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LI8RARY
P()OM

5030

JUN 1 ~ 1972
TREASURY

DEPARTMENT

UNITED STATES SAVINGS BONDS ISSUED AND REDEEMED THROUGH

August 31, 1967

(Doll or omounts in millions _ rounded and will not necessarily add to totals)
DESCRIPTION

.TURED
Series A-1935 thru D-19~1
Serif's F and G-1941 thru 1952
Series J and K-1952 thru 19$4

IMATURED
Series E!J:
19~1

1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
Unc lassified
Total Series E
Series H (1952 thru May, 1959)!J
H (June, 1959 thru 1967)
Total Series H
Total Series E and H
Series J and K (

19$,

thru 1957)

{Tot.l matured
All Series

Total unmatured
Grand Total

AMOUNT ISSUED1!

AMOUNT
REDEEMEDY

AMOUNT
OUTSTANDING

% OUTSTANDI~G
OF AMOUNT ISSUED

,,00)
29,,21
2,2)6

4,99$
29,467
2,213

8
,3
2)

.16
.18
1.03

1,866
8,237
13,253
1S,462
12,137
,,489
S,l95
,,361
S,286
4,620
3,999
4,191
4,779
4,867
S,068
4,886
4,,90
4,463
4,173
4,170
4,200
4,046
4,496
4,389
4,294
4,605
2,022

1,629
7,211
11,638
1),469
10,383
4,,01
4,087
4,120
3,969
3,429
2,968
3,079
3,413
3,389
3,448
3,263
2,95,
2,713
2,489
2,370
2,2,7
2,110
2,152
2,Oh9
1,900
1,627
331

237
1,02S
1,616
1,993
1,7S4
967
1,108
1,241
1,297
1,192
1,031
1,112
1,367
1,478
1,620
1,624
.1,63,
1,7,0
1,684
1,800
1,944
1,936
2,345
2,339
2,394
2,978
1,691

12.70
12.44
12.19
12.89
14.4$
17.98
21.33
23.15
24.54
2,.80
2,.78
26.,3
28.60
30.37
31.97
33.24
35.62
39.21
40.35
43.17
46.29
47.85
52.13
53.29
,5.75
64.67
83.63

660

681

-21

150,807

107,6,1

43,1,6

28.62

,,485
6,298

2,853
1,064

2,631
5,23h

47.97
83.11

11,783

3,917

7,866

66.76

162,$89

111,568

Sl,022

31.38

1,$14

1,160

3,4

36,760
164,103
200.863

36,675
112,727
149.403

84
,1,376
Sl.460

ludes accrued discount.
"rent redemption value.
option of owner bonds may be held and will earn interest for additional periods after original maturity dates.
ludes matured bonds which have not been presented for redemption.
Form PO 3812 - TRt:ASURY DEPARTMENT _ Bureau of the Public Debt

23.38
.23
31.31
25.6?_

TREASURY DEPARTMENT

September 1, 1967
FOR IMMEDIATE RELEASE

MINT TO RESUME THE MANUFACTURE AND SALE
OF PROOF COIN SETS
Miss Eva Adams, Director of the Mint, announced today that
the manufacture and sale of proof coin sets will be resumed in January,
1968.

Proof coins have not been made since 1964 when it became

necessary to suspend their manufacture because of the coin shortage.
The sets will consist of one each of the five denominations - the
half dollar, quarter, dime, nickel and cent.
will appear the mintmark

"s"

On the face of each coin

to designate its production at the United

States Assay Office at San Francisco.

The coins will have a mirror-like

finish, as a result of special techniques and equipment which will be used
in their manufacture.

The sets will be sold at $5 each.

Orders for the 1968 proof coin sets will not be accepted before
November 1, 1967.

All purchasers of 1967 Special Mint Sets from the

San Francisco Assay Office will receive a pre-punched order card for
1968 proofs prior to November 1, 1967.

Additional information and

ordering instructions will be released at a later date.

-000-

TREASURY DEPARTMENT
(

(~ RK~_L~E

6: 30 P .E. ,
iday, September 1, 1~67.
RE.3ULTS OF rrIill&SURY I S \\'EEKLY :dILL

OFFERI~G

The Treasury Department announced that the tenders for two series of Treasury
.lls, one series to be an additional issue of the bills dated June 8, 1967, and the
.her series to be dated Jeptember 7, 1967, which were offered on August 28, 1967, were
Jened at the Federal Reserve banks today. Tenders were invited for $1,400,000,000,
. thereabouts, of 91-day bills and for $1,000,000,000, or thereabouts, of lS2-day
.11so The details of the two series are as follows:
d~G2.: OF ACC£PTED
X.?.c;TITIVE BIDS:

High
LOW

hvera:..;e

91-day Treasury bills
maturing December 7.z 1267.
Approx. Equiv.
t'rice
Annual Rate
98.912
4.304%
98.904
4.336%
1/
98.'107
4.3247~

·
···

182-day Treasury bills
maturing Narch Lz 1268
Approx. Equiv.
Annual Rate
Price
97.604
4.739%
4 803;;
970572
4. 765~; 1/
97.591
0

5~ of the amount of 91-day bills bid for at the low price wa3 accepted
26% of the amount of 1~2-day bills bid for at the low price was accepted

./I'......L

T=~".D.::.;B.:.:>

APP.LlliD FOR Ju\D ACCEPTED BY FEDERAL RESERVE DISTRICTS:

District
Boston
1;e",; York
Fhiladelphia
Clevela.nd
hichmond
Atlanta
Chicago
St. Louis
~:Jinnea polis
Kansas City
Dallas
San Francisco

For
<P
29,835,000
1,895,864,000
24,757,000
27,010,000
15,756,000
43,415,000
212,269,000
65,945,000
17,777,000
33,424,000
22,398,000
28 9,245,000

AcceEted
4>
8,795,000
977,587,000
9,170,000
li:5,665,OOb
13,356,000
17,488,000
122,191,000
42,946,000
8,677,000
29,006,000
10,398,000
142 2020 2000

TUriILS

$2,678,295,000

$1,400,299,000 ~ $1,632,297,000

Am~lied

··
··
·
··
··
·
··
·

AEElied For
$
6,266,000
1,218,082,000
12,364,000
19,670,000
9,634,000
31,260,000
1-42,565,000
25,582,000
15,057,000
9,691,000
18,021,000
124 105 200O
t

Accepted
6,206,000
666,342,000
5,664,000
19,522,000
9,634,000
23,260,000
98,085,000
23,082,000
15,057,000
9,691,000
13,021,000
liO 2405 2000

$1,000,029,000

Includes ~201,022,000 noncompetitive tenders accepted at the average price of 96.907
Includes ~l07,506,000 noncompetitive tenders accepted'at the average price of 97.591
/ These rates are on a bank discount basis. The equivalent coupon issue yields are
4.44% for the 91-day bills, and 4.96% for the 182-day bills.
I
I

-1017

TREASURY DEPARTMENT

September 5, 1967
FOR USE IN MORNING NEWSPAPERS OF
wEDNESDAY, SEPTEMBER 6, 1967
FRANCIS BATOR APPOINTED SPECIAL CONSULTANT
TO THE SECRETARY OF THE TREASURY
Secretary Henry H. Fowler today announced the appointment
of Francis M. Bator as Special Consultant to the Secretary of
the Treasury. Mr. Bator will counsel with him and other senior
Treasury officials on a broad range of economic matters.
Mr. Bator will also become a member of the Advisory
Committee on International Monetary Arrangements, chaired by
former Secretary Dougla.s Dillon. This will permit him to
continue the close associa.tion he has maintained with the work
of the Dillon Committee while serving, prior to his departure
from full-time government service, on the senior interdepartmental Steering Group which has been responsible for planning
U.s. strategy on international monetary questions.
Mr. Bator is Professor of Political Economy, John F. Kenned
School of Government, Harvard University, and Director of Studie
in the School's Institute of Politics. From 1965 until
September 1 of this year he served as Deputy Special Assistant
to the President for National Security Affairs. His responsibilities at the "'hite House covered European political affairs
and the full range of foreign economic policy. In this last
capacity, he was the4hite House member of the Cabinet Committee
on the Balance of Payments and equivalent committees concerned
with trade policy and the Kennedy Round and other international
economic matters.
Mr. Bator was previously a member of the Senior Staff,
National Security Council (1964-65) and Senior Economic Advisor.
Agency for International Development, Department of State
(1963-64) .

F-1018

- 2 Before entering government service, Mr. Bator was on the
faculty of economics at the Massachusetts Institute of Technology, and a member of the research staff of the Institute's
Center for International Studies. He had been associated with
M.I.T. since 1951.
While at M.I.T., Mr. Bator served at various times as
consultant to the Office of the Secretary of the Treasury
(1961-63); the Under Secretary of State for Economic Affairs;
the Office of the Chief of Naval Operations; and the Congressional Panel on the Impact of the Peaceful Uses of Atomic
Energy. He also lectured at various of the \.Jar Colleges and
the Foreign Service Institute.
In 1962, Mr. Bator was the United States member of the
United Nations Consultative Group on Economic Projections.
In 1961 he served on the U.S. delegation to the Development
Assistance Group, Organization for European Economic Cooperation. He has also been a consultant to private organi~ations
and businesses, including The Rand Corporation, the Institute
for Defense Analyses, and A.D. Little, Inc., Cambridge,
Massachusetts.
Now 42, Mr. Bator holds B.S. and Ph.D. degrees in economics
trom the Massachusetts Institute of Technology, During 1944-46,
he served in the United States Army in the U.S. and Pacific
theaters, completing his service as a 1st Lieutenant, Infantry.
Mr. Bator's research and writing have been concerned mainly
with the economic role of government. His technical publications have been in the fields of allocation theory and "welfare
economics," macro-economic theory, and public finance. His
book, The Question of Government Spending, was published by
Harper & Brothers in 1960. In 1959 Mr. Bator was awarded a
Guggenheim Fellowship.
Mr. Bator is married to the former Micheline C. Martin of
New York and New Orleans. The Bators and their children.
Nina, 16, and Christopher, 13, live in Cambridge, Massachusetts.
000

TREASURY DEPARTMENT

FOR IMMEDIATE RELEASE
UNITED STATES AND FINLAND TO DISCUSS REVISION
OF INCOME TAX TREATY
Representatives of the United States and Finland will meet
in late September to discuss revision of the income tax convention between the two countries, the Treasury announced today.
The existing tax treaty with Finland was negotiated in
1952. The negotiations are expected to deal with a number of
specific problems which have evolved out of the tax law changes
which have taken place since 1952.
It is expected that among the items to be discussed will be
new rules for the taxation of income derived by residents of one
country who maintain permanent business connections in the other
country, or who earn professional fees or salaries therein, or
who receive royalty income. In addition, it is expected that
the "Draft Double Taxation Convention" published in 1963 by the
Fiscal Committee of the Organization for Economic Cooperation
and Development (OECD), will be considered in the course of the
negotiations.
Persons having comments or suggestions to make concerning
the income tax treaty between the United States and Finland
should submit their views by September 15 to Assistant Secretary
of the Treasury Stanley S. Surrey, United States Treasury
Department, Washington, D. C. 20220.

000

TREASURY DEPARTMENT

September 6, 1967

September 14, 1967,
representing an
and to
amount of
to be freely

182-day bills, for $1,000,000,000, or thereabouts, to be dated
September 14,1967, and to mature March 14,1968.
The bills of both series will be issued on a discount basis under
competitive and noncompetitive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the clOSing hour, one-thirty p.m., Eastern Daylight Saving
time, Monday, September 11, 1967.
Tenders will not be
received at the Treasury De~artment, WaShington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the baSis of 100,
with not more than three decimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompan1ed by an express guaranty of payment by an incorporated bank
or trust company.
F-1020

- 2 -

Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announcement will be made bv the Treasury Department of the amount and price
range of accepted b~ds. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasu~
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final.
Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on September 14,1967,
cash or other immediately available funds or in a like face amount
of Treasury bills maturing September 14,1967.Cash and exchange tender
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
T;le income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
Statr', but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 4~4 (b) and 1221 (5) of the Internal
Revenue ~ode of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revis ion) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained W
any Federal Reserve Bank or Branch.
000

TREASURY DEPARTMENT

September 7, 1967
FOR IMMEDIATE RELEASE
DR. SEYMOUR E. HARRIS RECEIVES
THE ALEXANDER HAMILTON AWARD
Secretary of the Treasury Henry H. Fowler today presented
the Treasury's highest honor, the Alexander Hamilton Award, to
Dr. Seymour E. Harris, Senior Consultant to the Secretaryo
The award is given for outstanding and unusual
leadership in the work of the Department.
The award to Dr. Harris cited his services as chief
economic adviser to the Secretary of the Treasury since 1961,
including his work as organizer and chairman of a group of
leading economists who advise the Department on economic and
fiscal policies.
In presenting the award, Secretary Fowler said that
Dro Harris' advisory group "has become a strong and vital link
between the Treasury and many of the leading economists of the
Nation,
"It is not by coincidence or chance," he continued, "that
the period during which your group has functioned has also seen
rur country blessed by 77 months of economic expansion, You have
contributed substantially to an expansion that in November will
become the longest sustained economic upturn in our historyo"
Dr. Harris, who will be 70 tomorrow, is professor of
economics and chairman of the economics department, University of
California, San Diego.
In addition to an outstanding academic career and extensive
service as a Government adviser and official, he is a noted
writer in the field of economics,
F-l021

- 2 -

A native of New York City, Dr. Harris holds A.B. and
Ph.D. degrees from Harvard University. He began his academic
career as an instructor at Princeton University in 1920,
returning to Harvard to teach in 1922. Except for one year on
leave as an official of the Office of Price Administration
during World War II, Dro Harris remained at Harvard until 1964,
when he assumed his present post with the University of
California. He was Lucius N. Littauer Professor of Political
Economy during his last seven yea~ at Harvard. He also has been
a visiting professor at Stanford University.
Dr. Harris was a consultant to the President's Council
of Economic Advisers in 1950-51. During World War II,
Dr. Harris also was a board member of the Economic Warfare Policy
Committee, a member of the Secretary of State's committee on
postwar commercial policy, and an economic adviser to the War
Production Board. He later was an adviser to the Commodity Credit
Corporation (1949-53) and a member of the Agricultural
Mobilization Policy Board (1951-53).
From 1955 through 1960, he was chairman of the New England
Governors' Textile Committee
0

Dru Harris was editor of The Review of Economics and
Statistics, published by Harvard, for over 20 years. He is also
the author of many books on economics, including The Economics
of the Political Parties (1962), Economics of the Kennedy Years
(1964), and Economic Aspects of Higher Education (1964).
Dr. Harris is a member of the American Economics
Association, the American Academy of Arts and Sciences and the
Harvard Club of New York, and is a trustee of the John F. Kennedy
Library at Harvard.
The citation accompanying Dr. Harris' award is attached.

000

CITATION
Alexand~

Hamilton

SeymouJl E. HaJrJt.i6

M SetU.oJt Con6uUa.nt :to :the SeClle:tMy 06 the TJtecuuJlY .6.ince 1961, you have
con:tJt.ibu:ted -6.igni6.icanUy to economic and 6.i-6cal polic.iu that have blLought
wtpaMUeled pILO.6p~y to the AmeMcan people. On beha.l6 06 the TILea.6U1Lfj, you
olLganize.d and Me. chcUJunan 06 a c.oMuUa.:t.ive glLoup 06 leading ec.onom.i.6.t.6 who
have. adv.i.6e.d :the. Ve.paJLtme.nt on majolL polic.y ma.t.te.M duJt..ing the pa.6t .6.ix yealL.6.
YOWl. acc.ot11pwhme..nt.6 60Jt :the TJteMWl.Y Me, ftowev~, only.the mO-6t lLece.nt .6tep
.in long and futiilgu.i-6hed .6~v.ice CU Gov~nmen:t adv.i.6~ and o66.icA.o.l. In
add.i:t.ion :to YOWl. ac.h.ieve.men:t.6 .in Gov~nment, you have ealLned wolLld Jtec.ognition
cu teac.h~ and au:tholL .in the 6.ield 06 economiC-6. FUlL:theJurrolLe, yOUIL devel.opne.nt
and applic.at.icm 06 a cio-6e lLel.a:t.ioMlUp between economiC-6 a.nd public. po.uc.y
have lLuui;ted .in economic. advancement 601L the Un.i:ted Statu a.nd oth~ ruz..t.ionA.
Ved.ica:t.ion to :the public .in:t~ut, ma.jolL con:tJt.ibu.:t.ion.6 :to oUIL economic.
well-bUng, ac.adem.«! a.nd U:teJtaJLy accompllihmen:t.6 -- thue have been .the
halbl1cvtR..6 06 YOWl. c.Me~. 1n .ideal.6 and .in deed.6, you have exempU6.ied t:h.e
h.ighut tJtad.i:t.ion.6 06 Alexand~ HamU;ton.

TREASURY DEPARTMENT

September 8, 1967
FOR IMMEDIATE RELEASE
TREASURY HONORS 118 AT
ANNUAL AWARDS CEREMONY
Honors were awarded to 118 Treasury Department emplOyees
today for outstanding service and significant operational
contributions at the Department's Fourth Annual Awards
Ceremony.
In the fiscal year ended last June 30, Treasury employees
received more than $950,000 in awards for adopted suggestions
for improved Treasury operations and other outstanding service.
Estimated first year benefits to the Treasury, in the form of
cost reductions and increased efficiency, exceeded $3 million.
Among those recognized at the awards ceremony, held
at the Departmental Auditorium, Washington, D. C., were:
2 employees who received the Alexander
Hamilton Award for demonstrating outstanding
leadership while working closely with the
Secretary.
36 persons, who during the year had received
either of the Treasury's two top awards,
for Exceptional Service or for Meritorious
Service.
25 employees who, through outstanding
suggestions or service, contributed to
significant monetary savings, increased
efficiency, or distinct improvements in
government service.
4 employees received special awards for
providing exceptional staff leadership to
the Cost Reduction and Management Improvement
Program.

- 2 15 supervisors, for notable achievements
in encouraging employee contributions
to efficiency and economy.
12 employees who received special awards
for outstanding contributions in
improving communications and services to
the public.
In addition, the awards ceremony, making the l78th
anniversary of the Treasury Department, honored 24 long-time
career employees -- 18 of whom have served more than 40 years,
4 more than 45 years, and 2 more than 50 years.
The awards were presented by Secretary of the Treasury
Henry H. Fowler. Everett Hutchinson, Under Secretary of
Transportation, was an honored guest as the Coast Guard
participated in a Treasury award ceremony for the last time.
Five bureaus were honored by the Treasury. The U. S. Saving~
Bonds Division was cited for outstanding participation in the
performance phase of Treasury Department's Incentive Awards
Program. The U. S. Coast Guard was recognized for outstanding
achievement in its suggestions program. The Internal Revenue
Service was commended for a positive aggressive program in
improving communications and services to the public.
The Office of the Comptroller of the Currency was recognized
for its safety record among bureaus with 1,000 or more
employees. As a third time winner the Office of the Secretary
earned the privilege of permanently retaining the plaque for
safety for its record among bureaus with less than 1,000 employee
Attached is a list of those recognized, and their citations.

000

...,

EMPLOYEE SUGGESTIONS AND SERVICES
Recognition by the Secretary of outstanding suggestions or exemplary
services which served to etJect significant monetary savings, increased
efficiency, or improvements in Government operations.
LCDR DON S. BELLIS, 8th Coast Guard District, New Orleans, La.
For successfully developing the "Work Card" system for inspections of Coast Guard HU-16 aircraft with the results of better
maintenance, improved flight safety and substantial saving. Estimated savings-$91,398. Suggestion Award-$500.
MICHAEL BrENES, Internal Revenue Conferee, Audit Division, Brooklyn District Office, Internal Revenue Service
For suggesting a change in processing procedures which smoothed
the flow of work and eliminated a time consuming processing
task while assigned to the Manhattan District Office. Estimated
savings-$IO,458. Suggestion Award-$5I5.
ROBERT A. BRIDGES, Assistant to the Director, Tax Court Division,
Office of the Chief Counsel, Internal Revenue Service
For the highly exemplary manner in which he has managed and
directed the technical function of the Tax Court Division. Superior
Work Performance Award-$500.
BERNARD CHERNOFF, Plate Printer, Plate Printing Division, Bureau of
Engraving and Printing
For suggesting a method of salvaging the expensive phosphor ink
used in printing postage stamps. Estimated savings-$18,500.
Suggestion Award-$7l5.
JAMES A. DANIELS, Criminal Investigator, Bureau of Narcotics, Lima,
Peru
For exceptionally productive efforts with international law enforcement officials in several South American countries, involving
the initiation of cases against important violators, the seizure of
illicit laboratories and a very significant amount of narcotic drugs
while working under the most hazardous of conditions. Superior
Work Performance Award-$500.

RICC\RDO R. DIONISIO, Master Chief Yeoman, 3rd Coast Guard District, 1\ew York, N.Y.
For developing a recruit processing check off listing which resulted
in increased efficiency in recruit processing through the elimination of errors and omissions. Estimated savings-$23,010. Suggestion A ward-$500.
ROBERT N. DYAs, Technical Advisor, Office of the Regional Counsel,
Midwest Region, Internal Revenue Service
For the highly exemplary manner in which he has discharged his
responsibilities in connection with the prosecution of numerous
income tax evasion cases. Superior Work Performance Award$500.
MICHAEL R. FIN~, Internal Revenue Agent-Program Analyst, Audit
Division, Internal Revenue Service
For the development of a check sheet which facilitates the more
efficient analysis of deferred compensation plans and the preparation and review of the analysis memoranda. Estimated savings$40,000. Suggestion Award-$860.
NAN HANCOCK, Tax Technician, Internal Revenue Service, Detroit,
Mich.
For her diligence and perception in uncovering a fraudulent
refund operation in the Detroit area. Special Service Award-$500.
JOHN J. H \~r:Y, III, Chief, Special Procedures Section, Delinquent
Accounts and Returns Branch, Collection Division, Philadelphia
District, Internal Revenue Service
For a suggested improvement in a daily report form which resulted in substantial saving on a national basis and greatly reduced
the frequency of incomplete reporting. Estimated savings$20,196. Suggestion Award-$755.
A. HART, Criminal Investigator (Liaison Office), Office of
Investigations, Bureau of Customs

RAYMOND

For his efforts in effecting considerable savings to the government
by the acquisition and maintenance of radio communications
equipment. Special Service Award-$500.

DUDLEY E. PARKER, Administrative Aide, 8th Coast Guard District,
New Orleans, La.
For suggesting the elimination of a marine accident report form
without loss of information and resulting in a cost reduction.
Estimated savings-$18,200. Suggestion Award-$705.
ROGER R. REED (Deceased), Formerly Contract Specialist, Office of the
Director, Bureau of the Mint
For developing improved handling procedures which resulted in
significant savings in transactions with private copper refineries.
Estimated savings-$65,428. Special Service Award-$975.
THOMAS B. ROBBINS, Yeoman First Class, U.S. Coast Guard
Headquarters
For developing an improved method of obtaining details and
disposition of any offenses committed by applicant for a Merchant
Mariner's document. Estimated savings-$lO,OOO. Suggestion
Award-$500.
DONALD W. SHERMAN, Special Procedures Officer, Collection Division,
Reno District, Internal Revenue Service
For initiative, tact and effectiveness displayed which led directly
to changes in state tax laws. The changes enacted have resulted in
substantial savings in administrative costs to the Federal Government. Estimated savings-$12,OOO. Special Service Award-$500.
NICHOLAS J. TRYFOROS, Internal Revenue Agent, Audit Division,
Manhattan District Office, Internal Revenue Service
For suggesting and developing a bank location system which
greatly facilitates agent investigative work. First year savings$41,394. Suggestion Award-$860.
ROGER C. WARNER, Special Agent, Vice Presidential Protective Division, U.S. Secret Service
For excellent performance and outstanding courage in several
situations involving grave personal danger. Special Service
Award-$500.

MARVIN J. BERMAN, Criminal Investigator
NICHOLAS

NATALE, Criminal Investigator

DONALD ZIMMERMAN, Criminal Investigator
JOSEPH P. BLAISE, Criminal Investigator
111CHAEL

LA PERCH, Criminal Investigator

EDW.\RD A. BERTELE, Formerly Criminal Investigator
Alcohol and Tobacco Tax Division, North Atlantic Region, Internal
Revenue Service
For 0utstanding services performed under conditions of grave
personal danger during a long tcrm undercover assignment. The
employees successfully infiltrated a notorious interstate "moonshine" syndicate and, while posing as gangsters, collected valuable
information which led to the successful prosecution of the case.
Group Special Service Award-$2,800.
NICHOLAS R. DEVINE, Operations Officer, Bureau of Customs, Chicago,

Ill.
EDWARD \V. VOIGT, Customs Examiner, Bureau of Customs, Detroit,
Mich.
For jointly suggesting that individual invoices be eliminated on
repetitive shipments and grouped on one weekly customs entry.
First year savings-$63,780. Group Suggestion Award-$970.

AWARDS TO SUPERVISORS
Recognition by the Secretary of notable achievements by supervisors
in encouraging employee contributions to efficiency and economy.
These supervisors were selected from Bureau nominees after consideration of such factors as the size of groups supervised, the value
of contributions, and the nature of action by the supervisor.
DENNIS C. BEAMAN, Group Supervisor, Intelligence Division, San
Francisco District, Internal Revenue Service
For his continuing and effective leadership and promotion of
employee participation in the Cost Reduction Program. Through
his personal example and positive leadership, the employees of
his group developed and maintained an unusually active and
productive role in the District's Cost Reduction Program.
RICHARD F. BUSCHMAN, Supervisor, Investment and Funds Secticn,
Investments Branch, Division of Deposits and Investments, Bureau
of Accounts
For the stimulus he has provided those under his supervision to
reduce costs through in-depth appraisal of operations and for
instilling in them a high sense of the Bureau's goals.
ROBERT A. COLE, District Director, Bureau of Customs, Port Arthur,
Texas
For the untiring efforts, interest, alertness and initiative demonstrated in encouraging his employees to participate wholeheartedly
in the improvement of Government operations.
SEYMOUR I. FRIEDMAN, Assistant District Director, Manhattan District,
Internal Revenue Service
For his outstanding contribution to the Cost Reduction Program
in the Manhattan District. His effective leadership fostered an
awareness of good management and need for economy and
efficiency at all levels of the District's operation.

9
273-912-57--2

MARY ELLEN GASKIN, Supervisor, Stenographic Pool, Correspondence
and Ruling Unit, Claims and Ruling Section, Division of Loans
:ll1d Currency, Bureau of the Public Debt, Chicago, Ill.
For achievements in developing inexperienced employees while
accomplishing an abnormally heavy workload through the exercise of exceptional supervisory skills and abilities.
VlI\GINIA B. H.\RTER, Assistant Chief, Diversified Payments Branch,
\Vashington Disbursing Center, Division of Disbursement, Bureau
of Accounts
For her enthusiasm and support of the Incentive Awards Program
which cfLctivc1y promoted genuine interest in improving operations throughout the organization.
R\LPH J. I I lYES, Chief, Buildings Operations Division, Office of
Administrati ve Services, Office of the Secretary
For stimulating his employees to constantly improve operations
by means of the suggestion program resulting in improved morale
and lower costs.
RADM DOUGUS B. HEND[RSON, Comptroller, U.S. Coast Guard
For distincti\'e leadership in motivating his employees to improve
operations through the Incentive Awards Program.
\VILLIAM H. HEYGSTER, Foreman of Plate Printers, Plate Printing
Division, Bureau of Engraving and Printing
For outstanding leadership in promoting the use of the Incentive
l\ wards Program to reduce oper:lting costs as manifested by the
m:ll1Y significant contributions made by his employees.
M . \RY F. KUTl:"G, Chief, Document Branch, Check Accounting
Di\ ision, Office of the Treasurer of the United States
For Jchie\'ing outstanding effectiveness in encouraging the employees of her Branch to process a substantially greater workload
without additional personnel or equipment.

MARTIN LEMESH, Chief, Special Payments and Claims Branch, San
Francisco Disbursing Center, Division of Disbursement, Bureau
of Accounts
For his significant contribution to the Incentive Awards Program
by motivating employees to actively participate in the suggestion
program and by encouraging subordinate supervisory personnel
to recognize superior employees.
FRANK G. PAPPAS, District Supervisor, Bureau of Narcotics, Dallas,
Texas
For initiative, resourcefulness and unusual leadership in promoting the Incentive A wards Program among personnel under his
jurisdiction.
EVERETT J. PRESCOTT, Superintendent, Examining Division, Bureau of
Engraving and Printing
For exceptional leadership and motivation of employees to work
at peak efficiency and for recognizing such efficiency through the
Incentive Awards Program, thereby contributing to the smoothness of operations during a major program change.
JESSE SWAIN, Ink Production Foreman, Ink Manufacturing and Testing
Division, Bureau of Engraving and Printing
For exceptional leadership in motivating his employees to perform
their duties with increased efficiency resulting in reduced costs and
the elimination of safety hazards.
MARSHALL R. WEEKS, Chief, Pension Trust Section, Los Angeles District Office, Internal Revenue Service
For his special success in substantially reducing an excessive
inventory of requests for qualifications determinations. Using
effective management techniques, his group was able to reduce
its inventory by over 30% in spite of an overall increase in the
volume of work received.

COST REDUCTION AND MANAGEMENT
IMPROVEMENT
Special awards by th~ S~cr~tary for their ~xceptional staff /~ad~ship
within their respectiv~ organizations in furthering the Treasury Department's Cost Reduction and Management Improvem~nt Program.
DALE AYLESWORTH, Management Analyst, Management Analysis
Office, Bureau of the Public Debt
WILLIAM E. EDEN, Chief, Management Services Branch, Administrative Management Division, U.S. Coast Guard
]. ELTON GREENLEE, Director, Office of Management and Organization,
Office of the Secretary
GEORGE R. NEIL, Management Analyst, Program Staff, Assistant
Commissioner (Administration), Internal Revenue Service

ECONOMY CHAMPIONS
The U.S. Ciuil Service Commission formally recognized those Federal
employees who were credited with the saving of $10,000 or more
during the current year. Treasury employees so honored are listed
below.
LCDR Don S. Bellis
Michael Bienes
Bernard Chernoff
Marilyn M. Curtin
Nicholas R. Devine
Christine DrufIner
John J. Haney, III
John E. Hurley
Gerald P. King
Mary P. Langford
Dudley E. Parker
Erma D. Pilgreen
Roger R. Reed (Deceased)
Thomas B. Robbins, YNI
CHMACHW-3
Floyd L. Stormer
Nicholas J. Tryforos
Edward W. Voigt
Edw:ud P. Weathersbee

U.S. Coast Guard
Internal Revenue Service
Bureau of Engraving and Printing
Internal Revenue Service
Bureau of Customs
Internal Revenue Service
Internal Revenue Service
Internal Revenue Service
Internal Revenue Service
Internal Revenue Service
U.S. Coast Guard
Internal Revenue Service
Bureau of the Mint
U.S. Coast Guard
U.S. Coast Guard
Internal Revenue Service
Bureau of Customs
Internal Revenue Service

SPECIAL AWARDS FOR EXCELLENCE IN
IMPROVING CO:MMUNICATIONS AND
SERVICES TO ruE PUBLIC
Recognition by the Secretary for outstanding contributions dun·n g fiscal
year 1967 which improved communications and services to the public.

MAY CHALoUPKA, Information Receptionist, New York Regional Disbursing Office, Division of Disbursement, Bureau of Accounts
For the quality of the relationship she has maintained with the
public through her exceptional efforts to assist those she serves.
C. CHARLES, Securities Examiner, Correspondence and
Ruling Unit, Bureau of the Public Debt, Chicago, Ill.

CHARLOTTE

For excellence in preparing tactful, effective and diplomatic replies to inquiries received from the public.
LEo P. FERNANDEZ, Internal Revenue Officer, Internal Revenue Service,
Blythe, Calif.
For his energetic and enthusiastic efforts to improve communications with the public in a sparsely settled area by making personal
appearances before local groups and constantly working with local
radio stations to adapt press releases for local use.
ROBERT O. GOFF, Legal Counsel, U.S. Secret Service
For noteworthy contributions in improving communications and
services to the public in the interpretation of laws relating to the
use of reproductions of U.S. coins, currency and securities in advertising and manufacturing.
MELVIN LERNER, Physical Science Administrator, Bureau of
Laboratory, Baltimore, Md.

Cus~c"s

For excellence in improving service to the public as reflected in
substantive articles published in authoritative outside publications.
ANNA E. SAUL, Secretary-Office Manager, U.S. Savings Bonds Division, Providence, R.I.
For outstanding performance in providing information and service to the public throughout the State with the positive result of
increased support of the program.
13

LT. DAVID S. SMITH, U.S. Coast Guard, Charlevoix, Mich.
For exemplary performance as the Charlevoix Group Commander
in conveying information of public interest through a weekly
radio program, publications, speeches and press relations.
GRETCHEN B. SCOTT, Correspondence Specialist (Research), Operating
Facilities Division, Bureau of Engraving and Printing
For outstanding performance of correspondence duties and in
recognition of the unusually current and valuable reference system she has established.
ROBERT E. 'WALTZ, Criminal Investigator, Bureau of Narcotics, Chicago, Ill.
For exceptional performance in improving the Government's
communications and relations with the public through participation in Police Academies and by lecturing in colleges and before
social and fraternal agencies.
JOliN ALFRED WHEELER, Jr., Chief, Trust Branch, Securities Division,
Office of the Treasurer of the United States
For exemplary performance in serving the public and stimulating
effective public relations in the processing of government securities
transactions.
PEARL MAE \VILLIAMS, Administrative Assistant, Office of the Director,
Bureau of the Mint
For outstanding achievements in management of the extensive
public contact work of the Office of the Director, resulting in a
substantial enhancement of the organization's public image.
ROBERT J. \VOJTAL, Attorney-Advisor, Office of the General Counsel,
Office of the Secretary
For unusual technical competence in assisting the Department to
implement the Freedom of Information Act in a manner aimed
at insuring quick and easy access by the public to all Treasury
information to which it is entitled.

SECRETARY'S AWARDS FOR SAFETY
Comptroller of the CUN'ency
For showing the greatest reduction in the frequency of disabling
injuries over the preceding four year average among bureaus with
more than 1,000 employees. The Office reduced its rate to 1.4
injuries per million man-hours worked, a reduction of 52%.

Office of the Secretary
For showing the greatest reduction in the frequency of disabling
1njuries over the preceding four year average among bureaus
with 1,000 or fewer employees. The Office reduced its injury rate
to 1.2, a reduction of 68%.

THE SECRETARY'S ANNUAL AWARDS
The Secrnary of the Treasury presents honorary awards each year to
"cogniu bureaus for outstanding performance in a number of areas.

SECRETARY'S AWARD FOR INCENTIVE
AWARDS PROGRAM (PERFORMANCE)
u.s. Savings Bonds Division
For the best overall resu!t~ in effectively recognizing employee
performance which significantly exceeded normal job requirements. Approximately 12% of the Division's personnel received
performance awards or high quality pay increases during fiscal
year 1967.

SECRETARY'S AWARD FOR INCENTIVE
AWARDS PROGRAM (SUGGESTIONS)
u.S. Coast Guard
For the best overall results in the suggestion program during

fiscal year 1967. Adopted suggestions increased 26% over the previous year. Estimated savings per JOO employees were approximatdy $4302.

SECRETARY'S AWARD FOR EXCELLENCE IN
IMPROVING COMMUNICATIONS AND
SERVICES TO THE PUBLIC
Internal Revenue Service
For a positive, aggressive program evidenced by enthusiastl "r.d
constructive leadership and by imagination and ingenuity ui employees throughout the Service which led to the innovation of a
variety of improved services to taxpayers.

CAREER SERVICE RECOGNITION
Recognition by 'he Secretary of employees in the Washington, D.C.,
area ",ho aItIlined 50, 45, or 40 years of Federal sertlice during fiscal
year 1967.

50 Years of Federal Service
Henry J. Holtzclaw
Jesse Swain

Bureau of Engraving and Printing
Bureau of Engraving and Printing

45 Years of Federal Service
Joseph R. Amato
Robert W. Campbell
Rudy P. Hertzog
John E. Nead

Office of the Secretary
Bureau of Engraving and Printing
Internal Revenue Service
Bureau of Customs

40 Years of Federal Service
Margaret L. Adams
Howard M. Annis
Ned W. Arick
E. Riley Campbell
Alwyn Cole
Bernard H. Fischgrund
AlvinR.Fox
Esther Friedman (Retired)
Esther M. Gornbein
Louise C. Guise
Jerome Matthews
Myrtice G. Pomeroy
John Rendo
Levi R. Robinson
George Vlases, Jr.
Floretta Vogd
Hazel A. Wasson
Hyman Weinstein

Internal Revenue Service
Office of the Treasurer of the U.S.
Internal Revenue Service
Internal Revenue Service
Office of the Treasurer of the u.s.
Internal Revenue Service
Bureau of Engraving and Printing
Internal Revenue Service
Internal Revenue Service
Internal Revenue Service
Bureau of Engraving and Printing
Bureau of Customs
U.S. Secret Service
Bureau of Engraving and Printing
Bureau of Customs
Internal Revenue Service
Internal Revenue Service
Bureau of Accounts

MERITORIOUS SERVICE AWARD
The\! eritorzous Sere' ice A ward is next to the highest award which may
be- recommended for presentation by the Secretary. It is conferred on
employees who render meritoriotls service tilithin or beyond their
required duties.
H. WALTON BLl:~IE, Chief, Graphics Branch, Office of Administrative
Services, Office of the Secretary
For his continuing excellence in the graphics work performed for
the Office of the Secretary and the Treasury Department.
JOHN P. BOTTi, Superintendent, New York Assay Office, Bureau of the
Mint
For exemplary leadership in guiding the New York Assay Office
through a period of vastly increased responsibility and activity in
all phases of its operations.
FRANKLIN W. CHAP!'" Director, Office of Industrial Relations, Bureau
of Engraving and Printing
For his high level of professional skill and exceptional achievements in the labor management field.
GEORCE M. DELCHER, Statistical Assistant, Office of Tax Analysis,
Office of the Secretary
For important contributions in providing accurate and timely
statistical data on current revenues and other financial information
required for successful fiscal policy formulation.
H!:',RY A. DOVE, Operating Facilities Officer, Division of Financial
~fanagement, Bureau of Accounts
For outstandi ng performance in managing the operating facilities
of the Bureau of Accounts and a rare ability to uncover untapped
potential human resources.
l\"oR~f.~'-I R. Du'-l'-:, Regional Administrator of National Banks, Comp-

troller of the Currency, Dallas, Tex.
For his outstanding technical competence, resourcefulness and
sustai ned superior performance in formulating and maintaining
unusuall y high standards of National Bank supervision.

WILLIAM J. DUllKIN, Assistant Commissioner (Permissive), Bureau
of Narcotics
For a highly successful mission in the establishment of a Bureau
of Narcotics enforcement program encompassing Mexico, Central
and South America, and the development of a truly cooperative
ejort with officials of governments concerned.
JAY L. ESSERMAN, Superintendent, Internal Audit Division, Bureau of
Engraving and Printing
For his outstanding leadership and exceptional technical competence and resourcefulness in effectively planning, directing and
coordinating the broad and complex audit activities required to
attain internal control of the billions of dollars of securities a.d
other assets under the Bureau's jurisdiction.
HOMER C. GANT (Retired), Formerly Assistant Regional Commissioner (Administration), Internal Revenue Service, San Francisco,
Calif.
For his outstanding performance as a resourceful administrator
and leader and for his significant organizational ability and
personal contribution to the Western Regional Office operations.
EDWARD J. HElD, Chief, Mobilization Planning Staff, Office of Management and Organization, Office of the Secretary
For his superior performance in the preparation of plans for the
continuity of financial, economic, and operational aspects of the
Department under emergency conditions.

LUCILE HENDERSON, Chief, Directives Control and Distribution
Branch, Office of Administrative Services, Office of the Secretary
For outstanding leadership of the Directives Control and Distribution Program.

GRACE HOOTEN (Retired), Supervisory Salary and Wage Administration Specialist, Bureau of Engraving and Printing
For her outstanding leadership and exceptional technical competence in effectively planning, administering and coordinating
the wage and classification program for the bureau.

SAMUEL LEVINE (Retired), Formerly District Supervisor, Bure:au of
N'rcotics, Philadelphia, Pa.
For his outstanding performance in presenting to the: me:dical and
scientific professions the position of the Treasury Departme:nt
regarding laws and regulations relating to narcotic drugs.
PHILIP M. LIGHT (Retired), Formerly Regional Director, U.S. Savings
Bonds Division, l"ew York City, N.Y.
For his unusual imagination and creativity in developing plans
and promotions for the sale of Savings Bonds which served as
prototypes for other states and regions.
RICH,\RD o. LOENG.\lw, Jr., Formerly Special Assistant for International
Tax Affairs, Office of the Secretary
For his outstanding performance, skill anci pC'ceptive insight in
areas of internation:!l tax afhirs evidenced in his formulation of
legislative propos:d s and 1'3;t:ci[1';0:1 in intcrna~i(lr:ai illcome tax
tre:1ty nt,' Jt: 1ti; ,II: ,
THOMAS R. LcsK, Financial Ecollo;ni,t, Tax ,\ndysis Sta£!, Office of
the Secretary
For out't~,r (Iq'g _-!)f;tnhl't;C'1~ to ,h,; Tr-:j'Jo:r -; tax analysis
program, t);:l;tic,;i:Jr!y ill ,'lC' ;lTfa (If "'''~n~l>: ~'tr,,1 :!, ng.
PACL McDol',\';.n, Director, (, 'Hice of .\dmil.istratJ"c S'Tvices, Office of
the Secretary
For his loyal dedication over two decades in guiding the Department's administrative services program with emphasis on service:
with dignity and for effecti,ely furthering the Safety and other
programs of special importance to the Government.
MARY S. MAXFIELD, Secretary to the General Counsel, Office of the
Secretary
For performance with intelligence, judgment, discretion and tact
of confidential and highly important duties as Administrative
Assistant and Secretary to five successive General Counsels.

THEODORE T. MERRILL, Assistant Director of Sales Operations, U.S.
Savings Bonds Division
For his outstanding service and dedication which have inspired
both his staff and volunteer workers to strive for and achieve
goa!~ that have exceeded expectations and have contributed
immeasurably to the success of the Savings Bonds Program.
CHARLES M. MILLER, Assistant Superintendent, Denver Mint, Bureau
of the Mint
For his superior performance during more than 33 years of Mint
service. His administrative ability and his technical skill have been
invaluable to the progra,ms of the Denver Mint during a peak
period of coin production unmatched in Mint history.
JACOB MOGELEVER, Special Assistant for Promotions, U.S. Savings
Bonds Division
For his outstanding performance in securing and retaining the
cooperation of the motion picture industry in support of the
Savings Bonds Program.
HAROLD Moss, Director, Foreign Tax Assistance Staff, Internal
Revenue Service
For his outstanding leadership in implementing and administering an effective Foreign Tax Assistance Program and in particular
for his work in establishing the Inter-American Center of Tax
Administrators.
ROBERT J. NEWBRAND, Special Agent, U.S. Secret Service, San Francisco, Calif.
For outstanding service, unusual competence, and dedication at
considerable personal risk in protecting the obligations of the
United States from counterfeiting.
MICHAEL G. PICINI, District Supervisor, Bureau of Narcotics, Rome,
Italy
For sustained contribution to international narcotic enforcement
with particular emphasis on Europe, the Middle and Near East.

RUTH W. PICKNELL, Attorney-Advisor, Office of the General Counsel,
Office of the Secretary
For invaluable services rendered and skill displayed in acting as
Officer in Charge of the Office of Domestic Gold and Silver
Operations, during a difficult and transitional period in which
major changes in Treasury silver policy were made.
MYRTICE G. POMEROY, Public Information Specialist, Office of Public
Information, Bureau of Customs
For continued exemplary performance in making information
available to the public in succinct and attractive form regarding
the privileges and responsibilities in clearing Customs on entering
the United States.
ROBERT A. RIDDELL (Retired), Formerly District Director, Internal
Revenue Service, Los Angeles, Calif.
For his exemplary performance as a District Director and for his
entire record of excellent achievement.
ELMER L. RUSTAD, Assistant National Director, U.S. Savings Bonds
Division
For dedication to the Savings Bonds Program, his warm and
understanding leadership of staff and volunteers, and outstanding
performance in creating systems and programs contributing to the
achievement of record Savings Bonds sales.
MICHAEL H. SURA, Superintendent, Philadelphia Mint, Bureau of the
Mint
For his forceful and imaginative leadership during a period of
unprecedented transition in the Mint.
NORBERT G. STRUB (Retired), Formerly Assistant Commissioner,
Bureau of Customs
For his consistent distinguished service during his 38 years in
the United States Customs Service.

BOWMAN G. TAYLOR, District Supervisor, Bureau of Narcotics, Boston,
Mass.
For pioneering our government's narcotic program in the Far
East and development of numerous major narcotic investigations
in cooperation with the law enforcement officials of the principal
countries within that area.
GLENN L. WEAVER, Special Agent in Charge, Vice Presidential Protective Division, U.S. Secret Service
For exemplary performance in meeting the unusual demand of his
responsibility for supervision of the Vice Presidential Protective
Division.

EXCEPTIONAL SERVICE AWARD
This is the highest award which may be recommNJded for presNJUltiOtl
by the Secretary. The award is conf",ed on employees who distinguish
thnnselves by except;ontd urv;ce w;lh;n or beyond their required
Juties.
LAWRENCE BANYAS (Retired), Formerly Deputy Assistant to the Secretary (Debt Management)
For outstanding contributions to the management of the public
debt during his Treasury career of over 36 years.
Ross A. HEFFELFINGER (Retired), Formerly Assistant Commissioner,
Bureau of the Public Debt
For dedicated and efficient service to the Treasury Department
over a period of many years, during which he made a major
contribution to the effective performance of administrative functions and operations in support of the Department's debt management policies.
AMOS N. LATHAM, Jr., Director of Personnel, Office of the Secretary
For an outstanding record of leadenhip and guidance that has
led to continuous growth in the application of sound personnel
principles and practices in the management of Treasury's human
resources.
JUSTIN T. WATSON, First Deputy Comptroller of the Currency
For unexcelled contributions to the stability and security of the
banking industry during a period of unprecedented bank
expansion.

ALEXANDER HAMILTON AWARD
This tIUlard is conferred by the Secretary to individuals personally
designated by him to be so honored. It is generally restricted to the
highest officials of the Department who have worked closely with the
Secretary tor a substantial period ot time and who have demonstrated
outstanding leadership during that period.
JOSlwH M. BOWMAN, Jr., Assistant to the Secretary (Congressional
Relations)
For his significant leading role in the formulation and enactment
of an exceptionally comprehensive Treasury legislative program.
FRANK LELAND HOWARD (Retired), Formerly Director, Office of Domestic Gold and Silver Operations, Office of the Secretary
For his distinguished contributions to the formulation and execution of Treasury policies concerning the domestic control of
monetary metals.

25
U,I. GOYERNIIEHT pRINTI"' OFFICE: 1961

TREASURY DEPARTMENT
WASHINGTON. D.C.

El..~,A.SE

6 :30 P .l·~.,
y, September 11> 1967.
li.E:)ULT3 OF TREASURY'S

"~EEKLY

BILL OFFERING

The Treasury Department announced that the tenders for two series of Treasury
, one series to be an additional issue of the bills dated June 15, 1967, and the
series to be dated September 14, 1967, which were offered on September 6, 19b7,
opened at the Federal Iteserve Banks today. Tenders were invited for ~1,40U,000,000,
ereabouts, of 91-day b:i_lls and for $1,000,000,000, or thereabouts, of 182-day bills.
etails of the two series are as follows:

uF hCCEPTED
TITIVi!; bIDS:

High
LO\,:

91-day Treasury bills
maturing December 14, 1967
Ar;prox. Equivo
Price
Annual Rate
4.328;;
98.906 Y
98.891
4.387%
98.398
4. 36(fts 11

132-day Treasury bills
maturing ~~ch 14, 1968
Approx. Equiv.
Price
Annual Rate
97.510
4.925%
97.490
4.965;0
97.497
4.951% 11

~ ~cepting one tender of $500 000

)170 of the amount of 91-day tilis bid for at the

lOVi

price was accepted

59% of the amount of 182-day bills bid for at the low price was accepted
'llii'!DEE.3

J-'..Pl'LI~D

FOR AND

.ACC~T.sD

BY FEDERAL RESERVE DISTRICTS:

Francisco

Applied For
$ 20,355,000
1,542,503,000
28,415,000
30,616,000
15,191,000
53,465,000
206,861,000
48,838,000
27,296,000
36,259,000
27,795,000
124,039,000

Accepted
Applied For
,$ 29,394,()()()
:P
10,355,000
917,562,000
1,214,527,000
16,415,000 :
13,786,000
30,616,000
39,709,000
12,191,000 :
8,723,000
42,780,000
33,590,000
144,612,000
213,584,000
40,731,000 :
29,653,000
21,856,000 :
20,338,000
.36,259,000 :
21,355,000
21,295,000 :
20,062,000
105,349,000
148,274,000

TOTALS

$2,161,633,000

~1,4oo,021,000 £1$1,792,995,000

~rj
~on

York
Ladelphia
velanc.
1lllond
:mta
~ago

Louis
1eapoljs
32.5

City

Las

Accepted
23,394,000
626,092,000
5,786,000
25,709,000
5,723,000
22,290,000
140,144,000
21,717,000
14,838,000
20,294,000
11,062,000
83,024,000

$1,000,073,000

£/

lcludes $253,197,000 noncompetitive tenders accepted at the average price of 98.898
lcludes $144,040,000 noncompetitive tenders accepted at the average price of 97.497
lese rates are on a bank discount basis. Theequivalent coupon issue yields are
48% for the 91-day bills, and 5.16% for the 182-day bills.
F-I022

S'l'Nl'El·)EWl' FOI~ UNDER SECHE'ri\[(l DI~l~n
BEFORE l!OUSE COI·[U'r'l'EE ON BAUI(ING AND CUm:j;i1C ~

Tuesday, September 12, 1967

f.lr

Chairman 1 Mcmbe:;:s of the Comrni t.tee:
We are here today not because this Committee or the

Congress as a whole has found any difficulty with the
proposed five year extension of the life of the ExportImport Bank and the necessary expansion of its lending
authority.

Widespread support for these b2Sic proposals

in the bill shOivs that the Cong-ress is \1e11 a'i'/c;.re of the
significant role played by the Export-Import Bank in
snpport of United States industry and trodc and in support
of the Unitod States balance of payments.

We are here because the bill. reported out by this
Cormni ttee and the parallel bill in the Senate helve fOCUSGc1.
attention on certain very broad issues of U.S. tr2de and
COflu.112rcial p::>15.cy.

One of these policy issues is the extent to \1hich
the UnIted Statcp should support trade in

pe2c~ful

goods--

on normal comme:rciCl.l terms-···\d.th the countries of Eastern

Europe.

1\ seconci. is

the extent to \'lhich 2nd the TI\CJ.nncr in

which the United states should sell military 8qui0nent to
friendly nations.
to tbe

A third is embodiE::c1 in the Byrd Nrt2nc1mcoT;:

f;C112.·l:-.e bill·---to \'lhc~.t

extent

~;ri.oulc1

th? United

, - :'.:-i
~

1_ •••••

f~tatc;s

2 -

Today I wish to address myself only to this third
issue.

In countless appearances before this Cowmittee

the Secretary and I have stated that a priority objective
of this nation is to correct the balance-of-payments
deficit in our international accounts,

To do so we must

maintain constant pressure on tHO fronts"
expand our balance-of-payments receipts.
the major item on this

side~

:First,

\'le

must

Export sales are

Secondly, \"Ie must maintain

constant pressure to reduce unnecessary foreign exchange
expenditures~

On the receipts side we believe that we must achieve
an expansion of total exports vlhich "li11

b~cin9"

our trade

surplus up to a persistent level of around $7 billion per
year e

It was $6,7 billion in 1964, a record peacetime high;

it dropped back to $3.7 billion last year; and it ran at an

annual rate of $t1.25 bilJ.ioll in the fin;t. half of thii:; year.
Obviously, we have a great deal of ground to cover to attain
the size of trade surplus that we need.
One of the most important factors in exp3nding our
foreign scd.es is the competi tiven(~!"~s of oU.r eX[lo:cts· ..-anc1
this depends to a considerable extent on tIle availabiJ.ity
of eredi t.

The availability of cred:i. t·~ ··,both f1.'o::1 the

mercial bcmb:; and iJ:om U18

Bxpo~ct-rmr'o:.~l:

eom'~

Ban}:·,.·is often a

- 3 -

In our efforts to expand exports the Export-Im?ort
Bank has pl&yed a prominent role through its loans, throug]}
its guarantees of cl:edit extended by co!nrnercial banks and
through its support of the operations of the Foreign Credit
Insurance Association o

I firmly believe that restrictions

on the activities of the Export-Import Bank of the type
proposed by the Byrd Amendment "lQuld run the risk of
inb."oducing a serious block to our export expansion p:r:'ogram

and delay progress toward elimination of our balance-ofpayments deficit.
Mr. Chairman and Hembers of the Committee, my
colleagues and I are prepareQ to help in any way we can

in your further consideration of this important legislationo

') h

TREASURY DEPARTMENT

''':::: ' . '

WASHINGTON.

FOR TIMMEDIATE RELEASE

September

............. -:-.-~ ,

D.c~b ·

13, 1967

UNITED STATES FOREIGN GOLD TRANSACTIONS IN 1967
The Treasury announced today that net purchases of monetary
gold by the United States from foreign holders during the second
quarter of 1967 amounted to $17 million.
The major transactions during the quarter, as shown In
Table I, were the purchase of $50 million from Canada by the
United States and the sale by the United States of $34 million
to the United Kingdom.

In addition, the table includes gold

sales and purchases for Fiscal Year 1967 which show net sales
to foreign holders amounting to $232.2 million compared to sales
of $378.4 million in Fiscal Year 1966.
The net drain on United States monetary gold stocks in the
second quarter due to industrial and artistic demand (net of
inflow from new production and scrap) came to $32.5 million.
This brought the total net outflow of gold from the gold stock
of the united States in the second quarter of 1967 to $15.5 millior
Table II, attached, shows sales of gold by the United States
during the second quarter of 1967 to other countries to enable
them to pay the gold portion of their quota increases in the International Monetary Fund.

Deposits of like amounts of gold were

made by the IMF with the United States to mitigate the effects
upon the United States gold stock of the quota increases.
Transactions of this nature amounted to $5.3 million in the
second quarter.

During Fiscal Year 1967 these transactions

amounted to $50.1 million.
AttachLl!~IIts

E - J 02 3

TABLE 1

UNITED STATES NET MONETARY GOID TRANSACTIOOS WITH
FOREIGN COUNTRIES AND INTERNATICNAL INSTITUTIONS

January 1 - June :J), 1967

(In millions of dollars at $35 per tine troy ounce)
Fiscal year 1967
Second
First
Area and Country
5ly,J.y 1. 1966-!IlWe JQ. ~
Qu~;te;t
QuS&l:;t~;t
W~::i1c~Cl E:!.),tQpe
-27703
France
-0.6
Greece
-1.3
-0.6
-0.3
Ireland
-60
0
Italy
-50.0
-:J).O
Switzerland
-5.8
+21.2
-16.9
Turkey
+7502
-34.0
+3.3
United Kingdom
-2.8
-0.7
-Q.2
Yugoslavia
-322.7
-44.3
-1405
Total
+100 00
+50.0
Canada
0

l..~1clll Ame;tl~i

Argentina
Brazil
Chile
Colombia
Costa Rica
Dominican Republic
Ecuador
Mexico
Nicaragua
Peru
Surinam
Uruguay
Total

Afghanistan
Indonesia
Iran
Iraq
Pakistan
Phi lippines
Syria
Total

Af;tlca
Liberia
Somalia
Sudan
Tunisia
Total

Al.l.

Q:tb~t

Total
Domestic Transactions
Total Gold Outflow
*Under $50,000.
Figures may not add to

-0.4
-0.4
-1.5

-0.1
-0.1
-10.0
-0.1
+10.0
+2.6
*
-0.1

-0.3
-0.3
-1.5

-0.1
-0.1
-0.2

+15.0
*
+12.4

-22.2
-1.7
-7.5
-0.4
-0.5
-0.4
-0.2
-0.2
+25.0
+0.1
-Q,2
-8 6
0

-1.9
-1.8
-1.3
-0.2
-0.8
+7.5
-0.6
+0.8

-1.2
-1.8
-1.3
-0 01
-0.2

-0 1

-0.2
-4.7

::Q.'
-0.6

-0.1
-0.1
-0 01
::Q.l
-0.4
-0.1

-0.1
-0.1
-0.2
::Q.l.
-0.5
-0.1

-0.3
-0.2
-0.5

-19.8
-29.9
-49.7

+17.0
-32.5
-15.5

-232.2
-128.0
-3€i>.2

-0.1
-0 02

totals because of rounding.

-0.4
-1.5
-0.5

TABLE 2
UNITED STATES MONETARY GOLD TRANSACTIONS
WITH FOREIGN COUNTRIES
MITIGATED THROUGH SPECIAL DEPOSITS BY THE IMF
(Millions of U.S.$)
January 1 - June 30, 1967

Area and Country
Latin America
Dominican Republic
Total
Asia
Iran
Lebanon
Vietnam
Total

First
Quarter

Second
Quarter

Total

-0.4
-0.4

-13.7
-0.6
-1.3
-15.6

-13.7
-0.6
-1. 3
-15.6

Africa
Algeria
Cameroon
Central African Rep.
Chad
Congo (Brazzaville)
Congo (Kinshasa)
Dahomey
Gabon
Ivory Coast
-0.2
Mauritania
Morocco
Rwanda
Upper Volta
Total
-0.2

-0.1
-0.9
-0.2
-0.1
-5.3

-0.8
-0.2
-0.1
-0.1
-0.1
-2.4
-0.1
-0.1
-0.2
-0.1
-0.9
-0.2
-0.1
-5.5

Total

-16.2

-5.3

-21. 5

IMF Deposit

+16.2

+5.3

+21. 5

-0.8
-0.2
-0.1
-0.1
-0.1
-2.4
-0.1
-0.1

TREASURY CEPARTMENT

)R IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
r two series of Treasury bills to the aggregate amount of
,400,000,000, or thereabouts, for cash and in exchange for
easury bills maturing September 21,1967, in the amount of
,300,149,000, as follows:
91-day bills (to maturity date) to be issued September 21, 1967,
the amount of $1,400,000,000, or thereabouts, representing an
jitional amount of bills dated June 22, 1967,
and to
ture December 21,1967,originally issued in the amount of
,000,050,000, the additional and original b111s to be freely
terchangeable.
l82-day bills, for $1,000,000,000, or thereabouts, to be dated
ptember 21,1967,and to mature March 21, 1968.
The bills of both series will be issued on a discount basis under
and noncompetitive bidding as hereinafter provided, and at
turity their face amount will be payable without interest. They
11 be issued in bearer form only, and in denominations of $1,000,
,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
aturi ty value).
~petitive

Tenders will be received at Federal Reserve Banks and Branches
to the closing hour, one-thirty p.m., Eastern Daylight Saving
~e, Monday, September 18, 1967.
Tenders will not-be
ceived at the Treasury De~artment, Washington. Each tender must
for an even multiple of $1,000, and in the case of competitive
nders the price offered must be expressed on the basis of 100,
th not more than three decimals, e. g., 99.925. Fractions may not
used. It is urged that tenders be made on the printed forms and
rwarded in the special envelopes which will be supplied by Federal
serve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
stomers provided the names of the customers are set forth in such
nders. Others than banking institutions will not be permitted to
bmit tenders except for their own account. Tenders will be received
thout deposit from incorporated banks and trust companies and from
sponsible and recognized dealers in investment securities. Tenders
:)m others must be accompanied by payment of 2 percent of the face
:)unt of Treasury bills applied for, unless the tenders are
~ompanied by an express guaranty of payment by an incorporated bank
trust company.

F-1024

- 2 -

Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Trea~n
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on September 21, 1967, i
cash or other immediately available funds or in a like face amount
of Treasury bills maturing September 21,1967 oCash and exchange tenden
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bi lls are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which t~
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained fr
any Federal Reserve Bank or Branch.
000

TREASURY DEPARTMENT

FOR IMMEDIATE RELEASE
TREASURY MARKET TRANSACTIONS IN AUGUST

During August 1967, market transactions
in direct and guaranteed securities of the
government for Government investment accounts
resulted in net purchases by the Treasury
Department of $56,885,500.00.
000

F-I025

STATEMENT OF THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL EXCHANGE
AND
PAYMENTS
OF THE
JOINT ECONOMIC COMMITTEE
SEPTEMBER 14, 1967, 10:00 A.M. EDT
Mr. Chairman and Members of the Subcommittee:
I

A little over two years ago -- on August 27, 1965 -the members of this Subcommittee urged major improvements
in the international monetary system, and particularly
prompt action by the United States and other leading financial
nations to insure an adequate and orderly expansion of the
world's monetary reserves.
In a report to the Joint Economic Committee, your
Subcommittee warned that failure to provide increased
international liquidity would inevitably result in a scarcity
of reserves, a decline in international trade and commerce, and
a slowing of world economic progress.
The Subcommittee's report at that time was not its first
expression of concern about the need for a mechanism to create
additional reserve assets.

In previous reports, both the

Subcommittee and the Joint Economic Committee had called
for free world action toward this end

- 2 -

Last spring, the Joint Economic

CODDD~.ttee

included

in its report on the January 1967 Economic Report of the
President a "statement of agreement by Majority and Minority
members of the Joint Economic Committee."

Two of the points

made in paragraph 6 of that statement reiterated the urgency
of this problem in the following words:
"6. In the field of international trade and
finance, there is also general accord on the following
conclusions:
"Agreement on international monetary refonn
is a matter of increasing urgency.
"We cannot rely on supplies of new monetary
gold being sufficient to assure the growth of
international reserves, in keeping with the rising
liquidity requirements of trade8"
Moreover,the Subcommittee's 1965 report performed the
invaluable services of directing attention to the growing
urgency of the problem -- "the need for action is pressing,"
the Subc0mmittee stated -- and of suggesting guidelines for
monetary improvements, including possible ways in which new
reserves could be created.
The Subcommittee also gave its strong support to the
decision by President Johnson, which I was privileged to
announce in a speech at Hot Springs, Virginia, on July 10, 1965,

- 3 -

that the United States was prepared to participate in an
international conference to seek substantial improvements
in monetary arrangements.
I am pleased to be able to report to you today that
the first and perhaps most critical step toward the goal
which you urged, and which the United States has pursued
through two years of difficult and intense negotiations,
has now been achieved.
The Executive Directors of the International Monetary
Fund and the Finance Ministers and Central Bank Governors of
the Group of Ten major financial countries have agreed on
an Outline Plan that "is intended to meet the need, as and
when it arises, for a supplement to existing reServe assets."
This Outline Plan has now been made public by the
Inte1~ational

Monetary Fund, prior to consideration of the

plan by the Board of Governors of the Fund at the Annual
Meeting to be held in Rio de Janeiro during the last week
of September (Attachment A).
At the Annual Meeting the Governors will have before
them a Resolution requesting the Executive Directors to
translate the Outline Plan into the legal text of the

- 4 necessary amendment or amendments of the Articles of
Agreement of the Fond which, after acceptance, would
bring the plan into effect.

The United States

will support this Reso1uticn, and we hope that the Governors
of the other 105 member nations of the Fund will also give
it their support.
After the Executive Directors have completed the draft
amendment of the Articles of Agreement of the Fund, and
it is approved by the Board of Governors, the amendment
will go to the member countries for their final acceptance.
In the case of the United States, legislation will be
proposed to the Congress to permit the United States to
give its acceptance.

Section 5 of the Bretton Woods

Agreements Act requires that, before the United States
accepts an amendment to the Articles, the approval of the
Congress must be obtained.
We must leave to history the final judgment of the
contingency plan.

Time alone can measure its value and the

worth of our efforts during the two

years of study and

two years of negotiation that preceded the agreement.
I am confident, however, that the agreement represents
one of the great forward steps in international financial

- 5 cooperation -- the greatest since Bretton Woods -- and that
our action ultimately will advance the well-being of countless
millions of people throughout the world.
As your Subcommittee urged in its report, the Outline
Plan is based on the constructive suggestions and views of
many nations.

It does not favor the interests of anyone

country or any group of countries.

Instead, it will promote

the interests and welfare of all members of the International
Monetary Fund, who together make up a very large part of the
world community.
The proposals in the plan also parallel, in other
important respects, the suggestions contained in your report,
as I shall discuss later in my testimony.
There has been considerable public discussion, and
generally favorable reception for the Outline Plan and for the
role of the United States in developing it and obtaining
agreement on it.
Federal Reserve Chairman William McChesney Martin and
I have been privileged to represent the United States in the
discussions and negotiations of the Finance Ministers and
Central Bank Governors of the Group of Ten.

- 6 -

However, if praise is due the United States' contribution
to the Outline Plan, it is praise that rightfully belongs to
the Members of Congress and the Executive Branch who have
participated in, and contributed to, our years of study and
negotiations.

Just as the plan itself represents the collective

efforts of people from many nations, the formulation and
presentation of the United States' position, and our SucceSS
in achieving a consensus, are the result of the work of
numerous individuals and groups.
Officials of the Treasury, the Federal Reserve Board,
the Office of the President, the Council of Economic Advisers,
the Department of State, the Advisory Committee
on International Monetary Arrangements, and members of the
Congress, have all contributed to the SuccesS of our efforts.
We are particularly indebted and grateful for the support
and guidance we have received from your distinguished Chairman,
Congressman Henry S. Reuss, the members of your Subcommittee,
the Joint Economic Committee, and individual members of the
Congress

Many thoughtful addresses have been devoted to

this subject by leading Senators and Congressmen, not serving
on your Committee such as Senators Hartke and Clark.

- 7 Because an expansion of international liquidity is
essential to the economic progress of our country, and to
world economic growth generally, our efforts to resolve the
problem have received strong bi-partisan support from the
Congress.

Republicans no less than Democrats have encouraged,

assisted and guided us.

In a letter to me of July 14, 1965,

and in suboequent actions, Congressman Gerald R. Ford of
Michigan and other Republican Congressional leaders have
supported and contributed to United States' leadership in
monetary reform.
I should also mention and express appreciation for the

valuable contributions to our thinking, and to the development of
the United States' position, made by former members of the Joint
Economic Committee, Robert F. Ellsworth of Kansas, and
Senator Paul Douglas of Illinois.
The members of Congress of both parties
immeasurably with our long and difficult task.

have helped
We hope and

expect to receive your continued guidance and supp0rt in
the future.
II
In evaluating the agreement that has now been reached,
it is useful to look back briefly along the road we have
now traveled.

It was in October 1963 that the Ministers and

- 8 Central Bank Governors of the Group of Ten countries asked
their Deputies to "undertake a thorough examination of the
outlook for the functioning of the international monetary
system and of its future needs for liquidity."

Following

this directive, the Deputies of the Group of Ten held a
number of meetings in 1963-64, which resulted in the
publication of a Ministerial Statement and Report by the
Deputies in August 1964.

In this statement the Ministers

. mot1on
.
. var10US
.
and Governors set 1n
a stu dy group to "
exam1ne

proposals regarding the creation of reserve assets either
through the International Monetary Fund or otherwise."
During 1964-65, this study group, under the Chairmanship
of Rinaldo Ossola of Italy, prepared a comprehensive technical
report on the creation of reserve assets, which was made
public in August 1965.

This report provided an inventory

of the techniques by which reServes could be created and
an analysis of the arguments for and against the USe of
eac'h of these techniques.
While this work was in progress, President Johnson
said in his Balance of Payments Message of February 10,

1965, that "We must press forward with our studies and
beyond, to action -- evolving arrangements

- 9 which will continue to meet the needs of a fast-growing
world economy.

Unless we make timely progress, international

monetary difficulties will exercise a stubborn and increasingly
frustrating drag on our policy for prosperity and progress
at home and throughout the world. II
During most of the work in 1963-65, there was an underlying
assumption that the matter was primarily a problem of creating
reserves under the aegis of a limited group of major countries.
As I have mentioned, it was in July 1965 that President
Johnson authorized me to announce, in a speech at Hot Springs,
Virginia, that the United States was ready to participate in
negotiations of a political nature on reServe creation, thereby
launching the initiative that culminated in the present agreement.
Shortly after this, in August 1965, this Subcommittee under the
Chairmanship of Congressman Reuss issued its Report on the
Guidelines for Improving the International Xonetary System, which
concluded that the need for action was pressing.
I, accordingly, undertook personal and individual

•

consultations in Europe with the European Ministers and
Governors of the Group of Ten, having previously consulted
with the Japanese and Canadian Ministers in Washington.

_ 10 These individual consultations revealed a basis for further
negotiations.

During the year 1965-66 the Deputies of the

Group of Ten countries made a searching examination of the
various proposals for reserve creation to ascertain whether
or not there was a basis for agreement on major points.

During

this year, the Executive Directors and Staff of the International
Monetary Fund also carried on constructive studies of the problem.
In July 1966, the Ministers and Governors of the Group
of Ten reviewed a second Report from their Deputies, that
set forth a number of essential elements of agreement for
a contingency plan of reserve creation, and narrowed down
the many possible approaches to this problem to five alternative
schemes providing for ways and means for reserve creation.
During this year there was a growing realization that the
subject of creating/supplementary reserve asset was of
vital interest to all of the members of the IMF.

The

Ministers therefore instructed their Deputies to undertake a
further stage of negotiations, in which the views of the
whole world would be represented, through a series of Joint
Meetings between the Deputies of the Ten and the Executive
Directors of the Fund, representing the 106 nations who are
members of the International Monetary Fund.

- 11 Four such Joint Meetings of the Deputies and the
Executive Directors were held in 1966-67.

There emerged

from the fourth and final Joint Meeting a draft Outline Plan
which has now been refined and agreed.

A number of important

issues were resolved in July and August of this year, largely
through two meetings of the Ministers and Governors of the
Group of Ten on July 17-18 and August 26.
Throughout the course of these negotiations, the
support and interest evidenced by this Subcommittee has
given additional.strength to the negotiators of the Executive
Branch, and has helped them to put the U.S. positions
effectively before the Delegations of other countries.
1 would also like to acknowledge the effective work
that has been done by an interdepartmental group which has
met frequently to plan U.S. positions and estimate those
held by other nations.

This group, under the Chairmanship

of Under Secretary of the Treasury Frederick L. Deming, consists
of Federal Reserve Board Governor J. Dewey Daane, Francis Bator,
Deputy Special Assistant to the President for National Security
Affairs, Arthur Okun, member of the Council of Economic Advisers,
Anthony Solomon, Assistant Secretary of State for Economic Affairs,
William B. Dale, U.S. Executive Director of the I.M.F.,

- 12 -

Winthrop Knowlton, Assistant Secretary of the Treasury for
International Affairs, and George H.

~,Ti11is,

Deputy to the

Assistant Secretary of the Treasury for International Affairs,
who serves as Secretary of the group.
Vigorous and effective assistance in this endeavor
was provided by former Secretary of the Treasury Douglas Dillon,
and I have deeply appreciated it.

Secretary Dillon, in an

address in June 1965, had also called attention to the
"urgent need to strengthen the international Monetary system
so as to ensure that the needed increases in reserves will
be forthcoming."
S11-lL't 1. J after this, the President announced that I was
naming an Advisory Committee on International Monetary Arrangements
under the Chairmanship of former Secretary Dillon.

This

Committee, consisting of distinguished economists and financial
leaders, has met a number of times with me and with the
principal U.S. Government officials concerned, and has
kept its finger closely on the pulse of these negotiations,
giving me invaluable advice from their judgment and depth
of experience.

The members of this Committee at the

time of the London meeting were:

- 13 Edward M. Bernstein, EMB Ltd.
Kermit Gordon, President, Brookings
Institution, former Director of the
Bureau of the Budget
Wa 1ter \0/. He ller, Profess or of
Economics, University of Minnesota
Andre Meyer, Partner, Lazard
Freres & Co.
David Rockefeller, President,
Chase Manhattan Bank
Robert V. Roosa, Partner,
Brown Brothers Harriman and Co.
Frazar B. Wilde, Chairman of the Board,
Connecticut General Life Insurance Co.,
and Chairman, Board of Trustees, Committee
for Economic Development
Professor Charles P. Kindleberger served as a member
of the Committee until September 20, 1966.
III
The main underlying facts which led to the conclusion
reflected in the initiative launched two years ago -- that
the international monetary system needs a major new supplement
to existing reserve assets are now fairly well known.

But

these facts are so fundamental to an understanding of why
the effort to establish a supplement to existing reserve assets
was launched that a brief summary of them is necessary at this point.

- 14 -

The Special Drawing Rights are distinguished from
gold and foreign exchange, the two major components of
reserves in the past, by the fact that these two types
of reServes have not been created by a conscious and deliberate
international decision.
~1r- rE:seTVeS

,as

", ...

the

tViC

The historical development '
flHijor c0rnponents, gold an,] fOl"€:ign exchange,

well as reserve claims on the Fund -- is :lhown in

chart

which appears as Attachment B to this statement.
So far as gold is concerned, the amount available
for monetary reserves is a residual that remains available
for monetary purposes after new gold production has met the
demands for private industrial, artistic, and professional USe.
In addition, there is some absorption of gold in countries
in which traditionally there is hoarding of gold, and there
is a speculative demand for gold that fluctuates in intensity
from time to time.

Projections of new gold supplies for

monetary purposes indicate that the amount available, which
averaged $655 million a year in 1955-59 and $565 million
in 1960-64, is likely to be much smaller in the future,
unless there is a

reflow of gold from speculative hoards.

During 1965-66, the combined gold reServes of individual
countries and international financial institutions rose
only $170 million.

- 15 The other main component in the recent growth in
reserves has been the accumulation of liquid dollar claims
on the United States by other countries.

While this method

of reserve creation has much flexibility, it depends on the
decisions of a number of individual countries, and the growing
volume of dollar liabilities places an increasingly heavy
potential strain on the gold reServeS of the United States.
Horeover, it provides reServes only to other countries,
and does not provide any addition to the reServes of the
United States.

There is a general realization that it

would be unwise to depend in the

fu~cre

on additional suprlies

of dollar liabilities for the secular growth of
In 1965, the

c~orld

reServes.

Subconnnittee concluded that "the United States

should seek neither to expand nor reduce the inte:_':lational
role of the dollar."

They felt that the dollar will continue

to have an important or even a growing international role, as a
private transactions currency, and through the voluntary
holding of the dollar by foreign central banks.

But they

did not believe that the dollar can or should contribute as
much to international liquidity in the future as it has in
the past.

This latter opinion was generally shared by the

countries with which we have been negotiating in the Group of Ten
and in the Fund.

- 16 From these considerations it became evident that, as
sources for reserve growth, gold and foreign exchange were
likely to dwindle in the future; at best, they are highly
uncertain.

What can be said about the future demand for reserves?

During the past 16 years world imports have grown about
three times as fa&as global reserves.

To a large extent,

this was made possible by the willingness of the United States
to permit a decline in its reServes while its import trade
(along with its exports) was advancing at a relatively rapid
rate.

If we disregard the United States, and make a comparison

between the trend lines of the growth of reServes and the
growth of imports for the rest of the world, there is a
closer relationship.

During these 16 years the import trade

of the rest of the world increased at the very satisfactory
rate of nearly 8 percent per annum, while reserves rOSe at
the rate of about 5-1/2 percent per annum.
Even though the reserves of the rest of the world outside
the United States have been growing at what appears to be a
relatively high rate of 5-1/2 percent per annum, the more rapid
growth of imports has meant that reserves on the average now
cover only about four months' imports for the rest of the world.

- 17 In the last decade, total reserves of all members of the
Fund have slipped from about 56 percent to 36 percent of
world imports.
There was a substantial slowdown in the growth
of reserves in 1965-66, largely because the United States
provided much smaller amounts of dollars to add
to the official reserves of the rest of the world.

In fact,

about two-thirds of the additions to reserves outside the
United States in 1965-66 came from other and non-traditional
sources, largely related to the balance of payments of the
United Kingdom.

The United Kingdom made substantial drawings

on the IMF which created for the time being reserve claims
on the Fund for Continental European countries and some other
nations, and the British also converted some $800 million
of marketable securities into liquid reserve assets.
One cannot now anticipate the relationship that will
be considered desirable in the future between the growth
of reServes and rising levels of world trade.

If, however,

there were to be a continuation of the relationship of the
past ten years to world trade, this would call for something
like $2-1/2 to $3 billion a year in annual increments of
reserves of all types when world trade reaches $250 billion a year.

- 18 -

IV
I shall refer in more detail later in this statement
to the Subconnnittee' s report on Guidelines for Improving
the International Monetary Systemo

I am happy to say at

this point, however, that the Outline Plan has incorporated
a very large portion of the suggestions made by the
Subcommittee

The first guideline pointed out that world

liquidity needs cannot be adequately met by existing
sources of reserves (gold, dollars and pounds sterling) or
even by the addition of new reserve currencies o

The

Subcommittee concluded that "new ways of creating
international reserves must be soughto H

The draft Outline

Plan does provide, in my judgment, a satisfactory
constitutional framework for achieving this objective o

will provide, once it is embodied in an amendment and the
amendment has been ratified in accordance with regular
Fund procedures, a way to create reserves that will
supplement existing reserves in the form of Special Drawing
Rights (SDR) in the International Monetary Fund.
Agreement on this Outline Plan therefore represents a
major breakthrough in international monetary arrangementso

- 19 It is more than a mere evolutionary step in the development
of the Bretton Woods system o

It is a breakthrough that

has been achieved by two years of thorough study of the
problem by the major financial powers, followed by two years
of intensive negotiations o

It is proposed to give effect to

the Outline Plan through the first formal amendment to the
Articles of Agreement of the International Monetary Fund
that has ever been adoptedo

All previous evolution within

the Fund has taken place during the past 22 years without
the necess ity of an amendmento
The new Outline Plan is in my judgment a major new
substantive departure in the international monetary

sphere~

This is not to deny that many of the actions taken in that
sphere in the postwar period have been important and highly
constructive o

The quotas of the International Monetary Fund

were increased by international decisions in 1959 by 50
percent and again in 1966 by 25 percento

In 1961 an agreement

was negotiated, known as the General Arrangements to Borrow
(GAB), under which a Group of Ten leading financial countries
provided additional credit lines to the Fund up to $6 billion,
for use by the Fund to forestall or cope with an impairment

- 20 -

of the international monetary system.

All three of these

international actions committed substantial additional
resources to support and maintain the international monetary
system.
In addition to these multilateral decisions, a network
of bilateral credit facilities of a short-term character has
been developed by the United States and other countries
through swap arrangements of the Federal Reserve System with
foreign monetary authorities o
All of these arrangements have helped greatly to
strengthen the monetary system which has facilitated a sustained
growth of world trade, international investment, and general
economic prosperity that has been unrivaled in past historyo
There is, however, an important difference between these
improvements that have taken place and what is now being
provided in the Outline Plano
The essential difference is that these earlier
improvements did not consciously deal with the problem of
supplementing international reserves.

The resources of the

Fund are used to provide medium-term financial support in the
form of credits to be extended to individual countries that
are faced with temporary balance of payments or reserve problems.

- 21 -

Apart from an amount corresponding to the gold paid into
the Fund, the resources provided through these enlargements
of the scope of the Fund have been essentially conditional
credit facilities that have been available to individual
countries only in conjunction with a review and appraisal
of a country's economic policies, by the staff and
Executive Board of the Fund o

As a by-product of the use of the medium-term credit
fac i1i ties in the Fund, reserves have been created from time
to time while these credit facilities were outstanding, but
only for the countries which were in fact lending their
resources to borrowing countries through the Fund o

A return

of the borrowing country to equilibrium and a repayment of
these medium-term credits would have the effect of cancelling
these temporary additions to international reserves o

The

use of the bilateral facilities under the swap network
provides only short-term credit to the borrowing country, and
also results in the creation of reserves for the lending
countryo

These reserves are even more short-term in character

than those which have, for a time, been outstanding as a
result of the lending operations of the Fund o

c·
~I
~,'~.

- 22 -

The new Special Drawing Rights (SDR) are consciously
a~ed

at a different and more fundamental problem o

Their

objective is to provide a means by which global reserves
can be expanded on a permanent basis by international
decis ions 0

23 -

v
What has now been achieved through arduous negotiations
is to bring the monetary authorities of the whole Free World
together in agreement on a single specific plan to provide
supplementary reServeS in the future by a conscious international
decision.

This brings us to a new phase in international

monetary cooperation.
Reaching agreement on this Outline Plan has not been
easy.

Negotiating problems have resulted from differing

assessments among the nations as to the future needs for
reServe assets.

Some countries tended to judge the world's

needs for reserves perhaps too much in the light of their
own current experience and their current reserve position
and not enough in terms of past experience or future trends.
This tendency has had a pervasive effect on their attitudes
toward a whole range of specific problems.
Another problem

which, like the one just cited,

was less of a negotiating difficulty in itself than the
cause of differences in view on various specific negotiating points-had to do with fears that the establishment of a supplement to
existing reserveS would cause or intensify domestic inflationary
pressures in some countries.

Monetary authorities are of course

- 24 -

very conscious that the creation of money in any form is
a very useful but dangerous tool.

In the right quantities,

the growth of the domestic money supply is necessary to
facilitate the continued growth of business activity.

too much is created, inflationary pressures are enhanced.
If too little is created, deflationary pressures result.
The experience with domestic monetary systems has
influenced the approach taken by most countries to the
creation of international reserves.

On the one hand,

there has been recognition that while international reserves
and domestic money are not fully analogous, an evolution
of international reServes broadly similar in some basic
~~pects

to that of domestic money, toward more reliance on

conscious and planned decisions as to reserve growth, is
a logical and necessary development.

On the other hand,

widespread awareness that money can be managed has as a
corollary a widespread recognition that it can also be
mismanaged.

Fears of mismanagement of deliberately created

international reServes -- in particular, fears of excessive
creation of such reserves, with the possibility that this
might cause or greatly intensify domestic inflationary pressures
in some countries --have been one of the underlying issues
throughout the negotiations.

.....)

- 25 -

While the mere creation and allocation of new reserves
to various countries need not, in themselves, have any
inflationary consequences, it may not always be easy for
nonetary authorities in a particular country to neutralize
or sterilize all inflows of reServe assets from abroad,
or to offset in their money markets all outflows of reServes
to other countries.

But, on the whole, the evidence of

the past six years seems to indicate that the rate of growth
in the domestic money supply has substantially exceeded the
trend of international reserves in most important countries.
This suggests that international reserve growth has not
been the real governing causal factor in monetary expansion
even in those countries that have gained reserves.
Nevertheless it is important that this initial breakthrough be
carried out in such a way that the first experience with the Special
Drawing Rights does not give rise to misgivings regarding
misuse of the ability to create reServes.

I am convinced

that the procedures adopted in the Outline Plan are fully
adequate to provide assurance against any possibility of
excessive use of this new authority to create reServeS.

- 26 -

VI
In appraising the agreement we have reached, it is
also useful tv review the extent to which we have been able
to attain international agreement along the lines set forth
two years ago by this Subcommittee.
Clearly we have accomplished the first point in the
Guidelines, that a new way of creating international
reserves must be sought.

We have sought and we have

found and agreed upon a plan that will make it possible
to add supplementary reserveS to the existing sources of reserveS.
Secondly, the Subcommittee cautioned that the Plan
should not encourage or require countries to convert existing
balances or new acquisitions of reserve currencies into
gold or the new reserve medium.

They wished to maintain

the role of the dollar both as a transactions currency
and as an official reserve medium, without basically
expanding or reducing itspresent role.

In this connection,

the Committee concurred with the view that we have continually
expressed in the Executive Branch, "that the nation's
objective in international monetary reform is not to find
a device for enabling the U.S. to finance balance of payments
deficits painlessly."

The agreement that we have reached

has, in my judgment, avoided impairing the role of the

- 27

dollar in the future and leaves the position of the dollar
in the status desired by the Committee.
Third, the Committee found that gold should continue
its present role but that nothing should be done to enhance
its value in relation to other forms of reserve assets.

The

Outline Plan should confirm the permanence of the price of
gold, and it is our hope that it will also increasingly
operate to remove any special enhancement of the position
of gold that may have developed as a result of uncertainty

regarding the future growth of the world's reServeS.
The Subcommittee's fourth point called for a new
method of reServe creation combining

min~

annual increases

with supplements determined by annual decision.

At a

relatively early stage in the negotiations, it became
clear that there was a strong feeling that it would not be
feasible to reach international decisions, on the difficult
matter of the amount of Special Drawing Rights to be
create~at

periods

so short as one year.

Decisions on

the amounts of Special Drawing Rights to be established
will normally cover five-year periods, with actual allocations
made at intervals within those five years -- which intervals
could be annual.

It is, however, possible to review a five-year

plan at any time if there are important changes in the world
situation.

- 28 -

As the fifth point, the Guidelines called for the
arrangements to be carried out under the International
Monetary Fund, and there has now clearly been a full acceptance
of this point.

It was also suggested that the new reserves

should be distributed to all Fund members who qualify under
criteria applicable equally to all countries.

After extensive

negotiation, the principle of participation of all IMF
members, with distribution across the board to all participating
Fund members in proportion to their quotas, has been fully agreed.
The Committee found that the new reserveS could not
be used as a primary foreign aid device, and this view
was strongly evidenced by other Group of Ten countries.
There is no direct connection between the new Special
Drawing Rights and the financing of economic development.
The developing countries will, however, obtain benefits
like other countries, in the form of additions to their
reserves, and will also benefit more generally, insofar
as adequate growth in reserves Serves as a protection
against a cumulative tendency to excessive restrictions
on capital flows, aid expenditures, and trade expansion
that could be the result of a global shortage of reServes.

- 29 -

On the eighth point, the Guidelines suggested that
the distinction between owned and borrowed reserves should
not be critical, and that reserve units or drawing rights
could be used by the Fund to create reserves o

While there

was considerable feeling that there are important differences
between owned reserves and borrowed reserves, there was
agreement that reserve assets can be created in the form of
drawing rights or of units 0
The Committee went on to suggest an expansion in IMF
quotas, both general and selective.

They suggested that

provisions should be made for periodic increases in the Fund's
conditional borrowing facilities to maintain reasonable balance
between them and owned reserveso

There were general and

selective increases in IMF quotas early in 1966, following
a review that was made in 1964-65.

While there is a general

recognition that periodic quota increases are desirable,
there is no present indication that the member countries wish
to proceed at the present time with action along this line.
The next quinquelmial review of quotas would be due about
1969-70

A recommendation was made that bilateral arrangements
should be expanded as a second line of defense against short-term
instability. The network of these arrangements has been enlarged
from time to time.

- 30 -

As point 12, the Subcommittee suggested that substantial
improvements are needed in the adjustment process.

mentioned elsewhere a bas ic study on this matter was prepared
by Working Party 3 of the OEeO in 1965-66 0

Efforts to

improve national po1ictes through cooperation and consultation
are going forward as a continuing process o
This brief catalogue of the points covered in the 1965
Guidelines makes clear that the largest part of the
Subcommittee's judgment as to the practical course to follow,
made in 1965, has now become the collective international
judgment of 1967"
earlier judgmento

This is an impress ive tribute to this

- 31 -

VII
Under Secretary Deming has prepared a statement
explaining the Outline Plan in some detail and will be
glad to present it to the Committee and to answer technical
questions.

In this statement, however, I should like to

call your attention to several major questions that have
arisen in the negotiations and in public comment on the
Outline Plan.

These relate to (1) the effectiveness of

the Special Drawing Right as a supplement to reserve
assets equivalent

these other assets, (2) the relationship

of the Outline Plan to the United States balance of payments,
aud (3) the provisions relatiug to voting and making decisions
to activate the plan.
It is not surprising that an agreement which brings
together 106 nations may not take the form that would be
favored by every monetary expert in the field.

In fact,

many of the negotiators might have produced somewhat different
plans in some respects if they had been able to achieve their
own personal formulations of the plan.

It was, however,

essential to reach an agreement, and in the process of
negotiation these individual views were hammered into the
shape of an agreed Outline Plan to create a supplement to

- 32 The answer to the question as to whether we have a
good reserve asset is, in my judgment, strongly affirmative.
The practical test in the future will be the attitudes of
monetary authorities toward the Special Drawing Right.

is important that they count it as a part of their official
reserves and they be prepared to make effective use of it
in their transactions with other monetary authorities.

believe it is the judgment of the group that these two
tests will be met, on the part of most, if not all, members
of the Fund.

It is the intention of the United States to

treat 100 percent of its holdings of Special Drawing Rights
as part of its international reserves.
The second main point to which I would like to draw your
attention is the relationship of the Outline Plan and the
Special Drawing Right to the United States balance of payments.
In a few quarters it has been suggested that the plan
is weak because it does not provide a solution to the balance
of payments problem of the United States.

Throughout the

course of these negotiations I have done my best to make
it very clear that the United States was fixing its eyes

- 33 on the global needs for reserves and did not expect
that the plan for reserve creation would solve the
United States balance of payments problem.

That is a

matter which I associate with the general subject of the
adjustment process.

At an early date in the negotiations

there was a complete and full understanding that negotiations
with regard to a supplementary reserve were to deal with
global nee3s and not with the problems of the balance of
payments of individual countries.
The questions of improving and developing the processes
of adjustment in international imbalances were examined in
a separate study undertaken by Working Party No. 3 of the

DEeD in 1965-66.

A continuous search for improvement in

adjustment policies goes forward in Working Party No. 3 of
the DEeD at its frequent meetings, and is also carried on
through the annual and special consultations held by the
International Monetary Fund with its member countries.
Accordingly, as a matter of design and logic, we should
dissociate this Outline Plan from balance of payments
cons iderations.
The third point of the Outline Plan on which I would
like to comment is the decision-making provisions.

These

provisions call for an 85 percent majority vote to create

- 34 -

Special Drawing Rights.

They represent a change from the

practice of the International Monetary Fund where an 80 percent
majority is required to take a dec is ion to increase quotas.
Under the provisions of the new scheme, both the United States
with 21.9 percent of the votes, the European Economic Community
with 16.5 percent of the votes, and any other group of countries
with more than 15 percent of the total voting power could
block a proposal to undertake the creation of reserves.
It was widely recognized in the Group of Ten and in
the Fund that in the new venture we were undertaking involving
the creation of reserves where confidence and the availability
of resources to back the new asset are so important, it was
necessary to have the widest participation.

The possible

abstention of a major country such as the United States, or a
major group of countries such as the EEC, wouid in practice
make any decision to create reserves meaningless.

Therefore,

the 85 percent majority is a recognition of the fact that,
with this breakthrough into a major new area of international
cooperation, this provision was considered a reasonable
requirement for an effective plan.

- 35 Moreover, I firmly believe that this voting majority
is consistent with a workable decision-making proceSS.
The IMF has operated in practice on a conSensus basis.

am sure that this effective and successful cooperation will
continue in the future.

Our ability to reach agreement on

this new Outline Plan is additional and convincing evidence
of the willingness of all countries to take a constructive
and responsible attitude toward the problems of the
international monetary system.

- 36VIII
I have noted how prophetic the Guidelines of the
Subcommittee have proved to be in foreshadowing the agreement
that is now before the Governors of the International Monetary
Fund for the ir cons ideration and approval o

If we now leave

the structure and content of the agreement, and attempt to
evaluate its significance for the future, what can be said?
President Johnson on August 28, 1967 rightly pointed out:
"Certa'inly no human being today can fully appraise
the potential of this new development in the international
monetary field."
But he ventured to state that it will stand out in the history
of international monetary cooperation, and that it marks the
greatest forward step in world financial cooperation in the
20 years since the creation of the International Monetary Fund
itselfo

The President went on to point out three major

consequences of the agreernento
First, the fact that agreement had been reached on this
Outline Plan makes it unmistakably evident that all the
major industrial nations of the free world have shown their
clear and sincere intent to build strongly and securely on
the base of our current international monetary systemo

C,
\

_ 37 -

the Plan achieves the approval of 106 nations, this intent
will be solidified into a truly global determination o
Secondly, the President pointed out that a firm
foundation has been developed for another reserve asset to
join gold, dollars and other reserve currencies as a needed
means of payment for a world of growing trade and commerce.
Third, the gold and exchange markets can now reflect
a new sense of confidence in the adequacy of future reserve
supplies.

With the United States unquestionably committed

to convert gold into dollars at $35 an ounce and with the
availability of a new facility to draw on when needed, there
can be no reasonable basis to fear a shortage of reserves o
In my view, the idea of international cooperation to
insure orderly and adequate growth of monetary reserves in
the years to come was basically an idea whose time had arrived.
It became clear to all enlightened financial experts in the
free world -- certainly to an overwhelming majority of
these experts -- that there was a dilemma resulting from the
uncertain and limited supply of new reserves to be expected of
existing types of reserves, and the irrestible onrush of
growing world trade and investment which in turn will make
the need for more reserves uncontestable and compelling o

- 38 -

This agreement should, in my judgment, give reasonable
insurance that there can be an orderly and adequate growth
of monetary reserves in the future.

The new facility should

provide a dynamic element of growth in the world's reserves
for the future -- a growth element of a deliberate character
subject to joint, collective and responsible processes of
international decision.
This will be its contribution to the growth and evolution
of the monetary ,system.

But the Special Drawing Right

facility can also provide useful insurance against the
impairment of the existing structure of the international
monetary system.

Thus, looked at either from the point of

view of growth and expansion of the world's financial and economic
system, or from the point of view of maintaining the essential
element of confidence which is so vital to the whole structure
of finance and banking, we may legitimately claim a real
contribution from this landmark step in aligning the
governments and monetary authorities of the world in support
of a single specific plan for supplementing reserves.
I know that the international monetary system may seem
to Some to be a matter for experts and far removed from the
daily concern of the average American family.

Yet the average

man may have an instinctive and well-founded feeling that the

- 39 world's financial structure is important to him.

Some of

us are old enough to remember that the financial problems of
the early thirties in the United States were closely related
to the breakdown of the international monetary system which
took place in the early years of the great depression.

do not expect that we have to deal in the future with such
dramatic demonstrations of the connection between the welfare
of the average citizen and a smoothly functioning and adequate
international monetary system.

But American business interests

have clearly become more and more farflung, and the prosperity
of many towns, cities and farms is closely related to the
earnings which they derive fram international transactions.
The most obvious and clear-cut practical impact of failure
to provide for adequate reserve growth is the danger that
world markets and world business will be handicapped and the
world's economic growth slowed down if countries are driven
by a shortage of reserves into competitive restraints on
their dealings with other countries.
In sum, the Outline Plan represents the first stage
in establishing an international constitutional structure
under which a good, effective and sound supplement to other
reserve assets can be created by a reasonable and responsible

- 40 process of international decision.

This is the essence of

What we in the Executive Branch sought, and it is my
understanding of what the Subcommittee has envisaged.

Attachments

Attachment

INTERNATIONAL MONETARY FUND
Outline of a Facility Based on
Special Drawing Rights in the Fund

Introduction
The facility described in this Outline is intended to meet the need,
as and when it arises, for a supplement to existing reserve assets. It
is to be established within the framework of the Fund and, therefore, by
an Amendment of the Fund's Articles. Provisions relating to some of the
topics in this Outline could be included in By-laws adopted by the Board
of Governors or Rules and Regulations adopted by the Executive Directors
rather than in the Amendment.
/

Establishment of a Special Drawing Account in the Fund

(a) An Amendment to the Articles will establish a Special Drawing
Account through which all the operations relating to special drawing
rights will be carried out. The purposes of the facility will be set
forth in the introductory section of the Amendment.
(b) The operations of and resources available under the Special
Drawing Account will be separate from the operations of the present Fund
which will be referred to as the General Account.
(c) Separate provisions will be included in the AIDendment for withdrawal from or liquidation of the Special Drawing Account; Article XVI,
Section 2 and Schedules D and E on withdrawal and liquidation will continue
to apply as they do at present to the General Account of the Fund.
II.

Participants and Other Holders

1. Participants. Participation in the Special Drawing Account will
be open to any member of the Fund that undertakes the obligations of the
Amendment. A member's quota in the Fund will be the same for the purposes
of both the General and the Special Drawing Accounts of the Fund.
2. Holding by General Account. The General Account will be authorized
to hold and use special drawing rights.

- 2 -

III. Allocation of Special Drawing Rights

1. Principles for decisions. The Special Drawing Account will
allocate special drawing rights in accordance with the provisions of
the Amendment. Special considerations applicable to the first decision
to allocate special drawing rights, as well as the principles on which
all decisions to allocate special drawing rights will be based, will be
included in the introductory section of the Amendment and, to the extent
necessary, in a Report explaining the Amendment.
2. Basic period and rate of allocation. The following provls10ns
will apply to any decision to allocate special drawing rights:
(i) The decision will prescribe a basic period during which special
drawing rights will be allocated at specified intervals. The period will
normally be five years in length, but the Fund may decide that any basic
period will be of different duration. The first basic period will begin
on the effective date of the first decision to allocate special drawing
rights.
(ii) The decision will also prescribe the rate or rates at which
special drawing rights will be allocated during the basic period. Rates
will be expressed as a percentage, uniform for all participants, of quotas
on the date specified in the decision.
3.

Procedure for decisions

(a) Any decision on the basic period for, timing of, or rate of
allocation of special drawing rights will be taken by the Board of Governors
on the basis of a proposal by the Managing Director concurred in by the
Executive Directors.
(b) Before formulating any proposal, the Managing Director after
having satisfied himself that the considerations referred to in 111.1
have been met, will conduct such consultations as will enable him to
ascertain that there is broad support among participants for the allocation of special drawing rights at the proposed rate and for the proposed
basic period.
(c) The Managing Director will make proposals with respect to the
allocation of special drawing rights: (i) within sufficient time before
the end of a basic period; (ii) in the circumstances of 111.4; (iii) within
six months after the Board of Governors or the Executive Directors request
that he make a proposal. The Managing Director will make a proposal for
the first basic period when he is of the opinion that there is broad
support among the participants to start the allocation of special drawing
rights.

- 3 (d) The Executive Directors will review both the operations of the
pecial Drawing Account and the adequacy of global reserves as part of their
.nnual report to the Board of Governors.
4. Change in rate of allocation or basic period. If there are
nexpected major developments which make it desirable to change the rate at
'hich further special drawing rights are to be allocated for a basic period,
i) the rate may be increased or decreased, or (ii) the basic period may be
erminated and a different rate of allocation adopted for a new basic period.
'aragraph 111.3 will apply to such changes.
5.

Voting majority.

(a) For decisions on the basic period for, timing of, amount and rate
,f allocation of special drawing rights, an 85 per cent majority of the voting
,ower of participants shall be required.
(b) Notwithstanding (a) above, the decisions to decrease the rate of
.llocation of special drawing rights for the remainder of the basic period
·ill be taken by a simple majority of the voting power of participants.
6.

Opting out.

The Amendment will include prOV1Slons that will prescribe to what extent
participant will be required initially to receive special drawing rights,
,ut will stipulate that beyond any such amount a participant that does not
'ote in favor of a decision to allocate special drawing rights may elect not
.0 receive them under that decision.
V.

Cancellation of Special Drawing Rights

The principles set forth in III relating to the procedure and voting for
he allocation of special drawing rights will be applicable, with appropriate
lodifications, to the cancellation of such rights.
Use of Special Drawing Rights

Right to use special drawing rights.

(a) A participant will be entitled, in accordance with the provisions
f V, to use special drawing rights to acquire an equivalent amount of a
urrency convertible in fact. A participant which thus provides currency will
eceive an equivalent amount of special drawing rights.
(b) Within the framework of such rules and regulations as the Fund may
dopt, a participant may obtain the currencies referred to in (a) either
irectly from another participant or through the Special Drawing Account o

- 4 (c) Except as indicated in V.3(c), a participant will be expected
to use its special drawing rights only for balance of p~yments needs or
in the light of developments in its total reserves and not for the sole
purpose of changing the composition of its reserves.
(d) The use of special drawing rights will not be subject to prior
challenge on the basis of this expectation, but the Fund may make representations to any participant which, in the Fund's judgment, has failed
to observe the expectation, and may direct drawings to such participant
to the extent of such failure.
2.

Provision of currency.

A participant's obligation to provide currency will not extend beyond
a point at which its holdings of special drawing rights in excess of the
net cumulative amount of such rights allocated to it are equal to twice
that amount o However, a participant may provide currency, or agree with
the Fund to provide currency, in excess of this limit.
3.

Selection of participants to be drawn upon.

The Fund's rules and instructions relating to the participants from
which currencies should be acquired by users of special drawing rights
will be based on the following main general principles, supplemented by
such principles as the Fund may find desirable from time to time:
(a) Normally, currencies will be acquired from participants that
have a sufficiently strong balance of payments and reserve position, but
this will not preclude the possibility that currency will be acquired from
participants with strong reserve positions even though they have moderate
balance of payments deficits.
(b) The Fund's primary criterion will be to seek to approach over
time equality, among the participants indicated from time to time by the
criteria in (a) above, in the ratios of their holdings of special drawing
rights, or such holdings in excess of net cumulative allocations thereof,
to total reserves.
(c) In addition, the Fund will, in its rules and instructions, provide
for such use of special drawing rights, either directly between participants
or through the intermediary of the Special Drawing Account, as will promote
voluntary reconstituticn and reconstitution under V.4.
(d) Subject to the provisions of V.I(c), a participant may use its
special drawing rights to purchase balances of its currency held by another
participant, with the agreement of the latter.

- 5 -

Reconstitution.

(a) Members that use ~heir special drawing rights will incur an
obligation to reconstitute their position in accordance with principles
which will take account of the amount and the duration of the use. These
principles will be laid down in rules and regulations of the Fund.
(b) The rules for reconstitution of drav.rings made during the first
basic period will be hased on the follcwing principles:
(1) The average net ~se. taking into account both use below and
holdings aDove its net cumulative allocation, made by a
participant of its special drawing rights calculat~d on the
basis of the precedjng five years, shall not exceed 70 per
cent of it~; a'l(>l-.'lge net cumulative allocation dur~ng this'
period. Reconstitution under this subparagraph (i) will
be brought 3bout through the mechanism of transfers, by the
Fund directing drawings correspondingly.
(ii) Participants will pay due regard to the desirability of pur-

suing over time a balcmced relationship between their holdings
of special drawing rights and other reserves.
(c) Reconstitution rules will he reviewed before the end of the first
and of each subsequent period and new rules will be adopted, if necessary.
If new rules are not adopted for a basic period, the rules for the preceding period shall apply unless it is decided to abrogate reconstitution
rules. The same majority as is required for decisions on the basic period,
timing of, or rate of allocation of special drawing rights will he
required for decisiuns to adopt, amend, or abrog2.te reconstituti0n rul~s.
A.ny amendment in the rules ·,."ill govern the reconstitution of dra\,dnrs mane
after the effective d~te of the amendment, unless otherwise decided.
VI.

Interest and Maintenance of Gold Value

(a) Interest. A moderate rate of interest will be paid in special
drawing rights on holdings of special drawing rights. The cost of this
interest will be assessEd against all participants in proportion to net
cumulative allocations of special drawing rights to them.
(b) Maintenance of gold value. The unit of value for expressing
;;pecial drawing rights will he equal to 0.888 671 grams of fine gL,ld.
rhe rights and obligatio~s of particippnts ancl of the Sryecial Drawing
'\ccount will be subject to an ahsolute mdiCltenar.ce of gold vClllle or to
Jrovisions similar to Article IV. Section 8 of the Fund's Articles.
III. Functions of Fund Organs and Voting

1. Exercise of powers. The uecisions taken with respect to the
;pecial Drawing Acrount, and the supervision of its operations, will be
~arried out by the B0Rrd Jf Governors, the Executive Directors, the Managing

- 6 -

Director, and the staff of the Fund. Certain powers, and in particular
those relating to the adoption of decisions concerning the allocation,
cancellation, and certain aspects of the use of special drawing rights,
will be reserved to the Board of Governors. All other powers, except
those specifically granted to other organs, will be vested in the Board
of Governors which will be able to delegate them to the Executive
Directors.
2. Voting. Except as otherwise provided 1n the Amendment, all
decisions pertaining to the Special Drawing Account will be taken by a
majority of votes cast. The precise formula for the voting power of
participants, which will include basic and weighted votes, and possibly
the adjustment of voting power in relation to the use of special drawing
rights, will be the subject of later consideration.
VIII. General Provisions
1. Collaboration. Participants will undertake to collaborate with
the Fund in order to facilitate the proper functioning and effective use
of special drawing rights within the international monetary system.
2.

Nonfulfillment of obligations.

