The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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TREASVRY
PJ(ES'..r'
J)EPT.
RELEASES.
LIBRARY
ROOM 5030
JUN 1 51972
TREASURY D£PARTMENT
0-/
UNITED STATES SAVINGS BONDS ISSUED AND REDEEMED THROUGH
February 29,
(Dollar omounts in million - rounded ond will not necellorily odd to total I)
DES(;AIPTION
AMOUNT IISUEDlI
~TURED
Series A-1935 thruD-1941
Serif's F' lind G-1941 thru 195
series J and K-1952 thru 19;5
9
AMOUNT
REDEE~QY
AMOUNT
OUTSTANDING
11
1968
"t. OuTSTANDING
OF AMOUNT ISSUED
5 ,ex»
29,521
3,156
4,995
29,472
3,114
8
49
42
.1.6
.17
1.33
1,870
8,256
13,284
15,499
l2,170
5,509
5,219
5,388
5,313
4,644
4,019
4,212
4,805'
4,895
5,098
4,918
4,623
4,499
4,210
4,211
4,243
4,087
4,548
4,435
4,340
4,660
4,220
1,638
7,250
11,700
13 ,546
10,453
4,541
4,137
4,166
4,036
3,473
3,006
3,120
3,464
3,446
3,515
3,335
3,045
2,793
2,555
2,432
2,317
2,169
2,232
2,142
2,018
1,878
1,114
232
1,006
1,584
1,953
1,717
967
1,081
1,223
1,277
1,171
1,013
1,092
1,341
1,449
1,582
1,583
1,578
1,706
1,655
1,780
1,926
1,918
2,315
2,293
2,322
2,782
3,106
12.41
12.19
11.92
12.60
lh.11
17.55
20.71
22.70
24.04
25.22
25.21
25.93
27.91
29.60
31.03
32.19
34.13
37.92
39.31
42.27
45.39
46.93
50.90
51.70
53.50
59.70
73.60
709
769
-60
153,886
110,293
43,593
5,485
6,535
2,984
1,200
2,501 ,
5,335
45.60
81.64
12,019
4,183
7,836
65.20
165,905
114,476
51,429
31.00
S96
396
200
37,680
166,501
204,181
37,581
114,872
152,453
98
51,629
51,728
~MATURED
Series E}j:
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
:962
1363
H164
1965
1966
1967
19G5
Unclassified
..
Total Series E
jeries H (1952 thru May, 1959)21
H (June, 1959 thru 1968)
Total Series H
Total Series E and H
eries J and K (
1956
thru 1957)
{Total matured
All Series
Total unmatured
Grand Total
..
..
..
..
28.33
1/
lades accrued discoun'
'rera! redemption IIGlue. '
ytJ,on of owner holld. /rIG): be held and will earn tnterut for additional period. after ori,inal maturitr 1I00e••
.. ma'",ed bolld. wla'eIa hotle not been pruenterJ for redemption,
F.rm PD 3812 .. TREASURY DEPARTMENT .. Bur.. " .. the P"bllc D.bt
33.56
.26
31.01
25.33
o~
UNITED STATES SAVINGS BONDS ISSUED AND REDEEMED THROUGH
March
1-
31, 1968
(Dollar amounts in millions - rounded and will not necessarily add to totals)
OEseRI PTIO,,",
AMOUNT ISSUEoll
MTURED
Sf'ries A-1935 thru D-1941
Serif's F' and G-1941 thru 1952
Serles.J and K-1952 thru 195~
JNMATURED
Series E.!J
1941
1942
1943
1944
1945
1946
1947
1948
UH9
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
Unclassified
Total Series E
Series H (1952 thru May, 1959).Y
H (June, 1959 thru 1968)
Total Series H
Total Series E and H
Series J and K (
1956 thru
{Tot.l matured
All Series
Total unmatured
Grand Total
1957)
AMOUNT
REnEEIjED!I
AMOUNT
OUTSTANDING
I % OUTSTANDING
Y . OF AMOUNT ISSUED
,
5,003
29,521
3,156
4,996
29,u73
3,119
8
48
36
.16
.16
1.14
1,871
8,259
13,293
15,503
12,173
5,512
5,222
5,392
5,317
4,648
4,023
4,215
4,810
4,900
5,104
4,924
4,631
4,505
4,219
u,216
4,249
u,094
4,555
4,u42
4,347
4,669
4,513
114
685
i,6uO
7,259
L.,713
13,563
10,u68
).. ,550
4,lU8
4,177
4,047
3,483
3.,015
3,130
3,476
3,459
3,530
3,350
3,063
2,811
2,571
2,446
2,329
2,186
2,2u7
2,161
2,037
1,909
1,237
-767
230
1,000
1,580
1,940
1,706
962
1,074
1,215
1,270
1,165
1,008
1,086
1,335
1,4u2
1,574
1,574
1,568
i,693
1,648
1,770
1,921
1,908
2,308
2,282
2,310
2,759
3,275
114
-82
12.29
12.11
11.89
12.51
lU.Ol
17.h5
20.57
22.53
23.89
25.06
25.06
25077
27.75
29.43
30.84
31.97
33.86
37.58
39.06
41.98
45.21
46.60
50.67
51.37
53.14
59.09
72.57
100.00
154,405
110,770
u3,636
28.26
5,847
6,213
3,137
1,102
2,710
5,111
46.35
82.26
12,060
4,239
7,822
64.86
166,466
115,009
51,457
30.91
596
411
185
31.04
37,680
167,062
204,742
37,588
115,420
153,008
51,642
51,734
92
.24
30.91
25.27
cludes ar.crucd discount.
redemption valllf!,
: loption of owner bOfkl.~ mar be held and will earn tnterelt for additional periods after ori,iraal maturity tlat •••
c iulu fNJtured bnnds wAie" have not been prele,uetl for redemption,
~rreiat
FIt'M PD 3812 ~AEASUAY DEPARTMENT - Bur.au .f the PullUc D.II.
-
0-.3
U;U";ED
7::mmm-:
ST~7;;S SAV~~~:~ :0::;::) ISSUE3 M:iJ REi.1~EL;:J
April 30,
(Dollar amounts in millions - rounded and will not necessarily cod to tOfals)
DESCRIPTION
TURED
Series A-1935 thru D-1941
Series F and G-1941 thru 1952
Series J and K-1952 thru 19$5
AMOUNT
REDEEMED
AMOUNT ISSUED.!!
5,003
29,521
3,156
4,996
29,474
3,122
!.J
AMOUNT
OUTSTANDING
1968
2J
I OF°/o01l7~7A~;D:NG
i
AII.(J~NT I~SLiED
I
7
47
33
.14
.16
1.05
IMATURED
I
Series E 1/:
UHl
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
19GU
Unclassified
1,B71
8,262
13,300
15,506
12,177
5,515
5,225
5,396
5,321
4,652
4,026
4,219
4,815
4,905
5,108
4,929
4,636
4,510
4,225
4,225
4,256
4,101
4,564
4,450
4,354
4,678
4,608
394
682
Total Series E
Series H (1952 thru May, 1959) 2/
H (June, 1959 thru 1968)
Total Series H
Total Series E and H
1,642
7,265
11,722
13,576
10,418
4,556
4,155
4,185
4,054
3,490
3,020
3,136
3,484
3,468
3,540
3,361
3,075
2,824
2,582
2,458
2,338
2,199
2,259
2,174
2,054
1,935
1,367
i
12.24
12.07
11.86
12.45
13.95
17.39
20.50
22.44
23.81
24.98
24.96
25.67
27.64
29.30
30.70
31.83
33.67
37.36
38.89
41.82
45.07
46.38
50.50
51.15
52.82
58.64
71.89
100.00
840
229
997
1,577
1,930
1,699
9$9
1,071
1,211
1,267
1,162
1,005
1,083
1,331
1,437
1,568
1,569
1,561
1,685
1,643
1,767
1,918
1,902
2,305
2,276
2,300
2,743
3,241
394
-158
154,910
111,237
43,673
28.19
5,485
6,609
3,039
1,250
2,445
5,359
44.58
81.09
12,094
4,290
167,004
115,526
I
I
-
I
Series J and K (
19$6
thru 1957)
7,805
I
I
I
64.54
51,478
I
30.82
Zij
28.48
{Total matured
Total unmatured
Grand Total
597
427
170
37,680
167,600
37,592
115,9$3
153,545
88
51,648
51,735
205~_278
leludes accrued discount.
'urren' redemption value.
t option of owner bond.~ mar be helt! and will earn iTitere.H for additional periods after original maturity dates.
leludes ma,ured bonds which have not been presented for redemption.
Form PD 3812 - 'tREASURY DEPARTMENT - Bureau of the Public Cebt
i
,
i
I
I
I
I
I.
I
I
I
-
I
All Series
I
.23
30.82
25.20
,
I
I
I
,
---<
i
.J
TREASURY DEPARTMENT
OR RELEASE 6:30 P.M.,
ooday, March 4, 1968.
RESULTS OF
TREASUR~'.-:
WEEIC..Y BILL OFFERING
The Treasury Departlllent announced that the tenders for two se~ies of Treasury
ills, one series to be an addi t1ona1 issu~ of bills dated December 7, 1967, and the
ther series to be dated March 7, 1968, which were offered on February 28, 1968, were
pened at the Federal Reserve Banks todJJ.y. Tenders were invited for $1,600,000,000,
r thereaDouts, of 91-day bills and for $1,000,000,000, or thereabouts, of 182-day
ills. The details of the two series are as follows:
ANGE OF ACCEPTED
<»IPETITIVE BIDS:
High
Low
Average
64~
35~
91-day Treasury bills
June 6 z 1968
Approx. Equiv.
Price
Annual Rate
182-day Treasury bills
maturins SeEtember 5 z 1968
Approx. Equiv.
Price
Annual Rate
97.392
5.15~
97.374
5.194~
97.385
5.17~
maturi~
98.748
98.731
98.736
4. 9531)
5.02~
5.00~
Y
11
of the amount of 91-day bills bid for at the low price was accepted
of the 8.Ilount of 182-day bills bid for at the low price was accepted
QTAL TENDERS APPLIED FOR AND ACCEP'lED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Phi lade 1phia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
Jan Francisco
Applied For
AcceEted
$ 20,381,000 $ 10,381,000
1,132,088,000
2,024,797,000
10,356,000
27,367,000
32,596,000
42,896,000
9,086,000
9,086,000
29,674,000
44,4:77,000
273,422,000
167,542,000
62,916,000
56,896,000
22,163,000
26,213,000
22,965,000
25,125,000
16,029,000
26,029,000
9O z848,000
148,398,000
'ID1)\LS
$2,731,107,000 $1,600,624,000
AEE1ied For
$
!I
AcceEted
5,805,000 $
4,705,000
1,353,888,000
12,693,000
55,74:9,000
3,723,000
38,311,000
223,003,000
48,196,000
17,490,000
24,401,000
18,890,000
128, 821 z 000
653,484,000
4,693,000
33,249,000
3,723,000
26,812,000
110,491,000
45,996,000
9,940,000
23,401,000
8,890,000
74t£i66 z 000
$1,930,970,000
$1,000,050,000
~
Includes $245,332,000 noncompetitive tenders accepted at the average price of 98.736
Includes $119,328,000 noncompetitive tenders accepted at the average price of 97.385
These rates are on a bank discount basis. '!he equivalent coupon issue yields are
5.13~ for the 91-day bills, and 5.3~ for the 182-day bills.
')
TREASURY DEPARTMENT
March 4, 1968
FOR IMMEDIATE RELEASE
UNITED STATES AND NICARAGUA
SIGN EXCHANGE AGREEMENT
Secretary of the Treasury Henry H. Fowler, the
Ambassador of Nicaragua, Guillermo Sevilla-Sacasa, and the
Minister of Finance and Public Credit of Nicaragua,
General Gustavo Montiel, today signed a $4.75 million
Exchange Agreement between the United States Treasury and
the Government and Central Bank of Nicaragua.
The Exchange Agreement is for a one-year period. It
is designed to assist Nicaragua in its efforts to
maintain economic stability and freedom in its trade and
exchange system. The Agreement. provides for the conduct
of exchange operations, as deemed mutually desirable and
advantageous. The United States may purchase Nicaraguan
cordobas with dollars from time to time, and Nicaragua
will subsequently repurchase the cordobas.
These operations will have as their objective
the promotion of confidence in the foreign exchange
market and increasing trade and other exchanges between
the two countries.
The Agreement signed today complements the $19
million standby arrangement with Nicaragua announced on
February 26, 1968 by the International Monetary Fund.
000
F-l.lSJ
TREASURY DEPARTMENT
March 6, 1968
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
$2,600,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing March 14, 1968,
in the amount of
$2,501,460,000, as follows:
91-day bills (to maturity date) to be issued March 14, 1968,
in the amount of $I, 600 ,000,000, or thereabouts, representing an
additional amount of bills dated December 14, 1967, and to
mature June 13, 1968,
originally issued in the amo~nt of
$1,000,357,000, the additional and original bills to be freely
interchangeable.
182-day bills, for $1,000,000,000, or thereabouts, to be dated
March 14, 1968,
and to mature September 12, 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, March 11, 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
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
F-1184
- 2 -
Immediately after the closing hour, tenders will be opened at tht
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount an~ price
range of accepted bids. Those submitting tenders will be adv1sed
of the acceptance or rejection thereof. The Secretary of the Treasur
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on March 14, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing March 14, 1968.
Cash and exchange tendel
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
c ond i t ions of the ir issue. Copies of the circular may be obta ined fr
any Federal Reserve Bank or Branch.
000
TREASURY DEPARTMENT
FOR IMMEDIATE RELEASE
UNITED STATES FOREIGN GOLD TRANSACTIONS IN 1967
The Trec.l.sury announced today that net sales of monetary
gold by the'United States to foreign countries during the
fourth quarter of 1967 amounted to approximately $953 million.
The major transactions during the quarter, as shovm in
Table I, were the purchase of $100 million from Canada by the
United States and the sale by the United States of $771.2
million to the United Kingdom and $149.6 milljon to Algeria.
The net drain on United States monetary gold stocks in
the fourth quarter due to industrial and artistic deDand (net
of inflow from new production and scrap)
ca~e
This brou6ht the total net outflow of 601d
to $59 million.
fro~
the 601d stock
of the United States in the fourth quarter of 1967 to $1,012.2
million.
Table I also shows that for all of 1967 net sales of
~onetary
gold by the United States to foreign countries totaled $1,009.4
million and the net drain on monetary gold stocks due to
domestic transactions totaled $160.2 million for a total decline
of $1,169.6 million.
F-1185
- 2 -
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.
of gold were made by the
I~~
Deposits of like amounts
with the United States to
mitigate the effects upon the United States gold stock of
the quota increases.
fourth quarter.
Attachments
(2)
There were no transactions in the
TABLE 1
UNITED STATES NET MONETARY GOLD TRANSACTIONS WITH
FOREIGN CCtJNTRIZS AND INTERllATIONAL INSTITUTIONS
January 1 - December 31, 1967
{In ni.ll; 0:''3 of. dol18.rs at 812 Der fine trOL01.lnCe)
Negatl ve flgures represent net sales b'" the
Uni. ed States: Dositive fi ures net u~chases
First
Second
Third
Fourth
Area and Country
Quarter
()larter
C1.larter
',7estern Zurooe
-0.6
+19.6
Greece
-0.7
-0.4
-0.6
-0.3
Ireland
-85.0
Italy
-30.0
S\"li tzerland
-4.5
+21.2
-16.9
Turkey
-771.2
-76.6
-34.0
+3.3
United Kin;:;dor:l
-0.9.
-0.2
-0.9
-0.2
YUGoslavia
-862.8
-58
01
-44.3
-1405
Tota.l
+100.0
+50.0
Ca,n~1:.1
Latin A'11erica
-0.1
-0.3
-0.4
Argentina
*
-0 01
-003
-0.4
*
Brazil
-1.5
-1.5
Chile
Colom'Jia
*
*
-0.1
-0.1
-0.1
-0.1
Costa Rica
-0.1
-0.1
-0.1
-0 01
Dominican Republic
-6.1
-006
-0.2
Ecuador
-2.5
El Salvador
*
Guatemala
*
*
*
-0.1
-0 01
-0.1
Haiti
*
Honduras
*
-10.0
Mexico
-0.1
Nicaragua
*
+10.0
+15~0
+10.0
Peru
-11 06
+2.6
Surinam
*
*
Uruguay
*
*
-18.1
+6.2
+12.3
-0.1
Total
-0.1
-0.1
-0.1
-1.2
i>ghanista.Tl
-g.l
Burr.,a
- 02
-0.1
-0.1
*
CeKlon
-0 03
-0.2
-1.8
In.onesia
-1.3
Iran
-21.1
-0.1
-0.1
Iraq
-0.3
-0.2
-0.2
-0.2
Pakistan
-0.1
Phi lippines
-0.1
-0.2
-0.1
-0.2
Sfoia
-22.2
-0.8
:0.6
-4.8
otal
Ai.ri£3
-149.6
Algeria
*
*
Burundi
*
*
-0.1
-0.1
-0.1
-0.1
Liberia
*
*
Rwanda
*
-0.1
*
-0.1
-0.1
-001
Somalia
-g.2
-0.2
-0.1
Sudan
- .2
-0.1
-001
TW1isia
:=150.2
-0.5
-0.5
-0.4
Total
AHa
-
-
:8:f
Total
Domestic Tra~sactio~s
Tot3..1 Gold OJtflo'.'1
Figures mAY not add ~o
Ii.T.A~~ +."",,11
$'i0 000 00
-5J.2
+1'7.0
-19.8
-)9.0
-32.5
-29.9
-92.2
-1505
-49.7
'to"talS d.ue "to rounalng.
-953.3
_t.:)-
CJ
-1,012)
Totill
+19.0
-1.9
-85.0
-30.0
-0.1
-878.5
-J~l
-979.7
+150.0
-0.8
-0.8
-3 00
*
-0.6
-0.5
-6.9
-2.5
-0 01
-0 02
*
-10.0
-0.1
+35.0
-8.9
-0.1
..0.3
-1.4
-0.1
-0.4
-2'3
-l.
-21.3
-0.9
-0.1
-0.6
-23.4
-149.6
-0.1
-0.4
-g.l
- .3
:8:~
-151.6
-l,GG;) .4
1~
-1: 10
t,
TABLE 2
UNITED STAT?.s
vnTH
MITIGATi:.TI
~,mrlETARY
GOLD TPJ,llSACTICNS
roH2I~1
THROUG~
COUNTRIES
SP:SCIAL D~PasITS BY
TH~ n~F
(Millions of U.S.$)
January 1 - December 31, 1967
Area and Country
Latin
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
A~.8rica
Do~nican
Republic
Total
ABi!!
Iran
Lebanon
Vietnam
Total
-13.7
-0.6
-1.3
-15.6
Afric..s
Algeria
Carr,eroon
Central African Rep.
-0 6
0
-l.~
-15.6
-0.8
-0.2
-0.1
-0.1
-0.1
Chad
Congo(Brazzaville)
Congo(Kinshasa)
Dahomey
Gabon
Ivory Coast
Mauritania
Morocco
Niger
RV/anda
Upper Volta
Total
-13.7
-0.8
-0.2
-0.1
-0.1
-0.1
-2.4
-2.4
-0 1
-0.1
-0.1
-0.1
-0.2
-0.1
0
-0.2
-0.1
-0.2
-0.2
:£l...l
-5.3
Total
-16.2
-5.3
IMF Deposit
+16.2
Figures may not add to totals because of rounding.
-0.9
-0.1
-0.2
-0.1
-5.6
TREASURY DEPARTMENT
FOR IMMEDIATE RELEASE
March 7, 1968
The following letters relating to the application of U.S.
balance of payments measures to Canada were exchanged today
between Secretary of the Treasury Henry H. Fowler and Canadian
Minister of Finance Mitchell Sharp.
"Dear Minister Sharp:
"Unique financial relations between our two
countries have been a mutual support to both and to
the international monetary system. These relations
have served the interests of both our countries without interfering with the domestic policies of either.
"As was said sone years ago when it was agreed
that Canada should be exempt under the Interest
Equalization Tax:
'For many years the capital
markets of the two countries have been closely interconnected and U.S. exports of capital to Canada have
financed a substantial portion of the current account
deficit with the U.S. This need continues.'
"At the same time this special financial interdependence was underscored by the undertaking of
Canadian authorities that it would not be the desire
or intention of Canada to increase her foreign exchange reserves through the procedure of borrowings
in the United States.
"It was agreed that active consultations would
continue to strengthen the close economic relations
between the two countries and facilitate measures for
making the maximum practicable contribution to
economic expansion and the strength and stability
of both countries.
"In keeping with this practice, we and our
colleagues have had the benefit of regular consultations prior to and since the New year's Day announcement by President Johnson of the deterioration in
F-1.186
- 2 -
....,.
I
1967 of the U.S. balance of payments and the special
program designed to bring the U.S. balance of payments
to or close to equilibrium.
"We have reviewed the new situation and the new
program particularly because of some concern in
financial markets over the potential effects of the
program on Canada's financial position.
"Our overall financial arrangements have worked
well and to our mutual advantage.
Our special relationships in the financial field include:
"-- All commercial bank lending to Canada,
regardless of maturities, is exempt from
the lET.
Such loans to Canadian borrowers
have priority under the Federal Reserve
guidelines.
"-- There are no restrictions on the amount of
long-term loans to Canadian borrowers which
can be made by U.S. non-bank financial
institutions.
Such long-tenn loans are
exempt from the lET, from the direct investment program, and from the Federal Reserve
guidelines.
"-- Canadian subsidiaries of U.S. companies as
well as all other Canadian companies can
corne to the U.S. capital market and borcow
free of the Interest Equalization Tax to
finance their investments in Canada.
"We agree that the time has now corne to adapt these
special relations in the financial field to our mutual
advantage in handling the new U.S. direct investment and
Federal Reserve programs as well as Canada's reserve
management policies.
"The cardinal element in the present financial relationships between the U.S. and Canada is the fact that to the
extent capital outflows from the U.S. to Canada of a kind
now covered by the U.S. balance of payments measures are
insufficient to finance Canada's current account deficit,
Canadian borrowers would further exercise their existing
- 3 rights to borrow more in U.S. capital markets. Therefore, any decline in the level of particular capital
outflows to Canada from the level of past years caused
by new U.S. measures could be expected to lead to
increased borrowings by Canadian entities in the U.S.
capital market.
"In the light of this situation and to make sure
that the flow of funds fro~ the United States to Canada
is adequate, the U.S. will undertake to exempt Canada
from all the new U.S. balance of payments measures
affecting capital flows that are administered by the
Department of Commerce and the Federal Reserve Board.
"By these arrangements Canada's financial position
is assured insofar as capital imports from the United
States are concerned and the U.S. balance of payments
objectives and program as announced on January I would
not be affected.
"I am sure that you will agree that it is desirable
that we should continue to keep the economic and
financial relationships between the two countries and
with the rest of the world under continuing review, and
that we should examine the detailed operation of this
agreement and its impact on the balance of payments of
both countries in the Joint Canada-U.S. Ministerial
Economic Committee and through regular meetings of our
offic ials.
"I am satisfied that these arrangements will provide
mutual support to our payments position and hence
strengthen the international monetary system.
"Sincerely yours,
/s/ Henry H. Fowler"
'~onorable
Mitchell Sharp
Minister of Finance
Ottawa, Cana d a "
- 4 "Dear Secretary Fowler:
"I acknowledge receipt of your letter of today.
"Canada has, as you are aware, a great interest in
the strength and stability of the United States dollar,
and we have been deeply impressed by the steps you
announced at the beginning of the year to reduce your
balance of payments deficit. We have also been conscious
of your desire to operate your program in a way which
recognizes the special position of Canada.
"I am, of course, very pleased that you have now
reached the conclusion that you can, consistently with
the objectives of your programme, give further recognition to this special position by exempting Canada
completely from your balance of payments program~e.
"The unique position of Canada was reflected in the
lET Exemption Reserve TargetAgreement reached in 1963.
The Canadian Government feels that the further steps you
are now taking should be matched by further steps on the
Canadian side.
First, to insure that your balance of
payments position is in no way impaired as a result of
your action, I am informing you that it is our intention
to take any steps necessary to insure that the exemption
from your programme does not result in Canada's being
used as a "pass-through" by which the purpose of your
balance of payments programme is frustrated.
"It is also our intention to invest our entire
holdings (apart from necessary working balances) of
United States dollars in U.S. government securities
which do not constitute a liquid claim on the United
States, with of course effective safeguards to our
position should our reserve level require.
"I agree that these arrangements are in the interest
of both countries and in the general interest and that
they provide further evidence of close and mutually
beneficial relationships between us.
"Yours Sincerely,
"The Honorable
Henry H. Fowler
Secretary of the Treasury
Washington, D. C."
/s/ Mitchell Sharp"
TREASURY DEPARTMENT
March 8, 1968
FOR IMMEDIATE RELEASE
U. S. WILL DRAW $200 MILLION IN
FOREIGN CURRENCIES FROM IMF
The Treasury Department will draw $200 million in various
foreign currencies from the International Monetary Fund today.
The currencies to be drawn and their dollar equivalent
values are:
Netherlands Guilders
Italian Lire
German Marks
Belgian Francs
$100
$ 50
$ 35
$ 15
million
million
million
million
The foreign exchange drawn from the International
Monetary Fund will be used to finance u.s. international
payments by repaying short-term swap drawings made by the
U.s. late in 1967. These drawings were made to facilitate
the orderly functioning of the international exchanges at a
time when there were large flows of funds across the
exchanges in connection with uncertainties attendant upon the
position of the pound sterling and its devaluation. Most of
the swap drawings made at that time have subsequently been
settled.
The current IMF drawing, together with past drawings,
brings the total drawn by the U. S. from the IMF to $1,840
million since 1964. The amount subject to repayment by the
United States to the IMF amounts to only $833 million,
however, because of u.S. dollar drawings from the IMF by
other countries, including the amount of $201 million in
u.S. dollars most recently drawn by Canada. Drawing rights
in the IMF gold tranche (virtually automatic u.S. drawing
rights in the Fund) of $457 million will remain.
000
F-1187
TREASURY DEPARTMENT
Washington
FOR RELEASE 2 P.M. EST
FRIDAY, MARCH 8, 1968
REMARKS OF THE HONORABLE FREDERICK L. DEMING
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
AT THE
UNITED STATES CHAMBER OF COMMERCE
BRUSSELS, BELGIUM
FRIDAY, MARCH 8, 1968, 8:00 P.M. (EUROPEAN TIME)
THE UNITED STATES BALANCE OF PAYMENTS AND
THE INTERNATIONAL MONETARY SYSTEM --It is a great pleasure for me to be in Brussels this
evening.
The United States has always had a warm and friendly feeling
for Belgium -- a feeling which I as an individual American share
fully
Belgium makes a major contribution to the affairs of
international finance Governor Ansiaux and Mr. Destrycker of the
National Bank and Minister Henrion and Mr. D'Haeze of the
Finance Ministry all carried responsible and constructive roles
in the working out of the outline plan for new reserve assets
the special drawing rights in the International Monetary
Fund. Governor Ansiaux, in particular, has been a leader in
Central Bank cooperation which has been so important to the
maintenance of a strong international monetary system.
Belgium, to a greater extent than many European countries,
has given to American investment an important place in its
pattern of economic growth for the future.
0
0
The balance-of-payments measures taken by our government
on January I have intensified the search for ways of
financing investment in Belgium by reliance upon sources of
capital other than those that impinge on our balance of
payments. I should like, therefore, to describe and explain
our new program, and give you some of the reasons why it
seemed to us essential to announce this comprehensive and
balanced action program to correct our persistent balance-ofpayments deficito
F-1188
- 2 -
] "Ii:...
',/
To begin, let me place in some perspective the role that
American investment has played in the Belgian economy. As
nearly as we can determine, plant and equipment expenditures
by foreign affiliates of American corporations averaged about
$l80million in the two years 1965-66, the base years for our
direct investment program. This was equivalent to approximately
5 percent of total fixed investment in Belgium in those years.
Only a part of this amount, of course, was financed through reinvested earnings and new capital outflow from the u.s. -- an
average of about $135 million in the two years. These
financial sources represented about 3-1/2 percent of all
fixed investment in Belgium in this period.
When Under Secretary Katzenbach, Ambassador Roth, and
I cameto Brussels early in January to outline our program to
the Belgian Government, there was a sense of concern here
because of fear that the physical investment in Belgium by
American companies would taper off and that the Belgian
economy would be affected unfavorably. I believe that it is
fair to say that the fuller appraisal now possible has
served to relieve much of that concern. Increasing
attention appears to be focusing on assuring financing so
that the physical investment can continue, I welcome this
change of emphasis, as we have no desire to restrain physical
investment in plant and equipment, when it can be carried out
by using sources of capital that do not worsen our
balance of payments.
NOW, let me speak of the payments balance problem more
generally. One is frequently met with two broad questions
concerning it.
One runs as follows: The U.S. economy is strong, big,
and growing. The dollar is the great reserve and transactions
currency for the world. The balance-of-payments deficit is
only a fraction of one percent of the Gross National Product.
Why is there any problem?
The other runs along these lines: The deficit is
small relative to Gross National Product. Why can't it be
corrected very easily by merely restraining demand in U.S.
thereby improving the current account and particularly the
trade position? Both approaches, of course, imply that it
is unnecessary to have any selective or direct program to
curb outflows.
- 3 -
The answer to the first question is relatively simple.
No one would be much concerned about a u.s. deficit which was
a fraction of one percent for one year -- or even several
years. But the u.s. has had deficits in its international
payments for 17 of the past 18 years. In the early postwar years, our generous assistance to the war-torn countries
of Europe and Asia left us with moderate deficits which we
were prepared to accept. They were not only acceptable but
desired by the countries which were receiving dollars to
build up their reserves. But by 1958, the deficits were
becoming too big to finance easily. In 1958-59, they
averaged $3.7 billion. In that volume, they supplied too
many dollars too fast to be absorbed into world reserves.
A substantial part of those dollars came back for conversion
into gold -- and our reserves fell. The need for action to
reduce the deficit became obvious.
With the American economy operating well below capacity,
there seemed to be little to be gained by depressing it
further. Therefore, the first actions to reduce the
deficit aimed at reducing the foreign exchange costs of
government spending overseas. Savings in this area plus
improvement in our trade account reduced the deficit. But
then capital began to flow out in increasing volume -partly because we generated large savings and had large
capital markets; partly because of investment opportunities
overseas, and partly because the long campaign to increase
u.s. foreign investment had gradually won many converts.
These tendencies were dampened somewhat by the Interest
Equalization Tax in 1963 and by the voluntary program
to restrain direct investment and foreign lending in 1965.
The 1960 deficit was $3.9 billion. The 1962 deficit
was $2.2 billion. The 1965 and 1966 deficits averaged
$1.3 billion. But in 1967 the deficit was back to $3.6
billion, with half coming in the last quarter alone. That
figure reflected a number of factors -- some of which were
nonrecurrent -- but it was simply too big to ignore -especially since it came on top of deficits that ran back -except for 1957 -- all the way to 1950.
The second question requires a more complex answer
to give the reasons why a proper corrective program for the
balance of payments involves more than simple restraint on
the domestic economy. But I want to make quite clear that
restrain of the domestic economy is an integral part of the
u.s.
- 4 -
}4
January 1 program -- the part which the President called
"The first order of business." It involves a 10 percent
income tax surcharge and other tax measures plus expenditure
control plus a call for a more effective voluntary program
of wage and price restraint. But in addition to this
"first order of business," additional measures are needed
for an effective program to correct our payments imbalance.
There are two primary reasons for this approach.
First, balance-of-payments problems are more complex today
than they were in the earlier years of this century. Second,
we have learned that too much deflation may cure a payments
deficit but may end by killing the patient and passing on
the disease to all of his relatives -- his trading partners.
It is now generally recognized that deflation was carried
too far by some major countries in the 1920's and
early 1930's. And it is now recognized that this resulted
not only in reduced growth in deficit countries but in the
world as a whole. Sharp deflation as a policy simply is not
acceptable today in any country -- or in the world.
In an earlier day, at least in theory, balance-ofpayments deficits generally occurred when a country's
economic pace was too fast relative to its resources, and
relative to growth in other major industrial and financial
centers. The country with an inflationary boom began to have
rising prices; its exports fell, and its imports rose. The
direct effect was a reduced trade surplus. The cure was
to deflate the economy, or at least dampen the inflation.
And this was usually accompanied by general tightening of
credit and rising interest rates that accentuated the
deflation in the economy over time. Moreover, in the short
run, these rising interest rates tended to stimulate borrowing
abroad and to attract foreign capital in an equilibrating
manner.
I have noted that a policy involving sharp deflation is
no longer acceptable. But this is due not merely to dislike
of deflation but also because it alone does not meet the
problem. Our persistent deficit has important elements that
make it far different from the early 20th Century, both in
genesis and in proper treatment. The foreign exchange costs
of our world-wide defense alliances simply are not susceptible
to being reduced by general fiscal domestic economy. Gross
outlays on this account amount to about $4.3 billion a year,
and the impact on our balance of payments, even after
netting receipts from sales of military goods to foreign
countries, is about $3.3 billion.
- 5 -
Our gross expencitures on tourism, (including fares to
foreign carriers) were about $4 billion in 1967, and the
world-wide net outflow of this account was around $2 billion,
with $1-1/4 billion of this accruing to countries outside
the Western Hemisphere. Our tourist outlay has been r~sLng
at an average rate of about 12 percent a year in the past
ten years, a rate far in excess of the growth in the
Gross National Product. This steeply rising trend is related
to the growing number of people moving into higher income
classes, and to various other factors, much more than to
fluctuations in the current rate of expansion in our economy.
Our capital outflow has become very large and quite
complex. In the early 20th Century we thoughtof capital
investment as flowing from the more advanced countries to
the developing countries. Today our private capital outflow
includes a substantial element of investment in countries
already industrialized, in Europe, Japan, and elsewhere.
We fully adhere to the principles set forth in the "Study
6f the Balance of Payments Adjustment Process" by
Working Party II of the Economic Policy Committee of the
Organization for Economic Cooperation and Development in
August, 1966. One of these is that countries with excessive
domestic pressures should apply an appropriate mix of monetary
and fiscal restraint, and that countries in surplus, because
domestic demand is deficient, should take fiscal and monetary
measures to expand demand. The study notes, however, that
practical situations can develop involving large-scale
movements of both short-and long-term capital, "sometimes
prompted by relative tax advantages or differences in the
structure of capital markets, which are not such as more
fundamental economic considerations would indicate as
desirable and where the use of direct measures to influence
them may be appropriate."
I have tried to demonstrate that the more complex
characteristics of deficits in general and of the
U. s.
in particular require both domestic economic
restraint and a selective attack upon particular items of
deficit. I should add one further important point here.
The January 1 program was designed to be a balanced program
and one that would produce results rather quick~y. The
devaluation of sterling, the heavy pressures on the gold
and foreign exchange markets and the sharp deterioration in a
payments position in the last quarter of 1967 all underlined
the need for strong action which could move us to or close to
equilibrium in 1968.
- 6 The new program is designed not only to redress our
unfavorable balance of payments, it is itself balanced in
three important aspects.
First -- and most important -- as I have noted, it
includes measures to restrain the domestic economy and to
avoid inflationary pressures which lead to a rapid growth
in imports. While I have indicated that balance of payment
problems today are more complex than those of earlier days,
it is still a matter of highest priority to contain domestic
pressures when demand is growing too fast at home. These
domestic pressures are only one reason for the widening in
the deficit in 1967. But they have exerted a strong
influence on our trade accounts and it is important to
correct them in 1968. It is even more essential to
correct them to avoid a more permanent deterioration in our
competitive cost and price situation.
Second, within the selective part of the program, we have
aimed at a correction of $3 billion. The program calls upon
the capital accounts for approximately half this total. It
looks for an improvement of another $1-1/2 billion in three
elements of the current accounts -- governmental outlays,
tourism, and the removal of trade disadvantages ar1S1llg
from border tax and non-tariff barriers imposed by foreign
countrie s.
Third, the program deliberately aims at reducing the
impact of adjustment on countries least well able to bear
it and placing most of that impact on countries in surplus
and in strong reserve positions. That is the primary reason
for the selectivity in the program and the primary reason
why it will have much of its impact on Continental Europe.
The program is selective, but it is selective in favor of those
parts of the world which should be favored -- it is not
selective for the advantage of the U. S.
Over the years our deficits have to a very large extent
been reflected in a corresponding surplus on the part of
Continental European countries, particularly the advanced
countries of the European Economic Community from 1958
to 1966. The European Economic Community countries alone
had surpluses on non-monetary transactions equal to about
four-fifths of the U.S. deficit, Over the past 17 years,
- 7 -
the industrial countries of Continental Europe accounted
for 82 percent of the total growth in reserves of all
countries outside the United States.
I have spent rather a long time stressing the need to
correct the imbalance in the international payments of
the U. S. and the reasons underlying the structure of
the program designed to achieve this end. I turn now to an
equally important point -- the action and response of countries
affected by the program.
It is, of course, a simple arithmetical fact that,
after adjustment for world reserve growth, elimination of
a deficit requires either equivalent elimination of a
surplus or the emergence of deficit elsewhere. The
reduction in the American deficit -- and the U. K. deficit
automatically requires adjustment somewhere else. In
addition, measures taken to reduce deficits have
deflationary effects -- unless these are offset by
expansionary actions, there is danger of some diminution
in world economic growth.
It is because of these effects that the U.S. was anxious
to explain and describe its new program at first hand to the
other nations of the world. In Europe, two missions visited
most of the capitals in the first week of January for this
purpose. There also have been multilateral discussions in
the GECD, both in the Economic Policy Committee and Working
Party 3.
The response of our partners to these presentations has
been responsible, constructive and generally satisfying. There
is recognition that the U.S. deficit should be corrected in the
interest of maintaining a sound international monetary system.
Thus, the U.S. program is regarded as necessary and the fact
that it is a strong program is welcomed.
There also is strong support for the recommended internal
measures to restrain growth of demand. And in this connection
it is notable that, virtually without exception, our friends in
Europe and in the GECD advise us to exercise domestic restraint
through tax-expenditure policy rather than through monetary
policy -- although there is recognition that stronger monetary
policy action may be required if fiscal policy is not adequate.
- 8 -
Third, there has been broad acceptance of the principle of
geographical selectivity in the light of th,= situation as it
exists. Surplus countries recognize that it is better policy
to reduce surpluses than to shift the U.S. deficit to countries
in equilibrium or in deficit.
Fourth, and most important, Europe has gone a long way
toward recognizing that the U.S. program, alongside that of
the U.K., will require comp2nsating policy actions on the part
of countries now in a strong international financial position.
This is needed not only to facilitate the correction of the
persistent imbalances but also to assure the continued progress
of world trade and business authority. There is wide recognition
that this requires:
(A)
Acceptance of the disapp2arance of past balance
of payments surpluses and possibly some
temporary reduction of reserves.
(B)
An offset to the consequent tendency of
European economies as a whole to fall below
a satisfactory level of growth, through expansionary measures that will compensate for
the lost stimulus from the persistent
balance of payments surpluses.
(C)
Monetary and related p~licies that will counter
tendencies to unduly high interest rates and
sustain domestic growth as well as facilitating
larger outward movements of investment and banking funds.
- 9 -
a
Parenthetically, on this latter point, our measures in the
field of capital will increase the demands upon European sources
of financing, including the Euro-Bond Market. The fact that
this demand has already appeared reinforces other evidence that
the measures to restrain capital outflow are achieving their
objective in shrinking our deficit. Fortunately, European
countries appear to be refraining fro~ measures that would
tighten their capital markets and raise their interest rates,
and some countries have given major assistance to the supply
of funds in the Euro-Dolla'r Market. Here in Belgium we have
seenconstructive measures taken to make domestic financing
more readily available to meet the needs of American affiliates
so that they can continue their physical programs of investment,
which are vitally needed in parts of the Belgian economy. The
U.S. Government, on its side, has been aware of the need for
granting special authorization, or exemptions, to those
companies which were caught by the new investment regulations
in the middle of expansionary programs or with firm prior
commitments. Thus the disruptive effect on U.S. investment
in Belgium, as elsewhere, has been minimized.
Finally, there ~as been a very general realization that
the elimination of persistent deficits and surpluses will
bring horne the need for international action to create supplementary reserve assets to assure an adequate growth in the
world's reserves in the years ahead.
I cannot close these remarks without again paying tribute
to the contribution made by the Belgian authorities to the
long negotiations that have given rise to the special drawing
rights in the International Monetary Fund. Moreover, in this
year's annual report, the National Bank of Belgium has made
clear that it looks upon these special drawing rights as a
supplement to international reserves which will over time take
a larger role, relative to gold, in the international monetary
system. The Bank sees advantages in relying upon a source of
supplementary global reserves which is related to balanced
growth in the world economy, and not subject to the uncertain
supply of new gold for monetary purposes. Corning from this
widely respected Belgian institution, with its tradition of
- 10 conservative finance, this statement is an important accolade
for the special drawing rights, as we approach the time of
launching of the new asset.
It is an excellent augury, and
a tribute to the foresight and constructive spirit of the
Belgian financial leaders.
Despite recurrent rumors in the financial markets, solid
progress has been achieved during the past six months. We
have had the approval of special drawing rights at Rio de
Janeiro. We have passed through the heavy speculative aftermath of the sterling devaluation. The United States has
introduced a severe balance of payments program, and Europe
is reacting in a cooperative way. World trade is rising again,
and the European economies are moving forward more rapidly.
While there are still uncertainties ahead, an eventful six
months has passed with not inconsiderable progress in the
international monetary area.
It is essential that we maintain that progress. The
international monetary s'ystem that has served us so well for
the past twenty years requires the change that will come with
the delib0rate creation of the new special drawing rights.
When these come illto being, the system will no longer be
dependent for new reserves upon new supplies of monetary gold
nor upon deficits in th0 balances of payments of the
rcscrvL' currencies. Those features led to instability in the
system which 't\las shown in the aftermath of the shock of sterling
dcval~ation. That instability was one of the principal reasons
for the strong American balance of payments program announced
on January 1. But on thf' other h;nJ(j, an equally principal
reason why the new American progrdl1l could be launched was the
fact that new reserve ass(>t cn.'dtion machinery was close to
coming into being. The U.~. and tll(.~ U.K. programs will lead
to reduction in Lhe rate of international reserve growth,
perhaps even to db:-:olute reduction in the volurr:~ of world
reserves. When UK' llC'W machinery is operativ(', that
reduction L:dll be offset, and steady and internationally-
- 11 -
planned additions to world reserves can be made with the new
special drawing rights.
In the interim, while the new plan is perfected
technically -- which should be very soon, by the end of
this month -- and while it is being ratified by the vari6us
national legislatures -- which will take some months -- the
C'xisting system may hdve to weather some shocks. These
shocks seet:! to t alec their most notable form in sporadic
~)peculati.v(' buying of gold -- apparently in the reli.ef that
the price of loLd might be changed.
This belief is, of course, Jbsur(J. The pr'L~scllt monetary
system rests upon the convertibility of dollars held by
monetary authorities into gold at the fixed price of $35 per
ounce. The United States has not the slightest intention of
changing either the price of gold or its pledge to convert
dollars into gold. Furthermore, the countries of the world
have worked hard and long to produce a plan for controlled
reserve asset creation by international decision in order to
free themselves from dependence upon new monetary gold
supplies or destabilizing payments imbalances for new
reserves. With th~ goat close to achievement, they simply
will not permit this new and better system to be lost by an
unnecessary and undesirable gold price change that would
solve no problems but merely create new ones.
The important gold pool countries have made their position
in this matter abundantly clear. The present system is strong
enough to withstand the shocks. The new system will be
impervious to them. And the adjustment of payments imbalance
in the world, as the U.S. and the U.K. move toward equilibrium,
facilitated by the responsible policies of their strong
surplus partners, will bring ever closer the new and
stronger international monetary system.
000
TREASURY DEPARTMENT
RELEASE 6: 30 P.M.,
day, March 11, 1968.
RESULTS OF TREASURY'S WEEKLY BILL OFFERING
Tbe Treasury Department announced that the tenders for two series of Treasury
.1s, one series to be an additional issue of the bills dated December 14, 1967,
l
the other series to be dated March 14, 1968, which were offered on March 6,
8, were opened at the Federal Reserve Banks today. Tenders were invited for
600,000,000, or thereabouts, of 91-day bills and for $1,000,000,000, or thereuta, of 182-day bills. Tbe details of the two series are as follows:
lGE OF ACCEPl'ED
!PETI TIVE BIDS:
High
Law
Average
~
7~
26~
~
91-day Treasury bills
maturiE8 June 13~ 1968
Approx. Equiv.
Price
Annual Rate
98.721
5.06(ij
98.704
5.127~
98.709
5.10~
182-day Treasury bills
maturi!!ej SeEtember 12. 1968
Approx. Equiv.
Price
Annual Rate
97.335
S.271~
97.300
5.341~
97.310
5.321~
!I
Y
Y
Excepting 2 tenders totaling $112,000.
of the amount of 91-day bills bid tor at the low price was accepted
of the amount of 182-day bills bid for at the low price was accepted
TENDERS APPLIED FOR AND ACCEPl'ED BY FEDERAL RESERVE DISTRICT:
listrict
Applied For
Accepted
Applied For
Accepted
loston
$ 21,155,000 • 11,155,000
14.,619,000
$
3,619,000
lew York
1,767,950,000
1,174,350,000
1,249,311,000
730,811,000
'hllade1phia
36,237,000
14,237,000
13,44:9,000
5,4:4:9,000
leve land
46,316,000
45,036,000
35,505, 000
26, 765,000
.ichmond
15,355,000
12,075,000
10,090,000
5,090,000
tlanta
46,987,000
37,987,000
26,149,000
19,149,000
hicago
195,975,000
123,575,000
186,949,000
88,179,000
t. Louis
52,347,000
34,067,000
31,~,000
20,74:4,000
inneapolis
22,536,000
18,536,000
29,336,000
13,966,000
ansas City
30,582,000
28,582,000
20,022,000
17,022,000
allas
26,799,000
17,799,000
18,331,000
10,591,000
an Francisco
126,453,000
82,613,000 :
107,875,000
59,095,000
TO~
$2,388,692,000 $1,600,012,000
$1,743,080,000
$1,000,480,000 ~
InCludes $271,996,000 noncompetitive tenders accepted at the ave~ price of 98.709
Includes $131,452,000 noncompetitive tenders accepted at the average price of 97.310
'lhese rates are on a bank discount basis. '!he equivalent coupon issue yields are
5.2S~ for the 91-day bills, and 5.5~ for the 182-day bills.
r
EI
F-1l39
,).
