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Al.ii^lh:a^j.^n4^J^''i of the Secretary of the Treasury on the State of the-Financesy F m WE HSCML ViM^ EmED MME 3g WIS DEPARTMENT OF THE TREASURY DOCUMENT NO. 3266 Secretary U.S. GOVERNMENT PRINTING OFFICE, WASHINGTON : 1975 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 \0 THE SECRETARY OF THE TREASURY WASHINGTON October 6, 1975 Dear Sirs: I have the honor to transmit to you the annual report on the state of the finances of the United States Government for year ended June 30, 1975. the fiscal This submission is in accordance with 31 U.S.C. 1027. Sincerely^^^terQrs, President of the Senate Speaker of the House of Representatives The statistical tables to this Annual Report will be published in a separate STATISTICAL APPENDIX. CONTENTS Page Introduction . _ xix REVIEW OF TREASURY OPERATIONS 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 . 3 9 28 32 41 51 66 ADMINISTRATIVE REPORTS 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 121 131 144 148 149 151 152 154 160 _. — 162 176 179 181 - 198 203 208 223 229 EXHIBITS Public Debt Operations, Regulations, and Legislation 1. 2. 3. 4. Treasury notes .— Treasury bonds -Treasury biUs _'.--Department Circular, Public Debt Series No. 1-63, January 10, 1963, Amendment, regulations governing United States retirement plan bonds 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 V 243 247 251 253 253 259 VI CONTENTS Page 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 265 267 267 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. 267 270 283 287 301 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 committees . __.. 301 308 311 314 319 324 339 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 340 341 344 345 353 358 360 CONTENTS vn Tax Policy Page 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 program •. --.-. 368 388 399 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 .J. , — 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 Cooperation" -_.._ :..-_...:.-_^-:.^ 41d 4i3 4i5 416 4i7 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_ _ ^__-_ ._ _. . ^_^-^-_^_ 424 4§7 436 438 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 ..^ ^ ^ ^_...:^__..^^__...^^.-- 438 442 449 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._;.__...^_.._..:. 457 464 467 471 VIII CONTENTS 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 Fund _-_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, 1975 .... .-_. 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 ^___ . Page 475 480 488 493 494 494 501 501 503 509 514 518 525 531 531 535 537 CONTENTS rx Page 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 firms .. 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 . ...... 544 544 545 546 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 banks 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. 547 552 555 557 562 567 573 576 Organization and Procedure 77. Treasury Department orders relating to organization and procedure. _ 576 INDEX 587 STATISTICAL APPENDIX The tables to this Annual Report will be published in the separate Statistical Appendix. 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 From To 1972 8, 1974 May 8, 1974 Jan. 22, 1973 July 31, 1974 May 8, 1974 Jan. 27, 1969 July July 9, 1974 8, 1974 0 UIJC May June 12, 1972 Mar. 15, 1974 July 9, 1974 July June Aug. Apr. Dec. Apr. June Aug. Aug. Jan. May May June 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 Officials 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. XI PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS OF THE DEPARTMENT OF THE TREASURY AS OF JUNE 30, 1975 Secretary of the Treasury Deputy Secretary of the Treasury Under Secretary for Monetary Affairs Under Secretary General Counsel 1. 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 Planning 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 Operations ^ . 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 (acting) Barbara A. Jensen Paul W. McCracken (Vacancy) 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 (Vacancy) Edgar R. Fiedler (Vacancy) 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 XII PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS Office, Under Secretary: Special Assistant to the Under Secretary Special Assistant to the Under Secretary for Revenue Sharing and Intergovernmental Relations . Assistant Secretary (Administration) Deputy Assistant Secretary for Administration and Director, Office of Management and Organization 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 Affairs) 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 : XIII Joseph J. Adams Kent A. Peterson Warren F. Brecht J. Elton Greenlee Robert R. Fredlund Wilbur R. DeZerne John Garmat (acting) Arch S. Ramsay (Vacancy) 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 (Vacancy) 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 (Vacancy) Hugo A. Ranta (Vacancy) Leslie S. Shapiro Assistant Secretary (Tax Policy) Deputy Assistant Secretary for Tax Legislation Frederic W. Hickman Ernest S. Christian, Jr. 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 1 Karl Ruhe Deputy to the Assistant Secretary for Tax Policy Nathan N. Gordon (International Tax Policy). BUREAU OF ALCOHOL, TOBACCO AND F I R E A R M S Director Deputy Director Assistant Director (Administration) Assistant Director (Criminal Enforcement) Rex D. Davis William R. Thompson William J. Rhodes John F. Corbin, Jr. XTV PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS 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 BUREAU OF ENGRAVING AND P R I N T I N G Director Deputy Director • James A. Conlon Kenneth A. DeHart BUREAU OF GOVERNMENT F I N A N C I A L OPERATIONS Commissioner Dario A. Pagliai Deputy Commissioner Gerald Murphy Assistant Commissioner, Administration George L. McConville Assistant Commissioner, Banking and Cash Manage- Sebastian Fama ment. Assistant Commissioner, Comptroller Steve L. Comings Assistant Commissioner, Disbursements and Claims (Vacancy) Assistant Commissioner, Government-wide Accounting— (Vacancy) BUREAU OF T H E MINT Director '. 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 BUREAU OF T H E P U B L I C DEBT Commissioner Deputy Commissioner Assistant Commissioner (Washington) Assistant Commissioner (Field) Chief Counsel . H. J. Hintgen J. J. Lubeley William M. Gregg Martin French Calvin Ninomiya CONSOLIDATED FEDERAL LAW E N F O R C E M E N T T R A I N I N G Director Deputy Director Assistant Director Assistant Director Assistant Director Assistant Director CENTER WilliamB. Butler Robert G. Efteland William H. McClarin Alvin C. Turner David W. McKinley (Vacancy) (Investigator Training) (Police Training) (Administration) (Educational Support) I N T E R N A L REVENUE SERVICE Commissioner Deputy Commissioner Assistant Commissioner payer Service) Assistant Commissioner Assistant Commissioner Assistant Commissioner Organizations) Assistant Commissioner Assistant Commissioner Assistant Commissioner Chief Counsel Donald C. Alexander William E. Williams (Accounts, Collection and Tax(Administration) (Compliance) (Employee Plans and Exempt (Inspection) (Planning and Research) (Technical) OFFICE OF T H E COMPTBOLLER OF T H E 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 OURRENCY James B. Smith Richard D. Chotard, Jr. James T. Keefe David H.Jones PRINCIPAL ADMINISTRATIVE AND STAFF OFFICERS 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 XV 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 UNITED STATES CUSTOMS SERVICE Commissioner of Customs Deputy Commissioner of Customs Assistant Commissioner (Operations) _ Assistant Commissioner (Regulations and Rulings) Assistant Commissioner (Administration) Assistant Commissioner (Investigations) . Assistant Commissioner (Internal Affairs) Assistant Oommissioner (Enforcement Support) Chief Counsel i Vernon D. Acree G. R, Dickerson Roland Raymond Leonard Lehman John A. Hurley George C. Oorconan, Jr. William A. Magee, Jr. Alfred R. DeAngelus Thaddeus Rojek (acting) U N l t m ) STATES SAVINGS BONDS DIVISION 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 ^ UNITED STATES SECRET SERVICE Director Deputy Director Assistant Director Assistant Director Assistant Director Assistant Director Assistant Director _ (Administration) (Inspection) (Investigations) (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 ORGANIZATION OF THE DEPARTMENT OF THE TREASURY SECRETARY DEPUTY SECRETARY UNDER SECRETARY FOR MONETARY AFFAIRS UNDER SECRETARY JL Assistant Secretary Assistant Secretary Commissioner Assistant Secretary I n t e r n a l Revenue (Tax Policy) Service - Assistant Commissionei (Accounts. Collection. ( T r a d e , Energy, & Financial Resources Assistant Secretary Fiscal Assistant Assistant Secretary Assistant Secretary ( E c o n o m i c Policy) Secretary (Administration) (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) (Enforcement, Operations, & Tariff Deputv Assi Sec Ioi Tiade and Ra> Mateiials Policy OM ce oi Law [niorcemenl Oil ce oi Opeiations Oi ce ol l a i i i l Allans 01 ce ol Foreign Assets Control Ta« Legislative Counsel Ollice oi Intefnational lax Counsel Ity Asst. Sec. ( a Comptroller of the Currency Affairs) Special Assistant to tlie Secretaiy (Debt Management) cy Coordination . Ollice ol Perso Consolidated Federal Law Enloicement riainmg Center \-\ firs! Deputy Comptroller INTRODUCTION ^ 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 Appendix. DOMESTIC D E V E L O P M E N T S 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 XX 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 occurred. 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 1975. 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. INTRODUCTION XXI 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 xxn 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 companies. 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 INTRODUCTION XXIII 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 XXrV 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. INTRODUCTION XXV 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, outlays.at $313.4 billion, and XXVI 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. INTRODUCTION XXVII 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 points. 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. INTERNATIONAL DEVELOPMENTS 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. XXVIII 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 INTRQDUCTION XXIX 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 problems. 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 xxx 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 markets. 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 INTRODUCTION XXXI 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 XXXII 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 petroleum. 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. INTRODUCTION XXXIII 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. Digitized for588-395 FRASER 0-75-3 XXXrV 1975 REPORT OF THE SECRETARY OF THE TREASURY 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, INTRODUCTION XXXV 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 production. 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 XXXVI 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. CONCLUSION 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. INTRODUCTION XXXVII 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 inflation. REVIEW OF TREASURY OPERATIONS FINANCIAL OPERATIONS Summary 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 financing. 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] 1974 1975 Budget receipts and outlays: Receipts Outlays 264. 9 268. 4 281. 0 324. 6 Budget deficit ( - ) _ -3.5 -43. 6 3. 0 50. 9 2.5 —.3 Means of financing: Borrowing from the public Decrease or increase (—) in cash and other monetary assets ., Other means: Increment on gold and seigniorage Outlays of off-budget Federal agencies Other Total budget financing 1.5 — 2. 7 -.9 3. 5 .6 — 9. 5 2. 0 43. 6 4 1975 REPORT OF THE SECRETARY OF THE TREASURY THE BUDGET 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 Fiscal Years 1975 Receipts 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] Source Individual income taxes Corporation income taxes Employment taxes and contributions Unemployment insurance Contributions for other insurance and retirement Excise taxes Estate and gift taxes Customs duties.-Miscellaneous receipts Total budget receipts Increase, or decrease (—) 1974 1975 118,952 38,620 65,892 6,837 4,051 16,844 5,035 3,334 5,369 122,386 40,621 75,204 6,771 4,466 16,551 4,611 3,676 6,711 1,343 264,932 280,997 16,064 3,434 2,002 9,312 -66 415 -293 -424 341 Projected estimates of receipts to future years, required of the Secretary of the Treasury, are shown and explained in the President's budget. Individual income taxes.—Individual income taxes reached $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 REVIEW OF TREASURY OPERATIONS 5 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. Outlays 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. 