(a) If the Fund finds that a participant has failed to fulfill its
obligations to provide currency in accordance with the Amendment, the Fund
may suspend the right of the participant to use its special drawing rights.
(b) If the Fund finds that a participant has failed to fulfill any
other obligation under the Amendment, the Fund may suspend the participant's
right to use any special drawing rights allocated to, or acquired by,
it after the suspension.
(c) Suspension under (a) or (b) above will not affec~ a participant's obligation to provide currency in accordance with the Amendment.
(d) The Fund may at any time terminate a suspension under (8) or
(b) above.
3. Accounts. All changes in holdings of special drawing rights
will take effect when recorded in the accounts of the Special Drawing
Account.
IX.

Entry into Force

The Amendment would enter into force in accordance with the terms of
Article XVII of the Fund's Articles.

COMPOSITION OF WORLD RESERVES, 1948 -'66
DOLLARS

DOLLARS

Billions

In U.S. Dollars
801

180

Totol Reserves
Reserve Pos/~ions in IMF

601

----1160

--~140

--~120

~
rt

1948
l

'50

'52

'54

'56
Y

Annually
Office 01 the SeCn!t/!ty of the Tn!asury

'58

'60

'62 I, '64
v

'66

rt
Il>
(')

:::s

Quarterly

C-1138

.,.

STATEl-1ENT BY THE HONORABLE FREDERICK L. DDUNG,
UNDER SECRETARY OF '!HE TREASURY FUR MONNl'ARY AFFAIRS ,
BEFORE '!HE
SUBCOMMITrEE ON INTERNATIONAL EXCHANGE AND PAYMENTS
OF THE
JOINT ECONOMIC COMMITTEE
SEPTEMBER 14, 1967

I vould like to join Secretary Fowler in expressing appreciation for
this opportunity to make a progress report on the international monetary
negotiations and to explain in more detail the workings of the "Outline of
a Facility Based on Special Drawing Rights in the Fund."

I would particu-

larly like to join him in thanking this Committee for the inspiration it
has given to this endeavor as well as for the timely and thoughtful guidance
it has provided throughout the negotiations.
The basic concept embodied in the Plan is quite simple.

The Plan

provides for a new international asset which will be an effective supplement
to existing reserve assets -- gold, reserve currencies, and reserve claims
on the Fund
The

one that will be a permanent addition to world reserves.

problem of elaborating this simple concept was partly technical and

partly political -- the new asset had to be endowed with qualities that
would make it useable and acceptable.

It not only had to be a hieh quality

asset -- it had to be regarded as such.
The Plan is embodied in the Outline you have before you.

As Secretary

Fowler has explained, the Outline will be implemented through amendments to
the Articles of Agreement of the International Monetary Fund.

I can sum up

the essential elements of the Outline Plan to create Special Drawing Rights
(SDR) in four basic points:

- 2 1.

Quality as a reserve asset - SDR are to be denominated in units
of account equivalent to the gold value of one dollar; they will
have the strong backing of the solemn obligations of Fund members
to accept them and pay a convertible currency in return.

It is

planned that they will bear a moderate rate of interest.
2.

~1ode

of creation - SDR are to be created

und~

an IMF procedure

which will assure wide support for their creation, with final
responsibility for decisions resting on the Fund Board of
Governors.

Each decision to create will authorize a specific

amount of SDR.

3. Mode of allocation - 3DR are to be allocated to participants in
proportion to their lMF quotas.
to participate.

All IMF members are eligible

Allocations of SDR will take the form of book

entries in a Special Drawing Account of the Fund.

4. Mode of transfer - SDR will be transferred by debiting the SDR
account of the user and crediting the SDR account of the receiver,
with the receiver paying convertible currency to the user.

There

will be rules on eligibility to use, on eligibility to receive,
and on partial reconstitution of the amount used.

The Fund will

act as a kind of traffic director, guiding the flow of SDR as
they are transferred from one country to another.
These are the main elements.

I would now like to go into some of the

more significant aspects of the main elements in more detail.

- 3 Perhaps, first I should emphasize an essential difference between
existing reserves and SDR.

This difference is that SDR will be created by

deliberate international decisions.

How are these decisions to be taken?

The Managing Director of the Fund will be generally responsible for
initiating proposals to start the machinery working, although it will be
possible for the }unc Executive Directors or Governors to request a proposal
for SDR creation from the Managing Director.

The principal criterion for

making a proposal is that there must be a widely-recognized global need for
reserve creation.
In arriving at a decision to propose creation of the new asset, the
Managing Director will have to take into consideration a number of factors
nnd developments -- both quantitative and qualitative.
that come to mind are:

Some obvious ones

the general trend in reserve growth, the supply of

cold and reserve currencies, the volume of international trade and its
relationship to international reserves, the general climate in the international monetary system, the state of the international exchanges, the
reserve policies of participants, the workings of the adjustment process,
and so on.

This list is not meant to be exclusive or to emphasize one

factor as against another.

In fact, I believe it would be a mistake to

attempt to fix an elaborate or detailed listing of criteria and relative
priorities, because conditions change and the relative importance of criteria
change.

Certainly it would not be useful to incorporate a fixed list in the

agreement or the report.
be noted.

But, in coming months, some general principles may

- 4I want to underline one point that Secretary FOwler noted in his statement.

Early in the negotiations it became apparent that the present state

of knowledge and prospective institutional arrangements did not lend themselves to attempts to make short-term and cyclical adjustments to the
volume of international reserves.

Central banks can do this in their

domestic spheres, but it did not seem possible to attempt this on an international scale.

This principle bears repeating because of its significance

for understanding the nature of the decisions to be taken to create

sm.

It was agreed that decisions would be taken from time to time to create a
specific amount of reserves for a period as a whole.

Such decisions would

not be changed unless unexpected major developments required modification
of the established trend.

It was also agreed that a reasonable period for

which decisions about the future could be made was five years forward.
Therefore, proposals to create SDR will norma.lly be for five years ahead.
Allocations, however, will be made to participants at regular intervals during the period.
The nature of decisions taken after the first five-year period would
depend on the five-year prospective need for reserves as conceived from
that point in time.

The Outline Plan provides that the Executive Directors

must keep the adequacy of global reserves under review and the Managing
Director is required to make a new proposal to allocate
time before the end of a basic period.

within sufficient

The essential point is that the OUtline

Plan envisions that the reserve creation machinery would continue to operate in
the future and that any STIR created would remain a permanent addition to world
reserves.
Once a proposal is made, it must be considered and approved by the
Fund.

To assure that decisions for reserve creation will have the widest

- 5 -

n-'

n'
\.

possible approval, the Outline Plan provides that the Managing Director
shall undertake full consultations to ascertain there is broad support
for his proposal.

The proposal, once put forward, and concurred in by the

IMF Executive Directors, would be submitted for the approval of the Fund
Governors voting by

85~

weighted majority.

If there were unexpected major

developments, a simple majority could reduce the trend amount and an
majority could increase it.

snR by an

85~

The technical possibility of cancellation of

majority will also be provided for, although we would not

expect this provision to be used.
The proposal to create an amount of new assets will be for a specific
amount.

Obviously, we cannot tell noY what that amount will be -- it will

be the product of a wide consensus, with judgment based on various factors.
But perhaps a little guidance may be obtained from the recent past.
Over the past 16 years -- since the end of 1950 -- global reserves
have increased at an annual average of $1.4 billion, or 2.4 percent.

Secretary Fowler has noted, United States reserves have been declining
during this period and reserves in the rest of the world have grown at an
annual rate of about 5.4 percent.

If one projects world trade growth at about its present rate, world
imports in 1970 will reach about $250 billion in contrast to 1966 volume of

$192 billion.

At that level, annual increments to reserves -- assuming

that the same relationship of reserves to trade as now prevails -- should
be $2.5 to $ 3 billion.
Thus, total reserve growth of some $2 billion a year or so would seem

- 6 reasonably consistent with the recent path.

How much of the total growth

would be in the form of the new asset natural.ly would depend on judgments

as to growth in other forms of reserves.

Gi yen present and prospective

conditions of new monetary gold supply and the intention of the Uhited
States to reach equilibrium in its international payments position When
the situation in Vietnam makes this feaSible, those other sources might
be quite small.

For illustrative purposes, however, let us assume that the plan enters
into effect in 1969 and a proposal to create $1 billion of SDR a year for
five year. is adopted.

How would this affect the participants in the Plan?

will be allocated to members of the Fund in proportion to their Fund

quotas.

For example, the United States has 24.6~ of the total Ftmd quotas

and thus would receive $246 million of

$1,230,000,000 for the five-year period.

created each year -- a total ()f

Receiving an allocation of SDR

means that in each of the five years the Fund will credit the Uhi ted States
on the books of the Special Drawing Account in the Fund with $246 m1ll1on

sm.
Assuming the annual creation of $1 billion and assuming present IMF
quotas are those applying when the first creation and allocation takes place,
the annual amounts credited to the accounts of various countries or groups of
countries would be about as follows:

- 7 -

$ 57.2 million

Germany

France

47.0

Italy

29.8

Netherlands

24.8

Belgium-Luxembourg

20.9

Total Ere

$ 179.7

United Kingdom

116.3

Canada

35·3

Japan

34.6

Sweden

10.7

United States
Total Group of Ten

245.9

$ 622.5

other Europe

66.9

Middle East
& North Africa

43.0

other Asia

107.5

other Africa

39.6

Latin America

89.0

Australia &
New Zealand

- 8 Now, just what kind of asset will these countries have to supplement
their other international reserves?

What are the factors which give it

high quality and acceptability?
Each sm is to be denominated in terms of 0.888671 grains of fine gold.
This is the gold value equiYalent of one U.S. dollar.

Thus, each sm Will

be equal to the gold value equivalent of one dollar.

Let me be clear that

will be gold value guaranteed, but they will not be redeemable in gold.

Further, I also want it to be clear that it would be against the rules for
a country to use its sm merely to change the composition of its reserves.
In other words, it would be inappropriate for any country observing the
rules to use its SDR to obtain dollars and in turn use those dollars to buy
gold from the Uhited States.
Countries will earn net a modest rate of interest on holdings in excess
of their cumulative allocations.

The formal amendment probably will not

set a specific interest rate, but rather a range which will allow the rate
to be set in the light of the circumstances at the time of creation of SDR.
The backing of sm will be unimpeachable.

It will consist of a firm,

1.D'lequivocal, and solemn obligation to accept the new asset when it is presented
and to pay a convertible currency in return.

That obligation is the funda-

mental backing of the asset, and is the principal factor which will give it
value as an asset.

The obligation is qualified, but the limits are broad

enough so that there can be no doubt about the usabil1 ty of
convertible currencies.

to obtain

Each participant will be obligated to accept SDR up

to an amount equal to its cumulative allocations plus two times its

- 9 cumulative allocations.

This obligation makes unnecessary and takes the

place of the pool of currency used to back present IMF drawing rights.
'£his concept of acceptance obligationsis so important to understanding the
working of the scheme that 1 would like to devote some time to explaining
it.
Put in its simplest form, a country's acceptance obligation is always
the difference between its actual holdings of SDR and three times its
cumulative allocations.

Thus, using the previous example of creation of

$1 billion SDR a year for five years, the United states would receive

$246 million SDR per year.

In the first year, assuming we used none of

our $246 million SDR, our potential acceptance obligation would be $492
million SDR -- that is, three times our cumulative allocations of $246
million ($738 million), minus our actual holdings of $246 million SDR.
If we had transferred all of our $246 million SDR allocation to other
countries, our potential acceptance obligation would be $738 million SDR.
If we held our allocation of $246 million SDR and had received $246 million
SDR in transfers from other countries, our potential obligation would be

$246 million SDR.
By the fifth year, we would have cumulative allocations of $1,230
million SDR and, assuming that we held this amount and that we had already
accepted $1 billion SDR from other countries, our potential additional
acceptance obligation would be $1,460 million SDR.

- 10 -

For the EEC countries, the aggregate allocation would be $180 million
SDR per year, or $900 million over a five-year period.

The aggregate

acceptance obligation is three times $900 million, or $1.8 billion more than
the Community's allocation.
'rhese examples indicate that the potential acceptance obligations of
the U. S. will be large enough to accommodate a transfer of all EEC holdings
and the EEC acceptance Obligations will be large enough to take a transfer
of all U. S. holdings.

Obviously, these are extreme examples, and the

system simply would not work that way.
acceptance obligations are

~uite

ample.

But they demonstrate that the
The margin between the amounts

created and the acceptance obligations normally should insure ample coverage
for SDR transfers.
The obligation to accept SDR is the foundation of the Outline Plan.
yet one might ask what would happen if a country should fail to honor its
obligations to accept or if there were a major calamity and the Plan were
liquidated or if a member were to withdraw.

We have given careful thought

to these remote contingencies, which we do not expect will occur but which
a prudent man must guard against.
1.

There are three points that are relevant:

Because the obligation to accept SDR against the payment of
convertible currency is the essence of the Plan, the Outline
provides its most severe sanctions -- suspension of the right
to use any SDR held by a country -- for failure to honor this
commitment.

- 11 -

Most of the transfer of SDR will be directed by the Fund to
countries in strong balance of payments and reserve positions,
and it is quite a remote possibility that such countries would
default on their obligations.

Moreover, even in the unlikely

event a default were to occur, the acceptance obligations of
the major industrial countries are large enough so that transfers could be directed toward these countries.

It is worth

recalling, at this pOint, that the allocations of the Group of
Ten countries are 62 percent of the total and that these countries have potential acceptance obligations more than three times the
total amount allocated to the rest of the world.

In addition,

a growing number of countries are demonstrating the financial
capacity which will qualif.Y them as receivers of SDR.

3. To cover the unlikely event of liquidation of the Plan or a
withdrawal, detailed prOVisions will be made for redemption in
acceptable means of payment of countries' holdings of SDR in
excess of their cumulative allocationso

The specific provisions

will be worked out in the coming months and incorporated into
the amendment implementing the Outline.

We expect that, should

there be any losses in the event of a withdrawal or liquidation,
such losses would be shared among all members in proportion to
their allocations.

Thus, countries would not be exposing them-

selves to special risks by holding a large amount of SDR
relative to other countries' holdings of SDR.

- 12 -

In concluding my comments on acceptance obligations, I want to make
one point very clear.

I have called these acceptance obligations "obliga-

tions," and they are exactly that from two pOints of view.

That is, (a)

they are obligations to provide backing for the SDR, and (b) they are
limited so that each country knows what its maximum constitutional obligation is.

But I want to stress still a third viewpoint.

These new assets, as I have indicated, are high quality assets deSigned
to supplement existing reserve assets.

Countries that get SDR from other

countries -- over and above their regular allocations -- normally will ce
surplus countries and, thus, countries gaining reserves.

Some of their

reserve gains will be in the form of the new asset -- which will be useable,
as are its other reserves, When it needs to use them.

Thus, accepting the

new asset is no more of a burden than accepting gold or foreign exchange
or reserve claims on the Fund.

In this sense, the acceptance obligation

is misnamed and, because of this fact, the acceptance limit of three times
allocationsis not a fixed limit.

Countries, if they wish, can accept and

hold more than their acceptance limits -- the limits merely state their
obligations to accept.
Why, then, are any limits set for acceptance?

holdings of gold and dollars.

There are none for

The answer is a simple one.

In the initial

periods, while the world gets used to these new assets, it was judged to be
the conservative course to say that no country need take more than a proportion of the new assets.

Their quality is good, but they are new and people

- 13 proceed with more caution with a new asset.

I suspect that, in time, the con-

cept of acceptance limits will be dropped.
I have already made the pOint that SDR are useable to obtain convertible
currencies, mainly dollars.

Tnis is essentially how countries use Gold.

use gold to buy convertible currenc ies, mainly dollars
and

They

Because SDR are new

do not have a tradition of use as a monetary asset, as do gold and dollars,

a few basic principles to guide their transfer have been provided.
1.

They are:

Countries will be expected to use SDR only for balance of payments
needs or to protect their reserve position.

A country's judgment

as to its eligibility to use may not be challenged, but the Fund may
make representations and direct drawings to a country which the Fund
believes has failed to observe this expectation.
This expectation simply expresses existing practice, under which present
reserve assets are used almost exclusively for balance of payments needs
or to protect reserve positions.

It will help to assure an orderly flow

of SDR and avoid instability resulting from shifts in the composition
of reserves which might come about if, at a pe.rticular time, one of
the three principal reserve assets -- gold, dollars, and SDR -- happened
to look more attractive than the others.

When a country -- say the United

States -- is eligible to use SDR, and wants to do so, it would request
the Fund to debit, say, $100 million of its SDR account and credit a
country, or countries, eligible to receive SDR with $100 million SDR.
The receiving country, or countries, will then credit the U. S. account
with the equivalent in convertible currencies of $100 million SDR.
brings us to the second major principle of use -- how is eligibility
to receive determined?

This

- 14 2.

I have already mentioned that normally countries in strong balance
of payments and reserve poSitions will be eligible to receive SDR.
It is only natural that cotmtries in this situation should receive
SDR, since they would be the ones which would be gaining reserves
because of their balance of payments positions.

Transfers of

could also go to countries in a strong reserve position even
though they have moderate balance of payments deficits.
cotmtries eligible to receiVe

sm,

Among the

the Fund will try to maintain

equali ty, over time, in the ratios of their holdings of

their total re'serves or in the corresponding ratios to total
reserves of their holdings in excess of their allocations.

The

purpose of this rule is to achieve a generally fair distribution
of the

among the cotmtries that meet the standards entitling

them to receive SIlR.

3. '!he third principle of use concerns what is known as reconstitution.

I would expect that a very considerable amount of use of

will be reconstituted through the normal processes of balance

of payments adjustment.

Cotmtries that are in deficit and that

use the asset will switch to a surplus position and will become
eligible to receive transfers of

sm.

It is, of course, natural

for countries that lose reserves when in deficit to try to regain
them when in surplus.

However, some countries were concerned

that a few countries might use

to the exclusion of other

reserves and that these countries might not became eligible to

- 15 receive a reflow of SDR, because they would remain in balance
of payments deficit.

While all countries agreed that some

reconstitution provisions were necessary, it was important to
avoid a compromise of the quality of the asset as a supplement
to gold and dollars.

The rules on reconstitution that were

adopted assure that the asset will not be abused, yet do not
interfere with its reserve asset status.
First, a general obligation to reconstitute, related to time
and amount of use, is set down.

The specifics are to be

elaborated in"rules subsidiary to the agreement.

The purpose

of this was to make it possible to change the reconstitution
rules without formally amending the agreement.

It was widely

agreed that it was not possible to lay down reconstitution rules
for all time, as they would have to be adjusted as experience is
gained with the use of SDR and, perhaps, in time dispensed with, as
concern about exclusive use of this one asset is dissipated by
actual experience.
Rules were made for the first five years of creation of SDR.
The reconstitution rules will be reviewed before the end of this
and each subsequent basic period and new rules adopted, if necessary
and if approved by an 85 percent majority.

During this initial

period, a country's average net use of allocations of SDR, calculated on the basis of the preceding five years, "shall not exceed
70 percent of its average net cumulative allocation during this

- 16 period."

If any country exceeds this rate of use, the Fund

would direct part of the natural flow of SDR to it, in order
to maintain this standard.

Thus, reconstitution will take

place through a restoration of holdings of SDR in the account
of the user with the Fund, with payment of convertible currency
by the user to other users.

The term reconstitution aptly des-

cribes the substantive intention.

A country "reconstitutes" its

reserve position in SDR by purchasing SDR from other countries.
It should be clearly understood that there is no bar to the use
of 100 percent of allocations of SDR; a reconstitution obligation is incurred only with respect to average use above 70 percent.
In addition to the net average use rule, it is also provided
that "Participants vill pay due regard to the desirability of
pursuing, over time, a balanced relationship between their
holdin5s of Special Drawing Rights and other reserves."

A rigid

application of such a relationship is not called for; this provision is intended, rather, to draw attention to the idea of a
balanced use of all three assets over time and, thus, maintain
stability, in a general way, over time in relative holdings of
the new asset and existing reserve assets.
In implementing the basic principles of use, the Fund will act as a
kind of traffic director, making known to eligible users which countries

- 17 are the eligible receivers of transfers and assuring that the flow to
receivers is distributed in an equitable manner.
and

It may provide that using

receivine countries may deal directly with each other in arranging trans-

fers, but the Fund must be informed of the transaction so that the proper
entries may be made on its books, and it may act as an intermediary to
Lring eligible users and receivers together.

The

~und

will also have the

obligation to direct the flow of SDR to countries that have became eligible
receivers because they have incurred a reconstitution obligation and to
promote voluntary reconstitution transactions between countries having an
obligation to reconstitute and countries whose holdings are in excess of
their cumulative allocations of SDR.
There is an area to which the Fund role as traffic director does not
extend.

This is the provision in section V(3)(d) of the Outline, which

allows an eligible user to select the country to which it wishes to transfer its SDR for the purpose of purchasing balances of its own currency held

by the other country, provided the latter agrees to accept SDR.

This provi-

sion is of particular interest to the United states, although it applies
bene rally to any participant.

It will remove a disability that would other-

Wise impair the effective use of SDR by a reserve center.

It gives the U. S.

the option to acquire dollars held by a given foreign country by using SDR,
but

only if the dollar-holding country agrees.

Normally, we use our reserve

assets to buy balances of our own currency, and this provision would allow

us to use the new asset in much the same way as we do existing assets, provided both parties agree to the transaction.

Of course, it does not modify,

in any way, our firm commitment to buy and sell gold at $35 an ounce.

- 18 In closing, I would like to emphasize that the Outline is a constitutional document that must be implemented by specific legal provisions.
This applies particularly to the provisions on holding and use, liquidation
and withdrawal.

With this caveat, I welcome any questions you may have on

the details of the operation of this new supplement to existing international
reserves.

--000--

Q~
~I

Statement of the Honorable Robert A. Wallace
Assistant Secretary of the Treasury
Before the
House Committee on Banking and Currency
Thursday, September 14, 1967
The Treasury Department strongly urges that prompt,
favorable action be taken on H.R. 10908 which would extend for
two more years the flexible authority under which the appropriate
financial agencies can regulate maximum rates of interest or
dividends payable on savings accounts.

H.R. 10908 would also

extend the authority of the Federal Reserve to:

(a) vary

reserve requirements on time and savings deposits between
3 and 10 percent, and (b) conduct open market operations in
securities issued or guaranteed by any agency of the United
States

Both are valuable potential tools to promote financial

stability and the efficient functioning of our financial
markets.
This same legislation was originally enacted last September 21
for a period of one year.

There is no need to review in any

detail the circumstances which made this legislation essential
a year ago.

Within an environment of heavy demands for credit,

and limited rupp1ies, a very aggressive competition for funds
among financial institutions contributed last year to an upward

- 2 escalation of interest rates and a diversion of funds from
thrift institutions.

The flow of savings into mortgage markets

was disrupted and the housing industry suffered a severe
dislocation.

Not all of these difficulties were due to

uninhibited interest rate competition, but it was an important
factor in the total picture.
During the past year, the regulatory authorities have made
prudent use of the flexible ceilings on interest rates payable
on savings accounts.

Some of the highest rates that were being

paid in the spring and summer of 1966, and that were threatening
to become even more general and further escalated, were brought
down to more moderate levels.

At the same time, the regulatory

authorities avoided pressing the ceiling rates down abruptly to
levels which, if they had been too low in relation to prevailing
market rates of interest, might have choked off the reflow of
savings to the thrift institutions.
With the help of these ceilings, and of other policies
during the past year that have been designed to alleviate strains
and upward rate pressures in the financial markets, savings flows
to thrift institutions and commercial banks rose to record levels
in the first seven months of 1967.

The increase in savings at

savings and loan associations, mutual savings banks, and commercial

- 3 -

banks was $25.8 billion in the January-July period of 1967,
compared with $12.8 billion in the same months of 1966, and
amounts ranging from $15.7 billion to $18.2 billion in the
comparable periods of 1963 to 1965.
The heavy savings inflow in 1967 has occurred without an
upward move in the rates payable on savings, although money
market rates of interest have risen in recent months after
declining from late 1966 through the early months of the year.
Because home mortgage financing has been more readily available
from savings institutions and other investors, housing is making
a strong recovery.

Total private housing starts in July reached

a seasonally adjusted annual rate of 1.36 million units, 61% above
the low of last October.
But, we must not be lulled into a sense of false security.
Some of this year's large savings inflow at financial institutions
is the reflection of outflows or absences of normal inflows last
year.

Already there are some signs of a slackening in the rate

of gain, and indeed it would have been unrealistic to anticipate
continued inflows at the rate experienced earlier this year.
Against the background of market interest rates that have risen
significantly in recent months -- despite an expansionary monetary
policy -- it would be foolish indeed to ignore the possibility
of a return bout of interest rate competition of the type

- 4 experienced last year among financial institutions.

Such a

competition could have severely detrimental consequences again
for savings flows, mortgage money, and homebuilding activity.
Since the legislation under consideration has amply demonstrated
its effectiveness, the only prudent course is to extend it -- and
promptly, since it would otherwise expire in a few days.
The need for prompt action on a simple extension of legislation which has already demonstrated its value is the reason
why the Treasury Department strongly favors H.R. 10908, which
has already been passed by the Senate.

The alternative bill,

H.R. 12754, also includes provision for a regular audit of the
Federal Reserve System by the Comptroller General.

The merits

of such a provision are debatable, but whatever merit there might
be, the audit proposal is not related to the purpose of the
existing authority which expires in just a few days.

Since

consideration of the audit proposal could not help delaying
prompt action on the vitally needed extension of existing
authority, the Treasury Department opposes the alternate bill
H.R. 12754.
As your Committee is well aware, the legislative authority
for ceiling interest rates is far from a panacea.

There is even

a question whether interest rate ceilings are a desirable
permanent or long-term feature of our financial landscape.

- 5 But, in the present setting, with some key interest rates
already above last year's peaks and all interest rates higher
than we like to see them, the temporary extension of the authority
to prescribe ceiling interest rates for savings is a necessary
step.
There is still the danger that rising market rates of interest
could begin to pull funds away from savings institutions and
imperil the continued recovery in housing.

The present legislation

cannot remove that. risk, although prudent use of the administered
rate ceilings on savings accounts can help to keep rate competition
among the financial institutions from further aggravating a
stringent credit situation.
The best insurance against a repetition of last year's very
tight money markets and imbalance in the distribution of credit
would be the swift adoption of the President's tax proposals,
and accompanying expenditure restraints.

Without such tax action,

there is a grave danger that the combination of government and
private credit demands would so far exceed supplies that market
interest rates would shoot well above their present high levels,
with major disruptive effects on the financial markets and on
segments of the economy that depend on those markets.

Under such

conditions , it would be better to have the authority in H.R. 10908

- 6 -

than not to have it, but there would be a question then as to
how much good could be done by administered ceilings on interest
rates payable by financial institutions.
The greatest value of H.R. 10908 is in the circumstances
that would be expected to prevail given the President's tax
increase and expenditure restraint proposals -- an environment
of healthy rising economic activity and strong but not excessive,
or overwhelming, credit demands.

Under those circumstances, the

extension of authority provided in H.R. 10908 will provide the
financial regulatory authorities with needed tools that have
demonstrated their value and effectiveness in the past year.
Therefore, your prompt and favorable action on this simple
two-year extension is earnestly requested.

000

STATEMENT BY THE HONORABLE JOSEPH W. BARR
UNDER SECRETARY OF THE TREASURY
BEFORE THE SENATE FINANCE COMMITTEE
ON S. 2100

THURSDAY, SEPTEMBER i4, J967
Dear Mr. Chairman:
I am pleased to have this opportunity to testify on the bill

2100, which provides certain encouragements to the construction

or rehabilitation of low-income housing.
We recognize that this hearing will serve to call attention to various
approaches to the goal of increasing the supply of adequate housing in
poverty areas.

Both the goal and the desire to explore all approaches

are most laudable.

As is always the case with Government policies,

we must be ready to evaluate alternative means of achieving our
objective and consider that objective in the light of other calls upon
our resources.

The bill introduces new ideas in the approach

to the problem of low-income housing, such as the increased reliance
on equity investment, which justify a careful study.
I shall address myself to the tax and loan provisions of S. 2100.

Briefly, the bill allows generous investment credits, generous depreciation
provisions, generous capital gain treatment after ten years, a partial
relief from local property taxes, and a generous low interest loan.
All of these tax and loan benefits are conditioned on the housing
proj ect meeting certain standards as to acceptab ili ty as low-income or
moderate-income housing. These standards are administered by the Secret2ry
of mID.

I shall not add anything to the evaluation of these provisions

as respects a desirable housing policy since Secretary Weaver has
already commented on this.

I sh all have a few remarks to make later

to findings as to compliance with
on about the problem of linking t ax treatment
conditions established by Government Departments other than Treasury.

- 2 -

I shall not undertake to repeat the details of the bill's tax
provisions, but I shall draw your attention to certain broad aspects
of the way these tax provisions are set forth in the bill.
(1)

The investment credit and the depreciation provision

are structured to provide more tax benefits the larger the proportion
of equity that is put into the project, though as I

6hal.~~

point out later

the structure of the bill as a whole does not always provide a better
rate of return for higher equity.
(2)

The investment credit and the depreciation provisions are

structured to yield tax benefits even if the housing project itself is
unprofitable.

Actually, the depreciation is so generous that the

normal expectation would be for the housing project to show a loss
for tax purposes; and the

~nly

way the taxpayer could realize the

offered tax benefits would be to use them against taxable income
from other sources.

This would be easy if the housing investor is

a large company with diversified interests, especially non-real estate
interests because even ordinary real estate investments tend to show
losses for tax purposes.

To facilitate this use of excess deductions

on the housing project, the bill also amends Subchapter S, the provisions that allow certain corporations to elect to be taxed in a way
generally similar to the taxation of partnerships.

This will permit

the organization of an eligible housing project by a group of individuals
with the intent of using the excess deductions against their ordinary
income from other sources.

- 3 -

(3)

Finally, the various tax benefits are designed to encourage

a ten year holding period by the original investors.

The provisions

dealing with sale are also structured to encourage sale to another
organization that will have the purpose of offering low-income
housing.
General Remarks on the Tax Incentive Approach
I want to comment first on this use of tax incentives
to encourage non-revenue objectives-involving a narrow group of
taxpayers.
My

first point is that there are no special tax disadvantages to real

estate investment.

There would be a case for considering changes in the

tax law if it were contended that the tax law provides special tax
disadvantages or tax barriers to housing investment.

The advocates of

this legislation have not claimed that present tax law is loaded against
real estate investment or against low-income housing investment.
Rather they state that the problem arises within the housing field,
that given the level of building and rehabilitation costs, construction
cannot be undertaken which yields a positive profit when rents are
charged which are a reasonable proportion of the income of moderate...
and low-income individuals.

The advocates of S. 2100 contend that this

inconsistency between building costs and reasonable rent levels
should be offset by very generous tax provisions.

- 4-

This makes S. 2100 plainly an effort to achieve non-revenue
objectives through the tax system.

What can be said about this?

To answer this question, I would like to start off by saying
that we ought to begjD with the assumption that an investor chooses
between alternative investments on the basis of net after-tax income
in relation to investment.

I shall address myself later to the question

of whether there are differences from the investor's standpoint or
the Government t s standpoint between dollars that are "paid" as tax
reductions and dollars that are Itpaid,r in other ways.

It is useful

first, however, to recognize the basic similarity between a dollar
benefit received from tax savings and a dollar benefit from direct
Government outlays.

Each is a buck.

A tax saving can always be reproduced by some form of Government

p~yment

program. A tax credit of 10 IErcent of an investment provides the same result
as giving an investor 10 percent of the cost of his investment.

Allowing

a taxpayer to speed up depreciation deductions by taking, say, 20 percent
of the cost in the first year permits a corporate taxpayer to reduce
its tax payment

by 48 percent of this deduction in the first year, and

it increases the tax payments at some future time when the deduction
would otherwise have been taken.

This benefit can be reproduced by

offering the taxpayer an interest free loan equal to the amount of
tax saving from the rapid depreciation to be repaid in the future when
he would have otherwise taken the depreciation.

- 5 I cannot stress this point too strongly.

There is no magic which

permits Government to give away tax dollars and have a lesser budget
impact than if it had given away expenditure dollars, ncrdoes a dollar
of net budget cost have a different impact on the investor,'s after-tax
rate of return if it is incurred as tax reduction or as direct outlay.
While there is this broad comparability between tax incentive
programs and loan or expenditure programs, there are some Significant
differences which must be kept in mind. To be very clear,

]~t

me specify

that I am comparing a tax and an expenditure program which produces
the same net benefits for the investor and has
Government.

the same net cost to the

For illustration, one may want to think of a tax incentive

which provides an annual tax credit for low-income housing investment
exactly equal to the benefit that the investor would gain from an
annual direct payment, which we might call a rent supplement.

This

hypothetical tax credit could be made available under exactly the same
terms that rent supplements are made available under present law.
The question comes down to:

"What are the advantages or disadvantages

of building this rent supplement program into the tax law?"
One difference is that the tax route does not provide assistance to
the individual or corporation which has limited income from other sources
and which therefore cannot make full use of the tax incentives.

- 6 system of direct payments on the other hand could provide benefits
even where the particular housing investment was the only activity
of the investor being benefited.

One would think that this was a

general disadvantage of providing incentives through the tax system.
The supporters of

2l0~

however, apparently believe that it is the

large businesses which ought to be attracted into the low-income
housing field and that they take it as no disadvantage to their tax
approach that the benefits are only helpful to taxpayers with incomes from
other sources.

This I might add is not a particular advantage of the

tax approach since this sort of condition could be built into
the rent 5upplement program if we agree that the condition is a desirable
one.
Another difference between the tax and expenditure routes is
that the tax benefits, where they are related to increased deductions,
vary in amount according to the effective tax rate of the taxpayer.

The

tax benefit of rapid depreciation can be as high as 70 percent for the individual
taxpayer in the top bracket or as low as 14 percent for a low-income
investor.

S. 2100 does provide some tax benefits that work through extra

deductions , so that it will thus afford different relief for different taxpayers.
This I should point out works in directly the opposite direction to
the nor.mal ;~centive generated by a free pricing system.

In a free

pricing system the usual response to shortages is an increase in price
and, consequently, an increasing income to people who can provide the
service in short supply.

This increasing income would be subject to the

usual tax rules, and a person in the 70 percent bracket would find that he could
keep 30 percent of income earned by providing the services just as he could

- 7-

keep 30 percent of any other income he had earned.

The investor in the

30 percent bracket would find that he could keep 70 percent in both
cases.

When we structure the incentive, however, as an additional tax

deduction rather than as a price increase, the incentive is far more
attractive to the high-income taxpayer than it is to the low-income
taxpayer.
It becomes a matter of careful calculation for each investor, and
his tax adviser, to determine how much this extra depreciation is worth
in the particular case and whether or not this justifies accepting
a lower before-tax return.

It may be useful to point to the analogous

situation of tax-exempt bonds.

One cannot answer the general question:

!rAre municipals a better investment than U. S. G:overnments?" without
examining, and making assumptions, about the future total income
prospects of the investor.
upon future tax rates.

The value of the tax exemption depends

It is well known that tax-exempt bonds are

attractive investments to high-income taxpayers but not to lowincome taxpayers.

It is also suggested in the literature on the

tax exemption that this constitutes a rather inefficient incentive
because the net incentive effect must work through the marginal
investor who will get less advantage from the exemption than higher
bracket investors , and some of the benefit afforded the high-bracket
investor is wasted.
Another difference between the tax solution and the expenditure
solution is that reliance on tax incentives for non-revenue objectives

- 8 divides the Government consideration of social problems.

Let me go

back to my hypothetical example of a tax credit system which provided
exactly the same benefits as a rent supplement program

By throwing

these benefits into the tax system we have not changed the basic fact that
this is still a major housing problem, but we have gotten the Treasury
Department and the Finance Committee and the Ways and Means Committee
into the act at the cost of reducing the ability of the Department of
BUD and the Congressional Committees

that normally deal with housing

problems to act on'the total housing picture.
fuat the two Tax Committees are necessarily

I donft want to suggest

inade~uate

to decide on

housing policy -- or on all other social problems -- but I can speak
from a personal standpoint that I see no reason why the Treasury
Department has any particular competence in making judgments as to
what constitutes good housing policy; and converting the rent supplement
arrangement into tax credits would simply push the Treasury into this
position.
A further aspect of converting an expenditure program into a set
of tax benefits is that it tends to get isolated from the budget review
process.

An expenditure program is examined regularly in the preparation

of the President1s budget and in the appropriation process.
provision rarely gets reviewed.

A tax

I might suggest that the whole problem

of tax reform to a large extent comes down to incentives and preferences
that have been adopted at various times and never systematically reviewed

- 9 to determine whether the Government is getting what it pays for.

This does

not mean that under a direct program we cannot provide a particular investor
reasonable assurance that benefits agreed upon will in fact be forthcoming.
Jt does mean that under a direct program we can make changes in the program
whenthese become desirable, whereas experience has shown time after time
that it is extremely hard to make changes where tax benefits are involved.
A final

difficul~

of structuring these benefits into the tax law

is the precedent problem.

There are an enormous number of other tax

incentive proposals o The list is so long that I could not include them all,
but let me give you the flavor of ft. There are bills to provide
A tax credit for tuition and expenses of higher educationo

A t~ credit to encourage contributions to higher educationo
A tax credit to encourage worker training.
A tax credit to encourage industrial pollution control

A t~ credit to encourage airport developmento
A tax credit for .underground transmission lines .
A tax credit for exports.
A tax credit for freight cars.
A tax credit to encourage gold mining.
A tax credit to encourage hiring older workers,
and so on and so on.
I cannot help but observe that if we go along this tax incentive route
the Treasury Department would soon be making the crucial decisions in almost
all matters of domestic economic policy.

This would, of course, require

a larger staff; and it has enormous possibilities for empire building.
We would, however, prefer to decline this honor.

- 10 The proponents of S. 2100 imply that there might be some net
advantages of the tax approach over the expenditure approach.
shall address myself to two of these.

One argument advanced is that

the Congress might vote for a tax program where it would not vote for
an expenditure program which provided precisely the same benefits at
precisely the same cost -- or even a lower cost.
of this argument.

~uestion

the validity

In a democracy we must face up to some decisions, and

we must be willing to abide by the decisions that our procedures reach.
The Congress mayor may not be willing to approve a program of budget
losses and housing benefits.

If that program is rejected on its own

merits, it would seem that restating it as a tax reduction is akin to
seeking a backdoor expenditure where it is harder for people to see just
what are the costs and benefits involved in the expenditure.
Another argument which seems to be implied in support of S. 2100
is that the business response to a tax incentive would be better because
there is a feeling that there is something wrong about accepting a direct
payment from the Government but something honorable about earning one's
tax bill through tax benefits.

Basically, this viewpoint attributes a

good deal of irrationality to business firms.

It says in effect that

they would not make a careful comparison of net returns but would
arbitrarily reject some worthwhile profit prospects because the incentives
were cast in the form of a direct subsidy rather than a tax subsidy.
The experience with the SST program -- and other subsidy programs -suggests that business firms do make careful calculations on their profit
prospects taking direct subsidies into account.

In fact, since the benefits

- 11 -

of tax incentives vary depending on the estimated tax position of
the investor, the calculation of the expected returns in a specific
case can become more complicated when special tax benefits are
involved.

It seems disingenuous to assume that investors will do a

lot of things in order to gain somewhat uncertain benefits in the
form of tax reduction that they would not do to win benefits of
exactly calculable amounts through some other system.
The Particular Incentives of the Bill S. 2100
Secretary Weaver has discussed some cost comparison of S. 2100
and other methods of providing incentives to low-income housing.

The

evaluation of the particular incentives under S. 2100 in terms of returns
to the investor requires analysis of the benefits under a variety of
assumed patterns of investing in real estate and a variety of tax
situations of the investor.

The complexities here are so involved that

we hesitate to offer any general conclusions.

Some comments are appro-

priate, however.
The bill provides increasing tax benefits for investors with a
higher portion of the cost of the project covered by equity investment.
The bill defines equity investment as the difference between the total
cost of the project and the face amount of any mortgage insured under
Section 235 of the National Housing Act.

This treats as a

100 percent

equity case a project financed largely by a conventional mortgage.

This

would produce the result, for example, that if the project is financed

- 12 with a 78 percent commercial mortgage then the investment credit in
the first year would be equal to the entire real equity investment
in the project.

After the first year the investor could have gotten

the full amount of his own investment back from the investment credit
alone and in addition would have substantial benefits from the accelerated
depreciation which is offered and from the net return provided in the
bill.

The value of the depreciation deductions alone, in the first

five years of operation for a taxpayer in the 70 percent bracket,
would be equivalent ,to an additional return equal to more than his
initial investment.

Over a twenty year holding period the bill seems to

provide tax benefits in gross amount equal to about the full cost of
the project, even after making allowance for the payment on the mortgage
if we assume that the mortgage is a twenty year - 6 percent loan.

After

the twenty years an investor who had put up a $1 million project and
was in a sufficiently high tax bracket would seem to have made tax
savings of $1 million; and he would be the outright owner of a housing
project which on the basis of experience with real estate values would
still be worth not much less than $1 million, and under the bill he
would be entitled to start taking depreciation on a restored basis of
$780,000.
In different circumstances, where there is no conventional mortgage,
it appears that despite the intentions of the authors of the bill the
rate of return under S. 2100 will not be better for a high equity
investment than it will be for a low equity investment.

This is likely

- 13 In one sense

to be the case if the taxpayer is in a lower bracket.

this is a problem that could possibly be modified by restructuring
the bill.

The apparent objective of making high equity investment

relatively more attractive could be accomplished by either charging a
higher rate on the guaranteed loan or by providing sharper graduation
of the investment credit.

The heavy reliance in the structure of oer.efitf

on rapid depreciation would seem to make the results of the bill
necessarily erratic between taxpayers at high or low marginal tax
rates.
One point to be drawn from this goes back to the point I made
earlier that the use of tax incentive devices makes it extremely difficult
to calculate how much we are paying for an increase in some desired
investment.
Another problem in this portion of the bill has to do with whether
or not we really want a very high equity investment.

In a basic sense

the cost to Government of any system of incentives for low-income housing
will have to be the dif:ler.itnce between what we expect the tenants to pay
in rent and the total return necessary to make the investment attractive
to an investor.

Lenders expect a lower return than equity holders.

90 percent of the initial investment can be accomplished through borrowing
with a return of about 6 percent on that 90 percent, the cost of the total
program to the Government wi 11 b e 1 ess th an l't would be

l'f'

50 percent

or 90 percent of the investment represented equity funds and vlhich 'tlvuld

- 14 require Government contributions large enough to provide a prospective
12 percent to 15 percent

a~ter-tax

rate

return on those equity

~uads.

To accomplish our goals in the low-income housing field as economically
as possible, it would appear that we should rely heavily on the use of
borrowed funds.

The leverage provided by borrowed funds can guarantee

a sufficiently high return on a net equity investment so as to attract
equity investors.

Some advice that we have gathered from people in

the real estate business suggests that increasing available mortgage
mOJey for 10v-inC'o:ne

nOll

in8 would be fully as effective, and cheaper,

than attracting more equity money.
~nt

On this point the Committee will

to get views from people with knowledge of the real estate business.

Since this Committee is particularly concerned with the Governmentfs
administrati ve budget, it should be pointed out tha'-,

'i'lY

program which can

be operated through the private banking system with a loan guarantee will
involve lower administrative budget deficits
Government to provide the loans directly.

th~~

a program which requires

The device of 2 percent interest

in So 2100 will require direct Government financing and mean

substantially

high short-term budget costs for any net incentive provided.
We have some technical problems with the draft of S. 2100 which I
shall not go into, but I shall submit a statement for the record on these
points.
The Tax Law and Real Estate Investment Generally
It is appropriste to add some remarks on the general situation of
investment in real estate including housing under the present tax law.

- 15 Real estate investmel1ts ,jclalify for the

acC'~';_,rar:ecJ '1""y,"~,

methods provided under the 1954 Code revision.
critical consideration at -that time of the
t.bese methods

Thf're'; f3

appropr:ia-;:,e.'~ss

buildings) and indeed it appears ;.,

were adopted entirely

witt~

-:'nvcstment in machiner' ,

-'- .

;:'.ticn
~':C cf

';,

-c:, '';:-

.,... '.l

,~I

mind.
Due in part to the inappropriateness of thE::
a pattern has developed in building investment

a~.

whe.r~'; L

jnvestfTs often hold the property for much lesf' eha'}
during which time the

deprp~iatlon

deduc:tio'l ::'5 ver,-.r

the cash flow, resulting in 1i ttL or no curren

'.!a~=·
..~.

. '.

':,h~

usef'tl"- ::'i fe

U~h

~,'ll('n

;:2,

--~

';", r-~':

base is largely <:>xhRusted} t,he property is sold; and ._ ':;Ilbst,:vc;,' ".

for cuttiPg back on this pattl-'-?rn of realizing UOIT0a: . n est''''.l.
at capital gain rates.

A slight cutback was enac':;;?c

(0.

~~o

in l":.:.ac.; r.ll

r'h,C:

iation

:8pi ta.i..

.~; ~r;:s

Cr'j--:"~::;s

1964.
Another part of the picture of the tax

treatr!c:r~t

,,' real

1·8

tats

investment is that the 7 percent investment credit - o'=s not R.Pf:l,j t:.!
buildings.

In substance we have the result that real estate investment

gets tax encouragements in forms different from tho", a
in machinery and equipment.

r;ff'.:Ycd

iL.c'i S ~~GYS

The Treasury Department .is E:-ngalSPci it:.

research to evaluate the impact of present tax provisions and ')o~;s i.ble
alternatives on real estate investment, and several Giltsid e cGns'J.-!.tants
are involved in the research.

- 16 In conclusion let me repeat my initial comment that S. 2100 raises
important issues.

I have tried to draw attention to several major

aspects, including the technique of casting benefits in the form of
specialized tax reductions and the emphasis on high equity investment.
Both of these aspects have disadvantages of Which the Committee should
be aware.

I believe that these hearings, providing as they do, an

opportunity carefully to consider and weigh as objectively as possible
the varying approaches to an objective Which we all share will prove to
be a very helpful step forward in this area.

000

TREASURY DEPARTMENT
Washington

FOR A.M. RELEASE
SATURDAY, SEPTEMBER 16, 1967
REMARKS OF THE HONORABLE FREDERICK L. DEMING
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
AT THE
GOLDEN ANNIVERSARY BANQUET OF THE LUTHERAN BROTHERHOOD
IN CHICAGO, ILLINOIS
ON FRIDAY, SEPTEMBER 15,1967, AT 7:00 P.M. DST
THE QUEST FOR LIQUIDITY
It is a pleasure to be with you tonight. I propose to
discuss with you some matters that may seem at first glance
a little removed from everyday business life, but which on
further reflection are highly germane and current. They
are as real and close as the businessman's ability to get
a bank loan on reasonable terms, the home buyer's ability
to obtain a mortgage, and the ability of the traveler abroad
to feel confidence that the dollars he spends in other
countries will be welcomed and highly regarded as a sound asset.
Since I divide my time as best I can between domestic and
international financial matters, it is natural, in developing
a theme for these remarks, to seek some unifying thread with
which the different pieces can be sewn together. Looking
back over the past year, I think that thread or theme could
well be "The Quest for Liquidity."
The symmetry isn't perfect. The domestic quest for
liquidity has been particularly evident on the part of private
participants in the financial markets. In the international
sphere, it is more a matter of governments seeking to construct
new and additional types of liquidity. But the two quests
have some common points. Both have been conducted with
determination and both have made progress. And the two are
related to one another. The striving for liquidity in our
own domestic financial markets, and in those of other
countries , is one of the factors that has drawn the world's
financial markets closer together. And, in turn, these closer
relationships -- developing possibilities for quick and large
movements of funds across international borders -- are a
part of the reason for additional international liquidity.
F-I028

- 2 I

DOMESTIC DEVELOPMENTS
Let me turn first to the domestic side. Here, it seems
to me, the present quest for liquidity is to a very considerable extent an outgrowth of the tightened credit market
conditions that developed during 1966. Those conditions
developed as unremitting demands for credit pressed upon
supplies that expanded more and more grudgingly. Indeed, for
a time in the latter part of 1966, supplies did not expand at
all in respect to some major components.
Commercial bank credit, for example, increased by a
seasonally adjusted $14.4 billion in the first half of 1966,
but only $1 billion in the third quarter and $1.5 billion in
the fourth. And looking within the quarters, there was
actually a $2.7 billion decline in bank credit in September
and October of last year. This was bound to cause some bruises
in a financial system accustomed to fairly steady bank credit
growth.
Another case in point is the savings and loan industry -which had become accustomed to annual increases in the volume
of shares of $7 billion to $11 billion in the years 1960 to
1965 -- but had to make do with just $3.6 billion in 1966.
And to say "make do" is something of a euphemism for the
circumstances in which some institutions found themselves, with
heavy lending commitments piled up and share capital flowing
out. In the April-July period of 1966, almost $700 million of
savings flowed rut, and it was necessary to borrow $1. 8
billion, mainly from the Federal Home Loan Banks, in order to
meet outstanding commitments to lend.
Sector by sector throughout the economy, liquidity was
stretched taut as each participantsought to squeeze the last
bit of fat from his cash supply and get by without having to
borrow additional sums which, if they were available at all,
came at the highest interest rates in several decades.
For corporations, a measure of the strain on liquidity
was the drop in their ratio of cash and Government securities
to current liabilities to a level, by late 1966, of only about
26%, down from 29% at the end of 1965, and 33% at the end of
1964. Corporate liquidity ratios have been drifting lower for
some time, as businesses found new ways to economize on holdings of liquid assets; but in the period through mid-1966 it

- 3 -

was possible for corporations in the aggregate to add simultaneously to their loans from banks and to their holdings of bank
deposits. By late 1966, the banks were not able to meet loan
demands, even after heavy liquidations of Government securities
holdings, while the corporations did not have the liquidity to
invest in bank CID's. So the net was drawn tighter and tighter.
The Treasury, too, felt the effects of strained liquidity,
although partly for reasons other than limited credit availability. Our additional problem was a very tight debt limit,
which caused us, last December, to run dawn our cash balance
close to the vanishing point. We usually figure, in our debt
and cash management projections, on an operating balance of
about $4 billion. With average monthly expenditures in the
cash budget running at about $13 billion, that is not really
a very high cash balance. But in the middle of last December
the operating balance was down to a minimal $800 million,
which was just as low as it could be under existing tax and
loan account arrangements.
The accompaniment to strained liquidity in 1966 was a
sharp rise in interest rates, and a particularly steep rate
rise in the shorter maturities that represent more liquid
investments. At least, those are the maturities that one
typically looks to for liquidity, although at times last summer
it appeared that instruments ordinarily endowed with considerable
liquidity came close to finding no market.
Beginning a little less than a year ago, a combination
of events produced a dramatic turn-around in the credit
markets -- reversing some of the forces that had led to
earlier strains, but not erasing the memories of market
participants by any means. The main factors leading to change
included the temporary suspension of the investment tax credit,
reduction and rearrangement of Federal Government demands on
the credit markets (including the temporary suspension of
participating sales), holdbacks in some Government spending
programs, action to restrain the fierce competition for.
consumer savings and a Federal Reserve move toward eas~er
reserve availabiiity. By early 1967, a flattening trend in
the pace of business activity contributed further to the
relaxation of credit Darket pressures, particularly as it was
accompanied by further Federal Reserve action toward ease.
This was accomplished with a combination of open market
operations and reductions in reserve requirements and the
discount rate.

- 4 Interest rates fell quickly under the combined influence
of these forces. Further impetus was provided in January when
the President's fiscal program called for a tax surcharge to
begin around mid-year. By February, interest rates on longterm Treasury bonds had declined 1/2 of 1% from their high
point in August 1966. Long-term corporate issues were down
more than a full percentage point. Long-term tax-exempt
issues dropped almost 7/8 of 1%. Mortgage rates, traditionally sticky at turning points, had continued to edge up
through November 1966, but moved lower in December 1966, and
continued to trend downward through April 1967.
Short-term rates also came down sharply and continued
falling until this past June. Treasury bills and other shortterm Government and Federal agency issues were down by two
full percentage points from the earlier high points.
This heady atmosphere did not last, however, and in seeking
reasons for the upturn in interest rates that has affected
various sectors of the market in the past few months, I believe
that the striving for liquidity must stand as a major factor.
First, let us consider some factors that do not explain the
rate upturn since early this year.
It was not, for example, a result of any renewed clampdown on bank credit or money supply growth. Bank credit,
after expanding hardly at all in the latter half of 1966,
grew at a seasonally adjusted annual rate of some 13% in the
first eight months of 1967. Money supply declined slightly
from June to December 1966, but expanded at a 7.7% annual
rate in the first eight months of this year.
Nor can the behavior of the financial markets in recent
months be explained in terms of heavy credit demands by the
Federal sector. Far from it, the fact is that the Treasury
was actually repaying debt to the private sector rather than
making net demands upon it. In the fiscal year ended last
June 30, total Treasury debt issues outstanding increased
$6.4 billion, but the Government investment accounts increased
their holdings of Treasury debt by $9 billion and the Federal
Reserve's holdings were up by $4.5 billion, so that the private
market's holdings were down by more than $7 billion.
Even after adding in the net effect of Federal agency
securities and participation certificates, there was still a
net decline of more than $6 billion in the private sector's
holdings of Federal credit instruments
In other words,
mstead of making a net credit demand on the markets, the
0

- 5 -

Federal sector made net repayments of earlier borrowings and,
in effect, made more room for private credit demands to be
met.
The net market effect of this paydown was not as great as
the figures might indicate. These should be set off against
the $6 billion paydown to the public in the $5 billion decline
in Treasury balances with commercial banks. But even after
making rough adjustment for this, one comes up with no net
Federal credit demand on the private sector in the fiscal
year that ended last June.
That, however, was "the fiscal year that was." When
we look at the fiscal year that is to be, there is a different
story. But before getting to that, let me go back to the
experience of the last several months for further clues as
to the performance of the credit markets.
If Government credit demands were negligible, or even
negative, and bank credit supplies were expanding rapidly,
where did the market pressure arise? Heavy corporate borrowing is part of the answer. New capital issues by corporations
in the first seven months of 1967 were a record $16.1 billion,
up 27% from the same period of 1966 -- which, itself, had been
a record-breaking year. Market pressure was especially great
in terms of public offering of corporate bonds by nonfinancial
corporations. A total of $9.1 billion was offered in the :irsl
seven months of this year, as compared with the previous
record of $8 billion offered during the whole of 1966.
The heavy pace of corporate borrowing is not easily
explained in terms of corporate new money needs. Plant and
equipment outlays have held about level in the past half-year,
albeit at a high level, while the rate of inventory accumulation has dropped steeply. At the same time, however, there
has apparently been a strong desire on the part of
corporations to repair liquidity that was strained in last
year's tight money market. In the summer of 1966, even the
largest and most credit-worthy business borrowers found their
access to bank loans limited, and this experience is still
having its repercussions. It is inducing corporations to
push ahead with bond issues to meet long-term capital needs,
and perhaps repay some bank loans and open up leeway in
credit lines with banks.

- 6 -

Another sector that has borrowed heavily so far this year
is state and local governments. New tax-exempt issues by
these units were $9.7 billion in the first seven months of
1967, up from $7.6 billion in the same period of 1966. This is
partly a reflection of gradually increasing long-term needs.
But another fac tor was the added borrowing to make up for
delays imposed by last year's unreceptive money markets.
This, too, is, in a sense, a refurbishing of liquidity.
One element adding to the volume of state and local
government offerings in recent months is the sale of industrial
revenue bonds -- bond issues sold on the strength of guaranteed
rentals from particular business firms. Often, these are the
bonds, technically, of small communities whose general obligations would not readily be sold in large volume, but which are
accepted by the market on the strength of a national reputation
of the industrial firm planning to use the facility. While
such arrangements may have played a useful role at times in
aiding economic development in particular areas where this was
needed, it has become more recently simply a device to borrow
more cheaply at the expense of the general taxpayer. It is a
practice that needs to be curbed.
Roundin8 out the picture of credit market demands, mortgage
credit growth appears to have been moderate during the first
half of this year, against past standards. The growth might
have been greater but for the fact that this sector, too, was
a.ffected by the striving for liquidity that I have mentioned.
The notable example here is that of savings and loan assoc.iations.
After their harrowing experience of last year, it was
understandable that they would want to rebuild eroded liquidity
as a first order of business. Accordingly, in the first half
of this year, with an inflow of funds from savers much improved
over last year, and a relatively low level of outstanding
commitments for making new mortgage loans, the associations
repaid an astonishing $2.6 billion of advances to the Federal
Home Loan Banks. This made it possible for the Home Loan Banks
both to payoff $2.2 billion of maturing securities without
replacement and to build up a sizable liquid reserve, largely
invested in Treasury securities. This performance helps
explain the absence of a net credit demand on the private sector
by the Treasury and Government agencies taken together.
No explanation of the market's behavior in the past
several months is complete without mention of the important
role of anticipationsc For markets live on anticipations -and this factor, as much as any other, accounts for the
enormous appeal of restoring liquidity. In large measure,

- 7 -

anticipations about the future credit climate turn on the
question of the Federal Government's budget position -- and
that, in turn, deperids on current tax and spending decisions
that are now being aired and weighed.
From the standpoint of the credit markets, it is clear
that the current fiscal year will not see a repeat of the
last one, in which Federal credit demands on the private
market were negligible -- and, in fact, not even demands at
all but net supplies of credit. This year, in contrast, the
question is rather how great the demands will be -- whether
they will be the manageable demands that would result from
responsible tax action and successful efforts to hold down
and cut back expenditures wherever feasible, or the outsize
credit demands that could emerge otherwise.
In late July, when we announced the terms for the
August Treasury refunding, and a few days before the President's
Tax Message to the Congress, we indicated that the Treasury's
new cash borrowing from the market in the July-December period
would be about $15 billion, together with about $2 billion of
participation certificates. Of that, somewhat over $8 billion
has already been done or announced.
Haw well those estimates stand up will depend on haw
speedily the Congress acts on the current tax proposals, and
00 how close Government expenditures may run to the lower end
of the range outlined by the President. With no tax action
this calendar year, and expenditures in the upper end of the
range, Treasury cash borrowing plus participation sales could
conceivably reach as high as $19 billion in the current halfyear per iod .
Looking at this whole fiscal year, Treasury debt outstanding will have to rise about as much as the administrative
budget is in deficit, since we cannot run down our cash
balance as was done last year. If that deficit was, say,
$14 billion, and that wculd assume prompt and full enactment
of the President's tax pr9Posals and successful efforts to hold
down spending, then the Treasury's debt would have to be up by
about that same amount. After allowing for purchases by the
Government investment accounts and the Federal Reserve, and
also allowing for net market sales of Federal agency issues
and participation certificates, the net Federal sector demand
on the private credit markets could be on the order of $10 or
$12 billion.

- 8 A net demand on that general order would be large, but I
believe it would be manageable in the context of rising total
credit supplies and moderated demands from some other sectors
that have made large net claims on the market recently.
Hopefully, the Congress will respond favorably to the
proposed surcharge and other tax proposals, and expenditures
will be contained so as to keep the Federal demands on the
private markets down to that $10 or $12 billion
range.
Without a surcharge, our credit demands will be
larger -- moderately larger in the current six-month period
and substantially larger by the time we get into 1968.
For the whole fiscal year, the demands on the private
credit markets, with no tax surcharge and less success
in holding back expenditures, could range to $20 billion or
even higher. Again, this is after allowance for purchases
by the Government investment accounts and the Federal
Reserve.
The difference between our net credit demands,
with and without tax action, arises from several factors.
Most immediate is the need for the Treasury to borrow
more if taxes do not bring in additional revenues. In
addition, under the tighter credit conditions that would
emerge, demands on Federal credit agencies, such as the
Federal Home Loan Banks, Federal National Mortgage
Association and Farm Credit Administration, would no
doubt be greater than otherwise -- just as occurred in
the tightened credit markets of 1966. Further, with the
~rkets under greater pressure, we would have to expect
higher levels of interest rates on all our borrowings -- for
new cash and refundings alike.
Pressing a demand as large as $20 billion onto
the private credit markets, I believe, would be far too
much. It could not be accommodated without shouldering
aside other would-be borrowers through a process that
propelled interest rates sharply higher. The market
conditions of a year ago -- when thrift institutions lost
funds heavily to market instruments on which rates could
fluctuate freely -- are not about to be repeated;

- 9 -

but neither is the possibility of repetion so remote
that we can disregard it. And the excessive credit
demands that could arise without a taK surcharge are
just the factor that could bring that possibility about.
In theory, one could imagine a big enough supply of
credit, including bank credit growth, so that any
prospective demand from the Federal sector could be met.
But that is not a realistic exercise. A large rise in
bank credit will be needed even with Federal credit demands
moderated by responsible fiscal action. To expect credit
supplies to rise sufficiently further to accommodate an
oversized Federal cash deficit would merely invite
inflation, building up excess spending power, and
destroying confidence in the stability of the dollar.
Against this background, the current concern about
liquidity in the domestic credit markets should come
as no surprise. Liquidity has been strained, is in
process of being restored, but stands in danger of
coming under greatly renewed strain unless responsible
fiscal and monetary policies are pursued. The challenge
is clear; and while decisions to raise taxes and contain
spending are never easy, the alternatives in this case
are thoroughly unacceptable.

- 10 -

II
INTERNATIONAL INTEREST RATE DEVELOPMENTS
There is some evidence that the industrial world may in
recent years have moved, at least temporarily, to a higher
plateau of long-term interest rates. Yields on long-term
government bonds are higher today than they were four years
ago in every major industrial country of the world
The
increases range from roughly ~ of 1 percent to nearly 2 percent. Yields on prime industrial bonds are also higher in
every major country with the single exception of Italy.
o

This higher level prevails despite the fact that pressures
on recources and on prices are, in most foreign countries, far
less today than they were four years ago. The year 1963 was
a period of general inflationary pressure throughout Western
Europe. Prices were rising and monetary authorities generally
were following restrictive monetary policies in an effort to
contain the inflationary pressure. Today, we have virtual
stagnation in Germany, while growth rates in France and the
Low Countries are well below capacity levels.
Against this background of slowed growth, monetary conditions in Europe have eased considerably. Monetary authorities in Germany and the Netherlands, particularly, are making
a valiant effort to bring interest rates down in order to
stimulate their domestic economies. Money market rates in
Europe generally are below the peak levels reached last fall,
but there has been a decided stickiness in long-term rates
and even some increases, for example, in France and Switzerland.
Rates, generally, have not corne down as quickly and as far as
might have been expected with the drastic reversal of monetary
policy.
Institutional factors may playa part in this stickiness,
but it may be that the major resistance to lower rates comes
from the expectation factor. Europe has experienced a
lengthy period of continuing inflationo This is the first
widespread interruption in Europe's forward surge since 1958.
Prices have been under pressure for most of this periodo The
authorities may have been depending too heavily on restrictive
monetary policy and high interest rates in their efforts to
combat this inflation. As interest rates in the United States

- 11 -

rose and external credit availabilities diminished, these
policies became increasingly stringent. Consequently, even
though the price pressures have receded in 1967 and the
authorities have relaxed their monetary policies, investors
seem reluctant to accept the new situation as lasting. They
are not rushing to place their funds in long-term instruments
before interest rates go down but, on the contrary, they
appear to be holding off.
Despite the increase in U.S. interest rates, the gap
between yields of~ng-term government bonds in the United ~
States and yields in other major countries has increased
moderately over the past four years. It is substantially
wider in the Netherlands and the United Kingdom. There has
been little change in the differential in Belgium, France,
Germany, Sweden and Canada. Only in the case of Italy do we
note a substantial narrowing.
There is growing recognition amongthe Finance Ministers
and the central bank officials of the major countries that
cooperative action must be taken to keep interest rates in
check. Last winter, Secretary Fowler met with his colleagues
from the United Kingdom, Germany, Italy and France at the
country home of the British Prime Minister at Chequers, for
a discussion of a cooperative approach to the problem. The
Ministers agreed that they would all make it their objective
within the limits of their respective responsibilities to
formulate economic policy in such a way as to put less
upward pressure on interest rates in their respective countries.
We are most hopeful that cooperation in this area will continue
and develop over the years to come and that the trend toward
higher rates abroad can be arrested and reversed.
That depends in part upon our own policy mix. Without
adequate use of tax and other fiscal policies to contain
domestic demand, we could be forced to rely unduly on monetary
restraint. Tightness of credit and high interest rates in
our money market and banking system can be quickly translated
into tightening money markets and rising interest rates
abroad. During the 5~ months from the beginning of July last
year, when shortages of liquidity here pushed CD market rates
beyond the regulation Q ceilings, throught the middle of

- 12 December, American banks drew out of the Euro-dollar market
in the form of borrowing from their branches abroad a total
of, roughly, $3 billion. The effects of this on liquidity
abroad, as reflected in prevailing interest rates in the
Euro-dollar market and in the money markets of major
European countr~es, was substantial -- despite a large
offsetting movement of dollar funds out of the reserves of
several European countries into money markets.
Following the reversal of monetary tightness here
during the final months of last year, there was an equally
prompt and quite substantial return flow of such Euro-dollar
funds to foreign markets -- with aggregate liabilities of
U.S. banks to their branches abroad declining, through early
May this year, by, roughly, $1.4 billion below their
December peak.
More recently, however, there has been -as you know -- a noticeable tightening of our markets again,
beginning in the latter part of May. There has again been
an equally noticeable inflow of Euro-dollar funds to U.S.
banks, amounting, from early May through late August, to
something over $1 billion. The Euro-dollar market, as you
know, provides a significant link between the capital
markets of the major industrial countries. That is another
way of saying that it is playing an increasing role in the
area of international liquidity. That is the area to which
I now turn.
III
NEW INTERNATIONAL LIQUIDITY
The quest for new international liquidity perhaps has
as many differences as-similarities to the quest for domestic
liquidity. Certainly, in the area of global international
reserves there has been no "crunch" such as there was in
domestic markets in Germany and the United States in 1966.
Also, as I have noted, it has been national governments
rather than businesses and individuals which have been engaged in seeking new international liquidity. But the fundamental underlying problem is quite similar -- if there is not
enough international liquidity it tends to make those who
seek liquidity uncomfortable -- although in this case it is
governments and central banks rather than businesses and
individuals
Protective measures taken tend to reduce world
0

- 13 trade and capital flows -- and, if there is a real international
liquidity crunch, distortions and stresses appear in the world
economy as well as in domestic economies
0

The problem of international liquidity -- its adequacy
and form -- has been under intensive study and negotiations
for the past four years. Just three weeks ago, in London,
the Ministers and Governors of the Group of Ten agreed on an
Outline Plan "intended to meet the need, as and when it
arises, for a supplement to existing reserve assets." And
just last week the Executive Directors of the International
Monetary Fund approved that same Outline Plan, and recommended
it be put forth for approval by the Governors at the International Monetary Fund Annual Meeting at the end of this month.
The Outline Plan was made public only on Monday of this week.
Now, let me briefly tell you about the problem and the
solution devised to meet it. There ar~ three components of
international reserves -- gold, foreign exchange, and reserve
claims on the IMF. The two major components are gold and
foreign exchange -- the latter being primarily dollars and
pounds held by official monetary authorities.
So far as gold is concerned, the amount available for
monetary reserves is what is left after new gold production
has met the demands for private industrial, artistic, and
professional use. In addition, there is some hoarding of
gold; and there is a speculative demand that fluctuates in
intensity from time to time. The amount of new gold available
for monetary purposes, which averaged $655 million a year
in 1955-59 and $565 million in 1960-64, is likely to be much
smaller in the future, unless there is a reflow of gold from
speculative hoards o During 1965-66, the combined gold reserves
of individual countries and international financial institutions
rose only $170 million.
The other main component in the recent growth in reserves
has been the accumulation of liquid dollar claims on the
United States by other countr~es. This form of reserve
creation has served the world well up to now. But the growing
volume of dollar liabilities places an increasingly heavy
potential strain on the gold reserves of the United Stateso
Moreover, it provides reserves only to other countries, ,and
does not provide any addition to the reserves of the Un~ted
States. While it is recognized that the dollar will continue

- 14 to have an important or even a growing international role, as
a private transactions currency, and through the voluntary
holding of the dollar by foreign central banks, there is
widespread belief that the dollar neither can nor should
contribute as much to international liquidity in the future
as it has in the past.
During the past 16 years, world imports have grown
about three times as fast as global reserves. Imports rose
from $59 billion in 1950 to $192 billion in 1966 -- an annual
increase of 6.9 percent. Reserves increased at an annual average
of $1.4 billion or 2.4 percent. But this figure marks the fact
that U.S. reserves declined in this period. During these 16
years, the fmport trade of the world outside the United States
increased at the very satisfactory rate of about 8 percent per
annum, while reserves rose at the rate of about 5-1/2 percent per
annum.
Even though the reserves of the rest of the world
outside the United States have been growing at what appears
to be a relatively high rate of 5~ percent per annum, the
more rapid growth of imports has meant that reserveson the
average now cover only about four months' imports for the rest
of the world. In the last decade, total reserves of all members of the Fund have slipped from about 56 percent to 36 percent of world importso
There was a substantial slowdown in the growth of reserves
in 1965-66, largely because the United States provided much
smaller amounts of dollars to add to the official reserves of
the rest of the world and because additions to monetary gold
stocks were small. In fact, about two-thirds of the additions
to reserves outside the United States in 1965-66 came from
other and non-traditional sources, largely related to the
balance of payments of the United Kingdom. The United Kingdom
made substantial drawings on the IMF which created for the
time being reserve claims on the Fund for Continental European
countries and some other nations, and the British also converted some $800 million of marketable securities into liquid
reserve assets.
If the supply of new gold going into monetary stocks is
no more than in 1965 and 1966 (or even the amount of earlier
years), and the U.S. brings its balance of payments into
eq~i1:brium -- which is its firm intention as soon as the
Situation in Vietnam makes this feasible -- so that increases
in official dollar liabilities are not forthcoming, then,
obvi01.isly, a new sourc~ of reserves must be sought.

- 15 This is the essence of the problem that faced the
international financial community and has engaged the attention of Treasury and central bank policy makers and
technical experts for some time.
The Ministers and central bank Governors of the Group of Ten
countries in October, 1963, asked their Deputies to "undertake a
thorough examination of the outlook for the functioning of the
international monetary system and of its future needs for liquidity."
During 1963-64, the Deputies of the Group of Ten held a number
of meetings and prepared a Report which was published along with
a Ministerial Statement in August 1964. In this Statement, the
Ministers and Governors agreed to establish a study group to
"examine various proposals regarding the creation of reserve
assets either through the International Monetary Fund or otherwise."
During 1964-65, this study group, under the Chairmanship
of Rinaldo Ossola of Italy, undertook an interim technical
analysis of ways and means of creating reserve assets, which
was made public in August 1965. This study provided an inventory
of several technical methods by which reserves could be created.
In July 1965, Secretary Fowler, in a speech at Hot Springs,
Virginia, stated that the United States was ready to participate
in negotiations of a political nature on reserve creation,
thereby launching the initiative that culminated in the present
agreement.
During the year 1965-66, the Deputies of the Group of Ten
countries again met frequently, exploring national attitudes
toward various proposals for reserve creation in order to
ascertain whether or not there was a basis for agreement on
major points. During this year, the Executive Directors and
Staff of the International Monetary Fund also carried on
constructive studies of the problem.
In July, 1966, the Ministers and Governors of the Group
of Ten reviewed a second Report from their Deputies and
concluded that there was a basis for specific negotiations
on a contingency plan. The Deputies' Report narrowed down the
many possible approaches to this problem and set out some of
the main elements of a plan. The Ministers, also, in September,
1966, instructed their Deputies to undertake a further stage
of negotiations, in which the views of the whole world would
be represented, through a series of Joint Meetings between the
Deputies of the Ten and the Executive Directors of the Fund,
representing the 106 nations who are members of the International
Monetary Fund.

- 16 Four such Joint Meetings of the Deputies and the Executive
Directors were held in 1966-67. Finally, two meetings of the
Ministers and Governors of the Group of Ten, on July 17-18 and
August 26, produced agreement on an Outline Plan which, in early
September, was agreed to by the Executive Directors of the Fund.
These negotiations thus have now brought all the diverse
ideas and points of view into an agreed-upon Outline Plan.
The basic concept embodied in the Plan is quite simple.
The Plan provides for a new internatiorn 1 asset, a Special Drawing
Right -- or SDR -- which will be an effective supplement to
existing reserve assets -- gold, reserve currencies, and reserve
claims on the Fund -- one that will be a permanent addition to
world reserves. The problem of elaborating this simple concept
was partly technical and partly political -- the new asset has
to be endowed with qualities that would make it usable and acceptable.
It not only had to be a high quality asset -- it had to be
regarded as such.
Now, just what kind of asset will these countries have to
supplement their other international reserves? What are
the factors which give it high quality and acceptability?
Each SDR is to be denominated in termsd 0.888671 grains
of fine gold. This is the gold value equivalent of one U. S.
dollar. Thus, each SDR will be equal to the gold value equivalent
of one dollar. Let me be clear that SDR will be gold value
guaranteed, but they will not be redeemable in gold. Further,
I also want it to be clear that it would be against the rules
for a country to use its SDR merely to change the composition
of its reserves. In other words, it would be inappropriate for
any country observing the rules to use its SDR to obtain dollars
and, in turn, use those dollars to buy gold from the United States.
Countries will earn net a modest rate of interest on
holdings in excess of their cumulative allocations.
SDR will have an unimpeachable backing. It will consist
of a firm unequivocal and solemn obligation to accept the
"
,
new asset when it is presented and to pay a country sown
currency, convertible in fact, to the country tendering the
SDR. That obligation is the fundamental backing of the asset
and is the principal factor which will give it value as an asset.
The obligation is qualified as to amount, but the limits are

- 17 large enough so that there can be no doubt about the usability
of SDR to obtain convertible currencies. Each participant will
be obligated to accept SDR up to an amount equal to its cumulative
allocations plus two times its cumulative allocations. This
obligation makes unnecessary and takes the place of the pool of
currency used to back present IMF drawing rights. This acceptance
obligation is a central operating feature of the Plan.
I want to make one point very clear. I have called these
acceptance obligations "obligations," and they are exactly that
from two points of view. That is, (a) they are obligations to
provide backing for the SDR, and (b) they are limited so that
each country knows what its maximum constitutional obligation is.
But I want to stress still a third viewpoint.
These new assets, as I have indicated, are high quality
assets designed to supplement existing reserve assets. Countries
that get SDR from other countries -- over and above their regular
allocations -- normally will be surplus countries and, thus,
countries gaining reserves. Some of their reserve gains will be
in the form of the new asset -- which will be usable, as are its
other reserves, when it needs to use them. Thus, accepting the
new asset is no more of a burden than accepting gold or foreign
exchange or reserve claims on the Fund. In this sense, the
acceptance obligation is misnamed and, because of this fact,
the acceptance limit of three times allocations is not a fixed
limit. Countries, if they wish, can accept and hold more than
their acceptance limits -- the limits merely state their obligations
to accept.
Why, then, are any limits set for acceptance? There are
none for holdings of gold and dollars. The answer is a simple
one. In the initial periods, while the world gets used to these
new assets, it was judged to be the conservative course to say
that no country need take more than a proportion of the new
assets. Their quality is good, but they are new and people
proceed with more caution with a new asset. I suspect that, in
time, the concept of acceptance limits will be dropped.
I have already made the point that snR are usable to obtain
convertible currencies, mainly dollars. This is essentially how
countries use gold. They use gold to buy convertible currencies,
mainly dollars. Because SnR are new and do not have a tradition
of use as a monetary asset, as do gold and dollars, a few basic
principles to guide their transfer have been provided. They are:

- 18 1.

Countries will be expected to use SDR only for
balance of payments needs or to protect their
reserve position. A country's judgment as to its
eligibility to use may not be challenged.
This expectation simply expresses existing
practice, under which present reserve assets
are used almost exclusively for balance of
payments needs or to protect reserve positions.
It will help to assure an orderly flow of SDR
and avoid instability resulting from shifts in
the composition of reserves.

I have already mentioned that, normally, countries
in strong balance of payments and reserve positions
will be eligible to receive SDR. It is only
natural that countries in this situation should
receive SDR, since they would be the ones which
would be gaining reserves because of their balance
of payments positions. Transfers of SDR could also
go to countries in a strong reserve position even
though they have moderate balance of payments
deficits. Among the countries eligible to receive
SDR, the Fund will try to maintain equality, over
time, in the ratios of their holdings of SDR to
their total reserves or in the corresponding
ratios to total reserves of their holdings in
excess of their allocations. The purpose of
this rule is to achieve a generally fair
distribution of the SDR among the countries that
meet the standards entitling them to receive SDR.

The third principle of use concerns what is known
as reconstitution. I would expect that a very
considerable amount of use of SDR will be reconstituted
through the normal processes of balance of payments
adjustment. Countries that are in deficit and that
use the asset will switch to a surplus position and
will become eligible to receive transfers of SDR.
It is, of course, natural for countries that lose
reserves when in deficit to try to regainfuem when
in surplus. While all countries agreed that some
reconstitution provisions were necessary, it was
important to avoid a compromise of the quality of
the asset as a supplement to gold and dollars. The
rules on reconstitution that were adopted assure that
the asset will not be abused, yet do not interfere
with its reserve asset status.

- 19 -

First, a general obligation to reconstitute , related
to time and amount of use, is set down. It was
agreed that it was not possible to lay down reconstitution
rules for all time, as they would have to be adjusted
as experience is gained and, perhaps, in time dispensed
with.
Rules were made for the first five years of creation
of SDR. The rules will be reviewed before the end
of this and each subsequent basic period. During
this initial period, a country's average net use of
allocations of SDR, calculated on the basis of the
preceding five years, "shall not exceed 70 percent of
its average net cumulative allocation during this
period ~t If any country exceeds this rate of use, the
Fund would direct part of the natural flow of SDR
to it, in order to maintain this standard. The term
reconstitution aptly describes the substantive
intention. A country "reconstitutes" its reserve
position in SDR by purchasing SDR from other countries.
It should be clearly understood that there is no
bar to the use of 100 percent of allocations of SDR;
a reconstitution obligation is incurred only with
respect to average use above 70 percent. In addition
to the net average use rule, it is also provided that
"Participants will pay due regard to the desirability
of pursuing, over time, a balanced relationship between
their holdings of Special Drawing Rights and other
reserves." A rigid application of such a relationship
is not called for; this provision is intended, rather,
to draw attention to the idea of a balance in the
holdings of assets over time and, thus, maintain
stability, in a general way, over time, in relative
holdings of the new asset and existing reserve assets.
In implementing the basic principles of use, the Fund will
act as a kind of traffic director, making known to eligible
users which countries are the eligible receivers of transfers
and assuring that the flow to receivers is distributed in an
equitable manner. It may provide that using and receiving countries
may deal directly with each other in arranging transfers, and
it may act as an intermediary to bring eligible users and
receivers together. The Fund will also have the obligation to

- 20 direct the flow of SDR to countries that have become eligible
receivers because they have incurred a reconstitution obligation
and to promote voluntary reconstitution transactions between
countries.
The Outline Plan represents, in a sense, a natural buildmg upon the foundation begun 22 years ago ~t Bretton Woods.
But, in a wider sense, it should be regarded as far more than
a mere evolutionary step in the development of the IMF. After
two years of intensive study by the major financial powers
and two years of intensive negotiation on a worldwide scale,
it really represents a major breakthrough in international
monetary arrangements. It gives reasonable insurance that
there can be orderly and adequate growth of monetary reserves
in the future -- under a collective and responsible process
of international dec is ion. By so doing, it should guard
against restrictionism in world trade and slowdown in
world economic growth.

000

TREASURY DEPARTMENT
(

FOR IMMEDIATE RELEASE

The Joint Commission on the Coinage will hold its next
meeting on Monday, September 18, at 10:00 a.m. in room 4121
of the Main Treasury Building, Washington.
The purpose of the meeting will be to review the
coinage and silver situation two months after the July 14
action ending sales of silver at $1.29 an ounce.

This will

include a review of coinage production, inventories of coins
and silver, silver prices, silver sales and the redemption
and retirement of silver certificates.
This will be the Commission's third meeting since its
creation under the Coinage Act of 1965.

Its 24 members

include 12 from the Congress, four from the Executive
Branch, and eight public members.

Secretary of the

Treasury Henry H. Fowler is Chairman.

000

F-1029

TREASURY DEPARTMENT
s

(

jR RELEASE 6 :30 P.M.
mday, september 18 J 1967.

RESULTS OF TREASURY' S

L~Y

BILL OFFERING

The Treasury Department announced that the tenders for t .....o series of Trea.sury
11s, one series to be an additional issue of the bills dated June 22, 1967, and the
iher series to be dated September 21, 1967, which were offered on September 13, 1967,
Ire opened at the Federal Reserve Banks today. Tenders were invited for $1,400,000,000,
,thereabouts, of 91-day bills and for $1,000,000,000, or thereabouts, of 182-day
lls. The details of the two series are as follows:
JlUE uF ACCEPTED
~iPETITIVi

BIDS:

High
Low
Average

91-day Treasury bills
maturing December 21J 1961
Approx. Equiv.
Price
Annual Rate
98.875 y'
4.451%
98.856
4.526%
98.865
4.49Cffo 1/

···

··
·
·

182-day Treasury bills
maturing !fill.rch 21, 1968
Approx. Equiv.
Price
Annual P.ate
97.490
4.965%
5.02Qb
97.462
4.99~
97.473
Y

y Excepting 2 tenders totaling $499,000
12% of the amount of 91-day bills bid for at the low price was accepted
76% of the amount of 182-day bills bid for at the low price was accepted
~..):sFtVE

rilL TENDERS APPLIED FOR AND ACCEPTED BY F£D:2;P..AL

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

A:e,elied For
$ 25,599,000
1,316,228,000
16,627,000
37,385,000
6,249,000
39,721,000
173,448,000
32,727,000
17,178,000
13,679,000
20,812,000
110.425.000

Acce:eted
$
4,599,000
686,948,000
8,423,000
32,385,000
6,249,000
31,521,000
101,968,000
26,607,000
11,078,000
13,679,000
13,812,000
62.745.000

BI $1,810,078,000

$1,000,014,000

Acce,eted
A,eElied For
$ 23,538,000 $ 13,538,000
899,496,000
1,392,096,000
18,148,000
30,148,000
28,127,000
28,127,000
20,469,000
20,469,000
50,273,000
51,273,000
134,058,0(:0
183,536,000
54,518,000
57,518,000
20,290,000 :
25,466,000
28,077,000
28,077,000
24,253,000
18,25.3,000
139,760 2 000 ~4.760.000

TOTAlS $2,004,261,000 $1,400,007,000

DISTRICTS:

·
·
·

·
·

£I

Includes $260 007 OOOnoncompetitive tenders accepted at the average pr~ce of 98.865
Includes $142: 2.34: 000 noncompetitive tenders accepted at the, avera~e prlc~ of 97.473
These rates are on a bank discount basis. The equivalent coupon lssue Ylelds are
4.62% for the 91-day bills, and 5.21% for the 182-day bills.
P-I030

TREASURY DEPARTMENT

September 18, 1967
FOR IMMEDIATE RELEASE

TO WASHINGTON PRESS ONLY
The Joint Commission on the Coinage,meeting today
at the Main Treasury Building, Washington, D. C.,
reviewed the coinage and silver situation as it stands
two months after the July 14 action ending sales of
silver at $1.29 an ounce.

This included a review of

coinage production, inventories of coins and silver,
silver prices, silver sales and the redemption and
retirement of silver certificates.
This was the Commission's third meeting since its
creation under the Coinage Act of 1965.

Its 24 members

include 12 from the Congress, four from the Executive
Branch, and eight public members.

Secretary of the

Treasury Henry H. Fowler is Chairman.
The next meeting will be January 15, 1968.

000

F-I031

TREASURY CEPARTMENT

fl}R IMMEDIATE RELEASE

TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$2,400,000,000 , or thereabouts, for cash and in exchange for
Treasury bills maturing September 28, 1967, in the amount of
$2,300,608,000, as follows:
9~day bills (to maturity date) to be issued
in the amount of $1 1 400,000,000, or thereabouts,
additional amount or bills dated June 29, 1967
mature December 28, 1967,originally issued in the
$1,000,439,000,the additional and original bills
interchangeable.

September 28, 1967,
representing an
and to
amount of
to be freely

182-day bills, for $1,000,000,000, or thereabouts, to be dated
;eptember 28, 1967,and to mature March 28, 1968.
The bills of both series will be issued on a discount basis under
and noncompetitive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
dll be issued in bearer form only, and in denominations of $1,000,
~5,OOO, $10,000, $50,000,
$100,000, $500,000 and $1,000,000
(maturi ty value).
co~etitive

Tenders will be received at Federal Reserve Banks and Branches
Eastern Daylight Saving
Gime, Monday, September 25, 1967.
Tenders will not be
~ecelved at the Treasury De~artment, Washington.
Each tender must
)e for an even multiple of $1,000, and in the case of competitive
:enders the price offered must be expressed on the basis of 100,
fithnot more than three decimals, e. g., 99.925. Fractions may not
)e used. It is urged that tenders be made on the printed forms and
'orwarded in the spec ial enve lopes whic h will be supplied by Federal
~eserve Banks or Branches on application therefor.
lP to the closing hour, one-thirty p.m.,

Banking institutions generally may submit tenders for account of
:ustomers provided the names of the customers are set forth in such
:enders. Others than banking institutions will not be permitted to
iubmlt tenders except for their own account. Tenders will be received
rlthout deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders
rom others must be accompanied by payment of 2 percent of the face
mount of Treasury bills applied for, unless the tenders are
ccompanied by an express guaranty of payment by an incorporated bank
r trust company.

F-1032

- 2 Immediately after the closing hour, tenders will be opened at thl
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasur
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on September 28, 1967,
cash or other immediately available funds or in a like face amount
of Treasury bills maturing September 28, 196~ Cash and exchange tende
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereundel
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and thi
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained f
any Federal Reserve Bank or Branch.
000

TREASURY

r~':PARTMENT

September 20,

JR IMMEDIATE RELEASE

TREASURY'S MONTHLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
rtwoseries of Treasury bills to the aggregate amount of
,500,000,000, or thereabouts, for cash and in exchange for
easury bills maturing September 30,1967, in the amount of
,400,163,000, as follows:
272-day bills (to maturity date) to be issued
the amount of $ 500,000,000,
or thereabouts,
'lt1onal amount of bills dated June 30, 1967,
ture June 30,1968,
originally issued in the
1,000,547,000,the additional and original bills
terchangeable.

October 2, 1967,
representing an
and to
amount of
to be freely

366-day bills, for $1,000,000,000, or thereabouts, to be dated
,tember 30,1967, and to mature September 30, 1968.
The bills of both series will be issued on a discount basis under
and noncompetitive bidding as hereinafter provided, and at
;urlty their face amount will be payable without interest. They
.1 be issued in bearer form only, and in denominations of $1,000,
000, $10,000, $50,000,
$100,000, $500,000 and $1,000,000
lturlty value) .
~etitive

Tenders will be received at Federal Reserve Banks and Branches
to the closing hour, one-thirty p.m., Eastern Daylight Saving
.e, Tuesday, September 26,1967.
Tenders will not be
e1ved at the Treasury De~artment, Washington. Each tender must
for an even multiple of $1,000, and in the case of competitive
ders the price offered must be expressed on the basis of 100,
h not more than three decimals, e. g., 99.925. Fractions may not be used.
twithstanding the fact that the one-year bills will run for 366 days,
.discount rate will be computed on a bank discount basis of 360 days,
18 currently the practice on all issues of Treasury bills.)
It is
ad that tenders be made on the printed forms and forwarded in the
~ial envelopes which will be supplied by Federal Reserve Banks or
.}ches on application therefor.
Banking institutions generally may submit tenders for account of
;omers provided the names of the customers are set forth in such
lers. Others than banking institutions will not be permitted to
lit tenders except for their own account. Tenders will be received
lout deposit from incorporated banks and trust companies and from
/Onsible and recognized dealers in investment securities. Tenders
F-I033

- 2 from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
. range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on October 2,1967, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing September 30,1967. Cash and exchange tendel::
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained ft
any Federal Reserve Bank or Branch.

TREASURY DEPARTMENT
Washington

FOR RELEASE ON DELIVERY
REMARKS OF THE HONORABLE JOSEPH W. BARR
UNDER SECRETARY OF THE TREASURY
TO THE NATIONAL CONFERENCE OF FARM CREDIT DIRECTORS
AT THE ST. ANTHONY HOTEL, SAN ANTONIO, TEXAS
THURSDAY, SEPTEMBER 21, 1967, 12:00 NOON
ON
CURRENT ECONOMIC HAPPENINGS
It is a great pleasure indeed to meet with you today
and share with you some of our thoughts about the economic
and financial climate of recent past, present, and immediate
future.

Climate and weather have always been matters of

priority concern to the farming sector of the economy, but
I suspect that during the past year or so there has been
a rising concern with the economic weather and financial
climate that has been of enormous importance, too.
Even such a trying period as this past year or so has
its fringe benefits, though, and one of them for us at the
Treasury, and for me personally, is the closer contact into
which we have necessarily been drawn with the different
Federal credit agencies.

I can think of none more rewarding

than our relationship with the Federal Farm Credit institutions l
and your distinguished Governor, Bob Tootell -- not because
we always agreed at the outset on every point that came up,
but because we could constructively work out programs and
solutions to problems that have affected us all.

Speaking just

- 2 for my own part, this has been very educational and
satisfying.
We have come through a period in which not all the
demands on the real and financial resources of the economy
could be satisfied in full or all at once.
better than others.

Some sectors fared

We hear a lot about "happenings" these

days, but it is worth stopping to think now and then about
some potential "happenings" that did not happen.
What might have happened in the very tight financial
markets of a year ago is that credit-worthy borrowers would
have been unable to find investors willing to finance them,
at virtually any price.

That did not happen.

How close we

may have come to such a panicky state of affairs we may never
know.

But there were days in that period some 12 to 14 months

ago when we could just not be sure.

Some major sectors

of the financial market did come pretty near a standstill
at times, unable to put buyers and sellers together.

But

there was no general panic.
That doesn't mean that we regarded last year's financial
developments as wholly satisfactory.

They were not.

Credit

restraint was highly uneven in its impact, taking a disproportionate toll particularly on the mortgage market and

- 3 homebuilding.

And interest rates were competed up to levels

that were distressingly high.
A major factor in the credit markets then was the
insatiable appetite of business for credit to finance a
rapid accumulation of inventories, especially for defense
production, and rapid increase in fixed investment outlays
for plant and equipment.

Corporate demands on the capital

market were of record proportions, and business borrowing
from banks was proceeding very rapidly until the latter
months of the year when the restraint on bank lending took
a very tight grip.
State and local governments were also borrowing record
amounts, although the rapid climb in interest rates was a
discouraging factor to some of these borrowing units.
The Federal sector was also a net borrower last year,
although its net demands on the credit market were not as
great as what we seemed to be blamed for.

If you add together,

for calendar year 1966, the entire net increase in securities
issued by the Treasury, the Federal agencies, and put in
participation issues as well, but then subtract out the
net takings by the Government investment accounts and the
Federal Reserve, you arrive at a net credit demand by the
Federal sector of just over $3 billion.

- 4 In a market where total flows of credit run on the
order of $70 billion a year, this $3 billion net demand need
not have been an excessive demand.

If it seemed big it

was partly because other demands were also strong, because
it was higher than the Federal sector's demand of the
previous year

which netted approximately to zero

and because some of it took a form which the market was
less readily able to accommodate.
In particular, there had been a big bulge in sales of
Federal agency securities and participation sales through
the Federal National Mjrtgage Association and the Export-Import
Bank.

A great deal of this bulge in sales of agency issues

and participation issues came in the spring of 1966, a period
that saw the typical 1/4% spread between rates on Treasury and
Federal agency securities widen out to 1/2% or even 3/4% for
a brief time.
All of the Federal credit agencies made increased demands
on the credit markets last year -- very substantially in the
case of the home mortgage oriented agencies (the Home Lc)an
Banks and the FNMA secondary mortgage market operation) and
more moderately in the case of the farm credit agencies.

This

difference was understandable in view of the extraordinary
drought in other sources of home mortgage credit.

Even after

using the Home Loan Banks and FNMA as major buffer, the flow

- 5 of mortgage credit was so restricted that the rate of new
housing starts dropped more than one-third from late 1965 to
late 1966.
To some extent, but less than in the case of mortgage
credit, there were extra demands on the resources of the
Federal farm credit agencies, too, and that probably underlay
the somewhat greater demands of those agencies on the credit
markets.

In calendar year 1966, the increase in farm credit

agency securities was about $1/2 billion more than in 1965,
while for the housing agencies the increase in their net
demands was nearly $2-1/2 billion.
The credit impasse that developed a year ago was dealt
with in a number of ways, and it would be impossible to say
which policy or event turned the trick

but in combination

there emerged a much improved set of credit market conditions
going into 1967.

These were the major elements:

Congress suspended the investment credit and
accelerated depreciation provisions that were
adding unnecessary and temporarily undesirable
stimulus to a sector of the economy -- business
investment spending-- that was becoming over-extended.
Congress passed a law, just one year age today,
giving financial regulatory agencies more authority,
and more flexible authority, to put maximum interest
rates on consumer savings accounts.

By itself, that

couldn't cut market interest rates, but it has

- 6 helped to keep banks and thrift institutions from
bidding against each other for a limited total
supply of consumer savings.
The Federal Reserve urged commercial banks, about
a year ago, to slow down in making business loans.
Later, along about October and November 1966, a
general shift toward ease in Federal Reserve
monetary policy began to take effect, against a
backdrop of slower expansion of business activity.
The Administration took steps to relieve Federal
credit demands on the markets, by seeking to hold
down spending and lending activities, and then
seeking to arrange necessary Treasury and agency
borrowing in ways that the market could most
readily accommodate.
Part of that latter program of restraint on borrowing and
lending is no doubt familiar to you.

All Federal lending agencies

were urged to make only the most essential, nonpostponable loans.
And in marketing new issues for the credit agencies, an effort
was made to raise part or all of the new money portions by
selling securities to the Government trust funds or other
GJvernment investment accounts.

In a related step, sales

of participation certificates were put off for several
months, pending the arrival of more favorable market
conditions.

- 7 -

No one can measure these things precisely, but it is our
conviction that these restraint programs did have a noticeable
and on the whole beneficial effect.

Part of the beneficial

effect derived from a slowdown in the rate of lending.

It may

be significant that the increase in Farm Credit Administration
issues outstanding was some $250 million less in the first half
of 1967 than in the comparable period a year earlier.

At more than

$700 million, it was still a good-sized expansion, enabling the
Farm Credit banks to contLl.ue channelling funds to meet essential
needs.
F,r a while, with the help of all these steps just mentioned,
things went "swimmingly" in the credit markets.

The President's

proposal, first announced last January, of a tax surcharge to take
effect later in the year, added impetus to the improvement in the
credit markets.

Interest rates fell dramatically and flows of

funds improved.

To cite just one instance, the highest rate paid on

a F2deral agency issue last year was the 6-/4% paid on Banks for
Cooperatives 6-month debentures, issued last October.

When it came

time to refund that issue, in April of 1967, the rate was just

4.30% -- a drop of nearly 2 full percentage points.

Longer term

rates also declined, typically by 1/2 to 1%, affecting corporate,
municipal, and Federal Government securities pretty much alike.
Even mortgage rates, typically laggard, began to turn down a bit
by the end of 1966.

- 8 With this dramatic change for the better, some of the earlier
constraints were relaxed.

Federal lending programs were able

to shed some of their tight restrictions by January 1967.

There

was also an easing back in the policy of taking agency issues
into the Government investment accounts.
were resumed.

Participation sales

And the investment tax credit was restored, as

it became apparent that because of the earlier suspension and of
other factors tending to slow the pace of business expansion,
this temporary suspension was no longer needed.
The improvement in financial markets which swept through
the first several months of this year did not last, however, and
its failure to endure longer points out the policy issues facing
the economy today.

At first blush there would seem to have been

every reason for the relaxation of money market pressures to have
continued as 1967 progressed.

Business activity tended to level

off while credit and money supply expanded.
Gross National Product, in real terms, after adjustment
for price factors, actually declined very slightly in
the first quarter of this year, and in the second
quarter, GNP increased only at a lackluster 2.4%
annual rate.
Industrial production edged off by 2.2% from
December through June.

- 9 Unemployment increased slightly, although it did
not climb above 4% of the labor force and actually
rose less than might have been expected alongside
the flattening trend in manufacturing activity.
As for the financial side, money supply has grown
at 7.7% annual rate so far this year, compared
with 2.2% in all of 1966.
And commercial bank credit has increased at a 13%
annual rate through August, against a rise of 6%
in the whole of 1966.
Together, these factors should have produced continued
credit easing and further rate reductions.

Instead, rates

began to level out by mid-winter and turn up in the spring,
so that long-term rates have now come back to, or even a little
above in some cases, the high levels of a year ago.
The key to the puzzle, I think, is that the flattening
out of business activity in the early months of this year was
not a sign of weakness, but just a phase of consolidation.
Inventories had been accumulating too rapidly and reached too
high a level by late 1966.
back.

The accumulation rate had to be cut

That is what produced the two quarters of relatively

little change in GNP in the first half of this year.

If you

look at just the "final sales" component of GNP -- thus leaving

- 10 out additions to inventory, the gains in the annual rate of
production for final use in the first two quarters of this
year were each at a substantial $15 billion rate.
Businessmen, perhaps realizing better than some others
among us the temporary nature of any hesitation in aggregate
production statistics from a cause of this sort, stayed right
in the market and borrowed.

Perhaps they remembered, too,

how hard it was to get hold of money when they really needed
it badly last year.

Thus even though inventory growth

slowed markedly and plant and equipment spending levelled off,
corporations have been borrowing record amounts in the
capital markets this year.

Through August, they have

borrowed some $16 billion, 27% ahead of the same months
a year ago and nearly equal to the amount taken during all
of 1966 -- which had been until now the record year for
corporate borrowing in the market.
A further concern haunting the corporate treasurer
was the thought that an awfully big Federal Government
deficit and credit demand might lie ahead, and that
it might be well to get in line early before the well
threatened to go dry again.

- 11 A similar concern, plus a large current need for

funds, may underlie the heavy pace of borrowing by state
and local governments this year.

Last year's record

borrowing by these governmental units is well on its way
to being far surpassed in 1967.

In the first 8 months alone,

borrowing by these government units is running 27% ahead of
a year ago -- the same wide margin of extra demands as with
corporate borrowers.
Time will tell the full extent to which those appraisals
of the current business pattern may be right -- which would
place the first half of 1967 as a mere hesitation and regathering of strength.

But the evidence of the last month

or two is certainly more consistent with that view than with
interpretations that cast doubt on the underlying strength
of business.

The evidence generally confirms that the

earlier hesitation was due to a let-up in inventory building,
and that source of weakening has now just about run its
course, while final demand has in the aggregate been rising
quite steadily.

Consider these recent facts:

Manufacturing inventories, after climbing by steadily
smaller amounts in the earlier months this year, and
then actually declining as noted by 2.2% from last

- 12 December through June of this year, turned around
and in July and August recovered nearly three-fourths
of the earlier decline.
Retail sales have been in a vigorous rise from
February through August of this year, increasing
6% over those months.

July and August retail sales

weighed in at levels 5 to 6% ahead of the year ago
levels.

Some of this rise, unfortunately, represents

price increases but the evidence of real buying power
and willingness to exercise it is there to an
increasing degree.
The employment picture has also strengthened noticeably
in the last couple of months, without ever having
weakened significantly in the period of hesitation
earlier this year.

The unemployment rate most recently

edged back down to 3.8% after creeping up to 4% in
June.
Business optimism is strengthening.

Plant and

equipment spending, after levelling out in the first
half of 1967 in the wake of very large increases
for several years, seems ready to pick up with

- 13 an increase again in 1968 according to one early
survey recently reported.
Housing starts have been recovering solidly from
the depressed levels of late 1966, aided both by
good underlying demand and much improved mortgage
credit availability.

Whether mortgage credit

availability can hold out is a constant threat
to this area, however.
That brings us around again, quite naturally, to
looking at Federal Government demands in the current
period -- demands on the real and financial resources of
the economy.

Inevitably, while we are engaged in Vietnam

those demands are going to be extra large.

They are large

anyway, even apart from Vietnam, but the non-Vietnam portion,
while large, has grown about in line with our large and
growing economy.

That doesn't mean the non-Vietnam

component of Federal expenditures should be immune from
consideration when we look for ways to hold the budget
Within bounds.

But it does mean that we need to keep

a sense of perspective about us in trying to reach rational
decisions about priorities and national goals.

- 14 Unquestionably, we can't proceed as fast as some of us
would like on desirable domestic programs.

But whether it

makes sense to throw long-range programs into an abrupt
reverse, and let urgent domestic problem areas mount, just
so that we can fight a war in southeast Asia without raising
taxes and asking some additional sacrifice from a prosperous
America, is something else again.

The fighting in Vietnam

does not touch the majority of us directly, yet the
possible consequences of that struggle can touch each of us,
and future generations of Americans, very deeply and closely
indeed.

So can the consequences of being forced into

excessively drastic cuts in domestic programs.

That can have

a direct observable cost in terms of unrest in our society,
and perhaps mer e insidious, a hidden cost in terms of
unfulfilled potential -- a falling short from the goals that
are within our capabilities.
The problem of setting priorities and making painful
choices among desirable alternatives is not, I know, entirely
unfamiliar to you.

In setting firm guidelines for Farm Credit

borrowings a year ago, that is more or less the same kind of
challenge that was faced, and met, by postponing, reducing,
and doing without wherever it could be accomplished without
serious damage to the broad objectives of financing needed

- 15 agricultural production.

Those decisions did not come

easily but they had to be made, and were made.

We face now,

with the Federal budget, the same kind of need for stringent
control, to hold down the deficit and our demands on the
credit markets.
~ben

he sent up his tax recommendations on August 3,

the President estimated that a 10% income tax surcharge taking
effect July 1 and October 1, respectively, for corporations and
individuals, in combination with certain other tax measures,
would raise $7.4 billion in additional revenues in the current
fiscal year.

Given those added revenues, and given also a

tight hold-down of expenditures which would involve some cuts
in on-going civilian programs and savings in the defense budget
to offset a possible addition of up to $4 billion because of
Vietnam, the administratives budget deficit could be held
to a $14-18 billion range.

Without the tax proposzls, with

less success in restraining civilian expenditures, and with
defense expenditures rising by $4 billion, that deficit could
soar to $29 billion.
That $29 billion deficit is not an acceptable figure.

By that I mean that our economy cannot tolerate it without
bringing into play such undesirable consequences as to far
over-shadow our natural reluctance and lack of enthusiasm about

- 16 paying higher taxes.
inflationary push.

One consequence would be a strong
Upward price pressures, which were

happily absent from 1961 to mid-1965, have been asserting
themselves more actively in recent months.

Prices certainly

stand a far better chance of returning toward stability if
net Federal demands on the economy can be restrained.
Interest rates and credit market conditions represent
another area that cannot readily withstand the punishment that
a huge Federal deficit could inflict, at a time when private
credit demands are also running strong.

We spoke earlier about

the net credit demands of the Federal sector on the private
credit markets, after taking account not only of Treasury
borrowing but also of participation sales and net Federal
agency borrowing, and then subtracting out the net purchases
of these obligations by the Government investment accounts and
the Federal Reserve.

In calendar year 1966, that net demand

worked out to be just over $3 billion.
In fiscal year 1967, the l2-month period ended last
June 30, the net Federal credit "demand" on this basis turned
out, surprisingly, not to be a demand at all but a net supply
to the market of more than $6 billion.

This reflected

exceptionally heavy repayments of advances to the Federal
Home Loan Banks in January-June 1967, letting them payoff

- 17 some of their heavy earlier borrowings from the market.

also reflected an unusually low Treasury cash balance at
the end of last June, and if proper allowance is made for
that it may be fairer to describe the Federal sector's
net credit demand for the fiscal year at approximately a zero
level, rather than speak of it as a big net supplier.

But

still, that was long way from making net credit demands on a
heavily burdened set of financial markets.
Now contrast that near-neutral position for fiscal year
1967 with the prospect for the current fiscal year.

Assuming

the tax increase as requested by the President, and assuming
sufficient restraint on spending to keep the administrative
budget deficit in the lower end of the $14-18 billion range,
the Federal sector's net credit demand would be on the order
of $10-12 billion.

That assumes a $14 billion increase in

Treasury debt, a $7 billion increase in agency debt and
participation certificates, and sufficient takings by the
Federal Reserve and Government investment accounts to pull
the net rise down from $21 billion to the $10 or 12 billion range.
That $10 or 12 billion demand is substantial -- well
above the experience of recent years -- but it should be
Possible for the credit markets to handle it, given a

- 18 -

reasonably accommodative monetary and credit policy.

