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of the Secretary of the Treasury
on the State of the-Financesy




For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402 - Price $5.15 (paper cov.)
Stock Nuraber 048-000-00278-1
Catalog Number T 1.1:975


October 6, 1975

Dear Sirs:
I have the honor to transmit to you the
annual report on the state of the finances of

United States Government for

year ended June 30, 1975.

the fiscal

This submission is

in accordance with 31 U.S.C. 1027.

President of the Senate
Speaker of the House of Representatives


The statistical tables to this Annual Report will be published in a separate






Financial Operations
Federal Debt Management
General Counsel, Office of the
Enforcement; Operations, and Tariff Affairs
Tax Policy
Trade, Energy, and Financial Resources Policy Coordination
International Affairs



Administrative Management
Alcohol, Tobacco and Firearms, Bureau of
Comptroller of the Currency, Office of the
Computer Science, Office of
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:
Government Financial Operations, Bureau of
Public Debt, Bureau 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



- 198

Public Debt Operations, Regulations, and Legislation

Treasury notes
Treasury bonds
-Treasury biUs
_'.--Department Circular, Public Debt Series No. 1-63, January 10, 1963,
Amendment, regulations governing United States retirement plan
r5. Department Circular No. 653, Ninth Revision, March 18, 1974, First
Supplement, offering of United States savings bonds. Series E
6. Department Circular, Public Debt Series No. 1-75, January 1, 1975,
regulations governing United States individual retirement bonds





7. Federal Financing Bank Circular No. 1-74, July 10, 1974, offering
of Federal Financing Bank bills
8. An act to increase the temporary debt limitation and to extend such
temporary limitation until June 30, 1975
9. An act to provide for a temporary increase in the public debt limit


Federal Debt Management
10. Remarks by Under Secretary Schmults, January 27, 1975, before the
National Savings and Loan League, Washington, D.C, on the Financial Institutions Act
11. Statement of Secretary Simon, February 10, 1975, before the Senate
Finance Committee, on the public debt limit
..12. Statement of Deputy Secretary Gardner, May 14, 1975, before the
Subcommittee on Financial Institutions of the Senate Committee on
Banking, Housing, and Urban Affairs, on S. 1267, the proposed
Financial Institutions Act of 1975
13. Statement of Secretary Simon, June 25,1975, before the Senate Finance
Committee, on extension of the debt limit
14. Other Treasury testimony in hearings before congressional committees.



Domestic Economic Policy
15. Statement by Secretary Simon, August 2, 1974, before the Joint
Economic Committee, giving a midyear review of the economy
16. Summary of the Financial Conference on Inflation, September 20,
1974, Statler Hilton Hotel, Washington, D.C
17. Remarks of Assistant Secretary Fiedler, October 26, 1974, before the
Inaugural Meetings of the Eastern Economic Association, Albany,
N. Y., on causes of and cures for inflation..
18. Address by Secretary Simon, February 28, 1975, before the Commonwealth Club, San Francisco, Calif., concerning the growth of government, the weakening of the free enterprise system, and inflation
19. Address by Secretary Simon, April 7, 1975, before the American
Newspaper Publishers Association, New Orleans, La., on reporting
economics in the Nation's press
20. Statement by Secretary Simon, May 7, 1975, before the Senate Finance Committee, on capital investment needs for the future
21. Other Treasury testimony published in hearings before congressional


Enforcement, Operations, and Tariff Affairs
22. An act to authorize the Secretary of the Treasury to change the
- alloy and weight of the one-cent piece and to amend the Bank
Holding Company Act Amendments of 1970 to authorize grants to
Eisenhower College, Seneca Falls, N.Y__^
23. Address by Assistant Secretary Macdonald, September 10, 1974,
before the American Importers Association, New York, N.Y., on
modernization of Customs entry and clearance procedures
24. Press release, January 9, 1975, announcing a notice listing complaints
received under the countervailing duty law
25. Report of investigation of effect of petroleum imports and petroleum
products on the national security pursuant to section 232 of the
Trade Expansion Act, as amended
26. Address by Assistant Secretary Macdonald, January 31, 1975, before
the ABA National Institute on Customs, Tariffs and Trade, San
Juan, P.R., on the "Future of the Countervailing Duty and Antidumping La\ys' •
27. Address by Deputy Assistant Secretary Sachman, March 11, 1975,
before the International Trade Committee of the Federal Bar
Association, Washington, D.C, on "The U.S. Antidumping Law:
After the Trade Reform Act"28. Statenient by Assistant Secretary Macdonald, April 23, 1975, before
the Subcommittee to Investigate Juvenile Delinquency of the Senate
Judiciary Committee, on proposed firearms legislation






Tax Policy

29. Statement of Secretary Simon, January 22, 1975, before the House
Ways and Means Committee, on the administration's tax proposals
and their impact on the economy
30. Statement of Assistant Secretary Hickman, February 20, 1975, before
the Senate Select Committee on Small Business, on Federal taxation
of small businesses
31. Statement of Secretary Simon, March 3, 1975, before the House Ways
and Means Committee, concerning the administration's energy tax


Trade and Raw Materials Policy
32. Executive order, March 27^ 1975, on administration of the trade
agreements program
33. Statement by Secretary Simon, April 10, 1975, at the Fifth Session
of the U.S.-U.S.S.R. Commercial Commission, Moscow (not a
verbatim transcript)
34. Press release at conclusion of Fifth,Session of the U.S.-U.S.S.R. Commercial Commission, April lO-ll, 1975
35. Letter from Secretary Simon to the Chairman of the Subcommittee on
Foreign Trade of the House Ways and Means Coitimittee, May 8,
. 1975, on the U.S.-Romania Trade Agreement.--..____--„:,-36. Speech by Assistant Secretary Parsky^ June 2()y 1975, before the Los
Angeles World Affairs Council, Los.Angeles, Calif., on "The Chal^
lenge of an Interdependent World: Isolation, Confrohtatidn, df



Energy Policy
37. Remarks of Secretary Simon, September 23, 1974, befpre the 1974
World Energy Conference Special Event, Detroit, Mich
--38. Address by Secretary Simon, November 18, 1974,. before the 61st
National. Foreign Trade Convention, sponsored by the National
Foreign Trade Council, Inc., New York, N.Y., on the establishment
of a suppiementary loan facility
•--.--,- --.39. Letter froin Secretary Simon to Senator Mike Gravel, May 23, 1975,
updating testimony given to the Subcommittee on Energy in 1974. ^ 40; Other Treasury testimony in hearings before congressional corhmittees_ _ ^__-_



Financial Resources Policy Coordination
41. Remarkis by Assistant Secretary Parsky, January 14, 1975, befoi'e the
Investment Association of New York, New York, N.Y;y on recycling
of oil revenues and the role of U.S. capital niarkets.^.
42. Statement by Assistant Secretary Parsky^ March 18^ lS75j befcife the
Subcommittee on Multinational Corporations of the^Senate Fbreign
Relations Committee, on foreign investment in the UnitedStates^.
43. Statement bj^ Secretary Simon, June 26^ 1975, before the Subcommittee
on Commerce, Consumer, and Monetai-y Affairs §f,,the Hbiise
Cornniittee Oh Government Operations, on New York City's
financial crisis



Middle East Policy
44. Statement by Secretary Simon, August 14, 1974, before^the Subcommittee on International Fiharice and Resources Of the Senate
Finance Committee, on a recently completed round of Mlks with
leaders in the Middle East and Europe. ^.^^
45. Joint Communique 6n the First Session of.the United States-Satidj
Arabian Joint Commission on Economic CdOperatiori, February 27,
1975, Washington, D.C
46. Remarks by Assistant Secretary Parsky, March 12, 1975, before the
Mid-America Arab Chamber of Cdmmerce^ Chicago, IIL, oh economic
potential in the Middle East.
-. ^^
= ___^
47; Joint Statement of United States-Israel Joint COinniittee for Investment and Trade, May 13, 1975, Washingtoh, D.C._;.__...^_.._..:.



International Monetary and Investment Affairs

48. Statement by Secretary Simon, September 18, 1974, before the Permanent Subcommittee on Investigations of the Senate Committee on
Government Operations, concerning domestic and international
energy policies. .
49. Statement submitted to the Senate Permanent Subcommittee on Investigations in conjunction with testimony by Secretary Simon, September 18, 1974, concerning the financial and economic consequences
of the price of oil
50. Statement by Secretary Simon as Governor for the United States,
October 1, 1974, 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,
Washington, D.C
51. Communique of the Interim Committee of the Board of Governors of
the International Monetary Fund on the International Monetary
System, October 3, 1974, released at the close of their inaugural
meeting in Washington, D.C
52. Statement by President Ford, October 28, 1974, on the Foreign Invest^
ment Study Act of 1974
53. Statement by Secretary Simon, December 3, 1974, before the Subcommittee on International Finance of the House Committee on Banking
and Currency, on gold, the proposed solidarity agreement, and contributions to the Asian Development Bank and Inter-American
Development Bank
54. Press release, December 9, 1974, statement of the U.S. Treasury on
consolidation of gold accounts administered by the Treasury
55. Communique of the Interim Committee of the Board of Governors of
the International Monetary Fund on the International Monetary
System, January 16, 1975, released at the close of their second
meeting in Washington, D.C
56. Remarks by Under Secretary for Monetary Affairs Bennett, February 19, 1975, before the Sixteenth World Affairs Forum, sponsored
by the World Affairs Council of Pittsburgh, Pa., entitled "Let's
Get on With the Job, and Damn the Statistics"
57. Statement by Assistant Secretary Cooper, February 20, .1975,
before the Subcommittee on Multinational Corporations of the
Senate Foreign Relations Committee, regarding the financial
solidarity fund__
58. Statement by Under Secretary for Monetary Affairs Bennett, March 4,
1975, before the Subcommittee on Securities of the Senate Committee on Banking, Housing, and Urban Affairs, on foreign investment in the United States
59. Statement by Secretary Simon, March 24, 1975, before the Subcommittee on International Economics of the Joint Economic Committee, on the international monetary situation and the position of
the dollar
60. Remarks by Assistant Secretary Cooper, April 7, 1975, before the
Bankers Association for Foreign Trade Convention at the Greenbrier, White Sulphur Springs, W. Va., on a perspective on current
international financial problems
61. Statement by Secretary Simon, April 9, 1975, upon signing the OECD
Financial Support Agreement, Paris, France
62. Statement by Assistant Secretary Cooper, May 5, 1975, before the
Subcommittee on International Trade and Commerce of the House
Committee on International Relations, on the Financial Support
_-_63. Communique of the Interim Committee of the Board of Governors of
the International Monetary Fund on the International Monetary
System, issued after its third meeting, Paris, France, June 10-11,
64. Address by Secretary Simon, June 13, 1975, before the International
Monetary Conference of the American Bankers Association, Amsterdam, the Netherlands, giving an overview of the U.S. approach to
the international economy


















65. Press release, October 16, 1974, announcing foreign currency report
form regulations
66. Press release, February 24, 1975, announcing new foreign currency
reporting requirements issued for nonbanking
67. Executive order. May 7, 1975, establishing the Committee on Foreign
Investment in the United States
68. Press release. May 21, 1975, announcing' the organization and inaugural meeting of the Committee on Foreign Investment in the
United States


Developing Nations Finance
69. Statement by Deputy Assistant Secretary Bushnell, July 24, 1974,
before the Inter-American Committee for the Alliance for Progress
(CIAP), Washington, D.C
70. Remarks by Deputy Assistant Secretary Bushnell, September 17,
1974, before the Consulting Engineers Council and the International
Engineering and Construction Industries Council, Washington, D . C ,
on the international development banks and procurement
71. Communique of the Joint Ministerial Committee of the Boards of
Governors of the International Bank for Reconstruction and Development and the International Monetary Fund on the Transfer of
Real Resources to Developing Countries (the Development Committee), January 17, 1975, released at the close of their meeting in
Washington, D.C
72. Statement by Secretary Simon as Governor for the United States,
April 24, 1975, before the eighth annual meeting of the Board of
Governors of the Asian Development Bank, Manila, Philippines
73. Statement by Secretary Simon as Governor for the United States,
May 20, 1975, before the 16th annual meeting of the Board of
Governors of the Inter-American Development Bank, Santo Domingo, Dominican Republic
74. Statement by Assistant Secretary Cooper, June 6, 1975, before the
Foreign Operations Subcommittee of the Senate Appropriations
Committee, on contributions to the international development
75. Communique of the Joint Ministerial Committee of the Boards of
Governors of the International Bank for Reconstruction and Development and the International Monetary Fund on the Transfer of
Real Resources to Developing Countries (the Development Committee) after its third meeting, Paris, France, June 12-13, 1975
76. Other Treasury testimony in hearings before congressional committees.







Organization and Procedure
77. Treasury Department orders relating to organization and procedure. _




The tables to this Annual Report will be published in the separate Statistical
NOTE.—Details of figures may not add to totals because of rounding.


Secretaries, Deputy Secretaries, Under Secretaries, General Counsels, Assistant
Secretaries, Deputy Under Secretaries, and Treasurers of the United States
serving in the Department of the Treasury from January 21, 1973, through
June 30, 1975 ^
Term of service


8, 1974


8, 1974

Jan. 22, 1973
July 31, 1974


8, 1974

Jan. 27, 1969 July
July 9, 1974

8, 1974



June 12, 1972
Mar. 15, 1974
July 9, 1974

Mar. 17, 1973
July 8, 1974

1, 1970 June
2, 1973 July
1, 1974

1, 1973
8, 1974

1, 1969 Jan. 21, 1973
12, 1971
_.11, 1972
12, 1972 July 1, 1974
1, 1974
18, 1972
22, 1973 Feb. 1, 1974
8, 1974
28, 1974
24, 1974

Aug. 18, 1972 Mar. 14, 1974
Aug. 22, 1972 July 4, 1973
Aug. 3, 1973 Apr. 13, 1974
June 15, 1962
Dec. 17, 1971 Feb. 14, 1974
June 21, 1974


Secretaries of the Treasury:
George P. Shultz, New York.
William E. Simon, NewJersey.
Denutv Secretaries *
Wilham E. Simon, New Jersey.
Stephen S. Gardner, Pennsylvania.
Under Secretaries for Monetary Affairs:
Paul A. Volcker, New Jersey.
Jack F. Bennett, Connecticut.
Under Secretaries (Counselors): 2
Edwin S. Cohen, Virginia.
Jack F. Bennett, Connecticut.
Edward C Schmults, New York.
General Counsels:
Samuel R. Pierce, Jr., New York.
Edward C Schmults, New York.
Richard R. Albrecht, Washington.
Assistant Secretaries:
Eugene T. Rossides, New York.
Edgar R. Fiedler, New York.
Warren F. Brecht, Connecticut.
John M. Hennessy, Massachusetts.
Charles A. Cooper, Florida.
Frederic W. Hickman, Illinois.
Edward L. Morgan, Arizona.
David R. Macdonald, lUinois.
Frederick L. Webber, Virginia.^
Gerald L. Parsky, Washington, D.C^
Deputy Under Secretaries:
Jack F. Bennett, Connecticut.
James E. Smith, Virginia.
William L. Gifford, New York.
Fiscal Assistant Secretary:
John K. Carlock, Arizona.
Treasurers of the United States: ^
Romana Acosta Banuelos, California.
Francine I. Neff, New Mexico.

1 For officials from Sept. 11,1789, to Jan. 20,1973, see exhibit 81,1973 Annual Report.
2 Act of May 18, 1972, which established the Deputy Secretary position, permitted the Under Secretary
position to be used as a counselor to the Secretary and so designated by the President as desired.
3 Act of May 18,1972, provided for two Deputy Under Secretaries, to be designated Assistant Secretaries
by the President as desired.
4 Treasmy Department Order 229, Jan. 14, 1974, raised the position of Treasurer of the United States
from the operating level of the Department to the Office of the Secretary.


Secretary of the Treasury
Deputy Secretary of the Treasury
Under Secretary for Monetary Affairs
Under Secretary
General Counsel


Office, Secretary of the Treasury:
Adviser to the Secretary (Counsellor to the Chairman, Economic Policy Board)
Executive Assistant to the Secretary
Director, Executive Secretariat
Confidential Assistant to the Secretary
Senior Consultant
Office, Deputy Secretary of the Treasury :
Executive Assistant to the Deputy Secretary
Special Assistant to the Deputy Secretary
Office, Under Secretary for Monetary Affairs:
Assistant Secretary (International Affairs)
Deputy Assistant Secretary for International
Monetary and Investraent Affairs
Deputy Assistant Secretary for Developing Nations Finance
Deputy Assistant Secretary for Research and
Deputy to the Assistant Secretary for International Monetary Affairs
Inspector General for International Finance
Deputy 'to the Assistant Secretary
Assistant Secretary (Trade, Energy, and Financial
Resources Policy Coordination)
Deputy Assistant Secretary (Trade and Raw
Materials Policy)
Deputy Assistant Secretary for Energy Policy—
Deputy Assistant Secretary for Financial Resources Policy Coordination
Assistant Secretary (Economic Policy)
Deputy to the Assistant Secretary
Director, Office of Domestic Gold and Silver
Director, Office of Financial Analysis
Fiscal Assistant Secretary
Deputy Fiscal Assistant Secretary
Assistant Fiscal Assistant Secretary
Assistant Fiscal Assistant Secretary
Treasurer of the United States
Departmental Bicentennial CoordinatorSpecial Assistant to the Secretary (National Security)
Deputy Special Assistant to the Secretary
Special Assistant to the Secretary (Debt Management)
Director, Office of Debt Analysis

William E. Simon
Stephen S. Gardner
Jack F. Bennett
Edward C. Schmults
Richard R. Albrecht

Sidney L. Jones
John C. Gartland
Margaret Hovell
Barbara A. Jensen
Paul W. McCracken
Alan M. Arsht
Charles A. Cooper
F. Lisle Widman
John A. Bushnell
Robert L. Slighton
George H. Willis
Weir M. Brown
Oscar M. Mackour
Gerald L. Parsky
J. Robert Vastine
Edward Symonds
Edgar R. Fiedler
Thomas W. Wolfe
John H. Auteri
John K. Carlock
David Mosso
Sidney Gox
Lester W. Plumly
Francine I. Neff
Edwar<d J. Storey, Jr.
William N. Morell
Gerald W. Nensel
Ralph M. Forbes
Edward P. Snyder

Office, Under Secretary:
Special Assistant to the Under Secretary
Special Assistant to the Under Secretary for
Revenue Sharing and Intergovernmental
Assistant Secretary (Administration)
Deputy Assistant Secretary for Administration
and Director, Office of Management and
Director, Office of Administrative Programs
Director, Office of Audit
Director, Office of Budget and Finance
Director, Office of Personnel
Director, Office of Computer Science
Director, Office of Equal Opportunity Program—
Assistant Secretary (Legislative Affairs)
Special Assistant to Assistant Secretary
Special Assistant to Assistant Secretary
Special Assistant to Assistant Secretary
Assistant Secretary (Enforcement, Operations, and
Tariff Affairs)
Deputy Assistant Secretary
Director, Office of Operations
Director, Foreign Assets Control
Deputy Assistant Secretary for Enforcement—
Director, Office of Law Enforcement
•Chief, Interpol (National Central Bureau)Deputy Assistant Secretary for Tariff Affairs—
Director, Office of Tariff Affairs
Special Assistant to the Secretary (Public
Deputy Special Assistant to the Secretary__
Director, Office of Revenue Sharing
Office, General Counsel:
Deputy General Counsel
Assistant General Counsel and Chief Counsel,
Internal Revenue Service.
Assistant General Counsel
Assistant General Counsel
Assistant General Counsel
Senior Counselor to the General Counsel
Director of Practice


Joseph J. Adams
Kent A. Peterson
Warren F. Brecht
J. Elton Greenlee
Robert R. Fredlund
Wilbur R. DeZerne
John Garmat
Arch S. Ramsay
David A. Sawyer
Frederick L. Webber
Jay T. Scheck, Jr.
Thomas J. McDowell
Pamela J. Sullivan
David R. Macdonald
James B. Clawson
William F. Hausman
Stanley L. Sommerfield (acting)
James J. Featherstone
Louis B. Sims
Peter O. Suchman
BenL. Irvin
James N. Sites
John O. Mongoven
Graham W. Watt
Donald L. E. Ritger
Meade Whitaker
Wolf Haber
Hugo A. Ranta
Leslie S. Shapiro

Assistant Secretary (Tax Policy)
Deputy Assistant Secretary for Tax Legislation

Frederic W. Hickman
Ernest S. Christian,
Deputy Assistant Secretary for Tax Analysis.
George S. Toiley
Associate Director, Office of Tax Analysis
Emil M. Sunley, Jr.
Tax Legislative Counsel
Phillip L. Mann
International Tax Counsel
Robert J. Patrick, Jr.
Director, Office of Industrial Economics
Karl Ruhe
Deputy to the Assistant Secretary for Tax Policy Nathan N. Gordon
(International Tax Policy).

Deputy Director
Assistant Director (Administration)
Assistant Director (Criminal Enforcement)

Rex D. Davis
William R. Thompson
William J. Rhodes
John F. Corbin, Jr.



Assistant Director (Inspection)
Assistant Director (Regulatory Enforcement)
Assistant Director (Technical and Scientific Services)—
Chief Counsel

Jarvis Brewer
Stephen E. Higgins
A. Atley Peterson
Marvin J. Dessler


Deputy Director


James A. Conlon
Kenneth A. DeHart


Dario A. Pagliai
Deputy Commissioner
Gerald Murphy
Assistant Commissioner, Administration
George L. McConville
Assistant Commissioner, Banking and Cash Manage- Sebastian Fama
Assistant Commissioner, Comptroller
Steve L. Comings
Assistant Commissioner, Disbursements and Claims
Assistant Commissioner, Government-wide Accounting— (Vacancy)


Deputy Director
Assistant Director for Administrative Support
Assistant Director for Planning, Analysis and Information Systems
Assistant Director for Public Services
Assistant Director for Production
Assistant Director for Technology

Mary T. Brooks
Frank H. MacDonald
Chadwick B. Pierce
Arnold Bresnick
Roy C. Cahoon
George G. Ambrose
Alan J. Goldman


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


H. J. Hintgen
J. J. Lubeley
William M. Gregg
Martin French
Calvin Ninomiya


Deputy Director
Assistant Director
Assistant Director
Assistant Director
Assistant Director


WilliamB. Butler
Robert G. Efteland
William H. McClarin
Alvin C. Turner
David W. McKinley

(Investigator Training)
(Police Training)
(Educational Support)

Deputy Commissioner
Assistant Commissioner
payer Service)
Assistant Commissioner
Assistant Commissioner
Assistant Commissioner
Assistant Commissioner
Assistant Commissioner
Assistant Commissioner
Chief Counsel

Donald C. Alexander
William E. Williams
(Accounts, Collection and Tax(Administration)
(Employee Plans and Exempt
(Planning and Research)


Comptroller of the Ourrency
Executive Assistant
Special Assistant
Special Assistant (Strategic Policy Planning)

Robert H. Terry
Joseph T. Davis
Singleton B. Wolfe
Alvin D. Lurie
Warren A. Bates
Anita F. Alpern
Lawrence B. Gibbs
Meade Whitaker


James B. Smith
Richard D. Chotard,
James T. Keefe
David H.Jones

Staff Assistant—
First Deputy Comptroller
Deputy Comptroller
Deputy Oomptroller
Deputy Comptroller (Economics)
Chief National Bank Examiner^
Deputy Comptroller (Administration)
Deputy Comptroller (FDIC Affairs)
Deputy Comptroller (Mergers and Branches).Deputy Comptroller (Trusts)
Ohief Counsel
Deputy Chief Counsel
Assistant Chief Counsel (Bank Operations)
Public Information Officer
Director, Consumer Affairs


Palmer Hamilton
Justin T. Watson
Thomas G. DeShazo
Robent A. Mullin
David C. Motter
Kenneth W. Leaf
W. A. Howland, Jr.
Joseph M. Ream
Richard J. Blanchard
DeJan E. Miller
Robert Bloom
0. Westbrook Murphy
GailW. Pohn
William B. Foster
Thomas W. Taylor


Commissioner of Customs
Deputy Commissioner of Customs
Assistant Commissioner (Operations)
Assistant Commissioner (Regulations and Rulings)
Assistant Commissioner (Administration)
Assistant Commissioner (Investigations)
Assistant Commissioner (Internal Affairs)
Assistant Oommissioner (Enforcement Support)
Chief Counsel

Vernon D. Acree
G. R, Dickerson
Roland Raymond
Leonard Lehman
John A. Hurley
George C. Oorconan,
William A. Magee, Jr.
Alfred R. DeAngelus
Thaddeus Rojek


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

Francine I. Neff
Jesse L. Adams, Jr.
Walter B. Niles
Louis F. Perrinello



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

(Protective Forces)
(Protective Intelligence)—

H. Stuart Knight
Lilbum B. Boggs
Francis A. Long
Myron I. Weinstein
Burrill A. Peterson
Clinton J. Hill
Thomas J. Kelley






Assistant Secretary

Assistant Secretary

Assistant Secretary

I n t e r n a l Revenue

(Tax Policy)



Assistant Commissionei
(Accounts. Collection.

Assistant Secretary

Fiscal Assistant

Assistant Secretary

Assistant Secretary

( E c o n o m i c Policy)

( T r a d e , Energy, &
Financial Resources



(Legislative Affairs)

Policy C o o r d i n a t i o n )

Ollice ol Ta« Analysis

and Ta<payei Service)

Assistant Secretary
|(lnternational Affairs)

Operations, & Tariff

Deputv Assi Sec
Ioi Tiade and Ra>
Mateiials Policy

OM ce oi Law
Oil ce oi Opeiations

Oi ce ol l a i i i l
01 ce ol Foreign
Assets Control

Ta« Legislative Counsel

Ollice oi
lax Counsel

Ity Asst. Sec. ( a

of the Currency


Special Assistant
to tlie Secretaiy
(Debt Management)

cy Coordination


Ollice ol Perso

Consolidated Federal
Law Enloicement
riainmg Center

\-\ firs! Deputy Comptroller


This statement reviews some of the major domestic and international economic developments which affected Treasury areas of interest
and responsibility during fiscal 1975. Detailed information on the
operating and administrative activities of the Department of the
Treasury is provided in the main text of the report and supporting
exhibits. Further information is contained in a separate Statistical
The Domestic Economy
The U.S. domestic economic situation changed rapidly during thie
course of fiscal 1975. At the beginning of the fiscal year the domestic
economy had apparently sta;bilized following the sharp decline in economic activity that occurred during the first 3 months of 1974. The
gross national product in constant prices did decline during the quarter of July through September, but the domestic economy appeared
to be correcting the most severe output distortions even though inflation remained intense and the unemployment rate was beginning
to rise.
The consensus among most economic forecasters—^^both inside and
outside of Government—was that nothing worse than a period of slow
growth or slight decline seemed to be in prospect. At the time of the
Financial Conference on Inflation held in late September, the general
view was that economic policies should still be aimed primarily at the
containment of inflation. Indeed, the rate of growth in prices, as
measured by the G N P implicit price deflator, accelerated to a 12percent annual rate during the July through September period and to
a 14-percent annual rate during the last 3 months of calendar 1974.
By the fall it was also apparent that consumer spending had slowed
abruptly, that inventories were becoming excessive, and that a fullscale recession adjustment was occurring. During the final 3 months of
calendar 1974, the real G N P stated in constant dollars declined sharply
at a seasonally adjusted annual rate of 9 percent. Keal G N P fell off
sharply at a 9-percent annual rate in the fourth quarter.
As the pace of economic activity slowed there was also a sharp decline in consumer confidence which further restricted the strength of
personal spending. High rates of inflation and declining consumer real



income and personal financial asset positions appeared to be major
factors explaining the decline in consumer confidence. The dropoff in
the volume of consumer purchases was especially pronounced during
the closing months of calendar 1974. Personal consumption expenditures in 1958 dollars fell from a seasonally adjusted annual rate of
$547.2 billion during the July through September period to $528.2
billion in the final 3 months of 1974—an annual rate of decline of about
13 percent. The bulk of this decline was in consumer purchases of
durable goods and was exaggerated by some anticipatory buying of
automobiles prior to price increases imposed in September at the
beginning of the 1975 model year.
The sudden, and largely unexpected, reduction in consumer purchases set in motion a massive inventory adjustment. Business inventories were accumulated at an $18 billion annual rate (current prices)
during the last 3 months of 1974, about double the rate of accumulation during the preceding 3 months. Most of this inventory buildup
was involuntary and led to a sharp reduction in orders by retailers.
Inventory-sales ratios increased, production and employment were cut
back, and the classic pattern of inventory cyclical adjustments
Business inventories declined at about a $19 billion annual rate during the first 3 months of calendar 1975 and at about a $31 billion rate
during the second 3-month period. The rapid runoff of inventories
resulted in a resumption in new orders for durable goods beginning in
April 1975, and retail inventories began to rise again in June 1975.
Continued inventory adjustments were still taking place at the manufacturing level throughout the spring and summer of 1975, but the bulk
of the inventory adjustment had been completed by the end of fiscal
From January through March of calendar 1975, real output fell at
about an lli/^-percent annual rate while inventories were being run
off. Nevertheless, there were some clear signs of improvement. Final
sales (total G N P less the change in inventories) in constant prices had
begun to stabilize in early 1975 and were rising at a relatively strong
pace by the summer.
Unfortunately, inflation continued to create problems for the economic recovery even though the rate of price increases did moderate.
These inflation problems and resulting financial constraints continued
to restrict the strength of residential construction even though some
improvement did occur following the low point of new housing starts
recorded in April. But even the improved rate of homebuilding after
April was still far below the normal historical rate of residential construction activity.



The recent recession turned out to be the most severe decline experienced during the postwar era. However, the threat of a full-scale depression was fortunately averted. Furthermore, a wide range of economic evidence indicates that the direction of the economy turned
by April and that the process of recovery was well underway by the
end of fiscal 1975. Major factors which clouded the outlook for sustained recovery were the persistence of very high rates of inflation, a
fairly pervasive feeling of caution on the part of consumers as a result
of recent economic experience, and reduced liquidity and equity ratios
on the part of business. I n addition, the financial markets had been
severely strained by inflation and were having to finance Govemment
deficits that were extremely large by all previous standards.
Unfortunately, the recession caused the rate of unemployment to
rise very sharply in late 1974 and early 1975. The peak level of unemployment of 9.2 percent was recorded in April. By June 1975, the total
unemployment rate had declined to 8.6 percent. The level of employment did begin to rise in April and the number of hours worked in
manufacturing and overtime hours had improved by the end of fiscal
1975. Unemployment assistance—^totaling nearly $15 billion during
fiscal 1975 and budgeted close to $20 billion in fiscal 1976—tempered
the severity of the adjustment. Nevertheless, the recession imposed
heavy costs, and very high rates of unemployment among younger
people and minority groups were a source of concern;
While the recession conformed in many respects to previous U.S.
cyclical experience, there were some important differences. The coexistence of high rates of unemployment and high rates of inflation—sometimes termed "stagflation"—persisted to an unusual degree. Cyclical
movements in the United States and major foreign countries were also
more closely synchronized. To some extent, this could be related to the
international impact of the oil embargo and resulting price rise. More
basically, it appeared to reflect a reaction to the prolonged period of
world inflation. The U.S. recession was the direct result of the failure
to deal effectively with inflation.
Domestic Economic and E n e r g y Policies
As the recession impact became more apparent, domestic economic
policy responded to the sharp decline in production and employment.
I n preparing the Federal budget for fiscal 1976, it was recognized that
the underlying economic situation had changed appreciably and that
there was a need for antirecession stimulus. The administration proposed a one-time, temporary tax reduction of $16 billion—^$12 billion
to individual taxpayers and $4 billion to business taxpayers. However, the effort to contain inflation was continued. No new spending
initiatives other than those for energy development programs were



proposed in the budget. Limitations were recommended on Federal pay
increases and on increases in various benefit programs linked to increases in the cost of living. The intent was to use the budget as an
instrument of economic stabilization while continuing to make progress
against inflation.
A sweeping program was also outlined in the President's January 15,
1975, state of the Union message to deal with the energy problem but
this was designed to be neutral from an overall fiscal point of view.
The program included the following major elements: Import fees on
crude oil and petroleum products to be imposed in stages by Presidential order and to be replaced by a $2-per-barrel excise tax on domestic crude oil and an import fee on crude oil and petroleum products,
an excise tax of comparable magnitude on natural gas, removal of Federal price regulation from new natural gas supplies, removal of price
control on domestic crude oil, conversion of powerplants and other
major users from oil to coal, and a windfall profits tax on oil
The new energy conservation taxes were estimated to raise $30 billion
annually as follows: Oil excise tax, $6 billion; natural gas excise tax,
$8.5 billion; import fee increase, $3.5 billion; and windfiEill profits tax,
$12 billion. I t was proposed to return that $30 billion to the economy
through individual income tax cuts of $16.5 billion (in addition to
the one-time $12 billion rebate to individual taxpayers), payments of
$2 billion to nontaxpayers, a $0.5 billion tax incentive for energy conservation improvements in homes, a $6 billion corporate tax cut, payments of $2 billion to State and local governments, and $3 billion to
offset higher costs of energy purchased directly by the Federal Government for its use.
From the outset there was strong congressional support for antirecession fiscal stimulus, but reaction to the administration's energy
program was mixed. The $22.8 billion Tax Reduction Act of 1975
was passed in March which combined key elements of the administration's recommendations along with modifications proposed by the Congress. However, no consensus could be reached between the administration and the Congress during the fiscal year on what legislative steps
should be taken to deal with the energy problem. An import fee of $1
per barrel on foreign crude oil was imposed by the President on
February 1, and additional fees of $1 per barrel on foreign crude oil
and $0.60 on refined products were imposed in late May to become
effective on June 1. By the end of the fiscal year, the administration
and the Congress had not reached agreement on a comprehensive plan
to deal with the energy problem. Much of the disagreement centered
upon the way in which the removal of price controls on domestic



crude oil production might be harmonized with other features of a
total program.
Inflation Experience
During the last 6 months of 1974, inflation continued at doubledigit rates before moderating somewhat during the first half of 1975.
That shift contributed to a gradual improvement in consumer attitudes
and helped promote the recovery of the economy. Unfortunately, inflation expectations are deeply embedded in th^ economy. Food and
energy prices are still rising more rapidly than wanted and the outlook
for rapid progress toward lower rates of inflation is still a matter
of great concern. Nevertheless, there has been a substantial improvement in the cost-price situation and the economy responded favorably.
In terms of the broadest measure of price performance—the GNP
implicit price deflator—^the rate of inflation fell from more than a
13-percent annual rate during the last 6 months of 1974 to less than
7 percent in the first half of 1975. The Consumer Price Index averaged
rates of annual increase in the 12- to 13-percent range during the last
6 months of 1974 and then fell to the 5- to 7-percent range in the first
6 months of 1975. The more volatile Wholesale Price Index increased
at a 30- to 35-percent annual rate until November of 1974 befpre
moderating sharply and then registered actual monthly (declines in
February and March 1975 as a result of falling agricultural prices?
By mid-1975, the rate of inflation at both wholesale and consiim§r
levels had turned upward again, primarily because of food and energy
price increases. Both consumer and wholesale prices rose by a seasonr
ally adjusted 1.2 percent in the month of July, Large monthly price
increases may occur during the coming months, but it is unlikely that
double-digit inflation will return in the near future as the economic
recovery occurs. However, the continuing strength of price pressures
in the early stages of economic recovery indicates that inflatipnary
risks remain.
The continued price. increases throughout the severe recession of
late 1974 and early 1975 occurred in an underemployed economy,
Fortunately, the cost situation improved significantly as fiscal 1975
progressed. Output per man-hour in the private nonfarm economy
declined at an average annual rate of roughly 2i/^ percent from mid1974 until March 1975 but then rebounded to nearly a 6-percent rate
of growth from April through Jime 1975. Compensation per manhour grew more steadily throughout the fiscal year at an 8- to 9-percent annual rate. As a consequence, unit labor costs rose at doubledigit rates in the first three quarters of the fiscal year but at only a
2-percent rate in the final quarter.
Short-term variations in economywide productivity and costs are



frequently erratic and should not be interpreted as representing longrim significance. However, the improvement toward the end of fiscal
1975 is consistent with the usual cyclical pattern of more rapid productivity gains during the recovery phase. Improving productivity
should help hold down inflationary pressures over the coming months
despite the persistence of relatively high rates of employee compensation and strong inflationary expectations.
Capital Investment Needs
The major economic problems during fiscal 1975 concerned energy
policies, output declines, unemployment, and inflation. However, increased attention was focused on the question of the adequacy of U.S.
investment for satisfactory longrun growth, particularly the creation
of jobs and moderation of inflation. During the 1960's, the U.S. economy recorded an annual growth rate for real output of approximately
4 percent. T h a t performance was in line with our historical experience
but it ranked near the bottom of the rankings for real output gains
of the maj or industrial nations.
There are, of course, some favorable aspects in the U.S. savingsinvestment record. Capital investment has continued to increase in the
United States and the capital-to-labor ratio is still relatively high.
However, other nations have allocated a substantially larger share of
their resources to new capital formation. Furthermore, the gap between the U.S. level of investment, measured as a share of national
output, and the commitment of other leading nations has increased.
Total U.S. fixed investment as a share of national output during the
time period 1960 through 1973 was 17.5 percent.* The U.S. figure
ranked last among a group of 11 major industrial nations for the
period in question.
Several factors help to explaiii the relatively slower rate of capital
investment in the United States. First, the size of the U.S. economy
and its advanced stage of economic development means that our rate
of additional growth might well be somewhat lower than those of other
nations without reflecting any serious tendency for the United States
to underinvest. Second, the United States has historically placed a
high priority on consumption, and the pattern is deeply ingrained in
our society. Third, a relatively large share of our total capital outlays
are committed to the services category which includes housing, government, and other services. Fourth, a relatively large share of our investment must be used for replacement and modernization of existing
•OECD (Organization for Economic Cooperation and Development) concepts of investment and national product. The OECD concept includes nondefense Government outlays
for machinery and equipment in the t^rivate investment total which required special
adjustment in the U.S. national accounts for comparability. National output is defined
in this study as "gross domestic product." r a t h e r t h a n the more familiar measure of
gross national product, to conform with OECD definitions.



facilities, and increasingly a large share of investment goes to satisfy
environmental and other requirements which may raise the quality of
life but do little to increase productivity in the usual sense of the term.
Fifth, the United States has generally not resorted to capital allocation
and special incentive programs that are used intensively by other
countries in an effort to encourage additional investment.
Some of the factors explaining slower U.S. capital formation are a
matter of deliberate choice. However, there are serious risks in having
a slow rate of capital investment for an extended period of time. A
number of studies have indicated a close relationship between capital
investment and various measures of economic growth and productivity. And, productivity gains in the United States have been disappointingly low, particularly in recent years. From 1948 to 1954, output
per man-hour in the private economy rose by 4.0 percent per year, from
1955 to 1964 it rose by 3.1 percent, from 1965 to 1974 it rose by 2.1 percent, and from 1970 to 1974 it rose by only 1.6 percent per year.
I n the future, U.S. capital investments will be significantly increased
to meet a variety of goals including improvement in the quantity and
quality of housing; development of new energy resources, protection
of the quality of the environment; rehabilitation of the existing transportation system; continuation of the mechanization of agriculture;
construction of new office buildings, communications systems, medical
facilities, schools, and other facilities; and to meet the massive needs
for new plants and equipment. Although the specific capital needs are
difiicult to predict, a number of independent studies suggest that totai
U.S. capital needs over the 1974 to 1985 period could range from
$4 to $41/^ trillion. By way of contrast, total outlays for capital investment from 1962 through 1973 in a smaller economy were $11/^ trillion.
Future capital requirements of $4 to $41^ trillion from 1974 to 1985
imply a need to raise the ratio of gross private domestic investment to
gross national product by perhaps 1 percentage point. The ratio has
averaged close to 15 percent over the past decade and may need to
average closer to 16 percent over the next decade. Such a shift in the
composition of national output is certainly feasible, and would apparently be desirable, but may require some fairly extensive changes in
public policy. Beginning in May 1975, the Treasury presented testimony to Congress on three separate occasions concerning the need to
improve capital formation efforts. In July the Treasury recommended
a tax program for increased national savings.
The Budget and Fiscal Developments
Primarily as a result of the recession the Federal budget moved
sharply into deficit during fiscal 1975. The initial budget estimates
published in February 1974 projected receipts of $295.0 billion, outlays
of $304.4 billion, and a deficit of $9.4 billion. By February 1975, receipts were estimated at $278.8 billion, $313.4 billion, and



the deficit at $34.7 billion. Final figures for receipts were $281.0 billion;
outlays, $324.6 billion; and the deficit, $43.6 billion. An even larger
budget deficit is in prospect for the 1976 fiscal year.
Large budget deficits were inevitable given the severity of the economic recession. As pointed out in the 1976 Budget of the U.S. Government, aid to the unemployed and the recession-induced shortfall
in tax receipts more than accounted for the deficits proposed by the
administration for fiscal years 1975 and 1976. However, there were
other, more disturbing aspects of the Federal fiscal position. iBudget
deficits had occurred in 14 of the past 15 years and continued deficits
are anticipated in future years. The rapid growth in Federal outlays
is also discouraging because the upward momentum of spending erodes
our flexibility in responding to changing national priorities and continues to increase the role of Government in the total economy. I n fiscal
1975, Federal outlays increased 21 percent over the previous year.
I n addition to the rapid growth of expenditures, the problems inherent in the financing of very large Federal deficits wSre an increasing
cause of concern. Although it was generally agreed that the Treasury
would be successful in meeting its financial requirements, there was
some uncertainty about the prospects for private sector financing even
though such demands were expected to be held down by the recession.
Nevertheless, there appeared to be a real risk that "crowding out"
would occur on an extensive scale if large Federal deficits were to be
continued very far into the period of economic recovery. For the first
time in the postwar period, there appeared to be a potential financial
constraint to recovery resulting from the debt financing requirements
of the Federal Government. Therefore, fiscal decisions must be made
with increasing regard for their financial consequences.
Domestic Finances
Financial markets in fiscal 1975 reflected the difficult economic situation caused by continued concerns about inflation and the severe recessidri. The flexibility and resiliency of the financial markets was once
again demonstrated as a wide variety of changing credit demands was
accommodated and the decline in the demand for funds by the private
sector enabled the financial markets to meet the unprecedented demands of the Federal Government.
The changing pattern of credit demands was evidenced by the sectoral demand for funds. Approximately $181 billion of nonfinancial
corporate funds were raised, relatively unchanged from fiscal 1974.
Funds raised by the public sector, however, increased from $20.5 billion
to $67.3 billion with nearly all of the increase represented by Federal
sector demands—an increase of $46.6 billion from fiscal 1974.



Short-term interest rates fell almost continuously throughout the
fiscal year from the historic highs reported in the summer of 1974.
At that time, rates such as the commercial paper rate and the
Federal funds rate were between 12 and 14 percent, and Treasury
bill rates were in the 8- to 10-percent range. After September, shortterm interest rates began to fall and by the summer of 1975 the
declines in rates ranged from 4 to as much as 7 full percentage
Long- and intermediate-term interest yields also rose to historic
highs during the summer of 1974. The Aa corporate new issue rate
peaked at over 10 percent, and intermediate-term Treasury securities
yielded over 8 percent. New home mortgage rates rose to the 9-percent
level. These longer term rates fell somewhat during the fall and
winter months but the declines were more gradual and less decisive
than for short-term rates. By spring, these declines had generally
halted, or reversed somewhat, and by mid-1975 these interest rates
had stabilized and some had actually turned upward.
The municipal bond market was under considerable stress during
fiscal 1975. Fundamental factors included a lessening of bank demand
for new municipal securities due to other offsets to taxable income,
development of a general preference for higher quality issues which
led to widening rate spreads, and the continuing financial problems
of New York City.
The Treasury securities market was dominated by the need to finance
the largest Government deficit in the postwar period. The deficit was
financed by a $45.5 billion increase in the outstanding privately held
markable securities and by an increase of $2.5 billion in nonmarketable issues. The increase in marketable securities was about evenly
divided between bills and coupon issues. Bills increased by $23.5
billion, and notes and bonds by $25.5 billion. Savings bonds increased
by $3.5 billion.
The Federal Financing Bank completed its first full year of activity.
During 1975, the bank made loans totaling $15.8 billion to Federal
agencies, making the bank the major instrument through which Federal agencies financed their programs. Bank lending rates were %
of 1 percent above the new issue rate of marketable U.S. Treasury
securities with similar maturities.
The fiscal year ending on June 30,1975, was notable internationally
for an unprecedented combination of recession and inflation. Among
the seven major industrial countries taken together,* industrial pro*Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.



duction appears to have peaked in the final quarter of 1973, and to
have continued near the peak levels until the last quarter of 1974,
when a steep decline set in. I n April 1975, the level of production
was highest in Canada at 119 percent of the 1970 base. Germany,
the United Kingdom, and the United States showed the smallest
advances over the 1970 level in April, at 1021^, 103, iand 103, respectively.
I n terms of sharpness of the decline from the 1973 peak, the steepest
curves were those of Japan, the United States, France, and Italy. The
rate of decline was more gentle for the United Kingdom, Canada, and
Germany. J a p a n and the United States appear to have shown the
earliest tendencies for industrial production to level out or to rise
in 1975.
According to the Intemational Monetary Fund's tabulation of
the annual rate of change in consumer prices during the preceding
12 months, the worldwide infiation rate began to rise in 1973 and
reached a peak of about 16 percent at an annual rate in November
1974. I t had subsided to an annual rate V of about 14 percent by
March 1975. For the developed areas of the world, this measure of
inflation had declined to an annual rate of about 11 percent by
June 1975, down nearly 3 percentage points from November 1974.
In the less developed areas, the timing was somewhat different. The
average rate of inflation rose rapidly in 1972 and 1973, from a little
less than 10 percent in 1971 to over 20 percent in 1973. It reached an
annual rate peak of 30.5 percent in September 1974, receding to about
26 percent in March 1975.
The growth of real G N P did not fall off so rapidly in the smaller
industrial countries as in the seven largest economies, and this wias
also true for the primary producing countries as a group, even
excluding the oil producers. Thus for a time their continue^ growth
has helped to sustain total world output and incomes. However, the
appearance of recession before inflation really subsided, and the
continuing threat of a revival of an inflationary cost-price spiral,
presented new and difficult problems.
I n some industrial countries inflationary pressures were made more
severe by a tendency for wage increases to advance even more rapidly
than prices, and to lead rather than follow the rising curve of prices.
More broadly, aggressive use of bargaining power by wider segments
of the public appears to have accelerated inflation pressures, concentrating even more severe pressure on the narrowing segment of groups
with the weakest bargaining power. Thus recovery has tended to be
impeded more than in the past by rapid and competitive rises in the
money incomes of particular bargaining groups. Moreover, ^ the



severity of repeated shocks to some extent temporarily weakened the
confidence of consumers, which sustained the world economy so well
during the postwar years.
Despite these problems, the decline has been arrested and recovery
has begun in Japan and the United States. As the cumulative forces
of recovery appear in other countries, world output and income will
recover at a moderate but persistent pace, thus reducing the danger
of renewed inflation.
Financing of C u r r e n t Account Surpluses and Deficits
I n international payments, changes were dominated by the higher
cost of petroleum. The current account surplus of the Organization of
Petroleum Exporting Countries ( O P E C ) has been estimated at $67
billion in 1974 and $47 billion in 1975, as compared with $3 billion in
1963 by the Organization for Economic Cooperation and Development ( O E C D ) . I n 1974, the current account position of O E C D countries shifted from a small $2 billion surplus the preceding year to a
deficit of $34 billion. I n 1975, the continued deficit of the OECD countries as a group is estimated at only about one-third of the smaller
O P E C surplus. Moreover, within the OECD the current 'account
deficits of the seven leading industrial countries may be rather small.
Thus the general picture at midyear 1975 was one in which the deficits
that offset the O P E C surpluses were shifting toward the smaller industrial countries and the developing world. This may prove to be a
passing phenomenon, to be partly reversed as the industrial countries recover further. I t does, however, imply that for calendar 1975
a current deficit of aibout $45 billion for the smaller industrial countries and the developing world may need to be financed, compared
with a total need of about $35 billion in 1974.
Thus the financial markets continue to be faced with substantial
movements of funds through direct or indirect channels from the surplus oil producers to the deficit countries. To date, most of this financing has been carried out through private financial channels, with the
I M F and other official lending institutions providing perhaps something like one-tenth of the total financing of the O P E C current account surplus. The initial fears of difficulty in financing these huge
amounts have not been realized. However, there are signs that some
of the developing countries may be cutting back on their other imports
and slowing down their rates of growth to reduce their financing
World T r a d e
While the dollar value of world trade is estimated to have increased
by nearly one-half in 1974 over 1973, most of this was due to higher



prices of internationally traded goods, particularly for energy. The
physical volume of trade is estimated to have expanded by only about
5 percent, compared with an average annual rate of growth of 81/^
percent during the 1960's. Incomplete data indicate that even weaker
volume figures can be anticipated for the first half of 1975. The only
part of world trade that was expanding early in 1975 was the movement of imports into the oil-exporting countries.
Exchange Market Developments
Since March 1973, the world has operated under what liiay be
broadly described as a tripartite system of exchange policies. By
June 30,1975, about 40 percent of world trade was accounted for by 16
countries whose currencies were independently fioating, with discretionary intervention. About 30 percent of global trade was recorded
by seven continental European countries (including France after
July 10,1975) that adhered to a "common margins" agreement among
themselves, with their currencies as a group floating against outside
currencies. The remaining roughly 30 percent of total international
trade was reported by countries that were under some form of loose or
tight pegging of currencies to the dollar, to the pound sterling, to the
French franc, to the special drawing right (SDR), or to some other
composite unit in which several currencies were combined.
This tripartite system has worked well in helping the world to make
adjustments to unprecedented peacetime shifts in international payments balances. Exchange crises have been avoided and no dramatic
closings of official exchange markets such as occurred in earlier years
have taken place. The very steep rise in the foreign exchange reserves
of industrial countries, that was associated with those currency crises,
pushed the total holdings from $12 billion in 1965 to $70 billion in early
1973. Since exchange rates for the dollar were permitted to float, the
rise in foreign exchange reserves has leveled off. In fact, for a number
of such countries, effective net reserves have been reduced by official
borrowing abroad, though the gross reserves have held at about $70
billion. The substantial accumulations of dollars and other reserves
since March 1973 have been concentrated in the holdings of the oilproducing countries. These holdings are in the nature of investments,
rather than the byproduct of disruptive flows across the exchange
During fiscal 1975, the composite exchange rate for the dollar,
weighted by bilateral trade figures with about 50 countries, showed an
appreciation of 3.8 percentage points, from a depreciation against the
May 1970 rates of 10.6 percent at the end of June 1974, to a depreciation of 6.8 percent at the end of June 1975. Calculated on a narrower
trade-weighted geographical base, the dollar also showed a slight rise



of 0.5 percentage points vis-a-vis the OECD currencies as a group,
ending the year at a 16-percent depreciation from May 1970. In terms
of SDR's, however, which give a smaller weight to the Canadian dollar than the trade-weighted averages, the dollar depreciated about
21/^ percent during the fiscal year.
The currencies of the European common margins group (commonly
called the "snake") did, however, appreciate against the dollar rather
steadily from about August 1974 to March 1975, and then depreciated
moderately through June 1975. The French franc, before rejoining the
snake at its original relationship in July, rose from March to June.
At the end of June, the dollar prices of some European currencies had
reached their earlier 1973 peaks and, in the case of the Swiss franc, had
moved considerably above those levels. After the end of the fiscal year,
however, there was a sharp reversal in the exchange rates, with the
European currencies falling steeply in terms of the dollar. The pound
sterling, reflecting very high rates of inflation in Great Britain, moved
steadily downward in the second quarter of 1975. The Italian lira and
the Japanese yen ended the year without much change, with the authorities giving considerable guidance and support to the exchange
market in both cases.
Money Markets and Interest Rates
Short-term market interest rates in monetary terms were generally
at unusually high levels of 10 to 14 percent, or even higher, in a number of industrial countries in the summer of 1974. They receded from
these levels in most countries during the final 6 months of 1974, particularly in the United States, and then began to level off or rise moderately again during the April-June 1975 time period. Long-term interest rates changed more slowly, but were moderately higher than the
1973 average in most industrial countries in the first half of 1975.
International Monetary and Financial Negotiations
The Committee of the Board of Governors of the Intemational
Monetary Fund on Reform of the International Monetary System and
Related Issues, at its final meeting on June 13, 1974, agreed on a program of immediate action, as well as transmitting to the Governors
for publication its final report on the longer range approach to international monetary reform. The elements in this action program have
provided the principal agenda items for intemational discussions during the year. Among other provisions, they included: (a) Establishment of an advisory Interim Committee of the Board of Governors,
pending amendment of the Articles of Agreement of the IMF to confer decisionmaking powers on a permanent and representative Council, (b) establishment of guidelines for the management of floating



rates, (c) establishment of a facility in the I M F to assist members in
meeting the initial impact of higher oil prices, (d) further study of
reform of gold arrangements, (e) valuation of the SDR in terms of a
"basket" of currencies, (f) preparation of draft amendments to the
Articles of Agreement, and (g) establishment of a Joint Ministerial
Committee of the Boards of Governors of the I M F and World Bank
to carry forward the study of the broad question of the transfer of
real resources to developing countries and to recommend measures to
implement its conclusions.
The Interim Committee of the Board of Governors of the Intemational Monetary Fund on the International Monetary System held its
inaugural meeting in Washington on October 3, 1974, and selected
Finance Minister Turner of Canada as Chairman for 2 years. I t called
upon the I M F to examine the adequacy of private and official arrangements for financing oil-related payments deficits. The Committee
decided to give priority to the issues of the adjustment process, quotas
in the I M F , and amendments of the I M F Articles, including amendments on gold and on the link between development assistance and
SDR allocations. The Joint Ministerial Committee of the Boards of
Governors of the World Bank and the Intemational Monetary Fund
on the Transfer of Real Resources to Developing Countries was organized on October 2,1974.
In November 1974, the United States proposed a "three-track"
approach to multilateral financial arrangements designed to supplement private financing channels. This called for use of I M F regular
resources as the first recourse, augmented by a quota increase, and by
more effective policies for use of members' subscriptions to the Fund.
This would be supplemented by a new Financial Support Fund designed to help industrial countries that could not arrange sufficient
financing on reasonable terms from private sources and the Fund making them less vulnerable to financial pressures. The third proposal involved the creation of a temporary trust fund in the I M F , in the
amount of $1.5-$2 billion, to be financed by sale in the market of some
of the IMF's gold, and by contributions from member countries. This
trust fund would be designed to provide concessional financing to
the developing countries most seriously affected by the high cost of
After several months of negotiations, the Financial Support Fund
Agreement among participating members of the OECD was signed
on April 9, 1975, on behalf of the United States, subject to the necessary legislative action. The quotas of participants in the Financial
Support Fund total SDR 20 billion (about $25 billion), with the
U.S. share amounting to 27.8 percent of the total, or about $7 billion.



The quotas of members determine voting rights, shares in financing
the Financial Support Fund, and borrowing rights, as well as establishing a maximum limit on the risk of loss shared by a member in its
operations. The United States intends to meet its share of any financing a:'equired by the Financial Support Fund principally through the
issuance of guarantees providing a basis for market borrowing by the
Fund. Legislation authorizing U.S. participation in the new facility
had been introduced and was under consideration in the Congress at
the end of the fiscal year.
Enlargement of the quota contributions to the Intemational Monetary Fund was also discussed extensively during the past year. The
United States has argued that consideration of such an increase in
quotas should occur only in the context of a broader package agreement covering arrangements for gradually phasing gold out of the
monetary system and amendments to the Articles of Agreement providing for floating exchange rates as a permitted option for member
nations of the I M F . In this context, the Interim Committee in January 1975 approved an increase in I M F quotas to SDR 39 billion (about
$47 billion), an increase of about one-third in Fund resources. This
increase would double the quota shares of the major oil exporters,
while maintaining the collective shares of all other developing countries. The Committee also agreed to review the quotas again in 3 years,
instead of waiting the normal 5-year period. Since January, further
discussions have been held on the distribution of quotas among individual members, and some problems remain to be resolved. Despite
the economic justification for a larger quota, the United States in these
discussions agreed to accept some decrease in its quota share, thus
reducing its voting share fractionally, on condition that the Articles
be amended to increase from 80 percent to 85 percent the vote required
to approve amendment of the Articles and certain other basic decisions.
Considerable progress has been made toward agreement on phasing gold out of its monetary role over time. The Interim Committee
has agreed on some principles such as abolition of the official gold
price in the I M F and elimination of the obligation to use gold in payments between the I M F and its members. The Committee also agreed
that a portion of the IMF's gold should be used for the benefit of the
developing countries, particularly the low-income developing countries. There remain, however, several issues, including the question of
transitional arrangements outside the I M F designed to avoid reappearance of a de facto official price of gold and to limit a rise in
aggregate official holdings.
More difficulty has been encountered in reaching accord on amendments to the Articles of Agreement concerning exchange rate policies.

7 5 - 3
588-395 0 



The United States believes that the I M F Articles should offer nations
wide latitude for choice among exchange rate systems, including full
acceptance of floating rates as an option, and should impose neither a
moral nor a legal obligation to establish par values, now or in the future. While there is wide support for this objective, some countries
would like to see all nations accept an obligation to return to par
values. The United States has indicated that it will not agree to this.
I n t e r n a t i o n a l Investment and Capital Flows
The accumulation of financial assets by oil-producing countries,
amounting to about $60 billion in calendar year 1974 and about $25
billion in the first half of 1975, aroused public interest in foreign
investment in the United States. Under the Foreign Investment Study
Act of October 1974, the Treasury is carrying out a special study to
improve data on foreign portfolio investment in the United States.
The Commerce Department is examining data on foreign direct investment in this country. The Treasury study will also analyze the
methods and determinants of foreign investment here and the purposes
and effects of U.S. laws and regulations bearing on such investment.
Following a report to the Economic Policy Board and the National
Security Council by an interagency committee chaired by the Under
Secretary of the Treasury for Monetary Affairs, several decisions
were taken regarding infiows of foreign investment. I t was decided
that the United States should maintain its traditional open economy
and investment policies and that no new legislation was needed to
supplement existing safeguards. A high-level Committee on Foreign
Investment in the United States was established to monitor the impact
of foreign investment by Executive Order 11858 in May 1975. The
Under Secretary for Monetary Affairs was designated as Chairman
of that Committee.
During fiscal 1975, Congress appropriated $619.1 million for the
operations of various international development banks. Although the
United States is the largest single contributor, other donor countries
together contribute more than twice as much as the United States.
Total lending from the international development banks was equal to
more than 40 percent of total new commitments of official development assistance from O E C D countries in calendar 1974.
The World Bank group committed over $6 billion for development
projects in fiscal 1975, an increase of 35 percent over fiscal 1974, and
72 percent higher than the lending level in fiscal 1973. The InterAmerican Development Bank committed $1.1 billion and the Asian
Development Bank $570 million. I n the Inter-American Development
Bank, an important event was the progress made toward broadening
the base of the Bank to bring in 12 nonregional members: Austria,



Belgium, Denmark, Germany, Israel, Italy, Japan, the Netherlands,
Spain, Switzerland, the United Kingdom, and Yugoslavia. These
new members will bring additional resources, both in capital subscriptions and in contributions to the Fund for Special Operations,
which supplies financing on concessional terms.
At the annual meeting of the World Bank, the U.S. Governor
stressed the need for effective utilization both of the private capital
and of the modern technology available on a commercial basis. H e
pointed out that within the World Bank group the International
Finance Corporation has a particularly important role in stimulating
investment, and the Secretary of the Treasury emphasized the vital
importance to developing countries of effective mobilization and use
of domestic resources. The scarce resources of the international lending agencies should be concentrated on the countries with the greatest
need and on high-priority projects such as promotion of food
Unfortunately, the increase in oil prices has fundamentally changed
the growth outlook for the developing countries. I n the 1960's and
early 1970's, growth was proceeding at a considerably faster rate in
those countries than in the industrialized nations. The impact of
higher oil prices placed an immediate burden on the balance of payments of developing countries and also contributed to the subsequent
recession which so adversely affected the exports of the developing
countries. The economic growth rate of the most seriously affected
countries has fallen below their rate of population growth. I n the
middle- and high-income developing countries, the problem of financing current account deficits has led to very heavy borrowing demands
on the world's capital markets, and a slowing down of growth to
avoid too rapid a rise in external debt.
To alleviate these undesirable pressures, the United States has
proposed that a temporary trust fund be created under the management of the I M F to help meet the balance of payments needs of the
poorest countries. The amount suggested is $1.5-$2 billion, to be
financed by contributions derived from the sale of a portion of the
I M F ' s gold reserves, as well as by contributions from oil producers
and other countries. Resources provided by the trust fund would be
on concessional terms.
The Development Committee has urged the Executive Directors to
consider all aspects of such a trust fund, including possible sources
of financing. I t has also agreed to establish a working group to review
regulatory and other constraints affecting access to capital markets
and to study further proposals to support access, including the possible
use of multilateral guarantees. The Committee also supported a 1-year

intermediate lending facility in the World Bank (known as the "third
window") to lend on terms intermediate between those of the International Development Association and the World Bank. The interest
rate on such loans is to be subsidized with contributions from member
countries. Pledged contributions will perinit about $500 million in
third window lending during fiscal 1976 with criteria for these limited
funds favoring countries with an annual per capita income below $375.
On other matters concerning relations with developing countries,
the Treasury submitted papers to the Economic Policy Board and the
Council on International Economic Policy outlining measures to
broaden and strengthen U.S. policy on expropriation. The Overseas
Private Investment Corporation, which insures investments against
the political risks of expropriation, inconvertibility, and war, revolution, and insurrection, issued $1,211.9 million in investment insurance
in fiscal 1975, up over 20 percent from the amount issued in fiscal 1974.
I n February 1975, the Secretary submitted the first comprehensive
annual report on debt relief granted by the United States to developing
countries, as required by legislation approved in 1974. Discussions on
debt relief were held with Pakistan and Bangladesh to conclude bilateral debt rescheduling agreements, and a bilateral agreement was
signed with India covering service due during the Indian fiscal year
ending March 31, 1975. A multilateral understanding was reached
with Chile under which debt due from the Government of Chile in
1975 would be rescheduled.
The Joint Ministerial Committee of the Boards of Govemors of
the Bank and the Fund on the Transfer of Real Resources to Developing Countries (Development Committee) was established in October
1974, during the I M F - I B R D annual meetings. The U.S. member is
the Secretary of the Treasury.
An unprecedented combination of recession and infiation developed,
both domestically and internationally, during the course of fiscal 1975.
By the close of the fiscal year, the U.S. economy was in the early stages
of an economic recovery. Unemployment was high but falling, and
the rate of inflation had been reduced significantly during the year. An
unprecedented amount of Federal financing was accomplished during
the year while private credit demands were relatively slack, but interest rates remained high by historical standards and there was some
difficulty in obtaining access to funds for some private borrowers.
Despite considerable effort to devise programs to deal with the energy
problem and to encourage a higher rate of capital formation, much
remains to be done in each of these areas.



On the international side, significant progress occurred during the
fiscal year in restoring the strength of the international economy although the rate of recovery in many nations is still slow and much
remains to be accomplished. Infiation remains a major problem in
many nations.
The international monetary system continued to evolve along three
lines, comprising individually fioating rates for the dollar and some
other major trading currencies, a group of European currencies fioating together against the dollar with limited intervention, and a number
of other currencies pegged to the dollar or to some other currency or
basket of currencies. During the year, progress was made toward international agreement on phasing down the intemational monetary role
of gold, enlarging resources of the Intemational Monetary Fund, and
liberalizing access by developing countries to financing from both the
Fund and the World Bank group. The massive accumulations of liquid
international resources by oil-producing countries slowed down, but
continued to contribute heavily to the worldwide situation of recession
combined with receding, though still abnormally high, rates of






On the unified budget basis the deficit for fiscal 1975 was $43.6
billion. Net receipts for fiscal 1975 amounted to $281.0 billion ($16.1
billion over 1974) and outlays totaled $324.6 billion ($56.2 billion
over 1974).
Borrowing from the public amounted to $50.9 billion as a result of
(1) the $43.6 billion deficit, (2) a $0.3 billion increase in cash and
monetary assets, and (3) a $6.9 billion decrease in other means of
As of June 30, 1975, Federal securities outstanding totaled $544.1
billion, comprised of $533.2 billion in public debt securities and $10.9
billion in agency securities. Of the $544.1 billion, $396.9 billion represented borrowing from the public. The Government's fiscal operations in fiscal years 1974-75 are summarized as follows:
[In billions of dollars]



Budget receipts and outlays:

264. 9
268. 4

281. 0
324. 6

Budget deficit ( - ) _


-43. 6

3. 0

50. 9



Means of financing:
Borrowing from the public
Decrease or increase (—) in cash and other monetary
Other means:
Increment on gold and seigniorage
Outlays of off-budget Federal agencies
Total budget


— 2. 7
3. 5

— 9. 5
2. 0
43. 6





1966 1967 1968 1969 1970 1971 1972 1973 1974
Fiscal Years



Total budget receipts amounted to $281.0 billion in fiscal 1975, an
increase of $16.1 billion over fiscal 1974. A comparison of net budget
receipts by major source for fiscal years 1974 and 1975 is shown below.
[In inillions of dollars]

Individual income taxes
Corporation income taxes
Employment taxes and contributions
Unemployment insurance
Contributions for other insurance and retirement
Excise taxes
Estate and gift taxes
Customs duties.-Miscellaneous receipts
Total budget receipts

Increase, or
decrease (—)












Projected estimates of receipts to future years, required of the
Secretary of the Treasury, are shown and explained in the President's
Individual income taxes.—Individual income taxes reached $122.4
billion in fiscal 1975, an increase of $3.4 billion over fiscal 1974. I n the
absence of the Tax Eeduction Act of 1975, which reduced individual



tax receipts by $9.6 billion, the growth over fiscal 1974 would have been
$13.1 billion.
Corporation income taxes.—Corporation income taxes increased by
$2.0 billion over fiscal 1974 to reach $40.6 billion in fiscal 1975. The
Tax Eeduction Act of 1975 reduced corporate tax collections by $0.8
billion. Eeceipts in fiscal 1975 reflected in part high corporate earnings in 1974 and therefore did not decline with the 1975 decline in
corporate earnings.
Employment taxes and contributions.—Approximately one-half of
the $9.3 billion increase in this category resulted from the social
security taxable earnings base increases effective January 1,1974, and
January 1, 1975. Employment taxes and contributions reached $75.2
billion in fiscal 1975.
Unemployment insurance.—Unemployment insurance receipts declined $0.1 billion in fiscal 1975, resulting largely from lower levels of
employment experienced in the second half of the year.
Contributions for other insurance and retirement.—These receipts
totaled $4.5 billion in fiscal 1975, an increase of $0.4 billion over fiscal
1974. Increases in medical premiums for the aged and disabled ($0.2
billion) and growth in Federal employees retirement contributions
($0.2 billion) accounted for the increase.
Excise taxes.—Excise taxes decreased by $0.3 billion to $16.6 billion
in 1975. Totals for 1975 were affected by reductions in the telephone
and interest equalization tax rates and by declines in receipts of taxes
on tobacco, gasoline, lubricating oil, and tires.
Estate and gift taxes.—Estate and gift taxes totaled $4.6 billion, a
decrease of $0.4 billion from fiscal 1974. The primary explanation for
the decline appears to be the depressed level of stock prices.
Customs duties.—^Customs duties increased by $0.3 billion, reaching
$3.7 billion for the year.
Miscellaneous receipts.—Eeceipts in this category were $6.7 billion
for fiscal 1975. This is $1.3 billion over fiscal 1974 and refiects the large
deposits of earnings by the Federal Eeserve System, which totaled
$4.8 billion in fiscal 1974 and $5.8 billion in fiscal 1975.
Total outlays in fiscal 1975 were $324.6 billion (compared with
$268.4 billion for 1974). Outlays for fiscal 1975, by major agency, are
compared to those of 1974 in the following table. F o r details see the
Statistical Appendix.







[In millions of dollars]
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
Energy Research and Development Administration »
National Aeronautics and Space Administration
Veterans Administration
Undistributed intrabudgetary transactions

Increase, or
decrease (—)










1 Effective Jan. 19,1975, the functions ofthe Atomic Energy Commission were transferred to the Energy
Research and Development Administration.

Cash and monetary assets

On June 30, 1975, cash and monetary assets amounted to $15.9
billion. The balance consisted of U.S. Treasury operating cash of
$7.6 billion (this amount is $1.6 billion less than June 30, 1974) ; $1.9
billion held in special drawing rights ($0.1 billion more than fiscal
1974) ; a net $2.2 billion with the Intemational Monetary Fund ($1.1
billion more than 1974) ; and $4.2 billion of other cash and monetary
assets ($1.6 billion more than 1974 )\ For a discussion of the assets
and liabilities of the Treasury account, see page 166. The transactions
affecting the account in fiscal 1975 follow:
Transactions affecting the account of the U.S. Treasury, fiscal 1975
[In millions of dollars]

Operating balance June 30, 1974
Excess of deposits or withdrawals (—), budget, trust, and
other accounts:
Withdrawals ( - )
Excess of deposits or withdrawals (—), public debt accounts :
Increase in gross public debt
Net discounts on new issues
8, 711
Interest increment on savings and retirement plan securities
Net public debt transactions included in
budget, trust, and other Government
6, 899
Net deductions

9, 158

- 4 1 , 704

58, 954


40, 134

Operating balance June 30,1975

7, 589

Corporations and other business-type activities of the Federal Government

The business-type programs which Govemment corporations and
agencies administer are financed by various means: Appropriations



(made available directly or in exchange for capital stock), borrowings
from either the U.S. Treasury or the public, or by revenues derived
from their own operations. Various agencies have been borrowing from
the Federal Financing Bank, which began operations in May 1974.
The bank is authorized to purchase and sell securities issued, sold, or
guaranteed by Federal agencies.
Corporations or agencies having legislative authority to borrow from
the Treasury issue their formal securities to the Secretary of the
Treasury. Amounts so borrowed and outstanding are reported as
liabilities in the periodic financial statements of the Government corporations and agencies. I n fiscal 1975, borrowings from the Treasury,
exclusive of refinancing transactions, totaled $47.1 billion, repayments and cancellations were $37.8 billion, and outstanding loans on
June 30,1975, totaled $44.7 billion.
Those agencies having legislative authority to borrow from the
public must either consult with the Secretary of the Treasury regarding the proposed offering, or have the terms of the securities to be
off'ered approved by the Secretary.
The Federal Financing Bank makes funds available in accordance
with program requirements to agencies having authority to borrow
from the bank. Interest rates shall not be less than rates determined
by the Secretary of the Treasury taking into consideration current
average yields on outstanding Govemment or bank securities of comparable maturity. The bank may charge fees to provide for expenses
and reserves.
During fiscal 1975, Congress granted new authority to borrow from
the Treasury in the total amount of $23.1 billion and reduced existing
authority by $2.1 billion, a net increase of $20.9 billion. The status
of borrowings and borrowing authority and the amount of corporation
and agency securities outstanding as of June 30,1975, are shown in the
Statistical Appendix.
Unless otherwise specifically fixed by law, the Treasury determines
interest rates on its loans to agencies by considering the Government's
cost for its borrowings in the current market, as reflected by prevailing
market yields on Government securities which have maturities comparable with the Treasury loans to the agencies. A description of the
Federal agency securities held by the Treasury on June 30, 1975, is
shown in the Statistical Appendix;
During fiscal 1975, the Treasury received from agencies a total of
$1.8 billion in interest, dividends, and similar payments. (See the
Statistical Appendix.)
As required by Department Circular No. 966, Eevised, semiannual



statements of financial condition, and income and retained earnings are
submitted to the Treasury by Government corporations and businesstype agencies (all other activities report on an annual basis). Quarterly
statements showing direct and guaranteed loans, and annual statements
of commitments and contingencies are also submitted. These statements serve as the basis for the combined financial statements compiled
by the Treasury which, together with individual statements, are published periodically in the Treasury Bulletin. Summary statements of
the financial condition of Government corporations and other business-type activities, as of J u n e 30, 1975, are shown in the Statistical
Government-wide financial management

Legislative Reorganization Act of 1970.—The Congressional Budget
and Impoundment Control Act of 1974 (Public Law 93-344) amended
the Legislative Eeorganization Act of 1970 to give the General Accounting Office an expanded role for coordinating the Governmentwide efforts to respond to the information needs of the Congress for
budget and fiscal data. Specifically, the Comptroller General, in addition to identifying these needs, is now required to prescribe basic
classifications, standard terminology, definitions, and codes to be
used in the information system. Under the new act, GAO is required
to report to the Congress annually (the first report was due September 1,1974) the results of its continuing program to identify and specify the needs of the Congress. OMB and Treasury are required to
report annually in response to the GAO report their plans for addressing the congressional information needs.
Because of time constraints the first reports from the General Accounting Office and the executive branch could not be fully responsive to the act. Therefore, progress reports were made on the status
of ongoing projects started as a result of needs already identified by
the "Plan for Addressing Congressional Information Needs" prepared by an ad hoc team consisting of executive branch personnel and
released on March 7,1974.
During the year Treasury initiated several improvements in data
and systems, the most significant being: (1) The inclusion of a special
analysis in the budget document, prepared by the Office of Tax Analysis, which reflected the tax revenue losses attributable to special
exclusions, exemptions, etc., (2) publication of the Daily Statement of
the United States Treasury in a new format designed to disclose the
U.S. Treasury's daily cash and debt operations in the manner most
useful for analysis purposes, and (3) formation of a project team to



redesign its Government-wide accounting system. A major objective
of this project is to structure a system which can be more responsive
to the information needs of the Congress and other users. I t is hoped
that direct access capability will be provided to interrogate selected
current and historical data files.
Joint Financial Management Improvement Program.—By the end
of the fiscal year, two projects were completed or near completion.
The first was a project on money management in the Federal Govemment. The major objective of this project is to review cash management policies and practices and recommend improvements. The second
project deals with the use of operating expense budgets for program
management, an interagency study to review the existing use of operating budgets in agency program management and to develop recommendations for improvement.
Intemational Monetary Fund.—The Commissioner of Government
Financial Operations was appointed to serve as U.S. correspondent
with the International Monetary Fund for matters related to the
Fund's government finance statistics project. Selected statistics on
Federal, State, and local government finance data are being collected
to provide the Fund with a means of measuring the impact of government operations on the economy as a whole and on particular parts of
the economy of Fund member countries.
The Fund is currently collecting fiscal 1973 statistical data. Eelative
data for which the Treasury is the source is being reviewed and passed
on to the Fund. Other relative statistical data which are to be gathered
through a network of information sources outside the Treasury sphere
will be furnished the Fund through the U.S. correspondent.

I n fiscal 1975 Treasury debt management was again conducted in an
extremely difficult economic atmosphere. Inflation continued to plague
the economy and economic activity remained sluggish. Over the course
of the fiscal year the Treasury had to issue an enormous amount of
debt as total debt outstanding increased $59.0 billion. This was the
largest increase since the $61.8 billion in fiscal 1944, a war year.
As in fiscal 1974, all coupon-bearing Treasury securities were sold
by auction. However, in fiscal 1975 some auctions were conducted with
bids stated in yields rather than in prices.
The cycle of 2-year note offerings was continued in fiscal 1975 as
the Treasury sought to regularize the maturity stmcture of the debt.
Nine notes were phased into the 2-year note cycle. I n addition, three




bills were issued in the 2-year cycle "slots," two of which matured and
were replaced by 2-year notes. Gross offerings of coupon issues totaled
$61.1 billion of which $26.8 billion was for new money. New money
from bill offerings totaled nearly $33.6 billion—$22.0 in regular bills,
$5.0 billion in tax anticipation bills, and $6.6 billion in other bills.
Because of the huge amount of debt issued by the Treasury, there
was considerable concern that the Treasury would be "crowding out"
less creditworthy private and public borrowers, particularly in the
second half of the fiscal year when the Treasury did most of its borrowing. However, this "crowding out" did npt materialize to any
great extent and the Treasury, when possible, gave more advance notice than usual of its financing needs before entering the market.
Changes in Federal securities

Federal securities comprise the marketable and nonmarketable public debt securities issued by the Treasury and those obligations issued
by Government agencies included in the unified budget. The principal
agency issues are the participation certificates of the Government
National Mortgage Association, the debt issues of the Export-Import
Bank of the United States and the Tennessee Valley Authority, Postal
Service bonds. Defense family housing mortgages, and the various
guaranteed issues of the Federal Housing Administration,


^1 I I I I I I I I I I I I I I I I I I I I I I I I M I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I







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


Federal debt and Government-sponsored agency debt
[In billions of dollarsl
Class of debt

June 30, June 30, June 30, Increase, or
1975 decrease ( - )

Public debt securities:
Marketable public issues by maturity class:
Within 1 year
1 to 5 years
5 to 20 years_
Over 20 years
Total marketable issues

45.6 '














Total nonmarketable public issues




Nonmarketable public issues:
Series E and H savings bonds
U.S. savings notes i
Investment series bonds
Foreign government series:
Dollar denominated
Foreign currency denominated
Other nonmarketable debt....





2 1.0



2 474.2









Government account series (nonmarketable)


Non-interest-bearing debt...


Total gross public debt.
Federal agency securities:
Government National Mortgage Association.. _
Export-Import Bank of the United States
Tennessee Valley Authority
Defense family housing
Total Federal agency debt
Total Federal debt.
Government-sponsored agency securities:
Federal home loan banks
Federal National Mortgage Association
Federal land banks
Federal intermediate credit banks
Banks for cooperatives
G overnment-sponsored agency debt.,






2 486.2








1 U.S. savings notes first oflered in May 1967; sales discontinued after June 30, 1970.
2 Non-interest-bearing debt for flscal 1973 and 1974 was adjusted to reflect the reclassification in July 1974
of $825 million outstanding special notes issued to the International Monetary Fund.

A t the end of fiscal 1975, outstanding Federal securities totaled
$544.1 billion—$57.9 billion, or 12 percent, more than the $486.2 billion
outstanding at the end of fiscari974. Treasury public debt securities
amounted to $533.2 billion, an increase of nearly $59.0 billion during
the fiscal year, while Federal agency issues fell $1.1 billion to a level
of $10.9 billion. Treasury markdtable securities outstanding at the
end of fiscal 1975 amounted to $315.6 billion. This represented an increase of $49.0 billion compared with $3.6 billion in fiscal 1974. Treasury bills accounted for $23.6 billion of the increase in marketable debt.
Treasury notes $21.8 billion, and Treasury bonds $3.6 billion.
At the close of fiscal 1975 private investors held $311.9 billion of
the $544.1 billion of Federal debt issues outstanding. The remaining

588-395 0 - 7 5 - 4



$232.2 billion was held by the Federal Keserve System and Government accounts. I n addition, private investors increased their holdings
of federally sponsored agency issues by $8.8 billion to a level of $71.5
billion. Federally sponsored agency issues held by the Federal Eeserve
System and Government accounts increased by $1.9 billion to a level
of $4.5 billion. Total borrowing from the public, which includes the
Federal Keserve System and foreign investors, amounted to $50.9
billion in fiscal 1975. This was considerably greater than the $3.0 billion
in fiscal 1974 and is the largest amount since the $23.1 billion borrowed
in fiscal 1968. Unlike fiscal 1974, when the Federal Keserve System
aquired $5.5 billion of these securities and private investors showed
a net disinvestment of $2.5 billion, in fiscal 1975 private investors
acquired $47.6 billion, or 94 percent, of the securities while the Federal
Reserve System picked up $4.3 billion.
I n fiscal 1975 nonmarketable public debt increased $9.9 billion compared with a gain of $13.4 billion in fiscal 1974. Special nonmarketable securities issued only to Government accounts and trust funds
such as the unemployment trust fund accounted for most of the increase in nonmarketable debt. These special securities increased $7.9
billion, while special nonmarketable issues to foreign investors declined $1.8 billion. Savings bonds outstanding grew by $3.6 billion
and other nonmarketables by $0.2 billion.
The unified budget totals exclude the Government-sponsored agencies. Therefore, the obligations of these agencies are not part of the
Federal debt; nevertheless, these privately owned and managed agen-


Federal Agency

1970 1971 1972 1973 1974 1975

1970 1971 1972 1973 1974 1975



cies are subject to some degree of Federal supervision. I n fiscal 1975,
the debt issues of Government-sponsored agencies grew by $10.7 billion to $76.1 billion.
Individuals.—Public debt securities held by individuals increased
$6.3 billion in fiscal 1975 to a level of $87.1 billion. Around 57 percent,
or $3.6 billion, of the increase was in savings bonds, while Treasury
marketable issues accounted for $2.7 billion. On June 30, 1975, holdings of U.S. savings bonds and notes totaled $65.4 billion and holdings
of marketable securities was $21.7 billion.
Insurance companies.—Insurance companies added $1.2 billion to
their holdings of public debt securities in fiscal 1975 compared with
a decline of $0.4 billion in fiscal 1974. Holdings of Federal agency
securities also increased slightly during the year. At the end of the
fiscal year, insurance companies held $7.1 billion of public debt securities and $0.4 billion of Federal agency issues.
Savings institutions.—Savings and loan associations' holdings of
public debt securities increased $0.5 billion during fiscal 1975 compared with a decline in holdings of $1.1 billion in fiscal 1974. However, holdings of Federal agency securities were down slightly during
the fiscal year. At the end of the year, savings and loan associations
held $4.9 billion of public debt securities and $0.5 billion of Federal
agency issues.
Mutual savings banks held $3.6 billion of public debt securities at
the end of fiscal 1975, an increase of $1.0 billion for the year compared
with a decline of $0.6 billion in fiscal 1974. Holdings of Federal agency
securities changed only slightly and stood at a level of $0.4 billion at
the end of the fiscal year.
State and local governments.—Around $29.6 billion of public debt
securities was held by State and local governments at the end of fiscal
1975. This represented an increase of $1.3 billion for the year compared with a decline of $0.5 billion in fiscal 1974. Holdings of Federal
agency issues, however, decreased $0.2 billion.
Foreign and international.—Foreign investors added $9.2 billion
of public debt securities to their holdings in fiscal 1975 compared
with a decline of $2.6 billion the previous year. Holdings of marketable issues, primarily bills, increased by $11.0 billion while special
foreign nonmarketables declined $1.8 billion. Holdings of Federal
agency securities declined by $0.2 billion. At the end of fiscal 1975,
foreign investors held $66.0 billion of public debt securities and $0.4
billion of Federal agency issues.
Nonfinancial corporations.—Corporations acquired $2.4 billion of
public debt securities in fiscal 1975 while holdings of Federal agency
issues declined $0.1 billion. At the end of the fiscal year, their holdings
of public debt securities amounted to $13.2 billion and Federal agency
securities to $0.4 billion.



Other private nonbank investors.—Public debt securities.held by
other private nonbank investors increased by $9.8 billion compared
with an increase of $1.7 billion in fiscal 1974. Holdings of Federal
agency issues increased only slightly. On June 30,1975, these investors
held $22.5 billion of public debt issues and $0.1 billion of Federal
agency securities.
Commercial banks.—Commercial banks were particularly heavy
purchasers of Treasury public debt securities in fiscal 1975 after posting declines in holdings for 3 successive years. Banks acquired $16.0
billion of public debt securities during the fiscal year, most of which,
$13.6 billion, was absorbed in the second half of fiscal 1975. However,
holdings of Federal agency securities fell '$0.5 billion. At the end
of the fiscal year, banks held $69.2 billion of public debt securities and
$1.9 billion of Federal agency issues.
Estimated ownership of public debt securities on selected dates 1965-76
[Dollar amounts in billions]

June 30, June 30, June 30, June 30,

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





(*) 2.7

Total individuals






Insurance companies
Mutual savings banks.
Savings and loan associations
State and local governments.
Foreign and international
Miscellaneous investors 4

3 12.3






3 200.1

3 202.4













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





Percent owned by:
Other private nonbank investors
Commercial banks
Federal Reserve banks
Government accounts.




28 ,
16 .
27 .

Total gross debt outstanding




100 .

» Revised.
•Less than $50 million.
1 Including partnerships and personal trust accounts.
2 U.S. savings notes first offered in May 1967; sales discontinued after June 30,1970.
3 Adjusted to reflect the reclassification in July 1974 of outstanding non-interest-bearing special notes
issued to the International Monetary Fund and other international lending institutions. The adjusted
amounts were $3,455 million at the end of fiscal 1965 and $825 million at the end of fiscal 1973 and 1974.
* Includes nonprofit institutions, corporate pension trust funds, nonbank Govemment security dealers,
certain Government deposit accounts, and Government-sponsored agencies.



Federal Reserve System.—^^The Federal Keserve System added $4.3
billion of public debt securities to their holdings in fiscal 1975 compared with an increase of $5.5 billion a year earlier. Holdings of Federal agency securities increased slightly. At the close of fiscal 1975,
the System held $84.7 billion of public debt securities and $0.2 billion
of Federal agency issues.
Govemment accoumjts.—Public debt securities held by Government
accounts increased $7.1 billion compared with $14.8 billion in fiscal
1974. Holdings of special nonmarketable securities increased $7.9
billion. However, marketable holdings declined $0.8 billion compared
with an increase of $1.1 billion in fiscal 1974. Holdings of Federal
agency issues were down slightly. At the end of the fiscal year. Government accounts held $145.3 billion of public debt securities and $1.9
billion of agency issues.
Financing operations

I n the quarter ending June^30, 1974, interest rate movements had
been largely dominated by a combination of inflationary expectations,
restrictive monetary policy, and continued strong demand for business loans. Interest rates on all forms of private debt had moved substantially higher, and by the end of the quarter many rates had
reached record levels. Yields on short-term Govemment securities,
however, had declined while rates on intermediate- and long-term
Government securities had changed very little.
When fiscal 1975 began there was considerable concern over the

Gov't Accounts



Federal Reserve

Nonbank Investors

/ ^ 171.1
Com'l Banks ^ ^ ^




Savings Institutions





sluggish economy, inflation, and the rise in interest rates* At this
time, the Treasury was meeting some of its new cash needs through
additions to weekly bill auctions. Except for paydowns in two weekly
auctions in September, the additions ranging from $100 million to
$800 million were continued through the end of the fiscal year. About
$22.0 billion of new money was raised through additions to regular
weekly and monthly bill offerings.
To help meet seasonal cash needs, the Treasuiy announced oh July 18
that it would auction $1.5 billion of 44-day tax anticipation bills on
August 1 for payment on August 7. The bills were due September 20
and commercial banks were allowed to pay for their own and their
accepted tenders by crediting Treasury tax and loan accounts. Bidding
for the tax bills was aggressive. Total tenders amounted to $4.3 billion
and $1.5 billion was accepted at an average rate of 9.66 percent.
Meanwhile, just prior to the tax anticipation bill auction, the Federal
Financing Bank held its first auction on July 23 and sold $1.5 billion
of 8-month bills priced to yield 8.05 percent* The bills, which had
the same characteristics as Treasury bills, wer^ auctioned with full
commercial bank tax and loan account privileges. The proceeds of the
offering were used to pay back the $1*4 billion borrowed by the Financing Bank from the Treasury to make loans to several agencies whose
borrowing activities are coordinated by the Federal Financing Bank.
About 3 weeks prior to the August financing, Treasury bills and
intermediate coupon issues were trading at rates substantially below
the general pattern of the market, in part due to a shortage of tradeable
issues and in part due to rumors of investment in Treasury securities
by the oil-producing countries and Federal Keserve purchases of
agency issues on July 17. As the .end of July approached, expectations
of increased foreign activity declined, and after testimony by Chairman Stein of the Council of Economic Advisers and Chairman Burns
of the Federal Keserve Board, pessimism increased, resulting in increased Treasury yields at the time of the August announcement of
refunding $4.3 billion in notes held by the public maturing on August 15.
The refunding called for the auction of $2.25 billion of 9 percent
33-month notes, $1.75 billion of 9 percent 6-year notes, and $400 million
of 81/^ percent bonds due in 1994-1999. In addition, the Treasury indicated that it would raise new cash by increasing the amount of weekly
bill offerings or by issuing other obligations having a maturity of 1
year or less to help raise $3.5 billion to cover Treasury needs through
early September.
The announcement of the offering of the short- and intermediateterm 9 percent notes, the reopening of the 81^ percent 1994-1999 bonds



Offerings of marketable Treasury securities excluding refunding of regular bills,
fiscal 1975
[In millions of dollars]


Apr. 1
Aug. 15
Aug. 15
Aug. 15
Sept. 30
Oct. 1
Nov. 6
Nov. 15
Nov. 15
Nov. 15
Dec. 31


Cash offerings
For new For remoney funding

Allotted to
and Gov't




l y percent note, Apr. 1,1979 »
9 percent note, May 15,1977
9 percent note, Aug. 15,1980
s y percent bond. May 15,1994^99.
s y percent note, Sept. 30,1976
l y percent note, Oct. 1,1979 i
714 percent note. May 15,1979
7 y percent note, Nov. 15,1977
7% percent note, Nov. 15,1981
s y percent bond. May 15,1994-99.
7}4. percent note, Dec. 31,1976




1 .




1 .




Jan. 7
Jan. 9
Feb. 18
Feb. 18
Feb. 18
Mar. 3 .
Mar. 3
Mar. 19
Mar. 25
Mar. 31
Apr. 1
Apr. 7
Apr. 8
Apr. 30
May 15
May 15
May 15
May 27
June 6
June 30

7 y percent note. May 15,1979
8 percent note. Mar. 31,1976
7H percent note. May 15,1978
7H percent note. Feb. 15,1981
7Y8 percent bond, Feb. 15, 1995-2000..
5% percent note, Aug. 31,1976
6 percent note, Feb. 28,1977
7% percent note, Nov. 15,1981
6 percent note. May 31,1976.
6M percent note. Mar. 31,1977
l y percent note, Apr. 1,1980 ^
s y percent bond, May 15,1990
7Y8 percent note, Nov. 30,1976
7Y8 percent note, Apr. 30,1977
7% percent note, Aug. 15,1978
8 percent note. May 15,1982
s y percent bond. May 15, 2000-05
6% percent note. May 31,1977
%y percent note, Oct. 31,1976..
63^ percent note,- June 30,1977
Total notes and bonds

756 .
1,662 .
1,665 .
1,580 .
2,576 .
2,007 .






2 .

61,130 .



Change in offerings of regular bills:
Total change in regular bills..



Aug. 7 . . .
Dec. 3 . . .
Dec. 5 . . .

Sept. 4 . . .
Nov. 4..^
Apr. 14..

5,727 .
10,023 .



Tax anticipation bill offerings:
9.656 percent, 44-day, maturing
Sept. 20,1974
7.426 percent, 134-day, maturing
Apr. 16,1975
7.521 percent, 194-day, maturing
June 17,1975
Total tax anticipation offerings..

July 30..

3,639 .
5,727 .
10,023 .

Other bill offerings:
8.049 percent, 244-day, maturing
Mar. 30,1975 (FFB)
9.767 percent, 299-day, maturing
June 30,1975
7.933 percent, 227-day, maturing
June 19,1975

1,526 .

1,526 .

2,251 .

2,251 .

1,256 .

1,256 .



1,501 .

1,501 .

2,003 .

2,003 .

1,501 .

1,501 .

6.560 percent, 292-day, maturing
Jan. 31,1976

1,585 .

1,585 .

Total other bill offerings.

6,590 .

6,590 .

Total offerings




»Issued in exchange for 2% percent Treasury bonds, investment series B-1975-80.

94,718 .




to be sold in a regular auction, and the probable raising of additional
September cash by means of bill issues elicited further price declines,
although the auctions of the securities the following week were fairly
I n particular, small investor demand for the 9 percent notes was
substantial; over 50 percent of the 33-month notes and almost 50 percent of the 6-year notes were sold noncompetitively for a total of $2.2
billion. This was the largest subscription by small investors to note
auctions since the Treasury began using the auction technique regularly. Moreover, the availability of the notes in $1,000 minimum accepted denominations as well,as the 9 percent coupon helped attract
small investors and was mainly responsible for the 8.59 percent and
8.75 percent average yields, respectively, on the 33-month and 6-year
notes. The bond sold at an average yield of 8.63 percent, reflecting
relatively less small investor participation.
Profit-taking on the issues was not significant during the week of
the auctions and prices actually moved higher shortly afterwards.
Following the August financing the Treasury prepared to meet its
needs for early September. On August 20, a $2 billion offering of 299day bills was announced, the auction to be held on the 28th. Market
reception of the announcement was dull, since the bills added to a heavy
calendar of bill financing. Bill rates rose steadily to the end of the
week, and the weekly bill auction on Monday, August 26 averaged 9.91
and 9.93 percent on a bank discount basis for the 3-month and 6-month
issues, respectively.
However, following that the market began to turn around, partly
based on a belief that Federal Keserve policy was beginning to ease.
As a result the 299-day bills, even without tax and loan credit, sold
fairly well, averaging 9.77 percent on a bank discount basis.
A slight easing of Federal Keserve monetary policy and expectations
of further easing resulted in a strong market for Government securities during the week prior to the Treasury's September 16 financing
announcement. Demand, largely from dealers, was especially strong
for shorter issues.
On September 16, the Treasury announced a refunding of the 2-year
notes maturing September 30, 1974, consisting of $2.0 billion in new.
2-year notes to be sold by cash auction. An innovation to the usual procedure was introduced by requiring all bids to be stated in yields rather
than prices. Bids were then arranged and notes awarded in ascending
order of yield, with the coupon later set close to the average so as to
avoid difficulties arising from the tax treatment of capital gains. The
minimum denomination was set at $10,000 to discourage disintermediation from thrift institutions.
The auction on September 24 was successful, as over $3.2 billion



was bid. The average yield of 8.39 percent was consistent with the
trading yields on outstanding issues of similar maturity and as a result
of the bidding, a coupon of 8l^ percent was set. About 20 percent of
the issue was awarded to private investors on a noncompetitive basis.
After a summer of record high interest rates, pressures in the financial markets eased in September and rates declined, especially in the
short-term sectors. The effective rate on Federal funds averaged 11.34
percent, 67 ba^is points below the August level and substantially below
the record high of 12.92 percent reached in July. Kates on 3-month certificates of deposit in the secondary market fell about 1 percentage
point to the 10%-11 percent range. Likewise rates on 90-119 day
commercial paper declined from 12 percent at the end of August to
10% percent at the end of September. However, the most dramatic
fall in short rates was in the Treasury securities market, where rates
on Treasury bills declined about 135 to 325 basis points over the month.
Yields on Treasury coupon securities also declined with long-term interest rates edging down only slightly. I n October, however, interest
rates on Government securities were mixed with yields on notes and
bonds falling while some Treasury bill rates increased. However, virtually all other interest rates fell in October.
During the week preceding the Treasury's October 16 announcement
of a new cash financing, the market for Treasury coupon securities had
remained fairly stable, while bill rates moved higher, as continued
prospects for monetary ease by the Federal Keserve were partly offset
by an expectation of heavy Treasury financing needs in the near future.
The financing consisted of a double offering, $1.0 billion of 41^-year
notes to be sold using the new yield auction technique and $1.5 billion
of 227-day bills. No tax and loan account privileges were allowed in
purchasing the securities, and the June 19 bills were cash management
bills rather than tax anticipation bills.
The note was auctioned on October 23, 1974. The average yield
was 7.89 percent; as a result of this the coupon was set at 7% percent.
Dealers took about 32 percent of the issue, while another 20 percient
was accounted for by noncompetitive bids. Despite the lack of tax and
loan account privileges, bank demand was fairly strong.
I n the week following the auction, dealers distributed about $185
million of their allotments, and the bid price for the 4i/^-year note fell
by about 7/32.
Bill rates moved higher during the week as investors prepared to
absorb the new issue of 227-day bills on top of the regular bill issues,
and an additional $200 million of 52-week bills. The higher rates
brought out new investors and, as a result, the October 29 auction of
the 227-day bills went well.