1975 REPORT OF T H E SEICRETARY OF T H E TREASURY [In millions of dollars] 1975 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 Other Undistributed intrabudgetary transactions Totaloutlays Increase, or decrease (—) 3,329 9,767 79,307 93,738 4,786 8,966 8,104 35,993 2,362 3,252 13,337 22,096 —16,646 3,572 9,725 87,471 112,411 7,488 17,649 9,247 41,177 3,198 3,267 16,575 26,920 -14,098 3,238 4,824 -2,648 268,392 324,601 56,209 243 -42 8,164 18,673 2,702 8,682 1,143 5,184 836 14 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: Deposits Withdrawals ( - ) Excess of deposits or withdrawals (—), public debt accounts : Increase in gross public debt _ Deduct: Net discounts on new issues 8, 711 Interest increment on savings and retirement plan securities 3,210 Net public debt transactions included in budget, trust, and other Government accounts 6, 899 Net deductions 9, 158 327,895 369,599 - 4 1 , 704 58, 954 18,820 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 REVIEW OF TREASURY OPERATIONS 7 (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 8 1975 REPORT OF THE SEiCRETARY OF THE TREASURY 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 Appendix. 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 REVIEW OF TREASURY OPERATIONS 9 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. FEDERAL DEBT MANAGEMENT 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 10 1 9 7 5 REPORT OF T H E SEiCRETARY OF T H E TREASURY 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, MARKET YIELDS AT CONSTANT MATURITIES 1970-1975' ^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 1970 1971 1972 1973 1974 1975 ' Monthly averages of daily market yields of public debt securities. Bank discount rates of Treasury bills. 11 REVIEW OF TREASURY OPERATIONS Federal debt and Government-sponsored agency debt [In billions of dollarsl Class of debt June 30, June 30, June 30, Increase, or 1973 1974 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 _ 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.... Total nonmarketable public issues 122.8 88.2 45.6 ' 6.4 139.9 77.2 44.4 5.1 163.9 101.9 41.3 8.4 24.0 24.7 -3.1 3.3 263.0 266.6 315.6 49.0 59.4 .5 2.3 61.9 .5 2.3 65.5 .4 2.3 3.6 -.1 26.8 1.7 .9 23.4 1:6 1.5 21.6 1.6 .3 -1.8 91.6 91.3 92.3 1.1 115.4 2 1.0 124.2 1.1 8.8 .1 2 474.2 533.2 59.0 4.4 2.9 2.7 1.4 .6 4.3 2.6 2.1 1.3 .6 -.1 -.3 -.6 -.1 12.0 10.9 -1.1 Government account series (nonmarketable) 101.7 Non-interest-bearing debt... 21.0 Total gross public debt. Federal agency securities: Government National Mortgage Association.. _ Export-Import Bank of the United States Tennessee Valley Authority Defense family housing Other Total Federal agency debt Total Federal debt. Government-sponsored agency securities: Federal home loan banks Federal National Mortgage Association Federal land banks Federal intermediate credit banks Banks for cooperatives G overnment-sponsored agency debt., 2457.3 -.. 4.5 2.2 2.3 1.5 .7 11.1 2468.4 -.6 57.9 2 486.2 12.1 20.4 9.1 6.7 2.3 18.6 25.2 11.1 8.0 2.5 21.2 28.2 14.2 9.5 2.9 60.6 65.4 76.1 2.6 3.0 3.1 1.5 .4 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. Ownership 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 12 1975 REPORT OF THE SECRETARY OF T H E TREASURY $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- PRIVATE HOLDINGS OF MARKETABLE FEDERAL SECURITIES Federal Agency Securities 1970 1971 1972 1973 1974 1975 1970 1971 1972 1973 1974 1975 REVIEW OF TREASURY OPERATIONS 13 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. 14 1975 REPORT OF THE SECRETARY OF THE TREASURY 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, 1965 1973 1974 1975 Estimated ownership by: Private nonbank investors: Individuals: i Series E and H savings bonds U.S. savings notes 2... Other securities 22.3 $58.9 .5 16.4 $61.4 .5 18.8 $65.0 .4 21.7 (*) 2.7 Total individuals 70.7 75.9 80.7 87.1 6.3 Insurance companies Mutual savings banks. Savings and loan associations State and local governments. Foreign and international Corporations Miscellaneous investors 4 10.7 5.6 7.1 24.1 3 12.3 15.3 9.7 6.3 3.2 5.7 28.8 359.4 9.8 10.9 5.9 2.6 '•4.5 28.3 356.8 10.8 12.7 7.1 3.6 4.9 29.6 66.0 13.2 22.6 1.2 1.0 ..5 1.3 9.2 2.4 9.8 3155.5 3 200.1 3 202.4 234.0 31.6 58.2 39.1 61.1 58.8 75.0 123.4 53.2 80.5 138.2 69.2 84.7 145.3 16.0 4.3 7.1 3313.8 3457.3 3474.2 533.2 59.0 Total private nonbank investors Commercial banks Federal Reserve banks Government accounts. Total gross debt outstanding $48.3 Change fiuring fiscal 1975 $3.6 Percent Percent owned by: Individuals 1 Other private nonbank investors Commercial banks Federal Reserve banks Government accounts. 23 27 19 12 19 17 27 13 16 27 17 26 11 17 29 16 28 , 13 16 . 27 . Total gross debt outstanding 100 100 100 100 . »" 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. 15 REVIEW OF TREASURY OPERATIONS 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 OWNERSHIP OF FEDERAL SECURITIES, JUNE 30, 1975 $Bil Total Gov't Accounts 500 147.2 400 Federal Reserve 850 Private Nonbank Investors 300 / ^ 171.1 Com'l Banks ^ ^ ^ 200 Individuals Corps. /^ 100 Savings Institutions ^ZZZZZZL 13.6 16 1975 REPORT OF THE SECRETARY OF THE TREAStJIlY 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 17 REVIE'W OF TREASURY OPERATIONS Offerings of marketable Treasury securities excluding refunding of regular bills, fiscal 1975 [In millions of dollars] Date 1974 Apr. 1 Aug. 15 Aug. 15 Aug. 15 Sept. 30 Oct. 1 Nov. 6 Nov. 15 Nov. 15 Nov. 15 Dec. 31 Description Cash offerings For new For remoney funding Allotted to Federal Reserve and Gov't accounts Total Average auction yield (percent) NOTES AND BONDS 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 116 92 19 1,016 316 234 81 180 1 2,277 1,743 381 1,818 1 2,936 2,461 486 205 1 . 5,329 4,296 886 2,023 8.59 8.75 8.63 8.34 2,255 1,532 522 2,025 1,059 949 338 77 1 . 1,016 3,630 2,715 941 2,282 7.89 7.85 7.82 8.21 7.32 1,994 1,080 460 697 400 150 1976 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 1,253 756 . 1,269 688 292 1,662 . 1,665 . 1,762 1,580 . 2,576 . 1,247 1,507 1,579 801 428 213 2,137 1,579 2,007 . 26,786 2,054 1,086 541 2,300 1,233 850 19,768 14,572 162 1,253 756 3,960 2,167 902 1,662 1,665 1,762 1,580 2,576 2 . 1,247 1,507 1,579 5,155 2,747 1,604 2,137 1,579 2,169 61,130 . BILLS (MATURITY VALUE) 1974 1976 Change in offerings of regular bills: July-September... October-December January-March April-June Total change in regular bills.. . 1974 Aug. 7 . . . Dec. 3 . . . Dec. 5 . . . Sept. 4 . . . Nov. 4..^ 1976 Apr. 14.. 2,576 3,639 5,727 . 10,023 . 21,965 21,965 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.. 2.576 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 . 5,033 5,033 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 60,374 19,768 14,572 »Issued in exchange for 2% percent Treasury bonds, investment series B-1975-80. 94,718 . 7.33 7.24 7.21 7.49 7.95 5.94 6.09 7.51 5.98 6.51 8.31 7.15 7.43 7.70 8.00 8.30 6.86 6.54 6.61 18 1975 REPORT OF THE SEiCRETARY OF THE TREASURY 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 successful. 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 REVIEW OF TREASURY OPERATIONS 19 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. 20 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 million. 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. REVIEW OF TREASURY OPERATIONS 21 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 22 1975 REPORT OF THE SEiCRETARY OF THE TREASURY 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 REVIEW OF TREASURY OPERATIONS 23 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. 24 1975 REPORT OF THE SEICRETARY OF THE TREASURY 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 million. 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, 1976. 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 REVIEW OF TREASURY OPERATIONS 25 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, though. 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. 26 1975 REPORT OF THE SEiCRETARY OF THE TREASURY 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. 27 REVIEW OF TBEASUBY OPEBATIONS Disposition of marketable Treasury securities excluding regular bills, fiscal 1976 [In millions of dollars] Date of retirement • Securities Description and maturing date Issue date Redeemed for cash or carried to matured debt Exchanged for new is,sue at maturity Total NOTES AND BONDS 1974 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.. 4,401 1,855 42 . 3,238 1,071 2,025 5,883 205 1976 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... 2,886 1,104 8. 2,597 1,556 1,129 118 Total coupon securities 20,783 2,204 142 77 10,284 2,060 42 5,442 1,213 2,102 4,163 220 4,015 1,222 8 6,760 1,776 14,141 34,924 BILLS 1974 Sept. 20.. Tax anticipation: 9.655 percent Aug. 7,1974. 1,526 1,526 1976 Apr. 16.Junel7.. 7.426 percent 7.520 percent. Dec. 3,1974. Dec. 5,1974. 2,251 1,256 2,251 1,256 5,033 6,033 1,501 1,501 Total tax anticipation bills Mar. 31. June 19. June 30. Other: 8.049 percent (Federal Financing July 30,1974.. Bank). 7.933 percent (227-day) Nov. 4,1974.. 9.767 percent (299-day) Sept. 4,1974.. Total other bills.. Total securities... 1,501 1,501 2,003 2,003 5,005 30,821 5,005 14,141 44,962 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 588-395 O - 75 - 5 28 1975 REPORT OF THE SEICRETARY OF THE TREASURY 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 conditions. Federal Financing Bank loans outstanding [In millions of dollars] Borrower Loans outstanding 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) Total 5,000.0 45.2 111.6 62.1 21.0 4,049.4 317.5 5.5 1,500.0 254.7 47.5 240. 0 1,435.0 33. 9 177. 0 13,300.4 OFFICE OF THE GENERAL COUNSEL 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 REVIEW OF TREASURY OPERATIONS 29 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 Practice. Reorganization 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 Counsel. Legislation 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- 30 1975 REPORT OF THE SEiCRETARY OF THE TREASURY 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. Opinions 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. REVIEW OF TREASURY OPERATIONS 31 Litigation The Legal Division is responsible for formulating the Department's position on litigation involving Treasury activities and for working with the Department of Justice in the preparation of litigation reports, pleadings, trial and appellate briefs and assisting in trying all cases in which the Department is involved. There are many 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 Appeals. 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. 32 1975 REPORT OF THE SECRETARY OF THE TREASURY Regulations 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. ENFORCEMENT, OPERATIONS, AND TARIFF AFFAIRS 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 REVIEW OF TREASURY OPERATIONS 33 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 reports. 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 34 1975 REPORT OF THE SEICRETARY OF THE TREASURY 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 laws. 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. Mint 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 billion. 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. REVIEW OF TREASURY OPERATIONS 35 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, 36 1975 REPORT OF THE SEiCRETARY OF THE TREASURY 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. Counterfeiting 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 victims. 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 REVIEV/ OF TREASURY OPERATIONS 37 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. Anti-terrorism 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 Firearms. 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. 38 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 explosives. 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 agencies. 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 REVIEW OF TREASURY OPERATIONS 39 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 effort. Interpol 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. 40 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. REVIEW OF TREASURY OPERATIONS 41 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.^ TAX POLICY Legislation 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. 42 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 Congress. 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. REVIEW OF TREASURY OPERATIONS 43 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 assets. 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 corporation. 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 44 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. REVIEW OF TREASURY OPERATIONS 45 of 1975, approved March 29, 1975. The major provisions of the act include: 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. 46 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 tariff. 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. REVIEW OF TREASURY OPERATIONS 47 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 48 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 benefits. 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 REVIEW OF TREASURY OPERATIONS 49 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 50 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 ) . REVIEW OF TREASURY OPERATIONS 51 TRADE, ENERGY, AND FINANCIAL RESOURCES POLICY COORDINATION 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 countries. 