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LIBRARY
RonNi

50~O

JUN 1 ~ 1972
TREASURY DEPARTMENT

m;:Tt!D STATES SAVINGS BONDS ISSUED AUD REDEEMED TUI10UGH Novcmbor .30, 1967
(Dollar amounh in ",III ions - rounded and wi II not nccc Slorlly odd to total s)
DESCRIPTION

AMOUNT ISSUfOll

AIo40UNT
REDEEMeD

AMOUNT
OUTSTANDING

% OUTSTANOING
OF AIo40UNT ISSUED

A";U~ED

Sl'ril's :\-19:15 thru 0-1041
Scril's F and G-l!Hl thru 1D52
Scril'S ,J and K-ID52 Lhru 1954

5,00.3
29,521
2,236

4,995
29,470
2,216

8
51
20

.16
.17
.89

1,867
8,246
13,272
15,473
12,153
5,498
5,206
5,372
5,298
4,631
4,008
4,199
4,793
4,882
5,083
4,902
4,610
4,L81
4,192
4,193
4,220
4,065
4,521
4,410
4,.316
4,632
3,228

1,633
7,231
11,670
13,509
10,419
4,522
4,112
4,143
4,013
3,452
2,988
3,101
3,L40
3,419
3,485
3,302
3,004
2,524
2,402
2,290
2,143
2,198
2,102
1,968
1,780
728

234
1,014
1,602
1,964
1,734
976
1,093
1,230
1,284
1,179
1,020
1,098
1,353
1,462
1,599
1,600
1,606
1,725
1,668
1,791
1,930
1,922
2,323
2,308
2,348
2,852
2,500

12.53
12.30
12.07
12.69
1L~. 27
17.75
21.00
22.90
24.24
25.1.6
25.45
26.15
28.23
29.95
31.2t 6
32.64
34.84
,38.50
39.79
42.71
45.73
L7.28
51.38
52.34
54.40
61.57
77.45

524

503

4.20

152,275

108 ,838

43,437

28.53

5,485
6,h07

2,895
1,141

~,590

5,267

47.22
82.21

11,892

4,036

7,856

66.06

16L,167

112,874

51,293

31.24

~,\~ATLJRr:D

Scnc:) E :Y:
1~ I '. 1

1~).j :;
1 ~j'i 3
1 ~H-i
1~i45
10·l G
10i7
1~J.l 8
10·l C)
1n:>o
10:>1
1032

19:>3
1054
1055
1:!jG
~fD57

1958
1059
1%0
1%1
1 %2
1%3
1%4

10G')
lSGG
1967

Unclassified
Total Series E
Series Ii (1952 thru May, 1959) 2/
H (June, 1959 thru_196 7 \

2,7~6

_ Total Series H
TotJ.l Series E and H

Series J and K (

195$ thru

{Tot.l m.bred
All Series

Total unmatured
Grand Total

1957)

1,515

1,220

295

36,700
165,682
202,441

36,681
114,09L
150,,775

79
51,588
51.1 667

d"dcs (H~crucd di.~ counl.
ur .. r.1 rcrl"/TOJI'ion ImlllC.

: option 01 owner bond, may' be /acid and will eClrn Intere,t lor oddit~l period! alter ori&inal moturity dill ...
elude, I7IlJtured 110"•• w"'eA Iiou. not been pruuted lor redemption.
If .. , .. PO U12 _ TREASURY DEPARTMENT _ Bureau of the Public D.b,

19.L7
.21
31.)4
25.52

UNITED STATES SAVINGS BONDS ISSUED AND REDEEMED THROUGH

December

31, 1967

(Dollar amounts in millions - rounded and will not necessarily add to totals)
DESCRIPTION

AMOUNT
REDEEMED l j

AMOUNT ISSUEO..!!

AMOUNT
OUTSTANDING ~

% OUTSTANDING
OF AMOUNT ISSUED

MATURED
Series A-1935 thru D-1941
Serif's F and G-1941 thru 1952
Series J and K-1952 thru

UNMATURED
Series 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
Unclassifiecl
Total Series E
Series H (1952 thru May, 1959) 21
H (June, 1959 thru 1967)
Total Series H
Total Series E and H
Series J and K

(1956

thru 1957)

{Total matured
All Series

Total unmatured
Grand Total

.5,003
29,521
3,156

u,~95

29,u70
3,089

8
.51
67

.16
.17
2.12
12.57
12 .28
12.03
12.68
lli.26
17.70

1,869
8,250
13,276
15,484
12,162
5,502
5,210
5,377
5,303
4,635
4,012
u,201
u,797
4,886
.5,088
4,907
4,613
u,498
4,198
u,201
4,227
4,073
4,529
4,418
4,324
4,642
3,589

1.63.5
7,237
11,679
13,519
10,h28
t ,;27

8u)'

235
1,013
1,.597
1,96u
1,734
974
1,091
1,229
1,283
1,177
1,018
1,094
1,350
1,459
1,59u
1,.595
1,596
1,720
1,665
1,790
1,929
1,921
2,320
2,302
2,339
2,827
2,7cO

499

553

-53

152,761

109,257

43,~04

28.48

5,48,
6,L11

2,932
1,lli5

2,552
5,296

46.53
82.22

11,926

4,077

7,848

65.81

164,687

113,334

51,352

31.18

.595

366

229

38.49

37,680
165,282
202,961

37,554
113,701
151,2,5

126
51,581
51,707

ti,119

h,1U9
h,020
3,L~8

2,99u
3,107
3,uu7
3,u27
3,1..9u
3,)12
3,017
2,758
2,~33

2,1.11
2,299
2,152
2,209
2,116
1,985
1,815

Includes accrued dis ('ount.
Current rl"df'mption tl(,lue.
At o~on of Olllncr bonds rna)' be held and will earn inte;eskl;;;~~onal periods after original maturity dates.

~XH"~

.
Forn, PD 3111: - TREASURY DEPARTMENT - Bureau of the Public Debt

.W.94

22.86
24.19
25.39
25.37
26.04
28.14
29.86
31.33
32.50
14.60
38.32
39.66
42.61
45.64
47.16
51.23
52.11
54.09
60.90
76.34

.33
31.21
25.48
--

TREASURY DEPARTMENT

December 1, 1967
FOR IMMEDIATE

RE~EASE

SECRET SERVICE PROMOTIONS
ANNOUNCED
U. E:~. Secret Service Director, James J. Rowley, today announced
the promotic{t elf Rufus W. Youngblood to Deputy Direc tor. This
new post is the second highest position in the Secret Service.
Thomas L. Johns, formerly Special Agent in Charge of the
Presidential Protective Division, is succeeding Mr. Youngblood
as Assistant Director (Protective Forces).
Robert H. Taylor, formerly Deputy Special Agent in Charge
of the Presidential Protective Division, is promoted to the
position of Deputy Assistant Director (Protective Forces).
Clinton J. Hill, for~erly Assistant Special Agent in Charge
of the Presidential Protective Division, is promoted to
Special Agent in Charge of that Division.
Director RO'\>vley said th:).t these promotions are a final part
of the Qverall recent reorganization of the Secret Service. The
purpose of this reorganization is to strengthen and broaden the
a(h~LTlistrative structure of the Service.
The Deputy Director participates with the Director in
supervising the activities of the Secret Service in the
discharge of its protective and criminal investigative
responsibilities.
Mr. Youngblood was born January 13, 1924 in Macon, Georgia.
He served in the U. S. Army Air Force during World War II. He
is a graduate of the Georgia Institute of Technology, Atlanta,
Georgia, and earned a Bachelor of Industrial Engineering Degree
in 1950. Mr. Youngblood was appointed as a Special Agent with
the Secret Service in 1951 and has served in the Atlanta and
Washington, D. C., field offices and on the Vice Presidential
and Presidential Protective Divisions. In 1965 he was promoted
to Spec ial Agent in Charge of the Pres idential Protec tive Divis ion
and later that year promoted to Assistant Director (Protective
Forces). Mr. Youngblood resides in suburban Virginia with his
F-I095

- 2 -

wife, the former Peggy Denham, and three children; daughters Adele Lois age 11; Rebecca Ann age 6; and son Mark age 17.
A married daughter, Joy Youngblood Rumpf, resides in
Andover, Massachusetts.
Mr. Johns was born on December 11, 1925, in Birmingham,
Alabama. He served as an Aviation Cadet with the U.S. Naval
Air Corps during World War II. In 1950 he earned a Bachelor of
Science Degree in Law and Business Administration from Howard
College in Birmingham. Mr. Johns was appointed to the
Secret Service as a Special Agent in 1954 and has served in the
Birmingham, Chicago, and Atlanta field offices on the Vice
Presidential and Presidential Protective Divisions. He was
promoted to Assistant Special Agent in Charge of the Presidential
Protective Division in 1965 and in 1966 to Special Agent in
Charge of that Division. He resides in suburban Virginia with
his wife, the former Nita Jean Parker, with their son Jeff age

17.
Mr. Taylor was born May 16, 1926 in lola, Kansas. He served
l.n the U.S. Navy during World War II. He received a B.A. Degree
in Political Science from Wichita State University in Wichita,
Kansas, in 1950 and has attended Memphis State Law School,
Memphis, Tennessee. He was appointed to the Secret Service as
a Special Agent in 1950 and has served in the Kansas City,
Washington, D. C., and Memphis field offices and on the
Presidential Protective Division. Before his promotion to
Deputy Special Agent in Charge of the Presidential Protective
Division in 1966, Mr. Taylor was Special Agent in Charge of the
Ncmphis Field Office. Mr. Taylor resides in suburban Virginia
with his wife, the former Loretta Mae Bowman, and their two
children, a daughter Karen age 16, and a son Kenneth age 14.
Mr. Hill was born January 4, 1932 in Larimore, North Dakota.
In 1954 he graduated from Concordia College, Moorehead, Minnesota,
with an A.B. Degree in History. He served in the U.S. Army,
Counter Intelligence Corps, from 1954 to 1957. He was appointed
as a Special Agent with the Secret Service in 1958. After
serving in the Denver Field Office he was transferred in 1959
to the Presidential Protective Division. Mr. Hill resides
in suburban Virginia with his wife, the former Gwen Ardeth Brown,
and their two sons, Chris age 11 and Corey age 6.
000

TREASURY DEPARTMENT
OR RELEASE 6: 30 P.M.,
onday 1 De cembe r..!,_ 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 September 7, 1967, and
he other series to be dated December 7, 1967, which were offered November 29, 1967,
ere opened at the Federal Reserve Banks today. Tenders were invited for $1,500,000,000,
r thereabouts, of 91-day bills and for $1,000,000,000, or thereabouts, of l82-dey
ills. The details of the two series are as follows:
A.NGE OF ACCEPTED
OMPETITIVE :BIDS:

High
Low
Average

91-day Treasury bills
maturing March 7, 1968
Approx. Equi v •
Price
Annual Rate
98.746
4.961%
98.736
5.00~
98.739
4.989i

l82-dey Treasury bills
maturing June 6, 1968
Approx. Equiv.
Price
Annual Rate

97.190

5.558%

97.174
97.179

5.590%
5.58oi

46% of the amount of 91-day bills bid for at the low price was accepted
34% of the amount of 182-day bills bid for at the low price was accepted
T)TAL lliNDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicaso
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTALS
I
I
I

Applied For
$ 28,253,000
1,647,400,000
14,983,000
64,010,000
20,584,000
43,433,000
277,607,000
31,812,000
21,328,000
13,787,000
14,174,000
238,498,000

Accepted
$
7,153,000
756,133,000
4,917,000
29,390,000
9,604,000
23,323,000
78,917,000
16,442,000
7,868,000
11,287,000
8,874,000
46,823,000

$1,500,128,000 ~ $2,415,869,000

$1,000,731,000

Applied For
Accepted
$ 19,161,000 $ 9,161,000
1,054,068,000
1,888,148,000
12,605,000
37,455,000
23,690,000
48,773,000
17,279,000
20,456,000
34,261,000
57,263,000
135,089,000
247,267,000
33,903,000
51,803,000
18,336,000
28,746,000
20,487,000
26,729,000
13,929,000
26,129,000
127,320,000
309,780,000
$2,761,710,000

£I

Includes $216,041,000 noncompeti ti ve tenders accepted at the average price of 98.739
Includes $133,936,000 noncompetitive tenders accepted at the average price of 97.17S
These rates are on a bank discount basis. The equivalent coupon issue yields are
5.14% for the 91-day bills, and 5.84 %for the 182-day bills.

·1096

TREASURY DEPARTMENT

December 4, 1967

FOR IMMEDIATE RELEASE
UNITED STATES FOREIGN GOLD TRANSACTIONS IN 1967
The Treasury announced today that net sales of monetary
gold by the United States to foreign countries during the
third quarter of 1967 amounted to approximately $53 million.
The major transactions during the quarter, as shown in
Table I, were the purchase of $19.6 million from Greece by
the United States and the sale by the United States of $76.6
million to the United Kingdom.
The net drain on United States monetary gold stocks in the
third quarter due to industrial and artistic demand (net of
inflow from new production and scrap) carne to $39 million.

This

brought the total net outflow of gold from the gold stock of the
United States in the third quarter of 1967 to $92.2 million.
Table II, attached, shows quarterly sales of gold by the
United States during 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.
Attachments

F-I097

TABLE 1
UNITED STATES NET M~ETARY GOID TRANSAc:rI~S WITH
FOREIGN COUNTRIES AND INTERNATI~AL INSTITtrrIrns
January 1 - September
1967

»,

(In

m11~gn§p¥f dollars at i~5 eer fine tro~ ounce)

Area and Country

Third

rst
Quarter

Second
Quarter

Quarter

Total

-0.3

-0.6

+19.6
-0.4

+19.6
-1.3

ba:t~l"lL

EJ.1.tQge
Greece
Ireland
Switzerland
Turkey

Uni ted Kingdom
Yugoslavia
Total
Canada

I:.a:t1n

_l:1~

Argentina
Brazil
Chile
Colombia
Costa Rica
Dominican Republic
Ecuador
El Salvador
Guatemala
Haiti
Honduras
Mexico
Nicaragua
Peru
Surinam
Uruguay
Total

&iii

Afghanistan
Ceylon
Indonesia
Iran
Iraq
Pakistan
Syria
Total
Africa
Burundi
Liberia
Rwanda
Somalia
Sudan
Tunisia
Total

-16.9
+3 .. 3
-0.7

-14.5
-0.4
-0.,4
-1.5

-0.1
..()~

*
*
*
-10.0
-0.1

+10.0
+2.6

-)J .. O

-~oO

+21.2
-34.0
-0.9
-44.3
+50,,0

_:::9..1.

-76.6

+4.4
-107.3

-58.1

-116.8
+50.0

-0.3
-D.3

-0.1
-0.1

-0.8
-0.8
-3.0

-0.1
-0 .. 1

-0$1
-0.1

-0.2

-0.6
-205

-0.4
-0.4
-0.8
-2.5
-0.1
-0.2

-1.5

-0.1

-2.2

+15.0

+10.0

-'*

-10.0
-0.1
+35.0
+2.6
-0.1

-0 0 1

+12.3

+6,,2

+18./i

-102

-0.1

-0.1
-0.,1

-1.3

-0.1
-1,,8
-1.3
-0 1
-0.2

~.Q,,2

-2.0

;0.2
-4~8

*
-0.1
*

-0.1
-O~l

-0.1
-0.4

-0.1

-0.2
.:.9..&2
-0 .. 6

'*
-0.1

-0.2

-911',...
()

-\"00

.Jrc-

...Q .. 2

-1.3
-0.2
-0 7
-0.5
0

~6.2

-0.1

-0.1
-0.2
-0.1

-0.3
-0.1
-0.2

-0.5

-0.3
-1.4

-00)1
-0.2

-0,,1

-53.2
+17.0
Total
-19.8
- 39.~}
-32 .. 5
-29.9
Domestic Transactions
-92.~
-15.,5
Total Gold Outflow
-49.7
*Under $50,000.
Figures ~ not add to totals because of rounding
0

-0.5

-56.1
-101,j
-157 .. 4

TABLE 2
UNITED STATES MONETARY GOLD TRANSACTIONS
WITH FOREIGN COUNTRIES
MITIGATED THROUGH SPECIAL DEPOSITS BY THE IMF
(Millions of U.S.$)

January 1 - September 30, 1967

Area and Coun try
Latin America
Dominican Republic
Total
Asia
Iran
Lebanon
Vietnam
Total
Africa
Algeria
Cameroon
Central African Rep.
Chad
Congo(Brazzavil1e)
Congo(Kinshasa)
Dahomey
Gabon
Ivory Coast
Mauritania
Morocco
Niger
Rwanda
Upper Volta
Total

First
Quarter

Second
Quarter

Third
Quarter

Total

-0.4

-0.4
-0.4

-0.4

-13.7
-0.6
-1.3
-15.6

-0,,8

8
-0.2
-0.1
-0.1
-0.1
-0

-0.2
-0.1
-0.1
-0.1

- 2. 4
-0.1
-0.1
-0.1

- 2.4
-0.1
-0.1
-0.2
-0.1

-0.9

-0.2

-0.1
-0.2

-5.3

-0.1

-0.1
-0.2
-0.1
-5.5

Total

-16.2

-5.3

-0.1

-21.6

IMF Deposit

t16.2

t5.3

10.1

121.6

-0.2
-0.1

TREASURY DEPARTMENT

December

1967

FOR RELEASE P.M.'S
TUESDAY, DECEMBER 5,1967
VICE PRESIDENT HUMPHREY WILL MEET WITH
INDUSTRY-GOVERNMENT SPECIAL TRAVEL TASK FORCE
AT ORGANIZATION SESSION IN WASHINGTON
JANUARY 16, 1968
The first meeting of the Industry-Government Special
Travel Task Force will be held at the Treasury in
Washington on January 16, Robert M. McKinney, Chairman,
announced here yesterday. Vice President Hubert H.
Humphrey, will meet with the group at its organization
session.
Appointment of Robert G. Pelikan as Executive Director
of the Task Force was announced by Mr. McKinney. Mr. Pelikan,
on loan from the Office of the Assistant Secretary for
International Affairs, has served as Treasury Attache in
Rome and Tokyo. An office and staff to deal with matters
on the government sector of the Task Force assignment has
been established in the Treasury Department, Washington.
Matters in the private sector will be handled from the
New York office, to be established shortly.
The Presidential Task Force, consisting of leaders in
private industry and government, will recommend actions
to increase foreign travel to the United States, improving
the U.S. balance of payments and helping foreign visitors
learn to know the United States and its people. In
appointing the Task Force, the President noted that the most
satisfactory way to arrest the increasing balance of payments
gap resulting from travel was not to limit American travel
abroad but rather to stimulate and encourage foreign travel
to the United States.
000

F-JOqg

•

"TREASURY DEPARTMENT

December 5, 1967
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES PUBLICATION OF
PROGRESS IN MANAGEMENT IMPROVEMENT BOOKLET
The Treasury today announced the publication of "Progress in
Management Improvement," a pamphlet illustrating the results of
cost reduction and management improvement efforts undertaken by
bureaus of the Treasury Department in fiscal year 1967.
Savings under these actions added up to approximately
$145.6 million and 2,600 man-years. This total was reported by
the Treasury in a report to the President in September.
Examples of the achievements of the Department listed in
the 31-page booklet include:
(1) Two major changes in tax collection procedures
that had the effect of accelerating the collection
of revenue and thereby reducing borrowing costs
and saving $80 million.
(2) Elimination of needless paperwork by the Bureau
of Customs that will save an estimated $341,000
in processing time and costs. In terms of
processing, this will mean a reduction of
1,324,000 pieces of paper each year within
Customs and 566,000 pieces of paper the public
will no longer have to prepare.
(3) The Bureau of Accounts presorted by ZIP Code,
Social Security, and tax refund checks prior
to release to the Post Office Department with
resulting savings to the Post Office Department
of more than $1 million.

F -1099

- 2 -

(4) The Internal Revenue Service program saved
$16.4 million and 1,641 man-years through
management improvements including:
a. Greater use of GSA vehicles and adoption
of a sliding scale reimbursement rate
for users of privately owned automobiles.
Nearly half a million dollars were saved
by encouraging drivers to use GSA vehicles
for official travel and, where this was not
possible, reimbursing them at a rate
comparable to the cost of renting a GSA
vehicle. Previously, drivers of privately
owned automobiles were reimbursed at a rate
of 10 cents per mile as compared with the
7 cents per mile cost of renting a GSA
vehicle.
b. In excess of $2 million was saved by IRS
through constant review of the need for
vacant positions. During fiscal years
1966 and 1967, over 300 vacant positions
were abolished as a result of this review.
c. Saving of $2.3 million resulted from
suggestions submitted by IRS employees.
This developed from the IRS policy to
make maximum use of the employee suggestion
program as a tool for improving management
effec tiveness.

( 5 \) The Bureau of Engraving and Printing saved
\

$256,000 by the use of improved equipment
and techniques to reduce the average cost
of printing currency from $8.42 to $8.14
per thousand notes.
(6) The Office of the Treasurer reduced reimbursable

costs by more than $1 million through regulations
granting the Federal Reserve banks the authority
to verify and destroy certain denominations of
unfit Federal Reserve notes.

- 3 (7) The United States Coast Guard, which at the time
was a bureau of the Treasury Department, saved
nearly $38 million during fiscal year 1967.
The major cost reduction of $14.6 million
resulted from a reorganization of the search
and rescue facilities along the East and Gulf
coasts which will enable the Coast Guard to
provide better service at less cost.

000

TREASURY DEPARTMENT

December 4, 1967
FOR IMMEDIATE RELEASE
TREASURY SECRETARY FOWLER NAMES WILLIAM B. ANDREWS
AS NEW SAVINGS BONDS CHAIRMAN FOR THE STATE OF MONTANA
William B. Andrews, President of the Union Bank and Trust
Company of Helena, Montana, has been appointed by Secretary
of the Treasury Henry H. Fowler as volunteer State Chairman
for the Savings Bonds Program in Montana. He succeeds A. T.
Hibbard, Honorary Chairman of the Board, Union Bank and Trust
Company, Helena.
Commenting on Mr. Andrews' appointment, Secretary Fowler
said "We feel that the Savings Bonds Program is one of the
most important activities in which we are engaged. It not
only is an essential feature of our debt management program
but also serves to encourage thrift."
Mr. Andrews has served for eight years as Vice State
Chairman of the Montana Savings Bonds Committee and has long
been associated with the program.
He is a graduate of the University of Montana,rnajoring
~n business administration.
He served as an officer in the
Army during World War II. He entered the banking industry in
1951 and rose to the presidency of one of the largest banks
in Montana in 1966. He is a leader in civic activities in
his community and is well known and highly regarded in industry throughout Montana.

000

TREASURY DEPARTMENT
December 6, 1967

FOR IMMEDIATE RELEASE

TREASURYOS 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 14, 196~ in the amount of
$2,400,635,000, as follows:
91-day bills (to maturity date) to be issued December 14, 1967,
in the amount of $1,500,000,000, or thereabouts, representing an
additional amount of bills dated September 14, 196~ and to
mature March 14, 1968, originally issued in the amount of
$1,000,527,000, the additional and original bills to be freely
interchangeable.
182 -day bills, for $1,000,000,000, or thereabouts, to be dated
December 14, 1967, and to mature June 13, 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 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.
0

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-1100

- 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 Treasurv
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 December 14, 1967, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing December 14, 19670 Cash and exchange tenders
will receive equal treatment.
Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954.
The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest.
Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his 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 frc
anv Federal Reserve Bank or Branch.
000

..o'.i

.A.-

fl._

TREASURY DEPARTMENT

December 6, 1967
FOR IMMEDIATE RELEASE
TREASURY SECRETARY FOWLER NAMES JAMES W. RAWLES
NEW SAVINGS BONDS CHAIRMAN FOR THE STATE OF VIRGINIA
James W. kawles, Executive Vice President, State-Planters
Bank of Cormnerse and Trus ts, Richmond, Va., was appointed by
Secretary of the Treasury Henry H. Fowler as volunteer State
Chairman for the Savings Bonds Program in Virginia, effective
December 1.. He succeeds John H. Randolph, Jr., President,
First Federal Savings and Loan Association of Richmond, Va.
Mr. Rawles is a native of Virginia. He received a Bachelor
of Arts degree from the University of Virginia, a Master of Business Administ~ation degree from the Harvard Business School, and
d certificate from the Stonier Graduate School of Banking, Rutgers University.
He began his banking career with the J. & W. Seligman and
Company of New York in 1930. He joined State-Planters in
September 1933. He has served in a number of positions and
was elected Executive Vice President in 1966.
Mr. Rawles is a member of the Association of Reserve City
Bankers and has he Id a number of pas ts 'Ni th the Virgini<1 Bankers
Association.
He is active i.n many community activities including the
Red Cross, American Cancer Society and the United Givers Fund.
He is a member and former vestryman and treasurer of
St. Paul's Episcopal Church.
Mr. Rawles is married to the former Georgina Olivia
Marraccini. They have five children.
000

TREASURY DEPARTMENT

December 7, 1967
FOR IMMEDIATE RELEASE

The Treasury today announced that it has
transferred $475 million in gold from its
Treasurer of the United States account to its
Exchange Stabilization Fund.

The gold will be

used to make settlement for the United States'
share in support operations in the London gold
market in November, to cover sales made
recently to central banks which requested the
Treasury to convert some of their dollar
balances into gold, and, as is cust.omary from
time to time, to provide the Exchange Stabilization
Fund \vith additional resources to
contingencies.

000

F-llOl

Cleet

future

TREASURY DEPARTMENT
Washington

REMARKS BY THE HONORABLE MELVIN I. WHITE
DEPUTY ASSISTANT SECRETARY FOR TAX POLICY
UNITED STATES TREASURY DEPARTMENT
BEFORE THE
ANNUAL TAX DINNER OF THE
NEW JERSEY SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
AT THE BRUNSWICK INN, EAST BRUNSWICK, NEW JERSEY
WEDNESDAY, DECEMBER 6, 1967
Economic Issues in Tax Policy
Essentially good policy making is choosing the best among
the possible alternatives.

To establish the proper basis for

policy, alternative courses of action must be subjected to a
two-sided examination:
and the cost calculated.

the benefits of each must be identified
Then the various benefit-cost

relationships -- or expressed quantitatively, the benefitcost ratios -- must be compared with one another so that the
optimum action program can be decided upon.

Furthermore, the

entire examination must be future-oriented, involving forecasts of possible consequences as a result of taking
alternative measures.
Economics perhaps more so than other disciplines does
develop, I think, sensitivity to, or even affinity for the
policy making problem.

In economics one is accustomed to

think never in absolute, but only in relative terms; gains

- 2 are always measured against costs; and the search is always
for the optimum, not the perfect solution.

History is

irrelevant except when it can serve as a basis for appraising
the future.
However, the expertise of the economist is limited, and
there are not many areas where he can, working entirely within
the framework of his own discipline, designate the optimum
choice -- especially if you include capability of political
enactment as a criterion.
Certainly this is the case in the multi-faceted field of
tax policy.

Therefore, I am aware that in dealing with the

economic aspects of tax policy tonight I am not giving a
rounded treatment of the subject.

But in speaking to a group

as sophisticated in tax matters as this one, tt is undoubtedly
wise to abide by a basic economic principle and focus these
remarks on that phase of the subject where I can at least
claim a comparative advantage.

Beyond this, I do believe that

economics invariably has something important to say about what
should be done in tax policy, if not always about what can be
done.

- 3 -

I would like then to consider some specific tax policy
issues for which an economic examination of the alternatives
involved appears to me to be particularly relevant and useful.
Form of the Surcharge
First -- a surprise to no one, I'm sure -- I would like
to consider the surcharge.

As all of you undoubtedly know

the surcharge proposed by the President calls for a tax that
on a full year basis would be equal to 10 percent of existing
liabilities of individuals and corporations, not 10 percent
of income.

On average the surcharge would amount to about

1 percent of personal income.

Thus a married couple with two

dependents, a wage income of $10,000, and taking typical
deductions, would have a tax under present rates of $1,114.
A 10 percent surcharge would amount to $111, or only slightly
more than 1 percent of the family's income.
The surcharge would not apply to low-income families and
individuals.

The surcharge proposal provides an exemption

so that married couples with two dependents and with total
earnings of $5,000 or less, and single people with earnings
of less than $1,900 a year would not be subject to the surcharge.

This exemption would cover approximately 16 million

- 4 taxpayers.

In addition there are, of course, all the families

and individuals who would not be subject to the surcharge
because they are not subject to tax under present law.
Altogether there are approximately 75 million men, women, and
children who would not be touched at all by the surcharge.
The surcharge form is itself, of course, a choice among
alternative ways of raising revenue.

It is a choice that is

easy to administer, requires no change in the definition of
the tax base and is easy for the taxpayer to understand.

reflects the generally progressive pattern of our present
income tax system, and this is strengthened by the provision
for a low-income exemption.
The surcharge form of tax increase

in line with the

recommendations concerning tax changes for short-run stabilization of the Subcommittee on Fiscal Policy of the Joint
Economic Committee.

In the spring of 1966 the Subcommittee

held hearings on the subject of tax changes for short-run
stabilization.

These hearings constituted a thorough and

comprehensive investigation of the subject including alternative types of tax measures.

The Subcommittee gave a final

- 5 endorsement to a uniform percentage addition to (that is a
surcharge) or subtraction from, tax liabilities, as being on
balance the best type of tax change for purposes of economic
stabilization.
Relation to Tax Reform
There are those who, while not disclaiming the need for
a tax increase, have advocated the closing of loopholes in
our existing tax laws as a possible partial alternative, or
adjunct to, the surcharge.

However, tax reform measures are

not appropriate for meeting the temporary objectives for
which the surcharge is so well designed.
Reform measures have the purpose of accomplishing permanent
not temporary structural changes in the tax system.

They must

be appraised in relation to long-range objectives of the tax
system.

The issues involved are complex and controversial,

and protracted Congressional debate about them is only to be
expected.
Furthermore, realistically viewed, revenue raising reforms
would provide significant revenue only after a considerable lapse
of time, and, thus, would not contribute significantly to the
fiscal restraint we now need.

This reflects not only the

- 6 time required for Congressional debate but also the fact that
most reforms would involve some phasing in arrangement and
period of adjustment by taxpayers that would defer realization of the potential revenue, in some cases, for many years.
This is not by any means to say, however, that tax reform
is unimportant, or that it is not a high priority item in the
tax policy outlook.

On the contrary, tax reform proposals

for permanent revision of the laws are under intensive preparation in the Treasury.

The President has said that tax reforms

will be forwarded to the Congress for the deliberate study,
debate, and action they require during the session next
year.
Alternatives to a Tax Increase
Accepting that the surcharge is the best form of tax
~ncrease,

there is still, of course, the question of whether

any tax increase at all is justified in present circumstances.
Put another way, would nct the nation be better off with the
alternative of a substantially larger Federal deficit?
We are all aware I'm sure that still another alternative has been proposed -- namely, to cut Federal non-defense

- 7 -

expenditures so drastically that the surcharge will not be
needed.

Some carefully worked out budget cutting at this time

is desirable, and a formula for doing so was presented to
the Ways and Means Committee by Secretary Henry H. Fowler
and by Director Charles L. Schultze of the Budget Bureau.
But it is neither feasible nor desirable to cut expenditures
in the drastic amount that would be necessary to obviate the
need for the surcharge.

Responsible expenditure cut-backs

and the tax increase are what is needed; it is not a matter
of choice of one or the other.
The tax increase program proposed by the Administration,
including the speed-up on corporate tax payments and deferral
of excises, would yield $7.4 billion in fiscal year 1968.
Viewed against the nearly $800 billion level of our Gross
National Product, the fiscal year tax yield figure may not
indeed, appear significant.

But in judging the economic impact

it must first of all be kept in mind that once the tax increase
program is fully in effect it will raise Federal revenues at
an annual rate of about $12 billion.

Then, due to the

- 8 multiplier effect, the tax increase could diminish the
annual rate of the GNP by considerably more than $12 billion
within a few quarters -- conservatively as much as $15 billion.
Next, in the present circumstances the tax increase and
its GNP effects should not be viewed against the level of
GNP but against the growth we might anticipate from hereon
with and without the tax increase, compared to the growth
the economy can stand without becoming unbalanced and inflationary.
Chairman Gardner Ackley of the Council of Economic Advisers
and others have indicated that the economy can tolerate without
undue strain a growth in GNP of between $50-$60 billion.
growth of $15 billion

25%-30% -- more than this, which might

occur in the absence of the tax increase, is not compatible
with a balanced economy and non-inflationary rise in prices.
Again, the tax increase must be put in the proper perspective in order to appreciate its importance for the money and
credit markets.

As Secretary Henry H. Fowler pointed out in

his statement before the Ways and Means Committee last Wednesday,
November 29, a key question is what the Federal sector's net

- 9 demands will be in the January-June 1968 period, and beyond.
With a program of rigorous fiscal restraint, it would be
possible to make a seasonal repayment to the market of between
$2 to $5 billion during the January-June period of 1968.
Without the tax increase, it would be necessary to make a net
demand on the credit market in this period of $5-$6 billion or
more, depending on how successfully the expenditure side of
the budget was restrained.

By comparison, in the January-

June period of 1967 the Federal sector supplied $11 billion
to the credit market.

Thus without the tax increase the

swing in Federal credit demands from the first half of fiscal
1967 to the first half of fiscal 1968 might amount to $17
billion or more.
A figure of $17 billion may also not appear large in relation
to an $800 billion GNP.
son.

But that is not the relevant compari-

Rather the swing in Federal credit demand must be related

to the annual flow of credit through the credit markets,
which amounts to around $70 billion annually.

Against this

total flow of $70 billion, a change in one sector of $17
billion does 100m very large indeed.

- 10 In the absence of the tax increase program, then, the
deficit and the borrowing, or credit, needs of the Federal
Government -- which would be large even with the surcharge
would assume outsized proportions which would have consequences
for money and credit markets, interest rates, prices, and the
general economy.
Effects Without a Tax Increase
I cannot predict the exact magnitude of these consequences.
But it does not take much imagination, based on past experience
and the teachings of economics to suggest realistic possibilities.
Interest rates could rise.

The cost of meeting the

Federal Government's credit needs would probably rise, but
those needs would, nevertheless, be met.
the needs of large corporations.

So probably would

But one cannot expect that

bank credit would expand sufficiently to accommodate all
demands.

The monetary authorities will want to appraise total

demands carefully and accommodate only with reluctance a
larger aggregate volume.

Undoubtedly as the net result of

enlarged Federal credit demands and Federal Reserve action,
there would be monetary restraint.

Therefore, credit demands

- 11 would go unsatisfied and perhaps other demands met only at
exorbitantly high rates.

As was clear from our experience

in 1966, monetary restraint can have a powerful dampening
influence on the economy.

But the major victim was, and

undoubtedly would be again, the homebuilding industry.

State

and local governments would also be pinched, as would smaller
business firms.
Whether or not the surcharge is imposed, it is likely
that prices will rise.
rise more and faster.
exactly.

But without the surcharge prices will
How much more, again, cannot be predicted

But all those low-income families and individuals

who would not be touched by the surcharge would clearly stand
to lose if there is an additional price rise because of not
imposing the surcharge.

Beyond this, however, many families

and individuals -- and surprisingly far up the income scale
might very well fare better with the surcharge than without
it, in the simple direct sense that the surcharge would amount
to less than the loss of purchasing power through the inflationary rise in prices that might occur without the surcharge.

- 12 I realize that I am speaking about future consequences
rather than about what is observable right now -- although
there is much to observe that points toward the necessity of
fiscal restraint.

This is the way it should be.

There are lags

in the effects of fiscal policy measures, and these measures
are not 100 percent flexible in the sense that they can be
reversed quickly and frequently.

Therefore, we cannot wait

until we are already in an inflationary situation to act.
Action must be taken before hand, and therefore, whether
willingly or unwillingly, implicitly or explicitly, we are
bound to rely on forecasts when policy decisions are made.
I could go on with more detailed examination of the possible implications of not imposing the surcharge.

But if I

did it would only reinforce what is implied in what I have
already said:

namely, that in the clearest light that analysis,

prudent judgment, and evidence can provide, the surcharge
proposal does appear to meet the rigorous, and only really
relevant, test of being the best of the alternative courses
of action open to us.

- 13 Tax Credits and Incentives
Turning now to another aspect of tax policy, the use of
tax credits and tax incentives has an eternally popular appeal
as a method of achieving specific policy goals.

One quickly

learns at the Treasury that the flow of claimants for such
use of the tax system is enormous and endless.

In a recent

statement before the Senate Finance Committee on the bill
introduced by Senator Robert Kennedy to provide tax incentives
for the construction and rehabilitation of low-income housing,
Under Secretary Joseph W. Barr gave an indication of the
variety of tax incentive bills that have been introduced into
Congress.

He listed bills to provide:
A tax credit for tuition and expenses of higher
education.
A tax credit to encourage contributions to higher
education.
A tax credit to encourage worker training.
A tax credit to encourage industrial pollution control.
A tax credit to encourage airport development.
A tax credit for underground transmission lines.

- 14 A tax credit for exports.

A tax credit for freight cars.
A tax credit for gold mining.
A tax credit to encourage hiring older workers.
And this was only a partial list.
Now, in general, a tax credit, or tax deduction, costs
public funds just as surely as does an expenditure program.
However, they are not generally subject to as careful appraisal
as are expenditures since budgets are reviewed annually, tax
law only rarely.

Thus, the use of tax credits and deductions

makes difficult the continuous rational calculation of the
efficiency with which our resources are being used for public
purposes.
Concern for this consequence of credits, deductions and
other tax benefits recently prompted Assistant Secretary
Stanley S. Surrey to advance a novel and very interesting
suggestion relating to the Federal Budget.

Namely, that the

possibility should be explored of describing in the Federal
Budget the expenditure equivalents of the various tax benefit
provisions.

- 15 While tax incentives may accomplish some desirable results,
in every case the question must be raised as to whether there
are alternative ways of accomplishing these results at lower
cost.

Included in this cost is the erosion of the tax base

that goes beyond the one particular credit that is proposed.
It is a simple fact of life that no one proposal for use of
a credit or deduction can be evaluated in isolation.

inevitably becomes a precedent that will weaken resistance
to others.

The proliferation of deductions, credits and

preferences, increases inequity, multiplies opportunities
for tax avoidance, and, in narrowing the tax base, causes
the level of tax rates to be higher than they otherwise would
be.

The Treasury official must always include a heavy "cost

add-on" reflecting this precedent effect when weighing cost
against benefits of a specific proposal.

Finally, the goal

of a particular tax credit or deduction, laudable though it
may be in its own right, must be evaluated against the aims
of other laudable programs that also require public funds.

- 16 These general points about the role of tax incentives
can be illustrated by considering some of the specific areas
where such incentives have been proposed.
Tax Incentives for Low-Income Housing
Tax incentives have been advocated to induce investment
in low-income housing in slum areas.

This advocacy does not

imply that the present tax law is disadvantageous to real
investment in general or specifically to investment in lowincome housing.

Present law provisions offer opportunity for

converting ordinary income into capital gain.

For several

categories of building investment we are aware of the fact
that a common operating procedure is for an investor to acquire
or construct a building on a relatively small equity and hold
it for a period of 8 to 10 years, and then sell it.

During

his period of ownership depreciation deductions allowed for
tax purposes are sufficiently high to offset most of the cash
throw-off, and perhaps even create a loss which can be used
to offset taxable income from other sources.

The gain from

the sale of the building at the end of the period is then
taxed mostly at the preferential capital gains rate.

-17On the other hand, it must be recognized that buildings
are not eligible for the investment credit nor have depreciation guidelines been established for them.
say then,

One cannot really

priori, whether on balance the tax system favors

or disfavors real estate investment.
Rather the problem is seen to be that

lo~and moderat~income

families cannot afford to pay rents that will, at prevailing
levels of building and construction costs, provide sufficient
profit to induce the

constru~tion

of an adequate volume of

low-income housing.

The purpose of the tax incentive proposals

then is to help close the gap between what

low-incom~

tenants

can afford to pay and the net return required from housing
proje'cts by investors.

The tax proposals include tax credits

and especially fast write-off of capital costs.
Immediately it may be worth noting that the equivalent
of any tax incentive proposal can be provided by some form of
government expenditure or loan program.

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
tax payments by 48 percent of this deduction in that year, and
requires a commensurate increase in tax payments at a future

- lt time over what would have been paid in the absence of the
special depreciation deduction.

This benefit can be matched

by providing an interest-free loan equal to the tax saving from
the depreciation deduction, to be repaid at a later date.
A tax credit equal to X percent of the cost of the investment can be matched by a direct payment equal to the same
X percent.

Alternatively a comparison can be made in the

opposite direction:

the stream of benefits to an investor

from an annual rent supplement program could be duplicated by
a program of annual tax credits.
Thus the tax incentive approach has alternatives for
providing investor inducements.

How does its impact differ

from the alternatives7
One mvious difference is that the tax approach does not
provide inducement to the individual or corporation having
limited income from other sources and therefore unable to make
full use of tax incentives.

A direct payment could provide

benefits even where the housing project was the investor's
sole activity.

- 19 The tax benefit from a rapid depreciation deduction varys
with the income and tax brackets of the investor.

The benefit

from a dollar of depreciation deduction can range from as
high as 70 cents for the top bracket taxpayer to as low as 14 cents
for a low-income investor.

This incidentally implies a reversal

in the pattern of rewards from what is provided by a free
market response to a condition of shortage.

Under the free

market a shortage results in uniformly higher prices to all
suppliers of shortage items increasing the income they earn
for their services and the services of their capital.

Then

the progressive tax implies that the rich supplier keeps after
tax only 30 cents of the dollar of additional income while
the low-income investor would retain 86 cents on the dollar.
The provision of tax incentives as I have already mentioned, costs public funds.

th~

case the funds would be

transferred from the rest of the community to investors in
low-income housing.

The transfer would be the price paid to

attract investors' capital.

Questions may be raised as to

whether there are alternative ways of attracting the needed
capital at lower cost.

Guaranteed loan programs similar to

those already in being,but perhaps on a more liberal

scal~,

- 20 should be examined as an alternative.

Guarantees of various

sorts might do much to remove some of the special risks that
deter investment in low-income areas, reducing perhaps the
required rate of return.

Debt capital is likely to be cheaper

to attract than equity capital.

The argument for the latter

is that it is necessary to assure high quality entrepreneurship
in "packaging" projects, and high quality management of the
constructed project.

But it is not clear how large an equity

ratio is needed to fulfill this function.
Manpower Training Incentives
Manpower training is another area, I think, where there
is general agreement that programs should be expanded
beyond their present scope.

Such expansion would have the

objectives of alleviating skill shortages, increasing the
employability of disadvantaged workers, facilitating the reemployment of workers displaced by technological change and
generally improving the skills and productivity of the labor
force.
Fundamentally, the justification for a subsidy to private
industry to train workers is that, due to labor turn-over,

- 21 the individual firm under-invests in worker training, because
the benefit from the training will not be returned to the
firm but will go to other employers when the worker shifts
his job.
To improve on the solution provided by the market and
induce additional investment in training, it has been proposed
that a tax credit for manpower training be allowed to industry.
This has been viewed as a particularly apt approach, since
it would appear to put investment in human capital on a par
with investment in physical assets, to which the 7 percent
investment credit applies.
However, there are serious defects with this approach.
In the first place it might be noted that insofar as tax
treatment is concerned investment in manpower training is not
now necessarily disadvantaged compared to physical investment,
even after allowing for the investment credit.

The reason

for this is that outlays for training are treated as current
expense for tax purposes.

This is equivalent to permitting

instant, 100 percent depreciation, and it is sufficiently
more favorable than double declining balance or sum of the

- 21 years digits methods of depreciation to more than offset the
investment credit.
Further, the investment credit was readily integrated
into the regular administration of the income tax since the
essential determinations involved in its application are part
and parcel of administering depreciation on capital equipment.
Manpower training credit, on the other hand, requires new
factual determinations, judgments and application of criteria
that are not a normal part of tax administration nor readily
adapted to it.
The tax credit approach does not appear an efficient
device for alleviating specific occupational shortages, which
are concentrated in a few sectors of the economy and in public
service areas (medical, educational, and welfare occupations)
which would not be affected by the credit.

For firms that

do have labor shortages the effect of the credit is quite
uncertain:

many firms are too small to conduct training

programs effectively, and many large firms in capital goods
and defense industries are limited in their engagement in
training by uncertainty as to output which the credit would

- 23 not overcome.

The help the credit might give to the disad-

vantaged is likely to be very limited:

most workers who would

be trained would be those already employed and relatively well
educated, and the disadvantaged probably need pre-job training before they can benefit from on-the-job training.
All this is not to sayfuat industry should not be assisted
in expanding training.

Rather, it is to say that the tax

incentive device is not the proper tool.

Alternative approaches

would be more effective.
Pollution Control
A similar line of reasoning applies to pollution control.
Again a problem arises because the market does not produce
the desired solution.

In this case it is due to the fact

that a cost item, rather than a benefit, accrues to other than
the originating firm.

Thus, the firm tends to under-invest

in methods that will reduce this cost.
There is, of course, an economic viewpoint that the cost
of pollution -- or of averting pollution -- ought to be borne
entirely by the industry and its customers.

This viewpaht

leads to such proposals as imposing a charge on effluents set
sufficiently high to induce their curtailment to acceptable
levels, which would corne about as a result of adopting methods

- 24 -

that diminish effluents or as a result of curtailing industry
output in response to higher costs and prices, or both.
But setting such an approach aside and accepting public
responsibility for meeting some portion of the costs of pollution control, the question is whether tax allowance is the
proper way to do it.
cient.

A tax allowance is likely to be ineffi-

It tends to be geared to meeting the cost of pollution

control only when it is done by treating effluents at the end
of the production process.

But there apparently are numerous

other possible technical means of cutting down on pollution at
other stages in the production process which would be reflected
in higher operating costs (low sulphur fuels for power plants;
better quality control in production; alkalize acid waste and
dump it rather than build a plant to remove it).

It would be

difficult to devise equivalent tax allowances when these means
are adopted.

Not all pollution is equally significant and it

would be preferable to have a method of cost-sharing that
could be varied so that the sharing might be greater, say, for
high density communities with many sources of pollution than
for low density communities with few pollution sources.
tax incentives vary in their impact on firms:

And

pollution does

frequently arise from firms that operate at little or no profit,

- 25 -

perhaps for purposes of recovering sunk capital, and, therefore, would not be responsive to tax incentives, while relatively small benefits would be derived from tax deductions by
small firms subject to lower marginal rates.
All three of these areas -- low-income housing, manpower
training, pollution control -- as well as many others involve
socially desirable objectives although individuals would differ
about priorities.

If the tax system were used for such programs,

one wonders how often the programs would be re-examined to
evaluate effectiveness and to reappraise their priorities.
Finally, if we were to travel freely down the tax incentive
route the Treasury Department would soon be making crucial
decisions in almost all matters of economic policy.

I can

assure you that the prospect of such an empire is not really
an appealing one to the Treasury Department.
Federal Assistance to States and Localities
Finally, and briefly,a policy issue that very much requires
examination of alternatives is that of Federal assistance to
state and local governments.

Many alternatives have been

advanced as to the method to be followed.

These include:

substantial Federal tax credits for state income taxes; Federal
assumption of a larger share of welfare costs (either directly
or through such devices as guaranteed income or negative income
tax); expanded urban programs with adequate funding of the
Model Cities program and more flexibility provided through an
urban development fund which merges different grant programs;
and general support grants with a wide range of proposed
formulas for distributing funds to states and to localities.
On the basis of our present knowledge and analysis, it seems
to me premature to try to make a choice at this time.

All of

these alternatives involve difficult problems of imp1ementation.

We are faced today with heavy demands on our fiscal

resources.

But also in the post-Vietnam period any proposed

method of aid involving substantial sums will have to, in the
final analysis, also be placed against alternative claims for
Federal expenditures and tax reduction.
But, then, the import of what I have been saying this
evening is that all uses of Federal funds -- in the form of tax
preferences, expenditure or debt reduction -- should be subject
to a similar comparative analysis and evaluation.

The economist's

role in this task is not, of course, exclusive, but it is now
and will, I think, become increasingly important.
000

TREASURY DEPARTMENT

R RELEASE 6: 30 P.M.,
nday, December 11, 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 September 14, 1967,
1 the other series to be dated December 14, 1967, ~hich vere offered on December
1967, ~ere opened at the Federal Reserve Banks today. Tenders ~ere invited for
,500,000,000, or thereabouts, of 91-day bills and for $1,000,000,000, or thereouts, of 182-day bills. The details of the two series are as follovs:
NGE OF ACCEPTED
91-day Treasury bills
~ETITIVE BIDS: _ _ma_t_u_r_i_n..:.g'--Ma_r_ch_l:......4
....,~1-.;9;...;;6;...;;8_
Approx. Equiv.
Price
Annual Rate
4.913%
High
98.758 §:./
4.961%
98.746
Low
Average
4.941%
98.751

182-day Treasury bills
maturing June 13, 1968
Approx. Equi.v.
Annual Rate
Price
97. 238 EJi
5.463%
97.215
5,50%
97.223
5.493i
1/

~ Excepting 2 tenders totaling $62,000; £/ Excepting 1 tender of $975,000
57i of the amount of 91-day bills bid for at the low price ~as accepted
38i of the amount of 182-day bills bid for at the lov price ~as accepted

TAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
rhiladelphja
:leveland
Richmond
Hlanta
:hicago
St. Louis
'.Ennea poli s
Kansas City
Dallas
San Francisco
'IDTALS

AEElied For
20,020,000
1,774,841,000
33,158,000
51,461,000
16,220,000
44,388.000
226,158,000
45,943,000
27,922,00')
33,456,000
25,667,000
189,750,000

AcceEted
9,811,000
1,077,451,000
11,058,000
49,161,000
13,220,000
28,158,000
110,245,000
29.514,000
19,565,000
29,456,000
17,237,000
105,840,000

ApELed For
14;911,000
1,449,311,000
21,206,000
66,,142,000
5,,851,000
29,212,000
179,148,000
28,812,000
21,946,000
20,687,000
19,980,000
116,640,000

$2,488,984,000

$1,500,716,000 ~ $1,973,846,000

AcceEted
3,911,000
698,611,000
10,866,OOC)
51,042,000
5,851,000
18,652,,000
75,806,000
21,612,000
11,446,000
18,687,000
12,360,000
71,340.,000

$1,000,184,000 ~/

Includes $237,667,000 noncompetitive tenders accepted at the average price of 98.751
Includes $L60,325,000 n0ncompetitive tenders accepted at the average price of 97.223
These rates are on a bank discount basis. The equivalent coupDn issue yields are
5.09% for the 91-day b:l1s, and 5.74% for the 182-day bills.

F-l102

TREASURY DEPARTMENT

December 11, 1967

FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES SCHEDULE FOR REGULAR WEEKLY
BILL AUCTIONS DURING THE HOLIDAY SEASON

The Treasury announced today that its next regular weekly bill auction
"rill be held on Friday, December 15, rather than on Monday.

The day for

the auction is beinG advanced to assure ample time between it and the paynent date during the pre-holiday season.

Payment for and delivery of the

bills ,rill be on the normal day Thursday, December 21.
Tne Treasury added that for the subsequent two weekly bill auctions
the announcements inviting tenders ,·rill be made on rloYlday, December 18,
and Friday, December 22, and the auctions lrill be held on Friday, the 22nd
and the 29th.

Tile

pa~r>'\ent

and delivery- day for

as usual.

000

F-II03

t~ese

issues will be Thursday

TREASURY DEPARTMENT

December 11, 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 1n exchange for
Treasury bills maturing December 21,1967, in the amount of
$2,400,015,000, as follows:
91-day bills (to maturity date) to be issued December 21,1967
in the amount of $1-,500,000,000, or thereabouts, representing an
additional amount of bills datedSeptember 21,1967, and to
mature March 21,1968,
originally issued in the amount of
$1,000,249,000, the additional and original bills to be freely
interchangeable.
182 -day bll)~, for $1,000,000,000, or thereabouts, to be dated
December 21,1967, and to mature June 20, 1968.
The bills of both series will be issued on a discount basis under
and noncompetitive bidding as hereinafter provided, and at
naturity their face amount will be payable without interest. They
will 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
(maturity value).
~ompetitive

Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard
time, Friday, December 15,1967.
Tenders will not be
received 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,
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
~orwarded 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-II04

- 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 prke
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 toese 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 December 21,1967, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing December 21,1967. 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.
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 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 lIs 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 thii
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue.
Copies of the circular may be obtainedft
any Federal Reserve Bank or Branch.
000

TREASURY DEPARTMENT
Washington
FOR RELEASE P.M.'S
FRIDAY, DECEMBER 15, 1967
OF THE HONORABLE TRUE DAVIS
ASSISTANT SECRETARY OF THE TREASURY
AND UNITED STATES EXECUTIVE DIRECTOR
OF THE
INTER-AMERICAN DEVELOPMENT BANK
BEFORE THE
LOS ANGELES ROTARY CLUB
THE STATLER HOTEL, LOS ANGELES, CALIFORNIA
FRIDAY, DECEMBER 15,1967, 12:00 NOON, PST
REMARKS

THE TRUE MEASURE OF A NATION:

RESPONSE TO THE CHALLENGES

A proverb familiar to Rotarians ITl the Twenties
and
surely familiar to Rotarians today -- states that it is
easier to pull dawn than to build up. Rotarians are
interested in building, in strengthening, not alone the
character of individuals, but also the character of our cultural
institutions. All of us are concerned with problems affecting
individuals in their relations with each other and the
problems of change and growth affecting the cities in which we
live. Without attempting to flatter Rotarians, I think that
it would be a reasonable proposition to state that you are
interested, first and foremost, in constructive criticism;
and through such criticism you help improve the environment
in which you live.
This has been a year of criticism -- a year in which
every critic with a message has been given ample opportunity
in our communication media to express himself. If we were to
believe all we have read and heard we could only conclude
that we are, as a people and as a nation, morally and
spiritually bankrupt. For most of the criticism that we
have been subjected to has been destructive in nature. The
desired effect of this type of criticism is to pull down
our institutions rather than to strengthen them, to weaken
the faith we have in each other, and to destroy the
confidence we have in ourselves.
F-ll05

- 2 -

Much of this criticism has been leveled at our Government
and at the people who direct its activities. It has even been
said of the Treasury Department that we are so concerned, so
preoccupied with law enforcement, including the collection of
taxes, with fiscal and monetary affairs, with financing the
public debt, and with other related matters of national and
international finance, hhat we are oblivious to the social
problems of our society, ignorant of the cultural changes
affecting us, and adamant against social change in
developing countries.
This criticism, like so much of the criticism surrounding
us, is just not true. One could easily arrive at such an
opinion through a cursory examination; but a thorough
understanding of the Treasury as an advocate of proposals,
recommendations, and courses of action reveals not only a
deep concern for human welfare in our own country, but for
the welfare of human beings in other countries.
The instruments with which we have to worR -- the tools
of our trade, so to speak -- are instruments called tax,
fiscal, and economic policy. When we argue and propose -as we have done in the past and will continue to do in the
future -- for a fair, just, and equitable tax policy, it is
precisely because we want the American people -- not just
a privileged few, but all -- to be treated fairly,justly,
and equitably. When we argue for a tax reduction, as we did
in the early Sixties, we are concerned with stimulating our
economy toward full employment and enabling more Americans
to enjoy the fruits of their labor and the rewards of our
technological achievements. When we argue for a tax
surcharge -- as we are now doing and have done for the past
12 months -- we do so because we are first and foremost
concerned with protecting the purchasing power of our money
so that individuals will not suffer personal financial
hardships, and social programs will not stop becaase of
exorbitant financial costs.
In carrying our fiscal policy, we are vigilant about
preventing disruptions in the money markets which are
invariably overcrowded with demanOs; because any disruption,
quick or prolonged, hurts people, harms vital programs in
need of financing, and hinders necessary progress.
Similarily,
our efforts to strengthen the economic structures of other

- 3 -

countries, as well as the financial foundations upon which
these structures rest, are designed to help other governments
help their people achieve a higher standard of living. In
doing this, we are advancing social progress and hindering,
if not preventing, social decay and degradation.
I have dwelled momentarily on Treasury matters not
primarily because I believe Treasury policy needs clarification
or justification, but rather to illustrate the correlation
between Treasury's action and our response to the challenges
of our t~es. Such a correlation exists, in one degree or
another, in every branch of government and in most of the
numerous agencies and bureaus of government. It has to, for
government is of the people, Qy the people, and -- above
all else -- for the people.
No government and people have been confronted with as
many challenges as we have faced in the last quarter of a
century. The leadership of the Western World after
World War II came to us not because we coveted it, but
rather because we inherited it. It was a legacy we accepted
quickly, knowing full well that in our acceptance we were
obligating ourselves to fUlfill the inherent responsibilities
within such a legacy. Part of this legacy obliged us to help
keep peace throughout the world, which necessitated heavy worldwide deployment of human resources and material strength.
Another part compelled us to help developing countries
whose leaders and people believed -- and quite justifiably
that the richest, largest, and technologically most advanced
nation in the world had a moral responsibility to assist
those who for so long had been deprived of, or denied, the
opportunity to grow.
I think it is a tribute to all Americans not only that
we recognize these innumerable challenges from without, but
more importantly, that our response as a people was immediate
and effective and our contributions permanent to peace and
meaningful to mankind.
Concurrent with the challenges that faced us from
without,~e suddenly were face to face with many challenges
arising from within. Many of these challenges were new,
reSUlting from structural changes that took place in our
society during and immediately after World War II. Others,
however, were the result of our not having fully faced up
to problems that had existed in our society for decades, and

- 4 toward which we had moved pitifully slow or not at all in
finding solutions. Nevertheless, once we recognized the
challenges that faced us across the entire spectrum of our
activity, we responded as a people and a nation toward
their sane and sensible resolution. It's about time, I believe,
to recognize how far we have progressed toward the realization
of our domestic national goals, how hard we have worked to .
resolve our problems, and how much closer we have moved, as
individual human beings and as a collective nation of some
200 million, toward ameliorating social and legal injustices
toward Negroes and other disfranchised and impoverished
minorities.
We have had this year far too much derogatory criticism
reflected in all media of communication about the imperfections
of our society, about our shortcomings as individual hUman
beings, and about our failures as a nation to affect quick
solutions to some of the challenges we face -- either because
we don't care or because we are incapable of doing anything
better. The plain truth of the matter is, however, that the
vast majority of Americans are not only conscious of existing
imperfections, but are working mightily to correct these
imperfections and accelerate our rate of effective response
to every challenge confronting us -- at home and overseas.
There are more people working in harmony today in our
country toward mutual goals and common concerns than at any
other time in our history. This is not an accomplishment
of insignificance. It is an incredible achievement.
It would be ord inary if we were few in number, of one
religion, of one color, of one nationality. But we're not.
The ethnic, cultural and racial threads that form the tapestry
we call the United States are complex, delicate, and diversified.
We cannot determine precisely where one thread begins, how it
weaves its way through this miracle of design, where it needs
strengthening, or how it always should be treated.
Our primary interest -- the primary interest of all
Americans -- should be to preserve the tapestry and thus to
enrich the design. For from the \iEry beginning of our country
we have constantly changed the design. Threads have been
rewoven and reshaped when necessary. New ones have continuously
been added. We have always striven to preserve and enrich
the tapestry, never to destroy or damage it. Similarly, we have
always striven to fit into this design the separate, everchanging parts -- those separate, diverse, and varied ethnic
and cultural aspirations and desires of our people. We should

- 5 -

be more proud, I believe, of what we have done, are doing, and
will do in the immediate future rather than being ashamed of
what we have not yet done, or of having handled portions of our
endeavors at too slow a speed.
Very few nations have been as conscious as we have been to
challenges to our country from without and to our way of life from
within. Our brief history has been a succession of responses to
these chal~enges. from these responses we have developed
into the most highly industrialized nation in the
World, reflecting the highest per capita ~come and one of
the highest standards of li~g. We have also developed
into one of the most humane nations in relation to ourselves and
to other peoples of the world.
The challenges from without, which every generation has
faced, have been primarily a succession of wars against
ideologies that have threatened our survival as a free
democratic nation. The challenges from within have been
more numerous and far more complex. In one way or anbther,
they all have been related to our efforts as a heterogeneous
people to resolve prejudices arising from religious, racial,
and cultural differences; to affect a harmonious and profitable
relationship between management and labor; to create a physical
environment conducive to man's enjoyment of life; to create an
educational system and an intellectual environment where the
best in man is nurtured; and to safeguard and strengthen the
inalienable rights that we are all guaranteed, regardless of
race, creed, color, or wealth, under the laws of our land.
We have not always succeeded in our numerous endeavors.
We have not always acted promptly, nor as effectively as we
might have. We have not always come up with the best possible
response. But over the course of some 14 generations, our
achievements far outweigh our failures. More importantly,
where we have not achieved success, where -- upon reflection
we recognized past mistakes in judgment, we have always tried
to render better judgments, to right previous wrongs, and to
improve or eliminate in our thinking and behavior patterns any
degrading thought or ~ction that detracts from us as human
beings and as a nation dedicatea to justice and fair play.
Far too many of our critics today, at home and around the
world, view our country and our people like a photographer in
love with a 175 millimeter lens. For love of detal, perspecti.ve
is lost. They see some three million people unemployed, many
because they are unemployable; they do not see that

- 6 -

there are more than 75 million people regularly
employed and that every year millions of young people are
added to our work force -- more than six million, in fact,
in the past seven years. They see a crisis when inventories
rise or fall, when interest rates clLmb or drop, when the
stock market dips or soars; they forget that for 82 months
we have enjoyed a sustained healthy economic growth rate.
~e benefits of this unprecedented period of prosperity may
be seen across the entire spectrum of human activity -- in
the rise of personal and corporate income after taxes, in
home ownership, in minimum wage protection, steady employment,
and greater security through social security.
This type of critic focuses on the high school dropout, the hippy and the beatnik, all of whom are getting
harder to find. He's blind or indifferent to the startling
facts that over three-fourths of our young people finish
high school, that 40 percent go on to college, that in 1965
our colleges awarded almost one-half million fo~r-year
degrees, and that almost 360 thousand students were enrolled
in graduate schools working for advanced degrees, and that. in
the last four y~ars college enrollment has increased by almost
two million to its present enrollment of almost six million
students. He does not see that some 9 million educationally
deprived boys and girls have benefited from the Elementary
and Secondary Education Act -- a modern landmark in the
history of our educational response to the challenges we faced.
Nor does he see that over one-half million physically and
mentally disabled citizens have been rehabilitated and given
gainful employment.
With his high-powered lens, our critic zooms in on
those families living in poverty or straddling the povery
~ncome line.
He does not see the progress made in combating
and eliminating poverty, where today people are crossing the
poverty line more than twice as fast than in the previous
four-year period, where more than 5~ million Americans have
been lifted above the poverty line, and where close to
3~ million children and young Americans have benefited through
such programs as Headstart, Neighborhood Youth Corps and Job
Corps T~aining, and that the diets of nearly two million needy
Americans have been improved thr~h the Food Stamp Program
0

- 7 The critic of civil rights, his perspective limited
by the range of his own mental vision, emphasizes existing
imperfections while ignoring or deprecating the great
accomplishments we have made in the past few years.
What have some of these been? The number of Negro
families earning above $7,000 a year has increased 28 percent
more than double the number since 1960. In five Southern
States, Negro voter registration has increased by over
one-half million since the passage of the Voting Rights Act
three years ago. The educational gap between Negro and
white students is constantly narrowing o Nearly a hundred
Negroes have been appointed to high executive and advisory
posts in the Federal Government, including the first Negro
Supreme Court Justice, the first Negro Cabinet Member, the
first Negro member of the Federal Reserve Board, the first
Negro woman Federal Judge, and the first' Negro woman
Ambassador. Perhaps even more important, we have seen within
recent days the election of a Negro United States Senator, a
Negro Mayor of Cleveland, Ohio, and Gary, Indiana, and a
Representative to the Louisiana House of Representatives.
One could go on, but that's quite unnecessary.
The enlightened American knows all this and more.
He knows that we have made, are making, and will make
continuing progress in response not only to social challenges,
but to challenges facing us in our efforts to elLminate from
our physical environment all undesirable features of our
culture. So, too, does he know that we are making. progress
fulfilling in a humane way our world-wide commitments to
preserve peace and stability wherever peace and stability
are threatened by those who still believe that that which
is won by subversion, sabotage, guerrilla warfare, or
revolution is more beneficial than that which is honorably
attained through peaceful, constructive efforts of mankin~.
Nor for one moment, however, are we oblivious or
indifferent to the problems we face that require greater
•
attention, more money, and more effective
approaches to
their solutions. Unfortunately, we have become so used to
instant tea and instant coffee that .Some Americans .tliihk

- 8 -

we can come up with instant solutions to complex problems.
Let me assure you, there a~e no easy answers. Instant
solutions to, complex problems are either unavailable or
undesirable.
Americans have always been confident that the answers
to the challenges of- the present are in the future, rather
than in the past. This is why we have come so far, and this
is why we will continue to ~prove and progress -- as
individuals and as a collective nation of 200 million peopleo
When we look back, let it be only to see how far we have
progressed. When we look ahead, let it be to see how quickly
and assuredly we can respond to the challenges we might faceo

000

TREASURY DEPARTMENT
Washington

FOR RELEASE P.M.'S
THURSDAY, DECEMBER 14, 1967

REMARKS OF THE HONORABLE TRUE DAVIS
ASSISTANT SECRETARY OF THE TRF..ASURY
AND UNITED STATES EXECUTIVE DIRECTOR
OF THE INTER-AMERICAN DEVELOPMENT BANK
BEFORE THE CALIFORNIA CLUB
LOS ANGELES, CALIFORNIA
THURSDAY, DECEMBER 14, 1967, 12:00 NOON, PST

I think it is reasonable to state that most Americans
expect things to be done quickly and to be done well.

Quality

of performance and swiftness of execution were concepts we
accepted early in our country's history.

Regardless of how our

national energies were used, or toward which goal they were
directed, we endeavored -- and for the most part succeeded -to keep in balance these two characteristics of thought and action.
When necessary, we controlled our impatience to get the job done
quickly in order that the job

should be done well.

We certainly

never sacrificed quality of performance for swiftness of execution.
Yet it seems to me lately, especially during the past years,
more and more Americans are less concerned with quality of performance.

Whether things are done well is currently not as impor-

tant to many Americans as it once was.

What is important to so

many today is to solve the problems we face

to get the jobs

- 2 -

over and done with guickly, to get on with other business and
fast.

Clean out the urban ghettos -- now!

Vietnam

now!

End the war in

Gid rid of poverty -- now!

Most of the criticism we have been subjected to in gargantuan proportions during the past year has resulted from the
growing inability of people to control such impatience, or to
bridle the desire to substitute swiftness of execution for quality
of performance.

We've become so used to instant tea and instant

coffee, to all types of services based on "in by nine, out by five/'
that we are coming to expect instant solutions to problems that
we face.

Surely we should realize by now that instant solutions

to complex problems are neither available nor desirable.

And

instant services, particularly in the complex area of social
problems, often intensify the problem rather than relieve the
stress on those who are its victims.
However loud or numerous the critics, the truth is that we

- 3 -

have made excellent progress during the past seven years toward
the resolution of every important problem we have faced.

Our

progress has not often been as swift as some people desire, nor
as expeditious as some cqnditions might seem to warrant.

None-

theless, great progress has been made.
A great deal of intelligent deliberation during the Sixties
in debates over methods of solving our problems was the direct
result of a desire to make certain that recommended proposals
were the best available in keeping with our concept of quality
performance.

Nowhere was this more apparent than in our national

efforts in the early part of this decade to re-vitalize and
strengthen our economy.
May I briefly restate some important facts we were then
faced with.
sick.

Unemployment was intolerably high.

Business investment was abnormally low.

Our economy was
Business had

failed to maintain an adequate level of growth, and as a result
could not compete in world markets against other industrialized

- 4 -

:ountries whose rate of growth surpassed ours.
To restore vitality to the private economy it was necessary
:0 free American enterprise from policies that had stifled private
~nvestment.

It was impe+ative to provide business incentives

:hat would enable business and industry to expand and grow.

One

)f the first things we did was to revise depreciation guide-lines
:or tax purposes.

Then Congress, at the President's request,

macted a tax credit of 7 percent on new investment in machinery
md equipment.
Paralleling these important fiscal measures, we also adopted

dual approach to over-all economic policy_

A massive,

across~

:he-board income tax reduction increased the general level of
lemand in the private economy and enhanced the incentives fat
)roductive investment.

Through wage-price guidelines, we

mcouraged wage-price restraint so that measures for expanding
)roductivity and aggregate demand would result in rapid and rea 1

- 5 -

growth.
The end result of these and other enlightened policies was
the greatest upsurge of economic well-being in the history of
the world.

These constructive efforts did not come about quickly

nor without serious discussions and debate among vitally concerned
segments of our society.
Old myths had to die.

Skepticism about the effectiveness

of proposed uses of tax, fiscal, and economic tools at out
disposal had to be overcome.

One point we emphasized time and

again, both to the Congress and the American people, was that
these same tools could and would be used later, if necessary, to
control inflationary elements in our economy, to dampen excessive
demands for capitol goods or investment credit, or slow down
economic expansion if we felt that further acceleration would
be detrimental to our national interests.
Last year, at the request of President Johnson, the Congress

- 6 -

suspended the special incentives to investment, including the
7 percent tax credit on investment and accelerated tax depreciation procedures.

In August of this year, the President asked

Congress to enact a tempprary surcharge of ten percent on
individual tax liabilities, and a similar levy on corporate taxes.
He asked that Congress apply these surcharges on corporations
effective July 1 of this year and on individuals effective October 1.

These two specific requests, I would like to emphasize,

recognize that positive use of the tax system is not a one-way
street.

It embraces the sterner aspect of restraint, as well

as the pursuit of tax reduction.
Our Congress listens most attentively to testimony of individuals who are recognized authorities in their fields when they
present opinions regarding proposed Congressional legislation.
They certainly listened most attentively to the numerous distinguished experts in the fiscal, monetary, and economic areas who

- 7 testified in behalf of the President's tax surcharge proposal.
Never have so many recognized authorities -- in areas where
unanimity of opinion is a rare phenomenon -- been in such complete
agreement regarding the pecessity for a surcharge

on individual

and corporate taxes.
Yet, it is rather ironic that something which should have
been done NOW, when it was proposed, or as soon as possible
thereafter, has not been done

will not be done this year, and

may not be accomplished in sufficient:

tirr ·~Jf'xt

year to help

alleviate excessive pressures on our econorny- ~
Paralleling Congress' refusal to take positive action in
this area, we have witnessed an advance in prices, wage increases
in excess of productivity gains, and a rise in interest rates.
Inflation is no longer a possibility_

Inflation is with us now.

When we face it again in 1968 -- in the form of a New Year's
present of an old year's problem -- it will remind us of how

- 8 -

negligent we have been, as individuals and as representatives
of important segments in our society, about keeping our financia1economic house in ordero
We have enjoyed an
82 consecutive months.

~nprecedented

period of prosperity --

Surely none of us wants to see the good

results of our individual and collective efforts blown away on
the winds of inflation.

Perhaps as a New Year's resolution we

could declare our willingness to work together in a determined
effort to control every inflationary element in our economy.

we agree on this, then let us use the same fiscal and tax instruments in 1968 to relieve tensions in our economy that we used in
1961 and the following years to accelerate our economy to these
unprecedented heights.
One of the first orders of business then would be the enactment of the surcharge on individual and corporation tax 1iabi1ities that President Johnson first mentioned to the Congress in

- 9 January of this yearo

To accomplish this, however, will require

further positive action on the part of our business-bankingfinancial fraternity to convince the Congress -- especially in
an election year -- of the imperative necessity for such action.
Such fiscal action is imperative;

otherwise the burden of

restraint could fallon the Federal Reserve System with deleterious effects to the mortgage market.

The quick passage of this

proposed tax surcharge will be of inestimable value in relieving
pressure demands on an economy that is now volatile.
Following this, business and labor should make every effort
to establish and adhere to a wage-price guideline policy of
restraint, comparable to that which served us so admirably from
1961 to this year.

Labor and business must accept this as a

joint responsibility; -- otherwise there can be no substantial
or enduring policy, -- there can be no lasting benefit to our
economy.

- 10 President Johnson emphasized this point earlier in the
month when, speaking before the Business Council, he said:
"Nobody benefits from a wage-price spiral.
does not.

You know that/business does not.

can people do not.

Labor knows that it
And surely the Ameri-

Yet business says it is labor's responsibility

to break the spiral, and labor says it is yours.
everyone's responsibility.

I say it is

It is the responsibility of Govern-

rnent, of labor, and of business."
Paralleling our national efforts to create and abide by a
meaningful wage-price guideline policy of restraint, every
American should exercise individual fiscal restraint in order to
help relieve existing pressures on our financial markets, to
help restore sound economic growth, and to further protect the
strength of our dollar -- which is the world's major currency.
The enactment of the proposed tax surcharge, of course, will
have considerable effect on private spending, and will materially

- 11 aid us in achieving these desirable and essential objectives.
The federal government, meanwhile, will continue, as it has
effectively done in the immediate past, to practice

~isca1

restraint by reducing fepera1 expenditures to an absolute minimum
consistent with defense commitments and national domestic requirements.
The problem we face as a nation in controlling or eliminating
inflationary elements in our economy is everybody's problem -housewives as well as trust officers, employees as well as
employers, labor as well as management.

The strengthening of our

dollar should be our nation's highest priority.

For upon its

continued strength rest all our national endeavorso

In this

endeavor, each of us should commit himself to the most practical,
possible extent.

If we do, then we need not worry about the

eyes of the rest of the world, now focused upon us, questioning
Our ability to respond to this new challenge we now face.
000

TREASURY DEPARTMENT
4

FOR IMMEDIATE RELEASE
TREASURY MARKET TRANSACTIONS IN NOVEMBER
During November 1967, market transactions in
direct and guaranteed securities of the Government
investment accounts resulted in net purchases by
the Treasury Department of $219,976,500.00

000

F-l106

TREASURY DEPARTMENT

FOR RELEASE 6: 30 P.M.,

Friday, December 15, 1967.
RESULTS OF mEASURY'S WEEKLY mLL OFFERING

'!be Treasury Department announced that the tenders for two series of Treasury
bills, one series to be an additional issue of the bills dated September 21, 1967,
and the other series to be dated December 21, 1967, which were offered on December
11, 1967, were opened at the Federal Reserve Banks today. ~nders were invited for
$1,500,000,000, or thereabouts, of 91-day bills and for $1,000,000,000, or thereabouts of 182-day bills. The details of tbe two series are as follows:
RANGE OF ACCEP'lED
COO>ETITIVE BIDS:

High
LO\I

Average

9l-day Treasury bills
maturing March 21, 1968
Approx. Equiv.
Price
Annual .Ra. te
5.052/J
98.723
98.696
5.l5~
98.704
5.127~

182-day Treasury bills
maturing June 20, 1968
Approx. Equiv.
Price
Annual Rate

97.189 ij
97.131
97.139

5.56~
5.675~

5.659i

"};/

~ Excepting 1 tender of $300,000
48~
27~

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

IDTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRIC'IB:

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

AEElied For
$ 22,324,000
1,851,604,000
44,754,000
46,998,000
10,711,000
41,198,000
231,954,000
39,294,000
25,183,000
25,471,000
19,842,000
364 z678 z 000

AcceEted
$ 12,324,000
923,644,000
22,754,000
29,998,000
10,711,000
32,158,000
129,002,000
36,474,000
19,623,000
23,471,000
14,842,000
245 z698 z 000

'IDTALS

$2,724,011,000

$1,500,699,000

ApElied For
$
7,138,000
1,737,001,000
17,814,000
50,122,000
9,047,000
35,846,000
225,903,000
29,792,000
23,502,000
18,588,000
14,299,000
129 z060 zoo0

$2,298,112,000

AcceEted
$
7,138,000
729,941,000
6,789,000
41,022,000
6,377,000
25,846,000
98,953,000
23,192,000
12,102,000
17,588,000
9,099,000
21 z 963 z 000
$1,000,010,000 ~

/ Includes $208,665,000 noncompetitive tenders accepted at the average price of 98.704
/ Includes $135, 707,000 noncompeti ti ve tenders accepted at the average price of 97.139
/ These rates are on a bank discount basis. The equivalent coupon issue yields are
5.28~ for the 9l-day bills, and 5.92~ for the 182-day bills.

F-II07

TREASURY DEPARTMENT
and

FEDERAL RESERVE BOARD

FOR IMMEDIATE RELEASE

Washington, DoC.
December 16, 1967

STATEMENT BY THE HONORABLE HENRY H. FOWLER,
SECRETARY OF THE TREASURY, AND
THE HONORABLE WILLIAM McCHESNEY MARTIN,
CFAIRMAN OF THE FEDERAL RESERVE BOARD
The Secretary of the Treasury and the Chairman of the
Federal Reserve Board today issued the following statement:
The United States stands firm in its determination to maintain the gold value of the dollar.
The central banks of Belgium, Germany, Italy,
the Netherlands, Switzerland. and the United
Kingdom support this position and continue to
participate fully with the United States in
policies and practices in support of the price
of gold at $35 an ounce
v

The operation of the London gold market will
continue unchanged c
The United States authorities and the
European central banks concerned endorse this
position unanimously and are cooperating in the
interest of maintaining the stability of the
international monetary system
o

000

TREASURY DEPARTMENT

December 18, 1967

OR 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
2,SOO,OOO,OOO,or thereabouts, for cash and in exchange for
reasury biJ Is matI. ring December 28,1967, in the amount of
l,_ , I+U-1 , -';0~
000 , as follows:
' J
~

9~day bills (to maturity date) to be issued December 28,1967,
the amount of $1,500,000,000, or thereabouts, representing an
jditlonal amount of bills dated September 28,1967,and to
:::t;ure >larch 28,1968,
originally issued in the amount of
1,OOO,271,OOO)the additional and original bills to be freely
1~erch3ngeable .

182 -daJ bills, for $1,000 ,000jOOO, or thereabouts, to be dated
2cember 23,1967, and to mature
une 27, 1968.

The bIlls of both series will be issued on a discount basis under
)mpe titive and noncompetitive bidding as hereinafter provided, and at
lturity thelr face amount will be payable without interest. They
I,ll be issued in bearer for-in only, and in denominations of $1,00'],
5,000, $10,000, $50,000,
$100,000, $500,000 and $1,000,000
naturi ty value).
Tenders will be received at Federal P~serve Banks and Branche'-')
) to the c losing hour, one-thirty p. m. , Eas tern S tar).dard
lme, Friday, December 22, 1967.
Tenders will not be
:!ce1ved at the Treasury Det>artment, Washington. Each ~::ender must
= for an even multiple of $1,000, and in the case of ~cf;'1petttlve
~nders the price offered must be expressed on the baSis of 100,
lth not more than three dec ima1s, e. g., 99.925. Frac tions me:! ~ldt
:! used.
It is urged that tenders be made on the printed forms :'1-;(1,
)rwaroed in the spec ial enve lopes whic h will be supplied by FecL'!l'cd
=serve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
Jstomers provided the names of the customers are set forth in BUC~
=nders. Others than banking institutions will not be permi teed 1.. )
lbmit tenders except for their own account. Tenders will be ;:"ecel'led
lthout deposl t from incorporated banks and trust companies and f '[,)/i<
=Sponsible and recognized dealers in investment securities. Tenders
rom others must be accompanied by payment of 2 percent of the ;'Cl;~ .c.
nount of Treasury bills applied for, unless the tenders are
~companied by an express guaranty of payment by an incorporated banks
r trust company.
F-ll08

- 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.
Settle[llent for ac('~)pted Lenders in accordance with the bids must be
rnade or completed dt the Federal Reserve Bank on December 28, 1967, in
cash or other imnediately available funds or in a like face amount
r,F Treasury bills maturing
December 28,1967. Cash and exchange tender
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
excha~ge and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain .crofT, the sale ,)r other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other dispositioo
nf 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 M
S ta to ~ bu tare exemp t from a 11 taxa t ion now or herea fter 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 bill:> are
sold, redeemed or otherwise disposed of, and such bi lIs 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

December 18, 1967
FOR IMMEDIATE RELEASE

TREASURY'S MONTHLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$ 1,SOO,000,000,or thereabouts, for cash and in exchange for
Treasury bills maturing December 31,1967, in the amount of
$1,401,121,000, as follows:
272-day bills (to maturity date) to be issued January 2, 1968,
in the amount of $500,000,000,
or thereabouts, representing an
additional amount of bills dated September 30,1967, and to
mature September 30,1968 ,originally issued in the amount of
$ 1,000,206,000,the additional and original bills to be freely
interchangeable.
366 -day billS, for $1,000,000,000, or thereabouts, to be dated
December 31,1967, and to mature December 31, 1968.
The bills of both series will be issued on a discount basis under
competitive and noncompetitive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard
time, Tuesday, December 26, 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 mnl"P t.h:m t,hl"p.p. decimals, e. g., 99.925. Fractions may not
be used. (Notwithstanding the fact that the one-year bills will run
for 366 days, the discount rate will be computed on a b~nk discount
basis of 360 days, as is currently the practice on all 1ssue~ of
Treasury bills.) It is urged that tenders be made o~ the pr1nte~
forms and forwarded in the special envelopes which w11l be supp11ed
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
resDonsible and reco~nized dealers in investment securities. Tenders
F-1109

- 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 announce~ent will be made by the Treasury Department of the amount and price
range of accepted bids.
Those submitting tenders will be advised
,),~ trlr~ acceptance or rejection thereof.
The Secretary of the Treasun
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 tnese reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bi0der 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 January 2, 1968) in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing December 31,1967. Cash and exchange tenders
will receive equal treatment.
Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other dispositioo
'J[ Treasury bills does not have any special treatment, as such,
u:'der the Internal Revenue Code of 1954.
The bills are subject to
estate~ inheritance, gift or other excise taxes, whether Federal or
Stat\?, 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
)1~11s 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 retur.n 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

December 21,

FOR IMMEDIATE RELEASE

STATES AND MEXICO SIGN
$100 MILLION EXCHANGE AGREEMENT
l~ITED

secretary of the Treasury Henry H. Fowler and the Ambassador
of Mexico, Hugo B. Margain, today signed a $100,000,000
Exchange Stabilization Agreement between the United States
Treasury, the Bank of Mexico, and the Government of Mexico,
~eplacing

a similar agreement signed in December, 1965 which

expires at the end of 1967.

The 1965 agreement was in the

amount of $75,000,000 and was increased to $100,000,000 in
May, 1967.
The Agreement signed today represents a continuation of
stabilization arrangements between the United States and Mexico
which have been in effect since 1941, and have proved beneficial
to the financial relationships between the two countries.

The agreement provides reciprocal swap facilities available
for use both by Mexico and by the United States.

These swap

facilities strengthen the ability of the financial authorities
to cooperate effectively and to conduct such stabilization
operations as may be desirable from time to time to promote
stable and orderly conditions in the exchange markets.
The new agreement will be effective during the two-year
period ending December 31, 1969.

F-lllO

TREASURY DEPARTMENT

December 22, 1967

FOR IMMEDIATE RELEASE
UNITED STATES INCOME TAX CONVENTIONS WITt{ TRINIDAD
AND TOBAGO AND WITH CANADA ENTER INTO FORCE
The Treasury Department has announced that

instrument~-:

ratificdtion have been exchanged of an income tax conVE:.'nt io..-,
between the United States and Trinidad and Tobago and of a
supplementary convention amending the United States-Cdnu.Uct
income tdX convention.
The convention with Trinidad and Tobago was brought into
force December 19, 1967, and the supplementary convention with
Canada took effect on December 20, 1967.
The convention with Trinidad and Tobago is an interim
agreement while discussions between that country and the United
States continue on an income tax convention of general
application. The convention deals only with the rate of withholding tax on distributed profits.
The convention provides that dividends paid by a corporac illY.
of one of the contracting states to residents in the other
contracting state shCill be subject to a \vithholding tax rate
of 25 percent, rather than the statutory rate of 30 percent
which applies in both countries. ~owever, the withholding rate
is reduced to 5 percent on dividends paid by a corporation of one
state to a corporation of the other sta;:e which owns 10 percent
or more of the outstanding voting stock of the paying corporation.
In addition, the withholding tax imposed by Trinidad and Tobago
on the profits paid ( 0 its home office by a permanent establi~;r;m('nt
of a U.S. corporation is also reduced to 5 percent.
The supplementary convention with Canada eliminates an
unintended tax privilege which resulted from the interaction of
Canad ian tax lm.v and e:r:.e prov is ions of the tax trea ty be tween
the United States and Canada.
The treaty provides that a company organized in Canada and
receiving investment income from the United States is subject
to a 15 percent U.S. withholding tax on such income rather than
the usual 30 percent. However, a company organized under
F-llil

- 2 Canadian law but deriving its income from outside Canada is
exempt from Canadian taxes under Canadian law if the company is
managed or controlled outside Canada.
Canadian legislation of
a few years ago eliminates this tax-exempt status for Canadian
corporations subsequently created, but does not apply
retroactively.
This combination of provisions permits such a
company created prior to that legislation to be used by third
country residents to avoid U. S. taxes.
The supplementary convention eliminates this tax haven
situation by denying the reduced rate of U.S. withholding tax
on investment income uILdc~- the trt:-aty t l l d corporation which
is exempt from tax in Canada because it is regarded as not
being resident in Canada.
The 1945 income tax convention between the United States
and the United Kingdom, as modifi~d by various supplementary
protocols, \vdS extended in its applL~_Dcion to Tl·2.1li.~:.c,d and
Tobago as of JanUdL'! l, 1959. TL-i"::-lidad and~',)hdgo became
independent in 1962, and, in 1965, nOL:~~iJ:~d the U.s. Government
of its intention to terminate the application of the 1945
convention, as modified.
Discussions on the pending convention were begnn in
October 1965.
It \vdS signed on December 22, l0Fr..,~nd submitted
to the Senate on Februarv 23, 1967.
The suppV:-'mer.c1··V convention ,:,\'ith Canada was signeo on
October 25, 1966 ~ 3.nlJ submitted to the Senate on January 25,
1967. It will supplement the existing 1942 convention between
the United StatL:'S and Ca.-nada, as modified by the supplementary
conventions of lLJ5() and 1956.

TREASURY DEPARTMENT

December 22, 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,SOO,000,000,or thereabouts, for cash and in exchange for
Treasury bills maturing January 4,1968,
in the amount of
$2,400,723,000, 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 Oc tober 5,1967,
mature April 4,1968,
originally issued in the
$ 1 , 000 , 305 , 000 , the additional and original bills
interchangeable.

January 4, 1968,
representing an
and to
amount of
to be freely

183-day bills, for $1,000,000,000, or th~reabouts, to be dated
January 4,1968,
and to mature
July 5, 196~.
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
to the closing hour, one-thirty p.m., Eastern Standard
time, Friday, December 29, 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

- 2 Immediately after the closing hour, tenders will be opened at t~
Fl,deral Reserve BcH;ks 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
'-if the acceptance or rejection thereof.
The Secretary of the Treasu:-v
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 tnese reservations, noncompetitive tenders f~
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 January 4, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing January 4, 1968.
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.
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 dispositi~
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
her c un d era res old i s not c on sid ere d t a a c c rue un til s u c h bill s are
sold, redeemed or otherwise disposed of, and such bi lIs are excluded
[rom consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunde~
[lo(?d include in his income tax return only the difference hetween
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale l'r 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 obtainedfr~
any Federal Reserve Bank or Branch.
000

TREASURY DEPARTMENT

OR RELEASE 6: 30 P.M.,

riday, December 22, 1967.
RESUL'IS 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 September 28, 1967, and
he other series to be dated December 28, 1967, 'Which were offered on December 18,
967, were opened at the Federal Reserve Banks today. '!enders were invited for
1,500,000,000, or thereabouts, of 91-day bills and for $1,000,000,000, or therebouts, of 182-day bills. The details of the two series are as follows:
riNGE OF ACCEPTED
:)MpETITIVE BIDS:

High
Low
Average

91-day Treasury bills
maturing March 28, 1968
Approx. Equiv.
Price
Annual Rate
4.953%
98.748
S.024i
98.730
98.739
4.98~
.Ii

182-day Treasury bills
maturing June 27, 1968
Approx. Equiv.
Price
Annual Rate
5.4911)
97.224
97.201
5.536%
5.515;'
97. c12

~ Excepting 1 tender of $1,000,000
10i of the amount of 91-day bills bid for at the low price was accepted
38~ of the amount of 182-day bills bid for at the low price was accepted

:TAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRIC'lE:

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

Applied For
$ 19,468,000
1,786,994,000
31,933,000
57,239,000
11,493,000
35,773,000
265,417,000
38,431,000
11,107,000
31,902,000
23,578,000
135,152,000

Acce,Eted
$
9,468,000
1,117,994,000
14,933,000
39,439,000
9,593,000
27,473,000
131,717,000
34,431,000
lO,107,000
25,902,000
13,678,000
65,282,000

'IDTALS

$2,448,487,000

$1,500,017,000 ~ $2,059,754,000

Ap,Elied For
$ 14,786,000
1,526,280,000
13,828,000
38,362,000
17,431,000
24,275,000
225,534,000
29,827,000
9,416,000
30,910,000
27,160,000
101,945,000

Acce,Eted
$
3,536,000
807,780,000
5,470,000
20,688,000
8,361,000
14,408.000
61,431,000
19,587,000
4,316,000
21,180,000
12,860,000
20,495,000
$1,000,112,000 ~I

Includes $212,756,000 noncompetitive tenders accepted at the average price of 98.739
Includes $150,426,000 noncompetitive tenders accepted at the average price of 97.212
These rates are on a bank discount basis. The equivalent coupon issue yields are
5.l4i for the 91-day bills, and 5.77% for the 182-day bills.

1113

TREASURY DEPARTMENT
(

=
IR RELEASE 6: 30 P.M.,

lesday, December 26, 1967.
RESULTS OF TREASURY I S MONTHLY BILL OFFERING
The Treasury Department announced that the tenders for two series of Treasury
116, one series to be an additional issue of the bills dated September 30, 1967,
ld the other series to be dated December 31, 1967, which were offered on December 18,
167, were opened at the Federal Reserve Banks today. Tenders were invited for
;00,000,000, or thereabouts, of 272-day bills and for $1,000,000,000, or thereabouts,
. 366-day bills. '!be details of the two series are as follows:
NGE OF ACCEPTED

MPETITIVE BIDS:
Higb
Low
Average

272-day Treasury bills
maturin~ SeEtember 30 z 1968
Approx. Equiv.
Price
Annual Rate
95.833
5.515~
95.777
5.58~
95.803
5.555i !I

366-day Treasury bills
maturing December 31, 1968
Approx. Equiv.
Annual Rate
Price
94.408
5.50&,i)
5.600;,
94.307
94.364
5.544% l,/

56~

of the amount of 272-day bills bid for at the low price was accepted
eli of the amount of 366-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
Minneapolis
Kansas City
Dallas
San FranCisco
roTALS

ApElied For

877,256,000
15,421,000
14,002,000
575,000
8,404,000
106,131,000
10,480,000
14,825,000
1,728,000
11,400,000
76,726,000

361,376,000
9,541,000
14,002,000
575,000
3,404,000
49,931,000
7,480,000
14,825,000
1,728,000
7,400,000
29,766,000

AEElied For
$ 10,501,000
1,148,138,000
11,552,000
33,258,000
2,912,000
19,466,000
140,304,000
17,515,000
15,069,000
4,399,000
11,692,000
78,336,000

$1,137,080,000

$ 500,160,000

~/ $1,493,142,000

AcceEted

132,000 $

132,000

AcceEted
$ 10,501,000
728,658,000
7,602,000
33,258,000
2,912,000
19,466,000
99,304,000
17,325,000
15,069,000
4,399,000
10,692,000
50,956,000
$1,000,142,000 ~/

Includes $16,945,000 noncompetitive tenders accepted at the average price of 95.803
Includes $46,543,000 noncompetitive tenders accepted at the average price of 94.364
These rates are on a bank discount basis. ~e equivalent coupon issue yields are
5.84% for the 272-day bills, and 5.89% for :he 366-day bills.

~-1ll4

TREASURY DEPARTMENT

FOR IMMEDIATE RELEASE
PROTOCOL TO THE UNITED STATES - BELGIUM
INCOME TAX CONVENTION EXTENDED
The Treasury Department today announced that the
United States and Belgium have agreed, in an exchange of
notes, to extend the protocol of May 21, 1965, amending the
convention for the avoidance of double taxation of income.
The protocol will remain

effect for income of

calendar years or taxable years beginning after December 31,
1967, but ending before January 1, 1971.

It will apply to

payment of taxes payable at source before January 1, 1971.
The present

~ncome

tax convention between Belgium and

the United States was signed October 28, 1948 and has been
amended three times, by the supplementary conventions of
September 9, 1952 and August 22, 1957, and by the protocol
of May 21, 1965, which further amended the convention in
light of modifications in the Belgian income tax law.
The exchange of notes keeps the protocol in force
through 1970, by which time it is expected that a new
tax convention will have been negotiated.

F-1115

000

~ncome

TREASURY DEPARTMENT

RELEASE 6: 30 P.M.,

Lday, December 29, 1967.

RESULTS OF TREASURY'3 WEEKLY :SILL OFFERING

The Treasury Department announced that the ten:iers for two series of Treasury
_Is, one series to be an additional issue of the b~11s dated October 5, 1967, ann the
ler se "'ies to be dated January 4, 1963, WhlCh ....ere offered sn December 22, 196 7 , were
!ned at the Federal Reserve Banks today. Tenders were invited for $1,500,000,000,
thereabouts, of 91-day b~lls and for $l,OOO,OOO,OOJ, or thereabouts, o~ 183-day
.1s. The details of the t-.10 series are as .fo:!..loi.ls:
lGE OF ACCEPTED
IPETIl'IVE BIDS:

High
Average

91-day Treasury bills
maturing April 4, 1968
Approx. Equiv.
Annual Rate
Price
5.056%
98.722
5 .14,"Z~
98.700
5.1:ni
98.710

193-day Treasury bills
maturing July 5, 1968
Approx. Equiv.
Price
Annual Rate
5.571%
97.158
5.614%
9 7 .146
1/
97.157
5.59~%

40% of the amount of 91-day bills bij for a~ ~he low price was accepted
1~ of the amount 0': 19,~-day bills J ~d for at the low price was accepted
'AL TENDERS APPLIED fOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

trict
ton
, York
ladelphia
veland
hmond
anta
cago
Louis
neapolis
sas City
las
Francisco

ApElied For
$ 19,126,000
1,690,735,000
32,682,000
33,461,000
9,651,000
41,489,000
261,894,000
37,359,000
23,119,000
26,214,000
12,021,000
188,041,000

fccej?ted
9,126,000
1,084,135,000
20,682,000
22,46],000
9,651.000
33,129,000
125,934,000
30,359,000
17,319,000
22,214,000
12,021,000
113,241,000

'roTALS

$2,375,792,000

$1,500,272,000 ~ $2,052,216,000

AEElied
For
..,
14,3cl,000
:L,477,372,000
18,992,000
56, ,~45, 000
4,l12,000
26,922,000
248,191,000
33,973,000
15,704,000
15,808,000
11,212,000
129,2,63,000

·D

AcceEted
4,32l,000
$
759,519,000
7,789,000
25,156,000
3,812,000
13,772,000
118,189,000
13,923,000
4,704,000
11,793,000
11,212,000
25,894,000
$1,000,084,000 b/

Includes $215,043,000 noncompetitive tenders accepted at the average price of 98.710
Includes $125,505,000 noncompetitive tenders accepted at the average price of 97.lS7
'lbese rates are on a bank discount basis. The eqUivalent coupon issue yields are
S. 26~ for the 91-day bills, and 5.85% for the 183-'day bills.

Ll16

TREASURY DEPARTMENT
(

FOR IMMEDIATE RELEASE

WEDNESDAY, JANUARY 3, 1968

INDUSTRY -GOVERNMENT SPECIAL TASK FORCE ON TEAVEL
RESCHEDULES FIRST ORGANIZATION SESSION FOR
JANUARY 11 IN WASHINGTON
The first meeting of the Industry-Government Special Task Force on
Travel will be held at the Treasury in Washington on January 11, Task Force
chairman Robert M. McKinney announced today.
The new January 11 date for the Task Force's first meeting--which was
originally scheduled for January 16--was prompted by President Johnson's
directive, at his New Year's Day press conference, that the Task Force
submit an interim report in 45 days--by February 15--and its final report
within 90 days--by April 1.
Pointing out that the 1968 travel deficit will exceed $2 billion, the
President called for a $500 million deficit reduction through an intensified
program to attract more visitors to the United States, and to encourage
Americans to refrain from non-essential travel outside the Western Hemisphere
for the next two years.
The President then directed the Task Force "to report wi thin 45 days on
the immediate measures that can be taken, and to make its long-term recommendations within 90 days."
The Task Force members are: Robert M. McKinney; Santa Fe, N.M., chairman;
William Bernbach, New York, N.Y.; Professor Daniel J. Boorstin, Chicago, Ill.j
Governor John A. Burns, Honolulu, Hawaiij Edward E. Carlson, Seattle, Wash.j
Howard L. Clark, New York, N.Yj Arthur Frommer, New York, N.Yj Frank Hildebrand,
Austin, Texasj Frank N. Ikard, New York, N.Y.j John H. Johnson, Chicago, Ill.j
Willis G. Lipscomb, New York, N.Y.j Winston V. Morrow, Jr., Garden City, N.Y.j
William D. Patterson, New York, N.Y. j Gerald Shapiro, New York, N.Y. j Lel-l R.
Wasserman, Universal City, Calif.j Anthony M. Solomon, Department of Statej
Winthrop Knowlton, Department of the Treasuryj Harry M. Shooshan, Department
of the Interiorj Donald G. Agger, Department of Transportationj Charles S.
Murphy, Civil Aeronautics Boardj Andrew F. Brimmer, Federal Reserve Systemj
and John W. Black, Department of Commerce.
000

F-1117

TREASURY DEPARTMENT

January 3, 1968

FOR IMMEDIATE RELEASE

The Treasury today announced that it has transferred $450
million in gold from its Treasurer of the United States account
to its Exchange Stabilization Fund.
December 28, 1967.

The transfer was made on

The gold was used in part in December to

make settlement for the United States' share in support operations
in the London gold market in December and the balance, as

to provide the Exchange

customary from time to time,

Stabilization Fund with additional resources to meet future
contingencies.
The t.otal of such transfers in 1967 was $1,175 million of
which $925 million was subsequent to the sterling devaluation.
The transfers this year were approximately twice that of last
year but one-half billion less than that in 1965.

01)0

F-1118

TREASURY DEPARTMENT

January 3, 1968
tOR

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
rreasury bills maturing January 11,1968, in the amount of
$2,501,746,000, as follOWS:
91-day bills (to maturity date) to be issued
in the amount of $1,500,000,000, or thereabouts,
~dditional amount of bills dated October 13,1967,
nature April 11,1968,
originally issued in the
$ 1,000,840,000~he additional and original bills
interchangeable.

January 11 1968
representing an '
and to
amount of
to be freely

182-day bills, for $1,000,000,000, or there~bouts, to be dated
January 11,1968,
and to mature July 11, 1968.
The bills of both series will be issued on a discount basis under
and noncompetitive bidding as hereinafter provided, and at
naturity their face amount will be payable without interest. They
~lll 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
(maturity value).

~ompetitive

Tenders will be received at Federal Reserve Banks and Branches
to the closing hour, one-thirty p.m., Eastern Standard
:lme, Monday, January 8, 1968.
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,
~lth 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
~orwarded in the special envelopes which will be supplied by Federal
ieserve Banks or Branches on application therefor.
lp

Banking institutions generally may submit tenders for account of
provided the names of the customers are set forth in such
Others than banking institutions will not be permitted to
3ubmit tenders except for their own account. Tenders will be received
~ithout deposit from incorporated banks and trust companies and from
~esponsible and recognized dealers in investment securities.
Tenders
'rom others must be accompanied by payment of 2 percent of the face
lmount of Treasury bills applied for, unless the tenders are
lccompanied by an express guaranty of payment by an incorporated bank
)r trust company.
~ustomers
~enders.

F-1119

- 2 -

Immediately after the closing hour, tenders will be opened at th.f
FL"dera 1 Reserve Banks and Branches, following which public announceTlcnl will be made by the Treasury Department of the amount and price
range of accepted bids.
Those submitting tenders will be advised
l)f
the acceptance or rejection thereof.
The Secretary of the Treasurv
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 he
final.
Subject to tnese reservations, noncompetitive tenders [or
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 January 11, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing January 11,1968.
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 dispositi.on
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
S ta te, but are exemp t from a 11 taxa t ion now or herea fter 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 hills issued
hereunder are sold is not considered to accrue until such bills are
sl)ld, redeemed or otherwise disposed of, and such bi Ils are excluded
[rom consideration as capital assets. Accordingly, the owner of
Tre3sury 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 upon
sale (lr redemption at maturity during the taxable year for which thO'
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and thic
n0tice prescribe the terms of the Treasury bills and govern the
c:.'nclitions of their issue. Copies of the circular may be obtained :;
anv Federal Reserve Bank or Branch.
000

TREASURY DEPARTMENT
(

January 3, 1968

D,lMEDIATE RELEASE

AUCTION OF TAX ANTICIPATION BILLS
T;le Treasury Dcpo.r"Gment announced today the forthcoming auction of $2.:.:.:

.lion of ta:c anticipation bills rlaturing in June 1968.

The bills are in

iition to the $3 bill~~n of June tax bills already outstanding.
The bj.lls '-Jill be auctioned on Tuesday, January 9, for payment on Monday,

lUary lS.

Co[unercinl "ballks may Make paynent for the bills oy creai ting Treasury

{ and loan account s .
The bills rr,atL~ L";~Jn June 24, 1968, but Tn:r be \.I.~; "d at face value in payment
Federal taxes due on June 15, 1968.

F-1120

TREASURY DEPARTMENT
;
=

R n.1HEDIATE RELEASE
TREASURY OFFERS ADDITIONAL $2.5 BILLION IN JUNE TAX BILLS
Tne Treasury De~arb:ent, by this public notice, invites tenders for
,500,000,000, or thereabouts, of 161-day Treasury bills (to ~aturity date),
'ric i,'3sued January 12), 1968, on a discount basis under comoeti ti ve and non~~peti ti ve biddinc a;~ L,ereinafter provided.
The bills of this series wi 11 t,e
signa:cd Tax Antic~na:,ion Series and represent an additional anount of oills
ted October 9, 1967, to mature June 24, 1968, originally issued in the a~ount
~,005,517,000.
The additional and original bills will be frccly intcrchan~e
le. They '\>Jill be accepted at face value in payment af incone ta~ces due on
ne 1S, 1968, and to tl ' e e::tent they are not presented for this purpose the face
ount o:i these bills '\.Jill be payable without interest at maturity. Taxpayers
sirinG to apply these oills in payment of June 15, 1968, incon,e taxes nay subt the bills to a Federal Reserve Bank or Branch or to the Office of the Trc2surer
the United States, HashinGton, not more than fifteen days before that date.
the case of bills SUJ:l'i tted in pay:nent of incone taxes of a corporation tlley
all be accompanied uy a duly campleted Form 503 and the office receiving these
er1S vl~ll effect the deposit on June 15, 1968.
In the case of Jil18 suo'1·"ti tte(1
pay:n,ent of income ta:{cs of all other taxpayers, the office receiving the bills
11 issue receipts therefor, the original of vlhich the taxpayer shall submit on
'oefClre June 15, 19G3, to the ni strict Director of Internal Revenue for the
st:::'ict in whicl1 such taxes are payable. The bills will be issuerl. in Dearer fom
1y, and in denominations of $1,000, $5,000, $10,000, $50,000, $100,000, $500,000
d $1,000,000 (naturity value).

Tenders will be received at Federal Reserve Banks and Branches up to the closinG
ur, one-thirty p.m., Eastern Standard time, Tuesday, January 9, 1968. Tenders will
t be received at the Treasury Departr.1ent, WashinGton. Each tender must De for an
en 11Ultiple of $1, ooe, and in tne case of competitive tenders the price offered r:lUst
e:~ressed on the basis of 100, witn not more than three decimals, e. g., 99.925.
actions may not be used. It is urged that tenders be made on the printed for~s and
rwarocd in the spec~Ql envelopes which vlill be supplied by Federal Reserve Ban;~s or
ancb:s on application therefor.
BCln;:ing insti tut~ons generally may submit tenders for account of custorrers prodec: the names of the customers are set forth in SUC:l tenders. Others than oankine;
stitutions will not be permitted to submit tenders except for their own account.
ncl.ers \'Iill be received viithout deposit from incorporated banl~s and trust co,,~panies
d frOM responsible and reCOGnized dealers in investment securities. Tenders from
hers ::1Ust be accompanied b/ pa;y:nent of 2 percent of the face anount of Treasury
11= applied for, unless the tenders are accompanied by an e)~ress guaranty ~f paynt 0;," an incorp,)rated ban); or trust corrpany.

F-1121

- 2 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
Jf :,hi::- issue at a specific rate or price, until after one-thirty p.m., Eastern
Standal':l tine, Tuesday, January 9, 1968.
L:l:"ediately 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
~;ut::li tt ing 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 tr~r:~er 3, in whole or in part, and his action in any such respect shall be fina:,
Sub,iect to these reservations, noncompetitive tenders for $400,000 or less without
stated price from anyone bidder will be accepted in full at the average price (in
three dec ir:l8.1s) of accepted competi ti ve bids. Payment of accepted tenders at the
pri CE'.-:; offered r:1Ust be Made or completed at the Federal Reserve Bank in cash or otr,e~
inr:tediately available funds on January 15, 1968, provided, however, any qualified
depositary will be permitted to make payment by credit in its Treasury tax and
l'J8.n account for Treasury bills allotted to it for itself and its customers up to
any a:nount for which it shall be qualified in excess of existing deposits when so
notified by the Federal Reserve Bank of its District.
The income derived from Treasury bills, whether interest or gain from the sale
or other disposition of the bills, does not have any exemption, as such, and loss
l'r:Jm the sale or other disposition of Treasury bills does not have any special trea:·
ment, 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
cxeLrI4t from all taxation now or hereafter imposed on the prinCipal or interest there·
of by o..ny ;::,tate, or any of the possessions of the United States, or by any local
tnxinG authority. For purposes of taxation the amount of discount at which Treasury
oills are originally s:)ld by the United States is considered to be interest. Under
Secti')ns <151 (b) and 1221 (5) of the Internal Revenue Code of 1954 the amount of
discount at whd.ch -oills 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 '-:onsideration as capital assets. Accordingly, the owner of Treasury bills
(other than life insurance companies) issued hereunder need include in his income
tax l'eturn only the difference between the price paid for such bills, whether on
~ri~inal 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
~ade, as ordinary gain or loss.
Treccsury Departr.1ent Circular No. 418 (current revision) and this notice, pre:3cri8e the terms of the Treasury bills and govern the conditions of their issue.
C.jpies of the circular ;:cay be ootained from any Federal Reserve Bank or Branch.

TREASURY DEPARTMENT

January 4, 1968
FOR IMMEDIATE RELEASE
STUART E. SE 1CEL NAMED TO

TREASUK~(

POST

Treasury Secretar~/;--:.enry H. Fowler today announced the
appointment of Stuart E. Seigel as Associate Tdx Legislative
Counsel.
Mr. Seigel, who has been v. ith the Office of Tax Legislative
Counsel since 1965, succeeds Thomas A. Troyer, who recently
resigned to join the Washington law firm of Caplin ~nd DrysdaL.'.
Mr. Seigel, 34, was ::>orn in New '~ork City. tie received a
C.S. degree from ~~ew "lork Univ0rsity in 1953, and an I.L.~,.
from New York Univc'rsity Lah School in 1957. While at the N I.D.
Law School, he vias Associate Editor of the :~aVJ Review.
After fini::h ing r.is school ing in ~~ew '{ork, Mr. Se ige 1 came
to Washington to ~ork in the Chief Counsel's Office of the
Internal Revenue Service. While there ~e attended the Evening
Division of the ~eorgetown University Sctool of Law, where he
received a [vla~,t: r of La~.Ns in Taxation in 1960.
For more than eight years the appointee worked in the
Office 0 f Chie f Counse 1, 1. R. S . , v;here he was Attorney -Advisor,
and a Trial Attorney, representing the Covernment in tax cases
before the Tax Court of the United Stdtes. Mr. Seigel joined
the staff of the Tax Legislative Counsel, Main Treasury, in
Oc tober, 1965.
The Office of Tax Legislative Counsel furnishes the Assistdnt
Secretary for Tax Policy dnd other polic~-making officials of the
Department with legal advice and analysis with respect to tdX
matters, dnd assists in the development of tax legislation.

The appointee is a member of the American Ear Associdtion,
the Federal Bar Association and the American judicature Society.
Mr. Seigel is married to the former joyce R. Meyers, of
New York. They hdve three children, Charles, Lee and Suzanne,
and make their home at 412 Sisson Court, Silver Spring, Maryland.
000

F-1122

REASURY DEPARTMENT

January 4, 1968
FOR IMMEDIATE RELEASE

MINT MARKS RESTORED TO COINS
The 1968 United States coins, which carry mint marks for the first
time since the 1964 dated coins, were shown today at the Denver Mint.
Miss Eva Adams, Director of the Mint, and Mrs. Marian Rossmiller,
Superintendent of the Denver Mint, presided at ceremonies which included
the inspection of a specimen proof coin set bearing the San Francisco
mint mark.
This marks the first time in history that mint marks will appear
on proof coins. Mint marks have not been on United States coins since
passage of the Coinage Act of 1965 which prohibited the use of mint marks
because of the coin shortage. In 1967 the Congress repealed this prohibition
thereby authorizing the restoration of mint marks. Mint marks are
important to the operation of the Mint because they provide an effective
control over the coinage by identifying the issuing institution.
To achieve uniformity, Miss Adams has directed that all mint marks
be placed on the obverse (face) of the coins. The mint mark on t1-;e cent,
nickel, dime and quarter will be to the right of the portraits, while on the
half dollar it will appear in the center under the portrait of the late
President Kennedy.
Coins produced at the Denver Mint will carry a small "D" mint mark,
and the proof coins struck at the San Francisco A ssay Office will bear a
small "S" mint mark. In the past, proof coins were made at Philadelphia
and bore no mint marks. Traditionally, coi1l.S made at the Philadelphia Mint
are distinguished by the absence of mint marks.
Proof coin sets, which consist of a specially made half dollar, quarter,
dime, nickel and cent, have not been produced since 1964. Their production
\\'8S discontinued at the end of that year so that full production facilities
would be given over to making regular issue coinage to alleviate the existing
coin shortage.

