a result, we are now coming into
the summer season with low gasoline stocks. As of April 20, we had only 204
million barrels of gasoline in storage. This is down 12 percent from last year,
while demand is up 6 percent. Furthermore, domestic production, even today,
is not keeping pace with demand. We are using, on average, 47 million barrels
of gasoline weekly, and producing only 43 million barrels. For this reason, we are
faced with the prospect of serious limitations on gasoline supply.
An important aspect of the supply problem is the distribution system in this
country. Some areas of the country are close to pipelines and refineries. Some
areas are served by the retail outlets of the major oil companies. These areas
will not feel a shortage as much as other areas which are relatively distant from
pipelines and not well-served by the major oil companies.
Recognizing the serious nature of the gasoline ahd fuel oil shortage, and that
there are regional differences in the intensity of the problem, we have established
regional subcommittees of the Oil Policy Committee, of which I am Chairman.
These groups consist of representatives of the independent segment of the
industry serving particular areas of the country. In addition, we have contacted the Governor's office of each State and explained to them the need to
reach some compatibility between our energy needs and State environmental
requirements. As a result, representatives of the Governors* offices are attending
these subcommittee meetings, and we are able to identify regional problems and
deal expeditiously with them. Working in this way, we are able to maintain
flexibility in the administration of the new oil import program and to be responsive to the special problems of particular areas of the country.
The problems of the independent oil companies
We are greatly concerned about the independent companies. The independent
segment of the oil industry—the independent refiners and the independent
marketers—are faced with related but distinct problems. The refiners face
crude oil shortages; the marketers, gasoline shortages.
To understand how these problems developed, it is important to realize that
until the early 1970's, we had surplus crude oil production capacity in the United
States. This enabled independent refiners to buy crude oil and build refineries
to supply, among others, independent jobbers, marketers, and other wholesale
customers. There was also a surplus of gasoline and other products being produced by the major oil companies. Independent marketers took advantage of this
surplus and opened thousands of gasoline stations to sell gasoline purchased
in the spot market. By efficient servicing of consumers, these marketers were
able to sell gasoline for a few cents a gallon less than the major oil companies.
I believe that these independents had a healthy influence on the petroleum
industry—by giving consumers a greater choice between price and service they
made it possible for consumers to buy gasoline at lower prices.
The gasoline shortage has hit these independents hardest. In the first place,
independent refineries can no longer get adequate supplies of crude oil. They used
to obtain domestic crude oil by exchanging their import licenses with the major
oil companies. The major companies used the import licenses to import cheaper
foreign crude for their own use, while providing the independent refiners with
domestic crude oil. In addition, the so-called sliding scale method of allocating
import licenses under the old system gave smaller refineries more than a proportionate share of the licenses.
All this has changed during the last 2 years. Quoted prices of foreign crude
oil are now equal to or higher than prices of American crude sold in the same
markets. There is a worldwide shortage of low-sulfur or sweet crude. As a
result, major oil companies have had no economic incentive to trade their domestic sweet crude production for imported crude obtained by means of independents'
import tickets. Further, because of local air quality standards, companies are
compelled to use low-sulfur crude eveu though their plants ^re designed for
EXHIBITS
295
refining high-sulfur crude. The result is that the independent refineries cannot
get the crude oil they need and are operating at less than full capacity.
Independent gasoline marketers are also in a difficult position. The wholesale
market for gasoline is drying up. Many of the independents find it impossible
to purchase gasoline wholesale. Plundreds of independent gasoline stations across
the country are closing down. Those that can obtain gasoline abroad find it
available only at much higher prices. This hurts them competitively, since their
main selling point with the public is that they can underprice the major oil
companies.
The problems of the independent segment of the industry were given considerable attention in designing the new oil import program. Indeed, had it not
been for the independents, the changes in the program might have been announced
much sooner than they were. Our basic objective was to balance the need to
preserve the independent segment of the petroleum industry with the desire to
create a vigorous domestic industry through incentives for construction of new
refineries in the United States and for exploration for new reserves of crude
oil. We also wanted to eliminate the many exceptions built into the oil import
program and to assure a reasonable stability of prices.
Perhaps the major benefit of the new program is the flexibility that it provides to importers. Marketers will be able to shop for supplies of oil anywhere
in the world. They will no longer be dependent entirely on their traditional sources
of supply. Moreover, through the availability of fee-exempt licenses issued by
the Oil Import Appeals Board, independent marketers should have access to
products at lower cost than their major competitors for the remainder of this
decade. This should provide the time required by the independent marketers
to make the changes necessary to protect their market position.
Another benefit of the new program is the incentive it creates for additional
output. The independent marketers have depended for their economic well-being
on the excess refinery capacity of the major oil companies. Excess refinery
capacity no longer exists, largely because we, as a Nation, have discouraged
refinery expansion and construction. The greatest hope for the independent
marketers, in the long run, will be the incentives provided both independent and
major refiners to produce additional supplies of crude oil and products. This,
in the end, is the only real solution to the problems the independent marketers
now face.
The effect of the new import program and other policies on the independent
oil companies
Let me discuss at greater length some of the steps we have taken to protect
the independents. In the past, the Oil Import Appeals Board (OIAB) would not
distribute import licenses in cases of hardships until September. These licenses
were, by and large, distributed to the independent refiners and marketers. Early
this year the OIAB began to allocate tickets immediately upon application. It
had soon disbursed its entire 1973 allocation. Then, on March 23, 1973, the
President issued a proclamation granting unlimited allocations to the Oil Import Appeals Board in an effort to make more crude oil and product available
to both the independents a;nd the Nation. Finally, on April 18, in another proclamation, the President removed volumetric controls altogether.
The new program does several things to help stirengthen the short-term position of the independent refiners and marketers, enabling them to establish themselves on a more enduring basis.
1. Outstanding import licenses will be honored free of license fee. Since the
independents hold a large share of these licenses because of the sliding scale
and past OIAB allocations, this provides some value to their tickets where none
existed previously. The independents will be able to import oil at lower cost
than the majors. As a result, the majors should now have greater incentive to
trade with the independents.
2. To provide greater value to the independents* tickets, we have suspended
existing tariffs. Had we not done this, the independents' ticket value would
have been lower. The only other way to create value under the new program
was to have the consumer pay substantially higher prices.
3. The Oil Import Appeals Board has been given specific responsibility for
helping the independent refiners and marketers by issuing fee-exempt tickets.
Major oil companies may also appeal to the Oil Import Appeals Board, but they
must demonstrate their inability to obtain import licenses by exchanging
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19 73 REPORT OF THE SECRETARY OF THE TREASURY
with independents or their willingness to supply established independent marketers and refiners with the same proportion bf crude oil or products supplied in
1972.
4. The Government has begun to allocate its "royalty oil" to independent
refineries in need. Under the terms of relatively recent lease sales, the Government can collect some of its royalties in cash or in a share of the oil produced
on lease lands. In choosing the latter course, it is, in effect, diverting crude
oil from the major to the independent refineries. To date, about 60,000 barrels
per day have been allocated in this manner to the independents. There is a
possibility for an additional sharing of royalty oil of up to 140,000 barrels per
day under this program.
5. All of these actions are probably not sufficient to assure distribution of
adequate supplies of refinery products to independent marketers and, especially,
adequate supplies of crude oil to independent refiners. It is for this reason that
the Government has decided to utilize the authority given it under the recently
enacted Economic Stabilization Act to allocate both crude oil and products to
independents, municipalities, and other purchasers who have been cut off from
their traditional sources of supply.
The Oil Policy Committee has been given general responsibility for drafting
an allocation program; the Office of Oil and Gas in the Department of the
Interior, responsibility for administering the program. The program adopted by
the administration relies on voluntary compliance with guidelines, set by the
Government, calling for the supply of no less thari the proportion of 1971 and
1972 sales to independents and other customers at prices not to exceed posted
and rack prices charged by refiners, marketers, distributors, and jobbers. Our
purpose is to apportion, as evenly as possible, any curtailment in consumption
that will result from gasoline and distillate shortages: Priority will be given to
meeting the needs of farming, other essential industries, and State and local
governments. A description of the allocation plan is attached as appendix A.
The program will apply to all segments of the industry. The oil companies'
adherence to these guidelines will be monitored and, if voluntary compliance
fails, more stringent measures will be taken by the administration. We hope and
expect, however, that this will be unnecessary. Our preliminary soundings
suggest that the companies are aware of the problems created by curtailments
and are willing to continue to provide a fair share of petroleum products to their
established customers. .
"
6. Perhaps the most critical problem, however, is the supply of sweet crude
oil to independent refiners. There is, at present, a general shortage of low-sulfur
crude oil brought on, in part, by the requirements of several Eastern States
and inunicipalities that refineries use sweet crude oil to meet air quality standards, even though these refineries are designed to take sour or high-sulfur
crude oil. This has diverted sweet crude to the east coast refineries of major
oil companies and away from inland indeperident refineries, many of whom
are unable to handle high-sulfur crude oil.
At the same time, the major oil companies have.had little incentive to exchange crude oil because the price of domestic oil is now equal to or lower than
the landed price of foreign oil. Under Cost of Living Council rules, the majors
cannot charge the replacement value for domestically produced crude oil, but
must absorb the losses resulting from an exchange. It is no surprise, therefore,
that the majors have been reluctant to swap U.S. for foreign crude oil. .
The administration is trying to rectify these problems. We are working with
the Cost of Living Council to find a compatibility between maintaining stable
prices and providing adequate compensation to the major oil companies that
do exehange domestically produced oil for imported oil.
Solutions to the gasoline and distillate shortage
These measures should help bring about a more equitable distribution of crude
oil and products in the short run. What about the long run? What is being done
to solve the basic gasoline and distillate shortages that have created the distribution problems with which we are now concerned ?
1. We have established a license fee program for crude oil and product imports.
This program removes all volumetric quotas on imports and allows free importation of crude and product subject to a fee of 21 cents and 63 cents a barrel, or
V and 1% cents per gallon, respectively, after 2^^ years. This is a longrun
2
system which is designed to spur the construction of refineries in the United
EXHIBITS
297
States. It does this by removing obstacles to acquiring an assured supply of
crude oil and by instituting a price differential between crude and products
sufficient to guarantee an adequate profit from domestic refining. I am happy
to report that, since the President's energy message on April 18, a number of
companies, including Shell, Ashland, The Pittston Corp., and Standard Oil of
California, have announced that they now plan to build or expand refineries in
the United States as long as sites are available. Others have indicated to us
that they are seriously considering building refineries here but have not yet
made their plans public. In addition, several independent marketers have stated
their intention to develop their own U.S. refinery capability, a necessary step
if the independent marketers are to become a fully viable entity in the industry.
In each case, however, the decision to build a new refinery is contingent upon a
satisfactory solution to the "siting problem"^—the seemingly chronic inability of
the industry to obtain approval to build new refineries in many parts of the
country.
2. We are also taking actions to solve the domestic crude oil shortage by a proposal we are making to the Congress for an exploratory drilling investment
credit. This gives a 7-percent tax credit for new drilling, plus a supplementary
credit of 5 percent for successful wells. We are confident that this program, if
enacted by the Congress, will stimulate crude oil production and have a significant impact on gasoline and fuel oil supplies.
Conservation measures
Energy conservation can play an important role in stretching gasoline supplies
and thus reducing the shortage. To this end, we will need the cooperation of
the Government, industry, and the public. For example, the public is being
encouraged to minimize its use of automobiles this summer. According to. the
Automobile Manufacturers Association, about 56 percent of the cars on the road
contain only the driver. This underutilization of cars can be reduced in many
cases, especially in metropolitan areas. Car pools and public transportation
should be substituted, where possible, for single-occupant cars. Use of smaller
cars, with better gasoline mileage performance, is another measure the public
might take to conserve gasoline. Additional measures include reducing the use
of the automobile air conditioner, keeping tires properly inflated, cutting off
motors when stalled in traffic, and avoiding excessive speeds on the highway. I
am attaching as appendix B a list of conservation measures that can be taken
to help reduce the demand for petroleum products.
Gasoline prices
Some have expressed concern that the price of gasoline will rise to astronomical levels. This concern is unfounded. There has been a substantial rise in foreign
crude oil prices in the last 3 years, and we will probably experience additional
price increases in the future. But crude oil accounts for only a small fraction of
the costs of producing gasoline. For instance, if the crude oil price were doubled,
this would increase the price of gasoline by only 8 cents a gallon.
One of the largest components of the price of gasoline is represented by Federal and State taxes. The breakdown in the retail price of a gallon of gasoline
costing 39 cents is as follows : Crude oil—8.1 cents ; transportation to reflnery and
refining—5.3 cents ; wholesaling and retailing—13.9 cents ; State taxes—^^7.7 cents;
and Federal tax—4 cents.
It is interesting to note that in England, the retail price of regular gas is 64%
cents a gallon; in Germany, 79% cents; in France, 911/^ cents; and in Italy, a
dollar. With prices like these, it is no wonder that European drivers prefer
smaller cars. Why are European gasoline prices so high? The answer is primarily
the higher taxes paid by motorists in these countries. In Europe, taxes account
for up to 75 percent of the retail price. By comparison, taxes represent only 30
percent of the price inthe United States.
Gasoline and other prices will probably increase over time. This would provide
benefits to the Nation:
1. It will help to save some independent gasoline dealers and refiners who
are otherwise going to go out of business.
- 2. It will encourage Americans to conserve on gasoline.
3. It would also help to provide the economic incentives needed to speed
up the construction and exipansion of badly needed domestic refinery capacity.
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19 73 REPORT OF THE SECRETARY OF THE TREASURY
Fuel oil
A major effort is being made now, and for the rest of the summer, to produce
more gasoline. This will have the effect of reducing the yield of fuel oil below that
which was being produced a few months ago. The question is whether, as a result, we will have adequate stocks of fuel oil for next winter.
In January, we removed all restrictions on the importation of No. 2 fuel oil.
Partly for this reason, stocks of distillate fuel oil are now higher than at this
time last year.. Imports of fuel oil continue at high levels. We are now importing
over 200,000 barrels per day. This, combined with domestic production, gives us
a total projected supply that is adequate to meet our needs this summer and,
barring extremely cold weather, to make it through next winter.
In addition to this, we are confident that the recent changes in the oil import
program will help us to attain needed levels of imports of fueloil. Major oil
companies can now bring in any amount of fuel oil they wish by paying a license
fee of 15 cents a barrel. The independents can, effectively, bring in fuel oil without paying any fee at all.
Further, I believe there is adequate refinery capacity overseas to produce the
fuel oil required by the United States, particularly if U.S. refineries maximize
their yields of gasoline.
Conclusion
In conclusion, let me say that I am basically opposed, as I am sure are most
of the members of this committee, to the needless injection of Govemment regulation and control into any industry, particularly where there is every evidence
of intense and healthy competition. I do not want to take any step which would
discourage private initiative.
I believe the new oil import program provides the proper incentives for such
initiative.
Of course, I realize that the new program has not solved all of the problems.
We did not expect that it would, because there is just no way that any program
can create a barrel of oil. In the long run, however, I feel this program will help
create a vigorous domestic petroleum industry. ,
At the same time, in the short run, I think we are in a situation in which we
need to make decisions on priorities. We cannot afford to let crops go unplanted
or unharvested for lack of diesel fuel for our tractors. We cannot let our vital
industries close down. We cannot endanger public health or safety. And, finally,
we should not let the independent segment of the oil industry, which provides
competition in the marketplace, be forced to shut down.
Thank you.
APPENDIX A
Allocation of Crude Oil and Refinery Products
The program for allocation of crude oil and refinery products will be voluntary
and (1) backed up by guidelines established by the Government, (2) a mechanism for providing continuing scrutiny of compliance with these guidelines, and
(3) the threat of imposition of more stringent regulations requiring reallocating
crude oil and products should this program fail. General policy direction will
be vested in the Oil Policy Committee; day-to-day administration of the program,
in the Office of Oil and Gas (OOG). An oil allocation section shall be established
in the OOG to administer the program.
Under the program, each producer, refiner, marketer, jobber, and distributor
will agree to make available in each State to each of its customers (including
those purchasers in the spot market) the same percentage of its total supply
of crude oil and products that it provided during each quarter of a base period
(defined as the fourth quarter of 1971 and the first three quarters of 1972).
Under the program, OOG may assign to each producer, refiner, marketer, jobber, and distributor allocations for priority customers still unable to obtain
needed supplies of crude oil and products, not to exceed 10 percent of any supplier's total sales of crude oil and products during the base period. This assignment by OOG will be based upon demonstrated need. The basic purpose of the
assignment is to assure adequate supplies of crude oil and products to priority
users who, for some reason, are not well-served under the proportional allocation
program. It will be particularly important for fulfilling the needs of new customers that have entered the marketplace since 1971-72.
EXHIBITS
299
In distributing the oil for OOG allocation, priority will be given to supplying
the following activities or to independent marketers, jobbers, and refiners who
supply the following activities:
1. Farming, dairy, and fishing activities and services directly related to
the cultivation, production, and preservation of food.
2. Food processing and distribution services.
3. Health, medical, dental, nursing, and supporting services except commercial health and recreational activities.
4. Police, firefighting, and emergency aid services.
5. Public passenger transportation, including buses, rail, intercity, and mass
transit systems, but excluding tour and excursion services.
6. Rail, highway, sea, and air freight transportation services, and transportation and warehousing services not elsewhere specified.
7. Other State and local government activities.
8. The fuel needs of residents in States or parts of States not well-served
by major oil companies and unable to obtain sufficient crude oil or products.
Wholesale and retail marketers of gasoline shall not be deemed priority customers unless they supply a substantial proportion of their product to these
priority users.
When convenient, various companies may exchange supply obligations incurred
under this program in order to simplify distribution problems..
The Office of Oil and Gas will receive complaints from anyone who feels he
is not receiving a proper allocation of supplies. If it deems it necessary, OOG
may require a public hearing and submission of data, by suppliers, on their
1971 and 1972 exchanges and/or sales of crude oil, unfinished oils, and products.
These data will include the names and addresses of customers, the amounts of
crude oil and products sold to them, the legal relationship between major oil
companies and customers, and whatever other information OOG believes necessary to conduct the hearing. The OOG will then verify the accuracy of complaints against a supplier and, if justified, impose mandatory allocation on the
supplier.
The price at which petroleum products shall be sold to independent marketers,
wholesale distributors, and other unaffiliated customers shall not exceed normal refinery rack prices charged by major companies to new contract customers.
The price which wholesale distributors may charge independent marketers shall
not exceed normal wholesale prices, or normal refinery rack prices plus a normal wholesale markup.
Where independent refiners have previously received domestic crude oil in exchange for import tickets, the independent refiners will be required to surrender
license fee-exempt quotas in return for receiving the privilege of purchasing crude
oil under the program. Where the independent refiners previously purchased crude
oil without surrendering import tickets, no license fee-exempt quotas will have to
be surrendered. The price at which crude oil shall be sold to independent refiners
shall not exceed posted crude oil prices plus an applicable pipeline transportation charge except, however, where crude oil is sold as required based upon
previous exchanges of import tickets for domestic oil, the major companies may
charge a price equivalent to the average landed cost of any oil imported to replace the oil sold under the provisions of this program. .
Immediately following the initiation of this program, the Oil Policy Committee shall begin hearings to determine any changes that may be required to
make the program equitable to all classes of suppliers and purchasers, and
whether the program should be made mandatory. The Chairman of the Oil Policy
Committee will designate an ad hoc board to conduct such hearings and report
its findings to the Oil Policy Committee. The board shall be composed of representatives of the Interior, Treasury, and Commerce Departments, GSA/OEP,
and any other representatives as the Chairman of the Oil Policy Oommittee may
feel appropriate. The Chairman of the Oil Policy Committee shall designate the
chairman of this board.
The Oil Policy Committee will also investigate and recommend additional
measures that should be undertaken to encourage allocations by major suppliers.
For example, it will investigate changes in Cost of Living Council rules and
environmental standards and regulations that seem necessary to assure efficient utilization and equitable distribution of crude oil and products.
506-1711—73^
22
300
1973 REPORT OF THE SECRETARY OF THE TREASURY
APPENDIX B
Actions to reduce the demand for petroleum products
1. Consolidate airline-fiights to attain higher efficiency, per passenger mile and
thereby lower fuel consumption.
;.
2. Encourage mass transportation. In nietropolitan cities, people could be encouraged to use buses and trains.
3. Reduce speed on all highways which could save 11 percent fuel when driving 50 instead pf 60 mph and 25 percent fuel when driving 50 instead of 70
mph. Legislation requiring 50 mph maximum speed'On state highways and
interstates might be required.
V
4. Keep engine in top shape. A poorly tuned engine, reduces mileage by 10
percent.
5. Form car pools.
6. Plan trips to stores—combining visits to cleaners, drug, department, and
grocery stores.
7. Use car air conditioners sparingly. You can save as much as 10 percent on
fuel consumption when it's not in use.
8. Keep tires properly inflated. Underinflated tires affect gasoline mileage
by approximately 1 mile per gallon.
9. Warrn up engine before driving.
10. Use multigrade motor oil in engine. It can giwe you 10 percent better mileage than regular grade oils.
11. Start slowly and stop slowly—you save gasoline.
12. Stagger working hours in metropolitan cities to ease traffic jams and
wasteful engine idling.
13. Walk more.
14. Eliminate or curtail nonessential driving.
15. Take vacations by train or bus.
16. Lower the thermostat setting by 2 degrees in your home in winter or raise
air conditioner,, setting in summer which can save significant volumes of
fuels.
'
.
17^ Add home insulation.
18. Minimize recreational driving, flying, and boating.
19. Ship more freight by rail and water which operate with good fuel economy.
Federal Debt Management
Exhibit 27.—Statement by Secretary Shultz, October 11, 1972, before the Senate
Finance Committee on the public debt limit
We are appearing today with a sense of urgency on the subject of the debt
limitation for fiscal year 1973.
The temporary limit of $450 billion in section 21 of the Second Liberty Bond
Act, as amended, will expire on October 31, 1972. At that time the debt subject to
limitation will be approximately $437 billion, while the permanent limit Is only
$400 billion. It is, therefore, necessary to have action on the debt limit before the
Congress adjourns.
As we requested, the Plouse has approved a temporary limit of $465 billion
through June 30, 1973. Based upon our current estimates that budget revenues
for the.fiscal year will continue to improve to approximately $225 billion and that
budget outlays are limited to $250 billion, this should be sufficient to carry us
through the fiscal year.
But let me emphasize that $250 billion .figure. We must limit our outlays to
$250 billion. Arid the only certain way is to include in the bill before you the
President's proposal for a spending ceiling.
We're talking about a ceiling of a quarter of a trillion dollars—and the President's belief is that, somehow, we ought to be able to get along on a quarter of a
trillion dollars a year. If we make the effort, we can.
I. believe we can succeed in this endeavor as well as we have succeeded in the
fight against inflation.
;
The recent international monetary meetings proved to me that the performance
of the U.S. economy has become the envy of the world. Everybody speaks about
it in terms of our strong rate of real growth and our relatively low rate of inflation—unsatisfactory though that rate may be.
301
EXHIBITS
The big question i s : Can we maintain this success? Can we maintain strong,
real growth and keep inflation declining? If we can, every person in this Nation
will benefit. If we cannot, every American will suffer.
If we have another fiood of infiation caused by overspending, wage increases
will again be wiped out by price increases. Price hikes will become the rule rather
than the exception. We will find ourselves right back in the same sort of fiscal
and economic trouble that we had in the late 1960's.
There is no reason for us to repeat that sorry performance. One way to ensure
success rather than infiation is to do as the President has done—bang on the
table and call for an absolute spending ceiling.
The fact is, we have got to change the whole way of thinking in every part of
the Government—not only in the Congress but in the administration itself. The
approach has to become, "fight, and keep spending under control."
I have in the past weeks spoken to groups of business, labor, and civic leaders
from many parts of the country. I have found intense public interest in the idea
we are discussing here today. But I have also found disbelief^—a feeling we cannot do it. Our record speaks against us.
The question most often asked of me at these meetings was this: "What programs can you cut out if Congress passes the.spending ceiling?"
I have worked in many parts of Government. Before joining the Treasury I
served at 0MB, which has more than a passing interest in expenditures. And I
told the questioners what I tell you now: "We can hold the line everywhere.
What we need is the will to act."
We need a get-tough attitude, an awareness that every dollar we spend comes
from somebody's taxes. If we do not hold the line on expenditures, we will not be
able to hold the line on taxes.
Finally, let me say two things. First, it is a financial necessity for your Government to have the debt limit increased and extended. And second—and even
more important, perhaps—it is in the interest of every American to have the
spending ceiling enacted at the same time. I urge prompt approval of the measure
before you.
TABLE I.—Public debt subject to limitation, fiscal year 1973, based on estimated
budget outlays of $250 billion and receipts of $226 billion
[In billions of dollars]
Operating
cash balance
June 30
July 17
28
31
Aug. 15
30.
31..
Sept. 14
1972
.-...
Public debt
subject to
limitation
With $3 billion
margin for
contingencies
ACTUAL
0.1
6.2
9.6
9.0
2.1
4.6
5.0
1.9
428.6
432.3
*437.0
433.7
434.8
*438. 2
436.8
438. 2
ESTIMATED
28...
29
Oct. 16
30
31
Nov. 15.
29
30
Dec. 15
29
Jan. 15
31
Feb. 15
27
28
^
im
Mar. 15'.'.^III""""I"^I^]1I*
29.
30
Apr. 16
30
May 15
30
31
June 15
29
•Peak level of month.
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
436
432
440
*441
437
443
*444
441
*447
445
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
*451
444
451
*452
449
457
*458
454
•461
451
458
•462
458
•465
456
•454
447
454
•455
452
460
•461
457
•464
454
461
•465
461
•468
459
302
1973 REPORT OF THE SECRETARY OF THE TREASURY
TABLE II.—Budget receipts, outlays, and surplus or deficit{—) hy fund
[In billions of dollars]
Fiscal year
Actual
1971
Keceipts:
Trust funds
Federal funds
Deduct: intragovernmental receipts
.
Current
1973
;
Total unified budget
Outlays:
Trust funds
Federal funds
Deduct: intragovernmental outlays
Actual
1972 p
Total unified budget
Budget surplus, or deficit (—):
Trustfunds
Federal funds
Total unified budget
p Preliminary.
66.2
133.8
11.6
i
.
..
...._..
.
'
72.9
148.8
13.1
82.6
155.6
13.2
188.4
.
208.6
. ,225.0
59.4
163.7
11.6
67.0
. 177.7
.13.1
75.2
188.0
13.2
211.4
231.6
250.0
6.8
-29.9
5.9
-28.9
7.4
-32.4
—23.0
-23.0
-25.0
T A B L E III.—Unified budget receipts, outlays, a n d deiicit ( —)
[In billions of dollars]
Fiscal year 1972
January 1972 Change from
estimate January 1972
estimate
June.
estimate
Fiscal year 1973
Change from
June 1972
estimate
Actual"
January 1972 Change from
estimate January 1972
estimate
June
estimate
Change from
June 1972
estimate
Current
estimate
fel
W
HH
Receipts.Outlays
197. 8
236.6
-38.8
Deficit ( - ) -
-F9.2
-3.6
207.0
233.0
-M.6
-L4
208.6
23L6
-fl2.8
-26.0
-1-3.0
-23.0
220.8
246.3
-1-2.2
-H3.8
223.0
250.0
-1-2.0
225.0
250.0
-1.6
-27.0
-F2.0
-25.0
t Preliminary
>
OO
o
00
oo
o
TABLE IV.—Comparison of fiscal year 1972 receipts as estimated in January 1972, June 1972, and actual (preliminary) June 1972
[In billions of doUars]
January
1972
budget
Individual income tax
. Corporation income tax
Employment taxes and contributions
Unemplojonent insurance..
Contributions for other* insurance and retirement.
Excise taxes.
Estate and gift taxes
.
Customs duties
...
Miscellaneous r e c e i p t s . . , . . . . . . .
...
Total budget receipts
Change from January 1972 budget
Economic
and reestimate
86.5
30.1
46.4 .
4.4
Other
+;.i
197.8
-f-7.8
Total
i-fl.5
-.1
-1-1.5
-f7.9
+L5
-.1
-.1
94.4
3L6
46.3
4.3
+.1
-1-6.4 .
-j-L5 .
3.4
15.2 .
5.2
3.2 .
3.5
Legislation
Change from June estimate
June 1972
estimate Economic Legislaand reOther
Total
tion
estimate
3.5
15.2
6.1
3.2
3.5
-f9.2
207. 0
-f.4.
-f-.4
-.1
-l-.l...
(*)
-f-.3
+.3
(*)
........
+.1
+1.6
Actual
fiscal year
1972 (preliminary)
-^.4
-f.4
-.1
-f-.l
..:.
94.8
32.0
46.1
4.4
(*)
-f.3
+.3
(*)
+.1
3.4
15.5
5.4
3.3
3.6
4-1.6
O
?d
O
208.6
W
i
Q
O
*^
Underlying income assumptions calendar year 1971
Gross national product
Personal income...
Corporate profits before tax.
21,047
2857
885
•Less than $50 million.
1 Change in capital gains tax estimate.
2 Figures are consistent with pre-July 1972 Commerce figures.
21,047.0 .
3857.0 .
385.5 .
1,050
861
83
i
pi
TABLE V.—Comparison of fiscal year 1973 receipts as estimated in January 1972, June 1972, and currently
[In biUions of dollars]
January
1972
budget
Individual income tax
Corporation Income t a x . . .
Employment taxes and contributions.
Unemployment insurance...
Contributions for other insurance and
retirement.
Excise taxes..
..•
Estate and gift taxes
...:
.
..
.
Customs duties
Miscellaneous receipts
93.9
36.7
56.1
,6.0
Change from January 1972 budget
Economic
and
Legislation
reestimate
-fO.l
+.3
Other
. ..
220.8
Gross- national product..^
Personal income...li.....
...
Corporate profits before t a x . . . . .1
•1,145
•924
•99
+.6
-
-I-L 6
+.3
+•1
95.5
36.0
56.26.0
+•1
1+L5
-fO.l
3.6 .. '
+.1
16.3
4.3
2.8
' • +. 1
4.1
. Total budget receipts....
Total
June
1972
estimate
3.7
16.3
4.3
2.9
4.1
+•1'
-l-.l
-I-L 6
+2.2
223.0
Change from June estimate
Economic
Legislation
and
reestimate
+3.5
-.5
+.7
-L6
+.1—
• .-.1
+3.6
Other
Total
:.
1-
..
-L6
Current
estimate
. ' +3.5
-.5
-.9
+..1'
99.0'
36.6
64.3
5.1
-.1
3.7
16.2
4.3
2.9
4.0
+2.0
W
H
%
225.0
Underlying income assumptions calendar yi'.ar 1972
• •I, 145
•924
•99
1,162
936
97
1 Change, in capital gains.tax estimate,.
•Figures.are consistent with pre-July 1972 Commerce revision.
00.
306
1973 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 28.—Statement by Under Secretary for Monetary Affairs Volcker,
March 1, 1973, before the House Ways and Means Committee on the proposed
Federal financing bank
I am pleased to be here today to express the views of the administration on
the Federal Financing Bank Act of 1973. The bill would establish a Federal
financing bank to provide for coordinated and more efficient financing of Federal
and federally assisted borrowings from the public.
This legislation was first submitted to the Congress by the Secretary of the
Treasury in December 1971. An amended version of the bill was reported favorably by your committee on September 29, 1972, and was passed by the Senate
on October 16, 1972. Yet the bill was not taken up on the floor of the House
before adjournment of the 92d Congress.
The Federal Financing Bank Act of 1973 has two major purposes: First, it
would establish a new agency—the Federal financing bank—to provide a means
of centrali2dng the marketing and reducing the cost of direct and guaranteed
borrowing activities of Federal agencies. Second, the bill would assure debt
management coordination by requiring the approval of the Secretary of the
Treasury of Federal agency plans with respect to direct and guaranteed security
issues in the market.
The need for more effective financing and coordination of Federal credit
programs has been recognized in a number of Government and private studies
over the past decade and in several reports to the Congress in recent years by
the Comptroller General.
The pressing need for the Federal Financing Bank Act at this juncture arises
from the growing tendency to finance credit programs directly in the securities
markets rather than through lending institutions. Because of the proliferation
of new Federal borrowing activities, we are already at the point where some
Federal financing is coming to market at least 3 out of every 5 business days.
Until recent years, the typical forms of credit assistance by Federal agencies
were either direct budget loans financed by the Treasury or guarantees of loans
generally made by lending institutions, such as commercial banks and thrift
institutions, who were normally engaged in that type of lending activity and
were equipped to service the loans and assume some portion of the loan risks.
But in recent years direct loans have given way to increased guaranteed lending,
and at the same time we have moved toward full guarantees of timely payment
of principal and interest on loans made by private lenders so that the share of
risk borne by the lender has declined. Also, the Congress has increasingly provided for direct Federal interest subsidies on loans made by private lenders, so
that a portion or all of any extra borrowing costs resulting from inefficient
financing of these loans is now borne directly by the Federal taxpayer rather
than by the borrower.
Moreover, even with complete Federal guarantees and interest subsidies, it
was found that the flow of credit at reasonable interest rates for the various
purposes authorized to be assisted by the Congress was not always adequate.
Thus, more and more of these programs have come to be financed, like Treasury
borrowings, directly in the securities markets rather than through lending institutions. This has been particularly true during tight money periods when the
flow of deposit funds to banks and thrift institutions has not been sufficient to
assure the availability of financing for Federal credit assistance programs.
Consequently, we have relied more and more on direct securities inarket
financing by means of (1) issues by the privately owned federally sponsored
agencies, such as FNMAL and the farm credit agencies; (2) direct borrowings
by Government-owned agencies such as the Export-Import Bank, TVA, and the
Postal Service; (3) loan asset sales in the securities market by Government
agencies, such as the Farmers Home Administration, CCC, GNMA, FHA, VA,
SBA, and GSA; and (4) other federally guaranteed securities, such as GNMA
mortgage-backed securities, public housing bonds, urban renewal notes, new
community debentures, merchant manne bonds, mass transit bonds, etc. Similar
financing arrangements have been proposed for a number of new agencies
or programs.
Federal credit agencies are thus required to develop their own financing staffs,
and their abilities to cope with their principal program functions are lessened by
the need also to deal with the complex debt management operations essential
to minimizing their borrowing costs and avoiding cash fiow problems which could
disrupt their basic lending programs.
EXHIBITS
307
Borrowing costs of the various Federal agency financing methods normally
exceed Treasury borrovnng costs by substantial amounts, despite the fact that
these issues are backed by the Federal Govemment. Borrowing costs are
increased because of the sheer proliferation of competing issues crowding each
other in the financing calendar, the cumbersome nature of many of the securities,
problems of timing and small size of issues, and the limited markets in which
they are sold. Underwriting costs are often a significant additional cost factor
due to the method of marketing.
Under the proposed Federal Financing Bank Act, these essentially debt
management problems could be shifted from the program agencies to the
Federal financing bank. Many of the obligations which are now placed directly
in the private market under numerous Federal programs would instead be
financed by the bank. The bank ih turn would issue its own securities. The bank
would have the necessary expertise, flexibility, volume, and marketing power
to minimize financing costs and to assure an effective flow of credit for programs
established by the Oongress.
The proposed legislation would also assure more orderly and effective Federal
financial management by requiring the submission of agency financing plans to
the Secretary of the Treasury and the coordination of borrowing activities
by the Secretary. The Congress has required such Treasury coordination of
agency borrowings in many cases, but some agencies are not subject to the
requirements; and in many cases the requirements are vague or incomplete,
and their lack of uniformity is awkward and inefficient to administer.
The Federal Financing Bank Act would thus provide both a more effective
means of financing as well as a focal point for early recognition of the volume
and timing of the proposed level of Government-assisted credit and its likely
impact on financial markets.
During the course of the financing bank hearings last year and in our discussions with Federal agencies, public interest groups, and capital market participants, considerable support for the legislation has developed. Most people
agree that the coordinated and economical financing of the Government's activities and programs is clearly in the public interest. In those discussions we found
it helpful to emphasize the following points :
First, the bank would not be a program agency. That is, it would neither add
to nor subtract from existing Federal credit assistance programs. The bank
would not be authorized, nor would the Secretary of the Treasury be authorized,
to make any judgments with respect to the purposes of Federal agency programs.
The bank is designed merely to improve the financing of programs otherwise
authorized by the Congress.
Second, the Federal financing bank would not be another big bureaucracy. It
would rely upon the staff and facilities of the Treasury Department and the
Federal Reserve banks in its borrowing operations. In fact, the establishment
of the bank would reduce Federal bureaucracy since it would eliminate the need
for establishing new financing staffs for each new Federal credit program or
agency.
Third, the Federal financing bank is not a device to remove programs from
the Federal budget, nor is it a device to bnng programs back into the budget. The
bank would in no way affect the existing budget treatment of Federal credit
programs. If a program is now financed outside of the budget, that treatment
would continue. If a program is now financed in the budget, that treatment would
continue. The bank is intended to improve the financing of all Federal agency
borrowing activities, regardless of their budget treatment.
Fourth, the Federal Financing Bank Act is not an assault on the tax-exempt
municipal bond market. Rather than involving the Federal Govemment in the
tax-exempt market, the financing bank would permit the Federal Govemment
to withdraw from that market. Under existing arrangements, Federal agencies
finance some of their programs in the municipal market by means of Federal
guarantees and debt service subsidies on tax-exempt obligations, e.g., for public
housing and urban Tenewal. Those programs currently require about 1 out of
every 6 dollars invested in tax-exempt obligations. Over time the Federal financing bank would permit the removal of the financing of these federally impacted
programs from the tax-exempt market, thus reducing pressures on that market.
Consequently, State and local governments should benefit, in terms of more receptive markets for all their borrowings, by enactment of this legislation.
Virtually all interested parties now agree that the Federal Government should
not be financing its own programs, including its loan guarantee programs, in the
308
19 73 REPORT OF THE SECRETARY OF THE TREAS'URY
tax-exempt market. It makes no sense to me, in view of the obvious potential
problems in the municipal market, for Federal agencies to be adding to those
problems and competing with hard-pressed local governments for the limited
and erratic supply of funds attracted by tax exemption. ,
The financing bank itself would have no authority to subsidize municipal
obligations, and it would be authorized to purchase only those municipal'obligations which are issued under those few programs which are directly subsidized
by other Federal agencies. To the extent that a decision is made to finance those
particular programs thrpugh the bank, there could be significant savings to government at all levels. Such financing would inot involve the Federal Government
in any municipal borrowing or project it was not already involved in. Thus the
financing bank legislation does not raise the question of Federal control over
municipal borrowing.
I would like to turn now to the two provisions of the bill before you today
which differ from the bill approved by your committee last year.
First, under this bill, the obligations issued by the Federal financing bank
would be subject;to State and local taxation to the same extent as the obligations of private corporations. This provision is a departure from the usual
practice of exenapting obligations of .Federal agencies from. State and local taxes.
But.the obligations issued by. tbe Federal financing bank would be issued,primarily for the purpose of financing the bank's purchases of guaranteed obligations whiqh, would otherwise be financed directly in the market on a taxable
basis. Consequently, if the Federal financing bank issues were exempted from
State and local taxation, there would be a loss of tax revenues tb State and
local governments as compared to' the present methods of financing guaranteed
obligations.
The other difference, between this bill and the bill approved by your committee last year is that this bill would require the approval of the Secretary
of the Treasury of the market financing aspects of certain guaranteed obligations sold in the market. The bill reported by your committee would have required approval of the Secretary of the Treasury of the market financing
aspects of obligations issued or sold by Federal agencies but not of obligations
guaranteed by Federal agencies.
Thus, under the bill approved last year, the Treasury would be responsible
for coordinating the marketing of guaranteed issues only when they are sold
directly by a Federal agency. Yet a-number of I^ederal agencies guarantee
obligations sold by others, e.g., by private trustees selected by the Federal
agency to handle the sale. Federal agencies arrange for the sale in securities
markets of guaranteed merchant marine bonds, new community debentures, taxexempt public housing bonds, SBIO debentures, GSA building certificates, and
inany other securities, which are not actually acquired by a Federal agency iii
the financing process.
Because of the technical distinction in last year's bill, based on whether an
agency actually acquires a security before arranging for its market financing,
there could be a substantial volume of Government-backed securities flowing
to the market without any overaU debt management coordination.
We recognize the concerns expressed. in the Congress last year about the
administrative problems which could result if Treasury approval were required
of the terms of each individual loan guarantee, especially in programs involving
large numbers of small loans which are financed by depository institutions rather
than ih the securities market. We have no intention of getting involved in such
guaranteed loans, and we had tried to make this clear last year.
Our intent in sectiori 7 of the bill is simply to provide for coordination of
agency financing in the securities market. To clarify this further, we have
amended last year's proposal, so that the bill before you would not require Treasury approval of obligations guaranteed in connection with programs involving
the guarantee of large numbers of individual obligations that are originated and
serviced by local lending institutions and that are not ordinarily bought and sold
in the same market as bonds and other similar types of investment securities. We
believe that this amendment would properly limit Treasury's responsibilities but
would also assure the effective financing of agency programs in the securities
market.
I would also like to point out that the provisions of the bill before your committee today are the same as the provisions of the bill reported by your committee
last year with respect to the U.S. Postal Service. There has been no change in our
understanding of the application of the Federal, Financing Bank Act provisions to
the Postal Reorganization Act. As stated by Assistant Postmaster General Bailar
in testimony before your committee on September 27,1972, on the Federal Flnanc
EXHIBITS
309.
ing Bank Act (S. 3001), under the Postal Reorganization Act the Treasury may
purchase all Postal Service obligations if it does so within the prescribed 15-day
period; and the Federal Mnancing Bank Act would have the effect of giving the
Secretary of the Treasury the authority to exercise this preemptive right by
requiring the Postal Service to sell its securities to the Federal financing bank.
Thus, the Federal Financing Bank Act would simply provide an additional
optional method of financing the postal obligations.
Mr. Chairman, that concludes my prepared statement. I would be happy to try
to answer any questions regarding this legislation.
Exhibit 29.—Statement by Secretary Shultz, June 4, 1973, before the House Ways
and Means Committee on the public debt limit
The temporary debt limit of $465 billion will expire on June 30 of this year. The
debt subject to limitation on that date will be about $460 billion and will, therefore,
greatly exceed the permanent debt limit of $400 billion. Since additional debt
will need to be incurred in fiscal year 1974 to finance both seasonal needs and the
overall deficit in the Federal funds accounts, i t i s now timely to consider what
provision should be made'for theyear ahead. Attached to my statement is a table (table I) showing our estimates of the debt
subject to limit on peak dates throughout the coming fiscal year. This is based
upon the reestimates of budget receipts and Outlays contained in the midsession
review and summarized in attached tables II and III. Also attached to my statement are tables comparing our curreht receipts estimates with the January
budget estimates (tables IV and V).
In summary, our reestimates show unified budget deficits of $17.8 billion in the
current fiscal year and $2.7 billion in fiscal year 1974. The January estimates were
$24.8 billion and $12.7 billion, respectively, so you can see there has been an improvement of $17.0 billion since January for the 2 fiscal years taken together.
The corresponding Federal funds deficits for the 2 fiscal years, which are the
more relevant deficit's for consideration of-the debt limit, are now estimated to be,
respectively, $27.9 billion in fiscal year 1973 and $18.8 billion in fiscal year 1974
against the January estimates of $34.1 billion and $27.8 billipn. So there has been
ain improvement of $15.2 billion in the Federal funds accountAs the committee knows, the Federal funds part of the unified budget is similar
in concept to the old administrative budget. It includes the funds which the
Government administers as owner and excludes those which the Goyernment
administers in a trustiee or fiduciary capacity.
The largest part of the Federal funds deficit—and, therefore, the largest i>art of
the growth in the debt subject to limit—^however, is associated with transactions
between Federal funds and trust funds. These consist largely of Federal funds
payments to social insurance trust funds. These are now estimated to net $21.2
billion in fiscal 1973 and $20.7 billion in fiscal 1974. Interest ori Federal securities
held by trust funds is the largest single item. Other major payments include the
Federal payments as employer to the civil service retirement fund and the miatching payment for supplementary medical insurance. The large surpluses in the
trust funds of $10.1 billion in fiscal year 1973 and $16.1 billion expected, in fiscal
year 1974 are invested in U.S. Government securities. Therefore, the debt ceiling
must increase enough to include these, amounts as well as the amount of debt sold
to the general public.
Table I, on the conventional basis, provides for a constant $6.billion operating
cash balance and a $3 billion allowance for contingencies. This table indicates a
maximum figure of $482 billion which applies to a brief period between the end
of May and the June tax payment date. Since this date is 12 months in the future, I suggest that.an additional .$3 billion margin is appropriate. Therefore, I
am requesting a debt limit ceiling of $485 billion.
I would also like to comment briefly op the improvement in the fiscal year 1973
budget position from the January estimates and also on the improvement in. the
fiscal year 1974 outlook.
'.
As shown by.the detailed figures ih the midsession review, all of the improvement in both fiscal years is the result of higher than previously anticipated.tax
receipts. Higher income tax receipts account for most of the changes in estimated,
receipts in fiscal years 1973 and 1974. In total, we have revised individual income
taxes up by about $8 billion for the 2 years combined. Corporation income .taxes
are up $7 billion. Social insurance taxes and contributions are up oyer $i/^ billion
and other receipts—excise taxes, customs duties, and so forth-^afeup by-,$i^
billion. In total, the increase in receipts for the 2 fiscal years is abouf $17 billibri.'
310
1973 REPORT OF THE SECRETARY OF THE TREASURY
We welcome the increased receipts and resulting decrease in the unified
budget deficit because the budget, as planned, will be exerting more restraint on
the economy as the economy moves toward full potential output, thus reducing
inflationary pressure.
We welcome the decrease in the unified budget deficit because it reduces the
Government's borrowing requirements. We welcome the fact.that the full-employment budget, which measures the expansionary or restrictive pressures of the
unified budget, on a cyclically adjusted basis, has moved from a slight deficit to a
small but significant surplus.
This is completely appropriate under present circumstances and should not be
taken as a basis for less vigilance over expenditure totals. As President Nixon
said in his budget message, "Except in emergency conditions, expenditures should
not exceed the level at which the budget would be balanced under conditions of
full employment." To this I could add, "with reasonable stability in prices." To
allow an expenditure increase above $268.7 billion in fiscal 1Q74 would simply
feed infiationary fires and make achievement of our domestic and international,
economic goals even more difficult.
While we welcome these shifts in our budgetary expectations, it should be recognized that part of the higher receipts reflect an excessive pace of infiation in
the economy. I make this point to reemphasize the pressing need—which both the
administration and the Congress face—-to exercise restraint over Federal outlays
so that they can be held to totals not higher than the figures specified by President Nixon in his budget message in January; that is, $249.8 billion in fiscal year
1973 and $268.7 billion in fiscal year 1974.
As one with responsibility for the sound financing of the Federal Government,
I applaud wholeheartedly the efforts by many Members in both Houses to find an
effective basis for exerting responsible congressional control over the outlay
totals. The control of outlays has become, as it should be, a joint and cooperative
eff'ort of the administration and the Congress, and the. overwhelming need for.success in this joint effort should spur us all toward finding a workable approach.
. Over the years, many Members of the Congress have considered the debt limit
as a tool for the control of Government outlays, and successive Secretaries of the
Treasury have come before you to argue, as best they might, that the debt limit at
best is a very imperfect tool for this purpose—^that it is much like locking the
barn door after the horse has gone, because the Treasury has no choice but to
pay the bills after the obligations have been undertaken.
Perhaps when the Congress has successfully dealt with the problem of directly
imposing an overall ceiling on outlays, it will be unnecessary to have a debt limit
per se, since then this additional limitation would have no real function but
might only impair the Treasury's ability to finance the Federal Government in
the most effective and constructive way.
We have found the debt limit hearings to be of value when the timing and circumstances have been such as to give both the administration and the Congress an
opportunity to reevaluate the budget.
Yet I see no reason why the Congress could not establish a procedure to accomplish the same purpose of budget, taxation, and debt review apart from a time
frame during which a change in law is required.
Today, however, I am not proposing such a procedural change. I am not proposing elimination of the debt ceiling, but rather I am proposing only a simple increase in the temporary ceiling.
In addition, I would like to recommend that the committee move to eliminate
the 41/4-percent interest rate ceiling which has applied to all Treasury bonds,
except for those issued under the $10 billion exception which the Congress approved 2 years ago.
I make this recommendation in the light of the record which shows that the $10
billion authority has been used responsibly by the Treasury Department to contribute to some improvement in the structure of the public debt.
As some members are aware, the average maturity of the privately held public
debt has now been reduced to a very low level of 3 years. This is a trend which I
would like to see reversed, but not in any radical or exaggerated fashion which
would carry a risk of upsetting financial markets and impairing the ability of
the various sectors of the private economy to finance in those markets.
We have, of course, undertaken and we will continue to undertake debt management policies which will minimize any disturbing impact of Treasury financing operations on financial markets. We have put an increasing part of our
financing on a routine basis and reduced the size of our refundings to more
manageable proportions. Some of the measures for these purposes include the
shifting of the annual bill cycle to a 52-week basis, initiating the offering of
EXHIBITS
311
2-year notes on a regular basis, and the reduction of the quarterly maturities
in private hands to amounts of $5 billion less.
We have also made greater use of auction techniques for pricing our securities.
In this way we have avoided the risk of overpricing or underpricing new Treasury obligations in rapidly moving financial markets.'
We have now utilized the exception from the 4^/4-percent interest rate ceiling on
seven occasions to issue a total of $8.4 billion of medium- and long-term bonds
with maturities, at time of issue, ranging from 9 years 9 months for the 6%'s of
February 1982 when they were reopened in May 1972 to 25 years for the 7's of May
1993-1998.
The first occasion was in August 1971, when in connection with the refunding of
the regular quarterly maturity,.we issued the first Treasury bond since 1965. This
was a 10-year security. Three months later, in November, again in connection
with a regular quarterly refunding, we issued a 15-year bond. As a result of the
fall in interest rates that had taken place, the coupon was only 6% percent, compared to 7 percent on the previous issue.
In February 1972, we offered a 10-year bond, this time with a 6%-percent coupon. In May, we were able to reopen the issue. In August, we offered a 12-year
bond with the same 6%-percent coupon.
Use of $10 biUion authority
Issue date
Aug. 15, 1971.....
Nov. 15, 1971....
Feb. 15,1972
May 15,1972
Aug. 15, 1972
Jan. 10, 1973..
May 15, 1973.
Coupon
percent
7
614
6H
6H
6H
6^
7
Maturity
• Yrs-Mos
10-0
15-0
10-0
9-9
12-0
20-1
25-0
Yield
percent
7.11
6.15
Par
6.29
6.45
6.79
7.11
j^mount issued
Total
807
1,216
2,197
505
2,353
627
692
Private
466543
1,643
505
1,173
627
652
Private
for cash
1195
^24
»66
2505
141
3627
3552
1 Sold to individuals in amounts of $10,000 or less.
2 Noncompetitive tenders for up to $50,000 were accepted at the average price.
3 Noncompetitive subscriptions were accepted from individuals and others for amounts up to $250,000.
In January, for the first and to date the only time apart from a regular quarterly refunding, we offered a bond for cash. This was the first time we had
auctioned such a long-term bond. This 20-year 1-month bond carried a coupon of
6% percent. Our seventh offering was a 25-year bond, callable at the Government's
option after 20 years, and we came full circle, back to a 7-percent coupon.
These moderate sales of bonds were accomplished without any perceptible
adverse effects on long-term capital markets. Compared with the much larger
totals of corporate and State and municipal offerings, they have taken only a
minor fraction of long-term funds available for investment. In fact, we believe
that the success of these offerings reflects a demand on the part of investors
for moderate amounts of the highest quality long-term securities which can only
be satisfied through Treasury issues, a demand which was unsatisfied between
1965 and 1971 when the Treasury was unable to offer new bonds because of the
41^-percent ceiling. I should point out also that a portion of these offerings was
taken on original issue by the Federal Reserve System and Government accounts
and additional amounts were acquired by them subsequently in the market.
Private holders, therefore, currently have a total of $4.5 billion, as against $3.9
billion held by Grovernment accounts and the Federal Reserve.
This points out a dilemma we have faced: How to assure that the trust accounts can obtain a reasonable amount of new long-term securities without dissipating the small amount of authority we have to issue bonds which should
largely be reserved for improving the structure of the privately held Federal
debt. Removal of the ceiling would resolve that dilemma.
Along with removal of the 41/4-percent ceiling, we believe it would be appropriate to remove the ceiling on series E and H savings bonds. The rate now is
^V2 percent, and there have been many changes, both of the rate to maturity and
the interim rates, over the more than 30 years since E bonds were put on sale
by the Treasury in May 1941.
While we have made no decision with respect to future savings bonds rates,
removal of the ceiling will allow us more easily to alter the rates in the interest
of the program if in the future it becomes necessary to do so in order to offer
312
19 73 REPORT OF THE SECRETARY OF THE TREASURY
a fair return to savers. As the committee knows, there are over $58 billion of
savings bonds now outstanding. This program has become a fundamental and
stable part of our debt management program. We want to make sure it continues
to serve both our needs and those of the public fairly.
My final request is also partially related to the matter of equity and the small
saver in the United States. As this committee; is well aware, we have a problem
in overwithholding of individual income taxes and there has been discussion in
previous hearings of providing for the investment of individual tax refunds in
an interest-bearing Treasury security.
I would like to request at this time that the Congress give the Treasury the
authority to institute a procedure by which tax refunds could be invested—^at
the option of the taxpayer—^in an interest-bearing Treasury bond. The procedure
would be to issue a refund check which could either be cashed in a normal manner
or held. If held, it would automatically bear interest as a security after a specified
period of time. We think that there is considerable merit in establishing a system
now for future use. In addition to the argument of equity there are other advantages to such a procedure. First, it would encourage savings by taxpayers,
and second, the procedure would contribute to more orderly cash and debt management by the Treasury.
•;
Mr. Chairman, members of the committee, this is the end of my prepared
statement. I would be most happy to answer any questions which the committee
might have and to furnish any supplemental material it would find useful. We
understand you may want to take up the Federal financing bank legislation also
at this time. We are quite pleased with the bill as reported by the Senate
Banking Committee, and I would be glad to comment on that also.
TABIJ'E. .1.-^Estimated public debt subject iq lirnitatiori, fiscal year 1974, based on
estirnated budget outlays of $268.7 billiori and receipts of $266.0 billion
[In billions of dollars]
Opier ating
cash balance
With $3 billion
margin for
contingencies
Public debt
subject to
limitation
197S
June 30
July 31
Aug.31..
Sept. 30....
Oct. 31.
Nov. 30
Dec. 31.
Jan. 3 1 . . . . . .
Feb. 28
Mar. 31_.
Apr. 30
May 31..-.
June 30
$6
6
6
6
".
6
$455
$458
461
467
464
470
463
467
470
469
460 -
464
'
6
.
6
6
6
6
6
6
6
1971,
4.67
467
470
474
470
479
466
470
473
477
473
482
476
472 .
TABLE II.—Budget receipts, outlays, and surplus or deficit (—) hy fund
[In biUions of dollars]
Fiscal year
Actual
1972
Receipts:
:
Federal funds
.-.
Trustfunds
.............^
Deduct: Intragovernmental receipts.
Total unified budget
Outlays:
Federal funds.-..
Trustfunds
I)educt: Intragovernmental outlays....
Total unified budget
B udget surplus, or deficit (—):
Federal funds
Trustfunds
Total unified budget..
Current
1973
148.8
73.0
13.2
160.9
92.6
21.4
181.1
106.1
21.0
208.6
232.0
266.0
178.0
67.1
13.2
......i..i
82.4
2L4
199.8
90.1
21.1
231.9
.-
..
249.8
-29.1
5.9
_„
---.:
-.-..-..
Current
1974
-27. 9'
10.1
-23.2.
-17.8
268.7
.-18.8
16.1
-2.7
313
EXHIBITS
TABLE III.—Unified budget receipts, outlays, and surplus or deficit { — )
[In billions of dollars]
Fiscal year 1973
January
1973
estlmate
Receipts
Outlays
Deficit ( - )
Fiscal year 1974
Change
from
Change
Janu- May 1 from
ary
estiMay
1973
mate
estiestimate
mate
Change
from
•.
Change
Janu- M a y l
from,
ary
estiMay
1973
mate
estiestimate
mate
226.0
-1-5.0
249.8 .
-24.8
-1-6.0
January
1973
estimate
Current
estimate
Current
estimate
230.0
249.8
-f2.0
232.0
249.8
266.0
-f7.0
268. 7 .
263.0
268.7
4-3.0
266.0
268.7
-19.8
4-2.0
-17.8
-12.7
-1-7.0
-6.7
4-3.0
-2.7
•Less than $60 million.
TABLE IV.—Comparison of fiscal year 1973 receipts as estimated in January 1973,
May 1973, and currently
[In billions.of dollars]
:. ,
Change from January
Change from May
January
1973 . budget
Mayl
Current
estimate
esti1973
•
-1973, mate
estimate Econom- Legisbudget Economic Legisicahdre- lation Total
andre-^ lation Total
estimate
estimate
Individual income tax
....
99.4
Corporation income tax
.
33.6
Employment tax and contributions
55.6
Unemployment insurance.:..
5.3.
Contributions for other insur3.7 .
ance and retirement
Excise taxes
16.0 .
, 4 . 6
Estate and gift taxes
,
3.0
Customs duties
. . . .
4.0
Miscellaneous receipts
.
Total budget receipts... .
Gross national product
Personal Income
_
Corporate profits before tax
225.0
-1-2.0
+2.0
-1-2.0
-1-2.0
101.4
35.6
+.4
-H.4
65.6'
5.7
+.4
-t-.2 .
-.1 .
4-. 4
4-. 2
-.1
3. 7
16.0
6.0 .
3.2 .
- 3.9
4-. 2 1 - 0 . 2
-1-5.0
4-5.0
230.0
4-2.2
+ L 6 . . . . . . . . .. 4-1.6
. 4-. 6
+.5
- . 3 . . . . . . . ..
-.3
. 4-.1
4-.1
- . 2 4-2.0
nderlyingjincomej assumptions—calendar yeai• 1972
1,16L9
1,15L8
936.8
936.9
93.8
94.3
103.0
36.0
55. 3
5.7
37
16.1
6.0
3.2
3.9
232,0
1,16L8
936.9
94.3
1 Transfer of writeoff of silver certificates to fiscal 1974.
TABLE V.—Comparison of fiscal year 1974 receipts as estimated in January 1973,
May 1973, and currently
[In billions]ofjdollars]
Change from January
Change from May
January
1973 budget
May 1
estimate
Current
1973
•
1973,
'•— estimate
budget Economic Legisestimate Economic Legisand re- lation Total
and re- lation Total
estimate
estimate.
Individual income tax
Corporation income tax
Employment tax and contributions .
.
.
Unemployment insurance
Contributions for other insurance and retirement
Excise taxes
Estate and gift taxes.
.
Customs duties...
Miscellaneous receipts
m.6
4.0 ,
16.8 .
6.0
3.3
4.1
-f.4
4-. 2
-.2
4-.4
4-. 2
-.2
4.0
16.8
6.4
3.6
3.9
Total budget receipts
256.0
4-7.0
4-7.0
263.0
37.0
67.9,
6.3
4-3.7 . . . . . . . . 4-3.7 116.3
4-3.0
-f3.0 . 40.0
'67.9
6.2 .
-.1
-.1
.
.
.
.
4 - 0 . 7 . . . . : . . . -fO.7
4-1.6
4-1.6
' 4 - . 6 . 1 . . ' . : : . •4-. 5
"""+'i"i"+o.T"•""+.'3"
4-2.8
Underlying income assumptions—Calendar year 1973
Gross national product
1,267.0
1,283.0
1,030.0
Personal Income
. . 1.018.0
Corporate profits before tax..
108.0
116.0
* Transfer of writeoff of silver certificates to fiscal 1974.
-1-.2
4-3.0
116.0
4L6
68.4
6.2
4.0
16.8
6.4
3.6
4.2
266.0
1,283.0
1,030.0
116.0
314
1973 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 30.—Other Treasury testimony in hearings before congressional
committees
Secretary Shultz
Statement of September 18, 1972, before the House Committee on Ways and
Means regarding the public debt limit.
Statement of June 21, 1973, before the Senate Finance Committee regarding
the public debt limit.
Under Secretary for Monetary Affairs Volcker
Statement of September 27, 1972, before the House Committee on Ways and
Means regarding legislation to create a Federal financing bank.
Law Enforcement Developments
Exhibit 31.—Statement by Assistant Secretary Rossides, September 6, 1972,
before the New York County Lawyers Association, New York, N.Y., on the
administration's antinarcotics program
I am pleased to report that President Nixon's antinarcotics drive is succeeding.
The President's action program:
(1) Has turned the tide in the war against drug traffickers.
(2) Has galvanized the nations of the world into action. More has been done
on the international front in the last 3l^ years than in the previous 35. The
most recent example of international cooperation generated by the President's
program is the extradition from Paraguay of Auguste Ricord to face trial in
the United States in a Bureau of Customs case. Ricord was indicted in connection with the smuggling of 97.5 pounds of heroin into the United States.
(3) Has reduced the supply of heroin.
(4) Is taking the profit out of the heroin traffic, which is the part of the
program I will highlight today.
Nine hundred and nineteen major targets In 42 States, 67 metropolitan areas,
and the District of Columbia were selected by Treasury's Target Selection Committee and referred to the IRS for intensive tax investigation (see table 1).
Under the direction of IRS Commissioner Johnnie M. Walters, 410 Treasury
agents and 112 support personnel are presently conducting the intensive tax
investigations. In addition, 798 minor traffickers are under tax action.
Taking the profit out of narcotics
$66.1 million in taxes and penalties have been assessed under the program, of
which more than $10.9 million has already been collected in the form of cash or
valued property. We are now using the drug traffickers illegal profits to put them
out of husiness.
Eight men have been convicted on criminal tax charges; 23 other criminal
tax cases are pending in Federal district courts in New York, Miami, Detroit,
Los Angeles, San Francisco, Seattle, Boston, Indianapolis, Baltimore, and Washington, D.C, and in other areas; and another 49 investigations have been
completed with prosecution recommendations. (See table II.)
During August we achieved the following results: 72 major targets for intensive tax scrutiny were added; an additional $3.6 million in taxes and penalties
were assessed, of which $1.1 million was collected; and 18 cases were recommended for prosecution. In addition, 112 minor targets were placed under tax
action.
We believe this represents a tremendous achievement. By focusing attention
on the persons responsible for the narcotics distribution, this program is making a major additional contribution to the President's offensive against drug
abuse.
315
EXHIBITS
Table I
Metropolitan areas
state
MobUe
Anchorage
Phoenix-Tucson-Yuma
Little Rock
Los Angeles-San Diego
San Francisco-Oakland
Denver
Hartford
Wilmington
Washington.
Miami-Tampa-Jacksonville. _
Honolulu
Atlanta
Chicago-Springfield
Indianapolis-Gary
LouisviUe-CovIngton-Newport
New Orleans
Bangor. _
Baltimore
Boston
Detroit
St. Paul-Minneapolis._.
Gulfport
St. Louis-Kansas City
Las Vegas
Portsmouth
Newark-Camden.
Albuquerque
Albany..
Buffalo-Rochester
New York City and subm'bs
Greensboro-Charlotte
Cincinnatl-Daj^ton.....^...
Cleveland
Oklahoma City
Portland
Philadelphia
Pittsburgh
Providence
Columbia
.:
NashvUle-Memphis
_
Austin-Houston-El Paso
Dallas
Salt Lake City
Richmond-Norfolk, Arlington-Alexandria.
Seattle
Alabama
Alaska
Arizona.
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Hawaii
Georgia
Illinois
Indiana
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
Tennessee
Texas
Utah
Virginia
Washington
West Virginia
Wisconsin
Parkersburg
Milwaukee
Total
506-171—73-
-2i3
Targets
Completed
investigations
2
1
38
2
45
39
8 .13
1
22
74
10
28
45
9
5
13
1
10
21
58
2
1
17
3
3
61
11
10
4
11
5
5
5
17
2
8
7
2
„
4
1
2
6
2
1
8
2
6
12
138
17
13
8
3
12
41
16
1
5
6
43
4
2
26
36
1
16
1
2
5
919
160
1
1
5
1
12
1
316
1973 REPORT OF THE SECRETARY OF THE TREASURY
Tablelll
Number
Major target assessments:
Regular
Jeopardy 1
Tax year termination 2
Total
Minor target assessments: s
Jeopardy
Tax year termination
Amount
60
23
33
116
58
740
798
Total
Total assessments involving narcotic traffickers..
i
Seizures involving narcotic traffickers:
Major targets:
Currency
Property.
Minor targets:
Currency
Property
30,978,981
66,194,800
1,990,126
87,238
7,351,258
1,549,174
Total amount seized
Cases recommended for prosecution
Criminal tax cases In U.S. courts awaiting trial
Criminal tax convictions
2,273,352
28,705,629
914
:
$7,710,730
18,862,460
8,642,629
35,215,819
10,977,796
_
1
_
49
23
8
1 Jeopardy assessments are assessments of taxes made where a return has been filed or should have been
filed, but where circumstances exist under which delay might jeopardize the collection of the revenue.
2 Termination of tax year is a computation of the tax due and assessment made where the time for filing
the return has not become due where circumstances exist under which delay might jeopardize the revenue.
3 These are assessments made as a result of seizures by other law enforcement agencies of cash or other
assets against current income of narcotic traffickers where delay might jeopardize collection of the revenue
The word for the drug traffickers is to get out of the illegal drug traffic or
face up to intensive tax investigation. This, word should be spread in every city
and town in the United States. We have institutionalized this program. Everyone in this illegal business should realize that they will be subjected to tough
tax scrutiny.
;
The program's objectives—to take the profit out of the illegal traffic in narcotics and thereby further disrupt the traffic—are accomplished in two ways:
1. Major targets—by conducting systematic tax investigations of middle
and upper echelon narcotics traffickers, smugglers, and financiers. These are
the people who frequently are insulated from the daily operations of the drug
traffic through intermediaries.
2. Minor targets—by the systematic drive to seize—to be applied to taxes
and penalties owing—the substantial amounts of cash that are frequenly found
in the hands of minor narcotics traffickers, those below the middle and upper
echelon level.
Although all of the penalties and taxes that have been assessed may not be
collected, the impact of this program on the narcotics traffic is already substantial and increasing each month.
Essential cooperation of State and local police and Federal agencies
Treasury has coordinated this tax program with State and local police, whose
more than 350,000 officers constitute the first line of defense against the internal
traffic in narcotics, as well as with the antismuggling drive of its Bureau of
Customs, the drive against narcotics distribution of the Bureau of Narcotics
and Dangerous Drugs, and the prosecution efforts of the Tax and Criminal Divisions of the Department of Justice. Their cooperation is an essential ingredient
to the success of the program.
The reasons for the substantial results since the program was initiated are
many, I mention the following:
1. Morale and dedication of the men and women of the Internal Revenue
Service.
2. Direct line organization, coordinated with all regional and district elements of IRS, with control of the nationwide program stemming from Washington.
EXHIBITS
317
3. Streamlined procedures for expedited investigation and review of cases.
4. Treasury Target Selection Committee system controlling the selection
of major narcotics traffickers and financiers as targets of the program.
5. Cooperation of State and local police agencies. Customs, BNDD, and
DALE in identifying major and minor targets, in developing intelligence on
them, and in locating cash ahd other assets in their possession.
6. Cooperation of Department of Justice attorneys in securing indictments and trying the cases.
In summary, we are doing the job better and faster but we are still not satisfied.
This is not the time to be overoptimistic. Much more needs to be done in the war
on narcotics.
The Treasury/IRS narcotics trafficker program is a major enforcement effort,
but it must be emphasized that it is only one part of this administration's comprehensive drive against.the supply of narcotics and the demand for narcotics.
The President's multidimensional war on drug abuse
President Nixon started his war on drugs the first month of his administration
when he established the Interdepartmental Task Force on Narcotics, Marijuana, and Dangerous Drugs that led to Operation Intercept in September
1969 and Operation Cooperation in October 1969. He has escalated that war
with a series of action programs, and progress has been made.
First, he elevated the drug problem to the foreign policy level and has taken
personal initiatives in soliciting the cooperation of other governments. The aim
of our diplomatic efforts is to have each nation do its share and meet its responsibilities in the worldwide war against drug abuse.
Much has already been accomplished in this area. In France, as ah example, we
have received close cooperation in joint antinarcotics progranis during Arthur K.
Watson's tenure as Ambassador. For the first time, the French-have made the
war on drugs a priority program. The fruits of the French effort have been considerable. On March 2, 1972, the French Customs seized 935 pounds of heroin,
the largest such seizure in history. On March 6, 1972, French Customs seized 321
pounds of morphine at the Italian border, and on March 16, 1972, French narcotics agents seized 220 pounds of almost pure heroin and discovered a functioning heroin laboratory. In July, the French narcotics agents seized three heroin laboratories, one of which produced enough heroin to supply one-fifth of
this Country's addicts for a year. We can assume that a substantial portion of the
heroin was destined for the United States. These seizures give renewed inspiration to all of us involved in combating this evil.
The Turkish and U.S. Governments announced in June 1971 that after June
1972 there would be no further planting of opium poppy in Turkey. Turkish opium
has been a major source of heroin for U.S. addicts.
And most recently, extradition proceedings have come to a conclusion with the
arrival of Auguste Ricord here in New York on September 2, 1972, to face trial
in the United States, in a Bureau of Customs case. Ricord was indicted in connection with the smuggling of 97.5 pounds of heroin into the'United States.
The President established the Cabinet Committee on International Narcotics
Control, under the chairmanship of Secretary of State Rogers, to coordinate
the United States initiative on the international level.
Second, he placed particular emphasis on the crucial roles of education, research, and rehabilitation.
On January 1, 1969, the Federal Government was, funding only 16 treatment
programs. This number has grown enormously, and as of the end of fiscal year
1972, there were 321 Federal treatment programs operating. Funding in the
areas of education, research, and rehabilitation have also increased substantially.
More money will be spent on these programs during this administration than in
all the preceding years. For fiscal year 1973 alone, $485.2 million has been requested for programs in these areas. This is over 10 times the amount funded
in fiscal year 1969.
Third, he recommended differentiation in the criminal penalty structure between heroin and marijuana, arid flexible provisions for handling first offenders.
Fourth, he stressed total community involyement—the private sector as well
as governmental agencies—in tliis anti-drug-abuse program. As part of this aspect
of the program, he has elicited the support of leading athletes and other celebrities for the production of antinarcotic public service advertisements which
have been especially effective among the youth.
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1973 REPORT OF THE SECRETARY OF THE TREASURY
Fifth, he provided a substantial increase in budgetary support for the Bureau
of Narcotics and Dangerous Drugs and the Bureau of Customs and initiated the
Treasury/IRS tax drive on drug traffickers. In fiscal year 1973, $244.2 million
will be spent on narcotics-related law enforcement as compared with $20.2 million which was spent in fiscal year 1969.
Sixth, he recognized the central role of the States and the need for close Federal-State cooperation in a unified drive against drug abuse. Through the Law
Enforcement Assistance Administration (LEAA), substantial funds have been
transmitted to our States for the attack on drug abuse. Also, he established the
Office of Drug Abuse Law Enforcement in the Department of Justice to assist in
the assault on the street-level heroin pusher working closely with State and local
enforcement agencies.
Exhibit 32.—Remarks of Assistant Secretary Rossides, September 13, 1972,
before the Federal Bar Association and other sponsors of the Symposium on
International Trade, Washington, D.C, on "Antidumping and Countervailing
Duty Laws: Instruments for Freer Trade, and the Development of a Doctrine
of Fairness in International Trade"
For the promotion of freer trade and the development of a doctrine of fairness
in international trade, there are probably no more important laws than the
U.S. antidumping and countervailing duty laws. These laws, designed to counteract and defend American traders against foreign price discrimination and subsidization of exports, are little understood by the public. They are administered
by the Treasury Department and for many years prior to this administration
were little used in the manner intended by the Congress to defend American industry and jobs against these foreign unfair trade practices.
Increased use of antidumping and countervailing duty laws
One of the accomplishments of this administration is the rejuvenation of the
antidumping and countervailing duty laws. The first effort by the Treasury
Department was to tighten the application and use of the antidumping law.
The statistics demonstrate how effective this effort has been. In the 2 fiscal years
prior to the Nixon administration, only 25 investigations of dumping were
initiated. In fiscal 1969 and 1970, 48 investigations were started—a 92-percent
increase; and in the last 2 fiscal years, we have commenced 62 investigations—
a 148-percent increase over the 2 fiscal years (1967-68) immediately prior to
the Nixon administration. In 1967-68, there were 27 final Treasury Decisions,
whereas in 1971-72, there were 59 such decisions—a 119-percent increase.
In the fiscal year just completed, investigations resulted in 23 findings of
foreign price discrimination in exports to the United States and 18 findings of
dumping, an alltime record. I anticipate a continuing increase in the number of
complaints filed under that act as American businessmen become more familiar
with the statute and its administration.
This vigorous application and use of the antidumping law have led to allegations by some of our friends abroad that the United States is abandoning its
traditional liberal stance and using these two statutes as instruments of
protectionism.
Nothing could be further from the truth.
In the final analysis, the antidumping and countervailing duty laws are two
great liberal trade laws of the United States and indeed of the international
community! They are instruments for freer trade.
What is dumping? In a typical dumping situation, a foreign company sells
its merchandise for less in the United States than in its home market, causing
injury to U.S. industry. Under our law, the Treasury Department is responsible
for determining whether a foreign company has been dumping, while the Tariff
Commission determines the question of injury. Dumping duties are assessed
only if there is hoth dumping and injury.
What is a countervailing duty? In a typical countervailing duty situation,
subsidies are paid by foreign governments on exports. The subsidies may be
simple direct bounty payments or, frequently, may be in the guise of other benefits
to assist the exporter. Duties are collected in an amount which will offset such
subsidies.
EXHIBITS
319
Typical dumping case
A foreign firm sells its merchandise for $1,000 in its hom-e market, where
competition with other producers may be limited. Realizing that it could not
compete successfully in international trade at this price, the foreign firm elects
to sell its product abroad, perhaps only for a short time, at lower prices to
capture the market
In the United States, American producers sell the same product, manufactured
here, for $950. The foreign firm, until its product name becomes widely known in
this country, will be tempted to underprice similar American products in order
to compete successfully. It therefore sells its product in the United States for
$900—$100 less than its home market. If it succeeds in its objective, American
firms will lose contracts, and American labor will lose jobs because of what is
universally recognized as an unfair international trade practice.
If the Tariff Commission finds that American industry has been injured by
such foreign dumping, the Secretary of the Treasury is required to impose dumping duties equivalent to the dumping margin. In our hypothetical case, the dumping margin would be $100.
The clear objective of the Antidumping Act is to eliminate any incentive that
foreign firms might otherwise have to dump their merchandise in the United
States.
Typical countervailing duty case
If a foreign exporter receives a bounty or grant of $100 on exportation of an
item which he normally^sells in the United States for $1,000, he is then in a position to sell this item for $900 in the United States. An American producer may
have been manufacturing this same item for sale in the United States for $950.
If it were not for the subsidy payment, the American firm would, all other conditions being equal, be able to undersell its foreign competition by $50.
Because of the subsidy, however, the American firm now suddenly finds itself
in a situation where its product can be undersold in the United States by the
foreign firm by $50—this despite the faet that if normal market forces had been
allowed to function without interference, the American manufacturer's greater
efficiency would have permitted it to hold its fair share of the market.
If the Secretary of the Treasury finds that a bounty or grant is being paid or
bestowed on exports to, the United States, he is required to impose, on top of the
normally assessed duty, an additional duty equivalent to the bounty or grant—
$100 in the case of our hypothetical example.
The rationale of the statute is simple and straightforward. No U.S. firm,
no matter how efficient, is in a position to compete successfully against the resources of a foreign government. Why should American firms lose contracts
and American labor lose jobs, when American merchandise is underpriced by foreign competition not through the operation of normal market forces, but because
of subsidies given by foreign governments on exports to the United States? The
subsidizations toward which countervailing duties are directed are recognized
as unfair international trade practices.
We represent the world's largest consumer market. Because of this, and
because of the liberal access to our market which we have traditionally allowed
to foreign competition, we have over the years become a major target for foreign
governments and firms willing to resort to subsidies and dumping as a means
of underselling U.S. products within our own borders.
What this administration has done to discourage unfair international trade
practices
When this administration assumed office, five professionals in the Bureau
of Customs were responsible for administering the antidumping and countervailing duty laws. In addition, one career Treasury official devoted part time to
supervising this area.
The consequences of the lax administration of these two statutes were predictable. Dumping investigations took 2 and even 3 years for the Treasury Department to complete. Countervailing duty investigations frequently took even
longer.
By the time the investigations were completed, even if there were a finding of
dumping or a decision to countervail, the foreign dumpers and subsidizing
governments had succeeded in their objective of penetrating the American
market by means unfair to U.S. industry and labor.
320
1973 REPORT OF THE SECRETARY OF THE TREASURY
This administration has acted decisively and energetically on many fronts to
halt the erosion that had been and was taking place in our international balance
of trade. To the extent the practices I have described contributed to this
process, they are being examined and acted upon within the context of our
rejuvenated administration of the antidumping and countervailing duty laws.
With the bipartisan support of the Congress, we increased the Treasury
staff' in the Bureau of Customs assigned to investigating and analyzing unfair
international trade practices from 5 to 41, and we have since directed an increase
to 60 professionals.
We streamlined procedures in order to reduce the inordinate time required
to decide cases.
In order to institutionalize the changes that had beeh made and to establish
a mechanism for adequate Treasury supervision in this area, the Secretary approved the establishment under my supervision of the Office of Tariff and Trade
Affairs. We now have the mechanism to ensure that the Treasury Department
will have an ongoing operation for proper supervision and administration of
these two acts.
We also made significant policy changes in the administration of the Antidumping Act. Among other things, in May 1970, we terminated the old policy
of indiscriminately accepting price assurances in dumping cases—a policy which
was actually encouraging dumping. Now we accept assurances (that they will
discontinue dumping prices) as a basis for closing out cases only when the dumping margins are minimal in relation to the volume of sales.
Under the new policy, foreign concerns are impelled fo take the Antidumping
Act into account hefore they engage in sales to the United States.
Results of changes in administration approach
The administration's personnel, policy, and administrative changes in implementing the antidumping and countervailing duty statutes have brought the
substantial results I mentioned at the beginning of my talk. U.S. industry and
labor have reacted favorably to our efforts to defend Americans from unfair
international trade practices. This is a development they had been seeking for
years. The present administration understands and is sympathetic with their
problems and is doing something in their behalf.
It is surprising and heartening to American industry and labor to learn that
the filing of antidumping and countervailing duty complaints, where the evidence
is plain, is no longer an exercise in futility.
What lies ahead
Now we are studying possible refinements of the use of these measures which
defend U.S. industry against unfair competition, partly to make sure they appropriately cover newer practices that may be emerging. In new proposed Antidumping Regulations which were published for comment on April 19, we moved
one step further in our plan to clarify and tighten further the procedures of the
Antidumping Act. The comments are now being considered, and I anticipate that
the revised regulations will be issued in definitive form in the near future, hopefully within 1 month.
We are also turning our attention to making full and appropriate use of the
countervailing duty law to defend American industry against imports which
are unfairly competitive because of foreign subsidies granted to exporters. With
our expanded staff and administrative and policy changes, we are now, at long
last, in a position to analyze many sophisticated subsidies which have previously
escaped our attention.
Amendments of both the antidumping and countervailing duty laws will be
required to achieve freer and fairer conipetition in international trade. We
have well underway a study of a number of possible amendments in connection
with our continuing campaign to guarantee effective administration of these
statutes for fair trade.
International reaction to the administration's new approach
Not surprisingly, foreign governments and exporters did not react enthusiastically to the changes made. This is understandable, since one of the consequences
of the new approach was to make it more difficult for price discriminators to
sell their merchandise in the United States.
Instead of asking themselves why this was so, many of the governments and
firms concerned automatically concluded that, to the extent that access to the
EXHIBITS
321
U.S. market for their goods was being impaired by reason of the new administration approach, this constituted protectionism. Such a conclusion fails to take
into account basic concepts of fairness in the conduct of international trade,
as well as the explicit rules of the GATT.
If, for example, foreign firms gain access to the U.S. market through subsidization of their sales to this country, is it protectionism to take action to
nullify the advantages gained by the subsidies? If such firms gain access to the
U.S. market by dumping their merchandise here, is it protectionism to nullify the
advantages gained from dumping? GATT Article VI and the International AntiDumping Code clearly indicate to the contrary.
We take pride in our fair administration of these laws. Numerous complaints
by domestic producers have been rejected because of lack of evidence of price
discrimination, injury, or subsidy. And critical foreign governments have failed
to take note of the fact that, after investigation, a significant number of antidumping cases have resulted in negative determinations.
And I should point out that vigorous application of these laws where appropriate has helped to forestall the enactment of protectionist legislation of
a type which could turn the clock back 20 years on the movement for more
liberal world trade.
The basic problem that our major trading partners find with the measures
taken by this administration to counter unfair international trade practices
is that once entry is effected into a lucrative market such as that of the United
States—regardless of the method by which it was achieved—those profiting
from such access are understandably reluctant to give up the advantages they
have achieved.
No vested right in lax enforcement
I am not prepared to concede that any one, whether it be a foreign government
or a foreign firm, has a vested right in lax enforcement of our international
fair trade statutes.
On the contrary, if we had been more alert years ago to the implications
of proper utilization of the antidumping and countervailing duty laws, perhaps
the United States would not be confronted, first, with complaints from our business and labor communities that we have not promptly reacted to their charges
of injury from unfair international trade practices and, second, with a growth
of protectionist sentiment in some quarters in the United States, a development
this administration deplores.
A liberal trade policy can have no meaning if we do not subsume in the
definition of liberal trade the concept of fair trade. I firmly believe it is a.mistake ever to allow unfair trade practices to take root. They are an impediment
to the liberal trade policy for which the United States has consistently stood.
But I cannot see the United 'States returning to a policy which ignores the
interests of efficient American producers and of American labor. Those interests are ignored when we permit foreign firms to benefit through subsidies or
resort to dumping tactics.
Development of a doctrine of fairness in international trade
This leads me to the conclusion that we must adopt and develop the doctrine,
which I have called the doctrine of fairness in international trade.
I happen to believe that we can make a valuable contribution toward the
development of such a doctrine through our case-by-case handling of complaints
filed under the antidumping and countervailing duty laws. The case-by-case
method helps to identify problems that develop and begin the process of solving
them. Through this process we can flesh out the meaning of the general phrases
incorporated in international agreements.
The future
Under the leadership of President Nixon, the United States has embarked
upon a program of discussions and negotiations designed to lead to a new. set
of monetary and trade rules and new procedures for implementing them. In our
handling of complaints flled under the antidumping and countervailing duty laws,
we expect to make an important contribution to the need to maintain fair play
in international trade. We hope to demonstrate to our trading partners that
neither they nor we can gain by engaging in unfair international trade practices;
that everyone loses under such circumstances.
We are in a period of rapid change in international flnance and trade. New
techniques of monetary management, trade regulation, taxation, and export pro-
322
1973 REPORT OF THE SECRETARY OF THE TREASURY
motion are being evolved by the major trading nations of the world. The impact
of these techniques must be examined on a case^by-case basis. To the extent that
they interfere with the operation of normal economic factors of free competition, our approach enables us to take steps to compensate for these factors—
not to give our traders an advantage, but to eliminate any resulting disadvantage. In this way, I believe the United States, as the largest single market in
the world, can make a significant contribution to the development of a doctrine
of fairness in international trade.
Statistics on numbers of antidumping cases, fiscal years 1967-1972
Fiscal year
Investigations
initiated
1967....
1968
1969
1970
1971
1972
10
15
22
26
23
39
Findings of
sales at less
than fair value
1
6
1
7
14
23
Findings of no
sales at less
than fair value
10
10
5
17
6
5
Final discontinuances*
.
.
.
.
"3'
8
Findings of
dumping
1
1
5
6
7
18
*Notices of discontinuance were lot issued prior to fiscal year 1971.
Exhibit 33.—Excerpt from remarks by Assistant Secretary Rossides, September 24, 1972, before the National Officer Installation Dinner of Bnai Zion,
New York, N.Y.
It is a privilege to be here tonight to participate in the tribute to the Munich
martyrs, the installation ceremony for your national officers, and the launching
of the celebration of 25 years of independence for Israel.
I will discuss with you three broad areas: President Nixon's leadership in
combating terrorism, his war against drug abuse, and his accomplishments
in building peace with prosperity for the world.
Terrorism: Munich—skyjacking—mail
President Nixon has acted against terrorism and has provided leadership
to the free world community in this effort. There is no single easy answer to
terrorism but there is an answer: Bringing together the combined efforts of the
world community—its governments, its law enforcement agencies, and its citizens—to prevent any safe havens for terrorists throughout the world, and especially to provide for extradition or punishment of guilty parties. President Nixon
is committed to seeing that this will be done.
Terrorist acts of violence and anarchy anywhere in the world must be stopped
decisively. If terrorism succeeds in one instance, then the price goes up in the
next instance.
iSo long as terrorists believe that the methods they employ will yield results,
they will continue perpetrating their crimes. Civilized society must never succumb to a conspiracy of violence.
Certainly the answer to terrorism is not "cbme home America."
The tragedy at Tel Aviv's Lod Airport, the murders in Munich, and the sending
df bombs through the mail obviously command headlines; but what should not
be overlooked, particularly by those who resort to terrorist activities, is that
substantial progress is being made by the world community toward containing
these threats, with this administration in a leadership role. President Nixon
has directed a series of actions on the diplomatic front and on the enforcement
front to strengthen the net to ensnare these criminals.
In the aftermath of the Munich tragedy, President Nixon moved swiftly to
tighten security in the United States against terrorist attacks. In the President's
words:
Since we are dealing with international outlaws who are unpredictable,
we have to take extra security measures to protect those who might be
the targets of this kind of activity in the future. That might include Americans of Israeli background, American citizens.
EXHIBITS
323
Then he placed a telephone call to Premier Golda Meir and assured her personally that the U.S. Govemment would protect Israeli citizens in the United
States who might be threatened. He also directed that the Executive Protective
Service, operating under the Secret Service, assist the New York Police Department in providing security at the Israeli and other U.N. missions in New York.
Moreover, we intensified EPS security for the Israeli Embassy and its personnel
in Washington. I would also note that the U.S. Customs Service intercepted the
three explosive envelopes addressed to Israeli officials in New York.
President Nixon also established a high-level intelligence committee, under
the direction of the State Department, to establish special relations with intelligence groups of friendly nations for the exchange of information about terrorists. Secretary Rogers conferred with representatives of more than 50
embassies in Washington to examine plans for a collective security system
against terrorism. Also, Secretary Rogers expresssed the administration's full
support for legislation extending to foreign "official guests" of the United
States the provisions of Federal laws against attacks on foreign government
officials here.
Finally, I was proud to see Ambassador George Bush exercise only the second
veto by the United States in the 27-year history of the U.N. Security Council.
The proposed resolution was so obviously one-sided against Israel that it did
not even mention the Palestinian Arab terrorist attack on the Israeli Olympic
team. The United States vetoed this resolution because every attempt our
Government made to balance the resolution by calling for the condemnation of
terrorism was blocked by China and the Soviet Union.
Air piracy
President Nixon also led the world community into action against terrorism
in the air piracy area, following the multiple hijackings in September 1970,
where Arab terrorists seized four commercial airplanes, imperiled 600 passengers,
and then destroyed the planes with a capital loss of $50 million.
Our President's reaction was swift and vigorous. His historic message
delivered on September 11,1970, declared:
Piracy is not a new challenge for the community of nations. Most countries,
including the United States, found effective means of dealing with piracy
on the high seas a century and a half ago. We can—and we will—deal
effectively with piracy in the sky today.
There was no suggestion in launching this bold program for "America to come
home." Rather, the President chose to lead the world in fighting a new terrorist menace that threatened all pc.xL-loying people, wherever they might live.
The President called for armed guards on U.S. carriers and for predeparture
inspections. Within 24 hours of the President's action, I am proud to say that
100 Treasury agents were in the air—the first American sky marshals. And
within a week Treasury agents protecting principal overseas flights numbered
275.
The President then selected Treasury as the agency to develop a permanent
sky marshal force because of the close relationship to Treasury responsibilities
and expertise in enforcing customs laws and in the Secret Service protective
mission. This Treasury sky marshal force works in close coordination with the
Department of Transportation, FAA, and the Department of Justice.
Treasury is proud of the job done in recruiting, screening, training, deploying,
and supervising a semipermanent force of about 1,300 customs security officers,
who now are able to perform their mission through predeparture screening of airline passengers and as guards aboard planes in flight.
With this assignment, Treasury enforcement came full-circle. Treasury is
the oldest Federal law enforcement organization in the United States. In the
early days of our Nation, customs officers of Treasury fought sea pirates—
in the 20th century they are being called upon to protect against the menace of
aerial piracy.
The President's program consists of diplomatic and enforcement elements:
First, U.S. diplomacy is working for agreement within the community of
nations so that none will offer sanctuary to skyjackers. Obviously, if a skyjacker
were punished wherever he lands, or returned to the country where the crime was
committed, it would create an important deterrent and close a serious loophole.
Diplomatic initiatives of the President have received support of almost all of
the nations of the world. In practically every country, skyjackers have only one
thing to look forward to—^prison.
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1973 REPORT OF THE SECRETARY OF IPHE TREASURY
The President's forceful action in September 1970 dramatically led the world
toward doing something constructive about this problem for the flrst time.
Secondly, there are armed enforcement personnel, caistoms security officers,
who screen and inspect passengers before they board their aircraft and who, on
selected flights, accompany the plane in the air.
To date there has not been a skyjacking attempted on a flight where customs
security officers have conducted a predeparture search. We have detained 55,000
potentially lethal weapons and made 2,072 arrests on the ground for possession
of illegal weapons, immigration violations, transport of narcotics, and other
law violations. Of those arrested, 328 possessed weapons and made hijacking or
sabotage threats and 738 possessed narcotics, marijuana, or dangerous drugs.
In the air,.CSO's have made 40 arrests for actions endangering crew, passengers, or the aircraft, including 17 in response to threats of hijacking and 23
for other causes involving air safety.
Every one of us working on this complex problem knows that a great deal
still has to be done. In the recent ICAO conference in Washington, the United
States took the lead in'formulating an enforcement convention under which subscribing nations would take firni and prompt action to effectively prevent air
piracy.
The President's multidimensional war on drug abuse
The President's worldwide war against drug abuse is succeeding.^
*
*
*
*
*
*
«
As a result of this mtultifaceted effort, we have already stemmed the tide and
seen a reduction in the supply of heroin in the United States, particularly on the
east coast.
It is, therefore, not surprising to note that the National Shomrim Society, the
police organization whose members are of the Jewish faith, has voted President
Nixon its Man of the Year Award!
"A full generation of peace . . . a new prosperity without war"
The President's leadership in combatting criminal violence, by individuals or
organized conspiracies, is one aspect of his overall objective of bringing about
world peace.
Implicit ih everything the President does is his dedicated pursuit of peace. His
objective is a new prosperity without war, a full generation of peace for the
United States and the world.
Indeed, his achievements in foreign policy,; supplemented by the beneflts flowing
from his new economic policy and hii^^ ; "-^'ons in the area of law enforcement,
will lead historians of this century to refer to Richard Nixon as the Peace
President.
Let me tell you why:
1. He is bringing to an end the war in Vietnam in a manner that will ensure a
lasting peace. Since he has taken oflSce, the U.S. troop level in that country has
dropped from 542,000 in January 1969 to 36,500 as of today; this means that our
direct involvement in Vietnam has been reduced by 93 percent. The casualty rate
has also dropped dramatically, with zero deaths last week.
2. The President made a historic journey to Peking last May which began a
dialogue with a government that represents nearly one-quarter of the world's
population. Already trade agreements have been reached with the Republic of
China and many other accords to further world peace are just over the horizon.
3. Mr. Nixon was the flrst American President to visit Moscow. This journey
opened up new lines of communication with the other superpower, damping the
flres of the cold war.
4. The Moscow trip achieved an arms race accord. The Senate has approved
a treaty limiting defensive weapon sites in each country. In the immediate
future the Congress will send to the President a resolution authorizing approval
of the U.S.-Soviet interim agreement limiting offensive nuclear weapons.
5. During the Nixon administration, the.four powers were able to reach an
historic agreement on the status of Berlin, a potential tinderbox for 25 years.
6. Through President Nixon's initiative and leadership, the Middle East has
enjoyed over 2 years of cease-flre. It was the President's position that before any
agreement could be reached between the two sides, a cease-flre must prevail.
1 See exhibit 31.
EXHIBITS
325
Recognizing that Israeli strength must be maintained until peace is achieved,
the President has provided for economic and military assistance, both grant and
credit, to Israel amounting to over $600 million in flscal year 1971, over $500
million in flscal year 1972, and over $500 million projected for flscal year 1973.
These are not pious promises but solid contributions. We are determined not
to permit the military balance to tip against Israel...
Foreign Minister Abba Bban and other Israeli leaders have declared that
President Nixon has "impressively fulfllled his promises to Israel."
7. Integral to the President's objective of world peace is economic prosperity.
His new economic policy, announced on August 15, 1971, marked a watershed in
world history, not just U.S. history. Because of the new economic policy we are
now achieving a peacetime economy with real growth and vitality, as well as
reasonable price stability. Economists of various schools of thought are as close
to consensus as they have ever been that a major upswing in the economy without excessive inflation is now taking place.
What does this new era signify for the United States and the rest of the
trading world? Essentially, it means we are well on the road to creating an international economic system which, on the basis of mutual advantage, will stimulate
international trade and freer competition, draw nations and people together,
and thus form the economic basis for a lasting peace with prosperity.
"A full generation of peace . . . a new prosperity without war" sums up the
guiding principle of President Nixon's administration. This may well be a
modern-day application of the immortal words of that revered teacher, Hillel,
who, when asked to condense the "Torah" into the briefest possible form, replied:
"What is hateful to thee. Never do to thy fellow man."
Exhibit 34.—Excerpts from remarks of Assistant Secretary Rossides, October 17,1972, before the 7^th annual conference of the International Association
of Chiefs of Police, Inc., Salt Lake City, Utah
It is a pleasure to be with you at the 79th annual conference on the International Association of Chiefs of Police.
Your distinguished professional society, which includes members from over 60
nations, is the kind of cooperative effort needed to meet the threat of modem
crime. As you well know, criminals today have as little respect for international
boundaries as they have for the rule of law. Therefore, the fight against crime
is truly a global responsibility for the law enforcement elements of every civilized nation in the world community.
I would like to stress three themes this morning:
First, the successes of President Nixon's worldwide war on the drug
trafficker;
Second, the need for an ongoing cooperative effort between Federal law
enforcement agencies and State and local police—the first line of internal defense
against criminal forces; and,
-•
Third, the professionalism of the peace officer.
The President's multidimensional war on drug abuse
Last Sunday began the third annual "National Drug Abuse Prevention Week."
In President Nixon's proclamation launching the event, he made this
observation:
The enormous human tragedy of drug abuse gives pause to our customary
gesture of setting aside 7 days a year for intensified concern with this or
that social problem. More than a problem, narcotics and dangerous drugs
are a grave emergency threatening each and all of us.
Drug Abuse Prevention Week, therefore, is but one more occasion to redouble our war against this enemy, to take stock of large victories won in a
short time, identify areas of continuing concern, and target more resources
on them.
I am pleased to report that President Nixon's antinarcotics drive is succeeding.^
1 See exhibit 31.
326
197 3 REPORT OF THE SECRETARY OF THE TREASURY
The need for ongoing cooperative efforts between Federal and local law
enforcement agencies
The Treasury Department deeply appreciates your assistance in the fight
against illegal narcotics.
I would like to report to you the results of one of these programs—the Treasuary/IRS narcotics trafficker program—which would not have attained the
remarkable success without your dedicated aid. In the 15 months that we have
worked on this program, we have selected l,Oll individuals as major targets for
tax investigation.
The word for the drug traffickers is to get out of this illegal business or face up
to intensive tax investigation. The warning should be spread in every city and
town in the United States that this program is institutionalized and is working.
Everyone in this illegal trade should know full well that he will be subject to
tough tax scrutiny and possible criminal penalties.
This program is one reason we have the drug traffickers taking steps backward and all of us must now redouble the pressure on them.
Treasury has coordinated this tax program with State and local police, whose
more than 350,000 officers constitute the first line of defense against the internal
traffic in narcotics. The cooperation of State and local police in identifying key
traffickers, in furnishing intelligence information on them, and, in several cases,
in actually working with our agents on some phases of the investigations, has
been an invaluable contribution to this program. A substantial number of the
major targets under tax investigation were referred to us by State and local
police.
The police have also been of great assistance to our program by contacting
IRS whenever, in the course of arrests or searches, they have found substantial cash or other assets in the possession of persons involved in the drug traffic.
In this manner, we have been able to remove considerable sums of cash from the
drug traffic by applying it to taxes and penalties owed. This aspect of our program could not be effective without the assistance of the local police.
Law enforcement cooperation is a two-way street
The Treasury Department, with its diverse law enforcement missions, has the
second largest law enforcement arm in the Federal Government—with over 6,000
Treasury agents. These agents are in four operating agencies of the Department:
The U.S. Secret Service, the Bureau of Customs, the Internal Revenue Service,
and the Bureau of Alcohol, Tobacco and Firearms. Each of these agencies has
a specialized mission. Our policy is to assist and complement, but never to usurp,
the job the local police must ultimately do.
The Treasury Department assists your law enforcement agencies with a multitude of resources and capabilities, including our advanced forensic sciences
techniques, which are primarily, though not exclusively, carried out by the ATF
and Customs Bureaus, and the facilities of the International Criminal Police
Organization (INTERPOL).
Should the occasion arise, INTERPOL can provide you with the means and
capability of pursuing a criminal who flees the United States, as well as obtaining vital information and evidence in a foreign country thousands of miles away.
The national central bureau of INTERPOL, operated by the Treasury Department in Washington, can draw upon the police resources of 114 countries located
on every continent of the globe. With the exception of the Soviet Union, Communist China, and their satellites, every major country in the world is a participating member.
INTERPOL serves any police or investigative agency, whether it be local,
county. State, or Federal, having a requirement for investigation, from a routine
criminal name check to a full criminal investigation leading to the gathering of
evidence and subsequent arrests and extradition of the fugitive.
The Treasury Department pays the annual membership dues and maintains and
staffs the national central bureau. So no charges are assessed local police departments for investigations, telex, cable or radio messages. Thus, you, the local
Chiefs of Police, are completely free to utilize INTERPOL'S services.
The professionalism of the peace officer
Now let me give you my appreciation of the work being done by the flrst line
of defense—^the local police officer. There is no question that police officers in this
country are doing an outstanding job of maintaining the public safety and cur-
EXHIBITS
327
tailing the criminal element, while simultaneously respecting the substantive and
procedural civil rights of all our citizens.
I n fact, the role of the policeman is t h a t of a peace officer and we should s t a r t
using t h a t more desciiptive title.
I w a s in Miami Beach last August a n d personally witnessed some of the confrontations t h a t t h e officers of Chief Rocky Pomerance h a d with the various
protestors. T h e Miami Beach police did a magniflcent job in preventing much of
the potential violence t h a t could have m a r r e d the conventions there. They behaved with marked restraint. Only after some of t h e protestors interfered with
t h e rights of law-abiding citizens and delegates were they arrested—and then
with moderate force.
The police force in a country is an essential element not only for the safeguarding of the rights of the citizens, but also for ensuring the minimal stability needed for any system of representative government to progress in a n orderly
fashion. I n fact, on a number of occasions the most anarchistic protestors have
found the protection of t h e peace officer necessary to ensure their very ability to
protest!
Yet in t h e United States prior to this administration the policeman h a d been
t h e forgotten man. Leaders spoke a n d wrote a great deal about almost every
other institution but very little about the essential and p a r a m o u n t role of our
law enforcement officials. President Nixon h a s changed that. H e set the tone of
leadership a n d support for law enforcement a s a n integral p a r t of the rule of
law.
If l a w enforcement is to continue to be regarded as an honored profession, then
the challenge to every law enforcement officer is to be a professional—properly
trained, judicious in application of his enforcement tools, and with personal
integrity and character.
Your own organization, the lACP, works toward these goals because its program is on a professional level, designed to strengthen t h e capability of peace
officers to m a i n t a i n public order with a minimum use of force and, a t t h e same
time, to improve t h e i r own public image.
I know t h a t these a r e t h e objectives of your association and of all of you here
today.
F o r his p a r t . President Nixon will continue to do whatever his administration can to help your forces m a i n t a i n peak effectiveness, a s together we combat
the menace t h a t drug traffickers and other criminals represent for America.
I n his speech last Sunday, t h e President made a categorical commitment:
. . . it is our local police forces who a r e the real frontline soldiers in t h e
w a r against crime. As President over t h e p a s t 4 years, I have given all-out
backing to our peace officers in t h e i r dedicated effort to make all of us safer
on t h e streets a n d more secure in our homes, and I shall continue to do so.
Exhibit 35.—Press release, November 17, 1972, announcing exemptions and
i n t e r p r e t a t i o n s relating to t h e r e g u l a t i o n s issued u n d e r Public Law 91-508,
t h e Currency and Foreign T r a n s a c t i o n s Reporting Act
Exemptions a n d interpretations relating to t h e regulations implementing
Public L a w 91-508, the Currency and Foreign Transactions Reporting Act,
were announced today by Assistant Secretary of the Treasury Eugene T. Rossides. This material, which will be published shortly in the F e d e r a l Register,
includes a n exemption from t h e requirement t h a t a t a x p a y e r identification
number be obtained by banks with respect to Christmas Club accounts on which
the a n n u a l interest is not anticipated to exceed $10.00.
A copy of t h e notice follows:
INTERPRETATION OF AND E X E M P T I O N S F R O M T H E TREASURY DEPARTMENT
REGULATIONS ISSUED T O I M P L E M E N T T I T L E S I AND I I OF P U B L I C L A W 91-508
Introduction
Advice h a s been requested by persons subject to these regulations concerning
t h e conclusions of t h e T r e a s u r y D e p a r t m e n t on t h e application of t h e l a w and
t h e regulations, and requests have been received for exemptions from various
requirements of the regulations which were published on April 5, 1970, 37 F.R.
328
1973 REIPORT OF THE SECRETARY OF THE TREASURY
6912 (1972), pursuant to the authority contained in Section 103.45 of the regulations. Interpretations made and exemptions granted up to this time are set
forth below. Additional interpretations and. exemptions will appear from time
to time as the occasion warrants. Identifying details and confidential information
have been deleted to prevent unwarranted invasions of privacy and to comply
with statutory requirements concerning disclosure of information obtained
from members of the public.
Sec. 103.11 Exemption from.
1. The definition of a bank as appears in Sec. 103.11(a) (7) was not intended
to include a company which is wholly engaged in financing inventories and retail
installment sales of automobile dealers. Such a company requested and was
granted an exemption from the recordkeeping and reporting requirements of
Part 103, Title 31, Code of Federal Regulations. However, if said company is
a "financial institution" within the meaning of Sec. 103.11 (other than as a
"bank") it would, of course, have to comply with these provisions of this part
relating to financial institutions other than banks.
Sec. 103.23 Interpretations.
1. Unless a transaction in foreign currency for clients who are nonresidents of
the United States and performed through brokers outside the U.S. involves the
physical transportation, mailing or shipment of currency, bearer investment
secui'ities or negotiable instruments in bearer form into or out of the U.S. in
amounts exceeding $5,000 on any one occasion, there is no duty to report the
transfer. A transfer of funds by means of bank check, bank draft, or wire transfer need not be reported.