_, \.1
TREASURY DEPARTMENT
(
March 11, 1968
FOR IMMEDIATE RELEASE
TREASURY MARKET TRANSACTIONS IN FEBRUARY
During February 1968, market transactions in
direct and guaranteed securities of the Government
investment accounts resulted in net purchases by
the Treasury Department of $64,469,500.00.
000
F-1190
STATEMENT BY THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
BEFORE THE
SENATE FINANCE COMMITTEE
ON
H. R. 15414, TAX ADJUSTMENT ACT OF 1968
TUESDAY, MARCH 12, 1968, 10:00 A.M.
Mr. Chairman and Members of the Committee:
The bill before this Committee contains two parts of
the President's tax recommendations.
These provisions,
incorporated in H. R. 15414, would:
Extend the excise taxes on automobiles and telephone
services beyond April 1 of this year, and
carry out our recommendations for accelerating corporate income tax payments.
The Administration is still strongly in favor of our
full program which would include, in addition, a temporary
10 percent income tax surcharge.
The Ways and Means Committee took action on a bill limited
to these two aspects, without waiting on further decisions,
"In view of the fact that the excise tax reductions,
in the absence of this bill, would occur on April 1, and
the fact that the corporate speed-up to be effective this
year must occur before April 15, .•.. "
The Report of the Committee on Ways and Means further
stated that this action "is not intended to prejudice possible
- 2 future action with respect to other tax recommendations which
have been proposed by the administration."
On the floor of the House, Chairman Mills stated:
"Let me emphasize to the Members of the House that,
in reporting this bill, the committee does not intend to
foreclose possible future action on the administration's
surcharge proposal. The question remains before the
committee and no decision has as yet been reached."
In addition to the excise tax and corporate acceleration
provisions in H. R. 15414, the President's program includes a
temporary 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
ap~ly
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.
- 3 -
The surcharge, I might emphasize, would be 10 percent
of the present tax, not 10 percent of income.
This is about
one-half of the tax decrease for individuals enacted in
1964.
While in effect, the increased tax on individuals
would average about 1 percent of their income.
Speaking for the Administration, I want to emphasize in
the strongest possible terms that we continue to recommend
enactment of this entire program.
It is as fully called for
in the light of recent events as it was by events prior to
January.
We want to see the surcharge adopted under whatever
procedures the Congress chooses to utilize.
are not for us to determine.
Those procedures
The end result should be prompt
enactment of the surcharge.
H. R. 15414
I turn now to the specific bill.
It would raise revenues
compared to present law by $1.1 billion in fiscal year 1968
and by $3.1 billion in fiscal year 1969.
This is about one-
fourth of the $16 billion which we proposed to raise by the
President's program.
The attached table shows the details of the revenue
effects compared to existing law.
You will realize, of course,
that the revenue gain from excise extensions could also be
- 4 -
Estimated Effect of the Bill on Budget Receipts
(In Millions of Dollars)
Fiscal Year
1968
Fiscal Year
1969
Excise taxes -- extension
of present rates:
Passenger
automobiles ............ .
Telephone service ........ .
Total, excise extensions.
Proposals for corporate
estimated tax payments
Total ...................
$
190
116
$1,500
1,160
306
2,660
800
400
1,106
3,060
- 5 described as preventing a loss of revenue that would occur
if the rates were permitted to fall below rates currently
in effect.
Moreover, the speed-up in corporate tax payments
does not involve the addition of new tax liabilities but
rather the more current payment of existing liabilities.
Presently the 7 percent manufacturers excise tax on
automobiles is scheduled to drop as of April 1, 1968, to 2
percent and then on January 1, 1969 to 1 percent.
The bill
would continue the 7 percent rate to January 1, 1970, when
it would be reduced to 5 percent.
The bill would provide
further reductions to 3 percent on January 1, 1971, to 1 percent on January 1, 1972, and repeal the tax on January 1, 1973.
The new schedule for reductions follows the pattern established in the Excise Tax Reduction Act of 1965 to limit
prospective reductions at anyone time to not over 2 points.
This three stage reduction program in the bill recognizes that,
with anticipation by consumers of a sharp drop in the automobile excise tax rate, there is a high likelihood they will
postpone purchases of cars.
This could be highly disruptive
of orderly production and employment.
The House bill also goes back to the 1965 decision to
make the reduction of rates effective on January 1.
Reductions
- 6 -
at this time of year should have the least disruptive effect
on sales.
There is usually a rush of orders for new cars in
the autumn, and dealers fall behind in meeting them.
Orders
come in more slowly in January so if some orders are postponed from the autumn to January it is likely to involve
smoother rather than more disorderly production schedules.
The bill also deals with the tax on telephone service
which is now 10 percent and is scheduled to be reduced to
1 percent April 1, 1968, and to be repealed on January 1,
1969.
This tax would be extended at the 10 percent rate to
January 1, 1970, reduced to 5 percent at that time, further
reduced to 3 percent on January 1, 1971, to 1 percent on
January 1, 1972, and repealed on January 1, 1973.
CURRENT PAYMENT BY CORPORATIONS
Another part of the President's program, which is
embodied in H. R. 15414, is two provisions which have the
effect of placing corporations on the same basis of current
tax payment that now applies to individuals.
Presently, individuals, including sole proprietors and
partners, are required to pay in current quarterly payments
80 percent of their estimated tax liability.
Corporations,
- 7 however, need only make current quarterly payments on 70 percent of the estimated tax liability in excess of $100,000.
The bill achieves equality between corporations and
individuals in two steps:
(1)
Effective with the quarterly payments due April 15,
1968, corporations will be required to make current payment
on the basis of 80 percent estimates rather than 70 percent
estimates.
(2)
Effective with quarterly payments due April 15,
1968, corporations will take the first of five annual steps
designed to eliminate the exemption from current tax payment
on the first $100,000 of estimated tax.
This will be done by
requiring that the 1968 current payment include 20 percent of
the first $100,000 of liability.
The 1969 payments will
include 40 percent of this first $100,000 and so forth until
1972 when corporations will be on the same basis as individuals.
This change in corporate tax payment provisions will
finally achieve an objective sought in a series of actions
taken by the Congress dating back to 1950.
The progressive
steps in moving corporations toward the same payment basis
applicable to individuals have been gradual so as to avoid
sharp liquidity effects.
- 8 There is no reason to permit small and medium sized
corporations to defer all or a substantial portion of their
tax while requiring current payment by unincorporated businesses.
By far the overwhelming part of small business is
made up of sole proprietorships or partnerships.
In 1965,
of the 8.6 million businesses with net incomes, 7.9 million
were sole proprietorships and partnerships or Subchapter S
corporations (where taxes are paid currently by the shareholders).
A corporation with $100,000 of tax liability, that is,
one that gets full benefit of the current favoritism, would
ordinarily have assets in the area of $1 million.
The
striking inconsistency of the present law is implied by the
fact that a moderately successful partnership or proprietorship can achieve a continuous postponement of virtually a
full year's tax by the simple device of incorporating.
This measure achieves equal treatment between incorporated and unincorporated businesses by moving corporations
to the basically sound system of keeping their tax accounts
current.
As the House Committee Report indicates, current
payment is frequently a net advantage to a business firm
- 9 which might have otherwise failed to make adequate provision
for tax payments.
The House bill has several technical changes regarding
tax payments:
it makes provision for quick refunds for
corporations after the end of the year in those cases where
their estimated tax payments significantly exceed their tax
liability; it eliminates declarations of estimated tax by
corporations, leaving this entirely to the deposit system;
and it prescribes rules regarding mailing of deposits.
THE GENERAL FISCAL SITUATION
I believe it is appropriate to lay before you the general fiscal situation, as the background for this bill, and
to relate that situation to the entire fiscal program of the
President of which the excise recommendations and the current
tax payment recommendations are a part.
The United States economy -- a mighty engine of production and distribution -- is roaring down the road.
It is
entering the eighth year of a record-breaking advance, having
weathered the inventory adjustment which slowed it to half
speed in the first half of last year.
But the ride is neither smooth nor safe.
Rising infla-
tionary pressures and a disturbing deterioration in our
international balance of payments signal a clear and present
- 10 -
danger that the economy is overheating and running at an
excessive rate of speed.
Given a high employment economy with heavy defense costs
at home and abroad, some inescapable increasing costs of
civilian government, and a private sector advancing on a wide
front, the acceptance of enlarged deficits in the budget and
the balance of payments is contrary to sound economic and
financial policy -- whether the wisdom is conventional or
the new economics.
Accordingly, the driver is trying to
brake the vehicle to a safe cruising speed.
That is the meaning of the President's request last
August for a substantial tax increase and a reduction in
many Federal outlays for fiscal year 1968, his tough and
courageous New Year's Day Balance of Payments Action Program,
and the austere budget for fiscal year 1969 presented a month
ago.
I want to express here a strong personal conviction.
It is shared by the President, his entire Administration,
the Federal Reserve Board, and the vast preponderance of
expert economk and financial opinion decision makers here
and abroad -- public and private.
-
L1 -
34
That conviction is that this is a year in which economic
and financial policy should h0 rllrected toward reversing
decisively the trend in lc)6-; t,l : ,;,:reasing deficits in our
interna 1 budget and our intern;ll1lma 1 ba lance of payments.
We should move back toward balD,-ce in our budget and our
international payments -- and thereby assure a balanced
economy, properly poised and positioned, to discharge our
national and international responsibilities -- in war or
peace -- at home or abroad.
With this Nation engaged in a
costly conflict abroad, we must act at home so as to maintain
the stability of the economy and the strength of the dollar.
A continued acceptance of these twin deficits in their
current proportions under the surrounding circumstances is
to
forsake prudence, accept intolerable risks and refuse to
accept the fiscal and monetary discipline essential to the
preservation of a balanced, sustained prosperity.
These observations bring us hard up against the outlook
for our Federal budget which will be the subject of comments
by Mr. Zwick, Director of the Budget.
I would like to add, however, a few words of my own.
I share the general concern that the totals of budget
expenditures are increasing.
But I must point out that this
- 12 fact does not diminish the desirability of a tax increase
to help finance the war in Vietnam out of current revenues
rather than borrowed money.
Our annual expenditures for our efforts in Vietnam
amount to about 3 percent of our gross national product.
Other outlays, exclusive of social insurance trust funds,
have been declining as a share of the Nation's income and
output in recent years.
In 1969 they stand at 13.9 percent.
In the last three years of the 1950's they were 16 percent.
In 1965 they were 14.6 percent.
It is not the rise in regu-
lar budget outlays which requires a tax increase but the cost
of Vietnam.
Of course, one can debate at length whether the budget
outlays in the 1969 budget for controllable civilian programs
should be substantially reduced.
But we must remember as we
keep debating that time is still running, and every day that
passes without the tax increase adds about $33 million to the
deficit.
The tax program now comes to $16 billion over the fiscal
years 1968 and 1969 and will reduce the deficit by that
amount.
It should be passed promptly regardless of the out-
come of the long-drawn-out debate on expenditures now beginning.
- 13 No amount of debate or budget cutting that is likely to
emerge is a realistic alternative to a tax increase for meeting our obligations at home and abroad in that amount.
To sum up on the budget for fiscal year 1969 -- it is a
responsible financial plan placed on a base of expenditures
for fiscal year 1968 rigidly scaled down by joint Executive
and Congressional action as recently as December 1967.
It
represents a hold-down in controllable expenditures in 1969;
the revenues from the requested tax increase will contribute
to the reduction in the deficit, not to rising expenditures;
and it does give assurance that the tax increase will be
temporary and can and will be removed when hostilities in
Vietnam corne to an end.
We must not forget that we are a Nation involved in a
war.
This involvement has had its obvious and direct effect
on the budget and in turn on the need for a tax increase.
We cannot mistake the connection between the tax increase
proposals and the costs of our efforts in Vietnam.
It is not the rise in regular budget outlays that requires
a tax increase but the cost of Vietnam.
The increase in budget
receipts from economic growth since fiscal year 1965 would
alone more than cover the increase in non-Vietnam costs.
What
- l4 is left to be financed is the cost of Vietnam.
In the
January Budget this was put at about $26 billion for fiscal
year 1969, and we are asking that one-half of this be met by
tax increases.
Meeting part of the cost of war through tax
increases rather than just through borrowing is the path of
fiscal responsibility, and this path we have followed in
those troubled times in the past when we found ourselves at
war.
So much for the principle.
I want to turn now to the
more specific discussion of the immediate situation, that
without tax legislation we would have a deficit of about
$22.8 billion in fiscal year 1968 and $20.9 billion in fiscal
year 1969.
Permitting this level of deficit -- two $20 billion
deficits back to back -- would incur intolerable risks for the
United States in the light of
Our present domestic economic conditions,
our financial situation, and
our balance of payments problem.
ECONOMIC CONDITIONS
Deficits of over $20 billion in each of fiscal year 1968
and fiscal year 1969 would involve intolerable risks of inflation in view of the current economic conditions.
- 15 During the fiscal year 1967, there was some slack in
the private economy associated with a decline in inventory
investment, a lower level of housing starts, and an interruption of the plant and equipment boom.
Since the summer
of 1967, however, these factors have been reversed, and the
economy has been moving in very high gear.
This is plainly
evidenced by the rate of growth in output and prices in the
last half of 1967 when real output grew by a 4-1/2 percent
annual rate, and the general level of prices rose at an
annual rate of 3.8 percent.
It is not a question of whether some economic indicator
went up "only" half a point last month or even held steady,
or whether some other indicator has dipped slightly below
the record high it set last month.
The important thing is
the level and general direction of the total economy.
The
economy is operating at high levels of capacity and is generating high rates of quarterly growth of GNP, $16 billion in
each of the last two quarters of 1967.
An obvious aspect of the overall economic level, in addition to the fact of sharp price increases in the last eight
months, is the rate of unemployment which is the lowest it
has been since the inflationary conditions of the Korean War.
- 16 -
3~
If one looks at the unemployment situation, moreover,
unemployment of men over 20 was 2.2 percent at the end of
1967.
In the substantially full employment that existed in
1956, this rate was 3.4 percent.
For 1953 when the total
unemployment rate was 2.9 percent, the rate for men over 20
was 2.5 percent.
What is clear is that at current levels of
output we are making maximum use of our skilled work force.
What has been happening over these last eight months
is that demand has been fueled by a Federal deficit running
at a rate which, without a tax bill, will bring it over $20
billion for the year.
This rate at which demand has been
increasing for the last eight months is simply too high for
an economy in which unemployment is well under 4 percent.
Our fiscal program including provisions for the revenues
provided in the bill before you plus the income tax surcharge
of 10 percent was designed to hold the growth of total GNP
in 1968 to about $60 billion.
At that rate the increase in
1968 will be only a little lower than it has been in the last
half of 1967, but we will be able to get the trend of prices
- 17 under control.
We will be able to enter 1969 with a declin-
ing rate of price increase and not an increasing one.
A
substantial increase in fiscal restraint is thus necessary
to move toward price stability in 1969.
If the present rate
of inflation is permitted to grow, this will sow the seeds
for more inflation in 1969 as wages and everything else
tries to catch up.
We must recognize the fact that we live in an uncertain
world abroad and at home.
Regardless of any international
developments that might require increased government expenditures, deficits over $20 billion running two years in
sequence do not represent fiscal responsibility.
-18FINANCIAL MARKETS
Failure to enact the President's tax program will
jeopardize the financial markets.
Interest rates are
generally at or above the peaks reached in the financial
crunch of 1966, and at that time the Federal Government's
credit demands were contributing very little to credit
tightness.
The heavy sales of securities by the Federal Government were a major factor in the rise in interest rates in
1967.
In the last half of 1967 the Federal sector borrowed
from the private sector $18 billion compared to the more
normal $5 billion in the last half of 1964, 1965, and 1966.
In the first half of 1968, even with prompt action on the
President's full program, we may have to borrow up to $5
billion whereas normally in the first half of a calendar
year we are reducing the Federal debt.
Fortunately, the recent rises in interest rates have
not led to the kind of large scale withdrawals of funds
from savings institutions as occurred in 1966.
But currently
available yields on marketable securities are close to the
point where a further rise could trigger significant disintermediation and loss of funds for home construction.
-19The anticipation of continued heavy borrowing of the
Federal Government can only serve to make mortgage lenders
reluctant to increase commitments for future mortgage
Jending.
Prompt fiscal action in the form of enactment of
the President's tax proposals is the best assurance of
continued opportunity for home financing and construction
to avoid a repetition of 1966.
The high rate of economic activity will assure a high
level of private and State and local demands for credit in
the months ahead.
Treasury borrowing demands involved in
continued deficits of over $20 billion involve a choice between permitting a larger rate of monetary growth than we
would like to see or bidding up interest rates to levels
that would foreclose substantial amounts of borrowing by
those borrowers most sensitive to interest rate differentials
and most affected by credit availability -- home builders,
State and local governments, and small business.
It is clear that the magnitude of Federal credit gains
in fiscal year 1969 depends critically on enactment of the
President's tax program.
Without the tax program budget
deficits would be excessive both from the point of view of
economic stabilization and credit markets.
If there is no
-20tax legislation, these borrowing needs would be about $21
billion.
H.R. 15414 would reduce them to about $18 billion.
The President's full program would reduce them to $8 billion.
Failure to take adequate fiscal action and thereby
leaving the burden of fighting inflation to monetary policy
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 BALANCE OF PAYMENTS
Closely following the acceleration of business activity
and the price inflation in our domestic economy that we have
observed in the last half of 1967 has been a sharp deterioration of our international trade surplus which contributed
to the return of our overall payments deficit to a critically
high level.
This return to a large deficit in our own inter-
national payments, combined with the British devaluation and
the subsequent period of heavy gold speculation, represented
a threat to the U.S. dollar and to the international monetary
system as a whole
re~uiring
decisive corrective action.
Just as the tax increase is an indispensable element in
our domestic financial plan for the year ahead, it is also the
keystone of the balance of payments program announced by the
-21President on January 1.
As the President said in his message to the Nation
that day
and sometimes this is conveniently overlooked
by those who say the direct measures are palliatives:
"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
surp 1us. "
Failure to take action here involves a risk both of
immediate further deterioration of our trade balance and
of lasting further deterioration of our competitive price
position internationally.
It would threaten a flood tide
of imports and a loss of export markets.
Too rapid a growth
in economic activity in the United States, giving Americans
more money to spend, would cause a more than proportionate
amount going directly or indirectly into increased purchases
of imported goods.
With the addition of sharp price inflation, the consequences could substantially weaken the United States competitive trade position.
-22The importance of restoration of price
sta't~lity
in
the United States to the maintenance of a functioning international economic community is recognized in Europe as well
as here.
Last December the OECD Economic Survey of the U.S.
stated:
"An irrnnediate concern of the authorities must
be to avoid an excessive increase in demand, which
would strengthen cost price pressures and aggravate
the balance of payments problem. Given the likely
strength of the expansion now developing, this can
hardly be achi.eved without the tightening of fiscal
policy proposed by the President,"
CONCLUSION
Mr. Chairman, when I appeared before the Ways and Means
Committee last August, I warned, in general terms, that we
would have an unwelcome acceleration in prices and deterioration in our balance of payments if the surcharge were not
passed.
If I had predicted that, in the absence of the sur-
charge, the general price level would rise at an annual rate
of 3.8 percent during the last half of 1967, many people
would have accused me of being an alarmist, and yet that is
exactly how fast prices did rise.
Similarly, if I had predicted that imports would rise
at an annual rate of over 16 percent and that exports would
4P
-23-
actually decline by 6 percent between the second and fourth
quarters of 1967, this also would have seemed unduly pessimistic to many people, and yet that is exactly what did
happen to our foreign trade.
Now; I cannot make a precise prediction as to how these
or other variables will move in the next six months, but I
do know that these rates of change are unacceptable and must
be halted.
The restoration of price stability in our domestic
economy and the improvement in our trade position lie in
enactment of the entire tax program of the President.
We face critical times.
war.
We are engaged in an expensive
At home we face and are determined to conquer serious
problems of poverty, ignorance, and urban blight.
Under
these circumstances failure to meet more of our budget through
tax revenues involves intolerable risks for the country to run.
Why must we run these risks?
Why in a period of hos-
tilities should our country weaken itself economically and
financially at home and internationally?
The fact is we know
how these risks can be avoided; there is no obscurity about
either the problems or their solutions.
answer as does the rest of the world.
We at home see the
The answer is to reduce
the deficit by raising revenues to pay for these wartime
expenditures.
-24-
47
The temporary tax increase will give us the fiscal
strength to avoid these risks.
bear the burdens involved.
Our people are well able to
Even after the surcharge in-
dividuals wil 1 be paying tax at significantly lower rates
than the rates in effect in 1963 before the reductions of
1964 and 1965; corporations will be paying at lower effective
rates than they faced in 1961 before the investment credit
and depreciation reform.
And the low income groups are exempt
from the surcharge.
I stress the word temporary.
This Administration has
given ample evidence of its desire to reduce tax burdens on
the American people.
There is no basis for predictions that
a temporary surcharge will remain in effect after the disappearance of the defense needs that give rise to it.
We have
a tax system which will produce a growth in GNP of about 6
percent which is consistent with an expected 4 percent 4-1/2 percent growth in real output.
Without the pressure
of military demand this will provide a large sum to meet our
national goals.
I stress also that this temporary surcharge will give
our domestic economy strength and stability and will not
weaken us.
The international monetary system on which the
-25-
4b
Free World economy is based will be strengthened as the
strength of the dollar is assured.
The welfare of American citizens cannot be measured
merely by the smallness of the tax they pay.
It rests on
the purchasing power of the income they have after taxes
and the value of the services they get from their government.
Our citizens will be treated badly if their tax
bills are held down but they are left with accelerating
jnflation, climbing interest rates, an unstable boom that
could end in a bust, and a weakening of the international
financial system which has been the basis for Free World
prosperity and development since World War II.
The Congress will serve the American people well if it
pursues a wise fiscal policy of substantially reducing the
prospective deficits in fiscal years 1968 and 1969 through
enactment of the President's tax program.
TREASURY DEPARTMENT
4~
.v
March 12, 1968
The attached material was a reply sent to Senator
John Williams on March 4, 1968 in response to his request
for the views of the Treasury Department on bills introduced by him with respect to various aspects of the fiscal
picture, including tax increases, expenditure reduction,
and balance of payments measures.
Senator Williams indicated that he intended to address
questions to Administration officials on those bills when
they testified in connection with the hearings on H. R. 15414
before the Senate Committee on Finance.
In order to provide Senator Williams and the Committee
with a careful analysis of his bills, which could also
provide a framework within which to respond to any questions
on the bills, a reply containing such analysis by the
Treasury Department and the Bureau of the Budget was sent
to Senator Williams prior to the hearing.
Attachment
Su
THE SECRETARY OF THE TREASURY
WASHINGTON
MAR
<1
1968
Dear Senator Williams:
This letter is in reply to your request for the views
of the Treasury Department on your bills, S. 2902 "A Bill
to improve the balance of payments and protect the domestic
economy of the United States", and So 2903 "A Bill to amend
the Internal Revenue Code of 1954 to limit the maximum rate
of percentage depletion to a rate of 20 percent."
Sections 3, 4, 5 and 10 of S. 2902 are within the
direct purview of the Director of the Budget, dealing as
they do with the number of civilian employees, the initiation of public works projects, budget expenditures generally,
and foreign travel by Government officers and employees o I
am therefore attaching a copy of a statement by Director
Zwick commenting on these sections. As that statement indicates, the Administration strongly opposes the provisions of
these sections.
The remaining prOV1Slons in these bills relate to matters within my area of responsibility, and I am commenting
upon them in a statement attached to this letter. In addition to that statement, I would like to make a few overall
observations on So 2902.
The sectic~s of So 2902 within my area of responsibility
cover matters which are the subject of proposals of the
Administration presently before the Congress. The principal
thrust of those sections is in the same direction as those
proposals, and I therefore welcome your support of our objectives. Moreover, for the most part the provisions of your
bill dealing with these matters are substantively quite
close to our own recommendations, so tha-t. -In a num 'J~ of
instances the difference becomes one of (l~:..ail. 'l'h~..ls, Jour
recommendation in Section 2 of the bill for a conti-mation
of existing automobile and communications e-<,:~ise taxes is
quite close to our proposal in this area and to what has
been already adopted by the House o Your recommendation in
- 2 Section 8 of the bill relating to reductions in existing
Customs exemptions is likewise close to the proposals I
presented to the Committee on Ways and Means on February 5,
and which have been the subject of re:ent hearings before
that Committee. Your recommendation tn Section 11 of the
bill to repeal the gold reserve ~equirements for Federal
Reserve Notes parallels legislation now before the Senate
which we strongly support. The recommendation in Section 6
of the bill for a temporary surcharge on individuals and
corporations adopts the same form for a temporary tax
increase that we have been steadily and strongly urging.
Your recommendations in these sections thus deal
directly with the basic objectives of our fiscal program
the reduction of the budgetary deficits that would otherwise
prevail in fiscal 1968 and 1969 to more manageable and
acceptable levels, and a reduction in our balance of payments
deficit. In these substantive areas I welcome and appreciate
your support.
As respects Section 6 of your bill, where you recommend
a temporary 8 percent surcharge on corporations and a 6 percent surcharge on individuals, I would of course strongly
urge that we achieve the temporary surcharge at the 10 percent level recommended in the Budget. A surcharge at that
level will ~dd over $1/2 billion in fiscal 1968 and over
$3 billion in fiscal 1969 to the revenues that would be
obtained under the rates you suggest. I feel that tnis additional revenue is needed to achieve the reductions in the
budget deficits that are desired.
The paramount need is that of achieving legislative
enactment of the requisite revenue-producing measures o We
should also secure that enactment as promptly as possible,
so that delay does not cause us to see revenues keep draining away that a prompt enactment would her", put into '-~e
coffers of the Government. I must leave to the Congress the
question of Congressional procedure involved in obt~ining the
desired legislation. Presumably that procedure is a matter
to be worked out between the leaders of both Houses and the
leaders of their Tax Committees.
BUREAU OF THE BUDGET COMMENTS ON S. 2902
S. 2902, "Balance of Payments and Domestic Economy Act of 1968,"
contains a combination of tax measures and expenditure provisions
lito improve the balance of payments and protect the domestic
economy of the United States." Sor(',e sections of the bill are
similar to proposals made or actions already underway by the
Administration with the same objectives in mind. Other sections,
however, represent unwise, inefficient, or impractical methods
of accomplishing the desired purposes. In total they are a
prescription for inefficient government.
The Bureau of the Budget is primarily concerned with Sections 3,
4, 5, and 10 of the bill; analyses of eaGh of these sections are
presented belm". Sections 3, 4, and 5 are,', :in our view, particularly troublesome. These sections, taken together, are designed
to accomplish an expenditure reduction of $8 billion in fiscal
year 1969. Section 3 calls for a freeze on civilian officers
and employees in the executive branch at the September 20, 1966
level. Section 4 requires a moratorium on public works. Section
5 imposes an expenditure limit of $178 billion in fiscal year
1969.
These sections are undesirable, from the point of view of both
policy anJ administration. To summarize briefly, they would --- require an arbitrary, meat-axe approach to Government
programs and services instead of careful and deliberate programby-program review.
-- fall inequitably upon the activities which are relatively controllable, requiring, in many cases, crippling reductions.
-- cause considerable uncertainty since, if, as the
year progressed, expenditures for uncontrollable programs were
to increase over the estimates, the limited controllable portion of the budget would have to be cut more and more deeply
to keep within the statutory ceiling on total expenditures.
-- transfer from the Congress to the Executive virtually
all decision-making as to which programs to fund and staff, regardless of congressional action through the appropriations
process.
5J
2
Orderly, efficient Government reauires explicit decisions
program by program -- after consideration of needs and priorities by both the Executive and the Congress. Moreover, to be
effective in these rapidly changing times, Government must have
a degree of flexibility.
A statutory expenditure limit, combined with a retroactive freeze on civilian employment and an
across-the-board moratorium on public works, runs counter to
both of these requirements.
ANALYSIS OF SECTIONS 3, 4, 5, AND 10
SECTION 3.
REDUCTION IN EXECUTIVE BRANCH EHPLOYf1ENT
Summary.--During any period in which employment in the executive
branch exceeds the level of employment of September 20, 1966,
no more than 25% of total vacancies occurring may be filled.
The Director of the Bureau of the Budget is required to determine
which vacancies may be filled, reserve from expenditure the savings in salaries and wages and other categories of expense resulting from this action, and make quarterly reports to the Congress
of his activities.
The section would not apply to employees in the Department of
Defense, the postal field service, the Federal Bureau of Investigation, offices filled by appointment by the President with
the advice and consent of the Senate, or to positions filled by
transfer from the same or another agency. However, all such
employees and offices would be counted in the aggregate number
of employees employed September 20, 1966 and the number employed
at any particular time.
The section would take effect April 1, 1968.
Comments.--Total Federal civilian employment in the executive
branch at the end of September 1966 was 2,762,000. The Post
Office and the Defense Department accounted for 1,834,000 and
all other agencies 928,000. The 1969 budget estimates of employment were based on careful review and determination of the minimum numbers of employees essential to support the proposed program
levels. The estimates indicate an increase of 315,000 in June
1969 above the September 1966 level. Post Office and Defense
will account for 207,000 of this increase and all other agencies
will account for the balance of 108,000.
Since the provisions of section 5 about not filling 3 out of 4
vacancies do not apply to the Post Office and the Defense
Department, but their numbers are included in the totals, employment
54
3
in the rest of the Government agencies would have to be reduced
below the level of September 20, 1966 to the extent that the
Defense Department, the Post Office and the Federal Bureau of
Investigation exceed their September 20, 1966 level. Therefore,
the other Government agencies ,~ould have to reduce employment
not only by the 108,000 by \~hich they are estimated to increase,
but also by the 207,000 that the Post Office and Defense Department are estimated to increase.
A reduction of some 315,000 employees in those agencies is in
excess of 30% from the estimated June 1969 level and more than
200,000 below the September 1966 employment level which section
3 is designed to maintain~ This would completely disrupt the
functions of Government.
Section 3 appears to give discretion to the Director of the
Bureau of the Budget as to which vacancies should be filled, but
in reality the Director would have little or no discretion.
Neither the President, the Congress, nor the public would want
air safety jeopardized, for example. The choice would then be
to limit air travel or to increase employment in the Federal
Aviation Administration. The effect of section 3 would be that
for each person added by the Federal Aviation Administration,
four vacancies elsewhere would have to go unfilled. If employment were to be merely held level at FAA, all vacancies in
FAA would be filled, and for each vacancy that occurred and
was filled at FAA three vacancies must be left unfilled elsewhere.
Similarly, programs such as social security or Medicare must
handle all of those who are eligible. Accordingly, maintaining
or increasing employment in the Social Security Administration
to cope with rising workloads would mean that four times the
number of increases and three times the number of vacancies
filled at the Social Security Administration would have to be
left unfilled elsewhere in the Government.
Long before the Director could satisfy requirements of the
Federal Aviation Administration, social security, and other
important activities, such as law enforcement, veterans'hospital care, and civilian agency support for Vietnam operations,
the number of vacancies that legally could be filled would undoubtedly be exhausted. The result would be that a large
number of agencies would be forced to drastically curtail or
eliminate services to the public.
Section 3 completely disregards the fact that demands for Government services are increasing and that there must be additional
employees to handle the resulting increased workloads.
55
4
For example, it is estimated that the number of establishments
requiring Federal meat inspectors will increase by 78% in 1969.
The only alternative to permitting uninspected and perhaps unwholesome meat to pass to the consumer is to increase the number
of inspectors. Similarly, additional employees are necessary
for projected increased services in 1969 such as:
Loans to small business -- up 21%.
New Federal manpower programs aimed at both the
urban and rural disadvantaged -- a 20% increase
in program level.
Maintenance of air travel safety while air traffic
significantly increases -- landings and takeoffs
at airports with FAA towers will increase 15%.
Processing of mortgage insurance applications to
the Federal Housing Administration by prospective
homemmers -- expected to increase by 100,000.
Disposition of 4% more patent applications in the
Commerce Department.
•
Handling of complaint applications concerning
monopolistic and unfair trade practices -- up 7%.
Disposition of slectric rate filings to the Federal
Power Commission -- up 4.4%.
•
Adjudication of air carrier rate and fare cases -up 16%.
Disposition of applications for motor carrier operating authority -- up 8%.
•
Mediation of unfair labor practice cases -- up 7.5%.
Handling of 112 million tax returns by the Internal
Revenue Service -- up almost 3 million.
In the face of these workload increases, it is apparent that
appropriate action with regard to Federal emplo~nent is not
to impose arbitrary and disruptive decreases, but to limit increases to what is essential. This was the policy pursued by
the President in his 1969 budget.
The selection of the month of September for the base period in
section 3 would cripple the regular and special summer activities
of the Government. These include programs to accommodate visitors
56
5
to the national forests and parks, construction activities in
agencies such as the Corps of Engineers and Tennessee Valley
Authority, the President's summer program for disadvantaged
youth, etc. Host temporary summer employees have left the
rolls by September.
section 3 requires the Director of the Bureau of the Budget to
decide which vacancies should be filled.
The number of vacancies occurring each year, apart from Defense and Post Office,
is about 250,000. For the Director to carry out this function
on any but a generalized basis would require a considerable
increase in staff.
Employees of the executive branch of the Federal Government are
hired to carry out the laws enacted by the Congress and at levels
of activity determined by the Congress. The effection of section 3 would be to require the Director of the Bureau of the
Budget to decide which of those laws should be ignored or only
partially carried out.
It would be more appropriate for the
Congress itself to make those specific determinations through
normal legislative processes.
SECTION 4.
.
MORATORIUH ON PUBLIC WORKS PROJECTS
surnrnary.--This section has four principal provisions:
From the date of enactment and during the time in which a tax
surcharge is in effect, no Federal agency shall:
initiate the planning or construction of any public
works project (excluding highway projects), or
make any grant to any State or local government
agency for initiating planning or construction of
any such projects.
Planning or construction of new projects may proceed only when
the Director of the Office of Emergency Planning, after investigation, determines that a delay in planning or constructing such
projects would caus,e irreparable damage to the "public health
or welfare."
The Director of OEP is required to investigate all public works
projects (except highway projects) being planned or constructed
on the date of enactment to determine 'I,.,hich projects can be
temporarily halted without causing irreparable damage to the
public health or welfare.
No Federal agency shall continue the planning or construction
of Federal projects or make any grant for continuing planning
or construction of State and local projects if the Director of
OEP determines that such projects can be temporarily halted.
57
6
Comments.--The proposed moratorium on public works projects
would be costly and difficult to administer.
It would reauire
uneconomic actions to stop many worthwhile projects already
underway if large reductions in expenditures were to be
achieved.
The intent of S. 2902 in restricting new public works construction starts may be only slightly more limiting than the
President's recommendations in th~ 1969 budget. The budget
proposes very few new direct Federal projects other than those
essential to the national defense and health and welfare of
the public, and holds going work to a minimum level.
The principal difference from the President's recommendations
is the intent to halt going projects. In this respect, the
bill goes far beyond actions taken in the Korean crisis, when
contracts were generally allowed to be completed on less
essential projects before placing the projects on a standby
basis. The present bill would require cancellation of existing
contracts.
~IDre
specifically, section 4 would create the following difficulties:
First, the proposal to stop projects under construction would
be economically wasteful and costly to the Federal Government
and to State and local governments. It would require additional costs to place projects on a standby basis and would
subject the Federal agencies to damage claims for cancellation
of construction contracts. The econofuic waste would apply also
to Federal grant prosrams whenever additional grants would be
necessary to complete a project already underway.
Second, thp
~~uJosal
to stop planning on projects (even though
is not yet underway) would severely damage Federal
and State and local construction programs with very little
~aving in Federal expenditures.
Halting of planning work would
result in the loss of highly skilled agency staff who could not
easily be replaced when the Federal construction program was
resumed. In addition, deferral of plannir.c could 5~~air later
effectiveness and timing of resumption cf ;:·du.-al r'~Qlic v.'Orks
construction if this were deemed desir2ble to f2~~Jit2te post\'ar adjustments.
construct~on
Third, determination of which projects could he undertaken
wit) in the phrase "essential to the public he Ith or welfare"
would be controversial and time-consuming. Without clear
definitions, the bill would be difficult to administer fairly
and efficiently.
58
7
Fourth, investigation of the projects being planned or under
construction before a determination to stop a project would
require a time-consuming investigation period. The application of the moratorium to all going projects could well take
several years, by which time some of these projects would
already be completed.
If an investigation of going projects
were to be required, it is questionable whether OEP is the
proper agency to review the agencies· proposals and make the
final determination as to what is "essential to the public
health and welfare. 1I
Fifth, there is no clear reason why the Federal highway construction program should be excluded from the moratorium, since
in many cases highways could as well be delayed as public
buildings, educational facilities, water resources projects,
and other projects beneficial to the domestic economy. Moreover, the provisions of section 4 appear to limit the exclusion
to direct Federal highway projects and do not mention the
exclusion with reference to grants to states or local governments. Most of the high\Vay program is, of course, financed
through grants from the Highway Trust Fund.
Finally, section 4 has a number of other technical difficulties
which would complicate its administration and in some cases
raise serious questions as to equity in its application to
Federal programs. For example n there is no definition of the
word "project," although this term can be applied with considerably different effects in different construction programs.
It also affects the determination of what is "new work ll or
"work underwayll. No mention is made of Federal loans to state
or local governments, although projects similar to, or complementary to, proj~cts financed by grants are also financed by
Federal loans. Private or quasi-public institutions (e.g.,
educational and health) receive construction assistance through
Federal grant programs, but the bill limits the moratorium to
grants to state and local government agencies.
8
SECTION 5.
EXPENDITURE LIMITATION
summary.--This section of the bill would limit expenditures in
fiscal year 1969' (using the new budget concept) to $178 billion.
This limit would not apply to expenditures in excess of $25 billion for our military effort in Southeast Asia, if the President
determines greater expenditures to be necessary for that purpose
in 1969.
The limit on expenditures is to be accomplished by reserving
amounts of obligational authority heretofore or hereafter made
available.
Comments.--The Bureau of the Budget opposes attempting to hold
budget expenditures to a legally set limit. Such an attempt
presents many serious difficulties, both for the executive branch
and the Congress.
First, the Congress provides appropriations which grant the
Administration power to enter into contracts or obligate money.
Expenditures are simply the process of paying off those contracts
and honoring those obligations. Expenditures alone cannot be
controlled: the initial contracts or obligations must be controlled. An expenditure ceiling does not face this fact -- it
is like locking the barn door after the horse has gone.
Second, an expenditure limitation makes no allowance for uncontrollable changes in expenditures. The President would, of
course, have to make an initial round of program reductions.
However, later in the fiscal year, expenditures could increase
~nd the Administration would be powerless to stop this -- in such
locked-in pro~~ams as interest on the public debt, CCC price
supports, veterans' pensions, and Medicaid, for example. These
:~ncreases would immediately require even further ':uts in other
'Y'ograms which could be controlled -~ aid to education I airway
safety, and health research, for example. As a matter of fact,
if substantial uncontrollable expenditure increases took place
late enough in the fiscal year, some vital programs might be
crippled or might well have to shut down completely to offset
he increases and stay within the legal ceiling.
'.rhird, an expenditure limitation would require a whole new and
The entire Federal accounting
system is set up to control at the point where contracts or
commitments are made. Expenditures-are simply an estimate of
~umbersome set of controls.
bU
9
how rapidly checks will be written as work progresses, planes
are delivered, States draw their grant authorizations, and so
forth. But with a legal limit on expenditures, all the agencies
would have to set up a whole new and wasteful management system
to control those expenditures.
Along· with these very practical problems associated with a
statutory expenditure limit, there are fundamental considerations involving the separation of powers and congressional
processes.
An absolute ceiling on expenditures, as provided in section 5,
would, in effect, transfer most of Congress' pOHers of the
purse to the President by giving him carte blanche authority
to reserve funds made available by the Congress. The President,
not the Congress, would thereby have almost complete authority
to decide whether new or old programs should be funded, and at
what levels.
An absolute ceiling on expenditures, as provided in section 5,
would also completely undercut the congressional appropriations
process. The Appropriations Committees make a careful examination of individual programs. Agency witnesses are questioned
closely and at length on each budget request. The specific
appropriations are considered by the House and Senate as a whole,
~nd normally by conference committees as well, before final
action is taken. section 5 would undo the results of this process
before most appropriations for fiscal 1969 are even enacted, and
w~uld substitute a sweepin~ r: ~-axe approach -- enacting obli.idting authoritYa on the 0;)12 hand, while disregarding it on the
',ther.
There can be no qup< 'Cir.";.LA t,hat a reduction of $8 bill' m from the
estimated level of 'xpenditures in fisca: 1969 woulQ mean sweep:'<:lg reduction':"
programs. To achieve a reduction of that magnitude ",,,ould 2_'equire cutting program levels by rougl,ly double that
lInOunt -- around $16' billion. ~Vhere could reductions of that
~mount realistically or desirably be made?
As noted earlier, there are some programs ~hich are relatively
;m:~ontrollable, under which payments are v~ tu_ally fix(
}-'1
'-tatutory formula in the short term. ThesL 'ncluCie" )cial security
'~dicaTe, and other social insurance trust lunds; veterans' pen:ons; interest on the Federal debt; and publi.c assistance grants.
I.ne Government is both legally and morally Gi.; Liged to make the
,3.~'TI1ents required for these types of programs, unless the authorizin~' legislation is changed.
And these payments are often difficult to estimate, since they involve factors largely outside of
GoverIlm?nt actions.
f
61
10
Our defense needs outside of Southeast Asia were examined with
great care in formulating the 1969 budget. It would not be
possible to effect large cuts in national defense at this point
in time without damage to our national security.
This leaves $39.5 billion of relatively controllable civilian
programs, includinq outlays from prior year contracts and obligations, to bear the full brunt of the reduction -- which could
require cripping and destructive cuts in
elementary and secondary education;
research on cancer, heart disease, mental illness,
and other health problems;
loans for rural electrification, telephones, and
housing:
veterans' medical care;
activities to combat crime;
Internal Revenue Service audits of tax returns;
grants for maternal and child health and welfare;
school lunch, special milk, and food stamp programs;
operation of airways by the Federal Aviation
Administration:
programs for Model Cities and urban transportation:
and
air and water pollution control.
This list could be extended, but the issue is clear. If we
want reductions in these programs of the magnitudes involved
in section 5, the Congress should say so in terms of the specific activities to be reduced.
The President's 1969 budget calls for tight controls on all
programs -- with selective expansions in some areas almost
entirely offset by reductions in other controllable programs.
The expenditure program in the budget is based on a strict review
of national needs and objectives. Coupled with the President's
tax program, it represents a responsible way of meeting our
economic, fiscal, and program requirements.
11
SECTION 10.
LIMITATION ON FOREIGN TRAVEL BY GOVERNr.1ENT EMPLOYEES
Summarv.--section 10 provides that no civilian officer or employee
of any of the three branches of Government may travel in a foreign
country unless the travel is certified as essential by a proper
certifying officer.
The term "proper certifying officer" is defined as:
(1)
The President, for the heads of departments and
agencies in the executive branch, the President pro
tempore of the Senate, the Speaker of the House,
the Chief Justice of the United States, the Justices
and Judges of the Courts of the United States, and
officers and employees in the Judicial branch.
(2)
Department and agency heads, for their officers and
employees.
(3)
The President pro tempore of the Senate, for Members,
officers, and employees of the Senate.
(4)
The Speaker of the House, for Hembers, officers, and
employees of the House.
The section does not apply to travel in a foreign country by
employees whose principal place of duty is in that foreign
country.
The section would remain in effect until termination of the
interest equalization tax.
Comments.--The provisions of section 10 are unnecessary for
reducing fore~1n travel in view of the measures already undertaken in the executive branch.
In a memorandum of January 18,
1968, the President 'directed the heads of departments and agencies
to reduce official travel overseas to the minimum consistent with
the orderly conduct of the Government's business abroad. On
February 14, the Bureau of the Budget issued further instructions
i_n Bulletin No. 68-8. Each agency head ,\'ias asked to take as his
0bjective a reduction of 25% in all overse~c travel to and from
places outside the united States except travel inherent in permanently assigning personnel overseas.
Each agency is required to report to the President a plan covering all of its overseas travel through fiscal year 1969 including
a statement describing the actions taken by the agency head to
reduce overseas travel, the amount that travel is expected to be
reduced by such actions, and reco~mendations as to any additional
measures that might be taken.
63
12
In addition, agencies will make quarterly reports comparing
actual overseas travel costs with the plan previously submitted.
The designations of "proper certifying officer" in section 10
present certain difficulties.
It would be most improper, if
not unconstitutional, for the President to determine whether
or not foreign travel could be performed by the President pro
tempore of the Senate, the Speaker of the House or all of the
Justices, Judges, and officers and employees in the Judicial
branch.
Moreover, the administrative burden required for some agency
heads to certify personally the essentiality of foreign travel
of all employees of their agencies could seriously interfere
with their primary duties.
64
VIEWS OF TREASURY DEE' ARTMENT
ON
S. 2902 (SECTIONS 2, 6, 7, 8, 9, 11) AND S. 2903
(INTROIUCED BY SENATOR WILLIAMS)
This memorandum sets forth the analysis and views of the Treasury
Department on sections 2, 6, 7, 8, 9, and 11 of S. 2902, "A BILL To
improve the balance of payments and protect the domestic economy of
the United States", and on S. 2903, "A BILL To amend the Internal
Revenue Code of 1954 to limit the maximum rate of percentage depletion
to a rate of 20 percent," both introduced by Senator Williams.
s. 2902.