The average yield was 7.93 percent. Dealers were awarded $862 million. After some initial hesitancy occasioned by the announced size of
the November financing, the market moved to absorb the bills.
For the November financing the Treasury announced its plans to
refund $4.3 billion of privately held notes and bonds maturing November 15 as well as to raise $550 million in new cash. The yieldauction method was to be used to sell $2.5 billion of 3-year notes and
$1.75 billion of 7-year, notes, while $600 million of 8i/^ percent bonds
due in 1999 was to be auctioned on a price basis. The minimum denomination on the 3-year notes was set at $5,000 in order to reduce pressures
on the thrift institutions, while the minimum denomination was $1,000
for the other securities. The Treasury also indicated that it would need
to raise an additional $4.5 billion of new cash by mid-December.
The firm tone in securities markets evoked an eager response to the
Treasury's refunding, which took place November 6, 7, and 8. All three
securities were well covered^ with the response to the reopened 81/^
percent bonds of 1999 being particularly strong. Despite the larger
issue size of $600 million, more than $1,800 million of bids were received, underscoring the fact that favorable market conditions make
good coverage possible for even a relatively large amount of a longterm issue. The $2.5 billion of 7% percent notes of 1977 attracted $4.3
billion of tenders, while the $1.75 billion of 7% percent notes of 1981
drew $3.3 billion in tenders. Average issuing rafes for the 3-year notes
was 7.85 percent, for the 7-year note 7.82 percent, and for the boiid
at maturity 8.21 percent.
To raise the $4.5 billion in new cash to meet Treasury needs through
mid-December, the Treasury relied on tax anticipation bills and a bill
strip. Prior to the November 14, 1974, announcement, the tone of the
bill market was firm. Expectations of interest rajte declines and seasonal increases in reserve outweighed the impact of increased supply^
although yields increased moderately in the short-end of the market
subsequent to the announcement.
On November 20, the Treasury auctioned $2.25 billion in April tax
anticipation bills. Bidding was brisk and the average fate of 7*43
percent was slightly below levels on outstanding April maturities.
Dealers took $1.5 billion of the issue; noncompetitive bidders, $22.7
Subsequently, the mood of the market changed and dealers began
to reduce their inventories. Bidding for the $1 billion strip bill ($200
million additional for each weekly series maturing December 12
through January 9) was weaker. The average yield was 7.527 percent and dealers accounted for most of the issue, some $874 million.
Noncompetitive awards accounted for only $1.3 million.



The $1.25 billion of June tax anticipation bills auctioned on November 26, 1974, yielded an average of 7.521 percent, slightly above
rates on outstanding June issues. Dealers accounted for about $638
million of the issue, with noncompetitive tenders accounting for another $25 million.
The terms of both the April and June tax anticipation bill sales were
unusual in that banks were not permitted to pay for bill purchases by
crediting their Treasury tax and loan accounts.
I n December most short rates fell, although this trend was interrupted at times. The Federal funds rate fell to its lowest level since
early in the year, and Treasury bill rates declined. I n its third weekly
bill auction in December, the Treasury did not raise any new cash for
the first time in 10 weeks. Coupon financing during the month consisted of two auctions, one for $2.0 billion in 2-year notes and the other
on December 30 of $1.25 billion in additional 7% percent notes maituring in May 1979. Proceeds from the sales were to be used to redeem $1.9
billion of publicly held 2-year notes maturing December 31 and to
provide additional cash.
The December 13 announcement for the refunding of the 2-year
notes placed the auction on December 23. The auction was on a yield
basis and resulted in an average yield of 7.32 percent with a coupon of
71/4 percent. The amount sold was $2.3 billion which raised $0.2 billion
in new cash.
During the week preceding the Treasury's December 20 announcement of a new cash financing, yields had been declining, in response
to the gloomy repoits about the economy and the belief that a further
relaxation of monetary policy was a possibility. However, the market weakened on the announcement since participants had not expected the financing to be through the issue of coupon securities.
The financing was to raise cash to meet the Treasury's needs prior
to the January tax payments. The total amount raised was $2.0 billion through an additional $1.25 billion of the 7% percent notes
of May 15, 1979, and an additional $0.75 billion of the 8 percent
notes of March 31, 1976. The auctions were held on December 30,
1974, and January 2, 1975, respectively. Bidding was on the conventional price basis, and in neither case could credit to tax and loan
accounts be used.
The Treasury accepted $1.25 billion of the $1.8 billion in tenders for
the 4-year 4-month 7% percent note at an average yield of 7^33 percent. The auction on January 2 for the 15-month notes resulted in
$0.75 billion of accepted tenders at an average yield of 7.24 percent.
Excluding the $1.25 billion of new cash raised through the auction



of additional amounts of the 7% P^i^cent notes of May 1979, the Treasury raised $16.8 billion of new money in the first half of fiscal 1975.
Just over $2.1 billion was in coupon issues and $14.7 in bills, including
tax anticipation bills issued and redeemed in the first quarter of the
fiscal year.
The Treasury securities markets had continued their improvement
from the low point in the summer of 1974 through the end of the year.
However, with unemployment rising sharply and production falling,
the administration introduced proposals for a cut in income taxes.
The proposal was for rebates on individual income tax, based on 1974
taxes, and increases in the investment tax credit for business. This led .
to projections of increased budget deficits and Treasury marketing of
new securities, and some unsettling of these markets. Fears were expressed that the Treasury would "crowd out" from the credit markets
other borrowers and stall any economic recovery.
Through the first 6 months of 1975 the Treasury raised $33.5 billion
in net new money in marketable securities, of which $25.5 billion, or
76.2 percent, was in issues of 2 years or less.
The Federal Keserve Board contributed to a less stringent monetary policy by lowering the discount rate on January 10, to 714 percent,
and again on February 5, to 7 percent for the third successive lowering
since December 9 when it was at an 8-percent level. Bank reserve requirements on demand deposits of over $400 million were lowered to
161/2 percent from 171/2 percent on February 13,1975.
The initial details of the Treasury's February financing were announced January 22, 1975. Three securities were offered that would
raise $5.5 billion from the public, to retire $3.55 billion of issues maturing on February 15, 1975. The refunding consisted of $3.0 billion
of a 3-year 3-month note maturing May 15, 1978, $1.75 billion of a
6-year note due February 15, 1981, and $0.75 billion of a bond due in
30 years on February 15, 2000, with call privileges after 25 years.
The 3-year 3-month notes were auctioned on January 28 at an
average yield of 7.21 percent with a 71/8 percent coupon. Tenders for
the $3.0 billion issue amounted to $6.4 billion of which $0.6 billion
were noncompetitive. The 6-year notes were auctioned January 29
with an average yield of 7.49 percent with a coupon of 7% percent.
Tenders for the $1.75 billion issue amounted to $4.2 billion of which
$0.2 billion were noncompetitive. The 25-year Treasury bonds were
auctioned January 30 with an average yield of 7.95 percent with a
7% percent coupon.
Immediately prior to the announcement of the terms of the February
refunding, the market had been cautious in view of worries over the
potential size of the Treasury financing. However, immediately prior



to the announcement the Federal Keserve Board reduced the reserve
requirements for commercial banks, which led to bill rates falling substantially, and coupon issues taking on a firm undertone.
Immediately after the announcement, prices of Treasury bills improved, short-term coupon issues were steady, and there were modestly
lower prices on longer term bonds. Generally, the refunding package
was thought to be manageable.
On February 11, the Treasury announced the auction of $3 billion
in notes to the public to be held February 19, $1.5 billion in 18-month
notes due August 31,1976, and $1.5 billion in 2-year notes due February
28, 1977. The auction for the 18-month notes resulted in $2.8 billion
of tenders for.the $1.5 billion offered. The average yield was 5.94
percent with a 5% percent coupon. The 2-year notes had $3 billion
in tenders for the $1.5 billion offered. The issue had a 6 percent coupon
and an average issue yield of 6.09 percent.
The market prior to the auction had been more constructive, as
economic statistics continued to validate expectations of a downtrend
in interest rates, and an accommodative posture from the Federal
Keserve, to revive the growth in the monetary aggregates. The auction
drew a good response from professionals, and investor demand came
particularly from bank investors. Dealers took $657 million and $578
million of the issues, respectively.
After the auction. Treasury bill rates continued to decline and the
price of intermediate and longer term issues edged higher.
On March 4, the Treasury announced the sale of up to $3.5 billion
in notes to the public, in two issues, one of which was a reopening
of an existing issue. An additional amount of $1.75 billion of the
7% percent notes due November 1981 was announced, along with the
issue of $1.5 billion in a new issue due May 31, 1976. Payment for the
notes was not allowed to be made through tax and loan accounts.
The minimum denomination of issue for the 6-year 8-month notes
was $1,000, and for the 14-month notes $5,000.
The sale of the 6-year 8-month notes was made March 11^ when they
sold for an average yield of 7.51 percent, and a 7.5 percent coupon.
Bidding for the issue was active, and $3.4 billion of tenders were
received. On March 31, the 14-month notes were sold with a coupon of
6 percent, ahd an average yield of 5.98 percent, with tenders received
of $2.9 billion.
Prior to the announcement of the auction, prices of short and
intermediate issues had shown modest gains. Sentiment was cautious
due to large supplies, but the continuing fall in the prime rate helped
steady the market. The Federal Keserve lowering of the discount
rate prior to the auction was largely anticipated by participants and
although there was concern that monetary policy was not easy enough.



good demand was received for both notes. After the auction, trading
subsided since the investor demand was largely satisfied by the auction,
and fears of new supplies caused prices to drift lower.
On March 12, a further announcement was made to auction $3.45
billion in notes and bonds to the public. The offering consisted of
$2.2 billion in 2-year notes due March 31, 1977, and $1.25 billion in
15-year bonds due May 15, 1990. The auctions occurred on March 18
and 20, respectively.
The results of the 2-year notes was a disappointing $2.6 million in
tenders, refiecting investor concern at the volume of new issues coming
to market. The coupon on the bond was set at 6/2 percent with an
average yield of 6.51 percent. The market remained cautious in front
of the auction of the 15-year bonds, but the lower prices drew better
bidding interest than had been expected. Tenders amounted to $2.9
billion, and the issue sold at an 8i/i percent coupon and an average
yield of 8.37 percent.
After the auction, sentiment remained discouraged by the large
supplies of new Treasury issues that would have to be sold in the
market and coupon securities resumed their downward price bias.
However, the 814 percent was fairly priced so that during the first
week of when-issued trading, the issue was able to rise in price by
i%4 over the average price at the auction. At the same time, dealers
were able to reduce their holdings of the issue from $591 million to $161
On March 25, the Treasury announced the auction to the public on
April 1 of up to $1.5 billion in 20-month notes maturing November 30,
The market for Treasury issues continued to deteriorate prior to
the auction, in the face of continuing large-scale financing needs in
both the government and the corporate bond markets. Dealers already
had large inventories, and in the face of the evidence that the recessionary forces were weakening there was increased reluctance to add
to these stocks. Investors tended to concentrate their demands on
shorter maturities, but the large buildup of supply in this range led
to the greatest weakness in this maturity range.
The Treasury received $3.8 billion in tenders for the $1.5 billion
offered. The issue was sold with a 71/3 percent coupon and an average
yield of 7.15 percent.
On March 31, the Treasury announced its intention to raise $1.5 billion in new cash with the sale of 292-day bills to mature January 31,
1976. The bills were placed in a 2-year note cycle slot, and they will
be refunded eventually with such a note.
The bills were auctioned April 8, 1975, at an average yield of 6.95
percent with $1.5 billion being sold to the public, and $85 million



additional to Federal Keserve banks, acting both for themselves and
as agents, for iforeign official institutions, and Government accounts.
On April 9, the Treasury announced the sale on April 15 of $1.5
billion in 2-year notes to the public, due on April 30,1977.
Prior to the announcement the securities market had been steadying as investor demand increased, brought about by the higher yields.
But confidence remained fragile since investors worried that the possible turnaround in the economy would drive yields even higher.
However, the respite in new coupon financing over the last half of
April helped distribute recent offerings. The threat of "crowding
out" caused by the large Federal budget deficits remained a problem,
Immediately prior to the auction, however, the coupon markets
took on a firm undertone as investors were attracted to the higher
yields prevailing. An excellent demand was evident for the 2-year
notes which attracted $4.1 billion in tenders. The average yield Vvas
7.43 percent on a 7% percent coupon.
The auction had a favorable impact on sentiment and good demand
was evident in the secondary market, and the issue tracied •%2 above
the average issue price the first day of when-issued trading.
The prices of Treasury coupon securities fluctuated sideways,feefore^
the announcement of the May refunding package, as market participants attempted to weigh the various options open to the Treasury.
As more corporations feared that they would be crowded out of the
market by the large Federal deficits if they waited, they announced
their own new financings. Consequently, prices in both corporate and
Treasury coupon securities retreated in the face of prospective large
new supplies.
The refunding package was announced May 1. The Treasury stated
its intention to sell $5.0 billion of new issues to the public, which would
retire $3.8 billion of maturing issues and raise $1.2 billion in new
money. The money would be raised by selling $2.75 billion in 3-year
3-month notes due August 15, 1978, $1.50 billion in 7-year notes due
May 15, 1982, and $0.75 billion in 30-year bonds due May 15, 2005,
callable at the option of the United States on or after May 15, 2000.
The 3l^-year note was sold with a minimum size of $5,000, and the
other two issues had a minimum size of $1,000. Payment could not be
made through tax and loan accounts.
The 314-year note resulted in $5.3 billion in tenders for an average
yield of 7.70 percent with a 7% percent coupon. Competitive tenders
of $3.9 billion were received for the 7-year note, which was sold at
par with an 8 percent coupon. The 30-year bonds received $1.8 billion
in tenders, and were sold with an 8i/4 percent coupon at an average
yield of 8.30 percent.



The response to the refunding package was heartening to the
markets, as investors took note of further accommodation from the
Federal Keserve. Dealers took $378 million of the $750 million of the
30-year bond sold to the public, as they sought to rebuild their long
maturity inventories. By the end of the first week of when-issued
trading, the long bond had moved 7/64 above its average issue price.
Dealers reduced their holdings during this time by $180 million to
$199 million.
On May 8, the Treasury announced the sale of $1.5 billion of 2-year
notes, to the public, due May 31,1977. The auction occurred on May 14
and $3.4 billion of tenders were received. The coupon was set at
6% percent to sell the bonds at an average yield of 6.86 percent.
On May 15, the sale of $1.5 billion of 17-month notes, due October 31, 1976, to the public was announced. The auction occurred on
May 22, for issue on June 6, and the issue was sold with a 6i/^ percent
coupon, at an average yield of 6.54 percent. Total tenders received
amounted to $2.6 billion.
Immediately after the auction announcement the Federal Keserve
lowered the discount rate, and the market for Treasurys improved.
This was bolstered by a falling prime rate, and evidence that the infiation rate was continuing to wane. The 6i/^ percent notes went to a
premium almost immediately in when-issued trading. Other coupon
securities were firm, on the evidence that Treasury borrowing requirements in June and July would be slightly lower than originally projected.
On June 11, the sale of $2.0 billion in 2-year notes to the public, due
June 30, 1977, was announced for June 17. This note was part of the
Treasury's policy of selling a 2-year note to mature at the end of each
month. The new note replaces a 299-day bill issued for the same
amount in September 1974.
Prior to the auction announcement the prices of coupon securities
had been rising steadily, on a continued improvement in wholesale
prices, and other data that suggested the rebound in the economy
was going more slowly than had been expected. Additionally, evidence
that Treasury's borrowing requirements were less than expected led
to increased demand from banks for short and intermediate securities.
The auction resulted in only $2.6 billion in tenders, accepted at the
average yield of 6.61 percent, with a 61^ percent coupon.
The relatively poor response to the offering caused some nervousness
in the market, and a cautious atmosphere prevailed. Prices of all
maturity ranges were lower, including the new 2-year note down
i%4 on its first day's trading.
On June 18, the Treasury announced that $9.4 billion of new cash
would have to be raised through mid-August, and on June 25, it would
auction $1.75 billion of new 4-year notes due June 30,1979.



Disposition of marketable Treasury securities excluding regular bills, fiscal 1976
[In millions of dollars]

Date of
retirement •

Description and maturing date

Issue date

for cash or
carried to

for new
is,sue at



Aug. 15
Sept. 30
Oct. 1
Nov. 15
Nov. 15
Dec. 31

bYs percent note, Aug. 15,1974
6 percent note, Sept. 30,1974..
l y percent note, Oct. 1,1974
5% percent note. Nov. 15,1974
ZYs percent bond, Nov. 15,1974
Ws percent note, Dec. 31,1974

Aug. 15,1968..
Oct. 19,1972..
Oct. 1,1969....
Nov. 15,1967..
Dec. 2,1957...
Dec. 28,1972..

42 .


Feb. 15
Feb. 15
Apr. 1 . .
May 15
May 15

b y percent note, Feb. 15,1975
bYs percent note, Feb. 15,1975
l y percent note, Apr. 1,1975
6 percent note. May 15,1975
5Ys percent note, May 15,1975

Feb. 15,1968..
Oct. 22,1971..
Apr. 1,1970...
May 15,1968..
Apr. 3,1972...



Total coupon securities









Sept. 20..

Tax anticipation:
9.655 percent

Aug. 7,1974.



Apr. 16.Junel7..

7.426 percent
7.520 percent.

Dec. 3,1974.
Dec. 5,1974.







Total tax anticipation bills
Mar. 31.
June 19.
June 30.

8.049 percent (Federal Financing July 30,1974..
7.933 percent (227-day)
Nov. 4,1974..
9.767 percent (299-day)
Sept. 4,1974..
Total other bills..
Total securities...








The market was nervous in front of the auction in the face of action
by the Federal Keserve to reduce the growth of the monetary aggregates within their previously specified limits. Prices of securities retreated enough that the auction received $5.4 billion in tenders, and
the notes were sold with a 7% percent coupon, at an average yield of
7.83 percent.
Federal Financing Bank
The Federal Financing Bank (FFB) was created December 29,
1973, to assure the coordination of Federal and federally assisted borrowings from the public and to assure that such borrowings are
financed in 'a manner least disruptive of private financial markets
and institutions.
The bank has become the vehicle through which most Federal agencies finance their programs involving the sale or placement of credit
market instruments, including agency securities, guaranteed obligations, participation agreements, and the sale of assets. The major exceptions to date are the title X I ship mortgage bonds, the federally
 - 5
588-395 O - 75



guaranteed tax-exempt housing and urban renewal notes and bonds,
and the Government National Mortgage Association asset sales.
During fiscal 1975, the F F B made approximately 150 loans and
advances totaling $15.8 billion to Federal agencies and federally guaranteed borrowers. I n the absence of the bank, the m'ajority of borrowers
would have issued their obligations in the market at a cost significantly
higher than that charged by the F F B .
At the first meeting of the Board of Directors of the bank on
May 23, 1974, the Board approved a policy of borrowing from the
Treasury Department on an interim basis. These borrowings were to
be periodically repaid by the sale of F F B securities in the market.
On July 23, 1974, the bank auctioned $1.5 billion of 244-day Federal
Financing Bank bills dated July 30, which matured on March 31,
1975. The cost of this borrowing by the F F B was somewhat greater
than the cost to the Treasury of similar borrowings. Therefore, it was
decided by the Board of Directors on June 5, 1975, that rather than
using the Treasury as an interim lender and the market as a permanent
source of funds, the bank would borrow all funds from the Treasury
Department matching the terms and conditions of its borrowings from
the Treasury with the terms and conditions of its loans. The bank is
currently lending funds at a rate % of one percent above the new issue
rate of marketable U.S. Treasury securities of similar terms and
Federal Financing Bank loans outstanding
[In millions of dollars]


Farmers Home Administration
General Services Administration
Department of Defense—foreign military sales
Department of Health, Education, and Welfare (medical facilities loan program)
Department of Housing and Urban Development (New Communities Administration)
Export-Import Bank of the United States
National Railroad Passenger Corporation (Amtrak)
Overseas Private Investment Corporation
Postal Service
Rural Electrification Administration
Small business investment companies
Student Loan Marketing Association
Tennessee Valley Authority
U.S. Railway Association
Washington Metropolitan Area Transit Authority (WMATA)

240. 0
33. 9
177. 0

The General Counsel, the chief law officer of the Department, is
appointed by the President, by and with the advice and consent of the
Senate, pursuant to an act of Congress approved May 10, 1934. The



General Counsel supervises the Legal Division and has responsibility
for all legal work in the Department. The principal and most important
role of the General Counsel is to serve as a senior legal and policy
adviser to the Secretary and other senior Treasury officials. As legal
adviser to the Secretary, the activities include consideration of legal
problems relating to broad policy aspects of management of the public
debt, administration of internal revenue and tariff laws, international
cooperation in the monetary and financial fields, law enforcement affairs, and similar activities.
Activities related to legal matters arising in connection with duties
and functions of Treasury operations include responsibility for: General legal advice wherever needed. Treasury litigation, preparing the
Department's legislative program and comments to Congress on pending legislation, reviewing the Department's regulations for legal sufficiency, and counseling the Department on conflict of interest and
ethical matters. The General Counsel also has the responsibility for
hearing appeals to the Secretary from certain decisions of bureau
heads or other officials.
All legal counsels of the Department and their staffs are part of the
Legal Division. The Chief Counsel for the Internal Kevenue Service,
Tax Legislative Counsel, and the Chief Counsel for the Comptroller
of the Currency report directly to the General Counsel. Chief Counsels
and individual attorneys of other bureaus report to him through an
Assistant General Counsel and the Deputy General Counsel. I n addition, the General Counsel supervises the Office of the Director of

To improve service to client bureaus and offices, the General Counsel
reorganized the Legal Division in January 1975. The General Counsel
issued and published a series of orders delegating authority to the
Deputy General Counsel, the Assistant General Counsels, and the
Chief Counsels. In these orders the responsibilities of Assistant General
Counsels were redefined and the reporting requirements for the Chief
Counsels and Legal Counsels of operating bureaus were made definite.
The responsibilities of Assistant General Counsels are defined so that
each organizational unit within the Office of the Secretary has a specific
Assistant General Counsel assigned to provide the unit with legal services. The Tax Legislative Counsel was designated an Assistant General
During fiscal 1975, the Legal Division participated in the drafting of
a number of legislative proposals. Among the more significant were:
The Office of the General Counsel in collaboration with other inter-



ested Federal agencies prepared the proposed Financial Institutions
Act of 1975, which is designed to reform and strengthen the financial
system to provide more competitive and efficient service to the public.^
The proposal was introduced in the 94th Congress as S. 1267, H.K.
5291, H.K. 5618, and H.K. 5619.
The Office of Chief Counsel of the Office of Kevenue Sharing and
attorneys in the immediate office of the General Counsel drafted proposed legislation to extend the State and Local Fiscal Assistance Act
of 1972, which was submitted to the Congress by the President and
introduced in the 94th Congress as S. 1625, H.R. 6558, H.K. 8244,
H.K. 8245, and H.K. 8246.
The Office of Chief Counsel of Customs participated in drafting the
proposed Customs Modernization Act of 1975, which was transmitted
to the Senate and the House in May 1975.
The Office of the Assistant General Counsel for International Affairs
participated in drafting a number of bills affecting international
financial relations. They include the Financial Support Fund Act,
introduced as S. 1907 and H.K. 8175; a bill to provide for the participation of the United States in the African Development Fund, introduced as S. 1512, H.K. 6241, H.K. 6937, and H.K. 8033; and a bill to
provide for the entry of nonregional countries, and the Bahamas and
Guyana, into the Inter-American Development Bank.

I n addition to the many routine legal opinions given by the General
Counsel and other Legal Division officials in the day-to-day transactions of the Department's business, the General Counsel, from time
to time, issues formal opinions on significant legal issues.
I n one such opinion the General Counsel took the position that
payments under the revenue sharing law to recipient State and local
governments do not provide a basis for application of the Hatch Act
because such payments should not be considered grants. This view was
affirmed in | an opinion by the Assistant Attorney General, Office of
'Legal Counsel, in a memorandum to the General Counsel dated
April 28,1975.
Another opinion involved preliminary procedures leading toward
issuance of Presidential Proclamation 4341 in February 1975, which
imposed a $l-per-barrel tax upon imported petroleum. The General
Counsel concluded that the Secretary had discretion to dispense with
public hearings before reporting to the President his determination of
the effect on the national security of the importation of petroleum, if
the Secretary decided such hearings were unnecessary.
1 See exhibits 10 and 12.




The Legal Division is responsible for formulating the Department's
position on litigation involving Treasury activities and for working
with the Department of Justice in the preparation of litigation reports,
pleadings, trial and appellate briefs and assisting in trying all cases
in which the Department is involved. There are many thousands of
individual cases arising out of Treasury activities pending in the U.S.
Customs Court, the U.S. Tax Court, and other Federal courts. Only a
few of the more significant cases can be mentioned here.
I n Sparrow et al. v. Goodman et al. the Director of the Secret Service
and 10 agents, along with other defendants, were sued because of certain actions allegedly taken in connection with a Presidential visit to
Charlotte, N.C. I n May of 1975, after many months of pretrial activity
and a trial lasting 2 weeks, the case against the Director and the Secret
Service agents was dismissed with the plaintiffs' agreement.
I n Robinson v. Simon the District Court for the District of Columbia issued an injunction in December 1974 prohibiting the payment of revenue sharing funds to the city of Chicago on the basis of
a preliminary finding that the city's police department was not in compliance with the nondiscrimination provisions of the revenue sharing
law. I n January 1975, the case was transferred to the district court
in Chicago for a trial on the substantive issues. The injunction against
the Department remained in effect.
I n Yoshida v. United States the U.S. Customs Court held that Presidential Proclamation 4074, which imposed a 10-percent additional
duty on most imported articles, was invalid because it exceeded the authority delegated to the President. The Government's appeal was argued on June 2, 1975, before the U.S. Court of Customs and Patent
I n February 1975, the District Court for the District of Columbia
denied a motion for preliminary injunction requested by several
Northeastern States to prohibit the implementation of Proclamation 4341, which imposed certain additional taxes on imported petroleum and petroleum products. This decision permitted the President
to go forward expeditiously with his energy conservation program.
What may be a significant trend in customs litigation developed
during the year. Domestic manufacturing interests sought injunctive
and other relief in several district courts in certain customs matters,
principally in four cases involving the countervailing duty and antidumping fields. The Government took the position that the statute
vesting "exclusive jurisdiction" in the U.S. Customs Court barred these
actions in the district courts. That position was rejected in these cases
and the Government has appealed the one case which was not mooted
by passage of the Trade Act of 1974.




I n November 1974, amendments to the Freedom of Information Act
(Public Law 93-502) were enacted which, among other things, required executive departments to provide a single set of general rules
governing access to information in its constituent units. The Office
of the General Counsel had the responsibility for preparing the
Treasury-wide regulations. Treasury operating bureaus revised their
disclosure regulations, supplementing the general departmental issuance. On February 18,1975, the Treasury regulations became effective
and included detailed procedures for submitting requests for information, appeal procedures if a request is denied in whole or in part, and
standardized fees for records searches.
The Office has responsibility for preparing proposed regulations
to implement the Privacy Act of 1974. The proposed regulations
will identify systems of records on individuals and proposed procedures for access and correction of such records by the individuals.
The Office of the Chief Counsel, Alcohol, Tobacco and Firearms,
assisted in drafting two notices of proposed rule making issued by
A T F which would have broad impact and have received widespread
publicity. One would require that alcoholic beverage labels include
information on the ingredients of the beverage; the other would
standardize beverage container sizes on the basis of metric measurements.
Privacy Committee
I n July 1974, the Deputy General Counsel represented the Secretary
at the first formal meeting of the Domestic Council Committee on the
Kight of Privacy. Of particular interest is the fact that the Deputy
General Counsel was the only non-Presidential appointee to attend
as a departmental representative at this Cabinet-level meeting. The
Treasury's Privacy Committee, on which all constituent units of the
Department are represented, worked during the year on several Committee projects dealing with the right of privacy of individuals and
freedom of information.

Six operating bureaus of the Department of the Treasury are supervised by the Assistant Secretary (Enforcement, Operations, and Tariff
Affairs), who is assisted by three deputies and three staff offices (Offices
of Law Enforcement, Operations, and Tariff Affairs). The bureaus
are Customs Service, Engraving and Printing, Mint, Secret Service,
Consolidated Federal Law Enforcement Training Center, and Alcohol,
Tobacco and Firearms. The policies and operations of the Office of



Foreign Assets Control are also directed by the Assistant Secretary,
and the enforcement aspects of the responsibilities of the Internal
Kevenue Service receive his review and coordination. I n addition, the
Assistant Secretary acts as the principal adviser to the Secretary on
all law enforcement matters under the jurisdiction of the Treasury.
Law Enforcement and Operations
The Deputy Assistant Secretary (Operations), with the assistance
of the Director, Office of Operations, exercised general line supervision, as delegated, over all bureau activities, with special attention
to cost-effective design and execution of programs, assignment of appropriate resources, efficiency of management, coordination of programs within Treasury and with other departments, review of senior
personnel appointments, and monitoring of management information
The Deputy Assistant Secretary (Enforcement) continued the ongoing development and review of the policies and programs of Treasury law enforcement activities. Particular attention was directed to
improved management; development of new strategic concepts; coordination among bureaus; coordination of Treasury's contributions to
interdepartmental law enforcement efforts; and interaction of programs and strategy with other departments, agencies, and governments.
Special concern was focused on the numerous legislative proposals
related to gun control, privacy, information systems, and intelligence
activities. The oversight by this office encompassed the enforcement
activities of the Secret Service, the Bureau of Alcohol, Tobacco and
Firearms, the Consolidated Federal Law Enforcement Training Center, and the Interpol National Central Bureau.
Antinarcotics program
Treasury continued a high level of antinarcotics activities. The
Department participated in activities of the Cabinet Committee on
International Narcotics Control, evaluating the cost-effectiveness of
foreign assistance programs and stressing the leverage of customs-tocustoms programs which trained over 1,300 foreign customs officials
in 40 countries to enhance their own border control and revenue collection capabilities.
Customs Service seizures of narcotics at U.S. ports and borders
exceeded those of all other Federal agencies, with over 21,000 seizures
representing a "street value" of over $678 million. Customs mobile
tactical interdiction units, located in strategic areas, continued to
make heavy inroads on narcotics-smuggling activity from Mexico, the
present major source of narcotics destined for the United States. A
record seizure of 37,785 pounds of marijuana was made in Arizona



in September 1974, with the arrest of four persons. Detector dog
teams, increased to 105, compiled an impressive drug detection record.
The Internal Kevenue Service continued the narcotics trafficker
program, which has achieved significant results against narcotics
traffickers known or suspected to be in violation of Federal income tax
Cargo security program
I n furtherance of Executive Order 11836 of January 29, 1975,
Treasury continued its collaboration with the Department of Transportation, other departments and agencies, and the transportation industry in suppressing theft of cargo. The Customs Service, with its
unique physical presence of Federal officers at all points where international cargo arrives and is stored awaiting clearance, extended and
intensified its cargo security program. Customs surveys of terminal
and transport deficiencies resulted in expenditures by industry for
improvements in security measures of over $9 million.
Customs closed nearly 1,300 cargo theft cases, with 232 arrests and
seizures valued at approximately $1 million.
I n September 1974, an audit team formed from various bureaus and
GAO examined the gold stored at the U.S. Bullion Depository, Fort
Knox, Ky., and reported that their inventory agreed with the Depository's records. I n the same month an extraordinary event took place
at the Fort Knox Depository when a congressional delegation and
over 100 news media representatives visited the gold vaults to view
the U.S. gold reserves there.
The Mint deposited $668.2 million into the general fund of the
Treasury, principally from seigniorage. Over 13 billion domestic coins
were produced in fiscal 1975, exceeding the previous year by nearly 3
During the last half of the fiscal year the Mint produced over 250
million of the newly designed Bicentennial dollar, 50-cent, and 25cent coins to be distributed after July 4,1975.
Productivity was improved by acquisition of 12 four-strike coin
presses and 4 improved upset mills, and implementation of a standard
coinage die and coin press tooling program.
Engraving and printing
Through a unique lease-purchase financing arrangement, without
contingent termination liability, the Bureau of Engraving and Printing let contracts for six high-speed intaglio printing presses and six
currency overprinting and processing machines. Estimated annual
savings in currency production costs from complete utilization of this
equipment is $3 million.



The Bureau also began installation of two modern web presses and
a sheet-fed offset press for printing multicolor postage stamps and
acquired equipment for completely mechanizing the manufacture of
stamps in book form.
The Bureau installed shredding and baling equipment for processing
mutilated currency and recycling it to the paper manufacturer, eliminating an incinerator which caused unacceptable air pollution.
During fiscal 1975, 616,040 visitors took the tour of engraving and
printing operations.
Customs services

The Customs Service collected a record $4.5 billion in duties and
taxes, processed over $100 billion worth of imported goods, and cleared
246 million arriving persons, 75 million vehicles, 353,000 aircraft, and
123,000 vessels.
Customs placed special emphasis on an expanded program of fraud
investigation, which produced a 42-percent increase in revenue recoveries and penalties, the detection of false manifesting of containerized cargo, the development of high-security seals for in-bound shipments, advancement of its automated merchandise processing system,
and its major role in the international programs of the Customs Cooperation Council and in bringing into force on June 13, 1975, the
American-German Mutual Customs Assistance Agreement.
Treasury transmitted to Congress in May 1975 a Customs modernization and simplification bill which would eliminate many archaic
provisions of the customs laws and enable Customs to adopt modern
business methods in processing persons and merchandise.
Customs completed the consolidation of all of its headquarters elements into one permanent Federal building at 1301 Constitution Avenue, NW. The Customs National Training Center was relocated from
Hof stra University in New York to the Georgetown area of Washington, D . C , and renamed the "U.S. Customs Service Academy."
Protective responsibilities

During fiscal 1975, the Secret Service provided protection for President Ford, Mrs. Ford, and their four children; Vice President Rockefeller, Mrs. Rockefeller, and Nelson, J r . ; former President Nixon;
John F . Kennedy, J r . ; and former First Ladies, Mrs. Truman, Mrs.
Eisenhower, Mrs. Johnson, and Mrs. Nixon.
The Secret Service also had the responsibility of protecting Secretary of State Kissinger (on a reimbursable basis) ; Secretary Simon;
and House Speaker Carl Albert during the period Vice President
Rockefeller was being selected and confirmed. I n addition, the Secret
Service protected 132 visiting foreign dignitaries.
On December 27, 1974, President Ford signed Public Law 93-552,



amending 18 U.S.C. 3056, to authorize protection by the Secret Service
of members of the immediate family of the Vice President, unless
declined. I n addition, this bill designated the former residence of the
Chief of Naval Operations, located on the grounds of the U.S. Naval
Observatory, as the temporary residence of the Vice President.
The Executive Protective Service provided protection for the White
House, buildings having Presidential offices, and 127 foreign diplomatic missions located at 300 locations in the metropolitan area of the
District of Columbia. Protection was afforded at Presidential directive on a case-by-case basis for foreign diplomatic missions located
in other areas of the United States.
Treasury enforcement communications system (TECS)

The Treasury enforcement communications system provided direct
communication capability between the constituent Treasury law enforcement groups, which include the U.S. Customs Service, the Bureau
of Alcohol, Tobacco and Firearms, and the Intelligence and Security
Divisions of the Internal Kevenue Service. I n addition to having
access to the commonly indexed Treasury law enforcement information, other necessary law enforcement information was available
through the F B I National Crime Information Center and through
interface with the national law enforcement teletype system.
Inquiries processed through T E C S furnished 21,232 pieces of positive information, which resulted in 717 arrests.
The speed with which millions of T E C S transactions were processed
was enhanced during fiscal 1975 by the installation, testing, and acceptance of a new B7700 computer and other modern hardware components. The new equipment not only permitted the addition of more
terminals consonant with the expanding workload, but also provided a
response time approximately eight times faster. One hundred new
terminals brought the total on line to over 500.
Counterfeiters in fiscal 1975 produced approximately $48 million
iil counterfeit U.S. currency, up 127 percent from fiscal 1974.
While fiscal 1975 losses to the public rose to $3.6 million, from $2.4
million in fiscal 1974 (up 49 percent), the Secret Service seized over
$45 million of the counterfeiters' total output before it reached
Organized crime

Treasury agencies continued their major role in the Federal Government's joint strike force program, which is coordinated by representatives of the Department of Justice, in 17 major cities throughout the United States. The I K S and other Treasury bureaus account



for almost half of the manpower involved and a large number of the
convictions obtained.
I n addition. Treasury took action against organized crime through:
The antinarcotics border interdiction activities of Customs; the I K S
narcotics trafficker program; actions against major counterfeiting
and bond forgery operations by the Secret Service; the cargo security
program of Customs; and the attack on armed and dangerous offenders. Project Identification (to trace weapons used in crimes), and the
suppression of illegal use of firearms and explosives by the Bureau
of Alcohol, Tobacco and Firearms.

As a member of the Cabinet Committee to Combat Terrorism, the
Treasury, through the Office of the Secretary, participated in the
President's continuing program to thwart international terrorism.
Contributing to the development and review of emergency procedures
for dealing with terrorist incidents were the U.S. Secret Service, the
U.S. Customs Service, and the Bureau of Alcohol, Tobacco and
Financial recordkeeping

The Assistant Secretary (Enforcement, Operations, and Tariff Affairs) administers Treasury's Financial Recordkeeping and Reporting
Regulations, which were issued in 1972 as part 103, 31 CFR. The regulations require banks and other financial institutions to maintain basic
records needed for the investigation of many tax, regulatory, and
criminal matters. I n addition to the recordkeeping, the regulations
also require reports of the ownership of foreign bank accounts by all
U.S. persons, reports of unusual domestic currency transactions, and
reports of the international transportation of monetary instruments.
The regulations implement Public Law 91-508.
Several Federal agencies have been delegated responsibility for
assuring compliance with the regulations under the general oversight
of the Assistant Secretary. I n addition to the Federal bank supervisory
agencies, the Securities and Exchange Commission, the Federal Home
Loan Bank Board, the National Credit Union Administration, the
Internal Revenue Service, and the U.S. Customs Service have enforcement responsibilities.
During fiscal 1975, 15,000 banks, 10,000 credit unions, and 3,500
savings and loans were examined for compliance with the regulations.
Twenty thousand reports of large currency transactions were filed
with the Intemal Revenue Service and 30,000 reports of the intemational transportation of monetary instruments were filed with the
U.S. Customs Service.



Firearms and explosives control programs
The Gun Control Act of 1968 provides the basis for programs of
the Bureau of Alcohol, Tobacco and Firearms ( A T F ) aimed at preventing the illegal possession and use of firearms by criminals and
would-be criminals. A T F special agents also provided assistance to
State and local law enforcement groups in their fight against crime
and violence.
I n discharging its responsibilities under title X I of the Organized
Crime Control Act of 1970, which regulates explosives, A T F concentrated on curbing the acquisition and misuse of explosives by criminals.
Most criminal investigations within this program involved actual or
attempted bombings followed by investigations of the thefts of
Under the provisions of the National Firearms Act, certain types of
firearms, including machineguns, sawed-off shotguns, and silencers,
have been subject to Federal registration since 1934. Certain other
weapons, including destructive devices, are also subject to registration.
A T F maintained the National Firearms Registration and Transfer
Record, which is the control file for these weapons. Persons found in
possession of unregistered weapons were prosecuted.
The National Firearms Tracing Center traces firearms from the
manufacturer or the importer through the wholesaler and the retailer
to the purchaser at the first retail level sale. During fiscal 1975, 34,622
traces were requested, 53 percent (or 18,476 traces) by State or local
Project I (for "identification") was launched in 1973 to determine
the sources of guns used in crimes in selected metropolitan areas and
to develop nationwide flow patterns of types of handguns used in
criminal activities. During fiscal 1975, the third phase of the project
was completed. Statistical analysis showed that, of 2,452 weapons
traced, 29 percent were in the cheaply made "Saturday Night Special"
category. Approximately 30 percent of all crime guns were purchased
in a State other than the one in which they were used.
The interstate firearms theft program, initiated during fiscal 1974,
was designed to eliminate theft from firearm shipments as a source
of weapons for criminal elements. During fiscal 1975, 687 reports of
lost or stolen firearms were received, reflecting losses of an aggregate
of approximately 3,500 weapons. Of this total, approximately 110
weapons were recovered by special agents and 13 criminal cases were
developed against 27 individuals. Loss reports fell from an average
of 75 per month to 57 per month.
The international traffic in arms program was initiated to cope
with the continuing illegal intemational gunrunning activities which



originate within the United States. Firearms, ammunition, and explosives illegally exported frequently are acquired within the United
States in direct violation of the Gun Control Act of 1968 and title X I
of the Organized Crime Control Act of 1970. Utilizing licensing and
inspection authority, A T F sought to curtail this illegal acquisition
and exportation.
Explosives investigations continued to receive high priority during
fiscal 1975, due to the potential threat to public safety. During this
year A T F prepared for prosecution 139 cases relating to explosives
violations and arrested 182 individuals. Special agents seized 61,711
pounds of explosives and 516 destructive devices.
During fiscal 1975, A T F significantly increased compliance inspections of dealers in firearms and explosives.
On June 19,1975, President Ford included in his message on crime
to Congress an order for A T F to expand its investigative efforts in
the 10 largest metropolitan areas. The President directed that A T F
employ and train an additional 500 investigators for this priority

I n fiscal 1975 assistance by the U.S. National Central Bureau of
the International Criminal Police Organization (Interpol) to local.
State, and Federal law enforcement agencies in the United States
and to foreign law enforcement agencies in handling criminal investigations continued to increase. This was primarily the result of
expanded efforts by the Bureau to publicize the assistance Interpol
can provide. The increased workload necessitated assignment of an
additional special agent and an additional clerical employee.
On January 1, 1975, the Bureau commenced full utilization of
T E C S . Since Interpol in the United States neither initiates investigations nor presents criminal cases for prosecutions, it is important
that information received concerning international crime be disseminated to the appropriate U.S. law enforcement agencies as soon as
possible. The use of T E C S makes this information more readily and
rapidly accessible.
During the fiscal year, the United States made a one-time, nonrecurring, voluntary contribution of $135,000 to Interpol from foreign
assistance funds for international narcotics control administered by
the Department of State. The funds are being used to establish and
support one Interpol liaison officer in the F a r East and one in South
America. Their mission is to assist in international coordination of
drug enforcement operations. This same program has operated in
Europe for several years; because of its success, the number of Interpol liaison officers in Europe was increased from three to five.



In September 1974, Treasury led the U.S. delegation to the 43d
Interpol General Assembly in Cannes, France. The General Assembly
adopted substantive resolutions on privacy of information, safeguarding of international civil aviation, cooperation with immigration
departments, traffic in heroin, cocaine, cannabis and its derivatives,
and exchange of information internationally with regard to firearms,
explosives, and ammunition purchased by aliens.
During the General Assembly, Director H. Stuart Knight, U.S.
Secret Service, was elected to the Executive Committee of Interpol
as a representative from the Americas.
Treasury also participated in Interpol symposiums on fraud, illicit
traffic in stolen motor vehicles, taking of hostages, illegal narcotics,
the Caribbean Conference, and the Manila Conference. ^
On May 30, 1975, the U.S. National Central Bureau was awarded
the Presidential Management Improvement Certificate "For Excellence in Improvement of Government Operations."
Tariff Aifairs
The Office of Tariff Affairs directs the administration of the Antidumping Act and countervailing duty law. These statutes serve as
remedies for domestic industries against the unfair trade practices
of their foreign competitors. The office sets policies and reviews the
actions of the Customs Service under these statutes as well as under
other tariff and customs laws in general.
In addition, the office has responsibility for conducting investigations and making recommendations with respect to the effects of
imported articles on the national security, pursuant to section 232 of
the Trade Expansion Act of 1962.
The activity of the office in administering the countervailing duty
law has dramatically increased in the past year. While in previous
years actions were taken in only a handful of cases, during the week
of June 30, 1975, alone. Treasury issued 15 preliminary determinations. This increased activity is attributable principally to amendments to the statute made by the Trade Act of 1974 coupled with
renewed efforts to administer the law in a manner consistent with the
legislative intent.^
During fiscal 1975, Treasury issued five final countervailing duty
decisions. In three, countervailing duties were imposed: Nonrubber
footwear from Spain, nonrubber footwear from Brazil, and bottled
olives from Spain. In the case of cut flowers from Colombia, there was
a negative decision based on the elimination of the subsidy. In the
, 1 See exhibit 26.



case of dairy products from European Community countries, there was
an affirmative determination coupled with a temporary waiver of
some duties and discontinuance of some subsidies. During the same
period, a total of 32 investigations were initiated, of which 13 were
subsequently terminated, principally because the petitioner withdrew
the complaint. Preliminary determinations were reached on 18 cases,
10 affirmative and 8 negative.
Only 10 antidumping cases were begun in fiscal 1975. This compares
with 27 initiations in fiscal 1973 and 10 in fiscal 1974. The Trade Act
of 1974 made several significant changes to the Antidumping Act.^
I n January 1975, an investigation of the effect of petroleum imports
on the national security was conducted pursuant to section 232 of the
Trade Expansion Act of 1962, as amended. This resulted in a report
by Assistant Secretary David R. Macdonald that the national security
was threatened by the magnitude and circumstances of the importations of crude oil and petroleum products, and a subsequent recommendation by Secretary Simon to the President that action be taken
to reduce such importations.^


During fiscal 1975, the administration's immediate efforts in the
area of tax legislation were focused on the alleviation of inflation,
recession, and unemployment; and on the shortage and rising costs of
energy. Attention was also given to the problems associated with
tax reform and the equity of the Federal tax system.
Tax reform.—By November 1974, the House Ways and Means Committee had completed a detailed examination of the Federal tax system
and had reached tentative decisions about changes in various tax
provisions with a view toward producing a comprehensive tax reform
bill. This examination had begun with the presentation of the Treasury's tax reform proposals on April 30, 1973. The committee's tentative decisions covered a wide area including elimination of many
itemized deductions for individuals and allowance of a simplification
deduction; an increase in the standard deduction; substitution of a
new minimum tax for the present minimum tax on income from items
of tax preference; limitation of deductions for artificial accounting
losses; changes in the taxation of capital gains including the reduction
of tax on gains from property held over 5 years, the elimination of
the alternative tax for individuals, an increase in the length of the
holding period necessary to qualify for long-term capital gains treat1 See exhibit 27.
2 See exhibit 25.



ment, and an increase in the amount of capital losses that may be
deducted against ordinary income; increasing the investment credit
for public utilities; phasing out the percentage depletion allowance
for domestic oil and gas products; tightening the tax treatment of
foreign source income; imposing a windfall profits tax on domestic
oil and gas production; and many other provisions.
Due to the lack of time remaining in the 93d Congress for consideration of a major tax bill, the Ways and Means Committee decided not
to report the comprehensive bill. Instead, Ways and Means reported
out a more limited bill, H.R. 17488, action on which it believed was
still possible by the Congress. The main features of H.R. 17488 provided for a windfall profits tax on, and the phaseout of percentage
depletion for, oil and gas production; extension of certain special
5-year amortization provisions; increases in the percentage standard
deduction and in the minimum and maximum amounts of the standard
deduction; an increase in the investment credit for public utilities;
changes in the taxation of political organizations; and changes in the
tax treatment of foreign source income, including a phaseout of the
earned income exclusion and an end to the per country limitation for
the foreign tax credit. The full House of Representatives, however,
did not take any action on H.R. 17488 before the conclusion of the 93d
On April 1, 1975, the Treasury released a paper showing that the
U.S. ranking in investment and in real economic growth is among the
lowest of industrialized countries. On May 7,1975,^ Secretary Simon
reiterated before the Senate Finance Committee the antisaving, antiinvestment bias of our tax system, pointing out the definite tilt toward
personal and corporate income taxes in the United States reflecting
our preference for immediate consumption over savings and future
investments. H e stressed that the future requirements for capital investment, estimated at over $4 trillion through 1985, indicate that tax
policies should be revamped. I t was announced that in anticipation
of a joint review with the Congress in the coming months of possible
tax reform initiatives, the question of the two-tier system of corporate
taxation, in which income is taxed once at the corporate level and again
at the shareholder level, is under study. I t was pointed out that our
system of taxation bears more heavily on corporations than do the tax
systems of almost every other major industrial nation. Through a
variety of mechanisms, other major countries have largely eliminated
the classical two-tiered system of corporate taxation by integrating
the corporate and individual income taxes. I t was announced that a
Treasury-Joint Committee on Internal Revenue Taxation study of
1 See exhibit 20.



integrating the corporate and personal income taxes will be ready for
congressional consideration after August.
Early in 1975, the Ways and Means Committee was concerned with
the immediate problems of a recession-related tax reduction and with
the energy crisis. However, as fiscal 1975 drew to a close, the committee
announced its intention to begin consideration of tax reform legislation.
Inflation^ unemployment^ recession measures.—In a message to the
Congress on October 8, 1974, the President proposed a 5-percent surcharge on individual and corporate income taxes for 1975 in order to
help control inflation and to pay for unemployment and other spending programs necessary to cushion the economic decline. While the
surtax was to apply to all corporate income tax, it was only to apply
to individual income taxes on incomes of over $15,000 for married
couples and $7,500 for single taxpayers. The message also endorsed
tax relief for lower income persons, mainly through the increase in
the minimum amount of the standard deduction contained in the thenpending tax reform bill.
Included in the Presidential message was a proposal for an increase
in, and a permanent restructuring of, the investment tax credit. The
credit was to be increased permanently from 7 to 10 percent for all
industries, and from 4 to 10 percent for utilities. The proposed changes
called for elimination of the limitations based on useful life so that all
property with a life in excess of 3 years would qualify for the full
credit. The proposal also would have replaced the limit on the maximum credit which may be claimed with eventual full refundability
for the excess of credits over tax liability. The purpose of making the
credit refundable was to help growing companies with large current
investments relative to their current incomes. It would also have helped
companies in financial difficulties and small businesses which were
more severely affected by the existing restrictions and limitations.^
The changes also required the adjustment of the depreciation base to
make the credit neutral with respect to long-lived and short-lived
To encourage expansion of corporate equity capital and increase
the effectiveness of capital markets, it was proposed that dividends
paid on qualified preferred stock be allowed as a deduction to the payer
In the state of the Union message in January 1975, the President
proposed a 1-year tax reduction to alleviate the effects of the recession,
a temporary increase in the investment credit, the imposition of excise.
1 See exhibit 30.

588-395 0 - 7 5 - 6



import, and windfall profits taxes on oil and gas, and permanent tax
reductions made possible by the revenue from energy-related taxes.^
The income tax reduction for individuals would have consisted of
a temporary reduction based on 1974 tax liabilities, and a permanent
reduction in 1975 and later tax liabilities. The President proposed to
make a cash refund of 12 percent of 1974 individual income tax liabilities but not over $1,000. The refund was to be paid in two equal installments in May and September of 1975. The proposed permanent changes
in the individual income tax consisted of an increase in the minimum
amount of the standard deduction and the alteration of the tax rate
tables. The changes were designed to raise tJie tax-free level of income
above the poverty line. Since the permanent tax changes were largely
intended to compensate individuals for extra taxes on oil and gas
which the President requested in his state of the Union message, a
mechanism was needed to assure that nontaxpayers received equivalent relief. The President suggested that every person 18 years of age
or older who did not pay any income tax or who did not under the
proposal receive at least an $80 reduction in income tax would receive
a cash payment from the Treasury of the lesser of $80 or the shortfall
from $80 of his actual tax reduction.
Instead of the previously proposed permanent restructuring of the
investment tax credit, the state of the Union message recommended a
temporary increase in investment tax credit for 1975 only to 12 percent
(instead of 10 percent) for all taxpayers including utilities. Utilities
would continue to receive a 12-percent credit for 2 additional years
for qualified investment in electrical powerplants other than oil- or
gas-fired facilities. Also, for utilities, the proposal included a temporary increase in the amount of credit which may be used to offset
income in excess of $25,000. Since many utilities have credits they
have been unable to use because of this net income limitation, it was
proposed to allow utilities to use the credit to offset up to 75 percent
of their tax liability for 1975, 70 percent for 1976, 65 percent for 1977
and so on, until 1980 when they would in five annual steps have returned to the 50-percent limitation applicable to industry generally.
The administration also proposed a 1-year reduction in the corporate
tax rate from 48 percent to 42 percent. This reduction would have
applied only to corporate income in excess of $25,000. Additionally, the
October proposal, allowing a preferred stock dividend deduction to
increase incentives for raising needed capital in the form of equity
rather than debt, was resubmitted in the state of the Union message.
Modifications of the President's proposals for an antirecession tax
package were embodied in Public Law 94-12, the Tax Reduction Act
1 See exhibit 29.



of 1975, approved March 29, 1975. The major provisions of the act
A rebate based on 1974 individual income tax liabilities. The rebate
was generally 10 percent of tax liability, but the minimum rebate
was the lesser of $100 or actual tax liability. The maximum amount
of the rebate was $200.
An increase in percentage standard deduction. For 1975 only, the
standard deduction was increased from 15 percent to 16 percent of
adjusted gross income. The minimum amount of the standard deduction was raised from $1,300 to $1,600 for single taxpayers and $1,900
for married couples. The maximum was raised from $2,000 to $2,300
for single taxpayers and $2,600 for married couples.
A tax credit, for 1975 only, of $30 per exemption (except exemptions for age and blindness).
A new refundable earned income credit, again for 1975 only, of
10 percent of the earned income of an eligible individual up to. a
maximum of $400. The credit phases down to zero at $8,000 of
income. To be eligible, an earner must maintain a household in the
United States for a dependent child.
A tax credit for the purchase of a new principal residence during
1975 of 5 percent of the purchase price, with a maximum credit of
$2,000. (These provisions were liberalized in Public Law 94-45,
approved June 30,1975.)
New income tax withholding tables, implemented May 1, 1975,
reducing withholding in conformity with the Tax Reduction Act
of 1975 and increasing take-home pay.
An increase in the investment tax credit to 10 percent for 2 years
(instead of 12 percent for 1 year as proposed by the administration) .
An increase in the corporate surtax exemption from $25,000 to
$50,000 of taxable income for 1975, and a reduction in the tax rate
applicable to the first $25,000 from 22 to 20 percent.
A permanent increase in the accumulated earnings tax credit
from $100,000 to $150,000.
Extension of the W I N program tax credit, to stimulate employment, to welfare recipients hired off welfare rolls (previously limited
to participants in W I N training programs) if employment lasts
at least 1 month, and to nonbusiness employees such as domestics.
Elimination generally of percentage depletion for oil and gas production for majors. A small production exemption was provided
royalty owners and independents.
Certain changes in the taxation of foreign source income. Various
provisions concerning foreign tax haven incomes were strengthened.



The per country limitation for the foreign tax credit for oil and gas
income was repealed. A loss recapture rule was adopted which provides that after 1975, foreign oil income will be treated as U.S.
source income to the extent of any post-1975 oil-related losses.
Energy tax program.—The state of the Union message reintroduced
the windfall profits tax, which has been proposed and supported since
1973, to recover windfall profits resulting from crude oil price decontrol. This was part of a comprehensive energy conservation tax program which the administration asked the Congress to pass, along
with an excise tax on all domestic crude oil and on natural gas and
an import fee on imported crude oil and products.^
Under the proposed windfall profits tax, the base for the depletion
allowance would be reduced by the windfall profits tax. The administration, however, recommended against the elimination of percentage
depletion on oil because it felt that the best way to capture the windfall
profits from domestic oil producers was not through the elimination
of percentage depletion but through a windfall profits tax.
The administration's energy tax program also contained a 15-percent
tax credit for residential conservation to provide incentives to homeowners for making thermal efficiency improvements such as storm windows and insulation in existing homes, to be applicable to the first
$1,000 of expenditures before 1979.
As stated above, the repeal of the percentage depletion allowance for
oil and gas producers was enacted into law in the Tax Reduction Act
of 1975. The Congress version of the energy tax proposals are contained in H.R. 6860 which at the end of fiscal 1975 had been approved
by the House of Representatives and was awaiting Senate action. The
maj or provisions of the bill include:
Import restrictions on oil are embodied in import quotas and in a
Automobile efficiency standards for the use of gasoline are imposed. These standards are to be enforced by civil penalties.
Excise taxes on radial tires and on buses used in intercity public
transportation are repealed.
Tax credits for home insulation and for the installation of solar
energy equipment are provided.
Excise taxes on business use of natural gas and oil are to be phased
in between 1977 and 1982.
The investment tax credit is denied for new electrical generating
equipment burning oil and gas.
1 See exhibit 31.



On June 13,1975, the White House released the Labor-Management
Committee's recommendations for tax and other measures to increase
electric utility construction and output. The proposed measures included an increase in the investment tax credit permanently to 12 percent on all electric utility property except generating facilities fueled
by petroleum products; full and immediate credit on progress payments for construction of property that takes 2 years or more to build,
except generating facilities fueled by petroleum products; tax deferral
for dividends which are reinvested in new issue common stock of
electric utility companies; extension of the fast writeoff of pollution
control facilities; and other incentive measures.
Pension reform,—Public Law 93-406, the Employee Retirement Income Security Act of 1974, was approved on September 2, 1974. Both
the House and the Senate had passed the pension reform bill, H.R. 2,
in fiscal 1974, but conference committee action to resolve differences
between the House and Senate versions was not completed until August
1974. The pension reform legislation incorporates in revised form the
administration's major proposals, made on April 11,1973, for strengthening the private pension system. The law includes: New standards for
participation, vesting, and funding; a new deduction for contributions to individual retirement accounts; portability through rollover;
contributions to plans for self-employed individuals; new fiduciary
standards; and new reporting and disclosure requirements. I t also
establishes a Government system of insuring against loss of benefits
upon termination of pension plans; establishes limits on contributions
and benefits under qualified retirement plans; establishes a declaratory
judgment procedure in the Tax Court relating to qualification of
retirement plans; and provides for a new Assistant Commissioner of
Internal Revenue for Employee Plans and Exempt Organizati(|>ns.
Public Law 93-406 also contains provisions altering the income tstxation of certain lump-sum distributions from qualified retirement knd
profit-sharing plans. Beginning in 1974, the portion of lump-sum |iistributions which represents contributions made after 1973 will be
taxed as if it were ordinary income received over a 10-year period.
However, it will be taxed separately from all other income under the
income tax rate schedule for single taxpayers. All qualifying distributions, regardless of whether they are received by employees or by
self-employed persons under Keogh Act plans, will be taxed in exactly the same manner.
Social security and railroad retirement.—In his tax message to the
Congress on January 15,1975, the President proposed as one measure
to help control infl-ation that the automatic cost-of-living increases for



social security benefits which are normally related to changes in the
Consumer Price Index be limited by legislation to 5 percent for 1975.
The Congress did not take action, and the cost-of-living adjustment
effective in June 1975 provided an 8-percent increase in social security
Public Law 94-12, the Tax Reduction Act of 1975, provided for a
one-time $50 paymentto each person who was entitled to social security,
railroad retirement, or supplemental security income benefits for
March 1975. These payments were made in June 1975.
For 1975, the annual retirement earnings limitation increased from
$2,400 to $2,520. For beneficiaries under 72 years of age, benefits are
reduced by $1 for every $2 of eamings in excess of $2,520. There is
no reduction in benefits for excess earnings for those over age 72.
Unemployment compensation.—^^The unemployment compensation
program is a Federal-State systenTdesigned to provide wage loss compensation to workers who are temporarily unemployed. The basic State
programs generally provide up to 26 weeks of benefits in a year for
covered workers. I n times of high unemployment as defined by State
or National insured unemployment rates, the law provides for up to
13 additional weeks of "extended benefits."
Public Law 93-572, the Emergency Unemployment Compensation
Act of 1974, approved December 31, 1974, provided for an extra 13
weeks of benefits (for a total of 52 weeks) during 1975 and 1976 for
workers who had exhausted their eligibility for regular and extended
benefits. The law also provided 13 weeks of benefits for persons who
were not covered under the regular unemployment compensation program. The conditions under which States could pay extended benefits
were also liberalized.
The Tax Reduction Act of 1975 increased the third tier of unemployment benefits provided by the Emergency Unemployment Compensation Act of 1974 from 13 weeks to 26 weeks for unemployment occurring
through June 1975. Thus, the act increased the maximum period for
which unemployment compensation benefits could be paid from 52
weeks to 65 weeks.
Public Law 94-45, the Emergency Compensation and Special Unemployment Assistance Extension Act of 1975, approved June 30, 1975,
extends the 65-week benefit period through December 1975 on a
National basis and through March 1977 on a State-by-State basis,
if rates of insured unemplojnnent within a State exceed certain levels.
Excise taxes.—Under the terms of previously enacted legislation,
the tax on communications services was reduced from 8 percent to 7
percent as of January 1, 1975, the tax of 0.53 cents a pound on sugar
manufactured in the United States terminated on July 1, 1975, and a



tax of ^11 percent on manufacturers' sales of bows and arrows became
effective elanuary 1,1975.
Public Law 93-490, approved October 26, 1974, repealed as of
October 27,1974, the excise tax on filled cheese and the annual occupational tax on manufacturers and dealers. I t also increased the amoimt
of carbon dioxide that may be contained in still wines.
Public Law 93-499, approved October 29,1974, reduced as of December 1, 1974, the excise tax on wagers from 10 percent to 2 percent and
increased the annual occupational tax from $50 to $500.
I n the President's message to the Congress of November 26,1974, on
budget restraint, he included proposals with respect to user charges
for the airways and waterways. The airways proposal involved a tax
of $5 or $10 to be paid by aircraft engaged in noncommercial aviation
upon departure from an airport having a Federal Aviation Administration control tower. The waterways user charge system combined a
$10 lockage fee for pleasure boats with a ton-mile charge for cargo
units which would vary with operation and maintenance costs for
designated segments of the inland waterways.
The March 17,1975, message to the Congress of the President transmitting legislation to restructure the airport and airway development
programs included a revised user charge proposal for noncommercial
aviation. Instead of the previously recommended departure tax, the
President proposed to raise the tax on fuel used in noncommercial aviation from 7 to 15 cents a gallon for the period July 1, 1975, through
September 30,1978, and then to reduce it to 10 cents a gallon.
Other legislation.—Public Law 93-499 provides that the decarbonation of trona is to be considered as an ordinary treatment process for
purposes of computing the percentage depletion allowance for trona.
The effect is to allow percentage depletion on trona based on the value
of soda ash extracted from it.
Public Law 93-597, approved January 2, 1975, resolves certain
income tax problems of military and civilian prisoners of war and the
families of those individuals who were listed as missing in action and
who it was subsequently determined had died at an earlier time, particularly with respect to their combat pay exclusion and eligibility to
file joint income tax returns.
Public Law 93-625, approved January 3,1975, contained a series of
amendments to the Internal Revenue Code, including a 1-year extension of the 5-year amortization provisions for rehabilitation of lowand moderate-income housing, pollution control facilities, coal mine
safety equipment, and railroad rolling stock; taxation of the investment income of political organizations; taxation of gifts of appreciated
property to political organizations; increases in the tax deduction or



credit for political contributions; and increases in the interest rate
the Government collects or pays on tax deficiencies or overpayments.
There were several laws which altered or removed import tariffs
from specific classes of merchandise.
Administration, interpretation, and clarification of tax laws

The Department of the Treasury, during fiscal 1975, issued 33 final
regulations, 13 temporary regulations, and 31 notices of proposed rule
making relating to matters other than alcohol, tobacco, and firearms
taxes. I n addition, there were 9 final regulations and 15 notices of
proposed rule making relating to alcohol, tobacco, and firearms taxes.
Seven of the temporary regulations and five of the notices of proposed
rule making were issued under the Employee Retirement Income
Security Act of 1974. Among the subjects dealt with in these regulations and proposed regulations were: Stock dividends, lump-sum distributions from pension plans, individual retirement accounts, H.R.
10 (Keogh Act) plans, social security taxes, industrial development
bonds, alternative capital gains tax, estate and gift tax charitable
deductions, charitable deductions of trusts and estates, child care
deductions, disability pay, foreign tax credits, and domestic international sales corporations (DISC's).
DISC report

Pursuant to the Revenue Act of 1971, the Treasury submitted to the
Congress its second annual report on the operation and effect of the
D I S C legislation. The report covered fiscal 1973.
Tax treaties

Bilateral income tax treaties with Poland and Iceland were signed
on October 8,1974, and May 7,1975. Both treaties have been submitted
to the Senate for approval. An income tax treaty with Israel was
initialed on May 13, 1975, income tax treaties with Kenya, Indonesia,
and the Republic of China (Taiwan) are approaching completion,
and tax treaty discussions with India have been initiated. Negotiations
and technical discussions on income tax treaties were conducted with
Canada, the United Kingdom, Botswana, Egypt, Iran, Malaysia,
Malta, the Philippines, and Singapore.
Participation in international organizations

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, including the working
party on the taxation of multinational corporations.
Treasury representatives attended the annual general assembly of
the Inter-American Center of Tax Administrators ( C I A T ) .



T r a d e and Raw Materials Policy
Fiscal 1975 was a year of new and complex challenges in the area
of international trade—a year marked by extensive consultations and
efforts among developed and developing countries, market and nonmarket economies to cooperate in addressing the major issues confronting the international community. The continued strong impact of
sharply increased energy prices on the economies of nations worldwide
contributed to what appeared to be a sudden surge of new concerns:
Balance of payments problems compounded by economic recession,
consequent pressures to impose trade or current account restrictions,
calls for a new economic order of greater benefit to the developing
countries, efforts to form new producer cartels for individual commodities, and—of some concern to the United States in particular
and not related to the energy situation—^the failure of the U.S.U.S.S.R. trade agreement to enter into effect due to congressional restraints on the normalization of relations.
The challenge of protectionism, the challenge of the developing
countries and of commodity issues, and the challenge of potential setbacks to East-West trade all called for a positive, creative U.S. response
consonant with the significance of these problems to national economic
interests. During the year the Treasury played an active role in all
of these areas, participating constructively in international consultations in an effort to maintain and improve a liberal international trading environment conducive to the more efficient use of natural resources, while recognizing the special needs of the developing countries
and the special requirements of trading with nonmarket economy
Response to protectionism
During fiscal 1975, countries with serious balance of payments problems due in large part to the increased price of oil and, increasingly,
those with sharply rising domestic unemployment have been under
strong pressure to impose trade or current account restrictions to improve their situation. Unfortunately, suOh actions have an adverse
impact on others in the international economic community and run a
serious risk of increasing worldwide economic difficulties for all.
The danger of a proliferation of import or other current account
restrictions became more acute during the fiscal year as individual
developed countries began to adopt restraints. This occurred in spite
of the adherence of all OECD (Organization for Economic Cooperation and Development) member countries to a trade pledge, signed



in May 1974, to refrain from such restrictions for balance of paiyments
reasons. Several different types of measures became a matter of concern: Import deposit schemes; export infiation insurance programs
with a clear subsidy element; tariff, quota, and tariff-quota restrictions
on imports ostensibly taken to protect domestic industries from | threatened unemployment; and import surcharges introduced for balance
of payments or budgetary purposes.
All of these actions potentially violated the spirit if not thp letter
of the OECD trade pledge, and agreement to renew the pledge was
considered vital to avoid a proliferation of restraints for balance of
payments or other reasons as countries moved into deepening recession.
I n response to these problems, the Treasury improved methods of
consultation on restrictive trade or current account measures in the
OECD, discussed these issues in the G A T T (General Agreement on
Tariffs and Trade) Council, and referred certain troublesome issues
to specialized groups of the multilateral trade negotiations. I n May
1975, the United States and other OECD countries (except Portugal)
renewed the trade pledge for a second year, stressing the importance
of combating inflation while maintaining a high level of employment
and expansion of world trade.
The Trade Act of 1974
Of major significance to longer term efforts to prevent the inter-,
national community from slipping backwards into protectionism.
Treasury worked closely with Congress in developing and securing
passage of the Trade Act of 1974, which will enable the United States
to join others in the multilateral trade negotiations in negotiating
positive improvements in the international trading system through
reduced tariff and nontariff barriers and new understandings on other
major trade problems.
Under the new legislation, the President has the authority to enter
into negotiations to harmonize, reduce, and eliminate existing barriers
to trade; he has been given a mandate to revise internationall trade
rules, including the GATT, to assure supply access to raw materials
and other products as well as to recognize the right of countries to
impose import surcharges to correct balance of payments deficits; and
he can impose import surcharges or quotas, if international agreements
permit, or lower tariffs or loosen existing quotas to deal with fundamental international payments problems.
The act also recognizes specifically the need to expand trade with
nonmarket countries as well as developing countries. I n the case of
nonmarket economy countries, certain preconditions must be met
before most-favored-nation treatment, credits, and guarantees can be
extended. As for developing countries, the United States is now in a



position to improve trade relations with these countries by providing
preferences to them by allowing duty-free treatment for certain of
their products.
While recognizing the benefits of liberalized trade. Congress a,lso
noted that there will undoubtedly be a period of adjustment for certain
U.S. industries and workers. As such, the act loosens the previous
stiff requirements for industries which need temporary relief. I n addition, a new concept of trade adjustment assistance for communities
has been introduced.
Commodities and the developing countries

Through a variety of producer organizations in copper, bauxite,
iron ore, rubber, mercury, and bananas, less developed countries
(LDC's) have been trying to stabilize commodity prices, assert
greater control over their natural resources, and increase their income
at the expense of developed country consumers. Thus far, most of
producer organizations outside of the Organization of Petroleum Exporting Countries ( O P E C ) have been ineffective either in increasing
consumption of their commodities or in raising their prices. Four
members of the International Bauxite Association (Jamaica,
Surinam, Haiti, and the Dominican Republic) have increased their
revenues by requiring foreign aluminum companies to pay a production tax ranging from 7/2 to 10 percent. Two producer associations—
the Union of Banana Exporting Countries and the Association of
Natural Rubber Producing Countries—have been seriously considering
forming intemational agreements with consumers as a means of
achieving the commodity price stability which they have not accomplished by themselves.
Unable to emulate OPEC's success, most LDC's have sought to
increase their trade revenues and their infiuence over the world economic system through diplomatic action in international fora where
they have demanded preferential, nondiscriminatory, and nonreciprocal access to foreign markets for their exports; regulation of commodity markets through integrated commodity agreements; indexation of commodity prices to the prices of manufactured goods; and
the right to nationalize foreign property without compensation or
recourse to intemational law.
Third World countries have been presenting their demands with
increased militancy since Algerian President Boumedienne proposed
and the U.N. General Assembly adopted the "Declaration and Program of Action for a New International Economic Order" in May
1974 at the Sixth U.N. Special Session despite U.S. objections.
Although the United States is investigating means of LDC's
ameliorating some of the commodity problems, the United States has



opposed the creation of the proposed new international economic order
on the grounds that the indexation of commodity prices, the nationalization of property without fair compensation, and the maintenance of
artificially high prices through cartel activity would diminish economic growth in both the developing and the developed world. The
essentially open trading system, including free markets for commodity
trade, has not failed. On the contrary, the efficient allocation of resources made possible by the market system has improved the living
standards of all the world's people.
The policy of the United States toward commodity trade has been
characterized for many years by a preference for noninterference in
the market, combined with a willingness to entertain propos^als for
commodity arrangements on a case-by-case basis. Treasury officials are
now coordinating and participating in an interagency task force review and reexamination of U.S. commodity policy that was called for
by the Economic Policy Board on February 25, 1975.
Although the review of U.S. commodity policy has not yet been
completed, a number of firm conclusions have already been reached.
First, it is believed that cooperative efforts between producejrs and
consumers, developing and developed nations, can yield constructive solutions in stabilizing excessive commodity price fluctuations,
strengthening commodity markets, increasing investment in natural
resources, and promoting the growth of the less developed world.
Second, while excessive price fluctuations are costly to both consumers and producers, price fluctuations per se are part of the realities
of the marketplace, and the functioning of the market should not be
distorted in the interest of shortrun price stability. Third, the solution
to commodity problems does not lie in establishing high fixedl prices
and attempting to maintain their value through indexation to the
prices of manufactured products. The appropriate solutions will vary
depending on the commodity being considered. I t is for this reason
that the United States has rejected the concept of a broad-scale commodity agreement in favor of a case-by-case approach to the problems
of specific commodities. Finally, the study concluded that joint efforts
between consumers and producers are the appropriate meansj in all
cases, of coping with specific commodity problems. Such efforts should
be aimed at improving the market-oriented system of commodity trade.
Unilateral actions and any generalized system of commodity agreements aimed at fixing prices should be resisted.
On the basis of these conclusions, a number of general action proposals have been formulated. The United States has agreed to an
overall review of existing mechanisms aimed at stabilizing the export
earnings of developing countries that are exporters of raw materials.



However, since production, consumption, transport, and investment
for each commodity differ, the United States has insisted that this
review be conducted on a case-by-case basis. I n addition, the United
States has proposed a strengthening of the compensatory financing
facility in the International Monetary Fund as an aid to LDC's
experiencing an unexpected shortfall in export eamings, and has proposed an increase in the resources of the World Bank available for
resource-related projects in conjunction with private management,
skills, and capital. Finally, the United States has been working in the
form of the multilateral trade negotiations in Geneva to reach agreement on market access and supply access.
Another area of international concern and discussion has been with
the problem of world food security arising from the short supply situation in grains. I n the past, world food supplies were assured by
the excess grain stocks unilaterally held by the major grain exporters,
particularly the United States. However, world stocks are now at
unusually low levels. This concern about the precariousness of the
basic food supply situation led the United States to propose that the
major grain importing and exporting countries negotiate an internationally coordinated system of nationally held grain reserves. Such
a system would be designed to offset serious global shor^tfalls in production. I t would also encourage expanded and liberalized trade in
grains. Discussions on this subject have taken place in London in
the framework of the International Wheat Council and in Geneva
in the Sub-Group on Grains of the multilateral trade negotiations.
East-West trade

Progress in the development of U.S. commercial relations with
Communist states continued in fiscal 1975, despite the legislative
restrictions on the normalizatiqn of East-West trade relations contained in title I V of the Trad^; Act of 1974 and the Export-Import
Bank legislation of 1974. The total turnover on U.S. trade with Communist countries in 1974, at $31,^ billion, was over five times the 1971
level, yielding a substantial favorable contribution to U.S. exports,
employment, and the balance oi payments.
The United States-Romanian trade agreement, the first agreement
negotiated under the provisions of the Trade Act of 1974, was signed
on April 2, 1975, in Bucharest, and submitted to the Congress for
approval.^ The agreement includes provisions for the extension of
most-favored-nation tariff treatment, for business facilitation, for procedures for dispute settlement, for the protection of industrial property rights, and for safeguards against disruption of U.S. markets.
Activities directed towards the further development of the insti1 See exhibit 35.



tutional framework for the normalization of East-West trade increased during fiscal 1975 and produced significant accomplishments.
Secretary Simon, as honorary co-Director, led the U.S. delegation to
Moscow for the second meeting of the Board of Directors of the
U.S.-U.S.S.R. Trade and Economic Council in October 1974. Assistant
Secretary Parsky headed the U.S. delegation to the first meeting of
the Working Group of Experts of the Joint U.S.-U.S.S.R. Commercial Commission held in Moscow in February 1975. I n April 1975,
Secretary Simon, as U.S. Commission Chairman, traveled to Moscow
for the fifth session of the Joint U.S.-U.S.S.R. Commercial Commission. Both Governments expressed regret that it had not been possible
to bring the 1972 U.S.-U.S.S.R. trade agreement into force and reaffirmed their determination to remove the barriers which currently
prevent the full development of trade. Trade legislation enacted during
the fiscal year, which restricts the extension of U.S. Government
credits and most-favored-nation tariff treatment to the Soviet Union,
has impaired the competitive position of U.S. firms relative to foreign
competitors during the period when the Soviet Union is negotiating
major contracts for the 1976-80 plan.
On March 27,1975, the President established the East-West Foreign
Trade Board as required by title I V of the Trade Act of 1974. The
Board, which subsumes the functions of the President's Committee on
East-West Trade Policy, is responsible for ensuring that U.S. trade
with nonmarket economy countries is conducted in the national interest, with particular regard to the export of vital technology and the
extension of credits by Government agencies. Secretary Simon was
appointed Chairman of the Board and Assistant Secretary Parsky
was designated Executive Secretary.
Multilateral trade negotiations

The multilateral trade negotiations (MTN) provide the opportunity
to governments to renew their commitments to a more open world
trading system.
Participating in the trade talks are 90 countries accounting for
nine-tenths of world trade.
The aims of the negotiations were defined in a meeting of ministers
in Tokyo in September 1973 as (a) the expansion and liberalization
of world trade and the improvement of the standard of living and
welfare of people of the world, and (b) the securing of additional
benefits for the international trade of developing countries. The Tokyo
Round is more comprehensive and ambitious than previous trade negotiations in that it reaches beyond the traditional negotiating tasks of
reducing tariff and nontariff barriers to encompass the institutional
and procedural requirements for reform of the trading framework.



Substantive negotiations were initiated in February 1975, marked
by a meeting of the intergovernmental Trade Negotiations Committee, which oversees the negotiations.
Negotiations have been structured according to major functional
areas—tariffs, nontariff measures, safeguards, and sectors; in addition,
groups were established for agriculture and for tropical products.
Each of the six groups was charged with organizing a work program
for the appropriate negotiating area.
I n the tariffs area, a number of proposed tariff formulae have been
tabled for discussion and various issues aired. U.S. commitment to a
tariff-cutting formula will be possible after public hearings and consultations with the private sector have been completed, which is expected in fiscal 1976.
The nontariff measures group established subgroups on customs
matters, quantitative restrictions, standards, and subsidies and countervailing duties.
The agriculture group focused initial attention on procedural matters. Subgroups for grains, dairy products, and meat—all areas of
particular importance in world trade—have been established. A major
task of U.S. negotiators in the field of agriculture will be to obtain
improved market access for U.S. farm products.
Tropical products, an area of particular interest to the developing
countries, has been designated as a special and priority area of the
negotiaitions. Work in this area has progressed beyond that of any
other group and has proceeded to the traditional item-by-item negotiating process. The developing countries would like to achieve concrete results in this area by the end of calendar 1975.
Work on the sectors approach to negotiations and on safeguards is
at the exploratory stage.
A formal group was not established on supply access issues during
fiscal 1975, but it is anticipated that these matters will be taken up
within the existing structure in conjunction with work on related trade
issues. I n view of its importance to the United States, close attention will be given to the work being carried out in this area.
Law of the Sea
Treasury continued to participate in the interagency Law of the
Sea Task Force and was represented in this year's U.N. Law of the
Sea Conference, held from March 17 to May 10 in Geneva, Switzerland. Treasury seeks to assure that any treaty resulting from the conference will protect U.S. economic interests, guarantee U.S. right of
access to the oceans' resources, and encourage their efficient development. These resources include fish and other protein sources, the



hydrocarbon reserves on the continental shelves and margins, and
the manganese nodules located on the deep seabed.
Over 100 developing countries participated in the conference and
presented policy positions that clearly reflect their goal to create a
new international order for the recovery of the deep seabed minerals.
These developing countries called for a strong international organization that would be given broad powers to coordinate seabed production with land-based producers, and determine the conditions under
which the deep seabed could be mined. A single negotiating text
emerged from the session and reflected many of the objectives of the
developing countries; however, it is not a final negotiated text. Another
session is scheduled for early spring 1976. Meanwhile Congress is
considering legislation that would change international ocean laws by
a unilateral as opposed to a multilateral treaty initiative.
Energy Policy
The abrupt end of the era of cheap energy brought about serious
problems for the United States and for other consuming nations.
The energy crisis has had four separate dimensions: First, the threat
to national security from a potential embargo; second, worldwide inflation from rapid escalation in energy prices; third, the threat to
the stability of the international financial system from the payments
imbalance between OPEC and the oil-consuming countries; and fourth,
the threat of recession following from the readjustment required by
the energy shortage and the first three factors.
To deal with such grave problems without either disruptive change
or government coercion was a major U.S. concern. To reduce the Nation's dependence on oil imports required a reduction of energy demand growth and an increase of domestic supply. To import less, the
administration determined that the United States commit more of its
labor, capital, and technological resources to producing energy—develop a national program to solve our short- and long-term energy
problems. Developing such a program became one of the top national
priorities, calling forth the best talents and creative energies of govemment, private industry, the scientific community, and the public.
The challenge was to establish a program to encourage accelerated
development of new supplies and to restrain domestic demand without adversely affecting the economy or causing disruptive social
In the analytical process of reaching these goals, the administration
explored many alternatives. By a skillful integration of both the energy and economic factors, a national program for improving the



diffused economy and developing a long-term energy plan for increased self-sufficiency was formulated.^
President's program

I n order to wage a simultaneous, three-front campaign against recession, inflation, and energy dependence, the President presented a
national energy policy in his January state of the Union message. To
support that presentation. Treasury analyzed the "Project Independence Report" and helped select options for national energy
Import tariffs.—To determine the extent and circumstances of our
dependency on imported oil, the Treasury conducted an investigation
under section 232 of the Trade Expansion Act of 1962, as amended,
which determined that oil was being imported in such quantities
and under such circumstances as to threaten to impair national security .^ This finding was the legal basis for the President's decision to
raise license fees on imported oil.
Decontrol and windfall profits.—Because a decontrol plan is a key
element of the President's program, the Treasury worked closely with
the Federal Energy Administration and with the Energy Resources
Council to analyze and help develop the President's decontrol plan.
Moreover, the Department helped coordinate devielopment of a windfall profits tax schedule with the plan to decontrol "old" oil prices.
(Old oil is that produced at pre-1972 production levels.)
Domestic refinery capacity.—Another key area of national energy
policy is expanding domestic refinery capacity. Treasury worked on
the development of the President's program for refinery expansion,
working closely with the Federal Energy Administration to consider
those policy elements of the refinery program which could be strengthened to encourage expansion of domestic refinery capacity.
Electric utilities.—The President has emphasized the need for legislation providing tax incentives to alleviate the capital formation
problems of electric utilities. The Treasury helped analyze the need
for such incentives and prepared supporting testimony which Secretary Simon presented to committees of the Congress.
International energy

International Energy Agency (IEA).—The energy crisis clearly
showed the need for international cooperation. The Treasury worked
with the Department of State and the Federal Energy Administration to bring about agreement on energy policy among consuming
nations. Such agreement resulted in formation of the l E A . Participating countries agreed to a program which includes: (1) An alloca1 See exhibits 29 and 3 1 .
2 See exhibit 25.

 5 - 7
588-395 0 - 7



tion scheme in times of emergency, including emergency reserve and
demand restraint obligations; (2) an extensive information system on
the international oil market; (3) consultation with oil companies;
(4) long-term cooperation on energy; and (5) relations with producer
countries and with other consumer nations. The Treasury participates
in the followup meetings of the governing board and the standing
groups of the I E A.
Financial safety net.—In connection with the international energy
program, guidelines were developed for the operation of a $25 billion
financial safety net.^
Minimum safeguard price.—Another important issue before the
l E A is the proposed minimum safeguard price for oil imports. Treasury developed issue papers pertaining to the economic implications
of such a plan.
Prepcon.—Senior Treasury officials actively participated in the
French-sponsored Producer-Consumer Preparatory Conference Meeting in Paris last April. Although the results were inconclusive, this
meeting was a milestone in forging new relations between the consuming nations ( l E A ) and the producing nations ( O P E C ) .
Canada.—The Treasury staff prepared a briefing for Secretary
Simon's visit to Canada, participated with the State Department in
discussions on the pipeline treaty, and analyzed the effects of Canada's
curtailments of crude oil and natural gas.
Middle East.—The Treasury gave technical assistance to Israel
on solving oil storage problems and led an interagency oil discussion
group which visited Saudi Arabia, Kuwait, Qatar, and Abu Dhabi.
Bilateral liaison.—To foster an exchange of technical information
on such subjects as alternative energy development and national
stockpiling. Treasury has maintained bilateral liaison with energy
and economic officers representing foreign nations.
Interagency cooperation

Treasury staff has participated in various important interagency
task forces and committees.
Synthetic fuels.—Treasury participated in an interagency Task
Force on Synthetic Fuels, identifying and analyzing various options
for commercial applications. Findings then go to the Energy Resources
Council for further consideration and determination of priorities for
the national effort.
Geothermal energy.—Treasury staff participated in the meetings
of the geothermal coordination and management project.
Natural gas curtailment.—The Treasury serves on the Federal
Power Commission Natural Gas Curtailment Task Force, which re1 See exhibits 53. 57, 61. and 62.



views the natural gas supply outlook and develops priorities for supply
and curtailments.
Uranium enrichment.—^To resolve the question of whether private
enterprise should be allowed to process and market enriched uranium.
Treasury assisted in a National Security Council study reviewing
uranium enrichment policy, which eventually lead to a determination
that private industry should enter that area.
Contingency plamming.—Emergency planning in the event of disruption of imports is another area where Treasury Staff are meeting
with other agencies to develop contingency plans.
Energy Developm^ent Bank.—The Treasury worked with other
Government agencies to prepare analyses on need for and implications
of an Energy Development Bank.
Tankers.—Treasury provided staff support in reviewing issues for
the iiiteragency Task Force on Tankers.
Energy resource studies.—The National Science Foundation has received support liaison from Treasury for various resource energy
studies, including western coal, oil shale, geothermal steam, and solar.
Transportation.—^Treasury participated with other Government
agencies on task forces to review and recommend policy on auto emission standards, auto efficiency goals, and auto excise taxes.
Clean Air Act.—To develop the administration's position on amendments to the Clean Air Act, including scrubber technology assessment.
Treasury met with officials of various Government agencies.
Recycling.—^Treasury met with other agencies to develop a position
on waste recycling of energy and nonenergy materials.
Legislation and regulation

The President's legislative proposal for a national energy program
created intense and detailed interest by the public and Congress in
energy matters. Treasury officials were invited to speak at public hearings and present their views on a wide range of energy issues and
energy-related legislation and regulatory policy. The need to respond
to congressional inquiries and invitations to testify was particularly
pronounced after the 94th Congress convened in January. Many of
these issues are ongoing at this time, requiring continuing review by
Treasury's staff*, who identify and advise on the need for new or
changed legislation and reform of regulatory policies dealing with
energy-related matters.
Financial Resources Policy Coordination
Middle East financial and investment issues

Investment flows.—rDuring fiscal 1975, it became apparent that the
financial accumulations in the hands of the governments of the Middle



Eastern oil-exporting nations, while large, were not likely to reach the
very high levels that had been widely predicted earlier. An important
factor in this change in projected accumulations was the demonstrated
ability of these countries to absorb imports at a much faster rate than
had been expected. Import volume has increased by approximately
40 percent since the oil price increases.
During the first half of calendar 1975, the oil-producing countries
have further diversified their placement of surplus funds. Investments
in the United States by oil-producing countries amounted to $2.25
billion, approximately 9 percent of the to'tal $24 billion accumulation.
I n 1974, the percentage allocated to investments in the United States
was 20 percent, $11 billion of the $60 billion surplus.
Perhaps more important, the pattern of oil producer investments in
the United States has also shifted. I n 1974, the overwhelming portion
of oil producer investments was in short-term Treasury obligations
and bank deposits. I n 1975, investments in longer term bank securities.
Treasury and Federal agency bonds, and corporate stocks and bonds
accounted for the major share of total reported O P E C inflows to the
United States.
However, such long-term investments in the private sector of the
United States remain small relative to the total O P E C surplus and
almost negligible compared with the size of the U.S. economy. These
investments were estimated to be less than $1 billion in 1974 and
were not expected to exceed $3 billion in 1975. Moreover, such investments continue to be of a passive portfolio nature. These countries do
not appear to be interested in buying control or participating in the
management of U.S. corporations.
Policy review.—During 1975, Treasury led an interagency review of
U.S. policy toward inward foreign investment. The review reaffirmed
the existing open-door policy toward foreign investment. I n addition,
the group recommended establishment of a high-level interagency
Committee on Foreign Investment in the United States, chaired by
the Treasury representative, and the creation of an Qffice of Foreign
Investment in the United States to be located in the Department of
Commerce. By Executive order of May 7,1975, the President adopted
these recommendations and the committee and office are now in operation.^
Also as a result of the review, the Government is establishing procedures providing for consultation by foreign governmental investors
with the U.S. Government on prospective major direct investments
in the United States. Such advance consultation will safeguard our
essential national interests and will facilitate foreign investment by
eliminating uncertainty as to the Government's attitude concerning
1 See exhibits 67 and 68.



specific proposals. The administration has initiated discussions relating
to consultations with each of the potentially significant governmental
investors in the Middle East.
I EA activities.—Early this year, the Governing Board of the International Energy Agency established an Ad Hoc Group on Financial
and Investment Issues, chaired by Assistant Secretary Parsky, to deal
with financial issues relating to the dialog between the oil-consuming
and oil-producing nations. This group is drawing upon the work of
other international organizations (in which Treasury also participates) in developing common consumer nation positions on the financial and investment issues that may arise in the consumer-producer
dialog. Among the issues the group is addressing are (1) the policies
of OECD member countries toward oil producer country investments;
(2) the indexation of oil prices; and (3) development cooperation between the industrialized and the producer countries.
Governmental involvement in capital markets ^

Fiscal 1975 saw U.S. Capital markets buffeted by the twin problems
of inflation and recession. The high rate of inflation has weakened
the financial condition of U.S. firms and, as measured in real terms, has
reduced the profitability of U.S. industry. As a consequence, some
U.S. firms are facing great difficulties in raising new capital. Moreover, new capital needs in the energy sector and elsewhere will call for
substantially greater rates of investment over the next decade.
Tax reform is at the top of the list of necessary measures. In addition, however, other Federal actions and policies substantially infiuence
the health of our capital markets and the financial intermediaries which
participate therein. As part of the administration's effort to meet the
challenge presented by the state of the U.S. capital markets. Treasury has organized an interagency Capital Markets Working
Group. Treasury chairs the group, and the other members are drawn
from the executive branch and independent regulatory agencies concerned with the operation of the capital markets and the activities
of financial intermediaries.
The Capital Markets Working Group has placed major emphasis
on the study of legislative and regulatory barriers in the capital
markets. It has devoted substantial resources to the restrictions, imposed by the Glass-Steagall Act, on the securities activities of commercial banks. By direction of the Economic Policy Board, the group
has taken action on other capital market-related issues.
U.S. activities of foreign banks

A Federal Reserve Board proposal to regulate the U.S. operations
of foreign banks precipitated a review of such activities. Presently,
1 See exhibits 20 and 41.



foreign banks may engage in banking in the United States in two
forms: either as a separate subsidiary banking entity chartered by a
State or as an undifferentiated branch or agency of a foreign-chartered
bank. State-chartered subsidiaries of a foreign bank or nonbank
company require approval of the Federal Reserve Board under the
Bank Holding Company Act. However, many of the most important
foreign bank operations here are now conducted through branches
or agencies and are, therefore, not subject to Federal regulation but
still may be subject to State banking laws.
The Federal Reserve Board bill would significantly increase the
extent of Federal regulation over all foreign banking activities in
the United States. With the exception of certain "grandfathered"
activities, all foreign operations would be subject to the same
regulation and the same restrictions on multistate and nonbanking activities as are^ now imposed on domestic banks. Through
the Capital Markets Working Group, the Treasury undertook a review
of the proposed legislation and submitted recommendations to the
Economic Policy Board.
Securities reform

The Treasury's interest in securities market reform was refiected
in the enactment of the Securities Acts Amendments of 1975 in June
1975 and by the deregulation of brokerage commission rates on May 1,
1975. These measures contributed substantially to the Treasury's objective of more efficient securities markets, consistent with the principle
of full investor protection which underlies the 1933 and 1934 Securities
The legislation directs the establishment of the national market
system for securities trading, as well as a centralized system for the
clearance and settlement of transactions. This central market system
(1) will ensure that all investors receive the best possible execution
of orders, (2) will maximize miarket-making capacity by encouraging
competition among market makers, and (3) will increase the depth
and liquidity of our securities markets.. The legislation also creates a
board of securities industry, professionals to advise the Securities and
Exchange Commission in the development of the market system.
Treasury supported deregulation of brokerage commission rates
because of the conviction that free price competition would promote
efficiency and improve services provided to investors. At the same
time. Treasury is monitoring the short-term impact of deregulation on
the structure of the securities industry to assure that the transition
from fixed to competitive rates is accomplished in a way which protects all of the vital market interests concerned.



Middle E a s t Policy
During fiscal 1975, the Treasury Department assumed a significantly
greater role in promoting closer economic and financial relations with
Middle East countries. The area had risen to new prominence in U.S.
economic relations during the previous year because of its greatly
increased importance in the energy and financial resources fields and
because of U.S. efforts to encourage progress toward peaceful settlement of the Arab-Israeli dispute. I n fiscal 1975, intensified efforts
were undertaken to establish a framework l)f economic cooperation
with countries in the Middle East to provide a better climate for peace
and stability in the region and to establish a balanced relationship in
key areas of economic interest.
Accordingly, in July 1974 Secretary Simon visited several Middle
East countries to explore in detail a range of cooperative programs
which had been discussed in general terms during President Nixon's
earlier visit to the area. During the visit a number of specific agreements were reached which set the stage for the development of programs which would be responsive to the diverse needs of those countries as well as of mutual benefit to them and to the United States.^
The closer relationship with six Middle East and North African
countries (Saudi Arabia, Iran, Israel, Egypt, Jordan, and Tunisia)
and with India was symbolized by the creation of joint cooperation
commissions in fiscal 1975 (joint committee in the case of Israel).
With other countries, particularly the oil-producing states of Kuwait,
Qatar, and the United Arab Emirates, senior Treasury officers expanded bilateral contacts and engaged in intensive discussions on a
broad range of economic and financial problems.
Among the issues taken up with the Middle East countries were
the infiationary and financial consequences of increased crude oil
prices and questions relating to investment of surplus oil revenues.
U.S. policy on inward foreign investment was discussed in detail,
including the U.S. Government's request for advance consultations on
major proposed governmental investments in the United States.
The possibility of triangular projects combining capital from the
oil-producing countries with American management, technical expertise, and equipment for projects in Third World countries was also
discussed both with potential host countries for such investment and
with potential capital suppliers. Efforts were made to develop broad
guidelines and procedures under which American firms could pursue
ventures offering prospective benefit to all three parties.
The individual joint commissions with the Mid-Eastern and South
1 See exhibit 44.