. 2. A bank is not required to prepare Form 4790 if the bank receives such items
over the counter from a person who may haye transported them into the United
States or if the bank delivers such items over the counter to a person who may
transport them out of the United States. However, if a bank knows that such
items have been transported into the country, it must file a report on Form 4790
if a complete and truthful report has not been filed by the customer.
3. Sec. 103.23(c) provides that a bank is not required to report currency or
other monetary instruments mailed or shipped through the postal service or by
common carrier. When a trust company is acting as a corporate executor or corporate trustee, no report need be filed with respect to currency or bearer monetary instruments mailed or shipped through the postal service.
4. In the case where a trust company acts as custodian for individual executors
and trustees who maintain Custody Accounts for those estates and trusts where
they are named fiduciary, it will be necessary to file a Form 4790, Report of International Transportation of Currency or Monetary Instruments, under the circumstances described in Sec. 103.23(a).
5. A private courier service does not qualify as a "common carrier" under the
regulations.
Sec. 103.23 Exemptions from.
1. A bank whose employees physically transport currency across the Canadian
border on a weekly basis for deposit with a Canadian bank which is only a few
hundred yards away requested an exemption from the requirements of Sec.
103.23. Due to the special circumstances, the Department granted the request
provided that an accurate record of such transfers is maintained by the bank.
2. A bank in Maine, which for a period of more than twenty years, has used
its personnel to physically transport sums of currency and checks in excess of
$5,000 to and from a bank in a contiguous Canadian town several times a month,
requested and was granted an exemption from the reporting requirements of
Sec. 103.23 due to the special circumstances involved. The Department, however,
does require the bank to maintain an accurate account of such transfers.
3. An exemption is granted to any merchant shipping company from the requirement to report the transportation into or out of the United States of currency or bearer instruments in amounts in excess of $5,000 with respect to currency or bearer instruments placed on board ship by the owner or operator in
order to provide for reasonable shipping needs. Records of such monies placed on
board are to be maintained by the shipping companies.
4. A company that transports sealed packages containing money and valuables
under written bilateral contracts for banks, brokerage houses, and security
dealers requested an exemption from the requirements of this section. Under the
EXHIBITS
329
provisions of Sec. 103.23 (c) (7), such companies are exempt from reporting
the transportation of currency or monetary instruments overland between established offices of banks or brokers or dealers in securities and foreign banks. The
company in question is further granted an exemption from reporting overland
shipments between domestic banks, brokers or security dealers and foreign persons. However, all firms engaged in international carriage of valuables by air
must continue to file with the Bureau of Customs reports of international air
shipments.
Sec. 103.33(a) Interpretation.
1. This regulation requires the keeping of records, the majority of which are
already kept by financial institutions. The typical loan application form asks
the applicant to state the purpose of the loan, so it would seem normal in the
case of each extension of credit in an amount in excess of $5,000 for the record
to contain a reference to the nature or the purpose of the loan. However, if it
is a passbook loan, for example, the entry "passbook loan" would suffice.
Sec. 103.34(a) Interpretations.
1. Any citizen residing or doing business in the United States and any citizen
of the United States who opens an account with a financial institution after
June 30, 1972, must provide that institution with his taxpayer identification
number at the time the account is opened. For individuals, the taxpayer identification number is his social security number; for corporations, partnerships, and
other entities, it is the IRS employer identification number.
Banks, savings and loan associations, building and loan associations, savings
banks, credit unions, and brokers and dealers in securities are included in this
requirement. If an account is opened in more than one individual's name, the
financial institution is required to secure and maintain the social security number of at least one individual having a financial interest in that account.
If the customer does not have a taxpayer identification number or has lost his
card and is unaware of his number, the account may be opened provided the customer (or if under eighteen years of age, his guardian) authorizes the Social
Security Administration to furnish his social security number to both the customer and the financial institution, or the customer, regardless of age, authorizes
the Internal Revenue Service to furnish his employer identification number to
both the customer and the financial institution.
With respect to accounts opened for trusts, charitable organizations, clubs
and similar entities the financial institution should secure the employer identification number of the entity. An employer identification number must be obtained
for this purpose even though an organization might not otherwise require one.
See instructions published July 6,1972 (37 F.R. 13279).
2. This requirement of a taxpayer identification number does not apply to
aliens who are ambassadors, ministers, career diplomatic or consular officers, or
to naval, military and other attaches of foreign embassies and legations, and the
members of their immediate families, nor to aliens who are accredited representatives to international organizations entitled to enjoy privileges, exemptions
and immunities as an international organization under the International Organizations Immunities Act of December 29,1945 (22 U.S.C. 288), and the members
of their immediate families.
3. In regard to determining the proper identifying number to be furnished by
accounts opened in more than one name, the bank should follow the regulations
and rulings issued by the Internal Revenue Service under Section 6109 of the
Internal Revenue Code. These rules are outlined on the back of IRS Form 3435.
However, the bank should not use Form 3435 to apply for a taxpayer identification number for a new account, but should instead use Form SS-4 or 'SS-5 .
4. The bankruptcy estate of an individual or partnership is considered as a
separate entity from the individual or partnership. However, the Treasury Department does not regard the estate of a corporation in bankruptcy as an entity
separate from the corporation. Accordingly, the trustee of a corporation in
bankruptcy should use the identification number of the corporation. Upon completion of the IRS Form SS-4 with an appropriate authorization to furnish the
Employer Identification Number to the institution, a trustee will be permitted
to make deposits. He need not wait until the Employer Identification Number is
obtained.
5. All accounts that are primarily savings or checking accounts, with the exception of mortgage escrow accounts, are deposit accounts and are subject to the
requirements of this section.
330
1973 REPORT OF THE SECRETARY OF THE TREASURY
6. Where a person purchases a money order directly from the bank or through
an agent of the bank and the bank maintains only a consolidated account with no
separate record by customer, no deposit account has been opened by the customer
and only those recordkeeping requirements normally applicable to cashiers'
checks would apply.
7. Where a person re-opens a checking account after June 30, 1972, the bank is
required to secure the social security number just as with a new account, and
the same would apply to the automatic extension of a certificate of deposit.
8. A certificate of deposit sold in bearer form is an interest-bearing form of
commercial paper, which need not be purchased from the bank, but is available
in the money market. It is not a deposit account as that term is used in the regulations and no identification number need be obtained. In the case of registered
certificates of deposit, the taxpayer identification number must be secured.
9. A credit card program operated by a bank does not involve a deposit account
and is not, therefore, subject to the requirements of this section.
10. Section 103.34(a) exempts nonresident aliens not doing business in the
United States from the requirement to furnish the bank with a taxpayer identification number. If an alien asserts that he is neither residing nor doing business
in the United States a bank therefore may open the account without obtaining
a taxpayer identification number, provided that it secures a statement from the
person to that effect and provided the bank is unaware of any facts inconsistent
with that statement. Normal banking practices for ascertaining identity and
location of customers should be followed. All nonresident aliens in the United
States should have one of the following U.S. Immigration and Naturalization
Service forms:
1. Form 1-151 (Alien Registration Receipt Card)
2. Form 1-185 (Nonresident Alien Canadian Border Crossing Card)
3. Form 1-186 (Nonresident Alien Mexican Border Crossing Card)
4. Form 1-94 (Arrival-Departure Record)
5. Form I-95A (Alien Crewman's Landing Permit)
6. Form 1-184 (Alien Crewman's Landing Permit and Identification Card)
The bank should maintain a record of the applicant's country of citizenship and
the number assigned him on his INS form or other official document issued by
the applicant's government.
11. In regard to a business firm opening an account in the name of employees
who are foreign nationals not residing in the United States, the bank may open
the account for them without securing a taxpayer identification number pursuant
to this section provided that the bank is satisfied that the persons are nonresident aliens not doing business in the United States. The bank should verify
the identity and whereabouts of such persons and require the business firm to
supply for each such account a statement to the effect that the employee is a
nonresident alien not doing business in the United States.
12. It is acknowledged that the "Old Order Amish" people do not accept social
security benefits or pay self-employment tax. In 1965, the Internal Revenue Code
was amended to provide an exemption from self-employment tax if a person can
show that he is a member of a recognized religious sect which follows the practice of making reasonable provisions for its dependent members. While the Amish
people are opposed to and exempted from the social security program, they do
pay their Federal taxes. A bank should explain to its Amish customers that the
number required to open any account is merely a taxpayer identification number
and in no way obligates such person to the social security system. However, if a
depositor still objects on religious grounds to applying for a social security number, Form SS-4, Application for an Employer Identification Number, can be used
instead.
13. If a new business has applied for an employer identification number, but
has not yet received it when it seeks to open a bank account, the bank may open
the account if it secures a completed Form SS-4 in accordance with the instructions issued by Treasury. The completed Form should not be sent to IRS but
simply retained as evidence that an application for a number is pending. Since
in the above instance the bank will not automatically receive the number, it must
follow up with the customer to insure that the number is furnished within a
reasonable time. Generally speaking, the Internal Revenue Service furnishes an
employer identification number to an applicant within 45 days.
Sec. 103.34(a) Exemptions from.
1. An exemption from the requirements of this subsection is granted with
respect to all accounts opened as part of a school savings program for school
. EXHIBITS
331
savers up to eighteen years of age, provided that the amount of interest earned
on such accounts is $10 or less. Children over eighteen years of age may apply
for a social security number without parental authorization and payments of
interest aggregating $10 or more are required by Section 6049, Internal Revenue
Code of 1954, to be reported on Form 1099, together with the depositor's social
security number. Banks having a school savings program should set up appropriate procedures to obtain numbers for accounts held by persons aged eighteen
years or older and for all accounts earning interest of $10 or more annually.
2. An exemption from the requirements of this subsection is granted with
respect to Christmas Club accounts, provided the annual interest is not anticipated to exceed $10.00.
Section 103.34(b) Interpretations.
1. If there is no check or draft corresponding to a pre-authorized paper entry,
it will be sufficient to maintain the customer's authorization to charge his account
and the memorandum,list of entries for a period of five years.
2. Insurance companies commonly issue drafts in settlement of claims or for
other purposes which are payable through a particular bank, but which are
drawn on the company itself and not on a deposit account. However, drafts which
are issued by insurance companies are treated as checks throughout the financial
system, despite the fact that they are not drawn on a deposit account, and are,
therefore, subject to the requirements of Sec. 103.34(b) (3). If these drafts meet
the volume and purpose requirements of this section, no copy need be retained.
If they do not meet these standards, it will be necessary for the bank to retain
a copy of the draft as required by this section and to retain the records required
by Sec. 103.34(b) (10) for a period of two years.
3. Clean drafts, including "cash items drafts," are drawn "payable through"
or "payable at" a particular bank. The bank receives them and presents them to
its customer who reviews them and pays for those it accepts. The majority of
such items should be eligible for exemption under Sec. 103.34(b) (3), those which
are not eligible should be microfilmed or copied before they are released to the
customer.
4. Sec. 103.34(b) (10) does not require a receiving bank to copy or be able to
produce an item drawn on another bank. Furthermore, a bank need not be able
to supply a description of a deposited check if it can trace a check through its
domestic processing system.
Sec. 103.36 Interpretation.
1. A bank must retain for a period of five years checks drawn on itself. However, the proof and entry run tapes, which allow a bank to reconstruct an account,
need only be retained for a period of two years.
Sec. 103.37 Interpretation.
1. The term "temporarily" used in this section should be interpreted as a vacation or business assignment expected to last less than six months.
Sec. 103.42 Interpretation.
1. This section provides that nothing contained herein shall require or authorize the microfilming or other reproduction of currency or obligation or security
of the United States as defined in 18 U.S.C. 8 or any obligation or security of
any foreign government. However, government checks may be microfilmed, but
not copied, for the purpose of tracing or identifying a transaction.
Sec. 103.45 Exemptions.
1. A bank, whose employees physically transport currency across the Canadian
border on a weekly basis for deposit with a Canadian bank which is only a few
hundred yards away, requested an exemption from the requirements of Sec. 103.23.
Due to the special circumstances, the Department granted the request provided
that an accurate record of such transfers is maintained by the bank.
2. A bank in Maine, which for a period of more than twenty years has used
its personnel to physically transport sums of currency and checks in excess of
$5,0(X) to and from a bank in a contiguous Canadian town several times a month,
requested and was granted an exemption from the reporting requirements of
Sec. 103.23 due to the special circumstances involved. The Department, however,
does require the bank to maintain an accurate record of such transfers.
3. An exemption is granted to any merchant shipping company from the requirement to report the transportation into or out of the United States of cur506-171—73
24
332
1973 REPORT OF THE SECRETARY OF THE TREASURY
rency or bearer instruments i n amounts in excess of $5,000 with respect to currency or bearer instruments placed on board ship by t h e owner or operator in
order to provide for reasonable shipping needs. Records of such monies placed
on board a r e to be maintained by the shipping companies.
4. A company wholly engaged in financing inventories a n d retail Installment
sales of automobile dealers which came within t h e definition of a "bank" in
Sec. 103.11(a)(7) requested a n d w a s granted a n exemption from t h e recordkeeping a n d reporting requirements of P a r t 103, Title 31, Code of Federal Regulations. However, if said company is a "financial institution" within t h e meaning of Sec. 103.11 (other t h a t a s a "bank") i t would, of course, h a v e to comply
with those provisions of this p a r t relating to financial institutions other than
banks.
5. An exemption from t h e requirements of Sec. 103.34(a) is granted with respect t o all accounts opened a s p a r t of a school savings program for school savers
up to eighteen years of age, provided t h a t t h e amount of interest earned on
such accounts is $10 or less. Children over eighteen years of age may apply for
a social security number without p a r e n t a l authorization a n d payments of interest aggregating $10 or more a r e required by Section 6049, I n t e r n a l Revenue
Code of 1954, t o be reported on F o r m 1099, together with t h e depositor's social
security number. B a n k s having a school sayings program should s e t u p approp r i a t e procedures to obtain numbers for accounts held by persons aged eighteen
years or older a n d for all accounts earning interest of $10 or more annually.
6. An exemption from t h e provisions of P a r t 103, Title 31, Code of F e d e r a l
Regulations, is granted to those persons who a r e registered with t h e Securities
and Exchange Commission a s broker-dealers solely in order to offer and sell variable a n n u i t y contracts issued by life insurance companies. However, if a person
so registered a t a n y time offers a n d sells other types of securities in addition
to variable annuity contracts, t h i s exemption does n o t apply to any p a r t of h i s
business. This exemption will in no w a y affect recordkeeping regulations or
other requirements promulgated under t h e Securities and Exchange Act of 1934,
as amended.
7. An exemption from t h e requirements of Sec. 103.34(a) is g r a n t e d with respect to Christmas Club accounts, provided the a n n u a l interest is not anticipated
to exceed $10.00.
(Signed)
EUGIDNE T . ROSSIDES,
Assistant Seci-etary for Enforcement,
Tariff and T r a d e Affairs, and Opei-ations.
Exhibit 36.—Amendments, effective J a n u a r y 17, 1973, t o t h e regulations on
financial recordkeeping and r e p o r t i n g of currency and foreign t r a n s a c t i o n s
Title 31—MONEY AND F I N A N C E : T R E A S U R Y
C h a p t e r I—Monetary Offices, D e p a r t m e n t of t h e T r e a s u r y
P A R T 103—FINANCIAL R E C O R D K E E P I N G AND R E P O R T I N G O F
CURRENCY AND F O R E I G N TRANSACTIONS
On October 28, 1972, a notice of proppsed rule making containing proposed
amendments to various provisions of t h i s Part, was published in the F e d e r a l Register (37 F.R. 23114 (1972)). I n accordance with t h e notice, interested persons
were afforded a n opportunity to submit written comments. After consideration
of all such relevant m a t t e r s a s were presented by interested parties regarding
the rules proposed, t h e following amendments a r e hereby adopted effective
J a n u a r y 17,1973.
(Signed)
SAMUEL R. PIERCE, Jr.,
General Counsel.
(Signed)
E U G E N E T . ROSSIDES,
Assistant Secretary.
PREAMBLE
T h e key provisions of the proposal were essentially as follows:
1. Eliminate t h e requirement t h a t banks keep microfilm copies of checks
d r a w n for $100 or less.
EXHIBITS
333
2. Require that information made available to other departments or agencies
under this part shall be received in confidence and not disclosed except for official purposes.
3. State specifically that these regulations do not authorize the Secretary or
any other person to inspect or review financial records maintained under this
part.
4. Eliminate operators of credit card systems from the definition of a financial institution subject to this part.
5. Delete a phrase which allows the Secretary by written order or authorization to impose additional record-keeping or reporting requirements.
After careful consideration of the comments received, it has been decided to
exempt checks of $100 or less from the copying requirement.
AVith regard to disclosure of information, the proposed change is intended to
ensure that information resulting from the recordkeeping and reporting requirements will be made available to other departments or agencies of, the United
States solely for the purposes intended. Various comments suggested that the
proposed language did not go far enough, and that the change should forbid disclosure to any other department or agency. Such a restriction would mean that
cases involving information obtained from this Department could not be referred
to the Department of Justice for prosecution until the Secretary gave his approval. This would simply cause further delay without serving any worthwhile
purpose. Every federal department Or agency has sanctions against the unauthorized disclosure of official information, and those sanctions have proved effective.
Accordingly, the proposed language has been adopted unchanged.
Certain of the comments on the proposed regulation dealing with access to records maintained under this part suggested that the proposal is inadequate to protect the rights of bank customers; however, the proposal is intended merely to
point out that these regulations do not authorize access to customer records, but
that access to such records is governed by other applicable law. The supervisory
agencies which have been given responsibility for assuring compliance with the
regulations may, of course, have access to these records as necessary to assure
that they are being kept as required.
The proposal to eliminate operators of credit card systems from the definition of
a financial institution for purposes of this part met with general approval, except
that some doubt arose as to its effect upon the operation of bank credit card
systems. Since it was agreed that all credit card operators, including banks,
should be removed from the scope of the regulations, the definition of a financial
institution has been amended to exclude bank credit card systems, as well as operators of credit card systems, from the definition. .
Comments on the proposed deletion of the phrase which allows the Secretary
by written order or authorization to impose additional recordkeeping or reporting
requirements were favorable to the proposal; however, one comment suggested
that the phrase "or otherwise modify" the requirements of this part also should be
deleted. This suggestion is consistent with the intent of the proposed amendment,
and it has been adopted.
AMENDMENTS
Part 103 of Title 31 of the Code of Federal Regulations is amended as follows :
Subpart A is amended by deleting from § 103.11 subparagraph (5) of the definition of a financial institution, renumbering the following subparagraphs so that
the definition of financial institutions will read as follows:
''Financial institution. Each agency, branch or office within the United States
of any person doing business in one or more of the capacities listed below :
(1) A bank (except bank credit card systems) ;
(2) A broker or dealer in securities ;
(3) A person who engages as a business in dealing in or exchanging currency as, for example, a dealer in foreign exchange or a person engaged primarily
in the cashing of checks ;
.;
(4) A person who engages as a business in the issuing, selling or redeeming of travelers' checks, money orders, or similar instruments, except one who
does so as a selling agent exclusively or as an incidental part of another business ;
(5) A licensed transmitter of funds, or other person engaged in the business of transmitting funds abroad for others."
Subpart C is amended by amending § 103.34 to read as follows:
"§ 103.34 Additional Records To Be Made and Retained by Banks
(a) (1) With respect to each deposit or share account opened with a bank
after June 30,1972, by a person residing or doing business in the United States or
334
19 73 REPORT OF THE SECRETARY OF THE TREAStJRY
by a citizen of the United States, such bank shall, within forty-five days from
the date such an account is opened, secure and maintain a record of the taxpayer
identification number of the person maintaining the account; or in the case of an
account of one or more individuals, such bank shall secure and maintain a record
of the social security number of an individual having a financial interest in that
account.
In the event that a bank has been unable to secure the identification required
herein with respect to an account within the 45-day period specified, it shall
nevertheless not be deemed to be in violation of this section if (i) it has made a
reasonable effort to secure such identification, and (ii) it maintains a list containing the names, addresses, and account numbers of those persons from whom it
has been unable to secure such identification, and makes the names, addresses,
and account numbers of those persons available to the Secretary as directed by
him.
(2) The 45-day period provided for in paragraph (1) shall be extended
where the.person opening the account has applied for a taxpayer identification or
social security number on Form SS-^ or SS-5, until such time as the person maintaining the account has had a reasonable opportunity to secure such number and
furnish it to the bank.
(3) A taxpayer identification number for a deposit or share account required under subsection (1) need not be secured in the following instances: (i)
accounts for public funds opened by agencies and instrumentalities of Federal,
State, local or foreign governments, (ii) accounts for aliens who are (a) ambassadors, ministers, career diplomatic or consular officers, or (b) naval, military or
other attaches of foreign embassies and legations, and for the members of their
immediate families, (iii) accounts for aliens who are accredited representatives
to international organizations which are entitled to enjoy privileges, exemptions
and immunities as an international organization under the International Organization Immunities Act of December 29, 1945 (22 U.S.C. sec. 288), and for the
members of their immediate families, (iv) aliens temporarily residing in the
United States for a period not to exceed 180 days, (v) aliens not engaged in a
trade or business in the United States who are attending a recognized college or
university or any training program, supervised or conducted by an agency of the
Federal Government, (vi) unincorporated subordinate units of a tax exempt central organization which are covered by a group exemption letter, (vii) interest
bearing accounts maintained by a person under 18 years of age opened as part
of a school thrift savings program, provided the annual interest does not exceed
$10, and (viii) Christmas Club, vacation club and similar installment savings
programs provided the annual interest does not exceed $10. In instances (vii) and
(viii), the bank shall, within fifteen days following the end of any calendar year
in. which the interest accrued in that year exceeds $10, use its best efforts to
secure and maintain the appropriate taxpayer identification number or application
form therefor.
(4) The rules and regulations issued by the Internal Revenue Service
under Section 6109 of the Internal Revenue Code of 1954 shall determine what
constitutes a taxpayer identification number and whose number shall be obtained
in the case of an account maintained by one or more persons.
(b) Each bank shall, in addition, retain either the original or a microfilm
or other copy or reproduction of each of the following:
(1) Each document granting signature authority over each deposit or
share account;
(2) Each statement, ledger card or other record on each deppsit or share
account, showing each transaction in, or with respect to, that account;
(3) Each check, clean draft, or money order drawn on the bank or issued
and payable by it, except those drawn for $100 or less or those drawn on accounts
which can be expected to have drawn on them an average of at least 100 checks
per month over the calendar year or on each occasion on which such checks
are issued, and which are (i) dividend checks, (ii) payroll checks, (iii) employee benefit checks, (iv) insurance claim checks, (v) medical benefit checks,
(vi) checks drawn on government agency accounts, (vii) checks drawn by
brokers or dealers in securities, (viii) checks drawn on fiduciary accounts, (ix)
checks drawn on other financial institutions, or (x) pension or annuity checks;
(4) Each item in excess of $100 (other than bank charges or periodic
charges made pursuant to agreement with the customer), comprising a debit
EXHIBITS
335
to a customer's deposit or share account, not required to be kept, and not
specifically exempted, under subparagraph (b) (3) of this section ;
(5) Each item, including checks, drafts, or transfers of credit, of more
than $10,000 remitted or transferred to a person, account or place outside the
United States;
(6) A record of each remittance or transfer of funds, or of currency,
other monetary instruments, checks, investment securities, or credit, of more
than $10,000 to a person, account or place outside the United States;
(7) Each check or draft in an amount in excess of $10,000 drawn on or
issued by a foreign bank, purchased, received for credit or collection, or otherwise acquired by the bank;
(8) Each item, including checks, drafts or transfers of credit, of more
than $10,000 received directly and not through a domestic financial institution,
by letter, cable or any other means, from a bank, broker or dealer in foreign
exchange outside the United States;
(9) A record of each receipt of currency, other monetary instruments,
investment securities or checks, and of each transfer of funds or credit, of
more than $10,000 received on any one occasion directly and not through a
domestic financial institution, from a bank, broker or dealer in foreign exchange
outside the United States; and
(10) Records prepared or received by a bank in the.ordinary course of
business, which would be needed to reconstruct a demand deposit account and
to trace a check in excess of $100 deposited in such account through its domestic
processing system or to supply a description of a deposited check in excess of
$100. This subparagraph shall be applicable only with respect to demand
deposits."
Subpart C is further amended by amending § 103.35 by deleting "paragraph
(1)" in subparagraph ( a ) ( 2 ) , and substituting therefor the words "subparagraph (a) (1) of this section" ; and by deleting "subsection (1)" in subparagraph
( a ) ( 3 ) , and substituting therefor the words "subparagraph (a)(1) of this
section."
Subpart D is amended by amending § 103.43 to read as follows:
"§ 103.43 Availability of Information
The Secretary may make any information set forth in any report received
pursuant to this part available to any other department or agency of the United
States upon the request of the head of such department or agency, made in
writing and stating the particular information desired, the criminal, tax or
regulatory investigation or proceeding in connection with which the information is sought and the official need therefor. Any information made available
under this section to other departments or agencies of the United States shall
be received by them in confidence, and shall not be disclosed to any person
except for official purposes relating to the investigation or proceeding in connection with which the information is sought."
Subpart D is further amended by amending § 103.45 to read as follows:
% 103.45 Exceptions, Exemptions, and Reports
(a) The Secretary, in his sole discretion, may by written order or authorization make exceptions to or grant exemptions from the requirements of this
part. Such exceptions or exemptions may be conditional or unconditional, may
apply to particular persons or to classes of persons, and may apply to particular
transactions or classes of transactions. They shall, however, be applicable only
as expressly stated in the order of authorization, and they shall be revocable
in the sole discretion of the Secretary.
(b) The Secretary shall have authority to further define all terms used
herein."
Subpart D is further amended by adding a new § 103.51 as follows:
"§ 103.51 Access to Records
Except as provided in 103.34(a) (1) and 103.35(a) (1) of this part, and except
for the purpose of assuring compliance with the recordkeeping and reporting
requirements of this part, this part does not authorize the Secretary or any
other person to inspect or review the records required to be maintained by subpart
C hereof. Other inspection, review or access to such records is governed by
other applicable law."
336
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 37.—Excerpt from remarks by Assistant Secretary Morgan, May 21,
1973, before the Los Angeles Air Cargo Association, Los Angeles, Calif., on
"International Trade ih the Years Ahead"
The past, the present, and the future
The. Uni ted States today is at a crossroads in its economic relations with the
rest of the world. Twenty-five years ago we decided, in our own interest, to
contribute our wealth, influence, and energy to help our weakened allies, as
well as our former enemies, gain the economic strength they so desperately
needed. We did so in order to achieve a more secure and more prosperous world
for all.
At that time the United States was the center of economic power in the world.
Today, economic power has become polycentric. The Common Market, not the
United States, is now the world's largest trading unit. Japan, through enormous
effort and spectacular growth, has become a strong and still-growing force in the
world economy. And other countries throughout the world are playing increasingly stronger roles.
Along with this growth, a number of problems have developed. The basic
premise of a dominant U.S. economy which underlay international trade and
monetary arrangements built up with considerable effort in the General Agreement on Tariffs and Trade (GATT), the International Monetary Fund, and
similar organizations is no longer valid. Basic reforms of the rules are needed.
Furthermore, restrictions and other nontariff trade barriers continue to exist
which may have been justiflable at one time to protect weaker economies, but
which can no longer be justifled today. Worse yet, these problems have grown
in scope. And if they are allowed to continue and to increase, they will block our
efforts to achieve a more open trade society.
Too many nations have tended to regard international trade problems with a
narrow, inward philosophy, overlooking the benefits of more expansive trade
policies.
Unfair trading arrangements have put the workers of one nation at a disadvantage with those of another. A reluctance to remove restrictions has limited
the principles of an open world economy. These are the types of things we seek
to eliminate.
The upcoming trade and monetary negotiations will provide an opportunity for
the United States and its trading partners to strike a new posture in international economic relations. To achieve this, we must restructure the entire international economic system, including its monetary, investment, and trade sectors.
This is the challenge which lies ahead.
The Trade Reform Act of 1973
In the trade area, the Trade Reform Act of 1973 will provide the President with
the tools he needs to negotiate eff'ectively on behalf of American workers, businessmen, and consumers. In addition, it will update our domestic laws to take
into account new economic realities.
The major proposals of the bill are designed to provide the President with
broad, flexible authority to—
1. Negotiate the lowering of tariff barriers intrinsic to a more open and
equitable trading system.
'• .2. Deal with excessively rapid increases in imports that disrupt domestic
markets and displace American workers.
3. Deal with unfair competition against U.S. products, both at home and
abroad.
4. Manage U.S. trade policy more efficiently and use it more effectively to
meet the needs of a more balanced and effective monetary system, as well as our
balance of payments problems and to combat domestic inflation.
.5. Permit the granting of most-favored-nation treatment to countries not
now receiving it in order to take advantage of new trade opportunities.
6. Follow the lead of other developed countries in granting developing
countries generalized tariff preferences designed to enhance the contribution
trade can make f o the development of these countries.
I have heard it said that the President is seeking more authority in this bill
than has ever beeri granted previously. That statement is inaccurate. What the
President is seeking to achieve in the Trade Reform Act of 1973 is to enable
Ainerican representatives to sit at the bargaining table with the same type of
negotiating authority that our trading partners have. Foreign governments are
EXHIBITS
337
understandably reluctant to negotiate with American officials who have no ability to commit the United States to anything concrete. One of the aims of the
Trade Reform Act is to create a closer working relationship between, the legislative and executive branches which will demonstrate to all our trading partners
that the United States intends to, and will have the power to, negotiate seriously.
In order to achieve a more open and equitable trading system, we must have
the ability to encourage change and to provide incentives to other nations to alter
existing relationships which have become outmoded and inequitable. This is the
reason for the requested authority to lower tariffs, and to reduce nontariff
barriers and other restrictions on trade with the United States. We are still
the world's largest economy, and as such we are in a position to provide both
attractive incentives to the international trading community, and disincentives
when necessary. While seeking a more open world trading system, the United
States has the right to, and will strive to obtain, more equitable treatment for
American business, American labor, and the American people.
The Antidumping Act and countervailing duty laws
Among the disincentives to which I referred are the Antidumping Act, involving the acts of foreign companies, and the countervailing duty law, involving the acts of foreign governments. Both statutes are administered by my office
in the Treasury Department. These laws are designed to defend American producers and labor against unfair foreign price practices and subsidization of
exports.
For those of you who are not familiar with the statutes, let me explain what
dumping is'and what a countervailing duty is.^
4{
4t
4:
4(
<e
H:
^
Proposed amendments to Antidumping Act and countervailing duty law
The Trade Reform Act of 1973 will, if enacted, make a number of significant
changes in present procedures for administering these two statutes.
The principal change in the Antidumping Act is a requirement that all findings,
conclusions, and the rationale therefor be stated on the record. This will be helpful to American producers and importers as well as foreign manufacturers and
exporters in that they will be better able to obtain case-by-case guidance as to
what constitutes dumping. The statute also sets time limits for the completion
of Treasury antidumping investigations—9 months in the normal case and 12
months for more complex decisions. Although similar time limits were recently
prescribed in Treasury's revised Antidumping Regulations, this is the first time
they are being fixed by statute.
The countervailing duty law would be amended to establish a 12-month statutory time limit for reaching decisions in countervailing duty investigations. At
the present time there is no deadline. Secondly, the countervailing duty law, now
applicable only to dutiable merchandise, would be extended to cover duty-free
merchandise contingent upon a Tariff Commission determination of injury to
U.S. industry. The exemption of duty-free merchandise from existing law makes
little sense today, especially after the Kennedy Round cuts, when many items
of a competitive nature became duty free. The injury requirement in this case is
essential from the standpoint of our international obligations and would be applicable only for such time as required.
Other amendments to this law would authorize the Secretary of the Treasury
to refrain from countervailing products already subject to quantitative limitations if the Secretary considers such limitations an adequate substitute. In addition, the Secretary would be given the discretion to refrain from assessing
countervailing duties where such "action would result in a "significant detriment
to the economic interests of the United States."
Rationale of U.S. antidumping and countervailing duty policy
Because we represent the world's largest consumer market, and because of the
open access to our market traditionally allowed to foreign competition, we have
over the years become a major target for foreign governments and firms willing
to resort to subsidies and dumping as a means of underselling U.S. products
within our own borders.
A liberal trade policy can have no meaning if we do not encompass in the definition of liberal trade the concept of fair trade. I firmly believe it is a mistake to
1 See exhibit 31.
338
19 73 REPORT OF THE SECRETARY OF THE TREASURY
ever allow unfair trade practices to gain a foothold, for they are an impediment to
the open and fair trade policy of the United States. This administration is firmly
opposed to any policy which ignores the interests of American producers, American labor, and the American consumer. And American interests would be ignored
if we were to permit foreign firms to benefit either through subsidies or by resorting to dumping tactics.
Impact of recent currency realignments on dumping
The Antidumping Act is also related to the recent currency realignments and
the improved outlook for American business and labor both at home and abroad.
Let me explain how.
The objective of the international currency realignments was to provide a
better U.S. and world payments balance. We are seeking to realize a world in
which America can compete more effectively at home and abroad through a more
realistic price structure. As a result of the actions taken, American products are
more competitive at home and abroad while the prices of foreign products are
less competitive in the United States and third markets.
As I explained earlier, dumping normally occurs when merchandise is sold by
a foreign exporter to a purchaser in the United States at a lower price than in
the exporter's home market, and these sales injure U.S. industry. The recent
changes in the market rate of the dollar in relation to certain foreign currencies
have effectively increased the home market price of foreign merchandise, as expressed in dollars. Thus, sales at less than fair value may occur following the
changes in the market rate of the dollar unless foreign exporters take effective
actions to adjust prices to the exchange rate changes either by lowering them
in the home market or increasing them in the United States.
The Antidumping Act, combined with the currency realignments, thus becomes an effective incentive toward improving our balance of payments position
and making the recent currency realignments and devaluations work.
The chairman of the board of a large corporation states in a recent letter to
a senior administration official the reasons for his company's improved competi. tive position in relation to foreign electronics firms :
"The principal reasons for this dramatic turnaround were the President's insistence on a revision of the completely unfair exchange rates for the dollar, and
the Administration's insistence on investigating and proceeding against dumping
of our industry products and investigating other government's export subsidies."
This case demonstrates how recent actions of this administration are helping to
redress the U.S. international trade position.
Conclusion
We are in a period of rapid change in international trade and finance. Enormous tasks still lie ahead. New techniques of international monetary, trade, and
tax management are being evolved by the United States and other major trading
nations of the world. New international rules of fair play must be negotiated.
Through the Trade Reform Act of 1973, and the strict administration of our fair
trade laws and similar measures, this administration looks forward to a new era
of prosperity not only for the United States, but for all people everywhere.
Taxation Developments
Exhibit 38.—Statement by Under Secretary Cohen, July 21, 1972, before the
Joint Economic Committee
I am pleased to have the opportunity to appear before you today to participate
in your consideration of the Federal tax structure.
The President has stated that he will submit to the Congress for action next
year recommendations for further tax reform. Chairman Mills of the Committee on Ways and Means and Chairman Long of the Committee on Finance, as
well as numerous members of both committees, have also stated that further tax
reform legislation will be taken up next year. The Treasury is conducting a
thorough review of the tax law in preparation for this legislation.
The Tax Reform Act of 1969, on which the administration and the Congress
collaborated throughout almost the entire year 1969, was a landmark in the long
history of tax legislation. Together with the Revenue Act of 1971, it represented
a maior achievement in improving the equity and efficiency of the tax structure.
EXHIBITS
339
The President's recommendation for the low-income allowance, adopted by the
Congress in 1969 and updated in 1971, has removed from the Federal income tax
rolls substantially all citizens whose incomes are below the poverty level. For
single persons the minimum income level at which the tax applies has been
raised from $900 in 1969 to $2,050 in 1972. For a family of four it has been
raised from $3,000 in 1969 to $4,300 in 1972. These changes mark a major advance
in the equity of the income tax structure.
At the other end of the income scale, much has been said in the heat of a
political campaign year to indicate that the rich somehow manage to avoid paying income taxes. In the face of political rhetoric, it is important that we keep a
proper perspective and consider the need for further reform of the tax structure
with a calm and deliberate appraisal.
It is true that a small number of taxpayers with high adjusted gross income
showed no net taxable income on their tax returns for 1970. But if we look at
the data as a whole it is clear that persons with high adjusted gross incomes
are paying heavy Federal income taxes. The Preliminary Statistics of Income for
1970 show the following:
Adjusted gross income class
Over
Over
Over
Over
Over
$1,000,000
500,000
200,000
100,000
50,000
Total number
of returns
Number showing no tax
Number showing tax due
Average tax
paid
624
2,393
15,323
77,899
429,568
3
22
112
394
1,338
621
2,371
15,211
77,505
-428,230
$984,862
483,089
177,161
73,678
28,886
When three persons out of a group of 624 with adjusted gross income above
$1 million pay no tax, it is pertinent to inquire why this might occur. But in
maldng the inquiry, one should not lose sight of the fact that 621 of this group
paid an average tax of about $985,000, for a total of $612 million. This represented an effective tax of 46.4 percent of their adjusted gross income and 65.3
percent of their net taxable income.
Similarly, for the 15,323 with adjusted gross incomes above $200,000, the
data shows 112 persons paying no tax; but it shows that 15,211 persons paid
an average tax of $177,161, for a total of $2.7 billion. This represented an effective tax of 44.1 percent of their adjusted gross income and 59.5 percent of their
taxable income.
We should be slow to condemn a Federal income tax system that produces by
voluntary assessment these huge amounts of tax on high adjusted gross income
groups merely because a fraction of one percent of the cases report no tax due.
It is important also to note that this is preliminary data taken from returns as
filed and prior to audit by the Internal Revenue Service. A review of many of
the returns indicates that on audit taxes may be found to be due.
The Treasury Department and the Joint Committee on Internal Revenue Taxation have reviewed the returns showing no tax filed by the 112 ^ persons with
adjusted gross incomes above $200,000; and I am attaching to my statement
letters that I have written to Congressmen Conable and Reuss concerning our
analysis of the returns, together with a brief idiscussion of them^ in a speech that
I gave on April 29,1972.^ From these analyses it will be seen that—
Some of these paid high income taxes abroad, which are credited against
U.S. tax to avoid double taxation.
Some of them paid very high U.S. taxes for 1969 and paid their State income
taxes in 1970 on their high 1969 income. On the cash basis of accounting used
by most individuals, the high 1969 State income.taxes paid in 1970 exceeded
their 1970 incomes and eliminated their 1970 Federal tax liability. This is
merely a result of the cash basis of accounting and is not a recurring circumstance. '
Many of them had high deductions for interest paid. There are indications
that some of these may owe minimum tax for 1970 on audit of the returns.
1 As explained in my letters to Congressmen Conable and Reuss, a t t a c h e d as appendices
A and B hereto, examination of the r e t u r n s later showed t h a t there were 106 nontaxable
returns Involved t h a t were governed by t h e Tax Reform Act of 1969.
2 F o r t h e full text of t h e April 29, 1972, speech, see t h e 1972 A n n u a l Report, pp. 341-48.
340
1973 REPORT OF THE SECRETARY OF THE TREASURY
Moreover, the 1969 act will have the effect, starting January 1, 1972, of disallowing interest deductions that substantially exceed investment income. To
the extent that the interest paid offsets investment income, we should consider revising the definition of "adjusted gross income" to require that the
interest be deducted in computing adjusted gross income rather than being
treated as a personal deduction.
Some of them had large miscellaneous deductions claimed as business bad
debts, business litigation payments, and expenses of deriving income, which,
if they are allowed on audit, again might better be classified as reducing
adjusted gross income rather than being treated as a personal deduction. In
other words, if these deductions are properly taken as expenses of earning
business or investment income and make the persons nontaxable, those persons ought not really be classed as "high-income" persons merely because they
have high gross income and incur high expenses in earning that income,
since the income tax is properly levied only on net income.
I do not intend by these observations about the nontaxable returns to indicate
that further reform is not in order. I mean only to stress that substantially all
those with high adjusted gross income are paying heavy amounts of taxes and
that the few nontaxable cases, while requiring analysis and review, should
not distract us from a proper appraisal of the overall system.
Indeed, we should be careful to note that the changes made since January 1,
1969, have produced a significant shift in the distribution of the Federal
income tax on individuals, reducing the burden in the lower income levels and
raising it in the higher, as shown in the table below :
Effect on Individual Income Tax Liahility of Tax Reform Act of 1969, ADR and
the Revenue Aci of 1971—Full-year Effect at Calendar Year 1971 Levels of Income
Adjusted gross Income class
Tax under
1968 law 1
Tax under
1972 law
0-$3,000
......
$3,000-$5,000
$5,000-$7,000
$7,000-$10,000
$10,000-$16,000.--_
$16,000-$20,000
$20,000-$50,000
$50,000-$100,000...
$100,000 and over..
1,469
3,488
5,543
12,263
22,065
15,287
19,375
7,344
7,131
$ millions
265
1,995
4,025
10,112
19,202
13,891
18,377
7,217
7,658
Total
93,966
Change under 1972 law from
1968 law
82,743
Percent
1,204
1,493
1,518
2,151
2,863
1,396
-998
-127
-f627
-82.0
-42.8
-27.4
-17.5
-13. 0
-9.1
-5.2
-1.7
+7.4
1 Excluding surcharge.
As will be seen from this table, the income tax burden has been reduced in
the zero to $3,000 income class by 82 percent, and has been reduced in gradually
decreasing percentages in each higher income; class to the $50,000 to $100,000
level. But in the income level above $100,000 the liability has been raised 7.4
percent.
It has sometimes been charged that the tax laws and regulations since the
beginning of 1969 have favored corporations as against individuals. This is not
so. Treasury estimates show that the combined effect of changes in the law and
regulations since January 1,1969 have had the following effect:
For the four calendar years 1969-1972 they will h a v e Increased corporate income taxes by an aggregate of $4.9 billion;
Decreased individual income taxes by an aggregate of $18.9 billion; and
Decreajsed excise taxes on automobiles and telephones, mostly affecting individuals, by $3.5 billion.
For the current calendar year 1972 they will have—
Decreased corporate income taxes by $0.4 billion;
Decreased individual income taxes by $12.0 billion; and
Decreased excise taxes by $2.6 billion.
fe:^ifeiTs
341
For the l^-year span from 1969 through 1980, assuming economic growth, they
will have—
Decreased corporate income taxes by an aggregate of $8.1 billion, an average
of $0.7 billion a year;
Decreased individual income taxes by an aggregate of $140.7 billion, an average of about $11.7 billion a year; and
Decreased excise taxes by $19.7 billion, an average of about $1.6 billion a
year.
It is clear that the changes have not preferred corporations as against individuals. Substantially all the reductions have gone to individuals. These circumstances should be borne in mind as we prepare for another thorough review of the
Federal tax structure.
The Joint Economic Committee published on January 11, 1972, an extensive
staff study entitled "The Economics of Federal Subsidy Programs." Included in
that study was an analysis of what was called "tax subsidies." The data for this
was taken primarily from a letter dated May 11, 1971, from former Assistant
Secretary Weidenbaum to Chairman Proxmire giving revenue cost estimates for
the fiscal years ended June 30, 1970, and 1971, prepared by the Treasury staff*,
of certain items in the tax structure selected by the staff of the Joint Economic
Committee. The letter appears as appendix A of the committee staff study, at
pages 205-206.
I am a'ttaching hereto as appendix C a schedule showing similar estimates for
these same items for the calendar year 1971, which would correspond to the fiscal
year 1972. (The figures for fiscal years 1970 and 1971 in Mr. Weidenbaum's
letter represented estimates for calendar years 1969 and 1970.) There are also
included estimates ais to several additional items which the committee staff' included in the list that appears in the committee staff study at page 31.
In addition, as you requested, I am attaching as appendix D our preliminary
figures as to the breakdown of these estimates to indicate their effect on individual tax liabilities by adjusted gross income categories.
I should say as a word of caution that with respect to a number of items in the
list these estimates are difficult to prepare and involve substantial uncertainties
because of lack of information concerning them on tax returns. As an illustration, tax-exempt State and local bond interest is not reported on tax returns,
and the estimates must be prepared from other sources which themselves are
open to some question. When the data is not available on tax returns, the breakdown between income classes presents special uncertainties. We are continuing
to do further work to improve these estimates.
We are in the process of preparing, in consultation with the staff of the Joint
Committee on Intemal Revenue Taxation, a more detailed report with respect
to these matters, as was agreed in the conference report on the Revenue Act of
1971. The report is to be made to the Joint Committee on Internal Revenue
Taxation, the House Committee on Ways and Means, and the Senate Committee
on Finance, and we shall be pleased to furnish the Joint Economic Committee
with a copy of that report when it is completed.
As Mr. Weidenbaum noted in his letter, "There is considerable conceptual controversy as to what is and what is not a tax subsidy." The Treasury is pleased to
furnish to the congressional committees estimates as to the revenue effect of various aspects of the tax law on which the committees wish information. Yet the
characterization of particular items as subsidies, the exclusion of other items
from the list, and the economic and net revenue and budgetary effects of changing
or repealing these items are all matters on which there is extensive division of
opinion.*
In particular, while it is desirable that this information be available for public
scrutiny and analysis, we should bear in mind its shortcomings. Among the difficulties, tb list a few, are the following:
1. The estimate for each item is made ori the assumption that it would be
eliminated without any other changes in the law. Thus if two or more items were
Changed, the result of the several changes being made concurrently could produce
greater or less revenue effect than the sum of the changes calculated independently of each other. Thus an addition of the separate estimates may not produce
meaningful figures.
*See e g . t h e criticism in Bittker, Accounting for Federal ''Tax Sulisiclies" in the
National Budget, X X I I National Tax J o u r n a l 244 and the reply in Surrey and Hellmuth,
The Tax Expenditure Budget-Response to Professor Bittkerj X X I I National Tax J o u r n a l
52S.
342
19 73 REPORT OF THE SECRETARY OF THE TREASURY
2. The estimates assume no change in tax rates, personal exemptions, or the
minimum standard deduction. The serious economic effects of terminating or
changing these various provisions of existing law without a basic change in the
rate structure, for example, have not been taken into account in making the
estimates. The changes would affect investment patterns and activity. One cannot
assume, therefore, that termination of these provisions would raise the revenue
indicated by each item.
3. In the estimates, no offset is made for the; cost of substitute programs that
would doubtless be enacted to replace some of the tax provisions if they were
terminated. For example, with respect to the exemption for State and local bond
interest, the cost of Federal payments to offset the increased cost of taxable 'State
and local bonds has not been refiected; nor, for example, has any provision been
made for the cost of substitute programs that might be needed with respect to
housing if the tax provisions relating to housing were changed. In many instances there doubtless would be no net revenue gain from a change.
4. The estimates have been prepared on the basis of the so-called first level
effects, without any offset for the "feedback" increases in revenue that now flow
from the increased investment and economic activity that many of the present
provisions generate.
5. If various existing provisions were changed, the statutory changes in many
instances would contain effective date provisions that would apply only to subsequent investments or activity occurring after the date of the change and not to
investments and commitments previously made. Thus the revenue effect in many
instances would be small initially and would require a number of years to reach
the amounts indicated.
6. The Federal tax law includes not only provisions that cause a reduction in
tax that arguably are "subsidies" but also other provisions that increase the tax
burden and affect its distribution, some of which arguably are "penalties." These
offsetting items should be taken into account.
As illustrations:
••
The list includes the additional tax that would be due if capital gains were
treated as ordinary income. But there is a penalty involved in existing law in the
provision that net capital losses can be deducted by individuals only against
$1,000 of ordinary income annually and no deduction for net capital losses can be
taken by corporation's. If capital gains were to be treated as ordinary income,
should capital losses be treated as ordinary deductions and allowed in full against
ordinary income ? If so, since taxpayers might choose to realize their capital losses
and defer realization of their capital gain, there could be an actual loss in
revenue.
The income tax on corporations, estimated now at a level of some $36 billion,
is in reality borne by individuals, either by the shareholders of the corporations
or by consumers of their products and services. Economists and others differ as
to the extent to which the corporate tax burden is passed forward to consumers
or backward to shareholders. I am attaching as appendix E an estimate as to the
distribution of the burden by income classes based on flve different assumptions
as to the extent of the division of the corporate tax burden between consumers
and shareholders. If the corporate tax is assumed to be shifted forward, it is in
essence an excise tax on consumers and bears heavily on lowr and middle-income
level individuals; if it is assumed to be borne by shareholders, the estimates show
that it increases substantially the income tax burden on upper income level
individuals.
The estate and gift tax, as well as other Federal taxes, represent additional
burdens that are not taken into account in the attached list. They have a significant effect upon the distribution of the tax burden.
The income tax rate structure itself can be said to involve a "penalty" to one
group or another depending upon their points of view; for it affects differently
single persons, married couples, heads of households, and surviving spouses, as
well as affecting differently low-income, middle-income, or high-income groups.
These are merely illustrations of difficulties involved in considering the effects
of the provisions which the committee staff has selected as "tax subsidies." Again
let me say that I think it highly desirable that these matters be publicly reviewed
and debated; but the review and the debate should take into account the many
different problems that in combination make solutions so difficult to find. There
are no easy answers.
EXHIBITS
343
Each issue of tax policy is encased in a long history with plentiful arguments
on either side. Many of them are not included in the committee staff's list. All of
them are deserving of a thorough review in the Congress in 1973, as should be
done periodically. The changes made in 1969 and 1971 represented a major overhaul of the tax system to improve its equity and its efficiency. More remains to
be done. But in the process of review, let us not forget that, whatever its problems, our Federal income tax system has been the most efficient revenue device in
the history of the world. As we constantly strive to improve it, we must proceed
with calm analysis and thoughtful judgment of the complex issues.
APPENDIX A
MARCH 1,
1972.
DEAR MR. CONABLE : In response to your request, I am writing to set forth the
information that we have developed to date with respect to individuals with
adjusted gross incomes above $200,000 for the year 1970 who showed no income
tax due on their federal income tax returns for that year.
The information that there were 112 such individuals came from computer runs
made from preliminary data extracted for statistical purposes in connection with
the customary preparation by the Internal Revenue Service of its Statistics of
Income series. The data is derived from a sample of some 500,000 of the approximately 75,000,000 individual income tax returns. The sample includes all returns
filed that show adjusted gross income above $200,000, and the information extracted from each return and fed into the computer shows, among numerous
items, the amount of adjusted gross income reported and the federal income tax
shown on the return to be payable. It is thus a routine matter, as a part of other
analyses of data, to run the computer to identify the number of returns with
adjusted gross income above $200,000 which reported no tax due.
This statistical data is preliminary, however, and is customarily reviewed
before publication of final data for the year.
Moreover, I should point out that this data is taken from the returns as filed
by the taxpayers before audit of the returns by the Internal Revenue Service. I
understand that at least 58 pf these returns are already under audit by the Service or have been assigned for audit. We have now received in the Treasury copies
of all the returns, and it appears likely that tax will be collected on a number of
the returns after audit.
The Tax Reform Act of 1969 took effect, in general, as of January 1, 1970,
although some of its provisions become effective gradually over a period of years.
It is significant to note, therefore, that—
(a) There was a substantial decrease between 1969 and 1970 in the number
of nontaxable returns with adjusted gross income above $200,000—from 300 to
112.
(b) The percentage which those 112 nontaxable returns bore to the total
number of returns with adjusted gross income above $200,000 dropped from
1.6% in 1969 to 0.7% in 1970. (There were some 18,000 returns with adjusted
gross incomes above $200,000 in 1969 and some 15,000 in 1970.)
(c) The total adjusted gross income on nontaxable returns with adjusted
gross income above $200,000 dropped from $279 million to $46 million, less than
17% of the 1969 total.
(d) The number of nontaxable returns with adjusted gross income above
$1,000,000 dropped from 52 in 1969 to 3 in 1970.
Of the 112 returns listed preliminarily, examination of copies of the returns
shows that inadvertently 8 were erroneously so classified: Paid a "minimum tax"
under 1969 Act, 2; paid income tax under Sec. 962 (permitting individuals under
certain circumstances to pay corporate income tax instead of individual income
tax on certain types of foreign income), 1; delinquent returns for prior year (not
subject to 1969 Act), 3 ; returns with net operating loss carried over from prior
year, 1; duplicate return, 1.
Of the remaining 104 returns, 6 returns paid substantial income tax to foreign
countries, mostly on salaries, for which credit is allowable against U.S. income
tax.
On the remaining 98 returns, the principal deduction against adjusted gross
income resulting in no tax was as follows:
State income tax, 12. Review of the returns before audit indicates that this
is likely due to payments in 1970 by cash basis taxpayers of state income tax for
344
1973 REPORT OF THE SECRETARY OF THE TREASURY
1969 or prior years. F o r example, a person having a large capital gain or other
non-recurring income in 1969 generally can pay the state income t a x on t h a t 1969
income when he files his s t a t e r e t u r n for 1969 in the Spring of 1970, in which
event t h a t s t a t e t a x is deductible on t h e cash basis of accounting in his 1970
federal income t a x return. The state t a x on large non-recurring 1969 income
may offset all or a substantial p a r t of the taxpayer's lower 1970 income. Also, if
on a u d i t of his s t a t e r e t u r n s for prior years the t a x p a y e r paid additional state
t a x e s for those y e a r s in 1970, he might have a very substantial deduction for
s t a t e taxes in 1970. I t is also possible t h a t he could have paid in 1970 state taxes
on 1970 income t h a t is not subject to federal income tax, such a s interest on state
and local bonds, but it does not seem from a review of the copies of the r e t u r n s
t h a t t h e large deductions were caused by t h a t circumstance.
Charitahle contributions, 13. Only 2 of these r e t u r n s showed contributions above
the 50'% maximum generally permitted, and one of these was a r e t u r n for a fiscal
year ending in 1970, which w a s not subject to the 1969 Act. I n 1966 there were
49 nontaxable r e t u r n s with adjusted gross income above $200,000 t h a t took the
"unlimited" charitable contribution deduction, which was ended by the 1969 Act.
I n t e r e s t expense, 54- I n many cases interest is incurred as an expense of borrowing money for investraents which produce current ordinary incoirie. If the
interest paid is high in relation to t h e income received, this may result in r e t u r n s
showing high adjusted gross income but no net taxable income; t h i s may reflect
simply a failure by the t a x p a y e r to earn a net profit on his investment, as in the
case of a business t h a t borrows money, pays interest to its creditors, and h a s no
net profit after paying t h e interest. Where the t a x p a y e r ' s interest paid substantially exceeds his investment income, however, t h e 1969 Act included the excess
among the preferences subject to the minimum t a x for the years 1970 and 1971;
and indications a r e t h a t as a result of t h a t provision in the 1969 Act, a number of
these r e t u r n s will be subjected to the minimum t a x on audit. F o r 1972 and subsequent years, investment interest paid t h a t exceeds by more t h a n $25,000 t h e
t a x p a y e r ' s investment income will generally be disallowed u n d e r t h e T a x Reform
Act of 1969.
Some of the interest claimed a s personal deductions on t h e 1970 r e t u r n s may
properly be classed as business items, b u t the interest deduction w a s shown by
the t a x p a y e r as a non-business item on his return. The place a t which the interest
deduction was reflected on t h e r e t u r n might be immaterial if no t a x is due.
Miscellaneous deductions: Loss of securities pledge as collateral for loans, 3 ;
gambling losses, 1 ; (Gambling losses a r e deductible against gambling g a i n s ; this
r e t u r n merely reports miscellaneous gambling income above $400,000 and a deduction for an identical amount of miscellaneous gambling losses for the year.)
Investment expense other t h a n interest, 7 ; theft casualties, 2 ; sundry (bad
debts, payments in settlement of litigation, etc.), 6.
A number of these deductions involve large sums and some involve unusual
transactions. On a u d i t of the r e t u r n s the deductions may be disallowed or reduced, or they may be t r e a t e d as capital losses, which may be deducted only
against $1,000 of income other t h a n capital gains.
Respectfully yours,
(Signed)
T H E HONORABLE BARBER B . CONABLE, J R . ,
Eouse of Representatives,
Washington, D.C. 20515
^
E D W I N S. COHEN.
345
EXHIBITS
Major sources of income and deductions for 106 nontaxable income tax returns with
adjusted gross incomes of $200,000 or more in 1970, classified by largest deduction
or credit ^
[Dollar amounts in thousands]
I n c o m e a n d deductions, r e t u r n s for w h i c h largest deduction or credit
was—
Foreign
tax credit
12
7
N u m b e r of r e t u r n s
Charitable contribution
Taxes
paid
Interest
paid
12
Miscellaneous d e ductions
55
20
Total
106
Wages a n d salaries
.Dividends
Interest
C a p i t a l gains (100 percent)
O t h e r income
$767
1,015
701
2
(20)
$562
1,700
2,467
663
(893)
$372
7,506
1,009
108
(424)
$2,673
11,402
5,132
5,132
(4,353)
$1,445
6,525
1,395
2,466
533
$6,819
28,148
10,704
8,271
(6,157)
A d j u s t e d gross income
A m e n d e d gross i n c o m e 2
Deductions:
Contributions.. _
Interest
Tax
Medical
MisceUaneous
2,462
2,471
4,123
4.427
8,616
8,606
18,470
20,166
11,134
12,392
44,705
48,062
39
89
111
389
416
4,160
29
417
4,227
1,327
973
39
2,380
2,019
17,337
1,106
74
1,633
1,976
1,261
1,426
56
10,616
8,650
20,430
7,776
198
14,901
5,412
8,947
22,069
16,235
51,957
(*)
T o t a l deductions
T a x a b l e income
O r d i n a r y tax .
M i n i m u m tax
Foreign tax credit
O t h e r credits
T a x after credits
55
294
2,156
1,384
_
. . . .
(*)
(*)
67
21
1,384
(*)
7
14
. .
205 .
84 .
(*)
2,428
1,489
84 .
1,476
14
-
•Less than $500.
1 Excludes one fiscal year return for which the provisions of the Tax Reform Act of 1969 were inapplicable.
2 Adjusted gross income plus the excluded haliof net long-term capital gains plus deductions for depletion
and depreciation reported on the tax returns which are estimated to be in excess of deductions allowed under
cost depletion and straight-line depreciation accounting methods.
APPENDIX
B
APRIL 28,
1972.
DEAR ME. RETJSS :
I am writing in reply to your letter of March 23, 1972, requesting further information with respect to individuals reporting adjusted gross incomes of ,
$200,000 or more for 1970 who paid no Federal income tax for that year. As you
noted, I reviewed the nature of these returns in my letter of March 1, 1972, to
Congressman Barber B. Conable, Jr., which was reprinted in the Congressional
Record on that day.
In your letter to me you asked if I could select a representative sampling of
those returns and analyze them in the way that eleven returns of high income
individuals were analyzed in the 1968 "Tax Reform Studies and Proposals" (pp.
89-94). This would involve summarizing various items of income, deductions and
credits on the individual returns. We have given careful consideration to your
request" and I have reviewed it at length with Dr. Laurence N. Woodworth,
Chief of Staff of the Joint Committee on Internal Revenue Taxation.
As I advised Mr. Verdier of your office, we have concluded that, even deleting
the names, addresses and identification numbers of those individuals, we could
not disclose the information publicly without breaching the requirements of confidentiality of tax returns. Disclosure of salary or other large items of income or
deductions for the year 1970 would make it possible to identify some of the
individuals from information that is either publicly available or known to other
persons who were involved in transactions with those individuals; and once the
individual is so identified from particular items, his other income and deductions
would become known. By contrast, the cases described in the 1968 Studies by
the prior administration were taken from returns filed in various earlier years
that were not identified.
346
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Dr. Woodworth and I concluded that the best method of giving the information
to you without breach of disclosure requirements was to set forth the aggregate
totals for the items of income and deduction you requested for all the returns
in each of the five categories referred to in ,my letter to Congressman Conable.
Those categories were selected according to the principal item of credit or deduction that made the return nontaxable: (1) foreign tax credit; (2) taxes; (3)
contributions; (4) interest and (5) miscellaneous. In addition, data includes
the grand total for all five categories as a group. In each instance the data
includes items you requested, as follows:
Adjusted gross income
Total deductions
Amended gross income
Contributions
Wages and salaries
Interest
Dividends
Taxea
Interest
Medical
Capital gains (100 percent)
Other
Other income (net)
Taxable income
Tax
A schedule showing this information, prepared in a cooperative effort by the
staff of the Treasury Department and the Joint Committee on Internal Revenue
Taxation, is attached. Some minor changes have been required in the draft schedule that was given to you by Dr. Woodworth on April 15; first, one previously
included return that had contributions as the principal deduction has been deleted because, as noted in my letter to Mr. Conable, it was a return for a fiscal
year that began in 1969 and ended in 1970, and accordingly was not governed by
the Tax Reform Act of 1969, which in general took effect for the first time for
years beginning in 1970; and, second, three additional returns have been located.
The attached schedule, therefore, includes 106 returns instead of the 104 returns
previously included.
You asked that the schedules show not only "adjusted gross income" but also
"amended gross income." The term "amended gross income" is not used in the
tax law, but we understand that you intended it to include in addition to the
above items found in adjusted gross income 100 percent instead of 50 percent
of long-term capital gains, as well as tax exempt interest on state and local
obligations, percentage depletion in excess of cost depletion and depreciation in
excess of straight-line depreciation.
As you will notice in the schedule, we have included in the table 100 percent of
capital gains, although only 50 percent are included under the Internal Revenue
Code.
However, we are unable at this time to include amounts for tax exempt interest on state and local bonds because those amounts are not required to be
reported on the tax returns and cannot be obtained prior to audit of the returns.
There has been included in "amended gross income" the amount of percentage
depletion shown in the individual tax returns in excess of what is estimated
cost depletion might have been and depreciation shown in the return in excess of
estimates of straight-line depreciation.
With respect to the 12 returns in which the principal deduction was taxes paid,
aggregating $4,160,000, it may be noted that of this amount $4,046,000 represented state and local income taxes paid. As I remarked in my letter to Congress^
man Conable, it appears likely that these large deductions were due to the fact
that individual taxpayers generally file their returns on a cash basis; and these
deductions seem to represent payments in 1970 on the filing of state and local
income tax returns for 1969 in which large gains or income were reported. We
have now obtained data as to the 1969 Federal income tax returns of 11 of these
12 individuals, and find that they paid 1969 Federal income tax totaling about
$18 million, an average of more than $1.6 million of tax per individual.
With respect to returns in which miscellaneous deductions were the largest
item, the aggregate of $10,371,000 in miscellaneous deductions included the
following:
Loss of securities pledged to secure loans, loss on guarantees
of loans, and payments in settlement of litigation
$5, 510, 000
Accounting, bookkeeping and professional fees, investment coun. sel and management fees
; 2,155, 000
Theft and casualty losses
658, 000
Other
2,193, 000
10,516,000
EXHIBITS
347
I would emphasize, as I did in my letter to Congressman Conable, that this
information has been compiled from the returns as filed without audit, that most
of these returns are under audit, and that these audits may produce substantial
assessments of tax. In particular, it appears that a number of the returns will be
subjected to the minimum tax on audit, and that some of the miscellaneous deductions may be disallowed or reduced, or treated as capital losses which may be
deducted only against $1,000 of income other than capital gains. To the extent
that the interest and miscellaneous deductions are allowed on audit, it appears
likely that many of them represent business and investment expenses or losses
that perhaps should be deducted in computing adjusted gross income instead of
being included among miscellaneous deductions.
You asked for a statement of the percentage which the tax paid on these
returns bears to amend gross income and amended taxable income. Since these
returns constitute a group in which no Federal income tax was paid, that percentage is necessarily zero, except to the extent that tax will prove to be due
following audit of the returns. However, with respect to the seven cases in which
the U.S. tax was offset in full by foreign tax paid, the taxpayers paid foreign
income tax aggregating about $1.5 billion. This represented an eff'ective foreign
income tax rate of 70 percent of the U.S. taxable income and 62 percent of the
U.S. adjusted gross income and U.S. amended gross income.
You also inquired as to the eff'ective rate ot tax on persons at the poverty level.
Prior to the Tax Reform Act of 1969, Federal income tax was imposed on the
income of single persons in excess of $900 (personal exemption of $600 plus minimum standard deduction of $300) ; and, in general, this minimum level was increased by $700 for each additional person included in the return (additional
personal exemption of $600 plus $100 minimum standard deduction).. This resulted in taxes being imposed on persons below the poverty level.
However, the President recommended in 1969 the institution of the Low Income
Allowance which was incorporated in the Tax Reform Act of 1969 so as to raise
the minimum level to which the income tax could be applied to approximately the
then estimated poverty levels. Under the 1969 Act the minimum level of tax was
to be adjusted to a small extent in the years 1971-1973. In the Revenue Act of
1971, effective for the year 1972, the minimum levels for tax were increased as
follows:
Family size {up to ^)
1
2
3
4
Minimum level for tax
$2,050
2,800
3,550
4,300
Estimated poverty level
$2,170
2,810
3,350
4,290
Because of the need to have systematic increases as the size of the family
increases, the minimum level of tax is sometimes somewhat belOw and sometimes
somewhat above the estimated poverty level. For a single person in 1972 it is
possible for a person to pay tax at a tax rate of 14 percent on $120 of income
below the estimated poverty level of $2,170, or a tax of $16.80, an effective rate
of less than one percent. A married couple could pay tax of $1.40 if their income
was $2,800, which would be $10 below the estimated $2,810 poverty level—an
effective tax rate of 0.05%.
Income for poverty level purposes includes so-called "transfer payments" (such
as social security benefits, unemployment insurance and welfare payments) which
are not included in income for tax purposes; and the poverty levels are based
upon the assumption that the individual occupies his own separate household,
which it has not been considered feasible to require for tax purposes. Thus while
there are some minor differences between the minimum income tax level and the
estimated poverty level, the general plan of the law since the 1969 Act has been
to impose no Federal income tax on persons below the estimated poverty levels.
Enclosed for your convenience is a copy of my letter of March 1, 1972, to Congressman Conable.
I trust this provides the information which you requested.
Respectfully yours,
(Signed) EDWIN S. COHEN.
T H E HONORABLE HENRY S. REUSS
House of Representatives
Washington, D.G, 20515
506->171—73—25
348
19 73 REPORT OF THE SECRETARY OF THE TREASURY
APPENDIX C
Effect of selected iax provisions
fin millions of dollars]
Calendar year 1971
Corpora- Inditions
viduals
Exclusion of benefits and allowances to Armed Forces personnel
Exemption for certain income earned abroad by U.S. citizens
.
Exclusion of income earned by individuals in U.S. possessions
VVestern Hemisphere trade corporations
_.
Exclusion of gross-up on dividends of less developed country corporations...
Deferral of income of controlled foreign subsidiaries.
Exclusion of income earned by corporations in U.S. possessions
Farming: Expensing and capital gain treatment
....i....
Timber: Capital gain treatment for certain income
Expensing of exploration and development costs
Excess of percentage over cost depletion.
Capital gains treatment of royalties on coal and iron ore...
Investment credit
'.
Depreciation on buildings (other than rental housing) in excess of straight- •
line
:
Asset depreciation range
_
_.
Dividend exclusion..
Capital gains: Corporation (other than agriculture and natural resources)...
Bad debt reserves of financial institutions in excess of actual
Exemptlonof credit unions.
Deductibility of Interest on consumer credit..
Expensing of research and development expenditures
$26,000 surtax exemption.
_
Deferral of tax on shipping companies
Rail freight car amortization
_
Deductibility of interest on mortgages on owner-occupied homes
Deductibility of property taxes on owner-occupied homes
Depreciation on rental housing in excess of straight-line
Housing rehabilitation
Disability insurance benefits
_
_
i
Provisions relating to aged, blind, and disabled:
Combined cost for additional exemption, retirement income credit, and
exclusion of OASDHI for aged
Additional exemption for blind.
•.
"Sick pay" exclusion
Exclusion of unemployment insurance benefits..
i
Exclusion of workmen's compensation benefits
Exclusion of public assistance benefits.
Net exclusion of pension contributions and earnings:
Plansfor employees.Plans for self-employed persons
_
Exclusion of other employee benefits:
Premiums on group term life insurance
Deductibility of accident and death benefits
Medical insurance premiums and medical care.
Privately financed supplementary unemployment benefits
Meals and lodgingExclusion of interest on life insurance savings
Deductibility of charitable contributions (other than education)
Deductibility of medical expenses
_
Deductibility of child and dependent care expenses.
_
Deductibility of casualty losses.
Excess of standard deduction over minimum
Capital gains: Individuals.
._
Pollution control amortization
Additional personal exemption for students
Deductibility of contributions to educational institutions.-.
Exclusion of scholarships and fellowships
Exclusion of certain veterans' benefits...
Exemption of interest on State and local debt
Deductibility of nonbusiness State and local taxes (other than on owneroccupied homes)
_
_
75
55
165
80..
50
125
260
785
5
1,496
320
600
650
60
10
790
60
65
200
306
660
50
10
75
55
166
80
840
176
i 325
985
5
2 1,800
15 .
1,800
3,260
10
120
*800
*320
65
*3,650
250
500
30
2,000
.5
170
1,100
3,200
1,900
30
165
700
5,600
500
30
2,000
5
170
1,100
3,200
1,900
730
*165
700
< 5,600
15
550
275
110
700
300
10
2,400
2,700
200
15
165
3,650
250
646
2,300
10
46
480
3700
300
^ 330
* 400
40
1,800
545
2,300
10
« 45
2,400
2,700
*600
26
155
3,250
10
120
800
320
65
380
400
40
160
100
300
Total
550
*275
*110
700
1,800
800
2,600
5,600
5,600
1 Considered in isolation this estimate would be $800 milhon. However, if considered in conjunction with
percentage depletion the $325 miUion gives a more accurate picture of the revenue effect.
2 Effective for only a part year in calendar year 1971. The full-year effect would be $3.3 biUion.
3 First-year effect, second-year effect would be $1.7 billion. Thereafter builds up for a period of years.
* Assumes present restriction on capital losses is retained.
6 This will dechne over time as present law becomes fully effective.
8 The estimate appears only because the investment credit is effective for only a part year. It will disappear
when the investment credit is fuUy effective.
7 The Mberalized child care deductions which become effective in calendar year 1972 would increase the
estimate to $175 miUion.
•Not comparable with previous estimates due to revised and/or new sources of data and improved estimating methods.
APPENDIX
D
Estimated distribution of selected items of tax preferences of individuals hy adjusted gross income class, calendar year 1971
[In miUions of dollars]
Adjusted
gross income
class
Exclusion of
Exemption
Exclusion of
Farming:
Timber:
benefits and
for certain
income earned Expensing Capital gain
aUowances to income earned by individuals and capital treatment
Armed Forces
abroad by
in U.S.
gam
for certain
personnel
U.S. citizens
possessions
treatment
income
$0-3,000
$3,000-$5,000
$5,000-$7,000.
$7,000-$10,000
$10,000-$15,000
$15,000-$20,000.....
$20,000-$50,000
$50,000-$100,000.-.
$100,000and over..
Total
15
120
175
180
115
28
13
3
1
650
• ( * )
1
4
6
7
16
15
1
(*)
50
(*)
(*)
1
1
2
3
3
20
55
80
120
155
90
170
55
45
10
790
(*)
(*)
(*)
2
2
2
4
2
9
8
21
50
Expensing
of exploration and
development costs
(*)
Depreciation
Excess of
on buildings Asset Divi- Deductibility of
percentage Invest- (other than depre- dend
over cost
ment
rental
ciation exclu- interest on
consumer
depletion
credit
housing) in
range sion
credit
excess of
straight-Une
1
3
2
4
4
16
14
21
1
2
8
6
12
12
50
43
66
3
16
27
41
51
32
73
33
29
65
200
305
(*)
3
5
11
18
12
47
28
36
160
(*)2
4
6
12
9
37
23
7
5
13
17
29
55
46
99
•27
9
100
300
1
• 44
64
185
435
380
620
59
12
1,800
X
3
CO
CO
O
CO
w
Estimated distribution of selected items of tax preferences of individuals by adjusted gross income class, calendar year 1971—Continued
t=J
[I n mUlions of doUars]
Adjusted gross
income class
DeductibiUty of
interest on
mortgages
on owneroccupied
homes
0-$3,000
$3,00()-$5,000
$5,000-$7,000
$7,000-$10,000
$10,000-$16,000
$16,000-$20,000
$20,00(^$50,000
$50,000-$100,000-...
$100,000 and over..
Total
(*)
27
81
276
719
643
621
101
32
2,400
DeductibiUty of
property
taxes on
owneroccupied
homes
(*)
41
84
263
642
505
788
240
137
2,700
Depreciation
on rental
Dishousing in Housing ability
excess of
rehabih- insurstraighttation
ance
fine
benefits
(*)
4
6
14
22
16
69
36
45
200
' (*)
(*)
1
1
2
1
6
3
1
15
35
40
25
30
10
•6
6
3
1
156
O
Provisions relating to
aged, blind, and disabled
Net exclusion of pension contributions and
earnings
Combined
"Sick
cost for
Addipay"
additional
tional T excluexemption
exempsion]
retirement
tion
income credit,
for
and exclusion
bUnd
of OASDHI
for aged
Exclusion
Exclusion of work- Exclusion
of unemmen's
of pubhc
ployment compen- assistance
insurance
sation
benefits
Plans for Plans for
benefits
benefits
selfemployees
employed
805
750
420
685
245
125
215
70
35
1
2
2
2
1
1
1
(*)
(*)
2
13
16
32
19
20
16
2
65
110
110
186
230
65
30
5
(*)
3,250
10
120
(*)
16
28
41
69
83
39
38
6
1
800
320
65
3,660
250
oJ
*
=
H
i
QQ
1
(*)
(*)
(*)
(*)
(*)
(*)
45
145
230
535
995
686
750
175
90
§
25
20
15
6
7
10
13
22
18
96
71
13
§
1
1
'
Estimated distribution of selected items of tax preferences of individuals by adjusted gross income class, calendar year 1971—Continued
[In mUUons of dollars]
Exclusion of other employee benefits
Adjusted gross
income class
a-$3,000
$3,00(>-$5,000
$6,00(>-$7,000
,
$7,000-$10,000
$10,00(>-$16,000...
$16,000-$20,000--.
$20,000-$50,000
$60,000-$100,000..,
$100,000 and over.,
Total..-
Premiums
on group
life
insurance
5
20
30
75
135
95
105
26
10
DeductibUityof
accident
and death
benefits
Privately
Medical
financed
insurance supplemenpremiums
taryunemand medical ployment
benefits
. 25
80
125
300
650
380
415
96
30
(*)
30
2,000
(*)
(*)
(*)
(*)
(*)
- Exclusion
of interest
on life
insurance
savings
Meals
and
lodging
2
14
22
36
35
25
30
5
DeductibiUty of
charitable
contributions (other
than
education)
Deductibility of
medical
expenses
5
20
36
85
206
186
420
80
65
3
31
82
225
467
364
716
426
5
100
205
325
470
310
360
90
35
1,100
3, 200
DeductiblUty of
child and
dependent
care
expense
1
7
12
6
3
1
Deductibihty of
casualty
losses
Excess of
standard
deduction
over
minimum
1,900
(*)
(*)
(*)
5
10
30
40
20
30
20
10
(*)
0
3
15
100
415
115
50
2
CO
CTI
to
Estimated distribution of selected items of tax preferences of individuals hy adjusted gross income class, calendar year 1971—Continued
O
[In millions of doUars]
Capital gains:
Individuals
Adjusted gross income class
O-$3,000
$3,000-$5,000
$5,000-$7,000
$7,000-$10,000
$10,000-$15,000
$15,00(>-$20,000.
$20,000-$50,000
$50,00(>-$100,000
$100,000 a n d over
.-
:
Total
:
30
60
70
160
230
210
960
920
2,970
6,600
Deductibility of
Exemption of
nonbusiness
Exclusion of
Exclusion of
Additional
Deductibility
personal exemp- of contributions
scholarships
certain veterans' interest on State State and local
tion for students to educational and fellowships
and local debt taxes (other than
benefits
on ownerinstitutions
occupied homes)
1
17
40
101
182
92
47
54
16
560
6
26
28
22
15
10
3
()
*
(*)
(*)
30
96
110
130
220
70
41
3
1
(*)
(*)
5
10
20
100
300
360
4
56
88
361
772
772
1; 713
906
928
o
5,600
*Less t h a n $500,000
o
i
353
EXHIBITS
APPENDIX
E
Distribution of the corporate income tax burden on individuals^
Adjusted gross
income class
Full forward
shifting to
consumer
prices
0-$3,000
$3,000-$5,000
$5,000-$7,000
$7,000-$10,000
$10,000-$15,000
$15,000-$20,000
$20,000-$50,000.
$50,000-$100,000
$100,000 and over....
Total
Three-fourths
borne by
consumers,
one-fourth
borne by
stockholders
One-half borne
by consumers,
one-half borne
by stockholders
One-fourth
borne by
consumers,
three-fourths
borne by
stockholders
FuU tax
borne by
stockholders
2.8
2.4
2.9
5.4
7.5
4.0
3.3
.7
.5
$ billions
2.8
2.1
2.4
4.5
6.3
3.5
4.3
1.7
1.9
2.8
1.8
2.0
3.6
5.2
3.0
5.3
2.6
3.4
2.7
1.6
1.5,
2.6
4.0
2.5
6.3
3.6
4.9
2.7
1.3
. 1.0
1.7
2.8
2.0
7.3
4.6
6.4
29.6
29.6
29.6
29.6
29.6
1 Net hability at calendar year 1971 levels after aU credits.
Exhibit 39.—Statement by Secretary Shultz, August 14, 1972, before the House
Ways and Means Committee on title II of H.R. 16141, allowing a tax credit for
parents of students in nonpublic elementary and secondary schools
I welcome this opportunity to appear before you in connection with a subject
which I believe to be very important: Aid to nonpublic schools.
My testimony will be confined to title II of H.R. 16141. That is the portion
of the bill which would give parents of students in nonpublic elementary and
secondary schools a credit of up to $200 against their income taxes for tuition
paid to those schools.
The administration strongly supports the goals of title II.
We believe that the existing system of nonpublic schools, which educates a
tenth of our children, is a vital national asset. The nonpublic school system
provides a diversity which is healthy. It provides, in many instances, a proving
ground for innovation and experimentation which is of great benefit to public
education and the public generally. It shoulders a heavy burden of costs which
would otherwise fall on the public generally. Large-scale closings of nonpublic
schools, if allowed to continue, could be accompanied by disruption of countless
communities and neighborhoods in which nonpublic schools are sources of pride
and stability. We must do all that we can to prevent this from happening.
A tax credit is not a complete answer to the problems of nonpublic school
parents. But it can help in a major way and it can be placed in operation quickly.
We believe the credit proposed to be consistent with our existing system of tax
deductions. The burden of maintaining private schools is carried primarily by
the parents of students, by alumni and friends of the school, and, in the case of
sectarian schools, by contributors to the church or synagogue involved. The
Intemal Revenue Code has since 191'6 allowed deductions to alumni and friends
for contributions to nonprofit nonpublic schools, and to members of religious
congregations for church or synagogue contributions which are, in fact, used
to support such schools. The present bill would extend similar benefits to the
parents who are the third principal class of supporters of such schools. The fact
that the tax benefit would come in the form of a credit, rather than a deduction,
would serve to make the benefit more uniformly available to all taxpayers,
regardless of their marginal tax rates. We do not believe the use of a credit as
distinguished from a deduction raises any constitutional problems.On June 21 of this year, in a letter to you from Mr. Weinberger, the Director
of the Office of Management and Budget, the administration pledged its support
to the principle of a tax credit to parents for nonpublic school tuition. At that
time we indicated that the proposals then under consideration needed modification in several respects. We are pleased to note that the most important of the
modifications which we suggested has been adopted in H.R. 16141. That recom-
354
1973 REPORT OF THE SECRETARY OF THE TREASURY
mendation related to the amount of the credit. We proposed that there be given
a credit for 100 percent of tuition up to $200 per child per year, instead of a
credit for 50 percent of tuition up to $400 per child per year, as then proposed.
Our recommendation was intended to give greater benefits to lower income tax
families and to minimize the amount of tuition increases which might result.
We made two other recommendations, however, which we believe to be important and which have not been incorporated in the present bill. They are:
First, we recommended that the credit should be gradually phased out for
families with adjusted gross incomes over $18,000. This would make the credit
comparable with the deductions authorized for child care expenses under present
law. The majority of taxpayers whose dependents attend nonpublic schools have
incomes below $18,000.
Second, we suggest that an effort be made to devise a way that the credit or
a comparable benefit can be made available to families who pay no income tax.
We are puzzled by H.R. 16141 in this respect because the text of the explanation
in the committee print indicates that a refundable credit is to be provided for
this purpose, but the text of the bill itself fails to do so. If the committee does
indeed favor a refundable credit, we urge that it give careful attention to the
question of whether there may be constitutional objections to the refundable
feature; and we recommend that such a feature be made separable from the
basic credit so that the constitutionality of the latter is not endangered. We
believe a refundable credit would be desirable. However, if it should not be
constitutionally possible, we believe that a nonrefundable credit is nonetheless
desirable. A nonrefundable credit could be utilized by the great majority of
nonpublic school parents. There are relatively few parents of nonpublic school
students who pay no Federal income tax. Scholarship programs, or other forms
of subsidized tuition, presently take care of many such students and would
hopefully continue to do so.
There is one final, but important, constraint. If this legislation is enacted, a
corresponding offset either by way of expenditure reduction or revenue increase
would have to be found. I shall not add to Mr. Weinberger's testimony on this
aspect.
The committee print explaining the bill contains a revenue estimate by the
Joint Committee on Internal Revenue Taxation. It estimates an annual revenue
loss of $584 million. We believe that to be a realistic estimate for a refundable
credit, assuming no increases in tuition. However, there will surely be tuition
increases, as one of the purposes of a tuition credit is to permit schools to raise
tuition without losing students. It seems safe to assume that all schools will
raise their tuition to at least $200. As the bill is now drafted without a refundable provision, we believe the revenue loss would be $790 million per year. If a
refundable provision were added, the revenue loss would rise to an estimated
$970 million.
In closing, Mr. Chairman, let me repeat that although we suggest modifications to H.R. 16141 and must condition our support on the expectation that
Congress will make adequate, offsetting adjustments in other expenditures, we
are strongly in favor of the purposes of title II of the bill.
Exhibit 40.—^Remarks by General Counsel Pierce, December 1, 1972, before the
thirteenth Southwestern Ohio Tax Institute Seminar, Cincinnati, Ohio, on tax
shelters
It gives me great pleasure to have this opportunity to address you today on
your general topic of "Tax Shelters.'* I do not intend, however, to discuss or to
describe in detail any particular shelter or group of shelters. Rather I would
like.to put the tax shelter concept into perspective by discussing it against the
background of the popular notion of tax loopholes, and considering whether there
should be any changes in the Federal tax laws as they relate to tax shelters.
Many people use the terms "tax shelters," "tax incentives," and "tax loopholes"
almost synonymously. To them, they are simply legal devices by which rich
individuals and big corporations avoid the payment of taxes. These people
believe that since these devices allow the rich to escape the payment of taxes,
they should be subjects of tax reform. There are, however, clear distinctions
between these separate concepts which are of vital importance to any considera-
EXHIBITS
355
tion of tax reform and I shall attempt to develop these distinctions during the
course of this talk.
The recent political campaigns indicated that candidates for office from the
precinct level to the national level felt that voters were concerned about the
subject of taxes. We in the Treasury are also aware of this concern. We must be
constantly alert to problems that arise in the tax system. It is absolutely vital
that this system be kept as fair and equitable as possible for it to serve the best
interest of the Nation. Certainly, inequities in this system will arise and they
must be dealt with. However, it must always be borne in mind that our Federal
income tax system has been the most efficient revenue device in the history of
the world. Consequently, as we strive to improve it, changes should be made
only after the most careful and thoughtful deliberations.
Tax incentives and preferences have been a part of our income tax structure
since its beginning. In general, a tax preference is a provision that recognizes
the peculiar or unusual circumstances of a particular taxpayer or an expenditure. For example, a blind or elderly taxpayer is permitted to take an additional
personal exemption when computing his tax, and an individual is permitted to
deduct a portion of his medical expenses. A tax incentive, on the other hand, is
usually thought of as a provision that induces a taxpayer to incur a particular
expenditure or to undertake a particular activity. For example, the investment
credit provides assistance for a taxpayer to invest in machinery and equipment,
and the DISC provisions provide an incentive to export goods produced in the
United States. Both tax incentives and tax preferences are provisions that are
carefully considered and intentionally enacted into law by the Congress of the
United States.
Much of the recent campaign rhetoric spoke of many tax incentives and preferences as tax loopholes which should be closed. As the Congress deliberately
and intentionally enacted these provisions, it is inaccurate to refer to them as
loopholes. We feel that the term "loophole" should be used to describe situations
where taxpayers devise a method for gaining an unintended tax benefit. With
respect to tax incentives and tax preferences. Congress intended them as tax
benefits. I do not mean to suggest, however, that tax reform should be limited
to closing loopholes. Tax incentives and preferences should be periodically
reviewed and reassessed.
It is interesting to observe that the political attacks were aimed primarily
at those tax incentives and preferences traditionally thought of as benefiting
the wealthy without regard to the comparative magnitude of the revenue loss.
Almost no attention was given to the largest items of tax preferences .such as
those given to individual homeowners. These preferences result from the deductibility of interest on home mortgages and the deductibility of State and local
real estate taxes. The revenue cost of an item such as depletion is very small
when compared to the revenue cost of these preferences. I hasten to add, however, that it is extremely important to give careful consideration to even the very
smallest revenue losses in order to keep the system equitable for all taxpayers.
Many tax incentives represent a congressional reaction to a specific problem
or need. For example, section 167(k) of the Code allows a special 5-year depreciation period for expenditures to rehabilitate housing for low-income families.
In view of the need for better housing for many poverty-level families, the need
for this incentive is apparent to all of us. Other incentives and preferences may
not be focused so precisely on a specific need. The consequences of a .change at
this time will still require careful analysis. For example, the current tax treatment of capital gains has recently been criticized. For more than 50 years the
tax system has given special treatment to capital gains. To a certain extent,
this preferential treatment represents a response to those who argue that these
gains are not truly income and thus they should not be taxed at all. In any event,
this system has been reviewed and changed many times by Congress (most recently in 1969). Any further significant changes in the tax treatment of capital
gains and losses could have a critical effect on the investment and capital markets.
Changes having such a significant impact can be made only after lengthy and
detailed study.
A favorite target of the "loophole closers" is the depletion allowance. This is
an incentive that has been a part of our tax structure almost from its inception. The allowance for percentage depletion was enacted by Congress almost
50 years ago. Again, this is a subject Congress has reviewed carefully over the
356
19 73 REPORT OF THE SECRETARY OF THE TREASURY
years. In 1969, the percentage rate structure was carefully revised, lowering
the value of a deduction in almost all cases. As the Treasury's representative on
the President's Oil Policy Committee, I have become keenly aware of the very
real energy crisis that this Nation faces. Therefore, any further changes in the
depletion rates, or other depletion provisions, should come only after thorough
consideration of this problem.
In summary, I feel that our system of planned tax incentives and preferences
has, in general, served us well in the past. Rather than completely revising that
system, we must consider each suggested change very carefully.
The background of tax incentives and preferences provides the basic building
blocks for the concept of tax shelters. A tax shelter arises when the deduction
of a later year is accelerated into the current year and a profitable enterprise
therefore produces an artificial loss which is deducted against income from other
sources. As the artificial loss is deducted from income upon which the taxpayer
would otherwise pay a high tax, this other income is said to be sheltered. As an
additional benefit, it is usually planned or hoped that the income produced from
the venture will be taxed at a lower rate. This effect may result from the operation of a tax incentive or preference such as depletion, or from a decline in the
taxpayer's income (with a consequent lowering of the applicable tax bracket).
The artificial accounting losses generally arise from certain investments in real
estate, minerals, and agriculture which permit a mismatching of income and the
expense of earning that income. These losses are usually produced in the following ways:
. 1. Interest and taxes during construction of a huilding.—Interest and taxes
paid during the period of construction of residential and other commercial real
estate are permitted under Federal tax law to be deducted currently, even
though there is not yet any rental income from the building and even though these
items are essentially construction costs which would normally be capitalized and
deducted as depreciation over the life of the building as the income comes in.
2. Accelerated depreciation on rental real estate.—Accelerated methods of depreciation of real estate permit the depreciation deductions of later years to be
accelerated into the early years of the building's life. Typically, this accumulation of depreciation is at least double the economic decline in value and substantially exceeds the net rental income, thus producing an artificial accounting
loss even though the building is economically profitable and produces a significant
cash flow.
3. Intangihle drilling and development costs of oil and gas wells (IDC).—
Nearly all the costs of exploring for and drilling an oil and gas well—which is
in effect acquisition by exploration rather than by purchase—are deductible in
the year paid, which normally precedes by about 15 months the first income from
oil or gas produced from the well. Such acquisition costs would, but for the
express exception in the tax law, be capitalized and deducted over the life of
the well as the income comes in. In the case of a passive investor not regularly
engaged in the business, the IDC deduction necessarily produces an artificial
loss in excess of mineral income.
4. Gash inethod of accounting for investments in agriculture.—The cost of feed
and other agricultural items may be deducted in the year paid even though in
other businesses these same kinds of costs would be capitalized or included in
inventory cost, the result of either of which is to defer the deduction until the
receipt of the income produced. The purpose is to relieve farmers of the burdens
of complicated accounting systems, but the result is that passive investors in
agriculture may also accelerate deductions and create artificial losses deductible
against their income from other sources.
The typical investor in tax shelters is a high-income individual in about a 50percent tax bracket with a large portion of ordinary income subject to full rates
of tax. A tax shelter is usually made available to such a taxpayer through a salesman, investment counsel, attorney, accountant, or financial advisor. The shelter
may take the form of a direct investment in a venture, or the purchase of an
interest in a partnership or Subchapter S corporation undertaking the venture.
I think most analysts would probably agree that the majority of the tax shelter
business ventures represent legitimate and ethical efforts to bring investment
money into tax-favored businesses. If this is so, then, is there any basis for concern? A review of recent history of tax shelters suggests that there is.
EXHIBITS
357
For one thing, we in Treasury are alarmed that the success of those in the
shelter business has spawned significant numbers of ventures that may not be
economical for the typical investor. You will probably say that this is a problem
for the Securities and Exchange Commission, and you would be right. But the
magnitude of the problem also bothers us at Treasury. For example, the SEC
informs us that up to 10 percent of all new SEC filings are now real estate tax
shelters. When oil and gas and other ventures are included, the percentage becomes even larger. The SEC has had to set up a special division just to process
tax shelter filings.
An important concern for us at Treasury is the impact that this volume of
selling has on the general public. We have all seen advertisements offering to
sell investments that will reduce your taxes. This highly visible indication that
high taxes can be easily reduced gives an inflated notion of the extent to which
loopholes may be present in the law. This general attitude does a great deal to
foster the type of political rhetoric to which I referred earlier.
If this attitude should become widespread, it could seriously undermine the
public's confidence in our tax system. As you know, the genius of our system is its
self-assessing nature. Any significant erosion of taxpayer confidence in the integrity of the system would have serious effects. This problem was illustrated
very graphically in a recent television program in which Archie Bunker was
discovered not reporting income he earned while driving a taxi on Sundays.
When questioned, he said that this was his tax shelter. He observed that all the
"rich guys" have tax shelters so he felt that he deserved one also.
Through a combination of notoriety and widespread use and abuse, tax shelters
have become a symbolic issue generating considerable pressure for reform.
It is very likely that careful thought will be given by Congress when it reconvenes to the adjustment and reconsideration of various tax incentives and preferences. As. you probably know., Congressman Mills, of the House Ways and
Means Committee, has introduced a bill calling for the phaseout repeal of a number of tax preferences. Congressman Ullman has introduced a bill which would
require a reconsideration of each item of tax preference. During the deliberation
of these and similar bills, it seems quite likely that the social utility of tax shelters
as a concept will be examined,
Prpfessor Friedman argues that the elimination of tax shelters could produce "something for everybody.'.' Investors would shift to more productive investments, producing more revenue for the Government, which could be shared
with taxpayers in the form of reduced rates. Only the merchandisers of tax shelters would lose. I am not certain that Professor Friedman's approach is correct.
As a practical matter it is extremely difficult to divorce the tax shelter from the
specific incentive that Congress intended when enacting the provisions that provide the deductions on which the shelter is based. In many situations, it is difficult to distinguish a legitimate investor in an industry from a person who is
merely seeking a tax shelter. To the.extent the incentive has a valid policy basis
for its existence, there will be valid arguments for its preservation. These arguments will lose much of their validity, however, if the incentive has had a prominent role as a tax shelter scheme.
It is imperative that everything possible be done to achieve the maximum
amount of equity and fairness in our tax system. It is almost as important that
we make certain that the system also has the appearance of fairness or we will
lose public confidence in the system. For this reason, the widespread use of tax
shelter arrangements in a manner that suggests a possible defect in the system
is being closely studied at the Treasury. This is an area of complex issues and
good solutions are not easy to come by. Obviously, much more work remains to be
done. Plowever. we are watching developments in the field of tax shelters very
carefully and are studying the area quite intensely so that if it should become
necessary, the Treasury will be ready to propose changes to preserve the integrity
of the tax system.
Exhibit 41.—Statement by Under Secretary for Monetary Affairs Volcker,
January 30, 1973, before the House Ways and Means Committee on the
extension of the interest equalization tax
I am grateful for the opportunity to appear before this committee in support
of the administration's proposal for a 2-year extension of the Interest Equalization Tax Act. As members of the committee are aware, the lET wa^ enacted in
358
1973 REPORT OF THE SECRETARY OF THE TREASURY
September 1964 as one means of protecting our balance of payments by restraining the outflow of portfolio capital from the United States to the developed
countries of the world. Subsequently, on four occasions, the law authorizing
the lET has been extended, with some small modifications. Under present legislation, the lET expires on March 31 of this year. I urge you to provide for the
extension of this tax for another 2 years.
.
The question of continuing the lET—as well as the other capital restraint
programs—must be considered in the context of the continuing U.S. balance of
payments problems and of the current international monetary reform negotiations. We are in the midst of an interrelated process in which we are seeking
to build a new international monetary system as well as strengthen our balance
of payments. One of our basic objectives in that effort is to establish a cooperative
monetary order in which not only the United States but other nations as well,
feel able to conduct their business without substantial reliance on controls.
Yet, with a deep deficit in our payments still evident, we cannot move immediately to that objective. Instead, failure to extend the lET during this transitional period would damage both the reform and balance of payments efforts.
The lET covers transactions involving the acquisition of foreign securities
by U.S. persons. The tax has plainly discouraged borrowers from other industrialized countries that would wish to raise long-term financing in the U.S.
market. It has also diminished purchases of foreign stocks by Americans. Thus,
the lET provides significant support to an important segment of our balance
of payments position.
The Interest Equalization Tax Act gives the President authority to vary the
effective rate of the tax between zero and the equivalent of ly^. percent per
annum on purchases by U.S. persons of securities issued by foreigners. Since
April 1969, the level of the tax has been set at % percent. There are no plans
to alter this rate at the present time althongh, of course, we keep the situation
under review and would, within the authority contained in the act, make whatever alterations in the rate circumstances might warrant.
While the lET directly discourages foreign borrowing in U.S. financial markets,
it also serves to reinforce programs of mandatory and voluntary restraint in two
other broad areas of capital outflows. These companion programs are the Commerce Department's foreign direct investment program (FDIP), aimed at containing the balance of payments costs of U.S. direct investment abroad, and the
Federal Reserve Board's voluntary foreign credit restraint (VFCR) program,
which is designed to limit outflows of funds from banks and other financial
institutions. These three programs—^^the lET, the'FDIP, and the VFCR—are
complementary and mutually reinforcing. The FDIP and the VFCR are being
continued. The extension of the lET is necessary so that the support that it gives
to the other two programs may also continue. Without the lET. the effectiveness
of the capital outflow restraint policy as a whole, and of the FDIP and VFCR in
particular, would be endangered.
As I mentioned earlier, we are engaged in grappling with the major challenges
of achieving world monetary reform and of bringing our payments situation into
a sustainable equilibrium position.
A necessary flrst step towards international monetary reform was achieved
with the currency realignment and other steps agreed at the Smithsonian in
December 1971. In 1972, the negotiating machinery was established in the form
of the Committee on Reform of the International Monetary System and Related
Issues—the Committee of Twenty, or C-20 as it is called—under the aegis of the
International Monetary Fund.
The C-20 negotiations are aimed at a fundamental reform of the system created
almost 30 years ago at Bretton Woods. The United States seeks an international
financial system which is more responsive to the needs of today's world and more
attuned to the changed circumstances of international trade and investment. This
means a system" which encourages prompt and effective adjustment of payments
imbalances by all countries—surplus or deficit, large or small. The system should
provide a sufficient choice of adjustment-measures so that no country is forced to
adopt undesirable controls due to a lack of effective alternatives. U.S. proposals to
achieve these goals have been placed on the table, and discussions are underway.
I have just returned from a meeting of the C-20 Deputies in Paris last week. We
are making progress in terms of achieving a common understanding of the issues
and means Qt pealing witft them, although many tough problems remain to be
splyed.
EXHIBITS
359
As you know, we are also in a period of discussion and review with respect to
international trading barriers and practices, and exchanges of ideas are also
underway on new understandings covering flows of capital among nations.
In all of these areas—monetary reform, trade, and investment—we look forward to a new era of international cooperation and progress. The lET and the
other U.S. capital restraint programs are looked upon by our major trading partners as a sign of the earnest intention of the United States to redress its
balance of payments position and as a contribution to international financial stability in a time of transition and potential stress. Their removal or substantial
modification now, at a time when we are engaged in complex negotiations to
establish a new framework for international economic affairs, could endanger
both those negotiations and the relative monetary stability that has existed since
the Smithsonian agreement. We must continue to demonstrate our willingness
to cope with our balance of payments problems while at the same time moving
ahead with the broader negotiations.
The deficit in the U.S. balance of payments continues. While complete data for
1972 are not yet available, all indications are that the deficit last year was larger
than in any year prior to 1971, when the result was affected by large capital
outfiows in anticipation of exchange rate changes. Looking at the components of
the U.S. balance of payments in 1972, we find that the trade balance deteriorated
by about $4 billion from 1971, partly because of the earlier start of business
recovery here than in the other major industrialized countries, and partly because
of the initial increase of dollar import costs due to the exchange rate change in
December of 1971. The worsening of the trade balance was, however, to a large
extent, offset hy an increase in foreign purchases of U.S. securities and, to a lesser
extent, by a rise in foreign direct investment in the United States.
Recent data remind us that our efforts to improve our trade position and our
balance of payments require a period of time to show large results. There is
evidence that our relative competitive position in many markets has improved
and continued strong efforts to control inflation—in line with the President's program—will bring further improvement. But we must face the fact that our current position does not give us grounds for abolishing the capital restraint
programs.
Within the limitations imposed by our balance of payments, we have, at times,
taken steps to improve the administration of the capital restraint programs and
to ease the compliance problems of business. We do not feel, given the present
state of affairs, that further significant relaxations are justified. For these reasons the administration has presented to the Congress a bill providing simply for
a 2-year renewal of lET authority. However, in addition to the extension, if the
committee is prepared to consider related amendments consonant with the spirit
and intent of the legislation, the administration has certain more or less technical
changes to propose.
Possible amendments
The administration supports—
Amending the estate tax provisions of the Internal Revenue Code to provide
an exemption from estate tax for certain obligations issued to foreigners
which are made subject to the interest equalization tax by an election of the
issuer and the interest on which is exempt from the U.S. withholding tax
under a provision enacted in 1971.
Limiting the lET exemption for less developed country corporations to
corporations that have. significant economic contact with less developed
countries, by eliminating the special rules under which a shipping company
can qualify as a less developed country shipping corporation by registering
its ships in a less developed country.
In addition, it has been suggested that the interest equalization tax in some
cases is a deterrent to direct investment in the United States by foreign corporations since, if they should desire to raise a portion of long-term financing for
such investment in the United States, the securities they issue would be subject
to the lET. We believe that the existing legislation provides authority to exempt
new issues of foreign securities for this purpose by Executive order. Treasury
would be prepared to recommend such an order. However, to assure compliance
it would be necessary to amend the statute so that the tax would be imposed on
an issuer who did not comply with the conditions of the Executive order.^
1 See exhibit 42 for summary tables on the U.S. balance of payments and transactions
in foreign securities.
360
19 73 IiEi>byT OF THE mifll&TARY W ^THE lllEASURY
Exhibit 42.—Statement 'by Under Secretary for Monetary Affairs Volcker,
March 7, 1973, before the Senate Committee on Finance on the extension of
the interest equalization tax
^I am pleased to appear on behalf ofthe administration to support the extension
of the interest equalization tax. Under present legislation, the lET would expire
at the end of this month.
This tax was enacted in 1964 as a temporary measure, designed to help curtail
our balance of payments deficit. Our continuing deficit has made it necessary to
extend the bill on four previous occasions. We believe that recent exchange rate
actions—accompanied by and combined with effective policies in other directions—can, and will, and must bring that deficit to an end. But those actions
cannot bring a cure to the deficit instantaneously. The hard fact is that no
raatter how forceful our policies—and I believe they are forceful—it will take
time for the more fundamental cures to work, and for our trade balance to
recover. For the transitional period ahead, therefore, our payments position still
needs the protection provided by the lET.
The lET sharply restrains the purchases by U.S. residents of securities issued
by other developed countries of the world (with the exception of Canada) by
imposing a graduated tax, currently equivalent to % percent per annum. By
effectively raising the cost of U.S. capital to borrowers in the developed countries
to a level more comparable with borrowing costs in their own countries, the
outflow of portfolio capital from the United States is contained. Our experience
with the lET indicates that it has been effective in those areas to which it applies.
Moreover, the tax complements and supports the Commerce Department's program to restrain outflows of direct investment capital (FDIP) and the Federal
Reserve's voluntary program to limit the export of funds by financial institutions
(VFCR). These three programs are interrelated and mutually reinforcing.
As I suggested, we are pursuing policies, both at home and internationally, to
bring an end to a payments deficit that has persisted for too long. So far as
exchange rates are concerned, two exchange rate realignments—one at the
Smithsonian and again in February—have, I am convinced, produced a fair and
realistic base for repairing our trade and payments position.
We do not, and cannot, look to exchange rate changes to do the whole job.
Competitive pricing, to be effective, requires that foreign markets be open to us.
We must attend to the efficiency, productivity, and price stability of the U.S.
economy to maintain our competitive edge. The administration has, as you know,
been moving vigorously in these directions.
Our confidence that the steps we have taken and are taking will restore our
basic balance of payments position is an important factor in our thinking that
this is the last time we should ask for an extension of this legislation, provided
the expiration date is set at the end of 1974.
The speculative atmosphere in international currency markets in the past few
weeks does not disturb our basic conviction in that respect.
I would point out the currency movements which have occurred are not of the
type that the lET is designed to impede or, indeed, is capable of impeding.
However, it also seems obvious that this is not the time to permit this measure
to expire. We continue to need the l E T and the other programs of capital
restraint in this period of transition and uncertainty in international monetary
affairs.
We are now engaged in an effort to build a new international economic system.
One of our objectives in that effort is to establish a cooperative monetary order
in which the United States and other nations do not have to rely on controls
to maintain balance. Our conviction on that score also underlies our expressed
intent to phase out the l E T by the end of 1974, along with the foreign direct
investment program. However, the objectives of reform would be not served by
a precipitous dismantling of these restraint measures today. Instead, we must
move by stages, consistent with anticipated improvement in our basic payments
position. As we do so, we hope and expect that more foreign capital will be
attracted to our markets, reflecting the positive attributes not only of satisfactory return, but of high liquidity and freedom from threat of official controls.