Section 2 of S. 2902 provides a one year postponement of the
scheduled rate reductions for the automobile and communications
excise taxes.
Thus, the reduction from 7 percent to 2 percent of
the excise tax on automobiles, now scheduled for April 1, 1968,
would be postponed until April 1, 1969, after which the rate
would drop to a permanent 1 percent.
The tax on communications,
now scheduled to drop from 10 percent to 1 percent on April 1, 1968,
would be continued at a 10 percent rate until April 1, 1969, after
which the tax would be repealed.
The Treasury, of course, favors postponement of the excise
tax rate reductions now scheduled for April 1, 1969.
We believe,
however, that the provisions of H. R. 15414, "The Tax Adjustment
Act of 1968," in this regard are more aptly suited to our revenue
65
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needs for fiscal year 1969 than the procedure adopted in S. 2902.
Under this bill, which has been passed by the House, the scheduled
excise tax reductions are postponed until December 31, 1969, after
which date a schedule of gradual reductions eliminates these taxes
by 1973.
The continuance of the excise taxes in this manner pro-
duces an estimated $2.7 billion of additional revenue in fiscal
year 1969 over the revenue from these excise taxes if the reductions
take effect as presently scheduled.
Under section 2 of S. 2902,
this revenue yield would be reduced by an estimated $360 million.
In addition, a sudden large drop in the excise tax rate on
automobiles, such as would occur under section 2, produces problems
for the industry.
H.R. 15414 provides for more gradual rate
reductions in order to avoid a significant deferral of automobile
purchases that might take place in the months immediately preceding
a reduction date.
Section 6 of the bill imposes a 6 percent surcharge on individuals and an 8 percent surcharge on corporations.
The surcharge
would be effective April 1, 1968, for individuals (thus producing a
4.5 percent surcharge for calendar year taxpayers for 1968), and
January 1, 1968, for corporations.
The tax would terminate on
July 1, 1969, for both corporations and individuals.
66
- 3 -
The Administration strongly supports a temporary surcharge.
Fbr the reasons indicated and more fully set forth in my statements before the House Ways and Means Committee, we believe that
the surcharge rate should be set at 10 percent as proposed by the
President.
Reduction of the surcharge rate to 6 percent for indi-
viduals reduces the revenue yield from the Administration's proposal by $370 million for fiscal year 1968 and by $2.770 billion
for fiscal year 1969.
Reducing the corporate surcharge rate to
8 percent yields $190 million less than the Administration
proposal for fiscal year 1968, and $580 million less for fiscal
year 1969.
Thus, the rates proposed in S. 2902 reduce the revenue
yield from the proposed 10 percent surcharge by a total of $560
million in fiscal year 1968 and $3.350 billion in fiscal year
1969.
Section 7 of the bill provides for the removal of interest
limitations on Government bonds.
In
1967, the Treasury Department
asked the Congress to redefine Treasury notes, which are not subject
to the interest rate ,ceiling, to include maturities of up to 10
years, and to allow issuance of as much as $2 billion of longer
term bonds without regard to the ceiling.
The Congress amended
this request by restricting the term of notes to seven years and
did not give the Treasury the authority to issue bonds without
6~
I
- 4regard to the ceiling.
We would naturally like to see the recom-
mendations we made last year enacted into the law.
While the
Treasury would not want to issue a substantial amount of long-term
bonds in the foreseeable future because of the current high level
of interest rates and the problem of competing in the market for
long-term mortgage funds, we would have no objection to removing
the ceiling as proposed in section 7.
Section 8 of the bill would reduce temporarily the exemption
from customs duty accorded to returning residents from the $100
and $200 provided in item 813.31 of the Tariff Schedules of the
United States to $25.
On February 5, 1968, I appeared before the Committee on Ways
and Means to present certain legislative aspects to the President's
balance of payments program.
That program includes a recommendation
that the tourist exemption of $100 be reduced to $10 for U.S. residents
returning from countries other than Canada, and Mexico, and the
Caribbean area.
The $10 duty-free gift privilege for articles arriving
in the mails would be' reduced to $1.
These changes (as well as that
provided in section 8) would impose a heavy administrative burden with
substantial increased costs on the Customs Service.
It is therefore
important to alleviate such problems by imposing a schedule of flat
rates of duty.
Thus, under the Treasury proposal, a flat 25 percent
rate of duty plus any tax due would be assessed on all dutiable
68
- 5 articles valued at $500 or less imported by travelers for noncommercial purposes.
Non-commercial mail parcels (and non-
commercial shipments arriving by other means) valued at $250
or less and more than $10 would be assessed a flat 25 percent
duty rate plus any tax due.
A $2 charge would be imposed on
all dutiable non-commercial parcels arriving by mail which are
valued at $10 or less retail.
Articles valued at $1 or less
arriving in the mails or otherwise would continue to be duty
free.
These steps would achieve a balance of payments savings
of about $100 million.
The Treasury, thus, supports the
objective of section 8, but believes that the Administration
proposals deal with the problem in a more comprehensive manner.
Section 9 would encourage the use of excess foreign currencies by offeri,ng them to American travelers at a 10 percent
discount.
However, this would not be available to a traveler
who visited another foreign country unless such travel was
reasonably necessary to reach the country in which the excess
currency was available.
We are opposed to this provision for several reasons.
It
would do little to aid the problem since travel to excess currency
69
- 6 countries is not Significant,lI and the amounts of currency available
are limited by prior agreement.
The United states is bound to obey
the currency control laws and official practices of each country with
respect to its own currency.
The offering of a "bonus" upon conversion
by a traveler would constitute unilateral devaluation of that country's
currency with all the incident results to its economy.
This would
constitute a violation of our IMF obligations with respect to another
D1F member country.
FUrther, it is likely that many of these countries
would hesitate to enter into the P.L. 480 agreements if they were forced
to agree to the discount arrangement for U.S. travelers.
The resultant
effects on our agricultural export program would be much more serious
than any possible gain from the slight increase in the use of excess
foreign currency.
Section 11 of the bill would repeal the gold reserve requirements
for Federal Reserve Notes, United states Notes and Treasury Notes of
1890.
The Administration supports the objective of this section.
On
11 The U.S. on June 30, 1967, owned excess currencies in only
ten countries: Burma, Ceylon, Guinea, India, Israel, Pakistan, Poland,
Tunisia, the UAR, and Yugoslavia. Ninety percent of the total U.S.
holdings of foreign currency of $2.18 billion is in these ten countries,
and sales are presently being made in seven of these. (See table attached.)
While our currency holdings are large in these ten countries, only a proportionately small number of American tourists visit these countries.
- 7 January 22, 1968, the Treasury Department submitted to the Congress
draft legislation to repeal the gold cover requirement which was
introduced as S. 2857 and H.R. 14743.
The House has passed H.R. 14743,
with amendments, and the Senate Banking and Currency Committee has
reported S. 2857.
S. 2903.
S. 2903 provides that the rate for percentage depletion for oil
and gas would be reduced from 27-1/2 percent to 20 percent over a 3year period beginning in 1968.
The present depletion allowance of 23
percent applicable to uranium, sulphur and other minerals would be
reduced to 20 percent over a 2-year period beginning in 1969.
The depletion allowance is a part of this nation's overall energy
policy.
In
his Message last year on Protecting Our Natural Heritage,
the President directed the President's Science Advisor and his Office
of Science and Technology to sponsor a study of our energy resources
and to coordinate our energy policy on a government-wide basis.
This
study is underway and will include an examination of the tax rules
regarding natural resources, including those covered by this bill.
would, I believe, be premature to comment directly on S. 2903 until
the results of that study are completed and its recommendations have
been considered.
It
[.larch 12, 1968
FOR
n~IEDIATE
RELEASE:
The Treasury today announced the transfer of go]
amounting to $450 million from the account of the
Treasurer to the Exchange StabilizatioG Fund.
tran~fer
The
was made to provide the ExchaLge Stabilization
Fund with gold to make settleme~t for its share of ttc
gold operations in February and to provide the
Exchange Stabilization Fund with additional resources
to mee t d irec t
purchase s of gold by fore ign cerctral
banks, anticipated settlemer:ts for gold pool operations
so far in Narch and other
transfer of $100 million
continger~cies.
h:~s
been made in 1968 on
February 6.
000
F-1191
Or.c previous
TREASURY DEPARTMENT
72
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
$2,600,000,000,or thereabouts, for cash and in exchange for
Treasury bills maturing March 21,1968,
in the amount of
$2,506,556,000, as follows:
9~day bills (to maturity date) to be issued March 21,1968,
in the amount of $1,600,000,000, or thereabouts, representing an
additional amount of bills dated December 21 1967 and to
mature June 20,1968,
originally issued in' the amount of
$1,006,112,000, the additional and original bills to be freely
interchangeable.
182 -day bills, for $1,000,000,000, or thereabouts, to be dated
March 21,1968,
and to mature
September 19, 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, March 18, 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
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
F-1192
- 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 Treasuq
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 March 21, 1968, m
cash or other immediately available funds or in a like face amount
of Treasury bills maturing March 21,1968.
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 frOllI
any Federal Reserve Bank or Branch.
000
TREASURY DEPARTMENT
and
FEDERAL RESERVE BOA~D
FOR IMMEDIATE RELEASE
72
1Jashington, D. C.
Narch 14, 1968
STATEMENT BY THE HONORABLE HENRY Ho FOWLER,
SECRETARY OF THE TREASURY, AND
THE HONORABLE WILLIAM McCHESNEY MARTIN,
CHAIRMAN OF THE FEDERAL RESERVE BOARD
The temporary closing of the London market does not
affect the United States undertaking to buy and sell gold
in transactions with monetary authorities at the official
price of $35 per ounce.
We have invited the central bank governors of the
active gold pool countries to consult with us on coordinated
measures to ensure orderly conditions in the exchange markets
and to support the present pattern of exchange rates based
on the fixed price of $35 per ounce of gold.
The central bank governors invited are:
Hubert Ansiaux, Governor, Banque National de
Belgique, Belgium; Dr. Karl Blessing, President,
Deutsche Bundesbank, Gerrnany;Guido Carli,
Governor, Banca d'Italia, Italy; Prof. J.
Zijlstra, President, De Nederlandsche Bank,
Netherlands; Dr. E. Stopper, President,
Banque National Swisse, Switzerland, and
Sir Leslie Kenneth O'Brien, Governor, Bank
of England, United Kingdom.
000
TREASURY DEPARTMENT
IR RELEASE 6 :30 P.M.,
IDday, March 18, 1968
RESULTS OF TREASURY I S WEEKLY BILL OFFERING
'!be Treasury Department announced that the tenders far two series of Treasury
11s, one series to be an additional issue of the bills dated December 21, 1967, and
e other series to be dated March 21, 1968, which were offered on March 13, 1968, were
ened at the Federal Reserve Banks today. Tenders were invited for $1,600,000,000,
thereabouts,of 91-day bills and for $1,000,000,000, or thereabouts, of 182-day
11s. 'nle details of the two series are as follows:
IGE OF ACCEPrED
MPETITIVE BIDS:
High
Low
Average
9l-day Treasury bills
matur 1 ng June 20z 1968
Approx. Equiv.
Price
Annual Rate
98.676 ij
5.238~
98.655
5.32l~
98.664
5.285~
Y
l82-day Treasury bills
SeEtember 19,z 1968
Approx. Equiv.
Price
Annual Rate
97.298 !V
5.345~
97.271
5.39~
97.281
5.378~
maturing
Y
!I
Excepting one tender of $100,000; ~ Excepting one tender of $25,000
~~ of the amount of 9l-day bills bid for at the low price was accepted
61~
of the "amount of l82-day bills bid for at the low price was accepted
'nU. TElIDERS APPLIED FOR AND ACCEPrED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philade Iphia
~:leveland
Ricbmond
~tlanta
~hicago
3t. Louis
finneapol1s
\ansas City
Dallas
3an Francisco
'roTALS
ApElied For
Acce!ted
~ 25,229,000 $5,229,000
1,002,821,000
1,702,621,000
17,777,000
29,777,000
34,009,000
44,009,000
16,249,000
16,749,000
45,800,000
48,800,000
252,480,000
314,280,000
59,540,000
64,729,000
21,788,000
21,788,000
25,362,000
25,362,000
15,902,000
27,532,000
93, 341,z000
138,841,000
$2,459,717,000
Applied For
4,544,000
$
1,325,803,000
13,625,000
34,092,000
10,295,000
38,656,000
165,453,000
34,658,000
17,077,000
18,004,000
21,496,000
164 z098,OOO
$1,600,298,000 ~ $1,847,801,000
AcceEted
4,54:4,000
$
655,803,000
5,625,000
22,942 OOO
9,295,000
31,876,000
84,453,000
26,371,000
13,077,000
17,254,000
ll,496,000
117 z 298, 000
j
$1,000,034,000 ~
Includes $270,318,000 noncompetitive tenders accepted at the aver~ price of 98.664
Includes $123,611,000 noncompetitive tenders accepted at the average price of 97.281
These rates are on a bank discount basis. nte equivalent coupon issue yields are
5.43~ for the 9l-day bills, and 5.61~ for the 182-day bills.
F-1l93
TREASURY DEPARTMENT
7~
I
_
March 17,1968
FOR IMMEDIATE RELEASE
TREASURY AMENDS GOLD REGULATIONS
Pursuant to agreements announced by the central banks
of Belgium, Germany, Italy, the Netherlands, Switzerland,
the United Kingdom, and the United States in Washington
on March 17, 1968, the Treasury Department has issued
amendments of the Treasury Gold Regulations, effective
immediately.
The Treasury will no longer purchase gold in the
private market nor will it sell gold for industrial,
professional or artistic uses.
The private holding of
gold in the United States or by U.S. citizens and companies
abroad continues to be prohibited except pursuant to
existing regulations.
The Gold Regulations have been amended to permit
domestic producers to sell and export freely to foreign
buyers as well as to authorized domestic users.
Authorized
domestic users regularly engaged in an industry, profession
or art in which gold is required may continue to import
gold or to purchase gold from domestic producers within
the limits of their licenses or authorizations in the
Gold Regulations
F-119+
000
TREASURY DEPARTMENT
March 18, 1968
FOR IMMEDIATE RELEASE
UNITED STATES AND VENEZUELA
SIGN $50 MILLION EXCHANGE AGREEMENT
Secretary of the Treasury Henry H. Fowler and the
President of the Central Bank of Venezuela, Benito Raul
Losada, signed a $50 million Exchange Agreement today in
Washington.
The new Agreement will be in effect for two years.
It represents a continuation of monetary cooperation
arrangements between the United States Treasury and the
Venezuelan Central Bank. The first Exchange Agreement
between the two countries was signed in Caracas on
March 18, 1966. The earlier Agreement expires today and
is being replaced by the new Agreement just signed.
The Agreement provides for reciprocal currency "swap"
facilities under which:
The U.S. Treasury Exchange Stabilization Fund
may purchase Venezuelan bolivares in exchange
for dollars, and
The Venezuelan Central Bank may purchase
United States dollars in exchange for bolivares,
Up to $50 million, at times and in amounts as may
be mutually agreed.
The availability of these currencies to the two
countries will increase the ability of their financial
authorities to cooperate effectively in international economic
affairs, and to promote stable and orderly conditions in
exchange markets.
000
F .. 1195
77
I
TREASURY DEPARTMENT
March 20, 1968
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
$2,600,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing March 28, 1968,
in the amount of
$2,502,430,000, as follows:
91-day bills (to maturity date) to be issued March 28, 1968,
in the amount of $ 1,600,000,000, or thereabouts, representing an
additional amount of bills dated December 28, 1967, and to
mature June 27, 1968,
originally issued in the amount of
$1 1 °°3,266,000, the additional and original bills to be freely
in~erchangeable.
182-da~ bills, for $ 1,000,000,000, or thereabouts, to be dated
March 28, 1968,
and to mature September 26, 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, March 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. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
F-1196
- 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 Treasu~
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on March 28, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing March 28, 1968.
Cash and exchange tend~l
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 ~
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 _~e 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 revis ion) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of the ir issue. Copies of the circular may be obtained fra
any Federal Reserve Bank or Branch.
000
?o
I
'•••..:
TREASURY DEPARTMENT
March 20, 1968
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
$1,500,000,000,or thereabouts, for cash and in exchange for
Treasury bills maturing March 31, 1968,
in the amount of
$1,400,376,000, as follows:
27~day bills (to maturity date) to be issued April 1, 1968,
in the amount of $500,000,000,
or thereabouts, representing an
additional amount of bills dated December 31, 1967,and to
mature December 31,1968, originally issued in the amount of
$999,945,000, the additional and original bills to be freely
interchangeable.
36~day bills, for $1,000,000,000, or thereabouts, to be dated
March 31, 1968,
and to mature March 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
(maturi ty value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard time,
Tuesday, March 26, 1968. Tenders will not be received at the
Treasury Department, 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 365
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 bill).
It is urged that tenders be made on the printed forms and forwarded in
the special envelopes which will be supplied by Federal Reserve
Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders
Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
F-1197
- 2 without deposit from incorporated banks and trust companies and from
responsible 3nd 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.
Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on April 1, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing March 31, 1968.
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 bi 11s are exc luded
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 revis ion) and thiS
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained fr~
any Federal Reserve Bank or Branch.
000,
TREASURY DEPARTMENT
March 20, 1968
FOR IMMEDIATE RELEASE
The Treasury announced today that it has transferred
a total of $750 million in gold from the account of the
Treasurer to the Exchange Stabilization Fund.
With this
transfer the U.S. completes its Gold Pool settlements
and replenishes working balances for the Exchange
Stabilization Fund.
(Earlier transfers from the Treasurer to the ESF
this year were:
February 7, $100 million;
March 7, $450 million; and March 14, $200 million.
Today's announced transfer was in two parts,
$350 million on March 15 and $400 million on March 20.)
000
F-1198
TREASURY DEPARTMENT
March 20, 1968
FOR IMMEDIATE RELEASE
The Right Honorable Roy Jenkins, M.P.,
Chancellor of the Exchequer of the United
Kingdom, will be visiting Washington on
Thursday, April 4 and Friday, April 5, for
informal discussions with Secretary of the
Treasury Henry H. Fowler on topics of mutual
interest.
000
F-1199
TREASURY DEPARTMENT
8!
=
)R RELilSE 6:30 P.M.,
March 25, 1968.
~nd&YJ
BESULTS OF TBEASURY I S WEEKLY BILL OFP'ERIBG
'!he Treasury Department announced that the tenders tor two series ot Treasury
ills, one series to be an additional issue of the bills dated December 28, 1967,
Ild the other series to be dated Marc. 28, 1968, which were otfered on March 20,
968, were opened at the Federal Reserve :Banks today. Tenders were invited tor
1,600,000,000, or thereabouts, ot 91-day bills and for $1,000,000,000, or therebouts, ot 182-day bills. 1'be details ot the two series are as follows:
UGE OF ACCEl"'lED
:»lPETI'ltVE BIOO:
High
Low
Average
91-day Treasury bills
_turing June 27 z 1968
Approx. Equiv.
Price
Annual Rate
96.691
5.17Eij
98.689
5.186~
98.689
5.186~
182-day Treasury bills
maturins SeEtember 26 z 1968
Approx. Equiv.
Price
Annual Rate
97.349
5.2«1'
97.310
5.321~
97.320
5.301~
11
11
8~ of the amount of 91-day bills bid tor at the low price was accepted
93~
ot the amount ot 182-day bills bid tor at the low price was accepted
OTAL TERDEBS APPLIED FOR AXD ACCEPrED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philadelphia
Cleveland
Ricbmond
Atlanta
Chicago
St. Louis
MinneapOlis
Kansas City
Dallas
San Francisco
roTALS
AEElied For
ApElied For
AcceEted
9,64:5,000
$ 30,495,000 $
1,358,088,000
2,692,767,000
11,784,000
2:5,970,000
25,728,000
54,780,000
10,221,000
10,227,000
31,610,000
56,513,000
52,886,000
254,309,000
44:,998,000
76,4:78,000
8,081,000
21,081,000
18,683,000
31,435,000
13,108,000
23,508,000
23 z 116 z oo0
151 z 570,OOO
$3,4:27,133,000
$1,608,014,000
$
!I
3,463,000
AcceEted
$
3,383,000
1,390,528,000
12,566,000
27,962,000
4:,105,000
33,062,000
157,811,000
34,232,000
12,844,000
15,553,000
19,"4:,000
124,54:1,000
156,513,000
4:,566,000
19,512,000
4,105,000
18,968,000
79,620,000
18,892,000
6,344,000
11,953,000
9,430,000
67,087,000
$1,836,111,000
$1,000,373,000
!I
Includes $267,673,000 noncompetitive tenders accepted at the average price ot 98.689
Includes $121,303,000 noncompetitive tenders accepted at the average price of 97.320
'l!lese rates are on a bank discount basis. The equivalent coupon issue yields are
5.33~ tor the 91-day bills, and 5.5~ tor the 182-day bills.
F-:pOO
TREASURY DEPARTMENT
March 25, 1968
FOR IMMEDIATE RELEASE
MINT TO STOP ORDERS FOR 1968 PROOF COIN
SETS AND ACCEPT ORDERS FOR 1968 UNCIRCULATED COIN SETS
The Director of the Mint, Miss Eva Adams, announced
today that the Mint will stop accepting orders for 1968
proof coin sets as soon as orders for three million sets
have been received, which is the production limit for
1968.
Orders for approximately 2.8 million sets are now
being processed by the Mint
(San Francisco Assay
Office).
At the same time, Miss Adams announced that
beginning about July 1, 1968, order cards for 1968
uncirculated coin sets will be mailed to all purchasers
of 1968 proof sets.
About July 15, the Mint plans to
accept orders for these sets, which will contain one
coin to each denomination struck for
circulat~on
at the
Philadelphia and Denver Mints, and the San Francisco
Assay Office.
Additional information and ordering
instructions will be released at a later date.
000
STATEMENT OF UNDER SECRETARY OF THE TREASURY
JOSEPH W. BARR BEFORE THE COMMITTEE
ON FOREIGN RELATIONS OF THE UNITED STATES
SENATE ON THE PROPOSED INCREASE IN
THE ORDINARY CAPITAL RESOURCES OF THE
INTER-AMERICAN DEVELOPMENT BANK
ON MARCH 25, 1968, at 10 a.m.
Mr. Chairman and Members of the Committee:
It is a real pleasure to come before you today in
support of S.2975 which authorizes the participation of
the United States in an expansion of the callable Ordinary
Capital resources of the Inter-American Development Bank.
On March 19, the House passed an identical Bill HR. 15364
by a voice vote after rejecting a recommittal motion by
271 to 1260
Proposed legislation on this matter was transmitted
to the Congress by Secretary of the Treasury Fowler on
February 8, 1968.
A Special Report of the National
Advisory Council on International Monetary and Financial
Policies, describing the background
~nd
details of the
proposal and recommending enactment of appropriate
legislation to this end, has also been made aVRilable
to each member of this Committee.
F-1202
- 2 The satisfactory growth of the Inter-American Development
Bank since its establishment in 1959 and its sound develop·
ment financing record have merited the firm support
of three Presidents and of five Congresses, from the 86th
to the present 90th Congress.
In its eight years of
existence, the Bank, in its role as the Bank of the
Alliance for Progress, has made a major contribution
to Latin America's economic and social development.
As
of the end of 1967 it had authorized 448 loans totalling $2,391
million from all of its sources of funds, including 155 loans
amounting to $901 million from Ordinary C8pital resources.
In this process it has helped to mobilize the equivalent of
$3 billion of additional development finance from Latin
American and other sources.
The proposed legislation would, in the words of President
Johnson, "enlarge the borrowing and lending capacity of
this vital Alliance for Progress institution without
requiring the expenditure of United States Government funds."
Approval of this legislation would mark another significant
step forward in reinforcing the Bank's position as the
principal hard loan financing institution of the Alliance
and would enable the Bank to fulfill new responsibilities
with respect to T,atin American regional economc integration
and the financing of multi-national development projects.
84
- 3 -
At their Annupl
~cetin£
in
Ap~il,
l~fi7,
the Board of
Governors of the Inter-American Development Bank unanimously
agreed to recommend to the member Governments that appropriate steps be taken to increase the resources of the
Bank in two ways:
first, by a 3-year increase,
starting
in 1967, in the resources of the Fund for Special Operations
(the Bank's concessional, or soft. lending window) and
second, by an increase in the authorized callable Ordinary
Capital stock of the Bank (for financing the hard lending
window of the Bank) for action this year.
The first
proposal involves an actual expenditure of government funds.
The second proposal, which is the subject of S. 2975, does
not.
The full Congress has already approved (by Public
Law 90-88) United States participation in the increase
of the resources of the Bank's Fund for Special Operations
and this increase is now being implemented.
Today's request deals exclusively with the second
of
the Bank's Board of Governors' recommendations, the increase
in the authorized callable Ordinary Capital stock of the
Bank, and the subscription by member governments -- on a
callable basis requiring no cash payment -- of their
proportionate share of this increase.
- 4 The proportionate share of the United States in the
proposed callable capital increase would be $411,760,000.
Under the terms of the proposal, this amount would be subscribed in two equal portions of $205,880,000 each, the
first by the end of this year, and the second in 1970.
While appropriations will be sought in the relevant
years, the subscriptions, as such, involve no budgetary
expenditure and it is not foreseen that the shares, once
subscribed, will be called for cash payment by the United
States.
(By the Act of January 22, 1964, [PL 88-259) the
Congress approved United States participation of the same
amount in a previous capital increase of identical purpose
and size).
Mr. Chairman, I would like to emphasize the fact
that the callable capital of the Bank is a only contingent
liability of the member countries which can be called
only and to the extent necessary to meet obligations of
the Bank on securities which the Bank has issued for sale in
private financial markets or on guarantees which the Bank
has made.
Otherwise, there is no burden on the member
8S
- 5 -
governmpntR on or tnxpnY('rfl In tTl('ml)('r countrieH.
('All q ~lt(Hll rl
/'V"T
1,(, n'qt1 f n'd.
If
they rnust he uniform in
Cnl13 cnnnot be
pxercised as n
JTl(·.1n~1
of ohtninI.ng cnsh from governmpnta
to Cllrry on norlll'l1 10.1n
On thp
hll~i~; of
(lp('rntion~).
tite contingent 1 inh!l i ty reprcsented
by the cnllnble cnpitnl,
~lich
is in effect
R gU8r~ntee
of
the member countries, tIle Bnnk hns been able to go to the
private mDrkets in Europe Dnd the United States Rnd
successfully place its
O\Yn
securities, the proceeds from
which hnve become 8vailnble to the Bnnk as 8dditionnl
capital for lending operations.
Since 1960, the Bnnk has borrowed in the capital markets
of the United Stntcs,Itnly, Germnny, the United Kingdom,
Switz€'rl:md nnd nelr,iulII.
It hns nlso borrowed from government
llgencics in SP,1 in nnd Jnrnn, nnd from centrnl bnnk!1 in
Lntin Americnn
mClTlh('r
countrLes t Spni.n nnd rsr£lnl through
the 91l1e of short tcnn
hond~.
outstnndinr, nre
$515 Illil 1 ion.
cnpitn!
tH'llrl y
sl1h~criptions.
Totnl borrowings now
Within pr£lscnt
th(' mnximum the B-nk CRn borrow
and hnve outstnnuing is $611.8 million --
II
figure con-
stituting a limit b('cnuse the Bnnk hns convenanted with
- 6 bond-holders not to permit its net borrowings to
exceed the United States share of the subscribed callable
capital.
As of December 31, 1967, the Bank had available for
Ordinary Capital lending $52.4 million in hard currencies,
together with further borrowing capacity of $98.2 million
against the U. S. callable subscription.
The proposed
increase in callable capital is therefore necessary to enable
the Bank to borrow
suffic~
sums in the private capital
market to maintain Ordinary Capital lending at the
$175 million per year level which the Executive Directors
have determined to be desirable for the period through 1970.
Mr. Chairman, I would like to focus on one particu18r
aspect of the Bank's operations of vital interest to us
all
its impact on the U. S. balance of payments.
We estimate the impact of the Bpnk's Ordinary
C~pital
activities on the U. S. Bplance of payments over the l8st
five years to have been favorable in the total amount of
$129 million, or an average of a favorable $26 million
per year.
- 7The Bank recognizes the U. S. balance of payments problem,
however, and has formally and publicly adopted a posture of
full cooperation in this respect.
As one element in its cooperation with the United States
on the balance of payments problem, the Bank has intensified
its efforts in recent years to obtain an increasing proportion of its capital requirements by floating bonds in
capital markets other than in the United States.
To date,
35 percent of the Bank's debt has been raised in non United
States markets.
The
B~nk's
cooperation with respect to the United States'
balance of payments problem is also demonstrated in its
handling of the proceeds from the flotation of bond issues in the
United States capital market.
This cooperation has taken the
form of undertakings on the part of the Bank to invest in
the United States the proceeds from the sale of bonds to
U. S. investors in such manner as to eliminate any effect
on the U. S. balance of payments until the end of 1969.
Under these conditions the Benk's loan flotation in the United
States have no early impact on our balance of paymenC8.
It
- 8 -
is only at a later stage when the proceeds from such
issues are disburaed under loan contracts that the
Bank's Ordinary Capital transactions may affect the
United States balance of payments situation.
These
undertakings to invest proceeds of bond issues in the
United States help assure that the Bank's Ordinary Capttal
operations will have but minimal effect on the United
States balance of payments position.
In October of last year, the Bank's Board of Executive
Directors approved a new program designed to mobilize
additional resources from the developed countries which
are not members of the Bank.
This program makes the use
of Bank funds for procurement in each non-member developed
country conditional upon an appropriate contribution of
resources to the Bank by such country.
It is intended
to provide the Bank with greater access to the private
capital markets of other industrialized countries and the
Bank is vigorously pursuing that end.
The new policy,
while retaining competitive bidding for procurement among
eligible countries, also helps to assure that the
operations of the Bank do not result in an undesirable
effect on the United States balance of payments.
- 9 -
Thelrowth of the Bank's Ordinary Capital, or hard
loan, operations makes an increase this year in the Bank's
authorized callable Ordinary Cnpital stock desirable
and timely.
S~les
of bonds in private markets are now
the Bank's principal source of lendable Ordinary Capital
funds.
Since 1960, the Congress has appropriated $612
million which has remained with the United State Treasury
as a guarantee behind these bonds.
Not one dollar of
this money has ever been spent, but thls guarantee has
enabled the Bank to raise its funds from private sources
.
here and abroad to provide effective support for sound
development projects.
The Bank has given its full cooperation in conducting
:its operations along lines that minimize the impact on the
United States balance of payments position.
Consequently, I urge that you act favorably to
authorize the U. S. Governor of the Bank -- the Secretary
of the Treasury -- to support the proposed increase and
indicate U. S. readiness to subscribe to its share.
I
also urge you to authorize appropriation, without fiscal year
limitation, of $412 million representing the United States
participation in this billion dollar expansion 1n the
callable capital stock of the Inter-American Development
Bank.
000
Q)../
vv
TREASURY DEPARTMENT
R RELEASE 6: 30 P.M.,
~sday, March 26, 1968.
RESULTS OF TREASURY'S MONTHLY BILL OFFERING
'1ll.e Treasury Depar'bnent announced that the tenders for two series of Treasury
Lis, one series to be an additional issue of the bills dated December 31, 1967, and
~ other series to be dated March 31, 1968, which were offered on March 20, 1968, were
~ned at the Federal Reserve Banks today.
Tenders were invited for $500,000,000, or
~reabouts, of 274-day bills and for $1,000,000,000, or thereabouts, of 365-day bills.
~ detaUs of the two series are as follows:
tfGE OF ACCEPl'ED
4PE'l'ITIVE BIDS:
lligh
Low
Average
274-day Treasury bills
maturing December 31 l 1968
Approx. Equiv.
Price
Annual Rate
95.922
5.358~
95.840
5.466~
95.872
5.424~
365-day Treasury bills
maturina March 31 z 1969
Approx. Equiv.
Annual Rate
Price
94.536 ij
5.38~
94.373
5.55~
94.44:9
5.475~
Y
Y
af Excepting 1 tender of $900,000
tl~ of the amount of 274-day bills bid for at the low price was accepted
34~ of the amount of 365-day bills bid for at the low price was accepted
mL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
)1strict
Boston
'lew York
?hiladelphia
~ieveland
Uchmond
~tlanta
~icago
3t. Louis
4inneapolis
Cansas City
~llas
)an FranCisco
'roTALS
Applied For
AcceEted
100,000
100,000 $
$
376,165,000
880,115,000
780,000
4,780,000
5,282,000
7,872,000
546,000
546,000
6,125,000
11,025,000
49,017,000
114,017,000
3,522,000
11,522,000
3,515,000
5,515,000
12,683,000
12,683,000
4:,965,000
11,555,000
37 z330 z000
60 z48002 000
$1,120,210,000
$
500,030,000
EI
Applied For
$ 11,016,000
1,163,188,000
9,254,000
31,090,000
1,570,000
13,135,000
159,589,000
15,453,000
5,700,000
2,985,000
11,545,000
98 z154 z000
AcceEted
356,000
$
749,588,000
2,274,000
24,090,000
1,570,000
13,135,000
99,589,000
11,453,000
5,700,000
2,985,000
7,545,000
81 z834 z 000
$1,522,679,000
$1,000,119,000 ~/
Includes $15,684,000 nonccmpetitive tenders accepted at the average price of 95.872
Includes $31,883,000 noncompetitive teDders accepted at the average prlce of 94.449
'lbese rates are on a bank discount basis. ']be equivalent coupon issue yields are
5.68~ for the 274-day bills, and 5.7~ for the 365-day bills.
'"-1.203
TREASURY DEPARTMENT
Washington
FOR RELEASE AFTERNOON NEWSPAPERS
TUESDAY, MARCH 26, 1968
REMARKS BY THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
BEFORE THE
PHILADELPHIA INDUSTRIAL PAYROLL SAVINGS COMMITTEE
BELLEVUE-STRATFORD HOTEL
PHILADELPHIA, PENNSYLVANIA
TUESDAY, MARCH 26,1968,1:30 P.M., EST
I am honored to be with you as you begin your 1968
Payroll Savings campaign in the Greater Philadelphia/Four
County business community.
The campaign you are starting today, and similar campaigns
conducted by many other public-spirited citizens throughout
the country, are of great and increasing importance to the
sound management of our nation's finances.
In the nearly 27 years since the Savings Bonds program
was initiated, volunteer groups like yours -- the
"Minute Men" of our day -- have written a proud and
inspiring record of achievement. Here in Pennsylvania alone,
you have helped the Treasury sell nearly $12 billion of
Savings Bonds, of which $4~ billion were still outstanding
at the end of 1967.
Last year was a highly successful one for
program.
the Bonds
Nearly $5 billion of Bonds was sold during 1967, making
it the best year in the past eleven. By the close of
1967, the American people held nearly $52 billion in E and
H Bonds, or nearly one-fourth of our publicly-held national
debt.
F-1204
- 2 -
More than 2,700,000 employees were enrolled in the
Payroll Savings campaign in industry and government last
year, surpassing the established goal. Of these new Bond
purchasers, about 2,400,000 were from industry, while
328,000 were enrolled in the Federal agencies campaign headed
by Postmaster General O'Brien.
These excellent results are a tribute to the Payroll
Savings campaigns conducted so ably and enthusiastically by
volunteer groups like yourselves. They show clearly how well
you have told the Savings Bonds story in thousands of plants
and places of business; in union meetings and over the
counters of banks; in newspapers and magazines; in radio and
TV broadcasts, and in motion picture theatres.
As a patriotic and public-interest program, our joint
venture in the sale of Savings Bonds -- in promoting investment
in America -- is a unique enterprise. In no other country of
the world is there anything quite like this cooperative
program of banking, business, education, government, industry,
labor, and the media of communications.
This partnership, this blending of private and government
effort, has served the United States well in the years since
1941. But now, because our country faces grave challenges
both at home and abroad, we must ask it to serve still more
effectively and successfully. Increased sales of Savings
Bonds are more important than ever, to help protect and
preserve our economic strength, and through it, the strength
of the dollar.
And as recent events have demonstrated, there is no more
urgent goal for America than to maintain that strength.
That is what I want to talk about today.
The ability of the United States to sustain strong, stable
and non-inflationary growth is now being severely challenged
and tested by events at home and abroad -- and the outcome is
watched closely by the rest of the world.
And for good reason.
The manner in which we respond to this test will determine
not only our own economic future but that of the entire Free
World as well. The strength of the world economy and the
continuance of a viable 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 exchange rates.
- 3 -
0,
V-4.
The United States has now entered the eighth year of
economic expansion -- the longest and strongest period of
economic growth in our historyo Over the past 20 years,
fueled by a strong U o So economy and a strong dollar as
the principal reserve and transaction currency, the Free
World has made the greatest strides in trade and development
in recorded history.
But a continuation of this progress is menaced by
twin deficits -- in our Federal budget and in our
international balance of paymentso And there is an
overwhelming conviction that this year -- now -- the United
States should direct its economic and financial policy toward
reversing decisively the trend toward sharp increases
in these deficits in 1968.
To continue to accept these deficits under current
circumstances is to forsake prudence, take intolerable
risks, and refuse to exercise the fiscal and monetary discipline
required for the preservation of a balanced prosperity -without which we cannot hope to achieve our goals of peace
and progress abroad and domestic tranquility at home born of
shared opportunities and benefits.
That is not just the view of the Secretary of the
Treasury. It is shared by the President, the Federal Reserve
Board, the Council of Economic Advisers, and the vast
preponderance of economic and financial authorities, private
and public, here and in other lands.
Indeed it is a view shared by many members of Congress
of both parties.
But, as yet, that sentiment has not been translated
into the legislative action that is necessary.
to protect the economic security
of the American people and the
strength of the dollar,
to preserve the international monetary
system for which the United States,
because of the role of the dollar as a
reserve currency, has a special responsibility
and trust"
To meet the challenge before us President Johnson has called
on the nation to act firmly, promptly, and with the highest
degree of responsibilityo He has urge9 "a program of national
austerity to ~nsure that our economy w~ll prosper and that our
fiscal position will be soundo"
- 4 -
~
What are the principal measures the President has asked
us to accept as a safeguard for our continued prosperity and
security? They are:
A temporary increase in taxes amounting to one
penny on every dollar we earn and a temporary
ten percent surcharge on corporate tax liabilities.
A cut in Government expenditure programs in the
next fiscal year beginning July 1 for Federal programs of lesser priority and urgency of the type
identified on pages 20 to 22 of the President's
January Budget Message.
A reduction in our expenditures overseas,
governmental and private, except where they
are absolutely essential to our national
interests and commitments.
These are not pleasant or welcome measures, and the
Government does not like to ask them. But they are essential
at this time when only by temporary sacrifices can we assure
the continued strength and stability of the United States
economy at home, while we defend freedom and our security
abroad.
Given a high employment economy with heavy defense
expenditures, some inescapable increases in the civilian costs
of government, and a private economic sector that is
advancing on a wide front, the acceptance of enlarged deficits
in the budget and the balance of payments is contrary to sound
economic and financial policy -- against all the wisdom
either of conventional or the so-called new economics.
Accordingly, it is the inescapable responsibility of the
Government to use fiscal and monetary policy to brake the
economy to a safe cruising speed.
Fiscal restraint is even more urgently required today
than it was when the President recommended it to the Congress
more than seven months ago. A tax increase on the scale
recommended then or even on an increased scale, coupled with
reductions in Federal expenditures, is the single most decisive
and important action we can take to protect our economic
security and strengthen the dollar.
At the direction of the President, my colleagues in the
Administration and I, and the Chairman of the Federal Reserve
Board, have sought this tax increase and effective measures of
expen~re control diligently and persistently.
- 5 But today the budget deficit for fiscal 1968 is running as
high as it was last August despite the fact that in December,
upon the recommendation of the Administration, the Congress
adopted a law that reduced some specific expenditures in the
budget by more than $4 billion. This experience should make
it clear for all to see that a meaningful reduction in the
deficit requires the tax increase.
It remained for Dr. Pierre-Paul Schweitzer, the
distinguished Managing Director of the International Monetary
Fund, to say publicly on March 6, 1968, in a discussion of
the world monetary situation:
"It is a matter for regret that the
proposed surcharge on personal and corporate
income taxes did not become effective last
summer, in time to exert a moderating
influence on the renewed upsurge of total
demand during the following year. The
lack of fiscal flexibility has considerably
complicated the task of demand management.
But the aim remains clear: to operate the
economy at a level in relation to capacity
capable of restoring reasonable stability
in costs and prices."
To keep matters in perspective it may be well to look
back over the course of our presentations to the Congress
and see what has happened.
Last year there were some who doubted the economic forecast
and were not sure the economy would rise after the slow start
in 1967. However, the gross national product increased by
$32.5 billion in the second half of 1967 in contrast with
only $13 billion in the first half.
The increase in the first quarter of 1968 will exceed all
previous records) but nearly half of the increase will reflect
price increases rather than real growth.
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 nearly four percent in the second half of
1967 and continuing to increase in the early months of 1968.
94
- 6 -
Last year we said that our balance of payments position
would be serious without a tax increase. It did become serious
largely because of a deterioration in our trade surplus that
accompanied a too-rapid advance in aggregates of economic
activity. We had to resort to a new and restrictive balance of
payments program on New Year's Day. We have lost over $2
billion in our gold reserves since the British devaluation
because of a lack of confidence in the pound and the dollar.
The loss of confidence in the dollar, in good part because
of a failure to enact the President's tax increase proposals and
deal definitively with our internal deficit, coupled with the
recent sharp decline in our trade surplus and our balance of
payments, now endangers the very preservation of the international
monetary system, as well as the strength of the dollar on which
it depends.
Last year some wanted the 1968 budget expenditures cut and
there was talk of a $5 billion reduction. Reductions in
specific civilian and non-Vietnam defense programs totaling
$4.3 billion were enacted in December, upon the recommendation
of the Administration.
Last year it was urged that the 1969 budget increases be
held to not more than the rate of increase in the .1967 budget
over the 1966 budget. This has been done and budget
expenditures will rise at a lower rate in 1969 than in 1968 or
1967.
In all this process we must remember that time is running
we have already lost $4.5 billion of the requested tax increase
and thus have lost the opportunity to reduce the deficit for
fiscal 1968 and the need for Federal borrowing by that amount.
In his New Year's Day Message on the Balance of Payments,
in his State of the Union Message, and in his Budget Message,
the President stressed that failure to take decisive fiscal
action -- to enact the tax increase -- would raise strong
doubts throughout the world about America's willingness to keep
its financial house in order.
This foreboding was soon fulfilled. The Tet offensive
in South Vietnam and the challenge to our security arrangements
in South Korea added to the already heavy concern felt in
financial and foreign exchange markets concerning the stability
of the American economy and the outlook for the dollaru
- 7 The impact of these events and the attack on the role
of the dollar in international transactions from speculative
sources and political opponents of the United States was the
most severe in history. The attack focused in the gold markets
of the world. Events of recent weeks have served notice in
the most emphatic way that this is no minor flurry. America
must deal decisively with the deficits in its internal
budget and in its balance of payments or risk the decline
or possible collapse of the world trade and payments system
it has struggled for twenty-four years to create and maintain
a system that has brought the greatest era of prosperity
and development the world has yet experienced.
It is against this background that on March 14, in
appearing before the Senate Finance Committee, I called to
the attention of Congress certain "factors which give great
urgency to prompt action by the Congress of the United States
to decisively reduce the budget deficit which we are confronted
by in this fiscal year and the coming fiscal year."
I will repeat these observations because they are even
more pertinent twelve days later:
"I will cite just five factors which I
think you all ought to be aware of here.
"First, the highly volatile situation
in the international exchange, gold and financial
markets, now threatens the very preservation of
the international monetary system as we have
known ito
"Second, the clear indication that the
Federal Reserve System is on the move to increasing
monetary restraints to arrest mounting inflation,
which they are doing reluctantly only because
of the lack of action on the tax billa They believe
that a combination of fiscal and monetary restraint
rather than a sole reliance on monetary restraint
is the preferable course and I agree with themo
"Third, it is now clear to everyone as a
result of developments in the Far East that if
there is any likelihood of expenditure estimates
being revised, they would be revised on the up
side rather than on the down side as we face the
situation in the future
0
- 8 -
Q~
Vv
"Fourth, the increasing pace of the
economy with the outlook for increasing
expenditures stretching through the second
half of the year in conjuction with a rapidly
expanding private sector calls for prompt action
in the nature of fiscal restraint.
"Fifth, our trade sup1us since the
first of the year is running at a sharply reduced
level from the 1967 pattern and is comparable
to the disturbingly low level reached in
December. This cannot be permitted to continue
because it would tend to cancel out some of the
gains that we hope to achieve in our balance of
payments as a result of the direct measures
announced in the President's New Year's Day Messageo
"In the light of all these factors, it
seems to me that all reasonable men who want to
preserve their country's economic and financial
viability ought to come together and put a tax
bill on the books and do that promptly, and I hope
the Congress will manage to do that within the
next 30 dayso"
Those remarks were made during the week of the climactic
run on the London gold market. Two days later it was
necessary for the so-called gold pool countries to withdraw
their participation in that market and for it to be closed
down temporarily
On the following weekend, the Governors
of the central Banks of the seven participating gold pool
countries met in Washington and took historic decisions to
divorce the exchange of gold reserves among monetary
authorities from the non-monetary markets, giving rise to a
two-price system. Other significant decisions were taken at
that meeting to preserve the international monetary system in
the period between now and the time when the new Special
Drawing Rights in the International Monetary Fund can become a
functioning part of the system.
0
But these measures however important, wise and properly
taken, are no final answer to the inadequacies in the workings
of our international financial system and the restoration of
confidence in the holdings of reserve currencies -- the
pound and the do11aro
- 9 -
The Centrol Bank Governors noted that an underlying
premise for the measures taken was their belief that it was
"the determined policy of the United States Government to
defend the value of the dollar through appropriate fiscal
and monetary measures and that substantial improvement of the
United States balance of payments is a high prioritY' objective."