With

good support from bank credit growth, these Federal sector
demands would be part of a large total flow of credit that
could be provided for.

It would be rash to predict substantial

interest declines in those circumstances, because demands
would still be large, but there might well be some room
for improvement in the credit markets and there would be little
reason to expect much upward pressure on rates.
The picture is quite different if we consider how the
credit demands might look in the absence of responsible action
to raise taxes and hold down expenditures.

In that case,

instead of a net Federal credit demand of $10-12 billion we
would be facing a net demand on the order of $20 billion or
more -- and that is an amount, as best as we can judge, that
is far in excess of what the credit markets can handle.
It just isn't reasonable to expect that in the absence of a
tax rise and spending restraint, bank credit would go up by
an additional $8 billion or more just to
additional borrowing.

accomm~date

our

On the contrary, one would have to

expect in that inflationary environment that the banking
syste~ wo~ld

be provided with less rather than mJre reserves,

so that the credit markets would be hit frum two sides -- by
big.ger Federal deTnands and by smaller available supplies.

- 19 How the credit maJ·kets ':fI7ould go ahout parcelling out
a smaller 8upply of funds to a l:)nger list o£ ?rospective
borrowers ca':lnot be precisely foret:)ld ill ad\Tance.

But it is

safe to predict that the process would be disagreeable, with
many borrowers unable to get credit at all and with borrowers
who did get funds having to pay much higher rates.
The Federal Government would get its money.

So would

Federal agencies, with perhaps some rearrangements of Federal
demands as was done a year ago.

Big businesses would be

likely to get their funds, too.

Filling the needs of other

borrowers might be more uncertain.

Smaller businesses, farmers,

local governrnents,and most of all housing credit, would have to
be shouldered aside to whatever degree was needed to balance
supplies and demands in the credit markets.

In the process,

interest rates would be bid severely higher.
No one can say how high interest rates might go under
those conditions of an outsized Federal deficit.

Looking at

other countries around the world, one can find rates in other
developed countries at least a full I per cent higher than
ours -- but that could be just a starter.

We can be pretty

confident that there would be severe market pressure, but just
where that would take us in terms of rate changes and distorted
flows of credit is sheer conjecture.

- 20A most important fact about our present and prospective
economic and financial environment is that, as a nation,
we can to a large extent shape that environment as we will.
We have the natural and human resources, and productive
capability -- not to do everything we might like all at once,
but to do a very great deal, and to be able to choose among
some alternative combinations of resource use within a
framework of balanced economic growth.

That does not make the

decisions easy, but at least there are some reasonably welldefined areas in which rational decisions can be made.
Compared, for example, with the problems of policy formulation
on the international political and military scene, where so
much depends on virtually unknowable actions and reactions
from our oppononets and sometimes our allies, the economic
problems may seem fairly tame.
Our economic problem today is one of balance -- a correct
balance between the stimulus that the economy needed through
the first half of this year as it worked through inventory
adjustment, and the restraint that will become increasingly
necessary when inventory building is resumed amidst further
growth in defense and other final demands.

Striking this

- 21 balance puts a premium on flexible economic policy -- just
as in your own area of direct concern there must be flexibility

for the farm credit system to respond to the changing needs
for agricultural credit.

On the national scale the numbers

get bigger and the dust a bit thicker at times, but the
essential problems of priorities, restraints, and encouragements
are much the same.

TREASURY DEPARTMENT
Washington
FOR RELEASE:

UPON DELIVERY

REMARKS BY THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
AT A
NATIONAL PRESS CLUB LUNCHEON
WASHINGTON, D. C.
THURSDAY, SEPTEMBER 21, 1967, 1:00 P.M., EDT

The moment of truth is approaching for the Congress and
the nation. In that moment the Congress will decide the
foremost financial and economic policy issue of the year and,
perhaps, many years. That question is whether Congress will
enact the President's proposals for a 10 percent surcharge
on existing income taxes and join with him in reducing planned
Federal expenditures and avoiding some contingent increases.
If I don't register any other point, let us be clear
that this proposed tax would not be 10 percent of your
income, but 10 percent of your tax -- a tax on a tax -equal to about 1 cent out of every dollar of your income.
It is the height of presumption for a downtown
bureaucrat, who has never run for office, to give unsolicited
advice to members of Congress on politics and taxes. Besides,
I've heard how high the mail is running against a tax increase.
So, I will confine my comments to what is good for the country.
However, if you change the tense of the remarks that follow
concerning a vote against the tax increase they might be
what a hypothetical opposition candidate might say next
summer or fall about a vote this fall against the tax increase
by an incumbent -- particularly if the tax increase failed to
pass.
A vote against the tax increase proposals is a vote for
the biggest budget deficit for any fiscal year since
World War II.
A vote against the tax increase is a vote to keep the
heaviest foot since World War II on the nation's economic
accelerator at a time when it has already rebounded to a
safe cruising speed.
F-I035

- 2 -

A vote against the tax increase is to risk throwing away
an economic expansion which in November will reach its 80th
month and become the longest and most rewarding period of
sustained growth in the nation's history.
A vote against the tax increase is a vote for a
resumption of the old boom and bust cycle that every American
over twenty-one can remember with sadness, bitterness and
apprehens ion.
A vote against the tax increase is a vote for a return to
the excessive and unsustainable boom followed inevitably by the
recession years like 1954 and 1958 when over a million jobs a
year disappeared in sharp contrast to the years beginning
with 1962 when every year more than a million new civilian
jobs were created.
A vote against the tax increase is a vote for an
overheated economy and spiraling inflation.
A vote against the tax increase that would temporarily take
away on the average of 1 percent of the income of the
individual taxpayers of America until June 30, 1969 is a vote
for an inflation that will diminish the real income of these
same individual taxpayers a number of percentage points a year
for many years and unjustly place the cruelest tax of all
spiraling inflation -- on the tens of millions of our low
income families who pay no taxes or are exempt from the
proposed surcharge.
A vote against the tax increase is particularly a vote to
levy that cruel and unjust depreciation of income on those
who are elderly and retired and must live on a fixed income
with the prospect of increased earnings no longer a
Compensa t ing fac tor.
A vote against the tax increase is a vote for sky-high
interest rates and tight money for all borrowers that will be
the consequence of the overcrowding of already crowded credit
markets by government borrowings to meet the deficit.
A vote against the tax increase is a vote to bring demand
into balance with supply by making credit mavailable to some
Which will bring depression once again to the housing industry,
make credit less available to the small businessman and State
and
. local borrowers , and leave the would -be home buyer out
l.1l the cold.

- 3 A vote against the tax increase is a vote for increased
hardship for the young and the poor, whether in ghettos or
outside of them, because they will bear the brunt of
increased costs of the bare needs of living, the lack of
adequate housing and the eventual loss of opportunity that
can only come from a steadily growing economy that creates a
million to a million and a half civilian jobs each year.
A vote against the tax increase is to strike a hard blow
at our national competitive strength and our favorable balance
of trade. If they are undermined by flooding imports to meet
excessive demand and diminished exports because of price and
supply problems, it will endanger the dollar and the international financial stability and progress which depend on it.
It will diminish the ability of our country to play its
historic and crucial part in Free World security and
development.
These views reflect far more than my judgment. They
embody the opinions of the President and Vice President, the
Council of Economic Advisers, the Director of the Budget,
the entire Cabinet, and the entire Federal Reserve Board.
But this point of view goes far beyond those in the Executive
Branch of the Federal Government concerned with public economic
and financial policy. It embraces the leaders of the private
sector.
In recent weeks a singular near unanimity has emerged
among many of the nation's foremost businessmen and labor
leaders, economists (both academic and in business),
industrialists, bankers and financial leaders in recommending
a tax increase. All of them, subjectively at least, have the
normal human aversion to paying increased taxes. Objectively,
however, and after appraisal of the unacceptable alternatives,
they support the President's recommendations -- in substance,
if not in each detail.
This consensus in favor of a tax increase is spread among
responsible leaders throughout the country. It takes a sense
of true responsibility for an industrialist, who is responsible
to his stockholders, to recommend greater taxes. The labor
leader, e lec ted by the members of his union to represent the ir
best interests , must show a similar sense of wise fortitude.
The professional economist, who is paid to be right more often
than he is wrong, evaluates the economic climate most carefully
before he goes down the line for a tax increase. In a way, all
of these have as much to lose from making a wrong judgment on
this question as a member of Congress.

- 4 Let me recite a few expressions of this growing consensus
for a tax increase:
In early August, Henry Ford was joined by other
well-known members of the business community in
supporting a tax increase. He simply said that
"h·~g her tax revenues are necessary to help control
in fla t ion" .
George Meany, President of the AFL-CIO, told
the House Ways and Means Committee that
organized labor backs higher taxes under the
current circumstances in both principle and
practice.
Another group of twenty-four leading businessmen,
headed by Howard Boyd, Chairman of the Board
of El Paso Natural Gas Company, told the House
Ways and Means Committee that "we believe a
tax increase, together with the restriction of
non-essential government spending, is vitally
necessary to the continued economic health and
well being of the Nation." Those joining
Mr. Boyd included J. Peter Grace, President of
W. R. Grace and Co.; Edgar F. Kaiser, President
of Kaiser Industries Corporation, and James A.
Linen, President of Time, Inc.
Leading business and financial organizations,
reflecting their intimate knowledge of money and
credit conditions and the economic outlook,
unanimously supported the call for a tax increase
and reduced expenditures. These included the
Committee for Economic Development, the National
Association of Manufacturers, the American
Bankers Association, the u.s. Savings and Loan
League, the Investment Bankers Association, the
Life Insurance Association of America, the
National Association of Home Builders, and the
National League of Insured Savings Associations.
A group of 260 academic economists signed a
statement circulated by Walter Heller, former
Chairman of the Council of Economic Advisers;
tax expert Joseph A. Pechman of the Brookings
Institution, and George L. Bach of Stanford

- 5 -

University. They stated to the House Ways
and Means Committee, in part: "We urge early
enactment of tax legislation along the general
lines proposed by President Johnson." While
not necessarily agreeing on the timing and the
amount of the increase, the group said the
increase is needed "to maintain orderly growth,
prevent a resurgence of inflation, and forestall
excessive reliance on tight money".
Lined up in favor of the tax increase is
every man who served as Chairman of the Council
of Economic Advisers under Presidents Eisenhower ,
Kennedy and Johnson -- Dr. Arthur Burns,
Dr. Raymond Saulnier, Dr. Walter Heller -- and
such outstanding and experienced former members
of that body as Dr. Paul McCracken, Dr. Kermit
Gordon, Dr. Otto Eckstein, and Dr. Robert Turner.
In a letter submitted to the House Ways and Means
Committee since the Labor Day recess, William H.
Chartener, Vice President of the National
Association of Business Economists, said a poll
of the group revealed that three out of four
economists employed by major U. S. business firms
favor an increase in income tax rates immediately
or in the near future.
Those supporting the tax increase include former
Secretary of the Treasury, Douglas Dillon, and
the former Under Secretary for Monetary Affairs,
Robert Roosa. At the time these gentlemen, and
Stuart T. Saunders, Chairman of the Pennsylvania
Railroad, and Walter Wriston, President of the
First National City Bank of New York, appeared
before the House Ways and Means Committee,
Mr. Saunders presented to the Committee a
statement supporting the tax increase and the
control and reduction in Federal expenditures
that was signed by 445 of the nation's leading
industrialists and banking and financial leaders.
The statement said: "The combined rerult of the
tax increase and expenditure reductions should
hold the deficit to manageable proportions.
These steps are necessary to prevent a deficit
so large that it could lead to dangerous inflation,
spiraling interest rates , tight money, and
.. a serious
"
weakening in our balance of payments pos~t~on.

- 6 -

And the next day William McChesney Martin, Jr.,
Chairman of the Federal Reserve Board, told the
Committee: "We have already clear and compelling
evidence of a resurgence in inflationary pressures,
which, if unchecked, would curtail our domestic
expansion, aggravate an already serious balanceof-payments problem, and bring severe strains in
the markets for credit, particularly the mortgage
market .... Accordingly, I favor prompt enactment
of the tax program proposed by the President."
In last Sunday's New York Times news analysis there
was this observation:
"The experts -- economists,
businessmen, financiers, union leaders
agree to a remarkable extent that
a tax increase is needed this year
to stop inflation and a rapid rise
in interest rates that could seriously
damage many areas of the economy.
The near-unanimity of those who have
educational and professional
qualifications to speak out on
economic issues was, beyond question,
the most dramatic and startling
aspect of the hearings on President
Johnson's proposed 10 percent tax
surcharge that came to a close last
week in the House Ways and Means
Committee. That those who were
heard by the committee constituted
a truly representative cross-section
of their various fields could not be
doubted. The witness list was in no
way stacked.
"Yet the number of those who
opposed a tax increase could be
counted on the fingers of one hand:
the Chamber of Commerce of the United
States (but not the National
Association of Manufacturers), one
prominent economist and a couple of
businessmen. "

- 7 Why did I stress at the outset of my remarks, in the tones
and words of a political stump speaker, the fact that a
Congressman who votes against the tax increase is practicing
political Russian roulette?
Why do I outline the basis for a telling political appeal
to people who think of themselves as consumers, the poor and
untaxed, the elderly and those who live on fixed incomes , the
businessman and the worker, those who would build a home, by
anyone who would run next year in primary or general elections
against a member of the House who votes against the tax
increase?
It is because representative government may face a
breakdown. There is considerable danger that many of the
people's elected representatives in the Congress may accede
to wholly normal but uninformed taxpayer reaction and vote against
the tax increase. There is a risk that the House of
Representatives will not lead public and voter opinion to the
almost uniform judgment of those in both public and private
life who are expert in the way our economy works.
For this is not the simple issue of voting to increase
taxes to pay for some desired objective, as we face it at the
State and local level. No one is per se for increasing taxes.
Voters who reflect the taxpayer syndrome will naturally react
against an increase. There are few who feel passionately
with Justice Holmes that "Taxes are what we pay for
civilized society."
Indeed, this Secretary of the Treasury, who had fought for
three significant reductions in Federal taxes in the last five
years which are saving taxpayers $24.2 billion this year,
recommended to the President this tax increase for only one
reason and with great reluctance.
And the President recommended it to the Congress for
only one reason and with great reluctance.
It was because the alternative -- an economy in shambles
with incalculable damage to the individuals and efforts that
depend on it
was far more unhappy.
One who is importantly involved in this issue remarked
recently that old age was very unwelcome, but the alternative
is worse.
So it is with this tax increase.

- 8 -

As of this hour, this date, it may be politically
realistic for a member of Congress to state, and with perfect
honesty, that "my mail is running heavily against this tax
increase" and, consequently, "I don't propose to vote for
it."
My first plea would be that he put the welfare of his
country ahead of his own political interests. But I wouldn't
stop there.
Let him look a ahead to next fall. Let him look
at what may well turn into a voter back-lash with
~inful political consequences if he reads only his current
mail and ignores the economic indicators.
Let him remember that, however unwelcome to Americans
as taxpayers, the President's program is in the best
interest of those same Americans -- as consumers who want
prices to be as stable as possible consistent with reasonably
full employment and a healthy rate of growth -- as wage and
salary earners who have or seek jobs -- as businessmen whose
life blood is credit and steadily expanding demand from
confident customers -- as home buyers, farmers and small
businessmen to whom ever higher interest rates, tight
money and increased costs are far more cruel than
taxes -- as poor, elderly or living on a fixed income
to whom a spiral of inflation is ruinous -- as fighting
men whodream of returning some day to a job and a home.
If the President's program is rejected -- with the
economic consequences that those most familiar with the
economy fear and predict with near unanimity -- then the
members of Congress who voted against the tax increase,
regardless of their reasons, are likely to find a large share
of the responsibility placed on their doorstep by all of
their constituents -- not just a few who responded as natural,
normal Americans by writing a letter to their Congressmen
objecting to increased taxes.
To illustrate, let us consider the alternative from
the consumer point of view of a tax increase versus no tax
increase for the people of America, including both the
125 million men , women , and children who are taxpayers
d
. or
members of taxpaying families, who would be aske to g~ve
up an average of 1 percent of their income for the
surcharge and the 75 million men, women and children who
would not'b;-touched at all by the surcharge either because

- 9 of the low income exemption from therurcharge or because no
tax is paid by them or their families under present law.
As a benchmark, over the first two years of the Korean
War prices rose at an annual rate of 5~ percent. This
is 3 percentage points more than the 2~ percent rise that
might be expected with the surcharge.
Let us consider the impact on all of us of an
additional rise of 3 percent in consumer prices which,
using the Korean experience as a guiding benchmark, might
result in the absence of the surcharge.
The figures are both shocking and very instructive. A
single individual with $900 of money income would pay no
surcharge; he would be exempt. But a 3 percent additional
rise in prices would actually decrease the real income of
this individual 4 percent since such a person typically must
spend more then his meager income on current living, making
up the difference by going into debt or drawing down on
savings. This would be equivalent to a 4 percent tax on his
income.
For the single individual living on $5,000, the
surcharge would impose a tax of $33, equal to 1.3 percent of
his income. The burden of the additional 3 percent rise
in prices would amount to $144, equal to 2.8 percent of
his income -- a smaller relative burden than for the
individual with $900 income, but still be above the burden
of the surcharge. At the $20,000 income level the surcharge
burden would rise in relative terms to 2.5 percent of
income and amount to $492, while the additional 3 percent
rise in prices would amount to $540.
Turning to a family of four we again see the same unjust
pattern of the burden distribution of inflation compared to
the surcharge. At $2,500 and at $5,000 of family income
no surcharge is paid. In contrast, the burden of the
additional price rise is equal to $82 or 3-1/3 percent of
income at $2,500, and $147 or 3.1 percent at $5,000.
At $10,000 of family income, the surcharge would
amount to $111 or 1.1 percent of income. The burden of
the 3 percent prise rise would be $285 or 2.9 percent.
This is substantially higher than the surcharge but less
m relation to income than the burden on lower incomes.

- 10 -

Some individuals and families in each of these
ranges will, of course, experience a rise in incomes when
prices rise. These people would not be hurt as much by
inflation as would others whose incomes are fixed, but in
the end everyone loses. While the surcharge exempts
entirely the low income families and individuals, the price
rise would place its heaviest relative burden em families
and individuals in the lowest income ranges.
But the overall result of a 3 percent additional price rise
would be to diminish the real income of the overwhelming
majority of the American people far more than the average
loss of 1 percent flowing from the tax increase.
Does that make a vote against the increased tax reflect
the right measure of the political risks?
But there are others who place their opposition to
the tax increase on higher ground than mail from home.
Let us turn to them.
Some of the reluctance to support a tax increase
wholeheartedly and see it move along promptly through
the legislative process comes from those in Congress and
out who believe that a balanced program of fiscal restraint,
including both tax increases and reductions in Federal
expenditures, is necessary and desirable. Many of those who
stress the importance of reducing Federal expenditures along
with any t ax increase share the point of view expressed in
my comments concerning the danger to the economy from
operating the government on the very large deficit in the
current and prospective economr environment.
During the course of this week the members of the House
Ways and Means Committee are beginning their closed door
deliberations on the tax increase. Many members of this
determinative body have no secret of their concern that
adequate treatment of the problem of reducing expenditures
be geared by Congress and the Administration.
There is no disagreement in principle between the President
and his Administration and the members of the Ways and Means
COmmittee or the Congress on the substantive importance of
coupling expenditure reductions with tax increases, while
minimizing and avoiding any contingent increases in
expenditures that are not now definitely provided for in
law and appropriations
0

- 11 The President in his Tax Message of August 3, 1967 pledged
to the country and the Congress that he will make every possible
expenditure reduction -- civilian and military -- in the Budget
submitted last January, short of jeopardizing the nation's
security and we ll-be ing.
He outlined a procedure for effecting these expenditure
reductions, stating that as Congress completes each appropriation
bill affecting Fiscal 1968 expenditures, "we will examine at
once very, very carefully" the results of those actions, and
determine where, how, and by how much expenditures under these
appropriations can be reduced. He also, at the same time,
announced that he was directing each Department and Agency head
to review everyone of his programs, to identify reductions
which can be made, and to report to the Director of the Budget
m detail on the actions he is taking to put those reductions
into effect.
But he noted that action by the Executive Branch alone
to reduce expenditures would not serve the purpose if every
time the Executive Branch saves a dollar the Congress adds
another dollar -- or more -- to the expenditures recommended
ill the January Budget by appropriation or legislation increasing
expenditures outside of appropriations such as the Employee
Pay Bill.
In every case in which the Congress has completed the
appropriation bill for a Department or Agency affecting
Fiscal 1968 expenditures this process has been followed.
Appropriation bills covering the operations of the Treasury,
Post Office and Interior Departments are the only ones completed
to date. The heads of those Departments, pursuing an extensive
review, are identifying the reduc tions tha t can be made over
and beyond those resulting from Congressional appropriation
action. They are taking steps to put into effect both the
reductions in expenditures for Fiscal 1968 reflecting
C~gressional action and additional Executive action.
This sets a pattern for the procedure which will be
followed for the remaining appropriation acts as soon as
Congress sends them to the President.
Moreover, following the presentation of his Message
the President met with every Democrat in the House and at
least fifty Republicans and talked extensively about the
problem of the deficit the t 8K increase proposal, and the
need to reduce expendifures -- as well as take other action
necessary to diminish the deficit.

- 12 In his statement to the House ~ays and Means Committee
on August 14, the Director of the Budget made clear that these
cuts would bite into projected non-defense or civilian type
expenditures. He said:
"We have begun a concerted effort to achieve
every reduction and deferral which can reasonably
be made in order to lower non-defense expenditures.
We are determined to cut more than the $1.5 billion,
which would offset the release of 1967 withheld
funds and the uncontrollable increases in CCC, public
assistance, and other outlays. Such a cut would bring
civilian expenditures -- exclusive of changes in
participation sales and in the President's pay
proposals -- back to the $59.5 billion level estimated
in the January budget. Our actual reduction target
is larger than that -- we are aiming at a cut of
over $2 billion -- as a means of holding civilian
expenditures below the January estimate. Such an
expenditure reduction would require cuts in
obligational authority and program levels of some
$4 billion. Whether we will be able to achieve our
target fully, I cannot predict at this time. But
we are setting our sights high in order to insure
signficiant reductions, when the actual results are
all in. The outcome will, of course, depend in part
upon Congressional action on the budget, as well as
our own efforts."
I am confident that the discussions being currently held
in the Executive Session of the House Ways and Means Committee
will produce an agreement which will give every member of
Congress an opportunity to cooperate with the President in
bringing the deficit in the 1968 Budget to manageable
proportions by increasing taxes and reducing or holding down
e~penditures .
We cannot afford a failure or delay in acting affirmatively
on the tax increase proposal because the procedures of the
appropriation process and the administrative follow-up
promised by the President have not yet supplied the detailed
particulars of the reduc tions that will be forthcoming.

- 13 Everyone knows that after a Report by the House Ways
and Means Committee and House action, there must be hearings
by the Senate Finance Committee and debate under the Senate
rules prior to Senate action. Everyone knows that during
this period final action on appropriation bills by the
Congress, putting the Pres ident in the pos ition to make
positive identification of the areas of expenditure
reduction to be effected, will proceed in piecemeal fashion.
Everyone knows that only when all of these actions have been
completed and the Congressional decisions on appropriations
and reductions in programs are finally taken can the
President make the additional decisions on expenditures that
may be necessary and supply the Congress and the nation with
a bill of particulars identifying in orderly fashion the
reductions in expenditures -- military and civilian -ill the context of up-to-date Budget totals.
For the
~esident to transmit to the Congress a new series of
budget recommendations at this time would only serve to
compound the delays in the appropriation process. Many of
the appropriation bills already have been acted on by the
House appropriation committee and subcommittees and passed
by the House.
Everyone knows that there are various provisions in law
or statements in the House Committee Report that could be
devised to protect the position of the House in any final
insistance its members may require on expenditure policy as a
prerequisite to voting a tax increase. Moreover, final House
action on the Conference Report that is usually required on
revenue bills to settle differences between the Senate and
House versions -- which is some weeks away -- would provide
an opportunity to affect the bill if appropriate expenditure
control has not been manifest in the interim. It is not
necessary now to hold up the process ing of the tax measure
until the passage of the appropriation bills and the
President's action on expenditure reductions are complete.
Therefore, the appropriate and statesman-like method of
dealing with this problem in the national interest is for the
House Ways and Means Committee and the House to proceed promptly
to dispose of the tax proposals. They can proceed on the
baSis of either the earlier pledges and commitments by the
Administration to do its share in this area of joint
responsibility or such further statements or provisions in
the Report and in the law as will assure a reasonable
combination of tax increase and expenditure control.

- 14 There have been many other statements on Capitol Hill that
for reasons of equity and justice loopholes in our existing
tax laws should be closed before, or coincident with,
enactment of any tax increase.
It does not require a superior memory to recall the
time
and tedious work -- necessary to move a tax reform
measure through the Congress.
My predecessor, former Treasury Secretary Douglas Dillon,
emphasized this fact in recent testimony before the House
Ways and Means Committee.
Mr. Dillon agreed, as do we, that further study and
action in the area of tax reform are needed, but added:
"As a result of experience we had and the
estimates we were able to develop at the
Treasury it is very clear that any of these
loophole closings that are at all possible and
advisable -- even adding them all together -have a very small effect, as far as overall
revenues, on the economy ....
"We were developing in 1963 what came as
the 1964 tax cut. We were trying to develop
possible sources of revenue through loophole closings
that would enable us to have as large as possible a
reduction in the overall tax rates and we just
were not able to find areas that would be
tremendously significant.
"Some of these were enacted and .... a number
of them were not accepted for very good reasons
by the Congress, and I think that this clearly
holds. You might if you work very hard save a
billion dollars •••• through very hard work,
very difficult work, upsetting pe,ople .•.. but it
would have very little effect as compared to the
$6 or $7 billion we are talking about here ....
"So loophole closing, while I think it is
primarily a moral issue, and that doesn't mean
it isn't important .... does not have the
economic impact and therefore can't be
considered at all an economic substitute for
the tax increase."

- 15 -

Our position, in terms of priorities, is simply to
put the imperative needs of the Nation first.
Loophole closing at the best is a long process. The
1962 and the 1964 tax acts, which included reforms, required
15 to 17 months for Congressional approval.
We have stated, and we repeat, that tax reform proposals
for permanent revision of the laws are under intensive
preparation in the Treasury. The President has promised
that tax reform proposals will be forwarded to the
Congress at this session for the deliberate study, debate,
and action they require during the session next year.
the alternatives to prompt and positive
action to increase taxes in line with the President's
proposals are clearly unacceptable.
In

con~lusion,

Our role in world leadership and the solution of our
pressing problems at home depend on a healthy economy, growing
at a robust and sustainable rate, characterized by both
reasonably. :full employment and relative price stability.
The program of temporary fiscal restraint proposed by the
President is necessary for the preservation of this healthy
balanced economy.
The Congress of the United States, controlling the purse
strings of government under Constitutional authority granted
to it, has voted and appropriated for the expenditure of
every dollar that enters into the 1968 Budget -- whether it be
for the discharge of our commitment in Southeast Asia, the
treatment of some of the ills and inadequacies of our society
at home, or the maintenance of Federal services in a growing
and rapidly expanding population. Congress has the
responsibility to see to it that the nation's bills,
which it authorized, are paid from taxes collected or money
borrowed in a mix and manner designed to keep the economy
healthy and well balanced.
The consensus among the vast majority of knowledgeable and
responsible leaders in economic and financial circles, public
and private, is remarkably undivided in recommending prompt
action in increasing taxes, combined with strict expenditure
control, as indispensable steps in preserving that kind of an
economy. Our economic course is clear. Only an act of
political will remains
0

- 16 -

I have every confidence that the Congress will discharge
its responsibility by increasing taxes temporarily for the
duration of the conflict in Vietnam while it and the President
strive, in the words of the President" to make every possible
reduction, civilian and military, short of jeopardizing the
nation's security and well-being."

000

TREASURY DEPARTMENT

FOR IMMEDIATE RELEASE
ROY C. CAHOON NAMED
ASSISTANT TO THE DIRECTOR OF THE MINT
U.S. Mint Director Eva Adams today announced the appointment of Roy C. Cahoon as Assistant to the Director in charge
of Coin Management and Public Information.
Mr. Cahoon succeeds Kenneth M. Failor, who retired this
month after more than 30 years service with the Mint.
Mr. Failor's most recent position was that of Executive
Director for the Joint Commission on the Coinage.
As Chief of the Coin Management and Public Information
Division, Mr. Cahoon will work closely with the Federal
Reserve Banks and Branches in carrying out the Mint's coin
distribution and coin forecasting programs. He will be in
charge of the Mint's public information functions and will
serve as liaison with Congressional and Executive Offices.
In addition, Mr. Cahoon will assume the post of Executive
Director for the Joint Commission on the Coinage.
Mr. Cahoon has served with the Office of the Secretary,
Treasury Department, for the past 18 years. He came to the
Treasury as an Administrative Assistant before serving in his
most recent position as a Public Information Specialist in
the Treasury's Office of Information. Prior to his Treasury
service, Mr. Cahoon held administrative posts with the
Agricultural Adjustment Administration in North Carolina and
the Department of Agriculture in Washington, D. C.
Mr. Cahoon, 47, was born in Swan Quarter, North Carolina,
where he received his early education. He is a graduate of
Kings Business College and attended the American University
in Washington, D. C. He was in the U.S. Army Air Force from
July, 1942 to January, 1946, serving in the European Theater
of Operations in England and France.
Mr. Cahoon is married to the former Anna Marie Hetchko
of Wheeling, West Virginia. They have two sons, Craig and
Chris, and reside in Falls Church, Virginia.

000

F-I036

TREASURY DEPARTMENT

FOR P.M. RELEASE
TUESDAY, SEPTEMBER 26,1967
TREASURY OFFICIAL CALLS FOR POSITIVE
ACTION FROM BANKS IN HIRING NEGROES
Assistant Secretary of the Treasury Robert A. Wallace
today told bankers they mus t take "pos itive action" to hire
Negroes in order to keep deposits of Federal money.
He said that positive action meant "applying controls
over personnel actions that are normally applied to any
program that you want to succeed," including clear statements
in writing, frequently reiterated to recruitment sources, that the
bank follows equal employment policies; recruitment among
minority groups; help-wanted advertising in minority group
publications as well as the general press; contact with
local schools to establish needed courses, and periodic
review of minority employees' records to see that they can
reach their highest capability.
Speaking before the American Bankers Association
Convention in New York, Mr. Wallace blamed the fact that
there are not many Negroes employed by banks an "following
the same old recruitment practices which have become a
matter of habit over a period of many years." He said "this
type of picture can be changed by positive action; the mere
absence of open discrimination is not enough."
President Johnson's Executive Order 11246 is the authority
under which the Treasury Department requires banks to adopt
equal employment practices in order to get Federal deposits.
These deposits average $4 billion a year and are a valuable
source of income for some 12,000 banks in the United States.

000

F-l037

TREASURY DEPARTMENT

FOR P.M. RELEASE
TUESDAY, SEPTEMBER 26,1967
TREASURY OFFICIAL CALLS FOR POSITIVE
ACTION FROM BANKS IN HIRING NEGROES
Assistant Secretary of the Treasury Robert A. Wallace
today told bankers they must take "positive action" to hire
Negroes in order to keep deposits of Federal money.
He said that positive action meant "applying controls
over personnel actions that are normally applied to any
program that you want to succeed," including clear statements
in writing, frequently reiterated to recruitment sources, that the
bank follows equal employment policies; recruitment among
minority groups; help-wanted advertising in minority group
publications as well as the general press; contact with
local schools to establish needed courses, and periodic
review of minority employees' records to see that they'can
reach their highest capability.
Speaking before the American Bankers Association
Convention in New York, Mr. Wallace blamed the fact that
there are not many Negroes employed by banks on "following
the same old recruitment practices which have become a
matter of habit over a period of many years." He said "this
type of picture can be changed by positive action; the mere
absence of open discrimination is not enough."
President Johnson's Executive Order 11246 is the authority
under which the Treasury Department requires banks to adopt
equal employment practices in order to get Federal deposits.
These deposits average $4 billion a year and are a valuable
source of income for some 12,000 banks in the United States.

000

F-l037

TREASURY DEPARTMENT
=
(

For Release at 3: 30 p.m.

September 22, 1967
Treasury Borrowing Plans

The Treasury Department announced today that it plans to raise $4.5 billion
through the sale of tax antiCipation bills maturing in April and June of 1968.
The bills are to be auctioned on Tuesday, October 3, for payment on Monday,
October 9.
Of the $4.5 billion total, $1.5 billion represents an additional offering of
tax anticipation bills maturing April 22, 1968, of which $2 billion are already
outstanding.

The remaining $3 billion will be a new issue of tax antiCipation

bills maturing June 24, 1968.

Commercial banks will be able to pay for the tax anticipation bills, to the
erlent of 75%, through crediting Treasury tax and loan accounts.

The remaining

25~ must be paid for in immediately available funds.

The Treasury also announced that it plans to continue adding $100 million
each week to the weekly offerings of 3-month bills through another i'ull 13-week
cycle.

The current cycle of $100 million weekly additions will be completed with

bills to be paid for October 5, it was noted.

Subsequent weekly bill offerings

~ll include $1.5 billion of 3-month bills and $1.0 billion of 6-month bills.

F-1038

000

TREASURY DEPARTMENT
(

=
FOR IMMEDIATE RELEASE

September 22, 1967

TREASURY OFFERS $4.5 BILLION OF APRIL AND JUNE TAX BILLS
The Treasury Department, by this public notice,- invites tenders for two series
of Treasury bills designated Tax Anticipation Series to the aggregate amount of
$4,500,000,000, or thereabouts, as follows:
196-day bills (to maturity date) to be issued October 9, 1967, in the amount
of $1,500,000,000, or thereabouts, representing an additional amount of bills

dated July 11, 1967, and to mature April 22, 1968, originally issued in the amount
of $2,000,967,000, the additional and original bills to be freely interchangeable.
The bills will be accepted at face value in payment of income taxes due on April
15, 1968.
259-day bills, for $3,000,000,000, or thereabouts, to be dated October 9, 1967,
and to mature June 24, 1968. The bills will be accepted at face value in payment
of income taxes due on June 15, 1968.
The bills of both series will be issued n~ a discount basis under competitive
and noncompetitive bidding as hereinafter provided and at maturity, to the extent
they are not presented in payment of income taxes, their face amount will be payable
nthout interest. They will be issued in bearer form only, and in denominations
of $l~OOO, $5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity
value) .
Taxpayers desiring to apply these bills in payment of income taxes may submit
the bills to a Federal Reserve Bank or Branch or to the Office of the Treasurer
of the United States, Washington, not more than fifteen days before the appropriate
income tax payment date. In the case of bills submitted in payment of income taxes
of a corporation they shall be accompanied by a duly completed Form 503 and the
office receiving these items will effect the deposit on the date the taxes are due.
In the case of bills submitted in payment of income taxes of all other taxpayers,
the office receiving the bills will issue receipts therefor, the original of which
the taxpayer shall submit on or before the date the taxes are due to the District
Director of Internal Revenue for the District in which such taxes are payable.
Tenders will be received at Federal Reserve Banks and Branches up to the
closing hour, one-thirty p.m., Eastern Daylight Saving time, Tuesday, October 3, 1967
Tenders will not be received at the Treasury Department, Washington. Each tender
~st be for an even multiple of $1,000, and in the case of competitive tenders
the price offered must be expressed on the basis of 100, with not more than three
deCimals, e.g., 99.925. Fractions may not be used. It is urged that tenders be
made on the printed forms and forwarded in the special envelopes which will be
Supplied by Federal Reserve Banks or Branches on application therefor.

F-1039

- 2 Banking institutions generally may submit tenders for account of customers
provided the names of the customers are set forth in such tenders. Others than
banking institutions will not be permitted to submit tenders except for their own
account. Tenders will be received -onthout deposit from incorporated banks and
trust companies and from responsible and recognized dealers in investment securities
Tenders from others must be accompanied by payment of 2 percent of the face amount
of Treasury bills applied for, unless the tenders are accompanied by an express
guaranty of payment by an incorporated bank or trust company.
All bidders are required to agree not to purchase or to sell, or to make any
agreements with respect to the purchase or sale or other disposition of any bills
of the issue for which they are bidding at a specific rate or price, until after
one-thirty p.m., Eastern Daylight Saving time, Tuesday, October 3, 1967.
Immediately after the closing hour, tenders will be opened at the Federal
Reserve Banks and Branches, following which public announcement will be made by
the Treasury Department of the amount and price range of accepted bids. Those
submitting tenders will be advised of the acceptance or rejection thereof. The
Secretary of the Treasury expressly reserves the right to accept or reject any or
all tenders, in whole or in part, and his action in any such respect shall be final.
~ubject to these reservations, noncompetitive tenders for $300,000 or less for the
196-day bills and $400,000 or less for the 259-day bills, without stated price
from anyone bidder will be accepted in full at the average price (in three decimals
of accepted competitive bids for the respective issues. Payment of a~cepted tenders
at the prices offered must be made or completed at the Federal Reserve Bank in cash
or other immediately available funds on October 9, 1967, provided, however, any
qualified depositary will be permitted to make payment by credit in its Treasury
tax and loan account for not more than 75 percent of the amount of Treasury bills
allotted to it for itself and its customers up to any amount for which i t shall be
qualified in excess of existing deposits when so notified by the Federal Reserve
Ban~ nf its District.
~e income derived from Treasury bills, whether interest or gain from the sale
or other disposition of the bills, does not have any exemption, as such, and loss
from tl1e sale or other disposition of Treasury bills does not have any special
treatment, as such, under the Internal Revenue Code of 1954. The bills are subject
to estate, inheritance, gift or other excise taxes, whether Federal or State, but
are exempt from all taxation now or hereafter imposed on the principal or interest
thereof by any State, or any of the possessions of the United States, or by any
local taxing authority. For purposes of taxation the amount of discount at which
Treasury bills are originally sold by the United States is considered to be interest
Under Sections 454 (b) and 1221 (5) of the Internal Revenue Code of 1954 the ammmt
of discount at which bills issued hereunder are sold is not considered to accrue
until such bills are sold, redeemed or otherwise disposed of, and such bills are
excluded from consideration as capital assets. Accordingly, the owner of Treasmy
bills (other than life insurance companies) issued hereunder need include in h;s
income tax return only the difference between the price paid for such bills, whethel'
on original issue or on subsequent purchase, and the amount actually received
either upon sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.

Treasury Department Circular No. 418 (cUTTent revision) and this notice,
prescribe the terms of the Treasury bills and govern the conditions of their
-:. sS'_:t". t:'~":}::""s nf th"" circular may be obtair_(...l fr~l m!Y' 'edeftll Resel'le Bank or

TREASURY DEPARTMENT
=

100 RELEASE 6 :30 P.M.,
~!lday,

September 25 z 1967
RESULTS OF TREASURY'S \,'E':.KLY bILL OFr'::lliING

The Treasury Department announced that the tenders for two series of Treasury bills,
Ine series to be an additional issue of the bills dated June 29, 1967, and the other
leries to be dated September 28,1967, which were o:t:fered on September 20,1967, were
Ipened at the Federal Reserve Banks today. Tenders were invited for :t)1,4OC,000,OOC,
~ thereabouts, of 91-day bills and for $1,000,000,000, or thereabouts, of 182-day
)ills. rfhe details of the two series are as follows:
W1GE OF ACGEPTED
:O.';PETITIVE BIDS:

High
Low
Average

!I ~xcept

91-day Treasury bills
maturing December 28 .. 1967
Approx. Equiv.
Price
Annual Rate
98.834 2:/
4.613%
98.827
4.64o,~
98.830
4.62<)% 11

·
·
··
·:

182-day Treasury bills
uturing lvlarch 28 z 1968
Approx. Equiv.
Price
Annual hate
97.406
5.131%
97.394
5.155%
97.400
5.143% !I

1 tender of $100,000

83% of the amount of 91-day bills bid for at the low price was accepted

72fo of the amount of 182-day bills bid for at the low price was accepted
O'rAL TENDERS

a:.~PLIED

District
Boston
New York

Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
~rinneapolis

Kansas 8ity
Dallas
San Francisco

TOTALS

FOR Al\D A;';CEPT1D D'Y. FEDERAL RESEi:'.VE DISTRICTS:
}O'or
$ 14,930,000
1,342,775,000
13,295,000
23,007,000
5,367,000
32,977,000
181,076,000
44,870,000
14,490,000
15,274,000
12,958,000
14:21 621 1000

AcceEted
$
4,490,000
725,l57,000
4,652,000
22,346,000
5,067,000
23,277,000
70,766,000
39,670,000
5,990,000
12,877,000
8,678,000
111291 1000

iji2,821,405,000 $1,400,102,000 ~ $1,844,710,000

$1,000,261,000

Applied For
lcceEted
:j)
20,982,000 $
9,604,000
2,131,485,000 1,095,248,000
26,238,000
12,487,00'0
43,539,000
25,819,000
12.,497,000
10,501,000
47,784,000
31,375,000
251,217,000
74,197,000
59,223,000
46,180,000
20,(;C9,OuO
7,209,000
31,768,000
18,789,000
15,995,000
10,645,000
160,668,000
28 .z O!:f:8 z000

~lied

··

£I

~ Includes $218 572 000 noncompetitive tenders accepted at the average pr~ce of 90.830
c/ ~cludes $133'835'000 noncompetitive tenders accepted at the average pr~ce of 97.400
These rates afe o~ a bank discount basis. The equivalent coupon issue yields are
4.76% for the 91-day bills, and 5.37% for the 182-day bills.

1"-1040

TREASURY DEPARTMENT

OR RELEAS!'<; b :30 P.M.,
uesday, September 26 2 19b7.
RESULTS CF TREA.=JURY I S MONTHLY BI.LL OFFlliIil.G

The Treasury Department announced that the tenders for two series of Treasury
ills, one series to be an additional issue of the bills dated June 30, 1967, and the
~her series to be dated September 30, 19b7, which ,,;ere offered on September 20, 1967,
~re opened at the FedercS..l Reserve DankS today.
Tenders ..'ere invited for $500,000,000,
~ thereabouts, of 272-day bills and for $1,000,000,000, or thereabouts, of 366-da,y
~.Lls.
'I'he details of the two series are as follOi'lS:
OF J>CGiPTED
);·YEThlV':::' l:huJ:

~~Gi

High
Lo",'
Average
3;~

62%
fAL

272-day Treasury bills
;naturing June 3O, 1968
Approx. Equiv.
Price
Annual Rate
96.154
5.090%
96.095
5.168%
96.113
50145;C; 11

·
·
·

··
·
4

366-day Treasury Bills
maturing September 30, 1968
Approx. EqUlV.
Price
Annual Rate
5.080%
94.835
5.169%
940745
5.124% 1/
94.791

of the amount of 272-day bills bid for at the low price was accepted
of the amount of 366-day bills bid for at the low price was accepted

r1':~;iiJ,;:J(.:)

ArP .LIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICT3:

)istrict
30ston
;ew York
lhiladelphia
:leveland
:ichmond
.tIanta
hicago
t. Louis
inneapolis
ansas City
alIas
3.n Francisco
TOTALS

AEE1ied For
$
.302,000
967,840,000
5,390,000
6,633,000
14,237,000
15,204,000
138,638,000
11,726,000
14,080,000
1,940,000
11,414,000
68,175,000

AcceEted
302,000
396,715,000
1,390,000
6,633,00D
7,237,000
6,604,000
18,259,000
2,816,000
13,580,000
1,940,000
4,414,000
40,1751000

$1,255,579,000 $

500,065,000

···

··
··

·
·
!I

AEElied For
$
40,507,000
1,302,088,000
1l,390,OOO
23,399,000
22,762,000
21,547,000
119,970,OOO
20,346,000
15,096,000
5,360,000
13,272,000
144,717,000

Acceeted
$ 30,507,000
718,338,000
3,290,000
23,399,000
17,762,000
12,947,000
46,970,000
8,346,000
15,096,000
5,360,000
8,272,000
109,717,000

$1,740,454,000

$1,000,004,000

Includes $21,707,000 noncompetitive tenders accepted at the average price of 96.11J
Includes ~56 666 000 noncompetitive tenders accepted at the average price of 940791
These rates ~re ~n a bank discount basis. The equivalent coupon issue yields are
5.39% for the 272-day bills, and 5.42% for the 366-day bills •

.041

TREASURY

C~PARTMENT

FOR IMMEDIATE RELEASE

TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$2,400,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing October 5,1967,
in the amount of
$2,302,245,000, as follows:
91-day bills (to maturity date) to be issued
in the amount of $ 1,400,000,000, or thereabouts,
additional amount of bills dated July 6, 1967,
mature January 4,1968, originally issued in the
$1,000,092,000, the additional and original bills
interchangeable.

October 5, 1967,
representing an
and to
amount of
to be freely

182-day bills, for $1,000,000,000, or thereabouts, to be dated
October 5, 1967,
and to mature April 4, 1968.
The bills of both series will be issued on a discount basis under
competitive and noncompetitive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(mat uri ty value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Daylight Saving
time, Monday, October 2, 1967.
Tenders will not be
received at the Treasury De~artment, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
provided the names of the customers are set forth in such
cenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
~1thout deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders
~rom others must be accompanied by payment of 2 percent of the face
~ount of Treasury bills applied for, unless the tenders are
lCCompanied by an express guaranty of payment by an incorporated bank
)r trust company.
~ustomers

F-1042

- 2 Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on October 5, 1967, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing October 5, 1967.
Cash and exchange tenders
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation ~ow or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained fro
any Federal Reserve Bank or Branch.
000

TREASURY DEPARTMENT
Washington

FOR IMMEDIATE RELEASE
REMARKS OF THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY OF THE UNITED STATES
AND
UNITED STATES GOVERNOR OF THE INTERNATIONAL MONETARY FUND
BEFORE THE
ANNUAL MEETING OF THE INTERNATIONAL MONETARY FUND,
RIO DE JANEIRO, BRAZIL, TUESDAY, SEPTEMBER 26, 1967
I

I take special pleasure in participating in this Annual
Meeting in Rio de Janeiro. I am very grateful to the
Government and the people of Brazil for their gracious
hospitality on this occasion. The beauty of this city, the
breathtaking potential of this huge vibrant country, form a
backdrop to the conference that can inspire us all.
The personal experience of viewing at first-hand the
problems and potentialities of economic growth in Brazil and
in her neighboring nations will, I trust, stimulate us all to
assist in further efforts to reinforce international
collaboration to support economic development.
I am very glad to see among us once again Governors for
Indonesia representing that large and important nation, and
to note that both the Fund and Bank have been able, in the
past year or so, to playa helpful, constructive role in
assisting Indonesia to deal with a most difficult and trying
period of economic stabilization. I know that all of us wish
the Indonesian authorities well in the courageous efforts they
are making.
It is also a pleasure to welcome to membership in our
organizations The Gambia, which last week completed the
formalities to assume membership, and Botswana, whose
membership resolutions are before this meeting of governors.
The Fund and Bank have had another highly successful year,
the highlights of which have been recorded in their excellent
annual reports. Mr. Woods and Mr. Schweitzer have summarized
the activity of the past year in the Bank family and in
the Fund and I will not retrace the ground they have
covered so well.
F-I043

- 2 -

But the events of the year in the usual pattern have
been crowned by an unusual, indeed, unique achievement -- the
creation of a facility to meet the need, as and when it arises,
for a supplement to existing reserve assets. This is to be
established within the framework of the Fund, and is embodied
in the Outline Plan for a Special Drawing Rights Facility
which is the principal business of this meeting.
II
Last year we urged joint meetings of the Executive
Directors representing all member countries of the Fund and
the Deputies of the "Group of Ten." It was our hope and trust
that from these meetings a specific plan for deliberate
reserve creation would emerge to become the subject of action
by the Fund Governors at this Annual Meeting. This hope and
trust have been fulfilled. The joint meetings have produced
results which exceeded expectations and the United States is
grateful to all the Ministers and Deputies of the Group of
Ten and to the Executive Directors, Managing Director
and staff of the Fund.
So at last we, at this meeting, come to the final and
logical forum for an International Monetary Conference to
consider what steps we might jointly take to secure substantial
improvements in international monetary arrangements looking
to the creation of a facility to provide, as and when needed,
a supplement to existing reserve assets. Despite twenty-two
years of steady progress since Bretton Woods, we need to
assure a world monetary system conducive to a more rational
and orderly expansion of global reserves. It would be a
grave error, however, to assume that a strong, flexible and
adequate international monetary system begins and ends with
the assurance of adequacy of global reserves o There are other
essential elements which require both international cooperation
and a responsible approach of national monetary authorities.
Two particularly deserve mention, and the assurance to my
fellow Governors is that the United States will play its full
part.
The maintenance of convertibility of the dollar and gold
for international monetary purposes is also essential to a
regime of stable exchange rates, which is a primary objective
of the Fund recalled to us yesterday by the Managing Director
in his notable address.

- 3 -

Nothing in the new arrangements on liquidity is designed
to alter the present relationship between gold and the dollar.
The United States' commitment to the convertibility of the
dollar into gold at $35.00 an ounce remains firm. This has
been, and will continue to be a central factor in the monetary
system.
Another element deserving comment is the process of
adjusting payments imbalances. International cooperation is
important here also, for it is difficult without it to make
this process work effectively in the complex world today.
The continuing expansion of world trade and investment carries
with it a corresponding tendency toward a higher absolute
level of international imbalance. An improved adjustment
process can serve to moderate this trend, and especially
to reduce or eliminate persistent or excessive deficits and
persistent or excessive surpluses.
The Fund report calls attention to some of the difficulties
encountered in improving the adjustment process. At the
present moment, in my own country there is clear need to apply
fiscal restraint to what may otherwise soon become an expansion
so excessive as to create serious inflationary strains and an
increasing balance of payments deficit. Meanwhile, many
countries of Continental Europe are still in need of stimulus
to restore more satisfactory rates of economic growth. This
would also reduce their balance of payments surpluses and
thereby promote the international adjustment process.
A perfectly even rate of growth is not to be expected
either in national economies or in world trade. The recent
situation has been marred by sluggish advances in output -and in some instances, contractions -- in a number of key
industrial nations. If this state of affairs were to continue,
or, worse still, to intensify, strains on the international
payme.nts mechanism would surely become severe~ In particular,
the world's primary producing nations would bear a heavy
burden of adjustmentu
In many of the industrial nations, a slower advance in
output was consciously sought by national policy in order to
reduce inflationary pressure. With the adjustment completed,
the basis for a more enduring expansion has been laid.
Essential as these adjustments in separate countries have
been, policies of contraction in surplus countries must not
be allowed to continue so long as to prejudice the prospects
for an expanding volume of world trade, severely aggravating

- 4 -

imbalances in international payments. A constantly expanding
volume of trade, well-distributed regionally, is essential if
acceptable levels of well-being are to be sustained in developed
countries and promoted in the developing countries of the world.
A common theme in the recent experience of many industrial
nations has been the monetary strains that are the consequence
of too rapid internal expansion, and too sparing reliance on
fiscal restraint. In general, this year has seen some easing
of the most severe financial strains. But, in turn, the
welcome moderate reduction in upward pressure on money markets
internationally has only been achieved, in the main, along
with a slowing in the growth of output in some major
industrial nations below the rates that are desirable and
feasible from a long-term point of view. Despite this, longterm interest rates have remained high.
There will be a need to harmonize national economic and
financial policies in the interest not only of balanced
expansion at home, but also of a balanced expansion of trade
internationally. We are all aware that both deficit and
surplus countries share the responsibility for continuous
efforts to improve the process of adjustment. Deficits and
surpluses are after all two sides of the same coin. There
should be no presumption that either the deficit or surplus
country is the one that is delinquent. Cooperative action by
both parties is essential.
Let me turn now to the main subject of interest -- on the
Fund side -- at this Annual Meeting.
This twenty-second Annual Meeting has a special meaning
for all Fund members. After nearly a quarter-century
of experience with the Articles of Agreement prepared at
BrettonYbods in 1944, we are now asked to approve a
procedure leading to the first amendment to those Articles.

- 5 The plan for Special Drawing Rights is important to all
our member nations. There is no area of the world that does
not have a vital interest in the expansion of international
trade. Moreover, the flow of public and private capital
acroSS national boundaries is of the greatest concern to the
developing world, and these flows can quickly feel the
adverse effects of inadequate reserves.
At the end of August, President Johnson, commenting on
the London meeting, said: "Without such a scheme, the increasing inadequacy of the world's money supply will make it
progressively harder for national governmentsto follow liberal
trade and employment policies. The livelihood and even the
lives of literally hundreds of millions of people over the
next decade or two could be at issue especially in the lessdeveloped countries."
Since the war, gold and dollars have provided a flow of
new reserves. But gold is not now adding to 8lobal reserves,
nor can it confidently be assumed that it will do so to a
very large extent in the future. Total monetary gold stocks,
including those held by the Fund and other international
financial institutions, are nocsignificantly larger today
than they were at the end of 1964.
Dollars, sterling and temporary reserves created by the
Fund under existing procedures are for the time being carrying
on growth of reserves. But it is clear that future reserve
growth cannot rely, as in the past, on U.S. payments deficits.
It is against this background that the negotiations on
the Outline Plan have proceeded. And the Plan makes crystal
clear that it is possible to reach agreement on a specific
course of action despite differences in approach to the
problems of the monetary system and despite widely varying
national reserve positions and policies. We have progressed
toward agreement in a pragmatic spirit, recognizing that no
one participating in these negotiations could expect the
outcome to coincide in full with his own ideas. The judgment
and good will of a large number of responsible officials of
Governments and Central Banks have combined to bring about
this result after some years of intensive work. The Outline

- 6 -

Plan is now before us. We have the responsibility -- and the
opportunity -- to adopt a resolution to begin the process of
giving it life. This is our unique opportunity, meeting as
a body, to act on the Outline Plan, before it is committed
to our Executive Directors for final drafting, then to this
Board for approval, and to Governments for acceptance.
The Outline Plan has the full support of my country. It
provides the framework for an effective and workable structure
for meeting future global needs for reserve assets. While
there are many aspects of the Plan that are noteworthy~ shall
confine myself to a few observations:
1. The Outline Plan is a universal plan. It
is open to all members of the Fund, and I hope that
all will wish to participate.
2. The facility is intended to meet the need,
as and when it arises, for a supplement to existing
reserve assets. While each country will make its
own decision, it is expected that these Special
Drawing Rights will be treated as first-line
reserves. The United States intends to do so.
3. The new reserve asset should provide
insurance against an excessive cumulative competitive pressure for restrictions on international
finance and trade transactions. It can also act
as a counter to such interacting national moves
toward unduly high interest rates as are brought
about by competitive actions of those countries
that are protecting their reserves. At one and
the same time, it will permit growth in world
reserves and buttress confidence in the stability
of the entire system of world finance. In a
word, it should operate to relax appreciably some
of theunnecessarily painful strictures on international finance that corne fromfuars of actual or
impending reserve shortage.

- 7 4. Endorsement of this Outline Plan should in
itself provide smoother sailing in the world's
money and exchange markets. Anticipation of the
future is a powerful present factor in all things
financial. Gold and exchange markets should reflect
a new sense of confidence in the adequacy of future
reserve supplies.
5. We are gratified that the Outline Plan
recognizes that international liquidity is the
business of the Fund, and clearly provides that the
Board of Governors, where every member of the Fund
is represented, will have the final responsibility
for the vital decisions to creat new Special Drawing
Rights. However, as to the role of the Fund in the
use of Special Drawing Rights, the Outline Plan
wisely leaves scope for development through experience.
The Fund's role may well become one of general
guidance, more than one of detailed operation.
While some basic rules for use need to be maintained,
they need not be numerous or complex. The essential
part of the Fund's role would seem to lie less in
the area of specific transactions than in the
process of taking decisions to create Special Drawing
Rights and in clarifying and maintaining the basic
rules governing their use.
6. A very considerable amount of reconstitution of Special Drawing Rights may be expected
to occur through the normal balance of payments
processes. Still it has been agreed that some
explicit reconstitution provision was necessary.
At the same time, it was important to avoid
compromising the quality of the Special Drawing
Rights as a supplement to existing reserve assets.
The principles for reconstitution that have been
adopted for the first 5-year period assure that the
Special Drawing Rights will not be abused, yet do
not interfere with their reserve asset status.
In addition to the net average use provision
adopted as the initial operating rule, it is also
provided that "participants will pay due regard to

- 8 the desirability of pursuing, over time, a
balanced relationship between their holdings of
Special Drawing Rights and other Reserves."
This provision is intended to encourage a balanced
use of all three assets over time and thus maintain
stability, in a general way, in relative holdings
of the new asset and existing reserve assets, as
well as to promote equivalence between the new asset
and the traditional reserve assets.
My country subscribes strongly to the view that the new
facility is designed to assure a satisfactory rate of growth in
global reserves. It is not designed to meet an individual
country's balance of payments problems.
Let me make it clear that the new facility should in no
sense be regarded as a solution to the balance of payments
problem of the United States or to the corresponding surplus
problem of Continental Europe. This is a matter that falls
under the heading of the continuing effort to improve the
adjustment process.
As the Hague Communique of the Group of
Ten in July, 1966 noted, "The prerequisite for the actual
creation of reserves should include the attainment of a better
balance of payments equilibrium between members and the
likelihood of a better working of the adjustment process
in the fu ture . "
Of course in determining his view as to global needs for
reserves, presumably the Managing Director will take into
consideration prospective future additions to reserves in
the form of dollars or other foreign exchange, as well as a
number of other factors and developments, both quantitative
and qualitative. I doubt that an elaborate or detailed
listing of criteria and relative priorities can be established,
because conditions change and the relative importance of
criteria change. I believe it would not be useful to
incorporate a fixed list of criteria in the agreement or the
report.
The United States Delegation has great pleasure in
giving its support to the Resolution that calls on the
Executive Direcfors to propose the necessary amendments to
the Articles of Agreement. It is my strong recommendation
that the work of the Executive Directors to this end be
completed with dispatch. We hope to ~ropose legislat~on
to the Congress of Eh~ United States III the early spr~g of
1968.

- 9 The Resolution before us also requests that a report
be made on such other possible amendments as may be
recommended at the same time. We are clearly at a much
earlier stage of our consideration of other proposals for
changes in the Articles and By-Laws. Nevertheless, my
Delegation concurs in proceeding to an examination of such
proposals.
The proposals will have to be judged on their own
merits, and accepted, altered or rejected on this basis in
the report to be submitted by the Executive Directors. Some
suggestions may prove relatively easy either to accept or
reject. If, however, some suggestions are found to be
complicated and/or controversial, the Executive Directors
could not be expected to put forward next year specific
proposals for change based on such suggestions. Adequate
time should be allowed to permit a mature, broad, and certain
meeting of minds. This is the way we have approached the
question of Special Drawing Rights.
For the above reasons, I believe that specific substantive
decisions on all these matters should not be regarded as a
precondition to taking action on the Special Drawing Rights
amendment.
III
I turn now to matters relating to long-term economic
development. The improvements we are now setting in motion
in the international monetary mechanism are, I believe,
essential to the long-term well-being of the developing
countries. Economic interdependence of the developed and
the developing countries is a fact of the present and of
the future that must be a guiding principle in the direction
we give to international economic policies.
It is a paradox that the problem of development, while
infinitely complex in its economic, social, cultural and
even moral ramifications, is also blindingly simple in its
barest elements. These can be reduced to three in number:
(A) Domestic self-help policies by the developing
country sufficient to;
(B) attract external resources, public and private,
drawn from countries able to provide them
resulting in a;
(C) diligent application of the combined domestic

and external resources along lines conducive to
long-term development rather than exhausting
immedi.ate consumpti.on.

- 10 The major factor in the history of successful development
lending by the World Bank may well be its devotion to these
principles. The Bank outstandingly reflects them today.
The subject of International Development Association
replenishment, while not formally on our agenda, is
nevertheless the most important business pending before the
Governors of the Ban~ family of institutions. It should be
evident from my remarks today that President Johnson fully
supports the efforts of the World Bank management to achieve
a replenishment for IDA on a substantially enlarged scale.
r am hopeful that in their statements here, other Governors
will share this attitude.
We are mindful, of course, that external assistance
such as IDA provides can only supplement sound national
development efforts. Only in association with self-help
efforts -- coordinated and soundly applied domestic policies
and actions -- can the application of external assistance
bring developing countries to sustained growth.
Further, domestic self-help policies which need not be
catalogued here are of vital importance to create a climate
in the developing countries conducive to maximizing the
flow of external resources -- public and private. Where these
measures are lacking, the task of commanding the support
of the electorates of high-income countries for continued
assistance with public funds will be made far more difficult.
Where these are lacking, private resources will not flow
in desired directions and amounts.
Two developments of the past year are especially
noteworthy for us here in relation to the object of
encouraging greater foreign and local private capital
participation in the growth process.
The initial use of the authority granted under earlier
Charter amendments was made by the Executive Directors
approving a $100 million line of credit from the World Bank
to the International Finance Corporation. As a result, we
may expect even more substantial increases in IFC financing
of the private sector -- and in the much larger ~olumes?f
foreign and local private capital that are assoc1ated w1th
it.

- 11 -

Second, the inauguration of a new and useful facility
within the IBRD institutional structure -- the
International Centre for the Settlement of Investment
Disputes -- through arbitration and conciliation services
will contribute materially to an improvement of the
climate in which international private investment takes
place. In so doing, it will extend the area that can benefit
from private investment. It merits the support of the
entire membership of the Bank.
I cannot over-emphasize the importance of policies
conducive to a strong and dynamic private sector,
offering opportunities to both foreign and local capital,
and serving as the pace-setter of the economy.
In stressing the role of private finance, I am, of
course, ever mindful of the need for effectively mobilized
and effectively applied public finance. We heard in
the opening addresses yesterday and will in the next days
learn more of the urgent need for the developed countries
to find the ways and means of promoting increases in
the volume of real resources available for development.
We have too long remained on the so-called aid "plateau".
It is time to strike out for higher ground. The World
Bank family, and with it the regional banks, offer a
promising channel for doing just this.
I would be taking an unrealistic view of the world
if I were not to recognize, however, that, leaving
aside the budgetary problem we all face, there are at
least two other constraints that tend to hold back the
steadily increasing availability of resources to these
multilateral lending institutions.
(A) Capital markets everywhere are under pressure
from mushrooming domestic requirements. The
price of capital in many markets is touching
historic highs. The World Bank should not be
forced to place excessive reliance on any
single market for its rising capital needs.
A sustainable mechanism for providing
development finance to the Bank through

- 12 private markets requires an equitable
sharing of the total efforts -- and the
concept of equity embraces reasonable
terms as well as adequate amounts.
Certainly, surplus countries should contribute
positively to the adjustment process through
granting preferred and substantially increased
access to their capital markets by the Bank
and other multilateral lending agencies.
(B) Balance of payments factors are the other special
constraint. Rather than permit our serious and
continuing balance of payments difficulties -made still more complex by the foreign exchange
cost of our effort in Vietnam -- we in the u.s.
have found ways to maintain a high level of aid
through the transfer of real resources to the
developing world.
We would prefer, in an ideal world, to make our
assistance available in the form of financial resources.
However, when balance of payments realities confront us,
our choice is clear: we strive not to reduce the level of
our assistance -- but instead to make our assistance
available through transfer of real resources. This approach
requires that the real resources represent an addition
to, not a substitute for, goods and services moving
in normal commercial channels.
If serious and continuing balance of payments difficulties
constitute a constraint on the ways the u.s. can provide
assistance, persistent balance of payments surpluses
constitute an imperative to countries enjoying such a
position to expand their assistance in the form of finance.
A sensible policy for such countries, and a policy which can
make a contribution to the over-all adjustment process in
the international payments system, is one of increasing the
VOlume, easing the term, widening the geographic scope and
eliminating procurement limitations on the flow of
development funds.

- 13 These thoughts are relevant to the unresolved question
of IDA replenishment.
As of last March, I was authorized by President Johnson
to support the IDA replenishment at a substantially increased
level, provided that account should be taken of the balance
of payments problems. of deficit donor countries in deciding
how IDA 1 s new resources would be made available. Such a
feature will in fact speed agreement leading to transfer of
resources to less-developed countries through IDA.
If the multilateral agencies themselves are to achieve
our hopes for them, they must have increasing funds committed
by the donors for a long-term period. Balance of payments
safeguards will help assure that long-term contributions are
made, since only with their protection will Finance Ministers
be in a position to assure their legislatures that the uncertainties of the future have been taken into account.
In thus referring briefly to IDA replenishment discussions
I would like to make one further point very clear. Nothing in
the United States plan would require IDA to make any changes
in its present policies with respect to the allocation of its
resources to countries and projects, or with respect to
international competition in procurement, and no such changes
are contemplated in this proposal.
The magnitude of the tasks ahead requires that we strive
to improve the quality of the development efforts of both the
advanced and the developing countries. In so doing, we must
recognize that certain economic sectors demand greater concentration of these improved efforts. The twin problems of
food and population should now occupy the forefront of our
attention. The U.S. is emphasizing assistance in agricultural
improvement -- including land reform as well as direct
production improvements -- in its own programs. The international institutions are giving increased attention on their
part. Nothing less than the highest priority attention to
these problems will provide the basis for averting the
potential disaster that looms in the food-population race.

- 14 In closing my remarks I would like to quote to you the
words of the Brazilian Representative, Mr. Souza Costa, who
in offering a resolution of thanks at the final session of
the Bretton Woods Conference, said:
"As the knowledge of these results becomes
more widespread,. a corresponding increase will
take place in the number of those who, realizing
the greatness of the objectives sought, will wish
to be counted among the supporters of this
undertaking."
How correct this prophesy has been with respect to the
Fund and the Bank. Let us hope that our successors will say
the same of the work that we have launched at this Annual
Meeting.

000

TREASURY DEPARTMENT
Washington

FOR P.M. RELEASE
SATURDAY, SEPTEMBER 30,1967

REMARKS BY THE HONORABLE TRUE DAVIS
ASSISTANT SECRETARY OF THE TREASURY AND
UNITED STATES EXECUTIVE DIRECTOR
OF
THE INTER-AMERICAN DEVELOPMENT BANK
BEFORE THE EXECUTIVES' SECRETARIES, INC.
KANSAS CITY, MISSOURI
SATURDAY, SEPTEMBER 30,1967, 10:30 A.M., CDT
YOUR BENEFITS FROM GOVERNMENT SPENDING
This morning I would like to talk with you about your
government's gathering and spending of money -- your money.
And this, as any taxpayer would quickly point out, is not
very funny. There are occasions, of course, when the American
public views the payment of taxes with a sort of grim humor.
But on the whole, the raising of federal revenues and their
subsequent spending is a serious business, affecting not only
the lives and welfare of every American, but also millions of
people throughout the world.
In a democracy such as ours, every citizen has a right
to know why he is being taxed and what happens to the money
he contributes through his taxes -- whatever form they may
take. And government, on the other hand, whether it is local,
State, or federal, is obligated to explain and justify its
expenditures. This explaining and justifying on the federal
level takes place not only in committee hearings of ,the
Congress, on the floors of both the House and the Senate, but
also in the American press, including radio and television.
The federal arena of public inquiry is every cultural
institution where public policy is discussed and debated.
The participants in this important discussion are the millions
of Americans who are concerned with how the federal government
spends its revenues, where it spends them, who benefits
directly, and what we ultimately hope to achieve.

- 2 -

Before discussing how, why, and where we spend federal
funds, let's look for a moment at the source of these funds.
The amount of money your federal government spends every
year depends primarily upon the economic health of our country
and the financial well-being of our citizens. This is true
not only of the United States but of every country. Countries
that are economically poor usually are economically
underdeveloped countries or countries which have little
or no natural resources capable of intelligent development and
exploitation. On the other hand, countries that are
economically prosperous usually are highly developed, industrialized countries. The economic health of a nation, in
other words, determines the economic health and financial
well-being of its citizens. I would like to emphasize
that as a people and as a government, we are committed
to maintain a healthy, viable economy, to provide maximum
employment to an ever-increasing population, and to use, in
an intelligent, fully-productive manner, our country's natural
resources, as well as our human resources -- the work of our
people -- which is the most important resource of all.
One reflection of the health of our economy and the
financial well-being of our citizens is in the amount of
revenues the federal government receives. In examining the
federal administrative budget for the fiscal year that ended
June 30, 1967, we find that the government received some
6l~ billion dollars from individual taxpayers, 34 billion dollars
from corporations, and 20.3 billion dollars from other
sources, such as excise, gift, and estate taxes. Our total
fuderal administrative receipts amounted to 115 billion,
794 million dollars. The amount of money that the federal
government spent during this same twelve month period, totaled
125 billion, 700 million dollars.
In other words, we spent almost ten billion dollars more
than we received. We were able to do this through borrowing
from the American public by selling Treasury bills, notes,
certificates, and Savings Bonds.
Each year the government estimates what it thinks it
will receive during the coming fiscal year. Estimating
revenues is always a ticklish business, for the government
has no way of guaranteeing in precise terms the amount of
revenues that our economy will generate. We can only.
estimate what the tax structure may yield under certa~n assumed
As conditions change, estimated tax .
economic conditions.
revenues may vary substantially from prior estimates, result~ng
either in a budget surplus or a budget deficit. Last

- 3 year we would have had a budget surplus had it not been for
additional costs of the Vietnam war.
During the present fiscal year ending June 30, 1968, we
anticipate a budget deficit that may go as high as 28 billion
dollars unless we take important steps to increase federal
revenues and reduce federal expenditures. It was for this
reason that the President recommended to the Congress last
August a program that would substantially increase revenues
by speeding up corporate tax collections, continuing existing
excise taxes,and placing asurcharge on corporate and
personal income taxes. Taken together, these tax measures
would raise some 7~ billion dollars during the current fiscal
year.
Depending upon the ability of the Congress and the
Executive Branch of the federal government to hold down
expenditures, the estimated deficit could be reduced to a
manageable range of between 14 and 18 billion dollars.
Unless the recommended tax proposals are adopted soon there
is a strong possibility, as President Johnson emphasized, that
inflation and tight money will tax the American people cruelly
and capriciously. Enactment of the President's tax proposals,
00 the other hand, would mean that the burden of financing
the war and carrying out essential domestic programs would
be more equitably shared by the many elements of our society
which contribute to the vitality of our economy.
We read a lot and we hear a great deal said about the
necessity for reducing government expenditures. What we don't
read and don't hear a great deal about are the continuous demands
for increasing government expenditures. These demands do not come
from people or groups of people who are financially irresponsible
or ignorant of fiscal, economic, and tax policy. Nor do they come
from isolated pressure groups within our society. These demands
Come from the entire spectrum of our society and from well-educated,
highly sophisticated people who believe that our economy is
sufficiently dynamic to support domestic programs necessary to
strengthen our institutions and enrich the lives of all Americans.
It is impossible for me, in this brief time, to chart
for you the flaw of funds from your federal government back
into the small towns and large urban centers of our country,
or into the cultural institutions that are concerned with
the health welfare and education of our citizens. Suffice
it it say ~hat your'tax dollars do flow, both directly and
indirectly, into every conceivable endeavor.or.pursuit that
We are engaged in as a nation of some 200 m~ll~on people.
Where we differ as Americans is in the assignment of
priorities -- in determjning which endeavors, which projects,

- 4 should receive a proportionally greater or lesser amount of
federal funds.
As a nation, we have at times been unjustifiably criticized
I believe, because we have been overly concerned with how
'
other cou~tries spent money we lent them, either directly,
through b~lateral arrangements, or indirectly, through regional
or international banks. How a government spends its money,
however, is extremely important. Money spent for the
education and health of its people, for example, will enrich
the resources of that country and provide greater personal
happiness for its people -- two bulwarks against social revolution.
Money spent by a government on unnecessary military armament,
or on projects which do not develop its technological and
scientific resources -- which do not benefit the people -- will
never enrich the country's economy. So how a government spends
its money is the indispensable criterion in determining whether
a government serves its people and strengthens those
institutions that give meaning and substance to their culture.
Many of you grew up after World War II, and I rather imagine
that many of your fathers went to college on the GI Bill of
Rights. Under this bill, your federal government invested14~
billion dollars to send more than eight million veterans to
schools. This program, I believe, clearly illustrates what I
am trying to convey to you <i>out the wise use of federal funds
to strengthen and enrich the resources of our country.
What did our society receive for its investment of some
billion dollars? In human terms we got 450,000 doctors and
l}urses; 180,000 teachers; 360,000 scientists; 107,000 lawyers;
36,000 clergymen; 243,000 accountants; 700,000 businessmen;
83,000 police and fireman; 17,000 journalists; and over one and
one-half million construction, metal, and electrical workers and
printers. This is what our nation received in human terms.
14~

In economic terms how did the nation benefit? In dollars
and cents our veterans paid over one billion dollars a year in
income taxes that they would not otherwise have paid without
their advanced education. The World War II Bill of Rights paid
for itself in less than fifteen years. Our country will continue
to reap the benefits of this federally financed investme~t f?r
decades -- and not just economically. Already the contr~but~ons
by these veterans to the cultural institutions of our country -as a direct result of their pursuit of knowledge -- has been of
inestimable value.

- 5 -

Earlier this month President Johnson signed into law a
new GI Bill of Rights. This extends to young men and women
who have served in our armed forces since January 31, 1955,
the same educational opportunity that we provided an older
generation. In doing this, we are continuing a valuable
tradition that will mutually benefit our veterans and our
nation. Both will be immeasurably enriched.
During the last fiscal year that ended June 30, the
federal government spent, as I mentioned earlier, 125 billion
dollars. More than half of this amount -- some 68 billion
dollars -- went for defense o Another l3~ billion dollars
went for interest on the public debt. Approximately 14 billion
dollars -- and this figure is extremely important -- was
spent enlarging equality of opportunity denied milliom of
our citizens, and in promoting the general welfare of all
our citizens. The domestic areas in which we channeled some
14 billion dollars include our public health, labor, and
welfare programs; economic opportunity projects; urban
renewal, public, and private housing; and the vast field of
education, from elementary schools into post graduate research
in our colleges and scientific institutions.
You know without my having to remind you of the numerous
problems existing in these areas of human relations. As long
as these problems remain -- as long as millions of human
beings are denied equality of opportunity in education, health
coverage, housing, and employment -- we are not adequately
fulfilling our obligations -- as citizens and as a government
to the political democracy which we profess and in which we
believe. As long as these problems remain they weaken the
structure of our society and our cultural institutions.
Yet it is in precisely these areas where so much misunderstanding prevails and where so many conflicting philosophies
exist. Enlightened Americans realize the necessity for providing equality of opportunity to all our citizens -- equality
of opportunity in all areas; education, employment, housing,
and as participants in the. democratic processo There is .
nothing wrong with conflicting philosophies when the conflLct.
arises over the best way to provide this equality of opportunLty.
Differences in approaches can always be satisfactorily resolvedo

- 6 -

Unfortunately, however, there are too many unenlightened
Americans who resent and prevent the constructive use of
federal funds to help eradicate the social diseases that
corrupt our society. We must not let the voices of the unenlightened, the prejudiced, the immature Americans deter
us from the important tasks we face as a people.
Out of this 14 billion dollars spent last fiscal year
in areas that I have mentioned, almost three billion went
directly into the field of education to improve our schools,
to help insure every person's receiving an opportunity to
obtain an education, to provide better educational facilities
and services, and to pursue basic research across the spectrum
of our intellectual activity. "We have entered an age,"
President Johnson recently said, "in which education is not
just a luxury permitting some men (and women) an advantage
over others. Education has become a necessity without which
a person is defenseless in this complex, industrialized
society. And the education our children get now charts the
course not only for their individual lives but for the welfare
of our country in the coming decades."
A few years ago, Dr. John W. Gardner, then president
of Carnegie Corporation of New York and Carnegie Foundation
for the Advancement of Teaching, and now Secretary of the
Department of Health, Education and Welfare, headed a task
force to chart our national goals in education. His thesis
is well worth repeating: "In our society, education, ultimately
serves all of our purposes -- liberty, justice and all our
other aims -- but the one it serves most directly is equality
of opportunity. We promise such equality, and education is
the instrument by which we hope to make good the promise."
In emphasizing the importance of education and the use
of federal funds in helping us achieve our goals in this
area, I am not forgetful of the great work that needs to be
done in correlated areas. Nor is the President, who recently
reminded the Congress and the American people of the number
of essential programs proposed by the Administr~tion d~ring
the current fiscal year which are concerned ent~rely w~th or
significantly with the tremendous urban problems of our
nation -- programs that have yet to be acted upon by the
Congress.

- 7 In these areas, as in others, the federal government
must lead the way -- as it is doing -- in directing our
national energies toward the realization of our national goals.
These goals have been established in all areas of human endeavor, and the taxes we pay provide the necessary revenues
through which we can move toward the realization of these objectives. This does not mean that private capital and private
initiative should not be used in helping the federal government
direct the nation toward achieving our national objectives.
On the contrary, local community action, State-wide action,
and regionally-wide action involving several States with
mutual interests, must be a constant energizing force not only
in financing essential projects, but in providing dynamic
leadership so essential to any undertaking. Without such
leadership and assistance the federal government's tasks
become more difficult and the realization of our national
objectives less imminent.
We must also realize and remember that local and State
taxes, which are constantly rising, are essential in providing
necessary services in local communities. They are needed for
better roads, better schools, better salaries, better recreational facilities, better housing, cleaner air and purer
streams, in short -- for a better physical and intellectual
environment for Americans.
The tasks before us -- locally and nationally -- are not
difficult to fulfill. As long as we continue to work together
in unison toward their realization, we will constantly improve
the general welfare and open wider the doors to equality of
opportunity for all our citizens. In doing this we enrich the
legacy we bequeath to successive generations of Americans.

000

TREASURY DEPARTMENT
Washington
FOR RELEASE:

ON DELIVERY

REMARKS BY THE HONORABLE TRUE DAVIS
ASSISTANT SECRETARY OF THE TREASURY
AND
UNITED STATES EXECUTIVE DIRECTOR OF
THE INTER-AMERICAN DEVELOPMENT BANK
BEFORE THE
HEART OF AMERICA lAW ENFORCEMENT ASSOCIATION
SHERATON-ELMS HOTEL, EXCELSIOR SPRINGS, MISSOURI
SATURDAY, SEPTEMBER 30, 1967, 7 P.M., CDT
It is a real pleasure to be with you this evening, for
you dedicated individuals are making this country a safer
place to live.
In this day and age there is a greater need for good
law enforcement than ever before for the law violator is
tougher, stronger, and better equipped than ever before.
Both at the Federal and the local levels the last twenty
years have brought dramatic and important changes to
enforcement work. Our United States population has increased
over forty percent in the last twenty years; and since
crime depends upon people, crime, too, has vastly increased
and with it the task of enforcement. At the same time, the
complexity of effective enforcement has become formidable,
requiring no small understanding of law and a thorough
~derstanding of the conditions deep down in the community.
What is more important, enforcement work and enforcement
resources represent a far higher priority claim on community
and national program resources as compared to twenty years
ago.
More people are unhappy about crime because they live
closer to it than they used to, and, like anyone who is
~happy over a problem, they want greater resources and
more advanced methods to make the problem go away. Our
large city areas have more voters, more crime, and demand.more
enforcement; and it would be surprising if it were otherwl.se.

- 2 -

The Treasury Department has been concerned with law
enforcement programs longer than any other department of
the Government. The Bureau of Customs was created in 1789,
and it was the first Federal agency to be established by
the Congress. In fact, it precedes the United States
Treasury of which it is now a part. Other law enforcement
agencies we have within the Treasury are the Bureau of
Narcotics, the Secret Service, the Intelligence Division,
and the Alcohol and Tobacco Tax Division of the Internal
Revenue Service, and, up until this past April, the United
States Coast Guard. So we, too, at the Treasury are concerned
with law enforcement in a big way and can appreciate the myriad
problems attendant.
My good friend, and a most capable man, James Hendrick,
who is Special Assistant to the Secretary for Enforcement,
is charged with the responsibility of supervisi ng and
coordinating these various enforcement groups. He and the
able heads of these bureaus and divisions, I feel, perform
a most exacting task in the finest manner conceivable.
By now every school child knows of the efforts and
successes of Eliot Ness in Treasury enforcement activities
against the forerunners of today's organized crime figures.
Most adults are aware that when Al Capone was finally
convicted, it was for violation of the laws enforced by the
Internal Revenue Service. But I suspect very few persons
outside the law enforcement field realize that 60 percent of
the organized crime figures now under detention are there as
a result of Internal Revenue Service convictions.
The Customs Service has responded to a rapid increase
in attempted narcotics importation by an equivalent increase
in its effectiveness resulting in the largest seizures of
marihuana in its history this past year. I might say that
the Customs Service has found itself in an extraordinary
administrative predicament as a result of these seizures
The amount of marihuana now being stored by the Customs
Bureau as evidence pending trial of the importers has .
reached such proportions that it is outgrowing the ava1lable
secure storage space. An arrangement is being worked out
with the Justice Department to permit destruction of large
portions of this material, reserving samples for use as
eVidence.
0

- 3 -

Seizures by other Bureaus continue to mount rapidly.
The Secret Service seizes approximately 90 percent of the
counterfeit currency manufactured in this country before it
reaches the public; notwithstanding the fact that counterfeiting
activity has tripled within the last four years.
The Bureau of Narcotics has some reason to believe it
is approaching the cres t of the hill in its long war
against the dark, desperate business of the heroin traffic.
There are increasing indications that the purity of heroin
sold an the street is declining, the strength of the
individual dose diminishing, and the cost to the addict
rising. There have been recent reports that organized
crime may be cons idering abandoning the heroin traffic
altogether because of the increasing effectiveness of the
law enforcement activity directed against it.
These impressive indications of increased effectiveness
investigation have been accompanied by technical
and sc ientific deve lopments in the Treasury enforcement
agencies which should lead to even greater successes in the
future. The Secret Service Ninhydrin Fingerprint Laboratory
with its capability of raising latent fingerprints from even
lightly touched paper is the most advanced fingerprinting
facility in the country.

m criminal

The Alcohol & Tobacco Tax Laboratory's neutron
activation analysis has provided a major breakthrough to
all law enforcement agencies. As you no doubt know, this
process enables absolute identification of true elements in
inorganic materials so that a fleck of paint, a piece of
hair, or a soil sample may be identified as part of another
sample with absolute certainty rather than as a matter of
subjective opinion. The inportance for evidentiary purposes
of such identification is hard to exaggerate.
The Secret Service, Customs Bureau, and Internal Revenue Service
are, of course, expand ing the ir use of computers in the
law enforcement area. Within the month the Treasury will
be linked into the National Crime Information Center of the
F.B. r. In the immediate future it will be possible for an
agent at a pay phone to dial a number and know within seconds
whether the automobile he is watching has been stolen
anywhere in the United States or whether there is a valid
warrant for the arrest of a given person outstanding in any
jurisdiction in the United States.

- 4 The Bureau of Narcotics is participating in studies
of the application of techniques of economic market theory to
determine, from studies of heroin pricing in New York and
Chicago, additional information about the structure of the
organizations distributing the heroin. The results of
such studies may be of considerable assistance to augment
the intelligence derived from traditional investigative work.
These achievements are all the more remarkable when
ooe considers the size o£ the total force which is producing
them. Altogether there are 4950 law enforcement agents in
the Treasury. As has been suggested by certain car-rental
firms, this makes us only "second biggest" and I might
suggest that perhaps our motto might be "We try harder."
The accomplishments certainly do not receive the recognition
they deserve. Director Rowley of the Secret Service has on
his desk a motto, cast in bronze, to the effect that there is
no limit to what you can accomplish if you don't care who
gets the credit.
These new techniques, the new processes, the new
procedures, methods and tools that will help us do our
work better are certainly useful; however, there is a new
dimension to our work. It is one which I expect you are
already finding yourself and your staffs spending more
and more time exploring. I refer to being aware of, and
understanding, the importance of economic and social
factors that are creating and shaping many kinds of problems
with which law enforcement officers must cope.
No longer is it enough for a law enforcement official
to understand the law or to understand the teclmiques for
apprehend ing those who break the law.
But we must now understand the why of those people,
those movements and those processes which threaten law and
order. For only through understanding why law and order
is threatened can we take steps to prevent disturbances
before they o~cur, to find the pressure points behind them
and move quickly to alleviate these pressures before they explode.
Simply,stated -- it means preventing.trouble befor: it
happens. If we can accomplish this, we wLll be perfo~mLng
in our most effective manner. For we are most effectLve at our
jobs when we understand not only ourselves, not only our
profeSSion, not only our problems, but also our enemies.

- 5 -

Equally as important as knowing those individuals and
groups that threaten law and order is earning and maintaining
the respect of law abiding citizens.
This, as we all know, means that we must continually
strive for a higher degree of professionalism. We must
always be willing to re-examine old ways, old procedures
old techniques, in the light of current knowledge and
'
information and new interpretations of law.
Here in this country our President has launched a
vigorous campaign against crime. President Johnson initiated
the first systematic, nation-wide study of lawlessness, law
enforcement and the administration of justice in our history;
and our children and our children's children will be the
beneficiaries.
Two weeks ago, President Johnson spoke to the International
Association of Chiefs of Police in Kansas City and pledged
that he was ready and willing to do his part on the Federal
level to undertake a far reaching program to reduce our
nation's crime. But he further pointed out that all
citizens must "be willing to pay the bill for improving
the performance of our police, and our courts, and our
correctional institutions and give them the salary, pay, and
equipment they need."
The President realizes, perhaps more than any other
person in this nation of ours, that lawlessness and crime
must be brought under control. The President further
stated, "let us act instead of talk against crime. Let
us repair as many shattered lives as we can. Let us do
it within and through the American system of due process
and in keeping with our tenacious regard at all times for
the bless ings of individual freedom."
As crime trends ascend, enforcement must do its job
better. This means that enforcement organizations must
possess the analytical faculty to determine how well they
are doing, what needs to be done, what facilities t~ey
need, and how to employ them. They must know, or ~Lnd ?ut,
these things with a hi.gh degree of precision. It LS gOl.ng
to be difficult, but so all important, for Federal and
community enforcement to muster the resources, the raw
human material, and the training programs to put men in the
Field who are consistently up to the extraordinary demands
of enforcement work at its best. This becomes a complicated

- 6 -

business for many high priority programs are advancing
together, each competing for the men, women and resources
that it needs: medical programs, educational programs,
military programs, urban recovery programs, enforcement
programs. However, as the President has indicated, he is
willing to take the lead in insisting that enforcement
resources be given a far greater priority than ever.
There is an absorbing fascination in your work as
enforcement officers. It is hard work, often dangerous,
sometimes straining your family tranquility as a result
of irregular hours. But, on the other hand, I know you all
have felt the challenge of the problem to be solved -- the
pride of pitting your wits against a suspected violator -the camaraderie of working with trusted fellow officers -the satisfaction inherent in a case successfUlly completed.
In other words, you have a justifiable pride in your work.
You gentlemen are one of the most valuable assets of our
nation.
In recent years our higher courts have handed down
decisions which have compelled you to change and improve
your law enforcement methods. Many of these changes may
not be to your liking; hONever, they represent the law of
our land and as good citizens we must obey these laws for
they make up the backbone of our nation and civilization.
The Government and the people of our nation trust us
to maintain our individual and professional integrity,
beyond the shadow of a doubt.
They trust us to protect them from unseen dangers,
regardless of risk.
They trust us to move forcefully and effectively when
danger shows itself.
They trust us never to use unnecessary force and
never to interfere with those individual rights which the
people of all free nations cherish.
Finally, they trust us to carry out our work in such a
fashion that the police power of the Go~ernment, and the State,
is used for the benefit of all the people. When it is so
used, the democratic institutions and processes are
strengthened.

- 7 -

These are heavy responsibilities which none of us take
lightly. They carry a single reward, the reward of public
trust. They carry a single opportunity, the opportunity
for public service -- a trust and an opportunity that we
share alike. This view we must keep always with us,
especially when the trust bears heavily upon us and the
responsibilities seem oppressive.
You men by your very profession are patriots, and
patriots in the true sense of the word in that you have
dedicated your lives to making this nation a better place
to live and, accordingly, I do want to advise with you a
minute concerning the conflict in Vietnam.
Our President has tried hard -- believe me, he has -to end this conflict in Vietnam. He has offered the
Communists every possibility of meeting them at the conference
table that any honorable person could. He has stated many
times that we are in Vietnam because the great majority of
our people believe that the citizens of Vietnam should have
a free choice.
Our nation is a democracy, and we believe in the
right of the minority to express themselves. Yet I do not
believe that extremist groups, leaning heavily to the right
or to the left, should conduct themselves in a manner which
sows seeds of treason.
There is disagreement among loyal and earnest citizens
as to our role in the Vietnam conflict. I do not think that
disagreement over our role in Vietnam runs along ideological
lines. I think, rather, that it arises largely from lack of
information and perspective.
The basic elements of the situation in Vietnam are the
facts that:
1. A long lasting, and growing, attempt has been made
by the Communist powers in the North (North Vietnam,
encouraged and supported by Red China) to take over
South Vietnam.

- 8 2. There is absolutely no indication of any kind
that the aggression against South Vietnam would
halt there, if it were successful. Every other
country in Asia, in an ever widening circle,
would be menaced by an ever-narrowing pair of
pincers, consisting of Red China and a
collection of countries impressed in the
Marxist world in Southeast Asia. These
pincers would end by closing upon India and
Pakistan. Then, a new expansionist movement
would be ready, with Asia Minor and the
Middle East as its target. The problem is
not merely South Vietnam and its 15 million
people. It is a problem concerning, more
nearly, half the population of the world,
spread over all Asia and the Middle East.
3. The third critical consideration is that only
with the help of the United States is it
possible to halt this disastrous entombment of
half of mankind in the grave Marxism has ready
for the free and beneficial life that the
world has been struggling toward since
civilization began. If we do not help halt it,
no one can do so~
That, to my way of thinking, is what it is all about in
Vietnam.
What, then, is the prospect?
I think that the prospect is for bringing the advance of
Marxist fear, class hatred, and economic failure to a complete
halt, at a known and generally recognized line in Asia, just
as we did earlier, by military firmness, in Europe. The
Communist part of the world only knows force -- and firmness.
That is a result of such tremendous significance that
the sacrifices and dangers of Vietnam stand forth as one
of those great hinges upon which history turns
With a line
drawn in Asia, we can begin the long and arduous process, there,
as we have begun it in Europe, of opening the tomb once again to
the light of freedom. With the line drawn, with aggression
halted, with a wide and evermore prosperous world of freedom
0

- 9 -

preserved and secure, we can entrust the task of eventual
world victory for freedom to the kind of world that freedom
builds once we have made certain that it has room to do its work.
Liberty is precious -- far more precious than riches -and we must fight and be willing to fight to defend it. Those
patriotic forebears of ours at Bunker Hill, Lexington,
Saratoga and Yorktown placed liberty above their lives and
gave willingly to establish our way of life on this
continent. One hundred and ninety years later we are faced
with the same choice in the free world.
Recently, I have noticed that some of our young people
have sneered at the word "patriotism." To me, this is an
outrage. But perhaps we must assume part of the blame, for
possibly we have not awakened in our young people the true
meaning of the word "patriotism." I feel that it is the
responsibility of each one of us to re-awaken the burning
light of freedom in our hearts; and by our very enthusiasm,
carry this to our young people. Defenders of liberty,
believers in freedom, we shall prevail as we have in the
past. We all may have some political differences -- but first
of all, and always, we are Americans~

000

UNITED STATES SAVINGS BONDS ISSUED AND REDEEMED THROUGH

October 31, 1967

(Dollar amounts in millions - rounded and will not necessarily add to totals)
DESCRIPTION

AMOUNT ISSUED2I

AMOUNT
REDEEMED lj

AMOUNT
OUTSTANDING

% OUTSTANDING
OF AMOUNT ISSUED

~URED

eries A-1935 thru D-1941
eriN; F and G-1941 thru 1952
eries J and K-1952 thru 1954

5,003
29,521
2,236

4,995
29,lt69
2,215

8
52
21

.16
.18
.94

1,866
8,2U3
13,269
15,468
12,144
5,h95
5,203
5,368
5,29u
4,627
4,006
4,197
4,789
4,877
5,079
4,898
4,604
4,475
4,186
4,185
4,214
4,059
u,511
4,403
4,.309
U,624
2,807

1,632
7,225
11,658
13,495
10,407
u,Sl5
4,10u
4,135
4,005
3,hh4
2,982
3,093
3,4.30
3,409
3,472
3,289
2,987
2,742
2,512
2,391
2,279
2,132
2,182
2,084
1,946
1,732
581

235
1,018
1,610
1,972
1,737
980
1,099
1,234
1,289
1,183
1,024
1,104
1,358
1,469
1,607
1,609
1,616
1,733
1,675
1,79u
1,9.35
1,927
2,332
2,319
2,36.3
2,892
2,226

12.S9
12 •.35
12.13
12.75
14.30

589

593

-4

151,789

108,454

43,335

28.55

5,u8S
6,37.3

2,875
1,121

2,610
5,252

47.58
82.41

11,858

3,996

7,862

66.30

163,647

112,450

51,197

.31.29

1,515

1,201

313

36,760
165,162
209.921

36,679
11.3,652
150.331

80
51,510

IATURED
eries

E!.J:
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967

Unclassified
Total Series E
!ries H (1952 thru May, 1959).Y
H (June, 1959 thru 1967)
Total Series H
Total Series E and H
ries J and K (

1955

thru 1957)

{Total matured
I Series

Total unmatured
Grand Total

1?cA3
2:.; .12

22.99
24.35
25.57
25.56
26 •.30
28 •.36
.30.12
31.64
32.85
35.10
.38.73
40.01
u2.87
45.92
u7.47
51.66
52.67
54.84
62.54
79 •.30

~1.~91

es accrued discount.

I~ redemption value.

. .
.
. .
.
Ion of owner bonds rna)' be held and will earn interest for additional periods after Original maturity dates.
es matured bonds whirh htl"" nDt hl'pn prps..entpd [or redpmptlOn.

------,---------------

Form PD 3812 _ TREASURY DEPARTMENT - Bureau of the Public Debt

20.66
.22
.31.19
24.58__

TREASURY DEPARTMENT
:

IR RELEASE 6: 30 P oM.,
Inday,

October 2, 1967.
RESULTS OF TREASURY' S WEEKLY BILL OFFERING

The Treasury Department announced that the tenders for two series of Treasury
11s, one series to be an additional issue of the bills dated July 6 1967 and the
her series to be dated October 5, 1967, which were offered on septe~ber 27, 1967, were
ened at the Federal Reserve
Banks today. 'lenders were invited for 'P,
dol 400 , 000 , 000 , or
.
eresbouts, of 91-day b~lls and for $1,000,000,000, or thereabouts, of 182-day bills.
e details of the two series are as follows:
NGE OF ACCEP'IED
MPETITIVE BIDS:

91-day Treasury bills
maturin6 Januar~ 42 1968
Approxo Equiv.
Price
Annual Rate
4.47811
98.868 ~
4.542~
98.852
98.859
4.514i
!I

High

Low
Average

l82-day Treasury bills
maturi!!a A12ril 4,2 1968
Approx. Equiv.
Price
Annual Rate
97.440 '§j
5.064%
97.418
5.107rf,
97.427
5.08~
Y

Excepting 2 tenders totaling $325,000; Ef Except 1 tender of $200,000
of the amount of 91-day bills bid for at the low price was accepted
of the amount of 182-day bills bid for at the low price was accepted

55~

86~

I'AL n:NDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISnuCTS:

)istrict
3oston
lew York
)}Uladelphia
!le ve land
!ichmond
~t1anta

:hicago
It. Louis

linnes.polis
&laas City
ellas
:an FranCisco

TO~

Accepted
Applied For
20,383,000 $ 10,383,000
962,927,000
1,483,499,000
13,725,000
25,725,000
22,653,000
22,633,000
11,196,000
20,666,000
28,347,000
44,639,000
159,989,000
209,876,000
28,706,000
36,317,000
20,781,000
25,558,000
24,119,000
25,119,000
16,913,000
25,913,000
100,705,000
124,2140,000
$2,064,468,000

Applied For
15,563,000
1,340,050,000
16,659,000
40,895,000
16,731,000
33,204,000
201,175,000
28,811,000
18,393,000
18,221,000
20,282,000
157 2°21 2°00

Accepted
~
10,563,000
681,680,000
8,659,000
31,895,000
6,731,000
17,104,000
107,175,000
19,081,000
8,393,000
13,196,000
10,282,000
85,2341,000

£I

$1,907,005,000

$1,000,100,000

$1,400,424,000

:
:
:

Includes $226 964 000 noncompetitive tenders accepted at the average price of 98.859
Includes $148; 067; 000 noncompetitive tenders accepted at the aver~ge pri 7e of 97.427
~se rates are on a bank discount basis. The equivalent coupon ~ssue y~elds are
4.64~ for the 91-day bills, and 5.3li for the 182-day bills.

-1044

TREASURY DEPARTMENT
4

R RELEASE 6: 30 P.M.,
esday, October 3, 1967.

RESULTS OF TREASURY'S OFFERING OF $4:.5 BILLION TAX ANTICIPATION BILLS
'!be 'ITeasury Department announced that the tenders for two series of Treasury
{Anticipation bills, one series to be an additional issue of the bills dated July
, 1967, and the other series to bL da ted October 9, 1967, which were offered on
rtember 22, 1967, were opened at the Federal Reserve Banks today. Tenders were
ri~d for $1,500,000,000, or thereabouts, of 196-day bills and for $3,000,000,000,
~ereabouts, of 259-day bills.
The details of the two series are as follows:
fGE OF ACCEPTED
IPEi'i'llVE BIDS:

High
Low
Average

19G-day Treasury bills
maturing April 22, 1968
Approx. Equiv.
Anr.ua 1 Ra te
97.327
4.910%
97.::'06
4.948%
97.314
4.933%

259-day Treasury bills
maturing June 24, 1968
Approx. Equiv.
Price
Annual Rate
5.030%
96.381
5.212,%
96.250
96.325
5.108%

6% of the amount of 196-day biliE bid for at ~he low pr~ce wes accepted
1001I of the amount of 259-day b'lls bid for at the low price was accepted
~

TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

,strict
IS ton
w York
,ilade1phia
eve land
chmond
lenta
icago
. Louis
Illleapolis
lsas City
Lias
1 FranCisco

A12l21ie<.l For
;p 131,654,000
1,342,095,000
1 TI, 414, 000
15:':;,840,000
65,030,000
115,790,000
379,470,000
72,895,000
9::,375,000

mTALS

$3,202,840,000

7~, ~.26,000

104,::'20,000
488z~31z000

AcceEted
$
48,084,000
585,895,000
45,534,000
65,620,000
14,830,000
,S7,560,000
213,970,000
45,275,000
42,255,000
27,:::l6,000
2::,720,000
330, 23l z 000

A1212lied For
$ 139,103,000
1,671,272,000
85,881,000
160,298,000
60,027,000
58,750,000
332,446,000
77,386,000
117,315,000
35,017,000
-86,320,000
449,11lzOOO

AcceEted
;p 139,103,000
1,402,272,000
85,881,000
160,298,000
60, 027, ()(jO
58,750,000
331,946,000
77,386,000
117,315,000
34,717,000
82,320,000
449 z lli z ooe

~1,500,590,000 ~

$3,i~

$2,999,126,000 ~

72, 926,000

.
'
9
,ncludes $181,790, 000 noncom~,:':.~ t: vo. tenders accepted at the average pr~ce 0 ... 97.314
ncludes $191,776,000 noncom:;;ctiLve tenders ac.:cepted at the aver~ge prl:e of 96.325
hese rates are on a bank discsunt basis. The equivalent coupon lssue Ylelds are
.15% for the 196-day bills, and 5.35% for the 259-day bills.

TREASURY DEPARTMENT
Washington
FOR RELEASE:

UPON DELIVERY
REMARKS OF THE HONORABLE JOSEPH W. BARR
THE UNDER SECRETARY OF THE TREASURY
BEFORE THE
BOSTON ECONOMIC CLUB
BOSTON, MASSACHUSETTS
WEDNESDAY, OCTOBER 4,1967,1:00 P.M., EDT
"IN TIMES OF PROSPERITY ... GOOD LORD PRESERVE US"

---===:.:...=..

One of the oldest litanies in the Christian Church is one
that I believe dates back to around 400 A.D. The priest chants
the theme, and the congregation responds with "Good Lord
Preserve Us." The pries t chants, I' In times of bereavement .... "
and the congregation responds, " ... Good Lord Preserve Us ," or
"In times of plague ... " and the response, " ... Good Lord
Preserve Us." One section of the litany has always intrigued me.
It goes, "In times of prosperity .. I, "Good Lord Preserve Us."
I am sure that this ancient bit of human wisdom is repeated in most other religions in one form or another. My friends
who are better acquainted than I am with theology have explained
to me that the chant refers to the theological belief that men
tend to become morally flabby in times when life is easy.
I have often thought, however, that the ancient litany has
a different and special significance for Secretaries of the Treasury
of the United States. A distinguished resident of this community,
Professor Paul Samuelson, has said on occasion that "The job
of Secretary of the Treasury can't be an easy one; it's to
suffer." I will argue today that their suffering is compounded
in times of prosperity, and most particularly in times of
excess ive pros perity.
Today, a Secretary of the Treasury who fought long and hard
for tax reduction as the keystone of long-run national economic
policy is pressing the case for a tax increase. And, throughout
government the public purse strings must be pulled tighter. For
'.
" economl.CS
.
these are the
tl.mes when t h e lessons 0 f t h
e "
new
merge with those of the "old". Economy takes on its traditional
meaning and a measure of fiscal restraint is essential to the
national interes t.
F-I046

- 2 -

I now would like to take just a few moments to place my
theme and our current dilemma in a historic perspective.
The economic debate in this country over the past quartercentury has in large measure revolved around the question of how
to maintain prosperity through the full utilization of our labo:,
our plant, and our savings. In 1940, when our GNP was running
at a rate then estimated at some $97 billion, I can remember
my distinguished professors at Harvard exhorting everyone in sight
to use all possible ingenuity to get rates well beyond $100
billion per year. With unemployment still far too high in 1940,
there was ample cause for concern.
It has often been pointed out that the great depression
left my generation oriented towards material considerations.
I believe that this is probably correct. We were -- and
perhaps are -- rather materialistic in our outlook.
Perhaps it is time someone said a few words in defense of
materialism. As is so often the case, I find that someone has
already said them. Not Professor Samuelson this time, although
they do appear as a preface to a chapter in his textbook, where
Francis Hackett is quoted to good effect:
"I believe in materialism ..• I believe in
all the proceeds of a healthy materialism -good cooking, dry houses, dry feet, sewers,
drain-pipes, hot water, baths, electric lights,
automobiles, good roads, bright streets, long
vacations away from the village pump, new ideas,
fast horses, swift conversation, theatres, operas,
orchestras, bands ... I believe in them all, for
everybody. The man who dies without knowing
these things may be as exquisite as a saint, and
as rich as a poet; but it is in spite, not
because, of his deprivation."
A materialistic outlook in this better sense possibly accounts
in some measure for the emphasis we have seen in this past quartercentury on science and technology, on sophistica~ed techniqu:s of
business management, and on conscious use of nat~onal econom~c
policy to promote economic expansion.

- 3 -

Our success in all these areas has been little short of
spectacular. As a result, the vast majority of the people in this
nation have reached a level of affluence few would have dreamed
possible in 1940. The interaction of our success in the areas
of science and technology, business management, and our use of
national economic policy has changed this country mightily.
the whole, I believe that the change has been to the good.
I believe that the American economy running at full employment
is a mighty engine of social progress and reform. I believe
that it has brought the opportunity for a useful and productive
life to millions of American men and women whose usefulness
might well have been lost -- as it was, for a time, in the
depression decade. I believe that our success has enabled us to
export a measure of hope to a large portion of the world where in
much of recorded history hope had been nonexistent.
On

Having said all this, I must also say that no human
situation is perfect, and even prosperity -- as the ancient divine
so clearly recognized -- has its problems. The problems are
clearly visible from the United States Treasury. Let me cite just
a few of the problems that have developed in the wake of the
prosperity that has characterized this last quarter-century.
Twenty-five years ago the problems of pollution,
decay in our cities, and the gap between the haves
and have-nots in our country were present, but not
in the magnitude nor with the urgency that they
afflict us today.
The pressures on our systems of transportation
and our higher educational complex were simply
not present twenty-five years ago.
The intensity of present demands on our capital
markets and our savings was not dreamed of during
an era in which 3-manth Treasury bill rates had
remained be low 1 percent for 15 years (between
1932 and 1947).
The perils of inflation were usuall~ shr~gged off as
pure theory or applicable only to sLtuatLons in
which "printing press" money was used.
The danger implicit in a balanc: of pay~ents
deficit was a subject so esoterLC that Lt was
rarely alluded to in academic circles.