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 52 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 REVIEW OF TREASURY OPERATIONS 53 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 54 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. REVIEW OF TREASURY OPERATIONS 55 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. 56 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. REVIEW OF TREASURY OPERATIONS , 57 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 58 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 change. 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 REVIEW OF TREASURY OPERATIONS 59 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 policy. 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. Digitized for588-395 FRASER 0-75-7 60 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. REVIEW OF TREASURY OPERATIONS 61 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 62 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. REVIEW OF TREASURY OPERATIONS 63 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. 64 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 Acts. 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. REVIEW OF TREASURY OPERATIONS 65 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. 66 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 activity. INTERNATIONAL AFFAIRS 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. REVIEW OF TREASURY OPERATIONS 67 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 68 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 supply. 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 REVIEW OF TREASURY OPERATIONS 69 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 70 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 1974 Dollars (billions) 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 Total p Preliminary. J a n u a r y - J u n e 1975 P Percent of t o t a l lli^ 19 221^ Dollars (billions) 2y Z7Y2 10^ yy? W2 i2y 9 2y zy 6 W^ 9K 4 60 &y 100 Percent of t o t a l 43 3 10 3 7 15 13 24 100 ly zy REVIEW OF TREASURY OPERATIONS 71 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 below. 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. 72 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 (Percent) 30.0 /"•\ . «» SWISS FRANC ,• GERMAN MARK 20.0 - — —.^^ -'IV-^' • \ / X / V** N JAPANESE YEN 10.0 .•' v ?r=^c:' '..^ ^ , , . FRENCH FRANC ".>„ CANADIAN DOLLAR -10.0 U.S. DOLLAR -20.0 -30.0 June 1971 Dec. June 1972 Dec. June 1973 Dec. June 1974 Dec. June 1975 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. Dec, REVIEW OF TREASURY OPERATIONS 73 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 operations. 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- 74 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. REVIEW OF TREASURY OPERATIONS 75 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. 0-75-8 Digitized for588-395 FRASER 76 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 increases. 1 See exhibit 54. a See exhibit 77. REVIEW OF TREASURY OPERATIONS 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. 78 1975 REPORT OF THE SECRETARY OF THE TREASURY 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, 1975. REVIEW OF TREASURY OPERATIONS 79 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, 80 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 share. 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. REVIEW OF TREASURY OPERATIONS 81 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 members. 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. 82 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 light. 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 REVIEW OF TREASURY OPERATIONS 83 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 84 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 Governors. 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 securities. 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. REVIEW OF TREASURY OPERATIONS 85 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. 86 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. REVIEW OF TREASURY OPERATIONS 87 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 88 1975 REPORT OF THE SECRETARY OF THE TREASURY $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 rates. 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. REVIEW OF TREASURY OPERATIONS 89 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. 90 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 REVIEW OF TREASURY OPERATIONS 91 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 facility. 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 session. 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 Digitized for588-395 FRASER O - 75 • 92 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. REVIEW OF TREASURY OPERATIONS 93 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 II. 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 94 1975 REPORT OF THE SECRETARY OF THE TREASURY 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). REVIEW OF TREASURY OPERATIONS 95 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- 96 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 1973. 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 REVIEW OF TREASURY OPERATIONS 97 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- 98 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 quarter. 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 REVIEW OF TREASURY OPERATIONS 99 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 available. 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 100 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. 101 REVIEW OF TREASURY OPERATIONS U.S. balance of payments, fiscal years 1974-75 [In millions of dollars] Fiscal 19741 Fiscal 1975 Fiscal 1975* 1st half Current account transactions: Merchandise trade, balance of payments basis,2 net.... Exports Imports ._.-.... Military transactions excluding grants, net Deliveries under sales contracts Expenditures Travel, excluding transocean fares, net Receipts Payments Other services, net Receipts Payments Income on investments, net Receipts on U.S. assets abroad Payments on foreign assets in the United States.. Private remittances, Govemment transfers other than grants Goverrmient economic grants Balance on current account transactions Capital account transactions: IJ.S. acquisitions (—) and liquidations (+) of assets abroad, net Private - Direct investments Other assets reported by U.S. nonfinancial corporar tions 3 Securities Assets reported by U.S. banks Govermnent Credits, capital contributions, etc Official reserve assets Foreign acquisitions (+) and liquidations (—) of assets in the United States, net 2d half 956 86,195 -85,239 -1,856 2,883 -4,739 -1,966 3,720 -5,686 2,950 12,013 -9,063 7,846 20,095 -12,249 1.333 104,409 -103,076 -1,768 3,365 -5,133 -1,633 4,432 -6,065 3,470 13,563 -10,093 7,770 22,292 -14,522 -3,769 51,577 -55,346 -1,009 1,605 -2,614 -930 2,082 -3,012 1,514 6,792 -5,278 4,939 13,518 -8,578 5,101 52,832 -47,731 -759 1,760 -2,519 -702 2,351 -3,053 1.957 ej^l -4,814 2,831 8,775 -5,943 -1,942 —2,744 . 3,244 -1,819 —2,906 4,447 -896 . —1,456 —1,608 -923 —1,449 6,055 -27,764 -30,339 -15,226 -15,112 -24,908 -26,069 -13,183 -12,885 -4,199 -8,181 -5,139 -3,043 -4,039 -1,637 -15,033 -2,856 -2,260 -596 -9 -4,052 -13,827 -4,270 -3,027 -1,243 -567 -1,030 -6,447 -2,043 -1,177 -866 559 -3,022 -7,379 -2,227 -1,850 -377 21,939 20,837 14,341 6,496 Private*_ 21.875 9,025 8,573 452 Direct investments Other claims on U.S. nonfinancial corporations 3 Securities other than U.S. Treasury issues LiabiUties reported by U.S. banks Official* Claims arising from prepayments on military and other sales contracts Liquid assets Other U.S. debt ObUgations Balance on capital account transactions 4,578 1,525 2,980 12,792 64 309 1,142 869 6,705 11,812 -654 751 -459 8,935 5,768 963 391 1,328 -2,230 6,044 743 -84 -595 —5,825 1,414 8,263 2,135 —9,502 401 4,386 980 —886 . 1,012 3,876 1,155 -8,617 2,583 5,054 2,493 2,561 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. 102 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 $619.1 million for the resources of the international development banks in fiscal 1975, as shown in the table below: Institution U.S. participation [$ milUons] Authorization Appropriation Comment International Development Association. Do 1,500.0 Inter-American Development Bank—Fund for Special Operations. Asian Development B a n k Ordinary Capital: Paid-in Callable U.S. contribution to fourth replenishment. Appropriation will be requested in four amiual installments of $375 milUon each in 1976-1979. 225.0 $275 milUon remains to be appropriated from the amount authorized inflscal1972. 72.4 289.5 24.1 Authorization is U.S. share of first replenishment; appropriation is first installment of first replenishment. 24.1 Subtotal 320.0 Final installment to third replenishment. 361.9 ADB—Asian Development 50.0 Fund. ———. Total 1 See exhibits 65 and 66. 2 See exhibit 74. 1,911.9 50.0 Authorization Is third U.S. contribution to ADB concessional faciUty; appropriation of second contribution autborized in fiscal 1974. 619.1 REVIEW OF TREASURY OPERATIONS 103 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 million. 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). 104 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 inillion). 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. REVIEW OF TREASURY OPERATIONS 105 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- 106 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 REVIEW OF TREASURY OPERATIONS 107 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 1976. 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 - 10 108 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. REVIEW OF TREASURY OPERATIONS 109 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 million. 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 obtained. 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 110 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 projects. 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 projects. 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. REVIEW OF TREASURY OPERATIONS 111 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. 112 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 REVIEW OF TREASURY OPERATIONS 113 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 account. 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. 114 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 financing.^ 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. REVIEW OF TREASURY OPERATIONS 115 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 problems. 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. 116 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 programs. 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 REVIEW OF TREASURY OPERATIONS 117 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. ADMINISTRATIVE REPORTS ADMINISTRATIVE MANAGEMENT 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. 121 122 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. ADMINISTRATIVE REPORTS 123 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 Digitized for588-395 FRASER 0-75-11 124 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 nationwide. 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 ADMINISTRATIV^E REPORTS , 125 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. 126 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 activities. Budgeting 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 action. (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 ADMINISTRATrVE REPORTS 127 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 128 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 locations. 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. ADMINISTRATIVE REPORTS 129 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 three. 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 alarms. Telecommunications 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. 130 1976 REPORT OF THE SECRETARY OF THE TREASURY 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 Office. 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. ADMINISTRATIVE REPORTS 131 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. Safety 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. Library 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. BUREAU OF ALCOHOL, TOBACCO AND FIREARMS 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. 132 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. ADMINISTRATIVE REPORTS 133 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 safety. 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, 134 1975 REPORT OF THE SECRETARY OF THE TREASURY the judge's residence received major damage, but no injuries were sustained. 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 ADMINISTRATIVE REPORTS 135 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 distilleries. 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 136 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 ADMmiSTRATIVE REPORTS 137 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 documents. 