It was a similar premise that there existed "the
determination of the United Kingdom authorities to do all
that is necessary to eliminate the deficit in the United
Kingdom balance of payments as soon as possible and to move
to a position of large and sustained surplus."
This was but a realistic recognition of the fact that,
without the restoration of stability to the two reserve
currencies, all efforts to preserve, maintain and improve
the international monetary system are threatened with failure.
Two days after the meeting of the Central Bank Governors
in Washington, the government of the United Kingdom
delivered its expression of will and determination. It dealt
with the problem of the pound in the form of a message to the
House of Commons, calling for a program of fiscal restraint
that includes tax increases in excess of $2 billion. A
similar program, applied to the U.S. economy, would amount to
a $13 billion tax increase. The British program also
included many other features that make it one of the most
stringent in that country's history.
And now the focus of world attention is on the United
States and what it will do.
It is universally recognized in informed circles in
the United States, throughout the Free World, and even in the
crowing calls from Moscow and Peking, that an act of
determination by the United States to defray the increased
costs of Government by a tax increase is essential to
preserve the position of the dollar and remove the threat to
the Free World economy.
Fortunately, I am able to report to you that there is a
riSing tide of feeling in the Congress that the time for
decisive action on the fiscal front is approaching. There is
a growing sense of urgency that our financial situation must
be corrected if representative Government is to perform its
function in meeting the necessities of the people rather than
satisfying wishful thinking.
QQ
vv
- 10 -
Inexorable demands of simple arithmetic are being felt.
This attitude is reflected in representatives of both parties,
in both houses of the Congress, in the tax-writing Committees
and the Appropriation Committees.
Of course, there is a minority who live in a dream world,
believing that it is financially feasible to provide unlimited
Federal appropriations for all things that seem desirable
without being willing to provide the increased revenues
through taxes. But I believe that the responsible majority
in the Congress are coming to the inescapable conclusion that
we must increase taxes temporarily, and that if taxes are to
go up, the increase must be made temporary by conjoining it
in a procedural form yet to be determined with a reduction in
the expenditures projected in the January budget.
Confronted by the intervening events since the submission
of his budget on January 27, with their requirement for
increased fiscal restraint, the President clearly indicated
in pronouncements weekend before last his willingness to
accept a program of even greater national austerity than
heretofore contemplated.
After much consultation, I am convinced that if there
is to be a tax increase, it must somehow be combined with a specific
and concrete measure of reduction in financial outlays and
obligations permitted in present Federal programs.
The procedure by which a formula for combining spending
reductions and a tax increase is to be devised and enacted
is a matter for decision by the Congress, its tax writing
Committees, its Appropriation Committees, and its leadership.
In this process the individual Congressman or Senator
will not get just what he would prefer for all of his
constituents or for the nation. Nor will the President, given
the special constitutional power of the Congress over the
purse. But acting together they can do what needs doing
most of all -- keeping our economy strong and stable to
take care of our essential needs at home and abroad -- not all
we would like in either place -- not as quickly as we would
like -- but soundly, efficiently and I hope adequately.
QQ
vv
- 11 -
These actions and decisions will not be easy or pleasant.
Higher taxes are not popular at any time -- and are even less
popular in an election year. Reduced appropriations for
programs deemed desirable are not welcome, particularly by
those who have a stake in them. No one welcomes a program of
national austerity. But thinking people must weigh the
consequences of a failure to stay with our responsibilities.
If they do, they will recognize that the time has come for
sacrifices.
The direct measures announced by the President to achieve
a $3 billion reduction in our balance of payments deficit this
year -- the restrictions upon outflows of funds for direct
investments abroad by business, a reduction in foreign lending
by our banks and other financial institutions, actions to
reduce our foreign travel expenditure deficit, to reduce or
neutralize the foreign exchange costs of our government
expenditures abroad, and to increase foreign tourism and
investment in the United States -- are all necessary and
important. Yet by themselves they cannot do what must be done.
We also must have the tax increase and other internal measures
that will keep our economy on an even keel.
The compelling fact is that all our efforts -- direct and
indirect, short- and long-term -- to improve our balance of
payments position, run the risk of failure unless we reduce
a highly stimulative budget deficit and prevent the kind of
excessive growth and inflationary pressures that reduce our
trade surplus and destroy confidence in the dollar. In short,
unless we take the course of financial responsibility, all
other efforts may be in vain.
While the success of the Action Program to deal with our
balance of payments deficit will depend largely on the support
of the American people, it will also rest, to a considerable
degree, on the cooperation we seek from other nations.
We are asking the United States trading partners, and
principally the countries of Western Europe whose large balance
of payments surpluses are the counterpart of our deficits, to
accept most of the burden of adjustment resulting from the
U.S. program.
We are urging them to adopt policies which will stimulate
economic expansion of their countries, while maintaining stable
prices.
.r
,
. i
I
~"V
- 12 We are asking that they become more receptive to
imports from the United States and other developed and lessdeveloped countries, removing non-tariff barriers that now
stand in the way of freer tradeo
We want them to accept an appropriate share of the
costs of mutual defense and of economic assistance to the
developing countries.
We are encouraging them to spur greater outflows of
capital from their countries, and to stimulate the development
of their internal capital markets.
I believe that we should and will have the cooperation
and support of our friends and trading partners in Europe
and other parts of the world. Like the United States, they
recognize that a cooperative approach to problems is in the
interest of all nations -- the decisions reached at the
meeting of the Central Bank Governors in Washington illustrates
this fact -- and they are aware that a solution to the
United States balance of payments problem is so important to
the world economy that it is a common enterprise.
The recent, historic growth in international cooperation
is evidenced also by the progress that has been made in
creating a new world reserve asset in the form of Special
Drawing Rights in the International Monetary Fund to serve as
a supplement to gold and the reserve currencies such as the
dol1aro
Later this week I will have the privilege of attending
a meeting in Stockholm of the finance ministers of the
Group of Ten, the major industrial nations, to consider the
final draft of amendments to the IMF charter providing a new
facility for the creation of Special Drawing Rights.
I am
hopeful that the amendments will be submitted shortly
to the 107 member governments of the IMF and ratified promptly
by three-fifths of them with 80 percent of the weighted vote
in the Fund.
When operational, the new IMF facility will supply
additional liquidity to the world in amounts needed
to accommodate an increasing volume of trade and capital
movements.
- 13 The adjustments we are asking other nations to
make under our balance of payments program -- and their
continued cooperation in strengthening the international
monetary system -- will be more easily obtained if they know
that the United States is acting in a fiscally responsible
manner at home.
We must demonstrate to them -- through deeds rather than
words -- the sincerity of our expressions of determination to
hold our economy to steady, stable non-inflationary growth, and
in this way maintain and increase the strength of the dollaro
Even with a tax surcharge and cuts in Government expenditures
there will be Federal budget deficits in fiscal 1968 and 19690
They will need to be financed in a sound and anti-inflationary
way -- and there is no better means available to us than the
sale of Savings Bonds.
I am convinced that our program can be expanded.
Savings Bonds and Freedom Shares offer the buyer an opportunity
to invest in our country's future, as well as notable advantages
over many other forms of investment-- safety, convenience,
liquidity, stability of rate, and certain tax benefits in
terms of deferred income, as well as exemption from State and
local income taxation.
I hope that you will emphasize these advantages, and
bring many more investors and savers into the program, so
that 1968 -- like 1967 -- will be another banner year for
Savings Bonds.
In closing, let me express my personal thanks -- and
that cr the Treasury -- to you who are doing so much for your
country by promoting the sale of Savings Bonds. Through
your efforts, which are in the finest tradition of the
nation's first patriots, you are helping the Treasury materially
in managing the country's finances, contributing to a stable
economy at home, and building greater security and prosperity
throughout the Free World o
000
TREASURY DEPARTMENT
March 27, 1968
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
$2,600,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing April 4, 1968,
in the amount of
$2,501,536,000, as follows:
92-day bills (to maturity date) to be issued
in the amount of $ 1,600,000,000, or thereabouts,
additional amount of bills dated January 4, 1968,
mature July 5, 1968,
originally issued in the
$1,001,047,000, the additional and original bills
interchangeable.
April 4, 1968,
representing an
and to
amount of
to be freely
182-day bills, for $ 1,000,000,000, or thereabouts, to be dated
April 4, 1968,
and to mature October 3, 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, April 1, 19680
Tenders will not be
received at the Treasury De~artment, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders
from others rnust be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
F-1205
- 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 pr~e
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rej ec t ion there of. The Secre tary 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 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 April 4, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing April 4, 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 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 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 revis ion) and thiS
notice prescribe the terms of the Treasury bills and govern the
cond it ions of the ir issue. Copies of the circular may be obtained fr(l
any Federal Reserve Bank or Branch.
000
TREASURY DEPARTMENT
103
March 27, 1968
FOR IMMEDIATE
I
ELEASE
GEORGE STICKNEY GIVEN SPECIAL TREASURY CITATION
Secretary of the Treasury Henry H. Fowler yesterday
conferred a Special Citation for outstanding performance
on George F. Stickney, Deputy Fiscal Assistant Secretary
who retired March 23 after 32 years of public service.
Mr. Stickney had received the Department's second highest
award, the Exceptional Service Award in 19570 No successor
to Mr. Stickney has been appointed.
At a reception in his honor last night, Secretary Fowler
cited his selfless devotion in the highest tradition of the
public service, and said his accomplishments have been
"timeless and immeasurable." Mro Stickney, often referred
to as Treasury's "Mro Computer," is regarded as the man who
instituted and directed Treasury's switch to electronic data
processing equipment which has saved the government tens of
millions of dollars annually
He saw, as far back as 1952,
that computers could be used in Treasury fiscal operations
for business and clerical functions when they were mostly
regarded at that time as having potential for military and
scientific uses.
0
Prior to his appointment as Deputy Fiscal Assistant
Secretary on June 15, 1962, Mr. Stickney had served since
April, 1951, as Chief of the Fiscal Service Operations and
Methods Staff of the Office of the Fiscal Assistant Secretary.
For more than four years prior to that he was Assistant Chief
of the staff. He has been the Treasury representative on the
Steering Committee of the Joint Financial Management
Improvement Program. The major part of his service has been
devoted to improvement of procedures, including the
establishment of the integrated electronic system for the
payment and reconciliation of government checks, which today
saves the government about $5 million annually in the processing
of 550 million checks.
F-1206
- 2 -
104
Mr. Stickney is a director of the Federal Government
Accountants Association. In 1957 and 1958 he conducted
seminars at the Harvard University Graduate School of Business
Administration for research students in the field of accounting
and electronic data processing. In 1957 he received the
Treasury Department's Exceptional Civilian Service Award.
Mr. Stickney has been with the Treasury since 1942,
when he was appointed Technical Assistant to the Chief of
the Accounting Division in the Office of the Treasurer of the
United States. In 1945 he became Chief Investigator in
the Office of the Treasurer. He entered Government Service
with the Federal Housing Administration in May, 1938 as a
messenger.
Born in Lancaster, New Hampshire, June 4, 1909,
Mru Stickney attended public schools there. In 1940, he was
awarded the degree of Bachelor of Commerce Science, cum laude,
by Southeastern University, Washington, D. C., and a year
later received his master's degree there.
000
COMMUNIQUE
OF THE MINISTERIAL MEETING OF THE GROUP OF TEN
MARCH 29-30, 1968, STOCKHOLM, SWEDEN
1. The Ministers and central bank Governors of the ten
countries participating in the General Arrangements to
Borrow met in Stockholm on 29-30th March, 1968, under the
~hairmanship of Mr. Krister Wickman, Minister for Economic
Affairs of Sweden. Mr. Pierre-Paul Schweitzer, Managing
Director of the International Monetary Fund, took part in
the meeting, which was also attended by the President of the
Swiss National Bank, the Secretary-General of the O.E.C.D.
and the General Manager of the B.l.S.
2. Ministers and Governors first discussed the international monetary situation and, second, they considered a
report by the Chairman of their Deputies on a Proposed
Amendment to the Articles of Agreement of the I.M.F. whi~h
has been drawn up in accordance with the Resolution of the
Board of Governors of the I.M.F. adopted at the annual meeting of the Fund in Rio de Janeiro last September. This
Amendment relates to the scheme for special drawing rights
in the Fund, the Outline of which was approved at that
meeting, and to improvements in the present rules and practices
of the Fund.
3. The Ministers and Governors expressed great satisfaction with the action taken by the United Kingdom which is
designed to achieve a substantial overall surplus in the
United Kingdom's balance of payments by 1969. They also
took note with equal satisfaction of the declaration made
by the Secretary of the Treasury of the United States stressmg how much the United States is conscious that early
action is necessary, through appropriate fiscal and monetary
measures, to improve substantially its balance of payments
and that this objective is given the highest priority by the
President of the United States in the inLerests not only of
the United States economy but also of the general stability
of the international monetary system.
4. The Ministers and Governors reaffirmed their
determination to co-operate in the maintenance of exchange
stability and orderly exchange arrangements in the world,
based on the present official price of gold.
- 2 5.
They consider that, while the scheme to establish
special drawing rights in the I.M.F. referred to in paragraph 7 on which they have now agreed will not provide a
solution to all international monetary problems, it will
make a very substantial contribution to strengthening the
monetary system.
6.
Moreove~ they intend to strength the close cooperation between governments as well as between central
banks to stabilize world monetary conditions.
7. As regards the Amendment to the Articles of the
I.M.F., the Ministers and Governors noted with appreciation
the performance of the Executive Directors of the I.M.F. in
carrying out the task entrusted to them and agreed to give
the necessary authority to the Executive Directors of their
countries, so that, in co-operation with those of other
countries, they will be able to complete the final draft of
the proposed Amendment.
In approving the changes in the rules and practices of
the existing structure of the I.M.F., the Ministers and
Governors agreed to co-operate with each other and the other
members of the Fund to avoid their application in any unduly
restrictive manner.
They took note that this proposed Amendment will be
attached to a Resolution which will be transmitted to the
Board of Governors of the I.M.F. with an explanatory Report
and that Governors will be requested to vote by correspondence
as is the usual practice of the Fund.
The Ministers and Governors noted that the Managing
Director of the Fund was confident that the Executive
Directors would be able to transmit these documents to the
Board of Governors within a brief period.
8.
One delegation did not associate itself with paragraphs 2, 4, 5 and 7 above, in view of the differences which
it has found between the Outline adopted at the meetings in
London and Rio de Janeiro and the draft text now submitted
by the Fund and because the problems which it considers
fundamental have not been examined.
Consequently, this delegation fully reserves its position
and will wait until it is in possession of the final texts
before reporting to its government.
000
GROUP OF TEN
Stockholm 30th March, 1968
Statement of M. Michel Debre
I have spoken enough during the course of yesterday
and again this morning for my explanations now to be brief.
Two ideas have inspired all that I have said:
The first is that, in our view at any rate, there are
serious differences between the London resolutions that
were ratified at Rio and the scheme that has now been presented to us, even taking into account the modifications
that have been made in it. The SDRs are no longer the
supplementary credit facility that we thought would be
useful: they are, I fear, an expedient, if not the first
step towards creating a so-called "money" which will certainly be a source of great disappointment to those who
place confidence in it.
My second theme was, if possible, more serious still.
The fundamental problems have not been tackled. Yesterday
morning I had dared to hope that they would be and I explained to you briefly my anxieties as well as the objectives
which, in my view, it was essential to aim at in a meeting
of this importance. What I had to say was not understood,
at any rate officially, and everything has taken place
around this table as if during the course of the last six
months no signs of danger had appeared. I regret that this
is so.
In separating myself from you - only temporarily, I
hope - I am under no illusion that the French economy is
independent from the world economy. I have always thought
and said the contrary, for the reality is that there exists
a profound solidarity - commercial, monetary, in short
economic, that is to say also social. If difficulties arise,
they will be experienced by all countries.
That is why France was ready to cooperate, and will be
ready to do so once the real problems are tackled: the
status of currencies and, in the first place, of those that
are called reserve currencies; and the international standard
- 2 of value whose name - let us not be afraid to mention it is gold, together with its proper price. Once this is done
we shall be able together to consider, in the general interest, a settlement of existing indebtedness, the continuous
improvement of different forms of international credit and
the concerted allocation of aid to developing countries.
At the moment, all these tasks are beyond our capacity
and the philosophy that lies behind the Communiqu~ will not
help in carrying them out.
I cannot therefore associate myself with it and I ask
that a phrase be added to the Communiqu~ in order to make
explicit, in very simple terms, the fact that I abstained.
Naturally, the final decision of the French government
on this matter can only be taken after the text is ready
and has been transmitted to us.
My last word will be this: I hope that we shall soon
have another meeting - perhaps less solemn that the present
one, and certainly after careful preparatory work has been
done - at which we shall be able to tackle the real problems
and settle them for a long time to come. I must tell you,
quite simply, that we are running short of time. But, so
far as my government is concerned, we are ready to play our
part in such a cooperative effort so that the necessary
measures may be taken in time and in an orderly fashion.
TREASURY DEPARTMENT
FOR RELEASE 6: 30 P.M. I
Monday, April 1, 1968.
RESULTS OF TREASURY'S WEEKLY BILL OFFERING
The Treasury Department announced that the teDders for two seriel'! of Treasury
bills, one aeries to be an additional issue ot the bills dated January 4, 1968, and
the other series to be dated April 4, 1968, which were offered on March 27, 1968, were
opeDed at the Fe''!'' '«1 Reserve Banks tn, 1, Tenders were invited for $1,600,000,000,
or thereabouts, ot 92-day bills and for
,000,000,000, or thereabouts, of 18G-day
bills. The details of the two series are (,~ follows:
RANGE OF ACCEPTED
92-day Treasury bills
COMPETITIVE BIDS:
maturing July 5,1 1968
High
Low
Average
48~
Price
98.711
98.673
98.685
Approx. Equiv.
Annual Rate
5.0Mi.'
5.193~
5.146~
11
182-day Treasury bills
maturi!!;S October 3 2 1968
Approx. Equiv.
Price
Annual Rate
97.352
5.2:38J
97.320
5.301~
97.338
5.265~
11
of the amount of 92-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
roTAL TENDERS APPLIED FOR AND ACCEPrED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philade 1phia
Cleveland
Ricbmond
Atlanta
Chicago
St. LOUis
Minneapolis
Kansas City
Dallas
San Francisco
ro~s
Accepted
ApElied For
8,355,000
$ 18,355,000 $
1,051,772,000
1,519,772,000
17,097,000
26,697,000
49,822,000
52,822,000
14,321,000
14,821,000
41,118,000
4.7,118,000
194,848,000
223,948,000
47,160,000
49,160,000
22,735,000
24,735,000
24,839,000
32,839,000
12,555,000
22,555,000
115,697,1000
145,1947,1000
$2,178,769,000
Applied For
$ 16,820,000
1,144,453,000
13,942,000
40,425,000
5,996,000
29,851,000
165,574,000
28,650,000
ll,528,000
20,306,000
18,739,000
104,511,000
AcceEted
$ 6,720,000
740,348,000
5,942,000
15,425,000
3,541,000
23,851,000
111,074,000
20,768,000
8,528,000
12,396,000
8,739,000
42,866,000
$1,600,319,000 ~/ $1,600,795,000
$1,000,198,000
EI
~ Includes $269,245,000 noncompetitive tenders accepted at the average price of 98.685
I) Includes $118,045,000 noncompetitive tenders accepted at the average price of 97.338
J lbese
rates are on a bank discoont basis.
'!be equivalent coupon issue yields are
5.2~ for the 92-day bills, and 5.~ for the 182-day bills.
F - L2 0 7
TREASURY DEPARTMENT
t
108
April 1, 1968
FOR IMMEDIATE RELEASE
STATEMENT BY THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY OF THE UNITED STATES
AND CHIEF OF U.S. DELEGATION TO THE GROUP OF TEN
MEETING, STOCKHOLM, MARCH 30, 1968
I wish to make a reaffirmation, on the part of the United
States, of our own internal responsibilities in connection with
our responsibilities to the governments which have taken this
action today and to other governments of the Free World which
are not represented at this meeting:
The ability of the United States to sustain strong, stable
and non-inflationary growth is now being severely challenged and
tested by events at home and abroad -- and the outcome is
watched closely by the rest of the world.
And for good reason.
The manner in which we respond to this test will determine
not only our own economic future but that of the entire Free
World as well. The strength of the world economy and the
continuance of a viable 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 exchange rates.
The United States has now entered the eighth year of economic
expansion -- the longest and strongest period of economic growth
in our history. Over the past 20 years, fueled by a strong
U.S, economy and a strong dollar as the principal reserve and
transaction currency, the Free World has made the greatest
strides in trade and development in recorded history.
But a continuation of this progress is menaced by twin
deficits -- in our internal Federal budget and in our
international balance of payments. And there is an overwhelming
conviction that this year -- now -- the United States ~hould
direct its economic and financial policy toward reversing
decisively the trend toward sharp increases in these deficits
in 1968.
F-120jl
- 2 -
That is not just the view of the Secretary of the Treasury.
It is shared by the President, the Federal Reserve Board, the
Council of Economic Advisers, and the vast preponderance of
economic and financial authorities, private and public.
But, as yet, that sentiment has not been translated into
the legislative action that is necessary.
To meet the challenge before us President Johnson has
called on the nation to act firmly., promptly, and with the
highest degree of responsibility. He has urged "a program
of national austerity to insure that our economy will
prosper and that our fiscal position will be sound."
In his New Year's Day Message on the Balance of Payments,
in his State of the Union Message, and in his Budget Message,
the President stressed that failure to take decisive fiscal
action -- to enact the tax increase -- would raise strong
doubts throughout the world about America's willingness to keep
its financial house in order.
In their recent communique on March 17, the Central Bank
Governors noted that an underlying premise for the measures
taken was their belief that it, was "the determined policy of
the United States Government to defend the value of the
dollar through appropriate fiscal and monetary measures and
that substantial improvement of the United States balance of
payments is a high priority obj ec tive."
This was but a realistic recognition of the fact that,
without the restoration of stability to the dollar as a reserve
currency, all efforts to preserve, maintain and improve the
international monetary system are endangered.
Fortunately, I am able to report to you that there is a
rising tide of feeling in the Congress that the time for
decisive action on the fiscal front is approaching. There is
a growing sense of urgency that our financial situation must
be corrected if representative Government is to perform its
function in meeting the necessities of the people rather than
satisfying wishful thinking.
The direct measures announced by the President to achieve
a $3 billion reduction in our balance of payments deficit this
year -- the restrictions upon outflows of funds for direct
investments abroad by business, a reduction in foreign lending
- 3 by our banks and ot~Ler financial institutions, actions to reduce
our foreign travel expenditure deficit, to reduce or neutralize
the foreign exchai_b e costs of our gover:-_meI~t expenditures
abroad, and to increase foreign tourism a:-.d investment in the
United States -- are all necessary and important. Yet by
themselves they ca~not do what must be do~e. We also must have
the tax increase ~~d other internal measures that will keep our
economy on an ever keel.
The compellir.g fact is that all our efforts -- direct and
indirect, short- and long-term -- to improve our balance of
payments position, run the risk of failure unless we reduce a
highly stimulative budget deficit and prevent the kind of
excessive growth ar:d inflationary pressures that reduce our
trade surplus and destroy confidence in the dollar.
In short,
unless we take the course of financial responsibility, all
other efforts may be in vai~.
While the success of the Action Program to deal with our
balance of payments deficit will depend largely on the support
of the American people, it will also rest, to a considerable
degree, on the cooperation we seek from other nations.
We are aski~g the lfuited States trading partners, and
principally the countries of Western Europe whose large
balance of payments surpluses are the cou: terpart of our
deficits, to accept much of the burden ,: C adjustment resulting
from the U. S. program.
The recent, historic growth in interr.ational cooperation
is evidenced alsooy the progress that has been made in
creating Special Drawing Rights in the International Monetary
Fund to serve as a supplement to gold and the reserve currencies.
I am hopeful that the amendment to De submitted shortly
to the 107 member governments of the TIfF will be ratified
promptly by the requisite majorities.
As a resul t of the dec is ion taker~ iI. Stockholm today, the
new IMF facility will supply additional liquidity to the world
in amounts needed to accommodate an increasing volume of trade
and capital movements.
The adjustments we are asking other nations to make under
our balance of payments program -- and their continued
cooperation in strengthening the international monetary system
will be more easily obtained if they know that the United States
is acting in a fiscally responsible manner at home.
We must demonstrate to them -- through deeds rather than words -the sincerity of our expressions of determination to hold our economy
to steady, stable non-inflationary growth, and in this way maintain
and incr~as~ ~~reng~h of thboBollar.
l1u
TREASURY
DEPARTMENT
April 3, 1968
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
$2,600,000,000,or thereabouts, for cash and in exchange for
Treasury bills maturing April 11, 1968,
in the amount of
$2,503,327,000, as follows:
9~day bills (to maturity date) to be issued April 11, 1968,
in the amount of $1,600,000,000, or thereabouts, representing an
additional amount of bills dated January 11, 1968, and to
mature July 11, 1968,
originally issued in the amount of
$1,001,879,000, the additional and original bills to be freely
interchangeable.
18~day bills, for $1,000,000,000, or thereabouts, to be dated
April 11, 1968,
and to mature October 10, 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, April 8, 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
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 ac~ompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an exp~~ss guaranty of payment by an incorporated bank
or trust company.
F-1209
- 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 Treasu~
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders fot
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 April 11, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills ma turing April 11, 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 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 thiS
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained fra
any Federal Reserve Bank or Branch.
000
TREASURY DEPARTMENT
111
April 3, 1968
FOR IMMEDIATE RELEASE
EXCEPTIONAL SERVICE AWARD PRESENTED TO
NARCOTICS COMMISSIONER HENRY L. GIORDANO
Secretary of the Treasury Henry He Fowler today
presented the Exceptional Service Award to Henry L. Giordano,
Commissioner of Narcotics, of the Treasury Department's
Bureau of Narcotics.
Mr. Giordano's Bureau is scheduled to be
April 7 with the Bureau of Drug Abuse Control
Department of Health, Education and Welfare.
organization will be under the administration
of Justice.
merged on
of the
The new
of the Department
Mre Giordano, who has been active in the war against
illicit narcotics most of his adult life, was cited for
leading this fight.
"Mr. Giordano has deservedly earned the reputation of
being a tough and great law enforcement officer," Mr. Fowler
said. "Starting as an ingenious undercover operator, he
later proved himself an extremely capable administrator and
diplomatic representative for the United States in the field
of narcotic control. As agent, supervisory officer, and most
recently head of the Bureau of Narcotics, Henry L. Giordano
has rendered exceptional service to the Treasury Department
and to the nation," the citation said e
As Commissioner, Mr. Giordano has been a member of the
United States delegation to the 14th, 18th, and succeeding
annual sessions of the United Nations Commission on Narcotic
Drugs in Geneva, Switzerland. He has served as alternate
U. S. Representative to the United Nations Conference for the
Adoption of a Single Convention of Narcotic Drugs in New York,
January-March 1961, and received numerous awards for his
outstanding efforts in combating the illicit narcotic traffic
and suppressing addiction. Last month he was awarded
Knighthood in the Order of Merit of Italy for his contribution
F-1210
112
- 2 in the suppression of the international illicit narcotic
traffic. The award recognized cooperation between the
United States Bureau of Narcotics and the Italian government
which resulted in the arrest and conviction of 32 defendants.
A graduate of the University of California, Mr. Giordano
practiced as a registered pharmacist in San Francisco between
1934 and 19410 He entered government service in 1941 as a
narcotic agent in Seattle, Washington. Following his military
service with the Intelligence Division of the U. S. Coast
Guard, Commissioner Giordano returned to the Bureau of Narcotics.
In 1950, he was named District Supervisor in Minneapolis,
Minnesota, and transferred to Kansas City, Missouri, as
District Supervisor in 1954.
From October 1955, through April 1956 Commissioner
Giordano served as Chief Investigator for the House of
Representatives Ways and Means Subcommittee on Narcotics.
Following the special Congressional assignment, he was designated
Field Supervisor for the Bureau of Narcotics on July 29, 1956.
On September 1, 1956, Mr. Giordano was named Assistant
Deputy Commissioner at Washington, D. C., and a year later
promoted to Assistant to the Commissioner. From 1958 to the
time of his appointment as Commissioner, Mr. Giordano was
Deputy Commissioner of Narcotics.
Mro Giordano and his wife, the former Elaine Watson,
of Sacramento, California, reside in Silver Spring, Maryland
They have two daughters.
000
0
I1J
STATEMENT OF THE HONORABLE FREDERICK L. DEMING
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE
SENATE BANKING AND CURRENCY COMMITTEE
ON S. 2923
WEDNESDAY, APRIL 3, 1968, 10:00 A.M., EST.
I am very happy to appear before you this morning in support
of S. 2923, which would extend until June 30, 1970, the present
authority of the Federal Reserve Banks to purchase public debt
obligations directly from the ,Treasury up to a limit of $5 billion
outstanding at anyone time.
My statement is quite brief, since I do not believe that
provision of the necessary means for the efficient management of
the public finances is or ought to be controversial.
This authority, which would otherwise expire on June 30
of this year, was first granted in its present form in 1942
for a temporary period.
It has been renewed on 13 separate
occasions since that time.
While used only very sparingly during
these past 26 years, I strongly share the conviction of my
predecessors that maintenance of this authority is essential
to the proper and economical management of the finances of the
Government.
As shown in the table attached to my statement, the direct
purchase authority was used on four occasions since it was last
extended by the Congress two years ago.
The authority was used
only for a few days at a time, and the maximum amount outstanding
at anyone time was $169 million.
These borrowings occurred
just prior to tax payment dates thus permitting the Treasury to
operate with lower cash balances than would otherwise be required.
114
- 2 -
The figures in the table show clearly that the authority
has not been abused.
I firmly believe that our borrowings
should meet the test of the market and that the direct purchase
authority is not intended to allow the Treasury to circumvent
the authority and responsibility of the Federal Reserve System
in its Open Market Account operations.
Any use of the authority,
moreover, is clearly subject to the discretion of the Federal
Reserve System and, thus, it can serve as an added instrument
of Federal Reserve monetary policy.
I might also add that these
borrowings, like any other Treasury borrowings, are subject to
the statutory debt limit.
Continuance of the direct purchase authority is essential
for three reasons.
First, it permits us to allow our cash balance to decline
to unusually low levels during times when our revenues are
seasonally low.
We are, thus, enabled to keep the public debt
to a minimum and to save on the interest costs of the Government.
Without the potential ability to borrow directly from the Federal
Reserve, these low balances could not prudently be maintained
even for very brief periods.
Rather we would be compelled to
enlarge our cash balances by borrowing additional amounts in
the market even though these amounts might be needed only for
a short while.
Second, there is always the possibility that temporarily
unfavorable conditions in the money and credit markets may make
it desirable, both from our own point of view and that of the
- 3 -
11~
Federal Reserve System, to postpone for a short time a planned
Treasury market borrowing.
The possibility of direct access
to the Federal Reserve provides the flexibility required in
such a situation.
Finally, I need not stress that the direct purchase authority
is a key element in our financial planning for a national emergency,
such as might result from a nuclear attack on the United States.
In such circumstances our financial markets could be seriously
disrupted at a time when large amounts of cash were necessary
to meet emergency requirements.
It is for this reason
.that
an authority as large as $5 billion is required although such
a large amount has never been used.
I might add that it would be advantageous in this uncertain
world, if the temporary authority were to be made permanent.
We are not, however, proposing that this be done although this
committee might wish to discuss the question.
Drr.zCT nORROWING FROH FEDERAL RESERVE BA.'IKS
1942 to date
C.s.lcrA.d~r
-~~~...:
1%2
D~ys
cscd
7
220
108
320
1
2
2
2
1
'3
811
1.172
424
4
2
2
20
13
207
1
2
3
169
1
3
7
153
1
3
none
none
2
2
4
9
SO
1953
1954
1955
1956
29
15
none
none
1957
none
1953
2
1959
1960
none
none
none
1%7
1968 to
d.lte
$
6
none
1952
1%2
of days used
at anyone
2
19:17
1963
1964
1965
1966
.
484
48
1%1
separate times
used
Uaximum numDc.r
28
none
1950
1951
-
of
4
4
19~~3
19L)9
(millions)
~h.l:m:'er
422
1,320
19
1944
1945
1946
lS~3
HuxiiJum E.lI;.lOunt
at any time
none
none
none
nOlle
none
9
tilli~
llr
STATEMENT OF THE HONORABLE FREDERICK L. DEMING
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE
SENATE BANKING AND CURRENCY COMMITTEE
ON S.3l33
WEDNESDAY, APRIL 3, 1968
10:00 A.M.
Mr. Chairman and Members of the Committee:
The Treasury Department Etrongly urges that favorable
action be taken on S.3l33 which would extend for two more years
the flexible authority under which the appropriate financial
agencies can regulate maximum rates of interest or dividends
payable on savings accounts.
demonstrated its worth.
This legislation has amply
In view of the present and prospective
pressures on financial markets, a further temporary extension
of this valuable authority would be an act of ordinary prudence.
In the absence of this legislation, we could face a return to
the potentially destructive form of competition among financial
institutions which contributed to mortgage market difficulties
and the escalation of interest rates during 1966.
This bill would also extend the authority of the Federal
Reserve to:
(a) vary reserve requirements on time and savings
depOSits between 3 and 10 percent, and (b) conduct open market
operations in securities issued or guaranteed by any agency
of the United States.
Both are valuable potential tools to
11-.- '-'Q
.....
- 2 -
promote financial stability and the efficient functioning of
our financial markets.
Some limited use has already been made
of the broadened authority to conduct open market operations.
While reserve requirements on time and savings deposits have
not been raised beyond the 3 to 6 percent range permitted under
earlier legislation, the reserve required on time deposits in
excess of $5 million is presently at 6 percent.
The broader
latitude inherent in the 3 to 10 percent range is clearly
desirable.
This same legislation was originally enacted September 21,
1966 for a period of one year.
A request for its extension for
2 years was favorably reported by your Committee last July and
the bill passed the Senate in that form.
As finally enacted,
shortly before it was to expire, the extension was for a oneyear period, with no other changes in the basic legislation.
A 2-year extension is again requested.
A permanent extension
is not requested because the interest rate ceiling part of the
authority was only intended initially to meet a special set of
circumstances.
The need for, and desirability of, such ceilings
under more normal circumstances remains an open question.
11Q
- 3 -
There is no need to review in any detail the circumstances
which initially brought this legislation into being.
During 1966,
a very aggressive competition for funds developed among financial
institutions.
This aggravated an already difficult situation
in the money and credit markets.
in all
cases~
Thrift institutions could not,
safely pay the higher rates on savings which were
required to attract new funds and hold old ones.
The flow of
savings into mortgage markets fell off abruptly and the housing
industry suffered a sharp decline.
Not all of these difficulties
were due to uninhibited interest rate competition, but it was
an important factor in the total picture.
These interest rate ceilings were one part of a coordinated
program which successfully alleviated strains and reduced
upward rate pressures in the financial markets by late 1966.
As soon as the enabling legislation was passed, the regulatory
authorities moved promptly to apply interest rate ceilings.
They found it possible to reduce some of the highest rates
that had developed during 1966.
At the same time, care was taken
not to press the ceiling rates down in a fashion which might
have choked off the reflow of funds to thrift institutions.
The regulatory agencies, themselves, will be in a better
position to comment upon the details of their experience with
the administration of these ceilings.
- 4 During 1967, there was a remarkable improvement in savings
flows.
The total inflow at commercial banks, mutual savings
banks, and savings and loan associations was around $39 billion.
This was about double the inflow in 1966 and exceeded the $32
billion inflow in 1965 and the $29 billion inflows in the previous
two years.
As a result, the position of lending institutions
was greatly improved.
Savings and loan associations were able
to repay a large volume of advances to the Federal Home Loan
Bank System which is, itself, now in a much better position to
render assistance to member associations.
With the improvement in savings flows, the housing industry
made a vigorous recovery.
New private housing starts rose from
a seasonally adjusted annual rate of a little over 900,000
units in the fourth quarter of 1966 to a rate of more than
1,400,000 units in the fourth quarter of 1967.
Residential
construction expenditures rose from a seasonally adjusted
annual rate of $20.9 billion to $27.6 billion
nearly one-third.
a rise of
Housing starts and permits have shown further
strength this year.
But there is another side to the story.
The rate of gain
in savings inflows slackened more or less steadily during the
121
- 5 course of 1967 although monetary policy was generally expansionary.
In January of this year, while sewings and loan
associations fared better than many had expected, they did
experience a net outflow of some $250 million, the largest on
record for a January.
Mutual savings banks and commercial
banks did somewhat better in January.
rather well in February.
Savings flows held up
But, in view of recent financial
developments here and abroad, it would be foolish to assume
that this will necessarily last.
Market interest rates have
been rising significantly and in many areas are already nearing,
or have passed, the peak yields of August-September 1966.
The
threat of a large-scale movement of funds into market instruments and a competitive scramble among financial institutions
is by no means remote.
As your Committee is well aware, the legislative authority
for ceiling interest rates is far from a panacea, and ceilings
may not be a desirable long-term feature of the financial landscape.
In particular, these ceilings will not prevent rising
market rates of interest from exerting their pull.
It is
possible to conceive of a situation in which market rates were
rising so significantly that the regulatory authorities would
- 6 -
have little option but to make some upward adjustments in ceiling
rates.
But, even then, this authority could be used so as to
promote an orderly adjustment.
The best insurance against further rises in market rates
and a tightening credit situation would be prompt enactment
of the President's tax proposals and rigorous restraint of
expenditures.
In the absence of that broader action, this
particular legislative authority, while still useful, cannot
be expected to work wonders.
We would be better off with
this authority than without it, but the home financing and
housing industries would still face difficult adjustments.
With fiscal restraint and reasonable balance in financial
markets, a substantial savings inflow to mortgage lenders
should continue.
In such a setting, the extension of authority
in S.3l33 will provide the regulatory authorities with tools
that have proven their value in the past year and a half.
If a more difficult situation is encountered, these tools
will still be usefulo
Your prompt and favorable action is
requested on a two-year extension of the existing authority.
TREASURY DEPARTMENT
Washington
FOR RELEASE ON DELIVERY
R~MARKS BY THE
UNDER ~ECRETARY OF
HONORABLE FREDERICK L. DEMING
THE TREASURY FOR MONETARY AFFAIR~
AT THE NEw YORK SOCIETY OF SECURITY ANALYSTS
INTERNATIONAL MONETARY SEMINAR
AT THE COMMODORE HOT~L, N~w YORK, NEw YORK
ON THURSDAY, APRIL 4, 1968, AT 6:30 PM EST
THE U.S. BALANCE OF INTERNATIONAL PAYMENTS
PROBLEM IN OUR MODERN ECONOMIC ENVIRONMENT
I am to talk to you tonight about the United States
balance of payments.
three themes o
In doing so,
I shall play variations on
None of these themes are new.
The first theme
is adagio -- the United States has a balance of payments problem
which it can and must resolve.
But a long overview of the
United States international payments
seeing what the problem is.
~s
most pertinent to
The second theme is counterpoint
and intertwines with the firsto
It is that the balance of
payments adjustment problem today is different and more complex
than it was in earlier years o
This is a general proposition,
but it is particularly noteworthy in the case of the United
States.
The new balance of payments program must be viewed
against that theme o
SpeCial Drawing Right
in most modern style.
::;- (tl ( (
The third theme
on gold and the new
begins andante but becomes scherzo
- 2 -
Let us begin with the first theme, which involves a
quick but long-term overview of the United States balance of
payments over the past twenty-seven years.
I hope not to over-
power you with numbers or concepts here.
I need to introduce this theme with a brief program note.
I shall be uSing the liquidity surplus or deficit when I cite
over-all numbers o
But my categories differ somewhat from
those used in conventional balance of payments accountingo
The first category I use is trade and service account, which
should have a familiar ring, but, as I use it, it does not
include military transactions or investment income and it
does include pensions and remittances.
The second category
is capital account, in which I include the income flows, both
Government and private, as well as the capital flows, and,
of course, net foreign capital transactions.
include errors and omissions.
But I also
The third category is funda-
mentally Government grants and capital plus military transactions net of military sales.
It is useful in developing depth and color in this theme
to break the twenty-seven years, 1941 - 1967 inclusive, into
two major periods, and then to further subdivide those major
periods.
Let us look first at the seventeen years, 1941 - 1957
inclusive, and subdivide that period into three sub-periods:
1941 - 1946; 1947 - 1949; and 1950 - 1957.
- 3 -
Over the full seventeen years, the United States had a
cumulative balance of payments deficit of less than $10
billion, or an annual average of just under $600 million.
We ran a cumulative surplus on trade and services of $85
billion, or about $5 billion per year, a cumulative surplus
on capital account of $17 billion, or $1 billion per year, and
a cumulative deficit on military and Government account of
$112 billion, or $6 6 billion per year.
0
From 1946 to 1957
alone, we extended economic assistance in grants and loans
of $42 billion net o
And yet, after all this, we gained gold
reserves of $800 million; our gold reserve at the close of
1957 was larger than at the beginning of 19410
What this means, of course, is that we financed our
deficit completely -- and more -- by increasing our dollar
liabilities to official and private holderso
In a world that
was starved for reserves, the dollar was better than gold.
In the three sub-periods, we can see these developments
0
In the war years, we ran a modest deficit averaging about
$800 million per year.
From 1947 through 1949, our surpluses
averaged $107 billion.
In the next eight years, our deficits
averaged $102 billion.
Our trade and service surplus diminished
in succeeding sub-periods, our capital account improved a bit,
and our Government _ military account deficit was Significantly
reduced o
125
- 4 The point I want to underline is that the United States,
throughout this period, was in fundamental surplus but, through
its deliberate policy of massive untied grant and loan assistance,
incurred more or less consistent liquidity deficits.
With high
reserves, immense productive power, a great and growing capital
market system, and a desire to help rebuild a war-shattered
world, the United States engaged in a unilateral adjustment
process that benefitted the world and, in so dOing, helped
both the world and itself.
It is no exaggeration to say that we picked up most of
the checks for insuring free world security; we permitted disadvantage to our trade, we encouraged our tourists to go abroad
and make substantial purchases there, and we strove mightily
to increase our foreign private investmento
All of these policies were rational and in the interest
of world trade and world economic growth.
But, after seventeen
years, the habit of deficit had become so strong that it was
hard to kick even when it became crystal clear that what was
a good habit under earlier conditions had become a bad habit
in the world of 1958 and following years.
habit in two respects.
It became a bad
The deficits got larger and had to be
financed both with increased dollar outflows and a reduction
in our gold reserves, which fell $11 billion between 1958 and
1967.
The outside world, which had enjoyed the mild deficits
127
.J..
I
- 5 -
of earlier years, got worried about the bigger ones, but it
took some time before the surplus nations recognized that it
was impossible to reduce
and that they had some
deficit~
without reducing surpluses
responsibiliti~~
to discharge in the
adjustment process.
In the ten years, 1958 - 1967, we ran a cumulative deficit
of $27 billion -- an annual average of $2.7 billion -- more
than four times the average of the earlier period.
Our
Government and military account deficit was reduced but
remained large
$55 billion in ten years.
It was, of course,
strongly affected by Vietnam after mid-1965.
Our capi tal account in the 1958 - 1967 period showed
real improvement as compared with
th~
~arlier
period.
:~o
The
annual average, in fact, showed a smaller surplus than in
1941 - 1957.
Capital outflows on direct investment, in the
form of bank loans and in portfclio,rose sharply -- enough so
that the steadily rising income just about kept it in balance,
but only after the outflow had beAn somewhat contained and
only after various special transactions, including some debt
prepayments to the United states on Government account.
But the big change came in trade aild service account.
Here our cumulative surplus was less than $19 billion, or
under $2 billion a year.
Our exports grew but, particularly
in later years, imports grew faster, and
increasing deficit
~n
tourist account.
",~
incurred a
ra~idly
128
- 6 -
We did, in 1961 - 1964, show improvement in trade and services,
but that improvement was not characteristic of the period as
a whole.
Now comes the second theme of counterpoint -- both a more
full analysis of the deficit in 1958 - 1967 and what was done
to correct it.
One is frequently met with two broad questions concerning
our payments balance problem.
The first runs as follows:
big, and growing.
The U. S. economy is strong,
The dollar is the great reserve and trans-
actions currency for the world.
The balance of payments
deficit is only a fraction of one percent of the gross national
product.
Why is there any problem?
The other runs along these lines:
relative to gross national product.
The deficit is small
Why can't it be corrected
very easily by merely restraining demand in the U. So, thereby
improving the current account and particularly the trade position?
Both approaches, of course, imply that it is unnecessary
to have any selective or direct program to curb outflows.
The answer to the first question is relatively simple.
No one would be much concerned about a U. S. deficit which was
a fraction of one percent for one year
or even several years.
~J
~. ~ ~
)
~J
_ '" l
- 7 As I noted, in the early post-war years, our generous assistance to the war-torn countries of Europe and Asia left us
with moderate deficits which we were prepared to accepto
They were not only acceptable but
by the countries
desi~:'d
which were receiving dollars to build up their reserves.
But, by 1958, the deficits were
easily.
becomin~
In 1958 - 1960, they averaged
too big to finance
~3.7
billion.
In that
volume, they supplied too many dollars too fast to be absorbed
into world reserves.
A substantial part of those dollars
came back for conversion into gold -- and our reserves fell.
With the American economy operating well below capacity,
there was nothing to be gained and much to be lost by depressing it further.
Therefore, the first actions to reduce the
deficit aimed at reducing the foreign exchange costs of Government spending overseas.
Savings in this area, plus improvement
in our trade account, reduced the deficit.
But then capital
began to flow out in increasing volume -- partly because we
generated large savings and had large capital markets; partly
because of investment opportunities overseas, and partly because
the long campaign to increase U. S. foreign investment had gradually won many converts.