- 4 The real measure of a nation, in my opinion, is its willingness to recognize and acknowledge new problems as they arise. I
personally take great pride in the fact that we in tnis nation do
recognize and are fighti~g for answers in the areas of pollution,
urban decay, transportat~on, education, poverty, financial
imbalances, homebuilding, inflation, and the balance of payments.
Solving many of these problems will not be easy -- perhaps not
as easy as resolving the question of how best to promote overall
economic growth. But we are attacking these areas; we are
responding to the challenge.
These problems -- the ones associated with normal, healthy
economic growth -- have been under attack for several years.
They mus t be attacked head -on, for they cannot be avoided. We
cannot and should not accept stagnation as an escape from the
difficulties that come with healthy and desirable growth. At
the moment, however, the country is preparing to attack a new
issue -- the question of how to head off the perils of an
unhealthy and excessive rate of expansion resulting from a
resurgent demand from the private sector and a continuing
heavy demand from the Federal government. These new perils
can and must be avoided.
You may we 11 ask at this point, "Why all the fuss?" "What is
so different in this current situation?" "Just what are the perils
of an unhealthy and excessive rate of expansion?" Let's try to
answer the second question first and examine some of the
differences between the current situation and those of, say, a
few years ago. It seems to me that the main differences are:
1. The economy is operating in the full employment range.
In contrast to the situation of a few years ago, there is no
longer any sizable margin of unuti1ized resources upon which the
economy can draw, and skilled labor is scarce. To be sure, the
slowdown in the early part of this year caused the average
industrial operating rate to fall back somewhat, but unemployment
remains below 4 percent. Relatively full utilization of resources
places a fairly definite limit on the rate at which national output can safely expand.
It is estimated that at full employment the overall productive
capacity of the economy now grows by about 4 percent annually.
OVer the next year or so, real output could probably grow at a
little more than 4 percent, perhaps 4-~ or even 5 percent,
while plant utilization rates are rising. Allowing for a
2-~ percent rise in prices -- as measured by the so-called

- 5 -

GNP deflator -- GNP in current prices might safely rise by 7
percent or so in the next year. As a steady diet, this would be
a shade too much since price rises of 2-~ to 3 percent annually
are too large. But, if the rise of GNP in current prices were
held to 7 percent or so in the next year, we would be on a path
leading to a less inflationary environment.
We no longer are in a situation where strong rises in demand
will yield sizable gains in output and employment. Instead, if
the total of public and private spending were allowed to rise
at an excessive rate, the consequences would be sharply higher
prices. Therefore, with the economy nearing unsafe speed,
we cannot keep a heavy foot on the accelerator. We must
throttle back to a safer cruising speed.
2. Price and cost pressures are readily apparent.
The upsurge in demand in late 1965 and early 1966, associated with
the early impact of the Vietnam build-up, was checked by monetary
and fiscal restraint. But, one unwelcome consequence of that
burst of spending was the disruption of a previous pattern of
cost-price stability. For example, the wholesale price index
rose by 3-~ percent between mid-1965 and mid-1967 in contrast
to a total increase of less than 3 percent during the previous
four years. Similarly, the wholesale prices of hdustrial
commodities rose by about 3-~ percent between mid-1965 and
early 1967 in contrast to a total increase of less than 2
percent during the previous 4-~ years. The consumer price
index rose by 5-~ percent between mid-1965 and mid-1967, only
slightly less than its total rise in the previous 4 years.
In delayed reaction to the burst of demand in 1965 and
1966, cost pressures have intensified. By the middle of 1966,
labor costs per unit of output in manufacturing had risen about
2-~ percent over mid-1965, but were still below the level of
early 1961. Eut, by the middle of this year, they had risen
a further 6 -~ percent. With strong 11 cos t -push" fac tors already
present in the economy, a renewed burst of demand could start
wages and prices on an upward spiral.
3. Interest rates are already at or near last year's levels.
Another crucial difference between the present situation and
that of several years ago, is the height of interest rates and
the degree of credit availability. Let me say that after last
year's "credit crunch", I have no desire whatsoever to see a
repeat performance -- and I don't think anyone else does either.

- 6 But, wishing will not make it so. If we are determined to avoid
a repetition of last year's difficulties, we must avoid undue
reliance on monetary policy to achieve restraint.
Last year the combination of strong credit demands and
monetary restraint pushed interest rates to peak levels.
By late summer and early fall, not only was credit
expensive, its availability was severely limited.
Prompt action was necessary last fall to relieve the
overall pressure on financial markets and calm the feverish
competition for savings. That action was forthcoming. It
included temporary suspension of the investment credit,
mterest-rate ceilings on consumer-type time deposits, and a
temporary slowdown on agency financings and sales of participation
certificates. The improvement in financial markets was dramatic.
Now, a year later, the situation is substantially different.
Savings flows to thrift institutions have been at
record levels this year. Mortgage commitments have been rising
strongly. The recovery in residential building has carried
the seasonally adjusted annual rate of housing starts back
to nearly 1.4 million units in contrast to an August 1966
low of about 850 thousand. Commercial bank credit has risen
at a 13 percent annual rate in the first 8 months of this
year as the Federal Reserve has pursued a course of relative
mone tary ease.
In short, credit is much more readily available now
than it was a year ago. But, there is a disturbing
similarity between the two periods. Interest rates,
especially long-term rates, are back at very high levels
despite a continuing policy of monetary ease since last
fall. Basically, this is because private demands for credit
have been extremely heavy this year, partly in reaction to
last year's squeeze. Also, the private demands for credit
are probably reflecting the faster pace of ecanomic activity
since late spring.

- 7 Net Federal credit demands have been relatively modest
although the picture is changing now. Net Federal demands on
the private credit markets can be measured by the change in
private holdings of Federal credit instruments, including Federal
agency securities and participation certificates along with
Treasury issues, by excluding the change in holdings of the
Government investment accounts and the Federal Reserve. On this
basis, Federal credit demands were only about $3 billion during
calendar 1966 in a total credit flow of some $70 billion. In
the fiscal year ending this past June 30, the net contribution
of the Federal sector to total credit demands was actually
negative, or near neutrality after allowance for an unusually
low Treasury cash balance at the end of the fiscal year. But,
in the current fiscal year, even with tax and expenditure action,
net Federal demands on the credit markets will rise to the $10
to $12 billion range. In the absence of tax action, that
figure would soar to the $20 billion range. This would be
beyond the capacity of the markets to handle at anything like
the current level of interest rates.
Frankly, even current levels of interest rates are higher
than we like to see them. And, without tax and expenditure
action, there would be only one way for interest rates to go -up from their present high levels. In contrast to the situation of several years ago, interest rates are already high and
the financial system is wound up pretty tightly. Liquidity is
at a premium. We have to operate cautiously in such an environment. Therefore, we need -- and need very badly in my opinion -an extra degree of fiscal restraint.
4. Too rapid expansion can hurt our trade balance. Recent
experience also highlights the importance from a balance of payments standpoint of holding the domestic expansion within prudent
limits. During the years 1961 through 1964, GNP in current prices
rose by an average of ~bcut 6 percent per year -- more in some
years, less in others. During that period, our trade surplus
rose by nearly $2 billion. It was $4.8 billion in 1960 and
$6.7 billion in 1964, when there were special favorable factors.
Not all of the improvement is directly attributable to the
relatively moderate rate of domestic expansion. Our exports
depend upon the pace of business activity abroad and there are
other complicating factors.

- 8 In striking contrast, during 1965 and 1966 when GNP in
current prices rose at rates between 8 and 9 percent, there was
an extremely sharp rise in our imports. Even though exports
continued to rise, the trade surplus narrowed to $4.8 billion
in 1965 and to $3.7 billion in 1966. Indeed, by the last
quarter of 1966, the trade surplus had shrunk to a $2.9 billion
annual rate. With a slower rate of expansion this year, the
trade surplus recovered to a $4.0 billion rate in the first quarter
and improved further to a $4.5 billion rate in the second quarter.
An overly rapid rate of domestic expansion can hit our trade
balance from both sides. As recent experience clearly shows,
the rise in imports is abrupt when the economy presses hard
against capacity. Too rapid domestic expansion can also undercut
our ability to export. In the interest of payments equilibrium,
we must keep our exports competitive. There can be little doubt
that a sustained upward drift in our costs and prices relative
to those abroad would soon begin to affect our competitive position
adversely.
5. We are fighting a costly war. Extra expenditures for
Vietnam are running at a rate in excess of $22 billion dollars
per year. While those expenditures do not bear as heavily on
the economy as defense expenditures did at the time of Korea,
their impact most certainly is felt. Without Vietnam, Federal
administrative budget expenditures would amount to only some
14 percent of Gross National Product in fiscal 1968; with Vietnam
included, Federal expenditures may rise to 17 percent or a bit
more. This would be about the level of 1955 and 1959 and well
below the 21 percent reached at the time of Korea. But, it would
amount to an appreciable rise over the 14.8 percent ratio in
fiscal 1965.
These are the crucial differences in the economic picture
at the moment and the picture as it appeared in 1964. Now, what
about those perils of an unhealthy and excessive rate of expansion? I would list them as follows:
We are in grave danger of losing control of a
relatively stable price structure.
Sharply higher prices throw wage-price relations
out of kilter and set the stage for a cost-push
inflation.
Cost-push pressures tend to narrow profit margins
and encourage efforts to raise prices.

- 9 -

Sharply higher prices put the nation at a severe
disadvantage in our competitive relationships
internationally.
At home, the burden of higher prices falls cruelly
on those least able to protect themselves.
And, of course, a strong resurgence of private
demand, unchecked by tax and spending actions,can
create some very bad days ahead for the Treasury
debt managers and for everyone who borrows money.
If our experience since 1960 is any guide, it would seem that
we as individuals, as corporations, and as a nation prosper most
when our rate of growth is held within the bounds of our productive
capacity. Perhaps in this town of investment advisors you believe
that you can protect yourselves against inflation. Perhaps you can
protect a small minority of our people for some period of time.
But inevitably the well-being of your clients can not be divorced
from the well-being of the nation as a whole. Parenthetically I
~ight add that I do not envy those of you who are keeping your
clients ahead of the game as "in and outers" in stocks that I can
only rarely identify.
In conclusion, I would argue that the risks and perils that
confront us are formidable but avoidable. The prudent course for
this nation to follow is clearly set forth in the President's
recommendations. I can only hope that next year as I join the
litany "In Times of Prosperity ••. Good Lord Preserve Us," I will
be referring to our moral fibre and not our national economic
well-being.

000

TREASURY C~PARTMENT

October 13, 1967,
representing an
and to
amount of
to be freely

181-day bills, for $1,000,000,000, or thereabouts, to be dated
October 13, 1967, and to mature April 11, 1968.
The bills of both series will be issued on a discount basis under
competitive and noncompetitive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Daylight Saving
time, Monday, October 9, 1967.
Tenders will not be
received at the Treasury De~artment, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
F-1047

- 2 Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on October 13, 1967, m
cash or other immediately available funds or in a like face amount
of Treasury bills maturing October 13, 1967. Cash and exchange tenders
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of 1ceasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revis ion) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained frl
any Federal Reserve Bank or Branch.
000

STATEMENT BY THE HONORABLE STANLEY S. SURREY,
ASSISTANT SECRETARY OF THE TREASURY, BEFORE THE
SENATE COMMITTEE ON FOREIGN RELATIONS ON THE INCOME TAX
TREATIES WITH BRAZIL, CANADA AND TRINIDAD AND TOBAGO
Thursday, October 5, 1967 at 10:00 A.M.

Mr. Chairman, Members of the Committee:
I am pleased to appear before your Committee this morning
to discuss three tax treaties -- with Brazil, with Canada, and
with Trinidad and Tobago -- that are pending before the
Committee.

I hope that your Committee will be able to take

prompt action on these conventions because the problems they
seek to meet are urgently in need of this action.
The proposed conventions with Canada and with Trinidad
and Tobago are limited in scope.

.I should like to discuss

them first and then turn to the convention with Brazil, which
involves the whole range of international tax relationships
generally covered by our income tax conventions with other
countries.
CANADA
The proposed convention with Canada would modify the
existing Canadian treaty by denying the reduced rate of U.S.

- 2 withholding tax that exists under that treaty to certain
Canadian corporations which are nothing more than conduits
for investment in the united States by persons who are not
residents of Canada and who would not otherwise be entitled
to the benefits of the tax treaty.

They are persons whom

the tax treaty with Canada was not intended to benefit.
The existing tax treaty between Canada and the united
States provides that investment income flowing from the
United States to Canadian residents and corporations shall
be subject to U.S. withholding tax at the rate of 15 percent
instead of our statutory rate of 30 percent.

The treaty

defines a Canadian corporation to include corporations that
have received their charter under the laws of Canada.
Canadian corporations are normally subject to Canadian tax
on their income at the rate of 50 percent.

However, there

is a group of Canadian corporations which are tax-free in
Canada because they are not considered to be resident in
Canada, but which nevertheless fall within the definition of
a Canadian corporation for purposes of the treaty.

These are

corporations which derive all their income from sources outside Canada and are managed and controlled outside Canada.

a result,

3 -

individuals resident in, say, Latin America or

Asia, that is in countries with which we do not have tax
treaties, have been able to use such Canadian corporations
as a vehicle for the purpose of making their investments in
the united States, with the result that they derive

their

investment income from the United States subject only to
the 15 percent u.s. withholding tax, rather than the statutory 30 percent withholding tax, and

pay

no additional tax

to Canada, or even, perhaps, to their own country.
The existence of this loophole was called to the
attention of the Canadian Government several years ago, and
legislation was enacted in Canada which eliminated the taxexempt status accorded such nonresident companies.

However,

the legislation applied only to newly created Canadian
corporations.

Pre-existing Canadian corporations continued

to retain their tax-exempt status in Canada.

At about the

same time that the Canadian Government adopted its legislation, the income tax treaty between the United States and
the Netherlands, as it applied to the Netherlands Antilles,
was modified to eliminate a similar loophole for foreign
investors arising out of the interaction of that tax treaty

- 4 and the Antilles tax laws.

This elimination of the tax

advantages that accrued to Antilles investment companies
placed a premium on Canadian tax-exempt corporations.

Since

the use of new Canadian corporations could not be created
for this purpose, trafficking developed in dormant Canadian
corporations created prior to the change in Canadian law.
Neither we nor Canada see any reason to perpetuate the
existing state of affairs.

The proposed amendment to the

existing U.S.-Canadian tax treaty would therefore eliminate
the opportunity that exists for this avoidance of u.S. tax
by residents of countries with which we do not have tax conventions.

This corrective action is accomplished by denying

the reduced rate of withholding tax on investment income
under the treaty to a corporation whose exemption from tax
in Canada is based on the ground that it is regarded as not
being resident in Canada.
There are unlikely to be any adverse consequences to
either the United States or Canada from this corrective
change.

We have explored the question whether the change

might adversely affect the volume of foreign investment in
the United States and have concluded that it would not.

- 5 Alternative portfolio investment opportunities for residents
of countries with which we do not have treaties are limited.
On the other hand if we fail to modify the convention in
the manner proposed, we are likely to see a proliferation
of Canadian companies used for tax avoidance.

There are

at present u.s. investment companies which find themselves
at a disadvantage in competing for business with other
firms that operate through Canadian companies of the type
I have described, and in order to achieve tax equality
they have been seeking out dormant Canadian companies through
which to conduct their investment operations.

The fact that

a modification of our treaty with Canada is pending has
restrained some of these companies from initiating such
operations.

Failure to make the change will remove this

restraint.
~RINIDAD

AND TOBAGO

The proposed convention with Trinidad and Tobago (for
simiplicity I shall refer to that country as "Trinidad") is
an interim agreement which deals only with the rate of withholding tax on dividends.

until January 1, 1966 a tax

convention of the traditional scope was in effect.

It was

- 6 a legacy from the time when Trinidad was a dependent territory of the United Kingdom and when the tax treaty between
the United States and the United Kingdom applied to it.
When Trinidad achieved independence that treaty continued
in effect as between two sovereign countries.

However, in

accordance with procedures in the treaty, the Trinidad
Government gave notice of its desire to terminate the treaty
and this took effect January I, 1966.

At the same time

Trinidad requested negotiation of a new treaty which it
hoped would be more appropriate to the economic relations
between the United States and Trinidad.

Negotiations for

such a treaty have been under way but have not been concluded.
Termination of the old income tax convention means that
the full weight of the Trinidad tax law applies to income
generated in that country without any of the moderating
effects of a treaty as respects income flowing across international boundaries.

The unrestrained application of Trinidad

law would impose a heavy burden on American firms operating
there, much heavier than that in effect when the treaty applied.
As an incerim measure, the Trinidad Government has agreed to
modify its withholding tax with respect to dividend income

- 7 while discussions continue on a tax treaty of general
application.
Accordingly, the convention before you provides that
dividends paid by a corporation of one country to residents
in the other country shall be subject to a withholding tax
rate of 25 percent rather than the statutory rate of 30 percent which applies in both countries.

However, when the div-

idends are paid to a parent corporation, the withholding tax
is reduced to 5 percent.

For this purpose, a corporation

is regarded as a parent of the dividend-paying corporation if
it owns 10 percent or more of the outstanding voting stock of
the latter corporation.

Trinidad law also imposes the equivalent

of the withholding tax on profits earned by a foreign corporation that operates a branch in Trinidad and does not
invest those profits there.

re-

The proposed treaty recognizes

the similarity of the two situations and therefore limits
the branch tax on distributed earnings to the same 5 percent
that would apply to dividends distributed by a Trinidad
subsidiary.

Both the 5 percent rate of tax and the definit.ion

of a parent-subsidiary relationship are to be found in other
treaties to which the United States is a party.

However, appli-

cation of the lower rate to branch profits is somewhat unique.

- 8 Generally those countries with which we now have income tax
treaties do not impose a tax on branch profits transferred
to the home office just as the United States does not impose
such a tax.

Accordingly, usually we have not found it

necessary to have treaty provisions dealing with such a
special tax.
We recommend that you approve the convention with
Trinidad to give effect to the reduced rate.

The Trinidad

Government is also desirous of effectuating this interim
arrangement.

It is likely that we shall submit to you next

year a full-scale convention with Trinidad.
BRAZIL
Turning now to the proposed treaty with Brazil, this
agreement for which we are asking your approval will be the

1/
28th u.S. income tax convention. -

It is, on the one hand,

an extension of our already widespread treaty network, and
on the other hand our first tax treaty with a major Latin
American country.

It incorporates provisions which in our

view can constitute the framework for treaties with the
other Latin American countries.

Six of the 27 treaties now in effect are with former
U.K. colonies which were covered by the U.K. treaty
prior to their independence.

- 9 -

Before going into the details of the proposed treaty with
Brazil, I should like to develop some overall observations
concerning the purpose and objectives of the tax treaty
program.
General Philosophy of Tax Treaties
Our income tax treaties with the industrialized
countries date back to 1935 when the first treaty between
the united States and France was ratified, clarifying the
French and u.S. taxing jurisdiction in cases where a resident of one country derived income from the other.

with the

increased pace of international economic activity since the
end of World War II, many new treaties were concluded and
old ones revised to reflect changes in tax legislation and
underlying changes in economic conditions.

Other industri-

alized countries of the world have responded in the same way
and now participate with each other in an extensive web of
treaties.

The united States,

for example, has entered into

' dustrla
' 1 'lze d coun t rYe
tax treaties with virtually every ln

These treaties set forth rules whereby the contracting
states agree on those situations in which the country that is

Excluding the U.S.S.R., Spain and portugal; discussions
with the latter two are already well advanced.

- 10 the source of income shall have the prior right to tax and
those situations in which it shall refrain from imposing a
tax.

The contracting states then agree on how the country

of which the taxpayer is a resident (or also a citizen in
the

u.s.

case) shall give recognition to the tax levied in

the source country, so as to avoid or minimize the double
taxation that would otherwise result from the fact that both
countries may levy a tax on the same income.
corollary to these objectives,
four other services:

In addition, and

the treaties seek to perform

(1) to adjust the rates of withhold-

ing tax in the source country with the object of avoiding to
the extent possible a heavier aggregate tax burden on income
which a taxpayer derives from foreign sources than would
result if the income originated in his own country;

(2) to

eliminate wherever appropriate the requirement to file tax
returns, and therefore to be conversant with the tax laws,
in more than one country;

(3) to prevent discriminatory tax

treatment on the basis of nationality; and (4) to provide
machinery for consultations between the tax officials of the
two governments to seek equitable solutions to tax problems
that may arise in implementing the treaty.
Returning to the first point I mentioned -- that the
treaty partners acknowledge the prior right of each state to
tax in certain cases and abandon its right in others --

11 -

I should like to illustrate how important a part of a
treaty it may be.

Statutory definitions of where income

originates frequently vary and unless rules of priority to tax
or rules of source of income are established, the result may be
unintended double taxation of the same income.

Suppose a

travel agent in a foreign country X sells seats on a u.S.
airline for transportation between points which lie outside
that country.

Country X may consider the airline to derive

income there because the ticket was purchased there.

Other

countries may consider the airline to have derived the income
within their territories because a flight segment originated
or terminated there.

Total taxable income may thus be more

than the profit earned by the airline.

Or suppose an archi-

tect in the United States draws up plans for a building to
be constructed in another country.

Does the income paid him

for those services arise in the United States where he performed the services or in the foreign country where the plans
are put to use?

The two countries may have different rules

so that both countries would tax the same income without
making any allowance for the fact that the other country has
levied a tax.
A treaty seeks to establish order on such issues as
these by arriving through negotiation at a set of rules that
is mutually acceptable.

This normally involves concessions

by both sides concerning their statutory jurisdiction.

- 12 some cases these rules establish uniform criteria for
determining the source of a given item of income.

Thus

as to the two examples above referred to, our treaties
generally provide that only the country of registration may
tax revenue from airline transportation, and that the source
of personal service income is where the services are rendered.
In other cases, the source rules may not be disturbed but
the country of source may abandon its tax on income from a
given activity even though it has the power to tax under
its law.

A common treaty provision having this effect is

the so-called permanent establishment article.

This provides

that a country will not tax the industrial or commercial
profits of a resident of the other country unless that resident
has a permanent place of business within its borders, even
though both countries are agreed that the source of at least
some of the profits is in the country which gives up its
right to tax.

The objective of such a provision, among others,

is to remove a tax obstacle to early stages of a firm's
participation in international trade.
Where the treaty assigns to a country priority to tax because it is the source country, the country where the taxpayer
resides then agrees in the treaty either to give its residents
a credit against their tax liability for taxes paid on income
which the country of source taxes, or to exempt such income
from tax.

A country may agree by treaty to adopt a credit

- 13 similar to that which the U.S. provides by statutory law, even
though that country's own law may provide less generous relief.
With respect to withholding tax rates on investment income
paid to nonresidents, we have sought and agreed to reductions
in rates in order to come to an aggregate of taxes on foreign
income that is as close as possible, consistent with other
factors, as the tax on a similar amount of domestic income.
Thus, for U.S. firms having subsidiaries or branches in Brazil,
the Brazilian 25 percent withholding tax on their dividends or
branch profits raises their total Brazilian tax on distributed
profits to more than 50 percent, resulting in unused foreign tax
credit in the United States on that income.

Our statutory

withholding rate of 30 percent has the same effect on dividends
obtained by foreign residents of those countries with similar
investments in the United States.

Other problems regarding

withholding rates arise from the fact that withholding taxes
are applied on the gross amount of income without taking
into account costs, personal deductions and the like.

Brazil,

for example, in most cases imposes its 25 percent withholding
tax on the gross amount of income remitted to a nonresident.
For U.S. individuals and corporations deriving income from
Brazil in situations in which there are expenses involved in
earning that income, this will represent a high effective
rate of tax if the net amount taxable in the United States
because of those expenses is low in relation to the gross

- 14 payment from Brazil. The Brazilian tax will in such cases be
too high to be fully offset by the foreign tax credit in the
United States.

For example, suppose a U.S. citizen derives

rent of $100 from leasing property owned in Brazil and has
costs of $50 associated with that income.

The Brazilian

25 percent tax on the gross amount means a tax of 50 percent
on the net income, which is almost certain to be higher than the
recipient's effective rate of U.S. tax.

The purpose of the

treaty provisions in this area of withholding taxes is to
reduce the frequency and size of excess tax burdens of this
type through negotiated adjustments in withholding rates.
The treaty objective of reducing the need to file
multiple tax returns may sound less important than the attempt
to avoid the same income being taxed by two countries neither
of which accepts the other as the country of source, but it
may be no less troublesome in many instances.

A U.S. business

executive on temporary assignment to a foreign subsidiary
can credit against his u.S. income tax the tax paid to the
foreign country on income earned for the services he performed
there.

He does not need a treaty to permit this.

But if he

is taxable in the foreign country he commonly has to file a
return there declaring his taxable income according to the
rules employed there.

If he is concerned with operations in

a region encompassing several countries, the obligation to
be familiar with varying tax systems and to submit returns

- 15 to each is troublesome and costly in terms of time and
energy which could be more efficiently employed in other
tasks.

A similar situation could confront any number of

persons whose activities involve international travel.

Tax

treaties meet this difficulty by exempting from tax in one
state the personal service income of working visitors who
are self-employed or employed by a resident of the other
state, within specified limits of time and remuneration.
The nondiscrimination provisions of tax treaties ensure
that a U.S. corporation operating in a foreign country
through a branch or through a foreign subsidiary will not
have those business activities taxed more heavily than are
the businesses or corporations of the foreign country, and
that an individual U.S. citizen resident in a foreign country
will not be taxed more severely than a national of that country
in comparable circumstances.
The administrative provisions of tax treaties implement
their application by providing for consultation on such
matters as proper intercorporate pricing, exchanges of information and procedures for hearing taxpayers' grievances.
The need for solutions to these types of international
tax problems is unquestionable.

Taxes can be an effective

barrier restricting the international mobility of capital,
labor and skills, a mobility which economically is highly
desirable.

We have to proceed to achieve such solutions by

- 16 means of bilateral agreements which conform as closely as
possible to the standards considered to represent the most
rational international treatment of each type of incomegenerating transaction.
OECD Model Treaty and Developing Countries
Currently, the point of departure for treaties between
industrialized countries is the "Draft Double Taxation
Convention", prepared by the Organization for Economic
Cooperation and Development, to which certain improvements
have been introduced by the united States and other countries
since its adoption.

As between an industrialized country

and a developing country, however, the OECD model treaty
needs more substantial alterations.

The economic relation-

ship between two such countries is apt to be significantly
different from that prevailing between two industrialized
countries, and the traditional answers are not always satisfactory.

The income flows between any two industrialized

countries may not be exactly in balance, but if their multilateral relationships are taken into account there is a
reasonable mutuality of income flows, so that revenue and
balance of payments considerations can take a secondary place
to trade objectives, consistency, equity and similar elements
that enter into tax treaty discussions.

When an industrial

country undertakes to enter a tax treaty with a less

develop~

country, on the other hand, it must recognize that most of
the income flows will be largely out of the less developed

- 17 country with much smaller amounts flowing into it.

To this

large imbalance in income flows must be added the fact that
a fundamental objective of all less developed countries is
the attraction of foreign capital and skills.

Local resources

are inadequate to finance a rate of economic development
commensurate with their needs.
Most of the substantive provisions of the OEeD model tax
treaty that have revenue effects require the giving up of tax
revenue by the country in which the income is earned or has
its source in favor of the country in which the taxpayer resides
in order to make the necessary accommodation to desirable international tax relationships.

Since the less developed country

is usually the country of source, the revenue loss under a
standard tax treaty is apt to rest largely on the developing
country rather than the industrialized country.

To compensate

for this revenue loss, developing countries have pressed for
concessions by industrialized countries.
take either of two forms:

These concessions

one is to grant to their taxpayers

who invest in the developing country tax exemption on profits
derived there and remitted home; the other is to grant a socalled "tax-sp3ring" credit.

Under such a credit, the indus-

trialized country allows its investors in a developing country
a credit against its tax not only for the tax actually paid
to the developing country but also for the taxes that for one
reason or another have been waived or reduced by the developing

- 18 -

country.

We have reviewed over 40 treaties written by other

industrialized countries with developing countries and find
that, with a few minor exceptions, each treaty contains provisions under which those industrialized countries either exempt
their residents on one or more types of income received from
the developing country or give their residents a tax-sparing
credit for the tax foregone by the developing country.
Our approach to tax treaties with developing countries has
differed in some respects from that of other industrialized
countries.

We have sought -- and in general I believe so have

the other industrialized countries -- first, to minimize the
adverse revenue effect of a treaty upon a developing country by
limiting our demand for reductions in foreign taxes to the

po~

where those taxes would equal our tax on the income brought
the united States.

In other words, we have not sought to

increase our revenue at the expense of the revenues of the
developing country.

We have sought reductions where the taxes

of the developing country would act as a deterrent to investment and trade.

Conversely, we have discouraged the

develop~

country from seeking reductions of u.S. tax on investment
income on the grounds that the treaty should not encourage
capital flows to the United States when capital is so urgently
needed at home.
As to capital flows to the developing country, however,
we believe that neither the exemption approach nor the tax-SP'
approach is desirable.

If we were to grant tax exemption

19 -

to firms making investments in a developing country, taxpayers engaged in business solely in the United States would
regard that as highly inequitable.

It would be inconsistent

with the principle of tax neutrality as between domestic and
foreign economic activity which our foreign tax credit mechanism
seeks to maintain.

Moreover, a tax-sparing credit would provide

the largest tax benefits to investors in countries which have
the highest nominal tax rates, and it would promote the repatriation of profits from developing countries instead of
encouraging reinvestment of profits in those countries.

contrast to the methods pursued by other industrialized
countries, therefore, we have included in this treaty with
Brazil a provision which would extend our domestic investment
credit to investments made by American firms in the treaty
country.

I shall shortly develop the details of this provision

as it is incorporated in the Brazilian treaty.

Here I should

like to stress that the extension of the investment credit
serves to make the treaty reciprocal in character and at the
same time is consistent with our own law.
Under our tax law we give our taxpayers a credit against
their tax equal to 7 percent of the amount spent on machinery
and equipment for use in the United States.

What we propose to

do by this treaty is to extend this credit to similar investments

when made in Brazil.

20 -

Our existing tax law has established

a tax benefit for investment in the united States in machinery
and equipment.

By the same token, we have made investment

in developing countries less attractive than at horne.

extension of this investment credit by treaty will reestablish the tax neutrality that formerly prevailed as between
domestic investment and investment in the treaty country.

developing country can view this as a device to facilitate
capital movements to its borders, as indeed it is compared
with the present situation.

We may look upon it as the elimina-

tion of a disincentive to investment in the treaty country.
Principal Features of Brazil Treaty
I should like to turn now to the substantive provisions
of the income tax convention between Brazil and the united
States which is now before you for consideration.
Industrial and commercial profits
Under

~he

convention Brazil agrees not to tax the indus-

trial and commercial profits of a firm in the United States
(and vice versa) unless the firm derives profits through a permanent

est~blishment

within Brazil.

The value of this provision

to u.S. enterprises is apparent when we consider some of the
features of Brazilian law.

One provision makes a U.S. firm

that sells goods to Brazil subject to tax there even if the

- 21 firm has no place of

business in Brazil.

The firm need

merely receive orders from Brazil through an agent there,
even though the agent is entirely independent, has no authority
to conclude any contracts on behalf of the u.s. firm, and
maintains no stock of goods in Brazil from which to fill orders.
Moreover, if the u.s. firm is thus subject to tax in Brazil,
it also becomes taxable on all sales made by it to residents
of Brazil, including those made without any participation by
the Brazilian agent.

In the latter case, the American firm

is considered to have derived a profit equal to 20 percent of
the gross sales price of the goods sold.

Brazilian tax applies

even though under u.s. law the American firm may be considered
not to have derived any income at all from Brazilian sources.
If title to the goods purchased by the Brazilian buyer passes
in the United States, the income from the sale of those goods
is considered to have its source in the United States, and
any tax paid by the American firm to Brazil would not be eligible for credit against U.s. tax.

These differences in tax

rules hinder U.s. trade with Brazil not only by causing double
taxation but also by imposing a compliance burden of filing
tax returns and understanding the intricacies of a foreign
tax system.

Such burdens may effectiv~ly hamper U.S. exports

especially on the part of smaller American business firms
and cause financial loss to those unsophisticated in tax
matters.

- 22 Under the treaty no tax would apply in Brazil unless
the u.s. firm has a permanent place of business there through
which it conducts its activities. (Article 8).

Consequently

American firms will be able to solicit business in Brazil
through an agent, and may even send their own travelling
salesmen to Brazil and not be concerned about the impact of
the Brazilian tax law on their sales.

The treaty facilitates

other activities in Brazil by providing that, even if a u.s.
firm has a permanent place of business there, if that place
of business is only used for purchasing, the storage of goods,
or advertising and research, the firm would not be regarded
as having a permanent establishment and would not be taxable
by Brazil.

Of course these provisions are reciprocal, so

that Brazilian firms may also seek to develop markets in the
United States without becoming involved in U.s. tax law so
long as their activities do not constitute the maintenance of
a permanent establishment in the United States.
Under Brazilian law, an American firm that sends its
employees to Brazil to install, say, an electric generator
or to oversee the installation of factory machinery, or to do
an engineering job is considered

to be engaged in business

in Brazil and is subject to Brazilian tax.

Under the treaty,

however, Brazilian tax would be eliminated in such cases
unless the activities involved are rather extensive.
treaty defines a permanent establishment to exclude a

The

- 23 construction, assembly, or installation project unless the
project exists for at least six months.
Dividend income and branch profits
Brazil imposes a general tax on total corporate profits
at the rate of 30 percent and a 5 percent tax on distributed
corporate profits.

It also imposes a 25 percent tax on divi-

dends paid to a foreign shareholder.

Consequently the total

Brazilian tax on the profits earned by a Brazilian subsidiary
and distributed to its parent company in the united States
amounts to 50.12 percent.

This is higher than the tax the

United States would levy on the profits received by the parent
company.

(The U.S. tax on such income is even less than the

normal 48 percent for technical reasons related to the method
of determining taxable income when dividends are received
from a foreign subsidiary in a developing country.)

Conse-

quently, part of the Brazilian tax represents a burden on
American firms that they may not be able to offset, through
our foreign tax credit provision, against their u.S. tax.

reduce Brazilian tax to a level that would reflect the U.S.
corporate rate, Brazil agrees in the treaty to lower its
25 percent withholding tax on dividends to a rate of 20 percent.

(Article 12.).

A Brazilian branch of a U.S. firm is

taxed in Brazil at about the same rate as a subsidiary, and
in order to maintain a tax on branch operations comparable to

24 -

that on a subsidiary, Brazil has also agreed to limit its
withholding tax on branch profits transferred to the U.S.
horne office to 20 percent.
The reduced Brazilian withholding tax on dividends (and
branches) will apply only when paid to a U.S. parent company,
as defined for purposes of our foreign tax credit, because
it is only in these instances that the present Brazilian tax
rate produces an unused credit.

In portfolio investment

situations, as where an individual has an interest in a
Brazilian company or where a U.S. corporation owns less than
10 percent of the Brazilian firm, the present Brazilian taxes
will not usually generate any excess credits, and the treaty
therefore does not lower Brazilian withholding tax rates.
It is of interest to note that this feature of the treaty
is not reciprocal.

It does not provide a reduction in U.S.

withholding tax rates on dividends flowing to Brazilian
investors in U.S. corporations.

This is attributable, as

indicated earlier, to a mutual desire that the treaty should
not divert investment from Brazil to the United States.

the United States were to lower its withholding taxes on
dividends going to Brazilian residents, it might induce
Brazilian capital to flow into American securities, contrary
to one of the objectives of the convention, which is to
promote capital formation and economic development in Brazil.

- 25 Interest and royalties
The supply to foreign users of capital, know-how, patents,
and the like, which is valuable to our export program, is
now hindered by the high taxes levied by Brazil on interest
and royalties.

A resident of the United States who derives

interest from a Brazilian debtor is subject to a withholding
tax in Brazil of 25 percent of the gross amount of interest.
If the interest is received by an individual or a firm that
is not engaged in the business of lending money, the gross
amount of interest received presumably will be generally
equivalent to the net return, since there would be little or
no cost incurred in making the loan.

Consequently, in such

cases the u.S. tax on the interest may be as high as or higher
than the Brazilian tax.

Since the Brazilian tax may be

credited against the u.S. tax, it does not constitute any
net additional burden on the U.S. lender.

The treaty there-

fore does not disturb the Brazilian withholding tax on
interest in such cases.
However, when interest is received from Brazil by a
U.S. bank or other financial institution, the net earnings
may be a significantly smaller amount than the gross interest
received.

A financial institution incurs various expenses

in doing business, such as the interest it pays to obtain the
funds that have been loaned out.

These costs must be charged

against the gross interest received.

Since expenses represent

- 26 a substantial share of gross income, a 25 percent Brazilian
withholding tax on the gross interest represents a much higher
percentage of the net income accruing to a financial institution.

In all cases where expenses are more than 48 percent of

the gross income, the present Brazilian withholding tax rate
of 25 percent on gross income exceeds the

u.s.

tax on the

net income and generates an unused foreign tax credit.

minimize the cases where unused credits occur, Brazil has
agreed to reduce its withholding tax on interest paid to
financial institutions to 15 percent.

(Article 13.)

At that

rate, unused foreign tax credits will not be generated unless
expenses exceed 68.7 percent of gross income.

In some cases

expenses may go as high as 80 percent or 90 percent, so that
unused credits will continue to exist.
For similar reasons the Brazilian withholding tax rate
on royalties is also reduced to 15 percent.

(Article 14.)

This provision is reciprocal since royalties are not likely
to involve an outflow of capital from Brazil.

I should note

in passing that the tax treatment of royalties is complicated
by the fact that under Brazilian law royalty payments are
frequently disallowed as a deduction to the payer.

This is

true when they are paid by a Brazilian subsidiary to a U.S.
parent company.

When royalties are disallowed as a deduction,

Brazil in effect treats the royalty as a dividend.

Hence,

the reduction in withholding tax on dividends also acts to

- 27 -

bring the Brazilian tax on yoyalties down to a level where
it is less likely to exceed the U.S. tax.
Deduction of expenses
As in some other less developed countries where American
firms have subsidiaries and branches, Brazil does not allow
as a deduction for Brazilian tax purposes certain expenses
which are incurred outside Brazil.

This disallowance is

contrary to the principles governing the allocation of expenses
which have been developed under international standards.
•

example, the overhead costa of the home office of a

For

u.s.

company doing business abroad would normally be allocated
among all of the countries in which the company has branch
operations.

u.s.

Indeed, such

.n allocation is required under

law and regulations, and this principle of allocation is

recognized in the OECD model treaty.

However, under its

internal law, Brazil may not allow a deduction to be taken by
a U.S. branch in Brazil, in computinq its Brazilian tax, for
the amount allocated to the branch operations.

Under the con-

vention, however, Brazil does agree to allow deductions in
computing taxable income for expenses which are reasonably
connected with the profits taxed by Brazil, whether incurred
within Brazil or outside it.

(Article 8(3).)

A similar situation exists in cnnnection with the determination of taxable income from real pl"Operty.

Under Brazilian

- 28 -

law, an American would pay tax on the gross rentals received
from real property located in Brazil without any allowance
for the expenses involved in maintaining and operating the
property.

However, under the convention Brazil is obliged

to compute tax on a net basis as if the property owner were
engaged in business in Brazil, so that the expenses will be
deductible.

(Article 15.)

Personal service income
An American engineer or other technician who goes to
Brazil for a brief period as a consultant or to perform other
services for a Brazilian employer is subject to tax under
Brazilian law on the income he earns while there, irrespective
of how much he earns or the period of time he has spent there.
Tax is imposed at the rate of 25 percent of the gross amount
received.

Similarly, a Brazilian temporarily employed in the

united States by a u.S. company is subject to U.S. tax on the
income earned for those services, irrespective of the amount
he earns or the period of time he spent here.

Under the

treaty, both Brazil and the United States adopt the approach
of granting an exemption to persons who are present for less
than 183 days and earned less than $4,000. (Article 17.)
The treaty also solves a related problem concerned with
personal services.

Under Brazilian law, an American technicia

- 29 or lawyer who performs services in the United States for a
Brazilian client becomes subject to tax in Brazil because
he receives payment from the Brazilian firm.

Yet the source

of those earnings, according to the standards used by most
countries, would be here in the United States since the
individual actually performed the services here.

Therefore,

as I indicated earlier, the tax imposed by Brazil in such a
case would not be credited against United States tax.

eliminate the problem of double taxation that thus arises
in these cases, the treaty provides that personal service
income shall be considered to have its source in the country
where the services are performed.

The result is that Brazil

will not tax in those situations where an American law, accounting, management or engineering firm performs services in the
United States for Brazilian clients.

(Article 5.)

Shipping and aircraft
At present American shipping and airline companies are
exempt from Brazilian income tax on the basis of reciprocity,
but this can be altered by action on either side.

The treaty

confirms the existing situation but strengthens the commitment
by making the exemption a matter of international agreement.
(Article 10.)
Administrative cooperation
At present, there is no basis for administrative cooperation between the tax authorities of Brazil and the United States,

30 -

and therefore there exists no medium for eliminating double
taxation in certain cases or resolving tax controversies
involving the two countries even though the amounts may be
substantial.
Suppose there are transactions between a parent company
in the United States and a subsidiary in Brazil or between
two sister companies, one in Brazil and one in the United
States, and the prices at which those transactions take place
are considered by either country or both to be other than on
an arm's length basis.

The company which buys a product may

be required to recompute its taxable profit on the basis of a
lower price than that used in recording the transaction
originally, and on the basis of which the company selling the
product computed its taxable profits.

Unless there is a down-

ward adjustment in the seller's taxable profits, both countries
will be taxing all or a part of the total profits that should
be taxed only in one country.
for consul tation

bett,.~een

The treaty therefore provides

the two countries in order to arrive

at the same prices for tax computations or the same allocation
of income or expenses in transactions between related cornpanief
After such consultation and agreement, the country which is
obliged to grant a refund is empowered to do so even though
the statute of limitations has expired.

The importance of

this provision, especially as to exporters, cannot be overemphasized, because the statutes of limitations governing

- 31 refunds and assessments are frequently different from one
country to the other, and tax justice frequently cannot be
achieved in cases of the kind I have mentioned.

One country

may assert a deficiency after the other country has lost its
power to make a refund.

The treaty would cure this situation.

(Article 24.)
Extension of investment credit
These and other principles incorporated in the convention
with Brazil are not significantly different from those to be
found in the conventions we have with other countries.

Never-

theless, when considered in relation to its existing law, the
treaty rules are important changes in the Brazilian tax treatment
of international transactions.

In return for these changes the

treaty extends to investment in Brazil the 7 percent tax credit
granted under our law to investment in the united States.
A firm in the united States which purchases machinery
or equipment for domestic use is allowed a reduction in its
tax liability equal to 7 percent of the amount spent on such
equipment.

There were a number of considerations that justified

the adoption of this investment credit for domestic purposes. At
the same time, for a variety of reasons, we were not interested
in granting an incentive to investment in European plants owned
by American firms, and hence the credit was confined to investment within the united States.

However, as a result of our

- 32 preoccupation with our position relative to European countries,
we have tipped the scales against investment in developing
countries.

What we look upon as an appropriate treatment for

domestic investment is regarded by developing countries as an
obstacle to investment within their borders.

It is one coin

but observed from different sides.
Extension of the investment credit is a valuable and,
realistically, the only instrument for obtaining tax treaties
with countries such as Brazil and other Latin American countries,
and through such treaties removing the tax obstacles to international trade and investment that result from differences in
national tax concepts and the fact that each country administers
its taxes independently of every other country.
in~ernational

In a world where

trade and investment are of major importance and

are becoming increasingly more so, these obstacles should be
eliminated wherever possible.

Tax treaties move in that direction,

and yet, as I have indicated, the fact that tax treaties involve
revenue losses for developing countries can constitute, without
some balancing factor, a barrier to such treaties even though
in the long run they are of interest to all concerned.
With this in mind, the treaty with Brazil extends the
investment credit to investment made by American firms in
Brazil.

(Article 7.)

In all essential respects the credit

granted under the treaty would be the same as the credit
granted for domestic investment.

Variations from our own law

- 33 -

have been made to take account of the fact that investment
abroad frequently is made through a foreign corporation rather
than a foreign branch of a domestic corporation, and to assure
that the investment credit is associated with a net increase
in

the capital of the eligible enterprise in Brazil.

Thus,

the credit would be granted to an eligible American company
whether its activities in Brazil are conducted in branch form
or through a Brazilian subsidiary.

Under our domestic law, a

firm may purchase machinery or equipment out of depreciation
reserves, out of borrowed funds or out of new equity contributions, and irrespective of the source of funds it is allowed
a credit against its tax liability of 7 percent of the amount
thus spent.

However, under the treaty approach the credit

would not be granted to the U.s. company unless it has made a
net addition to the funds available to the enterprise operating
in Brazil.

Moreover, the new capital added to the venture in

Brazil must be committed for a minimum period of five years.
If the capital is withdrawn in a shorter period, provision
exists for the recapture of the tax credit.
As in the United States, qualified machinery and equipment must have a minimum useful life of eight years for the
full credit to be obtained.

with respect to equipment having

a useful life of between four and eight years, a partial
credit would be granted similar to that allowed under domestic

law.

34 -

To the extent that the net new investment remained in

the enterprise in Brazil, replacements of qualified machinery
and equipment would also be eligible for the investment
credit, just as replacements in the United States qualify
for the investment credit.
The treaty credit treats as net new investment amounts
in excess of one-half the profits earned each year in Brazil
which are reinvested in the business.

Reinvestment of one-

half the profits of an enterprise is considered a normal reinvestment practice and would not be regarded as a net addition
to the capital of the company for purposes of the investment
credit.

Thus, if 50 percent or less of the profits are re-

tained in Brazil, then no reinvestment is considered to have
occurred.

But if 60 percent of the profits are reinvested

then the excess over half, that is 10 percent, would be considered to be net new investment and qualified equipment
purchases, to the extent of the lOpercent, would give rise
to an investment credit.
Conclusion
There can be no doubt that tax treaties have a beneficial
effect in facilitating the movement of goods, services and
capital between countries.

The efforts of other nations to

develop a network of treaties indicate the importance of these
international agreements.

The support we have received from

- 35 the business. communities engaged in, international trade and
investment at each stage in: the development of our own now
extensive network of treaties also attests to their utility.
But it is time that we moved further along in our efforts
to mitigate the effects of the anarchistic system where,
despite the economic interdependence of nations, each country
applies its tax system as if it were alone in the world. This
is an anachronism that should be eliminated.

A major achieve-

ment in this process will be the establishment of agreements
with the countries of Latin America.

And to reach such agree-

ments we are required to make our contribution to accommodation
to proper international tax relationships, just as those
countries are required to make their contribution to such an
accommodation.
this direction.

The Brazilian treaty is the first step in
The treaty is a balanced agreement that can

be considered to be of equal worth to both parties, which is
the essence of international negotiations and arrangements.
The United States in many ways has indicated that
wherever possible it seeks to have private capital, rather
than public aid, move to these Latin American countries.

The

treaty before you is an effort to remove tax impediments to
the participation of American private enterprise in Brazilian
economic development.

I therefore urge your approval of this

treaty with Brazil, so that the United States can thereby
make its proper contribution to international tax relationships

36 -

that will assist in the furtherance of private investment
and trade with the Latin American countries.

TREASURY DEPARTMENT
£

FOR RELEASE SUNDAY
OCTOBER 8, 1967
CONLON NAMED DIRECTOR OF
BUREAU OF ENGRAVING AND 'PRINTING

Secretary of the Treasury Henry H. Fowler today announced
the appointment effective tomorrow, October 9, of James Ao Conlon,
a 25-year career employee, as Director of the Bureau of Engraving
and Printing.
Mr. Conlon, who had served as Deputy Director, succeeds
Director Henry J. Holtzclaw who retires today, the 50th anniversary day of his servic-e at the Bureau.
Mr. Conlon, 46, a native of New York City, joined the
Bureau in 1942 as an apprentice plate printer. He subsequently
advanced to journeyman plate'printer; technical assistant in the
Examining Division; Head of the Quality Control Branch; Assistant
to the Chief, Assistant Chief, and Chief, Office of Currency and
Stamp Manufacturing; Director of Manufacturing; Acting Assistant
and Assistant Director, and Deputy Director.
Mr. Conlon attended George Washington University, studying
business administration at night. He has received two Treasury
High Quality Performance Awards 'and in 1955 was nominated for an
American Management Association Scholarship Award.
Mr. Holtzclaw's career -- like Mr. Conlon's -- readslike
a Horatio Alger novel. He never completed grammar school and is
largely self-educated. Coming to the Bureau in October, 1917 as
a machinist's helper, he later became an engineering draftsman,
an associate mechanical engineer, a mechanical expert and designer.
He stepped into a management role in 1938 when he became Chief,
Office of Research and Development Engineering, a post he held
for 11 years before becoming Assistant Director. He was named
Associate Director irl 1951, and has been Director for the past
13 years.

F"1048

- 2 -

Mr. Ho1tzc1aw's period as Director has been called the
"modernization years" for the Bureau, and has been marked by
better efficiency and lower costs in its services to nearly
70 federal agencies. In 1954 the Bureau had over 6,000 employees but modernization of facilities and equipment has permitted a reduction to 3,200 employees today, during a time when
production has greatly increased
0

In 1951 it cost $9.92 to print 1,000 notes but under
Mr. Holtzclaw's leadership the cost today has dropped to $8.14.
During his 13-year career as Director, the Bureau printed $26
billion in notes, and the total value of all notes, bonds, and
other securities printed was $4 trillion.
Some 600,000 visitors tour the Bureau annually. Eighteen
million people have visited it since 1920, making it one of the
most popular attractions in Washington.

000

TREASURY DEPARTMENT
(

R RELEASE 6:30 P.M.

nday, October 9, 1967.
RESULTS OF TREASURY'S WEEKLY BILL OFFERING
The Treasury Department announced that the tenders for two series of Treasury
lls, on~ series to be an additional issue of the bills dated July 13, 1967, and the
ler serles to be dated October 13, 1967, which were offered on October 4, 1967, were
med at the Federal Reserve Banks today. Tenders were invited for $1,500,000,000,
t~reabouts, of 90-day bills and for $1,000,000,000, or thereabouts, of 181-day
Lls. The details of the two series are as follows:
~GE

OF ACCEPTED

filETI TIVE BIDS:

High
Low
Average

90-day Treasury bills
maturi~ Janua~ 11 z 1968
Approx. Equiv.
Price
Annual Rate
98.870
4.52~
98.852
4.592~
98.859
4.564~
11

181-day Treasury bills
maturin~ AEril 11 z 1968
Approx. Equiv.
Price
Annual Rate
97.491
4.990%
97.467
5.038~
97.475
5.022%
11

73~of the amount of 90-day bills bid for at the low price was accepted
54%of
the amount of 181-day bills bid for at the low price was accepted
,

U TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

District
Boston
New York
Philade lphia
Cleveland
Richmond
~tlanta
~hicago

St. Louis
unneapolis
(ansas Ci ty
:611as
3e.n FranCisco
'IDTALS

APElied For
$ 17,183,000
1,366,991,000
15,772,000
24,525,000
7,945,000
40,203,000
201;086,000
38,478,000
25,107,000
18,599,000
22,336,000
l13 z583 z 000

AcceI!ted
$ 6,983,000
686,211,000
6,772,000
20,369,000
6,845,000
26,727,000
126,658,000
28,778,000
18,607,000
15,507,000
14,336,000
42,753,000

$2,182,432,000 $1,500,646,000 ~ $1,891,808,000

$1,000,546,000

APElied For
$ 20,434,000
1,571,812,000
36,583,000
28,686,000
12,290,000
44,357,000
186,544,000
51,595,000
26,998,000
29,964,000
26,739,000
146 z 430 z 000

AcceEted
.......
$ 10,434,000
1,021,432,000
29,583,00~

28,686,000
12,290,000
39,195,000
125,017,000
48,595,000
26,931,000
29,964,000
21,739,000
106,780,000

'Q/

Includes ~247 599 000 noncompetitive tenders accepted at the average price of 98.859
'¥
,
,
•
f 97 475
Includes $161,681,000 noncompetitive tenders accep~d at the aver~ge prl?e 0
•
These rates are on a bank discount basis. The equlva1ent coupon lssue Ylelds ere
4.6~ for the 90-day bills, and 5.24% for the 181-day bills.

F-I049

STATEMENT OF FRED B. SMITH
GENERAL COUNSEL, DEPARTMENT OF THE THEASURY
BEFORE THE
·SUBC0r.R.1ITTEE ON n.1PROVEHEN'l'S IN JUDICIAL ~1ACHn1ERY
OF THE SENATE JUDICIARY COI-1lHTTEE
ON S. 2041
OCTOBER 11, 1967, 10:00 A.M. EST

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to appear before you and state the
views of' the Treasury Department on S. 2041 relating to modifications
of' the Tax Court.
On

its face, the bill appears to involve relatively minor changes

in the status of the Tax Court and of its Judges, and in Tax Court
procedures.

But the direction of' some of these changes, and additional

changes which might logically be considered as floH'ing from them,
give us serious concern.

~le

do not believe there is a real need for

the proposed changes, and we fear that they could disrupt the existing
machinery for the timely 8-l1d equitable disposition of tax disputes.
The Tax Court as presently constituted is an integral part of
the largest tax system in the world.

It is the only Court in \Thich

a taxpayer can cha.llenge a proposed deficiency in income, estate or
gift tax without first paying the tax involved.

There are presently

over a billion dollars in tax deficiencies pending before this Court.
Under our self assessment system, each year some 80 miD_ion taxpayers file income tax returns.

Of this number in fiscal year 1966,

3,300,000 tax returns were eXDmined by the I.R.S.; 1,900,000 'YTere

notified of deficiencies or adjustments.
the Governt~ent and paid the deficiency.

1,800,000 of these a.greed with
Of the remaining 100,000, most

of these were settled under conference pTocedures at tbe District level.

- 2 27,652 taxpayers took their cases to the Appellate Division of the
Internal Revenue Service where the bulk of the cases ,.,ere disposed of
Only 2,385 taxpayers went to the Tax Court from the

administratively.
Appellate Division.

This plus l~ ,489 cases appealed directly from the

District Audit to the Tax Court made a total of only 6,874 taxpayers
who petitioned.

And this out of a total of 3,300,000 tax returns which

were examined!
In fiscal year

1966,

6,231~ docketed cases were disposed of by

the Tax Court, and only 726 of these required hearings.

Indeed, for

the past several years approximately 85 per cent of the cases docketed
in the Tax Court have been disposed of 'Hithout hearing.

This re-

markable settlement record is due in large part to the fs,ct that the
Office of the Chief Counsel and the Internal Hevenue Service are "rithin
the s eJTle Department and "lOrk clos ely tOGether.
I have gone into some detail to shov the o})eration of u vast
machinery for the resolution of tax disputes vrhich st.arts at the
District level, proceeds through the Apgellate Division, and in a
relati vely fevl cases, ends in the Tax COlU't.
the system operates quite w-ell.

On the whole, we think

And in this process for the clispositj on

of tax cases, we believe the present syste1:1 has bas:i.cally the right
mixture of c:.dministrative and judicial attributes.
A fundamental fwd complex problem arises from the fa.ct that the
bill would change the status of the 'l'n.x Court from that of an indr:penclent
Court in the Executj,ve bra.nch described in ArLicle I of the Corlstitution
to that of a jndicic0. Court described in k('ticle III of the Constitution.

- 3This proposal logically raises the issue of representation of the

Government before the Tax Court.
Absent a statutory exception, the attorneys of the Justice Department represent the Government before Article III courts.

There are

presently several such exceptions for various agencies and departments
of the Government.

Existing law expressly provides that in cases

before the Ta.•'{ Court the COIThllissioner of Internal Revenue shall be
represented by Chief Counsel of the Internal Revenue Service.
bill before you retains this provision.

The

'l'his, we regard as essential.

An important aspect of continuing the right of representation in

the Office of the Chief Counsel, Internal Revenue Service, lies in the
significrult role that Office plays in the settlement of cases in the
Tax Court.

The attorneys "rho represent the Government in the Tax Court

and the administrative personnel

vrho

develop the cases for the assertion

of deficiencies 'wrk together under closely coordinated control to
assure uniformity in the administration of the revenue laus.

The fact

that responsibility for the presentation of issues in tax cases before
the Tax Court is under the contI'ol of

s iuC1e Executive deps,rtment h8's

made possible an outstanding record of settlements both administratively
and before the Court.
The existing ma.chinery is geared t.o the settlement of the vast
majority of deficiency cases within the I.R,S. proceduTes.

Any

separation of the administrative and litisation responsibilities could
lead to a disruption of this system vrith a cono::nitant increase in the
trial dockets of the Tax Court.

As a result. > tl:~re vJOulJ. be deferred

- 4the collection of even larger amounts of revenue than the $1 billion
as at present.

It should be recalled that a taxpayer appealing a

deficiency notice does not have to pay until his case is finally decided.
For these reasons, we feel strongly that whatever is done with
this legislation, the provision for representation of the Government
by I.R.S. attorneys must be retained.

But essentially, the issue

should not be reached because we believe that the Tax Court is, and
should continue to be, the final judicial step in an over-all Executive
branch process of disposing of tax issues behrcen the citizen and the
Government, in other words an Article I independent Executive branch
court.
l<urther, the introduction of more formal procedures in the Tax
Court, as is contemplated by the proposed section 2652{8,), could tend
to encourage the bypassing of administrative settlement processes and
the placing of undue reliance on the resolution of issues by the Court,
which issues can and ought to be resolved by the parties themselves.
Finally, we believe that there is no real need for most of the
changes proposed by S. 2041.

We iwuld like to see Tax Court judges

get retirement benefits equivalent to those of District court judges.
We think that the responsibilities they perform a:ce equivalent, a.nd
they should have eQl'.iva-lent benefits.

HOi-leVer, the:ce seems to be no

reason -",hy this objective cannot be achieved through the amendment of
the provisions in Title 26, governing ths retirement benefits for
Tax Court judges.

- 5 The granting of life tenure is a controversial issue and deserves
careful consideration.

As a practical matter, hOliever, it does not

appear necessary in the case of the Tax Court.

Almost without exception,

in the 43 years of its history, Tax Court judges have been reappointed
upon completion of their l2-year terms.

In theory also, the Court should have the power to compel compliance
with its subpoenas and to punish for contempt.

However, as a practical

matter, it has been necessary to resort to the authority of the District
courts in this regard only in a very few cases over the years.
Finally, the proposal does not achieve Article III status for the
Tax Court for many years because of its provision for retaining judges
under their pres ent appointments for lind ted terms.
For these reasons, the Treasury Department is opposed to S. 2d~1.

TREASURY DEPARTMENT

FOR IMMEDIATE RELEASE

October 11,

TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$ 2,500 ,000 ,000 pr thereabouts, for cash and in exchange for
Treasury bills maturing October 19,1967, in the amount of
$2,401,606,000, as follows:
91-day bills (to maturity date) to be issuedOctober 19 1967,
1n the amount of $1.,500,000,000, or thereabouts, representi~g an
additional amount of bills dated July 20,1967,
and to
~ture January 18,1968, originally issued in the amount of
$1,000,696,000, the additional and original bills to be freely
interchangeable.
182-day bills, for $1,000,000,000, or thereabouts, to be dated
October 19,1967,
and to mature
April 18, 1968.
The bills of both series will be issued on a discount basis under
competitive and noncompetitive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
{maturi ty value}.
Tenders will be received at Federal Reserve Banks and Branches
Eastern Daylight Saving
time, Monday, October 16, 1967.
Tenders will not be
~ceived at the Treasury De~artment, Washington.
Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
/11th not more than three decimals, e. g., 99.925. Fractions may not
Je used. It is urged that tenders be made on the printed forms and
~orwarded in the special envelopes which will be supplied by Federal
~eserve Banks or Branches on application therefor.

up to the cloSing hour, one-thirty p.m.,

Banking institutions generally may submit tenders for account of
!Ustomers provided the names of the customers are set forth in such
;enders. Others than banking institutions will not be permitted to
lubmit tenders except for their own account. Tenders will be received
rithout deposit from incorporated banks and trust companies and from
~Sponsible and recognized dealers in investment securities.
Tenders
'~m others must be accompanied by payment of 2 percent of the face
mount of Treasury bills applied for, unless the tenders are
,ceompanied by an express guaranty of payment by an incorporated bank
l' trust company.
F-I050

- 2 Immediately after the closing hour, tenders will be opened at t
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasu
expressly reserves the right to accept or reject any or all tenders.
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on October 19, 1967,
cash or other immediately available funds or in a like face amount
of Treasury bills maturing October 19, 1967. Cash and exchange ~~
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other dispositioo
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject ro
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills au
sold, redeemed or otherwise disposed of, and such bills are exclud~
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereund
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upoo
sale or redemption at maturity during the taxable year for which tb
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and ~
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
any Federal Reserve Bank or Branch.
000

TREASURY DEPARTMENT

FOR IMMEDIATE RELEASE

TREASURY TO CHANGE FINENESS OF SILVER BARS
The Treasury Department announced today that effective
November 1, silver bars issued in exchange for silver certificates at the New York and San Francisco Assay Offices will be of
finenesses of .996 to .998 rather than the .999 fine bars presently
issued.
The change will not affect the amount of silver exchanged for
the certificates. Holders of silver certificates will continue
to receive silver equal to the face amount of their certificates
at the monetary value of $1.292929292 per fine troy ounce.
The change in the fineness of the bars is being made to comply
with a request by the Office of Emergency Planning that the silver
transferred to the stockpile be .999 fine. Because of this, the
General Services Administration has announced that commencing
October 20, 1967, future sales of silver by that agency will be in
silver ranging in fineness from .996 to .998.
For small transactions, the Assay Offices will continue to
issue small manila ~nve lopes which contain .77+ ounces of fine
silver in the form of granulations or pellets.
The Treasury has adequate supplies of silver on hand to fill
III requests for exchanges of silver certificates made before
rune 24 , 1968 , the date on which exchanges are to be terminated
mder Public Law 90-29, and to satisfy all presently scheduled
leeds including the continued sales of silver to industrial users
md the transfer on June 24, 1968, of 165 million ounces to the
!mergency stockpile as required by the same law.

000

-1051

TREASURY DEPARTMENT

October 13, 1967

FOR IMMEDIATE RELEASE
TREASURY MARKET TRANSACTIONS IN SEPTEMBER
During September 1967, market
transactions in direct and guaranteed
securities of the government for Government
investment accounts resulted in net purchases
by the Treasury Department of $61,489,000.00.

000

F-1052

TREASURY DEPAR'D4ENT

Wa.hington

FOR RELEASE ON DELIVERY
REMARKS OF FRED B. SMITH
GENERAL COUNSEL, TREASURY DEPAR'llt!ENT
BEFORE THE NATIONAL CONFERENCE ON PROFESSIONAL ETHICS
OF THE AMERICAN IISTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
NEW YORK HILTON HOTEL, NEW YORK, N. Y.
MONDAY, OCTOBER 16, 1967, 9:00 A.M., EDT
Mr. Chairman, Distinguished Guests, Ladies and Gentlemen:
It is a special pleasure for me to participate in this Conference today because the matter of professional ethics not only falls
within the ambit of my responsibilities in the Treasury Department,
but is also a matter of apecial personal concern to me.
I have a few thoughts that I would like to share with you, but
I also want to take advantage of this Conference, hopefully to get
some ideas from you on how to deal with some difficult problem areas
that are of mutual concern both to the Treasury Department and to
practicing certified public accountants and attorneys.
Let me start by laying down a few initial premises.

Some

10 million taxpayers annually file income tax returns under our selfassess.ent system, not to mention many other Federal tax returns.
Last year under this system we raised some $148 billion in taxes.
The system is absolutely and utterly dependent upon the responsibility and honesty of the taxpayers in this country and their
professional representatives.
As you know, until the enactment of the Agency Practice Act,
we had in the Treasury a system of requiring special licenses for
attorneys, certified public accountants, and others to practice before

- 2 -

the Treasury Department; and we had regulations which were very broad
in their scope.

In effect, we made a second judgment on a certified

public accountant's competence and personal and moral qualifications
to represent taxpayers before the Internal Revenue Service.

I was one

of those in the Government who led the fight in opposition to the bill
which eventually became the Agency Practice Act.

We opposed this bill

solely out of our concern for the protection of the taxpayers and for
the protection of the revenue of the United States.

Nevertheless, the

Act was passed, and, upon reflection, I am satisfied that we were
wrong and the Congress was right in passing that Act.

I am satisfied,

that is, if, as I fully hope and expect, the State licensing authorities and the professional aSSOCiations, such as yours, now assume and
proeeed to carry out faithfully the responsibility which the Congress
has rightfully said is theirs, to maintain high standards of ethics
and morality amongst their membership, and to weed out those disreputable and dishonest members who cannot be depended upon to live up to
their high professional responsibilities.
In any event, the Agency Practice Act was passed and we drastically
revised Treasury Department Circular 230, which constitutes the rules
governing the practice of attorneys and agents before the Internal
Revenue Service.

The special licensing or admission requirement was,

as you know, dispensed with.

However, the Act left in the hands of

Government agencies, including the Treasury Department, the authority to
discipline attorneys, certified public accountants, and agents practicing before the Service for misconduct.

- 3 It was clear to us from the records of the hearings and the
debates that Congress intended us to concern ourselves primarily with
matters of misconduct relating more or less directly to the work of
the Internal Revenue Service.

Accordingly, the revised Circular 230

now sets forth standards of conduct, the violation of which would be
the basis for suspension or disbarment, which fall principally into
two categories:

(1) those which more or less directly affect the

right of taxpayers to sound representation before the Service, and
(2) those which relate to the ability of the Service to carry out its
functions and missions.

Let me give some examples of the kinds of

things which might justify disciplinary action by the Treasury.

If a

practitioner willfully misrepresented facts to the Service with respect
to his client's affairs, this would clearly be a matter of concern.
Also, if he were guilty of willful tax fraud or evasion with respect
to his own personal affairs, there would be serious doubt as to his
qualifications to represent other taxpayers.
On the other hand, a great number of things that we used to
consider in determining whether to grant a practitioner a license,
or to discipline once admitted to practice before the Service, have
now been eliminated.

For example, imparting to a client false informa-

tion relative to the progress of a case or other proceeding before the
Internal Revenue Service; improper retention of a fee for which no
services were rendered; obtaining or attempting to obtain money or

- 4 other thing of value from a client or other person by duress or by
undue influence; endorsement of a Government check drawn to the order
of the client without authority of the client; charging unreasonable
fees, etc.
The new provision on fees provides that the practitioner shall
not charge an "unconscionable" fee.

Under our interpretation, this

means more than just charging a fee in excess of the professional
association's accepted standards.
scrupulous fee.

We interpret it to mean an un-

Well, I think these examples will give you an idea

of the new attitude which we now have with respect to the discipline
of practitioners, and suggest the broad scope of the area of responsibility which we now regard as falling upon the state licensing
authorities and the professional associations.
Since the enactment of the Agency Practice Act and the issuance
of our revised Circular 230, we have heard from a great number of
groups and individual practitioners, many of whom are somewhat overwhelmed and concerned with the situation that they have helped to
create in supporting the enactment of the Agency Practice Act.

think it is particularly true of a large number of those who specialize
in tax practice.

They realize that the "bug is now on their backs,"

and they are not entirely happy to have this responsibility.

This

is recognizable because as we have discovered over a great many years,
it is not easy to police the membership of a profession.

Those who

serve on grievance committees perform a very delicate job of making

- 5 initial judgments on the conduct of their fellow practitioners.

addition, the proper performance of this responsibility requires a
great deal of time and effort on the part of very busy men.

But, I

want to emphasize that, in my opinion, there are few undertakings
which a professional man can perform which are more worthwhile.

the field of taxation alone, for example, practitioners are rendering
a service which affects every taxpayer in the country practically, and
in a vital way.
The integrity of our whole tax system is heavily dependent upon
the ethical conduct of these representatives of the people.

I am

proud that in my whole adult life, I have been engaged in the practice
of an honorable profession.

In the not too distant future, I may

well be returning to private practice.

The reputation of the pro-

fession to which I belong is a matter of great concern to me, and
I know it is also to you.

I realize that a few bad apples practicing

among the legal profession can bring disrepute upon the profession
as a whole, and I am sure you feel the same way about the practice
of certified public accountancy.

Both of these professions have a

very high reputation in this country today, but it is something that
must be vigilantly maintained.
The Commissioner of Internal Revenue and I have both been the
recipients of requests by professional associations for cooperation,
particularly in the area of making available to state licensing
authorities and professional associations derogatory information
which comes to our attention.

I can say without qualification that

- 6 both of us are anxious to be of assistance in every way possible as
you assume a greater proportion of the responsibility for maintaining
the ethics of your profession.

We have given quite a bit of thought

to this matter, and we are engaged in studies looking toward appropriate avenues of assistance.

I am sorry to say that I cannot pro-

vide you with any very clear-cut conclusions at this point.

Rather,

as I indicated at the beginning of my statement, I am afraid that
the most I can do this morning is bring to your attention certain
problem areas that have arisen in connection with our thinking up
to date on this subject.
Let me take a relatively easy one first.

Every year a certain

number of disciplinary proceedings are initiated by the Director of
Practice against practitioners for violation of the rules of conduct
under Circular 230.

Parenthetically, I might say that the Director

of Practice is completely independent of the Internal Revenue Service,
and organizationally is a part of the Office of the Secretary of the
Treasury, operating under my general supervision.

These proceedings

are brought before an independent Hearing Examiner pursuant to the
Administrative Procedure Act.
Evidence and testimony on the charges are heard and weighed by
the Examiner who ultimately produces findings of fact and an order
which may call for the disbarment or suspension from practice before
the Service of a practitioner.

We regularly publish in the Internal

Revenue Bulletin the names and addresses of those who are disbarred
or suspended as a result of such proceedings.
notice does not give

any

However, the published

details as to the nature of the violation.

- 7Query:

Can a state licensing authority or professional grievance

association take action against one of those members solely on the
basis of a published notice of such a decision?
that they might need more than this.

It would seem to me

At the present time, I am exploring

the question of how we can make available to appropriate bodies the
findings of fact and order of the Hearing Examiner in this category
of cases.

One avenue to be explored is whether this can be done on

the basis of requests under the Freedom of Information Act effective
July 4, 1967.

I am hopeful that we will be able to work out a

satisfactory system so that this can be done.

There are problems

with doing so, particularly as regards profeSSional associations, since
from profession to profession and from state to state there are great
variances in what you might call the legal standings and procedures
of grievance committees.

It may prove to be appropriate in some

cases to recommend amendments of particular State laws to set up an
adequate procedure for doing this.
There is a much broader area of adverse information which comes
to the Treasury Department where the problem of cooperation with local
authorities and professional associations is much more difficult.
Many

of these cases never go to a hearing before an Examiner.

After

derogatory information is made known to a practitioner, he may consent
to suspension, and that is the end of it.

One might suggest that in

such cases, guilt could be presumed and the adverse information and
evidence which we have should also be made available to appropriate
authorities.

However, this may not be the case.

A practitioner, in

- 8 -

theory at least, might feel that he has such a small amount of tax
work that he really doesn't care about being authorized to practice
before the Service, and he doesn't want to go to the time, effort
and expense to contest the charges and produce the evidence.

In any

event, there would not have been a production of all the evidence
in a due process type of proceeding, a weighing of such evidence and
a decision; and we have great difficulty at the moment in seeing our
way clear to make this type of information available to local authorities
under the circumstances -- absent some statutory basis for dOing so.
This is an area concerning which I would be very interested to hear
the comments and suggestions of any of those participating in this
Conference.
Finally, in the course of its review and investigation of tax
matters allover the country, agents of the Internal Revenue Service
may discover some derogatory information about practitioners, but this
is derogatory information which does not relate to the matters encompassed by Circular 230.

You might say it is accidental or incidental

evidence and information which they acquire in carrying out their
regular responsibilities.
teste~

This is "raw" data which has not been

and we have great difficulty in seeing our

w~y

clear to make

this type of information available to professional organizations.
Bear in mind that among other things, we are tremendously concerned
not to cause any unfair harm to any individual practitioner.

We are

well aware that the disclosure of derogatory information which may

- 9 ultimately be proven to be of absolutely no validity whatsoever can
nevertheless do untold drunage to the reputation of the practitioner.
The vindication almost never catches up with the publication of
sensational charges and, of course, to a professional man, his reputation is his life blood.
I should like to touch on one further area which we are studying.
Under our present regulations, flagrant misconduct by a practitioner
before another agency of the Federal Government or, for that matter,
state and local government, is not a basis for disciplinary action
by the Treasury Department's Director of Practice.

Nevertheless,

we are well aware that an attorney or certified public accountant who
files fraudulent statements with, for example, my colleague in the
Securities and Exchange Commission, is certainly of dubious qualification to represent taxpayers before the Treasury's Internal Revenue
Service.

Of course, the initial responsibility for coping with this

type of an incident lies with the other Federal agency.

But, supposing

a practitioner is disbarred from practice before the Securities and
Exchange Commission.

Some contend that this should be grounds for

disbarment by the Treasury, but this can create problems.

For example,

I know of a similar case not involving Treasury's Director of Practice,
but involving a Treasury license of a different sort where a man was
denied a Treasury license on the basis of his having been found
guilty of violations of an act administered by another Department,
resulting in the denial to him of certain privileges under that Department's regulatory program.

Subsequent to our action, this person

- 10 -

provided the other Department with additional information and evidence,
and was completely reinstated and vindicated by the other Department.
We were considerably embarrassed by this incident because we had not
held a proceeding in which an independent Examiner had heard all of
the evidence and come to a decision.

My tendency is to feel that

while we can explore possibilities for cooperative arrangements mnong
the various Federal departments and agencies, essentially the task is
going to devolve principally upon the State licensing authorities
and the professional associations to keep track in the Federal Register
and Internal Revenue Bulletin of decisions in disciplinary proceedings
by the various departments and agencies, and to take the matter from
there themselves.

However, I will be very much interested to hear

the views of my colleagues on the panel, or of the other participants
in this meeting on this difficult question.
These are a few rambling thoughts which I have, which I hope may
make some contribution to the deliberations at this Conference.

are very pleased that by and large our new Circular 230 has found
favor among the various professional associations.

As you know, in

the development of these regulations, we received great help in the
form of suggestions fram the various associations, and in particular,
very thoughtful and constructive suggestions from the American
Institute of Certified Public Accountants.

It goes without saying

that the Director of Practice and I, and I know the Commissioner of
Internal Revenue, are always happy to discuss with representatives

- 11 -

of your organization and other similar organizations, any problems
which may arise for you in connection with the way we carry out our
responsibilities.

And, as I have said, we are tremendously interested

and anxious to be of whatever assistance we can in helping the various
professional associations as they move into action to tighten up
the quality and integrity of the services performed by their membership.

TREASURY DEPARTMENT
4

FOR RELEASE 6: 30 P.M.,
~onday,

October 16, 1967.
RESULTS OF TREASURY'S WEEKLY BILL OFFERING

The Treasury Department announced that the tenders for two series of Treasury
)ills, one series to be an additional issue of the bills dated July 20, 1967, and the
lther series to be dated October 19, 1967, which were offered on October 11, 1967, were
)pened at the Federal Reserve Banks today. 'lenders were invited for $1,500,000,000,
lr thereabouts, of 91-day bills and for $1,000,000,000, or thereabouts, of 182-day
Jills. ~e details of the two series are as follows:
tANGE OF ACCEPTED
:OMPETITIVE BIDS:

High
Low
Average

91-day Treasury bills
maturing January 18 z 1968
Approx. Equiv.
Price
Annual Rate
4.64~
98.827
98.808
4.716~
98.818
4.676~

182-day Treasury bills
maturing April 18, 1968
Approx. Equiv.
Price
Annual Rate
5.137%
97.403
97.376
5.19<>%
97.389
5.165%
Y

af Excepting 1 tender of $200 000

of the amount of 91-day bii1s bid for at the low price was accepted
14% of the amount of 182-day bills bid for at the low price was accepted
)TAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minne apo lis
Kansas City
Dallas
San Francisco
'IDTALS

AcceEted
AE:Elied For
$ 19,572,000 $
9,572,000
1,786,151,000
988,441,000
25,029,000
18,029,000
32,217,000
30,357,000
9,918,000
9,918,000
42,440,000
38,580,000
302,140,000
199,457,000
43,431,000
35,431,000
16,626,000
13,876,000
30,013,000
26,013,000
26,602,000
18,602,000
117 z 996 z000
l11 z 996,000

A12:E1ied For
$ 5,572,000
1,414,269,000
17,997,000
53,313,000
5,276,000
31,231,000
281,183,000
25,388,000
15,017,000
18,527,000
15,828,000
122,378 z000

Acce12ted
$ 5,572,000
625,929,000
9,997,000
37,453,000
5,276,000
25,231,000
140,883,000
18,528,000
11,727,000
16,527,000
10,828,000
92 z 058, 000

~2 452 135 000

$2,005,979,000

$1,000,009,000 ~/

.p,

$1 500 272 000~1
" ,

E.t

Includes $232 583 000 noncompetitive tenders accepted at the average price of 98.818
Includes $151;765;000 noncompetitive tenders accep~d at the aver~ge pri~e of 97.389
These rates are on a bank discount basis. The equ1valent coupon lssue Ylelds are
4.8l~ for the 91-day bills, and 5.39~ for the 182-day bills.

, 1053

TREASURY

r·.~PARTMENT

FOR IMMEDIATE RELEASE

TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, lnvltes tenders
for two series of' Treasury bills to the aggregate amount of
$2,500,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing October 26,1967,
in the amount of
$2,400,935,000, as follows:
91-day bills (to maturity date) to be issued
in the amount of $1,500,000,000, or thereabouts,
additional amount of bills dated July 27, 1967,
matureJanuary 25, 1968, originally issued in the
$1,000,293,000, the additional and original bills
interchangeable.

October 26, 1967,
representing an
and to
amount of
to be freely

182-day bills, for $1,000,000,000, or thereabouts, to be dated
October 26,1967, and to mature April 25,1968.
The bills of both series will be issued on a discount basis under
competitive and noncompetitive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000,
$100,000, $500,000 and $1,000,000
(maturi ty value).
Tenders will be received at Federal Reserve Banks and Branches
to the cloSing hour, one-thirty p.m., Eastern Daylight Saving
time, Monday, October 23, 1967.
Tenders will not be
received at the Treasury De~artment, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
up

Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
~sponsible and recognized dealers in investment securities.
Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
F-I054

- 2 Immediately after the closing hour, tenders will be opened at th
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasu,
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
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 OD October 26,1967, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing October 26,1967.
Cash and exchange tende
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunde
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upoo
sale or redemption at maturity during the taxable year for which t~
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and thi
notice prescribe the terms of the Treasury bills and govern the
.
conditions of their issue. Copies of the circular may be obtainedl
any Federal Reserve Bank or Branch.
000

TREASURY DEPARTMENT

IMMEDIATE RELEASE
TREASURY'S MONTHLY BILL OFFERING

The Treasury Department, by th1s publ1c not1ce, 1nvites tenders
r two series of Treasury bills to the aggregate amount of
,500,000,000, or thereabouts, for cash and 1n exchange for
,easury b1lls matur1ng October 31,1967, 1n the amount of
,405,740,000, as follows:
274-day b1lls (to matur1ty date) to be issued
the amount of $ 500,000,000,
or thereabouts,
d1t1onal amount of b1lls dated July 31,1967,
ture July 31,1968,
originally 1ssued 1n the
,000,551,000, the add1tional and original bills
tercnangeable.

October 31,1967,
representing an
and to
amount of
to be freely

366-day bills, for $ 1,000,000,000, or thereabouts, to be dated
tober 31,1967, and to mature October 31, 1968.
The b1l1s of both series will be issued on a discount basis under
and noncompetitive bidd1ng as hereinafter provided, and at
;ur1ty their face amount will be payable without interest. They
II be 1ssued in bearer form only, and in denominations of $1,000,
000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
lturlty value).
~et1tive

Tenders will be received at Federal Reserve Banks and Branches
to the cloSing hour, one-thirty p.m., Eastern Daylight Saving
e, Tuesday, October 24, 1967.
Tenders will not be
e1ved at the Treasury De~artment, Washington. Each tender must
for an even multiple of $1,000, and in the case of competitive
ders the price offered must be expressed on the basis of 100,
h not more than three decimals, e. g., 99.925. Fractions may not
used. (Notwithstanding the fact thatthe one-year bills will run for
days, the discount rate will be computed on a bank discount basis of
I days, as is currently the practice on all issues of Treasury bills.)
is urged that tenders be made on the printed forms and forwarded in
, special envelopes which will be supplied by Federal Reserve Banks or
nches on application therefor.
Banking institutions generally may submit tenders for account of
tomers provided the names of the customers are set forth in such
ders. Others than bank1ng 1nstitut1ons will not be permitted to
m1t tenders except for the1r own account. Tenders will be received
nout deposit from incorporated banks and trust companies and from
ponsible and recognized dealers in investment securities. Tenders
-1055

- 2 from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at th
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasm
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
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
cash or other immediately available funds or in a like face amount
of Treasury bills maturing
Cash and exchange tendf
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excludec
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereundE
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upoo
sale or redemption at maturity during the taxable year for which tru
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and th
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
any Federal Reserve Bank or Branch.
nOn

TREASURY DEPARTMENT

•

October 18, 1967

FOR IMMEDIATE RELEASE

Secretary of the Treasury Henry H. Fowler
today sent the following letter to
Senator Russell B. Long, Chairman, Senate
Finance Committee.

Attachment

F-1056

'HE SECRETARY OF THE TREASURY
WASHINGTON

OCT 1 8 1967

Dear

~~.

Chairman:

I am writing to you to express my judgment that the
recently proposed illiport quota bills, if enacted, would
worsen our balance-of-payrr.ents problem, already aggravated
by the Vietnam conflict.
During the post-war period, our substantial trade
surplus has been the major sustaining element in our
balance-of-payments picture. This trade surplus has
provided the financial means for carrying on necessary
military, economic, and diplomatic activities throughout
the world with a convertible dollar of constant gold
value. Because of this trade surplus, we have not had
to resort to the restrictions on personal freedom of
travel abroad or on direct investment abroad which so
many countries have used. I shudder to contemplate what
would have happened to our balance-of-payments position
and our gold reserves in the absence of this strong plus
factor in our payments situation.
A country with a large trade surplus is uniquely
vulnerable to the adverse effects of a quota war and
that is what wide use of import quotas would create.
To incite such a war would be a fool's game since the
U. S. would be-bound to end up as a loser. The broad
use of import quotas may, at times, make temporary sense
for inward-looking trade deficit countries; but it has
no place in the policy of a major trade surplus country
such as ours,
Import quotas would probably reverse the continued
recovery of our trade balance upon which the solution to
our balance-of-payments problem so heavily depends.

- 2 -

They would do this by causing a loss of U. S. exports that
would almost certainly exceed any reduction in U. S. imports
that they would produce.
There are three reasons for anticipating a substantial
adverse effect on our exports as a result of widespread
imposition of import quotas. These may be referred to as
the "feedback" effect, the "retaliation" effect and the
"competitive loss" effect. Let me describe each of these,
in turn.
Feedback Effect. ~fuen we import, we put dollars in the
hands of foreign countries which are likely to use the
bulk of them directly or indirectly either to purchase
U. S. goods, U. S. services or U. S. long-term investments.
Experience suggests that for each $1 billion reduction
in our merchandise imports, we will lose somewhat over half
a billion dollars of exports. Other items in our balanceof-payments accounts will also change; but I am speaking
of the observable statistical relationship between our
merchandise imports and exports over a period of years.
If foreigners earn less from us because of quota
barriers which we erect against their goods, we can surely
ant~cipate that their purchases of our goods will decline
even in the absence of retaliatory action against our
goods. But there will certainly be such action--and this
leads me to the second adverse effect that the proposed
quotas would have on our exports.
Retaliation Effect. President Kennedy in his Balance of
Payments Message to the House of Representatives on
February 6, 1961, warned:
"A return to protectionism is not a solution.
Such a course would provoke retaliation; and the
balance of trade, which is now substantially in our
favor, could be turned against us with disastrous
effects to the dollar."

- 3 -

, President Johnson in his Balance of Payments Report
to~he ?ongress on February 10, 1965, emphasized our
obl~gat~on to avoid I~eggar thy neighbor" restrictions
,on trade.
If we start down the quota path, there will be
retaliatory action abroad and our trade surplus position
will suffer.
The six Common Market countries have already given
a veiled warning that they would retaliate. I do not
think they are bluffing. The Commission which is the
executive arm of the European Community is reported to
have already undertaken a study of possible retaliatory
action. A Commission recommendation along this line to
the Community's Council of Ministers would certainly
receive very careful consideration.
Other countries would follow suit. I understand the
Australian Government has estimated that the proposed
quotas would apply to 60% of Australia's exports to us.
I hardly think that country, or other countries in

comparable situations, would remain passive in the face
of U. S. quota limitations affecting so large a portion
of exports to us.
Let me add that foreign countries have a variety of
devices with which they could retaliate against the proposed
U. S. quotas. These include not only counterquotas but
also administrative devices such as licenSing requirements
which are not so obvious but which could be quite effective
in reducing their imports from the U. S. There is ~o doubt
in my mind that these instruments would be brought ~nto
play within a short time after action'by the U. S. along
the lines of the proposed legislation.
In addition , then , to the adverse "feedback"
d effect
.
on our exports resulting from a quota-induced re uct~on

- 4 -

in our imports, there would be a decline in our eh~orts
due ~o foreign retaliatio~. Loss of U. S. exports due
to tnese two reasons alone might well exceed any reduction
in our imports resulting from the proposed quotas. But
the above losses would be supplemented due to a third
adverse effect resulting from imposition of import quotas.
Competitive Loss Effect. Imposition of the proposed quotas,
by curtailing competition from foreigners, would encourage
higher domestic prices for various materials and components
which enter our export products. As a result, our exports
would tend to be less competitive in foreign markets, and
we could expect foreigners to buy less of them for this
reason.
In August I testified before the House Ways and Means
Committee on the President's fiscal program. In that
testimony I emphasized thL importance of keeping our
exports competitive over the longer run and pointed out
that the requested tax increase would contribute to this
end. Maintaining an open economy--that is, one free from
widcsprcad quotas and other barriers to trade--also contributes to this end. We cannot hope to produce in a
highly protected domestic market and sell successfully
in highly competitive international markets.
I have described above three adverse effects that the

proposed import quotas would have on U. S. exports. I
cannot predict exactly what their combined effect would
mean in terms of dollar loss of U. S. exports for each
dollar reduction in U. S. imports brought about by the
proposed quotas. But my judgment is that the ratio would
be considerably greater than one for one--that is, more
than one dollar's loss of exports for every dollar reduction
of imports. In summary, the proposed quotas would hurt our
trade balance and, therefore, our balance of payments.
The approach under our balance-of-payments program
has been in exactly the opposite direction--namely, to

- 5 -

achieve an expansion of e:-:ports that would outstrip the
rise in our imports. In short, we are striving for a
balance-of-payments solution in the context of a healthy,
expanding international economy such as has been developing
in the last decade or t\-7O. The proposed legislation,
by contrast, would foster a retreat to protected markets
which could easily become cumulative. Protectionism is
like inflation. There is never enough of it for the firm
whose costs are seriously out of line.
Any adverse effects of increased imports on particular
firms or individuals are not remedied from the national
point of view by transferring the disruption to firms and
workers engaged in exporting. Adverse effects, in any
event, are likely to be temporary in a period of healthy
domestic growth and near capacity utilization of domestic
resources. We are not facing a period of mass unemployment
and low rates of plant capacity utilization such as featured
the 1930's. The Administration's policy has been directed
more and more firmly towards the maintenance of a full
employment, non-inflationary economy in which international
trade in both directions plays an important role.
Enactment of the proposed bills would bring to an end
an era of progressive liberalization in international
trucie--an era which has witnessed the highest growth rate
that the industrialized area of the world has ever experienced.
The U. S. has played a leading role in this liberalization
process. In addition to completing successfully the Kennedy
Round of trade negotiations, the U. S. and other Free l-1orld
countries have recently agreed on a facility for supplementing
existing international reserve assets, as needed, in order
that a shortage of such reserves will not impede the continued
growth of world trade.
Our best interests at home and abroad would suffer
if the U. S. were suddenly to forsake its role in the

- 6 -

expanding Free Horld economy for the illusory benefits
of an import quota system.
Sincerely yours,

Henry H. Fowler
The Honorable
Russell B. Long

Chairman
Senate Finance Committee
Washington, D. C. 20510

TREASURY DEPARTMENT
Washington

FOR RELEASE ON DELIVERY
REMARKS OF THE HONORABLE FREDERICK L. DEMING
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
AT THE
MID-CONTINENT EAST REGIONAL MEETING
OF THE
AMERICAN ASSOCIATION OF COLLEGIATE SCHOOLS OF BUSINESS
IN MINNEAPOLIS, MINNESOTA
ON THURSDAY, OCTOBER 19, 1967, AT 9:00 A.M., CDT
FINANCIAL FRONTIERS
It is always a pleasure to return to Minneapolis -- and
the opportunity to meet and exchange ideas with this
distinguished group makes the occasion still more satisfying.
One of the great strengths of the American system, I
believe, is the interchange of ideas and people between
business and Government, Government and the academic community,
and business and academic life. If not an eternal triangle, it
is, at least, a long-lasting and fruitful one -- with solid
ties and tensions in each of those interconnections. Each of
the three components benefits from the relations with the
other two.
This productive partnership shows up particularly in the
development of new frontiers of economic knowledge and
institutions. A striking example of this, which I have seen
at first hand, is the effort of the past several years to
create new international liquidity. There is not time today
to discuss this subject at length or in substantive fashion.
I want to spend most of my time on domestic matters. But a
brief historical and procedural comment is in order.
Much of the original thinking in this area came through
the interchange of ideas and people in Government and the
academic community. A succession of ideas was fostered in
Government circles here and abroad. In that process, the
business and financial world was drawn in, too, at first with
Some healthy skepticism and then with increasing conviction
that this was an appropriate, desirable and necessary path
to follow.

F-1057

- 2 -

The international liquidity exercise has gone through
several phases of study and negotiation with most of the
frontline work being done by representatives of Treasuries
and Central Banks. Government positions, of course, have
reflected widespread intra-Government study and consultation.
In the United States, both the executive and legislative
branches contributed to this work. And, in the United States,
an important role has been played by the Advisory Committee
on International Monetary Arrangements -- a group that
illustrates my point very well.
The Committee is composed of nine men from business,
financial and academic life -- many of whom have served in
important Government positions. From the financial and
business world are its Chairman -- Douglas Dillon (former
Secretary of the Treasury), Robert Roosa of Brown Brothers
Harriman (former Under Secretary of the Treasury), Andre
Meyer of Lazard Freres, David Rockefeller of The Chase Bank,
and Frazar Wilde of the Connecticut General Life Insurance
Company and the Committee for Economic Development. From the
academic community are Walter Heller of Minnesota (former
Chairman of the Council of Economic Advisers), and Kermit
Gordon of Brookings (former Director of the Bureau of the
Budget.) Charles Kindleberger of MIT served as a member for
a year; and Francis Bator of Harvard, who has just returned
to academic life after four years in Government -- most
recently as a White House Adviser -- has become a member.
Edward Bernstein, who has been in academic life, the Treasury
and the IMF and is now a consulting economist, completes the
Committee.
This Committee is a working group which has met some 25
times in all-day working sessions with the Secretary of the
Treasury and other Government officials concerned with the
international liquidity exercise. It has given advice and
counsel on both points of substance and negotiating strategy.
The steps taken, and the agreements reached in the past
two months -- in London among the ten major nations in world
trade and finance, and in Rio by all 106 members of the
International Monetary Fund -- are important, historic moves
in the process of creating new international liquidity. But
the process does not stop with these steps -- nor does the
interchange cease among business, Government, and the
academic community as we proceed to flesh out the framework
now agreed upon.

- 3 Let me switch now to another area of extremely valuable
interchange among these same three groups -- and one that is
also very timely at this moment. I refer now to the area of
fiscal policy -- Government spending and lending, and taxing
and borrowing -- to serve broad national purposes. Here, I
want to comment at some length and substance.
The role of the academic community in educating Government
and business to the merits of flexible fiscal policy needs no
elaborati~n here.
The success of the 1964 tax reduction was
most implessive, not only in stimulating a robust and healthy
economic expansion -- now in its 80th month -- but also in
bringing revenues from a prosperous economy up to a level
that produced a sur~lus in the national income account
budget in calendar years 1965 and 1966.
But there is another chapter in the book of "new
economics" which se ts out c ire urns tances in which tax increases
rather than cuts are the right medicine, and when tax
increases are the appropriate way to bring in more revenue
even though under other conditions a reduction in tax
rates had the effect of augmenting revenues along with
stimulating business activity.
The difference, of course, lies in taking account of what
the rest of the economy is doing. The Federal sector does not
operate in a vacuum, but in an economy which may be booming,
sagging, or operating somewhere in between -- perhaps en route
from one of these stages to another. In the early 1960's, the
economy was not exactly sagging, but it was also far from
booming. Unemployment hovered around 5-1/2% -- better than
the 7% recession level touched in 1961, but still distant
from the desired 4% level and not clearly headed either up or
down. In this case, an economic stimulus was appropriate,
and it could be provided by an expansionary fiscal policy that
would operate alongside an expansionary monetary policy -without requiring monetary policy to provide so much of the
push that it JToduced distorted financial flows within this
country and capital outflows from this country.
Compare that set of conditions with our current economic
position. Unemployment has held steady at around
~% of the
labor force. Consumer and Government demands have been rising
briskly. An inventory adjustment apparently has been
weathered without producing general weakening in the economy,
and renewed inventory demand is now ready to take its place
as a source of added aggregate demand. In the meantime, there
are strong credit market demands from virtually all types of
borrowers.

- 4 -

Granted, the economy is not, at this moment, in the grip
of clearly excessive demand.
There have been times when
unemployment was lower, capacity utilization higher, and the
pull of excess demand more clearly evident. Those were times
such as in the Korean War period, when demand inflation was
gaining an upper hand and clearly needed strong restraint.
But, just as clearly, that is the kind of economic structure
we may well be head iI~g into in a matter of months - - given a
continuation of present trends:in consumer and government
demand.
That we have not felt the hot breath of demand inflation
more strongly in recent months is a result of an inventory
adjustment of considerable proportions -- which, had it
arrived under different circumstances, without the offset of
strongly rising final demands, would have caused a general
softening in economic activity and called for consciously
stimulative fiscal policy.
With inventories now about in line,
and the adjustment pretty well completed, the fiscal stimulus
that had been appropriate earlier is less and less desirable
with each passing month -- and, in fact, it is now becoming
posit ively harmful.
The role of inventories is most clearly seen in looking
behind the quarterly changes in the annual rate of gross
national product -- to see how much was due to inventory
building and how much to final demands from Government,
consumers and business.
In the first quarter of this year,
the annual rate of GNP was up a scant $4 . 2 billion; and, in
fact, not up at all in real terms, after correcting for price
changes.
But final demands in that quarter were up more than
$15 billion while the rate of inventory accumulation fell
about $11 billion. A $15 billion quarterly gain, or about 2%,
is about as much as we should want to see; and, in fact, it's
a bit faster than we can tolerate for long without getting too
much price pressure.
Of course, in the first quarter of this
year, we did not get that excessive pressure because the big
rise in final demand was offset by a large drop in production
for inventories.
The picture began to change a little in the s~cor:d quarter
of this year,
Final demands were up an?ther $l? b~ll~on, and
the rate of inventory accumulation dec1~ned aga~n, but not as

- 5 -

much as in the first quarter so that total GNP increased by
nearly $9 billion.
That was enough to provide a little real
growth but still not a satisfactory total increase, so it
was appropriate that a fiscal stimulus continue to be provided through a budget deficit on the national income accounting basis.
For the third quarter, it is estimated that final demand
continued to push up -- this time by about $14 billion -while the rate of inventory building increased slightly from
the second quarter's pace.
In real terms, GNP increased at
a slightly better than 4% annual rate. With that performance,
the continuation of substantial fiscal stimulus is already
becoming questionable; and, when one looks ahead, the continuation of that stimulus becomes positively objectionable.
In the current quarter, statistics may be distorted by
the automobile strike -- but the trend is clear in pointing
to a steadily rising head of steam. Every major work stoppage
in recent years has had the effect, once it is settled, of
imparting further stimulus to the economy as it seeks to
make up for lost production.
I would not argue that the
current auto strike is an additional reason for going ahead
with the President's tax proposals -- but we should not let
ourselves be persuaded that the strike is a reason for delaying that needed fiscal action.
Participants in the credit markets seem to have had few
doubts about the basic trend of economic activity through the
past year of irregular growth. Particularly outstanding has
been the heavy demand for capital by corporations -- reaching
record proportions, even though capital needs for financing
inventories were lessening and needs to finance current fixed
investment outlays held about steady. How does one account
for the fact that corporations borrowed $17.9 billion in the
capital markets through the first nine months of this year -an amount somewhat exceeding the total of such borrowing
during all of 1966, and 27% ahead of the amount borrowed in
the first 9 months of that year? And 1966 was not a slack
year -- it was the record year to date. Underlying this
enormous demand was a combination of conviction and fear -conviction that liquidity positions run down during 1966
should be restored and dependence on short-term borrowing from
banks reduced , and fear that a failure to tie up some available
funds when they ar~ available might mean an inability to get
funds at all when they really are needed later on.

- 6 A special source of concern for the corporate treasurer has
been the possibility of an oversized Federal Government deficit.
The recollection of tight money markets in the summer of 1966 is
still quite vivid. Yet, tight as the markets were at that time,
the Federal sector's demands on the credit markets were quite
modest through that period. The contemplation of a period of
heavy private sector credit demands augmented by an overgrown
Federal deficit raises the possibility -- or spectre, if you will
of an even tighter set of credit conditions in the future.
Corporate borrowers have realized this and sought to make preparation for it.
Credit demands from state and local governments have not been
laggard, either. These governments, in the first 9 months of the
year, have borrowed $10.7 billion, or 25 percent more than in the
comparable months of 1966. Part of this reflected borrowings
postponed from the very tight money period of a year ago, which
was marked not only by high interest rates but also an unavailability
of funds to some prospective borrowers. Part of it, too, simply
reflects greater current needs by these governmental units, to
provide increases in things and services more quickly than current
tax revenues rise. Some of it, also, is due to the rising volume
of tax-exempt industrial revenue bonds -- borrowing by a local
government unit to build industrial facilities which are then
leased to corporations. This, incidentally, should be a source of
growing concern to the state and local governments themselves,
as it is making their own borrowings for schools, roads, and
other traditional state and local needs significantly more costly.
Looking at the Federal sector's credit demands for 1967 thus
far would tend to give a somewhat distorted picture because of
the very heavy debt repayments that occurred from January to
June 1967. That was partly seasonal, but the seasonal factor was
accentuated because of accelerated corporate tax payments, unusally
heavy repayments by savings and loan associations to the Federal
Home Loan Banks, and an unusual absence of the seasonal build-up
in the Treasury's cash balance that typically occurs in the first
half of the calendar year.
Because of these factors, net Federal demands on the private
credit markets from January to June 1967, as measured by the
increase in outstanding Treasury issues, agency issues, and
participation certificates, less the increase in holdings of these
obligations by the Government Investment Accounts and the Federal
Reserve was actually negative by $11 billion. That is, the
Federal'sector was supplying that amount of credit to the rest

- 7 of the economy, rather than lllctking a net demand on it. And so
great was the net paydown in that half-year period, that even
taking the whole of Fiscal Year 1967, to wash out purely seasonal
forces, there was a net paydown by the Federal sector of some $6
billion. Even after adjusting for the $5 billion decline over
the year in the Treasury's cash balance, the result still stands
for that period
the year ended June 30, 1967 -- that the
Federal sector, in effect, made no net credit demands on the
private market.

Tr2 picture in this current fiscal year stands in some
considerable contrast to last year, however, for there will be
a significant net Federal credit demand, and it is already being
exerted on the markets. How big that net demand will be depends
on several factors, prominently including the Pr2~ident's tax
proposals which are now before the Congress.
Essentially, it comes down to a question of whether the net
Federal CLtdit demand, with the benefit of a tax increase and
:i~~ restraint on expenditures, will be large but still of
~anageable proportions, or whether it will assume outsized
proportions with hard-to-dEt2rmine consequences for the credit
market at large, for interest rates, and ior the general economy.
We have estimated that with the President's tax program, as
recommended on Augu~~ 3, and with Federal spending held to the
lower end of the band that would produce an administrative budget
deficit in the $14-$18 billion range, net Federal credit demands
on the financial markets -- that is, including Treasury issues,
agency issues and participation certificates -- in the sense defined
lbove, would come out somewhere in a $10-$12 olllion range in
the current fiscal year. That would still be a sizable demand,
~oming d:i:er a yE:2J: of no net Federal credit demand in that sense
)lit it could probably be managed within the context of financial
mrkets that handle flows in the range of some $70 billion or so
I year, provided there was a good-sized i~crease in bank credit.
Without prompt tax ,.:~tion and expenditure restraint, however,
hat net credLt demand from the Federal sector could bulge to
20 billion or more, and there would be a real question about
hether that sort of demand would be "manageable," in the sense
f preserving reasonably orderly markets. One cannot, for example,
imply expect a sufficient expansion in bank credit to accommodate
G~tever demands emerge~ from the Federal sector. -~ ~~y more than
l1s sort of accommodat1.on could be expected 0., , __ '_~L of any

- 8 -

other borrowing sector in the economy. The monetary authorities
would want to appraise the total demands carefully and accommodate
only with increasing reluctance, the larger volume of aggregate
'
demands.
The process throug:! which the market would allocate a limited
supply of credit among an excess of would-be borrowers can be
described, ahead of time, only in qualitative terms and generalities.
The particulars might work out differently under slight variations
in circumstances. In general, though, it may be predicted that
the Federal Government's credit needs would be met, one way or
another, as would also the credit needs of larger business firms.
The cost might be high -- even in comparison to the high rates
prevailing today -- but the supply probably would be there because
some other borrowers would be "pushed off the end of the bench"
and unable to find money, except perhaps at rates that were
considered exorbitantly and prohibitively high.
Consumers might fare unevenly in the scramble for available
credit. Funds for installment purchases, and other short-term
credit, would probably be available -- but money for home mortgages
would quite likely be a major victim. As, in fact, it was the
major victim in the tight money period of 1966 and in similar
past episodes. Business might also fare unevenly, with large
firms, as noted, getting their needs filled, and small ones
having to make do with less -- drawing on every last ounce of
spare liquidity in the sytem, leaning on trade credit, and cutting
corners wherever possible in cash management. State and local
governments would also feel the pinch, especially if bank credit
expansion potential was under some restraint. In the summer
months of 1966, this was one of the areas where we seemed closest
to the stark possibility of non-functioning credit markets in
which funds were unavailable at virtually any price.
This is not a prediction, but an outline of possibilities that
would conceivably develop in the absence of responsible fiscal
policy action on both taxes and expenditure restraint. We had a
taste of this in 1966, and that did not particularly whet our
appetite for more of the same.

- 9 -

AJ to where we are now, at this point in the fiscal year, in

accomplishing our needed borrowing, we have done a good bit of
the job already -- but much of this represents the seasonal portion
of tne JOD. Without timely tax action, some additional borrowing
will r(;.maLl to oe do . tt:: at ci.e t.:ime of the year when we are normally
making substantial seasonal repayments.
With respect to cash needs for the July-December period, we
are now in the home stretch. In late July, we estimated that
Treasury needs for market borrowing in the July-December period
would be about $15 billion. That assumed timely action to bring
in some revenues from a tax increase before year-end; it assumed
partic.i..pu.tion sales of aho"t" $2 billion in this 6-month period,
so t~.: the total fi~ancing need, in that sense, was $17 billion;
and it assumed that spending would be ne~r thp. lower end of the
range outlined in the President's tax message of August 3.
If the spending and tax assumptions do not stand up, tuat
total need of about $17 billion ~or this 6-month period could
turn out to be higher -- perhaps $1 to $2 billion more. But,
as noted, the major change could be reflected in borrowings over
the following six months. Thus far, we have already either
borrowed, or announced the speciiic plan to borrow, close to
$14 billion in Treasury securities, including $8.5 billion in
tax anticipation bills, nearly $3 billiou in regular weekly or
monthly bills, and $2~ billion in coupon-bearing secur~cies.
We have aot yet sold participation certificates in Federal
agency loan portfolios in this fiscal year, but we still expect
to do some in the curren..: ~1c..::""::- ./.2ar, and, thus, avoid bunching
up too great a volume of these sales in the Ja~uary-June half
of the fiscal year.