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 138 1975 REPORT OF THE SECRETARY OF THE TREASURY analysis fourfold. During fiscal 1975, more than 4,200 specimens were processed. 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 Service. 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. ADMINISTRATWE REPORTS 139 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. Administration 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 - 12 140 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 systems. 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 public. 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- ADMINISTRATIVE REPORTS 141 gram: A means of identifying managers and high-potential employees, guidelines for subsequent development, and program evaluation methodSo 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 142 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 holders. 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. Inspection 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 program. 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 ADMINISTRATIVE REPORTS 143 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 compromise. 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 completed. 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. 144 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 investigators. 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. OFFICE OF THE COMPTROLLER OF THE CURRENCY ^ 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 billion. 1 Additional Information is contained in the separate Annual Report of the Comptroller of the Currency. ADMINISTRATIVE REPORTS 145 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 schedule. 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. 146 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 system. 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- ADMINISTRATIVE REPORTS 147 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 recruitment. 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. 148 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 year. OFFICE OF COMPUTER SCIENCE 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 ADMINISTRATIVE REPORTS 149 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 courses. CONSOLIDATED FEDERAL LAW ENFORCEMENT TRAINING CENTER 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 School. Training facilities A lawsuit filed under the National Environmental Policy Act delayed construction of the Center's proposed Beltsville, Md., facilities 150 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 CFLETC. 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. Training 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. ADMINISTRATIVE REPORTS 151 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. OFFICE OF DIRECTOR OF PRACTICE The Office of Director of Practice is part of the Office of the Secretary of the Treasury and is under the immediate supervision of the General Counsel. Pursuant to the provisions of 31 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 152 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. OFFICE OF DOMESTIC GOLD AND SILVER OPERATIONS 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. ADMINISTRATIVE REPORTS 153 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 1968-74 [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 1968 1969 1970 1971 1972 1973 1974 6,604 7,109 5,973 6,933 7,285 6,729 14,651 6,073 6,668 6,148 6,542 7,253 6,638 4,829 531 541 -175 391 32 91 -178 6,604 7,109 5,973 6,933 7,285 6,729 4,651 Jewelry and arts 3,908 3,839 3.340 4,299 4,344 3,473 2,402 Dental 771 710 658 750 750 679 509 Industrial, including space and defense 1,925 2,560 1,975 1,884 2,191 2,577 1,740 » 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. 154 1975 REPORT OF THE SECRETARY OF THE TREASURY TABLE 2.—Exports and imports of gold into the United States for industrial use, calendar year 1974 [Thousands of fine troy ounces] Country Austria Canada Japan Singapore ., Switzerland United Kingdom U.S.S.R West Germany Yugoslavia Other countries Total Net imports of gold Exports ^ Imports 11,014 841 19 ^..... 27 19 . 13 408 1 1,979 124 23 633 16 120 21 81 6 4,078 3,445 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. BUREAU OF ENGRAVING AND PRINTING 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. Reorganization 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. Finances 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- ADMINISTRATIVE REPORTS 155 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 - 13 156 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. ADMINISTRATIVE REPORTS 157 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. Warehouse 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, Va. 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 priorities. 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. 158 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. ADMINISTRATrV^E REPORTS 159 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. 160 1975 REPORT OF THE SECRETARY QF THE TREASURY OFFICE OF EQUAL OPPORTUNITY PROGRAM 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- 161 ADMINISTRATIVE REPORTS 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 Comparison 1973-1974 1970 Total employees* 1973 1974 No. 82,155 88,351 102,813 106,157 116,444 10,287 Percent Comparison 1968-1974 No. Percent 9.7 34,289 41.7 11,777 13,234 15,619 16,170 18,478 . 1,052 1,489 2,247 2,788 3,539 79 104 128 146 179 482 596 813 1,084 1,238 68,765 72,928 84,006 85,969 93,010 2,308 751 33 154 7,041 14.3 6,701 26.9 2,487 22.6 100 14.2 756 8.2 24,245 56.9 236.4 126.6 156.8 35.3 19,120 18,867 24,126 23,869 27,039 3,170 13.3 7,919 41.4 4,947 5,156 5,904 5,932 6,892 ^.. 255 398 791 922 1,146 ^.. 25 33 45 45 60 80 96 159 186 206 13,813 13,184 17,227 16,784 18,735 960 224 15 20 1,951 16.2 24.3 33.3 10.8 11.6 1,945 891 35 126 4,922 39.3 349.4 140.0 157.5 35.6 Negro Spanish-American. American Indian.. Oriental Other GS 1-4: Total Negro Spanish-American American Indian Oriental Other.. 1972 GS5-8: Total Negro Spanish-American.. American Indian Oriental Other GS 9-12: Total Negro Spanish-American. American Indian.. Oriental. Other GS 13-18: Total Negro Spanish-American American Indian Oriental Other 19,480 23,1 27,601 30,793 33,485 2,6 8.7 14,005 71.9 15.2 2,863 37.1 748 13.0 26 12.7 303 6.6 10,065 105.7 283.3 100.0 214.9 61.6 2,708 3,467 4,290 4,837 5,571 264 422 551 738 1,012 26 30 35 46 52 141 183 249 394 444 16,341 19,724 22,476 24,778 26,406 734 274 6 50 1,628 28,893 28,960 32,321 32,615 35,580 2,965 9.1 6,687 23.1 1.144 1,283 1,587 1,769 2,097 332 519 709 826 21 34 40 44 30 186 222 299 363 203 27,210 27,055 29,959 29,798 32,250 328 117 4 64 2,452 18.5 16.5 10.0 21.4 8.2 953 494 23 177 5,040 83.3 148.8109.5 95.2 18.5 9,491 10,665 12,037 12,562 13,297 735 5.9 151 218 307 353 403 35 54 88 117 135 3 5 8 9 15 55 67 90 102 104 9,247 10,321 11,544 11,981 12,640 50 18 6 2 )59 14.2 15.4 66.7 2.0 5.5 *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. 3,1 252 100 12 49 3,393 166.9 285.7 400.0 89.1 36.7 162 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. FISCAL SERVICE 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). ADMINISTRATH^E REPORTS 163 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 1976. 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 164 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. Volume Classiflcation 1974 Operations financed by appropriated funds: 'Checks: Social security benefits Supplemental security income program Veterans benefits Income tax refunds Veterans national service life insurance dividends program. Other Savings bonds Adjustments and transfers Operations financed by reimbursements: Railroad Retirement Board.. Bureau of the Public Debt (General Electric Co. bond program) Total workload—reimbursable items Total \^^orkload... 1975 324,627,344 25,862,546 78,928,491 66,009,233 2,870,965 65,116,179 7,643,271 299,164 340,024,721 50,683,926 85,069,062 J122,751,650 4,248,518 2100,754,343 7,918,396 340,109 571,357,193 711,790,725 13,968,671 1,409,201 13,767,833 1,463,114 15,377,872 15,230,947 586,735,065 727,021,672 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 ADMINISTRATIVE REPORTS 165 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- 166 1975 REPORT OF THE SECRETARY OF THE TREASURY gage Corporation, Federal intermediate credit banks. Federal land banks, and banks for cooperatives were eliminated, effective October 1, 1974. 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. ADMINISTRATrV^E REPORTS 167 The number of depositaries of each type and their balances on June 30,1975, are shown in the following table: No. of accounts Depositaries ^ Federal Reserve banks and branches .— . Other depositaries reporting directly to the Treasury: Special demand accounts _ Other: Domestic Foreign 3 Depositaries reporting through Federal Reserve banks: General.. . Special (Treasury tax and loan accounts) ..... . Total Balance June 30,1975 36 2 $6,141,528,180 9 343,490,000 19 44 2,062 13,722 3,902,150 8,932,902 149,083,278 1,474,813,777 15,892 8,121,750,287 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 1975. Deposits, withdrawals, and balances in the U.S. Treasury account [In millions of dollars] 1974 Operating balance at beginning of fiscal year Cash deposits: Gross tax collections (selected) Public debt receipts Gas and oil lease sale proceeds Other Total cash deposits Cash withdrawals: Public debt redemptions Letter of credit transactions: Medicare HEW grants Unemployment insurance Other (includes refunds and 1975 rebates) Total cash withdrawals Operating balance at close of fiscal year 1975 12,571 9,158 264,919 282,334 5,218 238,142 291,746 388,251 3,252 271,155 790,613 954,404 289,116 348,116 10,169 14,164 5,131 475,444 13,294 16,424 11,915 566,224 794,024 955,973 9,158 7,589 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 168 1975 REPORT OF THE SECRETARY OF THE TREASURY 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: 1974 Payment made for— Principal redeemed 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» 1 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 Authority.: others $5,229,635,000 Total.-L ^.... 150,602,154 4,103,878,000 151,100,000 61,651,400 7,213,820,000 2,618,733,400 3,407,723,000 1975 Interest paid Principal redeemed $204,238,026 $1,400,630,000 818,034 140,490,556 300,870,000 199,955,867 923,016,339 1,326,501,000 Interest paid $53,839,088 859,026 186,211,694 90,690,783 295,544,152 110,278,500 19,989,382 438,828,191 618,795,279 1,135,304,787 199,250,000 56,951,650 2,152,690,000 326,750,000 549,516,000 43,196,446 24,715,056 181,085,918 158,367,379 578,727,164 111,070,000 166,775,664 250,000,000 1,158,941,000.... 17,199,633 109,545,000 150,000,000 621,069,000 168,902,025 187,526 38,363,609 6,087 73,500 67,899,919 69,936 24,467,341,479 3,814,103,986 7,393,802,017 1,860,268,909 2,207 20,168,176 » 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 ADMINISTRATIVE REPORTS 169 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 Pieces 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 6,258,373,469 2,940,621,243 2,723,701,^21 6,476,292,881 Amount $64,266,738,143 21,174,514,100 15,341,196,880 70,100,066,363 Fiscal year 1975 Pieces Amount • 6,476,292,881 3,062,447,218 2,729,613,999 6,808,126,100 $70,100,055^363 22,478,293,800 14,967,262,406 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 accounts 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 accounts 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 ^.. 1974 . 1975 13,601 13^722 979 949 7,369 1,200 6>63,6 1,023 47 43 209 241 192 227 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 170 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 purpose. 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. ADMINISTRATH^E REPORTS 171 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 1960-75. Fiscal year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974..... 1975 Individual income and social security taxes 9,469,067 9,908,068 10,477,119 11,161,897 11,729,243 12,012,385 12,518,436 16,007,304 17,412,921 23,939,080 26,612,484 28,714,587 32,336,751 34,606,496 37,766,332 39,634,697 Railroad retirement taxes 10,625 10,724 10,262 9,937 9,911 9,869 9,986 10,651 14,696 12,479 11,622 12,367 16,080 11,202 10,360 10,072 Corporate income taxes Federal excise taxes 698,881 618,971 610,026 619,619 633,437 644,753 259,962 236,638 233,083 272,048 296,487 323,730 364,656 398,624 452,796 451,981 . . . . . . . 22,783 . 394,792 . 1,297,062 . 1,235,462 1,249,034 1,309,668 1,496,260 1,803,689 1,944,280 Unemployment taxes 192,905 966,201 1,409,627 1,978,266 2,340,062 2,363,091 Total 10,078,563 10,637,763 11,097,407 11,791,353 12,372,591 12,666,997 12,788,374 16,277,176 18,056,392 26,520,659 28,348,950 31,266,919 36,435,582 38,489,847 42,362,229 44,404,121 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 4 172 1975 REPORT OF THE SECRETARY OF THE TREASURY to make withdrawals from the account of the Treasury of the United States 8LS 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 ADMINISTRATIVE REPORTS 173 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 branches. 