These tendencies were dampened somewhat
by the Interest Equalization Tax in 1963 and by the voluntary program to restrain direct investment and foreign lending in 19650
- 8 -
The 1960 deficit was $3 09 billiono
was $202 billion o
billiono
The 1962 deficit
The 1965 and 1966 deficits averaged $1 3
0
But, in 1967, the deficit was back to $3.6 billion,
with half coming in the last quarter alone.
That figure
reflected a number of factors -- some of which were nonrecurrent -- but it was simply too big to ignore.
The second question requires a more complex answer to
give the reasons why a proper corrective program for the
U. So balance of payments involves more than simple restraint
on the domestic economy.
But I want to make quite clear that
restraint of the domestic economy is an integral part of the
January I program -- the part which the President called "the
first order of business."
It is important to our international
position and essential to our domestic position.
It involves
an income tax surcharge and other tax measures, plus expenditure
control, plus a call for a more effective voluntary program of
wage and price restraint.
But, in addition to this "first
order of business," additional measures are needed for an
effective program to correct our payments imbalance.
There are two primary reasons for this approach.
First,
balance of payments problems are more complex today than they
were in the earlier years of this century
0
- 9 -
Second, we have learned that too much deflation may cure a
payments deficit but may end by killing the patient and
passing on the disease to all of his relatives -- his trading
partners.
It is now Generally recognized that deflation was
carried too far by some major countries in the 1920's and
early 1930's.
And it is now recognized that this resulted
not only in reduced growth in deficit countries but in the
world as a whole.
Sharp deflation as a policy simply is not
acceptable today in any country -- or in the world.
In an earlier day, at least in theory, balance of payments
deficits generally occurred when a country's economic pace
was too fast relative to its resources and relative to growth
in other major industrial and financial centers.
The country
with an inflationary boom began to have rising prices; its
exports fell, and its imports rose.
reduced trade surplus.
The direct effect was a
The cure was to deflate the economy,
or, at least, dampen the inflationo
And this was usually
accompanied by general tightening of credit and rising interest
rates that accentuated the deflation in the economy over time.
Moreover, in the short run, these rising interest rates tended
to stimulate borrowing abroad and to attract foreign capital
in an equilibrating manner.
- 10 I have noted that a policy involving sharp deflation is
no longer acceptable.
But this is due not merely to dislike
of deflation but also because it, alone, does not meet the
problem.
Our persistent deficit has important elements that
make it far different from the early 20th century, both in
genesis and in proper treatment.
The foreign exchange costs
of our world-wide defense alliances simply are not susceptible
to being reduced by general fiscal and monetary policy.
Gross
outlays on this account amount to about $4.3 billion a year,
and the impact on our balance of payments, even after netting
receipts from sales of military goods to foreign countries,
is about $3.3 billion.
Our gross expenditures on tourism (including fares to
foreign carriers) were about $4 billion in 1967, and the
world-wide net outflow on this account was around $2 billion,
with $1-1/4 billion of this accruing to countries outside the
Western Hemisphere.
Our tourist outlay has been rising at
an average rate of about 12 percent a year in the past ten
years, a rate far in excess of the growth in the gross national
product.
This steeply rising trend is related to the growing
number of people with higher incomes, and to various other
factors, much more than to fluctuations in the current rate
of expansion in our economy.
~~
1 vv
- 11 -
Our capital outflow has become very large and quite
complex
0
In the early 20th century, we thought of capital
investment as flowing from the more advanced countries to the
developing countries.
Today, our private capital outflow
includes a sUbstantial element of investment in countries
already industrialized, in Europe, Japan, and elsewhere.
I have tried to demonstrate that the more complex
characteristics of deficits in general, and of the U. S. in
particular, require both domestic economic restraint and a
selective attack upon particular items of deficito
add one further important point here.
I should
The January 1 program
was designed to be a balanced program and one that would
produce results quickly.
The devaluation of sterling, the
heavy pressures on the gold and foreign exchange markets,
and the sharp deterioration in a payments position in the
last quarter of 1967 all underlined the need for strong action.
The January 1 program is designed to be a balanced
program -- balanced in three important aspects.
There is
balance between measures to restrain the domestic economy and
avoid inflation and direct measures to improve particular
segments of our international payments o
There is balance
between selective measures on capital and on current account.
- 12 -
And, finally, there is balance in the selective measures'
impact on the rest of the world.
The program is deliberately
designed to reduce the impact of adjustment on countries least
able to bear it and to place most of that impact directly on
countries in surplus and in strong reserve positions.
And
it is important to note that this selectivity is in favor of
those parts of the world that should be favored -- it is not
selective for the advantage of the U. S.
Right at this pOint, let me stress again the fact that it
is vital to have more restraint on our domestic economy
vital both for our internal economic health and for our
external accounts.
An economy running as fast as the U. S.
economy is running today is courting trouble in the future
on the domestic front and in our international trade account.
In this connection, I want to point out that our foreign
friends share this view.
Contrary to some opinion I have
seen expressed, this view from abroad does not represent a
price to be charged for cooperation in helping to maintain
stability in the international monetary system.
On the con-
trary, our foreign friends see international monetary instability
if the U. S. undergoes either sharp deflation or inflation.
Their fear, which we share, is that an overheated U. S. economy
will produce, in time, a badly deflated U. S. economy -- a
development that would hurt world economic growth as well as
U. S. economic growth.
- 13 -
They advocate -- as we do -- fiscal restraint in the Uo S. and
expansion of under-utilized capacities in European economies.
Both actions will facilitate the smoother working of the
adjustment process.
It is hard to appraise the results of the new program to
date
partly because we will have nothing approaching
definitive first quarter figures for another five or six weeks
and partly because the new program is not fully in force as
yet.
Most importantly, we do not yet have fiscal restraint
increased taxes and expenditure control -- although prospects
for action have improved substantially in the past two or three
weeks.
We do know that the trade account is not behaving as
well as had been hoped -- partly because of abnormally high
imports of copper and steel, which reflect actual or anticipated
strikes, partly due to excessive economic growth, which induces
imports in general.
The capital restraint programs -- on direct investment
and on financial institutions -- appear to be working wello
But, in the capital account area, two factors probably have
worked against us in the first quarter -- the gold crisis and
the fact that special transactions in the first quarter of 1967
were quite large and were smaller in the first quarter of 1968.
- 14 -
But our basic capital account trends seem to be quite
favorable
0
Work on reducing the net balance of payments drain on
Government account is proceeding with every promise of success particularly in the important area of further neutralization
of the foreign exchange costs of our overseas military expenditures in Europeo
We have not made equal progress on the travel
and trade disadvantages sectorso
When the full program is in being and operative, I am sure
it will lead to the goal set by the President on January 1
to bring our balance of payments "to, or close to, equilibrium."
Now let me turn to my third theme -- which I characterized
as andante and which moved abruptly into scherzo.
It was an-
dante in the sense that it has taken months and years to reach
agreement on a new international reserve asset -- the SDR; it
became scherzo after the British devaluation and the gold
rushes of last Fall and this March.
I speak first of the gold situation, which, in the past
three weeks, has undergone fundamental change -- in fact, a
change so fundamental I am not sure it has been fully understood.
A little history may be useful at this point.
In the early post-World War II period, a free market for
gold, without any gold pool operations, frequently saw prices
well above $35 per ounce and, after 1952, moderate fluctuations
both above and below $35 per ounce.
1~7
~VI
- 15 -
In 1960, there was an outbreak of the free market price on
the up-side, following three years of massive U. S. payments
deficits, and there were substantial conversions of dollars
into gold by foreign monetary authorities.
In the Fall of
1961, the now famous Gold Pool began to operate in order to
stabilize the free market price.
But, up to that time, there
really was a monetary gold price and a free market price
which could and did differ o
What seems to be overlooked in the history is that the
Gold Pool operated on both sides of the market from late
1961 until it closed at mid-March, 1968
0
The objectives
were to smooth out market operations and to provide an
orderly way for new gold to enter the monetary system o
These objectives of the Pool members were carried out
very well for most of the life of the Pool o
A number of
crises -- that of the Cuban missiles and the assassination
of President Kennedy, to name but two -- were rather easily
surmounted, and, from its inception through the first ten
months of 1967, the Pool was a significant net buyer of gold.
The Pool operations showed a small favorable balance by
the end of 1962, and there were large inflows in 1963 and 1964.
In 1965, the gain was diminished, but the Pool remained on
the credit side of the ledger..
In 1966 and 1967, with one
- 16 of the major St'pply factors -- Russian
saJp.s
absent from
the market, there was a moderate net ontflow as conditions
remained in
fa~'
rly good balance wi th cccasional speculative
outbursts, suer as that in June, 1967, at the outbreak of
hostilities in the Mid-East, at which time the Pool was still
a net purchaser of over $1 billion in gold o
During the period of Pool activity, there was an evolving
awareness of the need for a major change in the international
financial system.
The long-run problem of providing for
future international liquidity needs, as the supply of new
gold for monetary reserves diminished and new dollar outflows
were reduced through correction of the imbalance in the Uo S.
payments position, had been long recognized by monetary
authorities.
In the first instance, short-term credit
facilities in the form of swaps and medium-term conditional
credits through the enlargement of IMF quotas were set in place.
Invaluable as these have proven in meeting individual crises
of a reversible nature, they obviously do not meet the more
fundamental long-term global liquidity problem.
It was with
the latter in mind that work progressed on the creation of a
new reserve asset, which has come to be known as the SDR.
But, while steady, albeit slow, progress was being made
on a plan for a new reserve asset, a series of events created
uncertainties in the international monetary systemo
- 17 By
far the greatest factor of instabi Ii ty was 1 tH::
weakness
of sterling, which culminated in devaluation at mid-November,
1967.
But the Middle East crisis and the return to large
deficit by the U. S. in 1967 also added to uncertainty.
Rumors, some inspired, some merely reflective of unease,
swept through the markets -- particularly after sterling
devaluation.
In this setting, a number of people became
convinced that the price of gold would have to be increased,
and free market gold sales rose to very large volume.
The immediate outbreaks in late November and in December
were not unexpected, following the devaluation of a major
currency, and the authorities hoped that a continued show
of determination to hold the market, as well as the official,
price of gold would restore stability and give time to set
firmly in place the plan for the new reserve asset and thus
demonstrate the greatly reduced reliance of the world's
monetary system on gold.
However, there was further heavy loss of monetary gold
by the Gold Pool members in March.
Thus, it seemed that Pool
action, rather than restoring stability, tended then to feed
the speculative flames.
A new course of action was indicated.
I'
1~IV
ti
- 18 -
But, also, the large speculative holdings of gold brought a
new factor into the market which enabled the authorities,
with more equanimity, to allow the free market price to seek
its own level.
Certainly it would have been preferable if, as we had
hoped, a more orderly evolution could have taken place following the actual adoption of the SDR agreement, without
experiencing the speculative outbreak that did occur.
The
fact that it did occur does not, however, make less viable
the move to free and separate the private gold markets from
what might be termed the monetary gold market, composed of
the existing stock of monetary gold.
Fortunately, the near conclusion of the agreement on SDR's
enabled the Gold Pool members, in their Washington Communique
of March 17, to state that "as the existing stock of monetary
gold is sufficient, in view of the prospective establishment
of the facility for Special Drawing Rights, they no longer
feel it necessary to buy gold from the market."
The successful
outcome in Stockholm last weekend underscored this position
and removes much of the threat that a distinct free market
price, whether above or below $35 per ounce, could have
previously had on the official monetary price.
- 19 -
The Stockholm Communique said "the Ministers and Governors
reaffirmed their determination to coorerate in the maintenance
of exchange stability and orderly
exchan~e
arrangements in
the world, based on the present official price of gold."
It
also said, "Moreover, they intend to 5::rengthen the close
cooperation between governments as well as between central
banks to stabilize world monetary conditions."
Without a continued monetary demand for new gold, it
will be interesting to see what does develop in the free
markets.
The amount of annual new production is far in excess
of legitimate industrial needs for gold.
This leaves ample
room for a considerable volume of hoarding or savings in
those countries whose populations have been historically
attracted to gold as a store of value.
Without speculative
activity, the market would appear to have presently a supply
potential somewhat greater than the hard-core demando
And
this is without taking account of the present large overhang
of gold in speculative hands.
The events so far have clearly disappointed those who
felt that, in the absence of Pool support, the price would
rise sharply and permit a quick and easy killing in the
market.
Nor can the price situation to date give comfort to
those who have urged a doubling of the official price of goldo
One of the oddities I frequently encounter in the arguments of those who would have drastically increased the price
142
- 20 -
of gold is that they profess fear of the inflationary potentia:
in the controlled creation of reserves at a moderate rate
but could view with apparent unconcern the inflationary
consequences of a doubling of the price of gold which would
add over $40 billion of new liquidity at a single stroke.
They apparently fail to realize that not only would a gold
price increase have been the most inequitable and unsettling
method of creating additional liquidity but that decisions
by monetary authorities on gold price increases are no less
man-made than the decisions on creation of a new reserve
medium.
The new two-tier system has been characterized by some
as a stop-gap measure.
I am not sure what is meant by this.
If they mean that it doesn't solve all of our problems
most particularly the need to eliminate our balance of payments
deficit -- they are, of course, right.
If, however, they mean
that a two-tier gold system won't work, even with a welloperating adjustment process, to reduce our deficit and to
reduce the surpluses of others, I disagree.
In conclusion, let me try to blend my three themes
into a finale e
The new arrangements on gold underline the
stability of the $35 price for monetary transactions.
The
prospective new SnR system will produce reserves as and when
143
- 21 -
needed to supplement existing reserves -- both the gold in
the hands of monetary authorities and the foreign exchange
they hold.
This is a viable system.
But this, or any other system, can suffer shocks if the
economies of major countries, and particularly the Uo S.
economy, get badly out of balance.
There is nothing in the
new monetary system that guaranties order in a world in basic
disorder.
So it is necessary to have a smooth adjustment
process, and it is necessary to bring our own payments
pOSition into better balanceo
It is equally important to
have growth abroad with price stability and an elimination
of chronic surpluses.
The new American program should go a long way to achieve
the goal.
With cooperation -- in the interests of themselves
and the world -- the chances of reaching that goal will be
even more improved.
And, with a better balanced but growing
world economy, the new monetary system -- built as it is on
the solid foundations laid at Bretton Woods more than twenty
years ago -- should function wello
--000--
144
STATEMENT OF JOHN R. PETTY
ACTING ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE SENATE BANKING AND CURRENCY COMMITTEE
APRIL 5, 1968
Mr. Chairman, I welcome this opportunity to appear before
this Committee in support of S. 3218.
I would like to empha-
size the importance of S. 3218 in the framework of our comprehensive program to restore equilibrium to our international
accounts.
The need for action to eliminate the balance of payments
deficit is, in the words of President Johnson, "a national
and international responsibility of the highest priority."
The reasons for this priority are abundantly clear.
The strength
of the dollar abroad depends on our payments position.
The
international monetary system which rests so largely on the
dollar will be greatly strengthened by elimination of the
United States payments deficit.
A stable international
monetary system is essential to assure expanding world trade,
and a prosperous international economy.
On January 1 of this year, the President proposed a comprehensive balance of payments program designed to bring our
balance of payments position close to equilibrium in the year
ahead.
The program is broad and comprehensive.
It requires
additional savings in many phases of our activities abroad.
It affects government expenditures overseas, foreign loans
and investments, foreign travel and foreign trade.
14~
- 2 -
A great part of this program has already taken concrete
form.
A program has been established to cut government
personnel and other expenditures overseas as well as to reduce
the impact on our balance of payments of security expenditures
which cannot be further reduced.
The Office of Foreign Direct
Investment is now administering a program of temporary restraint
on direct investment and the Federal Reserve has greatly
strengthened its existing voluntary restraints on lending abroad
by banks and other financial institutions.
In the field of travel, the Administration has made a
number of proposals, now under consideration by Congress, to
decrease the amount of money spent abroad by
u.s.
travelers.
We are hopeful that these measures will be enacted.
On the
earnings side, the Industry-Government Task Force on Travel,
chaired by Ambassador McKinney, has made comprehensive recommendations to promote the flow of foreign travelers to the
United States.
Many of the recommendations of the Task Force
have already been implemented.
Moreover, negotiations, initiated by the President, are
in progress to improve our trade position.
The President in his January 1 Message also focussed on
the long-term measures
wh~ch
would assure a strong balance of
payments position for the United States.
Besides enacting the
anti-inflation tax, encouraging wage-price restraints and
reducing crippling work stoppage~three areas were cited where
146
- 3 further efforts are needed:
(1)
increases in exports,
(2) reduction of nontariff barriers, and (3) increased foreign
investment and travel in the United States.
The most important way to earn foreign exchange is through
increased exports.
Unfortunately our trade surplus has
decreased from $6.6 billion four years ago to less than $3.6
billion last year.
Increased exports are the cornerstone
of our balance of payments position.
In addition to measures
to keep the domestic economy competitive and stable and to
keep world markets open to U. S. goods and services, we need
to make our industry more export-minded through export expansion
programs.
To accomplish this objective, the President proposed:
(1) AS-year $200 million Commerce Department program
to promote the sale of American goods overseas.
(2) A joint Export Association program under the
Commerce Department to provide direct financial support
to American corporations joining together to sell abroad.
(3) A more liberal rediscount system to be provided
by Export-Import Bank to encourage banks to help firms
increase their exports, and
(4) The Export
E~pansion
Facility.
The Export Expansion Facility legislation which is before
you today can make a significant contribution to a larger
United States trade surplus and thus to our balance of payments
- 4 position.
It can do this principally through helping in the
development of new markets for U. S. goods and services and
by assisting smaller companies in exporting.
President Johnson
in his letter of March 20, 1968 transmitting the
export
expansion facility draft bill and requesting approval of a
$2.4 million supplemental appropriation to launch the five
year Commerce program to promote American exports said "Both
actions I recommend today will help increase America's exports
a vital element in the balance of payments equation."
The establishment of this facility within the ExportImport Bank was specifically endorsed by the President's
Cabinet Committee on the Balance of Payments.
The Action
Committee on Export Financing of the National Export Expansion
Council in 1966 proposed the creation of a somewhat similar
national interest fund in the Export-Import Bank which would
permit Export-Import Bank to support
u.
s. exports on the
basis of less stringent credit judgments than called for by
existing Bank standards.
The proposal also finds its orlgins
in the Export Expansion Act introduced in 1965 by
Senator .Magnuson.
It is evident that considerable. thought
and study have gone into this proposal.
I would like to emphasize that the legislation before
you is designed to improve the United States balance of payments
by expanding U.s. exports on a commercial basis.
Mr. Linder
14~
- 5 -
has already emphasized that the new facility is designed to
give further support to our commercial export trade.
We in
the Treasury are keenly aware that a loan financing exports
is only helpful to our balance of payments to the extent down
payments and installments are received.
Therefore we support
S. 3218 because we are convinced that the Export Expansion
Facility will encourage acceptance of our exports in difficult
markets.
It will permit our products to become established
in new markets where the potential for follow-on sales is
high and it will finance receivables on commercial terms for
which we will be paid.
In markets where competition is aggressive
it will facilitate the maintenance and expansion of existing
export markets.
For these reasons, Mr. Chairman, the
that S. 3218 will assist our exporters
-to
Tr~asury
believes
obtain new sales abroad
and contribute to elimination of our balance of payments
deficit.
·, -~ 0
.L;'i __
TREASURY DEPARTMENT
(
~
RELEASE 6:30 P.N.,
!9, April 8, 1968.
ItISULTS
or
BIASURf' S WIlILY BILL OFJElWIG
~ Treas\1l'1 Depar1aent anD.OQIlced tMt tbe teDders for two series of Treasury
ls, ODS series to be aD acl4itiozal issue ot the bills dated January 11, 1968, and
otber aeries to be dated AprU 11, 1968, "lUch were oftered on April 3, 1968, were
Dl4 at the ledera1 Ba •• rve Jaw to4a1. 1'eJllders were iDV1.ted tor $1,600,000,000,
thereabouts, of 91-daJ biU. ad. tar $1,000,000,000, or thereabouts, of 182-day
18. The details ot tile two •• rie. are as follows:
or ACCEPlED
DE
91-4&y !reasury ~lls
July 111 1968
Approx. Iquiv.
Price
Annual Bate
98.673
5.25~
5.~
98.6'9
98.658
S.30~
_tung
IPITITIVE BIDS:
!I
High
Low
Y
Average
!I Excepting
Price
91.286
91.260
91.210
Y
Approx. Equiv.
Jumua1 Rate
5.36iij
5.4.2~
5.40~
)}
'!I
1 tender of f3oo,OOO;
Excepting 1 tender of $850,000
the aaoont of 91-day billa bid tor at the low price vas accepted
ot the aaaunt of 182-a.y bills bid tar at tbe low price vas accepted
2~ of
~
182-4&1 Treasury Bills
_turinS October 10 z 1968
L '1DDERS A.PPLIiD J'OR AID ACCJt?r.ID BY nDIRAL BESERVJ: DISTRICTS:
l.tr1ct
,.ton
v York
1l.ade1phia
evelaDd
cbaoDd
lanta
1caio
., Louis
DlleapOlis
nsaa CitJ
lta.
11
lranelaco
Applied lor
•
23,868,000
1,605,593,000
35,069,000
45,332,000
1',689,000
'1,'-'6,000
281,211,000
68,89',000
11,415,000
30,125,000
21,139,000
203,462,000
$2,39',2'3,000
ACeetted
,3,868,000
956,193,000
23,069,000
35,332,000
1',689,000
~,44r6,OOO
196,711,000
56,594.,000
11,4rl5,OOO
30,125,000
18,139,000
19~,4.62,OOO
Applied lor
•
21,226,000
1,261,399,000
13,128,000
69,161,000
6,780,000
27,599,000
232,128,000
4.l,137,OOO
6,028,000
1',877,000
22,311,000
160,3403,000
.1,600,04.3,000 ~ $1,883,329,000
Accepted
$ 17,226,000
581,199,000
5,728,000
4.5,367,000
6,280,000
20,023,000
13.,168,000
31,365,000
5,023,000
14,877,000
12,351,000
120,103,000
$1,000,316,000 ~
llcludes '311,'95,000 noncc:.petit1ft teDders accepted at the avenae price of 98.658
nCludes .13',068,000 noncCllpeti tift teJlllUI aecepted at the averaae price of 97.270
be •• rate. are OD a be.Dlt tilcOUllt . I i . . !.be equift1eJlt coupon issue yields are
.'S~ tor the 91-.., bill., u4 5. 6~ tor the 182-day 'ills.
-1212
April 10, 1968
FOR IMMEDIATE RELEASE
TREASURY'S HEEKLY BILL OFFERI;:JG
The Treasury Department, by this public notice, invites tenderG
for two series of Treasury bills to the agg::'.sgate amount of
$2,700,000,000, or thereabouts, for cash a~d in exchange for
Treasury bills maturins April18,1968,
in thE: a:-nourlt ot
$ 2,502,288,000, as follows:
91-day bills (to maturity date) to be issued April 18, 1968,
in the amount of $ 1,600,000,000, or th'2r-ec~boutfJ) repr2senti.ns c.n
additional amount of bills dated January 18,1968, and to
mature Julv 18 1968
originally Issued in the amount of
J
"
$1 000 753 000 the additional and original bills to be fresly
intercr)angeable.
182-day bills, for $ 1,100,000,000, or thereabcuts, to be det2d
April 18, 1968,
and to mature October 17, 1968.
The bills of both series will be issued on a discount basis under
competitive and noncompetitive bidding as hereinafter provided, and 2[;
maturity their face amount will be payable without inte~est. They
will be issued in beare I' form only, and in denornina t ions ')f $1,000}
$5,000, $10,000, $50,000, $100,000, $500~OOO and $l,OOO}OOO
(maturi ty value). Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard
time, Monday, April 15, 1968.
Tenders will not be
received at the Tre3.3uFY Dek'artment J ~ilashington. Eac h tend::: r :T'.ust
be for an even multiple of $lJOOO, and in the case of cOl7lpetitiv2
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 th2r2fo~.
Banking institutions generally may submit tenders for account of
provided th2 names o~ the custc~ers S~2 sat forth in S~~~
~enders
Othe r\::>~ ~han
ba""'-i""~·
"'~..L-l not h-:> ~~~1"+-";:''''
t-·
v!
.i.J.6 i'~st1+-1'+-~onL~
_;".,yt,v .....
.Jv __ '-.
3ubmit tenders except for their mm account. Tenders ;·;ill be r-ec2ived
'lithout deposit from incorporated bahks and trust cor::panies and [:::";:);';1
:oesponsible and ~~cognized de ale:'s in irw2 St::'.2:1t sec.1:''''i ti2;:; . 'I'en2.::: ~"S
~
~ 0"''''
-,"',.....-,avo.+of'
2 r,Cl'":""t ,._
.... ·~;-,-40;"" ..... ··'. . 0
~2"':::'
.'rom. oth
,ers l"USl." L-€ o.C,--,...;:'iI,pan""eo.
. J pa,)'!,
__ !.v
_
..
lmoun'c of 'Tl'east:::; bl11s api)lied for, u~1123S :,:-::: :8::,-:";:;:;:-'3 03:-2
lccompanied by an express guaranty of: payment by an in:orpo~ated D:::,:--'K
lr trust corr.par.y.
~ustomers
OJ
~
~JA
• .
'"""'I.L.
F-1213
1...,
,..
""''"'"
II
,0
'';''':''
......
.i.
:)c~
j:J' __ ~_._ ....
lr.,.,_
V
_
.....
-..J
l_
-
._.,
- 2 Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public annQuncement 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 tnese reservations, noncompetitive tenders for
each issue for $200,000 or less without statep 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 April 18, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing April 18, 1968.
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 nmv 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 othert"ise disposed of, and such bi lIs are exc luded
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 O~
Subsequent purchase, and the aoount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or 'loss.
.
J
Treasury Department Circ~la~ No. 418 (=urrent revisic~) a~d this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be c~~ained f~c
any Federal Reserve Bank or Branch.
000
FOR D·r·IEDIATE RElEASS
April 10,
19~a
The Tre2.s1..:r'.r annoll..":ced. today th3.t ·"2~.::..y oi'::::.'er:"ngs of 6-t'.ont:-, bills
will be en13.rgerl by .~1(;0 ::lillion c:)=.~nci!:.0 wi t~ the bills to 02 a'-lctioned
means that ,ree}:ly bill offeriT"-e;s over this period 'tiou.2.d inr::llJdE: ;;1. 6 billion
of 3-month bills and $1.1 billion of 6-month bills.
F-1214
TREASURY DEPARTMENT
April 11, 1968
FOR IMMEDIATE RELEASE
JAMES F. KING, ASSISTANT TO SECRETARY,
RETIRING FROM GOVERNMENT
James F. King, Assistant to the Secretary of the Treasury
for Public Affairs, will retire from government service on
Friday, April 12, after two years on Secretary Fowler's
staff and more than 20 years in other Government executive
positiors.
Born in Georgetown, South Carolina, in December 1907,
Mr. King received a B.S. degree in government and economics
from Harvard College in 1929. He worked as a reporter and
editor on newspapers in his home state, and for the
Baltimore Post, the Baltimore Sun, the Washington Daily News
and the Washington Post.
Before World War II, Mr. King helped establish the
Federal Wage and Hour Administration and served as Assistant
to the Administrator.
Immediately after Pearl Harbor he
became the first Executive Officer of the wartime Office of
Censorship, and then worked successively on wartime problems
of housing, labor and price control, before going on active
duty with the U. S. Navy.
He served as a Naval Aviation Staff
Officer with the Atlantic Fleet and was awarded the Navy
Commendation Ribbon.
After the war he served as Assistant to Secretaries of
the Army Kenneth Royall, Gordon Gray and Frank Pace.
In the
period just before the outbreak of the Korean War he helped
set up the unified information organization of the then-new
National Military Establishment, now the Department of Defense,
and was its first Deputy Director.
During the Korean War he was Deputy Administrator of the
Defense Production Administration, Chairman of the Defense
Materials Operating Committee and U.S. member of the NATO Coal
and Steel and Industrial Raw Materials Committees. He was an
advisor to the Secretary of State at the Geneva Conference of
1954, and was a consultant to the Secretary of Defense in 1956.
F-121~
1 ~4
.J '
- 2 -
He went to the Office of Defense -Mobilization in 1957 to
assist Director Gordon Gray and as Staff Coordinator helped
merge ODM with the Federal Civil Defense Administration.
He was in charge of Government Relations for the
Manufacturing Chemists Association between 1959 and 1963,
headed the National Science Foundation's Office of
Congressional and Public Affairs between 1963 and Apri1 12, i966,
when he joined Secretary Fowler at the Treasury.
He is married to the former Janet Leake, of Clinton,
South Carolina. Mr. and Mrs. King have two sons:
James, Jr., who is on the staff of the U. S. Public Health
Service in Washington, D. C., and William, a captain in the
U. S. Army Special Forces in Vietnam.
000
TREASURY DEPARTMENT
April 12, 1968
FOR IMMEDIATE RELEASE
TREASURY SECRETARY FOWLER NAMES CROCKER NEVIN
AS NEW SAVINGS BONDS CHAIRMAN FOR STATE OF NEW YORK
Crocker Nevin, President and Chief Executive Officer
of the Marine Midland Grace Trust Co. of New York, has been
appointed by Secretary of the Treasury Henry H. Fowler as
volunteer State Chairman for the Savings Bonds Program in
New York, effective April 8. He succeeds John D. Lockton,
retiring Treasurer of the General Electric Co., who has
served as State Chairman since September 1954.
Mr. Nevin will head a committee of state business,
financial, labor and governmental leaders who -- working
with the Savings Bonds Division -- assist in promoting the
sales of Savings Bonds and Freedom Shares throughout the
state.
Mr. Nevin was born in Tulsa, Okla., in 1923.
graduated from Princeton University in 1946.
He was
He joined Marine Midland Grace in 1952. In September
1966, he was named President, and last January he added the
title of Chief Executive Officer.
Mr. Nevin is married to the former Mary Elizabeth Sherwin.
They have four children -- Anne, Paul, Elizabeth and Crocker.
000
1
~~
_.vv
TREASURY DEPARTMENT
(
April 12, 1968
FOR IMMEDIATE RELEASE
TREASURY MARKET TRANSACTIONS IN MARCH
During March 1968, market transactions in
direct and guaranteed securities of the Government
investment accounts resulted in net purchases by
the Treasury Department of $32,973,500.00.
000
F-1216
TREASURY DEPARTMENT
151
FOR A.M. RELEASE
TUESDAY, APRIL 16, 1968
TREASURY DEPARTMENT ANNOUNCES PUBLICATION
OF REGULATIONS UNDER SECTION 482
OF THE INTERNAL REVENUE CODE
The Treasury Department today made an announcement relating
to Section 482 of the Internal Revenue Code of 1954.
The Treasury announced the issuance of final regulations,
and a section of new proposed regulations, affecting the
taxation of transactions between related taxpayers, especially
those between U.S. companies and their foreign affiliates.
The final regulations will be published in the Federal Register
of Tuesday, April 16, 1968, as Treasury Decision 6952.
In its announcement, the Treasury explained the chief
differences between the final regulations and the proposed
regulations previously published in the Federal Register on
August 2, 1966 (31 F. R. 10394).
In addition, the Treasury explained the policy which the
Internal Revenue Service will follow in the administration of
Section 482.
GENERAL PLAN OF REGULATIONS
Section 482 of the Internal Revenue Code gives the
Commissioner of Internal Revenue authority to allocate income
and deductions between or among organizations, trades, or
businesses anooor controlled by the same interests in order
to prevent the avoidance of tax or clearly to reflect income.
To accomplish this, the Treasury said that, in accordance with
the basic rule which has been in effect since 1935, allocations
and adjustments will be based on standards which would be
applied by unrelated parties dealing at arm's length. For
example, the Commissioner may make allocations to reflect
adequate reimbursement for services rendered by one member of
F-12l7
- 2 -
a group of corporations to another member of tIC' ·~nnlp where
the services are for the benefit of the lattL ,- '~lcmber. He also
has the authority to adjust the prices charged for goods sold by
one member to another where the prices charged .1rf' nnt a fair
reflection of the proper price, or to require rl proper charge
where money or property of one merr:ber is l.iadr '", i 1<1:. . 1 (> to
another.
The plan of the regulations is to describe the application
of the arm's length standard generally and then to detail
its application in five specific types of transactions. In
each of these specific cases the general rule is first stated
that is, that the proper arm's length consideration will be
determined with reference to all surrounding facts and
circumstances. Next, in some instances, a safe haven or prima
facie rule is provided. The safe haven or prima facie rule
provides a specific rate or charge that will be accepted as
arm's length unless the taxpayer (and not the Government)
desires to establish a more appropriate rate.
CHANGES FROM REGULATIONS PREVIOUSLY PROPOSED
The Treasury stated that, in response to comments received
from the public, various changes have been made in Treasury
Decision 6952 from the proposed regulations published
August 2, 1966.
These changes include:
10 Sales of Tangible Property. In determining
an arm's length price for the sa1~ of goods, the
previously proposed regulations and the final regulations
describe in detail three pricing methods and specify
the conditions under which each method is to be used.
The three methods are the "comparable uncontrolled
price method", the "resale price method" and the
"cost plus method". Under the comparable uncontrolled
price method, which is first in the order of priority,
the final regulations provide for a greater range of
adjustments which may be taken into account in
determining the arm's length price which must be
charged between related parties o This expanded
range of adjustments will make this method more
useful in determining arm's length prices and should
result in a more satisfactory standard.
- 3 -
158
Some taxpayer comments indicated concern that
the proposed regulations did not a~equately take into
account the competitive position of foreign affiliates
in local m9-rkets as a factor in setting intercompany
prices. The final regulations make it clear that in
appropriate cases a taxpayer may take into account the
competitive position of its affiliate in determining
prices. Under both the comparable uncontrolled price
method and the resale price method, market conditions
faced by the affiliate are taken into account. For
example, it is specifically provided in the regulations
that goods may be sold, for a period, at a price
which is below the full cost of manufacture in order
to establish or maintain a market.
The proposed regulations had provided that prlclng
could be tested in some manner other than the three
methods specified in the regulations, but only where
the taxpayer had actually used another method in the
past and only when the District Director was satisfied
that such method was clearly more appropriate. The
final regulations have removed these limitations.
Consequently, a taxpayer will be allowed to use a
pricing method other than the three specified methods
if it is clearly more appropriate. Where, under the
facts of a particular case, none of the three specified
methods can reasonably be applied, some other method
can be used. In such cases, new pricing methods, or
variations on the three specified methods, can be
developed taking into account all relevant factors.
The Internal Revenue Service is considering, where
feasible, procedures for approving guidelines for use
in connection with audits of members of an industry where
the members desire to establish the applicability of a
method under these regulations.
2. Off-setting Transactions. The proposed
regulations had provided the rule that, in making
distributions, apportionments, or allocations between
two members of a group of controlled entities with
respect to particular transactions, the District
Director shall consider the effect upon such members
of an arrangement between them for reimbursement within
a reasonable period before or after the taxable year if
the taxpayer can establish that such an arrangement in
fact existed during the taxable year under consideration
The final regulations provide, in addition, that the
o
- 4 District Director shall consider the effect of any other..arm's length transaction between such members in the
.
. taxable year which, if taken into account, would result in
an off-set against any allocation which would otherwise
be made, provided the taxpayer is able to establish
with reasonable specificity that the transaction was
not at arm's length and the amount of the appropriate
arm's length charge. This liberalized off-set
procedure is a reflection of the Internal Revenue
Service's desire to insure that the regulations will
be applied and administered in a reasonable manner.
30 Loans or Advances. In the case of loans or
advances by one member of a group to another member,
the proposed regulations had provided that either a
safe haven rate or an arm's length rate of interest
would be acceptable. The final regulations provide
an additional rule which will allow the interest rate
charged by the lender to remain undisturbed if the
rate actually charged lies between the arm's length
rate and the specified safe haven rate. Thus, a
taxpayer is allowed a much greater degree of flexibility
in setting interest rates between related entities.
4. Performance of Services. The previously
proposed regulations and the final regulations provide
that an arm's length charge must be made for services
rendered. Under the previously proposed regulations,
unless either party renders services as part of a trade
or business, the arm's length charge shall be deemed to
be equal to the costs incurred. The final regulations
modify this rule by providing that the arm's length
charge shall be deemed to be equal to the costs incurred
except where the rendition of services constitutes an
integral part of the activities of either of the related
parties, even though neither is in the business of
rendering such services. New proposed regulations
have been published which would specify the instances
in which services are considered an integral part of
the business activity of the renderer or recipient.
The Internal Revenue Service has also announced the
publication of a Revenue Procedure which will allow a
taxpayer to request that the rules relating to
performance of services as they appeared in the
previously proposed regulations be applied for past
taxable years o
- 5 5. Use of Tangible Property. In the case where
one member of the group permits the-use of its
tangible property by another member, in determining
an appropriate rental, the regulations provide a
safe haven which may be used by taxpayers. This
charge is expressed in terms of a formula which
takes into account depreciation, a charge somewhat
equivalent to interest, and certain expenses incurred
in connection with the property. The new formula
in Treasury Decision 6952 is along the lines of the
formula that appeared in the proposed regulations
except that the new formula provides a level rental
charge.
6. Transfer or use of Intangible Property. In
connection with the transfer of intangible property
by one member of a group to another member, the
regulations require that an arm's length charge be
made
The regulations provide a means whereby the
necessity of determining the arm's length charge
may be avoided if the parties using the property enter
into a bona fide cost sharing arrangement in connection
with the development of the intangible property.
Detailed rules with respect to the establishment of a
bona fide cost sharing arrangement which appeared in
the earlier proposed regulations have been eliminated
in the final regulations. These rules are replaced by
a concise statement of general rules based on arm's
length standards.
0
The Internal Revenue Service is now studying
the feasibility of various methods of providing
greater certainty in this area, including the
possibility of the establishment of an administrative
procedure by which taxpayers may submit cost sharing
plans to the Revenue Service for prior approval for
the purpose of determining whether they meet the
requisite standards. The Revenue Service anticipates
that the flexibility provided by this change will
allow for the acceptance of all reasonable cost
sharing plans that are based on arm's length standards.
It is expected that cost sharing plans which would
have qualified as bona fide plans under the detailed
rules in the regulations previously proposed will
qualify under the final regulations.
- 6 -
GENERAL POLICY CONSIDERATIONS
Because these regulations affect all transactions between
related organizations, trades, and businesses, the general
descriptive statements above are subject to a number of
conditions and exceptions.
The Treasury stated that in view of the fact that the
arm's length standard has been the standard for many years
and the final regulations make no basic change from this
standard, the final regulations are applicable to all taxable
years except as provided in Revenue Procedures 64-54, 66-33,
and 68-22.
The Treasury stated that it is not the policy of the
Internal Revenue Service to make minimal allocations under
section 482. Rather, adjustments will be proposed only in
cases where there have been significant deviations from
arm's length dealing or where there has been a significant
shifting of income. Specific instructions have been issued
to Revenue agents reflecting this policy.
The Treasury added that the guidance provided by the
regulations is expected to minimize uncertainties about the
tax consequences of transactions between related entities.
It is expected that the specific rules provided by the
regulations will increase efficiency in audits and
facilitate voluntary compliance by taxpayers. However,
because of the varying and complex problems inherent in
business decisions, the rules, of necessity, are flexible
in some areas
Therefore, the Revenue Service will make
every effort to administer section 482 in a spirit of
reasonableness within the framework of the regulations.
o
Proposed regulations with respect to section 861
(relating to the determination of sources of income) were
also published in the notice of August 2, 1966. These
proposed regulations continue in effect under notice of
proposed rule making and will be given further consideration
before final action is taken thereon
0
. The final regulations were approved by Stanley S. Surrey,
Ass1stant Secretary for Tax Policy and Sheldon S. Cohen
Commissioner of Internal Revenue.
'
000
TREASURY DEPARTMENT
\
101 mARl 6:50 P. N.,
.....,. .lEU 15 J 1968.
RISUL'l'S 0.,
~'S
WIlILY mL OJ'JUIIO
!be '!reasury Departaent announc.d that tbe teDders
tor two series ot 1'reasUl'J
1111, o• •eries to be au a441tioaal issue ot tM 'ills ..ted. tlam1&J'7 18, 1968, aD4
lie otMr .. riel to be date4 April 18, 1968, which wre ottered OIl April 10, 1968, were
peDe4 at the Federal Reserve Banks toU.,. ~Dders were illrtte4 tor $1,'00,000,000,
r ~rt&boats, ot 91-day billa ao4 tor $1,100,000,000, or thereabouts, ot 182-4&7
111.. 'DIe details ot the tvo aerie. are as tol1ows:
DR
or ACCIP!ID
~<II!I!l!Ill
91-.., !rea.ur,
IIIS:
-.tur;h.l&
Price
98.626
98.616
98.619
lilb
Low
.lverage
3~
7~
.JU!l
~11s
182-4&7
!rea~ ~i11s
181 1918
Approx. lqui'Y.
_tung October
AD_llate
Priee
172 1968
Approx. EquiT.
5.&J
5.'1~
5.~~
AJamaalRate
5.S3iJ
97.200
5.57~
5.56~
91.180
97.185
Y
11
ot t.be UCUIlt ot 91-07 billa 'Di4 tor at the low price was accepted
ot the aaount ot 182-4&7 'Dills 'Did. tor at the low price was accepted
)IJIL 'IIIDDS .lPPLIID FOR AID ACC1I:PBD II J'lmERAL BiSDVI DIS'lmCTB:
l'aDlaa City
laUa.
au J'raaeiaeo
Aa11e4 ror
Aoeel'W
14.,,",000
26,",,000
2,213,502,000 1,~,'48,OOO
33,275,000
15,785,000
26,8'7,000
5',990,000
11,905,000
12,191,000
21,996,000
55,172,000
34.5,534.,000
278,l!5',OOO
M,2U,OOO
13,175,000
5,9<K,000
17,904r,OOO
19, MS, 000
2&,971,000
19,209,000
30,959,000
109 2 661 1 000
5i'1 Mal 000
msts
$3,255,763,000 $1,102,1'9,600
D1Itr1ct
Bolton
lewtork
Pbilade1ph1&
Cleftlud.
lie
__
Atlut&
Cb1eaao
St. Louis
JUue&polis
•
•
ABU••
•
~
*1,115,006
1,178,619,000
14,,796,000
-SS,O#d,OOO
5,117,000
4.5, 54.5,000
24.0,916,000
~,9~,OOO
17,965,000
17,715,000
20,119,000
34.5,151,000
!I $2,'92,001,000
AeeeEted
•
!,383,0"06
623,658,000
5,786,000
16,119,000
3,517,000
US, 230, 000
153,266,000
15,599,000
6,-'63,000
1',5240,000
10,619,000
233,911 1 °00
$1,102,135,000 ~
IIlcludes '276,3~,OOO DOl1Cc:.:pe'i1tift teD4ara acce,te4 at taa &"rap priee ot 98.619
Iacludes *l~, sss, 000 DoncCJlliteti th.. te... r. acceJte4 at tile &'ftrage price ot 97.185
bee rate. are ea & baDk d1sc<NBt _sis. •
equin.1ellt coupon issue 71el4s are
5.6~ tor the 91~ ~111st &ad 5.81~ tor ~ 182-", 'ills.
F-1218
TREASURY DEPARTMENT
FOR LMMEDIATE 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
$2,700,000,000,or thereabouts, for cash a~d in exchange for
Treasury bills maturing April 25, 1968,
in the amount of
$2,504,224,000, as follows:
91-day bills (to maturity date) to be issued April 25, 1968,
in the amount of $ 1,600,000,000, or thereabouts,,) representing an
additional amount of bills dated January 25, 19~8, and to
mature July 25, 1968, originally issued in the amount of
$1,002,368,000, the additional and original bills to be freely
interchangeable.
182-day bills, for $1,100,000,000, or thereabouts, to be
April 25, 1968,
and to mature October 24, 19680
dat~j
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, April 22, 19680
Tenders will not be
received at the Treasury De~artment, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
respons1b1e and recognized dealers in investment securities. Tendprs
from others must be accompanied by payment of 2 percent of the facp
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated D~nk
or trust company.
F-1219
- 2Immediately after the closing hour, tenders will be opened at ~e
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasu~
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on April 25, 1968, in
cash or other immediately available fund~ or in a like face amount
of Treasury bills maturing April 25, 1968Q
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 m
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 froo
any Federal Reserve Bank or Branch.
000
l
162
TREASURY DEPARTMENT
FOR IMMEDIATE RELEASE
TREASURY'S HONTHLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$1,500,000,000,or thereabouts, for cash and in exchange for
Treasury bills maturing April 30,1968,
in the amount of
$1,402,294,000, as follows:
27~day bills (to maturity date) to be issued April 30,1968,
in the amount of $500 000,000,
or thereabouts, representing an
additional amount of bills dated January 31,1968,
and to
mature January 31 1969 originally issued in the amount of
$1,000,078,000,the additional and original bills to be freely
interchangeable.
365 -day bills, for $1,000,000,000, or thereabouts, to be dated
April 30, 1968,
and to mature April 30, 19690
The bills of both series will be issued on a discount basis under
competitive and noncompetitive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(mat uri ty value).
Tenders will be received at Federal Reserve Banks and Branches
to the cloSing hour, one-thirty p.m., Eastern Standard
time, Tuesday, April 23, 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. ~., 99.925. Fractions may not
be used. (Notwithscanding the fact that the one-year bills will run
for 365 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 Balks or Branches on application therefor.
up
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
responsible and r~cognized dealers in investment securities. Tenders
1 :.::0
t.
- 2 from others must be accompanied by payment of 2 percent of the
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an 1ncorporated, ~
or trust company.
Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on April 30, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing April 30,1968.
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 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 frOll
Fe~ ral Reserve Bank or Branch.