- 10 -

It is fair to ask, in view of the many comments made on
the need for a tax rise to hold down Treasury borrowing and
avoid excessive monetary strains, "How is it that the Treasury
has been able to borrow as much as it has without greater
disturbance to the market?" The answer, I think, is twofold.
First, there has been a large expansion in bank credit that
has greatly facilitated the amount of borrowing we have had
to do thus far. From January through September 1967,
seasonally adjusted commercial bank credit increased $29
billion, and bank holdings of Treasury securities increased
by $8 billion. Second, the receptivity of the market has
been conditioned by an expectation that responsible fiscal
action will be forthcoming -- forthcoming in time to make a
considerable difference in borrowing needs during the months
ahead.
Even with these expectations, though, interest rates are
now high. Long-term rates on Treasury and corporate
securities are above the very high levels reached in August
and September 1966 -- mainly pushed aloft by the extremely
heavy pace of corporate borrowing earlier this year. Longterm, tax-exempt issues have also risen in rate during recent
months; and, in just the last few days, these yields have
pushed above last year's peaks to the highest levels since
the earl] 1930's. Commercial banks have continued to invest
in tax-exempt issues; but they have tended recently to shy
away from longer term issues.
Mortgage rates, typically sluggish, did not begin to
decline until several months after more sensitive rates turned
down a year ago. But mortgage rates, too, have been rising
steadi1v in recent months. They remain below the late 1966
highs, in part because of the continuing good inflow of funds
to t~e traditional mortgage lenders -- notably, the thrift
institutions. Those flows are vulnerable, however, if rates
on short-term marketable debt instruments rise to levels that
begin to attract funds that might have gone into the savings
institutions, or that succeed in pulling funds out of the
thrift institutions, as occurred last year.
The big difference between interest rates now and a year
ago is in the short-term area. Even though these short rates
have risen since last spring, they are still well under the
levels of a year ago -- especially in the maturities of

- 11 -

one year or less. Rates on somewhat longer maturities __
those of a few years, say -- are not so very far from the
rates of a year ago, however, and this is an area of some
concern with respect to competition for funds going to the
thrift institutions. When rates available on Treasury and
Federal agency securities push significantly above the rates
offered on various types of savings accounts, the possibility
of "disintermediation" or divergence of funds from there thrift
accounts, and, hence, from the mortgage market, must be
reckoned with.
Let me turn now to a little different area -- or, rather,
a dirferent focus.
Instead of the matter of current tax
policy and its possible effects on the economy and the credit
markets, I want to consider certain points relating to credit
programs that are carried out, guided or encouraged by the
Federal Government. In referring to this as a change of
focus, rather than a wtoll; new topic, I have in mind that both
Federal fiscal policy (taxing and spending) and Federal credit
policy (lending, or loan guarantees and borrowing) are
concerned with the use of resources, the degree and kind of
Governmental influence over that use, and the method or
methods of financing. This is an area of inquiry and endeavor
that is admirably suited to injections of new ideas and
interpretations from the academic community, or wherever else
these ideas might be generated. It is, indeed, a financial
frontier, in need of exploration and development.
The subject is scarcely new, but some of the developments
and applications are new -- and we continually find, in
returning to this area, that there are many facets remaining
to be analyzed and organized. The first broad look at this
area in recent years was taken by the privately sponsored
Commission on Money and Credit, which produced its Report in
1961. One of the memcers of that distinguished Commission was
our present Secretary of the Treasury, Henry Fowler.
This Commission's study was followed by a Federal
Government study by a Committee on Federal Credit Pr~grams,
chaired by then Secretary of the Treasury, Douglas Dliion.
The Committee reported on its study in 1963. A major study
of Federal credit programs was also sponsored by the House
Banking and Currency Committee, and published in 1964. More
recently, just about a year ago, the Treasury made a study

- 12 -

on certain aspects of Federal credit programs, as provided in
the Participation Sales Act of 1966. The particular focus of
that study was an evaluation of the advantages and disadvantages
of direct Federal loan programs, as compared with guaranteed or
insured loans.
One may well ask whether, with all those studies of the
past several years, any questions could possibly remain
unanswered. The answer is assuredly in the affirmative. That
this was so has shown up clearly in still another related
study -- that of the Budget Concepts Commission, which has
wrestled at some length with the question of how to treat
loans, loan repayments, and loan participations in the Federal
budget. The Commission said this was one of the most difficult
questions it faced. This has a significance that goes well
beyond the mere accounting technique -- for a different
hudgetary treatment may tend to encourage or discourage
particular types of loans and particular methods of financing
them. There can be significant differences, also, in the way
that sUDsidies are accounted for under various lending
programs -- whether they are to be buried as deeply as
pOSSible, or exposed with explicit disclosure and, perhaps,
with a need for specific Congressional appropriations to
cover a subsidy element.
Other things equal, most of us would have a predilection
for keeping credit programs a part of the private sector as
far as possible -- bringing in the Federal influence only
where needed to fill gaps that the private sector does not
cover adequately and that social policy demands be filled.
But the United States is a hig economy with many credit needs,
and there is no reason to ~elieve that the place of Federal
credit programs, in the ag6regate, will be diminished -- more
probably it will grow.
For example, one area of national effort that clearly
needs greater attention is that of urban redevelopment -rebuilding the living quarters and employment opportunities
in rnrr central cities, avoiding economic and racial
concentrat ions that becor;:e ~,reeding grounds for progress ive
deterioration and permitting our society to be enriched by
the full pote~tial of its human resources. This cannot be a
task for Government alone, and certainly not for the Federal
Government alone. Much of the drive, much of the resources,

- 13 -

and much of managerial talent must come from the private
sector. But, in partnership with various levels of Government ,
through constructive and imaginative credit-support programs
among other aspects, there is a real potential for worthwhile
achievement in this area. This cannot mean, in the present
context, large commitments of additional Federal funds from
an already overstrained Federal budget. Nor should it mean
searciling for budgetary accou;!t ing devices so that Federal
expenditures can be hidden ~way. But there is room, and need,
for Government stimulus anu support for programs that have up
to HOW Deen insufficie~·1t I] attrac t ive to draw forth adequate
private effort.
This brings me back to two points about Federal credit
programs -- their financing and the kinds of control or
guidance that should apply to them. Should the funds used
for loan disbursements be recouped by selling off the loans,
or by selling participations in the loans? Should there be
direct access to the Treasury by the Federal lending agencies
so that the ir financ ing comes in the form of direct Treasury
isslles? Should there be more consolidation of the borrowing
-- not the lending -- functions of the Federal agencies and
have financing done with issues of a combined institution
designed for this purpose? And what kind of control or
guidance should be exercised by the Federal Government? A
form of "debt limit" that puts a ceiling on over-all loan
volume outstanding or on particular kinds -- or limits on
new loan volume in a partL-::LLar period -- or merely the
setting of standards and, perhaps, a regulation of interest
rate ceilings on such loans?
~'-l.t the extreme, one might say that tt:e Federal Government

role should stop with the mere provision of a guarantee or
part ial guarantee of a loan that remains in tl-.e private sector.
Then, the volume of such loans can be regulated by market
forces, just as would any privately arranged loans. But if
the Federal Governmentl~ aegis is there, it is hard to say
that no limit or restraining force should be placed on the
underlying credits. For, otherwise, there is a Federal
Government involvement -- and potential for loss -- in a
wholly open-ended volume of credit, which might or might not
promote expansion along lines consistent with ove~-~ll
economic object ives. Toe balanc ing of prude"i:""L~ pu: l~c . n~sp~n
si~ility, with as full rein as possible to prlvate lnltlatlve,

- 14 is a neat trick indeed -- but one that is well worth the
prize, if it can be achieved.
I think it obvious from these few comments that, despite
the study and work devoted to the broad question of Federal
credit programs, there is much more work to be done. Here
is an area -- in applied finance -- where the business
schools might well make a contribution. I commend it to you.
Finally, turning hack again to our more immediate
problems of economic and financial management, the number one
fact is the clear and present need for a responsible Federal
fiscal policy -- a moderate tax increase, as proposed by the
President, and a firm restraint on spending. This is a
prerequisite to the successful resolution of deeper seated
economic and social problems, for without a reasonably
balanced general economic condition there is slim prospect
of being able to employ resources as needed to meet the
pro~lems we can all identify around us.
We need imaginative
financing and new techniques to help mobilize private capital
and initiative effectively. But, even with the most ingenious
techniques, it is hard to see how the economy and the financial
markets could function properly with an outsized Federal budget
deficit that provided excessive spending stimulus and excess
credit-market drag.

000

October 3, 1967
TIDHNICAL MIH>RANmM OF TREASURY D§>ARTMmT CONCmNING
UNITED STAT&S - BRAZIL INCOME TAX CCIlVENTION
Article 1.

TAXES COVERED.

Article 1 designates the taxes of the respective States which
are the subject of the convention.

Generally, the provisions of

the convention concern only the United states Federal income tax,
including surtax, imposed by subtitle A of the Internal Revenue
Code (but not including the accumulated earnings tax or the personal
holding company tax) and the Brazilian income tax imposed by the
Federal Income Tax: Law, except the tax on activities of minor
importance and the excess remittance tax.
The convention also applies to taxes substantially similar
to those taxes specified which are subsequently imposed in addition

to, or in place of, the existing income taxes.

For purposes of

the nondiscrimination provisions of Article 6, however, the convantion applies to taxes of every kind which are imposed by the
respective States, at the national, state, or local level.
Article 2.

GENmAL DEFINITIONS.

This article sets out definitions of certain of the basic
terms used in the convention and provides that any undefined term
shall, unless the context otherwise requires, have the meaning
which it has under the laws of the State imposing the tax.
Article 3.

GENERAL RULES OF TAXATION.

The general rules of taxation applicable under the convention
are as follows:

- 2 -

(a) A resident or corporation of one of the states will be
taxable by the other state only on income derived from sources
within that other State and

on~

in accordance with the limita-

tions set forth in the convention.

The rules set forth in Article 5

will be applied to deterlline source of income.
this general rule read together with Article

The effect of

5 (9), dealing with

the source of industrial and commercial profits, is to provide
that a resident of one State may be taxed by the other State only
on (1) industrial or cOmllercial profits attributable to a permanent
establishment located in that otber State, and (2) other income
from sources within that other state, subject to the limitations
of the convention.

The jurisdictional rules of the proposed con-

vention are substantially sillilar to those set forth in section

872 (_) of the Code, relating

to nonresident alien individuals, and

section 882 (b), relating to foreign corporations

en~ged

in trade

or business in the United States, as amended by the Foreign Investors
Tax Act of 1966.
(b)

Income from sources within a state to which the provisions

of the conwntion are not expressly applicable will be taxed by such
state in accordance with its own law.

Thus, for example, because

prizes and awards are not expressly covered by the convention, such
income will be taxed by the State from which such income is derived in
accordance with the internal law of such state.

- J (c)

No provision of the convention viII be construed so as to

restrict in any manner any exclusion, exemption, deduction, credit,
or other

allowanc~

presently or subsequently accorded (1) by the

laws of one of the States in determining the tax imposed by that
State or (2) by any other agreement betveen the two States.

This

p-ovision reflects the policy of the United State s under all conventions to which it is a party.
(d)

With specified exceptions, the United States may tax its

citizens, residents, and corporations as if the convention had not
COllie

into effect.

A clause of this nature is found in most existing

United states income tax conventions.

The exceptions to the "savings

clauae" provision are made to preserve benefits which are specifically
intended to apply to citizens or Brazilian nationals resident in the
United States,

relief from double taxation (Article 4), the

investMent credit (Article 7), and the deduction for charitable contributions (Article 22).

The benefits conferred on teachers

(Article 18), students and trainees (Article 19), and governmental
salaries (Article 20), are a180 excepted from the "savings clause"
but only with respect to iedi viduals who are no t citizens of, and do
not have immigrant status in, the United States.

Corresponding rules

apply to the right of Brazil to tax its citizens, residents, and
corporations except that Brazil is not obligated to allow an investment
credit or a deduction for charitable contributtons.

- 4 Artic Ie 4.

RELIEF PR CM DOUBIE TAllT ION.

This article provides that each state will allow a foreign
tax credit for the appropriate amount of taxes paid to the other
state.
For purposes of the United States foreign tax credit, the
source of income rules set out in Article 5 may be used in lieu ot
the source rules provided in the Internal Revenue Code.
evan though Article

Moreover,

4 contains a per-country limitation, such pro-

vision will not affect the right of a United States taxpayer to elect
the overall limitation under section 904(a)(2) of the Internal Revenue
Code.

See Article 3 (2) of the convention and the accompanying explana-

tion.
A Brazilian resident or corporation will be allowed a credit
against Brazilian income tax for the appropriate amount of taxes
paid to the United States.

For this purpose, such amount will be

limited to that portion of the Brazilian tax which net income from
sources within the United States bears to the total net income of
such resident or corporation subject to Brazilian tax.

Moreover, in

the case of a Brazilian corporation receiving dividends from a
10 percent or more owned United States corporation, Brazil will also
allow an indirect credit for United States taxes paid with respect to
the profits out of which such dividends are paid.

This provision

corresponds generally to section 902 of the Internal Revenue Code.

For

Brazilian credit purposes, the source rules set out in Article 5 will
be applied to determine source of income.

- 5Article 5.

SOURCE OF INCOME.

This article sets forth the rules for determining source of
income for purposes of Article J (General rules of taxation) and
Article

(Relief from double taxation).

The following items of income are to be considered from sources
within a state:
(1)

Dividends paid by a corporation of that State, or by any

corporation which had a permanent establishment in that State and
derived

percent or more of its gross income from sources within

that State for the J-year period preceding declaration of the
diVidends.

Dividends paid by any other corporation are treated as

income from sources outside that State.

This source rule conforms to

United States statutory law except that, under section 861 (a) (2) (B)
of the Internal Revenue Code, if

percent or more of a foreign

corporation's gross income is effectively connected with a United
States business conducted by such foreign corporation, a pro rata
share of such corporatlon's dividends is treated as from sources
within the United states.

The treaty rule permits taxation of all

corporate dividends by a State if the corporation derives

percent

or more of its income from such State, while the Code requires proration.
(2)

Interest paid by that State, including any local govern-

ment within such State, or by a resident or corporation of such state.
Interest paid by any other person will be treated as from sources
outside that state.

However, interest paid by a resident or corporation

- 6of any State With a permanent establishment in another State,
directly out of the funda of such permanent establishment on
indebtedness incurred for the sole use of, or on banking dt.'lX!:;its
made with, such permanent establishment will be treated as income
from sources within the state where such permanent establishment is
located.

The rules set forth in the first two sentences of this

paragraph correspond generally to the Internal Revenue Code provision
dealing with interest (other than interest on deposits with persons
carrying on the banking business), except that under section
861(a) (2) (C) of the Internal Revenue Code i f 50 percent or more
of a foreign corporation's gross income is effectively connected
with a United States business conducted by such foreign corporation,
a pro rata share of such corporation's interest (not all of such
interest as provided by the treaty rule) is treated as fro" sources
within the United states.

The permanent establishment source rule

for interest set forth in the third sentence of this paragraph is not
contained in the Internal Revenue Code provision.
(3)

Royal ties paid by a resident or corporation of one state

for USing, or the right to use, in the state, copyrights, artistic or
scientific .,rks, patents, designs, plans, secret processes or formulae,
or information concerning industrial, commercial, or scientific
lmowledge, experience, or skill or trademarks related to any of the
foregoing items.

This rule is of more limited application than the

rule set forth in the Internal Revenue Code which relies solely on

- 1 the place where rights are used ignoring the residence of the

p~or.

The Code rule would control in those cases in which the two tests
of the treaty rule were not satisfied.
(4)

Income from real property located in the State, including

the gain from the sale or exchange of real property, and royalty
income fram the operation of mines, quarries, or other natural
resources located within the State.

This rule conforms to the rules

set forth in section 861(a)(4) and (5) of the Internal Revenue
Code.

Interest income from mortgages or bonds secured by real

property is not considered income from real property, but see (2)
above.
Income from rentals of personal property located within

(5)

the State.

This rule conforms to the rule set forth in section

861(a)(4) of the Internal Revenue Code.
(6)

Compensation for personal services performed within the

State; income fran. providing personal services performed wi thin
that State; and compensation for personal services performed aboard
ships or aircraft operated b.Y a resident or corporation of that
State and registered in that State, provided the services are
performed by a member of the regular complement of the ship or aircraft.

For source purposes, compensation for personal services

includes private pensions or annuities paid in respect of such
services.

The rule set forth in the first clause of this paragraph

conforms generally to that set forth in section 86l(a)(J) of the
Internal Revenue Code.

The other rules are not specifically covered

by the Code rules and serve to provide certainty in several common

- 8types ot cues.
(7)

IncOlll8 trom the purchase and sale of personal property

it such property is sold within that state.

This rule confonns

to the rule set torth in section 861(a)(6) of the Internal Revenue
Code.
(8) Income fran the production of personal property to the
extent that such property was produced in that State. Income from
the sale ot such property will be treated as from sources wi thin
the State in which the property is sold.

These rules confonn

generally to the rules set forth in section 863(b) of the Internal
Revenue Code and the regulations thereunder.

It should be noted

that, under Article 29(3)(a), this provision of the convention will
have effect only after the competent authorities have established
mutually acceptable rules tor its implementation, and, under
Article 29(S)(a), such rules
at any time.

be terminated by either state

However, under Article 29(7) any termination may be

prospective only.
(9)

Industrial and commercial profits attributable to a

permanent establishment situated in that State.

Such profits

include dividends, interest, royalties, and income from real
property which is effectively connected with such pennanent establishment.

Tba factors taken into account in determining whether

such income is effectively connected will include whether the
income is derived from assets used, or held for use, in the conduct

ot a trade or business by the permanent establishment and whether

- 9the activities ot the trade or business are a material factor in

the realization ot the income.

app~ing

these factors, due

regard will be given to the manner in which the asset or income
is accounted for on the books ot the recipient of such income.
There is no comparable source rule provision in the Internal
Revenue Code.
The source of

item ot income to which the convention is

not expressly applicable will be detemined by each of the States
in accordance with its own law.
It should also be noted that the source rules do not extend
the benetits

ot this treaty to persons other than residents or

corporations ot the two States.
applicable

on~

Generally, the rules are

to residents or corporations of either State,

and, therefore, are not applicable in determining the source of
income of residents of other States, although the income of
such other residents is ot a type referred to in this article.

-19 Article 6.

NONDISCRIMINATION.

This article provides that the United States and Brazil
will not discriminate in their tax law against their residents
Who are citizens

ot the other State nor against permanent estab-

lislDents wi thin their jurisdiction owned by nationals or corporations ot the other State.

tis does not prevent either state

frail imposing whatever tax it del!l1res on citizens ot the other
state, resident witb:I.n its border, so long as such residents are
are taxed in the same manner as citizens ot the state imposing
the tax.

PUrthermore, this Article does not require a State which

grants personal allowances or deductions only to its reSidents to
grant such allowances or deducticms to nonresidents wbo are
nationals

the other State.

A corporation ot one State, the stock of which is completely
or partly owned b.y citizens or corporations of the other state,
mq not be subjected to mo1'8 burdens<De taxes than a corporation

owned wholly by' citizens or corporations of the fomer State.
The provisions of this article apply to state and locaJ..
as well as national taxes.

- 11 -

Article 7

INVESTMENT CREDIT.

The purpose of this article is to encourage investment in Brazil
by extending to such investment a credit similar to that allowed for
investment in the United States under sections 38 and 46 through 48
of the Internal Revenue Code.

The concepts employed in this Article

are patterned as closely as possible after the concepts employed in
the domestic investment credit except for necessary changes to
reflect the fact that the investment "rill generally be in stock or
debt obligations of a corporation which will purchase machinery
and equipment rather than directly in such machinery and equipment.
The amount and terms of the credit allowed by this article will be
governed by the same principles as are applicable to the credit
for investment in the United States.
The United States agrees to allow a credit against United states
income tax for investment in Brazil by an eligible investor (as
defined below) in an eligible corporation (as defined below).

The

credit will be allowed in the eligible investor's taxable year in
which or with which the eligible corporation's taxable year ends, and
will be based on 7 percent of an appropriate amount of qualified
property (as defined below) placed in service by the eligible corporation during such corporation's taxable year.

Reference is made

to an "appronriate" amount because several limitations discussed
beJow together pith the ownership interest of the investor must be
taken into account in determining the proper amount of qualified

- 12 property.

Moreover, in addition to the limitations discussed below ,

as is the case under the domestic investment credit, a limitation,
determined with reference to the amount of the tax liability of
the eligible investor for the taxable year will be imposed on the amount
of credit allowed for such taxable year.

In the event of insufficient

liability in the taxable year in which the eligible investor becomes
entitled to credit, a carryback or carryover patterned after the
comparable provisions of the domestic investment credit will be
provided.

See section 46 of the Internal Revenue Code.

Qualified property is "section 38 property" which is used
exclusively in Brazil in connection with a qualified trade or
business.

"Section 38 property" is defined in section 48 of the

United States Internal Revenue Code except that, for purposes of this
article, section 48(a)(2), relating to the limitation of the credit
to property used in the United States, is not applicable.

Moreover,

for purposes of this article, the limitations applicable to "used
section 38 property" will not apply.

Generally, qualified property

includes tangible depreciable property which is either personal
property or is used as an integral part of industrial, transportation,
communication, or other similar processes, or as a research or storage
facility (but not including a building or its structural components).
The amount of the property placed in service for which a credit will
be allowed depends upon the useful life of such property.

Thus, the

percentage of the basis of the property for which a credit will be

- 13 allowable is 100 percent, 66 2/3 percent, or 33 1/3 percent where
the property has a useful life of 8 years or more, 6 years or more
but less than 8 years, or
respectively.

4 years or more but less than 6 years,

If property is sold before the end of its original

estimated useful life, the amount of the credit allowed when such
property was placed in service will be recomputed with reference to
the actual period the property was used and any excess credit will
be recaptured.

The recapture rules will also be applied if (a) the

eligible corporation placing the property in service ceases to be
eligible, (b) the eligible investor ceases to be eligible, or (c) the
qualified property ceases to be qualified, and any such cessation will
be treated in the same manner as if the corporation disposed of the
property before the end of the useful life of the property.
In no event will the credit exceed the lesser of-(1)

7 percent of the eligible investor's net new investment

(as defined below) in the eligible corporation; or
(2)

the amount of United states property (as defined below)

acquired by the eligible corporation, during such corporation's
taxable year in which such corporation placed in service the property
for which a credit is allowed, or during the preceding taxable year,
and attributed to the eligible investor.
As indicated in an exchange of letters, the concept of "net new
investment" represents a running account covering a period of up to
10 years.

The account is determined as of the end of the taxable

- 14 year in which or with which the eligible corporation places qualified
property in service, as follows:
(a)

the sum for the eligible corporation's taxable year and

its 9 preceding taxable years (but excluding any taxable year to
which this article is inapplicable)
(1)

of~

any property transferred to the eligible corporation

qy the eligible investor as a contribution to capital or in
exchange for stock or indebtedness of the eligible corporation,
but only to the extent that such property does not represent,
directly or indirectly, funds borrowed within Brazil;
(2)

the eligible investor's allocable share of creditable

reinvested earnings (as defined below) of the eligible corporation;
(3)

the eligible investor's allocable share of the amount of

the reserve for depreciation with respect to the cost of any
qualified property with respect to which the eligible investor
previously was entitled to a credit; but during the first

years of the life of the propert,y only to the extent that, and
in the year in which, an amount equal to that reserve is used
to purchase qualified property;

(4) in the case of a disposition qy the eligible corporation
of any qualified property for which the eligible investor was
previously entitled to a credit, the eligible investor's
allocable share of the undepreciated cost of such propert,y at
the time of disposition;
(b)

less the amount of the credits allowed to the eligible

investor with respect to the eligible corporation during the 9 years

-~preceding the taxable year (determined without regard to aqy recaptures
of the credit) divided by 7 percent.
In the event of a withdrawal, described below, of property by
the eligible investor, the amount of such withdrawal shall reduce the
new investment, to the extent thereof, made in the year of withdrawal, the 3 years preceding withdrawal, and the year subsequent
to the withdrawal.

With respect to the 3 years preceding the

withdrawal, a recomputation of the credit allowed in those years
will be required.

The taxes otherwise payable by an eligible

investor in the year of withdrawal shall be increased by an amount
equal to the aggregate decrease in credits allowed for the prior 3
years which would have resulted solely from subtracting, in the
computation of the limitation of the credit for such years, the
amount of the eligible investor's net new investment in the eligible
corporation in such years.
Creditable reinvested earnings is defined as an amount equal
to one-half of the earnings and profits of the eligible corporation
for its taxable year, reduced by the amount of any dividends distributed by such corporation during such year.
A withdrawal is defined as (1) a distribution made by an eligible
corporation (or by another corporation conducting in Brazil a trade
or business similar or related to the trade or business conducted by
the eligible corporation) to the eligble investor (or to a related
person) which (a) is not a distribution of earnings and profits,

- 16(b) is in excess of 50 percent of earnings and profits for the year
of distribution, or (c) is in cancellation or rede~ption of the stock
of the eligible corporation; (2) the payment by the eligible corporation of an indebtedness to the eligible investor; and (3) the
sale or other disposition by the eligible investor of stock or
indebtedness of the eligible corporation.

An accompanying exchange

of letters provides that a transfer of stock or indebtedness of an
eligible corporation to a resident or corporation of the United states
will not be considered a withdrawal of property if the transferor,
transferee, and competent authority of the United states mutually
agree to defer recognition of the withdrawal.

Under such circum-

stances, a later withdrawal by the transferee will be considered a
withdrawal by the transferor.
The term "eligible investor" means a resident of the United states
or a United States corporation which owns, or is a member of a group
of United States residents or corporations which owns, at least 25
percent of the total combined voting power of the stock of an
eligible corporation.

The term "eligible corporation" means a

United States corporation or a Brazilian corporation if, for its
taxable year, such corporation derives at least 80 percent of its
gross income, if any, from, and at least 80 percent of its assets
(including assets located outside Brazil) are used or held for use
in connection with, one or more qualified trades or businesses (as
defined below).

- 17 The term "qualified trade or business" means, unless otherwise
agreed by the competent authorities of the States, any trade or
business conducted within Brazil, and consisting of:
(i)

the manufacture or production of personal property

(not including the extraction of any mineral, ore, oil, or gas,
or any processing which does not involve a substantial transformation thereof, but not excluding smelting or refining) or
the processing of agricultural or horticultural products or
commodities (including but not limited to livestock, poultry,
fur-bearing animals, or any kind of fish);
(ii)
(iii)

the catching or taking of any kind of fish;
the marketing of agricultural or horticultural

products or commodities (including but not limited to livestock,
poultry, fur-bearing animals, or any kind of fish);
(iv)

the marketing of goods and merchandise to the general

public through one or more retail establishments, unless the
business consists primarily of the distribution of goods or
merchandise manufactured or produced outside Brazil by a person
who is a related person with respect to the eligible corporation;
(v)
(vi)

the operation of hotels and related facilities;
the transportation within Brazil of passengers and/or

freight;
(vii)

the performance of services rendered as an incident

of a trade or business described in (i) through (vi); or

- 18 (T.l.ii)

the pertormance Within Brazil of services

utUized either Witb1n BruU or wi.thin a less developed
count17 i t the services are industrial, financial, technical,
sCientific, engineering, or architectural in nature.

The

precediDg sentence will not apP17 i t the services are perto~d

tor 8.IQ" person who is a related person wi tb respect

to the eligible corporation and 1£ the papents made in
consideration

ot such services are not reasonable in amount

or are contingent either in whole or in part on the sales,
product!T.lt7, or profita of the person for whalJl these services
are perto1WC1; and
(12:)

allY other trade or business agreed upon by the

cClllpetent authorities of both contracting states.
The tea "United States propertY''' means any tangible propertY'
which has been l'II8llU.factured, constructed, produced, grown, extracted,
01'

created in the United States and thereafter continuously used,

it at all, only in the United States.
I t the domestic investment credit is modified, amended,

suspeDded, or terminated, the CClllparable provisions of this article
will be de..ad moditied, amended, suspended, or terminated so as

to conform the invest.nt credit allowed
<ioIEstic investment credit.

by this article to the

The Un1 ted States will notify Brazil

through diplomatiC channeJ.s of any such change.

If Brazil considers

that &rrT modification or amendment as a result of this paragraph

- 19 material.lJt and adversely affects the credit allowed"by this article,
Brazil

1IqJ

giring notice to the United States through diplo-

matic channels, treat such lIIOditieation or amendment as a suspension
of the credit UDder Article 29(6)(b) and suspend the reduced rates
tor dividezds, interest, and l'01alties (Articles 12, 1), and

14).

In such a case, Brazil and the United States will consult together.
However, at UI:f time prior to such consultation and until such
t:1Jle as a supplement.ary agreeII8Ilt is reached, the United States
mq, b7 notice given to Brazil through diplomatic channels, suspend
the application of the investment credit.

The investment credit will be subject to such regulations as

are prescribed by the Seeretal7 ot the

Treasury of the United

states or his delegate, after consultation with the ccapetent
authority ot BrazU, to etfectuate the provisions of this article
and to further define and determine the terms, conditions, and

amounts referred to in this article.
Article 8.

BUSINESS PROFITS.

This article corresPonds generall1 to the article dealing with
taxation ot business proti ts which is found in other tax conventions
to which the United states is a party.

It provides that industrial

or commercial profits of a resident or corporation of one State
will be exempt from tax in the other State i t such resident or
corporation does not have a permanent establishment in the latter

- 20 -

State.

U such residant or corporation does have such a permanent

establisbllent, the latter state mq tax all ot the coonercial or
industrial proti ts which are attributable to such permanent establishment.

Profits which are derived trail sources within such latter

State tran sales of goods or merchandise ot the same kind as those
sold, or tram other business transactions ot the same kind as those
ettected, through the permanent establishment, are deemed. attributable to the permanent establishment.
In determining the proper attribution ot industrial or cCIIIIIIBrc1a1
profi ts, the permanent establishment is to be treated as an independent enti t;y and considered as realizing the proti ts which would be
realized i f the permanent establishment deal t with the resident
of which it is a permanent establishment on an arm's length basis.
All expenses, including executive and general administrative
expenses, wherever incurred will be allowed as deductions by the
state in which the permanent establishment is located in computing
the tax due to such state, i t such expenses would be deductible it

the permanent establishment were an independent enterprise and

such expenses are reasonably connected with protits attributable

to the pemanent establisbaent.

exchange ot letters accmpanying

the proposed convention sets torth the understanding that in
accordance with established Brazilian juridical principles, the
foregoing language will be interpreted to include all such expenses,

- 21 whether incurred in Brazil or abroad.

Such expenses are those

actually incurred, directly connected with the activities of the
permrulent establishment, and necessary to the production of its
taxable income.
the

The understanding is reciprocal in form though

r~sult mere~

conforms to United States internal law.

TIle mere purchase of goods or merchandise in a State by the
permanent establishment, or by the resident of which it is a
pennanent establishment, for the accow1t of such resident \-lill
not by itself cause attribution of any profit to such permanent
establisl~nent.

This rule conforms to existing United states

statutory law.

(See section 862(a)(6) of the Internal Revenue

Code. )
The term "industrial or cOITImercial profits" is defined as
income derived
()f

fr~n acti~ities

which constitute the active conduct

a trade or business, including agricultural activi ties, the

furnishing of personal services, the rental of tangible personal
pr(')perty, and insurance

acti~ities.

The term also includes

investment income but only if the right or property giving rise
to the income is effectively connected with a
ment.

pen~ent

establish-

Income received by an individual as compensation for

personal services either as an employee or in an independent
capacity is not treated as industrial or commercial profits.

- 2t Article 9.

DEFINITION OF PERMANENT ESTABLISHMENT.

This article defines the term "pemanent establishment".

The

existence of a permanent establishment is, under the tems of the
convention, a prerequisite for one state to tax the industrial or
commercial profits of a resident or corporation ot the other State.
The concept is also significant in determining the applicability

ot other proviSions of this convention, such as Articles 12, 13,
and

14 dealing with dividends, interest,

and royalties, respective17.

'l'he definition of "permanent establishment" is a modemized

version of the definition found in most conventions to which the
United States is a party.

The tera "permanent establishment" means

"a fixed place of business through which a resident or corporation
of one of the ())ntracting states engages in trade or business".
Illustrations of the concept ot a fixed place of business include
an office; a store or other sales outlet; a workshop; a factol'7;
a warehouse; a mine, quarry, or other place of extraction of natural
resources; and a building, construction, or installation site.

a general rule, any fixed tacili ty through which business is
conducted will be treated .. a permanent establishlllent unless it
talls within one ot the specific exceptions described below.
Under the speci.ttc exeeptioD8, a permanent establishment does
not include aitea or tac:111 ties used as follows:

- 2.3 (a)

tor the processing by another person, waather related

or unrelated, under arrangements or conditions which are or
would be made between independent persons, of goods or merchandise belonging to the resident or corporation;
(b)

for the purchase, under arrangements or conditions

which are or would be made between independent persons, of
goods or merchandise tor the account of the resident or corporation;
(c)

for the storage and/or delivery of goods belonging

to the resident or corporation, other than goods or merchandise:
(i)

held tor sale by such resident or corporation

in a store or other sales outlet; or
(ii)

purchased and resold in that Contracting

state by the resident or corporation, or by an independent agent or agents tor or on behalf of the resident or
corporation;
(d)

for the collection of information for the resident

or corporation;
(e)

for advertising, the conduct of scientific research,

the display of goods or merchandise, or the suppl.Y of information
if such activities have a preparatory and auxiliary character
in the trade or business of the resident or corporation; or
(f)

for construction, assembl.Y, or installation projects

i f the site or facilities are used for such purpose for less

than 6 months.

- 24 These exceptions are cumulative and a site or facility used solely
for one or all of these purposes generally will not be considered
a permanent establishment under the convention.
A person will be considered to have a permanent establishment
if he engages in business through an agent who has and regularly
exercises authority to conclude contracts in the name of such person
unless the agent only exercises such authority to purchase goods
or merchandise.

In addition, a pennanent establishment will be

considered to exist if an agent maintains a stock of goods or merchandise belonging to such person from which he regularly makes
deliveries.

However, these rules will not apply merely because a

resident or corporation of one Contracting State uses the services
in the other Contracting State of a bona fide broker, general
commission agent, forwarding agent, custodian, or other agent of
independent status acting in the ordinary course of its business.
Whether a corporation of one State has a permanent establishment in the other State will be determined

witho~regard

to any

control relationship between such corporation and a corporation
organized or engaged

trade or business

the other State.

Therefore, a United States subsidiary of a Brazilian corporation
may be considered an independent agent of such corporation if it

otherwise qualifies as an agent of independent status acting in the
normal course of its business.

- 25 A person ot one State Will be deemed to have a pemanent
establishment in the other State i t such person provides the
services of public entertainers (described in Article 17(4»)
in the latter Stateo

It a resident or corporation ot one state maintains a
permanent establishment in the other State

at any time during

the taxable year, the permanent establislDent will be considered
to have existed tor the entire taxable year.
The general ettect or this article will be to eliminate some

existing uncertainties respecting the application of Brazilian
income tax to business activities in that count17 in the situations
described above.

This article will also operate to restrict

Brazilian taxation of income fran certain activities conducted by
U. S. citizens, residents and corporations in Brazil.
Article 10.

SHIPPING AND AIR TRANSPORT.

This article provides that a resident or one State will be
exempt fran tax in the other State on income den ved fram the
operation in international traffic of ships or aircraft registered
in the rormer State.

A similar provision is found in most con-

ventions to which the Uni ted States is a party.
Article 11.

RELATED PERSONS.

This provision corresponds in purpose and scope to section 482
of the Intemal Revenue Code of 1954 and confims the power ot each
govemment to reallocate income in cases in which a resident ot

ODe

- 26 State is related to a resident of the other State if such related
persons impose conditions between themselves which are different
from conditions which would be imposed between independent persons.
Article 12.

DIVIDENDS AND BRANCH PROFITS.

This article provides that dividends paid by a company which
is a resident of one State to a resident or corporation of the
other State may be taxed by both States.

However, the rate of

withholding tax imposed by Brazil on dividends paid by a Brazilian
corporation to a United States corporation will not exceed 20
percent i f the recipient corporation owns 10 percent or more of
the outstanding voting shares of the

p~ing

generally, not more than 2$ percent of the

corporation and,

p~ing

gross income consists of dividends and interest.

corporation's
The rate of with-

holding tax imposed by Brazil on profits of a Brazilian branch of
a United States corporation is also limited to 20 percent.

the absence of a convention, the Brazilian withholding tax on
dividends and branch profits remitted to nonresidents of Brazil
is 2$ percent.
The reduced rate provision is limited to intercorporate
di vidends because its purpose is to encourage direct investment

in Brazil.

Another provision of the convention designed to encourage

such direct investment is the investment credit provision (Article 7).
The reduced rate is nonreciprocal in form.

Thus, the United states

remains free to impose its 30 percent withholding tax on dividends
paid by United States corporations to Brazilian corporations.

This

- 27 lack of reciprocity is in accordance with the desires of both
Brazil and the United states to encourage the formation of local
Brazilian capital sources and not to encourage the flow of such
capital to the United states.
This article also includes a provision under which Brazil
may increase the rate of withholding tax on dividends and branch

profits to the same extent as any reduction below 28 percent in
the rate of tax applicable generally to business profits of
corporations in Brazil.
The tem trdividends tr is defined, in the case of the United
states, as any item which under the law of the United States is
treated as a distribution out of earnings and profits, and, in the
case of Brazil, generally as income from shares including all
distributions of profits made by any company or individual enterprise situated in Brazil.

The definition employed by Brazil is

adopted, in part, from the OEeD model convention.

However, the

OEeD draft definition does not include the language relating to
distributions by any company or individual enterprise.

Under

Brazilian law, such distributions of partnerships and single
proprietorships are treated as dividends.
Dividends paid by a corporation of one State to a person
other than a resident or corporation of the other State are exempt
from tax in such other State.
in the following cases:

However, the exemption does not apply

(1) if the recipient of a dividend paid

- 28 by a Brazilian corporation is a citizen of the United states, even
though a nonresident of the United States; (2) if the dividends are
treated as income from sources within such other State under
Article 5(1)(b); or (3) if the recipient of the dividend has a
permanent establishment in such other State and dividends are
effectively connected with such permanent establishment.

The

first exception represents a specific application of the traditional
"savings clause" under which the United States reserves the right
to tax its citizens as though the convention had not come into
effect.

See Article 3(3).

With respect to the United States, the

second and third exceptions represent reservations of the right to
tax dividends paid by Brazilian corporations when either the payor
or the recipient of the dividends is, to a Significant extent,
commercially involved in the United States.
It is important to note that the reduced 20 percent rate on
dividends received by certain United States corporations from their
Brazilian subsidiaries is available without regard to whether such
United States corporation has a permanent establishment in Brazil
and without regard to whether such dividends are effectively connected
with such a permanent establishment.
Article 13.

INTEREST.

Under this article, interest derived from sources within one
State by a resident or corporation of the other State may be taxed
in both States.

However, interest derived by a Government of a State,

or any agency or instrumentality wholly owned by that Government, will

- 29 be exempt tram tax in the other state.

Moreover, the rate ot tax

on interest der!ved trau sources wi thin Brazil by a bank or tinancial. institution which is a resident or corporation of the United

states will not exceed 15 percent ot the amount paid.

However, 1£

such bank or financial institution has a permanent establishment
in Brazil, the 15 percent reduced rate will not apply and the
interest ot such a recipient may be taxed as industrial and
commercial pro:1"its attributable to the permanent establishment.
In the absence 0:1" a convention, interest derived trail sources
within Brazil b,y a nonresident ot Brazil would be subject to withholding tax ot 25 percent on the gross amount Pfdd.

The United

states remains tree to impose its withholding tax at the statutor;y
rate of )0 percent on interest derived b,y residents or corporations
of Brazil :1"rom sources within the United states except that interest
derived b,y the Government ot Brazil is exempt trom tax.

The lack

of reciprocity arises out ot the mutual desire 0:1" the UDi ted states
and Brazil to

encour~ and maintain

investment in Brazil.

Interest is defined generally' as income trail any kind of
debt-claim or any income treated as interest under the tax law ot
the State

ot source. In cases in which excessive interest is paid

b7 reason ot a special relationship between

the payor and the

recipient, the provisions ot the interest article do not apply to
the excess part ot the pqments.

Excess interest payments ma:y, in

certain cases, be taxed as dividends under Article 12.

- )0 -

Interest paid by a corporation of one State to a person other
than a resident or corporation of the other State is exempt from
tax in such other State.
the following cases:

However, the exemption does not apply in

(1) if the recipient of interest paid by a

Brazilian corporation is a citizen of the United States even though
a nonresident of the United States; (2) if the interest is treated
as income from sources within the other State under Article 5(2)(b)j
or (3) if the recipient of the interest has a permanent establishment
in the other State and the interest is effectively connected with
such pennanent establishment.

These rules parallel those found in

the dividend article and reserve the right of the United States to
tax interest paid by Brazilian corporations to United States citizens
and interest derived under circumstan:es in which either the payor
or the

reci?i~nt

of the interest is, to a sigpiticant extent,

commercially involved in the United States.
Article

11.

ROYALTIES.

This article provides that the tax imposed by one State on
rqyalties derived from sources within the other State by a resident
or corporation of the other State will not exceed 15 percent of the
gross amount of such royal ties.

In cases in which the recipient of

royalties has a permanent establishment in the other state, the
reduced rate does not apply.

Thus, the proposed convention retains

the so-called "force of attraction" principle with respect to
royalties.

- 31 In the absence of a convention, the Brazilian withholding tax
on royalties is 25 percent and the United States withholding tax on
royalties is 30 percent.
The term "royalties" is defined as including any royalties,
rentals, or other amounts paid for specified types of intangible
property, including trademarks related to such property, and know-how.
The reduced rate does not apply to natural resource royalties
or to rentals for films and similar property.

See Article 15 (Income

from real property) for rules governing the treatment of natural
resource royalties.
If excessive royalties are paid by reason of a special relationship between the payor and recipient, the provisions of the royalties
article do not apply to the excess part of such

p~ents.

Excess

royalty payments may, in certain cases, be taxed as dividends under
Article 12.
Article 15.

INCOME FROM REAL PROPERTY.

This article provides a net basis election with respect to income
from real property.

Thus, a resident of one State will be subject to

tax in the other State on income from real property and natural resource
royalties i f the property or natural resource is located in such other
State.

However, such resident may elect for any taxable year to

co~ute

the tax on such income on a net income basis which takes account

of expenses relating to the property.

The income referred to in this

article includes gain from the sale or exchange of real property.
similar provision appears in many conventions to which the United
States is a party and in internal U. S. law (see IRC, §§87l(d) and
882(d» •

- 32 Article 16.

INVESTMENT COMPANIES.

This article denies the benefits of the dividends, interest,
and royalties articles to a corporation of one of the States
deriving such income from sources within the other State if (1)
such corporation is entitled to special tax benefits which result
in the tax imposed on such income being substantially less than
the tax generally imposed on corporate profits in such State, and
(2) 25 percent or more of the capital of the corporation is owned
directly or indirectly by persons who are not individual residents
of such State or, if residents of Brazil, are citizens of the
United States.
The purpose of this article is to deal with a potential abuse
which could occur if one of the States provided preferential rates
of tax for investment or holding companies.

In such a case,

residents of third countries could organize a corporation in the
state extending the preferential rates for the purpose of making
investments in the other state and, but for this article, also
obtain reduced rates or exemptions in the source state.

At present,

neither the United states nor Brazil extends special benefits of
the type referred to in this article to investment or holding
companies.
Article 17.

INCOME FROM PERSONAL SERVICES

This article provides that an individual resident of one State

- 33 is exempt from tax by the other State with respect to income from
personal services performed in such other State if such person is
physically present there for not more than 183 days during the
taxable year and such income does not exceed $4,000 or its
equivalent in Brazilian cruzeiros.
In the case of employment income which exceeds $4,000 or its
equivalent in Brazilian cruzeiros, in addition to the physical
presence limitation the individual must be an employee of a resident
or corporation of a State other than the State of source (or an
employee of a permanent establishment of a resident or corporation
of the State of source located outside such State) and the amount
must not be deducted in computing the profits of a permanent
establishment of the State of source.

If, however, such individual's

employment income does not exceed $4,000 or its equivalent in
Brazilian cruzeiros, such individual need only satisfy the physical
presence limitation in order to qualify for the exemption.
Compensation for services performed as a member of the regular
complement aboard ships or aircraft operated by a resident or
corporation of one State and registered in such State is exempt from
tax in the other State.

This exception does not limit a State's

right to tax its own citizens or residents.
"Income from personal services" includes income from the
performance of personal services in an independent capacity and
"employment income".

Employment income includes income from

- 34 services performed by officers and directors of corporations.
However, income from personal services performed by partners is
treated as income from the performance of services in an independent
capacity.
The exemption applicable to personal service income is limited
in the case of public entertainers, such as musicians, actors, or
professional athletes.

These persons are taxable if their income

from such activities exceeds $100 (or its equivalent in Brazilian
cruzeiros) for each day the individual is present within the state.
Article 18.

TEACHERS

This article provides a reciprocal exemption from tax for
oersonal service income of visiting teachers.

It applies only if the

teacher is invited by the Government, a university or other accredited
educational institution to teach or engage in research activities,
or both, at a university or other accredited educational institution.
The exemption applies only to income received by the visiting teacher
as compensation for such teaching or research activities.

If the

visit exceeds a period of 2 years, this exemption applies only to
the income received by the visiting teacher before the expiration
of such 2-year period.

The exemption does not apply to income from

research undertaken not in the public interest but primarily for
private benefit.

- 35 Article 19.

STUDENTS AND TRAINEES.

This article provides that a resident of one State visiting the
other State for the purpose of studying at a university or other
accredited educational institution, securing training for
qualification in a profession or professional specialty, or
studying or doing research as a recipient of a grant, allowance,
or award, is exempt from tax in the host State on:
(1)

Gifts from abroad for his maintenance or study;

(2)

The grant, allowance, or award; and

(3)

Income from personal services performed in the host State

not in excess of $2,000 (or its equivalent in Brazilian cruzeiros)
for any taxable year.

This exemption is increased to $5,000 (or

its equivalent in Brazilian cruzeiros) if the student is training
for qualification in a profession or profeSSional specialty.
These exemptions continue for such period of time as may be
reasonably or customarily required to effectuate the purpose of his
visit but in no event for more than 5 taxable years.
Furthermore, a resident of one State, employed by or under
contract with a resident or corporation of that State, who visits
the other State for a period not in excess of 1 year for the purpose
of studying or acquiring technical, professional, or business
experience. is exempt from tax in such other State on income from
personal services rendered there not in excess of $5,000 (or its
equivalent in Brazilian cruzeiros).

In order to qualify for the

- 36 exemption, the visiting individual must stuqy at a university or
accredited educational institution in the host State, or receive his
experience from a person other than the resident or corporation by
which he is employed or under contract (including a 50-percent or
more owned subsidiary of such corporation).
A resident of one State who visits the other State for a period
not in excess of 1 year as a participant in a program sponsored by
the Government of the host State for the primary purpose of
training, research, or stuqy shall be exempt from tax in the host
State on income not in excess of $1.0,000 (or its equivalent in
Brazilian cruzeiros) received for personal services performed in
the host State in respect of such training, research, or
Article 2C.

stu~.

OOVERNMENTAL liUNCTIONS.

This article exempts from tax in one State any wages, salaries,
and similar compensation, and pensions, annuities, or similar benefits
paid by, or from public funds of, the other State, or a political
subdivision thereof, to a national of that other State for services
rendered to it or its political subdivisions in the discharge of
governmental fUnctions.

- 37 -

Article 21.

RULES APPLICABIE TO PmSONAL SERVICE ARTICLES.

This article provides that under Articles 17 through 20
reimbursed travel expenses will be exempt as income from personal
services but will not be taken into account in determining whether
the maximum income exemptions in Article IS 17 and 19 have been
exceeded.

If an individual qualifies for the benefits of more

than one of the provisions of Articles 17 through 20, he may choose
the provision most favorable to him but be may not claim the benefits
of more than one article in anyone taxable year.
Article 22.

DEDUCTION FOR CHARITABlE CONTRIBUTIONS

This article provides that a United States citizen, resident,
or corporation may deduct for United States tax purposes contributions made to charitable organizations in Brazil i f the following
conditions are met:
(1)

The Brazilian organization has qualified as a nonprofit

organization exempt from tax under the income tax laws of Brazil;
(2)

The contributions are used entirely within Irazil;

(3)

The Brazilian organization bas qualified as a tax-exempt

and

organization under section 501 (c) (3) of the Intemal Revenue
Code.
If these conditions are met, the contribution will be treated
as a charitable contribution

defined in section 170 (c) and will

- 38 be deductible subject to the limitations contained in section 170

of the Internal Revenue Code.
Artic le 23.

PENSIONS AND ANNUITIES

This article provides an exemption from tax in the State ot
source for private pensions and private life annuities paid to
individuals who are residents of the other State.

A life annuity

is a stated sum paid periodically at stated times during life,
or durin

a specified nunber of years, under an obligation to

make the payments in return for adequate and full consideration.
A pension is a periodic payment made after retirement or death for,
or by way of compensation for injuries received in connection with,
past employment, and does not include social security type payments.
Article 24.

CONSULTATION

This article provides that the competent authorities of the
two states may-(1)

Settle by mutual agreement all questions of interpreta-

tion or application of the convention;
(2) Resolve any matter concerning the relation of this
convention to any convention concluded by either State

with

third countries;
(3)

Consult regarding the application of the source rules in

Article S to particular items of income;

(4) Consult in regard to reaching a fair and equitable
apportionment of industrial or commercial profits between a

- 39 resident or corporation of one state and its permanent establishment in the other State; and

(5) Consult concerning the allocation of gross income and
deductions between related enterprises as provided in

Artic~ll,

and to adopt appropriate procedures for effectuating such apportionment or allocation.
This article also provides that if the competent authorities
reach agreement, taxes may be imposed and refund or credit may be
allowed in accordance with such agreement.

A similar provision

has been included in recent supplementary protocols to the conventions with the Netherlands, Germany, and the United Kingdom.
Article

25. EXCHANGE OF INFORl'lATION

Article

25 provides for a system of administrative cooperation

between the competent authorities of the two States and specifies
conditions under which information may be exchanged to facilitate
the administration of the convention and to prevent fraud or fiscal
evasion of taxes to which the convention relates.

This provision

is substantially similar to those found in existing tax conventions
to 'l-lhich the United States is a party.
Article 26.

ASSISTANCE IN COLLECTION

This article, which corresponds to articles in our existing
treaties, provides that each State will assist the other in the
collection of taxes imposed by such other State to the extent necessary

- 40to insure that any exemption or reduced rate of tax granted under the

convention by the other States will not be enjoyed by persons not
entitled to such benefits.

However, neither State i8 required to

take measures at variance with its administrative practice or which
would be contrary to its sovereignty, security, or public policy.
Nor is either State required to enforce the tax claillls of the other
or entertain suits on such claims in its courts.
Article 21.

TAXPAmt CLlIMS

Under this provision, where a Citizen, resident, or corporation
of either State shows proof that the action ot the other State's tax
authorities has resulted, or will possibly result, in taxation
in contravention of the provisions of the convention, such person may
present his ca se to his State's competent authority, who may attempt
to come to an agreement with the competent authority of the other State

with a view to the avoidance of double taxation.
Article 28.

EXCHANGE OF LEGAL INFCJtMATION

This article specifically provides that the competent authority
of each State shall advise the competent authority of the other state
of any addition to or amendment of the tax laws of the State

which

concern the imposition of taxes which are the subject of this convention.
This article also provides that for the purpose of mutual
assistance in development and maintenance of sound fiscal policies

- 41 and tax administration, the competent authorities may consult
together and maka mutually acceptable arrangements, including
exchanges of personnel, technical memoranda, and studies.
Article 29.

DIPLOMATIC AND CONSULAR OFFICERS

This article preserves the existing fi8cal privileges of
diplomatic and consular officials under the general rules of
international law or under the provisions of special agreelll8nts.
Article 30.

EFFECTIVE DATES AND RATIFICATION

This article provides that the convention will be ratified
and the instruments of ratification exchanged at Washington
as soon as possible.
In general, the convention will be effective for taxable
years beginning on or after January 1 of tbe year followit:€ the
date of exchange of instruments of ratification.
Special exceptions to the general effective date are as
follows:
(1)

The source rule governing

inCOJ1J3

from the sale of

personal property produced in one state and sold in the other
State (Article

5 (8»

will have effect only after the competent

authorities of both States have established mutually acceptable
rules for the implementatiDn of the rule.
(2)

The investment credit provision (Article 7) will bave

- 42 effect with respect to property placed in service and net new
investments made on or after January 1, 1968.
(3)

The dividends, interest, and royalties articles

(Articles l2, 13, and 14) will have effect with respect to amounts
paid on or after January 1, 1969.
The convention will continue in effect indefinitely but may
be terminated by either of the States at any time after 3 years
from the general effective date described above if at least 6
months' prior notice of termination is given through diplomatic
channels.

In such event, the convention will cease to be effective

for taxable years beginning on or after January 1 of the year
following the expiration of the 6-month period.
In addition, upon 6 months' prior notice given through
diplomatic channels, the follOWing may occur:
(a) Any rules established for the implementation of the source
rule discussed at (1) above may be terminated by either State at
any time;
(b) The investment credit provision (Article 7) and the
deduction for charitable contributions (Article 22) may be terminated
by the United States at any time atter 3 years from the general

effective date of the convention; and
(c) The reduction in rate for dividends and branch profits
(Article 12 (3) and (4», the reduction in rate for interest

- 43 derived by banks or other financial institutions (Article 13 (3»,
and the reduction in rate for royalties (Article 14 (1»

may be

terminated by Brazil at any time after 3 years from the general
effective date of the convention.
Further, by notice given by Brazil to the United States
through diplomatic channels, the reduced rates discussed in (c)
above, may be terminated by Brazil at any time after the date
on which the investment credit is terminated pursuant to Article 7 (4)
or suspended by Brazil at any time after the date, and for the
period, of any suspension of the investment credit provided by
Article 7 (4).
Any termination or suspension under the preceding two paragraphs
will not prejudice benefits available with respect to transactions
entered into prior to such termination.

TREASURY DEPARTMENT
Washington
FOR RELEASE:

UPON DELIVERY
REMARKS OF THE HONORABLE JOSEPH W. BARR
THE UNDER SECRETARY OF THE TREASURY
BEFORE THE
NATIONAL ASSOCIATION OF THEATRE OWNERS
BAL HARBOUR, FLORI DA
FRIDAY, OCTOBER 20, 1967, 1:00 P.M., EDT
THE IMPORTANCE OF SAVINGS BONDS
IN THE CURRENT ECONOMIC PICTURE

r am glad to be with you this afternoon.
pleasure of speaking before you at the

A year ago r had the

1966 convention of the

National Association of Theatre Owners in New York City.

r believe

that was your first meeting following the formation of this new exhibitor organization.

So you may well be wondering today if an ap-

pearance by the Under Secretary of the Treasury is to be a regular
feature of the annual NATO conventions.

assure you that it is not

- much as r would en;oy it.
The fact of the matter is that the promotional job you were asked
to undertake for our Savings Bond program a year ago is still unfin-

ished - not for any failure on the part of the motion picture industry
- but because the task itself has grown in both size and importance.

So r am grateful - as are Secretary Fowler and the President
himself _ that the leaders of your organization have seen fit to invite me back to re-state our case and appeal for your renewed support.

F-1058

- 2 -

You are well aware that as a nation we are beset with probl~
on many fronts.

On the economic front - the major area of the

Treasury's responsibilities - we are faced today with a growing
threat of serious inflation and sharply rising interest rates larg
as the result of special Vietnam costs.

To combat that threat and

ensure sound and stable economic growth, President Johnson has pro
posed a program of temporarily raising taxes and restraining gover
ment expenditures.
Today I want to talk to you about one frequently overlooked b
nevertheless important complementary aspect of the President's pro
It is one in which - by the very nature of your business - you are
a position to give direct and effective assistance.
I am talking, of course, about United States Savings Bonds, f
which your industry has a long and distinguished record of support
It is a popular program.

It is a practical and effective

progr~.

It is one in which the individual citizen can serve both his own a
his country's best interests.
The Current Need for Savings Bonds
There have been few times in our economic history when thene
for Savin~s Bonds purchases by Americans has been as great as it i
today.

'-lith the economy gaining greater upward momentum month by

month, and a rising Federal budget deficit putting pressure on the
nation's credi t markets, the Savings Bond program serves two vital
and related purposes:

- 3 -- First, it channels a part of consumers' income out of current
spending and into savings, thus directly relieving inflationary
pressures by reducing buying power that tends to drive prices up.
-- Second, it means that a part of the budget deficit can be
financed without having to turn to the nation's money markets to
draw funds away from other uses at higher and higher interest
rates.
Stepped-up purchases of U. S. Savings Bonds and the companion
Freedom Shares ,.y; 11 not solve, of course, all of our present economic
problems.

The need for the temporary 10% surcharge coupled with

firm restraint on Federal expenditures proposed by the President are
more urgent now than before.

I firmly believe only these basic

measures will help to avoid the twin problems of very tight money
and cruel inflation by holding down the Federal deficit and holding
down the aggregate demands on the economy's resources.
But, to a significant degree, the Savings Bonds program serves
the same broad purposes of relieving pressure on the nation's productive and financial resources.

To the extent that these purposes

can be served through increased sales of Savings Bonds, there can be
some progress in meeting the need to which the tax increase and expenditure restraint are addressed.
Let me hasten to add that I do not, for a moment, hold out the
prospect that bigger sales of Savings Bonds will make it possible
to drop the plans for a tax increase, but it is fair to say that

- 4 without solid support for the Savings Bonds program our need for
higher tax revenues would be even more pressing.

I, for one, would

prefer to put a few extra dollars aside every payday and have thole
dollars earning interest and be available to me at some future time
of need, rather than to have the extra dollars taxed away however
worthwhile the purpose for which they are currently spent.
In the year ended last June, Federal government borrowings
were not a source of pressure on the nation's financial markets.
Just looking at Treasury debt alone, there was an increase of some
$6.4 billion for the year, but marketable issues had to be incre...
by only $1-1/2 billion while the balance was made up by increases i
special issues for the trust funds, sales of U. S. Savings Bonds,
and minor changes in other nonmarketable issues.
rise in

holdin~s

The $1.1 billion

of Series E and H Savings Bonds by the public

dur~

Fiscal Year 1967 was certainly a big help in keeping down the inerl
needed in our marketable issues.
This fiscal year, we are talking about a much bigger Federal
increase.

Even the tax increase as requested by the President

August, and firm restraint on spending, would leave a Federal budg
deficit of $14-18 billion in this fiscal year, and an inevitable
rise :in debt.

Clearly, a larger part of this rise, compared with

year's, will have to be raised through selling additional debt iss
in a crowded credit market.

But just as clearly, every additio~l

million dollars of borrowing that can be pla~ed in Savings Bonds'

- 5 Freedom Shares, is a million dollars less to pry out of an unreceptive money market.

Like additional tax dollars, additional Savings

Bonds dollars will make the credit markets more tolerable this year.
The Meaning of intolerable credit conditions
I have very deep concern about the pressures that would be
exerted on the money markets by borrowing requirements associated with
a deficit in excess of the $l4-IR billion range.

To be sure, the

credi t markets can accommodate a Federal defici t of c::onsiderable size.
But given present private demands for credit, an outsized Federal
deficit, such as would result without the proposed tax rise, expenditure restraints and Savings Bond sales, cannot be accommodated
wi thont severe disruption to the credi t markets, sending interest

rates sky-high.
The precise pattern and sequence of events through which very
tight money would envelop

the nation's credit markets in the absence

of adoption of the President's program are only open to coniecture
at this point.

But one could expect, for example, that as the Federal

government l)orrowed in greater and greater volume, higher rates would
have to be paid to attract additional investors.
In the meantime, corporate borrowers would bid rates up, and
attract investment from institutional lenders that have the flexibi li ty to shi ft among Government securi ti es, corporate is sues and
mortp,a~es.

Banks might well face insistent business demands to draw

- 6 on credit lines, while lessened reserve availability kept a tighter
lin on the banks' total portfolio, so that less

~ould

be put into

Federal government securities or tax-exempt issues even at steeply
~;gher

intp.rest rates.

Along with the mortgage market, and state and local government
horrowers, other borrowers with relatively limited bargaining power
~no
~e

limited flexibiljty of alternative credit resources would also
like:; to

suffe~

disproportionately at the hands of tightened

crenit conditions -- including small business and farmers.

Secretary Fowler has told Congress, "It would be a case of 'pay up
OlA

rio

~.n thout',

and perhaps a case of

doing wi thout' even for those

pilJing to 'pay up' to a considerable extent."
In short then, without the President's program and without the
c;.qlcs of
helr1

Savjn~s

30nds we will probably have a "credit crunch" as

f not much worse than the one last year.

1,orne-huv~rs

~7ill

seriously hurt

and home builders by forcing them to seek increasing ex-

ppnsi ve and scarce

mortga~e

loans; it wi 11 serious ly hurt businessmen,

w',n ~av ~ancel expansionary plans rather than pay very high interest

rates lenders ~vill demand; and it l.nll seriously hurt local communitieE
t:'O'It: ~Jj 11 ~ave to pay increasingly higher rates on the sale of bonds

fnr roans> scho()ls, hospi tals, communi ty c~nters and other public

prr-:ects.
To illustrate, let us consider what could happen to borrowing
costs for the homebuyer.

As I mentioned before, we can not predict

- 7 -

how much interest rates will rise next year without the President's
program, but it would be safe to expect about a 1 per cent increase
in home

mort~a~e

this rise.

rates for instance.

Let us consider the impact of

The figures are instructive.

With a 1% increase in mortgage rates, a $15,300, 25-year mortgagl
loan would cost in principal and interest an additional $112 the
first year and a total of $2,800 over the full term of the mortgage.

A S19,800 mortgage would cost $145 more the first year and $3,625
more overall.

And a $27,000 home mortgage would cost $198 more the

first year, and $4,950 more over the life of the mortgage.
I hasten to remind you that adding the extra costs of a cruelly
accelerated spiral of inflation to the higher borrowing costs would
make for a very unfair, very painful and totally unacceptable alternative to the surcharge proposal for the average American.
Building a Bigger Program
It is in context I have described that U. S. Savings Bonds play
a vital complementary role to the President's tax and expenditure
restraint program.

And to ensure that this role is fulfilled com-

pletely, there is an impelling need today for a stepped-up bond program.
I am convinced our program can be expanded.
"products".

We have good

Savings Bonds are an attractive investment.

To be

sure, higher rates are available in today's markets than the 4.15
per cent rate oLinterest on our Savings Bonds.

But our bonds do

- R -

have advantages, namely, safety, convenience, liquidi ty, and certa1r
tax benefits in terms of deferred income as well as exemption
state and local income taxation.

fr~

Similarily, our newer "Freedom

Shares" with a 4. 74 per cent rate of interest are very attractive al
worthwhile investments too.
Let me spend a few moments to give you a little history of
Savings Bonds.

In May, 1941 the Treasury issued its first Series E

Defense Bonds.

After the U. S. entered Horld

~.]ar

II, American in-

dus try was called upon to encourage employees to buy E bonds throug.:
automatic payroll deductions.
savin~

As a result, the payroll method of

became one of the most successful features of the War Bond

Drive and has contributed significantly to the more than $165
billion worth of Savings Bonds sold since 1941.
A peacetime version of the Bond sales effort so successful
during the war was organized in 1963.
Dou~las

Then

Secretary of the Treat

Dillon called a team of top businessmen to organize what

has now become the U. S. Industrial Payroll Savings Conunittee. Th:
group is presently under the able chairmanship of Daniel J. Haught,
president of the Lockheed Aircraft Corporation.
It has been through the ;oint efforts of government and ind~
that the Savings Bonds program has become such an important force
in helping to bolster t~e nation's financial position and steady
economic footing.

The Bonds program, thanks to your help and that

- 9 -

so many other volunteers, has done well in the past fiscal year as
sales of nearly $5 billion were the highest since fiscal 1956.
Holdings of Savings Bonds now stand at a record high of more than
$51 billion.

The current outlook is for sales of E and H bonds to

show a gain in this fiscal year of some $265 million over fiscal
1967.

This rate of gain, while commendable, however, is not good enough.

To help us counter the threat of inflation and high interest rates,
a

~reater

gain is needed.

To achieve this objective, the program

needs to involve more families; it needs to attract more savers and
investors of all classes; it needs to produce more regular buyers
and many more dollars.

In particular, it needs to sell rnot'e parti-

cipants on buying the new higher-interest Freedom Shares in combination with their Bond purchases.

In short, the Bond program needs to

break out of its normal mold and become a much bigger contributor to
the solution of our financing problems.
You people in the theatre business can help make this happen.
You can dramatize the Savings Bonds Program and bring this patriotic
opportunity to the attention of your patrons - through special films,
through lobby displays, and through your own personal participation
fn the Share in Freedom Bond drives to be held next spring allover
the coun try.
~hen

you registered for this convention you were given an

envelope containing a special message on this sub; ect from Secretary

- 10 -

Fowler.

It expressed his own and the President's confident hope

that once again the motion picture industry would give leadership
to this vital national cause.
Secretary Fowler said in part:
"In the President's view, the theatre screen could well serve
as a rostrum to rally public concern about our Nation's problems;
and to persuade all Americans that the Savings Bonds program offers
a ready way to support their country while providing for their
future."
The Secretary's message also outlined a program of action - and
it included a pledge card on which you could indicate your intention
to participate.

We have additional copies of this pledge card on

the luncheon tables today.

I hope that if you have not already

filled one out, you will do so now - and will turn it in at the c10s
of the luncheon to one of the "Share in Freedom" girls who are
stationed at the doors.
In a few minutes you will be hearing from your guest of honor
Gregory Peck - who, like many other great stars of motion pictures,
has contributed his talents to Savings Bonds.

Tonight you will be

honoring Bob Hope - who, just a month ago, was received at the

l~itE

House as America's number one Bond salesman.
But whatever the magnitude of the star, or whatever the importance of his message, it is the medium of your theatre screen tMt

- 11 -

brings our story to the American people.

As theatre owners, you are

the real key to our success in this undertaking.

I know we can count

upon you, as we have so many times in the past.
Thank you for letting me be with you - and thank you for your
help.

TREASURY DEPARTMENT
Washington

FOR RELEASE UPON DELIVERY
STATEMENT OF THE HONORABLE JOSEPH W. BARR
UNDER SECRETARY OF THE TREASURY
AT A PRESS CONFERENCE HELD IN MIAMI BEACH, FLORIDA
AT THE CONVENTION OF THE NATIONAL ASSOCIATION OF
THEATRE OWNERS, THURSDAY, OCTOBER 19, 1967, 3:15 PM, EDT
WHAT KIND OF A PEOPLE ARE WE?
What kind of a people are we?

This question can be

asked by reasonable men in this country and allover the
world at this particular moment in our history.

I have

served the Government of the United States in its Armed
Forces, as a Member of Congress, and in the Executive
Branch for a period of approximately 12 years.

I can say

candidly that I have never seen a more crucial testing time
for this Nation.
These comments are prompted by certain disturbing
developments:

the emergence of a full-fledged drive for

protectionism in the guise of import quotas, the increasingly
savage attacks on foreign aid programs, efforts to tie the
President's hands in the conduct of this Nation's foreign
policies, a seeming reluctance to come to grips with the
problems of poverty and the cities, and a tendency to take
either a casual or an unrealistic approach toward the
financial position of this country.
F-1059

- 2 -

The world has caught up with us with a vengeance and
as a result there is abroad in the land and in the Congress
a sense of restlessness, frustration and disquiet.

We, as

a people, do not like to be confronted with an array of
problems whose solutions are difficult and complex.

this regard, however, I suppose that we do not differ from
other nations and other peoples.

If one listens to the debates that rage within and
without government, one can only conclude that there are
lots of things that we as Americans do not like about the
world today.

There are lots of things that fall far short

of our ideals and our goals.

Let me name a few.

-- We don't like the fact that 20 years after the
end of World War II, we are still forced to maintain roughly
six divisions in Europe at a heavy cost to our tax resources
and our balance of payments.
We don't like the fact that in spite of our carrying
this load, many of our colleagues in Europe are all too
prone to criticize our policies and our balance of payments
deficits.

- 3 -

We don't like the fact that many of the small
nations that were created in the breakup of the colonial
empires following World War II must look to us for protection
if they are to remain free and independent.
We don't like the fact that there are less developed
parts of the world that need our help and support if they
are to develop economies that can feed, house and educate
their people.
-- We don't like the fact that nations which benefit
from our aid sometimes publicly disagree with our foreign
policy objectives.
In short, if we look beyond our shores, there is a lot
we see that we don't like.
The same is true of the problems that beset us at home.
-- We don't like the fact that our technology has
literally outpaced the abilities of a sizable minority of
our citizens, who need retraining to become fully useful
members of our society.
We don't like the fact that our cities have tended
to become increasingly polarized along racial lines.

- 4 -- We don't like the fact that as this country grows,
its people inevitably demand more services that only the
Government can provide.
-- We don't like the corollary fact that services cost
money and money means taxes.
-- We don't like the fact that at times such as this
we are forced to pay higher taxes in one form or another -either the tax surcharge proposed by President Johnson, or
the far more cruel tax of inflation and high interest rates.
I might add, parenthetically, that I personally don't
like to pay $3 for a movie ticket.
There is nothing particularly new and different in the
existence of a long list of things that the people of this
country don't like -- or at least what they say they don't
like.

The list has probably been as long at most periods

in our history.

But'the question that many thoughtful

observers raise today is whether this nation is prepared to
develop reasonable and orderly solutions to the problems
we face.

- 5 One measure of gauging tne effectiveness of a nation
or of a people has always appealed to me.

I have always

found merit in Professor Toynbee's thesis that the true
measure of a nation or a people is the manner in which they
respond to the challenges that confront them.
Our history as a nation measures up well by this
standard and applying this standard to the current scene,
an impartial observer can give us high marks for responsibility
and courage.
-- Despite the grumblings

recognize and respect our

obligations to our allies in the North Atlantic Treaty
Organization.
-- We have recognized the fact that only we can offer
much hope of protection to many new nations that are trying
to carve out a decent life, in freedom, for their people.
-- we are living up to our solemn international
commitments.
-- We have recognized the fact that many of the nations
in Africa, Asia and Latin America simply cannot compete in a

- 6 world of vast markets and complex technology unless they
join together in cooperative efforts.

The regional development

banks which we support are one response to this challenge.
-- We have recognized the simple fact that our own national
interest requires a world economic order in which the people
of all nations can attain a measure of economic dignity, and
this means we must continue to work toward low trade barriers
and sensible international financial arrangements.

Completion

of the Kennedy Round, and the recent agreement upon a new
international monetary reserve unit, are our responses.
On balance I can say that our record in the international
area shows that this government has a clear view of the
problems; we are taking the world as it is; and we are trying
to meet our responsibilities -- perplexing and agonizing as they
often can be.
At home, we also are acting responsibly:

We have

recognized and are trying to meet squarely the problems of
those who need assistance in order to participate adequately
in our economy.
We have faced squarely the explosive issue of race
which has been submerged for far too long.

- 7 -- We have recognized and are trying to answer the problems
of our cities.
-- \ve have had the courage to try to make the new economics
work both ways -- by tax reduction when our economy is operating
far below its potential and by tax increases when the demands
of the Federal and private sectors place impossible strains on
our domestic economy.
None of the answers we have advanced to the issues that
confront us at home or abroad is simple, easy, or, in most
instances, popular.

But they constitute a serious, thoughtful

response to the realities of the world we live in.

They mayor

may not be correct; they should be subjected to severe and
strenuous debate, but they do constitute a meaningful response.

On those who object lies the burden of offering alternatives.
The problems are not about to go away -- the problems are
there and will remain there until they are supplanted by a whole
new set of problems.
and indeed of mankind.

This has been the history of this nation
So the essential test of a nation,

and the answer to the question of "What kind of people are we?"
lies in the manner in which we respond to the challenges that
confront us.

I can only admit that the going is tough, but

I personally feel like an honest man and not an ostrich.

000

TREASURY DEPARTMENT
(

=
FOR RELEASE 6: 30 P.M.,

I,fonday, October 23, 1967.
RESULTS OF TREASURY'S WEEKLY BILL OFFERING
The Treasury Department announced that the tenders for two series of Treasury
)ills, one series to be an additional issue of the bills dated July 27, 1967, and the
)ther series to be dated October 26, 1967, which were offered on October 18, 1967, were
lpened at the FederGi~_ Reserve Banks today. Tenders were invited for $1,500,000,000,
lr thereabout~, of 91-day bills and for $1,000,000,000, or thereabouts, of 182-day
lills. The details of the two series are as follows:
1l.NGE OF ACCEP'lED
OMPETI TIVE BIDS:

High
Low
Average
52~
27~

91-day Treasury bills
25 z 1968
Approx. Equiv.
Price
Annual Rate
98.841
4.585~
98.836
4.605~
4.597~
98.838

maturin~ Jan~

182-day Treasury bills
AEril 25 z 1968
Approx. Equiv.
Price
Annual Ra. te
97.421
5.101~
97.402
5.139%
97.409
5.125~
matur1n~

of the amount of 91-day bills bid for at the low price was accepted
of the amount of 182-day bills bid for at the low price was accepted

lTAL mNDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRIClE:
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
~inneapo1is

(ansas City
)allas
3an FranCisco
'roTALS

AEE1ied For
AcceEted
$ 21,469,000 $ 10,499,000
1,089,091,000
1,897,577,000
16,547,000
28,952,000
19,045,000
32,153,000
9,662,000
13,766,000
25,788,000
45,495,000
119,343,000
288,059,000
33,997,000
63,628,000
8,382,000
22,362,000
27,811,000
37,740,000
12,781,000
23,531,000
128,144,000
282,164,000

Applied For
$
9,869,000
1,377,252,000
12,854,000
33,261,000
10,983,000
28,061,000
187,732,000
44,187,000
18,885,000
16,410,000
20,244,000
204,524,000

Accel2ted
$
9,869,000
671,287,000
4,854,000
20,217,000
9,217,000
14,801,000
78,242,000
17,281,000
10,655,000
15,891,000
10,244,000
00
138 /

$1,501,090,000

!I $1,964,262,000

$1,000,558,000

$2,756,896,000

00°1°

£I

Includes $241 231 000 noncompetitive tenders accepted at the average price of 98.838
Includes $138' 941' 000 noncompetitive tenders accepted at the average price of 97.409
~ese rates ~ o~ a bank discount basis. The equivalent coupon issue yields are
4. 73~ for the 91-day bills, and 5 .35~ for the 182-day bills.

F-I060

TREASURY DEPARTMENT
(

"OR RELEASE 6: 30 P.M.,
l\l.csday, October 24, 1967.
RESULTS OF TREASURY f S MONTHLY BILL OFFERING

The Treasury Department announced that the tenders for two series of Treasury
dis, one series to be an additional issue of the bills dated July 31, 1967, and the
lther series to be dated October 31, 1967, which were offered on October 18, 1967, were
lpened at the Federal Reserve Banks today. Tenders were invited for $500,000,000, or
,hereabouts, of 27-,,-u. ',i bills and for $1,000,000,000, or thereabouts, of 366-day bills.
he details of the two series are as follows:
ANGE OF ACCLt-"l"'ED
OMPETITIVi BIDS:

High
Low
Average

274-day Treasury bills
maturin6 Jull 31 z 1968
Approx. Equiv.
Price
Annual Rate
5.279%
95.982 td
5.329%
95.944
5.313%
95.956

366-day Treasury bills
October 31 z 1968
Approx. Equiv.
Price
Annual Rate
5.275%
94.637 pJ
5.319%
94.592
5.302%
94·610

maturin~

~ Lxcepting 1 tender of $3,000 000; bl Excepting 1 tender of $238,000
100% of the amount of 274-day bills bi~for at the low price was accepted
.)';'11.to of the amount of 366-day bills bid for at the low price was accepted
)TAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISmIC'IB:

District
Boston
New York
Philade Iphia
Cleveland
Richmond
Atlanta
Chicago
St. LOUis
Minneapolis
Kansas City
Dallas
San Francisco
'roTAte

AEElied For
$ 42,275,000
1,488,845,000
10,418,000
54,062,000
12,777,000
11,789,000
210,981,000
23,136,000
13,428,000
3,333,000

AcceEted
AEE1ied For
$ 12,330,000 $
6,330,000
398,192,000
964,192,000
761,000
4,761,000
2,
772,000
12,772,000
1, 773, 000
9,773,000
3,650,000
8,650,000
22,156,000
103,406,000
6,197,000
16,397,000
3,700,000
12,700,000
1,557,000
1,557,000
2,806,000
10,806,000
50,635,000
124,635,£20
$1,281,979,000

500,529,000

1~,707,000

190,443,000

$2,073,194,000

Acce12ted
$ 22,275,000
757,145,000
2,418,000
4,062,000
1,777,000
2,789,000
109,291,000
6,886,000
3,428,000
3,333,000
1,707,000
86,214,000
$1,001,325,000 ~

Includes $14 968 000 noncompetitive tenders accepted at the average pr~ce of 95.956
Includes $39'337'000 noncompetitive tenders accepted at the average prlce of 94.610
~ese rates ~re bn a bank discount basis. The equivalent coupon issue yields are
5.58% for the 274-day bills, and 5.62% for the 366-day bills.

F-1061

TREASURY DEPARTMENT
Washington
ADDRESS OF THE HONORABLE ROBERT A. WAI.LACE
ASSISTA~IT SECRETARY OF TREASURY
BEFORE THE 24TH ANWAL CON\IE~ITION OF TIiE
NATIONAL LEAGUE OF INSURED SAVINGS ASSOCIATIONS
FAIRMONT HOTEL, SAN FRANCISCO, CALIFORNIA
OCTOBER 24, 1967 11:30 A.M.
THE TAX SURCHARGE AN) THE Nt\TICNAL ECOtnMY
IT t S A SPEC I AL PLEASURE FOR ME TO MEET WJTH YOU HERE AT TIiE 24TH ANNUAL
CONVENTICN OF THE

Nt\TIO~~L

LEAGUE OF INSURED SAVINGS ASSOCIATIONS.

I HAVE

WORKED CLOSELY WITH THIS GROUP ON ISSUES OF MUTUAL CONCERN FOR OVER 15 YEARS
FIRST AS ASSISTANT TO SENATOR PAUL DOUGLAS, THEN AS STAFF DIRECTOR OF THE
U. S. SENATE BANKlt\G AND CURRENCY COM'1ITTEE, AND FOR f\EARLY SEVEN YEARS,
AS AN OFFICIAL OF THE TREASURY DEPARTMENT.

I BELIEVE IN SAVINGS ASSOCIATIONS

AND ADMIRE YOUR WORK IN CHANNELLUK; SAVINGS INTO THE HOMEBUYING MARKET VlHICH
CONTRIBUTES OVER $25 BILLION A YEAR TO OUR GROSS Nl\TIONAL PRODUCT.
BUT I AM SAD, TOO, BECAUSE OF THE TRAGIC DEATH OF A DEAR FRIEND OF MANY
YEARS WHO SERVED YOUR INDUSTRY SO WELL -- BILL KERWIN.

WE WERE ALL PROUD OF

HIS ABILITIES AND HIS WORK, AND ASK GOD'S BLESSINGS ON HIS

v~NDERFUL

FAMILY.

AS WE MEET HERE TODAY, THE FATE OF THE PRESIDENT'S PROPOSED TAX SURCHARGE
IS BEING HOTLY DEBATED.
AND I AGREE WITH HIM.
GOVERt+1ENT.

SECRETARY FOWLER HAS PREDICTED ITS ULTIMATE ENACTMENT
IT IS TRUE THAT NO ONE LIKES TO PAY MORE MOf\EY TO THE

BUT, LET US HOPE THAT AFTER THE POLITICAL SMOKE HAS CLEARED

AWAY, FISCAL RESPONSIBILITY WILL CARRY TIiE DAY, ALL BUT ABSOLUTELY ESSENTIAL
EXPE/IVITURES WILL BE CUT AS MUCH AS POSSIBLE, At-{) THE 10 PERCENT SURCHARGE
WILL BE ENACTED.

WITH A

WE SHALL BADLY NEED BOTH.

POTE~rrIAL

DEFICIT OF $29-30 BILLION THIS FISCAL YEAR

THE IDEA THAT WE CAN FIGHT A WAR COSTING $25 - $30

BILLION A YEAR WITHOUT RAISING TAXES IS SIMPLY WISHFUL THINKING.

F-1062

- 2 -

NEXT WEEK AN EVENT OF GREAT HISTORICAL SIGNIFICANCE WILL TAKE PLACE.
THE PRESENT ECONOMIC EXPANSION WILL ENTER ITS 81ST MONTH, BECOMING THE
LONGEST IN THE HISTORY OF OUR NATION, SURPASSING IN LENGTH EVEN THE EXTRAORDINARY
EXPANSION DURING WORLD WAR II.
IS THIS RECORD-BREAKlf\(; 80 MONTHS OF UNINTERRUPTED ECOWMIC EXPANSION
SIMPLY AN ACCIDENT?

THI~K

NOT.

THE PREVIOUS 80 MONTHS,

JU~E

I, IQS4 TO

fEBRUARY 1, 1961, STARTED IN A RECESSION, ENDED IN A RECESSION AND HAD STILL
At-VTHER RECESS ION I N BETWEEN.
WHAT DOES AN UNBROKEN EXPANSION MEAN?
EARNIt-liS.

IT MEANS MORE JOBS AND HENCE MORE

IT MEANS HIGHER PROFITS, SMALLER UftMPLOYfv1ENT AW RISIf\G LIVING

STN-JOARDS.

RECESSIONS, ON THE OTHER HAND, MEAN FEWER JOBS, MORE UNEMPLOYM:NT,

LOWER PRODUCTION, AND LOWER PROFITS.

THUS, 80

MO~rrHS

WITHOUT A RECESSION IS

AN ACHIEVEMENT OF UNPARALLELED ECONOMIC SIGNIFICANCE.
BUT, A CYNIC MIGHT SAY, IT HAPPENED ONLY BECAUSE OF VIET NAM!

ON THE

CONTRARY, IT HAPPENED DESPITE VIET NAM.
IN THE FIRST PLACE, BEFORE THE VIET NAM ESCALATION BEGAN IN JULY 1CJfi5,
THE NATION HAD ACHIEVED THE LONGEST AND STRONGEST PEACETIME EXPANSION IN
HISTORY -- WHILE YET MAINTAINING THE MOST STABLE PRICE LEVEL OF ANY MAJOR
INDUSTRIAL COUNTRY OF THE WORLD.
VIET NAM RAISED NEW PROBLEMS -- INFLATED DEMAND, IMBALANCES IN PRODUCTION
AND

~~TARY

STRINGENCY.

BY HOLDING OOWN EXPENDITURES AND RAISIf\G REVENUES IN

1966, WE AVERTED A BOOM AND BUST CYCLE BUT IT WAS A NARROW ESCAPE.
QUARTER OF THIS YEAR

SA~'J

THE FIRST

OUR REAL GROWTH SHRIf\I( TEMPORARILY TO ZERO BECAUSE OF

THE HUGE INVENTORY BUILD-UP IN LATE 1966.

BUT THE EXPANSION CONTINUED, STILL

SLUGGISH IN THE 2ND QUARTER OF 1967, BUT GOlf\(; FULL BLAST IN THE 3RD QUARTER.

- 3 -

HOW HAS THE RECORD-BREAKIt--X; 80-M)NTH EXPAI\'SION BEEN ACHIEVED?

THE

~ST

BASIC FACTOR WAS THE ACTIVE USE OF FISCAL POLICY, INCLUDING TAX CHANGES.
IN THE EARLY DAYS OF 1961 \oIHEN THIS POLICY WAS BEING DESIGNED, THERE
~/ERE

FEARS THAT COt--X;RESS COULD f\()T ACT WITH APPROPRIATE TIMI NG.

BUT THEY DID,

WITH TAX REDUCTIONS WHICH FISCAL POLICY CALLED FOR IN 19fi2, 1%4 AND 1965.
RESULT WAS A STEADILY EXPANDIt\G ECOt'-OMY.

AFTER THE VIET

CONGRESS ENACTED THE TAX ADJUSTMENT ACT OF 1966,

SPEEDI~~

N~M

THE

ESCALATION BEGAN,

UP TAX COLLECTIONS

AND RESTORING EXCISE TAX CUTS ON AUTOS AND TELEPHONE SERVICE.

LATER THAT YEAR,

THEY SUSPENDED THE INVESTMENT TAX CREDIT, RESTORIt\G IT LAST SPRIt\G AS THE
PRESSURE ON FINANCIAL MARKETS EASED.
THE USE OF FISCAL POLICY AS A TOOL TO PROMOTE STABLE ECOt'-OMIC EXPANSION
HAS GREAT PROMI SE.
THE

GOVER~NT

UNDER t'-ORMAL COt-() IT IONS, WHEN THERE I S STEADY EXPANS ION,

TAKES IN SOME $8 TO

BILLION A YEAR IN EXTRA REVEI'lJES AS A

RESULT OF HIGHER TAXABLE EARNIt\GS PRODUCED BY THE EXPANSION.

THIS "FISCAL

DIVIDEt-()" CAN BE USED TO CUT TAXES, PAY FOR BETTER PROGRAMS, REDUCE THE
NATIONAL DEBT, OR SOME COMBINATION OF THESE DESIRABLE ALTERNATIVES.
BUT WITHOUT STABLE ECONOMIC EXPANSION, WE WILL SOON LOSE THIS FISCAL
DIVIDEND.

FOR IF INFLATED DEMAND AND RISING INTEREST RATES LEAD TO EXCESSIVE

INVENTORY BUILDUPS, WE WOULD t'-OT ONLY PAY THE IMMEDIATE COST OF HIGHER PRICES
AND HIGHER INTEREST RATES BUT ALSO THE LATER COST OF RECESSION CAUSED BY
ECOt-nMIC IMBALAl\ICE.

- 4 -

I DO NOT HAVE TO TELL THIS AUDIEtJCE THAT HIGHER PRICES LEAD TO HIGHER
\-IAGES \oJHICH LEAD TO IlfGHER PRICFS, AND SO ON -- THE INFLATIONARY SPIRAL.

YET

THIS IS EXACTLY \·niAT OUR PROBLEM COULD BECOMI! IF 'NE DO J'.K)T RAISE TAXES AS I'/ELL
AS

CUTTING

EXPENDITur~f.:')

T()

KEEP

[1:

m THF. SIZE or THE DEFICIT. THE FEDERAL

GOVERtKNT S It1PLY CMltDT PUt! A OEF I CIT OF THE SIZE tD\'/ Hl PROSPECT ','/JTHOUT A
TAX n;CREASE DURING

PEf:'IOD OF LO',..,t OVERALL UNEMPLOYfvENT HITHOUT RISKINS

H!FLATIOt~.

FROM lCJfi2 THROUGtl 1<1(,5 TAX ClJTS OF SOf'A.'E $?4 RILLION AT PRESENT LEVELS OF
INCOME WERE ENACTED.
THEY DID.

THE PURPOSE OF THESE CUTS WAS TO HELP THE

ECONO~~,

AND

IN LATER YEARS THERE WILL BE OTHER OPPORTUNITIES TO CUT TAXES OR

IMPROVE PROGRAMS FROM OUR FISCAL nIVIDEND IF WE CAN KEEP A STABLE ECONOMY.

BUT

FUTURE TAX CUTS WILL NOT 8E AS LIKELY IF WE DO NOT RAISE TAXES WHEN NEEDED.
FOR FUTURE PRESIDENTS AND MEMBERS OF CONGRESS MAY OPPOSE SUCH CUTS ON THE
GROUN)S THAT WE CANI'DT ACHIEVE INCREASES hlHEN THESE ARE NECESSARY.
THE TAX SURCHARGE MIGHT VERY WELL KILL THE GOOSE

T.~T

THUS, KILLING

LAID THE GOLDEN EGGS.

FISCAL POLICY AS A TOOL FOR ACHIEVING STABLE ECONOMIC GROWTH MUST BE
USED BOTH "'lAYS.

USH.G IT ONLY TO CUT TAXES \oJHEN THAT COURSE IS INDICATED, BUT

NEVER TO RAISE TAXES

Y~EN

THAT IS APPROPRIATE, WILL DESTROY ITS USEFULNESS.

SINCE THIS HAS BEEN THE PRIMARY FACTOR IN ACHIEVING OUR RECORD BREAKING 80 MONTH
EXPIt-JSION, THE DESTRUCTION OF FISCAL POLICY AS AN ECOI'DMIC TOOL I-JILL SEVERELY
~ER

FUTURE GROWTH AND STABILITY.

'rIHAT HAS 80 MJNTHS OF UNINTERRUPTED EXPANSION MEANT TO US?

JFAeMFTA6 1'FIRST

QUARTER OF 1961 THROUGH THE THIRD QUARTER OF 1967, GNP ROSE MORE THAN $285
BILLION, OR 57 PERCENT.
NATION I N THE WORLD.

PRICES WERE AMONG THE MJST STABLE OF ANY INDUSTRIALIZED

UNEMPLOYt-1ENT RATES WERE CUT FROM NEARLY 7 PERCENT TO

AN AVERAGE LEVEL BELOW 4 PERCENT.
OVER EARLY 1961 LEVELS BY MID-ICJf)7.
TO THE WHO:'E NATION.

CORPORATE PROFITS AFTER TAXES ROSE 71 PERCENT
GAINS OF THIS SIZE ARE OBVIOUSLY BENEFICIAL

- 5 -

IN JANUARY OF THIS YEAR OUR FORECASTS INDICATED THAT THE PACE OF ECONOMIC
ACTIVITY WOULD SLACKEN IN THE FIRST HALF OF 1967 AND ACCELERATE IN THE LAST
HALF OF THE YEAR.

THE ADMINISTRATION THEREFORE PROPOSED THAT A TAX SURCHARGE

BE ENACTED TO RESTRAIN AGGREGATE DEMAND IN THE LAST HALF OF THE YEAR.

THIS

ECONOMIC FORECAST HAS SINCE PROVED CORRECT AND THE ADVISABILITY OF A TAX
SURCHARGE IS

~RE

APPARENT TODAY THAN IT WAS WHEN THE PRESIDENT FIRST PROPOSED IT.

THE OVERALL IMPROVEt-1ENT IN ECOf\K)MIC ACTIVITY THIS YEAR CAN BE SEEN IN
THE QUARTERLY BEHAVIOR OF GROSS Nl\TIONA.L PRODUCT.

IN CURRENT PRICES GNP ROSE

$15 BILLION IN THE THIRD QUARTER OF 1967 TO A SEASONALLY ADJUSTED ANNUAL RATE
OF $790 BILLION.

THIS COMPARES WITH THE SLUGGISH $8.8 BILLION GAIN IN THE

SECOND QUARTER Af\l) THE VERY SLUGGISH $4.2 BILLION RISE Hl THE FIRST QUARTER.
OUTLOOK FOR 1968
tOOKING AHEAD, THE OUTLOOK FOR ACCELERATED EXPANSION IS CLEARLY EVIDENT.
THIS JUDGMENT IS BASED ON SEVERAL CONSIDERATIONS.
1.

EXPENDITURES BY GOVERNMENT, BOTH FEDERAL AND STATE

A~D

LOCAL, WILL

CONTINUE TO RISE SUBSTANTIALLY THROUGHOUT THIS YEAR AND INTO 1968.
2.

THE INVENTORY

ADJUSTME~IT,

lvHICH RETARDED ECONOMIC GROWTH IN THE

FIRST HALF OF THE YEAR, HAS BEEN LARGELY COMPLETED.

INDEED, It-NENTORY

ACCUMULATION OCCURRED IN THE THIRD QUARTER OF THIS YEAR Af\l) IS
EXPECTED TO CONTINUE IN THE CURRENT QUARTER AND INTO 1968.
3.

DATA ON RETAIL SALES AND PERSONA.L INCOME SUGGEST THAT

CO~5UMPTION

OUTLAYS WILL RISE STRONGLY IN THE MONTHS AHEAD.
4.

A STRONG REVIVAL IN RESIDENTIAL CONSTRUCTION IS UNDER WAY AND THIS
SH)ULD CONTINUE UNLESS FAILURE TO ENACT THE SURCHARGE LEADS TO
SKYROCKETING INTEREST RATES.

PRICE INCREASES HAVE RECENTLY BECOME MORE WIDESPREAD.

PRICES OF WHOLESALE

INDUSTRIAL COMMODITIES ROSE IN AUGUST AFTER NEARLY A HALF YEAR'S STABILITY.

- 6 -

THE PRICES OF SERVICES HAVE CONTINUED TO RISE SUBSTANTIALLY AND THIS, COMBINED
WITH INCREASED FOOD PRICES, LARGELY EXPLAINS THE MORE RAPID EXPANSION IN CONSLM:R
PRICES IN RECENT MONTHS.

WITH ECONOMIC ACTIVITY LIKELY TO RISE EVEN MORE RAPIDLY.

WITH SHORTAGES OF SKILLED LABOR LIKELY TO BECOME MORE WIDESPREAD, AND WITH PRESSURES
FROM THE COST SIDE LIKELY TO REMAIN INTENSE, THE NEED TO GUARD AGAINST DAMAGING
INFLATION AND TO MAINTAIN THE STABLE ECONOMIC GROWTH WHICH THIS COUNTRY HAS
EXPERIENCED FOR NEARLY SEVEN YEARS WOULD SEEM TO BE OBVIOUS.

THAT IS WHY THE TAX

SURCHARGE IS NECESSARY.
DESPITE THE MUCH EASIER MONETARY POLICY FOLLOWED THIS YEAR, HEAVY DEMANDS FOR
FUNDS TO MEET BOTH CURRENT AND ANTICIPATED NEEDS, ESPECIALLY FROM CORPORATIONS,
HAVE PUSHED INTEREST RATES HIGHER.

MOST

L~G-TERM

RATES OF IN![f!REST ARE CURRENTLY

AT OR NEAR THEIR HIGHEST LEVELS IN t-'DRE THAN 40 YEARS.

CONSIDERING THIS AND THE FACT

THAT MORTGAGE EXTENSIONS BY THRIFT INSTITUTIONS HAVE GENERALLY CAUGHT UP WITH
SAVINGS INFLOWS, PRESSURES ON THRIFT INSTITUTIONS, SUCH AS THOSE WHICH OCCURRED
IN 1966, COULD EASILY REAPPEIRIF THE DEFICIT IS NOT CUT BY A TAX SURCHARGE.
THRIFT INSTITUTIONS ARE CERTAINLY IN MUCH BETTER FINANCIAL

C~DITION

TODAY

THAN THEY WERE IN THE THIRD QUARTER OF 1966 WHEN DISINTERMEDIATION BECAME SUCH A
PROBLEM.

FURTHERt-()RE, NEW RATE REGULATIONS ADOPTED BY FEDERAL AGENCIES WOULD SEEM

TO It-'PLY THAT ANY DISINTERt-'EDIATION WHICH MIGHT OCCUR COULD BE t-'DRE EVENLY DIFFUSED
RATHER THAN CONCENTRAilED ON SAVINGS AND LOAN ASSOCIATIONS AS IT WAS IN 1966.
BUT, IF WE HAVE TO FINANCE THE DEFICIT WITHOUT HELP FROM A TAX INCREASE,
LONG-TERM INTEREST RAlcS COULD VERY WELL RISE TO THE HIGHEST LEVELS SINCE THE
CIVIL WAR WHEN S~ OF THE L~G-TERM GOVERNt-ENT SECURITIES ISSUED YIELDED OVER
SIX PERCENT.

- 7 THE EC<NJMIC CASE FOR THE TAX SURCHARGE RESTS

THE PREMISE THAT

EC~OMIC

ACTIVITY IS STRONG, THAT PRICE PRESSURES ARE EXCESSIVE AND LIKELY TO INTENSIFY,
f#)

~ST

THAT FINANCIAL

~ETS

ARE VUlNERABLE.

EXPERTS AGREE WITH THIS POINT OF VIEW.

I THINK THE CASE IS A GOOD ONE AND
EXPRESSIONS OF SUPPORT HAVE COM: NOT

ONLY FROM THIS lEAGUE BUT AlSO FROM ALL SECTORS COVERING THE SPECTRUM FROM THE
NATIONAL ASSOCIATION OF WWUFACTURERS TO THE AFL-CIO.
SPENDING CUTS t-.ECESSARY BUT MUST BE ACHIEVABLE
OPP~ENTS

OF THE SURCHARGE BU I LD THE I R CASE

THE PREMI SE THAT MASS I VE CUTS

IN CIVILIAN SPENDING SHOULD ACCOMPANY ANY TAX INCREASE.

WE AGREE THAT SPENDING

:UTS r-tJST BE MADE, BUT IT IS ESSENTIAL TO UNDERSTAND THAT THOSE CIVI lIAN EXPENDITURES
~ICH

CAN BE REDUCED REPRESENT

~LY

A SMALL PORTION OF THE TOTAL BUDGET.

OF THE

'OTAl NOJNT NOW BUDGETED FOR NONDEFENSE OUTLAYS BY THE FEDERAL GOVERN1'£NT, MORE
"HAN TWO-THIRDS IS NOT SUBJECT TO EXECUTIVE

REOUCTI~.

t-tJ&H OF THE SPENDING

IWGETED FOR FISCAL 1968 IS DEVOTED TO PROGRAMS FOR WHICH
~,

SUCH AS INTEREST ON THE PUBLIC DEBT.

EQUlRED TO COMPLETE CONTRACTS OR

H~OR

PAY~NT

IS FIXED BY

FURTHERK>RE, t-lJCH OF THE SPENDING IS

OBLIGATIONS ENTERED INTO IN PRIOR fEARS.

AKING ACCOUNT OF THESE ITEMS AND ALLONING FOR A

REDUCTI~

IN TOTAL OUTLAYS ACHIEVED

HROUGH THE SALE OF FINN-4CIAL ASSETS LEAVES ~LY $21 BILLI~ IN OUTLAYS OVER WHICH

W DISCRETION IS ACTUALLY EXERCISED.
~FORCftoENT /In)

EVEN THIS

OTHER ACTIVITIES VITAL TO THE NATION.

INCLUDES FUNDS FOR LAW
ANY SIZEABLE SPENDING CUTS

lULD HAVE TO Ca.£ OUT OF THIS PORTION OF THE BUDGET.
CIIILIAN SPENDING HAS ALREADY BEEN SEVERELY PARED BY THE PRESIDENT AND THE BUGT DIRECTOR.

NEVERTHELESS, RECOGNIZING THE GOVERNtoENT'S FISCAL PROBLEMS, THE

fSIDENT lAST AUGUST CAlLED eN FEDERAl AGENCIES TO REVIEW THEIR BUDGETS AND TO

- 8 MAKE FURTHER CUTS CONSISTENT WITH THE NATION'S SECURITY AND WELL-BEING.

ALL

GOVERl\MENT AGENCIES ARE IN THE PROCESS OF REDUCING THEIR BUDGETS ,/)ND, ACCORDING
TO BUDGET DIRECTOR SHULTZE, A TARGET REDUCTION IN THE NEIGHBORHOOD OF $2 BILLION
SEEMS POSSIBLE.

THIS IS A SIZEABLE REDUCTION, PARTICULARLY WHEN ()\IE C()\ISIDERS

THAT THESE EXPENDITURES ARE EVERY BIT AS URGENT AS THEY EVER WERE .AND THAT PL.ANS
HAD BEEN MADE AND PROGRAMS ARE IN MANY CASES ALREADY UNDER WAY.
CONCLUSION
THERE IS AN IMPORTANT LESSON TO BE LEARNED FROM THIS CONTROVERSY OVER THE
TAX SURCHARGE.

WHATEVER THE REASON, IF FISCAL POLICY LACKS THE NECESSARY FLEXIBILITY

TO BE USED AS A COUNTERCYCLICAL TOOL, THE TASK OF ECONOMIC STABILIZATION WILL, OF
NECESSITY, FALL SQUARELY ON THE SHOULDERS OF THE MONETARY AUTHORITIES.

I DOUBT

THAT IT IS NECESSARY TO RECOUNT FOR THIS AUDIENCE THE UNDESIRABLE C()\ISEQUENCES
WHICH MAY FOLLOW FROM PLACING UNDUE RELIANCE ()\I MONETARY POLICY, BUT THIS IS
EXACTLY THE KIND OF ALTERNATIVE WE FACE.

SPENDING CUTS OF THE MAGNITUDE CYRRENTLY

BEING CALLED FOR AS A PREREQUISITE TO Ca-JSIDERATION OF A TAX CUT C,GNNOT BE REALIZED
WITHOUT MAJOR DISRUPTION OF BADLY NEEDED PROGRAfI1S; ,/)ND IF NO ACTION IS TAKEN ()\I
THE SURCHARGE,

~ETARY

POLICY WILL BE SIGNIFICANTLY FIRM:R THAN IT OTHERWISE

WOULD HAVE BEEN.
FURTHERMORE, UNLESS TAXES CAN BE USED TO RESTRAIN THEEECONOMY IN A PERIOD OF
INFLATIONARY EXCESSES, THERE IS A DANGER THAllI FUTURE ADMINISTRATIONS ,/)ND C()\IGRESSES
Ml\Y NOT BE WILLING TO REDUCE TAXES TO STIMJLATE ECONOMIC ACTIVITY WHEN THIS IS CALLED
FOR.

THIS WOULD, OF COURSE, FURTHER REDUCE THE FLEXIBILITY OF FISCAL POLICY AND

INCREASE THE RELIANCE ~ ~TARY POLICY AS A CQU\JTERCYCLICAL WEAPa-J.
OUR POSITION AS LEADER OF THE FREE WORLD ,/)ND THE SOLUTION OF ()JR PRESSING
OOM:STIC PROBLEMS ARE AT STAKE t>.ND THEY BOTH DEtWJD THAT WE HAVE A HEALTHY ,/)ND
GRClrIING ECONOMY CHARACTERIZED BY FULL EMPLOYtwENT AND PRICE STABILITY.

IF WE ARE TO

PRESERVE THE HEALTHY, BALANCED ECONOMY WHICH WE HAVE ENJOYED FOR ALYOST SEVEN YEARS,
THE PROGRAM OF TEMPORARY FISCAL RESTRAINT WHICH THE PRESIDENT HAS PROPOSED MJST
BE ENACTED.

TREASURY DEPARTMENT

FOR IMMEDIATE RELEASE
WILL !AM N. GRIGGS NAMED
SPECIAL ASSISTANT TO ASSISTANT SECRETARY WALLACE
William N. Gl-"'iggs has been named Special Assistant to
Assistant SecrE'!:ary Robert A . Wallace . He succe e d somas
Th
W.
Wolfe, who is notv Drirec tor of the Office of Domes tic Gold and
Silver Operat{ons.
Mr. Griggs will aid Mr. Wallace in carrying out his
responsibilities for fiscal policy planning and the
direction of departmental activities relating to Federal
budgetary policies as well as policy supervision of the Bureau of the
Mint. He will also serve as the Treasury representative on
a number of intergovernmental committees.
Mr. Griggs joined the Treasury in February 1965 as a
Financial Economist in the Office of Financial Analysis. Prior
to his Treasury service, Mr. Griggs taught Economics at
universities in Oklahoma, Ohio, and Texas and served for several
years as Financial Economist for the Federal Reserve Bank of
Dallas.
He was born in Tulsa, Oklahoma, November 18, 1931, and
attended public schools in Oklahoma City. He receIved a
Bachelor of Science degree in Personnel Management in 1956
and a Master of Science degree in Economics in 1957, both from
Oklahoma State University. Mr. Griggs received the American
Bankers Association's Harold Stonier Fellowship in Banking for
the academic year 1959-60. He received a Ph.D. degree in
Economics from OJiio S.tate University in 1966. He served in
the U. S. Air Force during the Korean War.
Mr. Griggs is married to the former Darlene Tillman of
Oklahoma City. They have one daughter, Lisa, 3, and reside
in Arlington, Virginia.