Asian states have served as a forum for reaching agreed policies and
programs and as a joint agency to supervise implementation of programs in the fields of trade and investment, financial cooperation, and
technical assistance. The commissions with Saudi Arabia and Iran
have provided the framework and administrative machinery for extensive technical assistance on a reimbursable basis.
The Joint Commission on Economic Cooperation with Saudi Arabia,
which is chaired on the U.S. side by the Secretary of the Treasury,
effected early this year a technical cooperation agreement formalizing
arrangements under which the United States supplies Saudi Arabia
with technical advisers in diverse fields. The costs are being paid by
the Saudi Arabian Government through a trust fund established in the
U.S. Treasury. At the Commission's first formal meeting in late February, it was agreed that a Joint Economic Cooperation Commission
office would be established in Riyadh.^ The U.S. representation to the
Joint Commission office, now fully staffed with 12 Americans and 23
Saudis, will increase the opportunity for the development and maintenance of closer economic cooperation between the two Governments.
Participation of the U.S. private sector in the economic development
of the Middle East countries is another important area for joint commission activity. The commissions have been seeking to develop closer
relations between the U.S. private business, scientific, and cultural
communities and those of the partner country. Joint business councils
have been created with several of the countries offering a means of
direct contact for promotion of trade, investment, and other business

I n t e r n a t i o n a l Monetary a n d Investment Affairs
World economic and financial developments
The world economy.—By the beginning of the period under review,
deflationary policies had generally been in place in the oil-importing
countries for roughly 6 months, in response to excess domestic demand
conditions and increasing inflation rates. The contractionary effects of
these policies began to be felt in the major economies in early 1974. By
mid-1974, business investment in the major economies had started to
fall off. Uncertainties caused by the oil crisis and rapid inflation rates
eroded consumer confidence. As the weakness in demand throughout the
world became increasingly evident, businesses undertook sharp production cutbacks. Declines in demand outpaced production reductions and
inventory levels rose dramatically. The industrial world experienced
negative real growth on the order of 1 percent between July and DeL See exhibit 45.



cember 1974 as the economic downturn accelerated. By early 1975, the
world was in the worst recession of the postwar era.
The major industrial countries led the industrial world into recession
in early 1975, and during the first half of 1975 the smaller countries
joined the economic downturn. Although real gross national product
in the industrial countries declined some 4 percent in the first half of
1975, early signs of recovery in the major countries were becoming
evident late in the first half of 1975.
Recessionary pressures between July 1974 and June 1975 clearly
affected rates of inflation in the majority of the industrial world, and
exerted downward pressures on world commodity prices. With a few
notable exceptions, inflation rates reached their peaks in the last half
of 1974 and were substantially lower during the first half of 1975—
but still well above historical averages. Wholesale prices actually declined in the United States and a few other major industrial countries
during the first half of 1975, leading to expectations of reduced increases in cost-of-living indices in the near term.
The downturn in business activity reflects initial reactions to changes
in demands and in the availability and costs of resources used in the
productive process. What the final adjustments will be will not be
evident for some time. But it may be possible to foresee some of the
major changes that will be required. These could include a shift in
the more advanced countries toward economic growth rates more
compatible with less abundant and more expensive supplies of productive resources. A reduction may be required in the share of production for consumption as opposed to investment in order to broaden
bottlenecks in the production process, to meet the need for upkeep
and replacement which has been underestimated during the period of
rapidly rising prices, and to facilitate the changes in the existing stock
of capital equipment and other parts of the economic structure made
necessary by the change in the energy balance.
Impact of oil price increases.—The world economy witnessed the
first full year's effects of the oil crisis during the fiscal year. By
July 1974, the full force of the massive oil price increases of January
had been reflected in oil import prices as the lags in payments between
oil importers and exporters had been worked out. The sudden jump
in oil import costs led to an estimated total oil import bill of about
$110 billion in fiscal 1974 in contrast to about $25 billion in fiscal
1973, and the increase in oil import bills caused a sharp deterioration
in trade and current account positions throughout the oil-importing
world. The O P E C (Organization of Petroleum Exporting Countries)
nations' combined payments position, reflecting these deficits, recorded
an investable surplus of approximately $58 billion during the fiscal
year, the counterpart of a $25 billion combined current account deficit



in the OECD (Organization for Economic Cooperation and Development) member countries and a $33 billion current account deficit
in the non-oil-exporting developing countries. The size of these deficits,
and the prospect of their continuation for a number of years, have
seriously adverse implications for the world economy.
The primary economic costs to oil-importing nations arising from
the oil price increases are not financial but real. Most obviously, they
are measured in terms of the additional real resources transferred to
O P E C nations. This potential transfer cannot be regarded as insignificant—last year alone, increased oil payments were on the order of
15 percent of world trade. In addition, however, there are heavy
adjustment costs for oil-consuming countries arising out of major acceleration of inflation, f rictional unemployment, and accelerated capital obsolescence as countries adjust their industrial structures to a
very major change in the relative prices of inputs. The real losses
incurred in the process of an abrupt, forced structural adjustment of
the entire world should not be underestimated.
Even when shortrun effects are dissipated and accommodated, levels
of real income in the oil-importing nations at any point in the future
will be substantially lower than they would have been in the absence
of the oil price increases, not only because of the continuing costs of
high oil prices, but also because of the once-for-all reduction in efficiency of existing capital stock caused by the transitional adjustment to higher oil prices. There will probably also be some continuing
impetus to inflationary pressures, insofar as cheap energy in the past
helped to offset other cost pressures.
Quite apart from the question of the magnitude of the real resources
to be transferred, there is a question whether distinctions should not
be made among the types of resource transfers. For the next several
years, it seems more likely than not that demand will be concentrated
on industries producing goods most in demand in industrial countries.
Demand for capital goods promises to be strong, as the adjustments
in the energy field are undertaken. The burden of transferring real
resources in the form of automobiles, a sector which threatens to see
excess capacity for some time, is far different from the burden of
supplying real resources in the form of oil drilling rigs, a sector operating at high levels of capacity to produce equipment of critical
importance in the present circumstances. I n sum, the costs of transferring real resources to O P E C are apt to be greater than implied
by the magnitude alone because they will be wanting goods in short
Higher costs of energy will also mean: (a) A reduced supply of
funds available throughout the world for nonenergy uses, because of
the enhanced demands for capital to produce energy from non-OPEC



sources, and (b) some changes in the location of the world's industry,
increasing the share of the world's manufacturing capacity in the
OPEC countries relative to the shares of such capacity in the most high
cost competing areas.
In contrast to the real effects of the oil price increases, which are
serious and will persist, it became increasingly apparent during the
fiscal year that world financing requirements and problems arising
from the oil price increases could be substantially smaller and of
shorter duration than had been widely thought immediately after
the dramatic oil price increases. First, the OPEC nations have demonstrated an ability to absorb imports at much faster rates than had
first been expected. OPEC import volumes, estimated to have increased by 37 percent in 1974, are expected to rise by another 30 to
35 percent in 1975. Second, the oil price increase has had a strong
deflationary impact on the oil-importing economies, and worldwide
recession has further reduced demand for OPEC oil. Finally, the
oil-importing nations are pursuing a variety of measures to conserve
energy and develop alternative energy sources which will reinforce a
reduction in demand for energy in general and OPEC-sourced supplies in particular.
The combination of these factors has already resulted in a substantial increase in excess oil production capacity in the OPEC countries
(current production is roughly 33 percent below capacity) ; a reduction in the volume and value of OPEC oil exports (export volume is
estimated to be 12-14 percent below 1974 levels); and a substantial
increase in both volume and value of OPEC imports. In addition,
the OPEC members experiencing the largest production cutbacks are
"low absorbers" which would have invested their oil revenues rather
than purchase import goods: this pattern of production cutbacks has
further reduced the potential investable surplus.
Thus, in contrast to some of the earliest projections, more recent
analyses—^^published by private forecasters as well as internal projections by the OECD, World Bank, and U.S. Government—suggest that
the net accumulation of OPEC financial assets will be substantially
slowed and perhaps even halted entirely by the late 1970's or early
1980's. Most estimates of peak accumulations, expressed in 1974 dollars,
center in the range of $175 to $250 billion. Even these projections represent an unprecedented transfer of financial resources, and the rate
of accumulation will remain high for several years. One set of U.S.
projections sufifgests the accumulation of OPEC financial claims could
reach $250 billion in current prices ($200 billion in 1974 prices) by
the end of 1977.
The private financial markets have displayed substantial flexibility



and adaptability in meeting the massive financing demands resulting
from the oil price increases, and in channeling funds to places they
were needed. The international bond markets revived from low levels
of activity in 1974—in part as a result of a lower interest rate structure
and in part as borrowers become more "known"—and are now providing substantial amounts of long-term funds to both industrialized and
developing countries. Perhaps $15 to $20 billion of long-term lending,
including both private and public placements, can be expected of the
bond markets in 1975. Commercial bank activity in the international
area is expected to continue to grow—although banks are choosing
their customers carefully.
OPEC countries' investments are being diversified extensively in
terms of both country of placement and length of investment maturities. An increasing percentage of OPEC funds is going into longterm instruments. It also appears that the OPEC countries are now
placing funds in a considerably broader list of industrial countries
than was true earlier, including some of the developed countries facing
the largest current account deficits and some of the developing nations,
as a means of further diversification of their asset portfolios. Detailed
statistical information regarding the currency distribution of OPEC
investments is not available, although there are indications that producer countries are diversifying the currency distribution of their
holdings to some extent. The following table provides some indication
of the type of assets in which producer countries are investing, as well
as their maturity and liquidity. Perhaps 25 to 35 percent of OPEC
placements in calendar 1974 was in nonliquid assets such as direct loans
to developed and developing countries, lending to the international
financial institutions, and a residual category which includes securities
and real estate; and the data so far available in 1975 suggest that such
investments may be rising significantly as a proportion of the total.
Estimated OPEC investments

In United States
In Eurobanklng market (including United Kingdom
banks, other European banks, and offshore banks).
Other to United Kingdom
Other to developed countries
International flnancial institutions bonds and International Monetary Fund oil facility
Other to developing countries (including grants)
All other
p Preliminary.

J a n u a r y - J u n e 1975 P
of t o t a l



















of t o t a l










Wider diversification of the investments of the oil-exporting nations—as to maturity, geographic location, and currency—in comparison with the heavy concentration widely expected and to some extent
experienced immediately following the oil price increases is a natural
and healthy development. It can facilitate resolution of the world's
oil-related financing problems by enhancing the ability of nations to
obtain needed financing directly and reducing the need for international banking centers to play an intermediary role. However, financing requirements remain very large as a consequence of the oil price
increases, and the pattern and nature of OPEC investments remain
uncertain. Proposals to meet immediate financing needs are discussed
Foreign exchange developnmnts amd operations^—^The system of
generalized floating of currencies initiated in March 1973, which places
reliance on market forces for the determination of exchange rates, has
facilitated adjustment during a period of great stress and uncertainty
in the world economy. While exchange market behavior early in the
fiscal year was adversely affected by several highly visible bank closures, resulting primarily from losses on foreign exchange transactions, banks and business generally adapted well to the flexible exchange system over the course of the year and the markets broadened
and became more efficient. The flexible system has helped to avoid the
exchange market crises, trade and capital controls, and more severe
world inflation which undoubtedly would have accompanied attempts
to preserve a fixed-rate system in the face of the changes imposed on
the world economy in the past 2 years. The financial effects of the
major oil crisis have been absorbed reasonably well. Widely divergent
inflation rates among countries have been accommodated, and flexible
exchange rates have made an important contribution to the prevention
of new payments problems by permitting adjustments on a current
basis to changes in underlying economic conditions. And, by helping
the world to avoid a general resort to restrictions anci controls on trade
and payments, the flexible exchange rate system has contributed directly to the maintenance of high levels of world trade.
While fluctuations in exchange rates between individual currencies
have at times been large during the period of floating, substantial rate
changes could have been avoided under any exchange rate system,
given the large volumes of mobile capital and wide variation in inflation rates. The large, abrupt changes of the par value system have
been avoided and rate movements have served to stem speculative flows
and prevent the disorderly consequences of attempts to maintain rates
at variance with market judgments.
Moreover, any assessment of the position of a currency in the ex1 See exhibit 59.



change markets must be based on its position relative to other currencies in general. For example, a focus on exchange rates of individual
currencies vis-a-vis the dollar ignores the fact that during the floating
period the dollar has fallen in value in terms of some currencies and
risen in value in terms of others. Concentration on a single currency
rate for the dollar is an inadequate approach to assessment of the
dollar's general "strength" or "weakness" in the exchange markets.
On the basis of a trade-weighted average—an admittedly imperfect
measure but one which does encompass more than a single exchange
rate—the dollar rose slightly higher during the fiscal year and was at
about the same level as at the beginning of generalized floating.
Similarly, for many currencies, movements in rates vis-a-vis the
dollar are of far less significance than are movements vis-a-vis the
currencies of closer trading partners and competitors, and exclusive
focus on movements in rates vis-a-vis the dollar distorts and exaggerates the extent of overall change. Trade-weighted exchange rate
changes for several major currencies are presented in the accompanying chart. This chart indicates not only that the dollar appreciated
slightly between March 1973 and June 1975 in terms of other OECD
currencies, but that the dollar was more stable during the period than
were most other currencies. The dollar varied within about plus or
minus 4i/^ percent of the midpoint of its range in this period, compared
with 51/^ percent for the German mark, 81/^ percent for the French
franc, and 12 percent for sterling.
Trade-Weighted Exchange Rate Change
vis-a-vis Other OECD Currencies
Since May 1970

/"•\ .




- — —^


• \







.•' v

















Trade-weighted exchange rate based on 1972 bilateral trade shares. May 28,1970 base rates
represent par values just prior to floating the Canadian dollar on June 1, 1970.




Both the unparalleled changes taking place in the world economy
and the adoption of new and more fiexible monetary arrangements
have heightened the need for close consultation and cooperation among
world financial authorities. The United States and other nations have
arrangements for official intervention to prevent disorderly conditions in the exchange markets. These arrangements have been used and
will also be used in the future when needed to prevent disorderly
market conditions. But U.S. policy will continue to be to let underlying market forces determine the exchange value of the dollar. Such a
policy serves the world, as well as the United States, far better than
any attempt to fix a par value.
The beginning of the fiscal year saw the continuation of a modest
uptrend in the exchange value of the dollar, based on substantial improvement in U.S. trade figures at midyear and inflows of funds responding to high U.S. interest rates, including short-term funds being
accumulated by oil-exporting countries. The exchange market during
this period was adversely affected by the Herstatt Bank insolvency
in June, which focused attention on some of the risks of taking speculative positions in the exchange markets. In this environment, with
markets thin and sensitive, the Federal Reserve was nevertheless able
to acquire enough German marks and other currencies to liquidate fully
swap indebtedness accumulated to finance earlier exchange market
In September, the dollar began a gradual depreciation in terms of
most major foreign currencies that continued until early March 1975.
This trend coincided with an easing of U.S. monetary policy and a
reduction of U.S. interest rates relative to those abroad, and with a
natural and healthy correction of earlier expectations that the United
States would receive a greatly disproportionate share of the investments made by oil-producing countries. In October, Switzerland and
Germany lifted some restraints on short-term capital inflows, facilitating these movements. Also, there was some concern that expansionary
policies in the United States might lead to a resumption of strong inflationary measures, and that U.S. price performance would not be as
good as that of other major countries, particularly Germany and
Switzerland, whose currencies appreciated most strongly during this
period. Mounting evidence of a quickening slide of the U.S. economy
into recession appeared to reinforce the downward trend of the dollar.
The Federal Eeserve entered the foreign exchange market periodically during October and November, primarily selling German marks
drawn on the swap line with the Bundesbank. During this period the
Bundesbank also intervened to curb the rise in the mark, which by the
latter part of November had risen to its upper limits within the Euro-



pean common margins (snake) agreement.^ The Swiss authorities, on
the other hand, placed major reliance on the reimposition and strengthening of various controls and disincentives to limit short-term capital
inflows which put pressure on the franc, seeking to limit the appreciation of the franc as well as the expansionary effects on the money
supply which would result from exchange market intervention to slow
the appreciation.
While the dollar continued to depreciate in terms of most major
foreign currencies in December, selling pressure abated somewhat and
the Federal Eeserve was able at times to acquire marks, guilders, and
Belgian francs to reduce swap indebtedness. Continuing unfavorable
developments in the U.S. economy and more rapid declines in U.S.
interest rates than in some foreign rates stimulated further capital
outflows from the United States, and oil-producing countries continued to diversify some of their receipts. Movements out of sterling
were particularly large, especially following the announcement that
the guarantee arrangement for certain holders of sterling reserves
would lapse at yearend. By flowing through dollars into Continental
European currencies, these movements tended to add downward pressures on the dollar relative to these currencies.
During January-March 1975, the Federal Eeserve sold nearly $900
million equivalent of foreign currencies, and by late March its outstanding swap indebtedness accumulated since October had reached
$1,066 million equivalent, of which over $800 million equivalent was
in German marks. Most of these operations followed consultations
early in February with the German and Swiss authorities to undertake
more concerted intervention judged to be needed to maintain orderly
market conditions in the face of growing uncertainties.
In March, dollar exchange rates began to stabilize, and by the close
of the fiscal year the dollar had appreciated in terms of nearly all
major foreign currencies. There were indications in March that the
downward trend in U.S. interest rates was ending and that rates might
turn up ahead of European rates. Thereafter, fiuctuations in the dollar
were generally relatively modest, as U.S. and foreign interest rate
declines slowed and evidence grew of an impending economic upturn,
especially in the United States. An important exception was sterling,
which depreciated rather sharply at times, largely reflecting uncertain
prospects for bringing inflation under control. The improving U.S.
trade and price performance, which the market had seemed to ignore
during earlier months, became more pronounced and capital inflows
were attracted. The Federal Eeserve was able to acquire marks and
1 Under this agreement participating monetary authorities, which during the fiscal year
included Germany, Belgium, the Netherlands, Sweden, Denmark, and Norway, intervene
in the exchange market in member currencies or in dollars to maintain their exchange
rates within 21^ percent of "central" rates in terms of other participating currencies.



other currencies needed to reduce the substantial swap indebtedness
built up since October. By the end of the fiscal year this indebtedness
had been reduced to $396 million equivalent.
There were no drawings initiaited by foreign central banks on Federal Eeserve swap lines. Intervention undertaken by foreign monetary
authorities to support their currencies, including that by the United
Kingdom, Italy, Japan, and Canada, was financed in part by the use
of reserves or by borrowing from other sources, and in many cases the
conversion of government-encouraged borrowings by private and semipublic entities diminished the need for official intervention in the
exchange market.
The dollar depreciated by about 9 percent during the fiscal year in
terms of the group of currencies participating in the snake agreement,
and by about 16 percent in terms of the French and Swiss francs.
France had withdrawn from the snake arrangement in January 1974
as the franc depreciated sharply in terms of other members' currencies,
but by mid-May 1975 the franc had appreciated sufficiently to place it
within the band in terms of its former central rate, and the French
authorities announced they would formally rejoin the arrangement
in July. The dollar depreciated during the year in terms of the Italian
lira by about 3 percent, but appreciated in terms of certain other major
currencies—^by 4 percent in terms of the Japanese yen, 7 percent in
terms of the Canadian dollar, and 9 percent in terms of sterling.
The U.S. reserve position in the International Monetary Fund increased during the fiscal year as a result of drawings of dollars by
other I M F members. At the end of the period the United States had
a creditor position of $0.1 billion in the General Account of the International Monetary Fund, compared with a gold tranche utilization of
$1 billion as of June 30, 1974, remaining from past U.S. drawings on
I M F resources.
Gold market prices, at the London fixings, reached a low of $129
per fine ounce on July 4, rose again and then fluctuated broadly
around $155 from late July to late October. Prices then increased
to a high of $190.50 in mid-November, stimulated by purchases anticipating that the demand for gold in the United States would rise
sharply following the lifting of the restrictions on ownership on
December 31 (Public Law 93-373). Treasury spokesmen indicated,
however, that the Treasury might decide to sell some of its stock in
the market to meet some of the additional demand. Prices fluctuated
widely until yearend, reaching a low during this period of $170.50 on
December 4 and peaking at $197.50 on December 30.
On December 3, the Treasury announced that it would offer 2 million
ounces of gold to the market in an auction on January 6.^ Prior to
1 See exhibits 53 and 77.

Digitized for588-395 0 - 7 5 - 8



the auction the Treasury consolidated its gold accounts, including the
remaining gold held in the Exchange Stabilization Fund.^ In the
auction on January 6, tenders for 753,600 ounces were accepted, at an
average price of $165.67 per ounce. I t was evident that the additional
demand immediately following the lifting of the restrictions had been
far less than had been expected. I n deciding what volume of the
offers to accept, the Treasury was faced with the necessity of balancing,
on the one hand, the desirability of not selling at prices far below
market indications with, on the other hand, the desirability of following procedures which would not place the U.S. Government unnecessarily in the role of setting prices.
The market price fell to around $175 per ounce early in January
and thereafter fluctuated, gradually declining. I n late May, the Treasury announced that its second auction of gold, of 500,000 ounces, would
be held on June 30.^ The market price, after dipping briefly following
the announcement, varied in a narrow range through the month and
was $166.25 in London on June 30. At the Treasury gold auction on
that date, bids were accepted for 499,500 ounces of gold at a price of
$165.05 per ounce.
Meeting immediate financing needs in the wake of the oil price increases

The oil-importing nations have been faced with unprecedented shifts
in their payments positions and major increases in financing requirements as a consequence of the massive increase in oil prices. As suggested in the preceding section, the surpluses of O P E C countries are
likely to be more a medium- than a long-term concern. Thus potential
financing problems arising from the oil price increases are likely to be
temporary and transitional in nature.
The financial problem faced by the oil-importing countries in this
transitional period is not the availability of financing the aggregate,
for the oil-exporting countries have no alternative to investment in the
oil-importing world Vs a whole. Existing financial arrangements, private and official, have worked and adapted well in meeting the new
financial needs arising in the wake of the oil price increases. Countries
have npt sought to maintain rigidly fixed exchange rates for their
currencies in the face of sharp disruption of their extemal positions,
but—with major differences in degree among countries—have allowed
rates to respond more fully to market forces. This has helped the system to avoid the huge and destabilizing reserve movements and exchange market crises of earlier years, and has helped to prevent the
general resort to restrictive and self-defeating practices that appeared
to be a major possibility in the immediate aftermath of the oil price
1 See exhibit 54.
a See exhibit 77.



While the private financial markets and other financial arrangements
have operated well and should continue to do so, it is not possible to
foresee the pattern of international payments, or to know precisely
what official financing needs may arise for nations individually or collectively. Given the prospect of large surpluses on the part of the major
oil-exporting countries in the aggregate, and uncertainty about the
character and geographical distribution of the counterpart investment
flows, the United States believes that the international community must
have in place adequate facilities to deal with major financing problems
should they develop.
Accordingly, in November 1974, the United States put forward a
comprehensive, "three-track" approach to meeting official multilateral
financing needs in the present situation—involving the International
Monetary Fund, a proposed Financial Support Fund, or "safety net,"
associated with the OECD, and a proposed IMF-managed trust fund
for the poorest of the developing nations.
International Monetary Fund.—^Under the U.S. proposals, the I M F
would continue to be the institution relied upon to provide the basic
support, the first line of official multilateral balance of payments
financing for the full range of its membership, developed and developing countries alike, following principles of uniform treatment for all
members. To enable the I M F to continue to perform this role, the
United States supports an expansion of I M F quotas as part of a general package of quotas and amendments to the I M F Articles of Agreement ; has proposed measures to increase the usability of existing I M F
balances of member currencies; and has proposed authority for the
I M F to dispose of its large gold holdings as appropriate and necessary
to augment its lending capacity. These proposals are discussed in more
detail below.
Financial Support Fumd}—^The Financial Support Fund is designed as a temporary mechanism—a "safety net"—to encourage
cooperation in energy and economic policy by supplementing other
sources of financing in the event participating O E C D members cannot
obtain elsewhere on reasonable terms the financing they need to avoid
recourse to restrictive trade policies, capital controls, or undue restraint of domestic economic activity. The potential danger is that a
country could be moved to adopt inappropriate policies by the unavailability of financing on reasonable terms—or even out of concern that
financing would not be available in the future—^^and that other countries would respond in kind to protect their own positions. There is a
risk that recourse to such policies could quickly spread. The result
would be serious disruption of the world economy, reduction of eco1 See exhibits 57, 60, 61, ana 02.



nomic well-being worldwide, and less cooperation in energy policy.
The risk is shared by all countries, as are the benefits to be gained
through avoidance of such policies.
The Support Fund is designed to protect against this risk by providing a form of financing insurance to the industrial countries, whose
policies will determine both whether the world economic order remains
liberal and open and whether the oil-importing world succeeds in reducing its dependence on unstable and excessively costly energy
sources. The existence of the Support Fund during the period of
financial difficulty will strengthen the confidence of its participants in
the basic integrity of their own positions, and in their ability to deal
with their own problems without dependence on the actions or agreement of the oil-exporting countries, and without a need to rely on
financing provided by those countries. This self-confidence is fundamental to international cooperation, in energy as well as general economic policy. Membership in the Support Fund requires a basic
commitment to cooperation. And if the Fund is ever used, specific
policy conditions on loans by the Fund will be prescribed to further
assure cooperaitive solutions to mutual economic and energy problems.
The Financial Support Fund would consist of total quotas of SDE
20 billion (about $25 billion). The U.S. quota would amount to SDE
5,560 million (27.8 percent of the total), or about $7 billion at dollar/
SDE rates of exchange prevailing in the latter part of the fiscal year.
Participants' quotas will determine their share in financing loans made
by the Fund; their share in risks on loans made by the Fund; their
voting rights (each member has a number of votes proportional to its
quota); their maximum financial liability to the Fund; and the
amount they may borrow from the Fund.
The United States expects to meet its share of the financing of any
loans made by the Support Fund through the issuance of guarantees
covering market borrowings by the Support Fund. However, the
United States could choose, for market considerations or other reasons, to extend a direct loan to the Fund. Such loans could be extended
from the Exchange Stabilization Fund under existing authority.
Negotiations on the ^agreement establishing the Financial Support
Fund were initiated in the Group of Ten and completed by a temporary
working party of the OECD. The agreement was signed by most
OECD member countries in Paris on April 9, 1975, subject to necessary legislative action, with Secretary Simon signing on behalf of the
United States. The agreement has now been signed by all OECD
members. Proposed legislation authorizing U.S. participation in the
Financial Support Fund was submitted to the Congress on June 6,



A full description of the purposes and operations of the Financial
Support Fund is contained in a special report issued in May 1975 by
the National Advisory Council on International Monetary and Financial Policies.
Trast fund.—^The Support Fund will not directly meet the financing needs of the developing countries. It will strengthen the confidence
of private investors in the integrity of the system as a whole, and
will provide its participants with incentives and the means to avoid
policies disruptive to the world economy. The benefits to developing
countries of sustained economic growth and open trade and capital
markets in the industrial countries are of first importance. But potentially serious economic and financial problems do confront developing
countries as a consequence of the oil price increases. The IMF itself
will meet part of these needs, but the special problems of the poorest
countries call for highly concessional balance of payments financing,
better handled in a separate facility outside the regular resources
of the IMF.
As the third element of its proposal, the United States proposed
creation of a temporary trust fund, managed by but separate from the
IMF, for concessional balance of payments assistance to the poorest
of the developing countries. The United States proposed that the trust
fund be funded initially at about $1.5-$2 billion, financed by concessional contributions from the major oil-exporting countries and others
in a position to contribute, and by use of a portion of IMF gold. The
U.S. proposal was circulated to the IMF Executive Board in December and raised for initial discussion at meetings of Interim and Development Committees in, January.
The Ministers of the Interim and Development Committees are in
agreement regarding the need for concessional balance of payments
assistance to meet the emergency needs of the poorest countries. At its
meeting on June 12, the Development Committee urged the Executive
Directors of the IMF to consider all aspects of the establishment of
such a trust fund as well as to continue their study of all possible
sources of financing. This review was underway at the close of the
fiscal year. The United States will continue to pressi for early estaiblishment of a trust fund to meet the needs of the poorest developing countries, which may become increasingly urgent in the months ahead.
Negotiations on longer term aspects of the international monetary system

As indicated in last year's Annual Eeport, the IMF Committee of
Twenty on reform of the international monetary system, in its final
report, recommended action on a number of elements of reform, including (1) establishment of an "Interim Committee" of the IMF, to
oversee the future operations and evolution of the monetary system,



and (2) further consideration of a package consisting of an increase in
IMF quotas and a series of important amendments to the IMF Articles
of Agreement.
The Interim Committee was formally established in October 1974,
during the annual meetings of the IMF and IBED. Secretary Simon
is the U.S. member of the Committee. At its first full business meeting,
in January 1975, the Committee approved an enlargement of the IMF's
oil facility for 1975 and endorsed a proposal put forward by the Managing Director of the IMF to establish a special account to reduce, for
the most seriously affected developing countries, the burden of interest
payable by them under the oil facility.
The Committee also agreed on a 33.6-percent increase in IMF quotas,
to SDE 39 billion (approximately $47 billion), subject to agreement
on a satisfactory distribution of individual countries' quotas and on a
series of amendments to the IMF Articles of Agreement. The Committee also agreed that the collective quota share of the major oilexporting nations should be doubled aind that the collective quota share
of the other developing countries should not fall below the present
level. Consequently, the quota share of the developed IMF member
nations as a group will have to be reduced by about 4i/^ percentage
points in order to accommodate the increase in the oil exporters' quota
The Interim Committee requested the Executive Directors to continue their work on amendment of the IMF Articles of Agreement,
concentrating on amendments in the following areas: Gold; the exchange rate regime; improvements in the IMF General Account, including elimination of gold subscription requirements in connection
with quotas and establishment of arrangements to ensure that IMF
holdings of all currencies will be usable in its operations; improvements in the special drawing right; and transformation of the Interim
Committee into a permanent Council with decisionmaking powers.^
Substantial progress was made toward agreement on these issues
at a further meeting of the Interim Committee in Paris on June 10
and 11, 1975,2 although important differences of view still remain
and it has not yet proved possible to reach a comprehensive settlement. U.S. views on the major issues, and the status of the negotiations at the close of the fiscal year, are outlined below.
Gold.—Considerable progress was made toward agreement on gold,
both in terms of possible amendment of the IMF Articles of Agreement, and in terms of transitional arrangements outside the Fund
to govern transactions among national monetary authorities. The
Interim Committee agreed on a number of principles which would
1 See exhibit 55.
a See exhibit 63.



form a basis for a settlement, including reduction of the role of gold
in the monetary system, abolition of the official price, and elimination
of the obligations to use gold in payments between the Fund and its
Of particular interest was the Committee's agreement that a notyet-determined portion of the I M F ' s gold should be used for the
benefit of the developing countries, particularly the low-income developing countries. One proposal frequently mentioned was to use
one-sixth of the I M F ' s gold holdings, or about 25 million ounces,
for the benefit of the developing nations, with another one-sixth to
be distributed to the general I M F membership on the basis of quota
shares. The technique for mobilizing the gold and the mechanisms
that would be used to channel the proceeds to recipient countries also
remain to be agreed. As noted above, the United States has proposed
use of some I M F gold to finance a special trust fund, and discussions
on this proposal are continuing.
I n addition to questions concerning disposal of the Fund's gold,
four other issues remain:
(1) Whether, in addition to transitional arrangements outside the
Fund, already agreed, to prevent reestablishment of a de facto official
price for gold and to limit global official gold holdings, there should
be understandings governing transactions in gold among national
governments. The United States and most other countries believe it
would be desirable to have such understandings following lifting of
the I M F ' s formal restrictions on official transactions, in order to ensure
t h a t t h e movement toward a reduction in gold's role is in practice maintained.
(2) Whether there should be established in the Articles an obligation that countries collaborate with the I M F on policies to reduce the
role of gold in the monetary system. I n the context of a satisfactory
overall settlement, the United States would be prepared to accept
such an obligation. Some countries resist any such provision.
(3) Whether the I M F should be permitted to accept gold payments
from members under the amended Articles. While significant gold
payments probably would not in fact be made to the Fund even if permitted, the United States opposes such a provision on grounds that
it would be inconsistent with the general approach of reducing the
monetary role of gold, and this view appears to be shared by most
other countries.
(4) Whether an account should be established in the I M F to allow
countries to exchange their gold for SDE's—a gold substitution account. The United States doubts the utility of such an account and the
desirability of getting the I M F back into the business of buying gold.



whatever the objective. However, the proponents of this approach
regard it as a technique for facilitating a reduction of the monetary
role of gold, and the United States is examining the proposal in that
Exchange arrangements.—The present I M F Articles require that
all members maintain exchange rates for their currencies within narrow margins around declared par values, but no member is now adhering to this fundamental provision. All members agree that this situation should be corrected by appropriately amending the Articles. The
United States supports an amendment which, first, would establish
that each member country has basic obligations to foster exchange
stability, to maintain orderly exchange arrangements, and to pursue
cooperative policies; and, second, would assure that each country, in
meeting these basic obligations, has freedom to choose the exchange
arrangements best suited to its own needs and circumstances. The
United States believes the appropriate focus of I M F attention is on a
country's policies, not on the mechanisms, such as par values or floating
rates, which it uses in implementing those policies. The I M F should
look at how a country is behaving, with each country expected to provide information that permits assessment of its policies and to consult
on its economic situation and the intemational implications of its policies. The Articles should offer nations wide latitude for choice among
exchange rate systems, and should impose neither a moral nor a legal
obligation to establish par values, now or in the future.
The Interim Committee discussions indicated that there is wide support for this approach. But there are some countries that want all
nations to accept an obligation to return to par values. The United
States has indicated that it will not agree to this approach.
I M F quotas.—As noted above, the broad distribution of quotas
among major country groups was agreed in principle by the Interim
Committee in January. Negotiations on the distribution of quota
shares among individual countries are well advanced but not fully
completed. Despite the economic justification for a larger quota, the
United States has agreed that it will accept some decrease in its quota
share in an effort to resolve this issue. As a result, there will be a significant reduction in the U.S. voting share—to about 20.3 percent—which
must be expected to diminish further as new members join the Fund
in the years ahead. However, this reduction would occur only in the
framework of an amendment increasing from 80 percent to 85 percent
the vote required to approve amendment of the Articles and certain
other basic decisions in the I M F . While problems remain, it is expected
that the quota question can be resolved if other key issues are settled.
I M F General Account.—A number of amendments to streamline
and improve the operations of the I M F ' s General Account are under



consideration. Most of these changes are highly technical and are not
particularly controversial. Of the various changes under consideration,
the United States believes that one dealing with the usability of currencies held by the I M F is particularly important.
The United States believes that all member countries should permit
the I M F to use its holdings of their currencies under uniform conditions and criteria. This is not now the case. Countries, regardless of the
strength of their external positions, can effectively block use of their
currencies for loans to other members. I t is essential that each country
agree that when it is in a strong external position, the I M F would be
permitted tb use its currency. Such agreement must be a prerequisite
to an increase in the country's quota, in part because quota subscriptions will be paid in national currencies, and there is no reason for the
I M F to accumulate more of a country's currency if the Fund is not
permitted to use the balances it already holds. The I M F presently
holds about $32 billion of members' currencies, perhaps about one-third
of which is presently usable. Much of the remainder represents the
currencies of countries that are not currently in a strong enough position to make credit available to the Fund, but this is not the case in all
instances. Agreement on the use of these currencies could add substantially to the Fund's usable resources at present and in the future, and
strengthen its position as the central institution for provision of official balance of payments assistance to its members. The validity of
this point is widely recognized.
Changes in S D R rules.—The United States has supported changes
in the rules governing the special drawing right to make it a more
flexible and usable asset; for example, by easing existing restrictions
for voluntary transactions in SDE's among countries. The United
States does not believe this is the time for major alterations in the
character of the SDE, however, and has opposed proposals that would
change countries' basic obligations with respect to the S D E ; for
example, to eliminate the limits on countries' obligations to accept
SDE's, to eliminate countries' rights to opt out of new S D E allocations, and to eliminate countries' obligations to rebuild their S D E
holdings to the extent they fall below 30 percent of allocation on the
basis of a 5-year moving average.
I M F Governors Council.—^With U.S. support, the Interim Committee agreed that an amendment should be prepared which would
permit the Council to come into being when a decision is taken by the
Fund for that purpose. The Council would strengthen the Fund by
providing it with an organ composed in the same manner as the Committee of Twenty and the Interim Committee but with authority not
only to exercise advisory functions, but also to take decisions imder



specific powers. The Interim Committee agreed that, except for a few
powers of a political or structural character that should be reserved
to the Board of Governors, all powers of the Board of Governors
should be delegable in principle to the Council, to the Executive
Directors, or to both concurrently, by decisions of the Board of
While substantial progress had been made on the monetary negotiations at the close of the period under review, the differences which
remain are important differences, particularly those relating to the
exchange rate system and gold. Furthermore, understandings on specific issues are subject to agreement on the comprehensive package.
The United States hopes to see agreement reached at the next Interim
Committee session at the end of August. This session will be held just
prior to the annual meetings of the I M F and World Bank, during
which many other issues will be discussed. If it does not prove possible
at that time to resolve the remaining issues in the areas outlined, a
full meeting of the Interim Committee is scheduled in January 1976
which will be focused specifically on these issues.
International investment and capital flows

The accumulation of financial reserves during the past year by oilproducing countries has led to increased interest, on the part of the
public and Congress, regarding the possible political and economic effects of foreign investment in the United States. During the year 1974,
governmental and private investors from O P E C countries did appear
in the U.S. capital market in larger volume than before, but their
aggregate long-term investment was quite small. Of about $60 billion
in total accumulations by O P E C countries in 1974, it is estimated that
about $11% billion was invested in the United States, in both longand short-term instruments. Investments in short-term assets accounted for perhaps 90 percent of their total investments in the United
States. Long-term investments in the United States by the oilexporting countries consisted almost entirely of U.S. Treasury notes
and bonds and other Federal agency issues, with less than threequarters of a billion dollars being placed in private long-term investments, including real estate, corporate securities, and direct investment
in U.S. corporations. For the first half of calendar 1975, there is some
indication that O P E C countries have shifted to longer term investments, and will increase their holdings of private U.S. long-term
U.S. policy toward foreign investment in the United States.^—U.S.
policy with respect to international investment has generally been based
on the premise that one should rely on the private market as the most
1 See exhibit 58.



efficient means to determine the allocation and use of capital in the
international economy. Accordingly, the basic policy toward foreign
investment in the United States has reflected an "open-door" approach;
that is, foreigners are offered no special incentives to invest here and,
with a few intemationally recognized exceptions, no special barriers
have been imposed. Furthermore, foreign investors are generally
treated equally with domestic investors once they are established in
this country.
This policy was reviewed by the executive branch late in 1973 in
the face of the increase that year in investments from Europe and
Japan. The basic conclusion of that review was that the traditional
open-door policy should be maintained and that no new restrictions
should be placed on foreign investment in the United States unless
necessary to protect national security.
Foreign Investment Study Act.—^The review did, however, underscore a need to improve U.S. data on foreign direct and portfolio
investment in the United States. (The last comprehensive benchmark
census of foreign portfolio investment in this country was conducted
in 1941, and these data were only partially revised in 1949.) Therefore,
the Treasury testified in support of legislation introduced in the 93d
Congress to authorize a study to improve our data on foreign investment in the United States. This legislation, known as the Foreign Investment Study Act, was passed by Congress and signed by President
Ford in October 1974.^ Pursuant to the act, the Department of the
Treasury has begun a special study of foreign portfolio investment
in the United States and the Commerce Department is examining foreign direct investment here. Interim reports are due in October 1975
and final reports in April 1976.
The Treasury study consists basically of two parts: (1) Collectionof
data on portfolio investments by foreigners as of December 31, 1974;
and (2) analysis of these data and research on certain questions specified in the act. For the purposes of the study, foreign portfolio investment is defined as all securities of a U.S. corporation, including
stocks, bonds, and other evidences of ownership or long-term indebtedness, held by a foreign person owning less than 10 percent of the voting
securities of the corporation. The Treasury survey also covers foreign
portfolio investment of limited partnership interests, investment trust
certificates, and other evidences of ownership or indebtedness of noncorporate enterprises. In addition to private obligations, the survey
also covers foreign holdings of debt obligations of the Federal, State,
and local governments or other instrumentalities thereof, which have
an original maturity of more than 1 year.
The research portion of the study is to be analyzed at two levels: One
involves a study of the methods and determinants of foreign portfolio
1 See exhibit 52.



investments in the United States; another deals with the purposes and
effects of U.S. laws and regulations on such investment.
Committee on Foreign Investment in the United States.—^As was
noted earlier, the executive branch undertook another review of our
policy toward foreign investment in this country in 1975 and again reaffirmed our traditional "open door" approach. It was also concluded
that our existing legal and regulatory safeguards against abuses of
foreign investments are adequate and that no new legislation was
needed in this area.
At the same time, it was concluded, as discussed above, that new
administrative arrangements, including the creation of a new interagency Committee on Foreign Investment in the United States and an
Office of Foreign Investment in the United States in the Commerce
Department, were needed.^ The Committee was established in May
1975 by Executive Order 11858, which gave it a mandate to monitor
the impact of foreign investment in this country and to coordinate the
formation of U.S. policy on such investment. An important task of the
Committee is to assess general trends and significant developments in
foreign investments in the United States and to review investments
which, in the Committee's judgment, might have major implications
for U.S. national interests.
The Department of Commerce is currently in the process of getting
its new office into operation. The purpose of this unit is to bring
together the data on foreign investment in the United States which are
gathered by various U.S. Government agencies. Although considerable
data on foreign investment are collected by these agencies, until now
there has been no central point for synthesizing and analyzing it.
Foreign direct in/vestment issues in intemational organizations.—
During fiscal 1975, a number of official intemational organizations
considered the establishment of a code of conduct for multinational
enterprises. In light of this widespread interest in this issue, the U.S.
Government agreed to consider whether a nonbinding code, or set
of guidelines, might be developed, addressing the responsibilities of
enterprises as well as those pf the host governments, as part of a balanced approach to international investment issues. This work is consistent with our efforts to liberalize progressively world arrangements
affecting investment flows by developing a consensus of principles on
international investment.
At a U.S. initiative, the OECD has, since 1973, been considering
international investment problems caused by governmental policies,
as well as a number of issues relating to multinational enterprise oper1 See exhibit 67 and 68.



ations. Work on these issues accelerated with the January 1975 decision of the OECD Council to establish a provisional Committee on
International Investment and Multinational Enterprises, whose purpose is to strengthen cooperation in a generally balanced way in the
fields of international investment and activities of multinational enterprises. The new Committee is to make its recommendations on these
issues to the Council no later than the end of 1975.
At its meeting in April 1975, the Committee emphasized the determination of governments that the work on investment issues be brought
to a conclusion concomitantly with the work on the code.
As of June 30, 1975, work on intemational investment issues was
well advanced. This involved guidelines aimed at reducing incentives
and disincentives to foreign investment and at extending the same
national treatment to foreign-owned firms as is accorded domestic
enterprises. However, the Investment Committee work on a code of
conduct was only in the early stages of development.
International investment issues were also taken up in other official
international organizations. I n December 1974, the United Nations
General Assembly accepted the so-called "Eminent Persons" report
on the role of multinational enterprises on economic development and
on international relations. This report inter alia called for the establishment of a Commission on Transnational Corporations to report
to the Economic and Social Council. At its first session in March
1975j the Commission developed a preliminary work program which
attaches first priority to the development of a U.N.-wide multinational enterprise code of conduct.
A code of conduct relating to the activities of multinational enterprises was also under consideration in the meetings held in furtherance
of the so-called new dialogue established last year between the United
States and the countries of the Caribbean and of Central and South
America. These talks were interrupted, however, when the Western
Hemisphere meeting of Foreign Ministers was canceled at Ecuadorian
and Venezuelan insistence as a protest against the provision in the
U.S. Trade Act of 1974 whereby O P E C member countries would not
be eligible for generalized preferences on the export of their manufactured goods to the United States.
International Monetary Fund operations
As the principal official multilateral source of balance of payments
financing, the I M F is playing a central role in meeting the world's
financing needs arising from the sharp increase in oil prices, rampant
inflation, and severe economic recession. This wias reflected in a sharp
increase in I M F lending during fiscal 1975 with purchases of currency
(drawings) by I M F members reaching a record SDE5.2 billion (about



$6.3 billion).^ This increase reflected a marked rise in drawings under
the Fund's regular.resources, as well as the operations of the IMF's
special oil facility established in June 1974.
Regular resources.—Use of the IMF's regular resources rose sharply
during the fiscal year. Purchases amounted to SDE 2,555 million by
45 countries, roughly twice the previous year's level. Italy was the
single largest borrower, with drawings of SDE 1,268 million, followed
by Germany (SDE 154 million)^ and Argentina (SDE 125 million).
Principal currencies drawn were the dollar, German mark, and Japanese yen. The use of dollars in drawings increased substantially
from levels of recent years. Special drawing rights were drawn in the
amount of 44 million.
Eepayments of previous drawings (repurchases) totaled SDE 574
million with about 27 percent being made in German marks. In the
latter part of the fiscal year, repurchases with dollars occurred for
the first time since fiscal 1972 and totaled SDE 105 million. Other currencies used in repurchase included Belgian francs (SDE 90 million),
Japanese yen (SDE 62 million), and Dutch guilders (SDE 47
million). Eepurchases with special drawing rights amounted to SDE
28 million.
As of June 30, 1975, cumulative drawings from the beginning of
IMF operations amounted to SDE 32,242 million, of which SDE
9,110 million were in U.S. dollars; cumulative repurchases were SDE
17,660 million, of which SDE 4,725 million were in U.S. dollars.
The U.S. reserve position in the IMF increased to SDE 1,762 million
during the fiscal year as a result of purchases of dollars by other
countries (SDE953million).
Oil facility.—The oil facility is intended as a temporary response
to the emergency needs arising from the oil price rise (see 1974 Annual
Eeport, pp. 44, 619-20). Eesources available to the 1974 oil facility
amounted to SDE 3.04 billion (about $3.6 billion), obtained through
IMF borrowing from nine member countries, principally major oilexporting countries but also including two industri'al countries. Drawings from the facility were made by 40 countries and totaled the
equivalent of SDE 2,583 million. The only major industrial country
to use the facility was Italy, which drew the largest amount of any
country, SDE 675 million, or 26 percent of total draiwings from the
oil facility. Spain was the second largest user of the oil facility,
drawing SDE 296 million,, followed by India (SDE 200 million),
Yugoslavia (SDE 155 million), and Pakistan (SDE 125 million).
1 All conversions from SDR to dollars in this section are made at the r a t e of $1.20
equals SDR 1. With introduction of the SDR "currency basket" valuation technique a t
the beginning of t h e fiscal year (see 1974 Annual Report, pp. 45, 6 2 0 - 2 1 ) , t h e SDR's
value in terms of currencies fluctuates daily in response to changes in market exchange
3 Gold t r a n c h e drawings in connection with the settlement of liabilities under the
European h a r r o w margins arrangement.



I n January 1975, the I M F ' s Ministerial Interim Committee agreed
that the oil facility should be continued for 1975 on an enlarged
basis.^ The I M F was authorized to borrow up to S D E 5 billion and
to use the remaining funds available from the 1974 facility to finance
operations in 1975. By the close of the fiscal year, the I M F had reached
agreement with 12 countries to provide additional resources amouriting to S D E 2,870 million. Some of these countries have agreed to consider lending additional amounts in the event further resources are
needed and the S D E 5 billion limit has not been reached.
The I M F Executive Directors have made certain modifications in
the operational provisions of the oil facility to bring it into closer
conformity with current requirements. The formula for determining
access has been modified to reduce the heavy emphasis on oil import
costs in determining financing need and to focus increasingly on the
more appropriate consideration of a country's overall balance of payments position. Initially, individual country access to the facility is
limited to 30 percent of the maximum allowed (pending review in
July of available resources in relation to need). Policy conditionality
has also been strengthened in order to foster needed domestic adjustments and to avoid inappropriate external measures. Charges on
drawings have been raised to cover costs, with an increase in interest
rates to 714 percent (from 7 percent in 1974) to reflect higher payments to lenders and the addition of a 0.5-percent annual service charge.
As noted aibove, in recognition of the burden these charges placed on
the developing countries most seriously affected by current economic
conditions, the Interim Committee endorsed a proposal by the I M F
Managing Director to establish a subsidy account to reduce the interest
cost on borrowing from the facility by the poorest countries.
This account, projected to total about $380 million with a suggested
U.S. contribution of $70 million, could be financed in part through
use of a portion of the Fund's gold, and in part through voluntary
contributions. The United States has indicated that, should use of gold
not prove possible, it would consult with Congress on the feasibility
of obtaining appropriated funds for a U.S. contribution but that
such funds would not be requested without indications from Congress
that in so doing the funding of established bilateral and multilateral
programs such as the International Development Association would
be unaffected.
I t is anticipated that the oil facility will be phased out at the end
of calendar 1975, and that greater reliance will be placed on use of
regular I M F resources in loans to members. To place the I M F in a
better position to meet current and future needs, a review of policies
1 See exhibit 55.



and practices regarding the use of its currency holdings was initiated
during the fiscal year with the aim of increasing the number of currencies available to be drawn. I t is hoped that with termination of the
oil facility at the end of 1975—and consequently the availability of
the subsidy account—the trust fund proposed by the United States
will be in place to meet the needs of the poorest member countries.
I M F corrumodity financing arrangements.—Eecent developments
in world commodity markets have heightened international interest
in the I M F ' s special commodity financing arrangements as a means
of assisting developing countries in meeting the difficulties arising
from excessive fiuctuations in the prices of their primary product
exports. The Fund's compensatory financing facility was established
in 1963, and liberalized in 1966, to provide developing countries with
additional access to the IMF's resources to meet balance of payments
difficulties arising from temporary shortfalls in their export earnings
due to circumstances beyond their control. A country with an overall
balance of payments need may draw up to 50 percent of quota under
the facility to finance an export shortfall. Not more than 25 percent
of quota may be drawn in any 12-month period.
In determining the amount a country may draw from the facility,
the level of exports in the shortfall year is compared with the average
level of export earnings in a 5-year period that includes the actual
level in the 2 years preceding the shortfall year, the shortfall year, and
projected levels of earnings in the 2 years after the shortfall year.
Actual drawings fi'om the facility are subject to the same interest
rate and repayment provisions as regular I M F drawings (currently
4-6 percent interest and 3-5 years maturity) but carry easier policy
conditionality requirements than regular drawings and do not reduce
a country's access to regular Fund drawings.
I n the 12 years since the compensatory financing facility was established, 32 countries have made 52 drawings totaling S D E 1 billion.
Drawings outstanding at the close of the current fiscal year amounted
to S D E 519 million.
The second arrangement, the buffer stock facility, was created in 1969
to assist members with a balance of payments need to finance their
contributions to international buffer stocks that meet I M F criteria.
Countries may draw up to 50 percent of quota under the facility provided that total outstanding drawings under the compensatory financing and buffer stock facilities do not exceed 75 percent of quota.
Unlike the compensatory facility, there is no limit on the amount that
may be drawn in any 12-month period. While buffer stock drawings
are additional to regular I M F drawings, they automatically reduce
any available gold tranche position a member may have and in effect
reduce its unconditional access to I M F resources. Drawings carry the



same interest rate and repayment provisions as regular drawings, although disbursement of funds from the international buffer stock to a
member must be used to repay drawings from IMF's buffer stock
Two international buffer stocks, tin and cocoa, have been declared
eligible under the IMF's criteria for financial support, although funds
have been drawn only for the tin buffer stock. Total drawings have
amounted to SDE 30 million (or about $36 million) by five countries,
with only SDE 7.5 million still outstanding.
The United States has proposed that there be a major liberalization
of these facilities, and the Interim Committee has requested the IMF
Executive Directors to consider specific changes. In working with the
Executive Board on the development of specific modifications, the
United States will take the view that changes in the facilities should be
consistent with the basic purposes and concepts of the IMF as provider
of temporary balance of payments assistance to members in need.
Organization for Economic Cooperation and Development

There was intensified consultation on and coordination of economic
and financial issues among the industrialized countries of the OECD
in response to the multiple challenges of the past year. In addition
to serving as a forum for the customary periodic examination of a
broad range of fiscal and monetary matters, the OECD provided the
auspices for intensive work on specific oil-related problems, notably
the establishment of the Intemational Energy Agency and the Financial Support Fund. At their annual meeting held in Paris May 28-29,
1975, OECD Ministers expressed determination to overcome the twin
problems of recession and inflation; renewed for 1 year the "pledge"
to avoid introducing measures aimed at restricting exports or imports,
or providing artificial subsidies to exports; endorsed increased cooperation between oil-producing and oil-consuming countries; agreed on
the need for a more active and broadly based approach to commodity
problems; and adopted a Declaration on Eelations with Developing
Countries. Secretary Simon attended this meeting, as did Secretary of
State Kissinger.
The OECD also created an ad hoc high-level group to examine relations with developing countries and a high-level group to study specific steps which might be taken in the commodity area. The Treasury
participates in the work of these groups, which is being carried out
under auspices of the OECD's Executive Committee meeting in special
Subsequent to the Washington conference on energy questions in
February 1974, the effort to intensify cooperation in this area led to
ithe establishment of the International Energy Agency in November

588-395 O - 75



1974. The United States and 17 other of the 24 O E C D member countries
joined this agency, whose iwork includes operational arrangements to
deal with possible disruption of supplies. The Treasury participates
actively in much of the work of the I E A.
The Economic Policy Branch of the O E C D was concerned throughout fiscal 1975 with the appropriate policy reaction to continued inflation, the emergence of widespread decline in economic activity and
accompanying increases in unemployment, and the sharp increase in
the balance of payments deficits on current account of some member
countries, particularly as these problems were occasioned or exacerbated by the sharp increase in oil prices. Working Party 3 of the Economic Policy Committee, to which the Treasury's Under Secretary for
Monetary Affairs leads the U.S. delegation, followed the evolution
and financing of payments deficits of OECD countries throughout the
year, and found that the situation had progressed much more smoothly
than had been anticipated by some observers. A temporary working
party of the Economic Policy Committee was established to study
closely the economic and financial implications posed by higher oil
prices in preparation for a possible dialog with oil producers.
The Treasury continued to participate actively in other activities of
the OECD, many of which were also concerned directly or indirectly
with the consequences of higher oil prices. These included the newly
established Committee on Intemational Investment and Multinational
Enterprises; the Trade Committee and its subgroups on Export Credit
and Credit Guarantees and on Government Procurement; the Development Assistance Committee; the Committee on Fiscal Affairs and its
various working parties; the Committee on Financial Markets; and
the Committee for Invisible Transactions.
U.S. balance of payments
Interpretation of balances.—Th^ separation of intemational transactions into specific categories, and striking balances (e.g., current account, official reserve transactions) has an essentially analytical function. Depending on the construct of the balances, the results yield a
variety of information such as developments in a country's competitive position, changes in the size and profitability of its foreign investments, the magnitude of various types of international capital movements, and so forth. I n addition, several of the "overall" balances have
been used during the period of fixed exchange rates as indicative of
underlying trends in the strength of the dollar, or of the imbalance
between suipply of and demand for dollars in the exchange markets
during any given period. This imbalance was measured by official purchases or sales of dollars which were assumed to have been made
mainly to bridge that imbalance.



The analytical interpretation of any of these balances, or of <ihanges
in them, depends not only on the purpose for which the analysis is to
be made, but also on the fundamental form of the international
monetary system. The focus of the analysis of U.S. transactions has
shifted several times over the past 30 years. For example, from the
mid-1940's to the late 1950's, the emphasis tended to be on the impact
of U.S. international transactions on the physical recovery and financial strengthening of other economies in the aftermath of World War
From the late 1950's to the advent of generalized floating in March
1973, the analysis was largely concerned with the strength of the dollar in its role as the principal reserve currency and the standard for
measurement of the exchange rate parities of other currencies.
Under the current system, under which official agencies of foreign
countries are not obliged to maintain the exchange rates of their respective currencies relative to the dollar within a specified margin around
established par values, both a rise and a decline in foreign official holdings of U.S. debt obligations may be associated with either strength or
weakness of the dollar in foreign exchange markets. Shifts in the exchange rates of foreign currencies relative to the dollar in opposite directions may not result in offsetting purchases and sales of U.S. debt
obligations by foreign official agencies (leaving their aggregate holdings unchanged) but may result in either net sales or net purchases. If
foreign official sales exceed foreign official purchases, U.S. liabilities
to foreign official agencies would decline. Under such conditions, the
exchange rate of the dollar may weaken but under the concepts underlying the official reserve transactions balance, the U.S. balance of payments would show a surplus. If foreign official purchases of U.S. debt
obligations exceed foreign official sales, the exchange rate of the dollar
m'ay strengthen, but the official reserve transactions balance would
show a deficit.
Furthermore, since the abrupt rise in oil prices at the end of 1973
official agencies of some of the major foreign countries have attempted
to bolster their holdings of dollar assets by borrowing dollars directly,
or through enterprises and banks under their control, from U.S. or
foreign private sources. These official acquisitions appear as a deficit of
the United States under the official reserve transactions concept
although such acquisitions were deliberate and reflected confidence in
the fimction of the dollar as a reserve asset rather than an intervention
to absor'b an excess supply of dollars in the foreign exchange markets.
The usefulness of the official reserve transactions balance as a tool in
interpreting the balance of payments of the United States has been invalidated further by the large investments by the official agencies of oilexporting countries in U.S. Government and private securities. Such



investments should be interpreted as an indication of strength of the
U.S. economy and the U.S. balance of payments, not as a weakness.
In addition, the massive accumulations of OPEC funds has further
obscured the already somewhat murky distinction between short- and
long-term capital flows which underlie the so-called basic balance (current account plus long-term capital), sometimes used to evaluate the
"underlying" balance of payments position. A large portion of these
funds is invested in nominally short-term assets, although the intent
often is to hold the investments over a longer term.
For all these reasons, analysis in terms of the so-called overall balances is extremely hazardous and potentially misleading under the
present exchange rate regime, and the large acquisitions of dollar assets
by official agencies of various countries as long-term investments and
not merely for the purpose of evening out ^hort-term imbalances in
their foreign transactions.
Merchandise trade.—^Merchandise exports rose from about $25 billion in the September quarter of 1974 to $27.2 billion in the March
quarter of 1975 but declined to about $25.7 billion in the June quarter.
About half of the rise and nearly all of the decline were in exports
of agricultural products, largely due to changes in prices.
Exports of other commodities are more sensitive to business developments abroad. In value they expanded through the December 1974
quarter, but the rate of expansion slowed down considerably in the
course of the calendar year. In value terms, exports reached a peak in
January and declined in the following months. However, since prices
of nonagricultural exports were rising throughout this period, although at a declining rate, export volume peaked in the June 1974
quarter, declined somewhat in the July-December 1974 half year, and
more sharply in the following half year. This weakening in the volume
of nonagricultural exports reflects the influence of foreign business
developments, but only with a delay.
This delay is due to the normal lag between changes in foreign
business activity and the receipt of orders of capital equipment, and the
further lag until deliveries against these orders are made. During the
declining phase of the business cycle, deliveries may for some time
decline less than new orders as the order backlog is being reduced. The
value of exports of capital goods, which comprise about 40 percent of
all nonagricultural exports, has been maintained in part because of
the lag in the deliveries and in part because of rising prices. Adjusted
for prices, exports of capital goods leveled off in the second half of
calendar 1974, and started to decline in the first half of calendar 1975.
The impact of the decline in foreign business activity on U.S. exports
was mitigated in part, however, by the rise in import demands in the
oil-producing countries (other than Canada).



Exports (excluding military equipment) to these countries rose
from about $1 billion in the December 1973 quarter to $2.1 billion in
the December 1974 quarter and to about $2.5 billion in the June 1975
quarter. For the year ended June 1975, exports to these countries
totaled $8.8 billion, about double the amount in the preceding year.
The volume of imports peaked in the June 1974 quarter. Import volume in the following two quarters declined at an annual rate of 4 percent, but in the March and June quarters the decline was about the
same as in the value of imports. Imports, adjusted for prices, thus
started to decline about a half year later than domestic economic
activity (measured by G N P adjusted for the prices changes) which
had reached a peak in the December 1973 quarter and fell at an annual
rate of about 4.4 percent in the first half of calendar 1974. I n the
following half-year period, the decline in imports was less than the
decline in real G N P which had accelerated to about 5.5 percent. This
relatively retarded and slower rate in the import decline was more
than compensated for by the much more rapid decline in the March
1975 quarter, although the downward movement in domestic economic
activity accelerated to about 11.4 percent, and in the following quarter
when imports continued to decline while domestic economic activity
started to turn up again.
One of the major reasons for the relatively slow reaction of imports
to changes in domestic economic activity may have been the very large
swings in inventories, which continued to rise throughout the calendar
year 1974 but dropped sharply in the first and second quarters of
calendar 1975.
The very sharp decline in imports in the winter and spring of fiscal
1975 may also reflect, however, an improvement in the ability of domestic producers to supply the domestic markets for the same reasons that
domestic producers have been able to strengthen their competitive
position in foreign markets. As in the case of exports, imports may
not have reflected these changes until sales on domestic markets became more strongly influenced by competition among suppliers, and
older contracts have expired.
The balance on merchandise trade, which reached a low point with
a deficit of $2.3 billion in the September 1974 quarter, improved to a
surplus of $1.8 billion in the March 1975 quarter and expanded further,
to $3.3 billion in the June 1975 quarter.
Other current account transactions.—The balance on other current
account transactions declined about $1.2 billion from a surplus of about
$2,160 million in the second half of calendar 1974 to a surplus of $950
million in the first half of calendar 1975. The major reason for that
change was a $2.1 billion decline in the excess of receipts over pay-



ments on investment incomes. About $1.7 billion of this decline was in
incomes obtained by U.S. companies from direct foreign investments
in the oil industry, net of the share in these earnings paid or payable
to foreign governments of oil-exporting countries on their share in the
oil production. In the first half of calendar 1975, incomes on investments in the oil industry were at an annual rate of about $2.8 billion,
compared with $6.9 billion in calendar 1974 and about $4 billion in
The decline in incomes on direct investments abroad reflected in part
the general decline in foreign economic activity. However, income
receipts in the second half of 1974 also included dividend disbursements
by foreign subsidiaries of U.S. corporations from surpluses which had
been accumulated in earlier periods, so that the decline (about $600
million annual rate) from that period to the first half of 1975 was
probably larger than the decline in earnings on the foreign investments.
The decline in the balance on investment incomes was partly offset
by increases in the balances on various services transactions including
transportation and travel. Net payments for transportation dropped as
imports declined more than exports. Pajrments associated with travel
by U.S. residents to foreign countries rose less than receipts associated
with travel by foreign residents to the United States.
Other developments which have raised receipts and/or lowered
expenses affected military transactions and Government grants. Expenditures through both of these transactions were reduced early iri
1975 by the curtailment of activities in Southeast Asia. Eeceipts increased as a result of acceleration of deliveries of military equipment
mainly to the Middle East—largely on orders which had been placed
in earlier periods.
Capital transactions—July-December 197Jf..—The net outflow of
U.S. private capital, which amounted to $10.1 billion in the June 1974
quarter, fell to $4.3 billion in the September quarter. This abrupt
decline was due to a $5.3 billion contraction in net lending to foreign
residents by U.S. banks, and to a $0.6 billion decline in the net outflow
of corporate funds. These changes reflect the tightening in the availability of funds in the U.S. capital market which accelerated in the
June quarter and reached a peak in the September quarter.
To some extent, the decline in the outflow of U.S. private capital was
offset by a $740 million rise in dollar furids made available to foreign
countries by the IMF, which increased the U.S. reserve position by an
equivalent amount.
The decline in the net outflow of U.S. capital coincided with a $4.8
billion decline in the acquisition by foreigners of assets in the United
States (or claims on U.S. corporations) from $10.6 billion in the June
quarter to $5.8 billion in the September quarter. Official agencies and



banks of oil-producing countries increased their investments in U.S.
private and government debt obligations by about $3.6 billion, only
slightly less than in the June quarter ($4billion).
Investments in the United States by official agencies and banks of less
developed countries other than the major oil producers were about
stable in the September quarter, after having increased about $700 million in the previous quarter.
Assets held in the United States by private banks in other advanced
countries (including banks organized in the Bahamas and certain other
Caribbean islands) increased in the June and the September quarters
by $2.7 and $2.6 billion, respectively.
During the December 1974 quarter, the tightness in domestic capital
markets relaxed and interest rates, especially on short-term obligations, declined. These developments, which were associated with a considerable slackening in domestic activity (the GNP adjusted for price
changes declined at an annual rate of about 9 percent), provided the
basis for an acceleration in the net outflow of U.S. private capital by
$4.6 billion to about $8.9 billion. About $1.9 billion of this increase
consisted of bank loans, about $0.4 billion of purchases of foreign
bonds, largely new issues placed with U.S. investors, and about $2.3
billion were provided by nonbank corporations, partly to their own
affiliates abroad, and partly to other foreign residents.
The $4.6 billion rise in the net outflow of private U.S. capital plus
an $0.8 billion increase in net lending by the U.S. Government, less a
$0.6 billion decline in I M F lending of dollar funds, exceeded the $2.9
billion rise in inflows of foreign funds by $1.9 billion. The difference
is largely accounted for by the $1.4 billion rise in the U.S. surplus on
current account transactions and a $0.5 billion shift from net purchases to net sales of SDE's and convertible foreign currencies by U.S.
official agencies.
The net inflows of foreign funds in the December quarter amounted
to $8.7 billion; in the September quarter the net inflow was $5.9 billion. Included in the $8.7 billion rise in foreign assets in the United
States was a $1.6 billion increase in U.S. official and private debt obligations held by official agencies and banks of O P E C countries (net of
a reduction in claims by one of the oil-exporting countries ori a U.S.
corporation operating in its territory). This increase was about $2
billion less than in the preceding quarter. A slight offset to this decline
was a $0.1 billion rise in investments by these countries in equity securities of U.S. corporations. Apparently a larger share of net dollar receipts by O P E C members was lent to other countries either directly or
through intermediaries, including the oil facility of the I M F .
The U.S. debt obligations held by official agencies and banks of other
less developed countries remained nearly stable, the same as in the pre-



ceding quarter. Holdings of U.S. assets by private banks in advanced
foreign countries (including the banks organized in certain Caribbean
islands) increased (after seasonal adjustment) $2.6 billion, down from
$2.9 billion in the September quarter.
The decline in new investments in the United States by official agencies and hanks of O P E C and other less developed countries, and banks
in other advanced countries was more than made up, however, by a
shift from a reduction by nearly $1 billion (after adjustment for
seasonal variations) in U.S. debt obligations held by official agencies
of other advanced countries in the September quarter to an increase
of about $4.2 billion in the December quarter. This accumulation of
dollar assets restored the amount of official reserve assets held in the
United States by these countries to within less than $1 billion of the
amounts held at the beginning of 1974, before the large payments for
oil started.
Capital transactions—January-JuMc 1976.—In the March and June
quarters, capital transactions of the United States were affected by the
decline in business activity both in the United States and abroad
relative to the longer run trend.
Eecorded outflows of U.S. private capital dropped from about $8.9
billion in the December 1974 quarter to about $6.3 billion in the March
quarter and $6.6 billion in the June quarter. Net transfers of capital
through U.S. Government lending programs, which had expanded to
nearly $1 billion in the December quarter, remained at that level in
the March quarter but declined slightly, to $0.8 billion, in the June
Eecorded inflows of foreign capital declined from $8.7 billion in the
December quarter to $3.7 billion in the March quarter and fell further,
to $3 billion, in the June quarter.
The decline in the outflow of U.S. capital in the March and June
quarters from the December quarter was largely due to a decline in
the outflow of corporate capital to foreign affiliates as well as other
foreigners. I t is likely that this decline reflected the slowdown in foreign business activity and a contraction in their capital expenditures.
Bank lending was also down from the December quarter rate, but the
decline was smaller than that of corporate capital. I n part, these reductions were offset by a considerable increase in U.S. purchases of foreign bonds. These purchases, which were particularly large in the
March quarter, included primarily riew securities issued by international organizations, foreign governmental organizations, and state
enterprises. Capital requirements by these public organizations are not
affected by cyclical developments in the same manner as capital requirements by private business, and often expand when private capital



demand is relatively slack and contract in periods when private borrowing increases.
The decline in the foreign investments in the United States corresponded to the decline in net receipts of funds by foreigners from their
other transactions with the United States. Most important in the
March quarter was the $2.1 billion rise in their net payments to the
United States for current account transactions and the $2.3 billion
decline in their net receipts from the outflow of U.S. capital.
The further drop of $0.7 billion in foreign investments in the United
States in the June quarter cannot be as closely related to these major
categories of transactions. Net foreign payments for current account
transactions rose another $2 billion, but net foreign receipts from the
outflow of U.S. capital increased $0.4 billion. The difference of nearly
$1 billion largely reflected an increase in net foreign receipts through
other transactions, particularly some for which statistical data are not
The economic developments which influenced the changes in the overall size of capital inflows also influenced the composition of these inflows.
The major change in the inflow of foreign capital during the March
quarter was a $2.7 billion liquidation of assets held in the United States
by private banks of the advanced foreign countries. This liquidation
nearly reversed a rise in their assets in the United States in the preceding quarter. (These figures are adjusted for seasonal movements.) At
the same time, official agencies of the advanced countries increased their
holdings of assets in the United States by $3.1 billion, which compares
with an increase of $2.3 billion in the December quarter (after adjustment for seasonal movements). In fact, the inflow of funds from the
official agencies of these countries equaled over four-fifths of the
recorded infiow of foreign capital from all sources during that period.
Investments by official agencies and banks of OPEC countries, including investments in equity securities and advances to a U.S. corporation operating in the territory of one of these countries, amounted
to about $300 million, compared with about $2.1 billion in the December quarter.
Official agencies and banks of other less developed countries increased their investments in the United States by nearly $700 million,
slightly less than the rise in their indebtedness to U.S. banks in the
same period.
The major reason for the liquidation of dollar assets by banks of
other advanced countries and for the decline in investments in the
United States by OPEC countries was perhaps the decline in domestic
credit demand relative to the availability of capital and the lending



facilities of banks, and the resulting decline in domestic interest rates.
An additional factor reducing the inflow of funds from O P E C
countries was the decline in their revenues resulting from the decline
in oil production, the postponement by Iran of collecting obligations of
oil companies from the first to the second quarter.
I n the June 1975 quarter, the petroleum-exporting countries accelerated again their investments in the United States to about $1.9 billion. Official agencies and banks of other less developed countries increased their assets in the United States by about $300 million,
although their indebtedness to U.S. banks increased about $1 billion.
Private banks in industrially advanced countries (including banks
organized in the Bahamas and certain other Caribbean islands) stopped
the liquidation of their assets in the United States and reversed the
flow, but after adjustment for seasonal changes the rise of their assets
was less than $200 million.
These changes account for approximately the total capital inflow in
the June quarter except for about $0.5 billion iri purchases of U.S.
securities and direct investments by private foreign residents.
There were no significant acquisitions of assets in the United States
by official agencies of advanced foreign countries. Monetary authorities of the United States were able to purchase foreign currencies in
sufficient amounts to repay all but about $200 million of the loans obtained from foreign official agencies during the first 3 months of the
calendar year.
Treasury iroreign exchange reporting system

During fiscal 1975, by the introduction of 4 reports supplementary
to the regular series, 19 countries, principally oil exporters, were added
to the geographical list on which monthly data are collected under the
Treasury foreign exchange reporting system. Notice of the amendment to the Treasury Eegulations requiring the supplementary reports
was published in the Federal Eegister on August 29,1974.
The new reports were initiated primarily to provide comprehensive
data on U.S. liabilities to and claims on the oil-producing countries
in view of the current and potential magnitude of oil-related capital
flows and their impact on the U.S. balance of payments. I n addition
to oil-producing countries, the supplementary forms include certain
developing financial centers and certain countries in which U.S. banks
conduct an important branch banking business. Limited data on these
19 countries have in the past been collected only semiannually.
A supplementary reporting instruction was issued in February 1975
to all reporting banks to obtain separate data on claims on foreigners
held by the banks for their domestic customers.


U.S. balance of payments, fiscal years 1974-75
[In millions of dollars]


Fiscal 1975*
1st half

Current account transactions:
Merchandise trade, balance of payments basis,2 net....
Military transactions excluding grants, net
Deliveries under sales contracts
Travel, excluding transocean fares, net
Other services, net
Income on investments, net
Receipts on U.S. assets abroad
Payments on foreign assets in the United States..
Private remittances, Govemment transfers other than
Goverrmient economic grants
Balance on current account transactions
Capital account transactions:
IJ.S. acquisitions (—) and liquidations (+) of assets
abroad, net


Direct investments
Other assets reported by U.S. nonfinancial corporar
tions 3
Assets reported by U.S. banks
Credits, capital contributions, etc
Official reserve assets
Foreign acquisitions (+) and liquidations (—) of assets
in the United States, net

2d half





. 3,244


. —1,456



























Direct investments
Other claims on U.S. nonfinancial corporations 3
Securities other than U.S. Treasury issues
LiabiUties reported by U.S. banks
Claims arising from prepayments on military and
other sales contracts
Liquid assets
Other U.S. debt ObUgations
Balance on capital account transactions








. 1,012





Errors and omissions, net

1 The figures for Government economic g r a n t s and for Government credits, capital
contributions, etc. in 1974 have been adjusted to exclude certain g r a n t s to I n d i a and
Vietnam provided in the form of cancellations of claims against those countries. I n the
balance of payments compilations published in t h e Survey of Current Business, these
transactions appear a s g r a n t s offset by capital inflows.
2 The figures for merchandise trade included in balance of payments compilations are
based on d a t a collected by the Bureau of the Census, but a r e adjusted for coverage and
timing. The balance of payments figures also exclude exports and imports by U.S.
defense agencies which a r e included in military transactions. Details of t h e adjustments
a r e shown in table 4 of the quarterly balance of payments compilations published in the
Survey of C u r r e n t Business.
• I n c l u d e s claims and liabilities reported by U.S. brokerage concerns.
* Foreign p r i v a t e assets in the United States include (and foreign official assets in the
United States exclude) all foreign investments in equity shares issued by U.S. corporations,
and in claims, other t h a n marketable debt obligations, of U.S. nonbank enterprises.
•Seasonally adjusted.
S o u r c e : Survey of C u r r e n t Business, J u n e a n d September 1975, published by U.S.
Department of Commerce, Bureau of Economic Analysis.



Treasury foreign currency reporting system

The new Treasury foreign currency reporting system developed
pursuant to title I I of Public Law 93-110 of September 21, 1973,
was established during fiscal 1975.^ The first monthly reports provided
data on banks' positions in major foreign currencies as of the end of
November 1974; the first weekly reports covered banks' positions in
those currencies as of December 4, 1974. Eeports on the foreign currency positions of nonbanking corporations began as of March 31,1975.
Altliough the bank report forms had been designed with considerable
participation by banks and Federal banking authorities, because of
the pioneering nature of the new reports on foreign currency positions
unforeseen problems inevitably came to light when banks began to
submit the reports. I n addition, developments in the exchange markets
and the difficulties experienced by a number of banks led to increasing concern in the executive branch and the Congress with problems arising from the exposure of individual banks in the exchange
markets. Consequently, during the spring of 1975 significant revisions
in the forms were undertaken to solve the reporting problems which
had arisen, to increase the usefulness of the reports to the bank regulatory agencies, and to measure more precisely the foreign exchange
market phenomena being studied. At the close of the fiscal year, revised
bank report forms were in preparation for early submission to OMB
for clearance under the Federal Eeports Act.
Developing Nations Finance
International development banks ^

The Congress appropriated $619.1 million for the resources of the
international development banks in fiscal 1975, as shown in the
table below:

U.S. participation [$ milUons]



International Development


Inter-American Development
Bank—Fund for Special
Asian Development B a n k Ordinary Capital:

U.S. contribution to fourth replenishment.
Appropriation will be requested in four
amiual installments of $375 milUon each in
225.0 $275 milUon remains to be appropriated
from the amount authorized inflscal1972.


24.1 Authorization is U.S. share of first replenishment; appropriation is first installment of first replenishment.


320.0 Final installment to third replenishment.


ADB—Asian Development
1 See exhibits 65 and 66.
2 See exhibit 74.


50.0 Authorization Is third U.S. contribution to
ADB concessional faciUty; appropriation
of second contribution autborized in
fiscal 1974.



The international development hanks committed $7,743 million to
over 75 developing countries in fiscal 1975. The distribution of commitments by institution was as follows: World Bank group, $6,108
million; Inter-American Development Bank, $1,065 million; and
Asian Development Bank, $570 million.
To put into perspective the importance of these banks to development assistance generally, total lending flows from the international
development banks are equal to over 40 percent of the total official
development assistance from OECD countries in calendar year 1974.
At the end of fiscal 1975, the United States was behind the schedules
observed by other nations contributing to the international development banks. Although the United States is the largest single contributor to the international development banks, other donors together
contribute more than twice as much. Contributions from other donors
thus complement the U.S. subscriptions and increase the financial
impact of these institutions which stress the role of market forces in
the effective allocation of resources, the development of outward-looking trading economies, the critical role of private enterprise, and the
importance of spreading development benefits to the poorer people.
The World Bank group

The Intemational Bank for Eeconstruction and Development
(IBED) and its affiliates, the International Development Association
(IDA) and the International Finance Corporation (IFC), committed $6,108 million for development projects in their memlber countries in fiscal 1975. This volume represents a 35-percent increase over
the fiscal 1974 level and 72 percent over the lending level in fiscal 1973.
The IBED made new loans of $4,320 million ($1,102 inillion more
than in the preceding fiscal year) while new IDA credits were $1,576
million (compared with $1,095 million in fiscal 1974). New IFC investments in equity and loans to the private sector totaled $212 million in
fiscal 1975 (compared with $203 million in fiscal 1974 and $147 million
in fiscal 1973). As of June 30, 1975, total IBED loans outstanding
amounted to $22,322 million, total IDA credits outstanding were
$8,795 million, and total IFC cumulative net cominitments were $1,262
IBED and IDA lending is increasingly concentrated on agriculture
with agricultural projects accounting for 32 percent of total lending
in fiscal 1975 as compared with 22 percent in 1974. Other important
sectors of IBED/IDA lending in 1975 included development finance
corporations and industry (22 percent), transportation (17 percent),
and electric power (9 percent). IFC investments were concentrated in
iron and steel (23 percent), chemicals (15 percent), development
financing (13 percent), construction materials (10 percent), and textiles (10 percent).



The IBED and IDA coinmitted funds for development projects in
72 countries in fisoal 1975. The distribution of commitments by region
was as follows: Africa, $1,081 million; Asia, $2,166million; Latin
America, $1,215 inillion; and Europe, the Middle East, and North
Africa, $1,434 million. India was the largest individual borrower from
the IBED and IDA ($840 million), while Brazil was second ($427
million), and Mexico third ($360 million).
IFC commitments during fiscal 1975 went to 32 enterprises in 20
developing countries. By region, IFC commitments went to 12 projects
in Latin America ($80 million), 7 projects in Europe ($63 million), 8
projects in Asia ($55 million), and 6 projects in the Middle East and
Africa ($14 million). Turkey received the largest individual total
($62 million), with Korea second ($35 million), and Brazil third ($25
At the annual meeting of the World Bank in Washington, D.C.,
September 30 to October 4, 1974, Secretary Simon indicated several
challenges facing the Bank while strongly reiterating U.S. pride in its
role in the development of the World Bank group since its establishment in 1945.^ Among the challenges were: To strengthen the Bank's
commitment to the principle that project financing makes sense only
in a setting of appropriate national economic policies, of effective
mobilization and use of domestic resources, and of effective utilization
of the private capital and the modem technology that are available
internationally on a commercial basis, and to continue and increase the
Bank's annual transfer of a portion of its income to IDA.
The Secretary expressed concern about the Bank's capital position
and encouraged the Bank to seek ways to mobilize funds by techniques
which do not require the backing of its callable capital. He also noted
that the Bank needs to renew its commitment to stimulation of the
private sectors of developing countries, and pointed out that within
the Bank group, the IFC is a key element in the total equation and
one which should be even more important in the future.
The lending operations of the IBED are financed by paid-in capital
subscriptions, funds borrowed in capital markets and from governments and central banks, sales of participations, principal repayments
on loans, and earnings on loans and investments. The IBED's net outstanding funded debt increased by $2,637 million during the year to
$12,287 million. This debt includes 143 separate bond issues, denominated chiefiy in U.S. dollars ($5,693 million), deutsche marks ($2,859
million equivalent), and Japanese yen ($1,501 million equivalent).
During the year, IBED gross borrowings reached a new peak of
$3,510 million equivalent, up nearly 90 percent from $1,853 million
1 See exhibit 50.



borrowed in fiscal 1974. The total borrowing of $3,510 million included
$2,671 million equivalent in bond placements to raise new funds and
$839 million in rollovers of past issues.
IBED borrowings continued to shift toward placements with governments, governmental agencies, and central banks, with a sharp rise
in bond purchases by petroleum-exporting countries. Of the total of
$3,510 million raised in fiscal 1975, $856 million was raised on the private market and $2,654 million from governments. The percentage
of IBED issues purchased by central banks, governments, and governmental agencies has risen from 32 percent in 1972, to 59 percent in
1973, to 80 percent in 1974. There was a slight decrease to 76 percent
this year, but the share of IBED issues purchased by petroleum-exporting countries increased dramatically to 57 percent (up from 31 percent
in fiscal 1974 and 13 percent in fiscal 1973).
The principal suppliers of borrowed capital in 1975 were Saudi
Arabia ($891 million), Germany ($512 million), the United States
($500 million), and Venezuela ($500 million). The U.S. issues were
the first borrowings in the U.S. market in 4 years.
Of total issues outstanding on June 30, 1975^ about 24 percent were
estimated to be held in Germany, 22 percent in the United States, 12
percent in Japan, 8 percent in Saudi Arabia, 6 percent in Switzerland,
and 5 percent in Venezuela. The remaining 23 percent were held largely
by investment institutions in about 70 countries.
During the year IDA operations reached a new record level with
new credits totaling $1,576 million, an increase of 44 percent over fiscal
1974. IDA credits are funded primarily by member country subscriptions and contributions, grants from the net income of the IBED, repayments of credits, and earnings. During the year, the United States
contributed its fourth and final installment of $320 million to IDA's
third replenishment plus an additional $66 million as a maintenance
of value payment to IDA. Usable resources of IDA, cumulative to
June 30,1975, amounted to $11,613 million consisting of $10,505 million
in member contributions, $908 million in transfers from IBED net
income, and the remainder from earnings, participations in credits,
repayments on outstanding credits, and loans from the Swiss Confederation.
Eesources available to IDA for future commitment increased substantially in January 1975 when the IDA fourth replenishment became effective on receipt of official notification from the United States
of its intention to subscribe. This action was authorized by the Congress on July 2, 1974. The agreement was negotiated among 25 donor
countries in September 1973 to cover a 3-year period through fiscal
1977, and calls for total contributions of the equivalent of $4,501 million
in current dollars. (These contributions will not be subject to a main-



tenance of value provision.) The U.S. share of the replenishment
under the negotiated agreement will be $1,500 million, subject to
aimual appropriation by the Congress. The United States has chosen
to exercise its option to spread its contributions over 4 years and to
delay payment of its initial installment for 1 year until fiscal 1976.
Inter-American Development Bank
During fiscal 1975, the I D B committed a total of $1,065 million from
its two windows, for a 3-percent increase in lending over the previous
fiscal year. Of this amount, $590 inillion was lent on conventional terms
from Ordinary Capital resources and $475 million on concessionary
terms from the Fund for Special Operations. In addition, the I D B
committed $3 million in funds administered by the Bank for various
donors. Cumulative lending by the I D B from its own resources totaled
$7.1 billion as of June 30,1975. Of this, $3.5 billion had been lent from
Ordinary Capital and $3.6 billion from the Fund for Special Operations. I n addition, the I D B had lent $600 million from funds it was
administering. Local contributions in member countries to I D B financed projects are almost two times greater than I D B funding.
The power and agriculture sectors received most of the funds committed during 1975. About 27 percent ($292 niillion) went to power
and 24 percent ($257 million) to agriculture. The transportation sector
received 19 percent ($203 million) of the loans. On a cumulative basis,
agriculture has received the largest amount, 23 percent, or $1.8 billion;
power has received the next largest amount, 21 percent, or $1.6 billion.
Lending operations of the I D B are financed mainly from capital
subscriptions, borrowings in international capital markets, and member contributions to the Fund for Special Operations. At the end of
fiscal 1975 the total subscribed capital of the I D B was $5,965 million,
of which $983 million was paid-in and $4,982 million was callable.
The resources of the I D B Fund for Special Operations amounted
to $3,945 million. U.S. subscriptions to I D B capital shares were $2,409
million, or 40 percent of the total. The United States accounted for
$2,715 million, or 69 percent, of total resources contributed to the
Fund for Special Operations.
As of the end of June 1975, U.S. contributions to the Fund for
Special Operations under the capital replenishment initiated in 1970
were behind the schedule observed by the other member nations. On
March 26,. 1975, the Congress appropriated $225 million, of which
$50 million was designated for lending only to cooperatives, credit
unions, and savings and loan institutions. Of the $1.0 billion authorized
in fiscal 1972, there remained outstanding and still to be appropriated
$275 million.
I n fiscal 1975 the I D B placed long-term borrowings of $250 million



equivalent in intemational capital markets. These borrowings consisted of $225 million in the United States, $12 million in Europe
(Italy), and $10 million in Latin America (Trinidad and Tobago). In
addition, the IDB sold $53 million of 2- and 5-year bonds to central
banks in Latin America. The IDB's funded debt amounted to $1.6
billion equivalent on June 30,1975.
In February 1975, the IDB and Venezuela reached agreement on
a $500 million trust fund to be administered by the IDB. The resources
will consist of $400 million and 430 million bolivares (approximately
equivalent to $100 million), to be made available in 10 equal semiannual installments over a period of 5 years. The Venezuelan trust
fund will make loans on Ordinary Capital terms and will make small
equity investmejnts in the lesser developed countries of Latin America
to develop natural resources, finance working capital, finance agriculture and agro-industry, complement the IDB export promotion program, and promote economic integration.
In fiscal 1975, significant progress was made toward broadening
the base of the IDB's resources by bringing nonregional industrialized
nations into the Bank. A group of 12 nonregional countries (10 European, Israel, and Japan) issued in December 1974 a declaration of
their intention to join the IDB. In Febmary 1975 the IDB and the
prospective nonregional members concluded negotiations and in March
the Board of Directors approved the proposed financial package
and the amendments to the Charter necessary to facilitate entry of
the nonregional countries. The countries that were signatories to the
Declaration of Madrid are Austria, Belgium, Denmark, Germany,
Israel, Italy, Japan, the Netherlands, Spain, Switzerland, the United
Kingdom, and Yugoslavia. The group as a whole will subscribe to
$372.7 million in capital shares and contribute an equal amount to
the Fund for Special Operations. Of the total of $745.4 million, $444
million will consist of cash payments and the reraainder callable
capital. The Board of Governors adopted a resolution in May 1975
calling for expeditious consideration and ratification of the proposals
by both the current and prospective members. The target date for
effective implementation of nonregional membership is late in fiscal
The 16th annual meeting of the IDB was held in Santo Domingo,
Dominican Eepublic, May 19-21, 1975. Secretary Simon headed the
U.S. delegation and in his address said that the United States was
prepared to begin discussions of a capital replenishment for 1976-79.
He urged the more developed Latin American members to make part
of their contributions of soft funds in convertible currencies, and he
stated U.S. support for further concentration of scarce Fund for Special Operations resources in lending to the least developed countries.

588-395 O - 75
Federal Reserve Bank of St. Louis



He called for greater I D B efforts to expand agricultural research and
promote food production. He also urged reduction of the undisbursed
loan pipeline and of cost overrun financing. He emphasized the importance of private investment in the development process and called
on the I D B to expand its parallel and joint financing activities.^
The Board of Governors adopted several resolutions at the annual
meeting, the most important of which called for the urgent consideration of replenishment of the Bank's resources. A working group established to pursue that objective met in Paris in early June 1975 and
reached agreement on the basic outlines for an increase in the subscribed capital and Fund for Special Operations quotas. The Board
of Executive Directors approved the proposals of the working group
on June 26, 1975, and resolved to call a special meeting of the Board
of Governors to consider the matter. The proposed replenishment
package for the period 1976-79 totaled $6,348 million, of which $5,303
million would consist of subscriptions to capital shares ($348 million
paid-in and $4,952 million callable including unassigned shares) and
$1,045 million would be contributions to the Fund for Special Operations. The proposed U.S. share in the replenishment was $1,650 million
in capital subscriptions ($120 million paid-in and $1,530 million callable) and $600 million in contributions to the Fund for Special Operations. The administration plans to submit the proposal to the Congress
in early fiscal 1976.
Asian Development Bank

During fiscal 1975, the Asian Development Bank committed a total
of $570 million, of which $376 million were Ordinary Capital loans,
and $194 million from Special Funds/Asian Development Fund. (The
Asian Development Fund ( A D F ) was set up in 1974 to replace the
ad hoc Special Funds mechanism by a unitary, multilaterally negotiated concessional loan window.) As a result, the Bank's cumulative
loans stood at $2,061 million at June 30, 1975, $1,538 million from
Ordinary Capital and $523 million from Special Funds. The highest
proportion of lending was to the agriculture sector (29 percent).
The Bank obtains its lending resources for Ordinary Capital from
subscriptions to the Bank's Ordinary Capital stock. Cash for disbursements is provided by paid-in capital subscriptions, funds borrowed
in private capital markets and from governments and central banks
(backed by callable capital subscriptions), repayments of principal
and interest on loans, and net earnings on investments. Special F u n d s /
A D F loan resources come from member country contributions, setasides from Ordinary Capital eamings, and repayments of loans.
1 See exhibit 73.



At June 30, 1975, the Bank's subscribed. Ordinary Capital stock
totaled $3,201 million. The $431 million increase during the year
reflected the special capital increases for three members of the. Bank:
Malaysia, Indonesia, and Korea, $210.6 million, and the U.S. subscription to the first installment of the 1972 capital increase of $120.6
In fiscal 1975 the Bank entered the U.S. private capital market with
a $75 million placement. This was the first time the Bank had borrowed
in the United States since 1971. For the year as a whole, gross borrowings in international capital markets were $263 million, as compared
with $54.2 million in 1974. At the end of fiscal 1975, the Bank's total
funded debt stood at $432 million.
Congressional authorization for a $362 million U.S. participation
in the Bank's 1972 Ordinary Capital increase was approved in December 1974, along with the authorization for a third U.S. $50 million contribution to the Special Funds/Asian Development Fund. Appropriation of the first of three annual installments of $120.6 million in
Oriiinary Capital ($24.1 million paid-in and $96.5 million callable)
was sought in fiscal 1975. In March 1975, the Congress appropriated
orily the $24.1 million for the paid-in portion. On April 23,1975, Secretary Simon subscribed, on behalf of the United States, to 10,000 additional shares of the Bank's Ordinary Capital stock; i.e., to 2,000 shares
of paid-in capital amounting to $24.1 million, and to 8,000 shares of
callable capital amounting to $96.5 million. Since subscription to the
callable capital portion of the first U.S. installment of the capital
increase represents a contingent liability of the United States, appropriations are not required at the time authorization legislation is
Congress authorized a $100 million U.S. contribution to the ADB's
Special Funds in 1972. Of this amount, $50 million was appropriated
in fiscal 1974 and $50 million in 1975. A request for a third $50 million,
authorized in December 1974, has been included in the 1976 budget.
This $50 million contribution would complete the U.S. $150 million
share of the Asian Development Fund resource mobilization.
As of June 30, 1975, 14 donor countries had contributed $660.8
million to the Bank's Special Funds/Asian Development Fund. In
addition, they had contributed $16.8 million for technical assistance.
The ADF came into existence on June 28, 1974, with $236.9 million
pledged by 10 donor member countries of the Bank. The second stage
of contributions to the Fund came into effect on June 30, 1975, with
additional contributions totaling $101 million. As of June 30, 1975,
the United States had contributed $100 million to the Special Funds/
Asian Development Fund.
The eighth annual meeting of the Board of Govemors was held



at the Bank's headquarters in Manila, April 24-26, 1975. Secretary
Simon headed the U.S. delegation. I n his address,^ he emphasized
the continuing American commitment to development efforts in Asia,
exemplified by the U.S. subscription to the Bank's Ordinary Capital
increase and the contribution of a second $50 million to the Bank's
Special Funds. He congratulated the Bank for adopting a two-tier
interest rate which will entail higher rates for borrowers with higher
per capita incomes and thus encourage them to make greater use
of private capital markets for their external financing requirements.
I n this context, he urged the Bank to avoid cost overrun financing
and to pursue actively joint and parallel financing arrangements with
the private sector. Since development comes from completed projects,
he also encouraged the Bank to intensify its project supervision efforts
to ensure the successful implementation and completion of approved
A t the annual meeting, the Board of Governors approved a resolution requesting the Board of Directors to report its findings on the need
for future resource replenishment and its recommendations for future
action. During the annual meeting, the Bank held an initial discussion
with donor member countries on A D B management's proposal that
a $1 billion replenishment take place early in 1976 to provide resources
for the 1976-78 period. The United States and some other donors
were not in a position to comment on the replenishment at that time.
African Development Fund

The African Development Fund ( A F D F ) was established in July
1973 through the cooperative efforts of 14 industrialized nations and
the African Development Bank ( A F D B ) . The Fund was created to
channel non-African resources into the African development process
and to provide concessional funds for social and infrastructure
The United States was an active participant in the negotiation of
the Agreement Establishing the African Development Fund and has
sent observers to the annual meetings of the A F D B and A F D F . The
l l t h annual meeting of the Bank and the second aimual meeting of
the Fund took place in Dakar, Senegal, in early May 1975. At that
meeting Saudi Arabia and Argentina announced their intention to
join the Fund.
At the close of the fiscal year the capitalization of the Fund
amounted to $142 million, all from participants' contributions. The
Fund's lending terms are 50 years repayment period with 10 years
grace and a 0.75 percent service charge.
1 See exhibit 72.