000
,
TREASURY DEPARTMENT
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES COUNTERVAILING DUTY ORDERS ON
CANNED TOMATO PASTE FROM FRANCE AND ON CANNED TOMATOES
AND CANNED TOMATO CONCENTRATES FROM ITALY
The Treasury Department announced today that it has sent to
the Federal Register for publication notification of countervailing
duties to be imposed on importations of canned tomato paste from
France and on importations of canned tomatoes and canned tomato
concentrates from Italy.
The countervailing duty actions are the result of an investigation conducted by the Bureau of Customs following a complaint of
subsidization submitted by the Canners League of California. The
League's complaint was filed pursuant to Section·303 of the
Tariff Act of 1930 (19 U.S.C. l303)and will appear in the
Register on Friday, April 19.
The countervailing duties will be assessed on the importation
of these products following 30 days after publication of
notification in the Customs Bulletin on May 1. They will be
effective June 1.
The Treasury said the duties on canned tomato paste from
France are intended to counteract subsidies by the Government
of France on exports to the United States of the tomato paste in
question. Countervailing duties will be assessed only to
shipments which receive benefits from the subsidy program. The
amount of the countervailing duties will be equal to the amount
of the subsidy. The Treasury declared this to be 0.216 French
francs per kilogram. This amounts to approximately $0.02 per
pound.
Countervailing duties likewise will be assessed on importations
of canned tomatoes and canned tomato concentrates from Italy and
are intended to counteract subsidies by the Government of Italy on
exports to the United States of the tomato products in question.
These, too, will be assessed only on shipments which receive benefits
from the subsidy program.
F-1221
(OVER)
- 2 -
The Treasury declared the amount of the Italian subsidy to
be 18 percent of the invoice value but not more than 1,800
Italian lire per 100 kilos of canned tomatoes and 15 percent of
the invoice value but not more than 3,300 Italian lire per
100 kilos of canned tomato concentrates 0 The amount of
1,800 Italian lire per 100 kilos is approximately $0.0127 per
pound while 3,300 Italian lire per 100 kilos represents
approximately $00025 per~undo
000
TREASURY DEPARTMENT
i'QR RELEASE 6: 30 P.M.,
londay, Apr 11 22, 1968 .
RESULTS OF TREASURY'S WEEKLY BILL OFFERING
'!he
Treasury Department announced that the tenders for tvo series of Treasury
111s, one series to be an additional issue of the bills dated January 25, 1968, and
be other series to be dated April 25, 1968, which were offered on April 17, 1968, were
pened at the Federal Reserve Banks today. Tenders were invited tor $1,600,000,000,
r thereabouts, ot 91-day bills and tor $1,100,000,000, or thereabouts, of 182-day
ills. '!be details of the two series are as to11ows:
IAlIGE OF ACCEPTED
:C»IPETITIVE BIDS:
High
Low
Average
91-d&y Treasury bills
Ju1l 25 z 1968
Approx. Equiv.
Annual Rate
Price
98.61i
5.4I83J
98.593
5.566~
98.599
5.542~
maturi~
11
182-day Treasury bills
October 24 z 1968
Approx. Equiv.
Price
Annual Rate
97.138 !I
5.661"
5.709f1,
97.114
97.124
5.689f1,
maturin~
11
~ Excepting 1 tender of $1,000,000
2~ of the amount of 91-day bills bid for at the low price vas accepted
23~
~TAL
of the amount of 182-day bills bid for at the low price vas accepted
TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Phllade lpma.
Cleveland
RichlJlond
Atlanta.
Chicago
St. Louis
MinneapOlis
Kansas City
~llas
San Francisco
'roTALS
Ap;El1ed For
Acce!ted
,
23,582,000 $5,482,000
1,046,661,000
1,729,661,000
17,734,000
29,743,000
28,914,000
28,914,000
10,784,000
13,284,000
35,700,000
58,490,000
212, 712, 000
376,234,000
46,966,000
66,106,000
10,552,000
20,352,000
34,033,000
38,533,000
17,379,000
17,379,000
211 z 478 z 000
123,!798 z 000
$2,613,756,000
AE121ied For
$ 25,450,000
1,653,453,000
13,982,000
42,070,000
7,051,000
31,675,000
248,238,000
55,460,000
17,546,000
20,901,000
10,966,000
200 z 918 z 000
$1,600,715,000 ~ $2,327,710,000
Acce12ted
4,450,000
$
786,973,000
5,956,000
23,992,000
4,551,000
20,871,000
74,138,000
48,12.0,000
6,046,000
15,801,000
10,966,000
98 z 468 z 000
$1,100,332,000 ~
Includes $291,897,000 noncompetitive tenders accepted at the average price ot 98.599
Includes $146,498,000 nonccmpetitive tenders accepted at the average price of 97.124
'lhese rates are on a bank discount basis. The equivalent coupon issue yields are
5.7~ for the 91-day bills, and 5.9~ for the 182-day bills.
F-1222
TREASURY DEPARTMENT
Washington
FOR A.M. RELEASE
TUESDAY, APRIL 23,1968
REMARKS BY THE HONORABLE HENRY H. FOWLER
CHAIRMAN OF THE BOARD OF GOVERNORS
GOVERNOR FOR THE UNITED STATES
AND
SECRETARY OF THE TREASURY
AT THE INAUGURAL SESSION, NINTH ANNUAL MEETING
BOARD OF GOVERNORS, INTER-AMERICAN DEVELOPMENT BANK
BOGOTA, COLOMBIA
MONDAY, APRIL 22, 1968, 5:00 P.M., EST
Today we move another step forward in achieving the
dreams and ideals of the outstanding patriots of the
Hemisphere -- from Bolivar and San Martin, Morazan and Juarez,
Washington and Jefferson, to the current expressions embodied
in the declaration of the Presidents of the Americas at
Punta del Este. The world, with its modern science,
technology and communications, requires us to examine the
tasks we have before us in the broadest context of democracy,
tranquility, self-determination, social justice and the
aspirations of the people of the Hemisphere.
It was a great honor for me, in my capacity as the
Representative of the Government and people of the United
States, to have presided over the Eighth Meeting of the Board
of Governors of the Inter-American Development Bank. It is
now my most happy task, as the outgoing Chairman of the
Board of Governors, to welcome the delegates to the Ninth
Meeting. May I express on their behalf our gratification for
the hospitality extended by the Government of Colombia in
offering for our deliberations this historic site -- one that
is so important in the history of this Hemisphere, the
beautiful and cultured city of Bogota, where so many of the
beginnings of our contemporary concepts of hemispheric
solidarity were nurtured by the liberator -- Bolivar.
In the tradition of Bolivar and the Congress of Panama of
1826, the Inter-American System formally began with the
Washington Conference of 1889-90. The spirit of hemispheric
F-1223
- 2 solidarity developed constructively during the 19~0's and 40's
under President Roosevelt's "good neighbor policy." The
Organization of American States was founded here in Bogota in
1948.
The movement for a cooperative hemispheric program for
the development of Latin America found further expression in
the 1950' s in the Brazilian initiative known as "Operation Pan
America" and in statements by a number of leading Latin
Americans, including the current President of Chile, Eduardo
Frei, and the President of this Republic, Carlos Lleras
Restrepo. In this period our Bank was founded, and was given
strength by the Act of Bogota of 1960,which recognized the
need for greater social progress and more balanced economic
growth.
In March of 1961, President Kennedy called for an
Alliance for Progress. The Alliance was given specific
expression that same year in the Charter of Punta del Este.
Contained in this Charter was the aim of a "democratic
modernization" of the continent, including a decisive
economic and social advance. With the creation of ClAP -- the
Inter-American Committee for the Alliance for Progress -- in
1964 to review the self-help efforts on the one hand, and, on
the other, the adequacy of external assistance, the machinery
of the Alliance was viewed in a new focus. It was just a
year ago last week that the presidents of the Americas
convened in an historic meeting at Punta del Este, where a new
action program was given to our Alliance o This, in the words
of President Johnson, was "a response of farsighted Latin
American leadership to the needs of present and future
generations."
As part of this process the Bank's role in the social and
economic development of the Hemisphere has undergone a
profound change in the first period of less than a decade.
The initial emphasis of the IDB on financing specific
economic development projects has been substantially expanded.
It now includes increased attention to social investment,
cooperation in planning for the study and implementation of
institutional reforms, and the promotion of multinational
undertakings aiding the process of regional integration.
- 3 -
The Bank and Latin American Integration
Since its early period, the Bank has sought to fulfill the
hope and vision of President Herrera thp.t it serve as "the bank
of Integration" within the Alliance for Progress. Its
contributions in the field of regional integration already are
manifold and include the pre-investment fund for Latin
American integration, and institute for the study of problems
of integration, a comprehensive examination of the prospects
for the integrated development of such areas as the River
Plate basin, as well as the commitment of substantial sums
for integration projects.
The Bank's role in the integration process is one of broad
significance. More is involved than the narrow function of
providing technical and financial support to projects that
happen to involve both sides of some international boundary.
The main impact of integration on intra-regional relationships
is already reasonably well understood. We should now
recognize that the Bank's activities in support of integration
are helping to propel Latin America as a region into new
economic and trade relationships with the rest of the world.
The shape, speed and effectiveness of this integration
will depend primarily upon the follow-through on the
commitment by Latin American governments. But the Bank can
and should stimulate and catalyze governmental and private
action toward an outwardly-oriented Latin American economy.
The Bank can make difficult steps easier for governments by
providing expl;!tt technical and capital assistance. The
Presidents of the Americas agreed at Punta del Este to
mobilize resources within and without the Hemisphere in support
of integration. The Bank is the logical channel through which
these funds can be applied. By thus performing its tasks in
support of the creation of a unified Latin American economy,
the Bank will, at the same time, be preparing the way for new
and powerful Latin ~erican voices to be heard in the world's
trade and financial circles.
Physical Integration
With considerable realism, the Presidents at Punta del Este
last year coupled their plan for the creation of a Latin
American Co~mon Market with a plan of equal daring for the
creation of the physical underpinning which is basic to the
- 4 emergence of a viable Common Market. The Bank is clearly a
hemispheric body in a special position and especially equipped
to supply both the required expertise and external financial
resources for the creation of the facilities of physical
integration.
For many years President Johnson, who has long held a
deep personal interest in Latin America and its problems, has
been concerned with the possibilities for major advances in
tying Latin America closer together through physical projects.
He wished me to greet you, and it would be particularly
relevant if I read to you at this point the following letter,
which I received from him just before my departure from
Washington:
"Dear Secretary Fowler:
"It has been a matter of pride that you, as
United States Governor of the Inter-American
Development Bank, have served during the past year
as Chairman of the Board of Governors of that
distinguished organization. Before you relinquish
your duties as Chairman, I would appreciate it if
you would convey the following personal message
from me to the Ninth Annual Meeting in Bogota:
"It is a pleasure for me again to be able to
salute the annual gathering of the Inter-American
Development Bank -- the financial cornerstone of
hemispheric cooperation in the urgent tasks of the
Alliance for Progress. Last year, the Governors
took a far reaching action to expand the Bank's
resources. The United States responded promptly
with its $900 million share over a three-year
period in the $1.2 billion increase for lending
by the Fund for special operations. Our Congress
is now well alo~g in its consideration of a $412
million increase in our callable subscription to
the Bank's ordinary capital. These expanded
resources and the loans they will make possible
hold the promise of record levels of achievements
by a Bank that is already making a major contribution
to Latin American development. Under Felipe Herrera's
skillful and inspiring leadership, the Executive
Directors and Staff have responded to the challenges
before it.
- 5 -
''When I joined with my fellow Presidents of the
Americas at Punta del Este a year ago this month, it
was evident to all of us that the master key to full
development of Latin America's rich human and
natural resource potentials was the achievement of
integration of the markets and economies of the
Latin American community. We foresaw the vital
importance of establishing a Common Market through
the convergence of the Latin American Free Trade
area and the Central American Cornmon Market.
"It was equally clear that a necessary
prerequisite was a solid beginning in achieving
the physical integration of Latin America -building the visible and tangible interconnections
that make possible the free interchange of economic
factors -- the roads and river systems, power
grids and pipelines, transport and telecommunications.
"My thoughts since that historic gathering at
Punta del Este have continued to dwell on the vast
perspectives that lie in the physical integration
process. The Inter-American Development Bank is in
a position to play a leadership role in the work to
be done in this field, as is the Inter-American
Committee for the Alliance for Progress.
'We must organize hemispherically for this
task and draw on the best available wisdom and
expertise to plan the way ahead. I hope that
your meeting and related ones in Washington this
month will enable us to spell out in greater
detail a mechanism by which we can, together,
chart our way toward the bright prospect of the
full realization of this fundamental goal of the
Alliance."
This is the text of President Johnson's message to
our meeting.
- 6 Financial Resources in Relation to Operations
The special responsibility of the Bank for financing
physical and other approaches to integration, as well as its
continuing fundamental responsibility for financing economic and
social progress within national frameworks, require financial
resources adequate to the tasks. Our meeting last year set in
motion major efforts to ensure that such resources would be
available and more effectively used.
We must follow through on each phase of these efforts -replenishing the Fund for Special Operations, increasing the
callable capital, increasing utilization of a part of the FSO
contributions of rapidly advancing Latin American countries
for projects in other member countries, expanding the ability
of FSO to finance needed imports by reducing the use of its
hard currency resources for local cash, and increasing the
availability of resources from non-member countries.
The Bank, Latin America and the World Economy
I have tried thus far to place the Bank's activities as
described in its lucid and impressive Annual Report in their
broadest regional perspectives. But there is an even broader
relationship. That is the place of the Bank and its
individual member countries, singly and collectively, as
elements in an active, viable and effective world trade and
payments system. In such an improved system, goods and
services can move more freely across national boundaries and
between continents and hemispheres, with public and private
capital flowing easily in the directions indicated by both
the need for economic growth and development and economic
return.
In such a broad context, recent developments in the
international monetary system, and the imminent prospect for
major improvements in that system, are of great relevance.
We have confronted in the past year -- and have surmounted
the most serious thr~ to the world monetary system of the
post-war period. We are emerging into a period in which new
strengths are becoming apparent. They are strengths born of
a spirit of multilateral financial cooperation.
The March 17 action taken in Washington with respect to gold
by the central banks of the seven members of the former gold pool,
and subsequently endorsed by most other monetary authorities, has
relieved the pressure of specultative private activity in gold,
draining away official stocks. The favorable response in Latin
America and elsewhere to the new monetary gold arrangements is
anothe~ example of tl!e~same spirit of financial cooperation that
- 7 -
1 7i
I~
brought this Bank into being and that will motivate all of us
here today and in the future to continue our mutually
beneficial cooperation as new opportunities emerge.
This year is one of great opportunity for the
international monetary system. To assume adequate reserve
growth to support expansion of world trade and payments,
we should now turn our full energies to bringing into
effect the new Special Drawing Rights facility in the
International Monetary Fund. Latin America was the scene
last September when, at the Rio conference of the Fund, a
decision was taken to press forward with the proposal for
a new reserve asset in the form of Special Drawings Rights.
The International Monetary Fund today released in
Washington the text of the proposed amendment to the Articles
of Agreement of the Fund that will permit the implementation
of the Special Drawing Rights system. The resolution
embodying these changes is being submitted to the Governors
of the International Monetary Fund to be approved by them
by May 31 as satisfactory for submission to member Governments
for ratification.
For our part, I will promptly cast my vote as u. s.
Governor of the Fund for the resolution approving the
amendment for submission to Governments. After my return
to Washington, I expect that early in the month of May
legislation to authorize final acceptance of the SDR
arrangements by the U. S. Government will be submitted to the
Congress, where I can assure you it will be vigorously pressed
by the Administration and, I hope, accorded strong support
by our lawmakers in both major political parties.
We can all view Special Drawing Rights as contributing
to a better world economic structure, within which both
expanding trade and development efforts can move ahead more
effectively.
For a penetrating analysis of their particular meaning
for developing countries, I commend for your reading the
excellent study by the distinguished Managing Director of
the International Monetary Fund, Mr. Pierre-Paul Schweitzer,
entitled "The New Arrangements To Supplement World Reserves
and Their Implications for Developing Countries."
- 8 -
1 7 '.)
-.
I
'-
I do not wish to suggest that we regard SDR's as a
panacea leading to an immediate solution of ~ll world monetary
problems. Nor should we have any illusions that SDR's will
provide immediate solution for national balance of payments
problems, either our own or your s.
The urgent business that requires my return to
Washington tomorrow will have a direct effect on the ability
of the United States to achieve balance of payments equilibrium
and thereby stengthen the stability of the international
monetary system. In that light, this business is of concern
to each of you and the Bank as our trading and financial partners
in the world economic system. I refer to our tax increase aId
expenditure reduction program, which will determine to an
important degree our budgetary and aggregate demand levels in
the crucial period ahead. An economy like ours, simply because
it is huge, does not acquire an immunity to the need for belttightening to bring dispositions of rnsources into better balance
with availabilities of resources so as to avoid damaging and
dangerous inflation. This is a problem which I know you will
understand from your own experiences. Except for the question
of scale, we all engage in the same difficult struggle to order
our priorities wisely.
I deeply regret that I will not be able to remain with
you all week. My experience in Mexico City and Washington
convinces me of the great value of these deliberationso I shall
continue to follow them closely through the U. S. Delegation.
You may be assured of unflagging United States support for the
multilaterial goals and objectives of the Bank.
I wish you continued success in these important
deliberations and invite the election of my successor to the
Chair.
000
~
~_
7
I
j
V
TREASURY DEPARTMENT
FOR RELEASE 6: 30 P.M.
'l\1e sday I April 23 J 1968 .
RESULTS
or
TBEASURY' S N:>ITHLY BILL OlJ'ERING
'!he Treasury Department announced that the tenders tor two series of Treasury
bills, one series to be an additional issue ot the bills dated January 31, 1968, and
~ other series to be dated April 30, 1968, which were otfered on April 17, 1968, were
opened at the Federal Reserve Banks today. Tenders were invited tor $500,000,000, or
thereabouts, of 276-day bills and for $1,000,000,000, or thereabouts, of 365-day
tlills. '!be details of the tvo series are as to11ows:
or ACCEP!ED
~
~OMPETIfiVE
BIDS:
High
Low
Average
276-day Treasury bills
maturing January 31, 1969
Approx. Equiv.
Price
Annual Rate
95.668
5.65~
95.64.5
5.68~
95.657
5.665j
365-day Treasury bills
_turiDg April 30, 1969
Approx. Equiv.
Pr1ee
Annual Rate
91.272
94..2·4.1
94:.258
Y
S.tiSOJ
5.68~
5.663~
l~ ot tbe amount of 276-day billa bid for at the low price was accepted
~ ot the 8JIOunt ot 365-day bills bicl tor at the low price waa accepted
rom
TElDERS APPLIED lOR AlfD ACCEPTED BY FEDERAL RESERVE DISmIC'l'S:
Distr1ct
Boston
New York
Phi lade Iphia
Cleveland
Ricbllond.
Atlanta
Chieaso
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
'roTALS
Applied lar
AcceEted
136,000
136,060 •
$
4.50, 062,000
1,090,922,000
705,000
8,705,000
1,113,000
10,4:38,000
660,000
3,160,000
2,140,000
12,768,000
32,053,000
174,578,000
1,624.,000
18,246,000
1,689,000
13,789,000
1,058,000
3,058,000
1,138,000
11,138,000
7&892&000
92~4:921000
$1,439,"'30,000 $
500,276,000
AEEl1ed Por
22,64.5,000
1,620,365,000
15,358,000
74.,9'8,000
3,769,000
21,969,000
294.,769,000
39,092,000
12,705,000
8,558,000
11,500,000
AcceEted
9,805,000
$
803,366,000
2,959,000
8,94:8,000
1,269,000
5,672,000
151,169,000
7,826,000
705,000
2,408,000
1,500,000
178~327z000
4z577~OOO
•
!I
$2,304.,005,000
$1,000,204,000 ~
Includes $17,080,000 noncaapetitive tendere accepted at the &Terage price ot~.ffi7
Includes $37,751,000 nonccapetit1ve teDders accepted at tbe average price ot9'-25B
~ese rates are on a bank discount basis.
b
equ.ivalent coupon issue ;y1elds are
S.9'~ tor the 276- da1 billa, and 6.0~or the 365-day ~i111.
F-1224
TREASURY DEPARTMENT
April 24, 1968
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
$2,700,000,000, or thereabouts, for cash and In exchange for
T$reaSUry bills maturing May 2, 1968,
in the amount of
2,500,107,000, as follows:
91-day bills (to maturity date) to be issued May 2, 1968,
in the amount of $1,600,000,000, or thereabouts, representing an
addItional amount of bills dated February 1 , 1968 , and to
mature August 1,1968,
origInally issued In the amount of
$ 999,988,000, the additional and original bills to be freely
interchangeable.
182-day bills (to maturity date) to be issued May 2,1968, in the
amount of $1,100,000,000, or thereabouts, representing an additional
amount of bills dated October 31,1967, and to mature October 31,1968,
originally issued in the amount of $1,001,770,000 (an additional
$500,170,000 was issued January 31,1968), the additional and
original bills to be freely interchangeable.
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 1n 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
up to the closing hour, one-thirty p.m., Eastern Daylight Saving
time, Monday April 29, 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
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may SUbmit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
F-1225
- 2 -
Immediately after the closing hour, tenders will be opened at tl
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 Treasw
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 May 2, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing May 2, 1968.
Cash and exchange ten~
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 w
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunde~
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which t~
return is made, as ordinary gain or loss.
I
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 ffl
any Federal Reserve Bank or Branch.
000
17~
TREASURY DEPARTMENT
•
-
R RELEASE 6: 30 P.M.,
!!Y' April 29, 1968.
RESULTS OF Tfu:.ASURY I S WEEKLY BILL OFFERING
'!he Treasury Department announced that the tenders for two series of Treasury
111, one series to be an addi t10nal issue of the bills dated February 1, 1968, and
II! otber series to be an additional issue ot the bills dated October 31, 1967, which
re offered on April 24, 1968, were opened at the Federal Reserve Banks today.
~rs were invited for $1,600,000,000, or thereabouts, ot 91-day bills and tor
,100,000,000, or thereabouts, ot 182-day bills. '!be details ot the two series
e as follows:
D OF ACCEPTED
'CPETITIVE BIDS:
High
Low
Average
4~
6~
91-day Treasury bills
maturing August 1 z 1968
Approx. Equi v .
Price
Annual Rate
98.617
5.471~
98.606
5.515~
98.610
5.4:9~
182-day Treasury bills
October 31 z 1968
Approx. Equiv.
Price
Annual Rate
97.176
5.586~
5.62~
97.154
5.612~
97.163
maturi~
Y
Y
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
'llL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Boston
Rew York
Philadelphia
Cleveland
Ricbll.ond
an FranCisco
AEElied For
$ 27,860,000
1,766,299,000
26,455,000
29,153,000
12,110,000
4:9,936,000
4.36,730,000
73,759,000
22,288,000
29,588,000
31,029,000
198,z 772 z 000
AcceEted
$ 25,156,000
1,010,027,000
14,,197,000
28,449,000
9,810,000
38,286,000
258,020,000
63,059,000
17,288,000
23,261,000
21,4:29,000
91,z 4.471. 000
'ro'rALS
$2,703,979,000
$1,600,429,000
~tlanta
~hicago
St. Louis
tiDl1eapol1s
(ansas City
~llas
!I
ApElied For
$ 23,983,000
1,369,515,000
15,314,000
36,116,000
9,648,000
30,766,000
245,571,000
51,882,000
17,772,000
13,251,000
22,381,000
130 z 027 z 000
Acce12ted
$ 12,983,000
807,255,000
7,314,000
30,702,000
5,048,000
23,816,000
77,611,000
4:3,190,000
11,612,000
8,957,000
15,381,000
56 z 235 z 000
$1,966,226,000
$1,100,104,000 ~
Includes $276,013,000 nonccmpetitive tenders accepted at the average price of 98.610
Includes $133,338,000 noncOlll:petitive tenders accepted at the average price of 97.163
'bae rates are om a bank discount basis. The equivalent coupon issue yields are
5.65~ for the 91-day bills, and 5 .86~ tor the 182-day bills.
1<'-1226
TREASURY DEPARTMENT
Washington
176
FOR RELEASE UPON DELIVERY
REMARKS BY THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
BEFORE
THE CHAMBER OF COMMERCE OF THE UNITED STATES
WASHINGTON HILTON HOTEL, WASHINGTON, D.C.
TUESDAY, APRIL 30, 1968, 9:30 A.M., EDT
THE HOUR OF FISCAL RESPONSIBILITY
It is always an honor for me to meet with this
distinguished group of business leaders who convene here at
this season out of their concern with our national economic
and financial problems and policies.
The timing of our meeting together is particularly
propitious -- for you because you escape a much more detailed
speech since I must participate later today in a meeting
with conferees of the House and Senate, a group of some of
the most distinguished members of Congress, designated
from the tax-writing Committees. The conference will seek
to resolve the differences between the Tax Adjustment Act
as passed by the House continuing certain excise taxes and the
Senate Act called "Balance of Payments and Domestic Economy
Act of 1968" which does that and a great many more things,
including increasing income taxes and reducing Federal
expenditures.
This week you will be meeting your representatives
in the Congress, and this morning's session gives me an
opportunity to share with you my views on a topic which
is at the top of the legislative agenda -- what to do about
taxes and appropriations. Let me say in advance that my
remarks on this topic are meant to be calm, deliberate,
unexcited and unemotional -- and in prepared text -- and
not intended to give offense. In the spot I am in I
cannot afford to be mad at anybody and I need help from all
particularly you and the Congress.
F-1227
- 2 -
177
For in the month ahead, indeed the week ahead, in
fact today, and in this very hour, your national government,
your Nation, and each one of us faces the hour of
responsibility -- the hour of sober fiscal responsibility. In
it we must make a momentous decision.
That decision is whether or not we will pay our bills
and order our economic and financial affairs in such a
manner as to decisively reduce the twin deficits in our
Federal budget and in our international balance of payments.
These deficits rose to such proportions in 1967 that, unless
reversed and sharply reduced in 1968, they threaten to halt
the tremendous economic progress the United States has made
over the past seven and a half years and the remarkable
accomplishments achieved by the free world economy over the
past twenty years.
These twin deficits menace the continued strength and
stability of the American economy, the future of the economies
of many other nations whose destinies are closely linked
to ours, and the viability of the international monetary
system, which depends so heavily on a strong U.S. dollar as
the world's principal reserve and business transaction
currency.
The deficit in the U. S. balance of payments has been
persistent for a number of years. It has caused a heavy
loss in the liquid reserves behind the dollar. Although
each year has seen an increase in our overall net asset
position, including long-term as well as short-term assets
and liabilities, our liquidity position as the world's
banker has steadily weakened because of this increasing
imbalance in our short-term position. This situation has
been tolerated in the financial world primarily because of
the strength and competitive capacity of the U.S. economy
which has been capable in each of the last seven years of
producing a substantial trade surplus.
But, in the last six nlonths a sharp increase in our
balance of payments deficit has been accompanied by a
serious deterioration in our trade surplus, resulting from
an economy that is growing at too fast a rate of speed,
growth that is accompanied by an unacceptable rate of
inflation, a wage-price upward spiral, and work stoppages,
real or threatened, affecting key sectors of foreign trade.
- 3 -
178
A major contributing factor to the current balance
of payments situation with its declining trade margin, and
one that threatens our future prosperity and the stability
of our domestic economy, is the coincidence of a highly
stimulative deficit in our internal Federal budget this
fiscal year with a period of expanding economic activity.
And what is more frightening is the massive deficit -in excess of $20 billion -- projected for the next fiscal
year -- unless in the weeks immediately ahead the U. S.
Congress -- whose members you will be meeting this week -adopts a legislative package of fiscal restraint that
combines a substantial income tax increase with a reduction
in the expenditures and appropriations projected in the
January budget.
Given our high employment economy with heavy defense
expenditures, some inescapable increases in the civilian
costs of government, and a private economic sector that is
advancing sharply on a wide front, the acceptance of
enlarged deficits in the budget and the balance of payments
is contrary to sound economic and financial policy -against all the wisdom either of conventional or the
so-called new economics. Accordingly, it is the inescapable
responsibility of the Government to use fiscal and monetary
policy to reduce these deficits and to brake the economy
to a safe cruising speed.
We are facing nothing less than a test of representative
government in economic and financial affairs.
The ability of the United States to sustain strong,
stable and non-inflationary growth is now being severely
challenged and tested. The manner in which we respond to
this test will determine our national capacity to avert
the swings of feverish inflation, as well as the despair
of recession or stagnation, by the intelligent use of a
flexible fiscal policy conjoined to appropriate monetary
policy. Make no mistake. Our economic future and that
of the entire free world are at stake in this hour of fiscal
responsibility.
The strength of the world economy and the continuance
of a viable international monetary system depend to a
large extent on a sustained level of stable economic growth
in the United States and the maintenance of a sound dollar -sound in terms of prices and exchange rates.
- 4 -
179
This is true at all times, but particularly at a time
when confidence in that system has been shaken, as it was
last November by the devaluation of the British pound and
a number of other lesser currencies, and the speculative
buying of gold that cost the United States more than
$2 billion of its gold reserves in these last six months.
We simply cannot -- must not -- under these circumstances
continue to accept these twin deficits in our balance of
payments and internal Federal budget. To do so is to forsake
prudence, take intolerable risks, and refuse to exercise
the fiscal discipline required for the preservation of
a balanced prosperity. And without such a balanced
prosperity, we can never hope to achieve our national goals
of peace and progress abroad and domestic tranquility at
home born of shared opportunities and benefits of our free
private enterprise system.
That is not just the view of the Secretary of the
Treasury. It is shared by the President, Chairman William
McChesney Martin and the entire Federal Reserve Board, the
Council of Economic Advisers, and the vast preponderance
of economic and financial authorities, private and public,
here and in other lands.
It is a view shared by many members of Congress of
both parties including a substantial majority of the Senate,
reflected in the voting in late March and early April on
the Act referred to earlier.
But as yet, that sentiment has not been translated into
the decisive legislative action that is necessary.
What are the principal measures the Nation is asked
to accept temporarily so that we can assure a safe passage
through these financial shoals to continuing prosperity and
security, while meeting our urgent national responsibilities
at home and abroad? They are these:
1. A temporary increase in personal income taxes
amounting to an average of one penny on every
dollar of income we earn and a temporary ten
percent surcharge on corporate tax liabilities.
2. A cut in Government expenditures and appropriations
usable in the next fiscal year beginning July 1 for
Federal programs of lesser priority and urgency.
Some of these are identified on pages 20 and 22 of
the President's January Budget Message.
- 5 3. Appropriate monetary policy which in this period
calls for moderation in the provision of
additional credit and money supply.
4. Avoidance of highly inflationary wage-price
decisions and crippling work stoppages, real
or threatened, that induce an increase in
imports and interfere with export expansion.
5. Reductions in our expenditures overseas,
both governmental and private, except where they
are absolutely essential to our national
commitments.
Having earlier recommended the tax increase and
additional measures of expenditure control and reduction
in his Message on August 3, 1967, President Johnson
incorporated these proposals, together with a broadened and
more stringent series of balance of payments measures, in
his New Year's Day Message to the Nation.
This program includes unwelcome and unpleasant measures.
It involves temporary sacrifices by the American people,
our businesses and our banking institutions. We do not
like to ask them -- we cannot afford to ask less at this
point of our history. Too much is at stake for us to rely
on halfway, business-as-usual measures, hoping that they
will suffice, thinking that we still have lots of time to
come to grips with our financial problems. The simple fact
is that -- we are running out of time -- and neither the
United States nor other nations can wait much longer for us
to bring our financial affairs much closer to balance.
Fiscal restraint is even more urgently required today
than it was when the President recommended it to the Congress
nine months ago. A tax increase on the scale recommended
then, coupled with reductions in Federal expenditures, has
been and continues to be the single most decisive and
important action we can take to protect our economic security
and strengthen the dollar.
At the direction of the President, my colleagues in the
Administration and I, and the Chairman of the Federal Reserve
Board, have sought this tax increase and effective measures
of expenditure control diligently and persistently -- last
August, again in late November, again in January. We pressed
hard again in mid-March in the midst of the gold crisis.
- 6 -
181
It is now clear that the case presented then, and
challenged by some, has been abundantly confirmed by
developments.
Last August and on these later occasions, we urged that
a tax increase, along with expenditure control, was necessary
if the 1968 budget deficit then projected in excess of $20
billion was to be substantially reduced, trereby
(a) avoiding a coincidence of a highly
stimulative deficit with a rapidly
expanding private economy which would
make the combination increasingly
inflationary.
(b) minimizing the Federal credit demands
which would otherwise induce substantially
higher interest rates and tighter credit.
(c) protecting our trade surplus from the
decline that invariably accompanies an
excessively exuberant economy.
(d) maintaining confidence in the ability of
the U. S. Government to put its financial
house in order.
But there were those who insisted that a tax increase was
not necessary, if only expenditures were reduced. In the field
of expenditures, there was much talk and some action.
From August through November, appropriation bills for the
entire range of Federal activities were enacted by the Congress.
Upon the recommendation of the Administration, Congress enacted
a law providing an omnibus, cross-the-board cut in all
controllable expenditures. As a result of these actions there
were specific reductions in expenditures for many budgeted items
totaling $4-1/3 billion.
But there was no tax increase.
What was the result?
Today the 1968 budget deficit is still running as high as
it was last August.
Why?
- 7 -
18~
Because while controllable expenditures were being reduced,
others less controllable such as Vietnam war costs, interest
on the public debt, and matching payments to states required
by law were increasing.
Last August there were those who opposed the tax increase
because they doubted the economic forecast of a fast-rising
economy after the slow start of early 1967. What happened?
The gross national product increased more than $16 billion
per quarter in the second half of 1967 in contrast with less
than $6.5 billion per quarter average in the first half. And the
increase in the first quarter of 1968 was an extraordinary
$20 billion, exceeding all previous records. Inventory
accumulation in the first quarter of 1968 was unusually low, so
that final sales were up by an enormous $25 billion.
Last August there were some who doubted there would be an
inflationary trend in the absence of a tax increase.
In the hot-house atmosphere of excessive demand, prices
and wages were bound to rise sharply. The evidence that this
is already happening is as plain as can be. In the first quarter,
the GNP deflator rose at more than 4 percent at an annual rate.
The consumer price index has advanced about 3-3/4 percent in
the past year, and wholesale prices recently have shown very
rapid advances. Wage settlements have become more inflationary.
All of these developments, of course, create serious burdens
and inequities at home and are a major detriment to our
international competitive position.
The view is sometimes expressed that the inflationary
pressures that we are now experiencing should largely be ascribed
to "cost-push" rather than "demand-pull". The fact is that
in recent quarters, the advance in over-all demand has
accelerated sharply and that over the same period, there has also
been a very substantial step-up in prices.
It simply is not reasonable to assume that these developments
are unconnected. It is true that part of the present push
for higher wages is based on a desire to catch up with prior
increases in the cost of living. It is also true that if fiscal
measures taken now should succeed in reducing over-all demand
pressures, cost-push elements will still represent a substantial
problem for the economy for some tLme to come. But this in no
sense implies that there is no connection between over-all
demand developments and price pressures. Indeed, if proper
fiscal action is taken now, we will still have a fighting chan~e
- 8 -
183
to move the economy gradually back toward price stability,
both by reducing demand pressures on prices and by creating a
better environment for coping with cost-push. If, on the
other hand, we fail to take steps to contain excessive demand ,
the prospects of finding any effective ways of coping with upward
price pressures from the cost side are virtually nil.
Last August we spoke about a continuance of the Federal
deficit at a $20 billion level resulting in heavy burdens on
the credit markets. I don't have to tell this audience what has
happened to interest rates and credit. Rates have increased
in all categories and credit is getting tighter -- and the
end may not be in sight unless there is a tax increase.
Last August we said our balance of payments position
would be serious without a tax increase. It did become serious
largely because of a sharp deterioration in our trade surplus
that accompanied a too-rapid advance of aggregates of economic
activity.
Action on the tax proposals has become the symbol all
over the world of our willingness to manage our financial
affairs as befits the country which provides the world's leading
reserve and transaction currency. It has been the matter of
gravest concern to my fellow Finance Ministers in every
international gathering I have attended since August and in
innumerable bilateral exchanges here in Washington. America
is on trial on the issue of fiscal responsibility. More is
expected of us -- because ours is a reserve currency country.
We are the world banker and the foreign holders of our dollars
are, in effect, owners of demand deposits in our bank.
Confidence in the dollar has suffered somewhat because
of the failure, up to now, of the United States to increase
taxes and pay its bills in a manner conducive to the health of
the economy and stability of the currency_
But happily this is not the end of the story.
It is the duty of the Secretary of the Treasury to speak
plainly on these matters. And I ha~e done so in the past as I do
now.
But it is also his duty to keep trying, to retain hope, and
to have confidence in the ultimate capacity of representative
government to do what is plainly right, even in an election year.
- 9 -
It was out of this confidence that I said in mid-Marle~
during the week of the last climactic run on the London gold
market, to the Senate Finance Committee:
"In the light of all these factors, it
seems to me that all reasonable men who want to
preserve their country's economic and political
viability ought to come together and put a tax
bill on the books and do that promptly, and I
hope the Congress will manage to do that within
the next 30 days."
Let us review what has happened since that expression
of hope.
On the following week-end, the Governors of the central
banks of the seven participating gold pool countries met in
Washington and took historic decisions to divorce the exchange
of gold reserves among monetary authorities from the
non-monetary markets, giving rise to a two-price system.
Two week-ends later the Finance Ministers and Central Bank
Governors of the Group of Ten, the major financial powers, met
at Stockholm. Except for the representatives of France, they
reached agreements that enabled the Executive Boand of
the International Monetary Fund to conclude and release its
Report on the Amendment of the Articles of Agreement of the
International Monetary Fund providing for the deliberate and
orderly creation of Special Drawing Rights, as new reserve
assets to supplement gold and dollars. This will be the subject
of a Presidential Message to Congress later today.
These significant decisions, however important to preserve
and improve the workings of the international monetary system,
are no final answer to the inadequacies of that system that stem
from the deficits in our balance of payments and the waning
confidence in the holdings of reserve currencies such as the
dollar.
,
In their recent Communique on March 17th the Central Bank
Governors noted that an underlying premise for the measures taken
was their belief that "it was the determined policy of the
United States government to defend the value of the dollar through
- 10 appropriate fiscal and monetary measures and that substantial
improvement of the U. S. balance of payments is a high priority
objective. "
This was but a realistic recognition of the fact that,
without the maintenance of stability of the dollar as a reserve
currency, all efforts to preserve, maintain and improve the
international monetary system are endangered.
Because of intervening developments in both the Senate
and House, I was able to say to my colleagues at Stockholm on
March 30:
"Fortunately I am able to report to you
that there is a rising tide of feeling in the Congress
that the time for decisive action on the fiscal
front is approaching. There is a growing sense
of urgency that our financial situation must be
corrected if representative government is to
perform its function in meeting the necessities of
the people rather than satisfying wishful thinking."
I did not give these assurances lightly. Before leaving
for Stockholm I had noted, as you must have, that a bi-partisan
coalition, led by Senator Smathers of Florida and Senator
John Williams of Delaware, supported by both Senate Majority
Leader Mansfield and Minority Leader Dirksen, had registered
the clear conviction of a sizeable majority of that body
favoring a legislative package that combined in a single bill
the President's tax proposals with specific and concrete measures
for reductions in budgeted expenditures for fiscal 1969.
Moreover, as a result of extended consultations with
member of Congress, I had concluded and had publicly stated
that it was my belief that a responsible majority in the Congress
is coming to the inescapable conclusion that we must increase
taxes temporarily, and that if taxes are to go up, the increase
must be made temporary by C'Onj oining it in a procedural form yet
to be determined with a reduction in the financial outlays and
obligations projected in the January budget.
I said on March 26, while speaking in Philadelphia,
"The procedure by which a formula for combining spending
reductions and a tax increase is to be devised and enacted is a
- 11 -
18b
matter for decision by the Congress, its tax writing Committees,
its Appropriations Committees, and its leadership."
May I add only that everything that has happened since
that time has confirmed these views and this confidence.
On March 31 the President of the United States set
country above self -- and above all personal partisan causes
by foregoing any plans to continue in the Presidency beyond
next January 20. In so doing he said:
"The Congress is now considering our
proposals, and they are considering reductions in
the budget that we submitted. As part of a program
of fiscal restraint that includes the tax surcharge,
I shall approve appropriate reductions in the January
budget when and if Congress so decides that that should
be done.
"One thing is unmistakably clear, however.
Our deficit just must be reduced. Failure to act
could bring on conditions that would strike hardest
at those people that all of us are trying to help."
On April 2 the Senate adopted the WilliamS-Smathers
amendment providing for the tax increase and a cut in
expenditures. On April 5 the House and Senate conferees began
their deliberations; they were continued on April 10 and resumed
on April 24 after the Easter recess, and will continue
today.
Given the Government's serious financial situation now
recognized on all sides, I am confident that the men of wisdom,
experience and patriotism who are involved will not permit
disagreements over details or procedures, or marginal
differences as to the degree of expenditure reduction required,
to prevent decisive action to reduce our twin deficits to
manageable proportions.
And that decisive action should be early and soon.
Additional delay only increases the risks.
- 12 -
~
g(
It continues to be my hope and expectation that
appropriate modifications can be developed which will
satisfy the conferees on the substance of the bill; and that
suitable procedures satisfying the rules and prerogatives of
both Houses can be devised so as to permit early and
favorable consideration of the agreed-upon measure by both
Houses.
In this process the individual Congressman or Senator
will not get just what he would prefer for his constituents
or for the nation. Nor will the President, given the special
constitutional power of the Congress over the purse. Neither
will you or I. But acting together we can do what needs to he
done -- take care of our essential needs at home and abroad in
a manner that will keep our economy stable and the dollar strong.
In this hour of national fiscal responsibility I ask
for your help and I am confident of the result.
000
TREASURY DEPARTMENT
Washington
Fact Sheet
Special Drawing Rights in the IMF -the New Form of International Reserves
The International Monetary System and the Need for SDR' s
For the international monetary system to work, countries need
international reserves acceptable to themselves and the rest of the
world--just as we as individuals need accounts in our banks. These
reserves must expand as the world's population, resources, and international transactions rise. In the past, international reserves have
largely been made up of gold and foreign exchange, most ly dollar s.
For several years, however, new supplies of monetary gold have been
insufficient to provide enough new reserves, and in the future gold
will no longer be a source for increasing world reserves. In addition, as the United States reaches balance of payments equilibrium,
it will no longer be providing dollars in large amounts to the world,
and this source of reserve expansion will diminish.
The answer to this very real problem of future world
reserve growth has been found by the member nations of
the International Monetary Fund: They have agreed to a
deliberate creation of new international reserve assets
called Special Drawing Rights or SDR's. This means that
future world reserve growth will be freed from dependence
upon uncertain supplies of monetary gold or upon increases
in foreign dollar holdings--a potential calIon U.S. gold
stocks.
Without this new facility for the creation of SDR's, there
would be a danger that global reserves of about $73 billion could
level off or even dec line instead of rising. This ~uld lead to
an international liquidity squeeze. Countries would compete with
each other to hold reserves or to pull them away from other countries--leading to competitive escalation of interest rates, restrictive practices in international transactions, and a threat to the
unprecedented growth of world trade and prosperity of the past twenty
years.
What are SDR' s and how would they be used'Z
What makes any form of money useable as a medium of exchange
and a store of value is the willingness of the participants in an
economic system to accept it as money. In the international monetary system both gold and the dollar have had this characteristic.
The agreement to establish SDR' s is in effect an agreement among
the nations of the Free World to issue a special type of new money
and to accept it from each other as money. Thus, SDR' s will have
April '26, l~
- 2 -
the strong backing of the solemn ob ligations of the 107 Fund members to accept them and pay a convertible currency in return. Alsq
SDR's will be denominated in units of account equivalent to the
gold value of one dollar.
SDR's will not be issued as paper money, and they will not be
issued to private individuals or companies. They will be deposit
entries on the books of the International Monetary Fund--much like
the deposit entries in an individual's bank account--but they will
be issued only to governments and exchanged only among governments.
Acountry will be able to purchase foreign exchange for use in
~intaining the value of its currency by sellings its SDR's to
another country. In practice the using country will request the
I~ to debit its SDR account and credit the SDR account of the
nation from wh ich it is receiving foreign currency--much like an
individual writes a check on his bank to pay another person. The
bank debits the account of the person writing the check and credits
the account of the person receiving the check. Attached is an explanation which traces through how SDR transactions would work.
SDR's are to be created under an IMF procedure which will assure widespread support for their creation among the members of the
Fund. Decisions will normally cover creation to be made annually
over a five-year period.
SDR's will be allocated to participants in proportion to their
quotas in the IMF. Under this system if it is agreed to create
$2 billion in SDR's annually, the U.S. would receive $490 million
per year, if all members of the Fund were participants.
Each participating country commits itself to accept and hold
SDR's up to an amount equal to three times its cumulative allocation of SDR's. However, this obligation at any given time would
apply only to countries in a strong reserve or balance of payments
position. The obligation to accept SDR's gives the new reserve
asset its monetary status and assures it useability. But it is a
special kind of obligation, because in discharging its acceptance
obligation a country acquires an asset that is similar to gold and
can be used when needed.
libat do SDR' s mean to the U. S. ?
While SDR's will in no way serve to solve our balance of payments problem, this new reserve asset will provide the United States
with an opportunity gradually to rebuild reserves which it has: lost
in past years.
3 -
But in a broader sense, the Special Drawing Rights are of
value to the United States because they will provide the world
with a dependable and manageable supplement to reserves. -We
are a great trading and investment nation. A rising level of
world trade is important to us. We prosper in a world in which
foreign countries can be assured that there is adequate scope
for them to increase their reserves as world trade expands and
production and employment rise in all countries.
Attachment
191
The Managing Director of the International Monetar~
Fund has given the following example of how the SOR transactions will work. (The reference to the magnitude of SDR's
to be created is purely hypothetical and amounts to usin a
roun
or convenience of ca culat on :
"Let us suppose that, at some time in the future,
drawing rights equivalent to a total of $1 billion a year
are created by vote of the Board of Governors. If we
assume that a given Country A. has a quota amounting to
1 per cent of total Fund quotas, the lund will accordingly
credit to Country A in the special drawing account an
amount of SORs equal to $10 million. Country A could add
these to its reserves as it would be entitled to use them
without question in case of need.