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. 174 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 jurisdictions. 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 ADMINISTRATIVE REPORTS 175 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. Administration 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. 176 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 students. 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 ADMINISTRATIVE REPORTS 177 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 owners. 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, 178 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. ADMINISTRATIVE REPORTS 179 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. OFFICE OF FOREIGN ASSETS CONTROL 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 180 1975 REPORT OF THE SECRETARY OF THE TREASURY 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; ADMINISTRATIVE REPORTS 181 866 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 licenses. 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. INTERNAL REVENUE SERVICE' 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. 182 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. ADMINISTRATIVE REPORTS 183 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 magazines. 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. 184 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 previousyear. 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 185 ADMINISTRATIVE REPORTS 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 situations. 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 Subject Total 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 Taxpayers requests Field requests 24,236 23,596 640 42 4,987 9,880 719 556 240 506 310 2,691 4,305 30 4,987 .. 9,880 719 . . 490 163 429 229 2,574 4,095 Total 12 66 77 77 81 117 210 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 186 1975 REPORT OF THE SECRETARY OF THE TREASURY 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, 1975. 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. ADMINISTRATIVE REPORTS 187 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 provisions. 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 FRASER 0-75-15 188 1976 REPORT OF THE SECRETARY OF THE TREASURY 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 organizations. 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. ADMINISTRATIVE REPORTS 189 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 1974. 190 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 1974. 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. ADMINISTRATIVE REPORTS 191 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. 192 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 ADMMISTRATIVE REPORTS 193 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 others. 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 194 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 million. Security and integrity programSi-^The Internal iSecurity Division conducts personnel background investigations of IRS job applicants and investigates complaints against IRS eriiployees regarding mis- ADMINISTRATIVE REPORTS 195 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 employees. 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 Treasury. 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 employees. 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. 196 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 Improvement. 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 1975. 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 ADMINISTRATIVE REPORTS 197 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 law. 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 matters. 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 198 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. BUREAU OF THE MINT^ 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 bullion. 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. ADMINISTRATIVE REPORTS 199 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" policy. ...... 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 1975. 200 1975 REPORT OF THE SECRETARY OF THE TREASURY Bureau of the Mint operations, fiscal years 1974 and 1976 Fiscal years Selected items 1974 NiBwly minted U.S. coins issued: i 1 dollar 50 cents 25 cents 10 cents Scents Icent 31,000,000 178,609,834 524,356,064 836,906,500 629,791,200 8,247,873,600 56,267,000 308,164,000 674,344,000 913,980,000 756,960,000 9,886,662,200 10,448,537,198 12,596,377,200 580,600,000 1,292,300,000 2,009,278.452 3,045,404.87 451,210.518 4,643,895.42 267,007,454 45,017,170 266,700,077 43,819,864 ------ Total 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 1975 - 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 circulation. 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 coins. U.S. coins manufactured, fiscal year 1975 Denomination General circulation Number of pieces 1 dollar: Cupronickel. 70,529,710 Silver-clad 50 cents: Cupronickel407,663,100 Silver-clad 25 cents: Cupronickel- 1,013,819,100 Silver-clad 10 cents 951,215,688 Scents 929,607,100 Icent 10,004,825,049 Total.. Numismatic i Face value Number of Face value pieces $70,529,710.00 1,330,943 $1,330,943.00 23,207,295 3,207,295.00 Total coinage Number of pieces Face value 71,860,653 $71,860,653.00 3,207,295 3,207,295.00 203,831,550.00 1,330,943 31,172 665,471.50 586.00 253,454,775.00 1,330,943 31,172 1,330,943 1,330,943 1,330,943 332,735.75 1,015,150,043 253,787,510.75 293.00 1,172 293.00 133,094.30 952,546,631 95,254,663.10 66,547.15 930,938,043 46,546,902.15 13,309.43 10,006,155,992 100,061,559.92 95,121,568.80 46,480,355.00 100,048,250.49 413,377,659,747 769,466,209.29 11,195,297 5,750,275.13 408,994,043 204,497,021.50 1,172 586.00 13,388,855,044 775,216,484.42 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. ADMINISTRATIVE REPORTS 201 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. Production 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. Technology 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 202 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 cases. 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. ADMESriSTRATrVE REPORTS 203 Administration 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 yearend. 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 1976. OFFICE OF REVENUE SHARING' 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 Census. 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 6 204 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 . ADMINISTRATIVE REPORTS 205 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. 206 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. ADMINISTRATrVE REPORTS • 207 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 208 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 organizations. 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. UNITED STATES CUSTOMS SERVICE 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- ADMINISTRATIVE REPORTS 209 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. Enforcement 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. 210 1975 REPORT OF THE SECRETARY OF THE TREASURY 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- ADMINISTRATIVE REPORTS 211 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 persons. 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 cocaine. 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 212 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 213 ADMINISTRATIVE REPORTS 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: March Falsely manifested cargo: Additional revenue Penalties assessed Penalties collected Return on $1 expended Unmanifested cargo: Number of containers Value of merchandise Duties and taxes April $6, 992 195, 988 7, 801 3.68 $4, 443 310, 806 4, 898 4.38 457 $892, 677 $101, 408 324 $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- 214 1975 REPORT OF THE SECRETARY OF THE TREASURY 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) seized. 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, ADMINISTRATIVE REPORTS 215 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 216 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. ADMESriSTRATIV^E REPORTS 217 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. 218 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. Modernization 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 ADMINISTRATIVE REPORTS 219 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 Academy." 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 0-75-17 220 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 ADMINISTRATIVE REPORTS 221 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 222 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 conspirators. 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- ADMINISTRATH^E REPORTS 223 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. UNITED STATES SAVINGS BONDS DIVISION 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 investors. 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 224 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 corporations. 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- ADMINISTRATIVE REPORTS 225 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. to to O o CO O O Bicentennial-design series E savings bond. CO d ADMINISTRATIVE REPORTS 227 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 stories. Advertising 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 fall. 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 228 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 Bicentennial. 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. ADMINISTRATIVE REPORTS 229 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. UNITED STATES SECRET SERVICE The major responsibilities of the U.S. Secret Service are defined in section 3056, title 18, United States Code. The protective responsibilities include protection of the President of the United States; the members of his immediate family; the President-elect; the Vice President 230 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. ADMINISTRATIVE REPORTS 231 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 232 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 superimposed. 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 campaign. 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- 233 ADMINISTRATrVE REPORTS 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. Month suppressed Location 1974 July July August October October October October October October NovemberDecember.. Miami, Fla . St. Louis, Mo Dallas, Tex . New Orleans, La.. . Portland, Oreg.... . Sycamore, HI . Houston, Tex . Cerritos, Calif.... Beverly, Mass Bountiful, Utah... . Cedar Rapids, Iowa. December.. San Antonio, Tex. December.. Hatboro, Pa . December.. Greeley, Colo - Passed on the public Seized Location Passed onthe public December.. Winston-Salem, N.C. December.. Lancaster, Calif... $23,940 1976 February... Chattanooga, 300 Tenn. February... Hackensack, N.J.. .613,820 March Los Angeles, Calif. . 48,840 March Ft. Lauderdale, 20,200 Fla. April Boston, Mass . 22,480 April Las Vegas, N e v . . . 980 May Salt Lake City, 257,800 Utah. 113,080 May Naples, Fla . 62,580 159.770 June Roanoke, Va $9,960 $2,574,100 214,320 597,460 6,470 1,720 612,270 620 418,500 6,040 466,000 16,580 343,770 8,440,515 80 177,910 1,410 764,900 3,700 3,055,920 84,380 2,390 9,490 Month suppressed Seized $426,000 294,740 1,678,400 3,452,350 153,880 171,080 100,615 214,040 5,886,000 222,580 479,920 234 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 ADMINISTRATIVE REPORTS 235 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 redemption. 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 - 18 236 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 offices. 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. Training 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 ADMINISTRATIVE REPORTS 237 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 FBI. Plans continued to produce models of sites normally encountered on protective assignments for use in training special agents. ^ Administration 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 Service. 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 Administration. 238 1975 REPORT OF THE SECRETARY OF THE TREASURY Inspection 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. ADMINISTRATIVE REPORTS 239 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. EXHIBITS 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. DEPARTMENT CIRCULAR NO. 13-75. PUBLIC DEBT DEPABTMENT OF THE T B E A S U E Y , Washington, May 2,1976. I. INVITATION FOR TENDERS 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. I I . DESCRIPTION OF NOTES , 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^. III. TENDERS AND ALLOTMENTS 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 243 244 1975 REPORT OF THE SECRETARY OP THE TREASURY 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. IV. PAYMENT FOR AND DELIVERY OF NOTES 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 EXHIBITS 245 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 holder. V. ASSIGNMENT OF REGISTERED NOTES 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. VI. GENERAL PROVISIONS 1. As fiscal agents of the United States, Federal Reserve Banks are authorized and requested to receive tenders, to make such allotments as may be prescribed by the Secretary of the Treasury, to issue such notices as may be necessary, to receive payment for and make delivery of notes on full-paid tenders allotted, and they may issue interim receipts pending delivery of the definitive notes. 