Administration-sponsored legislation authorizing U.S. participation in the Fund with an initial $15 million subscription was introduced by Senator Sparkman on April 23,1975. In June, Congressman
Gonzalez introduced a similar bill. Authorization hearings were scheduled before the House Subcommittee on Intemational Development
Institutions and Finance for July 1975.
During fiscal 1975, the AFDF Board of Directors approved seven
loans and one study totaling about $29 million, principally in agriculture and roadbuilding in drought-stricken West Africa.
Impact of oil prices ^

The international economic and financial events of the last 2 years,
particularly the increase in oil prices, fundamentally changed the
growth outlook for the developing countries. Prior to the oil price
increases, the external position of the developing countries and their
growth prospects had been steadily improving. In the 1960's, the
developing countries were growing at a considerably faster rate than
the industrialized countries. This pattern continued into the 1970's,
with real GNP growth in the non-oil-exporting developing countries
exceeding 6 percent per annum. Export prices for the nonoil developing countries increased faster than import prices during the 1971-73
period, and the aggregate current account deficit of the developing
countries was reduced. Capital inflows increased, and contributed
significantly to an improved foreign exchange position by 1973. In
1973, the developing countries were enjoying an encouraging economic outlook; growth rates were at record highs and it appeared
such rates could be sustained because basic development policies were
being steadily improved, rates of domestic savings were rising, and
external financing was increasing.
However, the development prospects for the non-oil-exporting developing countries were significantly impaired by events in late 1973.
Not only did the increased price of oil place an immediate and extreme
burden on the balance of payments of the developing countries, but the
subsequent worldwide recession eroded both other commodity prices
and the demand for less developed country exports. In 1974, increases
in prices of food and fertilizer, occurring at the same time as oil prices
quadrupled, also had serious effects on the economies of some of the
developing countries. However, these effects appear to be transitory
as prices of basic foodstuffs have already declined and fertilizer prices
are falling. In 1974, the current account deficit of the non-oil-exporting
countries is estimated at about $27 billion.
Of particular concern to the international community has been the
problem of 33 countries designated by the United Nations as "most
1 See exhibit 49.



seriously affected" (MSA's) by the oil and other import price rises.
The magnitude of the current account and basic balance deficits for
the MSA's is modest in absolute terms^about $6 billion and $1.6
billion, respectively. However, these countries generally require assistance on highly concessional terms as they are the countries with
relatively weak long-term development prospects. I n many of the
MSA's, the growth rate of G N P has been reduced below the rate of
population growth. As the scarce resources of the MSA's are used to
pay for current consumption of oil, rather than longer term development projects, present and future growth potential is reduced. The
response of international donors to the financing needs of the MSA's
in 1974 was encouraging. Increased bilateral aid flows from both the
DAC (Development Advisory Committee) and O P E C countries
cushioned the immediate impact of increased oil prices, while the
MSA's were able to finance the remainder of the deficit through regular I M F drawings and I M F oil facility borrowings.
Many middle- and high-income developing countries experienced a
greater magnitude of disequilibrium in their extemal accounts than
the MSA's, although the consequences have been less dramatic. I n these
somewhat more advanced countries, oil is more widely used in the production process than in the subsistence economies of the most seriously
affected. However, middle- and high-income developing countries had
access to private capital markets to cover much of the increased cost of
^ oil, at least in 1974.
I n 1974, despite forebodings to the contrary, capital flows to finance
the greatly increased current account deficits of the developing countries were forthcoming mainly in the form of increased trade credits
from the industrialized nations and expanded private capital borrowings. Supplementally, traditional and new sources of financing from
the Intemational Monetary Fund were largely adequate to finance the
remaining 1974 balance of payments deficits.
I n 1975, the impact of higher oil prices and recession in the industrialized countries shows up as a requirement to substantially slow
down growth in the developing countries because large amounts of
additional capital cannot continue to be borrowed year after year.
Less developed country adjustment to higher oil prices will be assisted over time by a strong recovery in economic activity in the developed countries. Also, as oil has become an expensive source of energy,
the developing countries have begun to explore the possibility of
exploiting heretofore undeveloped energy potential such as hydroelectric power and gas.
Development Committee

I n June 1974, the Committee of Twenty recommended the establishment of a joint Ministerial committee of the Boards of Govemors



of the I M F and the I B E D to carry forward the C-20 Working Group
study of the broad question of the transfer of real resources to developing countries and to recommend measures to be adopted in order to
implement its conclusions. Prompt activation of such a group was
urged by the United States during the summer.
The Joint Ministerial Committee of the Boards of Governors of the
Bank and the Fund on the Transfer of Eeal Eesources to Developing
Countries (Development Committee) was established October 2, 1974,
during the I M F / I B E D annual meetings. The members of the Committee are govemors of the Bank, governors of the Fund, ministers, or
others of comparable rank. The U.S. member of the Committee is the
Secretary of the Treasury. The delegation includes representatives
from the Federal Eeserve Board, the Department of State, and the
Agency for International Development. The Chairman of the Committee is Henri Konan Bedie, Ivory Coast Finance Minister. Henry J .
Costanzo, an American, was elected Executive Secretary. Eepresentatives of selected international organizations will participate in the
Committee's meetings.
The formal mandate of the Committee is to maintain an overview of
the development process; to advise and report on all aspects of the
transfer of real resources to developing countries; and to make suggestions regarding implementation of its conclusions.
At its inaugural meeting, the Committee decided that priority attention should be given to the needs of the countries most seriously affected
by the increase in oil and other prices in 1973-74. The Committee met
twice more during the year—in January and June—each time in conjunction with meetings of the Interim Committee of the Board of
Governors of the I M F on the International Monetary System.
At the session on January 17, 1975, the Committee endorsed the Interim Committee's recommendation to establish a special account in
order to reduce, for the most seriously affected I M F members, the
burden of interest payable by them under the 1975 I M F oil facility.^
As of June 1975, no formal contributions had been announced, although there was continued widespread support in principle for concessional balance of payments assistance to poorest countries with
urgent needs. The United States has suggested that consideration be
given to using a portion of the profits from sale of I M F gold, in conjunction with voluntary contributions, to support the interest subsidy
The combination of high oil, fertilizer, and food prices along with
industrial country inflation and recession has caused severe economic
difficulties for many developing countries. Drawdowns of reserves and
1 See exhibit 71.



increased borrowing in 1974 and 1975 will result in reduced availability of funds for the immediate future. To help meet balance of payments needs of the poorest countries, the United States has proposed
that a trust fund be created, managed by the IMF, and financed by
concessional contributions from the oil producers and other countries,
as well as contributions related to the sale of a portion of IMF gold.
At its meeting on June 12, the Development Committee urged the
Executive Directors of the IMF to consider all aspects of such a trust
fund as well as to continue their study of all possible sources of
The Development Committee was also concerned with the capital
needs of middle- and high-income developing countries. In this regard, the Committee noted the importance of measures to facilitate
and expand the access of developing countries to private capital markets and recommended expanded technical assistance to developing
countries seeking such access. The Committee agreed to establish a
working group to make a review of regulatory and other constraints
affecting access to capital markets and also to study further proposals
to support developing countries' access to private markets.
As a further step to lighten the debt burden of poorer countries
in the present situation, the Development Committee gave its unanimous support to the establishment for 1 year of a new intermediate
lending facility in the World Bank (known as the "third window")
to lend on terms intermediate between those of IDA and of the World
Bank. Such a proposal was unanimously accepted by the World Bank's
Executive Board in late July. Since funds will be limited, eligibility
criteria will favor the developing countries with an annual per capita
income of less than $375.
During the coining year, the Development Committee will consider
establishment of a trust fund for the poorest developing countries on
the basis of study by the IMF Executive Board, Progress can also be
expected with regard to increasing access to capital markets for middle
and higher income developing countries. In addition, there will be
consideration of financial aspects of the world food situation and
measures to improve information systems on the fiow of resources to
developing countries.
Investment security

The Interagency Committee on Expropriation, whose membership
includes the Departments of State, Treasury, Defense, and Commerce,
was established in fiscal 1972 to implement President Nixon's policy
statement of January 19, 1972, on expropriation. During fiscal 1975,
this Committee continued to monitor investment security situations
1 See exhibit 75.



and periodically to consider actual and potential investmint probkmi
in order to head off investment disputes where possible and initiate
the U.S. response to countries which expropriate or unfairly treat
U.S.-owned interests without providing for prompt, adequate, and
effective oompensation.
In response to a request by the Economic Policy Board and Council
on Intemational Economic Policy, Treasury submitted several papers
outlining measures to broaden and strengthen the present U.S. policy
toward expropriations. An improved investment climate in developing
countries would benefit both the U.S. firms and the developing countries themselves because most developing countries need the management and technological skills as well as the capital which U.S. companies will provide if their investments are secure. Interagency discussions on these proposals are underway.
Debt rescheduling
On February 28, 1975, Secretary Simon submitted to Congress the
administration's first annual report on debt relief granted by the
United States to developing countries. (The report is required by section 634(g) of the Foreign Assistance Act of 1961, as amended in
1974.) The report is comprehensive, containing detailed information
on the debt of major debtor countries and the means by which the
United States and other creditor countries have dealt with debt service
In fiscal 1975, discussions were held with the Governments of
Pakistan and Bangladesh to conclude bilateral agreements for the
debt rescheduling agreed to the previous year.
On May 2, 1975, a bilateral agreement was signed with India rescheduling $45 million in Indian debt service which became due to
the United States during the Indian fiscal year ending March 31,
1975. This agreement effective as of June 13, 1975, implements an understanding reached with India by the World Bank, in its capacity
as chairman of the Aid-to-india Consortium, on October 30, 1974.
Other creditor nations rescheduled $149 million. However, at the
1975 Aid-to-india Consortium meeting the United States indicated
that it would not grant debt relief to India in fiscal 1976, but expressed
the view that its position not deter others from rescheduling if such
action were appropriate under their governmental procedures.
Also in fiscal 1975 the United States, along with most of Chile's
Paris Club creditors, agreed with IMF's analysis that Chile faced a
very difficult economic situation. On that basis creditors agreed to a
multilateral understanding whereby debt due from the Government
of Chile in 1975 would be rescheduled. Debt due the United States in
1975 is about $183 million while that due other Paris Club creditors
is approximately $350 million.



Local currency management

One of the responsibilities of the Secretary of the Treasury is to
determine which foreign currencies in possession of the United States
are in excess of normal requirements. The purpose of this determination
is to assure maximum use of local currencies in lieu of dollars.
Since 1960, a total of 14 currencies have been designated as excess
currencies. F o r fiscal 1975, the currencies of only seven countries were
designated as excess: Burma, Guinea, India, Pakistan, Poland, and
Tunisia. The only change from the fiscal 1974 determination was the
removal of Yugoslavia which took place on December 31, 1973.
Bilateral assistance

The Department of the Treasury participates in the U.S. Govemment development finance program through its membership 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 concerns are to relate the various foreign economic assistance programs
to overall U.S. economic interests and intemational development objectives, and to assure the interrelationship and consistency of bilateral
and multilateral programs.
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-for-peace program; and O P I C .
Agency for Intemational Development.—As a member of the
Development Loan Committee of A I D , Treasury focuses primarily on
the economic and financial impact of A I D development lending programs and on the macroeconomic policy performance of the borrowing countries. During fiscal 1975, A I D authorized 53 new development loans, totaling $453.4 million, for specific projects and sector
Public Law I^SO.—Treasury is represented on the Interagency Staff
Committee, which reviews all Public Law 480 proposals. Treasury
looks primarily at the impact of this program on the U.S. balance
of payments and the domestic economy. During fiscal 1975, Title I
sales agreements were signed with participating governments and
private trade entities for a total value of $861 million, higher than
the previous year but nevertheless down substantially from the levels
of earlier years. Title I I donations totaled $355 million, somewhat
higher than the previous year.
The Overseas Private Investment Corporation.—Assistant Secretary for International Affairs Cooper represented the Department of



the Treasury on OPIC's 11-man public/private Board of Directors
during fiscal 1975. O P I C administers two major programs to encourage U.S. investment in the developing countries: Investment insurance
against the political risks of expropriation, inconvertibility, and war,
revolution, and insurrection; and investment finance which provides
both direct loans and commercial risk guarantees.
O P I C issued $1^/,211.9 million in investment insurance in fiscal
1975, an increase from the $994.8 million issued in fiscal 1974. The
financing program guaranteed $26.2 million of new investment in the
developing countries and extended $6.9 million in direct lending during
fiscal 1975.





Special studies, projects, and programs
Numerous studies and projects were completed by the planning and
management staffs of the Office of the Assistant Secretary (Administration) which developed program systems and operating procedures
to strengthen general organization effectiveness.
Office of the Assistant Secretary {Administration).—The Assistant
Secretary (Administration) established a task force to cooperatively
implement the provisions of the Privacy Act of 1974 (Public Law 9 3 579) within Treasury. The task force provided for and reviewed an
inventory of Treasury's "systems of records," prepared regulations, directives, and handbooks, created an administrative structure to process
inquiries, and prepared estimates of resources, personnel, and support
services required to make the act's provisions fully operational within
the Department.
The Office of Administrative Programs was reorganized in response
to increasing requirements in the management of the Department's
telecommunications program, administrative support of the Secretary's representational activities, and renovation of the Main Treasury Building.
An analysis of the organization and management of the Office of
Computer Science led to plans for procedural changes and improved
controls over the allocation and management of A D P services in the
Office of the Secretary.
The offices under the Assistant Secretary (Administration) continued their management by objectives program, in which even the
smallest divisions in each office established objectives and developed
action plans for achieving them. The Assistant Secretary (Administration) held a series of highly productive meetings with each of his
office directors and their key staff members to discuss the objectives
and related problems.
Office of the Secretary.-^—TvQ^2iSViVj officials and analysts, with representatives from OMB and the Domestic Council, participated in a
study and assessment of the general revenue sharing program. This
program, administered by the Office of Eevenue Sharing in the Office
of the Secretary, is due to expire in December of 1976. The study recommended continuance of the program and made additional recommendations to improve its operations. The Secretary submitted the report
with the conclusions and recommendations to the President.
The 1974 amendments to the Freedom of Information Act were implemented within the Department in time to become fully operational
on Februarv 19, 1975. Analysts assisted in developing procedures and
directives for the purpose of processing requests for records received
from the public bv the Department. Locations to receive requests were
identified, and additional staff was made available to process the requests for access to information.




Departmental.—Th.^ Department's position management policy was
updated at the beginning of fiscal 1975. Eequirements for bureau position management systeins were revised in anticipation of the need for
further cost reduction efi'orts.
At the request of the National Director of the U.S. Savings Bonds
Division, an organization and management review was performed of
the Division's operations, focusing on the Washington headquarters.
The study made some 30 recommendations for modifying or improving
Division operations.
A contract study of U.S. coinage requirements to the year 1990 is now
in progress. This is a complex study which will take about 10 months. It
will examine improved ways of forecasting coin demand oyer the
next 15 years, the ability of the coinage production-inventory-distribution system to meet demand, and the options which are open for system
change. The study will reexamine the entire family of U.S. coins:
What should be the size, composition, and denominations of coins, given
the future demands of the economy, the anticipated price and availability of different metals, and the effects changes would have on user
groups and coin-operated devices ?
Man/jcgement by objectives.—^^The departmental management by objectives program was expanded to cover 69 priority projects throughout the bureaus and the Office of the Secretary. Seventeen of these were
Presidential objectives that were updated regularly for the information of OMB. The key to Treasury's successful program has been individual quarterly meetings between the bureau/office head and his
supervisory Assistant Secretary. In these meetings departmental managers reviewed progress, identified potential problems, and provided
policy guidance.
Productivity.—The Department has a long history of commitment
to productivity improvement and continued to participate vigorously
in the Government-wide program initiated in 1970 to establish measures of productivity and foster productivity improvement. Several
Treasury bureaus have been cited for productivity enhancement efforts
in the Federal productivity reports issued by the Joint Financial
Management Improvement Program.
Treasury bureaus have quantified productivity covering activities of
77 percent of the Department's man-years. Overall, Treasury's productivity management performance has been better than that of the
Goyernment as a whole in two respects. First, in measuring productivity. Treasury has covered a greater percentage of the man-years
expended than the Government as a whole. Second, Treasury's average
productivity, as^ reflected in data computed by the Bureau of Labor
Statistics, was higher than Govemment-wide averages.
Long-range plarming.^^K new approach to long-range planning for
Treasury bureau operations was initiated. The purpose of the revised
planning approach is to help policy officials set the basic direction of
bureau programs and monitor program performance. The new approach emphasizes three things: (1) Using a simplified planning document; (2) applying a planning methodology which provides a solid
basis for policy and program evaluation and resource allocation decisions; and (3) encouraging: a flexible process which permits policy
officials to tailor the process to suit individual bureaus and their own
management styla.



Advisory committee marmgement.—The Assistant Secretary (Adininistration), as departmental advisory committee management officer, continues to advise and assist all Treasury components in the
application of procedures required by the Federal Advisory Committee Act (Public Law 92-463) and reviews advisory committee
utilization and effectiveness.
Environmental quality program.—Major program accomplishments
in fiscal 1975 included: a draft statement concerning the proposed
construction of an additional facility for the Bureau of Engraving and
Printing in Washington, D.C.; an environmental assessment in connection with the proposed relocation of the Consolidated Federal Law
Enforcement Training Center to Brunswick, Ga.; participation in the
preparation of an interagency draft environmental impact statement
for the Energy Independence Act of 1975 and related tax proposals
in support of legislation proposed by the President; and the establishment of an agreement between the Department and the Environmental
Protection Agency to abate air pollution emissions from, and phase
out by June of 1976, the incinerator operated by the Bureau of Engraving and Printing in Washington, D.C.
Technical assistance to foreign governments and officials.—Treasury
continued its close cooperation with the Agency for International
Development (AID) and other U.S. agencies and private organizations, as well as foreign governments, in programs of technical assistance to developing nations. During the year, customs and tax advisers
were assigned on both a long- and a short-term basis to work in a dozen
such countries. I n the Treasury itself, orientation, educational, and
training programs have been provided on a continuing basis to foreign
visitors referred by A I D and other agencies, both governmental and
nongovernmental, involving in fiscal 1975 more than 100 man-days of
such activity. Visitors have come from less developed countries and also
from Western Europe and other industrialized areas of the world for
more advanced and specialized consultations and training.
Emergency preparedness

The Mobilization Planning Staff has continued cooperation and
coordination with the officials of the GSA Office of Preparedness
(which becomes the Federal Preparedness Agency on July 1, 1975),
the Federal financial agencies, and the Treasury bureaus in implementing and reviewing new concepts and policies for emergency preparedness planning and operation at both the national and regional levels.
One new and interesting area for Treasury participation in interdepartmental emergency preparedness planning, which commenced this
year, was the preparation of a Federal Eesponse Plan for Peacetime
Nuclear Emergencies. The purpose of this continuing, joint effort is tb
provide for coordinated Federal response to peacetime nuclear emergencies of wide-ranging variety and for coordinated supportive action
with State and local governments and the private sector.
The latest revised Treasury emergency planning directives, providing policy and procedural guidance to the Department and its bureaus
on preparedness requirements and plans for continuity of essential
functions of government, organizational arrangements, and civil preparedness readiness levels, were issued in November 1974. The provisions of these directives were tested at national headquarters level

 5 - 1 1
588-395 0 - 7



and in selected regions during the conduct of civil readiness Exercise
E E X - 7 5 in spring 1975. The overall Treasury participation in Exercise E E X - 7 5 emphasized the testing of (1) emergency alerting procedures, (2) contingency communications and operating plans/procedures, and (3) damage estimate/assessment procedures at its
emergency operating facilities. The remote terminal querying capability recently introduced at the Treasury's alternate relocation site was
used for obtaining, from the GSA Office of Preparedness computer
system, damage assessment information concerning Treasury facilities
Preparation for Exercise E E X - 7 5 included (1) a comprehensive
briefing program, (2) review of emergency preparedness plans and
procedures, (3) the conduct of an actual test to alert notification communications systems and procedures for the three Federal civil readiness levels, and (4) the designation of exercise action officers in the
various offices within the Office of the Secretary and in the Treasury
bureaus as ready points of contact for exercise action. During the exercise, three action/control teams, representative of the three emergency
executive teams, relocated as appropriate for the play of the exercise
scenario at the Treasury emergency operating facilities. An emergency
checklist of actions to be taken and action documents to be used (under
certain readiness levels for key Treasury officials responsible for directing such actions when required) which had been developed earlier in
the year proved sound and practical when used for this exercise.
The consensus of Treasury participants was that the experience
gained and lessons learned during the planning for and conduct of
Exercise E E X - 7 5 were significantly valuable and well worth the.time,
effort, and resources expended. Participation in future exercises on an
expanded scale is expected and desired. Certainly the benefits gained
from participation in Exercise E E X - 7 5 enhanced the Department's
readiness posture for the onsite review conducted by a joint TreasuryOffice of Preparedness team on June 26,1975.
Treasury payroll/personnel information system

I n an effort to provide administrative guidance and management
overview, the Assistant Secretary (Administration) established the
Treasury Employee Data and Payroll Division during fiscal 1975.
One of the tasks of the Division was to chair a study involving experts
of various bureaus to "determine the requirements of a Treasury-wide
payroll/personnel information system."
The task force study, approved by a departmental steering committee, concluded that an integrated payroll and personnel system would
be more efficient and provide more data than the maintenance of the
present diverse systems and could save as much as $6.6 million annually. Further, it was concluded after analysis of many systems and
careful consideration of the cost involved that a Treasury-wide integrated payroll/personnel information system would be implemented
utilizing as a base the departmental integrated personal service systems and a remote terminal data entry subsystem.
The task force based its conclusions on findings that the current
separate departmental personnel systems and the five independent
automated payroll systems, together with manual support, generally
fulfill their function: However, there is a lack of standardization of



data which results in the expenditure of considerable manual effort
to prepare bureau and Department-iwide reports. There is duplication
of effort as the separate systems perform the same function, resulting
in redundant staffing, systems programming, and systems changes, and
they do not take full advantage of available technology. Data stored
in the computer systems are not utilized to supplement manual recordkeeping and report preparation, nor is the most advanced communication means utilized to transmit data from its source to the data processing site.
Implementation of a Treasury payroll/personnel information system is estimated to take 18 months, following which all bureaus should
be incorporated into the system. Implementation of the system is
scheduled to start early in fiscal 1976. The implementation team will
have 46 members, representing various areas of expertise and selected
from most bureaus.
Internal auditing

Adequate staffing of bureau audit functions with qualified auditors
continued as a high-priority goal for internal audit in fiscal 1975, and,
as a result, the Office of Audit (OA) was involved in recruitment efforts of several bureaus.
An organizational change transferred the personnel, functions, and
responsibilities of the former Fiscal Management Staff from the Office
of Budget and Finance to OA, strengthening its central administrative
role. Also transferred was the responsibility for reviewing accounting
systems. I n addition, the function of handling complaints from employees concerning merit system violations was assigned to the Director, OA.
OA performed an appraisal of the internal audit activities of the
Internal Eevenue Service. The review focused on the use of Federal
audit requirements relating to organization, planning, reporting, and
the qualifications of staff members. Audits were completed on the administrative accounts of the Consolidated Federal Law Enforcement
Training Center, and the Exchange Stabilization Fund. An audit was
also made of the Treasury Historical Association.
OA participated in a conference to explore ways in which agencies
responsible for grant audits can assist the Office of Eevenue Sharing
by exchanging data on strengths and weaknesses of State and local
audits. Some 44 States agreed to perform audits under Treasury's
guide. Also, OA submitted to the Oftice of Eevenue Sharing an analysis of its first financial statement, and proposals for strengthening
controls over trust fund payments and improving the accounting system. A report to OMB was prepared on questions regarding general
revenue sharing obligations, reserves, and balances.
In response to congressional interest, and in conjunction with the
Bureau of the Mint and GAO, OA assisted in planning and observing
the gold inventory at Fort Knox. Auditors found control to be adequate, and records maintained agreed with the gold inventory.
OA cooperated with a task force on administratively uncontrollable
overtime, chaired by the Deputy Director, Office of Personnel. Agreement was reached to update the Treasury policy through provision
for more specific criteria for the administration of such overtime.



OA was assigned responsibility for a porti9n of the departmental
regulations and contributed to the final guidelines.
The Director, OA, chaired a meeting of the Committee on Practices and Standards of the National Intergovernmental Audit Forum,
held at OA offices in November. Members of the Committee are
drawn from city and State, as well as Federal, organizations. The
purpose is to improve cooperation and coordination of intergovernmental auditing. The Director chaired a meeting again in May to
recommend uniform accounting principles and audit guides for Federal, State, and local governments.
Continuous liaison was maintained with GAO on matters of mutual
concern, including coordinating responses to reports on departmental
The Office of Budget and Finance continued to develop policies and
procedures and to direct and coordinate the formulation, justification,
and presentation of appropriations for budget estimates which totaled
nearly $44 billion in fiscal 1975. The amount includes $2.3 billion for
operating appropriations, $1.8 billion for social security payments
pursuant to the Tax Eeduction Act of 1975, $33.1 billion for public
debt and other interest and miscellaneous accounts, and $6.1 billion
for general revenue sharing.
During fiscal 1975, the budget staff:
(1) Established and maintained controls on expenditures, number
of personnel on roll, and motor vehicle fleet to comply with limitations and directives prescribed by OMB.
(2) Gave special budgetary consideration and emphasis, including
the preparation of requests for budget amendments and supplemental
appropriations and reimbursements, to programs of special concern
to the administration. These included a supplemental appropriation.
Public Law 93-554, for making payments to Eisenhower College,
Seneca Falls, N.Y., and for the transfer of funds to the Samuel Eayburn Library at Bonham, Tex. Supplemental funds were also obtained : (a) under the Fishermen's Protective Act of 1967 to reimburse
owners for fines paid to foreign countries to secure release of their
fishing vessels and crews, and (b) to cover the costs of issuing 15
million additional checks for the special $50 payments made to social
security recipients pursuant to the Tax Eeduction Act of 1975.
(3) Obtained supplemental appropriations for the cost of pay increases authorized by Executive Order 11811, wage board actions,
and administrative actions amounting to $58.3 million. A total of
$15.3 million of the increased costs was absorbed by application of
management savings, reimbursements, and certain administrative
(4) Assisted in the preparation and presentation of budget requests
for funds totaling nearly $1 billion to be appropriated to the President for the U.S. share to the intemational financial institutions of
which the Secretary of'the Treasury serves as a Governor.
Personnel management

An affirmative action plan for employment, placement, and upward
mobility of disabled veterans was developed in addition to an update



for fiscal 1976 of the affirmative action plan on employment of the
handicapped. During the past year Treasury facilities nationwide
were reviewed to identify and, when feasible, eliminate architectural
barriers to the handicapped.
A new agreement was negotiated with the Civil Service Commission
which permits Treasury to appoint experts and consultants without
securing individual authority for each case from the Commission.
A special excepted appointment authority (schedule A) was negotiated with the Civil Service Commission permitting the Office of
Trade, Energy, and Financial Eesources Policy Coordination to hire
up to 10 persons to supplement the permanent staff in the study of
complex problems relating to international trade and energy policies.
Staff leadership and assistance were provided resulting in (1) the
successful termination of economic stabilization activities formerly
carried out by the Cost of Living Council, and (2) the provision of
approximately 30 Treasury employees by detail to assist in carrying
out the mission of the Presidential Clemency Board.
Bureaus have made substantial gains in making the development
of their managers and executives a systematic process. I n formal programs, 34 managers and executives attended'the Federal Executive
Institute in Charlottesville, Va., and over 110 attended the various
programs of the Executive Seminar Centers.
Each bureau within Treasury has an approved upward mobility
plan which provides for the systematic identification, development,
and placement of lower graded employees. In the first half of fiscal
1975, 1,286 persons were placed in target positions. This represents
68 percent of the fiscal year objective strength.
Sustained progress has been made in intensifying the Department's
personnel management evaluation program. Evaluation system guidelines have been published. The personnel management evaluation systems in the Treasury bureaus have been strengthened. Onsite reviews
in two bureau headquarters and a nationwide survey of the Bureau of
the Mint were completed.
As in the previous fiscal year, labor relations activity within Treasury continued to increase in terms of both numbers of employees
represented and coverage by negotiated agreements. Exclusive recognition was granted to three new bargaining units including over 900
employees. Some 89,010 Treasury employees are in units of exclusive
recognition in 8 separate bureaus, and of this number 85,380 are covered by negotiated agreements. Treasury is the most highly organized
of all CaJbinet-level agencies, with over 90 percent of all eligible
employees included in bargaining units. During the year, a sharp
increase was noted in the referral of disputes to third parties. More
unfair labor practice charges, disputes over agreement language, and
negotiations impasses were referred to third parties than the combined
number ref erred since the inception of the program.
Procurement iand personal property management

During fisoal 1975, the negotiation of 36 blanket purchase agreements for office machines and miscellaneous supplies for use by all
Treasury bureaus provided a savings in excess of $203,000. Consolidation of Treasury requirements for 575 undercover law enforcement
vehicles, procured through GSA, resulted in a significant dollar sav



ings over separate procurement methods and an improved quality of
vehicle. Vehicles purchased included compacts, intermediate-size and
full-size sedans, for average vehicle prices of approximately $3,600,
$3,800, and $4,100, respectively. Added for the first time this year for
undercover work were intermediate-size station wagons averaging in
price at $4,100.
Treasury's personal property transactions during fiscal 1975 included reassignment within Treasury of property valued in excess of
$850,000; transfer of personal property valued in excess of $1 million
to other Federal agencies for their use; and the donation of personal
propeity valued at approximately $302,000 no longer needed by the
Federal Government for use by State organizations and nonprofit
groups. Treasury also obtained, without cost, personal properlty valued
at over $3 million from other Federal agencies and $638,650 worth
from the former Cost of Living Council.
Real property management
The headquarters of the U.S. Customs Service has nearly completed
moving into the Federal Building at 1301 Constitution Avenue (formerly known as the Main Labor Building); only the computer center
remains to be moved. These moves will effect a consolidation of
Customs Service headquarters activities from leased space in eight
Two other consolidations of Treasury activities in Washington,
D . C , were completed: the Office of Eevenue Sharing was moved from
several locations into the recently completed Columbia Plaza facility;
and the Office of the Comptroller of the Currency completed moves
from a number of locations into a new facility at L'Enf ant Plaza.
Consolidation of the field offices of the Bureau of the Public Debt
into a new building in Parkersburg, W. Va., was completed on schedule. The Bureau took occupancy of the building on November 1, 1974,
and the move-in was completed by January 31,1975.
The Department is entering its second year of operations under
GSA's Federal buildings fund program. This program has and will
continue to demand close coordination between Treasury's facilities
management and budget staffs at both the bureau and departmental
levels. One promising element associated with the program is the
computerized listings and reports on the volume and characteristics
of leased and Federal space, as well as the special services necessary
to maintain suitable operational environments. This data, in conjunction with GSA's nationwide space utilization improvement program,
will assist the Department in reducing the costs incurred for space
and related services.
Major renovations in the Main Treasury Building are continuing,
with installation of air-conditioning fan coil units in 2 of 10 zones of
the building scheduled for early 1976.
Printing management

The GSA-funded renovation project of the Treasury Annex subbasement level to accommodate the consolidated departmental printing plant was completed during fiscal 1975. Several new major pieces
of equipment were procured, including a large paper folder and fourunit offset press. A two-shift operation was also implemented.



In fiscal 1975 there was a significant increase in the amount of work
coming from the bureaus for preparation and procurement by the
Printing Procurement staff. Printing procurement was transferred to
the working oapital fund, providing a means to charge for such services on an equitable basis.
Physical security

Controlled-access procedures were implemented during fiscal 1975,
based upon a physical security survey of the Main Treasury and
Annex Buildings which revealed a number of deficiencies in the internal and extemal security posture of these buildings. As a result,
the number of serious incidents occurring in the Main Treasury and
Annex Buildings has decreased from an average of nine a month to
Procedures were issued for the installation and retention of security
alarm systems in those Gt>vernment owned and leased buildings occupied by the Office of the Secretary. Substantial savings have been
realized as a result of technical physical security surveys conducted
to upgrade, consolidate, or eliminate existing security alarm systems,
along with comprehensive evaluations of individual requests for

Treasury automated communications switch.—A study was made
and draft specifications prepared for the automation of the Treasury
Telecommunications Center. A request for proposal was finalized in
fiscal 1975 and will be issued in fiscal 1976. The automated switch will
be installed and become operational in fiscal 1976, replacing the existing manual torn-tape operation.
Treasury electronic telephone system.—The first major phase in the
conversion of the Treasury telephone system to Centrex I I service was
accomplished during the move of the Office of the Comptroller of the
Currency t o X ' E n f a n t Plaza in fiscal 1975. The conversion was begun
following receipt of approval from GSA for the implementation of a
Treasury electronic telephone system to replace the present antiquated
electromechanical system. Conversion of the Federal Building at 1200
Pennsylvania Avenue, NW., to the new service is scheduled in fiscal
1976 followed by the remainder of Treasury early in fiscal 1977.
Treasury radio and paging system.—Planning for the implementation of the radio and paging system was completed in fiscal 1975 and
installation was completed in June 1975. This system provides a departmental mobile radio capability, including radio-telephone interconnect service, in the Washington metropolitan area. Eeliable, economical radio paging will also be available to replace the more expensive but less efficient leased service now provided by the telephone company and a commercial service vendor.
Telecommunications complex.—Plans were developed forthe utilization of the vaults on the first fioor of the Main Treasury Building to
accommodate the departmental telecommunications facilities, some of
which are now located in prime office space. Construction is scheduled
for the period October 1975 through March 1976. At that time, the
vault space should be completed and ready to accept the Treasury
automated communications switch and, shortly thereafter, the Treasury electronic telephone system.



Secretarial secure travel communications.—During fiscal 1975, equipment was installed in the Treasury Telecommunications Center to provide a secure message communications capability for the Secretary
of the Treasury and his immediate staff while in a travel status on
trips throughout the world. Messages of all classifications may be exchanged directly with the Secretary's aircraft while in flight and on
the ground during stopovers.
Secure communications for law enforcement.—Secure teletype circuits were established from the Treasury Telecommunications Center
to the U.S. Secret Service, the U.S. Customs Service, and the Bureau
of Alcohol, Tobacco and Firearms. The same capability is being programmed for the Internal Eevenue Service in fiscal 1976.
Paperwork management

The departmental effort was concentrated on the development and
installation of a new and innovative system for communicating the
Department policies and procedures. Principal features of the new system include a manual for initial reference on any subject, a standard
subject classification system to group related material, a codified index
system, and a standard format and style to ease both preparation and
reading. The new system replaces 18 separate issuances.
Additional significant accomplishments include the development of
records disposition schedules for approximately 80 percent of the records maintained in the Office of the Secretary by the design and preparation of 21 functionally oriented schedules. This breaks with the
traditional approach of individual schedules for each separate office
and provides a flexible system for maintaining current schedules while
the Office of the Secretary may undergo organization change. Also,
complete inventories of all interagency reports required by components
of the Department were compiled and a procedure established to evaluate the need and control the creation of interagency reports. A
complete inventory was also compiled of all reports required of Department components by Congress and costs for each report estimated.
International support

Involvement of Treasury officials in international affairs continues
to grow. The International Support staff and the Travel Office have
been able to handle the increased workload of conferences, meetings,
overseas trips, and embassy liaison only by working considerable overtime and by borrowing assistance from other areas of the Secretary's
Cash Room

A new and modern Cash Eoom is being planned for Main Treasury.
As presently envisioned, it will permit better accommodation of the
public while improving the security and efficiency of the banking operations. The old Cash Eoom may be used as a large conference and
meeting room, as a location for important ceremonies and significant
Treasury events, and for certain departmental activities such as those
associated with the Bicentennial. These uses are contingent upon the
results of historical studies now being performed as required in national historic preservation laws.



Space planning
The continued growth in the substantive staffs of the Secretary's
Office, the plans to relocate the Cash Eoom f acilities^ and the air-conditioning project have resulted in a shortage of some 20,000-plus feet of
space in the Treasury Building. A housing plan has been developed to
cover immediate, intermediate, and long-range requirements.
Treasury continued to maintain a low disabling-injury frequency
rate during 1974. The Department's rate based upon internal reports
was 2.9 injuries per million man-hours worked. This compared favorably with the all-Federal rate of approximately 6.0.
A program highlight of the year was the occasion of the annual
meeting of the Treasury Safety Council attended by the Secretary
of the Treasury and heads of bureaus or their representatives.
A Library for numismatic reference was established at the San
Francisco Mint in fiscal 1975. Materials for the collection were donated
by the Pacific Coast Numismatic Society.
Treasury Historical Association

I n 1974 the Association completed its first full year of operations.
Quarterly meetings of the memibership and the Board of Directors
were held and the first annual meeting, attended by Secretary Simon,
was held on April 29, 1975. The Association received tax-exempt
status from the Internal Eevenue Service and the District of Columbia.

The Bureau of Alcohol, Tobacco and Firearms ( A T F ) is charged
with regulating four industries—alcohol, tobacco, firearms, and explosives. During fiscal 1975, A T F also assumed responsibility for
enforcing the revised wagering law.
The Bureau is staffed with 1,510 law enforcement officers who enforce criminal laws relating to the four industries, and 708 inspectors,
who are regulatory officers. At the end of the yea^ it had a total of
3,805 employees.
The primary task of A T F law enforcement officers is now t h e
enforcement of Federal gun control laws, particularly in attempting
to keep guns from criminals and would-be criminals. Traditionally,
the Bureau's primary goal was to eliminate the manufacture and sale
of illicit liquor, which defrauds the Federal revenue of potential taxes.
During the 1930's, as a result of the misuse of certain types of
firearms by the criminal element, Congress passed the National Firearms Act and assigned enforcement responsibility to the Internal
Eevenue Service's Alcohol Tax Unit, the forerunner of the Bureau.



Thus, when the Federal Firearms Act, which regulated the interstate
commerce in firearms, was passed in 1942, enforcement responsibility
was given to A T F .
I n the 1960's the assassination of a President, a Senator, and a
prominent civil rights leader prompted Congress tb pass the Gun
Control Act of 1968, which encompassed the National Firearms Act
and the Federal Firearms Act and added many controls not contained in the previous statutes. Since then, the primary efforts of
A T F have been directed at controlling the flow of firearms to keep
them out of the hands of criminals.
A more recent mission originated with the passage of title X I of
the Organized Crime Control Act of 1970, which regulates explosives.
Eegulatory and enforcement jurisdiction over explosives also were
assigned to A T F .
I n November 1974, A T F launched the "significant criminal program—-armed and dangerous," which is aimed toward identifying and
perfecting criminal cases against the Nation's most violent and dangerous criminals.
During fiscal 1975, the Bureau collected $7.7 billion in excise taxes
on alcohol and tobacco products. These taxes are the second largest
source of revenue to the United States, following personal and corporate income taxes. This tax administration is the major function
of the Office of Eegulatory Enforcement.
A T F has held public hearings on the conversion of the wine industry
to the metric system of measurement and has scheduled hearings on
metrication for the distilled spirits industry.
Criminal enforcement
Project Identification.—This program was launched in 1973 in New
York, Detroit, Atlanta, and New Orleans to determine the source of
crime guns, the nationwide fiow patterns of crime guns, and the types
of handguns used in crimes. I n its second phase, it was extended to
Oakland, Kansas City, Denver, and Dallas.
The third phase of the project was completed during fiscal 1975
and included studies in Miami-Dade County, Fla., Philadelphia, Minneapolis-St. Paul, and Seattle. Statistical analysis of the third phase
reinforced findings in earlier studies by showing that of 2,452 weapons
traced, 29 percent were in the cheaply made "Saturday Night Special"
category and approximately 30 percent were purchased in a State
other than that in which they were used in a crime.
On January 15,1975, Project I was extended to the cities of Boston,
Charlotte, N . C , Los Angeles, and Louisville, and on May 12 to the
Washington, D . C , metropolitan area.
Interstate firearms theft reporting^ program.—The interstate firearms theft reporting program was initiated during fiscal 1974 and
is designed to eliminate firearms shipments as a source of weapons
for criminal elements. By establishing a system of notification by common carriers, A T F is able to investigate immediately reported thefts
or losses of firearms.
During fiscal^ 1975, 687 reports of lost or stolen firearms were
received, covering approximately 3.500 weapons. Of this total, approximately 110 guns were recovered by special agents and 13 criminal
cases were perfected against 27 individuals.



One A T F case resulting from this program occurred in North
Carolina, where 275 handguns were stolen en route from Miami to
South Carolina. During the latter part of fiscal 1974 and early fiscal
1975, special agents recovered 251 of the weapons and prepared criminal cases against 2 suspects.
During fiscail 1975, there was a marked decrease in reported losses,
from an average of 75 per month to approximately 55 per month.
I t is believed that ATF's emphasis on this problem has made carriers
more aware of their losses, which in turn has led to an industrywide
improvement in security measures.
International traffic, in arms.—This program was created to cope
with the continuing illegal international gunrunning activities that
originate within the United States by utilizing A T F ' s licensing and
inspection authority. Firearms, ammunition, and explosives illegally
exported frequently are acquired within the United States in direct
violation of the Gun Control Act of 1968 and title X I of the Organized
Crime Control Act of 1970. Most of A T F ' s cases have involved the
Irish Eepublican Army ( l E A ) and Mexican gunrunners.
One case under this program occurred in Texas when a foreign
national, suspected of being a smuggler, purchased 25 firearms, using
a fictitious Texas driver's license. This person was arrested attempting
to transport the weapons out of the United States.
Five l E A gunrunners, charged with 23 violations of the Gun Control Act, were convicted during fiscal 1975. The violations with which
they were charged included the use of fictitious names, counterfeiting
Federal firearms licenses, and illegally transporting firearms and
explosives across State lines.
Illicit liquor.—During fiscal 1975, A T F ' s illicit liquor enforcement
continued with the perfection by special agents of 1,149 criminal cases
and the arrest of 992 individuals.
Seizures of illicit liquor during this same period totaled 16,046
gallons. Gallons of mash seized totaled 283,043. I n addition, 676 illicit
distilleries were seized.
Though illicit liquor operations have shown a gradual decline in
recent years, A T F ' s continued enforcement efforts have averted a
major tax fraud against the Federal Government.
Explosives.—^Explosives investigations continued to receive high
priority during fiscal 1975, due to the potential threat to public
During fiscal 1975, a total of 644 explosives incidents were investigated by special agents, including 479 bombings, 126 attempted ibombings, and 39 accidental explosions.
A T F prepared 139 cases for prosecution relating to explosives
violations. One hundred eighty-two persons were arrested during these
investigations, and special agents seized 61,711 lbs. of explosives and
516 actual destructive devices.
Typical of the explosives investigations conducted by special agents
is a case involving two bombings in a northeastern city, where the residence of a witness in a State criminal case was bombed, followed in 2
days by the bombing of the residence of the State judge who was
hearing the case. The first bomb destroyed the witness' home occupied
by his wife and four children. However, all escaped injury. Similarly,



the judge's residence received major damage, but no injuries were
A T F , with local authorities, conducted an extensive multi-State
investigation that culminated in the arrest of seven persons. Convictions were obtained in both State and Federal court. Five of the individuals were convicted, one committed suicide before being brought
to trial, and the remaining person was acquitted.
Wagering.—On December 24, 1974, Secretary Simon delegated to
A T F the enforcement of the revised wagering law (26 U.S.C. 4401)
which became effective on December 1,1974.
On January 15 the Office of Criminal Enforcement began a program to train and orient special agents in wagering violations. This
task was completed May 28, with 1,200 Criminal Enforcement personnel trained to carry out this new responsibility. An intensive
training program for Eegulatory Enforcement inspectors, to enable
them to work in effective partnership with special agents in the fight
against illegal gambling, was also begun.
During May, criminal enforcement operations relative to wagering
violations were completed successfully in two metropolitan areas. One
resulted in the arrest of two alleged organized crime members who
operated an estimated $1 million yearly gambling network. The other
involved a large "numbers" operation and culminated in the seizure
of 20 vehicles used in the operation.
Enforcement of wagering laws has been incorporated into the significant criminal program.
State and local assistance.—hT^Y assistance to States and localities
has evolved into a relationship of cooperative sharing of personnel,
equipment, information, and expertise. Much of this involves enforcement of title I of the Gun Control Act and work on the significant
criminal program.
During fiscal 1975, the A T F assigned approximately 35 percent of its
total criminal enforcement resources to State and local assistance. This
commitment included direct investigative and technical assistance in
explosives incidents, direct investigative assistance in firearms-related
crimes of violence, tracing of weapons used in crimes for some 2,000
local agencies, and the continued training of local and State officers.
Direct investigative assistance is typified by a case in a major southern city, where A T F was concentrating its efforts on a significant
criminal. The investigation revealed active involvement of the suspect
in major armed robberies. Informajtion obtained through A T F surveillance was forwarded to appropriate local agencies in three different States. Working jointly with those jurisdictions, A T F was able to
coordinate multiagency and multi-State efforts which resulted in the
arrest of the significant criminal by State authorities.
Another example of State assistance occurred in a Midwest city
where A T F undercover agents were able to purchase weapons from an
alleged ringleader of a large burglary gang. As a result of this undercover probe, A T F was able to assist local officers not only in the arrest
of this individual but also in the solution of approximately 140 different burglaries.
Significant criminal program—armed and dangerous {SCAD).—
During fiscal 1975, the Office of Criminal Enforcement developed new



programs and revitalized existing projects in order to fulfill A T F ' s
responsibilities to the public. This work resulted in the submission for
prosecution of 4,532 criminal cases; the arrest of 4,894 individuals for
crimes ranging from bombings to felons in possession of firearms; and
the seizure of 11,328 firearms, 61,711 lbs. of explosives, and 676 illicit
On Noyember 1, 1974, A T F initiated the nationwide SCAD program, which directed Criminal Enforcement's resources in a concerted
effort to identify and perfect criminal cases against the most violent
and dangerous criminals in the United States.
There are two major goals of the program. The first is to investigate
those significant violations in which there is a paramount Federal interest in prosecution, due to the particular danger to public safety
posed by armed and dangerous criminals. The second is to assist State
and local law enforcement officials as mandated by Congress.
The "significant criminal" is defined under the program as an individual currently and actively engaged in felonious criminal activity
which presents a serious threat to the public safety.
Since inception of the program, 1,064 criminals have been identified
as meeting the program's criteria and are currently subjects of active
investigations by A T F . From November 1,1974, to June 30,1975, 423
armed and dangerous criminals were recommended for prosecution.
Of this total, 366 actually were apprehended.
Typical of this type of criminal case is a Paducah, Ky., investigation in which a significant criminal was apprehended while in possession of a short-barreled shotgun and in the act of casing a grocery
store. This previously convicted felon was with two other felons, one
of whom was in possession of a pistol stolen from a policeman in
Alabama. The significant criminal was convicted of violating the Gun
Control Act and was sentenced to serve concurrent prison terms of 2
and 3 years.
Two significant criminals were convicted in New York City during
May 1975 of multiple violations of the Gun Control Act. During the
investigation, an A T F undercover special agent purchased 95 firearms,
including silencers and short-barreled shotguns, from the defendants,
who were reputed to be a prime source of weapons for the criminal
element in Metropolitan New York. At the time of this arrest, enough
firearms parts were seized to assemble 400 handguns.
Eecent statistics of ongoing investigations indicate the arrest of 19
significant criminals throughout the country who, through prior records or reputations, could be characterized as "hitmen."
Regulatory enforcement

Ingredient labeling.—ATF held public hearings on proposals to require the listing of ingredients on alcoholic beverage container labels.
This is in keeping with A T F ' s belief that consumers have the right to
know—and A T F the duty to inform them—exactly what is contained
in the alcoholic beverages they purchase. A T F specialists will determine, after examining the hearing records and other data, the direction
to be taken on ingredient labeling.
Joint custody.—ATF continued to examine the roles of Govemment
and industry in the custody and supervision of activities in distilled



spirits plants, with the goal of streamlining Government supervision.
The result could mean the continued protection of Federal revenues,
while freeing A T F inspectors from routine plant duties and enabling
them to apply their time to A T F ' s ever-widening range of programs.
Consmner protection.—Fiscal 1975 was another successful year iri
ATF'j^ fight against unlawful trade practices and consumer deception
prohibited by the Federal Alcohol Administration Act. A total of
43,642 man-hours were spent enforcing the act during fiscal 1975. The
fiscal 1974 total was 76,408 man-hours.
During fiscal 1975, A T F accepted 103 offers in compromise, totaling $410,224. The preceding fiscal year, A T F accepted 87 offers in
compromise, totaling $548,015.
A T F also aggressively investigated cases involving consumer deception, such as the false or misleading labeling or advertising of alcoholic
beverage products. All labels on these products are subject to prior
approval by A T F . During fiscal 1975, more than 50,000 proposed labels
were reviewed by A T F specialists in Washington. A T F field inspectors
scrutinized approved labels and contents of alcoholic beverages at
every marketing level, including the retail establishment. Inspectors
made unannounced appearances at retail businesses to insure that
products contained in bottles are of the same proof that the label indicates or that the contents of the bottle have not been replaced by an
inferior product.
Metric conversion.—During fiscal 1975, A T F held public hearings on
the conversion of the wine industry to the metric system of measurement. A T F subsequently decided to proceed with metric sizes for
wine, with final implementation set for January 1,1979. Hearings were
scheduled for the summer of 1975 on metrication for the distilled
spirits industry. A T F ' s action will make the alcoholic beverage industry the first major segment of the Nation's business community to
convert completely to the metric system.
A T F views the metric conversion plans as an opportunity for the
Bureau, in partnership with the regulated industries, to lead the way
toward implementation of a system which will benefit the Government,
industry, and, most importantly, the American consumer. The advantages of metrication include: Elimination of consumer deception
resulting from the use of many similar bottle sizes; facilitation of
unit pricing and price comparison; and establishment of case sizes
with standard whole number contents, thus easing handling and inventory problems for the trade as well as customs duty and excise
tax computations.
Tobacco.—The excise tax on tobacco products continued to be an
important source of Federal revenue. I n recent years, A T F ' s tax determinations—for example, whether a product is a cigarette or a little
cigar—^have assumed new importance because other Federal agencies
rely on A T F ' s determination as a basis for enforcing Federal laws
relating to the product's packaging and its eligibility for advertisement
on the electronic media.
Firearms and explosives inspections.—During fiscal 1975, inspectors
of the Office of Eegulatory Enforcement were assigned increased responsibilities in the area of firearms and explosives compliance inspections. Prior to fiscal 1974, these were principally the responsibility



of the Office of Criminal Enforcement. When the shift to Eegulatory
Enforcement is fully implemented in fiscal 1976, this office will be
required to complete approximately 31,000 application inspections
and an estimated 51,000 inspections yearly.
Technical and scientific services

Laboratories.—^ATF laboratories provided technical and scientific
support to the Bureau in enforcing the laws and regulations administered by A T F . I n addition, the laboratories assisted without charge
any requesting State and local law enforcement agency.
A T F ' s Scientific Services Division operated the Nation's most complete ink library, which includes more than 3,000 domestic and European ink standards, and used it to identify and date inks on questioned
The Identification Branch began implementation of a national ink
tagging program, involving the voluntary addition of chemical tags
to inks during the manufacturing process. The tagging program will
enable A T F examiners to determine the manufacturer of inks on questioned documents as well as the exact year of production.
The Identification Branch performed about 500 fingerprint identifications and devised a procedure to begin collecting a national A T F
fingerprint file on persons arrested by A T F . This file will be valuable
in the identification of recidivist A T F violators. I n addition, a procedure for all A T F special agents to begin taking palmprints as well
as fingerprints of persons arrested will be implemented.
A T F firearms and toolmark examiners completed about 250 cases.
A T F laboratories offered a wide range of document examination
services such as handwriting identification, typewriting identification,
watermark examinations, and deciphering of obliterated writing.
During fiscal 1975, 1,400 cases including more than 50,000 documents
were processed. .
A T F continued to pioneer in the development of voiceprint identification. The headquarters laboratory voice identification program
processed about 70 cases, contributing greatly to acceptability of the
voiceprint method by the courts. Since A T F became involved in this
work, several favorable appellate decisions have been rendered.
The photography laboratory handled both still photography and
sound motion picture photography. The photo lab was converted
largely to automatic processing techniques, greatly increasing productivity. The workload in this area doubled during fiscal 1975, yet
no additional personnel were required.
Criminal bombings in recent years have made the misuse of explosives a major national problem. Within the last 2 fiscal years, A T F
agents participated in more than 2,400 explosives investigations and
the A T F laboratory analyzed evidence from more than 1,400 explosives cases, of which approximately 700 cases were in direct support
of State and local law enforcement agencies.
A T F laboratory personnel pioneered the use of neutron activation
analysis in forensic crime work. This system was used to process 1,200
such cases in fiscal 1974 as a service for local law enforcement agencies.
A new method, the technique of flameless atomic absorption analysis
of gunshot residue, was initiated in fiscal 1974, increasing the speed of



analysis fourfold. During fiscal 1975, more than 4,200 specimens were
I n January 1974, the A T F headquarters laboratory began a program of serological testing to augment its present trace evidence
analysis capabilities. From a caseload of 10 cases per month, requests
for examinations are expected to reach several hundred per year by
fiscal 1976.
For alcoholic beverages, distilled spirits, wines and beers, A T F laboratory personnel checked the fill of containers, the proof, the additives, and the presence of harmful ingredients such as lead in canned
alcoholic cocktails. Imported wines were examined to assure that overcarbonated wines are taxed at the champagne rate. Checks were made
to determine that colors used in alcoholic beverages are those authorized by the Food and Drug Administration, that products containing
artificial flavors are so labeled, and that alcoholic beverages are properly labeled as to their standard of identity.
A T F also regulated denatured alcohol articles (toilet preparations
and industrial alcoholic products) and nonbeverage drawback products (foods, flavors, and medicines). A T F ensured that denatured
products were properly labeled to indicate their point of origin, and
that denatured articles and drawback products contained sufficient ingredients to protect them from recovery as beverage alcohol. During
fiscal 1975, A T F specialists examined 5,266 samples, 4,718 formulas,
and more than 8,000 labels for specially denatured alcohol products, as
well as 1,735 samples and 2,470 formulas for nonbeverage foods,
fiavors, and medicinal products.
Tobacco was examined for tax purposes to distinguish between
cigars and cigarettes and to protect consumers by proper labeling.
Lubricants, filled cheeses, and other miscellaneous articles were also
examined for tax classification purposes for the Internal Eevenue
National Firearms Act loeapons.—For N F A weapons, A T F exercised control over their importation, exportation, registration by State
and local government entities, and manufacture and transfer between
owners of all devices described as nonsporting weapons, such as shoitbarreled shotguns and rifles, machineguns, bombs, and grenades. A T F
also maintained the National Firearms Eegistration and Transfer
Eecord, which is the control file for these weapons and supplies the
information needed to support criminal enforcement activities and
provide expert court testimony. During fiscal 1975, 2,851 certificates
were prepared to be used as documentary evidence in investigations
of possible criminal violations involving: N F A weapons.
Gun tracing.—The A T F National Firearms Tracing Center traced
firearms from the manufacturer or the importer to the wholesaler to
the retailer to the first retail sale. During fiscal 1975, 34,622 traces
were requested and 53 percent (or 18,476 traces) of these requests
were from State or local agencies.
Explosives Technology Branch.—Durinsr fiscal 1975, the Explosives
Technology Branch evaluated more than 150 criminal bombing cases.
These evaluations resulted in more than 50 destructive-device determinations, requiring more than 1,445 man-hours and the expenditure
of an additional 585 court-related man-hours.



The Explosives Technology Branch also completed 453 explosives
traces for A T F and Federal, State, and local law enforcement agencies.
These traces were nearly 90 percent effective.
A T F has initiated an explosives tagging program to trace explosives
once they have been removed from their original containers and to
trace explosives from their residue after detonation. This is a development program which will be implemented fully as funds become
available. A T F served as coordinator of all U.S. and foreign efforts
in this program. Eight foreign countries have expressed interest in
participating in the program once the technique has been developed.
Data processing.—Duruig fiscal 1975, the Bureau developed automatic data processing programs to register approximately 160,000
firearms licensees and 5,000 explosives licensees and permittees. The
A T F computer can also produce licensee and permittee mailing tapes.
The I E S Data Center in Detroit continued to support A T F in
preparing A T F paychecks and maintaining a property inventory control through the property accountability and recording system. The
Data Center brought to operational capability the management information system for criminal enforcement cases.
Imports Branch.—During fiscal 1975, the Imports Branch issued
15,151 import permits for firearms defined in the Gun Control Act of
1968, and all arms, ammunition, and implements of war covered by
the Mutual Security Act of 1954. Of these, 13,020 were for firearms,
1,075 for firearms and ammunition, 531 for ammunition only, and 525
for other implements of war; 243 applications were disapproved.

Management by objectives.—Significant objectives for fiscal 1975
were in the areas of explosives tagging, elimination of joint custody
in distilled spirits plants, development of firearms strategy, and requirements for ingredient labeling in the alcoholic beverage industry.
A T F currently is developing an internal management by objectives
program involving all levels of Bureau management.
Financial management-planning system.—The Bureau solicited the
assistance of the Government's Joint Financial Management Improvement Program in developing a new A T F financial managementplanning system. When completed, the system will integrate the payroll, personnel, accounting, and management information systems.
Under phase I, a five-team task force prepared a flow chart on all
the Bureau's processes and functions. During phase I I , each team
made field visits to verify the described information. The final two
phases, culminating in definition of system requirements, are scheduled
for completion in fiscal 1976.
Paperwork management.—ATF's separation from the Internal
Eevenue Service required the establishment of a new internal management document system suitable to the needs of the Bureau.
A T F formulated and implemented a standard subject classification
system. A series of numerical codes provides a means of classifying,
numbering, referencing, identifying, and filing all A T F documents
and records by subject. At the same time, a Bureau-wide directives
system was established, bringing together all written documents that
change or establish organization, methods, policy, or workload, or

588-395 O - 75 - 12



which provide essential information concerning the administration or
operation of the Bureau.
Together, the classification and directives systems provided basic
guidelines for implementing ATF's forms program. All A T F organizational units currently are using or are converting to the new paperwork management system.
Office relocations and changes.—Several A T F field offices were relocated or renovated as part of continuing efforts to improve service.
Four regional offices, in New York City, Chicago, Dallas, and San
Francisco, were moved to facilities more accessible to the public and
allowing more efficient use of office space, with no increase in long-term
costs. A new Eegulatory Enforcement area office was opened in Indianapolis to provide needed service to the residents of Indiana. Some
of the Bureau's smaller local offices, particularly those in the Southeast, were consolidated or moved, to reduce overall costs and provide
more efficient operation.
Distribution Center.—-An evaluation of the Bureau's distribution
function conducted early in fiscal 1975 led to the reorganization of
the unit as the A T F Distribution Center and its relocation into warehouse space approximately 8 miles from Bureau headquarters.
The Center is responsible for providing forms, publications, and
all other printed matter published by the Bureau of A T F headquarters
and field offices, members of the regulated industries, other law enforcement agencies, and the general public. More than 1,700 different
items are stocked in 20,000 square feet of storage space. The average
order is processed and delivered in 4-10 days; those who need items
on an immediate or emergency basis can receive their orders in 14
hours or less through special services offered by commercial delivery
Centralizing the Bureau's distribution functions resulted in financial
and space savings at the regional office level and brought about a
significant improvement in the quality of service provided to the
Training.—New training programs included 10 Kepner-Tregoe Government Management Seminar I I courses for A T F executives and
managers, a self-paced supervisory course for firstline supervisors,
training classes in the Federal wagering laws for the Bureau's special
agents and inspectors, an instructor training course, and on-the-job
instruction to improve the quality of field training programs.
Under the Law Enforcement Assistance Administration interagency
agreement, the Bureau also conducted subsidized training for State
and local police officers throughout the United States.
The assembled training courses (steps I and I I ) for A T F ' s Eegulatory Enforcement inspectors were redesigned. The basic (step I)
curriculum was expanded to include methods for conducting firearms
and explosives inspections. A statistical sampling class was added to.
familiarize inspectors with modern accounting procedures.
Most important of the instructional aids acquired during fiscal 1975
was a Bureau-wide video-tape system.
Executive development program.—The Bureau's executive development program was established January 10, 1975, with the issuance of
A T F Order 2412.1. Three essential elements are provided by this pro-



gram: A means of identifying managers and high-potential employees,
guidelines for subsequent development, and program evaluation
Personnel management evaluation.—To ensure the integrity and
effectiveness of the merit system, the position of personnel management evaluation coordinator was created on the staff of the Chief,
Personnel Division. A team comprised of the coordinator and a member from each of the three branches of the headquarters Personnel
Division visited all regional offices to evaluate their personnel functions. Survey findings were reported to each regional director.
Labor and employee relations.—A contract between the Bureau and
the National Treasury Employees Union ( N T E U ) became effective in
July 1974. Since that time, the union has established chapters and
appointed representatives throughout the regions.
Numerous consultations took place between A T F headquarters and
N T E U headquarters. Eegional consultations increased as the union
increased its number of representatives throughout the Nation. Specific
topics were discussed and resolved in these meetings, but, more importantly, A T F and N T E U engaged in a learning process that will result
in more meaningful and efficient negotiations of their second contract.
Upward mobility program.—The Bureau developed and provided
the regions with a complete plan of action for conducting employee
upward mobility programs. Specific achievements included a skills
survey for all eligible employees, the redesigning of some positions into
a crossover network, and appointment of several employees to upward
mobility positions.
Equal employment opportunity.—For the first time. Bureau headquarters and field offices implemented a comprehensive equal employment opportunity action plan which established consistent goals
throughout the Bureau. These include the appointment of Spanishspeaking coordinators in each region, extensive efforts to recruit
Spanish-speaking individuals in regions with hiring quotas, the hiring
of an additional 10 women as Eegulatory Enforcement inspectors,
and the development and presentation of A T F ' s first Women's Day.
Recruiting brochures.—The headquarters Personnel Division prepared two recruiting brochures describing the qualifications for, and
duties of, A T F ' s two principal occupations. Criminal Enforcement
special agent and Eegulatory Enforcement inspector. These pamphlets,
available nationwide to citizens interested in employment with the
Bureau, provide useful information on its central functions.
Communications.—A limited special assembly telephone switchboard was installed in the Bureau's headquarters communications
center, enhancing A T F ' s capacity to respond to other law enforcement
agencies and the general public. This facility provides immediate public and private access to key A T F operating officials full-time.
The Bureau also developed an automated A T F personnel authenticator/locator file for inclusion in the data base of the Treasury enforcement communications system ( T E C S ) . This file is unique among law
enforcement computer systems in that it readily identifies those A T F
employees requiring "need to know" access to records stored in T E C S
and other computerized Federal, State, and local law enforcement data
banks. T E C S , a nationwide communications network which A T F



utilizes along with other Treasury bureaus, contains the data base
for a central summary index of criminal information maintained by
the Office of Criminal Enforcement.
During fiscal 1975, the system became fully functional and supportive of all Criminal Enforcement field offices. As of June 30, 1975,
A T F had entered 53,000 records into T E C S at an average of 2,000 per
month. These records included data on the following:
1. All persons and corporations granted or denied relief from
Federal disabilities regarding firearms and explosives.
2. Significant criminals.
3. Significant and sensitive investigations.
4. An authenticator/locator file for all A T F employees.
5. Data on all explosives thefts and recoveries.
6. Suspect firearms.
7. Subjects of investigations.
8. Major liquor violators.
9. Arrested persons.
Field offices increased their usage of this computerized system by
250 percent during fiscal 1975. A total of 310,266 queries had been
made by the end of the period.
Also during fiscal 1975, the following additional information was
entered into the system:
1. All National Firearms Act special occupational tax stamp
2. National Firearms Act registrants who reported their registered guns stolen.
3. Mutual Security Act registrants.
The system contains appropriate access controls to prevent
unauthorized disclosure.

The Office of Inspection is charged with four significant areas of
responsibility: (1) Protecting the integrity of the Bureau; (2) reviewing all operational activities within the Bureau; (3) auditing the
Bureau's fiscal position; and (4) implementing the Bureau's security
Integrity investigations.—During fiscal 1975, the Operations Eeview
Division conducted 58 integrity investigations involving 64 employees.
Of that number, 29 investigations resulted in a finding of clearance of
any misconduct and 29 resulted in a basis for criminal prosecutive
at*,tion or administrative disciplinary action.
Operations review.—The Operations Eeview Division also conducted four reviews to determine effectiveness and conformance with
established policies and procedures in the areas of criminal enforcement, regulatory enforcement, technical and scientific services, and
administration. The findings of these reviews were used by management to initiate corrective action wherever necessary.
Internal auditing.—The Internal Audit Division performed audits
generally in accordance with the guidelines established by the General Services Administration, Office of Federal Management Policy
Circular FMC 73-2; Treasury Administrative Circular No. 224 (Eevised) ; and the Comptroller General's Standards for Audit of Governmental Organizations, Programs, Activities and Functions. The



objectives of internal auditing at A T F are to assist management in
attaining its goals by furnishing information, analysis, objective appraisals, and practical recommendations pertinent to management's
duties and objectives.
During fiscal 1975, audits and reviews were conducted to appraise
selected Bureau activities, including appropriated accounting, procurement, service operations, license collections, and administrative
activities in five of the seven regions. The team concept of having
personnel of the Internal Audit Division and the Operations Eeview
Division participate jointly in reviews of selected operating areas
brought diverse disciplines to bear on complex and potentially troublesome aspects of Bureau operations.
To provide adequate coverage of national programs, which a small
centralized audit staff could not do, A T F developed a plan to locate
professional auditors in regional offices. Implementation began with
the establishment of the San Francisco branch of the Internal Audit
Division in June 1975. This approach should permit reacting quickly
and decisively to changes, reducing the potential cost of travel and
per diem necessary to support a centralized audit staff, and providing
more timely review of field operations.
Security.—The Security Division coordinated background and
character investigations pertaining to all persons employed by the
Bureau, of which there are 1,600 employees in the GS-1811 criminal
investigator series and a lesser number of support personnel (managerial, technical, and clerical) in the critical-sensitive category. I n
addition, A T F has more than 1,800 employees in non-critical-sensitive
positions. The employees in this category also require security investigations, but on a postappointment basis.
Executive Order 11652, entitled "Classification and Declassification
of National Security Information and Material," imposes stringent
measures regarding classification and declassification of national security information and prevention of overclassification of such information. This program is ongoing in the Bureau together with a program
for appropriate protection of such information from loss or
To ensure compliance with Executive Orders 10450 and 11652 as
they apply to the Bureau, tJie Office of Inspection is charged with
the responsibility of maintaining an appropriate security program for
the Bureau by conducting investigations and certifying criticalsensitive employees for top-secret clearances, updating top-secret clearances every 5 years, and safeguarding classified information. During
fiscal 1975, 728 security and security update investigations were
Pamphlets and publications

A T F provided the public with a variety of technical pamphlets and
publications relating to • alcohol, tobacco, firearms, and explosives.
Information contained in these publications involves the public's rights
or duties, industry regulations, and new interpretations and positions
taken by A T F . These publications include The Explosives List,
Monthly and Cumulative A T F Bulletin, Published Ordinances Firearms, and Questions and Answers concerning the Gun Control Act
of 1968.



Public afifairs
Firearms security program.—To promote the theme of firearms
security by individuals and licensed dealers, and thus keep firearms
out of the hands of criminals, a series of public service announcements
was prepared for television and radio featuring Director Eex D. Davis
and actor Chuck Connors. These iwere distributed to all networks
and nationally to individual stations by A T F special agents and
Public information services.—The headquarters Office of Public
Affairs distributed 44 news releases during fiscal 1975, covering such
topics as legislative changes and major cases involving A T F . Staff
members frequently accompany special agents on significant raids
and arrange for attendant news coverage by media representatives.
Congressional liaison.—Members of the Congressional Liaison Staff
dealt directly with Members of Congress and their staffs. I n addition
to this personal contact, they prepared 657 letters in response to
congressional inquiries during fiscal 1975.
Public and industry liaison.—A public affairs officer participated
in 16 conferences dealing with law enforcement or industry regulation. These included the Department of Transportation-sponsored
convention in Chicago, where they discussed A T F ' s firearms security
program, and the A F L - C I O industry show in Milwaukee.
Disclosure.—The Disclosure Staff was organized to handle inquiries
resulting from passage of the 1974 amendments to the Freedom of
Information Act and of the Privacy Act of 1974.

The National Currency Act of 1863, reenacted in 1864 as the National Bank Act (12 U.S.C. 38), established the Office of the Comptroller of the Currency as Administrator of National Banks. The
Comptroller's responsibility is the regulation of the national banking
system, a function directly conferred on it by the banking statutes. I n
fulfilling this mission the Comptroller performs various functions:
(1) he renders decisions on applications affecting individual bank
structure and activities; (2) he conducts bank examinations to assure
compliance with laws and sound banking practices; and (3) he influences the conditions under which banks function by promulgating
rules and regulations which govern their operations.
Swift and profound changes in the banking industry have created new and complex challenges both for the Comptroller of the
Currency and the individual bank examiner. The growth of assets,
spui^ting by approximately $9 billion or 3.7 percent in fiscal 1975,
increased the national banks' total assets to approximately $535.0
1 Additional Information is contained in the separate Annual Report of the Comptroller
of the Currency.



To ensure that the regulatory process keeps pace with the industry,
the Comptroller selected, from proposals submitted at his request, the
accounting firm of Haskins & Sells to initiate in fiscal 1974 a complete
examination of all bureau practices and procedures. That study was
completed in June 1975, although some preliminary recommendations
were implemented throughout the year. I t is expected 12 to 15 months
will be required to put into effect all accepted recommendations. The
results of the study will enable the Comptroller to improve the quantity and quality of services provided the public and the national banks
and to ensure those services are applicable to today's needs.
Eapid changes in banking have suggested the Comptroller make
long-range projections of directions the bureau will pursue in the
near future. He established a Division of Strategic Policy Planning to
determine which areas should receive greatest attention. Intellectual
exchange concerning banking and economic developments has been
enhanced through the "Meet the Comptroller" conference cycle, a series of meetings at which bankers, the Comptroller, and members of his
staff gather to discuss issues and to communicate ideas. I n addition to
that series, communication between bankers, consumers, and r e ^ lators has been strengthened by the Comptroller's extensive speaking
The information services program, through issuance of publications, distribution of press releases, and responses to inquiries, publicizes the bureau and facilitates communications among agencies,
the banking community, and the general public. Standard publications available to employees, banks, and other interested parties are:
Comptroller's Manual for National Banks, Comptroller's Manual for
Eepresentatives-in-Trusts, and the monthly Summary of Actions. A
directory containing the address and telephone number of every decisionmaking bureau official, with photographs and biographical
sketches, is published. The Annual Eeport of the Comptroller of the
Currency contains a general statement of policy, descriptions of the
state of the national banking system, and reprints of selected documents relating to public issues in banking. Computer-generated microfilm containing the reports of condition and income of all national
banks has been placed on an indexed microfilm retrieval system to enable employees to respond more quickly to public requests for this information.
One outgrowth of the changes in the economy was a slight increase
in the number of problem banks. Difficulties arose particularly in the
areas of liquidity, foreign currency transactions, real estate loans, and
past due loans. Greater emphasis was applied to improving detection, monitoring, and dealing with such problem areas. Major systems developed during the year to spot potential problems include:
(1) bimonthly reports from all national banks outlining the status of
past due loans; (2) quarterly reports from large national banks detailing the schedule of maturities; and (3) weekly accounts from
banks having more than a 1-million-dollar net position in any foreign
currency to detail the status of foreign currency transactions. This
improved monitoring resulted partly through the utilization of largescale computers, including an I B M 370/168 and 370/158, and two
Univac 1108's. This was accomplished through the installation of both
high- and low-speed remote access terminals.



Interdisciplinary project teams were established to conduct a number of special studies. Among these was the fair housing lending practices pilot project in which the mortgage lending practices of national
banks in 18 standard metropolitan statistical areas were surveyed.
The study was carried out in cooperation with the Board of Governors
of the Federal Eeserve System, the Federal Deposit Insurance Corporation, and the Federal Home Loan Bank Board. Other special
studies included evaluation of examination software, preparation and
analysis of data on direct lease financing, and development of data
base management systems.
Several ongoing programs were actively supported, including management by objectives, emergency planning (including vital records
preservation), program planning and evaluation, productivity measurement, energy conservation, use of advisory committees, maintenance and operation of 53 data processing systems, and the conduct of
functional and procedural reviews.
While there were no major changes to the financial reporting system during the year, the Fiscal Management Division implemented a
number of changes to provide more efficient processing of voucher
payments. One such change in travel voucher processing substantially
reduced keypunch and machine time required to prepare reimbursement checks. A significantly greater volume of vendor payments was
processed during calendar 1974. A large part of this increased workload was attributable to consolidation of Washington headquarters
offices at L'Enf ant Plaza East.
Plans were developed to convert the present E A M accounting system to a computer operation. The computer system will provide more
timely and detailed information than is available under the present
The bureau's travel regulations are administered by the Fiscal Management Division. During 1974, per diem and mileage allowances were
increased after extensive analysis disclosed such increases were warranted to adequately compensate employees. Additionally, that division analyzed and reviewed regional requests for additional subregional offices. Establishment of these offices reduced travel costs and
permitted examiners to spend less time away from home.
The investment portfolio contributed $3.5 million to the bureau's
operating funds in 1974, an increase of 19 percent over the previous
year. The interest earned on investments over the past several years
has contributed substantially to financing the bureau's operating
costs, by virtue of the policy of keeping all available funds fully invested so as to maximize interest revenue.
In late 1974, the Personnel Management Division was reorganized
into five branches: employee relations, position management and classification, placement, training, and personnel operations. The reorganization was planned, first, to provide qualified applicants for positions and assist officials making decisions affecting employees, and
second, to establish a career ladder to facilitate progression of emplovees into more responsible positions.
Thereafter attention was focused on evaluating the existing position classification program to determine improvements required to
develop a viable, management-oriented position management classi-



fication program. Other improvements in daily operations included
more timely service in processing personnel action requests, assurance
of compliance with position management objectives prior to undertaking classification actions, assurance that position descriptions reflected duties actually performed, and creation of an effective followup system of projected positions established to permit expedient
During 1974, a pilot program based on the training crew concept
was devised for assistant national bank examiners and is scheduled
for implementation in 1975. The training crew concept involves a
6-month program of planned rotating assignments in various phases
of the bank examination process. A second program was initiated to
establish ongoing training programs for examiners and suppoi't staff.
A comprehensive supervisory-management training program was developed with implementation set for 1975.
The executive development program received special attention as
regional administrators and department and division heads nominated
32 candidates from a total of 78 applicants. Six employees were selected
to participate in the program.
At the end of 1974 there were 256 financial interns enrolled in the
cooperative education program, a 70-percent increase over 1973. Approximately 35 percent of the financial interns are members of minority groups and 27 percent are women.
Increased program activity and intensified examination functions
resulted in an increase in the number of examiners and support staff
from 2,366 to 2,581. Special progress was made in hiring members
of minority groups and women for the examining force. Of a total
number of 541 regional minority employees, 505 are in the examination
field of which 278 are women.
New goals were set for the Federal women's program. One major
objective was instilling into men new ways of thinking about women
and their career needs, and taking the action necessary to improve
women's status. As part of this program, a committee was selected
to support and advise the Federal women's program coordinator on
policies and programs specifically designed to assure advancement
and self-improvement opportunities for women employees.
As a result of 1975 being officially declared "International Women's
Year," several activities were planned. Geared to the special interests
of women, these programs included a luncheon/seminar for all bureau
women with a career management consultant as guest speaker, a selfdefense demonstration program, a security precautions program, and
a series of investment seminars. Continuous functions have been:
(1) Consulting with women on adequacy of their representation in
various training programs; (2) exchanging and distributing information on women's issues to bureau employees; (3) developing referral
sources for both women and managers to furnish assistance on available positions and skills; (4) computing average grade levels annually
for men and women in each series to determine inequities; and (5)
monitoring the filling of positions in the bureau.
Evaluations were conducted in eight regions to assess the effectiveness of regional personnel management programs. Those evaluations
helped resolve individual and regional problems and assisted institution of new practices.



The incentive awards program produced 69 awards for adopted
suggestions and superior achievements. One hundred thirty-one employees were recognized with high quality increase awards for their
superior performance. Awards distributed totaled $21,350 for the

The Office of Computer Science was established in April 1973. The
Office furnishes computer and related support to the analytical, policy
formulation, accounting, and administrative functions of the Office of
the Secretary, Bureau of the Public Debt, and the Office of Eevenue
Sharing. I t assists in computer development work for bureaus that
do not have their own computer facilities, and provides central management review, approval, and guidance functions for A D P management planning, policy, and procurement throughout the Department.
I n fiscal 1975, the Department used 135 computer systems, expended
28,412 average positions, and obligated $446 million in its A D P operations. These resources continue to provide such benefits as improved
tax administration, support-for implementation of general revenue
sharing, enhanced debt management and payment systems, revenue
collection, and enforcement and protective intelligence functions.
The Office actively pursued its analytical and computer service support functions during the year. Special projects included support for
the Office of Tax Analysis in development of a large-scale file merging
system; successful completion of several industrial surveys for the
Office of Industrial Economics; development of automated accounting
systems for two funds of the Office of the Secretary; provision of
assistance to the Bureau of Engraving and Printing in establishment
of A D P support functions and long-range plans; and undertaking a
feasibility study for the automation of departmental budget preparation activities.
The computer facility was expanded to accommodate growth in
interactive program development and in batch production. A front-end
minicomputer was installed to support more interactive terminals. A
nine-track tape system was added for batch production. The 10 tape
drives in this system represent the first installation of plug-to-plug
equivalents of Univac tape drives. The Systems Engineering staff
was instrumental in assisting the manufacturer in resolving a few
remaining software problems with this system.
The major departmental functions of the Office included continued
work with the Internal Eevenue Service on its new tax administration system and providing project and technical support in the Department's efforts to implement the Privacy Act of 1974. Assistance was
also provided to the Bureau of Govemment Financial Operations,
the U.S. Secret Service, the U.S. Customs Service, and the Bureau
of the Public Debt in development of plans for 4nd acquisition of
computers and A D P contracting support. The Office also continued



development of improvements to the long-range A D P financial planning system and in its management and coordination of Governmentwide A D P standards.
The Office of Computer Science, as a relatively new Office, also took
initiative in development of internal management systems by developing and presenting a plan for a management committee to supervise
the Office's service functions; developing and implementing an internal project management and resources utilization system; and
undertaking professional and technical development and training

The Consolidated Federal Law Enforcement Training Center
( C F L E T C ) is an interagency training facility formally established
within the Department of the Treasury on March 2, 1970. I t is under
the supei-vision of the Assistant Secretary (Enforcement, Operations,
and Tariff Affairs).
The Department of the Treasury serves as the lead agency for the
operation of the Center and, as such, controls the Center's day-to-day
activities. A Board of Directors, comprised of representatives at the
Assistant Secretary level from the major departments which have
agencies participating in the Center and on which there are nonvoting
members from OMB and the Civil Service Commission, determines
C F L E T C training policy, programs, criteria, and standards and resolves confiicting training requirements.
The C F L E T C conducts the criminal investigator and police training given personnel of more than one agency and furnishes facilities
for the participating agencies to conduct advanced, inservice, refresher,
and specialized training for their own law enforcement personnel. At
present, 26 agencies representing most major executive departments
and independent Federal agencies and the legislative branch participate in Center programs. In fiscal 1975, the Office of Investigation in
the Department of Agriculture and the U.S. Capitol Police were added
as participating agencies. The Center also has furnished training on a
space-available basis to personnel from 15 other Federal, State, and
local agencies.
I n addition to conducting common advanced training, the Center
provides administrative and educational support 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 primarily through the Police School and the Criminal Investigator
Training facilities

A lawsuit filed under the National Environmental Policy Act delayed construction of the Center's proposed Beltsville, Md., facilities



for 3 years, during which time estimates of construction costs increased
substantially. Consequently, an amended prospectus was submitted to
the Public Works Committees of the House and Senate requesting
authorization to expend $74.4 million, an increase of $21.8 million
over that authorized in 1971.
Citing the extremely high cost to complete the Beltsville facilities,
the Senate Public Works Committee requested that Treasury, the
General Services Administration, the Department of Defense, and
OMB conduct a survey of available Federal installations to determine
if any could be adapted for use by the Center at a substantial savings
to the Government.
Based on criteria set forth by the Center, GSA, in conjunction with
Defense, screened 90 potential sites and selected 6 which were then
evaluated by teams from GSA and the Center.
On March 24, 1975, GSA reported to the appropriate congressional
committees that a present-value cost analysis showed the Glynco Naval
Air Station near Brunswick, Ga., could best 'be utilized by the
Upon the recommendation of the Center's Board of Directors, Secretary Simon on March 28, 1975, requested that the Public Works
Committees of the House and Senate authorize the expenditure of the
necessary funds to adapt the Glynco Naval Air Station for the activities of the Consolidated Federal Law Enforcement Training Center.
The House Committee on Public Works and Transportation on
April 24,1975, and the Senate Committee on Public Works on May 15,
1975, authorized the expenditure of not to exceed $28,125,000 to relocate the Center's major functions at Glynco and provided an additional
$2 million to allow for accelerated interim occupancy of the facility.
I n the second supplemental appropriations bill for fiscal 1975, the
Congress approved the expenditure of previously appropriated construction funds at the Glynco facility.
The Center immediately began work with the Department of the
Navy and GSA to transfer title to the property to Treasury and to prepare the facility for the commencement of training in September 1975.

Attendance in the Criminal Investigator School registered an increase of 25 percent in fiscal 1975 over fiscal 1974 with a total of 657
agents being trained in 16 classes. The trainees represented 22 Federal
agencies and 3 non-Federal agencies. I n addition, 51 enforcement
officers received advanced law enforcement photography instruction.
The Center's Police School in fiscal 1975 more than doubled the
number of graduates over the preceding year. Twenty classes were
conducted in the three basic 5-, 8-, and 12-week courses, processing
838 police officers. The 5-week course was initiated to meet the needs
of agencies whose police functions are not as extensive as the agencies
which have patrol responsibilities. The development of the 5-week
course enabled the Center to provide basic training within Treasury
for special policemen of the Bureau of the Mint and the Bureau
of Engraving and Printing. I n addition, the Police School provided
training assi5:ance to the U.S. P a r k Police, the U.S. Customs Service,
the National P a r k Service, and the Armed Forces Police, and administered several inservice and specialized courses for the National
Zoological P a r k Police.



Curriculum development

During fiscal 1975, the Center developed and coordinated a broad
range of programs and materials for its basic curricula and for the
advanced, inservice, refresher, and specialized programs of the participating agencies.
Field performance evaluation materials were prepared for use by
the U.S. Park Police. Inservice training in connection with a new
judgment pistol-shooting program was also developed. Curriculum
assistance was given in connection with human relations training of
seasonal park rangers. Written materials, instructor assistance, and
a video-tape production were provided for the segments of 2-week
courses held by the Consumer Product !Safety Commission in Kansas
City. I n addition, the C F L E T C provided developmental support
services for a mine safety inspector course held at the Center under
sponsorship of the Mining Enforcement and Safety Administration,
Department of the Interior.
During fiscal 1975, several audiovisual presentations were produced
incorporating an illustration of offensive formations for use in civil
disturbances, a depiction of the interrelationships among members of
the International Criminal Police Organization, and a student orientation to the Center's judgment pistol-shooting exercise.

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 C F E , 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 Eevenue Service. He also acts on appeals
from decisions of the Commissioner of Internal Eevenue denying
applications for enrollment to practice before the Internal Eevenue
Service made under 31 C F E , section 10.4. During this fiscal year, the
Director of Practice was appointed executive director of the Joint
Board for the Enrollment of Actuaries, which was established pursuant to section 3041 of the Employees Eetirement Income Security
Act of 1974.
On July 1,1974, there were 85 derogatory information cases pending
in the Office under active review and evaluation, 5 of which were
awaiting presentation to or decision by an administrative law judge.
During the fiscal year, 154 cases were added to the case inventory of
the Office. Disciplinary actions were taken in 66 cases by the Office
or by order of an administrative law judge. Those actions were
comprised of 3 orders of disbarment, 31 suspensions (either by order
of an administrative law judge or by consent of the practitioner), and
32 reprimands. The actions affected 14 attorneys, 22 certified public



aocoimtants, and 30 enrolled agents. Foi^ty-seven cases were removed
from the Office case inventory during fiscal 1975 after review and
evaluation showed that the allegations of misconduct did not state
sufficient grounds to maintain disciplinary proceedings under 31 C F E ,
part 10. As of June 30, 1975, there were 126 derogatory information
cases under consideration in the Office.
During the fiscal year, 13 attorneys, certified public accountants,
and enrolled agents petitioned the Director of Practice for reinstatement of their eligibility to practice before the I E S . Favorable disposition was made on those petitions and reinstatement was granted.
I n addition, there was one decision on an appeal from a denial by the
Commissioner of Internal Eevenue of an application for enrollment
to practice before the I E S . The decision affirmed the denial.
Twelve administrative proceedings for disbarment or suspension
were initiated against practitioners tefore the Internal Eevenue Service during fiscal 1975. Together with the 5 cases remaining on the
administrative law judge docket on July 1, 1974, 17 cases were before
an administrative law judge during the year. Five of those cases
resulted in the acceptance of an offer of consent to voluntary suspension
from practice before the I E S , pursuant to 31 C F E , section 10.55(b),
prior to reaching hearing. Initial decisions imposing disciplinary actions were rendered in five of the cases. In four cases, the initial decision
of the administrative law judge was that the respondent be disbarred
from further practice before the Internal Eevenue Service. One suspension from practice before the Internal Eevenue Service was invoked.
I n one case, the complaint was dismissed. On June 30, 1975, six cases
were pending on the docket awaiting presentation to or decision by an
administrative law judge.
Under authority of 31 C F E , section 10.71, two cases resulted in
appeals to the Secretary from initial decisions for disbarment rendered by an administrative law judge. The decision on one appeal was
an affirmation of the order for disbarment. In addition, one decision
was issued by the Secretary on an appeal from the initial decision of
an administrative law judge pending on July 1, 1974. I n that appeal,
the administrative law judge's order of suspension was affirmed. One
appeal was pending at yearend.
During the fiscal year, the Office represented the Department in two
employees' appeals to the Civil Service Commission from adverse
actions taken by bureaus of the Department against them.

The Office of Domestic Gold and Silver Operations, in the Office 9^
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.



Gold regulations
Public Law 93-373, enacted August 14,1974, provided for an end to
all Government restrictions on the purchase, sale, or ownership of gold
on December 31,1974. Persons subject to the jurisdiction of the United
States may now freely import, export, and trade in gold and gold coins
within the United States and abroad.
Use of gold for industrial purposes
Estimated net industrial use of gold in the United States during calendar 1974 was 4,651,000 ounces, a decrease of 31 percent from the
previous year. The 1974 decrease in industrial purchases was due both
to a decline in the production of jewelry and electronic products, reflecting further increases in the price of gold and a slowdown in the
economy. The estimated total purchases of gold and allocation of
purchases by industry group for the years 1968-74 are shown in table 1.
Sources of gold
Of the 4,651,000 fine troy ounces of gold used by American industry
in 1974,1,206,000 ounces came from U.S. mine production and 3,445,000
ounces from sources abroad. Countries from which the gold was imported are shown in table 2. In addition to industrial gold imports, an
estimated 1,350,000 ounces were permitted entry in December 1974 in
anticipation of purchases by individuals following the end of restrictions on gold ownership.
Gold sales ^
With the lifting of the restrictions on the private holding of gold,
the Treasury on January 6, 1975, offered 2 million ounces of gold for
competitive public bidding. Bids were accepted for 754,000 ounces of
gold ranging from a high of $181 per ounce to a low of $153 per ounce.
The average accepted bid price was $165.67 per ounce. Gross revenue
from the auction was $124,911,585.
On June 30,1975, 500,000 ounces of gold were offered for competitive
bids. Bids were accepted for 499,500 ounces of gold at a price of $165.05
per ounce. The gross revenue from the auction was $82,442,475.
TABLE 1.—Estimated industrial use of gold in the United States, calendar years
[Thousands of fine troy ounces]
Estimated total purchases of gold by U.S. industry....
Converted into fabricated products
Increase In Inventories
Allocation of purcha ses by industry group



































Jewelry and arts
3,908 3,839 3.340 4,299 4,344 3,473
Industrial, including space and defense
1,925 2,560 1,975 1,884 2,191 2,577
» Excludes an estimated 1,350,000 ounces acquired by refiners and dealers in December 1974 to meet expected demand by individuals following the end of ownership restrictions.
1 See exhibit 77.



TABLE 2.—Exports and imports of gold into the United States for industrial use,
calendar year 1974
[Thousands of fine troy ounces]
United Kingdom
West Germany
Other countries
Net imports of gold






27 .


1 1,979




1 Includes purchases from foreign accounts at the Federal Reserve Bank of New York.
NOTE.—Imports are shown from country of flnal export as reported by Department of the Treasury gold
licensees and do not indicate prior shipment from country in which the gold was produced.

The Bureau of Engraving and Printing, one of the world's largest
securities manufacturing establishments, designs and produces the
major evidences of a financial character issued by the United States.
I t is responsible for the production of U.S. currency, postage stamps,
and public debt instruments, as well as miscellaneous financial and
security documents.
Faced with increasingly more complex demands from customer
agencies for security printed products, the Bureau reviewed the appropriateness of its organizational structure for initiating and controlling
the technological and operational changes needed to continue costeffective completion of mission requirements. A Bureau-wide reorganization, effective in fiscal 1976, will provide cohesive top management direction and functional concentration in the areas of research
and engineering, operati/)ns, and administration.

Operations of the Bureau are financed by means of a revolving fund
established in accordance with the provisions of Public Law 656,
approved August 4, 1950. This fund is reimbursed by customer agencies for the direct and indirect costs of the Bureau for work and services
performed, including administrative expenses.
I n followup of the directive by the House Subcommittee on Appropriations to develop alternate methods of financing, the Bureau incorporated a surcharge in the cost of its products beginning in fiscal
1975. The surcharge provides funds to help finance predictable equip-



ment acquisitions. However, it was recognized that the new surcharge
alone would not provide sufficient funds to acquire major equipment in
adequate quantities to meet current needs. Tlierefore, the Bureau
entered into equipment contracts on a monthly lease-with-option-tobuy financing arrangement (lease-to-ownership), without termination
contingency liability. The absence of liability requirements enabled
the Bureau to obtain essential major equipment without cash outlay.
Utilizing this method of financing, contracts were let for the acquisition of six modem high-speed intaglio printing presses and six production models of the currency overprinting and processing equipment
( C O P E ) . Delivery of two of the intaglio printing presses is expected
by July 1975, and three of the C O P E machines by August 1975.
Estimated annual savings in currency production costs from complete
utilization of this equipment is $3 million.
Currency program

Currency deliveries in fiscal 1975 totaled 2.8 billion notes, compared
with 2.3 billion notes in fiscal 1974. The smaller volume in fiscal 1974
refiected a reduction by the Federal Eeserve System in the level of its
cash inventory due to reassessment of its emergency reserve requirements.
Heretofore the Bureau has destroyed currency and other securities
mutilated during the production processes by burning in the Bureau
incinerator. Due to air pollution, the District of Columbia Government
requested the Bureau to develop other means. During February 1975,
the Bureau installed a system whereby the mutilated currency is
shredded, baled, and shipped to the Crane Paper Co. in Dalton, Mass.,
for recycling into newly manufactured currency paper. Each month,
approximately 20,000 pounds of shredded currency paper is being
disposed of in this manner instead of incineration, resulting in reduced
air pollution and paper conservation. Alternate nonpolluting systems
for destruction of other mutilated paper products of a security nature
are planned for fiscal 1976.
Operational changes accomplished during fiscal 1975 included the
shrink wrapping of currency packages, which replaced the traditional
method of the kraft wrapping process, and the installation of paper
lifts at the guillotine cutting machines, which eliminates the need for
manual handling. Both are labor-saving improvements.
Food coupon program

During fiscal 1975, the Department of Agriculture issued a new
series of food coupons, designed by the Bureau, with different denominations and book conformations. Since the private sector banknote
companies were unable to undertake production of the total number of
coupons needed by the changeover date of March 1, 1975, OMB approved the Bureau's request to continue production of the old series
through January 1975.
On January 24, 1975, the Department of Agriculture requested the
Bureau to extend production of the old series for an emergency requirement of 4 million $30 food coupon books by February 15, to meet the
increase in eligible recipients. During March 1975, the Department
again requested the Bureau's service, this time to assist in producing

588-395 O - 75
 - 13



the new series, since the private sector banknote companies were unable
to meet production requirements under the escalated program.
Total deliveries in nscal 1975 were 3.3 billion food coupons (approximately 16 percent of the req^uirements of the Department of Agriculture) , compared with 2.5 billion delivered in fiscal 1974.
Postage stamp program

Deliveries of U.S. postage stamps were 26.7 billion pieces in fiscal
1975, compared with 29.5 billion in fiscal 1974. (Abnormally heavy
production requirements in fiscal 1974 were occasioned by the postal
rate increase.)
The Bureau began installation of two modern postage stamp presses
ordered in 1972. One is a multicolor intaglio web press to be used for
printing stamps in coil form. The other is a cpmbination gravureintaglio web press which will introduce a new dimension in the production of other types of multicolor postage stamps. The versatility of
these presses will materially broaden the range of printing process
capabilities and provide operational experience to help determine the
new generation of presses to be designed for replacement of obsolete
single-color web presses.
The Bureau also purchased equipment for mechanizing the manufacture of postage stamps in book form. This equipment can print the
book covers, collate the covers with preprinted intaglio stamps, and
process the finished books in one continuous operation. Substantial
manpower savings and lower production costs will be realized.
During fiscal 1975, the Bureau manufactured its first pressure-sensitive postage stamp, a 1974 Christmas design, "Peace on Earth," which
eliminated the need for moistening prior to affixing the stamp to the
envelope surface. Distribution was limited to five postal regions as a
pilot project for determining public acceptance. The six-color stamp
was printed by the gravure process and then converted to die-cut
sheet stamps on prototype equipment.
Offset printing presses

A sheet-fed multicolor offset press to produce postage stamps was
installed during fiscal 1975 and will be operational early in the next
fiscal year. This press will eliminate the need for multiple passes of
sheets through two presses when more than two-color offset printing
is required.
Acquisition of a web-fed offset printing press is proposed during
fiscal 1976, to be used primarily for the production of red strip stamps
for distilled spirits. The elimination of the need to number such stamps
in a separate printing operation will result in significant recurring
annual savings.
Internal audit

An intensive program of internal audit evaluated operational efficiency and economy, and ascertained compliance with prescribed
regulatory directives. During fiscal 1975, 61 reports of audit containing 229 recommendations for improvements were released for management consideration. Coverage included fiscal and management
audits and reviews of operations and programs, conducted on a scheduled, special, and unannounced basis.



Quality control

During fiscal 1975, improved quality control measures provided
greater assurance that postage stamp books, coils, and sheets were
consistently maintained at acceptable quality levels. I n addition, two
new quality assurance programs were implemented for the early identification and correction of causes of excessive postage stamp spoilage
during manufacturing and processing operations, and for monitoring
in-house handling arid storage of paper to reduce waste and spoilage.
To resolve the Bureau's Critical shortage of warehouse space, interim
arrangements were made to utilize 10,000 square feet of space at the
Naval Gun Factory to store paper which was ordered for production
of the Christmas postage stamps. I n April 1975, the Bureau was successful in obtaining space in a modern warehouse located at Lorton,
Executive development
The first phase of the Bureau's executive development plans involved
the identification of specific kinds of knowledge and ability necessary
at each level of Bureau management. I n the second phase, an assessment center matched those requirements with candidate potential. Development plans for incumbent managers are based on a series of personal and operational goals for improvement. Followup development
and career planning has been ongoing with eight candidates who
emerged from the management assessment center. I n the initial seminar
of a planned series the group met with members of top management
to develop an awareness of current management approaches, issues, and
The Kepner-Tregoe process for problem analysis and decisionmaking
is being utilized for incuiribent managers and executive development
candidates. The objective is to provide participants with basic ideas
for organizing and using information in solving problems, making
decisions, and anticipating future problems. The approach deals with
inajor problems of the Bureau without regard for internal organizational boundaries which may or may not conform to the functional
dimensions of the problem. This not only serves to upgrade the manager's problem-solving and decisionmaking skills, but also provides
a developmental team-building approach to solving internal problems.
Supervisory development system

During September 1974, a special projects group was organized to
study and revise the supervisory personnel system. The new system
provides for an assessment center, a supervisory intern program,
revised development program, and a new evaluation plan. The initial
outline of the total system was approved in February 1975, and the
special projects team has since initiated revisions of existing selection
and promotion guidelines^ development of instruments for use in the
assessment center, and development of a modular training program.
The final program plan will be completed and ready for implementation during the next fiscal year.