The lET extension bill, as it was approved by the House, incorporates certain
technical amendments which we are prepared to support. However, extension
of the lET authority until December 31, 1974, rather than the date of June 30,
EXHIBITS
361
1974, provided in the bill as passed by the House, seems to us appropriate. This
would bring the expiration date into line with the final "phasing out" date
stated by Secretary Shultz for the existing restraint programs announced on
February 12 in his statement on foreign economic policy. This date should
provide us with an ample margin of time to accomplish the objective, withoiit
forcing action out of keeping with the development of our external position. At
the same time, we have signaled our determination to achieve a payments position and a monetary system that can stand without this artificial crutch.
CO
to
TABLE I.—Balance of payments summary table, 1961-1972
[In miUions of doUars]
1961-1966
average
1966
23,011
17,578
29,287
25,463
30,638
26,821
33,576
32,964
5,433
3,824
3,817
218
366
43
5,652
—3,042
4,190
-3,379
-3,631
193
Balance
...
Current and long-term capital accounts, net
Short-term nonliquid capital, net
Errors and omissions
Net liquidity balance (excl. SDR allocations).,
Transactions in hquid funds other than those of
official reserve agencies, net
Merchandise:
Exports
Imports.-.
Balance
Mihtary transactions, investment incomes, other
services and remittances, netBalance on current account (excl. Government
grants)..
Government grants and capital, net
Private long-term capital: i
U.S. assets abroad
Foreign assets in the United States
Official reserve transactions balance (excl. SDR
aUocations).....
1967
1968
1969
1970
1971
Jan.-Sept.*
1972
1972 P
36,417
35,796
41,963
39,799
42,770
45,459
47,391
54,355
48,838
55,659
612
621
2,164
-2,689
-6,964
-6,821
612
—12
—76
1,888
545.
3,858
-4,226
1,223
-3,866
610
—3,570
2,089
-3,752
-802
-4,423
-6,419 .
—3,191..
-3,918
1,363
-4,429
1,617
-4,297
5,495
-4,855
4,805
-5,753
4,355
-6,348
2,268
-5,392.
4,759.
-3,438
—828
-924
—848
- 2 , 555
-1,744
-104
-302
- 2 , 912
-3, 280
-522
-881
1,198
-1,444
230
-399
-50
- 3 , Oil
-640
-2,470
-1,398
-3,059
-482
-1,174
-4,079
-9,304
-2,386
-11,031
-633
—10,243
-611
—2,951
- 2 . 600
-2,151
-4,683
-1,610
-6,122
- 4 , 718
-22,719
-13,804
-14,607
849
2,370
1,265
3,251
8,824
-5,988
- 7 , 763
1,461
3,667
-1,751
219
-3,418
1,641
2,702
-10,706
-30,482
-12,343
10,940
•Seasonally adjusted, annual rate.
P Preliminary.
1 For detail see table II.
Source: U.S. Department of Commerce, Survey of Current Business, December 1972 and earUer issues, plus Commerce News Press Release of Feb. 14,1973.
O
pi
O
>j
T
H
w
H
H
. .
......
...
...
...
...
o
^
>
o
^
W
Pi
TABLE II.—Private long-term capital, 1961-1972
[In milhons of doUars]
[Inflows of capital to U.S. (-F): outflows of U.S. capital (—)]
1961-1965
average
U.S. assets abroad, net:
U.S. direct investments (net)
U.S. purchases of foreign securities (net)..
Stocks
Bonds
Outstanding U.S. loans and other foreign assets:
Reported by U.S. banks
Reported by U.S. concerns other than banks.,
Total U.S. assets abroad, net
Foreign assets in the United States, net:
Foreign direct investments (net)
Foreign purchases of U.S. securities other than
Treasury issues (net)
Stocks
-.
Bonds
Outstanding foreign loans to the U.S. and other
foreign assets in the United States:
Reported by U.S. b a n k s . . .
Reported by U.S. concerns other than banksTotal foreign assets in the United States
(net)
Balances:
Direct investments.
Transactions in securities
..
Other long-term claims
Total private long-term capital..
1966
1967
1968
1969
1970
1971
Jan.-Sept.*
1972
2,205
-854
- 3 , 661
-482
-3,137
- 1 , 266
•4, 765
-909
-3,331
-693
207
-51
•3, 254
•1,494
-467
•1,028
-4,400
-942
17
-68
-20
-874
-889
-983
-871
-689
- 1 , 216
- 3 , 209
- 1 , 226
-153
-1,073
438
134
337
-112
255
-281
358
-220
317
-424
175
-586
-565
-109
-1,156-212
—3,631
-3,918
-4,429
- 4 , 297
-4,855
- 5 , 753
-6,348
—5,392
258
319
832
1,030
-67
50
60
-7
67
909
-305
1,214
1,016
701
315
4,389
2,096
2,292
3,112
1,565
1,547
2,190
697
1,493
2,282
849
1,433
76
6
188
180
158
85
72
715
160
701
23
1,112
-249
303
193
1,363
1,517
5,495
4,805
4,355
2,269
—2,154
-795
-489
- 3 , 575
427
593
-2,879
-250
217
-2,890
3,163
925
-2,422
1,618
754
-3,370
1,248
724
-4,832
1,373
-620
-3,438
-2, 555
-2,912
1,198
-50
-1,3
-4,079
292
-599
-1,250
N
332 ,
3,599
1,652
1,947
281
547 ....
4,443
2,374
2,069
td
148
4,759
—2,999 . .
2,905
-540 ....
3,844
-633
*SeasonaUy adjusted, annual rate.
P Prehminary.
Note.—Details may not add to totals and quarterly figures may not add to annual figures due to rounding.
Source: U.S. Department of Commerce, Survey of Current Business, December 1972 and earUer issues, plus Commerce News Press Release of Feb. 14,1973.
1972 p
CO
CO
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Ci
TABLE
00
by U.S. residents 0/ foreign securities newly issued in the Uniied States, by area, 1962--1972
I I I . --Purchases
Pi
[In miUions of dollars]
1963
1962
-
1964
First
hah*
AU a r e a s . . .
l E T countries, t o t a l
West E u r o p e including U n i t e d
Kingdom
Japan
Otheri...
of w h i c h :
E x e m p t from l E T 2
Subject t o l E T
O t h e r countries, t o t a l (exempt)
Canada......
.
Latin America *
Other countries.
International institutions
1,076
356
1,000
343
195
101
60
219
107
17
1965
1966
1967
1969
1968
1970
Jan.-Sept.*
1972
1971
Second
hah*
250
110
53
57 .
3 110
722
656
141
458
119
61
84
608
13
35
85
23
33
1,063
35
1,206
147
1 210
19
35
95
52
15
4
20
15
1, 027
52
95
1,058
700
200
115
4
709
36
134
179
10
9
1, 191:
922
68
121
80
1,619
14
14'
1,712
45
42
3 ..
1,605
3 ..
42
1,667
1,007
140
212
246
957
144
176
390
14
1,456
130
1,668
13
1,137
17
i
130 . . .
11
...
17
130
14".
1, 655
1,506
3
3
"17326"" ""irsbs"
1,270
32
189
164
775
117
193
241
0
• Pi
790
33
304
376
"'
"'i7
CJi
Pi
>
1,120
Pi
616
54
176
274
^
^
!^
* N o t seasonaUy adjusted.
1 A u s t r a h a , N e w Z e a l a n d , S o u t h Africa.
2 R e l a t e d t o t h e export, t h e direct i n v e s t m e n t , a n d t h e J a p a n e s e exemptions. T h e latter for $100 miUion per year, r a n from 1965 to F e b r u a r y 1970.
3 R e p r e s e n t s c o m m i t m e n t s m a d e prior to J u l y 18, 1963, t h e d a t e of inception of the l E T .
4 I n c l u d e s I n t e r - A m e r i c a n D e v e l o p m e n t B a n k issues.
Source: D e p a r t m e n t of C o m m e r c e , B u r e a u of E c o n o m i c Analysis; D e p a r t m e n t of t h e T r e a s u r y , O A S I A .
1
T A B L E IV.—Net transactions i n outstanding foreign securities by U.S. residents by area, 1962-1972
[Net U.S. purchases (—); in milhons of doUars]
1963
1962
1964
First
hah*
West E u r o p e
Japan
.
Canada 3
Otheri.
O t h e r countries, t o t a l
102
85
-96
15
AU areas
l E T countries, t o t a l . . .
_
Latin America 2
Other countries..
International institutions
,
,
1965
1967
1966
1968
1969
1971
1970
Second
hah*
-151
-85
-16
-23
79
-25
-13
-52
-25
7
-15
-6
54
- 4 ..
30
5
10
-25
12
-98
-3
-3
-60
1
9
6
Jan.-Sept.*
1972
194
181
300
222
-135
-111
-60
0
-305
-284
80
120
117
145
211
228
152
"
225
234
12
2
119
6
147
-38
-8
149
10
68
-5
26
-96
-5
-8
-2
-36
-33
6
36
-9
—74
90
-292
-82
0
-51
27
31
53
9
-53
16
-125
247
7
-23
373
-156
10
1
-24
-13
15
11
-13
5
-3
2
24
51
-13
-23
13
-72
-2
16
-65
14
30
-64
11
13
-23
0
-3
-18^
-6'
7'
ir
11
x
ta
CQ
*Not seasonaUy adjusted.
1 Austraha, New Zealand, South Africa.
2 Includes Latin American Development Bank issue of $145 milhon in 1964.
3 Excludes Canadian repurchases, undertaken in 1966,1967, and 1968 for reserve management purposes.
NOTES.—These data reflect residence of seUer rather than the original country of issue of the security—the basis on which the l E T applies. Also, the above data show net
purchases (or sales) whereas the l E T apphes to gross purchases. Detail may not add to total due to rounding.
Source: Department of Commerce, Buieau of Economic Analysis.
-
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366
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 43.—Statement by Secretary Shultz, April 30, 1973, before the House
Ways and Means Committee on the administration's tax proposals
j\lr. Chairman and members of this distinguished committee, I am pleased
to be with you this morning to discuss President Nixon's tax proposals.
A tax system as complicated as ours requires constant attention to keep it
fair and efficient. The record shows that this administration is dedicated to
that eft'ort. T^is is the third time in 4 years that we have presented major
recommendations to your committee. The first of these occasions was 1969. Acting
upon the President's 1969 recommendations. Congress enacted changes which
corrected a long list of inequities and inefficiencies. Your committee stated in
its report that it was not aware of any prior tax reform bill of equal substantive scope.
In 1971, we came back to you with additional proposals. The revenue act
adopted later that year carried forward the relief for our lowest income classes
which President Nixon had recommended and which Congress commenced in
1969. Our proposals in 1971 also recognized the key role which taxes can play
in providing incentives for basic growth in the economy. JVIodest tax incentives
which appear by their terms to benefit a few can create jobs and prosperity for
everyone. The entire country is the winner when that occurs. The Revenue Act
of 1971 was enacted in that philosophy and, at the President's recommendation,
it reinstituted the investment credit and endorsed liberalized depreciation rules.
Those measures have contributed gxeatly to the resurgence of our economy in
the last 18 months.
We cannot expect to overhaul the entire tax system every 2 years. It is
basically a sound system and we have made far-reaching improvements in it
in the last 4 years. Nonetheless, I am pleased today to recommend to you a
series of modifications which we believe will be major contributions to the fairness of the revenue system, to its efficient operation, and to the well-being of
our Nation as a whole.
There are three basic goals to which our recommendations are directed.
They a r e :
Tax equity. We must ensure that all persons pay their fair share. There
is, of course, no single way to define a fair share. Individual opinions differ.
Nonetheless, we must have a system which most of the public accepts as
fair.
Simplification. IViany provisions of tax law that affect large numbers of
individual taxpayers are inordinately complicated. The annual tax return
form may never provide pleasure, but it need not be a nightmare.
Economic growth. The tax system must be conducive to the stable growth
of our domestic economy and the longrun improvement of our position in
world markets. Any change in the tax law that impedes the productivity of
our national economy will risk the loss of the prosperity we now enjoy.
Certain provisions in the tax law which stimulate economic growth must
be preserved.
Before I outline our specific recommendations, I should like to review with you
the perspective in which we have approached, in 1973, the general subject of
changes in our tax system.
We should note, first, that our revenue system has been spectacularly successful in raising the revenues required to run our country. The cooperation of individual citizens makes our system the envy of the modern world. We must do
nothing to impair that cooperation. We must deal effectively with aspects of the
system that may undermine confidence in it and, therefore, cooperation with it.
Second, under our progressive tax system those with high incomes pay proportionately more than those with low incomes. The changes made by the 1969 and
1971 legislation were markedly progressive in their effect. This is apparent from
table 1, which indicates that in the 4 years from 1969 to 1972, the greatest percentage reductions in tax have been made in the low-income groups, that substantial reductions have been made in the middle-income groups, but that significant increases have been made in the income levels above $100,000. The large
decreases in tax for the low-income groups flow primarily from the President's
1969 recommendation to Congress of a low-income allowance, which, when
coupled with the increase in the personal exemption, removed from the Federal
income tax rolls substantially all persons below the poverty levels. That principle was updated in the 1971 Revenue Act. Thus, for 1972 and subsequent years,
367
EXHIBITS
single persons earning less than $2,050 will pay no Federal income tax, nor will
a family of four pay tax if it earns less than $4,300.
TABLE 1.—Effeci on individual income tax liability of Tax Reform Act of 1969,
ADR, and the Revenue Act of 1971—full-year effect at calendar year 1971 levels
of income
0-$3,000
$3,000-$5,0'00
$5,000-$7,000
$7,000-$10,000
$10,000-$15,000..
$15,000-$20,000
$20,00a-$50,000..
$50,000-$100,000
$100,000 a n d over
Tax under
1972 law
Tax under
1968 law 1
A d j u s t e d gross
income class
C h a n g e u n d e r 1972
l a w from 1968 l a w
1,469
3,488
5,543
12,263
22,065
15,287
19,375
7,344
7,131
...
.
Total
-1,204
-1,493
-1,518
-2,151
-2,863
-1,396
-998
-127
-1-527
Percent
-82.0
-42.8
-27.4
-17.5
-13.0
-9.1
-5.2
-1.7
4-7.4
93,965
....
$ millions
265
1,995
4,025
10,112
19,202
13,891
18,377
7,217
7,658
82,743
, -11,222
-11.9
» Excluding surcharge.
Third, the aggregate income taxes paid by individuals have not increased significantly as a percentage of personal income for 20 years, but have remained at
about 10 percent. Under our system of graduated rates, an individual taxpayer
pays proportionately more taxes as his income grows. That is still true for individual taxpayers. However, a series of tax reductions has kept the overall
ratio of income taxes to personal income from rising. Thus, in the aggregate, the
level of individual income taxes compared to personal income has remained relatively constant although personal incomes have risen very substantially.
Fourth, we have enjoyed a steady growth in our gross national product and
in the affluence of our citizens. That is partly attributable to the fact that we
have as a Nation made enormous and increasing investments in the business
segment of our economy, which have enabled us constantly to increase our productivity and remain competitive with other nations. The tax system plays a key
role in that process of increased productivity because taxes take away, or drive
away, dollars which business might otherwise use to make the capital investments which produce increased prosperity and more jobs. Table 2 indicates the
extent to which the business sector of our economy contributes to our gross naTABLE 2.—1971 gross private business sector produci and income taxes
[In billions of dollars]
1971 Gross product
ITEM
Amount
Gross national product
Percent
Allocated Federal income
taxes
Percent
Amount
1,050.4
100.0
120.6
100.0
Gross product originating in the private business
sector 1
812.2
77.3
104.6
86.7
Claims against product:
Compensation of employees 2_.
Profits 2 . . .
Rent.
Interest
Capital consumption allowances
Indirect taxes
-
528.3
86.7
10.7
18.4
81.3
86.7
50.3
8.3
1.0
1.8
7.7
8.3 . . . .
55.4
45.3
1.5
2.4
45. g
37.6
1.2
2.0
1 Excludes households, including imputed rental of owner-occupied dweUings, nonprofit institutions, and
all goverimient activity.
2 Self-€mployed, proprietors' and partners' incomes have been allocated as between personal service and
.capital incomes, coj»pensation of employees and profits.
Source: Adapted from tables in thp Sp^y,ey gt Current Business, July 1972.
368
19 73 REPORT OF THE SECRETARY OF THE TREASURY
tional product and to our Federal tax revenues. You will see from the table that
business produces 77 percent of the GNP and generates 87 percent of the personal
and corporate income taxes. In terms of our national economic health, it is
^critical that U.S. business remain healthy and that it increase its productivity.
Private investment is one of the most important factors in making this enormous
economy continue to grow.
It has in recent months become painfully obvious to everyone that we cannot
rest on our past successes and that other countries have become much more
<competitive. Table 3 shows the amount of new investment which has been
'occurring in our country compared with the other industrial nations for which
fdata are available. You will see, for example, that Japan—a country roughly
'th'e same size as the State of California—has been making new investment at
^ rate which is roughly two-thirds of the total for our entire Nation. That is
'not necessarily cause for alarm, as Japan has a long way to go before it
reaches our level of economic well-being. Nonetheless, looking into the future
it is cause for concern that our effort is relatively so small compared to that
of other industrial countries, and that as a percentage of GNP, our investment
has been, cut nearly in half, while that of our competitors has climbed sharply.
TABLE 3.—Net domestic invesimeni"^ and as percent of GNP
[In millions of U.S. dollars]
Country
1950
1955
Percent
UnitedStates...
Canada
^..
Jap-an
CTnited
^Kingdom
''Germany
France.
Netherlands
Italy
Sweden
Belgium
$32,843
1,866
N.A.
11.4 $35,626
2,865
2,539
no
.
2,075
5.6 3,800
11,919
8.2 16,128
1,846
4,166
65
.
513
10.3
1,058
2,895
• N.A. .
2 19.3 2 1,857
2i,115
N.A.
695
1960
1965
1970
Percent
Percent
Percent
Percent
7.2 $52,093
6.2
7.5 $61,645
8.8 $36,835
10.6
10.6
3,789
8,589
10.4
20.0
6, 294
16,010
13.0
18.2
7,981
42,928
10.5
21.6
7.1
6,075
10,640
7,032
1,635
4,749
1,653
1.013
23.6
15.0
11.4
14.4
13.5
12.7
10,017
17,933
14, 241
3,039
6,032
2,945
2.131
27.9
15.9
14.3
15.8
10.2
14.3
12.5
11,319
29,317
22,982
5,579
11,767
4,071
3.237
15.7
15.5
17.7
12.6
13.2
12.5
14.3
8.6
13.4
12.0
2 20.3
7.6
8.8
9.3
•Figure obtained by subtracting "depreciation and other operating provisions" from "gross domestic
fixed asset formation."
1 Excludes the Saar and West Berlin.
2 Amount of "depreciation and other operating provisions" not available making amount and percentage
larger than in actuality.
N.A. Not available.
Source: OECD, National Accounts of OECD Countries.
We have for a number of years recognized the national need to encourage new
investment and greater productivity in order that all of our citizens might live
better. The Kennedy and Johnson administrations took steps to encourage investment by lowering the tax on corporations by 4 percentage points, by liberalizing depreciation rules, and by instituting the investment credit. All three
of those changes were designed to increase the resources which business might
use to expand and modernize and the incentive to do so. All three of these
changes are part of our law today. Congress 2 years ago added a fourth change,
a further liberalization in the depreciation rules. We believe that all four of
these provisions make an important contribution to our economic well-being and
to our revenues and that they should be retained. And in designing our tax
package generally, we have tried to be sure that we do not unduly impair the
ability of American industry to modernize and expand, for that modernization
and expansion is vital to all our citizens.
Let me now turn to specific proposals.
Viewed as a package, our recommendations are essentially neutral in their
budgetary effect and can be accomplished within the spending limitations of
the administration's budget for fiscal 1974. By holding down Federal taxes and
spending, and by stimulating productivity, the overall tax program will be a
major weapon in winning the fight against inflation. The recommended tax relief and the new tax incentive provision will be paid for by the tax reform
measures, which will collect a reasonable amount of income taxes from those
EXHIBITS
369
citizens who are not now paying a fair share of the tax burden. A general
tax increase is both unnecessary and undesirable.
Proposals with respect to high-income taxpayers who pay little or no tax
IMuch attention has been paid to the fact that some 72 citizens with high adjusted gross incomes pay no Federal income tax. These people are neither tax
dodgers nor tax cheats. IMany pay no taxes because they make large donations
to worthy causes—donations which existing law encourages by allowing a deduction. The great majority of persons with high incomes are paying tax and
lots of it. In 1971, persons with adjusted gross incomes above $200,000 paid an
average Federal individual income tax of $182,000. Further, the wealthy as a
group are paying more tax now than they were before the enactment of the Tax
Reform Act of 1969. Nonetheless, taxpayers who have large income and pay
little or no tax do exist in limited, but significant numbers. In our continuing
effort to produce sound tax reform, we have two proposals which deal with
investment devices which are popularly referred to as tax shelters.
A common characteristic of a tax shelter investment is that it produces
deductions and exclusions—particularly in the early years—which may be used
against other income of the taxpayer. The result may be an outright reduction
in taxes, an indefinite deferral of tax, or a conversion of ordinary income into
capital gain.
Sometimes these results are unintended and are caused by the exploitation of
tax rules which are sound in normal situations. Other times the results flow
from rules deliberately designed to provide tax incentives for particular activities. Where the rules were intended as incentives, the fact that taxpayers use
them to erase their entire taxable incomes means that the incentives have been
successful. But such a result has a dangerously demoralizing effect on the
operation of our revenue system, as it appears to most taxpayers simply to provide a means by which the wealthy avoid the iDayment of income taxes.
In addition, the widespread tax shelter market introduces significant distortions into our economy. Preoccupation with tax manipulations-^particularly tax
deductible "losses"—^^too often obscures the economic realities and can have 'the
effect of discouraging profitable and efficient enterprise. Inefficient tax incentives
available in the form of "artificial losses" to investors in preferred types of
properties may benefit only the promoters of tax shelter schemes without contributing effectively to the social objectives of the incentives.
For example, there are those who invest in farms not for the purpose of
efficiently producing food and fiber at a profit, but to produce an artificial tax
"loss" which will shelter their nonfarm income from tax. These investors compete with full-time farmers to bid up the prices of the necessary land, livestock,
and equipment. Somewhat perversely, overreaction to existing tax laws may
lead ''hobby" farmers to be lavish and wasteful in their expenses. The result
can be a competitive increase in the operating cost of all farmers.
Our proposals will eliminate these situations. They will increase the fairness
of the tax system and remove the spectacle of high-income taxpayers who pay
no tax by parlaying tax deductions and exclusions. Our proposals will reverse
the economic inefficiencies inherent in tax shelters and shift the emphasis away
from investments which produce tax losses and. will put the premium where it
belongs—on sound economic investments and efficient operations which produce
income.
Our proposals limit the use of some provisions that were intended as incentives. Where that is the case, the proposals should not be interpreted as necessarily foreclosing the possibility of providing other incentives or subsidies.
We do mean, however, to foreclose the use of the tax system to provide incentives
to a degree that impairs the confidence of the ordinary citizen in the fairness of
the system.
In order to achieve this result, we propose that the existing minimum tax
be repealed for individuals and that it be replaced by two new provisions applicable to individuals. They are a minimum taxable income provision and a limitation on artificial accounting losses. In general, the minimum taxable income
provision will deal with those tax items that are outright exclusions from
income, and the limitation on artificial accounting losses will deal with those
tax rules that provide deferrals. Both provisions are simple in principle and
we have tried to design them as simply as possible.
370
1973 REPORT OF THE SECRETARY OF THE TREASURY
Minimum taxahle income.—The minimum taxable income proposal would prevent the combination of exclusions and itemized deductions from offsetting more
than one-half of a taxpayer's income, and every individual will be required to
pay tax on at least the balance. The exclusions involved are the exclusions (1)
for one-half of long-term capital gains, (2) for the bargain element of a stock
option at the time of exercise, (3) for percentage depletion in excess of adjusted
basis, and (4) for income earned abroad and presently excluded under section
911 of the Code. A taxpayer's minimum taxable income will be computed by adding these exclusions to his adjusted gross income. From that sum he will subtract his personal exemptions plus $10,000, which will make the provision inapplicable to low- and middle-income individuals. The resulting amount is the
taxpayer's minimum taxable income base, and it is divided by two to produce
his minimum taxable income, which is the minimum amount on which he must
pay tax at regular rates. Q?he operation of this provision is explained by an
example in table 4.
TABLE 4
Current law
Minimum taxahle income
Salary
$100,000
Stock option bargain
(Excluded)
Long-teiTn gain in stock
$100,000
Less 50 percent exclusion. 60,000
50,000
Mineral income
100,000
Percentage depletion
40,000
60,000
Adjusted gross income.
Less deductions:
Interest on deep discount
bond margin loan
25,000
Charitable contribution
to pubhc charity
100,000
State income tax
30,000
Other personal deductions.
49,000
Exemptions
6,000
Taxable incomeTax (joint return) (minimum
tax)-___
210,000
Adjusted gross income.
Plus:
Option
Percentage depletion
Excluded gains.
Expanded AGI
Less:
Exemptions
Low-income
floor
MTIbase
210,000
0
11,000
Minimum taxable income (50
percent of base)
Tax
$210,000
$50,000
40,000
50,000 140,000
350,000
6,000
10,000
16,000
334,000
167,000
88,340
Limitation on artificial accounting losses.—The limitation on artificial accounting losses deals with deductions that are clearly associated with the production
of income in some future year. Existing tax accounting rules permit a number of
such deductions, thus mismatching them with the income to which they relate
and producing accounting losses that are artificial. The amounts of these deductions are often greatly magnified by the use of borrowed funds. Examples of such
deductions include prepaid feed in the case of livestock feeding syndications, intangible drilling expenses in the case of mineral exploration, and taxes and interest during construction, and accelerated depreciation in excess of straight-line
depreciation in the case of buildings.
We do not propose that any of these deductions be disallowed. Nor do we propose that they be capitalized. We propose only that if they create a loss from the
activity to which they relate, that loss may not be used to offset or shelter other
unrelated income of the taxpayer. The loss must be suspended until the property
commences to produce income, at which time the loss may be used against such
income as rapidly as it is generated.
You will observe that this still permits a taxpayer to shelter income from the
investment itself. Thus, there remains a substantial area in which incentives may
operate. Taxpayers may still purchase investments on which the income can be
tax free for substantial periods, but the tax system will no longer pay them to
buy such investments. They must buy with after-tax dollars and will not get to
use the deductions from the investment until it starts to produce income. They
will be using their own money, rather than tax dollars, to buy the investment.
In general, the limitation on artificial accounting losses will not affect those
taxpayers who are regularly and profitably engaged in the business activity involved. In the case of mineral exploration and housing—^where existing law implements intended incentives—^the proposal is liberal in defining the related
activity against which such losses may be used. Thus, in the case of such losses
EXHIBITS
371
associated with mineral exploration, they may be used against the income from
all oil and gas production wherever situated; and in the case of such losses associated with housing, they may be used against the income from all housing
wherever situated. The provision should have no effect in the case of ordinary
farmers for the reasons outlined in the technical explanation accompanying this
statement.^
Further, investments presently existing or for which commitments have been
made will be unaffected, since they have been made in reliance on existing law.
Housing projects which will receive certain kinds of governmental subsidy assistance will be similarly unaffected even though investment commitments are not yet
firm. This preserves the status quo with respect to Federal housing programs that
depend on such subsidies. Approval of new projects has been suspended by HUD
and the Department of Agriculture pending the reexamination of existing programs, on which the President is to make policy recommendations to the Congress in early September.
Other new projects commenced after April 30, 1973, would be subject to the
limitation on artificial accounting losses.
The minimum taxable income provision and the limitation on artificial losses
will apply to individuals and will be inapplicable to corporations other than
Subchapter S corporations. Coriiorations do not have the graduated rates which
provide the impetus for tax shelters and no major problem exists in the corporate
sector. The rules proposed are tailored for individuals and would be administratively unworkable for corporations with varied activities. Corporations will
continue to be subject to the present minimum tax.
In addition to providing a more equitable income tax the rule will help to eliminate from our economy the distortions inherent in the widespread tax shelter
market. Tax deductions now prematurely available in the form of * losses" wdll
hereafter be available only to offset income produced by the same or related investment. Where the investor will be risking his own money rather than simply
the Government's tax dollars, he will be more careful to investigate the soundness of the investment. This provides the right kind of tax incentive by rewarding efficiency and success.
The minimum taxable income provision and the limitation on artificial accounting losses would in combination raise about $1 billion in revenues, for a net
revenue gain of $800 million after taking into account the revenue loss of about
$200 million arising out of the repeal of the present minimum tax on individuals.
Proposals with respect to simplification of the tax laws
We believe there is overwhelming need for major simplification of our tax system and propose to provide it. The burgeoning complexity of the existing system
seriously threatens its effective operation.
The genius of our income tax system is voluntary compliance. The willingness
of the American public to comply with tax rules is essential. No amount of policing will achieve compliance if that vTillingness should disappear. When the law is
too complicated, many taxpayers cannot comply. Others give up trying. The resulting noncompliance by significant segments of the population infects the entire
system and destroys acceptance of it by the public as a whole.
Many tax professionals are concerned that we may be at a critical point. For
example, a recent report on tax simplification by a blue-ribbon committee of
the New York State Bar Association states:
"This committee is unanimously of the view that the present course of development of the tax law, if not reversed, may well result in a breakdown of the
self-assessment system. Indeed, some members believe that the breakdown has
to some extent occurred."
We share that concern.
No magic road to simplification exists. I have no simple formula to offer
you to unwind all of the complexity encrusting the tax law.
On the contrary, we will get simplification only if we work hard and long at
it. Plundreds of items must be considered individually. IMost of those items
were enacted in the belief that they produced greater equity. Some have outlived
their usefulness. Others need to be pared down or integrated into broader and
simpler provisions.
1 Omitted from this exhibit.
372
1973 REPORT OF THE SECRETARY OF THE TREASURY
Working at simplifying the law.—I urge that we roll up our sleeves and
commence this long-range project. The administration has several specific suggestions, to begin this process, but we must not delude ourselves. We will not
have achieved in a single bill the simplification we need.
Thus a most important recommendation on the subject of complexity relates
to procedures. We recommend that as the administration and your committee
work together on new legislation in the coming months, we set up procedures
under which we can carry forward a systematic program of simplification next
year, and the following year, and the year after that. It will be hard work. It
will be undramatic. But it will be of the greatest longrun importance.
Efforts to simplify specific provisions of the law are already underway.
Several months ago the tax staff at the Treasury began work in cooperation with
the staff of the Joint Committee on Internal Revenue Taxation to draft for
your consideration suggested revisions of such provisions as those relating t o :
The deduction for moving expenses;
The exclusion of sick pay and disability compensation;
The retirement income credit for the elderly;
The provision for taxing annuities ; 'and
The accumulation trust rules.
The aim was to strip away unnecessary complication and to make them readily
understandable and easy of application without sacrificing any of the essential
equity and benefits these provisions are designed to achieve. I will tell you about
some of these today, and in the course of your deliberations in the coming
months, we expect to make additional alternatives available to you.
In most instances, simplification can be best achieved by being more liberal
with taxpayers and it will undoubtedly be necessary in some instances to compromise the desire for simplicity with the need to avoid major revenue loss.
Simplifying the tax return form.—IMajor simplification requires major simplification of the tax forms, to relieve millions of individuals from the annual agony
of April 15. We must make progress on that now. I am pleased to present to this
committee a vastly simplified tax return concept to which the President attaches
the greatest importance. Some months ago I asked our tax staff at Treasury and
at the Internal Revenue Service to consider what might be done both legislatively and administratively to simplify the preparation of tax returns for the
75 million individual citizens who file them. That work is still continuing. However, we are now prepared to present to you a first-stage simplification of the
return form which could be used by most individuals who now itemize. It would
be possible with just a few legislative changes which we will recommend to your
committee.
j|j
«
ffi
*
:{t
«
*
The form 1040-S will be possible if Congress will do the following, which I
recommend:
Miscellaneous deduction allowance. We recommend the enactment of a provision for a miscellaneous deduction allowance of $500 per return. Every taxpayer
who itemizes would receive this allowance.
Elimination of deductions. In order to simplify the fonn and to pay for the
taxpayer benefits we are proposing, we recommend that the Code be amended to
eliminate the following itemized deductions and exclusions.
First, no itemized deduction would be allowed for the first $200 of those deductions which are now collected on the tax return under the schedule titled "miscellaneous deductions."
Second, medical and casualty deductions would be combined and an itemized
deduction would be permitted only to the extent that the combined total exceeds
a floor equal to 5 percent of the taxpayer's adjusted gross income.
Third, the dividends received deduction would be eliminated.
Fourth, the deduction for gasoline tax and other miscellaneous taxes would be
eliminated.
Fifth, the sick pay exclusion would be eliminated.
A child care deduction. We recommend that the child care deduction be
amended to apply to all such expenses actually paid during the year, subject only
to the limitation that the amount may not exceed the lesser of $4,800 a year
(which is the present maximum) or the amount of earned income of the lesser
compensated spouse. The deduction will be phased out on a dollar-f or-dollar basis
for incomes in excess of $22,800. The expected revenue loss is less than $20
million.
EXHIBITS
373
Simplified tahles. Our third specific recommendation is the enactment of a Code
provision which would permit us to eliminate the present tax tables which are
based on adjusted gross income and to replace them with tables based upon taxable income. That would permit the Internal Revenue Service to replace five
pages of complicated tables in the instruction book with a single table. This
would be a purely mechanical change and would have no effect on anyone's tax
liability nor upon the revenues. It would require taxpayers to perform a little
more simple arithmetic than they now do, but it is the judgment of the Internal
Revenue Service that that inconvenience would be greatly outweighed by the
advantages of less confusing tables.
Age credit. We recommend an age credit to replace the complex retirement
income credit, which would be repealed. The base would be $1,500 in the case of a
single taxpayer or in the case of married taxpayers where only one spouse is over
65 ; $2,250 for married taxpayers filing jointly ; and $1,125 for married taxpayers
filing separately. From that amount the taxpayer will deduct social security and
railroad retirement benefits received. The credit will be 15 percent of the difference. No reduction is required for earned income. Retirees and widows over 65
should not be penalized if they need to work. This amendment will do away with
a credit which is now so complicated that tens of thousands of our elderly taxpayers compute it incorrectly or fail to claim it, in favor of a slightly more liberal
credit wliich is vastly more simple. The revenue loss will be $200 million.
These four recommendations may seem minor when considered individually,
but they would, we believe, open the door to a major simplification in the return
forms for a great many taxpayers.
Recommendation to help meet the national energy needs
Our next recommendation is that Congress enact an investment credit for exploratory drilling.
Our annual consumption of oil and gas now exceeds the annual increase,
through new exploration, of the known reserves in our own country. State regulatory commissions which formerly restricted production have lifted these limitations, and production is up. Restrictions on the importation from abroad of
crude oil have also been relaxed. However, the real need is neither for more rapid
development and consumption of existing domestic reserves nor for imports which
will worsen our balance of payments and tend to make us dependent on foreign
sources. Instead, the need is for new exploration in the United States which will
add to the national wealth of known oil and gas reserves for the future and assure
the continued availability at reasonable prices at home—not abroad—of adequate
fuel supplies. Like the 7-percent investment credit enacted in 1971 at President
Nixon's recommendation, to which it is similar, this new credit will be an efficient
tax incentive that will produce the desired results quickly and at comparatively
little revenue cost.
This credit should serve as an overall incentive for new exploration in the
United States. Further, it is structured to reward success by providing a greater
credit for a commercially productive well. In this way the Nation will be a guaranteed winner, for a successful well will at the same time both provide needed energy resources and also increase the tax revenues.
The new credit would extend to oil and gas exploration a proven and successful
tax incentive device. The limitation on artificial accounting losses and to a lesser
degree the minimum taxable income provisions discussed above will limit somewhat existing incentives for oil and gas production. The new credit offsets the
effects of that limitation. It is thus a rechanneling of existing incentives to a more
efficient purpose—from production generally to the domestic exploration for
which there is critical need.
Under the proposed credit, a driller of a new domestic exploratory hole may
claim the 7-percent investment credit on his intangible drilling costs plus an allowance for geological and geophysical expenses. If the exploratory hole proves
commercially productive, a supplementary credit of 5 percent of the IDC will be
allowed against the first tax payable on net income from the production.
An "exploratory hole" will be defined as a hole, intended to produce oil or gas,
which is bottomed not less than 2 miles horizontally or 3,000 feet vertically from a
producing well.
374
19 73 REPORT OF THE SECRETARY OF THE TREASURY
The 7-percent exploratory drilling investment credit, but not the supplementary
5-percent credit, will be subject to the same overall limitations which currently
apply to the investment tax credit. In other words, no taxpayer may claim investment tax credit or exploratory drilling credit exceeding in the aggregate $25,000
plus 50 percent of his precredit tax liability! in excess of $25,000. Carrybacks and
carryovers for the exploratory drilling credit will be available on a similar basis
to the investment tax credit. Various special investment tax credit provisions,
such as those regarding useful lives of eligible property, credit recapture, used
property, public utility property, and pipeline companies, however, will not affect the exploratory drilling credit.
The credit will be available for exploratory wells drilled domestically, including off-shore, in Puerto Rico, and in territories or possessions of the United
States or their surrounding waters. Wells drilled elsewhere will not. The credit
will be available to corporations, individuals, or other entities.
The 7-percent credit will apply to all intangible drilling costs as currently computed. In addition, the credit base will include an allowance for geological and
geophysical costs of up to $50,000 per exploratory well. The figure of $50,000 per
well represents a conservative estimate of the national average of geological and
geophysical costs per exploratory hole. Because allocation of geological and geophysical costs to any particular well is difficult or impractical, and because a
generalized incentive to perform geological and geophysical activities within the
United States is desirable, the taxpayer will be permitted to allocate to any exploratory well geological and geophysical costs, wherever incurred in the United
States, up to the $50,000 limit. In order to prevent abuse, only wells 1,250 feet or
more in depth will qualify for this geological and geophysical inclusion in the
credit base.
The credit will be effective with respect to all drilling commenced after April 17,
1973.
Recommendation to provide property tax relief for the elderly
This administration has continually recognized the Nation's problems with respect to the property tax and has been committed to reducing residential property taxes. Therefore, the revenues gained from the recommended tax reforms
will be further used to provide major tax relief to the elderly—a large segment of
our population who are now overburdened by excessive State and local property
taxes oh their homes.
While the burden of property taxes is a matter of increasing concern to all of
our citizens, it falls with particular force upon elderly taxpayers. The Advisory
Commission on Intergovernmental Relations estimates that in 1970 the average
homeowner paid about 3.4 percent of household income in property taxes, while
homeowners age 65 or older paid on the average about 8.1 percent. Elderly homeowners with less than $2,000 income paid an average of 16.6 percent of family
income, and in the high-tax Northeast region such homeowners paid more than
30 percent of their meager income in property taxes. Elderly renters are also
affected; many are paying an excessive portion of their income in rent.
In scope and distribution this burden is a national problem. The imposition of
excessive property taxes on the elderly undercuts social security and other Federal programs designed to provide retirement benefits, as well as a minimum of
security for the aged.
While many States have adopted measures to deal with this problem, the State
response has generally proved insufficient. Fourteen States have adopted Statefinanced tax rebate provisions (called "circuit breakers") that are specifically
designed to relieve property tax overload situations. Only 7 of these provide full
coverage for renters, and the 14 States vary widely in the amount of relief afforded. For example, low-income ceilings ($6,000 or less) in 9 of the 14 States
deny relief entirely to the large number of middle-income elderly now paying excessive property taxes.
To deal with these problems, we propose enactment of a refundable property
tax credit for our low- and middle-income elderly. The credit would be allowed
for real property taxes over 5 percent of household income, up to a limit on the
credit of $500. Household income would be broadly defined to include items of income that are nontaxable but are nevertheless part of a household's economic
income.
Equivalent relief would be afforded under the proposal to elderly renters. Availahle information from real estate assessors' offices and national income statistics
EXHIBITS
375
indicates that real property taxes paid on rented homes and apartments average
about 15 percent of rental value. The proposed credit would accordingly treat
renters as having paid property taxes equal to 15 percent of their rental payments,
and would subject them to the same fioor and ceiling.
The credit would be phased out for household incomes between $15,000 and
$25,000, so as to concentrate the benefits of the credit on low- and middle-income
elderly persons. It would be refundable—a taxpayer would be entitled to a payment for any excess of his credit over his Federal income tax due—to extend
the benefit of the credit to the lowest income elderly who pay little or no Federal
income tax.
Recommendation to provide a nonpublic school tuition credit
The nonpublic school system educates a tenth of our school children. In order
to preserve this vital national asset and to provide needed tax relief for the many
low- and middle-income families who bear a large part of the cost, we recommend
enactment of a refundable income tax credit for nonpublic elementary and secondary school tuition.
The tax credit will apply only to tuition paid to nonprofit schools and will be
for 50 percent of the tuition paid for each child. The maximum amount of tax
credit for any one child in a single school year will be $200. The credit will be
claimed on the income tax return for the year in which the tuition is paid. To
the extent the total credit exceeds the income tax liability, the excess will be
refunded in a cash payment. In recommending this refundable feature, we are
particularly concerned about low-income families. We want them to benefit from
the tuition credit even though they owe little or no Federal income tax. To further concentrate the credit on the low- and middle-income families most in need
of this important relief, the credit will phase out as income rises above $18,000.
The nonpublic school system plays a vital role in our society. These schools provide a diversity of education in the best of our traditions and are a source of innovation and experimentation in educational advances which benefit the public
school system and the public in general. In many American communities they
are an important element of stability and civic responsibility. However, education costs are rising, the enrollment in the nonpublic schools is declining, and an
important American institution may be in jeopardy.
The nonpublic school tuition credit will help reverse this trend. The revenue
cost in fiscal year 1974 will be approximately $300 million, which is already included in the administration's budget for fiscal 1974.
Recommendation to increase the financing capabilities of State and local governments and to reduce the amount of tax-exempt interest
State and local governments have a rapidly growing need for revenues to
provide publie schools, highways, and the like, plus a wider array of new social
and community services than ever before. The State and local tax bases have
expanded and the rates of these taxes have in many instances gone up also.
However, State and local governments have traditionally financed much of their
immediate needs for heavy capital outlays through borrowing. They continue to
do so today. Their needs for adequate debt financing will increase, not diminish,
in the future. At present they are limited to the narrow market fpr tax-free
obligations. The proposal would give them an option to utilize the broader market
for taxable obligations when that seems to them advantageous.
Specifically, we recommend enactment of an additional tax provision which
will make available to State and local governments the option of issuing either a
tax-exempt bond, as they now do, or of issuing a bond on which the interest will
be subject to Federal income tax. If the governmental unit issues a taxable bond,
in order to be attractive to investors the bond will have to bear a higher rate
of interest than if it were tax exempt. To compensate the issuing government
for this additional interest cost, the Federal Government will pay an interest
subsidy equal to 30 percent of the net interest expense on a qualifying State
or local obligation on which the issuer has elected to pay federally taxable
interest. Generally, any State or local obligation now exempt from Federal,
income tax would be eligible for the subsidy if the Secretary of the Treasury
agrees to pay it and the issuer elects to subject the interest to Federal tax. Certain limited exceptions are provided to prevent inordinate costs to the Federal
Government.
The issuer would receive the 30-percent subsidy, less Treasury administrative
costs, in time to make its interest payments to the bondholders. fThe issuer would
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19 73 REPORT OF THE SECRETARY • OF THE TREASURY
have to report to the Internal Revenue Service the payments of the taxable
interest.
The subsidy would not affect the exempt status of interest on nonsubsidized
obligations, which will continue to be freely issued.
The proposal will provide a more stable market for State and local government
obligations by enabling these governments to compete more effectively with
corporations, especially when market rates are high. It will also make municipal
obligations attractive to pension trusts and other exempt organizations, which
presently do not typically invest in tax-exempt obligations. The subsidy program
will also tend to reduce the supply of tax-exempt obligations and slightly depress
interest rates on those remaining, thereby reducing both municipal borrowing
costs and the availability and attractiveness of exempt obligations to highbracket taxpayers.
We estimate subsidy costs for the first year of $180 million, with increased
tax receipts at about the same level, partly depending on the average marginal tax
bracket of the holders of investors in tax-exempt obligations. A reasonable estimate is that there would be little net gain or loss to Treasury at the 30-percent
subsidy level.
Recommendations with respect to arbitrage on advance refundings of State and
municipal securities
Prior to 1969, State and local governments had engaged in the practice of issuing securities on which they paid tax-free interest at low rates and investing the
profits in higher yielding taxable securities.
The "arbitrage" spread between the nontaxable and taxable securities afforded
a substantial profit to the issuers and spawned a substantial volume of State and
local bonds which had no other legitimate purpose. The Tax Reform Act of 1969
provided that bonds of State and local governments would lose their tax-exempt
character if issued in the expectation of investing the proceeds in higher yielding
securities.
The easiest vehicles for abuse were so-called advance refunding bonds, which
were new State and local obligations issued to refund outstanding old obligations
that could not be called for a number of years. The proceeds of advance refunding
bonds are typically placed in escrow and invested until the call dates of the old
bonds, thus providing a pretext for issuing new bonds and investing the proceeds
for long periods of time with arbitrage profit. A substantial volume of advance
refunding bonds are issued for legitimate reasons unrelated to arbitrage. ^Since,
uuder the 1969 act, the proceeds of State and local bonds may not be invested
in obligations bearing a materially higher yield, issuers are now required to
invest proceeds of advance refunding bonds in securities having an artificially
low yield. There is no other practical way to eliminate the practice of arbitrage.
The result of the rule is that issuers are required to give away the windfall
difference between the yields on the tax-exempt and taxable bonds. The beneficiaries are usually promoters, underwriters, or banks, who have au understandable incentive to promote even more advance refundings. This is a fundamentally unhealthy situation.
We recommend that Congress enact an incentive to rechannel the windfall
arbitrage element back to the United States. This is appropriate because it is the
tax exemption provided by the United States which creates the windfall element.
This purpose would be accomplished by providing that in the case of advance
refunding issues the proceeds may be invested;to obtain a yield equal to the yield
permitted under present law plus an additional one-fourth of 1 percentage point.
Issuers would be entitled to this extra profit-only if the proceeds were invested
in special Federal securities designated by the Treasury, which would be retained
by the issuer until their maturity dates and used to retire the outstanding State
or local obligations on their call date. Since most issuers are obligated by State
law to invest funds at the highest permissible yields, we expect that most issuers
of advance refunding bonds will invest in the new Trea&ury securities. This will
allow the U.S. Government to recover most of the taxes lost through tax-exempt
advance refundings by issuing the special securities at very favorable rates. At
the same time, issuers will be able to obtain higher yields than they can obtain
under existing law and also enjoy the flexibility, safety, and relatively low cost
of the new Federal investment securities. The only losers will be those promoters
and underwriters who would otherwise pocket the windfall arbitrage profit. '
EXHIBITS
377
Recommendations on the taxation of foreign source income
President Nixon's April 10 message to Congress on trade legislation urgently
requested, and committed him to help develop, legislation enabling the United
States to enter this fall's international trade negotiations with the tools to
build a fair and open trading world.
The interrelationship of taxes, trade, and investment should not be lost upon
us. Our tax system must be conducive to the longrun improvement of our position in world markets. Thus, President Nixon's trade message contained specific
recommendations on the taxation of foreign source income. Let me restate those
recommendations, which we arrived at after careful consideration of the arguments and theories abounding in this area.
A number of countries provide tax holidays from local taxes in order to attract
investment. In order that. American companies will not make their investment
decisions on the basis of tax inducements of this sort, we request the amendment
of our tax law to tax U.S. shareholders on the earnings from new investments
which enjoy such tax incentives, even before such earnings are repatriated. We
are prepared, however, in limited and appropriate circumstances, to enter into
tax treaties with other countries, subject to Senate approval, to recognize certain
such incentives.
In addition, we believe that a U.S.-controlled corporation which moves its plant
to enjoy lower foreign tax rates, while manufacturing goods for the U.S. market,
shouid be taxed currently in the United States. We have proposed, therefore,
that where a U.S.-owned foreign corporation, subject to a significantly lower
foreign tax rate, has more than 25 percent of its receipts from exporting goods
destined for the United States, the U.S. shareholders should pay tax currently
on its income.
Where U.S. companies deduct against U.S. income losses from their foreign
branch operations, we have proposed to reduce their subsequent foreign tax
credits by the amount of such losses. This will avoid the United States bearing
the cost during the loss years and receiving no revenue during profitable years.
The President has also instructed the Department of the Treasury, in consultation with the Department of Justice, to institute procedures involving
mineral importing companies, which import from their foreign affiliates, to
determine intercompany selling prices and tax payments in advance, in order to
expedite the determination and payment of their taxes.
Proposals with respect to tax return preparers
A very large and growing number of individual income tax returns are prepared by employees of commercial firms who are neither lawyers nor accountants. On the whole, a good job is done by these firms and the trend to
commercial preparation concerns us only to the extent that it indicates that taxpayers cannot—or in any event, believe they cannot—^prepare their own returns.
However, the Internal Revenue Service has been concerned for several years
about a growing number of incidents which indicate negligence or fraud on the
part of a minority of commercial preparers of tax returns.
It has been suggested that we institute a licensing program for tax preparers.
The Internal Revenue Service believes that such a program is neither feasible nor
appropriate. A program of licensing everybody will not cure the negligence and
fraud of a minority, and would be a clear case of overkill. The principal result
of a licensing program would be to insist upon the overqualification of tax return
preparers, which would result in excessive costs to the public.
We do, however, believe that some steps are required to make tax return preparers responsible to a greater degree than at present for the returns they prepare
and to raise the degree of compliance with the internal revenue law.
We, thus, propose a three-part approach.
First, the proposed legislation will require each tax return preparer to place
his identification number on each return he prepares, and will require a person
who employs tax return preparers to file a return listing the name, taxpayer
identification number, and place of work of each such employee. This information will facilitate inspection of the manner in which a tax return preparer conducts his preparation service when facts warrant such investigation.
Second, the proposed legislation will provide civil penalties for tax return preparers in the case of negligent or intentional disregard of the internal revenue
laws and in the case of willful attempts to evade, defeat, or understate a taxpayer's tax liability.
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19 73 REPORT OF THE ^SECRETARY OF THE TREASURY
Third, the proposed legislation will authorize injunctive action against preparers who engage in conduct subject to civil or criminal penalties or other acts
which substantially interfere with the adniinistration of the internal revenue
laws. Thus, although some of the civil penalties provided may appear to be
nominal, the provisions themselves will serve a dual function, since the acts
involved will also be grounds for injunctive relief.
Taxation of political contributions and activities
I would like to ask your committee to consider the manner in which the income tax laws should be applied with respect to political parties. I have no
specific legislative proposals to present on this subject because we believe i t i s a
subject best left to Congress. Nonetheless, I should like to explain how the tax
aspects of political operations present problems in the administration of the
tax law, and to suggest several areas about which we are concerned.
The income tax status of political parties has been in legal limbo since the
beginning of our income tax system. It is a matter of history that the Iriternal
Revenue Service has never attempted to tax political parties, although there
is nothing specific in the Internal Revenue Code which says that they are nontaxable. The situation with respect to political parties is much the same as the
situation with respect to social security, as there is nothing in the Internal
Revenue Code which makes social security benefits nontaxable, either. They
have just grown up that way.
In the absence of a specific statutory rule, we find that there are no clear
rules to govern the more complicated transactions. Thus, for example, in last
year's campaign we found emerging a practice of making contributions "to
political parties in the form of appreciated securities, in the apparent expectation that neither the donors nor the political parties would ,be taxable on the
appreciation." This occurred with respect to both major political parties and
was apparently done without realization that the contribution and subsequent
sale of the property might have income tax consequences for the parties involved. The Internal Revenue Service in noting the practice issued an announcement cautioning that tax consequences might result from the contribution and
subsequent sale of securities, and asked for public comment on that issue.
Comments both oral and in writing were received from a number of persons
and organizations, including the two major political parties. These comments
reflected widely differing points of view and legal positions but taken as a whole
strongly support our belief that the tax status of political parties and committees and the tax status of various aspects of political activity require a
legislative solution.
It is argued, with much cogency, that political parties have never in fact been
taxed, and that nontaxable status is presentiy accorded a wide variety of public
organizations, including civic leagues, country clubs, labor unions, lodges, and
cemetery companies—many of which are less committed to a general public
purpose than are political parties.
We believe that Congress should address itself to this problem and make it
clear whether political parties are to be completely nontaxable, or are to be
taxable for some purposes but not for others, or are to be taxable in their
entirety.
Second, we ask that your committee consider the specific problem raised by
the contribution of appreciated securities or other property. If an individual
contributes to a political party securities for which he paid $1,000 and which
are now worth $5,000, should he or the party or either of them be taxable on
the $4,000 of gain? If the political party is nontaxable and the contribution is
treated as a gift, neither the contributor nor the party has income tax liability
under present concepts. The common law which has grown up is that the contribution is a gift, I suggest that you should, reconsider that rule. If the individual had himself purchased television time or billboard space to extol his
preferred candidate and had used appreciated securities to pay for it, he would
have been taxable on the $4,000 of gain. Should the result be different if he
contributes the securities to a political party which in turn buys the same
television spot or billboard space? Should contributions to a political party be
treated as payments to the party to advance objectives favored by the contributor? Should such contributions be treated differently from club or union
dues or assessments, which are not thought of as gifts but rather as payment
for services to be performed?
EXHIBITS
379
That raises a third question which we ask you to consider, which is whether
such payments should be treated as gifts for gift tax purposes. The Internal
Revenue Service has held for many years that they are, although a recent court
decision in the fifth circuit has held to the contrary.
We believe it essential both to our political processes and to the administration of the tax laws, that any rules adopted be clear rules so that we may carry
forward the serious business of electing public officials and of collecting the
revenue without injecting politics into the revenue system. Whatever solution
is adopted, the objective, of course, must be to preserve the integrity and independence of our political system and its political parties. We urge that whatever
rules you prescribe you adopt an approach that will minimize the involvement
of the Internal Revenue Service in the aff'airs of the political system.
Estate and gift tax revisions
I am not today proposing specific changes in the laws relating to estate and
gift taxes. That does not mean that we are opposed to change.
JMost of the controversy involving estate and gift taxes turns on matters of
personal philosophy. There is no one key to truth in this area and even individuals of the same critical persuasion feel differently and deeply. The permutations and combinations of options are myriad. Diff'erences in view must
be compromised for they cannot be reconciled, and Congress is the best place
to do it.
We do have several broad convictions which I urge you consider as you
approach this project.
First, we urge that whatever changes are made in estate and gift tax laws,
they be balanced in a way which does not change the overall revenues from
these taxes.
Second, we believe that whatever changes are made, transition rules are of
the greatest importance. You should not change the basic rules so abruptly that
you frustrate the lifetime planning of millions of our citizens who have arranged
their affairs in reliance on existing rules. You should be careful not to subvert
the sense of responsibility with which our citizens work to build their businesses
and their estates on behalf of their families.
Third, we urge that you do nothing which will jeopardize the vitality of our
voluntary charities, which depend heavily on gifts and bequests. These organizations are an important influence for diversity and a bulwark against overreliance on big government. The tax privileges extended to these institutions
were purged of abuse in 1969, and we believe the existing deducti_pns for charitable gifts and bequests are an appropriate way to encourage those institutions.
We believe the public accepts them as fair.
The principal issues in the estate and gift tax area have been identified as
the problems of rates, the treatment of unrealized appreciation at death, generation-skipping, a unified gift and estate tax, and changes in the marital deduction.
We have no magic answer to any of these items but we shall be pleased to work
with your committee and share with you what expertise we have.
Other items
I have not spoken today of the administration's proposal with respect either
to pensions, for that topic will be the subject of detailed testimony on a later
occasion.
I have tried today to outline those subjects which, in our opinion, have the
greatest priority. There is a great backlog of lesser substantive and technical
provisions which should be considered by your busy committee. I am hopeful
that with the assistance of our joint staff's many of them can be considered on
this occasion and that for those which are not, we can devise a system for their
orderly consideration in the future. Among the particular items which we hope
you will find time to deal with are the proposals which we recently submitted
clarifying the tax law with respect to prisoners of war and those missing in
action.
The major proposals which I have outlined are made after careful analysis
and in a continuing effort to reform our tax structure so it will be more equitable
and efficient, so it will be more conducive to stable economic growth, and so it
will be more responsive to urgent social needs. We have taken significant steps
toward achievement of these objectives. IVIore needs to be done and we look
forward to working constructively with your committee in the days ahead.
506-171—73
^27
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19 73 REPORT OF THE SECRETARY OF THE TREASURY
TABLE 5.—Administration's tax program—magnitudes of revenue changes
[The following numbers are approximations only. They represent judgments based on data available, which
are more reliable in some instances than others. Some items will change over a period of years, e.g., the
proposal with respect to foreign losses phases in gradually and will produce revenue gains rising slowly from
zero in the first year to something in the neighborhood of $150 milhon after 10 years. (It is reflected in the
table at zero.) Readers are accordingly cautioned that the estimates should be used only to indicate the
order of magnitudes involved. In milhons of dollars]
First
full-year
effect
NEW ITEMS
1. Minimum taxable income and tax shelters
Lessrepealof the 10 percent minimum t a x . . .
-f-l, 000
—200
2. Simplification
3. Investment credit for domestic oil and gas exploration
4. Property tax credit for elderly
-^800
-400
—50
—500
-150
5. Tuition credit for nonpublic schools
BUDGETED ITEM
—450
Exhibit 44.—Statement by Assistant Secretary Hickman, JMay 10, 1973,
before the House Ways and Means Committee
My testimony today concerns the relationship of our tax system to international trade policy. I will explain the administration's proposals for changes in
the tax laws relating to income from foreign sources.
Some would use our tax system as a tool to deter - foreign investment. We
believe that would be a mistake. As Secretary Shultz stated in his testimony
yesterday, the evidence is that foreign investment has made a positive contribution to our balance of payments, to our exports, and to jobs and prosperity at
home.
The administration's tax proposals rest on the conviction, stated in the
President's trade message, that "our income taxes are not the cause of our trade
problems and tax changes will not solve them." The basic dislocations and
distortions that exist with respect to international trade and investment must
be solved by hard bargaining with other countries. The route to increased
domestic investment for exports lies in realistic monetary exchange rates and
in assuring fair access to foreign markets for U.S.-made products. It does not
lie in inhibiting foreign investment by use of the tax laws.
Our proposals for tax changes deal with distortions created by existing tax
laws, both domestic and foreign. What is wrong with the tax system we aim to
remedy. But we do not propose to use our tax laws to correct or to mask broader
problems not caused by taxes.
The present system—basic concepts
Under the existing law, we impose an income tax on individuals and an income
tax on corporations. Corporate earnings which are distributed are taxed twice—
once to the corporation when it earns them and again to the shareholders when
they receive them. We do not purport to tax foreign citizens or foreign corporations except on income earned in the United States.
These general principles apply to U.S. investment at home and abroad. Thus,
we tax the worldwide income of a corporation that is incorporated in the United
States, and we tax a foreign corporation on income earned in the United States.
But, we generally do not tax a foreign corporation on income earned outside the
United States, whether or not that corporation is controlled by U.S. owners.
However, when the income of such a corporation is distributed as a dividend to its
shareholders, if those shareholders are U.S. citizens, residents, or corporations,
we tax them on the dividends they receive. In order to eliminate double taxation
of the same income at the corporate level, we give a tax credit to corporate
shareholders for foreign income taxes paid by the foreign corporation.
The result is that foreign subsidiaries compete in foreign markets under the
same tax burdens as their foreign competition. As a foreign corporation operating
abroad, it pays tax abroad and not in the United States. However, at the stockholder level, the earnings are subject to U.S. tax under the general rules ap-
EXHIBITS
381
plicable to shareholders. When income is repatriated from the subsidiary to the
U.S. shareholders it is taxed to the shareholders at regular U.S. tax rates, subject to a credit for foreign income taxes. This credit cannot exceed the amount of
tax due to the United States on the foreign income, so that it does not reduce tax
liability on U.S. source income.
Effects of the present system
Our present system of taxing foreign source income has on the whole served
us well. It minimizes the intrusion of taxes into investment decision. At present,
a business can—and typically does^—decide whether or not to invest in a particular foreign country on the basis of market and business factors, knowing that
it will be taxed in that country just as its local competitors are taxed.
Thus, the present system has maximized the responsiveness of investment to
the forces of a free market. By being competitive abroad, American-owned foreign
businesses have opened major new markets to American companies and have
promoted exports, prosperity, and jobs at home.
Table 1 indicates the contribution which American investment abroad is
making to our balance of payments problem. The income flowing back to the
United States from investments abroad is today roughly twice as large as the
flow of new investment out. Foreign investment makes a major contribution on
the basis of repatriated earnings alone, to say nothing of the indirect benefits
which flow from the opening of foreign markets to Americans.
Not too many years ago, foreign tax rates were substantially lower than U.S.
tax rates, and it was argued by some that those lesser tax rates were a critical
factor in many investment decisions to locate abroad. Whatever the logical merits
of that position, the facts have changed very significantly in recent years. Tax
fates in the major industrial nations which are open to U.S. investment are now
in roughly the same range as U.S. tax rates. This is apparent from table 2. In
addition to the income tax rates indicated on table 2, it is important to keep
in mind that the foreign governments listed collect additional withholding taxes
at rates ranging up to 35 percent on the payment of dividends and interest flowing from foreign subsidiaries to U.S. shareholders. Thus, in many cases, the
combination of foreign income and withholding taxes exceeds the rate at which
a corporation's income would be taxed in the United States. Under these circumstances, it is apparent that comparative tax rates are of only marginal
sin-nificance in normal cases and major countries.
Table 3 illustrates still a further fact, that foreign subsidiaries repatriate
about half of their foreign earnings and reinvest about half abrond. Students of
corporate activity know that corporations today must reinvest n s^ubstantial portion of their earnings if they are to stay healthy and competitive. The payout
rate for foreign corporations indicated in table 3 is comparable to the dividend
payout ratio for American industry generaUy. There may, of course, be individual cases in which companies reinvest abroad solely to avoid the additional
tax occasioned by repatriation. But in the aggregate, the situation seems to be
a fundamentally healthy one in which normal percentages of income are returned to the United States and taxed here.
Tax proposals of H.R. 62
H.R. 62 proposes two major changes in the existing tax system. It would eliminate the credit for taxes paid to foreign countries and it would abolish the rule
that shareholders are taxed on dividends only when those dividends are paid to
them. We have considered these proposals at length and have concluded that
they are undesirable because they would destroy the neutrality of our tax system with respect to decisions to invest abroad. Let me deal briefly with each of
the two proposals.
1. Proposals to replace the foreign tax credit ivith a deduction for foreign
taxes. No major nation taxes foreign source.income in the manner or to the extent contemplated in H.R. 62. Every major industrial nation has devised some
system for preventing double taxation of the same income by itself and other
nations. These unilateral rules have been supplemented by international conventions for the avoidance of double taxation. There are two methods generally employed to that end. One method is simply to exempt from domestic tax income
having its source in some other nation. This is the method followed, for example,
bv France. A second method is to tax foreiJ?n source income domestically but to
allow credit against domestic tax for foreign taxes paid on the same income.
This is the method followed by the United States.
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1973 REPORT OF THE SECRETARY OF THE TREASURY
Within countries there may be double taxation of the same income at different
political levels. For example, in our country both the States and the Federal
Government may tax the same income. Where that occurs, the nation must work
out internally the interrelations between local and national taxes in order to arrive at a total level of tax which is tolerable. As a practical matter, that kind of
accommodation is simply not possible between nations, as the levels of total tax
in each nation have become relatively high.
Let me illustrate the level of tax which would result if we were to allow foreign
taxes only as a deduction. If, for example, $100 of corporate income pays $46
of corporate tax in England, a deduction for that tax would leave the remaining
$54 subject to tax at 48 percent in the United States. The corporation would
pay an additional $26 of U.S. tax for a total of $72 tax on each $100 at corporate
income. That would be an effective tax rate of 72 percent. If the remaining $28
were taxed when distributed to shareholders, at say 50 percent, the result would
be an effective tax rate on distributed corporate income of 86 percent. That is
an unrealistic level of taxation. People simply will not invest if the tax collector
cla ims too large a share of the profits.
Thus, the primary reason why elimination of the foreign tax credit is unrealistic is that it would, in fact, be nearly confiscatory.
2. Proposal to accelerate taxation of shareholders. H.R. 62 would abandon the
general rule that shareholders are taxed on corporate income only when that
income is received. The proposal would accelerate the time at which shareholders
are taxed on foreign source income by disregarding the corporate entity and
taxing such income directly to the shareholders as earned. That is a fundamental change in our system of corporate taxation, and in rejecting it we were
influenced by the following considerations :
(1) There is no persuasive evidence that the present system distorts investment decisions except in unusual cases. As previously noted, the income and
withholding tax rates in the major industrial nations are sufficiently close to U.S.
rates that any differences would be unimportant.
(2) Such a system would mean that American-controlled corporations operating abroad would in many instances be at a substantial disadvantage compared to their foreign competitors with respect to the tax burden on profits
refnined in the business.
(3) Where there is a disadvantage at the corporate level, only American-controlled companies would be subject to it and there would be a substantial
incentive, if not a necessity, for Americans to divest themselves of control.
That would entail a substantial loss in American investment values and a substantial decrease in the ability of American firms to manage their foreign
investments. We do not believe that to be desirable.
(4) The revenue gain to the Trea&ury from accelerating the taxation of shareholders would be minor in comparison to the depressing effect on U.S. economic activity abroad. We estimate that the acceleration of the tax on shareholders would produce about $300 million of additional revenup to the United
States. One of the chief effects of such a proposal would bp simply to in(^rnr,c^
the amount of tax which corporations pay to foreign governments. Let me i)'nitrate why that is so by assuming a corporation which earns $100 and is subject
to a 40-percent income tax rate in country X. The company knows that when it
ultimately repatriates its earnings there will be an additional 10-percent withholding tax due to country X. If a taxation of the U.S. corporate shareholders
were accelerated and they were required to pay $48 of tax* to the United States,
it would make sense for the foreign subsidiary to declare a dividend of the $60
which remains net after taxes in country X and to pay a $6 withholding tax to
country X on that amount. It would then have paid a total of $46 tax to
country X, all of which would be creditable against the $48 of tax owing to the
United States. It would thus satisfy its potential withholding tax liability to
country X without increasing its total tax. Tbe netx result is that the company's
tax has increased from $40 to $48, but of that $8 increase, only $2 goes to the
U.S. treasury and the remaining $6 goes to the treasury of country X. The
results would be dii'f'erent where the rates are different from those assumed, but
the point is that a substantial, amount of additional tax would go to foreign
governments.
For all these reasons, we believe it desirable to stay with the general rule that
corporate earnings are taxed to shareholders only when received.
EXHIBITS
383
1961-1962 congressional review of foreign source income
These issues are not new. In 1961 and 1962, Congress reviewed in depth U.S.
tax policy with respect to the taxation of foreign income and concluded that it
was generally appropriate to tax the earnings of U.S.-controlled foreign corporations when those earnings are distributed to U.S. shareholders, i.e., to
continue to apply the same rules that we apply to shareholders of U.S. corporations. This committee rejected a general proposal to tax the undistributed
income of foreign corporations to their U.S. shareholders. The Report of the
Committee on Ways and Means on the Revenue Act of 1962 stated that:
Testimony in hearings before your committee suggested that the location
of investments in these countries is an important factor in stimulating American exports to the same areas. Moreover, it appeared that to impose the U.S.
tax currently on the U.S. shareholders of American-owned businesses operating abroad would place such firms at a disadvantage with other firms located
in the same areas not subject to U.S. tax. (H.R. Rep. No. 1447, 87th Congress, 2d Session 57-8 (1962).)
However, Congress recognized in 1962—and the administration's proposals
recognize now—that changes in our tax structure should be made where the
tax rules themselves create inequities or artificial distortions in investment
decisions. Thus, in 1962, the Congress provided a special rule for foreign source
income of holding companies and certain selling and service subsidiaries operating in foreign "tax havens," and in that limited situation accelerated the time
at which U.S. shareholders were taxed on that income. Also in 1962, the law
was changed to ensure that untaxed and undistributed profits of a controlled
foreign corporation, whether or not operating in a tax haven, would not escape
ordinary income tax as a result of a sale or liquidation of the foreign corporation.
The administration's proposals
We have three proposals for legislative change. They are advanced in the
belief that our system is fair in its general application, but that in certain
limited situations we need changes in our tax system to neutralize distortions
in investment decisions and revenue collections caused by certain features of
some foreign tax systems.
TAX H O L I D A Y S
There has been an increasing tendency for both developed and developing
countries to provide "holidays" from their income taxes in order to attract investment in manufacturing. This can mean that no income tax, or very little
tax, is paid with respect to the earnings of certain foreign corporations until the
income is distributed as a dividend. This kind of deliberate and wholesale tax
enticement does often control investment decisions. We believe that is a tax
distortion and that it should be neutralized.
We are requesting amendment of the tax laws so that earnings from new
or additional U.S. investments in manufacturing or processing facilities which
take advantage of such tax incentives will be taxed to the U.S. shareholders at
the time they are earned. Where such an incentive is availed of, the income of
the foreign corporation will be taxed currently thereafter, regardless of whether
the incentive is in effect for a subsequent year, unless the corporation ceases
to be engaged in manufacturing or processing operations. We are prepared, in
appropriate circumstances, to enter into tax treaties with other countries, subject to Senate approval, to recognize incentives under appropriate safeguards.
In order to give the Secretary of the Treasury or his delegate broad authority
to define by rules or regulations the general categories of foreign tax investment
incentives subject to the rule, and to determine whether specific practices or
benefits constitute such an investment incentive, the proposal will define a
foreign tax investment incentive in broad terms. It will include any income tax
related benefit, however effected, which is intended to encourage or has the effect
of encouraging investment in the foreign country which provides the benefit,
and whether or not granted to nationals as well as foreigners. Such a benefit
may be provided by law, regulation, or individually negotiated arrangements.
However, the fact that there is a generally low rate of tax in a country will not
be considered by itself a tax incentive. It is intended that only major tax concessions would be affected. Examples of benefits or practices of the type which
constitute investment incentives include tax holidays (which are partial or com-
384
1973 REPORT OF THE SEORETARY OF THE TREASURY
plete exemptions from tax for a period of time) ; deductions for reinvestment
reserves; certain grants; and certain depreciation rules bearing no relationship
to useful life.
RUNAWAY PLANTS
We also believe that the United States has a legitimate interest in taxing
currently the income of a corporation that has moved abroad to take advantage
of lower tax rates to manufacture goods destined for the United States. To
accomplish this we propose, in addition to the tax holiday rule, that where a
U.S.-owned foreign corporation has more than 25 percent of its receipts from the
manufacture of goods destined for the United States and is subject to a significantly lower tax rate, the income of such corporation will be taxed currently
to the U.S. shareholders. A foreign tax will be deemed significantly lower where
the foreign eff'ective tax rate is less than 80 percent of the U.S. statutory corporate tax rate. The tests as to the percentage of exports to the United States
and the effective foreign tax rates will be applied annually.
Our proposal for tax holidays and runaway plants will add a new section to
the Internal Revenue Code providing that a U.S. shareholder (i.e., a shareholder who is a U.S. person owning 10 percent or miore of the stock) of a
controlled foreign corporation will be treated as having received his pro rata
share of the corporation's earnings and profits for a taxable year if the corporation is one that receives a tax holiday or a similar tax investment incentive
or is a runaway plant. A controlled foreign corporation is one having more than
50 percent of its combined voting power owned by U.S; shareholders. The tax
holiday and runaway plant rules would be in addition to those added by the
Congress in 1962 in its tax haven legislation, and the mechanism for taxing the
shareholders would be comparable, but without certain escape clauses that were
provided in the 1962 legislation.
A corporation will be regarded as engaged in manufacturing or processing
operations if the unadjusted basis of the. tangible property and real property used
in its manufacturing or processing operations exceeds 10 percent of thie unadjusted
basis of all tangible property and real property of the corporation. Corporations
engaged in other businesses, such as mining, would be unaffected. The provisions
will apply to any new investment or additional investment in existing manufacturing or processing operations after ApriL 9, 1973. In the case of additional
investment or replacement of existing investment, a transitional rule is proposed
so that these provisions will not be applicable until the increased investment
exceeds 20 percent of the investment on April 9, 1973.
FOREIGN
LOSSES
We have also proposed that where U.S. taxpayers have used foreign losses to
offset other income taxable by the United States and those foreignTosses are not
taken into account by the foreign jurisdictions in later years, then the United
States will, in effect, recapture those losses by a reduction of the foreign tax credit
or an inclusion in the gross income of the taxpayer in later years. This proposal
modifies the present system under which the,United States bears the cost during
the loss years, but receives none of the revenue during the profitable years. In
these circumstances, we wish to he certain of our fair share of the tax revenues.
The reduction in the tax credit would apply where the taxpayer itself continues
to operate abroad in profitable years. However, since initial losses are frequently
anticipated, one tax planning technique has been to operate in a branch form to
deduct losses against tJ.S. income during the startup period followed by incorporation of the foreign branch as a foreign subsidiary at or near the time the
operation becomes profitable. In order to prevent this maneuver, the legislation
proposes the recapture of losses by taking the previous losses into income upon
the incorporation of a branch or comparable change in its tax status.
385
aexHiBiTS
TABLE l.—U.S. direct foreign investment, halance of payments flows, 1970 and 1971
[Millions of dollars]
1970
N e t capital
outflows
1971
Income
inflow 1
N e t capital
outflow
Income
inflow 1
All areas
Developing countries
Developed countries.
4,400
1,162
3,238
7,920
3,784
4,136
4,765
1,940
2,824
9,455
4,743
4,713
Canada
Europe.
EEO
All other Europe.
Western HemisphereOther areas
908
1,914
994
920
'568
1,010
1,301
2,200
1,198
1,002
1,375
3,045
226
2,083
1,305
778
668
1,788
1,397
2,595
1,392
1,203
1,460
4,004
1 Includes after-tax branch profits plus dividends, interest, royalties, fees and film rentals net of foreign
withholding taxes.
2 Includes unallocated international direct investment.
Source: U.S. Department of Commerce, Survey of Current Business, November 1972.
TABLE 2.—Statutory {1972) iax rates for selected countries
Country
Canada
Mexico
Panama. _
Argentina
Brazil
Venezuela
Belgium
France...
_
Germany
Italy
Netherlands
Sweden
Switzerland
United Kingdom
Eepubhc of South Africa.
Japan
Phihppines
Austraha
Statutory
corporate
mcome
tax r a t e
2 50
3 42
4 50
33
8 30/5
6 50/60
7 35/10.
50
8 51/15
9 43
48
40
10 29
11 40/38.75
12 43/25
13 36.75/26
"35
47.5
Withholding
rates o n
dividends I
15
15
8
12
20
15
lb
5
15
5
5
15
5
15
lb
10
3b
15
1 Where a reduced rate of withholding is apphed for parent-subsidiary dividends, that rate is shown.
2 21 percent of first $35,000, and 50 percent of the excess.
3 Progressive rate structure of 5 to 42 percent.
4 Corporations are taxed according to a progressive rate sti-uctiu-e with bracket progression. The highest
percent on the excess is 50 percent.
fi 30 percent of taxable income and 5 percent on distributed profits of other than service corporations.
6 Progressive rate structure with a maximum rate of 50 percent of income over 28,000,000 bolivares. Corporations engaged in oil and mining activity are subject to a rate of 60 percent on gross increments.
7 30 percent for distributed income with a floating rate on undistributed income; maximum is 35 percent
on excess over B.Fr. 5,000,000.10-percent surcharge on basic rate.
8 Tax on undistributed profits/distributed profits. Distributed profits also bear substantial local taxes.
9 Companies in Italy are subject to both the income tax, at rates vai'ying from 18 to 25 percent, and to
the company tax of 18 percent.
1 Federal tax is a maximum of 7.2 percent; however, the cantons assess a progressive corporation tax.
0
The maximum rate is 29.78 percent including Federal and communal rates.
11 A corporate tax of 40 percent is levied on all corporate profits and a 38.75-percent tax is apphed on
distributed profits.
1 The normal tax on companies is 43 percent. There is a 25-percent tax on undistributed profits. Mining
2
income is taxed at 40 percent except for diamond mining (45 percent) and gold mining (special formula)
13 Undistributed profits are taxed at a maximum rate of 36.75 percent. Distributed profits are taxedi/
maximum rate of 26 percent.
1 Corporate tax is 25 percent of first 100,000 pesos and 35 percent of the excess.
4
386
19 73 REPORT OF THE SECRETARY OF THE TREASURY
TABLE 3.—Payout ratios of earnings of U.S. subsidiaries abroad
[Figures in miUions of U.S. dollarsl
Developed
countries
1970
I. All industries:
a. Dividends paid
b. Foreign withholding taxes
c. Dividends received
d. Reinvested earnings
e. Total earnings (a-t-d).-.
f. Payout ratio (a as percent of e)..
II. Manufacturing:
a. Dividends paid
b. Foreign withholding taxes
c. Dividends received
d. Reinvested earnings
e. Total earnings (a-f-d)
f. Payout ratio (a as percent of e).
1971 p
Other areas
1970
1971 p
All areas
1970
1971P
2,247
298
1,949
2,075
4,322
52
2,472
319
2,153
2,375
4,847
51
1,144
118
1,026
874
2,018
57
1,510
129
1,381
741
2,251
67
3,391
416
2,975
2,948
6,339
53
3,982
448
3,534
3,116
7,098
56
1,499
206
1,293
1,252
2,751
54
1,584
214
1,370
1,508
3,092
51
299
51
248
282
581
51
294
53
241
277
571
51
1,799
257
1,542
1,534
3,333
54
1,878
267
1,611
1,785
3,663
51
p Preliminary.
NOTE.—Data exclude interest earnings as weU as royalties and fees.
Source: Denartment of Commerce, Survey of Cm-rent Business.
Exhibit 45.—Remarks by Deputy Secretary Simon, May 19, 1973, before the
Section of Taxation, American Bar Association, Washington, D.C, on tax
reform
I am delighted to have the opportunity to discuss the administration's approach
to tax reform with this distinguished group. The Section of Taxation of the
American Bar Association has for many decades contributed much to the legal
profession. It has also, through sound and intelligent assistance to the Treasury
Department and the taxwriting committees of the Congress, contributed greatly
to the continuing improvement of the Nation's tax laws.
In the few months that I have served here in Washington, I have become
involved in a wide range of public policy issues, including international monetary
reform, trade, the economic stabilization program, energy, and many others. Of
all these issues, the one that I have found the most complex, and yet one that is
so important to us all, is the subject of taxes. As the President said in April of
1969, "Tax policy should not seek to 'soak' any group or give a 'break' to any
other—it should aim to serve the Nation as a whole." As such, tax policy must be
formulated with great care.
I would like to review with you the record of the Nixon administration in the
area of taxes. In so doing, we can better understand this administration's objectives with respect to the tax law, our approach to changing the law, and the
policies we have pursued in the recent tax proposals. I think you will then see
that we have continually sought genuine and major improvement of the tax
system to make it serve the Nation better; not merely change for the sake of
change but change that will result in a more equitable distribution of the tax
burden.
The President committed himself to tax reform in the 1968 campaign, and
within 100 days of his inauguration, he proposed major and fundamental tax
reform. In so doing, two basic objectives which underlie the administration's
approach to tax policy became evident:
(1) Tax equity—assuring that every person pays a fair and reasonable
share of the cost of his government and that when a citizen files his tax
return and pays a reasonable amount of tax, he does so with renewed
confidence that his fellow Americans are doing the same.
(2) Tax simplification—relieving the average American taxpayer of the
inordinate complexity in filing his tax returns, which is often a more
onerous burden than paying the tax itself and which must be eased if
our system of self-assessment and voluntary compliance is to survive.
EXHIBITS
387
Underlying each of these objectives has been our desire to foster sound economic
growth. The tax system must be conducive to the stable growth of our domestic
economy and the longrun improvement of our position in world markets. Consistent with our goals of greater tax equity and tax simplification, we have pursued changes in the tax system which would make American industry more competitive in world markets, resulting in more jobs in our country.
We took important steps toward achieving these objectives with the Tax Reform Act of 1969, which has been characterized as the most substantive tax
reform bill ever enacted. We pursued these goals further through the enactment
of the Revenue Act of 1971. We restored the investment tax credit and liberalized
depreciation rules. These changes have contributed greatly to the resurgency of
the national economy without compromising the essential equity of our tax
system.
Impact of 1969-1971 administration tax reform
We are now just able to assess the full effects of the Tax Reform Act of 1969
and, to a lesser degree, the Revenue Act of 1971; and although all of the pertinent statistics are not yet available, Treasury estimates show that the tax reform
and relief provisions of the 1969 and 1971 legislation were extremely progressive
in their effect and resulted in reducing individual income taxes while increasing
corporate income taxes.
For the 4 calendar years 1969 to 1972: Corporate income taxes have increased
by an aggregate of $4.9 billion; individual income taxes have decreased by an
aggregate of $18.9 billion; and excise taxes, mostly affecting individuals, have
decreased by $3.5 billion.
Equally as significant is the fact that for the years 1969 to 1972, the greatest
percentage reductions in tax have been made in the low-income groups and substantial reductions have been made in the middle-income groups. Further, there
were significant increases in tax liability for the highest income groups. Thus, due
to the 1969 and 1971 changes, persons in the zero to $3,000 income class had 82
percent less tax liability in 1971 than they would have paid if the Tax Reform
Act of 1969 and the Revenue Act of 1971 had not been in effect. Persons in the
$10,000 to $15,000 income class had 13 percent less, and persons in the $100,000
and over income class had 7% percent more.
Further, much concern has been expressed because some citizens with high
adjusted gross incomes pay no Federal income tax. These people are neither tax
dodgers nor tax cheats. Many of them pay no taxes because of various tax incentives purposely enacted by Congress. As important, however, is the fact that a
great majority of persons with high adjusted gross income are paying tax.
In 1971 there were a total of 18,261 persons in the country with adjusted gross
incomes of $200,000 or more, and 18,189, or 99.6 percent, of them paid an average
Federal individual income tax of $182,000—a total of about $3.3 billion. Thus, the
wealthy as a group are paying large amounts of Federal income tax and more
now than they were before the enactment of the Tax Reform Act of 1969.
These figures reveal that this administration has already produced sound tax
reform, the kind that more equitably spreads the tax burden and avoids incentivedestroying tax levels that would hinder economic growth and increase unemployment.
Greater equity and simplification has occurred
The administration's desire to improve the equity of the Federal tax structure
and achieve simplification of the tax law may be further illustrated in a number
of different ways.
The low-income aUowance.—A most significant step toward greater equity was
taken by the enactment of the low-income allowance, which the President recommended and Congress adopted in 1969 and which was updated in 1971. Under this
provision, single persons with income of less than $2,050 and a family of four
with income of less than $4,300 did not have to pay Federal income tax in 1972.
It should be noted that the low-income allowance is of considerable benefit to
students who work during their years of higher education since they often earn
less than the taxable income level of $2,050. The low-income allowance has removed from the tax rolls substantially all pf those whose incomes are below the
poverty level. Thus as a result of the 1969 and 1971 acts, some 9.5 million tax
returns, or 12 million taxpayers, that owed tax prior to 1969 no longer owe tax.
TTiis represents about 13 percent of all the tax returns that would have showed
a tax due in 1972 had not the 1969 and 1971 acts been adopted.
388
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Moreover, we significantly relaxed the withholding requirements so that large
numbers of persons who owe no tax—for example, the college students working
in the summer—will not have to file returns to recover a refund of tax needlessly
withheld. I think that these steps represent major simplification in the tax law
and offer genuine tax relief to the young, the elderly, the disadvantaged, and the
handicapped.
New rate schedule for single persons.—Another notable change in the 1969 act
produced greater equity for single persons. Under previous law, a single person's
t a x liability could be as much as 40 percent above a married couple with the
same income. The 1969 act added a new rate schedule for single persons which
ensured that in no case would a single person's tax be more than 20 percent
greater than the tax payable by a married couple with the same income.
Increase in standard deduction.—The regular standard deduction was increased from 10 percent of adjusted gross income with a $1,000 ceiling to 15 percent of adjusted gross income with a $2,000 ceiling for 1972 and after. As a result
of the 1969 and 1971 acts, and primarily due to the liberalized standard'deduction, some 13 million returns which would have itemized deductions in 1972 will
be able to shift to the standard deduction. This is also a significant step toward
simplification.
^
Increase in the personal exemption.—As a further adjustment of the tax
burden for individuals and in an attempt to achieve greater equity iii the; tax
law, the personal exemption was increased from $600 in 1969 to $750 for 1972
and after.
Tax preferences—further equity
Whenever the subject of taxes is discussed, attention is immediately focused
on the so-called preferences in the Federal income tax. These preferences are
most varied and the list depends on one's particular point of view. What is
viewed as an unfair preference by one man is considered an equitable provision
by another. The administration's efforts in 1969 resulted in considerable attention being focused on preferences. We sought to restrict tax avoidance while at
the same time preserving provisions which help stimulate economic growth. As
such, the changes embodied in the 1969 act affected specific preferences in a number of areas. For instance—
'.
Certain mineral transactions were treated in such a way that would.stop
artificial creation of net operating losses in these industries ;
Exempt organizations, including private foundations, have come, under
stricter surveillance;
The rules affecting charitable deductions were tightened to screen out the
unreasonable and yet not stop those that help legitimate charities;
The practice of using multiple subsidiaries and affiliated corporations to
take undue advantage of the lower tax rate on the first $25,000 of corporate income was curbed; and
The use of farm losses was restricted in order to curb abuses in'this area.
Further, the 1969 act affected such areas as oil depletion, real estate depreciation,
and interest deductions.
This effort was an important first step in our continuing desire tb achieve
greater equity in the tax law. But in dealing with this area of preferences, I
think it is wise to be very cautious and not hasty in calling for the elimination
. of one provision or the otiier. There have always been many provisions inserted
in the law for purposes of stimulation of investment in particular types of
property and other expenditures deemed desirable for the national interest because they act as inducements to private investment or. expenditures. Every
preference in tiie tax law serves to reduce the tax for those who take adyantage
of it and also reduces the revenue yield derived from the tax. However, a decision must be made as to whether the benefits that flow from the existence of the
tax preference are worth the estimated loss of revenue to the Government. This
cost-benefit analysis is of primary importance to evaluate the desirability of the
preference and should be made at frequent intervals as a matter of continuing
concern. In so doing, it is important to realize that each of these preferences
tends to shift the burden of income tax from one taxpayer to another. Since
the Government requires a certain level of revenue to finance. its heeds, the
preference used by sonie taxpayers will cause a shift of higher burden on
those taxpayers who either do not choose to take advantage of the preference or
are not able financially to do so. We have been committed to this careful: analysis
EXHIBITS
389
and in making our recent proposals to Congress, we went to great length to do
this.
1973 tax reform proposals
The President's recent "Proposals for Tax Change" are aimed at furthering
our goals of greater equity and simplification in our tax system without sacrific- "
ing vital incentives for economic growth. The proposals represent a lengthy
and careful study by the Treasury Department. In addition, the Ways and
Means Committee had previously concluded several months of hearings in which
panels of experts and public witnesses explored in great detail nearly every
aspect of the Internal Revenue Code. Many of you participated in these hearings,
which contributed substantially to a clearer understanding of our tax system
as it exists today and how it can be made better.
The administration proposals take into account and build upon the foundation of this extensive background in providing a balanced program of tax equity,
tax relief, and tax incentives to facilitate economic growth, help meet the Nation's energy needs, and expand the financial capabilities of State and local
governments. In all, there are 11 major proposals to which we recommend that
the taxwriting committees of the Congress give their immediate attention.
In order to better understand these tax proposals, it is important to keep in
mind several general principles :
First, there is the amount of tax Americans are called on to pay. We feel that
Americans are already taxed enough. The President has repeatedly taken the
position that a general tax increase is both unnecessary and undesirable, and his
tax proposals are essentially neutral in their budgetary effect,
Second, there is the matter of who pays these taxes ; that is, the relative distribution of the tax burden among citizens. As I mentioned earlier, the 1969 and 1971
tax changes added considerably to the progressive aspects of our tax system, and
the recent proposals add to this progressiveness.
Proposals for property tax relief, the credit for nonpublic school tuition, and
the major simplification of the average person's tax return all will benefit the
lower and middle-income Americans and will be offset by the revenues from
the minimum taxable income and artificial accounting loss proposals which will
require those few individuals who are not now paying a reasonable amount of
tax to do so.
Third, there is the amount of the tax burden borne by the capital which is
necessary to permit us to modernize and expand. We exei^cised .ijreat care in
developing these pronosals not to impair the ability of American industry to
comoete effectively with the rest of the world.
All the proposals are ImDortant, including the property tax relief and the tax
credit for tuition paid tn nonpublic schools, which alone provide abont $800 million of needed tax relief and equitv for low- and middle-income citizens. The
proposals in the foreign area are of srreat Importance and will play a vital role
in the overall proGram of the administration in strenarthening our d^mestiV
economy. And the proposal for optional issuance of State and local bonds wlU
be of great importance to these srovernmental units. However. I would like to
focus particularly on three of the proposals: The minimum taxable Income
and artificial accoutlnsr loss proposal, the exploratory drilling credit, and the tax
slmnlification proposal.
The minimum taxable income and artificial accounting los^ proposal involves
a bold sten \T\ our effort to achieve srreater equity. These proposals will affect a
number of h1s:h-1ncome taxpavers who pay little or no tax.
Some of the causes underlying this phenomenon—particularly the so-called tax
shelters—represent real economic inefficiencies in which an undue emphasis has
been placed on tax losses instead of efficient operations which add to economic
.srrowth. A common characteristic of a tax shelter investment is that it produces deductions and exclusions, particularlv in the early vears, which may be
used aarainst other income of the taxpnyer. The result may be an outri.srht reduction in taxes, an indefinite deferral of tax. or a conversion of ordinary income
into capital gain.
'.
Sometimes these results are unintended and are caused by the exploitation
of ta!x rules which are sound in normal situations. Other times the results flow
from rules deliberately designed to provide tax incentives, for particular activities. Nevertheless, aspects of the tax shelter market have introduced significant
distortions into our economy. Preoccupation with tax advantages—^particularly
390
1973 REPORT OF THE SECRETARY OF THE TREASURY
tax deductible "losses"—too often obscures the economic realities and can have
the effect of discouraging profitable and eflScient enterprise. Ineflacient tax incentives available in the form of "artificial losses" to investors in preferred
types of properties may not contribute effectively to the social objectives of the
incentives.
Our proposals are aimed at eliminating these situations in order to increase
the fairness of the tax system. The basic approach is to preserve all the tax incentives in the law as well as the traditional exclusions and itemized deductions,
which serve good purposes and are important to tax equity: but in the case
of certain tax incentive and accounting rules, to shift the emphasis away from
investments which produce tax losses to sound economic investments and efficient
operations which produce income.
In order to achieve this result, we have proposed that the existing minimum
tax be repealed for individuals and that it be replaced by a minimum taxable
income provision and a limitation on artificial accounting losses. In general, the
minimum taxable income provision will deal with those tax items that are outright exclusions from income, and the limitation on artificial accounting losses
will deal with those tax rules that provide deferrals.
We have already heard a number of comments that the minimum taxable
income proposal will have an adverse effect on such worthwhile causes as
charitable giving. Further, concern has been expressed that the limitation on
artificial accounting losses will greatly discourage certain needed investments,
such as those for the development of oil and gas reserves. A close examination of
the proposals, however, will show that the effect of these proposals in such areas
will not be drastic.
First of all, I think it is important to note the combined full-year revenue impact of the minimum taxable income and artificial accounting loss proposals, at
1972 levels of income, is estimated at about $800 million, after taking into account
repeal of the present minimum tax on individuals which amounts to about $200
million.
With respect to the minimum taxable income proposal, the proposal is estimated to affect about 130,000 people at most. The proposal will reduce the charitable contributions of some of these people, but the maximum possible reduction
would be a small percentage of total charitable gifts and is far less than the annual growth in charitable giving from those persons not affected. Specifically,
total annual giving by individuals to charity is estimated to be about $16 billiori
and the annual growth in charitable giving by individuals alone is about
$1 billion. We currently estimate that total annual giving by those persons who
would be affected by the minimum taxable income proposal is about $850 million,
of which preliminary estimates show that about $350 million may be affected. Further, we estimate that the average annual contribution to charity by individuals
affected by this proposal is about $8,000 to $10,000. There will, of course, be cases
in which a particular charity is heavily dependent on large gifts from one individual who may be influenced by this tax provision to reduce his contributions;
but we feel that these instances will not be significant and, in the long rnn, this
provision will help preserve the still generous charitable contribution provisions
which remain in the law.
With respect to the artificial accounting loss proposal and its impact on the oil
and gas industry, I feel that exploratory drilling should not be seriously affected.
I think that a major impact of the proposal will be to shift investment initiative
away from ventures aimed at producing a tax loss to those which will be economically successful. If the exploratory hole is productive, the intangible drilling
costs may still be written off against related income, and the tax savings will
probably be reinvested in another venture. It is also important to note that ex:
ploratory holes that are dry will get the same deductions as they do now, except
that the intangible drilling costs on yearend holes not completed by December 31
will be postponed 1 year. Therefore, the proposal will probably result in earlier
planning in order to have wells completed rather than merely "spudded in',' by
December 31.
The exploratory drilling credit.—Not only is it important to understand that
the minimum taxable income proposal should have a limited impact on investment in the oil and gas industry, but it is also important to realize that we have
proposed a new exploratory drilling investment credit which should serve as an
added incentive to increased domestic exploration and development.
EXHIBITS
391
This credit is structured to reward success by providing a greater credit for a
commercially productive well. In this way, the Nation will be a guaranteed winner, for a successful well will at the same time provide needed energy resources
and also increase the tax revenues.
This new credit extends to oil and gas exploration a proven and successful
tax incentive device; namely, the investment credit restored in 1971 at the President's recommendation. In general, it allows a driller of a new domestic exploratory hole to claim the 7-percent investment credit on his intangible drilling costs
and, if the exploratory hole is productive, to claim a supplementary credit of 5
percent. In this way, the new credit should more than offset any limiting effects
of the limitation on artificial accounting losses.
The tax simplification proposals.—The third aspect of our new proposals that I
would like to mention involves our continuing effort to simplify the tax laws.
These proposals represent a unique and exciting approach which I am confident
will enable us to go a very long way, this year and continuing in the future, toward
really eliminating complexity for millions of average individual taxpayers. In*
testimony before the Ways and Means Committee your distinguished chairman,
Donald McDonald, emphasized the importance of simplification and pointed out
the special committee of the Tax Section devoted to that and the work you are
doing.
A major part of the simplification program is in form 1040-S, and the common
sense sort of approach it represents—to look at the tax return, to find, ways to
simplify it, and then to try to amend the law to conform to that. The principle
legislative changes to implement form 1040-S are the enactment of the miscellaneous deduction allowance, revision of the child care deduction, and the substitution of an age credit for the present complicated retirement income credit.
The other aspect of simplification, also of major importance, is the project we
have underway in working with the staff of the Joint Committee on Internal
Revenue Taxation to redraft and simplify a large number of other Code provisions which affect the average individual and which are more complicated than
they need be. The Section of Taxation can be of great help in that effort.
It is easy to call for simplification, but to actually accomplish it is another
thing. Through a cooperative effort by the Treasury and the Internal Revenue
Service, we feel we have taken major steps to simplify the preparation of tax returns for the 75 million individuals who file them.
Conclusion
In conclusion, I would say that our new tax proposals are the result of careful analysis in our continuing effort to produce a tax structure that is more equitable and simpler while sustaining sound economic growth. In an environment
where respect for all law seems to be decreasing, we have sought changes in the
tax law which will strengthen its system of voluntary compliance. I feel our proposals will, if enacted, bring about fundamental and major improvement in the
law. Obviously, they do not exhaust the possibilities for change and as Secretary
Shultz has said, we stand ready to work with the Congress in other areas. I feel
we have made great progress, and we will continue to reform our tax structure to
make it more equitable and eflScient and to make it more responsive to urgent
social needs.
Thank you.
Exhibit 46.—Statement of Deputy Assistant Secretary Hall, June 13, 1973,
before the General Subcommittee on Labor of the House Committee on
Education and-Labor, on proposals for a Government-sponsored system of
insuring pension plan benefits against losses on plan termination
Mr. Chairman and members of this subcommittee, I am pleased to be with
you today to discuss proposals for a Government-sponsored system of insuring
pension plan benefits against losses on plan termination.
As you know, the administration is not recommending a plan of termination
insurance at this time. We are sympathetic to the idea of termination insurance.
We have done quite a good deal of work in attempting to frame a reasonable
program and are continuing to study the area in hopes of developing a workable
program. However, as President Nixon stated on April 11,1973:
No insurance plan has yet been devised which is neither on the one hand so
permissive as to make the Government liable for any agreement reached
392
1973 REPORT OF THE .SECRETARY OF THE TREASURY
between employees and employers, nor on the other hand so intrusive as to
entail Government regulation of business practices and collective bargaining
on a scale out of keeping with our free enterprise system.
This morning I would like to discuss with you some of the specific problems
which underlie that conclusion.
First, a bit of history :
In December of 1971, President Nixon directed the Departments of Labor and.
Treasury to undertake a study to determine the extent of benefit losses arising
from pension plan terminations. It was the purpose of the study to obtain information needed to determine what Federal policy should be on funding, the nature
of the employer's liability, and termination insurance. To do this, it was necessary to determine both the extent of the problem of termination-connected benefit losses, what kind of insurance program would best correct the problem, and
what new problems if any would be created in the course of solving the termination problem.
An interim report on this study was completed and released in February of
this year. This study found in general that while individuals suff'er significant
losses on plan terminations, each representing serious hardship to those affected,
these losses are small in relationship to the total benefits paid under the private
retirement system. Specifically, during the first 7 months of 1972, 3,100 employees
lost $11 million of vested benefits as a result of termination of underfunded
plans. This is a small fraction of the $10 billion of benefits paid out in 1972.
This is also a small fraction of the benefits lost through termination of employment without full vesting.
In connection with this study, the administration exerted considerable effort
in analyzing the insurance systems which have been proposed and in attempting
to devise the optimum program.
If we could be confident that the existence of the termination insurance program would not affect people's behavior in any way, the idea would be an
excellent one. Because benefit losses from terminations are few, they could be
insured against at a relatively small cost, and with relatively few administrative
difficulties. As we studied the possibility, however, it became readily apparent
that there is an inherent instability in the situa.tion. The existence of the
insurance program itself could lead to a variety of abuses and in fact increase
the number of plan terminations, creating constantly rising costs for what
would at the outset appear to be an inexpensive program. Let me illustrate
this.
Under current law, it is to the advantage of unions and employees generally
to see. that plans are properly funded. An underfunded plan endangers the ultimate receipt of retirement benefits. With full termination insurance in effect,
it is to the union's interest to have the barest minimum funding the law permits,
with the employer dollars thus saved applied to increase other forms of compensation. However, with minimum funding, benefit losses would increase, and
the insurance program could become very expensive.
Without termination insurance, an employer is less tempted to cause trust
assets to be invested in risky securities in hopes of getting a better yield. With
termination insurance, his employees have little to lose from such investment
policies because, if the investments become, worthless,, the insurance system
will pay their pensions. Plere again, the existence of the insurance program
could increase benefit losses.
Under present law, where there is no termination insurance, benefit increases
are not lightly granted, particularly in declining industries where the plan's
ability to make payment is problematical. If such increases are to be insured,
however, the increased pensions will be paid even if the plan is underfunded and
the employer is bankrupt. If worse comes to worse, the insurance will always
take care of the unfunded benefits. With termination insurance, in fact, it would
be possible—if you don't have proper safeguards—for an employer in a declining
industry to substitute an unfunded promise of benefit increases (at the potential
expense of the insurance fund) for a wage increase he would otherwise have to
make.
Again, to keep highly paid people from receiving large amounts from the
insurance fund, some limit on the size of benefit insured seems desirable. But
then, in the absence of regulations saying who gets paid first out of the fund,
plans could respond to such limits on termination insurance by providing that
EXHIBITS
393
uninsured benefits would be paid first with available trust funds. The insurance
fund would then be left to pick up the balance.
As a result of these and other potential abuses, we concluded that abuseprevention controls would be absolutely required for a sound termination
insurance plan. Some form of maximum-insured benefit would be needed to
keep stockholder-employees from lining their own pockets at the fund's expense.
Some form pf residual employer liability would" be needed to prevent the premature or unnecessary termination at the insurance fund's expense of an
underfunded plan. For instance, a new employer taking over the assets and
employees of a predecessor could look at the predecessor's underfunded plan and,
rather than funding it in order to keep his employees content, could just terminate it and let the insurance fund pick up the check. Some restriction on benefit
increases or limitation on the insurance of such increases would be required to
preclude a large benefit increase as a parting prebankruptcy gift at the insurance
fund's expense by stockholders of an organization facing imminent insolvency,
to the employees—and perhaps to themselves. It would be necessary to have some
form of prescribed order of priority for use of available trust funds on
termination.
Otherwise the available funds could be used first to pay the uninsured benefits,
leaving the insurance fund holding the bag, and so forth. Actuarial assumptipns
would have to be controlled in order to avoid underfunding, and investment
policy would have to be controlled in order to minimize investment losses.
In order to determine what kind of abuse controls could be devised, the
staffs at Treasury and Labor, with assistance from Commerce and the 0MB,
went ahead and prepared discussion drafts. Because no decision had been
reached on which Department could best administer such a program, the Department of Labor staff drafted a statute designed for administration by their
department; the Treasury staff prepared a statute designed for Treasury
administration. Having done this, we then stepped back and looked at what we
had done.
We had bills which would not have eliminated all benefit losses. To prevent
abuses, it was deemed necessary to exclude coverage of benefits beyond $500
per month, to exclude coverage of benefits under new plans for several years, to
exclude coverage of benefit increases for several years, and to exclude coverage
of nonvested benefits. On the other hand, the bills would very significantly encroach upon the present fiexibility of establishing plans. We had regulated the
order of priority of payments; we had imposed a residual liability on the employer, which he never bargained for when he established the plan and which
might adversely affect his financial statements; to protect the fund, we had
authorized an outside agency to come in and terminate a plan which appeared
to the agency to be endangered; and we had created a system of regulations
which would apply to all defined benefit plans although only a small minority are
in jeopardy of termination. In fact, it appeared possible ithat the regulatory and
other costs of the system to protect the insurance fund might adtually outweigh
the benefit payments themselves.
The result of our investigations, both into the scope of the problem and inito
the possibilities of termination insurance, led us finally to the reluctant conclusion that we could not justify the best termination insurance program we could
devise, in the teeth of the great problems which would be created either by a
program without adequate abuse controls on the one hand, or one with adequate
abuse controls on the other.
We are only too well aware of the painful impact of termination losses on
those who are affected. But we had to conclude reluctantly that the adverse
impact of the kind of program we are talking about on the whole system of
voluntary pension coverage might, in the aggregate, deprive more employees of
benefits because their employers decided not to set up plans, than the number of
employees who would receive insurance benefits.
We are still working on the problems, and we are openminded and hopeful
thalt we may yet be able to devise a workable solution which steers between the
Scylla of underproteetion against abuse and the Charybdis of overregulation. To
date, the best statutes we could come up with seem to us to impose social costs
which outweigh their social benefits.
Now, in the light of our consideration of this problem, perhaps it would be
helpful if I covered more specifically some of the issues our staff sought to
deal with in preparing our study-drafts of termination insurance legislation.
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1973 REPORT OF THE SECRETARY OF THE TREASURY
Diversity of plans
In attempting to design a feasible pension plan termination insurance program,
we found that there are many types of pension plans, with significantly differing
characteristics. We initially concluded that termination insurance is inappropriate for about half of the retirement plans in the country. Such plans consist
of money purchase pension plans, profit-sharing plans, and stock bonus plans.