- 2 -

Beginning late in 1965, however, conditions permitted the production
of special mint sets at the San Francisco Assay Office. Although these sets
are better in quality than any of the regular uncirculated coin sets previously
packaged by the Mint, they are not of proof quality. The manufacture of
these sets has been discontinued with the resumption of the production of
proof coins.
Miss Adams said that "during 1967 the Mint facilities produced over
seven billion coins, and in 1966 more than nine billion were produced,
thereby completely eliminating the coin shortage except for the half dollar."
She added that "the half dollar is now beginning to circulate more freely
in various sections of the country and is on the way to resuming its normal
commercial function as a medium of exchange. "
The 1968 coins will enter circulation through normal channels
the Mints make distribution of regular issue coin directly to the Federal
Reserve banks and branches, and it is the requisitions of the commercial
banks upon them for supplies that determine the amounts of the shipments
into the various areas.
Requests for the 1968 proof coin sets should be directed to the
Officer in Charge, United States Assay Office, Numismatic Service,
350 Duboce Avenue, San Francisco, California 94102. The price of $5.00
per set includes first class registered mail fee. The maximum number of
sets per order is 20 sets.

-000-

TREASURY DEPARTMENT
(

WASHINGTON, D.C

January 5, 1968
FOR IMMEDIATE RELEASE
INDUSTRIAL PAYROLL SAVINGS COMMITTEE
MEETS JANUARY 9 WITH SECRETARY FOWLER
The U. S. Industrial Payroll Savings Committee, made up of
top executives of American business and industry appointed by
Secretary of the Treasury Henry H. Fowler, meets in Washington
on Tuesday, January 9, to review program accomplishments in 1°6"""
and to formulate plans for the 1968 campaign.
Secretary Fowler and other Administration leaders will p-,ppt
with the Committee. William P. Gwinn, President and Chief
Administrative Officer, United Aircraft Corp., East Hartford,
Conn., is to be installed as 1968 Chairman, succeeding 1967 (neLlman Daniel J. Haughton, Chairman of the Board, Lockheed Aircraft
Corp., Burbank, Calif.
Haughton is to preside over the meeting, to be held in the
Benj amin Franklin Room of the State Department I s Diplomatic Fu;,._
tions Suite, with a reception at 6:00 and dinner at 7:00.
Other speakers on the day's program include Under Secretary
of the Treasury for Monetary Affairs, Frederick L. Deming, and
Glen R. Johnson, National Director of the Treasury's Savings Bn,",
Division. There will also be a special message from President
Lyndon B. Johnson.
During the past year, the Committee, members of which led
Payroll Savings activities in the major industrial and geograph,;:
areas of the country, spearheaded a drive "For Freedorrc I s Future
in which 2,606,640 new payroll savers or savers who increased
their purchases were signed up for the regular purchase of Savings
Bonds and Freedom Shares. Of these, 716,000 were from within companies of the Committee members. In terms of dollar volume, the
Committee's accomplishment comes to $3.5 billion.
A list of the 1967 Committee and of the new members who will
serve on the 1968 Committee is attached.
000

E-l1?)

U. S. INDUSTRIAL PAYROLL SAVINGS COMMITTEE
1968 MEMBERS
Ex Officio General Chairman
Honorable Henry H. Fowler
Secretary of the Treasury

1968 Chairman
William P. Gwinn
President
United Aircraft Corporation
East Hartford, Connecticut
1963-1967 Chairmen
Daniel J. Haughton
Chairman of the Board
Lockheed Aircraft Corporation
Burbank, California
( 1967 Chairman )

---

Lynn A. Townsend
Chairman of the Board
Chrysler Corporation
Detroit, Michigan
( 1966 Chairman )
Dr. Elmer W. Engstrom
Chairman of the Executive
Committee
Radio Corporation of America
New York, New York
( 1965 Chairman )
Frank R. Milliken
President
Kennecott Copper Corporation
New York, New York
( 1964 Chairman )
Harold S. Geneen
Chairman and President
[nternational Telephone and
Telegraph Corporation
New York, New York
( 1963 Chairman )

Geographic Members
Charles F. Adams
Chairman of the Board
Raytheon Company
Lexington, Massachusetts

J. Paul Austin
President
The Coca-Cola Company
Atlanta, Georgia
Edd H. Bailey
President
Union Pacific Railroad Company
Omaha, Nebraska
Robinson F. Barker
Chairman of the Board
PPG Industries
Pittsburgh, Pennsylvania
Roy C. Echols
President
Indiana Bell Telephone Company
Indianapolis, Indiana
Francis E. Ferguson
President
The Northwestern Mutual Life
Insurance Company
Milwaukee, Wisconsin
Robert O. Fickes
President and Chairman
Philco-Ford Corporation
Philadelphia, Pennsylvania
Richard A. Goodson
President
Southwestern Bell Telephone
Company
St. Louis, Missouri

- 2 J. E. Gosline
President
Standard Oil Company
of California
San Francisco, California
Fred L. Hartley
President
Union Oil Company of California
Los Angeles, California
Sherman R. Knapp
President
Northeast Utilities Service
Company
Hartford, Connecticut
John F. Lynch
President
La Gloria Oil and Gas Company
Houston, Texas

Vernon R. Rawlings
Vice President
Martin-Marietta Corporation
Baltimore, Maryland
Robert W. Reneker
President
Swift & Company
Chicago, Illinois
Frederick W. Roth
President in Charge of
Operations
Gould-National Batteries, Inc.
St. Paul, Minnesota
Marion Sadler
President
American Airlines, Inc.
New York, New York

Wilfred D. MacDonnell
President
Kelsey-Hayes Company
Romulus, Michigan

William C. Safford
President
The Wes tern and Southern Life
Insurance Company
Cincinnati, Ohio

Donald A. McMahon
President
Monroe International, Inc o
Orange, New Jersey

Horace A. Shepard
President
TRW Inc.
Cleveland, Ohio

Robert D. O'Brien
Chairman of the Board
Pacific Car and Foundry Company
Renton, Washington

Clyde Skeen
President
Ling-Temco-Vought, Inc.
Dallas, Texas

Robert T. Person
President
Public Service Company of Colorado
Denver, Colorado

Industry Members
William R. Adams
President
Sto Regis Paper Company
New York, New York

- 3 J. L. Atwood
President
North American Rockwell Corp.
E1 Segundo, California

Mr. John D. Harper
President
Aluminum Company of America
Pittsburgh, Pennsylvania

Orville E. Bea1
President
The Prudential Insurance Company
of America
Newark, New Jersey

Honorable Richard J. Hughes
Governor of New Jersey
Trenton, New Jersey

D. C. Burnham
President
Westinghouse Electric Corporation
Pittsburgh, Pennsylvania
L. du P. Copeland
Chairman of the Board
E. I. du Pont de Nemours
& Company, Inc.
Wilmington, Delaware
Edward S. Donnell
President
Montgomery Ward and Company
Chicago, Illinois
Ben S. Gilmer
President
American Telephone and Telegraph
Company
New York, New York

W. Maxey Jarman
Chairman
Genesco, Inc.
Nashville, Tennessee
Byron Jay
President
The Great Atlantic & Pacific
Tea Company, Inc.
New York, New York
David M. Kennedy
Chairman of the Board
Continental Illinois National
Bank and Trust Company of
Chicago
Chicago, Illinois
Joseph L. Lanier
Chairman
West Point-Pepperell, Inc.
West Point, Georgia

James M. Hait
Chairman
FMC Corporation
San Jose, California

T. V. Learson
President
International Business
Machines Corporation
Armonk, New York

Herbert E. Harper
President
Public Service Coordinated Transport
Maplewood, New Jersey

John P. Levis
Chairman
Owens-Illinois, Inc.
Toledo, Ohio

- 4 -

Michael R. McEvoy
President
Sea-Land Service, Inc.
Elizabeth, New Jersey
Louis W. Menk
President
Northern Pacific Railway Company
St. Paul, Minnesota
Robert L. Milligan
Chairman of the Board
Pure Oil Company
Palatine, Illinois
Thomas F. Patton
Chairman and President
Republic Steel Corporation
Cleveland, Ohio
William Wood Prince
President
Armour and Company
Chicago, Illinois
James M. Roche
Chairman of the Board
General Motors Corporation
New York, New York

Watson F. Tait, Jr.
Chairman of the Board
Public Service Electric
and Gas Company
Newark, New Jersey
Charles C. Tillinghast, Jr,
President
Trans World Airlines, Inc,
New York, New York
Jack Valenti
President
Motion Picture Association
of America, Inc.
Washington, D, C.
George R. Vila
Chairman and President
Uniroyal, Inc.
New York, New York

U. S. INDUSTRIAL PAYROLL SAVINGS COMMITTEE
1967 MEMBERS
Ex Officio General Chairman
Honorable Henry H. Fowler
Secretary of the Treasury

Chairman
Daniel J. Haughton
Chairman of the Board
Lockheed Aircraft Corporation
Burbank, California

Geographic Members
Frank Armour, Jr.
Vice Chairman of the Board
H. J. Heinz Company
Pittsburgh, Pennsylvania

Robert O. Fickes
President & Chairman
Philco-Ford Corporation
Philadelphia, Pennsylvania

Allen G. Barry
President
New England Telephone
& Telegraph Company
Boston, Massachusetts

Philip O. Geier, Jr.
President
The Cincinnati Milling
Machine Company
Cincinnati, Ohio

John B. Bunker
President
Holly Sugar Company
Colorado Springs, Colorado

Richard A. Goodson
President
Southwestern Bell Telephone Co.
St. Louis, Missouri

Norton Clapp
Chairman of the Board
Weyerhaeuser Company
Tacoma, Washington

Paul A. Gorman
President
Western Electric Company, Inc.
New York, New York

J. E. Countryman
President
Del Monte Corporation
San Francisco, California

William P. Gwinn
President
United Aircraft Corporation
East Hartford, Connecticut

Charles H. Dolson
President
Delta Air Lines, Inc.
Atlanta, Georgia

Gordon Hanes
President
Hanes Corporation
Winston-Salem, North Carolina

- 2 John F. Lynch
President
La Gloria Oil and Gas Company
Houston, Texas

W. A. Strauss
President
Northern Natural Gas Company
Omaha, Nebraska

G. Barron Mallory
President
P. R. Mallory & Company, Inc.
Indianapolis, Indiana

Watson F. Tait, Jr.
Chairman of the Board
Public Service Electric
& Gas Company
Newark, New Jersey

Arjay Miller
President
Ford Motor Company
Dearborn, Michigan
Thomas F. Patton
Chairman and President
Republic Steel Corporation
Cleveland, Ohio

Charles B. Thornton
Chairman of the Board
Litton Industries, Inc.
Beverly Hills, California

Industry Members
Ha:llee Branch, Jr.
Prf~sident

William J. Quinn
President
Burlington Lines
Chicago, Illinois

South~rn

Company
Atl.anta, Georgia
Donald C.

Burnham

:> . . . ~sident
Vernon R. Rawlings
Vice President
Martin-Marietta Corporation
Baltimore, MarylHnd
Frederick W. Roth
President
Gould-National Batteries, Inc.
St. Paul, Minnesota
Clyde Skeen
President
Ling-Temco-Vought, Inc.
Dallas, Texas
Robert S. Stevenson
Chairman
Allis-Chalmers Manufacturing Co.
Milwaukee, Wisconsin

Westinghouse Electric Corp.
Pittsburgh, Pennsylvania
Gilbert W. Fitzhugh
Chairman of the Board
Metropolitan Life Insurance Co,
NL~ York, New York
Ben S. Gilmer
President
Ane r ic an Telephone and Te legraph
Company
N2~ York, New York
John D. Harper
President
Aluminum Company of America
Pittsburgh, Pennsylvania

- 3 Fred L. Hartley
President
Union Oil Company of California
Los Angeles, California

William B. Murphy
President
Campbell Soup Company
Camden, New Jersey

Amory Houghton, Jr.
Chairman of the Board
Corning Glass Works
Corning, New York

Herman H. Pevler
President
Norfolk & Western Railway
Roanoke, Virginia

Honorable Richard J. Hughes
Governor of New Jersey
Trenton, New Jersey

James M. Roche
Chairman of the Board
General Motors Corporation
New York, New York

W. M. Jarman
Chairman of the Board
Genesco Inc.
Nashville, Tennessee

Marion Sadler
President
American Airlines, Inc.
New York, New York

Walter H. Johnson, Jr.
Senior Vice President
Interpublic, Inc.
New York, New York

Jack Valenti
President
Motion Picture Association
of America, Inc.
Washington, D. C.

James A. Linen
President
Time Inc.
New York, New York

H. E. Whitaker
Chairman
Mead Corporation
Dayton, Ohio

Robert L. Milligan
Chairman of the Board
Pure Oil Company
Palatine, Illinois

000

TREASURY DEPARTMENT

lELEASE 6: 30 P.M.,
Ilz Januarl 8, 1968.
RESULTS OF TREASURY'S WEEKLY BILL OFFERING

'llie Treasury Department announced that the tenders for two series of Treasury

one series to be an additional issue of the bills dated October 13, 1967, and
lther series to be dated January 11, 1968, which were offered on January .'S, 1968,
opened at the Federal Reserve Banks today. Tenders were invited for $1,500,000,000,
lereabouts, of 91-day bills and for $1,000,000,000, or thereabouts, of 182-day bills.
ietails for the t~NO series are as follows:
0,

OF ACCEPTED

~TITIVE

BIDS:

High
Low
Average

91-day Treasury Bills
maturing April 11, 1968
Approx. Equiv.
Price
Annual Rate
98. 7::51
5.02~
98.708
5.111%
98.716
5.080% ];/

182-day Treasury Bills
maturing July 11, 1968
Approx. Equiv.
Annual Rate
Price

97.301

97.272
97.282

5.33~

5.396%
5.37610

Excepting 1 tender of $10,000
14% of the amount of 91-day bills bid for at the low prjce was accepted
of the amount of 182-day bills bid for at the low price was accepted

TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
3trict
3ton
N York
ilade1phia
=veland
~hmond

lanta
ieago
. Louis
nneapolis
nsas Ci ty
llas
n Francisco
'roTALS

Acce;Eted
For
$ 24,087,000 $ 14,0,97,000
927,750,000
1,699,950,000
22,602,000
35,602,000
41,259,000
41,2.59,000
15,015,000
18,015,000
44,304,000
54,884,000
217,367,000
276,167,000
47,629,000
54,929,000
24,760,000
26,760,000
29,782,000
31,782,000
23,679,000
28,679,000
119,221,000
92,021,000

A:EI~lied

$2,411,335,000

AEE1ied For
$ 23,323,000
1,444,343,000
18,478,000
36,323,000
5,949,000
30,759,000
212,503,000
53,338,000
21,969,000
21,581,000
24,685,000
107,507,000

$1,500,255,000 £/$2,000,758,000

AcceEted
$ 13,323,000
634,143,000
10,478,000
28,495,000
5,949,000
24,759,000
122,822,000
44,000,000
19,469,000
21,581,000
17,685,000
57,858,000
$1,000,562,000 ~/

neludes $280,945,000 noncompetitive tenders accepted at the average price of 98.716
neludes $187,664,000 noncompe ti t:L ve tenders accepted at the average price of 97.282
hese rates are on a bank discount basis. The equivalen~ coupon issue yields are
.23% for the 91-day bills, and 5.62% for the 182-day bills.

-1124

TREASURY DEPARTMENT
(

January 9, 1968
FOR IMMEDIATE RELEASE
INDUSTRIAL PAYROLL SAVINGS COMMITTEE
SETS TWO MILLION 1968 CAMPAIGN GOAL
Fifty-six of America's top executives, representing 23
geographic areas and 27 industries and state government, met
with Secretary of the Treasury Henry H. Fowler today to initiate plans to sign up 2,000,000 Americans as new savers or
increased allotments for the purchase of U. S. Savings Bonds
and Freedom Shares during 1968. They are members of the
U. S. Industrial Payroll Savings Committee, first established
in 1963.
For 33 of the group, this was th2ir first such meeting.
They were installed officially as new members of the Committee for 1968, following their meeting with Secretary Fowler
and other Treasury officials, in the State Department's
Benjamin Franklin Dining Room. Each was presented with
a Certificate of Appointment, signed by the Secretary.
In making the appointments, Secretary Fowler said, "Your
Committee now represents the nation's largest markets, as well
as its major industries. Some of you are responsible for
organizing campaigns in your respective geographic areas.
Others will concentrate on the larger employers in their
related industries. Your abilities and your energies -cast together with the cause of Savings Bonds and Freedom
Shares -- can only add substantially to the growth and
strength of the economy."
The Chairman of the Industrial Payroll Savings Committee
for 1968 is William P. Gwinn, President and Chief Administrative Officer, United Aircraft Corp., East Hartford, Conn. In
acknowledging Mr. Gwinn's acceptance as Chairman, Secretary
Fowler said, "The vital volunteer activity which you will
now head is additional evidence of responsible patriotism
on the part of American business. The President joins with
me in a firm conviction that such outstanding public service
as that performed by your Committee adds strength to our
financial structure, helps to offset the forces of inflation
and substantially supports the valor of our servicemen in
Vietnam. "

- 2 Mr. Gwinn succeeds Daniel J. Haughtcn, Chairman of the
Board, Lockheed Aircraft Corporation, Bu=bank, Calif. Mr.
Haughton will remain active as a meDh~~-at-large of the
1968 Committee, joining with other former chairmen -- Lynn
A. Townsend, Chairman of the Board, Chrysler Corp., Detroit,
1966; Dr. Elmer W. Engstrom, Chairman of the Executive Committee, Radio Corporation of America, New York, 1965; Frank
R. Milliken, President, Kennecott Copper Corporation, New
York, 1964, and Harold S. Geneen, Chairman and President,
International Telephone and Telegraph Corp., New York,

1963.
In addition to providing over-all direction for the
national Payroll Savings effort, the business executives
who formed the 1967 Committee spearheaded Payroll Savings
drives in their own companies -- for a total of 716,000
savers. And purchasers of the Freedom ShareS/Savings
Bonds combination accounted for 334,000 of that number.
The Committee exceeded its national gJ3l of 2,500,000
new savers or savers who increased ~heir payroll allotments.
In terms of dollar volume, the 1967 Committee's
accomplishment comes to $3.5 billion.
In a special message to the industrialists, President
Lyndon B. Johnson complimented the 1967 Committee. His remarks stressed the urgent need to stabilize our economy,
preserve the value of the dollar and offset the deficit
in the balance of payments. He cited the values of the
Savings Bonds Program in that all-out national effort.
Commenting on the Committeeis accomplishments, Secretary Fowler said, "Your 1967 Payroll Savings campaign
throughout industry was a shining example of distinguished
and enlightened self-service by the business community in
meeting the needs of the nation."
Incoming Chairman William P. Gwinn told the members ,
"Secretary Fowler has clearly spelled out the economic
facts. As individuals deeply involved in the commerce and
industry of our nation, I am sure we fully appreciate the
need for maintaining the stability of the dollar.
In Savings Bonds, an~ their sale through Payroll Savings, we have
a powerful, positive instrument for helping to keep not only

- 3 -

our economy strong but the dollar stable. This is not a
one-way street, for the individual whc participates builds
a nest egg for himself and his family at the same time."
Another highlight of the meeting was the presentation
of awards to outgoing Chairman Haughton and members of his
Committee. Mr. Haughton received the Treasury's Medal of
Merit, while Committee members were presented with Silver
Medals of Merit.
The session -- which got underway in the afternoon -was opened by Under Secretary of the Treasury for Monetary
Affairs, Frederick L. Deming, who introduced the new members
of the 1968 Committee.
Glen R. Johnson, National Director of the Treasury's
Savings Bonds Division, spoke of the outstanding team
spirit shown by the Committee and outlined the guidance
and logistical support available from his Division.

000

TREASURY DEPARTMENT
=
LEASE 6:30 P.M.,
1, January 9, 1968.
ESUL'IS OF TREASURY'S OFFER OF ADDITIONAL $2.5 Bn.LION OF JUNE TAX BILLS

he Treasury Department announced that the tenders for an additional $2,500,000,000,
reabouts, of Tax Anticipation Series Treasury bills dated October 9, 1967, maturing
4, 1968, were opened at the Federal Reserve Banks today. The additional amount of
which were offered on January 3, 1968, will be issued January 15, 1968, (161 days
uri ty date).
details of this issue are as follmiS:

btal applied for - $6,332,020,000
otal accepted
- $2,500,362,000

(includes $067,380,000 entered on a noncompetitive basis and accepted in full
at the average price shown below)

ange of accepted competitive bids:

Except-i ng one tender of $40,001).

igh
:)w

rerage

- 97. 788 8/ Equivalent rate of discount approx. 4.946% per annum
97.727"
II""
" 5 . 082%"
"
- 97. 738
"
5 . 058'-' "
Y
" " "

( 2% of the amount bid for at the low price was accepted)

ral Reserve
rict
)n

(ork
idelphia
~land

Ilond
lta
igO

Jouis
!apolis
LS City
lS

i'rancisco
TOTAL

.s is on a bank discount basis.

Total
Applied For
$ 239,520,000
2,905,082,000
250 1 915,000
32:5,717,000
85,655,000
176,675,000
789,348,000
215,(;07,000
220,670,000
116,409,000
223,380,000
785,442,000

Total
Accepted
$ 167,020,000
754,502,000
174,915,000
71,567,000
44,255,000
119,175,000
335,490,000
158,907,000
131,660,000
96,J.09,000
107,380,000
_339.1 382; 000

$6,332,020,000

$2,500,362,000

The equivalent coupon issue yield is 5.26%.

TREASURY DEPARTMENT

January 10, 1968

FOR LMMEDLATE 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
rreasury bills maturing January 18, 1968, in the amount of
$2,501,068,000, as follows:
91-day bills (to maturity date) to be issued January 18, 1968,
in the amount of $ 1,500,000,000, or thereabouts) representing an
~dditional amount of bills dated October 19, 19b7, and to
nature April 18, 1968
originally issued in the amount of
~1,OOO,119,000, the additional and original bills to be freely
Lntercnangeable.
182-day bills, for $1,000,000,000, or thereabouts, to be dated
January 18, 1968, and to mature July 18, 1968.
The bills of both series will be issued on a discount basis under
ompetitive and noncompetitive bidding as hereinafter provided, and at
laturity their face amount will be payable without interest. They
'ill 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-thirty p.m., Eascern Standard
ime,Monday, January 15, 1968.
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
)rwarded 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
lstomers provided the names of the customers are set forth in such
!nders. Others than banking institutions will not be permitted to
lbmit tenders except for their own account. Tenders will be received
Lthout deposit from incorporated banks and trust companies and from
!Sponsib1e and recognized dealers in investment securities. Tenders
~om others must be accompanied by payment of 2 percent of the face
lount of Treasury bills applied for, unless the tenders are
companied by an express guaranty of payment by an incorporated bank
trust company.
1126

- 2 Immed ia te ly a fter the c los ing hour, tenders will be opened at the
FL'deral 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 Treasun'
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, noncompe~itive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average ,~ice (in three
decimals) of accepted competitive bids for the
'spective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on January 18, 1968, in
cash or othpr immediately available funds or in a like face amount
of Treasury bills maturing January 18,19680 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.
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 Tre~sury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954.
The bills ~re subject to
estate, inheritance, gift or other excise taxes, whe,~her Federal or
State, but ~re exempt from all taxation now or herea~ter imposed on
the p incipal or interest thereof by any State, or any of the
possessions of the United States, or by any local tc {ing authority.
For purposes of taxation the amount of discount at v licb Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of tt
Internal
Revenue Code of 1954 the amount of discount at whict bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bi lIs are excluded
from consideration as capital assets . Accordingly, ,he 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 oc 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 gover~ the
conditions of their issue.
Copies of the circular may be obtained frr
any F0deral Reserve Bank or Branch.
oO(~

TREASURY DEPARTMENT
Washington

REMARKS BY THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY, BEFORE
LUNCHEON-MEETING OF 1968 "SHARE IN FREEDOM"
SAVINGS BONDS VOLUNTEER CONFERENCE
COTILLION ROOM, SHERATON PARK HOTEL, WASHINGTON, D.C.
WEDNESDAY, JANUARY 10, 1968, 1:55 P. M., EST

Chairman Gwinn, Distinguished Guests, Ladies and
Gentlemen -- I am delighted to be here with you and to witness
the inspiring example that this superb audience is giving the
American people.
As volunteers in the cause of good citizenship, you are
putting patriotism into practice
You are demonstrating
not your rights -- but your responsibilities.
Your numbers are impressive and the importance of your
callings more so. You exemplify the simple truth on the cover
of your colorful campaign brochure as stated by a great
President -- "I go for all sharing the privileges of the Government who assist in hearing its burdens."
In an altogether fitting observance of New Year's day,
President Johnson launched an Action Program to maintain the
strength of the dollar and preserve the soundness of the Free
World monetary system by restoring our international p;)Hments
to balance.
This was an act of singular courage and decisiveness,
but also an act of challenge -- to you and to me -- whatever our
respective callings -- public or private.
The challenge was to all responsible citizens to join
in the "very necessary and laudable effort to preserve our
country's financial strength."
Today we Launch a related and equally laudable effort for
the same noble purpose -- for the sale of U.Se Savings Bonds
like the restoration of our balance of payments to equilibrium,
will preserve a strong dollar -- at home or abroad.
j

F-1127

- 2 -

And that strong dollar is the bulwark of both our domestic
and international monetary system.
It has helped bring the greatest economic miracles of
all times.
It has underwritten unprecedented prosperity for the
people of the United States who are now in the 83rd month of
sustained economic growth shared with our near neighbors.
It has helped bring back a war-torn Europe and Japan to
share in that prosperity.
It is helping to bring new life and strength and hope to
the developing world of Asia, Africa and Latin America.
It is turning back the naked aggression in Southeast Asia,
which, if left unchecked, would light the fires and fears of
war in other parts of the world.
The strength of the world economy and the functioning of
the international monetary system depend to a large extent on
the level of economic activity in the United States and the
maintenance of a stable dollar -- stable in terms of prices
and of exchange rates.
Yes, as the President said on New Year's day -- a strong
dollar protects and preserves the prosperity of businessman
and banker, worker and farmer -- here and overseas -- as it
~s restoring peace and security.
And it is our job to protect and preserve the strength of
the dollar for these tasks in the years ahead.
The Ne\", Year is a time for action -- for decisive action
pursuant to firm resolution.
Today -- this month -- we are concerned with three related
areas for decisive action and firm resolution to strengthen
the dollar by:
taking action to deal directly with our balance
of payments deficit through the selective
temporary and longer term measures set forth by
the President on January 1;

- 3 -

making it "the first order of business" -as termed by the President -- to restore the
first line of defense of the dollar -- a
strong American economy -- by moving decisively
in the direction of balance in our budget and
stability in prices and unit labor costs with
the enactment of the anti-inflation tax increase,
coupled with an austere budget, appropriate
monetary policy, and a more effective voluntary
program of wage-price restraint, and
launching here today the most intensive,
effective effort since World War II to meet
to the maximum extent the government's borrowing
needs outside the over-crowded money markets
through the sale of U.S. Savings Bonds and
Freedom Shares, thereby financing the debt in
an anti-inflationary manner.

First, I would like to discuss briefly three questions that
seem to arise frequently about the President's new balance of
payments program.
Why were these measures -- some of them drastic and
unprecedented -- taken at this particular time when we have had
this problem around for a long time and it concerns a deficit
that is only a fraction of one percent of our national output
of goods and services?
It is apparent that even today, many of our people are not
fully aware of the urgent necessity of restoring a balance in
our international payments. The U. S. economy is strong and
prosperous. The international transactions of the United
States, while very large in terms of the world economy, are
small relative to our total production, consumption and
investment. Why should the United States or the world be
disturbed about a balance of payments deficit that at worst
has been only a fraction of one percent of our output of
goods and services?
Despite the magnitude of our domestic economy, the foreign
transactions of the United States are very important to our
economic well-being and indispensable to the Free World,
Imports of foodstuffs, raw materials and finished goods are

- 4 essential for our production and our high standard of living.
The overseas expenditures of the U.S. Government for foreign
aid and defense are vital to our objectives of world peace
and security. U. S. private foreign investment or lending
is profitable to our banking and business institutions,
important for economic growth and development in many other
countries, and an inherent part of the functions of the dollar
as the preeminent international currency.
The cost of these imports, security expenditure::; abroad,
foreign investment, and -- yes -- our travels to other lands
for pleasure or profit, must be paid for by exports of goods
and services, the earning::; of our foreign investments, foreign
investment and tourism in the United States, dnd other foreign
exchange rece ipts. When our total fore ign pa~lments are more than
our foreign receipts, some of the excess dollars received by
foreigners are sold to their monetary authorities in return
for local currency.
To some extent and for some time, foreign centrJl odnk~
are \villing to add such dollars to their reserves. but v;h.en
the accumulation of dollars is L.1.rge in amount and cnrLtirJuc~;
for a long time, some foreign central banks no longe} ddd
these dollars to their re~erves but convert them into gold.
Our total fore ign payments [laVe exceeded our tot.:,
foreign receipts steadily since 1958. As our gold re~ rves
~Jere very large then - - they w'ere larger at l11e end 0 f 19 5 ~.'
than they had been a t the end of 1950 - - there was no uq~ency
dbout restoring our balance of payments. In fact, near!,!
all countries had very small reserves and many :J'_'re L'dg r to
add to their dollar reserves.
i

Nevertheless, President Eisenhower instructed the
Department of Defense and other Government aglncies to
economize on their foreign expenditures. Pre'ident Kennedy
strengthened the earlier program and introduc d new measures,
including those designed to increase U. S. ex lorts, to hold
down U. S. purchases of foreign securities and to increase
foreign purchases of U.S sccuritiesc A renewed capital
outflow in 1964 made it necessary for President Johnson to
introduce a voluntary program for holding down foreign direct
investment and foreign bank loans.
e

- 5 It had been hoped that the normal adjustment of
international payments would enable us to restore our payments
without restrictive measures. In fact, from 1959 to 1964, we
made good progress in reducing our payments deficit because of
the growth of our exports of goods and services, and because
of the rise in earnings from our foreign investments, and
because of the savings on the government account. The sharp
increase in our private capital outflow, however, prevented the
achievement of balance in 1964.
In 1965 and 1966, the accelerated expansion in the U. S.
economy and the war in Vietnam placed renewed pressure on the
balance of paymentso The great boom resulted in an extraordinary
increase of imports, very much more than the increase of exports o
The costs of our forces in Vietnam added substantially to our
foreign payments. Thus, while the voluntary program reduced
the capital outflow considerable from the peak of 1964, the
payments deficit persisted. No progress was made in 1967 because
our imports continued to rise nearly as much as our exports, the
foreign exchange costs of Vietnam rose further to over $105
billion, and private capital outflows and the tourism deficit
again increased.
The devaluation of sterling '_Jl~ought the balance of
payments problem to an acute stage. It resulted in a loss
of confidence in currencies and vJas accompanied by a large
outflow of foreign funds from the United States and a burst of
speculative buying of gold. This was a threat not only to the
dollar but to the international monetary system as a \vhole.
While the speculation was repulsed w"ith the coopera tion of
the members of the gold pool, it has underlined the urgency of
placing the dollar once more in d7'. impregnable position. With
the implementation of the Rio resolution for creating Special
Drawing Rights by the Internatiolld1 ~lonetary Fund, trll) \vorld will
be assured of an adequate supply of reserves without the
necessity of depending on continuco U.S. deficits. The time
has come, therefore, when it is nc'cpssarv and dc~;irable to
t~ke decisive measures to eliminate the payments deficit. That
will be done through the Action Program.

- 6 -

The second question often raised in connection with the
President's new balance of payments program is why were measures
selected that were restrictive of spending abroad in the private
sector -- business and direct investment, banking and
tourism -- instead of reducing Government expenditures overseas?
The answer is twofold. For some years the Govenlment has
conducted a rigorous program to reduce and neutralize the
balance of payments costs of its overseas expenditures
resulting in the saving of billions of dollars of foreign
exchange. Government spending abroad consists primarily of
military expenditures resulting from the positioning of
our military forces beyond our borders in the interest of
maintaining our security and that of our allies in Europe
and the Far East, and foreign aid provided to certain of the
less developed countries directly or in association with
other financially powerful nations in international
organizations such as the World Bank, the Inter-American
Development Bank and the Asian Development Bank.
In the field of military expenditures a very stringent
program, developed and rigorously executed by the Defense
Department under the leadership of Secretary McNamara, has
saved billions of dollars in foreign exchange costs of our
military expenditures abroad. I invite any who raise the
question as to what the Government is doing to hold down the
balance of payments consequences of its own expenditures abroad
to secure a copy and ready carefully a 26 page Report released
last week by the Department of Defense. That Report reviewed
the most intensive program being executed by that Department
in a variety of measures to reduce the balance of payments
impact of maintaining our security abroad.
For a few examples -- actual numbers of military perspnnel
deployed abroad have been reduced to the degree consistent with
our security commitments to our allies.

- 7 Military strength levels in Western Europe have been
reduced by 67,000 since the peak of the Berlin build-up in
March 1962 and there will be an additional reduction of
35,000 in 1968 resulting from arrangements made last year
on a new force rotation principle.
There has been a continuing effort to encourage
participation by military personnel stationed in foreign
countries in voluntary programs designed to channel available
disposable income back to the United States -- premiums on
savings returned home, the use of military payments
certificates in Vietnam and, more recently, the establishment
of a rest and recuperation program in Hawaii for military
personnel serving in South Vietnam are examples.
Actions taken to reduce the number of foreign nationals
employed in connection with military operations abroad has
resulted in substantial reduction of this category of
foreign exchange cost in all areas except Southeast
Asia.
Expenditure for material, supplies and services and
major equipment from U. S. sources rather than off shore
has received very great emphasis. The Defense Department is
also attempting to achieve maximum feasible use of U.S. owned
excess currencies and barter arrangements as a means of conserving defense dollar expenditures entering into the
b,.lance of payments.
A program to conduct sales of U.S. type military equipment
to our allies to further the practice of cooperative logistics
and standardization of equipment and reduce costs to our allies
and
ourselves has had the result of offsetting, at least
part~ally, the unfavorable payments impact of our deployments
abroad in the interest of collective defense. Receipts from
these sales have increased from an annual rate of
$300 million a year in fiscal 1961 to close to $lu6 billion
in fiscal 1967.

The reduction of the foreign exchange impact of foreign
aid by tying it to the purchase of U.So goods and services
a program inaugurated in the latter part of the Eisenhower

- 8 Administration -- has been rigourously pursued. Whereas in
1959 only forty percent of our bilateral aid dollars were being
sp~on U.S. goods and services, tying procedures have been
continually s'trengthened so that the percentage has been
increased to nearly ninety percent. Recognizing that
tying procurement to U.S. sources may not itself be
enough to reduce to the extent necessary the impact of the
aid program on the balance of payments if the purchAses made with
the funds merely substitute aid exports for commercial exports,
special efforts are being made to insure that aid f ILanced
exports will be "additional."
But the President's new balance of payments program did
not stop with pointing to past and current efforts to reduce
the impact of Government expenditures abroad on our balance
of payments. In speaking of these efforts he said: "I am
convinced that much more can be done. I believe we should set
as our target avoiding a drain of another $500 million on our
balance of payments."
To achieve this objective, he took three steps -- directing
the Secretaries of State, Treasury and Defense to ini.tiate
prompt negotiations with our al1ies to minimize further the
foreign exchange costs of stationing our troops within
their borders, instructing the Director of the hudg~~ to find
ways of reducing the number of Government civilian f'l"""1loyees
working overseas, and ins truc ting the Secre tary of Dt-~ tense
to find ways to reduce further the foreign exchange i~pact
of personal spending by U. S. forces and their d(-'pencitc:nts
in Europe.
Of course, there are those who would argue that
Government expenditures overseas should be further reduced
by bringing our forces back to the United States into a kind
of "fortress America." To this contention the anS\\7(,'r is
clear. In the words of the President: "We cannot forego
our essential commitments abroad, on which Am,Jrica';:, ~,::-curity
and survival depend."
When a family has a cash stringency because thF're is more
outgo than there is income and it has to cut c::'\,m 0:-: ?:Jending
and/or try to increase its earnings, I believ( the heal'; of that
family would make a very poor choice of meane if hE:' _1 ~(ided to
cancel the insurance policies on which family st:?cur:...:_ ~,,7as
based.

- 9 -

The third question asked about the President's new balance of
payments program is -- won't the reduction of outflow of dollars
from the United States or flow-back of dollars to the United States
cause a sharp deflation in the remainder of the world?
Again, the answer is in two parts. First, the monetary and
fiscal authorities in other countries can take domestic measures
to provide additional money and credit in their own currencies
for the dollars that no longer come or the dollars that go home
by adopting more expansionary monetary and fiscal policies.
Second, the early availability of additional monetary
reserves to the world's total in the form of Special Drawing
Rights in the International Monetary Fund through a new facility
now being provided by the collective action of the 106 member
countries in that organization should remove the concern that
the elimination of the U. S. deficit will endanger a healthy
growth in the monetary reserves of the rest of the world.
In past years there have been fears that more intensive
action to eliminate the deficits in our balance of
payments which have characterized past years and added
to the reserves of other nations at a time when little, if
any, newly mined gold was being added to world monetary
reserves would cause a worldwide recession as a scramble
by countries for reserves resulted in "begger thy
neighbor" policies, sharp deflation or escalating international interest rates. Now the risks of cutting our
deficit too much are negligible.

10 Last September at the Annual Meeting of the International
Monetary Fund in Brazil the Governors representing the 106 member
countries unanimously approved a resolution directing the
submission to Governments by March 31, 1968 of the first major
amendment to the Articles of Agreement of the IMF since the original
Agreement at Bretton Woods in 1944. This amendment, the
product of two years of intensive negotiations inaugurated in
July 1965 at the initiative of our President, would provide
a facility for the deliberate creation of additional monetary
reserves supplementary to gold and the reserve currencies such
as dollars in the form of "Special Drawing Rights." These Rights
would be distributed to the central banks of the 106 member
countries in accordance with their percentage quotas in the
~und.
They could be used for an unconditional call on tre
currencies of other countries in accordance with procedures
set forth in an extensive "Outline of a Plan" which was
approved as a basis for the amendment.
When operational -- this new facility will supply additional
liquidity to the world in amounts needed to accommodate
an increasing volume of trade and capital movements o The
international monetary system ~ould no longer depend for
additional reserves on newly mined gold excess to increasing
industrial and decorative use and sporadic speculative demand
a~d additions to the holdings of dollars in official reserves
of other countries resulting from variable deficits in U. S.
balance of payments.
In the words of the President, as our movement toward
balance curbs the flow of dollars into international reserves ,
"it will therefore be vital to speed up plans for the creation
of new reserves -- the Special Drawing Rights -- in the
International Monetary Fund. These new reserves will be a
welcome companion to gold and dollars, and will strengthen the
gold exchange standard ll
o

- 11 -

I have discussed the three questions most often raised
about the President's new balance of payments program. Sometimes
those who have not studied the President's statement carefully
ask a fourth question -- why does the program try to restrict
certain outflows instead of tackling the more fundamental
problem of handling our internal economy so as to avoid the
inflation that is the root cause of the problem?
The answer is that the President's balance of payments program
incorporates in very specific terms measures for tackling this
fundamental problem. Indeed, he labels them in his Message
as "the first order of business" and uses the word "urgent"
in describing them saying: "No business before the returning
Congress will be more urgent than this: to enact the antiinflation tax which I have sought for almost a year. Coupled
with our expenditure controls and appropriate monetary policy,
this will help to stem the inflationary pressurffi which now
threaten our economic prosperity and our trade surplus."
In addition, the President directed his Cabinet officers
to work with leaders of business and labor "to make more
effective our voluntary program of wage-price restraint 'and'
prevent our exports from being 'reduced or our imports increased
by crippling work stoppages in the year ahead."
This brings us in a natural transition to a concern for
the strength and stability of the U. S. economy which is the
first line of defense of the dollar.
To sustain the kind of economy that has given us nearly
seven years of continuous growth, we have urgent business before us.
We need a tax increase, and we need it now.
President Johnson last August requested a temporary, ten
percent surcharge. He did this in the face of a dangerous
deficit, rising interest rates and the threat of unacceptable
inflationary pressures.
Since that time a consensus in favor of a tax increase has
~merged among responsible leaders throughout the country,
including many of you here today. It takes a sense of true
responsibility for an industrialist, who is responsible to his
stockholders, to recommend greater taxes.
The labor leader, elected by the members of his union to
represent their best interest, must show a similar sense of
wise fortitude.

12 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.
And the responsible journalist and business writer, whose
views often mold the public thinking on important questions
affecting the economic course of our daily lives, must be doubly
cautious about what he commits to paper.
In a way, all of these have as much to lose from making
wrong judgment on this question as a member of Congress.
But -- to get the action that counts we need to add to the
singular near unanimity among many of the nation's foremost
businessmen and labor leaders, economists, industrialists,
bankers and financial leaders who have recommended a tax increase
the votes of the majority of the members of the House of
Representatives and the Senate.
A failure to take this tax action promptly will risk a
declining trade surplus. This trade surplus is the mainstay
of our balance of payments position. It can rapid1y decline
as it did in late 1965 and 1966 -- when a flood tide of imports
were induced by an economy running at a very high rate of speed.
When our rate of economic growth in money terms expands at a
rate of eight or nine percent, there is an increasing propensity
to import. In that situation, imports occupy an increasing
percentage of our gross national product and our trade surplus
evaporates. We cannot afford to let that happen, cancelling
our savings effected by the direct measures in the President's
program.
A failure to take this tax action promptly and decisively
will cause strain, tension and a scramble in our domestic credit
markets, endangering the housing industry and the satisfaction
of credit needs of states and local government and small business
on reasonable terms.
A failure to take this tax action promptly will give rise
to doubt at home and abroad on the health of the dollar -- and
the will and capacity of the American Government and people to
protect it from the internal danger of an inflation which is
accompanied by a wage-price spiral.
Let me be clear: The Number One domestic and international legislative objective of this Administration remains
passage of this badly needed tax surcharge.
I ask you to give your help in support of this measure.

- 13 This brings us to the last of the three programs being
aunched this January to strengthen the dollar -- your principal
usiness of the day and, I hope, an important part of your
usiness for the year -- promoting the sale of U. S. Savings
onds.
Buying and holding Uo So Savings Bonds are actions more
mportant to our nation's economic stability today than ever
,eforeo These bonds not only support our fighting men in
'ietnam and our commitment to the defense of freedom throughlut the world, but they strengthen the dollar by strengthening
lur economy at home and guarding against the forces of
.nf1ation o
In the days and months to come, all of us -- in government,
.n banking and finance, in industry and commerce -- must share
n extra burden of responsibility in maintaining a steady
conomic footing while we continue to move ahead o
Now, more than ever before, it is essential that we
inance our debt in the soundest possible way; that we do
11 we can to place more of the debt in the hands of savers.
ou well know that participation in the Savings Bonds Program
s a measurable and effective means of accomplishing both these
bjectives, because you have done an outstanding and admirable
ales job.
I am convinced our program can be expanded o We have good
products." Savings Bonds are an attractive investment
To
e sure, higher rates are available in today's markets than
he 4015 percent rate of interest on our S2vings Bonds
But
ur bonds do have advantages, namely, safety, convenience,
iquidity, and certain tax benefits in terms of deferred
ncome as well as exemption from State and local income
axationo Similarily, our newer "Freedom Shares" with a 4.74
ercent rate of interest are very attractive and 'vorthwhile
nvestments too.
0

In closing let me express a debt of gratitude from
reasury to you who are doing so much in the promotion of the
ale of Savings Bonds
The growing stockpile of Savings Bonds
ssists the Treasury materially in managing the nation's
inances -- maintaining a stable economy at home, and a strong
:onomic position internationally, to back our stand for
reedom in Vietnam and elsewhere in the world"
0

The fact that so many Americans participate in the regular
lrchase of Savings Bonds is irrefutable and inspiring evidence
E the effective energies and talents that you leaders of
lSiness, labor and finance have put into our programs to

TREASURY DEPARTMENT
(

January 10, 1968

FOR IMMEDIATE RELEASE
TREASURY MARKET TRANSACTIONS IN DECEMBER

During December 19c7, market transactions in
direct and guaranteed securities of the G8vernment
investment accounts resulted in net purchases by
the Treasury Department of $51,741,000.00.

000

F-1128

TREASURY DEPARTMENT

FOR ll1MEDIATE RELEASE
THURSDAY, JANUARY 11, 1968
McKINNEY OUTLINES TASK FORCE ON TRAVEL WORK
PROGRAM AND ANNOUNCES APPOINTMENT OF CO~~ITTEE CHAIRMEN
Robert M. McKinney, chairman of the Industry-Government
Special Task Force on Travel, today listed 12 areas of study the
Task Force will pursue before submitting recommendations to
the President on how to attract more visitors to the United
States, and reduce our balance of payments deficit. He
also announced the appointment of the chairmen who will head
the 12 working parties.
Objectives of the Task Force, ;'lr. HcKinney said, are:
(1) to detcrTline practical steps h~hich can be taken

quickly to produce early impro'Jement in the
travel sector of the balance of payments;
(2) to determine medium and long ::(rm measures to

bring u.~. travel expenditure,~ and receipts into
better halance) and to recommend the necessary
steps that should be taken in both the private
and government sectors to accomplish this
objective; and
(3) to determine how best to help foreign visitors

improve their knowledge and understanding of
the u.s. and the American people through firsthand experience, and to provide a new bridge of
understanding through tourism between the U.S.
and other countries, including Eastern European
and developing nations.

F-1129

- 2 -

The 12 committee chairmen and the areas of activity each
committee will study are:
COMMITTEE ONE -- Chairman, William D. Patterson,
The Saturday Review
Provide statistical information, including projections
of u.s. travel receipts and expenditures in 1970 and 1975, under
various assumptions. Submit an analysis of factors which
tend to limit or impede travel or which would be advantageous
to build upon. Recommend the most promising major markets for
rapid expansion of visitor travel, and analyze current travel
trends within the united States.
COMMITTEE TWO -- Chairman, E. O. Cocke, Trans World Airlines
Evaluate the effectiveness of present American travel
promotional programs by U. S. private industry, including
sources of funding; target areas and objectives, and scale of
efforts. Analy~e potential new target areas; magnitude of
efforts required; methods for financing new programs; new
government-indu~try roles; ways to increase assistance from
travel-related ir.dustries, and the possibility of cooperative
participation by federal, state and local governments with
private industrT. Recommend how better to mobilize the
travel industry ,oth in the U. S. and foreign countries,
and new promotion.,.l programs most likely to produce significant
response.
COMMITTEE THREE -- Chairman, Howard L. Clark,
American Express Company
Consider solutions to problems currently encountered in
creating and selling tours within the United States.
Recommend measures required to design a~d produce tours
which can compete successfully with tours offered in
competing traVEl areas outside the U.S.; ways to increase
student and educ,.tiondl travel; travel for purposes of
conventions, conferences, and incentive programs, and how to
enlist the cooperation of U.S. interna~ional corporations and
organiza tions.

- 3 COMMITTEE FOUR
Chairman, Willis G. Lipscomb,
Pan American World Airways
Report what new efforts should be asked from the
:ransportation industry -- including airline, bus, railroad,
:hipping, car rental, sightseeing, automobile, tire and
)etroleum companies.
COMMITTEE FIVE -- Chairman, Edward E. Carlson,
Western International Hotels, Inc.
Report on what new efforts should be asked from hotels
lnd potential providers of other accommodations (e.g., youth
lostels, college dormitories). Seek new government efforts
:or improving services and facilities in federal, state, and
_ocal parks, monument areas, etc.
COMMITTEE SIX -- Chairman, George Moore,
First National City Bank of New York
Report on what new efforts should be asked from banking,
:redit card, and insurance companies.
COMMITTEE SEVEN -- Chairman, Frank N. Ikard,
American Petroleum Institute
Suggest new efforts which would assist in increasing travel
:0 the U.S. through better visitor information, services, and
LOS t programs.
Cons ider trave 1 a ttrac tions, museums,
;ightseeing serv~ces, guides, interpreters and host programs
_n major cities and resorts, as well as guide books, maps,
:ravel brochures, and news media in formulating recommendations.
:eek new ways to help foreign visitors improve their knowledge
lnd understanding of the U.S. through first-hand experience
lith our way of life, attitudes, and aspirations.
COMMITTEE EIGHT -- Chairman, Winston V. Morrow, Jr.,
Avis Rent a Car Service
Advise on ways and means of reducing costs of travel to
nd within the U. S. and of acquainting potential trave lers with
uch lowered costs. Consider the cumulative impact of costs of
ransportation to and within the U.S., accommodations, meals,
hopping, sightseeing, travel attractions, accident, and
~edical inSl1rancp
~r£'

COMMITTEE NINE -- Chairman, Donald G. Agger,
Department of Transportation
Examine domestic and international transportation pc,} icies
of the federal government as they affect the balance of payments.
Study federal policies on rates, including rate differentials
and "directional fares" -- fares, making travel to the U. s.
attractive -- for international travelers, carrier certifications,
bilateral and multilateral transport agreements, U.S. and for2ign
regulations impeding competition by U.S. carriers, special
arrangements for group travel and other methods of reducing (J_ISt
of transportation to the U.S. Suggest ways of assisting u.s.
flag carriers to obtain a larger share of international travel.
Consider ways of simplifying and facilitating frontier
formalities (visas, customs, in1migration, agriculture
inspection, public health, etc.). Consider how better to
mobilize federal programs and resources affecting tourism,
including the role of a national tourist office. Consider
possible relief from indirect and direct taxes for visitors
and/or the travel industry. Consider anti-trust matters
related to coordinated domestic programs of the tourist and
travel industries (cOOlmon special rates for foreign tourists
in hotels and restaurants, pooling of language and other
special service resources, etc.).
COMMITTEE TEN -- Chairman, Frank Hildenbrand, Texas
Tourist Development Agency
Explore new ways for state and local governments to assist
through tax incentives, promotional programs, facilities
development, host activities, and other measures. Seek ways of
increasing cooperation with federal and/or travel industry
promotion and other programs -- including possibilities of the
government matching private promotional funds.
COMMITTEE ELEVEN -- Chairman a John Black,
United States Travel Service
Report on what can be learned from other governments and
governmental entities about methods of improving visitor
earnings
Explore means of reducing barriers imposed by
foreign governments which impede travel to the u.s. (Such 32
currency restrictions, travel restrictions, free entry
provisions, etc.). Consider ways of increasing travel fro,",i
Eastern European and developing nations to the U.S.
<

- 5 -

COMMITTEE TWELVE -- Chairman, Stuart Guy Tipton,
Air Transport Association
Draft a new natLonal travel policy in line with the
objectives of the Task Force and leading to intensified travel
within the U.S. by both U.S. citizens and foreign nationals
through: new services and technologies in the travel
industry; new facilities and attractions so designed and
located as to have maximum impact in attracting and serving
foreign visitors; new methods of cooperation between travel
and travel-related industries and the federal government; new
relationships between federal, state, and local government,
and new legislation and/or regulatory and administrative
practices designed to make the U. S. more competitive in
the international tourist market.

000

TREASURY DEPARTMENT
::-..::

FOR A.M. RELEASE
SATURDAY, JANUARY 13, 1968

January 12, 1968

MELVIN I. WHITE RECEIVES TREASURY AWARD
ON LEAVING POST
Melvin I. White, who is leaving the Treasury today to resume
his teaching post at Brooklyn College, City University of
New York, has been awarded the Department's Exceptional Service
Award by Secre tary of the Treasury Henry H. Fowler.
During the past two years Mr. White has been Deputy Assistant
Secretary for Tax Policy to Stanley S. Surrey, Assistant
Secretary of the Treasury for Tax Policy.
Mr. White, a professor of economics, took a leave of absence
from Brooklyn College early in 1966. Prior to his appointment as
Deputy Assistant Secretary, he was a Consultant to the Treasury
In tax matters, a position he will continue to hold.
Secretary Fowler cited Mr. White's work in helping shape the
~hinking, within and without the Treasury, on the nature and
;tructure of tax changes to meet swings in our economy, his work
Ln the development of the major domestic legislative measures of
L966 and 1967 -- the investment credit legislation and the
;urcharge proposal -- and his efforts to develop major research
,tudies in tax policy, with special emphasis on the use of
~conometric and other analytical techniques.
The award citation said:
"In all ... of his labors in his two years with
the Department, he has displayed a rare ability to
comprehend complex matters and translate them with
remarkable clarity into more easily understood
concepts."
A native of Cincinnati, Ohio, Mr. White, 49, holds a
:.A, degree with High Honors from the University of Cincinnati
.nd a Ph.D. in economics from Columbia University where he
'as a University Fellow. He is a member of Phi Beta Kappa and
,£ the honorary forensic society, Tau Kappa Alpha.

-1130

- 2 He served as a staff economist with the Council of
Economic Advisers in 1947-1948 and as an economist on the
staff of the Federal Reserve Board, 1948-1950.
Mr. White, who was a Fulbright Professor in Norway and
France in 1956-1957, also has been a consultant on various
fiscal projects for the City of New York. He also has served
as a research associate with the National Bureau of Economic
Research, New York, and has performed research work for the
Brookings Institution, Washington. He is the author of numerous
articles in various economic journals, and is a member of several
professional organizations in the field of economics.
Mr. White is rIB rried to the former Anne Schapiro of
New York, a statistician. They have four children. They made
their home at 5526 Westbard Avenue, Bethesda, Maryland.
A copy of the citation which accompanied the award is
attached.

000

Attachment

CITATION
Exceptional

S~v~ce ~

Me.lvin I. While

A6 Vepu,t~ A6~.i.6.tant SeCJleiaJu! 601l. Tax Polic.q, Melv~n. 1. WhUe hM been a
pJt.i.nupal memb~ 06 the TlleMuJr..1j VepaJrhnent'~ 6.i.6c.al pouc.y team.
He hM had a ieacUng pallt ~ ~ hap..ing .the thinlU.ng, wLtMn and wLthout the
TlleJUWtIj, on the ttatwte and ~tJr.uc.tuJte 06 tax c.hang~ to meet ~w.i.ng~ .in OuJr..
ec.onom~.
Tw ied to an active pa!l.tiupa;t(.on ..in the majoll domuUc. .tax
ieg.i.6£.tLtive meMuJr..~ 06 1966 and 1967--:the ~vutme.nt c.IlecUt ~~pen6~on and
llutolUlt.ion and the ~uJr..c.haJr.ge pMpo~al.. In adcUtion, he wo piafjed a kefj Iloie
Vl the 60Jtm.d.a.tion 06 pouc.y .in the .tmpoJttant Mea 06 tax lle601lm. Aiong~,.tde
theA e C.WUlent PJt09~, he ~ matvU..all1j advCUtc.ed the VepaJttment' ~ e 660Jr.M to
deveiop majoJt'LueaJlc.h ~tu.~u ..in tax poLictl, w.ith ~pec.ia{ emphMi...6 on the ~e
06 economeVtic an.d othell ana...ifjtic.a...i tec.hn"iquu.

1n o.i.1. 0 6 th(!.'~ e activiliu, and t.he !teAt 06 h-W iabOJrA ,.tn IU.IJ two 1jea.JU,
luah the VepaJr.-tment: he. hM d~pialje.d a JuVte ab~1j to c.ompllehend c.omplex
mcLtteM and tAaJ"l.~fa--te them with 1tCJn((p(kaCie. (~aJ7.A.ty .<-nto mOlle eMily undUr.6tood
c.onc.epu. To h-i..-6 WOl1J' he hM bJtought a k.een and ~c.hol.aJr.ifj m..ind, ~olidilj
9ILounde..d .in the ie.aJ[tUno. 06 pu.bUc. 6.<-ruutc.e, and It 6u.U ru.tUJtenU~ 06 the c.onc.eJtn.6
and lL6U 06 GOVellnment poUuu. H.i.6 deep undeJt,6.tandhtg 06 the ILup0n.6,.tb,i,.t,Uiu
06 the TlleMWtY and i l i 1L0ie.. Vt 6~cal. poUc./j htu, ~e,!tved the VepaJttment well.
That ~e..llv,.tce 6u.l.l.fj m~ th.i.6 Except"ionai SeJr.v.<-c.e Awalld.

TREASURY DEPARTMENT
(

FOR IMMEDIATE RELEASE

January 12, 1968

FRANK W. SCHIFF TO BECOME NEW
DEPUTY LmDER SECRETARY FOR MONETARY AFFAIRS
Frank W. Schiff, a senior staff economist of the President's
Council of Economic Advisers, will be appointed Deputy Under
Secretary for Monetary Affairs ,Treasury Secretary Henry H.
Fowler announced today.
Mr. Schiff ':'Jill succeed Peter D. Sternlight, who resigned
in November to return to the Federal Reserve Bank of New York
after two years' service as Deputy Under Secretary.
Mr. Sternlight continued to perform most of the duties of the
Treasury office on a loan basis until December 22.
As Deputy Under Secretary, Mr. Schiff will assist
Frederick L. Deming, Under Secretary for Monetary Affairs,
with domestic and international financial matters, and will
supervise Treasury's Office of Debt Analysis, Financial
Analysis, and Domestic Gold and Silver Operations.
Mr. Schiff is expected to assume his duties at Treasury in
early February. During the interim, the Treasury has arranged
with the Board of Governors of the Federal Reserve System for
Albert R. Koch, Deputy Director of the Federal Reserve's
Division of Research and Statistics, to serve as a
Treasury consultant on monetary affairs.
Mr. Schiff has played an important role since 1964 in
the Council of Economic Advisers' work on domestic and
international financial problems. He has been closely involved
in international discussions on balance of payments adjustment
and international liquidity. As a member of the United States
delegation to Working Party 3, the balance of payments subcommittee of the Organization for Economic Cooperation and
Development, he was a major contributor to the subcommittee's
report on the balance of payments adjustment process.
F-113l

- 2 From 1951 until the fall of 1964, Mr. Schiff was with
the Research Department of the Federal Reserve Bank of
New York, holding varied positions relating to domestic and
international finance. He was editor for several years of the
Bank's Monthly Review and Annual ~eport. He also served as a
member of a System-wide committee that undertook a basic
reevaluation of the Federal Reserve's financial research
program. In 1955 and again in 1957, he went to Vietnam as
adviser to the newly created National Bank. He was an Assistant
Vice President of the New York Federal Reserve Bank when he was
granted leave of absence to join the staff of the Council of
Economic Advisers.
Mr, Schiff, 46, is a native of Greifswald, Germany. He
attended high school in New Rochelle, New York, and received
an A.B. degree from Columbia University in 1942. After
serving as ~n executive in private industry and overseas with
the U.S. Army during World War II, he pursued graduate studies
in economics at Columbia. He also served as a member of the
university's economics faculty from 1946 to 1951.
Mr. Schiff is a member of Phi Beta Kappa,the Council on
Foreign Relations, the American Economic Association, and the
American Finance Association. He lives at 1330 New Hampshire
Avenue, N. W., Washington, D. C.
Mr. Koch, who is serving as a Treasury consultant until
Mr. Schiff assumes his new duties, received a B.A. degree
from Oberlin College in 1936 and M.A. and Ph.D. degrees
from Columbia University in 1937 and 1943, respectively.
After employment at the National Bureau of Economic Research,
teaching experience at the Wharton School of Finance, University
of Pennsylvania, and military service in World War II, he
joined the research staff of the Board of Governors of the
Federal Reserve System in 1946. He has been Deputy Director of
the Division of Research and Statistics since 1966.

000

TREASUXY DEPARTMENT

Washington
FOR lELEASE ON DELIVERY
REMARKS OF THE HONORABLE ROBERT A. WALLACE
ASSISTANT SECRETARY OF THE TREASURY
BEFORE A LLl'lQ-iE~ OF THE SILVER USERS ASSOCIATI~
WALDORF-ASTORIA HOTEL, NEW YORK, NEW YORK
FRIDAY, JANUARY 12, 1968, 1:00 P.M.

THE TREASURY SILVER AND COINAGE PICTURE, JANUARY 1968

THE OPPORTUNITY TO DISCUSS THE SILVER AND COINAGE SITUATION WITH THE
SILVER USERS ASSOCIATION IS t-'()ST WELCOM:.

THIS GROUP HAS A NATURAL STAKE

IN SILVER, NOT SIWLY BECAUSE YOU "USE" IT, AS YOUR NM-E IWLIES, BUT BECAUSE
IT IS A VITAL INGREDIENT IN YOUR BUSINESSES.
C~SUMER.

THE REAL SILVER USER IS THE

DIRECTLY OR INDIRECTLY, THIS IS JUST ABOUT EVERY ONE OF US.

MOREOVER, I THINK IT'S ABOUT TIME I ADDRESSED ONE OF YOUR MEETINGS.
AFTER ALL, I HAVE BEEN CONCERNED WITH COINAGE AND SILVER SINCE 1961.

NOT

ONLY THAT, BUT, OBVIOUSLY, ONE OF MY KINSMEN STARTED A VERY IMPORTANT SILVER
USING FIRM -- WALLACE SILVERSMITHS.
WELL NOroI, JUST A ~NT.
WALLACE CO'JFUsED WITH THE

I WI LL HAVE TO CHECK THAT.

I tJAY HAVE THAT

IN THE SILVER PRODUCING AA£.A WHO STARTED THE

TOHN OF WALLACE, lDM-tO.
I MUST STRAIGHTEN THIS O.JT.

I HAVE THE SAME PROBLEM

REME~ERING

WHETHER I AM RELATED TO GEORGE WALLACE -- OR HENRY WALLACE.
PERHAPS I AM RELATED TO THEM ALL.
I SHALL KEEP MY

RE~Ks

BRIEF SINCE THIS HOULD BE THE LAST AUDIENCE

TO REQUIRE AN EDUCATION ON THE HISTORY OF SILVER PROBLEMS AND POLICIES.
CONSIDERING YOUR INTEREST IN SILVER, HOWEVER, YOU CERTAINLY HAVE A RIGHT TO
KNCM AS MUCH OF THE FACTS AS POSSIBLE.

MJREOVER, WHERE FACTS DRIFT INTO

OPINIONS ON POLICIES, YOU NEED TO KNOW THE CONSIDERATI~S INVOLVED IN REACHING
FINAL DECISIONS.

F-1132

- 2 -

THE JOINT COMMISSION ON THE COINAGE IS, OF COURSE, THE BASIC GROUP FOR
THE CONSIDERATION OF POLICY ALTERNATIVES.

IT WAS THE INTENT OF THE CONGRESS

IN CREATING IT WITH THE ENAC TMENT OF THE CO I NAGE ACT OF 1965 THAT THE COt+1 ISS ION
SHOULD PLAY A VI TAL ROLE IN THE FORMULATION OF ALL IMPORTAl'JT SILVER Al'JD
COINAGE POLICIES.

OF COURSE, WE IN THE TREASURY DEPARTMENT CANNOT AVOID

THE FINAL RESPONSIBILITY FOR ALL ACTIONS TAKEN.
THE COMMISSION HAS BEEN AN INVALUABLE ASSET TO THE COUNTRY.

OF ITS

24 t1:MBERS, 12 ARE LEADING M:MBERS OF CONGRESS WHO ARE CONCERNED WITH
SILVER POLICIES, 8 PUBLIC MEMBERS ARE APPOINTED BY PRESIDENT JOHNSON, AND
4 ARE DRAWN FRQ'1 THE EXECUT IVE BRANCH OF THE GOVERNM:NT.

TREASURY SECRETARY

FCMLER IS THE CHAI RJW.J.
THE COtVMISSION HAS t-£T THREE TIMES.

SIGNIFICANT ACTIONS WERE TAKEN

AFTER THE FIRST TWO MEETINGS ON MAY 18 AND JULY 14, 1967.

AFTER THE MAY

t1:ETlNG, THE TREASURY RESTRICTED SALES OF ITS SILVER AT THE $1.29 AN ()Lt.JCE
PRICE TO INDUSTRIAL USERS ONLY.
PRICE WAS DROPPED ALTOGETHER.

AFTER THE JULY M:ETING, THIS CEILING
SINCE THEN ALL SALES HAVE BEEN MADE ON THE

BASIS OF COMPETITIVE BIDS AT THE MARKET.

AT THE THIRD MEETING, WHICH TOOK

PLACE ON SEPTEMBER 18, THE COMMISSION REVIEWED DEVELOPMENTS FOLLOWING THEIR
PREVIOUS HISTORIC DECISIONS TO SEE IF ANY FURTHER CHANGES WERE WARRANTED.
NONE WERE RECOM'1:NDED.

THE NEXT M:ETING WILL BE MARCH 1, 1968, AT WHICH

TIt-'f .ANOTHER REVI E~~ OF CURRENT POll CI ES WI LL BE UNDERTAKEN.

- 3 COINAGE SITUATION
FOR SEVERAL YEARS, THE THREAT OF SEVERE COIN SHORTAGES HAS C~SISTENTLY
LLRKED IN THE BACKGR~D OF ALL OUR SILVER POLICIES -- SO t-UCH SO mAT ALL OF
THESE POLICIES HAVE BEEN GEARED TO THE PREVENTI(J-J OF ~T COULD BE A GENUINE
CATASTROPHE -- A NATI(]\! WITHOUT ENCXJGH COINS TO C~lXJCT ITS BUSINESS.
()JR M)ST DANGEROOS PERIOD IN THIS RESPECT WAS IN EARLY NOVEMBER 1965.
AT THJS TIt-'E, JUST BEFORE THE CHRISTMAS SEAS()\I OF PEAK COIN
DESPITE OUR

TRE~tOlJS

LEVEL OF COIN

PROOUCTI~,

AND

OJR FEDERAL RESERVE

INVENTORIES OF QUARTERS HAD ALM)ST CCM'LETELY DISAPPEARED.
~L Y

DE~D,

15 MI LL I G4 OF THESE CO I NS FOR THE ENT I RE COLNTRY.

WE HAD AVAILABLE

FOR~TE LY,

lJ'.!a: R

TH[ AUTHORITY OF THE COINAGE ACT PASSED A FEW M:)\JTHS BEFORE, WE HAD BEEN

AS! E TO PRODUCE 200 MILLI<l'i OF THE NEW ClAD QUARTERS WHICH WE QUICKLY PLACED
IN CIRCULATIG4, THEREBY AVOIDING WHAT MIGHT HAVE BEEN A REALLY MISERABLE
SITUATION.
EARLY IN 1966, I TOLD A CONGRESSIONAL COMMITTEE THAT AT LEAST IN THE
CASE OF THOSE COINS VITAL TO

CIRCULATI~

QUARTER -- TI-ERE WOULD BE NO

~RE

-- THE PENNY, NICKEL, DIME, AND

SH:>RTAGES.

NEVERTHELESS, WE STI LL FACED THE

TASK OF PRODUCING ENOUGH OF THE NEW ClAD DIMES AND QUARTERS TO OFFSET THE
POSSIBILITY OF A CQVPLETE DISAPPEARANCE OF SI LVER Dlt-lES AND QUARTERS BEFORE
WE COULD SAFE LY STOP TREASURY SALES OF S I LVE R AT $1. 29 AN
WE COULD ACCO'f>LISH THIS GOAL -- IN MAY OF 1967 -- WE WERE
RLtJ

(J-J

~CE

•

SHORTLY BE FORE

C~FR(]\!TED

WITH A

OUR SILVER SUPPLIES WHICH MADE IT NECESSARY FOR US TO STOP SALES OF

SILVER AT THIS PRICE EXCEPT TO THOSE WHO WERE IN THE SILVER BUSINESS.
BY MID-JULY OF 1967, WE HAD PRODUCED ENOUGH OF THE ClAD DIMES AND
QUARTERS TO REPLACE ALL THE SILVER COINS OF THESE DENOMINATI~S ESTIMATED TO
BE IN CIRCULATI~.

THUS, (]\! JULY 14 THE C~ISSI(J.J RECC>t-M:NDED, AND THE

TREASURY ADOPTED, A POLICY CEASING SALES OF SILVER AT $1.29 AN OUNCE.

- '+ FUT\ft SALES OF TREASURY SILVER WERE TO BE ~ BY THE GENERAL SERVI CES
ADMINISTRATION AT A RATE OF TWO MILLION OUNCES A WEEK.
AS A SAFETY FACTOR, THE FEDERAL RESERVE BANKS NO UHifR ISSlEO 51 LVER
COINS.

MIXED SILVER AND CLAD Dlt-'ES AND QUARTERS WHICH FL<W:D BACK FRG1 THE

BANKING SYSTEM TO THE FEDERAL RESERVE BANKS WERE HELD IN MINT ~D FEDERAL
RESERVE I NVENTOR I ES •

THE CO I NS I SSUED TO REPLACE THEM WERE ALL MADE OF THE

NON-SILVER, CLAD MATERIAL.
NOrl, IN EARLY JANUARY 1968, WE HAVE (i()\JE THROUGH
SEASON WITHOUT ANY PROBLEMS.

~OTHER

CHRISTKt6

NGJ SAY WITHOUT ANY EQUIVOCATICJJ

WHATSOEVER THAT THERE IS ABSOLUTELY NO DANGER OF A SHORTAGE OF QUARTERS,
DIMES, NICKELS, AND PENNIES IN THE FORESEEABLE FUTURE.
THE 40 PERCENT SILVER HAlF-DOLLAR REMAINS IN SHORT SUPPLY, BUT EVEN
THIS COIN HAS ACHIEVED CIRCULATICJJ IN MANY PARTS OF THE

C~TRY.

TREASURY SILVER SUPPLIES
AT THE LAST twEETING OF THE COINAGE CQVMI SS I()'J ON SEPTEf'o4BER 18, WE t-4ADE
A "BEST ESTIMATE" OF THE

1968.

OF SILVER \tet-iICH WOULD BE AVAILABLE CJJ JU'JE 30,

BY THAT TIfo't, WE WILL HAVE

ALLOTTED

TO THE OFFICE OF Et-'ERGENCY

Pl..PN'JING 165 MI LLION ()L.NCES OF SI LVER AS A DEFENSE STOCKPI LE.

t-()REOVER, AFTER

THAT DATE, SILVER CERTIFICATES WILL NO L()'JGER BE REDEEtW3LE FOR SILVER.
THE OEP STOCKPILE REQUlREt-£NT M:T AND SILVER CERTIFICATES NO

U)~GER

WITH

REDEEtvlABLE

FOR SILVER, \E CN-! KNOW BY Jl..NE 30 HGJ MJCH SILVER WE WILL HAVE AVAILABLE FOR
SALES TO THE MARKET AND FOR FUTURE COINAGE.

ALLOtrlING FOR THE C()-.JTINLED SALE

OF TREASURY SILVER AT A RATE OF TWO MILLI()'J OUNCES A WEEK, PROVIDING FOR THE
STOCKPILE REQUIRE~T, SILVER CERTIFICATE RE~t-'FTI~S AND COINAGE, OUR ESTIMATE
THEN WAS THAT THE ~T OF SILVER WE v.QULD HAVE AVAILABLE ON JLf\jE 3D, }c~68,

IN BULLION AND IN COINS, WOULD BE BETWEEN 350 AND 400 MILLICJJ OUNCES.
ADOITI()\lAL SILVER v.oULD BEC<M: AVAILABLE AFTER THAT DATE AS A RESULT OF
FUTURE INFLOWS OF SILVER COINAGE.

- 5FOUR

WAS~.

HAVE ELAPSED SINCE THAT PROJECTIeJ.!

TO DATE, WHICH TAKES INTO

ACCO~T

AN ADDITICtiAL FOUR

()JR EXPERIENCE

~TH'S INFL~

OF SILVER

COINS AND FOUR MONTH'S REDEMPTIONS OF SILVER CERTIFICATES, INDICATES THAT THIS
ESTI~TE

WAS ACCURATE.

AS WE HAD

~TICIPATED, Tt£

TREASURY'S TOTAl to..DINGS

OF SILVER IN BULLlCl'J Al'-JD COINS ARE NOW ACTUALLY LAAGER

THEY WERE LAST

SEPTEMBER, DESPITE THE COPPER STRIKE WHICH AFFECTS THOSE COMPANIES PRODUCING
SILVER AS A BYPRODUCT OF COPPER.
AS OF SEPTEfo'BER 18, WE HAD IN MINT Al'-JD FEDERAL RESERVE INVENTORIES Al'-J
ESTItJATED 125 MILLI()'.J o..tJCES OF SILVER IN THE FORM OF COINS.

SINCE TMAT TH£,

AN ADDITIONAL 85 MILLION OUNCES HAS BEEN TAKEN IN, BRINGING THE TOTAL ESTIMATED
h,jlDINGS OF SILVER IN COINS UP TO 210 MI LLI ON QlJ\lCES.
ESlItJATE OF SILVER AVAILABLE FRO'-1 THIS SOURCE BY
45 MILLION

O~CES.

J~E

~ET

THE SEPTEMBER

3D, WE NEED TO ADD a-.JLY

I AM C<l'-JFIDENT THAT WE WILL EASILY EXCEED THIS

At-'QI.J\JT.

WE HAVE NOT YET MELTED Al'-JY OF THESE BECAUSE OF THEIR POSSIBLE USE AS A
STANDBY SOURCE OF COINS IN CASE A NEED HAD DEVELOPED DURING THE 1967
CHRISTMAS SEASON.

THIS CONTINGENCY IS NGI PAST.

WHILE NOT NEEDED

N~,

THE

SILVER IN THESE COINS COULD BE MADE AVAILABLE FOR USEFUL PURPOSES BENEFICIAL
TO BOTH SILVER USERS Al'-JD TAXPAYERS WHENEVER NECESSARY.
SALES OF TREASURY SILVER
WHILE THERE WILL ALWAYS BE DIFFERENCES OF OPINION OVER DETAILS, BOTH
THE SILVER USERS AND TAXPAYERS HAVE ALREADY BENEFITED BY THE GSA SALES OF
SILVER BULLION.

SINCE AUGUST 4, GSA HAS SOLD 45 MILLION OUNCES OF SILVER

FOR USE IN THE MANUFACTURE OF SILVER USING PRODUCTS, Al'-JD THESE SALES HAVE
RESULTED IN A PROFIT OF $22-1/2 MILLION TO TAXPAYERS.
FOR SQ'.'f

TI~,

IT HAS BEEN THE DESIRE OF THE TREASURY

"GET OUT OF THE SILVER BUSINESS."

DEPART~NT

BY THIS WE ~Al'-JT THAT WE W.Al'-JTED TO STOP

CONTROLLING THE PRICE OF SILVER, WHICH HAD BEEN NECESSARY IN RECENT YEARS IN
ORDER TO PROTECT THE COINAGE.

THIS FINALLY BECAME POSSIBLE LAST JULY.

- 6 NOW THERE STILL MAY BE SOME UNCERTAINTY AS TO WHY THE TREASURY'S
WEEKLY SILVER OFFERING TO THE MARKET WAS SET AT TWO MILLION OUNCES.
RATlClW.E IS SItoflLY THIS:

THE

IF YOO EXCLUDE THE LNITED STATES FRa-1 THE FREE

WORLD, THERE IS VIRTUALLY NO SUPPLY-CONSUMPTION DEFICIT OF SILVER.
ACCQl..NT FOR THE ENTIRE FREE WORLD DEFICIT OF ABOUT 100
RIGHT HERE IN THE LNITED STATES.

MILLI~ ~CES

A YEAR

THIS IS NOT TO SAY THAT ALL THE SILVER

SUPPLIES IN THE WORLD ARE MADE AVAILABLE FOR USE IN MANUFACTURING -- SOME OF
IT MAY BE HELD FOR SPECULATIVE PURPOSES.
TREASURY
T'J

DEPART~NT

BUT I THINK FEW WooLD EXPECT THE

TO t-4AKE UP FOR WHATEVER SPECULATIVE HOARDING TAKES PLACE.

DO THAT WOULD BE TO CONTINUE CONTROLLING THE WORLD PRICE OF SILVER FROM

WASHINGTON.
THE TWO MILLION OUNCES A WEEK RATE WOULD GENERAlLY BE SUFFICIENT TO
REPLACE BOTH THE U. S. AND THE WORLD DEFICIT, HAVING A GENERALLY NEUTRAL
EFFECT ON THE PRICE OF SILVER.

SELLING SILVER AT A GREATER RATE SHooLD

THEORETICALLY HAVE A DEPRESSING EFFECT ON THE PRICE, WHILE SELLING IT AT
A LOOER RATE SHOULD HAVE THE EFFECT OF PUSHING UP THE PRICE.

SINCE IT WAS THE

DESIRE OF THE COMMISSION THAT SILVER SALES SHOULD HAVE A NEUTRAL EFFECT ON
THE PRICE, THE TWO MILLION OUNCES A WEEK RATE WAS SET.
CAN BE REVIEWED FROM TIME TO TIME.

OF COURSE, THIS RATE

IT SHOULD BE REMEMBERED, HOWEVER, THAT

THE SILVER SOLD AT THESE SALES IS SUPPLEMENTED BY THE ADDITIONAL SILVER
BEING MADE AVAILABLE FOR USE THROUGH THE REDEMPTION OF SILVER CERTIFICATES.
REDEMPTION OF SILVER CERTIFICATES
DESPITE THE FACT THAT PREMIUMS ARE BEING PAID FOR SILVER CERTIFICATES
BECAUSE THEY CAN BE USED TO OBTAIN SILVER FOR LESS THAN CURRENT MARKET PRICES,
THE RATE OF THESE REDEMPTIONS IS NOT EXCEEDING EXPECTATIONS.

THESE REDEMPTIONS

HAVE AVERAGED ABOUT THREE MILLION OUNCES A MONTH SINCE THE BEGINNING OF JUNE.

- 7AT THIS RATE, WE COULD EXPECT

REDEt-PTI~S

TO BE IN THE NEIGHBORHOOD OF

20 MILLION OUNCES BETWEEN NOW AND JUNE 24, 1968, WHEN SILVER CERTIFICATES
WILL NO

L~ER

EXC~EABLE

FOR SILVER.
OTHER ISSUES

THERE ARE OTHER ISSUES OF INTEREST TO THIS GROUP WHICH WILL
TO BE A SUBJECT OF DISCUSSION BY THE COINAGE COMMISSION.

C~TINUE

I WILL NOT GO INTO

DETAIL ON THESE MATTERS.
I THINK, HOWEVER, THAT ONE IMPORTANT CONSIDERATION SHOULD BE BORNE IN MIND,
.AND IT IS THIS:

MANY M:t-1BERS OF CCl'-JGRESS, M:M3ERS OF THE COINAGE

COMMISSION, AND TREASURY OFFICIAlS, THERE IS A DISTINCT LACK OF SYMPATHY
FOR THOSE WHO ENGAGE IN HOARDING AND SPECULATICl'-J IN SILVER COINS.

THEIR

ACTIVITIES SEVERELY HANDICAPPED OUR ACTIONS TO DEAL WITH PAST COIN SHORTAGES.
THE POSSIBILITY OF EVER PERMITTING THEM TO REAP WINDFAlL PROFITS OF MILLICl'-JS
OF DOLLARS AT THE EXPENSE OF TAXPAYERS WILL, TO SAY THE LEAST, NOT BE VERY
POPULAR.
CCl'-JC LUS ION
THINK THE RECORD OF CCl'-JGRESS, THE COMMISSION, AND THE TREASURY
INDICATES A FULL AWARENESS OF THE PROBLEMS OF THE SILVER USERS.
WE WOULD ALL AGREE THAT THE GENERAL INTEREST OF THE NATION IS

BUT I THINK

PA~T.

UNTIL JULY OF LAST YEAR, YOU WERE THE BENEFICIARY OF THE POLICIES MADE
NECESSARY BY COINAGE CONSIDERATIONS.

YET, WHEN THE TIME CAME TO END THESE

POLICIES, THIS GROUP WAS READY TO ACCEPT THE CHANGES, DESPITE THE RESULTING
HIGHER COSTS OF YOUR RAW MATERIALS.

FOR THIS OVERALL LNDERSTANDING OF THE

TOTAL PROBLEM, WE IN THE GOVERl'nNT ARE
THANK YOU VERY MUCH.

~ST

GRATEFUL.

TREASURY DEPARTMENT
(

January 12, 1968
\ IMMEDIATE RELEASE
ASSISTANT TREASURY SECRETARY TRUE DAVIS
RECEIVES EXCEPTIONAL SERVICE AWARD
Secretary of the Treasury Henry H. Fowler has presented the
:eptional Service Award to Assistant Treasury Secretary
le Davis.
Mr Davis former St. Joseph, Missouri, businessman, was cited
r "ex~raordi~ary leadership and diplomacy in his supervi~;j on of thE
reau of Customs the Bureau of Engraving and Printing, and until
s transfer to the Department of Transportation, the Uni·ted States
ast Guard."
"His outstanding qualifications and public-spirited service
ve contributed significantly to Treasury's enviable reputation

r managerial and executive excellence. His warmth, thoughtfulness
j manifest sincerity earned him the respect of all with whom he ha~
sociated ," Mr. Fowler said.
Mr. Davis, who submitted his resignation for "compelling
rsonalreasons," leaves the Department on January 15. He has
rved as Assistant Secretary since September, 1965. Appointed
President Kennedy, he had served as Ambassador to Switzerland
om October 1963 until his nomination as Assistant Treasury
cretary by President Johnson.
In September, 1966, Mr. Davis assumed additional duties as
ited States Director of the Inter-American Development Bank.
Prior to his entry into Federal service, Mr. Davis was
airman of the board, president and/or director of 22
rporations. In 1967, he was presented the Americanism Award
the Veterans of Foreign Wars. Previous recipients of this
ard include Secretary of Defense Robert S. McNamara and
Edgar Hoover, director of the Federal Bureau of Investigation.

1133

- 2 -

The award was presented January 11 by Secretary Fowler at
a formal dinner given in Mr. Davis' honor at the F Street
Club. Secretary Fowler referred to Mr .Davis' career as an outstand
Government official, diplomat, and leading Midwestenl business
executive.
Among those attending were Under Secretary of the
Treasury Joseph W. Barr, Under Secretary for Monetary Affairs,
Frederick L. Deming; Mr. Olavi Munkki, Ambassador of Finland;
Mr. Ricardo M. Arias E., Ambassador of Panama; Mr. Felix Schnyder,
Ambassador of Switzerland.
Mr. T. Graydon Upton, deputy director of the Inter-American
Development Bank; Mr. Harold F. Linder, president and chairman
of the board of the Export-Import Bank of Washington, D. C.;
Mr. Hobart Taylor, director of the Export Import Bank;
Mr. Myer Feldman, former counsel to the President, and
Admiral Willard J. Smith, Commandant of the U. S. Coast Guard.
Mr. Davis was born in St. Joseph, Missouri, December 23, 1919,
Before starting his business career he attended Cornell
Univers ity.
He is married to the former Virginia Brace Motter of
St. Joseph, Missouri. They have three sons.

000

TREASURY DEPARTMENT
(

WSi 6:30 P.M.,
r, January 15, 1968.
RESULTS OF TREASURY'S WEEKLY BILL OFFERING

[be Treasury Department announced that the tenders for two series of Treasury
one series to be an additional issue of the bills dated October 19, 1967, and
~her series to be dated January 18, 1968, which were offered on January 10,
were opened at the Federal Reserve Banks today
'lenders were invited for
),000,000, or thereabouts, of 91-day bills and for $1,000,000,000, or thereabouts,
;-day bills
'!be details of the two series are as follows:
91-day Treasury bills
maturing April 18, 1968
Approx. Equiv.
Price
Annual Rate
5.052~
98.723
98.716
5.08~
98.718
5.072~
!/

OF ACCEPTED
IT TIVE BIDS:

ligh
lverage

182-day Treasury bills
. maturing July 18, 1968
Approx. Equiv.
Price
Annual Rate
5.2221)
97.360
97.348
5. 246~
97.352
5.238~

1~ of the amount of 91-day bills bid for at the low price was accepted
ll~ of the amount of 182-day bills bid for at the low price was accepted

TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
~rict

Acce~ted

York
.adelphia
reland
lmond
mta
:ago
Louis
leapolis
;as City
.as
francisco

A12121ied For
$ 21,382,000
2,610,151,000
37,320,000
53,623,000
23,372,000
50,501,000
275,214,000
63,439,000
30,200,000
30,665,000
30,452,000
326,159,000

'roTALS

$3,552,478,000

$1,502,048,000 ~ $2,103,649,000

~on

11,433,000
1,133,881,000
14,895,000
30,098,000
9,866,000
19,988,000
100,562,000
46,095,000
6,804,000
24,115,000
20,452,000
83,859,000

A~lied

For
$ 18,240,000
1,476,106,000
16,334,000
59,291,000
5,289,000
40,180,000
265,871,000
52,440,000
29,406,000
17,089,000
22,319,000
101,084,000

Acce~ted

8,140.000
719,695,000
7,534,000
36,091,000
4,989,000
14,730,000
123,421,000
35,690,000
12,646,000
12,437,000
11,119,000
13,755,000

$1,000,247,000

£/

:1udes $249,374,000 noncompetitive tenders accepted at the average price of 98.718
:1udes $150,270,000 noncompetitive tenders accepted at the average price of 97.352
~se rates are on a bank discount basis
The equivalent coupon issue yields are
:2~ for the 91-day bills, and 5.47~ for the 182-day bills.

F-1134

TREASURY DEPARTMENT
Washington

)R RELEASE:

UPON DELIVERY
REMARKS OF THE HONORABLE JOSEPH W. BARR
THE UNDER SECRETARY OF THE TRFASURY
BEFORE THE
ANNUAL CONVENTION OF THE
AGRICULTURAL NITROGEN INSTITUTE
MARRIOTT MOTOR HOTEL, ATLANTA, GEORGIA
\\T EDN ESDAY , JANUARY 17, 1968, 1: 00 P. M. , EST.
AGRICULTURAL nr~~LOPMENT AND
THE BALANC~ OF PAYMENTS

It gives me great pleasure to be here with you today, ann
particularly appreciate the opportunity to speak to the leaders
f one of our most basic American industries.

I am keenly aware of the significance of this industry from
=veral standpoints.

I have been a farmer myself.

Also, during

1e past year or two at the Treasury, I have worked very closely
Ltil the financial institutions of the Farm Credit Administration
1at have helped develop and expanr American agriculture.

Finally,

have had occasion to study at first hand the economic situation
E the "third 't-lorld"

-- the developing nations of Latin American,

3ia and Africa -- which so pointedly, and often poignantly,
=monstrates the crucial role of agriculture in almost every economy.
It may surprise you to hear that a Treasury official does
lve occasion to concern himself with foreign agricultural rlevelopment.

F-1135

- 2 [owever, the Treasury serves a consultative function in connection
~th

the international financial aspects of all of our country's

:oreign aid programs.

Moreover, we are directly responsible for the

rnited states' participation in the multilateral development lending
.nstitutions -- the World Bank and its International Development
~ssociation,

the Inter-American Development Bank, the Asian De-

relopment Bank, and the new African Development Bank.
In my work on these matters and my travels in the developing
lations, it has been confirmed many times over that the development

,f agriculture is one of the most essential -- if not the most
!ssential -- ingredients in any viable national or regional economic
,rogram.
The contribution that the United States can make to this
)rocess is not limited to the amount of development assistance funds
7e provide.

At least as important is the technical knowledge and

,roduction know-how we have developed so well in our own country,
lnd which is so sorely needed in Asia, Africa and Latin America.
Moreover, I am not speaking solely of our moral and foreign
'olicy commitment as a Nation to assist the economic development of
:hese regions.

For your industry, and for the United States, the

.all of economic self-interest supplements the prompting of

- 3 ~onscience,

for we ourselves can benefit from participation in our

1eighbors' efforts to feed their growing populations.
In other words, American companies can and do participate in
:his process through sound business operations:
-- By eXQorting your products to Africa, Asia and
Latin America;
-- By investing in production facilities in these areas.
The "third world", in fact, may be your most promising market
~n

both respects.

During the past decade your industry has grown

it an annual rate of about 10% on a worldwide basis, and it should
~ontinue

its rapid expansion.

But the growth rate in the less-

leveloped countries has been projected as high as 15%, to meet the
)urgeoning demand in those regions.
I know that many of you are very much mindful of these facts.
~he

United States exported over $200 million of manufactured

:ertilizer in 1966; and large investments have been and are being
lade by many of your firms in the developing nations.
What I perhaps can add to the discussion is a few comments on
:he relationship between these developments and the Treasury's
pecial responsibility for the United States balance of payments
,ur national "commercial self-interes t. "

- 4 In principle, both your exports

an~

your sound foreign

investments are advantageous to our long-run international financial posture:
__ Your exports add immediately to our trade surplus, and
also over the long run help develop potential markets for
U.S. exports.
Your investments are negative factors in the short run,
to the extent that they involve capital outflows; but usually
they will be positive factors in the long run if they are profitabl e, as most J-\.merican overseas invf'stments have bef'n.
That is a simple statement of the situation.

But particularly

today in the balance of payments area, a simple statement cannot
be adequate.

As you know, President Johnson found it necessary on

New Year's Day to announce a series of special measures concerning
the balance of payments.
I know that you recognize that it took extraordinary courage
and determination for the President to take the action he took on
New Year's Day.

A President never lightly calls for sacrifice and

restraint on the part of the American people -- in any year much less
an election year.

The President's action reflects his determination

to put the welfare and security of the nation and free world above
all smaller considerations, and it is only fitting that the rest of

- 5 respond in that same spirit.
Let me therefore review for you briefly the circumstances
lt impelled the President to act, and the way in which the program
has announced affects all of us.
In seventeen 0f the past eighteen years, the United States
5 sustained deficits in its balance of payments.

In the early

5t Porld Har II years these deficits Here desirable and necessary:
-- to redistribute the world's monetary gold reserves and to
supplement them with dollars, and
to provide a favorable environment for economic recovery
in Europe, while, at the same time, permitting many barriers
to the international movement of goods and capital which dated
back as far as the 1930s to be dismantled.
Bowever, by 1961 the desirable consequences of our deficits
re clearly being outweighed by undesirable consequences.

There

5 no longer a shortage of dollars; on the contrary, foreign
Eicial monetary authorities became reluctant to hold increasingly
rgc amounts of their international reserve assets in the form of

Llars, and this began to pose a real and unacceptable threat to
~

strength of the dollar.

As a result, beginning in 1961, the

Ltcc1 States Government took action to improve tlle balance of payments.

- 6 -

The measures instituted during the early 1960s included both
he public and the private sectors:
-- He began to ·'tie" all of our foreign aid programs to
U.S. procurement.
-- He reduced the foreign exchange cost of our other major
government expenditure item, our military deployments, by
a variety of techniques.
-- We reduced private capital outflows through the voluntary
restraint programs administered by the Commerce Department
and the Federal Reserve Board, and we also enacted the Interest
Equalization Tax.
-- We initiated programs to increase our receipts from foreign
investment in the United States and foreign tourism in this
country.
-- Last, but assuredly not least, we improved our basic trade
position through a remarkable record of price stability coupled
with economic growth.
Through 1965, this program made good progress.

Our deficit

s cut by two-thirds -- from $3.9 billion in 1960 to $1.3 billion
1965.
The direct and indirect consequences of the buildup in Southeast
ia toward the end of 1965 interrupted our progress toward payments

- 7 Ii librium.

In 1967, the cOLlbined impact of:

__ fur t- lCr increas es in our foreign exchange expendi tures
for Vietnam,
__ increased outflows of capital for private loans and
investnentr: abroad,
a sUDstantially increased "travel deficit", and
an improvec1 but still inadequate trade balance,
it the Uniteri States payrllents position in an unsatisfactory state.
anc1ition, the sho::k of British (levaluation in November of 19()7 had
e effect or

s~1arply

increasing our balance-of-payments c1p.ficit

rin:; t;le rOul-tOt quarter.

He now estimate that the 1967 deficit

11 be in excess of $3.5 billion, more than half of it occurring

Sterlin~~

ltion.
Irl

devaJuation raised an international s'vell of specu-

We have turned it back, with the cooperation of our allies,

at Some expense.

But the threat to the dollar and the inter-

ltional monetary system must be answered in a more fundamental way.
l(~

s'lOck provided by the British crisis dictated that ne'''' and

~cisive measures be undertaken immediately to bring the Uni ted States

llance of payments into equilibrium.
The Presi~ent, in his New Year's message, outlined four
ri tical condi tions \<7hich the new Unit ed States program mus t meet

- 8 -

solving our problem.

It must:

__ ;'sustain the gro'\yth, strength and prosperity of our own
economy.
__ :'Allm.7 us to continue to meet our international respon-

sibilities in defense of freedom, in promoting world trade,
and in encouraging economic growth in the developing countries.
-- ·'Engage the cooperation of other free nations, whose stake
in a sound international monetary system is no less compelling
than our mm.
-- I'Recognize the special obligation of those nations with
balance-of-payments surpluses, to bring their payments into
equilibrium. 11
Hhat is t;le program the President has laid out within these
conditions?
First, to sllstain the prosperity of our domestic economy, as
~vell

as protect our international financial and corrrrnercial position,

President Johnson called for prompt final action on the program of
fiscal restraint that he proposed last year.

The Congress and the

Administration already have put into effect agreed reductions in
government expenditures.

The President now has called for enactment

of the other part of the program -- the tax proposals -- as the first
orrler of business.

- 9 Second, the President has set forth a series of specific
~asures ~ealinB

with each of the major components of our inter-

lational pay~ents position, designed to move us prompt to equili)rium.
Our balance of payments receipts come principally in these
:ate~ories

A favorable trarle surplus
Dividends and other returns on foreign investments
Foreign investment in the United States
On the ontflm.] side, the principal items are:
government expenditures for
-- military deployments overseas, in Vietnam and
els e\vhere
-- bilateral and multilateral foreign aid
Private investment and lending abroad
A net deficit for tourism and travel
The President's program calls for action in each of these
categories, and is designed to obtain both immediate and longer-run
lmprovement 1n our payments position.
1.

the trade account, one of the most fundamental sources

of long-run strength in our international payments, we have recently
concluded a basic step forward.

The Kennedy Round of tariff ne-

gotiations will lead to a substantial reduction in tariff barriers,

- 10 and this will provide the opportunity for a further expansion in
United States exports.
non-tariff barriers.

We now must seek to reduce the impact of
Of these, perhaps the molt .ignificant are the

border taxes imposed by a number of countries.

Tax harmonization

within the Common Market, although unobjectionable in itself, can
disadvantage our competitive position in those countries.

We have

initiated discussions with our major trading partners and have begun
exploring legislative measures to solve this problem.
2.

Our export position also is effected by the availability

of export financing.

The President therefore has proposed both

the liberalization of the rediscount arrangements in the ExportImport Bank, and the creation of a special new facility in the Bank
to finance export sales of a slightly riskier nature.

The latter

proposal would particularly encourage sales to some of the developing
nations, and therefore it relates directly to the subject with which
I opened my remarks today.
3.

The Foreign Investors Tax Act of 1966 was a major step in

the direction of encouraging foreigners to invest in the United
States economy.

Following up on this, the government has engaged in

a Cooperative effort with the private financial community to make
foreign investors aware of the opportunities in this area.
efforts will be continued and intensified.

These

- 11 -

the government account, we have over the past several

years effected substantial balance of payments savings through
virtually complete tieing of our foreign aid, and measures including
reductions in overseas military personnel and in the number of
foreign nationals employed abroad, maximum United States procurement,
military sales to our allies, and a long list of other steps.

Non-

theless the President has set a target of $500 million in further
savings in this category.

Just last week, in this connection, he

issued instructions to reduce expenditures of our foreign aid program by $100 million.

He are vigorously pursuing other actions to

achieve the President's goal on the government account.
J.

To reduce our "tourist deficit", the President asked all

Americans to defer nonessential travel outside the Western Hemisphere.
He

also has called for prompt consideration of possible legislative

measures to insure the achievement of a $500 million improvement in
this category in the balance of payments.
A call for such a reduction in travel by Americans was issued
reluctantly, and only as a temporary measure.

Over the long run,

our objective must be to meet the problem in this area by increasing
foreign travel to the United States.

The President already had

appointed a special blue ribbon task force, headed by former
Ambassador Robert McKinney, to recommend positive measures in this

- 12 direction.

He now has requested a speedup in the work of the task

force, so that additional programs to increase our tourism receipts
can be implemented at the earliest possible date.
6.

Finally, the President determined that it is necessary

to further tighten the existing voluntary restraints on private investment and bank lending overseas, and to make the investment controls mandatory to insure evenhanded application of the tightened
limitations.

As I have mentioned, although our foreign investments

are a source of balance of payments strength over the long run, they
do involve heavy short-run balance of payments outflows.
our payments immediately into

equilibriL~,

To bring

some further moderation

in these outflows is essential.
In taking this last step, the President took special account
of the effects upon the developing nations and upon other countries
that rely heavily on the United States as a source of capital.

For

this reason, I believe that your industry, and American companies
in general, can and should continue to give active consideration to
further overseas investment in the less developed countries.
Not only are the overall limitations on such investments relatively liberal, but the program will be administered as flexibly as
possible within the limitations to permit the continuation at about
present levels of investment which are so important to the host nation~

- 13 as well as to the United States.
I believe that the President's program is a sound one.

It is

designed to deal decisively with the urgent international financial
problem that confronts the United States and all of the free world.
It calls for understanding and restraint on the part of the American
people, and for cooperation on the part of other nations.

The

response thus far -- both domestically and internationally -- has
confirmed my belief that such understanding and cooperation will be
forthcoming.

With it, we shall succeed.

000

TREASURY DEPARTMENT

January 17, 1968

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 fo~
reasury bills maturing January 25, 1968, in the amount of
2,501,384,000, as follows:
91-day bills (to maturity date) to be i3sued January 25, 1968,
n the amount of $ 1,500,000,000, or thereabouts, represent in~_; dn
dditional amount of bills dated October 26, 1967, and to
ature April 25, 1968, originally issued in the amo,.mt of
1,000,763,000, the additional and original bills to be freely
nterchangeable.
182-day bills, for $1,000,000,000, or thereabouts, to be dated
anuary 25, 1968, and to mature July 25, 1968.
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
ill 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 Standard
ime, Monday, January 22, 1968.
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
)rwarded 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
lstomers provided the names of the customers are set forth in such
~nders.
Others than banking institutions will not be permitted to
lbmit tenders except for their own account. Tenders will be received
tthout deposit from incorporated banks and trust companies and from
~sponsible and recognized dealers in investment securities.
Tenders
rom others must be accompanied by payment of 2 percent of the face
nount of Treasury bills applied for, unless the tenders are
~companied by an express guaranty of payment by an incorporated bank
~ trust compa!1Y.
-1136

- 2 -

Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announce.
ment will be made by the Treasury Department of the amount and prict
range of accepted bids.
Those submitting tenders will be advised
of the acceptance or rejection thereof.
The Secretary of theTreasury
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 tnese 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 January 25, 1968.in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing January 25, 1968. Cash and exchangetenders
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 ~
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 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 :::.}
any Federal Reserve Bank or Branch.
000

TREASURY DEPARTMENT

January 18, 1968
FOR A.M. RELEASE
FRIDAY, JANUARY 19, 1968

TREASURY ISSUES DOCUMENTARY REPORT ON UeS. BALANCE OF PAYMENTS
DESCRIBING NEED FOR PRESIDENT'S ACTION PROGRAM
The U. S. Treasury Department today released a documentary
art on "Maintaining the Strength of the United States Dollar in a
ong Free World Economy."
The 229-page document describes in detail the background and
sons for the Action Program announced by President Johnson in
New Year's Day message to the nation on the balance of payments.
report also reviews what has been done and what is proposed -h short and long-term -- to bring the nation's balance of payments
a equilibrium and keep it there -- an equilibrium described by the
sident as "a national and international responsibility of the
hest priority."
In a foreword to the report, Treasury Secretary Henry H. Fowler
_d that the U.S. program necessarily must involve cooperative actions
and with other nations. "Without such cooperation ,"Mr. Fowler
_d, "it is not possible to achieve U.S. payments equilibrium in a
lner conducive in the long term to an increased flow of trade and
)ital and to viable and sturdy arrangements for the security and
,elopment of the free world." Achievement of balance compatible
:h these objectives, he noted, will call for adjustments by America's
lding partners and allies as well as by the United States.
, The Secretary also said that the acceptance and execution of the
), program will require the understanding, support and participation
the entire Executive Branch of the Government, the Congress and
~ American people -- business, labor, financial and farm groups alike.
advocated speeding-up plans for the creation of new reserves -~cial Drawing Rights in the International Monetary Fund -- "as our
'ement toward payments balance curbs the flow of dollars into

1137

- 2 -

ernational reserves." A plan for such Special Drawing Rights
approved at Rio de Janeiro last September by the IMF's
-member countries.
The Treasury document cited these "key resources" as ones which
e the U.S. the strength to deal with its underlying long-range
ments problems both constructively and sensibly:
A strong economy with a Gross National Product in
excess of $800 billion -- representing 40 to 45
percent of world output;
a large stock of foreign assets with powerful earnings
potential. Gross assets abroad -- public and private
total more than $110 billion. The U.So net long-term
asset position -- approximately $70 billion -- has
increased every year for 20 years. Private overseas assets
alone now generate annual earnings of about $6 billion;
a basic trade surplus which totaled approximately
$4 billion last year on which the U.S. must build;
a strong reserve position -- nearly $15 billion, or
about 20 percent of world reserves -- even after losses
of the past few years.
The report pointed out that "we can build on these elements of
ength and move toward balance of payments equilibrium through
rt~ and long-range measures vigorously implemented ," and that passage
time "will ameliorate forces that presently exacerbate the balance
payments deficit and hide the fundamental progress achieved."
Ideally, the Treasury Department said, "the United Sta tes would
ve its balance of payments problem through a gradual, long-range
roach in which there was no interference with the free movement of
ds and services, capital or people." However, the Treasury said,
e situation that confronts the United States today requires
mpt and major corrective action. Long-term measures alone that
e hold gradually over time are not sufficient."
The Action Program announced by President Johnson on January 1
sists of general and specific measures, including short-range and
g-range actions, designed to reduce sharply the U.S. payments
icit in 1968, and bring it into -- or close to -- equilibrium.

- 3 measures include:

Mandatory limits on direct investments abroad by U.S.
companies to reduce the payments deficit in 1968 by
$1 billion;
o

A voluntary program for reducing foreign credits from
U.S. banks and other financial institutions, expected
to bring a net inflow of at least $500 million in
such credits in 1968;
Encouragement of more foreign travel to the U.S.;
deferment of non-essential American travel outside the
Western Hemisphere for the next two years, and
exploring of appropriate legislation, all to reduce
the U.S. travel deficit by $500 million;

•

A further reduction of $500 million in the foreign
exchange impact of government programs overseas through
negotiations with our NATO allies to minimize foreign
exchange costs of keeping our troops in Europe by
purchases in the United States of more defense equipment
and investment of exchange receipts in long-term U.S.
securities; reduction of personal spending by U.S.
forces and their dependents; reduction in the number of
American civilians working overseas, and reduction of
Agency for International Development foreign exchange
costs by at least $100 million in 1968;

•

Activities to increase the U.S. trade surplus by
encouraging exports,with a goal of a $500 million
increase in exports in 1968. Congress will be asked to
support an intensified five-year program to promote the
sale of U.S. industrial and agricultural products in
foreign markets; $500 million will be earmarked by the
Export-Import Bank to provide better export insurance,
to expand guarantees for export financing, and to
broaden the scope of Government financing of exports;
the Export-Import Bank will encourage banks to help
firms increase their exports, and the Commerce Department
will begin a Joint Export Association program to provide
financial support to American companies joining together
to sell abroad. Discussions have been initiated,
particularly with nations having balance of payments
surpluses, to minimize the handicaps to U.S. trade which
arise from differences in national tax systems.

- 4 The Treasury said the Action Program "will entail sacrifices
·his country and it may cause difficulties for some foreign
:tries ," But in order to assure a fair sharing of these
'ifices, the Treasury said, the program has been widely spread
, all sec tors of the U. S. economy. To minimize adverse e ffec ts
:he world economy, the program distinguishes among groups of
ltries on the basis of their ability to absorb reductions in
.r fore ign exchange rece ip ts .
"Restrictive measures are temporary," the Treasury said.
policy of the United States is to support the unrestricted
rnational flow of goods, services and capital under a stable
rnational monetary system based on fixed values for currencies
.ned in terms of gold or the dollar, linked at $35 an ounce."
An appropriate long-range balance of payments solution for
United States must, the Treasury said, be based on a substantial
growing surplus in trade and services, including earnings from
foreign investments.
"Unfortunately, after a period of unprecedented stability,
prices and costs rose in 1966 and 1967. The rapid expansion
.he U.S. economy that is now under way threatens a further rise
Irices and costs. This would endanger our economic prosperity
undermine our competitive position in world markets ... The most
nt business before Congress is to complete this anti-inflation
,ram by enac ting a temporary surcharge on income and profits
s," the Treasury said.
"Even a strong fiscal policy and a stringent credit policy
.ot maintain price stability,"it noted, "unless business and
'r are willing to follow price-wage practices that conform to
needs of our economy ... The country cannot afford the loss of
oUt resulting from crippling work stoppages in critical
stries. They reduce our exports and increase our imports."
The mandatory controls on direct investment outflows, the
er voluntary guidelines for banks and the request to defer
ssential travel outside the Western Hemisphere "are all measures which
United States has adopted very reluctantly. The high cost of
e measures is in itself a dramatic witness to the priority the
ed States attaches to doing its full share in reducing the
lance in world payments -- and to the recognition that a breakof the system would have involved far higher costs for the
and even more for the world economy," the report said.

- 5 -

The reduction of the deficit in the U.S. balance of payments
3t be allowed, and even encouraged, by the rest of the world, the
~asury pointed out, adding that "major positive measures" by
ner countries are required to bring about payments equilibrium
:msistent with the achievement of sound world economic growth
j freer as well as growing international transactions."
Treasury said it is a matter of the highest priority for
ropean governments, particularly the governments of the EEC
~ntries) to face fully the fact that their balance of payments
sitions must show a large change from excessive surplus to much
re moderate surplus, perhaps even to moderate deficit, for a
ort period.
The document will be placed on sale in the near future by
e Superintendent of Documents, Government Printing Office.

000

MAINTAINING THE STRENGTH
of
THE UNITED STATES DOLLAR
.
In

A STRONG FREE WORLD ECONOMY

u.s. TREASURY DEPARTMENT
January 1968

TABLE OF CONTENTS
i

Foreword
Statement by the President Outlining a
Balance of Payments Action Program

iii

Page
SUMMARY AND CONCLUSIONS
I.

The

Internat~~nal

AdjustJ!l~nt

Monetary System and
of-Payments Imbalances

The International Monetary System Why and How It Works

The Role of the Dollar

Exchange Rates

Reserves

Operations of the International
Monetary Fund

Other Institutional Arrangements

The Dollar as a Transactions
Currency

Balance of Payments Surpluses
and Deficits

The Adjustment Process--Basic
Objectives

The Adjustment Process--Need
For Multilateral Cooperation

The Adjustment Process-Equilibrium for the System as a
Whole

H.
I.

J.
K.

TABLE OF CONTENTS

II.

Current Problems Facina the
International Monetary System
A.

The Need for a New Reserve Asset

The Rio Agreement:
Drawing Rights

III.

IV.

Special

Reduction of the Large and
Persistent Payments Imbalances
in the United States and Europe

Maintaining Confidence in the
Stability of the Present System

Mutual Responsibilities and the
Need for Decisive Action

U. S. Balance of Payments -- The
Record
Date

Trends Since world War II

U. S. Balance of Payments Programs

Developments

New Action Program

1966 and 1967

An Intensified Effort to Achieve and
Maintain a Healthy United States Trade
Surplus
A.

Introductory Comments

Soundly Managing the U.S. Economy
to Keep It Competitive and Stable

Keeping World Markets Open

Making U. S. Industry More Export
Minded Through Selective Export
Expansion Programs

Keeping World Markets Fair

TABLE OF CONTENTS

Page

An Intensified Program to Moderate
The Foreign Exchange Costs of
Government Expenditures Abroad For
security, Development, and Other
Activities

VI.

Introductory Comments

Military

Aid

104

Other Departments and Agencies

108

An Intensified Effort for Temporarily
Reducing Outflows of U. S. Capital
Financial Policy on U. S. Foreign
Investment

Trends in U. S. Foreign Investment
and Investment Income

117

Limitations on Private Capital Outflows
in 1968: The New Program and the New
Interest Equalization Tax

122

A Capital Flows Policy for the
Long-Range Future

127

D.
VII.

VIII.

114

A Long-Range Program for Promoti~
Forei~n Private Investment in U .S_.
Secul"l.ties

133

A Long-Range Program for Narrowing the
Travel Gap Throu~h Promotion of Foreign
Travel in the Unl.ted States and Temporary
Measures to Restrain U.S. Travel Abroad
A.

Introductory Comments

138

Position of the United States
Travel Account

139

TABLE OF CONTENTS
Page
C.
D.