General educational development
During fiscal 1975,70 employees participated in various phases of the
general educational development (GED) program. Seven employees
completed the courses and elected to take tlie G E D examination, receiving their high school equivalency diplomas.
Upward mobility program
The upward mobility program was initiated with a survey of interest
conducted in August 1974. Approximately 320 employees responded.
Following completion of a skills inventory, each candidate was counseled by trained upward mobility career counselors.. Seven target
positions which were identified to be filled through this program were
formally advertised during March 1975. Eighty-three candidates were
processed through the upward mobility center and were ranked and
certified on a promotion register which will remain active for such
positions for a 1-year period. Each selected candidate will be afforded
individual training and development to enable him or her to meet the
qualifications of the target position in accordance with Civil Service
Commission regulations.
Awards program

During fiscal 1975, 1,141 employees received special achievement
awards and 47 employees were granted high quality pay increases.
Nonrecurring savings of $139,278 were realized this fiscal year from
this part of the incentive awards program. Under the employee suggestion program, 174 suggestions were received, of which 61 were
adopted, and it is estimated that the Bureau will realize annual recurring savings of $15,455 and nonrecurring savings of $1,980.
Equal employment opportunity program
The Bureau's equal employment opportunity program, in an effort
to increase the number of Spanish-speaking employees, broadened
recruitment contacts in fiscal 1975. Employee committees for equal
employment opportunity provided an effective and direct avenue of
communications between employees and top management. Employment statistics indicate definite progress in the advancement of minorities and females in the number of craft journeyman and higher grade
General Schedule and Wage Grade positions.
Labor-management relations
The Bureau continued to give special emphasis and attention to the
conduct of all labor-management dealings within the spirit and intent
of Executive Order No. 11491, as amended by Executive Order No.
11838 of February 6,1975. At the close of the fiscal year, there existed
within the Bureau grants of exclusive recognition to 17 A F L - C I O
affiliate unions covering 25 craft units, 1 noncraft unit, 1 guard unit,
and 1 GS clerical/technical unit. There were 12 approved substantive
labor-management agreements. The unions functioned as a dynamic
part of the Bureau and were a major factor in management considerations.



Safety program

During the 4-month period from January through April 1975, there
was an increase of 10 injuries over the same period in 1974. However,
the frequency rate of lost-time injuries when compared for the same
period reflected a dramatic upward spiral. Projecting the monthly
average of lost-time cases during 1975 to date, it is anticipated that
approximately 120 such injuries, representing a 167-percent increase,
will occur during this calendar year.
Primarily, this is attributable to changes in the Federal Employees'
Compensation Act which became effective November 6, 1974. The
factor having greatest impact is that the employee becomes immediately eligible for continuation of pay by the Bureau for up to 45 days
without charge to any leave account. The prior regulation required
placing an employee in a leave-without-pay status for 3 days, awaiting compensation claim adjudication. I n light of the changes in the
act, attention was concentrated upon reported injury cases which
could be expected to result in continuation of pay. Investigations were
promptly conducted, with a comprehensive report of findings and, as
appropriate, referral to the area manager for remedial action to
eliminate the cause or minimize recurrence.
Constant communication with supervisors continued to broaden the
basis for understanding plant safety and the supervisor's role in accomplishing safety goals. Also solicited was union representative
participation in the Bureau's safety awareness program, including
surveys of work areas, machinery, and processing operations.
. The Bureau's comprehensive industrial safety program includes
close collaboration with the medical office. The Bureau has acquired an
electronic audiometer and soundproof hearing testing chamber for
use in a hearing conservation program for employees.
Service to the public

The Bureau continued to promote increased public awareness of the
security characteristics of genuine currency.
Security exhibits were furnished for four numismatic and philatelic
shows. I n addition, the Bureau produced two distinctive souvenir
cards in conjunction with the American Numismatic Association's 83d
anniversary convention in Bal Harbour, Fla., and the National
Philatelic Exhibitions of Washington, D.C. Sales of the souvenir
cards not only responded to expressed public interest but also defrayed
costs of participation by the Bureau at these events. Participation at
exhibits is expected to accelerate during the Bicentennial era.
The Bureau of Engraving and Printing continues to be one of the
major points of interest for visitors to the Washington area. During
fiscal 1975, 616,040 visitors took the self-guided tour of Bureau operations. Other tours geared to technical needs and particular interests
are conducted on an individual need basis such as for agents of the
TT.S. Secret Service, representatives of domestic and foreign firms in
the printing industry, and news media personnel.



Total program operations
The Office of Equal Opportunity Program operates within the Office
of the Secretary and is under the immediate supervision of the Assistant Secretary (Administration). I t assists the Secretary and the
Assistant Secretary (Administration) 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
employment policies and programs of banks, savings and loan associations, savings banks, and other financial institutipns that are Federal
depositaries or issuing and paying agents of U.S. savings bonds and
savings notes (implementing Executive Order 11246, as amended, and
Treasury regulations governing equal employment for Treasury contractors).
Federal equal employment opportunity program

Progress in the administration of Treasury's equal employment opportunity program during the year was marked mainly by increased
emphasis on the upward mobility program, the Federal women's program, and the Spanish-speaking program. To emphasize the Spanishspeaking program, a handbook entitled "Department of the Treasury
Program for Spanish-Speaking Americans" was completed. The Office
also revised the E E O complaint processing system to include the 40 to
65 age provisions of the Age Discrimination in Employment Act of
1967, as amended, in 1974 (Public Law 93-259). On October 1, 1974,
the Civil Service Commission commended the Department on the
average time to process E E O complaints, which was 154 days. The
average for all other agencies was 201 days, which is 21 days above
the prescribed limit.
A memorandum was issued by the Secretary on May 8,^1975, to all
employees stressing his concern for that kinid of effective operation of
the equal employment opportunity program that would have the most
positive impact on all personnel, especially women and minorities, in
the total agency work force. Position statements of a similar vein, supporting the specific principles and goals of upward mobility, the Federal women's program, and the announcement of "International
Women's Year" emphasis, were also issued by the Secretary in May
and June of 1975.
On June 18, 1975, the Department, under the aegis of its top-level
Women's Advisory Committee, successfully conducted a women's day
convocation of all bureau heads, top-level inanagers and supervisors,
and selected employee representatives. I n addition to Secretary Simon,
Dr. Estelle Kamey, professor of physiology and biophysics, George-



town Medical School^ and the Honorable C. Delores Tucker, secretary
of state. Commonwealth of Pennsylvania, were the keynote speakers.
This conference, with its main theme being to emphasize the objectives of International Women's Year, included a special afternoon
session in which employees at all grade levels engaged in open dialog
with the Committee's member panelists, who also made short presentations on their ideas for effective approaches to personal career success.
The Committee and top management also answered specific questions
of interest concerning employees' desires for more training and obtaining greater merit promotion and upward mobility opportunities, and
other viable forms of self-development preparation.
On April 15, 1975, the Civil Service Commission reviewed the following Treasury full-time employment statistics for the period from
December 1968 through November 1974 and complimented the Department on the progress inade during this period.
Department of the Treasury full-time employment by minority group status

Total employees*




82,155 88,351 102,813 106,157 116,444 10,287




9.7 34,289


11,777 13,234 15,619 16,170 18,478
. 1,052 1,489 2,247 2,788 3,539
813 1,084 1,238
68,765 72,928 84,006 85,969 93,010


14.3 6,701
26.9 2,487
8.2 24,245


19,120 18,867 24,126 23,869 27,039





4,947 5,156 5,904 5,932 6,892
922 1,146
13,813 13,184 17,227 16,784 18,735





American Indian..
GS 1-4:
American Indian


American Indian
GS 9-12:
American Indian..
GS 13-18:
American Indian

19,480 23,1

27,601 30,793 33,485


8.7 14,005


15.2 2,863
6.6 10,065


2,708 3,467 4,290 4,837 5,571
738 1,012
16,341 19,724 22,476 24,778 26,406


28,893 28,960 32,321 32,615 35,580





1.144 1,283 1,587 1,769 2,097
27,210 27,055 29,959 29,798 32,250





9,491 10,665 12,037 12,562 13,297



9,247 10,321 11,544 11,981 12,640




*The totals include W£^e board personnel. Grade comparisons are for QS series only.
NOTE.—For figures for 1969 and 1971, see 1974 Annual Report, p. 116.





Contract compliance

During fiscal 1975, only 226 ^ compliance reviews were initiated. This
reduction in the number of reviews conducted in relation to past years
was a direct result of the expanded scope of coverage required by
Office of Federal Contract Compliance Revised Order No. 14.
However, notwithstanding the embarkation on a more sophisticated
compliance review approach, the Treasury contract compliance program nonetheless made other outstanding management and administrative strides during fiscal 1975. To improve operating efficiency, the
contract compliance responsibility which had been centralized in the
national office was decentralized to the regional field offices. As a part
of this effort four regional managers were hired to manage the field
offices in Atlanta, Chicago, Houston, and Los Angeles. I n addition,
a new regional office was established in Washington, D . C , and a sixth
regional office is planned for New York City. A new compliance review
workbook was adopted to enable the regional managers to meet the
more detailed contract compliance requirements. The Office is also
planning the installation of a computerized record retrieval system
that will provide for improved identification of clientele and a more
systematic scheduling of reviews. Likewise it will assist in maintaining
required statistics and aid in the preparation of reports.

B u r e a u of Government Financial Operations
The functions of the Bureau are Government-wide in scope. I t disburses by check, cash, or other means of payment for most Government
agencies; settles claims involving loss or forgery of Treasury checks;
manages the Government's,central accounting ahd financial reporting
system by drawing appropriation warrants and other funding authorizations, by maintaining a system of accounts for integrating Treasury
cash and funding operations with the financial operations of disbursing and collecting officers and of Government program agencies including subsystems for the reconciliation of check and deposit transactions,
and by compiling and publishing reports of budget results and other
Government .financial operations; provides banking and related cash
services involved in the management of the Government's cash resources; administers certain U.S. currency matters such as directing
the various aspects of the issue, redemption, and custody of Treasury
and Federal Reserve currency, and maintaining facilities for and overseeing the destruction of currency unfit for circulation; provides central direction for various financial programs and practices of Govemment agencies; and directs a variety of other fiscal activities.
1 Included in this figure is one completed review of Bank of America, N.T. & S.A., headquartered In San Francisco, Calif, (which has over 1,050 branches and subsidiaries, and
some 55,000 employees).



Disbursements and check claims

Disbursing operations.—The Division of Disbursement's 11 disbursing offices produced a total of 727 million checks and savings
bonds in payment of Government obligations for more than 1,400
civilian offices during fiscal 1975 at an average unit cost of 3.7 cents.
Over 98 percent of these payments were produced by computers. I n
addition, more than 115.6 million computer-generated Federal tax
deposil forms were produced and mailed.
Govemment agencies and the general public benefited from the
performance of the diversified activities of the Treasury's centralized
disbursing system by computerized methods which continued to result
in increased productivity. A number of small agencies received automated payroll accounting service from the disbursing centers.
Fiscal 1975 significant achievements are as follows:
1. The prototype check-wrapping system, which manufactures an
envelope from a roll of paper while simultaneously imprinting a signature and inserting a check and as many as three separate inserts,
was continued in operation in*^the Philadelphia Disbursing Center.
More than 90 million checks were processed in the system. The first
production model system was delivered to the Kansas City Disbursing
Center on June 26, 1975. Current plans provide for a total of 14
such systems to be installed in 6 disbursing offices by the end of fiscal
2. The Washington Disbursing Center completed a second year of
operation on its optical character recognition (OCR) system, where
typed voucher schedule payment data is read and converted onto
magnetic tape for computer input. During fiscal 1975, an average
monthly volume of 225,000 payments was processed on that system.
The OCR system in the Denver Disbursing Center became operational
October 1, 1974. Since that date, administrative agency stations
with a combined monthly volume of over 136,000 payments have been
converted to the OCR method of check processing. The OCR system
in Chicago became operational January 2, 1975. This installation encompasses plans for converting to OCR check processing the miscellaneous payments of administrative agency stations with a volume
of 145,000 payments monthly at full conversion. During June 1975,
the Chicago Disbursing Center processed over 75,000 payments on
OCR equipment. Annual recurring savings of $528,000 are projected
for the three disbursing centers at total conversion.
3. The income tax rebate program authorized under the Tax Reduction Act of 1975, Public Law 94-12, required additional workload
during the latter part of fiscal 1975. The disbursing offices issued,
enclosed, and mailed more than 54.6 million rebate checks during
May and June 1975. The May portion, coupled with the issuance of all
other payments produced in May 1975, resulted in a total volume
of over 106 million items processed—the highest monthlv volume in
the history of the Division of Disbursement.
4. I n June 1975 as a result of section 702 of the Tax Reduction
Act of 1975, the disbursing offioes issued and mailed 30.3 million
special $50 one-time checks to recipients of social security, supplemental security income, and railroad retirement benefits. This payment program was administered by the Department of the Treasury with the



cooperation of the Social Security Administration and the Railroad
Retirement Board.
5. Third-generation computer systems continued to provide the
necessary capacity for meeting yearly increases in check production
voluines and to more fully develop and efficiently maintain a computerized rapid check claims research system. One tape drive was
added to each of the two I B M S/360 computers at the Philadelphia
office and an additional card reader punch was procured for use on the
punch/print S/360 to increase processing capacity at that office.
6. Additional agencies have automated, or are considering automating, their accounts payable by submitting magnetic tapes to disbursing offices for the issuance of vendor and miscellaneous payments.
Computer-generated cards which accompany many of the checks provide the recipients with a permanent record of the purpose of the
p^vyment, Use of this card notice eliminates the time-consuming manual processing of large quantities and various sizes of paper notices
by the agencies and the disbursing offices, and reduces the number
of inquiries concerning the purpose of payments.
. The following table is a comparison of the workload for fiscal
years 1974 and 1975.


Operations financed by appropriated funds:
Social security benefits
Supplemental security income program
Veterans benefits
Income tax refunds
Veterans national service life insurance dividends program.
Savings bonds
Adjustments and transfers


Total workload—reimbursable items
Total \^^orkload...


Operations financed by reimbursements:
Railroad Retirement Board..
Bureau of the Public Debt (General Electric Co. bond program)









1 Includes 54,612,071 tax rebates.
2 Includes 30,291,958 special $50 pajrments.

Settling check claims.—During fiscal 1975, the Division of Check
Claims processed 1.2 million requests to stop payment on Government
checks. This resulted in 501,295 paid-check claims acted upon, including 72,479 referred to the U.S. Secret Service for investigation because
of forgery, alteration, counterfeiting, or fraudulent issuance and negqtiation. Reclamation was requested from those having liability to
the United States on 102,481 checks.
During the year, 54,533 paid-check claims resulted in settlement
checks to payees totaling $12.4 million; 4,332 claims resulted in settlement checks to endorsers totaling $1.8 million; and 24,662 claims resulted in payments to other agencies of $4.9 million for death and



nonentitlement cases. I n addition, 249,472 substitute checks valued at
$152.4 million were authorized to replace checks that were lost, stolbn,
destroyed, or not received.
The project to further automate check claims operations using thirdgeneration computers is continuing. Programs have been implemented
to extend the retention in the computer system of locater numbers of
paid checks needed to settle check claims. The locater number is necessary to retrieve the check from the Federal Records Center. This
greatly reduces the volume of locater numbers obtained through the
use of microfilm equipment. The processing of claims involving supplemental security income checks has been expedited by automatically
generating a substitute check issue tape.
Government-wide accounting

Government aiccounting systems.—In July 1974, a project team was
organized for the purpose of developing a unified Treasury accounting and financial reporting system replacing the two separate systems maintained by the former Office of the Treasurer, U.S., and
Bureau of Accounts. The overall project, known as accounting infbrmation management system, is comprised of multiple subsystems and
modules. A management iriformation system designed to track employee man-hours and related costs for all staff projects was introduced in fiscal 1975 and will be further refined and expanded, next
year. A preliminary analysis of the current central accounting and
financial reporting system, in process for 6 months, will result in
eventual conversion of the master file from a second-generation tapeoriented system to a third-generation on-line disc storage system. An
electronic funds transfer subsystem is in process which will result in
earlier availability of cash into the Treasury account. Additional side
benefits of improved cash management and reduction in paperwork
will be derived from the electronic funds transfer system. A depositin-transit systems study, begun in January 1974, has resulted iri a
new system for reconciling deposit-in-transit differences and a new
certificate of deposit form designed for automated processing. The
use of the new system and the new form is scheduled to begin in September 1975, on a test basis, utilizing a major Federal agency for the
pilot application. Upon evaluation of the test results, use of the system
will be gradually expanded Government-wide.
The simplified intragovernmental billing and collection system ^ a s
expanded in fiscal 1975 to include penalty mail usage charges by the
U.S. Postal Service. These charges are billed monthly in advance
based on the annual estimates of anticipated penalty mail usage provided to the Postal Service by the agencies.
The revised Daily Statement of the United States Treasury went
into effect July 1974. I t reflects current day activity based on telephone and wire reports from the Federal Reserve System and interrial
Treasury sources. The statement has been fully functional, providing
more timely and detailed information, better suited to its users.
Treasury special agent accounts maintained for the redemption of
securities and related payments of interest for Federal Natiorial Mortgage Association, Federal home loan banks. Federal Home Loan Mort-



gage Corporation, Federal intermediate credit banks. Federal land
banks, and banks for cooperatives were eliminated, effective October 1,
A project was started during the year to eliminate all remaining
funded checking accounts of the various Government agencies. All
such accounts will become unfunded, effective July 1, 1975.
Pursuant to Public Law 93-340 and Executive Order 11863, both
enacted in fiscal 1975, the Secretary of the Treasury entered into
agreements with 36 eligible cities for the withholding of city income
or employment taxes from the pay of Federal employees who are subject to the tax and whose regular place of Federal employment is
within such a city. Regulations were published in the Federal Register
governing the withholding of city income and employment taxes from
the pay of Federal employees.
On December 31, 1974, after 41 years, it became legal for U.S. citizens to buy, sell, and hold gold. Treasury through the General Services Administration conducted two auctions on January 6, 1975, and
June 30,1975, selling 756,862 and 499,500 ounces of gold, respectively.
These sales of gold earned Treasury profits of $154.8 million. To
accomplish these sales, the Bureau of Government Financial Operations in cooperation with the Bureau of the Mint and the General
Services Administration coordinated internal procedures to assure
proper payment, delivery, and financial accounting and reporting.
A project to accelerate the availability of outlay data at the appropriation level was begun during the year. I n cooperation with the
Department of Defense, a monthly reporting system was developed
.which utilizes computer-generated magnetic tape in lieu of hard copy
accounting reports. This new system was implemented in May 1975
and provides Treasury with actual data at the appropriation level for
the Department of Defense about 2 weeks earlier than in the past.
Assets and liabilities in the account of the U.S. Treasury.—TMe^ 53
in the Statistical Appendix shows the balances at the close of fiscal
years 1974 and 1975 of those assets and liabilities comprising the
account of the U.S. Treasury. The assets and liabilities in this account
include the cash accounts reported as the "operating balance" in the
Daily Statement of the Uriited States Treasury. Other assets included
in the account of the U.S. Treasury are gold bullion, coin, coinage
metal, paper currency, deposits in Federal Reserve banks, and deposits in commercial banks designated as Government depositaries.
Balances mentioned herein may differ from those in table 53 in the
Statistical Appendix which is on a final accounting basis.
Treasury's gold balance was $11,566.8 million at the beginning of
the year and $11,619.9 million at yearend. Inasmuch as deliveries of
the gold auctioned on June 30 are being made in fiscal 1976, no reduction in gold is herein reflected. The average accepted bid price in the
January 6 auction was $165.67 per ounce and in the June 30 auction
$165.05 per ounce.
Stocks of coinage metal stood at $418.3 million at the beginning of
fiscal 1975 and $402.1 million as the year ended. Such stocks included
silver, copper, nickel, zinc, and alloys of these metals which are not yet
in the if orm of finished coins.



The number of depositaries of each type and their balances on June
30,1975, are shown in the following table:
No. of

Depositaries ^
Federal Reserve banks and branches .—
Other depositaries reporting directly to the Treasury:
Special demand accounts
Foreign 3
Depositaries reporting through Federal Reserve banks:
Special (Treasury tax and loan accounts)

June 30,1975








2 $6,141,528,180



1 Includes only depositaries having balances with the U.S. Treasury June 30,1975. Excludes those designated to furnish official checking accoimt facilities or other services to Govemment officers but not authorized to maintain accounts with the Treasury. Banks designated as general depositaries are frequently also
special depositaries, hence the total number of accoimts exceeds the number oi banks involved.
2 Includes checks for $368,691,579 in process of collection.
3 Principally branches of U.S. banks and of the American Express International Banking Corp.

Government officers deposit moneys which they have collected to
the credit of the U.S. Treasury. Such deposits may be made with the
Bureau of Government Financial Operations in Washington, D . C , or
at Federal Reserve banks, or at designated Government depositaries,
domestic or foreign. Certain taxes are also deposited directly by the
employers or manufacturers who withhold or pay them. All payments
are withdrawn from the U.S. Treasury account.
Cash deposits and withdrawals affecting the Treasury's operating
balance are summarized in the following tarble for fiscal years 1974 and
Deposits, withdrawals, and balances in the U.S. Treasury account
[In millions of dollars]
Operating balance at beginning of fiscal year
Cash deposits:
Gross tax collections (selected)
Public debt receipts
Gas and oil lease sale proceeds
Total cash deposits
Cash withdrawals:
Public debt redemptions
Letter of credit transactions:
HEW grants
Unemployment insurance
Other (includes refunds and 1975 rebates)
Total cash withdrawals
Operating balance at close of fiscal year
















Investments.—The Secretary of the Treasury, under specific provisions of law, is responsible for investing various Government trust
funds. The Department also furnishes investment services for other
funds of Government agencies. At the end of fiscal 1975, Government



trust funds and accounts held public debt securities (including special
securities issued for purchase by the major trust funds as authorized
by law), Govemment agency securities, and securities of privately
owned Government-sponsored enterprises. During fiscal 1975, a new
special issue was developed that is identical in every respect (except
transferability) to Treasury marketable securities and is issued to
Gpvernment accounts in lieu of marketable issues. See the Statistical
Appendix for table showing the investment holdings by Government
agencies and accounts.
/Servicing securities for Federal agencies and Government-sponsored
enterprises.—In accordance with agreements between the Secretary of
th^ Treasury and the enterprises listed below, the U.S. Treasury acts
as special agent for the payment of principal and interest on their
securities. A comparison of these payments during fiscal years 1974 and
1975 follows:
Payment made for—


Banks for cooperatives »
District of Columbia Armory Board
Export-Import Bank of the United States.
Farmers Home Administration
Federal home loan banks »
Federal Home Loan Mortgage Corporation»
Federal Housing Administration...'.
Federal intermediate credit banks 1
Federal land banks »
Federal National Mortgage Association L .
- Government National Mortgage Association
Student Loan Marketing Association
Tennessee Valley Authority
U.S. Postal Service
Washington liletropoUtan Area Transit






Interest paid


$204,238,026 $1,400,630,000
923,016,339 1,326,501,000

Interest paid

















» Servicing of these accounts was transferred to the Federal Reserve Bank of New York on Oct. 1,1974.

Issuing and redeeming paper currency.—The Treasury is required
by law (31 U.S.C. 404) to issue U.S. notes in amounts equal to those
redeemed. In order to comply with this requirement in the most economical manner, U.S. notes are issued only in the $100 denomination
in the Washington, D.C, area. In 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 Reserve notes constitute over 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 pf the
Currency, and ships them to Federal Reserve banks as needed. The
Bureau of Government Financial Operations accounts for Federal Reserve notes from the time they are delivered by the Bureau of Engraving and Printing until redeemed and destroyed.
The Bureau also .retires unfit paper currency of all types received
locally and from Government officers abroad, and handles all claims



involving burned or mutilated currency. During fiscal 1975, payments
totaling $6.9 million were made to 52,045 such claimants.
A comparison of the amounts of paper currency of all classes, issued,
redeemed, and outstanding during fiscal years 1974 and 1975 follows:
Fiscal year 1974
Outstanding July 1
Issues d u r i n g year
R e d e m p t i o n s d u r i n g year
O u t s t a n d i n g J u n e 30



Fiscal year 1975

Amount •


77,611,086; 767

Deifcails of the issues and redemptions for fiscal 1975 arid 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.
Data processing.—During the year, 782 million Treasury checks
were paid and reconciled by the electronic check payment and reconciliation system. These checks were issued worldwide by all civilian
and military disbursing officers.
The automated central accounting system embraces all cash financial
operations of the Government. This is the only system which brings
together all of the cash transactions of the Fecieral Government. The
system is the data base for Federal budget results published in the
Monthly Statement of Receipts and Outlays of the U.S. Governmeht,
and in the annual Combined Statement of Receipts, Expenditures lahd
Balances of the U.S. Government.
The Division of Data Processing provided computer servicie to other
agencies in addition to the Bureau's needs. One of such services was
converting to magnetic tape 44 million Federal tax deposits for the
Internal Revenue Service.
Banking and cash management

Federal depositary system.—The types of depositary services provided and the number of depositaries for each of the authorized services as of June 30,1974 and 1975, are shown in the followirig table:
T y p e of service p r o v i d e d b y depositaries
Receive deposits from t a x p a y e r s a n d purchasers of p u b l i c d e b t securities for
credit i n T r e a s u r y t a x a n d loan accounts
Receive deposits from G o v e m m e n t officers for credit i n T r e a s u r y ' s general
M a i n t a i n checking accounts for (Government disbursing officers a n d for quasipublic funds..
F u r n i s h b a n k drafts to G o v e m m e n t officers i n e x c h a n g e for coUections
M a i n t a i n S t a t e u n e m p l o y m e n t c o m p e n s a t i o n benefit p a y m e n t a n d clearing
o p e r a t e limited b a n k i n g facilities:
I n t h e U n i t e d S t a t e s a n d its outlying areas
I n foreign areas


. 1975











Cash services.—In December 1974, an incoming funds trarisfer system was installed in Division of Cash Services. This system is a direct
on-line hookup with the Federal Reserve Bank of New York and was



implemented to interconnect a receiving and sending terminal at
Treasury with the F R B New York Sigma 5 communication system.
This system provides Treasury and Federal Reserve banks with the
following: Treasury funds transfers from or to on-line member banks
are processed automatically without manual intervention; funds transfers are completed in minutes; the funds transfer network is a dedicated private circuit; the system has a focal point within Treasury
for the initiation or receipt of all wire transfers of funds involving
Treasury accounts; and the system provides faster availability of
funds. Since December, 4,897 wires totaling more than $4.6 biUion
were received through this system.
Government officers during the year deposited 3.5 million commercial checks, drafts, money orders, etc., with the Division of Cash
Services in Washington for collection.
The volume of over-the-counter transactions rose to 218,921, about
13 percent greater than fiscal 1974, due in large part to the tax rebate
and $50 social security checks, and an increase in public assistance and
unemployment checks..
Banks in the Washington metropolitan area order currency and coin
to meet their daily needs: 95.6 million pieces of currency and 691.5
million coins were provided during the year—a 9.7-percent increase
when compared with fiscal 1974.
Methods of destroying unfit currency.—The Treasury continued
during fiscal 1975 to press its efforts to find ecologically cleaner methods of destroying currency which is no longer fit for circulation. A
total of about 3,000 tons of unfit currency are destroyed every year
by methods tested and approved by the Treasury. Destruction takes
place at 35 Federal Reserve offices around the country and at the
Treasury in Washington.
Incineration is used at 30 locations which account for 84 percent
of the volume. Although incineration effectively destroys the currency,
the equipment has to be very carefully controlled and correctly operated to keep its emissions within limits permitted by locally applicable
air quality standards. Consequently, the Treasury has also for several
years been looking in other directions for currency destruction equipment, and has tested and approved the installation at six locations of
pulverizers which grind the currency to a fibrous residue or to very
fine particles.
During fiscal 1975, currency destruction tests were made on equipment made by six different'manufacturers. Three incinerators and
three grinders were tested. Of these, the Treasury approved one incinerator and two pulverizers for use in destroying currency. At the
present time, two manufacturers of incinerators and three manufacturers of pulverizers are authorized to supply equipment for this
Foreign currency management.—The Foreign Currency Staff initiated a new funding concept that will minimize local currency bank
balances sufficient only to meet the disbursing officers' immediate needs,
minimize losses due to rate devaluations, and delay drawdowns on the
Treasury's general account. Results will be interest savings to the U.S.
Government and a favorable impact on the U.S. balance of payments.



This new procedure was fully implemented in Latin America in May
1975. The balances in the disbursing officers' operating accounts have
been reduced by approximately $15 million which will result in annual
interest savings of about $1.2 million. This funding method will be
expanded throughout Europe, Asia, and Africa in the period immediately ahead.
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 tlieir
banks with their tax payments. The cards are then routed to Federal
Reserve banks which complete the punching and forward them to the
Treasury in Washington. The Bureau of Government Financial Operations enters the data from the cards on magnetic tapes which are
furnished to the Intemal Revenue 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 Treasury's account.
The types of tax payments which are collected inthis 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
1975 totaled $233,847.5 million and required the processing of 44.4 million cards, compared with $203,002.9 million collected and 42.4 million
cards processed in the previous year. The following table shows the
volume of deposits processed by Federal Reserve banks for fiscal years

Fiscal year


income and







22,783 .
394,792 .
1,297,062 .





NOTE.—Comparable data for 1944r-59 will be found In the 1962 Annual Report, p. 141.

Paying grants through letters of credit.—Treasury Department
Circular No. 1075, first published May 28,1964, established a procedure
to preclude withdrawals from the Treasury any sooner than necessary
in cases where Federal programs are financed by grants or other payments to State or local governments or to educational or other institutions. Under this procedure. Government departments and agencies
issue letters of credit to Federal Reserve banks which permit grantees

588-395 0 - 7 5 - 1 4



to make withdrawals from the account of the Treasury of the United
States 8 S they rieed funds to accomplish the object for which a grant
has beeri awarded.
By the close Of fiscal 1975, 118 Governmerit agency accounting stations were inaking disbursenients through letters of credit. During
the year, th^ Bureau of Goverriment Finaricial Operations processed
116,426 withdrawal trarisactions aggregating $46,685 million, compared
with 81^408 transactions totaling $38,640 million in fiscal 1974.
I n addition, the t e ^ of the letter of credit-Treasury RDO system
which was first introduced in fiscal 1974 with two agencies has been
expanded to include six agencies. I n this system agencies issue letters
of credit to Treasury regional disbursing offices where payments are
riiade by Treasury cihecik upon receipt of requests from grantees. The
requests consist of brirf status of funds reports which enable the agencies and the Treasury to review j Ori a more current basis, each grantee's
need for furids.
Operations plaiiriirig and research

The Operations P l t o n i n g arid Kesearch staff is continuing its systems developirierital activities in a number of fiscal functions, including
the following major systems revisions:
(1) implementatiori of the program for paying recipients of recurring Federal payments by credit to their accounts in financial organizations has begun. Under the program, which is optional for the
check recipient, payiri^rits will first be accomplished with individual
checks mailed to th^ finaricial organizations designated by the recipients and, subsequeritly, by riieMs of electronic funds transfer to the
organizations. The program was riiade available, on a pilot basis, to
recipients of social security payments in Georgia and Florida in Noveniber 1974 and April 197S, respectively* Nationwide implementation
Of the prograni for this class of payirieritg will be completed in October
i§75. Current plans provide fof the coriversiOri of all of these check
payirients id a riatiOntvid^ electroriic furids transfer system by December 1976. During caleridar 1976, recurring payments made by other
administrativei agericies will be brought into the system.
(2) The joint efforts of Operations Plannirig and Research and Federal Reserye personnel to devdop a check truncation system have progressed to the point bi evaluating proposals by vendors for the equipment necessary to accomplish the task. Urider this system, the flow of
paid Treasury checks will stop at the level of the Federal Reserve
banks. Magnetic tape and riiicrOfilm records will be substituted for the
hundreds df millions of checks now shipped by the Federal Reserve
banks to the Treasury for further prodessirig, including final payment
and recdriciiiation. A pilot test of the check truncation system is targeted for March 1976 and the beginning of full system implementation
for September 1976.
Miscellaneous fiscal activities
Auditing.^-lDurms^ fiscal 1975^, the Audit Staff conducted 59 financial, compliarice, and operatidrial audits of the various Bureau activities covering matters ranging from small imprest funds to the accountirig for severd multibillidri-dollar Federal trust furids. Included were



onsite audits at various disbursing centers throughout the United
States. Also, management surveys and operational reviews in selected
areas were performed at several disbursing centers. I n addition, reviews were made of operations pertaining to canceling, verifying, and
destroying unfit paper currency at all Federal Reserve banks and
The Comptroller of the Bureau represented the United States on
an external Audit Committee which was charged with the responsibility of performing an independent financial audit of the International Monetary Fund. I n addition to serving as the U.S. representative, the Comptroller also served as chairman of the Committee.
The Audit Staff also completed the annual examination of the financial statements and related supporting data of surety companies
holding Certificates of Authority as acceptable sureties on bonds
running i n i a v o r of the United States (6 U.S,C. 8). Certificates are
renewable each July 1 and a list of approved companies (Department
Circular 570, Revised) is published annually in the Federal Register
for information of Federal bond-approving officers and persons re-,
quired to give bonds to the United States. As of June 30,1975, a total
of 280 companies held certificates.
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 30,1975.
Defense Production Act.—Loans outstanding were reduced from
$1.9 million to $58,000 during fiscal 1975. Further transfers of $1.3
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 $36.4 million. A total of $2.0
million has been deposited into miscellaneous receipts under the
authority of Public Law 93-426, dated September 30, 1974.
Liquidation of Reconstruction Finance Corf oration assets.—^The
Secretary of the Treasury's responsibilities in the liquidation of R F C
assets relate to completing the liquidation of business loans and securities with individual balances of $250,000 or more as of June 30, 1957,
and securities of and loans to railroads and financial institutions. Net
income and proceeds of liquidation amounting to $60 million have
been paid into Treasury as miscellaneous receipts since July 1, 1957.
Total unliquidated assets as of June 30,1975, had a gross book value of
$3 million.
Liquidation of Postal Savings System.—Effective July 1,1967, pursuant to the act of March 28, 1966 (39 U.S,C. 5225-5229), the unpaid
deposits of the Postal Savings System are required to be transferred
to the Secretary of the Treasury for liquidation purposes. As of
June 30, 1970, a total amount of $65 million representing principal
and accrued interest on deposits had beeri transferred for payment of
depositor accounts. All deposits are held in trust by the Secretary pending proper application for payment. Through fiscal 1975, payments
totaling $57.7 million had been made includirig $396,591 during fiscal
1975, leaving a balance of $6,1 millidri, excluding interest, to be liquidated.



Public Law 92-117, approved August 13,1971 (31 U.S.C. 725 note),
provided for the periodic pro rata distribution among the 50 States,
the District of Columbia, Puerto Rico, the Virgin Islands, and Guam
of the available amounts of unclaimed Postal Savings deposits. A distribution of unclaimed Postal Savings System funds was not made to
the States and other jurisdictions for fiscal 1975 due to the increased
amount of payments being made to rightful owners. Payments totaling $6.0 million have been made in prior years to the States and other
Govemment losses in shipment.—Claims totaling $212,362 were paid
from the fund established by the Government Losses in Shipment Act,
as amended (40 U.S.C. 721-729). Details of operations under this act
are shown in the Statistical Appendix.
Donations and contributions.—Duriiig the year, the Bureau of Government Financial Operations received "conscience fund" contributions totaling $229,757 and other unconditional donations totaling
$220,874. Other Government agencies received conscience fund contributions and unconditional donations amounting to $19,786 and
$50,263, respectively. Conditional gifts to further the defense effort
amounted to $781. Gifts of money and the proceeds of real or personal
property donated in fiscal 1975 for reducing the public debt amounted
to $295,058.
Foreigrn indebtedness

World War I.—The Governments of Finland and Greece made payments during fiscal year 1975 of $352,185 and $328,898, respectively.
F o r status of World W a r I indebtedness to the United States, see the
Statistical Appendix.
Credit to the United Kingdom.—The Govemment of the United
Kingdom made a principal payment of $69.9 million and an interest payment of $60.3 million on December 31,1974, 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,
1975, cumulative payments totaled $2,380.1 million, of which $1,321.0
million was interest. A principal balance of $2,629.0 million remains
outstanding; interest installments of $319.9 million which have been
deferred by agreement also were outstanding at the fiscal yearend.
Indonesia.) consolidation of debts.—The Government of the Republic
of Indonesia made payments in fiscal 1975 of $3,048,680 in principal
and $579,165 in interest on deferred principal installments in accordance with the Indonesian Bilateral Agreement of March 16, 1971. The
normal payment of interest on principal is not due until June 11,1985.
Payment of claims against foreign governments.—The 15th installment of $2 million was received from the Polish Government under the
agreement of July 16, 1960, and pro rata payments on each unpaid
award were authorized.
The third installment of $4,524,000 was received from the Hungarian
Government under the agreement of March 6, 1973. The third installment was greater than the minimum installment of $945,000 because 6
percent of the dollar proceeds of imports into the United States from
Hungary for the 12 months ending on December 31,1974, exceeded the



minimum installment by $3,579,000, thereby raising the annual installment from $945,000 to $4,524,000. Before any payment can be made
on the Hungarian awards, the Foreign Claims Settlement Commission
will have to adjudicate and certify new awards.
The Department of the Treasury received an amount of $4,750,000
for deposit into the W a r Claims Fund for payment on awards certified
under the War Claims Act of 1948, as amended. A distribution of
$24,000 or the balance of the award, whichever was less, was made.

Facilities management.—Significant strides have been made to accommodate the consolidation of activities and relocation of personnel
resulting from the merger of the Treasurer's Office and Bureau of
Accounts, through installation of space-saving partitioning and equipment and application of office excellence concepts at the Engraving and
Printing Annex, GAO Building, Liberty Loan Building, Main Treasury, Treasury Annex, and Vermont Building.
Personnel administration.—^The integration of all former Treasurer
of the U.S. and Bureau of Accounts positions into the new Bureau of
Government Financial Operations was accomplished through a series
of classification team reviews. The teams assisted management in revising their position structure to meet the objectives of the merger, conducted desk audits where necessary to assist in determining the placement of functions, and revised and processed over 1,000 position descriptions. During this effort, an authorized position list showing all
positions authorized for use in the new Bureau, Fair Labor Standards
Act status, and position restrictions was developed. The list also
identifies all career ladders and their target positions and shows bridge
and crossover positions identified for use in support of the new formal
upward mobility program.
A new procedure has been devised for meeting the annual Whitten
Amendment supervisory review of positions. A form was developed to
facilitate documentation by supervisors and employees of the results of
the review and will be used as the basis for scheduling position maintenance reviews.
Union activity has centered in the Division of Disbursement with
four regional disbursing centers (Austin, Birmingham, Philadelphia,
and Washington, D.C.) dealing with certified exclusive unions/Birmingham has a contract with A F G E Local 2890 through March 1977;
preliminary negotiations on ground rules are underway between Austin and the N F F E 1745; and Philadelphia and the A F G E Local 678
have exchanged proposals preparatory to negotiations on the contract
itself. Austin has been charged by the union with four unfair labor
practice complaints none of which has been affirmed by the administrative investigations of the U.S. Department of Labor or the Federal
Laibor Relations Council. Bureau policy and procedures are being developed to promote effective and cooperative labor-management relations throughout the Bureau.
A troubled-employee program has been developed for employees
whose performance has been adversely affected as a direct result of
drug abuse or alcoholism. Counseling and treatment are to be furnished
the employee if he/she agrees to it.



Ongoing training has been provided in typing and clerical skills,
and in the professional, supervisory, and management areas, as well as
special effort programs including pre-upward-mobility programs in
remedial reading and general equivalency degree coaching, a 2-week
residential management development program, and two short residential working-meetings for top management.
Emphasis has been placed on special recruitment and placement
programs. Summer hires, including needy youth, and appointments
under merit staffing plans totaled 227. Special programs included:
Campus recruitment in support of the E E O concept in 23 colleges
located in New York, Pennsylvania, Maryland, Texas, New Mexico,
and D.C. for professional accountant trainees; working out an affirmative action plan for employment of the handicapped, and carrying out
the recruitment and placement of handicapped persons; and a stay-inschool program providing part-time year-round work for 11 needy
The innovative check-wrapping system recently installed in the
Philadelphia Disbursing Center (with more to follow at other disbursing centers) will require a readjustment of personnel formerly
performing many of the duties which are now automated. Personnel
has assisted with the promulgation of qualification standards and
guides to the application of standards covering the new positions.
B u r e a u of the Public Debt
The Bureau of the Public Debt is charged with the administrative
functions arising from the Treasury's debt management activities.
These functions extend to transactions in the security issues of the
United States, and of the Government agencies for which the Treasury
acts as agent. The Bureau prepares the offering circulars and instructions relating to each offering of public debt securities, and directs
the handling of subscriptions and making of allotments; prepares
regulations governing public debt securities and conducts or directs
all transactions thereof; supervises the public debt activities of fiscal
agents and agencies authorized to issue and pay savings bonds; orders,
stores, and distributes all public debt securities; audits and records
retired securities and interest coupons; maintains individual accounts
with owners of registered securities and authorizes the issuance of
checks in payment of interest thereon; processes claims on account of
lost, stolen, destroyed, or mutilated securities; maintains accounting
control over public debt financial and security transactions, security
accountability, and interest costs; and prepares public debt statements.
The Bureau's principal office and headquarters is in Washington, D.C.
An office is also maintained in Parkersburg, W. Va., where most
Bureau operations related to U.S. savings bonds and U.S. savings
notes are handled.
Management improvement
The consolidation of the Bureau's Chicago and Parkersburg, W. Va.,
field offices was completed in January 1975. Designated as the "Savings
Bond Operations Office," the installation is located in a new building
in Parkersburg specifically constructed to house Public Debt field



operations. The consolidation has eliminated duplication and overlapping in service functions; promoted more effective utilization of
personnel and equipment by consolidating data pro<?essing functions;
and reduced the time required to process security transactions and correspondence, thus improving the quality df service to savings bond
The Federal Reserve banks are now processing prepayments on
sales of public debt securities under a system whereby deposits are
made directly to the Treasury account. Previously, deposits were
made to Federal Reserve bank accounts and transferred at a later date
to the Treasury account. Projections indicate that an estimated interest
savings of $1.4 million annually will be realized because of the earlier
availability of the deposits for use by the Treasury.
Ten additional issuing agents are now repdrting series E savings
bonds sales on magnetic tape in lieu of registration stubs. This eliminates key encoding of information from stubs in the Bureau and will
provide an estimated savings of approximately $53,000 for fiscal 1975.
Forty-one issuing agents are currently participating in this issues-ontape program.
The Federal Reserve Bank of Atlanta is currently transmitting
daily accounting information on issues and redemptions of marketable
and agency securities to the Bureau, via mail, ori niagn^tic tape rather
than hard copy. This program eliminates additidrial key encoding in
the Bureau and provides informatiori for the completion of accounting
reports on a more timely basis. Plans are to expand the program to
incorporate other banks and eventually to transmit the information
electronically, rather than physically ship the tapes.
To expedite final proof reading of the semiannual bond redemption
value tables prior to mailing, a program to computer match tapes of
savings bond redemption yalues cdriipiled by the Bureau offices in
Washington and Parkersburg has been implemented. Previously, this
information had to be matched manually because of differences in tape
formats. Under the new program, only the differences are printed out
for reconciliation.
As the result of a study to increase efficiency in paying agent mailing
operations performed by the Bureau, address information maintained
in Washington on address plates for the semiannual mailing of
redemption value tables was merged with address iriformation maintained in Parkersburg on magnetic tape for fee payment purposes.
The maintenance and utilization of a single address file for both
purposes is anticipated to result in an annual cost savings of
approximately $11,000.
The Bureau's Washington office has investigated alternative methods
of destroying security items other than by incineration. Plans have
been developed for the installation of a paper disintegrator which will
eliminate air pollution and reduce personnel costs.
Improvements to the registered accounts system have enabled the
Bureau to expedite operations in the maintenance and servicing of
accounts of owners of registered Treasury and designated agency
securities. Programs to automate investment series accounts, convert
depositary and R E A bonds to book-entry form, and redesign the
system for maintaining accounts for securities of the State and local
government series have been implemented,



A feasibility study conducted within the Bureau's Washington
office determined that automation of the securities audit and numerical records functions of the retired securities activity was operationally desirable. The study found that existing manual operations accomplished their purposes but that there was no way of improving the
timeliness and accuracy of information on a manual basis without
adding more personnel and more controls. As the result of this study,
a full-scale automation project was initiated to design, develop, and
implement an automated retired securities system in the Washington
office. Projections indicate that the system will be operational by
fiscal 1977 and that a net operational savings of approximately
$164,000 annually in personnel and equipment costs will result.
Significant improvements have been made in the performance
level of Bureau A D P programs and functions which have promoted
more effective utilization of computer hardware and technical personnel and resulted in reduced operating costs and an increase in overall operating efficiency. Improvements include the redesign of the
U.S. savings bonds and coupon audit systems; development of increased processing capability of the securities on-line inscription system ; modification of the computerized claims system; and preparation
of a request for proposal for replacement of the five separate computer
configurations in Parkersburg. An increased workload experienced by
the Bureau in the A D P operations area also necessitated improvements
in the management of computer facilities and resources, resulting in
the procurement of a key-to-disk data entry system with eight key
stations and the addition of five key stations to existing equipment
in the Washington office.
Federal Reserve banks have been authorized to pay past due interest
on interim certificates submitted for exchange transactions after the
first interest payment date. This procedure eliminates shipping of
certificates to the Bureau for processing and provides customers with
immediate service at the banks.
The following organizational changes were made within the Washington office to maximize work efficiency and improve personnel utilization: (1) Abolishment of one operating section and functional
realignment within the Registered Accounts Branch due to implementation of the automated registered accounts system; (2) reorganization of the Principal Accounts Branch eliminating duplication
of effort and recurring confiicts in processing daily and monthend
accounting reports; (3) functional and organizational restructuring
within the Division of Management Services to increase responsiveness in program and administrative activities; and (4) realignment
of A D P functions and responsibilities to provide the Bureau with
the type of management and staffing necessary to meet its requirements
in AJDP and computer-related telecommunications areas.
Bureau operations

During the year, approximately 180,000 individual accounts covering publicly held registered securities other than savings bonds, savings
notes, individual retirement bonds, and retirement plan, bonds were
opened, and about 70,000 were closed. This increased the number of
open accounts to 383,174 covering registered securities in the principal
amount of $10 billion. There were 640,943 interest checks with a value
of $508 million issued during the year.



Redeemed and canceled securities other than savings bonds, savings
notes, and retirement plan bonds received for audit included 6,637,011
bearer securities and 339,510 registered securities. Coupons totaling
13,612,073 were received.
During the year, 62,793 registration stubs of retirement plan bonds,
5,399 registration stubs of individual retirement bonds, and 13,468
retirement plan bonds were received for audit.
A summary of the public debt operations handled by the Bureau
appears on pages 15-27 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 149 million stubs or records on magnetic tape and microfilm representing the issuance of series E savings bonds received for
registration, making a grand total of 3,938 million, including reissues,
received through June 30, 1975. All registration stubs of 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 estimated 120.0 million series A - E savings bonds and savings
notes redeemed and charged to the Treasury during the year, 116.6
million 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 $15,131,088 and an average
of 12.98 cents per bond and note.
Interest checks issued on current income-type savings bonds (series
H ) during the year totaled 4,209,039 with a value of $467 million. New
accounts established for series H bonds totaled 126,761 while accounts
closed totaled 124,947.
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 58,579. I n 33,557
of such cases the issuance of duplicate bonds was authorized. I n addition, 15,723 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.

The 6ffice of Foreign Assets Control administers five sets of regulations which implement the Department of the Treasury's freezing
controls. The Foreign Assets Control Regulations and the Cuban
Assets Control Regulations prohibit, unless licensed, all trade and



financial transactions with North Korea, North Vietnam, South Vietnam, Cambodia, and Cuba and their nationals. South Vietnam and
Cambodia were added to the schedule of blocked countries under the
Foreign Assets Control Regulations following the takeover of these
countries by Communist forces in April 1975. These regulations also
block assets in the United States of the above-named countries and
their nationals.
Under general licenses contained in the Foreign Assets Control
Regulations, all transactions with the People's Republic of China are
now authorized except transactions abroad by foreign firms, owned or
controlled by Americans, involving shipment to the People's Republic
of China of internationally controlled strategic merchandise unless
the transaction is appropriately licensed under the Transaction Control Regulations (see below). Also, transactions in Chinese assets
blocked in the United States as of May 6, 1971, remain prohibited.
The Transaction Control Regulations supplement the export controls exercised by the Department of Commerce over direct exports
from the United States to Eastern Europe and the U.S.S.R. These
regulations prohibit, unless licensed, the purchase or sale or the
arranging of the purchase or sale of strategic merchandise located
outside the United States for ultimate delivery to Communist countries of Eastern Europe, the U.S.S.R., the People's Republic of China,
North Korea, North Vietnam, South Vietnam, and Cambodia. The
prohibitions apply not only to domestic American companies, but also
to foreign firms owned or controlled by persons within the United
States. A general license permits sales of these commodities to the
listed countries other than North Korea, North Vietnam, South Vietnam, and Cambodia provided shipment is made from and licensed by
a COCOM-member country. (COCOM is a NATO entity.)
The Office also administers controls on assets remaining blocked
under the World W a r I I Foreign Funds Control Regulations. These
controls continue to apply to blocked assets of Czechoslovakia, Estonia,
Latvia, Lithuania, East Germany, and nationals thereof who were, on
December 7,1945, in Czechoslovakia, Estonia, Latvia, or Lithuania or,
on December 31,1946, in East Germany.
Finally, the Office administers the Rhodesian Sanctions Regulations,
controlling transactions with Rhodesia and its nationals. The regulations implement United Nations Resolutions calling upon member
countries to impose mandatory sanctions on Southern Rhodesia. An
exception to the prohibition against imports of merchandise of Southern Rhodesian origin is authorized by general license for certain strategic and critical materials, pursuant to section 503 of the Military
Procurement Act of 1971.
Under the Foreign Assets Control Regulations and the Transaction
Control Regulations, the number of specific license applications received during fiscal 1975 (including applications reopened) was 582.
During the year, a total of 278 applications were acted on.
Applications for licenses and requests for reconsideration under the
Cuban Assets Control Regulations totaled 395. During the year, 397
applications were acted on.
Durinsr the same period, 875 applications (including applications
reopened) were received under the Rhodesian Sanctions Regulations;



866 applications were acted upon. Comparable figures under the Foreign Funds Control Regulations for this period were 25 (including
reopened) received and 26 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
During fiscal 1975, there was no criminal case action by the Department of Justice involving violations of the regulations administered
by this Office. Criminal court fines totaling $6,000 were collected as a
result of criminal convictions reported previously. Civil penalties
amounted to $518,705, and the total value of merchandise under seizure
at the end of the fiscal year amounted to $244,882. There were no forfeitures of merchandise during the fiscal year.

The Intemal Revenue Service administers the internal revenue laws
embodied in the Internal Revenue Code (26 U.S.C.) and certain other
statutes, including the Employee Retirement Income Security Act of
1974 (Public Law 93-406,88 Stat. 829).
Receipts, refunds, arid returns filed

Gross revenue colledtions in fiscal 1975 rose to a record high of $293.8
billion, an increase of $24.9 billion or 9.2 percent over 1974, in spite of
such counteracting infiuences as the economic slowdown and various
provisions of the Tax Reduction Act of 1975.
Individual and corporation income taxes accounted for over twothirds of all tax receipts. Individual income taxes amounted to $156.4
billion, an increase of $13.5 billion (9.4 percent) over the 1974 level.
Corporation income taxes totaled $45.7 billion, up $4.0 billion (9.6 percent) over the previous year.
Employment taxes (social security, unemployment, and railroad retirement) , the second largest source of revenue, totaled $70.1 billion, a
rise of $8.0 billion or 13.0 percent over 1974. The increase in employment tax collections in 1975 did not equal the 19-percent growth rate
of the 2 previous years mainly because of smaller increases in the social
security tax rate and the maximum amount of earnings subject to tax.
Excise taxes, levied on a variety of products, services, and activities,
declined slightly. Receipts from these taxes totaled $16.8 billion, dipping $0.3 billion (1.5 percent), refiecting the continued phasing out of
the telephone excise tax, elimination of the interest equalization tax,
and an overall net reduction in receipts from auto and energy-related
excise taxes.
1 Additional Information will be found in the separate Annual Report of the Commissioner of Internal Revenue.



During fiscal 1975, 67.8 million regular refund checks were issued.
This was 3.1 percent more than the 65.8 million refund checks issued
during fiscal 1974. The refunds amounted to $32.2 billion, 14.2 percent
more than 1974's $28.2 billion. I n addition to regular refunds, rebates
of 1974 individual income taxes, as provided by the Tax Reduction Act
of 1975, totaled $7,9 billion. Some 54.7 million checks were issued for
the rebate alone and 9.1 million checks combined the rebate with a
regular refund.
I n 1975, more than 125 million returns of all types were received
and processed by I R S service centers, compared with nearly 122 million in 1974. Individual and fiduciary returns totaled 85.5 million,
compared with 83.0 million in 1974. Over 22 million individuals, 27 percent of all individual filers, used the short form 1040A. Perhaps influenced in part by the economy, taxpayers filed earlier this year. Anticipating taxpayers' need for a prompt refund, the Service responded
by processing returns faster than any year in history.
Assisting and informing taxpayers


Taxpayer service.—The I R S recognizes its obligation to help taxpayers compute their tax liabilities and file timely and accurate returns.
Each year the Service provides assistance to millions of taxpayers by
answering their questions and helping them complete their returns.
During fiscal 1975, the Service received over 40 million written, telephone, and walk-in inquiries. While taxpayers were encouraged to prepare their own returns, I R S personnel prepared returns for those who
needed and requested such assistance. Walk-in taxpayer service was
offered in over 750 permanent offices and nearly 300 temporary locations. Centralized toll-free telephone service was offered for the second
consecutive year in all 58 districts. The actual number of answering
sites was reduced from 135 in 1974 to 85 in 1975, improving the quality
and depth of assistance to taxpayers at each location.
I n July 1974, Taxpayer Service was reorganized at the district level,
separating this function from enforcement activities. Collection and
Taxpayer Service functions now have equal organizational status. This
organizational realignment provides for year-round managers who can
give closer attention to the program, identify and correct problem
areas, and improve the quality of the program.
The number of permanent taxpayer service representatives was increased this year from about 1,900 to over 2,300 and their professional
training was expanded.
Special efforts were made in 1975 to meet the needs of the elderly
and low-income taxpayers unable to visit I R S offices by providing them
with income tax assistance in their own neighborhoods. Over 73,000
low-income individuals and almost 26,000 elderly taxpayers were
served under this outreach program in 1975.
A total of 148 I R S offices provided assistance to taxpayers in Spanish, and 154 offices provided assistance in other foreign languages. For
taxpayers unable to call or visit an I R S office during normal business
hours, 550 offices were open at times outside of normal business hours.
About 800,000 taxpayers received assistance under the volunteer
income tax assistance program in 1975. The Service trained more
than 23,000 volunteers who provided free assistance to the elderly,
Spanish-speaking, low-income, and other taxpayers in their communities.



To reinforce information provided taxpayers during direct contact
and to assure nationwide consistency in the application of the tax
laws, the Service also distributed approximately 90 different free I R S
publications dealing with special tax problems such as reporting the
sale of a personal residence or computing the value of donated property.
I n 1975, free distribution of Publication 17, Your Federal Income
Tax, and Publication 334, Tax Guide for Small Business, was inaugurated. Distribution reports for 1975 show that 1.5 million copies of
Publication 17 and 0.6 million copies of Publication 334 were distributed to taxpayers at no charge.
I D R S operations.—^The integrated data retrieval system ( I D R S ) ,
which links all district and area offices and Puerto Rico through video
terminals to computer files at the I R S service centers, processed an
average of 1.8 million inquiries per service center each month during
the last half of fiscal 1975.
To cope with the rapid growth in use of the I D R S since it was
made fully operational nationwide in 1974, the Service has installed
larger computers and related components with faster processing capabilities at all 10 I R S service centers. For example, the I D R S can
now report on a taxpayer's refund status and on rebates, which
accounted for voluminous taxpayer contacts in 1975.
This increased I D R S capability will also provide a better method
of controlling information concerning the number of audits being conducted and their disposition. The new method is named the "audit
information management system" (AIMS) and will be installed and
operating on a pilot basis in fiscal 1976 and is scheduled to be
operating nationwide in fiscal 1977.
Informing taxpayers through the mass media.—The I R S continued
to use the Nation's mass media to provide tax information to the
public. I n fiscal 1975, over 17,000 radio and T V stations, daily and
weekly newspapers, and magazines received material prepared by I R S
to inform and assist taxpayers. Service personnel participated in
6,500 interviews, answered more than 18,000 media inquiries, and
made 5,500 talks to citizen groups.
Nearly 8,800 news releases were issued to the media. These releases
covered such topics as services available to taxpayers, appeal rights,
correct filing of returns, checkoff for the Presidential campaign fund,
tax advice for disaster victims, and the tax rebate program. Some of
the releases were translated into Spanish for use in areas where it is
widely spoken as a second language. Tax question-and-answer columns
were written for nationwide distribution to weekly newspapers and
The Service also produced and distributed to field offices a 28-minute
color film on audit and appeals procedures. This I R S film was shown
on 393 occasions by T V outlets and 2,670 occasions by civic associations and educational groups from January through June of 1975.
Tax forms and publications ^

Tax forms.—The successful 1975 filing period may be attributed
partly to the fact that, although improvements were made in the 1974
individual income tax forms, the basic forms design remained substantially unchanged so that taxpayers could use their 1973 forms as
1 A complete listing of taxpayer publications can be found in the separate Annual Report
of the Commissioner of Internal Revenue.



a guide in preparing their 1974 retums. Returns were more completely
and accurately prepared with fewer taxpayer errors this year.
Among the changes on this year's return was the addition of a "no"
box for the 1976 Presidential election campaign fund checkoff allowing taxpayers to check "yes" or "no" regarding their desire to contribute to the fund. Participation in the checkoff election increased sharply
during the 1975 filing period. Designations totaled $19.8 million or
24.2 percent of returns processed, compared with 13.6 percent the
Schedule B (Form 1040) was reintroduced for the reporting of dividends and interest. Many taxpayers and practitioners found the reinstatement of this schedule helpful in correctly reporting such income.
Lines were added on schedule A to itemize deductions for taxes,
interest, and miscellaneous expenses, and additional space was also
provided on schedule D for listing capital gains and losses.
Over 2.6 million tax packages sent to farmers and fishermen were
printed on recycled paper as a cost reduction and environmental
experiment. Public reaction was generally favorable.
The Tax Reduction Act of 1975 required the I R S to revise a number of major forms and to develop new forms to refiect the changes
made by the act, such as the housing credit.
New publications developed for the public in 1975 included: Publication 587, Tax Information on Operating a Business in Your Home;
Publication 588, Tax Information on Condominiums and Cooperative Apartments; Publication 589, Tax Information on Subchapter
S Corporations; and Publication 590, Tax Information on Individual
Retirement Savings Programs.
These publications, along with additional tax forms, were available to the individual taxpayer at I R S offices across the country on a
walk-in basis. Many banks and post offices also cooperated in making
certain I R S forms available to taxpayers. As another option, the
taxpayer was able to order iforms or publications in writing or by
telephone. Over 4.4 million such orders were filled during the first
part of 1975. I n addition, 79 million individual income tax packages
were mailed to taxpayers in advance of the filing period.
Comnvunications with taxpayers.—During 1975, the I R S improvement of form letters, computer notices, and other form-type taxpayer communications continued to be a major obi ecti ve. A special
unit of writer-editors now reviews all such standard communications
to humanize them and make sure they are clear and understandable
to the average taxpayer. National Office units and field offices reviewed a total of 2,069 forms during the year, and were able to eliminate 553 of them as duplicative or unnecessary.
The Service continues to emphasize making all taxpayers aware of
their rights under the tax laws and providing complete and courteous responses to taxpayer inquiries.
Tax rulings and technical advice

The Service's tax ruling program consists of letter rulings and published revenue rulings.
A letter ruling is a written statement issued to a taxpayer by the
National Office interpreting and applying the tax laws to a specific



set of if acts. Such a ruling provides advice concerning the tax effects
of a proposed transaction so that the taxpayer may structure the
transaction to comply with the tax laws, thus resolving issues in
advance and avoiding future controversy. Letter rulings are not precedents and may not be relied upon by other taxpayers.
A revenue ruling is an interpretation of the tax laws issued by the
National Office and published in the Internal Revenue Bulletin for
the information and guidance of taxpayers, practitioners, and I R S
personnel. Most revenue rulings are based on letter rulings which
have the potential of setting precedents or have such broad applicability that general guidance should be offered to people in similar
Technical advice is advice or guidance as to the interpretation and
proper application of the tax laws to a specific set of facts. I t is ffurnished by the National Office at the request of a district office in connection with the audit of a taxpayer's return or claim for refund or
credit. Frequently, the district director's request is made in response
to the suggestion of the taxpayer that technical advice be sought.
Requests for tax rulings and technical advice (closings), fiscal 1976

Administrative provisions
Changes in accounting methods
Changes in accounting periods
Eamings and profits determinations
Employment and self-employment taxes..
Engineering questions
Estate and gift taxes
Excise taxes
Individual income tax matters
Corporation tax matters







4,987 ..
719 . .




Accounting methods activities.—During fiscal 1975, a sudden increase was experienced in requests for rulings regarding accounting
methods. The increase occurred principally in two areas.
First, many taxpayers requested permission to adopt or readopt
the last in, first out ( L I F O ) method of inventorying their goods.
The L I F O method softens the impact of infiationary trends on prices
paid ifor goods and, in effect, reduces or defers taxpayers' current
profits and taxes. The increase in requests for permission to adopt
the L I F O method is expected to continue until the present infiationary
spiral levels off or reverses. Second, there were increases in the number of requests by manufacturers to change to the full absorption method for inventory valuation. This activity was primarily a result of the promulgation in 1973
of section 1.471-11 of the Income Tax Regulations, which provided a
transition period for manufacturers to report the tax impact of a
change to the full absorption method for inventory valuation.
I n t e m a l Reverme BuUetin.—The weekly Intemal Revenue Bulletin
is the authoritative publication of the Commissioner for announcing
official rulings and procedures of the Service and for publishing
Treasury decisions. Executive orders, tax treaties, legislation, court



decisions, and other items of general interest. Bulletin contents of a
permanent nature are consolidated semiannually into Cumulative
Bulletins. Copies of the weekly and semiannual issues are distributed
within the Service and are made available to the public by the Superintendent of Documents on a single copy or subscription basis.
During fiscal 1975, the Bulletin included 576 revenue rulings, 66
revenue procedures, 27 public laws relating to Internal Revenue matters and 31 committee reports, 3 Executive orders, 42 Treasury decisions containing new or amended regulations, 19 delegation orders, 3
Treasury Department orders, 9 court decisions, 33 notices of suspension and disbarment from practice before the Service, and 181 announcements of general interest.
The Bulletin Index-Digest System, revised as of December 31,1974,
provides a rapid and comprehensive means of researching material
published in the Internal Revenue Bulletin after 1952. The major part
of the system consists of digests of Bulletin items arranged under headings that facilitate a topical approach to a search for items on a specific
issue. With the aid of finding lists, the researcher can locate items by
Code section or number.
Tax credit for purchase of residence.—Under the Tax Reduction
Act of 1975, new Code section 44 provides for a tax credit to taxpayers
purchasing a new residence under certain conditions. Since this provision had no counterpart in previous tax law, the Service promptly
issued a Technical Information Release summarizing the provisions
and the Service's interpretation of section 44. From April to June,
the National Office Technical organization received over 150 written
requests for information in addition to 10-30 telephone calls per day.
''Sick pay exclusion''' clarified.—Prior to April 1974, the Service
took the position that the sick pay exclusion under section 105(d) of
the Code was applicable to disability pension payments only until the
employee reached optional retirement age rather than mandatory retirement age. Optional retirement age was deemed to be the earliest age
indicated in the pension plan at which the taxpayer could retire without the employer's consent and still receive retirement benefits based on
service up to retirement computed at the full interest rate in the plan.
After a number of adverse court decisions, the I R S announced in
Technical Information Release 1283, on April 9, 1974, that taxpayers
retired on disability prior to the mandatory retirement age could
apply the sick pay exclusion to their disability payments.
During fiscal 1975, the Service received over 150 requests for rulings
and information on specific plans that included the sick pay exclusion.
Tax Regulations implementing the new procedures and superseding
prior regulations were published in the Federal Register on April 14,
Estate and gift taxes.—During fiscal 1975, requests for estate and
gift tax charitable deduction letter rulings and technical advice increased as the Estate Tax Regulations implementing the Tax Reform
Act of 1969 became final on July 10,1974.
The I R S provided computer solutions to over 400 complex mathematical problems involving estate and gift tax returns. This program
provides field personnel with accurate computations within 24 hours of
receipt of the request for assistance. Prior to the computerized program, manual computations by estate and gift tax attorneys in I R S
field offices often required several days to complete.



Under the computerized program, field personnel received mathematical solutions refiecting nationwide consistency in the legal interpretations on which the computations are based. Moreover, the amount
of time field personnel devote to the mathematical aspects of estate tax
cases has been reduced and taxpayers' representatives receive interpretations which are comprehensive, consistent, and accurate.
Employee plans and exempt organizations
To administer the Employee Retirement Income Security Act
of 1974 ( E R I S A ) , the I R S estahlished on December 2,1974, an Office
of Employee Plans and Exempt Organizations headed by an Assistant
Commissioner, the first such position created by statute. The purpose
of E R I S A is not to raise revenue, but rather to protect the retirement
income security of some 30 million American workers. I t also required
major changes in the private pension field. Its impact has been compared to the original Social Security Act of 1935. Not since the Tax
Reform Act of 1969 had there been such changes in the Federal taxing
The new office is responsible for carrying out the regulatory responsibilities assigned to the Service with respect to employee -benefit plans
as well as the Service's responsibilities with respect to tax-exempt organizations. I n the National Office, the new structure consists of Employee Plans, Exempt Organizations, and Actuarial Divisions. I t was
created by a transfer of functions from the Audit and Technical organizations. Field staff are located in 7 regional offices, 19 key districts,
and 39 associate districts.
Employee plans.—Regulations have been developed to administer
employee plans in accordance with the new law. Major emphasis has
been placed on those regulations most urgently needed by taxpayers.
I n April 1975, Service officials testified before the Subcommittee on
Labor Standards regarding actions taken to implement E R I S A .
To ensure that taxpayers receive consistent information on rulings
and are not required to make duplicate reports, the I R S established
liaison with the Department of Labor and the Pension Benefit Guaranty Corporation through a policy committee, an E R I S A coordination
board, and a joint interagency regulations drafting group.
From September 2,1974, to the end of fiscal 1975,12 regulations, 10
revenue rulings, 7 revenue procedures, 6 delegation orders, 22 technical information releases, 12 forms, 6 news releases, and 1 publication were issued in the employee plans area. Factsheets on the most
common questions and answers were also developed for taxpayer
assistance personnel.
The Employee Retirement Income Security Act requires the conformance of all new pension benefit plans, and will require the modification of approximately 500,000 existing plans.
I n 1975, the Service devoted an average of 555 field professional
positions to carrying out its regulatory responsibility in the employee
benefit plans area. This responsibility is met by issuing advance determination letters regarding the qualification of pension, profit-sharing,
and other employee benefit plans and by conducting an examination
program to determine whether plans continue to qualify in operation
and to verify the appropriateness of deductions for plan contributions.
The number of determination letters issued with respedt to corporate
pension and profit-sharing plans during 1975 was 70,818, a decrease
Digitized for 588-395 0 - 7 5 - 1 5



of 17.7 percent from 1974. The decrease is attributed to the passage of
E R I S A and the fadt that the I R S was in the process of developing
regulations under the new law.
Preparations have been made for a case inventory control and management information reports system with computer terminals in all
key districts and certain associate distriots. This will enable the I R S
to control applications for approval of plans and plan amendments.
Exempt organizations.—During 1975, the Service received 42,411
applications and reapplications from organizations seeking a determination of their tax-exempt status or seeking a determination of the
effect of organizational or operational change on their status. The
Service issued 34,203 determinations and ruling letters. I n addition,
400 technical advice memoranda were issued. The Service devoted an
average of 495 field professional positions to the examination of returns of 22,168 exempt organizations.
Also, 1 regulation, 50 revenue rulings, 8 forms, 4 news releases, and
2 publications relating to E O were issued in 1975. Question-andanswer sheets were also prepared for taxpayer service use on exempt
A taxpayer compliance measurement program covering the examination of private foundations, public charities, and social welfare organizations was initiated in 1975. The program is designed to identify
patterns and characteristics of compliance and noncompliance of the
exempt organizations being studied.
The number of active entities recorded on the exempt organizations
master file increased from 673,000 in 1974 to 692,000 in 1975. As of
July 1, 1975, the file was redesigned to include additional data from
retums to provide information to the Congress, the charitable community, and the Service.
Actuarial.—In 1975, the 'Service devoted 17 average positions to
reviewing actuarial determination, interpreting and clarifying provisions under E R I S A , and overseeing the enrollment of actuaries to
practice before the I R S .
The Joint Board for the Enrollment of Actuaries, which was established by E R I S A , developed final regulations for enrollment which
provide for examinations of applicants in all 58 districts in a manner
similar to the examination for enrollment to practice before the I R S .
Enrollment on the basis of professional standing and experience is
also provided.
Ensuring compliance

The I R S audits tax returns in order to help ensure the highest possible degree of voluntary compliance with the tax laws. Wiiile audit
activity is the primary method that the I R S uses to encourage voluntary compliance, every return is subject to scrutiny by I R S employees
and computers. When a return is received in one of the 10 I R S service
centers, it is first checked manually for completeness, accuracy, and
certain obvious errors such as the claiming of a partial exemption or
duplicate deductions. Then the service center's computers check the
accuracy of the taxpayer's arithmetic and pick up other errors which
may escape manual detection such as the failure to reduce medical
deductions by 3 percent of adj usted gross income.



Returns selection.—The method used by the I R S in selecting returns
for audit is a computer program of mathematical formulae—the discriminant function system—which measures the probability of tax
error in each return. Returns identified by the system as having the
highest probability of error are then reviewed manually, and those
confirmed as having the highest error rate potential are selected foi^
audit. Since the discriminant function system was introduced, the
I R S has reduced the number of taxpayers (all categories) contacted
whose audit would result in no tax change from 41 percent in 1969 to
23 percent in 1975.
I n 1975, the Service began using the discriminant function system
for the selection of partnership returns. I n 1976, taxpayer compliance
data will be accumulated to develop a selection basis for fiduciary
returns, and the filing and reporting characteristics identified will
then be used to develop formulae for fiduciary retums.
Results of audit activity.—TsiX returns audited in 1975 reached 2.4
million. This is an increase of 190,000 returns or 9 percent over a year
ago. Included in the total examinations are 2,265,425 returns examined
by district audit divisions and 112,550 returns examined by service
centers. Examinations conducted by revenue agents under field audit
techniques rose to 726,257 returns, an increase of 37,200 returns over
1974 and those conducted by tax auditors under office audit procedures
numbered 1,651,718 returns, an increase of 152,911 retums. Audit coverage was 2.55 percent of returns filed compared with the 2.39-percent
coverage achieved in 1974.
The Service's examination program produced $5.3 billion in additional tax and penalties recommended. While recommendations exceeded $5 billion for the third straight year, they were somewhat below
a year ago. This was attributed mainly to a fall-off iri unusually large
cases ($100,000 and over), which were down nearly 600 returns and
$779.6 million.
During fiscal 1975, assessments totaled $4.5 billion, including $3.8
billion in assessed tax and penalties and $0.7 billion in interest. I n
fiscal 1974, assessments amounted to $3.7 billion, of which $3.1 billion
represented tax and penalties and $0.6 billion represented interest.
Four out of every five returns examined were individual and fiduciary. These returns produced $1.4 billion in additional tax and penalties recommended. Corporate retums comprised 6.5 percent of total
examinations, but accounted for $2.9 billion in the additional tax and
penalties recommended. Estate and gift tax examinations resulted
in $626 million of total additional tax and penalties recommended, and
excise and employment tax returns accounted for $303 million.
Examiners also look for indications that taxpayers have overstated,
as well as understated, their tax liability. I n 1975, Service examinations disclosed overassessments on 122,399 returns, accounting for
refunds of $302.8 million.
Service center examinations.—The I R S service center review program began in 1972, and is generally limited to the verification or
resolution of issues which can be satisfactorily handled by service center correspondence with the taxpayer. More than 1,329,000 retums
were checked in service centers in 1975, an 86-percent increase over



Over half of these returns involved obviously unallowable items
such as medical expenses unreduced by the 1-percent and 3-percent
limitations. More than 952,000 returns with unallowable items were
corrected in 1975, compared with approximately 406,000 for 1974.
The service centers also conducted correspondence examinations of
returns selected under district office criteria involving such issues as
charitable contributions or interest payments. A total of 112,550 of
these returns were examined during 1975, a 40-percent increase over
Appeals process.—The I R S encourages resolution of tax disputes
through an administrative appeals systein rather than litigation. If
taxpayers disagree with a proposed change to their tax liability, they
may avail themselves of the administrative appeals system before resorting to court litigation. The appeals system is designed to give taxpayers a prompt, independent review of their case with a minimum of
inconvenience, expense, and delay in disposing of contested tax cases.
Within the system, there are two levels of appeal, (1) the conference
staff in the Audit Division of the District Director's office and (2)
the Appellate Division in the Regional Commissioner's office. For the
initial appeal conference, a taxpayer may choose either the district
conference staff or the regional appellate staff. Opportunities for appeal conference are provided at 58 district offices and 36 regional
appellate offices nationwide. As needed, conferences are also provided
at other I R S locations by circuit-riding conferees at a place and time
more convenient to the taxpayer.
I n a majority of cases, the taxpayers and district or regional conferees reach a mutual basis for resolving their tax disputes. Consequently, very few cases go to trial. I n the past 10 years, 97 percent
of all disputed cases were closed without trial. District conference
staffs reached agreement with the taxpayer in about 75 percent of the
cases they considered. I n 1975, the appeals function disposed of 54,945
cases by agreement; the Tax Court tried 967 cases; and the U.S. district courts and Court of Claims tried 376 cases.
District settlements.—Since April 1974, district conference staffs
have utilized the authority granted to them to settle cases with a
disputed tax liability of $2,500 or less. As a result, the percentage of
agreed cases closed by the district conference staffs has significantly
increased. About 25 percent of all cases where settlement authority
could be exercised have in fact been settled. The results have been favorable to the taxpayers in terms of time, convenience, and expense as well
as to the I R S in terms reducing the number of cases going to the
regional appellate office or to the Small Case Division of the U.S.
Tax Court.
Appellate workload.—Cases considered in the appeals process cover
a wide range of issues, and involve additional taxes or claims for
refund ranging from very small amounts to millions of dollars. They
consist of individual and corporation income tax, estate tax, gift tax,
excise tax, employment tax, and offers in compromise. Deficiency cases
can also be considered before a petition for a hearing is filed in the
Tax Court (nondocketed cases) and after the petition has been filed
(docketed cases). Nondocketed cases make up about 64 percent of
the appellate workload. I n 1975, 74 percent of the nondocketed cases
closed by appellate offices were closed by agreement with the taxpayer.



The remaining 36 percent of the appellate workload consists of docketed cases in which settlement negotiations continue in the appellate
offices after the filing of a petition. I n 1975, approximately 89 percent
of the docketed cases completed by the appellate offices were closed by
agreement with the taxpayer.
Tax fraud investigations.—The Intelligence Division enforces the
criminal provisions of the tax laws by investigating areas of potential
noncompliance to deter suspected tax law violators and to identify complex and significant tax fraud schemes.
Investigations conducted by I R S special agents involve the evasion
of income, excise, estate, and gift taxes, failure to file returns, failure to
remit trust funds (withheld income and social security taxes), as well
as the filing of false withholding exemption certificates, false claims
for refunds, and the preparation of false returns for others.
During 1975, the Intelligence Division completed 8,731 investigations and recommended prosecution of 2,760 taxpayers. Grand juries
indicted or courts filed informations on 1,495 taxpayers. Prosecution
was successfully completed in 1,219 cases. I n 1,046 cases, taxpayers
entered guilty pleas and in 173 cases, taxpayers were convicted after
trial. Acquittals and dismissals totaled 83 and 168, respectively. Of
those pleading guilty or convicted after trial, 485 or 40.3 percent received jail sentences, compared with 42 percent last year.
Collecting delinquent accounts.—In 1975, the Service collected $2.8
billion in delinquent taxes, an increase of $292 million over 1974.
The Service also undertook, during 1975, a thorough reappraisal of
delinquent tax collection practices. The goal was to make the delinquent
tax collection process more clearly understood by the taxpaying public.
To accomplish this goal, a major program, "The Collection Initiatives,"
was implemented and its changes are now showing results.
Some of the changes recommended or presently implemented include : (1) The use of postdated checks to cover the terms of an installment-payment agreement for the greater convenience of taxpayers and
the I R S ; (2) the substitution of a personal contact for one of four
written notices to explain the seriousness of tax delinquency and to
help the taxpayer avoid drastic enforcement action, such as levy or
seizure; (3) greater supervisory review before the property of a delinquent taxpayer is seized.
An increasing number of business taxpayers have failed to deposit
and pay over the money they withhold from their employees' salaries.
Instead, these trust fund taxes are improperly used as working capital
or otherwise diverted.
As a possible answer to this abuse and the general problem of taxpayers using the Government's money rather than borrowing through
legitimate means, the Service was successful in obtaining legislation.
Public Law 93-625, which raised to 9 percent the interest rate on tax
delinquencies. This rate will be adjusted periodically to refiect the
prevailing prime rate charged by the major banks. The I R S is also
vigorously pursuing civil and criminal sanctions against noncompliant
business taxpayers.
International activities
Technical assistance m foreign countries.-^The I R S Tax Administration Advisory staff ^ s i g n s tax advisers, upon request, to developing
countries to help them modernize their tax administration systems.



During 1975, 35 I R S employees performed such overseas assignments.
Full-time advisers were assigned to eight countries—Bolivia, Colombia, Guatemala, Paraguay, Uruguay, Trinidad & Tobago, Vietnam,
and Liberia. Short-term assistance in specific functions was provided
to the Governments of Guyana, El Salvador, and Ethiopia while broad
tax administration surveys were conducted for the Governments of
Egypt and Portugal.
Tax officials frorii foreign countries visit I R S facilities for observation, to discuss problems in tax administration, or for training purposes. During 1975, 284 officials from 69 countries made such visits.
Nearly 4,000 officials from 118 countries have visited the I R S during
the past 13 years.
The Commissioner of Internal Revenue is a member of the InterAmerican Center of Tax Administrators ( C I A T ) , which has representation from 26 countries of the Western Hemisphere. The purpose
of C I A T is to improve tax administration within the Western Hemisphere through the cooperative efforts of member countries. The
Commissioner led the U.S. delegation at the ninth annual C I A T
assembly in Ottawa, Canada, in June 1975.
Tax administration abroad.—The I R S also maintains a system of
permanent foreign posts to help coordinate its domestic and foreign
tax programs. Revenue Service representatives at these stations are
involved in compliance and taxpayer assistance activities, with
emphasis on cooperative contacts with foreign tax agencies.
The five new posts authorized in 1974 are now fully operational.
They are located in the U.S. embassies or consulates in the following
cities: Canberra, Australia; Caracas, Venezuela; Johannesburg, South
Africa; Kuala Lumpur, Malaysia; and Teheran, Iran. These posts
are in addition to those already established in Bonn, London, Manila,
Mexico City, Ottawa, Paris, Rome, Sao Paulo, and Tokyo.
The Office of International Operations conducted its annual overseas taxpayer assistance program in 1975 for the 22d consecutive year.
A taxpayer service representative was detailed to each of the OIO
foreign offices to counsel taxpayers during the extended overseas filing
period of January through June. Also, circuit-riding TSR's covered
an additional 105 cities in 59 countries.
These specially trained representatives gave information and guidance to approximately 93,000 taxpayers overseas during the first 6
months of 1975, an alltime record in number of taxpayers assisted.
In addition, instruction was provided members of the armed services
at foreign bases, who, in turn, were able to help other military
personnel prepare their returns.
Compliance program.—In 1975, the Service continued its overseas
audit program to encourage a level of compliance among Americans
abroad which will compare more favorably with the high degree of
voluntary compliance in the United States. Under this program,
revenue agents and tax auditors are detailed on 6-month tours to the
Service's foreign offices to conduct both field and office audits, working
together with the Revenue Service representatives.
Exchange of information.—Effective administration of U.S. tax
laws as to multinational conglomerates and other U.S. taxpayers
engaged in international operations has required increased cooperation



under our tax treaties. The I R S has continued to fulfill its reciprocal
obligations specified in the treaties and has encouraged the appropriate use of the mutual exchange of information provisions.
Federal-State cooperation

Aid to State tax authorities.—^Under the Intergovemmental Personnel Act, I R S employees have helped State tax authorities improve
their programs and contributed to increased cooperation between the
I R S and State tax authorities. I n fiscal 1975, the I R S provided almost
160 weeks of training assistance to 17 State and local governments.
State revenue employees received training in special agent, revenue
agent, and income tax law courses. I R S instructor training courses
have enabled New York State and the city df Philadelphia governments to develop training courses which will meet the future needs of
their tax department employees.
Planning activities

Planning activities of the Service during 1975 concentrated on the
design and testing of improved automation systems, analysis of pending legislation, and statistical compilation and projection of tax return
data. Long-range planning of iworkloads and resources and measurement of progress in meeting program objectives continued as central
features of planning activities.
Optical character recognition.—Recent technological advances in
optical character recognition (OCR) development indicate that OCR
will probably be more economical than manual transcription. The
Service is making efforts to acquire OCR equipment to test this
hypothesis in twd areas: (1) Converting to magnetic tape the data
reported by taxpayers on information returns such as payments of
wages, dividends and interest, or adjustments to income, and (2) conversion of data recorded on Federal tax deposit forms and other forms
with print characteristics controlled by Service preparation such as
internal management documents, management information data, and
Automatic document numbering.—Every year the Service processes
millions of paper documents, many of which are manually numbered
to fiacilitate control. The Service now plans to conduct a test of. automatic document numbering machiries in orie service center. These
machines are expected to be capable of automatically feeding, numberirig, and sequentially stacking tax returns as received from taxpayers,
and therefore have the potential to eliminate current irianual numbering activity, arid to expedite the flow of returns processing. Subsequent
tests will determine the feasibility df computer-controlled numbering.
Remittance processing system.—Successful tests were made with a
prototype computerized system to expedite clearance and deposit of
tax remittances. Combined remittance data input, numbering and preparation of accounting documents are performed in a single operation.
The system will reduce processing costs, accelerate remittance posting
to accourit status and tax data bases, and provide a "fact of filing"
indicator for account status operations. A pilot system for all remittance processing activity at one service center is planned for late 1976.
Technical referer^xje information.—Testing was successfully completed on a technical reference information system. Under the control



of a large-scale computer, the system applies computer techniques to
help resolve legal research problems of the IRS. Researchers query the
system, which contains the current Internal Revenue Code and Regulations, revenue rulings since 1954, and selected tax cases from the
various courts, via interactive video terminals for material relevant
to various tax issues. Fifteen video terminals are currently installed
in large IRS offices and gradual expansion to other offices is planned.
Advisory groups

Commissioner's advisory group.—In January 1975, the Commissioner named 14 prominent accountants, attorneys, business executives,
educators, and public interest representatives to serve as his advisory
group for 1975. The group met with the Commissioner twice before
the fiscal year ended to provide him and his staff with useful views
and criticism of IRS operations so that the Service could do a better
job of serving the public. Members of the group are selected on the
basis of suggestions by professional organizations in the tax field, IRS
officials around the country, and other groups and individuals in tax
administration. Members of the Commissioner's advisory group serve
f o r i calendar year without compensation.
Art advisory panel.—Since 1968, a 12-member panel of art experts,
including museum directors, scholars, and art dealers, has helped the
Service determine the correct value of works of art donated to charity
or included in taxable gifts or estates. In its 7 y^ars of operation,
the panel has reviewed more than $145 million worth of art and has
recommended valuation adjustmeritsof over $35 million. At the three
irieetings held during fiscal 1975, the panel reviewed works df art
valued in tax returns at approximately $27 million and recommended
substantial adjustments in approximately 60 percent of the cases.
Small business advisory committee.-^ks> a step towards recognizing
and dealing with the particular tax problems of small busiriessmen,
the Service announced the organization of a new small business advisory committee. The committee will hold its first meeting in the
fall of 1975.
Internal inspection programs

Management reviews.—The Internal Audit Division independently
reviews and reports on Service operations to determine whether they
are being carried out efficiently, effectively, and in accordance with
laws and regulations. These reports are used by mariageirient to make
changes in programs and procedures. The Division alsd assists iri the
investigation of irregularities involving employees and those who
attempt to corrupt employees.
Management actions resulting from internal audits have helped
improve taxpayer service, increase operating efficiency, strengtheri
internal controls, and foster a climate of integrity. While many
of these improvements do not result directly in monetary savings^
in areas where monetary measurement is possible, savings arid additional revehue from these actions in fiscal 1975 are estimated at $32
Security and integrity programSi-^The Internal iSecurity Division
conducts personnel background investigations of IRS job applicants
and investigates complaints against IRS eriiployees regarding mis-



conduct and irregularities, including criminal matters, Investigations
also are made of persons outside the I R S who attempt to bribe or
otherwise corrupt Service employees, or who threaten or assault
The Division investigates the unauthorized disclosure of Federal
tax information and disclosure or use of information by preparers of
returns, and investigates charges against tax practitioners. I n addition, the Division conducts special investigations and inquiries as
required by the Commissioner and the Office of the Secretary of the
A total of 18,265 investigations were completed during fiscal 1975.
Of the major case categories, there were 11,104 background investigations, 2,719 complaints against I R S employees, 238 bribery or attempted bribery cases, 619 assaults and threats on I R S employees,
and 179 investigations of unauthorized disclosure of Federal tax information. Investigations resulted in the indictment of 140 individuals
and conviction of 76 defendants during fiscal 1975. These investigations also resulted in administrative disciplinary actions such as separations, suspensions, reprimands, warnings, or demotions of 1,126
Management and administration

Cost reduction and management improvement.—^With active support and involvement of executives and managers at all levels, the
Service in 1975 placed high priority on and carried out numerous
projects aimed at reducing costs and improving the efficiency of operations. While it is not feasible to assemble and report the savings from
all cost reduction actions, the known results of several major cost
reduction initiatives in overhead support operations indicate that savings of approximately $20 million (some of a cost avoidance nature)
will be realized.
For example, estimated savings in space and property utilization
of over $400,000 were reported in 1975, and savings of over $3.0 million
are projected in 1976 as a result of actions to reduce office space
expansion; repair and refinish existing furniture when economically
sound; use multiple occupancy work stations where more than one
worker can efficiently occupy one work station; verify actual I R S occupied square footage against measurement and billing records; and
review assigned quality ratings and classifications of I R S space.
I n the telecommunications area, an intensive cost reduction campaign resulted in better use of telecommunications facilities and innovative approaches toward providing effective telecommunications at
lower cost. This campaign has reduced the cost of toll-free taxpayer
service. Federal Telecommunications Systems ( F T S ) , and local and
long-distance telephone calls in 1975 by $1.1 million. Savings of $6
million are projected for next year.
Several programs of efi'ective mail management have produced savings in 1975 of nearly $3.9 million.
Records disposal during calendar 1974 resulted in the release of
space and equipment valued at $2,047,000. A total of 126,953 cubic
feet of records were destroyed, and 265,580 cubic feet of records were
retired to Federal Records Centers.



The Service's reports curtailment project, which in 1974 yielded
annualized savings of $2.4 million, was carried into 1975 and produced
additional savings of $700,000 through elimination of further unessential reports and the streamlining of others.
Total tangible savings of $1,246,100 from suggestions and special
achievements were realized in 1975, slightly exceeding incentive
awards program savings reported in 1974 for which the Service received the Secretary's Award for Cost Reduction and Management
Safety programs.—^With a rate of 1.9 disabling employee injuries
per million man-hours worked in calendar 1974—down from a rate of
2.0 in 1973—the Service continues to rank as one of the top Federal
agencies in the area of health and safety.
Service personnel drove 127.6. million miles in 1975 with only 812
accidents for a low accident frequency rate of 6.4 accidents for every
million miles driven.
Executive personnel.—The Service experienced a severe shortage of
executive staff this year because of the large number of senior-level
officials who retired in 1974 and the $36,000 ceiling on executive salaries. Nevertheless, the Service met its obligation to fill these positions
by training 19 employees in one executive development class in fiscal
Other special efforts used by the I R S to train midleveland toplevel employees and minimize the amount of time senior officials are
away from their duty stations iwere: (1) Development of "Technical
Guidelines for Executives"—a ready desk reference providing current, concise, and accurate interpretation and clarifications of those
complex portions of the Internal Revenue Code and Manual needed
i n t h e executive's day-to-day activities; (2) communications via video
tapes—a means for the Commissioner and other headquarters officials
to directly communicate their views, official policy, and new procedures on an "in person" basis without the field executive having to
travel to executive conferences; and (3) reduction in instructor time—
reducing by almost 50 percent the time and number of executives
needed to serve as instructors in improved midlevel training courses
which accomplish in 2V^ weeks what formerly took 4 weeks.
''Bhte ribbon program.'^''—In recognition of increased emphasis upon
providing quality assistance to taxpayers, the Service developed a taxpayer service blue ribbon program during 1975 which will go into
effect at the beginning of 1976. The program establishes a new occupation for taxpayer service with expanded duties and responsibilities,
higher level qualification requirements, an improved grade structure,
and more comprehensive training. To implement the new occupation,
I R S developed new position descriptions, an amendment to the qualifications standard, and incuiribent selection and screening criteria.
During 1975, a special effort was also made to improve the effectiveness of taxpayer relations. All new and some incumbent employees
who have direct dealings with the public attended taxpayer relations
training, which covered interpersonal communications, communicating to taxpayers their rights and responsibilities, and dealing with
threats, assaults, and potential assault situations.
Revenue agent training.—In 1975, almost 1,000 revenue agents received formal classroom training in individual and corporate income



tax laws, taxpayer relations, and auditing techniques before they were
assigned auditing duties.
The IRS-designed revenue agent training program was evaluated
by the American Council on Education in March and found to be of
such high quality that the Council has recommended to colleges and
universities the granting of 6 postgraduate credit hours to Service
employees who successfully complete the training program and who
subsequently enroll in universities to pursue a masters degree in tax
The revenue agerit training program has been revised to reduce the
classroom portion of training from 141^ weeks to 12 weeks without a
resultant loss in the quality or effectiveness of instruction. Under the
restructured training arrangement, a new revenue agent will be able
to examine various tax returns with minimum supervision after only
25 weeks of classroom and on-the-job training instead of 32 weeks. I t
is estimated that 1,200 agents will be trained next year with salary
savings of '$1.2 million and per diem savings of $360,000 projected.
This year, another 44 experienced revenue agents were selected and
trained for computer audit specialist positions. Over 110 Service employees are now qualified to perform the complex auditing duties,
required by today's sophisticated computer-prepared tax retums.
P a rapro fessional positions.—By the end of 1975, over 1,000 paraprofessional positions had been established and filled in the Audit,
Collection, and Intelligence Divisions. These positions, at grades GS-4
through GS-7, perform work that would otherwise be done by professional and technical employees at grades GS-9 and above. This
program has resulted in savings of over $4.5 million plus improved
utilization of the higher level skills, knowledge, and abilities of the
professional and technical work force.
Lab or-mmfiag ement activities.—In early February, the I R S concluded a 2-year collective-bargaining agreement with the National
Treasury Employees Union ( N T E U ) , covering 2,200 employees iri the
headquarters office. I t provides for bilateral union-management
decisionmaking in personnel policies and practices, such as promotions
and performance evaluations.
At year's end, the I R S and N T E U were involved in the process of
negotiating a new multicenter agreement covering 29,000 employees
in the Data Center, National Computer Center, and in 9 out of the 10
service centers. I n total, the National Office agreement, the multicenter
agreement, and the multidistrict and multiregional agreements, which
were negotiated in 1974, cover over 62,000 I R S employees.
The collective-bargaining agreements concluded between the I R S
and employee unions renewed the need for training of managers and
supporting staff people in their responsibilities under the agreements.
Orientation sessions were held in all regions for firstline and middle
managers; three executive seminars in union relations were held for
field and National Office officials. Training was also conducted for personnel officers to assist them in advising managers on union relations
More specialized courses in grievance handling and arbitration have
been developed and will be used in Service-wide training next year.
Equal employment opportumity.—The Service has moved steadily
to increase equal employment opportunity and to ensure upward mo



bility opportunities for all employees. While total I R S yearend employment increased by 13.6 percent between 1974 and 1975, minority
employment during the same period increased by 19.6 percent. This
included a 36-percent increase in the employment of Spanish-speaking Americans.
On December 14, 1974, I R S officially recognized 1975 as "International Women's Year," and programs and activities were planned
throughout the Service to focus attention on the potential and accomplishments of I R S women. During the year, Ms. Anita Alpern was
appointed Assistant Commissioner (Planning and Research), making
her the first career womar in I R S and the Department of the Treasury
to reach grade GS-18.
The I R S formalized its upward mobility program in August 1974.
The program provides training and advancement opportunities for
employees in grades GS 1-7 and equivalent to enhance their career
potential and ultimate usefulness to the Service. While the program
was not fully implemented until late in the year, approximately 800
employees actively participated in training under the program.
Employment of the handicapped.—The I R S has continued to increase its employment of the handicapped in all occupations. By the
end of calendar 1974, there were 1,629 handicapped persons employed
by the I R S . Of this number, 107 were blind individuals working as
taxpayer service representatives in I R S districts and as tax examiners
in the service centers.
Every year, I R S focuses attention on the valuable contributions of
I R S handicapped employees and their ability to perform top-level
work by presenting an I R S Outstanding Handicapped Employee of
the Year Award. This year, Charles E. Johnson, computer operator at
the Andover service center, received the award.