Under such plans, the employee recognizes that he is entitled to no more than
the balance in his account, and makes his plans accordingly. Moreover, since the
employee stands to gain by market gain, it is only fair that he should suffer
any market loss.
Thus, the termination insurance concept makes sense only when applied to a
defined benefit pension plan. However, even among defined benefit pension plans,
there are wide variations. We quickly despaired of devising a separate system
for each type of defined benefit pension plan. Nevertheless, we found it useful to
make a distinction between two broad groups of plans—single-employer plans and
multiemployer plans.
Single-employer plans may cover only employees in a single plant or office,
or may cover substantially all of a company's employees and plants throughout
the country. These plans may or may not be collectively bargained. Most singleemployer plans call for a specific benefit amount payable at retirement, but do
not specify a required employer contribution. They are generally administered
by the employer, and the employer generally has the right to terminate the plan
at any time with no further liability for pension contributions.
Multiemployer plans have significantly different characteristics. They generally
require a specific employer contribution. They generally are administered by a
joint employer-employee board of trustees which has the authority to set benefits.
The employer's obligation is generally limited to making the specified contribution, and a particular employer cannot terminate the plan although he may withdraw from it. The withdrawal of any employer does not necessarily terminate
the plan.
Because of these differences, it is difficult to draft one insurance program
which applies to both types of plans. It has been suggested that multiemployer
plans do not need the protection of termination insurance. However, significant
losses have been incurred in multiemployer plans. Multiemployer plans do have
a special problem because, from the employers' point of view, the plans are not
defined benefit plans at all; they are somewhat like money purchase plans, since
in general the employers have agreed upon a specific contribution rate, but have
not agreed on a specific benefit level. Thus, one approach that might be followed
is to treat single-employer plans and multiemployer plans separately under a
termination insurance program, with different funding and employer liability
requirements and, perhaps, even with separate risk pools.
Of course, devising separate provisions for different types of plans creates
problems. Initially, there is a significant definitional problem, since some singleemployer plans have many characteristics which are more commonly found in
multiemployer plans, and vice versa. Furthermore, separate provisions create
administrative complexity. Nevertheless, if termination insurance is adopted,
some distinction must be drawn between single-employer plans and multiemployer
plans.
Insured termination
A significant problem exists in deciding when an insurance system should
step in to take over a plan. If the system takes over too early, losses can be
created which would not otherwise exist. This is because the employer might
have made significant contributions to the plan in the future. If the system
takes over too late, losses can be incurred because payment of noninsured benefits may have depleted the fund, or because, assets have been poorly managed.
There is an additional problem of coordinating a termination for insurance
purposes, which may trigger an insurance payment, with a termination for
the purpose of causing 100 percent vesting under the plan as required by the
Intemal Revenue Code. We have felt that these two "terminations" should
occur at the same time to the extent possible. However, we have yet to develop
a comprehensive definition which solves both problems. For instance, suppose
an employer switches from a pension plan to a profit-sharing plan. Is that
a plan termination?
EXHIBITS
395
Some proposals limit the types of terminations permitted or insured against.
These provisions provide abuse control, but result in both overregulation and
underproteetion against benefit losses.
Employer liability
At present, under most pension plans, the employer has no obligation to make
further payments into a terminated' pension plan, although many employers
make such payments in order to maintain employee good will. Under an insurance system, if there is no employer obligation to make payments, employers
will tend to skimp on their funding requirements and to terminate their plans
if the value of the fund assets drops significantly since they know their obligation will be met by the insurance system. Unfortunately, however, imposing a
liability upon employers in such cases is unfair to employers with existing
plans—^particularly multiemployer plans—and may force an employer into
bankruptcy, or adversely affect its credit rating or its ability to meet its
day-to-day expenses.
In such a case, the termination insurance concept creates a situation which is
worse than that which exists under the present system. If we are not careful,
termin,ation insurance, rather than increase retirement security, will jeopardize
jobs by adding to the problems of marginal employers.
As an attempt to solve this problem, we considered a concept whereby an
employer would be liable in the event of an insurance loss, but with liability
limited to 25 percent of taxable income over the 20 years following termination.
We excluded from liability multiemployers except in the Qase of a dominant
employer.
This solution has its own problems. Employers can hold down profits by
paying large salaries,;.25 percent of taxable income may exceed the available
cash; a subsequent reorganisation of the business may substantially reduce
(or increase) taxable income; raising fresh capital could be hampered, and so
on. However, at present this solution appears to be preferable to other proposals
we have seen.
Insurance limit
To be truly effective, an insurance system would have to insure all vested
benefits without limitation. However, such a system without any control would
be highly susceptible to abuse. As controls against abuse are built into an
insurance system, the degree of coverage decreases and the degree of governmental interference increases.
We concluded that, for effective abuse control, new plans should not be
insured at all for a short period, such as 3 years, and should not become fully
insured for a longer period, e.g., 10 years. Benefit incre,ases would be treated
as a new plan for this purpose. We further concluded that large pensions should
not be fully insured and that insurance should be limited to vested benefits.
However, we were uncomfortable with these conclusions because the result
is inadequate coverage. We never did figure out just how far we might wish to
go in insuring benefits which ,are not pure retirement benefits—such as death
benefits or widows' allowances.
In general, it would seem that, under termination insurance, plans would
have to be amended to provide that insured benefits are paid first, in order
to prevent the assets of the plan from being depleted. However, previously
retired employees have a special status which suggests that they should be paid
first even though they receive more than the insured limits. We found ourselves
led to imposing a requirement that the assets of a terminated plan must be
applied in a specific order required by statute until all insured losses are paid.
Unfortunately, the termination insurance concept forces us to impose requirements in these areas, thereby greatly reducing the flexibility of the private
pension system.
Financing
One of the basic decisions which must be made in developing a termination
insurance proposal is the means of financing the insurance payments. The
simplest means of financing is out of general revenues. This would have the
obvious advantage of no additional collection cost. The amount of estimated
annual benefit losses, in the area of $20 million to $40 million, is small enough
to make this means of financing feasible. However, financing out of general
revenues can be criticized because substantially less than one-half of the work
506-171—73
28
396
19 73 REPORT OF THE SECRETARY OF THE TREASURY
force is covered by defined benefit pension plans, and this half is already receiving
significant benefits through the tax system. It seems a little unfair to require
the rest of the work force to contribute to the security of those who are
already favored.
If-financing is to, be by means of a premium, a premium base must be chosen.
Our.first thought was that the premium should vary with the risk of loss. However, we soon realized that.the risk varies with so many factors—such as the
degree of funding, the composition of the portfolio, and the financial strength
of the employer—that a completely risk-related premium would be practically
impossible to administer.. Moreover, a completely risk-related premium would
put such a burden on a failing plan as to cause it to be terminated. Nevertheless,
we felt that tlie premium should bear some relation to risk. .
There, are three, basic alternative premium bases which we consideredcontributions, number of participants, and.unfunded vested liabilities. The base
of contributions and the base of the number of participants have the advantage
of :Simplicity, and since the premium should be quite small, it should not matter
too much if the premium burden is not completely equitable. The contributions
base is probably more risk-related than the number of participants base, since
under a contributions base a rich plan will pay a higher premium than a meager
plan covering the same number of participants. However, the contribution base
has an unfortunate effect in that, while higher contributions would reduce the
risk,,^they wbuld also increase the premiums.
The base of unfunded vested liabilities may be the fairest of the three bases.
However, it suffers from being the most difficult to compute. In fact, the cost of
calculating the bas,e' may very well exceed the premium cost itself. In broad
terms, unfunded vested liabilities relates to the insured risk. However, even plans
which do not have unfunded vested liability still have significant risk of
becoming underf unded. due, for example, to a decline in portfolio values. Yet
under.this base there would beno premium.
The means of assessing the premium is another problem. Most termination
insurance proposals simply impose a liability for the premium, and leave it to
the administering agency to sue upon default. Some proposals cancel the insurance in the event of default. We have considered a concept whereby the premium isr imposed as an excise tax, which would be collected by the Internal
Revenue: Service under normal tax procedures. An amount equivalent to the tax
collected would then be paid into the insurance fund.
Of course, part of the insurance payments can be financed by employer liability, if employer liability is imposed. However, it is expected that collections
from employer liability would be relatively small.
The financing of the administrative expenses is another problem. Some termination insurance proposals impose a flat charge on each insured plan equivalent to its pro rata share of administrative costs.'We anticipate that the administrative costs of such a plan will be very substantial, perhaps even as high
as the benefit losses. It does not seem equitable to have a plan covering 100
participants pay the same administrative charge as a plan covering 100,000
participants.
Administering agency
The selection of an administering agency is a difficult one. Any choice will
involve the establishment of a large bureaucracy to solve a relatively small problem in the context of the entire private pension system. We tend to think that
thOr administering agency should be either the Treasury Department or the
Labor Department because both Departments have significant responsibilities
regarding private pension plans. I-Iowever, no final decision on this matter was
ever, reached.
The basic problem which creates the desire for termination insurance is that
employees do not always receive the benefits they expect. In large part that problem can be alleviated through minimum funding requirements and through adequate disclosure. We must continue to work on the termination insurance problem, because it is an important one. But we must recognize that there are many
other areas of pension reform where action is clearly called for because we know
that what we do will result in a better pension system. We should act in those
other areas now—before tackling the difficult termination insurance problem.
The establishment of a Government-sponsored termination insurance program
would be a very significant step, and should not be taken lightly. We feel that,
EXHIBITS
397
on balance, the step is too large to be taken at this time, when we know so little
of the consequences. There is a significant danger that an ill-advised insurance
system could cause greater social costs than benefits by restricting pension
coverage," limiting benefit improvements, delaying earlier vesting, and precipitating employer bankruptcies.
I hope that you have found this discussion helpful. I will be glad to respond
to any questions which you may have.
International Financial and Monetary Developments
Exhibit 47.—Address by President Nixon, September 25, 1972, at the joint annual
meetings of the Boards of Governors of the International Monetary Fund and
the International Bank for Reconstruction and Development and its affiliates
It is customary in addressing such a significant international gathering to say
that we are participating in a great moment in history. Great moments in history
are easy to perceive—headlines blaze, and the world is riveted to television
screens as world leaders meet.
But great movements in history are much harder to perceive while we are
living through them. The action is slower, less dramatic, infinitely more complex, as changing circumstances and the new needs of people alter the behavior
of nations.
I am convinced, on the basis of the evidence of the past year, that we are
not only participating in a great moment of history but that we are witnessing
and helping to create a profound movement in history.
That movement is away from the resolution of potential conflict by war, and
toward its resolution through peaceful means.
The experienced people gathered in this room are not so naive as to expect
the smoothing-out of all differences. We anticipate that the potential for conflict will exist as long as men and nations have different interests, different approaches to life, different ideals.
Therefore, we must come to grips with the paradoxes of peace:
As the danger of armed conflict between major powers is reduced, the potential for economic conflict is increased.
As the possibility of peace grows stronger, some of the original ties that first
bound our postwar alliances grow weaker.
As nations around the world gain new economic strength, the points of commercial contact multiply along with the possibilities of disagreement.
There is another irony we should all recognize. With one exception, the nations
gathered here whose domestic economies are growing so strongly today can trace
much of their postwar growth to the expansion of international trade.
The one exception, of course, is the United States—the industrial nation with
by far the smallest percentage of its gross national product in world trade.
Why, then, is the United States—seemingly with the least at stake—in the
forefront of those working for prompt and thoroughgoing reform of the international monetary system, with all that will mean for the expansion of trade now
and in the future?
One reason, of course, is our national self-interest. We want our workingmen
and women and businessmen and women to have a fair chance to compete for
their share of the expanding trade between nations. A generation ago, we deliberately set out to help our former enemies as well as our weakened allies so
that they could gain the economic strength which would enable them to compete
with us in world markets. Now we expect our trading partners to help bring
about equal competition.
There is another reason, more far-reaching and fundamental, that motivates
the United States in pressing for economic and monetary reform.
Working together, we must set in place an economic structure that will help
and not hinder the world's historic movement toward peace.
We must make certain that international commerce becomes a source of
stability and.harmony rather than a cause of friction and animosity.
Potential confiict must be channeled into cooperative competition.
That is why the structure of the international monetary system and the future
system of world trade are so central to our concerns today.
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1973 REPORT OF THE SECRETARY OF THE TREASURY
The time has come for action across the entire front of international economic
problems. Recurring monetary crises, such as we have experienced all too often
in the past decade; unfair currency alignments and trading arrangements, which
put the workers of one nation at a disadvantage with workers of another nation;
great disparities in development that breed resentment; a monetary system that
makes no provision for the realities of the present and the needs of the future—
all these not only injure our economies, they also create political tensions that
subvert the cause of peace.
There must be a thoroughgoing reform of the world monetary system, to
. clear the path for the healthy competition of the future.
We must see monetary reform as one vital part of a total reform of international economic affairs, encompassing trade and investment opportunity as
well.
We must create a realistic code of economic conduct to guide our mutual relations—a code which allows governments freedom to pursue legitimate domestic
objectives but which also gives them good reason to abide by agreed principles
of international behavior.
Each nation must exercise the power of its example in the realistic and orderly
conduct of internal economic affairs, so that each nation exports its products and
not its problems.
We can all agree that the health of the world economy and the stability of the
international economic system rest largely on the successful management of
domestic economies.
The United States recognizes the importance of a strong, noninflationary
domestic economy, both in meeting the needs of our own citizens and in contributing to a healthy world economy. We are firmly committed to reaching our
goals of strong growth, full employment, and price stability.
We are encouraged by the record of our current economic performance. We
are now experiencing one of the lowest rates of inflation, and highest rates of
real economic growth, of any industrial nation.
Recent gains in the productivity and the real income of American workers
have been heartening. We intend to continue the policies that have produced
these gains.
We also recognize that, over the longer term, domestic policies alone cannot
solve all international problems. Even if all countries achieved a very large
measure of success in managing their own economies, strains and tensions could
arise at points of contact with other economies.
We cannot afford a system that almost every year presents a new invitation to
a monetary crisis. That is why we face the need to develop procedures for
prompt and orderly adjustment.
It is easy enough to say "prompt and orderly adjustment." But that phrase
encompasses the real problems of workingmen and women, the fears and hopes of
investors and managers of large and small businesses, and, consequently, the
concern of the political leadership of every nation. No nation should be denied
the opportunity to adjust, nor relieved of the obligation to adjust.
In the negotiations ahead, there will be differences of opinion and approach.
Immediate interests may appear to conflict. There will be times when impasses
develop that may seem impossible to resolve.
But the world has had some experience recently with long, hard negotiations—
for example, the strategic arms limitation agreements signed by the Soviet
Union and the United States.
That was bilateral negotiation, between two nations and not among 124. But
its complexity seemed almost infinite; the obstacles had been hardening for 25
years; the issue of national security was as sensitive a matter as can exist
between world powers.
We came to an agreement in Moscow this year because the issue that united
us—seeking an end to the wasteful and dangerous arms race—was greater than
the issues that divided us.
We reached agreement because we realized that it was impossible for either
side to negotiate an advantage over the other. The only agreement worth making
was one in which each side had a stake in keeping.
Those two principles can guide us in building the monetary system of the
future.
We recognize that the issues that divide us are many and serious. But the
impetus that will make this negotiation successful is the force that unites u s :
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A common need to establish a sound and abiding foundation for commerce,
leading to a better way of life for all the citizens of the world.
That common need—let us call it the world interest—demands a new freedom
of world trade and a new fairness in international economic conduct.
It is a mark of our maturity that we now see that an unfair advantage gained
in an agreement today only sabotages that agreement tomorrow. The only system
that can work is one that each nation has an active interest in making work.
The need is self-evident. The will to reform the monetary system is here in this
room. And in a proverb that has its counterpart in almost every language:
Where there is a will, there is a way.
We are gathered to create a responsive monetary system—responsive to the
need for stability and openness, and responsive to the need of each country
to reflect its unique character.
In this way we bring to bear one of the great lessons of federalism: That often
the best way to enforce an agreed-upon discipline is to let each member take
action to adhere to it in the way that is best suited to local character, stage of
development, and economic structure.
For its part, the United States of America will continue to rise to its world
responsibilities, joining with other nations to create and participate in a modem
world economic order.
We are secure enough in our independence to freely assert our interdependence.
These are the principles I profoundly believe should and will guide the United
States in its international economic conduct:
We shall press for a more equitable and open world of trade.
We shall meet competition rather than run away from it.
We shall be a stimulating trading partner and a straightforward bargainer.
We shall not turn inward and isolationist.
In turn we shall look to our friends for evidence of similar rejection of isolationism in economic and political affairs.
Let us all resolve to look at the ledgers of international commerce with new
eyes—to see that there is no heroism in a temporary surplus nor villainy in a
temporary deficit, but to see that progress is possible only in the framework of
equilibrium. In this regard we must take bold action toward a more equitable
and open world trading order.
Like every leader of the nations represented here, I want to see new jobs
created all over the world, but I will not condone the export of jobs out of the
United States caused by an unfairness built into the world's trading system.
Let all nations in the more advanced stages of industrial development share
the responsibility of helping those countries whose major development lies
ahead, and forego the temptation to use that help as an instrument of discrimination or rivalry.
Far more is at stake here than the mechanics of commerce and finance. At
stake is the chance to add genuine opportunity to the lives of people in all
nations, the chance to add stability and security to the savings and the eamings
of hundreds of millions of people, and the chance to add economic muscle to the
sinews of peace.
I have spoken this morning in general terms about how we can advance our economic interdependence. Later this week. Secretary Shultz will outline a number of
proposals which represent the best thinking of my top economic advisers. I commend these to you for careful consideration.
The word "economics," traced to its Greek root, means "the laws of the house."
This house we live in—this community of nations—needs far better laws to
guide our future economic conduct. Every nation can prosper and benefit working within a modern world economic order it has a stake in preserving.
Very little of what is done in these negotiations will be widely understood or
generally appreciated.
But history will record the vital nature of the challenge before us. I am confident that the men and nations gathered here will seize the opportunity to create
a monetary and trading system that will work for the coming generation—and
will help to shape the years ahead into a generation of peace.
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1973 REPORT OF THE SEORETARY OF THE TREASURY
Exhibit 48.—Statement by Secretary Shultz as Governor for the United States,
September 26, 1972, at the joint annual meetings of the Boards of Governors
of the International Monetary Fund and the International Bank for Reconstruction and Development and its affiliates
Needed: A New Balance in International Economic Affairs
The nations gathered here have it in their power to strike a new balance in
international economic affairs.
The new balance of which I speak does not confine itself to the concepts of a
balance of trade or a balance of payments.
The world needs a new balance between fiexibility and stability in its basic
approach to doing business.
The world needs a new balance between a unity of purpose and a diversity of
execution that will permit nations to cooperate closely without losing their
individuality or sovereignty.
We lack that balance today. Success in the negotiations in which we are engaged
will be measured in terms of how well we are able to achieve that balance in the
future.
I anticipate working closely and intensively with you to that end, shaping
arid reshaping the best of our thinking as we proceed in full recognition that the
legitimate requirements of each nation must be meshed into a harmonious whole.
In that spirit. President Nixon has asked me to put certain ideas before you.
In so doing, I must necessarily concentrate my remarks today on monetary matters. However, I am deeply conscious that, in approaching this great task of monetary reform, we cannot neglect the needs of economic development. I am also
conscious that the success of our development efforts will ultimately rest, in large
measure, on our ability to achieve and maintain a monetary and trading environment in which all nations can prosper and profit from the flows of goods, services,
and investment among us.
The formation of the Committee of Twenty, representing the entire membership
of the Fund, properly reflects and symbolizes the fact that we are dealing with
issues of deep interest to all members, and in particular that the concerns of
developing countries will be fully reflected in discussions of the reform of the
monetary system.
As we enter into negotiations in that group, we have before us the useful report of the Executive Directors, identifying and clarifying some of the basic issues
which need to be resolved.
We also look forward to participation by pther international organizations,
with each contributing where it is most qualified to help. The challenge before us
calls for substantial modification of the institutions and practices over the entire
range of international economic cooperation.
There have already been stimulating contributions to our thinking from a wide
variety of other sources—public and private. I have examined with particular
care tlae statements made over the past few months by other Governors individually and the eight points which emerged from the deliberations of the Finance Ministers of the European Community.
Drawing from this interchange of views, and building upon the Smithsonian
agreement, we can now seek a firm consensus for new monetary arrangements
that will serve us all in the decades, ahead. Indeed, I believe certain principles
underlying monetary reform already command widespread support.
First is our mutual interest in encouraging freer trade in goods and services
and the flow of capital to the places where it can contribute most to economic
growth. We must avoid a breakup of the world, into antagonistic blocs. We must
not seek a refuge from our problems behind walls of protectionism.
The pursuit of the common welfare through more open trade is threatened by
an ancient and recurring fallacy. Surpluses in payments are too often regarded
as a symbol of success and of good management rather than as a measure of the
goods and services provided from a nation's output without current return.
We must recognize, of course, that freer trade must be reconciled with the need
for each country to avoid abrupt change involving serious disruptions of production and employment. We must aim to expand productive employment in all
countries—and not at one another's expense.
A second fundamental is the need to develop a common code of conduct to
protect and strengthen the fabric of a free and open international economic order.
EXHIBITS
401
Such basic rules as "no competitive devaluation" and "most-favored-nation
treatment" have served us well, but they and others need to be reaffirmed, supplemented, and made applicable to today's conditions. Without such rules to
guide us, close and fruitful cooperation on a day-to-day basis would not be
possible.
Third, in shaping these rules we must recognize the need for clear disciplines
and standards of behavior to guide the international adjustment process-—a
crucial gap in the Bretton Woods system. Amid the debate about the contributirig
causes of past imbalances and the responsibility for initiative toward correction,
sight has too often been lost of the fact that adjustment is inherently a twosided process; that for the world as a whole, every surplus is matched by a.deficit.
Resistance of surplus countries to loss of their surpluses defeats the objective
of monetary order as surely as failure bf deficit countries to attack the source
of their deficits. Any effort to develop a balanced and equitable monetary system must recognize that simple fact; effective and symmetrical incentives, for
adjustment are essential to a lasting system. ...
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Fourth, while insisting on the need for adjustment, we can and should leaVe considerable flexibility to national governments in their choice among adjustment
instruments. In a diverse world, equal responsibility and equal opportunity need
not mean rigid uniformity in particular practices. But they da mean.a commpn
commitment to agreed international objectives. The belief is widespread—^^and
we share it—that the exchange rate system must be more flexible. Hpwever,
important as they are, exchange rates are not the only instrument of adjustment
policy available; nor, in specific instances, will they necessarily be the. 'most
desirable.
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Fifth, our monetary and trading systems are an interrelated ..complex: As we
seek to reform monetary rules, we must at the same time seek.to build in incentives for trade liberalization. Certainly, as we look ahead, ways must be found to
integrate better the work of the GATT and the IMF. Simultaneously we should
ensure that there.are pressures which move us toward adequate development,assistance and away from controls which stifle the free flow of Inyestment.Finally, and perhaps most funda.mental, any stable and well-functioning international monetary system must rest upon sound policies to promote doinestic
growth and price stability in the major countries. These are imperative national
goals for my Government—and for yours. And- no matter how well we. design an
international system, its prospects for survival will be :doubtful without effective
discharge of those responsibilities.
Today is not the occasion for presenting a detailed blueprint: for mpnetary
reform. However, I do want to supplement these general principles with .certain
specific and interrelated ideas as to how to embody these principles in a workable
international agreement.
These suggestions are designed to provide stability without rigidity. They
take as a point of departure that most countries will want to operate within the
framework of specified exchange rates. They would encourage these rates to be
maintained within specified ranges so long as this is accomplished without distorting the fabric of trade and payments or domestic economic management. We
aim to encourage freer fiows of trade and capital while minimizing distortions
from destabilizing fiows of mobile capital. We would strengthen the voice of the
international community operating through the. IMF.
I shall organize these ideas under six headings, recognizing that much work
remains to be done to determine the best techniques in each area:
The exchange rate regime.
The reserve mechanism.
The balance of payments adjustment process.
-.
Capital and other balance of payments controls.
Related negotiations.
Institutional implications.
The exchange rate regime
We recognize that most countries want to maintain a fixed point of reference for
their currencies---in other words, a "central" or "par" value. The corollary is a
willingness to maintain and support thesie values by assuring convertibility
of their currencies into other international assets.
A margin, for fluctuation for market exchange rates around such central
values will need to be provided sufficiently wide to dampen incentives for shortterm capital movements and, when changes in central values are desirable, to
402
1973 REPORT OF THE SECRETARY OF THE TREASURY
ease the transition. The Smithsonian agreement took a major step in that direction. Building on that approach in the context of a symmetrical system, the
permissible outer limits of these margins of fluctuation for all currencies—including the dollar—might be set in the same range as now permitted for nondollar
currencies trading against each other.
We also visualize, for example, that countries in the process of forming a
monetary union—with the higher degree of political and economic integration
that that implies—may want to maintain narrower bands among themselves, and
should be allowed to do so. In addition, an individual nation, particularly in the
developing world, may wish to seek the agreement of a principal trading partner
to maintain a narrower range of exchange rate fluctuation between them.
Provision needs also to be made for countries which decide to float their currencies. However, a country that refrains from setting a central value, particularly beyond a brief transitional period, should be required to observe more
stringent standards of behavior in other respects to assure the consistency of
its actions with the basic requirements of a cooperative order.
The reserve mechanism
We contemplate that the SDR would increase in importance and become the
formal numeraire of the system. To facilitate its role, that instrument should be
freed of those encumbrances of reconstitution obligations, designation procedures, and holding limits which would be unnecessary in a reformed system.
Changes in the amount of SDR in the system as a whole will be required periodically to meet the aggregate need for reserves.
A "central value system" implies some fluctuation in official reserve holdings
of individual countries to meet temporary disturbances in their balance of payments positions. In addition, countries should ordinarily remain free to borrow
or lend, bilaterally or multilaterally, through the IMF or otherwise.
At the same time, official foreign currency holdings need be neither generally
banned nor encouraged. Some countries may find holdings of foreign currencies
provide a useful margin of fiexibility in reserve management, and fluctuations
in such holdings can provide some elasticity for the system as a whole in meeting
sudden flows of volatile capital. However, careful study should be given to proposals for exchanging part of existing reserve currency holdings into a special
issue of SDR, at the option of the holder.
The suggested provisions for central values and convertibility do not imply
restoration of a gold-based system. The rigidities of such a system, subject to
the uncertainties of gold production, speculation, and demand for industrial
uses, cannot meet the needs of today.
I do not expect governmental holdings of gold to disappear overnight. I do
believe orderly procedures are available to facilitate a diminishing role of gold in
international monetary affairs in the future.
The balance of payments adjustment process
In a system of convertibility and central values, an effective balance of payments adjustment process is inextricably linked to appropriate criteria for
changes in central values and the appropriate level, trend, and distribution of
reserves. Agreement on these matters, and ori other elements of an effective and
timely adjustment process, is essential to make a system both practical and
durable.
There is, of course, usually a very close relationship between imbalances in
payments and fluctuations in reserve positions. Countries experiencing large
deterioration in their reserve positions generally have had to devalue their
currencies or take other measures to strengthen their balance of payments. Surplus countries with disproportionate reserve gains have, however, been under
much less pressure to revalue their currencies upward or to take other policy
actions with a similar balance of payments effect. If the adjustment, process is
to be more effective and efficient in a reformed system, this asymmetry will need
to be corrected.
I believe the most promising approach would be to ensure that a surfeit of
reserves indicates, and produces pressure for, adjustment on the sui-plus side
as losses of reserves already do for the deficit side. Supplementary guides and
several technical approaches may be feasible and should be examined. Important
transitional difficulties will need to be overcome. But, in essence, I believe disproportionate gains or losses in. reserves may be the most equitable and effective
single indicator we have to guide the adjustment process.
EXHIBITS
403
As I have already indicated, a variety of policy responses to affect the balance
of payments can be contemplated. An individual country finding its reserves
falling disproportionately would be expected to initiate corrective actions. Por
example, small devaluations would be freely permitted such a country. Under
appropriate international surveillance, at some point a country would have a
prima facie case for a larger devaluation.
While we must frankly face up to limitation on the use of domestic monetary,
fiscal, or other internal policies in promoting international adjustments in some
circumstances, we should also recognize that the country in deficit might well
prefer—and be in a position to apply—stricter internal financial disciplines
rather than devalue its currency. Only in exceptional circumstances and for a
limited period should a country be permitted direct restraints, and these should
be general and nondiscriminatory. Persistent refusal to take fundamental adjustment measures could result in withdrawal of borrowing, SDR allocation, or other
privileges.
Conversely, a country permitting its reserves to rise disproportionately could
lose its right to demand conversion, unless it undertook at least limited revaluation or other acceptable measures of adjustment. If reserves nonetheless continued to rise and were maintained at those higher levels over an extended
period, then more forceful adjustment measures would be indicated.
For a surplus as for a deficit country, a change in the exchange rate need not
be the only measure contemplated. Increasing the provision of concessionary aid
on an untied basis, reduction of tariffs and other trade barriers, and elimination
of obstacles to outward investment could, in specific circumstances at the option
of the nation concerned, provide supplementary or alternative means. But, in the
absence of a truly effective combination of corrective measures, other countries
should ultimately be free to protect their interests by a surcharge on the imports
from the chronic surplus country.
For countries moving toward a monetary union, the guidelines might be applied on a collective basis, provided the countries were willing to speak with one
voice and to be treated as a unit for purposes of applying the basic rules of the
international monetary and trading system.
Capital and other balance of payments controls
It is implicit in what I have said that I believe that the adjustment process
should be directed toward encouraging freer trade and open capital markets. If
trade controls are permitted temporarily in extreme cases on balance of payments grounds, they should be in the form of surcharges or across-the-board
taxes. Controls on capital flows should not be allowed to become a means of maintaining a chronically undervalued currency. No country should be forced to use
controls in lieu of other, more basic, adjustment measures.
Related negotiations
We welcome the commitments which major nations have already made to
start detailed trade negotiations under the GATT in the coming year. These
negotiations, dealing with specific products and specific restraints, need not wait
on monetary reform, nor need monetary reform await the results of specific trade
negotiations.
Those negotiations, and the development of rules of good behavior in the strictly
monetary area, need to be supplemented by negotiations to achieve greater equity
and uniformity with respect to the use of subsidies, and fiscal or administrative
pressures on trade and investment transactions. Improper practices in these areas
distort trade and investment relationships as surely as do trade barriers and
currency disequilibrium. In some instances, such as the use of tariff surcharges
or capital controls for balance of payments purposes, the linkage is so close
that the Committee of Twenty must deal with the matter directly. As a supplement to its work, that group can help launch serious efforts in other bodies to
harmonize countries' practices with respect to the taxation of international trade
and investment, the granting of export credit, and the subsidization of international investment flows.
Institutional implications
As I look to the future, it seems to me that there are several clear-cut institutional requirements of a sensible reform of the monetary and trading system.
Several times today, I have stressed the need for a comprehensive new set of
monetary rules. Those rules will need to be placed under guardianship of the
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1973 REPORT OF TPIE SECRETARY OF THE TREASURY
IMF, which must be prepared to assume an even more critical role in the world
economy. Given the interrelationships between trade and payments, that role will
not be effectively discharged without harmonizing the rules of the IMF and the
GATT and achieving a close working relationship.
Finally, we need to recognize that we are inevitably dealing with matters of
essential and sensitive national interests to specific countries. International
decisionmaking will not he credible or effective unless it is carried out by representatives who clearly carry a high stature and influence in the councils of their
own governments. Our international institutions will need to reflect that reality,
so that in the years ahead national governments will be intensively and continuously involved in their deliberations and processes. Without a commitment by
national governments to make a new system work in this way, all our other labors
may come to naught.
I am fully aware that the United States as well as other countries cannot
leap into new monetary and trading arrangements without a transitional period.
I can state, however, that after such transitional period the United States would
be prepared to undertake an obligation to convert official foreign dollar holdings
into other reserve assets as a part of a satisfactory system such as I have suggested—a system assuring effective and equitable operation of the adjustment
process. That decision will, of course, need to rest on our reaching a demonstrated
capacity during the transitional period to., meet the obligation in terms of our reserve and balance of payments position.
We fully recognize that we have not yet reached the strength we need in our
external accounts. In the end, there can be no substitute for such strength in
providing the underpinning for a stable dollar and a stable monetary system.
An acceptable monetary system requires a willingness on the part of all of
us to contribute to the common goal of full international equilibrium. Lacking
such equilibrium no system will work. The equilibrium cannot be achieved by
any one country acting alone.
We engage in discussions on trade and financial matters with a full realization
of the necessity to continue our own efforts on a broad front to restore our balance of payments. I must add, in all candor, that our efforts to improve our
position have, in inore than one instance, been thwarted by the reluctance of
others to give up an unjustified preferential and highly protected market position. Yet, without success in our endeavor, we cannot maintain our desired share
in the provision of aid, and reduce our official debt to foreign monetary
authorities.
We take considerable pride in our progress toward price stability, improved
productivity, and more rapid growth during the past year. Sustained into the
future, as it must be, that record will be the best possible medicine not only
for our domestic prosperity but for the effective functioning of the international
financial system.
My remarks today reflect the large agenda before us. I have raised difficult,
complicated, and controversial issues. I did not shrink from so doing for a simple
reason : I know that you, as we, want to move ahead on the great task before us.
Let us see if, in Nairobi next year, we can say that a new balance is in prospect
and that the main outlines of a new system are agreed. We owe ourselves and
each other that effort. .
.
Exhibit 49.—Statement by Secretary Shultz, December 21, 1972, on meat import
policy for 1973
As part of the administration's continuing flght against inflation, the President
has decided to suspend quotas on meat imports for 1973.
The vigorous growth of employment and income we foresee in 1973 will mean
an increase in the demand for meat in this country, which, despite an increase in
meat production, will put upward pressure on meat prices. Suspension of the
quotas is designed to moderate those inflationary pressures by encouraging increased imports of meat into the United States.
This action demonstrates the President's firm determination to hold down the
cost of food to the American consumer.
This is the second time the President has taken such action. In June of this
year, the President directed the removal of all restrictions on meat imports
for the balance of 1972. Since that time, some supplying countries have increased
EXHIBITS
405
their shipments of meat to the United States, and we expect this trend will
continue.
We anticipate that this suspension of the quotas will continue throughout
1973. Plowever, as required by law, the Secretary of Agriculture will review the
situation every 3 months. Should marketing conditions change substantially,
contrary to . our present expectations, the suspension of the quotas will be
reconsidered.
As the President stated in June, this action is not aimed at the American
farmer. Cattle prices have been rising; they are presently about 7 percent above
a year ago. Our purpose is to remedy a short-term shortage that is beyond the
ability of our farmers to fill in 1973.
All meat imports, of course, will be subject to the same h^gh standards of
sanitation that apply to domestically produced meat. ,
Exhibit 50.—Excerpt from statement by Secretary Shultz, February 7, 1973,
before the Joint Economic Committee
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International developments
The focus of the administration's eff'orts with respect to the international
economy is clear. First, we must continue our efforts to bring our external trade
and payments position into a sustainable position. Second, we must press ahead
with the urgent work of international monetary and trade reform to build an
international economic order within which all nations are treated fairly and can
grow and prosper.
These goals are interrelated. Without a stronger dollar and trade position,
the prospects for monetary stability and an open trading order will dim. Without
an agreed framework for the monetary and trading systems, unilateral defensive
actions. by one country or another can frustrate the restoration of an acceptable
balance in our payments.
Last year the overall U.S. oalance of payments position showed a reduced,
but still very substantial, deficit. However, the improvement can be traced entirely to some lessening of speculative pressures and smaller capital outflows.
Meanwhile, our trade deficit was larger in 1972 than in 1971, although the deteriorating trend was arrested in the second half of the year.
The larger trade deficit last year is explicable in terms of cyclical factors and
the initial, inevitably perverse effects of the exchange rate realignment. Looking
ahead, we can foresee some improvement.
Nevertheless, I inust emphasize the hard fact that we have a long way to go
to achieve the trade surplus we need to bring our overall payments into sustainable equilibrium. We have learned that process will take time. I believe the exchange rate realignment is beginning to help. So is our relatively good performance
toward restoring price stability at home. Yet there can be no room for complacency. The stark fact of our large deficit is plain for all to see. Sporadic speculative disturbances in exchange markets reflect the underlying uncertainties.
We must do what we can to speed the process of adjustment.
In particular, we need to recognize the favorable effects of exchange rate
realignment will be underriiined if we fail to manage our domestic economy
effectively. Our domestic and international objectives coincide in demanding that
we resist inflationary increases in costs and prices. Over the past 2 years, U.S.
price performance has compared favorably with that of our competitors. We
are resolved to do still better. The President's budget, the wage-price program, and
full range of our economic policies reflect our determination to dO' so.
For the longer term, we seek a major strengthening of the international economy
through further elimination of trade barriers and through thorough reform of
the international economic system.
Negotiations on reform of the international monetary and trading system are
already in full progress, mainly under the auspices of the Committee of Twenty
.created last year. The United States played a leading role in establishing that
. forum representative of worldwide interests, and has advanced a series of specific
reform proposals to stimulate, the discussions.
These, discussions are dealing with fundamental issues of deep concern to individual nations. It is understandable—indeed it may be essential—that conclusions be deferred in one area of discussions until the pattern of the whole can
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1973 REPORT OF THE SECRETARY OF THE TREASURY
be more clearly foreseen. Moreover, seeming agreement on such broad generalities as an improved adjustment process or convertibility can hardly be meaningful
until those generalities are fleshed out more with concrete approaches, incentives,
and obligations. I believe the negotiation process has achieved a better understanding of these issues, and more specifically the proposals which we and others
have submitted. In short, the Committee is laying the intellectual basis for ultimate decisionmaking.
We all recognize there are deep-seated and fundamental differences on many
aspects of reform, and I have no illusions about an easy solution. But 1 am encouraged that there is at least a common view of the broad objectives and a
general willingness to try to resolve our differences.
I continue to hope that the main outlines of a new system can be agreed by the
next IMF meeting iu Nairobi, and I assure you the United States will do its
best to help meet that target.
Exhibit 51.—Statement by Secretary Shultz, February 12, 1973, on foreign
economic policy
The United States, as do other nations, recognizes the need to reform and
strengthen the framework for international trade and investment. That framework must support our basic objective of enhancing the living standards of
all nations. It must encourage the peaceful competition that underlies economic
progress and efficiency. It must provide scope for each nation—while sharing in the
mutual benefits of trade—to respect its own institutions and its own particular needs. It must incorporate the fundamental truth that prosperity of one nation
should not be sought at the expense of another.
This great task of reform is not for one country alone, nor can it be achieved in
a single step. We can take satisfaction in what has been accomplished on a cooperative basis since the actions announced on August 15, 1971, clearly signaled our
recognition of the need for decisive change:
Intense negotiations established an important fact in December 1971: Mutual
agreement can be reached on changes in the pattern of world exchange rates,
including the parity of the U.S. dollar, in order to promote the agreed goal of a
better balance in international trade and payments.
Monetary negotiations have been started by the Committee of Twenty on the
premise that better ways must be found to prevent large payments imbalances
which distort national economies, disturb financial markets, and threaten the free
flow of trade. The United States has made practical and specific proposals for
international monetary reform.
The groundwork is being laid for comprehensive trade negotiations. Those
negotiations should look beyond industrial tariffs to encompass also other barriers
to the free flow of goods. They should assure fair competitive treatment of the
products of all countries. They should also seek agreed ways of avoiding abrupt
dislocations of workers and businesses.
In September 1972, the President told the financial leaders of the world that
the time has come for action across the entire front of international economic
problems. Recurring monetary crises, such as we have experienced all too
often in the past decade; unfair currency alignments and trading arrangements, which put the workers of one nation at a disadvantage with workers
of another nation; great disparities in development that breed resentment;
a monetary system that makes no provision for the realities of the present
and the needs of the future—^all these not only injure our economies, they
also create political tensions that subvert the cause of peace.
At the same meeting, I outlined the principles of a monetary system that would
enable all nations, including the United States, to achieve and maintain overall balance in their international payments. Those principles would promote
prompt adjustment and would provide equitable treatment for all nations—
large and small, rich and poor.
Yet, in recent months we have seen disquieting signs. Our own trade has
continued in serious deficit, weakening our external financial position. Other
nations have been slow in eliminating their excessive surpluses, thereby contributing to uncertainty and instability. In recent days, currency disturbances have
rocked world exchange markets. Under the pressure of events, spme countries
have responded with added restrictions, dangerously moving away from the basic
objectives we seek.
EXHIBITS
407
Progress in the work of the Committee of Twenty has been too slow and should
move with a greater sense of urgency. The time has come to give renewed impetus to our efforts in behalf of a stronger international economic order.
To that end, in consultation with our trading partners and in keeping with the
basic principles of our proposals for monetary reform, we are taking a series of
actions designed to achieve three interrelated purposes :
(a) To speed improvement of our trade and payments position in a manner
that will support our effort to achieve constructive reform of the monetary system;
(b) To lay the legislative groundwork for broad and outward-looking trade
negotiations, paralleling our efforts to strengthen the monetary system;
and
(c) To assure that American workers and American businessmen are treated
equitably in our trading relationships.
For these purposes:
First, the President is requesting that the Congress authorize a further realignment of exchange rates. This objective will be sought by a formal 10-percent
reduction in the par value of the dollar from 0.92106 SDR to the dollar to 0.82895
SDR to the dollar.
Although this action will, under the existing Articles of Agreement of the International Monetary Fund, result in a change in the official relationship of the
dollar to gold, I should like to stress that this technical change has no practical
significance. The market price of gold in recent years has diverged widely from the
official price, and under these conditions gold has not been transferred to any
significant degree among international monetary authorities. We remain strongly
of the opinion that orderly arrangements must be negotiated to facilitate the continuing reduction of the role of gold in inernational monetary affairs.
Consultations with our leading trading partners in Europe assure me that the
proposed change in the par value of the dollar is acceptable to them, and will,
therefore, be effective immediately in exchange rates for the dollar in international markets. The dollar will decline in value by about 10 percent in terms
of those currencies for which there is an effective par value, for example, the
deutsche mark and the French franc.
Japanese authorities have indicated that the yen will be permitted to float.
Our firm expectation is that the yen will float into a relationship vis-a-vis other
currencies consistent with achieving a balance of payments equilibrium not dependent upon significant government intervention.
fThese changes are intended to supplement and work in the same direction as
the changes accomplished in the Smithsonian agreement of December 1971. They
take into account recent developments and are designed to speed improvement in
our trade and payments position. In particular, they are designed together
with appropriate trade liberalization, to correct the major payments imbalance
between Japan and the United States which has persisted in the past year.
Other countries may also propose changes in their par values or central rates
to the International Monetary Fund. We will support all changes that seem warranted on the basis of current and prospective payments imbalances, but plan
to vote against any changes that are inappropriate.
We have learned that time must pass before new exchange relationships
modify established patterns of trade and capital flows. However, there can be
no doubt we have achieved a major improvement in the competitive position
of American workers and American business.
The new exchange rates being established at this time represent a reasonable
estimate of the relationships which, taken together with appropriate measures
for the removal of existing trade and investment restraints, will in time move
international economic relationships into sustainable equilibrium. We have,
however, undertaken no obligations for the U.S. Government to intervene in foreign exchange markets.
Second, the President has decided to send shortly to the Congress proposals for
comprehensive trade legislation. Prior to submitting that legislation, intensive
consultations will be held with Members of Congress, labor, agriculture, and
business to assure that the legislation reflects our needs as fully as possible.
This legislation, among other things, should furnish the tools we need to—
Provide for lowering tariff and nontariff barriers to trade, assuming our trading partners are willing to participate fully with us in that process;
408
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Provide for raising tariffs when such action would contribute to arrangements
assuring that American exports have fair access to foreign markets;
Provide safeguards against the disruption of particular markets and production from rapid changes in foreign trade; and
Protect our external position from large and persistent deficits.
In preparing this legislation, the President is particularly concerned that,
however efficient our workers and businesses, and however exchange rates
might be altered, American producers be treated fairly and that they have
equitable access to foreign markets. Too often, we have.been shut out by a web
of administrative barriers and controls. Moreover, the rules, governing trading
relationships have, in many instances, become Obsolete and, like our international
monetary rules, need extensive reform.
We cannot be faced with insuperable barriers to our exports and yet simultaneously be expected to end our deficit.
At the same time, we must recognize that in some areas the United States,
too, can be cited for its barriers to trade. The best way to deal with these bar-,
riers on both sides is to remove them. We shall bargain hard to that end. I am
convinced the American workers and the American consumer will be the
beneficiaries.
In proposing this legislation, the President recognizes that the choice we face
will not lie between greater freedom and the status quo. Our trade position must
be improved. If we cannot accomplish that objective in a framework of freer and
fairer trade, the pressures to retreat inward will be intense.
We must avoid that risk, for it is the road to international recrimination,
isolation, and autarky.
Third, in coordination with the Secretary of Commerce, we shall phase out
the interest equilization tax and the controls of the Office of Foreign Direct
Investment. Both controls will be terminated at the latest by December 31, 1974.
I am advised that the Federal Reserve Board will consider comparable steps
for their voluntary foreign credit restraint program.
The phasing-out of these restraints is appropriate in view of the improvement
which will be brought to our underlying payments position by the cumulative
eff'ect of the exchange rate changes, by continued success in curbing inflationary
tendencies, and by the attractiveness of the U.S. economy for investors from
abroad. The termination of the restraints on capital flows is appropriate in the
light of our broad objective of reducing governmental controls on private
transactions.
The measures I have announced today—the realignment of currency values,
the proposed U A trade legislation, and the termination of U.S. controls on
CV
capital movements—will serve to move our economy and the world economy
closer to conditions of international equilibrium in a context of competitive
freedom. They will accelerate the pace of successful monetary and trade reform.
They are not intended to, and cannot, substitute for effective management
of our domestic economy. The discipline of budgetary and monetaiy restraint
and effective wage-price stabilization must and will be pursued with full vigor.
We have proposed a budget which will avoid a revival of inflationary pressure
in the United States. We again call upon the Congress, because of our international financial requirement as well as for the sake of economic stability
at home, to assist in keeping Federal expenditures within the limits of the
President's budget. We are continuing a strong system of price and wage controls.
Recent international economic developments reemphasize the need to administer
these controls in a way that will further reduce the rate of inflation. We are
determined to do that.
The cooperation of our principal trading and financial partners in developing
a joint solution to the acute difficulties of the last few days has been heartening.
W^e now call upon them to join with us in moving more rapidly to a more.efficient
international monetary system and to a more equitable and freer world trading
system, so that we can make adjustments in the future without crises and so that
all of our people can enjoy the maximum benefits of exchange among us.
EXHIBITS
:409
Exhibit 52.—Letter of transmittal from Secretary Shultz to the Speaker of
the House, February 19, 1973, proposing legislation to devalue the dollar by
10 percent by amending the Par Value Modification Act of 1972. (A similar
letter was transmitted to the President of the Senate.)
DEAR MR. SPEAKER: There is transmitted herewith a draft bill, "To amend the
Par Value Modification Act."
In a statement on behalf of the President on February 12, 1973, I announced
our intention to propose legislation to implement a devaluation of the dollar by 10
percent. This step was proposed in combination with other actions taken in Europe
and Japan to amend the structure of exchange rates agreed at the Smithsonian
Institution in December 1971.
My statement, which is enclosed,^ explains the reasons for these exchange rate
changes and other steps being taken to strengthen the competitive position of
our factories and farms in world markets. Also enclosed is a background paper
which reviews the events leading up to the February currency crisis, the exchange
rates resulting from the agreed realignment, and the relationship of the realignment to broader reform of the international monetary and trading system.
The legislation I am submitting today would give Congressional approval to
the change in the dollar exchange rate. It amends the Par Value Modification Act,
P.L. 92-268, approved on March 31, 1972, by providing for establishment of a
new par value of $1 equals 0.828948 Special Drawing Right or, in. terms of gold,
of $1 equals 0.023684 of a fine troy ounce of gold. The Bretton Woods Agreements
Act prohibits a change in the par value of the dollar in the International Monetary Fund without prior Congressional approval and the proposed legislation
would grant this approval.
In the past, our par value has been expressed only in terms of gold. The proposed bill expresses our par value in terms of both Special Drawing Rights and
gold in order to emphasize the importance we attach to the enhanced role of
Special Drawing Rights in the future development of the international monetary system.
The change in the par value of the dollar will increase the value of the United
States gold reserves. Special Drawing Rights and gold tranche automatic drawing rights in the International Monetary Fund. There will also be increases in
the dollar value of subscriptions to the international financial institutions.
The par value change will also have the consequence of requiring the United
States to add to its dollar subscriptions to the international financial and lending
institutions in order to maintain the value of these subscriptions in terms of gold.
The maintenance of value provision is applicable to all members and is designed
to assure that contributions from all countries maintain their relative value when
relationships among currencies change. It also assures that we do not lose out
through devaluation in our share of the assets and voting power of these institutions. Authority to maintain the value of our international financial institution
subscriptions and an authorization of appropriations for this purpose are contained in the Par Value Modification Act.
In addition, certain costs reflecting foreign exchange obligations will result from
the change in par value. The enclosed tables and explanatory notes contain full
details on all aspects of the increases in assets and liabilities resulting from
the change in par value as well as an estimate of the maximum amount of appropriations to be requested to maintain the value of international financial institution subscriptions.
I urge early and favorable consideration of this important legislation.
It would be appreciated if you would lay the draft bill before the Plouse of
Representatives. A similar draft bill has been transmitted to the President of the
Senate.
The Department has been advised by the Office of Management and Budget
that enactment of this proposed legislation would be in accord with the program
of the President.
Sincerely yours,
(Signed)
THE HONORABLE CARL ALBERT,
Speaker of the House of Representatives
Washington, D.C. 20515
1 See exhibit 51.
GEORGE P. SHULTZ.
410
1973 REPORT OF THE SECRETARY OF THE TREASURY
A BILL
To amend the Par Value Modification Act
Be it enacted hy the Senate and House of Representatives of the United States
of America in Congress assemhled, That the first sentence of section 2 of the Par
Value Modification Act (Public Law 92-268) is amended by striking the words
"one thirty-eighth of a fine troy ounce of gold" and inserting in lieu thereof the
following: "0.828948 Special Drawing Right or, the equivalent in terms of gold,
of $1 equals 0.023684 of a fine troy ounce of gold".
SUMMARY TABLE
Financial effects of U.S. devaluation
mil^^'o'^^
2,518
1,900
I. On U.S. flnancial statements
A. Increase in assets.
B. Increase in liabilities
0 . Net increase in assets
618
II. On records of contingent liabilities
Increase in obligation to make additional capital subscription to the international lending institutions J f called
III. On maximum appropriation required
992
2,225
IV. On forecast budgetary expenditures •
Fiscal 1973
Fiscal 1974
Fiscal 1975-1985 (per annum)
..-
0
12
40
Financial effects of U.S. devaluation
[Explanatory notes folio wl
I. On U.S. financial statements
A. Increase in assets
« H1. Increase in value of reserves
$millions
Gold
1,165
Special drawing rights (SDR)
218
Gold tranche automatic IMF drawing rights
52
2. Increasein valueof U.S. currency subscriptions in the
606
International Monetary Fund (IMF).
3. Increase in value of U.S. participation in capital of
477
international lending institutions.
Total assets
2,518
B. Increase in liabilities
1. Treasury debt in foreign currencies
2. Federal Reserve obligations in foreign currencies
3. Increase in repajnnent of obligations to IMF
For currency drawings
5. Obligation for additional capital subscription to
international lending institutions.
,
C. Net increase in assets
II; On records of contingent obligations
Increase in obligation to make additional capital subscrlption to the international lending institutions, if called.
III. On maximum appropriation required
IV. On forecast cash expenditures
Fiscal 1973
Fiscal 1974
Fiscal 1975-1985 (per annum)
Treasury General Fund
Financed from
193 Exchange Stabilization Fund
196 Federal Reserve resources
For SDR allocations
4. Required additional subscription to the IMF-
Total liabilities.
A
• *
Accruing to
Treasury General Fund
Exchange Stabilization Fund
Treasury General Fund
Treasury General, Fund
150 Appropriations or exchange
of assets
278 Exchange Stabilization Fund
606 Appropriations or exchange
of assets
477 Appropriations
1,900
618
992 Appropriations
2,225
0
12
40
EXHIBITS
411
NOTES TO TABLE: "Financial effects of U.S. devaluation''
On U.S. financial statements
A. Increase in assets—Devaluation will result in increases in the dollar
value of three types of assets : (1) reserve assets, (2) currency subscrlp- •
tions in the International Monetary Fund, and (3) paid-in capital subscription to the international development lending institutions. The total
increase in all three classes is $2,518 million.
1. Reserve assets
Gold—U.S. holdings now total $10,487 million. After devaluation
the value of these holdings in current dollars will increase by 11.11
percent or $1,165 million. The increment in value of gold will result
in a direct cash infiow into the Treasury of $1,165 million as gold
certificates equivalent to the increase in gold. value are issued to
Federal Reserve banks. However, under unified budgetary accounting concepts, this increment in value will not be considered a budgetary receipt.
Special drawing rights (SDR)—SDR's are an international reserve asset that are created'by the IMF and allocated among members. These assets have a gold value and U.S. holdings now totaling
$1,958 million will increase by 11.11 percent or $218 million.
Gold tranche—The gold tranche is the amount of our automatic
regular drawing rights on-the International Monetary Fund. These
rights can be used by the United States to purchase or draw foreign
currencies from the Fund to meet a balance of payments need. These
rights, which'are included in U.S. reserves, now total $469 million.
They represent gold paid to the Fund in partial fulfillment of U.S.
subscription obligations and will increase in value, by 11.11 percent
or $52 million.
2. Increase in value of U.S. currency subscriptions iri the Interna tional
Monetary Fund
Seventy-five percent of our subscription to the IMF was paid in
U.S. dollars but this subscription of $5,456 million was denominated
on the books of the Fund in dollars of a fixed weight and fineness of
gold. Thus, the value of this subscription will increase in terms of
current dollars after devaluation to a total of $6,062 million—an increase of $606 million. This increase in value allows us to increase
our drawing rights, maintain our share of voting rights and allocations of special drawing rights.
3. Increase in value of U.S. participation in capital of development lending institutions
Paid-in investments in the World Bank, the International Development Association, the Inter-American Development Bank, and the
Asian Development Bank are also denominated in dollars of a fixed
weight and fineness of gold. U.S. investments in these institutions
will increase in value by $477 million. The increase for the InterAmerican Development Bank will be $233 million, for the World
Bank—$71 million, for the International Development Association—
$161 million, and for the Asian Development Bank—$12 million.
B. Increase in liahilities
. •
1. Treasury debt in foreign currencies
The Treasury has outstanding $1,714 million in foreign currency
borrowings—$306 million in German marks and $1.4 billion in Swiss
francs. Repayment of these obligations at maturity under the new
rates of exchange are estimated to result in approximately $193
million additional expenditure of dollars. The actual amount of loss
will vary depending upon the market rates at which the currencies
are obtained for repayment. The liability for meeting this additional
cost is borne by the Exchange Stabilization Fund. Thus, no appropriation or budgetary expenditures are involved.
2. Federal Reserve obligations under "swaps"
The Federal Reserve has outstanding mutual deposit arrangements or so-called "swaps" with foreign, central banks, totaling
$1,639 million. The cost of buying foreign currencies to repay these
swap obligations is estimated to increase by about $196 million over
506-171—73
29
412
19 73 REPORT OF THE SECRETARY OF THE TREASURY
what it would have been prior to devaluation. The actual amount of
loss will vary depending upon the market rates at which the currencies are obtained for repayment. The Pederal Reserve will bear this
additional cost and no appropriation or budgetary expenditures are
required.
3. Increase in repayment obligations to the IMF
For currency drawings—^The United States now has a drawing
outstanding, representing U.S. purchases of foreign exchange from
the International Monetary Fund in the amount of $1.4 billion. The
International Monetary Fund Articles of Agreement require the
United States to maintain the value of these dollars held by the
Fund in terms of gold. The payments required, in the form of a letter
of credit, will amount to $150 million.
For SDR allocations—Special drawing rights allocated to the
United States are also denominated in terms of gold. The United
States has been allocated a total of $2,491 million in special drawing
rights and should the SDR scheme ever be liquidated, the United
States would incur an increased liability of $278 million.
4. Required additional subscriptions to the IMF
In addition to the currency drawing maintenance of value described under item 3 above, the United States has a maintenance of
value obligation on its currency subscription in the Fund of $5,455
million. Under Fund rules, this currency subscription must be maintained in gold value requiring a paymerit of $606 million in tiie form
of a letter of credit.
5. Obligations for additional capital subscriptions to international
financial institutions
The United States will incur an increased paid-in capital obligation
to the international development institutions totaling $477 million.
The amounts are: World Bank—$71 million. Inter-American Bank—
$233 million, Asian Development Bank—$12 million, and the International Development Association—^$161 million. These amounts will
be financed from an appropriation requested of Congress.
This maintenance of value obligation stems from similar, but not
identical, provisions in the agreements governing each of the international lending institutions providing that each member country
that devalues its currency must maintain the value of its contributions as measured by a common yardstick, in this case gold. The purpose of this requirement is to assure that the contributions of all
members are maintained in value in relation to each other despite
changes in exchange rates. This provision has worked in favor of the
United States hy assuring that otlier countries that devalue their
currencies do not diminish the value of their contributions. Thus, the
burden-sharing principle is not adversely affected by currency devaluations. The maintenance of value provision also assures that our
share in the assets and voting rights in these institutions is not impaired by our devaluation.
All other countries have fulfilled their maintenance of value obligations. In total, there have been over 200 par value modifications in
the International Monetary Fund and in each case the country concerned has fulfilled its maintenance of value obligations in the international financial institutions. Moreover, most countries, especially
the large industrial countries, have fulfilled these obligations
promptly. For example, France devalued in 1957, 1958, and 1969. In
the first instance, maintenance of value was made on the date of
devaluation; in the second, 2 days after; and in the third, 3 days
after. In the case of the United Kingdom's devaluation in 1967, maintenance of value was made 33 days after; and in the case of Canada
in 1962,28 days after.
C. Net increase in assets—Increases in assets total about $2.5 billion; increases in liabilities total about $1,900 million; the result is a net increase in assets of about $618 million.
II. On records of contingent ohligations
Increase in obligation to make additional capital subscription to the IFI's if
called.
EXHIBITS
413
In the World Bank, the Inter-American Development Bank (IDB), and the
Asian Development Bank (ADB), our subscription of callable or "guarantee"
capital is denominated in dollars of a fixed weight and fineness, and the change
in the par value of the dollar will mean an increase of 11.11 percent in our callable capital obligation. The U.S. callable capital obligation in the World Bank is
$703 million, in the IDB it is $205 million, and in the ADB it is $12 million. The
total increase in the current dollar amount of these callable capital subscriptions amounts to $920 million.
This callable capital is a highly contingent liability. It has never been called
in the past and it is highly unlikely that these subscriptions will be called in the
future, considering the size of already existing callable capital and the reserves
which the international banks have built up. Therefore, no budgetary impact is
anticipated. Nevertheless, funds must be available to meet these obligations if
they are ever called, and an appropriation of $920 million will be requested.
Of the total maintenance of value for the IDB-FSO of $241 million, $72 million
is a contingent liability representing loans that have been made in dollars but are
repayable in either dollars or other currencies. If repaid in other currencies (and
this is the most likely prospect), the United States will have no maintenance of
value obligations on this sum.
III. On maximum appropriation required
Appropriations will be required for the paid-in capital subscriptions to the international lending institutions and for the callable capital subscriptions to these
institutions. Payments to the International Monetary Fund can be handled as
either an appropriation or as an exchange of assets. The maximum appropriations
to be requested are as follows:
.
.
.
(S millions)
Paid-in capital
Callable capital
IMF
:
'.
-
477
992
756
-
Total
The maximum amounts for each institution are as follows :
2,225
[In millions of dollarsl
Callable
IBRD
IDA
IDB
ADB
_.
.
To be paid in
703
.
277
12
71
161
233
12
992
Total
-
477
0
Subtotal
IMF
756
992
1,233
These amounts are approximate. The exact amount of maintenance of value
obligations can be determined only on the basis of holdings on the day of formal
change in par value.
IV. On forecast budgetary expenditures
Budgetary expenditures are expected in the near future only from a portion of
the obligations for increased capital to the interriational lending institutions.
In most cases these obligations will be met, at least initially, not by cash expenditures but rather, by the issue of letters of credit, which do not constitute
budget expenditures. All of the paid-in capital subscriptions will be paid in
letters of credit except for the Asian Development Bank. In the case of that institution, one-half of the paid-in subscription is required to be paid in cash.
Moreover, the letter of credit portion is expected to be drawn during fiscal year
1974. Thus, the full maintenance of value amount of $12 million is expected to be
paid to the Asian Development Bank in cash during fiscal year 1974.
No drawdowns on the other letters of credit are expected in fiscal years 1973
and 1974. It is expected that drawdowns will begin in fiscal year 1975 and will
414
19 73 REPORT OF THE SECRETARY OF THE TREASURY
be spread out evenly over about an 11-year period resulting in drawdowns of
$40 million per annum.
Exhibit 53.—Background material on proposed modification of par value of the
dollar
I. Introduction
The administration has proposed legislation authorizing and directing the
Secretary of the Treasury to take the necessary steps to modify the par value of
the dollar in the International Monetary Fund, by an amount corresponding to an
increase of 11.11 percent in the value of one special drawing right in the IMF, or,
in terms of gold, of 11.11 percent in the official value of an ounce of gold.^ This
modification is equivalent to a reduction of 10 percent in the value of the dollar
stated in terms Of special drawing rights per dollar, from 0.921053 SDR to
0.828948 SDR, or to the equivalent in terms of gold of one dollar equals 0.023684
fine troy ounces of gold. This corresponds to a value of $42.22 per fine troy ounce
of gold.
II. Relation of this proposal to foreign economic policy
The proposed change in par value is part of a program outlined in a Statement
on Foreign Economic Policy made by Secretary of the Treasury George P. Shultz
on February 12.^ This program has three objectives: (a) To reinforce our trade
and payments position in a manner that will support our effort to achieve constructive reform of the monetary system; (b) to lay the legislative groundwork
for broad and outward-looking trade negotiations, paralleling, our efforts to
strengthen the monetary system; and (c) to assure that American workers and
American businessmen are treated equitably in our trading relationships.
The legislation proposed is the first of three principal actions aimed at these
objectives. It would authorize the United States to change the par value of the
dollar in a manner that achieves a realignment of exchange rates.
As a second step, the President has decided shortly to send to Congress proposals for comprehensive trade legislation. This legislation is needed to provide
the tools that will permit us to take part in a nautual lowering of tariff and nontariff barriers to trade, assuming that our trading partners are willing to participate fully with us in that process. It should also provide necessary tools to help
assure fair access to foreign markets for American exporters. It should, further,
include means to safeguard particular markets and types of production from
disruption that results from rapid changes in the impact of foreign trade, and
to protect the U.S. external position from large and persistent deficits.
• The Secretary of the Treasury also announced the intention to phase out the
controls over the outflow of U.S. investment funds by December 31, 1974. The
controls to be so phased out are the interest equalization tax, the limitations
imposed by the Commerce Department's Office of Foreign Direct Investment, and
the voluntary foreign credit restraint program of the Board of Governors of the
Federal Reserve System.
Taken together, the actions proposed in the fields of money, trade, and investment, as well as actions taken by other countries, should help to direct the
world economy toward conditions of international equilibrium, and to do so in
a context of more competitive freedom for producers and investors both here
and abroad.
Iri connection with the Secretary's announcement here, a number of other
countries have stated that they will maintain their previous par or central
values, so that the central rates or par values of their currencies will appreciate
by 11.1 percent in terms of the dollar. Japan is pei-mitting its currency to .float
for the time being, and the market rate has appreciated relative to the U.S.
dollar by an amount substantially in excess of 11.1 percent. The United Kingdom
and Jtaly also have- floating currencies and their currencies have appreciated
against the dollar by.smaller amounts. There has been no significant appreciation
thus far in the Canadian dollar. The new pattern of world exchange rates provides
a basis for a thrust toward a viable equilibrium in world payments.
We believe the realignment, taking account of the floating of a number of important currencies, will produce a satisfactory and fair set of exchange rate relationships. While.a major step forward, however, exchange rate changes cannot
1 See exhibit 52.
2 See exhibit 51.
EXHIBITS
415
substitute for long-tenn revisions in the monetary and trading system. We contemplate vigorous pursuit of international negotiations looking toward a more
balanced economic order for the longer run, and for fairer treatment of American
workers and producers. Moreover, the success of the action taken requires the
effective management of the domestic economy of the United States. Budgetary
restraint, appropriate monetary policy, and wage-price stabilization must be
pursued with vigor to provide an essential foundation for achieving the stronger
international competitive position necessary for our economy and for a stable
monetary order.
III. World payments in 1972 and the exchange crisis of early 1973
Following the Smithsonian realignment in December 1971, there was a gradual
return to a calmer situation in the exchange markets. Plowever, this period of
relative tranquility was punctuated in the middle of 1972 by speculation directed
against the pound sterling. As a result of this pressure, the pound sterling was
allowed to float and the market rate depreciated moderately below the central
value fixed under the Smithsonian arrangement. During this period in the middle
of the year neaiiy one-half of the overall 1972 deficit of about $10 billion in our
official reserve transactions account took place. Following this period of disruption in the markets, more orderly conditions were again restored.
For the year as a whole, this U.S. balance on official reserve transactions of
just over $10 billion was about one-third of the extremely large total of nearly
$30 billion in 1971. This was, however, still much larger than the highest deficit
figure of about 3 ^ billion dollars during the decade of the sixties. The net capital
outflow, if we include in this category the large residual item not clearly identified, explains the smaller overall deficit in 1972.
On the other hand, the merchandise trade deficit, at $6.8 billion for the year, was
larger by $4 billion than the 1971 figure. The bilateral trade deficit with Japan rose
by neaiiy a billion dollars, to $4 billion. The net trade position with Western
Europe also worsened by 1^/^ billion dollars, and an equal deterioration took place
with the developing countries of Asia and Africa, a category that includes our
growing petroleum imports.
To a considerable extent this result was not unexpected. In the initial months
an exchange adjustment may not produce favorable results in terms of export
volume, while imports continue to be acquired at higher dollar prices. The strong
growth rate of the U.S. economy in 1972 stimulated a rising volume of imports,
while other industrial economies showed more moderate year-to-year expansion,
with a corresponding slower growth in their demand for our exports. Oil imports
were also rising for reasons related to that commodity, though there were favorable developments in our exports to the Communist areas. Moreover, in the latter
part of the year, the United States was able to report substantial progress in
restraining inflation at a time when prices and costs were rising more rapidly
in most other industrial countries.
Allowing for these factors, the trade deficit in the second half of 1972 appeared
to show a leveling off from the sharp decline of 1971, and the prospect for. 1973
could reasonably be one of some improvement. The question, however, was
whether this improvement would come rapidly enough, and be large enough, to
provide a firm basis for confidence in 1973. At the end of the year, it had become
evident that there still remained a large disequilibrium in the current goods
and services accounts. Our monthly trade figures in November and December
failed to bear out earlier signs of gradual improvement. Moreover, the very
large and persistent trade and current account surplus of Japan remained a
prominent feature of the world disequilibrium in payments. It also appeared that
for the year as a whole the enlarged European Community might have a current account surplus at about the same level as the Japanese, or about $6 billion. For December, Germany reported a substantial bulge in its trade surplus,
even though the German current accounts for the year as a whole did not show
a large surplus.
These developments raised questions as to whether the Smithsonian exchange
rate alignment, and other actions of the past 18 months (including our progress
toward restoring price stability), even though beginning to show beneficial effects,
could itself be adequate to bring sufficiently rapid and complete correction of the
persistent underlying disequilibria in world trade and payments. Recognizing
that the adjustment process might not be proceeding with sufficient vigor, the
administration was actively in touch with our major trading partners, particu-
416
1973 REPORT OF THE SECRETARY OF THE TREASURY
larly the Japanese, calling their attention to the need for their cooperation in
dealing with the imbalances.
A period of renewed exchange speculation was touched off by the Italian decision, taken on the weekend of January 20, to establish a dual exchange market.
The Italian reserve position had been weakening for some time through substantial capital movements. This outflow, which began in the middle of the year, appeared to have been related to political factors as well as uncertainty about the
eff'ect of rising costs in Italy on the Italian trade position—even though tourism
and other invisible items gave Italy an extremely strong current account surplus.
This announcement was followed by a sizable bulge in the persistent movement of funds from Italy into Switzerland. On January 23, the Swiss authorities
suspended intervention in the exchange market, and the Swiss franc appreciated
against the dollar and dollar-pegged currencies. This action appears to have triggered very large and growing purchases of German DM and Japanese yen, totaling about $7 billion, by February 9. The German authorities adopted emergency
measures to tighten their restraints on inflows of funds during the week, but
without appreciable effect in dampening the massive inward movements.
German authorities declared their intention not to revalue their rate by unilateral action, out of concern over their competitive position with respect to their
closest trading partners. In these circumstances, market pressures were spreading to other currencies and security markets and money markets around the
world were affected by the currency speculation and uncertainty. In these circumstances, temptations to resort to unilateral defensive action and reinforced controls were strong, but this course of events promised little progress toward dealing with the underlying imbalances in the payments of the United States and
other countries.
Against this background, the United States undertook to explore with Japan
and with several European countries the possibilities for a cooperative solution
that would halt the crisis, establish a new pattern of exchange rates that would
be appropriate, provide strong thrust toward correction of the underlying imbalances, and encourage fruitful negotiations in reshaping the structure of the monetary and trading system.
Under Secretary Volcker left Washington on Wednesday, February 7, for a
series of meetings in Japan and in Europe. These conversations, among other
points, considered whether the willingness of the United States to take overt action to devalue the dollar would produce an appropriate pattern of exchange
rates. In the course of these discussions, it became apparent that this approach
provided a means of achieving the needed results in a manner that met the needs
of all major parties. There was a common and heartening recognition of the
mutual need to reinforce the adjustment of payments imbalances and this cooperative spirit has been evident among many other members of the Fund, who have
agreed to allow their exchange rates to reflect the appreciation of the dollar.
By taking such an initiative at this time and participating in such a cooperative solution, we were able to convert a crisis into an opportunity. The decisions
taken posed difficulties for all the participants in the realignment. However, the
consensus was clear that these decisions were required to achieve the needed and
desired results, including particularly improvement in the competitive position
of the United States.
In its main elements, the new structure of exchange rates and exchange policies can now be identified. Information is not yet available for all the members
of the Fund, but the following table lists the actions taken by OECD countries.
Broadly speaking, they fall into four categories—(a) countries which, by maintaining their existing par values, will permit 11.11 percent appreciation vis-a-vis
the dollar; (b) a few countries fixing a new rate at a smaller appreciation
against the dollar; (c) several developing countries in the OECD group that
followed the depreciation of the dollar by the same amount; and (d) countries
floating for the time being.
In the first category appear the Benelux countries, France, Germany, Austria,
Australia, Denmark, Norway, and Spain. In the second group, Sweden, Finland,
and Portugal appreciated by 5-7 percent. The third category includes Greece,
Iceland, Turkey, and Yugoslavia. Finally, the floating group includes not only
Canada and the United Kingdom, which were floating before February 1973, but
also, for the present, Italy, Switzerland, and Japan. In the case of Japan, Secretary Shultz has indicated our firm expectation that the yen will float into a
relationship vis-a-vis other currencies that is consistent with achieving a balance
EXHIBITS
417
of payments equilibrium not dependent upon significant government intervention.
In the market to date, the Japanese yen has appreciated about 14 percent from
the actual trading level on February 9,1973.
Table 2 shows the average appreciation against the dollar for all OECD currencies, using February 16 market rates where no central rate or par value has
been announced, together with the corresponding estimates for the Smithsonian
realignment. The two results are quite similar. The cumulative effect of the two
realignments taken together is an average appreciation against the dollar, calculated on the basis of U.S. cents per foreign currency unit, of 15.5 percent since
April 30, 1971. If Canada is excluded, the average appreciation is about 23 percent. These results are Jr^^'^^ed as a weighted average of the rate changes, using
as weights the trade of the United States with the country in question.
Important as it is, exchange rate realignment alone can be only one part of a
successful effort to deal with payments imbalances and to lay the basis for a wellfunctioning international economic order. We must reinforce this action by appropriate domestic policies. In the international field there is still much to be
done to establish fair and equitable competitive conditions in international trading arrangements and trade policies and practices.
To support the exchange rate action, American producers must have equitable
access to foreign markets. Their opportunities have too frequently been closed or
restricted by administrative barriers, controls, and preferences. The rules, standards, and procedures governing trading relationships in many instances no longer
apply equitably or effectively, and need extensive reform, like those of the international monetary system. We propose to deal with foreign barriers to trade. In
doing so, we must also recognize that the United States can be cited for such barriers in some areas. The trade legislation now under consideration will provide
the tools essential for a concerted attack on these problems.
The decisions taken here and abroad as a result of the recent exchange crisis
are entirely consistent with the major thrust of the U.S. proposals for the longterm reform of the international monetary system. More broadly, they underline
our basic principle that any meaningful and stable international monetary system must rest on the determination of the major participant countries to seek
and attain an equilibrium in their payments structures.
IV. Financial aspects of the par value change
The par value change will result in increases in the dollar value of U.S. reserve assets—gold, special drawing rights, and gold tranche automatic drawing
rights in the International Monetary Fund—in the amount of $1.4 billion. There
will also be increases in the dollar value of subscriptions to the international financial institutions totaling about $1.1 billion.
These increases in the value of assets are partially offset by increases in direct
and contingent liabilities for international financial institutions totaling about
$2.5 billion as well as increases in repayment costs of obligations denominated in
foreign currencies amounting to about $389 million. A separate submission attached to the par value modification amendment contains the details of the effect of the par value change on U.S. assets and liabilities.^
Only the maintenance of value liabilities to the international financial institutions will require appropriations. Authority to maintain the value of our international financial institutions subscriptions and an authorization of appropriations for this purpose are contained in the Par Value Modification Act. A maximum appropriation of $2.3 billion will be requested.
This appropriation will have limited budgetary effect. This results from the fact
that (a) $1.8 billion of our liabilities to the international financial institutions
represents monetary exchanges of assets, and contingent liabilities are not expected to be called, and (b) because in almost all cases payments to these institutions are made in letters of credit which are drawn down gradually. In fact,
no expenditures are anticipated in fiscal 1973, $12 million in 1974, and thereafter at a rate of about $40 million a year over 10 years.
1 See exMbit 52.
418
19 73 REPORT OF THE SECRETARY OF THE TREASURY
TABLE 1.—Exchange rates and exchange rate changes against the dollar by OECD
countries ^ as of February 16, 1973
Country
Australia
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Iceland
Italy
Japan
Luxembom-g
Netherlands
Norway
Portugal
Spain
Sweden
Switzerland
Turkey.
United Kingdom
Yugoslavia
Percent change against dollar 2
!
11.11
ILll
ILll
3 0.7 (Float)
ILll
5.13
11.11
11.11
0
0
31.9 (Float)
314.3 (Float)
11.11
11.11
ILll
6.86
11.11
5.55
3 5.7 (Float)
0
3 2.3 (Float)
0
New exchange rate (foreign currency units per dollar)
0.71
20.97
40.33
41. oo7
6.28
3.90
4.60
2.90
30.00
98.56
* 570.00
«263.50
40.33
2.92
5.98
25.50
58.03
4.56
«3.37
14.00
4 2.44
17.00
1 Merabers of the Organization for Economic Cooperation and Development.
2 Expressed as percent change in U.S. cents per foreign currency unit compared with par value or central
rates prevailing prior to Feb. 13, 1973.
3 For currencies which are floating, percentage changes show changes in market rates between Feb. 9
and Feb. 16,1973. For Switzerland, market rate has changed 5.7 percent since Feb. 9, or by 11.5 percent since
the beginning of the Swiss franc float.
4 For currencies which are floating, market rates as of Feb. 16 are shown.
TABLE 2.—Weighted average appreciation of foreign currencies against the dollar,
as of Feb. 16, 1973 .
[Percent change in U.S. cents per foreign currency unit; based on U.S. bilateral trade weights in 19701
Resulting from
Smithsonian
realignment I
February 1973
rate changes
to date 2
Combined
changes, Smithsonian and
February 1973»
OECD countries
8.0
7.3
15.5
OECD, excluding Canada
11.8
10.8
23.0
1 Based on changes from Apr. 30,1971. Dec. 21,1971, market rate for Canada used.
. 2 Based on announced par values or central rates; or, where such rates have not been announced, on market
rates as of Feb. 16, 1973. For all countries except Canada and the United Kingdom, these February rates
are compared with the Smithsonian par values or cent] al rates in deriving the percentage of appreciation
in the middle column. For the United Kingdom, the February 1973 change is calculated by comparing the
market rate on Feb. 16 with a base rate of $2.35, which was roughly the average market rate prevailing in
the weeks preceding the exchange disturbances.
3 Also includes par value changes by Australia and Iceland in December 1972. These changes are not included in computing the middle column above. Tn all cases, the combined changes represent the percentage
appreciation of the February rates used over the par values or market rates prevaihng on Apr. 30, 1971.
CHART I
U.S. RESERVE ASSETS AND LIQUID LIABILITIES TO FOREIGNEES
Chart I shows how our short-term liabilities to foreigners continued their
dramatic increase in 1972, reaching a level more than six times our reserve assets
by the end of the year with still further increases early in 1973.
Our liabilities to foreign monetary authorities, which are included in the figure
for total liquid liabilities to foreigners, are currently estimated, including
amounts purchased by a number of central banks during the recent period of
speculation, to be nearly $70 billion.
Since the suspension of the convertibility of the dollar into gold on August 15,
1971, there has been little change in U.S. reserve assets except for the adjustment in the value of our gold holdings from $35 per fine ounce to $38 per ounce
and the allocation to the United States of special drawing rights of $700 million
in 1972.
'54
'56
* Including Non-liquid Liabilities to Foreign Official Agencies.
* * Normal Release Date February 27, 1973.
Source: TREASURY BULLETIN. January 1973.
420
1973 REPORT OF THE SECRETARY OF THE TREASURY
CHART II
U.S. OFFICIAL RESERVE TRANSACTIONS BALANCE
Chart I I shows that although the ofiicial reserve transactions deficit of $10.2
billion was much smaller in 1972 than the $29.5 billion deficit incurred in 1971, it
was still extremely large in relation to the deficits experienced prior to 1970 and
brought the cumulative deficit for the 3-year period to more than $50 billion.
OFFICIAL RESERVE TRANSACTIONS BALANCE
$Bil.
1
^«i^i^
0
"
"
^
^
\
-5
\
-10
\
-15
\r\
-\U
-25
-30
1
1
1962
1
1964
1
1
1
1966
1968
* Includes SDR allocation of $867 million In 1970, $717 million in 1971 and $710 million in 1972
* * Preliminary
SOURCE: SURVEY OF CURRENT BUSINESS, JUNE AND DEC 1972.
m
/
\
-20
-35
I960
10.2*
1970
C
O
1
1972*
to
422:
1973 REPORT OF THE SECRETARY OF THE TREASURY
CHART I I I
COMPOSITION OF U.S. BALANCE OF PAYMENTS
Chart I I I traces changes in the balance on goods, services, and private remittances, often called the current account excluding Government grants. The
United States has experienced an almost uninterrupted deterioration in this
balance since 1964, when there was a surplus of nearly $8 billion, with the most
serious deterioration occurring in 1972. The deficit in 1972 was about $6 billion.
Chart I I I also traces trends in the balance of Government grants and credits
and private long-term capital transactions. The movements of this balance are
irregular, fin 1971, the United States experienced a deficit of $8.5 billion, but in
1972 that deficit appears to have been cut ajpproximately in half.
COMPOSITION OF U.S. BALANCE OF PAYMENTS
Balances on Goods, Services & Remittances, and
on Government Grants, Credits, and Private Long-Term Capital
JBii.
-F8
1
h~
1
BALANCE ON GOODS.
/
\
SERVICES & REMITTANCES - ^ f
+6
u
+4
+2
K
SURPLUS
1
V
-
1
1 1 1 1 1 1 1i
A
y
^
/
f
^
y
I- -J
N
'°'*»^
A
\
\
/
1
A
^
^
X\
DEFICIT
J
l-H-
w
t-H.
P«^
/
-
"
:-\
["^
/ \
.^^
^
^
]—
V
RAI AMPF ON
GOV'T GRANTS, CREDITS, X
1 AND PRIVATE
1 y ^
LONG-TERM CAPITALK
[-
1
1951
1
1
1954
1956
* Estimate
Source: SURVEY OF CURRENT BUSINESS
1
\
1
i
/
/
\
T«>B/
v
1
*
1
1966
11
1
1968
- 1 :- - j
1970
CO
424
1973 REPORT OF THE SECRETARY OF THE TREASURY
CHAET IV
U.S.
BALANCE OF PAYMENTS ON CUERENT AND LONG-TEEM CAPITAL ACCOUNT
Chart IV illustrates the dramatic increase in the deficit on current and longterm capital account (sometimes called the basic balance) which has occurred
in the last 2 years. In 1972, the deficit in these transactions appears to have
been more than $10 billion. The Nation has not received enough money from the
sales of goods and services and from foreigh investments in the United States to
pay for imports, tailitary expenditures abroad, aid to developing countries, and
long-term Investments made by U.S. industry outside the United States.
We have borrowed from others and have consumed more goods and services
than we produced.
U.S. BALANCE OF PAYMENTS ON CURRENT
AND LONG-TERM CAPITAL ACCOUNT
31.
0
-2
\
/
—
^
/ v A_
vy V)n
V
\
V
-4
A
fc=J
X
>f
Cd
I—I
\
-B
U2
\
-8
-10
V
\
10.4
12
1951
1954
1957
• Estimate
Source: SURVEY OF CURRENT BUSINESS
1980
1963
1966
1969
1972
to
426
1973 REPORT OF THE SECRETARY OF THE TREASURY
CHART V
U.S. MERCHANDISE TRADE
Chart V portrays the severe deterioration in our merchandise trade balance
from 1964 to mid-1972 when a leveling off occurred.
Our position is best when foreign countries are operating at or near capacity
levels and our own economy is operating with significant slack. Thus we had
a record trade surplus of nearly $7 billion in 1984, but under similar conditions
in 1970 the surplus was only $2.1 billion. Oh the other hand, when the domestic
economy is under infiationary strain our trade position tends to be weaker, particularly if some of our major trading partners are going through periods of
relatively excess capacity. The very small trade surplus recorded in 1968 -reflects
these conditions.
Cyclical conditions had a higbly favorable effect on our actual balance in 1971
and a much smaller but still favorable effect, in 1972. The change in the cyclical
conditions was one of the major reasons for the worsening of the balance between 1971 and 1972.
:
;
Other important factors were the rising demarid for imports of fuel and the
initial effects of the 1971 realignment of exchange rates which probably were
somewhat adverse in 1972.
;
U.S. MERCHANDISE TRADE
*Bil.
+6.0
^,.*<****S^ ^ ^ r
^
V
^**^ a**"*'^
V
\
+4.0
^
.
+•2.0
^
.
>
w
0
w
\*
CO
w.
-2.0
\
\
-4.0
L"^
\
-6.0
\j*:
^ ^ f
1
1960
1962
1964
1966
SOURCE: SURVEY OF CURRENT BUSINESS: June and December 1972
^ 1st half at annual rate
•H-* Preliminary
1968
1970.
1972
fcO
428
19 73 REPORT OF THE SECRETARY OF THE TREASURY
CHART VI
NET INVESTMENT INCOME
Chart VI traces the trends in net investment income from 1960 through 1972.
During this period there was a very substantial rise in receipts from U.S. investments overseas—from $3.3 billion in 1960 to $11.2 billion in 1972. Payments covering the earnings of foreign investment in the United States also increased
dramatically during the period. They were about $1.1 billion in 1960 and $5.9
billion in 1972. Our net earnings on investment income have thus risen from
$2.2 billion in 1960 to $5.3 billion in 1972. The greater part of this improvement in
the net investment earnings occurred in the early part of the 1960's. Since 1967,
payments have grown nearly as rapidly as receipts and the net has improved by
less than $1 billion. The reason is that our overall payments deficits are being
financed by the buildup of liquid liabilities on which we must pay interest and
these growing interest payments offset most of the increase in income from U.S.
investments overseas.
NET INVESTMENT INCOME
5
^
4
3
2
1
-
^
^
^
S^
^^
^ ^ — ^
y
s
•-H
CO
1
n
I960
A
1962
1964
1966
1968
1970
1972
CO
430
19 73 REPORT OF THE SECRETARY OF THE TREASURY
CHART
VII
DETERIORATION OF U.S. MERCHANDISE TRADE BALANCE
Chart VII illustrates the shift in the U.S. trade balance with major are,as
of the world which has occurred since 1964, the year in which the United States
had its largest trade surplus. The overall deterioration between 1964 and
1972 w,as nearly $14 billion, of which $4.3 billion was with Japan, $2.6 billion
with Canada, $1.4 billion with the European Community (including United
Kingdom), and $2.3 billion with other countries in Western Europe.
The sharpest deterioration—some $4 billion—occu,rred between 1971 and
1972. About two-thirds of this deterioration was in our trade with other industrial countries, primarily Japan and the European Community, but about
one-third was with the developing countries.
^
DETERIORATION OF U.S. TRADE BALANCE SINCE 1964
^
* First three quarters at annual rate
* * Expanded E.E.C.
* * * Z e r o balance
"'CO
Source: SURVEY OF CURRENT BUSINESS
432
1973 REPORT OF THE SECRETARY OF THE TREASURY
CHART VIII
COMPOSITION OF WORLD RESERVES
Chart VIII depicts the growth of world reserves over the period since 1950.
By September 30, 1972, world reserves had reached $152 billion, more than
three times the level prevailing in 1950. Much of this increase has occurred
since 1969. In 1970 the rise was more than $14 billion; in 1971 the rise was
$37^ billion; and in the first 9 months of 1972 there was a further growth of
$22 billion.
The bulk of the increase in the reserves has been in the form of foreign
exchange. Monetary gold holdings have been declining since 1965. The other
major addition to reserves in recent years resulted from creation of $9.5 billion
in special drawing rights on the International Monetary Fund.
COMPOSITION OF WORLD RESERVES, 1950-1972
$Bil.
150
'^IMFReserve\
Position
100
• Foreign
Exchange
E2!
50
7^
^
w
m
m m
(—1
CO
'Gold
'
1950
'52
'54
* End September 30
'56
'58.
'60
'61
'62
'63
'64
'65
'66
'67
'68
'69
'70
'71
72*
CO
CO
434
19 7 3
REPORT
OF
THE
SECRETARY
OF
THE
TREASURY
T A B L E I . — U . S . reserve assets a n d liquid liabilities to foreigners^
[In billions of dollars]
Year
U . S . reserve assets
1950
1951
1952.
.—
1953
.1954
1955._.--.
. —_•
1956-..-1957
1958.— . _ - . . : . . . . . . . :
1959
..:...
1960
:.-.
1961
:
1962...:.. 1
1963
1964
1965
:...........
1966
1967
1968
1969
1970
...:.
19711972
24.3
24.3
24.7
23.5
23.0
22.8
23.7
24.8
22.5
21.5
19.4
18.8
17.2
16.8
.16.7
15.5
14.9
14.8
15.7
17.0
14.5
12.2
213.2
.
•
•
U . S . liquid liabilities
to all foreigners i
8.9
8.8
10.4
, ':
11.4
. ;
12.5
13. 5
;
15.3
15.8
16.8
19.4
2L0
22.9
24. 3
26.4
, 29.4
- 29.6
3L0
35.7
38.5
45.9
47.0
67. 8
2 82.7
U . S . liabUities (liquid a n d
nonliquid) to foreign
official agencies
n.a.
n.a.
. n.a.
n.a.
n.a.
n.a.
- n.a.
n.a.
.n.a.
(10.6)
(11.9)
(12.6)
(13.7)
(15.2)
(16.6)
(16.7)
(15.9)
(19.2)
(18.4)
(17.0)
(24.3)
(5L2)
2 (61.3)
- ;
_
n . a.. N o t available.
» I n c l u d i n g n o n l i q u i d liabilities to foreign official agencies.
2 N o r m a l release dates F e b . 27,1973.
SOURCE
T r e a s u r y Bulletin, J a n u a r y 1973.
TABLE 11.—Measure of t h e U.S. halance c)f p a y m e n t s , oMcial r e s e r v e t r a n s a c t i o n s
halance
[ I n billions of d o l l a r s ]
1960 _ ^ - _ _ _ _ _ - ^ _ _ 1961
1962
_:__
1963
1964
1965
:._______
1966
^________^
——^.
-3.4
-1.3
— 2.7
-1.9
— 1.5
—1.3
0.2
1967
1968
1969
1970
1-971
1972
-
-3;4
1.6
2. 7
_ 1 --10..7
_ 1-29.5
_i2—10:2
1 Includes SDR allocation of $867 million in 1970, $717 million i n 1971, a n d $710 milliQn
in 1972.
.
.
.
2 Preliminary.
SomiCE : Survey of C u r r e n t Business, J u n e a n d December 1972.
435
EXHIBITS
TABLE III.—Composition of L'.S. balance of payments
[In billions of dollars]
Balance on goods, services, and
remittances
Year
1951. _
1952
1953- _
1954
1955
1956
1957 . .
1958
1959..
1960
1961.
1962
1963 .
1964
1965
1966
1967
1968...
1969
1970
1971..
1972
Balance on Government grants,
credits, and private long-term
capital
-3.6
-3.4
-2.4
-2.3
-2.9
-4.4
-5.4
-5.1
-3.6
-4.7
-4.9
-5.4
-6.4
-7.7
-7.9
-5.9
-7.1
-2.7
-3.6
-5.2
-8.5
1 -4.3
3.3
1.8
—.1
1.3
1.6
3.5
5.2
1.6
—.5
3.5
5 0
4.4
5.2
7.7
6.1
4.3
3.9
1.3
.7
2.2
—.8
1 -6.1
.
1 Estimate.
TABLE I I I - A . — J 5 glance
1960
1961
1962
1963
1964
1965
1966
1 Including Government g r a n t s .
2 Preliminary.
Billion
$1. 8
3. 1
2. 5
3. 2
5. 8
4. 3
2. 3
1967
1968
19G9
1970
1971
1972 1
Billion
$2. 1
-. 5
-1.0
.4
-2.8
2_8. 3
TABLE IV.—U.S. halance of payments on current and long-term capital account
[ I n billions of dollars]
1951
1952
1953
1954
1955
1956
1957
1958
1:959
1960
1961
1 Estimate.
—0.3
-1.7
—2. 6
—. 9
—1.3
—.9
-.3
-3.5
—4. 1
—1.2
0
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
—1.0
—1.3
0
—1.8
-1.7
—3.3
—1.4
—3.0
-3.1
-9. 3
1—10.4
TABLE V.—Z7.^. merchandise trade
[ I n billions of dollars]
Trade
'balance
1961
1962
1963
1964
1965
1966
1967
1 Annual rate.
- Preliminary.
SOURCE : Survey of Current Business,
5.6
4.6
5. 2
6. 8
4.9
3. S
3.8
1968
1969
1970
1971 1st h a l f i 2d half i__
half 1
1972
2d half 2
J u n e and December 1972.
Traile
balance
. 6
.6
2.2
—1.4
-3.9
-6.7
1_7. o
436
1973 REPORT OF THE SECRETARY OF THE TREASURY
TABLE Nl:—Investment income
[In billions of dollarsl
Year
1960...
1961
1962
1%3
1964
1965
1966
1967
1968.
1969
1970
1971
1972
n.2
TABLE V I L -—Merchandise
2.2
2.9
3.3
3.3
3.9
4.2
4.2
4.5
4.8
4.4
4.4
5.9
5.3
-Ll
-LO
-1.1
-1.3
-1.5
-1.7
-2.1
-2.4
-2.9
-4.5
-5.1
-4.8
-5.9
3.3
3.9
4.4
4.6
5.4
5.9
6.3
6.9
7.7
8.9
9.5
10.7
-—
Balance
Payments
Receipts
trade balance hy area
[In billions of dollars]
1964
1972*
.2
.8
.6
2.3
.1
1.7
1.1
Japan
Ganada
EC**
O t h e r Western E u r o p e
.
Latin America
_
O t h or developing countries
O t h e r areas***
1971
-3.2
-L7
.4
.5
.3
.3
.7
-4.1
-L8
-.8
0
.1
-.9
.6
*Ffrs
"ee quarters, annual rates.
**Expa ried to include United Kingdom, Denmark, and Ireland.
•**Austi :!ia, New Zealand, South Africa, and Eastern Europe.
TABLE VIII.—Composition of world reserves, 1950-1972
[In millions of dollars]
E n d of year
Gold
(all countries)
Foreign
exchange
Reserve position i n fund
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
33.8
33.9
33.9
34.3
35.0
35.4
36.0
37.3
38.0
37.9
13.3
13.7
14.2
15.6
16.7
17.0
17.8
17.0
17.1
16.4
L7
L7
1.8
L9
1.8
L8
2.3
2.3
2.6
3.3
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
38.0
38.9
39.3
40.2
40.8
4L9
4.0.9
39.5
" 38.9
39.1
19.0
19.6
20.0
22.5
24.0
23.8
25.4
29.0
3L9
32.3
3.6
4.2
3.8
3.9
4.2
5.4
6.3
5.7
6.5
6.7
37.2
39.2
38.8
44.5
77.6
97.0
7.7
6.9
6.7
1970
1971
1972*
SDR's
Total
reserves
..
..
..
48.7
49.4
49 9
5L8
53 5
54.3
56.2
56.6
57.7
57 5
..
_.
..
-.
..
..
..
_.
_.
..
..
..
_.
60.6
62.7
63.1
66.6
69.0
7L0
72.6
74.3
71.3
78.2
3.1
6.4
9.5
*3rd quarter.
SOURCE: International Financial Statistics, January 1972, February 1973, Supplement to 1966-67.
92.5
130.1
152.0
EXHIBITS
437
Exhibit 54.—Statement by Secretary Shultz as Governor for the United States,
May 8, 1973, at the 14th annual meeting of the Board of Governors of the
Inter-American Development Bank, Kingston, Jamaica
It is a pleasure for me to be ,attending the annual meeting of tlie InterAmerican Development Bank for the first time. It is the first opportunity I
have had to work vv^ith many of my fellow Governors. I have enjoyed this
opportunity and have found the exehange of YIQWB most useful.
I wish to express to the people of Jamaica the sincere appreciation of the
U.S. delegation for the gracious hospitality they have extended to us. President
Nixon has asked me to convey his warmest personal regards to this meeting
aiid his wishes for its success.
, U.S. participation in the Inter-American Development Bank requires the
agreement and cooperation of both the executive and legislative branches of
the U.S. Gpvernment. Thus, it is most fitting th^at we have in the U.S. delegation
Members of the U.S. Congress of great distinction. In his report to the Coiigress
last week, President Nixon suggested that our legislators make such visits
within the hemisphere at the same time he announced his own intention to
travel to Latin America at least once this year.
We come together at a time when the international economy and the relations
of all nations are undergoing fundamental change. This change brings new challenges—new opportunities to our nations, individually and collectively.
It is now widely recognized that economic relationships between the United
States iand other industrial nations have undergone a fundamental transformation—greater than almost any nation was willing to admit less than 2 years
ago. ALfter World War II, the unrivaled economic strength of the United States
allowed us to make international economic commitments with little concern for
their effect on our own economy.
Now, however, economic strength and power is more widely distributed among
countries and, viewing the matter in global terms, this change has been for
the better. Many industrial nations have per capita incomes approaching th,at
of the United States. Many of the developing countries have broken out of
their poverty cycles and made rapid strides in improving their standards of
living. The less developed world, and Latin American nations in particular,
are now .conscious of their needs, their opportunities, and their ability to play
a central role in the development process.
The -reform of the international economic system in which we are now engaged, must reflect these changes in underlying economic realities. Rather
than resist needed change, we must reexamine our practices and reshape our
economic roles and institutions. Our aim should be to assure that our common
interest in economic prosperity and political harmony is served by change.
It is essential in this process for developed and developing nations to work
together, for economic reform can and will benefit all our nations and—most
importantly—^provide the framework in which the development aspirations of
the Latin American people can be most readily fulfilled. That is why the United
States has welcomed the participation of the developing countries of Latin
America as well as other continents in the work of the Committee of Twenty.
Two major realignments in the relationship of the dollar and the currencies
of other nations have taken place. Present rates now reflect the basic economic
realities and a major source of instability in the system has been removed.
Realistic exchange rates bring direct benefits to Latin America.
Most Latin American countries chose to follow the dollar at the time of the
realignments. Since Latin America is the most industrialized of the developing
regions of the world, the region's competitive position in world trade has been
improved considerably. The initial figures on trade and the increase in reserves
seem to indicate that Latin America has seized and profited by this new
opjportunity.
There are other fundamental ways in which development is and will be afl:ected
by the success of reform of the monetary system. It is clearly disadvantageous,
both to the developing countries and to the United States, to have a monetary
system which permits large and persistent surpluses or deficits. Large persistent
imbalances lead to a proliferation of controls on trade and capital which slow
the growth of world production and aft'ect the flow of development capital.
Such imbalances also lead to large and disruptive exchange rate changes. The
new system must assure that balance of payments adjustment takes place more
438
19 73 REPORT OF THE SECRETARY OF THE TREASURY
promptly and smoothly and in an outward-looking way—a system which provides for economic expansion, not contraction.
There is a certain nostalgia among some countries for the old fixed-rate system, where parities were supposed to change only rarely, and did so after great
pressure had been built up as an extreme deficit or surplus developed. As a result, change tended to be large and disruptive. The fear exists that somehow
more fiexible rates will lead to greater uncertainty and instability in the system,
with adverse effects on individual countries, especially those in the process of
development. I think the evidence is heavily on the other side.
One must not confuse a more flexible system with disruptive large-scale
changes in exchange rates which we have experienced in the past 2 years. The
recent changes were needed because the old system was not flexible. It did not
provide for adjustment to the major structural changes in the world economy
which had evoived over many years, and a major realignment was required.
One central element of a more stable monetary system is, in our view, the
use of some kind of objective indicator to signal the need for action to correct
an emerging disequilibrium^—to ensure that appropriate adjustment does take
place and is consistent with open and cooperative world economic relations.
Internationally agreed rules are very important in an economic system of more
equally distributed power where the possibility of economic friction and disharmony is increased.
The use of objective indicators which the United States has proposed would
place upon all countries, large and small, rich and poor, equal obligations to
take adjustment actions when disproportionately large imbalances were experienced—unless it could be demonstrated that the imbalance was soon to be
reversed without specific corrective steps. When action was clearly appropriate,
each individual nation would have broad flexibility to make its own choice among
internationally acceptable adjustment measures, and exchange rate modifications would represent but one possible choice out of a broad spectrum of possible
domestic or international actions. For example, greater use of borrowing facilities could be undertalien if that were judged appropriate.
The challenge of monetary reform is one,both developed and developing countries must meet quickly and decisively. Latin America and the United States
share a common objective in successful reform. It is an opportunity and an important challenge for us, for if the system does not permit all nations, including
the United States, to reach and stay in equilibrium, restrictions on the flows of
development assistance, private capital, and trade will be inevitable.
To be fully effective, reform of a monetary system must be accompanied by
reform of the trading system. There is now a great opportunity for progress in
the reduction of tariffs and other barriers to international trade. Multilateral
trade negotiations will begin in the GATT in September, in which I expect Latin
American nations v^ill talie an active part. The great changes which have occurred
in the structure of world economic and financial power require changes in trading rules which strike a fair balance between the legitimate interests of individual nations—including the developing nations and the need for a cooperative
worldwide approach.
\
This is the spirit in which President Nixon has proposed broad new legislative
authority for trade negotiations. The requested authority would include—and
look toward—reductions in both tariff and nontariff barriers. The. legislation has
as its fundamental premise that every nation can and should benefit from expanding trade and open trading practices, within the basic framework of a competitive market system. But that openness, however, must also be combined with
fairness for all nations.
It is in the elimination of nontariff barriers that the mutuality of objectives
between the United States and Latin American nations is perhaps greatest. A
reduction in the barriers to agricultural imports worldwide would bring major
benefits to our economies. Benefits would also accrue from a negotiation which
would reverse the trend toward inward-looking regionalism based on preferences for particular countries and groups of countries.
In some instances, open markets and free trade can bring change with disruptive speed. Our proposed legislation recognizes this. Like other countries, we
need effective safeguards when excessive hardships are imposed on domestic
workers and business by surges in imports. The aim of such safeguards is not to
avoid adjustment, but to ease the burdens of adjustment for a transitional period
EXHIBITS
439
and thereby facilitate the process. Safeguards of the kind we have in mind can
most effectively be worked out on a consistent multilateral basis.
Progress in reducing barriers to trade is sustainable for the United States only
if it is clear that our own products receive fair and nondiscriminatory treatment.
Our proposed legislation, therefore, would give the President broadened authority to respond effectively to restrictive or discriminatory practices of others.
Under this authority, the President could, if necessary, restrict the access of
others to the U.S. market.
The United States also realizes that developing countries face special difficulties in entering world markets, particularly when first attempting to diversify
into nontraditional exports. For that reason, the trade bill would permit the
United States to join with other industrialized countries in providing developing
countries access to the marlvets of the industrialized nations. A broad range
of manufactured products now regulated by tariffs would be accorded dutyfree treatment in instances where countries in the early stages of industrialization are beginning to enter world markets.
Much progress toward economic reform has already been achieved. Much
more is in the offing. I appreciated having the opportunity to discuss these
matters at some length with many of you this week. It is important to continue
this consultation. To this end, I have asked Under Secretary Paul Volcker
to act as my special representative for consulting with Latin America on these
matters, so that we may better understand our commonality of interests and
work cooperatively together toward these important goals.
Turning specifically to the Inter-American Development Bank, I congratulate
President Ortiz Mena on another successful year for the Bank, carried out in
the face of an increasingly difficult funding problem. The Bank has been the
engine—the driving force—of economic development in the region and must
continue to play that role. It has shown the ability to provide a large flow of
resources to member countries, and—equally important—it has been able to
adapt itself to the times and go through the difficult process of self-improvement.
But the Bank must be adequately funded if it is to play its part in furthering the development process. Legitimate questions can be directed at the United
States in that regard. I would like to state our position on the matter frankly
and fully.
It is- obvious that it is the overall economic and flnancial situation of the
United States that determines our ability to support development finance institutions. The same is true of all nations. My country as well as yours must take
budgetary .priorities and balance of payments considerations into account. But
priorities in my country are reviewed independently both by the executive and
Congress, so that any funding requests must withstand a double scrutiny.
We have been restraining our total budget as a means of countering domestic
inflationary pressures. Budgetary allocations for a number of domestic programs have been substantially cut back from earlier projections. The demands
for more domestic spending are vast. We need to control pollution. We need
to rebuild decaying cities. We need to assist poorer American citizens, who-^e
number is still too large. We are not able to meet all these pressing demands.
It is also obvious, in the light of recurrent attacks on the dollar in world
markets, that we must urgently restrain overseas spending to help deal with
our balance of payments problem.
I want to underscore the fact that the President, after considering the budgetary and balance of payments constraints, still feels strongly that we must give
priority to our past agreements to provide funds to the Inter-American Development Bank. The President's 1974 budget includes $500 million in concessional
funds for the Bank. In addition, there is before the Congress a $193 million
capital subscription request, mainly in the form of guarantee authority for
additional Bank borrowings in capital markets.