"Suppose, now, that Country A does want to use them.
In order to do so, it would have to convert them into a
usable currency. It would therefore ask the Fund into
what currencies it could convert an amount of SORs, equivalent to, say $5 million. The Fund would at any given
time have a list of participating Fund members whose balance of payments and reserve positions were regarded as
reasonably satisfactory. From this list the lund would
select appropriate countries to be designated. Since the
amount involved in my illustration is small, we may reasonably assume that the Fund would select, say, two countries:
Germany and Italy, for instance. In this event, the Fund
would notify Germany and Italy that it was crediting their
special drawing account with the equivalent of $2.5 million
each in SDRs, and that they should place to the credit of
Country A in the books of their central banks a corresponding
amount of Deutsche marks and lire (or any other convertible
currencies that Germany or Italy may own). At the same
time the Fund would debit the special reserve account of
Country A an amount of SDRs equivalent to $5 million.
in
of
of
by
'~s a result of these transactions, $5 million of SDRs
Country A's reserves would be replaced by $5 million
currencies which it could then spend; and the reserves
Germany and Italy would increase, at least initially,
$2.5 million each owing to the receipt of additional SDRs.
1
Qf)
~vc..
- 2 -
"country A would be charged a moderate rate of interest (perhaps l~ per cent) on the SDRs which it had used;
and Germany and Italy would be paid interest at the same
rate. The value of the additional SDRs held by Germany
and Italy, like the value of those allocated to them by
the Fund, would be guaranteed in terms of gold.
"As long as Country A used less than 70 per cent of
the SDRs which had been allocated to it by the Fund (and
in my illustration it would be using only 50 per cent),
no repayment (or reconstitution) would have to take place.
In due time, as its payments position strengthened again,
it would no doubt be called on itself to provide currency
in return for SDRs and so would tend to restore its holdings
of SDRs. But if over a period of time its average utilization of all the SDRs which had been allocated to it by
the Fund did exceed 70 per cent, the excess would have to
be repaid.
'~
might mention, to round off my illustration, that
Germany and Italy would be obliged to receive additional
SDRs -- including the $2.5 million equivalent in my example -- only up to a point where they were holding twice
the amount allocated to them by the Fund."
193
Statement on the United States Income Tax Conventions
with the Philippines and with France
by
Stanley S. Surrey, Assistant Secretary of the Treasury
before the Committee on Foreign Relations of the
United States Senate, April 30, 1968
~.
Chairman and Members of the Committee:
I am pleased to appear before you in support of two income
tax conventions, one with the Philippines and the other with
France.
The convention with the Philippines was signed in
october 1964 and the convention with France was signed in
July 1967, and I propose to discuss the two conventions in the
ordeJ in which they were signed.
Convention with the Philippines
In broad outline, the tax convention with the Philippines
is a somewhat truncated version of the pattern established in
previous conventions.
It contains the permanent establishment
principle, under which an enterprise of one country is not
subject to tax in the other on industrial or commercial profits
unless it has a permanent establishment in that other country.
And in the determination of the business profits of a permanent
establishment, provision is made for the allowance of a deduction
for expenses, wherever incurred, which are allocable to the
permanent establishment in deriving income subject to tax.
The
definition of a permanent establishment in the treaty has been
the subject of some misunderstanding which I believe has been
resolved to the satisfaction of interested groups, and I shall
return to this matter in a few Ir:)r.tents.
-
2 -
Nondiscrimination
Among the important provisions of the treaty is one which
guarantees against nondiscrimination.
Under the convention
a citizen of one country who is resident in the other may not
be subject to heavier taxes in the country in which he resides
than citizens of that country who reside there.
Similarly, a
corporation organized under the laws of one country but owned
by residents of the other must be treated for tax purposes in
the same way
ing
~tate
~hat
a corporation owned by citizens of the tax-
would be treated.
Finally, where a firm in one country
has a branch in the other country, it may not be subject to
heavier taxes than a similar business in the latter state.
Related Parties
Where transactions take place between related parties under
conditions which differ from those that would prevail between
unrelated parties, the convention provides that there mav be
a readjustment of income between the two entities so that the
proper amount of income will be subject to tax in the respective
states.
This provision is implemented by another provision
in the treaty dealing with consultations between the competent
authorities of the two countries which authorizes them to reach
agreement on the same allocation of income and expenses.
Investment Income
Typically, the conventions to which the United States is
a party contain articles dealing with investment income which
-
3 -
provide in varying degrees for a reduction in withholding taxes
on such investment income.
Some treaties provide for reciprocal
exemption at the source of some forms of investment income,
such as dividends, interest and royalties.
The convention
with the Philippines is confined in this respect to a provision
dealing with interest received by the Government of one of the
contracting states, or a wholly owned instrumentality, from
sources within the other state.
In such cases, the interest
is exempt from tax at the source.
,As a general proposition, the Philippine Government did not
favor incorporating any provisions in the treaty which would
reduce the revenue currently derived by the Philippines from
taxes on investment income flowing to U.S. resid2nts.
The
general U.S. attitude with respect to investment income was
that the Philippines should consider reducing its taxes on investment income in those cases where the amount of Philippine
tax was in excess of the tax that would be imposed in the United
States on the same income.
In other words, we sought adjustments
in Philippine tax so as to eliminate excess foreign tax credits
to the extent that they occurred.
Such adjustments would, in
our view, have improved the tax climate in the Philippines for
investment from the United States.
Since the Philippines did
not feel able to make such adjustments in view of their budgetary
problems, we on our side did not include other provisions in the
convention which, in our opinion, would have helped to promote
- 4 -
u.s.
investment in the Philippines.
I have reference here
primarily to the investment credit with which this Committee is
familiar,
Tax-exempt Transfers
The Philippines did incorporate a provision which should
facilitate investment under which it grants tax exemption to
the gain that might be said to accrue to an American firm which
transfers propertv to a Philippine corporation in exchange for
stock.
Following the transfer, the American firm, together with
any other persons making similar transfers, must own at least
80 percent of the voting stock of the transferee corporation.
A
similar exemption is already provided for under our internal law
but a transaction of this type would be subject to tax in the
Philippines.
The treaty eliminates this tax.
Income from Personal Services
The convention contains the customary articles dealing with
personal service income earned by persons who are resident in
one country and go to the other for limited periods of time.
An
individual who is a resident of one contracting state and
temporarily goes to the other to perform personal services will
be exempt from tax in the latter state if he is present there
for less than 90 days and his earnings do not exceed $3,000.
This rule is s~bject to some other qualificationR
to
B
provision in our Internal Revenue Code.
and corresponds
Teachers whn are
residents of one country and go to the other at the invitation
- 5 -
195
of a university or other accredited educational institution
to teach or engage in research will be exempt from income tax
in the host country for a period up to two years.
The convention also contains provisions designed to promote
the movement of students and trainees between the two countries.
Thus, a resident of one state who goes to the other for the
primary purpose of study or to secure training necessary to
qualify him in the practice of a profession or to do research
as the recipient of a grant will be exempt from tax in the host
state with respect to gifts from abroad, a grant, allowance,
or award, as well as income from personal services performed
in the host country provided the amount of income thus earned
does not exceed $2,000 a year.
In the case of a person who must
secure specialized training to qualify for the practice of a
profession, such as a physician for example, he may earn up to
$5,000 a year.
Charitable Contributions
The convention also provides that the United States will
allow a deduction to its citizens and residents for charitable
contributions made to nonprofit institutions organized in the
Philippines, provided those contributions are used within the
Philippines and provided that the organization qualifies as a
tax-exempt organization under the United States Internal Revenue
Code.
The organization must also be exempt from tax in the
Philippines.
The amounts which may be deducted are limited in
- 6 the same way as if the contribution were made to a United State.
charitable institution.
Effective Date and Administrative Provisions
As in other conventions, the treaty with the Philippines
will become effective on January 1 of the year following exchange
of instruments of ratification.
The convention will remain in
effect indefinitely but may be terminated after five years.
There are, finally, the usual administrative cooperation
prov.isions such as those dealing with exchanges of information
and assistance in collection in cases where persons erroneously
obtained an exemption granted by the treaty.
----- 0
-----
I should like now to revert to the matter of the permanent
establishment which I mentioned earlier.
On the occasion of
the hearing held on the income tax convention with Thailand, a
representative of the United States Steel Corporation, Mr. Hearne,
appeared and expressed concern about some aspects of the definitia,
of a permanent establishment contained in the Thai treaty.
The
language he found troublesome was identical to that contained
in the Philippine treaty.
As a result of these comments, we met
with Mr. Hearne to discuss his interpretation of the treaty
provisions.
The outcome was a letter to Senator Gore, Chairman
of the Subcommittee which conducted the hearing,
in which
Mr. Hearne indicated that in the light of our discussions and
the principles intended to be followed in our subsequent treatie'l
-
196
7 -
which I confirmed in a letter to him, the objections which he
had stated were eliminated.
The discussions were in terms of
the Thai treaty, but in reality it was the provisions in the
Philippine treaty which were of interest to him.
I should add
that in our conversations with Mr. Hearne, I indicated that
the language which he considered to be troublesome would not
be used as a precedent for other treaties, such as the treaty
with Brazil which was then under negotiation.
In this regard,
it should be noted that the Brazilian income tax convention,
which is pending before your Committee, does not contain the
language which concerned Mr. Hearne.
-----
0
-----
I want to urge your Committee to take affirmative action
on the pending convention with the Philippines.
I think it
is a useful addition to the series of income tax treaties
that we have with many other countries in the world, and is
likely to contribute to better trade and investment relations
between the Philippines and the United states.
- 8 -
convention with France
The pending income tax convention with France is a completely
revised version of one of our earliest tax conventions which was
signed in 1939 and took effect on January 1, 1945.
That document
was later modified three times to reflect changes in policy both
in France and in the united States.
The convention presently
before you is essentially a new convention, embodying a comprehensive revision of many of the provisions included under the
existing arrangements and the introduction of some provisions
not previously included, and reflects the fact that both parties
to the agreement have introduced major tax changes in the last
decade.
In France, a fiscal reform of 1959 substantially altered
the French income tax structure, particularly as it affects
personal income, and a 1965 law introduced a partial integration
of the corporate and personal income taxes so that part of the
corporate tax is now treated in France as a withholding tax on
the income of the shareholders.
Included in these reforms have
been important changes in the taxes on the income derived from
France by nonresidents.
On our side the tax changes of 1962 and 1964 and the Foreign
Investors Tax Act of 1966 have to be taken into account in any
treaty arrangements.
In addition, the experience in developing
an OEeD draft model income tax convention has provided new insights into the problems to be resolved in such conventions.
The pending convention with France is the first complete convention between the United States and another OECD country since
197
- 9 -
publication of the draft model and reflects variations felt
necessary by both parties to accommodate the OEeD provisions to
the interaction of the two income tax systems.
Some of the changes introduced by the new treaty are more
formal than substantive; for example, the names of taxes covered
had to be changed, along with the reference to Alaska and Hawaii
as territories, and a new article has been added providing for
periodic exchanges of texts of statutes, regulations and rulings
on tax matters.
Other modifications are intended to facilitate
administration of the treaty.
Since the accompanying technical
memorandum touches on each article of the convention, I will
call your attention only to the more significant changes to be
found in the new convention; these affect the taxation of investment income, business income and personal service income.
Investment Income
Dividends
As a result of a 1965 law, the French income tax structure
has undergone changes of wide dimensions, both internally and
in their impact on international investment.
The French corpo-
rate tax has been imposed at a 50 percent rate for many years
and until the 1965 change, had been applied in much the same
way as our corporate tax.
In order to improve the domestic
capital market and generate interest in French securities, the
French tax law was changed so that one-half of the corporate tax
is now regarded as: having been paid on behalf of the domestic
shareholder in the company.
This part of the corporate tax is
treated as if it were a withholding tax on the shareholder.
- 10 -
Consequently, resident shareholders in French companies
include one-half the corporate tax in their gross income and
receive a tax credit against their personal tax liability equal
to one-half of the tax paid by the corporation.
If the credit
exceeds the shareholder's tax liability he is entitled to a
refund.
This tax credit is not available to nonresident share-
holders nor is it granted to French residents on dividends from
foreign corporations.
Under the new French system, U.S. share-
holders are not any worse off, in absolute terms, than before
its introduction, but they are at a disadvantage relative to
French shareholders, and it is our expectation that in due course
France will act to eliminate or mitigate this relative disadvantage.
Meanwhile, France has agreed on the basis of reciprocity
to lower to 5 percent the withholding tax on dividends received
by a U.S. corporation from a French corporation, of which it
owns at least 10 percent of the shares, compared with 15 percent
in the present treaty and 25 percent under its statute.
~he
However,
rate on portfolio dividends paid to nonresidents remains
15 percent as under the existing treaty.
The inflow of dividends
to the United States from France has been rising in recent years !I
and should be further stimulated by this reduction in French tax.
The rate reduction will increase the inflow of dividends by
more than 11 percent even without any change in dividend policy,
1/ United States receipts of direct investment dividends from
France rose sharply in 1965. For 1963-66 the gross figures
are: $30 million, $28 million, $50 million, and $52 million.
198
- 11 and the lowering of the overall French tax liability on French
source dividends will make dividend remittances to the United
States more attractive.
Interest
The withholding tax rate on interest paid to nonresidents
is limited by the existing treaty to 15 percent, reciprocally.
Under the new treaty it has been reduced to 10 percent (except
that interest on French bonds issued before January 1, 1965 will
be taxed at 12 percent).
The French statutory rate of withhold-
ing tax payable by nonresidents is 25 percent while the U.S.
statutory rate is 30 percent.
Royalties
The mutual withholding tax exemption of royalties flowing
from one country to another has been replaced in the new convention
by a more limited provision.
Copyright royalties will continue
to enjoy tax exemption at the source, but a 5 percent withholding tax will apply to other royalties.
This compares with
statutory rates of 24 percent of the net royalty in France, and
30 percent of the gross royalty in the united States.
The net
royalty in France is defined as net of a presumed expense deduction of 20 percent.
Consequently, the effective French tax
rate is 19 percent of gross royalties.
Although the rate re-
duction on the French side is smaller than on the U.S. side,
the benefit of this provision is enjoyed principal Iv by U.S.
residents as the flow of industrial royalties is substantially
- 12 -
one-sided.
It was on this ground that the French were insistent
upon terminating the existing exemption for such royalties.
Real Property Rentals
Article 5 of the new convention assures to
u.s.
residents
who derive income from real property located in France that they
will be subject to French tax on the net amount of such income,
computed as for residents of France, rather than a tax on the
gross amount.
A similar guarantee applies to French residents
with,real property in the United States.
This treatment of non-
residents' real property income corresponds to the current law
of both countries, but the treaty provides assurance that it
will not be subject to statutory change during the life of the
treaty.
Branch Profits
In addition to corporate tax, foreign corporations operating in France through a branch in that country are subject to an
additional tax designed to compensate for the inability of the
French to collect a withholding tax on dividends paid by the
foreign corporation out of the profits earned in France.
The
statutory base for this branch tax is the entire amount of
branch profits net of the corporate tax, and the statutory rate
is 25 percent.
Since the corporate tax rate is 50 percent, the
combined statutory tax on branch profits is 62.5 percent.
the existing
u.s.
Under
treaty, the tax base is reduced to three-
fourths of the branch profits after French corporate tax, so
that the combined rate is reduced to 59 percent.
Under the
- 13 -
new treaty, the base for this tax on French branches of
u.s.
corporations is reduced to two-thirds of the after-tax profits
of the branch and the rate is reduced to 15 percent.
A distri-
bution of two-thirds of after-tax profits approximates the rate
of distribution typical of subsidiaries and thus brings into
line the tax base for the two types of business organization.
In addition, the treaty specifies that the French tax on
capitalization of profits (droit d'apport majore) no longer
applies to branches of
u.s.
corporations.
Since the French impose
a tax on branch profits in anticipation of their distribution
as dividends, it was inconsistent to impose, as well, a tax
based on profits that were not distributed and the French therefore agreed to give up the latter tax on
On our side, the
u.s.
u.s.
branches.
tax on dividends paid by a foreign
corporation has been restricted, so that instead of applying
whenever the corporation derives 50 percent of its gross income
through a permanent establishment in the United States, it will
apply to a French corporation's dividends only when 80 percent
of the corporation's gross income was so derived.
Business Profits
Profits derived from France by a U.S. company are taxable
in France only if attributable to a permanent establishment
which the company maintains in France, and conversely for a
French company deriving profits from the United States.
Al-
though this has always been a fundamental postulate of income
- 14 tax conventions, it has been refined from time to time as
experience has been gained.
The new convention with France
continues to apply this principle, but it has been modified
along the lines of the definition of a permanent establishment
worked out in the OECD.
The result is that an American firm
would be able to engage in a wider range of activities in France
without being considered to have a permanent establishment there
and consequently without becoming subject to French tax.
tr~aty
The
also contains a special rule under which an American firm
that insures French risks would not be regarded as having
acquired a taxable status in France if the insurance is secured
through a broker or general commission agent.
Reinsurance
premiums would not be taxable in any event.
The definition of profits in the new treaty no longer
includes all income received by a corporation which has a permanent establishment in the country in question.
To the extent
that dividends, interest, royalties, capital gains and real
property rentals are not "effectively connected" with such a
permanent establishment, they are not attributed to it and
qualify instead under the special provisions applicable to those
items of income.
Revenue Act.
This new approach is consistent with the 1966
An important innovation in this respect is that
film rentals are considered to be commercial or industrial profit.
rather than royalties, so that a firm in one country receivinq
film rentals from the other will be subject to tax in the source
-
,-.-
,.'" i ..
....)(.,
- 15 -
country only if it has a permanent establishment there and the
film rentals are "effectively connected" with the permanent
establishment.
Personal Service Income
The tax treatment of income from personal services is one
of the important improvements introduced by the new convention.
The distinction in the present treaty between those engaged in
the practice of a liberal profession and employees has been replaced by a more precise distinction between self-employed persons
and employees, to the significant benefit of self-employed persons
resident in one country who have occasion to perform services
during a temporary stay in the other country.
For example, a
U.S. consultant who performs services in France during a visit
there of not more than six months during any taxable year will
now be free of French income tax liability on the income earned
for those services.
A doctor who treats a patient while in
France, perhaps to attend a convention, or on vacation, or to
study firsthand a new medical technique, will not become liable
to French income tax.
(In both these cases, liability would
attach ,however , if the person maintained a fixed place of business
((fixed base)) in France for at least six months during the tax
year.)
These and similar cases may now involve liability to
tax, with the discouraging effect which results from requiring
temporary visitors to be familiar with and comply with foreign
tax laws.
- 16 -
Another specific situation which has been improved by the
new convention is the exchange of teachers, students and traineel.
Under the present convention a problem of interpretation arose
with respect to teachers, who were considered by the United
States to be members of a "liberal profession" while France
considered them not to be engaged in a "liberal profession" because they were employees.
Under the first interpretation a
French resident could come to the United States to teach for
two years without incurring liability for U.S. income tax; under
the second he would be taxable in the United States as a consequence of staying here more than six months in a taxable year.
Eventually, the U.S. position was chosen as the preferable
interpretation.
The new convention sets out the treatment of
teachers in a separate article, specifying exemption in the host
country for a two-year period for "teachers invited by an accredited
institution of that country.
The treatment of students is more
generous under the proposed convention than under the present
one because the new rule permits them to earn up to $2,000 a
year free of U.S. tax liability.
A new provision dealing with
apprentices permits residents of either country to earn up to
$5,000 a year serving apprenticeships in the other.
In each
case the benefit is allowed for a stay for a limited time period.
A new article provides that social security payments shall
be taxable only by the paying state.
- 17 Nondiscrimination
Another improvement in the new convention extends the
present nondiscrimination rule to all taxes imposed at all
levels, not just national income taxes.
This expanded provision
is included in the OECD draft and in all recent
u.s.
conventions.
Effective Date
The new convention will, enter into force one month after
the exchange of instruments of ratification and will remain in
force until either state gives six months' notice of termination
before the end of any calendar year after 1969.
I would like, finally, to mention Article 30 which deals
with exchanges of official information.
In our recent treaties
we have undertaken an obligation to exchange with our treaty
partner one another's tax laws.
Various arrangements already
exist for exchanges of information on
trea~ies.
Such exchanges
will help us keep abreast of developments in the field of domestic
as well as international tax policy and to ascertain the extent
to which changes in laws or treaties affect the
objectives of our tax treaties.
ope~ation
and
This is a constructive and
valuable type of cooperation.
As a corollary to such exchanges of information, the pending treaty also provides that the two signatories may make
appropriate adjustments in the convention if, by reason of
changes in the taxation laws in either countrv, such modifications in the convention appear necessary and are consistent
- 18 -
with the general principles incorporated in the convention.
The concept of taxation laws is intended to be construed broadl,
and to include not only changes in statutes or their interpretation but also changes in tax treaties.
I can illustrate how this provision might be applied by
reference to some of our recent treaties.
In our conventions
with Germany and the United Kingdom, authority has been given
to the competent authorities of the two signatories to reach
agreement on a uniform allocation of income between related
enterprises and to give effect to such an agreement by adjusting
taxes and making refunds where appropriate.
Refunds may be made
even if the statute of limi tationsotherwise bars them.
Many of
our other treaties empower the competent authorities to reach
agreement on allocations of income but they do not authorize a
tax refund if this involves an extension of the statutory period
for refunds.
Consequently, a full measure of equity may not
always be achieved.
However, if these other treaties contained
the language of Article 30, the implementation of the agreement
on uniform allocation could then be effectuated.
The effectua-
tion would be carried out by an exchange of diplomatic correspondence as is now used in extension of tax treaties to dependent
territories.
In several treaties there is a provision permittinq
an extension of their scope to the overseas territories of the
other country with such modifications in the conventions as
may be necessary.
Such extensions and modifications are under-
taken only after submission of the proposed exchange of correspondence to this
Committee.
- 19 In concluding my remarks on the French treaty, I want to
emphasize that while the proposed convention is an entirely
new document, its newness consists largely in the modernization
of various provisions to reflect changes in the tax systems
of the two parties and developments in the concepts governing
international tax relationships.
The treaty has benefitted
from the continuing discussion between ourselves and other
countries of the issues and problems dealt with in such an
agreement.
It is not a new convention in the context of our
policy in other conventions.
For the most part this convention
with France embodies the views developed over the years and
implemented in the various agreements we have entered with
other industrial countries.
Recently most of these agreements
have been partial, designed to amend rather than to replace
u
an existing convention.
In the French case the major revisions
in French income taxes necessitated a thorough
r~drafting.
As
a consequence the new convention with France will serve as
the reference guide in future negotiations with European
countries •. Thus, a new convention with Belgium is necessary
due to important recent changes in Belgian tax law.
are also continuing with Portugal and Spain.
Negotiations
The French con-
vention by virtue of its completeness and recent date will be
a useful standard for these negotiations, from which variations
appropriate to accommodate the treaties to differing national
tax structures can be made.
TREASURY DEPARTMENT
Washington
203
FOR IMMEDIATE RELEASE
REMARKS BY THE HONORABLE STANLEY S. SURREY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
AMERICAN CHAMBERS OF COMMERCE ABROAD BREAKFAST
AT THE FIFTY-SIXTH ANNUAL MEETING
CHAMBER OF COMMERCE OF THE UNITED STATES
WASHINGTON HILTON HOTEL, WASHINGTON, D.C.
TUESDAY, APRIL 30,1968, 8:15 A.M., EDT
RECENT PROGRESS IN INTERNATIONAL TAX RELATIONSHIPS
Many of you deal daily with problems involving the
relationship between the United States tax system and those
of the other countries with which you have close economic
and personal ties.
Where different tax systems apply to
the same international transaction or to the same person,
the possibility of tax conflict and resulting unfairness is
obvious.
Unilateral action by either country cannot com-
pletely obviate these tax conflicts and barriers to trade
and commerce.
As a result, we have entered into a series
of tax treaties designed to solve these difficulties.
The
problems in negotiating these treaties are somewhat different
when the treaties are between industrialized nations and when
they are between a developed country on the one hand and a
less developed country on the other.
I would like to take
this opportunity to discuss the current status of our tax
treaties.
F-l228
- 2 -
INCOME TAX TREATIES
Developed Countries
Current treaty negotiations with the developed countries are designed to complete our treaty network, particularly in Europe, and to update our existing conventions in
light of the Foreign Investors Tax Act, the Organization
for Economic Cooperation and Development Model Convention
of 1963, and changes which occur from time to time in the
tax systems of our treaty partners.
Our latest accommodation between the OECD Model Convention and our internal legislation is set forth in the
proposed revision of the treaty with France.
This is
presently pending before the Senate Foreign Relations Committee and we hope it will be acted upon shortly.
The
proposed convention is the first entirely new convention
entered into by the United States with another OECD member
since 1963.
The convention also, of course, reflects changes
that have occurred, principally in 1965, in the French income
tax structure. The new treaty carries forth the development
of patterns contained in the income tax conventions with
Germany, the United Kingdom and the Netherlands as recently
amended.
204
- 3 -
We expect to revise our existing treaty with Belgium
along the same lines as the new convention with France.
New treaties with Finland and Portugal are in the final
stages of negotiation and discussions are being held with
Spain.
When these treaties are effected, we will then
have income tax conventions with all of the nations of
Western Europe.
Less Developed Countries
As the less developed countries of the world become
more aware of the importance of solving tax problems generated by international business transactions, it is natural
that they have begun to consider tax treaties with other
nations.
This concern also coincides with recent attention
given by the developed countries to their tax relationships
with the developing countries.
In some cases a treaty may
be a part of a new relationship between a former mother
country and a newly independent country.
In other cases
tax treaties are designed to complement a developed country's
program to find new markets for its goods or new investments
for its capital.
The aims and objectives of the various
developing countries differ both from those of the industrialized nations and are often different as between themselves.
- 4 Since the purposes for these tax conventions vary as
between countries, the conventions are designed to have
varying effects.
In some cases they may serve to accommo-
date the tax systems to internationally acceptable standards.
In others they may also remove barriers and provide direct
incentives to the flow of investment capital.
Almost all of our recent treaties with developing
countries contain standard provisions substantially similar
to those in the developed country treaties and the OECD
Model Convention.
These provisions -- which essentially
define tax jurisdiction respecting transactions involving
both countries -- may sometimes be even more important in
a developing country treaty than in a treaty between developed countries since in the latter case they may often, in
substance, merely restate the sophisticated internal law
of both countries.
The often less sophisticated systems of developing
countries may need fleshing out to cover international
transactions.
Standard treaty provisions may be helpful
in filling gaps and providing rules where none existed
before.
For example, we suggest the inclusion of source
rules in our tax conventions with both developing and
205
- 5 developed countries.
Our treaties limit a country's tax
on a resident of the other country to income from sources
within the former country.
Some of these rules, such as
the rule with respect to income from furnishing personal
services or from the manufacture and sale of goods, may
have no counterpart in the law of the other country.
On the other hand, the internal laws of the less
developed country may not, when applied to international
transactions, coincide with internationally acceptable
standards.
These differences may exist because of revenue considerations, aspects of administration, or merely failure to
modernize an old statute.
For example, less developed
countries often refuse to permit deduction for expenses
incurred outside of the country.
This can result in double
taxation for the United States company which provides executive or managerial services in the United States for a
branch overseas.
We have included a specific provision permitting such
deductions as part of the standard clauses.
Examples may
be found in the Brazil and Philippine treaties.
- 6 -
In addition to source rules and provision for deductibility of home office expenses, several other examples of
standard provisions that have generally received international approval include
the permanent establishment article which exempts
taxation of the industrial and commercial profits
of a resident of one country by the other country
unless earned through a "permanent establishment"
in the latter country;
tax exemption under certain circumstances for
residents of one country temporarily in the other;
prohibition of tax discrimination against residents
of one country or their corporations by the other
country.
In addition to providing a greater degree of certainty
for traders and investors with respect to a particular
country, adherence to the same internationally accepted
standards within each treaty will eventually result in a
high degree of uniformity which can only benefit all concerned.
Turning now to the investment articles, substantial
differences in economic development often reduce the
206
- 7 possibility of reciprocity which can be maintained in the
treaty provisions.
Treaties between developed countries
tend to assume the desirability of a tax order which encourages or at least does not discourage the free and reciprocal
flow of capital.
Temporary restrictions made necessary or
desirable by economic considerations may be handled independently without disrupting these internationally accepted
tax rules and the agreements which effectuate them.
The developing countries are required to marshal all
available local capital for their own development.
Foreign
capital may also be required in such amounts and in such
areas as may be consistent with the particular economic,
political and security policies of these countries.
The
investment articles of the treaty provide a means by which
the developed country can channel available export capital
through incentives or removal of disincentives to developing
countries.
The investment articles in the developed country
treaties encourage capital flows by reducing taxes at source
on investment income.
In the case of developing countries,
however, reducing their rates of tax on investment income
- 8 -
such as dividends, interest and royalties is, in fact, a
unilateral concession.
The disproportionate revenue flow
makes equal rate reduction more costly to the developing
country than to its industrial counterpart.
Furthermore,
tax rate reductions on interest and dividends on the part
of the developed country are not in the best interests of
the less developed country.
Since such countries need to
increase capital investment within their own borders, it
is usually not appropriate to make investment by their own
nationals in the developed countries more attractive.
~
Keeping high tax rates is not a satisfactory solution
for the developing country because such rates may deter
foreign capital investment.
On the other hand substantial
unilateral reduction by the developing country to bring
their rates to the level generally specified in developed
country treaties may mean a considerable revenue loss, or
even the appearance of some loss may involve political considerations.
In a developing country a greater proportion
of tax revenue may be collected from foreigners than in a
developed country.
Faced with these factors, we have proposed the following general solution to developing countries.
We suggest
207
- 9 reduction in the rates of tax on investment income only to
the level at which the investor is subject to substantially
the same overall tax as if he had invested in the United
States.
We also suggest that the United States not reduce
its statutory rate -- of 30 percent -- on investment income
except with respect to royalties, the earning of which does
not generally require a capital outflow from the developing
country.
To the extent that the developed country is able and
willing to accept this proposal, we have offered the domestic
7 percent investment credit to investments made in developing
countries.
The credit thus extended would provide the same
treatment for investments in the developing country as is
provided for similar investment in the United States.
This
approach would permit us to maintain the equality of treatment between our investors at home and our investors in
less developed countries while still favoring those countries
over industrialized nations.
Neutrality is maintained from
our point of view while an incentive is created for the
developing country.
In taking this approach, we have had to assume the task
of demonstrating to these countries that this investment
- 10 credit extension is a better contribution on our part to
meeting the treaty objective of encouraging investment
than a tax-sparing concession would be.
A number of indus-
trialized countries are following the tax-sparing approach
and some Latin American countries have, we believe
uncritically, accepted the view that they benefit more from
tax-sparing than from an extension of the credit.
Indeed,
many of our own taxpayers have the same belief.
It can be shown that the direct cost to a less developed country of entering into a tax-sparing treaty with
respect to direct investment is
greate~than
the cost to
it of entering into an investment credit treaty.
The
former often requires a large reduction in the withholding
tax of the Latin American country to make the tax-sparing
concession of real benefit to the investor from the industrialized country.
This is not the situation under an
investment credit treaty.
On the other hand, the benefit
to the United States investor of a tax-sparing credit for
a treaty reduction in withholding rates may frequently be
small or even nil, as it would require an improbably large
reduction in the withholding rate to get significantly belw
208
- 11 -
the point where a net United States tax becomes payable
under the existing tax credit system.
In other words, in
many cases the benefit of the rate reduction would accrue
to the taxpayer with or without tax-sparing.
The benefits
to a firm under the credit treaty, on the other hand, are
cumulative, for it receives both the credit and the withholding rate concession of the other country, where the
latter brings the Latin American country's effective rate
to an approximation of the United States corporate rate.
The benefits to the taxpayer-investor under a treaty providing the investment credit and moderate withholding rate
reductions are thus greater than the benefits under a treaty
providing tax-sparing and drastic withholding rate reductions.
11
Suppose a foreign country makes a moderate reduction in
its withholding rate on dividends to reach an effective
overall rate of 48 percent in return for the extension
of the investment credit. The benefits of this withholding rate reduction go to the U. S. corporate taxpayer,
and in addition he receives the benefits of the extension
of the investment credit, so that the concessions of the
two Governments produce a cumulation of benefits -- as
they should to avoid any wastage of the concessions. But
if the foreign country reduces its withholding rate still
further, this time in exchange for tax-sparing rather than
the investment credit, a part of the reduction would still
have benefited the U. S. corporate taxpayer even in the
absence of tax-sparing, in view of our lack of gross-up
1/
- 12 Continuation of Footnote 1, page 11.
under the foreign tax credit (thus producing an effective
rate of our tax that is less than 48 percent). The balance
of the withholding reduction will only benefit the U. S.
corporate taxpayer if tax-sparing is granted. But the
full benefit of the withholding rate reduction, achieved
in this latter manner, would be distinctly less than the
cumulative benefit the U. S. corporate taxpayer would
have obtained under the first approach, given the limits
of the reductions in withholding rates the Latin American
countries are likely to make even under tax-sparing
treaties. Hence the U. S. corporate taxpayer does not
gain as much, and the foreign country loses more, under
the tax-sparing treaty. If the foreign country under an
investment credit treaty wants to benefit a U. S. corporate taxpayer still more, it could of course lower its
withholding rate to the point where it matches our effective rate in the absence of gross-up -- and this lowered
rate would without tax-sparing be of ~enefit to the taxpayer, cumulative with the investment credit. To illustrate
by a numerical example, assume a Latin American country
with a corporate tax of 35 percent and a withholding tax
of 25 percent. The combined tax on the profits of a U.S.
subsidiary remitted to the United States would total 51.25
percent. A reduction in the withholding rate to 20 percent
would lower the effective foreign rate to 48 percent. But
with a 35 percent foreign corporate rate the combined
United States and foreign effective rate on income from
the Latin American country is only 43.45 percent. (This
is the sum of 35 units foreign corporate tax paid plus the
net amount of 8.45 units payable to the United States on
the dividend of 65 units, after allowing a credit of 22.75
units for the foreign corporate tax [65(48%) - 65(35%) =
8.45].) Thus any reduction in the withholding rate down
to 13 percent (65x13%=8.45) would benefit the United States
investor. With withholding rates of less than 13 percent
the foreign tax credit becomes less than U. S. tax liability
and tax-sparing would begin to take effect. But even if the
Latin American country agreed co lower its withholding tax
from 25 percent to 10 percent, the value of the investment
credit would exceed 3 percent of the dividend -- which would
be ~he val~e of a tax-sparing credit -- over an indefinite
per1od, uS1ng moderate assumptions about investment, profits,
and dividends.
- 13 -
209
Even in the case of statutory investment incentive
concessions involving a reduction in the basic corporate
tax of the Latin American country, the investment credit
over the typical time period of those concessions will
compare favorably with the tax-sparing approach in terms
of value to the investor.~/
In addition, the credit comes
at the outset as the investment is made, is increased as
;;
For example, if a Latin American country assumed to have
a 35 percent corporate rate granted full exemption from
that rate to new firms in a certain area, it would take
about six years for the tax-sparing credit to match the
investment credit. Another form of incentive sometimes
used is a 50 percent reduction in income tax: in this
case, a profitably operating u. s. subsidiary entitled to
this benefit should clearly prefer the investment credit
to the tax-sparing credit as the latter would not match
the investment credit in tax savings until after the
tenth year, which is probably the final year of the
reduction.
The assumptions used in these examples are:
(1) the
investment credit is earned on 60 percent of the
initial investment for a new company and 75 percent
for an operating company. The creditable assets
acquired in either case are depreciated on a straightline basis over an eight-year period with depreciation
reserves applied to acquire additional creditable assets;
no credit is earned on reinvested profits since these
are assumed to total only one-half of current profits;
(2) the profit rate is assumed to be 20 percent before
tax; for a new company this is approached gradually
over the first four years (zero in year 1, then
5 percent, 10 percent, and 20 percent) while for an
operating company it prevails throughout; (3) one-half
of after-tax profits is distributed; and (4) the
discount rate is 15 percent.
- 14 additional investment is made, and is thus not dependent as
is the tax-sparing mechanism on the success of the enterprise arthe distribution of profits.
Also, under the investment credit approach the United
States would apply its tax in the same way to income from
the treaty country as to income arising within the United
States. As a result, the decision to invest in a treaty
country can be made on economic criteria without institutional pressures.
In contrast, the tax-sparing approach
would undo this basic aspect of United States control over
application of its .tax system by permitting different rates
to apply to income from different countries; it would
encourage investment in the treaty countries which provide
the largest unilateral tax relief.
If tax sparing were to
be generally accepted by the industrialized countries, the
result might be a competitive struggle among the developing
countries to divert resources to the lagging regions or
sectors of their economies by offering the largest tax
subsidies.
To the extent that such countries choose to try
the tax incentive route in their legislation, the benefit
of the rate reduction or exemption is available to United
States subsidiary firms insofar as they retain the profits
in those operations.
But a tax-sparing credit on our part
- 15 is
unacceptabl~
on tax policy grounds and less satisfactory
in terms of encouraging investment in developing economies
than the investment credit extension. The fact that the
investment credit approach compares favorably with taxsparing in quantitative value reinforces our position
that the extension of the investment credit is the more
efficient and desirable approach.
Our recent treaty with Brazil -- now before the Senate
is an illustration of the lines of main development that we
are following in our approach to Latin American treaties.
However, we would hope also to include a provision deferring the taxes of the two countries in the case of transfers
of patents and know-how for stock, including a minority
interest, in a corporation of the developing country.
We
are presently engaged in negotiations with Argentina,
Jamaica, and Trinidad and Tobago, and in consultations that
may develop into negotiations with several other Latin
American countries.
Our completed treaties and negotiations
indicate that there seems to be general agreement regarding
the standard provisions previously referred to.
Adoption
of these basic provisions which essentially define
tax
- 16 jurisdiction will be a major step forward in the field of
international taxation.
In some cases the convention as concluded will be
limited to these standard provisions and accordingly not
accomplish all of the potential goals of a complete convention.
Such was the case with the Philippines, which is
rather somewhat truncated version of our usual convention
primarily because of the absence of the typical investment
provisions.
The standard provisions, including the perma-
nent establishment clause, nondiscrimination clause, the
expense deduction provisions, exemption for temporary
activities, and the like will provide substantial benefits
to the United States trader, investor, and business and
professional temporary sojourner.
In other cases we may determine that it is not possible
to reach agreement with respect to the investment provisions
because of aspects of timing.
Accordingly, it may be useful
to conclude conventions leaving open the timing of the
application of the investment provisions.
These provisions
could then come into effect at such time as the concerns
which affected governmental policies with respect to foreign
- 17 investment are alleviated.
New negotiations would b::-
,_;:~::-,,,,
essary and yet the standard provisions would be immeriiatelj
applicable.
By discussion of why concerns may make exten-
sion of the investment provisions temporally inappropriate
whether they be balance-of-payments concerns on our side or
revenue loss on the other -- both countries can also explore
the appropriateness of these provisions and their mutual
understanding of their relevance to the problems to be
solved.
In any event we must not shy away from extension of
our treaty network to the developing countries because of
fiscal problems which may hinder their full implementation.
Germany, Sweden and Japan are actively concluding treaties
with the developing countries.
Increased trade and invest-
ment activity will undoubtedly follow and we should be
concerned lest we find ourselves limited in new markets or
cut out of our expected share of expansion of old ones.
ESTATE TAX TREATIES
With the publication of the model estate tax convention by the Organization for Economic Cooperation and
Development in 1966, many of the member countries, including
- 18 the United States, have renewed their negotiating activities
in this area.
At the present time we have twelve estate
3/
tax conventions in force,
and as we near completion of
our income tax treaty network in Western Europe we are
seeking a complementary estate tax convention system.
Our existing estate tax conventions are based on the
situs principle of taxation.
That is, a credit is granted
to a citizen or domiciliary of one country for foreign
estate or inheritance taxes paid to the other country on
property situated within that other country under the
comprehensive situs rules provided in each treaty.
In
certain cases (for example, where the property is deemed
situated in or outside both contracting states), existing
treaties provide that the contracting states share the
credit.
The OECO model adopts a different approach, but with
the same purpose:
the avoidance of international double
taxation of estates and inheritances.
l/
The OECD model places
Australia, Canada, Finland, France, Greece, Ireland,
Italy, Japan, Norway, South Africa, Switzerland,
United Kingdom.
- 19 principal emphasis on domicile and provides that all
property shall be taxable by the state of domicile, subject
to the exception that real property and business assets
may also be taxed by the state in which they are situated,
and the state of domicile would grant an exemption for such
property or a credit for the other state's taxes thereon.
Although the taxing rules relating to real property and
business assets are similar to our situs rules, the former
are extremely prescribed, since primary taxing jurisdiction
in the OEeD model is conferred on the state of domicile to
a greater extent than under our present conventions.
In determining domicile, the OEeD model refers to the
law of each of the contracting states.
If each country
finds domicile, the OECD model resorts to a sequence of
tests, the application of which is intended to assure that
there is one and only one domicile.
This series of tests
involves the following concepts -- permanent home, center
of vital interests, habitual abode, and citizenship -- in
that order.
If these tests do not solve the question of
domicile in any given case, the OEeD model provides that
the contracting states shall settle the question by mutual
agreement.
- 20 These concepts are highly uncertain in their actual
application, involving difficult factual determinations in
each case.
They follow the general European pattern of
little more than residence as giving rise to domicile for
both estate and income tax purposes.
The United States,
on the other hand, has two separate and distinct tests for
residence; for income tax purposes, the U.S. approach is
not dissimilar from the European test.
However, for estate
tax purposes, the United States requires not only physical
presence or residence, but also an intention to remain in
the United States indefinitely.
We are convinced that our estate tax domicile rule is
much more appropriate to this era of multinational business
than the physical presence tests proposed by the OEeD and
utilized by most European countries.
Foreign executives in
the United States and American executives abroad should not
be burdened by the estate or inheritance taxes of countries
other than their home state of citizenship, except with
respect to limited categories of property such as real
property or business assets situated in those countries.
These individuals are not generally in the foreign country
·1
2Iv
- 21 with a desire to live there indefinitely.
Many of them are
there because their employer happens to have a factory or
other business operation in that country.
In brief, their
presence abroad is based not so much on choice or desire
or the intention to stay there indefinitely, but rather
because business demands of the employer require their
presence.
Furthermore, the estate planning of these persons
is often geared to the laws applicable in what they consider
to be their "real" home state.
Requiring reappraisal and
readjustment of their estate plans for each temporary
assignment in a foreign country is not only burdensome, but
also may be impossible if irrevocable actions have already
been taken.
In our view, estate taxation of such persons -- located
temporarily away from their home country -- on a world-wide
basis does not accord with modern day business practices or
needs or with the desire of our trading partners to minimize
double taxation in whatever form it may arise.
In attempting
to adapt the approach of the DECD model to the maximum extent
feasible, this point is high on our list of priorities.
- 22 In our recent estate tax negotiations with Sweden and
the Netherlands we have discussed this particular problem
and we have also raised it in a general way with France.
Resolution of the estate tax jurisdiction over the corporate executive who is only temporarily in a foreign country
for a period of a few years is a touchstone to these and
other negotiations to be held in the future.
We are hope-
ful that a mutually agreeable solution will be found whereby
the pressure of possible estate tax problems can be alleviated, enabling Americans abroad and aliens in the U.S. to
be more mobile, thus diminishing the problems and burdens
already imposed on their wives and children.
We would not limit our taxing jurisdiction to domicile
alone, but would retain the right to tax on the basis of
United States citizenship.
Any potential double taxation
resulting from the retention of this taxing jurisdiction
would be resolved by the credit mechanism.
The Foreign Investors Tax Act of 1966 was an important
step toward encouraging foreign portfolio investment within
the United States, and we are pursuing this policy further
in connection with our current estate tax treaty negotiations.
- 23 -
214
We have been cautious about the situs rules relating to
portfolio investments of nonresident aliens and will not
permit the United States to become a tax haven for estate
or income tax purposes.
Under appropriate circumstances,
however, including the imposition by the treaty partner
of a comparable estate or succession tax, we are considering treaty provisions favorably affecting nonresident aliens
with respect to the Federal estate tax on stocks and
securities of U. S. corporations.
INSTITUTIONALIZATION OF THE ADMINISTRATION
OF INTERNATIONAL TAX MATTERS
Section 482
We have recently issued final regulations, and a section of new proposed regulations, affecting taxation of
transactions between related taxpayers, especially those
between United States companies and their foreign affiliates.
Section 482 of the Internal Revenue Code gives the Comrnissioner of Internal Revenue authority to allocate income
and deductions between or among organizations, trades, or
businesses owned or controlled by the same interest in order
to prevent the avoidance tax or clearly to reflect income.
- 24 -
The basic rule embodied in these regulations requires
related taxpayers to deal with each other on the same
basis as they would deal with unrelated parties.
This
standard, referred as the "arm's length standard", has
been in effect since 1935 but the new regulations specify
how that standard will be applied in specific situations.
The five areas dealt with in detail are:
interest, the
rendition of services, rentals, the use of intangible
property, and the sale of tangible property.
Where possible
a "safe haven" has been provided to give taxpayers a greater
certainty as to tax consequences of their transactions with
related parties.
The final regulations, issued on April 16, 1968, have
clarified and liberalized proposed regulations which were
issued in August of 1966.
The guidance provided by these
regulations is expected to minimize uncertainty about the
tax consequences of transactions between related entities.
It is expected that the specific rules provided by the regulations will increase efficiency in audits and facilitate
voluntary compliance by taxpayers.
However, because of the
varying and complex problems inherent in business decisions,
- 25 -
21S
the rules, of necessity, are flexible in some areas.