The Mint became an operating bureau of the Department of the
Treasury in 1873, pursuant to the Coinage Act of 1873 (31 U.S.C. 251).
All U.S. coins are produced at Mint installations. The Bureau of the
Mint distributes coins to and among the Federal Reserve banks and
branches, which in turn release them to commercial banks. I n addition,
the Mint maintains physical custody of Treasury monetary stocks of
gold and silver, handles various deposit transactions, including interMint transfers of bullion, and refines and processes gold and silver
During fiscal 1975, functions performed by the Mint on a reimbursable basis included the manufacture and sale of numismatic Eisenhower dollars (through December 1974), proof coin sets and uncirculated coin sets, medals of a national character, the Bicentennial 40percent silver proof and uncirculated coin sets, and medals commemorating the Bicentennial, including America's First Medals in
1 Arlditlonal information is contained in the separate Annual Report of the Director of
the Mint.



pewter and the A R B A medals; and, as scheduling permitted, the
manufacture of foreign coinage.
The headquarters of the Bureau of the Mint is located in Washington, D.C. The operations necessary for the conduct of Mint business
are performed at seven field facilities. Mints are situated in Philadelphia, Pa., and Denver, Colo.; assay offices in New York, N. Y., and San
Francisco, Calif.; 2.and bullion depositories in Fort Knox, Ky. (for
gold) and West Point, N.Y.^ (for silver). The Old Mint, San Francisco, contains the Mint Data Center, the Mint Museum, and the
Special Coinage and Medals Division.
The advantages of the decentralization of the Mint's Internal Audit
Staff during fiscal 1974 were underscored in fiscal 1975 by improved
results in the wider range of areas audited and more frequent reviews
in established areas. During the year, a resident auditor was assigned
to New York to service both the New York Assay Office and the West
Point Bullion Depository.
An audit of the gold stored at the U.S. Bullion Depository, F o r t
Knox, Ky., was performed beginning in September 1974. The Committee included Treasury auditors from the Office of the Secretary,
the U.S. Customs Service, and the Bureau of Government Financial
Operations, as well as the Bureau of the Mint. Auditors from the General Accounting Office (GAO) also participated. Audit procedures
and guidelines developed by auditors from the Mint and G A O were
designed to determine the reliability of the recorded values stored at
the Depository. The final GAO audit report, which was submitted to
the Congress, concluded that the gold stored at the Fort Knox Depository agreed with the records of the Depository.
The Mint security program provides continuous protection of all
employees and assets under the jurisdiction of the Bureau of the Mint.
This is accomplished through the operations of the Mint Security
Force, protective electronic and mechanical alarm systems, vaults and
sophisticated locking devices, security surveys and internal inspections, and a personnel security clearance program.
On September 23, 1974, an extraordinary security exercise took
place at the U.S. Bullion Depository, Fort Knox, Ky. A congressional
delegation and more than 100 news media representatives visited the
gold vault to verify the existence of the U.S. gold reserves maintained
in the facility. Extensive security measures were utilized inasmuch as
the occurrence marked a rare change in the customary "no visitor"
...... During fiscal 1975, a new police-type basic training school was initiated in cooperation with Treasury's Consolidated Federal Law Enforcement Training Center with 52 Mint security officers completing
the 5-week course.
Extensive security devices, including closed-circuit video equipment
and special doors, were installed at the Mint Museum in San Francisco
in preparation for the public display of the multimillion-dollar exhibit
of gold bars. I n October 1974 the gold was moved to the museum
exhibit area under armed escort.
The Bureau of the Mint deposited $668,196,653 into the general fund
of the Treasury during fiscal 1975. Seigniorage on U.S. coins accounted
for $626,372,785 of this deposit.
2 The U.S. Assay Oflice, San Francisco, also operates as a niint.
3 The West Point Depository was activated as a coin production facility during fiscal


Bureau of the Mint operations, fiscal years 1974 and 1976
Fiscal years

Selected items
NiBwly minted U.S. coins issued: i
1 dollar
50 cents
25 cents
10 cents













Inventories of coins in Mints, June 30
Electrol3rtic refinery production:
Gold—fine ounces
Silver—fine ounces
Balances in Mint, June 30:
Gold bullion—fine ounces
Silver bullion—fine ounces


1 For general circulation only.

Domestic coinage

U.S. mints during fiscal 1975 manufactured cupronickel-clad dollars,
half dollars, quarter dollars, and dimes, cupronickel 5-cent pieces, and
1-cent pieces composed of 95 percent copper, 5 percent zinc for general
The Philadelphia Mint produced 6,464,997,000 coins; the Denver
Mint 5,710,432,210 pieces; the newly activated coinage facility at the
West Point Depository 833,347,027 1-cent coins; and the San Francisco Assay Office 368,883,510 coins for general use. The 13,377,659,747
domestic coins produced for general circulation exceeded the previous
record established during fiscal 1974 by approximately 2.940 billion
U.S. coins manufactured, fiscal year 1975

General circulation
Number of

1 dollar:
50 cents:
25 cents:
Cupronickel- 1,013,819,100
10 cents

Numismatic i

Face value

Number of Face value


1,330,943 $1,330,943.00
23,207,295 3,207,295.00

Total coinage
Number of

Face value

71,860,653 $71,860,653.00






332,735.75 1,015,150,043 253,787,510.75
952,546,631 95,254,663.10
930,938,043 46,546,902.15
13,309.43 10,006,155,992 100,061,559.92


413,377,659,747 769,466,209.29

11,195,297 5,750,275.13

408,994,043 204,497,021.50



1 AU numismatic coins were manufactured at the U.S. Assay Office at San Francisco and included 1,330,909
proof sets dated 1974, 34 proof sets of the 1975 variety (dollar, half dollar, and quarter doUar dated 1776-1976;
all other denominations dated 1975), 602 Bicentennial proof sets, and 570 Bicentennial uncirculated sets.
2 Consists of 1,900,052 1974-dated uncirculated Eisenhower dollars, 1,306,071 1974-dated proof Eisenhower
dollars, and 602 proof and 570 uncirculated dollars for inclusion in Bicentennial coin sets.
8 Consists of 602 proof coins and 570 uncirculated coins for inclusion in Bicentennial coin sets.
< Includes 22,792,710 Bicentennial doUars, 200,674,000 Bicentennial half doUars, and 28,196,000 Bicentennial quarter doUars.
NOTE.—AU doUars, half doUars, quarter doUars, 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. Proof coins for
inclusion in the 1974- and 1975-dated sets are of the same metalUc composition as those for general circulation.
Numismatic Eisenhower dollars and coins for inclusion in BicentenrUal proof and uncirculated coin sets are
three-layer composite coins with an outer cladding 800 parts silver, 200 parts copper, bonded to a core approximately 209 parts silver, 791 parts copper.



During the third quarter of the fiscal year, production of the Bicentennial dollar, 50-cent, and 25-cent pieces was begun. These coins,
to be distributed after July 4, 1975 (Public Law 93-127), have newly
designed reverses to commemorate the Bicentennial and obverses bearing the dates "1776-1976." By fiscal yearend, about 23 million of the
dollar coins, 201 million of the 50-cent coins, and 28 million of the
25-cent coins for general issue had been produced.
The Bureau of the Mint shipped approximately 12.596 billion coins
to the Federal Eeserve banks and branches and the Treasury. This total
included almost 118 million Bicentennial coins for release after July 4,
1975. Due largely to preparation for the Bicentennial coin distribution,
Mint coin balances at fiscal yearend exceeded those of June 30, 1974,
by about 713 million coins.
Foreign coinage

The Bureau of the Mint is authorized to produce coinage for foreign
governments on a reimbursable basis, provided that the manufacture
of such coins does not interfere with coinage required for the United
States. During fiscal 1975, Mint installations produced coinage for
Haiti, Liberia, Nepal, Panama, the Philippines, and Taiwan. A total
of 240,146,337 foreign coins were manufactured.

During fiscal 1975, the Mint exceeded previous annual domestic coin
production by 28 percent and achieved new daily and monthly production records. The West Point Depository began manufacturing 1-cent
coins on July 29, 1974. By fiscal yearend that facility had reached a
daily rate of more than 7 million coins.
New production equipment delivered to the Philadelphia Mint during the fiscal year included 12 four-strike coin presses and 4 improvedtype upset mills.
The Mint standard coinage die and coin press tooling program was
fully implemented during the fiscal year, resulting in major economies
in die manufacturing, coin press tooling fabrication, and inventory
systems, as well as capability for interchange between coinage facilities. Parameters for the standardization of blanking die sets were dev^eloped this year.

The Bureau of the Mint's Laboratory in Washington continued to
provide technical expertise on the authenticity of U.S. coins. During
the fiscal year, laboratory examinations of 2,680 questioned coins relative to 196 cases were performed by the Mint.
Public seryices

Liaison with Federal Reserve.—The Bureau of the Mint continued
its close liaison with the Federal Eeserve in determining coin requirements. Demand for coins, as measured by the net outflow from Federal
Eeserve banks to commercial banks, increased to approximately 11.469
billion coins. Coin balances at the Federal Eeserve banks on June 30,
1975, totaled approximately 2.892 billion pieces, an increase of 63 percent over 1974.
Special coinage and medals.—^^The Mint continued, as part of the
Department of the Treasury's observance of the Bicentennial of the
American Eevolution, to reproduce in antique-finished pewter the first



10 medals authorized by America's Continental Congress. Orders were
accepted during fiscal 1975 for the second and third units, representing
four pewter medals. The second unit medals included Gen. Anthony
Wayne and Col. Frangois Louis DeFleury; approximately 162,000 of
each were sold. The third unit sales totaled approximately 212,000 each
of Maj. Henry Lee and Gen. Daniel Morgan medals.
Early in nscal 1975, the third medal authorized by Public Law
92-228 of February 15, 1972, was released. I n addition to the 511,000
medals sold as part of the American Eevolution Bicentennial Administration's Philatelic Numismatic Commemorative package (consisting of the A E B A medal and a block of four commemorative postage
stamps, postmarked July 4, 1974, Philadelphia, P a . ) , 187,980 bronze
"unique" package and 150,215 silver "unique" package medals dated
1974 of the same design were released in individual self-standing
The 40-percent silver proof and uncirculated 3-coin Bicentennial
sets, containing a dollar, 50-cent, and 25-cent coin, were offered to the
public at premium prices. Brochures describing these coins, with newly
designed reverses (a Liberty Bell and Moon combination on the dollar.
Independence Hall on the 50-cent piece, and a colonial drummer on the
25-cent coin) and the date "1776-1976" on the obverses, were distributed via the Mint's mailing list as well as through the commercial
banking community, congressional offices, the U.S. Postal Service, and
various other agencies. Distribution of these numismatic coin sets,
authorized by Public Law 93-127 of October 18,1973, was scheduled to
begin after July 4, 1975, and extend through calendar year 1976.
The segment of the Department of the Treasury's Bicentennial observance whereby the Mint manufactures medals of historic customhouses was continued during fiscal 1975. Four additional customhouses
designated as national landmarks were dedicated during the year.
Bronze "list" medals in the 1%6-inch size were issued in conjunction
with the following ceremonies: New Orleans, La., September 1, 1974;
Galveston, Tex., October 3,1974; Galena, 111., May 18,1975; and Providence, E.L, June 12,1975.
The Eisenhower silver dollar program, the manufacture and sale of
40 percent silver clad proof and uncirculated dollar coins to the public
at premium prices, was continued through December 1974. None of
these coins will be issued as numismatic items during calendar 1975,
because of the Bicentennial coin programs.
As is customary, the Mint offered sets of proof coins to the public.
These sets included one coin of every U.S. denomination from the
dollar through the penny.
During fiscal 1975, medals in recognition of the San Francisco Cable
Car, the Statehood of Colorado, and Jim Thorpe were struck under the
authority of congressional legislation. These medals will continue to be
struck until December 31, 1975, the expiration date of the legislation,
and delivered by the Mint to the sponsoring organizations for sale to
the general public* I n addition, the Mint continued to manufacture and
sell bronze national "list" medals in both the traditional 3-inch size
and the 1%6-inch size. Mint sales areas are located at the Main Treasury
Building, Washington, D.C.; the Philadelphia Mint; the Denver Mint;
and the Old Mint, San Francisco.




On December 19,1974, the first nationwide labor agreement between
the Bureau of the Mint and the American Federation of Government
Employees was signed. The 2-year agreement covers all professional
and nonprofessional employees, excluding guards, supervisors, and
management and confidential employees at the Office of the Director
and at all field activities. Supplemental agreements covering the unique
characteristics of the major field offices were being negotiated at fiscal
A contract was awarded to a private research organization to provide
the Mint with a comprehensive review of U.S. coinage requirements
through 1990. The report is scheduled for completion during fiscal

The Office of Eevenue Sharing is a part of the Office of the Secretary of the Treasury. By June 30,1975, the Office of Eevenue Sharing
employed 81 professional and support staff. I n addition, 10 persons are
assigned by the General Counsel of the Department of the Treasury
to handle the Office of Eevenue Sharing's legal work. All personnel,
including the legal staff assigned by the General Counsel, are located
in offices at 2401 E Street, NW., Washington, D.C.
Allocation and distribution of funds

During fiscal 1975, the following units of American general-purpose
government were eligible to receive general revenue sharing funds:
the 50 States and the District of Columbia, 3,047 counties, 18,783
cities, 16,934 towns and townships, and 357 Indian tribes and Alaskan
native villages. During the year, $6.1 billion was paid, which brought
to $18.9 billion the amount shared with States and local governments
since the inception of the general revenue sharing program in 1972.
Title I of the State and Local Fiscal Assistance Act of 1972 (31
U.S.C. 1221-1263), which established the general revenue sharing
program, authorizes the Treasury to distribute $30.2 billion over a
5-year period that ends December 1976 to all units of American general-purpose government as defined by the Bureau of the Census, and
to Indian tribes and Alaskan native villages. The funds are to be
distributed within seven periods of time specified in the law known
as entitlement periods.
Eevenue sharing allocation formulas contained in the law use data
relating to the population, per capita income, tax effort, and intergovernmental transfers of each recipient unit of State and local govemment. These data are supplied primarily by the Bureau of the
1 Additional information is contained in the separate Annual Report of the Office of
Revenue Sharing, Mar. 1, 1975.

588-395 0 - 7 5 - 1 6



I n February, the Office of Eevenue Sharing invites each recipient
unit of government to review its own data elements as provided by the
Bureau of the Census. An opportunity is provided for changes to be
made, where recipients can substantiate challenges to the Census
Bureau's data. During fiscal 1975, the Office of Eevenue Sharing processed 2,400 data challenges, of which 500 resulted in revisions.
I n April, the revised data were used to allocate funds for the sixth
entitlement period (equivalent to Federal fiscal year 1976).
Eevenue sharing payments are issued at regular quarterly intervals in October, January, April, and July.
Audit and compliance system

During fiscal 1975, major steps were taken to strengthen the Office
of Eevenue Sharing's capability to assure compliance by recipient
governments with all provisions of revenue sharing law.
Cooperative agreements were concluded with the State audit agencies of 44 States, through which State auditors are extending their
own audits or reviews of privately conducted audits of State agencies
and local governments to include information required by the Office
of Eevenue Sharing. I n performing this task, the States will use
standards p u t forward by the Office of Eevenue Sharing in its publication "Audit Guide and Standards for Eevenue Sharing Eecipients."
Cooperative working arrangements began to be developed with
other Federal agencies. I n October 1974, an agreement was concluded
with the Equal Employment Opportunity Commission through which
confidential employment data collected from public employers has
been made available to the Office of Eevenue Sharing. These data
can be retrieved by the Office of Eevenue Sharing for units of government against which complaints of discrimination in employment involving revenue sharing funds have been filed. The Office of Eevenue
Sharing and E E O C have undertaken jointly to prepare a "Guidebook on Equal Employment for Public Employers," due to be completed in the summer of 1975.
A memorandum of agreement signed with the Office for Civil Eights
of the Department of Health, Education, and Welfare in May 1975
established procedures to be used in cooperative civil rights compliance efforts with the Office of Eevenue Sharing.
The Office of Eevenue Sharing also has an understanding with
the Office of the Assistant Secretary for Equal Opportunity of the
Department of Housing and Urban Development which provides for
exchange of information and cooperation in investigation of complaints of infringement on individuals' civil rights.
A series of agreements began to be executed with State civil rights
agencies. By June 30, agreements had been concluded with agencies
in the States of Maryland, Connecticut, South Dakota, and Minnesota
and more were in various stages of development. These agreements
provide, generally, that State human rights agencies will extend their
ongoing monitoring and. enforcement activities to include reviews
of compliance and civil rights provisions of revenue sharing law.
The Office of Eevenue Sharing expects to conclude agreements with
all of the State human rights agencies recognized for deferral purposes by E E O C .



I n addition to reports received from State audit agencies. Office
of Eevenue Sharing staff are conducting random audits as another
way to measure compliance with revenue sharing law.
During fiscal 1975, the Office of Eevenue Sharing received 507 complaints of noncompliance with revenue sharing law of which 178 were
resolved and the remainder are in various stages of investigation.
Legal issues
During the fiscal year, the Chief Counsel was involved in the initiation or defense of 16 legal actions. The legal issues in those suits involved civil rights, the applicability of the National Environmental
Policy Act and the Uniform Eelocation Assistance Act to the expenditure of revenue sharing funds, the interpretation of Indian treaties,
and the determination of data factors for the revenue sharing allocation formulas.
On April 28, 1975, the Office of Legal Counsel of the Department
of Justice supported the view of the Office of Eevenue Sharing by
rendering the opinion that the Hatch Act, administered by the Civil
Service Commission, was not applicable to employees of State and
local governments paid with revenue sharing funds.
The promulgation of regulations continues to be an active area.
The revenue sharing regulations were amended on November 15,
1974, to implement an amendment to the revenue sharing law by the
Disaster Eelief Act of 1974. I n January 1975, proposed nondiscrimination regulations were published for comment. Those regulations would
clarify the withholding authority of the Secretary of the Treasury in
cases where a Federal court or a Federal administrative law judge
has made a finding that a recipient government has failed to comply
with the nondiscrimination provisions of the State and Local Fiscal
Assistance Act of 1972.
The most significant court decision in the area of civil rights was
the case of Robinson et al. v. Shultz et al. (U.S.D.C. for D . C ) , which
was initiated in 1974. During the year, the District Court for the District of Columbia denied plaintiffs' motion to require the Secretary to
promulgate regulations to defer the payment of revenue sharing funds
pending the outcome of an administrative hearing. I n denying the
motion, the court held that the Office of Eevenue Sharing's referral of
a case to the Attorney General fulfilled the statutory duty of the Secretary until such time as noncompliance was determined by the courts..
I n November 1974, the U.S. District Court for the Northern District
of Illinois, in an action brought by the United States against Chicago,
enjoined the city from continuing certain discriminatory employment
practices in its police department. Thereafter, the District Court for
the District of Columbia directed the Office of Eevenue Sharing to
withhold further revenue sharing funds to Chicago. The District of
Columbia case was subsequently consolidated with the complaint filed
in the Northern District of Illinois by the United States (and others)
against Chicago. The motion of the city of Chicago to vacate or modify
the order of the District Court for the District of Columbia was denied.
I n March 1975, a supplement to the digest of letter rulings on general
revenue sharing (covering the period October 1,1973, to September 30,
1974) was published for the guidance of recipient governments and
their counsel.



The Chief Counsel drafted the administration's proposed bill to
extend and revise title I of the State and Local Fiscal Assistance Act
of 1972. The draft bill was submitted to the Congress with a Presidential message in April 1975.
Renewal of general revenue sharing

The President's proposal for renewal of general revenue sharing was
developed by a task force comprised of representatives of Treasury,
OMB, and the President's Domestic Council, after careful study and
consultation with other Federal agencies.
The key elements of the President's bill, before the Senate as S. 1625
and the House of Eepresentatives as H.E. 6558, are as follows:
1. General revenue sharing would be extended for an additional 5%
years, through September 1982. The current stairstep increase in the
total amount of money to be distributed would continue at the rate of
$150 million per year. Accordingly, the proposal requests $39.85 billion
plus a noncontiguous States (Alaska and Hawaii) appropriation of
$27.5 million.
2. The allocation formula would remain as it now is, except that
the present maximum constraint of 145 percent of the average statewide local per capita allocation would be increased to 175 percent at
the rate of 6 percentage points per year.
3. The present strong antidiscrimination requirement of revenue
sharing law would be retained; but the Secretary's enforcement powers
would be clarified: The Secretary would expressly be authorized to
withhold all funds or that portion used in a discriminatory program
or activity, to require repayment, and to terminate the eligibility of
a government to receive one or more payments.
4. The proposal would give to the Secretary of the Treasury full
discretion to determine the form and content of use reports required
of recipient governments by revenue sharing law and to authorize alternative methods to publicize the reports.
5. To strengthen public participation in local decisionmaking regarding uses of shared revenues, recipient governments would be required to assure the Secretary that the public has had access to a public
hearing or other appropriate means of participation.
6. The Secretary of the Treasury would be required to review the
program and report his recommendations to Congress 2 years before
the new expiration date.
Uses of funds

The law requires that each recipient unit of government periodically
report to the Office of Eevenue Sharing the amounts of money that
have been spent in certain broad areas of activity.
The latest of the actual use reports, filed by September 1, 1974,
showed that approximately $6.7 billion in shared revenues were spent
by States and local governments between July 1, 1973, and June 30,
1974. Of each dollar spent—
• 23 cents was used in support of public safety by paying operating costs of police and fire departments, providing crime prevention and drug rehabilitation programs, in traffic safety, and
through the purchase of equipment.




21 cents was devoted to public education. Of this amount, most
was spent by State governments as assistance for primary and
secondary education at the local level. State governments
spent 52 percent of their revenue sharing receipts in the field
of education.
• 15 cents paid for improvements in public transportation services and facilities such as mass transit systems, highways,
bridges, and traffic control systems. Some revenue sharing
money spent for public transportation has been used to subsidize mass transit fares, to provide free or subsidized transportation for the elderly, and to construct special sidewalk
intersection ramps for the handicapped.
• 10 cents was devoted to multipurpose/general government expenses involving, for example, general planning and central
administrative services.
• 7 cents was spent in support of health., to provide medical
equipment and facilities and to pay operating costs of ongoing
health programs.
• 7 cents paid expenses involved in environmental protection/
conservation efforts including, for example, soil, water and air
pollution control and sanitation services.
• 5 cents provided recreation facilities and services.
• 4 cents went directly into social services for the poor or aged.
I t is important to note that some money listed as spent in other
categories may be considered to have been used to provide social services for the poor or aged, as well. Public transportation expenditures to subsidize intracity transportation for the
elderly are an example of this.
• 2 cents was spent in financial administration to help meet local
costs associated with tax collections, accounting, debt management, and other, related matters.
• 1 cent provided materials, publications, improvements and
geiier2i\suipiport tor public libraries.
• 1 cent used in the field of housing a/nd commumty development
supported housing and redevelopment projects.
• Less than 1 cent was spent in corrections by State governments
where increasing awareness of the importance of rehabilitation has generated new efforts related to work release and related programs.
• Less than 1 cent was devoted by recipient governments to promote economic development.
• Less than 1 cent paid for social development programs and
services not included in categories listed above. Community
centers may be considered a typical expense in this category.
• 4 cents provided other services that represent innovative ways
to meet particular needs of individual communities.
Categorization of reported uses is the responsibility of State and
local chief executives. Although use reports filed with the Office of
Eevenue Sharing provide a useful indication of the direct impacts
of revenue sharing dollars on the activities of recipient units of government, the data cannot and do not measure the indirect effects and



the ultimate impact of shared revenues on the total spectrum of services provided at the State and local levels of government.
The Revenue Sharing organization

The Office of Eevenue Sharing staff is organized into eight functional units, as follows:
Administration.—Manages personnel, budget, central services, and
other internal administration of the Office.
Program Planning and Coordination.—Coordinates special research
projects at the request of the Director; manages the program planning system.
Data and Demography Division.—Eesponsible for acquisition of
current and accurate data used to compute allocations of funds; conducts data improvement program.
Systems and Operations Division.—Computes allocations of funds;
writes payment vouchers; does all associated accounting; issues and
processes required reports; produces computer-generated communications and publications.
Compliance Division.—Eesponsible for assuring compliance with
the law by all recipient governments; makes or coordinates audits
and investigations of recipients; undertakes cooperative compliance
programs with other Federal agencies. State governments, and
national associations of civil rights, women's rights and governmental
Intergovernmental Relations Division.—Provides technical advice
and assistance to State and local governments; maintains liaison
with public interest groups.
Public Affairs.—Provides information about general revenue sharing to the public, the media, citizens groups, other Federal agencies,
research groups, and the Congress.
Chief Counsel.—Interprets the law; issues opinion letters, prepares
regulations; represents the Office of Eevenue Sharing in all legal
matters concerning the general revenue sharing program.

The mission of the U.S. Customs Service is to assess, collect, and
protect import duties and taxes; to enforce customs and related laws
against the smuggling of contraband; and to control carriers, persons,
and articles entering or departing the United States by enforcing the
Tariff Act of 1930 and numerous other statutes and regulations which
govern intemational traffic and trade.
To accomplish this mission, the Customs Service performs the following :
1. Examination and clearance of carriers, persons, and merchandise
consistent with the requirements for the proper assessment and collec-



tion of customs duties, taxes, fees, fines and penalties, and compliance
with the customs laws and regulations applying to international commerce.
2. Detection and investigation of illegal activities so as to apprehend
violators and reduce, prevent, and deter violations of laws and regulations enforced by Customs.
3. Detection and prevention of all forms of smuggling and other
practices designed to gain illicit entry into the United States of prohibited articles, narcotics, drugs, and all types of contraband.
4. As the principal border enforcement agency, the administration
and enforcement of over 400 laws and regulations of over 40 Government agencies relative to international traffic and trade.
5. The most effective application of resources to carry out the total
Customs mission, consistent with efficiency in Government and economy
and service to the public.
I n fiscal 1975 Customs cleared over 246 million persons arriving in
the United States. Morethan 75 million cars, trucks, and buses crossed
the country's borders; 123,000 ships and 353,000 aircraft were cleared.
This involved making 77 million baggage examinations and processing
12 million customs declarations.
There were 47.6 million foreign mail parcels processed, requiring
over 2 million informal mail entries. In all. Customs collected a record
$4.5 billion in duties and taxes and processed $100 billion worth of
imported goods, which required over 3 million formal entries (those
over $250 in value).
The Customs enforcement mission also registered gains. There were
over 21,000 drug seizures. The estimated "street value" of drugs and
narcotics confiscated was over $678 million. Seizures included 717
pounds of cocaine, 19.3 million units of polydrugs, and 207.6 tons of
marijuana. There were 103 pounds of heroin seized during fiscal
1975—an increase of 35 percent. I n addition, neutrality violations—
smuggling arms out of the United States to other countries—rose
from 315 cases to 674 cases in fiscal 1975.
Integrated interdiction

During fiscal 1975, the further development of the integrated interdiction program resulted in increased interdiction of narcotic and
other dangerous drugs and other illegal smuggling attempts along
the Nation's borders and at ports of entry in the United States. This
success resulted in large part from the. development and use of
sophisticjated electronic information and communications systems,
modern detection devices, improved processing methods, and the expansion of land, sea, and air Customs units.
To detect border intrusion between ports of entry particularly
along the Mexican border, a sensor system was deployed. During fiscal
1975, 175 Phase I I I sensors were procured from the Army; efforts
were initiated to develop a repeater to increase the range from which
the sensor can be monitored; and these sensors/repeaters were interfaced with the radio communications system. Customs also started
inctalling closed-circuit television systems to cover pedestrian, passenger, and baggage areas within land border stations and airports.



These systems will help detect illegal activities and will also serve as
deterrents to physical attacks on customs officers and as sources of evidence for future investigations and court actions.
The following are some significant cases during fiscal 1975:
I n January 1975, the largest cocaine seizure recorded at Los Angeles
was made when a customs officer found 30.9 pounds of cocaine concealed in false top and bottom suitcases and in a hollow fishing pole
section. On January 23 at the San Francisco Airport, 12 pounds of
heroin were discovered by a customs officer in the false bottom of a
shipment of chinaware.
On May 16,1975, a Miami customs officer discovered 46.2 pounds of
cocaine in unclaimed baggage aboard an incoming fiight from South
America. On the same day, a customs officer in San Luis, Ariz., found
15.7 pounds of cocaine hidden in a compartment within a vehicle gas
tank. The combined value of the two seizures approached $14 million.
The single largest marijuana seizure made by customs officers during
fiscal 1975 on the U.S./Mexican border, involving both air and land
units, resulted in the seizure of 37,785 pounds of marijuana and 2
trucks, and the arrest of 4 persons. This seizure occurred on September 19,1974, and was the largest seizure of marijuana on record on the
Southwest border. While on air patrol near Lochiel, Ariz., a customs
crew observed two trucks just south of the international boundary in
Mexico, hidden in a grove of trees. They maintained aerial surveillance
while Customs land units moved into position along the border. At
about 11:30 p.m. sensors signaled an illegal border intrusion and enabled the land units to track and detain the intruding vehicles.
CujStoms air and sea units.—The number of aircraft assigned to interdiction now exceeds 50 and the number of boats approaches the
same figure. Efforts were initiated in fiscal 1975 to develop an adv^anced lightweight radar which can track low-flying aircraft, boats,
and ground activities. Customs completed a lease-purchase agreement
on a high-speed, twin-engined jet aircraft that will be modified to
accommodate the advanced radar, as well as forward looking infrared
sensors and special purpose avionics equipment.
Customs officers using Customs aircraft seized or participated in the
seizure of a total of 46 aircraft during fiscal 1975. Typical cases were:
On September 22,1974, Customs aircraft intercepted an Aero Commander inbound from Jamaica and followed it to Clewiston, Fla.,
where it landed. A Customs search revealed 578 pounds of marijuana,
6 pounds of cocaine, and 14 pounds of hasliish; over $1,700 was seized
and 2 persons were arrested.
On November 7,1974, a suspect Beech Queen Air was tracked by an
air support unit as it flew from Tucson International Airport into
Mexico. The aircraft later returned on approximately the same course
northward and was observed landing in the desert northwest of Eloy,
Ariz., where it was met by two camper trucks. One of the Customs aircraft landed behind the suspect aircraft and stopped it, along with
one of the trucks. A Customs helicopter pursued and stopped the second camper. Seized with the aircraft and 2 trucks were 1,465 pounds of
marijuana; 5 arrests were made.
On December 6,1974, before daylight. Customs aircraft observed an
aircraft with its lights off crossing the border into Mexico. The air-



craft later reentered the United States and was followed to a dirt road
h6rth of Buckeye, Ariz., where it landed and met with a Dodge van.
The aircraft then departed in a northwesterly direction. The Customs
air support unit vectored a Customs ground unit into the area where
the Dodge van and 1,100 pounds of marijuana were seized and one
arrest was made. On December 7 the suspect aircraft was located in
Eeno, Nev., and placed under seizure.
On June 6^ 1975, customs officers at Tucson seized 1,200 pounds of
marijuana, 1 aircraft, and 1 vehicle at Turf Paradise Airstrip, Ariz.
The seizure resulted from a ground radar detection of the smugglers'
aircraft and interception by sensor-equipped Customs aircraft.
Typical interceptions by Customs marine support units were:
Awareness of a distinctive pattern and route followed by vessels
engaged in smuggling in the San Diego area led Customs to position
a marine unit ott'shofe to observe any smuggling attempts. On May 2,
1975, when a suspect vessel was sighted, the Customs unit followed and
radioed ahead to a land patrol unit. When the smugglers' vessel
landed at a secluded location, the Customs marine and land units were
ori the spot to apprehend the smugglers. Customs intercepted 482
pounds of marijuana, seized a vehicle and trailer, and arrested 2
On June 15, 1975, using two boats, customs officers in the Miami
area arrested five persons and seized 6,400 pounds of marijuana,
8.3 ounces of cocaine (combined value of $2.3 million), one 36-foot
boat, two 12-foot Boston whalers, one 40-foot houseboat, and four
vehicles. This successful interdiction resulted from extended surveillance of the suspect vessel as it approached Miami from the direction
of Bimirii. The Customs boats followed the suspect vessel into the
Intracoastal Waterway and tip a creek leading to a local marina at
North Miami Beach. During the predawn hours, customs officers observed the suspect vessel moor to a houseboat. When bulky sacks suspected of Containing marijuana were off-loaded, the customs officers
closed in.
Detector dogs.—First used extensively by Customs in 1970, detector
dogs, which have the ability to detect marijuana, hashish, cocaine,
and heroin, amassed a highly successful detection record while screening over 15 million units of mail, cargo, and arriving carriers. During
fiscal 1975, the number of trained teams (dog and handlers) increased
to 105 and a modern training center was opened at Front Eoyal, Va.
Detector dog teams contributed directly to the seizure of nearly 40,000
pounds of marijuana, 1,900 pounds of hashish, 39 pounds of cocaine,
i9 pounds of heroin, and 1.5 million units of dangerous drugs.
Typical of the seizures made by the teams was a narcotic alert by
detector dog "Tammer" at the Port of San Luis on April 4, 1975, in
the rocker panel of an automobile. The panel was opened and customs
officers discovered over 5 pounds of heroin and one-half pound of
Cargo security

Pursuant to Executive Order 11836, dated January 29, 1975, which
emohasizied that "Theft of cargo has emerged during this decade as a
serious threat to the reliability, efficiency, and integrity of the Nation's



commerce," Customs operated a cargo theft prevention program consisting of the following areas:
Public awareness.—The public awareness project presented cargo
security miniseminars to transportation industry management, insurance underwriters, and law enforcement personnel to demonstrate
that cargo theft and pilferage could be prevented by a few basic security procedures. As a result, industries and firms invested over $9
million in making such improvements. Additionally, thousands of
cargo theft prevention posters and pamphlets were distributed
throughout the Nation. Customs personnel were kept abreast of current developments through the quarterly publication The Cargo Security and Control Bulletin.
Imported merchandise quantity control {IMQC) program.—The
IMQC program was established in 1972 to upgrade the quality of inward manifests and provide a uniform system for accounting for imported merchandise. I n August 1974, a revised edition of the IMQC
Manual was issued to the field, carriers, and importing community.
To insure uniform interpretation of the new manual, familiarization
presentations were made in 18 major cities.
Customs program against cargo crime.—Designed to rediice cargo
crime at airports and seaports, this program has seven major objectives : Arrests, apprehensions, seizures, establishment of deterrent factors, gathering intelligence, identification of local problem areas, and
followup accountability both in-house and industrywide.
Theft information system.—The theft information system is designed to provide data related to cargo crimes which will permit the
most cost-effective allocations of customs manpower and equipment
to Customs program against cargo crime.
High-security warehouses.—In cooperation with the Bureau of
Alcohol, Tobacco and Firearms, the Customs Service undertook to upgrade the security of warehouses that handle imported automatic
weapons. Based upon a Customs evaluation of a warehouse's security,
A T F will either approve or deny the importer a permit. As a spinoff
from this program, specifications and amendments to the regulations
are being drafted to provide for a high-security warehouse for highrisk cargo.
Project Weight.^-Designed to aid customs officers in the detection
of overages, fraudulent weights, and large-volume shipments of controlled substances. Project Weight utilized portable scales to weigh
"empty" and full containers on a random or preselected basis.
High-security seal.—The Service began the process of adopting the
first approved high-security seal in Customs history. With the dramatic rise in cargo thefts in the last decade, the seal has gained added
importance as an accountability and control device. Five hundred
seals were sent to Customs field offices for a test of their effectiveness.
At yearend, with 85 percent of the test complete, only orie of the
seals had been violated.
Containerized program.—The Customs Service estimates that $40
million in revenue is lost each year through false manifesting (underreporting) of containerized cargo. To combat this loss, a program
was instituted at 48 ports in February 1975 to conduct 100 percerit



examinations of 2 percent of the house-to-house and pier-to-house
movements arriving by vessel. The following statistics for March
and April 1975 attest to the success of the program:
Falsely manifested cargo:
Additional revenue
Penalties assessed
Penalties collected
Return on $1 expended
Unmanifested cargo:
Number of containers
Value of merchandise
Duties and taxes


$6, 992
195, 988
7, 801

$4, 443
310, 806
4, 898

$892, 677
$101, 408

$1, 513, 095
$100, 890

During fiscal 1975, Customs opened 1,494 cargo theft cases and closed
1,281, which resulted in 232 arrests, 85 convictions, 215 seizures valued at $958,857, and 36 penalties totaling $78,949.
The following are selected cases:
On November 26, 1974, a truck containing approximately 2,500
French-made men's suits valued at $360,000 was hijacked after departing Kennedy International Airport. Customs officers subsequently
arrested five individuals involved in the hijacking and recovered suits
valued at $94,000. Participating with Customs in the arrests and
recovery of the merchandise were the F B I , New Jersey State Police,
U.S. Postal Inspectors, and the New Jersey Organized Crime Force.
Customs was notified on December 25, 1974, by the Broward, Fla.,
Sheriff's Office that, as the result of an anonymous phone call, six
men unloading liquor from two containers and placing it into two
motel rooms in Pompano, Fla., had been arrested. Preliminary investigation by Customs and the F B I disclosed that the two containers
were in-bond shipments and part of a theft involving three additional
containers. The F B I handled the theft investigation of the two containers and the subsequent arrests. On December 26, 1974, the Pembrook Park Police received an anonymous phone call with information that the three additional containers were in the vicinity of a
warehouse complex. Subsequent investigation by Customs identified
the anonymous caller, who was interviewed. As a result, two containers
of whiskey, and one container of plastic sheeting valued at $200,000
were recovered and a seizure effected for violation of 18 U.S.C. 549,
On April 30, 1975, two persons were arrested in possession of 441
items of stereo sound equipment valued at $97,000 which was part of
a container shipment stolen from Customs custody on March 16, 1975.
The stolen items had been stored in an unused warehouse in Fall
Eiver, Maine. One of the suspects was on bond for his part in an
attempt to smuggle $516,000 in stolen securities into the United
States at Atlanta, Ga., on April 19, 1974. Prosecution for currency
and smuggling violations in Atlanta is being withheld pending completion of an F B I case regarding possession of stolen property.
A suspect was arrested on June 11, 1975, by Customs in Los Angeles, Calif., based upon an arrest warrant issued by the U.S. Dis-



trict Court, Northeastern District of Illinois, Eastern District (Chicago), which alleged the individual's involvement with the theft of
700 cases of whiskey from Norfolk & Western Eailroad on February
28, 1975. Investigation continues and more arrests are expected. To
date, 70 cases of Scotch have been recovered, 5 persons arrested, and
1 trailer and 2 vehicles (one of which was a 24-foot motor home)
Investigations, fraud and smuggling

During fiscal 1975, Customs opened 28,279 investigative cases, closed
24,508 cases, and ended the fiscal year with a backlog of 16,926 open
and pending cases. Largely through fraud investigations. Customs
recovered $21,003,000 in unpaid duties, plus penalties assessed at an
average rate of three times the duties, for a total revenue return of
$84,012,000. This represents a 42-percent increase over fiscal 1973.
Case backlog.—The investigative case backlog increased 28 percent—from 13,213 at the beginning of the year to 16,926 at the end.
Fraud cases dominate the backlog with 7,644 cases, comprising 45.1
percent of the total. The problem is attributable to increased complexity and sophistication in the types of cases being worked and
increased demands on existing investigative manpower to respond
to significant arrests and seizures at over 300 ports of entry, producing
a situation where investigators are forced continually to react to pressure to clean up old cases (consisting primarily of referrals) rather
than initiating new lines of investigation.
F r a u d program.—Customs antif raud program was highly cost-effective and a deterrent against fraud activities throughout the multinational importer community. A number of major investigations
were highlighted by a key oil investigation handled in cooperation
with the Federal Energy Administration:
The ongoing oil investigations continued to have priority, with
over 30 positions assigned almost full time.
An electronics firm pleaded guilty to 15 counts of a Federal Maritime Administration law. The case, which concerned customs entries,
was concluded with a fine of $75,000 assessed against the company.
Still pending is a separate issue involving a loss of revenue of $125,000
with a forfeiture value of $54,000.
At San Diego, an individual was found guilty of attempting to
bribe a customs officer. The individual had been the subject of numerous other Customs investigations. Still pending are civil cases involving a loss of revenue of $400,000 and goods with a forfeiture value of
more than $2 million.
General smuggling.—Customs personnel specially trained in initiating investigations concerning the smuggling of arts and artifacts
from other countries made several significant seizures in this area.
A task force effort was initiated to combat commercial bird smuggling, with the expectation that this effort will largely eliminate
the threat of Newcastle disease being introduced into the poultry
population of the United States.
General investigations highlights were:
Ori J u l y 4, 1974, Customs personnel in Los Angeles concluded a
9-week surveillance by arresting three Mexicans (one a Jalisco, Mexico,



police officer) and seizing 34 firearms, 1,500 rounds of ammunition, and
2 vehicles as they attempted to export same at Los Angeles International Airport.
On July 17, 1974, Customs personnel in Newark arrested 3 persons
for negotiating with an undercover agent for tlie sale of 35,000 assorted
weapons stored in Europe. During the investigation, $125,000 in
"flash money" was shown to the conspirators. This case was worked
jointly with the Bureau of Alcohol, I'obacco and Firearms.
On August 23,1974, a customs officer acting undercover as a Mexican
"guerrilla" received at Laredo from 2 persons, 10 rifles, 3 handguns,
and various types of ammunition. A car and truck were also seized,
ending a 3-week investigation.
Customs personnel continue to remain active in seizures of illegally
imported commodities such as sugar and fertilizer. F o r example, in
February at Brownsville, Tex., Customs seized 4,417 metric tons of
undeclared anhydrous ammonia (fertilizer), valued at $3 million.
Customs furnished the Dallas County district attorney's office intelligence resulting in the arrest of five individuals and the recovery
of three stolen paintings and a wood carving alleged to have been
made by Leonardo da Vinci. The value of the items recovered was
claimed to be over $1 million.
Customs seized 705 long tons of submarine netting as an outgrowth
of an export licensing investigation. The total value of the netting
was $1,075,000. I n addition, 12 barges used in conveying the submarine netting were seized with a value of $960,000.
Customs seized $20,000 worth of Laetrile tablets and liquid, as an
outgrowth of an April 11 arrest and seizure at San Ysidro involving
300 glass vials and 2,000 tablets of Laetrile smuggled from Mexico.
Neutrality Act violations

Customs undertook a wide-scale program to combat the illegal movement of weapons to Mexico and South America. Discussions with
Mexican and South American officials led to an intensified intelligence
effort and an increase in seizures and arrests in the West and Southwest. Organized crime elements were connected with a large amount of
the traffic.
CPO homicide investigation

The investigation into the deaths of 2 customs patrol officers was
brought to a conclusion by the indictment and arrest of 20 persons.
Twenty-eight customs officers from 11 offices, with the cooperation of
Drug Enforcement Administration and A T F personnel and State and
local authorities, conducted a 4-month investigation which led to the
indictments and arrests. The investigation involved three conspiracies
within one large conspiracy to smuggle controlled substances from
Mexico into the United States.
Enforcement support systems and equipment

Customs operated several enforcement support systems involving the
use of modern computer, communications, and information technology:
Treasury enforcement comnvurdcations system {TECS).—TECS,
with a data base of over 350,000 records and over 500 terminals, was
improved and expanded in fiscal 1975. A new B7700 computer was



installed in the San Diego computer facility and work was begun to
convert all ongoing systems to the new computer; 100 new terminals
were installed at preclearance airports and Kennedy International
Airport; and a telecommunications study was completed which, when
implemented, will improve performance and result in long-range reduction in telecommunications cost. Also, added to the T E C S data
base were the license tag numbers of wanted persons in the F B I ' s
National Crime Information Center data base. Finally, interface with
the national law enforcement and telecommunications system was
completed, thereby enabling Customs to obtain from State and local
law enforcement agencies drivers' licenses and license-tag information.
Communications.—Long-range plans call for a sector radio communications system to provide for substantially complete coverage
along the entire perimeter of the United States. This system is intended
to enable Customs personnel to communicate with each other and with
the Eadio Control Center during interdiction, investigation, and inspection operations.
During fiscal 1975, the sector radio control system was extended
approximately 500 miles along the Gulf Coast to complete coverage
of the southern perimeter from San Francisco to Charleston, S.C.
Implementation was begun on two new sectors: The Mid-Atlantic
sector, from Charleston, S.C, to New York; and the Northeast sector,
from Bridgeport, Conn., to Buffalo, N.Y. Both of these sectors will
provide support to Customs operations impacted by the Canadian
Olympics and the Bicentennial activities. In addition, zone communications networks were initiated in New York, Detroit, Los Angeles,
and Miami to provide local radio communications in support of interdiction, investigation, and inspection operations.
Enforcement communications were enhanced by the establishment
of a complete communications center at the new Customs headquarters
this year. Tliis center will provide 24-hour administrative teletype,
facsimile, secure teletype, and secure voice service from Customs headquarters to regions, districts, and selected ports. In addition, the Customs administrative teletype system was designed and implementation
was nearly completed. This system, scheduled for operation on August
1, 1975, will enable Customs users to communicate between Customs
headquarters, all regions, and selected districts and ports throughout
the continental United States. The system will be utilized to transmit
quota data to headquarters in support of the Trade Act of 1974.
Customs enforcement information system.—As customs officers perform their enforcement or investigative functions, they collect a wide
spectrum of enforcement information. To make this information available to all customs officers with "need to know," a central file system
with microfiche capabilities and an automated index in T E C S was
established in fiscal 1975. I n addition, a number of special purpose systems were initiated or implemented: (1) The Customs law enforcement
activities reporting system, which provides statistical information on
arrests and seizures performed by customs officers; (2) the vessel violation profile system, which gives customs officers nationwide access
through T E C S to vessel-related violation information; and (3) a
private aircraft inspection reporting system, which provides a customs officer with information helping him to determine the illegal
penetration of U.S. borders.



Regulatory audit

A Eegulatory Audit Division was established during the year to
bring Customs processing of imported merchandise in line with the
development of modern business practices. The systemized review by
auditors trained to scrutinize the records of importing and exporting
firms permitted a more selective initial processing of transactions and
resulted in cost savings and the facilitation of the movement of goods.
Military predeparture inspection program

Under a joint agreement signed by the Department of Defense and
the U.S. Customs Service, six customs advisers were assigned to overseas locations from which large numbers of military personnel and
dependents depart for return to the United States. These advisers train
military personnel who assist in predeparture clearance. Between
April 26 and May 30 of this year, military customs inspectors under
the supervision of U.S. Custoins advisers also processed over 60,000
U.S.-bound Vietnamese refugees at Guam and Subic Bay, the Philippines.
International conferences

Customs played an important role in the full range of Customs
Cooperation Couricil programs, which highlighted enforcement and
the facilitation of international trade. Chairing the Finance Committee and the second meeting of the Working Party on Customs Enforcement, as well as sending delegations to the plenary council meeting and all committee and working party meetings, Customs not only
contributed to individual programs but also influenced the overall
direction of the Council.
Eesponding to initiatives by U.S. and Australian Customs, the Council stepped up its enforcement activities as the awareness of national
customs administrations of enforcement problems heightened. The
Council adopted a new "Eecommendation on the Pooling of Information"; decided to begin work on a multilateral convention on mutual
customs administrative support; and sponsored a successful narcotics detector dog seminar. The Council continued to take part in the
work of other international organizations dealing with enforcement,
and U.S. Customs represented the Council at the 26th session of the
U.N. Commission on Narcotic Drugs.
Customs played an active role in the Council's continuing program
to facilitate international trade. This included development of three
new technical annexes to the International Convention on the Simplification and Harmonization of Customs Procedures and steppedup work on the development of an international harmonized commodity description and coding system.
Customs also participated in significant projects of other international organizations in the field of facilitation. Principal among these
was the U.N. Economic Commission for Europe's development of
a revised text of the 1959 T I E Convention, which will be considered
at a review conference in November 1975. This convention makes possible the expeditious transit of cargo across borders and through
customs territory by means of a carnet and an international guarantee system. The revision will update the convention in the light
of technological advances during the past decade in the transportation
of cargo.



At the bilateral level, the American-German Mutual Customs Assistance Agreement entered into force June 13, 1975. I t provides for an
expanded range of cooperative effort in the enforcement of customs
laws and regulations. Work on a similar agreement with the Govemment of Austria has begun, and the possibility of ricgotiating an agreement has been proposed to the Government of Mexico.
Cabinet Committee on Intemational N arcotics Control {CCINC).—
The principal objective of the CCINC program is to interdict the
flow of narcotics before it reaches the United States. Through the enforcement training of foreign officials, U.S. Customs has a significant
role in implementing this objective. During fiscal 1975, Customs
trained more than 1,300 foreign officials representing some 40 countries. Directors General of Customs from Afghanistan, Bolivia, Colombia, and Singapore came to the United States to observe interdiction
techniques. More than 90 foreign officials received middle-management
training in narcotics interdiction in the United States, and over 1,200
line officers were trained in their own countries, which included West
Germany, France, Bulgaria, Colombia, Thailand, the Philippines,
and Nepal.
Customs modernization and simplification 5^7Z,—This legislative
package is a consolidation of various proposals to modernize and simplify Customs procedures. I t would amend sections 315 ( d ) , 321 (a) (i),
484, 498(a) (4), 499, 505, 508-511, and 526 of the Tariff Act of 1930,
and the Tariff Schedules (19 U.S.C. 1202), and eliminate certain
provisions which are considered archaic.
The bill was transmitted to the Congress in May. I n June, at a
special White House convocation, the Commissioner and other Customs
officials briefed industry associations and other interested members
of the public sector on the importance of the bill. To continue the above
program. Customs has prepared a supplemental legislative package
which contains proposals to change other sections of customs law.
Automated merchandise processing system {AMPS).—AMPS is
a system for automating the control of merchandise entering the
United States, the collection of duties, and the enforcement of import regulations. The increased workload on Customs due to the continued growth of foreign trade has taxed to the limits the present
manual merchandise processing system, A M P S will not only satisfy
the increased workload requirement but will also provide many additional benefits, including the use of modern business techniques
in dealing with importers and brokers, i.e., single periodic payment
for several entries of merchandise filed nationwide and monthly
statements of account; standardization of port procedures; speeding
the clearance of merchandise; increasing the effectiveness and efficiency of entry and air cargo manifest processing; and providing a
ready access to entry and management information.
The first phase of the A M P S entry processing system—the early
implementation system (EIS)—became fully operational in the Port
of Philadelphia on January 27, 1975. E I S is composed of immediate
delivery control, entry screening, and collection processing. A similar
system is also being implemented in the Chicago Seaport. I n early



fiscal 1976, E I S will be installed at Chicago's O'Hare Airport and
the Port of Baltimore. Later in fiscal 1976 additional liquidation and
collection fmictions, improved ori-line immediate delivery control
functions, and improved quota control capabilities will be added. The
enhanced system will then be implemented at J F K Airport, New York
Seaport, and Newark, and, in fiscal 1977, in Baltimore and Chicago,
with completion of nationwide implementation by fiscal 1981.
Additionally, an A M P S manifest clearance system frees the customs
officer from the clerical task of clearing cargo manifests, as well as
centralizing this function. The A M P S seaport manifest clearance system, currently operational in Houston, San Francisco, and Baltimore,
will be implemented in additional ports during fiscal 1976. An automated airport manifest clearance system is now in development and
will be implemented in the larger airports in fiscal 1976.
Duty assessinent by account {DABA).—The duty assessment by
account approach involves the processing of import transactions by
importer account rather than by port of arrival. Participation of importing firms is voluntary but their interest in the advantages to them
shows that a high proportion will employ this form of processing. The
system, as currently planned, utilizes business records and normal
accounts to verify classification, appraisement, and quantity of imports
rather than the shipment-by-shipment method now employed. Based
upon the level of importer participation, substantial savings for the
Government may result.
Investigative program analysis {IPA).—Numerous changes were
made to the I P A, a cost accounting system used by the Customs Service
to provide management information on the efforts expended by customs officers on investigative cases. These resulted in the development
of better measures of performance achievement and workload. The
most notable changes were: (1) Current fiscal year report tracking of
all major reporting areas, and (2) a nationwide productivity report
yielding certain fraud statistics.
Headquarters consolidation.—The consolidation of Customs activities into the new headquarters location at 1301 Constitution Avenue,
NW, was virtually completed. The relocation into one building of
employees previously located in several buildings iu the Washington
area improved both internal efficiency and service to the public.
Customs Service Academy.—The Customs National Training Center
relocation was completed April 5,1975. The center, previously located
at Hofstra University in New York, was moved to the Georgetown
area of Washington, D . C , and renamed the "U.S. Customs Service
Border construction authority.—K bill to increase the amount authorized to be expended for Customs and Immigration facilities along
the border from $100,000 to $200,000 was enacted as Public Law
93-396 on August 29,1974. This is the first piece of Customs-proposed
legislation to be enacted since 1971.
T r a d e Policy
Trade Act of 1971^,.—Over 20 countervailing duty cases were processed by Customs within the new stringent time limits provided under
the Trade Act of 1974. Eegulations and procedures for dealing with

588-395 0 - 7 5
 - 1 7



the generalized system of pi'eferences were being developed, looking
toward implementation of this major provision of the act later this
year. Substantial support was also given for the new round of General
Agreement on Tariffs and Trade (GATT) talks for which the act provides.
Antidumiping and countervailing duties.—Enactment of the Trade
Act of 1974 caused a comprehensive review of the regulations and
procedures applicable to antidumping and countervailing duty proceedings. The format and contents of an expanded statement of reasons
detailing findings of fact and conclusions of law, to accompany publication in the Federal Eegister of determinations under the Antidumping Act, were being developed. I n addition, as a result of an amendment made by the Trade Act of 1974, to section 516, Tariff Act of 1930,
as amended, part 175, Customs Eegulations, is being amended to afford
to American manufacturers, producers, and wholesalers the right to
petition for review of antidumping and countervailing determinations
in a manner similar to that currently provided for review of classification and valuation decisions.
Drawback.—An amendment to the Customs Eegulations was published in the Federal Eegister on April 2, 1975, increasing the amount
of accelerated payment of drawback claims from 90 percent of a claim
to 100 percent. Accelerated payment of drawback claims permits the
payment of claims prior to liquidation, with the Government's interest
being protected by the claimant filing a bond. The effect of this change
will be to increase the working capital of American industry by several
million dollars.
Trademarks., copyrights., and patents.—T^yo hundred twenty-five
trademarks, service marks, copyrights or renewals, assignments, and
name changes were recorded for import infringement protection during fiscal 1975. Eleven patent surveys were approved. Fees collected for
these services totaled $43,000.
South African coal—19 U.S.C. 1307.—^American coal-mining interests alleged that a company in the United States was in violation of
19 U.S.C. 1307, which prohibits the importation of articles manufactured or produced by indentured labor under penal sanctions, except
where it has been determined that the domestic supply cannot meet
demand, by importing low-sulfur coal from South Africa. (The use of
low-sulfur coal minimizes emissions of sulfur dioxide from steam
power utility stacks.) Customs investigated the charge by studying
whether domestic supply can meet the needs and then determining the
nature of labor used in mining the coal. Customs concluded that lowsulfur coal was not mined in sufficient quantities in the United States.
Custpiris further concluded that the shipments of coal were not subject
to the prohibition of 19 U.S.C. 1307 and that this finding made it unnecessary to consider the question of whether the system of labor under
which the coal was mined constituted indentured labor under penal
sanctions within the meaning of the statute.
Mutual assistance agreements.—Commissioner Vernon D. Acree
participated in a ceremony in Bonn on June 16, 1975, marking the
entry into force of the United States-Federal Eepublic of Germany
Mutual Assistance Agreement which had become effective on June 13.
On May 1, 1975, the State Department granted Circular 175 authority



to negotiate and conclude an executive agreement with Austria providing for mutual assistance between the customs services of the two
Governments. These bilateral agreements foster close cooperation between customs services to ensure correct determination of custoins
duties and more effective prevention and investigation of offenses
against customs laws.
Other Activities
Regulatory activities

Internal advice procedure.—Treasury Decision 75-17, published in
the Federal Eegister on January 13, 1975 (40 F E 2453), set forth an
intemal advice procedure for the use of customs officers, importers, and
other interested parties in obtaining advice and rulings from Customs
headquarters with respect to current Customs transactions within the
technical areas of law interpreted by the Service. This procedure provides for the disposition of issues by the U.S. Customs Service and a
formal method for furnishing advice and guidance to field officers in
the interpretation and application of laws and regulations.
Administrative rulings.—A proposed revision to the Customs Eegulations concerning issuance of administrative rulings relating to prospective transactions was published in the Federal Eegister on January 13, 1975. The revision will provide a uniform process under which
rulings can be requested and issued with respect to transactions for
which advance information concerning the dutiable status of merchandise is necessary for business or other reasons.
Prepenalty notice procedures.—Treasury Decision 75-21, effective
upon publication in the Federal Eegister on January 16,1975 (40 F E
2797), amended subpart A of part 171 of the Customs Eegulations by
setting forth a new prepenalty notice procedure which introduces an
additional element of flexibility in the Customs processing of certain
penalty cases. Under this new procedure, the district director will issue
a prepenalty notice to a party against whom he contemplates issuing a
claim for forfeiture value exceeding $25,000 for violations of section
592, Tariff Act of 1930, as amended (19 U . S . C 1592). The importer has
30 days in which to file a written reply explaining why the claim for
forfeiture value should not be issued. Upon request, the district director may permit an oral presentation of arguments in addition to a
written reply. Claims for forfeiture value will be issued when replies
have failed to disprove allegations in the prepenalty notice or when
no reply is made.
Freedom of information.—The provisions of the amendments to
the Freedom of Information Act, Public Law 93-502, effective February 19,1975, which, among other things, placed statutory time constraints on responding to requests for information in Customs files
and records have been implemented. Preliminary instructions have
been issued and a draft revision of part 103, Customs Eegulations,
patterned after Treasury Department regulations, is in preparation.
Fishing.—During fiscal 1975, Customs analyzed and commented
on several bills and other agency regulations involving the protection
of domestic fishing operations and international fishing conservation
programs. Close coordination of the various agencies having interest



in this important area is essential to a consistent approach and efficient
resolution of the related problems.
I n t e m a l audits.—During fiscal 1975, Customs formulated a new
approach to the internal audit program which is less regimented and
allows more flexibility. A national scope audit on Customs cash
collections, as well as a number of other significant audits, were completed during fiscal 1975 utilizing the new approach. Lateral and
vertical audits were utilized, as well as local audits and surveys,
as a reporting tool for Customs management to judge the effectiveness
and progress of priority programs.
Accelerated full field investigations.—In April 1975, Customs was
called upon to perform accelerated full field investigations in connection with 346 new positions to be filled by the end of fiscal 1975.
An abbreviated full field investigation with a 5-day completion date
was instituted and completion of the total investigation within a
30-day limit was prescribed. During May and June, 459 applicants
were investigated. During all of fiscal 1975, Customs processed 1,473
full field investigations, 98 of which were found to be derogatory and
referred to the principal field officers for determination.
I n t e m a l security.—Customs enjoys a high level of integrity. However, during fiscal 1975 Customs opened 479 personnel conduct investigations. For the most part, these investigations served to resolve
allegations against employees. Thirteen cases did result in termination of the employee, 35 resigned while under investigations, and
11 cases resulted in convictions for violation of law.
During the year, there were 14 instances where bribery offers were
made to customs officers. Five of these were attempts to procure collusion in the smuggling of narcotics into the United States'. Cooperation with F B I and Internal Affairs agents in investigations led to
the seizure of large amounts of narcotics and the arrest of the
Management improvement
During fiscal 1975, Customs continued its support of the management by objectives process. Customs was responsible for one Presidential level objective (modernization and simplification of customs
operations and procedures), two Secretarial level objectives (integrated interdiction and automated merchandise processing system),
and over 50 Customs level objectives (including an upward mobility
program for Customs employees; an increased enforcement communication and information capability to the users of the Treasury
enforcement communications system; an intensified and expanded
fraud investigations program; and a program to effectively reduce
cargo theft and pilferage).
Administrative activities

Upward mobility program.—The groundwork for implementing
a formalized upward mobility program within the Customs Service
was completed. An announcement to all employees explained the purpose, scope, and goals of the upward mobility program. A skills inventory was conducted by the regions and Service headquarters to
identify employees eligible to participate in the program and to
determine their counseling needs and the best avenues for their devel-



opment. Initial counseling services for approximately one-third of
the upward mobility population were completed.
Spanish language training program.—The Spanish language training program was very successful, with 293 employees completing the
training course at the various class locations. In preparation for the
Bicentennial celebration, French language training for customs personnel along the Canadian border is planned.
Equal employment opportunity-Spanish speaking program.—Customs took an active part in all Civil Service Commission and Treasury-sponsored workshops and conferences concerning employment of
Spanish-speaking personnel. A full-time program coordinator was
appointed at headquarters. Customs liaison with I M A G E , the major
organization concerned with the employment of the Spanish-speaking
in local. State, and Federal Government, was strengthened Tby participation in the I M A G E Convention at Kansas City in May.
Bicentennial era activities.—In support of this Nation's Bicentennial, Customs commemorated several customhouses as "historic" and
commemorative medals were issued. In connection with the Service's
185th anniversary, headquarters developed a program of celebrations
at ports of entry during National Port Week, September 29-October5,1974.
Minority bank depositary.—The designation of minority-owned
banks as depositaries for customs collections continued as a top priority for the Customs Service. The number of minority banks authorized to act as depositaries for customs collections increased 100
percent, from 7 to 14 banks, in this fiscal year. These depositaries are
currently receiving over $90 million in customs deposits a month.

The U.S. Savings Bonds Division promotes the sale and retention
of U.S. savings bonds. Because the average life of series E and H
savings bonds is about twice that of the marketable debt, this form of
savings constitutes a long-term underwriting of the Treasury's debt
structure, and makes possible the widespread distribution of the
national debt through its ownership by a substantial number of small
The program is carried out by a small staff with the active assistance of thousands of volunteers who. are leaders in business, labor,
finance, and the media. This corps of volunteers assists in the promotion and sale of savings bonds through banks, savings and loan associations, and approximately 40,000 employers cooperating in the
operation of the payroll savings plan and over-the-counter sales.
Sales of series E and H savings bonds totaled $6,826 million in fiscal
1975; reported participation in the payroll savings plan as of June 30,
1975, totaled close to 9i^ million. There were $65.9 billion in savings
bonds and savings notes held at the close of fiscal 1975, over one-fifth



of the privately held portion of the public debt. During fiscal 1975,
holders of these savings vehicles received over $31/^ billion in interest.
U.S. Industrial Payroll Savings Committee

The leader of the 1975 nationwide payroll savings campaign in
industry is Gabriel Hauge, chairman of the board. Manufacturers
Hanover Trust Co., and Chairman of the U.S. Industrial Payroll
Savings Committee. The 1975 campaign was launched in Washington,
D . C , on January 16, 1975, with the annual meeting of the Committee being highlighted by a meeting with President Ford at the
White House. Serving on the Committee with Mr. Hauge are 12
former chairmen and 48 top executives of the Nation's major
The members of the U.S. Industrial Payroll Savings Committee
conduct top management meetings, urge the chief executives in their
areas and industries to conduct payroll savings drives, and set strong
examples by the campaigns they conduct in their own companies.
Through June, four Committee members had completed their company campaigns and had enrolled over 198,000 employees either as
new savers or for increased allotments.
Chairman Hauge has contributed much time and effort to the
campaign. He has traveled to 19 cities to address 28 meetings of business and community leaders, helping members of the Committee
launch their area and industry campaigns.
On April 16, 1975, Mr. Hauge appeared on the NBC television
network "Today" show. Sixty NBC stations also presented their local
volunteer leaders to further publicize the campaign. Mr. Hauge provided sales tools for the volunteers and staff workers in the campaign,
including a brochure for the top executive and a sound motion picture
in color entitled "No Greater Bond." Mr. Hauge produced a newsletter
for volunteers to publicize the campaign and also ran a full-page
ad featuring the 1975 Committee members with a sketch of each in all
editions of the Wall Street Journal on January 21.
The U.S. Industrial Payroll Savings Committee has been the principal force in raising the sales of E bonds in the $25 to $200 denominations to $4.7 billion, more than $2.1 billion higher than in 1962 before
the Committee was formed.
Federal campaign

The annual savings bonds campaign for Federal employees was
conducted during the spring months. For the first time, the campaigns
were staggered over a 3-month period. Many large departments and
agencies conducted campaigns in March, others in April, and the
Department of Defense,, along with some smaller agencies, conducted
campaigns in May. The purpose of this was to allow field staff promotional personnel more time to give personal attention to field
installations. The Interdepartmental Savings Bonds Committee was
again headed by Secretary of Agriculture Earl L. Butz. The Chairman hosted two small luncheons for the major agencies and performed
countless other duties which furthered the savings bonds campaign.
He requested President Ford to address the Cabinet about the importance of the savings bonds program. This proved to be most sue-



cessful, resulting in substantially more involvement by Cabinet
members and agency heads than in recent years.
The April 9 kickoff rally was more widely attended than in years
past. Then-Secretary of the Interior Eogers C B. Morton was the
keynote speaker. He shared the platform with Secretary Butz and
Mrs. Francine Neff, Treasurer of the United States and National
Director of the Savings Bonds Division. William Conrad, star of
the T V series "Cannon," made his appearance as the honorary chairman of the Federal campaign.
The Federal establishment, with a work force of approximately 21/^
million civilian employees and over 2 million military personnel,
produced sales in excess of $1,075 million in 1974. The campaign resulted in approximately 225,000 new savers and increased allotments.
The 1975 campaign was an outstanding success wherein over 330,000
new savers and increased allotments were obtained. Sales should
surpass $1,100 million in 1975.
Volunteer activities

The volunteer chairmen of State savings bonds committees and
members of the American Bankers Association savings bonds committee met with Treasury officials during their annual conference
in Washington, D . C , on December 4 and 5. Sessions were presided
over by North Carolina Chairman Bland Worley, vice chairman of
the board, Wachovia Corp., and A B A Chairman W. Jarvis Moody,
president, American Security and Trust Co. of Washington, D*C.
Following the Washington meeting, volunteer meetings were held
in the States to plan introductory ceremonies for the Bicentennialdesign series E savings bonds and other volunteer activities.
I n a May 1, 1975, White House ceremony, President Ford purchased a Bicentennial-design series E savings bond—the first printed—
in a ceremony with Secretary Simon, Secretary Butz, Minnesota Volunteer Chairman Clifford C Sommer, A B A Chairman Moody, and
National Director Neff. On that same day, in similar ceremonies
throughout the country. State Governors participated in ceremonial
sales with their State volunteer chairmen and A B A State coordinators
and declared the week of May 5-9 as "Minute Man Week." Eeproductions of the Liberty Bell, one of which was presented to each State
during the special 1950 savings bonds Independence Drive, formed
the background for many of these ceremonies. Throughout "Minute
Man Week" savings bonds volunteer county chairmen around the
country conducted hundreds of ceremonial sales to city and county
officials to introduce the new design bond and open the celebration of
the Bicentennial through the savings bonds program.
During the fiscal year. Secretary Simon reappointed 4 volunteer
State chairmen and appointed 12 new volunteer State chairmen for
2-year terms.
Nineteen newly elected Governors were appointed by the Secretary
to serve along with the incumbent Governors as honorary chairmen
for their respective State savings bonds committees. They play an
important role by providing leadership for State citizens and employees in each State's savings bonds program.







Bicentennial-design series E savings bond.




Labor support

America's labor unions and their leaders continued their traditional support of savings bonds and the payroll savings plan. George
Meany, president of the AFL-CIO, voiced his strong support with
the following statement: ". . . as you know, the AFL-CIO has long
supported the Savings Bonds Campaign, and we intend to continue
that support. I am convinced the labor movement can and will do its
part to promote the Savings Bonds Campaign."
Mr. Meany helped publicize the Bicentennial-design series E savings bonds by his purchase of one from National Director Neff. Press
material originating from coverage of this event was sent to more than
500 labor publications throughout the United States, resulting in
excellent publicity for savings bonds.
Acting in the volunteer capacity of National Labor Chairman for
Savings Bonds, Mr. Meany is helping to form a new national labor
committee. From the AFL-CIO he has asked Lane Kirkland, secretary-treasurer of the AFL-CIO, Al H. Chesser, president of the
United Transportation Union, and Glenn E. Watts, president of the
Communications Workers of America, to serve and all have accepted.
On State and local levels, union officials continue to serve as volunteers for the program, involving themselves in payroll savings campaigns in their local communities. The labor press has been of great
help by continuing use of savings bonds ads, editorials, and news

The public service advertising campaign for saving bonds, conducted
in cooperation with the Advertising Council, enjoyed one of its best
years in 1974. According to council estimates, the media contributed
more than $75 million in space, time, and services, which was just short
of 1973's record-breaking total of $76 million. Included in the contributions were 17,500 ads in daily newspapers, the highest total since 1969,
and 158,000 lines in national magazines, another record.
The new advertising campaign for 1975 and 1976 is centered around
the Nation's Bicentennial, tracing the contribution of citizen financing
to the Nation's growth. Created by the Leo Burnett Co., volunteer
task-force agency of the council, the theme is "Take Stock in America—
200 Years at the Same Location." The campaign began in April in print
media and radio, and will be extended to television begiiming in the
John Wayne, well-known film star and longtime bond volunteer, contributed his services to a Bicentennial savings bondsfilmmessage which
is being shown this spring and summer in theaters throughout the country. Production was arranged and contributed by Lew Wasserman,
motion picture chairman of the U.S. Industrial Payroll Savings Committee, and Universal Pictures.
In the annual savings bonds awards competition for company communicators—based on payroll savings promotion appearing in company
publications in 1974-—Henry Bachrach of General Electric Co. was
named "Communicator of the Year" and A.T. & T. received the grand
award for a total corporate campaign. Members of the national Employee Communications Committee, which held its annual meeting in
Washington in March, judged the contest, and awards were presented



on June 12 at the conference of the International Association of Business Communicators in New Orleans.
National organizations

The National Organizations Committee, under the Chairmanship of
Valerie F. Levitan of Soroptimist International, continued its strong
support of the borid program. More than 90,000 individual club units
were asked by their national presidents to participate in the "SevenPoint Program" of cooperation, and results to date indicate widespread
pickup. The new program for the 1975-76 club year, as recommended
by the steering committee, will feature a strong tie-in with the
Public affairs

The Office of Public Affairs developed a comprehensive package of
"Copy Patterns" for use by the media and a special package of news
releases, proclamations, and scripts for the introduction of the Bicentennial-design series E bond. Two series of feature articles were
launched—"Family Forum" and "Voice of the Volunteer."
A manual of public relations techniques and tactics was prepared and
distributed to the field staff, and a leaflet describing the savings bonds
"freedom eagle" emblem was given wide distribution.
Charles E. Buxton, editor/publisher, Denver Post, was named Chairman of the National Committee of Newspaper Publishers, succeeding
Eobert Letts Jones, who retired as president, Copley Newspapers, Inc.
Continuing close collaboration with leading financial writers and
editors brought about increased coverage in a number of leading magazines, including U.S. News & World Eeport and Changing Times, and
hundreds of newspapers which carry the columns of Don G. Campbell,
John Cunniff, Merle E. Dowd, Leonard Groupe, Sam Shulsky, and
others. Scripps-Howard's Eobert Dietsch provided detailed chain
coverage of the Bicentennial-design E bond.
The cooperative efforts of the Office of Public Affairs led to a feature
article on the bond program in Public Eelations Journal and a section
on savings bonds in Ethyl Digest.
During the course of the year, some 6,250 pieces of correspondence
were handled, many inspired directly by publicity items in newspapers
and magazines.
EDP program

In the 10 years that the EDP program has been in operation, the system has proved to be a valuable management tool in the area of program planning. The centralized collection and publication of payroll
savings statistics relieves the State offices of many hundreds of hours of
clerical time and provides a meaningful picture of the payroll savings
program which is utilized at the National, regional, and State levels to
formulate sales plans each year and to establish payroll savings goals
on State, area, and county bases.
At the end of fiscal 1975 the number of reporting units (companies
that operate the payroll savings plan) on the EDP tapes was 39,042,
which represents 21,566 interstate units (including branches of companies) and 17,476 intrastate companies. Total employment in these
companies is shown as 26,970,613. The number of employees signed up
to buy savings bonds in these companies is 6,713,235, or 24.9 percent.



Management improvement

On January 20, 1975, a management study was initiated under the
auspices of the Office of the Secretary. The study team consisted of two
members of the Office of Management and Organization and a representative from the U.S. Savings Bonds Division. The study was completed in May. Its purpose was to assess the organizational structure
and function of the Washington, D.C, headquarters of the Division to
determine its efficacy for managing the savings bonds sales program.
Currently the 33 recommendations made by the study team are under
consideration by top management in the Division. Acceptance pf a
number of these recommendations should lead to a more effective
headquarters operation.
Training and staff development

The Division is continuing to recruit and move young persons up
through the ranks. Through an American Management Associationprepared course, "Principles of Professional Salesmanship," and
on-the-job training assignments, recently graduated college students
and persons promoted through the upward mobility program are
trained for key sales promotion, managerial, and administrative positions. A program of sales instruction/training—"20-Point System for
Guaranteed Sales Success" by Dartnell-Anderson—is used for new.
promotional employees unable to attend an indoctrination course for
6 to 10 months after entering on duty. This course is also being used
as a refresher course for veteran promotional staff members.
A line management training program entitled "How to Improve
Individual Manager Performance," prepared by the American Management Association, was continued in fiscal 1975. A management
library^ publicized quarterly, has been extensively used by all staff
members. During fiscal 1975, 5 of 14 persons selected for the executive
development program were involved in a planning conference to assist
in the development of a national sales program while 5 of the 14
attended courses presented by the Civil Service Commission, Department of Agriculture Graduate School, and Advance Management
Eesearch, Inc.
All executive level and supervisory personnel have received introductory level instruction on the implementation and operation of the
management by objectives program. This instruction was to further
enhance the grasp of management by objectives principles and the
installation of the program. As preparation begins for fiscal 1976,
understanding and use of the program has greatly improved.

The major responsibilities of the U.S. Secret Service are defined in
section 3056, title 18, United States Code. The protective responsibilities include protection of the President of the United States; the members of his immediate family; the President-elect; the Vice President



or other officer next in the order of succession to the office of President, and the Vice President-elect; the members of the immediate
family of the Vice President, unless such protection is declined; 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 protection is declined; the person of a
visiting head of a foreign state or foreign government; and, at the
direction of the President, other distinguished foreign visitors to the
United States and official representatives of the United States perforining special missions abroad. I n addition. Public Law 90-331
authorizes the U.S. Secret Service to protect major Presidential or
Vice Presidential candidates.
The investigative responsibilities are to detect and arrest persons
committing any offense against the laws of the United States relating
to coins, obligations, and securities of the United States and of foreign
governments; and to detect and arrest persons violating certain laws
relating to the Federal Deposit Insurance Corporation, Federal land
banks, joint-stock land banks, and Federal land bank associations.
Protective responsibilities

During fiscal 1975, the Secret Service provided protection for President and Mrs. Gerald E. Ford and their four children; Vice President
and Mrs. Nelson A. Eockef eller and Nelson, J r . ; former President and
Mrs. Eichard M. Nixon; John Kennedy, J r . ; and former First Ladies,
Mrs. H a r r y S Truman, Mrs. Dwight D. Eisenhower, and Mrs. Lyndon
B. Johnson.
I n addition, the Secret Service provided protection for Secretary
of State Henry A. Kissinger (on a reimbursable basis) ; Secretary of
the Treasury William E. Simon; and Assistant Secretary of the
Treasury Gerald L. Parsky (on two special trips abroad). Secretary
Kissinger made 10 foreign trips and Secretary Simon, 13. The majority
of these trips were extensive, and involved large-scale protective and
logistical problems.
During fiscal 1975, the Secret Service provided protection for
Speaker of the House Carl Albert during the period that Vice President Eockefeller was being selected and confirmed. On August 13,
1974, protection for Patricia Nixon Cox and Julie Nixon Eisenhower
was terminated.
There was an increase in Secret Service protection for visiting heads
of state or government from 70 in fiscal 1974 to 103 in fiscal 1975. The
total number of foreign dignitaries protected by the Secret Service in
fiscal 1975 was 132. The heaviest period of foreign dignitary protective activity occurred between April 15 and May 15, 1975, when 35
received Secret Service protection.
A large increase in Secret Service protective responsibilities is expected in fiscal 1976 and 1977. The Secret Service, by law, will be
responsible for the protection of major Presidential and Vice Presidential candidates and nominees. Also, it is anticipated that a large
number of foreign heads of state or government will visit the United
States for the Bicentennial celebrations. United Nations activities, and
the nearby Olympic games in Canada.



On December 27,1974, Public Law 93-552 was signed by President
Ford, amending title 18 of the United States Code, to authorize Secret
Service protection of members of the immediate family of the Vice
President, unless declined. I n addition, this bill designated the former
residence of the Chief of Naval Operations, located on the grounds of
the U.S. Naval Observatory, as the temporary official residence of the
Vice President.
The bill also amended title 3, United States Code, section 202, by
authorizing the Executive Protective Service to protect the temporary
official residence of the Vice President and grounds in the District of
Columbia. I n fiscal 1975, the Executive Protective Service provided
protection for the White House, buildings housing Presidential offices,
and for foreign diplomatic missions of 127 countries at 300 locations
in the metropolitan area of the District of Columbia.
Further, E P S protection was afforded, at Presidential directive, on
a case-by-case basis, for foreign diplomatic missions located in other
areas of the United States. Three cases in point were the annual International Monetary Fund Conference held in Washington, D . C ; the
29th annual General Assembly of the United Nations in New York
City; and continual coverage for selected foreign missions to the
United Nations in New York City.
Protective intelligence

During fiscal 1975, the Intelligence Division initiated a long-range
review of all files to determine which records to convert to the new
automated data processing system. Also, the Division was reorganized
to better utilize intelligence research specialists. These employees were
given more responsibilities and, as a result, special agents formerly
performing the duties were available for travel.
The Technical Security Division purchased and installed a Colenta
La 130 automatic color film processing machine, greatly reducing the
man-hours required for film developing. Also, this Division began the
installation of security systems for the new Vice Presidential residence
at the Naval Observatory. The program to computerize supply records
was also completed.
The Data Systems Division conducted a study to determine the
A D P needs for the Secret Service for the next 8 years, which indicated that the present computer equipment was inadequate to handle
the projected requirements.
I n order to provide an orderly expansion of A D P equipment and
programs, an interim upgrading of two central processing units was
authorized to meet the increased protective support requirements for
1976. In addition, a minicomputer with associated control terminals
and display board was authorized to interface with one of the units,
thus permitting more effective determination of agent personnel assignments.
The Technical Development and Planning Division served as consultant to the Architect of the Capitol in connection with the Capitol
security system and was in charge of the technical aspects of the system. This 2-year effort culminated in May of 1975 with the manning
by the Capitol Police of the centralized control room. The cameras
in the video surveillance system located throughout the Capitol and



Senate and House Office Buildings, and the sensors for the security
system in the steam and chilled water tunnels supporting the Capitol
complex are monitored from the control room. Also included in the
system are X-ray units for parcel and briefcase inspection, located at
major entrances to the building and in mailrooms.
The Technical Development and Planning Division began work
during the year on several significant new developments:
1. A system to provide current information on the available manpower of all field offices will greatly facilitate the formation of special
protective details. This system will include a computer-controlled wall
display and computerized storage and recall of every agent's present
and future work status, special skills, training, and past experience.
2. A mobile X-ray inspection system will facilitate the inspection of
baggage and parcels in connection with Secret Service protective responsibilities. The system is built into a Tradesman van and will allow
the operator to view a fiuoroscopic presentation of the packages. The
packages will be moved into and out of position on a conveyor belt,
thus allowing rapid inspection.
3. A unit to allow the rapid comparison of gold coins provides a
presentation of the coins magnified from 15 to 70 times actual size,
either full-view side by side, half-view, of each joined, or full-view
4. New high-strength steel gates designed in conjunction with personnel from the National Park Service will replace the present gates
at all entrances to the White House complex.
5. Both rigid armor and flexible ballistic armor for agents, configured to Division requirements, will be purchased.
I n fiscal 1975, the Communications Division expanded the Communications Center facility to meet the rapidly increasing volume of
messages and to prepare for increased foreign dignitary and candidate/nominee protective activities in 1976. In addition, radio communications were upgraded in 20 field offices.
The Liaison Division was very active during fiscal 1975, particularly at the U.S. Capitol, the Department of State, and other agencies,
regarding the visits of foreign dignitaries and visits of protectees
abroad. Also, the Division is working closely with the Office of Protective Forces and the appropriate office on Capitol Hill in preparation for activities at the U.S. Capitol during the 1976 Presidential
Investigative responsibilities

Counterfeiting.—Counterfeiters in fiscal 1975 produced $48.6 million in counterfeit U.S. currency, up 127 percent over fiscal 1974 and
$21 million higher than the previous record established in fiscal 1972.
.While losses to the public jumped $1.2 million to a-figure of $3.6
million (an increase of 49 percent), the Secret Service seized $45
million, 93 percent of total output, before it could be placed into circulation. This seizure figure represents an increase of 137 percent over
the past fiscal year and exceeds the previous high (fiscal 1971) by over
$21 million.
Of the $48.6 million in counterfeit currency reported during fiscal
1975, $39.3 million originated with counterfeiting conspiracies initiated during that fiscal year. A total of $37.9 million was seized be-



fore it could be passed on the public, and the plant operations
responsible for $37.3 million (95 percent) were successfully suppressed by the end of the fiscal year.
The suppression of one such plant operation began during November of 1974 when a person was arrested in Miami for passing a new
issue of counterfeit $20 Federal Eeserve notes. Pursuing leads resulting from that arrest, agents traced the counterfeits to a legitimate
printing firm located in Albany, Ga. One of the firm's owners, its
general manager, and the press foreman were arrested and charged
with manufacturing the notes. All were later convicted and received
prison terms ranging from 3 to 7 years. This conspiracy was responsible for producing over $4.9 million in counterfeit currency. Only
$3,180 was successfully passed on the public.
A second counterfeiting conspiracy successfully suppressed during
the current fiscal year first came to light in July of 1974 when a Los
Angeles doctor was questioned by authorities in Mexico City after
passing a single specimen of a new type of counterfeit $50 Federal
Eeserve note. The doctor claimed he had received the bill when he
cashed a check at the Los Angeles airport shortly before departing on
his trip. No further counterfeits of the type involved in the Mexico
City incident were passed during the next several months, and it was
felt that the case would have little significance. I n the latter part of
November, however, the administrator of a nursing home located in
Eedlands, Calif., reported he had found a large quantity of counterfeit notes hidden in one of the rooms. Over $3.1 million in counterfeit
currency, including a number of the Mexico City notes, were recovered.
Several items seized with the counterfeit notes were found to bear the
fingerprints of two persons who had been previously arrested by the
Secret Service in connection with a different counterfeiting scheme.
They admitted printing the counterfeits found in the nursing home
and identified the Los Angeles doctor, the nursing home administrator,
and a third party as being the financial backers of the operation. All
parties have since entered guilty pleas and have received sentences
ranging from 3 years' probation to 2 years in prison.
In addition, 25 other counterfeiting operations, each responsible for
producing more than $100,000 in counterfeit currency, were suppressed
during the current fiscal year.



Miami, Fla
St. Louis, Mo
Dallas, Tex
New Orleans, La.. .
Portland, Oreg.... .
Sycamore, HI
Houston, Tex
Cerritos, Calif....
Beverly, Mass
Bountiful, Utah... .
Cedar Rapids,
December.. San Antonio, Tex. December.. Hatboro, Pa
December.. Greeley, Colo

on the




December.. Winston-Salem,
December.. Lancaster, Calif... $23,940
February... Chattanooga,
February... Hackensack, N.J.. .613,820
Los Angeles, Calif. . 48,840
Ft. Lauderdale,
Boston, Mass
. 22,480
Las Vegas, N e v . . . 980
Salt Lake City,
113,080 May
Naples, Fla
. 62,580
159.770 June
Roanoke, Va

$9,960 $2,574,100
3,700 3,055,920





Check forgery.—During fiscal 1975, the Service received 78,148
checks for investigation, an increase of 21 percent over fiscal 1974. With
the Department of the Treasury having issued approximately 780
million checks during fiscal 1975, only 1 of every 10,500 checks paid
was referred to this Service for investigation.
Arrests for check forgery offenses increased from a previous record
of 5,465 in fiscal 1974 to a new^ record high of 6,602 in fiscal 1975. The
backlog of pending check cases increased 21 percent, from 35,006 to
42,478. This increase in backlog is due in part to the increase in referrals and to the number of cases pending judicial action.
The significant increase and improvement in the check forgery
arrest area may be attributed to the increase in the availability of manpower for assignment to this activity; the continued expansion of the
forgery squad system in the field offices; and the priority concentration
of the investigative effort in the area of those who forge and negotiate
two or more checks. Efforts in identifying check thieves and fences,
coupled with the early identification and arrest of multiple forgers before their activities can expand significantly, are the basic deterrents
which suppress the volume of cases.
Implementation of the supplemental security income program in
January 1974 only slightly increased the number of check forgery
cases referred in fiscal 1974; however, during fiscal 1975, the Service
experienced a significant increase in the number of forgery referrals
involving these checks—an additional 7,500 forged checks. Continued
increases in forged-check referrals involving supplemental security
income checks are anticipated.
Check forgery referrals occasioned by fraudulent I E S returns submitted to obtain refund checks and by thefts of checks from the Postal
Service, major postal facilities (e.g., military bases), disbursing offices, and issuing agencies continued to increase during fiscal 1975.
These multiple thefts have resulted in greater fencing activities and
additional multiple check forgery cases. The usual countermeasures, including undercover agent action, increased surveillance, and close liaison with other interested agencies, have again proved to be successful
in blunting the overall effect of these activities and schemes.
The initial impact of the social security and income tax rebate programs implemented during the last half of fiscal 1975 was reflected in
the rate of forged-check referrals to the Service during the last quarter of the year, which rose significantly over the "normal" referral rate
of 100 forged checks for every 1 million checks issued. The basic indicators, that is, the number of original checks recovered in the field prior
to being cashed, the number of field-originated forgery cases, the increased fencing activities involving checks, and the immediate appearance of the rebate checks in forgery activities, all point to continued increases in the number of forged-check investigations.
I n a recent forgery case, the proprietor of a jewelry store was arrested in Philadelphia for participating in a multiple check forgery
scheme along with seven other defendants. She accepted forged checks
and processed them through her business account from February
through June 1973. At least 85 Treasury checks, amounting to over
$21,000, were involved. A 56-count indictment was returned from the
Federal Grand Jury, Eastern District of Pennsylvania, charging the



defendants with forging and uttering U.S. Treasury checks, mail theftj
conspiracy, aiding and abetting, and transportation of stolen goods.
Seven of the deferidants pleaded guilty and the eighth was recommended for the deferred prosecution program, and will be sentenced in
the future. On October 7,1974, the jewelry store owner was given a 5year suspended sentence, placed on probation for 5 years, and ordered
to undergo imprisonment for a period of 90 days and make restitution
for $5,165.60. During September and October 1974, the remaining
defendants received sentences ranging from probation to 5 years' imprisonment.
Bond forgery.—Bond forgery investigations decreased during fiscal
1975, with 12,645 bond investigations being opened compared with
13,163 in fiscal 1974,13,849 in fiscal 1973, and 15,905 in fiscal 1972. This
decline may be attributed to the increased early identification, arrest,
and incarceration of prolific bond forgers. Also, an ever-increasing
number of bonds were recovered prior to being forged and redeemed.
Bonds, stolen throughout the country by various schemes, including
bank robbery, office and house burglary, and mail theft, repeatedly arid
rapidly appear in the hands of known fences of stolen securities iri
large metropolitan areas. Many of those individuals employ part-time
forgers, operating on a commission basis, who travel across the country forging and cashing the stolen bonds.
At the end of the fiscal year, there were 681,118 stolen bonds, representing a face value of $46,707,450, entered into the National Crime
Information Center (NCIC) by the Secret Service, compared with
approximately 600,000 bonds a t the end of fiscal 1974. Each of these
bonds represents a potential loss to the Government if presented for
During fiscal 1975,199 persons were arrested for bond forgery, just
urider the record established in fiscal 1974, when 210 persons were
arrested. Investigation established that many of those arrested have
connections with known organized crime figures.
Prior to forgery and redemption, the Secret Service recovered
10,437 stolen borids with a face value of $990,995, most of which were
returned directly to the registered owners.
iri August 1972, the New York office commenced one of the largest
bond forgery and conspiracy investigations in the Service's history.
The New York County district attorney's office notified the New
York office that it was investigating a group of individuals involved
in a conspiracy to forge and utter stolen U.S. savings bonds and other
securities. These bonds related to numerous pending cases in the
New York office, and further investigation was coordinated with the
district attorney's office.
As a result of confidential information, alerts to banks on specific
stolen bonds, inquiry by the banks on other suspicious transactions,
and identifications received from banks on suspected forgers, numerous
persons were arrested. These, in turn, provided valuable information
indicating that stolen bonds were distributed by fences to forgers workirig ori a percentage basis. On November 8,1973, all of the individuals
were arrested with the exception of two who became fugitives. Final
disposition of this case did not occur until April 1975. Three of the
indicted individuals were placed on probation for 3 years and the

588-395 O - 75 18
Federal Reserve Bank of St. Louis



remaining individuals received prison terms ranging from 30 months
to 5 years. The main fence received two concurrent 5-year terms and a
$5,000 fine. Conservative estimates are that 2,500 bonds with a face
value of $504,000 were stolen, forged, and redeemed in this case.
There was a combined total of 62 State and Federal arrests for 46
defendants. Bonds from more than^ 40 bond larceny cases that this
Service has investigated (i.e., cases involving a minimum of $5,000)
appeared in this case, along with bonds from smaller burglaries. Included were bonds taken in post bffice burglaries, armed robbery of a
bank, and mail thefts in many different States.
Identification Branch.—The Identification Branch of the Special
Investigations and Security Division, consisting of a Questioned Document Section and a Latent Print Section, serves all field offices by
conducting technical examinations of handwriting, handprinting,
typewriting, fingerprints, palmprints, striations on counterfeit currency, altered documents, and other types of physical evidence.
During the 12-month period ending May 31, 1975, members of the
Identification Branch conducted examinations in 6,846 cases involving
523,498 exhibits. This resulted in the identification of 2,467 suspects
and a total of 293 court appearances to furnish expert testimony.
Treasury Security Force

The Treasury Security Force, a uniformed branch of the U.S. Secret
Service, protects the Main Treasury complex and participates in providing security to the White House.
During fiscal 1975, the Force expended 3,236 hours in an intensive
inservice training program. Forty felony arrests, compared with 36
in fiscal 1974, were made by the Force; most of the arrests were effected
in the Cash Eoom as individuals attempted to cash forged checks
valued at $8,000.
Organized crime

The Secret Service provided 17 special agents to 16 organized crime
strike forces located throughout the United States. One intelligence
research specialist assigned to headquarters coordinated and disseminated organized crime intelligence information to Secret Service field
During fiscal 1975, these agents were involved in 95 organized crime
cases, representing 25,739 man-hours. Total man-hours expended in this
category by Service personnel exceeded 91,949, or 44.2 man-years.

There were 197,000 man-hours of training conducted by the Office
of Training for personnel engaged in investigative, protective, and
administrative functions. I n addition, 10,000 man-hours of interagency
training and 6,000 man-hours of nongovernment training were completed for a total of 213,000 man-hours.
The Secret Service provided all firearms training for students of
the Consolidated Federal Law Enforcement Training Center (302
students from the Criminal Investigator School and 641 students from
the Police School). I n addition, firearms training was provided to
1,074 employees of other agencies as follows: 10 special agents of the
Bureau of Alcohol, Tobacco and Firearms, 146 Customs employees,
525 U.S. P a r k Police Officers, 16 special agents of the U.S. Information



Agency, 89 Internal Eevenue Service employees, 26 special agents of
the Department of Commerce, 21 U.S. Marshals, 40 U.S. Park Eangers,
12 employees of the Department of Labor, 8 employees of the Department of the Interior, and 181 couriers for the White House Communications Agency. Firearms training was alsp provided for all the enforcement personnel of the Secret Service.
On January 2, 1975, a Training Eesource Center was opened, providing Secret Service employees with self-paced and individualized
training programs. The Center also contains materials such as books,
magazines, and programmed texts for research and study. Approximately 220 employees enrolled during the first 6 months of operation.
With the development of new programs and the acquisition of additional audiovisual equipment, the Center will expand its services to
meet a wide variety of training needs of Secret Service employees
at all levels.
The management objective of training one-third of the journeyman
special agents to act as supervisors on temporary protective assignments for campaign '76 was completed 6% months early. A total of
356 special agents completed this formal training course.
Two dignitary protective seminars were completed and 21 additional seminars are scheduled for fiscal 1976. Forty command level
police officers completed this 2-week program during fiscal 1975. The
first week is conducted by the Secret Service and the second by the
Plans continued to produce models of sites normally encountered
on protective assignments for use in training special agents.

The automated property accounting system designed during fiscal
1974 was installed and placed into operation. All accounting requirements of acquisition cost, depreciation, and disposal of Government
capitalized assets are supplied by this system.
During fiscal 1975, a change in cost accumulation of the automated
accounting system was designed and approved for fiscal 1976. With
this accumulation system, reports, both recurring and projected, will
be expedited due to the system's alinement with all phases of the
The Personnel Division established a formalized personnel management assistance program during the past year. Visits were made
to 11 field offices, and more limited surveys were performed in other
field offices and headquarters divisions, with the purpose of assuring
proper classification of positions, effective staffing, and overall sound
personnel practices.
A 2-year administrative intern program was initiated in the Office
of Administration. This program was designed to provide each intern
with a thorough working knowledge of the Secret Service administrative divisions. The first year, each intern will participate in rotating
assignments throughout the various administrative divisions. The
second year, each intern will receive specialized training in one diyision as determined by the needs of the Service and the individual interest and performance of the intern. At the conclusion of the 2 years,
the interns will receive permanent assignments within the Office of




I n fiscal 1975, the effectiveness of the Office of Inspection was
enhanced by the assignment of lower graded special agents to relieve
the Inspectors and Assistant Inspectors of many administrative functions of the inspection teams and to assist in special investigations.
Also, teams inspecting medium to larger offices of the iService were
restructured to include supervisors, senior special agents, and key
administrative personnel drawn from offices other than the one being
inspected. This gave better balance to the teams and permitted more
inspections within the year.
Legal counsel
During fiscal 1975, the Office of Legal Counsel drafted memorandums, reports, and legal opinions on the following: Proposed
legislation—44; inquiries from other agencies—^^29; litigation reports
for the Department of Justice—20; interpretation of protection laws—
2 1 ; interpretation of counterfeit laws—18; interpretation of forgery
laws—11; petitions for remission of forfeiture of seized equipment—
66; administrative tort claims involving employees of the U.S. Secret
Service—109; cases involving the reproduction of genuine U.S. and
foreign currency—1,083; Training Division projects—31; Secret
Service personnel matters—10.
I n December 1974, the Secret Service submitted five legislative proposals for consideration by the Secretary of the Treasury. The first of
these would amend 18 U.S.C. 871, "Threats against the President and
successors to the Presidency," so that, in addition to the protection
presently provided concerning threats made against the President and
successors to the Presidency, other persons authorized protection by
the Secret Service would be covered as to threats made against them.
The second proposal would amend 18 U.S.C. 475, "Imitating obligations or securities; advertisements," to clarify prohibitions against
the reproduction of obligations and securities of the United States and
foreign governments.
The Service also proposed to amend 18 U.S.C. 495, "Contracts, deeds,
and powers of attorney," to add a misdemeanor to the basic feloriy
charge under section 495, which the Secret Service utilizes to investigate and prosecute individuals who utter, publish, and forge Government obligations. I n a typical case involving the uttering and forging
of a Government check, the penalty, regardless of the amount of the
check, is $1,000 fine or imprisonment for 10 years, or both. This proposal would provide that, for forged writings where the face value
does not exceed $100, the penalty would be a fine of not more than
$100 or imprisonment for not more than 1 year, or both.
Another draft proposal would amend 18 U.S.C. 473 to provide Federal criminal penalties for the theft of Government obligations of a
value of $5,000 or more, and Federal criminal penalties for the possession and sale of such obligations, regardless of the value.
Lastly, the Secret Service proposed t o amend 18 U.S.C. 3056, "Secret
Service powers,'' to provide statutory authorization for U.S. S^r.^t
Service protection of individuals not specified in existing legislatiori,
arid to niodify, and in some cases eliminate, protection now prescribed.