We will press for appropriation of these amounts. But the Congress will
independently examine priorities and, frankly speaking, I cannot describe the
congressional prospects as other than uncertain. If we can clearly show that
this Bank plays a crucial role in building stronger economies in Latin America,
thereby contributing to economic stability and a peaceful world, there may
be grounds for greater optimism.
In this regard, the Bank has a real record of accomplishment. Last year the
total market rate and concessional lending reached $800 million and the quality
440
1973 REPORT OF THE SECRETARY OF THE TREASURY
of the Bank's programs continued to improve. A number of specific actions
taken last year to make the Bank raore effective also deserve special note.
Several years ago this Bank established the first independent evaluation
mechanism of any of the international financial institutions. This was a healthy
step. It was of particular concern to the U.S. Congress as a means of ensuring
effective use of Bank funds.
This evaluation group carried out last year three more in-depth evaluations
of Bank programs, resulting in major improvements in the Bank's operations,
and additional evaluations are in process. The Bank's ability and willingness
to profit from constructive, independent evaluation provide the best guarantee
to donors and recipients that the institution will continue to evolve to changing
conditions and meet the needs of its members.
The thrust for improved operating efficiency w^as also carried forward significantly by the implementation during the last 12 months of the reorganization
recommendations that grew out of an independent consultant's study.
Another milestone in the Bank's process of changing in accordance with the
progress of the region was passed last year. The Board of Executive Directors
acted to iunlement the Board of Governors' decision that it was now appropriate
to phase down soft loans to the richer countries, in order to increase the flow
of these funds to the poorer nations of the region whose economies are not yet
able to accept substantial amonnts of loans on commercial terms. These relatively lesser developed nations will also need technical assistance in project
identification and preparation. Much of this assistance could now be provided
by the more advanced members of the region themselves. They have gained
practical experience in overcoming many of the difficulties which lesser developed
countries still face.
Also, the Bank is taking steps to increase its donor country membership. This
will broaden the resource base of the institution, make it less dependent on the
United States, and do so in a way which fully preserves the fundamental hemispheric nature of the Bank.
i
I must acknowledge that there remain policy problems which affect the Bank
and the ability of the United States to provide financial support for it. The Bank
has a useful role to play as an intermediary in helping to resolve investment
disputes, a role best played out of the headlines and with quiet patience. These
disputes continue to affect economic harmony and cooperation in the hemisphere.
They are thus a matter of international concern, not just a bilateral issue. We
would hope that such disputes could be swiftly resolved so that the important
work of development can go forward unimpeded. But the position of both the
executive branch and the Congress of my country is clear. U.S. taxpayers' funds
should not be provided to nations which have expropriated property of U.S. firms
without the prompt, adequate, and effective compensation contemplated both
by international law and our domestic law.
This Bank was founded in a spirit of friendship and cooperation in the hemisphere. Its work has proven that different nations working harmoniously can
accomplish much more together than they can separately. In recent years there
has been a tendency to ignore this lesson. It is unquestionable that hemispheric
relations are passing through a period of transition, and new approaches to
regional cooperation, such as those being sought within the OAS framework, are
appropriate and healthy. I would hope, however, that we do not lose sight of
the common objectives that we share, and of the cooperation we need to accomplish these objectives and to achieve an equitable economic reform. This cooperation can form the basis of a continued and fruitful relationship among all our
nations.
There are great opportunities which confront us. We must take full advantage
of them. For my part, I will do everything possible to see that close cooperation
continues betweeen the United States and Latin America and that the InterAmerican Development Bank continues to be able to play its vital role in achieving economic and social progress in Latin America.
Exhibit 55.—Statement by Secretary Shultz, May 9, 1973, before the House Ways
and Means Committee
The world economy has changed greatly since this committee last considered .
comprehensive foreign trade legislation. This rapid change wdll continue whether
or not we in the United States seek to influence its future course. But we must
EXHIBITS
441
play an active and constructive role in influencing the shape of a sensible world
economy. Your approval of the Trade Reform Act of 1973 can be an initial step
toward that end.
The Trade Reform Act provides the President with the authority he needs to
negotiate effectively on behalf of American workers, businessmen, and consumers.
Ic would provide:
(a) Authority to change customs duties up or down in the context of negotiated agreements;
(b) A congressional declaration favoring negotiations and agreements on
nontariff barriers with an optional procedure tor obtaining congressional approval of these agreements where appropriate;
(c) Authority to raise or lower import restrictions on a temporary basis to
lielp correct deflcits or surpluses in our payments position.
These authorities are necessary for meaningful trade negotiations and will
provide for a more efficient and flexible management of American trade policy.
The Trade Reform Act and supplementary legislation will provide a second set
of tools to deal with domestic problems that may arise in connection with international trade and to permit our export firms to compete equally in international
markets:
i(a) The Trade Reform Act would introduce a fairer and less stringent test
for domestic industry to qualify for temporary import relief in order to give it
time to adjust to import competition or to avoid serious injury.
(b) The act would improve procedures for protecting American workers
and industry from unfair competition by amending the antidumping and countervailing duty statutes.
(c) . It would help protect the interest of U.S. exporters by revising and
simplifying the President's authority to raise import barriers against countries
that unreasonably or unjustifiably restrict our exports.
(d) It would permit the temporary reduction of import barriers as necessary to combat inflation.
(e) Separate legislation to amend the Export Trade Act will make explicit
the act's/application to our export of services as well as exports of goods and
will clarify the exemption of export associations from our domestic antitrust laws,
while ensuring the protection of the public interest through clear information,
disclosure, and regulatory requirements.
(f) Separate legislation will reform the pension and unemployment insurance systems to help all workers who lose their jobs, from whatever cause.
(g) Finally, the act will permit increased trade with nonmarket economies
by granting the President authority to extend most-favored-nation treatment to
these countries and will permit the United States to extend preferential duty-free
treatment to certain imports from developing countries. Secretary Rogers will
have more to say on these final two points.
The changed environment of international trade
We consider this legislation at a critical time. We have seen repeated and
widespread monetary disturbances in recent years. Points of strain and tension
have arisen in trading relationships among nations. These problems are part
of that process of vast change in the world economy which has taken place since
the basic monetary and trading institutions were established at the end of World
War II, almost 30 years ago. In part, they are the consequences of the success of
our postwar policies.
Since the end bf World War II, the United States has worked to create a
strong, free economy in a multilateral world with as few restrictions as possible
on the free fiow of trade and capital. We worked to create an economic framework in which all countries could grow and prosper. We gave of ourselves and of
our substance to achieve those goals.
This was done for our own sake, as well as in the interest of others. We worked
from a far-reaching vision of what would serve our own economic and security
interests. But it was a broad vision conceived in the interest of all. Our own
security and economic well-being depended on the ability of others to grow and
prosper in freedom.
The world today is different from what it was when American planners decided
to devote our wealth, influence, and energy to the achievement of a more secure
and more prosperous world. Today economic power is not concentrated in the
United States alone as it was 30 years ago. Great centers of wealth have grown
442
1973 REPORT OF THE SECRETARY OF THE TREASURY
up in Europe and Japan. The European Community is now the world's largest
trading bloc, with large and persistent trade surpluses. Japan has sustained a
truly remarkable rate of growth, and the size of its trade and balance of payments surpluses constitutes a major problem in the world economy. Other countries, including' many developing countries, have made notable strides forward.
However, along with this diffusion of economic power has gone a reluctance
to remove restrictions that are contrary to the principles of an open world
economy. At one time those restrictions could have been considered necessary to
support weak economies in the face of overwhelming U.S. economic power or as
temporary aids to promote political objectives such as regional integration. No
longer is this true.
In this changed world of economic equals we need to deal with those restrictions, and we need new rules to assure equality of responsibility. There must be
a reformed international monetary system^—one that puts equal obligations for
adjustment on surplus and deflcit countries. There must be reform of international
trade rules to eliminate growing discrimination, to assure that market access
is not barred by nontariff barriers, and to develop procedures for resolving differences without political tension.
This new system will allow our industries, workers, and farmers to compete
fairly in international trade and our consumers to benefit from the variety of
goods the world has to offer. We have much to gain from this kind of a new world
economic system, and much to lose from no system at all. Either we go forward
to a new and higher level of international cooperation, or, I fear, we may go
backward.
Negotiations are w^ell underway to reform the international monetary system.
We need the Trade Reform Act to begin to reform the trading system.
The need for trade reform
The existing system has been unable to deal with a variety of measures that
have made fair competition in world markets much more difficult. Undervalued
exchange rates, quotas, restrictions on agricultural trade, preferential trading
arrangements, and the proliferation of nontariff barriers have served to hamper
our exports, including some that we produce far more efficiently than anyone
else. These barriers to trade exact a high cost for all nations of the world in
higher consumer prices, inefficient use of resources, and heavy strains on the
balance of payments.
OUT trade position must be improved, and to do this we must secure the reduction of foreign barriers to trade in order to gain access to foreign markets and
permit our goods to compete equally with those of other countries. It is in the
interest of the United States, even more than other countries, to bring about a
freer and fairer trading system.
To deal with these problems we seek t o :
Free up agricultural trade ;
Come to grips with the unreasonable aspects of regionalism;
Bring order to the maze of nontariff barriers preventing the expansion of
world trade;
Work out new answers to the problems of buffering our industries against
injury from sudden surges of imports, and to better enable our workers to adjust to changing competitive situations affecting employment.
Other countries have complaints against some of our trade practices. To
move forward we must be prepared to strike a fair bargain, with a fair balancing
of the interests involved. The Trade Reform Act will make these negotiations
both possible and fruitful.
The need is urgent. But there are some things that can be done under existing
authorities, and we have made a beginning.
The United States has takeii several steps to improve its trade position and to
stimulate reform. In February 1972, the United States and the European Community reached an agreement on. future trade discussions. In this understanding
the United States and the Community agreed to move rapidly to:
(1) Examine the impact of the enlargement of the Community on U.S.
exports;
(2) Renegotiate the existing GATT concessions of the new members in
order to compensate the United States for the loss of these rights or for any
higher duties that might arise due to the enlargement; and
(3) Enter into multilateral trade negotiations this year.
EXHIBITS
443
We anticipate that the extension of the Community to the three new member
countries—the United Kingdom, Ireland, and Denmark—will harm our trade in
some products, particularly in agriculture. We expect the Community to recognize this damage and to compensate us. Negotiations began in Geneva in midMarch. We hope they will be concluded before the multilateral trade
negotiations begin.
The link between trade and monetary reform
The upcoming trade negotiations are important not only in their own right
but also in their implications for the monetary negotiations. We must have
coordinated consideration of the two areas if we are to construct a workable
economic system.
The two-stage realignment that was achieved at the Smithsonian Institution
in February of this year provides exchange rates that lay the foundation for
restoration of the external strength of the dollar. Overall, the major currencies
of Europe and Japan have appreciated against the dollar by an average of about
25 percent. Japan, the world's third largest economy, and Germany, Europe's
ranking industrial power, both appreciated by about 30 percent to 35 percent
against the United States. Nevertheless, fundamental reform of the monetary
system is urgently needed. Considerable progress has already been achieved,
making it all the more imperative that we achieve rapid progress on the trade
front as well.
The monetary and trade negotiations must lead to a consistency in rules that
has been lacking in the past. We need, for example, to reach a new consensus
on the relationships between nondiscrimination in monetary arrangements and
most-favored-nation treatment in trade. The divergence between rules and
practices in these two fields has grown unacceptably large. Trade rules cannot
be allowed to shield large portions of national economies from the impact of
balance of payments adjustment measures. And we need to build trade liberalization incentives into balance of payments adjustment rules.
To achieve a consistency in the rules in the monetary and trade fields does not
require that detailed trade and monetary negotiations proceed in the same forum.
Nor does it require that detailed trade negotiations wait on monetary reform,
or vice versa. But it does require a coordinated consideration of the rules in
the two areas.
The Trade Reform Act will further this coordination in several ways. The act
will provide the President with special balance of payments authority to increase
or reduce trade barriers. The act would specifically authorize the President to
employ an import surcharge for the purpose of protecting our balance of payments and authorize him to reduce tariffs as one possible adjustment measure if
we were to have a persistent surplus. This authority could also be used to protect
U.S. interests vis-a-vis a chronic surplus country which had not taken effective
adjustment measures.
Foreign investment and taxation
I would like to say a word about investment abroad by U.S. firms and the
administration's proposals for modification in the tax treatment of foreign source
income. The rapid growth of international investment in recent years—particularly the growth in investment undertaken by multinational corporations—
has been a subject of great controversy at home and abroad.
On balance, we^ believe that this investment has been beneficial to the American
economy. Government studies show that it has improved the U.S. balance of
trade and the overall balance of payments, and has meant more jobs for the U.S.
economy. We cannot assume that discouraging foreign investment will promote
investment and prosperity in the United States. On the contrary, if investment
opportunities exist abroad, foreign firms wdll take them if American firms do
uot, which will lessen the flow of American-made goods into foreign markets.
Our proposals for taxing foreign source income are shaped against that background. We believe our tax system should not be used as a club to inhibit foreign
investment, because w^e believe that investment to be good on the whole. At the
same time, we do not believe that our tax system or any other tax system should
be permitted to induce American business to make foreign investments which
they would not otherwise make.
Our existing system is designed to permit an American-controlled business
operating in a foreign country to operate under the same tax rules applicable to
506-471—73
31
444
1973 REPORT OF THE SECRETARY OF THE TREASURY
its foreign competitors in that same country. We believe that is a fundamentally
sound system and that we should not devise new rules designed to disadvantage
American business with respect to its foreign competitors.
Our data show that our American enterprises abroad pay substantial foreign
income taxes. In the vast majority of cases, it is business factors and not income
tax factors which lead to foreign investment. Income taxes are not the cause of
our trade problem, and income tax changes will not solve that trade problem.
For these reasons, we conclude that drastic surgery on our tax credit and deferral
provisions relating to overseas investment is not justifled.
The issues in this field are not new. In 1962, the Congress exhaustively reviewed
this field and we believe the conclusions which it reached are fundamentally
sound.
There are, however, three situations in which the existing tax system produces
artificial distortions and incentives and which we ask that you change. The
first two proposals relate to tax holidays and runaway plants, where we ask that
you modify our tax system to neutralize tax inducements offered by other countries. The third proposal would eliminate the present ability of American firms
to offset foreign losses against their U.S. income without ever paying U.S. tax on
subsequent profits.
Tax holidays—A number of foreign countries presently attract U.S. investment
by granting major tax incentives, such as extended tax holidays or cash grants
that are not included in taxable income. To neutralize such practices, the administration is recommending amendment of our tax laws so that earnings from new
or additional American investments which take advantage of those inducements
will be taxed to their U.S. shareholders as earned, rather than at the time they
are remitted to these shareholders. Exceptions could be made by treaty.
Runaway plants—Some American companies occasionally undertake foreign
investment for the purpose of reexporting a substantial share of their production
to the United States. To prevent income taxes from inducing such decisions,
the administration recommends that in cases where new or additional foreign
investment is made by a U.S.-controlled foreign corporation in a low-tax country,
earnings will also be taxed on a current basis if exports to the U.S. market account for more than 25 percent of the corporation's total receipts. This rule would
only apply when the effective rate of tax on the income of the controlled foreign
corporation is less than 80 percent of the U.S. tax rate and exceptions would be
permitted for particular situations if the President determines that it is in the
public interest to do so.
Recovery of foreign losses—The administration also recommends amendment
of our tax laws (a) to reduce the credit for foreign taxes where foreign taxes are
excessive because the foreign country has not allowed prior losses to be offset
against subsequent profits; and (b) to recapture benefits of loss deductions
where the legal form or ownership of an enterprise changes in such a way that
future profits are insulated from losses previously taken against U.S. tax. This
provision would also reduce the advantage of drilling for oil abroad and increase
the relative attractiveness of domestic drilling.
Conclusion
We have joined with our major trading partners in a commitment for a new^
round of comprehensive negotiations scheduled to begin this autumn. Our negotiators will face a challenge and an opportunity.
The world economy must be fair for all nations. It must permit each nation
to compete equally without artificial restraints in the international market. It
must be flexible enough to prevent recurring monetary crises that distort trade
and capital flows, injure our national economies, and create political tensions
that harm the cause of peace. Such a world economy will especially benefit the
United States. We wish to achieve this objective not through confrontation, but
through negotiation in a spirit of cooperation and progress with the other trading nations.
We ask Congress to join with us in this effort. We stand, ready to work out a
new cooperative relationship, and to utilize new institutional procedures to
assure that the Congress and the executive work together to achieve our mutual
objectives.
We must and we will approach the trade negotiations with a tough mind and
a clear resolve that American interests .will be properly looked after. We
believe that the legislative program now before you will give us the tools to do
the job. I urge its speedy enactment.
EXHIBITS
445
Exhibit 56.—Statement by Secretary Shultz, June 6, 1973, at the American
Bankers Association International Monetary Conference, Paris, France
This annual conference has become a highlight in the yearly calendar of the
international financial community. For me, the opportunity to participate in
your discussions and to draw from the experience of this informed group, is
especially welcome—not just because I am a first-timer, but because we are midstream in the great task of reshaping the monetary system for the needs of a
new generation. We have the right setting in this magnificent world city, where
we are constantly reminded of the great achievements of Western civilization
and culture.
My memories of Paris as a site for constructive monetary work derive from
a period as recent as March, when I attended two meetings with my colleagues
of the Group of Ten and the European communities. By common consensus, we
adopted new approaches for dealing cooperatively with what was then described as a crisis. Those decisions did not make up the long-term reform we seek.
But they do provide a valid framework for dealing with this transitional period.
And w^e will want to learn from this experience as we build for the future.
I look to that future with optimism. I say that because I believe there is
greater understanding of the mutual problems and each other's positions by the
officials concerned, and with that understanding we can begin to see a convergence of views on some of the major issues. Certainly, that was the sense of the
5-day meeting of C-20 Deputies in Washington 2 weeks ago and was my personal
experience in Iceland last week.
Obviously, progress has not been instantaneous; it cannot be, for it is no
mean task to devise a system that adequately deals with the immense shifts
in the world economy since Bretton Woods. You, in your daily work, are
conscious of the enormous integration of financial markets that has created
the capacity for vast flows of funds across national borders. You are conscious
of the rapid growth of Europe and the moves toward monetary unity on this
continent. The spectacular growth of Japan has created a major center of
economic power in the Pacific. In this world, neither the United States nor
any single country or region can be dominant, and we face the task of changing
from a system that implicitly assumed that dominance to one in which the
responsibilities and benefits fairly reflect our individual capacities and respect
our diversity.
Your deliberations can cast light on ways to achieve this goal, and in that
respect I am an eager listener. But, in talking to you today, I want to approach
this same problem—dealing with massive shifts in the world economy—from a
different angle.
Over the past year, in attending;a good many conferences with the financial
officials of other governments, I found that these meetings usually had two
agendas. There was the formal one—on SDR's, exchanges rates, intervention,
and all that. Then there was the informal agenda where, in the corridors and
across the dinner table, we reflected our mutual concern with developments
in the field of energy.
Later this afternoon, I will attend a meeting in which energy has made it
onto the formal agenda. The OECD Ministers are gathering here in Paris this
afternoon, and energy properly is prominent among the topics for discussion.
The OECD has estimated that the consumption of energy, in all forms, by
members of the Organization has risen more than 5 percent per year for
the last 10 years. That growth will continue. and, for the near future, the
world has no choice but to depend primarily on oil and gas to meet its rising
energy demand.
Nearly all of the developed countries share one common characteristic: They
must look outside their own borders for the bulk of their energy supplies.
The United States, itself, is not in that group. But in the years just ahead our
dependence on foreign energy will unavoidably become more pronounced. Some
projections suggest that oil imports of the OECD countries will donble between
1970 and 1980. Meanwhile, production will tend to be concentrated in a few
countries, some of which have very small populations. These producing countries will be exchanging assets from the gronnd for the assets in which you
deal in vast quantities. And it wdll be in the interests of both producer and
consumer to make that process work as smoothly as possible.
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1973 REPORT OF THE SECRETARY OF THE TREASURY
As awareness of these trends in the energy field has spread, scholars, banks,
petroleum and other energy-producing companies, and governments have begun
to pour out analytical studies and projections. Let us approach these projections
as the flashing warning signals that they are, but also with a healthy realization
that all projections must be based on times past. These projections usually
depend upon the basic assumption that recent trends in world demand for
energy, in the sources of energy, and in the form in which energy is supplied,
will roll on largely unchanged into the distant future. Since demand for oil
has been rising and production in major areas like the United States has been
falling, extrapolation of these trends inevitably points, in time, to crises.
The projections do show, clearly and vividly, that we face far-reaching changes
in our energy balnances. We must accept—in a world of few miracles—that the
rising demand for energy will lead to a substantial increase in real costs. We
cannot be blind to the concentrated location of the existing resources which
can be made available for years immediately ahead.
But, there is another side. With these projections showing us what needs to
be done—and if we make the commitment of personal energy that is required—
a potential crisis can be turned into a man^ageable problem. Action by consuming
countries, with a .long view of their best interest, is required now. Governments
of producing countries—with the same long view—will, I am equally convinced,
find cooperation on the problem in their own interest.
We in the United States—^in our actions and in our planning—are participating
in this process with a sense of urgency, precisely so that tomorrow's crisis
can be converted into constructive achievement. In that process, it seems clear
that energy is not an area where countries can safely "go it alone."
The United States is the largest energy consumer; we consume one-third
of the world's energy.
On the other hand, consumption of energy in the United States is only
rising now at about 4 percent per year—about in line with the longrun trend
in the growth of real output. This is less than in many other countries. Moreover, we have been blessed with substantial indigenous supplies of oil and coal.
Less fortunately, domestic production of oil and gas in the United States
has begun to decline. Between 1969 and 1972, U.S. imports of oil increased
52 percent. The.dollar costs of our fuel imports rose from $2.7 billion in 1969
to $5.1 billion in 1972. Some projections suggest that this figure could rise to
$15 billion before 1980.
It has been estimated that imports of foreign oil will increase from 27 percent
of total U.S. consumption of oil in 1972 to about 33 percent in 1973, to over
50 percent by 1980. Further, some estimate; that by 1985, our oil imports will
amount to 65 percent of our consumption. These estimates, however, assume that
no action will be taken. This is not the case. On April 18, 1973, the President
presented a broad and comprehensive energy message which I see as ^ blueprint
for action that must and will be taken. The policy is aimed not only at assuring
adequate supplies of energy in the short run, but also (at reducing our dependence upon foreign supplies in the long run by fostering a vigorous domestic energy
industry.
The President's program is designed—
(1) To increase production of all forms of energy in the United States;
(2) To conserve energy; and
(3) To meet our energy needs at the lowest cost consistent with the
protection of both national security and environment.
These objectives wdll be sought—
By reducing those numerous and insidious regulatory and administrative
impediments which have delayed or prevented construction of energy-producing facilities;
By cooperating with other nations in energy research and in seeking w,ays
to prevent shortages; and
By mobilizing both public and private scientific and technical skills to attack
the energy problem—^whether by increasing supply or utilizing it with
greater efficiency.
Actions have already been initiated under this program. The most striking
for the short run, of course, has been complete revision of our oil import program.
But, for the longer run, the increase in expenditures on research will be more
important. We are prepared to spend whatevei: reasonable amounts can be used
effectively to increase supplies and to avoid unnecessary consumption. Some of
EXHIBITS
447
our proposals require congressional action, and we will press for their understanding and cooperation.
We mean to change those projections, both by changing the trend in the U.S.
demand for energy and, more significantly, the trend of supply in the United
States.
Nonetheless, for a number of years ahead, we will face a larger bill for imports of oil. So will other consuming countries, despite the relief of some from
North Sea or other new fields. Moreover, there will be new investments to be
paid for. Large sums—many billions of dollars—will be required, to develop
petroleum supplies in producing countries, as well as to provide new transportation and refining facilities. No doubt, a significant portion of the funds for these
investments will be provided from the United States.
Energy is big money. But this is only one side of the ledger. We should not
overlook the other side. Too often, when we add up the import bill, we seem to
overlook the fact that, as production rises abroad, a return will be generated on
the large investments which developed countries—in large part, U.S. companies—
have made and are making in order to bring forth that production. Moreover,
some of the new investment will take the form of capital equipment and technical
services exported from the oil-consuming countries. In a competitive world—and
we expect the United States to be competitive—we will get a good share of those
exports.
Governmental and quasi-governmental entities in the producing countries will,
of course, be receiving a large percentage of the monies paid for oil by the United
States and the other importing countries. What those countries do with the sums
they earn will be a major factor in determining the significance of the growing
oil shortage for the U.S. balance of payments and for the world monetary system.
Plainly, many of these countries have large, unmet needs for manufactured
goods—both consumer goods and capital equipment. Some feel they must obtain
additional equipment for their defense forces. Countries such as Venezuela, Iran,
Algeria, Nigeria, and Indonesia have traditionally used increases in oil revenues
for immediate expenditures and investments to improve the living standards
of their people. The money that these nations earn can be expected to be spent
in the industrial nations, in large part, as payment for goods and services. Oil
will be fiowing from these countries to Europe, Japan, and the United States
to help produce the goods which, in turn, go back to the people of the producing
lands. This is the "meat and potatoes" of international trade, and we all learned
long ago that all participants can benefit from trade. In its essentials, payments
to these countries for oil are no diff'erent from the payments for any other
product.
On the other hand, an important group of producers, including probably the
Arabian Peninsula States of Saudi Arabia, Kuwait, the United Arab Emirates,
and Qatar, may be receiving oil revenues of $10 billion annually by 1975, and
up to $20 billion or more annually by 1980. The combined population of these
States is only about 7 million. Their foreign investments are already rising
rapidly, because they are not spending currently all of the $5 billion or so they
are now receiving from oil exports. We cannot expect all the payments to these
areas to be spent immediately for goods and services in the near future. A
substantial proportion of this revenue will be invested.
It is this pool of wealth that has loomed large in much recent discussion. But
let me give you some other figures to put it in perspective. The annual capital
formation of industrialized countries by 1980 will probably approximate $700
l)illion. New issues of stocks and bonds alone will probably be on the order of
$250 billion. It takes no stretch of the imagination—if one looks beyond the last
few months in Wall Street—to suggest that the total market value of outstanding
stocks and bonds in the world could exceed $3 trillion by 1980. Obviously there
will be many investment opportunities availalDle for the savings of the oilproducing countries. And they are likely to have a strong interest in stable,
secure, and profitable investment opportunities. They know that their reserves of
oil will not last forever. Looking ahead, our research will pay off and new sources
of energy, based on new technologies and with the incentives provided by high
energy prices, can be expected to reduce the dependence of the industrialized
world on imported oil.
So we have all the ingredients of a highly advantageous mutual bargain, worked
out, as the best bargains usually are, largely in the marketplace. The consumers
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19 73 REPORT OF THE SECRETARY OF THE TREASURY
will have enormous capital needs. The producers will have resources which will
be large but will still represent only a small fraction of our needs. We have—
not least in this room—middlemen to help make the market. What remains is to
go about it with good sense and good judgment.
The prospect before us is often cast in diff'erent terms. The United States will
bear a much heavier import load—so, it is alleged, there will be persistent pressure on the dollar. The prospect of exchange rate changes will be aggravated
by billions of short-term "oil dollars" sloshing about in the market. Monetary
instability will result.
But this specter, while perhaps useful to spur us to action, is not a necessary
or even reasonable consequence of the current energy outlook.
The basic requirements of the producers are for stable, secure, and profitable
investment opportunities—not for a year or two, but for long periods. What these
nations will probably be seeking to do in the next 10 to 15 years is to protect their
future by transforming their national heritage into new, and more permanent,
forms. Some of these new assets will be new plants in their own countries. But,
as they turn to world financial markets, there is no inherent reason to believe
their assets preferences will not be subject to the same profit instincts that lead
most investors to place a substantial portion of their funds in longer term form,
provided the climate is favorable.
Their purchases of assets abroad should be the channel through which their
balance of payments position and the payments positions of the United States
and other major countries, as well, are brought into balance in the years ahead.
And I frankly do not see why this process need lead to disturbing changes in the
form of violent or disturbing adjustments in exchange rates.
Certainly, as we pointed out in presenting our monetary plans, the accumulation of large current surpluses by Arabian Peninsula States should not call
for exchange rate adjustment actions on their part. While many of their external
investments might loosely be considered reserves, certainly they are not comparable to the kind of monetary reserves tha!t would suggest a need for monetary
adjustment action on their part.
Nor should such accumulations result in devaluation pressures on those consuming countries which offer attractive export prices and attractive sites for
investment.
In that connection, please remember that the United States is not the only
country which will be a heavy importer of oil. A large part of the earnings of the
producing States will derive from their sales to Europe and Japan. Indeed, most
projections suggest that the absolute increase in oil imports into Europe from
now through 1980 will be of the same order of magnitude as ours and that Japan,
almost totally dependent on imports and rapidly growing, will experience an
increase in imports equal to a large fraction of ours despite the fact it has a
much smaller economy. Of course, the Europeans, the Japanese, and the United
States will, in eff'ect, be competing both for exports to producing countries and
for their investments. In this competition the degree of our success will naturally
have an important bearing on the value of our currency. It is saying no more
than that success of our free economy will determine the value of our currency—
and that is a test we are glad to meet. Certainly, the need of all the industrial
countries to import more oil offers, in itself, no reason for the dollar to depreciate
in value in relation to the currencies of Europe or Japan. The United States could
well be the gainer.
Our judgment that the recent devaluations of the dollar have placed our currency in a fair and sustainable alignment is in no w^ay affected by this situation.
I am unabashed in feeling we can compete with' any nation in investment
opportunities.
That judgment is only reinforced by current developments. Despite growing
energy imports and a domestic boom, our trade balance is improving. Obviously,
we have had extraordinary agriculture exports, and I am realistic enough to know
we shall have temporary relapses from the recent favorable trend. We still have
a long way to go—but the evidence is strong that our underlying position is
strengthening. And, as our competitive position is strengthened, so are the opportunities for foreign investment in the United Sates.
Some of you may still have the nagging feeling that the investment of the oil
producers, however welcome at particular points in time, could be destabilizing
through sudden shifts. Plere certainly is an area for cooperation and planning
among nations, and for leadership of the financial community.
EXHIBITS
449
The problem is not different in kind from those presented by the huge amounts
of international short-term capital that already exist—and will surely grow. A
degree of flexibility in exchange rate practices—dampening the prospects for large
and sudden changes, and reducing the incentives for anticipating shifts—offers
one approach. Adequate facilities for absorbing and financing short-term flows
are another. In addition, we need to recognize fully the needs and aspirations
of the oil countries, themselves, in seeking safe and attractive outlets for their
national heritage. It is not beyond the ingenuity of the financial community—
against the background of understanding attitudes by national governments—to
help develop appropriate instruments for such investment.
In this process of developing constructive responses to the "energy challenge,"
it seems to me we have lacked a forum for bringing all the relevant considerations—financial and nonfinancial—together. I have been glad to see that a world
energy conference is being planned for Detroit in September 1974. That conference
can contribute meaningfully to the search for cooperative solutions to important
aspects of the problems in the energy field. Nevertheless, some of the financial
dimensions may not be adequately prepared without the wholehearted support of
the financial community. To that end, I hope those here could join with others
over the next year, before the conference, to address more fully the questions I
have touched upon today:
The financial implications of the rising demand for energy imports;
The prospects for financing these imports and the investment required to
bring them forth;
The means of furnishing investment instruments to the oil-producing States.
I recognize that the oil-producing countries could view the organization of
such a meeting with some concern. These countries have justifiable concerns
about the management of their precious assets. It seems to me important that
the oil-producing countries, themselves, play a strong role in such a meeting,
or meetings: for, after all, the assets involved are theirs. In appropriate circumstances, the U.S. Government would,, itself, be prepared to participate in
such deliberations in preparation for the world conference.
I have expressed confidence that we have the means of meeting the energy
challenge. At the same time, I do not underestimate the problem. The real
cost of energy will rise. We must bend our efforts to change the ominous trend
lines. If we shirk from the fundamental task at home of developing our own
energy sources—if we fail to face up to the research bill, if we fail to conserve,
if we fail to remain competitive—then, of course, the external consequences on
the balance of payments and on the monetary system would be disturbing.
Indeed, we have no real choice. The basic adjustments to new forms of
energy—or to slower growth—will need to be made. The only issue is how: In a
timely and orderly manner, or in a vacillating course which permits events to
force the result in a painful way.
We do not intend to fail. With foresight and cooperation, the energy situation
need not disturb our growth at home, nor disrupt our planning for a stronger
payments and trading system which will be in the interests of every nation.
Exhibit 57.—Statement by Secretary Shultz, June 6, 1973, at the annual meeting
of the Council at Ministerial Level of the Organization for Economic
Cooperation and Development, Paris, France
I am pleased to have this opportunity to participate in the deliberations of
the OECD Ministerial Conference. It is a particular pleasure to begin by extending
my congratulations to you, Senor Lopez Bravo, on your selection as Chairman,
and by welcoming New Zealand as the newest member of this organization.
I shall try to make good use of this opportunity to provide you with some
perspective on the U.S. Government's approach to cooperation in international
economic affairs in the year to come. I shall try to explain why I believe the
OECD can make a unique contribution to that cooperation.
The theme of my remarks was well put by President Nixon in his most recent
annual Economic Report in January. Speaking of the proposals of the U.S.
Government for reform of the international economic system he said:
Our proposals have been, and will be, put forth in the U.S. national
interest. But this is not contrary to the interest of other countries. Inter-
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19 73 REPORT OF THE SECRETARY OF THE TREASURY
national competition is shifting from the military and political arenas
to the economic. This is a great advantage, because in economic competition
every participant can win—there need be no losers. The effort of each
nation to produce and sell what it can do most efficiently will benefit others.
This is the fundamental belief underlying our proposals for reform and the
fundamental reason for thinking that a satisfactory agreement will be
reached.
To me that statement is a recognition that this is a year for building. We
have all benefited from postwar modes of cooperation and from institutions
forged initially by a common perception of common need. But, as our economies
have changed and as our very successes have brought new problems, the arrangements which worked well in the past become outmoded.
The high degree of economic cooperation among nations represented here has
brought unprecedented progress to us all. But too often in history arrangements
developed to meet one set of needs have been allowed to become irrelevant to
changing requirements.
The postwar political landscape has been vastly transformed, both in the
OECD. area, as historic progress has been made toward European unity, and
outside that area, as our nations have laid the base for new and constructive
relationships with the Soviet Union, the People's Republic of China, and other
nations, and as the developing world has become more articulate in its own
interests.
The economic map of the world has also been dramatically redrawn. Relative
positions have shifted as a result of the remarkable progress of Japan and
Europe. Points of economic contact among us have multiplied, as economic interdependence has rapidly increased.
The challenge of today is whether we can build from the common goals we
share to create a new order which will meet our needs during the remainder of
this century.
The new order cannot be built just on generalities. We shall have to negotiate
the practical details of new economic agreements. The negotiation of such details
is likely to expose differences of opinion and approach and points of seeming
conflict. It always has; it probably always will. But the vigor of the negotiations
should not obscure the fact that significant benefits may be achieved from such
negotiations by all the participants.
In the coming months we shall be engaged in such detailed negotiation—and
arguments—on monetary reform, on trade, on investment, and on energy. From
these negotiations we must create a realistic and durable system which assures
the equitable, orderly, and mutually beneficial conduct of international economic
affairs in an interdependent world in which no nation holds a dominant economic
position. We must create a new order in harmony with the world of the future.
We have a unique opportunity to do so. Indeed, failure to take advantage of this
opportunity to reinvigorate our economic relationships, and to make them a force
for mutual support, would risk the progress which has been achieved.
As w^e go forward with these negotiations, there will be differences which some
will seek to call confrontations. Some will suggest that international economic
relations have become a natural arena for international conflict and a threat to
the cooperative political relationships among our free societies.
But that will be a false impression. The negotiations will be energetically
pursued precisely because they offer potential benefits to all. Rather than a
natural arena for deep-seated conflict, economic relations constitute a natural
area for cooperation. We are not engaged in a zero-sum game; one nation's gain
need not be at the expense of another. By working together we can make available greater benefits to be shared than if we each went our separate ways. We
should not so concentrate on the division of the pie that we lose sight of the
fact that the pie itself can be made larger. Now, as we are entering the negotiations, it is probably wise to remind ourselves that, while there will be differences
over how to acliieve and divide the net advantage accruing from international
trade and investment, the important fact is that intelligent negotiations can
achieve net advantage for all.
During this period of intense negotiations, the OECD can malve an especially
valuable contribution. Obviously, in important areas, the specifics will be discussed elsewhere, notably in the GATT and in the C-20. Meanwhile here in the
OECD will be a fornm where we cau sit back in a non-negotiating atmosphere
and say, "These are the overall objectives and here are some of the important
EXHIBITS
451
interrelations between the various negotiations. Let's look at the matter in full
perspective and see that important aspects do not fall between the cracks. Most
of all, let us not lose sight of the gains to be shared when these issues are
resolved." In short, the OECD can help provide the understanding which will
permit the specific negotiations to succeed elsewhere. It can remind us of the
fruits of cooperation.
These fruits are reflected in the growth of world trade in recent years. In
volume terms—adjusting for the estimated increase in the prices of internationally traded goods—world trade grew by about 9 percent per year over the past
5 years. This rapid growth has made international trade a prime mover for
prosperity. International investment, too, has been a major force.in economic
prosperity, moving capital to areas of maximum productivity, and spreading
the benefits of technological advance widely and rapidly.
For the years to come, we in the U.S. Government will seek international
economic agreements which permit our citizens to continue to enjoy the fruits
of such cooperation. First, we want for Americans, as other nations want for their
citizens, the classical gains from trade. We want to be able to sell our products
where they can get the highest price and buy goods and services wherever they
may be cheapest. We want our citizens to be able to invest where it is most
productive, and thus earn a maximum real income. This may sound at first like
a pedestrian objective, but it is a fundamental objective of economic policy.
Second, we want an international monetary and trading system which will
interfere as little as possible with continuity and freedom of international
transactions conducted by our citizens, which will permit flexible and effective
management of domestic economic policy, and which will accomplish these
objectives in a context of reasonably stable exchange rates.
Third, we want to be able to discharge those responsibilities that fall upon us
to assist the growth and stability of other nations, and to maintain our security
as a part of the Western Alliance.
We believe that we cah attain these goals for ourselves in a way which benefits
others and the system as a whole. But we know we can achieve these goals only
if others enter willingly into agreement with us because they realize the gains
which will accrue to them from doing so. We know, too, that the agreements will
not be durable unless the other participants recognize that the agreements are in
their interest.
We know that harmony in economic relations depends in practice upon agreement in advance on well-understood and reasonable rules of conduct in the
monetary, trade, and investment fields.
In the monetary field, we know that our negotiations are rendered more complex by the fact that we must shift from a system that implicitly assumed that
one nation held a dominant economic position to a system which treats all countries evenhandedly. In practice, this means we now need a system which provides
better means for assuring prompt and effective action by both surplus and deficit
countries to correct emerging payments imbalances; a system which provides for
multilateral reserve creation so that no one nation is called upon to provide the
liquidity needs of an expanding world economy; a system which facilitates
establishment of an economic environment conducive to. resource transfers to
developing countries. I can assure you that the United States has carefully
thought through the implications of such a system for itself," and that we do not
seek special privileges or rights for ourselves. Nor have we become so shortsighted as to overlook the prospect that the rule proposed for a surplus country
today may apply to the United States tomorrow.
Against the background of a system which has developed strains and cracks,
our overriding interest in a viable international monetary system has; impressed
upon us the heed to achieve a code of conduct that insists upon a new consistency
between the action—or nonaction—of each individual nation, and the requirements of the overall operation of the system. By this we mean, for instance, the
system's tolerance for payments imbalances must be consistent with the availability of reserves to finance such imbalances. By this we mean that if there is
to be a certainty in settlement arrangements, for example by general convertibility, that must be balanced by a certainty in adjustment arrangements, assuring
that imbalances are effectively eliminated by incentives for both surplus and
deficit countries to act.
In the trade field we know that we also have a complex negotiation ahead.
That negotiation must fulfill simultaneously a number of criteria:
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1973 REPORT OF THE SECRETARY OF THE TREASURY
The overriding objective of achieving and maintaining a freer movement of
goods, services, and capital must be respected;
IThat goal, expressing our interdependence, must be achieved in a manner
consistent with compelling national social, political, and economic priorities;
Those trading practices which depart most seriously from accepted principles
should be subject to the greatest scrutiny;
An overall agreement can only be reached if it provides measurable benefits
to each participant;
An optimum overall package can be achieved only by looking to the results
of the whole and avoiding concentrating attention only on the direct benefits in
each subsector.
These criteria, it seems to me, are broadly expressed in the understandings
reached after the Smithsonian agreement among the United States, the European
Community, and Japan to negotiate "on the basis of mutual advantage and
mutual commitment with overall reciprocity,"
With those criteria in mind when I was last in Europe in March, I discussed
with a number of governments represented here our objectives for the multilateral trade negotiations scheduled to begin this fall. Subsequently, there have
been further consultations on the goal of broad and flexible negotiating mandates.
Tlie U.S. trade bill is now moving ahead. We have presented our testimony
before the U.S. Congress, and we have received a favorable response both in
Congress and throughout the United States. We expect to be in a position to
move ahead with the scheduled negotiations this fall.
We hope that others will also obtain adequate mandates for the negotiations.
And we hope—and expect—^that the various negotiations now underway, such
as those under Article 24^6 of GATT relating to EC enlargement, will be completed before we launch broader discussions on trade reform. These negotiations
involve every country represented here, and success in dealing with those issues
will help lay the groundwork for success in subsequent multilateral trade
negotiations.
By September, when the GATT contracting parties meet in Tokyo, the negotiations on EC enlargement should be completed, and all parties to the multilateral
trade negotiations should be ready to proceed with the complex and vital work
that will still lie ahead. I am convinced that those negotiations should—and
can—result in a major movement in the direction both of reduction and elimination of industrial and agricultural tariff and nontariff barriers.
In the area of international investment as in the trade area, we have too often
tended to lose sight of the fact that international capital flow can also contribute
to the welfare of both parties to the transaction. If we are to obtain the maximum
benefit, however, we must be sure that the advantages are not reduced by distorting government policies seeking advantage at the expense of others.
Short-term capital flows are being examined in connection with monetary
reform. Some aspects of long-term investment, direct and portfolio, are covered
by the OECD capital movements code. The OECD has here set a precedent for
establishing principles and machinery for ah important area of investment. In
some respects, however, particularly investment incentives and impediments,
there does not now seem to be a really eff'ective international means of examining
and resolving issues.
International investment and trade flows can be distorted by policies and
regulations which apply directly to transfers of capital across borders. They can
also be distorted by domestic policies which affect the profitability of investment
in particular industries or regions. We recognize that some of these policies have
valid social objectives—but when those policies have consequences for others,
they are as proper a matter for international concern as trade policies.
We need new principles, new mechanisms, new information systems; in short,
international guidelines for investment which will alert us to confiicts of interest
among government policies affecting investment, and which will provide standards by which these policies can be assessed and confiicts reduced.
I urge that we develop this new kind of international cooperation in the OECD.
The Executive Committee in special session has made a beginning and provides
a means for guiding the necessary technical work. I believe we should have a
new OECD cooperative framework for reviewing international investment problems in place when the forthcoming trade negotiations have reached completion.
In the coming months we also face the challenge of bringing some real meaning
into the concept of international cooperation, in the energy area. Concern has
EXHIBITS)
453
been expressed that the growing demands for energy, and the heavy concentration of supplies in a few countries, may pose a threat to the orderly advance of
the world economy. Yet there seems to be some reluctance to accept the view
that a cooperative approach is the best approach.
I believe that the energy outlook poses real and important problems for us all.
But I also believe that governments and industry working together will find
workable solutions. In the United States, the proposals put forward by the
President represent strong action to improve our energy balance. Yet there is
also scope for international cooperation. This is not, I recognize, an easy task,
for we must not only devise understanding among ourselves as to how we will
approach these problems, we must also ensure that cooperation among a group
of consuming countries does not turn into confrontation with producing countries.
Let us not, however, shirk the analysis because of awareness of the limits.
We have a useful precedent in the work the OECD had already undertaken
as a focus and a forum for international effort to help the poorer parts of the
world realize their full potential. When the Development Assistance Committee
was formed there could also have been concern that such a grouping might appear as a "ganging-up" by the developed countries and thus as a cause for concern by the developing countries. In practice, cooperation within the DAC framework has enriched the relationships among the developed countries and wdth the
developing countries.
More recently, the OECD has turned its attention to providing the thrust and
the mechanism for an international sharing of experiences in dealing with environmental and other problems posed by rising populations and rising living
standards and it has explored means of avoiding trade distortions arising therefrom. This interchange contributes to the well-being of all nations.
In sum, I suspect there can be substantial agreement on a number of central
economic goals and propositions that can provide a reference point for the
negotiations underway and planned.
We are committed to prgmotuig the growth and internal stability of our
economies in. a manner which does not impede the ability of others to do
likewise and w^hich respects the diversity of our national institutions and
character.
We seek an open and equitable monetary and trading system that recognizes
equal rights and equal responsibilities for all nations. The international
community must find better means to achieve effective discipline for ensuring prompt and effective adjustments of payments imbalances, the cooperative management of international reserves, and stable and orderly exchange
markets.
We look toward progressive reduction of trade barriers to permit nations
to participate more fully in the mutual gain from the interchange of onr
services, and on both industrial and agricultural goods. Similarly, capital
should be permitted to flow on a secure basis to the areas of greatest need
and greatest productivity on a basis of nondiscrimination.
In instances where international transactions bring internally disruptive
changes, we should not respond by preventing adjustment but rather by
seeking an agreed system of safeguards to cushion the impact and to facilitate smooth adjustment.
We wnnt to make more effective efforts to help poorer nations to realize
their full potential, whether by the provision of capital, or know-how, or
improving their access to our markets on a nondiscriminatory basis.
We should seek to work with each other to develop more effective w^ays to
protect the environment, develop our energy resources, and to meet the
other challenges posed by rising populations and industrialization while
holding to the cardinal principle that one nation not seek national benefit
at the expense of another.
Finally, and essential to all the rest, we must not permit problems to arise
or persist among us for warit of understanding of one another's views, or
because of inadequate institutional means of resolving them.
Plere lies the special value of the OECD. Through the frequent and candid
consultations it promotes, nations must consider the views of one another before
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1973 REPORT OF THE SECRETARY OF THE TREASURY
taking decisions which affect others. It can stimulate us to find solutions to
problems as they arise, and not when they have reached the stage of crisis and
conflict. It serves as a constant reminder to us all that we have inuch to gain
from cooperation.
I urge the OECD to display continued vigor in this vital task.
Exhibit 58.—Statement by Under Secretary for Monetary Affairs Volcker,
September 11, 1972, before the Subcommittee on International Exchange
and Payments of the Joint Economic Committee
In these hearings the subcommittee is reviewing two issues of importance to
U.S. international financial policy: First, the role of gold in the international
monetary system, and second, recent actions by the United States to intervene
in the foreign exchange markets. I would like to briefly comment on these subjects and then to respond to any questions you may have.
With respect to gold, the United States has repeatedly expressed the view that
the role of that metal in the international monetary system, should and must
continue to diminish. Such an evolution is, of course; fully consistent with the
trend of monetary history over a period of many years. Governments around
the world long ago reached the inevitable judgment that domestic monetary
systems and policies could not safely be hostage to vagaries in. gold demand
and supply—the cost in terms of economic stability was simply too high. Internationally, gold 25 years ago accounted for about 70 percent of total national
monetary reserves. By 1972, the ratio had declined to some 27 percent.
There are irresistible geological, industrial,, arid, economic facts behind these
trends. The physical supply of gold is both limited and, in the Western World,
virtually entirely under the control of one producing riation. The supply reaching the market is not only subject to. the policies,,and circumstances, of, that
country, but is also Increasingly preempted by industrial, artistic, and dental
uses. Gold is both an attractive and useful metal, but the residual supply is in
no way related to the liquidity needs of the world community. Commodity uses
inevitably compete increasingly with monetary uses as population and wealth
rise.
;
Given these facts, I suppose there are some who would argue that additional
liquidity in a gold-based system can be provided by increasing from time to
time the price at which gold is traded among monetary authorities. But surely
such an approach would make a mockery of any presumed "discipline" from
a gold-centered monetary system^—the virtue ;sometimes still attributed to the
use of gold. A system relying on gold price increases to regulate liquidity would
be both continuously destabilizing to the monetary system and capricious
in whom it benefits and whom it hurts.
The inadequacy of gold as the basis for an international morietary system
seems to me amply reflected in recent history. Throughout the "Bretton Woods
era," countries quite naturally sought supplements and substitutes, and this
process was necessary to meet the needs of an expanding and integrated world
economy. The two-tier gold system has been one means of coming to grips with
destabilizing speculation in gold markets. The adoption of the SDR gave explicit
international acknowledgment to the fact that new means needed to be found
to provide an orderly and satisfactory means of assuring appropriate growth
in world reserves.
None of this is new or.startling. It has been common ground among the vast
majority of economists for years—there are few issues upon which the profession is so united.
:
But within the general concept of diminishing dependence on gold in the
monetary system, there are, of course, a number of questions concerning the
role of gold that must be resolved in the course of negotiations on international
monetary reform. As the IMF Executive Directors recently reported, a consensus
among nations on what remaining role gold should still play in a reformed system
does not presently exist. I do not think it will be easy to resolve differences
on what to do about the precise role of gold. INIore than one approach may be
available within the general context of avoiding dependence on gold for monetary
purposes, but I would emphasize our belief that the historical trend toward
substitutes and supplements will and should continue.
EXHIBITS
455
Among the detailed questions concerning gold's role in the system are the
use of gold as "numeraire" for currency values, the existing .requirement for
using gold in certain transactions with the IM'F, the relationship of gold to the
SDR and other reserve assets, and the proper functioning of the two-tier
system. These questions are obviously related to other aspects of the system
and other issues of monetary reform; they cannot, therefore, be entirely
resolved, without consideration of other questions concerning SDR^s, the nature
of the exchange rate regime, the nature and use of alternative reserve assets,
and the like.
I would suggest that during this interim period, when broad issues of the
role of gold and structure of the monetary system are under negotiation, it
would not be the appropriate time to end our longstanding restrictions on gold
purchases by private U.S. citizens, thereby possibly injecting further speculative
elements into an already volatile and artificial gold market. Certainly it seems
to me ironic that speculation in private markets whipped up by lingering hopes
of an increase in the official price is itself cited by some as a reason to increase
the official price. Such an approach would appear to abdicate all prospects for
orderly control of international reserves. The time for sympathetic consideration to the elimination of our own restrictions is when the shape of the new
monetary structure emerges and the monetary system is fully insulated from
instability in private gold markets.
As I have suggested, it is our wish to deal with the official role of gold in
the context of an agreed cooperative global arrangement. I hope and anticipate
that other countries approach the negotiations in the same spirit.
Changes in the present two-tier system will naturally be considered in that
framework. I would not preclude any action in that respect prior to fullfledged reform, but I do think it is desirable to keep the overall objective in
mind and to approach the question in a cooperative framework.
Finally with respect to the gold issue, I would observe that a few voices are
occasionally heard that an increase in the gold price can somehow substitute for
needed far-reaching monetary reform; that somehow the difficult economic and
political issues of exchange rate adjustment, problems of achieving and maintaining balance of payments equilibrium, and the management of reserves can
somehow be washed away or escaped by manufacturing a sea of new liquidity
through an arbitrary adjustment in the official gold price: Surely, this is an
illusion. It is a particularly dangerous illusion, for it would instead divert us
from the urgent need to face up to and attack these real and fundamental
problems with vigor and imagination, so that the evident problems of the past
do not become a recurrent and damaging feature of the international economic
landscape.
The second subject of these hearings is the recent U.S. intervention in the
exchange markets, in accordance with a decision in July. This action is closely
coordinated between the Treasury and the Federal Reserve, under agreed guidelines, regardless of which agency at a particular time may actually engage in
the operation. Chairman Burns, who I understand will appear at a later session,
will undoubtedly also wish to comment on this subject.
This decision to intervene more actively in the exchange markets, at snch
time and in such amounts—large or small—as we deem desirable, was tak3n
for the primary purpose of helping to deal with speculative forces. Naturally
we do not like to see turbulence and strains in the money markets. It creates
problems for businessmen, our trading partners, and for us.
As you vidll recall, following a period of calm the exchange rate realignment
so arduously worked out in the Smithsonian agreement came under severe but
unwarranted testing in early July in the wake of the British decision to float
the pound. Speculative pressures growing out of this decision turned against
the dollar. Foreign central banks intervened heavily in the exchange market to
maintain their market rates, reaffirming their support of the Smithsonian agreement. It was our view that the speculation arising from the unique situation of
the pound should not affect the basic exchange rate structure. To help make
this point crystal clear, and to signal an intent to help deal with speculative
pressures in the future, intervention was undertaken by the Federal Reserve
on July 19, using initially cert.ain currency balances held by the Treasury. This
decision was not inconsistent with, and indicates no change in, our basic policy
approach to monetary reform and our efforts to achieve sustainable equillibrium
in our balance of payments.
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19 73 REPORT OF TPlE SECRETARY OF THE TREASURY
We have not embarked on any effort to artificially prop up the dollar counter
to any basic balance of payments trends in the longer run. In the end, the
strength of the dollar will rest on other policies to improve our balance of
payments—^policies we are pursuing with great vigor.
While the intervention action to date has been quite limited in term^ of
numbers of currencies, amounts and periods of intervention, we must, of course,
be prepared to acquire needed foreign exchange to finance such operations. The
existing swap facilities, or mutual credit facilities, long maintained by the
Federal Reserve, provide a convenient vehicle for obtaining currencies as needed.
In contrast to usual practices before August 15, the present operation is one
in which, while full consultation and cooperation is maintained with the foreign
country concerned, the basic initiative wdll lie with the United States. Foreign
exchange will be drawn not in a passive manner after intervention by other
countries, but for use in the exchange markets by the United States in such
amounts and at such times as we believe the market impact will be favorable
and help to curb unw-arranted speculative forces. Thus, the United States maintains full control over the usage of the lines. Drawings w^ould not be made or enlarged to deal with what would be fundamental misalignments in our payments
position. In normal and foreseeable circumstances, repayment could be anticipated from a reversal of market fiows.
Exhibit 59.—Remarks of Under Secretary for Monetary Affairs Volcker, October 27, 1972, at the annual meeting of the Minnesota Economic Association
at the College of St. Thomas, St. Paul, Minn., on "International Monetary
Reform: A Discussion of the Recent U.S. Proposals"
Last m.onth, at the annual meeting of the International Monetary Fund,
President Nixon and Secretary Shultz set forth broad principles and more concrete ideas for reshaping and modernizing the international monetary system.
The timing of their remarks was not just an accident of a meeting calendar.
More than a year had passed since the "events of August 15" signaled the end
of the Bretton Woods system, as it had developed earlier in the postwar period.
The intervening period had been one of ferment—sometimes in exchange markets
and more continuously in thinking.
But they could speak against the background of evident progress toward the
objectives of the new economic policy. Our inflation had been reduced to a rate
as low as any among important industrialized countries. Economic growth
had been speeded. Together with the unprecedented exchange rate alignment
negotiated last December, these laid the essential groundwork for urgently
needed improvement in our balance of payments and more international monetary
stability. Meanwhile, a degree of needed flexibility had been introduced into
exchange rate practices through wdder margins. Some of the groundwork had
been laid for trade negotiations, and agreement reached on a proper forum for
formal monetary negotiations.
But even more important as a setting for their remarks and for the future
of monetary reform has been the less tangible evolution in attitudes and thinking over the past year. There is today general agreement and understanding
that a thorough revamping of our international monetary system is necessary
to meet the needs of this generation—that tinkering with technical features
would not be enough. There is a fuller and sharper appreciation of an old lesson
of political economy: If we are to live harmoniously with our neighbors and
share the gains from expanding trade, individual nations must seek their prosperity in a context of prosperity for all. Tiiere is broad agreement that participation in an interdependent and open world requires a willingness to develop, and
adhere to, basic rules of international conduct—a general code of good conduct
to guide policymaking and day-to-day cooperation.
Moreover, 1 believe we can detect some areas of convergence of thinking on more
specific elements in a new monetary order. There is greater recognition, for
instance, that the problems of the adjustment process—the means by which
imbalances in international payments can be reduced and eliminated in timely
fashion—^must be dealt with more effectively than in the past. There is acceptance of the proposition that, to assist this process, the exchange rate structure
needs to be more flexible than in the past. The need for greater symmetry in the
EXHIBITS
457
responsibility for initiating adjustment policies between deficit and surplus
countries is more fully recognized—as is the need to leave considerable flexibility
to national governments in their choice among specific adjustment instruments.
Finally, the need for a broad consistency among our monetary and trading
arrangements is better established, even though the specifics of this interrelationship are still controversial and vague in many minds.
If these propositions sound self-evident and hardly worth repeating to an
audience of economists, from my particular observation post they add up to a
rather striking change in political and negotiating attitudes—in the "atmospherics" that can be so important in the success of negotiations. There seems
to me an eagerness to proceed, not just in the abstract, but to deal in a realistic
way with some enormously difficult questions—economic and political—that
need to be resolved to square our monetary and trading institutions and conduct with today's realities.
The U.S. initiative at the IMF meeting came on the eve of the formal start of
detailed and intensive negotiations in the newly formed Committee of Twenty.
The designation and composition of a properly representative and effective
negotiating body, with a necessarily broad mandate, itself presented issues of
importance and controversy. As those issues were resolved, and as both national
governments and the IMF, itself, began to identify more clearly the substantive
issues and to outline basic elements in their thinking, we had the conditions
necessary for setting out more specific ideas in a comprehensive and integrated
w^ay. The President thought it important to do so for, if the United States is to
play its proper role in helping to build a realistic and workable international
monetary system, our purposes must be clearly perceived and our ideas fully
understood.
We, as other governments, face a difficult problem in this respect. We are
dealing with complex matters which even an informed citizen can sort out only
with difficulty. Yet it is not enough that we debate our ideas with financial
officials from other nations around a negotiating table. In the end, we are dealing
with matters that affect the prosperity of our own Nation, the maintenance of a
stable world economic order, and political harmony. National commitments will
be involved, and legislative support will be required.
I know you, as economists, have a particular interest in the various reform
issues. We frankly look to you for understanding and leadership in contributing
to this necessary international dialogue.
In formulating our own proposals, we have tried to deal with the basic sources
of instability and strain in the monetary system that have become so evident in
recent years. In the broadest sense, the repeated crises and frictions reflect the
fact that, for too long, the monetary system, rather than promoting equilibrium,
tolerated disequilibrium. As sweeping and fundamental changes developed in
the world economy, our monetary and trading arrangements failed to keep
pace. For too long, the resulting imbalances were covered over with expedient
measures; the improvisation was often brilliant, but in the end fundamental
difficulties kept recurring in more virulent form.
Many of the economic changes in the more than 25 years since Bretton Woods
have been desirable in themselves; but they have, nonetheless, eroded the underlying premises of the system then established. With the resurgence of Europe
and Japan, a monetary structure which assumed and was based on a single
predominant currency—the dollar—^became untenable. The implicit assumption
that a dominant United States wdth immense reserves and an impregnable
competitive position could play a relatively passive role in the acljustment process,
while in effect underwriting the stability of the system as a whole, simply no
longer fits the elementary facts of the distribution of economic and political
power in today's world.
From our point of view, the system seemed to permit other countries, in seeking
their own economic and payments objectives, to achieve results that left the
United States with a more or less perpetual balance of payments deficit, without
adequate capacity to take action to correct that deficit. From the point of view of
others, the same system seemed to provide a special privilege for the United
States, freeing us from normal pressures to adjust our balance of payments. From
either point of view, the results were not satisfactory—^practically continuous
deficits for the United States and practically continuous surpluses for Europe
and Japan in particular, ever greater foreign holdings of dollars, pressures on
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197 3 REPORT OF THE SECRETARY OF THE TREASURY
our industry and competitive position, and an increasingly speculative
atmosphere.
Having said that much, we are still a long way from agreeing on specific measures to achieve and maintain the needed equilibrium in the system. In developing
our own proposals to that end, we have endeavored to build from certain principles that we believe command wide support.
Thus, the system must be, and must appear to be, equitable assuring that all
nations are accorded fair and comparable treatment under an internationally accepted set of rules and principles. The system should be symmetrical, both in the
sense of all nations having the same privileges and the same obligations, and
in the sense that pressures for initiating adjustment to correct imbalances should
be evenhanded, whether those imbalances are in the form of surpluses or deficits.
We have also sought to design a system which leaves needed freedom of action
for national governments. The health of the whole requires that every country
should have strong incentives to adjust when its economy is out of balance internationally, but there should be an adequate and realistic range of choice in
selecting instruments and techniques of adjustment compatible with national
institutions, national circumstances, and national objectives. There is, in other
words, more than one "path to righteousness."
Our specific ideas embodying those principles can be listed under six major aspects of monetary reform.
First, the exchange rate regime. Most nations have made plain they want a
fixed point of reference for the external value of their currency—a central or
par value—and this value would be supported by convertibility of their currencies
into other internationally agreed assets. We believe reasonably wide margins
for fluctuation of market exchange rates around such central values should be permitted—for the dollar as well as other currencies—to dampen incentives for shortterm capital flows and to ease transitional rate changes. Some countries—for
example, developing countries wishing to maintain a particularly close relationship to a major trading partner or nations in the process of forming a monetary union—may wish to maintain a narrower margin against certain currencies
and would be permitted to do so. Conversely, specific provision should be made for
individual countries choosing to "float" their currencies. Rather than considering such countries outside or beyond the law, nations choosing to float, particularly for more than a brief transitional period, should be required to observe
more stringent standards of behavior in other respects to assure the consistency
of their actions with the basic requirements of a cooperative order.
These proposals would provide greater symmetry, in that the dollar would
have the same technical possibilities for flexibility as other currencies. At the
same time, they would not impose unnecessary rigidity in practice, for nations
would be permitted certain options so long as their actions are compatible with
established standards of international responsibility.
More broadly, the proposals are aimed at protecting the stability of the entire
system by providing a reasonable degree of flexibility in exchange rate practice.
The search for a greater stability through flexibility may sound like a contradiction in terms. Indeed, it poses extremely difficult practical issues, particularly in developing criteria for when central values might change—a subject
to which I will shortly return. But we have learned from experience that rigidity
is not synonymous vrith stability. Rigid exchange rates, in the end, are not consistent with the degree of freedom of action in monetary, fiscal, and other national policies which most governments regard as necessary; they can breed
large imbalances''and invite large speculative flows, unduly large exchange
rate adjustments, and, thus, repeated monetary disturbances.
A system of central or par values with convertibility forces attention to a
second range of issues concerning the composition and volume of international
reserves. Consistent with much foreign thinking, the United States believes that
special drawing rights should increase in importance, should become the yardstick for measuring currency values, and should be subject to periodic changes
in amount to meet the aggregate need for reserves. We would neither generally
ban nor encourage foreign currency holdings, but certainly they should not be
required to play so central a role in the operation of a new system. Possibly
the new systein could be assisted by provision for exchanging part of existing
reserve currency holdings, at the option of the holders, into a special issue of
SDR; careful study will need to be given such proposals.
We of course continue to feel the role of gold will continue to diminish and
orderly procedures can be developed to facilitate that development.
EXHIBITS
459
The third—^and in many ways the most critical—area concerns the adjustment
process. Failure to achieve prompt and effective adjustment has been a central
defect in the monetary system—and an improved adjustment system lies at the
heart of the U.S. reform proposals.
Under Bretton Woods, or any system of convertibility into reserve assets,
there are more or less automatic pressures on deflcit countries to adjust—those
countries ultimately become unable or unwilling to continue to provide reserve
assets to others. But in practice there were no comparable pressures on surplus
countries. The system was asymmetrical in an important respect.
Our approach to deal wdth the adjustment problem is built on the assumption
that currencies generally will be convertible into reserve assets and, therefore,
subject to adjustment pressures from disproportionate loss of reserve assets
when in deficit. Similarily, disproportionate increases in reserves would become
an objective indicator of the need for surplus countries to adjust. These swings
in reserves would, of course, reflect swings in balance of payments positions.
Such a system would require agreed statistical criteria for measuring reserves,
and for appropriate benchmarks against which to measure the need for adjustment action. The aggregate supply of reserves, as determined in good part by
SDR allocation, will in turn need to be consistent with the established adjustment criteria to assure the system works evenhandedly, without bias toward
deficit or surplus countries.
Sufficient fiexibility, possibly with the help of supplementary indicators, would
need to be built into the application of the system to avoid reaction to false
signals, such as from unwarranted speculative movements. Moreover, as indicated
earlier, nations should be permitted flexibility in how they respond to the need
to adjust—whether a surplus country, for instance, reduces trade barriers, increases aid, or appreciates its currency. In many instances, a deficit country
might appropriately choose to restrain a domestic infiation. But in the end the
international community should insist on adjustment, and that insistence will
need to be reflected in some adequate combination of inducements and penalties
lest we slip back into tolerating such prolonged imbalances that the system
falls apart.
Fourth, in presenting our proposals, we also have given specific attention to
capital and other halance of payments controls.
The U.S. view is that for reasons of practicality, as well as basic philosophy,
freedom of trade and payments should be encouraged and reliance on controls
minimized. Countries should not be required to use controls in lieu of other
more basic adjustment measures, and should not be permitted, for example,
to use capital controls to maintain a chronically undervalued currency. When
trade controls are permitted temporarily in extreme cases of balance of payments
difficulty, tJiey should, in our yiew, be in the form of surcharges or across-theboard taxes.
A fifth feature of our ideas is the relationship hetween negotiations on monetary reform and related negotiations in trade and other fields. Our view has been
and continues to be that monetary, trade, and investment activities must be
viewed as parts of an integrated whole—and policies in each of these areas
must be mutually consistent and reinforcing.
Accordingly, we have taken the view that negotiations about a new monetary
system, now underway in the new Oommittee of Twenty, must embrace not
only explicitly monetary rules but must also consider their compatibility with
the broad rules of the trading system and those covering investment transactions. A comprehensive reform of all tliese interrelated aspects of the international economy is essential if we are to develop a system in which adjustment
is brought about effectively and equitably, with a liberalizing thrust. Detailed
trade negotiations over specific barriers, such as item-by-item changes in tariffs
ancl nontariff barriers, as well as similar negotiations in the investment field,
cannot and will not, of course, be dealt with effectively in the Committee of
Twenty. But the Committee can help support serious efforts in other bodies
to attack these specific problems; and, in its own deliberations, it cannot shy
away from assuring the broad compatibility of our codes of conduct in the
trade and monetary area.
A sixth and final feature of Secretary Shultz' presentation concerned the
international institutional arrangements which should accompany reform of
the trade and payments system.
Implicit in the proposals we have made is the need for modification of the
institutions which monitor the trade and monetary rules. With a new monetary
506-lTl—73
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1973 REPORT OF THE SECRETARY OF THE TREASURY
structure, I would envisage an even more critical role for the IMF. Also, with
increased emphasis on the interrelationships between trade and finance, there
is need for closer harmony in the rules of the IMF and GATT and a closer
working relationship between the two institutions. Further, the sensitive issues
involved imply a greater need for intensive and continuous involvement of
national governments in the deliberations of the international institutions, and
those bodies must more fully engage national representatives of stature and
Influence in their own governments.
I would judge the initial response to the U.S. ideas as encouraging. Certainly
the straightforward effort to present an integrated set of ideas has been
welcomed as a means of providing a new thrust to the negotiations and moving
the dialogue forward.
Nevertheless, we should not be misled into believing that points of difference in
approach—in some cases major differences—have already been resolved. In
presenting our ideas, Secretary Shultz carefully took into account the ideas and
proposals of others and incorporated, where he could, areas of consensus. Therefore, it is hardly surprising that one element or another in his remarks struck
a responsive chord. On the other hand, I would emphasize the ideas were presented as an inte.srrated package. In our mind, one part is clearly dependent upon
another. To put it plainly, the proposals should not be considered as some kind
of smorgasbord—with the diner entirely free to pick and choose among the
items he personally finds enticing. Rather, we visualize our proposals more in
the tradition of a fine French chef, carefully constructing a meal with one
course leading to another—with the final satisfaction of the diner dependent
as much on the balance of the whole as on any particular course. Or, perhaps,
as my mother used to tell me as a child, I could enjoy the dessert only if I also
ate the liver—:because it was the liver that was essential to a healthy growing boy.
Differences of approach, as well as controversy on technicalities, should, of
course, be expected. Nations have different traditions, different economic philosophies, different circumstances, and different experiences. Contrasting views on
how the international monetary system should operate, viewed from these different vantage points, are natural. The challenge is to reconcile these differences
in a cohesive whole, serving to the maximum extent possible the particular
interests of each partner, so long as those interests do not impinge upon the
rights of others.
We hope that by the time of the IMF meeting in Nairobi next year, we will
find that agreement on the main outlines of a new system can be accomplished.
To achieve that result, you can anticipate intense and difficult negotiations.
I would suggest that thbse negotiations deserve your continuing interest and
attention—for the outcome will be of great importance to the United States and
to the American economy.
Sometimes the point is made in this country that foreign trade is a relatively
picayune matter—after all, exports amount to less than 4 percent of our GNP.
I would suggest this is a misleading measure. One hundred billion dollar trade—
in and out—Is hardly a picayune number, to say nothing of the vast amount of
Investment, tourism, defense expenditure, and other transactions across our
boundaries. We need to do no more than look out the window into our streets,
or walk through a department store, to see how much trade affects our daily
lives.
Nowhere is this more apparent than in Minneapolis. As a center of trade in
so elemental a commodity as grain and as a manufacturer of so sophisticated
a product as computers—which happen to be t\^o of the Nation's largest export
items—its prosperity is closely tied to these seemingly abstract and arid matters
of monetary and trade reform.
That is why we do not underestimate the urgency for moving ahead to reach
agreement—^not any agreement, but an agreement that will serve our basic
interests as well as those of other nations. The challenge before us all is to
reconcile those interests in a context of freer trade and open international competition, supported by durable and practical monetary arrangements. I am confident that with the informed support of the American people—^but only with
that support—that goal will be reached.
EXHIBITS
461
Exhibit 60.—Remarks of Under Secretary for Monetary Affairs Volcker, November 13, 1972, at the International Finance and Monetary Reform Session of the
59th National Foreign Trade Convention sponsored by the National Foreign
Trade Council, Inc. at the Waldorf-Astoria Hotel, New York, N.Y,
In leading off this session on money at the National Foreign Trade Convention,
a few preliminary comments on the relationship between international monetary
reform and trade negotiations seem in order. I would then like to turn, rather
abruptly, to a central question for monetary reform itself: How can we achieve
a better process of balance of payments adjustment*?
In the broadest terms, the need for a properly functioning international
financial system is self-evident to those engaged in foreign trade. Conversely,
in my experience international bankers seldom talk together for long without
the achate broadening out into consideration of trading policies and practices.
These prosaic facts would hardly bear mention except in the light of two
further observations, both of which have impressed themselves on my consciousness in recent years and months.
The first is a commentary on national and international bureaucracies, from
which I do not exempt the "banks of the Potomac." The close linkage between
trade and monetary questions have too often been obscured and neglected by the
way the work is organized. Trade men do trade—GATT, tariff" bindings, escape
clauses, and all that. Monetary men do money—the IMF, SDR's, exchange rate
"tunnels," "snakes," and "worms," and all that. They both have a job, necessary
expertise, and a mandate—and they don't appreciate poachers on their preserves.
When asked in philosophical terms, "Shouldn't our approach toward trade and
money be linked?" the answer is usually, "Of course." When asked in operative
terms, "Shouldn't we sit down internationally and deal with the broad problems
together?" the answer has too often been, "Let's each mind our own business,"
or some equivalent expression.
My second observation is that the nations of the world, perhaps for the first
time since the postwar planning at the end of World War II, have the strongest
kind of incentive—and the plain responsibility—to take a fundamental new look
at virtually the whole range of international economic arrangements. The incentive grows out of the simple fact that, however great our achievements in expanding trade and promoting prosperity over the past 25 years, our monetary and
trading system and institutions have not been working so well. The vast economic
changes of the postwar period have produced strains and tensions threatening
the international economic equivalent of "law and order."
There is no doubt in my mind that, today, that challenge of updating our
institutions and our practices is widely accepted. There is a will to approach the
task in a cooperative spirit.
These are the absolutely essential ingredients for success. At the same time,
our conviction is that success will also be dependent on approaching the problem
in sufficiently large focus. President Nixon, in speaking recently to the IMF, put
the problems of economic reform in the larger context of peaceful relations
among nations. And, he emphasized, "We must see monetary reform as one vital
part of a total reform of international economic affairs, encompassing trade
and investment opportunity as well."
Painting on so large a canvas obviously presents problems. At the least, we
will need to overcome the inertia—bureaucratic or otherwise—that would keep
every problem in an insulated compartment and stifle imagination. As a practical matter, the negotiations will need to be broken down into manageable pieces.
But, at the same time, we need to recognize the broader relationships between
trade, money, investment, and development, and approach these problems with
a common philosophy and a common view. When the United States has emphasized the need to recognize the link between trade and monetary reform, this
is what we have had in mind.
Perhaps I can help clarify this approach by asserting several propositions on
the substance and possible organizational implications of this link.
Our point of departure, in the words of Secretary Shultz, is that there is
"mutual iriterest in encouraging freer trade in goods and services and the fiow
of capital to the places where it can contribute most to economic growth. We
must avoid a breakup of the world into antagonistic blocs. We must not seek a
refuge behind a wall of protectionism."
To achieve this general objective, we will need a stable monetary system and,
particularly, better arrangements to promote timely and orderly international
462
1973 REPORT OF THE SECRETARY OF THE TREASURY
balance of payments adjustments; without this, individual countries are propelled to protect their interests by controls aind restrictions. At the same time,
the objective requires a direct attack on existing trade and investment
restrictions.
Both approaches to the problem are in hand. The newly established Committee
of Twenty has started its work on monetary reform. Major nations have committed themselves to start detailed trade negotiations within the framework
of GATT.
In their specifics, these negotiations can prpceed in different forums. Discussion and resolution of a mass of detail on ,trade issues—which tariff is to
be reduced and when, how particular nontariff barriers and other administrative
barriers to trade can best be removed—require a special expertise, experience,
and negotiating process. The same is true of monetary techniques—exchange rate
mechanisms; the role of SDR's, gold, and the dollar; and all those other matters
that so intrigue the financial experts but which make the eyes of a trade man
glaze over. In this sense, the detailed trade negotiations should not and need
not wait on discussions of monetary reform, nor need the discussions of monetary
questions await the results of the detailed trade negotiations.
In the larger aspects, however, the negotiations will overlap. For instance,
in pursuit of the goal of freer trade, we believe definite incentives could and
should be built into the rules concerning the balance of payments adjustment
process to encourage trade liberalization. Indeed, surplus countries may sometimes find it more desirable from their own .point of view to reduce tariffs or
eliminate other restrictions than, say, put the full weight of adjustment on
exchange rates. In specific instances, such action could well be more desirable
from the viewpoint of other nations as well.
Looking at the same problem from the opposite direction, the process of orderly
balance 6f payments adjustment through exchange rates is made more difficult
if large areas of our economies are insulated from foreign price competition.
To the extent such restrictions remain, the adjustment process is less efficient:
more of the burden is thrown on less insulated sectors of the economy, creating
the temptation for still more controls.
Our approach toward monetary reform and reform of the trading system overlaps in another broad area. In the discussions at the IMF, the concern over the
world breaking up into antagonistic blocs was echoed and reechoed. There seemed
to be a wide consensus for what was termed a "one-world" solution—by which
is presumably meant a nondiscriminatory, multilateral payments system. Of
course, one prime characteristic of a "bloc world" would be widespread preferential tariffs and trade barriers. Thus, the logical counterpart of nondiscrimination
in monetary arrangements is most-favored-nation treatment in trade. That principle is already enshrined in article I of the GATT. But we are forced to conclude
from simple observation that the fo reefulness with which that principle is applied in practice today does not match its prominence in the Articles. We need to
reach a new consensus on nondiscrimination in money and trade alike.
A more specific example of the need to achieve consistency in the rules governing ti;ade and money arises when we consider the circumstances, if any, under
which trade restraints might legitimately be used to assist in the process of
balance of payments adjustment. In our thinking, such action should be confined
to extreme and temporary circumstances. The measures taken should be acrossthe-board and market oriented, such as a tariff surcharge or a general tax on
imports. In any event, the trade men and the money men will need to reach
agreement.
In his remarks to the IMF, Secretary Shultz also referred to certain other
important areas for negotiation that sometimes seem in danger of falling between
the stools of money and trade. Trading patterns and balance of payments adjustments are often distorted by the use of fiscal subsidies or penalities that affect the
flow of goods or investment, by administrative pressures on investment decisionmaking, and by competition in the provision of official export credits. The international discussion that followed the introduction of the DISC provision in
our own tax code, in an effort to provide tax treatment for our exporters more
comparable to that commonly available abroad, points up the need for agreed and
appropriate international standards. The growing practice of some countries in
providing large subsidies for investment in particular areas often has the practical result of impinging on the trade of others. This has been a matter of some controversy within the European Community, but the problem is not limited to
Europe and cries out for more general consideration.
EXHIBITS
463
Organizationally, the mandate of the Committee of Twenty plainly charges that
group with the responsibility for considering the interrelationships of monetary
reform to trade, investment, and development. Without itself becoming involved
in specific trade negotiations, that body can do much to assure a consistency of
approach, and provide stimulus for detailed negotiatioris in other bodies. The
presence of the Secretaries General of the GATT and the OECD at its deliberations should help assist that process.
The Committee of Twenty was conceived as a temporary. body. However, the
need for better harmonization of our approaches toward monetary, trade, and
investment problems will not cease once monetary reform is accomplished. This
reform effort should also aim at finding more permanent organizational arrangements to assure that the problems of the international economy continue to be
treated by governments and by our international institutions as parts of an
interrelated whole. We should be willing to reshape our institutions and, if
necessary, to.realign their responsibilities, to achieve that result; at the very
least, the rules and practices of the IMF and the GATT need to be fully consistent, and closer working relationships established among our international
institutions.
In discussing the relationships between trade and money, I have already
alluded several times to the importance of achieving improvement in the processes of balance of payments adjustment—the manner by which countries achieve
and maintain an equilibrium in their economic relationship with other countries.
Amid all the controversy about monetary matters, there is a biasic strand of
agreement that failure of the adjustment process was a prime cause of the breakdown of the Bretton Woods system. Imbalances were permitted to continue for
too long and in top large amounts, consistent with the stability of the whole.
There, were no agreed means for assigning responsibility for initiating "adjustment riieasures. To the extent effective pressures did exist, they worked in a
biased way. The lack of consensus on the adjustment process has provided fertile
ground for speculation, for monetary instability, and even for political friction.
Meaningful monetary reform must deal with this central problem. Some have
suggested that freely floating exchange rates would be a logical and straightforward approach, counting on the forces of the market to achieve a continuing
equilibrium through shifting currency values. However, most, leading, countries
have expressed the strong desire to work instead within the framework of
officially established exchange rates—^par or central values—rsupported by convertibility. of national currencies into internationally agreed reserve assets. The
ideas set forth by Secretary Shultz are based on that premise. Consequently,
his proposals deal with adjustment problems in that context.
\.- '.
There is ample evidence that a convertibility system will not, in itself, solve
the adjustment problem. To be sure, loss of reserves will eventually force a
persistent deficit country to take action. But even on the deficit side, disequilibrium can be maintained for a considerable period through extensive borrowing and by measures distorting trade, investment, or the internal economy. On
the surplus side, the disciplines are still less effective. Reserves can be accumulated more or less indefinitely.
! ^.
This is a crucial asymmetry. For a variety of reasons, countries have felt
little incentive to take overt action to eliminate surpluses. Revaluatioii, or action
to.liberalize imports, affects local domestic interests. A strong trading position
can be a vehicle for domestic expansion. A strong currency and large resierves
provide protection against the unknown and can be an element in national
prestige; surpluses are of ten equated with virtue.
'
In the end, therefore, the necessary corollary of a system of established exchange rates supported by. convertibility must be new arrangements to induce
and maintain a satisfactory balance of payments equilibrium. Our suggestions
are pointed in that direction. They are aimed at actively promoting timely measures of adjustments in a manner to support the basic objective of freer trade
and payments. They would apply in an evenhanded manner to deficit and
surplus countries. They would leave an appropriately wide area for national
discretion. Without ruling out either transitional or more indefinite "floats"
of a national currency, they would be fully integrated with,. and support, the
general desire to maintain established exchange rates and convertibility and to
work toward freer trade.
There are two related elements in the.approach to the adjustment problem
sketched out by Secretary.Shultz that deserve special emphasis: ,(1) the need
464
1973 REPORT OF THE SECRETARY OF THE TREASURY
for objective criteria to help guide adjustment actions; and (2) the use of reserve movements as a primary criterion.
An effective international monetary system will need to have substantial
flexibility for national governments to make adjustments in the manner suited
to their own needs and circumstances. However, taken alone, experience shows
national discretion cannot be counted on to produce either timely or equitable
decisions. Similarly, the need for international consultation and review is
evident—^but full reliance on the discretion of international bodies alone can
lead to long debate and indecision in a potentially politically charged atmosphere. These decisions can be disciplined by developing agreed objective criteria
that signal the need for adjustment action. But these criteria will never be
perfect. Taken alone, they cannot point unerringly to appropriate action, and they
must be reconciled with national discretion.
What is needed is a blend of these approaches. The objective criteria would
Identify periods of serious balance of payments disequilibrium and create a strong
presumption that effective adjustment policies should be implemented. But the
country concerned should have and could have substantial discretion in determining the composition of its adjustment policies. International consultations
would determine the applicability of the criteria to particular situations, or deal
with the rare case where the criteria provided a "false signal."
The use of objective indicators recognizes that adjustment decisions are
frequently difficult for any government. There is a natural tendency to postpone
and avoid action until imbalances cumulate into a major problem for nations
and a major opportunity for speculation. International groups may be equally
reluctant to face promptly difficult and politically sensitive adjustment questions.
With objective indicators agreed in advance, contention over which country
should initiate action should be reduced. The discipline to aet—and to act in a
timely way—will be stronger. In the context of such a system, countries should
find it in their own interest to act early as imbalances are emerging, rather
than simply waiting for imbalances to build up to the point that the indicator
comes into play.
The criteria developed will need to be capable of being applied evenhandedly
to all countries—^large or small, developed or developing, reserve currency
country or not—^in support of the common objective of dealing with payments
imbalance, whether surplus or deficit. In a convertibility system, there is already
a direct relationship between balance of payments adjustment needs and reserve
changes. Overall balance of payments movements are promptly reflected in
changes in official reserve holdings. Sooner or later, reservelosses will force a
deflcit country to act in any event. Building on that natural, but one-sided
relationship, use of reserve changes as the prime objective indicator to discipline
the adjustment process for both surplus and deficit countries seems both straightforward and equitable.
This approach would require that certain standards be developed for individual
countries, taking account of their needs and desires to hold and accumulate
reserves over time. These standards for individual countries would. In turn,
need to be consistent with the availability and growth of reserves in the system
as a whole. Given these standards, countries experiencing disproportionate losses
or gains of reserves would be expected to initiate corrective adjustment action.
Tf the losses or gains continued to an excessive degree, certain disciplines would
come into play.
At some point, for instance, a country piling up reserves should lose its right
to demand conversion: for, through conversion, its excessive surplus would create
unwarranted pressures on other countries. If reserves, nonetheless, continued to
rise, an effective combination of adjustment measures would be expected. Ultimately, in the absence of effective adjustment measures, other countries should
be permitted to protect their interests by such a measure as applying a special
surcharge on imports from the chronic surplus country. Conversely, a deficit
country persistently refusing to Initiate adjustment measures might be refused
credit, its SDR allocation, or other privileges.
;
A critical defect of the system in the past was that, while it required for its
sustained operation a broad equilibrium both in the supply of and demand for reserves and in balances of payments, there was no adequate means for assuring
either. An increasing portion of reserve holdings took the form of reserve currencies, and that portion became too large to support convertibility. Imbalances in
payments were not only increasingly large, but they tended to fall into persistent
EXHIBITS
465
patterns—^including a chronic U.S. deficit. The approach of using reserves as an
objective indicator is aimed at both problems. On the one hand, it provides a
basis for achieving greater consistency between the desire to hold reserves and
the total supply of reserves. On the other hand, it can provide a needed discipline
for guiding the adjustment process.
In sum, the logic of the approach is that: (a) there is a need for better balance
of payments adjustment; (b) there is a need for better indicators to help guide
balance of payments adjustment decisions; (c) there is a need for consistency
between the availability of reserves in the system and the equilibrium demands;
and (d) these needs can be brought together in the context of a system of established exchange rates supported by convertibility through a focus on reserve
movements as an indicator of the need for adjustment
If all this sounds highly technical and abstract, I would like to put the essence
of the problem in a few simple propositions.
No country wishing to benefit from the enormous advantages of international
trade and investment can be independent of external influence. Its actions affect
others. Others' actions affect it.
Certainly, every country wants a maximum freedom of action for itself.
Where it can have such freedom without impinging adversely on others,
it should have it. We should not demand a particular course of action when
that action is not essential to the whole. When a rule is unnecessary, let's get
rid of it.
But some rules are necessary. In terms of international monetary reform,
no nation has a right to run an indefinite surplus or deficit—when other countries are unwilling to provide the counterpart. No nation is entitled to acquire
or manage reserves in a manner inconsistent with other nations meeting their
objectives. Those two simple propositions are the core of the problem with
which we must deal.
The theme of Mr. Shultz' remarks before the IMF was that we need a new
balance in international economic affairs. In approaching the problems of monetary reform, balance and equilibrium have a special and precise meaning
beyond the general connotation of stability and good order. We lack both
kinds of balance today.
Our aim must be to regain balance in both senses of the word. That commitment will need to be expressed in our agreed codes of conduct and in our
institutional arrangements.
I am under no illusion that the process of reform will be easy. Vital
national interests are at stake. The real world is incredibly complex.
Yet, the heritage of the past provides the foundation for success. The real
glory of Bretton Woods lay not in the particular form of the institutions it
created or the specific agreements reached. Rather, it lay in the habit of
economic cooperation which it fostered and which is ingrained in our consciousness.
This is a time of new testing. There have been enormous shifts in the global
balance of power. The integration of markets for goods and capital that we
sought so eagerly has brought immense new problems in its wake. However
inevitable, institutional change—^fundamental change—is always a painful and
uncertain process.
But you know, and I know, all of that. What's important is that we approach
the job in good spirit and with willing acceptance of the need to find common
approaches to our problems. I can report I can see increasing evidence on all
sides of a willingness to do just that.
Exhibit 61.—Statement by Under Secretary for Monetary Affairs Volcker,
February 27, 1973, before the Senate Banking, Housing and Urban Affairs
Committee
Two weeks ago, after intensive consultation and negotiation, we took action
to achieve a needed realignment of international currency values. A key to
this result was the announcement of our intention to propose to the Congress
legislation to devalue the dollar. The bill before you, ^S. 929, would authorize a
10-percent reduction in the par value of the dollar to accomplish that change.
The realignment offers a highly constructive opportunity, both for the United
States and for the world community. Augmenting the Smithsonian realignment
466
19 73 REPORT OF THE SECRETARY OF THE TREASURY
agreed earlier, it attacks directly and effectively the major imbalances that
have plagued world payments for too long and undermined monetary stability.
I am convinced the size of the adjustments is fully commensurate with the
need. As part of this process, competitive opportunities in world markets
for American workers, farmers, and businessmen have been substantially
improved. By helping reestablish a more sustainable equilibrium in the world
economy, the exchange rate actions also provide a stronger foundation for
building a reformed international monetary and trading system.
Before discussing the realignment in more detail, I want to recognize and
emphasize a part of the larger setting in which these actions must be placed.
The substantial exchange rate changes involving the dollar over the past 18
months deal with imbalances that had been permitted to build up over a long
period of time, stretching back for nearly two decades. Inevitably, the corrective process, however essential^ has been painful and temporarily unsettling.
It is not a process to repeat.
As we look ahead, the strength of the dollar internationally—indeed the
stability of the monetary system, itself—must rest on the strength of our
domestic economy and the stability of the dollar at home. That fundamental
truth is refiected in the approach and policies of the administration. Amid
all the debate about one aspect or another of Phase III and food prices, about
the budget, and about monetary policy, let us not lose sight of the basic facts:
The inflation rate in the United States has been sharply reduced in the period
since mid-1971, averaging an annual rate of 2.7 percent through the end of 1972,
as measured by the comprehensive GNP deflator. In recent months when
food prices have increased sharply, largely in response to forces at work
worldwide, industrial prices have remained fairly level.
As shown in the table attached, this record in combating inflation has been
better overall than that of any other major industrialized nation. Contributing
to that result and promising to help maintain that relatively favorable comparison, we have in being at present a comprehensive wage-price stabilization program. The objectives of that program and its mode of operation are supported
by both labor and business.
Price changes in the United States and other major industrial countries—Percentage
change at annual rate
Wholesale
Consumer prices
prices in
August 1971 to manufacturing
November/
August 1971 to
November/
December 1972
December 1972
United States
Canada
Japan
United EZingdom
Germany
France
-
3.2
4.3
, 6.5
7.2
6.7
6.3
3.8
7.7
3.8
6.3
3.9
6.8
Gross national
product deflator
year 1971 to
year 1972 a
b3
43^
4M
m
6K
63^
a Partially estimated.
b For period mid-1971 to end 1972, U.S. GNP deflator rose by 2.7 percent at annual rate. Comparable
data not available for other countries.
SOURCES: Consumer prices: for United States, U.S. Departnient of Labor; for other countries, IMF
International Financial Statistics. Wholesale prices in manufacturing: for United States, U.S. Department
of Labor; for other countries, OECD, Main Economic Indicators. GNP deflators: for United States, U.S. Department of Commerce; for other countries, OECD, Economic Outlook.
We recognize the critical nature of the food price problem to the success of
this effort. Vigorous action has been taken to get at the root of the problem.
Restrictions on basic supply, in place for many years, have been removed.
Some 40 million acres have been released for production from the "set aside"
program, and set aside acreage may be used for grazing. Grains are being sold
from CCC stockpile. Quotas are gone on meat imports. The Cost of Living Council
and the new Food Advisory Committee will continue to examine other measures
that may be desirable and necessary. Actions to increase supply can work only
with a lag. But their effect can be powerful. The results will show this year.
EXHIBITS
467
The President is determined to hold budget expenditures to $250 billion in
fiscal 1973 and $268.7 billion in fiscal 1974. Those levels can be managed without
feeding inflation, and without requiring new taxes. Today, in sharp contrast to
widespread skepticism a few months ago, these figures are accepted as both
necessary and achievable.
Obviously, we must not and cannot be satisfied with our progress until price
stability is fully restored. But, as we seek to do better, let us not lose sight of
the fact that, comparing U.S. performance with that of other countries, basic
price trends are reinforcing the effects of the exchange rate realignment.
I would also emphasize that changes in the monetary system must be—and
I am confident will be—accompanied by reform of the trading system. Fair exchange rates and competitive prices are essential to stability. So are equitable
trading arrangements and access to world markets. We are dedicated to achieving that objective. The Congress will shortly be considering legislation to provide
the President with the tools he needs—tools that can help lead the world to
more open trade, and tools that can also assure fairer treatment for American
producers.
I would like to trace briefiy the specific developments leading to the bill
before you.
In the first year after the Smithsonian agreement, there was evidence of
a healthier world payments situation. As I have indicated, the U.S. record
on inflation improved sharply and compared favorably with that of our major
competitors. Though there were notable periods of disturbance, exchange
markets were generally calmer. With capital flows dramatically reduced, the
U.S. official settlements deficit fell to $10 billion in 1972 from $30 billion a year
earlier.
Nonetheless, serious imbalances in the world economy continued. The large
trade and current account deficit of the United States, and the large trade
and current account surplus of Japan, remained disquieting.
Our trade deficit reached more than $6 billion in 1972, with the balance deteriorating with all major regions of the world. In considerable part, the worsening of the trade balance could be traced to cyclical developments—the U.S.
economy was expanding more strongly than most of our trading partners. We
also knew the initial effects of exchange rate changes may be perverse, until business has time to change established trading patterns in response to the changes
in relative prices.
In early 1973, the prospects, as we saw them, were definitely for an improving
trade balance, partly refiecting the 1971 exchange rate changes. But—given
the size of the deficit—^^the anticipated improvement did not appear vigorous
enough to restore overall balance in a reasonable period. There were equal or
greater doubts that Japan's strong trade surplus would be reduced to a size compatible with international eauilibrium.
Against this background, new and severe exchange market disturbances
emerged in late January. These focused initially on capital flows out of Italy and
into Switzerland. However, against the large and persistent imbalances in the
United States, Japanese, and other payments positions, much larger flows of
funds soon developed.
A solution was thus needed to several converging problems. There was an
underlying need to add a strong, new thrust to the operation of the balance
of payments adjustment process. There was an immediate need to restore order
to the exchange markets—and to do so in a way that did not promise fresh
disturbances in the future. From the point of view of the United States, we
needed to find solutions which would be equitable to American workers and
businessmen, which would help set the stage for outward-looking trade negotiations, and would speed and foster constructive reform of the world monetary
and trading system.
We needed to act, forcefully and promptly, to achieve these objectives. We have
done so.
We w^anted first to consult fully with as many of our trading partners as
we could in the time available, to see if w^e could decide with them on an agreed
course. Our approach reflected the view that exchange rate questions cannot
and should not be approached as unilateral actions—by the United States or
by other nations. Indeed, they will fail unless others cooperate.
In the event, the interests of the United States coincided with those of others
in the actions agreed to: A 10-percent reduction in the par value of the dollar;
a cutting loose of the Japanese yen to allow it to float upward to a rate con
468
19 73 REPORT OF THE SECRETARY OF THE TREASURY
sistent with Japanese balance of payments equilibrium; a continued float by
the United Kingdom and Canada and initiation of a float by Italy; and agreement by others of our major trading partners to maintain then-existing par
values.
In this common search for the best solution to our common problems, I found
a spirit of realism and cooperation which is heartening for the future. The
negotiations were not easy, for hard economic and political decisions were
necessary for all. But, I believe, other nations welcomed the U.S. initiative as
constructive and responsible. Our willingness to crystallize a needed exchange
rate realignment through a devaluation of the dollar was seen as a way to
achieve the needed adjustment most promptly and forcibly. In contrast to the
compromise struck at the Smithsonian, there was a clear desire on all sides to
achieve changes fully commensurate to the magnitude of the problem.
Accompanying the proposal to devalue, we announced two other important
steps: First, that present U.S. capital controls will be phased out by the end
of 1974; and second, that the President will shortly propose comprehensive
trade legislation to enable us to negotiate a reduction of trade barriers. These
two steps are closely related to and consistent with the proposed devaluation.
I would note, in that connection, that the realignment of exchange rates, in
improving our competitive position, should make the United States a more
attractive place for investment by both United States and foreign companies.
All three moves^—the elimination of capital controls, the proposed trade
legislation, and the devaluation—are directed toward the same general objective:
Balance in our trade and payments not supported by the crutch of controls, and
within a world framework of freer and fairer trade.
We propose to devalue the dollar by 10 percent. However, the effective change
in our exchange rate vis-a-vis Japan—our largest overseas trading partner—
will be greater than 10 percent. The change is less than 10 percent against, for
example, the lira, which has floated downward part way with the dollar.
Weighted average realignments are sometimes calculated, based on a country's
trade pattern. On that basis, the constellation of exchange rates negotiated at
the Smithsonian represented a realignment for the dollar of approximately
8 percent against all other OECD currencies; or, if the Canadian dollar were
excluded, 12 percent.
A measure of the new realignment is more difficult, since a number of currencies are floating and may not remain at present market levels. Nonetheless,
as a rough approximation, and using market rates for currencies w^hich are
floating, it would appear the new realignment will yield a weighted average
realignment for the dollar in about the same range as the Smithsonian—about
71/^ percent against all OECD currencies, or about 11 percent against all OECD
currencies excluding the Canadian dollar.^
The Smithsonian realignment has not yet had its full impact on trade flows,
and it is appropriate to measure the combined effect of the two realignments.
This shows an average realignment for the dollar of about 15% percent against
all OECD currencies, or about 23 percent if Canada is excluded. As between the
dollar and the Japanese yen, the change has been much greater thus far—36
percent.
Changes of this magnitude obviously have a major competitive impact. Again,
however, we cannot expect a quick turnaround in our trade position; there is
simply no way to blink the fact that it takes time for trade flows to be redirected.
The effects in the flrst months could be adverse because the same volume of imports costs more. The full beneflts of the realignment will accrue only over a
period of years. Nonetheless, it is plain the new realignment, building on and
augmenting the Smithsonian, has greatly assisted the competitive position of U.S.
producers, both in the United States and in overseas markets. The change will
work strongly toward the restoration of a sizable trade surplus for the United
States. That surplus is essential to a balance in our overall external payments,
and thus to a stable monetary system.
I have indicated already that the need for this exchange rate change in no
way reflected any falling behind internationally by the United States in the inflationary battle since the middle of 1971. Rather, with international disequilibria having persisted so long and having become so ingrained in the structure
of the world economy—in particular the Japanese surpluses and U.S. deficits—
1 Market rates of February 26 are used In this calculation.
EXHIBITS
469
the Smithsonian realignment was simply not in itself enough to promise the improvement we need within a reasonable time span.
The devaluation of the dollar reemphasizes the need to deal effectively with
inflation at home. In that connection, the direct impact on the U.S. price level
is slight overall. Obviously certain foreign goods will cost tnore in the U.S.
market. The very purpose of the realignment is to make U.S. products cheaper
abroad and foreign goods more expensive.in the. United States. The prices of
selected import items may rise appreciably—we already see reports in the
press—and this will provide better opportunities for American products to compete. But overall imports still represent only a very small share of our total
GNP—less than 5 percent. A substantial fraction of those imports comes from
countries where exchange rate changes vis-a-vis the dollar will be small or nonexistent. Consequently, the impact on our general price level will be very small
and will only come over a period of time.
The devaluation we propose would be effected by authorizing the establishment
of a new par value of $1 equals 0.828948 special drawing rights; or, in terms of
gold, of $1 equals 0.023684 flne troy ounce of gold. That is a reduction of 10 percent
in the SDR and gold value of one dollar; it represents a devaluation of the dollar
of 10 percent as calculated in terms of International Monetary Fund convention.
Calculated alternatively, the change represents an increase of 11.1 percent in the
dollar value of one SDR or one ounce of gold.
In the past, the dollar's par value has been expressed only in terms of gold.
The bill before you, in expressing the par value in terms of SDR, as well as gold,
emphasizes the importance we attach to the enhanced role of the SDR in the
future development of the international monetary system; This move is consistent with proposals the United States has made for international monetary
reform: We have proposed diminishing the monetary role of gold and we have
favored use of SDR as the common unit of account in which all currency values
would be measured.
It is perhaps not necessary to point out that the increase in the official dollar
price of gold—to $42.22 per ounce—in no way suggests that we consider a general
change in the price of gold as an appropriate or useful device to increase international liquidity. The administration has stated repeatedly its firm conviction
that a goal of monetary reform should be to continue to reduce the dependence
of the international monetary system on that metal. The present market price of
gold is well in excess of both the present and the proposed official price. The wild
speculative fiuctuations in the market price of gold seem to me to point to one
of the grave deficiencies in the use of that metal as a centerpiece of the monetary
system.
The proposed change in the dollar's par value entails consequent changes in
the dollar value of certain assets and liabilities of the U.S. Government. With
the draft bill, we have submitted to the Congress a detailed explanation of these
changes and their effects on appropriations and on cash expenditures. Briefly,
there are three categories of items which would be affected by the devaluation:
First, there are increases in U.S. assets amounting to $2.5 billion. This represents a writeup of 11.1 percent in the dollar value of our reserve assets—gold,
SDR, and IMF gold tranche—and in the dollar value of U.S. subscriptions to the
IMF and the international lending institutions.
Second, there are increases in U.S. liahilities amounting to $1.9 hillion. The
bulk of this consists of amounts needed to maintain the value, in terms of SDR
or gold, of U.S. subscriptions to the IMF and to the international lending institutions. The remainder, estimated iat less than $400 million^, represents operating
losses to be absorbed by the Exchange Stabilization Fund of the Treasury and the
Federal Reserve on certain liabilities denominated in foreign currencies whose
exchange rates increased relative to the dollar.
Third, there are increases in U.S. contingent ohligations amounting to $992
million, to maintain the value, in terms of SDR or gold, of U.S. subscriptions of
callable capital to the international lending institutions, largely representing the
U.S. share in the guarantee of the banks' market borrowing. Conditions under
which this capital could ever be called are extremely remote. No impact on actual
expenditures has ever occurred or is expected.
The third category, and some—but not all—of the items in the second category,
will require appropriations, and requests will be submitted to the appropriate
committees. Actual cash expenditure under these appropriations is forecast
at a much smaller amount—a maximum of $47 million, spread over the 12 years.
470
1973 REPORT OF THE SECRETARY OF THE TREASURY
fiscal 1974 to fiscal 1985. There will be no budget impact in fiscal 1973; only
$12.million in fiscal 1974, rising to an estimated $40 million per year thereafter
through 1985.
Mr. Chairman and members of the committee, in our view the bill before you
is an important one—important for the present and for the future. The monetary
system has recently passed through a serious crisis. A crisis spells both danger
and opportunity. I believe we can turn this crisis into opportunity—not just
for the monetary system, but for the world economy. The bill before you is a step
to take advantage of that opportunity.
I am confident that the proposed legislation—reinforced by determined eff'orts
to maintain a vigorous and inflation-free economy—can provide a firm basis
for the restoration of monetary stability and international payments equilibrium.
We have a better foundation from which to attack the more fundamental, and
formidable, task of building a new trade and payments structure.
The two devaluations since 1971 have been ah uncomfortable experience for us
and for others. They were, however, needed to complete a major adjustment in
the postwar economy. But they cannot and must not become a policy for the
future.
We need a monetary system which does not, depend on jet planes and secret
missions and the kind of hurried negotiations which we were engaged in 2 weeks
ago. We need a system which is less prone to the persistent imbalances and
market turmoil and speculation which necessitated those hurried negotiations.
We need to deal with our internal infiation, and with our international trading
order.
We are working to those ends as hard as we can. We look forward to responsive
positions by our trading partners. Meanwhile, I urge you to report this bill
promptly and favorably, as an important step toward a better monetary order.
Exhibit 62.—Statement by Under Secretary for Monetary Affairs Volcker, February 28, 1973, before the House Foreign Affairs Committee on recent
international monetary developments and their foreign policy implications
You have asked for some comment on the impact of recent monetary developments on the U.S. international position and programs. I shall endeavor to
respond by describing the general background of these developments and the
needs for the future.
The postwar world has brought profound changes in international economic
relationships. The recent monetary developments reflect one adjustment to the
changed circumstances. However, the monetary changes are only a part of a
broader shift toward a new and different economic balance among nations. The
economic changes—and the manner in which they are handled—interact with
our international political and security affairs.
As President Nixon emphasized, in speaking to the assembled nations of the
International Monetary Fund last September:
Working together, we must set in place an economic structure that will
help and not hinder the world's historic movement toward peace.
We must make certain that international commerce becomes a source of
stability and harmony rather than a cause Of friction and animosity.
Potential conflict must be channeled into cooperative competition.
That is why the structure of the international monetary system and the
future system of world trade are so central to our concerns today.
The United States emerged from World War II with its economy unscathed
and with unparalleled economic dominance in the Western World. Today, 25
years later, the situation has changed fundamentally. While the United States
is still the largest and strongest economy, we must compete on more equal terms
with the efficient and large economies of Western Europe and Japan. At the
same time, the trading capacities of the developing world are greatly—if
unevenly—expanding. These fundamental shifts have called for equally fundamental changes in the institutional framework that was established on the basis
of the old order.