E.
IX.

Measures Taken to Improve the
Travel Balance

142

Need for a New Long-Term Action
Program and the Establishment of the
Special Task Force to Formulate i t

144

Temporary Measures to Reduce
the Travel Deficit

148

Adjustment Responses Expected of
Trading Partners
Distri~ution of the Adjustment
Among Countries

150

The Persistent EEC Surplus

151

Need for Compatible Adjustments

157

2hifts in European Capital Flows
and Development of European Capital
Markets

158

Offsetting the Balance of Payments
Impacts of Military Expenditures

161

Adjustment through Changes in the
Private Current Account

162

Tab
Summary of Major Presidential Messages
on Balance of Payments

Summary of Actions by the Department of
Defense to Reduce Net Foreign Exchange
Costs, 1961 - 1967

AID and the Balance of Payments

Interest Equalization Tax (lET) and
Voluntary Programs

FORElvORD
As Secretary of the Treasurv and Chairman
of the Cabinet committee on the Balance of
Payments, I am releasing for puhlic information
a u. S. Treasury Department Report entitled
"MAINTAINING THE STRFNGTH OF THE UNITED STATES
DOLLAR IN A STROFG FREE l'JOPLD ECONOMY."
This document describes in detail the
background and reasons for the Action Program
announced by President Johnson in his "Message
to the Nation" on the balance of payments of
Januarv 1, 1968. It describes what we have done
to date and what we propose to do, both over the
short and long term, to bring our balance of
paYments into equilibrium and keep it there--as,
in the ,..,ords of the President, "a national and
international responsibility of the hiqhest
priori ty. "
What we do must be compatible with the
strenqth and stability of the u.s. economv
because, in the final analysis, that is the
strength of the dollar.
What we do in this American program is
related to our international responsibilities
because without a strono dollar, a healthy,
stable international monetary syste~ is not
possible.
r"oreover, this American program must, as
a counterpart, involve cooperative actions bv
and with other nations. Without that cooperation, it is not possible to achieve u.S. pavments equilibrium in a manner conducive in the
long term to an increased flow of trade and
capital and to viable and sturdv arrangements

- ii for the security and development of the free
v]orld. Achievement of balance compatible ~1i th
these objectives will call for adjustments bv
America IS tradinrr partners and allies as ,,,ell
as hv the United States.
To secure the accentance and execution of
this proqram will require the understnndinq,
support and participation of the entire Executive Branch, the Conaress and the American
people--business, lahor, financial and farm
qroups alike--and also the qovernments and
peoples of other nations with whom this country
is cooperating in myriad trading, financial,
securitv and developmental relationships.
As our movement toward payments balance
curbs the flow of dollars into international
reserves, the memher countries of the International !1onetarv Fund, includina the United
States, should speed up plans for the creation
of new reserves--Special Drawinq Riahts in the
Fund--pursuant to the plan approved at Rio de Janeirn
in September 1967.
It is the purpose of this Report to qive
some measure of vital understandin~ of the
~ction Program and its importance ~t this point
of time to the people of the United States and
peoples everywhere. Given understandinq, support
of and ~rticipation in its achievement are sure·
to folloH.

tf~M'T~
Henry H. Fb\"ler
SecretarY of the Treasurv

- iii BALANCE OF PAYMENTS

Statement by the President

O~tlining

a Prqgram of Action.

J<:lnuary 1, 1968
WHERE

~lE

STAND TODAY

I want to discuss with the American people a
subject of vital concern to the economic health and
well-being of this nation and the

frc~

world.

It is our international balance of payments
position.
The strength of our dollar depends on the strength
of that position.
The soundness of the free world monetary system,
which rests largely on the dollar, also depends on the
strength of that position.
To the average citizen, the balance of payments,
and the strength of the dollar and of the international
monetary system, are meaningless phrases.

They seem to

have little relevance to our daily lives.

Yet their

consequences touch us all

consumer and captain of

industry, worker, farmer, and financier.
More than ever before, the economy of each nation
is today deeply intertwined with that of every other.
vast network of world trade and financial transactions
ties us all together.

The prosperity of every economy

rests on that of every other.

IV -

More than ever before, this is one world -- In
economic affairs as in every other way.
Your job, the prosperity of your farm or business,
depends directly or indirectly on what happens in Europe,
Asia, Latin America, or Africa.
The health of the international economic system
rests on a sound international money in the same way
as the health of our domestic economy rests on a sound
domestic money_

Today, our domestic money -- the

u.s.

dollar -- is also the money most used in international
transactions.
surely is

That money can be sound at home -- as it
yet can be in trouble abroad -- as it now

threatens to become.
In the final analysis its strength abroad depends
on our earning abroad about as many dollars as we send
abroad.

u.s.

dollars flow from these shores for many

reasons -- to pay for imports and travel, to finance
loans and investments, and to maintain our lines of
defense around the world.
When that outflow is greater than our earnings and
credits from foreign nations, a deficit results in our
international accounts.

- v -

For 17 of the last 18 years we have had such
deficits.

For a time those deficits were needed to

help the world recover from the ravages of World War II.
They could be tolerated by the United States and welcomed by the rest of the world.

They distributed more

equitably the world's monetary gold reserves and supplemented them with dollars.
Once recovery was assured, however, large deficits
were no longer needed and indeed began to threaten the
strength of the dollar.

Since 1961 your Government has

worked to reduce that deficit.
By the middle of the decade, we could see signs of
success.

Our annual deficit had been reduced two-thirds

from $3.9 billion in 1960 to $1.3 billion in 1965.
In 1966, because of our increased responsibility to
arm and supply our men in Southeast Asia, progress was
interrupted, with the deficit remaining at the same

level

as 1965 -- about $1.3 billion.
In 1967, progress was reversed for a number of reasons:
Our costs for Vietnam increased further.
Private loans and investments abroad increased.
Our trade surplus, although larger than 1966, did
not rise as much as we had expected.
Americans spent more on travel abroad.

Added to these factors was the uncertainty and
unrest surrounding the devaluation of the British pound.
This event strained the international monetary system.
It sharply increased our balance of payments deficit and
our gold sales in the last quarter of 1967.

THE PROnLEM
Preliminary reports indicated that these conditions
may result in a 1967 balance of payments deficit in the
area of $3.5 to $4 billion -- the highest since 1960.
Although some factors affecting our deficit will be more
favorable in 1968, my advisors and I are convinced that
we must act to bring about a decisive improvement.
We cannot tolerate a deficit that could threaten the
stability of the international monetary system -- of which
the U.S. dollar is the bulwark,
We cannot tolerate a deficit that could endanger the
strength of the entire free world economy, and thereby
threaten our unprecedented prosperity at home.
A TIME FOR ACTION

The time has now corne for decisive action designed to
bring our balance of payments to -- or close to -- equilibrium In the year ahead.
The need for action is a national and international
responsibility of the highest priority.

- VII -

I am proposing a program which will meet this
critical need, and at the same time satisfy four
essential conditions:
Sustain the growth, strength,and prosperity of
our own economy.
Allow us to continue to meet our international
responsibilities in defense of freedom, in
promoting world trade, and in encouraging
economic growth in the developing countries.
Engage the cooperation of other free nations,
whose stake in a sound international monetary
system is no less compelling than our own.
Recognize the special obligation of those
nations with balance of payments surpluses
to bring their payments into equilibrium.
THE FIRST ORDER OF BUSINESS
The first line of defense of the dollar is the
strength of the American economy.
No business before the returning Congress will be
more urgent than this:

To enact the anti-inflation tax

which I have sought for almost a year.

Coupled with our

expenditure controls and appropriate monetary policy,
this will help to stem the inflationary pressures which
now threaten our economic prosperity and our trade surplus.

Vlll

No challenge before business and labor is more
urgent than this:

To exercise the utmost responsibility

in their wage-price decisions, which affect so directly
our competitive position at home and In world markets.
I

have directed the Secretaries of Commerce and

Labor, and the Chairman of the Council of Economic
Advisers to work with leaders of business and labor to
make more effective our voluntary program of wage-price
restraint.
I

have also instructed the Secretaries of Commerce

and Labor to work with unions and companies to prevent
our exports from being reduced or our imports increased
by crippling work stoppages in the year ahead.
A sure way to instill confidence in our dollar
both here and abroad -- is through these actions.
THE NEW PROGRAM
But we must go beyond this, and take addition.l
action to deal with the balance of payments deficit.
Some of the elements in the program I propose will
have a temporary but immediate effect.

Others will be

of longer range.
All are necessary to assure confidence in the
American dollar.

- IX -

TEMPORARY MEASURES
1.

Direct Investment

Over the past three years, American business has
cooperated with the government in a voluntary program
to moderate the flow of U.S. dollars into foreign investments.

Business leaders who have participated so

wholeheartedly deserve the appreciation of their country_
But the savings now required in foreign investment
outlays are clearly beyond the reach of any voluntary
program.

This is the unanimous view of all my economic

and financial advisers and the Chairman of the Federal
Reserve Board.
To reduce our balance of payments deficit by at
least $1 billion in 1968 from the estimated 1967 level,
I am invoking my authority under the Banking Laws to
establish a mandatory program that will restrain direct
investment abroad.
This program will be effective immediately.

will insure success and guarantee fairness among American
business firms with overseas investments.
The program will be administered by the Department
of Comaerce, and will operate as follows:
As in the voluntary program, overall and
individual company targets will be set.
Authorizations to exceed these targets will
be issued only In exceptional circumstances.

- x New direct investment outflows to countries
in continental Western Europe and other
developed nations not heavily dependent on
our capital will be stopped in 1968.

Problems

arising from work already in process or commitments under binding contracts will receive
special consideration.
New net investments in other developed countries
will be limited to 65% of the 1965-66 average.
New net investments In the developing countries
will be limited to 110% of the 1965-66 average.
This program also requires businesses to continue
to bring back foreign earnings to the United States in
line with their own 1964-66 practices.
In addition, I have directed the Secretary of the
Treasury to explore with the Chairmen of the House Ways
and Means Committee and Senate Finance Committee legislative proposals to induce or encourage the repatriation
of accumulated earnings by U.S.-owned foreign businesses.
2.

Lending by Financial Institutions

To reduce the balance of payments deficit by at
least another $500 million, I have requested and authorized the Federal Reserve Board to tighten its program
restraining foreign lending by banks and other financial
institutions.

Chairman Martin has assured me that this reduction
can be achieved:
Wit.out harming the financing of our exports;
Primarily out of credits to developed countries
without jeopardizing the availability of funds
to the rest of the world.
Chairman Martin believes that this objective can
be met through continued cooperation by the financial
community.

At the request of the Chairman, however, I

have given the Federal Reserve Board standby authority
to invoke mandatory controls, should such controls become desirable or necessary.
3.

Travel Abroad

Our travel deficit this year will exceed $2 billion.
To reduce this deficit by $500 million:
I am asking the American people to defer for the
next two years all nonessential travel outside
the Western Hemisphere.
I am asking the Secretary of the Treasury to
explore with the appropriate congressional
committees legislation to help achieve this
objective.

XlI

Government Expenditures Overseas

We cannot forego our essential commitments abroad,
on which America's security and survival depend.
Nevertheless, we must take every step to reduce
their impact on our balance of payments without endangering
our security.
Recently, we have reached important agreements
with some of our NATO partners to lessen the balance of
payments cost of deploying American forces on the
Continent -- troops necessarily stationed there for the
common defense of all.
Over the past three years, a stringent program has
saved billions of dollars in foreign exchange.
I am convinced that much more can be done.

I be-

lieve we should set as our target avoiding a drain of
another $500 million on our balance of payments.
To this end, I am taking three steps.
First, I have directed the Secretary of State to
initiate prompt negotiations with our NATO allies to
minimize the foreign exchange costs of keeping our troopS
in Europe.

Our allies can help in a number of ways,

including:
The purchase in the U.S. of more of their
defense needs.

- XIII -

Investments in long-term United States
securities.
I have also directed the Secretaries of State,
Treasury and Defense to find similar ways of dealing
with this problem in other parts of the world.
Second, I have instructed the Director of the
Budget to find ways of reducing the number of
American civilians working overseas.
Third, I have instructed the Secretary of Defense
to find ways to reduce further the foreign exchange
impact of personal spending by U.S. forces and their
dependents in Europe.
LONG-TERM MEASURIS
5.

Export Increases

American exports provide an important source of
earnings for our businessmen and jobs for our workers.
They are the cornerstone of our balance of payments
position.
Last year we sold abroad $30 billion worth of
American goods.
What we now need is a long-range systematic program
to stimulate the flow of the products of our factories
and farms into overseas markets.

- X1V -

We must begin now.
Some of the steps require legislation:
I shall ask the Congress to support an intensified
five year, $200 million Commerce Department program
to promote the sale of American goods overseas.
I shall also ask the Congress to earmark $500
million of the Export-Import Bank authorization to:
Provide better export insurance.
Expand guarantees for export financing.
Broaden the scope of Government financing
of our exports.
Other measures require no legislation.
I have today directed the Secretary of Commerce
to begin a Joint Export Association program.

Through

these Associations, we will provide direct financial
support to American corporations joining together
to sell abroad.
And finally, the Export-Import Bank -- through
a more liberal rediscount system -- will encourage
banks across the Nation to help firms increase their
exports.
6.

~ontariff

Barriers

In the Kennedy Round, we climaxed three decades
of intensive effort to achieve the greatest reduction

- xv in tariff barriers in all the history of trade negotiations.

Trade liberalization remains the basic policy

of the United States.
We must now look beyond the great success of the
Kennedy Round to the problems of nontariff barriers
that pose a continued threat to the growth of world
trade and to our competitive position.
American commerce is at a disadvantage because
of the tax systems of some of our trading partners.
Some nations give across-the-board tax rebates on
exports which leave their ports and impose special
border tax charges on our goods entering their country.
International rules govern these special taxes
under the General Agreement on Tariffs and Trade.
These rules must be adjusted to expand international
trade further.
In keeping with the principles of cooperation
and consultation on common problems, I have initiated
discussions at a high level with our friends abroad
on these critical matters -- particularly those
nations with balance of payments surpluses.
These discussions will examine proposals for
prompt cooperative action among all parties to minimize

- xvi the disadvantages to our trade which arise from
differences among national tax systems.
We are also preparing legislative measures 1n
this area whose scope and nature will depend upon
the outcome of these consultations.
Through these means we are determined to achieve
a substantial improvement in our trade surplus over
the coming years.

In the year immediately ahead,

we expect to realize an improvement of $500 million.
7.

Foreign Investment and Travel in the
United States

We can encourage the flow of foreign funds to
our shores in two other ways:
First, by an intensified program to attract
greater foreign investment in U. S. corporate
securities, carrying out the principles of
the Foreign Investors Tax Act of 1966.
Second, by a program to attract more visitors
to this land.

A Special Task Force headed

by Robert McKinney of Santa Fe, H. Mex.,
is already at work on measures to accomplish
this.

I have directed the task force to

report within 4S days on the immediate
measures that can be taken, and to make its
long-term recommendations within 90 days.

- xvii MEETING

TH~

WORLD'S RESERVE NEEDS

Our movement toward balance will curb the flow
of dollars into international reserves.

It will

therefore be vital to speed up plans for the creation
of new reserves -- the Special Drawing Rights -- in
the International Monetary Fund.

These new reserves

will be a welcome companion to gold and dollars, and
will strengthen the gold exchange standard.

The

dollar will remain convertible into gold at $35 an
ounce, and our full gold stock will back that commitment.
A TIME FOR RESPONSIBILITY
The program I have outlined is a program of action.
It is a program which will preserve confidence
in the dollar, both at home and abroad.
The U. S. dollar has wrought the greatest
economic miracles of modern times.
It stimulated the resurgence of a war-ruined
Europe.
It has helped to bring new strength and life to
the developing world.
It has underwritten unprecedented prosperity
for the American people, who are now in the 83d month
of sustained economic growth.

- xviii A strong dollar protects and preserves the prosperity
of businessman and banker, worker and farmer -- here
and overseas.
The action program I have outlined in this message
will keep the dollar strong.

It will fulfill our

responsibilities to the American people and to the
free worlu.
I appeal to all of our citizens to join me in this
very necessary and laudable effort to preserve our
country's financial strength.
# # # # #

SUMMARY AND CONCLUSIONS
The united States must, can and will correct
its balance of payments problem. The action program
announced by President Johnson on January 1st is a
national and international responsibility of the
highest priority. Our task now is to assure the
success of that program.
This paper explains the importance of correcting
our balance of payments problem and explains why a
new program to'achieve it has become necessary. Beyond that, it describes the kinds of adjustments that
must now occur--in the United States and in other
countries--if the new program is both to restore
balance of payments equilibrium and to promote continued prosperity and economic growth in the United
States and throughout the Free World.
The world faces the need to restore equilibrium
ln international transactions. The United States
must cut its payments deficit now; it cannot allow
its official reserve assets to run down without
limit. Moreover, the smooth functioning of the
present international monetary system, under which
unparalleled prosperity and growth have been attained,
requires that large and persistent surpluses and
deficits be eliminated, and in particular that confidence in the main reserve currency--the U.S. dollar-be maintained.
The United States has acted decisively.
It 1S
in the interest of countries which have enjoyed
balance of payments surpluses, as well as of the
rest of the world, that they too act to facilitate
the needed adjustments and hasten the day when undesirable restrictions can be removed.
They must
accept reductions in their surpluses. This involves
policies leading to higher domestic levels of
activity within the framework of stable prices.
It requires receptivity to imports from developed
and less-developed countries, acceptance of an
appropriate share of the burdens of mutual defense
and of economic development assistance, and greater
encouragement of capital outflow.

2 -

A large part of the required adjustment can
be achieved over the longer term without disturbance
to the patterns of economic activity by which ~en
earn their living.
The united States must be able
to finance its share of world trade and investment
and defense without jeopardizin9 its international
liquidity position and hence the very structure of
the international monetary system.
Europe must now
arrange to play a larger role in the financing of
all these activities and devote less of its financial
resources to the, accumulation of gold and foreign
exchange reserves.
The Balance of

~ayments

Problem

It is understandable that even today many of
our ci tizens are not fully a\·:are of the urgent
necessity of restoring a balance in our international
payments. The U. S. economy is strong and prosperous. Foreign transactions of the United States,
while very large in terms of the international economy,
are small relative to our total production, consumption and investment--relatively s~aller than for almost
any other country. Why should the United States or
the world be disturbed about a balance of payments
deficit that is only a fraction of one percent of
our output of goods and services?
Despite the magnitude of our domestic economy,
the foreign transactions of the United States are
important to our economic well-being and indispensable to the free world.
Imports of foodstuffs, raw
materials and finished goods are essential for our
production and our high standard of living. The
overseas expenditures of the U. S. Government for
foreign aid and defense are vital to our objectives
of world peace and security.
u.s. private foreign
investment is profitable to our banking and business
institutions and important for economic growth and
development in many other countries. And travel
enhances international understanding.
The cost of imports, travel abroad, security
and aid expenditures overseas, and foreign investment must be paid for by exports of goods and
services, the earnings of our foreiqn loans and
investments, travel and investment by foreigners
in the United States and other foreign exchange
receipts.

- 3 -

In 1966 our total international payments,
in so f~r as they can be measured, amounted to
$49 billion while our foreign receipts were
nearly $48 billion. The resulting deficit in
our Lalance of payments amounteu to $1.36 Lillion.
This increaseti to about $3.5 to $4 billion last
year,
\'lhcn our total foreign payments are more
than our foreign receipts, some or all of the
excess dollars receivcu Ly foreigners are sold
to their central banks, which can use them in
a variety of ways--including holding them as
reserves or buying gold from the United States.
The result tends to De a :leterioration in tlie
liquidity position of the United States, as the
ratio of its reserve assets (e.g., gold) declines
relative to its liquid liabilities (e.g., dollars
held hy foreigners) .
The United States is the major international
Dankinq center holding large aeposits both for
monetary authorities and for private Lanks, corporations and individuals. The dollar functions
as the principal international currency.
Its
liquidity position must remain strong, like that
of any lJank, to retain the confidence of its
depositors.
The U. S. deficit was welcome when it first
developed in the early postwar years. Then, as
now, the deficit consisted of capital outflows-both public and private--that exceeded the U. S.
surplus on goods and services.
It supplied reserves
to foreign countries--principally European--which
had drawn them down to finance the war ana postwar
reconstruction. More basically, the U. S. capital
flow to Europe contributed to the European
economic miracle and the smooth transition to
European economic unity.
In the late 1950's, however, U. S. deficits
began to become a source for concern. Not only
did the size of the deficits rise, but they were
financed ~ore by sales of gold and less by foreign
accumulation of dollars than in prior years. Althouqh some foreign central banks had what they
considered to be adequate supplies of dollars in
their reserves, many countries had small reserves

- 4 ana were still eager to add to their dollar
reserves.
There was still no high urgency about
restoring balance to our international accounts.
Nevertheless, President Eisenhower instructed
the Department of Defense and other Government
agencies to economize on their foreign exchange
expenuitures. With three years of large deficits
culminatinq in a speculative outbreak in the London
gold market in October 1960, new measures were
called for.
President Kennedy proposed measures to
incrense exports and other receipts, intensified
efforts to cut government balance of payments costs,
and later introduced the Interest Equalization Tax
to holli down U. S. purchases of foreign securities.
h sharp ris0. in U. S. capital outflows in 1964
made it nC'cc;ssary for President Johnson to introduce a voluntary program for holding down direct
investment and bank loans abroaa.
The rationule oehind these measures was as follows:
First, while the risinq outflow of U. S.
caoital w~s moderatca, U. S. international
bula.nce woul(1 be restored by the growth of
the U. S. surplus on non-capital transactions.
Second, modestly restraining the increase
in U. S. foreign investments, particularly
those in Ivestern Europe, would have only a
~nall effect on world economic growth in
sharp contrast to other alternatives and
would yield satisfactory balance of payments results over time.
Fro~

1958-60 to 1965, we made good progress in
reducing our payments deficit because of the growth
of our cxrorts of goods and services relative to our
imports, because of the rise in earnings from our
foreign investments, and because of the reduction
in capital outflow in 1965.
In 19G5 and 1966, we reduced our liquidity
deficit by almost two-thirds from the average defic1ts
of 1958-60 and one-half from the Clvcraqe of-1961-64.
As this period progressed, however, the accelerated
expansion of the U. S. economv and the war in
Vietnam placeu renewed pressu~e on the balance of
payments. The boom resulted in an extraon.1inary
increase in imports. The costs of our forces in
Vietnal a(~u~(i substantially to our foreign payments.

5 -

Thus, while the voluntary program reduced the
capital outflow considerably from the peak of 1964,
the payments deficit persisted.
There was retrogression in the first three quarters of 1967 because
the foreign exchange costs of Vietnam rose further,
private capital outflow increased, net tourist
expenditures rose, and the European economic slowdown
reduced European imports--and our exports.
The devaluation of sterling in November 1967
brought the balance of payments problem to an acute
stage. Against the background of a persistent deficit
in the U. S. balance of payments, the British move
resulted in a weakening of confidence in currencies
and was accompanied by a burst of speculative
buyinq of gold and a resulting large loss of U. S.
gold reserves in November and December. This was
a threat not only to the dollar but also to the international monetary system as a whole.
While the speculation was repulsed with the
cooperation of most of the members of the gold pool,
it underlined the urgency of placing the dollar once
more in an impregnable position. The time had come
when it was necessary and desirable to take new and
decisive measures to move the U. S. payments position strongly toward balance.
What was the best way to achieve this?
Depressing the American economy is as unacceptable
to most other nations of the world as it is to the
United States. The United States occupies a unique
role in the world economy.
It is by far the largest
exporting and importing country.
It is the principal
source of international capital.
It is the largest
donor of aid.
Military forces stationed abroad are
inJispensable to the security of many countries-including the United States. For all these reasons
the entire world is affected by the U. S. economy
and the U. S. balance of pavments. The volume of
international trade, the l)r-iccs of basic commodi ties,
the cost of money and even the level of production
and employment abrocld respond to the U. S. economy.
The United States must seek a solution to the payments
imvalance through the expansion of the world economy
rather than the contraction of its own, and consequently the world, economy.

6 -

The action program announced by President Johnson
on January I avoids deflation, while underlining the
urgent need for prompt enactment of an anti-inflationary
tax increase, along with proper control of public
.
expenditures, appropriate monetary policy, responsible
wage and price decisions on the part of business and
labor, and other measures to increase our export
surplus.
Because the need to cut the U. S. payments
deficit is urgent, the program also includes new
and stringent temporary restraints on outflows of
U. S. private capital and on foreign travel by
Americans.
Indeed, it is upon these uncongenial
measures that we must rely for the largest immediate
effects. These measures have been adopted reluctantly as an emergency matter.
How soon they can
be relaxed will depend greatly upon our own efforts
to increase our trade surplus, reduce or neutralize
government expenditures abroad, and encourage
foreign travel and investment in the United States.
It will depend upon the policy responses of other
countries, especially of those countries in continental Western Europe that have experienced
chronic payments surpluses in recent years.
International Monetary System
It is the relationship of the U.S. dollar
and the U. S. payments position to the international
monetary system that makes this program both a national
and international responsibility.
The present international monetary system has evolved substantially
since the gold standard was in force for all of the
large trading countries.
During this long period of
evolution, the very nature of the system has changed
to conform to the needs of the world economy. The
International Monetary Fund, established at Bretton
Woods, embodies in its Articles of Agreement the
main principles on which the international monetary
system is now based.
Essentially, it is a system
~n which the par value of each currency is expressed
ln terms of gold.
The foreign exchange rates for
currencies must be kept within I per cent of the parity.
In most countries other than the United States, the
central bank supports the currency, when the balance
of payments is in deficit, by selling dollars in the

- 7 -

foreign exchange market; when in surplus, the
central bank purchases dollars against its own
currency in the exchange market. The United States
is the only country that freely buys and sells gold
as the method of meeting its obligation to maintain the international value of its currency.
Countries in deficit can receive medium-term
credit from the International Monetary Fund while
restoring their balance of payments without resort
to measures destructive of national or international
prosperity.
Such an international monetary system requires
adequate monetary reserves to enable countries to
meet payments deficits while they take measures to
adjust their balance of payments. The monetary
reserves of the world consist mainly of gold, U. S.
dollars, and other currencies. As world trade and
payments grow, the need for additional monetary
reserves also grows. Since 1950, less than half of
the increase in monetary reserves has been in the
form of gold. More than half of the increase has
been in the form of U. S. dollars acquired by the
central banks of other countries. Without the
growth of dollar reserves, the growth of world trade
and payments would have been severely restricted and
the world economy might have been subjected to
serious deflationary pressures and instability.
In actual fact, the international monetary
system has worked well. This is evident from the
enormous expansion of world trade from $55 billion
in 1950 to about $200 billion in 1967. The
expansion of trade and payments and the stability
of the international monetary system have been
buttressed not only by growth of reserves but also
by enlargement of international credit facilities.
The resources of the International Monetary Fund
were increased in two steps from over $9 billion in
1958 to $21 billion at present. The International
Monetary Fund entered into an agreement with a number of industrial countries (the Group of Ten) under
which they undertook to lend up to $6 billion to

- 8 -

the Fund if this should prove to be necessary. A
network of reciprocal currency agreements was
established by the central banks of the large financial
centers for swaps of each other's currency; the United
States has such swap arrangements totaling $7.1 billion
with 14 central banks and the Bank for International
Settlements.
In order to help maintain confidence in
the equivalence of gold and currencies at stable
values, a number of countries formed a gold pool to
maintain the orderly character of the London gold
market.
These various measures helped the international
monetary system to function effectively.
Even so,
it became evident that a more basic reform was
necessary. The world can no longer depend entirely
upon increases in gold and dollars to provide an
assured and satisfactory growth of monetary reserves.
The amount of newly-mined gold available will not
provide for an adquate increase in world reserves.
And it is not desirable from the point of view of the
United States or the rest of the world that the
growth of U. S. liabilities in the form of dollar
reserves abroad should continue as in the past. A
steady increase in U. S. liabilities, while its
reserves decline,
exposes the international monetary system to the threat of instability.
In 1965, at the initiative of the United States,
the Group of Ten and the International Monetary Fund
began to develop methods for creating a new reserve
asset to supplement gold and dollars. These discussions have led to an agreement for the creation of
Special Drawing Rights at regular intervals and in an
amount necessary to assure an adequate growth of
monetary reserves.
This new supplement to existing
reserve assets will be issued by the International
Monetary Fund. All 107 members of that institution
will be eligible to participate. At the annual
meeting of the International Monetary Fund in
Rio de Janeiro in September 1967, the Governors of
the Fund unanimously approved a resolution providing
for leqal drafting of this proposal as an amendment
to the Fun~'s Articles of Agreement.
It is hoped and
expected that the necessary legal steps will be
completed late this year or early in 1969 and that
the plan will then be put into operation promptly.

Q -

The Rio resolution for the creation of Special
Drawing Rights (SDR) represents a landmark in the evolution
of an international monetary system responsive to the
needs of the modern world. When this system is in
operation, the growth of monetary reserves can be
adequate without depending either ~n the uncertainties
of gold mining and gold hoardinq cr on persistent
deficit in the U. S. balance of payments.
The early availability of SDR removes one of the
concerns as to the impact of the U.s. halance of payments
program--namelv, a slowinq of reserve arowth nnn rt
consequent adverse effect on world trade and income.
Early activation of the SDR plan can maintain an adequate
growth of world reserves together with restoration of
u.s. balance of payments equilibrium.
Strategy for Payments Improvement
The key resources which give the U.s. the strength
to deal with its underlying long-range payments problem
constructively and sensibly are:
a strong economy with a Gross National Product
in excess of $800 billion, representing 40-45~
of world output;
a large stock of foreiqn assets with powerful
earnings potential. r,ro~s assets abroad -public and private -- total more than $110
billion. Our net long-term asset position
apprnximatelv $70 billion -- has increased
every year for 20 years. Private overseas
assets alone now generate annual earnings of
about $6 billion.
a basic trade surplus, on which we must build;
a strong reserve position (nearly $15 billion,
or about 20% of world reserves), even after
losses of the past few years.
We can build on these elements of strength and move
toward balance of payments equilibrium through shortand Ion -range measures vigorousl implemented. Furthermore, the passage of t~me w~ll amel~orate orces that
presently exacerbate the balance of payments deficit
and hide the fundamental progress achieved.

- 10 -

Ideally, the United States would solve its balance
of payments problem through a gradual, long-range approach
in which there was no interference with the free movement
of goods and services, capital or people. Over the long
run, the United States is, in fact, dedicated to just such
an approach.
However, the situation that confronts the united
States today requires promtt and major corrective action.
Long-term measures alone t at take hold gradually over
time are not sufficient.
The President's Action Program
President Johnson's program is designed to bring
about a sharp reduction in the United States payments
deficit in the year ahead, bringing it into--or close to-equilibrium. The program consists of general and specific
measures, short- and long-range actions.
As indicated in the President's message on January 1,
1968,

"The first line of defense of the dollar is the
strength of the American economy.
"No business before the returning Congress will
be more urgent than this: To enact the antiinflation tax which I have sought for almost a
year. Coupled with our expenditure controls and
appropriate monetary policy, this will help to
stem the inflationary pressures which now threaten
our economic prosperity and our trade surplus.
"No challenge before business and labor is more
urgent than this: To exercise the utmost responsibility in their wage-price decisions, which
affect so directly our competitive position at
home and in world markets.
"I have directed the Secretaries of Commerce and
Labor, and the Chairman of the Council of Economic
Advisers to work with leaders of business and labor
to make more effective our voluntary program of
wage-price restraint.

"I have also instructed the Secretaries of Commerce

and Labor to work with unions and companies to prevent our exports from being reduced or our imports
increased by crippling work stoppages in the year
a1iead.

- 11 -

"A sure way to instill confidence i:1 our dollar --both here and abroad -- is throuah these "'c:tions."
In addition, the Action Program contains these
direct measures:
1. Di rect investment.
Bv F::ecuti V0 ("-:-4r:- and
requlations lssued under the Rankina Lah~, 0 !7:Clndator v
li~it has been placed on direct investment by U.S. companie~ in f0reign affiliates.
Th~ proqran, t0gether
with its accompanying provisjons nn th~ reptitriation nf
forciqn earnings, is expected to rrducc th€ D~'~?nts
deficit by Sl billion in 1968.
In the highly-developed countries, p~lncipally
continental Western Europe, a moratorium is imposed
any new capital outflow from the United States, and
restraint is placed in the reinvestment of earnings
direct investment.

in
on
a
from

In a group of countries in which a high level of
capital inflow is essential for economic growth and
financial stability, and where adequate funds cannot
be secured from other sources, U. s. companies may make
new capital transfers for direct investment which together
with reinvested earnings do not exceed 65 percent of the
average of their capital outflow plus reinvested earninqs
in 1965 and 1966. The countries in the group subject ~0
this limitation include, among others, Canada, Japan,
Austral ia, ,',(;\,1 ~ealand, the Uni ted hingdom and the oi 1producing countries.
In the less-developed countries, U.s. companies may
make new capital transfers for direct investment which
together with their reinvested earnings in these countries
do not exceed 110 percent of the 1965-66 average.
The funds available for new investment through the
retention of earnings or permitted transfers of new
funds can be supplemented by borrowing abroad.
Funds
available from depreciation reserves abroad are also
not counted as part of the new investment.
Specific
authorization will be required for any new transactions
not falling within the targets set up for investors.
The
order does not apply to direct investment of less than
$100,000 in any year.

12 -

In accordance with the regulations, u.s. companies
must repatriate from their share of the earnings of all
their foreign business ventures in the three groups of
countries amounts equal to the greater of (1)
the same
percentage of their share of total earnings from these
three groups as they repatriated during 1964-66, or (2)
so much of their share of earnings as may exceed the
limit set for capital transfers to each group.
In the
case of the continental European countries where a
moratorium on capital transfers applies, the applicable
rule with respect to (2) above is that earnings in excess of 35 percent of investment in 1965-66 must be
repatriated.
In addition, short-term financial assets
held abroad, other than in direct investments, are
required to be reduced to the average level of 1965 and
1966 and held at this level.
2.
Banks and other financial institutions. Revised
guidelines have been issued by the Board of Governors
of the Federal Reserve System for reducing foreign credits
from u.s. banks and other financial institutions. The
new guidelines are designed to bring a net inflow of at
least $500 million in 1968. The program is voluntary,
although the President has given the Federal Reserve
Board standby authority to invoke mandatory controls.

The Bank program also requests banks to reduce the
amount of their term loans to developed countries of
continental Western Europe by not renewing such loans
at maturity and by not relending them to others. All
banks are also asked to reduce the amount of outstanding
short-term credits to developed countries of continental
Western Europe by 40 percent-of the amount outstanding
at the end of 1967. As these loans are repaid, ceilings
for outstanding foreign credits will be reduced
correspondingly.
Revised guidelines for other financial institutions,
such,as insurance companies, ~utua1 savings banks,
penS10n funds, etc., request them to reduce their holdings of forei~n assets covered by the program by 5 percent or more ln 1968 compared with the amount of such
~sse~s h~ld at,the end of 1967.
It is expected that these
1nst1tut10ns w1l1 reduce to zero their holdings of liquid
funds abroad, 0: to th~ minimum working balance required
to conduct forelgn buslness activities even if this entails a decline in foreign assets by m~re than 5 percent.

- 13 -

In both programs, priority will continue to be
given to credits for financing exports and to loans to
the less-developed countries. The major effects of the
revisions are focused on the developed countries of
continental Western Europe.
3. Foreign travel. Our travel deficit increased
substantially in 1967 to a figure estimated at approximately $2 billion. The Administration believes that
the best long-range manner to reduce this deficit is to
encourage more foreign travelers to visit the united
States. A special Task Force is at work on measures to
accomplish this. The President has directed the Task
Force to report within 45 days on the immediate measures
that can be taken and to make its long-term recommendations within 90 days. Their recommendations will be
acted on promptly. Meanwhile, however, more drastic
measures are required on a temporary basis. A reduction of $500 million in payments for foreign travel is
essential for restoring our balance of payments. The
President has therefore asked the American people to
defer for the next two years all nonessential travel
outside the Western Hemisphere. The Treasury is exploring with Congressional committees appropriate legislation to help achieve this objective.
4. Government expenditures overseas. The commitments for aid and defense, on which Free World security
depends, necessitate very large expenditures abroad.
These costs have risen sharply because of the vietnam
war. Over the past three years, a stringent program has
substantially reduced these foreign exchange costs.
The President has, nevertheless, set a target of a
further reduction of $500 million in the foreign exchange impact of such programs in 1968.
Negotiations will be initiated promptly with
our allies in Europe and in the Pacific to minimize
the foreign exchange costs of our military spending abroad. They can help, as they have, by purchasing in the United States more of the equipment for
their defense needs. They can also offset the adverse
effects of our military expenditures on the balance
of payments by investing part of their foreign

- 14 exchange receipts in long-term U. s. securtities.
The Department of Defense has been instructed to
find ways to reduce further the foreign exchange
impact of personal spending by U. S. forces and
their dependents. The President has instructed the
Director of the Budget to find ways to reduce the
number of American civilians working overseas. AID
has been directed to reduce its foreign exchange
costs by at least $100 million in 1968.
5. Export increases.
In the long run, the
best way to restore our balance of payments is to
increase our trade surplus by increasing the rate
of our export growth. The surplus on goods and
services must be the main source of the foreign
exchange earnings needed to finance our private
foreign investment and the overseas expenditures
of the Government. While the expansion of U. S.
exports is primarily a long-range program, special
efforts in this direction can contribute as much
as $500 million to the improvement of the balance
of payments in 1968.
The President will ask Congress to support
an intensified five-year program to promote the
sale of our industrial and agricultural products
in foreign markets. The President will also ask
Congress to earmark $500 million of Export-Import
Bank funds to provide better export insurance, to
expand guarantees for export financing, and to
broaden the scope of Government financing of exports.
Through a more liberal discount system, the ExportImport Bank will encourage banks to help firms increase their exports. The Commerce Department will
begin a Joint Export Association program to provide financial support to American companies joining
together to sell abroad.
Since 1934, the United States has taken the
lead in cooperative action to expand world trade
through reciprocal reduction of tariffs. The
policy inaugurated by President Roosevelt and Secretary of State Hull has been extended and broadened
in every Administration since then.
In the
Kennedy Round, we climaxed three decades of intensive

- 15 effort to achieve the greatest reduction in tariffs
in all the history of trade negotiations. Trade
liberalization remains the basic policy of the
united States.
Nontariff barriers, however, pose a threat to
the continued growth of world trade and to the u.s.
competitiv~ position.
We ask no unfair trade advantage. On the other hand, we cannot ignore the disadvantage to our trade resulting from the tax systems
of our trading partners.
Some countries, those that
make extensive use of indirect taxes compared to
personal and other income taxes, give across-theboard tax rebates on their exports and impose
special border taxes on their imports. These tax
practices are governed by the rules of the General
Agreement on Tariffs and Trade, which we will seek
through negotiation to adjust and expand international
trade further.
The United States has initiated discussions,
particularly with nations having balance of payments
surpluses, to minimize the handicaps to our trade
which arise from differences in national tax systems.
We are also preparing legislative measures in this
area whose scope and nature will depend on the outcome of these consultations.
Long-Range Aspects of the Balance of ?ayments Program
A drastic reduction in our balance of payments
deficit is necessary to defend the dollar and to
insure against a breakdown of the international
monetary system. The action program will achieve
this. The program will entail sacrifices in this
country and it may cause difficulties for some
foreign countries.
In order to assure a fair sharing
of these sacrifices, the program has been widely
spread over all sectors of the u.S. economy.
In
order to minimize adverse effects on the world
economy, the program distinguishes among groups
of countries on the basis of their ability to absorb
reductions in their foreign exchange receipts.
The action program is designed to deal with
an emergency. We do not regard certain aspects
of it as consistent with a long-range solution
to our underlying balance of payments problem.

- 16 Restrictive measures are temporary.
The policy
of the United States is to support the unrestricted
international flow of goods, services and capital
under a stable international monetary system based
on fixed values for currencies defined in terms of
gold or the dollar, linked at $35 an ounce. The world
economy can operate most effectively only with a balanced
pattern of international payments, achieved without
restrictions. The international monetary system
can function effectively only if monetary reserves
can grow steadily at an appropriate rate without
depending, as in the past, on a large infusion of
dollar reserves derived from a payments deficit of
this country.
When the fighting in Vietnam ends, the foreign
exchange costs of our security efforts in Southeast
Asia--now running at an annual rate of about
$1.5 billion--will drop and will help our balance
of payments position. But it is important to remember
that we had a balance of payments ~roblem before
Vietnam, and the cessation of theighting will
not in and of itself effect a cure. Much more is
required if we are to terminate restrictive measures
and at the same time maintain equilibrium. This
we are determined to do. This is why the Action
Program includes intensified longer-range, balance
of payments measures.
An appropriate long-range balance of payments
solution for the United States must be based on a
substantial and growing surplus in trade and services,
including earnings from U.S. foreign investments.
The present trade surplus is too small.
It must
be increased substantially through an expansion of
U.S. exports. The Government is taking measures
to encourage exports. U.S. producers will be able
to benefit from these measures only if they strengthen
their position in world markets by maintaining competitive
prices and costs.
Unfortunately, after a period of unprecedented
stability, U.S. prices and costs rose in 1966 and
1967. The rapid expansion in the U.s. economy that
is now under w~y threatens a further rise in prices
and costs .. ThlS would endanger our economic prosperity
and undermlne our competitive position in world

- 17 markets. The President has instituted rigorous controls
on Government expenditures. The Federal Reserve is
following a cautious monetary policy. The most urgent
business before Congress is to complete this antiinflation program by enactinq a temporary surcharge
on income and profits taxes.
Even a strong fiscal policy 2nd a stringent
credit policy cannot maintain price stability unless
business and labor are willing to follow price-wage
practices that conform to the needs of our economy.
Furthermore, at a time like this, the country cannot
afford the loss of output resulting from crippling
work stoppages in critical industries. They reduce
our exports and increase our imports. They may have
an enduring effect on our trade position if the need
for vital goods is met by imports not because of
lower prices but solely because of greater assurance
of a regular supply.
Not only our commodity exports, but our exports
of services can be increased. We hope particularly
that foreign tourists will come to the United States
in growing numbers over the longer term.
The United States is eager--and wo~king h~rd--
to encourage foreign direct investment in this country
and investment in U.S. corporate securities.
Foreign
companies whose products are already familiar to
U.s. buyers would find direct investment very profitable.
We have an enormous market, efficient labor, and
easy access to advanced technology.
The attractiveness
of u.s. corporate securities has been enhanced by
the Foreign Investors Tax Act of 1966. The benefits
granted by this legislatio~ as well as other
factors, should result in a moderate but steady
inflow of investment funds from abroad.
The United States recognizes its responsibility
for adjusting its own balance of payments and it
does not intend to shirk this responsibility. At
the same time, it must be recognized that the U.S.
balance of payments is part of a world pattern of
payments. The counterpart of the deficits of some
countries is the surpluses of other countries. Countries
in surplus have a responsiblity for adjusting their
balances of payments and thereby facilitating the

- 18 progress toward international equilibrium that the
u.s. action program makes possible. They can meet
these responsibilities by reducing their barriers
to trade, by increasing their aid to less-developed
countries, by sharing adequately in the cost of common
defense, by encouraging capital outflows, and, by
maintaining a satisfactory pace of domestic economic
expansion. As part of this vitRl adjustment effort,
we should be ablc--indeed we must fino ways--to work
constructively with our allies on forms of bilateral
and multilateral financial arrangements designed
to neutralize the foreign exchange consequences of
the locations of our troops and those of our allies.
The arrangements should be long term and provide
financial viability to our alliances.
The qrowth of reserves of the rest of the world
will be sharply affected by the reduction in the
U.S. deficit. Yet many countries will wish to see
a qradual increase in their reserves as their intcrnationill
transactions expand.
Therefore, it is important
to implement as speedily as possible the plan agreed
in outline last September to create new international
reserves in the form of Special Drawings Rights in
the International Monetary Fund.

- 19 I.

The International Monetary System and Adjustment of
Payments Imbalances

The problem of the U.S. balance of payments can be
understood and analyzed only against the background of
an understanding of the present international monetary
system. This paper therefore begins with a description
of the complex institutional framework within which world
trade and payments are carried out. A second chapter
discusses the current problems facing the present system.
Subsequent chapters then proceed to analyze the key elements of the U.S. balance of payments problem in detail,
the measures previously employed, and the President's
new program.
A.

The International Monetary System--Why and How it Works

An international monetary system provides means and
methods of payments in order to facilitate international
trade, capital and other transactions. In a world composed
of various countries, each with its own currency, trade
and capital movements across national borders have not
only to be paid for as they are within any country, but
have to be provided with a mechanism to convert one
currency into another.
The American exporter to Italy usually wants to be
paid in dollars--his currency. The Italian importer has
lire. Some mechanism has to be provided to convert the
lire into dollars to pay the American exporter. And if
credit is involved, there needs to be a financing mechanism
that crosses the frontier.
The requirements for handling international payments
smoothly are:
The various currencies should be convertible
easily into each other.
There needs to be confidence ln the stability
of the exchange rates of the major currencies
against each other.
The various countries need to have international
reserves of unquestioned value so that if for a
time their outpayments exceed their inpayments
they can finance the difference by using these
reserves.

20 -

The system works more smoothly if owned
reserves are supplemented by credit facilities to tide nations over periods of imbalance.
In a strict sense, the international monetary system
is not a system at all.
It is a series of arrangements,
procedures, customs and institutions which have evolved
over time and which are laced together by a network of
formal and informal agreements.
It has been partially
codified as to objectives, principles and procedures by
the Articles of Agreement of the International Monetary
Fund (IMF).
It has been aided by international cooperation on the part of the important central banks of the
world--most notably through the so-called "swap network."
It works partly through correspondent relationships of
the major commercial banks of the world. !\1oney and
capital markets in the United States and Europe are
important factors in making the system work.
In recent
years it has been strengthened by a series of consultative
arrangements undertaken under the auspices of the
Organization for Economic Cooperation and Development
(OECD) .
The system rests on five pillars:
a dollar convertible into gold at $35 per ounce;
other major currencies convertible into dollars
at stated rates of exchange--under IMF rules
they may vary plus or minus I percent from parity;
adeqilate intGrnatio~~l reserves and credit facilities
designed to sU290rt the~e relationships;
a general presumption that a country will over
time be in equilibrium in its international
position--that surpluses will be offset by deficits
on the average;
in seeking to adjust from deficit to surplus, or
vice versa, a country will take into account the
consequences of its actions on the world community.
B.

The Role of the Dollar

In practice, all member countries of the IMF which
have convertible currencies operate through their central
banks or monetary authorities to keep their currencies in
an established relationship to the dollar.
For example,

- 21 -

the exchange parity of the D-mark is 4 to the dollar,
or $0.25. The IMF intervention limits are $0.2475 and
$0.2525.
In practice, the German Federal Bank intervenes
within somewhat narrower limits. When the dollar is strong
against the D-mark, the dollar price of the D-mark falls
toward $0.2475. The Bundesbank supplies dollars from its
reserves to buy up the excess D-marks. When the D-mark is
strong against the dollar, its dollar price rises toward
$0.2525. Then the Bundesbank supplies marks and buys
dollars.
Each monetary authority acts essentially in the
same way--intervening in its own markets to maintain
the price of its currency vis-a-vis the dollar within
the narrow band of plus or minus 1 percent from its parity.
The United States does not have to carryon operations
like this.
It fulfills its IMF parity obligations by
freely buying and selling gold for dollars--only with
monetary authorities and for legitimate monetary purposes,
of course--at $35 per ounce.
The point is that virtually every country does its
market interventions by buying or selling dollars.
It does
so because the dollar is the major transactions or vehicle
currency and is widely used in the payment and receipt
transactions of international trade and capital flows.
It does so because the dollar is a reserve currency and
most countries hold dollars in their international reserves.
The dollar is both a reserve currency and a vehicle
currency because:
it is strong, being backed by a strong economy;
it can be invested profitably because there exists
a big money and capital market in the U.S.;
it is known and is acceptable as a store of value-that is, it holds its purchasing power better
than most other currencies;
it is in sufficient supply so that there are
dollars that can be used or borrowed for transactions; and
it is convertible by monetary authorities into
gold so that they are willing to hold it.

22 -

The u.s. did not deliberately make the dollar a
reserve currency or a transactions currency. The dollar
evolved as such out of its basic strength.
But this strength can be called into question 1n
two ways:
If the supply of dollars in foreign hands becomes
greater than the amount foreign central banks
and private holders want to hold, either because
of their basic needs or for other reasons.
If declines in the u.s. gold reserve and consequent unfavorable effects on the relationship
between u.s. gold and u.s. dollar liabilities
raise questions as to the ability of the U.S.
freely to convert outstanding dollars into gold
at $35 per ounce.
It is to prevent such developments that the U.S.
must achieve sustainable equilibrium in its payments
position. Unless it does so, its liabilities to foreigners
increase and its gold reserves decrease, and the monetary
system becomes more vulnerable to a shrinkage in overall
liquidity that can cause serious financial and business
disruption through an international credit squeeze.
Foreign central banks and other official institutions
hold some $16 billion of liquid dollar assets. Private
foreigners hold another $16 billion.
The official holdings are reserves for the rest of the
world and constitute nearly 30 percent of such reserves.
But so long as they are not withdrawn in the form of gold,
they have not reduced our reserves.
Thus, our balance of
payments deficit, unlike those of a nonreserve currency
country, has been only partially reflected in a decline of
gold reserves or in our reserve Dosition in the IHF. A
considerable part of our balance of payments deficit has been
covered by an increase in our liabilities rather than by
a reduction in our reserve assets.
J.:

Hhile it is not necessary for a commercial bank to
maintain liquid assets to cover all or even a major part
of its liquid liabilities, the u.s. as a reserve center
is a bank in a rather special sense, and needs to maintain
a substantial reserve against its liabilities.
It is
important that our reserves be adequate to meet demands
for conversion, and to maintain confidence in the bank on
the part of the official and private dollar holders abroad.

- 23 -

Rising dollar liabilities which constitute reserves
for other countries have permitted'the world as a whole
to build up its reserves more rapidly than would otherwise
have been the case. A return of the United States to
equilibrium would cut off this growth of reserves for
these countries. It has become increasingly clear, therefore, that some other means of providing for the future
growth in world reserves will be required. To this end,
the members of the International Monetary Fund have now
agreed on a plan for the deliberate creation of reserves
through multilateral action. When this plan is in effect,
the world would no longer be dependent unon gold and the
deficits of the United States to provide for the expansion
in world reserves which will be needed in the future.
Thus the role of the dollar as a reserve currency
has been intertwined with the problem of our balance of
payments and has also been related to the general problem
of expanding world reserves. Through a multilateral
system of reserve creation, we can relieve the dollar of
its responsibility to provide for a growth in world
reserves, and permit concentration on the balance of
payments problem.
The following sections of this chapter set forth
the elements of the international monetary system.

c. Exchange Rates
One of the distinguishing features of the present
international monetary system is the relative stability
of exchange rates. Under the Articles of Agreement of the
International Monetary Fund--which since their adoption
at Bretton Woods, New Hampshire, in 1944 have embodied
the formal principles and procedures which underly the
present system--countries undertake to maintain exchange
rates for transactions in their currencies within a margin
of one percent of a declared par value. This par value may
be changed, with the approval of the IMF, in the event of
a "fundamental disequilibrium" in a country's balance of
payments. For the most part, however, all the members
of the IMF have shown a strong preference for stable
exchange rates that are changed only infrequently.
In order to maintain their currencies within a
margin of ane percent of the declared par value, the
monetary authorities of almost all countries other than
the United States intervene when necessary in their exchange
markets, buying or selling dollars against their own
currency. There are a few exceptions to this method of
official exchange-market intervention (notably in the

24 -

sterling area), but for the most part the entire pattern
of stable exchange rates is maintained by virtue of the
fact that countries "peg" their exchange rates to the
dollar.
Since most other countries peg their currencies
to the dollar, the United States itself does not need
to intervene in the exchange markets to maintain the
value of the dollar in terms of other currencies. Although
it may at times find it advantageous to do so in order to
assure more orderly markets and more efficient and
economical use of its reserves, the Uni ted States baSically
maintains its obligations regarding exchange stability in
a very different manner:
by freely buying and selling gold
in transactions with monetary authorities (primarily
central banks of other countries) at the price of $35 an
ounce.
No country other than the United States freely
buys and sells gold.
The whole exchange-rate system is
therefore pegged to gold only through the commitment of
the U.S. monetary authorities to buy and sell gold freely
at the $35 price.
D.

Reserves

In order to weather periods of deficit in a system
of stable exchange rates, monetary authorities must hold
reserves of internationally-acceptable liquid assets.
If a central bank had no ~eserves with which to purchase
its own currency at times when its currency was in
excess market supply, it would have no choice but to ask
the IMF to approve a change in its par value.
Reserves are held primarily in the form of gold and
dollar claims on the United States.
Because dollars are
held so widely in countries' reserves, the dollar is the
main "reserve currency" of the international monetary
system. Countries in the sterling and franc areas hold
part of their reserves in sterling or French francs, and
thus--to a much lesser extent--the pound and the franc
also function as reserve currencies. Gold and reserve
currencies are supplemented by reserve credit available
from the International Monetary Fund (see below).
After an initial accrual of dollars resulting from
market intervention, the country can either retain its
reserve gain in the form of dollars or choose to convert
the dollars into another reserve asset, usually gold.
Conversely, a country necessarily experiences a reserve
loss by the act of selling dollars in its exchange market,
thereby reducing its dollar hOldings.
In order to stand
ready to intervene in the market, central banks have to

- 25 -

hold at least a working balance in dollars.
This working
balance can be replenished as necessary either by selling
other reserve assets (such as dollar securities, time
deposits, or gold) held by the monetary authorities or
by drawing on the IMF or other credit facilities.
Many diverse factors enter into the decisions of
central banks when they determine the proportions of
their reserves to hold in gold, dollars, and other assets.
Some central banks have traditionally held their reserves
primarily in gold except for foreign-exchange working
balances. Others have historically invested almost all
their reserves in dollar or sterling assets.
There are
many different patterns of behavior in between these
two extremes. Moreover, many countries have changed
their reserve-composition policies over time.
One important motive for holding dollars is that they
can be invested at interest.
Gold does not earn any
interest and actually costs something to store safely.
It has already been pointed out that the United States
maintains its exchange stability obligations in a unique
manner.
It is equally true that the United States must
of necessity have a unique policy with respect to its
reserves. Whereas other countries use their reserves by
buying or selling dollars in their exchange markets, the
United States uses its reserves only to redeem excess
dollars acquired by the monetary authorities of other
countries.
This structural feature of the international monetary
system has another important implication: when the United
states does use its reserve assets to redeem outstanding
dollar liabilities, this redemption--both in amount and
timing--is determined by the reserve-asset preferences
of fo~eign monetary authorities.
The amount and timing
of U.S. use of reserve assets is therefore not directly
subject either to U.S. desires or to U.S. official policy
actions. The United States can influence the rate at which
it gains or loses reserves only by influencing the attitudes
and asset preferences of foreign monetary authorities.
One of the major factors influencing foreign official
attitudes, of course, is the prevailing appraisal of the
strength or weakness of the U.S. balance of payments and
reserve positions.
Just as the United States uses reserves in a unlque
manner, it must hold its reserves subject to considerations
that are unique.
Whereas other countries have a rana~ of
assets from which to choose that includes gold, dollars,
~

- 26 -

other currencies, and reserve positions in the IMP,
the United States has a much more restricted field of
choice.
It must hold assets which are acceptable
to other countries when they call upon the United States
to redeem our outstanding reserve-currency liabilities.
While there is some scope for holding other countries'
currencies in our reserves, it is clear that in the
present system the United States must hold most of its
reserves in gold.
Given the wide extent to which the dollar is used
as the "intervention currency" and as a reserve currency,
it is clear that the stability of the entire international
monetary system is intimately bound up with the behavior
of U.S. reserves.
If a widespread feeling were to develop
that U.S. reserve assets might be inadequate in comparison
with the size of outstanding reserve-currency liabilities,
or especially if U.S. reserve assets threatened to continue
to decline simultaneously with a further large expansion
of U.S. reserve-currency liabilities, dollar assets might
be viewed with increasing distrust by individuals and
governments all around the world.
The U.S. Government
fully appreciates the significance of the fact that the
stability of the entire monetary system is interdependent
with U.S. reserve and balance of payments policy. This
fact and the desire to act responsibly in the face of it
have been one o~ the primary considerations underlying
u.s. balance of payments policy since the large payments
deficits of 1958-60, accompanied by heavy gold losses,
first underscored the existence of a problem.
E.

Operations of the International Monetary Fund

In addition to the gold and reserve currencies which
countries hold in their reserves outright (sometimes
referred to as "unconditional" liquidity since they are
usable without any outside institution or government
placing conditions on their availability), countries have
access to a pool of currencies in the International Monetary
Fund. The amount of resources a country may draw from the
Fund is governed by its quota, which reflects its economic
size and importance relative to other countries. When
initially paying in its quota subscription, each country
subscribes 25 percent in gold and 75 percent in terms of
its own currency.
In return for agreeing that the 75 percent
balance of its own currency may be drawn upon in case of
need to finance other countries' drawings from the currency
pool, countries obtain the right to draw the currencies of
others from the Fund themselves under certain stipulated
conditions.

27 -

The right of a country to draw on its gold subscription ("gold tranche
is essentially beyond challenge; so also is its right to draw on any credit balance
it acquired as a result of other countries having drawn
its currency.
These two amounts together are described
as the country's "reserve position in the Fund;" it is
also a form of unconditional liquidity.
Most countries,
including the United States, regard their reserve positions
in the Fund as an asset fully liquid and usable in case of
balance of payments need, and accordingly include the Fund
reserve position in their published reserves.
ll

)

Under circumstances which involve increasingly
stringent analysis and discussion of a country's economic
policies, members of the Fund may draw successive further
amounts from the Fund up to 100 percent of their quotas.
These further borrowings in a country's "credit tranches"
are not comparable to reserves.
They are conditional
credit facilities (hence sometimes referred to as
"conditional" liquidity).
They carry specific repayment
obligations and interest charges.
The role of the International Monetary Fund in
supplying conditional liquidity to governments for the
purpose of maintaining stability in exchange rates and
the adjustment of payments imbalances has expanded greatly
since the inauguration of the Bretton Woods system.
The
aggregate quotas of all members of the IMF are now some
$21 billion.
The appropriateness of quotas is reviewed
every five year~; the last round of general quota increases
became effective ~n 1966.
In addition to expanding the
general level of quotas and selectively increasing the
quotas of certain countries, the IMF was also strengthened
in 1962 by an agreement among the ten main industrial
countries (the "Group of Ten") known as the General
Arrangements to Borrow (GAB).
The GAB is an undertaking
by these countries to lend the Fund specified amounts of
their currencies (aggregating to the equivalent of about
$6 billion) if the Fund decides that supplementary
resources are needed to forestall or CODe with an impairment of the international monetary system.
The GAB
arrangements have been activated several times in connection
with large U.K. drawings from the Fund.
L

The U.S. quota in the I~F is $5.2 billion, out of
total Fund quotas of about $21 billion.
As of the end of
1967, the United States had approximately $400 million
of its "gold tranche" and the full $5.2 billion of credit
tranches available.
F.

Other Institutional Arrange0ents

In 1961, the new u.S. Administration began to foster
the development of a new system of international shortterm credits in the form of the "swap network" of the

- 28 Federal Reserve System, and also introduced the socalled IIRoosa bonds." Both of these provide a type
of exchange protection to the lending country. That IS,
the lending country is repaid in a constant yalue in its
own currency, and is thereby protected against an exchange
adjustment by the borrowing country.
The United States,
at the center of the swap network, can borrow foreign
currencies and sell them in the market in lieu of making
gold sales, in the expectation that a subsequent reversal
of ~art of the outflow will reduce the eventual drain on
its reserves.
In the meantime the swap partner holds
dollars with a form of exchange protection. Similarly,
the United States has, itself, been able to extend credit
and acquire foreign currency with exchange protection
when, for example, Italy or Canada or the United Kingdom
had an outflow of funds.
This network of short-term
reciprocal borrowing of reserves, frequently called
"a first line of monetary defense," now totals about
$7.1 billion.
It has helped to avoid gold losses
resulting from short-term flows that were later reversed.
When the United States has been drawn upon, other countries
have been provided with dollars to hold their exchange
rates stable.
Roosa bonds were designed to provide a longer-term
instrument for the investment of dollars accumulated by
foreign monetary authorities. Most of them have been
denominated in the foreign country's currency as an
added attraction to the purchasing country. A total of
about $1.5 billion of the~e bonds was outstanding as of
November 30, 1967.
Since its reopening ln 1954, the free market for gold
in London has re-ernerged as the largest and most important
center in the world for free-market gold transactions.
During most of the period since that time the flow of gold
to the London market, from new production and Russian sales,
has exceeded the various demands on it. Accordingly, the
residual supply of gold was absorbed by central bank
purchases and by the U.S. Treasury at prices varying fairly
closely around the U.S. fixed price of $35 per ounce. For
short periods, sudden outbreaks of speculative demand for
gold substantially exceeded the supply available to the
market.
Such a situation occurred in October 1960 when
the market price rose to around $40 and aroused widespread
anxieties concerning the international monetary system.
The U.S. monetary authorities supported the Bank of England
in intervening in the London market to stabilize the price
within an acceptable range.

- 29 -

In the following year, after a similar but milder
strain on the London market, the U.S. authorities
suggested that, in view of the mutuality of interest
among the monetary authorities of the major industrial
countries in maintaining orderly conditions in the gold
and exchange markets, an informal gold selling arrangement
be arranged among the group of central banks that are
members of the BIS or are associated with it. Under the
arrangement, each member of the group (Belgium, France,
Germany, Italy, The Netherlands, Switzerland, the
united Kingdom and the United States) undertook to
supply an agreed proportion of such net gold sales to
stabilize the market as the Bank of England, as agent
for the group, determined to be appropriate. The U.S.
share was 50 percent. This informal arrangement has
essentially been continued (without French participation
since mid-year 1967 and with the U.S. share at 59 percent
since then), both as to purchasing net gold acquisitions
as well as supplying net market demand. Representatives
of the central banks participating in the pool meet
periodically at Basle to discuss all aspects of the gold
and foreign exchange markets, providing a means thereby
to coordinate exchange operating policies as well as to
keep fully informed of developments in the London and
other gold markets.
II

The Dollar as a Transactions Currency

In additio~ to its role as the international monetary
system's major reserve currency, the dollar is also the
primary international means of payment and a major medium
for the international investment of short-term funds.
This "transactions demand" for dollars has grown greatly
over the whole postwar period. In recent years the growing
importance of the Euro-dollar market has provided further
illustrations of the central versatile role played by the
dollar in private international financial transactions.!/
Chart I, entitled ilLiquid Liabilities to Foreigners,"
gives some indication of how rapidly U.s. liquid liabilities
to nonofficial foreigners have grown in the recent past.
Liquid liabilities to "other foreigners"--foreign commercial
banks (including the foreign branches of U.s. banks) and other
private foreigners--increased over the period 1957 to 1967
from approximately $6 billion to about $16 billion. These

Euro-dollars are deposits in banks outside the United
States, principally in European financial centers, that
are denominated in U.s. dollars.

Ctlorl 1

LIQUID LIABILITIES TO FOREIGNERS
fNO Of- nAt 19.s6 6J. fNO 0' MONTH 1964

'Il\ IO""S OF DOll .... S

. ---+

I
20

~~---l--~l

----------t------t------+-----4------+~

i
_---r-.. .
------h----

! '

TO OffiCIAL INSTITUTIONS

"l.. _~___------r-.:-.=t--I· . I

;..-.

;'-

.-..J I ................... I - -..... , ..../'"_.

TO OTHER FOREIGNERS

I
0
+-----------+---------1--------1---------1 1

'0 NJ.ONnAn 'NmNAnONA!
AND REGIONAL ORGANIZATIONS
'

o
19.58

1960

1962

1964

1966

1961

- 31 liquid dollar assets of foreigners held in the United
States are invested in demand and time deposits and
money market paper. The secular growth in foreign
private dollar holdings can be expected to continue In
the future pari passu with continued expansion in
world trade and other international transactions.
The existence of very large outstanding dollar
liabilities, not only to foreign official institutions
("reserve-currency" balances), but also to private
foreign individuals and organizations ("transactionscurrency" balances) underlines the importance of
maintaining confidence in the dollar and, more generally,
in the international monetary system itself. The following chapter of this paper, which deals with current
problems facing the international monetary system, returns
to this important point.
H.

Balance of Payments Surpluses and Deficits

When a country consistently loses reserves, it is
in balance of payments "deficit." Conversely, if a
country consistently gains reserves, it has a "surplus ,.
in its balance of payments.
Strictly speaking, the matter is more complicated
than that.
"Surplus" and "deficit" are analytical concepts
with a variety of possible definitions.
For example, it
may be appropriate in some circumstances to take into
account changes in the foreign assets and/or liabilities
of the country's commercial banking system--as well as
changes in official reserves--in measuring a deficit.
The measurement of the u.s. balance of payments
deficit is more complex than for other countries because
of the unique position of the u.s. dollar, and was examined
by a special review committee.l/ Following this report,
the conclusion was reached that no single indicator
of surplus or deficit was suitable for all purposes. The
primary measure used in this paper is the balance on the
"liquidity" basis, although for some purposes reference
is made to the balance on the "official reserve transactions"
basis.2/

1/ See The Balance of Payments Statistics of the United
States A Review and Appraisal, Report of the Revievl
Committee for Balance of Payments Statistics to the
Bureau of the Budget (E.M. Bernstein, Chairman), u.s.
Government Printing Office, April 1965.
~/ For the differences between these two alternative

measures of the balance, see Chart VII in Chapter III.

32 -

Balance of payments surpluses and deficits sometimes are desired.
This was the case in the early 1950's,
for example, when (on the definitions of surplus and
deficit then in use) the European countries undergoing
reconstruction had surpluses and the United States had
deficits.
These deficits and surpluses enabled the
European countries to build up their reserves; the
declines in the swollen U.S. gold reserves and the
increases in our reserve-currency liabilities--representing as they did a redistribution and augmentation of the
world's stock of reserve assets--were universally welcomed
as such.
On th'~ other hand, large anc' persistent payments
imbalances, either surplus or deficit, are not sustainable
and can give rise to instability in the international
monetary system. There is an obvious limit to imbalances
of the deficit type:
countries can support their exchange
rates with their reserves and credit facilities only so
long as they have reserves or can arrange further credit.
In the case of a reserve-currency country, there are
limits to the willingness of private and official holders
abroad to accumulate that currency.
The limits on the
ability of countries to run large and persistent surpluses
are much less clear.
What is clear, however, is that large
anG persistent surpluses 1mpose strains on the international
monetary system as great as those resulting from large and
pcrsi::;tl,nL ,~cfj_cit.s.
I.

The Adjustment Process--Basic Objectives

Each individual country has its own mUltiple economic
and social objectives. These include full employment and
a satisfactory rate of growth, reasonable price stability,
an equitable distribution of income, and balanced regional
and sectoral development.
While seeking to attain these
objectives, as already noted, countries must also avoid
large and persistent imbalances in their external accounts.
It is also widely agreed (in the words of the Convention
setting up the Organization for Economic Co-operation and
Development) that countries s~ould "promote policies
designed to contribute to the" expansion of vorld trade on
a multilateral, nondiscriminatory basis in accordance with
international obligations.· o
The international monetary system set up at Bretton
Woods and based on a pattern of stable exchange rates was
then and is now believed by its participants to be the
most appropriate system designed to foster these objectives.
The system has evolved over time to meet changing needs
and problems.
It is once again going through a key
evolutionary stage, as the work on proposed amendments to

- 33 -

the IMF Articles of Agreement reaches completion, to
establish a facility for deliberate reserve creation
(see below) and to improve certain rules and practices
of the Fund.
The simultaneous achievement of all the economic
and social objectives described above, even for an
individual country, is far from easy.
Governments have
only a limited number of policy tools at their disposal.
They have not always been able or willing to use these
tools in appropriate combinations. Governments in
different countries attach different priorities to
achievement of various internal and external aims.
The
nature of imbalances in payments, as well as the appropriate range and mix of instruments required to deal with
them, can vary substantially from country to country in
line with wide differences in economic and financial
structure and in the nature of political institutions.
These difficulties have important implications for
the speed and effectiveness with which the adjustment of
payments imbalances can be attained. The adjustment
process may work somewhat imperfectly, and in any case
is apt to be gradual.
In a few difficult cases, adjustment
of payments imbalances may not take place at all, or will
take place only with the costly sacrifice of some of the
basic objectives that the system is intended to advance,
unless a large measure of multilateral cooperation is
brought to bear on the problem.
J.

The Adjustment Process--Need for Multilateral Cooperation

The need for multilateral cooperation in achieving
and maintaining balance of payments equilibrium has become
increasingly widely recognized in the last few years. An
understanding of this need has been particularly advanced
by an international working group formed under the auspices
of the Organization for Economic Co-operation and Development (OECD). The Economic Policy Committee of the OECD
established a Working Party in 1961 for the specific
purpose of promoting better international payments equilibrium.
This group, consisting of senior officials from Ministries
of Finance and other key government agencies and Central
Banks concerned with balance of payments questions, has met
together at approximately six-to-eight week intervals ever
since .. In 1964, the Ministers and Governors of the ten
countries participating in the General Arrangements to
Borrow suggested that this OECD working party, known as
Working Party 3, make a study of the balance of payments
adjustment process with a view toward improving the process
of continuing international consultation and cooperation.

- 34 The Working Party's report on this subject was
issued in August 1966.
In addition to endorsing the
commonly agreed view that prolonged imbalancp- in either
direction is in general undesirable, the Working Party
also noted that "the objectives of international consultation are broader and more general than the mere
avoidance of imbalance.
The purpose of consultation
regarding adjustment policies is to ensure that the
policies pursued by individual countries do not hinder
others in the pursuit of the general aims of economic
policy; more positively, the object is to ensure that
as far as possible countries, while avoiding imbalance,
collectively support each other in their policies."
The Working Party's report does not fail to point
out that there are often inherent difficulties in
managing an economy in a way which is consistent with
domestic objectives, with the aims of its trading partners,
with stable exchange rates, and with the general health
of the world economy.
But it also recognizes that there
is clear room for improvement and that improvement is an
urgent order of business. The report describes appropriate
methods of dealing with these problems in different circumstances.
It refers specifically to the need for clearer
formulation of balance of payments aims; early identification and better diagnosis of payments problems; new and
more selective instruments of economic policy; more timely
action to correct inappropriate demand levels, competitive
positions and capital flows; and a further strengthening
of the processes of international consultation.
The u.s. Government has strongly supported the
\vorking Party's report and its recommendations. At the
recent meeting, November 30 to December 1, of the Ministers
of the countries belonging to the OEeD, for example, the
United States representative, Under Secretary of State
Eugene V. Rostow, said:
"We have no doubt that the Atlantic countries
can resolve this problem, if they deal with it
together, in ways which fortify the world monetary
system and permit an early and assured return to
growth patterns closer to our full employment objectives.
All I am suggesting today is that we recognize that
some aspects of the adjustment process require
cooperative solutions and that we set about promptly
to find them.
Cooperation in handling the adjustment
process, I suggest, is the next major step after Rio
[see below for a discussion of the agreement reached
in Rio de Janeiro in September 1967] for us to take
in improving our machinery for managing the monetary
system. "

- 35 -

The Adjustment Process--Equilibrium for the
System as a Whole

For any country to reduce its deficit or move into
surplus, it is generally necessary for other countries
to reduce surpluses or increase deficits. This is simply
a statement of what must happen mechanically and
statistically if payments imbalances are to be adjusted
at all.
This inescapable interdependence of surpluses and
deficits makes it very clear that countries must have
compatible balance of payments aims if the whole system
is not to be working at cross purposes.
If all the
countries in the system that are in surplus set their
policies in such a way as to have continued surpluses,
while deficit countries take active measures to eliminate
their deficits, then either the deficit countries will
still find themselves running deficits or else surplus
countries will find that they have not been able to
attain their targeted surpluses. All countries together
cannot possibly achieve these inconsistent aims; someone
is bound to be disappointed.
Virtually all countries take it as their balance
of payments objective to be in surplus (and so to have
growing reserves) over time.
Few if any countries have
indicated either a policy or a willingness to have their
reserves fluctuate around a fixed level rather than around
an upward trend.
It is understandable why countries tend to have
this preference for surpluses. The volume of trade and
other international transactions has a strong upward trend.
It is a reasonable presumption that, because of this trend,
the absolute size of imbalances will also increase over
time. These facts alone suggest that reserves should
likewise have an upward trend if they are to continue to be
adequate to support the fixed exchange rate against
balance of payments swings. Another factor leading countries not to attempt to reduce their surpluses may be a

36 --

propensity to discount an existing surplus as partly
or wholly "temporary;" it is natural and prudent to
conduct affairs so as to prepare for "rainy weather"
in the future, and not to presume that current good
fortune will continue.
Even to the extent that countries aim at a long-run objective of a zero surplus
over time, which they tend not to do, they still
probably react more quickly to a deficit situation
than when they are in surplus (if only because
countries in surplus are under much less urgent and
intense pressures to act to reduce the imbalance).
Given the set of prevailing attitudes which
makes an upward trend in reserves (balance of payments
surplus) the targeted long-run "norm" for each country
taken individually, the obvious question suggests itself:
when, if at all, can the international monetary system
as a whole be in equilibrium? Given that it is difficult enough to bring about adjustment of payments imbalances even under ideal conditions where deficit
countries take actions to reduce deficits and surplus
countries willingly take cooperative actions to reduce
their surpluses, how can the system possibly function
smoothly when countries in surplus by and large do not
want to see their surplus~s reduced?
Happily, there is a solution to this dilemma.
It
is not the case that for every dollar of surplus in the
system there must be an exactly offsetting dollar of
deficit.
When the gross deficits and gross surpluses
(consistently defined) of all countries are offset against
each other, the sum of the surpluses can exceed the sum
of the deficits by the amount of new reserves being added
to the system which are not at the same time the liability
of a particular country. The key point of this relationship is that if new reserves of the appropriate kind are
flowing into the system, it is possible for some countries
to satisfy their preferences-ror reserve increases without
necessitating that other countries be in corresponding
deficit.
Up to the present time, the only "new reserves"
which have allowed this margin to exist have been increases
in countries' monetary gold stocks. When newly-mined
gold is sold to a monetary authority, that government has
a reserve gain without any other country having experienced
a deficit.
When the dollar component of world reserves
increases, on the other hand, this increase in reserves
does not allow the system as a whole to have a margin of

- 37 -

surpluses exceeding deficits.
When the rest of the
world adds to its dollar reserves, thr:~;:: rJ"\,; 2s::::ets
are also an increase in u.s. reserve-currency liabilities, and there is therefore a u.s. deficit
corresponding to the surplus of the rest of the world.
However, gold is not the only reserve asset that is
capable of permitting the system to have a situation
in which the sum of surpluses exceeds the sum of
deficits. Deliberately created new reserve assets,
such as the proposed Special Drawing Rights (SDR)
described in the next chapter, will serve this
function erlually \Jell.
Equilibrium for the system as a whole thus
requires that new reserves--gold or new reserve assets
such as SDR--be added to the system at such a rate
that the sum of surpluses can exceed the sum of deficits
by a reasonable margin.
This condition for "equilibrium"
of the system should be thought of as a necessary, but
not sufficient, condition. Other considerations, such
as the degree to which the system is promoting the
achievement of its basic objectives, also need to be
taken into account.
Only under these conditions is there a good chance
of making countries' balance of payments aims mutually
compatible;
only then is there a plausible hope of
attaining the objectives the system is intended to promote, including relative freedom from trade and payments
restrictions while still getting the adjustment of payments imbalances to proceed smoothly.
What is a "reasonable" margin by which surpluses
should exceed deficits? The answer to this question is
not fully clear to the financial experts and economists
who have studied this question.
Broadly speaking, the
rate at which new reserves should be added to the system
should probably bear some relationship to the rate at
which international transactions are expanding (though
the two rates need not be the same and there is no
necessity for a precise relationship).
The margin should
not be too small, and certainly should not be negative.
~or should the ~ar0in be an excessive nne.
At either of
these two extremes, one would ~ave to say that the slste~ as a
whole I,vas in disequilibrium. "
I!

- 38 -

It is important to be clear on the fact that
the above condition for equilibrium of the system,
if satisfied, in no way reduces the need for countries
to avoid large and persistent imbalances in their
external payments.
It is still imperative for countries
in large or prolonged deficit to reduce their imbalance.
And it is just as important as ever for countries with
large and persistent surpluses to reduce these surpluses
to the point where they are moderate and broadly consonant with the rate at which reserves are growing in
the system as a whole. The need for adjustment is not
removed. The margin by which surpluses exceed deficits
only means that, for each country individually and for
the system as a whole, adjustment takes place around
an upward trend in reserves rather than around a
constant level.

- 39 II.

Current Problems Facing the International
Monetary System
The Need for a New Reserve Asset

The first chapter of this paper pointed out that
virtually all countries want to see their reserves
growing over time, and that the international monetary system as a whole can only be in equilibrium if
new reserves of a particular sort are being added to
the system at a rate sufficient to permit the sum of
surpluses to exceed the sum of deficits by a reasonabie
margin. One of the current problems facing the monetary system is that this condition for equilibrium of
the system is not any longer being satisfied.
New amounts of gold are no longer being added to
monetary reserves. Monetary gold stocks have even
declined in the last two years, as shown in Table 1
(although part of this reduction in the gold reserves
of countries gave rise to reserve claims on the Fund
as gold was paid in to the Fund in connection with the
1965-66 increase in IMF quotas). On the production
side, newly-mined gold output--the bulk of which comes
from South Africa--will be increasing slowly at best
in the next few ~ears.
Experts predict that declines
in output will eventually occur. On the consumption
side, private demands for gold have been rising.
The
use of gold for artistic and industrial purposes has
had an upward trend, as can be seen from the table,
and this trend is expected to continue. 1/ The remainder of private gold absorption, referred to in the
table as "residual" private demand, is composed of two
elements: traditional demand for gold as an asset in
which to invest savings, and demand of a more speculative nature based on expectations of an increase in
the price of gold.
The latter speculative demand can

Data on the private absorption of gold are fragmentary.
The distinction between "industrial
and artistic" uses on the one hand and "hoarding"
on the other is not a clear one, and the figures
in the table are only estimates.
o
I~ HllwlNI>-,
'-. no '-. '-. '-.
o
>-'

Ho..MHM
::J
(l

X::J:<
(l

>-' >-' >-'

I.DI.DI.D

0'0'0'
"-l0'\.J1
I
I

tll

::J

1-'1-'1-'1-'1-'

I.DI.DI.DI.DI.D
0'0'0'0'0'
~WN>-'O

I-'I-'I-'t-'I--'

I.DI.DI.DI.DI.D
\.J1\.J1\.J1\.J1\.J1

I.DOO"-lO'\.J1

I--'

t--'

I--' I--' 1--1

I.DI.DI.DI.DI.D
\.J1\.J1\.J1\.J1\.J1
~WN>-'O

'i
~.

0..

Table 1
Estimated World Sources and Uses of Gold
(in millions of dollars)

Sources
Production
Sales by
South
the
II
Tota1Africa
U. S. S. R.

. - Sep t.

Chan~e
Total

Monetar~ Go1~1
21

IMP

Uses
Total

Other
Industrial
Usc2 1

Residual

Total

Countries-

335
225
230
455
670

292
189
68
445
632

43
36
162
10
38

515
600
620
465
300

180
135
160
165
130

335
465
460
300
170

408
403
414
418
462

850
825
850
845
895

75
75

850
825
850
920
970

511
556
596
618
702

940
975
1,015
1,050
1,125

75
150
260
220
300

1,015
1,125
1,275
1,270
1,425

665
490
690
680
750

597
606
1,202
528
325

68
-116
-512
152
1,075

350
635
585
590
675

190
245
275
280
300

160
390
310
310
375

748
803
892
960
1,019

1,175
1,215
1,295
1,355
1,405

200
300
200
550
450

1,375
1,515
1,495
1,905
1,855

345
580
355
830
710

312
942
238
712
843

33
- 362
ll7
ll8
-133

1,030
935
1,140
1,075
1,145

345
380
425
435
555

685
555
715
640
590

1,069
1,081
805

1,440
1,445
1,075

550

1,990
1,445
1,075

215
- 45
- 235

525
828
262

- 310
783
27

n. a.
n.a.

1, ns~)

l,49~1

1,310

610
675
540

41
1, 16 541
81 s.:::

1udes U.S.S.R., Other Eastern Europe, Communist China and North Korea.
1udes Bank for International Settlements and European Fund.
ludes, in addition to U.S.S.R., Other Eastern Europe, Communist China and North Korea, Other eastern countries where the purchase
rnaments is a customary mode of saving.
ludes estimated purchases by Communist China as follows: 1965, $150 million; 1966, $75 million.

- 41 be expected to subside as doubts about the stability
of the international monetary system and the gold
price are resolved (see below). But the former socalled "savings" demand for gold, which is of significance primarily in less-developed countries and in
some countries on the European continent, may well
rise over time as incomes rise.
From the development
point of view, of course, it would be better to devise
mechanisms to channel increased savings from increased
incomes into productive investment instead of into a
sterile asset--gold.
These considerations make it clear that the international monetary system cannot look to gold alone to
satisfy the need for a secular growth in reserves.
It was previously pointed out that new gold taken
into monetary reserves has historically been the only
component of world reserve growth that makes possible
an excess of total surpluses over total deficits.
The
fact that monetary gold reserves declined in 1967 takes
on an added significance when viewed in this light.
There has been no scope at all for some countries to
be in surplus without other countries being in deficit.
What about sources of growth in world reserves
other than gold~ Is it possible to rely on them in
the future?
Certainly it has been true that these other
sources have supplied the greatest part of increases
in reserves in the postwar period. Table 2 presents
some data on the sources of growth in the 1950-67
period. From that table it can be seen that additions
to foreign exchange reserves (overwhelmingly dollars)l/
accounted for more than half of the total increase in
world reserves over the whole period from 1950 through
1964.
~/ Table 2 does not show the breakdown between the

dollar component of foreign exchange reserves and
the component held in other currencies.
Since official reserves held in the form of sterling assets
have actually declined since 1950, line B in Table
2 tendsto understate the extent to which world reserve growth over the 1950-64 period depended on
increases in official dollar holdings.

Table 2
Sources of Growth in countries' Rcs,'rves,

TOTAL CHANGES IN COUNTRIES' RESERVEsl/
A.
B.

Changes in Countries' Holdings of Go1~/
Changes in Foreign Exchange Reserves
Excluding items D, E, and F below
TOTAL TRADITIONAL SOURCES
(Items A + B)

Changes in Reserve Positions in the IMP
(Drawings on IMF Credit Tranches)

Changes in United States' Convertible
Currency Reserves

Dollars Generated by Drawings on U.S.
Federal Reserve System Swaps by Other
Countries

1962

196~

1966

+2,453

+1,261

+1 ,486

+ 712
+2,122

+ 843
+1,025

+ 525
-1,109

828
140

+2,834

+1,868

584

968

1964
1963
(in millions of dollars)

1960

1961

+3,082

+2,140

425

+3,142

+ 312
+2,450

+
+

942
494

+
+

238
567

+1,436

805

~7b2

+
(+

320
21)

+ 588
(+1,008)
+

116

19~0-19b 7

+1,221
(+1,589)

954
4)

+1 ,182

+2,248

+1,374

226
970

+
+

423
600

+ 609
+1 ,332

151
625

744

.'"] ,023

+1,941

776

434
423)

181
206)

583

445

182

175

443

307

+2,150

145
84)

+
(+

215
349)

113

220

349

540

150

275

B85

308

585

+1,845

+2,454

-1,199

(

+1,088
(+ 793)

+
(+

Annual Averalles
1965196019501966
1964
1959

455

363
433)

159

Securities Taken into U.K. Reserves
TOTAL NON-TRADITIONAL SOURCES
(Items C + D + E + n

1967
,}ul.,- June

704

380

100.0

320

159

(per cent)
TOTAL CHANGES IN COUNTRIES RESERVES
A.

11
11

Changes in Countries Holdings of Gold
Changes in Ford gn Exchange Reserves,
Except Non-Traditional
Total Traditional Sources

10.1

44.0

56.0

22.7

34.4

41. 6

- 55.7

49. 7

35.6

27.1

11.0

79.S
89.6

23.1
67.1

133.4
189.4

67.5
90.2

41. 6
76.2

- 87.9
- 46.3

9.4
- 65.1

213.2
163.5

50.8
66.6

59.3
~4

45.5
56.5

Total Non-Traditional Sources

10.4

32.9

- 89.4

9.8

23.9

146.3

165.1

-263.4

13.5

---..!1.: 7

156.5

Includes BIS, and EI'U/EF'holdings of gold.
Excludes IMP holdings of gold, but includes holdings of the BIS and EPU/EF.

- 43 There is now widespread agreement, however, that
it is no longer desirable for dollars (or other reserve currencies) to supply the major part of future
additions to the world reserve pool. A continuous
growth in dollar reserves, which was welcomed in the
early 1950's, has gradually corne to be regarded as a
mixed blessing, and then as a growing strain on the
international banking position of the United States.
The reasons for this change in attitude are easy to
understand.
When foreign countries elect to retain
part or all of their reserve increases in the form of
dollars, these actions help to satisfy the need for
expansion in world reserves.
On the other hand, when
the rest of the world taken together is experiencing
reserve gains (which, as noted above, must be regarded
as the norm which countries individually will seek to
attain over time), and when the reserve gains are held
in dollars, the United States necessarily has a deterioration in its liquidity position.
The deterioration
of the U. S. liquidity position which took place in the
early postwar period of so-called "dollar shortage" was
generally regarded as a good thing for the world
economy.
But of course the deterioration could not
continue forever.
Given the fact that gold is not likely to supply
major additions to world reserves in the future, it is
often pointed out that the international monetary
system seems to be in a dilemma.
If the United States
does not expand its reserve-currency liabilities
(which, so long as the rest of the world is gaining
reserves, means an "official settlements" deficit for
the United States), the growth of reserves may be inadequate.
If on the other hand the United States does
expand its reserve-currency liabilities, the U. S.
liquidity position and confidence in the dollar will
deteriorate, ultimately undermining the stability of
the system itself. On this reading of the problem,
world reserves are bound to be either short in quantity
or shaky in quality.
Charts II and III at the end of this chapter show
the relationship of the growth trends of world trade
and reserves over the period 1953-67. Chart IV traces
the growth of reserves in various geographical areas,
and Chart V shows the three main components of world
reserves, in the period 1948-66.

- 44 Although growth in reserve-currency holdings of
dollars has been the major factor in world reserve
increases, there has been a moderate increase in
"reserve positions in the IMF" (for a description,
see Chapter I) and minor increases due to other
factors.
These other sources of reserve growth,
which are referred to as "non-traditional" sources
in Table 2, were particularly important in the last
three years.
While additions to monetary gold and
increases in reserve currencies were either declining
or failing to increase, in other words, these nontraditional sources were to some extent filling the
breach.
Not much comfort can be drawn from this fact,
however, for the scope for further large increases in
reserve growth from these sources is not extensive.
For example, the role played by reserve positions in
the Fund in adding to total world reserves, though
very substantial in 1965-66, was actually negative in
1967 (as the United Kingdom and others repaid earlier
drawings on the Fund) .
When all the considerations enumerated above are
set alongside one another, it is clear that a new
reserve asset is needed in the international monetary
system. A new asset is needed to ensure that the rate
at which reserves are increasing in the system as a
whole is adequate to prevent countries from having
to sacrifice basic economic objectives as they
compete to achieve their targets of balance of payments
surpluses over time. A new reserve asset is also
needed to ensure that the growth in reserves which does
take place is the type of growth which reinforces,
rather than undermines, the stability of the system.
The type of new asset that is needed is one that can
function as a genuine supplement to gold.
It must be
created and treated in such a way as to allow the system as a whole to have a margin by which surpluses can
exceed deficits.
It is sometimes argued that the above analysis
does not lead to the conclusion that a new reserve
asset is desirable and necessary.
There are two
extreme points of view which maintain this position,
at opposite poles from one another. The first view
challenges the fundamental premise underlying the
analysis--that a system of stable exchange rates and
growing reserves constitutes the best environment for
promoting and harmonizing countries' basic economic
objectives. Proponents of this view favor an entirely

- 45 different kind of international monetary system based
on freely fluctuating exchange rates, in which reserves of any type would playa relatively minor role.
Advocates of the second extreme view favor a general
increase in the price of gold, and argue that if this
step were taken, gold reserves would then be adequate
and creation of a new reserve asset would therefore
be unnecessary.
Neither of these views has found any significant
support within governments or business and financial
communities. Meanwhile, the member countries of the
International Monetary Fund have not shown any desire
to abandon the institutional framework which has
proved itself so well in the postwar period.
Rather
than embarking on an uncharted course that would be
littered with pitfalls and uncertainties, it is clearly
more sensible for all countries to cooperate together
to bring about evolutionary changes in the present
system that can build, and improve upon, the achievements of the past.
There is even less support for the extreme step
of an increase in the price of gold than there is for
a radical transition to a world of fluctuating exchange
rates. Any such action would disturb the long-standing
equality of gold and dollars as components of monetary
reserves, and would mean that monetary authorities
in the future would give a preference to gold over
other monetary reserves. This would be inequitable
and prejudicial to the interest of countries which
have held a large portion of their reserves in the
form of dollars. Moreover, a large-scale increase in
the price of gold would abruptly supply the world with
very large amounts of additional reserves, rather than
providing for the moderate annual growth in reserves
which is most suited to an efficient and sensible
course of monetary evolution.
The higher price of
gold would provide windfall advantages to the goldproducing areas of the world, including the Soviet
Union, and to those countries which have built up disproportionately large holdings of reserves in the
form of gold. Moreover, reliance on this crude method
of reserve expansion would only postpone for a time
the development of another period of tension and strain
in the monetary system, featured by gold speculation
in anticipation of another round of increases in the
price of gold. For these and other reasons the "Group
of Ten" countries have conducted their work on the

- 46 -

improvement of the international monetary system on
the general basis, adopted in 1964, that "a structure
based, as the present is, on fixed exchange rates and
the established price of gold, has proved its value
as a foundation on which to build for the future."
The reeent uneasiness in gold markets and discussion in some quarters of the revaluation of gold
may be regarded as symptoms of the current problems
facing the international monetary system.
Gold is
pre-eminently a monetary metal, and its price is determined by the action of the major monetary authorities
in acquiring it at a fixed price.
It is and should
continue to be a stable and useful component of monetary reserves and not a means of speculating in anticipation of changes in the relative value of the components of international reserves.
It is of fundamental
importance to the international monetary system that
there be no change in the monetary value of gold and
the dollar relative to each other.
The President has
made clear that the United States will utilize its
resources and adopt the policies necessary to maintain
this essential monetary relationship.
B.

The Rio Agreement:

Special Drawing Rights

Fortunately, plans for the creation of a supplementary reserve asset, by conscious decisions of the
world's monetary authorities, are well advanced.
Background and Negotiations Leading Up to the
Rio Agreement.
In his 1961 message to the Congress
on the balance of payments and gold, President Kennedy
pointed to the need for increased cooperation among the
industrialized countries in order to maintain world
growth and stability.
It was recognized that the
recent strengthening of a number of currencies, particularly in Europe, improved trade and reserve positions,
widespread currency convertibility, and greater freedom for capital movements made likely greater swings in
balance of payments positions.
This meant that there
would be greater susceptibility to disruptive shortterm capital flows among the industrialized nations.
While resources of the International Monetary Fund
were probably sufficient to deal with the balance of
payments problems of most of its membership, its resources in the currencies of the principal industrial

- 47 countries might not be sufficient to meet a major
threat to the international monetary system. A borrowing arrangement to meet this special problem was
negotiated in 1961, following discussions by a group
of Governors of the Fund at their September Annual
Meeting held in Vienna.
Under this agreement, the General Arrangements
to Borrow, which became effective in 1962, ten countries undertook to lend to the Fund specified amounts
of their currencies aggregating $6 billion if supplementary resources were needed to forestall or cope
with an impairment of the international monetary system. The United States commitment under this arrangement, which was renewed in 1966, is $2 billion.
Other
participants are: Belgium, Canada, France, Germany,
Italy, Japan, the Netherlands, Sweden and the United
Kingdom. Switzerland, though not a member of the Fund,
undertook special bilateral arrangements with the Fund
in order to associate itself with the arrangements.
This association, the "Group of Ten", thereby was
formed through a mutual concern with the operations
and strength of the international monetary system.
In
October, 1963, the Ministers and Central Bank Governors
of the Ten 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."
On the basis of the very thorough study and report that resulted from this directive, the Ministers
and Governors concluded, in a statement of August,
1964, that "the supply of gold and foreign exchange
may prove to be inadequate for the over-all reserve
needs of the world economy." They thereupon authorized a study of how to remedy this prospective shortage, through the creation of a new reserve asset.
From the summer of 1964 through the summer of
1965, a group of technical experts from Treasuries
and Central Banks labored to bring into being a body
of knowledge in this area.
The result was the Report
of the Study Group on the Creation of Reserve Assets-better known as the as sola Group, made public in
August, 1965. This report provided an inventory of

- 48 the techniques by which reserves could be deliberately
created and an analysis of the arguments for and
against the use of each of the.e techniques.
It was at this point that the Secretary of
the Treasury, acting on the authority of President
Johnson, announced that the united States was ready
to participate in high-level negotiations on
reserve creation. At about the same time, there became available a report by the Subcommittee on International Exchanqe and Payments of the Joint Ecnnomic Committee of the Congress of the United States, under
the Chairmanship of Congressman Henry Reuss of Wisconsin, called, "Guidelines for Improving the International Monetary System." Where the Ossola Report,
by request of the Ministers and Governors, dealt with
the technical aspects of the problem, the Guidelines
Report performed the invaluable service of providing a
legislative estimate of the urgency and dimensions of
the problem under the highly-respected imprint of the
Joint Economic Committee.
Its basic conclusion was:
"World liquidity needs cannot adequately be
met by existing sources of reserves (gold,
dollars, and pounds sterling) or even by the
addition of new reserve currencies.
New ways
of creating internattonal reserves must be
sought."
The Report stated, further, that:
"The need for action is pressing."
In order to ascertain the views of other countries, Secretary Fowler undertook personal and individual
consultations with the other Ministers and Governors of
the Ten. These individual consult.tions revealed a
basis for joint progress.
As a result, at the time of the Annual Meeting of
the Fund in September, 1965, it was agreed that the
Deputies of the Ministers and Governors of the Group
of Ten Countries should examine the various proposals
for reserve creation to ascertain whether or not there
was a basis for agreement on major points.
In the
meantime, the Executive Directors and staff of the
International Monetary Fund were carrying on constructive studies of the problem.

- 49 At a Ministerial meeting of the Group of Ten,
July 25-26, 1966, in The Hague, the Ministers and
Governors of the Ten considered a report of their
Deputies that represented a year of search for agreement on the essential elements of a plan for deliberate
reserve creation.
In addition.to these elements of
essential agreement, the Deputies' Report contained
five workable schemes for the mechanism of reserve
creation.
Basing their work on this report, the Ministers
and Governors, in their Hague communique, agreed on
basic prineiples for reserve creation. They reiterated their earlier conclusion that existing sources
of reserves would not provide an adequate basis for
world trade and payments in the longer run.
They
instructed their Deputies to begin a second 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 membernations of the International Monetary Fund.
Four such joint meetings of the Deputies and
Executive Directors were held, from the fall of 1966
to the spring of 1967.
The Joint meetings succeeded in producing a
draft outline plan, although a number of important open
issues remained unresolved--primarily in the area of
decision-making, mode of transfer between participating countries of the asset to be created, and requirements for reconstitution of balances of the asset
following its use.
These issues were considered by
the Ministers and Governors of the Ten in two meetings
in London, in July and August, and were resolved.
The outline plan, the "Outline of a Facility
Based on Special Drawing Rights in the Fund," was
submitted to the Governors of the Fund at their Annual
Meeting in September in Rio de Janeiro by the Executive
Directors of the Fund. By a resolution adopted unanimously, the Governors endorsed the outline plan, and
requested the Executive Directors to submit amendments
to the Fund Articles of Agreement to incorporate this
plan. The proposed amendments were requested by no
later than the end of March 1968.

- 50 Summary of the Plan for Special Drawing Rights (SDR)
The basic concept of the Plan is to provide for a
new international asset 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.
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 provided by the solemn obligations of Fund
members to accept them and pay convertible
currency in return.
They will bear a
moderate rate of interest.

Each SDR is to be denominated in terms of
0.888671 grams of fine gold, the gold value equivalent of one U. S. dollar.
That is, their value in
terms of gold will be maintained.
SDR will not, however, be redeemable in gold, and it would be against
the rules for a country to use its SDR merely to
change the composition of its reserves.
The backing of SDR will be unimpeachable. It
will consist of a firm, unequivocal, and solemn obligation to accept the new asset when it is presented
and to pay convertible currency in return. That obligation is the fundamental backing of the asset, and
lS the principal factor which will give it value as
an asset.
Each participant will be obligated to accept
SDR up to an amount equal to three times its cumulative allocations.
This means that if a country had
initially been allocated $100 million in SDR's and
still held all of these in its reserves, its obligation to accept additional SDR's would amount to $200
million.
If, on the other hand, it had spent all of
its SDR's, its total acceptance obligation would be
$300 million.
This acceptance obligation makes unnecessary and takes the place of the pool of currency
used to back present IMP drawing rights.

- 51 2.

Method of creation--SDR are to be created
under 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.

The Managing Director of the Fund will be generally responsible for initiating proposals to start
the machinery working, but it will be possible for the
Fund 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.
SDR are not to be created for the purpose of
making short-term and cyclical adjustments to the
volume of international reserves.
Rather, decisions
will be taken from time to time to create a specific
amount of SDR for a period as a whole, normally for
five years ahead, but allocations will be made to
participants at yearly intervals during the period.
Such decisions will not be changed unless unexpected
major developments require modification of the
established trend.
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 possible
approval, the Managing Director will 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, will 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 85% majority could
increase it. The technical possibility of cancellation of SDR by an 85% majority is also provided for.
3•

Method of allocation--SDR
allocated to participants
to their IMF quotas. All
eligible to participate.
SDR will take the form of
a Special Drawing Account

are to be
in proportion
IMF members are
Allocations of
book entries ln
of the Fund.

- 52 The proposal to create an amount of new assets
will be for a spec if ic amount, the product of a wide
consensus.
SDR 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 Fund quotas
and thus would receive $246 million of each $1 billion
of SDR created.
Receiving an allocation of SDR means
that the Fund would credit this amount to the United
States on the books of the Special Drawing Account in
the Fund.
I

Method 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 countries to which
transfer can appropriately be made, 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.

Countries will be expected to use SDR only for
balance of payments needs or in light of 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 SDR to a country which the
Fund believes has failed to observe the expectation.
This will help to assure an orderly flow of SDR and
avoid instabili ty resulting from shifts in the composition of reserves which might come about if, at a
particular time, one of the three principal reserve
assets--gold, dollars, and SDR--happened to look more
attractive than the others.
SDR will normally be transferred to countries in
strong balance of payments and reserve positions.
Transfers of SDR may also go to countries in a strong
reserve position even though they have moderate balance
of payments def ici ts.
In order to achieve a generally
fair distribution of the SDR among the countries that
meet the standards entitling them to receive SDR, ~he
Fund will try to work toward equality, over time, In
the ratios of their holdings of SDR to their total
reserves or in the corresponding ratios to total re~
serves of their holdings in excess of their allocatIons.

- 53 A further principle of use concerns a country's
obligation to reconstitute SDR balances, related to
time and amount of use.
For the first five-year
period, a country's average net use of SDR, "shall
not exceed 70% of its average net cumulative allocation during this period." If any country, for a time,
exceeds this rate of use, the Fund would direct part
of the natural flow of SDR to it, in order to promote
observance of 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.
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." This
provision is intended to draw attention to the idea
of a balanced use of SDR along with other reserves
over time and, thus, maintain a degree of stability,
in a general way, 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 appropriate 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, but the Fund may act as an intermediary
to bring eligible users and receivers together.
There is an area to which the Fund role as traffic director does net extend. An eligible user may
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 provision is of
particular interest to the United States, although it
applies generally to any participant.
Normally, the
U. S. uses its reserve assets to buy dollar balances,
and this provision permits the U. S. to use the new
asset in much the same way as it uses gold provided
both parties agree to the transaction.
This does not
modify, in any way, the U. S. firm commitment to buy
and sell gold at $35 an ounce.

54 -

Reduction of the Large and Persistent Payments
Imbalances in the United States and Europe

With the agreement at Rio de Janeiro, now being
followed up in the International Monetary Fund, important progress has been made in dealing with the longterm problem of an adequate rate of growth in international reserves. A second major problem that has
been facing the international monetary system for a
number of years is the protracted existence of large
U. S. and European payments imbalances.
With the
passage of time, these imbalances--welcomed in the
early years after the war--have proved difficult to
adjust and have imposed increasingly severe strains on
the international monetary system as they have accumulated.
The United States deficit has meant a gradual
but steady deterioration in the liquidity position of
the United States. That is, our obligations to foreign countries of a liquid character have been growing.
These obligations have risen to approximately $32
billion, about $16 billion representing the dollar
holdings of official monetary authorities, and the
remainder held by foreign commercial banks, corporations and individuals. At the same time the gold reserves of the United States have been reduced from
nearly $25 billion at the end of 1949 to $12 billion
at the end of 1967. Because of the central responsibility that the United States has for maintaining the
convertibility of foreign dollar holdings into gold,
the attenuation of the U. S. liquidity position,
though it is still strong, calls with increasing
urgency for effective action to halt this process by
elimination of the persistent U. S. deficit.
At the same time there has been a persistent surplus in the Continental European countries, taken as
a whole.
This is closely related to the United States
deficit (the two things are, broadly speaking, different sides of the same coin) .

- 55 The hard core of these persistent surpluses in
Continental European centers has been in the countries
of the European Economic Community, taken together.
Table 3 presents figures for several alternative
measures of the aggregate surpluses of these EEC
countries, as compared with measures of the U. S.
imbalance for the period 1960-66. Although there are
variations from year to year, and although the size
and direction of change of the imbalances depend
partly on which measure is used, the broad outline of
the situation is clear. The United States and the
European Economic Community as a whole were on opposite
ends of a joint imbalance that, instead of being reduced, persisted quite tenaciously throughout the
period.
There were, of course, substantial changes in the
balance of payments positions of individual European
countries during the past decade.
Italy's balance of
payments took a swing into deficit in 1963, for example,
while Germany experienced a period of deficit in 1965
and early 1966.
(The German balance of payments reverted to very large surplus later in 1966 and in
1967.) Nonetheless, these individual swings did not
substantially alter the situation for the Continental
and EEC countries taken as a whole.
Another element of imbalance in the network of
world payments during the 1960's was the persistent
weakness in the U. K. balance of payments and the resulting series of crises of confidence in the pound
sterling. These crises of confidence, beginning in
1964, resulted in very heavy use of credit facilities
to supplement British reserves, and provided the financial assets that further enlarged the surpluses of
Continental European countries.
D.

Maintaining Confidence in the Stability of the
Present System

Throughout the period of the Sixties, there have
been periods of strain on the international monetary
system which have required international cooperation
among monetary authorities.
While these strains have
been felt from time to time by other currencies, they
tended since 1964 to center on the United Kingdom and

56 -

TABLE 3

Al ternative ~1easures of Payments Imbalance, 1960-66,
Euron::an Economic community und uni ted States
(millions of collars)
Balance on
Non-Monetary
Transactions
(Surplus +)

Change in
Official
position
(Surplus +)

Chanqc in
Published
Reserves
(Incrf~asl~ +)

European Economic Community:
19GO
1961
1962
1963
1964
1965
1966

3,225
1,624
178
234
2,147
2,281
1,252

3,454
1,980
519
1,462
1,926
1,533
1,159

3,594
2,17 cl
674
1,447
1, 7 5~
1,327
1,148

1960-64 Annual Average
1965-66 Annual Averaqe
1960-66 Annual Average

1,482
1,767
1,563

1,868
1,346
1,719

1,928
1,238
1,731

10,941

12,033

12,116

Balance on
Liquidity
Basis
(deficit -)

Balance on
Official
Reserve
Transactions
(deficit -)

Decline in
Gold Reserns
and Reserve
Posi tion
in the HiF 1/
(decline -)

1960
1961
1962
1C)63
1964
1965
1966

-3,901
-2,370
-2,203
-2,671
-2,800
-1,335
-1,357

-3,403
-1,347
-2,705
-2,044
-1,549
-1,304
+225

1960-64 Annual Average
1965-6G Annual Average
1960-66 Annual Average

-2,789
-1,346
-2,377

-2,210
-540
-1,732

-1,053
-1,340

-16,637

-12,127

-7,944

Cumulative Balance 1960-1966

United States:

Cumulative Balance 1960-66

-2,14r)
-722

-1,516
-491
-391
-1, ')71
-1,108

-1,1]')

(cont. on next ra,]el

- 57 TABLE 3 cont.

Does not include changes in U. S. holdings of convertible
foreign currencies.

Sources and Notes:

For details on consolidated EEC balance of payments,
see Chapter IX. For details on U. S. balance of
payments, see Chapter I I I below.

58 -

the pos i tion of the pound sterling.
Despite a massive
effort of international cooperation through the Interna tional Monetary Fund and through bilateral arrangements with other monetary authorities, a series of
untoward events in 1967 led to the decision to reduce
the par value of the pound sterling in November 1967.
Aga inst the background of a persistent U. S. payments deficit, this development brought to the forefront the latent problems of maintaining confidence in
the convertibility between gold and dollars, the two
major elements in international reserves.
It also
led to substantial shifts of private funds out of
several major currencies on the part of foreign gold
speculators fed by expectations of a possible rise in
the price of gold on the London gold market.
These disturbed condi tions resul ted in a substantial shrinkage in gold reserves during the 4th quarter
of 1967, as gold was paid out of the reserves of the
Uni ted Sta tes and other members of the gold pool consortium. While the effects of these transactions are
somewhat complex, because of shifts between private
and official holdings of dollars, the overall effect
was also to reduce the supply of dollars in world
money markets.
This private movement to the sterile
liquidity of gold has a tendency to tighten world
interest rates, besides presenting the danger of a
cumulative drain on the United States as an international banking center.
The necessity of taking a prompt and decisive
action to nip in the bud any such tendency to cumulati ve pressure on the world's entire financial structure
through an international move toward excessive conversions of dollars into gold provided the immediate
urgency which called forth the new Action Program.
E.

Mutual Responsibilities and the Need for Decisive
Action

The three problems facing the international monetary system are obviously interdependent, so much so
that it is impossible to deal with them separately.
A full realization of this fact is the key to the
multilateral efforts that are required to solve these
problems.

- 59 First, it is necessary for the United States to
take new and decisive steps to reduce its balance of
payments deficit and arrest the long-standing deterioration in its liquidity position.
Forceful action
has now been taken, and this action,of necessity, un70rtunately involves measures which have a substantial
cost in terms of other economic objectives.
The mandatory controls on direct investment outflows, the
firmer voluntary guidelines for the banks and the request to defer nonessential travel outside the Western
Hemisphere a~e all measures which the united States
has adopted very reluctantly.
The high cost of these
measures is in itself a dramatic witness to the
priority the United States attaches to doing its full
share in reducing the imbalance in world payments-and to the recognition that a breakdown of the system
would have involved far higher costs for the U. s.
and even more for the world economy.
Second, the reduction of the deficit in the U. s.
balance of payments must be allowed, and even encouraged, by the rest of the world; indeed, major positive
measures by other countries are required to bring
about payments equilibrium consistent with the achievement of sound world economic growth and freer as well
as growing international transactions.
In other words,
a substantial improvement in the United States external
accounts must have a counterpart in adjustments of the
balance of payments positions of countries that have
excessive surpluses; it should not come at the expense
of countries who are in weak payments and reserve
positions.
It is therefore a matter of the highest priority
for European governments--again, particularly the
governments of the EEC countries--to face the full
implications of the fact that their balance of payments positions must show a large change from excessive surplus to much more moderate surplus, perhaps
even to moderate deficit for a short period.
These
governments may even be called upon to take forceful
actions themselves to make sure that this reduction in
their imbalances does occur.
Third, all the member countries of the International Monetary Fund must make a sustained effort to
complete the work on legal drafting of the SDR amendments, followed by a speedy adoption and activation of

-~-

the machinery itself.
For reasons already given above
the introduction of SDR into the international mone- '
tary system is an absolutely essential part of an
integrated effort to deal with the complex of problems
facing the system.

- 61 -

Chart IT

WORLD TRADE AND MONETARY RESERVES
-----~---~-~--

$Bil.

-T

--~-~-

$Bil.

200~--+~--+~~~~~~~~~4-~-+---+---~--~~4-~+-~~-',~200

World Trode
(Total Imports, elf)' "

~. . .

100 r---- t-~-

--~~- ----+-~-+-~-

100

- ---- - --->-- -

---~~-~-

601---- -- - -- - -- :-.:-.~..:.fo:.~.~ ....~.~;.~ .... ......... ~~~
50 r-...... ........ ......... .........
~ 7010/ Reserves

........ ~ .....

--~-------

...............................

'--

- -- - I-

---+-~--1

All Countfles

40 r---~

--e--~

--f--

30 c-

1---

r---- --+-~---j

60
50
40

----r--- ----

20 f - - - 15

1953 ~

L. ___

'55

'57

'59

'61

j __
'63

Source Intemoltonol FmonClol StotlStlCS.
FO-425-2

- 62 -

CharI

WORLD TRADE AND MONETARY RESERVES, LESS U.S.
$Bil.