2. The Secretary of the Treasury may at any time, or from time to time, prescribe supplemental or amendatory rules and regulations governing the offering, which will be communicated promptly to the Federal Reserve Banks. WILLIAM E . SIMON, Secretary of the Treasury, SUPPLEMENT TO DEPARTMENT CIRCULAR NO. 13-75. PUBLIC DEBT DEPARTMENT 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 ;preliminary announcement Concurrent offering circular No. Department circular Treasury notes issued (all auctioned for cash) Accepted tenders Type of auction * Average price High price Low price No. Date 1974 July 31 July 31 Sept. 16 Oct. 15 Oct. 30 Oct. 30 Dec. 13 8-74 9-74 11-74 12-74 13-74 14-74 16-74 1974 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 Price... do. Yield.. do. do. do. do. 101.00 101.15 99.84 99.937 99.737 99.628 99.872 3101.28 3101.50 3100.09 3 100.349 3 99.921 100. 000 3 100.183 100.86 Dec. 20 18-74 Dec. 23 17-74 7% percent Series D-1979 Price... 101.,95 102.20 101.80 Dec. 20 1976 Jan. 22 Jan. 22 Feb. 11 Feb. 11 17-74 Dec. 23 1975 2-75 Jan. 23 3-75 Jan. 23 5-75 Feb. 12 6-75 Feb. 12 18-74 8 percent Series H-1976 ...do. 100.84 3 100.91 100.80 Mar. 4 Mar. Mar. Mar. Apr. May May May May June 4 12 25 9 1 1 8 15 11 7-75 Mar. 8-75 9-75 11-75 12-75 13-75 14-75 16-75 17-75 18-75 Mar. Mar. Mar. Apr. May May May May June 5 5 13 26 10 2 2 9 16 12 3-75,4-75 2-75,4-75 6-75 5-75 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... Yield.. do. do. do. 3 99.814 3 99.881 99.993 100.056 99. 787 99.685 99.416 99.781 $1,000 1,000 10,000 1,000 5,000 1,000 5,000 Issue date 1974 Aug. 15 Aug. 15 Sept. 30 Nov. 6 Nov. 15 Nov. 15 Dec. 31 Maturity date May Aug. Sept. May Nov. Nov. Dec. 15,1977 15,1980 30,1976 15,1979 15,1977 15,1981 31,1976 Date tenders received Payment date 2 CO 1974 Aug. 6 Aug. 7 Sept. 24 Oct. 23 Nov. 6 Nov. 7 Dec. 23 1974 Aug. 15 Aug. 15 Sept. 30 Nov. 6 Nov. 15 Nov. 15 Dec. 31 o Ot 1975 99.643 99.311 99.852 99.778 Price 101.21 s 101.51 101.07 Yield.. do.. do.. do.. do.. do.. do.. do.. do.. 99.991 99.982 99.926 99.900 99.717 100.000 99.794 99.947 99.797 100.082 3100.185 3 100.234 8 100.009 3 100.001 3 100. 212 3 99.924 100.158 3 100.000 99.957 99.815 99.865 99.863 99.604 99.894 99.683 99.895 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 99.700 99.453 99.908 99.834 101.01 99.75 Minimum denomination 1,000 Nov. 6* May 15,1979 Dec. 30 1975 5,000 Apr. 9 6 Mar. 31,1976 Jan. 2 1975 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 1974 1,000 Nov. 15« Nov. 15,1981 Mar. 11 1975 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 Jan. 7 Jan. 9 Feb. Feb. Mar. Mar. 18 18 3 3 Mar. 19 Mar. Mar. Apr. Apr. May May May June June 25 31 I O 30 15 15 27 6 30 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. * 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. I3 EXHIBITS 247 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. DEPARTMENT CIRCULAR NO. 4-75. PUBLIC DEBT DEPARTMENT OF THE TREASURY, WasMngton, January 23, 1975. I. INVITATION FOR TENDERS 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. n . DESCRIPTION OF BONDS 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 permitted. 5. The bonds will be subject to the general regulations of the Department of the Treasury, now or hereafter prescribed, governing United States bonds. 248 1975 REPORT OF THE SECRETARY OF THE TREASURY H I . TENDERS AND ALLOTMENTS 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. IV. PAYMENT 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, EXHIBITS 249 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. v . A S S I G N M E N T OF REGISTERED NOTES 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. VI. GENERAL PROVISIONS 1. As fiscal agents of the United States, Federal Reserve Banks are authorized and requested to receive tenders, to make such allotments as may be prescribed by the Secretary of the Treasury, to issue such notices as may be necessary, to receive payment for and make 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. WILLIAM E . SIMON, Secretary of the Treasury. SUPPLEMENT TO DEPARTMENT CIRCULAR NO. 4-75. PUBLIC DEBT DEPARTMENT OF T H E 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. JOHN K . CARLOCK, Fiscal Assistant Secretary. to Ol o CO Summary of information pertaining to Treasury bonds issued during fiscal year 1976 O Date of prelimDepartment inary circular an- nounce- No. Date ment 1974 July 31 Oct. 30 1975 Jan. 22 Mar. 12 May 1 Concurrent offering circular No. Treasury bonds issued (all auctioned for cash) 1974 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..^._ 1976 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 auction» Price... do.. . . . „ Yield.. _ do.. do.. 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 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 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 Average price 98.70 103.04 99.191 99.455 99.450 High price Low price 3 99.76 103.50 98.00 102.79 99.837 3 100.826 3 100.000 date Maturity date Date tenders received Payment date 2 1974 1974 1974 May 15* May 15,1999 Aug. 8 Aug. 15 May 158 do Nov. 8 ^Nov. 15 1975 1976 1976 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. >^ o a CO Ct H > o EXHIBITS 251 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. PRESS RELEASE OF MAY 27, 1975 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 FRASER 0-75-19 252 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 Branch. PRESS RELEASE OF JUNE 2, 1975 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: Range of accepted competitive bids 13-week bills maturing Sept. 4, 1975 26-week bills maturing Dec. 4, 1975 Discount rate Discount rate Price High Low Average- 2 98.680 3 98.664 98.671 5.222 5.285 5.258 Investment ratei Percetii 5.38 5.45 5.42 97.260 4 97.198 97.217 5.420 5.542 5.505 Investment ratei Percent 5.67 5.80 5.76 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 District Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas : San Francisco - Total Accepted Received $45,745,000 3,946,285,000 39,865,000 140,090,000 34,560,000 35,190,000 321,280,000 45,825,000 27,765,000 44,295,000 30,825,000 903,215,000 $27,595,000 1,724,080,000 • 39,865,000 47,450,000 25,360,000 29,940,000 87,180,000 31,305,000 18,965,000 39,260,000 21,825,000 708,415,000 $18,950,000 3,268,815,000 7,825,000 44,615,000 9,885,000 55,770,000 199,935,000 27,090,000 22,880,000 23,565,000 18,285,000 199,350,000 $8,950,000 2,278,015,000 7,700,000 39,615,000 9,885,000 45,770,000 149,485,000 17,590,000 22,380,000 21,065,000 18,285,000 81,450,000 3,896,965,000 2 2,700,190,000 5,614,940,000 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. 26-week bills Received Accepted EXHIBITS 253 Exhibit 4.—Department Circular, Public Debt Series No. 1-63, January 10, 1963, Amendment, regulations governing United States retirement plan bonds DEPARTMENT OF THE TREASURY, Washington, October 2, 1974L I M I T A T I O N ON HOLDING 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 follows: § 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). « Xi « Hi « « « (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. JOHN K . OARLOCK, Fiscal Assistant Secretary. Exhibit 5.—Department Circular No. 653, Ninth Revision, March 18, 1974, First Supplement, offering of United States savings bonds. Series E DEPARTMENT OF THE TREASURY, 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. JOHN K. CARLOCK, 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 $7.50 10.00 Issueprice Denomination. Period (years and months after 2d extended maturity at 30 yrs. 0 mos.) O-OtoO-6 0-6 to 1-0 l-Otol-6 l-6to2-0 2-0to2-6 2-6 to 3-0 3-0to3-6 3-6 to 4-0 4-0to4-6 4-6 to 5-0 5-0to5-6 5-6to6-0_ 6-0to6-6 e-6to7-0_ 7-0to7-6 7-6 to 8-0 8-0to8-6 8-6 to 9-0. 9-0to9-6 9-6 to 10-0 10-02 - - 1(6/1/75) (12/1/75) (6/1/76) (12/1/76) (6/1/77) (12/1/77) (6/1/78) (12/1/78) (6/1/79) (12/1/79) (6/1/80) ..(12/1/80) (6/1/81) ....(12/1/81) (6/1/82) (12/1/82) (6/1/83) .(12/1/83) (6/1/84) (12/1/84) (6/1/85) $18.75 25.00 $37.50 50.00 $75.00 100.00 $150.00 200.00 $375.00 500.00 $750. 00 Approximate investment yield (annual percentage rate) 1,000.00 (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 period)* to beginning of to beginning of to 3d extended each half-year next half-year maturity T H I R D E X T E N D E D M A T U R I T Y PERIOD** period period $22.46 23.13 23.83 24.54 25.28 26.04 26.82 27.62 28.45 29.30 30.18 3L09 32.02 32.98 33.97 34.99 36.04 37.12 38.24 39.38 40.56 $56.15 57.83 59.57 6L36 63.20 65.09 67.05 69.06 7L13 73.26 75.46 77.72 80.06 82.46 84.93 87.48 90.10 92.81 95.59 98.46 10L41 $112.30 . 115.66 119.14 122.72 126.40 130.18 134.10 138.12 142.26 146.52 150.92 155.44 160.12 164.92 169.86 174.96 180.20 185.62 19L18 196.92 202.82 $224.60 23L32 238.28 245.44 252.80 260.36 268.20 276.24 284.52 293.04 30L84 310.88 320.24 329.84 339.72 349.92 360.40 37L24 382.36 393.84 405.64 $449.20 462.64 476.56 490.88 505.60 520.72 536.40 552.48 569.04 586.08 603.68 62L76 640.48 659.68 679.44 699.84 720.80 742.48 764.72 787.68 81L28 $1,123.00 1,156.60 1,19L40 1,227.20 1,264.00 1,301.80 1,34L00 1,38L20 1,422.60 1,465.20 1,509.20 1,554.40 1,60L20 1,649.20 1,698.60 1,749.60 1,802.00 1,856.20 l,9n.80 1,969.20 2,028.20 $2,246.00. 2,313.20 2,382.80 2,454.40 2,528.00 2,603.60 2,682.00 2,762.40 2,845.20 2,930.40 3,018.40 3,108.80 3,202.40 3,298.40 3,397.20 3,499.20 3,604.00 3,712.40 3.823.60 3,938.40 4,056.40 Percerit 5.98 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 3 6.00 . 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. Percent 5.98 6.02 6.01 6.00 5.98 6.02 6.00 5.99 5.99 6.01 5.99 6.02 6.00 5.99 6.00 5.99 6.02 5.99 6.00 5.99 Percent 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 8.00 6.00 5.99 O QQ O O 1^ 5 TABLE 39-A.—Bonds bearing issue dates from June 1 through Sept. 1, 1955 Issueprice Denominatioh $18.75 25.00 Period (years and months after 1st extended maturity at 19 yrs. 8 mos.) $37.50 50.00 $75.00 100.00 $150.00 200.00 $375.00 500.00 $750.00 1,000.00 $7,500 10,000 (1) R e d e m p t i o n 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)* SECOND EXTENDED MATURITY 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 period Percent 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 &-Oto9-6 9-6 to 10-0 10-0 2 - _ 1 (2/1/75) (8/1/75) (2/1/76) ...(8/1/76) (2/1/77) ....(8/1/77) (2/1/78) r8/l/78) (2/1/79) (8/1/79) .(2/1/80) (8/1/80) .(2/1/81) ..(8/1/81) (2/1/82) (8/1/82) (2/1/83) (8/1/83) (2/1/84) (8/1/84) ....(2/1/85) $40.93 42.16 43.42 44.73 46.07 47.45 48.87 5 0 34 5L85 53.40 55.01 56.66 58.36 60.11 6L91 63.77 65.68 67.65 69.68 7L77 73.92 $8L86 84.32 86.84 89.46 92.14 94.90 97.74 100.68 103.70 106.80 110. 02 113.32 116.72 120.22 123.82 127.54 131.36 135.30 139.36 143.54 147.84 $163.72 168.64 173.68 178.92 184.28 189.80 195.48 201. 36 207.40 213.60 220.04 226.64 233.44 240.44 247.64 255.08 262.72 270.60 278.72 287.08 295.68 $327.44 337.28 347.36 357.84 368.56 379.60 390 96 402.72 414.80 427.20 440.08 453.28 466.88 480.88 495.28 510.16 525.44 541.20 557.44 574.16 591.36 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 percent. $818.60 843.20 868.40 894.60 92L40 949.00 977.40 1,006.80 1,037.00 1,068.00 1,100. 20 1,133. 20 1,167. 20 1,202.20 1,238.20 1,275.40 1,313 60 1,353.00 1,393.60 1,435.40 1,478.40 $1,637. 20 1,686.40 1,736.80 1,789.20 1,842.80 1,898. 00 1,954.80 2,013. 60 2,074. 00 2,136.00 2,200.40 2,266.40 2,334.40 2,404.40 2,476.40 2,550.80 2,627. 20 2,706. 00 2,787. 20 2,870.80 2,956.80 $16,372 16,864 17,368 17,892 18,428 18,980 19,548 20,136 20,740 21,360 22,004 22,664 23.344 24.044 24,764 25,508 26,272 27,060 27,872 28,708 29,568 6.01 5.99 6.01 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 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 period Percent 6.01 5.98 6.03 5.99 5.99 5.99 6.02 6.00 5.98 6.03 6.00 6.00 6.00 5.99 6.01 5.99 6.00 6.00 6.00 5.99 (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 maturity Percent ' 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 5.99 t>i QQ *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. bO Ol Or bO Ol TABLE 40-A.—Bonds bearing issue date Oct. 1 or Nov. 1, 1965 Issueprice Denoinination. 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.) $18.75 25.00 $37.50 50.00 $75.00 100.00 $150.00 200.00 $375.00 500.00 $750.00 1,000.00 (1) R e d e m p t i o n 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)* SECOND EXTENDED MATURITY 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 rate) $7,500 10,000 (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 period Percent 0-0 t o 0-6 1(6/1/75) 0-6 t o 1-0 (12/1/75) l-Otol-6 (6/1/76) 1-6 t o 2-0 (12/1/76) 2-0to2-6 (6/1/77) 2-6 t o 3-0 (12/1/77) 3-0to3-6 (6/1/78) 3-6 t o 4-0 (12/1/78) 4-<)to4-6 (6/1/79) 4-6 t o 5-0 (12/1/79) 5-0to5-6 (6/1/80) 5-6 t o 6 - 0 . . . . . . . . . . . . . . . . . . . . . ( 1 2 / 1 / 8 0 ) 6-0to6-6 .(6/1/81) 6-6 t o 7-0 (12/1/81) 7-0to7-6.... (6/1/82) 7-6 t o 8-0 (12/1/82) 8-0 t o 8-6 .