000

F-lOfi 1

FOR nn>rEDIATF; RELEAS:;;;

October 25, 1967

TREASURY Al~HOU.NCES NOvTJvrnER REFUNDDW TERHS
The Trec:.sury Hill borrOl·r $12.2 billion, or thereabouts, through the issuance
of IS-month and 7 -year Treasury notes for the purpose of paying off in ca~h $10.2
billion of Treasury securities maturinG Novenber 15, 1967, and borrOl'ling neVI cash.
The 8.J110unt of the maturing issues held by the public is $2.6 billion.
The notes to be issued are:

$10.7 billion of 5-5/8~j Treasury Notes of Series A-1969, to be dated
November 15,1967, and to mature February 15,1969, at par; and
$1.S

billion of 5-3/410 Treas'ury Notes of Series A-1974, to be dated
November 15, 1967, and to mu.tul'e November 15, 1974, at par.

The matm'ing secUl'i ties are:
$8,135 million of 4-7 /8~~ Treasury Notes of Series F-l~G7, dated 113.y
15, 1966; and

$2,019 million of 3-5/8% Treasury Bonds of 1967, dated I-breh IS, 1961.
Interest v7ill be payable on tile IS-month notes on February 15 and AUGust 15,
1968, and }~ebruary 15, 1959, and on the 'I-year noJc;es semiannually on lIay 15 r;.ncl
~ovember 15.
~['he notes Hill be me,de ava:i.12ble in rccistC'red as vJell as bC:::tl'er fona.
A:1J.
mbscribers requesting rcgisterec~ n::rtc,s "\Jill be required to lurnis;l allpj_'opr~~).t!.'
.dentifyinS nU.:nbcrs as requirecl on tax return~; o.nd other docu--;-Icnts subn5ttecl to
;he Internal He'fenu8 Service.

Payment and deli very do.te 10:-" to.e notes I'iill be Kovc~:'-ber 15. Pa;;l:en t 112.;,c be
. s,- 7/8,0
,i
,
-f' .)
co or J.• e;) F, - Ie
b Ol1ClS
' 0 f ..
1 or-~
, . C 1-.
cG.sh, or In
no'CC's
0;'
.)0"7 , Or .J'7 -0,./,,~,
Uj)
J\) ( ,
\'h1l
it
ill be accepted at par, j n }Jayc:ent 0:[' c;:(cha;)~~c) in "hole or in pa:ct, for the notes
ubsc:cibccl for, to the extent. such sub"cc:~ptiorj.'" a:ce allotted 1)~' the Treasury. The
otes rl2.y not be paid for by crvlit in Treasury Ta;.:. and. lloan ACCOU!1~,S.

.
.a de 1n

~lhe su'oscri}ytion b;)o:~s ,dl1 be open only on Eonc3ay, October 30.
SU0SC}':i."[)Lio:1S
ith the required deposits 8.udressecl to [i, F'ed8l'Cll Reserve Bank Ol' Brartc::1~ o:c ',0
1e Treasu!.'cr of 1.'1(; United St'.itcs, 2nd placed in the ll'Ti.l before lnic1n:i C~0t O,:tc)1)e:c
), 1967, will be ~:onsiderccl tiJ:lely.

F-I064

- 2 Subscriptions from commercial banIes, for their ovm account, ,·rill be restrid.ed

in each case to an amount not exceeding 50 percent of the combined capital (not
including capital notes or debentures), surplus and undivided profits of the
subscribing bank.
Subscriptions from commercial and other banks for their Oim account, Federallyinsured savings and loan associations, states, political subdivisions or instrumentalities thereof, public pension and ret.irement and other public funds, international organizations in which the United states holds membership, foreign central
banks and foreign States, dealers who ma}\.e priwary markets in GovernInent securities
and report daily to the Federal Reserve Bank of }Iel·r York their positions "'ith
respect to Government securities and borrOir:ings thereon, Government Investment
Accounts, and the Federal Reserve Bcmks Hill be received liithout depo:::;it.
Subscriptions frol:l all others r.mst be acconpanicd by pa.yment of 2cjo (in cash,
or Treasury secu.:d. ties maturinG November 15, 1967, at par) of the a!flount of notes
applied for not subj ect to withclra~{8.1 D-l'ltil after allotn:ent.
The Secretary of the Treasury reserves the rirrht to reject or reduce any
subscription, to allot less than the a~nount of notes applied for, and to TI'okc
different percentaGe allotments to various classes of subscribers; and o.ny action
he may take in these respects shall be final. 'I'he bases of the o.llo-c.ments Hill
be publicly announced, and allotment notices \iill be sent out prolJ1FtJ.y upon allotment.
Subject to the reservatio::1s in the preceding paragraph, all subscriptions
instrv~:lcnt~.l.l:i ties thcYcof, pu'hlic p'.:ns:i.on
and retirement "mo. other public funds, intci·llation(~J. organ:i.z2.tions i:! I'lhich tr..e
United states holds nC::lbership, i'oreie,n ec:ntr~!l han~;s ancl 10rei[:)1 st'..:d,e3, Govcrnnent Investment Accounts, and tbe Fede:cc;,J. Rc~;c:,.'vc B:nl·~s, "rill 'oe o,l10'L ted i,l :Lull
if a sta-cerL',cnt is SUlx:,itted cEl'tifyinc; that the (jrWunc of t.l,e subscriDtion cbcs
10t excc{2cl the i:J:1ount of t118 tHO maturinc sccw:5.t:i C s O\Irl<2cl. or cor;trcv~tccl fm.·
)1XCchase for' vallJ.e, at 1 p.m., Eastern cJ0yJ_ic;Lt sav~inf, time, OC!tooer 2;-) > 18(:;1. P01 Y
mch subscriber may entr::r un adclitioncll SUbSC1·i:i.1"cion subject to a perccllt[;..::;e
Lllotrr.ent .

from States , political subdivisions or

All st1.oscril)crs 8:"e required to agree not to purcllClse or to sell, or to mo.]~c
1
1.
ny agreeL1ents iIith re,s:!.)t:;ct to tJ:'1e :pu:cc}),'::,se OT ,:~fLC
Oi.' Olt:Sl' Cl';I>0C;~LC).on oj. c:.11Y 0::'
he notes subscrihed for lmder this o.:.':'ferin[; "t.t a sJJ~'~cjfie rate or p-:1c:c, unt.il
fter midnieht Octobe:c 30 > 1~;G7.
J

•

'.1

•

COll'Jnercic.l ban}:s ill subuitting s1)bs(:ripti(m~) ':iill be rccILJ.il'ed to cc:,'t:iry
lat they have no beneficial int.crest in an:;; of t:ne s'·~~··JSc:.:.'ivl;ions tiley (,Gtc!' for
le account of their cu:,to;[;c:cs, and that t.heir cucotc:':c·,'.s }):J.':e no bene ~':i.cipl
lterest in the ou.nks I su'osc.:dytions for t.hej r o'.:n ci.ccO')n'c..

Estimated Ownership of November Maturities
as of August 31, 1967
(In millions of dollars)

3-578J

Bond

15& 1227
.November
400778J . Total
Note

Commercial Banks ••••••••••••••••.•••

690

576

1,266

Mutual- Savings Banks ••••••.•••••••••

Fire ............. '.........•.......
Life .......................•.••...

91
5

Total, insurance companies .•••••••

Savings & Loan Associations ••••.••••

Corporations •.......•....•.....•....

State & Local governments •••••••••••

100

155

255

All other private investors •••••••••

457

358

815

Total, privately held ••.••••.•••••••

1,407

1,187

2,594

Federal Reserve Banks and
Government Investment Accts •••.•••

612

6,948

7 ,560

Total Outstanding •••••••••••••••••••

2,019

8,135

10,154

Insurance companies

Office of the Secretary of the Treasury
Office of Debt Analysis

* Less

than $500,000.

October 25, 1967

TREASURY DEPARTMENT
October 25, 1967
FOR IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$2,500,000,000,or thereabouts, for cash and in exchange for
Treasury bills maturing November 2,1967,
in the amount of
$2,405,296,000, as follows:
9~day bills (to maturity date) to be issued
in the amount of $1,500,000,000, or thereabouts,
additional amount of bills datedAugust 3, 1967,
mature February 1,1968, originally issued in the
$ 1,OOO,357,000,the additional and original bills
interchangeable.

November 2,1967,
representing an
and to
amount of
to be freely

182 -day bills, for $1,000,000,000, or thereabouts, to be dated
November 2,1967, and to mature May 2, 1968.
The bills of both series will be issued on a discount basis under
competitive and noncompetitive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the clos1ng hour, one-thirty p.m., Eastern Standard
time, Monday, October 30, 1967.
Tenders will not be
received at the Treasury De~artment, WaShington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
F-I065

- 2 -

Immediately after the closing hour, tenders will be opened at thf
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the TreasuD
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on November 2,1967, m
cash or other immediately available funds or in a like face amount
of Treasury bills maturing November 2,1967.
Cash and exchange tendel
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bi lls are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereundel
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and thi
notice prescribe the terms of the Treasury bills and govern the
cond itions of the ir issue. Copies of the circular may be obtained f
any Federal Reserve Bank or Branch.
000

TREASURY DEPARTMENT
Washington

FOR RELEASE:

UPON DELIVERY

REMARKS BY THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
AT THE
HONORS CONVOCATION OF ROANOKE COLLEGE
SALEM, VIRGINIA
SATURDAY, OCTOBER 28, 1967, 10:30 A.M., EDT
As a proud alumnus of Roanoke College, may I congratulate
the faculty, Trustees, students, and all those responsible,
for the perceptive program marking this l25th Anniversary
Celebration of the educational contributions of Roanoke
College to the State, the nation and the world.
Haw fitting -- instead of looking back with satisfaction
to look forward to a fuller achievement of the ancient dream
of the founders.
Today, in this Honors Convocation the college -- this
community of intellectuals -- does honor to some of an older
and passing generation of its alumni for their performance in
this work-a-day world.
But our real concern today is that tomorrow's students
have the opportunity and equipment to move boldly into the
decades ahead. As the program notes, Roanoke College is
concerned with "preparing students for the developing world."
For those of us in the older generation who are privileged
to participate in this Honors Convocation, we are grateful.
We treasure this mark of your regard.
But, it is a bittersweet moment.
With it comes the reality to be faced -- our time is
rapidly passing. Soon a new generation will take over. What
we now on the top-side of fifty think and do will not matter
too much for too long. But what this new generation does or
does not do will matter terribly for as long as we dare
contempla te •

F-1066

- 2 -

It is my passionate conviction that what the new generation
of Americans do and think -- particularly those who are
university and college trained -- will determine the future
course of world affairs.
Justice Oliver Wendell Holmes once observed that the only
people he despised were those who stayed aloof from the
passions of their times.
Because of circumstances beyond their control, the new
generation of college trained Americans will be unable to
remain aloof from the passions of their times at home or in the
world at large. They have an inescapable responsibility to
become involved. They will be educated men and women and,
because of that, they will have a special responsibility to their
community. Because they are Americans, they will have an
inescapable responsibility to the world community. This
becomes clear as we face the facts of life that surround
America's position in the world.
Against this background the 125th Anniversary program
aptly chooses as its theme "A New Man for a New Age."
I will not discuss today this theme in the context of
responsibility to the pressing problems here in the
United States which call for a steady flow of extremely capable
people into decision-making roles in our domestic society.
The agenda at home for the on-coming generation is long and
compelling.
To meet these problems, as my colleague, John Gardner,
recently remarked, we need our ablest and most capable young
people in the dangerous and strenuous positions of leadership.
To use his words:
"We need them as leaders, not just as
buttoned-up and buttoned-down professionals
living secure and tidy lives. We need them
as leaders in business and in education and
in every other area of our national life -but most particularly we need them in public
life.
"We are producing the most educated,
articulate and brilliant sidewalk superintendents
the world has ever seen."

- 3 -

Apathy, cyn~c~sm, intolerance, self-deception, and an
unwillingness on the part of the individual to lend himself
to any worthy common purpose can lead to the decay of any
civilization -- even ours here at home.
The aspect of IiA New Man for a New Age" to which I will
invite your attention is the inescapable responsibility of
the educated American to the world community.
We must ask ourselves several questions. The first __
what kind of citizens of the world community are we? This
question can be answered. We shall attempt it.
The second question -- what kind of people as citizens of
the world community should we become -- cannot be so easily
answered. It is not a matter of individual judgment but of
collective decision. And only the future will tell whether we
as a people are setting our sights and fixing our goals wisely,
realistically and with a vision ,and courage that measure up to
the responsibilities our God-given opportunities have brought to us.
I can only give you one man's view based on one man's
observation, experience and participation.
In such a moment -- confronted by such a task -- one is
reluctant to etch even in broad outline his own personal
dream and conception of a new man for a new age. For in so
doing he will inevitably take a measure of his country and
his fellow countrymen.
In New York there is a play called "Man of La Mancha."
It is a new version of an old story of Don Quixote. It is
notable for one of the lyrics called "The Impossible Dream."
Dare we in envisaging "A New Man for a New Age"
the role of the educated American in adeveloping world -dare we dream "The Impossible Dream" of an America continuing
to lead a community of nations toward peace and security,
and toward that development for all men that has been the
dream of the poets, the philosophers, and the men of faith
down through the ages?
I covet that role for my country and its new generation
of educated Americans.

Why is the responsibility of the new generation to
become involved in the world community inescapable?

- 4 -

A short answer is that this new generation of educated
Americans will be leading a nation which in the greatness
of its power and wealth and influence no other nation in
the world can equal or, indeed, approach.
Our Unmense power is combined with a growing dedication
to a tradition of individual freedom and equal opportunity,
self-determination for nations, and an unparalleled
material development that promises the large-scale
conquest of poverty, illiteracy and disease for the first
time in human history. Given this combination of strength
and purpose, we bear upon our shoulders the mantle of Free
World leadership.
We have n.ot sought that leadership. Indeed, our
earliest tradition was isolationist. Under the
circumstances then existing, isolationism was both practical
and idealistic. Because our country was relatively small
in populatibn and wealth, geographically isolated from the main
movements of world politics, the educated American of the era
of Washington, Jefferson and Madison could realistically
satisfy his idealism by seeking to create in America a
splendid and inspiring example to all believers in popular
government everywhere.
But by the beginning of this century this nation had
grown too great to live alone in a world grown so small.
We came to learn that any threat to freedom anywhere is
a potential threat to our own freedom. In such a world
isolation offers only the illusion of security and strength.
In reality, it is the course of greatest weakness and greatest
danger.
But, for a while we retreated -- for a while we refused
to accept a share in the responsibility that history was
beginning to thrust upon us. International power politics -European style -- brought World War I and in its wake Soviet
Communism, a new form of imperialism. In the 1920's after
the horror of World War I we washed our hands of a world
which was not one of our making and not to our liking -- we
withdrew from an international effort to preserve world
order. We left the job of peace, security and economic
development to others.
Within two decades we found ourselves embroiled in a
world-wide depression and in the far greater horror of
World War II.

- 5 -

The cost of the world-wide depression was incalculable.
One by-product was an Adolph Hitler and a conviction, fed
by appeasement, that free democratic societies would Hot
resist aggression -- a view shared by Mussolini and the
Japanese war lords. The cost of the resulting war to the
world has been estimated at one trillion, one hundred and
fifty-four billion dollars -- taking no account whatever
of any property damage. In that war nearly one hundred
million people had died in the resulting maiming and disease
and starvation.
In the wake of that war came a new and serious challenge
posed by a Soviet Communist imperialism committed at the
outset to world conquest -- by outright aggression and by
subverson back~d by threat of aggression. Not far behind
was an even newer brand of Chinese Communist imperialism -sometimes competitive and sometimes cooperative with the
Russian brand -- but always contemptuous in public utterance
and act of competitive coexistence with a non-Communist
world.
The unleashing of these new forces coincided with
the collapse of the colonial system of the European powers.
The weakness of old nations and the emergence of 61 new
nations was coupled with growing demands and rising expectations
of underprivileged peoples everywhere for full and early
deliverance from hunger, disease, ignorance and grinding
poverty.
Meanwhile, the world has become increasingly interdependent as communication, missiles and the movement of ideas,
goods and people make our globe an ever smaller planet.
And the Space Age even promises to bring the other planets
closer.
In addition to the facts of history and communication,
there are some economic facts that place upon the United
States an inescapable responsibility in world affairs.
Consider the mighty productive power of the u.s. economy.
With a population of less than nine percent of the total Free
World population and less than six percent of the total
world population, this country enjoys a Gross National
Product that amounts to more than 42 percent of the total
Free World production and far exceeds the total output of all
the Communist areas combined. Or, expressed in different

- 6 -

terms, our Gross National Product per person exceeds $3,700
per year, more than twice the average $1,660 for European
industrial communities, more than seven times an estimate
of less than $500 per person for all the Communist world
combined, and more than 20 times an estimate of less than
$180 per person for the so-called less developed world.
And recent developments in the pace, pattern and
policies of the U. S. economy have added incredibly to our
power, wealth and strength. Next month the u.s. economy enters
the 81st month of an expansion which began in February 1961
and has continued uninterrupted by recession. This will
make the current expansion the longest in our history.
Moreover, our rate of economic growth has doubled in the
last six years over the pace of the previous six. From 1961
through 1966, income per person after taxes and after
correction for price changes has risen by 28 percent.
On a global scale the massive dimensions of our current
expansion may best be appreciated by some comparisons. In just
six and one-half years the u.s. Gross National Product
that
is the value of what we produce each year -- has risen by more
than $285 billion. This increase in the value of our
production in a short span of six years exceeds the total
1966 Gross National Product of France, West Germany and Italy
combined. In other words, it is as though since 1961 we
had annexed a national increment to our productive power
equal in size to the combined production of these three
great countries.
There need be no guilt complex about making responsible
use of this power and wealth. Surely, a large country,
already quite rich, has little to gain from imperialistically
exploiting other nations. Yet, there are those who shrink
from the responsibility that comes from this power and wealth.
Power, they say, corrupts. And they learnedly quote
Lord Acton. But the power and wealth of the United States
is also a fact. It must and will be used in the world
community for good or evil. That is why the responsibility
for its use is inescapable.
This brings us back to the world of reality in which
"The New Man for a New Age" in the United States must live.

- 7 Some Americans of this new generation, if one is to believe
all that one reads about the growing Hippie population and the
revolt of some intellectuals on some campuses against American
foreign policy, would prefer to be citizens of a small and
relatively impotent nation, ignoring what happens in the
world and acting as though their nation cannot change it.
Those who would have us come home from everywhere and mind
only what they consider our own business ignore the different
measure of responsibilities that attaches to a large and powerful
country in contrast with a small and weak one.
This was well put by a recent commentator in the July
issue of "Foreign Affairs". He said: "There
are a
.r,.
great many people who appear to think·that a great power is
only the magnification of a small power, and that the principles
governing the actions of the latter are simply transferable -perhaps with some modification -- to the former. In fact,
there is a qualitative difference between the two conditions,
and the difference can be summed.up as follows: a great
power is 'imperial' because what it does not do is just as
significant and just as consequential, as what it does.
Which is to say, a great power does not have the range of
freedom of action -- derived from the freedom of inaction
that a small power possesses. It is entangled in a web of
responsibilities from which there is no hope of escape:
and its policy-makers are doomed to a strenuous and unquiet
life, with no prospect of ultimate resolution, no hope for
an unproblematic existence, no promise of a final
contentment.
. .. It is no accident that all classical
political philosophers, and all depicters of utopia, have
agreed that, to be truly happy a human community should be
relatively small and as isolated as possible from foreign
entanglements. "
So here we have the first dimensions of the "new man for
a new age." He must expect the strenuous and unquiet life
with no prospect of ultimate resolution, no hope for an
unproblematic existence and no promise of final contentment.
I would suggest that the young Americans in the Armed
Forces who come into our homes on television from far-off
Vietnam, or are less dramatically engaged in the far-flung
operations of the Peace Corps, or who are diligently preparing
themselves for a constructive role in society by pursuing
their studies in classroom, dormitory and library rather than
cultivating the practice of civil disobedience -- these fill
out "the new man for a new age" concept. The Hippies and the
practitioners of civil disobedience seek an escape from it.

- 8 -

II.
In peering ahead to the all-important future for the
oncoming generations of Americans in the world community
we must ask ourselves what kind of people we have been in
the years just past. Continuity and consistency are
important. In these times we cannot lead the world to peace,
security and development sporadically.
My own assessment is that the American people have a
right to be proud of their performance in the world
community since World War II.
Of course, mistakes have been made, and hindsight is
always better than foresight. But, by and large, our
people -- young and old, rich and poor, business and labor,
Democrat,
Republican, or nonpartisan, leaders and rank
and file -- have met the great and common challenges before
us and seized the great and common opportunities.
We have helped mightily in a thousand ways to
restore the materially advanced countries which were ravaged
by war and did not fall behind the Iron Curtain.
We have sought and struggled for peace within the
framework of the United Nations and outside it.
We have lived up to our commitments in providing leadership and standing firm with other like-minded people against
Communist aggression and externally supported subversion,
supplying with our Allies sufficient force and power
to deter such efforts and to demonstrate beyond any doubt that
they are far too unrewarding and dangerous to be worth the
risk.
We have provided leadership in assisting on a multilateral
basis the new nations in their struggle to achieve both
essential stability and sufficient progress toward meeting
the rising needs and demands of their people.
We have given leadership in promoting the development
of an astonishing volume of world trade and investment across
international lines and promoted the highest degree of
international economic and financial cooperation ever experienced
in those countries that make up the Free World, resulting in
the greatest era of common prosperity and growth that many
have ever enjoyed.

- 9 -

We have helped to counter aggression in many guises
open or concealed -- on nearly every continent on the globe,
involving the freedom and self-determination of countries
great and small -- in Iran, in Greece, in Turkey, in
Berlin, in Korea, in Lebanon, in Taiwan, in the Congo,
in Laos, in India, and now in Vietnam.
But, this has not been a seeking of a "Pax America".
We have sought, not to act alone and apart, but to join with
other nations in forging effective alliances against
aggression -- aggression in the Atlantic Community through
the North Atlantic Treaty Organization, aggression in
Southeast Asia and the Pacific through the Southeast Asia
Treaty Organization, aggression in Latin America through
the Organization of American States, and aggression
anywhere in the world through the United Nations.
In the two decades since the end of World War II, we
have spent vast sums of money to maintain our military
security and that of the Free World. Our national
defense expenditures add up to over $850 billion in the
last twenty years.
More significant, the young people of both the generation
past and this generation have borne arms on behalf of all of
us and the future peace and security of the world in many
countries at many battle stations. Some have sealed the
sacrifice in blood. More than 33,000 Americans died on
the battlefields of Korea and more than 103,000 were
wounded. As of a week ago, more than 14,000 Americans
had died in Vietnam and more than 47,000 had been wounded.
We have helped organize and encourage the development
of great multilateral organizations for peace and
development and their accomplishments reflect, in large
measure, our leadership and our support -- the United Nations,
the International Monetary Fund, the World Bank, the Marshall
Plan, the Inter-American Development Bank, the Alliance for
Progress, and now the Asian Development Bank.

- 10 Through these multilateral efforts, through bilateral
government aid, and through numerous private channels -- such
as our private foundations and multinational corporations -we have devoted a substantial share of our wealth, energy and
resources to the mutually agreeable and beneficial task of
helping others increase their contribution to Free World
abundance. In the postwar decades we have contributed in
excess of $100 billion of our national wealth to helping
better the lives of others and provide a stable world community
of free nations through our major government foreign
assistance programs.
Indeed, in meeting the great challenges in the world
community the American people have not been found wanting.
Never in the memory of man has any nation done so much and
at such great cost, not to gain dominion over the lives or
the resources or the territory of others, but to help others
gain full and free dominion over their own destinies.
We have understood -- and our accomplishments have
proclaimed our understanding --·that with might must come
maturity, with wealth and riches must come wisdom and
responsibility, and with success must come service.
This is more than the history of an era past. It is
the living reality of right now. It is a dynamic moving
process. The foundations placed by Presidents Truman,
Eisenhower and Kennedy are being built upon soundly by
President Lyndon Johnson. There is continuity in conception
and consistency in achievement.
Look more closely in 1967, which has been a most
constructive year for the United States in the world
community.
True there is the stubborn refusal of a Ho Chi Minh,
abetted by his Soviet and Chinese allies, to accept repeated
invitations to unconditional negotiations, looking to a
peaceful settlement in Vietnam.
Yet through patient and persistent exchange of views,
American diplomacy has achieved agreements and participated in
the formulation of meaningful international arrangements that
promise much for the future of the world community.
The successful conclusion of the Kennedy Round negotiations to
reduce tariffs will -- if we have the courage and wisdom to resist
current protectionist moves -- lower trade barriers to many of the
goods produced by the United States and other nations, further
stimulating~_unparalleled growth of world trade in recent years.

- 11 -

The plan for the deliberate creation of a new world
monetary reserve asset to supplement inadequate supplies of
gold and relieve reserve currencies from additional strains
was recently approved by the member nations of the International
Monetary Fund after two years of intensive negotiations.
Other agreements encompass more than Free World cooperation.
The treaty for the peaceful exploration of space has been
recently ratified. This treaty, and the draft non-proliferation of nuclear weapon's treaty filed jointly with the Soviet
Unio~ constitute giant steps
to delimit the threat of nuclear
conflict.
The Presidents of the nations of the Western Hemisphere
decided this past spring to build a Latin American Common
Market during this next decade. The Asian Development Bank
became a going institution this year.
Even though there was a sharp and distressing war in the
Middle East, the fighting was ended in four days without the
great powers being drawn into conflict.
And so, my friends, the old generation does not say to
on-coming generations that it has always been successful.
But no man and no nation can justly deny what history makes
manifest: in the last twenty years we have not been found
wanting as citizens of a world community.
My generation has asked certain questions: Is it worthwhile to devote a portion of our human and material resources
to the military effort required for the promotion and preservation of peace and freedom in a world in which tyranny cannot
be imposed by aggression? Is it worth it to devote a share
of our resources to help shape a world that will, year by year,
witness nations, new and old, beat back the tides of hunger
and disease and illiteracy in an atmosphere of economic and
social progress and of political freedom and order? Is it
worthwhile to work with other like-minded nations in a wide range
of ever-growing economic, financial and cultural cooperation?
For two long decades, under four great Presidents -Harry Truman, Dwight Eisenhower, John Kennedy, and Lyndon
Johnson -- we have answered these questions in a clear and
unqualified affirmative, for that has seemed to us to be the
only answer that a truly great nation can and should give in
an inter-dependent world.

- 12 III.
And now we come to the final question which will be
answered -- like it or not -- by both the old and the new
generation. That question is: What kind of people as
citizens of the world community shall we become in the face
of adversity, disappointment and frustration?
There is a choice to be made. And, like most choices
in a confused and complicated area, the ultimate choice
arises out of some concrete decisions in concrete situations.
And the usual array of options is retreat, hold fast or go
forward. This choice is being presented to you at this very
moment in a new and novel form.
Vice President Humphrey said earlier this week:
"There are growing indications that the
coalition of retreat would.impose a new isolation
or maybe it is the same 'old isolation' -- on
America in a shrinking, hungry, troubled and dangerous world."
He cited danger signs in foreign policy -- the efforts
which would undermine the achievements of the Kennedy Round,
the attack on foreign aid which puts in jeopardy our whole
constructive postwar work of nation building, and the attack
on U. S. policy in Vietnam.
Those who would have America retreat from its world
responsibilities point up the difficulties where the going
is tough, the problems endless, and the deficiencies of others
somehow a moral challenge to quit. Perhaps they have never
taken to heart the wordsof Sir Thomas More in his "Utopia"
about the obligation of the true intellectual:
"If evil persons cannot be quite rooted out,
and if you cannot correct habitual attitudes as
you wish, you must not therefore abandon the
Commonwealth ••• you must strive to guide policy
indirectly, so that you make the best of things,
and what you cannot turn to good, you can at
least make less bad. For it is impossible to do
all things well unless all men are good, and this
I do not expect to see for a long time."

- 13 So it is important that we maintain our morale, our faith
in ourselves, and our role in the world community regardless
of the difficulties, frustrations and disappointments.
The single most acute situation in which our morale, our
faith in ourselves, and our role in the world community is
being tested is Vietnam.
Heretofore, the danger to America's role of responsibility
in the world community has come from an unwillingness to become involved, as in the late Thirties -- a withdrawal in the
wake of success or victory, as in 1919 -- an indifference or
apathy to a threat not fully perceived, as in Cuba in the late
Fifties.
But today a new and more terrifying danger signal sounds.
It is the rising cacophony of voices being increasingly heard
that urge or suggest that in one way or another the United
States contrive a withdrawal from its international commitment
specifically in Vietnam.
Let us be clear about this issue. This is not a debate
about whether the United States should enter into a commitment
or should have become involved in Vietnam. We are in Vietnam.
Our commitment is clear. These are demands, growing increasing1y
strident, culminating in a disgraceful demonstration last weekend
before the Pentagon, that the United States go back on its
commitment and, in one way or another, reward aggression by
North Vietnam against South Vietnam.
The SEATO Treaty, approved in 1954 with only one dissenting
vote by our Senate, declares that:
"Each party recognizes that aggression by
means of armed attack in the treaty area ••• would
endanger its own peace and safety, and agrees
that it will in that event act to meet the common
danger."
The fidelity of the United States is not subject to the
veto of some other signatory -- and five signatories have
engaged their forces alongside Korean and South Vietnamese
troops.

- 14 I wish to join with the eminent and courageous Secretary
of State Dean Rusk, who recently told the American people:
"Let me say, as solemnly as I can, that
those who would place in question the credibility
of the pledged word of the United States under
our mutual security treaties would subject this
nation to mortal danger. If any who would be
our adversary should suppose that our treaties
are a bluff, or will be abandoned if the going
gets tough, the result can be catastrophe for
all mankind."
What is the objective of our treaty commitments? It
is the overriding objective of our foreign policy -- the
establishment of a reliable peace. It is to prevent World
War III. It is to stop aggression before it becomes a pattern
of international conduct.
Our several alliances in the Pacific reflect our profound
interest in peace in the Pacific and in Asia, where live twothirds of the world's people who are no less vital to our
national interests than are the people of our own hemisphere
or those of the NATO area.
Th so-called "war of national liberation", which is a
new phrase for Communist subversion aided and abetted from
outside the afflicted country, is not peculiar to South Vietnam.
In one form or another it is apparent in Laos and Thailand.
There was a major Communist effort in 1965 to take over
Indonesia and its more than one hundred million people.
And "wars of national liberation", if successful in
achieving Communist domination in Southeast Asia, will not be
confined to that area. The spectre of Castro, the adventures
of Che Guevara, and recent incidents in other parts of the
Western Hemisphere remind us that they can strike nearer home.
The issue on Vietnam is coming into clearer focus as
the public debate waxes in the Congress, in the press, on
every television set, and on every street corner. It is:
shall we fall back, get out, go all out, or stick it out on
the course our Commander-in-Chief has chosen?

- 15 -

Eyes and ears allover the world are watching and listening. They are making up their minds about what kind of people
we are going to turn out to be.
Of course, Hanoi is listening. They remember that they
defeated France in Paris -- not Vietnam. They seem determined
to turn down all offers to negotiate while their hopes are
being raised by the sounds of dissent in the United States.
And Moscow is listening.
And Peking is listening.
For much of their future plans will hinge on the outcome
of this debate and the kind of people we Americans turn out
to be in the hot crucible of divided opinions.
After all, as recently as this year, to celebrate the
50th anniversary of the Bolshevik Revolution, a Soviet Communist party document was issued in Moscow which stated:
"Imperialism, notably U. S" imperialism, was
and continues to be the main enemy of the national
liberation movement."
Should that "main enemy" cut and run in Vietnam, how many
"national liberation movements" will be mounted in the years
to come?
And, yes, there are others listening to this debate in
many other capitals -- of countries allied to us -- of
countries uncommitted.
Prime Minister Lee, of the Republic of Singapore,made a
most revealing statement on one of the nationwide television
networks last Sunday, saying:
"I have no doubt that your President has
got resolution, and determination and restraint,
and I have also no doubt that your Secretary of
State and Secretary of Defense have got it, but
what, I think, in your kind of open, democratic
society you must demonstrate, and which I have
really come here to try and understand better,
to watch the proceedings in your presidential
elections next year is whether you, as a people,

- 16 have got that resolution, that stamina, that
perseverance and, most important of all,
infinite patience and capacity to hold back
your desire to settle this quickly and get it
over with, because this is a very different
kind of war."
A little bit later the Prime Minister made another
observation apropos the position of the uncommitted people
of Asia, Africa and Latin America. He said:
"And if you want people to take a stand,
you have got to demonstrate that as a people
you have got what it takes; that Asia does
matter to you and does matter to the Free World,
as you call it."
So, my good friends, it is not the President of the
United States, our Commander-in-Chief, and his principal
aides who are on trial in this ordeal. Ho Chi Minh knows
where they stands. So do the leaders of the Asian countries
who are fighting by our side in South Vietnam. So do the
leaders of the uncommitted people. What they are not sure
of is where the American people stand because they are confused by the babel of dissent.
Therefore, for one, I welcome the emergence this week
of a new voice which I like to believe is the truly authentic
voice of my generation. I refer to the organization announcement of the Citizens Committee for Peace in Vietnam, and its
statement that:
"We strongly support our commitment in Vietnam
and the policy of non-compromising, although limited,
resistance to aggression ••• We believe that, in
this, we speak for the great 'silent center' of
American life, the understanding, independent and
responsible men and women who have consistently opposed rewarding international aggressors from
Adolf Hitler to Mao Tse-tung. And we believe that
the 'silent center' should now be heard."
Signatories to that statement and members of the new,
nonpartisan Committee include former President Truman and
former President Eisenhower, and I, for one, have no doubt
that the spirit of John F. Kennedy approves and appreciates

- 17 the statement of the Committee, and in particular, these
further words:
"We are not supporters of a President or
an Administration; we are supporters of the
Office of the Presidency."
And so, my friends, in conclusion, my message from an
older generation to the "New Man for a New Age" at Roanoke
College and its sister institutionsconcerning his role in
the world community is a simple one.
You are inescapably involved in the affairs of the
world. Of necessity you will have to be a leader -- a
leader in the further advance to durable peace, security
for all nations, development and opportunity for all people
or a leader in a personal and national retreat from a great
tradition that started with the Declaration of Independence
and the Constitution and has flowered in a United States
foreign policy shaped in the last twenty years by four great
Presidents.
The path for continued advance on the course set will
not be easy; the problems will be endless. Courage, stamina
and vision must match training and skill. You will not be
loved in the world -- no great power enjoys popularity in
world affairs. But upon you falls the duty to be sure the
United States is respected.

000

TREASURY DEPARTMENT
,

)R RELEASE 6: 30 P.M. I

:mday, October 30, 1967.
RESULTS OF TREASURY I S WEEKLY BILL OFFERING

'!he Treasury Department announced that the tenders for two series of Treasury
Lils, one series to be an additional issue of the bills dated August 3, 1967, and the
;her series to be dated November 2, 1967, which were offered on October 25, 1967, were
~ned at the Federal Reserve Banks today.
Tenders were invited for $1,500,000,000,
~ thereabouts, of 91-day bills, and for $1,000,000,000, or thereabouts, of 182-day
~lls.
The details of the two series are as follows:
~GE

OF ACCEPTED

lMPE'l'ITlVE BIDS:

High
Low
Average

91-day Treasury bills
maturing February 1, 1968
Approx. Equiv.
Price
Annual Rate
98.860
4.516.'
4.557~
98.848
98.852
4.542~

182-day Treasury bills
maturing May 2, 1968
Approx. Equiv.
Price
Annual Rate

97.453

5.0g8~

97.442
97.450

6.06~

5.044~

33~ of the amount of 91-day bills bid for at the low price was accepted
25~ of the amount of 182-day bills bid for at the low price was accepted

TAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

District
Boston
New York
Hhllade 1phia
:leveland
Richmond
Hianta
~hicago

3t. Louis
Unneapo1is
Cansas City
)allas
)an Francisco
'roTALS

AcceEted
A12E1ied For
$ 18,269,000 $ 8,069,000
1,134,999,000
1,673,909,000
11,585,000
23,585,000
18,601,000
35,423,000
9,645,000
15,645,000
28,865,000
44,120,000
141,973,000
214,053,000
54,574,000
65,079,000
13,009,000
22,338,000
15,076,000
23,418,000
12,199,000
22,467,000
51,969,000
126,933,000
$2,285,239,000

$1,500,564,000

ApE1ied For
$ 20,155,000
1,432,796,000
13,684,000
20,032,000
11,028,000
27,626,000
180,202,000
46,095,000
18,162,000
12,547,000
19,211,000
110,066,000

AcceEted
$ 8,930,000
754,569,000
5,684,000
19,995,000
6,278,000
20,701,000
77,195,000
42,570,000
9,812,000
8,916,000
8,611,000
36,743,000

$1,911,604,000

$1,000,004,000

Includes $210,194,000 noncompetitive tenders accepted at the average price of 98.852
Includes $126 128 000 no~competitive tenders accepted at the average price of 97.450
These rates a~e o~ a bank discount basis. The equivalent coupon issue yields are
~.67~ for the 91-day bills, and 5.26~ for the 182-day bills.

F-I067

TREASURY DEPARTMENT

October 31, 1967

FOR IMMEDIATE RELEASE

UNITED STATES-CYPRUS INCOME TAX TREATY
TERMINATES DECEMBER 31, 1967
The Treasury today notified taxpayers that the United
States income tax convention with Cyprus will terminate as of
December 31, 1967.

For the purpose of the United States tax,

the convention will not apply for taxable years beginning on
or after January 1, 1968.

Notice of its desire to terminate

the treaty has been given to the U.S. by the Government of
Cyprus in accordance with the provision of Article XXIV (1) of
the treaty.
The convention to avoid double taxation with Cyprus
carne into effect January 1, 1959 when the treaty between
the United Kingdom and the United States was extended to
Cyprus and a number of other then dependent territories of
the United Kingdom.

It remained effective as respects Cyprus

after it became independent.
The parties have been considering changes in the convention
but were unable to reach agreement.

It is expected that

discussions will continue in the future, aimed at entering into
a convention to replace the one terminated this year.
000

F-1068

TREASURY DEPARTMENT
Washington

FOR A. M. RELEASE
THURSDAY, NOVEMBER 2, 1967
REMARKS BY THE HONORABLE STANLEY S. SURREY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
NATIONAL FOREIGN TRADE COUNCIL CONVENTION
THE WALDORF-ASTORIA HOTEL
NEW YORK, NEW YORK
WEDNESDAY, NOVEMBER 1, 1967, 3:00 P.M., EST
THE UNITED STATES TAX SYSTEM AND INTERNATIONAL
TAX RELATIONSHIPS
CURRENT DEVELOPMENTS, 1967
There is always a fascination and a challenge in speaking
on the topic of international tax relationships. The
subject is superb for exhibiting the difficulties and
obstacles, of theory and of practice, that beset the constant
task of improving a nation's tax system. It presents at the
outset a panoramic view of the mix of factors which shape
the changes in a country's tax structure -- the presence of
complex policy issues which must be analyzed and for which
acceptable solutions must be found, the task of embodying
those solutions into acceptable legislation, and the constant
effort to maintain a proper day-to-day application of the
legislative solution in the context of a tax administration
that must be both adversary and non-adversary in character.
These aspects can be seen of course in many facets of our tax
system.
But in the area of international tax relationships
we must go still further. For here we have the added task
of developing principles and policies to prevent the
international tax anarchy that otherwise would exist if each
nation applied its domestic tax structure without regard to
the tax structures of other countries. And since we are
therefore involved in achieving international taK harmony,
the framework of the tax system we must shape goes beyond
the unilateral domestic tax structure to cover international
tax accommodations through tax treaties and other international agreements. The task of giving shape to the
United States tax system in its international relationships
is thus as complex as it is endless.
F-1069

- 2 Our international tax relationships must begin with our
domestic tax structure and the rules it unilaterally
prescribes for those relationships. In recent years legislative
activity has established the current framework of our statutory
rules for this purpose -- first in 1962 as respects the
United States taxation of foreign income and then in 1966 as
respects the United States tax treatment of foreigners
rece~v~ng income from the United States.
In both cases, but
much more notably in 1962, the legislative patterns were
shaped in circumstances where differences of opinion existed on
the analysis of the policy issues and the character of the
solutions. Of necessity the ultimate legislative result
involved compromises at many points, and the need to reduce
compromises to legislative language in a technical field is
not conducive to a simple set of statutory rules. Undoubtedly
experience and further analysis will clarify the perspective
in which our unilateral rules must be viewed. Any efforts
at change, however, are not likely to come as long as there
exist important sectors seeking to turn back to a world in
which tax havens are encouraged and hidden incentives are
obtained to enlarge capital outflows to other industrialized
countries.
There are still those who believe that the path to
better tax rul~s lies in a crossing of the Internal Revenue
Code with the National Geographic magazine. But whatever may
be the undoubted attractions of many romantic countries or
tropical islands -- of which I gather the Cayman Islands is
the most recent discovery -- it is hard to conceive of an
enduring structure of international tax rules being founded
on these vagaries of geography, history, and island
jurisprudence. There would be much of the art of the absurb
in having imposing edifices of multinational corporations
shaped by these vagaries and tied by tax strands to the
islands of the Caribbean. We must also recognize the
attraction that the intricacies of the present statutory
structure hold for those whose talents lie in this fashioning
of elaborately structured tiers of corporations carefully
spotted in these havens -- indeed the fascinating temptations
that exist in the chains and grouping of corporations under
the minimum distribution rules combined with the foreign tax
credit rules appear irresistible to Some. And so the
Internal Revenue Service must maintain a constant vigilance
in guarding the basic principles and rules of the statutory
structure. You may rest assured that this vigilance is being
exercised.

- 3 Given these unilateral statutory patterns we are
continuously directing our efforts to improving international
accommodation through tax treaties and to improving the
day-to-day administration of our statutory and treaty rules.
INCOME TAX TREATIES
In considering the international tax accommodations we
are reaching through tax treaties, we must divide the subject
between developed country treaties and those with less
developed countries.
Developed Countries
In the past several years the United States has engaged
in extensive treaty negotiations with the European countries.
The causes are threefold: to accommodate existing treaties
to the changes that have occurred in the domestic tax systems
of those countries, primarily in their corporation taxes; to
adapt our treaty provisions as far as appropriate to those
in the Model DEeD Convention; and to reach treaties with
two European countries outside our treaty network, Spain and
Portugal.
As a consequence of these negotiations, our objectives
have in large part now been accomplished. We expect in the
coming year to sign a treaty with Portugal. We have, through
the process of these negotiations, worked out a United States
model which represents our accommodations to the OECD Model.
This United States model is pretty much represented by our
recent treaty with France, and it E thus the basis of our
current discussions with other countries. Of course,
refinements will develop in future negotiations, but the basic
framework that has evolved through our recent negotiations
appears to meet our needs. Our next steps are likely to be
revisions of treaties concluded some time ago. Thus, we
are now negotiating with Finland, and are considering the
appropriateness of revisions of our treaties with other
European countries.
The negotiations with the United Kingdom, Germany and
France illustrate the complexities involved in our efforts
to maintain a consistent set of international tax principles
to guide our negotiating posture. Each of these countries
has a different corporate tax structure: the United Kingdom
now has a corporate tax separate from the individual income
tax in the pattern of the United States structure; Germany

- 4 has a deduction at the corporate level for dividend
distributions which lowers its effective rate on distributed
profits; France provides the shareholders with a credit for
a portion of the corporate tax that goes far to eliminate the
shareholder payment of a tax on the dividends he receives.
The United Kingdom treaty negotiations presented primarily
the problem of the level of the withholding rates on dividends,
since the corporate taxes of the two structures are similar,
and the result was a compromise of 15 percent. The German
treaty presented the problem of seeing that American firms
with direct investments were not denied the benefit of the
corporate deduction for distributed profits and at the same
time achieving a reciprocal withholding rate. This was
accomplished by a 15 percent rate, with a provision to
protect Germany from abuse of the corporate deduction.
The treaty with France presented the problem of dealing
with the discrimination against American investors vis-a-vis
French investors by reason by the French law not granting to
foreign shareholders the benefits of the credit for the
French corporate tax. The French denied that in principle
a discrimination existed and asserted that the restriction
of the credit to shareholders subject to French income tax
was proper. The United States felt that if the allowance of
the credit means that the French 50 percent corporate tax is
in part a shareholder tax, then domestically-owned French
companies are paying a lower corporate tax rate than foreign(including American) owned French companies, which is
discriminatory in fact. If, on the other hand, the French
corporate tax is a full 50 percent and the credit instead
represents a reduction in the shareholder tax an dividends,
then since the reduction eliminates such tax for the most
part, the French should not claim a withholding tax on forei~
shareholders. A withholding tax on foreign shareholders is
but a counterpart to a domestic income tax on shareholders,
and if that domestic tax does not exist, the assertion of
a withholding tax is discriminatory.
The net result of these conflicting views was the French
agreement to a 5 percent withholding tax on parent-subsidiary
dividends, a reduction from the 15 percent tax under the
previous treaty. Since the United States is in favor
generally of a 5 percent withholding rate in parent-subsidiary
cases, the rate is reciprocal. The United States in effect

- 5 reserved its view that the French tax structure could still be
regarded as discriminatory and that lower withholding rates
an the part of the French on direct and portfolio investment -which need not be reciprocated on our side -- were appropriate.
(The United Kingdom, when it previously had a corporate
structure which gave a full shareholder credit, allowed that
credit to foreign shareholders.) We were the first country
to negotiate with France after the adoption of its new
corporate tax structure. We thus have an understanding that
if France accedes to this contention advanced by any other
country, modifications of its treaty with the United States
would be in order. It is interesting to note that France
has recently stated it is considering removal of this discrimination
against foreign shareholders in connection with its treaty
negotiations with the Common Market countries.
The United States also has the view that the denial by
France under its new corporate system of a credit to French
shareholders for the portion of the French corporate tax
levied on income of a French corporation from sources outside
France (or for the foreign corporate tax where France, in
effect, offsets that foreign corporate tax against the French
corporate tax) discriminates against Frenchmen who invest
abroad as against Frenchmen who invest in France. This
similar denial of a credit, for the foreign corporate tax, to
a French shareholder directly holding a portfolio investment
in a foreign corporation is also discriminatory. (Here
also the United Kingdom had not followed this differentiation.)
The French, on the other hand, see this as a matter of French
internal tax law even though the results affect international
investment. The treaty does not deal with this situation.
As a consequence of the differing views possible on the
treatment to be accorded non-residents on income from foreign
sources between countries that use the credit-to-shareholder
approach and countries that do not, it is evident that more
international discussion is needed of the principles that
should guide negotiations in these situations. The OECD
~odel Convention does not deal with this matter.
Since
other countries beside France use or may turn to the
~redit-to-shareholder approach, such a discussion has a wider
importance.

- 6 -

Less Developed Countries
As the less developed countries of the world seek foreign
private capital to hasten their economic development, it is
natural that they begin to think of tax treaties to govern
their tax relationships with the industrialized countries
supplying that capital. This aspect is especially evident in
Latin America, and the major countries of that continent are
intensively considering treaties with European countries,
Japan, and the United States. They are thus commencing the
process of country-by-country negotiation from which will
evolve the pattern of treaties between the industrialized
and these developing countries, just as those industrialized
countries have through the negotiations of the past two
decades produced the present general pattern governing the
treaties among themselves.
In most cases Latin American countries approach this
negotiating process with domestic tax systems somewhat illadapted to international transactions. As a consequence
their unilateral tax rules often produce obstacles to international trade and investment. There is in general the
realization in these countries that, through treaties,
modifications are in order to conform their unilateral
jurisdictional rules to the current international tax standards.
The modifications will not necessarily come all at once, for
the newness of the whole process and the degree of modification
sometimes needed combine to evoke a cautious and hesitant
approach. These countries are apparently also willing to
reduce their withholding taxes to more appropriate levels in
those cases where present races may constitute a barrier -though not to the levels of the OECD Convention. But in
making these reductions, the Latin American countries want
assurance that the reductions will benefit the taxpayerinvestors of the industrialized countries and not the
Treasuries of those countries. In addition, in making
accommodations to international standards and joining in
treaties these countries want the industrialized countries
to take some step representing an encouragement to investment
by their taxpayers in the Latin American countries. Encouragmg
trade and investment is the objective of tax treaties in
general; but for these developing countries, this objective
takes on a more urgent meaning.

- 7 The United States position is one of recognition of the
problems that the Latin American countries face in the somewhat unfamiliar area of international tax treaties. It is
also one of accepting the basic lines of approach guiding
those countries in their endeavors. This position is based
on a consideration of the bilateral tax relationship between
the United States and a treaty country and hence is
essentially on a "per country" view of the operation of the
treaty in the context of our tax system. As to the aspect of
encouragement to investment, the United States approach is
to offer to extend our domestic 7 percent investment credit
to investment, on similar terms, to those countries and
thus provide the same treatment as investment in the
United States. This approach on our part permits us to
maintain an equality of treatment between our investors at
home and our investors in those countries while still
favoring those countries over the industrialized countries.
In taking this approach, we have had to assume the task
of demonstrating to these countries that this investment
credit extension is a better contribution on our part to
meeting the treaty objective of encouraging investment than
a tax-sparing concession would be. A number of industrialized
countries are following the tax-sparing approach and some
Latin American countries have, we believe uncritically,
accepted the view that they benefit more from tax-sparing
than from an extension of the credit. Indeed, many of our
own taxpayers have the same belief.
It can be shown that the direct cost to a less developed
country of entering into a tax-sparing treaty with respect to
direct investment is greater than the cost to it of entering
into an investment credit treaty. The former often requires
a large reduction in the withholding tax of the Latin American
country to make the tax-sparing concession of real benefit to
the investor from the industrialized country. This is not
the situation under an investment credit treaty. On the
other hand, the benefit to the United States investor of a
tax-sparing credit for a treaty reduction in withholding rates
may frequently be small or even nil, as it would require an
improbably large reduction in the withholding rate to get
significantly below the point where a net United States tax
becomes payable under the existing tax credit system.
In other words, in many cases the benefit of the rate reduction
would accrue to the taxpayer with or without tax-sparing.

- 8 The benefits to a firm under the credit treaty, on the other
hand, are cumulative, for it receives both the credit and
the withholding rate concession of the other country, where
the latter brings the Latin American country's effective rate
to an approximation of the United States corporate rate.
The benefits to the taxpayer-investor under a treaty providing
the investment credit and moderate withholding rate reductions
are thus greater than the benefits under a treaty prov/idin g
tax-sparing and drastic withholding rate reductions.l

1/ Suppose a foreign country makes a moderate reduction in
its withholding rate on dividends to reach an effective
over-all rate of 48 percent in return for the extension
of the investment credit. The benefits of this withholding rate reduction go to the U.S. corporate taxpayer,
and in addition he receives the benefits of the extension
of the investment credit, so that the concessions of the
two Governments produce a cumulation of benefits -- as
they should to avoid any wastage of the concessions. But
if the foreign country reduces its withholding rate still
further, this time in exchange for tax-sparing rather
than the investment credit, a part of the reduction would
still have benefited the U.S. corporate taxpayer even in
the absence of tax-sparing, in view of our lack of grossup under the foreign tax credit (thus producing an effective
rate of our tax that is less than 48 percent). The
balance of the withholding reduction will only benefit the
u.S. corporate taxpayer if tax-sparing is granted. But
the full benefit of the withholding rate reduction,
achieved in this latter manner, would be distinctly less
than the cumulative benefit the U.S. corporate taxpayer
would have obtained under the first approach, given
the limits of the reductions in withholding rates the
Latin American countries are likely to make even under
tax-sparing treaties. Hence the U.S. corporate taxpayer
does not gain as much, and the foreign country loses more,
under the tax-sparing treaty. If the foreign country
under an investment credit treaty wants to benefit a
U.S. corporate taxpayer still more, it could of course
lower its withholding rate to the point where it matches
our effective rate in the absence of gross-up -- and
this lowered rate would without tax-sparing be of benefit
to the taxpayer, cumulative with the investment credit.

- 9 -

Continuation of Footnote 1, page 8.
,

-------------------------------------------------------------{-To illustrate by a numerical example, assume a
Latin American country with a corporate tax of 35
percent and a withholding tax of 25 percent. The
combined tax on the profits of a U. S. subsidiary
remitted to the United States would total 51.25
percent. A reduction in the withholding rate to
20 percent would lower the effective foreign rate
to 48 percent. But with a 35 percent foreign
corporate rate the combined United States and
foreign effective rate on income from the
Latin American country is only 43.45 percent.
(This is the sum of 35 units foreign corporate
tax paid plus the net amount of 8.45 units
payable to the United States on the dividend of
65 units, after allowing a credit of 22.75 units
_
for the foreign corporate tax L65(48%) - 65(35~8.42/.)
Thus any reduction in the withholding rate down to
13 percent (65x13%=8.45) would benefit the
United States investor. With withholding rates of
less than 13 percent the foreign tax credit
becomes less than U.S. tax liability and taxsparing would begin to take effect. But even if
the Latin American country agreed to lower its
withholding tax from 25 percent to 10 percent, the
value of the investment credit would exceed 3 percent
of the dividend -- which would be the value of a
tax-sparing credit -- over an indefinite period,
using moderate assumptions about investment,
profits and dividends.

- 10 -

Even in the case of statutory investment incentive coninvolving a reduction in the basic corporate tax
of the Latin American country, the investment credit over the
typical time period of those concessions will compare favorably
with the tax-sparing approach in terms of value to the
investor. ~/ In addition, the credit comes at the outset as
the investment is made, is increased as additional investment
is made, and is thus not dependent as is the tax-sparing
mechanism on the success of the enterprise or the distribution
of profits.
ces':';~ions

For example, if a Latin American country assumed to have
a 35 percent corporate rate granted full exemption from
that rate to new firms in a certain area,it would take
about six years for the tax-sparing credit to match the
investment credit. Another form of incentive sometimes
used is a 50 percent reduction in income tax: in this
case, a profitably operating U.S. subsidiary entitled to
this benefit should clearly prefer the investment credit
to the tax-sparing credit as the latter would not match
the investment credit in tax savings until after the tenth
year, which is probably the final year of the reduction.
The assumptions used in these examples are: (1) the investment credit is earned on 60 percent of the initial investment for a new company and 75 percent for an operating
company. The creditable assets acquired in either case
are depreciated on a straight-line basis over an eight-year
period with depreciation reserves applied to acquire additioo~
creditable assets; no credit is earned on reinvested
profits since these are assumed to total only one-half of
current profits; (2) the profit rate is assumed to be 20
percent before tax; for a new company this is approached
gradually over the first four years (zero in year 1, then
5 percent, 10 percent, and 20 percent) while for an operating
company it prevails throughout; (3) one-half of aftertax profits is distributed; and (4) the discount rate is
15 percent.

- 11 -

Also, under the investment credit approach the United
States would apply its tax in the same way to income from
the treaty country as to income arising within the
United States. As a result, the decision to invest in a
treaty country can be made on economic criteria without
institutional pressures. In constrast, the tax-sparing
approach would undo this basic aspect of United States control
over application of its tax system by permitting different
rates to apply to income from different countries; it would
encourage investment in the treaty countries which provide
the largest unilateral tax relief. If tax-sparing were to
be generally accepted by the industrialized countries, the
result might be a competitive struggle among the developing
countries to divert resources to the lagging regions or
sectors of their economies by offering the largest tax
subsidies. To the extent that such countries choose to try
the tax incentive route in their legislation, the benefit
of the rate reduction or exemption is available to United
States subsidiary firms insofar as they retain the profits
in those operations. But a tax-sparing credit on our part
is unacceptable on tax policy grounds and less satisfactory
in terms of encouraging investment in developing economies
than the investment credit extension. The fact that the
investment credit approach compares favorably with tax-sparing
in quantitative value reinforces our position that the
extension of the investment credit is the more efficient and
desirable approach.
Our recent treaty with Brazil -- now before the Senate
is an illustration of the lines of main development that we
are following in our approach to Latin American treaties.
However, we would hope also to include a provision deferring
the taxes of the two countries in the case of transfers of
patents and know-how for stock, including a minority interest,
in a corporation of the developing country. We are
presently engaged in negotiations with Argentina, Jamaica,
and Trinidad and Tobago, and in consultations that may
develop into negotiations with several other Latin American
countries.
For above all, the United States holds the view that
these treaties will be of assistance to the economic
development of Latin America and in turn that development
will be of benefit to the United States, both in material

- 12 -

ways as respects our export trade and in the many intangible
values that flow from viable, growing countries in that area.
Further, the experience gained by those countries in developing
their international tax relationships with the outside world
will be of assistance to them when they turn, as their common
market concepts grow more tangible, to working out their tax
relationships among themselves.
One more word about United States tax treaties with less
developed countries. The United States long ago put itself
at a distinct handicap in negotiating with these countries
when, by statute, it unilaterally extended the foreign tax
credit to all the countries of the world, and then more
recently when it unilaterally added to the ~alue of that
credit through the adoption of the over-all limitation. We
unilaterally avoid the adverse consequences to another country
of the double taxation of our traders and investors. What is
more, through the over-all limitation we even protect a
foreign country whose tax rates applied to income from that
country achieve levels considerably above international norms.
However, when these negotiations turn to talk of who is
conceding more and the like, the less developed countries will
often dismiss our allowance of the foreign tax credit as any
concession at all to be weighed in the negotiations, since
it is already in our Internal Revenue Code. The United
States thus enters these negotiations with a most valuable
card removed from its hand. Other industrialized countries
are not so handicapped: Sweden and Germany, for example, do
not have fully worked-out unilateral statutory relief against
double taxation and hence their treaties are needed to give
this benefit fully to the developing country. Few European
countries, if any, use the over-all limitation.
We were not so profligate in the Foreign Investors Tax
Act of 1966 when we unilaterally reduced the weight of our
estate tax and restricted the scope of our income tax as
respects foreigners with interests in the United States.
For we there provided that the President could return to the
former rules with respect to a particular country if he
found that the country, when requested to do so by the United
States, had not acted to make its taxes no more burdensome on
our nationals than those we imposed on its nationals.
As a consequence we might well ponder whether the goals
of the United States, and equally the goals of your organizatioo
in achieving those international accommodations by other
countries that will be of benefit to your members in their
investments and trade abroad, would not be further advanced

- 13 -

by some approach under the foreign tax credit that would
operate to give the United States a better negotiating
position -- that would let us keep in our hand a card
representing extension of the foreign tax credit. For
example -- and just as an example to spur further thought
on this subject rather than a proposal -- using the analogy
to the Foreign Investors Tax Act, our Code might perhaps
provide that the President could withdraw the benefits of
the over-all limitation from a country which, when requested
to do so, did not desire to include in a treaty rules
compatible with what we regard as generally accepted
international standards. While this could have an effect on
our investors, and it could therefore be restricted to new
investment or maybe new investors in the foreign country, the
motivation is clearly not that but rather to obtain a better
bargaining position that would assist all of our investors
and traders by permitting the United States to more readily
achieve proper tax treaties and proper international
accommodations. Indeed, once this authority were given to the
President, I very much doubt that he would be required to
exercise it. There may be other approaches to this problem.
I assure you that our negotiators would welcome suggestions
that would lessen the handicap they -- and in turn your
members -- now bear in achieving appropriate treaties.
ESTATE TAX TREATIES
In the Foreign Investors Tax Act of 1966 the United
States provided a unilateral posture for our estate tax that
resembles the situation regaTding our income tax as respects
foreigners with interests in the United States. We now have
a reasonably moderate estate tax structure at rates lower
than our domestic rates(but without the marital deduction)
that in this sense compares with our 30 percent withholding
rate and its relationship to our regular income tax rates.
We have jurisdictional rules which permit us to t ax: all
United States interests that foreign decedents may own
land, stock of United States corporations, obligations of
United States corporations, bank deposits, and so on -- just
as we possess jurisdictional rules under the income tax
that enable us to assert our proper claims as a source country.

- 14 Unc1er the income tax, through treaties following an
intr.'Pl<HLonal peJ,ttprn as evidenced in the OECD Model, we
hr:lve T.. r1.E:)·,·e :n'pr CD;' l.ate reduced the leve 1 of our 30 percent
witnholding tax and limited the assertion of our
il~risdicti.on to tax at source in return for reciprocal
treatment. We have, however, confined these steps to
r:ou.ntries that possess responsible income tax systems and
v7 h ich grant a credit for any income taxes we might impose.
As a c~nsequence, our relinquishment of source jurisdiction
.±'f, s not result in our becoming a tax haven for fore igners.
Rather, our concessions either lower our effective
r-ates to an appropriate international level or simplify
the tax 3spects of tra.de and investment even where our
tax wt.""mld he fully creditable -- and thus yield revenue
to the foreign Treasury -- in return for similar
CC)Tlcess ions.
\,vhere our concessions at source have turned
au t in prac t ic(~ to make us into a tax haven, we have
moved to eliminate this defect in our treaties -- as in
the c:ase of the Netherlands Antilles and Canada.
W2 now face similar issues under the estate tax.
Tbt;: OECD Hodel Estate Tax Convention, for example, provides
that the country of source shall yield its estate tax
on the decedent's investment in its stocks and debt
obligations and thereby confines jurisdiction to tax in
this situation tothe country of domicile of the decedent.
The U:J.ited States reserved its righs under that provision,
hrnvever, and has yet to determine the approach it will take.
It may well be that, in order to remove needless barriers
to investment in the United States, it would be proper to
follow the GEeD Model where the result would not turn us
into a tax haven. This approach could require that the
C);,_be:c treaty country have an estate tax at a level resembling
our rei tes at source and enforced that tax on the estates of
its decedents with assets abroad. The United States is now
entering upon estate tax negotiations -- with Sweden for
eX2mple -- and the OECD Model will necessarily be considered
in these negotiations. We are thus giving thought to the
approach that the United States should take as it expands
and modernizes its network of estate treaties.

- 15 -

SECTION 482
We may next turn to an aspect of international tax
relationships that under our tax system -- and the
tax systems of all other countries as far as I know
is principally dealt with by tax administrators working
under a general statutory mandate. This is the aspect
of the proper allocation of income and expenses
between entities under a cornmon control -- in the
international situation typically a parent-subsidiary
relationship with the parent corporation in one country
and the subsidiary corporation in another. Our Code
Section 482 provides that in any case where two or more
organizations are owned or controlled by the same
interests, the Secretary of the Treasury or his delegate
may allocate income and deductions among the
organizations if he determines that this action is
necessary to prevent evasion of taxes or clearly to
reflect the income of any of the organizations. Our
tax treaties also have provisions which look to such
an allocation.
The mandate is a broad one, and necessarily so,
for the provision is vital to the integrity of an income
tax. But we must be careful to recognize clearly the
reasons for this provision, and more especially the
reasons why particular taxpayers may present a
situation in which a tax administrator must ask himself
whether potentially a Section 482 check is in order.
The salient fact is that a taxpayer worry about
the section is almost a symbol of status, for a
Section 482 worry is generally the price of possessing
a tax preference.
As an example, the main corporate worriers about
the rules of Section 482 in a totally United States
domestic setting are those corporate chains which
exploit the preference permitted by multiple surtax

- 16 -

exemptions. Since they live in a tax world where the
exploitation of that preference requires as careful
an adherence as possible to the mathematics of the
$25,000 per corporation exemption, they must
constantly seek to distribute income and expenses among
the corporate components in keeping with that
mathematics. Thus, a parent corporation furnishing
goods, services, or fUnds to the subsidiary components
in the chain must hold its charges low to avoid itself
obtaining a large amount of surtax income. And so
Section 482 becomes a worry for these groups. If we had
a rational application of the surtax exemption and
did not permit mUltiple exemptions, then their preference
would end -- and so would their worries over Section 482.
But since they seem to prefer their Section 482
worries to a yielding of their preference, they can
hardly be heard to complain that the Internal Revenue
Service considers them proper potential for careful
Section 482 scrutiny.
The preference analysis is also applicable to
the international scene, for here also most
Section 482 allocations come only because the taxpayers
have preferences that others do not possess. I am
not us ing "pre ference" in any deprecatory sense, but
rather to describe situations in which there is the ability
to reduce the over-all tax compared to those taxpayers
without the preference. In general, the international
preference comes about because while one componenet,
the parent, is subject tocur 48 percent corporate
rate, the other components, its foreign subsidiaries,
are not subject to that rate but to the rates of tax
in the foreign countries in which they are located or
operate. Where those foreign rates are substantially
lower or nonexistent, the preference is quite marked. A
similar preference exists where a domestic Western
Hemisphere Trade Corporation is used, since its tax rate
is 14 percentage points below the regular United States
corpora te rate.

- 17 The mathematics of these tax preferences has a compelling
attraction and there is thus the potential for Section 482
application. If corporate treasurers never joined forces with
their tax departments to obtain the maximum tax savings that all
combinations of rates, source of income, and allocation of
expenses might provide under these preferences, then the need
for Section 482 application would be greatly reduced. But we
have heard no responsible person or group say that the Internal
Revenue Service may place Section 482 on the shelf in the
international area. On the contrary, Internal Revenue Service
:'."L~-=l:::.~-:::~nts, court cases, and the theories of a number of tax
advisors all bear witQn.ss ~o ~he F~~~ rh?t the m~them~tic~ OC the
p:. .~. 1\2nCeS can for some govern the allocation of income and
expenses. And private research studies show that some major
companies even have one set of allocations to permit management
control of their international business, but another set of allocations to squeeze the tax benefits from the preferences.
The factor of a tax preference in creating the potential
for a Section 482 scrutiny is clearl~ evident in the controversies
that do arise. The two major court decisions involving the
inter-company pricing of goods, Eli Lilly and Johnson Bronze,
both concerned transactions between uil~ted States manufacturing
companies and their Western Hemisphere Trade Corporation aI:I'iliates.
Virtually all the pricing cases currently in the lJational Office
of the Internal Revenue Service for technical advice involve
either Western Hemisphere Trade Corporations or tax haven
subsidiaries. If these cases are representative of the field
cases, there has been far more realistic pricing of goods where
no tax differential exists and as a consequence no Section 482
controversy.
Certainly the Western Hemisphere Trade Corporation and
the tax haven situations are open invitations to temptation: if
the manipulation is undetected or if a favorable "compromise
price" is worked out on audit, the consequent lowering of price
to the subsidiary results in after-tax savings. If the shifting
is fully corrected on audit, any adjustment of price will usually
simply mean a loss tofue taxpayer of 6 percent interest (3 percent
after tax) as the United States tax on the parent goes to its
proper level -- there is no fear of double taxation through
inability to make a correlative adjustment in the Wes ;:ern Hemisphere case (assuming it, itself, is not su~ject to tax aLro&d)
and no need for one in the tax haven case.

- 18 -

All this being so, the task of the

Iacer~d1

Revenue S~~~ice,
and indeed o~ any tax administration, is how to achieve a rational
a.dil1::":1~stration of Section 482 where there is a considerable
potem::L.a1 area {or its app1icat ion, where some companies sufficiently
serions in number take unwarrented advantage of the situation
created by the preferences, but where £vcry ~o . . . pany cannot and
sholl1d not be carefully scrutinized and its activities secondguessed just because tnose who yield to temptation are mixed
bmo~g the thro~g.
o~~ kny to sensible adminiqtr~tion in these
circumstances is to provide those concerns which seek no unwarranted
advantage with the sta~dards that the Service is using to identify
the others. Another key is to utilize standards that are sensibly
tolerant of the very wide variety of transactions, patterns of
business conduct, and investment and trade situations that are
clearly present in international activities.
This analysis leads inevitably to the provision of guidelines
for the appl~cation or Sectl0n 482, as well as those sections
bearing a relationship to 1~, such as Sections 861 and 862
involvlng the allocation of expenses in determining taxa.ble
income from foreign sources. But the analysis takes us still
further, for it also points to the premises on which those
guidelines must be formulated. We bel ;_eve that the guidelines
must adhere as closely as possible to management and accounting
standards developed to achieve the same goal -- that of proper
allocation of items among the constituent components of a
business enterprise.
This adherence has two distinct advantages: First, it will
keep tax administration within the mainstream of the developments
regarding thes~ management and accounting standards. The~e
standards are constantly being improved by management experts,
accountants, and others under the pressure of meeting a varie~y
of needs and concerns affecting these multi-component enterprises.
Thus, central management can keep control of the performance of
its compodents -- and evaluate their activities and reward their
managers -- only if it has tools that are sufficiently developed
to provide proper allocations of items of income and expense
among the components. As another example, where one part of an
enterprise is subject to Government controls -- because for example
it involves public utility regulation or Defense contracts -not applicable to the other parts, then the same tools of allocation are needed. Developments in accounting for conglomerates
will similarly need such tools.

• 19 Second, the use of these management and accounting standards
will provide the United Statel with a rational, consistent
approach to international transactions which it can use for all
the forms those transactions may take. We must not forget there
are two tides of the coin. Many groups focus on the side of the
coin involving a parent in the United Staten transferring goods
and services to ics subsidiaries abroad." But on the other side
of the coin are corporations involved in extraction or manufacture
abroad and thei:ral.sfer of materials or goods to the United
States -- they may !Je subsidiaries of United States corporations
or they may involve foreign parents and their United States
subsidiaries. These two sides of the coin underscore both the
need for consistency and the care required in the formulation
of appropriate rules. We have ou~ exporters of goods and our
importers of goods; we have our manufacturing industries operating
at home and abroad; we have our extractive industries obtaining
their raw materials at home and abroad; we have service, shipping
transportation, financing, and construction industries operating
across international borders; and so on. Section 482 guidelines
applicable to all these activities, all of which exhibit the
two sides of the coin, must be formulated in a non-discriminatory
manner that permits the United States to maintain the necessary
consistency of position no matter which side of the coin turns
up or where it does so. Indeed, the allocation provisions, the
competent authority provisions, and the non-discrimination provisions
in our treaties all require this objective, even-sided approach
to these guidelines.
This matter of allocation is thus not to be viewed as a
typical skirmish between taxpayers and the Internal Revenue
Service, involving only the typical parochial interests that
normally color such skirmishes. On the contrary, its proper
resolution is a challenge to the vision and statesmanship of those
who speak of the present and corning stature of the "multinational
corporation." Their insights have already led them to recognize
the importance of this form of business organization in the
evolution of the institutions of the modern world. But clearly
a part of this institutional role will be an appropriate allocation
of the profits of these organizations among the various countries
touched by their business activities, and thereby a fair sharing
among these countries of the tax revenues to be derived from
those profits.

- 20
Those who are concerned with shaping the institutional
character of these multinational corpovations should therefore
not shy away from this challenge, for its resolution is crucial
t~ the stability of their business planning and the achievement
; ) f maximum freedom
from di5pute and controversy with sovereign
governments. They should not be bemused or diverted from facing
the problem by attempts at legal smokescreens, such as the
argument that Section 482 does not permit the Service to create
income where none exists or the argument that Section 482 does
not apply between related foreign corporations.
They should also recognize the constraints that apply in
developing tax rules for this allocation. Tax disputes involve
concrete cases to whi.c h a specific dollars and cents answer
must be given at the end of the road. Hence accounting rules
and techniques must be rephrased as tax rules in which the
specific dollar results do count and in which details as well
as principles must be decided by some one. The attempt to
provide Section 482 guidelines is thus an effort designed to
permit Government and business to think through these principles
and details as broadly and thoroughly as possible, foreseeing
as far as possible the issues that may arise and their ramifications. The guidelines should be designed to guide -- to
represent the solutions to problems achieved after careful thinking
at top levels of business, the professions, and Government,
rather than leaving the individual Internal Revenue agents to
raise and solve problems on their own. This does not mean every
detail must be set forth in guidelines, for intelligent discretion
at the agent level is an integral part of tax administration.
But it does mean a recognition that tax allocation problems do
involve many matters of substance and principle and important
detail that demand a coherent and thought-through set of answers,
rather than a seat-of-the-pants, "let's decide each case on its
facts" approach.
We must emphasize that the guidance here sought is guidance
both before and after, so to speak. It is, of course,guidance to
Internal Revenue agents as to what to look for and what not to
look for, and what to decide when issues evolve. But it is
~lso guidance to business on how to minimize possible dispute
and controversy over the tax return and how to achieve a
st~bility in business planning and arrangements that will not
be upset, maybe years later, when that inevitable Internal
Revenue Service audit comes along.

- 21 -

With all this in mind, just where are we in our consideration
of the proposed Section 482 Regulations embodying these guidelines?
For the past several months a group from the Treasury and the
Internal Revenue Service has been concentrating on the comments
presented with regard to the proposed Regulations. Every comment
submitted by taxpayers has been read and a 200 page summary of
the criticisms and alternative approaches has been prepared and
carefully analyzed. The process of revision of the proposed
Regulations is well underway, with many of the suggestions made
at that hearing adopted and already incorporated. We are hopeful
of final revision within the next few months.
The comments at the last hearing dealt mainly with the subject
of inter-company pricing of goods -- a matter not on the agenda
at the first hearing. Part of the concern in this area may stem
from the amounts that can be involved in price adjustments, the
frequency of transactions involving the transfer of goods between
related organizations, and the problems involved in establishing
transfer prices. The concern for some companies also stems from
the aspect of correlative adjustments in the tax of the foreign
country applicable to a related foreign subsidiary, an aspect
which I will discuss later. At the risk of appearing negative,
let me indicate why we find difficulties in some of the approaches
suggested at the hearing.
A typical suggestion is that the Regulations should supply
a "mechanical safe haven" in the area of the pricing of goods.
Much as this solution appeals as blissful to our tax administration
as to the taxpayers who suggest it, we have not taken this route.
The reason is that no satisfactory device has yet been suggested
or worked out. The variation in profit margins from industry to
industry, among companies within an industry and even among
product lines within a company is much too great to permit a
single percentage, or a series of percentages, as mark-ups or
mark-downs in establishing transfer prices. The recognition of
this problem has led other taxpayers to urge just as strongly
that we do not provide a mechanical safe haven. They realize
how unrepresentative that safe haven may be and they fear that
in practice all territory outside the safe haven will be heavily
mined for taxpayers. The "safe haven" here will therefore have
to lie in a sensible, reasonable administration of the Regulations
themselves.
Nevertheless, we should not, after the Regulations are adopted,
give up the search for more precise standards. Consideration
should be given to framing a number of possible approaches and
then testing them in a sample of actual cases to see what results
they would~ave ~chieved compared with the actual adjustments.

- 22 -

Another set of suggestions relates to the point of view that
the only appropriate test of transfer pricing should be its
"red:-;on':-iblenpss." These cotTLrnents have been phrased in a number
of \{ays, b'Jt essentially they suggest that no Section 482 allocation
be 11lade where the price is "reasonable," or where the seller makes
a "reasonable profit," or where the total profit earned by related
entities is divided among them on a "reasonable basis." While
the test of reasonableness has its uses in some situations,
in this area it is not sufficiently precise to provide guidance
reasonable by what or by whose standards? Nor is the approach
substantively accurate, since the basic arm's length standard
underlying the section is not directly related to a reasonable
profit figure for the parties involved. The arm's length standard
is designed to determine the price or charge that the parties
would have arrived at assuming they had dealt with each other as
independent unrelated entities -- and this could mean no profit
at all or indeed a loss in some cases. In essence,this suggestion
for a safe haven of "reasonableness" has the same deceptive
attractiveness as a mechanical safe haven. But just as in that
case, its superficial appeal does not on analysis withstand its
potential for real unfairness among taxpayers.
But there is a place for the concept of "reasonableness" in
these Section 482 Regulations -- and it lies in the way the
guidelines should and will be applied. We expect these guidelines
to be applied in a reasonable manner by taxpayers. They, in turn,
have a right to expect a reasonable interpretation and application
by the Internal Revenue Service. The Commissioner has several
times in recent statements stressed that this will be the approach
of the Service. He has said that the guidelines will be
administered in an understanding and sensible manner. He has
stated that this policy is being emphasized in the agent training
seminars and other instructions to Service personnel. This will
be our use of "reasonableness."
When we turn to more substantive comments and to the other
parts of the guidelines in addition to transfer pricing, we should
first note that virtually no criticism was received on a
conceptual basis. It is not seriously questioned that the clear
reflection of income requires charges to be made for benefits
received. Interest for the use of money, rent for the use of
property, royalties for the use of intangibles have become such
basic concepts that they are no longer seriously questioned.
Some aspects of the guidelines have been criticized however
,
d
'
,
on tDe groLJn that they are ahead of our time and that we are
requiring business to meet impossible or unrealistic standards.

- 23 -

This is not our obj~ctive and we do not feel that this is basically
the case. The guide'lines, and the allocation rules they contain ,
utilize known and ac~epted applications of accounting principles.
We have not been referred to any instance in which the guidelines
are in conflict with generally accepted accounting principles.
We do, of course, recognize the limitations in these guidelines
in terms of furnishing absolute or precise answers. However,
as accountancy continues its development and as our management
and other analytical tools become more refined, the guidelines
will also benefit. Indeed, as stressed earlier, we recognize
there is much to be gained by using current accounting concepts
and management techniques as the foundation for these guidelines,
so that they can share in the progress to come in these areas.
\

We can look at the relevance of the guidelines to current
practices in another way. We hear on many sides that one
consequence of the guidelines has been that many companies have
begun to look at their foreign operations with a more realistic
and objective appraisal. We understand that the results have
been quite instructive. Apparently, many corporations in riding
the wave of the future in international business and in establishing
foreign activities consciously or unconsciously favored their
foreign enterprises. As a result these foreign subsidiaries
showed a fine profit picture. But now a more careful appraisal,
prompted by the stress placed on arm's length concepts in these
guidelines and the attention they have called to the management
techniques that do exist to that end, has shown that in many
cases this profitableness is but the reflection of a considerable
generosity on the part of the United States parent. A foreign
subsidiary can compile an attractive profit showing if it is
not charged for the services it receives or the financing it
obtains, or if it receives its goods at cost figures. As the
Journal of one accounting firm states, the guidelines may provide
an unexpected benefit to some United States companies by
"exposing to them the true cost of their
international operations, which they have not
always appreciated. Companies that manage their
United States operations very profitably, but
are new to the international field, frequently
have to pay well for their education in
that field. There seems to be a tendency
to conceal from oneself the cost of the
education, particularly if it is embarrassingly
high."

- 24 All of this underscores our desire to keep these guidelines
within the mainstream of accounting principles and management
techniques.
A number of comments at the hearing related to the pr1c1ng
standards set forth in the guidelines. These comments indicate
some misunderstanding as to our intention regarding those standards
and also deficiencies in the proposed Regulations in communicating
that intention.
The proposed Regulations require taxpayers and revenue
agents to test inter-company prices against the arm's length
standard of Section 482 by using one of three approaches.
The first approach is the comparable uncontrolled price
method under which the price charged to a related entity
must be similar to the price charged in comparable transactions with or between independent third parties. The second
approach, applicable to the situation in which the related
purchaser acts as a mere distributor with respect to the
goods, computes the transfer price by taking the price which
such distributor charges to third parties and reducing it by
the appropriate mark-up for a distributor operating under the
same circumstances. The third approach is the cost-plus method
under which the seller must charge related entities his full
cost, plus an appropriate profit margin. There is, in
addition, a so-called "fourth method" which is applicable
only in situations in which a taxpayer has been using a
method different from the three listed above and which the
Commissioner finds is clearly more appropriate.
There appears to be a certain amount of confusion with
regard to the "priority" of these methods. The priority of
application rule, which calls for an application of the
methods in the order they are set forth, is not intended to
be an arbitrary listing of preferences among methods which
might yield varying results. The fundamental arm's length
standard involves a determination of the price which would
have been arrived at by independent, unrelated entities
entering into the same transaction. The priority of application rule simply states the approach for obtaining the
most relevant evidence to establish that price. Clearly,
a price arrived at in a truly comparable third party sale
is the best evidence of such a price -- it is the direct
way to meet the arm's length standard. We are therefore
examining the feasibility of broadening this method to allow
a greater range of adjustments to comparable transactions
to permit arriving at a comparable price. The resale price

- 2S -

method and the cost-plus method are indirect ways to approach
the arm's length standard, and hence less likely to achieve
that end than the direct route. The resale price method is
placed ahead of the cost-plus method in the order of priority
since it is felt that in the limited distributor situation
to which the resale price method is applicable -- where the
buyer does not add significant value to the product or
employ significant intangibles in its resale -- a distributor
profit more clearly reflects the function of the buyerreseller and, therefore, the income of each of the parties
to the transaction.
These priorities thus reflect evidentiary guides. Under
the priorities, a taxpayer is protected from an arbitrary
choice of method by the examining agent, and has the assurance
that the most relevant evidence will be taken into consideration in arriving at an arm's length price. But some taxpayers
apparently would like to place their bets on method three or
method two and use only that approach
They may have followed
that approach in establishing their prices, or they now see
it as the appropriate way to support the prices used. In
such si~uations, one would expect the examining agent, as a
sensible precaution, to check the result obtained under the
methods higher in the priority scale. If the check shows a
marked variation from the method chosen by the taxpayer,
then an explanation would seem in order; if not, then the
taxpayer's price should not be disturbed. This seems to be
a sensible way to handle the three methods that are recognized as having the widest application.
0

There have also been conunents directed at the "fourth
method." This method has a limited scope under the proposed
Regulations, since the method to qualify must be actually
used by the taxpayer and the Conunissioner must feel that
it is "clearly more appropriate." Some companies have
requested, in the light of their own pricing practices, that
they be allowed to use a variety of methods in setting prices
which they feel are not prescribed by the proposed Regulations.
Some of the methods are merely variations of the specified
approaches; others are based upon different premises. Where
such pricing systems will yield results which are substantially
the same as the prices which would have been arrived at under

- 26 -

the Regulations, it would seem to be in the interest of both
taxpayers and tax administrators to apply prices based on
such systems. Of course, if such prices do in fact meet the
arm's length standard, the method by which they are derived
makes no difference. There is, however, a feeling among some
taxpayers that the system that they follow in arriving at
a price should be specifically blessed in the Regulations.
This can hardly be done without allowing a proliferation of
described methods, which in turn reduces the over-all guidance which these Regulations must develop in order to
accomplish their avowed purpose; certainly the taxpayer
whose method is left out of a long list would wonder where
it stands. But, on the other hand, we are aware of the
narrow focus in the proposed Regulations, and to the extent
feasible will make the "fourth method" broader in its application and clarify its relation to the other three approaches.
Another set of comments -- again resulting, we believe,
from some misunderstanding and a lack of clarity in communication -- relates to "marginal pricing." The guidelines are
intended to achieve the following results in this area:
Under the comparable uncontrolled price method, to the extent
that marginal pricing is used to establish or to maintain a
market, such pricing is proper under the guidelines if the
buyer-reseller engages in additional expenses, such as promotional expenses or if the reduced prices are passed on to a
third party. Further, if the parent company uses incremental
costing in arriving at the price charged to unrelated parties,
such prices may be charged to related parties in comparable
circumstances. Thus, to the extent that reductions in price
to third parties are based on a marginal or incremental
approach, such pricing to a foreign subsidiary is allowed under
the comparable uncontrolled price method. Similarly, if a
foreign subsidiary of the United States parent could purchase goods at a certain price from third parties, the United
States parent manufacturing company could sell at the same price
under comparable circumstances.
Some comments seek to clarify the application of the
guidelines where the related corporations are engaged in a
number of transactions falling under Section 482, such as
the transfer of goods to a subsidiary alongside the receipt
of royalties from that subsidiaryo We do not intend that
Section 482 interfere with normal commercial transactions.

- 27 'nlat section is designed to assist in policingt:;{le United
States income tax system, and is not cast as a <iu-ardian with
universal jurisdiction. Valid business reasons may require
that transactions be framed in different forms than the
sLmplest possible accounting technique would dictate. In
transactions between unrelated parties a price reduction
might often be offset by an increased royalty or other charge.
TIle proposed Regulations recognize this and provide for "setoff" computations in certain situations. This device is circumscribed in the proposed Regulations to prevent audits from
becoming interminable. In addition, care must be taken to
prevent unwarranted switching of sources of income and to
properly account for additional foreign taxes. But we do
recognize the need for flexibility in this area, and are
examining the Regulations with the aim of making this relief
available to taxpayers to the extent feasible on a less
restrictive basis.
Other areas of the proposed Regulations are, of course,
also being reviewed. Few taxpayers objected to the provisions allowing most services to be charged at cost. There
is thus no question that incidental services will not have
to be charged at a profito However, there will have to be
some clarification with regard to what services are, in fact,
"incidental" and on our own account we are reviewing this
mattero Some taxpayers have expressed concern that the
"full cost" requirement in the service area would yield
inappropriate resultso It must be noted that all safe havens,
including the service charge at cost, are secondary in order
of priority to an arm's length price. If a computer were
used at only a fraction of its full capacity, a proportionate
share of full cost would, in all probability, result in a
very high charge to a related party. However, since many
computer users are able, on an arm's length basis, to
acquire such services on a share-time or incremental basis,
the appropriate arm's length charge would be a charge based
on such comparable prices. A safe haven is not binding on
the taxpayer in any area and clearly would not be appropriate
in a situation such as the one described. We have created
safe havens to reduce uncertainty wherever possible. The
taxpayer, however, is not confined to the safe havens -- he
can always use the arm's length standard to support the amount
of the charge.

-28-

We recognize that the valuation of intangibles and the
determination of an appropriate charge for their use present
extremely difficult problems. For this reason, the proposed
Regulations developed a "safe haven" cost sharing arrangement
in an attempt to eliminate many of the valuations which would
otherwise be required. There are refinements which can be
made in the comprehensive scheme outlined in the Regulations.
For example, one of the principal problems remaining is the
requirement that the use of previously developed intangibles
be valued. We have discussed various alternatives to this
extremely difficult task with industry representatives and
members of the legal and accounting professions. We hope
that together we can develop a satisfactory alternative which
will eliminate this valuation problem. We have discussed
cost sharing with representatives of foreign governments,
attempting to impress upon them the need for such a system
and the iact that in most cases it would result in smaller
inter-company charges that would otherwise be required.
There were objections to the safe haven formula for tangible
property rentals contained in the proposed Regulations. The
formula, which was tied to the depreciation method l1sed by the
lessor, resulted in undesirable variable rentals in many
situations. We are developing a modified formula that will
yield level rentals in conformity with normal commercial
practices.
So far we have been discussing the substantive content
of the Section 482 guidelines, developed under our Internal
Revenue Code standard. These guidelines are United States
rules intended to minimize controversies arising under
United States tax returns and to resolve those disputes that
do arise. But these United States rules are being applied
to international transactions and we clearly recognize that
they affect entities which are under the jurisdiction of
other Governments. As a consequence the correlative adjustments which are integral to Section 482 allocations are
under the control of those Governments. If those adjustments
cannot be made, then Section 482 allocations by the United
States can have consequences different from allocations
affecting an entirely domestic situation.

- 29 -

This aspect of the application of Section 482 has led
to another set of comments that merits careful consideration.
This is the suggestion that no Section 482 scrutiny or
adjustment need be made if the subsidiary is located in a
country where the tax rate is approximately the same as
that of the United States. The suggestion has support in
actual practice, for as indicated earlier, Section 482
issues presumably are rarely raised by the Internal
Revenue Service in inter-company pricing cases where this
circumstance exists -- which leads one to conclude that the
companies themselves are here more careful to prevent their
pricing from being suspect under Section 482. Indeed, tax
motivation will here rarely be a controlling factor, for
little is to be gained from the standpoint of tax saving
by a departure from arm's length pricing. This situation
is the exception to the earlier observation that a Section 482
worry is the price paid for a tax preference.
We recognize that even in a situation in which no tax
reduction or avoidance motive exists, the possibility of
price adjustments may cause apprehension to management.
Moreover, we are not unaware of the many difficulties involved
in setting prices. We are aware of the fact that the proposed
Regulations provide guidelines and not final answers. We
understand that it can be difficult for even the best
intentioned taxpayer to arrive at a price for a particular
product which could not be challenged under any conditions.
Under these circumstances, the apprehension for such a
taxpayer with respect to a Section 482 allocation -- and hence
its care regarding its pricing -- can lie in the fact that
if a Section 482 adjustment is made, the company runs the
risk of not being able to achieve a correlative adjustment
in the other country, with the consequences of double
taxation and a considerable tax cost.
We do not intend this result. At the same time, we
must remember that the statutory standard of Section 482 is
a dual one: to clearly reflect income as well as to prevent
the avoidance of tax. The standard is indeed a part of the
process of determining the real profitability of foreign
activities, a subject mentioned earlier. In the international
context the standard of "clearly reflect income" also
goes beyond the allocation of income to the right company
and really involves the allocation of income to the right

- 30 -

country. It is the standard by which the United States
protects its sources of revenue and its tax system from the
encroachments and claims of the other countries affected by
the transactions. As a consequence, the issue is more than
a dispute between taxpayer and the Internal Revenue Service
and becomes one of international accommodation. It is thus
more important and more complex than domestic Section 482
issues.
But, as stated above, for the taxpayer involved in a
Section 482 allocation in a setting where the tax rate in
the foreign country is around the level of the United
States rate, the focus will be on the double taxation that
will result if the correlative adjustment is not made. How
can this possibility of double taxation be avoided or minimized?
A part of the approach lies in Revenue Procedures 64-54,
which for taxable years through 1964 permits the foreign tax on
the allocated item to be credited against the increase in
United States tax resulting from the allocation. In effect,
the United States itself is making the correlative adjustment.
This international generosity can be justified on the ground
that taxpayers may not in those years have had an adequate
appreciation of the Section 482 rules now being applied.
But any such international generosity carried into the future
would simply be a complete concession by the United States
that other countries may unilaterally assert any jurisdictional
rules they desire and the United States will always hold
its citizens harmless at the expense of our revenues.
For if the United States is to relieve the double taxation
that results from a failure of the foreign country to make
the appropriate correlative adjustment, then whatfu to
keep foreign countries from simply deciding not to make
correlative adjustments? No sovereign country can give
this blank check to the rest of the world, and we know of
no country that does so. As the size and importance of
international business increases, the need for each country
affected by a transaction to secure its fair share of the
profits produced also increases. The United States should
not be called upon to forego its share of the tax on the
~~nF;rc ~AnAT~~pn hv international business.

- 31 If, when a Section 482 adjustment is made, the other
country will make the correlative adjustment -- in effect
agreeing with the allocation -- then the taxpayer is not
subject to double taxation. We have asked taxpayers to keep
us advised of instances where the correlative adjustment is
not made by the foreign country, and have so far been quite
encouraged by the absence of negative reports. Moreover,
many of our allocation cases, though not many of our pricing
cases, concern transactions with Canada, a country with a
sophisticated tax administration and a long familiarity
with close administrative cooperation between the respective
Revenue Services
It is, moreover, a country whose present
statutory treatment of foreign income is such that its only
real defense to the exploitation of tax havens is the use
of tax allocation rules. As a consequence, in a generally
successful effort to protect its revenues it has achieved
full awareness of the techniques of allocation.
0

In addition, our recent tax treaties -- for example,
the United Kingdom, Germany, France, Netherlands -- contain
a provision expressly providing for consultation to achieve
agreement in the case of any initial difference between the
countries on the allocation. Also, the treaties expressly
provide that when the agreement is reached, the correlative
adjustment will be made. Moreover, the refund arising from
the correlative adjustment will be paid despite any running
of the statute of limitations or other procedural barrier to
the refund o No country with which we have recently negotiated
has refused to include this provision. Finally, we are examining our own "competent authority" procedures and in the OECD
Fiscal Committee are consulting with other Governments on
these procedures generally, so as to improve the processes
of administration under the treaties.
We are thus acting to strengthen international cooperation looking either to the making of the correlative adjustment
on the assertion of an allocation by one country or to the
modification of that adjustment through mutual agreement in
response to the views of the other country. We are also acting
to achieve substantive agreement among the countries on the
principles and rules that should govern international allocations. As a result of our request, the OECD Fiscal Committee has begun the consideration of this area and has given
it a prominent place on its agenda.

- 32 1 do not want to imply by this discussion of Section 482
in its international setting and the steps being taken to
achieve an appropriate response from other countries that
we expect many Section 482 adjustments in transactions involving
high rate countries. As stated earlier, our impression is that
there are very few cases relating to inter-company pricing of
goods where the subsidiary is in a high-rate country
Further,
with guidelines established and with the effort now being made
by most companies to more carefully watch their inter-company
transactions, we would not expect many Section 482 adjustments
in the remaining areas. Our efforts to obtain proper international accommodation are directed to achieving the proper
result and preventing double taxation in the relatively few
cases that may occur.
0

There are thus firm grounds for expecting that governments can achieve international allocations that are both
fair to the countries concerned and avoid double taxation
consequences to the taxpayers involved. The steps to this
end are, of course, not ready-made. We have only to remember
the problems and difficulties associated with interstate
allocation of taxes within the United States to dispel any
such illusion. But we must also remind ourselves that
through devices such as foreign tax credits and treaties,
countries have probably been more active in achieveing international harmony than is often the case with respect to
internal tax matters. The United States Government is thus
hopeful that its tax system and those of other countries will
continue in their international relationships to produce
the harmony that is conducive to the continued development
of trade and investment in the world.

TREASURY DEPARTMENT

FOR IMMEDIATE RELEASE

November 1, 1967

TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$2,500,000,000,or thereabouts, for cash and in exchange for
Treasury bills maturing November 9, 1967
in the amount of
$2,400,354,000, as follows:
'
9~day bills (to maturity date) to be issued
in the amount of $1,500,000,000, or thereabouts,
additional amount of bills dated August 10,1967,
mature February 8,1968, originally issued in the
$1,000,492,000,the additional and original bills
interchangeable.

November 9, 1967
representing an '
and to
amount of
to be freely

182-day bills, for $1,000,000,000, or thereabouts, to be dated
November 9,1967, and to mature May 9, 1968.
The bills of both series will be issued on a discount basis under
competitive and noncompetitive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard
time, Monday, November 6, 1967.
Tenders will not be
received at the Treasury De~artment, WaShington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders
from others rnust be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.

F-I076

- 2 -

Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on November 9, 1967, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing November 9,1967. Cash and exchange tenders
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need includ~ in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during tl~ taxable year for which t~
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revis ion) and thiS.,
notice prescribe the terms of the Treasury bills and govern the
~
conditions of their issue. Copies of the circular may be obtained frc
any Federal Reserve Bank or Branch.
000

TREASURY DEPARTMENT
(

JMMEDIATE RELEASE

November 1, 1967
RESULTS OF TREASURY I S CASH OFFERING

Reports from the Federal Reserve Banks show that subscriptions total

abo~t $15,640 million for the offering of $10,700 million, or thereabouts,

of 5-5/8% Treasury Notes of
million for the offering of
Notes of Series A-1974, due
to about $10 734 million for
the notes of Series A-1974.

Series A-1969, due February 15, 1969, and $14,124
$1,500 million, or thereabouts, of 5-3/4% Treasury
November 15, 1974. Subscriptions accepted amount
the notes of Series A-1969 and $1,636 million for

The Treasury will allot in full, as provided in the offering circulars,
subscriptions of $7,577 million for the notes of Series A-1969 and $136
million for the notes of Series A-1974, from 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, Government Investment Accounts, and
the Federal Reserve Banks where the required certification of ownership of
notes maturing November 15, 1967, was made.
On subscriptions for the notes of Series A-1969 received subject to
allotment, the Treasury will allot in full those up to $100,000 and other
subscriptions will be subject to a 36 percent allotment with a minimum
allotment of $100,000 per subscription. These subscriptions total $5,099
million from commercial banks for their own account and $2,964 million from
all others.
On subscriptions for the notes of Series A-1974 received subject to
allotment, the Treasury will allot in full 'those up to $100,000 and other
subscriptions will be subject to a 7-¥2 percent allotment with a minimum
allotment of $100,000 per subscription. These subscriptions total $6,865
million from commercial banks for their own account and $7,123 million from
all others.
Details by Federal Reserve District as to subscriptions and allotments
Will be announced later this month.

F-I071

TREASURY DEPARTMENT
WASHINGTON, D. C.

HOLD FOR RELEASE UPON DELIVERY

EXCERPTS FROM REMARKS
BY THE HONORABLE EVA ADAMS
DIRECTOR OF THE MINT
BEFORE THE
EXECUTIVES CLUB OF CHICAGO
CHICAGO, ILLINOIS
12: 30 P. M. CST
FRIDAY, NOVEMBER 3, 1967

Increased Coin Production

We in the Mint always like to feel that we enjoy a very close
relationship with the public because our products are so dear to all of
you.
And whether you realize it or not, each and everyone of you do
play an important role in the minting of United States coins.

Our most

recent statistics point to the fact that the United States is producing ove l'
40 percent of all the coins made in the free world.
I would like to mention that I have just had the pleasure of
visiting the Mints in several European countries, and I can tell you th~l.t
while I was tremendously impressed with their facilities, I am convh:ced
that ours is the most efficient and economical coin producing industrj'
of all.

- 2 -

Our production figures reflect a two-fold purpose.

First of all,

we have produced sufficient coin to overcome a nationwide coin shortage.
And I don't have to tell any of you the effect a coin shortage has on a
nation, because you here in the Chicago area were one of the first to feel
the effects when it all began as far back as 1963.
I can promise you that our coin production will and nJUst keep
pace with a continually growing and expanding economy.

.As you know,

beginning this month, we are witnessing the longest recession-free
expansion of the history of the United States economy.

An adequate

supply of coin is a prime ingredient necessary for this continued expansion.
Second, our production figures reflect the change-over from the
900 fine silver coins to the cupro-nickel clad coins.
When the Coinage Act of 1965 was passed authorizing the new
clad coins, the policy of the Treasury was that the Bureau of the Mint
should produce as many of the new coins in fiscal 1966 and fiscal 1967
as possible, with a view to replacing all outstanding subsidiary silver
coins that were necessary during a 2-1/2 year period.
Now let's look at what has been done.
1967, we produced over 24.9 billion coins.

From July, 1964 to July,
As for clad coins alone, we

made over 355 million halves, 3.5 billion quarters and 4. 6 billion dimes.

- 3 While the emphasis was on clad coins, we did not neglect
production of minor coin, nickels and cents.

Production of cents in

calendar 1966 increased about 20 percent over 1965.
A1l of the extra effort undertaken to achieve record production
levels at the Philadelphia and Denver Mints, plus assistance from the
San Francisco Assay Office, has let us develop ample coin inventories
for a1l denominations but half dollars.
According to reports reaching my desk, I can now assure you
that the coin shortage is over, and despite the heavy demands during
the coming holiday season, we have enough coin to go around.
On the basis of coin production and the success of the clad coins
in circulation, the Treasury and the Federal Reserve Banks have been
able for some time to accumulate circulated coin in inventory, while
releasing newly-produced clad into circulation.

The Treasury and the

Federal Reserve plan to separate this circulated coin, with the clad
returning to circulation and the silver going into Mint inventory.

you have probably read, the Treasury is considering melting some of
these coins beginning next year.
I would like to add here that without the excellent cooperation
from the Federal Reserve System, the Mint could not have produced
and circulated the clad coins in sufficient quantities to eliminate the
acute shortage in such a short period of time.

The Federal Reserve is

continuing this cooperation with our coin program.

- 4We are at the present time awaiting delivery of machines to do
the separating by using the latest available electronic equipment.
We expect to recover over 250 million ounces of silver from
these 900 fine coins by the middle of next year.

Added to the estimated

amount remaining after the demonetization of silver certificates, the
Treasury should have between 350 to 425 million ounces of silver on
hand by next June 24.
The President's Joint Commission on the Coinage, of which I
am a member, is keeping a close watch on the coinage and silver
situation.

As you know, this Commission has already made a number

of recommendations concerning silver policy which have been put into
effect.
Any reference to our clad coins would not be complete without
acknowledging the assistance given us by private industry.

In fact,

many of the steps preliminary to the actual striking of the coin are
being done outside of the Mint.
In order to manufacture the clad strip, our contractors

separately prepare the cladding and the core from materials supplied
them from the Government stockpile.
The processes used in bonding vary from company to company.
Perhaps one of the most unique is employed by one of our contractors
Who joins the core and the two clad strips together through explosion.

- 5 -

After the new Mint in Philadelphia is completed sometime in
1968, we will have our own facilities for the bonding of the clad strip;
at the present time, we do not.
The process we will use is known as cold-roll strip bonding.
The two strips of cladding and the core will be fed through a cold-rolling
mill and bonded together by speed and pressure, eliminating the use of
heat.
It is interesting to note that the development of the clad metal

composite strip used in the production of the 40 percent silver half
dollar has its roots in the practices employed in the manufacture of
Sheffield plate.

About 1750, British craftsmen had discovered that

silver sheets could be bonded to a core of copper, without the use of
solder, and subsequently the bonded material could be readily rolled
and shaped.
The use of clad materials in this country is not peculiar to
United States coinage.

For some time, clad materials have been used

in thermostats, motor controls and various electrical devices.

But

the success of our clad coins has given industry the platform it needed
to branch out into other areas.

In fact, it is estimated that the potential

market in this country for clad materials approaches $1 billion a year.

- 6 Our use of cladding makes it possible to meet basic coinage
requirements.

So that the new coins would possess the

~:3;:Hne

electrical

resistivity as the former homogeneous silver-copper alloy coins, a
vital requirement for vending machine use, it was necessary
coins be used.

For the half dollars both the cladding

composed of silver-copper alloys, and for the

d';(l

1hi.1t

clad

tnf: cc,re i:c;

qunl~te;> und di:J8,

tlJe

cladding is an alloy of copper and nickel, with a pure copper core, to
achieve the electrical resistivity factor.
In fiscal year 1967, the Mint made over $834 million in pe\ienue
on the production of some 9 billion coins.

The revenue derived from

the production of coinage is known as seigniorage and it is the difference
in the face value and the cost of the metal in the coin.

The seigniorage

is deposited in the General Fund of the Treasury under miscellaneous
receipts.

We obtain annual appropriations for operating expenses.

Before I close, I would like to say a few more words about the
new Philadelphia Mint.

This new Mint has been tagged the "jet-age TvIint"

and this may be a very appropriate appelation.

It will be the most

modern, as well as the largest, Mint in the world.
The capacity of this facility, 8 billion coins a year if necessary,
should be a joy to behold to all of you who are vitally interested in a large
supply of coins.

Now, we in the Government are used to talking glibly

- 7 about millions and billions, but let me put thio figure lllto a les:3
astronomical context.

When the new Mint comes "on stream", we will

be able to make 1 million coins an hour, or almost 300 a second.
While we have had some major delays at the new Mint, we do
expect to have it in full operation in 1969.

-000-

STATEMENT OF FRED B. SMITH
GENERAL COUNSEL, DEPARTMENT OF THE TREAS DRY

BEFORE THE HOUSE COMMITTEE ON BANKING AND CURRENCY
ON H.R. 6157
FRWAY, NOVEMBER 3, 1967, 10:00 A.M., EST
Mr. Chairman and Members of the Committee:
I am pleased to have this opportunity to testif'y on H.R. 6157, "to
permit Federal employees to purchase shares of Federal or State chartered
credit unions through voluntary payroll allotment."

This bill would give

Federal employees the right to make allotments from their salaries for
payment on shares in credit unions.

It would also require the credit

unions to reimburse the Government for the reasonable costs of providing
these special services; and the bill also provides for the Comptroller
General to issue necessary regulations.
The Treasury Department is opposed to this legislation and recommends
against its enactment.

I shall shortly summarize the principal reasons

why we think this would be undesirable legislation.

But first, let me

make it clear that the Government strongly supports the development among
Federal employees of the habit of regularly saving a portion of their
earnings.

In support of the objective, Federal credit unions have been

provided with cost-free office space in the principal Government buildings
in Washington and in major cities throughout the country.

Salaried em-

ployees of the Government serve without compensation from the credit
unions as directors and on their loan committees.

The provision of quarters

to which Federal employees have easy access and of these other privileges
already afford the credit unions with a preferred status insofar as the
savings of Federal employees are concerned.

The encouragement of habits

- 2 -

of thrift has been one of the principal objectives of the savings bond
program, including the new "Freedom Share" savings note, for which payroll deductions are presently authorized and encouraged.

Thus, I think

that the Federal Government has already done a great deal to encourage
Federal employees to save and to make it easy for them to do so.

The

question posed by the bill is whether we should go one step further and
permit payroll allotment for credit union savings.

We think not.

Among several important reasons for our opposition, the strongest
one is our conviction that enactment of H.R. 6157, or similar billS, would
prove to be a crippling handicap to the successful operation of the Payroll
Savings Plan for U.S. Savings Bonds and Freedom Shares in the Federal
Government.

Federal employees are currently purchasing through payroll

allotments savings bonds and "Freednm Shares" at an annual rate of
$1 billion.

This constitutes 20% of the total purchases throughout the

nation of savings bonds and Freedom Shares.

While i t is difficult to

assess the immediate effect of enactment of H.R. 6157, we believe that
once established and in full operation it would result in a significant
drop in our dollar sales to Federal employees.

Part of this would be due

to a reduction in the number of participants and the rest to a reduced
scale of allotments.
The bases for this estimate are as follows:
(1)

Most employees of the Federal Government having a desire

to save are already on the Payroll Savings Plan.