$Bil

200

World Trude

All Countries.
Less IlS'I\
(/mpor Is, Clf)
100
I-

k
60
50

-V

30 l~

.......,

100

80
60

........ ........ t--.......
.....
....
........
~

V
V
-V

.... ......... ......
.....
........
.
.......
......... .........

200

......... .........
.'

lOto/ Reseryes
All Countries, Less Us.

30
20

20
I

L -_ _

1953

'55

'57

'59

'61

'63

'65

'67

SOlJrce Internotional Financial Statistics.
FO·426"1

- 63 -

Chart lIZ

WORLD RESERVES BY MAJOR AREA, 1948 - '67

Indus/riol Europe ~ ...........1-_.-""'1-.

........... ~

.----.

.t:,- ~.-

.....
.-.

"I' -- ---...................
..~......~... ___ ........... _ .......c _______ .._...

#1'.#1'

20
~

..............-- -_................:::
...
.....
,...........
,.- "'....

-- ....,.
.. - ~---'" ...'I ..........
''I';:/
~ Olher Indus/rio/*ond
l
-~

........./

".~

.~ ~U.S.A,
./
~

/,1-._./
/-

$BiL

Jun,'61 _

T%l World NesefYes ~__

80
60

$BiI

a/her Defeloped Artos

~,--- .. ~iiIJ~

... ---...~ Less f)efeloped
Areos

v-_·

#1'.'

4
I

1948

'55

'58

'61

'64

'66

"'Other Indvslria/"inc/urles Uniled Kinr;mm, ColltJdo,af1{/ o/tJXJn.
Source: Mln/ema/ional Financial S/a/is/ics."
Z-'n4-'

- 64 -

COMPOSITION OF WORLD RESERVES. 1948-'66
DOLLARS

DOLLARS

Billions

u.s. Dollars

80~--------------------------------------------------------80

Reserve Positions in IMF
60~----------------------------------~

--60

'52

'54

'64

~--------------------~y~------------------~"~---.~--

..........

_.... -

Annually

Source- International Financial Statistics_

Quarterly

65III. U.S. Balance of Payrnents--The Record to Date
This chapter trace. the evolution of the U.S.
balance of payments during the 1960's and the
measures adopted to cope with the deficit.
In general, the United States has sought to
improve its balance of payments in ways that are
conducive to (1) vigorous economic growth at
horne and in the rest of the world, (2) reasonable
price stability at home and abroad, (3) and the
preservation of an international framework for trading and investing that encourages the best use of
resources. The specific measures adopted have
attempted to avoid interfering with the maintenance
of international security and the flow of capital
to developing nations while recognizing the special
role of the U.S. dollar in the international monetary
system.
A.

Trends since World War II

For more than a decade after the end of World
War II, the economic and financial policies of the
United States and of other countries were influenced
by an overriding need to get the world economy back
on its feet. Tremendous progress was made--in physical reconstruction, in bringing the defeated countries,
Germany, Italy, and Japan, back into the currents of
world trade, in gradually dismantling much of the prewar and wartime paraphernalia of exchange controls
and trade controls, in rebuilding monetary reserves,
in reactivating the machinery of private credit.
Severe inflation was halted. To help Europe and Japan
get into the position of financing themselves internationally by trade instead of American aid, many
currencies were devalued in 1949. Later, the French
franc was again devalued in 1957 and 1958.
In this earlier period the United States had a
balance of payments deficit, but it was not one that
this nation or other nations were concerned about.
The deficit may be said to have been almost deliberately created, to help rebuild the economies of the rest
of the world and to rebuild the monetary reserves of
the rest of world. The great problem for the whole
world was the "dollar gap," and we were doing our best
to close it.

_ 66 _
In the mid-1950's~ Europe and Japan were rapidly
regaining their economlC strength.
Between the recessions of 1954 and 1958, the United States had a consumption and investment boom during which our price level
for metals and machinery rose 20 percent (from the end
of 1954 to the end of 1957).
By the end of 1959 those
prices--particularly important in determining Our international competitive position--were nearly one-fourth
higher than in 1954. With Europe and Japan steadily
increasing their ability to produce goods for export,
conditions were being created that would make it more
difficult than before for the United States to achieve
an adequate surplus in the current account of the
balance of payrnents--that is, a current surplus sufficiently large to cover the flows of U.S. private and
Government capital to the rest of the world.
Beginning in 1958, the United States has had a
long series of large international payments deficits.
These deficits, and our reserve losses, averaged much
larger in 1958-60 than in the preceding ten years, and
though reduced after 1960 they remained excessive.
(See Charts VI and VII.)
Throughout the last ten years, except in 1958
and 1959, the United States has had large annual surpluses in net exports of goods and services (nonmilitary
plus private remittances and pension payments). But
these surpluses have been inadequate to cover the net
outflow of capital and the government overseas costs
of our security.
Furthermore, in the last two years,
this surplus has dropped somewhat at the same time
that private capital outflows and the costs of maintainlng security have riseno
The overall deficits have eaten into our net reserve position.
During the past ten years our gold
reserves fell from $23 billion to $12 billion, while
our liquid liabilities to foreign central banks and
governments increased from $9 billion to $16 billion.
Nearly half of these gold losses occurred in the period
1958-60.
In addition, our other liquid liabilities increased
by about $10
billion during the ten-year period in
question.
This growth of liquid liabilities to others
than foreign central banks and governments served to
hold down the amounts of the deficits that had to be
financed by official reserve transactions, including
gold sales.

- 67 -

Chart 1ZI

U. S. BALANCE OF PAYMENTS ON "LIQUIDITY" BASIS
AND GOLD SALES
tBil..------------------------------------,$Bil.

-4

I
I
I

-3

I
I

-I

-2

-(Jo/d
So/'s

-2

-2.3*

-I

1958

'59

'60

'61

'62

lIFtrsl.llirel3 quorlers 1967 seasonally odjus/ed annual ro/e

'63

'64

- ......--1Io...o.J~0

'66
'67
'tPrellmfnory full year estimate. -$35 to -$40
'65

No/e Includes sales for domes/lc !fIdus/(I01 and orlts/lc purposes. Also !fIeludes ocqUisillons from IMF of $300
million of qold !fI 1960 ond $150 mt/lion ill 1961 ond 0 poyment of $259 millton of qold for quota
!fIcreoses !fI 1965
FQ-417-S- 2

- 68 -

Chort

U. S. BALANCE OF PAYMENTS ON "OFFICIAL SETTLEMENTS"
BASIS AND GOLD SALES
$Bil.

$Bil.

-3
I

H,s,",Officiol
TrORSOCf/DRS

-2

8oloRC'

-I

o
+1

l . - - - - - - - - L - - -_ _ _ _- L_________L -_ _ _ _ _ _- L_ _ _ _ _ _ _ _~_ _ _ _ _ _ _ _ _ _ _ _~~~+I

1960

'61

'62

'63

'64

'65

'66

'67

"* FIrst three qllorters 1961 seosonolly odjlls/ed onnllol role.
Note. The offlClol settlements balonce cOllnts changes In dollar claims of foreign officiol mone/cry
outhofllles - bul nol pflVofe holdings - If! oddllion 10 reserve losses of the U.S The
Itquldtly bolonce cOllnls chonges In file lIqUId dollar holdIngs of all foreigners - prlYote
ond publtc - os well os losses If! reserves
FO· .'6·0· 2

69 After the end of the long steel strike in 1959
we had for five years an unprecedented degree of
stability in u.s. industrial prices, while creeping
inflation was going on in the rest of the world.
(See Tables 4 and 5.)
Along with that price stability
we had an unprecedentedly long period of uninterrupted
economic growth, and a great expansion of both our
international receipts and our international expenditures.
In the period from 1960 to 1964, the U.S. balance
of payments was characterized by a growing surplus on
current transactions as the U.S. competitive position
improved.
In this period the trade surplus increased
markedly, and receipts of income from foreign investments rose sharply. Also, the balance of payments cost
of foreign aid was reduced through tying aid to U.S.
goods and services, and net military outlays decreased
as a result of economies and offset sales.
The favorable trend in the balance on goods and
services from 1960 to 1964 was offset, however, by a
strong tendency for private capital outflow to increase-a tendency that was dampened first by the Interest
Equalization Tax (mid-1963) and later, in 1965, by the
voluntary programs to restrain direct investment in
subsidiary companies abroad and loans abroad by U.S.
financial institutions.
Though the overall balance of payments position
was sharply improved in 1965 as the result of the
voluntary restraint programs, the current account surplus began to worsen again. Especially from mid-1965
to the end of 1966, the underlying position worsened
as a result of both the foreign exchange costs of the
Vietnam War and the impact on the U.S. trade balance
of the sudden upsurge in demand and rising prices.
In 1967 there was a pause in the previously very rapid
rise in imports, but as a result of the recessions in
economic activity in some important foreign countries
the rise in our exports also slowed.
B.

U.S. Balance of Payments Programs

In the period 1961-65, the Kennedy and Johnson
Administrations launched a series of attacks on the
balance of payments problem (see Tab A). These programs,
described in Messages by President Kennedy in February
1961 and July 1963, and by President Johnson in February
1965, included in a broad spectrum of administrative
and legislative measures designed:

TABLE 4

Wholesale Prices for Manufactures - U.S. and Major Foreign competitors
(1960

100, national currency basis)

1958-1960
annual
average
European Economic Community
France a/
Germany-b/
Italy b/
United Kingdom

Canada c/

1961

1962

1963

1964

1965

95.6
99.2
100.7

103.0
102.3
99.8

104.1
104.6
104.2

107.2
105.8
110.1

109.8
106.6
113.8

110.4
109.2
116.8

98.8

102.7

104.0

104.7

107.5

111.6

99.4

101.0

102.8

105.0

105.9

107.9
-..J

Japan b/

93.2

100.9

101.2

105.2

109.1

United States c/ d/

99.5

100.0

100.3

100.0

100.4

102.2

b/
c/
d/

Intermediate goods
Consumer goods
Manufactured goods
For purposes of international comparison, U.s. data represent an OECD reweighting
of official U.s. indices, and exclude manufactured foods.

Source:

Derived from data in Main Economic Indicators,
for Economic Cooperation and Development.

published by the Organization

TABLE 5
Unit Labor Costs for Manufactures - U.S. and Major Foreign Competitors
(1957

100, U. S. dollar basis)

1958-1960
annuctl
average
European Economic
France
Germany
Italy

1961

1962

1963
---

1964

1965

101
125
99

lOS
129
110

110
129
113

112
137
109

Co~~unity

104
100

116
95

United Kingdom

104

III

114

113

114

120

Canada

100

Japan

101

100

10C)

113

III

113

United States

104

106

lOS

104

103

Adjusted for changes in dollar parities of foreign currencies.

Source:

Derived from data published by the Bureau of Labor Statistics, and the
National Institute of Economic and Social Research.

--...J
I-'

72 -

to increase American exports of goods
and services;
to increase inflows of portfolio capital
and tourist receipts;
to moderate private capital outflows;
to reduce Federal Government foreign exchange
outlays; and
to strengthen international financial cooperation through such multilateral institutions as
the International Monetary Fund and the
Organization for Economic Cooperation and
Development.
These Presidential recommendations for action
shared a cornmon philosophical underpinning, enunciated
by President Kennedy in his February 1961 balance of
payments message:
The official price of gold will be maintained
at $35 per ounce;
National security and economic development
programs will be carried forward;
Maximum emphasis must be placed on expanding
exports. This requires that costs and prices
be kept low and that the Government help to enlarge foreign markets for American goods and
services;
A return to protectionism is not a solution;
and
The United States must take the lead in
harmonizing economic policies among those industrialized nations whose behavior has a major
influence on the course of world income and
trade.
This statement of policy was in accord with the general
objectives of the Eisenhower Administration, as set
forth, for example, in the January 1961 Economic Report
of the President.

- 73 -

During 1961-64, fiscal and monetary policy aimed
at encouraging noninflationary economic expansion, and
as already noted there was improvement in the current
account of the balance of payments in this period.
Selective fiscal and monetary measures also affected
the capital account of the balance of payments. These
actions included:
reductions ln corporate income taxes;
liberalized depreciation allowances, to bring
our rates more closely into line with those
of our major foreign competitors;
passage of the 7 percent investment credit;
carefully designed monetary policies to keep
domestic long-term interest rates low while
moving shorter-term interest rates higher to
minimize short-term capital outflows
("Operation Twist").
Over the four-year period 1961-64, an improvement
of more than $3.7 billion took place in the following
accounts:
a higher commercial trade surplus ($1 billion);
•
reduced overseas dollar spending for foreign
aid ($400 million);
economies in military spending abroad
($200 million) ;
increased deliveries on military offset sales
to foreign countries by the Department of
Defense ($400 million);
and an increase in profits and interest on
past foreign investments ($1.7 billion).
The net overall improvement for 1964, however, fell
far short because of a sharp rise in overall private
capital outflows, including both short- and long-term
bank credits and direct investment. The $3.9 billion
deficit in 1960 was reduced to $2.8 billion in 1964.

- 74 The new balance of payments measures introduced
by President Johnson in February 1965 served to check
the rapid growth that had been developing in private
capital outflows. His message called upon the business
and banking community to do everything in their power
to help to reduce overall private capital outflows.
In addition, the President asked for legislation to
remove tax barriers to foreign investment in the
United States, an extension and broadening of the
Interest Equalization Tax, further efforts to promote
U.S. exports rurlf~ei~tourism in this country, and reductions in duty-free allowances for returning American
tourists.
In response to the voluntary credit restraint
programs, U.S. private capital outflows dropped substantially and the balance of payments deficit on the
liquidity basis was cut from $2.8 billion in 1964 to
$1.3 billion in 1965.
C.

Developments in 1966 and 1967

The year 1966 brought a halt to further progress
toward equilibrium, owing primarily to:
mounting direct costs of Vietnam, military
expenditures related to Southeast Asia showing a further increase of $700 million over
those of the preceding year;
a $1.1 billion deterioration in our trade
surplus which resulted from a flood of imports
induced by unusually rapid and unbalanced increases in aggregate domestic demand and renewed inflationary pressures (associated in
part with acceleration of defense outlays).
U.S. export performance also was adversely
affected by these factors, as well as by
lagging economic growth in some major foreign
markets.
On the other hand, u.S. capital outflow increased
only a little in 1966, reflecting the continued effects
of the Interest Equalization Tax, the Federal Reserve
and Commerce Department voluntary restraint programs,
as well as the tight credit conditions prevailing during much of the year. Meanwhile, there was a substantial increase in foreign capital inflow, as U.S.
corporations sold securities abroad to finance direct

75
investment abroad and as the Treasury Department
launched a campaign to acquaint foreign central banks
and others with certain long-term investments in the
united States -- notably certificates of deposit issued
by commercial banks and certain federal agency bonds
and participation certificates. Foreign purchases of
these instruments were motivated by attractive interest
returns as well as by the desire to reduce the large
burden imposed upon the U.S. balance of payments by
its growing overseas security and economic assistance
efforts.
All in all, therefore, the liquidity deficit remained unchanged from 1965 to 1966. And the balance
on the official settlements basis showed its first
annual surplus, as the dollar holdings of foreign
central banks fell substantially, reflecting the attraction of high interest rates for increased private
dollar holdings in the Euro-dollar market and in the
United States.
During the first three quarters of 1967 the
balance of payments deficit was higher (at a seasonally
adjusted annual rate) than in 1965-66.
The trade surplus increased only slightly from
its depressed level of 1966. Imports leveled off with
the slackening ln aggregate demand in the U.S. economy
in the first half of the year, but began to rise again
toward the end of the year. Exports also leveled off,
partly because economic activity in Western Europe was
not expanding much during the spring and summer.
Though activity was picking up in Germany in the autumn,
conditions were still slack in a number of other countries.
There was a further increase in U.S. military
expenditures in Vietnam in 1967 and a sizable increase
in the outflow of U.S. private capital, particularly
through purchases of foreign and international securities exempt from the lET, and through bank lending
abroad. The larger capital outflow was in part a
normal reflection of easier monetary conditions in the
United States as compared with 1966. The improved
liquidity of commercial banks helps to explain not
only the increase in bank loans to foreign borrowers
but also the repayment in the first half of the year
of debt of head offices of banks to their branches

_ 76 _
abroad.
The result of this reflow shows up in the
very large deficit on the official settlements basis
In the first half of the year.
In the final quarter of 1967 there was a large
deficit--substantially larger than the quarterly
average through September. This further deterioration
was accounted for, mainly, by the following factors:
liquidation by the U.K. Government of the $600 million
balance in its portfolio of U.S. securities; speculative pressures in connection with the sterling devaluation; absence of substantial net foreign official
acquisitions of long-term time deposits (as in 1966
and the first half of 1967); a deterioration in the
trade surplus.
(Complete data for the quarter are not
yet available.)
Table 6 summarizes the U. S .. balance of payments
performance from 1958-60 through the first three quarters
of 1967.
D.

New Action Program

The British devaluation of sterling has reinforced the urgency of the need to improve the u.s.
balance of payments. The British move created uncertainty and unrest in the international monetary system
and doubts about the future stability of the dollar.
These doubts arose in large part because of the persistence of large U.S. deficits and uncertainty as to
whether the U.S. payments position would improve.
In these circumstances, it was urgent that the
United States adopt strong measures to deal with the
balance of payments problem. This it has done. Some
of the new measures are clearly temporary. Others are
of a long-run nature.
The U.S. program will inevitably create the need
for adjustments elsewhere in the world.
If the program
is to lead to better and sustainable payments equilibrium,
reduction of the U.S. deficit must be accompanied by
reduction of surpluses in Western Europe.
The result will be a distinct slowdown in the rate
of growth of world reserves, and as the United Kingdom
repays its debts to the International Monetary Fund,
possibly a decline in world reserves. This development
will bring much closer the appropriate time for activation of the plan for creation of Special Drawing
Rights.

TABLE 6

u.s. Balance of Payments:

1958-60, 1965, 1966, and Jan.-Sept. 1967
(billions of dollars)

Average
1958-60

1965

1966

3.02

4.77

3.66

4.35

4.26

8.00

6.94

7.11

-5.32
-2.89

-5.26
-1.82

-6.23
-2.75

-6.60
-3.08

-3.19

(-0.25)
-4.28

(-0.95)
-4.68

(n. a.)
-5.24

0.76

0.85

Trade Surplus
Surplus on total private and Govt. non-mi1itar
current account a'
Military and Govt. grant & capital transactions, net
Net military bl
Of which: Increased expenditures
related to Southeast Asia cl
Gross grant & capital outlays ~/
Repayments on Govt. credits and
other Govt. capital receipts
(Net balance-of-payments cost of total Governmentsector transactions) ~I

(-3.71)

-4.21

-5.05

2.14
(2.45)

2.25
(3.17)

Other transactions, net
Of which: Foreign capital
(of which U.K. Govt. portfolio)

0.42
(0.41)

-0.33
(0.08)
(-0.50)

Balance on official settlements basis

)

1.72

-3.49

-3.74

1.20
(- 3.24)

-3.06

(

(-2.59)

u.S. private capital, net

BALANCE ON LIQUIDITY BASIS

Jan.-Sept.
1967
(annual rate)

(

)

(--=-=-1

-3.71

-1.34

-1.36

-2.28

n.a.

-1.30

0.23

-2.90

Non-military goods and services plus remittances and pensions.
Military expenditures less military cash receipts, as published by Commerce Department in balance-ofpayments accounts.
In 1958-60, less transfers under military sales contracts.
cl Increases over calendar year 1964 level.
~I Total foreign aid and credits, including outlays used on a "tied" basis to finance exports and other
receipts of both private and Government sectors.
el Excludes from net Government transactions that part of foreign aid and credits used on a "tied" basis
to finance exports and other private-sector receipts.
fl 1960 only.
Note:
Detail may not add to totals due to rounding.
Source:
Derived from Department of Commerce data.

.....,
.....,

- 78

IV.

An Intensified Effort to Achieve and Maintain A
Healthy united States Trade Surplus
Introductory Comments

The keystone of a sound international financial
position for the united States and the dollar is a
substantial trade surplus.
It is natural and desirable for a rich country
like the United States to export capital, to give
foreign aid, to provide its share of the cornmon
defense, and to have large numbers of its citizens
traveling abroad.
But all this is possible only
if, in addition to income from foreign investments,
the U.S. trade surplus is large enough to finance
such expenses.
The U.S. has consistently had a trade surplus-an excess of exports over imports.
In 1950-55, the
surplus averaged $2.2 billion; in 1955-60 it averaged
$3.8 billion; and in 1960-65 it averaged $5 .. 2 billion.
It reached an all-time high of $6.7 billion in 1964,
but it narrowed in 196 s: and dropped much further in
1966 when it reached $3.7 billion. There was some
strengthening of our trade surplus in 1967 to
approximately $4 billion.
Continued U.S. balance of payments deficits
strongly suggest that the trade surplus has been
inadequate. To determine what should be done about
increasing it, we must first examine the basic forces
affecting U.S. trade.
U.S. exports and imports are strongly influenced
by the pressure of U.S. domestic demand, by changes
in the U.S. competitive position, and by the economic
growth and policies in our major overseas markets.
What impact do these interrelated factors have on
our trade?

7[~-A

UNITED STATES FOREIGN TRADE
I$Bil.

- I ~30
4.41

. J 25

ID~----------~~-

~20
I

. 15

10
,

·fifSIIl,," qllorlefs seasonalIf odjllsled onnllal fal,.

-""'-''''''''-

FO 401·S·2

_ 79 _

U.S. competitive position in World Markets
As can be seen in Table 7,
in the 1960's, U.S. unit
labor costs in manufacturing declined slightly while those
of our major European competitors rose significantly. If
changes in relative costs were the only determinant of
export performance, then we should have noticeably
increased our relative share of world markets.

TABLE 7

Unit Labor Costs In Manufacturing For Selected
Industrialized Countries Since 1961 al
(1961=100)
country

United States
Canada.
France
Germany
Italy
Japan
· ·
United Kingdom

·
·
. ··
.

·
·
···
· ··
··

· ·

·
·
·
·
·
·

··.
·
·
·

· ·
··

1962

1963

1964

1965

1966

99
99
107
107
108
108
104

98
100
112

98
100
118

III

118
113
102

124

97
95
119
117
122
118
109

99
99
116
123
118
125
114

III
103

!/ Ratio of wages, salaries, and supplements to production;
national currency basis.
~/ Preliminary.

Note.--Data relate to wage earners in Italy and to all
employees in other- countries.
Sources:

Department of Labor and Council of Economic
Advisers.

_ 80 _

In point of fact, the U.S. held its share of world
trade between 1961 and 1964, as Table 8, shows.

TABLE 8

Year

u.S. Share of Total World
Export of Manufactures

1961

25.6

1962

26.5

1963

25.6

1964

25.8

1965

23.6

1966

23.5

Notes:
1.

An adjustment for declassified u.S. special
category exports was made by subtracting
Sl.0 billion from U.s. and world totals in
in 1965 and 1966.

Excludes intra-EEC and intra-EFTA trade.

Source:

United Nations Monthly Bulletin of statistics
November and December 1967.

In 1966 and probably in 1967, the U.S. competitive
position was eroded by increases in u.s. labor costs.

81-

Another important reason for the decline in the u.s.
share of world exports in the past two years has been the
sharp difference in rates of economic expansion in Europe and
the U.S.
Im~act

of Differences in Economic Expansion in the
Unlted States and Europe
The experience of the first half of the decade
indicates the vital importance of sound domestic economic
policies to growing u.s. trade surpluses. This is most
clearly seen in an examination of the relationship of
u.S. imports to the pace of u.s. economic expansion,
as illustrated below:
TABLE 9
GNP (Current Prices)
$

billion

Change
(from
previous
year)

Imports
$

billion

Change
(from
previous
year)

As %
of GNP

1963

590.5

5.4

16.99

5.0

2.9

1964

632.4

7.1

18.62

9.6

2.9

1965

683.9

8.1

21.47

15.3

3.1

1966

743.3

8.7

25.51

18.8

3.4

5.5

26.35

5.0

3.4

1967 (first
3 qtrs.) 777.5

As the annual growth rate in GNP (current prices)
moves up, imports climb more than proportionately. In
1965 and 1966, a period in which GNP growth exceeded
8 percent per annum, our average growth in imports
exceeded 16 percent per annum.

- 82

Clearly, it was not only the rate of increase of
GNP that was the causal factor, but also the fact that
the economic slack which had existed in the early 1960's
was being taken up in 1965 and was completely eliminated
in 1966.
In short, if the United States can maintain
a noninflationary pace of economic expansion, the growth
in imports is likely to be much more moderate than in
1965 and 1966.
What happens in our major markets is obviously of great
importance in determining the level of u.s. exports.
When foreign economies--principally Western Europe and
Canada--are expanding, total world markets are likely to
be strong and U.S. exports are likely to rise with a
general increase in world trade. Where expansion is
weak--as it was when it slowed markedly in Western Europe
in 1966 and 1967--world trade and U.S. exports suffered.
From 1960-63 to mid-l967, European industrial production
increased only 26 percent while U.s. industrial production
rose 36 percent--U.S. growth being more than a third
faster.
This was a major factor in the $1.7 billion
decline in the U.S. merchandise trade surplus from 1961
to 1966.
Foreign Trade Policies
Trade policy of foreign governments has an important
impact on the U.S. trade accounts. The Kennedy Round,
just completed, which will result in sUbstantial reduction
of barriers to trade, will strengthen national economies
through expansion of both exports and imports. But, as
far as we can now determine, this expansion will not
basically alter the trade balance of any major country.
Other changes in trade policy, however, are not
neutral in their impact on trade balances.
In particular,
recent changes in border tax adjustments--taxing imports
and remitting taxes on exports--of some European
.
countries, while consistent with the existing internatlonal
rules of the General Agreement on Tariffs and Trade,
will have an adverse effect on the u.s. trade balance.
B.

Soundly Managing the
and Stable

u.s.

Economy to Keep It competitiv~

The above discussion shows the crucial importance to
the J.S. trade balance of maintaining a noninflationary
~xpansion in the United States.
As in 1966, excessive
~ncreas~s in incorne--especially when we have full employment-~wll1 be quickly translated into higher prices and
capaclty bottlenecks with a resulting surge in imports
and a slowdown in exports. We need the fiscal action
propos~d by the President on August 3, 1967--expenditure~
Lestralnt and tax measures including surcharges on

- 83

corporate and personal income taxes. The performance
of our trade account in the last few years underscores
the need for responsible financial management by the
Executive Branch, the Congress, management and labor.
with the economy picking up momentum in 1968, and with
cost and price pressures increasing,_we are faced not
with the assurance of a continued improvement in our trade
surplus but the threat of another downward movement.
The recent devaluation of sterling and subsequent
speculative pressures in the gold market--reflecting the
view held by many that the U.K. move will put further
pressure on the U.S. balance of payments position--reinforce still further the need for responsible action
on the fiscal front.
All other efforts to improve our balance of ~ayments
position will be undermined unless we avoid the k1nd of
excessive growth that floods us with imports and unless
we return to relative erice stability and cost competitiveness in the Un1ted States economy.
The prompt enactment of the President's tax increase
program is the single most important and indispensable
ste this Nation can take now to improve our balance of
tra e and payments and protect the dollar and the international monetary system.

The role of the Federal Government in the maintenance
of an economic environment in which price and cost
stability can be sustained is widely recognized by
international financial authorities. The Balance of
Payments Adjustment Process Re~ort by Working Party No. 3
of the Organization for Econom1C Cooperation and
Development stated:
"It is agreed that there are certain
general principles (or 'rules of prudence') which
should be followed by all countries in order to
prevent as far as possible the emergence of balance
of payments disequilibrium. In the field of
demand management, it is agreed that it should

84 -

be a general object of fiscal and monetary policy
to maintain demand at a level which is neither
excessive nor deficient, and to promote a continuing
eXDansion of total national expenditure in line
with the trend growth rate of productive potential.
There is also agreement that, in general, fiscal
policy should play a major role in the management
of demand."
Business and labor also have an important responsibility to protect our trade surplus by
keeping wage demands and price decisions consistent
with national productivity performance; and
avoiding work stoppages or the threat of work stoppages in industries vulnerable to import or export
competition at a time when our balance of payments
position is under pressure.
Efforts to return to the price and cost stability that
characterized the first five years of the decade require
business and labor to exercise the utmost responsibility
in their wage-price decisions.
These decisions directly
affect our competitive position at home and in world markets.
Accordingly, the President has directed the Secretaries of
Commerce and Labor and the Chairman of the Council of Economic
Advisers to work with the leaders of business and labor to
make more effective the voluntary program of wage-price
restraint.
Work stoppages in major manufacturing, mining, or transportation industries, or the mere threat of such stoppages
can also cause considerable difficulties for the balance of
payments:
Most directly, imports are encouraged and exports
deterred because of work stoppages or threats of
them when the collective bargaining contracts affecting a basic industry are due to expire. Take, for
example, the relationship of trade in steel to the
three-year collective bargaining contract in that
industry: The steel strike of 1959, for example,
cost us $300 million in larger imports and $200 million in lost exports.
Imports jumped from 2.9 percent
of U.s. consumption in 1958 to 6.1 percent in 1959.
Many U.S. customers never returned to American mills.

85-

In 1962, imports jumped from 4.7 percent to
5.6 percent of steel consumption, as a result of
the threat of a strike, and in 1965, imports jumped
from 7.3 percent to 10.3 percent of consumption,
and the steel trade balance deteriorated by $430
mi11ion--again without a strike. The threat of
a steel strike in 1968 can bring in at least
$300 million of additional steel imports, and an
actual strike would push this figure even higher.
But steel is not the only area of concern. The
dock strike in 1965 appears to have cost an immediate
$700 million in our trade surplus, of which it is
estimated that no more than half was subsequently
regained. The current copper strike has already
cost our balance of payments at least $150 million.
While the United States is rich enough to afford the
real cost which strikes impQse, leaders of labor and management should be prepared seriously to consider whether there
is any feasible way to give advance public assurance that
there will be no work stoppage for the next year or two in
industries capable of causing significant balance of payments
trouble.

Keeping World Markets Open

We have witnessed two decades of progressive liberalization in international trade. From 1946 to 1966, Free World
exports rose from less than $50 billion to more than $180
billion. This extraordinary growth in trade has been accompanied by the highest domestic growth rates the industrial
world ever experienced.
The U.S. has played a leading role in this process of
trade liberalization, a process climaxed by the recent
conclusion of the Kennedy Round, in which all major trading
countries of the Free World participated. Indeed, the Kennedy
Round represents the most far-reaching liberalization of trade
ever achieved in international negotiations.
Tariff cuts exchanged among all the participants affect
about $40.billion of world trade and about $15 billion of
U.S. trade. Reduction of tariffs on industrial products to
the extent of 50 percent cover a very broad range of goods.
Substantial, but somewhat smaller, reductions cover many
more. This provides a challenge and an opportunity--a challenge
to U.S. industry to use its competitive vigor to meet international competition in our markets at home, and an even
greater opportunity to compete for a greater share of expanding

86 _
exports internationally.
Reduced tariff barriers mean
increased chances to trade.
At the same time however we have responsibility to
avoid resorting to unilaterally imposed statutory quotas
at home.
Our trade surplus is uniquely vulnerable to the
adverse impacts of a quotn war--and that would be the certain
aftermath of such protectionist action by the United States
Congress.
D.

Making u.s. Industry Hore Export Minded Through Selective
Export Expansion Programs

In addition to intensified efforts to keep American
exporters competitive and to keep foreign markets open, ~
United States will embark on a major new prosram of selective
export expansion measures.
These new measures, described below, will provide additional help to businesses already active in the export field
and those yet to enter it.
The measures cover the general
areas of export finance and export promotion.
Some of them
build on export expansion programs already launched in previous balance of payments programs and described in Tab A.
Others are new and experimental and will start on a small
scale. ~'1hile immediate budgetary prospects do not permit a
massive increase in outlays for export expansion purposes
in fiscal year 1968 and fiscal year 1969, we envisage a
gradual build-Up in these programs to very sizable dimensions
in coming years.
There is ample precedent for these new recommendations
in actions taken by other governments to stimulate their
exports.
We embark on this intensified program of selective
export expansion measures because the superior price and
cost performance by American industry may not be enough to
improve our trade balance.
Until quite recently, many U.s.
corporations have been fully occupied with the immense task
of serving the largest domestic market in the world.
(In
the past seven years the growth in the U.s. domestic market
has been equivalent in size to the combined market of France,
Italy, and the United Kingdom.)

- 87

Improved export performance by u.s. corporations
depends not only on competitive strength in terms of rrice
but on competitive strength in terms of delivery periods,
credit terms, and marketing efforts as well. It also depends
on zeal and a desire to venture for a position in foreign
markets.
On May 23, 1967, the President said:
"One of the most ambitious goals we have for the
months ahead is ..• to try to fire up the producers of
this Nation to attempt to make a substantial increase
in our exports and to find new ways and means of
bringing about that result."
The program described below is intended to do just
this.
In devising this package of export expansion proposals,
the Administration has been guided by
the recommendations of the National Export
Expansion Council;
recommendations of American corporations already
actively engaged in the export business and those
not yet so engaged;
recommendations of the American financial community;
the budgetary realities of the day; and
United States contractual obligations under the
General Agreement on Tariffs and Trade (GATT).
1.

Improved Export Financing

The Export-Import Bank is our key Government agency to
help provide appropriate financial accommodation for our
exports. As part of the new program to stimulate the flow of
our goods into overseas markets:
a.

The Con ress will be asked to earmark $500 million
of the a ready-requested 4.5 b1l 10n aut or1zat10n
for Export-Import Bank to be used for greatly
liberalized export insurance and export guarantee
facilities in that bank. In addition, a portion of
this sum should be earmarked to enable the ExportImport Bank to make loans carrying a higher degree of
risk than carried by its traditional credits in those
cases where the development of lasting and growing
markets for u.s. products appears particularly
-promising.

88 -

The Export-Import Bank will greatly strengthen
and liberalize its rediscount facility for export
paper, carrying such paper for longer periods of
time and charging more attractive rates than is
presently the case.

To reinforce a. and b.
Bank's Exporter Credit
liberalized, providing
throughout the country
and authority covering

Intensified Export Promotion Activity

As a result of initiatives arising from previous
balance of payments programs, the Commerce Department has greatly intensified its export promotion
activities in recent years. The number of commercial exhibitions at trade fairs and trade centers-to cite just one result of these intensified efforts-has climbed from 24 in fiscal 1963 to a planned total
of 65 in fiscal 1968. The number of u.s. firms participating in these fairs and centers has jumped
from 886 in 1963 to an estimated 2,390 this year.
While overseas promotion activities involve foreign
exchange costs, the balance of payments returns from
these programs are believed to be exceptionally high.
These returns are measured by annual questionnaires
sent by Commerce to corporations participating in the
activities in question.

above, the Export-Import
program will be greetly
the private community
with increased discretion
a new range of nations.

In view of the success of these programs to date and
the high returns derived therefrom, the Administration
will ask the Congress for an additional a ro riation
of 10-1 2 mill~on in fiscal year 1969 to increase
the sum sent on existin ex ort romotion
rom the 11-1/2 million resentl authorized to
2 million.
During the five years, fiscal year 1970
to fiscal year 1974, we should plan in terms of
increasing annual appropriations for these programs
up to an annual level of $50 million. The Secretary
of Commerce feels that he can roductivel send
approximately 200 mill~on over the five-year period
in guestion on these programs and the Congress will
be asked to support such an intensified program.

89 -

There are numerous small- and medium-sized companies
in the united States which engage in no--or only in
very limited--export activities.
(Two thousand U.S.
companies presently export from $100,000 to $10
million of goods and services annually.)
These and
many other companies could achieve more with
additional assistance. Secretary of Commerce
Trowbridge has developed a "Joint Export Association
Plan" under which the Commerce Department would
provide funds to firms associated for the purpose
of cooperatively improving their export performance.
The Secretary of Commerce has been directed to
begin this program.
Funds would be provided to such Joint Export
Associations for systematic development of export
markets over a sustained period, ranging from two
to five years, both in industrialized and developing
countries. Government financial assistance
provided for such market developments would be
determined on a contract-by-contract basis,
would generally not exceed 50 percent of the
cost, and would phase out over time.
Expenditures for trade development activities
eligible to be shared under this program would
include those for the following activities:
Advertising, Publicity
Participation in trade fairs and other
exhibitions
Market research
Supplying samples and technical data
Overseas trade promotional visits
Preparing and submitting bids (intended to
cover specialized equipment and unusual
projects, including blueprints, drawings,
etc. )
Operation abroad of sales offices, showrooms,
warehouses, and service centers
Training of sales and service personnel
Product use familiarization programs
Operation abroad of assembly and packaging
facilities for U.S. products
Joint Export Associations could involve
large, medium, and small firms, handling
unrelated, complementary, or competitive
products, although emphasis is expected
to be placed primarily on the smaller
firms.

- 90 -

In its initial stages, the Joint Export Associations program would be experimental.
If the
program were successful, requests for rather
substantial additional appropriations could be
made in subsequent years.
E.

Keeping World Markets Fair

The success of our own export expansion program depends
significantly not only on a competitively strong u. s. economy
and on a liberal trade policy at home and abroad to keep
world markets open.
It also depends on the treatment our
goods receive in world markets.
A number of other countries-some of them in balance of payments surplus--have utilized
financial me&sures, promotion, export rebates, and border tax
adjustments to strengthen their trade positions. Some of
these measures have put us at a relative disadvantage. To
reduce the inequities and harmonize trade practices requires:
a fresh look at some provisions of the GATT
minimizing the disadvantages to our trade that result
from the border tax systems ~f some of our trading
partners and
reducing nontariff barriers to our trade.
1.

A Fresh Look at the GATT

The time has come to reexamine certain features of
the General Agreement on Tariffs and Trade. That the United
States has been a staunch supporter of the GATT, and the
principles of liberalized trade for which it stands, should
be clear to all. An eaormous advance toward the expansion
of world trade has been made under the GATT. Yet the application of some of its rules could limit the possibilities of
expanding trade and with it the increase in u.s. exports,
both so essential to all--here and abroad.
Are the provisions of the GATT for countries in
balance of payments difficulties more oriented
toward restrictive rather than expansionary trade
measures?

91-

Does the GATT incorporate principles--in the field
of taxation and other government activities--that
do not apply in today's world, and give advantages
to some countries not available to others?
Do the nontariff barriers which remain in existence
throughout the world today limit the benefits
achievable from past trade negotiations and limit
the effectiveness of many GATT provisions?
Should we not consider the possibility that changes
in tax systems--either as a result of proposed harmonization arrangements in the European Economic
Community or other modifications--will make some
provisions of the 1947 agreement obsolete?
Article XII of the GATT permits countries in balance
of payments difficulty to impose import quotas to help correct
the disequilibrium in question. This right has been utilized
by a number of countries in the postwar period.
But the
present rule may result in much harsher and more persistent
impediments to world trade than required.
Careful consideration should be given to a revision of
the GATT rules so that balance of payments difficulties
could be eased by trade devices other than quantitative
restrictions.
Ambassador Roth, the President's Special Representative
for Trade, raised another urgent set of issues at the GATT
Ministerial Meeting this fall as follows:
"Another serious problem area is the relationship of countervailing duties and subsidies. The
United States has already raised this question in
the Plenary under Agenda Item 16. At that time we
emphasized that it was essential to undertake a
broad-ranging examination of all aids to exports
along with the countervailing duties, since one could
not be considered in isolation from the other. We
are very much concerned about the consequences of
conflicting policies and practices in this area, both
in agriculture and industry. This broad and complex
area of fiscal adjustment is filled with danger for
all of us where practices conflict. If order is to
be brought into this field, we must have a clear
idea of the nature and effects of these rapidly
expanding practices, their relation to one another
and to the rules by which we carryon our trade."

92 -

The GATT permits countries relying heavily on indirect
systems of taxati0n to provide exporters with rebates and to
impose border taxes on imports, while countries relying
more heavily on direct taxation, such as the United States,
are severely limited in taking comparable action.
Many economists and businessmen question the basic
premise underlying these provisions.
At one time, it was
generally thought that the effects of indirect taxes were
entirely passed on to consumers, while direct taxes were
wholly absorbed by producers.
The GATT rules, reflecting
this supposition, allow indirect taxes to be rebated on
exports and imposed on imports.
But it is increasingly
recognized today that border adjustment of indirect taxes
creates an unwarranted advantage for some countries.
2.

The Immediate Problem of Changes in Border Tax Rates

There is an immediate situation which creates an urgent
trade problem.
The member countries of the European Economic
Community are embarked upon harmonization of their internal
tax systems.
This harmonization will result in increases in
the border taxes and export rebates of some of those countries.
Other European countries are also raising their border tax
adjustments.
For over two years there have been multilateral and
bilateral discussions under the aeqis of the Organization
for Economic Cooperation and Development of the trade effects
of these planned changes in the European countries.
The United States representatives have repeatedly voiced
their concern. They have pointed out that such increases
will compound the trade advantages gained by the countries
which rely on export tax rebates and border tax adjustments
on imports of various indirect taxes.
They have noted that
both the present system and its impending intensification are
contrary to the better workings of the international adjustment process and the role that could be fulfilled by surplus
countries.

93-

The united States cannot question a country's choice
of an indirect tax system or the desire to change from one
indirect system to another. But it is concerned with the
effect on international trade of the changes in these
adjustments which will take place as the EEC countries
harmonize their indirect tax systems.
To bring about greater equity between these practices
and the United States is an essential element in the balance
of payments adjustment process.
Accordingly, the President has initiated discussions
at a hi h level with forei n countries-- articularl those
natlons wlth balance of payments surp uses--wlth a Vlew
to obtainin their rom t coo eration in minimizing the
lsadvanta es to our trade WhlCh arlse from dlfferences in
natlona tax s¥stems. Leglslatlve measures are also belng
prepared in thlS area whose scope and nature will depend on
the outcome of these consultations.
3.

Nontariff Barriers

Nontariff barriers abroad still act as impediments to
our exports. We must seek not only to reduce and remove
these nontariff barriers, but to remain alert against the
establishment of new ones.
The U.S. Government has actively reviewed this area of
concern:
In its September 1967 report on The Future of U.S.
Foreign Trade Policy, the Subcommittee on Foreign Economic
Policy of the Joint Economic Committee of the Congress of
the United States stated:
"The United States should be prepared to become
a leader in the review and mitigation of nontariff
obstructions to international trade. The accomplishments of the Kennedy Round negotiations in reducing
tariffs as such permits, indeed, calls upon all of the
trading nations of the world to take a new and fresh
look at the mass of nontariff barriers which have grown
up over the years in most countries.
"Not infrequently, these nontariff barriers deny
to the individual countries and the world the gains and
efficiencies of free trade more effectively and more
insidiously than the visible tariff obstructions
themselves. Nontariff barriers are numerous and varied,
sometimes having come into existence for good and
understandable reasons or unfortunately, in some cases,

94 _

ln response to special pleading or transient conditions
ln conflict with the long-run interest of the nations
involved."
Ambassador Roth, the united States Special Trade
Representative, said at the GATT Ministerial meeting on
November 23, 1967:
"". As tariffs are reduced, these [nontariff]
barriers take on an increasing significance.
Indeed,
they are already a matter of sharp concern to most
of us.
"We think the first need is for an inventory of these
restrictions. We do not yet have sufficient understanding of their scope, their significance and their intricate workings. But a useful examination will require
positive effort by all nations, because many of these
restrictions relate to basic national policies and practices.
When this inventory is completed, the Contracting Parties
should analyze their trade effects and examine various
possible negotiating techniques which might be applied to
them. "
The reduction of these barriers is an important element
in U.S. Government efforts to provide an international environment conducive to the expansion of world trade and a higher
level of u.S. exports.

95-

An Intensified Program to Moderate the Foreign
Bxchan e costs of Government Ex enditures Abroad
for Secur ty, Development,

Introductory Comments

We are faced now, and will be in the future, with
Government expenditures overseas to meet the costs:
of our commitments abroad, on which America's
security and survival depend,
of our regular overseas establishments, and
of contractual obligations overseas that arise
in the operation of our Government.
We have pressed in all areas of the Government to
achieve balance of payments savings, in our military
expenditures, in economic assistance, and in our regular
Government operations.
We must move ahead in all these areas even more
intensively to achieve further balance of payments
savings.
The President's program sets as our new target a
$500 million improvement over the present balance of
payments costs of our defense, AID, and other Government
expenditures abroad. The President has announced three
steps to this end:
"First, I have directed the Secretary of
State to initiate prompt negotiations with our
NATO allies to minimize the foreign exchange
costs of keeping our troops in Europe. Our
allies can help in a number of ways, including:
The purchase in the u.s. of more of
their defense needs.
Investments in long-term united States
securities.

- 96

"I have also directed the Secretaries of
State, Treasury and Defense to find similar ways
of dealing with this problem in other parts of
the world.
"Second, I have instructed the Director
of the Budget to find ways of reducing the numbers
of American civilians working overseas.
"Third, I have instructed the Secretary
of Defense to find ways to reduce further the
foreign exchange impact of personal spending
by u.S. forces and their dependents in Europe."
Table 10 shows the net costs of the Government
transactions to our over-all balance of payments.
(More
detail is shown in Tables 11 and 12.)
The table shows
that between 1960 and 1965 there was a $1.1 billion drop
in the net balance of payments cost of Government activities.
Nevertheless, in 1965, the Government sector still showed
a substantial deficit ($2.6 billion).
In 1966 (and again
in 1967), the Government deficit increased significantly
as a result of Vietnam expenditures.
(Investments in longterm u.S. bank certificates of deposit made largely by
foreign central banks as a result of the effort by the
United States Treasury described earlier are not included
in these figures.)
TABLE 10
Net Balance of Payments Cost
of Government Transactions
(billions of dollars)
1960

1961

1962

1963

1964

1965

1966

1967

-3.7

-3.0

-2.0

-2.5

-2.6

-3.2

-2.6

(Jan. sept.
only)

The foreign exchange costs of Government will not
disappear when hostilities end in Southeast Asia. They will
drop, but much of the opportunity to reduce the net cost
to the U.S. balance of payments could be lost unless we
exercise self-discipline and insist that other nations do
their fair share in meeting joint responsibilities in the
military and economic assistance fields.

- 97 -

Ways must be found to neutralize the foreign exchange
costs of military expenditures in the common defense.
We must find ways to work constructively with our
allies on bilateral and possibly multilateral arrangements designed to neutralize the foreign exchange consequences of the locations of our military forces and
those of our allies.
The determination of the share a nation should bear
in helping to meet the economic assistance requirements
of the less-developed world and the security requirements
of our community of nations requires difficult and continuous decisions on a host of issues. These issues cannot
be resolved solely on the basis of domestic resources or
budgetary considerations.
In the process of providing bilateral aid and contributions to multilateral financial institutions, we
must constantly ask ourselves:
What are other donor countries contributing?
How aggressively have the institutions in
question attempted to borrow in the capital
markets of other donor countries?
What are the recipients doing, through self-help
efforts, to utilize the money efficiently and
effectively?
What safeguards are the institutions providing
for donor countries that may from time to time
be in balance of payments difficulty themselves?
B.

Military
1.

General Measures to Reduce External
Military Expenditures

A detailed report by the Department of Defense on
its efforts to reduce expenditures and increase receipts
abroad is contained in Tab B.

- 98 -

Our efforts to hold down the foreign exchange costs
of military programs have been substantial.
Between
calendar 1960 and calendar 1965 net military foreign
exchange expenditures 1/ were reduced from S2.8 billion
to $1.6 billion despite rising overseas costs and despite
such events as the Berlin crisis build-up. The gap
widened again in 1966 and in 1967 because of essential
outlays for maintaining the shield of freedom in Vietnam.
The net balance of payments costs of our defense expenditures for other purposes, although substantial, have been
held strictly in check as the Secretary of Defense carried
out the President's prior directives to intensify his
program:
to shift defense buying from sources abroad to
sources in the United States;
to reduce the staffs in overseas headquarters;
to streamline overseas support operations;
to work with our defense partners to increase
their offset purchases of military equipment
in the United States.
These and other measures described in Tab B have been
taken while fully protecting our security interests and
discharging our responsibilities. Military personnel
levels outside Southeast Asia have been reduced. Employment of foreign nationals for support or service activities,
setting Southeast Asia aside, has dropped. Military Post
Exchanges emphasize U.S. goods in their display, pricing,
and purchasing practices. Non-Vietnam overseas construction costs entering the balance of payments have been
curtailed. On the individual level, a massive education
effort has been undertaken to restrain foreign expenditures
and increase savings in the United States.
These are general measures that have been taken and
which should continue to be vigorously pursued. But
they are not enough. Over the past six calendar years
(1961-66), our military expenditures outside the United
States have averaged $3.1 billion. Even after taking
1/

The figures in this section (B) and those in Tab B
are Defense Department data which have some technical
differences in classification from the data published
in the balance of payments accounts which are used in
Table 12 in this Chapter and Table 6 in Chapter III.

- 99 -

account of receipts under the military offset arrangements
with Germany and other sales of military equipment, the
net foreign exchange costs of military outlays averaged
$2.0 billion.
These military outlays are rising. They were less
than $3.4 billion in fiscal year 1966 and $4.1 billion
in fiscal year 1967. The rising trend in our net military
deficit is outlined by region in Table 11.
vietnam may be viewed as temporary, and the extraordinary foreign exchange drains from it should decline
in time. But other significant declines in balance of
payments consequences of military deployments outside
the United States will depend upon the neutralization
of their balance of payments effect.
Two possible ways to neutralize these military
expenditures, both involving action by the recipient
countries, are:
purchase of additional

u.s. goods and services.

long-term investments in the United States by
central banks or governments.
We must successfully negotiate--bilaterally or
multilaterally--long-terrn arrangements of this sort which
offset our large remaining balance of payments costs on
military account. No other course is consistent with
the adjustment process, or fair and equitable.
2.

European Area

Our commitments for the common defense are vital to
u.s. security and cannot be put in question. The balance
of payments cost to the u.s. of these commitments is
sUbstantial. Gross expenditures for the stationing
of U.S. forces in Europe currently amount to about $1.5
billion annually (a part of which has been offset by
European purchases in the U.S.). We are now engaged in
a renewed effort to find financially viable ways and
means of meeting the security needs of the alliance
while engaging with our allies in a continuing reexamination of the needs.

TABLE 11
U. S. DEFENSE EXPENDITURES AND RECEIPTS
ENTERING THE INTERNATIONAL BALANCE OF PAYf1ENTS
(In Millions of U. S. Dollars)
Fiscal years
Receipts

Expenditures

1965

1966

1967

1965

1966

1967

1,206

-340

-698

-1,138

392

535

-296

-364

-500

123

171

-75

-120

-168

1,442

1,531

1,545

1,033

761

1,226

-409

-770

-319

1965

1966

Southeast Asia a/

350

711

Japan

328

Korea
Western Europe

Net

1967

Canada

208

181

220

-146

-108

-179

Other/Undistributed

392

414

432

180

321

397

-212

-93

-35

2,800

3,352

4,109

1,322

1,199

1,770

-1,478

-2,153

-2,339

Total

a/ Republic of China, Philippine Islands, Ryukyu Islands, Thailand and South Vietnam.
b/ Receipts include primarily (I) cash receipts from sales of goods and services through
the Department of Defense and (2) barter.
Data exclude receipts for military equipment
procured through commercial u.S. sources except where covered by government-togovernment agreements and data are curently available.
Source:

Department of Defense

0
0

_ 101 -

After consultation in NATO, the u.s. has made
arrangements for redeploying about 35,000 u.s. military
personnel from Germany in 1968. These forces will be
based in the u.s. but will remain earmarked for use in
Germany and will return there at regular intervals for
training. This plan will also permit a reduction in the
number of the Defense Department's foreign employees in
Germany.
The Defense Department report contained in Tab B
describes the u.s. military sales program, which was
primarily responsible for increasing our receipts worldwide
from $300 million in FY 1961 to $1.6 billion in FY 1967.
Most of those sales were to our NATO allies. For six years,
until last June, we had a series of "military offset
agreements" with Germany under which the German Government
undertook to buy from the u.s. military equipment and
services costing an amount which offset the bulk of our
defense expenditures in Germany. The German Government
did not renew the agreements for the period after June 1967
but expects to continue major purchases in the U.S., although
advance payments under the offset agreements (of which
substantial amounts remain on deposit as of year-end 1967)
will reduce our new receipts over the near term. During
FY 1968 the German Bundesbank agreed to invest $500 million
in nonmarketable u.s. Treasury securities. This investment
counts as a long-term capital inflow, reducing our payments
deficit. It does not fully offset our expenditures in
Germany.
Despite our offset agreement with Germany, the EEC
countries gained an average of over $300 million annually
over the 1961-65 period from military transactions with
the United States. In the absence of any neutralization
arrangements, this figure will jump to nearly $1 billion
annually, beginning in July 1968.
The importance of neutralizing these costs was
stressed by Secretary of State Rusk and Deputy Secretary
of Defense Nitze at the NATO Ministerial Meeting on
December 12, 1967. In a formal statement in behalf of
Secretary of Defense McNamara, the latter said:

- 102 -

"We will, therefore, continue to maintain forces
in Europe for as long as they are desired.
In
saying this, however, I must also point out an
anomaly in European attitudes which cannot persist. This is that on the one hand there should be
no diminution of u.s. forces, but that on the
other hand the responsibility for meeting the
balance of payments deficit caused by such largescale continuing u.s. deployments in Europe is
none of Europe's affair.
It is essential that
deficits suffered by countries as a result of their
stationing troops abroad in the common effort should
be treated and solved by their allies on a cooperative basis. We would welcome suggestions from our
allies on how to meet this pressing problem, since
its solution cannot be further postponed."
The United
with Germany and
the u.s. has lar

The economies we have made as a result of the move
from France and those which will follow the redeployment
of about 35,000 additional military personnel from Europe
in 1968 are together expected to reduce our balance of
payments costs on military account in Europe by over $125
million a year. Nevertheless, the remaining balance of
payments costs incurred as a result of large-scale deployments of u.s. forces in Europe are still substantial.
We have made it clear to our allies that we consider it
essential that deficits suffered by countries as a
result of stationing troops abroad in the cornmon effort
should be treated and solved by the allies on a cooperative
basis.
In addition to the other steps being taken to reduce
the balance of payments costs of our military effort, the
Secretary of Defense has been instructed to find ways to
reduce further the foreign exchange impact of personal
spending in Europe by Defense personnel and dependents.

- 103 -

East Asia

The mounting foreign exchange costs of our vital
military actions in Vietnam have brought to the front the
question of dynamic and viable financial relationships in
that area of the world--both currently and when the fighting
stops. The direct balance of payments costs attributable to
our security efforts in Southeast Asia began to increase
in 1965.
By ~alendar year 1967 the increase totaled
$1.5 billion per annum (excluding indirect effects).
But
even before Vietnam, u.S. military costs in Asia were not
insignificant.
lie :Tlust ir ~~nSl tv 0ur efforts to reduce the impact
of th~foreign ~xchange costs of security operations in
Asia--both now and after the fighting ends.
We have already
begun, in a number of countries, to encourage investment of
official reserves--clinbing dramatically in many instances
because of u.s. military spending--in longer-term investments
in the United States.
This is ~utuallv beneficial--helpful
to the developing countries in putting aside a reserve
for the future and helpful to the united States, which is
now bearing heavy foreign exchange costs in the area. As
experience in Europe has taught us, this is but one of
a number of possible neutralization techniques. Very
clearly, more needs to be done in Asia to neutralize U.S.
balance of payments costs incurred in the common defense.
More is being done, and can be done without detriment to
economic development of the countries of East Asia.
The joint communique by President Johnson and His
Excellency Prime Minister Sato of Japan on November 15,
1967, included an agreement
..... to enhCii1ce ~he usefulness of the joint Uni ted
States-Japan committee on Trade and Economic
Affairs by establishing at an early date a subcommittee.
This subcommittee will be a forum for
consultation on economic and financial matters of
importance to both countries, including the short
and longer-range balance of payments problems of
the two countries."
The flrst ncetlng of the subcommittee 15 scheduled
for late January 1968.

- 104 -

Aid
1.

Bilateral

\ve cannot expect to strengthen our balance of payments
at the expense of the less-developed world.
It is in our
economic interest and in the world's economic interest to
assist this vast group of nations with its vast potential
for expanded world trade, output and employment, or world
insecurity, hopeless poverty and frustration.
We seek to assist the less-developed nations toward a
better life, but we seek to do it in a way that transfers
primarily real resources when we are in balance of payments
difficulties and emphasize both real and financial resources
when we are in balance of payments surplus.
Our efforts in the past have been directed to two
main areas:
incrEasingly to tie bilateral foreign assistance
to the financing of United States goods and
services; and
to have the other financially powerful countries
of the Free World increase their assistance to
the less-developed countries.
The fact that our agricultural sales program and the
operations of the Export-Import Bank involve u.s. exports
is well recognized. The AID story is less well recognized-its role of assisting others while on an increasing scale
supplying U.s. goods in ways that minimize any adverse
balance of payments impact.
In most of the 1950's, U.s. bilateral assistance
was open to international competitive bidding.
Increasingly, this resulted in u.s. financing of procurement
in other industrial countries which have recovered from
the war and become increasinqly competitive. While we
were seeking to help the economically "have-not" nations,
our help was hurting the dollar and adding to potential
calls on our gold. This was inconsistent with our own
and the ~orld's balance of payments situation. By
1959 only 40 percent of our bilateral aid dollars were
being spent on U.s. goods and services. At that time
moves were started to place tighter limitations on the
U.s. policy of worldwide procurement. Tying procedures
have been stre~~thened over time.

- 105 -

Today, AID funds are spent primarily in the United
States for goods and services procured in this country.
Ninety-two percent of total AID expenditures will be spent
in the United States.
Of AID's total expenditures for
commodity assistance, 96 percent will be for procurement
of u.s. goods. Successive tightening of AID activities
as part of our balance of payments program leaves only a
few elements not specifically tied to U.s. goods and
services--salaries and payments to AID overseas personnel
and contractors, only a part of which is spent abroad,
strictly limited offshore procurement, and AID's contribution to the multilateral Foreign Exchange Operations Fund
in Laos and parts of some grants to overseas educational
institutions.
On a balance of payTIents accounting basis AID's
offshore expenditures were over $900 million in FY 1961
and $800 million in 1963. The balance of payments directive
was to reduce its offshore expenditures to not more than
$500 million by FY 1965. The target was more than met.
Despite a greatly expanded economic aid program for Vietnam,
offshore expenditures were held to the target in FY 1966.
Asa result of AID's further tightening of tied procurement regulations, offshore expenditures are estimated at
$290 million in FY 1967 and at $200 million in FY 1968.
These figures do not take into account the repayments on
loans made by AID and its predecessors.
The President, on January 11, 1968, directed that
the foreign exchange costs of AID's activities be
reduced by at least $100 million in calendar tear 1968
below the calendar 1967 level. The Agency wii attempt to
reduce its overseas expenditures to less than $170 million
by further restricting dollar payments for staff and
services abroad and confining virtually all financial and
commodity assistance to tied or barter-type procurement.
Now that our bilateral assistance program is almost
completely tied, we are working to make sure that this
assistance results in truly additional transfers of
U.S. ¥OOdS and services to the developing countries. This
new e fort to assure "additionality"--to assure that these
exports are additional and that this assistance does not
SUbstitute for sales that the U.s. would have made on a
commercial basis--has important long-range potential for
our balance of payments. When an aid-receiving country
buys u.s. goods financed by AID under a tying arrangement,
it may be buying goods that it would otherwise have bought
with dollars it already owns. Such dollars--free foreign
exchange--can be used for purchases and payments either
in the u.s. or elsewhere. Tying procurement to U.S. sources
may not itself be enough to reduce to ~he extent necessary
the ime~9t of the AID Rrogram on the balance of payments.

- 106 -

To meet this potential balance of payments problem,
a special task force of the Cabinet Committee on Balance
of Payments has been formed to work with AID in a program
to assure " a dditionality" of exports in our aid program.
"Additionality Teams" have now visited a number of m.ajor
aid-receiving countries. AID has begun to explore measures
to ensure that AID-financed exports will be additional.
This is an on-going effort that must be pursued diligently.
As part of this effort, AID has included u.s. export
promotion as a factor--although necessarily not the dominant
one--in selecting capital projects. Attention is being paid
to the selection of projects and goods that have a greater
potential for IIfollow on" orders.
U.S. Embassy commercial
staffs in the more important aid-receiving countries are
being strengthened with this purpose in mind.
This new program cannot succeed by Government efforts
alone. u.s. industry and trade must play their role.
In
too many cases in too many developing countries our
businessmen have not actively sought to establish the
trade ties so essential in the international competition
for new markets. The export expansion program of the
Department of Commerce outlined earlier has an important role
to pla~ here and must be coordinated with the effort for
"addit1onality".
2.

Multilateral

In the field of the multilateral development finance
institutions, new efforts have been made to assure the
compatibility of our participation with our balance of
payments policies. While these efforts have balance of
payments improvement as an objective, they also seek to
strengthen these institutions and fully preserve their
multilateral character. The principles involve:
improved burden-sharing, by capital exporting
countries in their contributions and by developing
countries in their self-help efforts.
improved access of the development finance
institutions to wider and more diversified world
capital markets.
mitigating the impact on our balance of payments
when access to our own capital market is necessary.

107 -

providing safeguards not only for receiving
countries, but for contributing countries that
may, from time to time, be in balance of payments
difficulty themselves when long-term advance
pledges are turned into requirements for payments.
emphasizing contributions that take the form of
goods and services when contributing countries
find themselves in balance of payments difficulties
and in the form of finance when countries are in
surplus.
more generally, seeking to insure that development
finance more actively contributes to the international payments adjustment process while the
aggregate level of development assistance, which
for too long has been on an international plateau,
is significantly increased.
As stated earlier, the determination of a nation's
"fair share" of economic--or military--assistance is no
simple matter. Years ago, as the other industrial countries
regained economic strength, it became clear that the time
had corne to decrease reliance on a single country. This
issue can no longer be resolved solely by relating the size
of a given country's contribution to the size of its gross
national product. The form in which a donor provides aid,
the terms of its aid and its international liquidity position
must be taken into account.
The overall effect of the World Bank operations has
been a substantial positive factor to the U.S. balance of
payments. In its own interest as a multilateral institution and with some urging by the U.S., it has energetic~lly
sought to raise capital on other markets. More than half
of its funded debt is now held outside the United States.
Nevertheless, in the face of its increased requirements
for capital and still relatively underdeveloped capital
markets abroad, access to the U.S. bond market has from
time to time been approved. In each of these instances
in recent years the proceeds of these bond issues were
reinvested in the United States in a manner that neutralized,
at least for a time, any impact on our balance of payments.

- lOR The Inter-American Development Bank has acted in
the same fashion.
It has raised substantial money abroad
even under the handicap of going to nonmember country
markets, and it has invested the proceeds of its u.s.
borrowings in ways compatible with our balance of payments
policies.
It has recently taken further measures to
attract nonmember capital by limiting procurement under
its loans in accord with the financing that nonmembers
make available on appropriate terms.
The International Development Association, affiliated
with the World Bank, is in urgent need of replenishment.
Other nations have shared with us to the extent of about
$1.50 for every $1 we have contributed in meeting this
need. Pursuant to President Johnson's directive, the
Secretary of the Treasury has indicated our readiness to
participate in a substantial replenishment which must
include adequate balance of payments safeguards.
The newly-established Asian Development Bank has
been characterized by burden-sharing in the fullest sense.
Here 20 percent of the capital was provided by the United
States and the rest by Japan, other regional donors,
Canada, and Western Europe. The President has responded
to a further Asian initiative with a request to the Congress
to join with others in supplying special funds for concessionary lending by the B~nk.
In this case the balance
of payments will be protected and the u.s. funds will be
used only for procurement in the United States. It is
in these ways--ways compatible with the realities of
international finance--that the U.S. hopes to join with
others in meeting the urgent needs of development of those
economically less fortunate.
D.

Other Departments and Agencies

In order to assure that all activities--not only
the key military and aid activities--are brought into
balance of payments focus, the overseas disbursements of
all departments of Government have been brought under
special review and control by the Director of the Bureau
of the Budget. The review and control mechanism is called
the Gold Budget.
Increasingly vigorous screening of
expenditures abroad by these other Federal departments
and agencies must be continued if the Government is to
play its full role in moderating the exchange costs of
its own expenditures abroad.

- 109 -

The financial scope of the Gold Budget is large,
roughly $10 billion, taking receipts and expenditures
together. The range of activities covered is very wide,
from defense outlays to Post Office receipts and expenditures on international mail activities, from overseas
payments on the public debt to the cost of operating
overseas tracking stations by NASA for space flight
missions.
The figures for any agency do not necessarily reveal
the scope of the effort to achieve foreign exchange savings.
Real foreign exchange savings in some cases have been
offset by rising prices abroad which have raised the cost
of ongoing programs.
The St8tP. Deoartment, whose Gold Budget expenditures
in FY 1967 totaled $265 million compared with $280 million
in FY 1963, has undertaken a variety of actions to cut
foreign exchange outlays, including:
purchase of goods in the U.S. for use overseas,
at costs up to 50 percent greater than those
abroad;
use of U.S. flag carriers to the largest extent
possible ror travel by Department personnel;
consolidation of overseas posts, elimination of
overseas positions, maximal use of U.S. postage
for diplomatic pouch mail, and relocation of
some courier operations in the U.S.
Despite the narrow margin for reductions, and the
continually increasing costs of operation, overseas costs
are now below the 1963 levels. The search for additional
savings continues.
The United States Information Agency has striven for
savings by centralizing operations and procurement where
possible in countries where the U.S. Government holds
local currencies in excess or near-excess of its needs
and by increasing procurement of other goods in the U.S.
consolidation of some overseas operations and their
removal to the U.S. are now under consideration.
The Atomic Energy Commission's expenditures abroad
reflect purchases of uranium. Such purchases are being
phased out entirely.

- 110 -

The Department of Agriculture spends money abroad for
development of foreign markets for American foodstuffs,
research activities, and payments to foreign-flag vessels
to ship agricultural exports. Expenditures for foreign
vessels reflected the shortage of u.s. shipping because
of Vietnam supply needs. To the maximum extent possible,
Agriculture uses excess u.s. holdings of foreign currencies
to minimize the balance of payments costs of its activities.
As is well-known, the United States owns amounts of local
currency in excess of its needs in a handful of lessdeveloped countries. These holdings have resulted from
sales, for local currency, of surplus agricultural products.
While the use of these local currencies has helped us save
dollars in a number of instances--where we could use the
currencies in question in lieu of dollars--we have not been
able to utilize all of the currencies acquired. The accumulation of large holdings of other countries' currencies
clearly presents a variety of problems. Under the Food for
Freedom Act of 1967, we are moving away from agricultural
sales for local currency. The Act calls for a transition
to dollar sales over a five-year period, except to the
extent that the united States needs local currencies for
its own uses, for mutual defense, or for "Cooley" loans.
Table 12 summarizes on-the basis of our published
overall balance of payments accounts, the identifiable
impact of all of the foregoing Government transactions.
Comparing the results for calendar year 1966 with 1960
levels:
Net military expenditures had by 1964 been
reduced by $850 million; and, despite the subsequent increase of nearly $1 billion in
Southeast Asia related expenditures, net
expenditures worldwide for 1966 did not exceed
the 1960 level.
In other words, apart from the
Southeast Asia increase, net military expenditures
in 1966 were down nearly $1 billion, or more than
one-third, from the 1960 rate.
Net dollar outflows from all types of u.s.
Government grants and credits (excluding, that
is, the "tied" outlays serving to finance U .. s.
exports and other receipts from foreigners) had
also been reduced by more than one-third, from
$1.1 billion to about $700 million per year.

- 111 -

The balance of all oth~ Government transactions
appearing in the overall balance of payments
accounts, while fluctuating widely from one year
to another due largely to variations in special
capital receipts, has generally shown some
surplus. In 1966 this surplus was a little
over $200 million, up slightly from that in 1960.
The performance in holding down the foreign exchange
costs of all our Government programs during the decade of
the 1960's has been good, particularly when the burden of
Vietnam is taken into account.
Nevertheless, we should make sure that further savings
are obtained. We cannot let up on our efforts in this
important area, for unless we can demonstrate conclusively
that we are doing everything in our power to limit Government
balance of payments costs, we cannot expect continuation of
the fine cooperation received to date from the private
sector in its efforts to help us solve our balance of payments problem. The Gold Budget will be a key instrument
to insure that no stone is left unturned in finding areas
where further savings can be made on Government account-both now and after the end of hrstilities in Vietnam.

TABLE 12

u.-S.
'l'ransZlct i. ()w, \,:!,ich Ap;lear in Balilnc(' of rayr-lents J\ccounts
- -Govcrnncnt
- - - ------- --- .- --_. - - - - - - - - - - - - - ,
---_._.

O'illions of c!oll()rs; b',' c()lcr'cL,r ycarsl

nili tary expendi tun~s <i/
Hilitary cash receipts-a/
l~et military
-Excluding increased expenditures
related to Southeast Asia b/
Cross grant & carital outl~s not
- retalnecrwrtliln GoVt.-sector-CT"
---I;xcluding "tiec1" outlc:iys' to
finance U.S. exports & other
private-sector receit,ts

19 f) 1

19 (j 2

1963

1964

1965

1966

-3.1
0.3
-2.7

-3.0
0.4

-3.1
1.1

-2.9
1.0
-2.0

-2.9
1.0
-1.9

-2.9
1.1
-1.8

-3.7
0.9

=-L.l

(-1.6)

(-1.8)

-3.2

~et operational costs & receipts of
-otheI-Govt---:- progrill"1s & ()ctivlt1es'9/

NET

19GO

OPJ=P.J\TION,,\L " COSTS

Lxcluding "tied grants &
capital & Southeast J\sia
military increases

-2.G

-3.

=-r.9

-3.9

-4.1

-3.9

-4.0

-4.3

(-1.1)

(-1.0)

(-0.8)

(-0.7)

-0.2

-0.3

-0.4

-0.5

-6.2

-(,.7

-6.2

-6.4

-6.2

-7.6

Govt. payments of interest & pensions
Receipts of interest & cash
amortization on Govt. credits e/
Special Govt. capital receipts, net
NET COVERNVLEliT SECTOR

Excluding "tied" grants &
capital

........

(-4.1)

(-4.0)

(-3.3)

(-3.1)

(-3.0)

(-2.7)

(-3.0)

-0.5

-0.6

-0.7

-0.9

0.9

o.~

1.0

0.9

1.0

1.2

0.1

0.7

0.9

0.3

0.2

-S. 5

-5.6

-4.9

-5.9

-5.8

-5.9

-6.9

(-3.7)

(-3.0)

(-2.0)

(-2.5)

(-2.6)

(-3.2)

(-2.3)

r::;xcluuing also Southeast l\sia
military-expenditure increases

(TABLE 12

cant.)

a/
-

Expendi ture and cash receipts data are as published by COIT'J'lerce Department in
balance-of-payments accounts. They differ fron Defense DepartMent data by excludinc:; (i.e., shiftinG fro~" militarv to other entries):
(1)
on payr~ents side,
small ar~lOUl!ts of retiree] pvy, clair~s -, r:rrants. anc1 net c11ar.aes in foreicm-currency
balances purchased vlith dollcJ.rs.~ an(: (2)
on receir;ts si(~e, certain military sales
through conu;'..ercial channels and burter sales.

Heasurcd from calendar year 1964 level.

c/
-

Differs from gross outlays shown in Talle 6 by excludinq that part of "tied"
outlays used to finance military-sales contracts and otller Government-sector
receipts.

Represents total Government payments for miscellaneous services, less estimated
one-half of government sales of such services not financed by "tied" grant and
capital outlays.

Excludes non-scheduled repaynents and those financed by ne\' Government credits.

f/
-

Includes non-scheduled repaynents on Government credits plus Government nonliquid
liabilities not associated with military-sales contracts or grant and capital
outlays.

Note:
Source:

Detail may not add to totals due to rounding.
Derived from Department of COPl",erce data.

~
~

- 114 -

VI.

An Intensified Effort for Temporarily Reducing
Outflows of U. S. Capital

Financial Policy on U. S. Foreign Investment

In its Annual Report of 1967, the Council of
Economic Advisers clearly enunciated U. s. financial
policy on U. S. investment abroad:
"Over the years, the outflow of u.s. capital
has made a major contribution to world economic
growth.
By providing capital to areas where it is
relatively scarce, u.s. foreign investment raises
foreign incomes and often leads to a more efficient use of world capital resources.
u.s.
direct investment has provided a vehicle for the
spread of advanced technology and management
skills.
u.s. foreign investment also has yielded
handsome returns to American investors and substantial investment income receipts for the balance
of payments.
"Despite the advantages of u.s. foreign investment both to the recipient countries and to
the United States, it can--like every good thing-be overdone.
And it was being overdone in the
early 1960's.
Just as a person must weigh and
balance opportunities for investment that will be
highly profitable in the future against his current
wants, so must a nation weigh the benefits of
future foreign exchange income against current
requirements.
The costs of adjusting other elements
in the balance of payments may be greater than the
costs of sacrificing future investment income.
"It is often true that U.S. investment abroad
generates not only a flow of investment income but
also additional u.s. exports.
From a balance of
payments standpoint, this is an additional
dividend.
Yet it is also true, in some cases,
that U.S. plants abroad supply markets that would
otherwise have been supplied from the United States,
with a consequent adverse direct effect on U.s.
exports.

- 115 -

"It is sometimes held that the international
flow of capital occurs always and automatically
in just the economically 'correct' amount, and
that any effort to affect this flow through government measures constitutes a subtraction from
the economic welfare of the country of origin,
the country of receipt, and the entire world
community.
Such a position cannot be sustained.
"While much of the larae flow of u.S. capital
to the developed countries is no doubt a response
to a shortage of real capital there relative to
the United States, the flow is also influenced by
many other factors.
These may include cyclical
differences in capacity utilization, differences
in monetary conditions and financial structure,
speculation on exchange rates, tax advantages,
and opportunities for tax evasion--none of which
necessarily leads to a more rational pattern of
international investment.
"High prospective returns on investment in
a particular country may reflect a particular
choice of policies in the recipient country that
is quite unrelated to any underlying shortage of
capital.
If a country chooses to channel the
bulk of its private saving into low productivity
uses, if it employs a tight monetary policy, if
it limits access of its own nationals to its
capital market, it will attract foreign capital.
Restraint on such capital flows may therefore
merely mean that more of the adverse effect of
such domestic policies on economic growth will
rest--as perhaps it should--on the country that
made the policy choice.
"Trade restrictions may also lead to a flow
of capital that would not otherwise take place.
U.S. investment in the EEC has, at least in part,
been induced by the desire to get within the
tariff walls erected around a large and growing
market.
If, however, a continued movement toward
trade liberalization may be expected, the economic
justification for some part of these capital flows
is lessened.

- 116 -

nOne major stimulant for direct investment
abroad is undoubtedly the substantial advantage
in technology and managerial skills which U.S.
firms often possess. The international transfer
of these factors may be embodied in a capital
outflow independent of the relative scarcity of
capital. Action would thus be appropriate, not
necessarily to curtail the investment itself,
which would interfere with the beneficial transfer of the scarce technology and skills, but to
transfer the so~rce of financing to the area receiving the direct investment. This, indeed, is
the primary intention and the result of the
present voluntary program on direct investment.
"Finally, differential monetary conditions
among countries can induce capital flows.
But
monetary policy is an important and useful instrument of domestic stabilization and growth as
well as of balance of payments adjustment ••...
Appropriate use of restraints on capital outflows
in such forms as the voluntary programs and the
lET can usefully supplement monetary policy ln
promoting domestic and international goals.
!lIn summary, ... it is
clear that the
United States should be a major capital exporter.
The U.S. programs have been designed to maintain
a reasonable flow of capital, especially to the
less developed countries. But given the alternatives and the need to improve its payments position, the United States has restrained the outflow of capital as preferable to cutting essential
international commitments, limiting international
trade or restricting domestic--and world--economic
growth. "
Our stake in our corporations operating abroad, of
course, goes far beyond our balance of payments returns
from their operations.
Indeed, since World War II, our
corporations operating overseas have made a substantial
contribution to the economic growth of the Free World,
and it is difficult to overstate their importance to a
continuation of that growth.

- 117 -

They are playing a growing role in the expansion of
world trade and in providing capital and technology--as
well as employment--in the countries in which they
operate. Their contribution to growth in the developing
countries is often a unique one. The rising incomes and
economic progress to which they have contributed means
their influence surpasses the economic sphere.
The benefits which have accrued, and should continue
to accrue, from the growth of multinational corporations
are today threatened by the rising tide of nationalism
abroad. In many of the less-developed countries, a growing nationalism, mixed with state intervention or discrimination in varying degrees, has begun to create an unconqenial atmosphere for multinational private business.
Indeed the same trend is evident in some of the developed
countries where multinational companies have become well
established.
There are no easy solutions to the problems of reconciling the interests of the various parties involved-host country, base country, and the overseas corporation
itself. A first requirement is clearly a growing understanding of others l needs and problems on the part of all
involved.
For its part, the u.s. Government seeks in countless
ways to enlarge the freedom of opportunity for multinational corporations operating overseas--by diplomatic
efforts to allay fears of foreign domination and exploitation, as well as to remove local barriers to foreign
private investment, by programs aimed at deepening and
widening understanding in less-developed countries of the
workings of a privately-oriented economy, by programs to
encourage and directly assist prospective investors in
foreign countries, by tax treaty negotiations and by other
efforts far too numerous to mention here.
B.

Trends In U.S. Foreign Investment and Investment
Income

The basic information on u.s. foreign investment and
its impact on the U.S. balance of payments is contained
in Tables 13-16. The major lessons are:

TABLE 13
Private International Investment Position of the United states a/
(billions of dollars)

U. S. Investments Abroad
Other
Long Term

Forei n Investments in the U.S.
Tota
Long Term Short Term

Net
Position

Total
---

Direct

1960

8.5

49.4

31.8

12.6

5.0

40.9

18.4

22.5

1961

9.9

55.5

34.7

14.3

6.5

45.6

21.4

24.2

1962

15.0

60.0

37.2

15.5

7.3

45.0

20.2

24.8

1963

16.6

66.5

40.7

17.6

8.2

49.9

22.8

27.1

1964

21.0

75.8

44.4

20 .5

10.9

54.8

25.0

29.8

1965

24.6

81.1

49.3

21.6

10 .2

56.5

26.4

30.1

1966

28.2

86.2

54.6

21.0

10.7

58.0

27.0

31.0

Short Term
-~-----

Includes short-term and marketable long-term U. S. Government obligations.
Excludes U. S. Government claims and nonli~uid U. S. Government liabilities to
foreigners.

Note:
Source:

Detail may not add to totals due to rounding.
Department of Commerce

~
~

CIO

- 119 -

TABLE 14

U. S. Direct Investment Abroad:
Value, Earnings and Yield
(billions of dollars)
Book Value
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967 (est. )

11.8
13.0
14.7
16.3
17.6
19.4
22.5
25.4
27.4
29.8
31.8
34.7
37.2
40.7
44.4 .
49.3
54.6
n.a.

Earnings a/
1.9
2.4
2.5
2.4
2.5
3.0
3.5
3.8
3.3
3.6
4.0
4.3
4.8
5.2
5.8
6.4
6.7
6.8

Yield b/
17.7
20.1
18.9
16.2
15.6
17.2
18.2
16.9
12.8
13.1
13.3
13.4
13.9
14.1
14.3
14.4
13.6
12.5

al Includes reinvested earnings plus fees and royalties.
bl Total earnings as a percent of end-year book values of
the previous year.
Source:

Derived from U. S. Department of Commerce data.

- 120 -

TABLE 15
U. S. Direct Investment Abroad:
Balance
of Payments Outflows and Income
(billions of dollars)

Outflows
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966

-0.6
-0.5
-0.9
-0.7
-0.7
-0.8
-2.0
-2.4
-1.2
-1.4
-1.7
-1.6
-1.7
-2.0
-2.4
-3.4 a/
-3.1 a/

Income

1.4
1.6
1.5
1.6
1.9
2.1
2.4
2.5
2.4
2.6
2.8
3.2
3.6
3.8
4.4
4.9
5.1

Net Balance
of Payments
Impact
0.8
1.1
0.6
0.8
1.2
1.3
0.4
1.2
1.2
1.1
1.6
2.0
1.8
2.0
1.5
2.0

Excludes direct-investment outflows financed by borrowinq abroad through U. S. financing corporations.

Includes direct investment fees and royalties.

Note:
Source:

Detail may not add to total due to rounding.

S. Department of Commerce data.

- 121 -

TABLE 16
Plant and Equipment Expenditures of Foreign Affiliates
of U. s. Companies, by Area
(billions of dollars)
1960

1964

1965

1966

All areas, total

3.8

6.2

7. 5

8. 8

Canada, total

1.3

1.6

1. <)

2.4

Latin America, total

0.7

1.0

1.1

~ 1.1

1.2
1.0

1.4
1. 3

1.9
1.4

0.7

1.4

1. 9

2. 0

Europe
Common Market, total
Other Europe, total
Other areas, total

Note:
Source:

Detail may not add to totals due to rounding.
U. S.

Depart~ent

of Commerce.

- 122 -

1. The large flows of u.s. investment abroad in the
1960's were an important factor in the u.s. deficit of
these years.
In each year since 1960 the net private international investment position of the United States has
risen substantially.
2.
These past investments are, nevertheless, a
source of strength now.
In 1960, U.s. direct investments
abroad contributed to $2.8 billion of earnings to the
United States; this rose to $5.1 billion in 1966.
3. The yield on u.s. direct investment abroad in
the 1960's has been considerably below that of the 1950's.
4. Despite moderation of outflows from the United
States for direct investment, the gross investment in
plant and equipment expenditures by U.S. affiliates has
increased from $3.8 billion in 1960 to $7.5 billion In
1965 to $8.8 billion in 1966 and over $9 billion in 1967.
5.
Even if there were no new foreign investment by
the U.S.,earnings flows back to this country would continue
because they are based on the stock of U.S. investment
made to date.
Moreover, with continued, even though
reduced, U.S. investment aero ad and with some improvement
in the yields on these investments as economic recovery
proceeds in Europe and as start-up costs are reduced! the
earnings should rise.
In short, with the new capital restraint programs,
we expect a major strengthening of the u.S. balance of
payments through the reduction in capital outflows and
increases in u.S. earnings on its foreign assets.
C.

Limitations on Private Capital Outflows in 1968:
The New Program and the New Interest Equalization
Tax

The history of the Interest Equalization Tax and the
voluntary capital restraint programs administered by the
Federal Reserve System and the Commerce Department are
summarized in Tab D.
These latter programs were
strengthened on November 16, 1967, two days before the
devaluation of sterling.
In view of the present balance
of payments situation and the need to bring about a
decisive improvement, both programs were substantially
tightened on January 1, 1968.

- 123 1.

The New Federal Reserve Program for 1968

The Federal Reserve voluntary program announced on
November 16, 1967, asked that participating banks keep
their holdings of foreign assets within 109 percent of
the amount outstanding at the end of 1964. This target
ceiling was unchanged from that for 1967. Since banks
were below target levels for 1967, however, there was
leeway for outflows of bank capital. Moreover, to provide flexibility for banks with relatively small bases,
banks were given the option of using the 109 percent
ceiling or a 2 percent of total assets test. Banks were
requested, therefore, to limit the use of their leeway.
In addition, participating banks were requested to hold
the level of nonexport credits to the developed countries
of Western Europe to or below the amount outstanding on
Octoher 31, 1967.
This program is now further tightened in order to
achieve a net inflow of at least $500 million during
1968, primarily by reducing outstanding credits to the
developed countries of continental Western Europe, while
assuring that sufficient leeway is available to meet the
essentlal credit requirements of export financing, and
continuing the existing priorities for developing countries and certain other countries that are heavily
dependent on the u.S. to provide the capital needed for
economic growth and stability.
The outline of the program to accomplish the new
1968 objective is:
For banks, a reduction in credits by at least $400 million
General ceiling for 1968 on foreign credit
extensions by banks to be fixed at 103 percent of each bank's 1964 base.
Alternative provision for smaller banks to
allow them a ceiling equal to each bank's
1967 ceiling plus one-third of the difference between that amount and 2 percent
of its total assets at the end of 1966.
Maturing term loans to developed countries
of continental Western Europe not to be renewed; the repayments thereon not to be
reloaned to residents of those countries;
and each bank's overall ceiling on foreign
credits also to be reduced by the amount of
such repayments.

- 124 -

Outstanding short-term loans to developed
countries of continental Western Europe to
be reduced by 40 percent during 1968 (at
rate of at least 10 percentage points per
quarter) with a corresponding reduct~o~ also
being made in each bank's overall celilng.
For nonbank financial institutions:
credits by at least $100 million

a reduction of

Holdings of foreign assets covered by the
program to be reduced by at least 5 percent
during 1968.
Holdings of liquid funds abroad to be reduced
to zero or minimum working balance requirements.
New loans or investments in developed countries
of continental Western Europe to be limited to
credits essential for financing of U.S. exports.
2.

The New Commerce Program for 1968

The Commerce voluntary program for U.S. corporations
was also continued and strengthened for 1968 by an
announcement on November 16, 1967. The 1968 target under
the November program provided for an average rate of
direct investment in developed countries during 1967 and
1968 equal to the annual average for the three base years.
This compares as follows with targets under previous
programs:
Total target for 1965-1966 = 90% of 1962-64 total
Total target for 1966-1967 = 80% of 1962-64 total
Total target for 1967-1968 = 66-2/3% of 1962-64 total.
The target cutback under the November program would
have produced a savings, combining the outflow of direct
investment and earnings retained abroad, in 1968 compared
to that estimated for 1967 of some $200 million.

- 125 The Commerce program on direct investment is now
substantially tightened to produce a balance of payments
savings of $1 billion in 1968 as compared to the estimated
1967 level. The voluntary mechanism was judged not adequate
to attain this goal and the new program is mandatory.
It
sets targets for geographic areas and will set targets for
companies as has been the case under the voluntary programs.
Similarly, it is directed to outflows of capital and reinvestment of earnings and not to the bricks, mortar and machinery
that may be financed abroad. The major features of the
new program are as follows:
New capital transfers to countries
in continental Western Europe and other
developed nations not heavily dependent
on our capital are to be stopped in
1968. Problems arising from work already
in process or commitments under binding
contracts should receive special consideration.
New capital transfers to other developed
countries, e.g. Canada, Japan, Australia,
New Zealand, the U.K., and the oilproducing countries, are to be limited
to 65 percent of the 1965-66 average of
direct investment.
New capital transfers to the developing
countries are to be limited to 110 percent
of the 1965-66 average of direct investment.

U.s. businesses must repatriate from their
share of the earnings of all their foreign
business ventures in the three groups of
countries amounts equal to the greater of
(1) the same percentage of their share of
total earnings from these three groups as
they repatriated during 1964-66, or (2) so
much of their share of earnings as may
exceed the limit set for capital transfers
to each group.
In the case of the continental
European countries where a moratorium on
capital transfers applies, the applicable
rule with respect to (2) above is that
earnings in excess of 35 percent of investment
in 1965-66 must be repatriated. U.s. business is also required to reduce short-term
financial assets held abroad to the 1965-66
average level.

_ 126 -

This new mandatory program still permits American
corporations to invest abroad but they must rely to a
far greater degree than before on foreign sources of
funds, such as depreciation, foreign borrowings (either
in local markets or the Euro-dollar market), the sale of
equity to foreigners, and, within the limits permitted,
retained earnings.
They must utilize bank borrowings
(from foreign banks, including branches of u.s. banks),
foreign private placements and public offerings of securities in foreign capital markets.
3.

The Interest Equalization Tax

The Interest Equalization Tax, adopted in 1963, imposes
a tax on bonds and stocks purchased by Americans from
foreigners in the developed countries. Canada and, to an
extent, Japan, were excepted on sale of new issues. The
lET was later extended to apply to loans with a maturity
of one year or more.
Direct investments are not covered
by the lET.
The two-year extension of the IET through July 1969,
recently enacted by Congress, changed the law to make it
a more flexible policy instrument by granting the President discretionary authority to vary the rate of tax
within a range equivalent to an added cost of zero to
1-1/2% per annum to foreign borrowers. After being
raised temporarily to the 1-1/2% level during the period
of Congressional consideration, the tax was reduced on
August 30, 1967, to 1-1/4%.
This lowering of the tax rate by Presidential Executive Order emphasized again the fact that the purpose of
the Interest Equalization Tax is to equalize the interest
cost of borrowing between u.s. and foreign capital markets.
The lET is not designed to halt completely the outflow of portfolio capital from the U.S. but rather, by
equalizing borrowing cost, to moderate the rate of outflow to a level which is dependent upon factors other
than substantial basic interest rate differentials.
In addition to changing the rate of the tax, the
Congress also strengthened the procedure for establishing
American ownership of a foreign security in order to permit tax-free transactions among American owners.
It is
now necessary for an American seller of a foreign
security to show by means of a validation certificate
either that he paid the tax when the shares were originally
acquired or that these shares were exempt from the tax.

- 127 -

A Capital Flows Policy for the Long-Range Future

At present, the United States clearly must moderate
the outflows of private capital, weighing carefully the
eventual yield such outflows will bring against their
immediate foreign exchange costs.
In this connection, it is important that these
restraints be clearly temporary and administered with
flexibility.
And finally, it is important that they
help generate structural improvements in overseas
capital markets. We believe the present program meets
these long-term aims:
It emphasizes an approach as close to previous
voluntary programs as possible. Much of it requires no specific legislation.
Its success in
reducing balance of payments losses will continue to be largely attributable to the cooperation of U.S. companies.
It is in the context of
an overall program aimed at achieving balance in
as short a time as possible and lends itself to
phasing out as soon as conditions permit.
Within the limits established, decisions under
the program will continue to be made in the
market place. Companies will, subject to these
limits, be able to move ahead with what they
judge the more vital investments, deferring
or canceling other investments providing less
promising returns. The temporary program
restricts capital outflows from the U.S. and
sets certain limits on the reinvestment of
foreign earnings, but companies can proceed
with their foreign rrojects beyond these
amounts if foreigninancing is obtained.
Similarly, the Interest Equalization Tax is
not a prohibitive tax.
It permits American
companies and individuals to make portfolio
investments and bank loans abroad where there
is an unusually high rate of return.
Investments in marginally less profitable foreign
credit instruments are discouraged.
The recently obtained flexibility to vary the
rate of the Interest Equalization Tax will
assure that as the U.S. balance of payments
position improves, it will be possible to
reduce restraining policies gradually without
fear that excessive outflows of capital will
suddenly arise.

- 128 -

The program as a whole is designed to moderate
capital outflows only as much as deemed vital
to obtain the needed improvement in the balance
of payments.
Both the direct investment and bank credit
programs and the lET have been shaped by
taking objectives other than the balance of
payments into account--notably, the need to
have a liberal flow of capital to the lessdeveloped countries and to countries such as
Canada which have a traditional reliance on
the U.S. capital market.
The programs also
give high priority to the extension of
credits--or the movement of capital--that
help expand U.S. exports.
The direct investment and bank credit programs and
Interest Equalization Tax, while short-term programs,
are designed to have long-term consequences. Most importantly, the growth of the European capital market has
been a priority goal of U.S. and European policy for many
years.
This market could not be developed to handle all
of Europe's needs over night.
But, by restraining
foreign access to capital and money markets in the united
States, the lET in conjunction with the Commerce and
Federal Reserve programs has operated as one of the
primary causes of a significant change in the size and
structure of European financial markets.
The growth of the international bond market in Europe
(shown in Table 17) hQS been striking.
In 1962, the
volume of new foreign bond issues sold in European markets
was $360 million.
The flotation of such issues (including
foreign issues in national markets in Europe and in the socalled Euro-bond market) accelerated during the second half
of 1963 and in 1964 reached a level of $991 million.
In
1966 the amount of new flotation was $1,286 million, an increase of more than 200 percent from the most recent prelET year. And, during the first three quarters of this
year, new international issues floated in Europe were
running at an annual rate of $2.1 billion.
U.S. companies have made extensive use of this expanding European capital market to finance their overseas
investment needs. Although there were no sales of new
long-term issues abroad for the financing affiliates of
U.S. companies during 1963 or 1964, the amount of such
issues had reached the level of $490 million in 1966 and
promises to be still larger in 1967.

TABLE 17

New International Dond Issues Floated in Euror0
--------------(ffill1]ons-of--doflarS)-----------

al
1967

Borrower

1966

662

660

eg6

233

330

293

209

120

269

516

913

768

726

258

450

313

346

534

991

875

795

278

529

353

306

490cl

117

132

202

395

661

555

19{;3

190

362

Japan

Other Developed

I'les tern Europe

Total Developed Countries
~11

Other Countries

11--111

1C"l6S

1967

1964

......
International Institutions
Total
U. S. Subsidiaries

Grand Total

14
360

534

991

1,181
-----

1,285
----

Includes issues denominated in foreign currp-nciGs as well as in dollars; also
includes portion of foreiqn issues made in New York and sold to foreiqners.

Domestic based as well as foreiqn basen.

Excludes $127 million exchanqe of convertihle detcnturps for stock by a U.S.
corporation to obtain major inter0st in a foreian enterrrisG.

tlate:
Source:

["'etai 1 may not add to tota.1s due to roundinG.
U. S. Treasury

N
\.0

- 130 -

The European countries have been giving a great
deal of consideration to capital market problems and
to reforms that can and should be instituted.
Both the
Common Market and the Organization for Economic Cooperation and Development are actively working to stimulate
improvement.
The OECD has published a study on capital
markets containing a number of recommendations for
strengthening markets and increasing their efficiency.
Member governments of the OECD are currently studying
the applicability of these recommendations to their own
markets.
A number of reforms have been undertaken and
some of the remaining governmental restraints in Europe
on international capital movements have already been
removed.
Unfortunately, progress in this area lS not quickly
achieved.
The disparity between the capital export
capacity of the U.s. market and that of capital markets
abroad remains so wide as to require for the time being
continuing restraint on capital outflows from the U.s.
The extent of this disparity is illustrated in
Table 18 which indicates that between 1958 and 1965 the
volume of securities floated abroad by the EEC countries
exceeded the volume of foreign securities floated in the
EEC markets.
During the same period foreign securities
totaling $8.3 billion were floated in the United States
and only $400 million in U.s. securities were floated
abroad.
There are compelling reasons to believe, however, that the continued effective operation of the new
Commerce and Federal Reserve programs and the lET will
not only improve the U.S. balance of payments position
in the short run but will help to induce some of the
structural changes in capital markets abroad that will
contribute to a sustained equilibrium in U.s. payments
without control.
A successful capital flows policy also requires a
substantial reduction in the differential between longterm interest rates in the United States and those in
Europe.
The gap between long-term government bond rates
in the United States and those prevailing in the EEC
countries in recent years has for the most part exceeded

- 131 -

TABLE 18
Gross International Security Issues
U.S. and EEC, Total 1958-1965
(millions of dollars)
Foreign
Issues on
Domestic
Market
a/

Country

Domestic
Issues
Abroad
b/

Balance
(+ sign
indicates
net export
of capitai)

Germany

418

250

+ 168

Belgium

132

393

- 261

France

253

- 185

Italy

120

264

- 144

Netherlands

282

+ 194

EEC Total c/

1,020

1,248

- 228

Uni ted States

8,286

413

+7,873

Including international organizations.

Including Euro-issues.

£/ Totals in first two columns include intra-EEC issues;
last column excludes these issues.
Source:

Organization for Economic Cooperation and
Development, Report on Improvement of Capital
Markets.

- 132 -

1 percent and has at times exceeded 3 percent in the case
of Germany.
Differentials in industrial bond yields have
often been even larger.
The increase in u.s. long-term
rates has within recent months narrowed the rate differentials somewhat.
It is, however, inconceivable that
the maintenance of such very high rates would be compatible with balanced economic growth at capacity rates
in the United states itself. Moreover, it is undesirable
for the U.S. to maintain for a long time high interest
rates which would limit total investment in the developing
countries and Europe.
It has, therefore, been the u.s.
desire to see the interest rate differentials narrowed
through reductions in the long-term rates prevailing in
European countries.
As the new united States program takes hold, it
becomes even more critical that European countries pursue
domestic monetary and fiscal policies that help to dampen
upward pressure on interest rates.
As we move into the difficult but necessary area of
mandatory controls on direct foreign investment by U.S.
firms, it is clear, in short, that a maximum degree of
understanding, cooperation and adjustment by private and
public institutions, both toreign and domestic, will be
required. We believe that circumstances will bring about
that degree of understanding which was so evident under
the voluntary program.
By so reacting, all parties will
hasten the return of free movement in the worldwide
market place.

- 133 -

'r:-

Program for
,'r iva te .J.ilvestment in U.

!\ Lon r] - P<1llge

Promoti~g Fore ign
Secur 1 ties

In his Special Message on the Balance of Payments
in July 1963, President Kennedy urged that a positive
action program be established to promote the overseas
sale of U. S. corporate securities. The following
October, he appointed an Industry-Govern~ent Task
Force to develop a long-range program for promoting
foreign portfolio investment in the United States.
The Tusk Force, chaired by tne Secretary of the
Treasury in his then capacity of Under Secretary of
the Treasury, examined a large number of factors inflilcncing
the sale of U. s. securities to foreign investors.
It sought to identify and appraise the legal, administrative,
and institutional restrictions remaining in the capital
markets of other industrial nations of the Free World
which prevent the purchase of American securities
by foreigners.
This Task Force also reviewed governmental and private activities in the U. S. adversely
affecting foreign purchases of our corporate securities.
On the basis of these studies, it outlined a broad
and intensive program designed to
Improve the U. S. balance of payments by
increasing foreign investment in U. S.
private securities;
Guide U. S. based international corporations
toward making greater use of foreign-held
funds where they do business; and
Help establish conditions under which
restraints upon the flow of capital
between industrially vdvanced nations
could te removed, diminished or allowed to
expire.
The Foreign Investors Tax Act of 1966 e~eraeG
from the recommendations of the Task Force. It prQvj~
a firm base in the tax statutes to attract growing
foreign savings for investment in the United States
to help our long-range balance of payments position.
The tax rates of foreigners deriving income from
portfolio investment in U. S. corporate securities
were reduced. The source rules for dividend payments
were modified so that foreign investment corporations
would find the purchase of U. S. securities reore

- 134 attractive.
In one of its key provisions, the Act
brought U. s. estate tax laws on foreign investment
more into line both with the tax situation of U. s.
residents and with estate taxes applied in a large
number of foreign countries.
It thereby removed a
major disincentive to the flow of long-term portfolio
capital to the United States.
In addition to seeking ways to promote the sale
of our securities abroad, the Task Force examined
the possibilities of increasing foreign financing
for U. S. corporations operating abroad.
The recommendations
it formulated to our international corporations on
steps to maximize use of such financing were grounded
in experience and tailored to our balance of payments
objectives.
Its recommendations were given substance
in the voluntary balance of payments program announced
in early 1965, which encouraged U. S. companies to
increase their recourse to foreign funds for their
operations abroad.
In the form of new security issues
alone, U. S. corporate borrowing abroad rose from
virtually nothing in prior years to over $300 million
in 1965 and about $500 million in 1966, with some
further increase likely in 1967.
The task of encouraging foreign investment in
the U. S. is perhaps less ~ifficult than it would
seem because of a number of factors which operate
to attract this investment. The breadth of trading
in our securities, the quantity and quality of information
available on our corporations, the speed with which
information is transmitted to stockholders, and the
variety of investment instruments offered constitute
one set of factors making the U. S. a place where
every foreign investor should consider putting a portion
of his long-term savings. The unique position of
the dollar as an investment medium in the world today
is another fundamental factor which should tend to
pull portfolio capital from the rest of the world.
Yet another is U. s. technological superiority in
many areas, which has become increasingly important
to the sophisticated investor.
There has been a balance of payments inflow resulting
from net foreign purchases of U. S. corporate securities
in 14 out of the last 18 years. The total derived
from our balance of payments figures is shown in Table 19.

- 135 -

TABLE 19

Net Foreign Purchases of U. S. Corporate Securities a /
1950 - Sept. 1967
(millions of dollars)

Year

Net
Purchases

Year

Net
Purchases

1950

- 7

1959

430

1951

126

1960

270

1952

1961

314

1953

1962

122

1954

135

1963

266

1955

172

1964

- 96

1956

313

1965

- 372

1957

228

1966

665

1958

- 6

1967 (Jan.-Sept.)

854

Net purchases by foreigners of U. S. securities
other than Treasury issues. Excludes purchases by
international and regional organizations of U. S.
agency bonds. Includes $190 million in 1965, $594
million in 1966, and $329 million during Jan.-Sept.
1967 of new security issues sold abroad by U. S.
corporations to finance direct investment abroad,
and net sales of securities from official portfolio
of U. K. Government.
(See text discussion.)

Source:

Derived from Department of Commerce and Treasury
data.

- 136 Net o~tflows arp shown in 196~ and in 1965.
~hilp
the data show a substantial increase in this outflow
in 1965, they reflect the sale of approximately $500
million of securities held in the official portfolios
of the U. K. as a result of wartime acquisitions.
This was part of a British move to build up their
foreign exchange reserves.
In that same year net
purchases of U. S. corporate securities by other foreigners
were of much larger magnitude, offsetting to some
degree the British Government sales.
The net selloff of U. S. securities was reversed during 1966 as
foreigners acquired net over $660 million of U. s.
corporate securities. A substantial part of this
flOW were sales of bonds by Delaware-based subsidiaries
of American corporations, for reinvestment of the
proceeds abroad as a direct investment.
Clearly,
building on the experience of the past, an important
contribution to the balance of payments can result.
Vigorous promotion efforts by the U. S. private
communi ty are required as a follow-up to the \-lork of
the Task Force.
This will be bulwarked by the Foreign
Investors Tax Act and other forms of Government cooperation.
The New York Stock Exchange, as part of its educational
program, has just produced a brochure summarizing
the changes in U. S. tax laws as they effect nonresident investors, and outlining to investors everywhere
the advantages of participating in the U. S. capital
market.
Looking over the longer term, the securities
of U. S. private firms should be one of our best selling
exports.
Increased foreign investment in these securities
will create a more balanced two-way capital flow between
the U. S. and other capital markets.
This, in turn,
will minimize the balance of payments impact of other
long-term outflows from the United States.
For these
reasons we must undertake to utilize the provisions
of the Foreign Investors Tax Act, and other features
advantaqeous to foreign investment in the U. S. to
increase the net inflow of this type of long-term
investment capital.
It is also clear that encouragement
of foreign investment cannot stop at portfolio investnent
alor (.
rye ::lU.s~_ c'rr:rJljrage a hospi table climate to
foreign direct investment--investment in brick and
mortar and plants.
The Administration is continuing to work with
individuals and corporations which participated in
the Task Force and with other similar organizations,
to encourage private activity aimed at drawing more

- 137 foreign investment to the United States. Of particular
interest is the work of the recently formed Council
of the U. S. Investment Community, which has as its
goal the development of closer working relationships
among portfolio managers and brokers here and in the
major capital markets abroad. This group, which in
October of this year sponsored a visit here by a group
of European financiers for an on-the-spot view of
U. S. investment possibilities, should continue to
play a leading role in developing foreign interest
in U. S. securities. Finally, we must continue our
efforts in the OECD and directly with other governments
to remove remaining impediments to an increased flow
of investment to the United States.
In these and other ways we can respond to
President Johnson's call, as part of the long-term
measures in his new program, for "an intensified
program to attract foreign investment in u. s.
corporate secu~ities, carrying out the principles
of the Foreign Investors Tax Act of 1966 ff •

- 138 VIII.

A Lcng Pange Program for Narrowing the Travel
Gap Through Promotion of Foreign Travel in' Ehe
unlfed States and Temporary Measures to Restrain
U. S. Travel A~ad

Introductory Corrunents

Americans spend more in travel to foreign countries than foreiqners spend in travel to the United
States.
The outflow of dollars that results contributes
substantially to our balance of payments deficits. We
have sought to overcome this outflow by encouraging
foreign travel ~ere.
This has been the primary focus
of our balance of payments actions in the travel area
throughout the 1960's. The stimulation and encouragement of foreign travel here rather than limiting American
travel abroad has been--and is--an essential ingredient
of our long-term balance of payments program.
Temporary actiol1 to reduce our overseas spending
has now become inperative until the longer-term ~easures
to increase our balance of payments receipts produce
much better results.
BeC2use of the urgent necessity
of correctin~ our balance of payments now, we must call
on those k~erD2ans who would travel abroad to make some
temporary sacrifices. We callan them and on the travel
industry-~just as we calIon all others--to join in the
program to eliminate the deficit in our international
payments and keep the dollar strong.
Between 1960 and 1966, travel receipts from
foreigners increased a total of 72 percent.
Travel
payments to forciqners by U.S. residents increased 51
percent.
Nevertheless, the travel deficit increased
from approximately $1.2 billion to $1.6 billion.
In 1967, the travel deficit is believed to have
widened to <lppl~oximatel y $ 2 bill iCln-- in considerable
part because of the impact of Expo 1967.
To reduce this deficit by $500 million, the
President as part of his 1968 balance of payments program called on "the American people to defer for the
next two years all nonessential travel outside the
Western Hemisphere".
He also called on the secretary

- 139 -

of the Treasur to ex lore with the a
Congress10na comm1ttees
this objective.
As part of the "Long-Term Measures" in his new
balance of payments program, President Johnson called
on the Industry-Government Special Travel Task Force
set up on November 16, 1967 to speed up its work on a
program to attract more visitors to this country. He
directed this Task Force to report within 45 days on
the immediate measures that can be taken, and to make
its long-term recommendations within 90 days.
B.

position of the United States Travel Account

In recent years the trend in the U.S. travel account has become more unfavorable.
(See Table 20.)
~ith the continually risinq level of income of
the average American and the growing ease of foreign
travel, Americans have tended to seek more travel opportunities abroad. The conse9uence has been a rapid
growth in tourist outlays outs1de the United States, a
growth which has outpaced increased receipts from
foreign visitors in this country.
In 1955 payments to foreign countries were
$1.4 billion .

•
In 1960, shortly after the United States began

to run an overall balance of payments deficit
of serious proportions, travel payments in
foreign countries reached the $2.3 billion
level.
In 1966 the figure rose to $3.4 billion, and
for 1967 expenditures are estimated at about
$4.0 billion.
If U.s. travel receipts over past years had grown
correspondingly to travel payments, these figures for
total tourist expenditures in foreign countries would
not pose a major problem. But while u.s. receipts from
foreign visitors have made encouraging advances, the
differential between receipts and expenditures has
nevertheless risen sharply.
art of our travel deficit is normall
with Europe See Table
• About one-th1rd of what
Americans spent for travel in 1966 went to Europe and
the Mediterranean (Canada and Mexico constituting the
bulk of the remainder). Americans spent $ .9 billion
while traveling in Europe and the Mediterranean compared

- 140 -

TABLE 20

S. Travel Account a/

(billions of dollars)
Payments

Year

Receipts

Net Deficit ( - )

1950
1951
1952
1953
1954
1955

-0.90
-0.89
-1.01
-1.11
-1.19
-1.35

0.47
0.52
0.61
0.63
0.66
0.72

-0.43
-0.37
-0.40
-0.48
-0.54
-0.64

1956
1957
1958
1959
1960

-1.51
-1.63
-1.78
-1.99
-2.26

0.77
0.87
0.91
0.99
1.03

-0.75
-0.76
-0.87
-1.00
-1.24

1961
1962
1963
1964
1965

-2.29
-2.51
-2.73
-2.86
-3.16

1.06
1.07
1.13
1.36
1.55

-1.24
-1.44
-1.60
-1.50
-1.61

1966

-3.41

1.77

-1.64

Including transocean fares.

Begin. new .eries; data for praviou& years are
substantially comparable.

Note:
Source:

Detail may not add due to rounding.
U.S. Department of Commerce.

- 141 TABLE 21

Travel Deficits by Major Areas
(billions of dollars)
1960

1966

-0.77
0.70

-1.25
1.02

Percent
Increase (+)

Canada and Mexico
Payments to
Receipts from
Deficit (-)

63
47

-0.08

-0.23

204

-0.69
.09
-0.60

-0.92
0.22
-0.71

33
139
17

-0.30
0.13
-0.16

-0.48
0.34
-0.15

64
151
-8

-0.76

0.20
-0.56

European and Mediterranean
Payments to
Receipts from
Deficit (-)
All other Areas
Payments to
Receipts from
Deficit (-)
Transportation
Payments to foreign
carriers by Americans
-0.51
Receipts by U.S. carriers
from foreigners
0.11
Deficit (-)
-0.40

Total
Payments
Receipts
Deficit (-)
Note:
Source:

-2.26
1.03
-1.24

-3.41
1.77
-1.64

51
72
j3

Detail may not add to totals due to rounding.
Derived from data of U.S. Department of Commerce.

- 14"2 -

to only $ .2 billion spent by people from that area
while traveling in the u.s.
This $ .7 billion deficit
plus a substantial part of $ .6 billion deficit on the
costs of travel transportation points to a major area
for correction in our balance of payments program--both
short- and long-term range.
The travel deficit is significantly different with
our neighbors in the Nestern Hemisphere.
~7hile there
have been very substantial increases in u.s. travel to
Canada and Nexico in recent years, our receipts from
visitors from these two countries also increased substantially. u.s. travelers spent $1.3 billion in
Canada and Mexico in 1966, but because of their spending here our tourist deficit with them was $ .2 billion.
Canadians traveling to the United States account for a
larger part of these receipts, although when all the
results are in for 1967, it is likely that Expo '67 will
have changed the balance.

Measures Taken to Improve the Travel Balance
1.