(6/1/83) 8-6 t o 9-0 (12/1/83) 9-0to9-6 (6/1/84) 9-6 t o 10-0 (12/1/84) 10-02 (6/1/85) $4L38 42.62 43.90 45.22 46.57 47.97 49.41 50.89 52.42 53.99 55.61 57.28 59.00 60.77 62.59 64.47 66.40 68.39 70.45 72.56 74.74 $82.76 85.24 87.80 90.44 93.14 95.94 98.82 10L78 104.84 107.98 111.22 114.56 118.00 12L54 125.18 128.94 132.80 136.78 140.90 145.12 149.48 $165.52 170.48 175.60 180.88 186.28 191.88 197.64 203.56 209.68 215.96 222.44 229.12 236.00 243.08 250.36 257.88 265.60 273.56 28L80 290.24 298.96 $33L04 340.96 351.20 36L76 372.56 . 383.76 395.28 407.12 419.36 431.92 444.88 458.24 472.00 486.16 500.72 515.76 531.20 547.12 563.60 580.48 597.92 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 percent. $827.60 852.40 878.00 904.40 931.40 959.40 988.20 1,017.80 1,048.40 1,079.80 1,112.20 1,145.60 1,180.00 1,215.40 1,251.80 1,289.40 1,328.00 1,367.80 1,409.00 1,451.20 1,494.80 $1,655.20 1,704.80 1,756.00 1,808.80 1,862.80 1,918.80 1,976.40 2,035.60 2,096.80 2,159.60 2,224.40 2,29L20 2,360.00 2,430.80 2,503.60 2,578.80 2,656.00 2,735.60 2,818.00 2,902.40 2,989.60 $16,552. 17,048 17,560 18,088 18,628 19,188 19,764 20,356 20,968 21,596 22,244 22,912 23,600 24,308 25,036 25,788 26,560 27,356 28,180 29,024 29,896 5.99 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 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 maturity period Percent 5.99 6.01 6.01 5.97 6.01 6.00 5.99 6.01 5.99 6.00 6.01 6.01 6.00 5.99 6.01 5.99 5.99 6.02 5.99 6.01 Percen 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.01 6.00 6.01 *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 . CO M Cn O O GO O S3 O H3 CD d 3 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 . . . Denoinination $18.75 25.00 Period (years and months after original maturity at 7 yrs. 0 mos.) $37.50 50.00 $56.25 75.00 $75.00 100.00 $150.00 200.00 $375. 00 500.00 $750. 00 1,000.00 $7,500 10.000 Approximate investment yield (annual percentage rate) (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 X T E N D E D MATURITY PERIOD'' e a c h half-year period (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 Percent Percent 5.97 6.01 6.05 5.94 6.03 5.98 6.00 6.01 6.01 6.00 6.00 5.98 6.02 5.99 6.02 5.99 6.00 6.00 6.00 6.00 ** 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 _. 1(6/1/75) ...(12/1/75)1 (6/1/76) (12/1/76) (6/1/77)1 (12/1/77)1 (6/1/78) (12/1/78)1 ....(6/1/79) ...(12/1/79)1 (6/1/80) (12/1/80)1 (6/1/81)\ (12/1/81)\ (6/1/82)1 ..(12/1/82)1 (6/1/83) (12/1/83) (6/1/84)1 (12/1/84) (6/1/85)1 $26.81 27.61 28.44 29.30 30.17 31.08 32.01 32.97 33. 96 34.98 36.03 37.11 38.22 39.37 40.55 4L77 43. 02 44.31 45.64 47. 01 48.42 $53.62 55.22 56.88 58.60 60.34 62.16 64.02 65.94 67. 92 69.96 72.06 74.22 76.44 78.74 8L10 83.54 86.04 88.62 9L28 94.02 96.84 $80.43 82.83 85.32 87.90 90.51 93.24 96.03 98.91 IOL 88 104.94 108. 09 i n . 33 114.66 118.11 121.65 125.31 129. 06 132.93 136.92 14L03 145. 26 $1.07.24 110 44 113.76 117. 20 120.68 124.32 128.04 13L88 135.84 139. 92 144.12 148.44 152.88 157.48 162. 20 167. 08 172.08 177.24 182. 56 188.04 193.68 $214.48 220.88 227.52 234.40 241.36 248.64 256.08 263.76 27L68 279.84 288.24 296.88 305.76 314.96 324.40 334.16 344.16 354.48 365.12 376.08 ,387.36 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. 20 568.80 586.00 603.40 621. 60 640.20 659.40 679. 20 699. 60 720.60 742. 20 764.40 787.40 811.00 835.40 860 40 886.20 912.80 940. 20 968.40 $1,072.40 1,104.40 1,137. 60 1,172. 00 1,206.80 1,243.20 1, 280.40 1,318.80 1,358.40 1,399.20 1,441.20 1,484.40 1,528.80 1,574.80 1, 622.00 1,670.80 1,720.80 1,772.40 1,825.60 1,880. 40 1,936.80 $10,724 . 11,044 11,376 11,720 12,068 12,432 12,804 13,188 13,584 13,992 14,412 14,844 15,288 15,748 16,220 16,708 17,208 17,724 18,256 18,804 19,368 5.97 5.99 6.01 5.99 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 3 6.00 . (4) F r o m begin n i n g of each half-year period to extended maturity Percent 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.0U 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 H CQ *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. to Of fcO Ol 00 TABLE 88-A.—Bonds bearing issue dates frcmi June 1 through Nov. 1, 1969 $18.75 25.00 Issue price Denomination. Period (years and months after original maturity at 5 yrs. 10 mos.) O-OtoO-6 0-6 to 1-0 l-Otol-6 1-6 to 2-0 2-0to2-6 2-6 to 3-0 3-0to3-6 3-6 to 4-0 4-0to4-6 4-6to5-0 5-0to5-6 5-6 to 6-0 6-0to6-6i 6-6to7-0 7-0to7-6 7-6to8-0 8-0to8-6 8-6to9-0 9-Oto9-6 9-6 to 10-0 10-02 1(4/1/75) ..(10/1/75) (4/1/76) (10/1/76) (4/1/77) ..(10/1/77) (4/1/78) (10/1/78) (4/1/79) (10/1/79) ..(4/1/80) ...(10/1/80) ....(4/1/81) (10/1/81) .(4/1/82) (10/1/82) (4/1/83) (10/1/83) (4/1/84) (10/1/84) (4/1/85) $37.50 50.00 $56.25 75.00 $75.00 $150.00 $375.000 100.00 200.00 500.00 $7,500 Approximate investment yield (annual percentage rate) 10.000 (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 E X T E N D E D M A T U R I T Y PERIOD** maturity period period $25.77 26.54 27.34 28.16 29.00 29.87 30.77 3L69 32.64 33.62 34.63 35.67 36.74 37.84 38.98 40.15 4L35 42.59 43.87 45.19 46.54 $5L54 53.08 54.68 56.32 58.00 59.74 6L54 63.38 65.28 67.24 69.26 7L34 73.48 75.68 77.96 80.30 82.70 85.18 87.74 90.38 93.08 $77.31 79.62 82.02 84.48 87.00 89.61 92.31 95.07 97.92 100.86 103.89 107.01 110.22 113.52 116.94 120.45 124.05 127.77 13L61 135.57 139.62 $103.08 106.16 109.36 112.64 116.00 119.48 123.08 126.76 130.56 134.48 138.52 142.68 146.96 151.36 155.92 160.60 165.40 170.36 175.48 180.76 186.16 $206.16 212.32 218.72 225.28 232.00 238.96 246.16 253.52 261.12 268.96 277.04 285.36 293.92 302.72 31L84 32L20 330.80 340.72 350.96 361.52 372.32 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. $750.000 1,000.00 $515.40 530.80 546.80 563.20 580.00 597.40 615.40 633.80 652.80 672.40 692.60 713.40 734.80 756.80 779.60 803.00 827.00 851.80 877.40 903.80 930.80 $1,030.80 1,061.60 1,093.60 1,126.40 1,160.00 1,194.80 1,230.80 1,267.60 1,305.60 1,344.80 1,385.20 1,426.80 1,469.60 1,513.60 1,559.20 1,606.00 1,654.00 1,703.60 1,754.80 1,807.60 1,86L60 $10,308. 10,616 10,936 11,264 11,600 11,948 12,308 12,676 13,056 13,448 13,852 14,268 14,696 15,136 15,592 16,060 16,540 17,036 17,548 18,076 18,616 Percent 5.98 6.00 6.00 5.99 5.99 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 3 6.00 . Percent 5.98 6.03 6.00 5.97 6.00 6.03 5.98 6.00 6.00 6.01 6.01 6.00 5.99 6.03 6.00 5.98 6.00 6.01 6.02 5.97 Percent 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 5.97 *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. CD cn O o•==1 QQ fej a fel o EXHIBITS 259 Exhibit 60—Department Circular, Public Debt Series No. 1-75, January 1, 1975, regulations governing United States individual retirement bonds DEPARTMENT OF THE TREASURY, 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 regulations. (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 inscription. § 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 260 1075 REPORT OF THE SECRETARY OF THE TREASURY 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 registration. § 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 EXHIBITS 261 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. 262 1976 REPORT OF THE SECRETARY OF THE TREASURY (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 them; (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. EXHIBITS 263 (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. 264 1975 REPORT OF THE SECRETARY OF THE TREASURY § 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 Treasury. (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. 265 EXHIBITS (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^ JOHN K. CARLOCK, 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.. $50.00 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.. $100.00 $500.00 Redemption values during each half-year period (values'increase on first day of period shown) $50.00 51.50 53.05 54.64 56.28 57.96 59.70 61.49 63.34 65.24 67.20 69.21 71.29 73.43 75.63 77.90 80.24 82.64 85.12 87.68 90.31 93.01 95.81 98.68 101.64 104.69 107.83 111. 06 114.40 117.83 121.36 125.00 128.75 132.62 136.60 140.69 144.91 149. 26 153.74 158.35 163.10 $100.00 103.00 106.10 109.28 112.56 115.92 119.40 122.98 126.68 130.48 134.40 138.42 142.58 146.86 151.26 155.80 160.48 165.28 170.24 175.36 180.62 186.02 191.62 197.36 203.28 209.38 215.66 222.12 228.80 . 235.66 242.72 250.00 257.50 265.24 273.20 281.38 289.82 298.52 307.48 316.70 326.20 $500.00 515.00 530.50 546.40 562.80 579.60 597.00 614.90 633.40 652.40 672.00 692.10 712.90 734.30 756.30 779.00 802.40 826.40 851; 20 876.80 903.10 930.10 958.10 986.80 1,016.40 1,046.90 1,078.30 1,110.60 1,144.00 1,178.30 1,213.60 1,250.00 1,287.50 1,326.20 1,366.00 1,406.90 1,449.10 1,492.60 1,537.40 1,583.50 1,631.00 Exhibit 7.—Federal Financing Bank Circular No. 1-74, July 10, 1974, offering of Federal Financing Bank bills FEDERAL F I N A N C I N G B A N K , 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. 266 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 value). 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^ EXHIBITS 267 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. JACK F . BENNETT, . 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 ^^^^first 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 crease. 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 - 20 268 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 EXHIBITS 269 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 expire. 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 270 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. EXHIBITS 271 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 balance June 30 July 31 Aug.31 Sept. 30 Oct.31 Nov.30 Dec. 31 Jan. 31 1974 ._ 1975 9.2 6.5 5.4 8.7 2.2 3.1 5.9 5.9 Public debt subject to limitation With usual $3 billion margin for contingencies 476.0 475.6 482.1 481.7 480.5 485.7 493.0 494.5 ESTIMATED Feb. 2 8 Mar. 31.. Apr.30.. May 31.. June 30. 6 6 6 6 6 502 507 510 522 528 505 510 513 525 531 272 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 balance Public debt subject to limitation With usual $3 biUion margin for contingencies ESTIMATED 1976 June 30 July 31 Aug. 3i: Sept. 3 0 J . . . Oct. 31.: Nov.30 Dec. 31 Jan. 31 Feb. 29.. Mar.31 Apr. 30 May 3 1 . . . . . June 17 (peak) June 30 6 6 6 6 6 6 6 528 532 538 544 551 558 567 531 535 541 547 554 561 570 6 6 6 6 6 6 6 571 577 583 584 596 601 596 574 600 586 587 5Q9 604 699 1976 TABLE 3.—Budget summary [In biUions of dollars] Estimated Actual 1974 1975 Receipts: Federal funds Trust funds. _.. Interfund transactions . 1976 181 105 -21 186 119 -26 199 127 -28 Total budget receipts. 265 279 298 Outlays: Federal funds Trust funds— Interfund transactions.. 199 91 -21 229 110 -26 254 123 -28 Total budget outlays. 268 313 349 -18 14 -43 8 -55 3 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 1975 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... 1976 118 38 75 7 4 20 5 4 8 279 106 48 80 7 5 32 5 4 11 EXHIBITS 273 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 274 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 cycle. 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. 275 EXHIBITS TABLE 5.—Treasury money market borrowing {including foreign nonmarketable securities) [In billions of doUars] Calendar year 1970.... 1971.... 1972.... 1973.... 1974.... 1975e.. 19768... Maturities 2 Gross new issues 1 22 27 13 17 17 - . 45 49 1970...1971.... 1972.... 1973.... 1974.... 1975e... 31 37 21 20 32 48 1970.... 1971.-.. 1972.... 1973.-.. 1974.... 1975e... 53 64 34 ... . e Estimated. »Includes increases in regular biUs. 2 Includes paydowns in regular biUs. 37 49 93 Net new money First half 24 24 15 16 22 Peak increase ill borrowing -2 3 -2 1 -5 28 24 4 3 7 10 4 31 28 Second half 15 15 7 15 18 11 16 22 14 5 14 37 16 22 16 5 14 37 FuUyyear 39 38 22 31 40 27 14 25 12 6 9 65 14 2.5 13 6 9 65 17 23 bO TABLE 6.—Net funds raised in the capital markets by major sector CO [Fiscal years, biUions of doUars] U.S. Treasury and Federal Financing Bank 1954 1955 1956 1957 1958 1959 . I960-... 1961 1962 1963 1964 1965 1966 1967 1968 1969 3.6 1.7 -4.3 -3.6 6.3 8.0 .8 2.0 8.8 6.4 2.7 3.1 -1.0 .6 18.2 -1.9 Federal and sponsored agencies 1.7 -.1 .6 Total Federal sector 5.3 1.7 State and local 5.5 5.4 4.6 3.4 2.6 3.3 .9 .8 -3.7 -2.7 7.1 1.4 9.3 5.7 4.7 2.0 .1 2.4 1.1 L5 2.2 6.7 2.6 5.5 5.7 2.8 2.1 5.7 4.9 6.0 5.5 5.2 6.9 7.3 6.0 7.2 3.5 5.0 5.5 5.5 3.8 5.2 9.2 11.2 7.6 4.2 5.4 5.7 3.3 23.8 4.0 5.1 3.8 12.0 1970 6.8 8.1 14.9 1971 2.7 23.2 20.5 1972 8.7 28.2 19.6 1973 32.8 18.5 14.3 1974 2.1 2L3 23.3 1975e2 61.5 43.9 17.6 78.4 63.7 14.7 1976e2 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. 9.7 Corporate and foreign i 15.0 15.6 12.6 16.7 12.5 14.6 5.7 6.9 Total securities 14.2 9.7 4.1 . 7.0 . 19.2 19.7 12.2 15.1 14.7 12.1 12.0 22.7 18.6 13.2 17.5 22.2 21.5 46.1 30.5 14.8 23.0 15.8 10 5 15.6 26.3 22.7 39.4 61.3 59.7 55.9 55.6 100.3 115.7 Federal sector as a percent of total securities 37.4 17.4 37.1 47.5 23.5 17.7 49.4 40.7 3L8 30.8 25.8 15.2 51.6 12.4 37.9 37.9 47.2 58.6 41.9 6L3 67.8 Government sector as a percent of total securities ^ 76.0 73.1 2L0 18.6 63.9 76.4 70.7 58.5 75.6 70.3 71.4 70.4 58.9 43.3 67.3 5L8 62.4 62.4 73.5 8L2 72.0 73.8 80.4 3 Includes State and local as part of government sector. Source: Fiscal 1954-1974 data based on Federal Reserve Board "Flow of Funds." o o w CO O o 277 EXHIBITS 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 Total Aotai Fiscal 1976 Federal percent Government ^^^cent Total iotai Federal v^ropryf Government Percent Long-term funds: Mortgages: Residential Commercial Farm $35.3 7.9 4.6 $10.4 29.5 19.5 'iso.'o' $43.7 8.7 . 