In no area of international activity has this need been clearer than in the
monetary sphere. The international trade and monetary framework which developed after the end of World War II implicitly assumed a United States of
EXHIBITS
471
predominating financial strength. We were expected to—^and did—^^provide a preponderant share of the resources for defense, recon structi on j and overseas development. We accepted certain imbalances in trade and payments arrangements
in order to spur economic recovery and the restoration of financial stability
overseas. With too little concern for our eroding international financial position,
we permitted our international payments to be in persistent deficit, counterbalancing the desired surpluses abroad.
The assumptions underlying those policies grew increasingly obsolete with the
shift toward a world of a number of strong currencies and a number of strong
economies competing vigorously and more or less as equals. The need for change
and the need for reform was signaled dramatically on August 15, 1971. The new
policies which President Nixon then introduced, and the new directions the
administration took, pointed toward restoring a new equilibrium and balance in
world economic affairs. I have no doubt that, in historical perspective, those
moves at and since that time will be seen as a logical and necessary adaptation
to the change in underlying economic circumstances.
We .g;eek two related but diff'erent kinds of adjustment, both difficult, but
both essential to lasting success:
.
First, in adapting to the new competitive world, we must correct the severely
unbalanced world payments position that had been permitted to build up over
a long period of time. The deficit in the U.S. balance of payments and the large
persistent surpluses of other countries need to be brought to an end as promptly
as possible.
Second, we must help build a new, equitable and sustainable world morietary
ai^vd trading order. This requires a rethinking of basic precepts. We should
discard principles and practices that are outmoded and rededicate ourselves
to those which remain valid.
So far as the first of these needs is concerned, we have learned the persistent
imbalances in world payments had become more thoroughly ingrained in the
structure and fabric of the world economy than had been generally appreciated.
Two sizable exchange rate realignments have been necessary to establish a new
basis, in the monetary area, for restoring equilibrium. The Smithsonian realignment in December 1971 provided the first significant step toward improvement.
Partly as a result of that move, we could see at the beginning of 1973 a strengthening U.S. trade position in the future. However, there were doubts that enough
improvement would result within a reasonable time span. There were equal
doubts that strong foreign surpluses, that of Japan in particulalr, were likely
to decline adequately. This evidence of continued disequilibrium on both sides,
together with renewed uncertainties in world financial markets and massive
capital transfers, led in early February to the second major realignment, building on and augmenting the Smithsonian.
Mr. Chairman, the February realignment represented a very important step,
and I would distribute to the committee material commenting on it in detail
which has been submitted in connection with the par value legislation now before
the Congress. I would emphasize two points in connection with the recent moves:
First, this realignment, together with the Smithsonian realignment, provides a
major competitive thrust for the dollar and a major competitive opportunity for
our industry. We measure the exchange rate change at some 23 percent against
our major OECD competitors, excluding Canada. I believe these changes constitute a strong basis for restoring a sustainable equilibrium in world payments.
Taken together with an effective fight on inflation at home—^^and that is crucial—
I am confident these changes can do the job of repairing our competitive position
in world markets.
^
Second, thiis process of correcting the serious postwar international maladjustment by realignments involving two major devaluations of the dollar within
14 months, while essential, has been painful and temporarily unsettling. This
process is adequate warning that we must not again permit the development
of large and persistent imbalances and, thus, the need for further disturbing
adjustments.
The actions in the exchange rate field, by attacking the basic disequilibrium
in payments, provide a framework for proceeding with the second and longer
range task: Revising the monetary and trading system to fit today's conditions.
The recent crisis provides new and timely evidence of the urgent need to develop
a better system of adjustment, less crisis-prone and more conducive to a sustainable payments balance.
472
1973 REPORT OF THE SECRETARY OF THE TREASURY
Secretary Shultz last September outlined major reforms w^hich we believe
would accomplish that purpose. We have elaborated our own ideas in greater
detail in the special international body—the Committee of Twenty—charged
with the task of reform. We must seize the opportunity provided by recent
developments to press ahead with new determination to meet the challenge of
monetary reform. We look to other nations to respond constructively.
In pa:rallel with monetary reform, the administration will shortly propose trade
legislation. This legislation should provide the President with the tools he needs
to enter into broad and outward-looking trade negotiations and, in that context,
assure fair and equitable treatment for American workers, consumers, and
businessmen. Consultations are proceeding with Members of Congress, labor,
agriculture, and business to assure that the legislation refiects our needs as
fully as possible.
These efforts to create a new and viable trade and monetary system are central
to bringing the world economic institutions, practices, and codes of conduct
into conformity with the economic facts of the world in which we live. We
must proceed through careful cooperative negotiations and decisions and not
allow events to force a series of uncoordinated, ad hoc, and unilateral responses
that, taken together, will not serve our basic objectives.
In speaking to the IMF, the President pointed out:
. . . we are witnessing and helping to create a profound movement in
history.
.^
That movement is away from the resolution of potential confiict by war,
and toward its resolution through peaceful means.
^'
The experienced people gathered in this room are not so naive as to expect
the smoothing-out of all differences. We anticipate that the potential ffiv
conflict will exist as long as men and nations have different interests,
different approaches to life, different ideals.
Therefore, we must come to grips with the paradoxes of peace:
As the danger of armed conflict between major powers is reduced, the potential for economic conflict is increased.
As the possibility of peace grows stronger, some of the original ties that
first bound our postwar alliances grow weaker.
As nations around the world gain new (economic strength, the points of
commercial contact multiply along with the possibilities of disagreement.
Our challenge is to develop cooperative trade and monetary arrangements for
directing nations' energies into constructive competition to the benefit of all.
The cooperation demonstrated during the recent!crisis augurs ^vell for the success
of our efforts.
/.
We have seen historical instances in which a nation's ability to achieve its
political and security objectives has been constrained by external financial weakness. The United States has been able to fulfill its responsibilities despite the
external financial problems we have faced. The adjustments we seek, by strengthening the economic system, will help to ensure that both the United States and
other nations wdll be able to meet their full share of their joint responsibilities.
Exhibit 63.—Statement by Under Secretary for Monetary Affairs Volcker,
March 6, 1973, before the Subcommittee on International Finance of the
House Banking and Currency Committee
One week ago, I appeared before the Senate Banking Committee in support of
this bill (H.R. 4546), which is now before you, tb authorize a 10-percent reduction
in the par value of the dollar. I am attaching, for the record, the full text of my
earlier statement, which gives the full background to the administration's request for favorable action on this legislation.^ This morning, I intend to make a
few supplementary comments to bring you up to date.
As you know, heavy speculative pressures developed in certain European
foreign exchange markets over the past 2 weeks. In view of these pressures, those
members of the European Community maintaining a fixed exchange rate have
closed their markets, at least in the sense of ceasing official support for the
exchange rate structure. The Japanese, who already had a fioating rate, tempo1 See exhibit 61.
EXHIBITS
473
rarily closed their market entirely. Several important European currencies—
sterling, the Swiss franc, and the Italian lira—were floating before the latest disturbance. During the weekend, the Finance Ministers of the EEC have had
discussions concerning recent developments and ways of concerting a response.
We have been in contact with a number of leading countries during this period.
Further meetings on an international level have been scheduled, including a meeting between the EEC countries and their Group of Ten partners on Friday.
There are several points I would like to reiterate with respect to the events
of the past few days.
First, it remains our conviction that the basic realignment of exchange rates
achieved in February is appropriate. That realignment provides—insofar as exchange rate changes can—a realistic base for restoring sustainable balance of
payments equilibrium. The situation we face today is a consequence of a speculative outburst. We do not contemplate further devaluation of the dollar.
Second, we are prepared to work expeditiously with the European Community
and our other trading partners toward achieving a speedy and satisfactory solution of this problem. We have been in close contact with them, and we will be
meeting with them face to face in Paris later this week.
Third, recent developments reemphasize once again—if such emphasis is necessary—the need to intensify the pace of our efforts toward fundamental reform
of the international monetary system. In that respect, I believe, with intelligence
and good will on all sides, we can turn the events of recent weeks to constructive
achievement. We have been faced with two separate, but related, problems. We
need to correct the underlying imbalances in international payments—of the
United States and of other countries—that lie behind the monetary unsettlement
and disturbance. The exchange rate changes are responsive to that requirement.
We also need lasting arrangements to assure that these imbalances do not recur;
that hecessary international adjustments are made more effectively, smoothly,
and surely in the future; and that our monetary arrangements contribute to open
trade and payments among nations. This latter need is the task of monetary reform. We must achieve both objectives to assure that the international monetary
system—instead of intruding so frequently on our consciousness in an atmosphere
of "crisis"—becomes the unobtrusive handmaiden of a growing and prosperous
world economy.
Fourth, and last—^but by no means least—I want to reiterate emphatically
that the strength of the dollar abroad is, in the last analysis, dependent upon the
strength of the dollar and the strength of our economy at home. The administration is deeply conscious of that simple truth. I believe our record reflects that
concern. Indeed, in relative terms, our performance in restoring greater price
stability stands out favorably among the major industrial countries. In absolute
terms, we aim to do better. Budgetary, monetary, and wage-price policies are
directed to that goal.
In concluding, I urge the committee to act soon and favorably on the legislation
before you. In doing so, an important part of the process of ending uncertainty,
restoring equilibrium, and working cooperatively with our trading partners
toward a stronger monetary system will be completed. The realignment of exchange rates was necessary three weeks ago, and it remains necessary today. It
required difficult decisions and action on the part of many other countries, as
well as the United States. The legislation is essential to enable us to meet the
legal and financial consequences of the exchange rate changes. More broadly,
I hope you will agree the realignment of exchange rates will promote the best
interests of American workers and producers, and passage of this legislation
will help lay the base for further cooperation with other nations toward restoring
balance in our payments and achieving needed monetary reform.
Exhibit 64.—Statement by Under Secretary for Monetary Affairs Volcker,
March 19, 1973, before the Senate Committee on Appropriations
I welcome this opportunity to appear before the Senate Appropriations Committee to explain the eff'ect of the proposed 10-percent change in par value of the
dollar on U.S. assets and liabilities, as well as the need for an appropriation to
meet certain of these liabilities.
474
19 73 REPORT OF THE SECRETARY OF THE TREASURY
The details of these changes are quite complex. I believe it would be helpful in
understanding this subject if you would follow the tables attached to my testimony as I proceed.
Devaluation has two purely financial effects: Certain assets and certain liabilities are increased in value. First, let me discuss the assets side.
Increase in value of assets
Devaluation increases the value of assets that are denominated in terms of
gold. An ounce of gold at the official price is now worth $38; after devaluation
this same ounce of gold will be valued at $42.22—an 11.1-percent increase. Thus
assets that are denominated in terms of gold will be worth more in terms of
dollars.
The United States has two classes of assets that are denominated in gold:
(a) International reserves^—gold, special drawing rights, and gold tranche
drawing rights on the IMF; and (b) subscriptions to the international financial
institutions.
First, the effect on our international reserve assets.
Gold.—The dollar value of our gold stock will increase by 11.1 percent from
$10,487 million to $11,652 million, an increase of $1,165 million. Under existing
law, this increment in value is transferred to miscellaneous receipts of the
Treasury. The Treasury can issue gold certificates to the Federal Reserve against
this increased value of gold and receive from the Federal Reserve a cash deposit.
Special drawing rights.—The United States now holds $1,958 million special
drawing rights and these SDR's are denominated in terms of gold. The dollar
value increase as a result of devaluation amounts to $218 million. The SDR is
a new international reserve asset created by the IMF and usable by member
governments in a way comparable to gold to settle international imbalances.
The United States wishes to see greater reliance on the use of this instrument
in the international monetary system in the future.
IMF gold tranche.—Our remaining gold tranche automatic drawing rights on
the International Monetary Fund, which represents gold which we have paid to
the Fund, increases by $52 million to a total of $469 miUion. These are automatic
rights to draw currencies from the IMF when needed to finance a balance of
payments deficit. As of the present, we are using $1.4 million of these drawing
rights.
IMF suhscription and paid-in capital suhscriptions.—The devaluation also has
the effect of increasing the value of another type of asset—our paid-in subscriptions to the International Monetary Fund and the international development lending institutions. These assets are denominated in terins of gold and
therefore increase in dollar value—$606 million for the Fund subscription and
$477 million for the paid-in capital subscriptions to the lending institutions. However, to realize this increase in value, we must pay-in additional dollars to these
institutions, which I will mention in the discussion of the increase in our
liabilities.
The total increase in assets amounts to $2.5 billion—$1.4 billion in liquid
international reserve assets and $1.1 billion in the value of international financial institutions subscriptions.
Increase in liabilities
On the liability side, there are increases in three general types of liabilities:
Liabilities resulting from borrowing of foreigp currencies and foreign exchange
operations; increase in repayment obligations resulting from IMF drawings
and SDR allocations; and maintenance of value obligations in the international
financial institutions.
;
Some of these liabilities will be financed from Federal Reserve resources and
from the Exchange Stabilization Fund without need of appropriations. The
remainder—our increased payment obligations to the international financial
institutions—will require an appropriation of up to $2.25 billion. However, of
this new obligational authority, only $477-million will result in budgetary
expenditures. I would now like to give you some of the details on each of these
liability items.
Nonappropriation liabilities—Treasury borrowings, SDR's, and "swaps*.*.—^The
portions of our liabilities not requiring appropriations are those derived from
EXHIBITS
475
Treasury borrowing in foreign cuirrencies, from special drawing rightsy and
from Federal Reserve mutual credit "swap" arrangements.
The devaluation will make it more costly iri terms of dollars to purchaise
the foreign currencies needed to repay the $1,714 million of Treasury borrowing
denominated in Swiss francs and German marks. The additional cost is estimated
at $193 million arid would be financed from the Exchange Stabilization Fund—
the organ of the Government established for dealing in foreign' exchange and
whicli is designed to absorb gains or losses involved in fOreigri exchange
transactions.
Similarly, our increased repayment obligations to the IMF on alloeaticiris of
special drawing rights do not require an appropriation. In accordance with
established accounting procedures, we have not only written up by $218 million
the increase in value of our preserit holdings of SDR as an asset, a s ' I have
already described, but we have also increased on the books of the ESF our
liability to the International Monetary Fund of $278 niillion based on our allocatioris of special drawing rights. The net liability, amounting tb $B6 miliidn;
would only be realized if the SDR scheme were liquidated'or if' the United
States withdrew from it.
The last nonappropriation liability results fi'bm the additiorial cost of'purchasing foreign currencies at the new exchange rates to repay Federal R^sefVe
swap borrowing totaling $1,639 million. The additional cost to the Pedetal
Reserve of purchasing foreign currencies is an estimated $196 million and this
ariaOunt will be absorbed from the earnings "of the Federal Reserve System.
Liahilities requiring appropriations.—I will now turn to the liabilities requirdng appropriations. These, too, are of three different types : Maintenaiice of value
on the Ihternational Monetary Fund's holdings pf dollars; contingent" obligatiori's
to the international development lending institutiOris; arid paid-in caplt^V subscriptioris to these institutions.
As you can see, all of these liabilities ai:e to the international financial institutions. They derive from a provision in their Articles of Agreement requiring
member countries to maintain the value of their subscriptions in terms of a
common denominator, in this case gold. In other words, a member that devalues
its currency must pay-in additional amounts of that currency in order to maintain the same gold value, and thus the same proportionate contributions, as
existed prior to devaluation. The provision is thus intended to guard against
loss in the relative value of the cohtributions of all members despite alterations
in exchange rates, thus assuring that the equitable burden-sharing that these
institutions seek to achieve is not distorted and that voting rights are not
diminished. In the past, there have been over 200 devaluations involving? 60
countries. Iri every case, maintenance of value obligations have been fulfilled.
The first type of liability—maintenance of value on International'Monetary
Fund holdings of dollars—has two components. First, the IMF Articles require
us to increase the value of our subscription of $7.2 billion by 11.1 percent. In
addition, the United States has paid $1.4 billion to the F u n d a s a result of drawings of foreign currencies. This sum must also be maintained in value by the same
percentage resulting in a payment of $150 million.
Thus, total payments to the Fund will amount to $756 million. This obligation—
to be reflected in the form of a letter of credit—will have no budgetary impact.
U.S. transactions with the Fund are excluded from the budget in accordance
with a recommendation of the President's Commission on Budget Concepts which
pointed out that subscriptions, drawings, and other transactions with the Fund
w^ere monetary exchanges of assets. Our subscription is akin to a deposit in a
bank that can be used by the bank for lending to others and also to establish
a line of credit for the depositor—in this case the United States.
The second category involves contingent obligations amounting to $992 million.
The largest part of this amount—$920 million—derives from the U.S. subscriptions to the callable capital of the World Bank, the Inter-American Development
Bank, and the Asian Development Bank. This callable subscription, together with
the similar subscriptions of other members, stands as a guarantee behind the
Banks' borrowing in private capital markets and is to be called only if these Banks
cannot meet their obligations to bondholders.
The other element of contingent obligation, amomiting to $72 million, involves
loans made in dollars by the Fund for Special Operations of the Inter-American
Development Bank but repayable in dollars or local currencies. The United
506-171—73
33
476
1973 REPORT OF THE SECRETARY OF THE TREASURY
States V7ill have to maintain the value of the loan repayments only if.made iu:
dollars—a highly unlikely event.
I must emphasize the remote nature of these contingent liabilities. Our callable
capital obligations have never, as yet, been called, and we do not expect calls
in the future. We can make this prediction based on the sound financial condition of these institutions, their reserves, and the fact that this guarantee is
backed not only by the United States but by other major countries as well.
. Thus, we do not anticipate that these liabilities—while constituting a contingent call upon U.S. Government resources analogous to other government guarantees—will materialize.
The third category of obligations involves paid-in capital subscriptions. This will
involve $477 million fiowing from certain present and planned future contributions to the three Banks mentioned above, plus the International Development
Association.
It is only this $477 million that will result in budgetary expenditures. There will
be no expenditures in fiscal year 1973 and $12 million in flscal year 1974. The
remaining amounts will be spread out in relatively small installments over
a period of 12 years.
The.total amount of obligations requiring appropriation resulting from the
par value change now before you amounts to $2,225 million consisting of (a)
obligations to the IMF—$756 million; (b) cipntihgent obligations^992 million;
and (c) paid-in capital subscriptions—$477 million. Our appropriation request has
been rounded to a maximum of $2.25 billion because we cannot be precisely certaiii now of the exact amounts involved because maintenance of value is flxed
only at the time that the United States communicates its formal par value change
to the International Monetary Fund. It is my hope, in fact, the obligations will
be less than $2,225 million. This is borne out by our experience with the 1972
appropriation which, when the flnal data were compiled, involved obligations
of $1,578. millionagainst a rounded appropriation of up to $1.6 billion.
; As this summary suggests, there is a rough offsetting between increases in
assets and liabilities as a consequence of devaluation. Most of the liabilities
irivolve either exchanges of assets with the IMF or remote contingent liabilities.
The increase in.value of liquid international reserve assets totaling $1.4 billion—
whicli provides cash to the Treasury—is almost three times as large as the liabilities on paid-in capital to the international financial institutions of $477 million—
which will everitually become a cash drain. Moreover, the budgetary impact of
those ihcrea'sed liabilities is spread out over a long period of time.
I would end, by stressing that maintenance of value is a legal obliga tion.fiowing
from the devaluation and our membership in the international financial institutions. I strongly feel that this obligation should, be met in timely fashion as
it' has been honored by other countries. The amounts involved are quite substantial. However, the outline I have given you today makes it clear that our
apjpropriation request cannot be looked at in isolation but as part of a pattern
of Increases in assetiS and liabilities that are the direct consequences of the change
in par value that we have recommended to the Congress.
Estimated budgetary outlays for maintenance of value—fiscal years
[In millions of dollars]
1972
1973
1974
1975
1976
1977
1978'
1979
1980
1981
1982
1983
1984
1985
1986
Total
1972 DEVALUATION
IDA
IB R D _ . . . . — . . - .
I D B (Ord. Cap.).
IDB ( F S O ) . . . . . . .
ADB
Total (1972).
.12
4.30
4.42
4
.94 ,
2
12
4.30 .
23.24
17 .
12
5
6 .
16
2
12
2
12
2
12
2
12
2
12
2
12
2
12
22
22
23
23
30
30
30
37
40
20
16
3
18
20
10
9
10
120
50.06
41
109
8.60
12
5
13
328.66
15
9
11 . .
14
-9
161
71.30
64
169
12
35
23
477.30
49
36
805.96
teJ"
1973 DEVALUATION
te)
4
1.3 .
IDA
-..IBRD...
I D B (Ord. Cap.)I D B (FSO)
ADB
12
Total (1973)
Total (1972 and 1973).
3
18
3
18
35
23.3
4.42
35.24
45.3
68
3
18
35
65
3
18
71
96
NOTE.—The above figures represent estimated budgetary outlays arising from payments to the international development lending institutions in fulfillment of U.S. maintenance of value obligations relating to the paid-in capital of these institutions. With minor exceptions, payment has been made or will be made by letters of credit. Budgetary
expenditures only arise as these letters of credit are drawn down. Drawdowns are made by each institution as the need arises for cash funds to pay for goods and services furnished
to borrowers of these institutions. It is anticipated that drawdowns relating to maintenance of value obligations on I B R D and IDB dollar loans outstanding at the time of
change in par value of the dollar will be spread out over the period of repayment of these loans, i.e., through fiscal 1986. With regard to IDA, funds relating to maintenance of
value obligations on flrst, second, and third replenishments, respectively, will only be drawn down after other funds from the particular replenishment have been exhausted.
478
1973 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 65.—Statement by Under Secretary for Monetary Affairs Volckei
March 21, 1973, before the Subcommittee on International Finance of th<
House Banking and Currency Committee
You have asked that I appear again before this subcommittee to review dc
velopments in the international monetary area in the past 2 weeks and thei
implications for the legislation before you concerning the par value of th
dollar.
In that connection, I believe your record might usefully include three doci:
ments attached to this statement:
1. The Press Communique of the Ministerial Meeting of the Group of Ten an(
the European Economic Community, dated March 9, 1973, in Paris.
2. Statement by the Council of Ministers of the European Community, date<
March 12, 1973, in Brussels.
3. Press Communique of the Ministerial Meeting of the Group of Ten and th
European Economic Community, dated March 16, 1973, in Paris.
As these documents indicate, broad agreement has been reached among th
leading industrial nations on a cooperative approach aimed at assuring ai
orderly exchange rate system, dealing with speculative, disturbances, and helpin,
to speed the task of fundamental monetary reform.
To these ends, at the meeting of the; Group of Ten with the members of th
European Economic Community on Marth 16, there was agreement *dn principl
that official intervention in exchange markets may be useful at appropriate time
to facilitate the maintenance of orderly conditions. . . ." This does not impi;
an obligation to intervene generally to maintain given margins about par o
central values. Instead, intervention, w^hen considered necessary and desirabl
in the light of market conditions, will be handled in a flexible manner in clos
consultation with the authorities of the nation whose currency may be bough
or sold.
Consistent with this overall framework, a number of European countries hav
decided to maintain a 2^-percent margin among their own currencies.
In addition, some countries have taken additional steps to discourage specu
lative capital flows, and the United States is reviewing actions that may b
appropriate to remove inhibitions on the flow of capital to this country. Mor
generally, it was also agreed to study urgently approaches toward dealing wit
the volatility of the Euro-currency markets and with the funding or consolidatio:
of official currency balances. These matters are on the agenda of the Committe
of Twenty of the IMF.
Beyond these specific points, more general considerations were emphasized
(1) The need to deal effectively wdth domestic infiation; and (2) the goal o
the greatest possible freedom for international trade and investment, and th
avoidance of competitive changes of exchange rates.
Those participating in the series of meetings over recent weeks could no
help but be struck by a sense of cooperation and agreement toward a commo]
approach. Obviously, much remains to be done to assure a smooth transition t
a durable and satisfactory monetary system in the future. But I feel there ar
solid grounds for optimism. The pressures of recent weeks have, I believe, helpe
precipitate forward progress toward achieving that combination of flexibilit
and stability in our monetary arrangements that will serve the interests of a l
The actual exchange rates prevailing in the market have, for the most part, no
moved over a large range in the past week. Indeed, on Monday and Tuesday th
exchange rates of the dollar vis-a-vis other leading currencies remained withi]
a margin of ±2'% percent around the par values or central rates establishes
following the announcement of our intended devaluation (taking account of th
further small revaluation subsequently announced by Germany). This marke
performance, in the absence of intervention in dollar markets by the leadiU;
countries maintaining par or central values, is consistent with our judgmeni
and that of others, that the pattern of exchange rates established by our d€
valuation is broadly reasonable and realistic.
Certainly the events of the past 2 weeks in no way change our judgmen
as to the wisdom of the exchange rate realignment precipitating the proposei
devaluation of the dollar. I hope the Congress will, with all deliberate speec
complete the necessary action on this legislation.
EXHIBITS
479
PRESS COMMUNIQUE OF T H E MINISTERIAL MEETING OF T H E GROUP OF T E N AND T H E
.EUROPEAN ECONOMIC COMMUNITY, 9 T H MARCH, 1973, I N P A R I S
1. The Ministers and Central B a n k Governors of the ten countries participating in the General Arrangements to Borrow* met in P a r i s on 9th March, 1973,
inder t h e Chairmanship of Mr. Valery Giscard d'Estaing, the Minister of tlie
Kconomy and of Finance of F r a n c e . Mr. P . - P . Schweitzer, Managing.Director of
:he I n t e r n a t i o n a l Monetary Fund, took p a r t in the meeting, which was also
ittended by Mr. Nello Celio, Plead of the F e d e r a l D e p a r t m e n t of F i n a n c e of t h e
Swiss Confederation, Mr. E. Stopper, President of the Swiss National Bank, Mr.
Francois-Xavier Ortoli, President of the Commission of the European Economic
Community, Mr. E. Van Lennep, Secretary-General of the Organization for
Economic Co-operation and Development a n d Mr. Rene Larre, General Manager
)f the B a n k for I n t e r n a t i o n a l Settlements.
Mr. All W a r d h a n a , P r e s i d e n t of the Committee of Twenty of the I n t e r n a t i o n a l
Monetary F u n d was specially invited to participate in this meeting.
2. They examined the international monetary situation in the light of the
present crisis and had a broad exehange of views both'on t h e origins of the crisis
m d on ways of dealing with it in a spirit of co-operation.
3. They agreed t h a t the crisis was due to speculative movements of funds,
riiey also agreed t h a t the existing relationships between parities a n d central
rates, following the recent re-alignment, correspond, in their view, to the ecolomic requirements and t h a t these relationships will m a k e an. effective mone:ary contribution to a better balance of international payments. I n these
drcumstances they unanimously expressed their determination to ensure jointly
in orderly excliange r a t e system.
4. The Ministers and Governors a r e agreed that, for this purpose, a set of
neasures needs to be d r a w n up.
5. The formulation of these measures requires a technical study which they
lave instructed their Deputies to u n d e r t a k e forthwith.
6. The Ministers and Governors have decided to meet again on Friday, 16th
March, to d r a w joint conclusions on the basis of this study and t a k e the decisions
;vhich a r e called for, so as to make it possible for t h e E.E.C. countries a n d Sweden
:o re-open their exchange m a r k e t s on Monday, 19th March.
7. Finally, t h e Ministers and Governors considered t h a t the recent disturbinces underline t h e urgent need for an effective reform of the international
nonetary system. They decided to t a k e the necessary steps to accelerate the
;^^ork of the Committee of Twenty of the I n t e r n a t i o n a l Monetary F u n d .
UNOFFICIAL TRANSLATION OF T H E M A R C H 12
MINISTERS
STATEMENT BY T H E COUNCIL OF
The Council of the Community met on March 11, 1973, to discuss measures to
leal with the international monetary crisis in light of the meeting of t h e enarged "Group of Ten" which took place in P a r i s on March 9.
. The Council decided that>—
The maximum margin a t any one time between t h e German mark, t h e Danish
kroner, the Dutch .fiorin, .the Belgian franc, the Luxembourg franc, and t h e
French franc is maintained a t 2.25 per cent. F o r the member states which a r e
naintaining a two-tier system of exchange rates, this commitment applies only
:o t h e regulated market.
The.central banks a r e no longer obligated to intervene in t h e fluctuation margins of the US dollar.
To protect the system against disruptive capital movements, the application of
:he March 21, 1972, directive will be reinforced and complementary instruments
)f control will be established to whatever degree is necessary.
The British, Irish, and I t a l i a n members declared t h a t their governments intend
;o participate as soon as possible in the decision to m a i n t a i n Community margins
)f
fluctuation.
*The Group of Ten comprises six of the member countries of the European Economic
;:ommunity (Belgium, France, Germany, Italy, t h e Netherlands and t h e United Kingdom),
s well as four other countries (Canada, J a p a n , Sweden and the United S t a t e s ) . The other
hree member countries of t h e E . E . C . Denmark, Ireland and Luxembourg, also participated
Q this meeting.
480
1973 REPORT OF THE SECRETARY OF THE TREASURY
To t h i s end, the Commission will present suggestions it considers adequat
before J u n e 30, 1973, when it is also due to report on p r e p a r a t i o n for short-terr
monetary support and conditions for the g r a d u a l pooling of reserves.
The Council agreed that, in t h e meantime, close a n d continuous cooperatio:
in monetary m a t t e r s will be maintained between t h e member states' authorities
The representative of t h e German Government indicated his Government'
intention to u n d e r t a k e before the exchange m a r k e t s ' reopening a limited adjusi
ment in t h e central exchange r a t e of the m a r k to contribute to an orderly develop
ment in exchange relations.
T h e technical details of the m a t t e r s mentioned above will be worked out in th
next few days, taking into account the n e x t meeting of the enlarged Group o
Ten which wdll t a k e place in P a r i s on March 16, so t h a t they will become appli
cable on March 19, 1973, the scheduled date for t h e reopening of exchang
markets.
TRANSLATION OF T H E M A R C H 12 DECLARATION BY T H E C O M M I S S I O N ' S SPOKESMA:
T h e Commission believes t h a t t h e a r r a n g e m e n t s u n d e r t a k e n by the Counci
which will avoid a disjointed float, w a r d off the risk of speculation.
Nonetheless, the Commission regrets t h a t the Council w a s unable to decid
upon measures in which all Community member states could participate, a s t h
Commission h a d proposed.
The Community must still work toward economic a n d monetary union. There
fore, the nine nations m u s t r e t u r n a s soon as possible to a Community syster
of exchange rates, as agreed a year ago.
T h a t is why t h e Commission attaches the greatest importance to the m a n d a t
it has received t o m a k e suggestions to this end. I t ascribes equal importanc
to the proposals it m u s t make on the pooling of reserves and short-term support
P R E S S C O M M U N I Q U E OF T H E M I N I S T E R I A L MEETING OF T H E GROUP OF T E N AND T H
EUROPEAN ECONOMIC COMMUNITY, 1 6 T H M A R C H , 1973, I N P A R I S
1. The Ministers and Central B a n k Governors of the ten countries participal
ing in the General Arrangements to Borrow and t h e member countries of t h
European Economic Community met in P a r i s on 16th March, 1973, under .th
Chairmanship of Mr. Valery Giscard d'Estaing, Minister of t h e Economy a n d o
Finance of France. Mr. P . - P . Schweitzer, Managing Director of t h e Internationa
Monetary Fund, took p a r t in the meeting,; which was also attended by Mr. Nell
Celio, H e a d of the F e d e r a l D e p a r t m e n t of Finance of the Swiss Confederation
Mr. E. Stopper, President of the Swiss National Bank, Mr. W. H a f e r k a m j
Vice-President of t h e Commission of the European Economic Community, Mi
E. van Lennep, Secretary General of the Organization for Economic Co-operatio:
and Development, Mr. Ren6 L a r r e , General Manager of the B a n k for I n t e i
national Settlements and Mr. Jeremy Morse, Chairman of t h e Deputies of t h
Committee of Twenty of the I.M.F.
2. The Ministers and Governors heard a report by the Chairman of thei
Deputies, Mr. Rinaldo Ossola, on the results of t h e technical study which th
Deputies have carried out in accordance with t h e instructions given to there
3. T h e Ministers and Governors took note of the decisions of the members o
the E.E.C. announced on Monday. Six members of the E.E.C. a n d certain othe
European countries, including Sweden, will m a i n t a i n 2^4 per cent margins b€
tween their currencies. The currencies of certain countries, such as Italy- th
United Kingdom, Ireland, J a p a n and Canada remain, for t h e time being, floal
ing. However, Italy, the United Kingdom and I r e l a n d have expressed the inter
tion of associating themselves as soon as possible with the decision to maintaii
E.E.C. exchange r a t e s within margins of 214 per cent a n d meanw^hile of remain
ing in consultation with their E.E.C. p a r t n e r s .
4. T h e Ministers a n d Governors reiterated their determination to ensur
jointly an orderly exchange r a t e system. To this end, they agreed on t h e basi
for a n operational approach t o w a r d s the exchange m a r k e t s in t h e near- futur
and on^certain further studies to be completed as a m a t t e r of urgency.
5. They agreed in principle t h a t official intervention in exchange m a r k e t s ma;
be useful a t appropriate times to facilitate the maintenance of orderly condi
tions, keeping in mind also the desirability of encouraging reflows of speculativi
movements of funds. Each nation stated t h a t it will be prepared to intervene a
'"'' "
EXHIBITS
"'
' "' •
481
its initiative in its own market, when necessary and desirable, acting in a flexible
maimer in the light of market conditions and in close consultation wdth the
authorities of the nation whose currency may be bought or sold. The countries
which have decided to maintain 2% per cent margins between their currencies
have made known their intention of concerting among themselves the application
of these provisions. Such intervention will be financed, when necessary, through
use of mutual credit facilities. To ensure fully adequate resources for such
operations, it is envisaged that some of the existing "swap" facilities will be
enlarged.
„^
6. Some countries have announced additional measures to restrain capital
inflows. The United States authorities emphasized that the phasing out of their
controls on longer-term capital outflows by the end of 1974 was intended to
coincide with strong improvement in the U.S. balance-of-payments position. Any
steps taken during the interim period toward the elimination bf these controls
would take due account of exchange market conditions and the balance of payments trends. The U.S. authorities are also reviewing actions that may be appropriate to remove inhibitions on the inflow of capital into the United States.
Countries in a strong payments position will review the possibility of removing
or relaxing any restrictions on capital outflows, particularly long-term.
7. Ministers and Governors noted the importance of dampening speculative
capital movements. They stated their intention to seek more complete understanding of the sources and nature of the large capital flows which have recently
taken place. With respect to Euro-currency- markets, they agreed that methods
of reducing the volatility of these markets wiU be studied intensively, taking into
account the implications for the longer run operation of the international monetary system. These studies will address themselves, among other factors, to
limitations on placement of official reserves in that market b.v member nations
of the IMF and to the possible need for reserve requirements comparable to
those in national banking markets. With respect to the former, the Ministers
and Governors confirmed that their authorities would be prepared to take the
lead by implementing certain undertakings that their own placements would
be gradually and prudently withdrawn. The United States will review possible
action to encourage a fiow of Euro-currency funds to the United States as market
conditions permit.
8. In the context of discussions of monetary reform, the Ministers and Governors agreed that proposals for funding or consolidation of official currency
balances deserved thorough and urgent attention. This matter is already on the
agenda of the Committee of Twenty of the IMF.
.
^
9. Ministers and Governors reaffirmed their attachment to the basic principles
which have governed international economic relations since the last war—the
greatest possible freedom for international trade and investment and the avoid:
ance of competitive changes of exchange rates. They stated their determination to
continue to use the existing organisations of international economic co-operation
to maintain these principles for the benefit of all their meinbers.
'
10. Ministers and Governors expressed their unanimous conviction that international monetary stability rests, in the last analysis, on the success of national
efforts to contain inflation. They are resolved to pursue fully appropriate policies
to this end.
11. Ministers and Governors are confident that, taken together, these moves
will launch an internationally responsible programme for dealing with the speculative pressures that have recently emerged and for maintaining brderiy international monetary arrangemients, while the work of reform of the international
monetary system is pressed ahead. They reiterated their concern that this'work
be expedited and brought to an early conclusion in the framework of the Committee of Twenty of the IMF.
Exhibit 66.—Statement by Under Secretary for Monetary Affairs Volcker as
Temporary Alternate Governor for the United States, April 26, 1973, before
the sixth annual meeting of the Board of Governors of the Asian Development Bank, Manila, Fhilippines
I want to speak with you today primarily about some of the opportunities and
pi:oblems we face together as we approach the future of this Bank, of. this region,
and of the millions of people who inhabit this vast and important area of the
482
1973 REPORT OF THE SECRETARY OF THE TREASURY
globe. Before doing so, however, I first, take special pleasure in officially greeting
our new President, ghiro Inoue. I know all of us who have worked with him in
other areas in the past share confidence in his leadership—a leadership.essential
tO:the success of our joint effort.
i also want to welcome the Solomon Islands as the 39th member of the Asian
Development Bank and the prospective entry of Burma. In a real sense, their
entry both marks the forward progress of pur institution and represents the
continuing challenge of economic development.
I would add the thanks of my Government to the people of the Philippines .for
tlieir hospitality, and especially for the faith and confidence in the Bank they
have demonstrated so tangibly. In a striking way, this impressive building
symholizes the coming of age of the Asian Development Bank.and the important
responsibility it has assumed as a permanent catalyst for Asian development.
I am also pleased that five Members of the American Congress have accompanied me.to Manila as advisers. The participation;0f the United States.in this
institution is, and must be, a joint enterprise in which the Congress and the
executive work,together as partners. For that reason, "J am glad that we also
had the opportunity to pause in Korea together to view firsthand some of the
early results of the-Bank's efforts to finance development.
The.Governor for the United States, Secretary of the Treasury George Shultz,
regrets that he cann'ot be with you.this w^eek. On his behalf, I extend,the best
wishes of President Nixon, as well as his.own, to the members and to the management of the Bank.
We meet at a critical tirae, not just for this Bank and for the development
qf Asia, but for the.economic system of the worid as a whole. We have seen
repeated and widespread monetary disturbances.in recent .years. Points of strain
and tension have arisen in trading relationships among nations. New questions
have arisen about the development process and means of financing i t
Problems of this sort are.never welcome. But.let us recognize that they are,a
part—perhaps an inevitable part—of the process of vast change in the world
economy,since our basic.trading and monetary institutions were shaped at the
eud of World War II, almost 30 years ago.
Certainly most of these changes—viewed,iU;a w^orld perspective—have been for
the better. Economic strength and power is more widely distributed among the
industrialized countries. Individually, more of the developing countries have
made particularly rapid strides in improying their standards of living. As a
group, they are more conscious of their needs and their opportunities and better
prepared to play an effective role, in the. decisionmaking process.
The challenge is not to resist this process of change. Rather, we want to reexamine our practices and reconstruct our institutions in a manner that will
ensjire that change serves our common interest in economic prosperity and
political harmony.
In this process, it is vital that the developed and developing nations work
together. For that reason, we in the United States have welcomed the participation, of the developing, countries of Asia, as well as other continents, in the
work of the Committee of Twenty. Similarly^ we also recognize that constructive revision, of our trading practices and rules must strike a fair balance between
the legitimate interests of individual nations—including the developing nations!—
ancl the need for a common and cooperative approach.
I t is in that spirit that President Nixon has,proposed to the Congress broad new
authority for trade negotiations. The fundamental premise of that legislation is
that every nation can and should benefit from expanding-trade and; open trading
practices within the basic framework of a competitive market system. But that
"openness" must ^also be combined wdth fairness for all nations.
The President has requested authority of unprecedented scope to.engage in
multilateral trade negotiations. This authority would include—and look toward—
reductions in both tariff and nontariff barriers.
At the same time, the legislation would recognize that open markets and free
trade can, in some instances, bring change with disruptive speed. The United
States, like other countries, needs effective, safeguards when surges in imports bring excessive hardship to domestic workers and businesses. We believe
such safeguards—designed not to avoid adjustment but toease adjustment for a
transitional period—can most effectively-be worked out on a consistent multilateral basis.
EXHIBITS
483
Our proposed legislation also recognizes that progress in reducing- trade barriers for the United States can be sustainable only in a context of-a perception
that our own products receive fair and nondiscriminatory treatment by others.
For' that reason, our proposed legislation would provide improved authority
to respond effectively to restrictive and discriminatory practices of others^—if
necessary, by restricting their access to our markets.
Another significant provision Of the bill would permit the United States to
join with other industrialized countries- to improve the access of developing
countries to our markets. Duty-free treatment would be provided for a broad
range of. manufactured products now regulated- by tariffs in instances where
countries in the early stages of industrialization are beginning to seek out
foreign markets.
As we start this sixth annual meeting and plan for the new year,.a challenge
for our development efforts—a(nd particularly for the Asian Development B a n k is evident. The hopeful prospects for peace in Indochina should open the way to
improvement in the lot of millions who have not known peace for decades. Here
is constructive work,, not. only for the nations represented here, but for all
countries-andpeoples ready to cooperate.
But the effort will not organize itself. We believe the Bank—founded by
Asians with a mandate to help Asia—can and should play a key role in the
needed international effort. We look to the Bank to work with other institutions
and to involve diverse donor nations in the process of rebuirding the economiesof those countries of Indochina who seek an end to hostilities.
The Bank,, in fact, has already identified specific projects in Laos, the
Khmer Republic, and the Republic of Vietnam and. committed funds for
them. Other projects are in the pipeline and should be ready for consideration
later this year.
The study of Southeast Asian economies and the regional transportation
survey sponsored by the Bank show the breadth of its field of activities. Its
expertise should aid all who may become involved in the effort to build for
peace.
Historically, the United States has long been involved in efforts to bring stability and economic progress to Asia. We have important political and economic
relationships which tie us closely to this part of the globe and its.energetic and
proud people. We intend to maintain those ties, not least by cooperating in the
efforts, symbolized by the Asian Development Bank, to build strong econoinies.
Having said that much, it is obvious that, if the Bank is to play its part in
furthering the development process, it must be adequately funded. In that respect, pointed and legitimate questions can be directed at the United States. I
owe you a full and frank exposition of our position.
Obviously, as with all nations, the ability of the, Uni ted States to support
development finance institutions at any point in time depends on our total
economic and financial situation. Budgetary priorities and balance of payments
considerations apply to my country as well as to yours. And, unlike many other
countries, this question of prilorities is subject to independent executive and
congressional review—essentially, funding requests must pass a dbuble hurdle.
At home, the total budget has been under rigorous restraint because of infiationary problems. We have made substantial cutbacks iri budgetary allbcations from earlier projections for a number of domestic'pro.grams. We are not
able tb meet all the vast demands for added' expenditures for such purposes as
controlling pollution, rebuilding decaying cities, or assisting the poorer American citizen—of whom there are still far too many.
At the same time, wheh the dollar has been under recurrent attack in world
markets, the urgency of restraining overseas spending to help deal with' our
balance of payments problem is obvious.
Faced with this situation, I sometimes hear persons in less developed'countries say that the United States is a big and strong country; it lias ha'd'a balance
of payments deficit for years; it should not worry about its balance of paymiBnts
now. But we are concerned—and we must be. Weakness of the dollar and
monetary instability is not in our interest or yours. The time has long since
come to end the deficits that underlie that weakness. We have moved to do so
primarily by achieving exchange rate and trading relationships that permit us
to compete effectively. But, as part of the process, no foreign expenditure can
expect to escape searching review.
484
1973 REPORT OF THE , SECRETA;RY OF THE TREASURY
.1 would emphasize that the President, in assessing these budgetary and balance of payments constraints, feels strongly, that our past pledges of funds to
the Asian Development Bank deserve priority. The appropriation from the Congress for the long-delayed $100 million contribution to the Special Funds
remains high on our agenda. We are also requesting from the Congress authority
to provide $362 million of Ordinary Capital over a 3-year period—an amount, that
would restore our previous relationship among the Bank's members. ,
.: .
We will continue to press for those funds. Nevertheless, I must, tell you,
bluntly that the congressional prospects^—as Congress independently examines
the priorities—remain uncertain. We can be optimistic only by demonstrating
effectively this Bank's crucial role in buildiiig stronger economies in Asia^and
thus in contributing to a peaceful world.
In this connection, I am gratified by the evidence that; in the past year, the
Bank has further increased its effectiveness—^working with more member countries, providing more needed expert technical assistance, and, not least, financing more projects.
•
.
^
At the same time, I must be equally candid in saying that, as part of the
process of defending budgetary priority for the Bank and assuring future support, we must look toward improvement in certain operational matters. In that
connection, we have upon a number of occasions cited our concern about the
low procurement share U.S. firms have received from ADB-financed projects^—
low In terms of absolute volume, low in terms of relative share, and low in trend::
Whatever the.reason, this is a situation incompatible with strong legislative
support I do not say that the situation reflects either deliberate or inadvertent
iBank policy: the evidence I, have seen is to the contrary. Rather, it was partly
a symptom of exchange rates that were out of line. Moreover, in many instances,
U.S. business may not have been sufficiently a.ggressive in seeking out the opportunities, across the broad Pacific. Perhaps we in government have not been active
enough in assuring that information about projects and contracts is wddely
disseminated.
We have now .taken, steps to,repair those deficiencies within our control. We
hope and expect to see improved results. We must do so to end what has become
a very difficult situation in obtaining legislative and public support.
In this same spirit of candor, allow me to iirge that the time has come for the
Bank to establish a. capacity for independent evaluation of the efficiency and
effectiveness .with which its funds have been utilized. With eight projects
finished—and others nearly so—we are in a position for the first time to raise—
and to answer—^legitimate questions about the fruits of the Bank's efforts.
After some hesitation, the World Bank and the In ter-American Development
Bank haye each adopted such "postaudit" mechanisms and procedures. This approach can go a long way toward maintaining the full confidence of donor governments. With experience, management, itself, has come, to see. the benefits from
objective evaluation of their work. In the long run, I believe, recipient countries
can. only gain as well.
•
Finally, after 6 years of operations, a review of the Bank's organization and its
procedures is timely. We hope the management and the Executive Board will
initiate such an effort in the next year.
None of these comments in any sense call into question the excellent job the
Bank management has done. It simply means that enough time has passed, and
enough experience has been gained, to permit constructive review. Our procedures
and methods should be changed to meet current needs in the most effective way.
' The world economy has changed in many ways. Over the years since World
War II, other industrialized nations have grown into economic strength and
stability, able to carry a larger share of the responsibility for advancing the development Of others: Some poorer countries have made enormous strides toward
self-confidence—w^hile others plainly require a lift from abroad to help break a
vicious cycle of poverty, inefficiencyj and dependence. Not least are the fresh
opportunities and challenge provided by the prospect of peace in Indochina.
All these external changes find their reflection in the internal work of the Asian
Development Bank. We press for change within the Bank in a constructive spirit
as we press at home to provide an appropriate share of the resources the Bank
requires. Let there be no doubt: We remain committed tp the Bank and to the
purposes for which it stands.
liXHIBITS;
^
. . :
485
Exhibit 67.—Statement by Under Secretary for Monetary Affairs Volcker,
May 11, 1973, before the Foreign Operations Subcommittee of the Senate
Appropriations Committee on fiscal year 1974 appropriations for international
financial institutions
I am here this morning to testify in favor of President Nixon's flscal 1974
appropriations requests for the three principal multilateral development institutions. These requests cover :
The Asian Development Bank
The Inter-American Development Bank
The International Development Association, an affiliate of the World Bank.
These programs are an integral and important part of the President's overall
foreign economic policy. The institutions concerned are a principal vehicle for
assisting the economic and social progress of developing countries. They do so
in a manner fully consistent with our broad conception of encouraging development in a context of free and market-oriented economies broadly aligned with
Western political and economic traditions. Indeed, by virtue of their broad
membership and international standing, these institutions can play a uniquely
effective role in bringing this about. To help assure these results^—as well as to
maintain an appropriate level of influence in world affairs generally—we must
maintain a meaningful presence in these institutions.
There are more specific reasons why it is in the U.S. interest for us to provide
funds to the international financial institutions so that they can help developing
countries.
1. Raw materials—increasingly provided by developing countries—are essential to the continuing vitality and noninfiationary expansion of our domestic
economy. By financing physical and social infrastructure in developing countries
and helping to encourage their social and political stability, these institutions
help assure access to needed supplies.
2. Developing countries are increasingly important potential markets for
TJ.S. goods and services. They are already a balance of payments surplus area for
us. Help from the international financial institutions permits the developing
countries to expand these markets and improve their ability to repay us and
others.
3. There is close to $25 billion of U.S. investment in developing countries,
yielding over $4 billion annually in return flows. Assistance from these institutions helps build and keep a healthy environment for this important U.S. investment
4. These institutions are useful intermediaries between developed countries
(including the United States) and developing countries on a variety of issues,
including encouraging fair treatment for private investment and open trading
practices.
I would like to support a number of points by inserting into the record letters
ffom Secretary of State Rogers and AID Administrator Hannah.^ These communications make clear the fact that U.S. backing for the international financial
institutions is indeed seen by the administration in terms of our broadest internatioha! political and economic interests.
We believe the funds requested for our participation in these institutions represent the minimum required to do the job. The President, after careful review
of our national priorities, has determined that the amounts we are asking for
are:
Within our budgetary capabilities. The total expenditure flowing from our
request will be made over many years, and is about one-third of 1 percent of the
fiscal, year 1974 budget; significant cuts, stretchouts, and deferrals have already
been applied to the total, and most of the outlays of a billion dollars will be
stretched out over as much as 10 years. In fiscal year 1974, the budgetary outlay
is limited to $15 million.
Within our balance of payments capability. The short-term balance of payments impact is almost nil; as I have just indicated, actual disbursements will be
spread over a considerable peidod of time. As the exchange rate changes and other
actions we have taken toward rectifying our balance of payments problems take
full effect, our concern in this area should ease.
1 Omitted from this exhibit.
486
1973 REPORT OF THE SECRETARY OF THE TREASURY
Justified in relation to domestic problems. Expansion in many domestic programs has been cut back, but we have cohtinued to fund those programs essential
for domestic objectives. We have applied the same scale of priorities t o t h e international institutions requests. They are what is necessary to meet essential
national objectives overseas.
And essential in relation to other international negotiations. We are engaged
in intensive negotiations on international trade and monetary issues, the successful resolution of which involves attention to the problems of international development as well. Our contribution to the international financial institutions represents an important part of our share of the responsibilities in that area.
Let me outline briefly the specific requests we are making today. I will start
with the Asian Bank, whose resource position for further lending is most critical,
and which is seeking to position itself to play an important role in the reconstruction of Southeast Asia.
The first Asian Development Bank request is for $100 million for Special
Funds for concessional lending. It was deleted entirely for fiscal 1973 under the
terms of the continuing resolution. Thus far, the United States has not been able
to make any funds available to the Bank for this program, although proposals to
do so have been before the Congress for several years. Other developed nations—
the United Kingdom, Canada, Australia, New Zealand, the Netherlands, Norway,
Germany, Italy, Belgium, Finland, and Japan—have gone ahead to make more
than $240 million available to the Bank on an ad hoc bilateral basis. As of December 31, 1972, $201.5 million had been committed on Special Funds loans, and
the balance of the Bank's Special Fund resources is expected to be fully committed by September of this year.
Under the terms of authorizing legislation passed by the Congress in February
1972, the funds in this request are to be tied to the purpose of U.S. goods and
services and priority is to be given to projects and programs in Southeast Asia.
Until we contribute, U.S. suppliers will remain ineligible for procurement from
the contributed Special Fund resources of the Bank. This item has been delayed.
I urge its prompt passage.
In this connection, I also want to seek the counsel of this committee on a proposal now being discussed to restructure and replenish the soft loan resources of
the Asian Development Bank with agreed shares and standardized operating
terms. Success in this effort will require U.S. participation.
It appears possible that other contributor countries might regard our original
$100 million contribution (which would remain tied) as a major part of our
share of such future replenishment, while the other industrial members would,
make substantial new contributions. This would result—in practical effect—in a
substantial reduction of our share over time in the financing of this institution. In
contrast, the Japanese share would sharply increase. This strikes me as a promising and indeed unique opportunity to maximize the leverage—in terms of development impact and burden-sharing—of our long-delayed contribution. I believe
this approach needs to be further explored. We have made no commitments in this
regard, and I solicit and welcome the reaction of this committee to what seems
to me a highly promising development.
The other portion of our ADB request relates to the increase in the Ordinary
Capital resources of the Bank. The Governors of the Bank, wdth the U.S. Governor abstaining, passed a resolution in November 1971 authorizing a 150-percent increase in the capital stock. This was done in order to permit an orderly 10percent-per-annum increase in the Ordinary Capital lending of the Bank ovei
the years 1973-75. By November 1972, enough members had taken up their shares
to permit the increase in resources formally to come into effect. When this happened, the voting power of the United States was automatically reduced from 1(
percent to 8 percent, while that of other countries rose proportionally in the
absence of U.S. participation.
,
Authorizing legislation for U.S. participation will be submitted to the Congress shortly. We are thus testifying today on an appropriation request that wdll
be for formal transmittal later. Assuming api3roval of the proposed legislatior
on the change of par value, the total authorization wonld be for $362 million
Of this amount, SO percent, or $289 million, would be callable guarantee capita
and would not constitute an actual budgetary outlay. The remaining 20 percent
$72.4 million, would be paid-in over a 3-year period: This paid-in portion woulcl
be paid 40 percent in cash and 60 percent in non-interest-bearing letters of credit
to be drawn down later as needed for loan disbursements. New budget author
EXHIBITS
487
ity for this is being requested for fiscal 1974 in the amount of $121 million. However the fiscal year 1974 budgetary impact is limited to $9.6 million. When this
appropriation goes forward, the United States will be permitted to regain its
original equity position in the Bank as w-ell as its original voting strength.
The $193 million that we are seeking for tlie Inter-American Development
Bank's Ordinary Capital is part of the third and final tranche of the current increase in those resources. One hundred and sixty-eight million of this amount
represents callable guarantee capital and does not constitute a budgetary outlay.
Twenty-five million dollars is to be paid-in. This portion will be paid in the form
of non-interest-bearing letters of credit and will not constitute a budgetary outlay in,fiscal 1974. These two amounts, as well as the $193 million appropriated by
the Congress in fiscal 1973's continuing resolution, will be due under terms of the
original agreement on June 30,1973.
The $500 million requested for FSO resources represents further funding toward our past agreement to make a $1 billion contribution to the concessional
lending resources of the IDB. All of these funds will also be provided in noninterest-bearing letter of credit form to be drawn down later. As a result, there
will be no budgetary impact in fiscal year 1974. Under the original understanding
between the United States and Latin countries reached in April 1970, the United
States was to have completed the final installment of the $1 billion contribution
by the end of fiscal 1973. Although the $1 billion was fully authorized in 1972,
Congress reduced the first two appropriation requests by half. Last year, as you
will recall, the Senate approved the full $450 million requested, but the House
approved $225 million. A conference was not held, and a continuing resolution
was passed, set at the lower level. Provision of the $500 million requested this
year will thus still represent a considerable str.etchout of the U.S. contribution
to the FSO replenishment.
In fact, the failure of the United States to provide funds on the originally
agreed schedule has forced cutbacks in the soft lending programs from both
planned and past levels. For example, in 1970, the Bank lent $443 million, and last
year it lent $344 million in concessionary funds.
On January 1 of this year, uncommitted hard currency resources available
to the FSO were $353 million. This included $20 million from the Canadian contribution, $275 million which we made available on December 21, 1972, under
the continuing resolution and prior appropriation, and $56 million in residual
resources. These funds, however, are now expected to be exhausted in the final
quarter of this year. Action on your part is needed if IDB concessional lending
activity is to continue through this calendar year.
Finally, the IDA contribution of $320 million that we are asking for is for the
second of three tranches of the third replenishment—"IDA III." IDA III formally came into effect in September 1972 when the United States agreed to
make available its share of $960 million. This was done after full consultation
with the Congress and in the light of the May 1972 conference committee report
indicating that the Appropriations Committees had "no intention of denying
each of the three annual installments of $320 million in the next 3 fiscal
years. . . . "
As members of the committee know, IDA is the concessional lending affiliate of
the International Bank for Reconstruction and Development. Its funds are used
to finance developnient projects and programs on concessional terms in the
poorest of the developing countries, i.e., those countries with annual per capita
incomes of $375 or below. Its terms are 40 years maturity, after 10 years grace,
and a service charge of three-fourths of 1 percent per annum. As of 31 December
1972, it had made total cumulative commitments of $4,608 million, mainly in
agriculture and transportation. In recent years, it has placed an increasing
emphasis on education, population, and related areas.
These funds are needed by IDA and will be well used. I urge this subcommittee to act promptly in the spirit of the conference committee statement.
I would like to bring to your attention several important ways in which we
are moving to improve our participation in the international financial institutions. First, we have pressed the World Bank and the Asian Bank toward establishing independent program audit mechanisms. We are making progress on this
front. We have also laid a specific requirement on our embassies and aid missions
abroad to report periodically on international financial lending plans in their
countries, and specifically on implementation of projects already approved. In
addition, we have begun an expanded system of direct onsite inspections of
488
19 73 REPORT OF THE SECRETARY OF THE TREASURY
international financial institution-financed projects. Through these inspections
we expect to learn of any implementation problems which may arise, of the
quality of work being done, and of the extent of the supervision being maintained by the Banks. Without superseding any of the responsibilities of either
the Bank or the borrowers, we intend to use this additional means to assure ourselves of the effectiveness and efficiency of use of the resources w^e are providing
to the IFI's. So far this year, inspection visits have been made to projects in
Indonesia, Korea, the Philippines, Jamaica, and Haiti.
I strongly believe that the executive branch has a fully functioning and effective system for management of our participation in the international financial
institutions. The General Accounting Office has made three detailed reviews of
our participation in the Banks. Their principal recommendations cover areas in
w^hich Ave have already moved to strengthen our capabilities. I am submitting
our separate report on their reviews in an annex to this statement.^
Another matter for brief mention is that of maintenance of value on our subscriptions and contributions. As this subcommittee knows, separate appropriations are being sought to cover our various maintenance of value obligations in
the international financial institutions relating to the par value change of the
U.S. dollar which is now pending before the Congress. I want to emphasize that
these are legal obligations which other countries have, in similar circumstances,
observed meticulously in literally hundreds of instances amounting to $1.4
billion. Maintenance of value resources are intended to protect against erosion
of the real value of international financial institution resources, and I anticipate
that the Congress^—as in the previous par value.change—will again want to
recognize promptly their obligation. At the same time, we are exploring in the
various institutions the appropriate application in today's circumstances for
maintenance of value provisions to future contributions.
We have significant opportunities to shape policies and operations of the international institutions at an early stage,; and my observation is that when we
set out to achieve a given objective, we liave a high prospect for ultimate success. Indeed, I believe our influence in these institutions often exceeds the relative share of our contributions or our voting power. But this influence will
inevitably and quickly erode if we are not willing to put up our fair share of
resources. Obviously, we cannot and do not exert the same complete control over
the operations of the multilateral institutions that we do over U.S. bilateral
programs. However, in many instances, I am convinced that our ultimate influence and effectiveness, in terms of results, is maximized by working through an
institution with- broad membership. In that connection, and as I mentioned at
the start, the operations and policies of these institutions have been very much
in accord wih the basic foreign policy interests of the United States.
I have been concerned, as you have, about the relatively low procurement
share U.S. firms have been receiving of some international institution-financed
business, and more specifically that of the Asian Development Bank. In this
connection, procurement performance in all the institutions has been influenced
by our declining competitiveness in recent years. The exchange rate realignments of recent years have been designed to restore that competitiveness. For
example, the realignment against Japan has been 35 percent, while that against
Germany has been 29 percent. This should be a very significant help. In addition,
we have taken steps to assure that much more information is given—and goes
promptly—to our firms on procurement opportunities from international institution borrowers. In my own recent travels, I have seen some informal but not
yet conclusive signs that potential American bidders are now indeed in a more
favorable position. On the basis of independent examination, we see no evidence
of deliberate discrimination against the United States. However, we shall con.tinue to work to assure the procedures of the institutions and their borrowers
provide ample and fair competitive opportunities for U.S. business. As a result,
I look forward with some confidence to an increasing share of procurement in
this country.
I would now like to summarize where we stand with regard to the fourth replenishment of IDA—the so-called IDA IV. As indicated in our letters to you, meetings
of part I countries were held on March 13, in London, and in Tokyo on May 1-2.
Other developed nations are now clearly ready to go ahead with a new round of
I'See exhibits 71 and 75.
•
- " ' '
• " jEXHiBiTs-
>
'.
/
•:
489
contributions to permit IDA lending to continue in fiscal 1975 and beyond.
Thus far, the United States has played a passive role in these discussions,
informing others that until consultations were held with our Congress, we would
not be in a position to discuss amounts. However, we have made it clear that
a substantial reduction in our percentage share is necessary for our participation
in view of our serious balance of payments situation.
'
The next meeting of-the negotiating group will be held in Washington, July 11-12. The general expectation and intention is that negotiations be completed in
time for submission to legislatures by the end of 1973. To meet this timetable,
decisions will need to be reached at the time of the annual meeting. of the
World Bank in September. As in the case of Asian Bank Special Funds, I welcome
the reactions and guidance of this committee on this matter either now or in
informal consultations over the next month.
-.
Exhibit 68.—Resume of remarks by Under Secretary for Mbnetary Affairs
Volcker, June 7, 1973, at a session on "Issues of International Monetary
Reform" at the 1973 International Monetary Conference of the American
Bankers Association, Paris, France
'
Monetary reform is as much a political as it is an economic problem, and
this is a point of which we must be conscious in developing reform plans. We
must deal with the issues in a political perspective.
/.
We-must keep in mind that one country's actions impinge on other countries.
Thus, we need a sense of system, a set of rules or a code of conduct. Without
such rules, not only are economic confiicts likely to arise but, more importantly,
there will be political squabbling and international tension.
Another political reality that must be taken into account is that countries
don't.like other people telling them what to do. This point is very neatly
crystallized in the phrase "national sovereignty." Thus, one of the main problems of monetary reform is to resolve the conflict between the interests of the
community as a whole and the interests of individual member countries.
Our objective in reform should be to work towards international financial
equilibrium, which we prefer to disequilibrium. Unfortunately, the temptation
is to say that we prefer surpluses to equilibrium,but this approach is not-workable. Moreover, we need "discipline." Now this statement may sound "French,"
but if it does, so be i t We agree.
,
The question is how to make these principles operational. We have ^accumulated a certain number of slogans—stable but adjustable rates, the necessity
of controlling the creation of international liquidity, and various views about
the degree of stability or fiexibility in the system. The problem is how to define
these concepts and make them operational and meaningful.. In other words, how
do we make discipline.operational?
This is the sense that people attach to a convertible system. Why do they
want such a system? The reason is that it is a tool to enforce discipline. It
enforces discipline on deficit countries, and thus works in one direction. I t is a
simple concept. The deficit country loses reserves and therefore has to adjust.
.It is politically palatable in that it is understandable to the. population at
large. The loss of reserves is a clear public signal that something needs to be
,done. And-"this feature is contained in the U.S.'proposals. However, it is not a
sufficient mechanism in that it is one-sided. So the question is how to enforce
discipline on countries moving in the opposite direction—that is, surplus
countries.
" .
Now the logic of this situation is to apply the reserve criterion symmetrically.
In other words, when a isurplus country registers reserve increases, it should
also be required to adjust. This would mean an evenhanded ajpjplication of
discipline. However, we run into reluctance on the part of many people to accept this logic. Discipline is fine for others, but nbt for theih..And this is a natural
reaction. So, if we can understand the reluctance of surplus,countries to accept
the logic of the discipline that would be involved in evenhanded reliance on
reserve indicators, we should also be able to understand the reaction of deficit
countries if they get the feeling that the system is not symmetrical and equitable. Our objective is to try to deal with both problems.
:
.
There are distinct political advantages in a reserve indicator mechanism that
operates in both directions. It is fair and equitable. It operates alike on coun-
490
1973 REPORT OF THE SECRETARY OF THE TREASURY
tries of diff'erent size and in different positions. It is a code of conduct that
can be readily understood by politicians and informed public opinion in the
countries required to take action.
Now a classic convertibility system requires a deficit country to adjust, but
does not tell the country specifically what to do. The country must do something, but it is left with discretion as to the type of action it takes. The U.S. pro-^
posals also envisage leaving the widest possible discretion to countries that are
required to adjust. While some actions would be ruled out, countries would be
left more or less to choose their own medicine. This is a political necessity for
a system whose .members are national, sovereign governments. Thus, the principal rule would be to maintain equilibrium., but with maximum freedom of
choice for the,country concerned in the instruments used to do so.
The problem of adjustment arises, whether we have a fixed or a fioating rate
system. In a system of established rates with convertibility, there is a need for
reserves. The type of adjustment process has a direct bearing on the size of
that need. How quickly will countries be required to adjust? How much scope
will be allowed for imbalances? We must be consistent in our judgment on
this point and on the amount of reserves created. If we leave a lot of scope for
countries to adjust, but insist on a tight reserve situation, then there will not be
enough reserves to finance the amount of play in the adjustment process. The
less reserves we are willing to provide, the stronger the adjustment process
must be. If we do not want to be too harsh on surplus countries, if we are going
to allow surplus countries to pile up reserves, then there must be sufficient reserves to enable this process to go on. The need for consistency between the
reserve system and the adjustment system is a point that is sometimes overlooked. The advantage of the U.S reserve indicator proposal is that this consistency is automatically obtainable.
The sum of individual reserve needs must be equal to global need. Otherwise,
we will be in disequilibrium from the start. ;We have had a system where the
amount of primary reserves available was far less than what people wanted to
hold as total reserves. This was the element that gave rise to the widespread
holding of national currencies as reserves and rel ated instability.
In a convertible system, the certainty of the settlement mechanism must be
matched by equal certainty in the adjustment process. Otherwise, inconsistencies
will arise, but this is a requirement which it is hard to satisfy, particularly
on the surplus country side of the equation. Merely to say that at a certain point
the surplus country would be required to enter into discussions and consultations is vague. Here we are confronted with the certainty of the settlement
mechanism compared to the uncertainty of the adjustment process. In our
minds, these two elements niust be consistent. If adjustment is to be consultative, then convertibility could be consultative as well, but not automatic.
The proposed U.S. system contains no easy political choices for any country.
It is always easy to applaud principles, but the root question is how to apply
them. It is natural to squirm when we see the principles applied to ourselves.
Looking iat this fundamental point is a good thing. We cannot evade it. We must
take a commitment here; otherwise, the reformed system will break down.
Mr. Volcker answered the following questions from the floor.
Q. I n his remarks. Dr. Emminger stressed that evolutionary influences were
having an important effect in shaping the future monetary system. Why does
Mr. Volcker think that the work of the Committee of Twenty, in looking .for
agreed rules, is so important if evolution is ,to be the determining force?
A. I lagree with the point made by Dr. Emminger and see no inconsistency
between his remarks and mine. There are two parallel lines of influence shaping
the future monetary system—^the formal negotiations on structure and market
evolution. What is important is to bring these two lines into .convergence. The
market evolution does not provide any sense of system or rules.
Q. Doesn't the existence of large-scale international credit facilities reduce
the need for reserves?
A. Yes, but it does not eliminate the need for reserves. Attention to the
reserve aspects of the matter is crucial. I sense that countries are now much
quicker to change their exchange rates than in the past and show a greater
reluctance to go into debt. In the operation of the adjustment process, credit and
reserves are not full substitutes for one another.
^EXHIBITS
491
Q. Why should surplus countries that have followed good policies and managed their affairs w^ell be expected to "help" deficit countries get out of
trouble?
A. The question is formulated in a prejudicial way. One might equally ask
why surplus countries shouldn't help themselves to have ,a higher standard
of living. The fundamental point is whether we are going to have international
payments equilibrium or not. Surpluses somewhere in the system inevitably
mean deficits elsewhere. It has often ^been said that this preoccupation with
the problem of the surplus countries represents nothing more than a bias of the
United States. On this topic, I would make the following points :
1. Is there a tendency to prefer surpluses to deficits ? The answer is probably
yes, but this confiicts with the general equilibrium hypothesis. The problem
is of some concern to the United States in that the United States tends to be
the residual country in the system. Thus, other people's desire for surpluses
tends to force the United States into deficit.
2. Do we consider it possible that the United States would accept the
discipline of the U.S. proposals if it were to .become a surplus country? After
all, the United States was a surplus country within my lifetime. Thus, in
formulating the U.S. proposals, we looked hard at this question. I can categorically affirm that the United States would accept the discipline.
Q. Why does the United States persist in its negative attitude towards the
role of gold in the system?
A. Recent developments reinforce us in our view regarding the undesirability of relying on gold as a key instrument in international monetary aff,airs.
A commodity like gold, which is subject to rising industrial demand and heavy
speculative influence,.is becoming less and less suitable as a.reserve instrument.
Q. When you described your views on the adjustment process, you ^aid that
countries required to adjust should have maximum freedom to select the means
for accomplishing adjustment. Does that mean that you would allow them
to impose import quotas, import surcharges, and the like?
A. Maximum freedom does not mean complete freedom. Wh<at I had in mind
was maximum freedom consistent with the general interest. We accept the
general presumption against the use of trade measures as an adjustment tool.
Thus, they are the last on our list, but we would not want to see an absolute
prohibition against their use if they are used in.a general, nondiscriminatory
way.
Mr. Volcker answered the following questions at the press briefing after
the session on international monetary reform on June 7:
Q. What role do you see for the IMF in the new system? Would it be an
independent power?
A. That depends on what the phrase "independent power" means. We have
a strong sense of the need for rules of behavior. However, we are skeptical
about a system that would place a high degree of discretionary .authority in
the Fund, whatever the word "Fund" is taken to mean—the Managing Director,
the staff, the Executive Directors, etc. In such a system, countries would feel
that decisions were being made in a context outside of their sovereignty.
Therefore, we should be as explicit as we can be in advance about rules of behavior. This does not mean there would be no consultation. There would be a
great deal of consultation, but we would not remand all problems to the "Fund"
for discretionary decision.
People say convertibility has merit because it is automatic. It is a crude
mechanism, but they would say it works. The U.S. proposals build on this
technique. They are symmetrical and fair. The basic rule of the system is to
maintain equilibrium. At the same time, we must avoid a degree of detail
of external instruction that no country would want to live with. Our proposals
try to reconcile discipline with the need to leave maximum freedom for countries
to choose their own tools of adjustment.
Q. What is the effect of market developments on the timing of reform?
A. These are two parallel processes. Market evolution teaches us something
about the operation of the system, and w^e should learn from it. However, it does
not provide us with agreed rules, and this is important. This is a topic that
falls in the negotiating track. In other words, the negotiators should learn
-from what is going on in the market, and ad hoc decisions taken to deal with
market developments should be consistent with long-term objectives. Of course,
we do not want to make an agreement merely for agreement's sake. We want
506-171—73
34
492
1973 REPORT OF TELE SECRETARY OF THE TREASURY
to think this problem through- and have a system people have conviction about
In the light of recent developments, I am hopeful on the prospects for agreement.
Q. Mr. Laird stated yesterday that measures would be developed regarding
a speculation against the dollar. What does he have in mind ?
A. I only read the newspaper reports on Mr. Laird's statement, so that it
w^ould not be appropriate for me to comment on it. I would merely reiterate
that the behavior of the chief currency and country is important for the system.
This depends on how that country, does at home. Domestic stability is important
both for the United States and for other countries. I am confident that we will
be able to maintain reasonable domestic stability in the United States.
Exhibit 69.—Statement by Under Secretary for Monetary Affairs Volcker,
June 26, 1973, before the Subcontmittee on International Economics of the
Joint Economic Committee
The question before the subcommittee—**how well are fiuctuating exchange
rates working?"—is of particular interest at present, both in connection with
recent exchange market developments, and because of the implications for negotiations on monetary reform. At the same time, we have to recognize that
conclusive lanswers ai:e not yet possible for we are, to a large extent, operating
in a new and npt fully tested area.
At the present time, most of the major industrial countries are allowing their
currencies in some sense to fioat—jointly in the case of certain EO and certain
other European nations, and individually in other instances. This situation developed out of a broad consensus reached among the major nations last March
that, in the light of short-term capital flows of unprecedented magnitude, greater
scope for floating exchange rates would be appropriate pending more thoroughgoing reform of the international monetary system. This decision did not reflect
any feeling that, following the February realignment, the existing structure of
exchange rate relationships w^as inappropriate to foreseeable economic requirements. Rather, it was recognition that, in all the circumstances and given- the
time necessary to achieve equilibrium in underlying payments positions, recurrent speculative pressures could best be dealt with, and orderly monetary arrangements thus best assured, by permitting market exchange rates to respond more
flexibly to the ebb and flow of funds through the exchange markets.
- ' At a joint meeting of the Group of Ten and the European Community in
March, those governments assumed no general obligation to intervene in excliange
markets to maintain specified, exchange, rate margins, but agreed intervention
could be useful at appropriate times and in particular situations in the interest
of orderly conditions. In the event, there has been relatively little official intervention during the 3 months since that agreement, apart from the intervention
by the participants in the joint EC float designed to maintain the exchange
rate relationships among those countries. One exception has been sales of dollars
recurrently by the Japanese, authoritie.s, with the yen-dollar, rate remaining
rather steady since mid-March. There have been sizable movements in some
other market exchange rates, particularly between the European currencies
and the dollar.
The BC currencies floating jointly have risen on the average by about 9
percent relative to the dollar. Changes between the dollar and other currencies have generally been much smaller; w^eighted by our trade, the dollar since
mid-March has declined in the market vis-ra-vis all currencies by something in
the order of 2 to 3 percent. Similarly, the trade weighted appreciation of EC
joint float currencies against all their trading partners has been on the order
of 3 percent or less, with the exception of Germany.
I continue to believe that the general structure of exchange rates established
by the February realignment is broadly correct in the sense that it provides a
valid basis for the elimination of the longstanding U.S. deficit and restoration of
international payments equilibrium. Indeed, developments in recent months
with respect to our trade position reinforce the view that our competitive
position has benefited in a major way from the two. realignments of December
1971 and February 1973, and further important gains in our balance of payments
can be expected. Plainly, the speed and extent of our success will, as always,
be dependent upon our ability to restrain inflation at home and to maintain a
,: .EXHIBITS:
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493
sound domestic economy. The new domestic measures announced by the President are obviously relevant in this connection.
At the same time, we have to recognize that duidng this transitional period,
an unusual degree of uncertainty has been present. Our payments have been
in deficit for so long, and the imbalance in our trade had become so large, that
some tendency to await more complete and "conclusive" evidence of change is
perhaps natural. While economic analysis and econometrics certainly point
strongly to a conclusion that the February realignment should provide a powerful thrust toward equilibrium, those forecasting techniques cannot provide
certain "proof" of achieving that result. The process of change, after decades in
which the international stability of the dollar.was taken for granted, has itself
unsettled market expectations for a time. In the best of circumstances, the process of adjustment works only with substantial lags. Finally, and perhaps most
fundamentally, the strong infiationary currents running throughout the world,
together with shifting judgments as to the ability of one country or another to
deal effectively with those pressures, have contributed to an unsettled atmosphere.
Against this background, I would suggest three broad conclusions may be
drawn from recent experience, recognizing that in each area we still have
much to learn.
„\
1. Present arrangements in the excharige markets are appropriate to the
present period of transition to a more satisfactory balance of payments equilibrium and to a reformed monetary system. This view is, I believe, shared by
the governments of virtually all major nations.
The validity of this conclusion does not rest upon an endorsement of either
the size or direction of recent changes in market exchange rates. Indeed, as I
have suggested, in,my view and that of most governments, the exchange rate
levels established in February are more nearly appropriate to the outlook over
time, and the day-to-day movements in rates in recent weeks have often been
larger than I would like to see. However, in present circumstances, the practicable alternatives to present arrangements are unsatisfactory. An attempt to
fix now a rigid structure of exchange rates would risk a return to massive capital fiows, increased restrictions, and intermittent closing of markets—precisely
the conditions we want to avoid, and have avoided.
In contrast, present arrangements have permitted countries to deal with internal inflationary problems more freely. With less concern over triggering fresh
flows of international capital, while maintaining viable international markets.
In the process, European-dollar exchange rates have fluctuated over a broader
range than heretofore. I have already suggested that, in my judgment, the exchange rates established in February and March were broadly appropriate to
adjustment needs. Ih that light, the further appreciation of most European
currencies in recent weeks—while temporarily tending to reinforce the competitive adjustments—seems overdone and reversible. However, the basic point is
that after a period of change and uncertainty, businessmen, traders, and financiers need to become solidly convinced that the structure of rates is fully appropriate to present and foreseeable economic circumstances and has not been artificially contrived. I believe we must look to the performance of the market itself
to help establish and reinforce such judgment.
We have not ruled out official intervention during this period. You have asked
what guidelines might be established to govern such intervention. In testifying
before the subcommittee last September, Chairman Burns and I described the
administration's general policy with respect to official intervention at a time prior
to the more widespread use of currency fioats. I made clear that it was not our
intention to prop up the dollar artificially counter to any basic balance of payments trends. We recognized that, in the end, the strength of the dollar must
rest on .other, more fundamental policies to improve our balance of payments.
Any active intervention on our part would be under our own control; would be
undertaken at such times arid in such amounts—^large or small—as we deemed
desirable in light of market conditions; and would be for the purpose of helpirig
to deal with speculative forces, which cah admittedly bring excessive and unnecessary turbulence and strains to money markets.
I believe that basic policy should continue to govern our approach in the new
conditions of widespread fioating. This policy is fully consistent with the agreements reached in Paris last March, which envisaged a cooperative international
effort aimed at assuring an orderly system, while leaving intervention decisions
to be worked out by each individual nation or group, flexibly and in close con-
494
1973 REPORT OF THE SECRETARY OF THE TREASURY
sulfation with the authorities of the nation whose currencies may be bought and
sold. I doubt that it would be possible or useful to establish more explicit international guidelines at present, although more thought needs to be given to this
in the context of longer range reform. For now, we want to maintain a flexible
instrument that w^e can use in the interests of Orderly markets, taking into
account particular market circumstances at the time.
2. Such evidence as is available, while not conclusive for the longer run, suggests the present transitional arrangements have not seriously affected, in one
direction or another, the volume of trade and long-term investment. Massive flows
of short-term capital, which have been part of the pathology of earlier arrangernents, have heen dampened, partly by controls as' well as by exchange rate
arrangements.
In reaching this tentative conclusion, it is worth recalling that international
trade has continued to grow over the past decade through thick and thin, crisis
and calm, pegged rates and floats, at rates which are quite high by historical
standards. Indeed, trade in most recent years has grown substantially faster than
real .GNP—a trend that sooner or later will presumably have to come to an end.
We know now that during the^period of widespread floating in 1971, trade did
not grow at appreciably lower rates than would have been expected, given the
somewhat depressed rate of growth.of business activity in the major industrial
countries at that time. Comprehensive data are not yet available for analysis
of the volume of trade flows during the present period of floating rates. However,
the information we have is consistent with projections by international bodies
that the volume of world trade is increasing by about 12 percent per year.T would
emphasize here that the general absence of new'controls on trade is an important
factor encouraging the growth of trade—probably far more important than any
influence from exchange rate practices.
A comprehensive current picture of changes in the-flow of international investment is still more difficult. Examination of the data on'U.S. capital flows, however, does not indicate that any noticeable fall iri the level of long-term capital
transactions during the period of floating rates in 1971 or more recently.
The subcommittee has already received testimony from business and banking
spokesmen about the impact of floating rates on their operations. I can add little
to their tremarks, other than to report to you my strong impression that the exchange markets have been generally able to handle business transactions expeditiously. A particularly large transaction may take longer to accomplish fullyj-and
some transactions for a period a long time ahead might-prove more time consuming. But such difficulties—particularly of the latter type—were encountered
under a nominally fixed rate regime as well.
There is some evidence that the transactions costs of purchasing forward
cover—that is. the "brokerage charge" or thes spreads between buyins: and selling rates—is now somewhat higher than in earlier years. However, these spreads,
after widening during specific crisis periods, appear to have returned to levels
that are relatively inconsequential in terms of the profitability of trade transactions—^typically on the order of .1-.2 percent for 3-month forward transactions.
As experience is gained, some narrowing of these spreads would seem probable.
Similarly, in times of exchange market uncertainty, spot and forward rates
have sometimes deviated quite widely, and the differences have departed from
amounts justifiable solely in terms of interest rate differentials. However, forward discounts and premiums vis-a-vis the dollar for most major currencies have
narrowed appreciably in recent months and generally have moved in line with
interest rate differences.
Businessmen and bankers have certainly become more aware of exchange rate
risks and practices in recent years. In this connection, we cannot reasonably
compare a system of fioating rates to a systeni—an idealized system—in which
exchange rates never change. Obviously, every businessman would prefer certainty to uncertainty, no change to change. But that is a false choice—R permanently fixed rate system is not really available. In a dynamic world economy,
with nations differing in rates of growth, productivity, and price stability, changes
in the terms on which international business is conducted—including exchange
rate changes—will be necessary and will occur. The choice is not whether there
should be changes but what kind of change. I find few businessmen, for instance,
that would prefer greater use of controls to changes in exchange rates. I also
find few businessmen who, in making longer run investment or marketing deci-
EXHIBITS -
495
sions, will not find it necessary to consider the possibility of changes in exchange
rates, whether in a nominally fioating or fixed-exchange rate environment.
3. Present arrangements are not a substitute for agreed long-range reform.
The issues involved in long-range monetary ref orm go far beyond the question of
exchange rate practices. At the most general and fundamental level, the question is one of developing those agreed codes of conduct necessary for governing
behavior in an interdependent world. Each nation naturally likes to retain for
itself as much freedom of action as possible. But where its actions impinge on
others, we must face up to the need to assure that those actions are consistent
with the requirements of the system as a whole.
International cooperation—fostered by the habits of the past,.by recognition
of the. common interest, and by close consultation currently—has, I believe, met
the present challenge. But for the long run, cooperation will flourish not in a
context of ad hoc decisions, but only in a framework of agreed rules, specified
with some, clarity and broadly perceived to be in the common interest. Such
rules are now lacking. That is the basic task of our reform efforts.
In this effort, no consensus has yet been reached on specific exchange rate
provisions. However, I think it is fair to say that recent experience has tended to
increase support for- the view that substantially greater flexibility in exchange
rate practices than characterized the Bretton Woods system will be necessary
and. desirable. At the same time, the view is widely held that international
cooperation and surveillance of exchange rate practices is facilitated by retaining the concept of established exchange rates—par or central values. The question should not be posed as one between "stability" and "instability," but rather
as the best means for achieving the highest degTce of stability in the market,
consistent with other goals and- international cooperation.
The members- of the Group of Twenty in their March meeting expressed the
highest common denominator of official opinion in-this matter by suggesting the
exchange rate regime should be based on "stable but adjustable par values,"
while recognizing "floating rates could provide a useful technique in particular
situations." This formulation plainly leaves a great deal of room for differences
in emphasis, and for means of making the concepts operational.
The views of the United States on this matter have been spelled out in considerable detail. The proposals put forward by Secretary Shultz last September,
took as a point of departure that most countries will want to maintain a fixed
point of. reference for their currencies—a central or par value. We' recommended
that around such central value there should be a margin for fluctuation—symmetrical for the dollar and for other currencies—sufficiently wide to dampen
incentives for short-term capital movements and to ease the transition when a
change in a central value is desirable. While changes in par values would remain
subject to the initiative of individual countries, they would be a part of, and
subject to, the rules governing the entire balance of payments adjustment process.
While in Secretary Shultz' words this framework of central or par values would
provide a "center of gravity" for the system, in our view countries should also
be permitted an option to float their currencies. However, a country floating
beyond a brief transitional period should be required to observe agreed standards
of behavior in other respects^—including intervention—to assure the consistency
of its action with the basic requirements of the adjustment process and of a
cooperative order.
I believe we and others can learn, much from current experience. I am not at
all happy about what seems to me an unnecessary depreciation of the dollar
in recent weeks, or about the size of some of the fluctuations in exchange rates
from day to day. But I am satisfied that, during a period of great uncertainty
in financial markets, exchange market pressures have been absorbed and diffused
in a manner consistent with our basic goals and requirements, and those of other
nations. Specifically, economic policies at home and abroad have not been distorted by the need to deal with massive fiows of speculative capital in an atmosphere of crisis. International business has not been impaired. The basic processes
of international adjustment are at work.
But we are also reminded by recent experience of certain fundamental facts.
No international monetary arrangements can produce great stability if our
national economies are themselves unstable and inflation prone. International
confidence must grow out of sustained performance at home. Our monetary
techniques will be effective and durable only as they grow out of a broader international consensus and cooperation.
496
19 73 REPORT OF THE-SECRETARY OF THE TREASURY
In sum, present arrangements are no panacea for our problems, or the end
of the road of monetary reform. But they do seem to be working for the present,
and provide lessons and experience that must not be lost in our planning for the
future.
Exhibit 70.—Statement by Deputy Under Secretary Bennett, June 5, 1973, befare
the Subcommittee on International Finance and Resources, Senate Committee
on Finance
Mr. Chairman, I am flattered by your invitation for me to present the administration's thinking on current international monetary developments. I shall present a viewpoint which differs substantially from those of several of the witnesses
who appeared before you last week. They spoke—as does the blue briefing book
prepared by your staff—of an international morietary crisis. There are changes
underway in the w^orld, but in my view it is a considerable overstatement to refer
tp them as a crisis.
.
•
Current developments indicate that we have great responsibilities before us
in the management of our domestic economic affairs and great opportunities for
negotiating further improvements in international monetary arrangements. But,
while recognizing these responsibilities and opportunities, we should recognize
that existing international monetary arrangements have, performed well in recent weeks, far better than would have been likely if earlier arrangements were
still in place. It is my judgment that ciirrent morietary arrangements are capable
of—and indeed are—absorbing and diffusing new pressures and speculative influences without impairing domestic economic policies or the fabric of trade.
The price of gold has moved in large jumps in the private markets not only
against the dollar but also against all other currencies as well. That experience
has, in our view, further underlined the unsuitability of gold as the base for a
reformed monetary system. But despite the continuing formal links between gold
and the international monetary system, the instability of the private gold price
has not brought crisis to the currency markets.
We have been living through a difficult period in terms of an unexpected and
unacceptable rate of price inflation and in terms of foreign questions about the
.reliability of our governmental processes; but the outlook is strong for the basic
determinants of our international payments position. There has been no faltering
in the economic policy procedures of our Government. Prices will be rising at a
lower rate in the ^coming months. Our trade balance has been moving strongly in
the right direction, and foreigners have increasingly recognized the opportunities
for attractive investment in the U.S. economy.
Looking backward a few years it may be helpful to recall that the dollar and
our balance of payments weakened sharply in the 1950's and 1960's, not because
of a poor relative record on inflation—the United States performed better than
most countries—but because of abnormally rapid increases in productivity elsewhere as Japan and Europe Were "catching up" with us after World War II. This
major structural change in the world economy was not matched by comparable
changes in exchange rates—under the Bretton Woods system there was a certain inertia if not rigidity in exchange rates. The result was a progressively:
growing upward pressure on certain currencies of Europe and japan and downward pressure on the dollar.
•"
By 1971. it was* apparent that a fundamental malalignment of exchange rates
had been allow^ed'to develop; The actions taken since the President's initiatives in
August 1971 have now removed that fundamental malalignment from the system. It took a year and a half to accomplish the necessary changes. In the process
a natural resistance to change had to be overcome, and uncertainties arose as
established beliefs were broken. But a difficult adjustment needed to be made and
nowhasbeenmadednsofar as exchange rates are concerned. •
- As a result, adjustment toward elimination of our payments deficit is well
underway.
'
'
•'
' .• • '
"'
The question is sometimes asked, "T^Hiv was the. United States so anxious to*
put an end to its payments deficits?" "Since the {United States was receivirig
more goods in import than it was having to export, wasn't this helping us to combat inflation in the United States?" The answer is that the United States fight
against inflation probably was strengthened in the short run by the import surplus. And the U.S. Government.wasn't borrowing any more just because some
foreign governments were buying U.S. Treasury, bills; in effect some U.S. citi-
EXHIBITS-
.
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•
497
zens were flnding it more attractive to sell than to hold U.S. Treasury obligations
at the prices the foreigners w^ere offering. Yet these factors were more than
offset by other considerations. For one thing unreasonable exchange rates were
unfair to large segments of our economy forced to compete under a significant
handicap with goods produced abroad. The United States could—and was—providing an adequate level of total demand in the United States, but that was not
adequate consolation for those whose livelihood was lost or threatened by foreign
competitors benefiting from an unfair rate of exchange. Moreover, we could not
reasonably expect foreign countries to continue forever to ship more to us than
they received. We could hot reasonably expect their governments to continue
indefinitely accumulating low-interest U.S. Treasury bills. ;Sooner—rather than
later—this imbalance was sure to be'brought t o a halt, probably with great recriminatiohs," probably with new forms of government tr ade :and, investment controls abroad, probably with a suddenness which- would caiuse larger economic
dislocations the longer the correction was delayed.
'
It was for these reasons that in' December 1971 we entered into the Smithsonian agreement, it was for the same reasons, but on the basis of the further need
fbr change indicated by the experience in 1972, that we entered into another agreement in February of this year. Again, as at the Smithsonian, the United States
agreed to propose a change iri the par value of the dollar in terms of gold—a
change sometimes referred to as a change in the price at which we were not
trading in gold. But again, as at the Smithsonian, the real implementation of
the agreement took place by the action of other governments moving the points
at which they would intervene in the private exchange markets, thus permitting a
decline in the value of the dollar relative to other currencies in the market.
In the weeks subsequent to the February agreement the markets effectively
expressed their disbelief ih the newly declared intervention points. Foreigners
continued to acquire assets expressed in the currencies of some of the intervening
countries, particularly. Germany. And after a few weeks the authorities in these
countries abandoned the practice of regular intervention in the market at announced points in the relationship between their currencies and the dollar. In
replacement of earlier arrangements in mid-March an agreement in principle
was announced in Paris among the principal countries and the United States
that in the future "official intervention in exchange markets may be useful at
appropriate times to facilitate the maintenance of orderly conditions. . . ." .
Since that time, as you can see in the illustrative chart which I have provided,
market rates have varied, but no large-scale intervention has been necessary. The
rates are now free to move but there is a difference from the situation for the year
and a half after mid-1971. During that period there was a large accumulated need
for rate adjustment—and the signs pointed all in the same direction. Now there
may be changes, but they are likely to be largely as a result of any new developments which may occur in the future. To the best of our judgment the accumulated
need for rate adjustment has been accommodated, and I see no justification for
the statement in your blue book that the present situation is "inherently
unstable."
A little later I would like to mention some of the reasons why I suspect the
dollar will be worth more on the exchange markets relative to other currencies
3 months and 12months from now; but whatever the change, I would expect it
to be brought about gradually by changes in the marketplace. I am convinced that,
when the Congress completes action shortly on the Par Value Modification Act
now before'it, there will not be anpther occasion when the Congress will be asked
to devalue the dollar by lowering the official price in terms of gold.
Many questions have been asked about who were the speculators who brought
about the exchange rate changes in February and March. And we are sometimes
asked what can be done about such destabilizing speculations. Before cominenting on what facts we do have at this time, however, I would like to add to
the list of questions. Has there been an irrational degree of emphasis on the
word speculation? Is there really any point in attempting to delve into an individual's motives to try to determine whether he w^as hedging or speculating;
that is, whether his lack of belief in some government's official line was expressed
through changing the timing of a foreign exchange transaction which would
have been made in any event at some time or was expressed through a transaction
which would not have taken place if there had not been the lack of belief? Is
there any reason to consider it unpatriotic for an American to doubt that a
49&
19 73 REPORT OF THE SECRETARY OF THE TREASURY
foreign government would be successful in its effort to hold down the value of
its currency relative to the dollar ?
These question's-should be borne in'mind, I think,, when studying the chart
attached to the statement.^ Certainly a case can be made that those movements
of funds which led* to the change in the dollar value of the mark and the Swiss
franc from the basic level of early January to the new level of late March were
not irrational and destabilizing. They could be considered a final part of the
suppressed need for rate adjustment which had built up over quite a few years.
The further changes in the last few weeks are probably different. They are,
for one thing-, not the sudden result of breaking.through>a level of governmental
opposition to change. The rates have been free to move on a-daily basis since
mid-March. I can understand thatr there have been some developments which
private traders and investors might judge tOi be adverse"for the foreign exchange
value of the dollar. I wouldn't.be surprised, however, if it turns out that the
market has given undue weight to these adverse factors. I mention them to help
explain a' somewhat confusing picture. Probably there have been some irrational
elements, but our rate of price infiation in- the first quarter was higher than
expected, and this was not a favorable development foi* our future trade balance. Germany did introduce severe antidnfiationary measures and did increase
its interest rates. The Senate did approve legislation to permit private U.S. citizens to hold gold for investment and speculative purposes starting at the end
of this year; and such permission, if finally enacted^ into law,, could well not
only increase the' cost of our substantial level of imports of gold for industrial
and artistic purposes, but also lead to a large additional import burden. It is
for that reason that it is my hope that the Senate-House conference committee
on this legislation will adopt the House version, which defers the move to private
ownership until such time' as" the President determines that sufficient reform
of the monetary systiem arid sufficient demonstrated improvement of our payments position'have been accomplished to permit the change to be made in an
orderly fashion.
I mention these consideratiohs in part to explairi my belief that the exchange
rate changes in recent weeks were not the result siiriply of some inherent instability in current exchange arrangemerits. B u t l do believe, as I shall explain later,
that the market may temporarily be overlbbkirig:sbme contrary andmOre fundamental considerations.
In recent weeks j as you know, the exchange rates rather than the levels of
exchange reserves have refi"ected tlie market's changing viewpoints on various
currencies. One can never be sure, but my own guess is that in present circumstances if we had tried the'reverse, if governments had consistently intervened
to atteriapt to hold the exchange rates unchanged while absorbing the curreney
flows in reserve changes, then we could well have generated greater uncertainty
arid a-crisis atmosphere:
That, of course, was what happened ih February and March. During that peidod
the reserve holdings of dollar- assets of thie foreign countries increased by about
$10 billion. From reports which have been made public already, it appears that
about a half of the accumulation was refiected in transactions reported by banks
in the United States including branches and agencies of foreign banks. Some of
the transactions took the form of reductions in privaitely held deposits in the
United States. Some took the form of new loans from the offices in the United
States either in the form of newly approved credits or—^in most cases probably—
drawdowns on already existing lines of credit. What we don't know in any precise numerical way is to what exterit the initiative'for the transactions came
from within the United States and to what extent from instructions received
from abroad. In a qualitative way the banks have reported that the preponderance
of the initiatives came from abroad.
Apart from the reported bank transactions there were probably about $5 bilr
lion of other transactions which increased the dollar asset holdings of the foreign
central banks. Later this month we'll get our first statistical reports for the
first quarter showing a breakdown of this Outflow among the current accounts,
the direct investment flows of U.S. corporations, the credits of U.S. nonbank corporations, and the errors and omissions. The company reports from which the
Government's statistical reports of the investments and credits are prepared
^vere received in recent weeks by the Treasury and the Commerce Departments
1 Omitted from this exhibit.
EXHIBITS
499
and are now being compiled and analyzed. To ensure the accuracy and comprehensive coverage of.these reports to the Government, a joint letter was sent
by the Secretary of Commerce and the Secretary of the Treasury to the heads of
over 1,400 reporting companies asking these men to give their personal attention to ensuring the quality.of the reports submitted.^ More recently the two
Secretaries:have sent another letter to.about 20 selected companies in various
parts of the country requesting the companies to receive a joint Commerce,
Federal Reserve, Treasury team. of experts which hopes to discuss these companies' transactions in detail to ensure that present forms and procedures are
not missing any significant types of transactions involving the U.S..companies.
As you can see, there is still a great deal we do not know about the transactions in the first quarter. The lack of the knowledge was not a,handicap at
the time,-since for any operations we might have wished to-undertake there
was ample prompt knowledge of the magnitude and direction of the flows taking
place even though the purpose of the flows was not known. Later this month
we will know more, but to the extent that-the movements were originated .by
foreigners, for-example, by foreign trading companies and foreign central r banks
reducing their deposits in the United States, we .will never know the full story.
As a point of interest to you, however, I should mention that we have had
reports from a number of important oil-producing countries indicating that they
had not originated large movements during the first quarter.
However it was that the new interim monetary arrangements were put in
place, they have provided a favorable climate in which the negotiations on longer
term international monetary reform can proceed.
I believe that the present monetary arrangements represent a substantial
improvement over the recent past, and that with international cooperation, these
arrangements are serviceable and sustainable for the period required to negotiate
and introduce needed further reforms. But the present system is far from perfect,
and the United States is committed to the effort to build a better permanent
system. We helped launch the Committee of Twenty, and last September the
President and Secretary Shultz presented a comprehensive outline of U.S. views
on reform.^
In essence, our proposals are for an open and equitable international-economy,
free from continual reliance on controls but with effective means-to prevent
development of large and persistent payments disequilibria whether surplus or
deficit.
At this level of generality there is little disagreement. But we have not yet
reached agreement on specifics—for example, on the rules and procedures which
should be introduced to assure that countries do eliminate their balance of
payments surpluses and deficits, on the means for determining the amounts and
types of reserve assets in the system, on the way in which gold will be phased
out of its central position in the system. On that last point there is a wide
measure of agreement on the objective, but there is not yet agreement on
the most practical route to the objective.
In addition to these questions, your subcommittee has asked two other specific
questions on the reform: First, should the short-term liabilities of the United
States be funded? And second, is a new monetary conference similar to Bretton
Woods needed to reshape the international economic order?
The first question, on the possible desirability for funding or consolidating
some or all of the $70 billion held by foreign official institutions, has been the
subject of much discussion. The large dollar holdings of foreign central banks
are the result of past instabilities in the system. For the major holders they are
not particularly volatile. Therefore, funding of that balance would not necessarily make an important contribution to short-term monetary stability. Over the
longer term, our preference is to deal with these balances by earning back a
maximum number of the dollars through balance of payments surpluses. In a
reformed system it would be useless to fund or otherwise tie up these dollar balances without at the same time changing other elements of the system so that
instabilities and inadequacies in the system would not simply lead to new
accumulations of currency balances replacing those which were funded. With
effective adjustment arrangements and other elements of a .reformed system,
possibilities for funding or exchanging part of existing dollar holdings into
SDR. obligations warrant careful consideration. I must point out that it would
1 See exhibit 78.
2 See exhibits 47 and 48.
500
1973 REPORT OF THE: SECRETARY OF THE TREASURY
be no mean task to find terms that would be agreeable to both debtors and
creditors, but we have stated our wdllingness to give careful consideration to
the possibilities.
The second question, the possible need for a Bretton Woods conference, has
been considered more than once. Our feeling is that such a move would not be
helpful. At the time of Bretton Woods, conditions were quite different from
today—a wartime period, when travel was difficult and communications limited,
and relatively few voices were involved in the major negotiations. Also we
did not have, as we now have, annual meetings of the IMF Governors, where
the financial leaders of 125 member states can regularly convene. It has seemed
to us that a better way to proceed was with periodic meetings of the Committee
of Twenty, and regular meetings of the IMF, without the fanfare and potential
for market disturbances of a special conference like a new Bretton Woods.
Several meetings of the C-20 have been held, at both Ministers and Deputies
levels, with considerable progress toward understanding of respective positions
and definition of critical issues. Another meeting of the Deputies is scheduled
for early next month. There is the possibility of another meeting of the Ministers
before they, are scheduled to meet again at the time of the annual meeting of
the IMF Governors in Nairobi, Kenya, in September. We and others have expressed the hope that the main outlines of a new monetary system can be
agreed upon by the time of the meeting in Nairobi. The United States will do
all it can to meet that goal.
Meanwhile,, of course, as these reform discussions continue, international business goes on and you have asked three basic questions about the period just
ahead. What steps can be taken to strengthen the dollar? How can the U.S.
deficit be cut? And how can speculation be reduced? In practice I suspect those
three questions are just three ways of asking the same question. At any rate,
it seems to me that the right answer and the basic answer is the same to all
three questions: Take care of the fundamentals. We must ensure that we
follow the appropriate budgetary and monetary policies, that we remove impediments to the full productivity of the U.S. economy, and that our businessmen
are not handicapped by unfair international conditions of trade.
With respect to the budget, you have, of course, just received the inidsession
review indicating that on a full-employment basis tiiere will be a surplus of $5
billion in the fiscal year starting at the end of this,month. In fact, I would
guess that the economy has already moved into a posture of surplus. With respect
to monetary policy, Go.vernor Daane has already reviewed for you in detail the
gradual and persistent tightening which the Federal Reserve System has introduced over the past year.
For the release of the full productivity of the U.S. economy, you have had reports of the shortrun measures which have been taken and those that have
been proposed, including the release, of nearly 50 million acres of land into
production and the planned reduction of the Government's material stockpiles to
more appropriate levels. For the long run, you are aware, for example, of the
decisions that have been taken to amend the oil import program to make it
possible in the future to build oil refineries in this country rather than to have
to rely on new construction abroad; and you have received the President's recommendations for the deregulation of newly produced gas to encourage expanded
exploration and production in this country.
Such basic measures are the proper response to inflation at home. It is true
that since August of 1971 the increase in our cost of living has been less than
that of any other.one of the 20 members of the OECD. But the performance of
our Wholesale Price Index, which is more relevant to our international trade,
w^as not equally good and, of course, we were greatly disappointed by the increases in our price indices during the flrst quarter of this year. Yet I think there
is justifiable confidence that the basic measures which I have outlined will increasingly be reflected in lower rates of price increase. Moreover, I have seen
no evidence of hesitation within the administration to take additional basic
measures if it should become clear that they are needed. It is, of course, necessary to bear in mind that there is a timelag between decision and results, and
there wo.uld be no wisdom in overturning the boat in the other direction.
In our international trade the improving trend is apparent to all. Over the
first part of this year, the improvement was in large part a reflection of our
higher level of agricultural sales. It is quite possible these sales will not be at
the same high level in the coming quarters. Yet the marked improvement which
EXHIBITS
501
provided a $196 million trade surplus last month in contrast to the deficit of the
previous month depended only in small part on an increase in agricultural sales.
It seems to me that, as a result of the basic improvement of our competitive
position, there is a strong likelihood that in the first half of next year our trade
balance will be markedly stronger than in the first half of this year—stronger
even if agricultural sales are not quite so high, and stronger despite the forecast
of continuing growth in our oil imports.
The real cost of a barrel of imported oil is rising and will probably continue
to rise, and we shall be importing more barrels. The total dollar costs rose from
$2.7 billion in 1969 to $5.1 billion last year. And there are many projections that
the figure will reach $15 billion per year well before 1980. Yet no confidence
can be placed in precision of such long-range forecasts. Necessarily they tend to
be based primarily on extrapolation of past trends and cannot yet have taken
adequately into account the results to be achieved from the President's new
energy program .designed to increase production of all forms of energy in the
United States and designed to use that energy with greater care and efficiency.
I realize that there have been concerns expressed that the large income of
some small producing countries will endanger international monetary stability
in the future. On the other hand, I am also aware that these countries will have
large needs for imports to meet their developmental and their defense needs.
They will be seeking secure and productive investments to replace their assets
from the ground. They know that their reserves of oil will not last forever and
that an important part of their income, must be invested wisely in order that it
may provide income for the time when their production is declining and newly
developed alternative sources of energy have reduced the dependence of the
industrialized world on their supplies. Furthermore, large as their assets may
be compared to their holdings today, their combined assets will not comprise
any large fraction of the capital assets of the world as a whole.
The large income of these countries will represent a real cost to the importers,
but they represent no reason to forecast a weakening of the dollar relative to
the currencies of Europe and Japan. These countries taken together will be
increasing their imports in absolute terms by far more than the United States.
They too will be competing with us to provide exports to the oil producers and
to offer them attractive investment opportunities. In such competition we expect
the United States to be competitive, and the dollar could well come out ahead.