International Travel Act of 1961

The first step ta~en to enhance the u.s. tourist
market was the passage of the International Travel Act
of 1961, which had as its purpose "to strengthen the
domestic and foreign commerce of the United States by
providing for the establishment of the United States
Travel Service within the Department of Cor:unerce."
The U.S. Travel Service was designed to coordinate
the programs of Government toward the purposes of the
International Travel Act and to establish corr~unication
with individuals, businesses, and organizations related
to international travel includinq state and local units.

A major contribution of the United States Travel
Service has been its overseas promotional activities
carried on through foreign branch offices. The Travel
Service has acted as a catalyst in advertising and sales
promotion cooperation between Government and industry,
to this end, it has employed various media at home and
abroad for the promotion of foreign travel to the U. S.
and to facilitate foreign travel throughout this country.

- 143 -

Cabinet Committee on Travel Planning and
Promotion

Pursuant to his balance of payments message of
February 1965, President Johnson asked Vice President
Humphrey to form a Cabinet Committee for the purpose
of bringing to bear continuing efforts of high-level
Government officials toward increasing intra-Government
and Governrnent-industr coordination of activities affect1ng travel rece1 ts. Ach1evements of the Ca inet
committee have inclu ed:

simplification of customs entry,
upgraded and expanded National Park facilities,
pilot projects for improving tourist services
in the Nation's Capital,
creation of foreign language facilities at
ports of entry, and
creation of a .favorable climate within
Government for successful implementation of
national travel programs.
3.

Discover America, Inc .
•

Concurrent with the establishment of the Cabinet
Committee, Discover America, Inc., was formed as a
private nonprofit organization to bring the various
elements of the u.s. travel industr together in an allout e ort to 1ncrease t e S1ze of t e tour1st market.
The membership of Discover America comprises a broad
cross-section of the private u.s. tourist industry and
is wholly financed and directed by private enterprise.
The organization has concentrated essentially on public
information and promotion, liaison with various industry groups, and government relations.
4.

Other Related Efforts to Reduce the Travel
Deficit

In an effort to reduce u.s. tourist expenditures
without affecting travel abroad, the Administration in
its 1961 balance of payments program requested legislative action to reduce the comparatively very generous
duty free exemption for purchases of foreign goods by
returning tourists. The exemption was lowered from
$500 to $100. There has been a balance of payments
savings, but it has been more than offset by the increase in

- 144 -

the numbers of tourists going overseas.
In October 1965,
the exemption was reduced from $100 of goods calculated
at wholesale value to $100 retail, the price actually
paid rather than the lower wholesale value of the goods.
The new law also reduced the exemption for liquor from
a gallon to a quart for each returning tourist.
The Government also embarked on a stepped-up program to sell certain foreign currencies that it owns
to American tourists and businessmen. This program has
been intensified as 0 result of the Food for Freedom
Act of 1966. While important, the program has only very
limited applicability in coping with the travel deficit.
The sale of those currencies which the Government owns
in excess of its operating needs are helpful to our
balance of payments. However, there are less than a
dozen countries in which we have such "excess currency"
holdings and while the amounts in these countries are
very substantial, they are poorer countries and ones
that account for a very small portion of our tourist
spending.
If the Government were to sell Western
European currencies, for example, it would have to, in
turn, buy these currencies for dollars and add to our
balance of payments deficit. Nevertheless where "excess
currencies" exist the sales program will be pursued
vigorously.
Individual private industry, recognizing its stake
in an expanded tourist market in the U.S., has also
undertaken effective programs. For example, in November
1966 the American Express Company sponsored a tour of
the U.S. for 500 European tourist agents in an effort
to make them more familiar with American travel opportunities. united Airlines, in cooperation with Discover
America, Inc., launched a large-scale program to encourage Americans to discover new vacations in their
own country.

Need for a New Long-Term Action Program and the
Establishment of the Special Task Force to Formulate
it

The growing drain on our balance of payments resulting from growing foreign travel cannot be ignored.
The Administration regards a lon~-term program in travel
as a balance of payments imperat1ve.
In response to
this need, President Johnson on November 16, 1967, appointed an Industry-Government Special Travel Task
Force to:

- 148 -

make specific recommendations as to how the
Federal Government can best increase foreign
travel to the United States and thereby improve our balance of payments; and
build into its program ways and means that
will insure that more foreign visitors truly
learn to know our country and people.
In announcing his intentions, the President called
attention to his previous statement that "the most
satisfactory way to arrest the increasing gap between
American travel abroad and foreign travel here is not
to limit the former but to stimulate and encourage the
latter."
The Task Force is headed by Robert M. McKinney,
former u.s. Ambassador to Switzerland, and includes the
following distinguished leaders in the field of travel,
transportation, public relations, entertainment, publishing, hotelkeeping, education, and public service.
William Bernbach

President, Doyle, Dane, Bernbach

Daniel J. Boorstin

Professor of History
University of Chicago

John A. Burns

Governor of Hawaii

Edward E. Carlson

President, Western International
Hotels, Inc.

Howard L. Clark

President and Chief Executive
Officer, American Express Company

Arthur Frommer

President, Arthur Frommer, Inc.

Frank-Hildebrand

Director
Texas Tourist Development Agency

Frank N. Ikard

President
American Petroleum Institute

John H. Johnson

Editor and Publisher
Johnson Publishing Co.

Willis G. Lipscomb
(retired)

Vice President, Traffic and Sales
Pan-American World Airways

- 146 -

Winston V. Morrow, Jr.

President, Director and Chief
Executive Officer
Avis Rent-A-Car System, Inc.

William D. Patterson

Vice President and Secretary
Saturday Review, Inc.

Gerald Shapiro

Vice President and General
Manager
Hertz Rent-A-Car Division

Lew R. Wasserman

President, Music Corporation
of America

Anthony M. Solomon

Assistant Secretary for
Economic Affairs
Department of State

Winthrop Knowlton

Assistant Secretary for
International Affairs
Department of Treasury

Harry M. Shooshan

Deputy Under Secretary for
Programs
Department of the Interior

Donald G. Agger

Assistant Secretary for
International Affairs
Department of Transportation

Charles S. Murphy

Chairman, Civil Aeronautics
Board

Andrew F. Brimmer

Member of Board of Governors
Federal Reserve System

John W. Black

Director, united States Travel
Service
Department of Commerce

In arriving at its recommendations, the Task Force
will examine a variety of areas which have an impact on
foreign travel.
Its em?hasis will be to make tourism
in the United States more readily available and attractive for foreigners.
It will look into actions which
should be undertaken by the Government, by the private
sector, and under joint effort by both.
It will recommend areas where new legislation should be sought and
where increased u.S. Government expenditure would be
justified.

- ]47 -

Areas of examination will include: the shortage
of good medium-priced hotels in key cities; the use of
vacant university facilities during ~iac~tion periods;
the possibility of select tours for special interest
groups; the possibility of directional aircraft fares;
the difficulties foreigners face in renting, buying,
and insuring cutnmobiles in the U.S. the adoption of
international road signs on our hig~'~~Ys; the use of
qualified students as Federally ce=tified guides and
interpreters; the publication of an attractive, comprehensive guidebook for the u.s. translated into a
variety of foreign languages: inprovement of market
research to maximize the tourist advertising dollar;
possible new incentives for tour OD~~atorsi legislation
to assist foreigners' ?urchasing and driving a car during u.s. vacations; a new International Travel Act with
a strong balance of payments orientation; study of
measures adopted by those countries and cities which
have been successful in attracting foreign tourists; a
coordinated state and local government campaign to improve and promote tourist facilities; the encouragement of foreign government ame~dment of regulations
inhibiting tourism by their residents; a summer job
program for foreign college-age youths to work in u.s.
hotels, restaurants, and airlines; space-available
airplane travel for all foreign tourists in the U.S.
and for foreigp students on transoceanic flights; use
of u.s. Government land to stimulate tourism; a dynamic
visit-an-Arnerican-family program; cost reduction of
transoceanic travel; competitive programs within the
U.S. tour industry leading to Presidential citations
and awards; possibility of prior purchase of meal
tickets for use in the U.S.; availability of single
price unlimited bus, rail, and air tickets usable during a specified time period; visa waiver regulation~
and an intensified business visit program.
Based on the Task Force's recommendations, the
Government will be better equipped to: coordinate
private and public measures; initiate educational programs both abroad and in the U.S.i suggest new legislation to the Congress; and judge priorities for new
expenditures.
u.S. Government assistance to our tourist industry has been minuscule by international comparisons.
Last year, the u.S. Travel Service operated with a
$3 million budget--a budget that compares with $10
million for Canada, $10 million for Spain, $7 million

- 148 for Mexico, $5 million for France, and $5 million for
Greece.
Much could be accomplished with a properly
guided major budgetary effort on the part of the U.S.
Government--more funds not only for the U.S. Travel
Service, but also for improved customs and reception
centers, translation services, and better park facilities.
The causes of our "travel gap" are many, the
main ones being: higher per capita income in the
United States; foreign government restriction on
travel; the language barrier in the United States-oral and written; the cost of transoceanic transportation; the cost of tourism in the United States: and a
U.s. travel industry not organized to receive and
service middle-income, non-English-speaking visitors.
On the other hand, we do have many assets and
these must be exploited: rising disposable income in
many countries; unique attractions in the United
States; and great worldwide curiosity about the
United States. New ideas have been put forward--they
should be tested. Other ideas should be developed.
The successes of others should be investigated. The
work has started--but it has not had a balance of
payments orientation. More must be done and a new
emphasis adopted. The Task Force will furnish guidance.
Under the new balance of payments program its work has
been accelerated.
E.

Temporary Measures to Reduce the Travel Deficit

We are confident that the Special Travel Task
Force will help produce an effective, constructive
long-range program for increasing foreign travel to the
United States with Federal, State, and private action.
We recognize that even with its mission accelerated,
it will take time to implement and translate into concrete results its recommendations for new actions that
can be undertaken by the Government, by the private
sector and under joint effort by both.
Meanwhile, for the reasons that have been outlined
throughout this report, it is essential to reduce
spending for travel abroad by Americans. The President's
request that the American people defer for two years all
nonessential travel outside the Western Hemisphere is
clearly a call for temporary restraint.
It is a request that is made only in the urgent national interest.
It is a calIon our citizens to participate in protecting the international financial strength of this country

- 149 -

rather than contribute to an erosion of that strength
which would have unfortunate consequences for all.
It is not a sacrifice of travel but only of nonessential
travel abroad. It is our hope, expectation, our firm
policy to eliminate this restraint on travel as quickly
as possible--as soon as our long-term measures to increase our receipts from travel and from our trade
surplus permit.
This temporary restraint on travel abroad will
give added incentive to promote more energetically
and more quickly and effectively foreiqn travel to
these shores. The speed and effectiveness of carryinq
out this longer-term effort Houlcl make even more certain
the early abandonment of the temporary measures of
restraint. This process of adjustment of our travel
account should have the support, cooperation and certainly the understandinq of European countries whose surpluses have been in the counterpart of our balance of
payments deficits.
The Secretary of the Treasurv is in the meantime
exploring with the appropriate Conqressional Committee
le~islation to help achi~ve the objective of reducinq
the travel deficit bv $500 million in 1968. The exact
character of any leqis1ative measnres will emerge from
their consultations. The mo~t effective actions,
nevertheless, are those that y7ill be taken by American
citizens themselves.

- 150 -

IX.
A.

Adjustment Responses Expected of Trading Partners
Distribution of the Adjustment Among Countries

The importance of multilateral cooperation in
making the adjustment process work smoothlY was
stressed in the first two chapters of this paper.
There it was pointed out that a~ a matter of arithmetic a reduction of the U. S. deficit necessarily
means that other countries will have to reduce
their surpluses, movp into deficit, or (for countries
that are in deficit already) move deeper into deficit.
The adjustment process should ideally proceed with
minimal adverse effects on individual countries
and on the world economic comrnunitv in general.
Adjustment will not occur in this relatively
smooth manner, however, if the reduction in the
U.S. deficit hits countries whose balance of
payments positions are already weak.
The improvement in the U.S. balance of paYments therefore
must, as stressed in Chap~er II, have as its main
counterpart a reduction in the surpluses in the
balance of payments of the continental European
countries.
Within continental Europe, much the
greatest part of the adjustment must corne in the
external po~ition of the European Economic
Community.
The adjustment of the present imbalance in
world payments is not the sole responsibility of the
United States and the EEC countries.
But it is
true that, with a few exceptions (which also are
mainly in continental Europe), countries other
than those in the European Economic Community do not
have sufficient reserves or the balance of payments
surpluses to bear the brunt of a reduction of the
U.S. deficit.

- 151 -

The United States is not the only developed
country whose balance of payments needs strengthening.
rhe united Kingdom is also determined to achieve a
substantial improvement in its external position.
This improvement in the U.K. balance of payments
should come about readily and smoothly following
the recent devaluation of sterling, provided again
that the major surplus countries are willing to
tolerate--indeed, to encourage--offsetting
changes in their balance of payments. The united
states wants the new u.s. Action Program to
create the fewest possible difficulties for the
united Kingdom as that country restores balance in
its own payments. And the United States is determined to avoid having the developing countries of
the world bear the burden of the necessary u.s.
retrenchment of its payments. It is doubly important,
therefore, to have the greatest part of the adjustment take place in the continental European countries.
B.

The Persistent EEC Surplus

There are interesting patterns that emerge when
one compares the broad structures of the u.s. and
the EEC payments positions (see Table 22 ). The EEC
and the United States both have sizable outflows of
official grants and capital, and both have large
surpluses on private current account transactions.
Whereas in the u.s. case military expenditures
abroad ~ar exceed the receipts from military
transactions, however, the reverse is true for the
Common Market. Primarily because of the large
numb~r of u.s. troops stationed in Europe and the
foreign-exchange costs associated with keeping them
there, the EEC has large receipts on military
account.
(EEC net military transactions with the
United States are separated from the rest of the
current account items in the balance of payments
and shown separately on line 3 of Table 22.)

TABLE 22

STRUCTURE OF PAYMENTS POSITIONS OF THE U.S. AND THE EEC
1958-61 and 1962-66
(millions of dollars)

195[-1°~1

U.S.
l.
2.

3.
4.
5.
6.

7.
8.
9.

10.
11.
12.

13.
14.

1..1

Net military transactions
Official unilateral transfers
Non-military goods and services and
ot'her unilsteral transfers
Official capital
Prepayment of official debt
Direct investment
Other private long-term capital
Non-bank short-term capital and
errors and omissions
Balance on non-monetary transactions

U.S. short-term banking claims
Sho~t-term banking flows
Change in official position
U.S. balance on liquidity basis
(U.S. balance on official settlements
basis)

-2,775
-1,690

Annual Av~rage
HC

895
-760

1962-1966 Annual Average
EEC
U.S.
-1,840
-1,890

340
-1,020

5,030
-1,100
295
-1,320
-785

2,510
-690
-350
50
780 1/

7,680
-1,745
355
-2,535 1/
-735 1/

1,560
-420
- 315
500

-395
-2,740

-145
2,290

-690 ])
-1,595

-290
1,170

815 1)
t-'

480

630

-100
1,270

-40
2,330
-3,370
(n.a.)

-2,075
(- 68 5)

Includes direct invesbnent for Belgium, also for France for years 1958, 1959.
The figure for "Other Private Long-Term Capital" includes an inflow of $885 million borrowed in Europe by
American corporations for invesbnent abroad. Of this sum, $569 million is included as an outflow under
direct investment and $310 million under short-term non-banking capital (and errors and omissions). If an
adjustment were made for these offsetting transactions, the average outflow of direct investment wculd
be $2,421 million, the outflow of other long-term capital would be $912 million, and the outflow ()f nonbanking short-term funds and errors and omissions $628 million.

Source:

!MF, Balance of Payments Yearbook; U.S. Department of Commerce, Survey of Current EUEiness.

IJl
N

- 153 -

The other major difference in the structure of
the U.S. and fEe balance of pavments is in the
private capital accounts. The EF.C ha~ tended to
have large net inflows of private nonmonetary
capital, while the United States has experienced
larae outflows on private capital account. The
strength, flexibility, and comretitiveness of the
u.s. capital market, the large volume of U.s.
savinq, and the importance of the United States as
the dominant international financial and banking
center all help to explain why U. S. private capital outflows were so large and growing so rapidly
in the 1960 1 s. Conversely, the underdevelopment
of--and restrictions imposed in--European capital
markets help to explain why the EEC countries
taken together have been net importers, rather than
net exporters, of private capital funds. As
Table 22 brings out, direct investment inflows into
the EEe countries have been large, but not so
large as the net inflows of other private long-term
capital.
The absolute size of the imbalance in EEC
external payments and receipt~ is alone an indication
of its importance as the main counterpart in the
world to the large U.S. deficit. The high per
capita incomes in the EEC and the very high level
of reserves (see Table 23 ) are further indications
that the major burden of accepting the adjustment
resulting from the U.S. program should fallon
these countries.
Further evidence to sugqest that the EEC
surpluses have been excessive and that the EEC
balance of payments must show the weakening which
will be the counterpart to the reduction in the
U.S. and U.K. imbalances is provided by a comparison of data on countries' reserve increases and
growth in trade. Table 24 presents figures which
show the reserve gains of some of the more important countries that have been gaining reserves over
the entire 1960-66 period and, for the same period,
the growth in their imports (chanqes in the value
of imports between 1959 and 1966). Since reserve

- 154 -

TABLE 23

Geographical Composition of World Reserves
End-September 1967

Millions of dollars

Per cent

25,110

34.9

2,551
6, 750
7,889
5,445
2,475

3.5
9.4
11.0

6,891

--2.J!

1,439
1,188
1,108
3, 156

2.0
4.4

2,391

...:1.l

Canada
Japan
United Kingdom
United States
Other Developed Areas - Not included above
Less Developed Areas

2,682
2,047
2,733
14,649
3,412
12,115

...l2.

World Total

72,030

100.0

European Economic Community
Belgium-Luxembourg
France
Germany
Ita 1y
Netherlands
Other Major Countries in Continental

Euro~

Austria
Portugal
Spain
Switzerland
Scandinavian Countries

Sou ree:

7.6

3.4

1.6
1.5

~
~

20.3

~
16.8

Internationa 1 Finaneia 1 Stat istics , January 1968.
Reserves cons ist of go 1d,
foreign exchange and reserve positions in the Fund.

Denmark, Finland, Norway, aod Sweden.

The major countries in this grouping are Greece, Iceland, Ireland, Turkey,
Yugoslavia, Australia, New Zealand, and South Africa.

Figures for less developed areas (and therefore for world total) are partly
estimated by International Monetary Fund.

- 155 TABLE 24
Reserve Gains and Growth in Trade, 1960-1966
(1)
GroVJth in
Reserves 1/
($ mil1io~)

(2)
Growth in
Trade 2/
($ mi 1li-;;-n)

4,997
1,261
314
636
(12, 1l0)
996
1,855
3,238
320
1,014
549
1,006
246
319
269
106
664
672
299
-6,623

6,755
2,02l
547
1,183
(29,338)
2,779
5,220
9,554
1,026
3,732
2, 168
4,077
1,081
1,511
1,401
598
3,906
5,925
5,227
10,739

. 740
.624
.574
.538
(.413)
.358
.355
.339
.312

46 Countries Experiencing Net
Reserve Gains 1/

22,666

66,618

.340

Total, All Countries in World 4/

14,265

85,800

,166

France
Switzerland
Portuga 1
Austria
(EEC count ri es as a group)
Spain
Italy
Germany
South Africa
Belgium
Sweden
Netherlands
Norway
Australia
Denmark
Mexico
Canada
Japan
Un i ted Kingdom
United States

Source:

Rat io of Reserve
Gain to Trade
Growth (1;'2)

.272

.253
,247
.228
.211
,192
• 177
.170

.113
.057

International Financial Statistics, January 1968.

11 Change in Reserves (Gold, Foreign Exchange, and Reserve Position in the Fund)
between December 31, 1959 and December 31, 1966.
Change in Value of Imports (cif) between calendar years 1959 and 1966, as reported
in International Financial Statistics, pp.35-37.
1/ Includes all countries (a) whose reserves are reported separately by IFS (p.16),
(b) for which comparable trade data were available, and (c) whose reserves increased
over the 1960-66 period. Of the 62 countries listed separately in the !I§
reserve tables, 46 had reserve gains while 16 had reserve losses (total reserve
losses for these 16 countries were $8,320 million).
~I Change in Reserves is the net change for the total of all countries' reserves.
Growth in Trade is the change in total world imports (IFS tables).
~I

- 156 gains over time are one important measure of a
country's balance of payments surplus, the figures
on reserve changes in Table 24 can be used as a
rough yardstick for comparing the relative size of
countries' cumulative net surpluses in the current
decade. The data on growth of imports in column
two of the table can serve as a crude proxy for
the growth of a country's international transactions. The final column of Table 24 calculates
the ratio of a country's cumulative net surplus
to the growth in its "transactions" (imports).
Countries are ranked in the table by these
ratios; the further one moves down the list of
countries, the lower the ratio of reserve gains
to trade growth.
For example, France at the top of the list
had an increase in its published reserves between
December 31, 1959 and December 31, 1966 of $5.0
billion. French imports increased in value between 1959 and 1966 by some $6.8 billion. The ratio
of French reserve gains to trade growth was very high,
the former being nearly three-fourths the size of
the latter. Even discounting for the fact that French
reserves were abnormally low in 1958 and 1959, which
is the starting point for the comparison, it is clear
that compared with other ~ountries France had quite
disproportionate reserve gains. Noving towards the
other end of the spectrum one finds countries such as
Canada or Japan, whose reserve gains were only some
10-20 per cent of the growth in their trade. At the
bottom of the list of individual countries, two other
ratios are shown, the first is the ratio for all the
major countries taken together who were in "surplus"
(had a reserve gain) for the entire period. The
second is the ratio for all countries in the world,
regardless of whether or not they were in surplus.
An upward trend in reserves (balance of payments
surplus) is the targeted long-run "norm" for virtaully
all countries (see Chapter I). So long as the total
amount of reserves in the system is growing at a reasonable pace, moveover, the existence of a moderate net
reserve gain over an extended period must be judged
as one piece of evidence of a successful balance of
payments policy. Excessive reserve gains, on the other
hand, are clear indicators of an imbalance in payments
that needs to be rectified. The definitions of "moderate"
and "excessive" reserve gains, to be sure, are not clear.
But the analysis in Chapters I and II does suggest one
possible criterion which might be used, namely, that a
country has had an excessive reserve gain if its cumula-

- 157 tive net surplus over some reasonably long and appropriately chosen period has been markedly greater relative
to the growth in its international transactions than could
possibly prevail in the system as a whole (the ratio that
would prevail, in other words, if every country were
moderately in surplus and sharing in the total reserve
growth proportionately to the growth in its own transactions) .
On the basis of this criterion, an examination of
Table 24 brings out very clearly that all of the EEC
countries and several of the other major European
countries have had excessive surpluses in the 1960-66
period. Countries such as Canada and Japan, on the other
hand, have experienced moderate reserve gains much more
consonant with the rate at which reserves were growing
in the system as a whole. The "norm" for proportionate
reserve growth in the 1960-66 period might roughly be
taken as the ratio shown on the last line of the table
for all countries taken together; if no country had lost
reserves over the period and if each country had shared
proportionately in the growth of total reserves that
actually took place, each country individually would
have had a ratio of reserve gains to trade growth
roughly equal to one-sixth (.166). The data in the
table therefore strongly reinforce the conclusion that
it is the surpluses of the Continental European countries
that need to be reduced pari passu with the reduction of
the u.s. and U.K: deficits.

Need

i9~Compatible

Adjustments

The EEC countries have up until now generally
considered it inappropriate to reduce their current
account surpluses materially and have suqoested that
adjustment should occur primarily, if not~ful1y,
through changes in their capital accounts.
Increased
capital flows from the EEe countries to the rest of
the world will benefit all parties and help the
adjustment process. An increase in the flow of
capital to the less-developed countries is one of
the basic objectives of the OECD.
Structural adjustments of this nature would appear to be hiqhlV
desirable, if they could be achieved bv measures
consistent with economic growth and the expansion
of world trade.
Nevertheless, it is uncertain that
the EEC countries will in the near future be prepared to undertake structural adjustments that will
result in really substantial net capital outflows,
even if they permit a reduction in the present net
capital inflow.
In this event, they must be prepared to face up realistically to the need for
~llowing changes in the other components of their
lnternational accounts.

- 158 -

Shifts in European~ital Flows and .Development
-of Furopean _~~£I!-al-Mar)(ets

Feductions of Flows of U.S. Capital to Europe.
The flow of-U.S. private capital (excluding shortterm banking funds) from the united States to
Europe averaged roughl~' $1.1 billion annually from
1962 through 1966.
The flo\-1 to the EEC countries
alone averaqed less than $700 million.
From 1962
throuqh 1964, ther~ was a flow of portfolio capital
to Europe, but, in 1965 and 1966, under the influence
of the interest equalization tax, the voluntary
restraint program, and tioht monetary conditions in
the United States, the net flow was toward the
vnited States. Direct inve~tment flows to the EEC
countries roughly averaged $700 million annually
from 19€4 through 1966, 1/ excluding reinvested earnings of about $100 million annually
Elimination of the movement of u.s. capital
to continental Western Europe will make a contribution to needed balance of payments improvement but
will not solve the whole a~justment problem by
itself.
Over the longer pull, these capital flow
restraints must be liberalized in the interest of
continued growth in world investment, improvement
in technology, efficient means of mohilizing
financial capital, and efficient financing of world
trade.
In a world short of capital, and with
pressing capital needs, it is not an appropriate
lonq-run payments adjustment to place restrictions
on capital flows.
~

This figure includes proceeds of borrowing by
special Delaware corporations to finance direct
investment abroad.

- 159 -

Inducin~ European Capital Outflo,.,s.
In
recent years, yields on long-term Government bonds
in the EEC countries have exceeded those in the
united States by well over 1 percent. German
rates have generally ranged from 2 percent to
nearly 4 percent higher. Differentials in industrial bond yields have often been larger. Only
within recent months, when u.S. lonq-term rates
have moved to the hiqhest level in more than 40
years and most of the ERe countrie~ were experiencing a period of relatively lm-,? economic
growth, has this di fferential narrm'led. Even
now, however, long-term rates in Europe remain
significantly higher than those prevailing in the
United States. How high u.s. rat~s would have to
go in order to draw funds out of Europe in the
required volume is impossible to determine.

It is quite clear, however, that such action
could not be taken without damaginq irrpact on
other area~ of the world. The Adjustrn~nt Process
Report of Working Party 3 (see Chapter I) takes
specific note of thi~ problem. It recognizes
that the policies of advanced countries powerfully
affect other countries and urges that in formulating adjustment policies, con~ideration be given to
the intere~ts of the international community as a
whole. How could the United States establish
monetary conditions which would induce large-scale
flm-ls of fund~ from Europe to the Uni ted States
without also affecting the availability of capital
to developing countries and other nations ~uch as
the united Kingdom, Canada and ,-,apan for whom
international flows have been important?
Long-term interest rates in the united States
could not he driven to the extraordinarily high
levels which ,,,ould be required and maintained
there without causing short-term rates to rise as
well. Short-term banking funds could easily move

- 1160 -

in such volume a~ to i~neril the reserves of vulnerable countries ano perhap~ even endanger the
linuiditv of foreian financial in~titutions and
lead to
escalation of int~rest rates ever~~here.
"orcover, the maintenance of such rates would not
he comT"'atible vdt~ balanced economic gro,"-'th in the
Uni ted- States it~elf or in Furope.
'A slo,,,down in
economic qrowth in the United States and Europe
has an impact, in tLrn, on growth rate~ elsewhere.
ror these reasons, it is desirahle that the
needed narrovd.na in interest rate di fferentials
be brouqht arout more throuqh reduction~ in
prevailinq rates ~'7i thin Furooe than hy increased
rates in the Uniteo State~.

The extent to which the structural readjustment
in paYMents positions can be brought about by the
c]evelopment of a large-scale net outflo\-y of longterm capital from the FTC countries will, therefore,
nepend largely on what the EFC countries themselves
can and will be preoared to do.
SOMe of them are
making vigorou~ effort~ to stren~then and improve
their capital Market~.
nther~ are seeking to
strengthen the rol~ of fiscal policY in managing
the level of internal de~and.
Bonefullv more
progress will be Made alonq these lines.
Nevertheless, the prospects for rapid reduction
in interest rates or the early eli~ination of
remaining barriers to foreicrn borrowing in the FEe
countries do not see~ particularly bright.
Budgetary
problems appear to be blockinq SUbstantial increases
in the volume of governmental as~i~tance to developinq nation~.
Consecruently, it seems unlikely that
the EEC countries will soon achieve the level of
net long-term capital outflm., which would be
necessary to offset a current account surplus of
the magni tude nov' in prospect.

- 161 -

Offsetting the Balance of
HiJItary Expenditures

P~ents

Impacts of

A major contribution to short-tp.rm payments
equilibrium would be achieved if strong countries
in both Europe and Asia with which the United
States is allied in a common defense undertaking
were prepared to enter into special arrangements
to compensate for the balance of payments impact
of U. S. military expenditures in these countries.
If military strategy requires that the forces of
one country be stationed on the territory of
another to provide for the common defense, the
country furnishing the military forces ought not
to be expected, in addition to assuming the budgetary
burden, to meet the foreign exchange costs. Nor
are countries in which forces are stationed entitled
to economic advantage from this fact alone.
There are various methods by which the balance
of payments impact of such military expenditures
can be counterb~lanced. The most important and
desirable long-run method is for other items in
recipient countries' balance of payments accounts,
such as trade or private capital flows, to adjust.
And to some extent, the country receiving the
balance of payments advantage can make military
purchases in the country suffering the disadvantage.
Another possihility is for the beneficiary nation
to make long-term official investment in the
other country. Approaches such as these can be
either bilateral or multilateral. Conceptually,
there are substantial advantages in the multilateral
approach in a multilateral world. Since these
various techniques are within the power of governments, offsetting the balance of pavments impacts of
military expenditures would appear to be a question
of political willingness.

- 162 -

Adlustment throuoh Chanq~s in the Private
Current Account-----~

There remains the auestion of adjustment
throuqh other private current account transactions.
"ne obvious means bv ,,,hich adjustment in the current account could be fostered would be for the
United States to continue to improve its competitive position bv maintaininq a better cost and
~rice stability than surplus countries.
The
surplus countries cannot and should not be expected
deli~erately to overexnand the level of demand
in their economies to the point where unacceptable
jnflation occurs.
It is a sin~ sua ~ for the
l'ni ted States to preserve a QrOW1nQ economy wi th
sta~ility in costs and prices so as to preserve
and strenqthen its competitive position in international trade.
The scope for adjustment to occur
ty chanqcs in relative competitive positions is
therefor€' rather nClrrOl.J, al thouqh it is certainly
not absent altoaether. At a minimum, surplus
countries have a very clear responsibility to
achieve their qrol·.'th and st.ahili zation objective
~'ithout dependinq upon furt~er increases in their
current account surpluses.
The curr0nt account--and particularly the
trade account--is suhject to other influences.
~or example Frc and other countri~s have actively
used export rebates and inport taxes (horder tax
adjustments) and this has tended to increase
trade surpluses even of countries in overall
balance of pa~ents surplus.
Such adjustments
are permitted bv the G~~~, ~ut the time has come
to reexamine the ~~TT rules and their relationship
to balance of pay~ents adjustment, as well as the
practices under these rules.
In current circu~stances, there is also room
for adjustment through the reduction or elimination
hy other countries of tariffs and nontariff barriers and liheralization of government procurement
policies.
Such actions could contrihutp not only

- 161 -

Off:e~ting

the Ba~ance of yayrnents Impacts of
r11J1tary Expend1tures

A major contribution to short-term payments
equilibrium would be achieved if strong countries
in both Europe and Asia with which the United
states is allied in a common defense undertaking
were prepared to enter into special arrangements
to compensate for the balance of payments impact
of U. S. military expenditures in these countries.
If military strategy requires that the forces of
one country be stationed on the territory of
another to provide for the common defense, the
country furnishing the military forces ought not
to be expected, in addition to assuming the budgetary
burden, to meet the forei9n exchange costs. Nor
are countries in which forces are stationed entitled
to economic advantage from this fact alone.
There are various methods bv which the balance
of payments impact of such military expenditures
can be counterbalanced. The most important and
desirable long-run method is for other items in
recipient countries' balance of payments accounts,
such as trade or private capital flows, to adjust.
And to some extent, the country receiving the
balance of payments advantage can make military
purchases in the country suffering the disadvantage.
Another possihility is for the beneficiary nation
to make long-term official investment in the
other country. Approaches such as these can be
either bilateral or multilateral. Conceptually,
there are substantial advantages in the multilateral
approach in a multilateral world. Since these
various techniques are within the power of governments, offsetting the balance of payments impacts of
military expenditures would appear to be a question
of political willingness.

- 162 -

Adlustment throuqh Changes in the Private
Current Account---- .

There remains the auestion of adjustment
throuqh other private current account transactions.
"'nC' ohvious means bv h'hich adjustment in the current account could be fostered would be for the
united states to continue to improve its competitive position bv maintaininq a better cost and
price stability than surplus countries.
The
surplus countries cannot and should not be expected
deli~erately to ovprexnand the level of demand
in their economies to the point where unacceptable
jDflation occurs.
It is a sine sua ~ for t~e
t1ni ted States to preserve a qrow1ng economy Wl th
stability in costs and prices so as to preserve
and strengthen its competitive position in international trade. The scope for adjustment to occur
ty chanqes in relative competitive positions is
therefore rather norrow, althouqh it is certainly
not absent altoaether. At a minimum, surplus
countries have a very clpar responsibility to
aC"1ieve their gro~,'th and stabilization objective
pithout dependinq upon furtrer increases in their
current account surpluses.
The current account--and particularly the
trade account--is subject to other influences.
~0r example F.EC and other countries have activelv
used export rebates and iMport taxes (border tax
adjustments) and this hos tended to increase
trade surpluses even of countries in overall
balance of pavroents surplus.
Such adjustments
are rermitted bv the GrT~, ~ut the time has come
to reexamine the GrTT rules and their relationship
to balance of pay~ents adjustment, as well as the
practices under these rules.
In current circumstances, there is also room
for adjustment through the reduction or ~limination
hy other countri~s of tariffs and nontariff barriers and liberalization of government procurement
policies.
Such actions could contrihutp not only

- 163 -

to better international payments balance but also
to the preservation of price stability in the EEC
countries themselves. Indeed, the ~djustment
Process Report recommends that, "~:rherever possible,
it is desirable that adjustment should take place
through the relaxation of controls and restraints,
over international trade and capital movements by
surplus countries, rather than by the imposition
of new restraints by deficit countries".

SUMMARY OF MAJOR PRESIDENTIAL MESSAGES ON BALANCE OF PAYMENTS

TAB A

Improving the U.S. Trade Balance
President Kennedy's 1961 Message

President Kennedy's 1963 Message

President Johnson's 1965 Message

Legislative

Congress requested to add 41
foreign service commercial
attaches and to increase its
trade mission program from 11
to 18 per year.

Request that the Export-Import
Bank's charter be renewed, including its new program of
guaranteeing short- and mediumterm export credits through the
Foreign Credit Insurance
Association.

Request that Congress approve a
$13 million budget request for
export expansion.

Administrative
Commerce Department to step up
its support of U.S. exporters.
President of the Export-Import
Bank directed to submit a new
program for export financing to
make the competitive advantage
of U.S. traders equal to that of
foreign exporters.
Secretary of the Treasury
directed to undertake a study
of how private financial
institutions could participate
more broadly in providing
export credit facilities.

Request that the $6 million
additional appropriation of
funds for the Commerce Department's
export expansion program be
approved by the House of
Representatives.
Administrative
Secretary of Commerce directed to
take corrective measures through the
Maritime Administration to realign
ocean freight rates unfavorable to
U.S. exports.
Announcement that a White House
Conference on Export Expansion
would be convened to provide a
boost to the export program.

Administrative
Announcement that efforts to
assure American industry sound
and fully competitive export
financing would be stepped up.
Increased efforts "to eliminate
such artificial barriers to U. S.
exports as discriminatory freight
rates on ocean traffic."

- 2 -

President Kennedy's 1961 Message

President Kennedy's 1963 Message

President Johnson's 1965 Message

Administrative

(Continued)

Secretary of Agriculture directed
to survey means for expanding
exports of farm products.
Increased effort in GATT tariff
negotiations to reduce tariff and
other barriers to U.S. exports.

(Continued)

Announcement that the Department
of Agriculture's new auction
program for direct sales of
cotton abroad would increase
exports by as much as $100
million over the previous year's
level.

(Continued)

Request to business and labor
to adhere to the Government's
wageprice guideposts in order
to maintain the U.S. competitive
position.

Underlining the importance to U.S.
exports of maintaining competitive
costs, improving productivity, and
stabilizing, or where possible,
lowering prices.
Improving the U.S. Balance on Tourist Expenditures
Legislative

Legislative

Request for the UoS. to begin a
major program to bring more
foreign tourists to this country.
(Legislation creating the U.S.
Travel Service was enacted
June 29, 1961.)

Requested the Congress to approve
the full amount of the appropriation
requested for the U.S. Travel Service.

Request that the duty-free
exemption for American tourists
returning to the U.S. be further
reduced to $50, based on the
price actually paid for goods and
limited to goods actually accompanying
the traveler.

Recommendation that the duty-free
allowance for American travelers
returning from abroad be reduced
from $500 to $100. (Enacted
August 10, 1961.)

Pres~dent

Kennedy's 1961 Message

Pres~dent

Kennedy's 1963 Message

President Johnson's 1965 Message

Administrative

Announcement of a "See America
Now" program to encourage
Americans to see and learn more
about their own country.

Request that the tourist industry
"strengthen and broaden the appeal
of American vacations to foreign
and domestic travelers."
Improving the Net Impact of U.S. Investments Abroad

Legislative

Congress requested to l1enact
legislation to prevent the
abuse of foreign 'tax havens'
by American capital abroad as
a means of tax avoidance."
(Revenue Act of 1962
enacted October 16, 1962.)

Request that the Congress approve
the Interest Equalization Tax (lET)
to raise the cost to foreigners of
borrowing in the U.S. by the
equivalent of approximately 17. per
annum. (Enacted September 2, 1964
retroactive to the date of the
Presidential message.)

Request that the Congress extend
the Interest Equalization Tax for
two years and amended it to include
nonbank credit of one-year or more
maturity.
Request that the Congress "grant
statutory exemption from the antitrust laws to make possible the
cooperation of American banks in
support of our ba1ance-of-payments
objectives." (See below.)

- 4 -

President Kennedy's 1961 Message

President Kennedy's 1963 Message

President Johnson's 1965 Message

Administrative

The Secretary of the Treasury
requested to evaluate whether
U.S. "tax laws may be
stimulating in undue amounts
the flow of American capital
to the industrial countries
abroad through special preferential treatment."

Recognized Federal Reserve
efforts to stem the outflow
of short-term capital by raising
interest rates while maintaining
adequate domestic credit.

Announcement that the lET would
be extended to bank loans with
maturities of 1-3 years.
Establishment of a Voluntary
Cooperation Program for "American
businessmen and bankers to enter
a constructive partnership with
their Government to protect and
strengthen the position of the
dollar in the world." Under this
program the Secretary of Commerce
later requested 600 U,S. companies
to review their foreign transactions, particularly with their
affiliates, and to improve their
foreign exchange positions by
15 to 20t. Under the voluntary
program for financial institutions,
administered by the Board of
Governors of the Federal Reserve
System, banks were later asked to
keep their foreign asset positions
at the end of 1965 at a level not
exceeding 1057. of their end-1964
positions.

5 -

Increasing Foreign Investment Activity in the United States
President Kennedy's 1961 Message

President Kennedy's 1963 Message

President Johnson's 1965 Message

Administrative

Announcement that Western European
countries with strong reserve
positions would be requested to
eliminate restrictions on investment
by their citizens in the U.S.
Initiation through the Department
of Coumerce of "a new program to
bring investment opportunities in
the U.S. to the attention of
foreign investors. u

Request that the Treasury
Department in consultation
with the State Department:
(1) identify and make a critical
appraisal of foreign restraints
to foreign investment in the
United States;
(2) review Government and private
activities which adversely affect
foreign purchases of U. S. private
securities; and
(3) coordinate and encourage a
broad and intensive effort by the
U. S. financial community to sell
U. S. private securities abroad.

Request to Congress that various
administrative and tax barriers
to foreign investment in the U. S.
be eliminated. (The Foreign
Investors Tax Act was enacted
November 13, 1966.)

Government Operations
Administrative

Administrative

The Director of the Bureau cf the
Budget, in consultation with the
Secretary of the Treasury, was
requested to institute special
procedures for analyzing foreign
expenditures by the various government agencies (the "Gold Budget"
procedure).

Announced substantial savings
achieved under the Gold Budget
program and prospective future
substantial achievements, including
benefits which would stem from
Congressional legislation permitting
freer use of holdings of the
currencies of a number of aidreceiving countries.

Announced that 85% of new AID
commitments were now spent within
the U. S.
Requested the Secretary of Defense:
(1) "to shift defense buying from
sources abroad to sources in the U.S.;

- 6 -

President Kennedy's 1961
Administrative

Mes..s;J~

(Continued)

A closer review of foreign exchange
expenditures for econimic assistance
programs was announced.
New measures were taken to reduce
the foreign exchange outflows
associated with U.S. military expenditures abroad. The Secretary of
Defense was asked to "review the
possibilities for savings and logistic
support of our forces, including the
combined use of facilities with our
allies." And instructed to "urge the
purchase of the newer weapons and
weapons systems of those of our
allies capable of doing so."

President Kennedy's 1963 Message

President Johnson's 1965 Message

Administrative

(Continued)

Announced that during FY 1964 AID
commitments tied to U.S, exports
would rise beyond 807. of the total.
Also, that AID expenditures abroad
would be further reduced to about
$500 million less than during FY
1961.

(Continued)

(2) to reduce the stdffs in overseas
heddquarters;
(3) to streamline overseclS support
operations; dnd
(4) to work with our defense partners
to increase their offset purchases of
military equipmen t in the U. S."

Announced that foreign defense
outlays had declined substantially
and that efforts to sell more
defense items to major allied
countries had met with considerable
success.

Management of Gold and International Reserves
Legislative

Administrative

Requested that the Federal Reserve
Act be amended to permit payment
to foreign governments and monetary
authorities of higher than usual
rates of interest. Instructed the
Secretary of the Treasury to use
the authority already extended to
him by the second Liberty Bond Act
to make available special security
issues at preferential interest
rates.

Announced that special government transactions had covered $1.4 billion of the
1962 deficit. These included prepayment
of debt by foreign countries, advance
payments on military purchases here, and
the issuance by the Treasury of mediumterm securities to foreign official
holders of dollars. Efforts to secure
such special receipts were expected to
have a continued favorable effect on the
balance of payments. Announced that the
International Monetary Fund had approved
the United States' request for a $500
million standby arrangement.

Reiterated that lithe dollar is, and
will remain, as good as gold, freely
convertible at $35 an ounce."

TAB B
SUMMARY OF ACTIONS BY THE DEPARTMENT OF DEFENSE
TO REDUCE NET FOREIGN EXCHANGE COSTS,
1961 - 1967

Introduction
The Deparbment of Defense has long recognized that, due
to the size of U. S. defense expenditures entering the international balance of payments (IBP), it has a major responsibility to reduce the foreign exchange costs associated with
defense activities to the minimum consistent with the requirements of national security. In recent years, this continuing
concern has been expressed in a wide range of Department of
Defense programs serving to hold down and, where feasible, to
reduce defense IBP costs and to increase receipts. These programs have been re-emphasized and expanded during the past
two years as the intensification of hostilities in Southeast
Asia (SEA) sharply raised foreign exchange costs. As part
of this renewed effort, the Secretary of Defense in April 1967
re-emphasized the need to continue concentrated attention on
the Department of Defense balance of payments program, and
outlined more than 20 separate actions or studies relating to
various facets of the program.
The primary function of the Department of Defense is to
provide for the security of the United States. Therefore,
balance-of-payments considerations cannot be overriding, or
indeed, examined independent of requirements stemming from
our national security objectives, including fulfillment of
our commitments to help provide for the security of other
nations. The Department of Defense balance-of-payments program has been developed and is being carried out under two
general guidelines: first, essential combat capability must
be maintained and second, expenditure reductions must be
achieved without creating undue hardship for U. S. military
and civilian personnel and their families.
The following table summarizes balance-of-payments data
relating to U. S. defense activities:

- 2 -

U. S. DEFENSE EXPENDITURES AND RECEIPTS
ENTERING THE INTERNATIONAL BALANCE OF PAYMENTS

FY 1961 - 1967

($ billions)

1961

1962

1963

1964

1965

1966

1967

$2.5

$2.6

$2.5

$3.1

$3.9

Military Assistance

Other (AEC, etc. )

$3.1

$3.0

$3.1

$2.9

$2.8

$3.4

$4.1

-.3

-.9

-1.4

-1.2

-1.3

-1.2

-l.B

$2.8

$2.1

$1.7

$1.5

$2.2

$2.3

$ -

$ .1

$ .2

$ .7

$1.5

EXPENDITURES
U. S. Forces and
Their Support

TOTAL
RECEIPTS
NET ADVERSE BALANCE
Increase in SEArelated Exp. over

FY 1961

The data reflected in this table are on a gross basis. They
do not reflect so-called feedback effects, ~., as U. s.
military expenditures increase in a foreign country, that
country will in turn be in a position through these increased
earnings to increase its imports from the U. S. directly or
through third countries. Expenditure data also include expenditures in foreign currencies purchased from U. S. Treasury.
In FY 1967, these expenditures were approximately $200 million,
of which $26 million were in excess or near-excess currencies.
Details may not add due to rounding.
Less than $50 million.

- 3 Between FY 1961 and FY 1965, the net adverse balance on
;",e defense account was reduced from about $2.8 billion to
, fS than S1,S billion.
This reduction was achieved througb
(1) l substantial rise in receipts from sales of U. S. mili,~ty goods and services to foreign countri2B, (2) a reduction
in overseas uranium purchases of more than $200 million, and
(3) a successful effort to hold down Department of Defense
expenditures in the face of <a) rapidly increasing foreign
wages and prices, (b) increases in pay and allowances for U. S.
military personnel (16t between FY 1961 and FY 1965), and (c)
considering SEA related increases, a net increale in U. S.
rilitary personnel deployed in foreign countries.
Between 1961 and 1966 over-all wages in France rose by
41t, in Germany by 521 and in Japan by 6lt; during the same
period Wa,(~e8 increased in the U. S. by only 201. Similarly,
the cost of living rose in France by 19t, in Germany by l6t,
\nd in Japan by 34t from 1961 to 1966 -- but in the U. S. by
only 9t. Average annual wagel -- including social security
benefits under local law and other related costs -- paid foreign nationals on Deparement of Defense rolls also have increased markedly during the last six years. For example, from
FY 1961 through FY 1966 average foreign national wage costs to
the Deparement of Defense increased in France, Germany, and
Japan by approximately 50t. While relative increases in prices
and wages can have an eventual favorable impact on the U. S.
competitive position in foreign markets and hence on the U. S.
balance-of-payments position, for the DeparODent of Defense
they simply increase the cost of maintaining our defense posture
overseas. (In Western Europe alone, it is conservatively estimated that such price and wage increases serve to increase
DeparOment of Defense foreign exchange expenditures by over
$40 million annually.)
In FY 1966 and FY 1967, as a result almost entirely of
the U. S. effort in SEA, Department of Defense expenditures
rose markedly. Between end FY 1965 and end FY 1967, about
452,000 additional U. S. military personnel were deployed in
SEA countries. During the same period total military strength
in all foreign countries, including SEA, increased by about
434,000. Hence, in areas outside of SEA, there was a net reduction of approximately 18,000 military personnel.

- 4 Concurrent with the substantial increase in U. S. military
strength in SEA, there was a substantial increase in logistical
support requirements for military operations in South Vietnam.
The extensive construction program included deep water ports,
logistic depots and airfields. The supplies and equipment
needed in Vietnam include more than one million different items.
This reorientation and tremendous expansion of effort in SEA
is shown in the following table which highlights shifts in
military IBP expenditures by major geographic area:

S. DEFENSE rBP EXPENDITURES BY MAJOR AREA
FY 1961 - 1967
(billions of dollars)

Fiscal Year

Western
Europe

1961

$1.6

1962

Asian
Countries l /

Canada

Other

Worldwide=2 /

$ .6

$.4

$ .5

$3.1

1.6

3.0

1963

1.6

3.1

1964

1.5

2.9

1965

1.4

•7

2.8

1966

1.5

1.1

3.4

1967

1.S

1.7

4.1

Japan, Philippine Islands, Republic of China, Ryukyu Islands,
South Vietnam and Thailand. These data should not be
equated with increases in SEA-related expenditures over
1961, shown in the table on page 2, or with "costs of the
war" since there have been increased expenditures in
other geographic areas resulting either directly or
indirectly from the Vietnam conflict. Other adjustments
also are required to derive estimated SEA-related '~ar
costs."

Details may not add due to rounding.

- 5 -

Although there was a marked net increase in Department
of Defense lBP expenditures in FY 1966 and Py 1967, this net
increase would have been significantly higher had it not been
for the Department of Defense balance-of-payments policies
already in effect at the time hostilities were intensified
and the new measures which have been undertaken since that
time.
Reductions in Expenditures by U. S. Military. Civilian and
Dependent Personnel Overseas
The Department of Defense balance-of-payments program
relating to reductions in foreign exchange expenditures by
U. S. personnel has three main focal points: first, a strenuous effort to review requirements for U. So military and civilian personnel in foreign countries, with a view to reducing
these requirements where feasible; second, continuing stress
on voluntary actions by individuals to reduce personal spending
on the local economy; and third, efforts to hold down lBP expenditures related to nonappropriated fund activities.
a.

Hilitary Strength Levels in Foreign Countries

Special procedures governing U. s. military strength
in foreign countries have been developed during the past several
years. These procedures, which supplement normal manpower requirements reviews, reflect the continuing Department of Defense
effort to assure the assignment and continued deployment of
military personnel in foreign countries at the minimum levels
necessary to meet military requirements. Under these procedures,
an over-all end fiscal year ceiling on military strength in
foreign countries is established for each military department.
In certain cases there are additional subsidiary country and/or
area ceilings.
Since 1963, although there has been an over-all net increase
in U. S. military strength in foreign countries, there also
have been a substantial number of actions which served to reduce
such requirements for military personnel without detriment to
U. S. national security objectives and with beneficial balanceof-payments effects. Some of these actions are as follows:
In FY 1964, three U. S. air defense units in Spain were phased
out; SAC Reflex B-47 operations were consolidated i.n Europe
(and later the B-47's were redeployed from Europe) and U. S.

- 6 personnel requirements in U.S. military headquarters in foreign countries were reduced by 1510 below end FY 1963 levels.
(These actions served to reduce military strength requirements
in for~ign countries by about 6,500.) In FY 1965, the Army's
Lil1e of COIIDllUnica tion (LOC) in France was reorganized and three
U.S. interceptor squadrons and a C-124 transport squadron were
withdrawn from Japan to the U.S. (On completion of these actions, military strength requirements in foreign countries had
been reduced by more than 7,000 spaces.) In FY 1966 and FY 1967,
over 20 overseas activities were consolidated, reduced or discontinued with a savings of about 8,000 military spaces. In
FY 1967, also, there was a gross reduction in U.S. military
manpower requirements in Europe of about 18,000 U.S. military
and civilian personnel resulting from the U.S. relocation
from France. These reductions stemmed in part from special
Department of Defense manpower revalidation procedures associated
with the relocation.
Certain of the earlier actions outlined above, and others,
served to reduce U.S. military strength in Western Europe by
approximately 51,000 between March 1962 (the peak of the Berlin
Buildup) and March 1965. Between March 1965 and March 1967,
there was a further net reduction of approximately 16,000 U.S.
military personnel in Western Europe.
b.

Expenditures by Individuals

A continuing effort is made by the Department of
Defense to encourage participation by its personnel stationed
in foreign countries in voluntary programs designed to channel
available disposable income back to the U.S. These programs
were initiated by the Department of Defense early in 1961.
As applied to individuals, these programs emphasize and encourage voluntary actions to reduce spending on the local
economy, to increase use of payroll allotments and other voluntary savings programs and to increase spending in U.S. controlled
facilities, including USe of U.S. operated recreation areas.
In 1966 and 1967, existing programs relating to voluntary
reductions in personal spending by Department of Defense personnel stationed in foreign countries were intensified and new
programs were initiated. Disbursement procedures were modified
to make it eas ier for servicemen to leave their pay "on the

- 7 books." Regulations were amended to permit servicemen to increase the size of their alloODents sent home. In addition,
the Uniformed Services Savinls Deposit Program was enacted.
The law and accompanying Executive Order revitalized the old
Soldiers, Sailors and Airmen's Deposit Program. Participation
in the program is l~ited to military personnel on active duty
in a foreign area. Amounts deposited under the program earn
interest at the rate of 107. per aMUIl, coapounded quarterly
and interest is paid on deposits up to a aaxim\D of $10,000
while the depositor is on a duty assignment for more than
90 days outside the U. S. or its possessions or Puerto Rico.
Any part of unallotted current pay and allowances (in multiples
of $5), including a re-enlistment bonus paid in a foreign country, may be deposited.
Against the background of the actioDs outlined above, the
Department of Defense undertook in August 1966 a concerted effort
to encourage greater participation by all its members in foreign
countries in the voluntary balance-of-payments program. The
Directorate for Armed Forces Information and Education is producing and distributing materials supporting these personal
savings programs, including Bulletins for Commanders, a special
Fact Sheet for Servicemen, a special film and radio and television and pre~s material. In November 1966, 277,000 copies
of a special Fact Sheet entitled "Your Personal Savings Program"
were issued. Later in the year about 300 copies of a 10-minute
film entitled "Gold and You" were distributed for showing to
Deparcment of Defense personnel. This fi~ explains the U. s.
balance-of-payments program, outlines ways and means of achieving reductions in IBP spending by U. S. personnel, and emphasizes the revitalized Uniformed ServiCes Savings Deposit Program as an attractive avenue of saving. In this respect, as
of September 30, 1967, there was $183.5 million in gross
deposits in the program. (It is recognized that these deposits
-- as in the case of savings associated with similar programs -cannot be equated directly with equivalent net liP savings since
some portion of the new deposits are made in place of other forms
of savings or expenditures which would not enter the international balance of payments.)

- 8 -

Currently, the Office of the Secretary of Defense and
the military departments are taking additional steps to provide
more comprehensive orientation on the U. S. IBP problem to
Department of Defense personnel prior to their assignment overseas.
In South Vietnam, the efforts to encourage voluntary reductions in personal spending serve also as a significant part of
the over-all effort to reduce inflationary pressures in the
local economy. Additional measures in South Vietnam include
a special piaster budget for spending by U.S. agencies in that
country, the use of military payment certificates and a prohibition on the use of regular American currency in the country
as part of the effort to eliminate unauthorized currency transactions. In this respect, the rest and recuperation (R&R)
program recently established in Hawaii for military personnel
serving in South Vietnam also serves to hold down the foreign
exchange cost resulting from R&R leaves outside U.S. dollar
areas. On the basis of an average expenditure of about $265
per man on R&R in foreign countries, use of Hawaii as an R&R
site is estimated to result in foreign exchange savings of
about $20-$25 million in FY 1968.
c.

Nonappropriated Fund Activities

It is the policy of the Department of Defense to
promote the sale of U.S. items in overseas nonappropriated
fund activities. Military exchanges and other nonappropriated
fund activities in foreign countries have been directed to take
whatever steps are possible, within the limits of sound business
practice, to stock merchandise of U.S. origin to the greatest
practicable extent. At the same time, it is recognized that
there is a demand for foreign merchandise by U.S. personnel
stationed in foreign countries and that a more favorable effect
on the U.S. balance of payments will result if such goods are
purchased through U.S.-operated nonappropriated fund resale
activities than procured directly on the local economy or from
other foreign outlets. Accordingly, nonappropriated fund resale
activities in foreign countries are authorized to procure for
resale foreign-made goods available in the local market, subject
to certain restrictions. Among these restrictions is the requirement that the price of foreign items sold in overseas exchanges

- 9 and other retail outlets must be at least as high as the selling
price prevailing on the local economy. This pricing policy in
effect permits a lower markup and more attractive prices on
u. s. goods because of the additional profit from sales of foreign items, thus stimulating demand for U. S. products.
The Deparement of Defense also has expanded the use of
catalogues to emphasize the availability of U. S. merchandise.
In the fall of 1966, the Navy Ship Store Office distributed
25,000 U. S. commercial catalogues specially printed for the
Navy to all overseas exchanges and to some 50 ships located
outside the U. S. The Army and Air Force Exchange System also
has es tab lished a "mail a gif t II service for U. S. -made items
which can be delivered in the U. S. In July 1967, the Military
Departments were requested to review the sale of foreign merchandise directly or through concessionaires, by the various
clubs, messes and sundry funds and curtail such sales by eliminating items, restoring to the military exchanges the responsibility for the sale of those items normally sold through that
channel and by minimizing the presence of display type concessionaires.
In July 1967, new procedures were approved governing overseas exchange procurements based on a percentage of foreign
merchandise procurement expenditures to total exchange sales,
including Vietnam -- 27-1/2% for July-December 1967 and 251
for January-June 1968 -- and a concurrent re-emphasis on U. S.
merchandise sales. This action was designed to halt and reverse
the increase in the proportion of foreign procurement expenditures to total sales experienced in the July-December 1966
period in SEA and concurrently, to increase emphasis on better
stockage of U. S. merchandise and to assure the highest priority
for purchase, promotion and sale of U. S. manufactured items.
This program is being monitored closely in order to assure that
there is no shift by Department of Defense personnel from purchaSing in the exchanges to purchasing foreign items on the
local economy. Early in August 1967, the Military Deparoments
also were requested to conduct a thorough review of items stocked
for resale in exchanges to ensure in-stock positions of U. S.
manufactured goods in demand and to substitute comparable U. S.
manufactured items for foreign goods wherever feasible.

- 10 This continuing stress on foreign exchange economies in
the nonappropriated fund area rests on a base of actions taken
during the FY 1961 - FY 1966 period. In FY 1960, the overseas
military exchanges spent about $150 million for the purchase
of foreign merchandise and total exchange sales were slightly
less than $500 million. In FY 1966, expenditures for foreign
merchandise were slightly less than the FY 1960 level, but
total exchange sales had risen to slightly more than $700 million, or a $200 million increase over FY 1960. The nonappropriated fund activities have provided, and provide today,
perhaps the single most significant avenue through which U. S.
military and civilian personnel and their dependents in foreign
countries "return" dollars to the United States.
Actions Relating to Foreign Nationals
The Department of Defense has made strenuous efforts to
hold employment of foreign nationals to minimum essential levels.
Major emphasis on reducing employment of foreign nationals was
initiated in July 1963 with some actions to be effective by end
FY 1964 and additional actions scheduled by end FY 1965. The
results of the FY 1964-1965 program are reflected in the following table, which also reflects FY 1966-1967 SEA related increases:
FOREIGN NATIONAL STRENGTH AND DOD IBP EXPENDITURES
FY 1961 - 1967

Fiscal Year
1961
1962

Foreign
National
Strength
(March 31 Data)
243,100
242,800

DOD IBP
Expenditures
!~ Millions}
$370
400

1963
1964

240,000
223,300

440
425

1965
1966

198,200
203,800

410
440

1967

261,100

530

- 11 Between FY 1963 and FY 1965, there wa. an over-all net
reduction of close to 42,000 foreign nationals employed on
Department of Defense rolls and a concurrent decr•••• in IBP
expenditures for foreign nationals of about $30 million, in
spite of some upward pressure in this area already being experienced as a result of the conflict in SEA. ~ring this
period Deparbnent of Defense U. S. civilian Itreogth in foreign countries remained relatively stable.) But the savings
shown do not fully reflect the actions taken, in as much as
foreign national wage costs were steadily rising during the
period. If the FY 1963-1965 reductions had not been made,
and if SEA foreign national eaployment increases had been
added to the FY 1963 employment level, total foreign national
expenditures in FY 1966 could have been well above $500 million,
and in FY 1967 well above $600 million, instead of .t the levels
reported.
The increase in foreign national employment during the
last two fiscal years is attributable almost entirely to SEA
requirements. From March 1965 to March 1967, foreign national
employment in Vietnam alone increased by about 47,000, while
for the same period the number of foreign nationals in Western
Europe declined by an additional 4,000. (Between March 1961
and March 1967, there was a net reduction of approximately
28,000 foreign nationals in Western Europe.)
Expenditures for Materials. Supplies and Services and Major
Equipment
Deparbnent of Defense policies place primary emphasis on
use of U. S. materials and supplies in support of U. S. defense
activities. Efforts to restrain IBP expenditures for materials,
supplies and equipment can be related initially to a Presidential
directive in November 1960 calling for reductions in Deparbnent
of Defense procurement abroad during CY 1961.
Beginning in January 1961, DeparbDent of Defense purchases
(excluding Military Assistance Program ~P), nonappropriated
fund procurements and POL) normally were "returned" to the U. S.
when costs of U. S. supplies and services (including transportation and handling) for use outside the U. S. did not exceed the

- 12 cost of foreign supplies and services by more than 257.. In
mid-1962 the standard 25% differential was increased to 501.,
and on a case-by-case basis could exceed 50%. These policies,
which are continually re-emphasized, remain in effect today.
Hence, in cases where the U.S. versus foreign procurement
source is to be determined on price differential grounds, a
5010 premium in favor of U.S. end products or services is
acceptable automatically and caSes over $10,000 where the
price differential is over 5010 continue to be forwarded to
the Deputy Secretary or the Secretary of Defense for procurement source determination. From CY 1961 through FY 1967,
about $340 million in procurements had been diverted from
foreign products to U.S. products or services under this
program, at an additional budgetary cost of about $75 million,
or about 22%.
Similarly, for Department of Defense procurements of goods
and services for USe in the U.S., case-by-case review procedures USing the 50% differential as a "bench mark" were initiated
in July 1962. The 50% differential was subsequently formalized
as a part of Department of Defense procurement regulations with
a clear statement that this policy would be kept in force only
as long as is required by the U.S. ba1ance-of-payments situation. From FY 1963 through FY 1967, based only on cases where
foreign source bids were rcceived~ approximately $13 million
in procurements which normally would have been foreign were
returned to U.S. sources at an additional budgetary cost of
approximately $4 million, or about 31%.
With respect to purchases of POL, in FY 1967 the Department of Defense returned to the U.S. somewhat over $100 million
of the approximately $570 million which normally would have
been earmarked for overSeas procurement; thus, about 20% of
Department of Defense overseas procurement requirements in FY 1967
were purchased in the U.S. Additional returns have been determined
to be infeasible, principally on economic grounds, ~., the
additional budgetary cost involved would greatly exceed any
benefits in foreign exchange savings.
Emphasis on reducing Department of Defense expenditures
overseas for material, supplies and services is continuing.
The Secretary of Defense in July 1967 approved a recommendation

- 13 to establish as a FY 1968 objective a reduction in lBP expenditures for subsistence in foreign countries below FY 1967 expenditures, which were about $100 million, under specific guidelines.
Similarly, in mid-July 1967, the Deputy Secretary of Defense
confirmed the use of more stringent criteria governing the
selection of foreign research and development projects. The
Director, Defense Research and Engineering also has directed
that a semiannual review of all foreign projects be made to
ensure full compliance with these criteria.
Reductions in Expenditures for Construction and Operation of
Overseas Facilities
Department of Defense efforts to reduce expenditures relating to the construction and operation of facilities in foreign
countries have two principal focal points. First, the Department of Defense has attempted to operate required facilities
at minimum costs under groundrules which in part require that
maintenance and repair of real property be conducted at levels
sufficient only to ensure continuity of operations and to preclude uneconomical costs due to excessive deterioration. As
part of this effort, there are continuous reviews to seek out
areas where base closures or consolidation of activities can
be achieved without detriment to national security objectives
and with savings in budgetary and IBP costs. Second, the
Department of Defense has eliminated or deferred all construction not essential to military needs and attempted to reduce
the foreign exchange costs of essential construction even where
additional budgetary costs are required.
Proposed construction programs in foreign countries are
subject to special reviews as to essentiality, and those which
are approved are designed, where permitted by the applicable
country-to-country agreements, so as to reduce foreign exchange
costs to a minimum. Under specially developed construction
procedures, the Department of Defense is emphasizing the use
of: (1) U. S. procured materials, (2) U. S. Government furnished materials and equipment, (3) U. S. flag carriers,
(4) prefabricated buildings manufactured in the U. S., and
(5) competent troop labor. It is recognized that these construction procedures may result in increased budgetary costs;

- 14 however, extra budgetary costs generally are considered acceptable provided the added cost over normal construction methods
does not exceed 50~ of the amount of reduction achieved in lBP
costs. These special procedures also may be acceptable as
approved on a case-by-case basis even though premium costs may
exceed 504.
In view of the magnitude of the construction program in
SEA, particularly in Vietnam, an extraordinary effort has been
made to reduce the IBP impact of the program. The results of
this effort can be stated very simply. Of the over $1.4 billion
in approved and funded construction for South Vietnam, almost
$1 billion had been expended through June 30, 1967. But, only
about $250 million, or approximately 25%, of these expenditures
were foreign exchange costs. This achievement also must be
considered in the light of the extreme urgency under which much
of the construction work has been accomplished.
The emphasis to restrict overseas construction projects
to those necessary to meet national security objectives continues also in other geographic areas. As a result of a study
called for in April 1967, the Secretary of Defense subsequently
approved an action to hold IBP expenditures for military construction, including NATO Infrastructure, but excluding expenditures for construction in Vietnam, to $270 million in FY 1968.
Military Assistance Program
Military assistance IBP expenditures generally are reflected
in three separate areas: offshore procurement, NATO Infrastructure and all other MAP costs. An intensive effort is being
made to hold down IBP costs in all these areas.
In December 1960, the Department of Defense issued instructions to the Unified Commands to review the MAP in their respective area and to recommend adjustments that would lead to reductions in dollar expenditures abroad either through deletion or
deferral of requirements or through transfer to the U. S. of
sources of supply. Initially, recommendations for changes were
limited to adjustments which would not increase budgetary costs
to the Department of Defense by more than 10~. This differential subsequently was raised to 25;', and beginning in December

- 15 1963, the 50t differential relating to military functions appropriations procurementl was applied also to MAP offshore procurement. In addition, policy guidaace wal reviled in sdd-1963 to
require that offshore procur...ntl under MAP cost sharing agreements be limited el.entially to the fulfil~nt of prior commitments. Under the policies outlined above, liP expenditures for
HAP offshore procurement were reduced fra. about $160 .tllion
in FY 1963 to less than $50 Billion in FY 1967, and all other
HAP expenditures entering the liP were reduced by about onethird during this period.
Military Assistance Progr.. funds allo were uled during
the FY 1961-1967 period to provide the U. S. contribution to
NATO multilateral efforts, the .cst significant of whicb is
NATO Infrastructure, i.e., the joint U. S.-Al1ied fUDding of
airfields, communication facilitie., firing rang.s and other
facilities. During 1966, the U. S. negotiated a reduction in
its percentage share contributed to NATO Infraltrueture from
30.851 to 25.771.
Stringent control procedures to restrain MAP liP costs,
stemming in part from the provisions in the Foreign Assistance
Act of 1961, as amended, remain in effect today. For example,
in addition to the percentage guidelines outlined above with
respect to offshore procurement, the Assistant Secretary of
Defense (International Security Affairl) must certify before
foreign procurement can be undertaken that failure to procure
outside the U. S. would seriously ~pede the attainment of
HAP objectives.
Military Salea Program
During the FY 1961 - FY 1967 period, the U. S. military
sales program has resulted in ~portant ba1ance-of-payaents
benefits to the U. S. In FY 1961, Department of Defense cash
receipts, which stem in large part from military sa1ea, were
slightly over $300 million. By FY 1963, Department of Defense
cash receipts had risen to well above $1 billion and during
the FY 1963-1967 period have averaged close to $1.3 billion,
with unusually large receipts of close to $1.6 billion in
FY 1967.

- 16 The principal objective of the foreign military sales
program, however, is basically the same as that of the U. S.
grant aid program, i.e., to promote the defensive strength of
our allies in a way consistent with over-all U. S. foreign
policy objectives. Encompassed within this over-all objective
are several specific goals:
1. To further the practice of cooperative logistics
and standardization with our allies by integrating our supply
system to the maximum extent feasible and by helping to limit
proliferation of different types of equipment.
2. To reduce the costs, to both our allies and ourselves,
of equipping our collective forces, by avoiding unnecessary and
costly duplicative development programs and by realizing the
economies possible from larger production runs.
3. To offset, at least partially, the unfavorable payments ~pact of our deployments abroad in the interest of collective defense.
Under the policies and goals outlined above, between FY 1962
and FY 1967, the total program has resulted in sales of about
$9.8 billion. In addition, outstanding sales commitments as of
June 30, 1967, amounted to approximately $2 billion. The list
of equipment involved has been dominated by sophisticated weapons
systems: ~., F-lll's, F-4 I s, POLARIS equipment, HAWK and
PERSHING missile systems, etc. Of the $11.8 billion of sales
and commitments, $8.5 billion are for cash and $3.3 billion
are credit transactions. Of the latter amount, about $2.1
billion are being financed by the Export-Import Bank without
any Department of Defense guaranty and about $1.2 billion through
a combination of Department of Defense credit sales and guaranty
loans.
About 754 of the sales and commitments to date have gone
to Europe and Canada, 12% went to the Far East, primarily Australia, Japan and New Zealand, with about 13t distributed among
a substantial number of other countries throughout the world.
All important proposals for military sales are reviewed
by the Secretary of Defense, with appropriate interagency

- 17 coordination, and Presidential decision frequently is required.
Decisions to sell equipment are based on a positive determination that it is in the best over-all U. S. national interest
to make the sale.
In addition, there have been some instances where U. S.
sales have been associated with arrangements under which the
purchasing country gains increaled access to U. S. military
procureaent requirements on a competitive basis. From an overall standpoint, such arrangements at times are desirable, even
though they serve in part to increase U. S. foreign exchange
expenditures.
Barter and Excess Currency Programs
The Department of Defense also is attempting to achieve
maximum feasible use of U. S.-owned excess currencies and barter
arrangements as a means of conserving Department of Defense
dollar expenditures entering the IBP. In terms of priorities,
Department of Defense uses excels currencies before barter for
overseas procurements where a choice exists.
Specific policies and procedures have been developed which
provide for the use of U. S.-owned foreign currencies rather
than dollars for payment of overseas Department of Defense requirements. Where feasible, such items as (1) overseas allowances, (2) travel, transportation, per diem and related expenses
of Defense personnel, dependents, employees of contractors, and
(3) contract procurements, are paid for in excess currencies.
It should be noted, however, that the bulk of excess currencies
held by the U. S. are currencies of countries where the number
of U. S. forces and the magnitude of Department of Defense
expenditures are relatively small (in FY 1967 less than 1.5%
of all military personnel assigned overseas were stationed in
excess or near-excess currency countries, and less than twotenths of one percent were in excess currency countries). In
addition, there are relatively limited possibilities of using
excess currencies to meet requirements in other countries,
based in part on the nature of existing country-to-country
agreements governing use of the currencies.
With respect to barter, where it has first been determined
that excess currencies cannot be used and a determination also

- 18 has been made under Department of Defense balance-of-payments
procurement guidelines that the requirement must be met from
an overseas source, an effort is made to use barter procurement, under procedures developed with the Department of Agriculture.
In its initial year, in FY 1964, the Department of Defense
barter program amounted to less than $25 million. In FY 1967,
the barter program amounted to slightly over $200 million (including about $15 million AEC barter), or about an eightfold
increase over the FY 1964 level.
Miscellaneous Actions
During the past several years, the Department of Defense
has given continuing attention to improving IBP reporting and
management control procedures in an effort to supplement and
enhance the various specific balance-of-payments policies.
Some examples are as follows:
1. In FY 1964, Department of Defense implemented a
revised system for recording and reporting Department of Defense
expenditures and receipts entering the IBP. During FY 1967
these reporting procedures were further refined.
2. The Secretary of Defense has assigned balance-ofpayments expenditure and receipt targets to various components
of the Department of Defense. These targets, which reflect
approved actions, provide useful bench marks from which to
measure Department of Defense balance-of-payments efforts.
3. As part of the actions and studies undertaken in
April 1967, a Department of Defense-wide review of IBP procurement
actions and related accounting is underway. These reviews serve
to emphasize the need for continuing attention by activities to
current IBP procurement policies and to help assure that IBP
accounting reports accurately identify and report properly the
impact of Department of Defense expenditures entering the IBP.
4. Specific procedures have been included in annual budget
reviews which call for the identification of IBP impacts resulting
from alternative budget decisions. International balance of payments
implications also are required to be submitted for review in
connection with basic budget estimates for construction, procurement and research, development, test and evaluation appropriations.

- 19 The Outlook for 1968
The Deoartment of Defense balance-of-payments program will
receive continuing attention during ry 1968 in keeping with the
President's MessRge on Balance of Payments of January 1, 1968.
This emphas is wi 11 res t in part on the significant number of
policies and nr~ctices already in effect which serve to hold
down and, where feasible, reduce Department of Defense expenditures entering the IBP. In addition, the IBP Action and Project
List, issued in April 1967, sets out for examination additional
proposals where there was same possibility of additional IBP
savings and/or the need for renewed attention. Decisions on
some of the pro"',nsa Is, as noted above, a lready have been made.
Other items on th~ project list still are under study and
favorable decisions in 1968 on certain of these longer-term items
may provide additional IBP benefits in the future. In addition,
Department of Jefense is examining other proposals with a view
to reducing fur.ther the IBP costs of personal spending by U.S.
forces and their dependents stationed in foreign countries,
particularly in Western Europe.
In Western E':rone also, it is anticipated that these actions
will be supplemented by the previously announced planned redeployment of approximately 35,000 U.S. military personnel from the
Federal Republic of Germany during CY 1968, with some associated
reductions in foreign national emplo\~ent. This action, based
on current plans, will serve to reduce Department of Defense
lBP costs by about $75 million at an annual rate, although
substantial IBr savings are not anticipated until the first half
of CY 1969. In SEA, the current outlook is for a smaller increase
in expenditures as compared to the increases experienced in 1966
and 1967.
Overall, with respect to Department of Defense IBP expenditures,
based on present programs and strength levels, significant new
savings will be more difficult to achieve. As a result of past
efforts, the "easy" reductions have long since been made. For
example, under present circumstances the Department of Defense
already appears to have reached the borderline, in the procurement area in terms of IBP savings/budgetary cost tradeoffs.
The Department of Defense also will continue to take all steps
feaSible within existing policies which would Serve to increase
receipts. Nevertheless, it is currently anticipated that there
will be a reduction in Department of Defense cash receipts in
Cy 1968 below FY 1967 levels. In this respect, however, Department

- 20 of Defense data exclude special purchases of securities by
other countries and these purchases are expected to be substantial
in FY 1968 and CY 1968. For example, as previously announced,
the Bundesbank (FRG) has agreed to purchase in FY 1968 $500
million in U.S. medium-term securities to ease the net IBP
impact of stationing U.S. forces in Germany. There may be
other actions of this nature which also represent a departure
from the more traditional military offset approach. Although
these actions would be of benefit to the U.S. balance of payments
during this period, they would not be reflected in Department
of Defense receipts data. The Department of Defense is
participating with Treasury and other U.S. Government agencies
in these efforts.

Source:

Department of Defense.

u. S.

DEFENSE EXPENDITURES AND RECEIPTS ENTERING THE

INTERNATIONAL BALANCE OF PAYMENTS

FISCAL YEARS 1961-l967

(Nlillions 01 dollars)

EX 1261
EXPENDITURES:
U.S. Forces and Their Support:
Expenditures by U.S. Military,
Civilians and Dependents EI
Foreign Nationals (Direct ano"
Contract Hire>. ...............
Procurement:
Mijor Equipment ............•.
Construction
Materials and Supplies
(Includes POL) £I ...........
Operation & Maintenance)
(Other) gj ........... J
Other Payments .sY .•••••• )
Sub-Total ................
Military Assistance Program:
Offshore Procurement ....•...•..
NATO Infrastructure ...•........

775

FY 126d

815

879

FY 1967

956

$1,121

$1,256

438

425

408

438

525

62
157

67
122

76
101

92
94

78
105

256

146
396

562

597

547

474

415

527

642

418

400

491

216
$2,452

217
$2,474

5~6

18~

17~

21~

$2,513

$2,566

$2,536

$3,133

695
270
$),930

155
105
52
312

122
36

....
N

222

+l~

161
90
67
318

118
61
58
237

75
34
$

53
50

168

157

29
53
44
126

-2
$2,762

$2,709

-6
$2,825

-8
$2,795

+1
$2,705

+12
$3,302

+22
$4,081

319

899

1,394

1,204

1,253

1,060

flSl

lJSl

$ 319
$2,443
343

$ 899
$1,810
273

$1,394
$1,431
250

$1,227
$1,568
136

$1,322
$1,383
95

$1,199
$2,103
50

1,566
201.
$1,770
$2,311
28

$2,786

$2,083

$1,681

$1,704

$1,473

$2,153

$2,339

.Bc3.rter .•..•.••••..•......•.•••.••

Footnotes on page 2.

FY 1966

FY 1965

396

Oilier ..........................

Total Receipts ..•..•.•..••
Sub- Total ....•.•.........•....
OTHER EXPENDITURES:
(AEC and other agencies included
in NATO definition of defense
expendi tures ) ............•.••.•.
Net AJverse Balance
(NATO Definition). .......•..

FY 1964

366

.................

Sub- Total .•......•.......
Net Change in Dollar Purchased
Foreign Currency Holdings .•.•...
Total Expenditures ...••...
RECEIPTS:
Cash Receipts y . ................

789

FY 1262

•

!Y'

fu La differ somewhat from data on the defense accmmt shown in the Department of Commerce publi a t ~on
01ITVey of Current Bu.sineGs. Conunerce data exclude I on payments side I smull amounts repreGenting retired paJ',
claims and grants and ne~ changes in roD holdings of foreign currenc~e.s purchased VIi th dollars. On rece~pts
side, Commerce data exclude military sales through commercial channels and bar~er. These data are included in
Cormnerre ac"ounts W1der other entries.

J2I

Includes expendltUl'cS for eoods and services by nonappropriated fund activities.

Begirming wi Ul IT 1964, Ja ta for materials and suppLLes include onl~' expenditures for O&M supplies and stock
i'W1d purchases .

.Q/

BeGinning with FY 1964, "Operation & M3..intenance (Other)" includes all o&M payments not included elsewhere and
"Other Pa:yments" includes expenditures for retired pay, claims, research and development, industrial fund
activities, etc.

Cash receipts data include primarily: (1) sales of militarj items through the U.S. Department of Defense;
(2) reimbursements to the U.S. for logistical support of United Nations forces and other nations I defense forces;
and 0) sales of services and excess personal property. They do not include estirrates of receipts for mili tarj
equipment procured through private U.S. sources, except where these are covered by government-to-government
agreements, and data are available, i.e., FRG, Iran, Italy and Saudi Arabia.

N
N

TAB C
AID AND THE BALANCE OF PAYMENTS
During the Marshall Plan and most of the 1950's, aid
appropriations were generally spent wherever prices were
lowest. For the first few years after the war, the United
states was the only major source for most of the goods
needed by aid recipients. Consequently, most aid dollars
were spent in this country even though they were not tied
to U.S. procurement.
This situation changed as the revived European economies
became increasingly effective competitors for U.S. aid purchases.
By 1959 only 40% of our aid dollars were being spent on U.s.
goods and services.
Beginning in 1959, in order to improve the U.S. balance of
payments we began to limit our policy of worldwide procurement.
Today, funds are spent primarily in the United states for goods
and services procured in thi3 country. The only significant
elements in the A.I.D. program not specifically tied to U.s.
goods and services are salaries and payments to A.I.D. overseas
personnel and contractors (only part of which is spent abroad)
and limited offshore procurement for A.I.D. administrative
purposes.
In FY 1968, the U.S. share of total A.I.D. expenditures
is expected to reach 92%, with 96% of commodity expenditures
being made in the United States. The net impact of the A.I.D.
program on the balance of payments in FY 1968, after allowing for
repayments of principal and interest, is estimated at close to
zero, as compared to $934 million in FY 1961.
This change has been brought about by the aggressive steps
which A.I.D. has taken in recent years to minimize the balanceof-payments costs of its programs. These steps fall into three
general categories--(a) expansion of A.I.D.'s tied procurement
regulations; (b) measures to improve U.s. export additionality,
both in the context of A.I.D. programs and generally; and
(c) use of local currencies.
Tightening of Tied Procurement Regulations
Loan Financing. To assure that A.I.D. funds are used for the
purchase of goods and services in the United States, A.I.D.
has progressively tied all loans to U.s. procurement.
Exceptions are possible only if waivers are approved by
interagency committees and signed by the A.I.D. Administrator.
There are no current exceptions.

- 2 --

Grant Financing. Virtually all grant procurement is also tied
to U.S. goods and services -- procurement is limited to the
United States and eight Asian and African less-cevelopcd
countries. These commodities are paid for in local currencies.
But arrange!.lents are made to purchase in the United States a
dollar-equivalent amount of u.S. goods under Special Letters
of Credit.
These arrangements are used almost exclusively
for security-related foreign procurenent for Vietnam and are
estimated at about $70 million in FY 1967.
Local Cost Financing.
In some instances, A.I.D. pays part
of the local costs of A.I.D.-financed projects.
In countries
where the Uni -J:_ed States does not already have available local
currency in excess of u.s. requirements, dollars must be used
to obtain the local currency to cover any project costs which
Z\.I.D. may finance.
Since 1963, A.I.D. has !.loved progressively
to tie these dollars to U.S. procurement by using Special
Letters of Credit good only in payment of goods and services
originating in the United States.
There are only three elements of the A.I.D. progr~, then,
which still have a significant irepact on our balance of
payments:
1.

Salaries and other payments to A.I.D. overseas dirccthire personnel and contractors. ~.I.D. direct-hire
personnel and contractors working overseas have to
spend money for living expenses and other local costs.
Their salaries and payments cannot, of course, be
tied to u.s. procurenent, but only part of these
funus is spent abroad. The estir.late for the FY 1968
progran is about $99 million.
Little can be done
to reduce this ar,1ount materially, although 1\. I. D. is
continuing efforts to increase the use of local
currencies vJhere they arc avai lable.

Hinirr,um forei n rocurement for A.I.D. administrative
expenses. A very small amount of A.I.D. funds (.7
nillion of FY 1968 funds) is used to make local
!?urchases of i terns nece~ sary fer adrr,inistration of the
program which cannot be inported froQ the Uni ted ~;tates.
Here again, available local currencies are used
whcr.ever possible.

Cash grants. These are still being made in situations
where it has been difficult to substitute U. S. goods
and services. The item has been reduced drastically
in recent years until it includes only the multilateral
Foreign Exchange Operations Fund in Laos (about $13
million) and parts of some grants to overseas educational
institutions.

- 3 -

A.I.D.'s Expenditures as l'leasured by the "Accounting" Method.
One way to measure the impact of A.I.D. 's expenditures on the
balance of pay~ents--the way used by the Department of Commerce
in preparing its balance-of-payments figures and which might
be called the "Accounting" approach---is to look at the direct
result of A.I.D. spending. To what extent are aid dollars
spent directly in this country, and to what extent are they
spent abroad or paid to an international organization? To
what extent are offshore expenditures offset by repayments
to the United States of principal and interest on prior-year
loans?
In FY 1963 A.I.D. 's offshore expenditures totaled $799
million, including all contributions to the UN and other
international organi zations and before making an allo\<]ance
for offsetting expenditures by these organizations in the
united States. In that year the Agency made a commitment
as part of the U. S. balance-of-paynents program to reduce
its offshore expenditures to not more than $500 million by
FY 1965. 'rhat goal was reached. In FY 1965 they were about
$411 million.
Despite the greatly expanded Vietna~ program,
offshore expenditures were held to $503 million in FY 1966.
As a result of A.I.D. 's further tightening of tie~ procurement
regulations, there was a further reduction in offshore expenditures of $100 million between FY 1966 and FY 1967. It also
became apparent that A.I.D. and the State Department's contributions to international organizations should not be treated
as "offshore" expenditures since they were more than offset by
the spending of these sar.1e organi zations in the U. S. !/
The currently estimc::.ted offshore expenditures in FY 1967,
therefore, are $290 million, after allowing for international
organization offsets up to the amount of the U. S. contribution.
The projected figure for FY 1968 is $201 million. '!;../

The classic example was that of the Indus Basin Development
Fund. The U. S. was contributing 44% of the foreign exchange
needed by the IBRD to finance the construction of the Indus
Basin projects. The entire amount of the U.S. contribution,
under the old procedures, was being counted as a drain on
the U.S. balance of payments, even though 54% of the foreign
exchange costs of the contracts under the Indus Basin Fund
had been let to U.S. firms for construction or consultant
activities.

If international organization contributions were still treated
as 100% offshore disbursements, these last two figures would
have been $403 million for FY 1967 and $325 million for
FY 1968.

- 4 -

These offshore figures are on a gross basis. They do not
take into account the fact that each year the United States
receives payments on loans ~ade by ~.I.D. and its predecessors.
Such payments totaled $173 million in FY 1965 and $184 million
in FY 1966, and are estimated at $203 million and $215 million,
respectively, in FY 1967 and PY 1968.
In percentage terrls, total A. I. D. expen<li tures for goods
and services in the Uni tec~ States rose fror. 41% in ry 1961 to
about 80% in FY 1966.
For FY 19G7 this percentage was about
84% and for FY 1968 is expected to reach 92%.
Calculated on the basis of expenditures which will result
from current cOl'lrai tI7lents, rather than on the basis of current
expendi tures (!.lade in E1art as a resu1 t of prior-year comr.ti tments) ,
total A.I.D. funds recorded as spent in the United States have
risen to over 90%, a level which cannot be increased
significantly.
The dramatic rise in the proFortion of recorded A.I.D.
expenditures in the United States is even more apparent when
expenditures for con®odities alone arc examined.
A.I.D.
expenditures for commodities purchase~ dOffiestically rose from
44'6 in FY 1961 to about 90% in FY 1966. 1•• I.D. commodity
expendi tures currently beinq niac.e in tile United States are
now above 90~ and are eX2ected to rise to about 96% in FY 1968
as tightened A. I. D. procur8T,1ent measures take effect and
rerr,aining expendi tures frei:''. prior-year cOI:mi tr.lents are 1ic:'uidatecJ.
'1'his ihprovement in <:li(:-ty in~~ has not, of course, been
achieved 'Ii;i thout cos t.
I nc:.i vidual comrnodi ties finar.cec1 by
i .... I.D. and, therefore, produced in the United States, may cost
an aid recipient ~ore--including higher transportation
costs--than if they were bought elsewhere at world market prices.
:ensuring )\<.kiitionality of U.S.

Export~

The true economic effect on the bal<lnce of paYl'lents of
the A.I.D. progran (or of any other prograJT1 involving overseas
eXF-enditures) cannot be determined as sir:lply as the "accountin<::;/l
~ethod suggests.
There are indirect effects not revealed by
the direct accounts.
!,iany dollars contrilJuted under the A.I.D. program to
nultilateral agencies, for example, come back through regular
COlTII,lCrcia1 channels for purchases of u. S. qoods.
Also, dollars
uhich go out and enter the economy of a less-developed country
r,lay later be used by that country to buy needed goods in the
u.S. market.
Or, they may go through trade channels to a third
country which \"ill usc them to purchase goods here.

- 5 -

These are examples of the so-called "feedback" or "re-flo\v"
which comes from overseas spending. They demonstrate that the
"accounting" wethod overstates the effect of aid outflows on
the U. s. balance of payr.lents, because the outf lCMs are to a
considerable extent soon ref lected in increasec \.!. ~~. export
sales.
nut there is another indirect effect in tlle \))'lx'sitc
direction. \~cn an aid recipient buys U.S. goods financed by
ILI.D. under a tying arrangement, it muy be buying goods that it
vlOuld othen"ise have bought with dollars it already owns. The
latter dollars--free foreign exchange--can then be usec~ for
other purchas( s ei ther in the Uni ted S ta tes or e ls ewhere . \7hen
purchases are made elsewhere, the u.s. balance of payQents roilY
be adversely ilffecteci, although (because of the rcsj,endincr
effect) not necessarily by the full aITIOunt of tllirc1-country
purchases.
This is the so-called "substi tution II effect, fleaning that
A.I.D.-financed purchases are sometimes substituted for
purchases that would otherwise have been made vJi th "free dollars."
To the extent that this takes place, the "accountinc:" method
unClerstates the adverse effect of the 1\. I. D. ~roC:ll:ari on the
balance of payments.
Simply tying procurement to U. S. sources ffiuy not, therefore,
be fully effective in reJucing the ir~Dact of the 1\. I. D. proc::;run1
on the balance of payments. Having already gone ahout as far
as possible in tying procurement to u.s. goods and services,
A.I.D. has undertaken a wide variety of measures to ensure that
1,.I.D.-financed exports 1,'Jill be additional to, rather than a
substi tute for, exports that would have occurrec; \vi thout I,.• I. D.
financing.
A.I.D. has included u.s. export promotion as an
important factor in selecting capi tal projects and cOllUTloc1i ties
for A.I.D. financing and has stressed in otl:er \12ys the urC::Gnt
necessity of J:''Linin.lizing the impact of A.I.D. programs on the
U. S. balance of paynents. r.1oreover, U. S. Errbassy cor.mercial
staffs in the rnore important aid-recipient countries have been
or are being strengthened.
Project and COJillllodity Selection CritcriZl.
A.I.D. is paying
increasingly close attention to balance-of-Dav~ents considerations
in selecting projects and commodities \Jhich it \"i 11 or \"ill not
finance:
A.I.D. is placing greater emphasis on projects and
products \'lhich will ensure not only irJTlcciate U.s.

6 -

exports but also II follO\., on" orders for such i terns
as spare parts or specialized intermediate materials.
A.I.D. also has limitations on financing projects
which will compete with U. s. exports.
Another device A.I.D. uscs is to refuse to finance
items, such as spare parts or goods in which the
United States is strongly competitive, which a
recipient will buy from the United States in any
event since they arc available at reasonable cost
only in this country.
Still another method is to li~it the list of goods
eligiblc for A.I.D. financing to those in which the
United States does not have a price advantage.
Other ~easurcs to Increase AdeH tionali'!y.
It has also been
possible in a nUDwer of cases for host governments to make
A.I.D.-financed loans less costly or other\V'ise more attractive
to importers through surcharge reductions or elinination: waiver
of prior i:rlport deposi ts; or fClvorClblc terms for bank credi t.
Other :r.1ore established A.I.D. procedures include general
incligibili ty of COIl1T,10di ties of \vhich tile Uni ted States is a net
importer (c.s. POL) for A.I.D. dollar financin~ and tightened
provisions -cover ing the application of 50/50 shipping regul2.tions,
COTi1.1Tlodi ty inport cOf71ponent value rules, and rules concerning
contractor services.
In adclition, A.I.D. Llissions arc taking a nuMber of steps
to make sure that inforlliation about U. S. exports is made
uvailaLle, for example:
officials responsible for puLlic and private
procurement are being brought to the United States
to meet U. S. supplicrs;
an !-\fro-]unerican Purchasing Center has been set up
ir: ;~e\>l York and special arrangements made with the
N2tional Institute of Governrnental Purchasing to
improve knowledge and availability of U. S. supplies;
and
the availability of unused Special Letter of Credit
dollars in certain African countries is being
publicized in International Con~erce.
General Measures to Increase U. S. ~xnorts.
Finally, in
addi tion to these and other measures taken by ]'I•• I. D. to reduce
the impact of its own prograr:l on the be_lance of payments,
discussions have been held with Clicl recipients about the
difficulties of maintaining current assistance levels in the

- 7 -

face of the U. S. payments deficit and about ways, in light of
the deficit, in which U. S. commercial exports, not financed
through the A.I.D. program, may be increased. In several
instances A.I.D. has obtained agreement from aid recipients on
measures, such as liberalization of exchange or trade restrictions,
designed to increase their imports from the United States.
Not only can this approach serve to offset any adverse
effect that the A.I.D. program in a particular country may
have on the U. S. balance of payments, but it can in sone cases
result in a positive balance-of-payments effect flowing from
the existence of the A.I.D. program in that country.
Research. ~.I.D. is also continuina-' research into the indirect
effects of the progran on the balance of paynents--the effects
Vlhich the "uccounting" method does not measure. vEth the results
of this research not yet avai lab Ie , it renLains diff icul t to
estimate the size of the feedback, substitution and other effects
of aid spending. Only indirect evidence is avai lab Ie. ~h tIl
respect to the question of how much SUbstitution occurs, for
example, an analysis of U. S. trade figures does not indicate
that a drop-off in con~ercial trade occurs when there is an
increase in aid. On the contrary, there is evidence that
comr;>,ercial trade I.vi th less-c:!evelopeo countries is increasing
even where aid Qay in se~e cases be increasing.
The less-developed countries do net, as a rule, increase
their foreign exchange reserves, although so~e of the develope~
countries do. i~evertheless, looking at the world as one large
trading conununi ty \.'i th an inf ini te l1ur,lbcr of rounds of respendinq
or feedbacks, there can be Ii ttle doubt that the great majori ty
of the dollars spent abroad under the A.I.D. program ultinately
come back to the United States.
Clearly, more work needs to be done on this score.
it seems fair to conclude that the inairect economic
effects of the 1\. I. D. program on the balance of payments rough ly
cancel out. Even allowing for some variation from tine to time,
the true effect of the program on the balance of payments would
probably not differ very much from the figures shown by the
"accounting" estir1ates referred to earlier.
I~anwhile,

Use of Local Currencies
Increasing stress has been laid on using local currencies
derived froIl the sale of commodity imports--including P.L. 480
irnports--in place of dollars. In all countries ",here a supply
of local currencies is available, these are used for any U. s.financed local costs of dollar-assisted projects, local salaries,
housing allowances and the like. In the so-called excess
currency countries--where U. S. holdings of local currency
greatly exceed U. S. needs--local currency is used instead of
dollars not only for local procurement, pay and allowances, but

- 8 -

also for such items as international air travel of l~erican
technicians and foreign participants, meetinsr international
commi~~ents to the Palestine Refugee Program and the Indus Basin
Development Fund, and the support of ~~erican-sponsored schools
and hospitals abroad.

Source:

Agency for International

Develop~ent.

- 2 -

The IE'll was not designed to ha.lt cO!'.lpletely the
outflow of pr iva te portfolio capi tal frorli the U.:::. to
the countries concerned, but rather to restrain the rate
of outflow to a more normal level anci. thus relieve the
pressure on the U. S. balancc-of-payr 1en ts posi tion.
After the a~option of the lET new foreign security
issues subject to the tax have virtually ceased. U.s.
transactions with foreigners in outsta~ding foreign
stocks and vonds, which had regularly resulted in
substantial net c. S. purchases for years prior
to the lET, shi fteCi to net sales from the middle
of 1963 through 1966. Por the first three quarters of
1%7, there \<las a resumption of net purchases but on a
very limi ted scale. Long-term cOrl1merical bank loan
cOLlII',itments to foreigners in countries suiJject to the
L'J. Lave fallen to a small fraction of the pre-tax
level, as comparee wi th only a moderate reduction J.n
cOIT'mitments to countries not covered by the tax.
On July 31, 1967, the tax was extended to July 31,
1%9, and discretion \'laS given the President to alter
the rate of tax froIT. zero to a level approximating an
annual interest burden of 1.5%. The rate currently
established by tlle Pres ident is the ceui valent of a
1.25% interest rate. stricter procedures for deterrnininq
prior American mvnership in the case of transactions in
foreign securi ties ar:long Americans were also established
in order to prevent evasion of the tax through false
representations as to &'1lerican ownership.
Commerce Department Program
The Voluntary Cooperation Program for business firms
was announced by the President on February 10, 1965, in a
special message to Congress. On I1arch 12, 1965, the
Secretary of Cornr;terce wrote to the officers of six hundrec.i
corporations inviting them to participate in the program and
to report regularly on their balancc-of-paynents transactions.
Companies were asked to increase their over-all balance-ofpayments contributions by
establishing a special balance-of-payments
ledger for 1964 and to estill\ate the amount
of improvement believed possible for 1965,
increasing their efforts to expand exports,

TAB D
Interest Equalization Tax (lET) and Voluntary Programs
The Interest Equalization Tax was proposed in July 1963,
at a time when the U. s. balance of payments was continuin~;
to show substantial defici ts and the Collar \\·as under
pressure in foreign exchange markets.
A rapid acceleration
in the outf low of pri va te portfolio capi tal from the Uni tr.c1
States was occurring, with u.s. purchases of new foreign
security issues rising from just ovcr half a billion
dollars per year in 1960 and 1961, to $1.1 billion in 19G2
and an annual rate of alrr.ost $2 billion in the first half
of 1963.
'l'he major Illotivation for the increased borrowing by
other industrialized countries in the u.s. capital rr.arket
was the higher level of interest rates prevailing in these
countries rather than a need on the part of the foreign
borrowers for foreign exchange. ':2he Furrose of the IFT ,."as
to compensate for this intere~t rate differential by increasing by the equivalent of 1% per vear the cost to
borrowers fr0m 0thcr industriali~ed countries of raising
long-term capital in the u.s. market.
The tax, which became effective on July 19, 1963,
(August 17, 1963, for listed securities) was originally
imposed on u.S. purchases from foreigners of foreign
stocks or foreign debt obligations with maturities of
3 years or morc.
The tax was applied to outstanding
issues as well as to new issues.
The principal exemptions
fron the tax included direct investment abroad, export
credits, investments in less-developec countries, and
in the new issues of another industrialized country, if
the President makes a determination that application of
the tax would have such consequences for ~le foreign
country as to threaten the stability of the international
monetary system.
Discretion was given the President to
apply the tax to bank loans, including those with a
maturity of one year or more, and this authority
was exercised on February 10, 1965.
rl'he original law which was due to expire on
Decelnber 31, 1965, was extended until July 31, 1967,
and foreign debt Obligations subject to the tax were
defined to include those with a perioe remaining to
maturity of 1 year or more.

- 3 -

returning more foreign earnings to the U.S.,
repatriating short-term funds which were held
ab~oad merely to earn a small but differentially
higher rate of interest,
delaying or postroning direct investment expenditures in developed countries when such
investments are of marginal iwportance,* and
making greater use of funds obtained abroad in
order to reduce the amount of u.s. capital outflow
into direct investment abroad.
In addition, since the beginning of 1966, each company
has been requested specifically to hold its direct investment capital transactions (including reinvested earnings)
with developed countries below an established, quantitative
target level. The object of the target was not to reduce
productive investnlents in plant and equipment abroad but
rather to lessen reliance on capital outflows from the u.s.
and the reinvestment of earnings to finance those investments.
Companies were urged to cancel or postpone direct investments
abroad only when their projects are of marginal importance
and do not soon result in higher exports or larger
investment incomes.
Between 1964 and 1966, the 708 companies currently
participating in the voluntary program increased their
over-all contributions to the u.s. balance of payments, as
defined under the overall improvement goal, from $15.1 to
$18.6 billion, or by nearly 23 percent. r1id-year revised
projections for 1967 indicated an over-all improvement this
year of $2.4 billion over the 1966 level, compared with the
goal of $2.0 billion originally set for the year. Most of
the significant growth expected in 1967 can be attributed
to continuing improvement in exports and net direct investment transactions.

U.S. direct investment abroad which had been well
under $1 billion a year prior to 1956 was close to
$3.5 billion in 1965 (see Table 2). Remitted earnings
plus receipts of fees and royalties rose considerably
less rapidly.

4 -

In 1966, participating companies, as a group, were
well under the specific direct invest~ent target.
They
also expected to remain considerably below the tighter
1967 target.
American plant and equipment expenditures in
Europe and Canada, which account for the bulk of u.s.
direct investment transactions with developed countries,
increased by over 71 percent from 1964 to 1967. During
the same period, u.s. direct investment outflows to
developed countries, adjusted for the use of funds borrowed abroac, declined by 28 percent. The large expansion
in plant and equipment expenditures despite smaller
adjusted capital outflows reflects the growing use of
funds borrowed abroad as an alternative to capital outflows and reinvested earnings for financing foreign
investment.
Borrowing abroad by u.s. companies and their
foreign affiliates has increased five-fold since 1964.
A total of $3.2 billion was borrowed overseas from 1964
to 1966, and an additional $1.5 billion is expected in
1967.
Federal Reserve Program
The Voluntary Foreign Credit Restraint Program for
banks and other financial institutions also originated
with the President's Balance of Payments Message of
February 10, 1965.
It was designed to restrain the
increase of foreign loans and investments by financial
institutions which, in the case of banks, had reached
a very high level in 1964 and had continued to accelerate
during the early part of 1965 (see Table 3).
As in the case of business firms under the Commerce
Department program, banks and other financial institutions
under the Federal Reserve program were asked to observe
target ceilings. The target for 1965 was for banks to
keep their outstanding foreign credits and investments
within 105 percent of the amount outstanding on December 31,
1964. Within the over-all ceiling, absolute priority was
to be given to bona fide export credits to foreign borrowers.

- 5 -

Among nonexport credits, priority was to be given to
credits to less-developed countries; and insofar as
reductions in other credits become necessary, they were
to be made in nonexport credits to developed countries
other than those largely dependent on u.s. financing,
such as Canada and Japan, or those involved in balanceof-payments difficulties, like the United Kingdom.
For 1966 and, again, for 1967 the ceiling was set
at 109 percent of the amount outstanding on December 31,
1964; and quarterly limits on the rate of expansion
within the target ceilings were suggested.
Nonbank financial institutions were asked to reduce
their holdings of liquid funds abroad to the year-end
total of 1963 or 1964, whichever was lower, in an
orderly manner. Other foreign assets with original
maturities of 10 years or less, and loans and advances
to their foreign branches and subsidiaries, were to be
held within 105 percent of the amount outstanding at
the end of 1964. Long-term credits (exceeding 10 years)
to other developed countries were not subjected to an
aggregate target but it was expected that increases in
the amounts of such credits outstanding would normally
be avoided, except in the cases of Canada, Japan, and the
United Kingdom. The nonbank financial institutions were
requested to observe the same schedule of credit
priorities as the banks. Remittance of earnings from
abroad to the fullest extent possible was urged.
Both banks, as a group, and nonbank fiancial institutions, as a group, have remained within the suggested
ceilings. As of September 30, 1967, the banks were under
their end-of-1967 ceilings by $783 million. As of June 30,
1967, the nonbank financial institutions were below their
end-of-1967 ceilings by $57 million.

- 6 Table 1
New Issues of Foreign Securities Purchased

--b{ u~_~~~~ -R~~1~ffn!~~i~~r!s~_~;1962-1966

1962
First
Ha1f*

1963
Second
Ha1f*

1964

1965

1966

TOTAL NEN ISSUES

1,076

999

251

1,063

1,206

1,210

lET Countries:
Nest Europe
Japan
Other~/

195
101
60

219
107
17

53
57

80
52

Subtotal

356

343

110

132

Of which:
(i) Subject to lET
(ii)

Exempt from
lET:
Reason:
a) Commitments made
prior to 7-18-63
b) U.S. exportrelated
c) Japanese exemption
d) Other

Latin pmerica~1
Other countries
International
institutions

(110)

(-- )

(--)

(9)

(-- )

(--)

(--)
(52)
(11)~/ (--)

(--)

Subtotal

II
2/
3/
4/

608
13
35

23
33

720

656

(-- )

457
102
77

758

110

Other Countries:

--cana<fa----

1967
First
Ha1f*

141

(10)~/(--)

922~/ 497

700
208
131

709
37
149

120

179

104

757
1,191
---- --------------

1,043

1,074

Not seasonally adjusted.
Australia, New Zealand, South Africa.
Includes Latin ~~erican Development Bank issue of $145 million in 1964.
Issue had maturity less than three years, which was lowest maturity
to which tax had applied prior to February 11, 1965.
Issue by united Kingdom subsidiary of Canadian firm.
Before deducting $162 million of Canadian Government purchases from
U.s. residents of outstanding Canadian and other foreign securities
in accordance with Canada's agreement not to let its foreiqn exchange
reserves rise as a result of borrowinq in the u.S.

Tabl.e 2

U. S. DIRECT INVESTMENT ABROAD

($million)
(1)
Book
Value
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966

11,788
12,979
14,721
16,253
17,631
19,395
22,505
25,394
27,409
29,827
31,815
34,667
37,226
40,686
44,384
49,328
54,562

(2)

(3)

Outflow
from u.s.
621
508
852
735
667
823
1,951
2,442
1,181
1,372
1,674
1,599
1,654
1,976
2,435
3,418
3,543

bl
bl

Earnings
(U.S. Share)
1,766
2,236
2,327
2,258
2,398
2,878
3,298
3,561
3,014
3,241
3,566
3,815
4,235
4,587
5,071
5,460
5,680

al Computed as earnings (Col. 3) plus royalties and fees
value of the previous year (Col. 1) .

bl
-

(4)
(Earnings
Remitted
to U. S.)
(1,294)
(1,492)
(1,419)
(1,442)
(1,725)
(1,912)
(2,171)
(2,249)
(2,121)
(2,228)
(2,355)
(2,768)
(3,044)
(3,129)
(3,674)
(3,963)
(4,045)

(5)
Royalties
and fees
126
129
130
128
136
158
229
238
246
348
403
463
580
660
756
924
1,045

(Col. 5) divided by book

Includes use ($52 million in 1965 and $445 million in 1966) of proceeds from
bond issues abroad by domestic - based finance subsidiaries of u.S. firms.

Source:

Derived from Department of Commerce data.

(6)

Yield al
17.7
20.1
18.9
16.2
15.6
17.2
18.2
16.9
12.8
13.1
13.3
13.4
13.9
14.1
14.3
14.4
13.6

'-oJ

- 8 -

Table 3
eha

ners

e in U.
inc1udin

or customers
($ million)

Total
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967*

Long-Term

Short-Term

-289
-89
-123
261
-590
-388
-552
-605
-503
-238
-1,148
-1,261
-451
-1,535
-2 , 464
93
253

-177
-14
-36
115
-102
-226
-166
-349
-152
-181
-153
-136
-127
-754
-941
-232
337

-112
-75
-87
146
-488
-162
-386
-256
-351
-57
-995
-1,125
-324
-781
-1,523
325
-84

-557

206

-763

*First three quarters only, seasonally adjusted.
Source:

Commerce Department Press Release, November 16,
1967, and Survey of Current Business, June, 1967.

TREASURY DEPARTMENT

January 18, 1968
FOR IMMED IATE RELEASE

TREASURY'S MONTHLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$l,SOO,ooOiooo,or thereabouts, for cash and in exchange for
Treasury bi Is maturing January 31,1968, in the amount of
$1,401,412,000, as follows:
27~day

bills (to maturity date) to be issued January 31,1968,
in the amount of $500,000,000,
or thereabouts, representing an
additional amount of bills dated Oc tober 31,1967, and to
mature October 31,1968, originally issued in the amount of
$1,001,770,000,the additional and original bills to be freely
interchangeable.
366-day bills, for $1,000,000,000, or thereabouts, to be dated
January 31,1968,
and to mature January 31, 1969.
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,Thursday, January 25, 1968.
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. (Notwithstanding the fact that the one-year bills will run
for 366 days, the discount rate will be computed on a bank discount
basis of 360 days, as is currently the practice on all issues of
Treasury bills.) It is urged that tenders be made on the printed forms
and forwarded in the special envelopes which will be supplied by
Federal Reserve Banks or Branches on application therefor
0

-2respons1ble and recogn1zed dealers 1n investment securities. Tende~
from others must be accompan1ed 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 atthe
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 rej ec t ion thereof. The Secre tary 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 $20G,OOO 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 January 31, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing January 31, 19680 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 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 froi.'
any Federal Reserve Bank or Branch.
000

TREASURY DEPARTMENT
=

Ja~uary

25, 1968

FOR IMMEDIATE RELEASE

TREASURY SECRETARY FOWLER NAMES BLAND W. WORLEY
AS NEW SAVINGS BONDS CHAIRMAN FOR NORTH CAROLINA

Bland W. Worley, Senior Vice President, Wachovia Bank and
Trust Company, Greensboro, North Carolina, was today appointed
by Treasury SecTetary Henry H. Fowler as volunteer State Chairm~ for the Savings Bonds Program in North Carolina, effective
January 25. He succeeds William H. Andrews, Jr., CLU, Jefferson
Standard Life Insurance Company, Greensboro.
Mr. Worley is a Director of Blue Bell, Inc., and the AdamsMillis Corporation. He is also a member of the Small Business
Corranittee of the American Bankers Association.
He attended Atlantic Christian College, Wilson, N. C.; received a B. S. Degree from the University of North Carolina in
1938; attended the Graduate School of Banking, Rutgers University,
in 1954; and the Executive Program, University of North Carolina,
in 1955.
During World War II, he served in the Army in the African and
European theaters and was discharged as a Major.
Mr. Worley is a past president and first honorary life member
of the Greensboro Chamber of Commerce. His civic activities include posts with the United Fund, Salvation Army, Boy Scouts of
America, and Wesley Long Community Hospital. He is a member of
the Board of Stewards, West Market Street Methodist Church.
In 1953, he was named Young Man of the Year in High Point, N. C.,
Md in 1959 he was selected Outstanding Young Businessman of North
Carolina.
Mr. Worley is married and has three children.
000

TREASURY DEPARTMENT
(

R RELEASE 6: 30 P.M.,
~ay,

January 22, 1968.
RESULTS OF TREASURY'S WEEKLY BILL OFFERING

Toe Treasury Department announced that the tenders for two series of Treasury
11s, one series to be an additional issue of the bills dated October 26, 1967, end
e other series to be dated January 25, 1968, which were offered on January 17, 1968,
re opened 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. 'llie details of the two series are as follows:
NGE OF ACCEPTED

MPETITIVE BIDS:

High
Low

Average
~
2l~
l~

182-day Treasury bills
maturing July 25, 1968
Approx. Equiv.
Price
Annual Rate
5.305~
97.318
97.300
5.341i
97.303
5.335~

91-day Treasury bills
maturing April 25, 1968
Approx. Equiv.
Annual Rate
Price
5.032~
98.728
5.076~
98.717
98.719
5.068~

Excepting 1 tender of $164,000
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

TAL TENDERS APPLIED FOR AND ACCEP'IED BY FEDERAL RESERVE DIS'mIC'lB:

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

Ap~lied

For
$ 29,250,000
2,432,910,000
37,653,000
40,395,000
22,992,000
54,187,000
230,810,000
61,037,000
21,692,000
27,942,000
26,030.000
232,371,000

Acce~ted

$3,217,269,000

$1,503,317,000

12,813,000
1,142,497,000
14,846,000
22,848,000
9,610,000
21,173,000
142,176,000
37,137,000
9,092,000
19,967,000
15,130,000
56,028,000

£I

A~Elied

For
$ 22,708,000
2,043,229,000
15,096,000
44,928,000
10,093,000
28,309,000
293,327,000
40,055,000
18,446,000
22,513,000
19,750,000
120,356,000

AcceEted
$
4,308,000
786,395,000
5,136,000
23,596,000
5,093,000
10,163,000
115,038,000
13,455,000
3,946,000
12,763,000
9,650,000
11,4.83,000

$2,678,810,000

$1,001,026,000 ~/

Includes $254,803,000 noncompetitive tenders accepted at the average price of 98.719
Includes $138,550,000 noncompetitive tenders accepted at the average price of 97.303
~ese rates are on a bank discount basis. The equivalent coupon issue yields are
S.22~ for the 91-day bills, and 5.57~ for the 182-day bills.