5.2 $8.5 6.9 '3."8' '73.'i Total 47.8 17.3 36.2 57.6 12.3 2L3 2.0 6.9 26.9 7.9 L6 5.9 Corporate securities: ** Bonds Stocks .... 29.1 5.3 . . . . ^ 34.4 2.0 5.8 34.8 1.6 4.6 Total long-term funds... 82.2 19.3 23.5 92.4 13.9 15.0 Government securities: U.S. Government Federal agencies State and local governments.. 43.9 17.6 12.5 43.9 17.6 2.2 IOOO 100.0 17.6 63.7 14.7 14.6 63.7 14.7 L9 100.0 100.0 13.0 74.0 63.7 86.1 93.0 80.3 86.3 36.8 3.2 —.4 1.9 6.1 .1 16.6 3.1 7.9 .3 19.2 4.3 4.0 210.5 41.1 7.0 1.0 9.2 5.3 57.6 Total 4L5 10.2 58.3 23.2 Total funds raised 197.7 93.2 243.7 44.2 Total Total 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. 278 1975 REPORT OF THE SECRETARY OF THE TREASURY 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: Mortgages: Residential Commercial Farm Total Total Federal Percent Government $56.7 16.7 3.3 $10.9 19.6 28.6 3.2 97.0 $45.3 15.9 4.5 $12.9 .— 2.1 46.7 - 75.7 14.1 18.6 65.7 15.0 22.8 .2 \ L3 _.. 17.4 7.1 .6 3.4 Total Corporate securities:** Bonds Stocks 15.5 12.2. - Total Total long-term funds-. Govermnent securities: U.S. Government Federal agencies State and local governments..., Total .- Other funds:*** Business c r e d i t - - - _ . . Consumer credit Security credit Other loans, including foreign Total... Fiscal 1974 Federal Percent Goverrunent - Total funds raised -.-- 27.7 .2 '.7 24.5 .6 2.4 103.4 14.3 IsTs 902 15.6 ITTS 18.5 14.3 12.6 18.5 14.3 2.2 100.0 100.0 17.5 2.1 21.3 16.7 2.1 21.3 1.9 100.0 100.0 11.4 45.4 35.0 77.1 40.1 25.3 63.1 6.8 .1 9.4 .6 2.4 17.4 53.1 23.3 —4.8 13.2 4.5 ' 8.5 3.2 24; 2 72.3 16.3 —3.7 13.8 84.8 7.7 9.1 98.7 9.3 9.4 67^0 24~4 229.0 502 2l79 233.6 ^' *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. EXHIBITS 279 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 Total Federal Percent Government Long-term funds: Mortgages: Residential Commercial Farm -. - Total Corporate securities:** Bonds Stocks 43.7 12.6 2.6 1L2 25.6 2.3 88.5 68.9 13.5 22.9 2L6 15.5 .2 .9 37.1 .2 .6 Total long-term funds 96.0 13.7 14.3 Government securities: U.S. Government Federal agencies State and local governments Total 19.6 8.8 16.2 19.6 8.8 1.9 100.0 100.0 11.7 44.6 30 3 67.9 26.7 15.2 9.5 9.4 3.3 12.4 2.9 30.9 Total 608 6.2 102 Total funds raised 201.4 50.3 25.0 Total 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. 280 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 system: 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 come; 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; EXHIBITS 281 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 1973 Average private Average annual investment as growth in percent of GNP productivity (excluding (output per defense man-hour) expenditures) Percent United States Canada Japan France Germany Italy United Ejngdom OECD less United States* AUOECD* 18.0 22.4 33.4 24.9 26.2 21.4 18.9 24.2 20 5 3.3 4.3 10 7 5.9 5.8 6.2 4.2 6.3 4.8 *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 Italy. 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 282 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. EXHIBITS 283 Conclusion 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 jobs. 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 investment. 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 Plus: Unified budget deficit Trust fund surplus.. Off-budget agency spending financed by Treasury Allowance for contingencies Less: Change in checks outstanding (assumed flow of tax rebate checks) Equals debt subject to limit end of year 1976 1976 476 531 473 531 35 8 14 3 52 3 11 2 531 —2 599 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 0-75-21 Digitized for588-395 FRASER 284 .1975 REPORT OF THE SECRETARY OF THE TREASURY 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 legislation. 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 legislation. 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 "j 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 EXHIBITS 285 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. 286 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 financing. 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. EXHIBITS 287 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 288 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 departures. 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 EXHIBITS 289 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 exercise. 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 Act. 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 balance June 30 July 31 Aug.31... Sept.30 Oct.31 Nov.30 Dec.31 Jan.31 Feb. 29 Mar.31 Apr. 15 Apr.30 May 31 June 15 (peak) June 3 0 . . . 1975 PubUc debt subject to Umitation With usual $3 bilUon margin for contingencies ESTIMATED :.. 6 6 6 6 6 6 6 567 6 6 6 6 6 6 6 6 569 579 591 600 593 605 610 607 1976 533 540 548 547 553 560 . 536 543 551 550 556 563 570 572 582 594 603 596 608 '. 613 610 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 vital. 290 1975 REPOJIT OF THE SECRETARY OF THE TREASURY 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 market. 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 EXHIBITS 291 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 economy. 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 operations. 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. 292 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. EXHIBITS 293 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 time. 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 bills. 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 increa.se 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 sensitive. 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 years. 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 294 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 management. 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. 295 EXHIBITS MATURITY DISTRIBUTION OF PRIVATELY HELD TREASURY MARKETABLE DEBT $Bil. Underi Yearl 1-2 Years 100 ^ m Bills 75 50 - H N o t e i 25 _ ^ i B o n d 0 100 75 50 25 0 100 84.1 75 50 25 0 2-3 Years 3-5 Years 5-7 Years Over 7 Years June 1975* '• 13^ ••• l 12.1 17.1 110 ^ ^ n^ 17.8 June 1974 l l l g 22^ 12B 14.7 June 1973 204 1&2 175 * Estimated SHORT TERM INTEREST RATES Weekly Averages 1972 1973 Calendar Years 1974 1975 296 1975 REPORT OF THE SECRETARY OF THE TREASURY INTEREST RATES Weekly Averages ^t^ Prime Rate I II III II III II I II I ill! I I I I I I I I II ill M I I I I III II II III II I II MM I I I I I M I I II ll II nil M J F M A M J J A S O N D J F M A M J 1974 1975 AVERAGE LENGTH OF THE MARKETABLE D E B T ^ Privately Held Yearsr v---June 1947 10 years months January 1965 5 years 9 months / 2/ 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 1974 May June July August September October November December 1975 January February March April... May Outstanding Fed. & G.A. Totalpriv a t e l y held Commercial banks 2 Individuals 3 Lv. Chg. Lv. Chg. Lv. Chg. Lv. Chg. Lv. 474.7 475.1 475.3 481.8 481.5 480.2 485.4 492.7 2.8 .4 .2 6.5 -.3 -1.3 5.2 7.3 215.3 218.7 215.6 222.8 221.6 217.8 220.0 221.7 4.1 3.4 -3.1 7.2 -1.2 -3.8 3.2 1.7 259.4 256.4 259.7 259.0 259.8 262.5 265.3 271.0 -1.3 -3.0 3.3 -.7 .8 2.7 2.8 5.7 54.4 53.2 53.9 53.0 52.9 53.5 54.5 56.5 -2.4 -1.2 .7 -.9 -.1 .6 1.0 2.0 80.0 80.7 81.6 82.6 83.3 83.8 84.3 84.8 494.1 499.7 509.7 516.7 528.2 1.4 220.4 5.6 220.8 10.0 219.9 7.0 225.9 11.5 226.5 -1.3 .4 -.9 6.0 .6 273.8 278.9 289.8 290.9 301.7 2.8 5.1 10.9 1.1 10.8 54.5 56.9 62.0 63.0 n.a. -2.0 2.4 5.1 1.0 n.a. 85.3 85.3 85.7 86.1 n.a. 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. Chg. 0.8 .7 .9 1.0 .7 .5 .5 .5 .5 .0 .4 .4 n.a. Insurance companies Lv. 6.0 5.9 5.7 5.7 . 5.8 5.9 5.9 6.1 Chg. 0.1 6.2 6.2 , .4 6.6 .1 6.7 n.a. n.a. Mutual savings banks Lv. 2.6 2.6 2.6 2.6 2.5 2.5 2.5 2.5 2.6 2.7 2.9 3.2 n.a. Corporations 4 State and local governments Foreign a n d international 5 Chg. Lv. Chg. Lv. Chg. Lv. -0.1 11.2 10.8 11.3 11.0 10.5 11.2 11.0 11.0 0.7 .4 .5 -.3 -.5 .7 -.2 29.2 28.3 28.8 29.2 29.3 28.8 28.7 29.2 -0.9 .9 .5 .3 .1 .5 -.1 .3 57.3 57.3 1.4 57.7 .4 56.9 -.8 56.0 .9 56.0 . 56.6 .6 58.3 1.7 58.4 .1 -.1 .1 .1 .2 .3 n.a. 11.3 11.4 12. 0 12.5 n.a. .3 .1 .6 .5 n.a. 30.0 30.5 29.7 29.8 n.a. Chg. Other investors ^ Lv. 18.6 17.3 18.8 19.0 19.5 20.3 20.1 22.4 Chg. -1.1 -1.3 1.5 .2 .5 .8 -.2 2.3 61.5 64.6 65.0 64.9 3.1 3.1 .4 -.1 22.3 21.3 25.9 24.7 -.1 -1.0 4.6 -1.2 n.a. n.a. n.a. n.a. 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. W w HH Ul 298 1975 REPORT OF THE SECRETARY OF THE TREASURY TABLE 3.—Offerings of marketable securities,'^ J anuary-June 1976 [Amounts in billions of dollars] Maturity Total offerings Under 2 years — Bills Amount Percent of total $47.6 100.0 32.5 68.3 16.7 33.0 11.7 2.4 L6 13-, 26-week bills 52-week bills other bills 16.8 35.2 Coupons 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. 1.7 1.7 1.6 2.3 L5 1.6 2.1 L6 2.0 12.4 26.0 1.3 3.3 L8 1.8 2.8 L5 1.2 2.6 1.2 L5 3.2 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 accounts. 299 EXHIBITS 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] Outstanding Treasury bills Regular weekly 52-week Coupons and other 1975 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. 1976 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 Total *Less than $50 million. n.a. Not available. 1 Treasury bills in 2-year note cycle slot. 588-395 0 - 7 5 - 2 2 •.. (*) Privately held 126.9 93.2 100.5 26.4 n.a. n.a. 37.0 26.0 7.7 2.0 4.6 1.9 3.1 1.7 (*) 1.5 .9 3.5 2.1 1.6 3.7 4.9 2.3 (*) 2.7 2.8 1.6 2.7 163. S 2.4 1.5 (*) 1.9 2.2 1.5 2.0 119.2 oo o o CD <i ox Treasury issues, maturities, and new money, fiscal years 1973-76 [In millions of dollars] JulyDecember 1972 JanuaryJune '• 1973 Total O SI JulyDecember 1973 JanuaryJune 1974 Total JulyDecember 1974 JanuaryJune 1975 p Total Gross issues 144,374 134,745 279,119 142,145 141, 228 283, 373 167, 379 187,419 354,798 Bills 125, 297 19, 077 120, 660 14,085 245, 957 33,162 132, 111 10, 034 128, 981 12, 247 261, 092 22, 281 144,307 23,072 149,565 37,854 293,872 60,926 131,565 140,915 272,480 134, 562 144, 349 278, 911 147, 651 154, 632 302,283 115, 975 15, 590 124,463 16,452 240,438 32,042 124,490 10, 072 131,740 12,609 256, 230 22,681 130,854 16, 797 140,859 13, 773 271,713 30,570 12,809 -6,170 6,639 7,583 -3,121 4,462 19, 728 32,787 52,515 9,322 15,327 -3,803 6,683 5,519 22,010 7,621 8,102 - 2 , 759 9,810 4,862 17,912 13,453 14,561 1 8,706 31,955 22,159 46,516 Coupons Gross maturities Bills Coupons Net (-1- or — issues).-. Issued to private: Bills (net) Coupons to foreign 2 Total Maturities privately held: Coupons New money from private 24, 649 2,880 27,529 15,723 7,051 22, 774 28,014 40,664 68,678 11,798 9,114 20,912 8,095 10,061 18,156 8,568 7,215 15,783 12,851 -6,234 6,617 7,628 -3,010 4,618 19,446 33,446 52,892 p Preliminary. » Assumes rollover of $4,506 million regular bills maturing June 26,1975. 2 included in coupons issued to private. O CO o 1-3 > o w > EXHIBITS 301 Exhibit 14.—Other Treasury testimony in hearings before congressional committees 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 302 1975 REPORT OF THE SECRETARY OF THE TREASURY 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— everybody. 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 inflation. 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. N O T E S TO C H A R T 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. EXHIBITS 303 THE BUDGET AND INFLATION -4h Actual NIA Budget Position I .2 Deficit I 0 CL +2 Surplus +4 48 U ^ o 50 52 54 56 58 60 62 64 66 68 70 72 NIA Budget Position, Full Employment Basis -2 Deficit 1 ° a>+0.8 t2! +2 Surplus +4 48 50 52 54 56 58 60 62 64 66 68 70 72 57 59 61 63 65 67 69 71 73 +10 Inflation +8 L ^ (GNP Deflator) +6 §+2.9 t^ +2 49 51 53 55 Note: Bars are plotted as deviations from average rather than from zero. 304 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. Profits 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 EXHIBITS 305 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 standards. 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 306 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 mu.st, 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 EXHIBITS 307 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. 308 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 EXHIBITS 309 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 institutions. 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 policy. 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. 310 1975 REPORT OF THE SECRETARY OF THE TREASURY 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. EXHIBITS 311 SUMMARY 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 effect. 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 312 1975 REPORT OF THE SECRETARY OF THE TREASURY 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 rush. 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 EXHIBITS 313 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