There are presently 58 lawsuits pending in which the Secret Service
is a party. These cases involve, among others, the Federal Tort Claims
Act and alleged violations of civil rights stemming from the protective and investigative responsibilities of the Service.
On May 4, 1975, 11 Secret Service agents, including the Director,
were voluntarily dismissed from a suit in Charlotte, N . C , which involved alleged violations of civil rights when the plaintiffs were denied
entry to a program attended by the President honoring Billy Graham.
Similar major lawsuits against the officials of the Secret Service are
pending in San Diego and Cleveland.





Public Debt Operations, Regulations, and Legislation
Exhibit 1.—Treasury notes
A Treasury circular and supplement covering an auction of Treasury notes for
cash with prices established through competitive bidding are reproduced in this
exhibit. Circulars pertaining to other note offerings during fiscal 1975 are similar
in form and therefore are not reproduced in this report. However, essential
details for each offering are summarized in the table in this exhibit, and allotment data for the notes will be shown in table 37 in the Statistical Appendix.
During the year there were no offerings in which holders of maturing securities
were given preemptive rights to exchange their holdings for new notes.

Washington, May 2,1976.

1. The Secretary of the Treasury, pursuant to the authority of the Second
Liberty Bond Act, as amended, invites tenders on a yield basis for $2,750,000,000,
or thereabouts, of notes of the United States, designated Treasury Notes of Series
E-1978. The interest rate for the notes will be determined as set forth in Section
III, paragraph 3, hereof. Additional amounts of these notes may be issued at the
average price of accepted tenders to Government accounts and to Federal Reserve
Banks for themselves and as agents of foreign and international monetary
authorities. Tenders wiU be received up to 1:30 p.m.. Eastern Daylight Saving
time, Tuesday, May 6, 1975, under competitive and noncompetitive bidding, as set
forth in Section III hereof. The 6 percent Treasury Notes of Series B-1975 and
5% percent Treasury Notes of Series F-1975, maturing May 15, 1975, will be
accepted at par in payment, in whole or in part, to the extent tenders are allotted by the Treasury.

, 1. The notes will be dated May 15,1975, and will bear interest from that date,
payable on a semiannual basis on February 15 and August 15, 1976, and thereafter on February 15 and August 15 in each year until the principal amount becomes payable. They will mature August 15, 1978, and will not be subject to call
for redemption prior to maturity.
2. The income derived from the notes is subject to all taxes imposed under the
Internal Revenue Code of 1954. The notes are subject to estate, inheritance, gift
or other excise taxes, whether Federal or State, but are exempt from all taxation now or hereafter imposed on the principal or interest thereof by any State,
pr any of the possessions of the United States, or by any local taxing authority.
3. The notes will be acceptable to secure deposits of public moneys. They will
not be acceptable in payment of taxes.
4. Bearer notes with interest coupons attached, and notes registered as to
principal and interest, will be issued in denominations of $5,000, $10,000, $100,000
and $1,000,000. Book-entry notes will be available to eligible bidders in multiples
of those amounts. Interchanges of notes of different denominations and of coupon
and registered notes, and the transfer of registered notes will be permitted.
5. Thie notes will be subject to the general regulations of the Department of
the Treasury, now or hereafter prescribed, governing United States notei^.

1. Tenders will be received at Federal Reserve Banks and Branches and at the
Bureau of the Public Debt, Washington, D.C. 20226, up to the closing hour, 1:30
p.m.. Eastern Daylight Saving time, Tuesday, May 6, 1975. Each tender must




state the face amount of notes bid for, which must be $5,000 or a multiple thereof,
and the yield desired, except that in the case of noncompetitive tenders the term
"noncompetitive" should be used in lieu of a yield. In the case of competitive
tenders, the yield must be expressed in terms of an annual yield, with two decimals, e.g., 7.11. Fractions may not be used. Noncompetitive tenders from any one
bidder may not exceed $500,000.
2. Commercial banks, which for this purpose are defined as banks accepting
demand deposits, and dealers who make primary markets in Government securities and report daily to the Federal Reserve Bank of New York their positions
with respect to Government securities and borrowings thereon, may submit
tenders for account of customers provided the names of the customers are set
forth in such tenders. Others will not be permitted to submit tenders except
for their own account. Tenders will be received without deposit from banking
institutions for their own account. Federally-insured savings and loan associations. States, political subdivisions or instrumentalities thereof, public pension
and retirement and other public funds, international organizations in which the
United States holds membership, foreign central banks and foreign States,
dealers who make primary markets in Government securities and report daily
to the Federal Reserve Bank of New York their positions with respect to Government securities and borrowings thereon, and Government accounts. Tenders
from others must be accompanied by payment (in cash or the notes 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 yield range of accepted bids. Those submitting competitive tenders
will be advised of the acceptance or rejection thereof. In considering the acceptance of tenders, those with the lowest yields will be accepted to the extent required to attain the amount offered. Tenders at the highest accepted yield will be
prorated if necessary. After the determination is made as to which tenders are
accepted, an interest rate will be established at the nearest % of 1 percent necessary to make the average accepted price 100.000 or less. That will be the rate of
interest that will be paid on all of the notes. Based on such interest rate, the
price on each competitive tender allotted will be determined and each successful
competitive bidder will be required to pay the price corresponding to the yield bid.
Price calculations will be carried to three decimal places on the basis of price per
hundred, e.g., 99.923, and the determinations of the Secretary of the Treasury
shall be final. The Secretary of the Treasury expressly reserves the right to accept
or reject any or all tenders, in whole or in part, including the right to accept
tenders for more or less than the $2,750,000,000 of notes offered to the public,
and his action in any such respect shall be final. Subject to these reservations,
noncompetitive tenders for $500,000 or less without stated yield from any one
bidder will be accepted in full at the average price (in three decimals) of accepted
competitive tenders.

1. Settlement for accepted tenders in accordance with the bids must be made
or completed on Or before May 15, 1975, at the Federal Reserve Bank or Branch
or at the Bureau of the Public Debt. Payment must be in cash, notes referred
to in Section I (interest coupons dated May 15, 1975, should be detached), in
other funds immediately available to the Treasury by May 15, 1975, or by check
drawn to the order of the Federal Reserve Bank to which the tender is submitted, or the United States Treasury if the tender is submitted to it, which
must be received at such Bank or at the Treasury no later than: (1) Monday,
May 12, 1975, if the check is drawn on a bank in the Federal Reserve District of
the Bank to which the check is submitted, or the Fifth Federal Reserve District
in case of the Treasury, or (2) Friday, May 9, 1975, if the check is drawn on a
bank in another district. Checks received after the dates set forth in the preceding sentence will not be accepted unless they are payable at a Federal Reserve
Bank. Payment will not be deemed to have been completed where registered
notes are requested if the appropriate identifying number as required on tax
returns and other documents submitted to the Internal Revenue Service (an
individual's social security number or an employer identification number) is not
furnished. In every case where full payment is not completed, the payment with



the tender up to 5 percent of the amount of notes allotted shall, upon declaration
made by the Secretary of the Treasury in his discretion, be forfeited to the United
States. When payment is made with notes, a cash adjustment will be made to or
required of the bidder for any difference between the face amount of notes submitted and the amount payable on the notes allotted.
2. Delivery of notes in bearer form will be made on or about May 27, 1975.
Purchasers of bearer notes may elect to receive interim certificates on May 15,
1975, which will be exchangeable for the notes when available at any Federal
Reserve Bank or Branch or at the Bureau of the Public Debt, Washington, D.C.
20226. The interim certificates must be returned at the risk and expense of the

1. Registered notes tendered as deposits and in payment for notes allotted hereunder are not required to be assigned if the notes are to be registered in the same
names and forms as appear in the registrations or assignments of the notes surrendered. Specific instruction for the issuance and delivery of the notes, signed by
the owner or his authorized representative, must accompany the notes presented.
Otherwise, the notes should be assigned by the registered payees or assignees
thereof in accordance with the general regulations governing United States securities, as hereinafter set forth. Notes to be registered in names and forms different
from those in the inscriptions or assignments of the notes presented should be
assigned to "The Secretary of the Treasury for Treasury Notes of Series E-1978
in the name of (name and taxpayer identifying number)." If notes in coupon form
are desired, the assignment should be to "The Secretary of the Treasury for
coupon Treasury Notes of Series E-1978 to be delivered to
Notes tendered in payment should be surrendered to the Federal Reserve Bank or
Branch or to the Bureau of the Public Debt, Washington, D.C. 20226. The notes
must be delivered at the expense and risk of the holder.

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.

Secretary of the Treasury,

Washington, May 7, 1975. ,
The Secretary of the Treasury announced on May 6,1975, that the interest rate
on the notes described in Department Circular—Public Debt Series—No. 13-75,
dated May 2, 1975, will be 7% percent per annum. Accordingly, the notes are
hereby redesignated 7% percent Treasury Notes of Series E-1978. Interest on the
notes will be payable at the rate of 7% percent per annum.

DAVID Mosso,

Beputy Fiscal Assistant Secretary.

Summary of information pertaining to Treasury notes issued during fiscal year 1975
Date of



Treasury notes issued
(all auctioned for cash)

Accepted tenders
Type of
auction *






July 31
July 31
Sept. 16
Oct. 15
Oct. 30
Oct. 30
Dec. 13


Aug. 1
Aug. 1
Sept. 16
Oct. 15
Oct. 31
Oct. 31
Dec. 16

9-74,10-74 9 percent Series D-1977
8-74,10-74 9 percent Series B-1980
8 ^ percent Series J-1976
7J^ percent Series D-1979
14-74,15-74 7M percent Series E-1977
13-74,15-74 7K percent Series B-1981
7M percent Series K-1976



3 100.349
3 99.921
100. 000
3 100.183


Dec. 20

18-74 Dec. 23

17-74 7% percent Series D-1979





Dec. 20
Jan. 22
Jan. 22
Feb. 11
Feb. 11

17-74 Dec. 23
2-75 Jan. 23
3-75 Jan. 23
5-75 Feb. 12
6-75 Feb. 12

18-74 8 percent Series H-1976


3 100.91






7-75 Mar.




71^ percent Series D-1978
7 ^ percent Series C-1981
5 ^ percent Series L-1976.
6 percent Series F-1977

8-75 7K percent Series B-1981
7-75 6 percent Series M-1976
10-75 6V^ percent Series G-1977
7H percent Series N-1976
7H percent Series H-1977
14-75,15-75 7H percent Series E-1978
13-75,15-75 8 percent Series A-1982
6% percent Series 1-1977
6V$ percent Series 0-1976
6}4 percent Series J-1977...


3 99.814
3 99.881

99. 787



Aug. 15
Aug. 15
Sept. 30
Nov. 6
Nov. 15
Nov. 15
Dec. 31





date 2


Aug. 6
Aug. 7
Sept. 24
Oct. 23
Nov. 6
Nov. 7
Dec. 23

Aug. 15
Aug. 15
Sept. 30
Nov. 6
Nov. 15
Nov. 15
Dec. 31







s 101.51




3 100.234
8 100.009
3 100.001
3 100. 212
3 99.924
3 100.000

99. 650

* Some issues of notes were auctioned by the "price" method, with the interest rate
being announced prior to the auction, and bidders were required to bid a price.
Other auctions were held by the "yield" method in which case bidders were reciuired
to bid a yield; after tenders were allotted, an interest rate for the notes was established at the nearest J4 of 1 percent necessary to make the average accepted price
100.000 or less.
2 Payment could not be made through Treasury tax and loan accounts for any of
the issues.
3 Relatively small amounts of bids were accepted at a price or prices above the high




1,000 Nov. 6* May 15,1979 Dec. 30
5,000 Apr. 9 6 Mar. 31,1976 Jan. 2
1,000 Feb. 18 May 15,1978 Jan. 28
1,000 Feb. 18 Feb. 15,1981 Jan. 29
5,000 Mar. 3 Aug. 31,1976 Feb. 19
5,000 Mar. 3 Feb. 28,1977 Feb. 19
1,000 Nov. 15« Nov. 15,1981 Mar. 11
5,000 Mar. 25 May 31.1976 Mar. 13
5,000 Mar. 31 Mar. 31.1977 Mar. 18
5,000 Apr. 8 Nov. 30.1976 Apr. 1
5,000 Apr. 30 Apr. 30.1977 Apr. 15
5,000 May 15 Aug. 15.1978 May 6
1,000 May 15 May 15,1982 May 7
5,000 May 27 May 31,1977 May 14
5,000 June 6 Oct. 31.1976 May 22
5,000 June 30 June 30.1977 June 17







Mar. 19





shown. However, the higher price or prices are not shown in order to prevent an
appreciable discontinuity in the range of prices, which would make it
* Interest was payable from Jan. 7,1975.
5 Interest was payable from Jan. 9,1975.
8 Interest was payable from Mar. 19,1975.
NOTE.—The maximum amount that could be bid for on a noncompietitive basis
for each issue was $500,000.




Exhibit 2.—^Treasury bonds
A Treasury circular and supplement covering an auction of Treasury bonds for
cash are reproduced in this exhibit. Circulars pertaining to other bond offerings
during fiscal 1975 are similar in form and therefore are not reproduced in this
report. However, essential details for each offering are summarized in the table
in this exhibit, and allotment data for the bonds will be shown in table 38 in the
Statistical Appendix. During the year there were no offerings in which holders
of maturing securities were given preemptive rights to exchange their holdings
for new bonds.

WasMngton, January 23, 1975.

1. The Secretary of the Treasury, pursuant to the authority of the Second
Liberty Bond Act, as amended, invites tenders on a yield basis for $750,000,000, or
thereabouts, of bonds of the United States, designated Treasury Bonds of 19952000. The interest rate for the bonds will be determined as set forth in Section III,
paragraph 3, hereof. Additional amounts of these bonds may be, issued at the
average price of accepted tenders to Government accounts and to Federal Reserve
Banks for themselves and as agents of foreign and intemational monetary
authorities. Tenders will be received up to 1:30 p.m., Eastern Standard time,
Thursday, January 30, 1975, imder competitive and noncompetitive bidding, as
set forth in Section III hereof. The 5% percent Treasury Notes of Series A-1975
and 5% percent Treasury Notes of Series E-1975, maturing February 15, 1975,
will be accepted at par in payment, in whole or in part, to the extent tenders are
allotted by the Treasury.
2. Defered payment for 50 percent of the amount of bonds allotted may be made
as provided in Section IV hereof. Delivery of bearer bonds will be made on.February 18,1975, except that deUvery of that portion of the bonds on which payment is
deferred will be made on March 3,1975.

1. The bonds will be dated February 18, 1975, and will bear interest from that
date, payable on a semiannual basis on August 15,1975, and thereafter on February 15 and August 15 in each year until the principal amount becomes payable.
They will mature February 15, 2000, but may be redeemed at the option of the
United States on and after February 15, 1995, in whole or in part, at par and
accrued interest on any interest day or days, on 4 months* notice of redemption
given in such manner as the Secretary of the Treasury shall prescribe. In case
of partial redemption, the bonds to be redeemed will be determined by such
method as may be prescribed by the Secretary 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,
OT any of the possessions of the United States, or by any local taxing authority.
3. The bonds will be acceptable to secure deposits of pubUc 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 $1,0(X), $5,000, $10,000,
$100,000 and $1,000,000. Book-entry bonds will be available to eligible bidders in
multiples of those amounts. Interchanges of bonds of different denominations and
of coupon and registered bonds, and the transfer of registered bonds will be
5. The bonds will be subject to the general regulations of the Department of
the Treasury, now or hereafter prescribed, governing United States bonds.



1. Tenders wiU be received at Federal Reserve Banks and Branches and at the
Bureau of the PubUc Debt, Washington, D.C. 20226, up to the closing hour, 1:30
p.m.. Eastern Standard time, Thursday, January 30,1975. Each tender must state
the face amount of bonds bid for, which must be $1,000 or a multiple thereof,
and the yield desired, except that in the case of noncompetitive tenders the term
"noncompetitive" should be used in lieu of a yield. In the case of competitive
tenders, the yield must be expressed in terms of an annual yield with two
decimals, e.g., 7.11. Fractions may not be used. Noncompetitive tenders from any
one bidder may not exceed $500,0(X).
2. Commercial banks, which for this purpoise 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 fund's, intemational organizations in which the United States holds membership, foreign central banks and foreign States, dealers who make primary
markets in Govemment securities and report daily to the Federal Reserve Bank
of New York their positions with respect to Government securities and borrowings thereon,*and Govemment accounts. Tenders from others must be accompanied by payment (in cash or the notes referred to in Section I which will be
accepted at par) of 5 percent of the face amount of bonds appUed 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 yield range of accepted bids. Those submitting competitive tenders
will be advised of the acceptance or rejection thereof. In considering the acceptance of tenders, those with the lowest yields will be accepted to the extent
required to attain the amount offered. Tenders at the highest accepted yield will
be prorated if necessary. After the determination is made as to which tenders
are accepted, an interest rate will be established at the nearest Vs of one percent
necessary to make the average accepted price 100.00 or less. That will be the
rate of interest that will be paid on all of the bonds. Based on such interest rate,
the price on each competitive tender allotted will be determined and each successful competitive bidder will be required to pay the price corresponding to the
yield bid. Price calculations will be carried to three decimal places on the basis
of price per hundred, e.g., 99.923, and the determinations of the Secretary of the
Treasury shall be final. The Secretary of the Treasury expressly reserves the
right to accept or reject any or all tenders, in whole or in part, including the
right to accept tenders for more or less than the $750,000,000 of bonds offered
to the public, and his action in any such respect shall be final. Subject to these
reservations, noncompetitive tenders for $500,000 or less without stated yield from
any one bidder will be accepted in full at the average price (in three decimals)
of accepted competitive tenders.
4. All bidders are required to agree not to purchase or 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 Standard
time, Thursday, January 30,1975.
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.

1. Settlement for accepted tenders in accordance with the bids must be made
or completed on or before February 18, 1975, at the Federal Reserve Bank or
Branch or at the Bureau of the Public Debt, except that a bidder may elect to
defer payment for not more than 50 percent of the amount of bonds allotted until
March 3, 1975. Payment must be in cash, notes referred to in Section I (interest
coupons dated February 15, 1975, should be detached), in other funds immediately available to the Treasury by February 18, or by check drawn to the
order of the Federal Reserve Bank to which the tender is submitted, or the
United States Treasury if the tender is submitted to it, which must be received
at such Bank or at the Treasury no later than: (1) Tuesday, February 11, 1975,



if the check is drawn on a bank in the Federal Reserve District of the Bank to
which the check is submitted, or the Fifth Federal Reserve District in the case
of the Treasury, or (2) Monday, February 10, 1975, if the check is drawn on a
bank in another district. Checks received after the dates set forth in the preceding sentence will not be accepted unless they are payable at a Federal Reserve
Bank. Accrued interest from February 18 to March 3, 1975, will be charged on
the face amount of bonds on which payment is deferred, at the coupon yield
established for the bonds. Where partial payment for bonds allotted is to be
deferred, delivery of 5 percent of the total par amount of bonds allotted, adjusted to the next higher $1,000, will be withheld from all bidders required to
submit a 5 percent payment with tenders, until payment for the total amount
allotted has been completed. Payment will not be deemed to have been completed
where registered bonds are requested if the appropriate identifying number as
required on tax returns and other documents submitted to the Intemal 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 wi'th the tender up to 5 percent of the amount of bonds allotted shall,
upon declaration made by the Secretary of the Treasury in his discretion, be forfeited to the United States. When payment is made with notes, a cash adjustment
will be made to or required of the bidder for any difference between the face
amount of notes submitted and the amount payable on the bonds allotted.

1. Registered notes tendered as deposits and in payment for bonds allotted
hereunder are not required to be assigned if the bonds are to be registered in
the same names and forms as appear in the registrations or assignments of the
notes surrendered. Specific instructions for the issuance and delivery of the
bonds, signed by the owner or his authorized representative, must accompany
the notes presented. Otherwise, the notes should be assigned by the registered
payees or assignees thereof in accordance with the general 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
notes presented should be assigned to "The Secretary of the Treasury for Treasury Bonds of 199'5-2000 in the name of (name and taxpayer identifying number)." If bonds in coupon form are desired, the assignment should be to "The
Secretary of the Treasury for coupon Treasury Bonds of 1995-2000 to be delivered to
" Notes tendered in payment
should be surrendered to the Federal Reserve Bank or Branch or to the Bureau
of the Public Debt, Washington, D.C. 20226. The notes must be deUvered at the
expense and risk of the holder.

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 deUvery 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.

Secretary of the Treasury.


Washington, January 31,1975.
The Secretary of the Treasury announced on January 30, 3975, that the interest
rate on the bonds described in Department Circular—Public Debt Series—No.
4-75, dated January 23, 1975, will be 7% percent per annum. Accordingly, the
bonds are hereby redesignated 7% percent Treasury Bonds of 1995-2000. Interest
on the bonds will be payable at the rate of 778 percent per annum.


Fiscal Assistant Secretary.



Summary of information pertaining to Treasury bonds issued during fiscal year 1976
Date of
an- nounce- No.
July 31
Oct. 30
Jan. 22
Mar. 12
May 1


Treasury bonds issued (all auctioned
for cash)

10-74 Aug. 1
8-74,9-74 S}4 percent of 1994-99
15-74 Oct. 31 "13-74,14-74 8J^ percent of 1994-99..^._
2-75,3-75 7]4 percent of 1995-2000
4-75 Jan. 23
9-75 SH percent of 1990
10-75 Mar. 13
15-75 May 2 13-75,14-75 8K percent of 2000-05

Type of

. . . „ Yield..

1 Some issues of bonds were auctioned by the "price" method, with the interest
rate being announced prior to the auction, and bidders were required to bid a price.
Other auctions were held by the "3deld" method in which bidders were required to
bid a yield; after tenders were allotted, an interest rate for the borids was established
at the nearest 3^ of 1 percent necessary to make the a v e r s e accepted price 100.000 or
2 Payment could not be made through Treasury tax and loan accounts for any of
the issues.
3 Relatively small amounts of bids were allotted at a price or prices above the high
shown. However, the higher price or prices are not shown in order to prevent an appreciable discontinuity in the range of prices, which would make it misrepresentative.

Accepted tenders




3 99.76


3 100.826
3 100.000




date 2

May 15* May 15,1999 Aug. 8 Aug. 15
May 158
Nov. 8 ^Nov. 15

99.084 Feb. 18 Feb' 15,2000 Jan. 30 7 Feb. 18
98.947 Apr. 7 May 15,1990 Mar. 20 Apr. 7
99.232 May 15 May 15,2005 May 8 8 May 15

* Interest was payable from Aug. 15,1974.
5 Interest was payable from Nov. 15,1974.
8 Payment coi:Ud be deferred until Dec. 3,1974, for not more than 50 percent of the
amount of bonds allotted.
" Payment could be deferred until Mar. 3,1975, for not more than 50 percent of the
amount of bonds allotted.
8 Pajmient could be deferred until June 2,1975, for up to 100 percent of the amount
of bonds allotted.
NOTE.—The maximum amount that could be bid for on a noncompetitive basi
for each issue was $500,000. All issues had a minimum denomination of $1,000.







Exhibit 3.—Treasury bills
During the fiscal year there were 52 weekly issues of 13-week and 26-week bills
(the 13-week bills represent additional amounts of bills with an original maturity
of 26 weeks), 13 52-week issues, 1 299-day issue, 1 292-day issue, 1 227-day issue,
3 issues of tax anticipation series, and an issue of a strip of weekly bills. 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. Data for each issue during the fiscal
year appears in table 39 in the Statistical Appendix.
The Department of the Treasury, by this public notice, invites tenders for two
series of Treasury bills to the aggregate amount of $5,500,000,000, or thereabouts,
to be issued June 5,1975, as foUows:
91-day bills (to maturity date) in the amount of $2,800,000,000, or thereabouts,
representing an additional amount of bills dated March 6, 1975, and to mature
September 4, 1975 (CUSIP No. 912793 XM3), originally issued in the amount of
$2,500,980,000, the additional and original bills to be freely interchangeable.
182-day bills, for $2,700,000,000, or thereabouts, to be dated June 5, 1975, and
to mature December 4,1975 (CUSIP No. 912793 YA8).
The bills will be issued for cash and in exchange for Treasury bills maturing
June 5, 1975, outstanding in the amount of $4,805,505,000, of which Government
accounts and Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,314,740,000. These accounts may exchange bills they hold for the bills now being offered at the average
prices of accepted tenders.
The bills will be issued on a discount basis nnder competitive and noncompetitive bidding, and at maturity their face amount will be payable without interest.
They wiU be issued in bearer form in denominations of $10,000, $15,000, $50,000,
$100,000, $500,000 and $1,000,000 (maturity value), and in book-entry form to
designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to onethirty p.m.. Eastern Daylight Savings time, Monday, June 2, 19 i 5. Tenders will
not be received at the Department of the Treasury, Washington. Each tender
must be for a minimum of $10,000. Tenders over $10,000 must be in multiples of
$5,000. In the case of competitive tenders the price offered must be expressed on
the basis of 100, with not more than three decimals, e.g., 99.925. Fractions may
not be used.
Banking institutions and dealers who make primary markets in Government
securities and report daily to the Federal Reserve Bank of New York their positions with respect to Government securities and borrowings thereon may submit
tenders for account of customers provided the names of the customers are set
forth in such tenders. Others wiU not be permitted to submit tenders except for
their own account. Tenders will be received without deposit from incorporated
banks and trust companies and from responsible and recognized dealers in investment securities. Tenders from others must be accompanied by payment of 2 percent of the face amount of bills applied for, unless the tenders are accompanied
by an express guaranty of payment by an incorporated bank or trust company.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids. Those submitting competitive tenders
will be advised of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or reject any or aU tenders, in
whole or in part, and his action in any such respect shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $500,000 or less without
stated price from any one bidder will be accepted in full at the average price (in
three decimals) of accepted competitive bids for the respective issues. Settlement
for accepted tenders in accordance with the bids must be made or completed at
the Federal Reserve Bank or Branch on June 5,1975, in cash or other immediately
available funds or in a like face amount of Treasury bills maturing June 5, 1975.
Cash and exchange tenders will receive equal treatment. Cash adjustments will
be made for differences between the par value of maturing bills accepted in
exchange and the issue price of the new biUs.

Digitized for588-395 0 - 7 5 - 1 9



Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954
the amount of discount at which bills issued hereunder are sold is considered to
accrue when the bills are sold, redeemed or otherwise disposed of, and the bills
are excluded from consideration as capital assets. Accordingly, the owner of
bills (other than life insurance companies) issued hereunder must include in his
Federal income tax return, as ordinary gain or loss, the difference between the
price paid for the bills, whether on original issue or on subsequent purchase,
and the amount actually received either upon sale or redemption at maturity
during the taxable year for which the return is made.
Department of the Treasury Circular No. 418 (current revision) and this notice
prescribe the terms of the Treasury bills and govern the conditions of their issue.
Copies of the circular may be obtained from any Federal Reserve Bank or
Tenders for $2.8 bilUon of 13-week Treasury biUs and for $2.7 bilUon of 26-week
Treasury bills, both series to be issued on June 5, 1975, were opened at the
Federal Reserve Banks today. The details are as follows:
13-week bills maturing
Sept. 4, 1975

Range of accepted
competitive bids

26-week bills maturing
Dec. 4, 1975





2 98.680
3 98.664




4 97.198




1 Equivalent coupon-issue yield.
2 Excepting one tender of $30,000.
3 Tenders at the low price for the 13-week bills-were allotted 24 percent.
1 Tenders at the low price for the 26-week bills were allotted 91 percent.

Total tenders applied for and accepted by Federal Reserve districts
13-week bills

New York
St. Louis
Kansas City
San Francisco

26-week bills







1,724,080,000 •




2 2,700,190,000


1 2,801,240,000

1 Includes $445,850,000 noncompetitive tenders from the public.
2 Includes $158,420,000 noncompetitive tenders from the public.




Exhibit 4.—Department Circular, Public Debt Series No. 1-63, January 10, 1963,
Amendment, regulations governing United States retirement plan bonds

Washington, October 2, 1974L I M I T A T I O N ON


Section 341.5 of Department of the Treasury Circular, Public Debt Series No.
1-63, dated January 10, 1963, as amended (31 OFR Part 341), is hereby further
amended to prescribe a higher limitation on holdings. As so amended it reads as
§ 341.5 Limitation on holdings.
The limit on the amount of any Retirement Plan Bonds issued during 1974, or
in any one calendar year thereafter, that may be purchased in the name of any
one person as registered owner is $10,000 (face value).







(Sections 1 and 20, Second Liberty Bond Act, as amended, 40 Stat. 288, 48 Stat.
343, both as amended (31 U.S.C. 752, 754b) ; (5 U.S.C. 301))
The foregoing amendment was effected for the purpose of increasing the limitation on holdings of United States Retirement Plan Bonds. Notice and public
procedures thereon are unnecessary as the fiscal and tax policies of the United
States are involved.

Fiscal Assistant Secretary.
Exhibit 5.—Department Circular No. 653, Ninth Revision, March 18, 1974, First
Supplement, offering of United States savings bonds. Series E

Washington, January 3,1975.
The purpose of this first supplement to Department of the Treasury Circular
No. 653, Ninth Revision, dated March 18, 1974 (31 CFR Part 316), is to show
the redemption values and investment yields for the next extended maturity
period for United States Savings Bonds of Series E bearing issue dates of (1)
June 1 through November 1, 1945, (2) June 1 through September 1, 1955, (3) October 1 through November 1, 1955, (4) June 1 through November 1, 1968, and
(5) June 1 through November 1, 1969. Accordingly, in § 316.14 the tables to the
circular are hereby supplemented by the addition of Tables 12-A, 39-A, 40-A,
86-A and 88-A.
Dated: December 24, 1974.

Fiscal Assistant Secretary.
§ 316.14 Reservations as to terms of offer.

TABLE 12-A.—Bonds bearing issue dates from June 1 through Nov. 1, 1945

Period (years and months after 2d
extended maturity at 30 yrs. 0 mos.)

0-6 to 1-0
2-6 to 3-0
3-6 to 4-0
4-6 to 5-0
7-6 to 8-0
8-6 to 9-0.
9-6 to 10-0









$750. 00 Approximate investment yield (annual percentage

(2) From begin- (3) From begin- (4) From begin(1) Redemption values during each half-year period (values increase on 1st day of ning of current
ning of each
ning of each
maturity period half-year period half-year period
to beginning of to beginning of to 3d extended
each half-year
next half-year



$112.30 .





3 6.00 .

1 Month, day, and year on which issues of June 1,1945, enter each period. For subsequent issue months add the appropriate number of months.
2 Third extended maturity value reached at 40 yrs. and 0 mos. after issue.
3 Yield on purchase price from issue date to 3d extended maturity date is 4.26 percent.
*For earlier redemption values and yields see appropriate table in Department Circular 653, Oth Revision, as amended and supplemented.
**This table does not apply if the prevailing rate for series E bonds being issued at the time the extension begins is different from 6.00 percent.









TABLE 39-A.—Bonds bearing issue dates from June 1 through Sept. 1, 1955


Period (years and months after
1st extended maturity at
19 yrs. 8 mos.)







(1) R e d e m p t i o n v a l u e s d u r i n g each half-year period (values increase o n 1st d a y
of period)*


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)
(2) F r o m beginn i n g of c u r r e n t
m a t u r i t y period
t o beginning of
each half-year

0-0 to 0-6
0-6 to 1-0
1-0 to 1-6
1-6 to 2-0
2-0 to 2-6
2-6 to 3-0
3-0 to 3-6
3-6 to 4-0
4-0 to 4-6
4-6 to 5-0
5-0 to 5-6
5-6 to 6-0
6-0 to 6-6-...
6-6 to 7-0
7-0 to 7-6.
7-6 to 8-0
8-0 to 8-6
8-6 to 9-0
9-6 to 10-0
10-0 2


1 (2/1/75)

5 0 34

110. 02

201. 36

390 96

1 Month, day, and year on which issues of June 1,1955, enter each period. For subsequent issue months add the appropriate number of months.
a Second extended maturity value reached at 29 yrs. 8 mos. after issue.
» Yield on purchase price from issue date to 2d extended maturity date is 4.68

1,100. 20
1,133. 20
1,167. 20
1,313 60

$1,637. 20
1,898. 00
2,013. 60
2,074. 00
2,627. 20
2,706. 00
2,787. 20


3 6.00 .

(3) F r o m beginning of each
half-year period
to b e g i n m n g of
next half-year

(4) F r o m beginn i n g of each
half-year p e r i o d
to 2d e x t e n d e d

' 6.00



*For earlier redemption values and yields see appropriate table in Department
Circular 653, 9th Revision, as amended and supplemented.
**This table does not apply if the prevailing rate for series E bonds being issued at
the time the extension begins is different from 6.00 percent.



TABLE 40-A.—Bonds bearing issue date Oct. 1 or Nov. 1, 1965

P e r i o d (years a n d m o n t h s after 1st
e x t e n d e d m a t u r i t y a t 19 y r s . 8 mos.)







(1) R e d e m p t i o n v a l u e s d u r i n g each half-year period (values increase o n 1st d a y
of period)*


A p p r o x i m a t e i n v e s t m e n t jdeld ( a n n u a l p e r c e n t a g e


(2) F r o m beginning of c u r r e n t
m a t u r i t y period
• t o begiiming of
each half-year

0-0 t o 0-6
0-6 t o 1-0
1-6 t o 2-0
2-6 t o 3-0
3-6 t o 4-0
4-6 t o 5-0
5-6 t o 6 - 0 . . . . . . . . . . . . . . . . . . . . . ( 1 2 / 1 / 8 0 )
6-6 t o 7-0
7-6 t o 8-0
8-0 t o 8-6
8-6 t o 9-0
9-6 t o 10-0




. 383.76

1 M o n t h , d a y , a n d y e a r on w h i c h issues of Oct. 1,1955, e n t e r each period. F o r issues
of N o v . 1, 1955, a d d 1 m o n t h .
2 Second e x t e n d e d m a t u r i t y v a l u e r e a c h e d a t 29 y r s . 8 m o s . after issue.
3 Yield o n p u r c h a s e price from issue d a t e t o 2d e x t e n d e d m a t u r i t y d a t e is 4.72




3 6.00 .

(3) F r o m begin- (4) F r o m beginn i n g of each
ning of each
half-year period half-year period
t o b e g i n n i n g of
t o 2d e x t e n d e d
next half-year


*For earlier r e d e m p t i o n v a l u e s a n d yields see a p p r o p r i a t e t a b l e i n D e p a r t m e n t
C i r c u l a r 653, 9 t h R e v i s i o n , as a m e n d e d ^ a n d s u p p l e m e n t e d .
**This 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 i s s u e d a t
t h e t i m e t h e extension begins is different from 6.00 p e r c e n t .











T A B L E 8 6 - A . - — B o n d s bearing issue dates from J u n e 1 through Nov. 1, 1968

Issue p r i c e . . .






$375. 00

$750. 00


Approximate investment yield (annual percentage

(2) F r o m begin(1) R e d e m p t i o n values d u r i n g each half-year period (values mcrease on 1st d a y ning of c u r r e n t
of period)*
m a t u r i t y period
t o b e g i n m n g of
e a c h half-year

(3) F r o m beginning of each
half-year period
t o b e g i n n i n g of
n e x t half-year


Period (years and months after original
maturity at 7 yrs. 0 mos.)



0-0 to 0-6
0-6 to 1-0.
1-0 to 1-6
1-6 to 2-0
2-0 to 2-6
2-6 to 3-0
3-0 to 3-6
3-6 to 4-0.
4-0 to 4-6
4 ^ to 5-0....
5-0 to 5-6.
5-6 to 6-0
6-0 to 6-6
6-6 to 7-0
7-0 to 7-6
7-6 to 8-0
8-0 to 8-6
8-6 to 9-0.
9-0 to 9-6
9-6 to 10-0
10-0 2



33. 96
43. 02
47. 01

67. 92

IOL 88
108. 09
i n . 33
129. 06
145. 26

110 44
117. 20
139. 92
162. 20
167. 08
182. 56


1 Month, day, and year on which issues of June 1, 1968, enter each period. For
subsequent issue months add the appropriate number of months.
2 Extended maturity value reached at 17 yrs. 0 mos. after issue.
3 Yield on purchase price from issue date to extended maturity date is 5.66 percent.

$536. 20
552. 20
621. 60
679. 20
699. 60
742. 20
860 40
940. 20

1,137. 60
1,172. 00
1, 280.40
1, 622.00
1,880. 40

$10,724 .

3 6.00 .

(4) F r o m begin
n i n g of each
half-year period
to extended




*For earlier redemption values and yields see appropriate table in Department
Circular 653, 9th Revision, as amended and supplemented.
**This table does not apply if the prevailing rate for series E bonds being issued at
the time the extension begins is different from 6.00 percent.




TABLE 88-A.—Bonds bearing issue dates frcmi June 1 through Nov. 1, 1969

Issue price

Period (years and months after original
maturity at 5 yrs. 10 mos.)

0-6 to 1-0
1-6 to 2-0
2-6 to 3-0
3-6 to 4-0
5-6 to 6-0
9-6 to 10-0




$75.00 $150.00 $375.000
100.00 200.00

$7,500 Approximate investment yield (annual percentage

(2) From begin- (3) From begin- (4) From beginning of each
ning of each
(1) Redemption values during each half-year period (values increase on 1st day ning of current
maturity period half-year period half-year period
of period)*
• to beginning of to beginning of
to extended
each half-year
next half-year





1 Month, day, and year on which issues of June 1,1969, enter each period. For subsequent issue months add the appropriate number of months.
2 Extended maturity value reached at 15 yrs. 10 mos. after issue.
3 Yield on purchase price from issue date to extended maturity date is 5.83 percent.





3 6.00 .



*For earlier redemption values and yields see appropriate table in Department
Circular 653, Oth Revision, as amended and supplemented.
**This table does not apply if the prevailii^ rate for series E bonds being issued at
the time the extension begins is different from 6.00 percent.












Exhibit 60—Department Circular, Public Debt Series No. 1-75, January 1, 1975,
regulations governing United States individual retirement bonds

Washington, January 3,1975.
AUTHORITY : Sec. 2002, Pub. L. 93-406, 88 Stat. 958 (31 U.S.C. 738a, 752, 754b) ;
5 U.S.C. 301.
§ 346.0 Offering of bonds.
The Secretary of the Treasury, under the authority of the Second Liberty Bond
Act, as amended, and pursuant to the Employee Retirement Income Security Act
of 1974, offers for sale, beginning January 1,1975, bonds of the United States, designated as United States Indiyidual Retirement Bonds. The bonds will be avail- ^
able for investment only to individuals eligible to make deductions on their Federal income tax returns for retirement savings, as provided in Section 2002 of the
latter Act. This offering of bonds will continue until terminated by the Secretary
of the Treasury.
§ 346.1 Description of bonds.
(a) Investment yield (interest). United States Individual Retirement Bonds,
hereinafter sbmetimes referred to as Individual Retirement Bonds, will be issued
at par. The investment yield (interest) on the bonds will be 6 percent per annum,
compounded semiannually, except that no interest shall accrue on any such bonds
redeemed within twelve (12) months of its issue date. See the table of redemp^
tion values appended to this circular. Interest will be paid only upon redemption
of the bonds. The accrual of interest will continue until the bonds have been redeemed or have reached maturity, whichever is earlier, in accordance with these
(b) Term. The maturity date of any bond issued under this circular shall be
the first day pf the month in which the registered owner thereof has attained
the age of 70i/^ years, or five years after the date of his death, but no later than
the first day of the month in which he would have attained the age of 70l^ years,
if he had lived. Unless sooner redeemed in accordance with these regulations, the
investment yield on a bond will cease on the interest accrual date coinciding with,
or, where no such coincidence occurs, the interest accrual date next preceding (1)
the first day of the seventh (7th) month following the 70th anniversary of the
birth of the person in whose name it is registered, or (2) the first day of the
sixtieth (60th) month following the date of death of the person in whose name
it is registered, exeept that such date shall be no later than the date on which he
would have attained the age of 70^/^ years, had he lived.
(c) Denornvriations—issue date. Individual Retirement Bonds will be available
only in registered form and in denominations of $50, $100 and $500. At the time
of issue, the issuing agent will enter in the upper right-hand portion of the bond
the issue date (which shall be the first day of the month and year in which payment of the purchase price is received by an authorized issuing agent), and will
imprint the agent's validating stamp in the lower right-hand portion. The issue
date, as distinguished from the date in the agent's validating stamp, will determine the date from which interest will begin to accrue on the bond. An Individual
Retirement Bond shall be valid only if an authorized issuing agent receives payment therefor, duly inscribes, dates, stamps, and delivers it.
§ 346.2 Registration.
(a) General. The registration of Individual Retirement Bonds is limited to
the names of natural persons in their own right, whether adults or minors, in
either single ownership or beneficiary form. A bond registered in the beneficiary form will be inscribed substantially as follows (for example) : "John A. Doe
payable on death to (or P.O.D.) Richard B. Roe." No more than one beneficiary
may be designated on a bond.
(b) Inscription. The inscription on the face of each bond will show the name,
address, date of birth, and the social security account number of the registered
owner. The name of the beneficiary, if one is to be designated, together with his
social security account number, where available, will also be shown in the
§ 346.3 Purchase of bonds.
(a) Agencies. Individual Retirement Bonds may be purchased over-the-counter or by mail from Federal Reserve Banks and Branches and the Bureau of



the Public Debt, Securities Transactions Branch, Washington, D.C. 20226. Customers of commercial banks and trust companies may be able to arrange for the
purchase of the bonds through such institutions, but only the Federal Reserve
Banks and Branches, and the Department of the Treasury itself, are authorized
to issue the securities. The date of receipt of the application and payment by such
issuing agencies will govern the dating of the bonds issued.
(b) Applications. Applications for the purchase of Individual Retirement Bonds
should be made on Form PD 4345, accompanied by a remittance to cover the
purchase price. Personal checks will be accepted, subject to collection. Checks, or
other forms of exchange, should be drawn to the order of the Federal Reserve
Bank or the U.S. Treasury, as the case may be. Checks payable by endorsement
are not acceptable.
' (c) Delivery. Delivery of bonds will be made in person, or by mail at the risk
and expense of the United States at the address given by the purchaser, but only
within the United States, its territories and possessions, the Commonwealth of
Puerto Rico, and the Canal Zone. No mail deliveries elsewhere will be made.
If the registered owner temporarily resides abroad, the bonds will be delivered
to such address in the United States as the purchaser directs.
§ 346.4 Proof of purchase.
At the time an Individual Retirement Bond is issued, the issuing agent will furnish therewith to the purchaser a copy of Form PD 4345 for the purchaser's
personal records. The form will show the name and address of the registered
owner, his date of birth, social security account number, the number of bonds issued, a description thereof by issue date, serial numbers, denominations, and
§ 346.5 Limitation on holdings.
The amount of Individual Retirement Bonds issued during any one calendar
year that may be purchased in the name of any one person as registered owner
shall not exceed an amount equal to 15 percent of compensation includible in his
gross income for that year, or $1,500, whichever is less. This limitation does not
apply to rollover contributions, as described in sections 402(a)(5), 403(a)(4)
or 408(d) (3).
§ 346.6 Nontransferability.
United States Individual Retirement Bonds are not transferable, and may
not be sold, discounted or pledged as collateral for a loan or as security for
the performance of an obligation, or for any other purpose.
§ 346.7 Judicial proceedings.
No judicial determination will be recognized v/hich would give effect to an
attempted voluntary transfer inter vivos of an Individual Retirement Bond.
Otherwise, a claim against a registered owner will be recognized when established by valid judicial proceedings, but in no case will payment be made to the
purchaser at a sale under a levy or to the oflScer authorized to levy upon the
property of the owner under appropriate process to satisfy a money judgment
unless or until the bond has become eligible for authorized redemption pursuant to these regulations. Neither the Department of the Treasury nor any of
its agencies will accept notices of adverse claims or of pending judicial proceedings or undertake to protect the interests of litigants who do not have possession
of the bond.
§ 346.8 Payment or redemption during lifetime of owner.
(a) During first 12 months of issue date. An Individual Retirement Bond is
redeemable at any time during the first twelve (12) months of its issue date. No
interest will be paid on any bond so redeemed.
(b) Prior to age 59^2- (1) With penalty. Unless redeemed within twelve months
of its issue, or except as provided under paragraph (b) (2) and (c) (2) of this
section, if an Individual Retirement Bond is cashed by its owner before he attains
age 59^/^, he must include on his Federal income tax return for the year of redemption the value of the bond. In addition, there is an additional income tax
equal to 10 percent of the value of the bond imposed by section 409(c) of the
Internal Revenue Code of 1954.
{2) In case of disability. An Individual Retirement Bond will be paid at its then
current redemption value upon a registered owner's request (or by a person
recognized as entitled to act on his behalf) prior to his attainment of age 5 9 ^
years upon submission of a physician's statement or any similar evidence show



ing that the owner has become disabled to such an extent that he is unable to
engage in any substantial, gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death
or to be of long-continued and indefinite duration. The following are examples of
impairments which would ordinarily be considered as preventing substantial,
gainful activity:
(i) Loss of use of two limbs.
(ii) Certain progressive diseases which have resulted in the physical loss or
atrophy of a limb, such as diabetes, multiple sclerosis, or Buerger's disease.
(iii) Diseases of the heart, lungs, or blood vessels which have resulted in
major loss of heart or lung reserve as evidenced by X-ray, electrocardiogram, or
other objective findings, so that despite medical treatment breathlessness, pain,
or fatigue is produced on slight exertion, such as walking several blocks, using
public transportation, or doing small chores.
(iv) Cancer which is inoperable and progressive.
(v) Damage to the brain or brain abnormality which has resulted in severe
loss of judgment, intellect, orientation, or memory.
(vi) Mental diseases {e.g., psychosis or severe psychoneurosis) requiring continued institutionalization or constant supervision of the individual.
(vii) Loss or diminution of vision to the extent that the effected individual
has a central visual acuity of no better than 20/200 in the better eye after best
correction, or has a limitation in the fields of vision such that the widest diameter
of the visual fields subtends an angle no greater than 20 degrees.
(viii) Permanent and total loss of speech.
(ix) Total deafness uncorrectible by a hearing aid,
In any case coming under the provisions hereof, the evidence referred to above
must be submitted to the Bureau of the Public Debt, Division of Securities Op^
erations, Washington, D.C. 20226, for approval before any bonds may be paid.
If, after review of the evidence, the Secretary of the Treasury is satisfied that
the owner's disability has been established a letter will be furnished authorizing
payment of his Individual Retirement Bonds. This letter must be presented each
time any of the owner's bonds are submitted for imyment to a Federal Reserve
Bank or Branch or to the Department of the Treasury.
(c) Prior to age 70y2. (1) General. An Individual Retirement Bond will be
redeemable at its current redemption value upon the request of the registered
owner (or a person recognized as entitled to act on his behalf), provided he is 59%
years of age or older. The owner's age will be determined from the date of birth
shown on the face of the bond, provided, however, that the Secretary of the
Treasury reserves the right in any case or class of cases to require proof, in the
form of a duly certified copy of his birth certificate, that the owner has attained
the age of 59^/^ years. If such evidence is unavailable, one of the following documents may be furnished in lieu thereof:
(i) Church records of birth or baptism
(ii) Hospital birth record or certificate
(iii) Physician's or midwife's birth record
(iv) Certification of Bible or other famUy record
(v) Military, naturalization, or immigration records
(vi) Other evidence of probative value
Similar documentary evidence will also be required to support any claim made
by an owner that the date of birth shown on his bond is incorrect.
(2) For Gham,ge of vnvestment. Under section 409(b) (3) (c) of the Internal
Revenue Code, if an Individual Retirement Bond is cashed at any time before
the end of the taxable year in which the owner attains age 10^2, and the entire
redemption proceeds are transferred to an individual retirement account, an
individual annuity, an employees' trust, or annuity plan, as described in sections
408(a), 408(b), 401(a) and 403(a), respectively, of the Internal Revenue Oode,
on or before the OOth day after receipt of such proceeds, they shall be excluded
from gross income and the transfer shall be treated as a rollover contribution
described in section 408(d) (3) of the Internal Revenue Code.
(d) Requests for payment. (1) By owner. When redemption of any Individual
Retirement Bond is desired by the registered owner, it should be presented, with
the request for payment on the back of the bond signed and duly certified, to
a Federal Reserve Bank or Branch or to the Bureau of the Public Debt, Securities
Transactions Branch, Washington, D.C. 20226. If payment is requested on account
of disability, the letter described in paragraph (b) (2) of this section should accompany the bond.



(2) By person other tham, owner. When redemption of any Individual Retirement Bond is desired by the legal guardian, committee, conservator, or similar
representative of the owner's estate, it should be presented, with the request
signed as described below, to a Federal Reserve Bank or Branch or to the
Department of the Treasury. If payment is requested on account of disability,
the letter described in paragraph (b) (2) of this section should accompany the
bond.^ The request for payment, in either case, should be signed by the representative in his fiduciary capacity before an authorized certifying oflacer, and
must be supported by a certificate or a certified copy of the letters of appointment
from the court making the appointment, under seal, or other proof
of qualification if the appointment was not made by a court. Except in the case
of corporate fiduciaries, such evidence should state that the appointment is in
full force and should be dated not more than one year prior to the presentation
of the bond for payment.
(e) Partial redemption. An Individual Retirement Bond in a denomination
greater than $50 (face value), which is otherwise eligible for redemption, may
be redeemed in part, at current redemption value, upon the request of the registered owner (or a person recognized as entitled to act on his behalf), but only
in amounts corresponding to authorized denominations. In any case in which partial redemption is desired, before the request for payment is signed, the phrase
"to the extent of $
(face value) and reissue of the remainder" should be
appended to the request. Upon partial redemption of the bond, the remainder
will be reissued as of the original issue date. No partial redemption of a bond
will be made after the death of the owner in whose name it is registered.
§ 346.9 Payment or redemption after death of owner.
(a) Order of precedence where owner not survived by heneficiary. If the registered owner of an Individual Retirement Bond dies before it has been presented
and surrendered for payment, and there is no beneficiary shown thereon, or if the
designated beneficiary predeceased the owner, the bond shall be paid in the
following order of precedence:
(1) To the duly appointed executor or administrator of the estate of the
owner, who should sign the request for payment on the back of the bond in his
representative capacity before an authorized certifying oflScer, such request to be
supported by a court certificate or a certified copy of his letters of appointment,
under seal of the court, which should show that the appointment is in full force
and effect, and be dated within six months of its presentation;
(2) If no legal representative of the deceased registered owner's estate has
been or will be appointed, to the widow or widower of the owner;
(3) If none of the above, to the child or children of the owner and the descendants of deceased children by representation;
(4) If none of the above, to the parents of the owner, or the survivor of
(5) If none of the above, to other next-of-kin of the owner, as determined
by the laws of the domicile of such owner at the time of his death.
In any case coming under the provisions of this paragraph, a duly certified copy
of the registered owner's death certificate will ordinarily be required. Proof of
death of the beneficiary, if any, will be required where he predeceased the
owner. Payment of bonds under paragraph (a) (1) of this section will be made
by a Federal Reserve Bank or by the Bureau of the Public Debt, Securities
Transactions Branch, Washington, D.C. 20226. Payment of bonds under paragraph (a) (2) to (5) of this section will be made upon receipt of applications on
Form PD 3565-1, together with the bonds and supporting evidence, by the Bureau
of the Public Debt, Division of Securities Operations, Washington, D.C. 20226.
(b) Order of precedence where beneficiary survived owner. If the registered
owner of an Individual Retirement Bond dies before it has been presented and
surrendered for payment, and the beneficiary shown thereon survived the
owner, the bond shall be paid in the following order of precedence:
(1) To the designated beneficiary upon his presentation and surrender of
the bond with the request for payment signed and duly certified;
1 In any case in which a legal representative has not been appointed for the estate of a
registered owner who has attained the age of 59% years, or who has become disabled, a
person seeking payment of a bond on the owner's behalf should furnish a complete statement
of the circumstances to the Bureau of the Public Debt, Division of Securities Operations,
Washington, D.C. 20226. Appropriate instructions will then be furnished.



(2) If the designated beneficiary survived the registered owner but failed to
present the bond for payment during his own lifetime, payment will be made in
the order of precedence specified in paragraph (a) (1) to (5) of this section to the
legal representative, surviving spouse, children, parents, or next-of-kin of such
beneficiary, and in the manner provided therein.
In any case coming under the provisions of this subsection, a duly certified copy
of the registered owner's death certificate will ordinarily be required. Proof of
death of the beneficiary will also be required where he survived the owner but
failed to present the bond for payment during his own lifetime. Payment of a
bond to a designated beneficiary will be made by a Federal Reserve Bank or by
the Bureau of the Public Debt, Securities Transactions Branch, Washington,
D.C. 20226.
(c) Ownership of redemption proceeds. The orders of precedence set forth in
paragraphs (a) and (b) of this section, except in cases where redemption is made
for the account of a registered owner, are for the Department's convenience in
discharging its obligation on an Individual Retirement Bond. The discharge of
the obligation in accordance therewith shall be final so far as the Department is
concerned, but those provisions do not otherwise purport to determine ownership
of the redemption proceeds of a bond.
§346.10 Reissue.
(a) Addition or change of beneficiary. An Individual Retirement Bond will be
reissued to add a beneficiary in the case of a single ownership bond, or to eliminate or substitute a beneficiary in the case of a bond registered in beneficiary
form upon the owner's request on Form PD 3564. No consent will be required to
support any reissue transaction from a beneficiary whose name is to be removed
from the registration of an Individual Retirement Bond. If the registered owner
dies after the bond has been presented and surrendered for reissue, upon receipt
of notice thereof by the agency to which the request for reissue was submitted,
such request shall be treated as ineffective, provided the notice of death is received by the Federal Reserve Bank or the Bureau of the Public Debt, Division
of Securities Operations, Washington, D.C. 20226, to which the request was
sent, in suflficient time to withhold delivery, by mail or otherwise, of the reissued bond.
(b) Error in issue—change of name. Reissue of an Individual Retirement
Bond will be made where an error in issue has occurred, as well as in cases
where the owner's name has been changed by marriage, divorce, annulment,
order of court, or in any other legal manner upon an appropriate request.
Information as to the procedure to be followed in securing such reissue may
be obtained from a Federal Reserve Bank or the Bureau of the Public Debt, Division of Securities Operations, Washington, D.C. 20226.
§ 346.11 Use of power of attorney.
No designation of an attorney, agent, or other representative to request payment or reissue on behalf of the owner, beneficiary, or other person entitled
under § 346.9, other than as provided in these regulations, will be recognized.
§ 346.12 Lost, stolen, or destroyed bonds.
If an Individual Retirement Bond is lost, stolen, or destroyed, relief will be
granted upon identification of the bond and proof of its loss, theft, or destruction.
A description of the bond by denomination, serial number, issue date and registration should be furnished at the time the report of loss, theft, or destruction
is made. Such reports should be sent to the Bureau of the Public Debt, Division
of Securities Operations, Washington, D.C. 20226. Full instructions for obtaining substitute bonds, or payment, in appropriate cases, will then be given.
§346.13 Taxation.
The tax treatment provided under Section 409 of the Internal Revenue Code
of 1954, as amended, shall apply to all Individual Retirement Bonds. The bonds
are subject to estate, inheritance, 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, municipality, or any local taxing authority. Inquiry concerning the application of any Federal tax to these bonds should
be directed to the District Director of Internal Revenue for the district in
which the taxpayer resides.



§ 346.14 Certifying oflficers.
Officers authorized to certify requests for payment or for any other transaction involving Individual Retirement Bonds include:
(a) Post offices. Any postmaster, acting postmaster, or inspector-in-charge,
or other post office official or clerk designated for that purpose. A post office
official or clerk, other than a postmaster, acting postmaster, or inspector-incharge, should certify in the name of the postmaster or acting postmaster, followed by his own signature and official title. Signatures of these officers should
be authenticated by a legible imprint of the post office dating stamp.
(b) Banks and trust companies. Any officer of a Federal Reserve Bank or
Branch, or a bank or trust company chartered under the laws of the United
States of those of any State, Commonwealth, or Territory of the United States,
as well as any employees of such bank or trust company expressly authorized
to act for that purpose, who should sign over the title "Designated Employee."
Certifications by any of these officers or designated employees should be authenticated by either a legible imprint of the corporate seal, or, where the institution
is an authorized issuing agent for United States Savings Bonds, Series E, by a
legible imprint of its dating stamp.
(c) Issuing agents of Series E savings bonds. Any officer of a corporation or
any other organization which is an authorized issuing agent for United States
Savings Bonds, Series E. All certifications by such officers must be authenticated
by a legible imprint of the issuing agent's dating stamp.
(d) Foreign countries. In a foreign country requests may be signed in the
presence of and be certified by any United States diplomatic or consular representative, or the manager or other officer of a foreign branch of a bank or
trust company incorporated in the United States whose signature is attested
by an imprint of the corporate seal or is certified to the Department of the
Treasury. If such an officer is not available, requests may be signed in the
presence of and be certified by a notary or other officer authorized to administer
oaths, but his official character and jurisdiction should be certified by a United
States diplomatic or consular officer under seal of his office.
(e) Special provisions. The Commissioner of the Public Debt, or his delegate,
or any Federal Reserve Bank or Branch is authorized to make special provision
for certification in any particular case or class of cases where none of the officers
authorized above is readily accessible.
§ 346.15 General provisions.
(a) Regulations. All Individual Retirement Bonds shall be subject to the general regulations prescribed by the Secretary with respect to United States securities, which are set forth in Department of the Treasury Circular No. 300, current
revision, to the extent applicable. Copies of the general regulations may be obtained upon request from any Federal Reserve Bank or the Department of the
(b) Reservation as to issue of bonds. The Secretary of the Treasury reserves
the right to reject any application for the purchase of Individual Retirement
Bonds, in whole or in part, and to refuse to issue or permit to be issued any such
bonds in any case or any class or classes of cases if he deems such action to be in
the public interest, and his action in any such respect shall be final.
(c) Additional requirements. In any case or any class of cases arising under
this circular, the Secretary of the Treasury may require such additional evidence
as may in his judgment be necessary, and may require a bond of indemnity, with
or without surety, where he may consider such bond necessary for the protection
of the United States.
(d) Waiver of requirements. The Secretary of the Treasury reserves the right,
in his discretion, to waive or modify any provision or provisions of this circular
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.
(e) Fiscal agents. Federal Reserve Banks and Branches, as fiscal agents of
the United States, are authorized to perform such services as may be requested
of them by the Secretary of the Treasury in connection with the issue, delivery,
redemption, reissue, and payment of Individual Retirement Bonds.



(f)) Reservation as to terms of circular. The Secretary of the Treasury may at
any time, or from time to time, supplement or amend the terms of this circular,
or any amendments or supplements thereto^

Fiscal Assistant Secretary of the Treasury.
Table of redemption values providing an investment yield of 6 percent per annum
for bonds bearing issue dates beginning January 1, 1975
Table shows how the Individual Retirement Bonds bearing issue dates beginning January 1, 1975, by
denomination, increase in redemption value during successive half-year periods following issue. The redemption values have been determined to provide an investment yield of approximately 6 percent per
annura, compounded semiannually, on the purchase price from issue date to the beginning of each half-year
period. The period to maturity is fixed in accordance with the provisions of § 346.1(b) of this circular.
Issue price..

Period after issue date

F i r s t s year
1^ to 1 year
1 to IVi. years
13^ to 2 years
2 to 2H years....
21;^ to 3 years
3 to3K years
3V^ to 4 years
4 to 43^ years
4V^ to 5 years
6 to 51^ years
53?^ to 6 years
6 to 63^ years
63^ to 7 years
7 to7K years
71^ to 8 years
8 to 83^ y e a r s —
81^ to 9 years
9 to9>^ years
93^ to 10 years..
10 to 103^ years..
103^ to 11 years..
11 to 113^ years..
113^ to 12 years..
12 to 123^ years..
123^ to 13 years..
13 to 133^ years..
13>^ to 14 years..
14 to 14}/^ years..
143^ to 15 years..
15 to 153^ years..
153^ to 16 years..
16 to 16>^ years..
163^ to 17 years..
17 to 173^ years..
173^ to 18 years..
18 to 183^ years..
183^ to 19 years..
19 to 193^ years..
193^ to 20 years..
20 to 203^ years..



Redemption values during each half-year
period (values'increase on first day of
period shown)
111. 06
149. 26

. 235.66

851; 20

Exhibit 7.—Federal Financing Bank Circular No. 1-74, July 10, 1974, offering of
Federal Financing Bank bills

Washingtoii, July 10, 1974The Federal Financing Bank Act of 1973 created a body corporate to be known
as the Federal Financing Bank. The Bank, which is subject to the general supervision and direction of the Secretary of the Treasury, is an instrumentality of the
United States. It is authorized, with the approval of the Secretary of the Treasury, to issue publicly obligations having such maturities and bearing such rate
or rates of interest as may be determined by the Bank.



A new Chapter VIII, entitled "Federal Financing Bank", containing a new Part
810, entitled "Federal Financing Bank Bills", is added to Title 12 of the Code of
Federal Regulations. The new Part sets forth the regulations contained in Federal
Financing Bank Circular No. 1--74. As these regulations relate to the fiscal policy
of the United States notice and public procedures thereon are unnecessary.
In consideration of the foregoing. Title 12 of the Code of Federal Regulations is
amended by the addition of a new Chapter VIII, as set forth below, effective
July 10, 1974.
AUTHORITY : The provisions of this Part 810 are issued under Secs. 9-11, 87 Stat
939, 940; 12 U.S.C. 2288, 2289, 2290.
Sec. 810.0. Authority for issue and sale.—The Federal Financing Bank is
authorized, under the Federal Financing Bank Act of 1973, to issue publicly, with
the approval of the Secretary of the Treasury, obligations having such maturities
and bearing such rate or rates of interest as may be determined by the Bank. Pursuant to this authority. Federal Financing Bank bills, referred to herein as "FFB
bills", are offered for sale from time to time and tenders invited therefor, through
the Federal Reserve Banks. The FFB bills so offered, the tenders made, and all
subsequent transactions therein are subject to the terms and conditions of the
public notice offering the bills for sale, this circular, and to the extent not inconsistent with such notice and circular, to Department of the Treasury Circular No.
418, current revision, the regulations governing United States Treasury bills, and
all other regulations governing United States securities.
Sec. 810.1. Description of Federal Financing Bank bills.
(a) General.—^^Federal Financing Bank bills are bearer obligations of the Federal Financing Bank, the terms of which provide for payment of a specified amount
on a sp. jified date. They are issued only by Federal Reserve Banks and Branches,
pursuant to tenders accepted by the Federal Financing Bank^ and are available in
both definitive and book-entry form^ Where issued as a definitive security, it shall
not be valid unless the issue date, the maturity date and the CUSIP number are
imprinted thereon.
(b) Denominations.^—Federal Financing Bank bills will be issued in denominations of $10,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity
Sec. 8i0.2. Public notice of offering.-—On the occasion of an offering of FFB
bills, tenders therefor will be invited through public notices issued by the Federal
Financing Bank. Each ndtice will set forth the amount offered, the issue date, the
date they will be due and payable, the place and the date of the closing hour for
thie receipt of tenders and the date oh which payment for accepted tenders must
be made Or completed.
Sec. 810.3. Payment at maturity.^^^Rch FFB bill Will be paid in its face
amount at maturity upon presentation ahd surrender to any Federal Reserve
Bank or Branch or to the Department of the Treasury, Bureau of the Public
Debt, Securities Transactions Sranchj Washington, D.C. 20226. If an FFB bill is
presented and surrendered for redemption after it has become overdue, the Federal Financing Bank may require satisfactory proof of ownership, as provided in
§ 306.25 of Department of the Treasury Circular Nd. 300, current revision.
Sec. 810.4. Acdeptance of FFB bitts for varioics pitrposes^^-Federal Financing
Bank bills are lawful investnients and may be accepted as security for all fiduciary, trust, and public funds, the investment or deposit of which shall be under
the authority or control of the United States, the District of Columbia, the Commonwealth of Puerto Rico or any territory or possession of the United States.
They are eligible for purchase by national banks, and will be accepted at maturity
value to secure public moneys.
Sec. 810:5. Taxation.—All FFB bills shall be subject to Federal taxation to the
same extent as obligations of private corporations are taxed.
Sec. 810;6. Exemption.—Obligations of the Federal Financing Bank are
deemed to be exempted securities within the meaning of § 3(a) (2) of the Securities Act of 1933 (15 U.S.C. 77c(a) (2)), of § 3(a) (12) of the Securities Exchange
Act of 1934 (15 U.S.C. 78(a) (12)), and of § 304(a) (4) of the Trust Indenture
Act of 19^9 (15 U.S.C. 77d(a) (4)).
Sec. 8l0.7. Federal Reserve Banks as fiscal agents.—The Federal Reserve
Banks, as fiscal agents Of the United States, have been authorized by the Department of the Treasury to perform all such acts as may be necessary to carry out
the provisions of this and other circulars of the Department of the Treasury as
may be applicable to FFB bills, and of any public notice or notices issued in
connection with any offering of these securities^



Sec. 810.8 Reservations as to terms of circular.—The Federal Financing Bahk
reserves the right to amend, supplement, revise or withdraw all or any of the
provisions of this circular at any time or from time to time.

. President,
Federal Financing Bank.
Exhibit 8.—^An act to increase the temporary debt limitation and to extend such
temporary limitation until June 30, 1975
[Public Law 9 ^ 3 , 94th Congress, H.R. 2634, February 19,1975]
Public debt
Tem^porary increase.
31 U.S.C. 757b
Rerfeai- effec
tive date. "
31 U.S.C. 757b

Be it enacted by the Senate and House of Representatives of the
TJnited States of America in Congress assembled. That during the
period beginning on the date of the enactment of this Act and
ending on June 30, 1975, 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 $181,000,000,000.
SEC 2. Effective on the date of the enactment of this Act, the
section of the Act of June 30,1974, providing for a temporary
increase in the public debt limit for a period ending March 31,
1975 (Public Law 93-325), is hereby repealed.

Exhibit 9.—An act to provide for a temporary increase in the public debt limit
[Public Law 94-47, 94th Congress, H.R. 8030, June 30,1975]
Public debt
Be it enacted by the Senate and House of Representatives of the
Temporary in- United States of America in Congress assembled, That during the
period beginning on the date of the enactment of this Act and
31 U.S.C. 757b ending on November 15, 1975, the public debt limit set forth in the
R^D^eai • pfPectivp ^^^^ Sentence of section 21 of the Second Liberty Bond Act (31
date. '
U.S.C. 757b) shall be temporarily increased by $177,000,000,000.
31 U.S.C. 757b
SEC. 2. Effective on the date of the enactment of this Act, the
Ante p 5
^^^^ section of the Act of February 19, 1975, entitled "An Act to
increase the temporary debt limitation and to extend such temporary limitation until June 30, 1975" (Public Law 94^3), is
hereby repealed.

Federal Debt Management
Exhibit 10.—Remarks by Under Secretary Schmults, January 27, 1975, before the
National Savings and Loan League, Washington, D.C, on the Financial Institutions Act
I am happy to be here with you today to discuss the Financial Institutions Act
and its prospects in 1975. Exhaustive, in-depth hearings were conducted on the
act in the 93d Congress by Senator Mclntyre's Subcommittee on Financial Institutions, and I am sure that most of you are familiar with the general nature of
the reform program. The basic thrust of the legislation is to provide a minimum,
balanced set of structural financial reforms. We believe that the administration's
proposals will, among other things, strengthen thrift institutions and allow them
to manage change in the future.
The basic problem that has increasingly come to plague savings institutions is
their structural inability to adapt to changing financial conditions quickly
enough. The crises of disintermediation during periods of monetary restraint
and the distress caused by comparatively mild institutional innovations, such as
the variable rate note of last summer, are symptomatic of this difficulty. The
mortgage portfolios of savings and loan associations are the justification for
their existence. But, as you know, at the same time they are at the root of the
problem. The relatively slow turnover of their mortgage portfolios makes it

588-395 O - 75 - 20



difficult for thrifts to respond to change, especially where such responses may
require a greater competitiveness with respect to savers. The traditional remedy
in the past has been for the industry to turn to the Govemment for support. But
the remedy has created problems of its own. Perhaps chief among these is the
impact of Federal agency borrowings on the capital markets. Since the need for
additional agency finance is greater during periods of tight money, Federal support has been partially self-defeating in that it has made it even more difficult for
thrifts to compete for deposits.
The FIA (Financial Institutions Act) seeks to resolve the basic problem of
thrift institutions by a restructuring so as to provide them with the ability to
compete more effectively on their own. The FIA makes for greater flexibility and
adaptability by increasing both asset and depository freedom. Savings institutions
will be allowed to hold a more varied portfolio of earning assets, such as consumer loans and commercial paper which have a high rate of turnover. The
earnings from these instruments are sensitive to changing market conditions and,
thus, they provide a flexible source of funds. This will reduce the critical impact
of tight money by raising yields sufficiently to enable thrifts to comi>ete for
savings deposits and/or "buy time" as the low-yielding oldest portion of the
mortgage portfolio rolls over. It also provides a source of funds for new, higher
yielding mortgage assets.
Expanded deposit powers, including demand deposits and N.O.W. (negotiable
order of withdrawal) accounts, will promote the broadened concept of thrifts as
centers for family financial services. Thrifts will prove more profitable if well
managed. Only the degree of ingenuity and innovativeness of thrift institution
managers will limit the profitability of these operations.
Because of these and other reform provisions of the FIA, we expect that the
competitive strength of thrift institutions will increase materially. We anticipate
(and we have some empirical support for this) that the net volume of savings
flows to thrifts, and probably to all flnancial institutions, will increase. In particular, even though savings institutions will become more diversifled than at
present, the larger flows of savings will support larger extensions of mortgage
credit, and housing is expected to benefit materially from financial reform.
Increased flexibility and responsiveness of financial institutions were our
objectives when we first introduced the FIA in the fall of 1973. The introduction followed an almost 2-year review and implementation program regarding
the findings of the Hunt Commission. The planning was carried out in cooperation
with all of the depository regulatory agencies, and involved extensive consultation
with affected groups.
By necessity, then, the program contained elements of compromise, consisting
of much that was desired by and useful to individual classes of institutions but
also some measures that were thought to be objectionable.
When the bill was introduced, there was a natural response by affected institutions of discounting the potential benefits of the program and magnifying the
potential costs. There was opposition to the FIA by the savings and loan and
housing industries, who saw in the eventual abolition of Regulation Q and other
deposit rate ceilings an immediate threat to their viability. This fear was intensified by the brief but fierce competition for deposits following the introduction of "wild card" CD's during the summer of 1973.
The administration has maintained the position that the ceiling rates are a
self-defeating means of protection necessitated by the structural inability of
thrifts to compete effectively. It is our view that ceilings force small savers to
subsidize mortgage credit borrowers and at the same time encourage disintermediation because of the low interest rate relative to the yields available on
other money-market instruments.
As the policy of monetary restraint pursued by the Federal Reserve in 1974 to
combat inflation intensified, and as interest rates rose, agreement on the need for
financial reform became more widespread. Despite a substantial effort by Federal
agencies involved in housing finance, net mortgage creation and housing starts
were totally inadequate during 1974. Savings flows at insured savings and loan
associations fell by $4.8 billion during the first 11 months of 1974 compared to the
same period during 1973, and the flow of mortgage repayments fell by over $3.4
billion. Six and one-quarter billion dollars in home loan advances were important,
but insufficient to reverse these pressures. As a result, mortgage loans made or
acquired by federally insured savings and loan associations were some $9.9
billion less than for the comparable period during 1973. A greater effort by the
Federal agencies might well have placed greater pressure on the already strained



capital markets, raising the level of interest rates even higher and providing
even greater incentive for depositors to shift their funds into higher yielding,
alternative investments, such as Treasury or agency paper or the liquid asset
mutual funds, which grew rapidly during the period.
By the fall of 1974 it appeared that most of the affected financial institutions
viewed reform as necessary, and were in closer agreement on the need to focus
such reform on the extension of asset and deposit powers. As this growing
coalescence of attitudes becomes apparent, and since the FIA would have to be
resubmitted during 1975, the Treasury Department decided to formally meet
with the industry representatives to attempt to bridge the remaining gaps preventing agreement. A series of such meetings were held in November and December, and as a result there will be some modifications in the form of the FIA
during 1975. The basic intent and the thrust of the legislation remains unchanged.
Probably the two most important changes, from your point of view, concern the
eventual abolition of Regulation Q and all other deposit rate ceilings, and the
substitution of the mortgage interest tax credit for the bad debt loss reserve
deduction you currently enjoy. It seems that we are closer to agreement on both
these issues than might be apparent simply by reading position papers and
testimony. I am optimistic that our restatement of titles I and VII of the FIA
will result in a bill that will enjoy your enthusiastic support.
At present Regulation Q and other deposit rate ceilings must be renewed
periodically; otherwise, they automatically cease to exist. Although there is
usually little difficulty in securing an extension of the regulations, there is no
guarantee 'that this will always be the case. In addition, preparation of support
for the preservation of the ceilings requires time, effort, and expense.
Our revised title I extends deposit rate ceilings continuously for a period of 5^/^
years and will require no periodic renewal by the Congress. We are confident that
the expanded powers given you by other provisions of the act will strengthen
your competitive position to such an extent that at the end of that period of time
you will no longer require the protection of the ceilings.
We are proposing some changes in what is to take effect during the 5i/^-year
period. First, the act as written now calls for the phaseout of. the differential
over 4 years, starting 18 months after the bill is enacted. A portion would be
phased out for each of the 4 years. We are now proposing that the act be silent
regarding the phaseout of the differential. Since the differential in most cases is
only one-fourth of a percent, a gradual phaseout seems unnecessary.
Second, prior to the end of the S^/^-year period, we are recommending that the
administration conduct a thorough review of how the financial system is functioning to determine whether or not the FIA has worked to the full extent we
expect it to. We will submit recommendations based upon our findings to the
Congress at that time. Congress will take whatever remedial action it feels is
desirable. If Congress decides no further action is necessary, the ceilings will
Although we realize that the 96th Congress will not be bound by the conditions
set by the 94th Congress, we anticipate that the possibility of a permanent end
to the ceilings will spur savings institutions to integrate the new powers into
their structure as rapidly as possible. Equally important will be the competitive
incentives encouraging thrifts to profitably use their powers to take advantage
of changing economic, technological, and institutional changes. We are confident
that the restructuring proposed in the FIA will enable the thrift industry to
gain strength and independence, savers to receive a wider variety and a higher
level of services, and the housing industry to benefit from the resulting increase
in savings flows.
Turning now to the mortgage tax credit and the bad debt loss reserve tax
deduction: The mortgage tax credit is probably our best assurance that the
housing market will not suffer as the reforms contained in the FIA are phased
in. The tax credit would give almost 70 basis points to savings and loan associations-and over 50 basis points to mutual savings banks, on average, for each
mortgage they accept at current market rates. This would provide a considerable
incentive for these institutions to maintain or increase mortgage flows.
Another strong advantage of this measure is that it is countercyclical in nature.
As interest rates rise, the tax value of the credit on new loans rises proportionately. This is when the credit is most needed by thrift institutions. When
interest rates fall, however, the basic conditions for successful operations of
thrift institutions reassert themselves, and it is then that the tax value of the
credit falls. The mortgage tax credit provides our economy with an efficient



automatic stabilizer for the housing industry, one that has been badly needed
for years, one that presents few administrative problems and that can be modified
fairly easily if warranted by economic conditions.
Your association commissioned one of the best studies on this topic to date.
In it Dr. Beiderman and his associates suggest that "the mortgage tax credit
procedure might be offered as a possible substitute for the loss reserve formula;
i.e., each association could then select the more beneficial of the two methods."
This is precisely what we are doing in our revision of title VII.
As it will be presented to Congress, the FIA will permit each thrift institution a one-time option to shift from the bad debt loss reserve method to the
mortgage tax credit. The switch would be made at the option of the individual
thrift institution, but once having made the decision an institution would not
then be able to switch back. Because the value of the bad debt loss reserve deduction is to decline to 40 percent by 1979 pursuant to the Tax Reform Act of 1969
and the prospects of a return to the low mortgage rates of the 1950's in the near
term are unlikely, the mortgage tax credit will probably offer a greater tax
advantage than the present method in the near future. Indeed, John Stafford of
the U.S. League estimates that in 1972, when the bad debt deduction was most
favorable relative to the credit, 44 percent of the approximately 2,100 thrifts
sampled would have found the mortgage interest tax credit resulting in a lower
tax bill. By 1979 we expect virtually all thrifts to have opted for this treatment.
It is proposed that thereafter, in order to simplify administration of the law,
the bad debt loss deduction be eliminated.
There are other, and from your point of view minor, changes in the FIA. We
believe that the net impact of all of the modifications is to define a program of
financial reform that deserves your warmest support. You are certainly aware
that this support is necessary to assure speedy passage through the Congress,
and I'd like to reemphasize our view that it is to your advantage, and that of
the entire Nation, to get the bill signed into law as quickly as possible.
The FIA does not contain all of the reforms needed by the financial system.
However, we do not see the FIA as the only vehicle of financial reform. We
expect that other efforts at restructure and reform will be made, and we will
welcome these insofar as they reinforce the objectives ^ this program.
Right now there is a certain amount of breathing room as. the current Federal
Reserve policy of monetary ease lowers short-term interest rates relative to longterm yields and enhances your ability to compete for deposits. But, I believe that
you should keep in mind that all of this can change practically overnight, as has
been demonstrated twice during the past 2 years. In particular, whether the
President's economic program, a congressional economic program, or a blend of
the two is enacted, huge new cash borrowings approaching $90 billion will be
required by the Treasury during the next year and a half. This will certainly
have an imi>act on capital markets and interest rates, to the extent that it is
not offset by the Fed.
As a result, it is important to enact the FIA program while there is still time
to unhurriedly integrate its reforms into the structure of thrift institutions.
The alternative is to trust to luck and Govemment support if another crunch
should come. Depositors have learned more about alternative investments during
the last tight money period. As a result, it is possible that the deposit outflows you
experience the next time around will be even more sudden and severe. If this
happens, you will get Government support. But such will burden the capital markets even further, putting additional pressure on interest rates and increasing
further the potential for disintermediation.
The alternative, as we see it, is to meet periods of high interest rates with the
increased ability to withstand them and even benefit from them. The reforms
contained within the FIA will provide this additional strength. I urge your
enthusiastic support for the program when it is reintroduced in the Congress.
Thank you.
Exhibit 11.—Statement of Secretary Simon, February 10,1975, before the Senate
Finance Committee, on the public debt limit
In the second portion of my testimony today, I would like to discuss with you
another subject of immediate concern : The need to raise the Federal debt ceiling.
As you know, the current limit on the Federal debt is $495 billion. That is a
temi)orary limit which will expire on March 31; in the absence of legislation,
the limit will revert on April 1 to $400 billion.



Our current estimates show that the Government will exceed the temporary
limit of $495 billion on February 18—less than 10 days from now. Thus, there
is a genuine need for immediate action on the part of the Congress.
Just over 2 weeks ago I presented to the House Ways and Means Committee
the administration's proposal to raise the debt ceiling to $604 billion. Barring
unforeseen developments, that new ceiling should be adequate to carry us through
June 30, 1976, which would be the end of fiscal year 1976. I also pointed out that
if the ceiling were extended only to the end of fiseal year 1975, it would have
to be set no lower than $531 billion. Our estimates are based on the conventional
assumption of a $6 biUion cash balance and a $3 billion margin for contingencies.
The House last week approved a bill authorizing a temporary debt limit of
$531 billion through the end of the current fiscal year, at which time the limit
would revert to the permanent ceiling of $400 billion.
Our request for a higher figure carrying us through fiscal year 1976 Was consistent with legislation passed by the Congress last year, the Congressional Budget
and Impoundment Control Act. In that law, the Congress set up a timetable for
spending and revenue decisions. When that timetable takes effect, the Congress
by May 15 of each year is to have completed action on the first concurrent resolution providing new budget authority, setting revenue figures and establishing
the public debt limit for the fiscal year beginning that October 1. A second concurrent resolution and reconciliation bill, if needed, must be enacted by late September. Thus, prior to the new fiscal year, the debt limit will be set for that entire
fiscal year. This is essentially the idea that we are asking the Congress to approve
for fiscal year 1976, and we strongly urge your support for this proposal.
For your background, I am submitting to the committee today four tables which
usually accompany our discussion of the debt ceiling:
Table 1 shows actual operating balances and the debt which is subject to limit
through December 31, 1974. It also shows the estimated debt subject to liinit at
the end of each month through the end of fiscal year 1975.
Table 2 extends these estimates through fiscal year 1976.
Table 3 shows the budget estimates for fiscal years 1975 and 1976, providing
you with the basis for the figures in the earlier tables.
Table 4 presents our tentative revenue estimates for fiscal years 1975 and 1976.
As all of you know, the rapid downward slide of the economy has reduced the
Federal revenues below our original expectations in January of 1974. As a result.
Federal deficits are mounting rapidly and are causing the current squeeze on
the debt ceiling. A slowdown in the economy had been anticipated, but the current recession is steeper and will probably last longer than first expected. We
have thus been required to reduce our fiscal year 1975 estimates of individual
income taxes by $6.7 billion, reflecting higher unemployment, shorter workweeks,
less overtime, and fewer second jobs. We have also reduced our estimates of corporate income taxes by $3.7 billion, due in large measure to the decline in
corporate profits.
TABLE 1.—Public debt subject to limitation, fiscal year 1976, based on estimated
budget receipts of $279 billion, outlays of $313 billion, and deficit of $36 billion
[In biUions of dollars]
Operating cash

June 30
July 31
Sept. 30
Dec. 31
Jan. 31




Public debt
subject to

With usual $3
billion margin
for contingencies


Feb. 2 8 Mar. 31..
May 31..
June 30.







TABLE 2.—Public debt subject to limitation, fiscal year 1976, based on estimated
budget receipts of $298 billion, outlays of $349 billion, and deficit of $52 billion
[In billions of dollars]
Operating cash

Public debt
subject to

With usual $3
biUion margin
for contingencies



June 30
July 31
Aug. 3i:


Jan. 31
Feb. 29..
Apr. 30
May 3 1 . . . . .
June 17 (peak)
June 30



Sept. 3 0 J . . .

Oct. 31.:
Dec. 31




TABLE 3.—Budget summary
[In biUions of dollars]

Actual 1974


Federal funds
Trust funds.
Interfund transactions .


181 105



Total budget receipts.




Federal funds
Trust funds—
Interfund transactions..




Total budget outlays.







Surplus, or deficit (—):
Federal funds
Trust funds
Total budget....

TABLE 4.—Estimated unified budget receipts, fiscal years 1976-1976
[In biUions of dollars]
Current estimate including
proposed legislation

Individual income taxes
Corporation income taxes.
Employment taxes and contributions
Unemployment insurance.-..
Contributions for other insurance and retirement
Excise taxes
Estate and gift taxes
Customs duties
Miscellaneous receipts..
Total budget receipts...






Most of you are aware that a number of corporations are switching their inventory accounting methods from "first in, first out" to "last in, first out." LIFO
accounting methods exclude a large portion of the effect of inventory price increases from the calculation of business profits and thus lessen corporate tax
liability. This trend toward LIFO accounting methods in fiscal year 1975 is expected to reduce our total revenues by $3-$4 billion. I should point out that in
first estimating revenues for fiscal year 1975, we anticipated reductions in revenue of approximately this size from companies switching to LIFO, so that it has
not been a factor in changing our predictions.
The changes in forecasts that we are making this year are similar in nature to
those that were made in past recessions. In the recessions of 1959-1970 and
1960-61, corporate and individual income tax collections fell well below estinates. On one of those occasions, fiscal year 1962, an increase in the debt ceiling
was also needed prior to the expiration of the one then in effect.
The new debt ceiling we are requesting today incorporates our tentative estimates for both Federal revenues and expenditures, based upon our projections
for the economy over the next 17 months and upon the economic and energy
proposals that the President has presented to the Congress. As I noted earlier,
it also includes the traditional $6 billion cash operating balance and the $3 billion
margin for contingencies. It does not take account of new spending programs
which might be enacted.
Let me point out that the debt figures also include Treasury borrowing to finance the Federal Financing Bank. The bank nas one marketable issue of $1.5
• billion now outstanding and maturing at the end of March. In the future, I
believe that the bank should borrow from the Treasury rather than going into
the market. The bank's cost of borrowing is somewhat greater than Treasury's
and the additional interest costs which result are inappropriate. Moreover, we
can already anticipate that large budget deficits projected for fiscal years 1975
and 1976 will put some upward pressure on interest rates. Federal Financing
Bank market borrowing would be likely to put somewhat more pressure on rates
than the equivalent Treasury borrowing. In order to minimize costs to the Govemment and the taxpayers, it would thus be prudent for the bank to borrow
from the Treasury.
Some members of the committee may think that the new debt ceiling is too
high and the deficits too big. I would emphasize that there is no one in Washington today who feels more strongly than either the President or I that deficits of
the magnitude we are now facing are horrendous. We believe that many of the
economic troubles we have today are rooted in more than a decade of excesses in
fiscal and monetary policy. To continue the rapid upward momentum of Government growth over an indefinite period would erode the very foundations of our
economy and could threaten us with social ruin. But we also recognize that
because of the recession, receipts are inevitably going to be lower than we would
like and we believe that in order to stimulate the economy, we must temporarily—
and I stress the word "temporarily"—cut taxes and leave more money in the
private spending stream. Big Federal deficits in fiscal years 1975 and 1976 are
thus a result of both the recession and the cumulative cost of the many Federal
spending programs that have been enacted in recent years.
lOther members of this committee may feel that, to the contrary. Federal outlays should be increased significantly this year so that the deficits and, therefore,
the debt ceiling should be much higher than we propose. The President strenuously opposes this view. If we open up the sluice gates on Federal spending
during the coming year, we could seriously overheat the economy and insure that
further down the road we will be riding the tiger of infiation once again—^and
inflation then would be even more virulent and powerful than what we have had
over the past year. That is why the President has proposed a moratorium on all
new spending programs outside of the energy field and why he intends to veto
bills which violate that moratorium.
Impact of deficits on the credit markets
A second reason why the administration wants to hold the line on massive new
spending programs is in order to preserve the private credit markets.
There is considerable dispute among economists and market specialists on this
question. My own view is that the deficits anticipated by the President's program
will cause some strains in the markets, but those strains could be manageable.
However, in the event that the Congress is unwilling to accept the strong discipline the President is trying to impose upon the Federal spending, the higher



deficits that will result will certainly threaten the private credit markets with
intolerable burdens. We could quickly clog up those markets and create genuine
havoc in the Nation's financial system.
The anticipated deficits already exceed the upper limit of demands that the
Govemment should place on the financial markets. Normally, financial conditions
ease substantially in a recession, and normally they remain easy for some time
after the recovery gets underway. This slackening occurs because private demands for credit fall off at the same time that the Federal Reserve moves to
maintain or increase the rate of growth in money and credit. We have seen some
evidence of this easing in recent declines in business loans and in the Federal
discount rate. Under such conditions, interest rates decline and credit becomes
more readily available—all of which is part of the process by which the economy
pulls out of a recession and regains the road to prosperity.
A decline in interest rates, in both the short-term and long-term markets, has
in fact been underway for several months. There are reasons to question, however, whether the decline in interest rates will continue.
In the first place, current pressures on the financial markets from private
business are heavier than normal for a recession. The borrowing needs of only a
few sectors have moderated, and the financing of oil consumption both here and
abroad as well as the external financing needs of business have remained, extraordinarily large. As businessmen will readily confirm, the inflationary forces of
recent years have helped to produce a marked decline in profits and have seriously eroded the liquidity base of both households and businesses. As a result,
huge amounts of credit are needed in the private sector just to sustain existing
levels of economic activity. Moreover, with the stock market so low that many
issues are selling well below book value, new equity financing is not a feasible
source of funds. Therefore, the demand from the private sector for new long-term
debt issues is unusually high—unusual at least for this stage of the business
The members of this committee have probably read that borrowing demands
are declining in the private sector and therefore, according to some analysts,
Federal borrowing should not present a problem in the credit markets. Private
short-term credit demands are indeed declining, but the point is that they are
not declining as much as we would expect in a normal recession, and corporate
bond issues are running at levels considerably above the totals of any other
previous year. Our latest projections show that net new corporate bond issues,
which rose from $12^/^ billion in 1973 to $25 billion in 1974, will advance even
further to some $30 billion or more in 1975. In addition, while some slowing in
business demand for short-term credit is underway, total short-term credit for
1975 is still expected to be one of the highest yearly totals on record.
A second reason why interest rates may not continue their decline lies in the
borrowing needs of the Federal Government. Under proposed programs, we estimate that the Treasury during this calendar year will be coming into the
caintal markets for almost $70 billion of net new financing, of which $65 billion
will be marketable securities (table 5). Federally sponsored agencies may account
for another $14 billion in borrowing. Total borrowing of net new money attributable to the Federal Government will thus come to an enormous sum—more
net new funds, in fact, than have ever been borrowed before by both the private
and public sectors combined.
I have frequently attempted to provide some perspective on the enormity of
the Govemment's financing requirements, and I have pointed out that borrovring
for all Federal programs has ranged between half to two-thirds of the total
amount of funds borrowed by all issuers of securities in the U.S. capital markets
in recent years.
In table 6 we have charted the level of Government borrowing in the debt
capital markets over a period of more than two decades. This table clearly
illustrates the progressive domination of the private capital markets by the
Federal Govemment. In fiscal years 1955-59, the Federal Government accounted
for 20 percent of net funds in the capital markets; in fiscal years 1970-74, the
Federal share grew to 45 percent. In fiscal year 1976, we anticipate that even
with the moratorium on new spending and other spendLing control measures proposed by the President, total Federal borrowing will account for 68 percent of the
capital markets, and if we add to that amount the anticipated borrowing by State
and local governments, total government borrowing during the coming fiscal year
will be 80 percent of the capital markets. Only 20 percent will be left to private
industry in a financial market that has always been the centerpiece of our free
enterprise system.



TABLE 5.—Treasury money market borrowing {including foreign nonmarketable
[In billions of doUars]
Calendar year


Maturities 2

Gross new
issues 1


- .









e Estimated.
»Includes increases in regular biUs.
2 Includes paydowns in regular biUs.



Net new money

First half

Peak increase
ill borrowing



Second half








TABLE 6.—Net funds raised in the capital markets by major sector


[Fiscal years, biUions of doUars]
U.S. Treasury
and Federal
Financing Bank








Federal and


Total Federal


State and local


















e Estimated.
1 Bonds issued by nonfinancial corporations.
2 Assumes adoption of President's budget program, with budget deficits of $35 biUion
in fiscal 1975 and $52 biUion in fiscal 1976.


Corporate and
foreign i




4.1 .
7.0 .



10 5


Federal sector
as a percent of
total securities



sector as a
percent of
total securities ^

3 Includes State and local as part of government sector.
Source: Fiscal 1954-1974 data based on Federal Reserve Board "Flow of Funds."






Some observers have suggested that those figures are misleading because they
do not take into account the full range of borrowing in pur financial markets. For
instance, they do not encompass the mortgage market. My staff has recently been
working to develop measurements of the entire financial markets. This project
poses many difiBcult analytical and data collection problems, but we have developed preliminary data for current years, and in the near future we hope to
have a more comprehensive presentation which will show these borrowing activities for earlier years. The preliminary data is included in tables 7A, 7B, and
7C. These tables measure the levels of borrowing in all of our financial markets
for fiscal years 1972 through 1976 and show the impacts of Federal and federally
assisted borrowings on each major sector within these markets. Included here are
the markets for debt securities, mortgages, securities, business loans, and consumer credit.
These are remarkable tables, and I would urge that at your leisure each of you
spend a few moments examining them. The tables show that the estimated Federal share of funds raised in all sectors of the economy increased from less than
one-fourth in fiscal year 1974 to almost one-half in fiscal years 1975 and 1976. The
growing domination of the Government in our credit markets represents an
alarming situation, refiecting the even more alarming growth of Government in
this country.
It is startling enough to realize that we reached the point in recent years where
the Federal Government's stamp was on 1 out of every 4 dollars of credit fiowing
in this country. But we are now entering a period in which 1 out of every 2 credit
dollars must be blessed by Washington.
TABLE 7A.—Federal and federally assisted credit as percent of total fiow of funds
in U.S. financial markets, by type of credit*
[Fiscal years 1975 and 1976 projected; doUar amounts in bilUons]
Fiscal 1975
Net funds raised


Fiscal 1976

Government ^^^cent


Government Percent

Long-term funds:






8.7 .

















Corporate securities: **

5.3 . . . .








Total long-term funds...







Government securities:
U.S. Government
Federal agencies
State and local governments..




























Total funds raised






Other funds: ***
Business credit
Consumer credit
Security credit
Other loans, including foreign

* Based on Federal Reserve flow of funds accounts (through third quarter 1974) and Special Analyses
C and E, Budget ofthe U.S. Government, 1976.
** Including foreign.
*** Includes bank term loans and long-term Federal credits.



TABLE 7B.—Federal and federally assisted credit as percent of total fiow of funds in
U.S. financial markets, type of credit*
[Fiscal years 1973 and 1974; doUar amounts in biUions]
Fiscal 1973

Net funds raised

Long-term funds:























\ L3




Corporate securities:**







Other funds:***
Business c r e d i t - - - _ . .
Consumer credit
Security credit
Other loans, including foreign

Total funds raised











Govermnent securities:
U.S. Government
Federal agencies
State and local governments...,



Total long-term funds-.


Fiscal 1974





















24; 2















*Based on Federal Reserve flow of funds accounts and Special Analyses C and E, Budget of the U.S.
Government, 1975 and 1976.
**Including foreign.
**•Includes bank term loans and long-term Federal credits.



TABLE 7C.—Federal and federally assisted credit as percent of total fiow of funds in
U.S. financial markets, type of credit*
[Fiscal year 1972; doUar amounts in biUions]
Net funds raised




Long-term funds:







Corporate securities:**











Total long-term funds




Government securities:
U.S. Government
Federal agencies
State and local governments





30 3











Total funds raised





Other funds:***
Business credit
Consumer credit
Security credit.Other loans, including foreign-



* Based on Federal Reserve flow of funds accounts and Special Analyses C and E, Budget of the U.S
Govermnent, 1976.
** Including foreign.
*** Includes bank term loans and long-term Federal credits.