1139

TREASURY DEPARTMENT

January 21, 1968
FOR IMMEDIATE RELEASE

There have been reports that, during the past week or
two, some Canadian subsidiaries of U.S. corporations have
been transferring abnormally large amounts of funds from
Canada to the U.S. and that these transfers have resulted
in some pressure on the Canadian dollar in the exchange
market.
The new U.S. balance of payments program does not call
for and is not intended to have the effect of causing
abnormal transfers of earnings or withdrawals of capital
by U. S. companies having inves tments in Canada. Moreover,
the U.S. Government has already made it clear, and now
repeats, that Canadian subsidiaries of U.S. corporations
are expected to act as good corporate citizens of Canada.
The new U.S. balance of payments program covering private
capital flows and the Canadian exemption from the Interest
Equalization Tax provide scope for continued large flows of
capital to Canada.

000

F-1140

STATEMENT OF THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
BEFORE THE
HOUSE WAYS AND MEANS COMMITTEE
ON THE PRESIDENT'S FISCAL PROGRAM
MONDAY, JANUARY 22, 1968, at 10:00 A.M.
Mr. Chairman and Members of the Committee:
I appreciate this opportunity at the start of this session to
request early enactment of the President's tax recommendations, including a temporary 10 percent surcharge on individual and corporate income
taxes.

My colleagues and I will try to put these proposals in the

perspective of the current situation

budgetary, economic, and

financial.
You are familiar with the tax program itself in view of last year's
he~ings.

Some of the recommended dates have been changed to accommodate

to the fact that we are now in 1968.
This tax program is the key part of our fiscal response to a set of
major challenges that face our Nation.
In international security affairs we have committed ourselves to
repelling Communist aggression in Southeast Asia.

Hundreds of thousands

of our young men have accepted the burdens of carrying this commitment
on the battlefields.

It remains for the rest of the population, through

the Congress, to accept temporarily increased taxes as the most desirable
means of financing a portion of this national effort.

In domestic affairs we have the challenge to government to help meet
many problems beyond the scope of individual or private action.

Meetin~

this challenge demands the courage to support cutbacks in government

- 2 -

e~enditures

for low priority programs and a willingness to meet the

cost of the remaining activities -- in a manner conducive to the maintenance of a stable and strong but well-balanced economy -- in a manner
that minimizes the dangers of serious trouble with respect to prices,
interest rates, credit availabilitY,and the health of our home-building
industry.
In financial affairs we have a national and international responsibility of the highest priority which has grave significance for our economic
security and strength and that of the entire free world.

It grows out

of the role of the dollar in the international monetary system -- as a
reserve currency and the principal "transaction" currency of the free
world.

It is our responsibility under present international monetary

conditions, disturbed by the recent devaluation of the British pound
Md a deterioration in our balance of payments position, to take decisive
action to bring our balance of payments to -- or close to -- equilibrium
in the year ahead.

A tax increase to preserve a stable economy, to protect

our trade surplus, and to give the world confidence in our fiscal responsibility in this area, vital to others as to the United States, is the
Single most important step we can take to fulfill that responsibility.
A proper response to all of these challenges at home and abroad
requires that we promptly enact the surcharge legislation.

- 3 Developments Since November

Mr. Chairman, the reasons for the surcharge that I gave in August
and November have been strengthened by recent developments, particularly
developments since we last testified in November.

The most significant

developments relate to the Federal budget, the balance of payments,
the credit markets, and the economic situation.
The Budget and EXEenditure Control
When we testified last November, we

presented a legislative

proposal for reducing obligations below the fiscal year 1968 budget
proposals then outstanding.

The reduction was to be, for civilian

agencies, 2 percent of personnel costs and 10 percent

of controllable

costs; for defense, it was to be 10 percent of non-Vietnam, new obligation
authority.
This measure was enacted by the Congress in December.

It is now

an operative part of the budgetary situation for fiscal year 1968 and
provides a reduced base for fiscal year 1969 projections.
That measure in combination with Congressional action on specific
appropriation bills has reduced obligations in fiscal year 1968 by
$10 billion from earlier requested levels.

In many cases the reduction

of an obligation in 1968 will reduce expenditures in fiscal year 1968.
In other cases the expenditure reduction will show up in fiscal year 1969
or later.

The expenditure reduction to be achieved in fiscal year 1968

is estimated to be

$4.3 billion.

- 4 We have now the dimensions of the President's budget for the fiscal
Jee;[ 1969.

Director Schultze will go o'rer these, but I 'want to bring

out some highlights.
The scale of increase in expenditures is less than one-half that
of 1967 over 1966 and substantially less than that of 1968 over 1967.

The fiscal program provides an increase of budget outlays of fiscal
year 1969 over fiscal year 1968 which is less than the expected normal
grmrth in revenues from expansion of the tax base through the rise in
GNP.

Even if no changes were to be made in existing income and excise

tax rates, the budget deficit would thus be lower in fiscal year 1969
than in fiscal year 1968.
But it would not, in the current economic situation, reduce the
level of deficit financing to a point consistent with the security and
stability of the United States

econo~v.

For this reason it is essential that the Congress enact tax legislatir,n that would increase budget receipts befcre the end of fiscal year 1968
and maintain thL:; hiGher level through the fiscal year 1969.

The budget

deficit for fiscal year 1968 would be reduced by the tax program from
$22.8 billion to $19.8 billion, and in fiscal year 1969 it would be
reduced from $20.9 billion to $8 billion.

It is not realistic from a standnoint of tirEinc-: or amounts to
oct to achieve this scale of deficit reduction by cutting expenditures
3.-;

long as military activities at their pre::;,nt Ipvel -;Jersist

South Vietnam.

Outlays in the controll:lblc civilian programs are only

Slightly higher than the already tight L~vel of 1968, and rise by
significantly less than the incy::ase in pa~;ments nn prior contracts.

- 5 Nor is the problem answered by pointing to the increase in budget
expendit1lres in the budget for

1969 over fiscal year 1968 of $10.4 billion.

Of this tota.l:

$3-1/4 billion is for national

defens~ including the weapons

program of the Atomic Energy Commission.

$1 billion is for increas ed interest payments on the public debt.
$1-1/2 billion is for the second step of the civilian and military
pay increase provided by Act of Congress la.te last year.

$4-3/4 billion is for mandatory payments required by laws passed by
the Congress, such as social security, public assistance,
and

p~ymen~s

to veterans.

The budget will recommend reduction and reforms in various programs
which will cut fiscal year

1969 obligations for these programs by almost

$3 billion belovl the levels appropriated in 1968.
reductions will be unpopular.

Some of the program

The President's fiscal program represents

a tough polic y, but one which is responsive to important social needs while
making the hard decisions to postpone or eliminate some desirable but
lower priority i terns.
We need now to address ourselves to the problem of how to finance
this l:ludget.

c~nnot

procrastinate fw'ther in a vain hope that a

different and substantially lower budget will soon be forthcoming.
Prices and the Economic Outlook
Since our testimony of last November, the economy has developed
substantially along the lines that we had predicted at that time. Income
has risen sharply, and there has been disturbing price pressure.

- 6 The level of unemployment at the end of 1967 was, seasonally adjusted,

j.7 percent and this after an unusually large gain in the civilian labor
force of nearly 1.6 million in 1967.

In the last half of

1967, however,

general prices, as measured by the GNP deflator, rose at the disturbing
rate of 3.8 percent a year.
Broadly, one goal of our fiscal program with the tax increase is to
hold the growth of demand) that is, the growth of money GNP, to about
$60 billion.
increases.

As you will see, this will involve some unwelcome price
Due to the sharper rise in consumer prices in 1967, it is

inevitable that wage increases in 1968 will be somewhat above
productivity gains.

Thus, somewhat higher prices are in prospect.

BaSically, our tax

prog~am

to check the growth in money demand in

1968 is a matter of assuring that the price increase in 1968 slows down
from the rate experienced in the second half of 1967.

This will make it

possible to move further in the direction of price stability in 1969.
I cannot overemphasize this pcint.

We are not saying merely that

a tax increase would be nice because we should have a better price
performance than

'Irp

had in 19 67.

We are saying more than this,

that failure to take action to hold down the growth of money demand in

1968 would lead tc a serious, progressive increase in domestic prices.
It would lead to larger wage increases, and it would make it still harder
to move tmV8.rd price stability in 1969.

- 7Financial Developments
Let me turn now to developments in domestic financial markets
since we last met with this Committee.

On balance, financial conditions

improved slightly in January, although interest rates at the end of

1967 were extremely high.

Both corporate bonds and State and local

bonds vlere yielding rates '"ell above their 1966 highs.
on

The yields

mortgages sold in the secondary market were back to their

1966 highs.
Money and capital markets remain cautious and uncertain.
rates and security prices will still gyrate dizzily at
the prospects for Congressional tax action.

app~rent

Interest
changes in

Almost all financial

market observers fixed the principal responsibility for the financial
pressures in the second half of 1967 on the United States Government's
fiscal situation.

The prospects of large

Federal borrowing in the

absence

of a tax increase so dominate the financial markets that an investor's
outlook at any particular time must be governed by his judgment as to
the chance of a tax increase and the prospective Federal deficit.

The

financial markets received a considerable lift in December on the
announcement that this Committee would take up consideration of the tax
proposal tod2,Y.

- 8 Then early in January domestic financial conditions were buoyed by
two additional elements -- our balance of payments program announced on
January 1 -- and press comments suggesting the greater likelihood

peace negotiations with Hanoi.
This market improvement lasted until early last week.

Then,

mterest rates rose sharply again as stories about the possible
imminence of peace talks diminished and as our communications media
reported somewhat pessimistically on the prospects for a tax increase.
This brief chronology underscores the importance financial markets
place on a tax increase.

This widespread feeling in financial markets

is based on a realistic estimate of the la.rge dema.nds on credit and
~pital

markets -- from private borrowers, State and local governments,

and the Federal Government -- that are likely to persist if a tax increase
is not enacted.

I shall have more to say about likely credit demands in

this event later in my remarks.
The Balance of Payments
When we appeared before you on November 29, I said, "}1ake no
mistake about it -- confidence in the dollar and the incernational
monetary system depends on the ability and determination of the
United States Government to act responsibly.

- 9 Developments in the weeks following the sterling devaluation
both befoTe and afteT the Committee hearings on November 29 and 30
served to place in sharp focus the need for decisive and responsible
action on our part.

Against the background of a persistent d efici t

in the United States balance of payments, the British move resulted in

weakening of confidence in currencies and was accompanied by a burst of
speculation in the gold markets which led to a loss of over $1 billion
to our gold reserves.

In addition, it became evident during this period

that our payments position in the fourth quarter had deteriorated sharply,
and that for the year as a whole, we would be running a deficit of

$305 billion to $4 billion.

The fact that the trade figures for

October and November showed a disappointing qecline in
trade surplus was quite disturbing.

the

It was clear that new and decisive

measures had to be taken to move the United States balance of payments
position strongly toward balance.
These measures were announced on January 1 by the President, and you
are familiar with them.
In order to give understanding of this Action Program and its
~portance

at this point of time to the people of the United States

and peoples everywhere, the Treasury Department issued last week a

- 10 -

report entitled, ItMaintaining the Strength of the United States Dollar
in a Strong Free World Economy. It

This document describes in detail the

background and reasons for the January 1 Program.

It describes what we

have done to date and what we propose to do, both over the short and
long term, to bring out balance of payments into equilibrium and keep
it there, as well as the relationship of this action to the viability
of the international monetary system and maintaining confidence in its
stability.
The keystone to this balance of payments program is the surcharge
proposal you have before you.

The other direct measures added in the

January 1 Program to the pre-existing effort are like the four fingers
of the hand.

They cannot be effective in dealing with the problem without

the tax proposal which is the thumb, enabling us to get a firm grip on
the problem.
As the President said in his January 1 Message:
"The first line of defense of the dollar is the strength
of the American economy.
No business before the returning Congress will be more
urgent than this: To enact th~ anti-inflation tax which I
have sought for almost a year. Coupled with our expenditure
controls and appropriate monetary policy, this will help to
stem the inflationary pressures which now threaten our economic
prosperity and our trade surplus. 1I

- 11 The Tax Program
These developments are all in the direction of strengthening our
conviction as to the need for a temporary, but substantial, tax increase
that would produce, at an annual rate, about $10 billion.

Our program

at the rates proposed last AU@lst does this, and it also postpones the
revenue losses of almost
excise tax reductions.

$3 billion a year that would come fram scheduled
Only the dates have been changed to recognize

that we are already in 1968.
Our tax program is this
We urge the enactment of a 10 percent surcharge on the income
tax of individuals and corporations.
On individuals the 10 percent surcharge would be effective
April 1, 1968, and continue through June 30, 1969.

The effective

rate on individuals in calendar year 1968 would be 7.5 percent
of their present law tax.

The surcharge would not apply to about

17 million individuals whose taxable income does not rise above
the second bracket.
On corporations the surcharge would be effective January 1, 1968,
and continue through June 30, 1969.

This would give an effective

rate of 10 percent for corporations in calendar year 1968.
Corporations should be moved to the same fully current payment
basis now applicable to individuals.
The automobile

and telephone excises now scheduled to be

reduced April 1 should be extended, at present rates to
June 30, 1969.

- 12 The specific revenue estimates by fiscal years are given in the
following table:
Table 1
Estimated Effect of Proposal on Budget Revenues
(In Millions)

Fiscal year: Fiscal year

Proposal

1968

1969

$930
970
800

$6,920
2,880
400

2,700

10,200

Telephone service ....••........•.•••••••.••..•.•

190
116

1,500
1,160

Subtotal, excise extensions .•...•.•.•••..••.••

306

2,ti)0

Total revenue under proposals .....•........••.••••

3,006

12,860

Income taxr:::s:
Proposed surcharge:
Individual income tax ....•....•.•.•..•
Corporation income tax ..•...•.....•..•..•.••.
Acceleration of corporation tax payments ......••
0

••••••

Subtotal, income tax proposals .•...•..••••••.•
Excise taxes -- extension of present rates:
Automobiles .................................... .

- 13 -

There has been, I think, some confusion as to the magnitude of
this surcharge.

It is not 10 percent of income; it is 10 percent of

the present law tax.

In the aggregate Americans pay in Federal indi-

-ridual income taxes about 10 percent of their total income.
surcharge durinG the 15-month period while it is in effect

The
will be

about 1 percent of income.
Another way of putting the size of this surcharge in perspective
is to recall that the tax reductions enacted in 1961-65 came to 20
percent of the tax due, or somewhat over 2 percent of the income of
Americans.

Our proposal is to restore, on a temporary basis, less than

half of this cut.
Another way of viewing this surcharge is to look at shares of the
national output.

In 1963, excluding the largely self-financed so~ial

insurance, the trust fund:, Federal GoverDIT.ent expenditures were about
16 percent of GNP.

In 1968, they will be 17 percent even when we include

3 percent for Vietnam.
have: not

i~r01.ffi

Our total expenditures for other than Vietnam

as fa::; t as the GNP.

We are able, therefore, to cover

less than half of the war cost out of increased taxes.
As to termination

this surcharge, it will be keyed to our ability

to reduce substantially expenditures in Vietnam following a cessation of
lClrge scale hos tili ties

If it occur::; before June 30, 1969, the President

"Iill recommend early termination of the surcharge.

- 14 The Risks of Failure to Act
The issue on any tax increase is not whether we like it or not.
Of course we don't like it.

The only issue is whether we dislike

it as much as we would dislike the
tax increase.

consequenc~2

of not enacting the

If you will examine these alternatives with me, you

':Jill find the case for

a tax increase overwhelming.

I am reminded of the advice of Edmund Burke.

On one occasion

he incurred the wrath of his constituents in Bristol by his vote
on an Irish Shipping Bill.

He wrote an open letter to the merchants

of Bristol explaining why the bill was really in their interests.

closed 1dHh the corrunent, "I would rather displease my constituents
th'ln harm them. II
I want to discuss with you the risks that we run through consequences of failure to pass a tax bill.

These risks fall in three

an:as, financial and credit markets, prices and inflation, and the
balance of payment s .
Financial and Credit Markets
An obvious alternative to a tax increase is tighter credit since
high interest rates can curtail demand as does a tax increase although

- 15 it curtails the demand of different people.

Governor Martin will

discusS this consequence with you in greater detail.
I want to emphasize, in the strongest terms, my conviction that
it would be a reckless course of action to leave to monetary policy
the task of curtailing demand.
Prospects for avoiding strains in money and capital markets
in 1968 depend crucially on enactment of the tax increase.

Failure

to pass the surcharge would mean that the Federal Government would have
to continue to tap the securities markets in volume.

These Federal

demands for funds would be occurring in the context of a more rapid
economic expansion in the private sector, which would strengthen
the demands for funds by private borrowers.

The provision of needed

State and local services will also call for larger borrowing by these
instrumentalities.
Moreover, in the absence of a tighter fiscal policy, additional
monetary restraint would no doubt have to be brought to bear to stem
the heightened prospects for accelerating inflation.

This would

contribute further to upward pressures on market rates of interest.
Interest rates on long-term securities would no doubt rise to levels
above their recent highs.
peaks of 1966.

Shorter term rates might again approach the

- 16 With this rise in interest rates, and reduced credit availability,
some savings institutions and some potential borrowers are bound to
get hurt.

The net inflows of savings to thrift institutions began

to slow in the latter months of 1967 in response to rising interest
rates on market securities.

Correspondingly, these institutions

became increasingly reluctant to continue to commit funds to the
mortgage market in the amounts they had earlier.
This trend toward "disintermediation" would step up were market
interest rates to rise much further.

This would mean that the housing

industry undoubte11y again would suffer most, as it usually has when
interest rates are high and credit tight.

And along with this squeeze

in housing credit, one would anticipate a significant curtailment
in fund availability to such other borrowers as State and local
governments and small businesses.
To refuse to take fiscal action and leave to monetary policy the
responsibility for a credit control approach to preventing inflation
would be like enacting a special tax that would fallon home buyers,
home-builders and suppliers, the savings institutions, State and local
governments, and small business -- the groups most affected by credit
tightr..ess.

- 17 Clearly this is an ineQuitable alternative to a general tax increase.
It will result in an unbalanced pattern of growth.

It leaves an inade-

Quate mix of monetary and fiscal policy that is unwelcome to those on
this side of the table responsible for both of these elements of
economic policy.
Prices and Inflation
There are both limits and risks involved in trying to control
inflation through resorting to credit restraint while fiscal stimulus
flows from a failure of Congress to enact the surcharge.

And the risks

are unacceptable if inflation is not restrained in 1968.
I IIDlst start with our recent experience "vi th prices.
had an appreciable amount of price inflation.
and the GNP deflator rose about 3 percent.
understates the problem two ways.

In 1967

We:

Thus the cost of living

The statistic, however,

The overall rise of 3 percent occurred

despite generally lower prices for farm goods and for many industrial
rm'l materials.

Further, prices rose only a bit over 2 percent in the

first half of the year and almost 4 percent in the last of the year.
Thus we are going into 1968 with a very fast rate of price increase.

A basic point that I need to stress here is that price changes are
close~y

related to things that have happened in the past.

In 1967 wage

increases were relatively high in large part due to the price increases
that occurred in 1966 and were associated then "vith rising farm prices.
Thrring the first half of 1967 poor market conditions made it impossible to
pass on in prices many of the wage increases that were occurring, but these
started to be reflected in prices in the last half of the year.

- 18 1968 wage settlements will reflect a com-

For the first half of

bination of adjustments to the cost of living increases in
completion of multi-stage wage settlements arrived at under
labor contracts in

1966 and 1967.

1967 and the
lon~

term

In addition, farm prices are likely

to increase somewhat.
Since we will be at substantially full employment, these wage
increases are likely to be passed on in higher prices.
we could say that for the first half of

In the main,

1968 something like a 3-1/2

percent price increase is nearly assured.
With a tax increase there is every reason to expect that the rate
of price increase in the las t half of
half.

1968 will be lower than the firs t

Under this projection we would be coming out of

1968 with a

tapering off of the rate of price increase, and the prospects for moving
t01:Tard price stability in

1969 would be excellent.

Without a tax increase money demand will continue to grow through
the las t half of

1968.

There will be continuing shortages of labor,

particularly skilled labor.

These are precisely the circumstances under

which we would expect that any cost increases could be passed on and
business firms generally would be in a position to raise price margins.
If prices are accelerating at the end of

1968, there will be

a lot more at stake than what would appear from the simple statistic
that the average price increase for the year was 4 percent rather than
: percent.

What would be at stake is the price pattern in

1969.

The

- 19 cost of living would be higher and rising.

Labor would expect to get

wage increases to cover these cost of living increases.

The wage in-

creases would push prices up still higher in 1969, and we could be well
on the way to a spiralling price inflation.
The risks that we run by tolerating a budget deficit of over $20
billion for two years in a row and permitting the resulting inflation
should be unacceptable.
Balance of Payments
A failure to take this tax action promptly will risk a declining
trade surplus.

This trade surplus is the mainstay of our balance of

payments position.

There are both short term and long term dangers to

it if there is a failure of fiscal policy.
This short term risk is a flood-tide of imports -- as in late 1965
and 1966 -- induced by an economy running at a very high rate of speed.
When our rate of economic growth in money terms expands at a rate of

8 or 9 percent, there is an increased propensity to import.

In that

situation imports climb relative to our gross national product and our
trade surplus evapor8.tes.
As in 1966, excessive increases in income -- especially when we
have full employment -- ,'Till be quickly translated into higher prices
and capacity bottlenecks with a resulting surge in imports and a slowdown in exports.

In 1965 and 1966, a period in which GNP growth

- 20 exceeded 8 percent per annwm, our average rate of growth in imports
exceeded 16 percent per annum a.s compared with 5 percent in 1963 and

9. 6 percent in 1964.
Our trade surplus -- the excess of a large amount of exports over
almost as large amount

of imports -- changes sharrly with relatively

small changes in imports or exports.

If our imports rise 1 percent

faster than our exports, we would in one year lose $300 million of our
trade surplus.
The long term threat to our trade surplus to which fiscal action
is importantly related is the danger that a continuing spiral of
increasing costs and price pressures wi 11 undermine the long term
competitive position of the United States in markets abroad and at
home.

With the economy picking up momentum in late 1967 and in 1 168,

and with cost and price pressures increasing, the risk of no tax
increase is for higher pricps in 1968 and particularly for a higher
rate of price increase toward the end of 1968.
pl~

The higher money incomes

the loss of competitive position from rising prices of United

States exports could

mal~e

substantial inroads on our trade surplus.

All other efforts to improve our balance of payments position
run the risk of failure unless we
that floods us with imports and

avoid the kind of excessive growth

lli~less

we return to relative price

stability and cost competitiveness in the United States economy.

- 21 -

The prompt enactment of the President's tax increase program is
the single most important and indispensable step this Nation can take
now to improve our balance of trade and payments and protect the dollar and
the international monetary system.
The role of the Federal Government in the maintenance of an
economic environment in which price and cost stability can be sustained
is widely recugnized by international financial authorities.

The

Balance of Payments Adjustment Process Report by Working Party No. 3
of the Organization for Economic Cocperation and Development stated:
"It is agreed Lhat there are certain general
principles (or 'rules of pruden~e') which should be
followed by all countries in order to prevent as far as
possible the emergence of balancr; of payment:,; disequilibrium.
In the field of demand managcm~nt, it is agreed that it should
be a general object of fiscal and monetary policy to maintain
demand at a level which is neither excessive nur deficient, [lnd
to promote a continuing expansion of total national expenditure
in line with the trend growth rate of productive potential. There
is also agreement that, in general, fiscal policy should playa
major role in the management of demand."
Over time we mus+ be able to look to our trade surplus to be
sufficiently large to finance a large portion of onr other expenditures abroad.

The sooner we achieve a sustained improvement in our

trade surplus, the easier it wtll be for us to phase out the restrictive measures we have found it necessary to take.

In addition, if it is to be effective, the new balance of payments
program requires other nations to make adjustments which in many cases
will not be pleasant -- particularly for th

surplus countries in

- 22 -

Western Europe where the impact will be sharpest.

It will be far

easier for them to make these adjustments and not retaliate against
o~

actions, if they know that they are not carrying the whole burden

themselves -- but that we, too, are taking difficult measures at homeo
Last December the OECD Economic Survey of the U.S. stated:
"An immediate concern of the authorities must be to avoid
an excessive increase in demand, which would strength~n cost
price pressures and aggravate the balance of payments problem.
Given the likely strength of the expansion now developing, this
can hardly be achieved without the tightening of fisrel policy
proposed by the Presidm t. II
A United States economist writing for a New York investment
counselor last week described the situation as follmls:
"The 10 percent tax surcharge has become a symbol
of the Sincerity of the U.S. GovernmentYs determination
to defend the dollar. Unless Congress moves promptly
to enact the surcharge, Europe will not be impressed
with the rest of the balance of payments programs.!1
This observation squares completely with all the information and
impressions we have received throu.gh official channels. For example,
it was indelibly impressed on Under Secretary Katzenbach and Under
Secretary Deming in their recent mission to seven countries to explain
the new Balance of Payments Program.
Action on the surcharge is imperative if we are to assure the
Success of the Balance of Payments Program and maintain the strength
of and confidence in the dollar.
Conclusicn
Mro Chairman, one may reasonably ask, however, whether there are
risks if we pass the surcharge.

- 23 There may be some who say that any increase will halt our economic
expansion and push the economy into a stall or even worse.

We do not

foresee this as a real or substantial risk that is being run.
and

prospective demands are strong.

Current

The consensus of private forecasts,

which typically have the assumption of a tax increase, agrees on this
outlook.

If by 1969 things change, both fiscal and monetary policies

can be modified.

In any event, a new decision will have to be taken

since the proPQsed surcharge is scheduled to expire on June 30, 1969.
There may be some who feel that a temporary tax increase will not
remain temporary and that we risk being locked into a higher level of
taxation.

No one can, of course, say that all things labeled temporary

live up to their label.

We have had "temporary taxes" that have out-

li ved their "temporary duration."

For the surcharge, however, there is

solid foundation for confidence in the belief that it will remain
temporary.
For one, the surcharge is needed because of hostilities in Vietnam.
Its yield is only a portion of those costs.

Moreover, the tax reductions

of 1964 and 1965, have demonstrated to the country the benefits that
flow to our economy and to all in the private sector from the policy of
using some portion of the fiscal dividend that comes from economic
growth to reduce our level of taxation.

This policy will be reinforced

at the end of hostilities in Vietnam, which will surely come, by the
need to stimulate the private sector to put to peacetime tasks the

- 24 resources of men, materials, and facilities that have been used in that
effort.

Indeed, the enactment of the surcharge now will provide a

ready means for a smoother post-Vietnam adjustment through its quick
removal.
The clear and present advantages of enacting the tax proposals
f~

outweigh the minimal potential risks involved in taking the action.

The prompt enactment of the tax proposal at this session of Congrr,;ss
would:
Reverse sharply and decisively the trend toward increased
deficit financing which began with our increased participation
in hostilities in Southeast Asia in the fiscal year 1966.
Reduce the budget deficits for fiscal yeaffi1968 and 1969 by
approximately $16 billion.
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 United States economy.
Reduce appreciably the most important source of pressure on
our credit markets:

the huge over-hang of Federal borrowing

which steadily ups interest rates.
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
credit.

- 25 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. I!
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 and the stability of the international monetary
system.

Mr. Chairman, I would like to submit for the record a bill incorporating the statutory language to carry out our surcharge proposal
and a

technical explanation of that bill.

000

TREASURY DEPARTMENT
Q

January 22, 1968

FOR IMMEDIATE RELEASE
Attached is a proposed bill and accompanying
technical explanation embodying the recommendations
contained in Secretary Fowler's statement today
oefore the House Ways and Means Committee.

Attachment

A BILL
To amend the Internal Revenue Code of 1954 to impose a temporary tax
surcharge, and for other purposes.
Be it enacted by the Senate

andJi~use~f

Representatives of the

United States of America in Congress assembled,
SECTION 1.
(a)

SHORT TITLE, ElrC.
Short Title.--This Act may be cited as the "Tax Surcharge Act

of 1968."
(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

section or other provision of the Internal

Revenue Code of 195 LI-.
SEC. 2.
(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
"Sec. 51. Tax Surcharge.
"SEC. 51.

"(a)

TAX SURCHARGE.
I mposition of Tax.--

"(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

Year

Percent
Individuals
Corporations

1968
1969
"(2)

7·5

5·0

leJ.O

).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 whosetaxable year is other than the calendar year, a
tax equal to-"(A)

Ten percent of the adjusted tax for the

taxable year, multiplied by
11

(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-11

(A)

(B) April 1, 1968, in the case of an individual.

January 1, 1968) in the case of a corporation, and

- 3 "(b)

Low Income Exemption. --Subsection (a) shall not apply if

the adjusted tax for the taxable year does not exceed-"(1)

$290, in the case of a joint return of a husband

and wife under section 6013,
"(2)

$220, in the case of an individual who is a head of

household to whom section 1 (b) applies, or

"(3)

$14), 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 881j and
"( 2)

any increases in tax under section 47 (a) (relating

to certain dispositions, etc., of section 38 property) or section

614 (c) (4)
section

615 (a) prior to aggregation),

and reduced by an amount equal to the amount of any credit which would
be allo~able under section

37 (relating to retirement income) if no tax

were imposed by this section for such taxable year.

"(d)

Authority to Prescribe New Optional Tax Tables.--

Secretary or his delegate

The

may prescribe regula.tions 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.

The composite rates so determined may be

rounded to the nearest whole percentage point and the tax tables so
determined may be rounded to the nearest whole dollar.

If the secretary

or his delegate prescribes regulations pursuant to this subsection,
then notwithstanding section 144( a), in the case of a taxpayer (whose
taxable year is the calendar year) to whom a credit is allowable for

1968 or 1969 under section 37, the standard deduction may be elected
for such year regardless of whether the taxpayer elects to pay the
tGX

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--

11(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-

"(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.
11

(f)

Withholding on Wages.--In the case of wages paid after

Apri 1 1, 1968,

and before July 1, 1969, the tax required to be

deducted and withheld under section 3402 shall be determined in
accordance with tbe 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)
"(g)

Western Hemisphere Trade Corporations and Dividends on Certain

Preferred Stock.--In computing, for a taxable year of a corporation, tbe
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 241 (a)(2), relating to deduction with respect

to certain dividends paid by a public utility, or

11(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
i;npCGed under subsection (a) for such taxable year.
11

(h)

'~xp!essly

Special Rule. - -For purp-:Jses of this title, except as otherwise
provided in this section, to the extent the tax imposed by

this section is attributable (under regulations prescribed by the Secretary
or his delegute) 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

tJle amount of tax deemed p9.id under section 852 (b) (3) (D) (ii) and the
ddjustment to basis described in section 852 (b) (3)( D) (iii), the
percentagES set forth therein shall be adjusted under regulations
prescribed by the Secretary or his delegate
wl1ich 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 thereo f the fo llowing :

"(3) Taxable years beginning after 1964 (except taxab.LE:; years
which include any part of the surcharge period).--tl, and

(3)

by addinG after the table in paragraph (3) the following:

"In the CJse of a taxable year beginning before the surcharge
period and ending within the surcharge period, or beginning
within the surcharge period and ending after the close of the
surcharge period, the required minimum distribution shall be
an amount equal to the sum of-"(A)

that portion of the minimum distribution which would

be required 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 required 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 January 1, 1968, and ending at the close
of June 30, 1969. 11
(c)

Clerical Amendment.--The table of parts of subchapter A

of chapter 1 is amended by adding at the end there"f the following:
"Part V.
(d)

Tax

Surcharge~1

Effective Date. --The amendl1ients made by this section shall

apply-(1)

Insofar as they relate to individuals, with ~~spect

to taxable years ending after March 31, 1968, and beginning
before July 1, 1969.
(2)

Insofar as they relate to corporations, with respect

to taxable years ending after

December 31, 1967, and beginning

before July 1, 1969.
SEC.

RAIS:rnG FROM 70 PERCENr TO 80 PERCENT THE ESTIMATED TAX
WHICH MUST BE PAID :rn INSTALLMENTS BY CORPORATIONS.

(a)

In Genera1.--Section 6655 (b)(relating to amount of under-

payment)} and section 6655 (d) (relating to exception), are amended
by striking out "70 percentfl each place it appears therein and inserting
.
In

l'leu 'c'h ereo f

0°0

percentil •

- 9 (b)

Effectj. ve Date. -~~'he amendments made by this section shalJ

apply with respect to taxable years beginning after December 31, 1967.
SEC.

4.
(a)

PPIMENT OF FIRST $100,000 OF ESTIMATED TAX.

Requirement of Declaration.--Section 6016 (a) (relating

to requirement of decJaration of estimated. tax in case of corporations)
is amended by striking out !!$lOO,OOO!! 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.-"(1)

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 :rart IV of subchapter A of chapter 1, over

"(B)

an amount equal to the applicable exc 1usion percent age

(determined under paragraph (2)) multiplied by the lesser of--

"(i)
"(ii)

"(0_)
,-

$100,000, or

the amount determined under subparagraph (A'.

Exclusion percentage.--The term 'exclusion percentage' means--

- 10 -

-._--_._------------------------

If the dec.lal'at ion is for a taxable
year beCinr,ine in

The exclusion percentage is

80
60

40
20
1912 or later

(c)

Exception from Addition to Tax.--Section 6655 (d)(1) is

amended l,y striking out the phrase IIredu ced by $100,000 II and inserting

in lieu thereof Ifreduced by an amount equal to the applicable exclusion
percentaee, determined under section 6016 (b )(2) , multiplied by the
lesser of $100,000 or the amount of such tax II •

I: d) Addi tion to Tax for Underpayment of Estimated Tax. -2ection 6655 (e) (relating to the definition of tax) is amended to
:read as

fo1101;.Js:
"(eL Definition of Tax.--For purposes of subsection(b),

(d)(2), and (d)(3), the term 'tax' means the excess of-H(l)

the amount of tax imposed by section 11 or 1201 (a),

or subchapter L of chapter 1, whichever is applicable, reduced

ty the sum of any credits against tax provided by part IV of
subchapter A of chapter 1, over
II

(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 determined in paragraph (1)."

Technical Amendment.--Clause (v) of section 243 (b)(3)(C)

is amended by striking out '~100, 000" •
(f) Effective Date.--The amendments made by this section shall
apply with respect to taxable years beginning after December 31, 1961.
SEC.

5
(a)

POSTPonEMENT OF GERTADJ EXCISE TAX RATE REDUCTIONS.
Passenger Automobiles.-(1)

In general.--Subparagl~ph (A) of section 4061 (a)(2)

(relating to imposition of tax) is
"(A)

a.mended to read as follows:

Articles enumerated in subparagraph (B) are

taxable at whichever of the following rates is applicable:
"1 percent for the period March 16, 1966, through June 30, 1969.
"2 percent for the period July 1, 1969, through December 31, 196 9.
"1 percent for the period after December 31, 1969."
(2)

Conforming 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, 1910".
(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 pa;i.d pursu8.nt
to bills first rendered

Percent

"Before July 1, 1969
"After June 30, l 009, 3,11(1
before January 1, 1970
(2)

10
1"

By striking out subse:~+,ir,n (n) and inserting in lieu

thereof:
"(b)

Termination 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:
"(c)

Srecial Rule.--For purposes of subsection (a), in the case

of coomffinications 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 corrnnunications 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 orc enactment of this Act.

TECHNICAL EXPLANATION

TAX SURCHARGE ACT OF 1968
This bill, which is entitled the "Tax Surcharge Act of 1968",
has four substantive sections:
(a)

Section 2 imposes a temporary surcharge on both

individual and corporate income tax liabilities at an annual
rate of ten percent.
(b)

Section 3 raises from 70 percent to 80 percent,

the p.ercent of its estimated tax which a corporation may pay
by installments without incurrIng a penalty.

(c)

Section 4 eliminates, over a five-year period, the

$100,000 estimated tax exemption presently granted corporations.
(d)

Section 5 suspends the schedule for the reduction

of the excise taxes on passenger automobiles and telephone service during the period of the temporary surcharge.
There follows a more detailed description of each of these
provis ions.

- 2 -

SEC.

TAX SURCHARGE.

(a)

Imposition nf tax.

Subsection (a) of section

2 adds a new

part to Bubcllapter A of chapter 1 of the Internal Revenue Code which consists of a new section 51 imposing a temporary tax surcharge on corporations
and indi v1duals .
General Provisions.

Subsection (a) of the new section 51 provides for

the imposition of the surcharge.

The tax is at an annual rate of ten per-

cent of tax liability (adjusted as provided in section 51(c)) and is effectiye from January 1, 1968, through June 30, 1969, for corporations and
ITom

April 1, 1968

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:
Calendar Year

Rate of Tax
Individuals
eOrporation~

7· 5%
5%

In the case of taxpayers who report their income on a fiscal year basis,
l,tt

rate will be ten percent for years falling entirely within the ef-

f'ective 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

if:

1.0 effect.

~,ow

~;'\vtdeB

income exemption.

Subsection (b) of the new section 51

an exemption from the surcharge for indi viduels (other

- 3 than estates and trusts) V'hole tax does not exceed that fJlnerally applicable to the first two brackets of taxable incone.

More specif-

ically, the surcharge will rot apply to a hURband 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 siniUe
individual (or a married individwl filing a separate return) ~or(;
tax does not exceed $145.

In the case of a head of household, the

exemption level is determined on the basis of the tax appUcable 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.

Subsection (c) of

the new section 51 provides that the surcharge shall be canputed
~rcentage

6.S 8.

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 sect.ions 871(a) and 881 on nonresident alien individuals and foreign corporations receiving income
not effectively connected with a business in the United States, or (2)
with respect to any increases in tax under section 47(a) (relating to

certain dL;l'ositions of section 38 property) and section 614(c)(4)(c)
(relating to deductions taken under section G15 (a) prior to aggregation).
the case of an elderly -p=rson who is eligible for the retire~nt income
credit, the surcharge will be ccmputed as a percentage of his tax
liabili ty after suhtracting his retirement income credit.

Similarly,

tax liability shall be reduced by the retirement income credit in determining whether Sl.lc:h an individual is eligjble for the low income
exemption.

This treatment is afforded the retirerent incc:me 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.
(d) of the new section
or his delegate may

Subsection

provides that the Secretary of the Treasury

prescribe regulations setting forth modified

optional tax taDles computed on the basis of composite rates incorporating
the surcharge.

The tables may: be rounded to the nearest whole

dollar, and the composite rates to the nearest whole percentage point.
The usual rule that a taxpayer with le ss than $5,000 of i:~lcome
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
retirerrent income credit.

This special rule is to refle ct the fact

that the effect of the retirement income credit on the surcharge cannot
be accurately incorporated into the optional tax tables, with the
resnlt that tl10se claiming the retirerrent 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 at the rate for the current year.

Under the provisions of the new subsection (e), corporations
,lould be reCluired to reflect the surcharge in their first estimated
tax payment due r;,ore them 15 days ar-ter the bill is enacted.

For

individuals) the surcharbe would have to be reflected in the first
estimated tax payr:Jent due more than 45 days after the enactment of
the bill.

Fiscal year taxpayers will spread the surcharge ratably

over the number of installments remaining in their taxable year.
Thus, a corporation with a November 30 fiscal year would reflect the
surcharge for its taxable year ending November 30, 1968 in three eClual
installments on May 15, August 15, and November 15.
New

withhol~ing

tables. Subsection (f) of the new section 51

will set forth new tables for computing the amount of income taxes
to be withheld from wages paid on or after April 1, 1968, and before
July 1, 1969.

These tables will reflect an increase in the withholding

rates of ten percent.
Western
preferred

Hemispher~

~tock.

Trade COEPorations and dividends on certain

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 14 percentage points.
(1)

These provisions are:

Section 922, relating to the taxable income of

Hestern 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 other

tax-imposing sections of the Code.

Thus, for example, these sub sec LLons insure that the provisions of
sections 72(n) (3) and 1378(b) (re lating to reduction of taxes b:,r
certain credits), sections 815(b)(2)(B) and 8l5(c)(3)(B) (relating to
adjustments to the shareholders and policyholders surplus accounts),
sections 535(b)(1), 545(b)(1), and 556(b)(1) (relating to adjustments
for taxes of personal holding companies), 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 137 3( 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 surcharge. (This list is not intended to be exhaustive.)
(b)

Minimum distributions by foreign subsidiaries.

(b) of section

Subsection

2 of the bill amencls section 963(b) (relating to

receipt of minimum distributions by domestic corporations from their
foreign subsidiarie s) 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 period.

is the same table that was applicable for taxable years beginning
in

1963 when the corporate tax rate was 52 percent (the present

corporate tax rate including the additional surcharge is

52.8 percent).

In the case of taxpayers with taxable years falling only in part
within the surcharge perioi, the

52 percent minimum distribution

table is to be used on a pro rata basis.
(c)

Clerical am:,ndment.

Subsection (c) of section 2

of the

bill makes a clerical amendment to reflect the addition of the
new Part V imposing the surcharge.

- 9 -

(d)

Effective ~ate.

Subsection (d) of section

2 of the

bill provides the effective dates for the surcharge.

These

dates are explained in the discussion under subsection (a)
of section

2 of the bill.

INCREASE FROM

SEC.

70-80 PERCENT THE AMOUNT OF ESTIMATED

TAX WHICH CORPORATIONS MUST PAY :rn :rnSTALLMENTS.

Under present law, a corporation is not penalized for an underpayment of estimated tax if its payments equal or exceed those
which would be required on the basis of estimated tax liability
of 70 percent of actual tax liability (less $100,000).

Section

3 of the bill amends section 6655 to raise the 70 percent
figure to 80 percent.

This conforms the percentage for cor-

porations to that made applicable to individuals beginning in

1967. This change would be effective for taxable years beginning
after December 31, 1967.
SEC. 4.

PAYMENT OF FIRST

$100,000 OF ESTIMATED TAX.

Under present law, corporations are required to make estimated
tax payments only with respect to their estimated tax liability in

- 10 excess of $100,000.

They are not required to make any estimated

tax payments on their first $100,000 of estimated tax liability
and, if their annual estimated tax liability is $100,000 or less,
they are not required to file a declaration.

Under section 4

of the bill, the $100,000 exclusion would be repealed over a five
year period.
More specifically, subsection (a) of section

4 of the bill

would amend section 6016 (a) to require a corporation to file a
declaration of estimated tax for a taxable year if it can reasonably
be expected that its tax liability for the year (after taking into
account credits) will exceed $40.

As indicated above, the present

exemption level is $100,000.
Subsection (b) of section 4

of the bill amends section 6016(b)

to provide a new definition of "estimated tax" (which is the basic
amount subject to payment by installment) reflecting the removal of
the existing $100,000 exemption over a five year period.

During the

transition period, a corporation, in determining the amount of its
estimated tax

l~ability,

would ,be permitted to exclude an amount

e'iual to the applicable "exclusion percentage" multiplied by the
lesser of (1) $100,000, or (2) the amount which the corporation estimates as its income tax for the year less the estimated amount of its
credits.

The revised subsection (b) of section 6016 would define the

term "exclusion percentage" as follows:

- 11 If the declaration is for a

The "exclusion percentage" i8-

year beginning in1968
1969
1970
1971

80
60
40
20

In the case of taxable years beginning after 1971, there would
be no special exemption.
As an example of the transition rule, a corporation which estimates its income tax less credits for 1968 to be $80,000 would be entitled to an estimated tax exclusion of $64,000 for 1968; 80 percent
(its exclusion percentage) times $80,000.
would, therefore, be $16,000.

Its estimated tax liability

If the corporation estimates its income

tax less credits for 1968 to be $120,000, its estimated tax exclusion
would be $80,000(80 percent times $100,000) and its estimated tax
liability would be $40,000.
Subsection (d) of section 4

of the bill amends section 6655(e)

to reflect the repeal of the $100,000 exemption in the provisions for
determining whether, and if so, to what extent, an addition to the tax
should be imposed for underpayment of estimated tax.
itional rules apply.

The same trans-

Thus, for example, assume a corporation's tax

return for the taxable year ending December 31, 1968, indicates an
income tax liability of $150,000.

To utilize the exception provided

in section 6655 (d)(l) permitting estimated tax payments to be based
on the prior year's tax, such corporation would be required to pay
for 1969 an estimeted tax of $90,000, computed as follows:

- 12 1968 Income Tax Liability

$150,000

Less: $60,000j 60 percent
(the exclusion percentage
for 1969) times $100,000

60,000

Do,ooo
Subsection (e) of section

4 of the bill amends section 243

(b)(3)(C) (relating to estimated tax exemption for members of an
affiliated group) to reflect the repeal of the $lOO,OJO exemption.
Subsection (f) of section

4 of the bill provides that the

amendments made by this section shall apply to estimated tax payments for taxable years beginning after December 31, 1967.
SEC. 5.
(a)

POSTPONEMENT OF CERTAIN EXCISE TAX RATE REDUCTIONS.

Passen~er Automob~~~.

Under present law, an excise tax

of 7 percent of the selling price is imposed on the sale by the
manufacturer, producer, or importer of passenger automobiles.

This

rate is scheduled to be reduced to 2 percent on April 1, 1968, then
to 1 percent after December 31, 1968.
Subsection (a) of section

5 of the bill suspends this schedule

of reductions for the period during which the temporary surcharge
will be in effect.

Thus, the present 7 percent rate will remain in

effect until July 1, 1969.
betwe~n

A rate of 2 percent will apply to sales

July 1, 1969 and December 31, 1969, with a 1 percent rate

- 13 applying to all sales after December 31, 1969.

Conforming amend-

ments are made so that floor stocks refunds will apply on the
corresponding date of each reduction.
(b)

Communication Services.

Under present law, an excise

tax of 10 percent is imposed on amounts paid for local and long
distance telephone service (including teletypewriter service).

A reduction of the rate to 1 percent is scheduled to apply to
amounts paid pursuant to bills rendered on or after April 1, 1968,
with the tax scheduled to terminate entirely as to bills rendered
on or after January 1, 1969.
Subsection (b) of section 5

of the bill suspends this

schedule of reductions for the period during which the temporary
surcharge will be in effect.

Thus, the present 10 percent rate

will continue to apply until July 1, 1969, at which time the
scbeduled reduction to 1 percent will take effect.
terminate on January 1, 1970.

The tax will

A conforming amendment makes cor-

responding changes in the dates applicable under the special rules
established under present law to adjust for billing practices.

(c)

Effective Date.

Subsection (c) of section 5

of the

bill provides that the amendments made by this section shall
apply as of the date of enactment of the bill.

STATEMENT OF THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
BEFORE THE
HOUSE BANKING AND CURRENCY COMMITTEE
ON LEGISLATION TO REMOVE THE GOLD COVER
TUESDAY, JANUARY 23, 1968, at 9:30 A.M.
Mr. Chairman and Members of the Committee:
I am grateful to you for the opportunity to appear
promptly to support the President's recommendation for
removal of the gold cover.

On December 15, 1967 the Honorable Wilbur Mills,
Chairman of the Ways and Means Committee announced that
his Committee would reconvene on January 22 to continue
its consideration of the President's surcharge proposals.
Chairman Martin and I were alerted to stand by to appear
before the Committee on that date, and we accepted the
invitation of Chairman Mills.
The Committee will convene at 10 o'clock this morning,
~d

Chairman Martin and I must be there at that time.

With

the Committee's permission, we will both read our statements
for the record and then ask Under Secretary Barr and Governor
Robertson, Vice Chairman of the Federal Reserve Board, to
answer your questions.
I have assured the Chairman that in the event the Committee feels that it would be desirable after this morning's

F-1142

- 2 -

session to question Chairman Martin and me directly, then
we will

be available to come back to this Cotmnittee on

either January 31 or February 1.
The legislation before you would eliminate the 25% gold
reserve requirement irom Federal Reserve notes and the $156 million reserve held against U. S. notes and Treasury notes of 1890.

The Administration believes that prompt action to remove
the cover requirement is necessary for three principal reasons:
-- Prospective normal increases in currency holdings
-- Federal Reserve notes -- by the public will
"lock up" more and more of our "free" gold and
soon reach a point inhibiting further expansion
of our pocket cash.

Obviously we cannot tolerate

such a situation.
There should be no doubt whatsoever that our total
gold stock is available to insure the free international convertibility between the dollar and gold
at the fixed price of $35 an ounce.
The world knows as a fact that the strength of the
dollar depends upon the strength of the U. S. economy
rather than upon a legal 25 percent reserve requirement against Federal Reserve notes, and it is clearly
appropriate for this fact now to be recognized in
legislation.

- 3 Despite these facts, the gold reserve requirement
against Federal Reserve notes, instituted at a time when
gold circulated freely in the domestic economy, is still
part of our law.

It should be removed.

The need for prompt removal is apparent from a look at
the simple arithmetic of the problem.
The U. S. gold stock is now at $12 billion
the cover requirement is approximately $10.7
billion -- the balance remaining is $1.3 billion.
The normal increase in notes will absorb over $500 million annually and a further $150 million or more will be
absorbed each year for domestic artistic and industrial
purposes.

These two factors taken together mean that about

$700 million a year of our free gold will be absorbed for

domestic reasons.

There is thus but two years grace at most

even if one assumes that no gold at all will be needed for
international purposes.

Clearly we cannot proceed on such

an assumption.

***
Since the passage of the Federal Reserve Act more than
a half century ago, the function of gold in our monetary
system has undergone a fundamental transformation.

GoM no

longer circulates freely as domestic currency in any major

- 4 country in the world.

We Americans have not used gold as

domestic currency since 1934.
international reserves.

Gold belongs in a nation's

The dollar serves as a reserve

currency to the world; the United States' gold supp ly is
available to convert dollars held by national monetary
authorities at a fixed price.

As such, it is one corner-

stone of our international monetary system.
Today, the strength of the dollar is not a function
of this legal tie to gold -- a tie which i.s only applicable
to one portion of our total money supply, Federal Reserve
notes.

The value of the dollar -- whether it be in the form

of a bank balance, a coin, or "folding money"

is dependent

on the quantity and quality of goods and services which it
can purchase.

It is the strength and soundnes s of the Amer-

ican economy which stands behind the dollar.
at home and a strong competitive
g~e

Balanced growth

position internationally

the dollar we use as everyday pocket money its ~trength.

An expanding United States economy needs an expanding
supply .of currency.
Reserve notes.

Our main form of currency is Federal

In the years ahead, we can expect increases

in Federal Reserve note circulation of about $2 billion a
year.

This growth is a norma 1 response to the pub lic ' s

demand for cash in a grmving economy.

It is bas ica lly a

- 5 -

trend development, reflecting a growing population) a growing
economy, and a growing number of transactions.
Not to move on the cover requirement at this time would
only mean putting off the inevitable.

We cannot afford to

permit an outmoded provision of our law to impinge on the
nation's supply of pocket money.
Removal of this requirement is also of key importance
from the viewpoint of the role of the dollar and of gold in
the international monetary system.

Today, that system relies

primarily on gold and dollars -- interchangeable into gold
at $35 an ounce -- as its international reserves.

Tomorrow

these two key factors will need help from a third -- the new
international reserve asset created under multilateral agreement in the International Monetary Fund -- but gold and dollars
will continue to playa vital role in the international monetary system.
If this system, which has served us so well in the past,
is to continue to facilitate the growth of world trade and
prosperity, we must assure that confidence in the system
and in the strength of the dollar is maintained.
requires action on four fronts:

This

- 6 We must continue the long-standing United States'
policy of maintaining the gold-dollar relationship
at $35 per ounce.

This must not be open to ques-

tion, and the best way to make continuation of
that policy crystal clear is to free our entire
gold stock for that purpose.
We must assure that the U. S. economy grows in an
environment of cost and price stability through
enactment of the anti-inflation tax and through
expenditure controls and appropriate monetary
policy.
We must achieve sustained equilibrium in our balance
of payments.
We and the rest of the free world must put into place
the plan for the creation of a new reserve asset
agreed upon in Rio last September.
Our policy of maintaining the fixed relationship between
gold and the dollar at $35 an ounce for legitimate monetary
purposes is one of the reasons why virtually all countries
hold dollars in their reserves and why many of them hold
very large amounts of dollars.

In addition, of course,

- 7 countries hold dollars because, unlike gold, they can invest
them in interest earning assets.
The monetary authorities of most of the major industrialized countries understand full well that the link between
gold and domestic currencies is no longer a pertinent and
relevent fact and that gold is an international asset.

Only

three other major countries still maintain some link between
their domestic currencies and gold.

While foreign authorities

are aware of the fact that the Federal Reserve can suspend
the cover requirement, they find it difficult to understand
why the United States, the world's major reserve currency
country, still maintains this legal impediment to the free
international use of gold.
Thus, legislative action on the cover requirement, by
making it clear to the world that the congress as well as
the executive branch are cornmiting our total gold stock to
international use, is necessary to maintain confidence in
the dollar.
Removal of the gold cover will not solve the United
States' balance of payments problem nor is it a
for the solution of that problem.

substit~te

- 8 -

The need to achieve sustained equilibrium in our international payments position is essential to confidence in the
dollar and the future stability of the international monetary
system.

The series of measures announced by the President on

January 1, with which you are all familiar, are designed to
bring us to, or close to, equilibrium this year.
that they be successful.

It is vital

I ask, Mr. Chairman, that the Presi-

dent's message be made a part of the record of these hearings.
Conclusion
I urge you to act promptly on the gold cover legislation
before you in order that, domestically, we can continue to
be assured that the Federal Reserve will be able to supply
appropriate amounts of currency to meet the needs of our
growing economy for cash and in order that our policy of
maintaining the gold-dollar relationship -- one of the
major elements of confidence in the dollar and the international monetary system -- will not be open to question.

MESSAGE TO THE NATION
ON THE BALANCE OF PAYMENTS

JAN 1 1968
Where We Stand Today

I want to discuss with the American people a subject of vital concern
to the economic health and well-being of this Nation and the Free World.

It is our international balance of payments position.
The strength of our dollar depends on the strength of that position.
The soundness of the Free World monetary system, which rests
largely on the dollar, also depends on the strength of that position.
To the average citizen, the balance of payments, and the strength of
the dollar and of the international monetary system, are meaningless
phrases.

They seem to have little relevance to our daily lives.

Yet

their consequences touch us all -- consumer and captain of industry,
worker, farmer, and financier.
More than ever before, the economy of each nation is today deeply
mtertwined with that of every other.

A vast network of world trade and

financial transactions ties us all together.

The prosperity of every

economy rests on that of every other.
More than ever before, this is one world - - in economic affairs as in
every other way.
Your job, the prosperity of your farm or business, depends directly
or indirectly on what happens in Europe, Asia, Latin America, or Africa.
The health of the international economic system rests on a sound
international money in the same way as the health of our domestic economy
rests on a sound domestic money.

Today, our domestic money -- the U. S.

dollar -- is also the money most used in international transactions.

That

-2-

money can be sound at horne - - as it surely is - - yet can be in trouble
abroad - - as it now threatens to become.
In the final analysis its strength abroad depends on our earning abroad
about as many dollars as we scnd abroad.
U. S. dollars flow from these shores for many reasons -- to pay for

imports and travel, to finance loans and investJnents and to maintain our
lines of defense around the world.

hen that outflow is greater than our earnings and credits from
foreign nations, a deficit results in our international accounts.
For 17 of the last 18 years we have had such deficits.

For a time

those deficits were needed to help the world recover from the ravages
of World War II.

They could be tolerated by the United States and welcomoo

by the rest of the world.

They distributed more equitably the world's

monetary gold reserves and supplemented them with dollars.
Once recovery wall assured, however, large deficits were no longer
needed and indeed began to threaten the strength of the dollar.

Since 1961

your government has worked to reduce that deficit.
By the ITliddle of the decade, we could see signs of success.
annual deficit had been reduced two-thirds

Our

from $3.9 billion in 1960

to $ L 3 bill ion in 196 5 .
In 196b, because of our increased responsibility to arm and supply
our ITlen in Southeast Asia, progress was interrupted, with the deficit
remaining at the same level as 1965 - - about $1. 3 billion.
In 1967, progress was reversed for a number of reasons:
Our costs for Vietnam lncreased further.
Private loans and in'",estrr,ents abroad increased.
Our trade surplus, although larger than 1966, did not rise
as ITluch as we had expected.
AITlericans spent more on travel abroad.

- 3-

Added to these factors was the uncertainty and unrest surrounding
the devaluation of the British pound.
national monetary lIystem.

This event strained the inter-

It sharply increased our balance of payments

deficit and our gold sales in the last quarter of 1967.

The Problem
Preliminary reports indicate that these conditions may result in a
1967 balance of payments deficit in the area of $3. 5 to $4 billion -- the
highest since 1960.

Although some factors affecting our deficit will be

more favorable in 1968, my advisors and I are convinced that we must
act to bring about a decisive improvement.
We cannot tolerate a deficit that could threaten the stability of the
international monetary system - - of which the U. S. dollar is the bulwark.
We cannot tolerate a deficit that could endanger the strength of the
entire Free World economy, and thereby threaten our unprecedented
prosperity at home.

A Time for Action
The time has now come for decisive action designed to bring our
balance of payments to -- or close to -- equilibrium in the year ahead.
The need for action is a national and international responsibility of
the highest priority.
I am proposing a program which will meet this critical need, and
at the same time satisfy four essential conditions:
Sustain the growth, strength and prosperity of our own economy.
Allow us to continue to meet our international responsibilities
in defense of freedom, in promoting world trade, and in
encouraging economic grow th in the developing countries.
Engage the cooperation of other free nations, whose stake in a
sound international monetary system is no less compelling
than our own.

-4-

Pecognize the .pecial obU,ahon o{ thoee nation. with balance
of payments surplu.es, to bring their payment. into equilibrium.

The Fir.t Order of Bu.ine . .
The fl ra

line of defens e of the dollar i. the strength of the Ame rican

economy.
No busine8' before the returning Congreu will be more urient than
this:

To enact the anti-inflation tax which I have sought for almo. t a year

Coupled with our expenditure controle and appropriate monetary policy,
this will help to stem the inflationary pressures which now threaten our
economic prosperity and our trade .urplue.
No challenge before busine.s and labor ill more urgent than thil:
To exercise the utmost responsibility in their wage-price decilionl, which
at home and
affect so directly our competitive positionlil" world marketl.
I have directed the Secretariel of Commerce and Labor, and the

Chairman of the Council of Economic Adviler. to work with leaderll of
business and labor to make more effective our voluntary program of wageprice res traint.
have aho instructed the Secretaries of Commerce and Labor to
work 'With unions and companies to prevent our export. from being reduced
or our Imports increilsed by crippling work stoppages in the year ahead.
A sure way to inlltill confidence in our dollar -- both here and abroad
is through thelle actionll.

The New Program
But

\I,

emus t go beyond thie, and take action to deal directly with the

balance of payments deficit.
Some of the elements in the program I propole will have a temporary
but imrr.erliate effect.

Otherl will be of longer range.

All are necessary to aSlure confidence in the America.n dollar.

-51.

Direct Investment
Over the past three years, American business has cooperated with

the government in a voluntary program to moderate the flow of U. S.
dollars into foreign investments.

BU8iness leaders who have participated

so wholeheartedly deserve the appreciation of their country.
But the savings now required in foreign investment outlays are
clearly beyond the reach of any voluntary program.

This is the unanimous

the Banking Laws to establish a mandatory program that will restrain
direct investment abroad.
This program will be effective immediately.

It will insure success

and guarantee fairness among American business firms with overseas
investments.
The program will be administered by the Department of Commerce,
and will operate as follows:
As in the voluntary program, over-all and individual company
targets will be set.

Authorizations to exceed these targest

will be issued only in exceptional circumstances.
New direct investment outflows to countries in continental
western Europe and other developed nations not heavily dependent
on our capital will be stopped in 1968.

Problems arising from

work already in process or commitments under binding contracts
will receive special consideration.
New net investments in other aleveloped countries will be limited
to 65% of the 1965-66 average.
New net investments in the developing countries will be limited
to 1100/0 of the 1965-66 average.

-6This program also require. busines.es to continue to brina back
foreign earnings to the United Statu in line with their own

196'-66

practices.
In addition, I have directed the Secretary of the Trea.ury to explore
with the Chairmen of the House Ways and Means Committee and Senate
Finance Committee legislative proposals to induce or encourage the
repatriation of accumulated earnings by U. S. -owned foreign ba,t.n •• ses.
2.

Le ndi ng by Financial In s tituti on.
To reduce the balance of payments deficit by at least another $500

million, 1 have requested and authorized the Federal Reserve Board
to tighten its program restraining foreign lending by banks and other
financial ins titutions.
Chairman Martin has assured me that this reduction can be achieved:
without harming the financing of our exports;
primarily out of credits to developed countrie. without jeopardizing
the availability of fund. to the rest of the world.
Chairman Ma.rtin believes that this objective can be met through continued
cooperation by the financial community.

At the request of the Chairman,

however, 1 have given the Federal Reserve Board standby authority to
invoke mandatory controls, should such controls become desirable or
necessary.
3.

Travel Abroad
Our travel deficit this year will exceed $2 billion.

To reduce this

deficit by $500 million:
I am asking the American people to defer for the next two years
all nonessential travel outside the

We.tern Hemisphere.

I am asking the Secretary of the Treasury to explore with the
appropriate Congre,sional committees legislation to help achieve
this objective.
4.

Government Expenditures Overseas
We cannot forego our essential commitments abroad, on which America's

security and survival depend.

-7-

Nevertheless, we must take every step to reduce their impact on
our balance of payments without endangering our security.
Recently, we have reached important agreements with some of our
NATO partners to lessen the balance of payments cost of deploying American
forces on the Continent - - troops necessarily stationed there for the common
defens e of all.
Over the past three years, a stringent program has saved billions
of dollars in foreign exchange.

am convinced that much more can be done.

I believe we should set

as our target avoiding a drain of another $500 million on our balance of
payments.
To this end, I am taking three steps.
First, I have directed the Secretary of State to initiate prompt
negotiations with our NATO allies to minimize the foreign exchange costs
of keeping our troops in Europe.

Our allies can help in a number of ways,

including:
The purchase in the U. S. of more of their defense needs.
Investments in long-term United States securities.
I have also directed the Secretaries of State, Treasury and Defense
to find similar ways of dealing with this problem in other parts of the
world.
Second, I have instructed the Director of the Budget to find ways of
reducing the numbers of American civilians working overseas.
Third, I have instructed the Secretary of Defense to find ways to
reduce further the foreign exchange impact of personal spending by U. S.
forces and their dependents in Europe.

Long-Term Measures

Export Increases
American exports provide an important source of earnings for our

businessmen and jobs for our workers.

- 8-

Thn' are the cornerstone of our balance of paytnents position.
Last year we sold abroad $30 billion worth of American goods.
What we now need is a long-range syllternatic program to stimulate
the flow of the products of our factories and farms into overlleall markets.
Vi e m

II 5

t beg 1 n now.

Some of the steps require legislation:
I shall ask the Congress to Bupport an intensified five year, $200
million Commerce Department program to promote the lIale of American
goods ove rs eas.
I shall also ask the Congress to earrna;'k $500 ITlillion of the ExportImport Bank authorization to:
Provide better export ins urance.
Expand guarantees for export financing.
Broaden the scope of GovernITlent financing of our exports.
Other measures require no legislation.
I havE' today directed the Secretary of COITlITlerce to begin a Joint
Export Association program.

Through these Associations, we will

provide direct financial support to American corporations joining together
to sell abroad.
And finally, the Export-hnport Bank -- through a rrlOre liberal
rediscount system -- will encourage banks across the Nation to help firms
incrE'asE' their exports.
6

~ontanff

Barriers

In the Kennedy Round, we climaxed three decades of intensive effort
to achieve the greatest reduction in tariff barriers in all the history of
trade negotiations.

Trade liberalization remains the basic policy of

the lTnited States.
\\'e n1ust now look beyond the great success of the Kennedy Round
to the problems of nontanif barriers that pose a continued threat to the
grow th

of world trade and to our cOITlpetitive position.

- 9-

American commerce is at a disadvantage because of the tax systems
of some of our trading partners.

Some nations give across-the-board

tax rebates on exports which leave their ports and impose special border
tax charges on our goods entering their country.
International rules govern these special taxes under the General
Agreement on Tariffs and Trade.

These rules must be adjusted to

expand international trade further.
In keeping with the principles of cooperation and cons ultation on
common problems, I have initiated dis cus sions at a high level with our
friends abroad on these critical matters - - particularly those nations
with balance of payments surpluses.
These discussions will examine proposals for prompt cooperative
action among all parties to minimize the disadvantages to our trade
which arise from differences among national tax systems.
We are also preparing legislative measures in this area whose scope
and nature will depend upon the outcome of these consultations.
Through these means we are determined to achieve a substantial
improvement in our trade surplus over the coming years.

In the year

immediately ahead, we expect to realize an improvement of $500 million.
7.

Foreign Investment and Travel in U. S.
We can encourage the flow of foreign funds to our shores in two other

ways:
Firs t, by an intensified program to attract greater foreign
investment in U. S. Corporate securities, carrying out the principles
of the Foreign Investors Tax Act of 1966.
Second, by a program to attract more visitors to this land.

Special Task Force headed by Robert McKinney of Santa Fe, New
Mexico, is already at work on measures to accomplish this.
have directed the Task Force to report within 45 days on the
immediate measures that can be taken, and to make its longterm recommendations within 90 days.

10
Meeting the World 1 s Reserve Needs

Our movement toward balance will curb the flow of dollara into
international reserves.

It will therefore be vital to speed up plans

for the creation of new reserves -- the Special Drawing Rights -- in
the International Monetary Fund.

These new reserves will be a

welcome companion to gold and dollars, and will strengthen the gold
exchange standard.

The dollar will remain convertible into gold at

$35 an ounce, and our full gold stock will back that commitment.

A .Time for Responsibility

The program I have outlined is a program of action.
It is a program which will preserve confidence in the dollar. both
at hOITle and abroad.
The U. S. dollar has wrought the greatest economic miracles of
modern tiITles.
It stimulated the resurgence of a war-ruined

Eu~ope.

It has helped to bring new strength and life to the developing world.
It has underwritten unprecedented prosperity for the American people,

who are now in the 83d month of sustained economic growth.
A strong dollar protects and preserves the prosperity of businessman
and banker, worker and farmer -- here and overseas.
The action program I have outlined in this message will keep the
dollar strong.

It will fulhll our responsibilities to the American people

and to the Free World.
I appeal to all of our citizens to join ITle in this very necessary and
laudable effort to preserve our country's financial strength.

TREASURY DEPARTMENT

January 24, 1968

-'OR IMMEDIATE

RELEASE
TREASURY'S WEEKLY BILL OFFERiNr

The Treasury Department, by this public notice, invites tenders
:or two series of Treasury bills to the aggregate amount of
~2,500,OOO,000,or the!"eabouts, for cash and tn exchange for
rreasury bills maturing February 1,1968, in the amount of
~2,501,430,000, as follows:
91-day bills (to maturity date) to be is~ued February 1,1968,
tn the amount of $1,500,000,000, or thereabc uts, repre senting an
~ddit1onal amount of bills dated NoveITtber 2,1967,
and to
Mture May 2, 1968,
originally issued in the amount of
~999,896,OOO,
the additional and original bills :0 be freely
tnterchangeable.
182 -day bills, for $1,000,000,000, or tnereabouts, to be dated
February 1,1968, and to mature Augus t 1, 1968.
The bills of both series will be issued on a discount basis under
and noncompetitive bidding as hereinafter provided, and at
natur1ty their face amount will be payable without interest. They
~1l1 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).
~ompet1tive

Tenders will be received at Federal Reserve Banks and Branches
lP to the c losing hour, one-thirty p. m., Eas tern Standard

time, Monday, January 29, 1968.
Tenders will not be
received at the Treasury De~artment, Washington. Eac h tender must
~e 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,
I/ith not more than three dec imals, e. g., 99.925. Frac t ions may not
De used. It is urged that tenders be made on the printed forms and
forwarded in the spec ial enve lopes whic h 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
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
llithout deposit from incorporated banks and trust companies and from
~eSPonsible and recognized dealers in investment securities.
Tenders
rom 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.
~ustomers

F-1143

- 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 tnese 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 February 1, 1968, i
cash or other immediately available funds or in a like face amount
of Treasury bills maturing February 1,1968.
Cash and exchange tend
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 fI
any Federal Reserve Bank or Branch.
000

TREASURY
DEPARTMENT
I
;
!
January 25, 1968
FOR RELEASE A .M. NEWSPAPERS
FRIDAY, JANUARY 26, 1968
TREASURY ISSUES REGULATORY CHANGES
PERMITTING MARKETING OF NEW TYPE WHISKEY

The Treasury Department today issued regulatory changes
which will permit the marketing of a new type whiskey to be
produced in the United States.
The new type whiskey, like most imported Scotch,
Canadian and Irish whiskies, will be distilled in a
relatively high-proof range and stored in used oak containers.
It will be known as "light whiskey."
Under the new regulations, members of the domestic
distilling industry will be able to market the new type
whiskey after July 1, 1972.
Under existing regulations administered by the Internal
Revenue Service, the principal American type whiskies, such
as bourbon and rye, mus t be rna tured in charred new oak barre ls .
Canadian, Scotch and Irish whiskies are aged primarily in US(-'U
oak barrels and are generally lighter in flavor than the
Amer ican type s .
In recognition of a growing trend of American consumers
t~ard lighter alcoholic products, several domestic distillers
requested that Treasury regulations be amended to permit aging
of domestic whiskey in used barrels, and distillation at
higher proofs, in order to produce a 1 ighter produc t which
could compete with the imported whiskies.
The views of the distillers and other interested parties
\vere presented to the Internal Revenue Service in formal
hearings last September.
.
The Treasury Department, after careful study, found that
it would not be in the best interest of consumers to alter
the present requirements for producing those traditional

F-1144

- 2 American type whiskies labeled as "bourbon," "rye," or
"straight," since the whiskey produced under the proposed new
methods would not have the characteristics which consumers
havl' associated Ivith traditional American types of Ivhiskies
for more than 30 years.
However, the Treasury also concluded that the regulations
should not operate to prevent the domestic production of 3
lighter whiskey, intended to meet consumer demand and compete
effectively with imported products.
In order to permit the marketing of a lighter type
domestically-produced whiskey, while at the same time
preserving the long-established standards of identity for the
present American-type whiskies, the Treasury regulations h~vc
been revised by defining a new standard for a new type of
domestic whiskey which will be known as "light whiskey."
The word "light" describes the distinguishing character
of the whiskey and provides the consumer with information to
differentiate it from other domestic products. The new
product must be distilled at a relatively high proof and
stored in used oak containers.
In the interest of equity among members of the domestic
distilling industry the new regulations will apply only to
\\,'hiskey produced subsequent to today's announcement. The
Treasury Department also established an effective date of
July 1, 1972, for the marketing of the new product. This
\. vill provide all distillers a reasonable period for initial
aging of the new type whiskey on an equal basis.
The regulations governing the production and sale of
alcoholic beverages in the United States are within the
jurisdiction of the United States Treasury Department and
are administered by the Alcohol and Tobacco Tax Division of
the Internal Revenue Service.
The amendments announced today were approved by
Stanley S. Surrey, Assistant Treasury Secretary for Tax
Policy and Sheldon S. Cohen, Commissioner of Internal Revenue.
They are published, together with findings and conclusions
on the issues involved, in the Federal Register dated
January 26, 1968.
000

TREASURY DEPARTMENT
•FELEASE 6: 30 P. M• ,
sday, January 25, 1968·

RESULTS OF TREASURY'S MONTHLY BILL OFFERING
llie ~easury Department announced that the tenders for two series of Treasury
5 one series to be an addi tional issue of the bi lls dated October 31, 1967, and the
r'series to be dated January 31, 1968, which were offered on January 18, 1968, were
ed at the Federal ReseTve Banks tooay. Tenders were invited for $500,000,000,
hereabouts, of 274-day bills and for $1,000,000,000, or thereabouts, of 366-day
s. The details of the two series are as follo\Js:

E OF ACCEPTED
ETITIVE BIDS:

High
Low
Average

274-day Treasury bills
maturin~ October 31: 1968
Approx. Equiv.
Price
Annual Rate
96.0c8
5.219%
5.295%
95.970
5.254%
96.001

366-day Treasury bills
maturing January 31~ 1969
Approx. Equi'v.
Price
Annual Rate
5. (.28%
94.685
94.576
5.335%
.~/
94.645
5.267%

~ Excepting 1 tender of $200,000

of the amount of 274-day bills bid for at the low price was accepted
12i of the amount of 366-day bills bid for at the low price \Jas accepted
,L TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

strict
Iston
~w York
lilade 1phia
.eve1and
lchmond
;lanta
licago
:. Louis
inneapolis
Insas City
lUas
In Francisco

Applied For
5(:2,000
$
969,608,000
4,640,000
20,724,000
600,000
11,354,000
114,747,000
7,530,000
12,130,000
2,380,000
11,230,000

mTALS

$1,209,230,000

53 z 765 l 000

~ncludes $14,798,000

AcceEted
522,000
$
409,848,000
640,000
15,724,000
600,000
1,424,000
44,757,000
1,330,000
11,630,000
2,380,000
3,300,000
8: 015 z 000

AEElied For
$ 30,605,000
1,251,162,000
10,127,000
29,735,000
7,381,000
12,816,000
147,348,000
10,710,000
12,740,000
8,283,000
12,100,000
71:167:000

500,170,000 ~ $1,604,174,000

AcceEted
$ 20,605,000
755,162,000
2,127,000
20, :)35,000
7,381,000
4,056,000
9=:;,348,000
8,710,000
12,740,000
8,283,000
7,100,000
60,167,000
$1,000,014,000 ~/

noncompeti ti ve tenders accepted at the average price of 96.001
noncompeti ti ve tenders acce~ted at the average price of 94.645
~ e::;e rates are on a bank discount basis. The equivalent coupon issue yields are
).51% for the 274-day bills, and 5.58% for the 366-day bills.

~cludes $43,711,000

TREASURY DEPARTMENT
,

January 26, 1968

FOR U1MEDIATE RELEASE
TREASURY TO INVESTTGATE COMPLAINT OF
SUBSIDIES ON CANNED TOMATO PRODUCTS FROM ITALY
The Treasury Department annour.ced toddY that it is issuirg
a notice of couTltervdi1ing duty proceeding vlith respect to
imports of carined tomatoes and tomato concentrates from Ltaly.
The notice, which will be published in the Federal
Register of Saturday, January 27, reports thdt the Treasury
is investigating d complaiTit of subsidiz;~,tion of canned
tomato product exports to the United Stdtes from Italy.
The amount of the subsidy is stated to JJe 15 to 18 percent
of invoice vdlue.
The complainant was Canners League of California,
San Francisco, California.
Under the United Scates Countervailir,g Duty~aw, if the
Treasury Department finds that a "bounty or grant" (witbir:
the meaning of the law) is being paid, it is required to
assess an equivalent countervailing duty.
'~he

notice of countervailing duty proceeding allows
30 days for submission of data, views, and arguments
concerning the ex is tence or nonex is tene e and the ne t amOUL t
of a bounty or grant.
Canned tomato paste and sauce exports from Italy to the
United States totaled more than 22 million pounds during the
first 10 months of 1967 and were valued dt ':ctpproximately
$3,700,000. Canned tomato exports from Italy to the Fnited
States during this period totaled some 80 million pounds
valued at approximately $6,900,000.

000

F-1146

TREASURY DEPARTMENT
Washington
FOR IMMEDIATE RELEASE

REMARKS BY THE HONORABLEI~{ENRY :-1. FOWLER
SECRETARY OF THE TREASURY
AT THE
ANNUAL HARVARD-YALE-PRINCETON CLUBS LUNCHEON
WILLARD HOTEL, WASHINGTON, U C ,
DELIVERED THURSDAY, JANUARY 25,1968, 1:00 P.M . ~EST

The New Year is a fit t ing time for dec is ions. This
is true not only of individuals but also nations. It is
particularly true of the dec is ions we mus t make this Ne\v
Year's period about the U. S. economy and, because of its
special role, the economy of the Free World as well.
For the past twenty years, fueled by a strong U. S.
economy and a strong U. S. dollar in a viable international
monetary system, the Free World has made the greatest strides
in trade and development in recorded history. For the past
seven years the u. s. economy has enj oyed the longes t and
strongest and most stable economic expansion in our history.
The decisions the nation is taking in the early weeks
of this new year will have much to do with the preservation
of that viable international monetary system and that
expanding, stable U. S. economy on which it depends.
It is highly important therefore that the nation takes
these decisions responsibly -- not avoiding the hard and
difficult choices -- not ducking the disagreeable measures
not waiting for the problems to become unmanageable.
If we do so, we can preserve for many years to come a
healthy prosperity and the social dnd economic progress
it makes possible.
Now I realize that preservation of anything is not
glamorous or exc iting. Indeed, it seems from read ing a
recent poll by Mr. Gallup that the average American either
is taking prosperity for granted or feels a little guilty
about enj oying it.

F-1147

- 2 The record-breaking, stable expansion we have experienced
during the las t seven years has not occurred by acc ident .
It has been made possible by taking decisions to promott' the
kind of environment in which it can thrive.
This is not a one-way street. When unemployment is high
and production low, the environment must be one of encourdgement
to greater economic activity -- such as the tax reductions of
1962, 1964 and 1965. Eut prosperity, like many other enj oyable
experience s, can deve lop its own exce sse s .
The principal excess is running at a rate of speed which
puts pressure on resources of labor,mdterials and plant dno
results in inflation, imbctlances in va.rious sectors of the
economy and, if unrestrained, leads to the inevitable bust
of the old familiar boom and bus t cyc le . Thu s, when
economic activity threatens to accelerate too fast, we must
have the courage to hold down public expenditures and raise
taxes temporarily -- to use appropriate monetary restraint
in the creation of money and credit -- to exercise the utmost
responsibility in wage and price decisions which added costpush inflation to that induced by demand -- to take whatever
action is required to preserve the stability of the economy.
It would be a wonder ful thing if we could, during the
present period of economic pressures, enlarge many of our
worthwhile programs for education, health, the war on
poverty, desirable public works, and so forth. And yet, as
wonderful as these steps would be, they are not 3S vital as
the maintenance of a stable sustained expansion which will
keep making all of these things possiDle, along with more
jobs, more wealth and a higher standard of living. Better
education and training will mean little if we are pushed
into an expansion-wrecking inflation; greater wealth in
the extra mileage of highway and buildings which are sought
should be compared to the potential loss which can be caused
by a decline in economic activity and expansion accompanying
a recess ion.
But holding down the level of desirable and worthwhile
expenditures is not enough. Nor is it sufficient to rely
entirely on the Federal Reserve System to use high interest
rares and tight money as a restraint. We must also have the
Courage and wisdom to raise taxes and thereby siphon off a
~otential excess of private demand when this becomes necessary
Insurance for the preservation of economic stability.

- 3 The stake we all have in a stable prosperity transcends
our desires as individuals
as taxpayers, to avoid tax
increases -- as investors, to avoid curbs on investment
abroad -- as parents and educators, to expand our school
systems -- even to press on to the maximum in the war on
poverty.

A healthy and stable economy is a prerequisite to
almost all of our aspirations whether they be economic,
social or cultural.
That is
the pol ic ie s
or difficult
re lapse back
that quite a

why it is vital in this new year to adapt
and to make dec is ions - - no rna t ter how hard
and unpopular -- rather than to have d
in to the rece s s ion and in fla t ion -r idden eras
few in this room still can recall.

A strong, stable

u.s.

economy is th~ Odse for a
strong dollar, which is the bulwark of our international
mane tary sys tern.
It has helped bring the greatESt economic miracles
of d 11 t ime s .
It has not only underwritten unprecedented prosperity
for the people of the United States, but it has helped
bring back a war-torn Europe and Japan to sha.re that
prosperity along with our near ne ighbors on this continent.
The strong dollar is helping to bring new life and
strength and hope to the developing world of Asia, Africa
and Latin America. The strength of the Free World economy
and the functioning of the international monetary system
depend to a large extent on a stable level of economic
activity and growth in the United States and the maintenance
of d stable dollar -- stable in terms of prices and of
exchange rates.
The devaluation of the British pound last November
resulted in a loss of confidence in currencies allover
the world. It was accompanied by a large international
flow of fore ign funds seeking safe ty and a burs t of
speculative buying of gold. This was a threat not only
to the dollar but to the international monetary system
~s a whole.
While the speculation was repulsed by the
international financial cooperation of the members of
the so-called gold pool, it has underlined the urgency of
placing the dollar in an impregnable position.

- 4 This means tha t the time has come when it is nece s sary and
desirable to take decisive measures to eliminate the chronic U.S.
balance of payments deficit. While we brought this deficit down,
for a brief period in 1965, to the point of equilibrium,
and held it at a tolerable point during 1966 despite the
fucrease drain of the war in Southeast Asia, there has been
an intolerable deterioration in the wake of the financial
crisis accompanying the devaluation of the British pound -the reserve currency other than the dollar which is wide ly
held.
So, as we in the United States look back upon seven
years of relatively stable and satisfactory economic
growth at home and 20 years of unprecedented economic
progress in the Free World, we find tha t the new year
presents the inescapable challenge to deal decisively with
~o deficits -- the intolerable deficit in our international
balance of payments and a deficit in our national
budget of a magnitude that is a highly stimuldtive tactor
in an economy already running at an excessive rate of
speed accompanied by an unacceptable rate of inflation.
In this new year, the battle of the deficits is on, and
fundamental decisions have been dnd are ~eing taken.
On New Year's Day, the President, in his Balar.ce of
Payments message, said:
"The first line of defense of the dollar
is the strength of the American economy.
"No business before the returning Congress
will be more urgent than this: To enact
the anti-inflation tax which I have sought
for almost a year. Coupled with expenditure
controls and appropriate monetary policy,
this will help to stem the inflationary
pressures vJhich now threaten our economic
prosperity and our trade surplus."
In his New Year's Day message the President also announced
a number of measures designed to reduce directly the balance of
payments deficit -- measures which are admittedly unwelcome
and temporary -- restrictions upon direct investments abroad
by American business, a tightening of lending by banks and
oth2r financial institutions abroad, a request that Americans

- 5 defer non-essential travel outside this hemisphere.
In
addition, he set in motion new efforts to reduce sharply the
balance of payments impact of U.S. Government expenditures
overseas for security and df~velopment Jeither by reducing
those expenditures or neutralizing their balance of payments
effects. The President also directed his representatives
to seek to reduce non-tariff barriers that inhibit the
development of an adequate U.S. trade surplus and to seek
fairer treatment, through negotia tion for U. S. goods and
services which put our commerce at an unfair disadvantage.
A drastic reduction in our balance of payments deficit
is necessary at this time to defend the dollar and insure
against a breakdown of the international monetary system. The
President's Action Program will achieve this. The Program
will entail sacrifices in this country and it will cause
difficulties for some foreign countries.
In order to assure
a fair sharing of these sacrifices, the Program has been
widely spread over all sec cors 0 f the U. S. economy.
In order
to minimize adverse e ffec ts on the ~Nor ld economy, the Program
distinguishes among groups of countries on the basis of their
ability to absorb reductions in their foreign exchange
receipts. That is in keeping with the agreed philosophy of
the balance of payments adjustment process agreed upon for
some years between the United States and the principal
financial countries whose chronic surpluses must be narrowed
if our deficits are to be closed.
The Action Prog~am is designed to deal with an emergency.
We do not regard certain aspects of it as consistent with the
long-range solution to our underlying balance of payments
problem. Restrictive measures are temporary. They are not
cor,sistent with the long-term policy of the U.S. which is to
support the unrestricted flow of goods, services and capital
under a stable international monetary system based on fixed
values nf currencies defined in terms of gold or the dollar,
linkprJ at $35 an ounce.
An appropriate long-range balance of payments solution
for the United States must be based on a substantial and
growing surplus in trade and service s, inc lud ing earnings from
U.S. foreign investments.
The present trade surplus is too
small. It must be increased substantially through an expansion
of U.S. exports. The Government is taking measures to
encourage exports.
The United States is working hard to encourage foreign investment in the U.S.
It believes that a building of a two-way flow of
p~rtfolio investment into the U.S. from abroad is an import:ant
e ement in the long-term flow of funds which will always include
substantial exports of capi.tal from the United Stdtes.

- 6 The U.S. believes, and the Action Program embodies the
concept, that the best long-term solution to the so-called
deficit is to increase foreign travel in the United States,
and a task force of eminent and informed citizens is hard at
work designing plans and programs to facilitate foreign travel
in the United State~ by the private sector working in cooperation
with Federal, state and local government s.
But let me emphasize that these direct measures, temporary
or long-term, announced in the New Year's Day program, adding
to the pre - exi sting effort, are 1 ike the four finger s 0 f a
hand. They cannot be effective in dealing with the problem
without fiscal restraint, which means the tax bill, which lS the
thumb enabling us to get a firm grlp on the problem.
For all our efforts, direct and otherwise, to improve our
balance of payments position, run the risk of failure unless
we avoid the kind of excessive growth that floods us with
imflorts, and unless we return to relative price stability and
cost competitiveness in the U.S. economy which assures a strong
dollar.
The prompt enactment of the President's tax increase
program, which has been pending for five months before the
Congress, is the single most important and indispensable step
this nation can take to insure the achievement of its economic
objectives and preserve the expansion and the international
monetary system.
That is why the President in his State of the Union Message
said, and I quote:
"There are clouds on the horizon
Prices are
rising_ Interest rates have passed the peak of 1966:
and if there is continued inaction on the tax bill they
will climb even higher, and I warn the Congress and
the nation tonight that this failure to act on the tax
bill will sweep us into an accelerating spiral of price
increases; a slump in horne building; and a continued
erosion of the American dollar and this would be a
tragedy for every American fami ly. "
This is not just the President's view or that of his advisers
and the unanimous Federal Reserve Board. This need for a temporary
surcharge of ten percent on personal and corporate income taxes -which average, for the individual, to about one cent on the dollar
earned -- is supported by the overwhelming majority of the nation's
le~ding economists, and the country's principal business, financial
and labor lead..2LS~

- 7 Another way of putting the size of this surcharge in
perspective is to recall that the tax reductions enacted
in 1961 to 1965 came to 20 percent 0 f the tax due, or
somewhat over two percent of the income of Americans. Our
proposal is to restore, on a temporary basis, less than
half of this cut.
The termination of the surcharge is keyed to our
ability to reduce substantially expenditures in Vietnam
following a cessation of large scale hostilities. If
this occurs before June 30, 1969, the President will
recommend an early end of this tax.
On Monday, the Congress will be presented a budget
which does include substantial expenditure reductions in
1968, which does represent a tight hold-down in expenditures
in 1969, which does devote the requested tax increase to
deficit reduction -- not to rising expenditures -- and which
does assure that the tax increase is truly temporary, needed
only so long as the fighting in Vietnam requires it.
There are those who have maintained for months that
the medicine prescribed for the patient is more than he
can take
They say tax increases will halt our economic expansion
and push the economy into a stall or perhaps worse. There
are those who fear that "temporary" means permanent and that
the surcharge will become a permanent factor of the Federal
tax structure. But given the specific termination, the
circumstances and setting of the tax and the need for measures
of tax reduction in the wake of cessation of hostilities to
stimulate the economy to utilize the resources released by
the coming of peace, give assurance that this tax will be
temporary.
We are now approaching a period of critical national
decision on a very fundamental issue involving the future
of ~he U.S. economy and the world monetary system of which
it 1S a part.
The issue has been roundly debated for five months Slnce
the President recommended the proposal last August. It has
been examined carefully in hearings on three occasions. Let
us look back over the course of the discussion of this issue
and see what has happened.

- 8 Last year there were some who doubted the econom1C
forecast and were not sure the economy would rise after the
slow start in 1967. The economy has risen by $32.5 billion
in the second half of 1967 in contrast with only $13 billion
in the first half.
Last year there were some who doubted there would
be an inflationary trend in the absence of a tax increase
it is clear that we are in a rising price trend, with consumer
prices rising at a rate of four percent in the second half of

1967.
Last year we said that our balance of payments
position, especially after the British devaluation, would be
serious without a tax increase -- it did become serious,
we lost a billion dol~ars in gold, and we hact to resort to a
new and restrictive program with respect to our balance of
payments.
Last year many wanted the 1968 budget expenditures reduced
and there was talk of $5 billion in this area -- the fiscal
year 1968 budget has been reduced, with the reductions coming
close to $4.5 billion.
Last year many urged that the 1969 budget increase be
held to not more than the rate of increase in the 1967 budget
over the 1966 budget -- this has been done, and 1969 budget
expenditures, however defined, will rise at a lower rate in
1969 than in 1968 or 1967.
Many wanted us to restrict new programs -- this has
been done
They wanted us to cut back existing programs this
year
this has been done.
In all this process we must remember tbat time 1S
running -- we have already lost $4.5 billion of the requested
tax increase and thus have lost the opportunity to reduce
the deficit and the need for Federal borrowing by that
amount.
Of course we can debate at length whether the increases
in existing programs in the 1969 budget should have been as
high as $3 billion, even though these increases were offset
by reductions in other programs. But we must remember as we
keep debating that time is still running -- the tax program
now comes to $16 billion over the fiscal years 1968 and 1969
and will reduce the deficit by that amount. I do not see how
any amount of discussion can produce a change in the budget
expenditures remotely near that figure.

- 9 The issue, then, on any tax increase, is not whether we
like it or not. Of course we don't like it. The issue on
the President's action on various controversial measures on
the President's balance of payments program announced on
January 1 is not whether we like them or not. Of course we
don't like tax increases or restrictive measures on the way we
spend our money abroad. The issue is whether we dislike these
as much as we would dislike the consequences of not reducing
and holding down expenditures, increasing taxes and taking
direct measures to curb the outflow of our dollars, while
better, longer-term, solutions are being brought to bear upon
the international monetary situation.
One often hears the comment that old age
unwelcome, but the alternative is worse.

very

So it is with the tax increase and the balance of payments
measures if you examine the alternative to a failure to take
these act ions.
Those of us in public service have a grave and unusual
responsibility in dealing with this type of situation.
President Johnson did not like to recommend a tax increase
or to exercise the sharp budgetary restraints that characterize
the present spending program. But he acted as he had to act
in face of a dangerous deficit, rising interest rates and the
threat of unacceptable inflationary pressures.
Since that time, the responsible leaders of business,
labor, and finance -- who don't like to recommend harmful
measures for their constituents and stockholders -- have joined
in the President's recommendation. 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.
But now the issues presented untimately will be resolved
either by the action or inaction of the Congress.
I can only hope that their decision will be that of the
great Edmund Burke, who dealt with an issue not to the liking of
a group of his constituents, with the following comment: "I would
rather displease my constituents than harm them." It is my sincere
conviction that that is the unhappy choice facing the country and
the Congress today.
000

FOR RELEASE AT 12: 00 NOON (EST) MONDAY, JANUARY 29, 1968
(THERE SHOULD BE NO PREMATURE RELEASE OF THIS
MATERIAL NOR SHOULD A~ OF ITS CONTENTS
BE PARAPHRASED, ALLUDED TO,
OR HINTED AT IN EARLIER STORIES)

STATEMENT BY THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
AT THE PRESS BRIEFING ON FISCAL YEAR 1969 BUDGET
SATURDAY, JANUARY 27, 10:00 A.M. (EST)
AT THE NEW FEDERAL OFFICE BUILDING
The new budget makes plain for all to see that the
early adoption of the President's tax increase proposals
is a necessary and indispensable element in a sound financial
plan for the next IS months.
Fiscal responsibility is incompatible with back-to-back
budget deficits in fiscal 1968 and 1969 exceeding $20 billion.
~e

early passage of the tax increase proposals is the only

way in which these deficits can be reduced in a meaningful
measure.
Paying additional taxes is not pleasant to ask of the
American taxpayer.

But it is necessary if we are going to

raise the revenues to pay our bills without excessive borrowing.

- 2 -

Passage of the tax program would produce an additional
$16 billion in revenue over the next 18 months and reduce
the deficits for the fiscal years 1968 and 1969 by that
total amount -- reducing the current fiscal year deficit
from $22.8 billion to $19.8 billion and the fiscal year
1969 deficit from $20.9 billion to $8 billion.
No amount of discussion and debate is going to produce
changes in budget expenditures remotely near those figures.
Therefore, the alternatives are clear -- either accept
these dangerous and intolerable deficits over the next
18 months or pass the tax proposals in this budget.
Failure to enact the tax increases proposed, thereby
allowing these clearly excessive budgetary deficits to go
uncorrected, is to risk fueling a boom that will produce a
bust.

Already, our deficits and a high rate of expansion

are contributing to an unacceptable acceleration of price
increases, causing the highest interest rates in 40 years
and leading to further credit stringency, and triggering a
deterioration in our trade surplus which is very damaging to
our balance of payments position.

- 3 -

Unless we put our fiscal affairs in order by the
enactment of the President's tax increase proposals, we
shall be unable to deal effectively with these problems.
We will thereby jeopardize the record breaking seven-year
steady and stable expansion in our economy and the 20-year
operation of a sound international monetary system that
has brought the greatest era of world trade and development
in history.
A thorough examination of the budget will reveal that
it incorporates a policy of austerity on the expenditure side.
Reduction of the deficits to manageable levels calls
for a combination of restraint on expenditures and increased
revenues.

To reflect this combination called for initially

bv the President's tax message last August 3, 1967, the

budget reflects the joint economy efforts of the President
and the Congress in the closing months of the last session.
~ese

resulted in nearly $10 billion of reduced appropriaticns

and $4.3 billion of reduced expenditures in fiscal 1968.
Moreover, the 1969 budget represents no net increase
in controllable civilian program levels, with all increases
offset hy decreases.

This financial plan incorporates national

- 4 priorities which have made it necessary to cut back or hold
back many prog::-uns below desirable levels in order to make
room for a few selected increases in very high priority
activities.

The increase in the total budget for 1969 over the
previous year is far less than the increases in expenditures
in 1968 or 1967 over previous years.

The total rise of

$10-1/2 billion in projected spending is completely accounted
for by higher

~xpenditures

for defense, obligatory interest

on the public debt, and mandatory payments acquired by
recently enacted laws dealing with social security, public
assistance,

ve~erans

benefits and Federal pay increases.

Increased revenues to be derived in fiscal 1969 from
the increased scale of economic activity will be sufficient
to more than fund these inescapable increases in expenditures.
The total yield from increased taxes would go to a reduction
in the deficIt,

~hereby

avoiding the fear of many that

increased t3XP.S would only go to fund increased expenditures
rather than contribute to a declining deficit.
The budget reveals that even with the projected increase
in expenditures, but without the proposed tax rise, the deficit

- 5 -

would be considerably less than the $26 billion of special
expenses of Vietnam.

This fact gives assurance that the

tax increase need only be temporary and can be terminated
when a cessation of the hostilities in Southeast Asia
relieves the budget pressures from that conflict.
Even with the projected austerity in expenditures and
the proposed tax hike, there will still be strong pressures
on the economy.

An adequate fiscal program, including both

expenditure restraint and increased taxes, is necessary to
support our security efforts in Asia

keep our economy strong

and stable, reverse the trend toward a spiraling inflation,
improve our balance of payments, and

~lill

provide for some

increase in our -efforts to impro'le substantially the plight
of our disadvantaged citizens.
In conclusion, this budget presents the issue of an
increase in taxes in an unavoidable

co~text.

will be taken either by action or inac\..ion.

A decision
The budget

frames it square ly .
Let us review what has

happe~ed

to the arguments against

the President's tax increase proposals.

- 6 -

Last year there were some who doubted the economic
forecast and were not sure the economy would rise after
the slow start in 1967.

The economy has risen by $32.5

billion in the second half of 1967 in contrast with only
$13 billion in the first half.
Last year there were some who doubted there would be
an inflationary trend in the absence

tax increase

it is clear that we are in a rising price trend, with consumer
prices rising at a rate of four percent in the second half
of 1967.
Last year we said that our balance of payments position,
especially after the British devaluation, would be serious
without a tax increase -- it did

becom~

serious, we lost a

billion dollars in gold, and we had to resort to a new and
restrictive program with respect to our balance of payments.
Last year many wanted the 1968 budget expenditures reduced
and there was talk of $5 billion in this area -- the fiscal
year 1968 budget has been reduced, wi td the reductions coming

close to $4.5 billion.

But the deficit is still running at

around $20 billion.
Last year many urged that the 1969 budget increase be
held to not more than the rate of increase in the 1967 budget

- 7 over the 1966 budget -- this has been done, .:mel 1969 buclget
expenditures, howcvQr defined, will rise at a lm'ler rate
in 1969 than in 1968 or 1967.

Many wantect us to restrict new programs -- this has
been done.

They wantecl us to cut back existing programs

this yedr -- Ll1i.s

h.1S

heen Jone.

In all this process we must remember that time is
running -- we have <.llreacly lost $4.5 billion of the requested
tax increase and thus have los t the opportllni ty to reduce
the deficit and the need for Federal borrowing by that amount.

Of course there can be unending debate about whether
expenditures have been cut enough or too much -- whether
additional cuts can or 'will be made -- whether the proposed
cuts can or will be adopted

whether additional outlays

to those proposed in the budget ought to be included in
our scale of nCltion,l1. priorities.
throughout this

s('s~ion

This debate will rage

of Congress and there3fter into the

active political campaigns of thir, fall, only to be resumed
once again next January.
\Vhatever the outcome of this debate on expenditures,
the. decision to increase taxes .:md thereby take $16 billion

- 8 off these b,lck-to-b~lck $20 hillion defLcits cannot be put

off much longer.

It will ue taken hv .jf[irmntive action

on the President's tax proposals as proposed or in amend2d
form or simply by fai lure to act.

That is the fi rst and

decisive issue :)rcsente,l by the President's bunget.

TREASURY DEPARTMENT
=

ELEASE 6: 30 P.M.,

U. January 29, 1968.
RESULTS OF 'ffiEASURY I S WEEKLY BILL OFFERING
'!be Treasury Department announced that the tenders for two series of Treasury
one series to be an additional issue of the bills dated November 2, 1967, and
Ither series to be dated February 1, 1968, which were offered on January 24,
were opened at the Federal Reserve Banks today. Tenders were invited for
10,000,000, or thereabouts, of 91-day bills and for $1,000,000,000, or there;5, of 182-day bills.
The details of the tW'o series are as follows:

; OF ACCEPTED
91-day Treasury bills
;TITIVE rIDS: _ _ _
ma_t_ur_i_n..
g_Ma
___y_2...., _1_9~6....;8~_
Approx. Equi v .
Price
Annual Rate
High
98.783 ~/
4.815%
98.767
Low
4.87810
Average
98.775
4.846%

182-day Treasury bills
maturing August 11 1968
Approx. Equiv.
Price
Annual Rate
97.515
4.91511
97.478
4.98%
97.494
4. 957<f,

1.1

~/ Excepting 1 tender of $1,515,000;

'E/

Excepting 2 tenders totaling $343,000
57i of the amount of 91-day bills bid for at the loW' price was accepted
87i of the amount of 18c-day bills bid for at the low price was accepted
~

TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DIS'lmCT3:

,trict
,ton
i York
iladelphia

AEl~lied

Lanta
icago
. Louis
nneapolis
nsas City
llas
n Francisco

AEElied For
$ 26,999,006
1,873,766,000
25,649,000
31,630,000
21,069,000
42,986,000
210,196,000
61,008,000
23,405,000
27,018,000
22,407,000
103,718,000

AcceEted
$ 12,089,000
1,096,416,000
13,591,000
31,244,000
11,069,000
34,236,000
138,046,000
51,849,000
15,548,000
23,018,000
15,407,000
57,693,000

mThLS

$2,469,851,000

$1,500,206,000 ~ $1,918,134,000

~veland

~hmond

For

7,883,000

1,474,689,000
16,254,000
28,748,000
10, 772,000
30,791,000
160,038,000
39,056,000
17,469,000
16,467,000
19,364,000
96,603,000

AcceEted
45
7,883,000
738,909,000
8,254,000
19,748,000
6,772,000
20,776,000
80,998,000
33,749,000
9,469,000
12,337,000
14,364,000
46,793,000
$1,000,052,000 ~/

inClUdes $244,389,000 noncompeti ti ve tenders accepted at the average price 0,' 98.775
~clUdes $130,119,000 noncompetitive tenders accepted at the average price 0.: 97.494:
es; rates are on a bank discount basis. The equivalent coupon issue yields are
4.99;0 for the 91-day bills, and 5 .17~ for the 182-day bills.

148

STATEMENT OF THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
BEFORE THE
SENATE BANKING AND CURRENCY COMMITTEE
ON LEGISLATION TO REMOVE THE GOLD COVER
TUESDAY, JANUARY 30, 1968, at 10:00 A.M.

r. Chairman and Members of the Committee:
M
I am grateful to you for the opportunity to appear before
you promptly in support of the President I s recommendation for

remova 1 of the go ld cover.
The legislation before you would eliminate the 25% gold
reserve requirement from Federal Reserve notes and the $156
million reserve held against U.

notes and Treasury notes

of 1890.

The Administration believes that prompt action to remove
the cover requirement is necessary for three principal reasons:
Prospective normal increases in currency holdings
-- Federal Reserve notes -- by the public will
"lock up" more and more of our "free' gold and
soon reach a point inhibiting further expansion
of our pocket cash, one portion of our domestic
money supply.

Obviously we cannot tolerate such

a situation.
There should be no doubt whatsoever that our total
gold stock is available to insure the free international convertibility between the dollar and
gold at the fixed price of $35 an ounce.

- 2 The world knows as a fact that the strength of the
dollar depends upon the strength of the U. S. economy
rather than upon a legal 25 percent reserve requirement against Federal Reserve notes, and it is clearly
appropriate for this fact now to be recognized in
legislation.
Despite these facts, the gold reserve requirement against
Federal Reserve notes, instituted at a time when gold circulated
freely in the domestic economy, is still part of our law.

should be removed.
The need for prompt removal is apparent from a look at
the simple arithmetic of the problem.
The U. S. gold stock is now at $12 billion
the cover reguirement is approximately $10.7
billion -- the balance remaining is $1.3 billion.
The normal increase in notes will absorb over $500 million
annually and a further $150 million or more will be absorbed
each year for domestic artistic and industrial purposes.

These

two factors taken together mean that about $700 million a year
of our free gold will be absorbed for domestic reasons.

There

is thus but two years grace at most even if one assumes that no
gold at all will be needed for international purposes.
We cannot proceed on such an assumption.

Clearly

- 3 Since the passage of the Federal

RC3~rve

Act more than

a half century ago, the function of gold in our monetary
system has undergone a fundamental transformation.

Gold no

longer circulates freely as domestic currency in any major
country in the world.

\ve Americans have not used gold as

domestic currency since 1934.
international reserves.

Gold belongs in a nat ion's

The dollar :serves

currency to the world; the United States

3.5

resc·C"J(,

gold supply is

available to convert dollars held by national monetary
authorities at a fixed price.

As such, it is one corner-

stone -- and a very main cornerstone

of our international

monetary sys tem.
Today, the strength of the dollar is not a function of
this legal tie to gold -- a tie \vhich is only applicable to
one portion of our total money supply, Federal Reserve notes.
The value of the dollar -- whether it be in the form of a
bank balance

a coin

or "foldin n money"
b

is dependent on

the quantity and quality of goods and services which it can
purchase.

It is the strength and soundness of the American

economy which stands behind the dollar.

Balanced growth at:

home and a strong competititve position internationally give
the dollar we use as everyday pocket money its strength

An expanding United States economy needs an expanding
Supply of currency.

Our main form

currency is Federal

- 4 Reserve notes.

1 (./

LV\J

In the years ahead, we can expect increases

in Federal Reserve note circulation of about $2 billion a
year.

This growth is a normal response to the pub lic I s

demand for cash in a growing economy.

It is basically a

trend development, reflecting a growing population, a growing
economy, and a growing number of transactions.
Not to move on the cover requirement at this time would
only mean putting off the inevitable.

We cannot afford to

permit an outmoded provision of our law to impinge on the
nation IS supp ly of pocket money.
Removal of this requirement is also of key importance
from the viewpoint of the role of the dollar and of gold in
the international monetary system.
I know most members of this committee are well versed
in the functions of gold and the dollar in the international
monetary system.

Rather than take up your time with a descrip-

tion at this point, I would refer you to a Treasury report which
was issued two weeks ago, entitled Maintaining the Strength of
the United States Dollar in a Strong Free World Economy, and
ask that Chapter I, which describes the international monetary
system and the role of the dollar, be inserted in the record.
If this system, which has served the entire free world
so admirably in the past twenty years, is to continue to

- 5 facilitate the growth of world trade and prosperity, we must
assure that confidence in the system and in the strength of
the dollar is maintained.

This requires action on four fronts:

We must continue the long-standing United States' policy
of maintaining the gold-dollar relationship at $35 per
ounce.

This must not be open to question, and the best

way to make continuation of that policy crystal clear
is to free our entire gold stock for that purpose.
We must assure that the U. S. economy grows in an environment of cost and price stability through enactment
of the anti-inflation tax and through expenditure controls and appropriate monetary policy.
We must achieve sustained equilibrium in our balance
of payments.
We and the rest of the free world must put into place
the plan for the creation of a new reserve asset agreed
upon in Rio last September.
Our policy of maintaining the fixed relationship between
gold and the dollar at $35 an ounce for legitiamte monetary
purposes is one of the reasons why virtually all countries
hold dollars in their reserves and why many of them hold very
large amounts of dollars.

In addition, of course, countries

hold dollars because, unlike gold, they can invest them in
interest earning assets.

- 6 -

The monetary authorities of most of the major industrialized countries understand full well that the link between
and

golQ

domestic currencies is no longer a pertinent and

relevant fact and that gold is an international asset.

Only

three other countries in the Group of Ten plus Switzerland,
the major industrialized countries, still maintain some link
between their domestic currencies and gold.

While foreign

authorities are aware of the fact that the Federal Reserve
can suspend the cover requirement, they find it difficult to
understand why the United States, the world's major reserve
currency country, still maintains this legal impediment to
the free international use of gold.
Thus, legislative action on the cover requirement, by
~king

it clear to the world that the Congress as well as

the Executive Branch are committing our total gold stock to
international use, is necessary to maintain confidence in
the dollar.
Removal of the gold cover will not solve the United
States' balance of payments problem nor is it a substitute
for the solution of that problem.
The need to achieve sustained equilibrium in our international payments position is essential to confidence in the
dollar and the future stability of the international monetary

- 7 system.

The series of measures announced by the President on

January 1, with which you are all familiar, are designed to
bring us to, or close to, equilibrium this year.
that they be successful.

It is vital

I ask, Mr. Chairman, that the Presi-

dent's message be made a part of the record of these hearings.
Conclusion
I urge the committee to consider and act promptly on the
gold cover legislation before you in order that, domestically,
we can continue to be assured that the Federal Reserve will be
able to supply appropriate amounts of currency to meet the needs
of our growing economy for cash, and in order that our policy
of maintaining the gold-dollar relationship -- one of the
major elements of confidence in the dollar and the international
monetary system -- will not be open to question.

MESSAGE TO THE NATION
ON THE BALANCE OF PAYMENTS

JAN 1 1968
Where We Stand Today

I want to discuss with the American people a subject of vital concern
to the economic health and well-being of this Nation and the Free World.
It is our international balance of payments position.

The strength of our dollar depends on the strength of that position.
The soundness of the Free World monetary system, which rests
largely on the dollar, also depends on the strength of that position.
To the average citizen, the balance of payments, and the strength of
the dollar and of the international monetary system, are meaningless
phrases.

They seem to have little relevance to our daily lives.

Yet

their consequences touch us all -- consumer and captain of industry,
worker, farmer, and financier.
More than ever before, the economy of each nation is today deeply
intertwined with that of every other.

A vast network of world trade and

financial transactions ties us all together.

The prosperity of every

economy rests on that of every other.
More than ever before, this is one world -- in economic affairs as in
every other way.
Your job, the prosperity of your farm or business, depends directly
or indirectly on what happens in Europe, Asia, Latin America, or Africa.
The health of the international economic system rests on a sound
international money in the same way as the health of our domestic economy
rests on a sound domestic money.