The current over-

all participation rate of 66% (74% civilian, 60% military) is the

-~highest s ince
Therefore,

~.Torld

th~s

War II and is not likely to fO much higher.

constitutes the lion's share of the market insofar

as payroll allotment is concernc(l for both savinr,s bonds and credit
union shares, or other private savings.
(2)

We can only assume that presr.nt enrollees are saving about

all they feel they can afford to save.

Of course, some of them have

savings by direct deposit for which -payroll allotment would be
substituted.

But, if they elect another savings form through pay-

roll allotment, we believe it would be largely at the expense of
savings bonds -- either by dividing th0ir allotments or switching
over entire]:;.

(3)

The validity of these assumptions is supported by surveys

we have mad'2 with respect to payroll savings in private industry.
These surveys show that there is a marked Clisparity in the size of
per capita bond allotments between Federal workers and employees
of private companies where credit union withholding is also done.
Federal civilians average $32 per month, and the total of Federal
withhold ing, both military and c i vi Ii !:'.•1 , averages $23 per month.
By contrast, a spot check of eleven companies which actively promote
payroll savings for bonds, but also handle credit union deductions,
shows an average monthly allotment for bonds of $8.36.
Thus, there is strong evidence that direct competition with credit
unions in the field of payroll deductions would result in a significant
dollar loss to the Savings Bond program.

- 4 The question might be asked as to why the

savin~s

bond program

should have the special privilege of Federal Government payroll deduction
when other forms of savings do not.

I think the answer is that the

savings bond program is "special" and i t is in the national interest
that it should have this type of special assistance.

Particularly in

these times, it is a way in which Government employees can feel that
they are making a contribution toward the efforts of our fighting men
in this bitter and frustrating war in Vietnam.

If partiCipants today

were motivated solely by t.he rate of return, purchases of savings bonds
would be reduced.

Of course, there are other attractive aspects such

as maximum safety of investment and postponed payment of tax.

But, if

they had the convenience of payroll allotment, we feel that there would
be a high rate of switching to other forms of saving.

As the costs of Government go up in direct relation to the costs
of this war, the Treasury has two ways of financing these costs:
increases in taxes and through public debt financing.
guard against the problem of inflation.

through

And we have to

Taxes are, of course, the most

noninflationary method of financing the costs of government.

Second to

taxes, savings bonds are the most noninflationary way to finance the
Government's necessary expenditures.

Certainly, borrowing in this form

is the best way for the Government to borrOW while still keeping a lid
on total public and private spending in the economy.

In this sense,

savings through the purchase of U.S. Savings Bonds is even more noninflationary than would be individual savings in other forms, for those

- 5 other types of savings are eventually reflected in additional spending
however worthwhile that added spending may be -- while in the case of
U.S. Savings Bonds we can take Government spending as already

~iven

and

then it is only a question of how best to finance that given amount of
spending.
Let me briefly mention some other reasons why we oelieve this
legislation is undesirable.

Put simply, another important reason is that

we thiru{ the time has come to draw the line and put a stop to the proliferation of payroll allotments.

Already payroll systems include de-

ductions for Federal and State income taxes; for Civil Service retirement
and, where applicable, for Social Security taxes; for Government life
insurance and health insurance; for Combined Federal Campaign charitable
contributions and union dues; and for purchase of u.S. savings bonds and
notes.

The administration of payroll S:fstems, includin f; all of these

deductions, has become a tremendous task requiring the services of
thousands of employees and a vast amount of expensive equipment.

We feel

that the Government should be, and is, the most enlightened employer in
the country today, and that the allotments which are presently
in the mutual interest of the Government and its employees.

made are

What is now

proposed goes beyond the objective of mutual interest and enters into a
kind of paternalism on the part of the Federal Government which should
be avoided.

As I have pointed out, through their credit unions conveniently

located in the buildings in which they work, Federal employees already
have an easy way in which to save.

Also, under existing authority and

- 6 Treasury Rehulations, a Federal emplovee todc..'r can have his net salary,
after all payroll deductions, paid directly to a financial orvanization
of his choice for credit to an account of his choice.

In most commercial

banks, this same employee can, if he wishes, arrange to have part of this
deposit transferred to a savinr,s account, or he can of course draw his
own check for deposit to a savings account in any financial

or,~anization

of his choice.
When I testified on an identical \Jill before the Senate Banking anri
Currency Cornmi ttee, I predicted that the proposed legislation 'would lead
to demands by banks, savings and loan associations, and other financial
institutions for like privileges.

I said that the end result coulrl be

the extension of payroll deductions be:/ond reasonable limits, with the
Federal Government serving as a banker or bookkeeper for many things that
are personal affairs of its employees.

Little did I realize at the time

how accurate a prediction this would be, for the Senate Bankinr and
Currency Committee reported out, and the Senate subsequently passed, S. 1084 1
which would extend the privilege of payroll a.llotments for savings not
only to credit unions but to any bank, savings ba.n.l< or savinGS and loan
association.

We, of course, are vigorously opposed to enactment of

S. 1084, and for the same reasons and for additional reasons relatin/,,: to
its legal and administrative methodolo[;:!.
We are aware that the bill before this Committee provides that the
credit union shall reimburse the United States Government for the reasonabJ
cost of making a payroll allotment.

It is exceedingly difficult to

- 7 estimate what such costs wouln be

be~al.l.3e the~rvA.ry

from agency te> agency

and are, in part, dependent upon factors which cannot be calcul.ated in
advance, such as the frequency of changes in allotments.

There are

already two Federal payroll allotments for which reimbursement is required.
These are the Combined Federal Campaign (for charitable contributions)
and deductions for union dues.

At the time that the Civil Service

Commission was preparing to authorize these allotments, it made a survey
to determine what would be a reasonable charge per item.

On the basis

of this survey which, at best, was an educated guess, the Civil Service
Commission arrived at a standard charge of 2 cents per deduction on each
payroll, which is the charge presently in effect.

It shoulo. be pointed

out that this charge was fixed some time 8go, and costs have risen substantially since that time.

Moreover, this charGe merely reflected the

cost of setting up the allotment in the system ani makJnG the bi-weekly
payments.

It did not, for example, include any estimate of cost for

changes in the amount of the allotment.

This is because,

the Combined Federal Campaign, an employee aecides once a

i;1

the case of

~'ear

how much

he wishes to have ile'lucted every pay (la,'/ for this purpose and the amow1t
remains the same throughout the year.
relatively static.

Union dues ~ once alloti.e'i, are also

Therefore, these two allotments are relati vel:; simple

and inexpensive to administer.
However, it is predictei that if payroll allotments were B.uthcyizec
for savinr;s, employees woulcl wish to change their allotments frequently
and this, along with other operational considerations, woul:l mea.n that

- 8 the reasonable cost to he passerl on to the cre,j 11'. uni.on . . roulc;

[!E.'.

siderably hit":her -- conceivably as much as 10 cent:;

"] mi(rht

add, parenthetically, that

doinE~

;j.t:

item.

COil-

the same thing for savings ballics and

savings aIlel loan associations, which S. 1084 would require, would uncioubtedly involve even greater reimbursable unit costs.

This is b2cause

most employees wantinG the Snecial service would have a chOlet': of one
amon£ many such financial organizations and .Te wou16 probal)ly Le t11ai,inl ,
wi thin most payrolls, an individual payment for every particl.l'al..Lll c,

t;Ulp.Lu,IE;e

to only one financial organization.
I wonder if the credit unions woulci still be in favor of trd;"
addi tional privilege if they were aware that they might have t.o pay,:;,
charge of this magnituue.

Or, to put it another way, would not the credit

unions, faced with such a charge, brine: pressure to bear for the aclo1Jtion
of a charp;e of a considerably lesser :unount "lhicl1\-i,lU]:
to an additional form of subs icy of their operat:i.ons.

W11:)I..!lJ;;)

The

as to whether the additional amount of savings 'Which the

.'IIJ

r.p.<2:>!,

l~j'er1i t

21 .~',-(: ~,

ion

a;:ises

uni.)ns

woule! get would be worth the cost to them.
They probably would still be in favor cf the bjll, 'out.

p()sGil;~,'

solely or primarily because of the net Eain th2,t they wClll,i te<-..Li?"C
the form of aclCiitional savinf!s.

In support in;=; the bin

ht:f().r'~

BankinG" and Currenc'l Committee, the Credit l.h.1.ons Nat,:ioI\a.l
t>

•

eDNA, emphasized the much lower loss ratio on

108...115

v)":

llOc

ilL

(;en€l.l:c

/.;:;,;l.cj:-'.l(dt.

ill Ijjjvatt:: :::()mI)::,n<~

where payroll allotments for credit unions were pel'lflitted.

DnC"'l).3yf'c':'::'

allotments for credit· union shares are authorized, the creed":

ilf.

i,m i!'

- 9 then in a position to arrange with individual borrowers to sign

rjot'u-

ment authorizing each pay day the transfer from his share account to his
loan account of the amount required to amortize the loan.

Thus,

put

the matter in a crude form, enactment of the bill before the Committee
could put the Federal Government in the loan-collecting business; !md,
if the allotment privilege were extended to banks and savings and loans,
we would be helping them also to collect on their loans.
an especially valuable and cost-saving item for

lendin~

This would be
institutions.

would eliminate a great deal of paper work and the cost of stationery and
postage necessary to send reminders to delinquent borrowers.

It would

reduce salary costs for those employees needed to hanne inii vi dual tra'1f,actions at the teller window on pay days and other peak periods.

Without

question, it would also be a convenience to the Federal employees

co~

cerned.

But query:

How far should 'ole go in what we might call creepi ng

paternalism in doing a multitude of things for all employees that each
one is fully capable of doing for himself?

And query further:

If the

Federal Government is to assist financial institutions in the collection
of their loans, what about helping others to collect amounts due -collection agencies, department stores, etc.?
The possible abuse of this privilege by the financial instit'c,ticns
could result in the use by them of leverage on Federal employer:s who wish
to borrow, in the sense that in order to get approval

0: a loan, t[le

lending institution might require the borrower to execute a salary allot
ment and a document authorizing a crediting of a portion of the uroceecs
of his outstanding loan.

- 10 -

Mr. Chairman, this sums up some of the principal reasons why we are
opposed to the enactment of H.R. 6157, but I want to emphasize without
minimizing our other points of objection that the most important reason
for our opposition is the damage which we feel it will do to our savings
bond program.

In this period of great competition for savings and high

rates of return on some forms of investment, I think the Savings Bonds
Division of the Treasury has done a remarkable job in obtaining an
increase from $1/2 billion to $1 billion in the amount annually dedicated
by Federal employees through the allotment system to the purchase of
Savings Bonds and Freedom Sheres.

It is going to be exceedingly difficult

for them in the coming few years to maintain the rate of saving in this
form, much less to achieve a substantial increase.

We believe that their

problem should not be aggravated by providing credit unions or indeed
other financial institutions with additional privileges which would result
in a loss to the Savings Bond program of a significant percentage of
Federal employees' savings.

TREASURY DEPARTMENT
(

lR RELEASE 6: 30 P.M.,

mc1ay, November 6, 1967.
RESULTS OF TREASURY'S WEEKLY BILL OFFERING
'!he Treasury Department announced that the tenders for two series of Treasury
11s, one series to be an additional issue of the bills dated August 10, 1967, and the
her series to be dated November 9, 1967, which were offered on November 1, 1967, were
ened at the Federal Reserve Banks today. Tenders were invited for $1,500,000,000,
thereabouts, of 91-day bills and for $1,000,000,000, or thereabouts, of 182-day
11s. The details of the two series are as follows:
NGE OF ACCEPTED
MPETITIVE BIDS:

High
Low
Average

91-day Treasury bills
maturin~ Februarl 8
z 1968
Approx. Equiv.
Price
Annual Rate
98.827 Y
4.64~
98.814
4.692;'
98.819
4.672;'

182-day Treasury bills
maturin~ Mal 9 z 1968
Approx. Equiv.
Price
Annual Rate
97.406
5.131%
5.204;'
97.369
97.381
5.18~

Excepting 1 tender of $100,000
96% of the amount of 91-day bills bid for at the low price was accepted
77% of the amount of 182-day bills bid for at the low price was accepted

PAL TENDERS APPLIED FOR AND ACCEP'lED BY FEDERAL RESERVE DISTRICTS:
)istrict
30ston
lew York
'hiladelphia
!leveland
tichmond
.tlanta
~hicago

t. Louis
Inneapolis
ansas City
a11as
an FranCisco
IDTALS

AEElied For
$ 19,126,000
1,746,180,000
24,148,000
52,130,000
21,562,000
37,455,000
203,491,000
36,339,000
22,130,000
21,073,000
23,544,000
174 z101 z 000

AcceEted
$
9,076,000
1,135,580,000
12,148,000
31,078,000
12,562,000
23,655,000
118,157,000
23,899,000
12,750,000
20,573,000
13,544,000
88.1 121 .1°°0

$2,381,279,000

$1,501,143,000

AEElied For
$ 13,216,000
1,314,583,000
16,880,000
26,476,000
8,052,000
22,010,000
147,881,000
26,691,000
16,797,000
13,431,000
23,693,000
126 z662 z000

AcceEted
3,216,000
$
703,833,000
8,880,000
25,326,000
6,822,000
14,010,000
76,881,000
22,691,000
9,797,000
13,431,000
15,693,000
99 z662 z000

$1,756,372,000

$1,000,242,000 ~/

Includes $222 007 000 noncompetitive tenders accepted at the average price of 98.819
Includes $132;922;000 noncompetitive tenders accepted at the average price of 97.381
These rates are on a bank discount basis. The equivalent coupon issue yields are
4.81% for the 91-day bills, and 5.41;' for the 18e-day bills.

TREASURY DEPARTMENT
WASHINGTON. D.C.

November 6, 1967
FOR IMMEDIATE RELEASE
PETER D. STERNLIGHT TO SERVE AS TREASURY CONSULTANT
PENDING RETURN TO NEW YORK FEDERAL RESERVE BANK
Peter D. Sternlight has resigned his position as Deputy
Under Secretary of the TreAsury for Monetary Affairs effective
November 11,1967. Hr. Stern1ight came to the Treasury from
the Federal Reserve Bank of New York in November, 1965, and
will return to the official family of the New York Bank
effective November 12, 1967.
Mr. Sternlight graduated franS'tvarthmore College in 1948 and
rece ived his Ph. D. in economics from Harvard in 1960. He joined
the staff of the Federal Reserve Bank of New York in 1960. At
the time he came to the Treasury as Deputy Under Secre tary, he
was Assistant Vice President assigned to Open Market Operations
and Treasury Issues.
Beginning on November 13, 1967, Mr. Sternlight will return
to the Treasury on loan from the Federal Reserve Bank of
New York to serve as a Consultant. In that position, he will
continue to fulfill most of the functions of his former position
as Deputy Under Secretary. His assignment as Consultant will
continue until December 22, 1967.
On the occasion of his official resignation as Deputy Under
Secretary, Secretary Fowler has presented Hr. S ternlight with
the Secretary of the Treasury's Exceptional Service Award. The
::itation reads in part:
"
His analytical abilities were coupled with
a thorough understanding of the functioni.ng of
complex financial markets and a keen sense of the
public interest. His early appreciation of the threat
posed during 1966 by unbridled competition among
financial institutions for a limited pool of savings
helped in framing policies which limited the escalation
of interest rates. Throughout a difficult period of
monetary stringency, his cool judgment was always a
valuable asset to the Treasury. His contributions were
of especial value in the formulation of Treasury policy
on legislation for raising the limit on the national
debt and on t.he taJ(; ~l:charge ~y(oposed in Augus t, 1967."
000

TREASURY DEPARTMENT

~OR

IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING

The Treasury Department, by this public notice, invites tenders
or two series of Treasury bills to the aggregate amount of
2,500,000,000, or thereabouts, for cash and in exchange for
reasury bills maturing November 16,1967, in the amount of
2,400,412,000, as follows:
91-day bills (to maturity date) to be issued
n the amount of $1,500,000,000
or thereabouts,
jditional amount of bills dated August 17,1967,
ature February 15,1968,originally issued in the
1,000,569,000, the additional and original bills
1terchangeab1e.

November 16,1967,
representing an
and to
amount of
to be freely

182-day bills, for $l,OOO,OOO,OOOi or thereabouts, to be dated
ovember 16,1967, and to mature May 6, 1968.
The bills of both series will be issued on a discount basis under
)mpetitive and noncompetitive bidding as hereinafter provided, and at
lturity their face amount will be payable without interest. They
.11 be issued in bearer form only, and in denominations of $1,000,
i,OOO, $10,000, $50,000, $100,000, $500,000 and $1,000,000
laturi ty value).
I

Tenders will be received at Federal Reserve Banks and Branches
to the cloSing hour, one-thirty p.m., Eastern Standard
me, Monday, November 13, 1967.
Tenders will not be
ceived at the Treasury De~artment, Washington. Each tender must
for an even multiple of $1,000, and in the case of competitive
nders the price offered must be expressed on the basis of 100,
th not more than three decimals, e. g., 99.925. Fractions may not
used. It is urged that tenders be made on the printed forms and
rwarded in the special envelopes which will be supplied by Federal
serve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
stomers provided the names of the customers are set forth in such
1ders. Others than banking institutions will not be permitted to
~it tenders except for their own account.
Tenders will be received
;hout deposit from incorporated banks and trust companies and from
lponsible and recognized dealers in investment securities. Tenders
1m others must be accompanied by payment of 2 percent of the face
lunt of Treasury bills applied for, unless the tenders are
:ompanied by an express guaranty of payment by an incorporated bank
trust company.
F-1074

TREASURY DEPARTMENT
4

November 8, 1967

FOR IMMEDIATE RELEASE

The Treasury Department today released a
copy of a letter to the Accounting Principles
Board of the American Institute of Certified
Public Accountants expressing Treasury's views on
the Board's proposed Opinion on accounting for
income taxes.

The Institute recently solicited

views from interested parties on the APB's
proposed Opinion, and Stanley S. Surrey,
Assistant Secretary for Tax Policy, replied for
the Treasury Department.

Attachment

F-1075

TREASURY DEPARTMENT
WASHINGTON. D.C. 20220
SSISTANT SECRETARY

NOV

1961

Dear Mr. Lytle:
We submit the following cOIDn'ents in response to your solicitation of views on the Exposure Draft of the proposed AFB Opinion on
accounting for income taxes.
The Treasury Department has a substantial interest in the manner
in which American business concerns report their Federal income tax
liabilities. While the statutory corporate income tax rate is 48 percent, it is clear that the effective corporate tax rate on American
business as a whole is considerably less than this. The reduction
results from conscious decisions on the part of the Congress to
achieve this lower effective tax rate on American business in general
and on special industries in particular. The accounting approach
suggested in the proposed APB Opinion would, however, in the aggregate, substantially overstate the tax liability of American business and present an inaccurate picture of our tax system. Since the
tax liability would be substantially overstated in the aggregate, it
would obviously also be overstated individually for the vast majority
of United States corporations.
Congress has achieved this lower effective tax rate by a
variety of means _.. artificial deductions structured to achieve a
rate reduction (e.g., Western Hemisphere trade corporations), expensing of capital costs (e.g., intangible drilling expenses and
certain research and development costs), fast tax write-offs (e.g.,
amortization of emergency facilities), expensing in excess of cost
(e.g., depletion), creation of excessive reserves (e.g., financial
institutions), capital gains rates (e.g., timber and livestock),
special deferrals (e.g., shipping companies and life insurance
companies), and credits (e.g., investment credit). The financial
accounting treatment for each of these items of tax reduction are
all facets of a single problem. Moreover, it appears that the treatment of these items does not readily fall within the framework of
traditional accounting concepts. The proposed Opinion recognizes
this fact. Thus, paragraph 37 of the Exposure Draft enumerates some
of these items as presenting accounting problems still to be resolved.
The effect of the various deductions in these areas still to
be resolved, as well as the intention behind their presence in the
tax system, is to reduce the effective tax rate on companies in the

- 2 -

particular industries involved (e.g., financial institutions, c'i:
and gas exploration, stock life insurance companies, and certa~_n
Uni ted States steaml;lhip companies;. Fer example, in the case of
savings institutions, the tax reduction is achieved by wh2.t is recognized to be an unrealistic deduction for additions to reserves for
bad debts.
The financial accountiP£ of these institutions does not recognize these additions as charges tu income. (While it may be contended
that it is always possible that loss experience could utilize the
reserve, this is so unlikely that prudent accounting does not take
the possibility into account in re flecting current income.) This
provision, once devoid of its tecrnical characterization in th~
Internal Revenue Code, is seen to be simply a preferential tax rate
made applicable to these institutions through the device af a bad
debt reserve. A substantially identical tax result could have been
achieved by a reduction in tax rates applicable to these insti~uticns.
Under this approach there would have been no doubt as to the accounting treatment of this reduction -- it would have been recognized
immediately.
In many of the preference situations mentioned above, the particular means of achieving tax reduction is less important than the
fact that there is a reduction. Most deductions could be structured
as credits and, in turn, most deductions and credits could equall::
well be rate reductions. The financial accounting treatment of tbe
tax reduction arising from the investment credit is a part of this
broad problem. In this regard, the investment credit is designed to
give a lower effective tax rate to companies modernizing or expanding
their machiner,y and equipment.
When originally proposed the investment credit was to be allowed
only on the excess of current investment over current depreciation
charges on the theor,y that new investment equal to annual depreciation was normal investment necessary simply to maintain a company's
status quo and would not represent a new level of investment effort.
Under this form. of the credit it would be difficult to say that the
investment credit would be associated with any particular asset.
It would represent, rather, a selective ta~ reduction to those corporations engaged in modernization or expansion. The fact that the
provision as finally enacted provided for an investment credit
measured by a percentage of gross investment should not be viewed as
determinative of the nature and accounting treatment of the credit.

- 3 The basic question to be resolved in the case of the investment
credit, as well as in the case of the other preferences, is whether
the financial accounting treatment of a tax reduction should depend
on the mechanical method by which the reduction is measured or implemented in the statute. To seek a solution to the accounting
treatment by following the manner in which these reductions are
characterized within the Internal Revenue Code will surely lead to
accounting inconsistencies because of the variation in the legislative approaches used in achieving these reductions. For example,
the tax benefits enjoyed by Western Hemisphere trade corporations,
certain cattle and timber sales, dividends received by corporations,
etc., are also tax reduction measures. Yet, the benefits arising
from these particular measures are recognized immediately for accounting purposes, because the technique by which they are implemented
in the statute is regarded as relating more closely to a tax rate
reduction. It appears basically inconsistent to recognize immediately
the benefits of these tax reduction measures but then to defer the
benefits of certain other tax reduction measures because they are
artificially associated with assets or because it is possible under
some circumstances they may !1turn-aroundll in a later period. In
many of these situations the "turn-around!! was not viewed by the
legislature as a real possibility. While we recognize that under
traditional accounting concepts the future prospects of a particular
corporation should be viewed with a degree of caution, given the
present dynamic economy of this country and the commitment of our
society to continued economic growth, such a view is not cautious,
but unrealistically pessimistic.
In total, the preferences incorporated within the tax law clearly
result in an effective corporate tax rate that is less than 48 percent. We believe that financial accounting should recognize this -both because it is the fact and because the stimulative effects resulting from the tax reduction should not be obscured.
The essential question is whether the characterization of a tax
reduction in the Internal Revenue Code should control the accounting
treatment of that reduction, when following such a ritualistic approach has these unfortunate consequences. It appears to us that an
accounting approach must be developed that is capable of dealing appropriately and consistently with each item of tax reduction regardless of how it is implemented in the statute.
Special care must be exercised with respect to the investment
credit because of its magnitude and because most companies would have
to change their existing practice in response to the position taken

- 4in the APB Exposure Draft. Presumably, this will result in a massive
restatement of earnings whose effects on the economy, while difficult
to measure, could be serious. Furthermore, a mandate to defer the
benefit arising from the investment credit could well blunt its effectiveness as an i~centive to modernization and expansion.
The Treasury Department has said many times that it would like
to look to the accounting profession for leadership in the computation of income for tax purposes, for these problems are essentially
and historically accountants' problems. Obviously, there are areas
where the tax law differs, and indeed must differ, from the accounting
approach but in each such case there should be a compelling nonaccounting reason for this. We would view it as an unfortunate reversal
for the accounting profession to be bound in its determination of
income for financial reporting by the ad hoc characterizations and
structures of tax benefits adopted in the Internal Revenue Code for
the purpose of achieving selective tax reductions.
Sincerely yours,

~{ (./(~J

s~~etary

Stanley S.
Assistant

Mr. Richard C. Lytle
Administrative Director
Accounting Principles Board
666 Fifth Avenue
New York, New York 10019

urrey

TREASURY DEPARTMENT
(

)R RELEASE 6: 30 P. M.,

mday, November 13, 1967.
RESULTS OF TREASURY'S WEEKLY BILL OFFERING

The Treasury Department announced that the tenders for two series of Treasury
11s, one series to be an additional issue of the bills dated August 17, 1967, and the
.her series to be dated November 16, 1967, which were offered on November 8, 1967, vere
lened at the Federal Reserve Banks today. Tenders were invited for $1,500,000,000,
. thereabouts, of 91-day bills and for $1,000,000,000, or thereabouts, of 182-day
11s. The details of the two series are as follows:
.NGE OF ACCEP'lED

MPETITIVE BIDS:

High
Low
Average

91-day Treasury bills
maturing February 15 z 1968
Approx. Equiv.
Price
Annual Rate
98.834
4.6131)
98.822
4.66Oi
98.825
4.648~
!I

182-day Treasury bills
maturing May 16, 1968
Approx. Equiv.
Price
Annual Rate
97.411
5.121%
97.382
5.178~
97.394
5.155~

56~of the amount of 91-day bills bid for at the low price was accepted
98~of the amount of 182-day bills bid for at the low price was accepted
TAL 'lENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRIC'IB:

District
Boston
~ew York
)hilade 1phia
;leve1and
Uchmond
ltlanta
:hicago
It. Louis
linneapolis
:Snsas City
laUas
:an FranCisco

AEE1ied For
$ 18,073,000
1,907,904,000
27,481,000
34,743,000
21,446,000
35,931,000
272,835,000
40,495,000
29,823,000
30,844,000
24,058,000
184,654,000

'IDTALS

$2,628,287,000

AcceEted
$
8,073,000
1,018,684,000
13,403,000
25,279,000
10,446,000
23,699,000
228,285,000
31,675,000
19,023,000
25,971,000
14,618,000
81,574,000

AEElied For
17,445,000
$
1,163,190,000
16,326,000
32,820,000
12,938,000
35,797,000
163,851,000
26,713,000
19,522,000
13,275,000
19,173,000
130,561,000

$1,500,730,00~ $1,651,611,000

AcceEted
7,445,000
$
613,825,000
8,326,000
27,820,000
12,938,000
30,781,000
131,751,000
25,209,000
13,022,000
13,271,000
11,173,000
104,461,000
$1,000,022,000£1

Includes $227 990 000 noncompetitive tenders accepted at the average price of 98.825
Includes $148'574' 000 noncompetitive tenders accepted at the average price of 97.394
1ft.
"
•
•
ld s are
~uese rates are
on a bank discount basis. Theequiva1ent coupon lssue
Yle
4.78~ for the 9l-day bills, and 5.38~ for the 18c-day bills.
F-I076

TREASURY DEPARTM£NT

November 13, 1967

FOR IMMEDIATE RELEASE
TREASURY MARKET TRANSACTIONS IN OCTOBER
During October 1967, market
transactions in direct and guaranteed
securities of the government for Government
investment accounts resulted in net purchases
by the Treasury Department of $60,533,100.00.
000

F-1077

t- ::tS! 1i ng ton
~'OH

mH,EM3E on m..:r... I VERY
Hm',lMU~S

BY THE IIONOR."\BLF~ FHEDEfncJC L. DE:UNG,
UNDEH SECRETARY OF TIlE THEASUEY.FOl{ 1,10NETA}{Y AFFAIW;,
AT 'fHE 1967 LEGISLATIVE CONFEHENCE
OF TIlE ENLAHGED HEALTOHS WASHINGTON cm.!i'HTTEE,
THE NATION1\L ASSOC I tlTION OF REAL l<~ST..\TE BOARD:),
IN 'l'HE INTERNATIonAL BALLR001,t E.I\ST, THE WASHINGTON IIILTON HOTEL,
WASHINGTON, D. c.,
ON SATUfn)J\Y, NClVEIJDER 11, 1967, A'f 4: 00 PM (J':ST)

~:?_

My thesis today is a simp Ie one -- a tax surcharr,e,

.:!:comm?E.?ed

now.

the PJ,'esident,

!~_~.?ected_bad_!y_ and i~ ne<?_Q~~

The real estate jnctustry has a direct interest in this

matter and should support the recommended t2x action.
in ('!sscl1ce, is my n1ess:tge.

1bat,

Now let me develop it more fully.
9_J~_<:,

Th€'rc are two fundamental points to lwep in mind.

the hOllGing and real ef;t".te

secto~.'s

of the economy do bottc}:

under condi tions of balanced {Jc')nomic growth than they do nodcr
conditions of inflation or d0flation.

The problems of

or. famine ill the honsing Rnd real estate

indm;tJ~i('s

well l;nown to you t.o requlre me to discnss
Villo

WOJ:k

tl13!;l

fea~t

are too

further.

You,

in those fields, lcnow thorn at first hand.

!~Y!.!!.'

tight money hi ts hax-d and {1ispr.opoJ~tion8.tcly at th(;se

ser:me.nts of the economy. This point I do want to develop much
more fully _.- al thOUg'l you have lmd recent and, I c:cpcc t,

COI1-

villeinr" (>xIJcrience of this fact ~- in the StllOlmcr rInd Fall of
,~

1966.

F-1078-

- 2 -

Let me turn first and briefly to the state of the economy.
Mos t of the forecas ts fOl' IDGS see an economy rising rather
strongly but in reasonable balance

assuming a tax increase.

They see quarterly gains in gross national product averaging
just short of $15 billion.

This would produce close to a $60

billion increase over four quarters

a gain right at the

upper limit of what most economists believe the economy can
tolerate without undue strain.
In this setting, prices will be increasing faster than
we would like.

While much of the upward pressure will be

coming froll1 the cost increases of 1965 and 1966, GNP growth
of the magnitude expected will hardly contribute to price
weakness.

But, with reasonahle balanee in the economy, we

would have a chance for better price performance, which would
make it ~asier to continue healthy real growth in 1969.
I want to underline the point that this fairly optimistic
outlook has a tax increase built into it.

Witbout that tax

increase, there would be n1Q.1,'e expansion

too much more for

any comfort.

That overexuberance would require restraint --

and that restraint, almost incvltal)ly, would mean tight monoy.
If there were no additional restraint, prices would rise
more strongly.

~nflation

is a tax in itself -- the crue10st

tax of all, since it bears most heavily on those who can least
protect themselves from it.
cen"t

~urcharge

The recommanded temporary 10 per-

real I y means a tax -- on the aver,'lgo -- of about

·. 3 -

). percent of inconlc, and those least able to pay cscnpc the
surch<'.rge en tire ly.

I f prices rise 1 percell t, un less Illoney

incomes also rise, average real income is reduced by the sallie
amount as through a 1 percent tax increase.

TIle impact on

different inCOI'le levels varies.
Now,

BOIilC

may say

-~.

then I'll gamble that prices won't

rise enough more wi thout a tax increase to
off as a tax incre:lse would.
without a tax

iIlCre3.~C',

C0013

then they would with a tax

I'll have higher income.

mal~e

me as badly

Aftcl' a] 1, if the high0r prices,
out less than 1 per.cent higher

incre~se,

I'll wino

And, anyway,

That ktnct of a gamble llsually has

not been a good one -- certainly not a good one for the little

fellow, for tho r.ctj.r.cd, for tho save,,' who finances
. Anyone who is

thjnl~in~

about that k1 nd of a gamble needs to

lwep in mind (a) that high prices tend to be
they stay around

Plld

future higher prices;

hOU6in[~ •

sticJ~y

-.:.. and

build bases, through cost increases, for
(b) there obviously is no guarantee that

the price rise can he held to even a good temporary trade-off
level, and (c) it's hard to repeal inflation -- but taxes can
be repcn]crt and the surcharge is a temporary one.

I'd sum up the broad economic picture this way.
peopl~

Some

see the inflation wolf slipping through the woods; some

hear him sCl'atching at the front door;
in grandma's bed.

SO!Jll3

find him already

- L! -

Wherever he is, this Red Hiding Hood economy needs a little
wolfbune in the form of a tax increase.

It is too plump and

tempting for the inflation wolf.
Now I want to turn to the financial picture -- both because
it is of more direct concern to you and because there is no
question of where the high interest rate wolf is -- he's in
grandma's bed, grandma's in his stomach, his

ja~s

Are

wj.de

open, and Rod Riding Hood hasn't got a chance without the tax
increase wolfbane.
Interest rates for intermediate and long-term securities
in the tlnited States today are highAr than they have been sinco
the very early 1920's.

Less than two weeks ago, tho Treasur.y

issued a 7-ycnr note at 5-3/4 percent -- the highest coupon on
a Tl'easury issue since June, 1921, and it is trading slightly
below par.

Except for

short~tcrm

securities, most interest

rates today are higher than they were in the money crunch of
Augus t - September, 1966 -- long-term Gove:l'nmcnts and corpora tos
arc more than 1/2 percent higher, municipals.just a bit higher.
I am sure none of you like to remember the August September, 1966, poriod.

The crunch that occurred thon

broken by a series of actions.
interest rates fell.

ViaS

Money became available and

From the hiGhs of the Summer of 1966 to

the 1967 lows in the early and late Spring, Treasury bill rates
dropped 2-1/4 percent, one-year Treasury notes and agency

- 5 -

securities declined about 2 percent, 5- and lO-year Governlnents
dropped 1 to 1-1/2 percent, corporates more than 1 percent, and
municipals 7/8ths percent.
But sincE'! the lows of last Spring, rates have moved. up
again quite sharply.
movem'3nt later.

We will get to the reasons for this

Meanwhile, the figures are as follo 1v?,.

As of

yesterday, Treasury bill rates were up 1-1/4 to 1-1/2 percent
from their Spring lows; short-term Governments nnd agoncies
and long-term corporntes were up 1-1/2 percent, longer-term
Governments up 1-1/4 to 1-1/2 percent, and municipals up
percent.

Much of the incrense -- between one-third and one-half

has occurred since the President's Tax Message went to the
Congress on August 3.

And all of these increases have tnlwn

place against the background of an easy monetary clilnatc.
Whi Ie I'm talh,ing about intel"eS t rates, let m€J note tlla t
they have effects on both the domestic and international
economies.

And let me note fUrther that these effects concern

countries other than the United States.
In January, 1967 J the finance ministel"S of five countries
the United States, the United Kingdom, Germany, France, and
Italy -- met at Chcquers in England in what became a widelypub1ictzcd effort,. to
war.

de~escalate

t.he so .... called interest rate

The Communique issued after that meeting said, in par.t:

- 6 -

"The Ministers agreed that they would all make it
their obj ecti vo wi thin the lind ts of their respective
responsibilities to cooperate in such a way as to
enable interest rates in their respective countries
to be lower than they otherwise would be."
The whole point of the Chequers meeting was that all felt
that undue dependence in the past had been placed on monetary
policy, that, while this had produced needed restrictions on
their economies, it had also produced distortions in their
economies.
By and large, monetary cooperation proved successful

through the Spring of 1967.

And, even since then, despite

the sharp upward rise of interest rates in the United States,
most of the European countries have continued to follow
relatively easy monetary policies.

The German rediscount rate

has been reduced from 5 to 3 percent in a series of moves.
Belgium has cut its bank rate five times -- from 5-1/1 to 4
percent, the latest move coming at the end of October.

In the

Netherlands, bank rate has been reduced from 5 to 4-1/2 percent.
France and Italy have continued their bank rates at 3-1/2 percent; Austria reduced its rate again at the close of October.
All of these moves were in full keeping with proper
domestic economic policy -- they were not done out of altruism.

- 7 The point is that the moves were taken in the face of rising
rates in the United States, and there may be real question
whether these policies can be continued as rates rise here.
We already have seen recent upward bank rate movements
in the United Kingdom and Canada that were clearly defensive
and reflective not of their domestic situations but developments in the international money markets, which are strongly
influenccd by U. S. interest rates.

Enrly in 1967, the Bank

of England cut its bank rate from 7 to 5-1/2 percent in three
steps.

In the past three weeks, it has done back up again to

6-1/2 percent in two moves.

The

Banl~

of Canada cut its rate

3/4 percent in two moves earlier this year; in late September,
it went back up 1/2 percent.
More than a year ago, President Blessing, of the Bundesbank,
said publicly that high intereHt rates abroad hamper the German
Federal Bank's efforts to bring down rates at home.

At about

the same time, in a speech here in Washington, Governor Carli,
of the Bank of Italy, said:
" ••• if one deludes oneself into thinking that a
more elaborate policy mix can be successful without
the operational techniques and sufficient forcefulness
to put them into effect qUickly, then it will, sooner

or later, still become necessary to employ the credit
restrictions which nre characteristic of a cruder Rpproach.

- 8 -

In the end effect, their belated application leads
the economy into more serious stagnation, the external deficit persists, confidence is lost,
speculative pressures grow, and, ultimately, unemployment ensues."
On October 9, 1967, the French Minister of Economy and
Finance told a gr.oup of Fn-ench businessmen that "a rise in
interest rates in the United States, with the risk of spreading
to other countries, and the corresponding risk of a slowdown
in economic development" was a negative factor in evaluating
worldwide economic growth prospects.
I need not go on with this part of my story.
I

thin~

is quite clear.

The point

Tight money and high interest rates

in the United States are disturbing influences not only in the
United States but also abroad.
Now let me return to the domestic scene and come down
harder on the supply-demand picture in our capital and credit
markets.

While economists were debating the economic outlook

earlier this year, and members of Congress were expressing
concern over the economy, participants in the credit markets
seem to have had few doubts about the basic trend of economic
activity.

Even though capital needs for financing inventories

were lessening and needs to finance current fixed investment
outlays held about steady, corporations have racked up record
amounts of borrowing in the capital markets this year.

- 9 -

New 10ng-tC3rm corporate issues in 1966 totalled $17.6 billion.
Based on what has been done and is in prospect, that total will
be beat by $7 billion, or 40 percent, this year.

New state and

municipal securities in 1966 totalled $11.3 billion.

It looks

as though they will be $2.5 billion higher, or up 22 percent,
in 1967.

And in neither case was 1966 a slack year -- in fact,

it was the record year before 1967.
What has caused this heavy volume of borrowing through the
capital markets?

Underlying the demand was a combination of

conviction and fear

conviction that liquidity positions run

down in 1966 should be restored and dependence upon short-term
borrowing from banks reduced, and fear that failure to tic up
some available funds while they

available might mean in-

ability to get funds later on when they are needed.
A special source of concern for corporate, state and
municipal financial officers has been the possibility of an
oversized Federal Government deficit.
tight markets of the Summer of 1966.

They, too, remomber the
But, at that time, the

Federal Government's demands were quite modest.

Now they con-

template a period of heavy private demand augmcntedby all
overgrown Federrrl deficit.

That makes for sleepless nights.

Let me put the picture in simple and stark form by
contrasting fiscal year 1967 and fiscal year 1968.

- 10 In fiscal 1967, net Federal demands on the private credit
markets, as measured by the increase in outstanding Treasury
issues, agency issues, and participation certificates, less the
increase in the holdings of these obligations by the Government
Investment Accounts and the Federal Reserve, was actually
negative by $6 billion.

Even after adjusting for the decline

of $5 billion in the Treasury cash balance, it is clear that
thore was no net denland from the Federal sector in fiscal 1967
instead, there was net supply.
Contrast this with fiscal 1963.

Assume the tax program

and expenditure control, as recommended by the President,
produces an administrative budget deficit of $11 to $18 hi.llion.
This will be financed by direct Treasury

borrowln~.

Add to this

sales of participation certificates and agency securities.
Subtract pronpcctive purchases of the Government Investment
Accounts and the Federal Reserve.

We estimate the net take

from the private markets to be $10 to $12 billion, in contrast
to a net supply of $6 billion last year.

Without a tax increase,

the fiscal 1968 figure becomes $17.5 to $19.5 billion net demand.
We believe we can manage -- with difficulty, of course,
but man~ge -- a net demand of $10 to $12 billion.

But another

$7.5 billion would put great strain on the markets.
Put the picture in this perspective.

Last fiscal year,

the total demand for funds flowing through the markets was
about $60 billion.

- 11 The Federal sector put in about $5 to $6 billion, so private
satisfied demand was $65 billion.

This fiscal year, total

supply should be higher -- perhaps $70 - $75 billion -- maybe
more, depending on bank credit expansion.

But Federal net

demand of $10 - $12 billion would use up the increase.

And

net Federal demand of $20 billion would use twice the prospective
increase.
p~essure

And, incidentally, these are the figur.es which show
on the markets and on interest rates.

It is not just

$7.5 billion more borrowing against a GNP of $800 billion.
The relevant figures are $16 billion

net Federal credit

in fiscal 1968 as against fiscal 1967

~emand,

or $26 billion

more relative to a total supply of, say, $75 billion.
Now, let me finish the story of Federal credit demand in
fiscal 1968

Direct Treasury borrowings, gross of new money,

in the markets in the last half of calendar 1967 will total
a bit more than $16 billion.

All of this has been done or

announced; there will be no more market borrowing by the
Treasury in 1967.

Yesterday, we announced

$1 billion parti-

cipation certificate sale -- the only one so far "in this half
year -- and we will do no more in 1967.

There will be sOlUe

more agency issues, but they are essentially rollovers
no new money.

So we are finished for 1967.

Because of seasonal factors relating to revenues, most
Treasury new money borrowing comes in the second half of a
calendar year.

- 12 -

Remember I said that, in fiscal 1967,

Federal credit demand

direct Treasuries, agencies, and participation certificates __
was a minus $6 billion.

But we took $5 billion out in the last

half of calendar 19G6 and put back $11 billion in the first half
of this year.
With a tax increase and expenditure control, we would
expect to put back net about $2.5 billion in the first half of
1968.

With expenditure control and no tax increase, we would

take out net about $5 billion.

So the swing from the first

half of this year would be $16 billion more net demand.
The process through which the
limited supply of credit among an

marl~et

~xcess

would allocn te a
of would-be borrowers

can be described, ahead of time, only in qualitative terms and
generalities.

The particulars might work out differently.under

slight variations in circumstances.

In genel.'al, though, it may

be predicted that the Federal Government's credit needs would
be

met, one way or another, as would also the credit needs of

larger business firms.

The cost might be high -- even in com-

parison to the high rates prevailing today -- but the supply
probably would be there because some other borrowers would be
"pushed off the end of the bench" and unable to find money,
except at rates that were considered exorbitantly and prohibitively high.

13 -

Consumers might fare unevenly in the scramble for available
credit.

Funds for installmcnt purchases, and other short-term

credit, would probably be available -- but money for. home
mortgages would qui te llk(!ly be a nwjor victim.

Business

might also fare unevenly, with large firms getting their needs
filled,

~nd

small ones having to make do with less

drawing

on every last ounce of spare liquidity in the system, leaning
on trade credit, and cutting corncrs wherever possible in cash
management.

State and local governments would also feel the

pinch, especially if bank credit expansion potential was under
some restraint.

In the Summer months of 1966, this was one of

the areas where we seemed closest to the stark possibility of
non-functioning credit markets in which funds were unavailnble
at virtually any price.
Let us look more specifically at housing and real estate.
Any threat of sCl.'ious imb<llance in the pattern of funds
supplied and demanded in the credit markcts is necessarily a
matter of special concern to those associated with the housing
industry.

When interest rates are bid sharply higher in a

scramble for funds, someone is sure to be the loser.

And, if

our earlier bouts with tight money are any guide, the housing
and real estate industries will feel the first and hardest
blows.

Certainly, that was the case last year.

- 14 -

In the span of a very few months, the housing industry
moved last year from relative prosperity to severe adjustment.
Suddenly deprived of a steady inflow of new savings, the
mortgage and real estate murh:ets were caught in a tightening
squeeze.

The main financial causes were clear enough.

Total

demands for credit, swelled by a rising tide of business borrowing for plant and equipment outlays, far outran potential
supplies.

Interest rates were drive up and a balanced pattern

of financial flows was badly distorted.

Thrift institutions

lost out to commercial bankf:> in a hectic race for a limi ted
pool of savings, and neither could match the lure of the
higher yields that soon appeared on marltet instruments.

As a

result, tho home financing, residontial construction, nnd
real estate sector experienced a period of extreme financial
stringency, and the effects fanned out to material suppliers,
the construction tractes, specialized financial institutions,
and the general publico
Loan commitments were cut back sharply as mortgaGo lenders
were hit by heavy withdrawals of funds moving to obtain higher
yields.

New housing starts plummeted from a rate of 1,430,000

uni ts ill March to 8'15,000 uni ts in October -- a decline of
more than 40 percent.As you know all too well, the problem was
not limited to the financing of new homes.

In a typical year, the share of the real estate market
accounted for

b~r

the purchase and sale of existing homes may

be neal'ly twice tha. t of now homes, wi th some 2-1/2 lI1i 11iol1
existing homes changing hands.

According to your own figures,

transfers of existing houses in September, 1966, was 23 percent smaller than in September, 1965.
existin~

The markets for llew and

howes arc linked and interrelated wi th the pm,'chase

of a new hOI1'e frequently dependent lIpon the avai labi Ii ty of
financing for the sale of an old home.

And, last year, with

mortgage money uncommonly scarce, the financing of both new
and existing homes was

diffi~ult,

expensive, and, at times,

in some regions, nearly impossible.

None of us wants to see

those conditions again.
So far the story this year hns been one of solid recovery.
1:'rom some standpoints, the pace of the recovery has even
exceeded expectations.

In September, the seasonally adjusted

annual rate of new private housing starts reached 1,457,000
uni ts, the hi ghes t since Decf2lJlbm:, 1965.

Third quarter hOllsing

starts were 17 percent abov0 the second quarter and more than
50 percent above the fourth quarter, 1966.

Savings inflows

at thrift institutions and commercial banks have continued
in re~ord volume.

In the fjrst 9 months, this savings inflow

totalled a massive $31.5 billion, in contrast to a mere $14.6
billion in 1966 and an average $21.4 billion in 19G3 through
1965.

New home sales have been running at high levels.

- 16 The inventory of unsold new

hom~s

is only about 170,000 units,

about 100,000 fewer than at the 1964 peak.

In the faco of

rising incomes and favorable demographic factors, all this
suggests a solid basis for a continuing revival in home construction and the real estate business if financial factors
permit.
That, I hasten to add, is a mighty big "iL"

Already,

the mortgage market is feeling the impact of high and rising
long-torm interest rates.

Mortgage rates are sluggish, but

they have been moving up.

On the basis of historical relation-

ships with other long-term interest rates, they could go still
Discounts in the FHA market are larger than we like

. higher.

to sec fo:l.' tho smooth fUllcU.oni flG' of that

marl~et.

But, to

this point, financial factors have not arrested the housing
recovery.

While possibly less than ideal, the financial

environment for housing and real estate this year has been one
of credit availability, although that avatlability has been
at a high price.
As we look to the future,

the problem is whether we can

assure th8 continued availability of credit that real estate
markets require.
there.

Over the longer pull, the money will be

But, in this difficult period, while net Federal

credit demands are swinging from net supply to sizeable net
demand, there is a real risk that total credit demands will
again outpace supply
different reasons.

as they did in 1966, although for

- 17 -

If an over-all imbalance were allowed to develop, there is
little doubt in my mind -- or, I am sure, in yours

as to

where the heaviest burden of adjustlllent would come to rest.
Once again the residential constrltction, home financing, and
real estate sectors would be Ilear the end of the line when the
credit windows were closed.
Some fiilancial problems arc complex.
tially very simple.

This one is essen-

The problem is simply to insure that

total credit demands are scaled down into reasonable cor1'e5pondence with probable supplies.

This can be, accomplished

through the President's fiscal recommendations -- a 10 percent
surcharge on

person~l

and corporate taxes, coupled with reduc-

tions in Federal expenditure.

The effect would be to reduce

the net Federal credit demand from an intolerable $20 billion
or more to the $10 to $12 billion range, and also to trim down
slightly the net private demand for credit.
Credit demands will be cut back to available supplies by
the operation of the market, make no mistake about that.

TIle

choice lies between the exercise of fiscal responsibility or
letting nature take its course.
course that nature takes.

And we saw last year the

Without fiscal restraint, interest

rates aOnd the market processes will equate the total demand
and supply for credit -- they always do.

But that cutting back

of demands will surely hit the housing sector with special force.

- 18 -

The course of wisdom, in

Illy

opinion, is to apply a badly

needed degree of fiscal restraint, so that over-all demands
and supplies will be brought into reasonable balance.

that way, the markets will achieve a more even and equitable
distribution of credit supplies, and the 1966 experience can
remain only as an object lesson of what we are determined to
continue to avoid.
The tax increase is ne(!ded Clnd is needed now.

The

question is a right now question -- not one for the indefinite
future.

Markets don't wait, as is evidenced by the interest

rate rise that has taken place so far -- particularly the
increase since August 3.

To put off taking action is far too

big a gamble -- and a gamble thnt is almost sure to produce
some -- perhaps many -- losers -- and housing and real estate
are likely to be among tho[;e losers.
Again, I say -- the tax question is a right now question
and we need your support to get it answered right now.

--000--

TREASURY DEPARTMENT

Novelnber 14, 1967
FOR IMMED IA TE RE LEASE

TREASURY DEPARTMENT OUTLINES EQUAL EHPLOYMENT REQUIREMENTS
FOR SAVLNGS AND LOAN ASSOCIATIONS, SAVINGS BANKS
AND OTHERS WHO HANDLE U. S. SAVINGS BONDS
Assistant Treasury Secretary Robert A. Wallace, the
Department's Equal Opportunity Officer, today announced that
letters arc being sent to some 6,000 savings and loan associations,
,dvings bdnks and other organizations which issue and redeem
['. S. Savings Bonds and Savings Notes, providing detailed infornla tion on requirements for compl iance with the Treasury Department's
new Equal Employment regulations affecting all organizations
hundling these securities.
Some 12,000 commercial banks with federal deposits which issue
3nd pay savings bonds are already covered by Treasury Equal
Employment requirements. The new regulations affect about 6,000
other organizations -- commercial banks which are not already
covered, savings and lOrtn associations, savings banks, and a small
number of other organizations which I~[lve heen authorized to issue
3nd pay U. S. savings bonds and savin~s notes.
These regulations prohibit discrimination in hiring, promotion,
training and other personnel activities on the part of these
Jrganizations.
Issuing and paying agents which issue or pay savings bonds or
;avings notes on or after December l, 1967 will be required to:

1. Establish positive equal employwent policies and
programs.
2. Include in all solicitations for ?mployees through
employment agencies or advertisf>ments a statement
that all qualified applicants \~'ill receive
cons idera t ion wi thou t reg;ird tc 1-ace, creed,
color or national origin.
3. Pos t in cons picuous place s (t ~~ t, ncldrcl pos ter entitled
DISCRIMINATION IS PROHIBITED. :vltich hCls been furnished
all is~uinl! md Daying agent-.; on tl" Treasury.
F-107'l

- 2 -

Complaints that issuing and paying agents are not pursuing
Equal Employment policies will be reviewed by the Treasury and
efforts made to resolve such complaints by conciliation. Any
agent found to be following discriminatory practices and refusing
to end them will have withdrawn authority to issue or pay savings
bonds and savings notes.
All issuing and paying agents who did not file a compliance
report (Standard Form 100, EEO-l) during 1967 will be required to
do so by January I, 1968. These forms are to be mailed to the
Equal Employment Opportunity Officer, lJ. S. Treasury Department,
Washington, D C. 20220. Subsequent reporting will include only
those agents having 50 or more emploY2cs and they will be
required to file by March 31 of each year.

000

TREASURY DEPARTMENT
(

FOR IMMEDIATE HBLEASE
SUBSCHIPTIOH AlJD ALLOTMENT FIGURES FOR TREASURY'S CURRENT CASH OFFERING
The Treas\lry Depar":'Mcnt today announced the subscription and allotment figures
.lith respect to the current offering of 'J-S/Srjo Treasury Notes of Series A-1969, due
February 1;:>, 1969, ami '0-3/470 TreasuI'1J Note::; :jf 3eries A-1974, due Hovember 15, 1974.
Subscript+~ns and allotments were divided among the several Federal Reserve
Districts and the Tl'easury as fol1o",s:

~'cJ.eral

Reserve

):::.;:;trict
30ston
~e"l York
?hi lade 1ph ia
;leve1anll
{~.chn!ond

\t1anta
~hicago

;t. Louis
:inneapolis
:ansas City
}:11las
,an Francisco
'reasury
TOT/~L3

5-sL8i; NOTES OF SERIES A-1969
5-3L4~ NOTES OF SERIES A-1974
Total Subscrip- Total
Total Sub scrip- Total
tions Received
Allotments
tions Received
Allotments
$' 380,031,000 $ 150,544,000 $
793,719,000 $ 77,509,000
11,062,263,000
8,831,472,000
7,034,635,000
685,715,000
312,137,000
232,700,000
35,336,000
124,624,000
545,695,000
65,761,000
508,777,000
200,893,000
45,369,000
299,944,000
248,782,000
103,425,000
292,448,000
79,479,000
334,666,000
144,412,000
210,921,000
387,856,000
1,774,521,000
922,115,000
77 ,110,000
436,643,000
334,644,000
155,692,000
44,006,000
205,953,000
87,446,000
:'...89,191,000
9t),215,000
342,863,000
2;:)3,865,000
120,539,000
46,986,000
348 , 183 , 000
267,964,000 .
116,458,000
184,980,000
1,804,084,000
298,521,000
792,554,000
3,321,000
20,789,000
15,699,000
37,799,000
$15,644,788,000

$10,737;~81,000

Subscriptions by investor classes:

$14,132,177,000
5-5/8~b NOTES

A-1969
tates, political ::;ubdivisions or intrumentalities thereof, public pension
10 retirement and other public funds,
ltcrnational or{janizations in which the
lited 3tates hoLis menbership, foreign
~ntra1 bank::> and foreic;n States which
Ibmi tted certification and received
III allotment ----------------------------lmmercial bank::; (own acc~unt) ------------.1 others --------------------------------TOTAL
'deral Reserve Banks and Government
vestment Account~ ------------------------

-1080

GRAND TOTAL

$1,651,708,000
5-3/4% NOTES
A-1974

89,716,000
5,108,061,000
2,959,919,000
$8,157,696,000

73,700,000
6,866,815,000
7,091,662,000
$14,032,177,000

7,487,092,000

100,000,000

$15,644,788,000

$14,132,177,000

TREASURY DEPARTMENT
Washington

FOR A. M. RELEASE
THURSDAY, NOVEMBER 16, 1967
REMARKS BY THE HONORABLE STANLEY S. SURREY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
MONEY MARKETEERS
AT
OSCAR'S DELMONICO RESTAURANT, NEW YORK, NEW YORK
NOVEMBER 15,1967 - 7:00 P.M., EST
THE UNITED STATES INCOME TAX SYSTEM -- THE NEED
FOR A FULL ACCOUNTING
The United States income tax system is a powerful
factor in our society, in our businesses and in our households.
Viewed in the aggregate, its importance for fiscal policy
purposes has been demonstrated in recent years, notably
in the 19()4 revenue reduction -- and we hope again this
year through the tax surcharge. American business is
intimately aware of its importance in the particular, and
tax planning is an integral part of business planning. About
90 percent of our adult population is involved in filing an
income tax return and 75 percent in paying an income tax -a coverage broader than in any other country.
An income tax system of such strength and breadth of
application warrants a full accounting. It would seem but
obvious that we should be fully aware of its content and
scope, so that we could intelligently pass judgment on its
effects. This being so, it is all the more surprising that
there are gaps in the accounting that now obtains. These
gaps exist both at the Governmental level, in the way our
Budget reflects the income tax, and at the level of the
individual business, in the way financial accounting
handles the impact of the tax. These gaps have serious
implications for our understanding of the tax system.

F-108l

- 2 -

We may start with the way our income tax is reflected
in the Federal Budget in aggregate terms. The Administrative
Budget and the Cash Budget both treat tax receipts on
a cash basis. This being so, the degree to which changes
in income tax or other rates are currently reflected in the
Budget depends upon the timing of tax payments. Recent
changes in that timing, notably graduated withholding,
estimated tax payments for corporations, and currency of
deposit for withheld taxes and excise taxes, have considerably
narrowed the gap between legislative changes in rates and
the impact of the changes on the Administrative and Cash
Budgets. The National Income Accounts Budget reflects taxes
on an accrual basis, except for non-withheld individual
income taxes which are on a cash basis. These variances
in the Federal Budget statements of revenues have made it
difficult for the general public to readily comprehend the
aggregate economic effect of the tax system. The problem
is heightened by the fact that the Administrative Budget
does not cover the taxes earmarked for various trust funds,
such as Social Security taxes and highway taxes, while the
other two Budgets do include these revenue sources.
Each of the Budgets conveys some information and a
thorough analysis would make use of all of them. Many
people, however, think of "the Budge t" in terms of one se t
of figures; this one set of figures is usually that in the
Administrative Budget, which is probably the least useful
for general economic analysis.
The recent Report of the President's Commission on
Budget Concepts seeks to develop one comprehensive measure
to reflect aggregate revenues. Its recommendation for the
revenue and expenditures part of the Budget would include
all revenue sources -- both general revenues and trust fund
revenues -- and would place reporting of the income tax
revenues on an accrual basis. The Commission states that
the use of an accrual basis for the corporate tax and other
taxes could be done at this time, while its application to
the individual income tax requires further study. These
changes in Budget reporting will permit a better public
understanding of the economic weight of our taxes. The
changes will thereby contribute to a more informed consideration of what will be our major fiscal policy issue in
the Post-Vietnam period -- how the revenues released by the
reduction in military expenditures should be distributed
between tax reduction and aggregate civilian expenditures.

- 3 -

The President's Commission on Budget Concepts also made
recommendations regarding the Budget treatment of expenditures, but one aspect was not considered. The aspect not
considered -- and this is reflected in all discussions of
expenditures -- concerns the Government expenditures made
through the tax system. At first blush, such a phrase -Government expenditures through a tax system -- seems
almost meaningless. A tax system presumably concerns itself
with raising revenues rather than spending funds. But a
closer analysis of our present tax system would reveal real
substance to the phrase. Through deliberate departures
from accepted concepts of net income and through various
special exemptions, deductions and credits, our tax system
does operate to affect the private economy in ways that are
usually accomplished by expenditures -- in effect to produce
an expenditure system described in tax language.
Let us take a simple example: The Federal budget for
the Department of Health, Education and Welfare has line
items detailing expenditures, including trust fund expenditures, for old age assistance. But that budget contains no
line item for the $2.3 billion expended through the tax
system to aid the elderly -- under the special $600 exemption,
the retirement income credit, the exclusion of Social Security
retirement benefits, and so on. The HEW budget also has line
items for medical assistance expenditures, but no line item
for $100 million expended through the tax system by reason
of the special exemption for sick pay paid to employees.
The budgets of the Commerce Department and the
Transportation Department contain line items for expenditures
under Federal programs for aiding business. But there are no
line items for the very large amounts, reaching over $1 billion,
expended through the tax system either as tax relief,
incentives, or assistance for a variety of business activities: for example, financial institutions, through special
deductions for reserves; Western Hemisphere Trade Corporations,
through special rate reductions; shipping companies and life
insurance companies, through special deferrals.
The budget of the Interior Department has line items for
natural resources programs, but no line items for the large
amounts, also over a billion dollars, expended under the tax
system to assist our natural resources industries, including
timber, through expensing of certain capital costs, expensing
in excess of cost under the treatment of depletion, and special
capital gain treatment. The budget for the Agriculture
Department has line items representing programs to assist
agriculturaL-.activ:ities, but nn 1 ine items for amounts, over a

- 4 half-billion, expended under the tax system through the
expensing of certain capital costs, the availability
of the cash method of accounting even if inventories
are used, and special capital gains treatment of livestock.
The absence of line items in the Budget for these tax
expenditures -- this lack of a full accounting for our tax
sys tern - - has many fdce ts . To begin with, it les sens
public understanding of sigr.ificant segments of our tax
policies. For the most part there are no line items in
the Internal Revenl.e Service Statistics of Income
delineating these items, so that in the absence of special
studies the amounts involved are simply unobtainable.
Indeed, many of these "tax expenditure" programs cannot
be found in the Internal Revenue Code, so that unlike
direct expenditure programs where the budget trails are
relatively well postea, the" tax expenditure" trails are
very often obscure ly narked.
A large pRrt of Lhe tax benefits for the elderly
rests on a very brief and cryptic administrative ruling
of the Internal Revenue Service excluding Social Security
retirement benefits from income, without citation of any
authority for the result; much of the benefits for
financial instjtutions rests on administrative rulings
stating how the reserves against debts owed to banks shall
be computed; a lctrge part of the ber.efits to agriculture
and natural rpsources also find their origin and even
some of their current expression in administrative rulings
and regulations.
When Congrcssior.a1 talk and publ~c opLnLon turn to
reduction and cnntrol of Federa.l experditures, these
tax expenditures are never mentioned. Yet it ~ clear
that if these tax amounts w~re treated as line items on
the expenditure side of the Budget, they would
automatically come under the close scrutiny of the
Congress and the Budgf't Bureau. But the tax expenditures
are not so listed, and they are :-hu:; automatically
excluded from tha t scrutiny. Ins tead, since they are

- 5 -

phrased in tax language and placed in the Internal Revenue
Code, any examination to be given to them must fall
in the classification of "tax reform" and not
"expend iture control". There is a vas t difference
between the two classifications.
It can be suggested therefore that we need a full
accounting for these effects of the tax system. The
approach would be to explore the possibility of describing
in the Federal Budget the expenditure equivalents of tax
benefit provisions. We should not, of course, overlook
the difficulties of interpretation or measurement
involved here. Thus, just which tax measures can be
said to fall in this category -- in other words,
which tax rules are integral to a tax system in
order to provide a balanced tax structure and a proper
measurement of net income) and which tax rules represent
departures from that net income concept and balanced
structure to provide relief, assistance, incentive or
what you will for a particular group or activity. Also,
once a tax item can be identified as falling in this
second category, we must then compute its expenditure
equivalent. Presumably this would be the amount of
revenue lost, Le., "spent," under the special tax
treatment, and in a number of situations revenue statistics
wculd have to be improved to give us this information.
This discussion is not to b~ taken as saying that
all tax relief measures are bad -- or that all are
good -- just as it is not htended to state that all
Federal expenditure programs are bad or all good.
This is not a qualitative discussion of tax preferences
or, as some say, tax loopholes.
I might here digress to note that one reason tax reform
is so difficult may be the hard, unfeeling way we go about
it. The very word "loophole" has a jarring ring. I commend

- 6 -

to your attention the delicacy of the following paragraph
from a recent Canadian Budget speech of last year:
'.'
"In recent months there has been evidence of
increasing abuse of the section of the Act providing special tax treatment for deferred profit
sharing plans. In 1960 and 1961 my predecessor,
then the Hon. Member for Eglinton, with the worthiest of motives, introduced a section in the Act to
provide for these plans, which he described as an
important piece of social legislation. Since then
various businessmen and their professional advisers
have exploited this well-intended but vulnerable
section in various ways."
Nor is my discussion intended to say that tax relief
deliberately programmed as a direct expenditure item would
look the same.
Indeed, a possible consequence of describing tax preferences as expenditure equivalents is that
more efficient ways to achieve the objective may be developed.
I cannot think of any responsible HEW or Budget
Bureau official who would put together an expenditure program of assistance to the elderly that would in any way
resemble the crazy-quilt pattern of our tax treatment of the
elderly. Under that treatment half of the tax revenues
spent go to people over age 65 on retirement whose annual
income is over $10,000 and hardly any goes to people in that
age group who continue to work for their maintenance and
whose incomes are far lower. Nor can I think of an agricultural expert who would put together a farm program under
which the benefits would become greater the wealthier the
owner and the less he relied on his farm activity as the
source of his income. Indeed, I suspect that cost-benefit
experts assigned to measure the efficiency of tax expenditure programs would have a fascinating time. Appropriate
budgetary recognition of these tax expenditures would
facilitate such cost-benefit studies.
At this point a word on the investment credit may be
helpful to illustrate a different kind of tax device.
This credit is a feature of our tax law designed to improve
rates of return and to increase investment. We believe it
is a sound provision which serves to achieve a better balance in a tax system which would otherwise impinge too
heavily on the level of private savings and investment.

- 7 -

Perhaps it couLi be cast as a d~rect government expenditure,
and the English have recently taken this approach. But there
are very definite advantages in ~Landling the sums involved
through the tax sys~em. The computation of the credit
depen-ls e:-ti reI} on t:ax concepts, such as the basis for
depreciation and depreciable lives, and being in the tax
system its effect is limited to firms which, at least over
the long run, ~xpect to make profits. Also, by being in
the tax system it remains quite neutral with regard to the
investment to wllic1 i, is app1.ied; it does not involve
extensive government dccisiC'""s as to i.i:iicil inves~me~~t:sSlre
p,c~rt:'(,i.'l;rl;~ rr,t..'r"i.t:orious.
I t is s predd very broadly
over all business, agriculture, finance, the professions
and so on -- the whole gamut of American enterprise.
Let US turn from the accounting at the Federal Budget
level for aspects of 0t'r tax s:vs~em and consider the accounting at the taxpayer level. We m~st, of course, recognize
thst American accounting practices, the requirements of the
Securities and Exchange Commission, and above all the
integrity and experience of our accounting profession, have
combined to give the American public a very considerable
Clmount of reI ia,)le d,,1 ta reg-:;; rd i,.g the opera tions of opr btls iness concerns. This is a long cry from an accountant's
statement recently submitted to ot1r Internal Revenue Service
representative in one of our European Embassies with respect
to the balance sheet of a concern in that foreign country.
The statement said that the balance sheet was:
"Prepared from t;'e official books (of the economy)
together with dat~ made available (to the accountant)
with regard to secret surplus reserves orig inating
from profits that were not disclosed to the ...
Government. These secret reserves consist of cash
balances at two local ba':lks; marketable securities
held by these same two banks as guaranties to overdraft accounts, and an oversta~2ment of the liability
regarding cormnissions payable to the London agent."

- 8 -

It is not this situation that I am now discussing, for fortunately we do not face in the United States this kind of
lack of full accounting regarding the profits picture of
a corporation, and hence its tax picture. Rather, I would
like to consider the questi on of how a properly, and of
course honestly, prepared financial statement should account
for these special tax expenditure programs I have been discussing.
The Accounting Principles Board of the American Institute of Certified Puolic Accountants has recently issued an
Exposure Draft of a proposed Opinion on financial accounting
for income ta~es. One aspect of that Opinion relates to
how business firms should, in their financial reports,
handle the 7 percent investment credit. The present accepted
accounting for the credit affords an option: the company may,
in computing after-tax profits, simply treat the tax reduction
provided by the credit as a reduction'in the current year's
tax expense, or it may amortize that reduction over the
life of the asset giving rise to the credit. Apparently
about 80 percent of the firms use the first option, that
of direct reduction (sometimes called the "flow-through"
approach). The proposed Accounting Principles Board
Opinion would eliminate the optional approach and require
the second method, that of amortization or the "deferred
method." The restIlt of the deferred approach would be to
show lower after-tax profits, since the tax reduction
resulting from the credit is spread over future years. The
Opinion also considers the accounting for various other tax
reduction provisions, and here also applies "deferred
accounting."

-9-

The Treasury Department has a substantial interest in
the manner in which business concerns report their Federal
income tax liabilities on financial statements. The proposed Accounting Principles Board Opinion raises a crucial
issue whose resolution is of vital significance to the public
understanding of our tax system. Just as it is important to
know at the level of the Federal Budget what is happening
with respect to the aggregates under our tax system with
its many special tax provisions, it is equally important to
delineate as clearly as possible the effects of those
provisions on individual firms.
The Treasury's concern with respect to the proposed
Opinion has nothing to do with income tax collections -the corporations affected will pay the same amount of tax
annually whichever approach is adopted.
Rather, our concern
is with the proper representation in the financial statements
of these corporations of the effect of the tax system.
While the statutory corporate income tax rate is 48
percent, it is clear that the effective corporate tax rate
on American business as a whole is considerably less than
this.
The reduction results from decisions on the part of
the Congress to achieve this lower effective tax rate on
American business in general and on special industries in
particular.
The accounting approach suggested in the
proposed APB Opinion would, however, in the aggregate,
substantially overstate the current tax liability of American
business and present an inaccurate picture of our tax system.
Since the tax liability would be substantially overstated
in the aggregate, it would obviously also be overstated
individually for the vast majority of United States
corporat ions.
The preferences incorporated within the tax law clearly
result in an effective corporate tax rate for many taxpayers
that is less than 48 percent. Financial accounting should
recognize this -- both because it is the fact, and because
the stimulative effects resultingErom the tax reduction
should not be obscured.
Special care must be exercised with respect to the
investment credit because of its magnitude and because most
companies would have to change their existing practice in

-10-

response to the position taken in the Accounting Principles
Board Exposure Draft.
Presumably, this would result in a
massive restatement of earnings whose effects on the economy,
while difficult to measure, could be serious.
Furthermore,
a mandate to defer the benefit arising from the investment
credit could well blunt its effectiveness in promoting
modernization and expansion.
For these reasons the Treasury Department responded
to the request of the Accounting Principles Board for
comment on its Exposure Draft with a letter expressing its
serious concern over the approach taken by the APB in its
proposed change in the method of accounting for the 7 percent
investment credit. We believe our comment underscores
the need for further study of the financial accounting for
income tax liabilities at the level of the individual firm.
There are thus considerable gaps in the present accounting for our income tax system.
It may be helpful to relate
this description of these gaps to a current matter -the use of tax incentives to meet our social problems.
America faces many social problems that desperately
require solution. A major part of these problems centers
around the plight of our cities and their disadvantaged
residents.
One aspect of suggested solutions involves an
increase in moderate and low income housing, with special
emphasis on housing located in these areas. Another involves
providing jobs for the disadvantaged, through manpower training programs and greater employment in business activity
within these areas or the aided movement of the inhabitants
to jobs outside the areas.
Participation by private
enterprise, especially large concerns, is considered helpful
to achievement of these goals.
But it is said that the likely
rate of return from business activity involving that participation may not be adequate to enlist that participation. Hence
it is proposed in some quarters that the rate of return be
'increased by some form of tax reduction in exchange for the
participation desired.
The tax reduction suggested generally
involves a large credit against tax or special deductions.

- 11 This is one illustration of the tax incentive approach
in the setting of social reform.
Other illustrations may
be found in other social objectives -- pollution control,
aid to education, assistance to rural areas, and so on.
Certainly no one can quarrel with these social objectives.
In the past tax incentives were generally sought -- and at
times obtained -- on the ground that a particular industry
needed SUPPOLt.
The crucial question of why that support
was in the public interest was barely spelled out, if at
all, and the detaj_ls of proof were held to a minimum.
But
today the public interest objective is in the forefront,
and needs no proving.
And it is generally taken for granted
that private enterprise participation will always be helpful.
What is not shown is why the tax route is to be preferred
over other means of inducing the desired participation of
prIvate enterprise.
The immediate leap to the tax solution serves only to
stultify thinking about these social problems.
Once the
leap is made there is no opportunity to explore the details
of the problems.
Yet a great many useful questions can be
asked:
For example, as to low income housing in urban areas
and jobs for the urban disadvantaged, just why has private
enterprise not undertaken these tasks in the past?
Is it
that the immediate return is insufficient, or is it that the
participation has been seen as only sporadic? What forms
of private enterprise are best suited to the tasks?
Is it
a large industrial concern or a small indigenous business
locally owned; is it manufacturing activity or service
activity; is it an experienced builder or a concern new to
the building field but with management know-how in other
business fields? More crucial, what measures are needed to
induce the participation -- what rate of profit, what
assistance in financing, what guarantees against loss,
what assurance of a continued market, what other forms of
protection against the risks that have hitherto restrained
participation, and so on?

- 12 -

With these questions answered as best we can, the
task is then imaginatively to search the arsenal of possible
Governmental action -- if Government assistance is needed -to see which forms of Governmental action can be most
responsive, effective and efficient.
Here also the immediate
leap to the tax route can only prove stultifying, for it tends
to foreclose consideration of all other avenues of assistance.
And yet experience has taught us that with respect to
Governmental assistance to a particular group or activity,
the non-tax route is far more liekly to yield the better
answer at a lesser cost. Moreover, the tax answer once
enacted may well inhibit further useful thought about the
problem.
Tt would seem far better to let HUD or Commerce
or Labor Or HEW gain experience and flexibility through
non-tax solutions that can be varied and tested, than turn
much of the task over to the Internal Revenue Service,
which has no background of experience to use and for whom
an increase in experience in the social area will not yield
the productive return that it would in the other Departmentso
Our progress in space exploration is not built 01. tax
incentives, but on direct relations between Government and
business that bring forth the required participation by
private enterprise.
Our capsules are not propelled into
space by the Internal Revenue Code.

- 13 In large part those who leap to the tax route recognize
all this. But they assume that the non-tax solutions will
involve large Government expenditures and they fear that the
appropriation door is shut or will not open very wide. Whatever
may be the validity of those assumptions and fears as to any
particular program, there is no reason to conclude that because
the front door of appropriations is closed or narrow, the back
door of tax reduction will open wide.
Those who are concerned with the level of government
expenditures are cognizant of the two doors to the Federal
budget. They readily understand that a decrease in revenues
through a tax expenditure has the same impact on the Budget
deficit as a direct increase in expenditures. Chairman Mills
of the House Ways and Means Committee, for example, has said he
considers such tax incentives as "a form of back door spending."
He thus fully recognizes it is the door of his Committee that
is being knocked on as the entrance to the Budget through tax
incentives, rather than the direct route of government assistance.
And he can also recognize if that door opens for one or two
tax incentives, it must inevitably stay permanently ajar for the
wave of tax incentives that would follow.
Chairman Mills is on sound ground. For here also we
reach the aspect of full and proper accounting. Our experience
with the tax incentives of the past should give us pause before
we add a new tax-route expenditure and then keep it buried in
the Code away from public scrutiny. We have learned that the
tax incentive of the moment becomes the tax reform target of
many tomorrows. What can be said about tax incentives for
these urban problems can also be said about tax incentives
for our other social problems -- pollution control, college
education within the reach of all who are qualified, development
of rural areas and new towns, assistance to depressed areas, and
so on. It is almost demeaning to our collective wisdom to say
that everyone of these problems will yield and yield only to
the universal solvent of a tax incentive. And if they did, how
would we solve the loss of our tax system that this maze of tax
incentives would mean?
All of this is not to be taken -- and this must be underscored -- as saying the Treasury Department stands aloof from
society and its problems. The Treasury clearly recognizes that
a negative answer as respects the tax route equally dops not
solve a problem. It therefore ras joined -- and conti'llla11y
will join -- the other Departments and agencies in thl active
search for constructive solutions involving other form:; of
governmentRl~s1stall('e or .')ction.

-14-

Indeed, the Treasury has found that the way to obtain imaginative and broad thinking about these social problems -- to obtain
real brainstorming -- is to tell the groups concerned to forget
their stereotype, first impulse solution of a tax incentive, to
close the Internal Revenue Code, to bar their tax lawyers from
the meeting -- and then get down to the real task of analyzing
the problems and thinking about the possible solutions. The
results are always positive. Once the blinders of a proposed
tax incentive solution are removed and the whole horizon of
approaches is opened to exploration, we begin to appreciate that
there are many constructive measures that can be taken outside
of the tax system.
Our social problems are causing very large demands to be
made upon the Federal Government. We are a wealthy nation and
we certainly should be able to solve these problems. But even
with our great wealth the solutions for all these problems will
come more readily if our planning is efficient and sound. There
are limits to the ways in which we can use our resources and
those limits require careful expenditure control. Such control
in the planning of a particular program, even one with a high
priority, means other useful programs will not have to be starved.
We must therefore recognize that our tax system should
not be used as a back door through which the dollars are to
flow free from this careful planning. We need a much higher
degree of accounting for the dollars that the tax expenditure
programs which grew up in the past aLe now absorbing. We
also should be careful not to leap tc a new set of uncontrolled
tax expenditure programs through a new set of tax incentives.
This is especially so when there are adequate non-tax measures
at hand with which to attack these social problems. As a
consequence, closing the back door of tax incentives does not
mean that no solution will be provided.
Rather, it means that
the doors and windows are opened for constructive thinking
about these other measures. This is the way to both social
progress and a sound tax system.

000

STATEMENT OF 'l'HE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
ON PRIVATE FOUNDATIONS
BEFORE SUBCOMMITTEE NUMBER 1, SELECT COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
WEDNESDAY, NOVEMBER 15, 1967, 10:00 A.M.

Mr. Chairman and Members of the Subcommittee:
I should like to take this opportunity to state, as succinctly
and

dire('~ly

as I can, both the record and the position of the

Treasury Department on legislative reform relating to private
foundatioqs.

If you or your staff have any questions concerning

the administration and application of existing laws in various
individual cases and situations, I shall refer all questions and
leave the discussion to the Commissioner of Internal Revenue in
whom I repose the highest confidence.

He is in charge of the

administration of tax laws.
In his appearance before your Committee in the summer of 1964,
Secretary Douglas Dillon stated:
"As a matter of personal practice, I do not

associate myself, and have disassociated myself ever
since I was in the Treasury, with individual tax cases
and tax questions, so that to the extent it is an
individual case dealing with an individual taxpayer
or an individual foundation which is not a taxpayer,
but has to file information returns, I would not have

F-I082

- 2 -

any action.

This has been left entirely to the

Internal Revenue Service."
I, too, have followed that practice.
On detailed questions as to the various choices of remedy
through modification of the laws applying to foundations, I shall
call upon Assistant Secretary of the Treasury for Tax Policy
Stanley Surrey, who was in charge of the study which resulted in
the submission of the Treasury Report on Foundations which contained
the Treasury Department's recommendations for new legislation
concerning foundations.
in April

I resigned from the Treasury as Under Secretary

1964 and returned as Secretary in April 1965.

In that

interval, the Treasury completed its Report and Secretary Dillon
submitted it to the appropriate committees of Congress for implementation.

While I am not familiar in detail with all of the choices

open at that time and the reasons for the selection of those which are
included in the Treasury Report, by reason of not being in the Treasury
Department then, I endorse the principal recommendations and will
support them if called before the House Ways and Means Committee
and the Senate Finance Committee.
From

1961 through 1964 the Department conducted an extensive

study of the activities of private foundations and the operation of
the present laws governing them.

It analyzed the relevant administrative

- 3 and litigation experience of the Internal Revenue Service and the
Department of Justice.

It made a special survey of a selected

sample of about 1300 foundations to secure new data about their
characteristics and performance.

Department representatives

discussed the facts of the foundation world with lawyers, accountants,
critics, administrators, and others familiar with foundation
operations.

Careful attention was given to the work of other

investigators, including this Subcommittee.
Drawing upon the information produced by this study, the
Treasury Department concluded that six major problems exist among
private foundations.

The Department found, also, the presence of

several additional problems of less general significance.

In its

Report on Private Foundations, submitted to the House Ways and Means
Committee and the Senate Finance Committee early in 1965, the Department
described these problems in considerable detail, provided a series
of illustrations of each of them, and recommended quite specific
revisions of existing Federal laws to deal with them.
That study did not conclude that the abuses outweighed the
benefits to society of private foundations.

Rather the Report

concluded, and I firmly believe, that private foundations fulfill a
vital need of our society; the need for the pioneer, and the vision
of the experimenter.

In this role, they both complement and supplement

the services provided by government and by other non-profit activities
in general.

.,. 4 Thus, our recommendations were conceived within the framework
of preserving this vital philanthropic activity.

Our objective

is the elimination of abuses engaged in by some and thereby to
strengthen the institution itself.
We should not be misled or diverted from this goal by those who
operate on the fringes of philanthropy or with the cloak of philanthropy
but without philanthropic motive.

The aberrations which they produce

can be readily curbed either under existing law or if necessary by
specific and selective legislative changes.

It is a disservice to

confuse those who pervert the law for private gain with those foundations
which operate to sustain and advance philanthropy.
The Senate Finance Committee published the Treasury Report at
once.

Later in the year the House Ways and Means Committee solicited

written comments on the Report from the general public.

It published

those comments in November and December of 1965.
In his 1966 Economic Report to the Congress, the President
urged the Congress "to deal with abuses of tax-exempt foundations."
In his Economic Report of 1967, the President again directed
Congressional attention to the need for reforms in this area.
However, the Ways and Means Committee--its time during the past
several years almost steadily occupied by other major tax and
Social Security legislation--has not yet taken further action on
the Treasury Report.

- 5 An examination of the record, then, makes the Treasury Department

position on foundation reform quite clear.

Having studied the field

thoroughly, the Department reported its findings to the Congress,
made specific and detailed recommendations for legislative action,
and has strongly urged adoption of those recommendations.
has twice recommended action.

The President

The Department presently awaits the

attention of the tax writing Committees to this important matter
and stands ready to work on this important phase of tax reform with
those Committees in the customary manner and procedure when they are
ready to proceed.
Thank you.

TREASURY DEPARTMENT

November 15, 1967

·OR IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
two series of Treasury bills to the aggregate amount of
t2,500, 000, 000, or thereabouts, for cash and in exchan~e for
Preasury bills maturing Novemb er 24, 1967. in th~ amou~t ·")f
52,401,985,000, as follows:
.

~or

91-day bills (to maturity date) to be issued November 24, 1967,
Ln the amount of $1,500,000,000, or thereabouts, representing an
ldditional amount of bills dated August 24, 1967, and to
lature February 23, 1968, originally issued in the amoun+: of
~001,494,000, the additional and original bIlls to be freely
.nterchangeable.
181-day bills, for $1,000,000,000,
::r thereabouts, to be dated
24, 1967, and to mature May 23, 1968.

~ovember

The bills of both series will be issued on a discount basis under
ompetitive and noncompetitive bidding as hereinafter provided, and at
aturity their face amount will be payable without interest. They
111 be issued in bearer form only, and in denominations of $1,000,
5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
maturity value).
Tenders will be received at Federal Reserve Banks and Branches
:) to the cloSing hour, one-thirty p.m., Eastern Standard
tme,Monday, November 20, 1967.
~enders will not be
~celved at the Treasury De~artment, Washington.
Each tender must
~ for an even multiple of $1,000, and in the case of competitive
~nders the price offered must be expressed on the basis of 100,
.th not more than three decimals, e. g., 99.925. Fractions may not
! used.
It is urged that tenders be made on the printed forms and
Irwarded in the special envelopes which will be supplied by Federal
'serve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
stomers provided the names of the customers are set forth in such
nders. Others than banking institutions will not be permitted to
bmlt tenders except for their own account. Tenders will be received
thout deposit from incorporated banks and trust companies and from
sponsible and recognized dealers in investment securities. Tenders
am others must be accompanied by payment of 2 percent of the face
aunt of Treasury bills applied for, unless the tenders are
~ompanied by an express guaranty of payment by an incorporated bank
trust company.
1083

TREASURY DEPARTMENT

=2 _

FOR IHMEDIA TE RELEASE
TREASURY'S I'10NTHlY g TU, OFFERING
The Treasu.ry Department, by thhl publlc notice, invites tenders
for two series of Treasury bIlls t(, the agp; reRate amount of
$1,50(),000,000,or thereabouts, for C'8n!~ and in exchange for
Treasury bills maturing November 30,1')(,7, 1.n the amount of
$3,801,885,000, as follows;

27 r:rday bills (to maturl ty date) to be ifHmed
in the amount of $500,000,000,
or thereabouts,
additional amount of bills dated August 31~1967,
mature August 31 1968, originally issued in the
. $ 1,000,336,000, the additional and orlgtnal bIlls
interchangeable.

November 30, 1967
representing an
and to
amount of
to be freely

366-day bills for $1,000,000 ,000, or thereabouts, to be dated
November 30,1967, and to mature November 30,1968.
j

The bills of both series will be issued on a discount basis under
competitive and noncompetitive bidding a.s hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only) and in denominations of $1,000,
$5,000, $10,000, $50,000,
$100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be recelvp.r.i at F8deral Reserve Banks and Branches
up to the closing hour, one-U11rty p .m"
Eaftern Standard
time, Wednesday, November 22, 1967.
Tenders will not be
received at the Treasury De~artment, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three dec.:l.mals, e, g., 99.925. Fractions may not
.be used.
(Notwiths tand ing the fae t tho t the one -year b ills will run
for 366 days, the discount rate wi 11 be computed on a bank discount
basis of 360 days, as is currently the practice on all issues of
Treasury bills.)
It is urged that tenders be made on the printed
forms and forwarded in the speci~l envelopes which will be supplied
by Federal Reserve Banks or Branches on application therefore.
Banking institutions generally may submlttenders for account of
customers provided the names of the elAstomers are set forth in such
tenders. Others than bank:tng jns l ,·lt:;tt,-ws will not be permitted to
submit tenders except for their own account. Tenders will be received
Without deposit from incorpor~ted banksB,nd trust companies and from

l!'-l084

TREASURY DlPAftHBMr
Waahinaton
FOR IMMIDIATE RELEASE

STATEMENT BY THE HONORABLE HENRY H. FOWLER
SECRETARY OJ' THE TREASURY

AT A NEWS CONFERnCI
ON THE

THIRD-QUARTER, 1967, BALANCE-OF-PAYMlHTS RESULTS
AND VOLUNTARY COOPERATION PROGRAMS lOR 1.968,
NOVEMBER 16, 1967 AT 2:00 P.M.
ROOM 4121, MlIN TREASURY
1 am hera today primarily for four purpoa.. :
-- to make our

announc_nt of prelialnary

balanc.-of-,.,..nta reaulta tor the third quarter;
... to pr••ent, jointly with Secretary TrOllf'brldp

and GoY.mor Robertaon, the Ccxaaaerc. aDd F.deral
Reae"e pldeltn•• for the Volum:ary Cooperation

Proar"

in 1968;

-- to call atteation to the annOUftee.ent by the

heaid.nt thu aomilll of the Indultry-

Government Special Travel T•• k Force which
bu .. ita eta the development of

DeW

proar-

to lncre... fonl&ft travel to the lmit" Itatea,
anel floally

'-1085

- 2 •

-- to emphas 111. that the enaetmec.t of th..

tax incr.a•• program at thl...... loa of

Pi'i~~ tdent·.
CC'~.7t'"fUI •

.0 6 ! . , - " , - ,

i. the .ingle mo.t important and ind18penaable

.tep this nation ean tab now to improve our
balance of trade and payment. and

prot~et

the

dollar and the international monetary .y.tern.

'mIRD-gUARTER RESULTS

The main feature. of the balance-of-payment. r •• ult. for
the third quarter are:
.- A deficit of $670 million on ti::e "liquidity" bula.

Thi. is $120 million larger than in the previoUl
quarter.

At the end of nine month. the liquidity

deficit totalled $1,750 million compared with
$938 million

a y.ar .arlier.

-- An "official settlement." .urplue of $462 million.
Thi.

re~r••• nt.

~provement

of $1.292 million

from the large deficit of the preceding quarter.
At the end of nine month. we had a total deficit
of $2,181 million on thi. ba.i. ccm~~red with a

.urplu. of $243 million a year .arlier.

-- A decline ift our gold Itook of $92 million,

pared with • lOll of $15 million in the .econd
quarter.

At the end of nine monthl the total

gold 10"

v..

$157 million compared with $450

million a year ..rlier •
• rehandi.. Trad.
A major favorable factor in our balanc.-of-payment.
1tuation through the third quarter 11 the continuing r.cov.ry
n our trade .urplua.

U.ina .... onally adjult.d balanc.-of-

ayment8 (a. oPPol.d to C.n.ua) figure.:
_. The third-quart.r trade lurp1ua

Val

at an annual

rat. of $4.5 billion, down .l1ahtly ($100 million
annual r.t.) from the .econd quarter.
-- For the fir.t thr.e quart.r. our trade .urplu. -.gain on . . . . .onally adjuat.d b.. u -- ran .t
• $4.39 billion annual r.t., r.pre•• ntlng an
~prov.ment

of $473 million ov.r the

.am. period of

l •• t y.ar.
-- Particularl, not.-orthy 11 the lharp drop in the
growth rat. of our import..

In the year 1966,

Lmport. inor....d more than 18-1/2 perc.nt ov.r
1965.

For the fir.t nine monthl of 1967, th.y

iner•••• d not quit. S percent compared with the

- 4 ..
lame period ta.t y.ar.

In the third quarter,

th~re

w•• a .mall ab.olute d.clin. in total import. from
the

88 •• onally

adjust.d level in the prec.ding two

quarterl.
Our export total for the first three ouarters of
this year incr•••• d about 6 percent from a year
earlier.

However, export. during the palt nine

months have remained almolt flat at the $7.:
billion quarterly rate .chieved :tn the fi!'lt
cruarter.

This undoubtedly refleetl the continued

slow pace of bUline.s expanlior. in leveral of our
major market. abroad.
While our trade positton haa improved in 1967, the improvement
i. cle.rly inadeouate.

For the first three quarter., and in

the cruarter just concluded, our trade Iurplu. w•• still ntnn1.ng
at .n annual rate more than $2 billion below the all time high
of $6.7 billion re.ehed in 1964.

I will comment on thi. in

more det.il a bit later in my .t.temant today.
Other Iterna
New i.lu.. of foreign .ecurities in the third quarter
.h~d

• $170 million incr•••• ( •••• on.l1y

lecond quarter.

adj~t.d)

ov.r the

Nearly h.1f of th1. incr•••• w•• accounted

- 5 -

for. by extraordinary lal.1 of Ilr•• li bond. following the Middle
Eaat war and an increue between the two quarterl in lBRD issue.,
rhese outflows, however, were accompanied by .ome off.etting
purchasea of U. S. agency bondl.
While redemption' were aubltantially unchanged from the
)reviOUI

~uarter,

the preliminary figure. on other transactiona

In outstanding foreign .ecuriti•• Ihow a net outflow of arou:1d
~50

million.
Total bank loanl to foreigner' .howed ••••• onablly adjulted

.ncrease of almost $400 million in thft third quarter, • $170
lillion increa.e over the .econd quarter.

This increale r£-

lected:
-- a $100 mtllion reduction in the outflow of ahortterm

b~nk

funda (from a second quarter level of

about S390 million to $291 million in the third),
coupled with

an adverse Ihift of $270 million on long-term bank
credit3.

The leeond quarter inflow of $163 million

changed to an outflow of $107 million in the third
Quarter.
: the end of the third quart.r, the octltanding level of such
'reign credit.- wae Itill about $530 million below the Iugge.ted

- 6 :eilir'g of $10.1 billion under the 19ri7 Federal Re.erve voluntary

Inflows of foreign capital through transaetion. in U.S.
lon-Treasury securitie. and in long-term CD'. and depo.ita
lith U. S. banks were down roughly $500 million in the third
narter, compared with the second, but .till about $170 million
aLger than in the corr•• ponding quarter of la.t year.
Peceipts from advance paymentB on U. S. Government credits
ere negligible in the third ctuarter ($5 million) compared with

bout $225 million in the 8ame quarter lalt year.
The $125 ;i1:1.1lion purchaae by Germany of a special mediumen) Treasury hO'ld in the third quarter was more than double

Je payment. which they made to ua during the third quarter
f 196·,) for military purchase. under our previous offset ag:-ee~nt

... but was also les. than half the second-quarter level of

lese :I'i1 itary- purchase payments this year, preceding the mid!a~'

expiration of the old

agree~nt.

As you know, these preliminary quarterly balance of payta d!leases alway. include a large re.idual item, covering
number of accounts i!-! our balance of payments for which the
test quarterly data are not yet available.
O:-1g

These inelude,

others, the tourism, inve.tment-inc:ome, and other

elvic.a" accounts; Government grant. and capital;

II.

number

- 7 f categories of private capital tranlaction., inc lud:f">6 G, L.

1rect

i~ve8tment

abroad; and our military expenditure •.

The net third-quarter outflow on this re.idual item "a.
,-wn

$800 million from the •• cnnd quart.r this year, but that

)r the firlt three quarters combined wa. about $800 million
lrger than
Wit~out

th~

corr•• ponding period lalt y.ar.

attempting any gue •••• at this stage a. to what

ly have happened to the mAny diff.rent accounts which are

Impad together in this item, we do know:

.- that

("..1:"-

Vietnam COltS, and over-all military

expenci..tu:::-e. abroad, have been running moderately
hig!-ler~

that

t~1e

travel d.ficit hal been adverlely

affected by Expo; and
that private remittances to Ilra.l increaled
sharply.
to the

~.t

le.st in the aecond <lU4rter, due

~1iddl.

East conflict.

a "Official Settlements" Balance

As I have indicated previously, thl. balanee 18 likely to
~ ~uite erratic movement..

In particular, during the period

- 8 -

from mid-l965 on (due in large part to the appearance, and sub.equant ea.ing, of very tight money and credit condition. here
along with Some pre •• ure on .t.rling in international

axchan~e
t;)

market.) our balance on thl. ba.i, .wung:
-- first to • • urplua of nearly $850 million for the
.econd half of !a.t year, and
-- then b.ck to a very large d.ficit (about $2,650
milliOl'l) in the firlt half of thi. year.
Thel. previou, wid. awing. in the "official .ettl.ments"
b.la~ce

were also,

you know, accompanied by very large

.hifts in net borrowing of Euro-dollara by U. S. bank. through
their branchel abroad.

Our third-quarter return to a .urplu8

Oli

t:-tla butl has again .hown thi. pattern of a parallel Ihift

.uc~

Euro-dollar borrowing by U. S. banks.

A. mea.urad by

the liabiliti@1 of U. S. banks to their branche. abroad, .uch
borrowing began to turn up again late in the •• cond quarter
of thi. year and incr•••• d during the third quarter by
roughly $900 million.

- 9 -

BALANCE OF PAYMENTS PROGRAM

•

Our over-all balanc. of payment. program hu both .hort-

:erm and long-term element ••
F1Ort-term

The Inter•• t Egualization Tax
Aa you know, the CO'1gr••• , acting on the reeoltllllendation
'f t 1e Pre. ident, haa voted to extend tha life of the IET
:01:'

two years and alao ehange the law to make it a more

lexible policy

i~latrumant

by granting the Pre.ident

11eretionary authority to vary the rate of tax within a
a.-·g. eQuivalent to an added coat of zero to 1-1/21. per
nnUIn of added coat to foreign borrower..

After being

ai.ed temporarily to the 1-1/2% level during the period
f Congr•• aional eonaideration, thia w.. redueed, following

laetment, to 1-1/41., a moderate incr.... from the original
~

l.vel.
The Nn Voluntary Program.
Supplernentir~g

that action, we are today announcing an

.. 10 0-;t.e,'.~inn,

and new guideline., for the

C~rce

and Federal

Reserve voluntary programs for 1968.

Pr•• ident John.on has approv.d the recommandation which
I

made to him -- in my capacity a. Chairman of the cabin.t

Connnittee on Balance of Payment. and on the ba.i. of an
i'lten.iv. review in that Committ.. both of the curr.nt
bala~ce

of paym.nt •• ituatton and outlook and of the over-

all U. S. balanee of payment. program -- for continuation
and strengthening of the Voluntary Coo.,. ...tion Program.

Detail. of the n.w guideline. for 1968 under thi.
program are contained in the r.l..... by the Commerce
Department and the F.deral Re.erve Board already di.tribut.d
to you.

Secretary Trowbridg. and Governor Rob.rt.on are

prepar.d to d.al with any qua.tion. about them you may
have.

- 11 ..
Le. ,i Term

Export.
I have already co..-nted on the iraportance of our
merchandl.e trade and the dlaappotnttngly l1raited
improvement we have had on thb account

far thia

year.
-- 'l1l18 r .... mpha.l• • tM need for .ound

fiscal and monetary policy -- including
11

prompt tax 1ncrea•• J which i. needed

badly and needed now.
-- It re-emphaalze. the toolhard1ne., of

recent protectlonut propo.a1a. which

can only cripple our trade po,ition over
the long runi and
-- It r ....mpha.iz•• the need for .elective

meaaure. to encourap Americans
industry to cultivate foreign market.
more as&re.aiv.ly.

Such .a.ure. are

under active con.ideratian.

- 12 In another very

Travel Task Force.

~ortant

ar.. ,

I also want to call special attention to the announcement
by the President this morning of the Indu.try-Government
Special Task Force, chaired by former Ambassodor to
Swit=erland Robert McKinney.

Its

will be to develop

new programs to increase foreign travel to the United
States -- which

88n

be an

~portant

part of our long-term

effort to balance our international payment a by increaaing
our receipts.
The group include. distinguished representatives of a
broad cross section of American bu.ines. -- with emphasis
on the travel and communications industries.

The.e men

will study what other government. are doing in the travel field;
what foreign businea. doe8; and what our government and
travel industry !£! and .hould be doing to promote more
foreign travel

to thit~

country.

The government effort in this area has been a

l~ited

one -- the $3 million a year thi. government spends vn
promoting travel by foreigners in the United States is
only a fraction of what is utilized by • number of ot.her
countries.

We are looking to the new Task Force to make

recommendations on how the federal government, atates

- 13 and the private sector can work together, shoulder

shoulder, to increaae travel receipts and reduce the
travel gal'.

Thi. will require a long term effort on the

part of all of us but I am confident it: can be done.

Encouragement of Foreia,n Investment.

81&0

wish to

congratulate the private flnanctal community on their
intensified efforte to encouraae increa8ed investments by
foreigners in the United States.

This baa recently been

exemplified by the formation of the Council of the United
States Investment Coaaamity abd its 8ponsorship of a trip
to the United States by a larse group of foreign bankers
and investment manager••

Thi. is just the kind of private initiative we need»
and we in the Government pledge QIX' continued cooperation

in making sach initiative .s fruitful a8 po •• ible.

Gold Budget
An intens if led review of government expend itures
abroad i8 underway.

While for moe t departments

these are a very minor portion of their total
expenditures, they are, nevertheless, being subjected

to careful scrutiny with the objective of achieving
balance -of -payments savings

- I&. -

The Government l.1t engaged in the III08t atrenuou8 and
extell81ve effort it bas ever undertaken to Ilf.nfaize
the f.mpect on our balance of

.,.,_ta

of the

fore 19n exctuma. expend ltur.. _de for tbe

Co.DOD

de fense

and in connection with our bilateral and mul ti·-

lateral aid program.

w•• ball have more

to . .yeout that later.

ConclUli(!l

Thu. t in concluding, I wat to IDIlklt it clear that the
programe that Secretary Trowbridp and Governor Robertson
will deacribe today represent only • part of our overall
balance of payments effort.
in nature.
W4!

While

t~'l8y

would like, thu .t.

They are •• aent1ally .bort-tern

have been extended more often than
It

cOll8equence of the large foreign

exchange coata of Vi.6tnaaa.

We are workfna bard to develc·v

a broader and more intenaive lOD&-range prosram to

1.ncreae~

our foreign excbanp receipt8 and to keep loverDlleDt foreign
exchange coata under tight control.

It 18 upon the success

of theae prograaaa t .a well .a the termination of

hostl11t1.~r.

f.n South Eaat Asia, that ultt.te pha.ing out of the••

vuluntary progra. depend••

- 15 But, in the final &naly. all of. thete efforts,

sh~rttr,term

or lona-term, to improve Qlr balance of pay.at. poalt1aa
are threatened with failure unle.s •• r.turn to relative
price stability and cost competitivene •• in the U.

economy -- unle •• we re.ut and avert the threat of
excessive demand which damages out trade balance -unle.s we play a r •• ponaibl. role in a.suring a .ound
international monetary .y.tem that enable. our market.
to prosper •
•• I .aid at the out.et, the enactMnt of the Pre. ident , •
tax incr.a.e program at thu •••• 1on of Cqre •• i. the
single mo.t important and indispen.able step this natlon
can take now to improve our balanc. of trade and payment.

and protect the dollar and the tDt.raatlonal monetary

system.
It 1.a unthlnkable to me to allow th1.a •••• ion of
Congre •• to conclude without an all-out effort by all

respto.lble forc.s to put the Pr•• ident's tax proposals
into law.
This i. a legialative matt.r which cannot be delayed
without undue and unacceptable ri.k of •• rloua damap to
the natioo'. economic and financial structure and the
international .ituatiOll.

- 16 'lbia 18 • "right DCW" _tter -- it caD't w.it.
It la lndlapenaable to . 7 early arreat of lD.tenlt
rate escalatih and movement toward a credit crunch

!1 bOII!.

with all of the denser. to our da.at1c ecOll.,., ,abort
and loog term, of a credit ahortage clue to Government
borrOlliDg to . . t a deficit tbat caamot be reduced to

mauapable prOportiODB without a tax 1Dcreaae.
~b.e

But

cOllt1Dued riM fA our fAtere.t rates baa

serious international cOl18equerace8 •• well.
'!'be delay in acting OIl the tax lDcreaae, with the

resultiDg upward movement of interest rate. here, baa
already caused the central baaa of cauda and the
United Kblgdom to raise their rates ... defeuive actiOll.
In January 1967 the f1Dance minuter. of five couatrias .-

the

~ited

State. t the United KiDadom.

Italy -- met at Cbequer8 111

GerDlilDy t

France, and

EDslaDd ill aa effort to .....calate

the so-called 1I1temational 1Dterest rate race.

The

Con", ... iqua issued after that _tiDg aaid, in part:
"'ftle Mmuter. agreed that they would all

make it their objective within the limits of

tbllr respective responsibilities to copperate

- 17 in such a w.y a. to eaable iAterest rates in

their respecti" cOUDtr1e. to be lowr thaD

they ctberwlse would be."
The whole point of the Clwquera . . tf.n& .... that .11 felt
that undue depeDdeftce in the past bad been placed

OIl

monetary

poltey, that, while this bad produced Deeded restrictions
their ecODOal1ea» it bad also produced d1atorttou ill their

econoaaie ••
By and large, monetary cooperatiCJll proved lucca.sful

in the euulng months.

And. eVeD .iDee theil, despite the

sharp upward rise of interest r .... in the United StatU.

moat of the European countries bave

cOllt~d

relatively eaay . . . tary policiea.

Tbe Gerwan rediacouDt

to follow

rate baa been reduced from 5 to 3 percent fa • aerioua of
lIIOVea.

Belgium baa cut ita bank rate five t • • -- from

5-1/4 to 4 percent.

In the Netberlands. the bank

ra te bas been reduced from 5 to 4-1/4 percent.
France aDd Italy have coatinued their baDk rates at 3-1/2
percentj Aus tria reduced ita rate again at the close of
October.

OIl

- 18 -

All of these moves were in full keeping with proper
domeatic economic policy.
However, there may be real question whether these monetary
policies can be continued in the face of rising rates in the
United States.
About a year ago the dlsttnguished Governor of the
Central Bank of Italy, Guido Carli, said this:
" . • •• if one deludes oneself into thinking
that a more elaborate pollcy mix can be successful
without the operational techniques and sufficient
fOJ:'cefuln8ss to put them into effect quickly, then
it will, sooner or later, still become necessary to
employ the credit restrictions which are characteristic
of a. cruder approach.

In the end effect, their

belated application leads the economy into more
serious stagnation, the external deficit persists,
confidence is lost, speculative pressures grow, and
ultimately, ultimately, unemployment ensues."

On October 9, 1967, the French Minister of Economy and
Finance told a group of French businessmen ~h.at fta riae in
interest rates in the United States, with the risk of spreading

- 19 to other countries, and the correspcndlng ;::-i"ak of
in economic development" was a negative factor in evall1!l~ .sn~

worldwide economic growth prospects:.
The point I am making i8. I believe. quite clear.

High interest rates in the United States due to excessivE"

borrowing by government are disturbing influences not
only in our own country but a180 abroad.

The

more that rates rise in the United State •• and the more
that we seem inclined to rely on monetary rather than fiscal
policy to restrain them, the greater the likelihood that we
will again face international interest rate escalation.

Confidence in the dollar and the gold exchange
standard wh1d"t 1s the basis of our international

monetary system depends on the ability of the
United States Government to act responsibly.
is a general, widely-beld feeling in

here and

abr~d

There

financial circletS

that a tax increase in the Unite d

Stat?;S 111 sn

essential element of responsible financial policy unde~t"

ex is t 1ng c ircums tance s .

- 20 -

There i. inflation alr.ady in fact and in pro.paet which
will .urely lead to another di.ruptive inv8atory eyele, a
deterioration in our balance of payment., and a grave ri.k of
"boca and bust", in addition to all it. otber unde.irable
consequences.

No course of ameliorative or preventive action can be
effective without tax action now.
Because the consequences of a failure by Congress to act
affirmatively this y .. r could prove so damaging to the country
and our international situation, every effort mu.t be exerted
by all in a re.ponsible position to have the President'. tax

proposal. acted upon promptly in the broad daylight with the
full gl're of national and international attention focussed on
the i8suea.