There are several ways in which the strains created in the private capital markets by Federal borrowing could be eased this year. For instance, the deficits
could be financed without diflaculty and interest rates could decline even further if the recession becomes deeper than we expect, if infiation subsides more
than we anticipate, if the OPEC nations put a larger amount of their accumulated funds into investments in this country, or if the American people save more
and spend less of their rebate. Some financial analysts expect such developments
even with a set of economic projections similar to our own. We cannot, however,
be sure that any one of these events will occur so that it would be foolish to base
our policy decision upon such assumptions.
Moreover, we must be aware of what might happen if the Federal Government
does begin to elbow other borrowers out of the market:
Housing, for example, is always at the end of the line in the credit markets
and thus the first sector to be crowded out. We now expect that a recovery
in housing starts will get underway by midyear, but we cannot overload the
continuing danger that excessive Government borrowing, coupled with a
high demand coming from a private sector that is suffering from illiquidity,
could drive up interest rates and seriously disrupt this recovery or even abort
it at an early stage.
Business firms of marginal financial strength, especially small businesses,
would also be cut off fi-om the supply of credit if the Federal Government
completely dominates the capital markets. This would further weaken the
creditworthiness of such firms. Lenders would then intensify their preference
for high-quality debt issues, and marginal firms would be unable to obtain
enough credit. Their ability to expand would therefore be limited and bankruptcies could result.



Let me stress that I am not predicting these events, I am only suggesting the
scenarios that could unfold if we ignore the President's call for fiscal discipline
and increase Federal deficits beyond their projected levels. It is too early to tell
precisely what will happen this year in the credit markets, but we do know that
Government will preempt most of this market and we must constantly be alert
to the possibility that unrestrained Government borrowing could drive the
economy into an even worse mess than it is today.
Some observers suggest that it would be easy to avoid these difliculties—^^at
least for now—if the Federal Reserve were to adopt more aggressively easy
monetary policies. In other words, to prevent the Federal Government's demands
from crowding others out of the market, the Federal Reserve would make the
market larger by increasing the total supply of money and credit. This approach,
however, is a sure formula for still higher inflation rates when the recovery gets
into full swing—if not sooner. It does not solve our problems, it only postpones
them, and when they recur they could be much worse than they are today. By
now, like the man who gives up drinking because he can't stand the hangovers, we
should have learned that short-term binges with easy money and excessive spending are no substitute for the long-term virtues of savings, investment and moderation in our monetary and fiscal policies.
This dilemma, I would hope, emphasizes for all of the members of this committee the fundamental importance of a tough policy to restrain the growth of
budget outlays by reducing less urgent programs and postponing new initiatives
that are not included in the President's package of economic and energy policies.
We already have-enough problems on our hands—many of them created by
irresponsible Government policies over the past decades—so that we should be
sensible enough to avoid the shoals of even more serious troubles.
Let me review for a moment the staggering size of the deficits that are already contemplated. Under the budget program submitted by the President, the
deficit estimated for fiscal year 1975 is close to $35 billion and in fiscal year 1976
the estimated deficit is the biggest in peacetime history—^almost $52 billion. That's
a total of approximately $87 billion over 2 fiscal years, an amount that hardly
anyone can welcome gladly. But I would remind you that even these deficits are
significantly below what will happen without the cap that the President is seeking to impose on Federal expenditures. Six billion dollars will be saved by limiting Federal pay increases to 5 percent through the end of fiscal year 1976 and by
placing a similar limit on those Federal benefit programs, like social security,
that increase automatically with the cost of living. In addition, we can realize
savings of $14 billion through the budget reductions requested or planned by the
administration for fiscal years 1975 and 1976. Thus, overall, the President's proposed actions would save $20 billion in expenditures. If the Congress ignores
this call and overrides the President without making savings in other areas, the
additional $20 billion in deficits would make the combined deficit figure for fiscal
years 1975 and 1976 well over $100 billion—more than the total deficits of the
previous 10 years combined.
Unfortunately, even these deficits do not tell the full story of Federal borrowing, for they do not include the borrowing for off-budget programs or the myriad
of obligations issued by federally sponsored agencies or guaranteed by Federal
agencies. For fiscal years 1965-1974, the cumulative deficit of the unified budget
was $102.9 billion. During that same period, the cumulative .borrowing for offbudget programs was $137 billion.
II cannot overemphasize the dangers that may be created by such mammoth
deficits at the Federal level, nor can I urge upon you more strongly a plea for
maximum fiscal discipline during the life of the 94th Congress. It is absolutely
imperative that during the 1970's we turn this country's fiscal policies around.
The capital investment challenge
If time permitted today, I would very much like to discuss with you in greater
detail the impact that the growth of Government has had upon our free market
The way that irresponsible fiscal and monetary policies stretching back to
the mid-1960's and earlier have created strong, underlying forces of inflation in our economy, forces that we must contend with for many years to
The way that excessive governmental regulation has discouraged new production and growth in many of our industries, particularly in the fields of
agriculture and energy;



The way that the wage and price controls of the early 1970's disrupted the
economy and have left us a residue of troubles that are still working their
way through the system ;
The way that the Government's policies have encouraged consumption at the
expense of adequate savings and investment;
The way that broad Government domination of many of the industries in the
Nation has stified individual initiative and spawned a new breed of business managers who seem more eager to rely upon the judgments of a GS16 in Washington than upon their own judgments and competitive instincts.
To me, there is nothing more distressing than to see businessmen trade
their economic freedoms to the Government in exchange for what they
(falsely perceive to be financial security.
'Rather than dwelling further on this point, however, I ask you to consider the
net result of the kind of Government growth as well as other social forces which
have gained favor in the United States.
The net result, I would suggest, is that we have tilted our great economic machine in the wrong direction. Instead of continually renewing and enlarging our
economic foundations, we have allowed them to rust and crumble while we have
enjoyed a long binge of overspending and overconsumption. The bills are coming
due today, and unless we soon reverse these trends, the bills can only grow larger
in the future.
'Once again, let's look at the facts. From 1960 through 1971, as an accompanying
table shows (table 8), annual capital investment in this country averaged approximately 18 percent of our gross national product—the smallest figure of any
major industrialized nation in the free world. In Japan, for instance, annual
capital investment averaged over 33 percent of the GNP, while in Germany it
averaged 26 percent and in France, 25 percent. Thus, the amount of its annual income that the United States was willing to put back into new plant equipment
was smaller than in most of the nations with whom we compete.
TABLE 8.—International comparisons of investment and productivity, 1960 through
Average private Average annual
investment as
growth in
percent of GNP
(output per
United States
United Ejngdom
OECD less United States*

20 5

10 7

*Figures in the first column for the OECD country groups represent private investment as a percent of
GNP including defense expenditures and cover the 1960-1971 period only.
Sources: OECD and national sources; Bureau of Labor Statistics.

The recent figures that are available for international comparisons—figures
showing investments in 1973—indicate an even bleaker investment picture for
the United States. In that year, our investment in private industry sank to 14.9
percent of our GNP, lower than any other major industrialized nation except
Higher rates of capital investment do not guarantee lower rates of inflation.
Japan, for instance, has the highest rate of inflation among the countries mentioned, even though it has also had the highest level of capital investment. But
there is a close correlation between the rate of capital investment and the increase
in a nation's productivity. The annual growth in productivity during the 1960's
and early 1970's averaged more than 10 percent in Japan, almost 6 percent in



Germany and France, and only 3.3 percent here in the United States. As you can
see, the United States had the lowest level of capital investment among these
countries and also the rate of growth in productivity. I need not explain to this
committee that it is growth in productivity which determines how much of an increase in living standards that the American people can achieve over time.
!ln the future, we are going to have to do better. The capital requirements of
the American economy over the next decade will be enormous. We will need up to
a trillion dollars for energy alone. Beyond that, we will need extremely large
sums for control of pollution, urban transportation, and rebuilding some of our
basic industries where new investment languished over the past decade. In addition, there are the more conventional, but still mammoth, requirements for capi. tal to replace and add to the present stock of housing, factories, and machinery.
Yet in the face of these massive requirements, we are not providing adequate
incentives for new investment. Over the past decade the inflation has led to high
effective rates of business taxation and low rates of profitability, which in turn
have greatty eroded the incentives for capital formation. It is not unfair to say
that we are in a profits depression in this country. Nonfinancial corporations reported profits after taxes in 1974 of $65.5 billion as compared to $38.2 billion in
1965, an apparent 71-percent increase. Those profit increases are an optical illusion created by inflation and outmoded accounting methods. When depreciation
is calculated on a basis that provides a more realistic accounting for the current
value of the capital used in production and when the effect of inflation on inventory values is eliminated, after-tax profits actually declined from $37.0 billion
in 1965 to $20.6 billion in 1974—a 50-percent decline. A major factor contributing
to this decline is that income taxes were payable on these fictitious elements of
profits. That resulted in a rise in the effective tax rate on true profits from about
43 percent in 1965 to 69 percent in 1974.
Corporate profits normally provide the foundation upon which corporations
build for the future. They are not only a source of investment funds in themselves, but they also permit corporations to attract or borrow other funds which
may be used for capital investment and which in turn create more jobs. The
decline in profits therefore has grave implications for capital formation and
growth. That is perhaps seen best in the figures for retained earnings of nonfinancial corporations, restated on the same basis to account realistically for
inventories and depreciation. I t is the retained earnings that corporations have
available to finance additional new capacity, as distinguished from the replacement of existing capacity. In 1965, retained earnings totaled $20 billion. By 1973,
after 8 years in which real GNP had increased more than 35 percent, the retained earnings of nonfinancial corporations had dropped 70 percent to $6 billion.
And for 1974, our preliminary estimate for retained earnings is a minus of nearly
$10 billion. That means that there was not nearly enough even to replace existing capacity, and nothing to finance investment in additional new capacity.
I t is a simple but compelling economic fact of life that increases in productive
performance are required over time to support a rising standard of living. Yet,
as a Nation, we are rapidly expanding public payments to individuals but neglecting to provide adequate incentives for new investment. Since 1965, in real terms,
economic output has increased by one-third while government transfer payments
to persons have more than idoubled. On the other hand, private investment expenditures—upon which the economic future of all of us inevitably depends—^have
failed to keep pace, rising by approximately one-fourth.
It is imperative that we make better provision for the future. This means that
we must place much greater emphasis upon saving and investment and much less
upon consumption and govemment expenditure. Today, recession and inflation
dominate the discussion of economic events and policy. We must take determined
action to deal with these interrelated problems and I believe we shall. At the
same time, however, we must begin to shift the longrun balance of domestic
priorities away from consumption and government spending and toward investment and increased productivity. I believe history will judge us, not on how we
handle our shortrun problems such as recession, but on our ability to deal with
the more fundamental problems of the allocation of resources and capital formation. If, as a Nation, we fail to address these problems, we will fail to attain the
prosperity and the rising standard of living that the American people can achieve.
I hope that the recession, has taught all of us the folly of pursuing a "no-growth"
policy, as some figures once argued. Our goal should be to enlarge the economic
pie, not just redistribute it.



While many of the challenges of the economy must be solved primarily in the
private sector, the Federal Government has a positive responsibility to help, and
there are a number of ways that I believe we can help:
First, we can and must take steps to prevent the recession from deepening to
intolerable levels.
Second, we must not abandon the more long-range fight against inflation, for
inflation is a bitter enemy of savings and investment and exacts a heavy toll on
economic growth.
Third, we must enact legislation that will create greater incentives for capital
investment and will allow our financial institutions to operate more fiexibly.
Fourth, we must lift the heavy hand of Federal regulation from the many areas
where it restricts the eflaciency and growth of the free enterprise system. Competition is still the best route to an eflacient and productive economic system, and that
in turn remains the best means we have of fighting infiation and creating more
Fifth, as we emerge from the recession, we must restore a reasonable balance
to the Federal budget and even seek to achieve budgetary surpluses in better
years so that we can free up a maximum amount of capital for savings and
Finally, even as we recognize that the Government should provide strong
leadership, let us also resist those who would have us turn to the Government
for solutions to all of our problems.
Considering the severity of our economic troubles today, it is easy to understand why there are so many who look to Government for instant answers. Many
want to take the easy road, which means letting Government intrude more and
more into our daily lives. We should understand by now that whenever we allow
the Govemment to do something for us that we can do for ourselves, we must
surrender some of our own freedom. In these diflicult times, there is a continuing
danger that temporary security may become so attractive to many Americans
that they may become not only willing but eager to give up more of their liberty
in return for security.
If we have neither the strength nor the wisdom to say "no" to those who call
for further Government domination over our affairs, we will set tliis Nation on
the road to a planned economy and the destruction of the free enterprise system
that has preserved our liberties and given us the highest standard of living man
has ever known. I do not want that for my children, and I am sure you don't
want it for yours. Let us recognize, then, that each of us must accept the risks of
freedom so that we may preserve its rewards.
Thank you.
TABLE 9.—Summary reconciliation of debt limit need in fiscal years 1976 and 1976
with budget and off-budget activity
[In biUions of doUars]
Debt sub ject to Umit end of prior year
Adjusted to $6.0 cash balance
Unified budget deficit
Trust fund surplus..
Off-budget agency spending financed by Treasury
Allowance for contingencies
Change in checks outstanding (assumed flow of tax rebate checks)
Equals debt subject to limit end of year

1976 1976




Exhibit 12.—Statement of Deputy Secretary Gardner, May 14, 1975, before the
Subcommittee on Financial Institutions of the Senate Committee on Banking,
Housing, and Urban Affairs, on S. 12S7, the proposed Financial Institutions Act
of 1975
I appreciate the opportunity to testify on behalf of S. 1267, the so-called
Financial Institutions Act (FIA) of 1975. This committee has played a leading
role in the Congress in the consideration of these structural reforms which will
broaden the powers of financial intermediaries that serve consumers. Nothing
has happened since the original drafting of similar legislation in 1973 that

588-395 0 - 7
5 - 2 1

invalidates the concept and purpose of the legislation. On the contrary, the need
for granting expanded powers has been demonstrated by our problems with
infiation and disintermediation. In fact, in the last year your committee's hearings and the substantial dialogue between industry and consumer representatives
and the Treasury Department have developed better understanding and support
for the principal thrust of S. 1267.
The proposed Financial Institutions Act of 1975 also contains a number of
significant changes from the legislative proposals you considered last year. I
believe these changes are responsive to the comments made at your hearings and
our discussions with the public.
The bill before you now is designed to increase the strength and viability of a
number of classes of financial institutions by permitting them to respond more
readily to economic, financial, and institutional change. But I want to say at the
outset that a clear beneficiary of this change will be the consumer. The bill
encourages greater competition and provides new opportunities for savers to eam
a competitive rate on their investment while providing homebuyers with greater
assurance that the fiow of funds for home mortgages will not be disrupted during
periods of high interest rates.
If the Congress enacts this bill into law, our financial institutions will benefit
from the ability to offer new services and enter new markets; and their customers, both depositors and borrowers, will share these benefits.
Savings and loan associations and mutual savings banks will be permitted to
offer checking and negotiable order of withdrawal (N.O.W.) accounts to individuals and businesses, while diversifying a portion of their investments into
consumer loans, unsecured construction loans, commercial paper, and certain
high-grade private debt securities.
Commercial banks will be permitted to offer corporate savings accounts and
N.O.W. accounts. Credit unions will be permitted to offer mortgage loans to
members, make a wider range of loans at more varied interest rates, and set up
an emergency loan fund.
To improve the availability of mortgage credit, commercial banks, savings
and loan associations, mutual savings banks, and other taxable financial institutions will be granted a new tax incentive to enlarge their volume of mortgage
loans. Finally, the act provides for the elimination of interest rate ceilings on
all types of savings over 3.6^2-year period.
The significant changes from the original proposal involve two sections of the
First, the abolition of interest rate ceilings on deposits will still occur 5^/^ years
after the passage of the act. However, prior to the removal of ceilings, the
administration will conduct an intensive investigation to examine economic and
financial conditions at that time. The study will include a review of the general
state of the economy as it relates to financial institutions, how savings institutions have responded and used their new powers, and the needs and interests of
the consumer/saver. The President and the Congress will then have the opportunity, if appropriate, to make any final improvements in the direction of the
It is our conviction that within 5^^ years the thrift institutions, with broader
powers to compete for deposits, will not need the artificial ceilings imposed by
Regulation Q. During this period the coordinating committee will continue to
have, however, the authority to set ceilings and differentials.
Second, the mortgage interest tax credit is included in the act as before, but
savings and loan associations and mutual savings banks will be given a one-time
option until 1979 to decide when to substitute this tax measure for their current
bad debt loss deduction. By 1979, all savings institutions will be required to
shift to the mortgage interest tax credit.
In addition, the bill has also been changed to clarify the language which
authorizes S&L's to make residential mortgage " loans. The purpose here is to
provide parity with commercial banks. In addition, the permissible investment
of S&L's in corporate assets has been expanded to include bankers' acceptances,
and Federal Home Loan Mortgage 'Corporation securities.
Under the new version of the bill, credit unions will have the authority to
make mortgage loans for up to 30 years to members, and the limits on unsecured
loans are raised from $2,500 to $5,000 for credit unions that otherwise qualify.
Housing and the Financial Institutions Act
Mr. Chairman, I feel that the impact of the Financial Institutions Act on
housing is a matter of great consequence. We have prepared a Treasury paper



on the interaction between the FIA and housing which I have appended to my
testimony and would like to submit for the record.^
Our views and findings in this area can be summarized briefiy.
During the past 10 years, the residential construction industry has undergone
three major housing cycles. The last decline has been particularly devastating:
The drop in housing starts has been more severe and protracted than any other
since World War II.
Much of the decrease in residential construction is the result of rising inflation,
tight money, and unemployment. However, the situation has been aggravated
by the statutory imi>erfections in the housing financing system.
In an effort to provide long-term reform of our financial institutions and
reduce the severity of housing credit cycles, the administration has indeed proposed the FIA. But I should make it clear that the FIA was not intended solely
as a housing measure. The basic purpose of the act is to achieve needed reform
and flexibility for our financial institutions. The FIA is concerned with housing,
but it is also concerned with assuring the consumer/saver of an adequate return
on his savings and a wider variety of financial services, ending the disruptive
and unstable pattern of savings fiows to mortgage-oriented thrift institutions,
increasing the strength and fiexibility of these institutions, and raising the efficiency of the financial system through a greater reliance on market forces.
In the process of achieving all of these objectives, we believe that the FIA
will also increase the longrun supply of housing credit and reduce the cyclical
instability of mortgage financing.
Under the provisions of the FIA, mortgage-oriented thrift institutions will
retain their specialized functions. They will tend to do so because of the competitive advantages of specialization, and because of the positive incentive offered
by the mortgage interest tax credit provisions in title VII of the bill.
The growth of transactions balance held in these institutions as a result
of their new checking account and N.O.W. account powers will add a stable
source of funds for mortgage lending. The higher interest rates that institutions
will be able to offer depositors as a result of increased consumer lending will
attract new savings. Recent studies have shown that savings flows are highly
responsive to small changes in deposit rates. If the increased yield from consumer
loans enables mortgage-oriented thrift institutions to offer more comi)etitive
rates, the new savings flow is likely to exceed the volume of funds invested in
consumer loan assets. As a result, there will be a larger volume of funds available for mortgage lending.
Nor will S&L's switch to consumer loans to the detriment of mortgage lending.
S&L's are mortgage specialists and have expressed a strong commitment to maintain their traditional role. A comparable study of Texas savings and loan
associations found that in every year between 1960 and 1972, the State chartered
associations—which possess consumer lending powers—had a higher percent of
savings in mortgage loans than the Federal associations. We expect consumer
loans to complement mortgage loans; they will certainly not replace them.
In addition, the mortgage interest tax credit provision of the FIA will serve
as an automatic stabilizer with respect to mortgage credit flows. During times of
tight credit, the M.I.T.C. offers a greater incentive for thrift institutions to continue to invest in housing. If a thrift has 70 percent or more of its portfolio
in mortgages, the credit raises the before-tax rate of interest on a 7-percent mortgage to 7.47 percent, a gain of 47 basis points. If, on the other hand, the mortgage
interest rate is 10 percent, the equivalent before-tax yield is 10.67 percent, a gain
of 67 basis points. In other words, the absolute rate advantage of mortgages will
rise during times of tight money, making mortgages relatively more attractive
to investors when credit is scarce.
In addition, the mortgage interest tax credit will increase the absolute importance of mortgage investments by institutions such as commercial banks. These
are less subject to disintermediation and therefore total mortgage flows will be
less variable.
In conclusion, I want to stress that virtually all of the available studies on
financial reform along the lines of the FIA support the conclusion that housing
will benefit as a result of such a program. This was the result of a study by
Professors Barry Bosworth of the University of California at Berkeley and
James Duesenberry of Harvard University, and it was confirmed in the recent
study by the Federal Home Loan Bank Board which was prepared for your
iNot Included in this exhibit.



committee. Further, similar results were presented in testimony to this subcommittee by Prof. Dwight Jaffee of Princeton University during the 93d Congress.
We have submitted copies of what we believed t o be the most significant of these
studies to members of your staff, and I would be happy to submit this list for
the record. I believe that you will find substantial agreement among professional
economists on the need for the FIA.
Credit unions and the Financial Institutions Act
I understand that in this set of hearings the subcommittee is also considering
S. 1475, Credit Union Financial Institutions Act amendments of 1975. The credit
union amendments cover three major areas: (1) Restructuring the National
Credit Union Administration (NOUA), (2) expanded powers, and (3) a broad
central liquidity facility.
Regarding the restructuring of the National Credit Union Administration, we
have not felt that detailed reform of the regulatory agencies should be included
as a i>art of the Financial Institutions Act. Regulatory agency reform is a complex question and requires careful, independent review. While we have no objection in principle to separate consideration by the committee of the proposed
restructuring of the NCUA, we do not feel it should be part of the FIA.
In the matter of expansion of credit union powers, the Treasury Department
has held a number of meetings with credit union associations. We feel that as
other financial institutions are allowed to expand their powers, credit unions
indeed should receive similar opportunities. However, it is important to remember that credit unions have a unique role in the family of financial institutions.
They serve a limited membership drawn together by some type of "common
bond," and they enjoy a special tax-exempt status.
Under the revised version of the FIA, the powers of credit unions would be
expanded significantly. As a part of the act, credit unions will be able to offer
mortgages to their members. The maximum term of unsecured loans will be
raised from 5 to 7 years, and the maximum term for secured loans from 10 to
12 years. The FIA provides for extending lines of credit to credit union members
and permits such credit to vary according to the creditworthiness of their borrowers. The act permits the issuance of share certificates with varying dividend
rates and maturities subject to the rules of the NCUA. And the FIA further
authorizes the administrator of the National Credit Union Administration to
approve loan rates above the statutory ceilings if it is appropriate.
In addition, there are a number of items that are not included in the Financial
Institutions Act which we believe can be handled by regulation, subject to the
judgment of the administrator of the National Credit Union Administration.
For example, credit unions are concerned about third-party payments. The Financial Institutions Act does not provide for this specifically, but there is currently
a share draft experiment nnderway which provides third-party payments for an
experimental group of credit unions. We support this innovative experiment, and
we are optimistic about the resnlts.
The expanded credit union powers proposed in S. 1475 would go far beyond the
balanced expansion of powers proposed in the FIA. The more significant provisions of S. 1475 would eliminate the common bond requirement, generally diminish NCUA's regulatory control, and provide authority to accept demand deposits,
to participate vrith other lenders, to make any loan which is guaranteed by the
Federal Government or State government, to provide personal trust and custodial
services, to deal in "any money transfer instrument," and to hire professional
managers. If this bill is enacted, credit unions would be indistinguishable from
taxpaying thrift institutions.
The principal differences between the discount fund proposed in the FIA and
the central liquidity facility (C.L.F.) proposed in S. 1475 are in its scope and
The discount fund would be authorized to lend to its member credit unions to
provide funds to meet emergency and temporary liquidity problems. The purposes
of the C.L.F. would be to provide funds to meet the general liquidity needs of
credit unions.
The discount fund would be authorized to borrow only from the Treasury in
amounts up to five times its paid-in capital but not in excess of $150 million
outstanding as authorized in appropriations acts and only in the event that
the Secretary determines that an emergency exists and that there are insufficient
funds in the discount fund to meet its obligations for advances to members.



The C.L.F. would be authorized to issue bonds and other obligations in the
market up to 20 times its paid-in capital. Obligations of the C.L.F. would be
fully and unconditionally guaranteed both as to interest and principal by the
United States, and such guarantee would be required to be expressed on the face
of the obligations. This provision would appear to bring the obligations of the
C.L.F. within public debt subject to statutory limitation.
The C.L.F. would also be authorized to require the Treasury to lend it up to
$1 billion in the event that there are insufficient funds in the C.L.F. to meet
obligations for advances to members.
The broad scope of the expanded powers and C.L.F. proposals in S. 1475 raises
important questions about the role of credit unions vis-a-vis competing depositorytype lending institutions that bear on the tax-exempt status of credit unions.
Such powers would also raise questions about the philosophy of the concept of
"common bond", memberships joining together to make loans to members from
the savings of other members. Authority for the C.L.F. to issue its own obligations in the market raises serious concern about the proliferation of Federal
agency borrowing activities in the marketplace.
Mr. Chairman, I would again like to take the opportunity to commend you,
your committee, and your staff for the consideration you have given to financial
reform. Through your efforts a central forum has been provided for the discussion of policies which attempt to deal with the inadequacies of our present system
of financial intermediation.
When the Financial Institutions Act was first introduced in October 1973, its
method of balanced reform included measures that would strengthen the entire
system. At that time each institutional group favored that portion of the bill
which seemed to add to its competitive well-being and opposed measures that it
felt would add to the strength of its competitors. Where the threat was perceived
to be serious, institutions fiatly rejected the idea of any reform at all.
Two years of recurrent high interest rates have accomplished a great deal by
convincing a number of institutions and regulatory authorities of the need for
immediate action and reform to enable the financial system to better cope with
high interest rates and dramatic change.
It is gratifying to see that interest in reform through expanded services to
depositors and borrowers has been generally accepted. The Federal Home Loan
Bank Board has published or adopted regulations permitting an expanded billpayment-type automatic third-party payment and a limited consumer-lending
authority for S&L service corporations. Credit unions, with the approval of the
National Credit Union Administration, are experimenting with share drafts. The
National Commission on Electronic Fund Transfers, the Fair Credit Bill, Truthin-Lending Act amendments, and the Equal Credit Opportunity Act are all in the
spirit of the FIA.
We applaud such independent movement toward financial reform. At the same
time, we must caution against a piecemeal approach.
The FIA-75 is a minimum reform, emphasizing balance and comprehension.
It seeks to achieve financial reform while maintaining the competitive balance
between institutional classes. As a result it is important that the measure be
passed as a whole, rather than be broken into piecemeal legislation which might
substantially alter the relative strength of competing financing institutions. It is
also important that it be passed intact because certain beneficiaries, such as
savers, are generally npt formally organized to present their views, and may not
receive sufficient consideration in a series of partial measures.
The FIA is important, responsible legislation. Over the last few years it has
received substantial support from the nonpartisan academic community. It is time
for the Congress to move forward. The penalties of waiting will indeed be high.

Exhibit 13.—Statement of Secretary Simon, June 25, 1975, before the Senate
Finance Committee, on extension of the debt limit
It is again time to consider the borrowing authority of the Treasury Department.
The present temporary debt ceiling of $531 billion, which was enacted by the
Congress on February 19, will expire at the end of this month. On July 1, in the
absence of new legislation, the Treasury will be unable to issue any new debt



obligations of any kind, either to refund maturing issues or to raise needed
new money.
In the past, iSecretaries of the Treasury have come to the Congress—as I have
today—to request an increase in the debt limit only when the Treasury was close
to running out of borrowing authority. I doubt, however, whether this procedure has really insured the most productive consultation between the Congress
and the administration. For that reason, I would like to discuss with you today,
as I did earlier with the Ways and Means Committee, some possible new
Under the new procedures prescribed in the Congressional Budget and Impoundment Control Act of 1974, the Congress has now established its own timetable for determining the Government's aggregate receipts, outlays, deficit, and
debt. As the new congressional budget and debt limit process is placed into effect, it would seem to me appropriate for this committee to consider shifting its
focus from the amount of the debt to the way in which the debt is managed;
that is, to the timing of debt issues, the size of denominations, the maturity
structure, and the marketing techniques.
While a detailed account of the stewardship of the iSecretary of the Treasury
with regard to these debt management matters is already presented to the
Congress each year in the Annual Report of the iSecretary of the Treasury on
the State of the Finances, we would be happy to work with this committee in
any way that it sees fit in scheduling oversight hearings for the review of these
important governmental activities in greater depth.
In this regard, I should note the considerable discussion in recent months of
the potential impact of large Federal deficits on the prospects for economic
recovery. Dr. McCracken put the matter succinctly when he noted before the
Joint Economic Committee earlier this year that:
If the financial community has been slow to appreciate the role of fiscal policy
in the management of the economy, economists-have been slow to face fully
the implications of the fact that Treasury financing and private borrowing
do compete for funds in the same money and capital markets. And Treasury
requirements are now large enough so that their impact on financing in the
private sector must be faced quite explicitly.
For the fiscal year 1976, the whole Congress has already spoken with regard
to the debt limit. The congressional budget resolution for fiscal 1976, which was
adopted by the Congress on May 14, provided for an $86.6 billion increase in the
debt limit to a figure of $617.6 billion for the fiscal year ending June 30, 1976.
I understand that this congressional action does not have the force of law in
the sense of providing the Treasury with borrowing authority after the end of this
month. Yet, as I said to the Ways and Means Committee, I wonder whether it
would not be more productive if we just accepted that number and got down to
a more substantive discussion of the real issues of debt management.
We all know that there is no widespread inclination to use the debt ceiling as a
real determinant of Federal spending and taxing. Decisions on those subjects
are made by the Congress in other legislation, and once the taxes are set and the
spending is mandated, the Government has no choice but to borrow to cover the
differences between its revenues and outlays.
I could, therefore, accept the $617.6 billion figure as a reasonable estimate of
the peak borrowing of the Treasury in the next fiscal year despite the fact,
which you all know, that the fiscal 1976 budget deficit figure adopted by the
Congress in its May 14 action is significantly larger than the deficit proposed
by the President.
In suggesting that Ways and Means also adopt the $617.6 billion figure, I was
infiuenced by several considerations.
First, I had understood that the Congress in setting its debt ceiling figure was
concentrating on a forecast of the June 30, 1976, debt level. Normally, however,
the debt is as much as $5 billion higher a few weeks earlier in mid-June just before the heavy June tax receipts are received.
Second, I understood that the Congress was operating with an estimate which
was about $5 billion lower than our current estimate of Federal borrowing which
is subject to the debt ceiling even though the purpose is to finance Federal agency
programs which have been placed outside the budget.
Table 1 shows our estimates, based on the President's proposed budget program
in 1976, of debt subject to statutory limitation at the end of each month through



fiscal year 1976, as well as the peak debt in mid-June 1976. Our estimates include
all Treasury borrowing to finance both budget and off-budget programs and make
the usual assumptions of a $6 billion cash balance and $3 billion margin for contingencies. The table shows our peak debt limit need on June 15 at $613 billion,
compared to the congressional figure of $617.6 billion. Given the uncertainty in
estimates and the fact that the debt limit does not control spending, I questioned
whether this relatively small difference was worth an extensive legislative
Indeed, in view of the new congressional procedures, the committee should consider doing away with separate legislation on the debt ceiling and concentrating
on our debt management operations.
As members of this committee know, the House yesterday approved an increase
in the debt limit to $577 billion through November 15, effective on the date of
enactment. I am glad to be able to endorse this action as evidencing a reaffirmation of the policy adopted in the Congressional Budget and Impoundment Control
Obviously, I believe that the President's views on the size of the budget deficit
in fiscal 1976 should and will prevail. But it seems to me that the House action
is a highly responsible act in that it provides the borrowing authority required
by the budgetary targets adopted by the Congress on May 14.
It also seems to me to be significant that the expiration of the temporary limit
under the House bill essentially coincides with the date for the final congressional
resolution on the budget totals. Since the Congress will speak to the debt limit in
that resolution, that action on the debt limit itself will be a pro forma action, and
an opportunity will be afforded for the review of our debt management operations
and economic and financial developments in some more detail than heretofore has
been feasible.
TABLE 1.—Public debt subject to limitation, fiscal year 1976, based on estimated
budget receipts of $299.0 billion, outlays of $368.9 billion, unified budget deficit
of $69.9 billion, and off-budget outlays of $14.2 biUion
[In biUions of doUars]
Operating cash

June 30
July 31
Feb. 29
Apr. 15
May 31
June 15 (peak)
June 3 0 . . .


PubUc debt
subject to

With usual $3
bilUon margin
for contingencies










In light of the very large deficits that we have been financing and will need to
finance in the coming year, whether we look at the congressional numbers or the
President's, I think it is important for the Congress and the American people to
understand what the Treasury has been doing in the area of debt management.
In making our financial decisions, we have sought and obtained the best advice
of practical and experienced market participants and financial leaders.
The Government Borrowing Committee of the American Bankers Association
numbers among its membership senior bank officers from banks in all geographical areas of the country and of a wide range of sizes from the very largest to
relatively small banks. Commercial banks are the largest private purchasers of
Government securities. Advice on bank demands for new Government securities is



The Government Securities and Federal Agencies Committee of the Securities
Industry Association similarly includes senior officials of institutions active in
the Government securities market, a number of whom haVe served also in responsible positions in government—several in the Treasury as Assistants to the Secretary for Debt Management. This committee also has a broad view of the
The members of both advisory committees have been in full agreement that the
Treasury must tap all maturity sectors of the market and that its offerings
should be designed to create and build an upward sloping yield curve to appeal
to nonbank investors and to improve the maturity structure of the debt. They
have pointed out also that such policies would provide some protection against
excessive monetary growth.
We have not followed the specific recommendations of the advisory committees
in all respects, for the ultimate judgments have been ours, as they should be.
But their advice has been valuable, and the results of our financing operations
have indeed been satisfactory.
I agree completely with the wisdom of their consistent advice that to raise the
tremendous sums we require, without extreme disturbance to our financial structure, we must issue securities in all the different maturity ranges; and we must
do our best to halt the long-continued concentration of our debt in short-dated
securities. In that regard, it is a matter of concern to me that the average maturity of the privately held marketable debt has been allowed to deteriorate to
the point that the average maturity at the end of June will be 2 years and 9
months compared to 5 years and 9 months just a decade ago and 10 years and 5
months in June 1947.
The importance of an upward sloping yield curve should not be underestimated.
In the words of one committee:
Because the majority of institutional investors borrow short-term funds and
invest them longer—this is true of commercial banks, of savings institutions
and others—anything that raises short-term rates destroys the incentive to
invest longer term, be it in mortgages, corporate bonds, or stocks. This is
because any action that makes short rates higher than otherwise simply increases the risks of investing long, and destroys the incentive or need to
extend investment maturities.
I particularly call your attention to the attached charts showing the recent
course of interest rates. As these charts indicate, intermediate and longer term
interest rates rose steadily from mid-February until the announcement on May 1
of our May refunding and cash financing program.
The Treasury was accused of having "talked up" these interest rates and has
also been blamed by some for the market difficulties encountered by corporate
and other borrowers in this period.
There is, in fact, very little, if any, lasting market effect from a statement by
the Secretary of the Treasury or any other person regarding the course of future
market rates unless the facts support his conclusions.
Those who make decisions in markets do not survive for long by acting on
statements that are not based on fact. Market reactions to statements which are
not based on facts are temporary and self-correcting. The key to fundamental
market moves is what market participants perceive as the realities of current
and prospective financial conditions. These, in turn, are determined by existing
and anticipated conditions affecting the supply and demand for savings, including the present and prospective Federal deficits.
I would like to point out that as Secretary of the Treasury it is my responsibility to maintain the financial integrity of the U.S. Government and, in so
doing, to speak out whenever that integrity is threatened. Unfortunately, the
cause of a problem is too frequently attributed to the messenger rather than to
the message itself. As the Wall Street Journal said in an editorial, it's like blaming the obstetricians for the high birth rate. As you all well know, in the period
between February and May, it appeared that the Federal deficits for fiscal 1975
and fiscal 1976 would be increased by congressional tax and spending actions
almost without limit. That was the factor in this period that was clearly responsible for the rise in interest rates.
The market rally following our May financing announcement was based on the
downward revision in the anticipated Federal deficit resulting from larger than
anticipated corporate and individual tax receipts and the immediate relief to



the market that was provided by the reduction in our estimated borrowing
requirements for the 2 months of May and June.
The further factor which has since helped to lower rates is the growing sign
of greater congressional recognition of the financial and economic dangers of
excessive budget deficits. Our experience has clearly indicated that further reductions in interest rates from now on depend on maintaining a firm grasp on the
budget situation, on continued progress against inflation, and on continued progress in improving the financial structure of our business firms. All of these things
are essential to achieving a solidly based and long-lasting recovery of the
Based on the administration's projection of a $60 billion deficit in fiscal 1976,
our new cash requirements, including off-budget financing, will total nearly $73
billion—$38.2 billion in the July-December 1975 half year and $34.5 billion in the
January-June 1976 half year. This has not been generally recognized, except by
active market participants. The simple facts are these: On December 31, 1974,
private investors held $181 billion of marketable Treasury obligations. By June 30,
1976—18 months later—they will have acquired another $80-$90 billion more of
marketable Treasurys.
In fiscal 1976 all government borrowing, including State and local, is expected
to amount to about 80 percent of the net borrowings in the securities market;
and the Federal sector alone will account for 50 percent or more of the total
funds raised in all credit markets.
Tables and charts are included in my statement showing changes in the ownership of total outstanding Treasury debt over the past year; offerings of new
marketable securities by maturity since January 1; the schedule of obligations
maturing in the next 12 months; and historical information on new issues, maturities, and new money financing for recent years.
I believe that analysis of this data will support a conclusion by this committee
and the Congress that the Treasury has been fiancing the deficit in a responsible
and constructive manner. In this regard, however, I must say that I am personally
deeply concerned by the notion and I sometimes hear expressed that there is
some simple answer to financing the deficits which will avert painlessly all risks
which are inherent in operations of this magnitude.
In addition to raising an unprecedented amount of new money, we will also
have substantial refunding requirements in fiscal 1976, as table 4 shows. Apart
from the $93 billion of privately held regular weekly and monthly bills, $26 billion of privately held coupon issues will mature in fiscal year 1976.
Thus, our gross financing job will total over $190 billion.
The sheer size of this financing job requires the greatest fiexibility with regard
to the choice of maturities for every new securities offering. And yet, under
present law, however, there is a statutory limitation of $10 billion on the amount
of bonds held by the general public with interest rates in excess of 4i/4 percent.
Moreover, Treasury notes, which are not subject to an interest rate limitation,
are restricted to a maximum maturity of 7 years. Bear in mind that, since 1965,
interest yields required by the market on longer term Treasury securities have
been in excess of 4^/4 percent, and the Congress on three occasions in this decade
has recognized Treasury needs for greater flexibility in its debt management
In 1967, the maximum maturity on Treasury notes was increased from 5
years to the present maximum of 7 years, thus exempting issues up to 7
years from the 4^^-percent limitation.
In 1971, the Treasury was authorized to issue up to $10 billion of bonds
without regard to the 4^/4-percent ceiling.
Then, in 1973, the $10 billion exemption from the 4i^-percent ceiling was
amended so that it would apply only to bonds outstanding in the hands of
the public. The effect was to exclude any bonds held by Government accounts,
including the Federal Reserve banks, in calculating the amount outstanding
against the $10 billion limitation.
The Treasury has used $8.5 billion of the $10 billion bond authority. This
leaves a balance of only $1.5 billion.
In light of the magnitude of our projected refunding and new money needs in
fiscal year 1976 and beyond—and also in light of the basic need to restructure
the debt to redress the neglect of past years—^the flexibility which I now have
for conducting our borrowing operations is grossly inadequate.



The weight of practical and experienced market advice, as I have already indicated, is that we should offer securities in all maturity areas to minimize the
risk of an adverse impact on any particular sector. Indeed, unless we can offer
securities in all the maturity ranges to a wide range of investor interests, debt
management is made more difficult and the ultimate cost of financing our deficits
is likely to be increased. Obviously, this means a market judgment is called for
at the time of any financing, and if our choices are restricted by inadequate
authority to issue a range of securities, such choices are made more difficult and
the results are likely to be less satisfactory.
In this connection, I should mention the sometimes erroneous conclusions about
the impact of Treasury financing operations on particular sectors of the economy.
There is a tendency, for example, to think of housing finance in terms of permanent, 30-year mortgage financing, but as every homebuilder knows, the availability of short-term construction financing is as important to getting a job
started as the permanent financing is to getting the job completed. We also know
that the deposit fiow to financial institutions, such as savings and loan associations, is far more sensitive to the competition of shorter term Treasury obligations than to the comi>etition of longer term obligations. Indeed, every sector
of the economy, every aspect of our financial markets, is so interrelated that undue
concentration of Treasury financing in any particular maturity area can have
adverse effects throughout the whole market—which could largely have been
avoided by a better choice of new securities.
As we move forward into the recovery phase, there is an additional reason for
concern with our debt structure.
It is obvious that a substantial portion of our financing in the future, as in the
past, will have to be handled in the short and intermediate area. In fact, in the
first 6 months of this year we have issued $47.6 billion of new marketable securities excluding exchange offerings to the Federal Reserve and Government
accounts and counting only the net additions to bills. Of this total, $32.5 billion—
68 percent—^has been in maturities of less than 2 years; $12.4 billion—26 percent—^has been in maturities of 2-7 years; and only $2.7 billion—less than 6
percent—has been in maturities over 7 years; that is, in the ^bond area. Only
$1.5 billion, 3 percent of the total, has been in long-term maturities over 20 years.
But if we concentrate our new offerings entirely in the short- and intermediateterm areas, then, when the economy has achieved a substantial measure of recovery, the problems of the Federal Reserve will be greatly complicated, as would
the problems of future Secretaries of the Treasury. The already substantial
buildup in the amount of securities coming due in each year is likely to continue.
Two years ago, the privately held marketable debt maturing within a year
amounted to just $84 billion. Today, the figure is $119 billion. Two years ago our
major refundings were quarterly, but it is now likely that we will soon have
significant coupon maturities in every month of the year.
We cannot escape all of the future adverse consequences of necessary shortterm financing. In my judgment, however—and I know this is a judgment shared
by other market professionals—excessive amounts of short-term Treasury debt
could contribute to another situation in which we could get an excessive rise in
short-term interest rates, with the whole panoply of adverse economic and financial consequences such as developed in 1966,1969-70, and again in 1973.
This is obviously not an immediate problem, but as the recovery develops and
private credit demands expand, commercial banks and other lenders will attempt
to liquidate Treasury securities to obtain funds for lending to the private sector.
Short-term Treasury debt is very near to money and, unless there is a substantial rise in interest rates, it can be readily liquidated at small cost to provide
funds for other purposes. If Treasury financing needs are still large at that time
and excess demand threatens to reignite infiationary pressures, the Federal
Reserve System will have to resist this liquidation by the private sector by allowing short-'term interest rates to rise.
The alternative of Federal Reserve purchases from the private sector—monetization of the debt—could temporarily restrain such a rise in rates, but only at
the expense of adding to the inflationary potential.
I know the argument that we should refrain from long-term borrowing at this
time when rates are historically high and wait until a time when rates are lower.
Despite the superficial appeal of this argument, to preclude the Treasury from
the sound debt management practices available to virtually all other financial
market participants will inevitably lead to undesirable and damaging results.



It may seem strange that any Secretary of the Treasury woiild wish to borrow
at a rate of near 8 percent in the long-term market when he could borrow at a
rajte of 5 percent or less with 91-day bills, an apparent cost difference of 3 percent, which could translate into many millions of dollars of interest in a year's
Such mechanical-type calculations beg the question.
In the first place, long-term financing avoids the need for frequent future
refundings of debt at unpredictable rates of interest. Short-term rates are volatile and their volatility would be increased by concentrating Federal financing
unduly in the short-term area. Such volatility would harm not only Treasury
finance but the financing of private borrowers. This is one reason that the Treasury chose to do a substantial part of World War II financing with 2^/^ percent
bonds, when the alternative was financing with % of 1 percent bills. The immediate budget cost was less of a concern than the consideration for future economic
stability; but undoubtedly, with the subsequent rises in interest rates, the longrun cost of bond financing was less than the cost of continually rolling over the
Second, and more important, short-term Treasury debt is a near-money, so
thait to achieve the same economic effects. Federal Reserve i)olicy must be relatively more restrictive if the amount of short-term Treasury debt outstanding
is larger. If we finance all of our debt in the short-term area, therefore, we will
create a prospect that future interest rates will be higher throughout all financial markets than if we finance a meaningful portion of our debt in the longer
term area.
Thus, the apparent interest saving from short-term financing can be an illusion, whether we are concerned about the budget alone or whether we take the
point of view of the economy a.s a whole, and I might add that nearly every
corporate or municipal Treasurer who has relied on short-term financing in the
last few years will share this view.
Beyond this, an inability of the Treasury Department to utilize all maturity
sectors, including the long-term sector, would be interpreted by the market, and
the public generally, as indicative of a lack of will to deal with the infiation
which is still our basic, longrun economic problem. Whether that were or were
not a valid concern, it would be an important psychological barrier to the future
reductions in longer term rates, which I perceive as essential if we are to restore
health to the housing industry and are to encourage the business investment
which is needed if this country's economic progress is not to falter. Long-term
interest rates have continued to refiect ingrained infiationary expectations. Our
financing should be conducted in a way that will help to overcome those expectations.—not in a way which will tend to confirm them.
For these reasons, I believe the time is now appropriate to the amount
of bonds that may be issued without regard to the 4^/4-percent ceiling on rates and
to extend the maximum maturity of Treasury notes.
I specifically recommend, with regard to the 4i/4-i>ercent ceiling, that the exception be increased from $10 billion to $20 billion. I wish to emphasize as strongly
as I can that market conditions are unpredictable, so that the amount of longer
term issues which might be issued in any specific period could vary greatly,
depending upon market demands. The record indicates, however, that we have
been responsible and sensitive to financial and economic conditions in our use
of the exception to the 4^^-percent limit. We will continue to be responsible and
I also strongly recommend that the maximum maturity of Treasury notes be
extended from the present 7 years to 10 years. This extension of the maximum
note maturity, assuming that market conditions permit, could be a powerful
tool in helping to arrest the decline in the average maturity of the debt and
reduce the concentration in short-term issues which has taken place in recent
In addition, I want to urge that early consideration be given to removing the
6-percent rate ceiling on savings bonds. Such action would allow the rate on savings bonds to be varied from time to time in accordance with changing financial
circumstances in the interest of both savers and taxpayers. Thus, we could provide greater assurance to the savings bond investor that his Government will
continue to give him a fair rate of return on his investment. Greater flexibility
to adjust savings bonds rates could also make a significant contribution to the
Government's overall debt management objectives. Savings bonds account for



about one-fourth of the total privately held Treasury debt, and the average savings bonds investor holds his security for a longer period than investors in marketable Treasurys and is thus an important source of stability to debt
Such flexibility would Obviously need to be exercised with due regard to the
impact of savings bonds rate changes on depositary institutions. As experience
has demonstrated, however, there is no way permanently to insulate these institutions from the effects of changing economic circumstances. We have, therefore,
proposed a Financial Institutions Act, which will allow the removal of Regulation
Q-type ceilings by providing the thrift institutions with expanded powers which
will improve their ability to compete without a Federal crutch.
The urgency of the need for greater debt management flexibility is, I believe,
underscored by the facts that I have already mentioned. During this calendar
year, out of the $47.6 billion of marketable securities issued to the public, $32.5
billion has been in maturities of less than 2 years. This is 68 percent of the total
in money market instruments. $12.4 billion has been in maturities of 2 to 7 years.
This is 26 percent of the total. And only $2.7 billion, less than 6 i)ercent of the
total, has been in the bond area over 7 years. In fact of all our market financing,
only $1.5 billion, just 3 percent, has been in maturities of over 20 years.
There is a large debt management job before us. The Treasury will handle its
part of the debt management job responsibility. I urge you to act promptly to give
us the tools to do the job.



$Bil. Underi Yearl 1-2 Years


^ m Bills
50 - H N o t e i
25 _ ^ i B o n d

2-3 Years

3-5 Years

5-7 Years

Over 7 Years

June 1975*








^ ^



June 1974






June 1973




* Estimated

Weekly Averages


Calendar Years





Weekly Averages

^t^ Prime Rate


Privately Held

v---June 1947
10 years

January 1965
5 years
9 months



April 1975
2 years
8 months

j y Semi-annual plots, calendar years 1946-1969, monthly thereafter.
2 / Partly estimated.

T A B L E 2.—Changes in ownership of Treasury public debt securities
[ P a r values i; i n billions of dollars]

E n d of m o n t h


Fed. &

Totalpriv a t e l y held

banks 2

Individuals 3




















1.4 220.4
5.6 220.8
10.0 219.9
7.0 225.9
11.5 226.5







n . a . N o t available.
1 U . S . savings b o n d s are i n c l u d e d a t c u r r e n t r e d e m p t i o n v a l u e .
2 Consists of commercial b a n k s , t r u s t companies, a n d stock savings b a n k s i n t h e
U n i t e d States a n d in Territories a n d island possessions. Figures exclude securities
h e l d in t r u s t d e p a r t m e n t s .
8 I n c l u d e s p a r t n e r s h i p s a n d personal t r u s t accounts.
* Exclusive of b a n k s a n d insurance companies.




5.7 .



6.2 ,



Corporations 4

State and
local governments

a n d international 5












56.0 .



12. 0




investors ^












5 Consists of t h e i n v e s t m e n t s of foreign balances a n d i n t e r n a t i o n a l accounts i n t h e
U n i t e d States. Beginning \vith J u l y 1974 t h e figures exclude non-interest-bearing
notes issued to t h e I n t e r n a t i o n a l M o n e t a r y F u n d .
6 Consists of savings a n d loan associations, nonprofit i n s t i t u t i o n s , corporate pension
t r u s t funds, a n d dealers a n d brokers. Also i n c l u d e d are certain G o v e r r m i e n t deposit
accounts a n d G o v e r n m e n t - s p o n s o r e d agencies.




TABLE 3.—Offerings of marketable securities,'^ J anuary-June 1976
[Amounts in billions of dollars]

Total offerings


Percent of







Under 2 years



13-, 26-week bills
52-week bills
other bills



1 year-3 month. Issued 1/9
1 year-6 month, issued 3/3.
2 year-0 month, issued 3/3
1 year-2 month, issued 3/25
2 year- 0 month, issued 3/31
1 year-8 month, issued 4/8
2 year-0 month, issued 4/30
2 year-0 month, issued 5/27
1 year-5 month, issued 6/6
2 year-0 month, to be issued 6/30
2-7 years
4 year-4 month, issued 1/7
3 year-3 month, issued 2/18
6 year-0 month, issued 2/18
6 year- 8 month, issued 3/19
3 year-3 month, issued 5/15.
7 year-0 month, issued 5/15
7-20 years


15 year-1 month, issued 4/7
Over 20 years.







20/25 year-0 month, issued 2/18..
25/30 year-0 month, issued 5/15..
1 Includes net additions only to biUs and excludes exchange offerings to Federal Reserve and Govenunent



T A B L E 4.—Marketable maturities through J u n e 30, 1976 (issued or announced
through J u n e 30, 1976)
[In billions of dollars]

Treasury bills


*Less than $50 million.
n.a. Not available.
1 Treasury bills in 2-year note cycle slot.

 7 5 - 2 2
588-395 0 





Coupons and other






Regular weekly

SJ/s percent note 8/15/75
8M percent note 9/30/75
I H percent note 10/1/75.
7 percent note 11/15/75
7 percent note 12/31/75.
J anuary 31 bill ^
6K percent note 2/15/76
5>'R percent note 2/15/76
8 percent note 3/31/76
VA percent note 4/1/76
6H percent note 5/15/76
5 ^ percent note 5/15/76
6 percent note 5/31/76
SH percent note 6/30/76









163. S







Treasury issues, maturities, and new money, fiscal years 1973-76
[In millions of dollars]

'• 1973







1975 p


Gross issues





141, 228

283, 373

167, 379




125, 297
19, 077

120, 660

245, 957

132, 111
10, 034

128, 981
12, 247

261, 092
22, 281







134, 562

144, 349

278, 911

147, 651

154, 632


115, 975
15, 590



10, 072


256, 230

16, 797

13, 773








19, 728







- 2 , 759



1 8,706



Gross maturities
Net (-1- or — issues).-.
Issued to private:
Bills (net)
Coupons to foreign 2
Maturities privately held:
New money from private

24, 649





22, 774























p Preliminary.
» Assumes rollover of $4,506 million regular bills maturing June 26,1975.


2 included in coupons issued to private.




Exhibit 14.—Other Treasury testimony in hearings before congressional
Secretary Simon
Statement, January 23, 1975, before the House Ways and Means Committee, on
raising the Federal debt ceiling.
Statement, June 2, 1975, bef ore the House Ways and Means Committee, on raising the Federal debt ceiling.
Under Secretary for Monetary Affairs Schmults
Statement, July 24, 1974, before the Subcommittee on Financial institutions
of the Senate Committee on Banking, Housing, and Urban Affairs, on the current
disintermediation situation.

Domestic Econoinic PolicyExhibit 15.—Statement by Secretary Simon, August 2, 1974, before the Joint
Economic Committee, giving a midyear review of the economy
Your midyear reviews provide a valuable opportunity to examine current economic developments and to make plans for the future. It is a pleasure to be here
today and to participate in these deliberations.
In this statement, I plan to comment briefly on both domestic and international
aspects of our current situation. There is, however, no need for me to cover in
detail our recent and jxrospective economic performance or our basic economic
policies. These have been carefully and thoroughly described within the past week
by the President and other administration spokesmen.
Nevertheless, I do want to say a few more words about the intolerably rapid
rate of inflation we are now experiencing. Domestically this has become the dominant, overriding—almost overwhelming—fact of economic life. Americans are experiencing their first sustained siege of rapid peacetime inflation. It is a new and
most unwelcome experience. They do not understand where double-digit inflation came from and they lack confidence that their Government will be able to get
the situation under control.
How did we get here? I will not try to retrace all the causes of the current
inflation, or try to fix the blame one place or another. Without too much risk of
oversimplification, I think it is fair to say that the price explosion of 1973-74 is
primarily attributable to (a) a series of severe temporary shocks that originated
mostly outside the U.S. economic system and (b) almost a decade of excessively
stimulative fiscai and monetary policies.
The outside shocks are, by now, familiar to all of us: the worldwide agricultural crop failures of 1972, enormous pressures on the prices of internationally
traded raw materials, two devaluations of the dollar, and the Arab oil embargo.
In addition, the end of the controls program is now^ operating as an additional
temporary force to raise some prices and wages faster than otherwise would have
been the case.
But all these special factors, as important as they have been, are of a temporary one-shot nature. Had our general economic policies not been too stimulative, the outside shocks would have had only a one-time effect. Once they had
worked their way through the system, the inflation would have settled down
again to a tolerable rate.
But our general economic policies have, in fact, been far too stimulative for a
long period of time. Let me give you two examples of how policy changed in the
mid-1960's. First, on the fiscal side: From 1955 to 1965 Federal expenditures
rose at roughly a 6-percent annual rate. From 1965 to 1974, however. Federal expenditures surged to a 10-percent annual rate of growth. Second, monetary policy
also broke out of a previously established pattern. From 1955 to 1965 the money
supply grew at a 2i/^-percent rate. Since then, the growth rate has more than
doubled to a 6-percent annual pace. It is no accident that during the earlier
period we had a rather stable price performance, but since 1965 we have had the
worst peacetime inflation in our history.
What has and is happening, then, is that the excessive budget deficits and the
excessive growth of money and credit in recent years prevented the "temporary"
price pressures from running their course and fading away. Instead, much of
the inflation from the outside shocks is or soon will be deeply embedded in our



entire system. It is or soon will be embedded into the pattern of wage settlements
and into the structure of interest rates. It is or soon will be embedded into the
economic expectations of consumers, of workers, of investors, of businessmen—
And because this inflation is becoming so deeply embedded, squeezing it out of
the system will be a long, tough process. It is a most diflacult challenge for economic policy.
In my opinion the correct course of action is to apply the necessary fiscal and
monetary discipline persistently and consistently to keep the economy operating
within the limits of its capacity to produce. The economy can be prosperous and
it must continue to grow, but we must not let it continue to run away with itself. Demand will have to be held slightly below total potential output. Sales can
show a healthy growth, but that growth will have to be constrained so that if
businessmen try to raise prices too fast, competitive pressures will prevent them
from doing so. Employment can grow, too, but our labor markets must not be too
tight so that the joint worker-management process of wage determination can
result in a gradual deceleration of the upward trend of pay scales.
Let me emphasize that this fight against inflation will take time, years of it.
There are no shortcuts, no acceptable quick solutions. Frequent and abrupt
changes in policy are the worst policy of all. To cure the price disease, we must
be prepared to stay the long course and take an even .strain on economic policy
year after year. This is the only way to get the job done.
The President has put forward a coordinated program for dealing with inflation. The first requirement is to relieve those pressures of excessive demand in
the economy that have caused the acceleration of advances in the price level. The
second part of the program has to do with measures to relieve the casualties and
inequities of inflation.
There are many who question the effectiveness of restrictive fiscal policy to
counter these fundamental inflationary pressures. In my view, however, the evidence of experience is clear that fiscal restraint applied consistently and in tandem with monetary restraint can bring inflation under control.
I have attached to my statement a chart—a very instructive chart, I believe—
that shows the broad relationship between the budget and inflation. As seen
on the chart, the actual budget position does not correlate closely with the rate
of inflation. This is where the full-employment budget proves itself to be a useful
guide to economic policy; the full-employment calculation adjusts the budget
data to remove the impact of the economy on the budget, and thereby brings out
the impact of the budget on the economy. And when the full-employment budget
position is compared to the rate of inflation, a fairly high degree of correlation
shows up. The relationship is less than perfect, but in the broad sweep of things
it is clear that sustained budget surpluses are associated with below-average
inflation, and sustained budget deficits are associated with above-average
There are 2 years during the 26-year span covered by the chart in which the
inflation is far higher than can be accounted for by fiscal policy. These years are
1950-51. and 1973-74, which were the two occasions when commodity infiation
(food and industrial raw materials) had an extraordinarily large, one-time
impact on the general price level. Aside from those tw^o occasions, the relationship strongly supports the general notion that budget deficits are inflationary
and budget surpluses are not inflationary.

P a n e l 1: The budget d a t a shown here are the actual surpluses and deficits, on a national
income accounts basis, for calendar years expressed as a percent of gross national product.
Note t h a t these d a t a are plotted on an inverted basis in order to provide an easier visual
comparison with the inflation rate.
P a n e l 2 : These budget d a t a are t h e same as in panel 1 except t h a t the surpluses and
deficits have heen adiusted by the Federal Reserve Bank of St. Lonis to a full-employment
basis by standardizing the figures to a constant 4-percent unemployment rate. The bars are
plotted—for the purpose of better displaying the relationship between the budget and
inflation—as deviations from the average surplus for 1948-73 of 0.8 percent of GNP.
(Panel 1 was not plotted this way because the average was virtually equal to zero.)
P a n e l 3 : Inflation is represented here by percent changes in the GNP deflator from the
previous year. In eifect, therefore, the inflation measure is charted with a 6-month lag
compared to the budget d a t a in panels 1 and 2. The bars are plotted as deviations from
the 1949-74 average price increase of 2.9 percent.
Source of d a t a : U.S. Department of Commerce.




Actual NIA Budget Position
























NIA Budget Position, Full Employment Basis


1 °

























+8 L

(GNP Deflator)








Note: Bars are plotted as deviations from average rather than from zero.



I do not want to suggest that countering inflation is so simple that all we have
to worry about is our budget position. Quite the contrary. We all know that
"money matters" and that we have to be concerned with monetary policy. Arthur
Burns has already testified that a 6-percent growth in money is too high for price
stability over the longer term. He has also stated that monetary policy will be
conducted so as to avoid a credit "crunch."
In this regard, we should remember that a strong, steady fiscal i>olicy is
especially important when, as at present, demands for flnancing capital formation and housing are heavy relative to the flow of national savings. I believe the
normal target for the budget should be a surplus equal to 1-2 percent of Federal
outlays. With such a surplus, which would add roughly 2 percent to the national
savings stream, credit requirements would be in approximate balance with this
flow of savings, and the needed steadier course for monetary policy would then
be less endangered by the risks of floundering credit and capital markets.
Any well^conceived anti-inflation program must also have regard for the
casualties of inflation and for those whose earnings may be interrupted for a
time by a program of disinflation. Without getting into detail, let me say that
I believe we can gradually reduce inflation without suffering massive unemployment. For a time, we will have to live with slightly more unemployment than we
would like, but it will not have to be a large amount. To deal with this contingency, the President has proposed improvements in our system of unemployment compensation, and I again urge congressional passage.
Strains in the financial markets have had particularly adverse effects on
housing, and in May the President put forward a $10 billion program to augment
the supply of mortgage funds. These financial strains together with higher prices
of primary energy have—because of the slow pace of the regulatory process—
produced dangerously low eamings for many companies in regulated industries.
While these are largely State and local regulatory bodies which must act, the
administration is examining what might be done to speed up the needed changes.
These illustrate the kinds of economic adjustments that must be accommodated
in order to facilitate the disinflationary process.
Summing up
To bring our price disease under control, we will have to keep our general
economic policies under flrm control. There is no acceptable alternative. We can
and will pursue complementary policies—maximizing agricultural production,
reorganizing ineflficient Government regulatory practices, and others. But the
key is to keep demands in the economy within the limits of its productive capacity
through balanced fiscal and monetary restraint.
If we do not do so, we will continue to have the cruel, indiscriminate, insidious
tax of inflation. Inflation hurts everybody—people on every rung of the income
ladder, corporations, financial institutions. State and local governments—everybody. Most of all, it hurts the poor. And if we do not have the self-discipline to
keep Federal spending in line with tax revenues, what happens is that the deficit
is closed by the harsh and uneven tax of inflation, rather than by more equitable
routes of achieving balance between outlays and revenues.
Before closing this discussion of our domestic economic situation, I want to
say a few words about profits. To curb inflation, our policy in the short run must
be to restrain demand. In the long run, however, we must make every effort to
expand our productive capacity. To this end, adequate profit incentives are crucially important.
In the last year or two, there has been much talk about an excessive increase
in corporate profits. I am afraid, however, that these increases in profits have
not been put into proper perspective. In particular, there has been inadequate
recognition of the impact of inflation on this measurement of profits.
For example, nonfinancial corporations reported profits after taxes in 1973
of $55 billion as compared to $38.2 billion in 1965, an apparent 44-percent increase.
But when depreciation is calculated on a basis that provides a more realistic
accounting for the current value of the capital used in production and when the
effect of inflation on inventory values is eliminated, after-tax profits actually
declined by 21 percent, from $36.1 billion in 1965 to $28.5 billion in 1973. One
major factor behind this decline is the fact that taxes were paid on these fictitious
elements of profits, which resulted in a rise in the effective tax rate on true profits



from about 43 percent in 1965 to 59 percent in 1973. On this basis, furthermore,
after dividend payments, the retained earnings available for reinvestment, which
were $19 billion in 1965, were only $5 billion in 1973.
Thus, a more realistic calculation shows that the sharp rise in profits was
an optical illusion caused by inflation. And this helps to explain why the ability
of business to increase its productive capacity is in jeopardy and why our flnancial markets are so congested.
In this context, it is not surprising that basic industries such as steel, coal,
natural gas, and aluminum are experiencing shortages in productive capacity. Increased productivity and decreased Government spending are the two essential
lines of attack against inflation. Both the administration and the Congress
must reassess past legislation that stimulates consumption and inhibits saving
and investment. No nation can neglect investment in favor of consumption for
very long and still prosper. I am quite concerned that since 1960, plant and equipment spending in the United States was only 15 percent of total output, whereas
France invested 18 percent, Germany 20 percent, and Japan 27 percent. And
furthermore, for gross domestic investment, 'which includes inventories, housing,
and public investment, the proportions for 1973 are: United States, 17 percent;
France, 26 i)ercent; Germany, 25 percent; and Japan, 37 percent.
The International Economy
We have now had more than a half-year's experience with the increased oil
prices announced late last year. The international economy has been profoundly
changed. Fortunately the most exaggerated fears of some have not proved justified. But we are confronted by diflficult problems, related both to petroleum developments and to worldwide infiation, which together have led to a widespread slowdown in economic growth this year.
As in the United States, people everywhere are suffering the wrenching pains
of inflation. Few countries have escaped double-digit rates of price increase, and
almost all are experiencing inflation rates considered intolerable by past
Inflation is a common problem around the world, in part because of the
strong forces that carry price pressures across national boundaries. Fundamentally, this reflects our growing interdependence—the fact that the links among
nations have become stronger as intemational trade has grown more rapidly
than domestic trade. To illustrate the importance of the international transmission of inflation, I would cite recent forecasts of the Organization for Economic
Cooperation and Development that increases in the price of imported oil will
directly add some 1^/^ percentage points to the rate of inflation in OECD member
countries this year, and increases in the prices of imports of other primary
products another percentage point. These figures do not allow for secondary
effects of the import price rises on domestic prices, and thus understate the
total price effect. Another striking measure of the price increases affecting international trade is that in the first half of 1974 the average value of OECD imports,
swollen by the oil price increases, rose by 65 percent and. the average value
of exports by 32 percent.
I found in my recent travels abroad that others view the inflationary problems
we are experiencing in this country somewhat differently than we do. In fact,
others look at our record with a certain envy. While this does not make our inflation easier to bear or to deal with, the fact is that we are doing better than
many other countries. Consumer prices have been rising at rates of about 12 percent in the United States, but this compares with figures of some 30 percent for
Japan and 15 to 20 percent for Italy, the United Kingdom, and France. In Germany, on the other hand, where strong policies of demand restraint have been
pursued for an extended time, prices are rising at a rate of less than 8 percent.
Recognition of the common danger of inflation has in recent months brought
about a more realistic view of the prospects for growth. At the turn of the year,
against the background of an oil embargo, some thought the oil-consuming
nations might be thrown into chaos, and the specter of a 1930's depression was
raised. Today, the embargo is lifted and energy shortages are no longer a severe
restraint on growth. While the industrial world is still experiencing a slowdown,
there is wide agreement that the slowdown is essential if we are to control the
forces of inflation. There is a healthy recognition that the inflationary co^s of
excessive expansion would be unacceptable. While we cannot turn our backs on



the possible future need for stimulative policies, it is understood that nothing
could more severely threaten the fabric of our societies than to hit the throttle
at a time when we should have our foot firmly on the brake.
The increase in oil prices brought with it the danger of an escalation of trade
restrictions. There was concern that importing nations, seeing their own trade
balances deteriorate because of increased oil imports, might impose restrictive
trade measures which would simply shift more of the deficit elsewhere, and the
cumulative effect could be excessive domestic deflation. This must, of course,
be watched. However, OECD member countries agreed in May to a declaration of
intent to avoid recourse to restrictive measures. In June the IMF Committee of
Twenty agreed to a similar pledge for adherence by the broader membership of
the International Monetary Fund. The United States strongly supported both
these moves, and we are confident they will reinforce the commitment of the
world trading community to a liberal trading order. It is critical that the Congress help us maintain the momentum toward expanding world trade by prompt
and aflSrmative action on the Trade Reform Act, so that the "Tokyo Round" of
multilateral trade negotiations can faove forward toward reducing trade barriers
and building better arrangements for managing intemational trade relations.
When this Oommittee met in February, concern had already been expressed
about the problems of financing oil surpluses and deficits and the ability of private
financial markets to handle the anticipated vast flows of funds. More recently,
diflSculties of a few banks heavily involved in intemational transactions have
magnifled expressions of concern.
We recognize that the private markets face a serious challenge. But we should
not exaggerate the difficulty. Let us not make allegations unsupported by facts.
An individual bank, through imprudence or other management problems particular to the firm, can certainly get into trouble. But that does not imply any
impending failure of financial markets generally or of the monetary system.
Certainly there will be strains in the face of the major challenges posed for the
markets. In my talks with the Finance Ministers of other countries, we have
frankly recognized this prospect. And we are confident that we can develop
mechanisms to deal with these strains.
I do not, however, classify as real the problem of potentially massive shifts of
funds—the worry that oil monies will be capriciously shifted from one market to
another, thereby disrupting the foreign exchange and financial markets. In part,
this is because investments by the oil-producing countries will be in instruments
of varying degrees of liquidity, some of which—probably a growing proportion—
could not be liquidated without losses that would make such shifts unattractive.
Beyond this, massive shifts of funds would cause pressures on exchange rates,
also quickly making such transfers unprofitable. I can assure you my experience
has been that the financial authorities of the Arab countries who will be managing
oil revenues are indeed conservative and responsible and will not be found taking
illogical actions.
The private financial markets are in fact making substantial progress in adapting to the problems of oil financing. In the first instance, bankers have initiated
discussion of the problems, such as rapidly growing liabilities relative to their
capital base, excessive divergence in the maturity preference of lenders and borrowers, and too much concentration on particular lenders and borrowers.
And they are adapting their own practices. In a market saturated by offers of
short-term funds, banks are insisting on paying lower rates for monies in maturities they don't need. We are seeing banks acting as brokers, arranging direct
,placements. These are necessary, encouraging responses.
The lenders, too, are adapting. They are looking for other places to put money :
government securities; advance payments for imports; phased loans to governments ; credits to nationalized industries and corporate borrowers; real estate;
and equity of large corporations. These shifts of funds into nonbanking channels
will ease the pressures on the banks.
In these circumstances bankers must continue to look for new techniques, new
channels of moving funds to those who need them. Some traditional practices may
have to be reexamined. Management, above all, be prudent and careful. But
there is no reason why the banking system cannot continue to handle a very large
share of these funds while the remainder move through other channels.
I am asked what the role of governments and central banks is in this situation.
Certainly they must maintain a proper economic environment, by containing inflation and following suitable policies. But that is not their only duty. I do not



believe t h a t the private sector alone should carry the responsibility. Governments
and central banks as bank supervisors and suppliers of liquidity—their traditional
role in developed flnancial systems—have a clear responsibility to assure the
soundness of the system as a whole. I am referring to problems of liquidity, however, not solvency. I t is not the role of t h e public authorities to underwrite
management of an individual institution or to assume the risks of its stockholders.
There will also be occasions when direct govemment-to-government handling of
funds will be the most eflacient method. Over the years, the Treasury Department
has issued special securities to various countries, including particularly large
amounts to Germany. Inevitably, special responsibility must be assumed by
governments of the oil-exporting countries, and they are already beginning to provide direct loans and other types of financing for, and investments in, the economies of the oil customers. I r a n alone has in recent weeks agreed to make subs t a n t i a l loans to F r a n c e and the United Kingdom and made a substantial investment in the Krupp concern in Germany.
Governments' most urgent task—one for which the private m a r k e t s a r e largely
inappropriate—is to organize assistance for the poorest countries most seriously
affected by the oil price increases so t h a t severe hardships a r e not wrought on
their populations. The new Development Council recommended by the Committee
of Twenty will urgently address this problem. Public responsibility hag also been
recognized in the establishment of a special oil facility in the International
Monetary F u n d to supplement private markets—a kind of "safety net" for
countries able to afford its near-market terms but unable to obtain adequate
financing through the private markets. We have also expanded our extensive network of intergovernment swap agreements.
However, the objective of public policy should not be to take OV(T the basic
role the p r i v a t e m a r k e t s have traditionally played in moving funds about the
world. Rather, governments should seek to strengthen t h a t role, as the United
States did early this year when we removed our capital controls.
We a r e fortunate to be able to approach the problems we face today within the
framework of the monetary agreement reached a t the Committee of Twenty
Ministerial meeting in June. T h a t agreement represented a landmark in our
efforts to reform the international monetary system. Certainly much remains to
be done, and further negotiations lie ahead. B u t the international contmunity has
responded in a constructive manner to the challenges it faces. One of the most
important results of the C-20 work was t h a t it demonstrated both our determination and ability to work cooperatively in dealing with our problems. This spiiit
is essential to the success of our future efforts. I have had useful discussions
with my counterparts in other countries and am confident t h a t a solid foundation
exists for our continuing to work together.
I believe, too, t h a t the flexible exchange r a t e arrangements presently in place
have served us well in a particularly diflScult period. Despite the great uncertainties we have been through, speculative pressures have not been excessive and
exchange rates fluctuations have not been extreme. The dollar, following a r a t h e r
large swing from the middle of last year to the flrst q u a r t e r of this year, h a s
subsequently moved against the trade-weighted average of other currencies
within a range of plus or minus 2 percent around the levels prevailing following
the realignments of F e b r u a r y 1973.
I had an opportunity on my t r i p last month to discuss the oil financing problems
with Middle E a s t e r n and European leaders. The authorities of the oil-producing
countries with whom I spoke displayed a keen awareness of their interest in and
responsibility for assuring t h a t their vastly increased oil revenues will be invested
in a way t h a t minimizes disruption to world economic and financial relationships.
I am glad to report t h a t the atmosphere I encountered in Europe on the question
of recycling oil revenues was one of concern but basically consistent with our
own views. I t w a s generally agreed t h a t we should broaden our exchange of
information and ideas on developments in the financial markets. We must have
contingency plans, so t h a t we are prepared to act, and to act quickly, in the
event an emergency situation requires it.
Mr. Chairman, a great deal of w h a t I have spoken to you about today is related
directly or indirectly to t h e question of oil prices. As you know, it is my conviction t h a t we will see lower oil prices. I am convinced this is in the longrun
interest of producers as well as consumers. I know of no single move more import a n t to the elimination of worldwide inflation and the maintenance of international financial stability.



It would be a disservice to underestimate the tenacity with which we shall
have to attack our present problems. I am confldent, though, that we are on the
right track, that the policies being followed nationally and internationally are
the policies which will in time bring solutions to our problems. Inflation will
abate. We will avoid the extremes of depression and flnancial collapse. We will
flnd a new equilibrium in the commodity markets.
To achieve these goals here in the United States, the most important single
action we can take is to regain control of Federal spending. To this end, close,
cooperative, and bipartisan action will be required. This committee could make
a significant contribution by encouraging a prompt activation of the new and
stronger procedures for budget control provided in the Congressional Budget Act
of 1974. Without determined action by both the administration and the Congress,
the rise in Federal outlays this year and next could be so large as to impose
sustained rapid inflation on the American people. To prevent that result is our
most important duty as public oflScials.

Exhibit 16.—Summary of The Financial Conference on Inflation, September 20,
1974, Statler Hilton Hotel, Washington, D.C.
The Financial Conference on Inflation conducted by the Department of the
Treasury brought together a distinguished group of private and public participants to examine the problems of inflation. Congressional cooperation and active
participation was an integral element in the success of the Conference. The
flnancial community was represented by senior oflScials from commercial banks,
savings institutions, insurance companies, and the investment community. Participation by professional economists, consumer experts, and labor representatives
insured a desirable breadth of view. Those invited put aside parochial concerns
and participated actively in a serious and objective review of inflation and its
financial consequences.
The Conference opened with brief statements by Secretary of the Treasury
Simon, Chairman Greenspan of the Council of Economic Advisers, Associate
Director Scott of the OflSce of Management and Budget, and Chairman Burns of
the Federal Reserve. The remainder of the morning session was devoted to brief
statements on the inflation problem by each of the private and congressional
participants. In the afternoon a series of seven topics was discussed by the group :
flscal policy, monetary, policy, capital markets and capital formation, international economic policy, flnancial institutions and inflation, wage-price policy, and
other suggestions to deal with inflation.
IThe major theme that ran through the entire Conference was that the inflation
problem is difficult and will not be solved quickly or easily. It was recognized that
inflation had already created serious financial strains and inflicted large financial losses. At a time when the Nation faces enormous future demands for new
capital, our flnancial markets are seriously constrained in their ability to provide
the required funds. One particii>ant pointed out that 30 miUion stnckbo^d'^rs have,
in the aggregate, seen their equity values decline by an estimated $500 billion since
January 1973, and another observed that ". . . high interest rates kill investment
bankers and brokers and bankers would not vote for them either." Yet, it may be
significant that there was virtually no mention of trying to live with high rates of
inflation bv some full-scale adaptation of financial techniaues or instruments and
little suggestion that monetary policy should dexmrt from its current course of
moderate restraint. Instead, there seemed to be general consensus that inflation
could, and would, be dealt with.
Fiscal policy
There was virtually unanimous opinion, however, that much greater reliance
needs to be placed upon fiscal restraint, and that this should take the form of
cuts in Federal expenditures. Most participants seemed to regard an expenditure
figure below $300 billion in fiscal year 1975 as either essential or hisrhly desirable.
Even those who tended io minimize the direct shortrun effect on inflation of. say,
$10 billion less in Federal expenditures, accepted the desirability of expenditure
restraint for the beneficial financial and psvchological effects that would result.
There was little discussion of the details of any expenditure reduction program,
but several delegates expressed their belief that definite steps should be taken



before the fall elections. In addition, a suggestion that the Executive might initially be given power to withhold sufiicient funds from current appropriations
to meet 150 percent of any desired cut in Federal expenditures was supported by
several participants. Also, several delegates contended that any large budget—
corporate or Federal—could usually be cut by a few percent.
In general, expenditure reductions were regarded as the way in which flscal
restraint should be exercised. But a number of participants indicated that they
would favor general tax increases if these were essential to control inflation. Also,
there was some discussion of the possible desirability of imposing a sizable excise
tax on gasoline and remitting part of the proceeds to low-income groups. Other
tax suggestions related more directly to flnancial markets and financial
There was some expression of dissatisfaction with the budget concepts that
are currently employed. A number of participants felt that the full-employment
budget concept should be relegated to obscurity and attention directed to actual
budget deficits. One felt that the actual budget concept should be narrowed by
excluding the trust funds and returning to the older administrative .budget concept. There was much more support, however, for widening the budget concept
to include the activities of off-budget agencies and the effects of Federal credit
programs. The latter were widely regarded as an important factor explaining the
extent of current financial strains.
Monetary policy
In contrast to fiscal policy, monetary policy received very little criticism from
the Conference participants. There was some expression of belief that high interest rates may cause inflation, rather than the reverse; but most participants
seemed to accept high interest rates as a necessary evil, or as an inevitable consequence of high rates of inflation. There was some expression of hope that the
Federal Reserve would find a further reduction of short-term rates compatible
with the containment of inflation, but little suggestion that monetary policy
should be eased appreciably. Indeed, despite the adverse effects of tight money
on financial markets and institutions, the continuation of a moderate degree of
moneitary restraint was cle'arly regarded as desirable by most of the participants.
There was some departure from this apparent consensus. A few participants
questioned the effectiveness of monetary restraint so long as commercial banks
were not subjected to Regulation Q ceilings, and one likened unregulated financial
markets to a "financial jet engine." It was suggested that a partial remedy might
lie in the application of a ceiling on the bank prime rate. But this suggestion, and
the analytical view upon which it was based, did not seem to elicit much support
within the Conference. There was also some mention of "financial brinkmanship"
and a few references to the possibility of having pressed monetary policy up to,
if not beyond, the limits of prudence. But some felt that this was necessary to
deal with inflationary expectations and there was general agreement that failure
to employ suflficient fiscal restraint had caused undue reliance on monetary
Wage-price policy
While fiscal and monetary policy were clearly regarded as the major tools for
dealing with inflation, there was an articulate minority view which favored a
supplementary effort in the wage-price field. This minority view ranged from advocacy of an explicit incomes policy to reliance on a less explicit "social contract" approach. There was general recognition within the Conference that we
face a difficult wage-price situation, in view of the decline in labor's real eamings over the past year or so. It was suggested that tax reduction might even have
merit as a quid pro quo for wage restraint, but the diflficulties of such an approach
were also recognized. No interest whatsoever was evidenced within the Conference
for a return to wage-price controls.
Other broad issues
A number of other broad issues emerged in the course of the Conference. The
view was widely expressed that there is currently a need for a clear signal to the
public of the Government's intention to deal firmly with inflation—to most participants this meant sizable reductions in Federal spending. The general desirability of strong Presidential leadership and an early initiative in the economic
field was also mentioned. Several speakers stressed the need for a deeper public
understanding of the inflation problem and one called for more responsible reporting of economic news by the TV networks.



There was a fair amount of discussion of the desirability of achieving a greater
feeling of involvement in the inflation fight on the part of the public. The issue
was raised a number of times in different contexts. Several suggestions were advanced as to how closer public involvement might be achieved. For example, millions of publicly owned acres could be made suitable for community gardens to
cope with rising food costs.
There was frequent expression of the importance of taking steps to insure that
the cost of reducing inflation be fairly shared. The attention of the Conference
was directed to the possibility that the burden of unemployment falls so heavily
on minority groups that some members may be driven to prefer the comparative
security of welfare programs.
International economic policy
In the international area, attention was directed to the fact that since the end
of World War II there has been a progressive dismantling of barriers to the movement of goods, services, and people across national boundaries. This has had
enormously beneficial effects. Now, however, there is some danger that inflation
may drive countries into economic nationalism. It was urged that we push ahead
on the Trade Reform Act to enable this country to take a leadership role in pursuing lower barriers to trade and investment. Some concerns were expressed over
the potential instabilities inherent in the Eurodollar market and it was questioned whether the "recycling" problem had been solved satisfactorily.
There was some expression of belief that international matters might have been
insuflficiently emphasized within the Conference. But more importantly there was
a fairly widespread view that the United States had failed to deal effectively
with broad problems cutting across economic and political areas, e.g., the quadrupling of oil prices. It was suggested that the responsibility for U.S. foreign
economic policy is too fragmented and that better coordination would result if
policy decisions were reached in an "International Quadriad" headed by Treasury
and including State, NSC, and the Federal Reserve.
Capital markets
A certain degree of pessimism was expressed on longer term domestic financial
developments. The basic diflSculty is the inability of financial markets to function eflficiently in an inflationary environment. Many participants pointed to the
current sad state of the equity markets, and the difficulties faced by long-term
debt markets. There was general agreement that future capital requirements
would be very large in comparison with past experiehce. The need to offer greater
incentives to both saving and investment was stressed. Adequate levels of
profits were regarded as essential and there was considerable discussion of
the accounting problems involved during inflationary periods in both the inventory
and capital investment areas.
Regulatory requirements and costs
Attention was directed by a number of participants to the harmful effect upon
productivity of Government regulations. Particular reference was made to the
diflScult situation of the utility industry. It was suggested that there is a need
for a thoroughgoing review at all levels of Govemment of regulations on industry
which result in increased costs without increased benefits to the consumer.
Several participants cited the desirability of a more gradual approach to
environmental cleanup.
Financial institutions
The special problems of savings institutions during periods of tight money
received a good deal of attention. Considerable support was expressed for the
reforms embodied in the administration's Financial Institutions Act. A few participants pointed, however, to the long road ahead before savings institutions can
compete on anything like an equal basis with commercial banks. Possible future
resort to variable rate mortgages was mentioned. An issue to which a number of
participants referred was the possibility of an exemption or tax credit for interest
on savings deposits.
Special topics
A number of special topics were raised by industry spokesmen and a profitsharing proposal was described by one participant. Details on these and other
matters are provided in the full transcript of the Conference proceedings.




In general, the Conference felt that major reliance must continue to be placed
upon the two main tools of aggregate economic policy : fiscal policy and monetary
policy. There was widespread recognition of the need to insure that the burdens
of any anti-inflationary program are equitably shared. The need for greater fiscal
restraint was emphasized by nearly every participant. No further intensification
of monetary restraint was recommended but a continued policy of moderate
restraint was generally viewed as desirable. There was a minority within the
Conference which favored a more active wage-price policy.
There was also wide consensus on the need to develop specific policies to deal
with specific problems that have arisen in the domestic financial area as a
consequence of inflation. Also, the need for a more active and better coordinated
foreign economic policy was stressed.

Exhibit 17.—Remarks of Assistant Secretary Fiedler, October 26^ 1974, before the
Inaugural Meetings of the Eastern Economic Association, Albany, N.Y., on
causes of and cures for inflation
Day before yesterday, the New York Stock Exchange celebrated—if that's the
word—the 45th anniversary of "Black Thursday," the beginning of the debacle on
Wall Street in 1929. Although the debacle of 1974 on Wall Street has induced
some comparisons with the events of 4^/^ decades earlier, our economic diiOficulties
today are of a very different nature and origin than those following 1929. Tlien
the primary problem was depression with its shockingly high rate of unemployment. Today our primary problem is the shockingly high rate of inflation.
This is not to say that our economic diflSculties today are of only one dimension.
We not only have inflation, but sluggish economic activity along with it. In a
word, stagflation. But I put the inflation dimension of our problems at the head of
the list, not only because it is so severe and not only because the decline in
activity will be (by 1930's standards at least) quite limited, but also because the
basic source of the weakness in activity comes from the inflation itself.
This is a point worth some emphasis. The same forces causing prices to rise
so virulently are also producing the economic downturn. It has been inflation
that has dried up the supply of mortgage credit and sent housing into a tailspin.
And it has been inflation that has crushed consumer confldence and put the
brakes on consumer spending harder than at any time since World War II.
These are the two weakest sectors of the economy, and thus it is the inflation
itself that is the basic cause of our economic sluggishness and rising unemployment. In shaping policy to deal with our economic diflSculties, therefore, we
must continue to put top priority on the fight against inflation—even though
it is so much easier and, from a short-term point of view, so much more enjoyable
to flght recession.
Causes of inflation
What policies we use to counter inflation'depend in part on its causes. In the
long run, e.g., two decades, the monetarists are right: It is the supply of money
that is the strategic varialjle in determining what happens to the general price
level. But to know that is not much help in solving the problems we face in the
short- and intermediate-range future. We must know what it is that causes
changes in the quantity of money. Equally important, we must recognize that
there can be extremely important nonmonetary influences on the general price
index in the short run.
On this latter point we have had over the past couple of years two of the
most prominent examples imaginable: food and energy. In the long run, what
happens to prices of individual commodities, or commodity classes, is of little
or no consequence to the rate of inflation. But in the short run, even for several
years, commodity groups as important as food and fuel can have a very powerful
Workers' loss of income
While on this topic, there is a related point that deserves much more attention
than it has received. When real incomes are discussed, we often hear statements
like, "inflation has cut the real spendable purchasing power of the average



nonfarm worker's paycheck by 4 percent over the past 12 months." I n a pure
arithmetic sense, t h a t statement can't be denied. Yet it seems to me to misrepresent w h a t has actually taken place, namely, a transfer of real income out of
the pockets of nonfarm workers.
F a r m prices went up because food supplies went down, through n a t u r a l
causes. Energy prices went up because oil supplies went down, through unn a t u r a l causes. I n both cases, to get the food and fuel he wants a t higher
relative prices the nonfarm worker must give up more of his real income to
farmers and to owners of oil both here and abroad. Thus it is the reduction of
supplies of both food and fuel t h a t is the real cause of the worker's loss of real
income, not the inflation. The inflation is a measure of w h a t has taken place,
but not the cause of it.
This point is not just a m a t t e r of semantics or a nice essay question for Economics 201, but also has serious ramifications for our future r a t e of infiation.
Quite understandably, workers do not w a n t to accept this loss of real income—
they don't w a n t to be taken advantage of by either a quixotic Mother N a t u r e or
by the countries t h a t produce petroleum. Workers w a n t t h a t real income back.
Accordingly, wage demands and wage settlements have escalated sharply since
the end of controls. B u t since the worker's loss w a s not his employer's gain—i.e.,
corporate profits in almost all sectors of the economy a r e still in the normal
range—there is no way for these accelerated wage pressures to be met except
through another round of price hikes. The attempt by workers to catch up, to
make up for their lost real income, is t h u s doomed to failure. As a group workers
will be no better off—and we are all likely to be worse off. The price increases
associated with reduced supplies of food and fuel will have been built into the
system; they will have become embedded into our inflation r a t e on both the wage
and price sides.
More fundamental causes
B u t the horrendous r a t e a t which the price level h a s been rising is not due
solely to bad luck, as in the case of food and fuel. I t is also traceable to the
dogged pursuit of bad policies for a decade or more, including—
Fiscal policy; not only the rapid growth of spending from the mid-1960's on
with its accompanying deficits in prosperous years a s well as slack years,
but also the massive proliferation of off-budget lending programs.
Monetary policy; the accelerated growth in money and credit throughout
the past decade, over and above w h a t was in some sense " m a n d a t e d " by
Federal spending and lending programs, and which h a s succeeded only
in bringing us higher prices and higher interest rates.
The maintenance for many years of an intemationally overvalued dollar,
which dampened inflation in the United States but contributed to the
inadequate expansion of capacity by most of our basic materials industries—steel, paper, et cetera—where almost all of our inflationary bottlenecks were experienced in 1973 when we reached the limits of economic
expansion. Then, when the devaluations of 1971 and 1973 occurred the
United States suddenly became the most favorable place to buy those
scarce r a w materials, which added another special burst of price pressures
to our recent inflation;
Wage and price controls, which did little to control inflation overall but
. which did, in those areas where prices were suppressed, create economic
distortions. Perhaps the best examples a r e those same basic materials
industries, where controls kept prices and proflts a t low levels, causing
expansion plans to be further delayed. Then in the spring of 1974, when
the controls ended, those price pressures came out of the bottle with a
Thus bad economic policies joined hands with bad luck to create the rampaging
inflation we a r e stuck with today. How much of the inflation we should allocate
to each cause is impossible to determine, because of the strong interactions t h a t
a r e surely involved. We can safely say, however, t h a t the country would have
been in much better shape to weather the food and fuel crises, without so much
inflationary damage, h a d w^e not h a d bad economic policies for so long.
I n t h i s catalog of t h e causes of inflation, I liave not thus far said anything
about oligopoly, administered prices and wages, and the greed of labor leaders
and business managers. The omission is deliberate. Not t h a t such conditions
and characteristics do not exist. Quite the contrary. Greed, for example, is as



prevalent in business and labor as it is in academe, in politics, and everywhere
else. B u t I personally do not see greed or oligopoly or administered prices and
wages as bearing any major responsibility for our inflation.
Cures for inflation
About the only sure thing t h a t can be said about curbing inflation is t h a t the
process is -unpopular. Catching the inflationary disease and then curing it are
like a wild night on the t o w n : The first few drinks appear to have decidedly
pleasant effects, but oh t h a t hangover !
Since bad luck was a significant p a r t of the acceleration of inflationary
momentum over the p a s t few years, it would be nice if we could have a r u n of
good luck to help us with the deceleration. We had better not count on it, however.
The critical requirement is to pursue the necessary monetary and fiscal discipline consistently and persistently to keep the economy operating within the
limits of its capacity to produce. I t is essential, in my opinion, t h a t we establish
and maintain a moderate degree of slack in the economy for a number of years.
This does not mean a depression. Decidedly not. After a period of weakness, of
the sort we a r e now in, it is vital t h a t economic growth resume a t a normal
pace. Business sales can show a healthy growth, but t h a t growth will have to
be constrained so t h a t if one businessman tries to raise prices too fast there
will be a competitor someplace with extra capacity who will take the orders
away from the first company. Employment can grow, too, but our labor m a r k e t s
must have a little slack in them, so t h a t the joint worker-management process
of wage determination can result in a gradual deceleration of the upward trend
of pay scales. A small gap will have to be maintained between our total economic capacity and the level of demand, if we a r e to achieve a meaningful
slowdown in the r a t e of inflation.
T h a t is not a happy prescription. No one likes to see total income and output
restrained below maximum. No one likes to put off increases in worthwhile Federal spending programs, or to forego the pleasures of a tax cut. No one likes to
have credit less easily available, or to see the growth of business profits held
back for a while. Most important, no one is happy with the prospect of unemployment averaging slightly higher t h a n it otherwise would. B u t if we a r e to
regain control over inflation, there is no other way. These costs, which a r e not
negligible, must be met. There is no acceptable alternative, because the costs of
continued rapid inflation a r e much higher.
Some people think there is an easier way in the form of controls of one sort
or another. I cannot accept that. We and other countries have tried comprehensive, mandatory controls, and they j u s t don't work—'short-term gains are
sometimes realized, but only a t the expense of long-term pains. And more benign
versions of direct government intervention—guidelines or social compacts—
suffer the same shortcomings. Generally, they don't provide any effective res t r a i n t on inflation, and where they do impact on individual price and wage
decisions they do more h a r m t h a n good. Thus, I conclude t h a t the only choice
is to operate our growing economy with a moderate margin of slack for an
extended period of time.
The p r e s e n t situation
An effective policy to curb inflation is already underway. Our policies have
already produced enough restraint to develop the necessary margin of slack in the
economy, as is becoming clearer every week. The flrst crucial step in the antiinflation fight is therefore behind us.
The r e s t r a i n t created t h u s far, however, h a s come almost entirely from the
monetary side. The Federal Reserve has been bearing the burden of restrictive
policies substantially by itself. T h u s the second vital step is to redress this
imbalance between monetary and fiscal policies by achieving greater control of
the budget. I would argue t h a t total restraint from both nia jor policy tools need
not be any tougher than h a s been the case over the past year—perhaps slightly
less, in fact—but there is a compelling argument for changing t h e mix. I t is
vital t h a t we ease pressures in the credit markets, so t h a t interest rates can ease
off and so t h a t funds again flow to the beleagured housing industry.
T h e third and final step for policy will be to keep a moderate degree of
economic slack in existence for some time to come. We must not be pressured
into a new round of overheating. To achieve this goal, we must be sure to have
effective programs in place to cushion the impact of inflation where it strikes



with disproportionate force—programs such as direct aid to housing, low-income
t a x relief, extended unemployment benefits and an expanded public employment
program. These programs a r e important for two r e a s o n s : First, they a r e important as a simple m a t t e r of compassion for the unlucky and the disadvantaged.
Second, if we a r e to keep the slack in existence, we must be sure t h a t its burden
is shared equitably throughout society, so t h a t this policy a t t a i n s a broad and
durable political acceptance. Otherwise the American people.will opt for a new
round of excessive economic policy stimulus—^i.e., more of w h a t got us into this
mess in t h e first place.
I n conclusion, I can only express my hope t h a t the American people will choose
to take the unpleasant-tasting medicine of fiscal and monetary discipline. I t is
not an ideal solution and it is not an easy solution. None exists. B u t it is a better
choice t h a n another try a t controls or t h a n trying to live with double-digit inflation. Our economy will survive in any event, but I believe we will experience less
economic diflSculty if we follow the p a t h of s-elf-discipline.

Exhibit 18.—Address by Secretary Simon, F e b r u a r v 28, 1975. before t h e Commonwealth Club. San Francisco, Calif., concerniner th*» growth of government, t h e
weakening of t h e free e n t e r p r i s e system, and inflation
I t is good to be in San Francisco again, especially among so many old friends.
I am also deeply honored to be a t this podium, for every speaker who comes
here knows he is addressing one of the flnest audiences in the country.
For several months, one depressing economic s t a t i s t i c after another h a s been
pouring out of Washington, subjecting all of us to an exquisite form of Chinese
water torture. Back East, people a r e reminded of the fellow who was told by
his doctor t h a t he had to stop drinking or he would become deaf. T h e fellow
refused t o follow the doctor's advice. Asked why, he explained: "I like w h a t I've
been drinking so much better than w h a t I've been hearing."
Times haven't been easy for a n y of us. T h e day after I took this job, a close
friend of mine put it nicely. "Bill," he said, "you've just become the purser on the
I don't seriously believe that, of course. Those who take such perverse delight
in proclaiming the end of t h e American Dream are dead wrong, just as the
touters of gloom and doom have always been wrong in the past. We should
never underestimate either our economic system or ourselves. Certainly, our
economv h a s its weaknesses and certainly the present r a t e s of unemployment
. and inflation a r e unacceptably high, but our economv remains the strongest and
most powerful in the world and as a people, we still have the wisdom and the
will to regain control of our own destiny.
The major question before us is whether we can wake up to the malignant
forces t h a t are subtly, quietly, but verv busily eating away a t the foundations of
our society. Once we know the