In the short run, of course, we are all familiar with the recent declines in the
value of the dollar in the foreign exchange markets. We have watched the decline in the value of shares on the U.S. stock exchanges. Fears have been expressed that these developments will drive away prospective foreign investors,
and it is true that, at any moment in time, a prospective investor may choose
to wait so long as he expects those trends to continue. On the other hand, the
prospective buyer must be careful not to hold out too long when a bargain is
available but not guaranteed to last. There are large sums in the hands today of
foreigners who are definitely prospective buyers, and I expect they wdll not fail
to notice that the value of the dollar has been increasing in. terms of U.S. shares.
I do not have any reports on net trading in the last few weeks. There was probably no great infiow. But I do know that in the first quarter of this year the
net flow of foreign private portfolio investment into the United States was at
an alltime record rate. I would expect it to be at an even higher rate in the
coming months.
I do not have the skill—or the temerity—to attempt to predict exchange rates
precisely in the coming weeks. My own judgment is, however, that the foreign exchange market has probably misjudged the exteiit to which basic fundamentals
will be reinforciug in the near future the improvement in our trade balance and
enhancing the attractiveness of investment in U.S. dollar assets. On balance,
therefore, I would expect the dollar to strengthen. Fundamentally, however, 1
thirik what is important is not what changes may take place from day to day in the
market valuation of the dollar. What is important is that we appear now to have"
in place a system which can accommodate changes without disrupting the fabric
of international trade, investment, and cooperation. Meanwhile, work on" longterm reform continues.
502
1973 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 71.—Statement by Assistant Secretary Hennessy, September 21, 1972,
before the Latin American Subcommittee of the House Foreign Affairs
Committee
I. am happy to have this opportunity to testify today and to respond fully and
specifically to any comments or questions you may have on the recently submitted
report by the General Accounting Office on U.S.'participation in the Inter-American Development Bank. Several of the issues presented in the body of the report
are very familiar to members of this committee. My predecessor, John R. Petty,
reviewed them with you in. some depth duidng his testimony in January and in
July of 1971.
I would like, first of all, to highlight four main points :
(1) The Treasury Department accepts the three recommendations made
to i t in the GAO report. Action has already b.een taken oris now in the process
of being taken on all of them.
(2) The Treasury Department strongly disagrees with the overalLhighly
critical tone of the.report. We fully.recognize.the need fpr additional improvements in the operations of the Bank. We do not think, however, that the
Bank's record of improvement—in both policy and procedures—has been
placed in proper perspective.
(3) We also fundamentally disagree with the concept,contained in the
GAO report of,how the United States should manage its.participation in a
multilateral institution. Obviously, there is a difference in the way we approach bilateral aid problems and the way we approach multilateral aid problems. Over the long term, howjever, I believe we have developed a system
which takes account of our interests.
(4) The Inter-American Development Bank's successful record of development activity is either minimized or ignored in the GAO report. We,believe
this particular point needs more emphasis as well as the increasing level of
the Latin American contribution to their own economic development and
growth.
With regard to the specific recommendations of the GAO report, the.first one
is that the IJnited States should sort out the recommendations made.by the IDB's
Group of Controllers, decide which it wishes to support, and vigorously pursue
their acceptance and implementation. This is being done. The Group of Controllers has completed three reports: One on loans to Venezuela, another on loans to
Paraguay, and a third on educatipn loans. Three others.are in final stages and
close to.comi.)letion. Aside from recommendations aimed at individual,projects,
each report contains a large number of specific recommendations relating to the
general operations of the Bank. Some of these we can support. Others we do not
agree with. For example, the report on Venezuela suggests expansion of the intraregional export financing program to include consumer durables as well as capital
goods. This we would oppose. The same report also recommends improvements in
the current use of the Bank's regional offices. This we w-ould support.
The report on Paraguay contains recommendations relating to ascertaining
the qualifications of contractors and consultants and to the desirability of improving the performance of intermediate credit institutions. We have supported
these two recommendations within the Bank's Board of Directors and they:have
been adopted. New controls on cost overruns, a problem area also covered in the
Paraguayan report, were given to the Bank's staff on August 4 as a result of
a special report on this matter submitted to the Board of Directors.
The Controller Group's report on. educational, loans has been intensively reviewed,by a special working group of the jSTational Advisory Council. A proposed
U.S. position on .its recommendations is now pending .before the cQ'ouncil. We
expect to have completed action on all the ^recommendations contained in the
three-reports within the next few weeks.
The report of the GAO also recommends that specific instructions.and guidelines be developed for U.S. officials involved in appraising loan proposals. As a
matter of fact, these instructions and guidelines already exist. What does not
exist is a formalized codification. In our judgment, the process of loan appraisals
has not been hampered by this lack of codification. However, we are agreeable to
implementing this recommendation with the understanding that the exercise of
judgment by senior Government officials and the introduction of broad policy considerations will affect the ultimate U.S. position in given cases. This matter is now
EXHIBITS
503
being reviewed by a special NAC working group which will make concrete recommendations by October 15 on how this codification can be carried out
The third GAO recommendation ds that firm lending criteria be developed which
take into account a recipient country's economic performance as-a major criterion
and which provide for limiting access to the Fund for Special Operations. Annual
economic reviews are conducted each year under the aegis of the CIAP with the
participation of representatives from the IMF, the IBRD, and USAID as well as
IDB officials and technicians. It was as a result of the application of the country
criterion and a finding that performance was not adequate that lending activity
was halted in one country for an extended peidod of time. Lending activity was
also stopped in another country following the failure of the government to implement promised fiscal reform. No new loans were made to that country as a result.
These two examples show, I believe, the commitment of the Bank to the country
criterion as an important factor in the conduct of its lending operations. I^do
not claim that the application of lending criteria is perfect, but I- do believe it has
been effective and that actions have been taken which promise to make it more
effective in the future.
In summary, the three recommendations made in the GAO report are fully
consistent with steps Treasury has taken in the past and other steps we plan to
take in the future. I also recognize constructive aspects of criticisms of our
efforts that are made in the report. Both we and the Bank have-been engaged-in
meeting new demands and requirements for some time in these areas. In the long
run, the Latin American countries will be the final losers if our multilateral assistance work within the Inter-American Development Bank Is not carefully planned,
aggressively carried out, and thoughtfully evaluated.
I spoke earlier, Mr. Chairman, of my strong disagreement with the overall
highly critical tone of the GAO report. Let me substantiate with some examples,
at this point, my assertion that there has been a long-term trend of improvement
within the Bank and that much of it has been at the stimulus of the United
States. •
With regard to operational procedures:
(a) The Bank has refined its own internal review-procedures, apart from those
of the Controller Group, to improve its evaluation of completed projects.
(b) It established in January 1972 a loan evaluation committee, chaired by the
Executive Vice President of the Bank whose competence is well-known to this
committee. This committee now regularly screens out weak loan proposals at the
time when initial applications are submitted. It also reviews projects before their
consideration by the Board and bounces back those not ready for action.
(c) The Bank has initiated a study of its data processing requirements with a
view toward setting up a master plan for computer use.
(d) The Board of Directors is taking a more direct and active role in the implementation phase of the Bank's lending activity by instituting on a regular basis
a review of loans already in progress.
(e) The Bank is reorganizing its basic structure and making fundamental procedural changes to further improve the quality of its operations. The reorganization, announced on September 15, will take effect on December 1. It involves,
among other steps, the removal of the function of project preparatiori and
appraisal from country loan offices, to provide even greater" independence of assessment of projects.
With regard to changes in operational policy :
(a) It has been agreed that all lending out of new resources for the Fiind for
Special Operations will be repaid in the currencies lent rather thari in local
currencies—-a significant hardening of the lending terms.
(b) The relative share of FSO loans by the four largest recipient countries will
be reduced from 46 percerit in 1971 to approximately 20 percent in 1975.
(c) As I already mentioned, the Bank has placed greater emphasis than ever
before ori a borrowing country's overall economic performance as a major criterion for lending. Pertinent portions of the annual CIAP review are required to
appear now in all individual loan documents of the Bank, so the United States
and the Board can test the individual project against country performance arid
devielopment priorities.
With regard to mobilization of resources, w^e have also seen progress. For
example:
(a) Non-Latin membership in the Bank, in addition to that 'of the United
States, was achieved when Canada became the 24th member earlier this year;
504
1973 REPORT OF THE SECRETARY OF THE TREASURY
(b) The special committee of the Board of Go-i^emors established at U.S. initiative, reached general agreement last May ona.. formula for allowing nonhemispheric industrial nations (Japan and major European countries), to become
members of the Bank.
(c) Latin American member countries, as part of the current replenishment
negotiation, agreed to increase their contribution to the Fund for Special Operations from $250 million to $500 million and to raise its ratio with the U.S. contribution from 1 to 3 to 1 to 2.
These last three actions reduced the U.S. share of the overall assistance burden
in Latin America. The first of these—Canadian membership—reflects a positive
endorsement of the Bank by a new creditor country member taken only after a
most careful, review by that country.
. In my view, Mr. Chairman, the most disturbing part of the report relates to
the issue of how the United States should manage its participation in the
Bank. Throughout the report, despite statements to the contrary, a viewpoint is
vigorously pressed, much different from that of my Department and the executive branch, of how the United State's should operate in a multilateral institution.
It implies that one has to have a tough take-it-or-leave-it attitude—^maintain a
"high profile" in order to be effective. I very strongly disagree. Although the
United States is the major contributor, it is only 1 of 24 contributors. We do not.
want and ishould not want to unilaterally dictate policy to other Directors of the
Bank or to the management of the Bank. This does not mean, of course, that we
should not stand up and fight for policies or changes we think are fundamental
to the Bank's future. But it does mean the United States cannot act in an international institution exactly the same as in a bilateral one. This misconception—applying a bilateral standard to a multilateral institution—is, in my judgment, the
single greatest shortcoming of the report.
It should be recognized that in using multilateral channels of development
finance, the United States gives up the 100-percent control we have in a bilateral
organization. In return, we obtain other benefits which we do not get through bilateralisni. I will not list them all here- but they include, among others, a mpre
equitable sharing of the burden of providing resources, the availability of multilateral expertise, and the encouragement of self-help.
In taking the position that it has, the GAO report attacks what is, to ns, a
central theme of multilateralism: The idea that each developing country should
assume a greater responsibility for establishing its own development priorities,
for raising resources, and completing the projects which will contribute to its
developnient and growth. It is very clear that the idea of a more equal relationship between donor and recipient countries dpes not fit at all with the view
pressed in the GAO report of how w^e should manage our participation in the
affairs of the Inter-American Development Bank.
On the last of my four points, I believe it w^ould be useful to empliasize, for
the record, the substantial impact which the Inter-Ameri can Development Bank
has had on the economic development of Latin America. Since its establishment in
1959, it has made approximately 700 different loan commitments, including those
from the Ordinary Capital, the Fund for Special Operations, and the Social Progress Trust Fund, which have totaled nearly $5 billion: Cumulative disbursements have been made on these commitments which exceed $2.2 billion. The Bank
has an excellent record of receiving loan repayments. The two defaults—a very
minor part of the Bank's portfolio—were on loans made in its early years, .and
porr^ctive actipn was taken to ay oid any recurrence. Much of the Bank's effort
has been concentrated in agriculture, transportation, and electric power, with the
social services, including educatipn, housing, and w^ater supply and sewerage,
receiving emphasis. Many of these efforts were pioneering ones in fields not previously covered by this kind of institution. Through its program of loans through
intermediate credit institutions, the Bank has been innovative and pioneered in
providing loans to small farmers and entrepreneurs. An appendix attached to
my statement gives specific detail on the lending of the Bank.^ At the same
time, the Bank has established a higli credit rating in the world's private capital
markets and is assured of continuing access to funds of this type which substantia.ll,y. augment the direct contributions of the United States and other members.
Asof June 30,1972, it had a funded debt of more than $1 billion outstanding in the
United States and 15 other, markets. In. other words, the private market here
and abroad has a good opinion of the value of the IDB poftfolib.,
;
i will be happy to answer any specific questions you have at this point.
1 Omitted from this exhibit.
EXHIBITS
50^
Exhibit 72.-~Statement of Assistant Secretary Hennessy, October 10, 1972,
before the Foreign Operations and Government Information Subcommittee
of the House Committee on Government Operations
Mr. Chairman and members of the subcommittee, I am glad to review again
with you our progress since the last hearing in the reporting and collecting of
overdue foreign debts owed to the U.S. Goyernment. The chairman's letter to the
Department of the Treasury indicates that today's debt review will be concentrated mainly on the countries which may be visited by the subcommittee in an
inspection mission to several U.S. Embassies in Europe, North Africa, and the
Near East later this year. We have already made some preliminary material
available to the subcommittee staff concerning the debt arrearages of these countries, and I will be glad to comment on the arrearages in more detail.
With the chairman's permission, I would like to take this opportunity to discuss
first some of the recent developments in the debt area in order to bring up to date
the discussion of these matters.
As you all know well, the subcommittee has been asking since its initial hearing in 1970 for a statement of the total debt—long- and short-term—owed
to the U.S. Government by foreigners. On previous occasions we have had to
reply that we lacked complete information on the short-term portion of this
debt. During the hearing last February, I was able to give you only preliminary
and incomplete figures, because at that time we had not yet received complete
reports on the short-term foreign debts and accounts receivable of the military
departments.
I am glad to say that we are now able to give you the figures you have requested on total foreign debt to the U.S. Government. We have obtained reports
as of June 30, 1972, from the Government agencies of their short-term foreign
credits and accounts receivable from foreigners, and I am now able to give you
a preliminary total figure. As of June 30, 1972, the preliminary grand total
of foreign indebtedness to the U.S. Government was $30.6,billion; of this amount
$660 million was reported to be in arrears.* The figures are summarized in the
following table:
"
['/.[..'
Foreign credits and accounts receivable reported by U.S. Government agencies
as of June 30, 1972
[ I n millions of dollars]
Principal
outstanding
Long-term credits
Short-term credits
Accounts receivable
Grand total
"
.
-..—-
Amount in
arrears
30,117
82
356
374
6
280
30,555
660
I would like to offer a few general comments on these figures. The total of
short-term credits and accounts receivable outstanding—over $435 -million for
June 30, 1972—considerably exceeds the approximately $200 million we reported
in February on a preliminary and incomplete basis for June 30, 1971. The 1971
figure did not include complete reports by the military agencies. During my
testimony in February, I estimated that the amounts remaining to be reported
by the military could amount to as much as several hundred million dollars.
The amounts reported this year by the military were $285 inillion, of which about
$245 million was in arrears. The largest portion of the arrearages reported by the military agencies,
about $200 million, represents amounts on their books arising from logistical
support provided to allied military forces during the operations conducted
under U.N. auspices—in Korea and in the Congo.
The military arrearages have been under careful review by the National
Advisory Council. Only last month, the NAC held a meeting with representatives
of the various services.to discuss, the problems connected with debts owed the.
military agencies. The Council will continue to keep these matters under careful
*This excludes t h e World W a r I indebtedness, of which $19.9 billion is due and unpaid.
50i5
1973 REPORT OF THE SECRETARY OF THE TREASURY
and energetic review, and it is expected that recommendations concerning^ the
disposition of these claims will be developed shortly:
Our ability to provide you w i t h a figure on total debt ow^ed to'the U.S. Government rests on the fact that our reporting system for short-term credits and accounts receivable has been completed and is operating satisfactorily. We believe
that our present reporting regulatioris are adequate to produce these figures
regularly in the future at 6-month intervals, as of June 30 and December 31
of each year. Therefore, we will'provide these data to the Cohgress regularly
in the future. I should like to add that on the basis of these reports the Nationail
Advisory Council will subject arrearages on short-term credits and accounts
receivable to the same full scrutiny as we give to the arrearages on long-term
debt
Turning now to the debt status of the countries included in yoiir inspection
mission, most of the arrearages owed by these 10 countries are ofthe type which
have for the first time beeh reported to Treasury^ under our new reporting requirements. As the table below shows, nearly all of the official arrearages of
these countries are either accounts receivable or short-term credits owed to the
various aigencies, mostly the military services.
Indebtedness of selected countries ib U.S. Government agencies—Amounts repoi'ted as
of June 30, 1972
[In thousands of dollars or dollar equivalents]
Total
outstanding
Country and type of obligor
Cyprus
.. '
Official
Private
Germany
Official
Private
Greece
NANA . .
208,407
'-
Official..
Private
Iran
-..
Official
Private
Italy.
Official
Morocco
O'fficial
Private
Spain
NA
NA
313,911
NA
NA
36,042
;
-
.
Official
Private
Tunisia
Official...
Private
Turkey
Official
Private
Total, 10 countries NA Not available.
•Less than $500.
.
•
NA
NA
768,478
NA
NA . .
242,227
NA
NA
465,885
NA'
NA541,392
Long-term
credits
(*)
202
192
188
4
328
Accounts
receivable
( * ) •
202
39
153
39
149
4
199
199
.
.
_
.
129
328 .
129
18,440
18,440
(*)
(*)
(*)
40
18,400
40
18,400
(*)
36,664
35,624
51
36,664
35,624
51
989
14,622 .
45
14,577
14,622 .
45
14,577
207 .
3
204
206 .
1 5; 032
3
203
1
5,006
(*)
NA
NA
308,349
NA
NA
1,259,495
NA
NA
53
8
87,729
87,472 .
257
(>
*
61
163,477
26"-
(*)
989
26
5,032 .
4,148,062
Short-term
credits
202
202
3,876
--
Official
PrivateFrance
_
Amounts due and unpaid 90 days or more
Total
(*)
5,006
60
1
62
8
257
87,472
1
87,472
257
36,143
333
127,001
EXHIBITS
507
The largest portion of the amounts due the military represents logistic
support expenses going back to the Korean operations, the status of which is
presently being examined. The remainder of the military accounts represents
mostly short-term credit sales. In this category, Italy is the major debtor—about
$14.5 million. The other more significant arrearages, which range from about
$100,000 to $1 million, are owed by France, Greece, Iran, and Turkey. The rest
of the short-term arrearages in these countries relate to current programs of the
various U.S. agencies, including the Departments of State, Commerce, and
Justice, the AID, and the Federal Aviation Administration.
The only major long-term item in arrears is the lend-lease and surplus property
debt of Iran which arose from World War II.
This, Mr. Chairman, concludes my prepared statement. I will be glad to answer
any questions you may have.
Exhibit 73,—Statement by Assistant Secretary Hennessy, March 1, 1973, before
the Foreign Operations and Government Information Subcommittee of the
House Committee on Government Operations
Mr. Chairman and members of the subcommittee, I am pleased to have the
opportunity to review with you once again the progress and problems connected
with the collection of delinquent foreign debt owed to the United States. ALS you
indicated in your letter to Secretary Shultz, today's review wiU focus primarily
on debt matters pertaining to the eight countries you and your staff visited
at the end of last year. The hearings you held abroad in these selected countries
have, in my opinion, further emphasized the degree of congressional concern
with foreign debt arrearages and demonstrated the determination of our Government to find ways which will assure that the obligations of foreign governments
to us will be paid promptly and fully.
As you said in your letter, Mr. Chairman, the hearings abroad have indicated
that, at least in these particular countries, the military arrearages represent a
major percentage of the delinquencies. Consequently, you have asked that we
focus this morning on any problems and suggestions we might have to improve
the collection of such debts.
The Treasury Department's collection of information on military debt arrearages, other than long-term military sales, is of comparatively recent origin.
The arrearages we are discussing here represent principally accounts receivable
from foreigners by the military, the systematic reporting of which was only
begun less than a year ago. Prior to that time our reporting system only included foreign debt obligations with a maturity of longer than 1 year. As you
well know, it was pursuant to your subcommittee's suggestion that we broadened
our reporting requirements to include, in addition, all foreign accounts receivable
and short-term credits of U.S. Government agencies.
Since we first learned of the magnitude of the military debt arrearages which
had previously not been reported to Treasury, we have established close contact
with the military departments for the purpose of ascertaining: the nature of
these arrearages. Last fall, for example, the Natiohal Advisory Council held a
meeting with the participation of all interested agencies, where the military arrearages were discussed in considerable detail. In addition, both in connectipn
with our reporting functions and our responsibilities to provide current information on country debts to the National Advisory Council, we are in contact.
with the military on staff level concerning the arrearages.
We have compiled a table on the arrearages of the eight countries that the
subcommittee visited, broken down between military and other debts. I would
like to submit this table for the record.
Since.representatives of the Defense Department and.the military agencies
appearing before you today are far better qualified than I am to comment on
the specific problems pertaining to the collection of debts owed to them, I will
limit myself here to some general observations. As I mentioned when I last
testified before the subcommittee, by far the largest portion of military debt
arrearages arose frorii,logistical support provided by the United States to other
nations during the Korean confiict and the U.N. operatibns in the Congo. At the
end of 1972, these accounts amounted to approximately $204 million of the $250
million total due and unpaid military arrearages. Indeed, two of the largest
amounts set forth in the attached table, namely amounts listed for Turkey and
506-171—73
35
508
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Arrearages on debts of selected countries to the U.S. Governinent, as of June 30 and
December 31, 1972
[In dollars or dollar equivalents]
Country and type of arrearage
June 30,1972
3?rance
.
xMilitary...
Other
Greece
.441,140
163,194
6,170
437,611
• 3,629
..
202,911
187,862
_.
Germany, Federal Republic of
169,364
....1.
Military
Other
173,946
28,966
171,288
16,564
_
18,400,033 •
14, 577,169
Military.
Other..Morocco.
1,345,866
36,711,897
16, 246,484
14, 676, 023
1,146
Italy..
37, 067,763
949,838
35,857, 681
Military.
Other 2..
18,217,617
46,449
36,807,4.19
Iran.
18, 264,066
18,398,691
1,342
Military '
Other
16,244,661
823
206,603
8, 679
205, 762
Military.
Other....
8,474
105
741
Spain..
6,036,399
.
388,347
4,112, 647
923,862
Turkey
.-..-
366 616
21,731
87, 728,496
Military
Other
Military 3
Other
. .
December 31,1972
87,903,384
87,471,394
267,102
87,559,643
343,741
1 .Includes $17,440,122 representing logistic support provided during the Korean conflict.
2 Inclades arrearages on World War ir accounts ($35,603,711 as of Dec. 31,1972). •
3 Includes $86,792,033 representing logistic support provided during the Korean conflict.
^
Greece, represent such logistical support costs. These logistical support claims,
as you noted, Mr. Chairman, during one of the hearings in Europe, are very
controversial and difficult to resolve, with political as well as financial implications.
Of the remainder of the military debt arrearages on December 31, 1972, military sales on short-term credit accounted for $38 million ; long-term credit sales,
$4 million; unpaid military mission costs, $3 million; and other logistical support expenses, $1 million.
I understand that the specific problems which have given rise to these
arrearages will be discussed by representatives of the military departments.
Let me just say that we consider it essential that the creditor agencies review
their billing and collection procedures to assure • timely payments by fbreign
debtors. If payments are not received on time, consideration should be given to
imposing penalty charges on the unpaid balances.
It is important, however, that arrearage data reported by the military agencies
do in fact represent overdue obligations of the foreign governments. Because of
the nature of the billing process, some of the amounts recorded as outstanding
on the books of U.S. agencies may not be recorded as firm obligations on the
books of the foreign debtor. For example, some of the amounts may be contested
by the foreign govemment because of discrepancies in quantity or condition of
the items delivered. During the time when these accounts are being reconciled
EXHIBITS
509
with the foreign governments, there is a question whether they should be characterized by the creditor agencies as delinquent. Consequently, it may be desirable to set up a new category in agency reporting which would distinguish
between amounts clearly delinquent and those which are outstanding but under
discussion with the foreign governments'. This would be an additional step in
the accurate reporting of foreign debt arrearages.
Turning to the role of our diplomatic representatives in debt collection, you
have noted, Mr. Chairman, that some of our embassy personnel had little or no
knowledge of the debt arrearages of the countries you visited last year. We
could provide comprehensive tabulations of arrearages to our diplomatic missions on the basis of the agency reports submitted to Treasury. However,
considerable explanatory material on each debt problem would have to be
furnished by each creditor agency at the same time if the data were to be
meaningful. This would require a very substantial effort on the part of the
Government. I question whether providing such detailed information on the
whole range of debt arrearages to our posts abroad would justify the very substantial cost since diplomatic intervention in the ' debt collection process is
required only in a relatively few specific cases.
In my view, each creditor agency should collect the obligations resulting from
its programs and should request assistance from the State Department only
after its own procedures have been fully exhausted. In my opinion, it would be
an error to shift the responsibility for debt collection to our diplomatic posts.
Although their assistance has certainly been utilized in the past and should
continue to be relied on in the future, the shifting of responsibility would inevitably result in a duplication of eff'orts, added costs and, conceivably, in the
relaxation of collection eff'orts by the responsible agencies. Nevertheless, I
understand that the Department of State, when a claim is fully documented and
is ripe for diplomatic intervention, does not hesitate to use the full range of its
diplomatic mechanism to settle overdue accounts.
Finally, Mr. Chairman, you have asked for our views on the possible acceleration of payments, particularly by countries with strong reserve positions. It
must be stressed that the foreign debts are contractual in nature and thus their
repayment terms can be altered only by mutual agreement. In a number of cases
we have had considerable success in reaching such. agreements. For example,
most of the Western European countries, particularly Germany, France, Italy,
and the Netherlands, have already prepaid a substantial portion of their war
accounts and Marshall plan debt to the U.S. Government. Specifically, since the
late 1950's we have received approximately $2.2 billion of prepayments from
these European countries on lend-lease, surplus property, and other war account
loans and the Marshall plan loans. The remaining obligations on such loans are
relatively small for some of these countries. For example, as of June 30 last
year, Germany owed $1.8 million and Italy only $1.2 million on these loans.
We are constantly alert to opportunities to maximize Government receipts.
One recent occasion on which we were particularly successful was the repayment
ofthe $355 million U.S. capital contribution to the European Monetary Agreement
at the beginning of the year. We felt that the purposes of fhe EMA, which was
originally founded by grant from our Economic Cooperation Administration
in 1948, namely, to facilitate full convertibility of the currencies of European
members, had been achieved. After several years of discussions, it was decided
last December to terminate the Agreement and return to the United States its
contribution and earnings thereon. The United States has received a total of
$355 million, which represents the initial U.S. contribution of over $270 million
and accumulated interest of $84 million. The funds returned by EMA consist
of a cash payment of $118 million, a release of $123.5 million which had been held
by Treasury in a trust account in the name of the OECD, and the assignment
of a long-term claim on Turkey of $114 million. We believe this was a very constructive step by members of the EMA.
In addition, we have been discussing with the Japanese Government the possibility of prepayment of their obligation stemming from our economic assistance
to that country after World War II. These discussions have been concluded,,and
the .Japanese Governraent has agreed in principle to make payment.in the near
future, which mil extinguish this obligation.
This, Mr. Chairman, concludes my prepared statement. I will be glad to answer
any questions you may have.
510
1973 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 74.—Statement by Assistant Secretary Hennessy, March 28, 1973, before
the Subcommittee on Multinational Corporations of the Senate Foreign Relations Gommittee
You have asked us to review the record of lending to Chile by the international
development institutions since November 1970, when Salvador Allende was
elected President of Chile. You have also asked nie to comment on the contacts
between the Treasury Department and the International Telephone and Telegraph Corp. and any role that company may have played in influencing Treasury
Department views in this area.
There are three international development lending institutions from which
Chile pr Chilean nationals are eligible to borrow. These are the World Bank,
the International Finance Corporation (IFC), and the Inter-American Development Bank (IDB). Chile is not eligible to borrow from the International Develppment Association, since lending by this institution is limited to .the poorest
of the developing countries.
' The record of international institution lending is as follows :
In the World Bank, just before the close of its fiscal year in June 1970,
three loans were made to Chile totaling $18.9 million. Subsequently, monthly
reports of projects under consideration circulated to the Executive Board of the
World Bank and IFC show that at various times a total of eight projects involving possible loans to Chile or its nationals were under review. These reports to
the Executive Board also disclose that no loans h^ve been made since the election
by either institution and no loans are now under active consideration.
In the IDB, operations reports to the Board of Directors indicate that two
loans were under consideration by the staff in the pre-November 1970 period.
Both loans were for educational development—one of $7 million to the Universidad Catolica de Chile, and another of $4.6 million to the Universidad
Austral de Chile. These loans were brought before the Executive Board of the
Bank and were approved on .Tannary 14, 1971. No loans have been made by
IDB to Chile since that time. The Bank staff now has a number of investment
proposals under technical review.
In years prior to 1971, Chile had been a major recipient of development
assistance provided through the multilateral lending institutions. Since their
inception Chile has received over $270 million in loans from the World Bank
Group and $312 million from the IDB. The major decline in lending is explained
by a number of factors.
Initially, with a new government coming to power in Chile on a platform calling
for far-reaching chan.ges in the economic structure of the country, it was appropriate for the development banks to wait until the new administration's development program had been -formulated before commencing new lendine programs.
The banks place great emphasis on the economic and financial condition of the
borrower in making loans, and had to be concerned about how the proposed
structnral changes would affect the Chilean economv, and its ability to utilize
and reoav fbrei.sm borrowings. Their charters make the assurance of riepayment
an explicit reouirement.
In point of fact, over the past 2 years, the performance of the Chilean economy
has been poor and a major reason for the present lack of new lending by the
international development institutions. This was brought irito sharp focus by
World Bank President Robert McNamara at the meetin.ir of the United Nations
Economic and Social Council in October of 1972. McNamara stated that a. primary condition for bank lending which Chile had failed to meet was a soundly
managed economy with a clear potential for utilizing additional funds effectivelv.
McNamara indicated that rampant inflation, a balance of payments deficit
of $370 million for 1972, and successive annnal losses in net foreign exchansre
reserves, even after Chile had suspended most payments on its external deb^s,
were grounds for the Bank's decision not to initiate new projects in Chile. He
made the further point that no amount of external financial assistance could
substitute for needed internal measures and under present conditions it was
simply impossible for Bank funds to be nsed productively for the benefit of the
Chilean people and with reasonable possibility of repayment which the Bank's
Articles of Agreement required.
Thus, if for no other reason, the international development banks have not
been lendin.g to Chile because of problems of creditworthiness. But there are two
other factors—debt repayment record and fulfillment of international obligations—which also apply to this situation.
In the case of Chile, there is a .general debt repayment problem and particular
problems of debt repudiation. In November 1971, Chile declared a unilateral
EXHIBITS
511
moratorium on its external public debt, due to its precarious balance of payments
situation. Although a multilateral agreement was reached in April 1972 on
rescheduluig of 1971-72 maturities, Chile is again in default on repayments due
in 1973 and is behind schedule on repayments to certain of the international
institutions.
In 'addition, there are two cases of actual debt repudiation. Chile has repudiated a $153 million debt owed to the Anaconda Copper Corp. It has unilaterally disallowed $8 million of a government-guaranteed debt to the Kennecott
Copper Co., and it has defaulted on payments on the remaining debt to Kennecott that was recently assumed by the Overseas Private Investment
Corporation.
Any bank—whether for development or other purposes—must take importantly into account a country's situation on paying existing international obligations when considering the granting of new loans. When the most recent repayment record is questionable, commonsense alone would dictate a go-slow policy in
approving loans.
Chile's eligibility for new loans has also been adversely.aff'ected by its expropriation without compensation of the Kennecott Copper Co. and the Anaconda
Copper Corp., as well as the intervention of the International Telephone and
Telegraph Corp. with the subsequently announced intention of expropriating
that company. Adequate compensation is being effectively denied through the
unprecedented and illegal deduction of alleged excess profits. Moreover, Chile
has failed to provide the companies with any genuine mode of appeal of the government's decisions—a clear denial of justice under international law. These
actions are in violation of international law. .
Because of the importance of these two factors—debt repayment record and
fulfillment of international obligations, especially those concerning compensation for expropriation—the World Bank has developed a formal policy position on these two questions. The World Bank will not lend to countries that have
defaulted on private debt obligations or expropriated foreign private investments without compensation unless there is evidence that satisfactory progress
is being made toward settlement of the dispute. This policy came about originally
because of the Bank's concern over defaults on external bond issues held by
foreign private investors. The Bank felt that it had a direct stake in the principle of repayment on international bonds in view of its heavy reliance on private
capital markets as a source of its own funds. The Bank's policy has evolved to
include—^for similar underlying reasons—situations where expropriation of direct
investments takes place.
The United States has a policy similar to that of the World Bank. On January 19, 1972, in a statement on "Economic Assistance and Investment Security
in Developing Nations," the President took the position that when a country
expropriates a significant U.S. interest without making reasonable provision for
comx)ensation to U.S. citizens, there will be a presumption that the United States
will not extend bilateral economic benefits to the expropriating country unless
and until it is determined that the country is taking reasonable steps to provide
adequate compensation or that there are major factors affecting U:S. interests
which require continuance of all or part of these benefits. The same presumption
applies to the multilateral institutions. In the face of expropriation without
compensation, the United States will vrithhold its support from loans to. the
expropriating country under consideration in the multilateral development banks.
Congressional policy has also dictated U.S. position in opposition to lending by
the international financial institutions to countries that expropriate Americanowned property without compensation. This is not a new concern but has run
through the history of the U.S. foreign assistance program. You are all aware of
the Hickenlooper amendment.
More recently. Congress has provided even more specific instructions affecting
U.S. voting in international development banks in the form of the Gonzalez
amendment, adopted in March 1972. That amendment requires a negative vote
against loans to countries that expropriate American property without compensation unless compensation has been made, or good-faith negotiations are in
progress leading to prompt, adequate, and effective compensation under international law, or the dispute has been submitted to arbitration.
The formalization, through a policy statement, of the President's position
on expropriation without compensation, as well as the expression of congressional policy contained in the Gonzalez amendment, can be explained in part
by the expropriations that have occurred in recent years, including the Chilean
512
1973 REPORT OF THE SECRETARY OF THE TREASURY
expropriations. In dealing with this problero, it is necessary for the executive
branch to follow the situation closely and to obtain current information both
from the American companies and the country involved. This is, in fact, required
by the President's investment security statement and is inherent in the Gonzalez
amendment which calls upon the President to make an assessment of whether
good-faith negotiations aimed at providing compensation are in progress. Information comes to the United States from various sources—from foreign embassies and from our embassies abroad, among others. It also comes to the United
States from direct contacts with American businessmen.
A procedure has been developed for dealing with the facts and opinions obtained
from these information sources. An interagency group under the chairmanship
of the State Department has been established under the Council on International
Economic Policy to. review expropriation cases and to recommend courses of
action for the U.S. Govemment. In matters concerning votes in the international
financial institutions, the advice of the CIEP group, as well as the National
Advisory Council on International Financial Policies, is conveyed to the Secretary of the Treasury, to whom the President has delegated responsibility for
instructing the U.S. Executive Directors on voting where Gonzalez amendment
questions are involved. In the case of the Chilean expropriations, we have
attempted to stay on top of factual developments, and this has included contacts
with all the American companies involved, including ITT.
In closing, I must emphasize that the decisions on. U.S. Government policy in
expropriation matters are strictly determined by the overall national interests
of the United States. More specifically, as applied to the multilateral development
banks, U.S. Government policy has been formulated on the basis of the longstanding policies of the institutions themselves, as well as by Presidential policies
and congressional directives.
Exhibit 75.—Statement by Assistant Secretary Hennessy, April 5 1973, before
>
the Foreign Operations Subcommittee of the House Appropriations
Committee
I am here this morning to testify in favor of President Nixon's fiscal 1974
appropriations requests totaling $1.2 billion for the international lending institutions. I strongly urge that you and the Congress act promptly and appropriate
the full amounts which are being requested.
My statement addresses itself to the broader issues of U.S. Government participation in the three institutions since the Secretary of the Treasury has overall
responsibility. The U.S. representative in each of the institutions will accompany
me and provide you with a statement on the details of operations in his respective
bank.
Before providing information on the specific requests and on the operations of
the institutions, I would like to raise two questions which I consider important.
The first question i s : Why should you appropriate this amount of money for
foreign economic assistance at a time of extreme budgetary stringency and serious balance of payments and trade problems? This year the entire budget has
been subject to extremely close scrutiny in terms of our national interests. The
President has assigned a high priority to the international lending institutions
and for very practical reasons.
It is clear, Mr. Chairman, that our first concern must be for the welfare of the
American people. It is also clear tliat as a Nation, we have import.ant interests.in
the developing areas of the world. Their economic growtli and stability are in
actual fact important to us for economic as well as general foreign policy reasons.
Our economic interdependence with all nations, and particularly these, has grown.
Today they provide raw materials, as well as manufactured and semimanufactured products, which are vital to the continued vitality and noninflationary
expansion of our economy. A little-known fact is that year after year the Unitecl
States has had a positive trade balance with the less developed countries (including a modest surplus last year when we ran a large deficit with the rest of the
world). The truth is that they are good customers and it is in our interest to provide them with capital to expand their economies and their ability to repay us.
A second little-known fact is that we get one-third of pur raw materials imports from them now, and this figure is almost certain to rise in the future.
A third little-known fact is the importance of how our investment eamings in
these countries contribute to our balance of payments and to th^e welfare of our
people. The United States has close to $25 billion in private direct investments
EXHIBITS
513
in less developed countries. Multilateral bank loans help provide the infrastructure to complement the activity of private capital. In 1972, the gross infiow of
repatriated earnings, dividends, interest, royalties, and fees to this country from
LDC's amounted to $4.2 billion. Even after allowing for investment outfiows,
there was still a net infiow of $2.6 billion.
.Aside from the economic reasons I have just outlined, there is a second reason
why the foreign assistance that we provide through the international lending
institutions has been included in this year's budget. Such assistance fits in with
the President's overall foreign policy. Moreover, we are now engaged in negotiations on important matters of international trade and international finance. The
question of development assistance is closely related to and even interdependent
with these other two questions. All three are "legs of the same stool." We cannot,
..in my view, expect to achieve our objectives in trade and finance unless we are
willing to provide our fair share for economic development.
After why, the second major question, Mr. Chairman, is how to provide foreign
economic assista.nce. Why use multilateral institutions? The answer is that the
international institutions are efficient and effective. They have been organized
and operated as responsible financial institutions. They sell their bonds in the
marketplace and they are disciplined by the demands of the marketplace. This
discipline is reflected in good organization, management, and staffing and high
quality of analysis. In my judgment, there is a place for them just as there is an
important place for bilateral aid programs. The multilateral and bilateral programs complement each other.
There is also the financial advantage of burden-sharing. U.S. Government
paid-in contributions—an important element of what we are asking you to appropriate today—are greatly increased by paid-in contributions of other developed
countries. Since the inception of the institutions, these other developed countries
have provided a total of $4.8 billion. Their share is steadily increasing and
smaller industrial countries who could not mount their own bilateral programs
can contribute through the Banks. Thus, we get a greater degree of burdensharing than we would otherwise get.
The paid-in capital contributions of the U.S. Government are also leveraged
to a great extent by the Banks' borrowings in the world's private capital markets.
Since the establishment of the Banks, 77 percent of capital funds, or a total of
$14 billion, has come from private markets and has been relent at market or
near-market rates. This represents an enormous mobilization of private capital
for economic development purposes at no cost to the U.S. taxpayer. Furthermore,
in recent years a large and growing percentage of these borrowings have been
made in Western Europe and Japan. In fact, during the past 2 years, borrowings
by the international institutions have taken place almost exclusively outside
the United States. As a Treasury official, I consider these budgetary and foreign
exchange factors important ones to keepi in mind.
Against this background, let me turn,now to the specific proposals befpre you
which are summarized in this table by institution.
Fiscal year 1974 budgetary requests for the international financiai institutions
[In millions of dollars]
International Development Association
Inter-American Development Bank:
Callabie Ordinary Capital
Paid-in Ordinary Capital
J—_
$320
—
168
25
193
Fund for Special Operations
Asian Development Bank:
Special Funds__
;
500 .
100
Callable Ordinary Capital
96.8
Paid-in Ordinary Capital
24. 2
121
1,234
514
19 73 REPORT OF THE SECRETARY OF THE TREASURY
New budget authority sought this year amounts to $1.2 billion: $320 million for
the International Development Association; $500 inillion for the Fund for
Special Operations of the Inter-American Development Bank and $193 million
to its Ordinary Capital resources; $100 million to the Special Funds of the
Asian Development Bank and $121 million to its Ordinary Capital.
A large portion of this total relates to programs for which funding was
sought but not received in fiscal 1973. The amounts not funded under the fiscal
1973 continuing resolution are: $193 million for the Ordinary Capital of the
Inter-American Development Bank, $225 million for the Fund for Special Operations, and $100 million for the Special Funds of the Asian Development Bank.
Projected budgetary outlays for fiscal 1974 amount to $548 million, practically
all of which stems from prior-year appropriation..
The IDA contribution of $320 million is the second tranche of the third replenishment. The third replenishment formally came into effect in September
1972 when the United States agreed to make available its share of $960 million.
Shortly thereafter the United States paid its first tranche of $320 million under
the continuing resolution of October 2^, 1972. Urider terms of the original agreement, the second tranche was due on November 15,' 1972.
As members of the committee know, IDA is the concessional lending affiliate
of the International Bank for Reconstruction and Development. Its funds are
used to finance development projects and programs on concessional terms, in
the poorest of the developing countries, i.e., those countries with annual per
capita incomes of $300 or below. Its terms are 50 years maturity, including
10 years grace, and a service charge of three-fourths of 1 percent per annum.
As of 31 December 1972, it had made total curiiulative cominitments of $4,608
million mainly in agriculture and transportation. In recent years, it has placed
an increasing emphasis on education, housing; and related areas.
In its report of May 11, 1972, the committee,of conference on supplemental
appropriations said: "The managers agree that there is no intention of denying
each of the three annuar installments of $320 niillion in the next 3 fiscal years
and that the first installment will be provided in the iiscal year beginning July 1,
1972." I urge this subcommittee to act promptly in the spirit of that joint explanatory statement.
.
'
The $193 million for the Inter-American Development Bank's Ordinary Capital
is part of the third and final tranche of the current increase in those resources.
$168 million of this amount represents callable! guarantee capital and does hot
constitute a budgetary outlay. $25 million is to be paid-in. It will, however, be
paid in the form of non-interest-bearing letters' of credit and not constitute a
budgetary outlay in fiscal 19^74. These two amounts, as well as the $193 million
appropriated by the Congress in fiscal 19^3's continuing resolution, will be due
under terms of the original agreement on June 30,1973.
The $500 million for. FSO resources represents further funding toward our
$1 billion contribution to the concessional lending resources of the IDB. All of
these funds will also be provided in letter of credit form to be drawn down
later. As a result, there will be no budgetary impact in fiscal 1974. Under
the original understanding between the United States and Latin countries,
the United States would have completed the final installment of the $1 billion
contribution by the end of fiscal 1973. Assuming full appropriation of this
year's request, $775 million will have been provided before the end of fiscal 1974.
Provision of the requested $500 million will thus still represent a considerable
stretchout of the U.S. contribution to the FSO replenishment.
On .January 1 of this year, uncommitted hard currenc.v resources available to
the FSO were $353 million. This included $20 million from the Canadian contribution, $275 million which we made available on December 21, 1972, under the
continuing resolution and prior appropriation, and $56 million in residual resources. These funds, however, are now expected to be exhausted in the final
quarter of this year. Action on your part is needed if IDB concessional lending
activity is to continue through this calendar year.
The first Asian Development Bank request is for $100 million for Special
Funds for concessional lending. It w^as deleted entirely for fiscal 1973 under the
terms of the continuing resolution. Thus far, the United States has not been able
to make any funds available to the Bank for this program, although proposals
to do so have been before the Congress for several years. Other developed nations—the United Kingdom, Canada, Australia, New Zealand, the Netherlands.
EXHIBITS
515
Norway, Germany, Italy, Belgium, Finland, and Japan—have gone ahead to
make more than $240 million available to the Bank on an ad hoc bilateral basis.
As of December 31, 1972, $201.5 million had been committed on Special Funds
loans, and the balance of the Bank's Special Funds resources is expected to be
fully committed by September of this year.
Under the terms of authorizing legislation passed by the Cpngress in February
1972, the funds in this request are to be tied to the purchase of goods and services and priority is to be given to projects and programs in Southeast Asia. Until
we contribute, U.S. suppliers will remain ineligible for procurement from the
contributed Special Funds resources of the Bank. This item has beendong delayed. I urge its prompt passage.
The other portion of our ADB request relates to the increase in the Ordinary
Capital resources of the Bank. The Governors of the Bank, with the U.S. Governor abstaining, passed a resolution in November 1971 authorizing a. 150-percent
increase in the capital stock. This was done in order to permit an orderly lOpercent per annum increase in the Ordinary Capital lending of the Bank over
the years 1973-75. By November 1972, enough members had taken up their shares.
to permit the increase in resources formally to come into effect. When this happened, the voting power of the' United States was automatically reduced from .
16 percent to 8 percent while that of other countries rose proportionally in the
absence of U.S. participation.
Authorizing legislation for U.S. participation will be submitted to the Congress shortly. We are thus testifying today on an appropriation request that will,
be for later transmittal. Assuming approval of the proposed legislation on change
of par value, the total authorization would be for $362 million. Of this amount,
80 percent, or $289 million, would be callable guarantee capital and not constitute an actual budgetary outlay. The remaining 20 percent, $72.4 million, would
be paid-in over a 3-year period, 40 percent in cash and 60 percent in non-interestbearing letters of credit to be drawn down later as needed for disbursement.
New budget authority being requested for fiscal 1974 would be $121 million.
Fiscal 1974 budgetary impact is limited to $9,6 million. This appropriation
should go forward in order to permit the United States to. regain its original
equity position in the Bank.
That completes my review of the specific amounts being requested. I would
like to turn now to some matters that may result in future appropriations requests. Over the past year. Treasury has sought to find better ways of consulting with the Congress in advance of formal appropriations requests so that, as
specifically requested by this committee, no new international commitments are
entered into without your full prior knowledge. It is in this spirit that we have
kept the Congress and your committee, Mr. Chairman, informed by letter and,
by informal briefings.. Now I want to summarize, formally and for the record,
where we stand on two important issues: A fourth replenishment of IDA and the
restructuring and replenishment of ADB Special Funds.
First, with regard to IDA IV, as I indicated in my letter to you of March 6,
a meeting of part I countries was held on March 13, in London. Other developed
nations are now clearly ready to go ahead with a new round of cohtributions to
permit IDA lending to continue in fiscal 1975 and beyond. Thus far, the United
States has played a passive role, informing others that until consultations were
held with our Congress, we would not be in a position to discuss amounts. Nonetheless, a broad consensus has developed among the other developed nations on
a 3-year pay-in program at an annual rate of $1.5 billion. On the basis of our
existing percentage rate, this would mean an annual U.S. contribution of $600
million for 3 years beginning in fiscal 1976. However, we have also made it clear
that a very large reduction in our percentage share is necessary for our participation in view of our serious balance of payments situation.
Mr. Chairman, you yourself have pointed out the necessity for consultations
on these matters with the Appropriations Committees. The Treasury Department wants to have the benefit of ybur committee's general views on amounts
before continuing further with the negotiations.
The next meeting on this matter will be held in Tokyo in May. We would
welcome, Mr. Chairman, the participation of members of this subcommittee as
members of the U.S. delegation to that meeting.
As we have explained in the past, because of the number of nations involved,
we need quite a long leadtime. We would hope that negotiations could go forward
in time for submission to legislatures by the end of the year.
516
1973 REPORT OF TPIE SECRETARY OF THE TREASURY
A meeting was also held in March on a proposal to restructure and replenish
the Special Funds resources of the Asian Development Bank. As I indicated
in my letter, this was a follow-on to,a preliminary meeting of ADB developed
member countries held on this subject in September 1972, at the time of the
IMF/IBRD annual meetings. The proposal would create a pool of funds, on the
IDA model but smaller, to replace the present system of bilateral contributions
made on an unscheduled basis. At both meetings, the U.S. position was the same.
We could not now move beyond acceptance in principle of tlie concept of the
Fund; that is, that ideally funds should be made available on a multilaterally
negotiated basis and be available for use under common terms and conditions.
In taking this position, it was emphasized that the United States was experiencing serious trade and balance of payments problems which would aff'ect
our ability to provide funds on an untied basis.
In order to accommodate to the fact that we have not yet made our initial
contribution of $100 million to Special Funds, other developed members are now
considering the possibility of launching and contributing to this new fund structure in two stages, representing two-thirds and one-third of the total, respectively.
Under this approach, the $100 million contribution, presently authorized but not
appropriated, could serve as our share of the first stage and could be tied to
procurement of U.S. goods and services. This approach would also imply, in the
second stage, a further U.S. contribution of $50 million. Since the overall amount
being discussed is $525 million, our share under the two-stage arrangement would
be approximately 28 percent of the total. As you recall, others have already
paid in more than $240 million, which would npt count as part of the new proposal although our initial contribution would. I also need an expression of your
views before we can proceed further along this line.
The final part of my statement, Mr. Chairman, deals with two reports released
by the General Accounting Office: The first on Treasury's management of U.S.
participation in the Inter-American Development Bank, dated August 22, 1972;
the second on our participation in the World Bank and IDA, dated February 14,
1973.
As indicated, both in the annex of the report, itself, and in my testimony
before Mr. Fascell last fall. Treasury has accepted and implemented the recommendations of the IDB report. However, we very strongly disagreed with its
overall highly critical tone. We think that Treasury has a good and improving
system for managing U.S. participation in the Bank. In my judgment, the GAO
report did not take adequate account of progress achieved by Treasury and the
Bank itself. The details of our implementation of the recommendations are
contained in a separate report I am now submitting for the record.
The GAO report on our participation in the World Bank and IDA has a
number of recommendations which are identical to those in the IDB report.
We are now completing our formal response to the Government Operations Committees of the House and the Senate. We will also report to this committee on
our progress in implementing these recommendations as well.
SUMMARY OF TREASURY DEPARTMENT ACTIONS TO
IMPLEMENT GAO RECOMMENDATIONS
U.S.
SYSTEM FOR APPRAISING AND EVALUATING INTER-AMERICAN
DEVELOPMENT BANK PROJECTS AND ACTIVITIES
The Treasury Department's complete response to the report is contained in an
annex of the report itself, and in Assistant Secretary Hennessy's testimony before
a subcommittee of the House Foreign Aff'airs Committee on September 21, 1972.
Although the Department has accepted all of the recommendations which were
made, we very strongly disagree with the overall highly critical tone of the
report; We continue to think that we have developed a good and improving
system-for managing U.S. participation in the Bank. In our judgment, the GAO
report has not taken adequate account of progress achieved by the Treasury
Department and the Bank itself.
, '
The GAO's.major recommendations were :
1. Recommendation: The United States should sort out the recommendations
of the Group of Controllers it wishes to support and vigorously pursue their
acceptance and recommendation.
Actiqn: The U.S. Government has adopted and supported firm positions on all
the recommendations in the three Controller Group reports acted upon by the
EXHIBITS
517
IDB Board of Executive Directors. The Board, with the support of the.United
States, has taken action on all the recommendations in those.reports. Implementation of the Board's decisions,is being pressed; At the initiative of the United
States, a deadline has been established for receipt of the Bank management's
comments on reports submitted by the Group, and a system of semiannual reports
on progress made toward implementation of recommendations has been set up.
The first of these reports is due on June 30,1973.
Two other Controller Group reports have been released very recently and are
under study and review within the U.S. Government. These two reports are:
"Reporting Systems" (December 1972) and "Preinvestment Studies" (January
1973).
2. Recommendation: The United States should arrange for the development of
instructions that stipulate the desired depth and parameters of the U.S. process
for appraising proposed projects to guide U.S. officials and technicians in making
their appraisals. These instructions should include a clear statement of policy
regarding the appraisal of the economic and technical aspects of the projects.
Action: Instructions and guidelines for appraisal of loan proposals have always
existed within the U.S. Govemment. What has not heretofore existed is their
formal codification. A preliminary edition of this formal codification has, however, been issued this month. It is available to officials and technicians in the
five NAC agencies. It now contains nearly 50 pages of detailed information
relating to loan proposal documentation, project criteria, special policy criteria,
and country performance criteria, It can be expanded and modified to accommodate additional requirements or changes in policy.
3. Recommendation: The United States should arrange for followup on the
U.S. positions with respect to specific loan proposals to determine the extent to
which they have been accepted in the Implementation of the project. Provision
also should be made for the feedback of results to those officials and technicians
participating in the appraisal process for use in subsequent appraisals.
Action: Followup action has always been taken on "U.S. positions on specific
loan proposals. It is now being done on a formalized basis. The U.S. Executive
Director's Office at the IDB reports regularly both verbally and in writing to
members of the NAO Staff Committee on points they have raised. These reports
are now incorporated into the minutes of meetings. In addition, a new reporting
requirement has been added to the combined economic reporting program
(CBRP). It requires reports from U.S. personnel in the field on IFT-financed
projects and on project proposals which may be submitted to the IFI*s in the
future. Revision of this requirement will be made as necessary to assure an
adequate flow of information back to Washington.
4. Recommendation: The United States should take the necessary steps to
develop, and get agreement among member countries on, firm and sustainable
criteria for eligibility for IDB lending. Such criteria, although based predominantly on the economic performance bf recipient countries, should also provide
for such things as guidelines on access to resources of FSO by more developed
countries and recognize the need for value judgments in certain individual cases.
Action: Economic performance of recipient countries has always been considered by the Bank. This is done through annual economic reviews conducted
under the aegis of the CIAP. Reviews are attended by representatives from the
IMF, IBRD, IDB, and USAID. In two instances, the IDB has halted lending
activity for extended periods of time because of inadequate economic performance.
In July 1972, the Board of Directors of the IDB received a management plan
to phase down access to FSO resources by relatively more advanced recipient
countries. This phasedown will take place over a 3-year period in 1972-75 and
reduce the share of the four largest countries from 40 percent to 20 percent. This
was a course of action earlier urged by the U.S. Government.
Exhibit 76.—Remarks by Assistant Secretary Hennessy, May 15, 1973, before
the Propeller Club of Port of Charleston, Charleston, S.C.
It is a double pleasure for me to be here in Charleston. First, I look forward
to the chance to address such a distinguished group and to exchange ideas on the
important subject of trade. Secondly, it is a great personal pleasure, since this
city is home to a large part of my family, and a number of very happy years of
my own childhood was spent here.
518
1973 REPORT OF THE SECRETARY OF THE TREASURY
Trade is a topic of widespread concern today. It is no longer the exclusive
interest of a relatively small group of businessmen and government officials.
Its impact on the well-being of all of us—industry, workers, and jobs in general—
is now well and viscerally recognized.
Trade was first taken off the financial pages and put on the front page in 1971
when the United States had the first trade deficit in 90 years. The concern increased in 1972 when the trade deficit became even larger.
The most visible effect^—at least to ohe working in Washington—has been
growing pressure for restrictions of all kinds, on imports, on corporations, on
capital.
Fundamental questions have been raised about the United States ability to
compete, ih what seemed to be ah increasingly discriminatory world trading system ; about an appropriate U.S. response t o a changed world economic situation,
one in which our country no longer is the dominant economic power; and about
how the rules of the game must be modified to reflect the modern realities, not
those of a postwar era.
The administration's response to these problems-has been several, both in the
domestic and international area, dating back to the measures first Instituted on
August 15, 1971. I would like to mention two sets of actions. The first, of a shortrun nature; would refiect the changes in the rel;ative position of economies, which
had taken place over the preceeding 25 years and thus allow us- to compete on a
fair price basis. Two general exchange rate realignments have taken place and
the present rates reflect basic underlying economic realities—no further change'
in the value of the dollar is needed or will be taken.
. . . .
The second set of actions—^longer term but equally important actions—is reform of the international rules of the game both in the monetary and trading
system.
.-......•
. .
•.,:,.,•-..
While I will speak briefly on monetary reform and its relevance to. trade, I want
to focus the majority of my talk on trade and tlie trade bill, submitted to Congress
by President Nixon on April 10 of this year.
The title—The Trade Reform Act of 1973—was carefully chosen, for the bill
represents a major American initiative, an effort by President Nixon to bring
about reform in the rules and practices of world, trade so that the United States
and other nations can compete fairly and freely. It is.designed to provide a new
direction to world trade. Its thrust is. outward looking and expansionary,, but—
and this is a large but-^it also provides new tools and new authorities to be able
not only, to-bargain hard for freer and fairer trade but also to be able to look
after our own vital interests—as and when this is needed.
Some of the specific provisions of this bill and its objectives are worth mentioning because they demonstrate a package or balanced approach, which best
ensures the type of world trading system which,will be beneficial to our country.
First.of all, the bill does ask for rather broad authorities for the President. These
include:
1. An, authority to move tariffs up, as well as down, during the negotiations.
2. A congressional declaration in favor of negotiations and agreements on
nontariff barriers with an optional procedure for obtaining congressional approval of these agreements, where appropriate. .
3.: A more flexible and effective authority for the President to protect
American workers and industry against countries thatunreasonably or unjustifiably restrict U.S. exports.
"
4. The authority to raise or lower import restrictions on a transitory basis,
when our balance of payments situation requires such action.
The bill was written with the conviction that the United States must have a
strong bargaining position in order to bring about needed changes—in order to
reform the international trading order, and, in point of fact, the authorities
which the President is requesting would, in most cases, provide us with no more
powers than other industrial nations customarily bring to the negotiating: table.
While the message of the bill is quite clear in favoring an expansion of world
trade, it also recognizes that, in the past, we had inadequate tools to deal with
the domestic aspects of problems arising from international trade. The proposed
trade bill would provide more fiexible and effective safeguards for both our
workers and our industries, for it is clear that in a world of rapid change and
open markets our Nation cannot and should not expect its domestic workers and
business to bear excessive hardships caused by surges in imports.
•'
EXHIBITS
519
The aim of such safeguards is not to avoid adjustment, but to ease the burdens
of adjustment for a transitional period. The safeguard provisions of the bill
would:
A. Introduce a fairer and less stringent test for domestic industry to qualify
for import relief. Restrictions of a transitory nature would be permitted in order
to provide the industry with time to adjust, increase competition from imports,
or to avoid serious injury.
B. Provide more accessible and rapid adjustment assistance to workers who
are displaced due to import competition. At the same time, separate legislation
will be submitted to ref orm the pension and unemployment insurance systems in
order to provide assistance to any worker who loses his job irrespective of whether
the cause is domestic or international.
C. Embody a considerable improvement in the procedures of the antidumping and countervailing duty statutes in order that our workers in industry are
adequately protected from unfair foreign competition.
These are major aspects of the proposed bill, and I believe they indicate a
balanced approach—one Which is designed to move the system toward greater
openness, greater fairness and yet at the same time provide us with the bargaining power and protection we need.
Specifically, what does the United States hope to achieve in the negotiations,
which will begin in September? There are three general objectives:
Free up agricultural trade.
Reverse the trend of inward-looking regionalism and the erosion of the mostfavored-nation principle,
Attempt to rationalize nontariff barriers, which now aff'ect a large part of
. world trade.
Let me say a brief word about each of these three:
Agriculture
While the Trade Reform Act does not request specific negotiating authority for
agriculture, since the general authorities on tariffs and nontariff barriers are
fully applicable, agriculture is one of the most important issues in the upcoming
negotiations. Our farm sector is a very efficient producer of many products^—•
particularly grains.
We are fortunate in having the greatest contiguous land area that can be found
anywhere, blessed by nature for abundant grain production, with a favorable
climate and water supply.
For many years we have held much of this land out of production, at considerable cost. This is no longer a viable proposition. Farm exports have made a substantial positive contribution to our balance of trade since 1960 and last year
farm exports helped reduce our overall trade deficit by $2.9 billion. The potential
for expansion is even greater. The paramount U.S. objective in these negotiations, therefore, will be to broaden the role of market forces at the international
level by reducing and removing barriers to trade farm products.
Regionalism
U.S. support for European unity has been a consistent American postwar
policy. We have been strong in pur encouragement of it.
However, in its economic relations, the European Community has developed a
regional character that has become increasingly inward looking and based upon
special preferential arrangements which involve real trade losses to us and
others. By 1975, these arrangements will involve some 80 countries. This is not a
healthy situation for any of us, and we must find a solution which reconciles the
legitimate aspirations of regionalism with the imperatives of a balanced and
fair international trade and monetary system. Abandonment of the most-favbrednation concept, in our judgment, is not in anyone's interest, and certainly not in
the interest of the United States. This trend can be reversed. One way to do this
with a minimum of friction would be the mutual elimination of tariffs.
Nontariff barriers (NTB's)
. This is a very complex area. Partly because of the difficulty of coming to grips
with NTB's, past multilateral trade negotiations have concentrated on tariffs.
Tariffs are not without importance, but with their progressive lowering NTB's
have assumed even greater importance as barriers to trade. They cannot be given
a back seat any longer.
Not every barrier can be considered a target for reduction. Many of them, such
as those for the protection of health and safety, are legitimate. But some are not,
520
1973 REPORT OF THE SECRETARY OF THE TREASURY
and these we must cope with, in spite of the difficulty involved. Progress has
already been made bilaterally;with the Japanese, and, altliough we do not underestimate the problems, our experience is that if we are right and bargain hard
for what we want we will be successful.
; The reaction abroad to the President's trade bill has been generally constructive, although it causes more concern to certain countries than to others. In the
negotiations there will be give and take—other nations have complaints against
some of our trade practices. We will have to be ready to strike a fair bargain
ourselves, although I believe it fair to say, if we are to reach a balanced interuational trading order, the United States will be more of a taker than a giver
this time.
We do have a large stake in trade. Although, trade as a percentage of our gross
national product is smaller than any other industrial nation in the free world,
we. cannot live just as well without the $100 billion of exports and imports we
now trade yearly. I would urge we all recpgnize that imports are good; that they
increase the welfare of the American people, its workers, and its industries.
They help keep cost inflation down, provide variety and a competitive force that
is beneficial to us. Exports are, of course, vital to our economic well-being, and
we must make sure these obtain fairer treatment than in the past.
In assessing the problems facing us in the trade field, let me just say one word
about the ability of our business to take advantage of new opportunities to compete internationally.
In the past, no matter how hard our exporters tried or our domestic industry
worked, many could just not compete. Other major currencies were undervalued
and reluctant to give up the competitive edge that gave them. Today we have a
far different world in which the relative price of the dollar versus, for example,
the deutsche mark and the Japanese yen has changed around 30 and 35 i>ercent,
respectively. This removes a major impediment to our exports and provides
many new opportunities, but at the same time there is concern that we may have
forgotten how to export—how to compete internationally—during the last 10
years.
I recently took a trip to the Far East, where, as you know, the Japanese trading presence is even more strongly felt than here. In places like Korea, the Philippines, and Taiwan, I heard many stories that, even with the incentives provided
by the new prices, U.S. exporters are not bidding on many major projects where
we do have an advantage. Officials and businessmen expressed dismay to me about
this and asked what must be done. I personally believe this will be a short-lived
phenomenon. It is due partly to the size of the U.S. domestic market and the
strong growth in internal demand which we have experienced duidng the last 2
years, which makes exporting less attractive. Partly, however, I believe the failure may be due to our having lost the knack of exporting, and some of my friends
in business tell me the export manager in many medium and even large firms
has passed into history, not unlike the dinosaur. I am optimistic that there will
be a renewed and major effort by our industries to overcome quickly the years we
could not actively participate in export business. Our economy has always been
responsive to price incentives and I am sure it will be in this case, but in my
talks around the country I do like to urge you in the private sector to take a
good look at foreign markets you once wrote off. Here the example of South Carolina and Charleston provides a tangible evidence of what dedicated eft'ort can do.
; • i .am sure there are many questions which I wbuld be happy to address on our
overall trade objectives and the specifics of the proposed bill now before the Congress. Before getting to thpse I would like to close by making a few remarks on
other parts of international economic reform. Change in the prevailing exchange
rate patterns was only one step in the process of reform. It is equally clear, however, that our efforts to reform the rules and structure of the international monetary system are more urgent now than ever. In a system of more equally distributed economic power, countries amassing huge surpluses which throw the entire
system into disequilibrium cannot be tolerated. The United States has presented
proposals for a reformed system with much more fiexible exchange rates and a
system of rules, based on the use of objective indicators, to ensure that adjustment does take place—that countries do take action to correct their emerging
balance .of payments problems quickly and effectively, without the postponement and subsequent disruption we have experienced in recent years. Progress is
being achieved in the monetary negotiations, which began last September, and
EXHIBITS
521
is equally critical to our success in trade for it is obvious that if we do have an
international monetary system which produces recurrent crises,'then we shall
end up in a world of controls and restrictions not only on capitaLl'but on trade
as well.
The monetary and trade negotiations must lead to a consistency in rules that has
been lacking in the past. For perhaps the first time, in the present negotiations
countries are having to coordinate the reform of monetary and trade policies.
While no businessman could afford the luxury of treating the sale of the goods as
independent from the currency and manner of paying for them, until very recently, trade and finance ministers did not speak to each other too frequently.
It is now recognized that these two areas are intimately linked and rules will
be written accordingly. Nondiscrimination in monetary arrangements must be
balanced by a return to most-favored-nation treatment in trade.
The success in our forthcoming trade negotiations and the effort to expand
world markets on a fair and equitable basis is of vital concern to all of us. South
Carolina and Charleston, in particular, represent an important case study of
how an enlightened industrial and trade policy can lead to expanded trade and
employment. Last year, I understand, close to $1 billion of imports and exports
passed through the Port of Charleston, representing an increase of more than
60 percent over the previous year. At the same time, there is a concerted effort
by both State authorities and private industry to assure facilities of the Port
of Charleston are updated in order to attract new and diversified industry to the
State and $40 million of State-backed funding will be provided for the expansion
of the port. Moreover, foreign investment has been attracted to the State. According to figures I have seen, some 40 plants from foreign countries are now
operating in South Carolina. I applaud your fine work in this area and I hope
and trust you will support our efforts to create a new reformed trading system
which will allow the United States, South Carolina, and Charleston to enjoy
the just fruits of its hard work and its expanding competitive ability.
Exhibit 77.—Communique of the Ministerial Meeting of the Committee of
Twenty, March 26-27,1973, Washington, D.C.
1. The Committee of the Board of Governors of the International Monetary
Fund on Reform of the International Monetary System and Related Issues (the
Committee of Twenty) held their second meeting in Washington on March 26 and
27, 1973, under the chairmanship of Mr. All Wardhana, Minister of Finance for
Indonesia. By the courtesy of the Organisation of American States the meeting
was held in the Pan American Union Building. Mr. Pierre-Paul Schweitzer,
Managing Director of the Internation.al Monetary Fund, took part in the meetiner which was also attended by Mr. Wilhelm Haferkamp, Vice-President of the
E.E.C, Mr. Ren^ Larre, General Manager of the B.I.S,, Mr, Emile van Lennep,
Secretary-General of the O.E.C.D., Mr. Olivier Long, Director-General of the
G.A.T.T., Mr. Manuel P^rez-Guerrero, Secretary-General of the U.N,C.T,A.D.,
and Sir Denis Rickett, Vice-President of the I.B.R.D.
2. The Committee received a report in which the Chairman of their Deputies,
Mr, Jeremy Morse, summarised the Deputies' discussions to date on the adjustment process and exchange rate mechanism, reserve assets and convertibility,
and capital flows.
3. The Members of the Committee reaffirmed the need for a world, monetary
order, based on cooperation and consultation witl;iin the framework of a strengthened International Monetary Fund, that will encourage growth of World trade
and employment as well as economic development and will support the domestic
efforts of monetary authorities throughout the world to counteract inflation.
4. The Members of the Committee exchanged views on the substance of
international monetary reform in the light of recent developments in exchange
markets and of countries' policy reactions to these developments, and instructed
their Deputies to take account of these events and their implications in their
continuing work. The Members of the Committee recognised that the various
elements of reform are interlinked. Their discussion of a reformed system centered on the following points:
(a) There should be a better working of the adjustment process, in which
adequate methods to assure timely and effective balance of payments adjust-
522
1973 REPORT OF THE SECRETARY OF THE TREASURY
ment by both surplus and deficit countries would be assisted by imprpved international consultation in the Fund including the use of objective indicators. It
was noted that the Deputies are establishing a technical group on indicators.
The importance of effective domestic policies for balance of payments adjustment was underlined. Members of the Committee recognised that exchange
rates must be a matter for international concern and consultation and that in
the.reformed system the exchange rate regime should, remain based on stable
but adjustable par values. It was also recognized that floating rates could.provide a useful technique in particular situations. There was also general agreement on the need for exchange market stability and on the importance of Fund
surveillance of exchange rate policies.
(b) There should be .better international management of global liquidity.
The role of reserve currencies should.be reduped and the SDR should become
the principal reserve asset of the reform system.. The Deputies were asked
to study further the conditions for a resumption of general cpnvertibility, including questions relating to consolidation of excess reserve currency balances and
to methods of settlement.
T .
(c) An intensive study should be made of effective means to deal with
the problem of disequilibrating capital flows by a variety of measures, including
controls, to influence them and by arrangements to finance and offset them. It
was noted that the Deputies are establishing a technical group on disequilibrating capital flows, including those associated with Euro-currency markets.
(d) There should be a strong presumption against the use of trade controls for balance of payments purposes. Developing countries would, however,
be exempt wherever possible from trade and capital controls imposed by other
countries and their particular circumstances would be taken into account in
assessing controls that they themselves felt it, necessary to apply.
5. The Members of the Committee recognized. the concerns of developing
countries under current conditions and their interests in a reformed system.
They affirmed the desirability on the occasion of the reform of promoting economic development and the flow of real resources from developed to developing
countries.
6. The Committee approved their Deputies' program of future work. In
directing the attention of the Deputies to those aspects of reform which have
an important bearing on the current situation, they recognized that procedures
are already established for coordinating the work of the Executive Directors
of the Fund with that of the Deputies. They noted that the Deputies' plan to
expand their meeting schedule and to intensify their work between meetiings,
and they instructed the Deputies to proceed urgently with the preparation
of a draft outline of the reform, in which the major issues would be presented
to the Committee for decision.
7. The Committee will meet again at a time to be proposed by the Chairman
in the light of the progress of the Deputies' vrork.
Exhibit 78.—^Press release, April 25, 1973, announcing joint letter from Secretary
of the Treasury Shultz and Secretary of Commerce Dent to presidents of
firms in the United States which file regular statistical reports to one or both
Departments
!
Attached is a letter from the Secretary of the Treasury and the Secretary of
Commerce to presidents of business firms in the United States which file regular
statistical reports to one or both Departments. for the purpose of compiling
statistics on international capital transactions ih the U.S. balance of payments.
The request is .specifically, designed to ensure that data, reported within the
existing statistical reporting system are as complete and accurate as possible,
particularly for the first quarter of 1973.
It is hoped that the request will lead to a better understanding of the sources
and nature of the unusual capital flows of recent months.
APRIL 23,
1973
The recent period of international monetary dis|:urbances was accompanied by
large movements of funds out of the United States and from the dollar into
foreign currencies. While these flows of funds have aroused widespread public
interest in this country and abroad, neither the tlnited States Government nor
the governments of countries which were the major recipients of these funds have
adequate information concerning the nature of these movements. The 14-nation
monetary meeting in Paris last month, in which the United States participated,
EXHIBITS
523
announced, t h e need to seek mpre complete understanding of t h e sources a n d
n a t u r e of these large capital
flows.
.•
The established statistical reporting systems operated by t h e D e p a r t m e n t of
the T r e a s u r y a n d t h e B u r e a u of Economic Analysis of t h e Department of Commerce a r e designed to obtain comprehensive d a t a on international capital transactions in t h e U.S. balance of payments, and together provide reasonably adequate
information under normal conditions. However, t h e extent of transactions in t h e
balance of payments for which no d a t a have been recorded—^^the so-called "errors
and omissions"—indicates t h a t many transactions escape the statistical system in
periodjS when unusual flows take place. Because of the importance of a n adequate
explanation of t h e recent events, w e a r e convinced t h a t a major effort must be
made to ensure t h a t responses to t h e present reporting forms a r e thorough a n d
a(2curate, a n d t h a t t h e reporting system is properly designed.
We a r e asking you, therefore, to u n d e r t a k e a policy level review within your
firm to ensure t h a t t h e statistical d a t a which a r e reported on t h e Treasury
and Commerce forms for t h e first three months of this year a r e complete, consistent a n d accurate. They should refiect all of your financial relationships with
foreigners, including those with your own foreign branches a n d subsidiaries or
foreign p a r e n t or head office, except to t h e extent t h a t t h e reporting exemptions apply. Please see the enclosed material for details.
Our p r i m a r y objective is to ensure t h a t t h e d a t a reported for December 31,
1972 a n d t h e first q u a r t e r of 1973 in both t h e T r e a s u r y a n d Commerce data
systems a r e a s accurate a n d complete a s possible, to enable us to analyze the
movements which occurred during t h e first quarter. W e believe t h e interests of
the business community coincide with our own in establishing accurate information on recent fiows. I n addition, t h e review should, of course, produce continuing improvements in reporting. We would also like to be advised.of any.types of
international capital transactions of your firm which do not fit into the categories
provided in these forms, and which therefore a r e not reported.
We will appreciate it very much if you will give this m a t t e r your personal
attention. W e a r e sure you recognize t h e importance to t h e U.S. Government
a n d to the business community of a n objective and factual understanding of these
capital movements.
Sincerely yours,
(Signed)
GEORGE P . S H U L T Z ,
Secretary of the Treasury.
( S i g n e d ) FREDERICK B . D E N T ,
:
•
• ENCLOSURE
Secretary of Commerce.
'
REVIEW OF .REPORTING ON T H E TREASURY FOREIGN
. , EXCHANGE FORMS AND T H E COMMERCE DIRECT INVESTMENT FORMS
F i r m s in t h e United States whose transactions with foreigners result in
fina/ncial liabilities to or claims on foreigners or investment positions in foreign
affiliates above specified exemption levels a r e required t o report on t h e Treasury
Foreign Exchange forms or t h e direct investment forms of t h e Bureau of Economic Analysis of the. Commerce Department,. or both. T h e relevant Treasury
Foreign Exchange forms cover liabilities to a n d claims on non-affiliated foreigners ( F o r m s C-1/2 and C-3) and securities transactions directly with foreigners ( F o r m S - l ) . T h e T r e a s u r y reports a r e filed with the F e d e r a l Reserve Bank of
New York, a s fiscal agent of t h e Treasury. T h e Commerce direct investment
forms cover t h e accounts of business firms in t h e United States with their overseas subsidiaries a n d branches (BE-577 a n d 578) or their overseas parents or
.heald offices. (BE^605 a n d 606). These t w o reporting systems a r e designed to
cpver, without duplication,.all of t h e capital transactions between.firms in t h e
United States and non-resident firms a n d individuals. They are p a r t of a s t a n d a r d
statistical system providing d a t a for t h e bala/nce of payments, a n d a r e separate
from the reporting requirements of the Office of Foreign Direct Investment of the
Commerce Department.
W e a r e asking firms reporting on these forms to undertake a searching review
of their procedures t o ensure t h a t d a t a reported on t h e Treasury a n d Commerce forms a r e complete^ consistent a n d accurate. If your firm is filing reports
in only one. of these statistical systems, or is n o t currently filing in either of
them, please check carefully to be sure t h a t your firm is in fact exempt from t h e
filing requirements. If you file reports on both the Treasury and Commerce forms
a n d they a r e prepared in different p a r t s of your firm's organization, please have
them reviewed together to be sure they a r e properly coordinated within your
firm.
506-171—73
36
524
1973 REPORT OF THE SECRETARY OF THE TREASURY
The initial objective of this review is to ensure t h a t t h e d a t a reported for
December 31, 1972 through March 31, 1973 in t h e T r e a s u r y system, a n d for t h e
first q u a r t e r of 1973 in the Commerce system, a r e as accurate and complete a s
possible. W e expect, of course, t h a t any improvements which result from your
review will continue in future reports.
Please complete the review of your reporting procedures as soon as possible, b u t
do not delay sending your Treasury reports for March 31, 1973 or your Commerce reports for the first q u a r t e r 1973 on schedule. If you revise the basis of
your March 31 T r e a s u r y reports as a result of your review, your March reports must be accompanied by comparable revised reports for December 31, 1972
a n d succeeding months. If you cannot provide comparable revised reports for
the earlier months a t the same time, please submit your March 31 Treasury
reports on t h e unrevised basis, and provide revised reports for December 31,
1972 through March 31, 1973, marked "Revised R e p o r t " as soon as possible, but
no l a t e r t h a n J u n e 30, 1973. If you revise the basis of your first q u a r t e r 1973
Commerce report as a result of the review, please so indicate in your letter of
t r a n s m i t t a l . If you complete the review after your first q u a r t e r Commerce report
is submitted, and the basis of your reporting changes, please submit a revised Commerce report for t h e first quarter, m a r k e d "Revised Report," as soon as possible, but no l a t e r t h a n J u n e 30,1973.
Revisions of the Treasury reports should be sent to the Balance of Payments
Division, I n t e r n a t i o n a l Research Department, Room 929, F e d e r a l Reserve Bank
of New York, New York, New York 10045; revisions of the Commerce reports
should be sent to the B u r e a u of Economic Analysis. I n t e r n a t i o n a l Investment Division, BE-50, D e p a r t m e n t of Commerce, Washington, D,C. 20230. Copies of
blank forms can be obtained from these offices if needed.
If your review shows t h a t all required d a t a a r e being properly reported
in both reporting systems, or t h a t you a r e exempt from one or both reporting
requirements, please send statements to t h a t effect to t h e offices specified above.
Exhibit 79.—U.S. p a p e r entitled "Quantitative Indicators from t h e Point of View
of t h e Overall Operation of t h e System," made available to t h e D e n u t i e s of t h e
Committee of T w e n t y a t t h e i r m e e t i n g in Washington, D . C , in May 1973
T h e attached paper, entitled "Quantitative Indicators from t h e P o i n t of
View of t h e Overall Operation of the System," w a s m a d e available to the Deputies of the Committee of Twenty a t their meeting in Washington in May 1973.
I t is a f u r t h e r elaboration of t h e U.S. proposal for establishing a system in
which nations' reserve movement would serve as a q u a n t i t a t i v e indicator to
guide the balance of payments a d j u s t m e n t process. T h e basic U.S. proposal
w a s contained in a n address by T r e a s u r y Secretary Shultz a t t h e I M F / W o r l d
B a n k a n n u a l meetings September 26,1972.^
T h i s paper supplements one entitled "The U.S. Proposals for Using Reserves
a s a n Indicator of t h e Need for Balance-of-Payments Adjustment," circulated
to t h e Deputies of t h e Committee of Twenty in November 1972 a n d published
a s a supplement t o chapter 5 of the Economic Report of t h e President, J a n u a r y
1973.
QUANTITATIVE INDICATORS F R O M T H E P O I N T OF V I E W OF T H E OVERALL OPERATION
OF T H E SYSTEM
The discussion of quantitative indicators h a s seemed to proceed mainly from a
"national" point of view—with each individual nation thinking of indicators
in terms of application to and effects on itself. There h a s been comparatively
little consideration from an overall point of view—that is, how indicators would
relate to the operation of the system as a whole. B u t a fundamental purpose
of an indicator mechanism is to assure t h a t t h e system is workable in its entirety.
I n the U.S. proposal, indicators enforce the viability of t h e system in two related
ways—one, assuring consistency between t h e settlement mechanism a n d t h e
adjustment m e c h a n i s m ; two, assuring consistency between t h e tolerance for
imbalance in the system and the availability of reserves to finance such imbalance. The U.S. would welcome, and indeed would regard as necessary, an assessment of indicators which takes account of such questions of t h e overall operation of the system.
iSee exliibit 48.
EXHIBITS
525
A. Consistency between the settlement mechanism and the adjustment mechanism
An understandable first reaction to indicator proposals is concern that one's
own government might be called upon to take adjustment actions at a time
when it does not want to undertake such actions—^and accordingly to favor
indicators only for "initiating consultations," but not for "inducing policy
actions" or "inducing graduated pressures by the international community."
But while there might be widespread support for the relatively noncontroversial move of using indicators to initiate consultations, such a move would in
the U.S. view be insufficient. It would leave the monetary system without one
of its indispensable requirements—the assurance of an effective and equitable
adjustment mechanism.
The international monetary system cannot in the U.S. view function on a
sustained basis with a settlement mechanism and obligations which are certain
and definite, and an adjustment mechanism which is uncertain and indefinite.
Such a system would be inherently unbalanced in its application to surplus
and deficit countries; and, as experience has shown, would provide no assurance
that disequilibria in the system could be kept within reasonable bounds. Such
a system would break down, inevitably and probably quickly. A presumption
of certainty in settlement must be balanced by a presuhaption of certainty in
adjustment.
To make this point more vivid, in logic if the adjustment mechanism were
to be uncertain—^for example, if indicators were used to initiate consultation
without a strong presumption that adjustment action would be undertaken,
one would be forced to conclude that the settlement mechanism should be uncertain—for example, countries might initiate consultations on the extent to which
imbalances might be settled with primary assets without any strong presumption
of general convertibility.
The U.S. proposals envisage certainty in settlement obligations: deficit countries must promptly meet conversion requests in primary assets, except where
a persistent surplus country has avoided adjustment and has reached its convertibility point—i.e., has made excessive claims on the world's stock of iDidmary
reserve assets. In our view, quantitative indicators would play a central role in
assuring that the adjustment mechanism contained an equivalent degree of
certainty ("certainty" in the sense that there needs to be a strong persumption
that adjustment actions will be taken by surplus and deficit countries alike,
though not "automaticity" in the sense that a particular country must undertake a particular exchange rate or other adjustment action when a particular
indicator point is reached).
Indicators would—
Call attention to emerging disequilibria.
Suggest which nation or nations should adjust to correct such disequilibria.
Assure that prompt and effective adjustment actions are taken,
Induce international pressures on countries refusing to correct large and
persistent disequilibria.
Using indicators only to initiate consultations assures consultations but not
adjustment. For countries in deficit, adjustment may eventually follow consultation—since deficit countries may eventually become unable or unwilling to
continue to finance their deficits—though the adjustment might well come later
and have to be larger than would have been called for under an indicator system
which "induced action" at an earlier stage. But for countries in surplus, the end
result of consultation may be nonadjustment. The asymmetry in disciplines and
inducements has been a serious flaw in the monetary system of the past, and
its elimination constitutes one of the generally acknowledged reform needs.
We cannot have an equitably balanced system if deficit countries are presumed
to have to adjust until proven otherwise, and surplus countries presumed not to
have to adjust until proven otherwise. The system would lack harmony and balance. It would be subject to the same strains as in the past, the same competitive, if self-defeating, interest by all countries in running surpluses. Without a country to absorb these pressures for surplus by running an offsetting
deficit—as the U.S. did in the past—^protectionist pressures become a much
greater danger.
It is not the U.S. aim in proposing presumptive indicators to have a system in
which countries would be frequently passing through deficit and surplus indicator points and directly subjected to international pressures to adjust. We would
regard it a failure if the system operated in that manner. The broad purposes
of the indicators are to show when adjustment is essential from the standpoint
526
1973 REPORT OF THE SECRETARY OF THE TREASURY
of the system as a whole; and to create built-in incentives for adjustment to
eliminate deficits'and surpluses without hitting indicator points and calling international pressures directly into play. Such built-in incentives for correction
would not exist if indicators only initiated, consultations.
.The U.S. proposal for indicators is designed to apply the same adjustment incentives to all nations, large or small, deficit or surplus. But limiting use of
indicators to initiation of consultation: might also result in undesirable frictions
and a somewhat arbitrary distribution of adjustment burdens.- Lacking an objective standard against which to measure adjustment need, it is hard to prevent
some countries—the strong or the st.ubborn--from being able to hold out against
recommendations for adjustment actions, while others cannot hold out. Not only
effectiveness but equity would be missing.
B. Consistency between tolerance for imbalance and the availability of reserves
to finance imbalance
When considering the placement of base levels of reserves and indicator points
in an indicator system, it is natural for a country to want tO' preserve substantial freedom of action from the system's adjustment pressures—and accordingly, assuming an exchange rate regime; of central or par values, to want a
relatively high base level and wide bands before indicator points are reached.
That is a reasonable approach for any single nation to take from its "national"
point of view—^provided it accepts the consefiuences for the overall operation of
the system. A primary consequence is that the system must be able to provide
the possibly substantial amounts of reserves needed for the tolerance of relatively large and persistent surpluses and deficits in the system. If, on the other
hand, the international community does not,want to see the creation of substantial amounts of reserves, nations must accept the consequences pf that decision and be willing to live within the constraints of a system requiring the
introduction of effective adjustment measures after what might appear to be
relatively small surpluses or deficits. The tolerance for surpluses and deficits
must be keyed to the availability of reserves^—it would be dangerous to build into
the system demands for reserves which are not matched by the availability of
reserves.
In the U.S. proposals, the reserve indicator mechanism acts to ensure the consistency of international reserves with the need and action of individual countries. There has been much talk in the reform discussions of the importance of
"international control" over the level of world liquidity—but little specific comment pn how the control should be exercised or what the level of world reserves
should be. The U.S. reserve indicator mechanism represents our attempt to pro^
vide a rigorous framework for an equilibrium system based on such international
decisions and control.
The reserve indicator system is aimed at ensuring the needed consistency
betweeh the supply of international reserves and national behavior in several
ways.
(a) It would assure that the initial demand for primary reserves is balanced
by the availability of primary reserves, by the establishment of a generally
acceptable system of base levels, which each nation would accept as its primary
reserve target, and by creating a world-wide supply of primary reserves equal to
the aggregate base levels.
(b) It would provide a framework for determining periodic SDR allocations by collective decisions on the appropriate trend of base levels over time,
and the consequent decision to allocate new SDR's equal to the increase in base
levels.
(c) Irrespective of other adjustment pressures or inducements, it prevents
the strain oh the system which would result from excessive accumulation of
primary reserves by one or more countries beyond the level justified on the basis
of the total primary reserves in the system, through a convertibility point for
each country where its right to accumulate additional primary reserves would be
suspended.
(d) It provides safeguards against excessive permanent primary reserve creation or inappropriate adjustment pressures by permitting currency holdings to
act as a safety-valve while preventing excessive reliance on currencies by the
requirement that currency holdings must be at the agreement of both the issuer
and the holder and by the placement of indicator points, based on total reserves,
which strongly presume effective adjustment action.
EXHIBITS
527
Exhibit 80.—Remarks by General Counsel Pierce, September 28, 1972, at the
sixth annual meeting of the International Centre for Settlement of Investment Disputes, Washington, D.C.
The past year has been an important one for the International Centre for Settlement of Investment Disputes (ICSID), Two more developing countries—
Jordan and the Arab Republic of Egypt—have acceded to the Convention, bringing the total number of signatories to the Convention to 68. Progress has been
made toward publication of a compendium of national laws and international
agreements relating to foreign investment. Most significantly, for the first time
parties have submitted a dispute to ICSID for settlement by arbitration.
The decision in the case between Morocco, Holiday Inns, S.A., and Occidental
Petroleum can become a milestone in the history of ICSID, and in the settlement
of international investment disputes. The decision could generate increased confidence in ICSID, making resort to it more familiar, and alleviating the concerns of
foreign investors and host countries which have thus far not used. ICSID facilities.
The decision may be the first step away from the period of inactivity so frequently found in the early years of international tribunals. Hopefully it will
mark ICSID's evolution into an increasingly important international organ for
dispute settlement. More importantly, the decision could demonstrate the flexibility, utility, and impartiality of the Centre—attributes which make its arbitral
tribunals ideal fora to pass on new problems which have arisen in expropriation
disputes.
The need for ICSID has clearly not diminished. Over the past year, Ave have
seen several large expropriation disputes. Some of these have proved susceptible
to successful resolution through negotiation, but other disputes have raised new
issues that make settlements more difficult. For example, in some cases the fact
of expropriation has become less than clear due to the use of techniques for "intervention"—usually without compensation—in foreign-owned enterprises. In
other cases the compensation due an expropriated foreign investor has been reduced by claims for "excess profits" or "back taxes," or by refusal to pay for
mineral rights, ICSID arbitral tribunals are well-suited to test the validity of
these claims under international law—claims which countries have asserted
despite their novelty in international practice. For our part, we believe, that these
claims do not have any legal merit whatsoever.
The benefits of utilizing ICSID, of course, extend beyond decision on the
claims of parties to a particular investment dispute, ICSID enables host
countries to avoid the detrimental long-term effects of expropriation without
compensation, such effects as the diminishing fiow of private funds and technology vital to development, the erosion of donor country support in both bilateral programs and the multilateral institutions, the unwillingness of other
foreign investors in the host country to reinvest their earnings, and the loss
of much-heeded managerial assistance. Under the Convention, a "cooling off"
period will occur as arbitral or conciliatory proceedings get underway. More
importantly, a dispute can be removed from the tension of the political arena to
the order of well-defined arbitral and conciliatory procedures, where decisions
about contentious issues can be made impartially, by men of recognized character, expertise, and competence, and in accordance with international law.
It was these advantages of ICSID that led President Nixon, in his expropriation policy statement of January 19, 1972, to reaffirm U.S. support for ICSID.
The President noted that one method of making reasonable provision for just compensation in an expropriation dispute is to refer the dispute to international
arbitration under the auspices of ICSID,
The Gonzalez amendment.to the U.S. multilateral financial institution legislation adopts a similar rationale. That amendment requires that, in certain circumstances, the United States vote against loans by the international development banks to an expropriating country. However, there is an exception which
applies when investment disputes are submitted to ICSID for arbitration. Submitting a dispute to ICSID is viewed as equivalent to good faith negotiations
being in progress aimed at providing prompt, adequate, and effective compensation.
Although ICSID is the international institution most likely to resolve the
impasse between the need for security of investment on the part of foreign investors, and the demand by developing countries for control over their resources,
its advantages are as yet potential, and are not fully realized. We therefore
reiterate our recommendation of last year that the Secretary General undertake
a study of practical measures which would make for greater effectiveness of
the Centre.
Ox
to
Orgamzation and Procedure
00
Exhibit 81.—Secretaries, D e p u t y Secretary, U n d e r S e c r e t a r i e s , General Counsels, Assistant S e c r e t a r i e s and D e p u t y U n d e r Secret a r i e s for M o n e t a r y Affairs serving in t h e T r e a s u r y D e p a r t m e n t from September 11, 1789, to J a n u a r y 20, 1973, and the
P r e s i d e n t s u n d e r whom they served
T e r m of service
Served u n d e r Official
To—
From-
Secretar}^ of the
Treasury
President
o
o
Secretaries of the Treasury
Sept. 11, 1789
Feb. 3, 1795
Jan. 1, 1801
May 14,. 1801
Feb. 9, 1814
Oct. 6, 1814
Oct. 22, 1816
Mar. 7, 1825
Mar. 6, 1829
Aug. 8, 1831
May 29, 1833
Sept. 23, 1833
Julv 1, 1834
Mar. 6, 1841
Sept. 13, 1841
Mar. 8, 1843
Julv 4, 1844
Mar. 8, 1845
Mar. 8, 1849
July 23, 1850
Mar. 7, 1853
Mar. 7, 1857
Jan. 31, 1795
Dec. 31, 1800
M a y 13, 1801
Feb. 9, 1814
Oct 5, 1814
Oct 21, 1816
Mar, 6, 1825
Mar. 5,1829
June 20, 1831
M a y 28, 1833
Sept. 22, 1833
June 25, 1834
Mar. 3, 1841
Sept, 11, 1841
Mar. 1, 1843
M a y 2, 1844
Mar, 7, 1845
Mar. 5, 1849
July 22, 1850
Mar. 6, 1853
Mar. 6, 1857
Dec, 8, 1860
Alexander Hamilton, N e w York
Oliver Wolcott, Connecticut
Samuel Dexter, Massachusetts
Albert Gallatin, Pennsylvania ^
George W. CampbeU, Tennessee
Alexander J. Dallas, Pennsylvania
Wm. H . Crawford, Georgia
Richard Rush, Pennsylvania2
Samuel D. Ingham, Penns3dvania ^
Louis McLane, Delaw^are
Wm. J. Duane, P e n n s y l v a n i a .
Roger B. Taney, Marjdand
Levi Woodbur.y, New H a m p s h i r e
T h o m a s Ewing, Ohio
^
Walter Forward, Penns3dvania
J o h n 0 . Spencer, New York ^__
Geo. M. Bibb, Kentuck}'R o b t . J. Walker, Mississippi
Wm. M. Meredith, PennsylvaniaThos. Corwin, Ohio
James Guthrie, Kentuck}^
Howell Cobb, Georgia
---.-
-
:
1
Washington,
Washington, Adams,
. Adams, Jefferson.
Jefferson, Madison.
Madison,
Madison.
Madison, Monroe.
^_______________ Adams, J. Q.
Jackson,
Jackson.
Jackson.
Jackson,
:
Jackson, Van Buren.
Harrison, Tyler.
Tyler,
T3der,
Tyler, Polk.
Polk.
TaAdor, Fillmore.
Fillmore.
Pierce.
L
Buchanan.
O
>
K!
O
^^
>
Zfl
d
Dec. 12, 1860
Jan. 15, 1861
Mar. 7, 1861
July 5, 1864
Mar. 9, 1865
Mar. 12, 1869
Mar. 17, 1873
June 4, 1874
July 7, 1876
Mar. 10, 1877
Mar. 8, 1881
Nov. 14, 1881
Sept. 25, 1884
Oct. 31, 1884
Mar. 8, 1885
Apr. 1, 1887
Mar. 7, 1889
Feb. 25, 1891
Mar. 7, 1893
Mar. 6, 1897
Feb. 1, 1902
Mar. 4, 1907
Mar. 8, 1909
Mar. 6, 1913
Dec. 16, 1918
Feb. 2, 1920
Mar. 4, 1921
Jan. 14, 1861
Mar. 6, 1861
June 30, 1864
Mar. 3, 1865
Mar. 3, 1869
Mar. 16, 1873
June 3, 1874
June 20, 1876
Mar. 9, 1877
Mar. 3, 1881
Nov. 13, 1881
Sept. 4, 1884
Oct 30, 1884
Mar. 7, 1885
Mar. 31, 1887
Mar. 6, 1889
Jan. 29, 1891
Mar. 6, 1893
Mar. 5, 1897
Jan. 31, 1902
Mar. 3, 1907
Mar. 7, 1909
Mar. 5, 1913
Dec. 15, 1918
Feb. 1, 1920
Mar. 3, 1921
Feb. 12, 1932
Feb. 13, 1932 Mar. 3, 1933
Mar. 4, 1933 Dec. 31, 1933
Jan. 1, 1934 July 22, 1945
July 23, 1945 June 23, 1946
June 25, 1946 Jan. 20, 1953
Jan. 21,1953 July 28, 1957
July 29, 1957 Jan. 20, 1961
Jan. 21, 1961 Apr. 1, 1965
Footnotes at end of table.
Philip F. Thomas, Mar3dand
J o h n A. Dix, New York
Salmon P . Chase, Ohio
Wm. P. Fessenden, Maine
H u g h McCulloch, I n d i a n a ^
Geo. S. Boutwell, Massachusetts
Wm. A. Richardson, Massachusetts
Benj. H . Bristow, K e n t u c k y
Lot M. Morrill, Maine
J o h n Sherman, Ohio
W m . Windom, Minnesota ^
Chas. J. Folger, New York
Walter Q. Gresham, I n d i a n a
H u g h McCulloch, I n d i a n a ^
Daniel Manning, New York
Chas. S. Fairchild, New York
W m . Windom, Minnesota ^
Chas. Foster, Ohio
J o h n G. Carlisle, K e n t u c k y
L y m a n J. Gage, Illinois
.
L. M . Shaw, Iowa
George B. Cortelyou, N e w York
Franklin MacVeagh, Illinois
W. G. McAdoo, New York
Carter Glass, Virginia
David F . Houston, Missouri
Andrew W, Mellon, Pennsylvania
Ogden L, Mills, New York
William H. Woodin, New York
H e n r y Morgenthau, Jr., New York
F r e d M. Vinson, Kentuck3^
J o h n W. Sn3^der, Missouri
George M . H u m p h r e y , Ohio
R o b e r t B. Anderson, Connecticut
Douglas Dillon, New Jerse3^
^
Buchanan.
Buchanan.
Lincoln.
Lincoln.
Lincoln, Johnson.
Grant.
Grant.
Grant.
Grant, Ha3^es.
Hayes.
Garfield, Arthur.
Arthur.
Arthur.
Arthur, Cleveland.
Cleveland.
Cleveland, Harrison.
Harrison.
Harrison, Cleveland.
Cleveland, McKinley.
McKinley, Roosevelt,
Roosevelt.
Roosevelt.
Taft.
Wilson.
Wilson.
Wilson.
Harding, Coolidge,
Hoover,
Hoover.
Roosevelt.
Roosevelt, T r u m a n .
Truman.
Truman.
Eisenhower.
Eisenhower.
Kennedy, J o h n s o n .
W
I—I
w
H-l
w
CO
00
o
Term of service
From—
Served under—
Official
Secretary of the
Treasury
To-
President
Secretaries of the Treasury—Continued
Apr.
Dec.
Jan.
Feb.
June
1, 1965 Dec. 20, 1968 Henry H, Fowler, Virginia
21, 1968 Jan. 20, 1969 Joseph W. Barr, Indiana
22, 1969 Feb. 10, 1971 David M. Kennedy, Utah
11, 1971 June 12, 1972 John B. Connally, Texas
12, 1972
George P. Shultz, Illinois
Johnson.
Johnson.
Nixon.
Nixon.
Nixon.
Deputy Secretary ^
June 12, 1972 Jan. 17, 1973
1,1921
20, 1923
4, 1927
13, 1932
May 19, 1933
Nov. 17, 1933
May 2, 1934
Jan. 29, 1937
Nov. 1,1938'
Jan. 18, 1940
Mar. 4, 1946
Jan. 23, 1947
July 15, 1948
Jan. 28, 1953
Aug. 3,1955
July
Nov.
Mar.
Feb.
Nov. 17, 1923
Feb. 1,1927
Feb. 12, 1932
May 15, 1933
Nov. 16, 1933
Dec. 31, 1933
Feb. 15, 1936
Sept..15, 1938
Dec. 31, 1939
Dec. 31, 1945
Jan. 14, 1947
July 14, 1948
Jan. 20, 1953
Julv 31, 1955
Jan. 31, 1956
Charls E. Walker, Texas
._
Under Secretaries ^
S. Parker Gilbert, Jr., New Jersey
Garrard B. Winston, Illinois
Ogden L. Mills, New York »
Arthur A. Ballantine, New York__
Dean G. Acheson, Mar3dand
Henry Morgenthau, Jr., New York ^
Thomas Jefferson Coolidge, Massachusetts
Roswell Magill, New York
John W. Hanes, North Carolina
Daniel W. Bell, Illinois--O. Max Gardner, North Carolina
A. L. M. Wiggins, South Carolina
Edward H. Foley, New York
Marion B. Folsom, New York
H. Chapman Rose, Ohio
Shultz
Nixon.
Mellon
Mellon
Mellon
Mills, Woodin
Woodin
Woodin
Morgenthau
Morgenthau
Morgenthau
Morgenthau, Vinson
Vinson, Sn3^der
Snyder
Snyder
Humphrey
Humphrey
Harding, Coolidge.
Coolidge.
Coohdge, Hoover.
Hoover, Roosevelt.
Roosevelt.
Roosevelt.
Roosevelt.
Roosevelt.
Roosevelt.
Roosevelt, Truman.
Truman.
Truman.
Truman.
Eisenhower.
Eisenhower.
O
td
»^
o
i
o
td
>
-
td
o
H9
td
>
CO
d
td
Aug. 9, 1957
F e b . 3,1961
Apr. 29,1965
J a n . 27.1969
Jan.
Apr.
Dec.
June
20, 1961
10,1964
20,1968
12, 1972
Fred C. Scribner, Jr., Maine
H e n r y H. Fowler, Virginia »
Joseph W. Barr, I n d i a n a »
Charls E. Walker, Texas lo
Aug. 3, 1954
Sept, 30, 1957
J a n . 31,1961
Feb. 1, 1965
J a n . 27, 1969
Sept.
Jan.
Dec.
Jan.
Anderson
Dillon
Fowler
Kennedy, Connally
25, 1957 W. R a n d o l p h Burgess, M a r y l a n d
20, 1961 Julian B . Baird, Minnesota
31,1964 R o b e r t V. Roosa, New York
20, 1969 Frederick L. Deming, Minnesota
Paul A. Volcker, New Jersey
Eisenhower.
Kennedy, Johnson.
Johnson.
Nixon.
H u m p h r e y , Anderson __
Anderson
Dillon
Fowler, Barr
Kennedy, Connally,
Shultz.
Eisenhower,
Eisenhower.
Kennedy, Johnson.
Johnson.
Nixon.
Shultz
Nixon.
Under Secretaries for Monetary Affairs ^^
Under Secretary (Counselor)^^
J u n e 12,1972
Edwin S. Cohen, Virginia
-
_
General Counsels ^^
20, 1934
19, 1939
7, 1942
10, 1944
Jan. 11, 1939
July 24, 1942
Mar. 22, 1944
Aug. 11, 1947
H e r m a n Oliphant, M a r y l a n d
E d w a r d H. Foley, Jr., New York ^^
R a n d o l p h E . Paul, New York
Joseph J. O'Connell, Jr., New York
June 10, 1948
Jan. 30, 1953
Jan, 26, 1955
Sept. 22, 1955
Jan. 28,1958
Oct. 2, 1959
Apr. 5, 1961
Nov. 16, 1962
Apr. 12, 1966
Apr. 1, 1969
July 1, 1970
Jan. 20, 1953
Sept. 1,1954
Aug. 2, 1955
Apr. 17, 1957
Oct. 1,1959
Jan. 20, 1961
Oct. 6, 1962
Jan. 31, 1965
Jan. 20, 1969
Mar. 20, 1970
T h o m a s J. Lynch, Ohio
E l b e r t P. T u t t l e , Georgia
David W. Kendall, Michigan ^^
Fred C. Scribner, Jr., Maine ^^
Nelson P . Rose, Ohio
D a v i d A. Lindsay, New York
R o b e r t H. Knight, Virginia
G. d'Andelot Belin, Massachusetts
F r e d B . Smith, M a r y l a n d
Paul W . Eggers, Texas
Samuel R . Pierce, Jr., New York
June
May
Aug.
May
Footnotes at end of table.
X
.
Morgenthau
Morgenthau
Morgenthau
Morgenthau, Vinson,
Snyder,
Snyder__J
Humphrey
Humphrey
Humphrey
Anderson
Anderson
Dillon.
Dillon__
Fowler, Barr
Kennedy
Kennedy, Connally,
Shultz.
Roosevelt.
Roosevelt.
Roosevelt.
Roosevelt, T r u m a n .
3
Truman.
Eisenhower.
Eisenhower,
Eisenhower.
Eisenhower,
Eisenhower,
Kennedy.
Kenned}^, Johnson.
Johnson.
Nixon.
Nixon.
Cn
00
Ol
00
to
Term of service
From-
Served Under-
Official
Secretary of the
Treasury
To—
o
President
12, 1849 Oct. 9,1849
10, 1849 Nov; 15, 1850
16, 1850 Mar. 13, 1953
14, 1853 Mar. 12, 1857
13, 1857 Jan. 16,1861
13, 1861 July 11, 1865
Mar. 18, 1864 June 15, 1865
Jan. 5,1865
July 11,1865
Dec.
Mar.
Mar.
July
31,1868
17, 1873
11, 1874
3,1877"
Mar. 4, 1875 June 30, 1876
Aug. 12, 1876 Mar. 9, 1885
...
Nov. 30, 1867 WiUiam E. Chandler, New Hampshire
May 4,1875 John F. Hartley, Maine
2, 1867 May
20, 1869 Mar.
8, 1873 June
1,1874 Apr.