Today, our domestic money - - the

dollar - - is also the money most used in international transactions.

U. S.

That

-2-

mon"y can be Bound at home - - as it surely is -- yet can be in trouble
abroad - . as it now threatens to becc-me.
In the final analysis its strength abroad depends on our

earnin~

abroad

about as r.<any dollars as we send abroad.
U. S. dollars flow from these shores for many reasons - - to pay for
imports and travel, to finance loans and investments and to maintain

Ollt

lines of defense around the world.

nen that

outflow is greater than our earnings and credits from

foreign nations, a deficit results in our international accountll.
For 17 of the last 18 years we have had such deficits.

For a time

thost: deficits were needed to help the world recover from the ravag<'s
of World War II.

They could be tolerated by the United States and welcomro

by the rest of the world.

They distributed more equitably the world'.,

monetary gold reserves and supplemented them with dollars.
Once recovery was assured, however, large deficits were no longer
needed and indeed began to threaten the strength of the dollar.

Since 1961

your government has worked to reduce that deficit.

By the middle of the decade, we could see signs of

SUCCIOSB.

Our

annual deficit had been reduced two-thirds -- from $3.9 billion ill 1960
to $1. 3 Dillion in 1965.
In I Q 66, because of ollr Increased responsibility to arrrl and supply
our men In Southeast Asia, progress was interrupted, with the deficit
rem.aining at the same level as 1965 -- about $1. 3 billion.
In 1967, progress was reversed for a number of reasons:
Our costs for Vietnam increased further.
Private loans and investJnents abroad increased.
Our trade surplus, although larger than 1966. did not rise
dS

much as we had expected.

Americans s pent more on travel abroad.

-3-

Added to these factors was the uncertainty and unres t surrounding
the devaluation of the British pound.
national monetary system.

This event strained the inter-

It sharply increased our balance of payments

deficit and our gold sales in the last quarter of 1967.

The Problem
Preliminary reports indicate that these conditions may res ult in a
1967 balance of payments deficit in the area of $3.5 to $4 billion -- the
highest since 1960.

Although some factors affecting our deficit will be

A Time for Action
The time has now come for decisive action designed to bring our
balance of payments to -- or close to -- equilibrium in the year ahead.
The need for action is a national and international responsibility of
the highest priority.
I am proposing a program which will meet this critical need, and
at the same time satisfy four essential conditions:
Sustain the growth, strength and prosperity of our own economy.
Allow us to continue to meet our international responsibilities
in defense of freedom, in promoting world trade, and in
encouraging economic growth in the developing countries.
Engage the cooperation of other free nations, whose stake in a
sound international monetary system is no less compelling
than our own.

-4-

Recognize the special obligation of those nations with balance
of payments surpluses, to bring their payments into equilibrium.

The First Order of Busineu
The first line of defense of the dollar is the strength of the American
economy.
No business before the returning Congress will be more urgent than
this:

To enact the anti-inflation tax which I have sought for almost a year.

Coupled with our expenditure controls and appropriate monetary policy,
this will help to stern the inflationary pressures which now threaten our
economic prosperity and our trade surplus.
No challenge before business and labor is more urgent than this:
To exercise the utmost responsibility in their wage-price decisions, which
at home and
affect so directly our competitive position/if' world markets.
I have directed the Secretaries of Commerce and Labor, and the
Chairman of the Council of Economic Advisers to work with leaders of
business and labor to make more effective our voluntary prosram of wageprice res traint.
have also instructed the Secretaries of Commerce and Labor to
work with unions and companies to prevent our exports from being reduced
or our iITlports increased by crippling work stoppages in the year ahead.
A sure way to instill confidence in our dollar - - both here and abroad
is through these actions.

The New Program
But we ITlust go beyond this, and take action to deal directly with the
balance of payments deficit.
Some of the elements in the program 1 propoBe will have a temporary
but immediate effect.

Others will be of longer range.

All are necessary to assure confidence in the American dollar.

-51.

Direct Investment
Over the past three years, American business has cooperated with

the government in a voluntary program to moderate the flow of U. S.
dollars into foreign investments.

Business leaders who have participated

so wholeheartedly deserve the appreciation of their country.
But the savings now required in foreign investment outlays are
clearly beyond the reach of any voluntary program.

This is the unanimous

view of all my economic and financial advisers and the Chairman of the
Federal Reserve Board.
To reduce our balance of payments deficit by at least $1 billion in
1968 from the estimated 1967 level, I am invoking my authority under
the Banking Laws to establish a mandatory program that will restrain
direct investment abroad.
This program will be effective immediately.

It will insure success

Authorizations to exceed these targest

Problems arising from

work already in process or commitments under binding contracts
will receive special consideration.
New net investments in other Ilieveloped countries will be limited
to 65% of the 1965-66 average.
New net investments in the developing countries will be limited
to 110% of the 1965-66 average.

-6This program also requires businesses to continue to brin. back
foreign earnings to the United States in line with their own

196"-66

practices.
In addition. I have directed the Secretary of the Trea.ury to explore
with the Chairmen of the House Ways and Means Committee and Senate
Finance Committee legislative proposals to induce or encourase the
repatriation of accumulated earnings by U. S. -owned foreign bClJ..... ee.
2..

Lending by Financial Institutions
To reduce the balance of payments deficit by at least another $500

million, I have requested and authorized the Federal Reserve Board
to tighten its program restraining foreign lending by banks and other
financial ins titutions.
Chairman Martin has assured me that this reduction can be achieved:
without harming the financing of our exports;
primarily out of credits to developed countries without jeopardizing
the availability of funds to the rest of the world.
Chairman Martin believes that this objective can be met through continued
cooperation by the financial community.

At the request of the Chairman,

however, I have given the Federal Reserve Board standby authority to
invoke mandatory controls, should such controls become desirable or
necessary.
3.

Travel Abroad
Our travel deficit this year will exceed $2 billion.

To reduce thls

deficit by $500 million:
I am asking the American people to defer for the next two years
all nonessential travel outside the

Western Hemisphere.

I aITl asking the Secretary of the Treasury to explore with the
appropriate Congressional com.mittees legislation to help achieve
this objective.
4.

Government Expenditures Overseas
We cannot forego our essential commitments abroad. on which America's

security and survival depend.

-7-

Nevertheless, we must take every step to reduce their impact on
our balance of payments without endangering our security.
Recentl y, we have reached important agreements with some of our
NATO partners to lessen the balance of payments cost of deploying American
forces on the Continent - - troops necessarily stationed there for the common
def ens e of all.
Over the past three years, a stringent program has saved billions
of dollars

foreign exchange.

I am convinced that much more can be done.

1 believe we should set

as our target avoiding a drain of another $:'00 million on our balance of
payments.
To this end, 1 am taking three steps.
First, I have directed the Secretary of State to initiate prompt
negotiations with our NATO allies to minimize the foreign exchange costs
of keeping our troops in Europe.

Our allies can help in a number of ways,

including:
The purchase in the U. S. of more of their defense needs.
Investments in long-term United States securities.
I have also directed the Secretaries of State, Treasury and Defense
to find similar ways of dealing with this problem in other parts of the
world.
Second, 1 have instructed the Director of the Budget to find ways of
reducing the numbers of American civilians working overseas.
Third, I have instructed the Secretary of Defense to find ways to
reduce further the foreign exchange impact of personal spending by U. S.
forces and their dependents in Europe.

Long-Term Measures

Export Increases
American exports provide an important source of earnings for our

I;uoineli~_ .. n

-ODd jobs for our workers.

-8-

They are the cornerstone of our balance of paytnents position.
Last year we sold abroad $30 billion worth of American lood •.
What we now need is a long-range systematic program to stimulate
the flow of the products of our factories and farm. into overseas markets.
We must begin now.
Some of the steps require legislation:
I shall ask the Congress to support an intensified five year, $200
million Commerce Department program to promote the sale of American
goods overseas.

I shall also ask the Congress to earmark $500 million of the ExportImport Bank authorization to:
Provide better export insurance.
Expand guarantees for export finanCing.
Broaden the scope of Government financing of our exports.
Other measures require no legislation.
I have today directed the Secretary of Corrunerce to begin a Joint

Export Association program.

Through these Associations, we will

provide direct financial support to American corporations joining together
to sell abroad.
And finally, the Export-Import Bank -- through a more liberal
rediscount systern -- will encourage banks acr088 the Nation to help firms
increase their exports.
6

N::lntariff Barriers
In the Kennedy Round, we climaxed three decades of intensive effort

to achieve the greatest reduction in tariff barriers in all the history of
trade negotiations.

Trade liberalization remains the basic policy of

the United States.
We must now look beyond the great success of the Kennedy Round
to the problems of nontarifi barriers that pose a continued threat to the
grow th

of world trade and to our competitive position.

- 9-

American commerce is at a disadvantage because of the tax systems
of some of our trading partners.

Some nations give across-the-board

These rules must be adjusted to

expand int('rnational trade further.
In kepping with the principles of cooperation and consultation on
common problems, I have initiated discussions at a high level with our
friends abroad on these critical matters - - particularly those nations
with bahne;> of payments surpluses.
Thesf' rliscussions will examine proposals for prompt cooperative
action among all parties to minimize the disadvantages to our trade
which arise from differences among national tax systems.
We ,'lre also preparing legislative measures in this area whose scope
and natur" will depend upon the outcome of these cons ultations.
Through these means we are determined to achieve a substantial
improvement in our trade surplus over the coming years.

In the year

immediately ahead, we expect to realize an improvement of $500 million.
7.

Foreign Investment and Travel in U. S.
We can encourage the flow of foreign funds to our shores in two other

ways:
First, by an intensified program to attract greater foreign
investment in U. S. Corporate securities, carrying out the principles
of the Foreign Investors Tax Act of 1966.
Second, by a program to attract more visitors to this land.

10
Meeting the World's Reserve Needs

Our movement toward balance will curb the flow of dollars into
international reserves.

It will therefore be vital to speed up plans

for the creation of new reserves - - the Special Drawing Rights - - in
the International Monetary Fund.

These new reserves will be a

welcome companion to gold and dollars, and will strengthen the gold
exchange standard.

The dollar

~ill

remain convertible into gold at

$35 an ounce, and our full gold stock will back that commitment.

A .Time for Responsibility

The program I have outlined is a program of action.
It is a program which will preserve confidence in the dollar, both
at home and abroad.
The U. S. dollar has wrought the greatest economic miracles of
modern times.
It stimulated the resurgence of a war-ruined Europe.
It has helped to bring new strength and life to the developing world.

It has underwritten unprecedented prosperity for the American people,
who are now in the 83d month of sustained economic growth.
A strong dollar protects and preserves the prosperity of businessman
and banker, worker and farmer -- here and overseas.
The action program I have outlined in this message will keep the
dollar strong.

It will fulfill our responsibilities to the American people

and to the Free World.
I appeal to all of our citizens to join me in this very necessary and
laudable effort to preserve our country's financial strength.

II # II II II

EXCERPT FROM TREASURY DEPARTMENT REPORT, MAINTAINING
THE STRENGTH OF THE UNITED STATES DOWAR IN A
STRONG FREE WORLD ECONOMY
I. The International Monetary System and Adjustment
of Payments Imbalances
The problem of the U.S. balanc£> of payments can be understood and
analyzed only against the background of an understanding of the
present international mOIH'tary syst£>m. This paper therefore begins
with 1\ description of the complex institutional framework within
which world trade and payments are carried out . .A second chapter
discusses the ('urrent prohlems facing th£> present system. Subsequent
('hupters thl'n proc£>ed to analyze the key elements of the U.S. balance
of payments prohlem in detail, the measures predously employed, and
the President's new program,

A. The International Monetary System-Why and How It Works
An internntional monetary system provides means and methods of
payments in order to facilitate international trade, capital and other
transactions, In u world composed of various ('ollntries, each with its
own CIl1'1'l'n(')" trade awl rapital !l1o\'ements across national borders
have not only to he paid for as tlwy are within any conntry~ hut haw
to be prO\'ided with a mechanisllI to ('OJl\'ert one ("ul'I'ency into another,
The .\mel'ican exporter to Italy u:-;ually wants to lX' paid in dollars-hi:-; ('urrPIH'Y, 'I'll{' Italian importer has lirl', Some mechanism
has to hp provided to ('Ol\\'l'l't tIlt' lirl' into (lollars to pay the .\meri('an expol'tpr, .\!\(l if ('l'(,dit is ill\'oh'p<!, thl're needs to be a financing
lIIechani:-;m that ('l'OSSPS the i'rontipr,
The requirements for handling intl'l'natiollal payments smoothly
are:
-The \'arious ('ulTelwip:-; shol\ld 1)(' ('oll\'pl'tihll' ('asily into p:\('h otlH'r,
-There needs to be confi<!elJ('p in thp :-:tahility of the pxchange rat('s
of t he major ('11 lTP Il<' il.':-; aga in:-:t ('a(' h ot hpl',
-The \'al'iolls ('olll1trips IH'NI to Il:ln) intpl'l1atiol1al l'e:-;el'\'p:; of
IInqul'stione<! \':dllP:-:o that if fol' a tilllP their olltpnYlllents exceed
their inpa.nlwl1t:-; they (':tn tin:tIH't' tllP ditl'pl'(,ll<'(, by using these
rE'sel'\'es,
-The syst('m works more smoothly if oWlled reserves as supplemented by credit facilities to ti<ip natiolls oYer periods of
imbalance,
In :t strict sponse, the international 1II01lPtary system is not a system at all. It is a series of arran~eanents, procedures, Gustoms and
(15)

248

16
in<.;titlltion!' w11i('11 han' f"'oln'o O\'rJ' timE' nno whi('h nrp In('('(l to~pthpr
11,\' a llt'twOl'k of fOI'lIl:d :\Ild infoJ'mal a~~TI'('nH'Hts, It 1m!' 1)('('11 pl\l'til\lI~'
l'o,liliP(1 as to ohjpdins. prinl'iplp!, :tnO PI'OCPOIll'('S hy thp ,\"ti('1('s of
,\,!!I'I'PIIH'llt of tlu' flltf'I'Il:ltionnJ ~f()IH't:ll'Y Fund (IMF), It hns )'('E'll
i<l('(1 h~~ intf'l'I\atioll:l I ('oo}wl'ation 011 tilt> PH!'t of tIl(' impclI't:lIlt ('(')lInd hallk", Ilf Illp \\'01'111-· 1l10",t ]lotalll.'" tltr011~h tIl(' sO-(':ll1l'd "",wap llE't\\llI'k," It "'ork~ p:l rt Iy I II l'o1Ji!h ('OI'I'("spollCh'nt 1'(\ In t iOll",h i p~ of t hp 111:\jill' ('OIllIlI\'1'I'ial hank ... of tlu' world, :\IOI)(,,\" ;\1)(1 ":lpit:ll m:II'kf'ts ill tIll'
rllit('cl ~tat('<.; :lnd ElIl'OpP :l1'{' im)l(lI'tant f:ldol's in ",akina' th(> s~'s11'111 '''/It'k. III 1'('('('lIt yl'nt's it has "('('11 sf 1'('ll~t}H'Ill'd hy a series of
,'oll..;"llati\'(' a1T:\l\~'\,llH'llt<; \11)(I<'l"ta\.;(,11 IIndpl" tIlt' :lllspif'f's of thp Or-

:,!:Jllizntioll foJ' El'OlloHli(' ('OOP<'I':lt illll :Ind npwloplllf'nt (OEeD),
Thp S~'",tt'IJll l'P<;ls 011 fin' pillal'S:
--a dollar ,'oll\"l'rtihlt' illto ,!!olcl at ~:~;I pl'l' O1I1H'(,:
- ·ot1\('1' lll:ljOI' ('III'I'PIWip~ ('III1\'PI'tihh· illto dolla)'" at ~t:ttl'd I':\t('!, of
,,'X('h:lllg'(,-l1llclPI' DfF l'"J('~ thl',\' lI1a~' ,"aI'," pll1<; 01' l1lillll~ 1 ])('1'""Ill from parity:
:I<Jl'flll:ttp illtpl'II:ltilll1:1J I'p,";I'I"'('~ :11)(1 ('I'pilit f:lI'ilitip", (It'",i~'IIt'd tn
"l1PPOl't tllt'sl' 1't'1:Itiol1..;hips:
. -:1 gnu'!':11 pl'l'~lIllqltioll that a "(Hllltt',\' will (l\"t,]' tilll(' hI' III (''lllilihrim)) in it~ il1tpl'l1at iOlla 1 po..;it iOIl-t Itat "'lIl'l'hl~I'''; ",ill hI' tl!l':,('!
hy clpfi,'it~ 1111 till' a \'pl'ag-!':
-ill !-'('('kill).! til :Id.illst frlllll ill·ti"it to !-'l1rphl'"', Ill' /,;, ,
,'so, a "(llllltry
\\"ill ta!.;:p illto al'('Ollllt tIl\' ('())I"'I''llll'll'"I'''; of it..; ;\1"1 illJ\~ 011 thl' world
1'1

,'01111111111 it,'"

B. The Role of the Dollar
III pr:lI'ti('p,:lll 1I1(,11i1)('r ('lll1llrl'i('~ of Ill(' L\fF whi('11 han' ('OI1'-<'l'tihl(' "lIn"'I\I'i\'''; (/111'1':111' thl"III~'11 Ilwil' "('1111':11 \':llIk" Ill' 1l11l1H't:\1'~' :\11.
111\)\,;tip:-; 10 1,\,(,1' tlll'ir "llrJ'PI\<'il'''; ill all l'",tallli"III'd J'\·1atioll..;lli)llo tlH'
<Illlbl', Fill' l'\::1I1I\1II', tIll' {'V';I:lII!!'{' parily "I' tIll' 1>-1I1:11'\': i" -4- til tht'
,1011:.1',111' ~(I,~'-', TIll' l\fF ilill'I'\"('lltioll lilllit" an' ~(I,:.!II,-, :tile! ~U,:!;'I:!;"I,
III pr:',"lin', III\' (;"l'lll:lll Fl'd,'I':IJ H:1l1\.; illll'rY"lll'" \\"ithill :-'Illllt'\\'hal
JI:IITIII\\'rlillllt:-, \Yll1'll 111\' dill I:. I' i..; "'tl'llllg" :lg":lill:-1 tll\' }>-lllal'k. tIll'
,101LII' 11I'i,"\' of lIlt' /)·/lI:ll'k f:1IJ~ 11'\\";11".1 ~II,:..!~'j:" TIl(' B1I1Hlt,,,,ltallk
,..!IJlpli\,,.. .]"Ihr" 1'1'0111 it,.. 1'I"vl'\"p", til huy 11)1 tlIP ,'X(,('S'" f)-mark!',
\YIIPII IIII' I )·IIl;ll'k i,.. :-II'Ollg" ;Ig"aill,..r 1111' ,Iolbl". il~ doll:!r ,'1'11"1' 1'1'"'1''''
!lIl\al'd ~II,:!:I~.-"

'1'111'11

1111'

Hlll1dt"!.:II1I,

'lIjI[llil''''

111:lr!.;,

alld

\111\":-

.\011:1 rs,
1-::11"11111(111\'1:;1'.' :llllllliritY a,'I,.. ''',..Pllli:lll\'
\ ('II

in!,!' ill il-.

""11

ill

liH' "aliIP

1I1:lrk"I-. I .. IIlall1taill tIll' pri"I'

Ilf

iI, ('II1'1'I'I1(',\' I';S-

I P('l'('('Jlt
ih parity,
Till' {"nill''' ~t:lll'''' dlll'~ 1101 11:1\ \' to I':llTy 1111 0lH'rHl iOIl"; likl' tlti~,
It fillfill", it", DII-' 1':lIil\ "I"i,~"alilln:- Ily fn'('ly IJllyill;! alld :-'t'lIilll!
,I-I';' III(' dlllhl' lIilllili 1111' 11;11'1"11\\" 1':111.1
fl'OIll

(If pIli'"

\\"ay-illtl'l'-

Ill' IIlillll";

17
gold for dollars-only with monetary authorities and for legitimate
monetary purposes, of course-at. $.35 per ounce.
The point is that virhmHy every count.ry does its market interventions by buying- or selling- dollars. It does so because the dollar
is the major transactions or vE.'hide currency and is widely used in
the payment. and receipt transu,ctions of internlttional trade ltnd capital flows. It doe." so because the rlollar is a reserve currency and most
countries hold dollars in their international reserves.
The dollar is both a reserve eurrency and a vehicle currency
because:
-it is strong, being- backed by a strong economy;
-it can be invested profitably because there exists a big money
a.nd capit.al market in the U.s. ;
-it is known and is 'acceptable as a store of value-that is, it. holds
its purchasing power better than most other currencies;
-it is in sufficient supply so that thE.'re are dollars that can be
used or borrowed for transactions; and
-it is conVE.'rtible by monetary authorities into gold so t.hat. they
are willing to hold it..
The r.s. did not delibE.'ratE.'ly make the no11ar a reserve currency or
a transactions currency. The dollar evolven as such ont of its basic
strength.
Hut this strengt h can he callen into question in two ways:
-If the supply of (lollars in foreign hanns beeomes greater than the
amount forpign central banks and private holders want to hold,
either bE.'('ausp oftheir hasic needs or for other reasons.
-If declines in the F.S. goln rpserw ann consequent unfavorable
pft'pds Oil tIll' relationship hphvPPll F.S. goln ann r.s. dollar
liahilities r:list' questions as to the ability of tlw r.s. freely to
conwrt olltstanning no11ars into gold at :j'0;) per ounce.
It is to prewnt su('h npwloplllE.'nts that tIlE.' r.s. must achieve sustainablp pquilihrilll11 ill its payments position. rnless it dops so, its
liahilities to foreigners in<Tease ann its gold rps('rws decrease, and the
Illonptary systPIl1 hecomes Illor(' nllnprablP to a shrinkage in oVE.'rall
liquinity that ('an cause st'rious financial and husiness disruption
through an international eraclit squeeze.
Foreign cE.'ntral banks and other official institutions hold some $16
billion of liquid donar asspts. Private foreigners hold another $16
billion.
The official holdings are reserves for the l'E.'st of the worln and
l'onstitllte nearly :)0 percent of slIch resE.'l'VE.'s. Hilt so long as they are
not withdrawn in tIll' form of gold, they have not reducen our reserves.
Thlls, our halances of payments nE.'ficit, IInlike those of a non reservE.'
currency country. has been only partially reflecten in a decline of

18
gold l'~serves or in onr r('serve position in the IMF, .A considerable
part of our halal1<'e of payments oeficit has been covered by an incrt'ase
in O\ll' liahilities I'atlwr than hy a reondion in our reserw assets,
"~hile it is not ne('('ssnry for n commercial hnnk to mnintain liquid
n~~l'ts to ('O\'er all or I'n'll n lIIajor part of its liquio liabilities, the
l·.~. as a r(,Sl'r\'l' ('ent('r i~ a hank in a rather special sense, nnd needs
to Ill:lintain a slIhstantial l'es('I'\'(, against its liahilities. It is important
t hat our l'eSel'\,(,S he no('qllate to mel't delllanos for conversion, and to
maintain confidence in the hank on the pnrt of the official and private
dollar holders nhroao.
Rising dollar liahil iti('s which constitute reser\'('s for other countries
han' permitteo the worl(l as a whole to build up its 1'(,8(>rV('8 ll1or{'
rapidly than would otllC'rwise haY(' Iwen tIl£' casf' .•\ I'etnrn of the
l nited States to f'quilibrimll wOllld cut otT t hi~ growth of l'('sen'es for
tlH'se conutril's. It has h('('ollle illl'rl'asillgly ('ll'al', thpl'efol'C', that SOlll('
other 1\l(,llns of prm'ioilll! for tlU' flltur(' growth in \YorIo I'(,Sf'l'\'es will
be required. To this ('nd. the IIIPmhel's of t!H' Intl'J'llationnl ~Jonetary
Fllnd han> now agl'£'Pcl on a plan for tl\l' d('lih(>l'ate (')'(>at ion of reserves
through 1Il111tilaft'l'al action. "~h(>ll this plan is in pti'l'd, the world
would no lon~er be <1epl'll(lent UpOll gold and t hp dpticits of the {""nited
Stat£'s to prm'ide foJ' th£' pxpansion ill \\'orl<l rpspnes which wil1
ht' needed in th(' f11ture.
Thlls the role of th(' dollar as a reSPl'\'e (,IllTt>Il<'Y has b(,(>ll intertwined
with the prohlem of ollr halancp of pa~'m('nts and has also I)('('n relateo
to til(' /!pnernl prohl(>1ll of l'xpan(lill/! world l'l'SPI'\'l'S. Throu/!h a 1l11l1til:ltpl'a I system of I't>sen'(' ('reation. Wl' (':tn 1'(>1 il'\'(' t Itt' dollar of its respon~ihility to pl'O\'i(lp fOI' a /!l'owth in world I'l'SPITt'S, and permit
('OIlCl'ntl'atioll fill tilt' ha lall"(' (If payllH'llts prohlelll.
TIl(' following- sect ions of this chapter Sl't forth t 1)(' elelllents of the
intPl'Ilationallllonetary system,
T

C'. Exchange Rates
(>Ill' of tIll' distin/!uishin/! features of the pr(>scnt international
Illolll'tary system is thp l'platiye stability of exchange rat(>s. l ndel' th(>
.\rtielps of .\gre('nwnt of tIl(' International ~lonetal'Y Fund-which
since their :I<loption at Bretton "'oods, Xpw Halllpshi-re. in H),a haw
PIlli>o(lied the formal principlps ano procedu),es which underly tlw
1)J'espnt systelll-counh'ips 1Illoertak(' to maintain ex('hang'p rntes for
tl'Hnsaetions in their ('ulTPIH'ies within a margin of OIl(' lll'l'c('nt of a
c\£'clarecl pal' "!lllle. This par valuc may 1>(' chan/!~d. with flU' approval
of the I~[F, in the event of a "fllndanH'ntal disequilihrillm" ill a COUlltry's halance of paYl1lpnts. For the most part, ho\\,('\,er, all the IIH'llIh(,l's
of the I~IF have shown a strong preferenee for st able ex('halll!e ratf'S
that are ('hanged only infl'('quently,
T

19
In order to maintain their currencies within a margin of one percent
of the declared par value, the monetary authorities of almost all
countries other than the United States intervene when necessary in
their exchange markets, buying or selling dollars against their own
currency. There are a few exceptions to this method of official exchangemarket intervention (notably in the sterling area), but for the most
part the entire pattern of stable exchange rates is maintained by virtue
of the fact that countries "peg" their exchange rates to the dollar.
Since most other countries peg their currencies to the dollar, the
United States itself does not need to intervene in the exchange markets
to maintain the value of the dollar in terms of other currencies.
~\lthough it may at times find it advantageous to do so in order to
assure more orderly markets and more efficient and economical use of
its reser,'es, the United States basically maintains its obligations
regarding pxchange stability in a "ery different manner: by freely
buying and selling gold in transactions with monetary authorities
(primarily central banks of other countries) at the price of $35 an
ounce. No country other than the United States freely buys and sells
gold. The whole l'xchange-rate system is therefore pegged to gold only
through the commitment of the U.S. monetary authorities to buy and
sell gold freely at thl' $35 price.

D. Reserves
In order to w('at her perioos of deficit in a system of stable exchange
rates, monetary authorities must hold reserves of internationallyacceptable liquid assets. If a ('('ntral bank hao no resenes with which to
purchase its own currency at times when its currency was in excess
market supply, it would han' no choice but to ask the UIF to approve
It change in its par ,'alue.
Reserves are held primarily in the form of gold and dollar claims
on the United States. Because dollars are held so widely in countries~
reser,'es, the dollar is the main "resen'e currenc-y" of the international
monetary system. Countl'ies in the sterling and franc areas hold part
of their reserves in sterling or French francs, and thus-to a much
lesser extent-the pound and the franc also funetion as reserve currencies. (!DId and resen'e curreneies are supplen1l'ntecl by reser\"(' credit
antilable from the International Monetary Fund (see below).
After an initial accrual of dollars rpstdting from market inten'ention, the coulltry can either retain its resen'e gain in the form of dollars
or choose to convert the dollars into another reserve asset, usually
goM. COIl\'ersely, a country necessarily experiences a resen'e loss by the
act. of sPlling clollars in its exchange market, thereby reducing its
dollar holdings. In order to stand ready to intelTene in the market,
central banks have to hold at least a working balance in dollars, This

20
working- halance rnn be rE"plE"nished as necE"ssary eithel' by selling other
I'PSl'IT(> ass{'ts (such as dollal's('curiti('s, tillle oeposits, 01' g-oId) held by
th~ 1ll0lwtary ;mthOl'iti('s or by drnwin~ on th(' DfF 01' other nedit
facilities,
~1;llIY din'rsp f:l<'tol's PIltpl' into thE" dE"cisiolls of ('PIltnd bunks when
t JH'Y (h,tl'I'mine t hl' proport ions of their reserves to hold in goold, dollars, and otlH'1' assds. Some ('elltmJ hanks have tl'aciitionalIy held their
I'('S(>},H'S primarily in gold eX(,E"pt for foreign-<'xchnnge wor'king balal1<'PS, Others han' historiral1y inn'sted almost all their reserves in
dollar or sterling assets, There are man,)' difi'el'l'nt patterns of behuvior
in between these two extremes, MOl'eOHi', many ('onntries have changed
their r('sl'l'\'('-composition policit:'s anI' time,
One important motin> for holding dollars is that tl1{'), cnn he inY('sted at illterE"st. Gold dO(,8 not earn any intl'I'('st alHl actllnl1y costs
somrthing to store safp1y,
It has already beell pointed out that the tTnited States mnilltains its
pxchan~e stability ohligations in a ulliqne n1:llllH'r. It is equal1y true
that the lTnited States must of necessity have a unique policy with resped to its r('serns, 1Vhereas other ronntries nse t]wir r('s('l'ves by
bllying or selling dollars ill their ('xchang(' mnl'kets~ the lTnit<,d States
II";('S its \'('Sel'n'8 only to H'd(,(,ln exc('ss dollars aCft'lir('d hy the monetary
nut horities of ot hrl' coun trirs,
This strndural featurl' of the illternational monetary system has nnother important implication: when tlw rnited States does llse its reserYe assets to redeem outstanding' cio]]ar 1iabi1ities, this redE"mpt ion-both in amount and timing-is cl('trrlllined by the reserve-asset
preferenres of forei~1l mOlletary <luthoritit's, The amollnt anel timing
of l-,S, use of reserve assets is then'fore not directly subject either to
r,s, dpsirps or to r$. officin l policy :l(,tiolls. Thp rnitNl States can
inf1l1('nc(' the rat(' at which it gains or los('s I'PS(,lTes only hy influencing
tllp attitlldes and ass('t pr<'fpI'Pl1ces of foreign monetary authorities.
Oil!' of thE" major fadm's infhwllcing' fOl'Pign official attitudes, of
('Ol1l'5e, is the prpntiling appraisal of tIl(' stren~th or weakness of the
l'.S. halance of payments and r('serve positions,
.rust as th{' rnited States m;eS l'esel'\'p~ in a unique manner, it must
hold its reserves suhject to consideratiolls that are unique, 'Vhereas
0(1)('1' ('olln!ries haye a range of assets from which to clioose that in(,ludes gold. dollars, other ('I1l'l'Plwi('s. nlHI I'esern positions ill tlIP
DfF. tll(' T~nited Stntes has a much more restricted fi~ld of choice,
It lllllst hold a,,~ets which are accC'ptahle to other ('ountriC's when they
('all upon the' T~nit('(l States to redeem Olll' outstanding- reserve-currPIH'Y
. li"hilitiC's, 1Yhile tll('re is some scopP for holdinO' other coun(riC's' ('1I1'I'(,l1ci('s in our l'es('l'\'('s, it is clear that in the present system the
ITnitC'd States must hold most of its reserves in gold.
~

19
In order to maintain their currencies within a margin of one percent
of the declared par value, the monetary authorities of almost all
countries other than the United States intervene when necessary in
their exchange markets, buying or selling dollars against their own
currency. There are a few exceptions to this method of official exchangemarket intervention (notably in the sterling area) ~ but for the most
part the entire pattern of stable exchange rates is maintained by virtue
of the fact that coulltries "peg'~ their exchange rates to the dollar.
Since most other countrie::; peg their curren(,ies to the dollar, the
United States itself does not need to intenene in the exchange markets
to maintain the value of the dollar in terms of other (·urrencies .
.\lthough it may at time.., find it advantageous to do so in order to
assure more orderly markets and more effiC'ient and eC'ollomical use of
its resen'es, the Fnited States basiC'ally maintains its obligations
regarding exC'hange stability in a \'ery differl'nt manner: by freely
buying and selling gold in transactions with monetary authoritirs
(primarily central banks of other countries) at the price of $;)5 an
ounce. No C'ountry other than the l~nited States freely huys and sells
gold. The whole l'xchange-ratr system is thereforr peggpd to gold only
through the COllllllitlllent of the F.S. monetary authorities to buy and
sell gold freely at tIll' $35 price.

D. Reserves
In order to weat her periods of deficit in a system of stable exchange
rates, monetary authorities must hold reserves of internationallyacceptable liquid assets. If a c('ntral bank had no reserves with which to
purchase its own eurrency at times when its currency was in excess
market, supply, it would han no choice but to ask the IMF to approve
n change in its par yalue.
Reserves are held primarily in the form of gold and dollar claims
on the United States. Because dollars are held so widely in countries'
reserves, the dollar is the main "reserve currency" of the international
monetary system. Countries in the sterling and franc areas hold part
of their reserves in sterling or French francs, and thus-to a much
lesser extent-the pound and the franc also function as reserve currencies. Gold and reserve currencies are supplemented by resene credit
available from the International Monetary Fund (see below).
After an initilll aecrual of dollars resulting from market intervention, the eountry can either retain its reserve gain in the form of dollars
or choose to convert the dollars into another reserve asset, usually
gold. COIl\'ersely, a country necessarily experi('nces a reserve loss by the
!lot of selling donars in its exchange market, thereby reducing its
dollar holdings. In order to stand ready to internne in the market,
central banks have to hold at least a working balance in dollars. This

20
mwking- halan('e ('an be replenished as nec(>ssary either by sel1ing other
I'I':-,PlTt' a:-'spf:.; (sue h as dolJa n;{'('u riti{'s, t illle d.pposi ts, 01' gold) held by
the 1II00wtal'Y authorities 01' hy drawing- on the DfF or oth('r credit
fneil it ies.
~rany din'r~e fadors Pllter into the decisions of I'entrlll banks when
Ihey cl('tPI'min(' tIl(' proportions of their ]'('S(ll'Yes to hold. in gold, dollars, alld otlH'I' assds. ~OIlH' l'pntl'l11 banks have trad.itiolla1ly held. their
l'I'S£'ITPS primarily in gold. except for forl'ign-('x..]ulllge working balall('(,s. Others han historically innsted almost all their reserves in
dollar 01' sterling assets. There are lllallY c1itf('rent patterns of b{'luH'ior
in between these two extremes. :Mot'eo\'el', lllallY ('oHntri{'s have changed
t hei l' resel'Y('-eomposit ion pol icies O\'er time.
Olle important nlotin' for holding dollars is that thpy can be in,·('~t('d nt interest. Gold ooes not earn any intl'rpst and a('tually costs
sOIll('thing to store safely.
It has already be(,1l pointed out that the lTnited States maintains its
('xehange stability ohligations ill a ullique manner. It 1S equally trm'
that the Pnited States must of necessity have a lllliqtH> policy with respect to its 1'(,spn·ps. 'Vlwreas othpr ('olllltrips use tlwir r(,S(,ITes by
hll,ving- 01' s(']]ing dollars in their pxchang'(' markets, the Unitpd States
ll,.;es its l'p~en'cs only to rer1(,(,111 excess dollars a(,quired hy thp monetary
allthoriti('s of oth('rcountri('s.
This structural feature of thc illtel'llntionallllollptary system has another important implication: wl\{'n the lTnited States dops nse its reS<'rYe assets to redeem outstanding do11ar liabilities, this redemption-both in amount and timing-is d('tl'rlllillCd by the reservc-asset
preferellc('s of foreig-n 1l101lPtal'Y <lllthoritips. The amount and timing
of 1'.8. llse of reserve. asspts is therefore not directly subject either to
1'.s. desi1'Ps or to r,~. offkin 1 policy a(,tions. Tllp rnitC'f1 Stntes can
illfhwllc(' thc rat(' at which it ga illS or los('s I'£'S('l"\'(,S only hy influcncing
the attitlldes and ass£'t pr('fl'I'PJ)cPs of forpigll 1lI0net:u'Y anthoritiE"s.
Olll' of the major factol's influencing forl'igll official attitudes, of
('Ol1l'se, is the pr,,\'ailing appraisal of tIl<' strcng-th or weaknpss of the
l' .S. balance of payllH'nts and I'('SC1'\'(' positions .
.Tust as th" rnited States uscs rcsel'\"('s in a unique manner, it must
hold its rpservE'S suhjE'ct to considerations that .He IIniqup. "'hereas
ot hpl' ('olllltries have a rangE' of assets from which to ('}ioose that in,'III<I('S gold, dollars, other ('I1lTE'Il('il's, :\11(1 l'Psern' positions in th('
OrF, tIl(' 1'nit('o ~tntE's has n much more r{'strietE'd fil'hl of choice.
It Illllst hol(l as,.;pts which are ac('('ptable to othcr ('oHlltrips when they
(,:\11 Ilpon tIl(' lTnit('(l States to redeE'm ollr outstanding l'eserve-curI'PI}('Y liahiliti('s. "'hilt, tlwre is some scopp for holding other count I'ies' ('urrencips in our l'esel'H'S, it is clear that in tlw present system the
Cnitcd States must hold most of its reserves in gold,

21
Gi,'en t.he wide extent to which the dollar is used as the "intervention currency" and as a resen'e currency, it is clear that the stability
of the entire international monetary sY8tem i8 intimately bound up
'with f/t(' bel/(lI~ior of U,S, I'(,8el'l'e8, If a widespread feeling were to
de\,plop that F,S, reserve assets mig-ht he inadequate in comparison
with the size of olltstandillp; rcsel'\'l'-C'Hrl'l'IH'Y liabilities, or ('specially
if U,S, r('se1'\'('. asspts threatened to continnp to dpdine simnltaneously
with It fmther Illrg'p expansion of IT,~, f('sern'-('lIlTency liahilities,
dollar assets might be \'iewpcl with increasing' distrllst by indi\'iclnals
and gO\"l\rnllH'nts all arolllul t 11(' world, 'I'll(' CS, (JoH-'rnment fully
apprec'iat('s tIll' signifieanC'e of tIl(' fad that thp stahility of the entire
1Il01l('tal'Y syst(,1lI is intprdpppIHlent with r",~, rpsprn' and halHIH'P of
paYllWl1ts \lolicy, This fact and the clesirp to ad responsihly in tlw
face of it han- hePll one of the prilllary l'OlIsidpl'at iOIl:'; IIllclerlying' F,S,
ha la lH'P of payments pol icy sincp the la rg'p paylllellts dptkits of H);iS-(iO,
:H'('Olllpn,niecl hy IWIl"Y gold IO~N\s, tirst IIIl(iPl's('orpcl tlw (>xisrplll'p of
a problem,

E. Operations of the International Monetary Fund
In additioll to tIll' gold and rl'~l'l'\P l'III'l'I'II('ie," whi('h ('01ll1t rip" hold
ill their I'P~Pl'\'l':-; olltright (:-;()llIPt illll':-; l'l'fpl'l'Pel to as "llIl<'olHlitiollal"
liquidity ~in('p thpy al'p usa hIe without any olltsidl' in~t itllt ion or g()\l'l'I\lllPllt pla('illg ('olHlitions on tlwil' :\\'ailahility), ('ollntl'ies han' a('C'('S"
to a pool of C'llITPIl<'ips ill thp IlItl'rllat iOlla I ~rOll('tal'y Fund, 1'111'
alllOllllt of I'PsoUJ'('P:-; a ('Oulltry Illay elm \\' frOll1 t hp Fnnel is gon'rllpd
by its qllota, whi('h I'pftpd...- its pc'onollli(' :-;izp and illlpol'tall<'l' !'l,btin'
to othpl' ('(l1;lltril's, 'Yhpll illitially paying ill its quota "I1I',,('I'iptioll,
padl ('oulury :-;ul,~('J'ill('" ~;, /ll'r('l'nt in gold al\d j;, /ll'n'pllt ill tpl'IlIS of
its OWII ('III'I'pl}('y, III !'l'tlll'll for agl'Ppillg that tIll' j,-, 1'I'I'I'l'lIt 1,:11:1111'1'
of its OWIlI'IlI'l'I'Il('y Ilt:ly Ill' dra \\"11 II/lOIl ill ('as(' of Ilt'l'd to fillall<'l' otht'r
\'(Illlltl'ip< dl':twillg" fl'Ol1l tl\l' ('1l1'l'l'I}('y pool. ('(>1l1ltrip:-; obtaill tltp right
to e1l':\W tilt· ('llI'l'('I\('ip~ of otllPI':-; f1'01l1 tIlt· FIIIHl tlH'lIlsl'l\(,S Ulldl'l'
('Pl'tain stiplllatt,d ('oIHlition:-;,
Tlw right of a ('Olllltl'Y to dl'aw OIl it:-; gold suhs('I'iption ("gold
tl':uwlw") is (':-;:-'('llt ially hl'yolld (,Itallt'ngp: so al:-;o is it:-; right to dm w
Oil any ('l'pclit I,alaw!' it a('qllin'd as a 1'(,~lIlt of othpl' ('()\\Iltril':-; ha\'illg
dl'HWIl its ('II 1'1'1'111 ',\', Thp:-;(' two :1111011111" togl'tltt'r an' d('''I'I'ihpd as thl'
I'olllltry's "I'PSl'nl' position ill tlu' Flllld:" it is al"o a f01'1I1 of IlIH'ollditiollal liquidity, ~rost ('011 II t rit,s, ill<'lllding tli(' {'nitI'd Statp:-;, \'('g:lrd
tlll'ir I'l'spn'p positions in thp Fund a~ all aSSl't flllly li(l'lid and lIsah]p
ill ca~p of halall<'t' of l,a"II11'lIh
IH'(,d, :llId :1('I'ol'dilwlr ilH']lHlp till'
,
FlIllel J'('SPITp posit ion in t Ilt'i I' l'"hlislll'd n'SI'I'\'pS, ,
{·nelPl' ('irl'IIIII:-;tall('('s \"hil,1t ill\'oln' iIH'I'('asillgly st ringPlI1 analysis
and e1is('ussioll of a ('Olllltry's l'('ollonli(' poli('il's, IIlPllIhl'rs of thp Flllld
~,

22
may draw successiye further amounts from the Fund up to 100 percent of their quotas. These further borrowings in a country's "credit
trnnches" are not comparable to resen'es. They are conditional credit
facilities (hence sometimes referred to as "conditional" liquidity).
They carry specific repayment obligations and int('rest charges.
The role of the Intf'rnational ~Ionetnry Fund in supplying conditional liquidity to go\'ernments for the pnrpos(' of maintaining stability in exchange rates and the adjustment of payments imbalances has
expanded greatly since the inauguration of the Bretton 'Yoods system.
The aggregate quotas of an members of the IMF are now some $21
billion. The appropriateness of qnotas is l'('yiew('d ev('ry fin' years; the
last round of general quota increases became effective in 1966. In
addition to expanding the general lewl of quotas and selecti,'ely increasing the quotas of certain conntries, the I~IF was also strengthened
in W62 by an ngreem('nt among the ten main industrial ('Olllltries (the
"Group of Ten") known as the General .\rnlngements to Borrow
(GAB). The GAB is an undertaking hy th('se (,()lIntr'it:'s to lend the
Fund specified amounts of their' currencies (ng:gregating to the equi\'alent of about $6 hiI1ion) if the Fund decides that supplementary
resources are needed to fore~tall or cope with an impairment of the
international monetary systt:'l1l. The GAB arra.ngements haY(~ been
activated seyeral times in connection with Iargt:' F.K. drawings from
the Fund.
The U.S. quota in the BIF is ~3.2 billion, Ollt of total Fund quotas
of about $21 billion ..\5 of tht:' end of 1967, the Cnited States had
approximately ~!OO million of its ';gold tranche" nllcl the fl111 $5.2
billion of credit tnmches available.

F. Other Institutional Ar~.-angements
In 1061, tht' IIp\\, {-.S ..\dlllinistration i>pgan to foster the de\'elopl1}(>nt of a IH'W system of internationa I short -tel'Jll ('redi ts ill the form
of th£' "swap network" of the Federal R£'selTe System, and also intro(1w,'p(l the so-called "Roosa bonns." Roth of these prO\'ide a type of ex,
(·hnlll!e prot£'dioll to the lenlling country. That is, the lending country
is repaid in a constant ,'alne ill its own ClIlTPIlCY, and is thereby pro({'<'fpd :tgaill~t all £'xchang£' adjustment by the borrowing country.
Thl' {-nitI'd ....;tatl's. at the cPllter of tIl£' s'''ap Ill't\\'ol'k, call horrow foreign cllrrencies and se 11 them in the III a rket ill I icu of making gold
sah·~, ill thp t'xpl)datioll that a slIbsef\lIPllt l'l'H'I';;al of pali of the outflo\\' ,yill l'£'dll(,p thp P\'Plltunl dl'aill 011 its re::;pn'e!'. In Ill£' meantime
tllt' swap partlH:'l' holds dollars with a form of ex('hang-r protection,
Similarly, tlw l-lIitl'd :-\tate:-; has. itself, heen able to ('xtelHll'l'£'dit and
:Lcquire fOl'l)ign ('urrew'y with px\'hange Pl'ot\·(·tioll wlwll, for eX:lll1pl£"
Italy or Canada or till' r-nitNI Kill!!clolll hall :tn outtiow of fuuels.
This I\£,(\\'ork of short-terlll re('iprocal bOlTowillg of reSPl'\'rs, freqnently ('alled "a tirst lin£' of 1ll00wtal'Y defense," now totals ahollt

23
$7.l billion. It hns hplped to ll.Yoid gold losses resulting from shortterm flows that were Intel' reYersed. When the Fnited States has been
drawn upon, other countries ha\'e heen provided with dollars to hold
their exchange rates stahle.
Roosa bonds were designed to provide a longer-term instrument
for t he in \'est IlIpnt of dol1a rs :\('('UIllU lated hy foreign monetary aut horit ips. ~r()st of thelll hare hpen dpnominated in the foreign country's
('lIrren('y as nn addpd attmdion to tlle pur(,hasing ('ountry. A total
of ahout
hillion of tlwse bonds was outstanding as of Xon:omher ~O,
1967.
Since its reoppning in 19!>4. the free market for gold in London has
re-emergl'd as th(' laq!pst and Illost important ('enter in the world for
free-market. gold transactions. I>lIl'ing most of thp period since that
time the flow of gold to tIl(' London llIarkpt, frolll Ill'W production and
Russian sa Ips; lUIS ('x('eeded t lIP nl rious clpllIands on it. •\('('ordi ngly,
the residual sllpply of gold was absorbed by ('l'lltrallmllk pur('hases and
hy the C~. Trpasllry at pri('es \'aryillg fairly ('Iosply around the U.S.
fixed pri('p of :-:::.-. IWI' olln('l'. For sllOl't ppriods. slIddpn outbreaks of
spp(,IIlatin~ dl'lllalld for gold substantially px('pedpd the supply availahll' to the lIlarkt't. ~lWh a situation ()('(,IllTpd in <><,tober l!H;O when
the lIIarkl't pri('p ros(' to arolllld ~-!() and arolls('d widespread anxieties
('())l('Pl'IIing I lIP intpl'Ilatiollal Illollptary sy:.;tPIll. TllP l~$. monetary
authOl'ities slIpportpd thl' Ballk of England ill inten'ellillg in the
London llIari.;PI to stal.ilizp tllP pri('p \\·ithill an a('('eptahle range.
In thl' foJ1()\\"illg: .\"pal'. :tftpr a silllilar hilt llIilder strain on thp LOllc1olllllarkpt. till' ('.~. :lIltllOrit iI'S slIggpstpd that. in "iew of thp mlltllality of illt('n'sl :lIIIOIlg' thp lllolIptal'Y :lIlthoritips of till' Illajor illdu~
tl'ial (,Olllltril's ill Illailltaillillg ordpl'ly f'ollditiollS in tllP gold and
('x('hallgp 111:11'\.;1'1:-. :111 ill fOl'lll:l I g'old spllillg :l1'I':lllgPIllPllt bp arrallgrd
:tlliong tIll' gl'l'IIP of ,'pntrall.allks that an' IIIpllIlH'rs of tlIP HI~ or arp
as:'(lI'iatl'd \\·illt it. ('lIdpl' till' al'l'allgpIIIPllt. p;l<'h IlIplllhpr of thp grollp
(Bplg'illlli. Fl'all<'p. (lpl'llIall.\', Italy. Thp ~ptill'rlands. ~witzerland, tllP
('nitI'd Killgdolll alld till' ('lIitpd ~tatps) IIl1dprtook to :,upply all
agn'l'd pl'oportioll of slI('h 111'1 gold sah·s to stal.ilizp til(' Illarkpt as tltp
Bank of EIlU'lalld. as agpllt for thp grollp. dptpl'IlIillPd to 1)(> appropriatp. TIll' (-.~. sharp was :.() ppl"(·pnt. This infol"lIIal arrallgPlllent has
(':':'I'nt ia lIy hppl1 ('Oil t iII II I'd (\\ it hOIl t F rPIl<' II pa I't i(' ipa t iOil s i IH'p 111 id,\"I'ar l!Hij alld \"ilil thp ('.~, :-;harl' at .-.!lI)('I",'pllt sin('p tlIl'lI). hoth asto
pl!I'I'ha:,illg IIl't gold :u'qllisitioIlS as WI'!I as sllpplyillg Ilpt Illarkpt deIllalld. Hl'pl'I's('lItatin's of tlIP f'plltrall.allb pal"t i('ipat illg in tltp "pool"
IIl1'pt pl'riodif'ally at Hash· to dis(,llss all asppds of the gold and
fO)'('ign I'vhall!.!."\' IIlal'kds. pl'o\'iding a Illl'allS thpl"pl.y to ('oordinatp
('whang'p opl'l'atillg poli('ips as \\1'11 as to kl'l'p flllly ill foI" III pd of dp\'('I0lllllpllb ill till' LOlldoll alld othpl" goldlllarkpts.

*U.

G. The Dollar as a Transactions Currency
In additioll to ib rol(' as thr international mOIlf'tnry system's major
l'rsenf' ('lIl'l'PIl<',V. thp dollar is also the primary international means of
payment anel a majol' IlH'(liulIl for the international ill\'estment of
slio]'t-tprm fllnd~, This "transactions demand" for dollars hns grown
g:rl'atl~ 0\'1'1' till' ",holt, postwar ppl'iml. 111 n'('pnt yf'al's thf' growing
illlpOl'talll'p of tlip Ellro-(lollar market has }lroyidl'd furthpr illustrations of tht' ('('!ltmJ \l'rsatile roll· playpd hy tIlt' dollar in prinlte interl1atiollal tiwuH'ial tl':lnsadiolls,l
Chart 1. Pl1tith'd "Liquid Liahilities to FOl'eil!lH'I's." g:in's some indication IIf how 1':lpidly l-,~, liquid liahilities to nOl1ofli('al foreigners
lIa \'(~ I!I'II\\'1l ill t ht' I' I'PHt past. Liquid I iahilitips to "otllf'1' foreigners'!fOI'Pi/.!."l1 ('OIlIIlI\'I'I'i:t1 hanks (iJlI'llIding- the fo\,t'ig-II In':tIH'lies of P.S.
\lallks) alld lit hpJ' prinltp fOI'Pig-IlPJ's-illl'l'('aspd on'\' the period 1957 to
1!Hi7 fl'olll :lpproxilllatl'ly ~(i hillion to ahout 81(; hillioll, These liquid
<\ollal' asspts of fOl'pil!lH'I'S held ill the (-nitl'd ~tat('s an' im'ested in
1\('111:11111 and tilllP dt'»osits and lllonr.'" Illarket P:I)H'\" Tlw secular
gTO\\th in fon'ig'lI PI'j\':tte dollal' holclil1l!s (':tn
pXIH'cted to ('ontinue
ill the future 11111'; IJ(IS,~I/ \"itll ('olltiJ1l1e(1 pxpansiol\ in world trade and
Iltlll'r intprnational tran:-;actiolls,
TlIp ('xi:"tpnC'P of l'l'ry Iargc· outstanding dollal' li:lhilities, not only
to forei:"''11 offi\,i:ll illst itlltiolls ("I'psprn'-('IIITPI\C'Y" halanC'es), but also
to pri\'atl' fon'ig'll illdllidllal,.: :llId org'alliz:1tions ("transactions-curn'IH'Y"\I:llall"\''''') Illldl,!'lillPS th(' illlportancp of lIIaintaining C'onfidence
ill tIlt' dollar :llld. Ill<))\' !..!'(' II (. 1':1 lIy. ill tht' illtl'rnatiollallllollPtary system
itsl'lf, '1'11£' foll()\\lllg' 1'\I:lptpl' of this papPI'. which clpnls with current
prn"ll'llIs fa('illg' Ihl' illtl'I'Il:l1 ion,,! 1l1()llptnn' systPIlI. rptllrns to this
illlportant pOilll,

H. Balance of Payments Surpluses and Deficits
"'hl'll :1 l'Ollllll'Y ,'ollsistPllt Iy losps reSPI'\"l·S. it IS III halance of
,'III('llls "(ldi"it ," COI1H'I',,!'ly, if :I 1'(JllI1tr.\' ('ollsistPlltly I!ains reserves,
it 11:ls:l ""111']1111"" ill it" h:Il:tI)(,P of p:lylllrnts,
~(,'i"lly "1l('akil1!.!. (hI' Illattpl' is 1l10l'P ('olllplic':ltpd than that. "Surpili" .. alld ·'dplil'it"· :11'1' :lllaltytil,:t1 ('olll'ppls \"ith a variety of possible
dl'lillitillllS, For PX:IIIlJl!I'. it 111:1." 1)(· :I JlJl]'()pl'iatl' ill SOllIe ('ir'rlllTIstances
to 1:1 \.:1' illto :\I"'Ollllt (,\I:lIl,FI'S ill till' fOI'Pig11 :lsspts and/or liabilities of
I hI' "(JIII1II'Y's "()IIlIIlPI'I'ia \ I 1:llIkilll! systPIl1-:\s \\'('11 :IS rhanges in offieial
l't'SPITPS-ill 1III'''''llrillg':1 dpfil'it,
Thp IIIP:ISIII'I'II)('llt of thp l~,~, halalll'!' of payments rlrfirit, is more
"(lIIl]>\!'X thall for othpl' l'Olllltrips h('(':lIIS(, of the nnirl'lP position of
tlw l-,~, dolLl!'. :llId \\':IS pX:lI11illPd 11.1':1 sp('('ial rp\'ip\\, ('ommittee. 2 Folp:1

1 ElIr(Hlo)l:lr ... al',· ,1f'IH'~il'" ill h~llIk, ollt~tcl(' th., '"nitt'c] ~tatp~. prin('ipal1.,·
tillall('ial ""Ilrl'r"', tllat ;Irl' d"lIolllill<ltl'd in {',S. dollnT"':.

til

ElIropNl1l

"S,'" Tlu 11",,,"(·,, of """"" 11/. 8t"fi~ti,'" oj 1/", I '"it,.,1 Nt"lr,. A Rcric". "'"/ Appr"j~nl,
H"pDrt of tht· H,'yh·\\- C'lllllllliUI't' fDr H;ilall{'.· of Pil,\ rllf'nt...; ~tati:-::ti("~ to tlu" HlJrf':l1l (If thf'
flll,1:.:"t 'E,~( g"r"""ill. ('''"ir''''''ll, l',~ C;,,\'('rlllllPnt I'rlntlllJ;: Offic(', ,\prll H)6r;,

.....
o

'"'

...I

iii
0

c
...

::::»
~

(;

.
Q

~ 0
;; ~

-+--~
I
I

...o

o
N

0
N

I
I

-0

0
-0

r
!

·
3
S

·a

~
~

! ::

.
!
.
!

26
lowing this report, tIl(> conclusion was reached that no single indic.ator
of surpllls 01' dptit'it "'as suitahle fOl' all purposes, The primary meas111'(' llspd ill tllis p;qwl' is till' )',,]all('P Oll th(' "liquirlity" hasis, although
fol' SOIllE.' PIll'P0SP-; n,fpl'l'II('P i-; ll1ilde to thr halance on the "official
l'pselTP t I'a nsal't jons" ha-;j-;,
Halnl\('(' of paYlIlPllts :--III'plusps alld deficits sometimes are desired.
'I'll is \\' as till' ,':\ s(' ill! lit, I'a rI,\' 1!);)()'s, for example, w hell (Oil the dE"finiI iOlls of sUl'pllls alld deli('it thl'll ill use) thr European countries Wlderg'lIillg' I'Pt'lIl1stl"llt'tioll had sUI'phIS(,:-; and the rnitrd States had deficits,
Thpsp «Iplil'its and surplllses (,llablr<l t hr, European countries to build
II p t lip i I' rrserns : tIll' <1£'(' Ii l1PS in the swollPIl 1 $, gold )"esenes and t.he
illl')"r;tSPs ill OUI' rpsprH-I'lIlTPIH'Y liahilitip$-repn'sPllting as they did
a I'pdistrii>ution alld aU:,!IllPl1tation of the world's stock of reserye
a-;St>ts--wPI'P unin'l'sally wl'lcomed as such,
On tllp othpr hand, lflNlf' and 1)('I"'ii.~tl'lIt paynwnts imhalal1cPs, either
sllrpllls 0)' deticit, ;In' lIot sllstainahlp and can gin' rise to instability
ill tllp int('l'natiollal 1ll0lH'tal'Y systPlIl. There is an obvious limit to
illtlmlaw'ps of th(' dl'ti('it t~'pl': conntrips ('all support th('ir exchange
I'atp,; ",itll tlll'ir )"('SI'I'\'(,;-; and ('n,elit faciliti('-; only so Ion:,! a;-; thl'y ha,'('
I'I'S(,I'\"(,-; or ('all :\1'J'<lIl,!!P fllrthpr 1'I'l'dit, In thf' ('as(' of a rpseIT('-currency
"Ol1l1tI'Y,
thpl'p an·]illlits to tIl(' willintTIl(>ss of pl'i,'atp and official hold,
PI'S ahroad to :1('('11111111:111' that ('III,),(,I1('Y, The limits on the ahility of
,'olllltrips to 1'1111 1:II':,!l' :tlld ppl~i~lpllt ~t1l'plt1ses aI'£' Il1IH'h less clear.
'\'hat i" ('11'<11'. h()\\"(,\"()I'. i" that Ial',!!f' and })(,r."istf'nt sllrpltlsP~ impose
,,11':1 ins 011 tIll' illterllal iOlla I IIIOllPt<ll'\" sy"tPIll as grp:lt as thoS(' reslllti Ilg' from I:t I'gP a l](lllPl'sistpnt dPhcit:-;,
T

I. The Adjustment Pl'ocE'ss-Basic Objectives
E:\I'h indi,idllal ('o\llll t'," h:l:-- its 0\\'11 I\Il1ltiplp P(,0I1011li(' and social
tllljl'din's, TI$'sl' illt'h](lf' fIliI I'lIlploYlllPllt and a ~atisfal'tory ratr of
gTo\\·th, 1'1';1-'011;11,](' pl'i!'p "tal1ility. alll'CJllitahh) distl'ilmtioll of inc'()llw,
11Ic\ halalH'pd I'l':,!i 011 a I ;111<1 st'l'\oral c\P"P]OplIll'llt. "~hilp sN',king to
attaill tIH'''p objedin)",:I'; aln·ady Ilol('d. ('ollntl'i('s IlIlIst abo a\'oi(\
l:II'g'1' alld ppl~istl'l1t il1lhalall('{';-; ill th('il' l'xtpl'nal :H'COIlIlts. It is also
\\'idl'ly ag-I'~(l ( ill til(' \\'OI'I!" of till' ('olln'nl ion sf'tting up th(' Organiz<l1 iOIl fol' I'>ol1ollli(' ('o'0l't'l'atioll and ])P\'P]o»IIH'nt) that countries
shollld "PI'(lllltltl' poli!'il's (It'sig'lIl'd 10 cOl1tri\lIltp to thp l'xpansion of
\\'ol'ld tr:ldl' 1)11 <I Illllltilatl'l'al. 1I01lC\i"t'l'illlillatol'y Ila"is in :1ccordal1('p
\\' it It i II I I' 1'11:1 t i011<1 I obI ig-a t iOIlS,"
'1'1111 illll'l'II;ltioll:11 1I101ll't<lry S.'""tPIII Sl't lip al Hl'£'tton "~oods <1nd
11;1~I'd Oll:t P;lttt'J'I1 (If "tal,lt' px('hang-l' ratps \\'as t1lP11 anel is now ${'lieYed
Ily its l':trtit'ip:tllt-. III lIP th(' Illos1 ;lpl'l'o]ll'iatp ~y"t(,1lI df'~ig-ll('d to foster
F'41r r11.' dttf.·r'·'ln· ... III·t\\ 1'1'11 til,· .. "
i II ('II .. I'tt'r Ill,

tWtl

.llt.'rnatl\'f' IIl~a:--lIr~'S ~If tIll' halnllc'4'. ~Wfl rliart

'·11

27
these oh,jPctin's. The system has eyoln>o over time to meet changing
needs all(1 prohlrllls. It is OI1('P again going t hrollgh a key evolutionary
stage, as the ,york Oil proposed amendments to the IMF Articles of
Agreement rea('hes (,OIl1pletion, to establish a facility for deliberate
reserve creation (see below) and to impron certain rules and practices
of the Fund.
The simultaneous achievement of all the £'conomic and social objectives described above, even for an individual country, is far from easy.
Governments have only a limited number of policy tools at their disposal. They ha,'e not always been able or willing to use these tools in
appropriate ('omhinations. Gon~rnments in different countries attach
d.ifferent priorities to achievement of \'llrious internal and external
aims. The natlll'(' of imbalancps ill payments. as well as the appropriate range anll mix of instruments required to deal with them, can
vary substant ia lly from (,Olllltry to country in line with wide differences
in ('collomi(' and financial structure and in tJH' nature of political
institut ions.
These c1ifficlIltil's han> important implications for thr speed and
effectin'ness with whi('h tIl£' adjnstnwnt of payments imhalances can
he attain£'d. Th£' adjustment process may work somewhat imperfectly.
and in allY ('ase is apt to he gradual. III a frw difficult casps. adjustIllPnt of payments imhalances may not take place at all, or will take
place only with the costly sacrifice of some of the basic ohj<,diws that
tll(' systpm is int£,lI(led to adnln(,p. unless a large measure of multiIntera I ('oo]1rra t ion i:-; hrought to bea r on t hr prohlem.

J. The Adjustment Process-Need for Multilateral Cooperation
Thr Ileecl fo/' Jllultilatpr:d ('ooprration in achie\'ill!,! and maintaining
haJalH'p of p:t.'lll(,lit~ I !jllilihrilllll has heron1£' in(')'ra:c:ingly widrly l'p('ognized in tJ)(, Ja:-t fl'w y(,:tl'~ .. \Il lInclpr:-;tanding of this nped has hp£'ll
palti('llJarly :1I1":lllI'l'd II." :Ill intl'l'Ilatioll:l1 working grollp forlllP(l
IIIHj(>1' Ill(' :llIspi('l's of tilt' Orgallization for E('ollollli(' ('o-o}>l'ration
ancl J)PI"('IOPIII(,llt (OEC}»), TIl(> E('onollli(' Poli('Y COl)}mitte(> of thl'
OEC}) (>:-tal,lislwcl :I 1Yo/,king Pal'ty ill 1%1 for tlIP ~p('('ifil' pllrpose
of prolllotillg hl'ttl'1' intl'l'national payments t'qllilihrilllll. Thi:-; grollp.
1'()II~i:.;tillg of ~('lIi()r oRi(·i:tls from ~fini:-;tl'i(':-; of Finan('£' and other
kr~' g'o\'pl'Iln}('llt agl'll<'il's and ('l'lltl'a! Hanks ('()lwl'l'ned with halancl'
of paYIllPnts <]1I1':-;tioIlS, has IllN togethl'l' at :lpPl'm:illlat('ly six-to-eight
\\,(,pk int('na!s p\'(,1' :,ill<'l'. In 1!l()·L tllp ~rilli~tl'l':' :llId nOH'l'IlOI'S of thr
t(,11 ('ollntril':' 1':ll't i('ipating ill the nPIll'ral .\ 1'I':lllgl'lIH'llts to Borrow
~Il:.r:.re~tl'd that thi:, ()E('J) '\'Orking party. known :l:-i 1"ol'king Party :1,
Illak.. :I !-'t\l(ly of thl' 1):I!:ln('(> of paynll'nt:' adjll:-;tlll(,llt ))1'O(,('S:-; with :l
yjpw toward illljl!'oying thl' PI'OC(,:,S of ('ontinlling intl'rnational consultation and ('o(»))('ration.

28
The ""orking Party's r(>pnrt on this suhjN't wns issueo in August
l!Hlfi, In ndclitioll to (,IHi()r~ing thp commonly agrl'pd yip\\, thnt prolong-po imhalalH'p ill pitlH'1' dil'pdion is in g't>llpml Hllo(>sirnhlp, the
"?'ol'king Party also Ilot(>n that i'tllt> ohjt'('tin~s of intprnatiolllll rOll";lIltation al'(, h)'oao(>r alld Il\OI'P g('IH'I'al thall tIl(> IlWI't' 1l\'oidnl1rp of
illlhalalll'p, Th(' \l"I'}lO:-:l' of l'oll~l\ltati()1I l't'gal'(lillg aojnstlll(,Ht )loli('i{'s
is to (,IISlIl't> that thl' !loli{'it's IUll'SHPd hy indi"idllHI cO\llltl'ips do not
hilldl'), otllPl's il\ thp pllrsuit of till' gl'l\('I'al aill\"; of ('('ollol\li(' policy;
lllor<' posit i,"t'I,'" 1 hp ohjt'(,t i..; to PIISlll't' thnt as fa)' as pos~ihl(' ('oHl1trif's,
\\"hill' H\'oidillg illlhal:II}(,t'. ('()II(>cti\"(>J~' SIlPP{H-t (,:t('h othpl' in th(>ir
pol icips,"
TIl(' 'Yol'king Pnl'ty\; rpp'H't <lops not fail tn poinl Ollt thllt thpI'(, arp
oftt'n i1\1\(>r(,llt, <liffi('\Ihi('s in BlallH~,dl\g an l'('OIlOJllY in a WHy \\,hi('h is
('ollsistPllt \\'i:h (iollll'sti(' oh.i{)(,ti\'('~, with tIll' aillls of its tmding plll'lH(,J'S, \\'ith ~tahll' ('x('han:,!(' mtps, and with tlH' :,!(,lwl'al h('alth of tlw
\y()dd p('OnOl~ly, Hut it also l'p('oJ,!llizl's that thpJ'p i:-i clenr room for
improyement. and that i m pl'ovcmeut is fin llrgent ordpl' of bllsiness,
TIl(' I'pport ,h's('\'il)('s appl'opl'iat(> llH'tllOds of dealing with t!lrS(> prol.,
lpms in (lifi'el'ellt ('i 1'('11 Illstall('PS, It l't:'fl'l's spP('in('nlly to tIll' lIeen for
('le:Il't'1' fOl'lllulation of hall\l\('(' of paYIllPnts ninls: pady id(,lIt ificatioll
:lnd ht'ttel' (lingllosis I) f p.\yllH'1I ts pro!>! PillS: new a lid 11101'(' s(>lp(,t i\'p
illst l'Ull1l'llts of p('Ollnllli(' polil'y: 1I1()I'P t illwly action to (,Ol'l'(>('t illappropriate dl'numd Ip\',,!s. ('olllpetiti\'p positions and ('apita! Hows: and a
fllrtllPI' strPIlg1hellillg- of tllp I)J'O('('SSPS of illtpl'llatiol1al ('l)llsllltatioll,
Till' l-,~, (yon'I'\llIlplIl has stl'oll/!I~' suppol'tt'(l thl' "'OJ'killJ,! Party's
)'('1> 01' t al\(l it..; 1'l'('OIIJllH'IHlatiolls, .\t thl> l'I'('Pllt llH't'till~, XO\'I'IlI\'PI':\O
tl) Dl'('Plllher 1, I)f t hI' :\fillistl'I'S of t lip ('Ollllt I'il's hploll:.,!'illg' to tllp
OEC]), f()!' l'x:lInph·, t\t(' l'nitt'd ~tar(>s I'PIlI'psPlltati,'t', rlldt'1' ~('(TP'
t:try of Stall' EIIg'PHI' y, Host()\\", ~:ti(l:
""'P ha\'p 110 (lonh, that the .\tlallti(' (,Olllltril's (':III J'(·soln' this
pl'Ot,lpl1l. if tht,y <It'at with it togptlwl', ill wa,vs \\'hi('11 fm'tify tilt'
world IlIOIll'tHl'), systt'lll alld pl'l'lIlit :Ill (':\I'I,\' alld :ls.... lIl'l'd 1'l'tlll'lI to
g-rowth pattt'I'IIS ('losPI' to Ollf' filII l'mploylllPllt ()hjl'(,ti\"t's, .\11 J
alll slIgg(>stillg' tolla,\' is that \\'P \'l'co/!lIizt' that SOllll' a:--pt'ds of till'
:lCljll!"tIllPllt P"O\'('s"" 1'1'11";1'(' ('oolwl'ati\'(' ;';Ollltiolls Hlld that \\'1' ~4>t
ahout Ill'OIllJ>tly to filld tl\('I11. ('oo}ll'I':UiOll in handling tltt' adjul"tIllpnt prO('f'SS, T . . ng',!!l'st, is t ht' llext major stl'P a ftpl' Hin [sl'e
I)plo\\' fol' a dis('u,",,,i()11 of thp a:.,!'I'PPIIIPllt I'p:l('hl'd ill Hio tiP .Talleil'o
in S<'ptt'1ll1wl' IfHi"n for Ill" to takl' ill illllll'O\'illlf
for
.... 0111' 1II:\('lIi1l('1'\'
,
manna-illl! t lit' 1I1()llptar~' ",Ystl'lIl."

K. The Adjustment Process-Equilibrium for the System as a
Whole
For any ('ollntry to l'(,GIlC'e its deheit or InO\"e illto sHrpllls, it is
genE'l'fllly I1P('eSsHI'Y for other ('o11ntl'ies to l'erlll(,(, slllVlusps 01' ill('I'P:lSP

') r:,. LO.

29
deficits. This is simply a statement of what must happen mechanically
and statistically if payments imbalances are to be adjusted at all.
This inescapable illterdependence of surpluses and deficits makes
it very clear that countries must have compatible balance of payments
aims if the whole system is not to be working at cross purposes. If all
the countries in the system that are in surplus set their policies in such
a way as to han continued surpluses, while deficit countries take
active measures to eliminate their deficits, then either the deficit countries will still find t helllse1ves running deficits or else surplus count1'ies will find that they have not been able to attain their target eo
surpluses. All countries together cannot possibly achieve these inconsistent aims; someone is bound to be disappointed.
Virtual1y all countries take it as their balance of payments objective
to he in surpl1ls (ano so to JUlYe growing reserves) over time. Few if
any countries lun'e indicated either a policy or a willingness to have
their reselTes fluctuate around a fixed level rather than around an
upward trend.
It is understandahle why c01lntries tend to han this prflference
for surpluses. The volume of trade and other international transactions has a strong upward trend. It is a reasonable presumption
that, hecallse of this trend, thfl ahsolute size of imbalances will also
increase o,'er tillIP. These facts alone suggest that reserves should likewise h~w an IIp,,oard trend if tlH'Y are to continue to be adequate to
support thp fixed exehange rate against halanc(' of payments swingso
.\nother factor leading cOllntries not. to attempt to reduce their surpluses may be a propensity to discount an existing surplus as partly
or wholly "temporary;" it is natural and prudent to conduct affairs
so as to prepare for "rainy weather" in the future, and not to presnme
that current good fortune win continue. Even to the extent that
conntries [lim at [I long-run objective of a zero surplus orer time,
which they tend not to 00, they still probahly react more quickly to
a deficit situation than whell they are in smplns (if only because
countries in surplus are under much less urgent and intense pressures
to ad to rednce the imhalance).
Given the set of prevailing attitudes which makes an upward trend
in reselTes (balancp of paY))Jf>llts surplus) the targeted long-run
"norm" for ('ach f'01l1ltl'y takl'1l indi,oidually, tlw ol)\-ious question suggests itself: when, if at all, call the iJltel'llatiollal monetary system as
a whole he in (,qllalibrium? Gin)n that it is difficult l'nough to bring
about adjustment of paymellts imbalances even under ideal conditions
where deficit countries take actions to reduce deficits and surplus countries willingly take cooperatin' ad ions to reouce their surpluses, how
can thr system possibly function smoothly when countries in surplus
by and larg(' do not want to see their surpluses reduced?
2~ 1---659

0-68--4

·i..~ \"

--l

30
Happily, tlwf{' is n solution to this dil{'mmn, It is not thE> cnSE> thnt
for PHI'y dollar of surpills in tlIP syst{,1ll tlwr(' must h{' an {'xadly
otfspttillg- dollar of drticit. "Th{,11 til<' g-ross df'firits and g-ross s\1I'phlsf's
('ollsistPlltly dt'fiIlP(l) of all ('ol1ntrips al'f' otfSf't agaillst PIH'h othf"" thE>
S11111 of thp Sllrphls{'s ('all ('x(,p{'(l tIl(' Slllll of th{' dt'ticits hy tIl(' nmollnt
of llf'W l'PSPITt'S I){'ing' acl(h'(l to tlIP systt'1ll whi('h are not at till' san1P
tillH" tlw liahility of a particular coulltry, ThE> hy point of this J'(,lntiollship is that if np\\" ,'PSPITPS of th{' ap}ll'o}lriatp kind al'f' flowin/!
into th(, systt'1I1. it ;s possihlp for so 111(' ('oulltJ'ips to sal isfy tlwir' pr{'f(I)'('I)('PS foJ' l't's('I'\'(' ilHTPasps without IlP(,Pssitntillg' that othf'r ('ollntri('s
1)(' in (,OITPspolHlillg dt'ficit.
'.p to thl' prl'spnt tinH', thp only "npw l'(lsprYC's" whi('h han' allowpd
this lllargin to ('xist ha\'p hpt'll iw','pasps ill ('oll11trip< lllo11Ptary gold
st()('k-.:. 'YIH'1l IlPwl.'-lllilwd gold is sol(l to a IllOIH'tn)'y :llIthority. that
g'O\'P),IlIlIPllt has :t I'PSC'ITP gaill withnllt allY oth!')' ('Olllltl'." h:l\'ing f'\:1'(,l'it'll('p(l a d('fi('it, 'YIl('1l tIl(' dollar ('OIll])()J](,llt of \\'()J'ld J'f'spr\'('s
ill(,),l'aSps. Oil thp nthpJ' hand. this iIH,),pas(' ill rpS(,I'\'ps doC's not allow
tlH' systl'lll:lS n wholl' to han' a lllal',!!ill of s1lI'pI1l";(,s ('xl'I,('dillg df>ficits.
"ThPII t hp )'t'st of tIll' \\'I)l'ld adds to its dollnl' I'!'SPJ'\'ps, t hp"p ll(lW aSSf'ts
:tn' ab() all illl'\'pa~!' in 1~_:-;. l'l'SI'I'\'I'-I'IIIT('IWY lia\)ilitil's. alld tlrP)"P is
tlll'],pfol'l' a r.:-;, dl'fi('it l'OlTC'spoll<iillg: t() tIl(' S1\)'pltl~ ()f tlrt' rpst of tllP
\\'()rl(l. Ho\\'('\,C']'. gold i" lIot till' ollly n'''!')'\'(' :lSs!'t t hnt is eapahlp of
pprlllittin,!!' tll(' systl'lll to ha\'(' a silllalioll ill whirh th!' SllIll of SIII'pllls('''; l'x('ppds till' S11111 of dl'fi"its, J)('li\'('l'atl'l." I,),f'atl'd np\\, I'PSpl'\'f'
:IS"l'fS. SlIl'll:l" tIll' prol'osl'd :-;p('('ial Dr:l\\ illg Bights (~nR) clps('l'ihrcl
ill thl' Ill'Xt ('haptl'r. \\'ill Sl')'n' thi" fllll.-tioll ('qwl1ly \\,pll.
Eqllili\ll'illlll for tIll' "ystl'lll as :t \\'ll()l(' tlrllS I'P(l'lirC's that 111'\\' I'P'-'£'l'\'(',.:--g'ol(l 0)' Ill'\\' 1'1"1'1'\'1' ass('t" s1)l'Il as :-;nI{-~\H' ;)(lcll'<l to till' syst(,1l1 :1t sll(-1I :1 1':111' th:lI Ih(' "1I1l1 of Sllrpitl"I's V:l1l px('pp(l tl)(' snm of
dl'ti"it-: hy :1 l'\'asoll:lhlp IIlal'gill, Thi,.; I'ollrlitioll for "C'f]l1ilih)'illlll" of
1111' systt'lll ,111)11111 \)(' thollght of :IS :1 IH'('pSSal'.". hilt lIot "lrfti('ipllt. ('011dit i()))' ()tlll'r "()Il ... idt'r:ltioll". ";\1<,11 as th(1 cll'grl'(1 to ",IIiI'll th£' ",yst(,111 is
Pl'OIIl()t ill,!!' tll(' :1<'hip\'PllH'llt of its ha"il' ()\,jPI,tin1s. also IIp('d to hI' tnkl'1l
illtn :$,(,OI111t,
(>nly IIIlt\P)' thp:,!, ,'ollditiollS is t]lP)'(' :1 good C'II:lIl('P of Ilwkillg ('01111trips' hal:1I1('p of payllH'llt" ailll" 1I1lltliall.' ('olllp:ltihlC': Oldy tlll'1l is
tlwl'P a plal1-.:ihlt' hopp of attaillill!,! rill' o$j('din's till' systl'lll is ill'
It'ndp(l tn I'l'(llllotf'. ill('lndillg' l'l'iat in' f)'('Ptiolll fJ'(llll I l'at\1' alld ]la,\'
Ill('llts )'('''tridi(lll'' ",hile' still ;.!'rttillg: tltl' :ldjll"tllll ' llt of paYlllPllt" illl'
\ ':11:t 1l(,t'S to ]ll'()('(,f'd "moot hly.
,,'II:lt i, :[ "l'I':\"ollahlp" ll1argin hy \\'hil,1t ,,")'plns!'s ... holr1d I'XI'I,(,d
dpti('it,.; ~ TIH' :11l"'\\(,)' tn this flllE-sti()11 is Ilot fully clf'al' to titP finan(,ial
('xp(')''' ;Illd I"'()ll()lllish ,,'lio ha\'!' stlldipd titisq11('stillll, Broadly ~p(':tk
ill;.!'. tit!' 1':lt£' at \\'hil'h IIP\\' resf'l'\'ps shollid he addf>rl to till' systelll

31
should probably hear some relationship to the rate at which international transadions are expanrling (though the two rates need not he
the same and there is no necessity for a precise relationship), The
mn,rgin should not be too small, and certainly should not be negative,
~or should the margin be an cxcessive one, At either of these two extremes, one would han' to say that the system as a whole was iT'
"disequilibrium,"
It is important to be clear on the fact that tIl(' ahore condition for
l>quilihril1lH of tIll' system, if satisnl'd, ill no way rl'dll<'l'S the need for
('otmtries to an)id large and persistent imbalan('es ill their extel'llal
payments, It is still impl'mtin' for countries in large or prolonged
deficit to reducc their imbalance, ,\nd it is just as important as ever
for countries with large and persistent surpluses to reduce these
surphlsl's to t 11(' point wl1£'re they aI'£> 1lI0d£>rate awl hroadly consonant
with the rate at which n'SP1'\"('S are growing' in tIll' systl'lll as a wholl,.
The Iwed for a(ljustment is lIot relllo\·e(l. TIll' margin by which surpluses l'x('c('d (h'ficits only 1lI1'ans that, for each country indi\'idually
and fOl' the SystPIlI as a whole, a(ljustlllent takes place around an upward trend in l'eS('1'\"es rathl'rthan around a constant level.

TREASURY DEPARTMENT
-=

FOR IMMEDIATE RELEASE

January

TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
Cor two series of Treasury bills to the aggregate amount of
p,500,OOO,000,or thereabouts, for cash and in exchange for
Treasury bills maturing Fe bruary 8,1968, in the amount of
$2,501,967 ,000, as follows:
9l-day bills (to maturity date) to be issued February 8,1968,
in the amount of $1,500,000,000, or thereabouts, representing an
additional amount of bills dated November 9,1967, and to
mature May 9,1968,
originally issued in the amount of
$1 ,000 ,647 ,000 , the additional and original bills to be freely
interchangeable.
l8t:-day bills, for $1,000,000,000, or thereabouts, to be dated
February 8,1968,
and to mature August 8, 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
I(matur.lty value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard
time, Monday, February 5, 1968.
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
fONamed 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
~Sponsib1e 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"1149

- 2 Immediately after the closing hour, tenders will be opened It
Federal Reserve Banks and Branches, following which public anno~
ment will be made by the Treasury Department of the amount and pri
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Trea
expressly reserves the right to accept or reject any or all tender
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 February 8, 1968,
cash or other immediately available funds or in a like face amount
of Treasury bills maturing February 8, 1968. Cash and exchange ter
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 to
estate, inheritance, gift or other excise taxes, whether Federal M
S ta te, bu tare exemp t from a 11 taxa t ion n ow or herea f ter 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 lIs are exclude
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 upon
sale or redemption at maturity during the taxable year for which th
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.
000

TREASURY DEPARTMENT
::as:
,..-%1"
_

:::

w;&

Ii.....

WASHINGTON,

OR nllWIATE RELEASE

TREASURY ANNOUNCES REFUNDllIG AND CASH BORROirJllm PLANS

The Treasury today a::mounced that it is offering holders of the note issue
I8.turing February 15, 1968, and the note and bond issues rl2.tu:ring August 15 and
:ovember 15, 1968, em oppor:'unity to exchanse their holdinGs for a 5-3/?~ 7-year
lote to be dated February 15, 1960, to m2.tu:re ~'ebruary 15, 1975.

The Treasury also announced that upon completion of this refunding it vlill
$4 billion through the offering of a IS-month note. Exact terms
,.;ill be annou.'I1ced on February 8 vlith the boo1:s onen for subscrin-tions on February
j and payneI:lt on February 20,
-

trow about

Bends of 1968, r:laturing August; 1;:5, 18Gb
IT'")~cs ()~ 2,eI"~i~s D-l?Gn ~ r~?~t'w1Yir~s I~o"reY'~·b·~~ IS, 19F5B
Bonds o:~ 1903, I''.atUl'in6 l;ove~\.J::r 15, ~962

The neyT notes are heing offereel at :9ar to holders of the FebruP.ry naturi ties
and therefore ,.;ill yield. 5_3/4,.4;, Deta2.l.:; f')r the Au:::;-ust and IJoye~":)e:r "laturities
Showing cash and :'ntercst ad.,just:-"".ents ~'9]e:;.~ in Ta·ole 1.. A??:--'o:·,:i~::ate :'::1~rest~·.ien-:'
fields appear in Table 2. Both tables o.re Ctt s:;.ched.
The public holds ~;L2.1 billion of the sec\:l'i ties el~_sible fo::: e:·:c: 2.:'':::C, 8.::13
about $12.2 billi.on is held 1:y federal P.eser"re a:l:1 GC'Ier:l~ent invest.'er;."c acc~)t'.21.ts.
C

Cash subscriptions for the 11e\,! 7 -~re2..r notes \01:.11

TiC:

be received.

The books on the exchc.nGe 'Hill be o}?en for three days only, O~l ?eoruary 5
tbroue;h FebrUal'Y 7, for the receiIlt of snoscri-ptions. SuJSCr5.Dtions adc~es2.er3 to
a Federal Reserve Ban~z or Branch) or to the Office of the Treasurer of the United
States, and placed in the mail be:~cre 1:'..idrliGht "February 7, ~,Till be consiciered as
timely. The paJ'-ment a....'1d delivery date for the ne~·: notes 'Hill be Februar'Y 15, 1968.
Interest on the securi tie s due Novc:nber 15, 1963, vTill be adj usted as of Feh:::uary
15, 1968. The ne'.i notes 1,nll be made a-railahle in resistered as ';Tell as bearer
foAll SUb SC:"l. b·e·cs rec.'lcsc::.::.ns
..
'.L
.
• '11 '
".L.I:"
•
<.110
reSls
vcrec..1 no::;es
';·lJ.~~ oe recl.1.11:ce rJ. 'JO 1. Ur!11Sn
aTlTlroprl'
aJ..
.
d
..
d
'
.
'
.
'u
lie 1 en:'l.L'rlnr; nU70ers 2.3 l'emurea. Xl -;:;2..:': ::::'e;.,u:cns 8:1, . 01:,'le::: u')ccC:er,,,s
sub 't
~
,
•
TIn ted. to the Internal Re',,"e:-:"J.e Sel'"v"ice, This is 2. taxaole e:;:chc.:-:S~'
L>

. ,

. " . ,

- 2 Coupons dated February 15, 1968, on the securities tendered in exchal1e;e should
e detached and cashed "Then due. Coupons dated l1ay 15, August 15 a:'1d November 15,
1968 on the securities due on August 15 and november 15, 1968, must be attached.
Feb~ry 15, 1968, interest due on registered securities "Till be paid by issue of
interest checks in regular course to holders of, record on Ja..Yluary 15, 1968, the
ate the transfer 'ooo:':s closed.
Interest on
Al®lst 15.

~he

ne1,-T 7 -year notes \-Jill be :IJayable seni2.nnunlly on February 15

("(1Q

TABLE NO.1
~..YIYlents

due to or by Subscribers

the February 1968 Prerefunding

(In dollars per $100 face value)
Securi ties to
exchanged

.1!4~ lTote 8/15/68
'3!4~ Bond 8/15/68
.1/4% Note 11/15/68
.7/8% Sor.d 11/15/68

Payment by
Payment to
subscribers
subscribers for
on account of : accrued interest to
issue price
February 15, 1968,
of offered
on securities
notes
: exchanged
For the 5-3/4% Note of 2/15/75
.600000
~
a/}'
.850000
- ~
.150000
1.325923
1. 1500CO
.97939S

Net amount to be paid
by subscriber: to subscribe

.600000
.850000
1.176923

. 17C5(4:

Interest "Till be paid in regular course.
'l'ABLE NO. 2

-1/4% Note
·3/4% Bond
·1/4% Note
·7/8% Bond

8/15/68
8/15/68
11/15/68
11/15/68

5.73%
5.73
5.73
5.72

5.77%
5.77
5.79
5.79

~ce of the Secretary of the Treasury

Yields to nontaxable holders (or before tax) on issues offered in exchange
based on prices of eligible issues (adjusted for payments on account of
issue price). Prices are the mean of bid and ask quotations at noon on
January 30, 1968.

Rate for nontaxable holder (or before tax).

TREASURY DEPARTMENT
,

FOR IMMEDIATE RELEASE

EXCEPTIONAL SERVICE AWARD PRESENTED
TO ASSISTANT SECRETARY WINTHROP KNOWLTON
secretary of the Treasury Henry H. Fowler has presented
the Exceptional Service Award to Winthrop Knowlton, Assistant
Secretary for International Affairs.
Mr. Knowlton, who leaves the Treasury today, is a former
partner of the New York investment banking firm of White,
Weld & Company, 'was cited for his significant contributions
"to this country's effort to maintain a stable international
monetary position."
"His unusual ability to harness international economic
theory and convert it into practical proposals is manifest in
Treasury Department policies and programs directed toward
achieving a satisfactory balance of payments without impairing
our economy or those of friendly nations.
"His creative problem-solving," Secretary Fowler said, "was
invaluable in the development and implementation of specific
programs. Many of his ideas are embodied in the President's
Action Program, announced on January 1, 1968, and described in
detail in the Treasury publication, "Maintaining the Strength
of the United States Dollar in a Strong Free World Economy."
The award was presented to Mr. Knowlton at a reception
January 29 at the Washington Hotel. Secre tary Fowler commented
that "in addition to bringing to your work -- and thus to the
Treasury -- great imagination and perception, your practical
experience of working in the international financial community
has given you the diplomatic ability to work successfully with
many different persons from many different cultures."
Mr. Knowlton has served as Assistant Secretary for
International Affairs since August 2, 1966. In that year he
had served as Acting Assistant Secretary for International
Affairs from June 11 until his appointment as Assistant Secretary.

- 2 From June 28, 1965, until June 10, 1966, he was Deputy Assistan
Secretary for International Affairs.
Previously, he served for
a short time in Washington as a consultant with the Office of
Education, Department of Health, Education and Welfare.
During his tenure at the Treasury, Mr. Knowlton
represented the United States during negotiations
for a second replenishment of the International
Development Association (IDA), attending meetings
of Part I countries in Paris in May 1967 and
The Hague in November 1967
headed the U. S. delegation at meetings of the
U.S.-Canadian Committee on the Balance of
Payments in Ottawa and Washington in 1966 and 1967
headed the U.S. delegation to the August 1967 (Paris
meeting of Working Party 3 of the OECD
headed the U.S. delegation to the December 1966
(Paris) meeting of the OECD Group on Export
Credits and Credit Guarantees
served as a member of U.S. delegations to the
OECD Ministerial meeting in Paris in November
1966; the Inter-American Economic and Social
Council (IA-ECOSOC) meeting in Buenos Aires in
March-April 1966; the Inaugural Meeting of the
Asian Development Bank in Tokyo in November 1966;
meetings of the Economic Policy Committee and
Working party 3 of the OECD in May-June 1967;
the meeting of the Joint U.S.-Canadian Cabinet
Committee on Trade and Economic Affairs in
Montreal in June 1967; the meeting of the
Development Assistance Committee of the OECD
in Paris in July 1967; the meeting of the
Joint U.S.-Japan Subcommittee on Trade and
Economic Affairs in Hawaii in January 1968
served as Temporary Alternate Governor of the
International Bank for Reconstruction and
Development (IBRD) and the International Monetary
Fund (IMF) during their annual meeting in
Washington in September 1966 and of the InterAmerican Development Bank (IDB) during its annual
meeting in Washington in April 1967.

- 3 The author of "Growth Opportunities ~n Cornman Stock," and
.author of "A Killing in the Market ," Mr. Knowlton is
rried to the former Grace Danie Is Farrar of Buffalo, New York.
ey live with five children in McLean, Virginia.

Mr. Knowlton attended Lawrenceville School in Lawrenceville,
w Jersey,

from 1942 -to 1948; the Univers ity of Nanking in 1948,
d Harvard College from 1949 to 1953 where he received his
chelor degree (magna cum laude). He received his master's
gree in business administration
with distinction -om Harvard Business School in 1955.

000

UNITED STATES SAVINGS BONDS ISSUED AND REDEEMED THROUGH January 31, 1968
(Dollar amounts in millions - rounded and will not necessarily add to totals)

DESCRIPTION

RED

Se ries A'1935 thru D-1941
Se riesFand G-1941 thru 1952
Se ries J and K-1952 thru 1955

AMOUNT ISSUED.v

AMOUNT
REDEEMED

1./

AMOUNT
OUTSTANDING

% OUTSTANDING
OF AMOUNT ISSUED

5,003
29,521
3,156

4,995
29,471
3,106

.16
.17
1.58

1,870
8,254
13,281
15,493
12,167
5,506
5,215
5,384
5,309
4,640
4,016
4,206
4,801
4,890
5,092
4,912
4,618
4,494
4,205
4,207
4,236
4,081
4,540
4,427
4,333
4,652
3,920

1,636
7,243
11,688
13,531
10,439
4,533
4,126
4,156
4,027
3,464
2,999
3,112
3,454
3,435
3,503
3,322
3,030
2,779
2,543
2,420
2,307
2,160
2,221
2,129
2,001
1,847
978

234
1,011
1,593
1,962
1,728
973
1,088
1,228
1,282
1,176
1,017
1,094
1,346
1,455
1,589
1,590
1,589
1,714
1,661
1,786
1,929
1,921
2,319
2,299
2,331
2,805
2,942

12.51
12 .25
11.99
12.66
14.20
17.67
20.86
22.81
24.15
25.34
25.32
26.01
28.04
29.75
31.21
32.37
34.41
38.14
39.50
42.45
45.54
47.07
51.08
51.93
53.80
60.30
75.05

607

737

-129

153,353

109,822

43,532

28.39

5,485
6,488

2,952
1,182

2,533
5,307

46.18
81.80

11,973

4,133

7,840

65.48

165,326

113,955

51,371

31.07

596

378

217

37,680
165,922
203,602

37,572
111,333
151,906

107
51,589
51,696

lURED

Se ries E!i:
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) 21
H (June, 1959 thru 1967)
Total Series H
Total Series E and H

nes J and K (1956 thru 1957)
II

otal

matured

Series Total unmatured
_
Grand Total

!./

dIS arcrued d'
'"' r~d
. IS Count.
1!ln emption value.
dIS" of owner bonds may be held and u,!ll earn Lntprest for additional periods after origirw.l maturity dates.
, nllJ!ured bonds whir'h have not been prespnted for redemption.
'-orm PO 3812 - TREASURY 06..PARTMENT - Bureau of the Public Debt

36.41
.28
31.09
25.39_

TREASURY DEPARTMENT
-=

February 1, 1968
FOR IMMEDIATE RELEASE

TREASURY TO INVESTIGATE COMPLAINT OF SUBSIDY
ON CANNED TOMATO PRODUCTS FROM FRANCE
The Treasury Department announced today that it is
issuing a notice of countervailing duty proceeding with
respect to imports of canned tomato paste from France.
The notice, which will be published in the Federal
Register of Friday, February 2, reports that the Treasury
is investigating a complaint of subsidization of canned
tomato product exports to the United States from France.
The amount of the subsidy is stated to be 2¢ per pound.
The complainant was Canners League of California,
San Francisco, California.
Under the United States Countervailing Duty Law, if
the Treasury Department finds that a "bounty or grant"
(within the meaning of the law) is being paid, it is
required to assess an equivalent countervailing duty.
The notice of countervailing duty proceeding allows
30 days for submission of data, views, and arguments
concerning the existence or nonexistence and the net
amount of a bounty or grant.
Canned tomato paste and sauce exports to the
United States from France totalled in excess of four
million pounds for the firs t ten months of 1967 and
were valued at approximately $675,000.

000

F-1l52

TREASURY DEPARTMENT

February 5, 1968

\ft1EDIATE RELEASE.
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
wo series of Treasury bills to the aggregate amount of
~,OOO,OOO,or thereabouts, for cash and in exchange for
u~ bills maturing February 15,1968, in the amount of
)1 ,459,000, as follows:
H-day bills (to maturity date) to be issued February 15, 1968,
e amount of $1,500,000,000, or thereabouts, representing an
lanaI amount of bills dated November 16,1967, and to
e May 16,1968,
originally issued in the amount of
947 000
the additional and original bills to be freely
~han~eabie .
L82 -day bills, for $ 1,000,000,000, or thereabouts, to be dated

try 15,1968,

and to mature August 15, 1968.

rhe bills of both series will be issued on a discount basis under
~itive and noncompetitive bidding as hereinafter provided, and at
tty their face amount will be payable without interest. They
)e issued in bearer form only, and in denominations of $1,000,
), $10,000, $50,000, $100,000, $500,000 and $1,000,000
:-ity value) .
renders will be received at Federal Reserve Banks and Branches
the clOSing hour, one-thirty p.m., Eastern Standard
Friday, February 9, 1968.
Tenders will not be
red at the Treasury De~artment, Washington. Each tender must
, an even multiple of $1,000, and in the case of competitive
's the price offered must be expressed on the basis of 100,
lot more than three deCimals, e. g., 99.925. Fractions may not
!d. It is urged that tenders be made on the printed forms and
~ed in the special 'envelopes which will be supplied by Federal
'e Banks or Branches on application therefor.
I

lanking institutions generally may submit tenders for account of
lers provided the names of the customers are set forth in such
'S, Others than banking institutions will not be permitted to
tenders except for their own account. Tenders will be received
.t deposit from incorporated banks and trust companies and from
,Sible and recognized dealers in investment securities. Tenders
thers must be accompanied by payment of 2 percent of the face
of Treasury bills applied for, unless the tenders are
antied by an express guaranty of payment by an incorporated bank
S company.

- 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 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 toese 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 February 15, 1968,
cash or other immediately available funds or in a like face amount
of Treasury bills maturing February 15,1968" Cash and exchange tendl
wfll 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 thi~
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained h
any Federal Reserve Bank or Branch.
000

STATEMENT BY THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
U. S. HOUSE OF REPRESENTATIVES
ON
CERTAIN LEGISLATIVE ASPECTS OF
THE PRESIDENT'S BALANCE OF PAYMENTS PROGRAM
MONDAY, FEBRUARY 5, 1968, 10:00 A.M.
fu. Chairman, Members of the Committee:

In 1967, the deficit in our international balance of
payments increased substantially to reach an intolerable
level.

On January 1, the President, in a Message to the

Nation, announced an Action program to bring our balance of
payments to -- or close to -- equilibrium, stating the need
for action is a National and international responsibility
of the highest priority.

I would ask that his Message be

made a part of the record.
Shortly thereafter, I released a Treasury Department
report entitled "Maintaining the Strength of the United States
Dollar in a Strong Free World Economy."

This document

describes in detail the background and reasons for the Action
Program announced by the President.

It describes what we

have done to date, and what we propose to do, both over the
short and the long term.

I have asked that copies of this

- 2 report be made available this morning to each member of
the Committee, because there may be occasions to make
reference to it.
We welcome this early opportunity to appear before you
to review in general terms the balance of payments program
as a background for some important legislative program
decisions within the purview of this Committee that call
for early action.

The areas of particular legislative con-

cern to this Committee relate to improving our trade surplus
as the mainstay of our balance of payments situation, both
short-term and long-term, and action to deal with our
so-called travel deficit, which is one of the sources of
increasing weakness in our balance of payments situation.
I shall discuss both the trade surplus and the travel deficit
and measures to deal with them.

Ambassador Roth, the

President's Special Representative on Trade Negotiations,
is here to present a statement for the information of the
Committee concerning a particular aspect of the trade problem
which is dealt with specifically in the President's January
Message under the heading, "Nontariff Barriers."

- 3 -

The Balance of Payments Problem -- What It Is
and How To Resolve It
Before I go into detail concerning the areas with which

this Committee is directly concerned, it will be useful to
discuss the broad question of the United States balance of
payments problem and our strategy -- both the short- and
long-term -- to deal with it.

In essense, I raise here,

and attempt to answer, five questions:
Why is there a problem with our balance of payments?
Why do we have to take such drastic action now?
What are our long-term prospects?
What will be the world impact of the present program?
How will the rest of the world respond to it?
The Balance of Payments Problem
Even today, many of our citizens are not fully aware
of the urgent necessity of restoring a balance in our international payments.
prosperous.

The United States economy is strong and

Foreign transactions of the United States, while

very large in terms of the international economy, are small
relative to our total production, consumption, and investment

- 4 relatively smaller than for almost any other country.

Why

should the United States, or the world, be disturbed about
a balance of payments deficit that is only a fraction of
one percent of our output of goods and services?
Despite the magnitude of our domestic economy, the
foreign transactions of the United States are important to
our economic well-being and indispensable to the free world.
Imports of foodstuffs, raw material, and finished goods are
essential for our production and our high standard of living.
The overseas expenditures of the United States Government
for foreign aid and defense are vital to our objectives of
world peace and security.

U. S. private foreign investment

is profitable to our banking and business institutions and
important for economic growth and development in many other
countries.

And travel enhances interna tiona 1 unders tanding.

The cost of imports, travel abroad, security and aid
expenditures overseas, and foreign investment must be paid
for by exports of goods and services

the earnings of cur

foreign loans and investments, travel and investment by
foreigners in the United States and other foreign exchange
receipts.

- 5 -

In 1966 our total international payments amounted to
$49 billion, while our foreign receipts were nearly $48
billion.

The resulting deficit in our balance of payments

amounted to $1.4 billion.

This increased to more than $3.5

billion last year.
When our total foreign payments are more than our
foreign receipts, some, or all, of the excess dollars
received by foreigners are sold to their central banks,
which can use them in a variety of ways -- including holding
them as reserves or buying gold from the United States.

The

result tends to be a deterioration in the liquidity position
of the United States, as the ratio of its reserve assets
(e.g., gold) declines relative to its liquid liabilities
(e.g., dollars held by foreigners).
The United States is the major international banking
center holding large deposits both for monetary authorities
and for private banks, corporations and individuals.

The

dollar functions as the principal international currency.
Its liquidity position must remain strong, like that of any
bank, to retain the confidence of its depositors.
The U. S. deficit was welcome when it first developed in
the early postwar years.

Then, as now, the deficit consisted

- 6 -

of capital outflows -- both public and private -- that
exceeded the U. S. surplus on goods and services.

It sup-

plied reserves to foreign countries -- principally European
which had drawn them down to finance the war and postwar
reconstruction.

More baSically, the U. S. capital flow to

Europe contributed to the European economic miracle and the
smooth transition to European economic unity.
In the late 1950's, however, United States deficits
began to become a source for concern.

Not only did the size

of the deficits rise, but they were financed more by sales
of gold and less by foreign accumulation of dollars than in
prior years.

Some foreign central banks had what they con-

sidered to be adequate supplies of dollars in their reserves.
~ny

countries, however, still had small reserves and were

still eager to add to their dollar reserves.

Thus, there

was still no high urgency about restoring balance to our
international accounts.

Nevertheless, President Eisenhower

instructed the Department of Defense and other Government
agencies to economize on their foreign exchange expenditures.
With three years of large deficits culminating in a speculative outbreak in the London gold market in October, 1960,

- 7 new measures were called for.

President Kennedy proposed

measures to increase exports and other receipts, intensified
efforts to cut Government balance of payments costs, and
later introduced the Interest Equalization Tax to hold down
U. S. purchases of foreign securities.
~ited

A sharp rise in

States capital outflows in 1964 made it necessary for

President Johnson to introduce a voluntary program for holding down direct investment and bank loans abroad.
The rationale behind these measures was as follows:
First, while the rising outflow of U. S. capital
was moderated, U. S. international balance would
be restored by the growth of the U. S. surplus on
non-capital transactions.
Second, modestly restraining the increase in U. S.
foreign investments, particularly those in Western
Europe, would have only a small effect on world
economic growth

in sharp contrast to other

alternatives -- and would yield satisfactory balance
of payments results over time.
From the 1958-60 period to 1965, we made good progress
in reducing our payments deficit because of the growth of

- 8 -

our exports of goods and services relative to our imports,
be~use

of the rise in earnings from our foreign investments,

and because of the reduction in capital outflow in 1965.
In 1965 and 1966, we reduced our liquidity deficit by
almost two-thirds from the average deficits of 1958-60 and
one-half from the average of 1961-64.

As this period

progressed, however, the accelerated expansion of the U. S.
economy and the war in Vietnam placed renewed pressure on
the balance of payments.

The boom resulted in an extra-

ordinary increase in imports.

The costs of our forces in

Vietnam added substantially to our foreign payments.
Despite this the dollar was strong.

After France

ceased in October, 1966 its regular monthly purchases of
gold initiated early in 1965 to absorb the dollar surpluses
it had accumulated, the drain on the U. S. gold supply dried
up to a trickle.
There was retrogression in the first three quarters of

1967 because the foreign exchange costs of Vietnam rose
further, private capital outflow increased, net tourist
expenditures rose, and the European economic slowdown
reduced European imports -- and our exports.

- 9 The devaluation of sterling in November, 1967, brought
the international monetary situation and our balance of
payments problem to an acute stage.

The British move

resulted in a weakening of confidence in currencies and was
accompanied by a burst of speculative buying of gold and a
resulting large loss of U. S. gold reserves in November and
December.

This was a threat not only to the dollar but

also to the international monetary system as a whole.
While the speculation was repulsed with the cooperation
of most of the members of the gold pool, it underlined the
urgency of placing the dollar once more in an impregnable
position.

The time had come when it was necessary and

desirable to take new and decisive measures to move the
United States payments position strongly toward balance.
What was the best way to achieve this?

Depressing the

American economy is as unacceptable a solution to our
imbalance of payments to most other nations of the world as
it is to the United States.

The United States occupies a

unique role in the world economy.
exporting and importing country.
of international capital.

It is by far the largest
It is the principal source

It is the largest donor of aid.

- 10 Military forces stationed abroad are indispensable to the
security of many countries -- including the United States.
For all these reasons, the entire world is affected by the
U. S. economy and the U. S. balance of payments.

The

volume of international trade, the prices of basic commodities, the cost of money, and even the level of production
and employment abroad respond to the U. S. economy.

The

United States must seek a solution to the payments imbalance
through the expansion of the world economy, rather than the
severe contraction of its own, and, consequently, the world
economy.
The action program announced by President Johnson on
January I avoids deflation, while underlining the urgent
need for prompt enactment of an anti-inflationary tax increase,
along with proper control of public expenditures, appropriate
monetary policy, responsible wage and price decisions on the
part of business and labor, and other measures to increase
our export surplus and avoid any deterioration through excessive growth accompanied by inflationary trends that will
weaken the United States competitive position in world
markets.

- 11 -

Because the need to cut the United States payments
deficit is urgent, the program also includes new and stringent temporary restraints on outflows of U. S. private
capital.

We are here today to recommend a program to cur-

tail, temporarily but sharply, theamount of foreign travel
expenditures by Americans.

Indeed, it is upon these

uncongenial measures that we must rely for the largest
immediate effects.

These measures are taken reluctantly

as an emergency matter.

How soon they can be relaxed will

depend greatly upon our own efforts to increase our trade
surplus, reduce or neutralize Government expenditures abroad,
and encourage foreign travel and investment in the United
States.
International Monetary System
It is the relationship of the U. S. dollar and the U. S.
payments position to the international monetary system that
makes this program both a national and international responsibility.
The international monetary system requires adequate
monetary reserves to enable countries to meet payments deficits while they take measures to adjust their balance of

- 12 payments.

The monetary reserves of the world consist

mainly of gold, U. S. dollars, and other currencies.

world trade and payments grow, the need for additional
monetary reserves also grows.

Since 1950, less than half

of the increase in monetary reserves has been in the form
of gold.

More than half of the increase has been in the

form of U. S. dollars acquired by the central banks of
other countries.

Without the growth of dollar reserves,

the growth of world trade and payments would have been
severely restricted and the world economy might have been
subjected to serious deflationary pressures and instability.
In actual fact, the international monetary system has
worked well.

This is evident from the enormous expansion

of world trade from $55 billion in 1950 to about $200 billion
in 1967.

The expansion of trade and payments and the stabil-

ity of the international monetary system have been buttressed
not only by growth of reserves but also by enlargement of
international credit facilities.

The resources of the Inter-

national Monetary Fund were increased in two steps from over

$9 billion in 1958 to $21 billion at present.

A network of

reciprocal currency agreements was established by the central

- 13 banks of the large financial centers for swaps of each
other's currency; the United States has such swap arrangements totaling $7.1 billion with 14 central banks and the
~nk

for International Settlements.

~intain

In order to help

confidence in the equivalence of gold and cur-

rencies at stable values, a number of countries formed a
gold pool to maintain the orderly character of the London
gold market.
These various measures helped the international monetary system to function effectively.

Even so, it became

evident that a more basic reform was necessary.

The world

can no longer depend entirely upon increases in gold and
dollars to provide an assured and satisfactory growth of
monetary reserves.

The amount of newly-mined gold available

will not provide for an adequate increase in world reserves.
And it is not desirable from the point of view of the United
States or the rest of the world that the growth of U. S.
liabilities, in the form of dollar reserves abroad, should
continue as in the past.

A steady increase in U. S. liabili-

ties, while its reserves decline, exposes the international
monetary system to the threat of instability.

- 14 The Rio resolution for the creation of Special Drawing
Rights (SDR) represents a landmark in the evolution of an
international monetary system responsive to the needs of the
modern world.

When this system is in operation, the growth

of monetary reserves can be adequate without depending
either on the uncertainties of gold mining and gold hoarding
or on persistent deficit in the U. S. balance of payments.
The early availability of SDR removes one of the concerns as to the impact of the U. S. balance of payments
program -- namely, a slowing of reserve growth and a consequent adverse effect on world trade and income.

Early

activation of the SDR plan can maintain an adequate growt?
of world reserves together with restoration of U. S. balance
of payments equilibrium.
Strategy for Payments Improvement
The key resources which give the United States the
strength to deal with its underlying long-range payments
problem constructively and sensibly are:
a strong economy with a Gross National Product in
excess of $800 billion, representing 40-45 percent
of world output;

- 15 a large stock of foreign assets with powerful earnings potential.

Gross assets abroad -- public ard

private -- total more than $110 billion.

Our net

long-term asset position -- approximately $70
billion -- has increased every year for 20 years.
Private overseas assets alone now generate annual
earnings of about $6 billion.
a basic trade surplus, on which we must build;
-- a strong reserve position (nearly $15 billion, or
about 20 percent of world reserves), even after
losses of the past few years.
We can build on these elements of strength and move
toward balance of payments equilibrium through short- and
long-range measures vigorously implemented.

Furthermore,'

the passage of time will ameliorate forces that presently
exacerbate the balance of payments deficit and hide the
fundamental progress achieved.
Ideally, the United States would solve its balance of
payments problem through a gradual, long-range approach in
which there was no interference with the free movement of
goods and services, capital, or people.