TREASURY DEPARTMENT
Washington
November 16, 1967
STATEMENT BY THE HONOHABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
IN ANSWER TO QUESTIONS ON\:CREDITS

TO THE
UNITED KINGDOM

It is clearly inappropriate for me to comment in any way
on the various stories which have been circulating concerning
various financial packages and other matters relating to
the United Kingdom.
The Prime·;Minister and Chancellor of the Exchequer
have repeatedly made very strong statements on the subject of
sterling, and have currently reaffirmed them in both word
and deed.

They have faced the issue with great determination

and I have no doubt as to their success.
Against this background, in answer to any question concerning additional credits to the United Kingdom. I can only
repeat what is already known to be established United States
policy:

this country has a consistent record of multilateral

financial cooperation, a record which we intend to maintain.

TREASURY DEPARTMENT
WASHINGTON
November 19, 1967
FOR IMMEDIATE RELEASE
STATEMENT BY THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
Events of the twenty-four hours following announcement of the
new parity rate of $2.40 for the pound have demonstrated the
strength of the international monetary arrangements and the
spirit of monetary cooperation created in the Free World since
World War II. This cooperation began with Bretton Woods, was
strengthened and implemented through various successful arrangements over the past twenty years, showed up fully in the agreement
reached at Rio de Janeiro in September in plans for new international
liquidity, and has been expressed since the U. K. devaluation
as:
The International Monetary Fund has indicated that
it is giving prompt attention to the U. K. request for
a $1.4 billion standby "with the expectation of
reaching a favorable decision in a few days."
President Johnson has reiterated the firm commitment
of the United States to buy and sell gold at the
existing price of $35 an ounce.
An overwhelming majority of the major financial and
trading nations of the Free World have announced
decisions to maintain their currencies at present
rates. It is clear now that adjustments will be
confined to a few countries where fundamental
disequilibrium also exists.
Chancellor Callaghan has indicated that very substantial
additional financial support has already been pledged
by a number of important central banks. Together
with the $1.4 billion International Monetary Fund
standby, this will bring total new support to
approximately $3 billion.
1-1086

- 2 To emphasize her determination to reach equilibrium,
the U.K. Government has announced a series of new domestic
measures designed to resolve her balance of payments problem.

The United States is confident that with this broad
understanding and the actions cited above the United Kingdom
will achieve its objectives. As the President said yesterday:
"I believe the United Kingdom will -- at the new
parity -- achieve the needed improvement in its
ability to compete in world markets. The attainment of equilibrium by the United Kingdom will be
a healthy and constructive development in international financial markets o "
Thus the nations of the Free World have demonstrated again
that they have the will and the means to work together, in
the framework of the International Monetary Fund and other
international cooperative arrangements, to assure the continued
healthy functioning of the international monetary system.
The United States, with all of its productive strength,
stands firmly committed to joining with others in the international task of maintaining a sound world monetary system.

000

TREASURY DEPARTMENT
RELEASE 6:30 P.M.,
day, November 20, 1967.
RESULTS OF TREASURY'S WEEKLY BILL OFFERING
The Treasury Department announced that the tenders for two series of Treasury
is, one series to be an additional issue of the bHls dated August 24, 1967, and
other ser les to be dated November 24, 1967, which t,.lere offered on November 1::5,
7, were opent>d at the Federal Reserve Banks today. Tenders were invited for
500,000,000, or thereobouts, of 91-day bills and for $1,000,000,000, or therellts, of l,::n-day bills. The details of the two series are as follows:
:IE OF hCCEP'IED
E'ETl rIVE BIOS:

High
Low
Average
a/

9l-day Treasury bills
maturing February 23, 1968
Approx. Equiv.
Price
Annual Rate
98.751
4.941%
98.735
5.004%
98.739
4.989%

lS1-day Treasury bills
maturing May 23, 1968
Approx. Equiv.
Price
Annual Rate
97.255 g
5.460%
97.204
5.561%
97.226
5.517%
Y

Excepting 1 tender of $6,000

t5~ of the amount of 91-day bills bid for at the low price was accepted

48% of the amount of 181-day bills bid for at the low price was accepted
{L TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
is trict
)ston
~w York
liladelphia
Leveland
ichmond
~lanta

licago
;. Louis
.nneapolis
msas City
Illas
In Francisco
'roTALS

AEElied For
$ 17,641,000
2,237,449,000
35,021,000
57,992,000
19,918,000
:32,781,000
265,963,000
41,213,000
22,997,000
17,330,000
24,054,000
2651, 554 z 000

AcceEted
$
7,641,000
1,095,881,000
13,021,000
15,992,000
12,068,000
22,519,000
63,626,000
29,313,000
11,197,000
17,330,000
14,054,000
197,754,000

$3,037,913,000

$1,500,395,000

AEElied For
$ 16,707,000
1,685,899,000
15,604,000
34,308,000
13,019,000
21,710,000
213,142,000
22,018,000
17,112,000
10,821,000
18,146,000
220,944,000

Acce12ted
$ 16,707,000
708,459,000
5,804,000
32,308,000
6,019,000
21,410,000
49,842,000
21,318,000
8,592,000
10,721,000
10,636,000
lOS, 194, 000

$2,289,430,000

$1,000,010,000 ~/

I~c1udes $199,417,000 noncompetitive tenders accepted at the average price of 9S.7.39
Includes $122,083,00~ noncompetitive tenders accepted at the average price of 97.226
These rates are on a bank discount basis. The equivalent coupon issue yields are
5.14% for the 91-day bills, and 5.77% for the lSI-day bills.

TREASURY DEPARTMENT
Washington

FOR RELEASE UPON DELIVERY

REMARKS OF THE HONORABLE JOSEPH W. BARR
THE UNDER SECRETARY OF THE TREASURY
BEFORE THE
1967 CONVENTION OF THE
SOCIETY OF AMERICAN REGISTERED ARCHITECTS
MARRIOTT TWIN BRIDGES IDTEL, WASHINGTON, D. C.
MONDAY, NOVEMBER 20, 1967, 1:00 P. M., EST

THE FINANCIAL ENVIRONMENT
FOR ARCHITECTURAL DESIGN

F-I088

It is a pleasure to be with you today on the occasion of
your annual convention.

As I traveled the relatively short

distance across the Potomac from the Tredsury building, I
was struck by the contrast of old and new and the changes
time has

Qro~ght.

To come from that ornate and dignified

Treasury building -- more than 30 years in the construction
to today's

~odern

and functional surroundings is to come quite

a distance from the standpoint of architecture and constructi9n
technique.
Cert~inly,

site selection was simpler then.

According to

the legend handed down through the years and still preserved
in our Treasury publications, the cornerstone location for the
present Treasury building was determined by President Andrew
Jackson in characteristically forthright fashion.

One morning

back in 1836, displeased by what he felt was undue delay in
committee action

a sentiment later Presidents may sometimes

have shared -- he strode over from the Hhite House, planted his
cane into the ground near the northeast corner, and announced
that the cornerstone would be set right there.
Later that year, actually on July 4, 1836, Congress

authori~ed

the construction of a "fireproof building of such dimensions
as mflY be required for the present and future accommodations"

- 2 of the Treasury Department.

We may assume that the Congress

was acting on sound architectural advice in commissioning a
fireproof building, or was it perhaps merely the lessons of
bitter experience?

The first Treasury building in Washington,

completed in 1799 and occupied in 1800 by 69 Treasury employees,
the full 7-man complement of the State Department, and some
personnel of the Navy Department, was partially destroyed by
fire just one year later in 1801.

Rebuilt, the building was

again destroyed by fire in 1814 under circumstances too
painful to repeat, but familiar to you, I know.
there was a rebuilding.

Once again,

But, within two decades, the Treasury

building met a similar fate, being destroyed by fire in the early
morning of March 31, 1833, although this time fortunately not by
foreign hands.

But the circumstances were scarcely more pleasant.

Subsequent investigation suggested strongly that the fire had
been set to destroy certain papers which would prove fraudulent
conduct by persons engaged as Treasury agents.
With this record of misfortune, the outlook for the new
building could hardly have been regarded as a promising one in
1836.

But, perseverance finally had its reward in the form of

- 3 the present stately structure.

Successive additions and

enlargements -- interrupted by the Civil War -- were finally
completed by 1869.

After more than a third of a century,

the Treasury building became the magnificent structure originally
intended.

But in the process, one of the results of site

selection and expansion was the violation of what some consider
to hdve been a vital feature of L'Enfant's master plan for
the Federal City -- to leave unobstructed the view from the
\.Jhite House to the Capitol.
If the Treasury building's past has lessons for us even
today in the fields of site selection, fireproofing, and
respect for an architect's original vision, it certainly has
something to say on the subject of construction costs as well.
This massive structure was constructea at an estimated total
cost of only $8 million.

We need search no further for a

graphic example of the difference between historical and
replacement cost.
As Under Secretary of the Treasury, I take pride in our
building's rich architectural past, bound up so closely with
the history of this city and our nation.

But, I came to speak

- 4 with you this noon on other matters of more immediate concern
to us, and to you as well.

I think it can fairly be said that

success in your profession requires a unique blend of the
creative and the practical.

My remarks today will be directed

more to your practical side.

For I want to discuss with you

the stake that architects and the public they serve have in
the preservation of a sound financial environment, free from
chronic inflationary strains and wide swings in the cost and
availability of credit.

Within such a sound financial

environment, both nationally and internationally, your efforts
to build and to create are much more likely to receive the
continuing financial support they deserve.

In the absence of

Qverall financi.l} stability and dependable sources of finance,
your creative activities and those of-many others may feel the
blight of a hard financial reality.
Certainly, the architectural profession has special reason
for concern about the financial conditions that affect commercial
and residential construction.

One possibility is that expensive

financing may lead developers and builders to "economize" on
architectural design.

At best, the result would be a

duplication of an existing and satisfactory design but no progress.
And, at the worst, our urban landscape would feature more ghastly
examples of "do-it-yourself" architecture.

- 5 -

If expensive financing of residential and commercial
construction sometimes takes its toll in the form of false
economy, an even more serious consequence of tight money may
be the temporary unavailability of financing on almost any
terms.

This can lead to periods of an inadequate volume of

construction which may then be followed by bursts of overhasty construction, riding the tide of speculation and easy
credit.

Dependable and regular flows of credit and a building

expansion closely geared to developing commercial and private
needs can avoid the waste and inefficiencies inherent in a
"stop-go" approach to construction.
Yet, I think it is perfectly clear to all of us that there
are no panaceas in this area.

Our institutional framework

for the financing of construction is basically sound and
improvements and refinements are constantly being sought, both
within and without government.

But, a steady flow of finance

into construction is going to be possible only in a balanced
economic and financial environment.

When total demands for

finance far outpace the volume of privately generated savings
in a full employment economy, rising interest rates and credit
imbalances are the more or less inevitable consequence.

- 6 -

And, all too frequently in the past, periods of heavy pressure
in the financial markets have been followed by periods of
retrenchment and slack business activity.

An adequate and

dependable flow of funds into construction and other sectors
requires a certain degree of moderation and balance in the
economy generally.
There really are two interrelated features of the adequacy
of financing for construction activity.

One is longer-run

in nature and concerns the terms on which long-term debt
financing will be available over, say, the next quarter century.
This is a complex problem, and I will content myself today
simply with raising what seem to be some of the key questions.
The second part of the problem is the avoidance of sharp and
disruptive contractions and expansions in the short-term
availability of financing in the construction field.

Last

year's experience should be a constant reminder that overloaded
financial markets and sharply rising interest rates can deal
the construction industry some sharp blows.

In this year's

situation, with construction activity making a strong recovery,
the clear need is for more fiscal restraint to prevent a return
to last year's conditions.

As I will argue more fully in a

few minutes, a tax increase and reductions in government
expenditures now can fend off the threat of another "credit crunch"

- 7 and insure continuing expansion in the construction field.
Whether that necessary fiscal action will be taken is the
prime issue of economic and financial policy.

The outcome

will be of crucial importance for residential and commercial
construction.
Before I comment in more detail on the immediate need
for fiscal restraint, let me raise just a few questions
concerning the longer-run outlook for construction financing,
and debt

financift~

in general.

By its nature, investment in land and building is
inherently a type of capital investment that rests in large
part upon debt financing -- and relatively long-term debt
financing at that.

Therefore, those who are concerned with

construction activity are inevitably concerned with the future
developments that will be influencing the cost and availability
of long-term debt financing.
Many in the financial community contend that there is a
fundamental movement away from fixed-return investments toward
investments which provide some opportunity to share in equity
profits.

They cite such developments as:
the increasing popularity in recent years of
convertible debentures;

- 8 -

the decreasing ratio of debt to equity in the
portfolios of such major institutional investors
as pension funds and insurance companies;
the movement toward variable rate annuities;
proposals for increased use of variable rate mortgages.
It is not easy to assess the full implications of these
developments or even whether some of them are necessarily of
much lasting significance.

It is true that over the past

decade and a half, there has been some apparent shift in
investor preferences toward equities.

This is reflected in

a rising interest yield on high-grade corporate bonds and
declining dividend yields on common stocks.
In 1950 the interest yield on outstanding high-grade
corporate bonds (Moody's AAA) was about 2-5/8 percent while
the dividend yield on 500 common stocks (Standard & Poor's Index)
was about 6-1/2 percent.

Since then, that relationship has

almost exactly reversed itself.

By the late 1950's, rising

bond yields and falling dividend yields on stocks brought
these two rates into approximate equality.

The decline in

dividend yields on common stocks has continued -- with some
interruptions -- and averages near 3 percent at the present time.
On the other hand, high-grade bond yields have accelerated

- 9 their rise, particularly since 1965, and the average yield
on outstanding issues is near 5-3/4 percent, with yields on
top quality new issues as much as 3/4 percent higher.
Surely, one factor in the reversal of the earlier
relationship between bond and stock yields has been the
alteration in investor expectations.

In the immediate post-

war period, memories of the depression decade were still fresh
and the longer-term business outlook was uncertain.

During

the period that followed, investors came gradually to the
view that the economy would be operating near capacity, with
only minor lapses.

The fact that the current expansion is

now the longest in our history has done much to strengthen
that view.

In a prosperous and growing economy, many investors

have wanted an equity share in that growth and have driven
dividend yields down in the process.
Another factor has been the development of a view that
inflationary pressures were likely to predominate.

In the

minds of some investors, common stocks became a "hedge against
inflation" and some prospective investors in bonds may even
have tended to discount their nominal return for an expected
degree of inflation.

- 10 What will the future hold in terms of the cost and
availability of the long-term debt financing so important
to construction as well as other sectors?

On the one hand,

it could be argued that the worldwide need for, and ability
to utilize capital, are at the moment increasing more rapidly
than the required amount of savings can be mobilized.

This

fundamental capital scarcity leads to pressures on capital
markets and rising interest yields.
rates is

r~inforced

The tendency toward high

from the monetary side to the extent that

more reliance is placed on monetary policy than on fiscal
policy to restrain demand and contain inflation.

And, in

countries where inflation is chronic investors may demand and
receive a premium, either in terms of an even higher interest
rate or an equity "kicker", if they are to provide long-term funds.
It is clear that some of these pressures for higher interest
rates do exist.

But there is no warrant for a fatalistic

attitude toward them.

We must work toward increasing the

rate of capital formation and improving capital markets
throughout the world.

Particularly in Western Europe there

is a need for much better capital markets to mobilize that
region's savings and enable it to assume its proper and historic
role as an exporter of long-term capital to capital-scarce regions.

- 11 Intelligent financial management in the United States -which has so great an influence in world economic affairs
can facilitate greater progress along these lines in other
countries.
It is conceivable that the world is entering, or has
entered, an era of relative capital scarcity and that the
average of long-term interest rates may edge still higher.
But I would not be so sure.

Certainly in this country there

are factors operating in the other direction.

The United

States economy generates a tremendous volume of savings each
year and channels them to productive use through an adaptable
and efficient market mechanism.

When we read that this bond

issue or that carries the highest yield since 1921, or the
Civil War, or some other remote date, it should remind us just
how far from accustomed levels interest rates are at the present
time.

And it is worth recalling the fact that the bulk of this

sharp rise in rates has occurred within the last two years
under the pressures of a rapid defense buildup, now apparently
reaching its late stages.

On the longer view, which as

architects and builders you are accustomed to take, the present
upsurge in long-term rates may well turn out to be a peak
rather than a plateau.

- 12 Only time will tell whether the cost of long-term debt
financing will soon return to the much lower levels
characteristic of most of our own and Western European
experience in the past century or so.

Much will depend

on how flexibly and how effectively fiscal and monetary
policies are employed in this and other major countries.
In both the short and long range, we must avoid excessive
inflation, but do so without undue reliance upon restrictive
credit policies.

This will require the active use of fiscal

policy to help keep the economy on a steady course of
sustainable growth and price stability.
That brings me to the present and to the crucial issue
facing us at the present time.

Right now the need is for

country to apply a measure of fiscal

~estraint

thi~

-- through

control of government expenditures and enactment of the
President's tax proposals -- in order to forestall excessive
expansion in the near future without forcing a turnaround in
Federal Reserve monetary policy.
Some have questioned the ground for expecting an excessive
rate of economic expansion.

Bemused by the appearance of a

statistic or two reflecting effects of the Ford strike, they

- 13 have ignored the overwhelming consensus of informed economic
and financial opinion on the economic outlook.
forecasts are fallible.
forecast.

Economic

But the following is fact, not

It is a fact that our most comprehensive measure

of overall economic activity, Gross National Product, has
risen by the following quarterly increments this year:

first

quarter, $4.2 billion; second quarter, $8.8 billion; third
quarter, $16.1 billion.

Consider further that quarterly gains

of $15 billion are at, or beyond, the upper range of the
increases the economy can safely tolerate; consider that the
actual third quarter gain of $16.1 billion was beyond the
noninflationary range and would have been even some $2 billion
higher had it not been for the Ford strike; and finally
consider that nearly half of that

thi~d

quarter GNP gain

was illusory in the sense of being due to sharply rising prices.
What clearer signs could we have of the need to ease off on
the accelerator and start applying the brakes?
In terms of financial markets and the Federal deficit
the need for prompt fiscal action is equally clear and
compelling.

In fiscal 1967 -- the year ending last June 30 --

net Federal demands on the private credit markets were

- 14 actually negative.

Net Federal credit demands (or supply

when negative) is measured by the change in outstanding
Treasury issues, agency issues, and participation certificates,
less the increase in the holdings of these obligations by
the Government Investment Accounts and the Federal Reserve.
In fiscal 1967, there was a net Federal supply of funds of
some $6 billion as debt in private hands was reduced.

But

this fiscal year, in the absence of tax and expenditure action,
there would be a call of as much as $20 billion on private
credit markets in the form of net sales of all types of
Federal securities above and beyond the normal takings of
the Government Investment Accounts and the Federal Reserve.
In a total credit market flow of some $70 to $75 billion there
would be a net increase of possibly $25 billion in Federal
impact.

This is simply too much.

We know what would happen.

The Government would get its money but some private borrowers
would not.

And, if previous experience is any guide, the

construction sector would bear a heavy burden in terms of
reduced availability of credit.
Nor can there be any expectation that the Federal Reserve
will pump out enough bank credit to fill the gap and tide us
over.

A failure to accept either fiscal or monetary restraint

- 15 would produce an unacceptable degree of inflation.

The

choice is rapidly coming down to fiscal restraint and a
transition back to stable prices and moderate interest rates,
or a turn to restrictive monetary policy and a credit crunch
that would hurt housing and other construction most severely.
There is still time to put our finances in good order and to
avoid sharply higher interest rates and restricted credit
availability.

But there is not an unlimited amount of time.

r remain confident that the Congress will see the need for
fiscal restraint and take this necessary, if seemingly
unpopular, action in the national interest.

000

TREASURY DEPARTMENT

'OR IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
'or two series of Treasury bills to the aggregate amount of
Q,500,000,000, or thereabouts, for cash and in exchange for
~reasury bills maturing November 30,1967, in the amount of
; 3,801,885,000, as follows:
9l-day bills (to maturity date) to be issued November 30, 1967,
amount of $1,500,000,000, or thereabouts, representing an
ldditional amount of bills dated February 28, 1967, and to mature
~ebruary 29, 1968, originally issued in the amount of $901,029,000
:additional amounts of $500,040,000 and $1,001,441,000 were issued
my 31,1967, and August 31,1967, respectively), the additional
md original bills to be freely interchangeable.

m the

l83-day bills (to maturity date) to be issued November 30, 1967,
.n the amount of $1,000,000,000, or thereabouts, representing an
ldditional amount of bills dated May 31, 1967, and to mature May 31,
.968, originally issued in the amount of $900,146,000 (an additional
,500,686,000 was issued August 31, 1967), the additional and original
tills to be free ly interchangeable.
The bills of both series will be issued on a discount ba$is under
:ompetitive and noncompetitive bidding as hereinafter provided, and at
laturity their face amount will be payable without interest. They
rill be issued in bearer form only, and in denominations of $1,000,
·5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
maturi ty value).
Tenders will be received at Federal Reserve Banks and Branches
p to the closing hour, one-thiy.ty p.m., Eastern Standard
ime, Monday, November 27, 19b7.
Tenders will not be
'eceived at the Treasury De~artment, Washington. Each tender must
e for an even multiple of $1,000, and in the case of competitive
enders the price offered must be expressed on the basis of 100,
Ith not more than three decimals, e. g., 99.925. Fractions may not
e used
It is urged that tenders be made on the printed forms and
orward~d in the special envelopes which will be supplied by Federal
eserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
ustomers provided the names of the customers are set forth in such
enders
Others than banking institutions will not be permitted to
ubmit tenders except for their own account. Tenders will be received
F-1089

TREASURY DEPARTMENT
-m.EASE 6:30 P.M.,
:~sday, November 22, 1967.
RESULTS OF TREASURY I S MONTHLY BILL OFFERING
The Treasury Department announced that the tenders for two series of Treasury
, one series to be an additional issue of the bills dated August 31, 1967, and
lther series to be dated November 30, 1967, which were offered on November 16, 1967,
opened at the Federal Reserve Banks today. Tenders were invited for $500,000,000,
tereabouts, of 275-day bills and for $1,000,000,000, or thereabouts, of 366-day
. The details of the two series are as follows:
OF ACCEPl'ED
TITIVE BillS:
High

Low
Average

275-day Treasury bills
maturing August 31,2 1968
Approx. Equiv •
Price
ArulUal Rate
95.883
5.390%
95.838
5.448%
95.858
5.422%
11

366-day Treasury bills
maturing November 30~ 1968
Approx. Equiv •
Annual Rate
Price
94.525
5.385%
94.429
50480%
5.430
94.479
11

37% of the amount of 275-day bills bid for at the low price was accepted
5% of the amount of 366-day bills bid for at the low price was accepted
TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
fPlied For
30,544,000
1,347,619,000
10,416,000
16,416,000
5,991,000
17,599,000
114,113,000
23,423,000
6,258,000
7,466,000
15,546,000
171,463,000

Acce]2ted
$ 10,544,000
803,469,000
2,416,000
4,416,000
3,991,000
13,599,000
54,163,000
23,423,000
3,308,000
5,466,000
10,546,000
64,788,000

500,075,000 ~ $1,766,854,000

$1,000,129,000

strict
ston
W York
iladelphia
eveland
::hm.ond
lanta
icago
. Louis
Ilneapolis
Ilsas City
Uas
'1 Francisco

ApE1ied For
145,000
$
984,514,000
4,411,000
1,194,000
3,975,000
11,926,000
98,465,000
17,685,000
6,281,000
3,529,000
10,934,000
120,546,000

AcceEted
145,000
$
423,254,000
411,000
1,194,000
1,975,000
4,666,000
19,465,000
16,425,000
981,000
1,529,000
2,934,000
27,096,000

TOTALS

$1,263,605,000

[ncludes $16 137 000 noncompetitive tenders accepted at the average price of 95.858
[ncludes $34:272:000 noncompetitive tenders accepted at the aver~e pri~e of 94.479
~hese rates are on a bank discount basis. The equivalent coupon lssue Ylelds are
5.70 % for the 275-day bills, and 5.76% for the 366-day bills.

TREASURY DEPARTMENT

November 22, 1967

FOR IMMEDIATE RELEASE

Secretary of the Treasury Henry H. Fowler
today sent the attached letter to Senator
John J. Williams.

Attachment

F-109l

THE SECRETARY OF THE TREASURY
WASHINGTON

NOV

1967

Dear Senator Hilliams:
Thank you for your letter of November 7th, concerning the
Administration's tax surcharge proposal. I know of no subject
which demands more urgent attention among those concerned with
the future of the American economy.
Because of your key position in the Senate and because of
the many areas of mutual agreement between us, I would like to
respond in full.
History of the Proposal
The Administration's proposal for a surcharge was made last
January, almost eleven months ago.
Early in August it was revised due to the changed conditions
in the economy. In the face of an unacceptable deficit, of rising
interest rates and heavy inflationary pressures, the President on
~ugust 3 recommended a balanced fiscal program:
"rigorously controlling expenditures"
"raising as much money as possible through
increased taxes" and
"borrowing the difference."
Following·hi~~essage,

the President met with the leadership
)£ both Houses and the ranking majority and minority L11Chlbers oE
:he tax writing and appropriations committees. He invited every
)eluocrat in the I-louse of Representatives, and at least fifty
tepublicans to discussions in which he described the vital
.mportance of a tax increase and the need to reduce les3 cS~0.nti.:ll
!xpcnditures. He outlined the dangers of inaction to the l_rnc~ic.:tli.
,eople.
The top fiscal officials of the Administration and the
hairman of the Federal Reserve Board (speaking for the entire
oard) made detailed presentations in hearings before the House

- 2 -

l-:'.1yn and Heans Connnittee from August lL~ throu[,h ':;Cf'te:mb2r H:.
Rcprcncntativas of maj or business, financial and labor ors.:mizations, and leaders in the field of business ancl finance .:=~lso
testified.
The need for a tax increase was supported virtually
unanimously. Many of those supporting a tax incre~1~c ~lso ::-::pok2
or another major element in the president's pro~rdm: the need to
reduce federal expenditures.
At the time of the President's August 3 message, eleven of
the fourteen appropriation bills for Fiscal 1968 had not been
enacted. The President urged "the Congress to exercise the
utmost restraint and responsibility in the legislative decisions
which are to come and to make every effort not to exceed the
January Budget estimates."
For his part, the President pledged to make every possible
expenditure reduction -- civilian and military -- short of
jeopardizing the Nation's security and well-being.
Since January, the Congress has been working its will on
expenditures by acting on appropriation bills and on the Federal
employee pay increase. As of today the Congress has passed
12 of the 14 appropriation bills for Fiscal 1963. Both the House
and Senate therefore, have taken, in your words "legislative
action prior to a tax increase dealing with expenditures."
TIle Chairman of the House Appropriations Committee has
stated that Congressional action taken and anticipated is likely
to reduce new spending authority proposed in the Budget by up to
$6 billion.-=o. ," ~~'"" - "
As a result of these appropriation actions, fiscal 1968
expenditures will be reduced by about $1.5 billion.
The "indecision" over the tax increase to which you refer
does not rest with the Administration. The uncertainty is whether
the Congress will act on the President's recommendations.
Consistently the president, the Council of Economic Advisers,
members of the Federal Reserve Board, and senior officials of the
Treasury have urged prompt enact~nt of the tax increase.

- 3 -

But on October 3, the House Ways and Heans Committee adopted
a motion, stating that:
"The Committee lay this matter on the table
and that further consideration of the tax increase
be deferred until such time as the President and
the Congress reach an understanding on a means of
implementing more effective expenditure reduction
and controls as an essential corollary to further
consideration of a tax increase, and that at such
time this matter will again be given priority in
the Committee's order of business."
Two days after the House Committee action, President Johnson
stated in his news conference:
"The Secretary of the Treasury was at the
Committee session representing the Administration.
He had certain proposals that he desired to make
along the lines of my tax message and along the lines
of what I have said in this statement -- that we will
try to have the Administration and the Congress agree
on the restraints that the Congress desires to put
into effect.
''We were ready that day, and we have been ready
every day since -- the Secretary of the Treasury and
each department head -- to appear before the
Appropriations Committee or the Ways and Means
Committee to express our views and to go as far as
we can in___ c.~EYing out the decision of. the Congress."
The President restated his view in the strongest terms
last week.
Since October 3 the House Ways and Means Committee has been
in recess. Nonetheless, Budget Director Schultze and I have had
a number of conferences with the Chairmen of the House 1vays and
Heans and Appropriations Committees. We have tried to work out
a solution to the problem of combining expenditure reduction and
control with a tax increase in a manner that would be satisfactory
to both Committees and some chance of being acceptable to the
Senate 8S well.

- 4 Let us be clear, Senator Williams, that the A~linistration
has made its willingness known "to get together" with the
appropriate conunittees of Congress to help them "make a decision
as to whether they will or will not approve a tax increase in
1968. "
Action on a tax bill is a legislative matter which cannot
be delayed without undue and unacceptable risk to the Nation's
economic and financial structure. We should not wait any longer.
This is a "right now" matter.
Consequences of Inaction
A tax increase is necessary to prevent skyrocketing of
interest rates. This necessity goes beyond damage to our domestic
economy such as, for example, putting a pistol to the head of our
housing industry now in process of a needed recovery.
A continued failure by Congress to act decisively may
reverse the trend towards lower interest rates in Europe, a
trend which began so successfully earlier this year. If those
rates begin to rise sharply, they will surely threaten the
healthy growth of the free world economy.
Confidence in the dollar and the gold exchange standard
the basis of our international monetary system -- depends on the
ability of the United States Government to act responsibly. TI1ere
is a widely-held feeling in financial circles at home and abroad
that a reduction in our budget deficit by reducing expenditures
and a tax increase in the United States are essential elements of
responsible finan-cial policy. I do not need to remind you of
the most recent signs of disturbance in international financial
conditions. The British devaluation puts the dollar in the front
line. It calls for responsible action that will maintain full
confidence in the stability and strength of the dollar and of
the U.S. economy.
But there is another important reason to move ahead with
the tax proposal -- the grave risk of mounting inflation, another
disruptive inventory cycle, a deterioration in our balance of
payments, and of a return to the old pattern of "boom and bust."

- 5 No course of preventive action can be effective 'vithout
tax action -- now.
I have been encouraged by recent public statements on the
tax question by the two Senate leaders, Senator Mansfield and
Senator Dirksen. For that reason I welcome your statement on
October 24 and an earlier one by your colleague on the Finance
Committee, Senator Smathers.
A New Proposal
Upon careful reflection it appears that once again it is
up to the Administration to make another effort to break the
deadlock between the spending and taxing powers of the Congress.
Accordingly, we have prepared a plan which combines the
President's tax proposals with a statutory provision embodying
a program of realistic expenditure reductions.
This package would result in a reduction of the administrative
budget deficit in Fiscal 1968 by about $11 billion and would
relieve the credit markets of that much anticipated demand over
the next seven months.
There has been much misunderstanding about a key element
in the program -- the tax surcharge on both individual and
corporate incomes. Its impact on the individual taxpayer is
modest -- about one penny on a dollar of income. For those in
the lower brackets, no tax increase at all.
In short, this bill would bring our deficit into manageable
proportions. ·It-would take much of the pressure off the credit
markets and interest rates. It would enable the Federal Government
to put money into the credit market in the first half of Calendar
1968 instead of taking it out. It would give additional confidence
in financial markets here and abroad in the dollar dnd the u.s.
economy.
I believe this proposal can be readily considered and processed
by Congress in the normal course of business . during this session.
As you know, the President in his meeting HondJ.Y with the

bipartisan leadership of the Congress and the appropri<1te Committees
appealed for favorable action on this legislative package of
expenditure reduction and tax increase.

- 6-

I have requested Chairman Hills to convene the House F<1Ys
and Heans Conunittee to consider this legislative plan and he
has called a meeting for Wednesday, November 29, at 10 a.m.
Of course, action by that Committee and th.2 House l~ppropri
ations Committee on these two key elements in the package must
be the first step in the legislative process. However, the
Director of the Budget and I stand ready to appear before the
Senate Finance Committee and the Senate Appropriations Committees
to explain these proposals on the necessity for prompt and
favorable action.
I appreciate your letter. I am grateful for your thoughtful
approach to a problem of great importance to our country, a
problem which, as you say, transcends the "political aspects"
of the decision.
Sincerely yours,

(i -0\,\,.\,','1 H·l~ V\I ~ L ~
Henry H. Fowler

The Honorable
John J. Williams
United States Senate
Washington, D.C.

TREASURY DEPARTMENT
Washington
November 26, 1967

FOR IMMEDIATE RELEASE

The Secretary of the Treasury and the Chairman of
the Federal Reserve Board made available a communique
issued in Frankfurt, Germany, today which reads as follows:
"The Governors of the Central Banks of Belgium,
Germany, Italy, Netherlands, Switzerland, United
Kingdom and the United States convened in Frankfurt
on November 26, 1967.
"They noted that the President of the United
States has stated:
"'I reaffirm unequivocally the cormnitment of
the United States to buy and sell gold at the
existing price of $35 per ounce. I
"They took decisions on specific measures to
ensure by coordinated action orderly conditions
in the exchange markets and to support the present
pattern of exchange rates based on the fixed price
of $35 per ounce of gold.
"They concluded that the voltnne of gold and
foreign exchange reserves at their disposal
guarantees the success of these actions; at the
same time they indicated that they ~ould welcome
the participation of other central banks."

000

TREASURY DEPARTMENT

RELEASE 6: 30 P.M.,

ay, November 27, 1967.
RESULTS OF TREASURY I S WEEKLY BILL OFFERING
The Treasury Department announced that the tenders for two series of Treasury
s, one series to be an additional issue of the bills dated February 28, 1967, and
other series to be an additional issue of the bills dated May 31, 1967, which
offered on November 22, 1967, were opened at the Federal Reserve Banks today.
ers were invited for $1,500,000,000, or thereabouts, of the 91-day bills and for
00, 000, 000, or thereabouts, of the 193-day bills. The details of the two series
as follows:
E OF ACCEPTED
ETITIVE BIDS:
High
Low
Average

91-day Treasury bills
maturins February 29 z 1968
Approx. Equiv.
Price
Annual Rate
98.752
4.937~
4. 973rf,
98.743
98.747
4.957~

183-day Treasury bills
maturins Ma~ 31 z 1968
Approx. Equiv.
Price
Annual Rate
97.206
5.496~
97.182
5.544~
97.186
5.536~

47~ of the amount of 91-day bills bid for at the low price was accepted

94% of the amount of 183-day bills bid for at the low price was accepted
L TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

:;trict
3ton
11 York
Uadelphia
~veland
~hmond

Lanta
Lcago
, Louis
meapolis
lsas City
.las
1 Francis'!o
TOTALS

Applied For
24,448,000
1,533,423,000
24,526,000
49,796,000
14,473,000
33,105,000
237,067,000
36,482,000
16,804,000
13,923,000
16,467,000
144 z 495, 000

Accepted
$ 13,348,000
720,814,000
10,926,000
47,696,000
7,473,000
16,175,000
100,458,000
27,602,000
9,804,000
11,373,000
6,467,000
28 z 995,000

$1,500,590,000 ~ $2,145,009,000

$1,001,131,000

Accepted
Applied For
9,019,000
$ 20,190,000 $
1,159,600,000
1,996,290,000
12,333,000
39,333,000
20,791,000
28,444,000
10,746,000
21,846,000
20,873,000
38,178,000
165,603,000
239,203,000
31,614,000
49,092,000
15,033,000
24,663,000
18,535,000
26,313,000
13,731,000
22,261,000
22 z 712,000
198 z 082,000
$2,703,895,000

£I

:ncludes $217,486,000 noncompetitive tenders accepted at the average price of 98.747
:ncludes $128,198,000 noncompetitive tenders accepted at the average price of 97.186
hese rates are on a bank discount basis. The equivalent coupon issue yields are
;.l~ for the 91-day bills, and 5.79rf, for the 183-day bills.

1092

TREASURY DEPARTMENT
November 29, 1967

FOR IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$2,500,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing December 7, 1967, in the amount of
$2,401,536,000, as follows:
91-day bills (to maturity date) to be issued December 7, 1967,
in the amount of $ 1,500»000,000, or thereabouts, representing an
additional amount of bills dated September 7, 1967, and to
mature March 7, 1968, originally issued in the amount of
$1,001,208,000, the additional and original bills to be freely
interchangeable.
182-day bills, for $1,000,000,000, or thereabouts, to be dated
December 7, 1967, and to mature June 6, 1968.
The bills of both series will be issued on a discount basis under
competitive and noncompetitive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the clOSing hour, one-thirty p.m., Eastern Standard
time, Monday, December 4, 1967.
Tenders will not be
received at the Treasury De~artment, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
~r trust company.

-1098

STATEMENT BY THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
WEDNESDAY, NOVEMBER 29, 1967, 10:00 A.M., EST

I am here today to present the Administration's specific
recommendations, in the words of your resolution of October 3,
for "an understanding between the President and the Congress
on a means of implementing more effective expenditure
reduction and controls" as a corollary to the President's
tax increase proposals.
Permit me to appeal to you on both an official and
personal basis to report promptly and favorably a bill to the
House embodying these recommendations.
I have appeared before this Committee many times in the
last six years.

We have faced many situations together.

I am proud of .the record of fiscal initiative, flexibility
and responsibility we have built together with beneficial
results to the nation's economy.
N,=ver have we been confronted by a fiscal problem
which, iu my judgment, was more decisive for our country
and the Free World.

Never have I been more convinced of the

appropriate course of action to meet the problemo

F-1094

- 2 -

It is my deep-seated, personal conviction, which I wish
to stress with all of the earnestness at my command, that
favorable action by the Congress on the proposals to be
placed before you cannot be further deferred without undue
and unacceptable risk to the nation's economic and
financial structure and the international monetary system.
We should not wait any longer.
as defeat.

Delay can be as damaging

It is unthinkable to me to allow this session

of Congress to conclude without an all-out effort by all
responsible forces to enact into law the proposals to be
presented today.
To be specific, I am submitting our recommendations
in the form of a bil1

This bill has two titles --

one embodying the President's tax increase proposals;
the second presenting a specific statutory plan and
provision for expenditure reduction and control for the
Fiscal Year 1968.
The prompt enactment of this proposal at this session
of Congress would:
keduce the deficit in the Administrative
budget by more than $11 billion.

- 3 -

Bring the currently estimated deficit from
a range upwards of $25 billion to below
$14 bi11iono
Reverse the trend toward increased deficit
financing which began with our increased
participation in hostilities in Southeast
Asia in the Fiscal Year 19660
Take a giant step in providing the confidence
and stability in financial markets here and
abroad which. is based on the strength of the
dollar and the U. S. economy 0
Reduce appreciably the most important source
of pressure on our credit markets:

the huge

overhang of federal borrowing which steadily
moves up interest despite an easy monetary
po1icyo
Remove the threat to our housing industry which
is in the process of a needed recovery.
Remove the risk of a credit crunch that will
deprive States and local governments and small
business of ready access to credits.

- 4 Reverse the trend from a creeping to an
accelerating inflation and turn the economy
back toward price stability and wage changes
more closely related to increased productivity.
Halt movement toward another disruptive
inventory cycle.
Prevent our returning to the old pattern of
"boom and bust."
Protect, maintain and expand our trade surplus
which is the mainstay of our balance of payments
position and which is vitally important to
the preservation of international confidence
in the dollar.
When I appeared before this Committee on August 14, I
presented these basic over-all reasons which had led us to
the conclusion that the prompt enactment of the President's
fiscal program

tax increases joined with expenditure

reductions -- was the "sound, fair and fiscally responsible
choice of the alternatives open to this Committee, the
Congress, and the American people."

- 5 -

Developments since August 14 serve to confirm those overall reasons advanced on that day and underscore the urgency
of the Administration's request for action.

(A Supplementary

Statement summarizing the intervening economic and financial
developments supporting these overall reasons is submitted for
the convenience of the Committee.)
TWO NEW REASONS FOR PROMPT ACTION
But two significant reasons, not present then, make the
prompt adoption of proposals along the lines of those in the
bill before you an inescapable responsibility of the Congress o
The first reason is that the devaluation of the British
pound last Saturday a week, with the ensuing disturbances in
the gold and financial markets, calls for prompt and speci.al
measures to protect the dollar and the international monetary
system.

Dealing decisively with our budget deficit has the

highest priorityo
We must recognize that the gold exchange standard which
is the basis of the international trade and payments system
on which world trade and prosperity has been based since World
War II is being tested, and tested very seriously, by those who
speculate, by those who are fearful, and by some in official
positions who prefer a different system.

- 6 -

We must recognize that this nation's political, military,
diplomatic and commercial position outside our borders , and ,
with it, our national security, depends in large measure on
the maintenance of financial stability in the Free World.
We must recognize the need to take steps designed to
assure confidence and stability in financial markets here
and abroad which depend on a sound dollar and a prosperous,
stable U. S. economy.
We must recognize, in short, that the dramatic
international financial events of the past two weeks
underline more forcefully than could any rhetoric and
argumentation on my part the high responsibility that we
bear for the maintenance

of a stable international

economic system.
There are two means by which we can preserve these
stakes.

First, by practicing multilateral financial

cooperation with other leading financial nations in the
International Monetary Fund and other related multilateral
economic and financial institutions.

Second, by

maintaining a strong dollar through positive decisive
action to reverse the current trend to increasing deficits
in our budget and our balance of payments.

- 7 The sterling devaluation -- even though it was felt
necessary by the United Kingdom and is being supported by
all the major countries of the world -- is a shock to
markets, domestic and international.

The dollar is

basically strong, and by reaffirming our determination to
buy and sell gold at $35 an ounce, we are maintaining the
system of fixed exchange rates in which world trade has
flourished.
But -- even before a sterling devaluation -- delay
and inaction on taxes and on diminishing our prospective
deficit was weakening confidence in the dollar and the gold
exchange standard.

These are the foundations of the

international monetary system.
The present situation makes it even more imperative
that we insure the strength of the dollar by insuring the
strength of the U. S. economy.
Make no mistake about it -- confidence in the dollar
and the international monetary system depends on the
ability and determination of the United States Government
to act responsibly.

- 8 There is a widely held feeling in financial circles at
home and abroad that a meaningful reduction in our budget
deficit by reducing expenditures and a tax increase is an
essential element of responsible financial policy.
The second new reason for prompt adoption of the
proposals presented is the clear and evident truth that
only by the passage of this type of measure can the
United States Government substantially reduce the budget
deficit and keep this nation on the course of fiscal
responsibility.
There were some in the Congress in August who would
have met the challenge of the deficit by a temporary
increase plus some minor economies; there were some who
would rely on massive, long-range economies without a tax
increase or a minor and belated one; there were some who
wanted a specific program of expenditure reduction and
controls, balanced with a meaningful but temporary tax
increase; and there were some who wanted neither a tax
increase nor economies, following a "the sky's the
limit" policy as far as deficit financing is concerned.

- 8 There is a widely held feeling in financial circles at
home and abroad that a meaningful reduction in our budget
deficit by reducing expenditures and a tax increase is an
essential element of responsible financial policy.
The second new reason for prompt adoption of the
proposals presented is the clear and evident truth that
only by the passage of this type of measure can the
United States Government substantially reduce the budget
deficit and keep this nation on the course of fiscal
respons ibility.
There were some in the Congress in August who would
have met the challenge of the deficit by a temporary
increase plus some minor economies; there were some who
would rely on massive, long-range economies without a tax
increase or a minor and belated one; there were some who
wanted a specific program of expenditure reduction and
controls, balanced with a meaningful but temporary tax
increase; and there were some who wanted neither a tax
increase nor economies, following a "the sky's the
limit" policy as far as deficit financing is concerned.

- 9 It seems high time for the first three groups who
are in agreement on the need to reduce the deficit to pool
their forces to take decisive action, rather than by
inaction and delay forfeit the fiscal responsibility of
this Congress.
In August when the President reported a prospective
deficit of $29 billion only three of the fourteen
appropriation bills for Fiscal 1968 had been enacted.
The President, in his Message, urged "the Congress to
exercise the utmost restraint and responsibility in the
legislative decisions which are to come."
As of today, the Congress has passed all but two
of the appropriation bills for Fiscal 1968.
Both the House and Senate, therefore, have taken
legislative action in the normal fashion dealing with
expenditures in the face of this deficit.
The Chairman of the House Appropriations Committee has
stated that Congressional action taken and anticipated
in the traditional process is likely to reduce new
spending authority proposed in the budget by up to

- 10 $6 billion -- thereby reducing actual expenditures this
year, next year and, in some cases, in years

follow,

by tha t total.
As a result of appropriation actions to date (amowlting
to appropriation reductions of $4.5 billion) actual
expenditures in the form of cash outlars in Fiscal

~968

will be reduced by only about $1.5 billion because much of
the appropriation action affected spending in future years.
Therefore, it is clear to all who would exercise anX
t

realism that the deficit for Fiscal 1968 will not be
reduced sufficiently by these actions r

Both larger

expenditure reductions and a substantial tax increase
;

are required to reduce the deficit to manageable
I

proportions.
It is equally clear that the best way for

Congr~ss

and the Adminis.tration to join together in a combined
effort reflecting the will and decision of both branches
to reduce meaningfully this deficit is to enact the
President's tax proposals, and special legislation thCJ.t
will insure additional expenditure reduction.
That is the plan before you.

... 11 -

BACKGROUND OF PLAN

......

;

In January the President recommended that ~ temporary
tax increase in the form of a six percent surcharge be adopted
in the ~ummer of this year as a part of the fiscal 1968 budget
to help finance the increased costs of the war.
~nd

timing of Chat recommendation were

course of the economy as the facts

th~n

ba~ed

The level

on the anticipated

iQ hand indicatedo

The President reviewed that recommendation last summer
in the light of both the outlook for increased expenditures
and reduced
that then

revenu~s ~nd

~xisted

the economic and financial situation

and the expectat.ions for

th~ ~onths

ahead.

He concluded that the sttuation called, 4S it did befrre,
for a tax increaseo

But in view of the substantial increasE

in the prospective deficit he cOQc1uded that his January tax
proposals should be enlarged and a determined effort inaugurated
to reduce controllable expenditures in the January Budget.
In his Tax Message of August 3, he

r~commended

a ten percent

surcharge and contin\1ation of expiring excise taxes.

Moreover,

that Message contained a fiscal program for reducing the
prospective deficit by combinins a tax increase and expenditure
reduction and controlo
As you will recall, in his

Ta~

Message the President

declared that to accept the prospective deficit and totally

- 12 finance it "by additional borrowing, which itself would
drive up interest rates

eoo

would be fiscally and financially

irresponsible under present conditions o "

He posed a second

alternative, namely, that "the deficit could be reduced by
regularly controlling expenditures, raising as much money
as possible through increased taxes, and then borrowing the
difference o "

He declared the second alternative "is the

only way to maintain a strong and healthy economyo"

Accord-

ingly, he presented for "the judgment and action" of the
Congress a fiscal program with two essential elements:
"Expenditure restraint to which this Administration is committed and which I urge upon
the Congress", and
"Tax measures to increase our revenues."
With most of the appropriation bills still pending
before the Congress, the President urged "The Congress to
exercise the utmost restraint and responsibility in the
legislative decisions which are to come and to make every
effort not to exceed the January Budget estimates."
The President in his Message also noted that the
Congress was considering a bill which would raise civilian
and military pay by more than $1 billion above the Administration's pay proposal o

The Congress acceded to his persistent

- 13 -

urging that proposals for the extra $1 billion pay raise
above his Budget not be adopted and, in fact, the pay scale
for this fiscal year exceeds the President's

Budget by

only a small amount.
For his part the President pledged to the country and
the Congress that he would make every possible expenditure
reduction -- civilian and military -- in the Budget submitted last January, short of jeopardizing the nation's
security and well beingo
He stated that as Congress completes each appropriation
bill affecting Fisr.ql 1968 expenditures "we will examine at
once very, very carefully" the results of those actions and
"determine where, how and by how much expenditures under
these appropriations can be reduced."
Moreover, following the presentation of his Message
the President invited every Democrat in the House of
Representatives and at least fifty Republicans to meetings in
which he personally described the serious problems presented
by the prospective deficit without a tax increase and the
reduction of expenditures.
An accurate contemporary picture of the President's
program to reduce the prospective $29 billion deficit described
in his Message by combining expenditure reduction and control

- 14 with a tax increase may be obtained from the following
series of excerrts in his press briefing on the Tax Message
on August 3:
"What <1r, vc going to do about the $29 billion?
hope, first,

tnat we can take $1 billion off here by the

pay bill if the Congress will stay with the budget estimates,
and we so recommend"
"We hope \vE' can take $2 billion more off by giving us
the authority to sell $2 billion in PC'soo.
"Under that tax bill, that 10 percent surcharge that
expires in

196~

or when the Vietnam problem is over with,

plus the extension of the excises due to expire next April
and they will

~ive

you the details -- that will raise $704

billion, so that will give us $1004 billion if we get
everything that we are asking for 90 0o
"Take tbe 5l0v4 billion from your $29 billion.
gives you an $16,6 billion.
appropriation hills.
probably 12 mor0,

That

Then we only have three

We expect to get another 10 or 12,

We will take each one of those 15 and

see what we can cut out of there.oo.
"Whatever \ve can squeeze out will be deducted from the
$18 billion.

It could be as much as $4 billion.

The deficit

- 15 will likely be somewhere in the area of $14 billion to
$18 billion, depending on the appropriations u

•

The need for combining expenditure reduction with a
tax increase in order to deal adequately with the budget
deficit was stressed in numerous statements by the President
and on August 14 before this Committee by me and the Director
of the Budget.
Testimony was taken from representatives of a number
of interested business, financial and labor organizations,
and leading academic economists and experienced leaders in
the field of business and finance.

A tax increase was

opposed by only one economist, a couple of businessmen and
only one business organization.

The others

the enactment of a meaningful tax increase.

strongly urged
Many of the

proponents of a tax increase urged that it be combined with
expenditure reduction and controlo
Since the hearings concluded, the one business organization that presented testimony in opposition to a tax
increase, fue U. S. Chamber of Commerce, has reversed its
position and announced publicly as of November 2:

"Following

a commitment by the Administration to a program of expenditure
reduction, the Chamber will support an across-the-board
temporary tax increaseo"

- 16 In the executive sessions of the Committee, following the
conclusion of the public hearings, I expressed the hope that we
could find some procedure for dealing in a combined fashion
the two

as~ects

with

of the proposed fiscal program because I thought

it was primarily a procedural problem.

The task confronting us

was how, in terms oi specific commitments, pledges, provisions,
statements or procedures, we could achieve the common result
most uf us wished u£ cumbining expenditure reduction and
control with a tax increase.
It was against this background that I stressed publicly
in my remarks at the National Press Club on September 21 that
there were "various provisions in the law or statements in the
House Committee Report that could be devised to protect the
position of the House in any final insistence its members may
require on expenditure policy as a prerequisite to voting a
tax increase."

In accordance with that view I prepared four procedural
plans and obtained the president's approval to present

the Committee as suggested ways in which to accomplish
the desired linkage between expenditure reduction and the tax
increase.

I had these plans ready to present to the Committee

when it decided instead to put aside the tax proposal on
October 3.

- 17 With the now detailed impact of Congressional appropriation
action, the analysis of the ap~ropriations picture that emerges
from this action, and the administrative review by Departments
and agencie~ conducted at the President's instructions referred
to in his August 3 Message, we have been able to develop a
plan which we feel is specific, feasible, and should be acceptable.

ruE PUN
The plan for implementing significant expenditure

~eductions

and obtaining more effective expenditure control as a corollary
to the tax inCLease proposal is specific.

It is a statutory plan.

Its details are contained in the proposed bill which I am sUbmitting
with this statement.

That bill has two parts:

Title I contains the proposal for a tax increase.
Itronforms to the proposals submitted to you on August 15 in
the draft bill you requested.

It includes the 10 percent

surcharge, effective July 1, 1967 for corporations and October 1,
1967 for individuals', an acceleration of the time for payment
of corporate estimated taxes; and postponement of the rate
reductions in the excise taxes on automobiles and telephone
service scheduled for April 1, 1968.
In the case of individuals, the surcharge for 1967 will
amount to only 2~ percent of their 1967 tax.

Since it will not

- 18 be feasible to collect any of this increased 1967 liability
through withholding, its effect will be through the final payments
made in 1968 on account of 1967 tax iiabilities.

We estimate

that for about two-thirds of individual taxpayers subject to
the surcharge, it will be reflected through reduced refunds in
1968 rather than by any requirement for additional payments.
In the case of corporations, the bill includes a provision which will insure that every corporation will have
at least the normal

months after the surcharge is enacted

in which to file their 1967 tax return and pay their surcharge
for 1967.

This is essentially the same procedure that was

followed with respect to the 1951 tax increase, which was
enacted approximately EEven months after its effective date.
Title II represents a specific, statutory plan for expenditure
reduction for Fiscal Year 1968.

It involves a specific formula

which would be applicable to each Department and agency of the
government.

It involves reductions in both nondefense expenditures

and in non-Vietnam defense expenditures.

It involves reductions

in both payroll expenses and in nonpayroll expenses.

It not only

incorporates the reductions which have already been achieved
through the appropriation bills.

It goes beyond those reductions.

The plan calls for a reduction in total obligational
authority for the Fiscal Year 1968 for each civilian Department or

- 19 -

agency of at least the following combined sum:
A two percent reduction in the January budget
estimated for personnel compensation and benefits ,
plus
-- a ten percent reduction in such estimate for
controllable programs other than personnel compensation
and henefits.
These percentage reductions in obligational authority
do not extend to those items described in the Budget as
uncontrollable.
For the Defense Department, the reduction is ten percent
of the new obligational authority requested in the January
Budget, excluding special Vietnam costs.
I have said that the reductions for each Department and
agency shall be at least the above amounts o

If for any

Department or agency Congress in the appropriation bills has
red~ced

the obligational authority below the reduction that

would be achieved through the formula, then the lower
appropriation for the Department shall prevail.

- 20 The application of this plan will apply to the total
controllable obligations of each Department and Agency.

Each

Department and Agency will therefore be required to examine
its individual programs and activities and to apply these
reductions to the lowest priority items.
Fiscal Impact of the Plan
The Congress has to date reduced the obligational authority
requested by the President in January by roughly $4.5 billion.
Applying the 2 percent - 10 percent formula in combination
with this Congressional action will result in a total combined
reduction of obligational authority of over $9 billion for
various programs in the January Budget.

This reduction in

obligational authority will produce an expenditure reduction
in Fiscal Year 1968 of over $4 billion.

The $4 billion

expenditure reduction will be almost equally divided between
defense and non-defense expenditures.
Let me sum up haw this plan, and the bill, will affect
the Fiscal 1968 deficit.

The tax proposals will increase

Fiscal 1968 revenues by $7.4 billions.

The expenditure

reduction plan will cut Fiscal 1968 expenditures by $4 billion.
The combined total reduction of the deficit is thus $11-1/2 billion.

- 21 We said on August 14 that the Fiscal Year 1968 deficit
under certain contingencies could amount to about $29 billion
and that we were desirous of reducing that presumptive deficit
to a range of $14 to $18 billion.

Since then we have

successfully averted two of these contingencies, the likelihood
of a $1 billion higher payroll increase and a $2 billion
reduction in authority for sales of Participation Certificates o
Other changes in expenditure estimates have also occurred
since our August testimony, which Director Schultze will
explain.

But taken all together, passage of the proposals

before you should keep the deficit close to the lower end of
the $14-18 billion range which was our target in Augusto
The allocation of national resources to Federal programs
has always involved a cooperative effort between the Congress
and the President -- the President proposes and the Congress
disposes.

The President is most anxious to cooperate with

the Congress in developing a meaningful statutory package of
fiscal restraint.

The plan that we have before you today is

our best answer to resolving the procedural dilemma that has
confronted all of us since August 140

- 22 -

Director Schultze will further describe the operations
of this plan.
A TASK FORCE TO STUDY FEDERAL AGENCIES
In addition, the President is prepared to establish
a special bipartisan Task Force of outstanding Americans
to take a look at long range Federal program priorities.
The Task Force would examine:
(1) The effectiveness of each such program or
activity in the context of its present and
projected costs;
(2) Whether and at what level the program or
activity should be continued; and
(3) The relative priority it should be assigned
in the allocation of Federal funds.
ACTION ON THE PLAN
Of course, the procedure by which this Committee and
the other Committees concerned -- the House Appropriations
Committee and the House Rules Committee

move this

legislation to the floor, is not for me to suggest.

That is

a matter for the leadership of these Committees and the House
to determine.

- 23 However, the precedent comes to mind of the handling
of the Highway legislation which is of joint concern to
the House Public Works Committee and the House Ways and
Means Committee.
Whatever procedure is chosen, I ask only that Congress
act promptly.

For the time for action is now.

Undoubtedly each Committee may find it desirable to
make changes in the Title of the proposed law which is in
its particular jurisdiction.

The Administration will be

flexible in its reactions to any changes provided they do not
thwart the primary objective -- the enactment of a law
prescribing a combined package of expenditure reduction and
control and a timely and meaningful tax increase that will
reduce the budget deficit for Fiscal 1968 to manageable
proportions.
For example, Title II is our recommendation on
expenditure reduction and control.

It is based on all of the

discussions the President, the Director of the Budget and I
have had with the leadership of both Houses, members of the
Approprie.tions Committee and other informed persons.

represents our best judgment of what is appropriate under
all the circumstances.

- 24 -

If there are those who can persuade the House
Appropriations Committee or the Senate or the Congress
to accept a larger measure of reduced expenditures by

...

changtDi the percentage figures in Title II of the
proposed bill, let them proceed.

If a law providing

deeper cuts should be passed by the Congress, I can
assure you that the President will give it the most
sympathetic consideration.
The Director of the Budget and I will be at
the disposal of the other Committees ready to make a
presentation, answer questions, or supply information
on these proposals.

way.

We will try to cooperate in every

And I am sure that Chairman Martin will be

available.
CONCLUSION
Virtually every responsible businessman and economist,
every fiscal advisor to the President, and the Chairman
of the Federal Reserve Board, have again and again stressed

the urgent need for a tax increase coupled with a program
of expenditure reduction.

- 25 -

The President's proposal has been before this Committee
since early Augusto

And today, in the Administration's

recommendation, we have tried to go one step further in
response to your request.

Now, a specific formula for

expenditure control is written into the same law providing
fb~

increased taxes o
That tax increase, I might add, is modest by every

standard.
individuals

It averages about one penny on the dollar for
0

And millions of Americans in the lower

brackets will not be affected by the surcharge at all o
With the overriding necessity to support our fighting
men in Vietnam, to keep our economy prosperous and our dollar
sound, we seek only what the situation urgently requires.
We seek only to ask the American taxpayer to return
temporarily to his Government less than half of the
$24 billion in tax cuts which the President recommended and
the Congress approved over the past 4 years.
That, I believe, is a small price to pay and a small
burden to bear to help keep our Nation on a sound fiscal
course and to provide responsible financing for the arms
and equipment American soldiers in Vietnam must have for
their missions and to protect their liveso

- 26 -

A higher tax is unpleasanto

Reducing or postponing

less essential expenditures in an already tight budget fu
unpleasant

But far worse are the drastic consequences

to every American which will flow from inaction and delay
the higher, crueler, and unrepealable tax of inflation,
weakened confidence in the dollar, brutally high interest
rates, and the risk of a return to the old cycle of boom and
bust.
Time does not stand stillo
opportunity -- and the obligation
responsible fiscal action.

We dare not lose the
to join together in

That is what I have proposed

here todayo
The eyes of the world are on this Congress
is much at stakeo

There

Now the issue is squarely up to you.

SUPPLEMENT TO THE
STATEMENT OF THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
BEFORE THE
HOUSE WAYS AND MEANS COMMITTEE
ON THE PRESIDENT'S FISCAL PROGRAM
WEDNESDAY, NOVEMBER 29, 1967, AT 10:00 AoM.
The purpose of this supplementary statement is to
review events relating to the general economy, our money
and credit markets, and our balance of payments, as they
have developed since August 14 when Chairman Ackley,
Director Schultze, and I appeared before this Committee.
At that time hard facts and a careful appraisal of
the outlook were presented to you, and they strongly
supported the conclusion that enactment of the fiscal
program recommended by the President was urgently needed o
Since that time events have only served to reinforce the
necessity for such immediate fiscal action.
The General Economy
First as to the general economy, in his testimony to
this Committee on August 14, Chairman Ackley presented a
careful appraisal of the outlook which led to "the verdict
of a buoyant economy in which the pursuit of a highly stimulative fiscal policy would be inappropriate -- indeed,
perilous. II

He went on:

"1 have far more confidence in

this over-all judgment than in any quantification I can

- 2 offer of just how fast the economy is likely to advance and
just where the gains

~Nill

take place."

At the same time, 01airman Ackley outlined in some
detail the Council's numerical projections for the period
from the second to the fourth quarter of 1967, assuming trno
major disruptions from strikes or developments abroad rt and
no Congressional action on taxes within 1967.

After survey-

ing the various components of national expenditures,
Chainnan Ackley concluded, rtEven at the lower end of this
range, the increase in GNP [from the second to the fourth
quarter] would be $29 billion.

At the upper end, the $35

billion advance would nearly match the hectic pace of gain
between the third quarter of 1965 and the first quarter of

1966.

If unchecked, the pace of advance would accelerate

in the first half of 1968 •• 0"
Developments in the past three months have validated

Mr. Ackley's appraisal.

Even though strikes have had a

major impact in holding economic activity down, the increase
in GNP from the second to the fourth quarters should still
lie within the range of $29 to $35 billion that Mr. Ackley
specified.

In the absence of major strike activity, the

rate of advance might well be exceeding the upper end of the
range.

- 3 In light of the strong $16 billion advance registered
in the third

q~arter

and the available evidence on the

performance of the economy so far in the fourth quarter,
the pattern as well as the total magnitude of the gain is
matching closely with Mr. Ackley's earlier assessment o

several areas, the projections of mid-August remain realistic estimates today:

this is the case for the $4-1/2

billion increase in spending

State and local governments

that Mro Ackley projected, the range of $3 to $6 billion
for the rise in Federal Government outlays, and the $1 billion prospective increase in plant and

equip~ent

spending.

Needless to say, however, some revisions are in ordero

Yne

gratifying rebound in homebuilding has exceeded expectations
and now seems headed toward a rise of about $4-1/2 billion
over the two-quarter interval rather than the $3-1/2 billion
that was projected in August.

And the earlier assessment

that inventory investment would recover by $1 to $2 billion
may also turn out to be conservative, even with auto stocks
depressed by strikes.
On the other hand, consumer spending has risen somewhat
less rapidly than expected.

It will most likely fall short

of the $16 to $18 billion range that Mro Ackley outlined -in large part, but not entirely, because of the strike-induced

- 4 shortfall in auto sales.

Consumer spending is the one spot

that has not firmed up markedly in recent months.

If it

had, we would already be riding a runaway economy.

As it

is, the smaller advances in the consumer area have merely
kept the over-all pace within safe speed limits.

While

nobody can predict the consumer's mood with any confidence,
it would be most precarious to bet that the saving rate will
rise further in the months ahead o
The other major recent development which deserves some
comment is the rise in the unemployment rate during
September and October to a level of 4.3 percent of the
civilian labor force.

This movement is clearly associated

with the phenomenal labor force growth of recent months
rather than with any notable surprises in the course of
employment.

The behavior of the labor force has been puz-

zling throughout 1967.

In the early months of the year,

when employment was stagnant and there was marked softening
in key labor market indicators (like insured unemployment,
factory layoffs, and help-wanted advertising), the labor
force aid not grow and hence the over-all unemployment rate
held steady.

More recently, employment has been performing

well and the other indicators have strengthened consistently,

5 -

but the labor force has spurted.

From May to October, the

seasonally adjusted labor force grew by an enormous 108
million, largely concentrated among adult females and
younger workers.

Since the growth of employment could not

keep pace, the over-all unem?loyment '"atE' rose, reflecting
marked increases among women and tee;.::ge:·s.

The sr.-urI: i71

the labor force does not have significant implications for
demand -- output, employment, or spending.

It does tell

us something about supply, namely that we have some extra
margin in the availability of female and teenage workerso
But since there is virtually no margin of slack in the
availability of adult male workers, we are highly vulnerable
to inflationary pressures in the labor market.
The general assessment of economic developments in
recent months has been immensely complicated by widespread
strike activit yo

Strikes have dominated the performance of

our key measures of manufacturing activity -- industrial
production, orders, and shipments.

It is impossible precisely

to disentangle strike impacts and trace their ramifications
forward to retail sales and backward to supplier industries.
A few facts and estimates are nevertheless worth noting.

both September and October, major strikes directly held about

- 6 -

300,000 workers off their jobs -- far exceeding any monthly
figures in three years.

Trade pUblications in the auto

industry estimate that strike activity so far has cut back
output by 362,000 cars in the current quarter.

This means

a dent of more than $4 billion (annual rate) in this quarter's GNP, following a $2 billion loss in the third quarter.
The continued rise of over-all backlogs in durable goods
manufacturing in September and October also points to the
dominance of strikes in curbing both orders and shipments.
If there are no further strikes in the automobile
industry, a considerable catch-up of output will be forthcoming early in 1968.

The swing reflecting the strike and

its aftermath could easily exceed $6 billion (annual rate)
from fourth to first quarter.

An appraisal of the near-term

outlook must also recognize the likelihood that production
and accumulation of steel will soon begin to be influenced
by the anticipation of next summer's labor negotiations in
that industry.

One"might hope that any enormous rises in

sales and output in the opening months of 1968 would be
properly interpreted and discounted by the business and
financial community as reflecting strike make-ups and
anticipations.

But most likely that will not be the case.

- 7 -

Just as the recent strikes have temporarily calmed down
the boomy atmosphere that was beginning to emerge late
this sunrner, so the aftermath could contribute to a
dangerously inflationary fervor early in 1968.

If the

strikes have given us a little more time on the economic
front, they have also made it more urgent than ever that
fiscal policy should be moderating the pace of advance
right at the beginning of 1968.
This is the season when economists throughout the land
are sizing up the economic outlook for the year ahead.
Among private forecasters, a consensus view is shaping up;
it places the GNP for 1968 at $840 billion or a little
higher, assuming a tax increase.

It seems significant, in

itself, that the overwhelming majority of private forecasters are assuming the prompt enactment of a surcharge
on income taxes for 1968.

They generally regard fiscal

restraint as essential to the health of our economic and
financial system and have confidence that this need will be
met through our democratic process.
With a tax increase, the standard forecast calls for
a rise in GNP of a little more than $55 billion in 1968.
Of this gain of 7 percent or more, about 3 percent is typically expected to represent price increase and the remaining

- 8 -

3-1/2 percent to 4-1/2 percent a gain in real output.

The

unemployment rate is usually projected at between 3-3/4
percent to 4 percent.
All-in-all, this standard private forecast -- assuming
a tax increase -- represents a fairly reassuring picture.
Our real output would grow in pace with capacity.

To be

sure, prices would be increasing considerably faster than
we like, but primarily because of pressures on costs that
were initially generated during late 1965 and 1966, and not
because of new demand pressures straining our capacity.

these samefDrecasters were obliged to reassess the economic
outlook assuming no tax increase, they would see potentially
serious trouble with respect to prices, interest rates,
credit availability, our international trade position, and
the health of our homebuilding industry.
There are good reasons to be skeptical about economic
forecasts, but there is simply no way to avoid or ignore
them.

The decisions of this Committee are bound to affect

the economy in 1968.

Failure to enact the surcharge would

be a decision to maintain a highly stimulative fiscal policy
with a large deficit at full-employment.

This would be

appropriate only if private demand could be counted on to be

- 9 especially weak next year -- if the recent private surveys
pointing to rising business investment are all too high,
if housing demand were about to level off abruptly, if the
consumer saving rate were going to rise to unprecedented
heights.

No expert in the world can give Congress a

guarantee that any -- or all -- of these things will not
happen.

B~t

no prudent man would wish to gamble that they

will take place o

Mr. Ackley concluded in August:

ttThere is nothing to

suggest that a powerful stimulus is called for in order to
s~pport

healthy economic growth.

On the contrary, the

maintenance of such stimulus is most likely to undermine
our prospects for prosperity.tt

That judgment is every bit

as valid today as it was then, and it is shared by the overwhelming majority of informed opinion throughout the lando
Money and Credit
Turning to the money and credit markets, on August 14
we stated our expectations of an undesirable rise in interest
rates and an unhealthy condition in those markets if a tax
increase "Nere not forthcoming.
are:

The facts since August 14

- 10 -

Interest rates declined briefly on the announcem2nt of the President's tax proposals, but it was

only a short-lived decline because the market soon
concluded that the tax proposals would encounter
delays; in the meantime, the market appraised
quite soberly the mounting evidence of excessive
credit demands that would emerge in the absence
of prompt and effective action on taxes and
expenditures.
Thus interest rates moved higher, across-the-board,
from early August onward.

A particularly steep

rise occurred in rates on Treasury securities
during October, following the temporary shelving
of active consideration of the tax proposals by
this Committee.
Sin::e early August the rate on 3-month Treasury bills
has risen by three-fourths of one percent.
Treasury b'Jnds are up more than 1/2 percent.

Long-term
Yields on new

high-grade corrorate issues are up more than 3/4 of 1 percent.
Yields on State and local government issues are up nearly

1/2 percEnt.

- 11 These increases have proceeded from a level of interest rates that was already high -- generally approaching
the 40-year highs that had been reached in August and
September of 1966.

By now, because of the further increases,

the high points of 1966 have been reached and surpassed,
except in the relatively short-term maturities.

For

example, in the case of high-grade corporate bonds, the
latest rate level of 6.99 percent compares with the high
of 6.35 percent in August=September 1966.
These increases in interest rates, moreover, have
taken place despite continued growth in the money supply
and bank credit.

The money supply has risen at an annual

rate of 6.8 percent thus far in 1967 in contrast to increases
of 2.2 percent in all of 1966 and 4.7 percent in 1965.

Bank

credit has grown at an annual rate of 12.5 percent for the
first 10 months in 1967 compared with increases of 5.7 percent in 1966 and 10.2 percent in 1965.
Rather than a stringency on supply, recent interest
rate increases reflect very strong demands for credit from
virtually every sector of the economy.

An over-hanging

fear of excessive Federal Government borrowing is a key
factor.

- 12 Last year corporations borrowed a record $17.6 billion
in the capital markets.

This year, in just the first 10

months, they have already borrowed $20 3 billion.
0

The

lO-month period is running about 35 percent ahead of the
comparable months of 1966.
In my presentation to this Committee last August, I
cited a similar comparison but at that time the margin of
increase of corporate borrowing over a year ago -- applying then to the first 7 months of the year -- was 23 percent
rather than 35 percent.

That is one measure of the current

pressures on the capital markets o
There is a similar story to tell for State and local
governments.

Last year these governmental units borrowed

$11.3 billion in the capital markets -- a record amount up
to that time.

That figure has already been surpassed in

just the first 10 months of this year, with borrowing of
$11.9 billion.

This is 27 percent ahead of the amount bor-

rowed in the first 10 months of 1966.

It maintains about

the same margin of increase that I referred to in my statement to this Committee on August 14.
The major change from a year ago, however, is in the
area of Federal Government borrowing.

Let me shift here to

- 13 -

talk about fiscal years rather than calendar years because
this points up the contrast more distinctlyo

In the fis-

cal year that ended last June 30, the Federal Government
had an Administrative Budget deficit of $909 billion.

addition to financing that deficit there were net borrowings
by Federal agencies and sales of participation certificates
in Federally-owned financial assets, which also exerted a
demand on the credit markets.

On the other side substantial

financing was provided through net purchases of securities
by Government investment accounts, purchases by the Federal
Reserve System, and a reduction over the year in the
Treasury's cash balance o After netting out all of these
factors, the Federal sector did not make a net demand on
the private credit markets but rather repaid about $6 billion to these markets.
In the current fiscal year the Federal sector will
instead be making a significant net demand on the private
credit markets.

It will be a substantial demand even with

the benefit of the proposed tax surcharge and tight
restraints on expenditures.

Without these fiscal constraints,

it will be a clearly excessive demand -- far more than the

- 14 credit markets would be able to handle without drastic
cuts in the availability of funds to meet private credit
demands, which are also substantial o
The rough orders of magnitude run something like this:
given the President's program of fiscal restraint, applying
to both the tax and expenditure sides, the Federal sector's
net credit demands on the private markets in this fiscal
year might be held to the neighborhood of $12 or $13 billion.
Without the tax rise and spending restraints, the net
Federal credit demand could soar above $22 billion.
In the current half year period, which covers the portion of the year when credit demands are seasonally heavy,
the Federal sector's net credit demands on the private market
are working out to about $16 billion o

That compares with

net credit demands of roughly $5 billion each in the JulyDecember periods of 1964, 1965 and 1966.
A key question, however, is what the Federal sector's
net demands will be in the January-June 1968 period, and
beyond o

With a program of rigorous fiscal restraint it

will be possible to make some seasonal repayments to the
market during the January-June period in 1968.

It will not

be as large as was the $11 billion repayment in January-June

- 15 1967, but it could fall somewhere between the $1.9 billion
repayment of January-June 1966 and the $4.7 billion repayment of January-June 1965.
Without the proposed tax measures, however, and with
only

~odest

success in restraining the level of Federal

expenditures, it would be necessary to press an additional
credit demand of at least $6 billion on the markets at a
time when seasonal repayment is the normal course of
events.

A $6 billion net demand would contrast very sharply

indeed with the $11 billion net repayment achieved in the
January-Ju-~1e

period of 1967 -- an adverse s\tJing of some

$17 billion.
This may not sound like a very large number against
the ba·:!kground of an approximately $800 billion annual rate
of GNP.

The relevant comparison, however, is not with GNP

but with the annual flow of credit through our credit
markets which has run roughly in the neighborhood of $70
billion a year.

In that context, a swing of $17 billion

within a half-year period -- would constitute an extraordinary overload that could not be met out of anticipated
levels of savings or new credit formation.

- 16 In the process of meeting excessive Federal Govern.
ment demands, many private credit needs would go unmet.
Home buyers, small businessmen and farmers would feel a
particularly tight pinch.
Nor would it be any better a solution if one attempted
to let all the credit demands be met through pumping in
unlimited additions to money supply,

That might produce

some temporary euphoria but also some very serious problems
of inflation and economic distortion that would ha\lnt us
for many years to come.
Balance of PaYments and the Dollar's World Position
;

Turning to the international aspects, 1 said in August
that tax and expenditure actions are vitally tmportant to
the protection of our balance-of-payments position and to
the maintenance of confidence in the dollars.
ment bears even greater emphasis now.

This state-

The devaluation of

sterling -- considering its psychological effect of focusing the eyes of the world upon us as keepers of the world's
major currency, and also its expected economic effects on
world trade and our balance-of-payments accounts .- makes
responsible fiscal action in the United States doubly
imperative

- 17 All of our efforts to improve our balance-of-payments
position may be for naught.
Unless we maintain relative price stability and
cost competitiveness in the United States economy;
Unless we resist and avert "the threat of excessive
demand which could damage our trade balance;
Unless we play a responsible role by assuring the
healthy state of our capital markets so important
to the balanced workings of the international
monetary system.
Statistical evidence of action or inaction by this
session of Congress will be read in annals yet to be published.

These indicators will reflect in the months and

years ahead whether the foreign holder of dollars today is
convinced about our capacity to manage our economy effectively and responsibly.

Investors traditionally have been

as impressed by imponderables as they have been by facts.
They have seized upon our handling of the surcharge and the
accOID?anying expenditure restraints as the measure of our
capacity and our intention to act responsibly.
In a very real sense, the size of our gold reserves
reflects the judgment by those abroad who now hold dollars

- 18 -

of the ability of the United States to exercise fiscal and
budgetary responsibility.

We must not give them any cause

for doubt of our ability or our resolve to act in a
responsible and timely mannero
The delay in acting on the tax increase, with the
resulting rise in interest rates here, has already caused
many foreign central banks to take defensive action.

This

moves us away from what we were achieving through the
Chequers meeting last January in England.

High interest

rates in the United States, due to excessive borrowing by
the Government, are disturbing influences that have implications far beyond our own border.
All of us realize that the international trading game
is made more competitive by the British devaluation.

Obvi-

ously a part of whatever total improvement the British may
achieve in their trade balance will probably be reflected
in a correspondingly adverse impact on our own trade surplus.
Most likely it will become apparent in our reduced exports
to various world markets.
This points up the fact that any deterioration in our
competitive position due to rising costs in the United states,

- 19 or due to abnormally high United States imports because of
excessive demand and capacity pressures in our domestic
economy, could have the effect of diverting a substantially
larger portion of the impact of the British action towards
our own country and away from Europe.

With Europe in a

surplus position as to balance of payments, it is vital
that such a shift be avoided.
The facts and trade statistics speak for themselves:
During the 1961-64 period of substantial but
clearly sound and well-balanced domestic growth,
and with high rates of economic advance in
Europe, our trade surplus increased almost
$2 billion -- from $4.8 billion in 1960 to
$6.7 billion in 1964.
During the following two years, with accelerating
domestic demand and increasing pressure on our
productive capacity, and slower growth rates in
Europe, the trade surplus fell -- back to $4.8
billion in 1965 and down to only $307 billion
last year.

With Europe in a

- 20 -

With a slower rate of growth again and leis
inflationary and capacity pressure in our
domestic economy so far this year, our trade
surplus has, despite the continued slower pace
of business activity in Europe, shown significant tmprovement -- from a last-quarter 1966 low
of $2.9 billion (annual rate) to an annual rate
of $4.4 billion for the first three quarters of
this year.

This offers no cause for complacency:

in fact, the

developments of the months since August only accentuates
the need for tax and budgetary action now o
In summary, then, the tmport of this review of developments since August 14 is clear:

namely whether from the

viewpoint of promoting a balanced and healthy domestic
economy, or of maintaining stable and orderly conditions
in our money and credit markets, or of protecting our
balance of payments and the strength of the dollar in the
international monetary system -- the case for the recommended program of fiscal restraint becomes even more
compelling today than it was last August.

Tft'EASURY DEPARTMENT

No,pmber 29, 1967

FOR IMMEDIATE RELEASE

Attached is a proposed bill and accompanying
technical explanation embodying the recommendations
contained in Secretary Fowler's statement today
before the House Ways and Means Committee.

Attachment

A BILL
To amend the Internal Revenue Code of 1954 to impose a temporary tax
surcharge, to

provide for expenditure reductions, and for other purposes,

Be it enacted by the Senate and House of Representatives of the
United States of

A~E:;rica

in Congress assembled, 'J'hat (a) Short Title.--

This Act may be cited as the IITax Surcharge and Expenditure Reduction Act
of 1967. II
(b)

Amendment of 1954 Code.--Except as otherwise expressly pro-

vided, whenever in this Act an amendment is expressed in terms of an
amendment to a section or other provision, the reference shall be
considered to be made to a section or other provision of the Internal
Revenue Code of 1954.
TITLE I--TAX PROVISIONS
SEC. 101.
(a)

IMPOSITION OF TAX SURCHARGE,

In General.--Subchapter A of chapter 1 (relating to deter-

mination of tax liability) is amended by inserting at the end thereof
the following new part:
"PART V- -TAX SURCHARGE
IIS ec . 51. Tax surcharge.
IISEC. 51.
11

(a )

TAX SURCHARGE.
Imposition of irax.--

11(1)

Calendar year taxpayers.--In addition to the

other taxes imposed by this chapter and except as provided in
subsection (b), there is hereby imposed on the income of every

- 2 -

person whose taxable year is the calendar year, a tax equal
to the percent of the adjusted tax (as defined in subsection (c))
for the taxable year specified in the following table:
Calendar

"(2)

Year

Percent
Individuals
Corporations

2·5

5·0

10.0

5·0

Fiscal year taxpayers.--In addition to the other

taxes imposed by this chapter and except as provided in subsection (b), in the case of taxable years ending on or after
the effective date of the surcharge and beginning before
July 1, 1969, there is hereby imposed on the income of every
person whose taxable year is other than the calendar year, a
tax equal to-"(A)

Ten percent of the adjusted tax for the

taxable year, multiplied by
tt(B)

A fraction, the numerator of which is the

number of days in the taxable year occurring on and
after the effective date of the surcharge and before

July 1, 1969, and the denominator of which is the number
of days in the entire taxable year.

"(3)

Effective aate defined.--For purposes of para-

graph (2), the 'effective date of the surcharge' means-"(A)

July 1, 1967, in the case of a corporation, and

tt(B)

October 1, 1967, in the case of an individual.

- 3 "(b)

L
E xemption.--Subsection (a) shall not apply if
ow I n
come

the adjusted tax for the taxable year does not exceed-"(1)

$290, in the case of a joint return of a husband

and wife und.er section 6013,
"(2)

$220, in the case of an individual who is a head of

household to whom section 1 (b) applies, or

"(3)

$145, in the case of any other individual (other than

an estate or trust).
"( c)

Adjusted Tax Defined. --For purposes of this section, the

adjusted tax for a taxable year means the tax imposed by this chapter
for such taxable year, determined without regard to-"( 1)

the taxes imposed by this section, section 871 (a),

and section 881; and
"(2)

any increases in tax under section 47 (a) (relating

to certain dispositions, etc., of section 38 property) or section

614 (c) (4) (c) (relating to increase in tax for deductions under
section 615 (a) prior to aggregation),
and reduced by an amount equal to the amount of any credit which would
be allowable under section 37 (relating to retirement income) if no tax
were imposed by this section for such taxable year.
I!

(d)

Authority to Prescribe New Optional Tax Tables. --

The

Secretary or his delegate shall prescribe regulations setting forth

- 4modified optional tax tables for calendar years 1968 and 1969 computed
upon the basis of composite rates incorporating the rate at which tax
is imposed by this section.
rounded to the neat:'es t whole

The tax tables so determined may be
dollar.

When, pursuant to this

subsection, the Secretary or his delegate prescribes regulations setting
forth modified optional tax tables for calendar years lSEB and]969;then~ notwithstanding section 144(a), in the case of a taxpayer to whom a credit is
allowable for
may be elected

eithe~

such year under section 37 the standard deduction

for such year regardless of whether the tax-

payer elects to pay the tax imposed by section 3.
"(e)

Estimated Tax.--For purposes of applying the provisions of

this title with respect to declarations and payments of estimated
income tax due more than 45 days (15 days in the case of a corporation)
after the enactment of this section-"(1)

In the case of a corporation, so much of any tax imposed

by this section as is attributable to the tax imposed by section 11
or 1201 (a) or subchapter L shall be treated as a tax imposed by
such section 11 or 1201 (a) or subchapter L;

- 5 -

n(2)

The term 'tax shown on the return of the individual

for the preceding taxable year', as used in section 6654 (d) (1),
and the term 'tax shown on the return of the corporation for the
preceding taxable year', as used in section 6655 (d) (1), shall
mean the tax which would have been shown on such return if tax
had been imposed by this section for such preceding taxable year
at the rate applicable to the current taxable year.
"(f)

Withholding on Wages.--In the case of wages paid after

January 1, 1968,

and before July 1, 1969, the tax required to be

deducted and withheld under section 3402 shall be determined in
accordance with the following tables in lieu of the tables set forth
in section 3402 (a) or (c)(l).-Tables to be Used in Lieu of
'Tables in Section 3402 (a)
Tables to be Used in Lieu of
Tables in Section 3402 (c)(l)
neg)

Western Hemisphere Trade Corporations and Dividends on Certain

Preferred Stock.--In computing, for a taxable year of a corporation, the
fraction described in-"(1)

Section 244 (a)(2), relating to deduction with respect to

dividends received on the preferred stock of a public utility,

- 6
"(2)

Section 247 (a)(2), relating to deduction with respect

to certain dividends paid by a public utility, or
"( 3)

Section 922 (2») relating to special deduction for

Western Hemisphere trade corporations,
the denominator shall, under regulations prescribed by the Secretary
or his delegate, be increased to reflect the rate at which tax is
imposed under subsection (a) for such taxable year.
"(h)

Special Rule. - -For purposes of this title, except as otherwise

expressly provided in this section, to the extent the tax imposed by
this section is attributable (under regulations prescribed by the Secretary
or his delegate) to a tax imposed by another section of this chapter,
such tax shall be deemed to be imposed by such other section.
"(i)

Shareholders of Regulat'd Investment Companies.--In computing

the amount of tax deemed paid under section 852 (b)(3)(D)(ii) and the
adjustment to basis described in section 852 (b)(3)(D)(iii), the
percentage set forth therein shall be adjusted under regulations
prescribed by the Secretary or his delegate
which tax is imposed under

subsection (a).

to reflect the rate at

·7(b)

Minimum Distributions.--Section 963 (b) (relating to receipt

of minimum distributions by domestic corporations) is amended-(1)

by striking out the heading of paragraph (1) and inserting

in lieu thereof the following:
"( 1)

Taxable years beginning in 1963 and taxable years entirely

within the surcharge period.--", and
(2)

by striking out the heading of paragraph (3) and inserting

in lieu thereof the following:

"(3)

Taxable years begiIUling after 1964 (except taxable years

which include any part of the surcharge period). __ If, and
(3)

by adding after the table in paragraph (3) the following:

"In the case of a taxable year beginning before the surcharge
period and ending within the surcharge period, or begiIUling
within the surcharge period and ending after the close of the
surcharge period, the
an amount
"(A)
be

e~ual

re~uired

minimum distribution shall be

to the sum of--

that portion of the minimum distribution which would

re~uired

if the provisions of paragraph (1) were applicable

to the taxable year, which the number of days in such taxable
year

which are within the surcharge period bears to the total

number of days in such taxable year, plus
"(B)

that portion of the minimum distribution which would

be re~uired if the provisions of paragraph (3) were applicable
to such taxable year, which the number of days in such taxable
year which are not within the surcharge period bears to the total
number of days in such taxable year.

- 8 As used in this subsection, the term 'surcharge period' means
the period beginning on July 1, 1967, and ending at the close
of June 30, 1969."
(c)

Clerical Amendment.--The table of parts of subchapter A

of chapter 1 is amended by adding at the end thereof the following:
"Part V.
(d)

Tax

Surcharge~'

Effective Date.--The amendments made by this section shall

apply-(1)

Insofar as they relate to individuals, with respect

to taxable years ending after September 30, 1967, and beginning
before July 1, 1969.
(2)

Insofar as they relate to corporations, with respect

to taxable years ending after June 30, 1967, and beginning
before July 1, 1969.
SEC. 102.

RAISING FROM 70 PERCENT TO 80 PERCENT THE ESTIMATED TAX
WHICH MUST BE PAID IN INSTALLMENTS BY CORPORATIONS.

(a)

In General.--Section 6655 (b) (relating to amount of under-

payment), and section 6655 (d)(relating to exception), are amended
by striking out "70 percent" each place it appears therein and inserting
in lieu Jchereof "80 percent".

- 9 (b)

Effective Date.--The amendments made by this section shall

apply with respect to taxable years beginning after December 31, 1967.
SEC. 103.
(a)

PAYMENT OF FIRST $100,000 OF ESTIMATED TAX.
Requirement of Declaration.--Section 6016 (a) (relating

to requirement of declaration of estimated tax in case of corporations)
is amended by striking out "$100,000" and inserting in lieu thereof
"$40" •
(b)

Reduction of Exclusion from Estimated Tax.--Section 6016

(b) (relating to the definition of estimated tax in the case of a
corporation) is amended to read as follows:
"(b)

Estimated Tax.--

"(I)

Definition.--For purposes of this title, in the case of a

corporation, the term 'estimated tax' means the excess of-"(A)

the amount which the corporation estimates as the

amount of the income tax imposed by section 11 or 1201 (a),
or subchapter L of chapter 1, whichever is applicable,
reduced by the amount which the corporation estimates as the
sum of any credits against tax provided by part IV of subchapter A of chapter 1, over
"(B)

an amount equal to the applicable exclusion percentage

(determined under paragraph (2)) multiplied by the lesser of--

"( i)
"(ii)
"(2)

$100,000, or
the amount determined under subparagraph (A'.

Exclusion percentage.--Tbe term 'exclusion percentage' means--

- 10 -

If the declaration is for a taxable
year beginning in

The exclusion percentage is

1968

1969

1910

1')71

1972 or later
(c)

Exception from Addition to Tax.--Section 6655 (d)(lj is

amended by striking out the phrase "reduced by $100,000" and inserting
in lieu thereof "reduced by an amount equal to the applicable exclusion
percentage, determined under section 6016 (b)(2), multiplied by the
lesser of $100,000 or the amount of such tax".
(d)

Addition to Tax for Underpayment of Estimated Tax.--

Section 6655 (e) (relating to the definition of tax) is amended to
read as follows:
!I(e)

Definition of Tax.--For purposes of subsection(b),

(d)(2), and (d)(3), the term 'tax' means the excess of-II

(1)

the amount of tax imposed by section 11 or 1201 (a),

or subchapter L of chapter 1, whichever is applicable, reduced
by the sum of any credits against tax provided by part IV of
subchapter A of chapter 1, over
"(2)

an amount equal to the applicable exclusion percentage,

(determined under section 6016 (b)(2)), multiplied by the lesser
of--

- 11 -

(e)

"(A)

$100,000, or

"(B)

the amount detennined in paragraph ( 1 ) ."

Technical Amendment.--Clause (v) of section 243 (b)(3)(C)

is amended by striking
(f)

outr~lOO,OOO".

Effective Date.--The amendments made by this section shall

apply with respect to taxable years beginning after December 31, 1967.
SEC'.

104.
(a)

POSTPONE:MENT OF CERTAIN EXCISE TAX RATE REDUCTIONS.
Passenger Automobiles.-(1)

In general.--Subparagraph (A) of section 4061 (a)(2)

(relating to imposition of tax) is
"(A)

amended to read as follows:

Articles enumerated in subparagraph (B) are

taxable at whichever of the following rates is applicable:
"7 percent for the period March 16, 1966, through June 30, 1969.
"2 percent for the period July 1, 1969, through December 31, 196 9.

"I percent for the period after December 31, 1969."
(2)

Confonning amendments.--Section 6412 (a) (1) (relating to

floor stocks refunds on passenger automobiles, etc.) is amended by
striking out "April 1, 1968, or January 1, 1969" and inserting in
lieu thereof "July 1, 1969, or January 1, 1970".
(b)

Communication Services.--Section 4251 (relating to tax on

communications) is amended-(1)

By striking out subsection (a)(2) and inserting in lieu

thereof:
"(2)

The rate of tax referred to in paragraph (1) is as follows:

- 12 -

"Amounts paid pursuant
to bills first rendered

Percent

"Before July 1, 1969
"After June 30, 1969, and
before January 1, 1970
(2)

10
1"

By striking out subsection (b) and inserting in lieu

thereof:

"(b)

Termlnation
.
of Tax.--The tax imposed by sUbsection (a ) shall

not apply to amounts paid pursuant to bills first rendered on or after
January 1, 1970."

(3)

By striking out subsection (c) and inserting in lieu

thereof:

"(e)

Srecial Rule.--For purposes of subsection (a), in the case

of communications services rendered before May 1, 1969, for which a
bill has not been rendered before July 1, 1969, a bill shall be treated
as having been first rendered on June 30, 1969.

For purposes of

sub~

sections (a) and (b), in ",:;he case of communications services rendered
after April 30, 1969, and before November 1, 1969, for which a bill has
not been rendered before January 1, 1970, a bill shall be treated as
having been first rendered on December 31, 1969."
(c)

Effective Date.--The amendments made by this section shall be

effective on the date oft enactment of this Act.

- 13 -

SEC.

105.

ENDJNG AFTER

FILJNG OF CORPORATION RETURNS FOR TAXABLE YEARS
JUNE 30,

1967, AND BEFORE DECEMBER 1, 1967.

In the case of a corporation subject to

a tax imposed by chapter 1

of the Internal Revenue Code for a taxable year ending after June 30,

1967, but prior to December 1, 1967, such corporation shall after
the date of

the enactment of this Act and on or before March 15,

1967, make a return for such taxable year with respect to the tax
imposed by chapter 1 of the Internal Revenue Code for such taxable
year.

The return required by this section for such taxable year

shall constitute the return for such taxable year for all purposes
of the Internal Revenue Code; and no return for such taxable year,
with respect to any tax imposed by chapter 1 of such Code, filed on
or before the date of the enactment of this Act shall be considered
~or

any of such purposes as a retarn for such year.

The taxes

imposed by chapter 1 of such Code (determined with the amendments
made by this Act) for such taxable year shall be paid on March 15,

1968, in lieu of the time prescribed in section 6151 of such Code.
All payments with respect to any tax for such taxable year imposed
by chapter 1 of such Code under the law in effect prior to the enactment of

this Act, to the extent that such payments have not been

credited or refunded, shall be deemed payments made at the time of the
filing of
for

SUC:l

the return required by this section on account of the tax
taxable year under chapter 1 determined with the amendments

made by this Act.

- 14 SEC. 105.

SPECIAL PROVISION WITH RESPECT TO INTEREST AND PENALTIES
ON PAYMENTS BY INDIVIDUALS OF SURCHARGE FOR 1967.

Notwithstanding any provision of the Internal Revenue Code, no
interest or penalties shall be imposed on account of the late payment
by an individual taxpayer of the tax imposed by section 51 for 1967 if
s~ch

tax is paid within 30 days after a bill therefor

to the taxpayer by the Secretary or his delegate.

has been rendered

- 15 TITLE II -- EXPENDITURE REDUCTIONS
Sec. 201.

The Congress hereby finds and determines that

it is necessary to reduce budget expenditures for the fiscal
year 1968 below the budget estimates therefor, and that the
limitations on obligations required by this Title are necessary for that purpose.
Sec. 202.

(a) During the fiscal year 1968, no depart-

ment or agency of the Federal Government, including the
Legislative and Judicial branches, shall incur obligations
in excess of the lesser of-(1) the aggregate amount available to each such
department or agency as obligational authority in the
fiscal year 1968 through appropriation acts or other
laws, or
(2) an amount determined by reducing the aggregate
budget estimate of obligations for such department or
agency in the fiscal year 1968 by-(i) 2 percent of the amount included in such
estimate for nersonnel comnensation
and benefits,
,
~

plus
(ii) 10 percent of the amount included in
such estimate for objects other than personnel
compensation and benefits.
(b) As used in this section, the termg "obligational
authority" and "budget estimate of obligations" include

- 16 authority derived from, and estimates of reservations to be
made and obligations to be incurred pursuant to, appropriations and authority to enter into contracts in advance of
appropriations.
(c) The references in this section to budget estimates
of obligations are to such estimates as contained in the
Budget Appendix for the fiscal year 1968 (House Document
No. 16, 90th Congress, 1st session), as amended during the
first session of the 90th Congress.
Sec. 203.

(a) This Title shall not apply to obligations

for (1) permanent appropriations,

(2) trust funds,

(3) items

(except legislative and judiciary) included under the heading
"relatively uncontrollable" in the table appearing on page 14
of the Budget for the fiscal year 1968 (House Document No. 15,
Part 1, 90th Congress, 1st session), or (4) programs, projects,
or purposes, not exceeding $300,000,000 in the aggregate,
determined by the President to be vital to the national
interest or security.
(b) This Title shall not be so applied as to require a
reduction in obligations for national defense exceeding
10 percent of the new obligational authority (excluding
special Vietnam costs) requested in the Budget for the fiscal
year 1968 (House Documents Nos. 15, Part 1, and 16), as
amended during the first session of the 90th Congress:
Provided, That the President may exempt from the operation

- 17 of this Title any obligations for national defense which he
deems to be essential for the purposes of national defense.
Sec. 204.

In the administration of any program as to

which (1) the amount of obligations is limited by section
202(a)

(2) of this Title, and (2) the allocation, grant,

apportionment, or other distribution of funds among recipients
is required to be determined by application of a formula
involving the amount appropriated or otherwise made available for distribution, the amount available for obligation
as limited by that section or as determined by the head of
the agency concerned pursuant to that section shall be substituted for the amount appropriated or otherwise made available
in the application of the formula.
Sec. 205.

The amount of any appropriation or authori-

zation which (1) is unused because of the limitation on
obligations imposed by section 202(a) (2) of this Title and
(2) would not be available for use after June 30, 1968, shall
be used only for such purposes and in such manner and amount
as may be prescribed by law in the second session of the
90th Congress.

TECHNICAL EXJ?LA.NATION
TAX SURCHARGE AND EXPENDITURE
REDUCTION ACT OF 1967
This bill, which is entitled the IITax Surcharge and Expenditure
Reduction Act of 1967 11 , has
(1)

two titles:

Title I sets forth the tax provisions of the bill in four

substantive sections:
(a)

Section 101 imposes a temporary surcharge on both

individual and corporate income tax liabilities at an annual
rate of ten percent.
(b)

Section 102 raises from 70 percent to 80 percent,

the percent of its estimated tax which a corporation may pay
by installments without incurring a penalty.
(c)

Section 103 eliminates, over a five-year period, the

$100,000 estimated tax exemption presently granted corporations.
(d)

Section 104 suspends the schedule for the reduction

of the excise taxes on passenger automobiles and telephone service during the period of the temporary surcharge.
(2)

Title II provides for expenditure reductions for fiscal year

1968.
There follows a more detailed description of each of these
provisions.

- 2 -

TrrLE I
SEC. 101.
(a)

TAX PROVISIONS

TAX SURCHARGE.

Impos~on of tax.

Subsection (a) of section 101 adds a new

)art to subcbapter A of chapter 1 of the Internal Revenue Code which con,ists of a new section 51 imposing a temporary tax surcharge on corporations
md individuals.
General Provisions.
~he

~ent

Subsection (a) of the new section 51 provides for

imposition of the surcharge.

The tax is at an annual rate of ten per-

of tax liability (adjusted as provided in section 51(c)) and is ef-

fective from July 1, 1967, through June 30, 1969, for corporations and
from October 1, 1967, through June 30, 1969, for individuals.

For taxpayers

who report their income on a calendar year basis, the rate of the surcharge
for the calendar years involved is as follows:
C:alendar Year

Rate of Tax
IndividualS~orporation~

1967

2.5%

1968

10%

1969

In the case of taxpayers who report their income on a fiscal year basis,
the rate will be ten percent for years falling entirely within the effective dates, whereas, in the case of taxable years that straddle either
the commencement or termination date, the tax will be prorated depending
on the number of days in the taxable year falling within the period the
tax is in effect.
Low income exemption.

Subsection (b) of the new section 51

provides an exemption from the surcharge for individuals (other

- 3 than estates and trusts) whose tax does not exceed that ~nerally applicable to the first two brackets of taxable incore.

More specif-

ically, the surcharge will rot apply to a husband and wife filing a
joint return if their tax does not exceed $290.

It will not apply

to a head of household whose tax does not exceed $220, or to a single
individual (or a married individual filing a separate return) whose
tax does not exceed $145.

In the case of a head of household, the

exemption level is determined on the basis of the tax applicable to
$1,500 of taxable income which is midway between the first two tax
brackets of a single individual and the first two tax brackets of a
married couple filing a joint return.
Tax base on which surcharge is computed.
the new section 51 provides that the

surchar~

Subsection (c) of
shall be computed as a

percentage of the tax otherwise imposed by chapter 1 of the Internal
Revenue Code, with the exception that it shall not be imposed (1) with
respect to the 30 percent tax under sections 871(a) and 881 on nonresident alien individuals and foreign corporations receiving income
not effectively cormected with a business in the United States, or (2)
with respect to any increases in tax under section 47(a) (relating to
certain dispositions of section 38 property) and section 614(c)(4)(c)
(relating to deductions taken under section 615(a) prior to aggregation).
the case of an elderly person who is eligible for the retirerent income
credit, the surcharge will be computed as a percentage of his tax
liability after subtracting his retirement income credit.

Similarly,

tax liability shall be reduced by the retirement income credit in determining whether such an individual is eligible for the low income
exemption.

This treatment is afforded the retirement income credit

- 4 in order to give it the same effect on the surcharge as the exclusion for social security benefits.

Tax liability would not be reduced

by any other credits in computing the amount of the surcharge.

the other hand, once the surcharge has been computed, it may be offset
by credits to which the taxpayer is entitled and which are not
absorbed by his regular tax liability.
Authority to prescribe new optional tax tables.

Subsection

(d) of the new section 51 provides that the Secretary of the Treasury
or his delegate shall prescribe regulations setting forth modified
optional tax tables computed on the basis of composite rates incorporating
the surcharge.

The tables may be rounded to the nearest whole

dollar.
The usual rule that a taxpayer ~ith less than $5,000 of i~come
may take the standard deduction only if he uses the optional tax tables
will be waived in the case of a taxpayer who is eligible for the
retirement income credit.

This special rule is to reflect the fact

that the effect of the retirement income credit on the surcharge cannot
be accurately incorporated into the optional tax tables, with the
result that those claiming the retirement income credit will almost
universally use the regular tax

- 5 computation.

Under these circumstances, without the special rule,

most taxpayers claiming the retirement income credit would be precluded from using the standard deduction.
Estimated tax.

Subsection (e) of the new section 51 contains

provisions conforming the estimated tax provisions to the new surcharge tax.

Under present law, corporations are required to pay

estimated tax only with respect to taxes imposed by section 11 or
1201 (a) or subchapter L (relating to insurance companies).

The

new subsection (e) (1) provides that any surcharge that is attributable to a tax imposed under these sections or subchapter shall,
for estimated tax purposes, be treated as a tax imposed under
these sections or subchapter and, therefore, subject to estimated
tax payments.

paragraph (2) of the new subsection (e) provides that,

in the case of the option under which individuals and corporations
may pay their estimated tax on the basis of their prior year's
tax liability, their prior year's liability shall be adjusted to
reflect the surcharge tax.

- 6 Under the provi~ions of the new subsectipn (e), corporations
would be required to reflect the surcharge in their

~irst

estimated

tax payment due more than 15 days after the bill is enacted.

For

individuals, the surcharge would have to be reflected in the first
estimated tax payment due more than 45 daYij after the enactment of
the bill.

Thus, individuals

w~ll

not have to reflect the surcharge

on their final estimated tax return for 1967 which is due on January 15,

1968.

He~ce,

no underpayment

of estimated taxes fo~ 1967 will result

because of the surcharge.
~~thholdin~

tables.

Subsection (f) of the new section 51 will

set forth new tables for computing the

a~ount

of income taxes to

withheld from wages paid on or after January 1, 1968, and before July 1,

1969. These tables will reflect an increase in the withholding rates
of ten percent.
~6ter~
pref~red

Hemisphere Trade

stock.

co~~rationsand

dividends

~~~

The following two provisions of the Internal

7 -

Revenue Code provide a special deduction with respect to certain
income which has the effect of reducing the corporate tax rate applicable to that income by l~ percentage poin~s.
(1)

These provisions are;

Section 922, relating to the taxable ~ncome of

Western Hemisphere Trade Corporations; and
(2)

Section 247, relating to dividends paid by a

public utility on its preferred stock.
Section 244 provides a reciprocal deduction with respect to amounts
received as dividends on certain preferred stock of a public utility.
In order to maintain the 14 percentage point differential under these
sections, subsection (g) of the new section 51 provides that the computation shall be adjusted, under regulations prescribed by the
Secretary of the Treasury or his delegate, to reflect in the regular
corporate tax rate the surcharge imposed under the neW section 51.
Special rules.

Subsections (h) and (i) of the new section 51 insure

that, under regulations to be prescribed by the Secretary, the surcharge
interacts properly with ether

tax~imposing

sections of the Code.

Thus, for example, these subsec(,Lons insure that the provisions of
sections 72(n)(3) and 1378(b) (relating to re~uction of taxes b~
certain credits), sections 815(b)(2)(B) and 815(c)(3)(B) (relating to
adjustments to the shareholders and policyholders surplus accounts),
sections 535(b)(1), 545(b)(1), ~d 556(b)(1) (relating to adjustments
for taxes of personal holding co~panies), section 852(b)(3)(D)(ii)and (iii)
(relating to treatment of undistributed capital gain by shareholders
of regulated investment companies), section 1361(a) and (h) (relating
to unincorporated business enterprises electing to be taxed as

- 8 domestic corporations), sections 1373(c), 1375(a)(3) and 1378
(relating to subchapter S corporations), and sections 515 and 841
(relating to the credit for foreign taxes) will properly reflect the
application of the surchar§e. (This list is not intended to be exausted.)
(b)

Minimum distributions by forei~ sUbsidiaries.

Subsection

(b) of section 101 of the bill amends section 963(b) (relating to
receipt of minimum distributions by domestic corporations from their
foreign subsidiarjes) to provide for the use of a minimum distribution
table reflecting the surcharge.

The table is to be used for taxable

years all or part of which fall within the surcharge perio

Full text of Press Releases of the United States Department of the Treasury : Volume 159

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