Apr. 3,1877
Dec. 9, 1877
Apr. 10, 1880
Charles B. Penrose, Pennsylvania
Allen A. Hall, Pennsyl vania __.__...
William L. Hodge, Tennessee
Peter G. Washington, District of Columbia.
Philip Clayton, Georgia
-..-..
George Harrington, District of Columbia i^.
Maunsell B. Field, New York
Edmund Cooper, Tennessee
Wilham A. Richardson, Massachusetts
Frederick A. Sawyer, South Carolina
Charles F. Conant, New PIampshire__
Curtis F. Burnam, Kentucky
Henry F. French, Massachusetts
Dec. 8,1877 Richard C. McCormick, Arizona
Mar. 31, 1880 John B, Hawley, Illinois.
Dec. 31, 1881 J. Kendrick Upton, New Hampshire
td
O
td
Assistant Secretaries ^^
Mar.
Oct.
Nov.
Mar.
Mar.
Mar.
CO
..
Meredith
Taylor.
Meredith, Corwin
Taylor, Fillmore.
Corwin, Guthrie
Filhnore, Pierce.
Guthrie, Cobb
Pierce, Buchanan.
Cobb, Thomas, Dix
Buchanan.
Chase, Fessenden,
Lincoln, Johnson.
McCulloch.
Chase, Fessenden,
Lincoln, Johnson.
McCulloch.
Fessenden, McCulloch. Lincoln, Johnson.
McCulloch, Boutwell,
Johnson, Grant.
Richardson, Bristow,
McCulloch
Johnson.
Boutwell
Grant.
Richardson, Bristow
Grant.
Bristow, Morrill,
Grant, Hayes.
Sherman.
Bristow
Grant.
Morrill, Sherman,
Grant, Hayes, GarWindom, Folger,
field,
Arthur,
Gresham, McCulCleveland.
loch, Manning.
Sherman
.
Hayes.
Sherman- _^
Playes.
Sherman, Windom,
Hayes, Garfield,
Folger.
Arthur.
o
H
o
td
t=)
>
td
O
t=l
td
d
td
Feb. 28, 1882 Apr. 16 1884
1885
Apr, 17, 1884 Nov. lO!
J o h n C. New, I n d i a n a
C h a r l e s E , Coon, New York
Mar. 14, 1885 Apr, 1 1887 Charles S, Fairchild, New York ^
Nov. 10, 1885 June 30,1886 William E. Smith, New York
July 12, 1886 Mar. 121889 H u g h S. Thompson, South Carolina
6 1887
,
1, 1889
1, 1889
22, 1890
23, 1890
Mar. 11 1889
July 20, 1890
Oct. 31 1890
Dec. 1 1892
June 30 1893
Isaac N . M a y n a r d , New Y o r k ,
George H. Tichner, Illinois
George T . Batchelder, New York ^^
A. B. Nettleton, Minnesota
Oliver L. Spaulding, Michigan-_*
Apr. 27, 1891
Nov. 22, 1892
Dec. 23, 1892
Apr. 12, 1893
Apr. 13, 1893
July 1, 1893
Apr. 7, 1897
Apr. 7, 1897
June 1, 1897
Mar, 13, 1899
Mar. 6, 1901
Mar. 5, 1903
May 27, 1903
Mar. 6 1905
,
Oct 31 1892
Mar. 3 1893
Apr. 3 1893
Apr. 7 1897
Mar. 31 1897
May 4, 1897
Mar. 10 1899
Mar. 4, 1903
Mar. 5 1901
June 3 1906
_
Apr. 15^1903
Mar. 5. 1905
Lorenzo Crounse, Nebraska
J o h n H. Gear, Iowa
Genio M . Lambertson, Nebraska
Charles S. Hamlin, Massachusetts
WilUam E . Curtis, New York
Scott Wike, Illinois
William B . Howell, New Jerse3'
Oliver L. Spaulding, Michigan
F r a n k A. Vanderlip, Illinois
Horace A. Ta3dor, Wisconsin
Milton E . Ailes, Ohio_ — _
R o b e r t B. Armstrong, lovv^a
Charles H, Keep, New York
___.
James B, Re3''nolds, Massachusetts
Apr.
Apr.
Apr.
July
July
July
Jan.
Apr.
Mar.
1,
22,
23,
17,
Jan. 21 1907
Nov. 1 1909
1906 Mar. 15 1908
1907
1907 Feb, 28^
1907 Mar. 6 1909
1908 Apr, 1 ,
0 1909
,
Apr. 5, 1909
Apr. 19, 1909
June 8,1910
Apr. 3,1911
Footnotes at end of table.
J o h n H, Edwards, Ohio
Arthur F . Statter, Oregon
Beekman Winthrop, New York
Louis A. Coolidge, Massachusetts
Charles D. Norton, llhnois
Charles D. HiUes, New York
-j
Folger
Folger, Gresham,
McCulloch, M a n ning.
Manning
Manning.Manning, Fairchild,
Windom,
Fairchild, W i n d o m . _
Windom
Windom
Windom, Foster
Windom, Foster, Carlisle.
: Foster
Foster
Foster, Carlisle
Carlisle, Gage
CarUsle, Gage
Carlisle, Gage
Gage
Gage, Shaw
Gage
__- Gage, Shaw
Gage, Shaw
Shaw
Shaw
Shaw, Cortel3^ou,
MacVeagh,
Shaw, Cortel3'ouShaw
Cortel3^ou
Cortel3^ou, M a c Veagh.
MacVeagh
MacVeagh
Arthur.
Arthur, Cleveland.
Cleveland,
Cleveland.
Cleveland, Harrison.
Cleveland, Harrison.
Harrison.
Harrison.
Harrison.
Harrison, Cleveland.
Harrison,
Harrison.
Harrison, Cleveland.
Cleveland, McKinle3^
Cleveland, McKinle3^
Cleveland, McKinle3^
McKinley.
McKinle3^, Roosevelt.
McKinle3',
McKinle3% Roosevelt.
McKinle3^, Roosevelt.
Roosevelt,
Roosevelt.
Roosevelt, Taft.
Roosevelt.
Roosevelt.
Roosevelt.
Roosevelt, Taft.
Taft.
Taft.
CO.
00
Served under—
T e r m of service
Official
From-
Secretary of the
Treasury
To—
President
td
o
Assistant Secretaries ^^—Continued
Nov. 27 ,1909 July 31 , 1913
June 8 ,1910 July 3 , 1912
Apr. 4, 1911 Mar. 3,
,1913
,
July 20, 1912 Sept, 30,
1913
Mar. 24,1913 Feb, 2, 1914
Aug. 1, 1913 Aug. 9, 1914
Oct. 1, 1913 Sept. 30,1917
Mar, 24,1914 Jan. 26, 1917
Aug. 17,1914 Mar, 15, 1917
Apr, 17,1917 Aug. 28,1918
June 22, 1917 Nov, 20,1919
Oct, 5, 1917 Aug. 26,1921
J a m e s F . Curtis, Massachusetts
A. P i a t t Andrews, Massachusetts
R o b e r t O. Bailey, llhnois
Sherman P. Allen, Vermont
J o h n Skelton Williams, Virginia
Charles S. Hamlin, M a s s a c h u s e t t s
B3^ron R. Newton, New York
William P. Malburn, Colorado
Andrew J, Peters, Massachusetts
Oscar T, Crosby, VirginiaLeo S. Rowe, Pennsylvania
James H . Moyle, U t a h
Oct. 30, 1917 July 5, 1920
RusseU C. Leffingwell, New York ^^
Dec. 15,1917 Jan, 31, 1919
Sept. 4, 1918 June 30, 1920
T h o m a s B. Love, Texas
Albert R a t h b o n e , New York
Mar. 5, 1919
Nov. 21,1919
June 15, 1920
July 6, 1920
Dec. 4, 1920
Dec. 4, 1920
Mar. 16,1921
J o u e t t Shouse, Kansas
N o r m a n H . Davis, Tennessee
Nicholas Kelley, New York
S. P a r k e r Gilbert, Jr., New Jersey ^o
Ewing Laporte, Missouri
Angus W, McLean, N o r t h Carolina
Eliot Wadsworth, Massachusetts
E d w a r d CUfford, Illinois
May 4, 1921
Nov. 15,1920
June 14, 1920
Apr. 14, 1921
June 30, 1921
M a y 31, 1921
Mar. 4, 1921
Mar. 31,1925
Julv 9, 1923
__-_
MacVeagh, McAdoo-__
MacVeagh
MacVeagh
MacVeagh, McAdoo.__
McAdoo
McAdoo
McAdoo
McAdoo
McAdoo
-_
- - McAdoo
McAdoo, Glass
McAdoo, Glass,
Houston, Mellon.
McAdoo, Glass,
Houston,
McAdoo, Glass
McAdoo, Glass,
Houston.
Glass, H o u s t o n
Glass, Houston
Houston, MeUon
Houston, Mellon
__ Houston, Mellon
Houston
Mellon
Mellon
td
Taft, Wilson,
Taft
Taft
Taft, Wilson.
Wilson.
Wilson.
Wilson.
Wilson.
Wilson,
Wilson,
Wilson,
WUson, Harding.
o
o
td
>
td
K!
Wilson,
O
Wilson.
Wilson.
Wilson,
Wilson.
Wilson, H a r d i n g .
Wilson, H a r d i n g .
Wilson, H a r d i n g .
Wilson.
Harding, Coolidge,
Harding,
td
>
c«
d
td
23,1921 July 25, 1922 Elmer Dover, Washington
3, 1923 June 13, 1926 McKenzie Moss, Kentucky
9, 1923 Nov. 19,1923 Garrard B. Winston, Illinois ^o
1, 1924 Nov. 5, 1927 Charles S. Dewey, Illinois
1, 1925 July 31, 1927 Lincoln C. Andrews, New York
.
28,1926 June 25, 1929 Carl T. Schuneman, Minnesota
1, 1927 Mar. 15, 1933 Seymour Lowman, New York
,
1927 Sept. 1, 1929 Henry Herrick Bond, Massachusetts
Nov. 7,
June 26, 1929 Apr. 17, 1933 Ferry K. Heath, Michigan
Nov. 21, 1929 Mar. 15,1931 Walter Ewing Hope, NewYork
,
Mar. 16, 1931 Feb. 12,1932 Arthur A. Ballantine, New Yorkto
,
Mar. 9, 1932 June 11, 1933 James H. Douglas, Jr,, Illinois
,
Apr. 18, 1933 Feb. 15, 1936 Lawrence W. Robert, Jr^, Georgia
June 6, 1933 Sept. 30, 1939 Stephen B. Gibbons, New York
,
June 12, 1933 Dec, 12,1933 Thomas Hewes, Connecticut
Dec. 1, 1934 Nov. 1, 1937 Josephine Roche, Colorado
Feb. 19, 1936 Feb. 28,1939 Wayne C. Taylor, llhnois
July 1, 1938 Oct 31, 1938 John W, Hanes, North Carolina 2
0
June 23, 1939 Dec, 2, 1945 Herbert E. Gaston, New York..
Jan. 18, 1940 Nov. 30,1944 John L, Sullivan,- New Hampshire
Jan. 24, 1945 M a y 1, 1946 Harry D, White, Mar3dand
Apr. 15,1946 July 14, 1948 Edward H, Foley, New York i^
July 16, 1948 Jan, 20, 1953 John S. Graham, North Carolina
Feb. 8, 1949 Mar, 31,1951 William McChesney Martin, Jr., New York
Jan. 24, 1952 Feb. 28,1957 Andrew N. Overby, District of Columbia
Jan. 28, 1953 Aug, 2, 1955 H. Chapman Rose, Ohio 2
0
Sept, 20, 1954 Jan. 20, 1961 Laurence B. Robbins, Illinois 21
,
Aug. 3, 1955 Dec. 15,1957 David W. KendaU, Michigan
Apr. 18, 1957 Aug. 8, 1957 Fred C. Scribner, Jr., Maine "
Dec. 4, 1957 Dec. 15,1958 Tom B. Coughran, California
Dec. 16, 1957 Dec. 19,1961 A. Gilmore Flues, Ohio
Dec. 17,1958 Dec. 18,I960- T. Graydon Upton, Pennsylvania
Dec. 20,1960 Jan. 20, 1961 John P. Weitzel, Rhode Island
..
Apr. 5, 1961 Oct. 31, 1962 John M. Leddy, Virginia
Apr. 24, 1961 Jan. 20, 1969 Stanley S, Surrey, Massachusetts
Dec. 20,1961 Sept. 1, 1965 James A. Reed, Massachusetts
Footnotes at end of table.
Dec.
Mar.
July
July
Apr.
Dec.
Aug.
Mellon
Mellon
Mellon
MeUon
.
Mellon
Mellon
Mellon
Mellon
Mellon
Mellon
Mellon
Mills
.
Woodin, Morgenthau. _
Woodin, Morgenthau. _
Woodin
Morgenthau
Morgenthau
Morgenthau
Morgenthau, Vinson
Morgenthau
_. Morgenthau, Vinson
Vinson, Snyder
Snyder
Snyder
Snyder, Humphrey
Humphre3^
Humphrey, Anderson_
Humphrey, Anderson.
Humphrey, AndersonAnderson
Anderson, Dillon
Anderson
Anderson
_
Dillon
Dillon, Fowler, Barr-Dillon, Fowler
Harding.
Harding, Coolidge.
Harding, CooUdge.
Coolidge.
Coolidge.
Coolidge, Hoover.
Coolidge, Hoover.
Coolidge, Hoover.
Hoover.
Hoover.
Hoover.
Hoover,
Roosevelt.
Roosevelt,
Roosevelt.
Roosevelt.
Roosevelt,
Roosevelt,
Roosevelt, Truman,
Roosevelt,
Roosevelt, Truman,
Truman.
Truman.
Truman.
Truman, Eisenhower.
Eisenhower.
Eisenhower.
Eisenhower.
Eisenhower.
Eisenhower.
Eisenhower, Kennedy.
Eisenhow^er.
Eisenhower,
Kenned3^
Kennedy, Johnson.
Kennedy, Johnson.
X
c/2
Ol
CO
CJI
Ol
CO
T e r m of service
Served under—
Official
To-
From—
Secretar37' of the
Treasur3^
President
td
Assistant Secretaries ^^—Continued
Dec. 18, 1962
Sept. 18, 1963
Apr. 29, 1965
Sept. 14, 1965
Aug. 2, 1966
M a r . 19, 1968
M a y 15,1968
Oct, 15,1964
Jan. 20, 1969
June 10, 1966
Jan. 15, 1968
Jan. 31, 1968
Jan, 20, 1969
1972
Feb, 25,
M a r . 11, 1969
Apr. 1, 1969
June 12, 1972 Edwin S. Cohen, Virginia 20
June 23,
Dec. 12,
June 12,
Aug. 18,
J o h n C. Bullitt, N e w J e r s e y
R o b e r t A. Wallace, Illinois 22
Merlyn N . Trued, New Jersey
W. T r u e Davis, Jr., Missouri
Winthrop Knowlton, New York
Joseph M, Bowman, Georgia
J o h n R . P e t t y , New York
Eugene T. Rossides, New York
1969 Aug. 13, 1971 M u r r a y L. Weidenbaum, Missouri
1971
E d g a r R. Fiedler, M a r y l a n d .
----1972
J o h n M. Hennessy, M a s s a c h u s e t t s . . . _
1972
Frederic W. Hickrnan, Illinois
.
Dillon
Dillon, Fowler, Barr
Fowler
Fowler
FoAAder
Fowler, Barr
Fowler, Barr,
Kenned3^, ConnaU3^
___.
Kennedy, ConnaUy
.
Kenned3^, Connall3',
Shultz, •
^^---._.__ Kenned3i^, Connally___
Connall3^, Shultz
.
Shultz
Shultz
Kennedy, Johnson.
Kennedy, Johnson.
Johnson.
Johnson.
Johnson.
O
td
o
Johnson.
Johnson, Nixon.
Nixon.
Nixon.
W
o
td
Nixon.
Nixon.
Nixon.
Nixon,
>
td
O
Deputy Under Secretaries for Monetary Affairs
Dec; 21, 1961
Dec. 3, 1963
Nov. 24, 1965
Feb. 12, 1968
Nov, 28, 1963 J. Dewe3^ Daane, D i s t r i c t o f Columbia--_____
Nov, 23, 1965 P a u l A. Volcker, New Jerse3^_.
___ —_____!
Nov, 11, 1967 Peter D. Sternli ght j N e w Y o r k
..
Mar, 31, 1969 F r a n k W, Schiff, New York
.._:
Apr. 1,1969 June 30, 1971 Bruce K, M a c L a u r y , New Y o r k . . . . .
Sept. 23, 1971
_ . J a c k F . Bennett, Connecticut
Dillon
Dillon, Fowler.__"
Fowler
Fowler, Barr,
Kennedy.
" . - . . . - l Kennedy, Conhalty
.
Connall3^, Shultz - _ . - _ -
Kennedy, Johnson,
Johnson,
Johnson,
Johnson, Nixon.
td
Nixon.
Nixon,
d
>
td
Fiscal Assistant Secretaries 23
Mar. 16, 1945 June 17, 1955 Edward F. Bartelt, Illinois
June 19, 1955 Mar. 31, 1962
June 15, 1962
Aug.
2, 1950 Aug. 31, 1959
Sept. 14, 1959 Oct. 25, 1970
Oct. 25, 1970 Jan.
Apr. 11,1972
7, 1972
Morgenthau, Vinson,
Roosevelt, Truman,
Sn3'der, Humphre3^ . Eisenhower.
William T. Heffelfinger, District of Columbia
Humphre3^, Anderson, ^ Eisenhower, Kenned3^.
DiUon.
John K. Carlock, Arizona
Dillon, Fowler, Barr,
Kenned3^, Johnson,
Kenned3^, Connall3^,
Nixon.
Shultz.
Assistant Secretaries for Administration 2^
William W. Parsons, California
Sn3^der, Humphre3^,
Truman, Eisenhower.
Anderson,
A. E. Weatherbee, Maine
Anderson, DiUon,
Eisenhow^er, Kennedy,
Fowler, Barr,
Johnson, Nixon.
Kenned3'.
Ernest C. Betts, Jr., Wisconsin
Kenned3^, Connally.... Nixon.
Warren F. Brecht, Michigan
Connall3^, Shultz
Nixon.
1 While holding the office of Secretary of the Treasury, Mr. Gallatin was
commissioned envoy e x t r a o r d i n a r y and minister plenipotentiary Apr. 17,
1813, w i t h J o h n Quincy Adams and J a m e s A. B a y a r d , to negotiate peace
with Great B r i t a i n . On Feb. 9, 1814, his seat as Secretary of t h e T r e a s u r y
was declared v a c a n t because of his absence in Europe. William Jones, of
P e n n s y l v a n i a (Secretary of the N a v y ) , acted as ad interim Secretary of
t h e T r e a s u r y from Apr. 21, 1813, to Feb. 9, 1,814.
2 Rush w a s nominated Mar. 5, 1825, confirmed a n d commissioned Mar. 7.
1825, b u t did not enter on d u t y u n t i l Aug. 1, 1825. Samuel L. Southard, of
New Jersey (Secretary of t h e N a v y ) , sensed a s ad interim Secretary of
t h e T r e a s u r y from Mar. 7 to J u l y 3 1 , 1825.
3 Asbury .Dickens (Chief Clerk), ad i n t e r i m Secretary of t h e Treasury
from J u n e 21 tb Aug. 7, 1831.
* Spencer resigned as Secretary of t h e T r e a s u r y May 2, 1844 ; McClintock Young (Chief Clerk), was ad interim Secretary of t h e T r e a s u r y from
May 2 to J u l y 3, 1844.
5 McCulloch was Secretary from Mar. 9, 1865, to Mar. 3, 1869, and from
.Oct 31, 1884, to Mar. 7 , 1 8 8 5 .
6 Windom w a s Secretary from Mar. 8, 1,881, t o Nov. 1 3 , 1881, and also
from Mar. 7, 1889, to J a n . 29, 1891.
7 Office established by act of May 18, 1 9 7 2 ; appointed by t h e President.
8 Office established by act of J u n e 16, 1 9 2 1 ; appointed by t h e President.
^ L a t e r became Secretary.
10 L a t e r became Deputy Secretary.
11 Office established by act of July 22, 1954 ; appointed by t h e President.
1-Act of May IS, 1972, which established t h e Deputy Secretary position
permitted t h e Under Secretary position to be used as a counselor to the
Secretary and so designated by the President as. desired.
13 Office estabhshed by act of May 10, 1934 (iSl U.S.C. 1009) ; appointed
by t h e President.
^* L a t e r became Assistant Secretary and subsequently Under Secretary.
-^° L a t e r became Assistant Secretary.
io Office established by act of Mar. 3, 1849 ; appointed by the Secretary.
Act of Mar. 3, 1857, made the office subject to presidential a p p o i n t m e n t .
•^7 Act of Mar. 14, 1864, provided for an additional A s s i s t a n t Secretary.
18 Act of J u l y 11, 1890, provided for an additional A s s i s t a n t Secretary.
1° Act of Oct, 6, 1917, provided for two additional A s s i s t a n t Secretaries
for t h e d u r a t i o n of w a r and 6 m o n t h s thereafter.
^0 L a t e r became Under Secretary.
21 Act of J u l y 22, 1954, provided for an additional A s s i s t a n t Secretary,
22 Act of,-July 8, 1963, provided for a fourth A s s i s t a n t Secretary.
23 Office established by Reorganization P l a n No. 3 of 1940.
24 Office established "by Reorganization P l a n No. 26, of 1950. Title
changed from " A d m i n i s t r a t i v e Assistant Secretary" to " A s s i s t a n t Secret a r y for A d m i n i s t r a t i o n " by Public Law 88-426, approved Aug. 14, 1964 :
appointed by t h e Secretary with t h e a p p r o v a l of t h e President. Act of
May 18, 1972, provided for a p p o i n t m e n t by the President.
N O T E . — R o b e r t Morris, t h e first financial officer of t h e Government, was
Superintendent of F i n a n c e from 1781 to 1784. Upon t h e resignation of
Morris, t h e powers conferred upon him were transferred to t h e " B o a r d of
the T r e a s u r y . " Those who finally accepted positions on t h i s Board were
J o h n Lewis Gervais, Samuel Osgood, and W a l t e r Livingston. T h e Board
served until Alexander Plamilton assumed office in 1789.
H
W
g
H
H
^
^
Ol
CO
•<!
538
1973 REPORT OF THE SECRETARY OF THE TREASURY
Exhibit 82.—^Treasury D e p a r t m e n t o r d e r s relating to organization and procedure.
No. 190, REVISION 8, SEPTEMBER 1, 1972.—SuPEBivisiON OF BUREAUS, DELEGATION
OF AUTHORITY, AND ORDER OF SUCCESSION I N T H E TREASURY DEPARTMENT
1. The following ofiicials shall be under the direct supervision of the S e c r e t a r y :
The
The
The
The
Deputy Secretary
Under Secretary for Monetary Affairs
Under Secretary
Executive Assistant to t h e Secretary
Deputy Assistant a n d Director, Executive Secretariat
2. The following officials shall be u n d e r the supervision of the Secretary, shall
report to him through t h e Deputy Secretary, and shall exercise supervision over
those organizational units indicated t h e r e u n d e r :
General Counsel
Legal Division
Oflice of Director of Practice
Office of Equal Opportunity P r o g r a m
Deputy Under Secretary (Congressional Relations)
Special Assistant to t h e Secretary (National Security Affairs)
Oflace of Foreign Assets Control
Special Assistant to the Secretary (Public Affairs)
3. T h e following officials shall be u n d e r t h e direct supervision of t h e Deputy
Secretary a n d shall exercise supervision over those offices, bureaus, a n d other
organizational units indicated t h e r e u n d e r :
Assistants to the Deputy Secretary
Assistant Secretary ( T a x Policy)
Office of T a x Analysis
Office of T a x Legislative Counsel
Office of I n t e r n a t i o n a l T a x Counsel
Assistant Secretary (Enforcement, Tariff & T r a d e Affairs, & Operations)
Office of Law Enforcement
Office of Operations
Office of Tariff and T r a d e Affairs
B u r e a u of Alcohol, Tobacco and F i r e a r m s
B u r e a u of Customs
B u r e a u of Engraving a n d P r i n t i n g
B u r e a u of the Mint
Consolidated F e d e r a l Law Enforcement Training Center
United States Secret Service
Assistant Secretary for Administration
Office of Administrative P r o g r a m s
Office of Audit
Office of Budget and Finance
Office of Central Services
Office of Management a n d Organization
Office of Personnel
Commissioner of I n t e r n a l Revenue
Comptroller of t h e Currency
4. T h e following officials will be under t h e direct supervision of t h e Under
Secretary for Monetary Affairs and shall exercise supervision over those offices,
bureaus, and other organizational units indicated t h e r e u n d e r :
Deputy Under Secretary for Monetary Affairs
Special Assistant to the Secretary (Debt Management)
Office of Debt Analysis
Assistant Secretary ( I n t e r n a t i o n a l Affairs)
Deputy Assistant Secretary for I n d u s t r i a l Nations Finance
Deputy Assistant Secretary for Development Finance
Deputy Assistant Secretary for T r a d e and Investment Policy
Deputy Assistant Secretary for Research
Assistant Secretary (Economic Policy)
Office of Domestic Gold and Silver Operations
Officeof Financial Analysis
EXHIBITS
539
Fiscal Assistant Secretary .
Bureau of Accounts
Bureau of the Public Debt
Office of the Treasurer of the United States
United States Savings Bonds Division
5. The Deputy Secretary, the Under Secretary for Monetary Affairs, the
Under Secretary, the General Counsel, the Deputy Under Secretaries, and the
Assistant Secretaries are authorized to perform any functions the Secretary is
authorized to perform. Each of these officials shall perform functions under this
authority in his own capacity and under his owm title, and shall be responsible
for referring to the Secretary any matter on which actions should appropriately
be taken by the Secretary. Each of these officials will ordinarily perform under
this authority* only functions which arise out of, relate to, or concern the
activities or functions of or the laws administered by or relating to the bureaus,
offices, or other organizational units over which he has supervision. Any action
heretofore taken by any of these officials in his own capacity and under his own
title is hereby affirmed and ratified as the action of the Secretary.
6. The following officers shall, in the order of succession indicated, act as
Secretary of the Treasury in case of the death, resignation, absence, or sickness of the Secretary and' other officers succeeding him, until a successor is
appointed or until the absence or sickness shall cease:
A. Deputy Secretary
B. Under Secretary for Monetary Affairs
C. Under Secretary
D. General Counsel
E. Commissioner of Internal Revenue
F. Deputy Under Secretaries, appointed by the President with Senate confirmation, in the order'in which they took the oath of offi'ce as Deputy
Undersecretary
G. Assistant Secretaries, appointed by the President with Senate confirmation, in the order in v/hich they took the oath of office as Assistant
Secretary
H. Other Executive Pay^ Act Officials in the Office of the Secretary, first
in the order of Executive Pay Act levels, then in the order in which
they took the oath of office in their present positions
I. Executive Pay Act Officials in Treasury Bureaus, first in the order of
Executive Pay Act levels, then in the order in which they took the oath
of office in their present positions
7. Treasury Department Order 190 (Revision 7) and Treasury Department
Order 183 (Revision 5) are rescinded, effective this date.
GEORGE P.
SHULTZ,
Secretary of the Treasury.
No. 150-79, SEPTEMBER 5, 1972.-^DELEQATION OF EXCEPTION AUTHORITY AND
AUTHORITY TO CHALLENGE, REVIEW AND DECIDE CERTAIN CATEGORY III PAY
AD'JUSTM:ENT CASES
. By virtue of the authority delegated to me as Secretary of the Treasury by
•Pay Board Order No. 5 (37 Fed. Reg. 17525), the authority delegated Is hereby
redelegated to the Commissioner of Internal Revenue including the authority
to act on all Pay Board decisions and orders coming within the purview of
such Order. •
The authority delegated herein shall be. exercised in consultation with the
Secretary, and where major policy issues are involved, with the approval of
the Secretary.
•
.
.
. This order .shall be effective as of July 12, 1972.
. . .
.
'
GEORGE P.
SHULTZ,
Secretary of the Treasury.
No.
200,
AMENDMENT 3, DECEMBER 1,. 1972.—ORGANIZATIONAL CHANGE, OFFICE
OF THE A S S I S T A N T SECRETARY FOR ADMINISTRATION
By virtue of the authority vested in the Secretary of the Treasury by Reorganization Plan' No.' 26 of 1950, and pursuant to the authority delegated to me
by Treasury Department Order No. 190 (Revision 8), the Personnel Operations
506-171—73
37
540
1973 REPORT OF THE SECRETARY OF THE TREASURY
Division, and all its functions, positions, personnel, property, and records, are
transferred from the Office of Central Services to the Deputy Assistant Secretary
for Administration, under his supervisioii and. direction, eff'ective December 11,
1972.
WARREN F . BRECHT,
Assistant Secretary for Administration.
No.
128,
REVISION 5, DECEMBER 7, 1972.—TRANSFER OF T H E OFFICE OF FOREIGN
A S S E T S CONTROL W I T H I N T H E OE:FICE OF T H E SECRETARY
By virtue of t h e authority vested in me as the Secretary of the Treasury by
Reorganization P l a n No. 26 of 1950, it is hereby ordered t h a t the Office of Foreign Assets Control with its responsibilities for licensing and enforcement be
transferred from the supervision of the Special Assistant to the Secretary
(National Security Affairs) to t h a t of the Assistant Secretary (Enforcement,
Tariff and T r a d e Affairs, and Operations).
Regulations and rulings relating to these responsibilities shall be prepared
and, when required, interpreted by the General Counsel in consultation with
the Assistant Secretaries ( I n t e r n a t i o n a l Affairs) and (Enforcement, Tariff and
T r a d e Affairs, a n d Operations).
Such positions, records, and equipment which are determined by the Assista n t Secretary for Administration and the Special Assistant to the Secretary
(National Security Affairs) in consultation with the Assistant Secretary (Enforcement, Tariff and T r a d e Affairs, and Operations), and the General Counsel
to be necessary to the performance of the functions of the Office of Foreign
Assets Control shall be transferred from the Special Assistant to the Secretary
(National Security Affairs) to the Assistant Secretary (Enforcement, Tariff
and T r a d e Affairs, and Operations).
The activities of the Offlce of Foreign Assets Control shall continue to be
supported by the Exchange Stabilization Fund.
The functions herein transferred may be reassigned by the Assistant Secret a r y (Enforcement, Tariff and T r a d e Aff'airs, and Operations) to subordinates
in such m a n n e r as he shall direct.
Any previous orders in confiict with the provisions of this order are hereby
amended accordingly, including Treasury Department Order No. 190 (Revision
8) dated September 1, 1972, T r e a s u r y D e p a r t m e n t Order No. 128 (Revision 4)
dated March 1, 1972, and Treasury D e p a r t m e n t Order No. 220 dated April 23,
1971.
GEORGE P. SHULTZ,
Secretary of the Treasury.
No. 150-80, DECEMBER 12, 1972,—DELEGATION OF AUTHORITY CONCERNING
STABILIZATION OF W A G E S AND SALARIES
By virtue of the a u t h o r i t y vested in me as Secretary of the Treasury, including
t h a t delegated t o me by P a y Board Order No, 1, Revision No, 1 (37 Fed, Reg,
25000), P a y B o a r d Order No, 4, Revision No. 1 (37 Fed. Reg. 25002), and P a y
Board Order No. 5, Revision No. 1 (37 Fed. Reg. 25002), the authority delegated
to me by those orders is hereby redelegated to the Commissioner of I n t e r n a l
Revenue except a s to the authority set forth in section 1 ( c ) of P a y Board Order
No. 1, Revision No, 1 relating to the issuance of rulings respecting the regulations
and other guidance issued by the Pay Board, which is redelegated to the General
Counsel of the Treasury. The authority vested in t h e Coinmissioner and General
Counsel by this order may be redelegated by them.
The a u t h o r i t y delegated herein shall be exercised in consultation w i t h the
Secretary, and where major policy issues a r e involved, with the approval of the
Secretary.
Under the t e r m s of section 3 of P a y Board Order No, 1, Revision No. 1, section
7 of Pay Board Order No. 4, Revision No. 1, and section 3 of P a y Board Order No.
5, Revision No. 1, all T r e a s u r y bureaus and organizations a r e available to assist
the I n t e r n a l Revenue Seiwice in carrying out the responsibilities assigned by this
delegation.
This order shall with respect to P a y B o a r d Order No. 1, Revision No. 1 be
effective a t 12:01 a.m., November 14, 1971, and with respect to P a y Board Order
EXHIBITS
541
No, 4, Revision No. 1 and Pay Board Order No, 5, Revision No, 1 be effective a t
12 :01 a.m,, November 14, 1972.
GEORGE P.
SHULTZ,
Seci-etary of the Treasui-y.
No,
190-1, JANUARY 8, 1973,^—DELEGATION
OF AUTHORITY
By virtue of authority vested in the Secretary of the Treasury, which authority
h a s been delegated to me as Assistant Secretary for T a x Policy by Treasury
D e p a r t m e n t Order No. 190 (Revision 8 ) , I hereby delegate to the Deputy Assistant
Secretary for T a x Policy ( T a x Legislation) authority to approve regulations
relating to the internal revenue laws. This authority may be exercised by him in
his own capacity and under his own title, and he shall be responsible for referring
to the Asssistant Secretary for T a x Policy any regulations on which action should
appropriately be taken by him.
FREDERIC W . H I C K M A N ,
Assistant Secretary for T a x Policy.
No,
82
( R E V I S E D ) , JANUARY 17, 1973.—PERSONNEL AND P H Y S I C A L SECURITY—
ORGANIZATION AND DELEGATION OF AUTHORITY
Personnel Security
1. P u r s u a n t to the authority vested in the Secretary of the Treasury by Reorganization P l a n No. 26 of 1950 and delegated to me by Treasury Department
Order No. 190 (Revised), the Director of the Office of Personnel is delegated the
responsibility for direction and oversight of the personnel security function in
the D e p a r t m e n t of t h e Treasury. Pie will serve as the proper channel througli
whom m a t t e r s requiring exceptional attention Avill be processed. The Director of
Personnel will m a i n t a i n the security files of, and have jurisdiction over granting
T O P S E C R E T clearances for, the following emi}loyees :
Presidential appointees requiring confirmation by the Senate, and occupants
of Executive level positions, to the extent of the Department's authority with
respect to these employees.
H e a d s of bureaus and their first deputies.
B u r e a u security officers and any official to whom the authority to g r a n t TOP
S E C R E T security clearance has been delegated.
In addition, the Director of Personnel will assume jurisdiction over all cases involving a potential determination t h a t an employee in any Treasury bureau or in
the Office of the Secretary should be suspended, reassigned, or terminated on the
grounds t h a t such action is necessary in the interest of the national security.
2. Authority for performing the operating functions relating to personnel security, including the granting of T O P S E C R E T security clearances, is hereby
delegated to the following ofiicials in the Department of the Treasury :
I n the Office of the Secretary :
Chief, Office of the Secretary Personnel Division
I n the b u r e a u s :
Commissioner of Accounts
Director, B u r e a u of Alcohol, Tobacco and F i r e a r m s
Comptroller of the Currency
Director, Consolidated Federal Law Enforcement Training Center
Commissioner of Customs
Director, B u r e a u of Engraving and Printing
Commissioner of I n t e r n a l Revenue
Director of the Mint
Commissioner of the Public Debt
T r e a s u r e r of the United States
National Director, U.S. Savings Bonds Division
Director, U.S. Secret Service
3. T h e authority delegated herein may be redelegated with the concurrence of
the Director of the Office of Personnel or the Assistant Director of Personnel
(Personnel Security). In addition, bureau heads who do not find it feasible to
542
1973 REPORT OF THE SECRETARY OF THE TREASURY
carry out these functions may, with the concurrence of the Director of t h e Office
of Personnel or t h e Assistant Director of Personnel (Personnel Security), request
t h a t the functions be performed for them by the head or delegate of one of
T r e a s u r y ' s investigative agencies, namely. B u r e a u of Customs, I n t e r n a l Revenue
Service, or the U.S. Secret Service. Subsequent to t h e required concurrence the
request may be made directly to the head, or his delegate, of the investigative
agency.
4. T h e personnel security program w i l l be carried out under Executive Order
10450 and implementing regulations in the Federal and Treasury Personnel
Manuals. I n addition, the Director of Personnel of the Department wdll issue such
supplemental regulations and instructions as may be required for the conduct
and coordination of the personnel security program in the Department.
Physical Security
5. The Director of the Office of Administrative Programs wdll have and m a i n t a i n
responsibility for the Department's functions relating to physical security t r a n s ferred to him. by virtue of Treasury Department Order No. 82, Supplement No. 1.
These responsibilities are to be carried out p u r s u a n t to Euxecutive Order 11652
and implementing Treasury regulations and directives, including Treasury Dep a r t m e n t Order 160, as revised.
Physical security functions include the following:
1. Document security
2. Communications security
3. Building security
4. I n d u s t r i a l security
6. This order supersedes Treasury Department Order No. 82 (Revised) and
Supplement 1 thereof, and is effective immediately.
WARREN F .
BRECHT,
Assistant Secretary for Administration.
No. 224, JANUARY 26, 1973.—ESTABLISHMENT OF OFFICE OF REVENUE SHARING
P u r s u a n t to the a u t h o r i t y vested in me by Reorganization Plan No, 26 of 1950,
and as Secretary of the Treasury, there is hereby established in the Office of
the Secretary the Office of Revenue Sharing. This Office shall be headed by a
Director who shall be appointed by the Secretary of the Treasury. The Director
shall perform his duties under the direct supervision of the Deputy Secretary of
the Treasury.
...
The Director shall perform the functions, exercise the powers and carry out
the duties vested in the Secretary of the Treasury, by the State and Local Fiscal
Assistance Act of 1972, Title I, Public L a w 92-512, and those functions, powers
and duties a r e hereby delegated to the Director, Regulations for the purposes of
carrying out t h e functions, powers a n d duties delegated to the Director may be
issued by him under his own name a n d title with the approval of the Secretary,
;
GEORGE P , SHULTZ,
Seci-etary of ,the Treasury.
No,
170^13 ( R E V I S I O N 1 ) , MARCH 13, 1973.—ADMINISTRATION
EXCHANGE STABILIZATION F U N D
E X P E N S E S OF T H E
By virtue of the a u t h o r i t y vested in me as Secretary of the Treasury, including the a u t h o r i t y in Reorganization P l a n No. 26 of 1950; it is hereby ordered t h a t :
The Assistant Secretary for Administration is to" provide and direct the administrative servicing functions for the Office of "the Assistant Secretary for
I n t e r n a t i o n a l Affairs (OASIA) which a r e currently uncier the jurisdiction of the
OASIA Office of Administration, except those functions performed by the
Secretariat,
T h e Office of Administration under the Assistant Secretary for I n t e r n a t i o n a l
Affairs, established by Treasury Order No, 202, dated October 14. 1964, with all
its functions and personnel (except those of the Seeretariat) is transferred to
the supervision of the Assistant Secretary .for Administration.
EXHIBITS
'
543
A Memorandum of Agreement between the Assistant Secretary for Administ r a t i o n and the Assistant Secretary for I n t e r n a t i o n a l Affairs wiil be prepared
to implement the provisions of this Order.
W I L L I A M E , SIMON,
Acting Secretary of the Treasury.
No.
223,
A P R I L 2,
1973.—ESTABLISHMENT OF AN O F F I C E OF AUTOMATIC DATA
PROCESSING MANAGEMENT AND OPERATIONS
By virtue of t h e a u t h o r i t y vested in me as Secretary of the Treasury, including a u t h o r i t y in Reorganization P l a n No, 26 of 1950, there is hereby established
a n Office of Automatic D a t a Processing Management and Operations in the
Office of the Secretary a n d under the direct supervision of the Assistant Secret a r y for Administration,
The functions of the Office include, but a r e not limited to, the followdng:
1. Manage and operate a Departmental computer service center and provide computer and related support services to users in the Office of the
Secretary, the bureaus of the D e p a r t m e n t of the T r e a s u r y and others as
required.
2. Develop, recommend to the Assistant Secretary, interpret, a n d evaluate
adherence to a n d t h e effectiveness of. Department-wide policies and
guidelines for t h e development, acquisition, management a n d use of aut( >matic d a t a processing systems, netw^orks, equipment, software, services
and related resources. Maintain a central source of information and d a t a
on t h e availability and use of Treasury ADP resources a n d p r o g r a m s ;
and serve as point of contact w i t h other agencies on ADP matters.
3. Serve as a central technical resource for advice, guidance, assistance and
consultant service to t h e D e p a r t m e n t on software and on A D P systems
a n d operations. Provide systems, program a n d d a t a base development
a n d maintenance services a s requested by users. Conduct research in
computer sciences in support of the Department's requirements.
The Assistant Secretary for Administration will activate the Office bf ADP
Management and Operations effective immediately by establishing the departmental computer service center and transferring functions, personnel, funds and
other resources from Office of the Secretary users as determined to be appropriate
jointly wdth the Assistant Secretaries supervising user organizations; providing
such additional resources as may be essential; and establishing an advisory committee of T r e a s u r y officials to participate in planning for Center activities a n d
coordinating user service requirements.
The Office will commence immediately to work with the B u r e a u of the Public Debt in the activation of the computer to be used in the computer service
center. At a date mutually agreed by t h e Assistant Secretary for Administration
and the Fiscal Assistant Secretary, but no later t h a n December 31, 1973, t h a t
computer a n d such functions, positions, personnel, funds, property and records
as a r e jointly agreed will be transferred from the B u r e a u of the Public Debt to
the new Office, which will, thereafter, provide necessary computer support to the
B u r e a u of t h e Public Debt and other users as appropriate.
The other functions of the Office of A D P Management a n d Operations as identified above in p a r a g r a p h s 2 and 3, with related resources, will be assigned or
transferred to, or activated by the Office on a time phased basis as determined
by the Assistant Secretary for Administration.
The Assistant Secretary for Administration shall consider the desirability
a n d feasibility of transferring any other Treasury computer application to the
Office and, upon agreement with t h e affected organizations, shall transfer such
funds, personnel, property, records, etc., a s may be appropriate.
GEORGE P. SHULTZ,
Secretary of the Treasury.
No. 165-23, A P R I L 4, 1973.—DESIGNATION AS UNITED STATES CUSTOMS SERVICE
By virtue of the a u t h o r i t y vested in me as Secretary of the Treasury, it is
hereby ordered t h a t :
544
19 73 REPORT OF THE SECRETARY OF THE TREASURY
1. The Bureau of Customs is designated the United States Customs Service,
effective August 1, 1973.
2. As appropriate, all regulations, rules, orders, decisions, forms, and other
Customs and Treasury documents are amended to conform to this order but
existing supplies of these inaterials shall continue to be used without change
until tliey are exliausted.
3. No action taken p u r s u a n t to this designation shall be invalid by reason
of the fact t h a t any s t a t u t e or regulation provides or indicates t h a t the action
should have been taken uncier a different name.
GEORGE P , SHULTZ,
Secretary of the Treasury.
No. 225, M A Y 11, 1973.—CREATION OF OFFICE OF T H E ENERGY ADVISOR
Executive Order No. l!i703 of F e b r u a r y 7, 1973, designates the Deputy Secretary
of the T r e a s u r y as the chairman of the Oil Policy Committee. By virtue of the
authoritj^ vested in me by Reorganization Plan No. 26 of 1950, there is hereby
created an Office of the Energy Advisor to support the Deputy Secretary in
this capacity. The Office shall be headed by an Energy Advisor who will report
directly to the Deputy Secretary.
Under the direction of the Deputy Secretary and in accordance with guidance
from me in my capacity as Assistant to the President for Economic Aff'airs, this
Office will develop and m a i n t a i n an analytical base for providing policy direction, coordination, surveillance, and evaluation of the F e d e r a l Goverimient's oil
import control program.
The Office will play a major role in determining the impact of oil imports on
the U.S. balance of trade. I t will review the outfiow of dollars resulting from
payments for oil imports ancl the extent to which this generates counterbalancing
U.S, exports. Concurrently, it will make continuing evaluations of the impact of
oil imports on the I n t e r n a t i o n a l Monetary System resulting from increased holdings of U.S, clollars by foreign oil producing countries. These evaluations will
also encompass t h e extent t o which t h e income from oil imports is utilized by
foreign countries for Investment purposes in the U.S.
With t h e aim of reducing the oil industry's contribution to the United States'
negative balance of payments in t r a d e with other countries, the Office will seek
appropriate ways to limit the nation's need to import oil, stimulate domestic
production, a n d find alternative energy sources.
The analyses accomplished by this Office will assess the impact of the oil import
program on national security, evaluate the net impact of policy options on
national security objectives, and contribute to overall energy policies. These
studies will include assessments of t h e relationship among the petroleum industries, the methods of allocating import licenses, levels of imports of products, t h e
reduction of energy demand through more effective utilization, import based
n a t u r a l gas substitutes, emergency energy capacity, Canadian-U,S. cooperation
in oil and energy, AVestern tiemisphere preferences, and distribution and consumption control in supply emergencies.
The Energy Advisor will also serve as Chairman of the Oil Policy Working
Group,
The functions and positions now assigned to the N a t u r a l Resources Program
Office under the Assistant Secretary for I n t e r n a t i o n a l Affairs are liereby reassigned to the Office of the Energy Advisor.
GEORGE P.
SHULTZ,
Secretary of the Treasury,
No, 194 ( R E V I S I O N 3 ) , J U N E 10, 1973.—REASSIGNMENT OF CERTAIN ADMINISTRATIVE
F U N C T I O N S W I T H I N T H E OFFICE OF T H E A S S I S T A N T SECRETARY FOR A D M I N I S TRATION
P u r s u a n t to the a u t h o r i t y vested in the Secretary of the T r e a s u r y by Reorganization P l a n No. 26 of 1950, and the authority delegated to me by T r e a s u r y
Order No. 190 (Revision 8) of September 1, 1972, the Office of Central Services
is hereby disestablished and its authorities, functions, positions, personnel,
records, and property transferred to the Office of Administrative P r o g r a m s ;
EXHIBITS
545
except for the authorities, functions, positions, personnel, records, and property
of the Fiscal Division "which are transferred to a hereby created Financial Management Division reportiug to the Deputy Assistant Secretary for Administration.
P u r s u a n t to the above authorities, the former Administrative Office of t h e
Office of the Assistant Secretary ( I n t e r n a t i o n a l Affairs) is disestablished and
its authorities, functions, personnel, records and propert.y are hereby t r a n s ferred to t h e Office of Administrative Programs, except for (a) the budget and
.-nccounting functions for the Exchange Stabilization F u n d which are t r a n s ferred with corresponding authorities, positions, personnel, records, and property to the Financial Management Division, and (b) the internal audit functions for the Exchange Stabilization Funcl which a r e transferred along w i t h
corresponding authorities, positions, personnel, records, and property to the
Office of Audit.
P u r s u a n t to the above authorities, the authorities, functions, positions, personnel, records, and property of the Office of the Secretary Financial Manager
are herein incorporated into the Financial Management Division,
Also p u r s u a n t to the cited authorities, the Personnel Operations Division is
liereby retitled the Office of the Secretary Personnel Division a n d T r e a s u r y
Order No, 200 (Amendment 3) dated December 1, 1972, is hereby amended accordingly. The Division will continue to report to the Deputy Assistant Secretary for Administration.
The following T r e a s u r y Orders a r e herein superseded: No. 194 (Revision 2)
dated J u n e 24,1971 and No, 170-13 (Revision 1) dated March 13,1973,
WARREN F . BRECHT,
Assistant Secretary for Administration.
No.
175-5, J U N E 11, 1973.—TRANSFER OF T H E OFFICE OF INDUSTRIAL ECONOMICS
By virtue of the authority vested in me by Reorganization P l a n No. 26 of 1950,
supervision of the current functions of the Office of I n d u s t r i a l Economics is
transferred from the Commissioner of I n t e r n a l Revenue to the Assistant Secretary for T a x Policy, effective immediately.
Positions, personnel, funds, records, and property of the Office of I n d u s t r i a l
Economics, as determined by the Commissioner of I n t e r n a l Revenue, t h e
Assistant Secretary for T a x Policy and the Assistant Secretary for Administration, will be transferred from I n t e r n a l Revenue Service to the Office of t h e
Secretary effective July 1,1973.
GEORGE P , SHULTZ,
Secretary of the Treasury:
Advisory Committees
Exhibit 83.—Advisory committees utilized by t h e D e p a r t m e n t of t h e Treasury
DEBT M A N A G E M E N T COMMITTEES
The D e p a r t m e n t of the T r e a s u r y h a s used the services uf various industry
committees, whose memberships include representatives of a variety of financial
organizations and institutions, to advise on debt management m a t t e r s . The
committees have met periodically, a t t h e invitation of the Treasury, to discuss
and make recommendations about current and future Federal financings.
At the beginning of the fiscal year six such committees were a c t i v e : The
American Bankers Association Government Borrowing Committee, the Securities I n d u s t r y Association Government Securities and Federal Agency Committee, the Committee on Government Securities and t h e Public Debt of t h e
National Association of Mutual Savings Banks, the Economic Policy Committee
of the American Life Insurance Association, the Savings and Loan Business
Committee on Government Securities, and the Government Fiscal Policy Committee of the Independent Bankers Association of America,
546
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Public L a w 92-463, enacted October 6, 1972, and subsequent regulations from
t h e Office of Management a n d Budget implementing t h e - l a w , established new
rules governing Federal agency use of advisory committees. The .new law be^
came effective on J a n u a r y 5, 1973. Following this date, only the American Bankers Association Government Borrowing Ct>mmittee a n d t h e Securities I n d u s t r y
Association Government Securities a n d Federal, Agency Committee were chartered as T r e a s u r y advisory committees.
F o u r meetings were held with the Government Borrowing Committee of t h e
American Bankers Association during fiscal year 1973, on J u l y 25-26, October
24-25, J a n u a r y 30-31, a n d April 24-25. Membership of t h e Committee w a s as
follows:
Robert M, Surdam
(Chairman)
Alfred B r i t t a i n I I I
Robert E. Bry ans
Willard C. Butcher
A. W. Clausen
R i c h a r d P . Cooley
Gaylord F r e e m a n
Robert J. Gaddy
Donald M. G r a h a m
William M. J e n k i n s
Ben F . Love
J o h n A. Moorhead
J o h n A. Oulliber
H o w a r d C. Petersen
Robert V. Roosa
Thomas I. Storrs
D. Thomas Trigg
W a l t e r B. Wriston
J o h n J, L a r k i n
Donald C. Miller
Leiand S. Prussia, J r .
J a m e s R. Sheridan
Eugene H. A d a m s
Willis W. Alexander
Rex J. Morthland
Douglas R. Smith
Chairman and Chief Executive Officer, National
Bank of Detroit, Detroit, Mich,
President, B a n k e r s T r u s t Company, New York,
N.Y.
President, F i r s t National Bank of Casper, Casper, Wyo.
President, The Chase M a n h a t t a n Bank, N.A.,
New York, N.Y,
President a n d Chief Executive Officer, Bank df
America, N.T. & S.A., San Francisco, Calif,
President and Chief Executive Officer, Wells
F a r g o Bank, N,A., Sah Francisco, Calif.
Chairman of the Board,' The F i r s t National
Bank, Chicago, 111.
Chairman and President, Tower Grove Bank
and T r u s t Company, S t Louis, Mo.
Chairman a n d Chief Executive Officer, Continental Illinois National B a n k a n d T r u s t
Company, Chicago, III.
Chairman, Seattle-First National Bank, Seattle,
Wash.
. Chairman a n d Chief Executive Oflicer, Texas
Commerce Bank, N.A., Houston, Texas
Chairman and Chief Executive Officer, Northwestern National Bank, Minneapolis, Minn.
Chairman of the Board, F i r s t National Bank of
Commerce, New Orleans, La.
Chairman of the Board, T h e Fidelity Bank,
Philadelphia, Pa..
P a r t n e r , Brown Brothers H a r r i m a n & Company,
New York, N.Y.
President, North Carolina National Bank, Charlotte, N.C.
Chairman and Chief Executive Officer, National
Shawmut Bank of Boston, Boston, Mass.
Chairman, F i r s t National City Bank, New York,
• N.Y.
Senior Vice President, F i r s t National City Bank,
New York, N.Y.
Executive Vice President, Continental Illinois
National B a n k a n d T r u s t Company, Chicago,
in.
Senior Vice President, Bank of America, N.T.
& S.A., San Francisco, Calif,
Senior Vice President, North Carolina National
Bank, Charlotte, N.C,
President, T h e F i r s t National Bank, Denver,
Colo.
Executive Vice President, T h e American Bankers Association, Washington, D.C.
Chairman of the Board, The Peoples Bank and
T r u s t Company of Selma, Selma, Ala.
President a n d Chairman of the Board, National
Savings & T r u s t Company, Washington, D.C,
EXHIBITS
Allen P. Stults
Hampton A. Rabon
Laurence B a n y a s
547
Chairman and Chief Executive Officer, American National Bank & T r u s t Company, Chicago,
111.
A.B.A. Director
A,B.A. Consultant
F o u r meetings were held with the Government Securities and Federal Agencies Committee of t h e Securities I n d u s t r y Association in fiscal 1973, on. July 25-26,
October 24-25, J a n u a r y 30-31 a n d April 24-25. Membership of the Committee
was as follow-s:
E d w a r d D. McGrew
(Chairman)
Robert H, Bethke
(Vice C h a i r m a n )
Daniel Ahearn
David J. B a r r y
C. H. Baumhefner
Robert B, Blyth
William M, Brachfeld
Robert H, Britton
Carl F . Cooke
G, L a m a r Crittenden
S t e w a r t A. D u n n
George W. Hall
M. Dale Jackson
Donald R, Koessel
E d w a r d R. McMillan
J o h n H. Perkins
Robert B. Rivei
George A, Roeder, J r .
H, Jack Runnion, J r .
F r a n k P, Smeal
Robert W. Stone
P a u l E. Uhl
Edwin H. Yeo I I I
C. Richard Youngdahl
Executive Vice President,. The Northern T r u s t
Company, Chicago, III.
Chairman Executive Committee and. Director,
Discount Corporation of New^ York, New York,
N.Y..
.
. ,
Senior Vice President, Wellington Fund, Bbstoii,
Mass.
' • . - . . :
Senior Vice President, Manufacturers Hanover
T r u s t Company, New York, N.Y.
Vice Chairman of the Board and Cashier, Bank
of America, N.T, & S.A,, San Francisco, Calif,
Vice Chairman, National City Bank of Cleveland, Cleveland, Ohio
P a r t n e r , Salomon Brothers, New York, N,Y,
President^ Briggs, Schaedle & Company, I n c ,
New York, N,Y,
. . . . .
Senior Vice President, The F i r s t Boston Corporation, New York, N.Y,
Executive Vice President, F i r s t National Bank
of Boston, Boston, Mass.
Senior Vice President, Merrill Lynch, Pierce,
Fenner & Smith, Inc., New York, N.Y.
President, Wm. E. Pollock & Co., Inc., New York,
- N.Y..
Senior Vice President, Security Pacific National
Bank, Los Angeles, Calif.
Senior Vice, President, F i r s t National Bank of
Minneapolis, Minneapolis, Minn,._
Senior .Vice President, National Bank of Commerce, Seattle, Wash.
President, Continental Illinois National Bank &
T r u s t Company, Chicago, III.
P a r t n e r , L a z a r d F r e r e s & Co., New York, N.Y.
Vice Chairman, The Chase M a n h a t t a n Bank,
N. A., New York, 'N.Y.
Senior Vice President, Wachovia Bank a n d
T r u s t Company, Winston-Salem, N.C.
Executive Vice. President, Morgan G u a r a n t y
T r u s t Company,.New York, N.Y.
Senior Vice President, Irving T r u s t Company,
New York, N.Y,
Executive Vice President, United California
Bank, Los Angeles, Calif.
Vice Chairman, Pittsburgh National Bank, Pittsburgh, P a .
Chairman of the Board, Aubrey G, Lanston &
Co., Inc., New York, N.Y.
548
197 3 REPORT OF THE SECRETARY OF THE TREASURY
One meeting was held with the Committee on Government Securities and the
Public Debt of the National Association of Mutual Savings B a n k s in i t s advisory capacity in fiscal 1973 on October 11, 1972. Membership of the Committee
w a s as follows:
Alfred S. Mills
(Chairman)
Wayne Alderman
Luke A. Baione
Charles W, Chamberlain, Jr,
Anthony I. Eyring
William PI, Plarder
Clifford A, Henze
Rem ay n N, Holdridge
Francis A. Holmes
Sheldon L, Ladd
Albert L, Moore
William G, Morton
Lester J, Norcross
Donald P, Noyes
Harold J, Patterson, J r ,
Ploward M. Picking, J r .
Norman C. Ramsey
William H, Smith I I
John E, Vroman
Theodore W, Lowen
(Adviser)
Saul B. K l a m a n
Donald E, Lawson
New York B a n k for Savings, New York, N,Y.
President, Community Savings Bank, Plolyoke,
Mass.
i
President, Metropolitan Savings Bank, Brooklyn, N.Y.
President, W a t e r t o w n Savings Bank, Watertown, Mass.
President, Washington M u t u a t Savings Bank,
Seattle, Wash.
P r e s i d e n t Buffalo Savings Bank, Buffalo, N,Y.
President, The Kingston Savings Bank, Kingston, N.Y.
Chairman of the Board, The Chelsey Savings
Bank, Norwich, Conn,
President, Pieoples Savings Bank of Yonkers,
Yonkers, N,Y,
President and Treasurer, The Central Bank for
Savings, Meriden, Conn.
Treasurer, AVaterville Savings Bank, Waterville,
Me.
President, The Onondaga Savings Bank, Syracuse, N.Y.
Chairman of the Board ancl President, Syracuse
Savings Bank, Syracuse, N.Y.
President, North Avenue Savings Bank, Cambridge, Mass.
President, The Morris County Savings Bank,
Morristown, N.J.
President, Johnstown Savings Bank, Johnstown,
Pa.
Chairman of the Board, P r u d e n t i a l Savings
Bank, New York, N.Y.
President, Plolyoke Savings Bank, Holyoke,
Mass.
President, Home Savings Bank of Upstate NewYork, Albany, N.Y.
President, Savings B a n k s T r u s t Company, New
York, N,Y.
Staff member, NAMSB
Staff member, NAMSB
One meeting was held with the Savings and Loan Business Committee on
Government Securities in its advisory capacity in fiscal year 1973 on October 12,
1972, Member.ship of the Committee w a s as follow-s:
C, L, Clements, Sr,
(Chairman)
.James A, Aliber
Junius F. Baxter
C. E. Bentley
Frederick Bjorklund
Henry A, Bubb
Carl Distelhorst
Chairman, Chase F e d e r a l Savings and Loan
Associaticm, Miami Beach, Fla,
President, F i r s t Federal Savings & Loan Association, Detroit, Mich.
President & Chairman of t h e Board, Western
Federal Savings &. Loan Association, Denver,
Colo.
President, Abilene Savings Association, Abilene,
Tex.
President, Minnesota F e d e r a l Savings & Loan
Association, St. Paul, Minn.
Chairman of t h e Board, Capitol Federal Savings & Loan Association. Topeka, Kans,
141 Alexander Place, Winter P a r k , Fla.
EXHIBITS
W. O. DuVall
Fred F. Enemark
E. Stanley Enlund
J o n a t h a n M. Fletcher
Richard G. Gilbert
L, W, Grant, Sr.
E, Michael Lallinger
H a r r y L. Leavy
George E. Leonard
Donald P. Lindsay
Roy M. M a r r
Gregor F . Meyer
Raymond L. Miller
Tom B. Scott, J r .
John W. Stadtler
Robert PI. Taylor
Donald A, Thompson
Gerrit Vander Ende
J a m e s A. Hollensteiner
549
Chairman of the Board, Atlanta Federal Savings & Loan Association, Atlanta, Ga,
Executive Vice President, Bell Savings & Loan
Association, San Rafael, Calif.
Chairman of the Board, F i r s t Federal Savings
and Loan Association, Chicago, 111.
President, Plome Federal Savings & Loan Association, Des Moines, Iowa
President, Citizens Savings Association, Canton,
Ohio
Chairman of the Board, Home Federal Savings
& Loan Association, Tulsa, Okla.
President, Gibraltar Savings Association, Piouston, Tex.
President, Uptown Federal Savings & Loan,
Baltimore, Md.
President and Chairman of the Board, F i r s t
Federal Savings & Loan Association, Phoenix,
Ariz.
President, Lincoln F i r s t Federal Savings & Loan
Association, Spokane, Wash.
Chairman of the Board, Leader Federal Savings
& Loan Association, Memphis, Tenn.
Chairman of the Board, Century Savings &;
Loan, Pittsburgh, Pa.
President, F i r s t Federal Savings & Loan Association, E a s t Hartford, Conn.
President, F i r s t Federal Savings & Loan Association, Jackson, Miss.
President, National P e r m a n e n t Savings « Loan
&
Association, Washington, D.C:
President, Boston Federal Savings & Loan
Association, Boston, Mass.
Senior Vice President, California Federal Savings & Loan Association, Los Angeles, Calif.
President, Pacific F i r s t Federal Savings & Loan
Association, Tacoma, Wash.
Secretary and Staff Vice President, United
States Savings and Loan League, Chicago,
111.
No meetings were held during fiscal 1973 in their advisory capacities with
Economic Policy Committee of the American Life Insurance Association or
with the Government Fiscal Policy Committee of the Independent B a n k e r s
Association of America.
I n t e r n a l Revenue Service
ART ADVISORY P A N E L
The A r t Advisory Panel was established by the Commissioner of I n t e r n a l
Revenue on F e b r u a r y 1, 1968. This group consists of members representing the
three major segments of the a r t world—museums, universities, and dealers.
The group provides advice on the valuation of works of a r t for Federal t a x
purposes. No meetings were held during fiscal 1973.
Charles E. Buckley
Anthony M. Clark
P e r r y B. Cott
Kenneth Donahue
Louis Goldenberg
George H. Hamilton
Director, City A r t Museum, St. Louis, Mo.
Director, Minneapolis I n s t i t u t e of Arts, Minneapolis, Minn.
Chief Curator ( R e t ) , National Gallery of Art,
Washington, D.C.
Director, Los Angeles County Museum of Art,
Los Angeles, Calif,
A r t dealer, Wildenstein & Co., New l^ork, N.Y,
Professor, Williams College, Williamstown,
Mass.
550
1973 REPORT OF THE SECRETARY OF THE TREASURY
B a r t l e t t H, Playes
Sherman E. Lee
William S, Lieberman
Charles F , Montgomery
F r a n k Perls
E s t h e r W. Robles
Director, American Academy, Rome, I t a l y
Director, Cleveland Museum of Art, Cleveland,
Ohio
Director, Paintings & Sculpture, Drawings &
Prints, Museum of Modern Art, New York,
• N.Y.
Professor, Yale University, New Haven, Conn.
xArt dealer. Perls Gallery, Beverly Hills, Calif.
Art dealer, Esther Robles Gallery, Los Angeles;
Calif, f>-"^
Alexander P, Rosenberg
Theodore Rousseau
Merrill C. Rueppel
Art dealer, P a u l Rosenberg & Co,, New York,
• • . N,Y; •
Vice Director, Metropolitan Museum of A r t New
York, N,Y,.
Director, Dallas Museum of Fine Arts, Dallas,
•' T e x , •
ADVISORY C O M M I T T E E ON T H E CATTLE I N D U S T R Y
I n October 1970 the Commissioner formed an Advisory Committee on the
Cattle Industry, A p r i m a r y purpose of the Committee is to counsel the Service
in implementing important changes in t h e t a x l a w ; such as, those regarding the
holding period for livestock for capital gains treatment, the exchange of
livestock, ancl hobby losses. The Committee advises the Service on development
of policies for administering new code provisions dealing with cattle a n d comments upon proposed administrative guidelines or revenue rulings. No meetings
were held during fiscal 1973.
H a r v i e Branscomb, J r .
W. T. Berry, J r . .
F r a n k D, Brown, J r .
Gordon M. Cairns
Donald V. H u n t e r
Ben H. Carpenter
John M. Marble
Robert H. Rumler
Nelson E. Tamplin
John T r o t m a n . ,
Gordon VanVleck
Tobin Armstrong
Branscomb, Gary, Thomasson & Hall, Corpus
Christi, Tex,
Executive Secretary, American Hereford Association, K a n s a s City, Mo.
Mt. A r a r a t F a r m s , P o r t Deposit, Md,
Dean, College of Agriculture, University of
Maryland, College P a r k , Md.
Centerville, S, Dak,
Chairman of the Board and Chief Executive
' Officer, Southland Life I n s u r a n c e Co., Dallas,
Tex. ./'.
Rancho Tularcitos, Carmel Valley, Calif,
Executive "Secretary, Holstein-Friesian Association of America, Brattleboro, Vt.
E r n s t & Ernst, Denver, Colo.,'
Montgomery, A l a .
Plymouth, Calif.
Armstrong Ranch, Armstrong, Tex.
ADVISORY C O M M I T T E E ON T H E HORSE
INDUSTRY
. I n October 1970, t h e Commissioner announced t h e formation of an Advisory
Committee on the Horse Industry,. Composed of 15 distinguished citizens whose
experience a n d special knowledge of t h e industry h a s long been recognized, t h e
Committee includes representatives of t h e academic community and professional groups concerned with horses. The p r i m a r y purpose of the Committee
is to apply its special expertise td counsel t h e Service in implementing i m p o r t a n t
c h a n g e s ; ' such as, those tregarding t h e holding period of livestock for capital
gains treatment, t h e ' exchange of livestock, and hobby losses. Members also
take p a r t in the development of policies and comment on administrative guidelines or proposed rulings, dealing with horses: No meetings were held during
fiscal 1973.
Benjamin Eshleman, J r ,
W. Sidney Felton. .
P a r t n e r , Eshleman-Vogt Ranch, Corpus Christi,
Tex.
< Herrick, Smith, Donald, Farley a n d Ketchum,
Boston, Mass.
551
EXHIBITS
Katheidne Haley
Max C. Hempt
E d w a r d H. Plonnen
Kenneth Merdith
Gayle Mohney
Ogden Phipps
H a r t PI. Spiegel
Frederick Van Lennep
W a r n e r L, Jones, J r .
William S. F a r i s h I I I
Robert G. Lawrence
Robert H. Kieckhefer
Albert Greene Clay
Thoroughbred owner, Rancho Misolar, Ventura,
Calit
Owner of Plernpt F a r m s , Mechanicsburg, P a .
Chairman, Board of Trustees, American Horse
Council, Inc., Denver, Colo,
Elmer Fox & Company, Wichita, Kans,
Stoll, Keenon & P a r k , Lexington, Ky,
Chairman, The Jockey Club, New^ York, N.Y, '
Brobeck, Phleger, & Harrison, San Francisco,
. Calif,
Treasurer, American Horse Council, I n c , Lexington, Ky.
President, Thoroughbred Breeders of Kentucky,
Hermitage Farm, Goshen, Ky.
President, Blue Creek Ranch Co., Houston, Tex.
Assistant Professor, Dept, of Agricultural Economics, University of Maryland, College P a r k ,
Md.
Chairman, American Quarter Horse Association,
Prescott, Ariz.
Secretary, American Plorse Council, Inc., Fairway F a r m , Mt. Sterling, Ky.
Comptroller of t h e Currency
CONSULTING C O M M I T T E E OF B A N K
ECONOMISTS
• On November 23, 1965, the Comptroller announced the appointment of a Consulting Committee of Bank Economists which included seven national bank
economists. T h e duties of the Committee a r e to meet with the Comptroller and
any other bureau officials the Comptroller designates to bring the specialized
experience a n d technical knowledge of the members to bear on current problems
of banking policy and practice.
This Committee met on March 28, 1973. Members of the Committee are as
follows:
Eugene C. Zorn, J r .
Senior Vice President and Economist, Republic
(Chairman)
National B a n k of Dallas, Dallas, Tex.
Miner B a k e r
Vice President and Economist, Seattle-First Na• tional Bank, Seattle, Wash.
J a m e s M, Daw^son
Vice President and Economist, National City
B a n k of Cleveland, Cleveland, Ohio
Walter Hoadley
Executive Vice President and Chief Economist
B a n k of America, N.T. & S,A,, San Francisco,
Calif.
J a m e s M. Howell
Vice President, The F i r s t National Bank . of
Boston, Boston, Mass.
Vice President, F i r s t National Bank of Chicago,
William J, Korsvik
Chicago, III.
Senior Vice President and Economist, F i r s t NaLeif H, Olsen
tional City Bank, New York, N.Y,
I N V E S T M E N T S E C U R I T I E S ADVISORY
COMMITTEE
I n 1962, t h e Comptroller of the Currency established the Investment Securities
Advisory Committee, The duties of the Committee a r e to meet with the Associate
Chief Counsel ( I n v e s t m e n t Securities) a n d any other bureau officials the Comptroller designates to discuss m a t t e r s concerning proposed regulations and legislation a n d the eligibility of securities for investment and underwriting, a n d to provide expertise on problems in the field of investment securities a n d municipal
financing.
552
19 73 REPORT OF THE SECRETARY OF THE TREASURY
No meetings of this Committee were held in fiscal 1973, Members of the Committee a r e as follows:
President, Continental Illinois National Bank &
J o h n H. Perkins ( C h a i r m a n )
T r u s t Company of Chicago, Chicago, III.
Vice President, F i r s t National City Bank, New
Richard F, Kezer
York, N.Y. ;
President, Mercantile National Bank a t Dallas,
Lewis F, Lyne
Dallas, Tex.
LeRoy F . Piche
Vice President, Northwest Bancorporation, Minneapolis, Minn.
A r t h u r H. Quinn, J r .
Vice President, The Philadelphia National Bank,
Philadelphia, Pa,
Thomas L. R a y
Senior Vice President, Mercantile T r u s t Company, N,A., S t Louis, Mo.
F r a n k l i n Stockbridge
Vice Chairman, Security Pacific National Bank,
Los Angeles, Calif.
J a m e s G. Wilson
Senior Vice President, The National Shawmut
Bank of Boston, Boston, Mass.
N A T I O N A L ADVISORY C O M M I T T E E ON B A N K I N G POLICIES AND PRACTICES
On October 4, 1965, the Comptroller of the Currency appointed this Committee,
composed of leading bankers. The duties of the Committee a r e to meet with the
Comptroller and his designated officials a n d participate in a cooperative effort
to present the position of the banking community on the numerous m a t t e r s of
national concern in which the banking industry is involved.
No meetings of this Committee w^ere held in fiscal 1973, Members of the Committee a r e as follows:
Chairman, Executive Committee, American SeRobert C, B a k e r
curity & T r u s t Company, Washington, D,C,
Robert M, Surdam
Chairman of; the Board, National B a n k of Detroit, Detroit, Mich,
Roger C, Damon
Director, T h e F i r s t National B a n k of Boston,
Boston, Mass.
G. Morris Dorrance, J r .
Chairman of the Board and President, The Philaclelphia National Bank, Ardmore, Pa.
George S, Eccles
Chairman of the Board, F i r s t Security B a n k of
Utah, Salt Lake City, U t a h
J. A, Elkins, J r ,
Chairman of the Board, F i r s t City National Bank
of Houston, Houston, Tex.
Sam M, Fleming
Senior Chairman, Third National B a n k in Nashville, Nashville, Tenn.
Robert D, H, Harvey
Chairman of the Board, Maryland National
Bank, Baltimore, Md.
William M, Jenkins
Chairman of t h e Board, Seattle-First National
Bank, Seattle, Wash.
Mills B. Lane, J r .
Chairman of the Board, The Citizens & Southern
National Bank, Atlanta, Ga.
Frederick G. Larkin, J r .
Chairman of the Board a n d Chief Executive Officer, Security Pacific National Bank, Los Angeles, Calif.
J o h n A, Mayer
Chairman of the Board, Mellon National Bank
& T r u s t Company, Pitt.sburgh, Pa.
R, A, Peterson
Director, B a n k of America, N.T. & S.A., San
Francisco, Calif.
W, H a r r y Schwarzschild, J r ,
Chairman of t h e Board, T h e Central National
Bank, Richmond, Va.
Robert H, Stewart I I I
Director, F i r s t National B a n k in Dallas, Dallas,
Tex.
EXHIBITS
553
REGIONAL ADVISORY C O M M I T T E E S ON B A N K I N G POLICIES AND PRACTICES
On November 11, 1965, the Comptroller of the Cuii.ency established 14 Regional
Advisory Committees on Banking Policies and Practices to meet with the regional
administrator of national banks a n d any other bureau officials the Comptroller
designates to discuss bank examination procedures, regulations and policies, and
to develop reports and recommendations in connection with the supervision of
national banks. The Committees' membership a n d the dates of the regional meetings d u r i n g fiscal 1973 follow :
Region 1 meeting date, November 2,1972,
Arnold M, Leibowitz (Chair- President, The Constitution National Bank,
man)
Hartford, Conn.
President, F i r s t Bristol County National Bank,
H a r r y PI, Carey
Taunton, Mass.
President, I n d u s t r i a l National B a n k of Rhode
J o h n J. Cummings, J r
Island, Providence, R.I.
President, The Merchants National B a n k of
Dudley H, Davis
Burlington, Burlington, Vt.
President, F i r s t National B a n k of F r a n k l i n
Ronald R, Findlay
County, Greenfield, Mass.
President, Bay State National Bank, Lawrence,
Leslie N, Hutchinson
Mass.
President, The F i r s t National Bank of FarmJohn D, Robinson
ington, Farmington, Maine
Maureen M. Smith
Senior Vice President, The State National Bank
of Connecticut, Bridgeport, Conn,
William E. Stearns
Chairman, B a n k of New Plampshire, N,A,, Manchester, N,H,
Widgery Thomas, J r .
'Chairman, Canal National Bank, Portland,
Maine
Thomas PI, Trigg
Chairman, The National S h a w m u t B a n k of
Boston, Boston, Mass.
Fred A, White
President, D a r t m o u t h National B a n k of Hanover, Planover, N.PI,
Region 2 meeting dates, November 3 - ^ , 1972, a n d May 25-26, 1973,
William I, Spencer
(Chairman)
Richard Beekman
Norman J, Brassier
P a t r i c k J, Clifford
J a m e s L. Cooper
Robert I-I, Fearon, J r .
Thomas W. Pliggins
Leonard F . Hill
E r w i n O, K r a f t
William T, Leese
Frederick P a l m e r
Mary G, Roehling
President, F i r s t National City Bank, New York,
N,Y,
President, Citizens F i r s t National Bank of
Ridgewood, Ridgewood, N,J,
Chairman of the Board, New Jersey Bank, N,A,,
Clifton, N.J.
Chairman of the Board, Security National Bank,
Hempstead, N.Y.
Chairman of the Board, Atlantic National Bank,
Atlantic City, N.J.
President, Oneida Valley National Bank of
Oneida, Oneida, N.Y.
President, The Merchants National B a n k &
T r u s t Company of Syracuse, Syracuse, N,Y,
President, The National Bank of New Jersey,
New Brunswick, N.J.
President, F i r s t National B a n k of New Jersey,
Totowa, N.J.
President, F i r s t National Bank of E a s t H a m p ton, E a s t Hampton, N.Y.
Chairman of the Board, Chemical Bank Hudson
Valley, N.A., Nyack, N.Y,
Chairman of the Board, The National State
Bank, Elizabeth, N,J.
554
19 73 REPORT OF THE SECRETARY OF THE TREASURY
Region 3 meeting date, November 30,1972.
Thomas L. Wentling
(Chairman)
E r n e s t R. Andrew
J a m e s E. Brucklacher
Plarold U. Crouse
G. Morris Dorrance, J r .
Robert K. Gicking
Merle E. Gilliand
Roger S. Hillas
J o h n J. McCartney
Wilson D. McElhinny
M. A. Powers
H. Myron Wetzel
President, Southwest National B a n k of Pennsylvania, Greensburg, Pa.
Chairman of the Board, President and T r u s t
Officer, Deposit National Bank, DuBois, P a .
Chairman of ^ the Board, Cumberland County
National Bank & Tr, Co,, New Cumberland,
Pa.
P r e s i d e n t T h e Peoples National B a n k of Shippensburg, Shippensburg, Pa.
President and Chairman of t h e Board, The
Philadelphia National Bank, Ardmore, Pa.
President, The Hazleton National Bank, Hazleton, P a .
Chairman of. the Board and Chief Executive
, -Officer, The Pittsburgh National Bank, Pittsburgh, P a .
President, . Provident National
Corporation,
B r y n Mawr, Pa,
President, The F i r s t National Bank of Allen. towm, Allentown, Pa,
President, National Central Bank, Lancaster,
Pa.
Chairman of the Board, F i r s t National Bank &
T r u s t Co., Washington, P a .
President, Third National B a n k and Trust
Company, Scranton, Pa.
Region 4 meeting dates, September 29,1972, and April 27,1973.
Clair E. F u l tz ( C h a i r m a n )
Claude M. B l a i r
Harriet Brown
William P . Givens
Robert E. Plall
Robert A. K e r r
Arch G. Mainous, J r .
C.W.Pratt
J. F r e d Risk
Hugh M. Shwab
Arch C. Voris, J r .
J o h n W. Woods, J r .
Chairman of t h e Board, Huntington Bancshares,
Inc., Columbus, Ohio
Chairman bf the Board and Chief Executive
Officer, T h e ' N a t i o n a l City B a n k of Cleveland,
Cleveland, Ohio
President, The Springs Valley National Bank,
French Lick, Ind.
President, The Merchants National B a n k of
Muncie, Muncie,, Ind.
President and T r u s t Officer, The F i r s t National
B a n k & T r u s t Co., Troy, Ohio
Chairman of the Board, The Winters National
B a n k and T r u s t Company of Dayton, Dayton,
Ohio
President, Citizens Union National B a n k &
T r u s t Company, Lexington, Ky,
President, F o r t Knox National Bank, F o r t Knox,
Ky.
Chairman of the Board, The I n d i a n a National
Bank, Indianapolis, Ind.
Chairman of the Board, F i r s t National B a n k
of Louisville, Louisville, Ky.
President, The Citizens National B a n k of Bedford, Bedford, Ind.
P r e s i d e n t The Third National B a n k of Ashland,
Ashland, Ky.
Region 5 meeting dates,.December 9,1972, and May 4-5,1973,
W. N. Shearer, J r .
(Chairman)
Francis G. Addison I I I
W. T. Clements
President, Kanaw^ha Banking and T r u s t Company, N.A,, Charleston, W, Va.
P r e s i d e n t Union T r u s t Co. of D . C , Washington, D.C.
President, The Wise County National Bank,
Wise, Va.
EXHIBITS
H. J. Gibson P a u l O. Hirschbiel
H. W. Kelly, J r .
William T. McLaughlin I I
Guy W. Nusz
Vyilliam J. Schuiling
.
A. G. Thompson
C. R. Tusing . ^
J o h n P. Watlington, J r .
555
Fresident, The National B a n k of Logan; Logan,
W. Va.
President, United Virginia B a n k / N a t i o n a l Valley, Staunton, Va.
President, The National B a n k of F a i r f a x , Fairfax County, Va.
Executive Vice President, Community B a n k and
Trust, N.A., Fairmont, W. Va.
President, F a r m e r s & Mechanics National Bank,
Frederick, Md.
Chairman of the Board, The F i r s t National
Bank of Washington, Washington, D.C.
President, Carolina F i r s t National Bank, Lincolnton, N.C.
President, The F i r s t National Bank of Oakland,
Oakland, Md.
President, Wachovia B a n k and T r u s t Company,
N. A,, Winston-Salem, N.C.
Region 6 meeting dates, November 9,1972, and May 11,1973.
J. B. Williams ( C h a i r m a n )
Clarence T. Ayers
R u t h Cecil
Charles K. Cross
Michael J.. F r a n c o
Daniel S. Goodrum
H e n r y M. J e r n i g a n
Richard L. K a t t e l
T. H. Milner, J r .
Charles E. Rice
G.H. Watts
Chairman of the Board, The F i r s t National
B a n k and T r u s t Co. of Augusta, Augusta, Ga.
P r e s i d e n t The F i r s t National B a n k of Gainesville, Gainesville, Fla.
Senior Vice President, The F i r s t National B a n k
of Homestead, Homestead, Fla.
P r e s i d e n t and Chief Administrative Officer,
South Carolina National Bank, Columbia, S.C.
Chairman, City National Bank of Miami, Miami,
Fla.
President, F i r s t National Bank and T r u s t Company in Lake Worth, Lake Worth, Fla.
Chairman of the Board, F i r s t National Bank of
F o r t Pierce, F o r t Pierce, Fla.
President, The Citizens and Southern National
Bank, Atlanta, Ga.
Chairman of the Board and President, The F i r s t
N a t i o n a l B a n k of Athens, Athens, Ga. .
Chairman of the Board, B a r n e t t Bank of W i n t e r
P a r k , National Association, Winter Park, Fla.
President, The F i r s t National Bank of Dalton,
Dalton, Ga.
Region 7 meeting date, November 8,1972.
Lewis H. Clausen ( C h a i r m a n ) . .President, The Champaign National Bank,
Champaign, 111.
J a m e s W. Carpenter
President, Union Bank & T r u s t Company, N. A.,
Grand Rapids, Mich.
J a m e s H. Duncan
President, The F i r s t National B a n k & T r u s t
Company of Michigan, Kalamazoo, Mich.
William G. Ericsson
President, American National B a n k & .Trust Co.
of Chicago, Chicago, III.
Don R. F r a n k
President^ City National B a n k of Kankakee,
Kankakee, III.
William G. Hoskins
Chairman of the Board and President, T h e
F i r s t National B a n k of Libertyville, Libertyville, 111.
Robert C. H u m p h r e y
President, State National Bank, Evanston, III.
Ned A. Kilmer, J r .
President, City B a n k and T r u s t Co,, National
Association, Jackson, Mich.
Executive Vice President, F i r s t National B a n k
Charles D. R e n t ro
i n Carbondale, Carbondale, III.
506-171—^73
38
556
1973 REPORT OF THE SECRETARY OF THE TREASURY
J a m e s PI. Smaby
Selma E. Sweeney
R i c h a r d E. Willard
President, Commercial National B a n k of I r o n
Mountain, I r o n Mountain, Mich.
Executive Vice President, The F i r s t National
Bank of Areola, Areola, 111.
President, F a r m e r s and Merchants National
Bank in Benton Harbor, Benton Harbor, Mich.
Region 8 meeting dates, November 3,1972, and J u n e 1,1973.
William A. Carpenter (Chairman)
W. E. Newell (Vice C h a i r m a n )
W. B, B r a n n a n
C. Bennett H a r r i s o n
W. E. Howard, J r .
W, PI. Kelly
E r n e s t F . Ladd, J r .
Aubyn PI. McKenzie
F r a n k M. Moody
M. J. Moody
William R. Rice
J. W. Roberson
President, Whitney National B a n k of New Orleans, La. I
Chairman of the Board, The F i r s t National Bank
of Sullivan County, Kingsport, Tenn.
President, The F i r s t National Bank of Canton,
Canton, Miss.
Chairman of the Board, Union P l a n t e r s National
Bank, Memphis, Tenn.
President, The (Commercial National B a n k &
T r u s t Co, of Laurel, Laurel, Miss,
President, The State F i r s t National B a n k of
T e x a r k a n a , Texarkana, Ark.
President, The Merchants National B a n k of
Mobile, Mobile, Ala.
Vice President, The Plomer National Bank,
Homer, La.
Chairman of the Board, The F i r s t National
Bank of Tuskaloosa, Tuskaloosa, Ala.
President, Britton and Koontz F i r s t National
Bank, Natchez, Miss.
President, F i r s t American National Bank, North
Little Rock, Ark.
Chairman of the Board and President, F i r s t National Bank of West Monroe, West Monroe,
La.
Region 9 meeting date, October 24,1972.
Erliiig Haugo ( C h a i r m a n )
Alexander M. Castle
Norman K. Christensen
George H. Dixon
John M. Eldred
John C. Geilfuss
Donald C. Miller
John F. Nash
David A. Shorn
Weber L. Smith, J r .
G. O. Thorpe
Charles T. Uncllin
President, Valley National B a n k of Sioux Falls,
Sioux Falls, S. Dak.
President, Tlie F i r s t National B a n k of Plibbing,
Hibbing, Minn.
President, F i r s t National B a n k of Wahpeton,
Wahpeton, N. Dak.
President, F i r s t National B a n k of Minneapolis,
Minneapolis, Minn,
President, The F i r s t National Bank a n d T r u s t
Company of Beloit, Beloit, Wis.
President, Marine National Exchange Bank of
Milwaukee, Milwaukee, Wis.
President, Community National B a n k of Grand
Forks, Grand Forks, N. Dak.
President, American National B a n k and T r u s t
Company, St. Paul, Minn,
President, Suburban National B a n k of Roseville,
Roseville, Minn,
President, F i r s t Wisconsin National Bank of
Madison, Madison, Wis,
Chairman of the Board, The F i r s t National
B a n k of Chippewa Falls, Chippewa Falls, Wis,
President, F i r s t National B a n k of the Black
Hills, Rapid City, S, Dak.
Region 10 meeting dates, September 29,1972, and April 25,1973.
Plarold R. Deitemeyer (Chairman)
President, The F i r s t National B a n k & T r u s t Co.
of Beatrice, Beatrice, Nebr.
EXHIBITS
William N. Brownfield
C. Q. Chandler
Rex W. Crowley
Stanley W. Evans
F. Phillips Giltner
Harold E. Larmon
Bill B.Lee
Winfield S. Mayne
David H. Morey
Martin Roggen
Willis E. Stout
557
President, Leawood National Bank of Kansas
City, Kansas City, Mo.
President, First National Bank in Wichita,
Wichita, Kans.
Chairman of the Board, The National Bank of
Pittsburg, Pittsburg, Kans.
Chairman of the Board and President, Northwestern National Bank of Sioux City, Sioux
City, Iowa
President, The First National Bank of Omaha,
Omaha, Nebr.
President, The First National Bank of McCook,
McCook, Nebr.
Chairman of the Board and President, The First
National Bank in Neosho, Neosho, Mo.
Chairman of the Board and President, The
Montgomery Co. National Bank of Red Oak,
Red Oak, Iowa
Chairman of the Board, The Boatman's National
Bank of St Louis, St. Louis, Mo.
President, First National Bank of Ottumwa,
Ottumwa, Iowa
Chairman of the Board, First National Bank
in Goodland, Goodland, Kans.
Region 11 meeting dates, March 2-3,1973.
Eugene Swearingen
President, National Bank of Tulsa, Tulsa, Okla.
(Chairman)
President, Citizens First National Bank of
Plenry M. Bell, Jr.
Tyler, Tyler, Tex.
Chairman of the Board and President, The First
Benton Browning
National Bank and Trust Company of Ada,
Ada, Okla.
President, The First National Bank of Lamesa,
G. R. Crawley
Lamesa, Tex.
President, The Union National Bank of BartMelvin L. Ford
lesville, Bartlesville, Okla.
President, Fidelity Bank, N.A., Oklahoma City,
Grady D. Harris, Jr.
Okla.
President, First National Bank of Abilene, AbiWalter F. Johnson
lene, Tex.
Frank Junell
Chairman of the Board and Chief Executive
Officer, The Central National Bank of San
Angelo, San Aoigelo, Tex.
President, Texas Commerce Bank, National
Ben F. Love
Association, Houston, Tex.
President, Mercantile National Bank at Dallas,
Lewis F. Lyne
Dallas, Tex.
President, First City National Bank of FloresJohnnie E. Merchant
ville, Floresville, Tex.
President, First National Bank in Clinton, ClinF. A. Sewell, Jr.
ton, Okla.
Region 12 meeting date, November 17,1972.
Executive Vice President, The First National
Bank of Denver, Denver, Colo.
President, First National Bank, Torrington,
L. C. Atkins
Wyo.
President, The Valley National Bank of Arizona,
Earl L. Bimson
Phoenix, Ariz.
President, The First National Bank in Fort
Tom Gleason
Collins, Fort Collins, Colo.
President, Pioneer National Bank, Logan, Utah
Ronald S. Hanson
T. D. Brown (Chairman)
558
19 73 REPORT OF THE SECRETARY OF THE TREASURY
President, The F i r s t N a t i o n a l B a n k of Artesia,
Artesia, N. Mex.
President, The F i r s t National Bank of Belen;
Belen, N, Mex.
President, The Alamosa Natiorial Bank, Alamosa, Colo,
P r e s i d e n t T h e E a s t B a n k of Colorado Springs,
N.A., Colorado Springs, Colo.
President, F i r s t Westland National Bank, Lakewood, Colo.
Chairman of t h e Board, The F i r s t National
B a n k of Rawlins, Rawlins, WyO.
President, The F i r s t National B a n k and T r u s t
Co. of Wyoming, Cheyenne, Wyo. "• •
Charles K. Johnson
J. C. Johnson
Delmer P . K e a t i n g
W . L . Perry
Roger L. Reisher
F. A. Rummel, J r .
B e r n a r d R. Weber
Region 13 meeting dates, August 25,1972, a n d May 11,1973.
Philip L. Cornell
(Chairman)
Thomas G. Bourke
W. W. B r o k a w
H a r r y S. Goodfellow
John G. Horning
R. G. Johnson
W. H . Nussbaum '
Robert I. P e n n e r
Lyman E. Seely
J a m e s H. S t a n d a r d
W. G. Stroecker
A. F . Winegardner
• Executive Vice President, Sea ttie-First National
. , Bank, Seattle, Wash.
Executive Vice President, F i r s t Security B a n k
of Idaho, N.A., Boise, Idaho
President,. The F i r s t National B a n k of Stanwood, Stanwood, Wash.
President, Old National B a n k of Washington,
Spokane, Wash.
President, Columbia Center National Bank, Kennewick. Wash.
President, Continental National B a n k of Harlowton, Harlowton, Mont.
Executive Vice President, F i r s t National B a n k
of Whitefish, Whitefish, Mont.
President, Citizens F i r s t National B a n k of Wolf
P o i n t Wolf P o i n t M o n t
Vice Chairman of the Board, F i r s t National
B a n k of Oregon, Portland, Oreg.
Executive Vice President, The F i r s t National
B a n k of McMinnville, McMinnville, Oreg.
President, F i r s t National Bank of Fairbanks,
F a i r b a n k s , Alaska
President, F i r s t National Bank a n d T r u s t Company, Billings, Mont.
Region 14 meeting dates, October 20,1972, and May 4,1973.
W. Gordon Ferguson
(Chairman)
E r n e s t D. Bonta
Harold N. Bruce
A. W. Clausen
Albert C. Gianoli
Alden W. Johnson
Roy G. Lovelock
K. J. Luke
William S. Pfeifie
"
John A. Raffetto
Don'A. W e s t e r m a h
President, National B a n k of Whittier, Whittier,
Calif.
President, Inyo-Mono National Bank, Bishop,
Calif.
President, San Luis Obispo National Bank, San
Luis Obispo, Calif.
P r e s i d e n t Bank of America, N.T. & S.A., San
Francisco, Calif.
Chairman of the Board and President, The
F i r s t National Bank of Ely, Ely, Nev.
Chairman of t h e Board, Southern California
F i r s t National Corp., San Diego, Calif.
President, H a y w a r d National Bank, H a y w a r d ,
Calif.
Chairman of t h e Board & President, H a w a i i
National Bank, Honolulu, Honolulu, H a w a i i
President, The Bank of Califorma, N.A., San
Francisco, Calif.
Chairman, of t h e Board & President, P l a c e r Natipnal Bank, Rocklin, Calif.
President, Mid-Cal National Bank, Lodi; Calif.
STATISTICAL A P P E N D I X
TABLES
The statistical tables to this Annual Report will be published in the separate
Statistical Appendix.
INDEX
... A
, . ..
Page
Accounting systems
_____„l_L_ll___________i
75, 109-10
Accounts, B u r e a u of, administrative report
108-15
Administrative management
:
'_
^ _ _!__
^_
71-8
Administrative Programs, Office of
.
^
__- 71-2
ADP m a n a g e m e n t — .
____:________:_:_:____:„___ 74, 87, i l 6 , 119,162
Advisory committees
____.,
72, 545-58
Agency for International Development
'.
67-8, 73
Air security program^ _____ J
X X V I I I - X X i X , 27, 147, 152
Alcohol, Tobacco and JBdrearms, B u r e a u of, administrative report
78-88
AMPS program
31,147
Antidumping
32, 147, 318-22, 337-8
Antinarcotics program
25-6, 314-18, 325-7
Antiterrorism
.
__1 28, 322-5
Asian Development Bank
X X X V I , 65-6,481-9, 512-17
Audit, Office of
^_________
73-4
Balance of payments
:______________:___ X X X I , 54-6, 57, 4.02-3, 522-4
Banks:
Minority deposit prograni
253-7
Status of national
._^
90-92
Bills, T r e a s u r y :
1973 operations
________^__ 17-24
Press releases
____^__
189-90
Summary, 1973 issues
'.
191-5
Bonds, Treasury :
1973 operations
T-—.—
——
17-24
Summary, 1973 issues_^___
—---.^-——
---^
182-8
Bonds, U.S. S a v i n g s :
: Forgery
168-70
I s s u a n c e and redemption__
.
.
118,158
. Promotiona;i activities__
__!
^
158-62
Regulations, revised and amended__
^-198-204, 208-13
Budget:
Accounting and reporting
8,110
Accrual basis concepts
8
Cash and monetary assets
6
Means of
financing_
___.
XXIII-XXIV
Policy
_:_____:
.. X X I I , 74-5
Recepits and outlays
3-6
Surplus or cleficit_____
XXII, 3
Cargo security program
30, 147, 152
Charts:
: Budget 1963-73___
_______:
4
Market yields a t con'stant maturities, 1968-73
12
Organization of the Department of the T r e a s u r y
XVII
Ownership of Federal securities, J u n e 30, 1973
17
P r i v a t e holdings of marketable Federal securities, fiscal years 196973
:'—
—
14
563
564
'^^
INIDEX
Page
Checks, T r e a s u r y :
Claims
..
—
119, 124
Forgery
124, 166-8
Issued
112
P a i d __-_
124
Unit cost
111
Circulars, Department
.
,
175-250
Claims against foreign governments, payment of
114
Coins, production
139-42
Committee of Twenty
.
XXIX,
X X X I I - X X X I I I , 41-2, 47, 253, 400, 463, 521-2, 524-6
Comptroller of the Currency, Office of the :
Administrative report
.
88-92
Advisory committees
551-8
Conscience fund
.
115
Consolidated Federal Law Enforcement Training Center, a d m i n i s t r a t i v e
report
—
93-6
Controls, wage a n d price
X I X , 10,136-7, 258-66, 272-8
Corporation income taxes. See Taxation : Income ancl profits taxes.
Corporations a n d other business-type activities of the Federal Government,
review for 1973
7
Cost of Living Council
10-11, 136-7, 2G6
Counterfeiting
X X V H I , 27, 164-6
Countervailing cluty
32-3, 147, 318-22, 337-8
Criminal Investigator School
93
Currency:
Issuing and redeeming
122-3
Production
100
Customs {see also Law enforcement operations) :
U.S. Customs Service, administrative r e p o r t 145-57
I n t e r n a t i o n a l operations
156-7
Receipts
5, 147-8
D
Debt management. See Federal d e b t : Management,
Defense lending
114
Deficit budget
XXII, 3
Depositary services
112-13,119, l 2 l , 282-5
Deposits, w i t h d r a w a l s a n d balances in T r e a s u r e r ' s account
122
Director of Practice, Office of, administrative report
96-7
Disbursing operations
111-12,124
Dollar, modification of p a r value
— X X X I , X X X V I I , 409-36, 465-70
Domestic Gold and Silver Operations, Office of, administrative report
97-9
Doinestic International Sales Corporation
,
38, 39
Drug seizures
146, 151
E
Economic policy
_-^
X I X - X X I I , 9-11, 251-314
Economic stabilization p r o g r a m . . X X - X X I I , X X V I I , 10-11, 136-7, 258-66, 272-5
Emergency preparedness
73
Energy policy
X X V I - X X V I I I , X X X I I I - X X X I V , 285-300
Enforcement activities {see also Law enforcement operations) :
Alcoliol, Tobacco and F i r e a r m s , B u r e a u of
79-86
Foreign Assets Control, Office of
125-7
I n t e r n a l Revenue Service
129-33
U.S. Custoins Service
150-53
Enforcement, Tariff and T r a d e Affairs, and Operations, 1973 review
24-33
Engraving ancl Printing, B u r e a u of, administrative report
31,99-103
Environmental quality program
,
72-3
Equal Opportunity P r o g r a m :
Office of, administrative report
104-8
Other reports
103,109,153
INDEX
565
Page
E s t a t e and gift taxes. See Taxation.
Exchange r a t e realignment__
Expenditures. See Outlays.
Explosives program
XXX, 44-6, 48-51, 401-02, 458, 492-6
81-2, 88
F
Federal debt {see also Public debt) :
Advisory committees
: 545-9
Changes in Federal securities
13-14
Disposition of marketable Treasury securities
24
Financing operations
X X I I I , 3, 17-24, 175-95
Government-sponsored agency debt
' 13
M a n a g e m e n t 1973 review
11-24
Off'ering of marketable T r e a s u r y securities
23
Ownership of public debt securities
14-17
Policy
1
300-14
Federal financing bank
306-09
Federal-State T a x Collection Act of 1972__________
35,134-5
Federal t a x deposit system
:
115,123
Financial institutions, reform of
XXV-XXVI
Financial operations, 1973 review
3-9
Financial recordkeeping—Public Law 91-508
-____
29-30, 327-35
F i r e a r m s programs
79-81
Food coupon production
101
Foreign Assets Control, Office of, administrative report
125-7
Foreign currency management
68
Foreign exchange developments and operations
48-51, 56
Foreign indebtedness
66, 505
G
General Agreement on Tariffs and Tracie (GATT)
XXX,
XXXV, 46, 58-9, 336, 442, 452, 4Q1-5
Gold {see also P a r Value Modification Act) :
E x p o r t and imports
98
Official monetary price of
51, 282, 454-6, 496
P r i v a t e ownership of
278-82
Stock
121
Use of for industrial purposes
. 97-8
Gonzalez amendment
:
67
Government corporations. See Corporations and other business-type activities of the Federal Government,
Government losses in shipment
115
Government-wide financial management
8-9
Gross national product
X I X - X X , 10
Group of Ten
61, 478-81
Gun and explosives control program
79-82
I
Income taxes. See Taxation.
Indebtedness of foreign governments to the United States
;
113-14, 505-9
Inter-American Development Bank
XXXVI,
62, 64-5, 437-40, 485-9, 502-4, 512-17
Interest equalization t a x
38, 61-2, 357-65
I n t e r n a l revenue, collections and refunds
.
127
I n t e r n a l Revenue Service {see also Director of Practice) :
Administrative report
127-39
Advisory committees
:
549-51
Taxpayer assistance
:
127-9
I n t e r n a t i o n a l Bank for Reconstruction and Development
63, 397-405
I n t e r n a t i o n a l Development Association
X X X V I , 62, 63, 458-9, 512-17
I n t e r n a t i o n a l Finance Corporation
63
I n t e r n a t i o n a l financial affairs—review
X X I X - X X X V I , 41-68, 397-527
566
INDEX
I n t e r n a t i o n a l investment
X X X V - X X X V I , 60-2, 67, 527
I n t e r n a t i o n a l Monetary Fund__ X X X I , X X X I I , 41, 46, 51-2, 397-405, 461-5, 470-2
International tax matters
37-9,.133-4
Interpol
X X V I I I , 29, 326
Introduction
.
.
XIX
Investigative activities:
Alcohol, Tobacco and Firearms, B u r e a u of—_
_
: — 78-86
I n t e r n a l Revenue Service
129,131-2
U.S. Customs Service
150-3
U.S. Secret Service
__
164-6
•'
•
J
- . . . . • •
.'
•
•
J o i n t Financial Management Improvement Program:
.
". •
^-^
8-9, 108
Laboratory operations
_—__-__
^_ 86-7,141-2,149,170
Law enforcement operations_X X V I I I - X X I X , 25-31,. 132-3,170, 314-38
Legislative Reorganization Act of 1970
.
^
.—
8
Letters of credit
—--__—^
.123
M
Management by objectives_
Management improvement program
Meat import policy—1973
Minority bank deposit program
Mint, B u r e a u of, administrative report
—-—,
___
,_
'.-
___——
71
-, 116,137-9,154-5,162
404-05
•.-^,---.—- 253-7
139-44
N
Narcotics trafficker program__
Notes, U.S. Government {see also Currency) :,
1973 operations
'——
Summary, 1973 issues
Numismatic services
X X V I I I , 25-6, 314-17, 326
.
^__^_^-
^
,
17-24
. 175-81
; 139-44
0
Officers, administrative and staff' of the D e p a r t m e n t of the T r e a s u r y
XI-,XV.
.' .'
.
' •528-37
Oil import program
X X V I - X X V I I , 285-92, 445-9
Oil Policy Committee
X X V I - X X V I I , 294-300
Orders, Department of the Treasury
•.__ 538-45
Organization c h a r t of the Department of the Treasury
1
'.
XVII
Organization for Economic Cooperation and Development
XXXVI,
39, 46, 52-4, 445, 449-54
Organized crime. See Law enforcement operations.
Outlays:
1963-73 budget ( c h a r t )
4
1972-73 by major agencies__
'_!
^^________-__
.5-6
Overseas P r i v a t e Investment Corporation __j
'.
1-______1_
68
P a r Value Modification Act___
Pension reform
Police School
Postage stamp production
,__,
P o s t a l Savings System, liquidation
Protective responsibilities_:
Public L a w 4 8 0 - _ _ _ ^ _^^_^
____[_-__
L_
:___J___
:_i_
409-36,'472-7
„_____ 35-6, 391-7
__" ,93-4
:_____
____'
101
:____
__; ___!_
114
^1___
__j
27-8, i63-4
lJ__i__:
68
INDEX
567
Page
Public debt {see also Federal debt) :
- B u r e a u of the, administrative report
Donations t o w a r d reduction of
Legislation
Regulations, amended and revised
.'Statutory limit
:
115-18
115
250
196-250
300-05, 309-14
R
Receipts:
1963-73 budget ( c h a r t )
__-__
Budget
Customs
.I n t e r n a l Revenue
Reconstruction Finance Corporation ( R F C ) (in liquidation)
Revenue s h a r i n g :
Office of, administrative report
:
Safety program
Social security
Strike force program
4
3-5
147-8
127
114
XXVI, 144-5
77,102-3
36-7
26-7
Tariff and tracie affairs
X X I X , 31-3
Taxation {see also I n t e r n a l Revenue Service) :
Developments, 1973
33-40, 338-97
Employment taxes, receipts
5
Environmental taxation
35
E s t a t e and gift taxes, receipts
.
5
Excise taxes, receipts
5
Federal t a x deposits
115,123
Income and profits taxes :
Corporation, receipts
4, 5
Individual, receipts
4-5
International tax matters
37-9, 133-4
Recommendations for t a x reform__ X X I V - X X V , 33-5, 353-4, 366-80, 386-91
T a x treaties
^_ .38-9, 134
T r a d e policy, international
X X X I , XXXIA'^-XXXV, 58-60, 318-22,
380-6, 400-04. 440-44, 517-21
Tracie Reform Act of 1973
59, 60, 336-8, 440-44
T r e a s u r y Enforcement Communication System (TECS)
28,77,151-2
T r e a s u r e r of the Unitecl S t a t e s :
Account of the
6,120
Office of the, administrative report
118-25
'Securities, held in custody__^
__^
124-5
Troika
10
u
Unemplo.yment insurance
U.S. Customs Service, administrative report
U.S, savings bonds. See Bonds, U.S. savings.
U.S. Savings Bonds DiAdsion, administrative report
U.S, Secret Service, administrative report
:
_
37
145-57
157-63
163-72
w
World Bank
03-4
o
@FedFRASER