Over the long run,

- 16 the United State is, in fact, dedicated to just such an
approach.
However, the situation that confronts the United States
today requires prompt and major corrective action.

Long-

term measures alone that take hold gradually over time are
not sufficient.
The President's Action Program
President Johnson's program is designed to bring about
a sharp reduction in the United States payments deficit in
the year ahead, bringing it into -- or close to -- equilibrium
The program consists of general and specific measures, shortand long-range actions.
The first and essential requirement is stability in the
United States economy.

I will deal with this matter in more

detail later in this statement, along with foreign travel
and the trade surplus.

Here I shall touch briefly only on

three remaining parts of the Action Program, not of direct
concern to this Committee:
1.

Direct investment.--By Executive Order and regula-

tions issued under the Banking Law, a mandatory limit has
been placed on direct investment by United States companies

- 17 in foreign affiliates.

The program, together with its

accompanying provisions on the repatriation of foreign
earnings, is expected to reduce the payments deficit by
$1 billion in 1968.
2.

Banks and other financial institutions.--Revised

guidelines have been issued by the Board of Governors of
the Federal Reserve System for reducing foreign credits

from United States banks and other financial institutions.
The new guidelines are designed to bring a net inflow of at
least $500 million in 1968.

The program is voluntary,

although the President has given the Federal Reserve Board
standby authority to invoke mandatory controls.
3.

Government expenditures overseas.--The commitments

for aid and defense, on which free world security depends,
necessitate very large expenditures abroad.

These costs

have risen sharply because of the Vietnam War.

Over the

past three years, a stringent program has substantially
reduced these foreign exchange costs.

The President has,

nevertheless, set a target of a further reduction of $500
million in the foreign exchange impact of such programs in
1968.

- 18 Negotiations will be initiated promptly with our allies
in Europe and in the Pacific to minimize the foreign exchange
costs of our military spending abroad.

They can help, as

they have, by purchasing in the United States more of the
equipment for their defense needs.

They can also offset the

adverse effects of our military expenditures on the balance
of payments by investing part of their foreign exchange
receipts in long-term U. S. securities.

The Department of

Defense has been instructed to find ways to reduce further
the foreign exchange impact of personal spending by U. S.
forces and their dependents.

The President has instructed

the Director of the Budget to find ways to reduce the number
of American civilians working overseas.

AID has been

directed to reduce its foreign exchange costs by at least
$100 million in 1968.

Long-Range Aspects of the Balance of Payments Program
A drastic reduction in our balance of payments deficit
is necessary to defend the dollar and to insure against a
breakdown of the international monetary system.
program will achieve this.

The action

The program will entail sacrifices

in this country and it mav cause difficulties for some foreign

- 19 countries.

In order to assure a fair sharing of these

sacrifices, the program has been widely spread over all
sectors of the U. S. economy.

In order to minimize adverse

effects on the world economy, the program distinguishes
among groups of countries on the basis of their ability to
absorb reductions in their foreign exchange receipts.
The action program is designed to deal with an emergency.

We do not regard certain aspects of it as consistent

with a long-range solution to our underlying balance of payments problem.

Restrictive measures are temporary.

The

policy of the United States is to support the unrestricted
international flow of goods, services, and capital under a
stable international monetary system based on fixed values
for currencies defined in terms of gold or the dollar, linked
at $35 an ounce.

The world economy can operate most effec-

tively only with a balanced pattern of international payments:
achjeved without restrictions.

The international monetary

system can function effectively only if monetary reserves
can grow steadily at an appropriate rate without depending,
as in the past, on a large infusion of dollar reserves derived
from a payments deficit of this country.

- 20 -

An appropriate long-range balance of payments solution
for the United States must be based on a substantial and
growing surplus in trade and services, including earnings
from U. S. foreign investments.
is too small.

The present trade surplus

It must be increased substantially through

an expansion of U. S. exports.

The Government is taking

measures to encourage exports.

U. S. producers will be able

to benefit from these measures only if they strengthen their
position in world markets by maintaining competitive prices
and costs.
The United States is eager -- and working hard -- to
encourage foreign direct investment in this country and
investment in United States corporate securities.

Foreign

companies whose products are already familiar to United
States buyers would find direct investment very profitable.
We have an enormous market, efficient labor, and easy access
to advanced technology.

The attractiveness of U. S. corpo-

rate securities has been enhanced by the Foreign Investors
Tax Act of 1966.

The benefits granted by this legislation,

as well as other factors, should result in a moderate but
steady inflow of investment funds from abroad.

- 21 Responsibilities of Our Trading Partners
The United States recognizes its responsibility for
adjusting its own balance of payments, and it does not
intend to shirk this responsibility.

At the same time,

it must be recognized that the United States balance of
payments is part of a world pattern of payments.

The

counterpart of the deficits of some countries is the surpluses of other countries.

Countries in surplus have a

responsibility for adjusting their balances of payments
and thereby facilitating the progress toward international
equilibrium that the U. S. action program makes possible.
They can meet these responsibilities by reducing their barriers to trade, by increasing their aid to less-developed
countries, by sharing adequately in the cost of common
defense, by encouraging capital outflows, and by maintaining
a satisfactory pace of domestic economic expansion.

As part

of this vital adjustment effort, we should be able -- indeed,
we must find ways -- to work constructively with our allies
on forms of bilateral and multilateral financial arrangements
designed to neutralize the foreign exchange consequences of
the locations of our troops and those of our allies.
arrangements should be long term and provide financial
viability to our alliances.

The

- 22 The growth of reserves of the rest of the world will
be sharply affected by the reduction in the United States
deficit.

Yet many countries will wish to see a gradual

increase in their reserves as their international transactions expand.

Therefore, it is important to implement

as speedily as possible the plan agreed in outline last
September to create new international reserves in the form
of Special Drawing Rights in the International Monetary

Fund.

- 23 II.

Travel Proposals

In his message on New Year's day the President pointed
out that the travel deficit in our balance of payments this
year will exceed $2 billion.

To reduce this deficit by

$500 million he asked the American people to defer for the

next two years all non-essential travel outside the
Hemisphere.

~estern

He also asked me to explore with the appropriate

Congressional committees legislation to help achieve this
objective.

After some informal exchanges with the Chairman

and ranking Minority Member and a good deal of collaborative
staff work by the Treasury staff and the staff of the Joint
Committee on Internal Revenue Taxation, I am here to present
some proposals to this committee which, if adopted, will
help achieve this objective.
In addition to the President's request to forego nonessential travel outside the Western Hemisphere for two years,
we will seek to reduce the travel deficit by two approaches:
A. Through a program to increase the number of travelers
coming to the United Scates.
our program.

This is the permanent part of

It will make possible a continued increase in

international travel.

This is in the interest of the United

States and all other nations; and

- 24 -

Through customs proposals and temporary tax meas-

ures that would induce a reduction of United States tourist
expenditures abroad with the least possible impact on the
number of travelers.

We are also recommending an extension

of the existing domestic ticket tax to international travel.
We would hope that a portion of the revenues produced by
this extension would be made available to finance the promotion of foreign travel to the United States.
A.

Measures to Increase Travel to the United States

The Johnson and the Kennedy Administrations have both
recognized
that the long-term solution to the travel deficit
should not be found through restrictive measures
but must be sought through the expansion in the
number of foreign visitors to the United States.
that the United States has unique attractions
which, when adequately promoted, will attract
far larger numbers of foreign visitors.
With these thoughts in mind, President

Kenn~

in 1961

proposed, and Congress passed, the International Travel Act
which established the United States Travel Service.

The USTS

has over the years made a major contribution through its

- 25 promotional activities abroad and has acted as a catalyst
in advertising and sales promotion cooperation between
Government and industry.
As part of his February 1965 balance of payments program, President Johnson asked Vice President Humphrey to
form a Committee which would enlist the continuing efforts
of high-level Government officials to increase coordination
of activities affecting our travel receipts.
Concurrent with the establishment of this Committee,
"Discover America", Inc., was formed as a private non-profit
organization to bring the elements of the United States
travel industry together in an all-out effort to increase
the size of the tourism market.

This organization worked

closely with the Vice President's Committee on Travel.
As an intensification of these efforts, President Johnson
on November 16 announced the appointment of an IndustryGovernment Special Travel Task Force under the chairmanship
of former Ambassador Robert M. McKinney.

The Task Force is

now hard at work in developing a whole series of recommendations to increase the flow of foreign travel to the United
States.

In particular, the objectives of the Task Force are

- 26 -

to determine practical steps which can be taken
quickly to produce early improvement in the
travel sector of the balance of payments;
to determine medium and long-term measures to
bring U. S. travel expenditures and receipts
into better balance, with recommendations on the
necessary steps that should be taken in both the
private and government sectors to accomplish this
objective; and
to determine how best to help foreign visitors
improve their knowledge and understanding of the
United States and the American people through
first-hand experience, thus providing a new bridge
of understanding through tourism between the United
States and other countries.
To facilitate a thorough investigation of the many
facets of the problem, the Task Force has been dividedmto
12 working parties -- eight dealing with guggestions geared
toward private industry and four concentrating on efforts
which the government might contribute.

I am attaching as

- 27 -

an exhibit a copy of the release issued by Ambassador
~Kinney

at the time of the organizational meeting of his

Task Force describing the personnel and terms of reference
of these working parties.
Ambassador McKinney informs

me that that Task Force

has received the entlru..siastic cooperation of Federal, State
and local governments and of private industry, both foreign
and domestic.
Through the Task Force's imaginative recommendations
and the concrete steps suggested, Ambassador McKinney feels
confident that travel costs to the United States will be
substantially reduced, inhibitions on travel removed and
promotion of the United States as a tourist center more
effectively achieved.
These steps should make a trip to the United States
economically and otherwise feas ib1e to hundreds of thousands
of potential visitors who have not, as yet, had an opportunity
to visit our shores.
Recommendations from the 12 working parties have been
completed and are now under review by the parent Task Force,
which will submit its report to the Pres ident by February 19.

- 28 Ambassador McKinney's report will include an action
program some elements of which have already gone into effect
and others of which will go into effect during the next few
months.

We expect the program to increase the number of

travelers to the United States and U. S. receipts from travel.
It will have a substantial impact this year and a growing

impact in future years.
While the long-term success of this program to increase
receipts from travel to the United States should remove the
necessity for making permanent the short-term temporary tax
measures to be proposed, it will take some time for this
program to be fully effect ive.

Measures to Reduce U. S. Travel Expenditures

The benefits of foreign travel need no elaboration by
me,

The free interchange of people is a basic tenet of

democratic life and an ingredient of an expanding free world.
But we must be prepared in times when our balance of payments
is under the heavy pressure ,of war, and external circumstances
require unusual and temporary measures in other areas affecting our payments, to try to hold down the dollars we spend
abroad in travel as well as promoting increased tourism to
the United States -- particularly while the latter program
is getting under way.

- 29 -

The number of Americans traveling abroad has been
expanding at a high rate.
~ited

For example, the number of

States travelers to Europe and the Mediterranean

areas has grown from 637,000 in 1958, the year when our
large recurrent ba1ance-of-payments deficits began, to

1,570,000 in 1966.

The figure was undoubtedly higher

last year, although the exact number will not be known for
some months.
In only one year during the period 1958 through 1966
did the increase in the number of travelers fall below 10
percent and that was in 1961 when the Berlin crisis deterred
United States travel to the European area.

Excluding that

year, the average annual rate of increase in number of U. S.
travelers was 14 percent.
The objective in the travel area, as in other parts of
the balance-of-payments program, is to forge an effective
device which, as far as feasible, avoids an undue burden
either on those United States citizens or on those foreign
countries least able to bear it.
With these general considerations in mind, I would like
to describe the specifics of our proposal.

- 30 -

General Description of Tax Proposals
The travel tax proposal contains two basic elements -a.

A permanent extension of the present 5 percent

ticket tax on the cost of domestic airline travel to
cover the cost of all airline transportation, whether
within or without the United States, purchased in the
United States and also a temporary extension of the tax
to cover the cost of water transportation to a destination outside the Western Hemisphere.
b.

A temporary graduated tax on the expenditures

incurred in connection with a trip outside the Western
Hemisphere.

Expenditures would not include the cost'of

transportation to and from the traveler's foreign destination -- which it is proposed be taxed under the
expanded transportation tax mentioned above.
The expenditure tax would generally apply to each
traveler's expenditures in excess of $7 per day of
travel -- with the first $8 of the excess taxed at a
15 percent rate and the remainder at a 30 percent rate.
The tax would apply only to trips undertaken during the
period after the legislation is enacted and before

- 31 October 1, 1969.

Thus, it would apply to the 1968 and

1969 travel seasons.
Some general description of overseas travelers

will

be helpful in understanding why we are recommending this
particular tax structure.
Twenty-four percent of these travelers are going on
business, 45 percent on vacation, 5 percent to study or teach,
18 percent "visiting", and 8 percent in miscellaneous categories.

The visiting classification is made up of people,

frequently foreign-born, visiting friends and relatives
abroad.
The average length of stay is 33 days.
daily expenditures are $16.73 per person.
are misleading.

The average
However, averages

When the length of stay is analyzed by

family income, we find that the lowest income travelers by
far stay the longest, 51 days for those with under $5,000
income.

It is 26 days for those with over $20,000 income.

However, the amount spent per day varies as one might expect
according to income.

In the under $5,000 group, it is $9.63

:/ The following statistics relate only to travelers to Western
Europe and the Mediterranean area, the only group for whom
statistics are available. These travelers, however, represent 85 percent of all non-Western Hemisphere travelers.

- 32 per day, on the average, and in the over $20,000 group on
the average $25.39 per day.

These two factors, the varia-

tion in length of stay and the variation in per diem expenditures, produce the result that in the whole income group up
to $20,000, expenditures per trip are about the same in
total.

It is only over the $20,000 level that expenditures

per trip increase significantly.
The average cost of a trip to Europe is $1,000, made up
of a $450 fare for the transportation over and back and $550
expenditures while in Europe.

A significant number of

travelers, however, have over $1,000 of expenditures, in
addition to the transportation fare, while abroad.

In fact,

roughly one-half of the total travel expenditures are made
by the travelers with over $20,000 income -- one-third of all
travelers.
Considerations in Adopting this Particular Program
In developing this tax program, we carefully considered
many alternatives.

We believe that the particular package

we are recommending will achieve the desired restraint in
the most equitable manner.
principles we followed.

Let me list for you some of the

- 33 First; I have already mentioned, the ideal program would
be one which achieved the balance of payments savings with a
minimum of trip cancellations.

This, of necessity, requires

that the tax not fall heavily on those with modest incomes
or those of any income level who choose to travel modestly
in this period.
The proposed tax program -- by being directed primarily
at spending over a modest level -- is consistent with this
objective.

The $7 per day exemption, graduated rate, and

the low rate of tax on transportation fare will all combine
to keep the tax at a modest level for one traveling inexpensively.

One spending $15 per day would pay an expenditure

tax of only $1.20 each day.

For a trip of 30 days, this tax

($36.00) when combined with an average ticket tax, would
produce a total tax bill of under $60 -- about 6.5 percent
of the $900 cost of the trip.

the other hand, the exer-

cise of restraint on each dollar of spending above this amount
would be encouraged by a 30 percent tax.
For the low income traveler -- students and foreign born
visiting relatives and friends -- who spend on the average
about $10 a day, the expenditure tax would be only 45 cents

- 34 per day.

Even for a 50-day trip the expenditure tax would

be only $22.50.

When combined with an average ticket tax,

the total would be $45, or less than 5 percent of the cost
of the trip.
Other forms of taxes -- such as a flat tax per trip, a
relatively high ticket tax, or a flat tax per day -- which
require every traveler to pay a specified amount regardless
of his expenditure level, necessarily have their greatest
impact at the lower income levels where the amount of tax
is a proportionately higher percentage of the total funds
available for expenditure than at higher income levels.
They would achieve the necessary expenditure reduction primarily by causing large numbers of the less affluent to
cancel their trips and would have little impact on the
expenditures of the more affluent.

the other hand, the

proposed $7 per-day exemption, together with the lower tax
rate proposed on the next $8 of expenditures per day are
specifically designed to achieve the reduction of expenditures without substantial trip cancellations.
Moreover, since those in the lower income range tend
to take longer trips and spend less per day, the proposal
avoids graduating the tax on the basis of the length of stay.

- 35 -

A second principle followed in developing the tax program was that any tax retraint on foreign travel expenditures
should continue to apply as the expenditures increase.

expenditure tax of the type we are recommending meets this
objective by applying the deterrent on each dollar spent
over a basic exemption level.

In other words, each time a

traveller contemplates making an expenditure, the tax will
be a factor which he must weigh in making his decision.

flat tax per trip, or even per day, does not have this continuing effect on marginal spending.
The graduated rate of the tax is designed to achieve
deterrence at all income levels.

Under the proposal each

dollar an individual spends above the level of $15 per day
would be subject to a 30 percent tax rate -- double that
applicable to amounts spent up to that figure.

A third principle which we have followed is that the
tax program should be structured so as to preclude the necessity for providing numerous exceptions.

We can all think of

particular types of trips which we would not want cancelled.
If the tax were in the form of a certain amount per trip
regardless of the traveler's expenditures, it would inevi~bly

have to be imposed at such a level as to act as a

- 36 -

financial deterrent to large numbers of trips, particularly
by lower income travelers.

This, in turn, would create

immediate pressure for exemptions involving very difficult
judgments as to what constitutes a trip worthy of exemption.
Moreover, specific exceptions produce complexity and administrative burdens.
The program we are recommending obviates the necessity
of numerous exemptions, since the impact of the tax will be
small on individuals who travel modestly.
These are the general principles we have followed in
structuring our tax program.

By meeting them, we believe

that this program will accomplish its objective of reducing
foreign travel expenditures with the least impact on the
number of Americans traveling overseas and without, as the
President put it in his State of the Union Message, "unduly
penalizing the travel of teachers, students, business people
and American people who have relatives abroad whom they want
to see."
Let me now turn to a more detailed description of the
tax proposals:

- 37 Tax on Transportation
Existing law imposes a 5 percent excise tax on the cost
of air transportation.

Generally, this tax does not apply

to international travel.

Our proposal would permanently

extend this existing air ticket tax to all amounts paid for
transportation where the tickets are purchased within the
United States.

The tax would also be extended temporarily

to water transporation between the United States and a point
outside the Western Hemisphere.
While the temporary travel tax is in effect this tax,
rather than the ticket tax, would apply to expenditures for
air and water transportation outside the Western Hemisphere
after the traveler has reached his first stop scheduled for
more than 12 hours.

For example, the 5 percent ticket tax

would apply to a flight from the United States to the first
European stop and from the last European stop to the United
States.

All travel within Europe between arrival and depar-

ture would be treated as an expenditure, and taxable under
the temporary travel tax.

Moreover) where a ticket for

transportation to the United States is not subject to the
ticket tax because purchased outside the United States, it

- 38 would be subj ect to an equivalent tax of 5 percent collected
as part of the trave 1 tax.
Tax on Travel Expend itures
The travel tax would, with few exceptions, apply to all
who travel outside the Western Hemisphere, and would apply
to all expenditures made in connection with the trip except
transportation to and from the United States, which as I
explained above, would be covered by the ticket tax.
Each traveler would be entitled to an exemption of $7
of expenditures times the number of days he is abroad.

The

next $8 of expenditures times the number of days abroad would
be taxed at a rate of 15 percent.

All expenditures in excess

of this amount would be taxed at a rate of 30 percent.
Thus, an adult traveler going abroad for 30 days and
spending $700 in addition to the cost of transportation from
the United States would be subject to a tax of $111 computed
as follows -- the first $210 would be exempt (30 days x $7.00);
the tax on the next $240 would be $36 (30 days x $8.00 x 15%);
and the tax on the remaining balance of $250 would be $75
($250 x 30%).

- 39 In the case of a non-business traveler, the tax would
apply to all expenditures -- meals, lodging, entertainment,
purchases of tangible personal property, and transportation
not part of a continuous trip to or from the United States.
In the case of a business traveler it would apply to
all expenditures for meals, lodging, entertainment and
travel as above but would not apply to other types of business expenses nor to the purchase of business assets, such
as inventory.
Exemptions from the tax would be limited to the following:
1.

Individuals (and their families, transferred or
going abroad in connection with their trade,
business, profession, or education, and remaining
abroad for more than 120 days.

Individuals who establish residence outside the
United States.

All United States Government travel.

With respect to U. S. Government travel, on January 18
the President directed the heads of all the Departments and
Agencies to reduce official travel overseas to the minimum

- 40 consistent with orderly conduct of the Government's business
abroad.

The Bureau of the Budget will issue instructions

this week to the agencies calling for approval by the Department of State of each Government-sponsored trip to international conferences abroad.

By March 15 agencies will report

to the President specific measures they have taken to curtail
overseas travel.

Thereafter, they will report quarterly on

progress in achieving the President's objective.
The mechanics of the expenditures tax would be relatively
simple.

Before embarking on a foreign trip, each individual

would deposit at his port of departure an amount of money
equal to the tax he expects to owe.

Rather than keep an

itemized account of all expenditures he would compute the
tax on a "net worth" basis.

To do this he would file a

statement indicating how much money and traveler's checks
he is taking with him.

his return, he would make a cor-

responding statement of the amount of money and traveler's
checks he has with him and leave this with the Customs officials at his port of entry.

His formal tax return would be

required to be filed with the Internal Revenue Service within
60 days after his return and any tax due would be paid.

- 41 There would be special provisions to take care of
expenses paid or facilities furnished by employers.
For the ordinary tourist, the tax base would be an
amount equal to the difference between the money he left
the

co~ntry

with and the money with which he returned, plus

any expenses he prepaid or charged on a credit card during
his trip and the amount of any personal checks issued abroad.
This method of computing the tax will eliminate the necessity
of any traveler

having to keep a detailed record of his

expenditures while abroad.
When a family travels abroad together, they would be
permitted to file a joint return aggregating all their expenditures as well as their exemptions.
Enforcement of the travel tax would be carried out by
the Customs Service and the Internal Revenue Service.

It is

fully expected that the tax will be both effective and
enforceable.

The formal return will be associated with the

traveler's income tax return for audit purposes.
In summary, we are proposing a tax program aimed at
encouraging travelers outside the Western Hemisphere to
reduce their expenditures in 1968 and 1969.

The balance of

- 42 payments savings for this measure has been estimated in the
neighborhood of $250-$300 million.
2.

Customs Measures
a.

Duty-Free Tourist Exemption
The estimated value of articles acquired abroad

and brought into the United States during 1967 by
United States residents returning from countries
other than Mexico and Canada and the Caribbean area
totaled approximately 200 million dollars.

One hundred

ten million dollars of this amount was brought in under
the present $100 Customs duty-free exemption granted to
returning residents.

A substantial reduction in this

duty-free exemption would achieve a significant reduction in the value of articles brought into the United
States by returning United States residents.
b.

$10 Gift Exemption for Parcels Arriving by Mail
An estimated 11,000,000 packages arriving by mail

during 1967 were admitted duty-free under the existing
exemption for gifts valued at less than $10.

In addi-

tion, many other parcels, presently being admitted
without payment of duty, would have duty owing if there

- 43 were adequate Customs manpower available to assess the
duty.

The elimination of the $10 gift exemption, and

a more intensive processing by Customs of packages
arriving from abroad by mail would bring about a
decline in the shipment of such parcels to the United
States.

Since many such parcels are purchased by

United States residents this would result in a significant balance of payments saving.
Summary of Proposals
In order to reduce foreign expenditures by returning
United States residents and thereby achieve a balance of
payments savings, we propose:
a.

Reduction of Tourist Exemption
The present $100 duty-free exemption granted to

returning United States residents should be reduced to
$10 for persons returning from countries other than
Canada, and Mexico and the Caribbean area.
b.

Modification of Gift Exemption for Parcels Arriving
by Mail
The $10 duty-free gift provision for articles arriv-

ing in the mail from abroad should be reduced to $1.00.

- 44 This will be accomplished administratively under existing law.

No change is proposed in the present $50 gift

exemption law applicable to gift parcels arriving from
United States servicemen in combat zones.
c.

Modification of Duty Assessment Procedures Applicable
to Returning United States Residents and to Certain
Noncommercial Parcels
In order to minimize the increased Customs workload

implicit in the changes described above, the following
flat rates should be made applicable:
1.

A flat 25 percent rate of duty on all dutiable

articles accompanying arriving travelers, provided their
aggregate value does not exceed $500 wholesale.
2.

A $2 charge on all dutiable noncommercial parcels

arriving by mail which are valued at $10 or less retail.
Articles valued at $1 or less will continue to be free of
any duty or charge.
3.

A flat 25 percent rate of duty on all noncommer-

cial importations of dutiable articles arriving by mail,
railway express and other means of transportation, which
are valued at more than $10 retail but less than $250
wholesale.

- 45 -

The new simplified rates proposed above reflect
an average of the duty rates assessed currently under
the Tariff Schedules on importations of the types
under consideration.

Without such a simplified duty

assessment procedure, the changes recommended with
respect to tourists' baggage and mail parcels would
impose a staggering burden for the Bureau of Customs.
d.

Resulting Balance of Payments Savings
It is estimated that implementation of all the

above recommendations will achieve a balance of payments
savings of about $100 million.
Implementation of the above measures will entail increased
administrative costs for the Customs Service and the Internal
Revenue Service; and also for the Post Office Department to
the extent its expenses in collecting the duty on parcels
arriving by mail cannot be covered by postal handling charges
because of the ceiling set under the Universal Postal Union
Convention.

Their ability to execute these measures is

dependent upon the establishment of an adequate mechanism for
reimbursement of these costs to the agencies involved.

- 46 This completes the outline of the measures which we
propose be taken to effect a $500 million savings in the
balance of payments deficit resulting from foreign travel.
This is intended to be a cooperative program involving the
Congress, the Executive, and the American people. The
problem is clear; the need for quick action is imperative;
I urge you to give it your immediate attention.

III.

'+ I

Achieving An Adeguate TraC2 Surplus

The keystone of a sound international financial position for the United States and the dollar is a substantia;
trade surp Ius.
It is natural and desirable for a rich country like
the United States to export investment capital abroad, to
give foreign aid, to provide its share of the common defense,
and to have large numbers of its citizens traveling abroad.
But all of this is possible only if, in addition to incomes
from foreign investments, the United States trade surplus
is large enough to finance such expenses.
The United States has consistently had a trade surplus
an excess of exports over imports.

In 1950-55 the surplus

averaged $2.2 billion; in 1955-60 it averaged $3.8 billion;
and in 1960-65 it averaged $5.2 billion.

It reached an a11-

time high of $6.7 billion in 1964, but it narrowed in 1965
to $4.8 billion and dropped much further in 1966 to $3.7
billion, the lowest point since 1959.
There was some strengthening of our trade surplus in
the first three guarters in 1967 but a sharp

deteriora~ion

- 48 in the fourth quarter eliminated the anticipated gain in

1967. *
The question naturally arises:

What happened to the

fourth quarter trade figures?
Our best answer from the information available to date
is that there was an upsurge of imports, more than any real
worsening of our export picture, which produced this sharp
decline in our fourth quarter trade surplus.
For the first three quarters of 1967, our quarterly
trade surpluses were averaging about $1.082 million.

the fourth quarter however this rate of surplus deteriorated
to only $357

millio~with

nearly three-fourths of the deteri-

oration on the import side and one-fourth on exports.
Basically the upsurge in imports, which became particularly noticeable in November and December, reflects the
further warming-up of the domestic economy.

It was just this

development which we were trying to anticipate in the
President's Tax Message last August.

* The

figures used are calculated on the so-called balance of
payments basis. On a census basis the 1967 trade surplus
was about $4.1 billion, up less than $300 million from the
previous year. The primary difference between these two
sets of figures involves the ways in which certain military
exports are handled.

- 49 While some special factors were at work affecting
fourth quarter trade, we cannot avoid the fact that we
have again moved into a situation where the rapid growth
in our Gross National Product in money terms will almost
inevitably bring a more than proportionate rate of increase
in our imports.

This was the process which, as you will

recall, brought in 1965-66 the increases of from 15 to 20
percent per annum in our imports as contrasted with 9.6
percent in 1964 and 5 percent in 1963.
But the problem is not limited to imports alone.

Start-

ing with the fourth quarter of 1966 and exte~ing through
the second quarter of last year our rate of export growth
over the same periods a year earlier was averaging about
7 percent.

In the third quarter of last year, the rate fell

to 3-1/2 percent and in the fourth quarter to less than one
percent.

The fact that this decline was mainly attributable

to reduced exports of agricultural products does not lessen
the need for a greater intensified effort to achieve and
maintain a much higher rate of export growth.
Moreover, these are only the most immediate types of
adverse impact on our trade from an expansion that is highly
inflationary in character.

In addition, wage and price

- 50 -

increases of the kind we are already experiencing, accentuated by the further push of a new outburst of demand, could
seriously undercut our long-term competitiveness in world
markets if a'llowed to continue into a spiraling inflation.
Thus, very dramatically the events of the last quarter
of 1967, underscored by a dwindling trade surplus, provide
proof positive of earlier assertions of the important relationship of the tax surcharge to our balance of trade and
payments and the international position of the dollar.
In his Tax Message of August 3 last year the President
stated that failure to act on his tax proposals and to

restrain unnecessary spending could have the most serious
consequences including:

"An excessive expansion of domestic

markets could again quicken the flow of imports to the United
States, while rising costs and prices cut into our exports.
The position of the dollar as the key element in the world's
financial system could be impaired."
This proposition developed in my previous appearances
on August 14, 1967, November 29, 1967 and January 22, 1968
in connection with the surcharge must be again developed in
any discussion of our overall balance of payments situation
and what we propose to do about it.

- 51 The keystone to the entire balance of payments program is
the surcharge proposal you have before you, or some variation.

The other direct measures added in the President's

January 1 program to the pre-existing effort are not going
to be as effective in dealing with the balance of payments
problem unless these tax proposals coupled with expenditure
controls, appropriate monetary policy, and a more effective
voluntary program of wage-price restraint, are combined to
'stem the inflationary pressures which now threaten our
trade surpluses, both long-term and short-term.
Let no one assume that this recent experience is an
isolated phenomenon, unrelated to the past.
In the mid-1950's Europe and Japan were rapidly regaining their economic strength.

Between the recessions of 1954

and 1958, the United States had a consumption and investment
boom during which our price level for metals and machinery
rose 20 percent (from the end of 1954 to the end of 1957).

By the end of 1959 those prices -- particularly important in
determining our international competitive position -- were
nearly one-fourth higher than in 1954.

With Europe and Japan

steadily increasing their ability to produce goods for export,

- 52 conditions were being created that would make it more difficult than before for the United States to achieve an
adequate surplus in the current account of balance of paythat is a current surplus sufficiently large to

ments

cover the flows of U. S. private and government capital to
the rest of the world.

In 1959 our trade surplus dwindled

to less than $1 billion and it was only with the recession
of 1960 that it rebounded to a more normal range.
Again in 1965 and 1966 the decline in our trade surplus
from the peak level reached in 1964 can be related to the
very high rate of growth of those years.

Indeed, had we

held in 1965 and 1966 the trade surplus level reached in
1964 there would have been substantial balance of payments

surpluses in both of those years.
Hence, our balance of payments deficits in the last
three years strongly suggest that the trade surplus has been
inadequate.

To determine what should be done about increas-

ing it we must examine the basic forces affecting U. S.
trade.
United States exports and imports are strongly influenced
by the pressure of United States domestic demand, by changes

- 53 in the U. S. competitive position, and by economic growth
and policies in our major overseas markets.
What impact do these interrelated factors have on our
trade?
1.

U. S. Competitive Position in World Markets.--As

can be seen in Table 1, in the 1960's, United States unit
labor costs in manufacturing declined slightly while those
of our major European competitors rose significantly.

changes in relative costs were the only determinant of
export performance, then we should have noticeably increased
our relative share of world markets.

- 54 Table L.--Unit labor costs in manufacturing for
selected industrialized countries since 1961 1
Country
United States------------------------~nada--------------------------------

hance-------------------------------Germany -----------------------------Italy------- -- -- -- -- -- -- -- -- -- -- -- ---Japan------------ -- -- -- ---- -- -- --- ---United Kingdom -----------------------

1962

1963

1964

1965

1966 i

99
99
107
107
108
108
104

98
100
112

98
100
118

III

118
113
102

124

97
95
119
117
122
118
109

99
99
116
123
118
125
114

III
103

Ratio of wages and salaries (and including supplements) to production; national currency basis.
2. Preliminary.

relate to wage earners in Italy and to all employees in
other countries.
Sources: Department of Labor and Council of Economic Advisers.
N~E.-Data

In point of fact, the U.S. held its share of world trade between
1961 and 1964, as Table 2 shows.
Table 2.--U.S. Share (%) of Total World Exports of Manufactures
Year
~6l-----------------------------------------------------------25.6

1962-----------------------------------------------------------26.5
1963-----------------------------------------------------------25.6
~M-----------------------------------------------------------25.8

1965-----------------------------------------------------------23.6
1966------- ------ ------- - -- --- -- -- -- --- ---- ---- - ---- --- -- -- - -- -23.5
Notes.--l. An adjustment for declassified U.S, special category
exports was made by subtracting $~. 0 billion from U, S. and world
totals in 1965 and 1966. 2. Excludes intra-EEC and intra-EFTA trade.
Source:

United Nations Monthly Bulletin of Statistics November
and December 1967.

- 55 In 1966 and probably in 1967, the U.S. competitive position was
eroded by increases in U. S. labor costs.

Another important reason

for the decline in the U. S. share of world exports in the past two
years has been the sharp difference in rates of economic expansion
in Europe and the U. S .
2.

Impact of Differences in Economic Expansion in the United

States and Europe. -The experience of the first half of the decade
indicates the vital importance of sound domestic economic policies
to growing U.S. trade surpluses.

This is most clearly seen in an

examination of the relationship of U.S. imports to the pace of U.S.
economic expansion, as illustrated below:
Table 3.-U.S. GNP and Foreign Trade, 1960 - 1967
Imports

GNP (current prices)

1960
1961
1962
1963
1964
1965
1966
1967
Av. 1961-64

billion

change

billion

change

503.7
520.1
560.3
590.5
632.4
683.9
743.3
785.1

4.1
3.3
7.7
5.4
7.1
8.1
8.7
5.6

14.73
14.51
16.19
16.99
18.62
21.47
25.51
26.89

-.58

(5.9)

%
change

As %
of GNP
2.9

4.04
1.38

-3.8
-1.5
11.6
5.0
9.6
15.3
18.8
5.4

( .97)

(6.2)

(2.9)

-.22
1.68
.81
1.63

2.85

2.8
2.9
2.9
2.9
3.1
3.4
3.4

- 56 -

As the annual growth rate in GNP (current prices)
moves up, imports climb more than proportionately.

1965 and 1966, a period in which GNP growth exceeded 8
percent per annum, our average growth in imports exceeded
16 percent per annum.
Clearly, it was not only the rate of increase of GNP
that was the causal factor, but also the fact that the
economic slack which had existed in the early 1960's was
being taken up in 1965 and was completely eliminated in
1966.

In short, if the United States can maintain a non-

inflationary pace of economic expansion, the growth in
imports is likely to be much more moderate than in 1965 and
1966.
What happens in our major markets is obviously of great
importance in determining the level of U. S. exports.

When

foreign economies -- principally Western Europe and Canada
are expanding, total world markets are likely to be strong
and U. S. exports are likely to rise with a general increase
in world trade.

Where expansion is weak -- as it was when it

slowed markedly in Western Europe in 1966 and 1967
trade and U. S. exports suffered.

world

From 1960-63 to mid-1967,

European industrial production increased only 26 percent

- 57 -

while U. S. industrial production rose 36 percent -- U. S.
growth being more than a third faster.

This was a major

factor in the $1.7 billion decline in the U. S. merchandise
trade surplus from 1961 to 1966.
3.

Foreign Trade Po1icies.--Trade policy of foreign

governments has an important impact on the U. S. trade
accounts.

The Kennedy Round, just completed, which will

result in substantial reduction of barriers to trade, will
strengthen national economies through expansion of both
exports and imports.

But, as far as we can now determine,

this expansion will not basically alter the trade balance
of any maj or country.
Other changes in trade policy, however, are not neutral
in their impact on trade balances.

In particular, recent

changes in border tax adjustments -- taxing imports and
remitting taxes on exports -- of some European countries,
while consistent with the existing international rules of
the General Agreement on Tariffs and Trade, will have an
adverse effect on the U. S. trade balance.

- 58 -

The above discussion shows the crucial importance to
the United States trade balance of maintaining a noninflationary expansion in the United States.

As in 1966, exces-

sive increases in income -- especially when we have full
employment -- will be quickly translated into higher prices
and capacity bottlenecks with a resulting surge in imports
and a slowdown in exports.

We need the fiscal action pro-

posed by the President on August 3, 1967 -- expenditures
restraint and tax measures, including surcharges on corporate and personal income taxes.

The performance of our

trade account in the last few years underscores the need
for responsible financial management by the Executive Branch,
the Congress, management and labor.
With the economy picking up momentum in 1968, and with
cost and price pressures increasing, we are faced not with
the assurance of a continued improvement in our trade surplus
but the threat of another downward movement.
All other efforts to improve our balance of payments
position will be undermined unless we avoid the kind of
excessive growth that floods us with imports and unless we
return to relative price stability and cost competitiveness
in the United States economy.

- 59 -

Business and labor also have an important responsibility
to protect our trade surplus by
keeping wage demands and price decisions consistent
with national productivity performance; and
avoiding work stoppages or the threat of work stoppages in industries vulnerable to import or export
competition at a time when our balance of payments
position is under pressure.
Efforts to return to the price and cost stability that
characterized the first five years of the decade require
business and labor to exercise the utmost responsibility in
their wage-price decisions.

These decisions directly affect

our competitive position at home and in world markets.
Accordingly, the President has directed the Secretaries of
Commerce and Labor and the Chairman of the Council of Economic
Advisers to work with the leaders of business and labor to
make more effective the voluntary program of wage-price
restraint.
The prompt enactment of the President's tax increase
program is the single most important and indispensable step
this nation can take now to improve our balance of trade and

- 60 -

payments and protect the dollar and the international monetary system.
The Committee will recall that in my appearance before
you on November 29 and again on January 22, after noting
the impact of devaluation of the British pound on the
international monetary system and the ensuing disturbances
in the gold and foreign exchange markets, I stressed the
high responsibility we bear for the maintenance of a stable
international economic and monetary system and the need to
take steps designed to assure confidence and stability in
markets here and abroad.
I stressed then and I emphasize again both the real
and psychological importance of achieving a meaningful reduction in our budget deficit by reducing expenditures and a tax
increase as essential elements of responsible financial policy.
Since that time a national policy of expenditure control has
become manifest in the enactment by Congress of the Continuing Appropriations Act last December.

The President's budget

is responsive in terms and in fact to this prevailing attitude
in the Congress.
But there has been no tax increase.

Once again, I repeat

that the tax increase is the single most important symbol of

- 61 -

this nation's determination to exercise fiscal discipline.
However, this is by no means the whole story on an
int.ensified effort to achieve and maintain an adequate
U. S. trade surplus.

In addition tosound1y managing the

U. S. economy to keep it competitive and stable, we must
work through international negotiating machinery, multilateral and bilateral, to keep world markets open by
implementing the tariff reductions negotiated in the Kennedy
Round and avoiding the unilateral imposition of statutory
import quotas, which could lead to retaliatory action to
which our trade surplus is uniquely vulnerable.
We must strive at home through improved export financing and export promotion measures to make U. S. industry
more export minded and facilitate its export operations.
In this connection, I should like to ask that there be made
a part of the record the material in the last two paragraphs
on page 69 and pages 70, 71 and 72 of the Treasury Report
referred to earlier, which develop in some detail the background for the recommendations on export financing and
promotion contained in the President's January 1 Message.

- 62 -

Finally, we must strive through international negotiations, both multilateral and bilateral, and, where necessary,
through legislative measures to keep our exporters and
importers in a fair competitive position in world markets.
Ambassador Roth, the President's Special Representative on
Trade Negotiations, is with me this morning to present a
statement for the information of the Committee concerning
this last aspect of the problems surrounding our trade surplus which is dealt with specifically in the President's
January I Message under the heading "Nontariff Barriers."
Attached to my statement are technical explanations of
the travel tax program and the proposed changes in the
Customs rules recommended today before the Committee.

TREASURY DEPARTMENT

FOR JMMEDIATE RELEASE

THURSDAY, JANUARY 11, 1968
McKINNEY OUTLINES TASK FORCE ON TRAVEL WORK
PROGRAM AND ANNOUNCES APPOINTMENT or COMMITTEE CHAIRMEN
Robert M. McKinney, chairman of th~ Industry-Government
Special Task Force on Travel, today listed 12 areas of study the
Task Force will pursue before submitting recommendations to
the President on how to attract more visitors to the United
States, and reduce our balance of payments deficit. He
also announced the appointment of the chairmen who will head
the 12 working parties.
Objectives of the Task Force, Mr. HcKinney said, are:
(1) to deter-nine practical steps ~hich can be taken
quickly to produce early impro·lement in the
travel sector of the balance 0f payments;
(2) to de terrr, ine med ium and long !::.E rm measure s to
bring u.~. travel expenditure"J and receipts into
better halance, and to recommend the necessary
steps that should be taken in b~th the private
and government sectors to accomr:.ish this
objective; and
(3) to determine how best to help foreign visitors
improve their knowledge and understanding of
the u.S. and the American people through firsthand experience, and to provide a new bridge of
understanding through tourism between the U.S.
and other countries, including Eastern European
and developing nations.

F-1129

- 2 The 12 committee chairmen and the areas of activity each
committee will study are:
COMMITTEE ONE -- Chairman, William D. Patterson,
The Saturday Review
Provide statistical information, including projections
of U.S. travel receipts and expenditures in 1970 and 1975, under
various assumptions. Submit an analysis of factors which
~nd to limit or impede travel or which would be advantageous
to build upon. Recommend the most promising maj or markets for
rapid expansion of visitor travel, and analyze current travel
trends within the United States.

COMMITTEE TWO -- Chairman, E. O. Cocke, Trans World Airlines
Evaluate the effectiveness of present American travel
promotional programs by U. S. private industry, including
sources of funding; target areas and objectives, and scale of
efforts. Analy:::e potential new target areas; magnitude of
efforts required; methods for financing new programs; new
government-indu c; try roles; ways to increase ass istance from
travel-related ir.dustries, and the possibility of cooperative
participation by federal, state and local governments with
private industr'T. Recommend how better to mobilize the
travel industrv, oth in the U. S. and foreign countries,
and new promotion~l programs most likely to produce significant
response.

COMMITTEE THREE -- Chairman, Howard L. Clark,
American Express Company
Consider solutions to problems currently encountered in
creating and selling tours within the United Sta tes.
Recommend measure s requ ired to de s ign a:1d produce tours
which can compete successfully with tours offered in
competing travE 1 areas outs ide the U. S.; ways to increase
student and educ,.tional travel; travel for purposes of
conventions, conferences, and incentive programs, and how to
enlist the cooperation of U.S. internat:ional corporations and
organiza tions.

- 3 COMMITTEE FOUR
Chairman, Willis G. Lipscomb,
Pan American World Airways
Report what new efforts should be asked from the
transportation industry -- including airline, bus, railroad,
shipping, car rental, sightseeing, automobile, tire and
petroleum companies.
COMMITTEE FIVE -- Chairman, Edward E. Carlson,
Western International Hotels, Tnc.
Report on what new efforts should be asked from hotels
and potential providers of other accommodations (e.g., youth
hostels, college dormitories). Seek new government efforts
for improving services and facilities in federal, state, and
local parks. monument areas, etc.
COMMITTEE SIX -- Chairman, George Moore,
First National City Bank of New York
Report on what new efforts should be asked from banking,
credit card, and insurance companies.
COMMITTEE SEVEN - - Cha irman, Frank N. Ikard,
American Petroleum Institute
Suggest new efforts which would assist in increasing travel
to the U.S. through better visitor information, services, and
host programs. Consider travel attractions, museums,
sightseeing servlces, guides, interpreters and host programs
in major cities and resorts, as well as guide books, maps,
travel brochures, ~nd news media in fJrmulating recommendations.
Seek new ways to help foreign visitors improve their knowledge
and understan'Jing of the U.S. through first-hand experience
with our way of life, attitudes, and aspirations.
COMHITTEE EIGHT -- Chairman, Winston V. Morrow, Jr. ,
Avis Rent a Car Service
Advise on ways dnd means of reducing costs of travel to
and within the U.S. <1nd of acquainting potential travelers with
such lowered I J s t S . Consider the cumulative impact of cosu: of
transportation t~ ('!TId within the U.S., accommodations, meal::,
shopping, sightseeing, travel attractions, accident, and
medical insurance, etc.

- 4 -

COMMITTEE NINE -- Chairman, Donald G. Agger,
Department of Transportation
Examine dome2.tic and international transportation policies
of the federal government as they affect the balance of payments.
Study federal policies on rates, including rate differentials
and "directional fares" -- fares, making travel to the U. S.
attractive -- for international travelers, carrier certifications,
bilateral and nrultilateral transport agreements, U. S. and fore ign
regulations impeding competition by U.S. carriers, special
arrangements for group travel and other methods of reducing cost
of transportation to the U.s. Suggest ways of assisting U.S.
flag carriers to obtain a larger share of international travel.
Consider ways of sir.lplifying and facilitating frontier
formalities (visas, cus toms, immigration, agriculture
inspection, public health, etc.). Consider how better to
mobilize federal programs and resources affecting tourism,
including the role of a national tourist office. Consider
possible relief from indirect and direct taxes for visitors
and/or the travel industry. Consider anti-trust matters
related to coordinated domestic programs of the tourist and
travel industries (ccxnmon special rates for foreign tourists
in hotels and restaurants, pooling of language and other
special service resources, etc.).
COMMITTEE TEN -- Chairman, Frank Hildenbrand, Texas
Tourist Development Agency
Explore new ways for state and local governments to assist
through tax incentives, promotional programs, facilities
development, host activities, and other measures. Seek ways of
increasing cooperation with federal and/or travel industry
promotion and other programs -- including possibilities of the
government matching private promotional funds.

COMMITTEE ELEVEN -- Chairman, John Black,
United States Travel Service
Report on what can be learned from other governments and
governmental entities about methods of improving visitor
earnings. Explore means of reducing barriers imposed by
foreign governments which impede trave 1 to the U. S.
(Such as
currency restricti.ons, travel restrictions, free entry
provisions, etc.). C07.lsider ways of increasing travel from
Eastern European and deve loping nations to the U. S.

- 5 COMMITTEE TWELVE -- Chairman, Stuart Guy Tipton,
Air Transport Association
Draft a ~ nattonal travel policy in line with the
objectives of the Task Force and leading to intensified travel
within the u.S. by both U.S. citizens and foreign nationals
through: new services and technologies in the travel
industry; new facilities and attractions so designed and
located as to have maximum impact in attracting and serving
foreign visitors; new methods of cooperation between travel
and travel-related industries and the federal government; new
relationships between federal, state, and local government,
and new legislation and/or regulatory and administrative
practices designed to make the U. S. more competitive in
the international tourist market.

000

TREASURY DEPARTMENT
!!

February 5, 1968

FOR IMMEDIATE RELEASE
Attached are technical explanations of
the travel tax program and the proposed
changes in the Customs rules recommended in
Secretary Fowler's statement today before
the House Ways and Means Committee.

Attachments

TECHNICAL EXPLANATION
'rnAVEL TAX PROGRAM
The travel tax program consists of two major proposals:
(1)

A permanent extension of the tax on transportation fare s

to cover international air transportation and a

tempo~ary

extension

of the tax to cover certain incernational water transportation, and
(2)

A temporary graduated tax on expenditures in connection

with travel outside the Western Hemisphere.
Transportation of Persons by Air or Water
Present Law.--Section 4261 now imposes a tax upon the amount
paid in the United States (the States and the District of Columbia)
for taxable air transportation as defined.

Taxable air transportation

means generally air transportation which begins in the United States
or in those portions of Canada or Mexico which are not more than
225 miles from the nearest point in the continental United States
(lithe 225 mile zone lt ) and ends in the United States or the 225 mile
zone and certain portions of other trips if the portion begins and
ends in the United States.

There is at present a partial exclusion

for trips to Alaska and Hawaii generally for that portion of the
transportation which is over Canada or the Pacific Ocean.

- 2 Thus, under present law if the ticket for air transportation
is purchased in the United States, a trip from:
New York to Chicago
New York to Montreal
Montreal to Toronto
Montreal to Monterrey
Mexico
Miami to Los Angeles
via Panama

is taxable.
is taxable.
is taxable.
is taxable.
is taxable (regardless
of length of stopover in Panama).*

Miami to Los Angeles

via Caracas
New York to Puerto Rico
San Francisco to
Honolulu
San Francisco to
New York to London
(with a 3 hour stopover
in New York)
San Francisco to New York
to London (with a 7 hour
stopover in New York)

is not taxable. *
is not taxable.
taxable only on a small portion.

is not taxable.
is taxable on the San Francisco
to New York portion.

* Since the trip from Miami to IDs Angeles d.oes not involve a change
of direction it is considered to be a single trip which begins and
ends in the United States regardless of the length of the stopover
in Panama. However, once a traveler departs from the Northern portion
of the Western Hemisphere (which area is defined not to include any
part of South America) his trip is considered at an end even though
he does not change direction. Therefore, neither the Miami to
Caracas leg or the Caracas to Los Angeles leg both begin and end in
the United States and therefore neither is taxable.

- 3 General Description of Proposed Change
Air Transportation.--The proposal would eliminate this inconsistent pattern of taxation and impose a tax at the domestic
rate on all amounts paid within the United States (including not
only the States and the District of Columbia but also Puerto Rico
and all United States possessions) for air transportation both
within and without the United States (including all trips described
above as well as other trips between two points within the Western
Hemisphere, e.g., Buenos Aries to Lima).
Certain amounts paid for
to the expenditure tax.

air transportation would also be subject

Thi.:; category includes amounts paid for

transportation between two points outside the Western Hemisphere which
is

not part of uninterrupted transportation I which begins or ends in

the Western Hemisphere.

(Transportation is considered uninterrupted.

when the scheduled interval between the end of any segment and the
beginning of the succeeding segrrent of such transportation is not more
than twelve hours.)

In these situations, the ticket tax will not

be imposed in order to avoid a double tax.

However, when the

expenditure tax expires, amounts paid for this type of transportation
will become subject to the ticket tax.
Wa.ter Transportation. --As a corrolary to imposing the transportation tax on air travel to points outsi0.e the Western Hemisphere
(at lower than the expenditure tax rate), tLe ticket tax would

- 4 also be temporarily extended to apply to amounts paid within the
United States (including Puerto Rico and the possessions) for
uninterrupted transportation (as defined above) by water of a
person between a port wi thin the Western Hemisphere and a port
outside the Western Hemisphere.

The tax base would include

woounts paid for sleeping accommodations is connection with such
transportation and, if no separate charge is made, amounts paid
for food and servi ce s •
Amounts Paid without the United States.--As indicated above,
the ticket tax on foreign travel will not apply to transportation
a~ually

purchased outside the United States.

(The present tax

applies to such purchases only if transportation begins
in the United States and this rule will be retained.)

and ends
This is

provided in view of the administrative difficulty of collecting
the tax as part of the purchase of the ticket in this situation.
Hmrever, if the ticket tax would apply to transportation to or
from

point outside the Western Hemisphere except for the fact

that the ticket was purchased outside the United States, the
expenditure tax (at a 5 percent rate) would apply to such purchases
for the period this tax is in effect.

Moreover, it is not expected

that many travelers will seek to avoid the tax "Ti th respect to intra
Western Hemisphere travel by purchasing their return tickets outside
the United States since to do so would require forfeiting a round-tr~p
discount which in most situations is worth at least as much as the tax
avoided on the cost of the incoming leg.
Exemptions
The exemptions now applicable to the tax on amounts paid for
domestic fl1ghts will continue ~o apply to the tax as extended.

- 5 Thus, payments for transportation furnished to the American
National Red Cross or an international organization (section 4263
(b) ), to State and local governments (se ction 4292), to the United
States, if the Secretary of the Treasury makes a determination that
the tax will cause a substantial burden to the United States which
can be avoided by granting tax exemption, (secti. on 4293), and to
certain non-profit educational organizations (as defined in section

4294 (b )) will remain exempt.
Payment of the Tax
The rules concerning payment of the tax will in general remain
unchanged.

Thus, while the tax is imposed on the person paying for

the transportation, it will ordinarily be collected and remitted to
the Government by the airlines or ship operators.
Reverrue from the tax collected in Puerto Rico, the Virgin
Islands, and Guam will be covered into the respective treasuries of
these areas in keeping with present excise tax rules.
Effecti ve DatE!
The expanded tax on air and water transportation will be
effective with respect to amounts
date of enactment.

-0",-;1

more than 10 days after

However, if a ticket for transportation

outside the Western Hemisphere, which would otherwise be subject to
the new tax, is purchased before such effective date for a trip
which is subject to the expenditure tax, the tax vnll be collected
through

~he

expenditure t2-.

The tax on water transportation will

terminate with respect to transportation beginning after September 30, 1969,

- 6 Tax on EXpenditures
T;nder this proposaJ, a temporary graduated tax would be imposed
on certain expenditures made by a United States person in connection
with a taxable trip he takes outside the Western Hemisphere or in
connection with such a trip taken by another United States person.
The rate of tax on these expenditures would generally be as follows:
The first ~i per day would be excluded from the tax base; the next

$8 of expenditures per day would be taxed at a 15 percent rate; and
the excess would be taxed at a 30 percent rate.

The cost of trans-

portation to and from the traveler's foreign destination would be
taxed at a 5 percent rate--either as part of the expanded transportation
tax described above or, if that tax is not applicable, as part of
the expenditure tax.

The application of the exemptions and rate schedule

in the case of families traveling together is discussed in a
subsequent part of this memorandum.
United states Person.--The tax applies to expenditures made
by a United states person in connection witb his own trip ~r the
trip of another United States person.

Thus, amounts paid directly

by an ecnployer for meals and lodging of an employee while on a taxable trip would be taxable foreign travel expenditures of the employer;
if the exp en di tures are made by the employee (even though he was

reimbursed), they wo\lld be his taxable foreign travel expenditures.

- 7 -

If a student travels abroad during the summer on funds given to him
by his parents, he is taxable on his expenditures of the trip.

the other hand, if his father pays certain of his expenses directly,
the father would be taxable on those expenditures and would pay the
tax either with an annual return or, if he so elects, by filing a
joint return with his son.
A United States person means:
(a)

!my individual who is a resident in the United

States,
(b)

A corporation or a partnership engaged in trade

or businesses
(c)

the United States,

An estate or trust which is considered a United

States person within the meaning of section 4920(a)(4)
(relating to the Interest Equalization Tax),
(d)

The United States or any agency or instrumentality

thereof,
(e)

A State including the District of Columbia, Puerto

Rico and the possessions, a political subdivision or any agency
or instrumentality thereof, and
(f)

A foreign corporation not engaged in trade or business

in the United states which is directly or indirectly controlled
by a United states person except that any expenditures made by
such corporation shall be deemed to be made by the person in
control.

Control means the ownership of 50 percent or m.ore of

the value or voting power of the outstanding stock.

- 8 United States.--For this purpose, the United States includes
the states, the District of Columbia, the Corrrrnonwealth of Puerto
Rico and all possessions.

Thus, residents of Puerto Rico, the

Virgin Islands, Guam, and American Samoa, will be subject to the
expenditure tax on their travel outside the Western Hemisphere.
A tax on expenditures by such residents while traveling abroad is

consistent with the fact that the foreign expenditures of these
areas are considered in United States balance of payments.

On the

other hand, there would be no tax imposed upon expenditures made
while traveling in any of these areas.
Thus, these areas would be treated in the same manner as the
continental United States.

Any revenue collected under the expenditure

tax from residents of Puerto Rico, the Virgin Islands or Guam will
be covered into the treasuries of those areas.
Taxable Trip.--Only those expenditures in connection with a
"taxable trip" would be subject to the expenditure tax.
Commencement and Conclusion of a Taxable Trip.--A taxable trip
of an individual shall in general commence with the individual! s
departure from a port or station in the United States, including
the possessions and Puerto Rico.

However, since trips within the

Western Hemisphere are not subject to the expenditure tax, if

- 9 the individual after leaving the United states stops at a port
or station in the Western Hemisphere for a scheduled interval of
more than twelve hours, the taxable trip shall not begin until
his departure from the last such port or station in the Western
Hemisphere.

The taxable trip shall end when the individual

returns to a port or station in the United states; or, if he
makes a prior stop at a port within the Western Hemisphere, at
that time provided the stop is for a scheduled interval of more
than' twelve hours.
The tax will only be applicable to taxable trips beginning
more than 10 days after the date of enactment of the legislation.
The tax will terminate on September 30, 1969, which marks the
end of the European travel season.

If a person is on a trip on

the termination date, he would pay tax only on the part of his
trip falling within the term of the tax.
Western Hemisphere.--The Western Hemisphere means the area
lying west of the 30th meridian west of Greenvnch, and east of
the 160th meridian west of Greenwich.

- 10 Certain Trips Excepted
Individuals establishing foreign residences.--An individual
who, after his departure frum the United states, establishes his
residence in a foreign country would be considered on a non-taxable
trip.
st'.ldents. --An individual (and his dependents) would be con-

sidered on a non-taxable trip if he spends at least 120 consecutive
days-1.

Enrolled as a student in a full course of study at

an educational institution outside the Western Hemisphere, or
2.

Engaging on a full-time basis in educational

activities which are directly related to a course of study
leading to a degree he is undertaking in an educational
institution in the United states.
Trade or Business.--An individual (and his dependents) shall
be considered on a non-taxable trip if he is outside the Western
Hemisphere for at least 120 consecutive days while engaged on a
full-time basis in a trade or business or profession.

This

category of exceptions will cover the case of an employee who is
transferred abroad by his employer for more than 120 days, an
individual who goes abroad to teach on a full-time basis in a foreign
school, and a professor on a sabbatical abroad who is doing research
on a full-time basis in connection with his traC:_e or business.
If the stu lent , t<;;acher, e':1ployee, or businessman, does not
spend a total of more than 14 days outside the Western Hemisphere

- 11 before and after the period he is carrying on exempt activities,
his entire trip would be exempt.

If he stays longer than 14 days,

th-u.3 ';onverting his trip to a partial vacation trip, he (and his
dependents) would be considered on a taxable trip, but would be
permitted tv exclude all expenses incurred during the period he is
in the exempt activities.

engac~d

t;h':; student, teacher, employee, or businessman does not

stay abroad for the prerequisite 120 consecutive days, his trip would
be taxable unless he could not have reasonably foreseen the circumstances which caused him to cut his trip short.
Military.
who is

A member of the armed services (and his dependents)
to a duty station outside the Western Hemisphere

transfer~ed

would be considered on a non-taxable trip during his tour of duty
at that station.

Any trips he makes back and forth to the Western

Hemisph2re rl.ur:i::-_;; that to,;x would also be exempt.
Other United states Employees.

individ~al

employed by the

United states traveling in his official capacity will be considered on
a nun-taxable

'ip.

If he combines his trip with a vacation, only the

expenses during the period he is on official business would be excluded
frc~

the expenditure tax.
Crew Me;",.DC:':c's of Ships or Airlines.

An individual would not be

considered on a taxable trip while he is serving
crew of

3. facil~_ty

a member of a

providing transportation to or from a port

or ports outside the Western Hemisphe:L-e provided that the portion of
the triTe

oUT~i

of layover

lon~''r

the Westerr;, Hemisphe:-" does not include any period
than normally

proY~_d~;d

in similar situations.

- 12 -

Taxable Foreign Travel

~enditures.--In

general, unless

specifically excluded, the tax applies to all expenditures which
are made by a United states person in connection with his own
taxable trip or the taxable trip of another United states person.
They include not only the traveler's own living expenses, but also
those which he pays for other members of his family who are on the
trip, as well as the cost of any entertaining he may do and any gifts
or other purchases he may make.

Expendi tures for the use ot' main-

tenance of property while on a taxable trip, such as rent for an
apartment or

auto~obile,

are taxable foreign travel expenditures.

If an item of property (such as an automobile) is both purchased and

sold during the same taxable trip, the loss, if any, would be considere d
an expenditure for the use of property, and therefore a taxable foreign
travel expenditure.

However, only expenditures made for facilities

or services to be provided on the taxable trip would be considered
made in connection with the trip.

Thus, any expenditures for pre-

trip facilities or serVices, such as taxi fares to the airport in
the United states, costs incurred during the trip, such as in
connection with the traveler's house in the United states while he
is gone, or the cost of work done after the traveler's return to
repair damages occurring on the trip would not be taxable foreign
travel expenditures.

- 13 Expenditures of a taxable trip are taxable whether paid
before, during or after the trip.

For example, hotel bills and

transportation fares are taxable foreign travel expenditures
whether prepaid to a travel agent, paid in cash or by check while
on the trip, or charged and paid for after return.
Consistent withthe rules on deductibility for income tax
purposes of ordinary and necessary business expenses, the expenditure
tax imposed on amounts deductible as business expenses would
itself be deductible.
Purchase of Property.--In general, amounts spent while on a
taxable trip for the purchase of tangible personal property (other
than property held for investment or property to be used in a trade
or business) would be taxable.

Moreover, the cost of property

purchased for delivery to an individual on a taxable trip would be
taxable.

Thus, for example, if a person purchases a European auto-

mobile (whether before leaving or while on a taxable trip) and takes
physical delivery while on that trip, the purchase price would be
a taxable foreign travel expenditure.

Or conversely, if a person

purchases the automobile while outside the Western Hemisphere for
delivery after his return to the United states, the purchase price
would be subject to this tax, in addition to the normal custom duty.

- 14 Business Expenses.--In the case of an individual traveling
on a taxable business trip, his business expenses, other than for
transportation, meals, lodging, gifts and entertainment, would be
excluded from the expendi tv.re tax base.
Rate of Tax
The taxable foreign travel expenditures made by a United
states person in connection with a taxable trip of such
~other

perso~

United states person shall be subject to tax at the following

rates:
T~ansportation

to the first stop outside the Western Hemisphere

or from the last stop

o~tside

the Western Hemisphere. --The expenditure

tax will in general not apply to the cost of transportation to the
first and from the last scheduled stop outside the Western Hemisphere
of more than 12 hours.

The cost of this transportation, if paid for

in the United states, will be subject to the expanded transportation
tax described above.

If the ticket is purchased outside the

United states or before the effective date of the expanded transportation
tax, for a trip taxable under the expenditure tax, the expenditure
ta.xwill apply but only at a 5 percent rate.

- 15 Amounts paid for food and services (where no separate charge
is made), and seating or sleeping accommodations, during the period
transportation is subject to the 5 percent tax rate shall also be
taxed at the lower 5 percent rate.

Thus, if a United States person

takes a 30-day cruise which makes no stops within the Western
Hemisphere and which makes its first stop outside the Western
Hemisphere of more than 12 hours on the 5th day and makes the last
such stop on the 25th day, one-third of the cruise fare plus any
separate charge for sleeping accommodations will be subject to tax
at a 5 percent rate either under the transportation tax (if paid
for in the United States) or the expenditure tax.

The remaining

two-thirds of the cruise fare and separate sleeping accommodations'
charge and any additional expenditures (such as for sightseeing or
food) not covered by the basic fare will be subject to the expenditure
tax at the regular rates.
flies from New York to

As another example, if an individual

P~ris

and, after a scheduled two-hour stopover,

continues to Rome, the entire cost of the
York to Rome would be taxed at 5 percent.

tr8~sportation

from New

However, if his stopover

in Paris is scheduled for longer than 12 hours, only the cost of
the transportation from New York to Paris is taxed at 5 percent and
the remainder would be taxed at the regular expenditure tax rate.

- 16 All other Taxable Expenditures.--All other taxable expenditures
will be taxed on the following basis:
(a)

Exclusion from tax.--Each traveler is entitled to a

$7 daily exclusion from the expenditure tax base.

The amount

excludible under this provision for a taxable trip shall be
computed by multiplying the number of days during any part of
which the individual was on such taxable trip by his exclusion
rate.
(b)

15 percent rate.-- Expenditures in the excess of the amount

excluded under the above provision shall be subject to tax
at the rate of 15 percent to the extent they do not exceed $8.00
multiplied by the number of days during which such individual was
on such taxable trip.
(c0

30 Percent Rate.--The remaining expenditures

shall be subject to tax at the rate of 30 percent.
~~ere

expenses are paid for a traveler by another person,

they will be taxed to

such other person at the 30 percent rate

unless the payor joins with the traveler in filing a joint return
in which case any unused benefit from the exemption or lower rates
may be claimed by the payor.

- 17 For example, if a corporate employee goes to London on
business for 10 days and spends $200 for taxable expenditures
(whether or not he is reimbursed by his employer) he would pay a
tax of $27 computed as follows:
Exclusion
15% rate
Remainder -

X
X

$7
8

30% rate

10 days
10 days

=
=

$70
80
50
$200

Tax Rate
0
15%

3CY/o

Tax
-0$12
15
$27

If in addition to his plane fare to London, the employer
~rectly

paid for the employee's hotel bill of $200, the employer

would pay a tax of 30 percent on this amount, or $60.
As another example, assume an individual traveling in Europe
has his transportation and hotel arranged for in advance and paid
for by his parent.

If the parent files a separate return, he will

be taxable at 30 percent on the entire amount so paid and the child
will be entitled to the exclusion and the 15 percent rate on his own

expenditures.

However, if any part of the benefit of the exclusion

or the 15 percent rate would otherwise be lost, the parent may file a
jOint return with the child covering all expense s of the dependent IS
~xable

trip and apply the exclusion and the 15 percent rate to their

combine d expenditure s •

- 18 ~utation

of the Tax

In order to preclude the necessity of travelers having to keep
~tailed

records of their expenses, taxable foreign travel expenditures

would be computed, to the greate st extent possible, by a travel net
worth method.

For many people this would involve merely subtracting

the money with which they returned from the cash and traveler's checks
with which they left and adding this to the amounts paid before the
trip began.
More specifically, the first step in the computation for all
travelers would be to determine the cash expenses of the trip.

do this, the amount of money with which a person returns from a taxable

trip would be subtracted from the sum of the amount of money with
which he departed plus
trip.

all amounts received while on the taxable

Amounts received while on the trip must be included regardless

of their origin.

Thus, withdrawals from domestic or foreign banks,

money sent from home, compensation for services received while abroad or
money received from the sale of property, would be included.
The second step in the computation would be to add to the cash
expendi ture figure, the amounts of expenditure s in co nne ction with
the taxable trip paid before the taxable trip began, the amounts charged while
on the taxable trip, and the amount of checks cashed while on the
taxable trip.

These are all amounts of which the traveler will have

a record, e.g., credit card statements, personal check stubs.

The

resultant figure would represent the tax base for most travelers,
and would be taxed according to the graduated rates of 15 and 30

- 19 percent or, in the case of certain transportation, the 5 percent
transportation tax.

For others, a further reduction would be made

for expenses specifically excludible from taxable foreign travel
expenditure s (such as the cost of busine ss inventory).

The figure

resulting from these reductions would represent their taxable
foreign travel expenditure s •
In the case of a return filed by a person who paid the expenses
of a traveler (such as an employer), the -i.;axable foreign travel
expenditures would be itemized (rather than computed on any travel
net worth method).

However, since expenditures in connection with

the taxable trip of another person are likely to be for major
items, such as airline tickets and hotel bills, itemization should
not be burdensome, and, in any event, must be done for income ta:x;
purposes if they are business expenses.
Estimated Tax
Every individual, at his point of departure from the United
States for a period during which he reasonably expects to be on a
taxable trip, and whether or not he plans to make a stopover in the
Western Hemisphere, would be required to make a declaration of his
estimated tax with respect to that taxable trip and pay the amount
of the estimate to the Internal Revenue Service.

He would include

in his declaration a statement of the amount of cash (and traveler's
checks) he is taking on the taxable trip.

This figure is necessary

~n order to utilize the travel net worth metlKd for co!":.puting cash

expenditure s.

Appropriate. procedures ;:rill be developed for filing the declara-

tion so that compliance with the requirement may be verified before the
traveler's departure.

- 20 -

The accuracy of the cash statement would be subject to verification
at the point of departure by customs officials or other Treasury
officials.
If a United states person departs on a taxable trip from a
IX>rt in the Western Hemisphere outside the United States, and he

did not make the req,.uired declaration and statement upon leaving the
United States, he will be subject to penalty unless he can show such
departure was not eXf€cted.

In any event, the declaration or statement,

if not previously filed, would be filed at this time.

Any individual returning from a taxable trip would be req,.uired
to make a statement of his incoming cash (and traveler I s checks)
at the time he is proce ssed through United State s Customs.

This

statezrent would provide the incoming cash balance from which the
travel net worth would be

computed~

and the accuracy would be subject

to verification by a customs official.
Returns and Paynent of Tax

A tax retuTIl for a taxable trip, together with payment of any
balance due) would be req,.uired to be filed with the Internal Revenue
Service by the traveler within 60 days after his return.

This will

allow the taxpayer adeq,.uate time to receive all necessary credit card
and banking records for preparation of the return.

the return may be filed immediately upon arrival.

Of course,
A husband, wife,

and any of their dependent children who travel together on a taxable

trip may make a single taxable trip return jointly with respect to
such trip.

Such a return may be filed even though one

- 21 or more of sllch individuals has no taxable foreign travel expenditure s.
A joint return would allow a family to utilize the full per diem
exemption and graduated rate schedule available to each traveling
member without

re~uiring

that each have separate expenditures to

absorb them.
A United States person who paid a portion or all of the expenses
of another United States person's taxable trip, and was not on that
taxable trip himself, would be

re~uired

to file an annual tax return

cove.ring all such expenditures during the taxable year or in lieu
t hereof he may join in the ta...'{able trip return filed with respect
to the expenses of that taxable trip.

Liability for tax shown on

a joint return would be joint and several.
Administration and Procedure
Generally the administrative and procedural

re~uirements

applicable to other excise taxes would be applicable to this expenditure
tax.

Thus, for example, the general provision for penalties for

failure to file returns,

re~uirements

for claims for refund,

assessment and collection procedures, and statutes of limitations
would apply to the administration and procedure of this tax.
Two new prOvisions would be added to insure compliance with
the requirements for declaration and payment of estimated tax.

- 22 A flat penalty of $200 would be imposed for failure to make
a declaration of estimated tax and statement as to cash on hand,
as

re~uired

at the time of departure from the United States unless

it were shown that such failure were due to reasonable causes.

Thus,

if an individual flew from New York to Europe without making a
declaration and statement, a $200 penalty would be imposed for
failure to make the declaration in New York.

A significant penalty

is necessary because of the importance of having an individual
establish his outgoing cash figure for purposes of computing the
tax baseo

An underestimation penalty would be imposed of 10 percent

of the underpayment of estimated tax.

The amount of the underpayment

would be the difference between the estimated tax payment and 80
percent of the tax shown on the taxable trip return.

The purpose

of this 80 percent rule is to allow some leeway for errors in
estimation.

TECHNICAL EXPLANATION

PROPOSED CHANGES IN CU3TOMS RULES REIATING TO TOURIST
EXEMPTIONS AND PROCESSING OF CERTAIN NON-COMMERCIAL
IMPORTATIONS

The proposal is intended to reduce noncommercial expenditures of
do~s

abroad where such expenditures would further adversely affect

our balance of payments.

It would do this in several ways.

lower the duty exemption allowed returning residents.

It would

It would provide

for a flat rate of duty on articles brought in by travelers and in the
mail or otherwise within certain monetary limits.

This would ease the

a&nnistrative burden of handling noncommercial mail importations.
At the same time the proposal would not interfere with the legitimate

business interests of manufacturers or sellers abroad, or of American
businessmen in the import trade.
The proposal would not assess any duty or charge on articles which
are themselves free of duty under existing provisions of the Tariff Act.
Most of such articles would be works of art, paintings, books, American

goods returned, United States origin personal effects of residents
abroad and similar items.
'!he Reduced Tourist Exemptions
The present tourist exemptions granted to returning U. So
reSidents permit the importation duty free of foreign acquisitions not
exceeding a total retail value of $100.

This exemption is granted to

American residents who have been abroad for more than 48 hours and may
be used only once each 31 days (in the case of persons arriving from
MeXico the time limit is waived).

The resident is permitted to include

within this exemption o!',e quart of alcoholic beverages.

This exemption

is applicable to residents returning from any area or country.

However,

a special exemption is granted to residents arriving from the Virgin
Islands and other U. S. insular possessions.

This special exemption

perndts the importation of acquisitions up to a value of $200,
of ~iThich not more than $100 may be acquired outside the Virgin Islands or
other insular U. S. possessions, and may cover not nnre than one gallon
of alcoholic beverages of which not more than one quart may be acquired
outside the Virgin Islands or other insular possessions.
The proposal would reduce the duty-free exemption to $10 for U. S.
residents returning to the United States from any place other than Canada,
),{exico, and the Caribbean area.

The continued maintenance of the $100

exemption for residents returning from Canada, Mexico, and Caribbean area
countries is based on the special relationship between the United States
and those countries.

The definition of Caribbean countries or areas

excludES the Virgin Islands of the United States since they are given
special treatment and also excludes Cuba because of our trace restrictions
e;;ainst that country.
The new $10 tourist exemption would be based on the retail value
and would be available only after an absence of 4C hours and could be

used only once each 31 days.

The present privilege perIni tting the

inclusion of one q'.lart of alcoholic beverages would be retained.
Foreign

acqul:~i tions

accompanying the returning tJ. S. resident

valued in excess of the $10 exemption would be dutiable at a flat

25 percent of the value of the wholesale merchandise, but articles
otherwise free under the Tariff' Schedules would be exempt from the application of the flat duty rate.

The 25 percent rate would be applied on

articles accompanying the resident for noncommercial use up to an
~gregate value of $500 wholesale.

Such articles exceeding $500 in value

would be dutiable at the standard rates of duty.

In addition to any

customs duties, all articles would, of course, be subject to any applicable
Internal Revenue taxes.
Consistent with the reduction if. the duty-free allowance for
tourists, the special exemption applicable to the Virgin Islands and
certain other United States insular possessions would be partially changed
so as to limit duty-free acquisitions outside Canada, Mexico and the
Caribbean to $10.

Articles accompanying returning residents intended

for commercial use would be assessed duty at standard rates.
Mail

Shipment~

At present all arriving mail parcels undergo a preliminary
screening to identify parcels supposed liable to duty.

Such articles

as newspapers or low-value items (under $1) are stamp2d "passed free"
~d

returned to the Post Office Department for delivery.

The same

"passed free" status is given to articles identifiable as gifts valued
at less than $10 and to gifts valued at less than $50 for servicemen in
combat areas.

4
Nondutiable personal effects of U.S. citizens abroad and other
items obviously free of duty are returned immediately to the Post
Office Department for delivery.
The $50 gift exemption for servicemen in co~bat areas would be
retained.

The $10 duty-free exemption for all gift parcels, including

those mailed by military personnel stationed abroad in non-combat areas,
would be reduced to $1 retail by regulation.

The retention of the

ex~tion for articles valued at $1 or less is believed necessary since

it would be impracticable to assess duty on such articles which comprised
approximately 25 million parcels received during

1967.

The value of

such articles is extremely low -- estimated to average approximately

40 cents a piece.
On dutiable mail shipments valued at over $1 and $10 or less retail,
the proposal would require collection of $2, in lieu of any other d.uty or
tax.

This $2 would approximate the average duty and tax on such articles.

~tiable noncommercial mail shipments valued at over $10 but not over $250

wholesale would be assessed at the flat rate of 25 percent ad valorem.
~tiable commercial mail shipments valued at over $10 and not over $250

would be assessed at the rates of duty provided under the Tariff Schedules.
In addition to the above amounts, the Post Office Department would continue
the present practice of charging a 50 eent handling fee on all mail parcels
on which it collects duty.
All shipments arriving inthemail valued in excess of $250 wholesale,
Would require formal entry and would be assessed at the rate of duty
proVided under the Tariff Schedules.

5
~ments

Valued At $250 or Less Which Arrive Otherwise Than in the

ll!ils or Accompanying a Person
No

duty or charge would be imposed in connection with the arrival

of articles which are themselves free of duty under existing provisions
of the Tariff Act.
Dutiable noncommercial shipments valued up to $250 wholesale would

assessed at a flat rate of 25 percent.

Dutiable commercial articles

would be assessed duty under the Tariff Schedules.
~termination

of the 25 Percent Flat Rate of Duty

An analysis of present duty rates applied to articles typically
uriving by mail and in passengers' baggage indicates that a 25 percent

flat rate of duty would approximate the average duty which could be
expected to be collected on merchandise affected by this provision.
The flat rate would be in addition to the internal revenue taxes
otherwise applicable.
~timated

Foreign Expenditure Reductions

During 1967, the total value of foreign acquisitions made by returning
U. S. residents arriving from all foreign countries was estimated to be
in excess of $)62 million.
~xico

Of this total, persons arriving from Canada,

and the Caribbean countries (including Caribbean cruise passen-

gers) accounted for slightly over $162 million.

The value of

articles acquired by returning U. S. residents arriving from other
countries was approximately $200 million.

Approximately

6
$110 million was brought in by persons whose purchases totaled less

than $100 per person, while approximately $90 million was brought in
~persons

whose foreign acquisitions exceeded the present duty-free

exemption.

The total reduction in foreign acquisitions to be achieved by
reducing the tourist exemption to $10 is estimated to be approximately
$50 million.
We estimate that the value of foreign acquisitions by persons
now bringing in less than $100 each will be reduced by $45 million or

approximately 40 percent of the total purchases made by this group.
The effect on foreign acquisitions by the approximately 200,000
persons who now exceed our duty-free exemption and pay duty would be
much less drastic.

If we can assume that the foreign acquisitions by

these persons will be reduced by an aIOOunt roughly equivalent to the
additional duty ($23) which they would have to pay, the total reduction

in foreign acquisitions by U. S. residents would be nearly $5 million.
It is estimated that the total value of the 55 million mail
parcels which arrived in the U. S. during 1967 was approximately $500
million.

Of this 55 million total, an estimated 11 million parcels were gifts

orp~orted

gifts said to be valued at less than $10;

4 million were

gifts valued at less than $50 from servicemen in combe.t areas; and 25

million were "flats," newspapers, periodicals, samples, and shiprrents
of insignificant value.

Of the remaining 15 million parcels duty was

assessed on 1,600,000 parcels.

However, our studies indicate that

approximately one-third of the 15,000,000 parcel total ':'lOuld have
been dutiable if adequate manpower was available to properly handle

them.
Certain parcels now included in the present $10 gift exemption
are bona fide gifts mailed from I,ationals of foreign countries to
persons in the United States.

While elimination of this privilege

with respect to such parcels rill not affect expenditures of U.

dollars abroad, it is nevertheless believed necessary to eliminate
this free-gift privilege entirely because it is subject to widespread
abuse and because, in practice, it would be difficult to distinguish
between gifts from foreign nationals and those from U. S. tourists.
Of the 11 million gift parcels

under $10, we estimate approxi-

mately 4 million from U. S. tourists would be discouraged if the
existing gift exemption were eliminated.
parcels is estimated to be $7.

The average value of these

Therefore, foreign expenditure curtail-

ment of approximately $28 million would be achieved.

The application

of a flat rate of duty to the remaining noncommercial shipments, by
simplifying Customs' administrative task, would allow it to assess duty
on an appreciable number of packages which now escape duty because

Customs manpower cannot cope adequately with the number of packages
involved.

Closing this loophole will probably deter the sending of

a number of these packages.

(Of' course, this increased efficiency

would be somewhat offset by the need for additional manpower to process
the gifts which would become dutiable.

Even the relatively simple

assessment of a flat $2 involves more work than the present practice
of passing such gifts free.)

It is a conservative estimate that

approximately an additional $12 million in duty collections and a
reduction in foreign acquisitions of about $40 million will result
~

the above-proposed changes in the Customs processing of foreign

llllil parce Is •

TREASURY DEPARTMENT
l

FOR IMMEDIATE RELEASE

INDUSTRY-GOVERNMENT SPECIAL TRAVEL TASK FORCE
TO MEET FEBRUARY 12 AND 13
The industry-Government Special Task Force on Travel will meet
in Washington on February 12 and 13 to cons ider its report to the
President, Task Force Chairman Robert M. McKinney announced today.
The report, to be submitted to the President by February 19,
will detail specific immediate steps and outline longer term
steps which can be taken to encourage a substantial increase in the
number of foreign visitors to the United States, Mr. McKinney said o
At the first meeting of the Task Force on January 11, 12
committees were formed to study the various aspects of the Task
Force's mission -- eight working parties dealt with actions in
the private sector and four dealt with actions by federal, state,
and local governments.
Recommendations of the 12 committees will form the basis of
the Task Force's report to the President) Mr. McKinney said.
The 14 members from private industry are: William Bernbach,
president, Doyle, Dane and Bernbach, New York, N. Y. ;
Professor Danie 1 J. Boors tin, His tory Department, Univers ity of
Chicago, Chicago, Ill.; John A. Burns, Governor of Hawaii,
Honolulu, Hawaii; Edward E. Carlson, president, Western
International Hotels, Seattle, Wash.; Howard L. Clark, president,
American Express Company, New York, N Y .; Arthur Frommer, pres ident ,
Arthur Frommer, Inc., New York, N. Y.; Frank Hildebrand, executive
director, Texas Touris t Deve lopment Agency, Aus tin, Tex.; Frank N.
Ikard, president, American Petroleum Institute, New York, N.Y.;
John H. Johnson, president and editor, Johnson Publishing Co.;
Chicago, Ill.; Willis G. Lipscomb, retired senior vice president
and director, Pan American World Airways, New York, N. Y . ;
Winston V. Morrow, Jr., president, Avis Rent A Car System,
Garden City, N.Y.; William D. Patterson, vice president and
aSSociate publisher, Saturday Review, Inc., New York, N.Y.;
Gerald Shapiro, vice president and general manager, Hertz Rent
A Car Division, New York, N.Y.; and Lew R. Wasserman, president
MCA, Inc., Universal City, Calif.
v

F-1l56

- 2 -

The six members from government are: Donald G. Agger, Assi:
Secretary for International Affairs, Department of Transportatim
John W. Black, Director, U.S. Travel Service, Commerce Departmen
Governor Andrew F. Brimmer, Board of Governors, Federal Reserve
System; Charles S. Murphy, Chairman, Civil Aeronautics Board;
Harry M. Shooshan, Deputy Under Secretary for Programs, Interior
Department, and Anthony M. Solomon, Assistant Secretary for
Economic Affairs, Department of State.

000

TREASURY DEPARTMENT
(

February 7, 1968
FOR IMMEDIATE RELEASE

UNITED STATES-NETHERLANDS ESTATE TAX TREATY
DISCUSSIONS TO BE HELD
The Treasury Department announced today that discussions
will be held in Washington in late March between representatives
of the United States and the Netherlands on an estate tax

treaty between the two countries to eliminate double taxation
of estates and inheritances.

Presently, there is no estate tax treaty between the
two

countries.
Persons who have an interest in such an estate tax con-

vention and who wish to offer comments or suggestions may wish
to consult existing United States estate tax treaties, such as
those with Canada, Italy, or Japan, which have been published
by the Department of State in the series called "United States

Treaties and Other International Agreements".

They may also

wish to consult the "Draft Double Taxation Convention on
Estates and Inheritances", a report published in 1966 by the
Fiscal Committee of the Organization for Economic Cooperation
and Development (OECD).
Corrnnents and suggestions in connection v,i th the tTnited
States-Netherlands negoti8tions should be submitted by March 15,

1968 to Assistant Secretary of the Treasury Stanley S. Surrey,
United States Treasury Department, Washington, D. C. 20220
oUo
F-1157

TREASUIlY PJJl.'KlUHCES $1 BIL)~ION l'lE'i'l CASH BORROUH;G

The Treasury De:p11rt.ment. annO'lJJ1ced t.oday tb8,t it is offerinG for co.r~h subscription $4 billion, or therea1)outs, of l5-month 5-5/8% Treasury Notes of
Series B-19G9 at :Q2.:c'.
The notes lTill be dC'-tco. Febi'uo..ry 21, 19G8, 'uill I112,ture Hay 15, 1~;69) and
will be iSSU8d in registered. Cl.ud bGarer form. Interest "iill be payable on ga:v
15 and November 15, 1968, and ~lay 15, 1909.
Subscriptions i{ill be recei veel for one a.3.y only, on Tue sday, 1"eb:cusry 13.
PJly subscriptio!1, "vith requirecl deposit, addressed to a Federal Reserve Banl~ or
Branch, or to the Treasurer of the United States, H8,shingi:.on, D. C. 20220, and
placed in the mail before midnight FebruQ:cy 13, 19G8, ,dll be con:sidercd timely.
The payment date for the 11o"':'CS v;ill be rebrl.1.~}xy 21, J9G8.
made throu::,:h credit to Treasury Tax and LOhn Accounts.

Payment may 'be

Subscriptions from banki,n[~ illf;tit'tIcJons for their own account, Fed.erally"'
insured, savings ancl loan assoc:"at;iollS, St'1.tes, political s,,-"bcU visions or in-,
strumentalities thereof, public pension end ret~_:ce'i1cnt and. other public funds,
international organiz8,tions in i'Thich the UniteCt Stb.tes bolds memb:~rship,
foreign central bG.nks and foreic;n States, cleale:cs ,·;110 make prime.ry markets
in Government securities and report dc:dly to the Federal Reserve Bank of Hc'H
York their positions ",ith r'Cspcct to Governm,~nt securities and. borrmlings
thereon, and Government InvestIticnt Accounts l)ill be recej,ved. Vii thout c'l.c:po~~:it"
Subscriptions from v.ll others r.1USt be accump0.ll:Led by P::'tylllcnt of 2 percent of
the amount of notes applied for, not subject to "I'li thdra';'lal until after allot!Llcnt.
Subscriptions from comm~rcip,l banks, for their m~n ~1.ccolmt, v)ill be
restricted in cacb. case to an amOV~Qt not exceeding 50 percent of the cOJ:1bined
capital (not including capital not~s or debentures), surplus D,nd. uncli viclcd
profits of the subsc:cibinc; bnnk.
The Secretary of the TreaslJ:ty reserves the riGht to reject or reduce any
subscription, to allot less than the ClJ:lount of notes appliecl for, and to m.al:e
different percenta.ge allotwents to various classes of subscribers. Subject to
these reservations subscril)tions in a:c.m).nt s UJl to and inchl.dinz $200,000 vTill
be allotted in full and subscriI)tions over $200,000 'l;1ill be allotted on c\ percentage basis but not less than $200,000.

F-U58

2 -

CO~:~~lercio,l l11Jn;'\.S CDc!, othr1' lcn.dc~:~~ Ere r2c~'_:r,~:tC0 to r('f'n~in frG:, };,:'.1dn2:
unsecured loo. nf~, or l02,ll:~ colJ~ctz.::Y'ol-L7,ccl in 'c'[t()lc o:c in r:;Yt, by til::: no~;c;c;
subscritccl fol'~ to (:0',(:1:' the (lqosj'c.~; 1 c::c~n:~T2cl 'GO be: Fdcl ,;:';C;l subscJ. . :i:0tiol!c.~
are cntcl'C:cl, aed bCl1lks \,ill bc; :cc (].'ui.:r.c;cl. to k~,.1:e the no;lJ'11 certific[;.tic:Cl to

that effect.

All sU[)8crillers are requi{'c(I to 9Z,"(,2 n:l"t; to IJJ.rcL2:;c or -Co 8(:11, or to
make any f,.gn::u;l':;l:-CS '\i::i.th }'(:[;y 2Ct to the lYU[c!.",':',s,::; 01' [;c',lc or otk.::(' c'liQ)o3ition
of the notes s~l1.1);:;C:l.""i1),=~(1 i'or' tr_J.C1... ;), tl~LI.: o:f"fc:('iljL~ p,t 8. sJ:8c:).fic i'ate oy· IJ::"icc:,
until after miGnic:ht. ]i'E,bru?ry r::;) 19G8,

TREASURY DEPARTMENT
(

roR RELEASE 6: 30 P.M.,
:!!d81 z February 9, 1968.
RESULTS OF TREASURY I S WEEKLY BILL OFFERING
'!he Treasury Department announced that the tenders for two series of Treasury

lilla, one series to be an additional issue of the bills dated November 16, 1967,
Dl the other series to be dated February 15, 1968, which were offered on February
" 1968, were opened at the Federal Reserve Banks today. 'Denders were invited for
~,500,OOO,OOO, or thereabouts, of 91-day bills and for $1,000,000,000, or therebcuts, of l82-day bills. The details of the two series are as follows:
WE OF ACCEPTED
IlIPE'l'ITIVE BIDS:

High
Low
Average

9l-day Treasury bills
maturins Ma;y: 16 2 1968
Approx. Equi v. :
Price
Annual Rate
98.734
5.008~
98.720
5.064~
98.726
5.04~

l82-day Treasury bills
maturin6 Au~st 15 z 1968
Approx. Equi v ..
Price
Annual Rate

97.354
97.326
97.333

5.234~
5.28~
5.275~

58~ of the amount of 91-day bills bid for at the low price was accepted
ll~ of the 8lOOunt of l82-day bills bid for at the low price was accepted

IJlL TERDERs APPLIED FOR AND ACCEP'IED BY FEDERAL RESERVE DISTRICT3:
District

Boston
lev York
fhiladelphia
:leveland
I1cbmond
Itlanta
lb1cago
It. LOUis
~llDeapol1s

ansas City
lllas
III Francisco
roW,S

ApElied For
$ 19,842,000
1,957,657,000
28,528,000
40,374,000
9,500,000
52,900,000
268,318,000
50,820,000
17,778,000
29,640,000
30,491,000
111 z 802z 000

AcceEted
9,842,000
$
999,517,000
11,409,000
36,374,000
9,500,000
43,900,000
190,958,000
45,520,000
8,778,000
29,220,000
22,071,000
93 z 038 z 000

$2,617,650,000

$1,500,127,000 ~ $2,217,774,000

AEElied For
$ 23,063,000
1,627,511,000
18,147,000
60,281,000
4,655,000
41,667,000
255,575,000
40,621,000
16,201,000
20,662,000
19,488,000
89,903,000

Accefted

$2,06~,OOO

712,591,000
10,058,000
19,474,000
4,032,000
17,815,000
141,606,000
27,463,000
5,756,000
10,422,000
9,288,000
29,2453,2000
$1,000,021,000

~ncludes $222,575,000 noncompe ti ti ve tenders accepted at the average price of 98. 726
.ncludes $117,373,000 noncompetitive tenders accepted at the average price of 97.333
~ae rates are on a bank discount basis. '!be equivalent coupon issue yields are
'.l~for the 91-day bills, and 5.51~ for the 182-day bills.

US9

TREASURY DEPARTMENT
t

February 9, 1968

FOR IMMEDIATE RELEASE

PRELIMINARY RESULTS OF TREASURY REFUNDING

Preliminary figures show that $5,116 mtllion, or 21.~ of the $24,331
million securities of the five issues eligible for exchange have been exchanged
for the new 7-year 5-3/4'10 notes offered in the current refunding. This includes
$3,836 million, or 31.8%, of the eligible securities held outside the Federal
Reserve Banks and Government accounts.
Of the total securities exchanged, $2,162 million, or 82.~ were exchanged
by holders of the $2,635 million of the notes maturing February 15,1968, and
$2,954 million or 13.6%, were exchanged by holders of the $21,696 million note
and bond issues maturing August 15 and November 15, 1968.
Of the total securities held outside the Federal Reserve Banks and
accounts $1,241 million, or 72.4'fo of an aggregate of $1,713 million,
of February 15 maturities and $2,595 million, or 25.1% of an aggregate of $10,347
million, of August 15 and November 15 maturities were exchanged.
~vernment

Following is a breakdown of the securities eligible to be exchanged (amounts
in millions) :

Date
Security
5.5/8~ notes, A-1968

Unexchanged
Amount
10

Amount

Total
Exchanged

2/15/68

$ 2,635

$2,162

473

18.0

8/15/68
8/15/68
11/15/68
11/15/68

6,444
3,747
9,913
1 2592
$21,696

487
1,117
916
434
$2,954

5,957
2,630
8,997
1 2158
$18,742

92.4
70.2
90.8
72.7

86."i

$24,331

$5,116

i19 z215

79.0

Due

PREREFUNDING
4.1/4~
3.3/4~
5·1/4~
3.7/8~

notes, C-1968
bonds, 1968
notes, D-1968
bonds, 1968
Total prerefunding maturities
Grand Total

Details by Federal Reserve Districts as to subscriptions will be announced
later.

F-1l60

REI''lARf<'S OF THE t !m,oRAGL[ R03FRT A. !.'!ALLACE
ASS 1STANT SECf:.ETARY OF THE TRE/\SUKY
!JEFORE THE ROTARY CLUR OF CHICAGO
S!ERjvW~ HOUSE, CHI CAGO, I LLHXn s
TUESDAY, FEBRUARY 13, 1%8, 1:00 P. 1"1.

THE PER I LS OF PROSPER I TY -- 1%8

A PERSON \OklO ACHIEVES A PROSPEROUS CONDITION IS SAID TO BE
STREET. 11

O~~

!;[ASY

YET, AS A NATION ENTERI1'iG THE EIGHTH YEAR OF OUR LONGEST EXPANSION

IN HISTORY, VIE HAVE LEARNED THAT THE PATH OF PROSPERITY IS t\0T "EASY. iI
INSTEAD, RATHER BUf'A'pY AND DI FFI CULT.

IT IS,

BUT IT 3EATS SEI NG STUCK I N THE f'AIUD BY

A COUNTRY MILE.
PROSPERITY'S PROBLEfvlS --

M~D

VALUES

READH!G A30UT U.S. ECOl\OMIC AND FH-lANCIAL PROBLEMS Ol'lE tvlAY ItJELL ASK \-tHY
viE HAVE THEI'vl.

THE FACT IS THAT TI-lESE ARE THE \'IORRIES OF PROSPERITY.

i'/E COULD

QUICKLY BANISH THEM I'JITH AN OLD-FASHIONED RECESSION SUCH AS OCCURRED THREE
TItvlES I N THE SEVEN YEARS BEFORE THE PRESENT EXPANS I ON BEGAN.

A RECESS ION

\>!OULD DRASTICALLY CURTAIL INFLATIONARY PR.ESSURES AND PROBABLY PROVIDE A QUICK
REDUCTION IN OUR BALANCE OF PAYMENTS DEFICIT.

GUT FE\'J OF US

~~OULD

\'IlLLINGLY

PAY THE PR I CE OF 'til DESPREAD UI'JEI"IPLOYt·1ENT , SLO\'I SALES, SHR H<K I NG PROFITS, Af';D
LOST PRODUCTION.

THUS, THE BETTER \JAY TO DEAL \-/ITH THE WORRIES OF PROSPERITY

IS \>lITH SELF-DISCIPLIf'£.
THE PRIfvARY PERIL OF PROSPERITY IS THAT II'!FLATIONARY IMBALANCES iV,IGHT
DEVELOP AW Kl\OCK US u,,rro A RECESSION -- THE OLD BOOM I',ND 8UST 5YNDRGtIE.
AVOIDH~G THIS i'JILL REQUIRE FISCAL RESPONSIBILITY.

RESPONSISILITY?

',.JHAT DO i'/E f'AEAN BY FISCAL

AS A DEI''OCRATIC NATION, ','IE I'VST I1v1POSE ON OURSELVES THE

CO,V?ARATIVELY S{\'iALL PRI CE OF GOVERI'JvENT EXPEi'DITURE RESTRAI NTS, i'lODEST TAX
n:CREASES, A"lD BALANCE OF PAYi-1ENT5 RESTRICTIO~lS.

THIS v!ILL 1':OT BE POPULAR,

BUT IT I S NECESSARY I N ORDER TO PRESERVE THE VASTLY GREATER GOOD -- A 5TABLE

PROSPERITY.

- 2 OF COURSE, THE PRESSURES ON OUR ECO~QMIC SYSTEM STEM VERY LARGELY FROM
THE COSTS OF VIETNAM.

THE REASON THESE COSTS, PER ~ ARE BURDENSOt'l£, mWEVER

15 THAT THEY HAVE BEEN PILED ON TOP OF AN ECOf\DMY ALREADY VERY NEAR FULL
efLOYMENT, WITH LITTLE SLACK TO ABSORB THE EXTRA DEMA~DS ON OUR PRODUCTIVE
CAPACITY.

SO WE MUST HOLD DO\'iN THE GROHTH OF OTHER DEMANDS -- BOTH I N THE

GOVERNMENT AND IN THE PRIVATE SECTORS -

I N ORDER TO ACCOfv1lvDDATE OUR VIETNAM

NEEDS.
IN SOME RESPECTS, MANY AMERICANS MAY HAVE COME TO FEEL A LITTLE GUILTY
ABOUT ENJOYING PROSPERITY.

IT SEEMS SO SELF-INDULGENT AND EVEN SELFISH.

IS TRUE THAT PROSPERITY PRODUCES ITS OWN BRAND OF EXCESSES.

IT PROBABLY

IT
BREED~

SMUGNESS JlND SLOTH AS WELL AS GREED AND SOCIAL DISSATISFACTION.
BUT THE PURPOSE OF HIGH EIviPLOYMENT IS I'DT TO PROt'lOTE A LA DOLCE VITA KIND

OF EXISTENCE -- FAR FROM IT.
EXPANSION

\~HICH

THERE IS A POSITIVE AND UNSELFISH SIDE OF AN

MAKES ITS PRESERVATION THOROUGHLY vJORTH\>JHILE.

FOR ONLY SUCH

AN ENVIROI\MENT PROVIDES THE JOB OPPORTUNITIES NEEDED FOR THE POOR AND THE
DISADVANTAGED TO ESCAPE THE TRAP OF GRINDING POVERTY.

ONLY IN A GROl1ING

ECOt\OMY DO YOUNG PEOPLE REALI ZE THE I R FULL ECOt'-D~lI C POTENTI AL •

ONLY A HI GHL Y

PRODUCTIVE NATION PROVIDES ITS SOLDIERS HITH THE GOODS AND SERVICES THEY
NEED.

ONLY IN THESE SURROUNDINGS CAN OUR CORPORATIONS HAVE THE NECESSARY

'INCENTIVES FOR INVESTMENT SO IMPORTANT TO RISING LIVING STANDARDS I'\ND SCIENTIFIC
ADVANCEMENT.

ONL Y OUR I NG SUCH A PER IOD DO FUNDS FLOH FREELY TO SCHOOLS, COLLEGES,

OOSPITALS, HEALTH RESEARCH, AND OTHER VALUABLE PURSUITS.
A STASLE AND THRIVING U. S. ECOr-PMY IS THUS A SINE QUA M)N FOR THE SUSTAINED
ADVANCEMENT OF SOC I ETY.I \'iHETHER I T BE SOC I AL, SC lENT! FIe, OR CULTURAL.

- 3 -

:~
-' 7·I

CONSIDER, FOR A t/OIVENT, THAT IN THE PAST SEVEN YEARS OF UNBROKEN
EXPANSION:
-- t/ORE THAN 12 MILLION Afv1,ERICANS f-JAVE t.ADVED OUT OF THE POVERTY
CATEGORY.
-- THE OVERALL RATE OF VJORKERS VI ITHOUT JOBS HAS BEEN CUT IN H,l\LF,
FROM 7 PERCENT TO 3-1/2 PERCENT.

THE I'lON-i-IHITE JOBLESS RATE

HAS DROPPED FROM 12-112 PERCENT TO 6-1/2 PERCENT.

AND,· IN THE

PAST FOUR YEARS, 35 PERCENT 1'<lORE NEGROES HAVE FOUND PROFESSIONf..L,
TECHNICAL, AND MANAGERIAL JOBS.
-- MIDDLE INCOfVE FAMILIES HAVE ALSO IJV1PROVED THEMSELVES.
THIS SAfv1E SEVEN-YEAR PERIOD, 8 MILLION

~ORE

DURING

FAMILIES HAVE

ACHI EVED YEARLY I NCOtv'ES P,BOVE $10, 000, MORE THAN OOUGLI NG THE
NUMBER ENJOYING SUCH PAY IN 1960.
THESE GAINS REFLECT SUBSTANTIAL PROGRESS BY THOSE WHO t\EED IT (vOST, AND WE
SHOULD FEEL PROUD THAT OUR SY STEM HAS MADE IT POSS I BLE •

WE jv1,UST CONTI NUE TH IS

KINO OF ADVANCEJvlENT \'JHICH IS INDISPUTABLE EVIDENCE OF THE ECOI\I()MIC SUPERIORITY
OF CAPITALISM OVER COJvlJ'vlUNISM.
PROSPERITY'S BENEFITS

EXTE~~D

FAR BEYOND OUR SHORES.

NA.TIONS ALSO HAVE A STAKE IN THIS SAME STAt3LE EXPANSION.

THE PEOPLES OF OTHER
VJERE WE TO PERMIT

OUR ECONOMY TO STAGI'J/\TE OR SLI DE I NTO A RECESS ION, IT WOULD DESTROY A SUBST ANTI AL
PORTION OF THE \~ORLD'S (vIARKETS A"JD, ALm~G V/ITH IT, IJvlPAIR ECONOMIC OPPORTUNITIES
AW PROGRESS EVERn.-JHERE.

U. S. IMBALANCES -- I NFLA TI ON OR RECESS ION -- CAN

HAVE DISASTROUS ECONOMIC CONSEQUENCES THROUGHOUT THE ItJORLD.

- 4 HE IN nlE UNITED STATES THUS HAVE AN 03LIGI'~TION TO PROVIDE THE KH~D OF
ECOWMIC ENVIRON"v\ENT ~"!HICH IS A PREREQUISITE TO THE it/ELL-BEING BOTH OF OUR
OI'1N CITIZENS AND THOSE OF OTHER NATIO~S.

't!HETHER OR t\OT VIE AS H-iDIVIDUALS

HAVE !lEVER HAD IT SO GCOD" I S RES IDE THE PO I NT •
PRESERVI~:G

OUR STA[3LE EXPANS IOf\J

THE RECORD-BREAK I NG STABLE EXPANSION I'IE HAVE EXPERI ENCED DURI t-G THE LAST
SEVEN YEARS HAS f\DT OCCURRED BY ACCIDEt\IT.
E~VIRm~""Er-..rr

1,'E ~.'EED

IN ORDER TO THRIVE.

t-/HEN

IT HAD TO fiAVE THE RIGHT KIf\D OF

UNE~PLOY01ENT

IS HIGH AND PRODUCTION LO"I,

r.·lEASURES TO El'\COURAGE GREATER ECOf\;QHIC ACTIVITY, SUCH AS THE riUGE TAX

CUT OF 1964.

ON THE OTHER S I DE OF THE COl N, v/HEN

EC01\Ot~I

C ACTIVITY THREATENS

TO ACCELERATE TOO FAST, vIE MUST HAVE THE COURAGE TO HOLD Dm'/N FEDERAL
EXPENDITURES AND Ri\ISE TAXES TEMPORARILY IN ORDER TO RESTRAIN
PRICE PRESSURES AND

DE~·1AND,

EASE

PRESERVE THE STREf'iGTH OF THE OOLLAR.

PRES !DENT JOHNSON'S NEVI BUDGET riOLDS ALL CI VI LI AN PROGRAMS BE LO'.'} LEVELS
TWIT 'tIOULD BE 1'v10RE DES I RABLE, I F VIE COULD AFFORD THEI'1.

A FE\;: EXTREMELY HIGH

PRIORITY PROGRA1'1S, t-lOSTLY RELATED TO THE ~·IEEDS OF OUR LARGE CITIES, ARE SLATED
FOR lV0DEST INCREASES -- t'lr'\t\PO'..IER TRAINIl'<r., COt\ITROL OF CRII"E" POLLUTION CONTROL,

ftND lV,ODEL CITIES ARE GOOD E)(.LlJv1.?LES -- BUT EVEN THESE ARE BEING HELD BELOi'/ A1'10U~rrS
TWIT NOST OF US i..,rOULD PREFER.

MEAl',\'/HI LE, LOOK FOR CONS IDERAF3LE D1 SSATI SFACTION

\'IITH THE CUTBACKS THE PRES I DENT PROPOSES FOR fvlA~,iY POPULAR ACTI VI TI ES, SUCH AS
EDUCATION, HEALTH, CONSTRUCTION, St/ALL BUSINESS At\D FARM PROGRAJ'v'tS' AS \'Jt:LL AS
FOR SPACE EXPLOP,ATIOl'l.

NEVERTHt:LESS, vIE ~UST BE ',-fILLING TO fv'AKE THESE SACRIFICES

TO PRESERVE OUR STAGLE EXPN5 ION.

IT ~'JOULD E3E A V.ONDERFUL TH I NG IF, DESP ITf THE Ecm·lOMI C PRESSURES" '..JE COULD

GREATLY ENLARGE OUR At-,iTI POVERTY PROGRAI',.1,5 I FlAKE VAST Ne..: Expa:DITUR.ES FOR EDUC!',TI Of'.;"

- 5 N)OTO OUR NATIONAL WEALTH BY INCREASED CONSTRUCTION OF HIGH'dAYS AND POHER
PROJECTS, AND SO FORTH.

YET, EDUCATION FOR BETTER JOBS \'J!LL MEN~ LITTL[ IF

TOO MUCH SPENDING PUSHES US II'ITO AN EXPANSIOtl.JrJRECK.ING INFLATION Al\;D CONCOMITANT

SHRINKAGE OF ECONOt-1IC OPPORTUNITIES; GREATER It/EALTH IN THE NU/'IBER OF ROADS Al\'D
DAMS PALES VJHEN CO~1PARED TO THE LOSS OF \;JEALTH CAUSED BY THE RISING UNEi"'PLOYMENT
AND LOST PRODUCTION OF A RECESSION.

BUT HOLDIt\'G DO\'IN THE LEVEL OF EXPENDITURES IS NOT ENOUGf"(.
flAVE THE COURAGE TO RAISE TAXES \'JHEN THIS BECOMES

OF ECON)MIC STABILITY.

~JECESSARY

\'JE MUST ALSO

FOR THE PRESERVATION

THIS STEP IS NECESSARY 1\0\-/.

IT IS IRONIC TO THINK .BACK TO JANUARY 1961 v/HEN THE EXPANSION FIRST BEGAN.
AT THAT TIfvlE, \;JE CONFRONTED OUR THIRD RECESSION IN SEV&l YEARS -- HIDESPREAD
UNEMPLOYMENT AND SHRINKING PRODUCTION AND A BALANCE OF PAYf'lENTS DEFICIT OF NEARLY
$4 BILLION, STILL THE HIGHEST ON RECORD.
GET THE COUNTRY

~OVI(\!G

AGAIN.

FOUR PERCENT, DEFI NED AS "FULL

HE \'IORKED SEVEN DAYS A VJEEK TRYING TO

OUR GOAL?

~10VE

EMPLOY/V'Et~'T.

OH, HE THOUGHT, \'/OULDN'T EVERYTHI NG

THE UNEtv1PLOYMENT RATE SELOH

BE WONDERFUL IF vJE COULD JUST REACH FULL Et1PLOYI'-ENT?

WE MADE IT.

BY MID-1965, BEFORE THE VIETN.AM ESCALATION, UNEMPLOYl''iENT HAD DROPPED TO

4-1/2 PERCENT AND VJAS /'IDVI NG DO'dNtJARD.

BY THIS TIt>1E, THE ~Ll\TION 's ECOt'DMY HAD

ACHIEVED THE LONGEST AND STRONGEST UNINTERRUPTED PEACETIME EXPANSION IN HISTORY.
WE REACHED OUR 4 PERCENT UNEtv1PLOYfv1ENT GOAL BY THE END OF 1965, BUT T1 lEN \;JE
CONFRONTED AN Et\111 RELY NE'tJ SET OF PROBLEMS -- HOh' TO DEAL ~~ITH AN ECOr-¥)~.w
tJOVlt-G TOO FAST RATHER THAN TOO ~SLOH -- HO\'J TO AVOID INFLATION RATHER THAN

STAGNA.TI ON •

- G -

CONSIDERING THE hULTI-BILLlON DOLL ..'\R It"'.Pr'\CT OF VIEHtAf.1, I THHIK THE
ECO!'VI'vlY HAS ACHI EVED A RH't.t\RKABLE RECORD. COI'SUl'':ER PRI CE I NCR[ASES H! 30TH 1965

ftNJ 1967 \'/ERE HELD BELO',.I THREE PERCH.!T, A !3ETT[R RECORD OF r)RICE STP-,SILITY TH,'\t\j
tIOST OF THE OTHER It<DUSTRIALlZED COU1'ITRIES OF THE
PRESSURES ON TOP OF A FULL Et'PLOYlv'H!T
THE FISCAL t'lEASURES

\':Or~LD,

ECO~Dfv'Y.

~·r.-tICH CO~~TRIBUTt:D

TO THIS RECORD OF STARILlTY

EXPENDITURE RESTRAIt,IT, A SPEEDUP IN TAX COLLECTIor-:s,
SCHEDULED REDUCTIONS IN CERT,c.IN EXCISE TAXES.
RATES, BUT HE CN·]:--DT

COt'-;TH~UE

DESPITE OUR VIEH.:N<

N~D

POSTPot·H'~EilT

It~CLUDED

HE AVOIDEC NN It,JCRE/\SE IN TAX

a-DEFH!ITELY TO CP-.R.RY THE HEAVY BURDEN OF VIEHW'i

WITHOUT RAISItlG THESE RATES.
PRES !DENT JOHNSON I S FISCAL PROGRA',i
PRES IDENT JOHt'SON' S PROPOSED T)\X HIKE \'10ULD APPLY f ...
SURCPARGE TO It<D I VIDUAL f·J

Full text of Press Releases of the United States Department of the Treasury : Volume 160

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