There-
fore, our Internal Revenue Service will make every effort
to administer Section 482 in a spirit of reasonahleness
within the framework of the regulations. The specific rules
contained in the regulations reflect accepted Aconomic and
accounting approaches, but some taxpayers have indicated
the inevitable concern as to the manner in which the regulations will be administered by the Internal Revenue Service.
They can be assured that the Internal Revenue Service will
take every possible step to ensure that agents do in fact
administer the regulations on a reasonable basis.
It is
not the policy of the Internal Revenue service to make
minimal allocations under Section 482.
Rather adjustments
will be proposed only in cases where there has been a
significant deviation from arm's length dealing or where
there has been a significant shifting of income.
Specific
instructions have been issued to Internal Revenue agents
reflecting this policy.
Section 367
Section 367 of the Internal Revenue Code limits taxfree reorganizations involving foreign corporations, or
- 26 transfers of property to foreign corporations, to those
cases where the Secretary or his delegate finds that tax
avoidance was not one of the principal purposes of the
transaction.
Temporary guidelines were published in 1966
and permanent guidelines, which are more comprehensive and
therefore more useful, will be published in the immediate
future.
These new guidelines take into account the many
constructive suggestions and criticisms received from the
business community and their professional advisors.
We
have been made particularly aware of the desirability of
consolidating foreign operations by mergers of controlled
foreign entities.
The new guidelines will be of help in
solving resulting tax problems.
Treaty Administration
In addition to the extension of our treaty network, we
are now also moving ahead with ancillary problems concerning
the administration of the tax conventions.
While regulations
have been promulgated with respect to parts of our tax conventions, we are now in the process of drafting a set of
regulations which will apply to the substantive aspects of
our entire treaty network.
This master set of regulations
- 27 -
would cover what we might call the standard provisions and
the variations found in the several conventions.
A key provision in our tax conventions is the mutual
agreement article which provides for the administrative
review of taxpayer claims.
This remedy is in addition to
any remedy provided by the national laws of either State.
This article also contemplates that the competent authorities of the two States will endeavor to settle by mutual
agreement any difficulties or doubts arising as to the
application of the convention.
Some particular areas with
respect to which the competent authorities may consult are
the attribution of industrial and commercial profits to a
permanent establishment, the allocation of income between
a resident and a related person, and the determination of
source of particular items of income.
In implementing the
provisions of this article, the competent authorities may
communicate with each other without the formality of going
through diplomatic channels and may meet together for an
exchange of oral opinions if such a meeting seems desirable.
In cases in which the competent authorities reach agreement
- 28 -
with respect to a particular matter, taxes will be imposed
and refunds or credits allowed, in accordance with such
agreement.
In view of the general expansion of international
busi~
ness activity and the resultant increased possibility of
conflicting tax results, the Treasury and the Internal
Revenue Service are reviewing the administrative procedures
for handling cases under this article and hope to publish
a statement of procedures in the not too distant future.
Our recent tax conventions have specifically provided
for the competent authorities to attempt to agree as to the
proper allocation of income between the respective taxing
jurisdictions.
We are continuing our efforts through the
OECD and with the individual countries to gain acceptance
of basic principles of allocation to provide guidance to
taxpayers and to ease the task of the competent authorities
when faced with a double taxation problem.
Thus, we are
apparently the first country to issue detailed uniform
rules governing the allocation of income between related
taxpayers.
From these detailed rules can be distilled cri-
teria governing the allocation of income, which criteria
- 29 may be useful as an aid in the formulation of internationally acceptable standards for handling this problem.
We recognize that our adjustment under Section 482 is
only one side of the coin when a foreign country is involved.
We believe that mutual adoption of basic principles will
assist taxpayers by providing certainty and obviating the
necessity of adjustments by either country.
However, when
such adjustments are necessary, these same principles will
guide the competent authorities to a mutually agreeable
result.
The procedure might work as follows:
Assume a United
States company had rendered services free of charge to a
foreign affiliate.
Under our domestic rules a charge equal
to the actual costs incurred in connection with the services
rendered must be made.
Consequently, the income of the
United States company would be adjusted to reflect this
charge.
In this situation the foreign affiliate would seek
a correlative adjustment in the form of a deduction in
computing its income for foreign tax purposes.
If such an
adjustment were denied by the foreign tax authorities, the
competent authorities could be asked to corne to a consistent
- 30 -
result under which the deduction and the charge would be
the same.
Under the mutual agreement article of the con-·
vent ions such a resolution by the competent authorities
would be appropriate. Agreement with our treaty partner
in advance on the necessity for a charge under these cir- .
cumstances and the basis upon which the appropriate amount
of such charge would be determined, would enable the
competent authorities to solve this type of problem with
greater facility.
The treaty regulations, guidelines under Sections 482
and 367, the competent authority procedures and our work
with the OEeD are all part of a program to institutionalize
our administration of the international aspects of our tax
system.
These efforts should serve to ease the task of the
management of United States overseas business and their
advisors by providing greater certainty and simplifying
planning in this important aspect of international business.
Such certainty can in the long run provide a sounder basis
for international business ventures and better assist in
- 31 -
218
enhancing the United States economic and fiscal position
than temporary tax rearrangements which distort tax policy,
lose needed revenue and cannot help but reward some favorably situated taxpayers unduly to the detriment of domestic
business and United States individual taxpayers who would
have to assume the tax burden.
With these premises, we in the Treasury stand ready to
assist wherever possible with respect to the new challenges
and qld problems facing the American businessman overseas.
TREASURY DEPARTMENT
•
t
April 30, 1968
FOR IMMEDIATE RELEASE
UNITED STATES AND ARGENTINA
SIGN $75 MILLION EXCHANGE AGREEMENT
Secretary of the Treasury Henry H. Fowler and the
Ambassador of Argentina, His Excellency Alvaro Alsogaray,
today signed a $75 million Exchange Agreement in Washington.
The new Agreement provides for reciprocal currency
"swap" facilities which enable either the United States
or Argentina to draw the currency of the other country up
to an aggregate amount of $75 million.
The drawings may
be made at times and in amounts that are mutually agreeable
to both countries.
The new Agreement will be in effect for one year.
It replaces an expiring one-year Agreement signed
May 2, 1967.
The reciprocal availability of currencies will increase
the ability of financial authorities of the United States
and Argentina to cooperate effectively in international
economic affairs, and to promote stable and orderly
conditions in the foreign exchange markets.
000
F-1229
STATEMENT OF THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON BANKING AND CURRENCY
U.S. HOUSE OF REPRESENTATIVES
ON
THE AMENDMENT TO THE ARTICLES OF AGREEMENT
OF THE INTERNATIONAL MONETARY FUND
ESTABLISHING SPECIAL DRAWING RIGHTS
WEDNESDAY, MAY 1, 1968, 10:00 A. M.
I
I appear before this Committee today to recommend
action on H. R. 16911 which would authorize the President
to accept the Amendment proposed by the Executive Directors
of the International Monetary Fund to the Governors of
that institution.
The legislation would also give
Congressional approval for U.S. participation in the Special
Drawing Account that would be established by the Amendment
in order to implement the Special Drawing Rights facility.
The Amendment is the first that has ever been negotiated
since the adoption of the Articles of Agreement of the Fund,
approved by the Congress in the Bretton Woods Agreements Act
of 1945.
There have been several increases in the resources
of the Fund, the last being approved in 1965.
In 1962,
the Congress approved legislation providing for U.S.
participation in the General Arrangements to Borrow, under
which a group of ten advanced countries undertook to provide
credit lines to the International Monetary Fund that could
be used to meet a threatened impairment of the monetary system.
F-1230
- 2 -
Through these various actions, the Congress has
kept in touch with the growth of the International
Monetary Fund from an institution with global quotas
of around $7 billion in 1945 to an institution having
global resources in all currencies of over $21 billion today.
The Amendment does effect some changes in the rules
and practices of the Fund governing its traditional credit
operations, but the primary purpose of the Amendment is
to establish in the Fund a new function different from
that originally contemplated.
This function is to provide
a supplementary reserve alongside the traditional components
of the world's monetary reserves -- gold and foreign exchange.
The Amendment is consistent with the recent important
decision taken in the Washington Communique of March 17, 1968,
with respect to gold.
It was the prospective establishment of
the Special Drawing Rights facility which enabled the
members of the gold pool central banks to indicate on
March 17 that "as the existing stock of monetary gold
is sufficient in view of the establishment of the facility
for Special Drawing Rights, they no longer feel it necessary
to buy gold from the market.
II
These two decisions -- the Amendment and the Communique .represent a giant stride forward in the long process of
supplementing gold and of developing forms of money, both
221
- 3 -
domestic and international, that are essentially entries
on the books of domestic or international banking or monetary
institutions, the outstanding volume of which is deliberately
controlled.
Domestically, advanced nations have almost completely
eliminated metallic money, except for subsidiary coinage.
The money of commerce, internally, is paper currency and
bank deposits.
In the international field, the evolution of the
monetary system has proceeded somewhat more slowly.
Metallic
money in the form of gold has retained a much more important
role in the international monetary system.
Nevertheless, even in this sphere the march of progress
has led to supplementing limited supplies of monetary gold
through the gold exchange standard.
Under this system, the
domestic money of certain countries -- primarily the
United States and the United Kingdom -- has been used
by other countries as a form of international reserves.
In 1950, gold comprised 70 percent of the world's
reserves.
By 1967 this proportion had fallen to 54 percent
largely because of substantial additions to foreign holdings
of dollars (see Chart 1).
- 4 While the world has seen an unprecedented
per~od
of sustained prosperity under this gold exchange standard,
the associated deficits of the reserve centers have given
rise to well-known difficulties and problems.
In order
to develop a supplement to gold and foreign exchange that
would avoid these difficulties, there have been two years
of studies and three years of negotiations.
These have
resulted in devising an international reserve asset that
can be used to assure the future growth in reserves,
without depending on gold or continuing deficits of the
reserve centers.
The Special Drawing Rights are not a
temporary feature, but are intended as a permanent addition
to international reserves.
The related decision in the Washington Communique
resulted from the drain of monetary gold into the private
market, occasioned by speculation in gold.
It introduced
the 2-tiered gold system, which logically calls for the
isolation of the monetary stock of gold from the private
commodity market in gold.
This, coupled with the advent
of the Special Drawing Right, points to a decline in the
relative importance of gold in the total of global reserves.
The SDR Amendment signalizes in a formal international
way that Special Drawing Rights should have a place of
rising importance as a oomponent of world reserves.
- 5 -
Federal Reserve Chairman Martin and I have been
privileged to represent the united States in the discussions
and negotiations of the Finance Ministers and Central
Bank Governors of the Group of Ten.
Chairman Martin
represented the Federal Reserve System in the meeting
of the gold pool countries held in Washington on March 17,
1968.
Under Secretary Frederick L. Deming and Governor
J. Dewey Daane of the Federal Reserve conducted negotiations
as members of the Deputies of the Group of Ten.
Under Secretary Deming also chaired an interdepartmental
group, which has met frequently to develop the u.S. substantive
positions and negotiating posture.
Particularly during
the past few months, William B. Dale, u.S. Executive
Director on the Executive Board of the Fund, has carried
the responsibility of representing the united States in
the almost continuous daily sessions of the Executive
Board, which hammered out the final text.
The National Advisory Council on International
Monetary and Financial Policies has prepared a Special
Report to the President and to the Congress on the proposed
Amendment to the Articles of Agreement of the International
Monetary Fund.
The Departments and agencies that are
members of the Council include the Treasury, State and
Commerce Departments, the Board of Governors of the
Federal Reserve System, and the Export-Import Bank.
- 6 -
The Council examines the role of the Special Drawing Rights
in the international monetary system, indicates the main
characteristics of the Special Drawing Rights, reviews
the negotiations, comments on the proposed changes in
present rules and practices of the Fund, and gives a
brief explanation of the proposed legislation.
The Council
strongly recommends the enactment at this session of Congress
of legislation which would permit the united States to
accept the Amendment and thus encourage early acceptance
of the proposed Amendment by other countries.
The Special Drawing Rights Amendment is not just an
American success. It is a joint creation of many countries
actively participating in the negotiations.
It is a
victory for international monetary cooperation.
It is a
clear recognition of the community of interest which binds
us all.
It is a demonstration of the willingness and the
determination to make the international monetary system
work on the basis of the multilateral framework on which
it was built almost a quarter of a century ago at Bretton
WOO~
For this foresight and dedication to the common good
we are indebted to many in the Group of Ten and the Internatior.
Monetary Fund.
It was Robert Roosa who, as first Chairman
of the Group of Ten Deputies, began the studies that recognizee
223
- 7 the need for a new reserve asset.
It was Rinaldo Ossola
of Italy who in 1964-65 conducted the pioneering technical
studies that brought us to the point where practical
negotiations could begin and, three years later, as the
third Chairman of the Group of Ten Deputies, helped pave
the way for agreement at Stockholm.
The technical skill
and imaginative, patient diplomacy of Otmar Emminger
of Germany, as second Chairman of the Group of Ten Deputies,
took us over two difficult years of negotiations culminating
in the Outline Plan whiCh was formally endorsed by the
Fund in Rio de Janeiro in September 1967.
The Plan is also an achievement for the International
Monetary Fund, which will equip that institution and its
member countries to adapt operations to changing conditions.
Special Drawing Rights participation is open to all members
of the Fund and all members can participate in the benefits
and obligations of the Facility on an equitable basis,
determined by existing quotas.
objective.
We strongly supported this
It was achieved in no small measure because
of the wisdom, perseverance and responsibility of the
Executive Directors of the Fund, who joined with the Deputies of
the Group of Ten in writing the Outline Plan, and in six months
of intensive effort prepared the proposed Amendment.
But most
of all, the entire effort owes much of its success to the
Managing Director of the Fund, Pierre-Paul Schweitzer, and to
his staff.
More than any other man he has represented
- 8 -
the world's interests, and with impartiality, unusual foresight
and diplomatic skill guided the negotiations to a successful
conclusion.
II
I want to acknowledge the very great assistance and
support which the u.s. negotiators have received from members
of the Congress of both parties.
The assurance that there
was not only such support, but also a keen interest in the
subject on the part of Congressional Committees and individual
members of the Congress has encouraged us at all stages of
the negotiations.
I cannot here acknowledge specifically all those members
of Congress.
But I will mention briefly some instances to
indicate how closely our efforts have been stimulated and our
progress reviewed in the Congress.
The Subcommittee on International Exchange and payments
of the Joint Economic Committee, under the Chairmanship of
Congressman Reuss, has taken a specific interest in the
improvement of the international monetary system.
In August
1965 that Committee issued a report that cited the pressing
need for action to assure the orderly and adequate expansion
of international
of
G~idelines
liq·~idity.
The Committee set forth a series
which became basic points of reference in the
development of the u.S. posture in these negotiations.
Eight
of these Guidelines related to the creation of a new reserve
asset and its relationship to gold and to reserves in the form
- 9 -
of dollars and other reserve currencies.
Other Guidelines
dealt with international credit facilities, IMF quotas and
the process of adjusting international imbalances of payments.
Valuable contributions to our thinking, and to development
of the United states position were made by former members of
the Joint Economic Committee, Robert F. Ellsworth of Kansas
and Senator Paul Douglas of Illinois.
Congressmen Reuss and
Ellsworth surveyed the European situation in a fact-finding
trip in November 1965 and set forth their findings in a
special report, covering international monetary reform as
well as the balance of payments adjustment problem and other
aspects of Free World economic cooperation.
Early in 1967, the Joint Economic Committee itself,
under the Chairmanship of Senator Proxmire, reporting on the
January Economic Report of the President, issued a "Statement
of Agreement by majority and minority members of the Joint
Economic Committee."
Paragraph 6 of that statement reads in
part as follows:
"6.
In the field of international trade and
finance, there is also general accord on the following
conclusions:
"Agreement on international monetary
reform is a matter of increasing urgency.
"We cannot rely on supplies of new
monetary gold being sufficient to assure the
growth of international reserves, in keeping
with the rising liquidity requirements of trade."
- 10 -
T:tis is one of many instances of the strong bipartisan
support from the Congress for action in the field of
international financial and monetary institutions.
It continues
the experience dating from the original Bretton Woods Agreemenu
Act, under which legislative action involving the International
Monetary Fund and the International Bank have generally had
support from members of Congress without distinction as to
party affiliation.
At the very outset of negotiations,
Congressman Gerald Ford and other Republican leaders
lent their influence to our taking the initiative in seeking
monetary improvements.
I cannot recall here all the many important statements
on this and related problems made by leading Senators and
Congressmen.
Among this group there are such names as
Senators Clark, Proxmire, Hartke and Javits and Representatives
Reuss, Widnall and Halpern.
Just prior to the Annual Meeting of the International
Monetary Fund in Rio de Janeiro last September, I appeared
before the Subcommittee on International Exchange and
payment.~
of the Joint Economic Committee and reviewed the ,Outline
for the Special
Dr~:ing
pl~~
Rights which had been approved at a
meeting of Ministers and Governors of ten major countries
held in London at the end of August.
This Outline Plan was
subsequently approved by the Governors of the International
- 11 -
22S
Monetary Fund at Rio de Janeiro and formed the basis of
the Amendment which has now been finalized in the Executive
Board of the Fund.
The Subcommittee issued a further report on this
subject in December 1967 urging that the Amendment to the
Fund's Articles be promptly ratified and pointing out the
risks inherent in undue delay "not only for the effectiveness
of the new Special Drawing Rights, but also for the stability
of the monetary system itself."
I could not improve on the succinct statement contained
in the Report of the Joint Economic Committee on the
January 1968 Economic Report of the President, which deals
with international liquidity in the following terms:
"The free world's 1iguidity needs reguire prompt
ratification and activation of the IMF's amendments
providing the new special drawing rights."
This report continues as follows:
"The free world's liquidity needs cannot be
satisfied by continued reliance on gold, accumulations
of dollars in foreign hands, and increased sterling
liabilities. Nor can we depend on increases in the
presently provided drawing rights under the IMF
agreements. A sizable part of the apparent growth of
foreign exchange reserves in the past 2-1/2 years has
been dependent on fortuitous deficits which the
countries of the world wish to see terminated at once.
Nor is there any prospect that increased availability
of gold will do the job. It is, therefore, imperative
that the new IMF agreements, providing for special
drawing rights, should be ratified at once and activated
at the earliest practicable moment."
- 12 -
A minority opinion, while questioning some aspects of
the Administration's balance of payments program, supports
the majority with respect to the Special Drawing Rights as
follows:
"It therefore becomes essential in our view that:
"1. The new special drawing rights under the
IMF be activated as soon as possible after ratification
of the agreement.
"With gold in official monetary reserves declining
and with confidence in the key reserve currencies
beginning to wane, an additional source of world liquidity
will be needed to accommodate expanding economic growth
and, equally important, to head off protectionist and
restrictionist measures that could result if countries
find themselves short of official reserves."
I want also to indicate how much we in the Administration
are indebted to the Advisory Committee on International Monetary
Arrangements which has worked closely with us on these matters,
under the Chairmanship of former Secretary of the Treasury
Douglas Dillon.
Secretary Dillon shared the view of the
Joint Economic Committee as to the urgent need to strengthen
the international monetary system, and so expressed himself
as early as June 1965.
The Advisory Committee was established
on July 16, 1965, and consists of Chairman Dillon and eight
distinguished economists and financial leaders.
of this Committee are as follows:
The members
- 13 -
Members
Francis M. Bator
Professor of Political Economy
John F. Kennedy School of Sovernment
Harvard University
Edward M. Bernstein
President of EMB (Ltd.)
Kermit Gordon
President
The Brookings
and former
and member
Council of
Institution
Budget Director
of the President's
Economic Advisers
Walter W. Heller
Professor of Economics
University of Minnesota
and former Chairman of the
Council of Economic Advisers
Andre Meyer
Senior Partner
Lazard Freres & Co.
David Rockefeller
President
The Chase Manhattan Bank, N.A.
Robert V. Roosa
Partner
Brown Brothers Harriman & Company
and former Under Secretary of the
Treasury for Monetary Affairs
Frazar B. Wilde
Chairman Emeritus
Connecti~ut General Life Insurance Company
- 14 III
As I have stated on several occasions, the Special
Drawing Rights Plan is not designed to help the United States
or any other individual country deal with its palance of
payments problem.
It does not change in any way the
urgency of achieving the correction of the disequilibrium
in our balance of payments.
If it were assumed, for example, that Special
Draw~nq
Rights were to be created in the amount of $10 billion in a
5-year period, or at the rate of $2 billion a year, the
united States would receive about $500 million a year in
Special Drawing Rights.
This amounts to only 1/6th of the
approximately $3 billion improvement sought in the balance
of payments under the January 1 program.
Furthermore, if the United States continued to have a
large deficit and if world reserves continued to rise as a
result, this would certainly affect the collective judgment
as to the global need for reserves in the form of Special
Drawing Rights.
The provisions of the Amendment leave
flexibility for the exercise of collective judgment as to
the initial decision to create SDR, by an 85 percent weiqhtea
majority.
But the Report of the Executive Directors of the
Fund makes clear that the situation of the United States balance
of payments will have an important bearing on that decision.
The relevant passage reads as follows:
- 15 "Article XXIV, section l(b), provides that
the first decision to allocate special drawing rights
shall be based on the principles that guide all decisions
to allocate special drawing rights, and in addition,
that it shall take into account certain special considerations. The first of these special considerations is
a collective judgment that there is a global need to
supplement reserves. The term 'collective judgment'
reflects the requirement of an 85 per cent majority
of the total voting power for the adoption by the
Board of Governors of decisions to allocate special
drawing rights. The other special considerations
are the attainment of a better balance of payments
equilibrium and the likelihood of a better working
of the adjustment process in the future. While the
situation of all members is relevant to a judgment
with respect to the attainment of a better balance
of payments equilibrium, the judgment to be made
at the time will necessarily be influenced predominantly
by the situation of members that have a large share
in world trade and payments."
In short, the Special Drawing Rights Plan does not in
any way relieve the United States of the necessity to
bring its international payments into far better balance
than is the case at the present time or has been for the
last several years.
As we are all well aware, the United States has
experienced a protracted decline in its gold reserves,
from more than
nea~ly
$24 billion to less than $11 billion.
The introduction of the Special Drawing Rights should
give us a welcome opportunity to begin rebuilding the
level of our reserves without taking reserves away from
other countries.
We should endeavor to use our allocations
of Special Drawing Rights for the purpose of building
up our reserves rather than using them to finance a
continuing deficit.
- 16 A key to the proper functioning of the international
monetary system is to maintain confidence in the dollar.
The
dollar plays a role, both as a means of holding reserves and
as a privately used international medium of exchange, which
the world has found extremely useful and efficient, and which
would be difficult to replace.
IV
One cannot now anticipate the amount of Special Drawing
Rights that will be created under the Special Drawing Rights
procedure by the exercise of a collective judgment as to
global needs for reserves.
It is quite clear, however, that
Special Drawing Rights will be needed to maintain sufficient
growth in global reserves.
Over the longer run, if the secular
trend of reserves becomes too gradual, or levels off, this can
have a pervasive effect in dampening the advance of international
trade and investment.
Newly created reserves provide a margin
by which the countries gaining reserves can do so without
simultaneously reducing the reserve position of other countries.
The narrower this margin becomes, the fiercer is the competition
for reserves arnon1 th= trading nations.
the
~vuntrles
Under such conditions,
losing reserves have a stronger tendency to take
defensive measures by raising interest rates and applying
restraints of various kinds on capital movements or even upon
current transactions.
Other countries may respond with similar
defensive measures, leading to a cumulative escalation of interest
- 17 -
':-1 r·,
c...
,,1 ....
,
'-,
rates and restraints and restrictions on international
transactions.
Conversely, a wider margin of new reserves entering
the monetary system will provide a greater leeway for the
countries desiring to expand their reserves -- and this
includes most countries -- and to do so with less impact in
the form of corresponding reductions in the reserves of
those countries which are the weakest and can least afford it,
in the international competitive sense.
It has, of course, been important to establish a
careful and cautious procedure for taking decisions to create
reserves that would not arouse concern regarding any misuse of
the ability to create reserves.
The procedures set forth in
the Amendment, requiring an 85 percent weighted vote of the
members of the IMF, after a period of extensive consultation,
should be fully adequate to provide the necessary assurance.
v
Attached to this statement as Attachment A is an analysis
of the main substantive features of the Special Drawing Rights,
as set forth in the Amendment.
The Executive Directors of the Fund have proposed a single
integrated Amendment to the Articles of Agreement, that is to
be accepted or rejected by countries in its entirety.
- 18 The Amendment covers modifications in the existing
Articles of Agreement, plus additional Articles XXI through
XXXII, covering the new Special Drawing Account, together with
four new schedules to implement the Special Drawing Rights
facility.
There is now in process a vote by mail of the Fund
Governors, which is to be completed by May 31.
This vote
signifies that the Governors of the Fund are prepared to
recommend acceptance or ratification of the Amendment by their
governments;
an affirmative vote has been cast by the
United States Governor.
The Amendment becomes effective only
when 60 percent of the members having 80 percent of the total
voting power have accepted it by formally notifying the Fund
to that effect.
For the United States this requires
authorization by the Congress.
The next step is to form a body of participants in the
Special Drawing Account by depositing with the Fund a document
setting forth that the member has taken all steps necessary to
enable it to carry out all of its undertakings as a participant.
The body of participants is not in a position to take action
until members having at least 75 percent of Fund quotas have
deposited such instruments.
This provision avoids any
possibility of precipitate decisions by a small group of early
participants.
- 19 . ') 'Y
"-'.-,-
.~
- '-'
Once the body of participants has been formed, the
Managing Director of the Fund may then recommend that a
given volume of Special Drawing Rights be created for
the ensuing 5-year period.
Three special considerations
must be taken into account in this first decision to create
SDR.
They are:
(1) a collective judgment (by the required
85 percent vote) that there is a global need to supplement
reserves; (2) the attainment of a better balance of payments
equilibrium; and (3) the likelihood of a better working
of the adjustment process in the future.
All of these
considerations are matters of judgment and consultation
rather than statistical formulation.
Allocation of SDR will be made to participants in
proportion to their quotas in the fund.
Any participant
that does not vote in favor of an activation proposal may
"opt out" of receiving allocations under a particular
decision to create reserves.
The Amendment sets up rules governing the use of
Special Drawing Rights in transfers among monetary authorities.
The general effect of these rules is to cause Special Drawing
Rights to flow from countries that need to spend reserves to
countries that are in a strong reserve or balance of payments
- 20 -
position,
a~c.
that are expected to hold the SDR.
In fact
they are reauired to receive and hold the SDR up to an
amount which, together with their own allocated SPR, woulJ
equal three times their cumulative allocations.
One procedure for spending the special Drawing Rights
would lead to a flow of SDR to several designated countries
in a strong financial position.
By mutual agreement, however,
a country needing to use Special Drawing Rights may transfer
them to a single recipient country for the purpose of
acquiring from that country balances in its own currency.
For example, if the other country is agreeable, the United
States can pay Special Drawing Rights to that country for
the purpose of reducing the dollar holdings of such a
country.
This is a
useful feature, since the way in which
a reserve center uses reserves is, in most cases, to purchase
and thus reduce some of its own foreign-held liquid liabilities.
There are provisions regarding reconstitution which
required extensive negotiation to reach a meeting of minds.
The basic requirement is that the average net holdings of
Special Drawing Rights should not, for the S-year period
as a whole, fall below 30 percent of the average
curnulativeamo~
allocated to the participant: this provision is automatically
- 21 -
complied with if a participant has not used more than 70 percent
of his allocation.
It is not an onerous obligation.
It is also worth noting that the Special Drawing Rights
can be used in various transactions with the General Account
of the Fund, through which the Fund
its traditional functions.
wi~l
henceforth conduct
For example, a participant can
repay previous drawings from the Fund partly or wholly with
Special Drawing Rights -- in some cases by right, and in others
by decision of the Fund.
There is a provision permitting the holding of Special
Drawing Rights by non-member countries or by institutions
such as the Bank for International Settlements or a regional
monetary agency in Latin America.
This provision does not
permit allocations to non-members, but allows the holding of
SDR by institutions that perform one or more functions of a
central bank.
Other international institutions, such as those
engaged in development financing, cannot be authorized to be
holders of SDR or to engage in SDR transactions.
VI
The proposed Amendment also will change certain features
of the existing provisions in the Articles of Agreement of
the Fund.
There are six main proposals for change, along with
- 22 subsidiary and consequential alterations.
More detailed
discussion of these changes is provided in Attachment B.
First, general changes in quotas of the Fund are to
require approval by 85 percent of the total voting power,
instead of the 80 percent now needed.
Departures from
the standard arrangement for paying one-quarter of any
quota increase in gold are also to be decided by 85 percent.
This higher majority was considered desirable by some countries
to place the same decision-making requirement on increases
in liquidity resulting from quota increases as on increases
in reserves through creating and allocating SDR.
Second, the voting majority to decide on a uniform
proportionate change in par values -- that is, on a
change in the official price of gold -- will be raised
to 85 percent under the proposed Amendment.
Previously,
the majority specified for this decision was a simple
majority, provided that each member with 10 percent of
the quotas concurred.
Also, the voting majority for a
decision not to maintain the gold value of the Fund's
assets in the event of a decision to change the price of
gold will in the future be 85 percent, compared to a simple
majority in the past.
Since these changes make a change in
the monetary price of gold even more difficult, we were able
to agree to them.
- 23 -
Thirc, the procedures for making legal interpretations
of the provisions of the Articles of Agreement of the Furd
are to be altered.
As before, the Fund's Executive Directors
will have authority to interpret the Articles by a s:L"TIple
majority of the voting power.
And, as before, such an
interpretation can be appealed to the Board of Governors,
whose decision will be final.
But in future, there will be
a Governors' Committee which will conduct the initial review
of an appeal to the Governors.
The decision of this Committee
will be final, unless it is changed by 85 percent of the total
voting power in the full Board of Governors.
The other three changes are largely technical and, to a
large degree, represent codifying changes rather than major
new departures.
The fourth change involves making the so-called
"gold tranche" positions in the Fund more fully acceptable
as reserves by giving them legally automatic status, to
succeed the de facto automaticity they have had for many
years.
At the same time, so-called "super gold tranche"
positions are to be paid a remuneration, in practice an
interest return, initially set at 1-1/2 percent.
The fifth change concerns drawings in the credit tranches.
In a change that will codify the existing approach of many
years' standing, credit tranche drawings will in future legally
- 24 _
have to be subject to appropriate policy conditions.
This
legal change will not, however, require any stiffening of
the existing policies of the Fund governing credit tranche
drawings.
Sixth and finally, some technical changes are being
proposed in the so-called mandatory repurchase obligations
in the Fund.
These changes will bring these provisions more
up to date and enable them to operate more effectively and
smoothly.
VII
There are, it seems to me, several reasons why it is
important that the Amendment be ratified at this session of
the Congress.
First, delay in ratifying the SDR Amendment would encourage
gold speculation.
To a very considerable extent, the Special
Drawing Right has now become recognized as the preferred
alternative to the increase in the gold price.
Second, the United States has always taken the lead in
legislative action on quota increases and other legislation
affecting the International Monetary Fund.
If the United states
were to delay action, many other countries might also postpone
ratification until the United States has acted.
This could mean
a delay of many months in setting up the facility for creating
- 25 special Drawing Rights.
with affirmative action by the
Congress at this session, it would be possible for 65 member
countries to ratify the Amendment early in 1969.
Delayed
action on our part could add another twelve months to the
interim period before the facility is in effect.
During the
interim the growth of world reserves could be meager,
assuming improvement in the balance of payments of the
United Kingdom and the United States.
Consequently, delay
might bring signs of an uncomfortable international liquidity
squeeze, due to the failure of reserves to rise at an adequate
rate for several years.
As the Report of the National Advisory Council points out,
despite the financial strain of the year 1967 the world's
reserves did rise in that year by about $1.7 billion.
This
occurred despite a net loss of $1.6 billion in gold from monetary
reserves, but it did mean for the world exclusive of the
United States, reserve growth at the rate of only 3 percent,
as compared with more than 5 percent per annum during the
past 17 years.
We cannot now anticipate what the decision might be as
to the amount of Special Drawing Rights that would be created
in the first 5 years, but over the longer run, the needs of
a rapidly growing international trading and investing world
economy should be reflected in decisions to make use of the
new facility.
It is strongly in the interest of the United States
- 26 to take prompt action to become a participant in the
Special Drawing Account.
VIII
The Amendment once approved must be accepted by the
United States before it can enter into effect.
Under
Section 5 of the Bretton Woods Agreements Act, the President,
on behalf of the United States, cannot accept the Amendment
until he is authorized to do so by Congress.
The principal
provision of the bill before you is an authorization to the
President to accept the Proposed Amendment to the Fund Articles.
The bill also authorizes the President to participate in the
Special Drawing Account which will implement the provisions
of the Special Drawing Rights portion of the Proposed Amendment.
In order to participate in the Special Drawing Account,
the United States must deposit an instrument with the Fund
stating that it undertakes all of the commitments of a
participant in the Special Drawing Account in accordance with
its law and that it has taken all steps necessary to enable
it to carry out all of these undertakings.
The second major area covered by the proposed legislation
comprises the steps that must be taken under our domestic law
to fulfill the commitments that flow from participation in
the Special Drawing Account.
- 27 -
The primary commitment of the SDR facility is to have
authority to accept transfers of SDR from other participants.
This undertaking by all participants to provide convertible
currency in return for SDR is the primary element which makes
Special Drawing Rights a high quality reserve asset.
The
united States must also be prepared to pay charges on its use
of its allocations of SDR and pay the United Stated share of
assessments the Fund may make to meet the administrative
expenses of running the Special Drawing Account.
Because it is so essential to the operation of the
Facility we must make domestic arrangements that will assure
beyond question the ability of the United States to meet its
acceptance commitment.
In searching for the method to accomplish
best this objective, we naturally turned to the techniques
used for handling existing reserve assets.
Purchases of gold
are similar in nature to purchases of Special Drawing Rights.
When the United States buys gold it pays dollars in return.
Thus, in a sense, our acceptance commitment for gold is the
same as fbr Special Drawing Rights -- the payment of dollars
against the receipt of an asset.
For gold the domestic
arrangement that assures that the United States can always
SUpply dollars is the authority of the Secretary of the Treasury
to issue gold certificates, against an equal amount of gold
holdings, to the Federal Reserve banks in return for dollars.
-
28 -
When gold is sold, the resulting
dolla~;
are used to redeem
the gold certificates which had previously been issued
against the gold that was sold.
A similar procedure is proposed for Special Drawing Rights.
The Secretary of the Treasury would be authorized to issue
Special Drawing Rights Certificates against an equal amount
of SDR holdings to the Federal Reserve banks in return for
dollars.
Just as in the case when gold is sold, the dollars
resulting from the sale of Special Drawing Rights Certificates
would be used to redeem the Special Drawing Rights which had
previously been issued against the SDR that were sold.
Use
of a similar technique for Special Drawing Rights as is used
for purchases and sales of gold not only provides an assured
method of meeting our acceptance commitments but also demonstrates
to the world our confidence in Special Drawing Rights as a
valuable reserve asset.
Although acceptance commitments must be honored in order
to make the SDR Facility work, they are not a burden on the
United States.
Acceptance of SDR against dollars involves only
an exchange of assets.
In return for one asset -- dollars
we will obtain a highly valuable international reserve asset -Special Drawing Rights -- that the United States can use to meet
problems arising from a balance of payments deficit or a decline
in reserves.
Because these transactions are exchanges of assets
they will have no effect on budget receipts or expenditures.
Similarly, our participation will involve no increase in new
- 29 obligational authority.
The proposed legislation provides that Special Drawing
Rights will be held in the Exchange Stabilization Fund.
ES,F
The
would be responsible for providing dollars against Special
Drawing Rights presented to the United States, utilizing as
needed the Special Drawing Right Certificate procedure I have
already described.
It would also pay charges and assessments,
and receive interest payments on SDR.
The technical details
of the operation of this method of financing United States
participation in the Special Drawing Account are contained in
the section-by-section analysis of the proposed legislation,
annexed as Attachment C to this statement.
Finally, it is understood that members of the Fund wishing
to become participants will have authority to accept the
rights and responsibilities that go with SDR allocations up
to a minimum amount of 50 percent of their quotas.
A number of
countries are likely to operate with no ceiling on their ability
to participate, by treating Special Drawing Rights in the same
way as official holdings of gold and foreign exchange, which
are usually subject to no legal ceiling.
In our case, the
recommendation is that Congress give authorization to participate
up to an amount equal to the united States quota of slightly
more than $5 billion.
By placing a ceiling on the amount of
SpeCial Drawing Rights that may be allocated to the United States,
provision is made for a Congressional review of the experience
- 30 -
with the Special Drawing Rights.
But by giving an
authorization that is larger than the minimum suggested
by the Fund, the United States would be indicating a more
positive attitude towards Special Drawing Rights as a reserve
asset than would be the case if we were to adopt the minimum
acceptable participation authority.
.1111•••
e' ..... ar.
80
i
7.9%
IMF Positions
60
5.9%
3.3%
Other Foreign
Exchange
................
................
................
................
..................
mm~ 18.4%
g::::
40
Dollars
Gold
20
r ',:'
~~..)
("
n
o
Dec.
Dec.
Dec.
1948
1960
1967
Economic Graphics Section, Division of Data Processing, Board of Governors of the Federal Reserve System.
April 30, 1968
::T
PI
t1
rt"
H
Attachment A
Main Peaturea of Special
DrawiDi Rights Facill ty
latuft of the Amendment
'.ftIe Executive Directors of the Fund have proposed a single, inte-
grated Amendment to the Articles of Agreement of the lMF and this AmendIIIInt must be accepted or rejected by countries in its entirety; the
approach of accepting or ratity1.Dg sale parts of the .Amendment, while
reJectiDg others, is not open.
The integrated Amendment does, however,
contain material of two different types:
1.
A series of provisions that will introduce modifications
into a number of features of the existing Articles of
Agreement, so as to make changes in the regular or traditional operations of the Fund that are being proposed as a
result of the experience of the Fund or in order to be sure
the regular Fun3.operations and the new special-drawing rights
facility fit together into a consistent whole; and
2.
A new set of additional Articles, Articles XXI through XXXII
together with four new Schedules, which will be added on to
the existiDg twenty Articles and five Schedules and will
furnish the legal framework for implementiDg the new special
drawiDg rights facility within the institutional set-up of
the International Monetary Fund.
Let me describe how the new arrangelllents will work, starting with the
p~ceCUre
to make the Amendment legally effective, proceeding to a discus-
sion of the special drawiDg rights sytem, and finally touching on the most
importaDt of the proposed changes in the regular Fund.
Procedure for Making the Amendment Effective
The new provisions are to become effective by the procedure of amendina
the Fund's Articles of Agreement.
The Proposed AmeDdment must tirst be
approved by the Fund's Board of Governors, consisting of one Governor from
each of the 107 Fund members.
Approval requi res
&
maJority of the weighted
votes cast, and the votes cast must represent the equivalent of a quorum of
the total voting power of the Fund Governors, this being established as two-
thirds of the total voting power.
The Executive Directors have detennined
that this vote will be caupleted May 31.
Approval by the Governors does
not constitute, as a matter of law, acceptance or ratification of the Amendment on behalf of any member government.
I have cast an affirmative vote
as the U.S. Governor of the Fund, after consultati on with the National
Advisory Council on International Monetar,y and Financial Policies.
After approval by the Board of Governors, the govermnents of members
of the Fund will be asked formally whether they accept the Amendment.
It
is at this stage that formal goveranental acceptance is involved, and prior
legislative authorization by the Congress is required.
The Amendment in
its entirety will become legally effective, pursuant to the provisions of
the Articles of Agreement governing amendments, when 60 per cent of the
members having 80 per cent of the total voting power, have accepted it by
formally notifying the Fund to that effect.
When this has occurred, the Amendment will be fully effective as a body
of law.
A further requirement is provided for, however, before the members
of the Fund will be in a position to decide to activate the special drawing
rights facility to create and. allocate new reserve assets.
This is to
form a body of partiCipants in the new Special Drawing Account, through
A-3
which the SDR system will be administered within the Fund.
Each member
of the Fund has the right to become a participant in the Special Drawing
Account, but no member is legally obligated to do so, even if the member
has ratified the Amendment.
In order to become a participant in the
Special Drawing Account, a Fund member must deposit with the Fund a
document setting forth that it has taken all steps necessary to enable it
to carry out all of its obligations as a participant.
Only when members
ha ing 75 per cent of the Fund quotas have thus became participants can
decisions of the participants in the new scheme be taken.
This procedure
for substantial participation protects countries fran incurring financial
obligations against their will, and also guards against the theoretical
possibility that a very few countries would quickly becane participants
and would make decisions under the new scheme that would be opposed by the
great majority of countries that had not yet completed the procedure to
become participants.
At the same time, the 75 per cent participant require-
ment, while relatively high, would still enable the scheme to move ahead
even if substantial delays were to be encountered on the part of same
countries in completing the steps to become participants.
In practice,
of course, it is expected that nearly all countries will want to handle
acceptance of the Amendment and becoming a participant simultaneously and
in a single procedure, and that is what the United States proposes to do.
Initial Activation to Create SDR
I hope that the SDR facility will be in place and in a position to take
deCisions at an early date--hopefully by the end of 1968, but certainly in
~
event by early in 1969.
It will then be feasible to initiate the pro-
cedure looking toward the first activation of the SDR system.
Here a
word on the question of timing and quantities is in order.
Neither the
timing of the first activation, nor its amount, can be foreseen clearly
at this time.
Both of these aspects are, under the Amendment, to be
matters for consultation and decision when the system has cane into foree
and the Amendment contains very carefully drafted provisions governing
these procedures.
Decisions to activate the system will normally provide
for annual creation and allocation of a specified amount of SDR to partiCipants over a five-year period ahead, but these standard featm-es of a
decision can be altered.
So far as any ceiling or outer limit on the
ini tial capacity of the SDR mechanism to create and allocate SDR, it is
understood that members of the Fund wishing to becane participants will
seek financial authority of not less than what is necessary for them to
meet thei r obligations when SDR allocations to them have reached 50 per
cent of their quotas when they becane participants.
If- that were to be
generally adopted as the initial upper limit, the SDR mechanism would haw
the capacity to create and allocate as much as $10.5 billion of SDR before
participants would have to seek addi tiona! legislative authority.
But there
is also a widespread feeling that countries will wish to treat SDR in their
domestic financial legislation in the same way they treat official
holdi~
of gold and foreign "!xchange, and to the extent this practice is folloved,
there would be no ceiling on the financial authority of participants 1n
the new fac1Ii ty to create and allocate such amount of SDR as would cCJllllll,Dd
the necessary weighted majority vote.
A-5
In the process of reaching a decision on the timing and amount of
creation and allocation of SDR, the Managing Director of the Fund will play
a central role.
He must conduct such consultations as will enable him
ascertain that there is broad support among participants for mOving
ah~ad,
and must satisfy himself that his proposal will be consistent specified
principles governing creation and allocations.
For all such decisions,
these principles are that there is a long-term global need to supplement
existing reserve assets, that doing so will promote the general purposes
of the Fund, and that the quantity proposed will avoid both economic
stagnation and deflation as well as excess demand and inflation in the
world.
In addition, for the first decision to allocate, three special
considerations must be taken into account:
1.
A collective judgment (referring to the required 85 per cent
vote) that there is a global need to supplement reserves;
2.
The attainment of a better balance of payments equilibrium;
and
3.
The likelihood of a better working of the adjustment process
in the future.
All of the principles and considerations laid out to govern decisions on
creation and allocation are matters for careful judgment and consultation
in the light of developments as seen when decisions are in process of being
shaped, and none of them can be reduced to precise statistical formulations.
Any decision to allocate SDR must be made on the basis of a proposal
by the Managing Director.
To becane effective, the proposal must be
concurred in by a majority of the weighted votes of the Fund's Executive
A-6Directors and then adopted by 85 per cent
in the Board of
GoverDOrI.
or
the weighted. vot1lal power
In decisicu relatiDa ueluiwq to the
Special Drawiag Account, only the votes of participan.... 1D that Account
are taken into account.
It
m~
be said here that, althO\llh no decision
to create &D:l allocate special draviag rights e. . be Mde except on the
basi s of a proposal of the Managing Director, the Board of Govel'llors will
have authority to ameDi any proposal betore adoptiag it by 85 per cent
of the total voting power of participants.
Moreover, it the M&nagiDg
Director has failed to put forward a proposal--whether to start the tirst
activation or later--either the Board of Governors or the Executive
Directors ma:y, by a simple majority of the weighted voting power of the
partiCipants, make a formal request for him to present one.
The ManagillS
Director must then comply within six months, unless he ascertains in the
process of his consultations that there is no proposal which he can make
that would be consistent with the principles and considerations govemillS
allocation and also has broa.d support among participants; in this event,
he must sumi t a report on the situation to both the Board of Governors
and the Executive Directors.
So, you see, tlere are a number ot checks
and balances built into the procedure for reaching very carefully considered
and widely supported decisions as to the timing and amount of creation of
SDR.
All SDR to be created will be allocated to participants in the scheme,
and only to them.
The allocation to participants will be on the basis of
their quotas in tle Fund on the date of each decision to allocate.
Since
the relative size of quotas in the Fund is, at least in principle, determined
A-1
as
approximation to the relative international economic and financial
aD
size
ot Fw:Id members" this basis for allocation appeared. fair and reason-
able.
In fact" decisions to create and allocate will be expressed in
tel'lll8 of a common percentage of Fund quotas for each participant.
Fund quotas are presently abou.t
$21
Since
billion, the creation of $1 billion
ot SDR would be expressed as 4.76 per ce nt of quotas assuming all Fund
members were participants in the SDR facility.
Out of each $1 billion
ot SDR created, the allocation to the United States would be about $246
mimon, and that to the six members of the Camnon Market about $179 rnil-
lion.
Opting Out
Considerable public discussion has taken place on the question of
"Opting Out", and I should explain here what the Amendment means in this
respect.
As I have said, every member of the Fund has the right to become
a partiCipant, but no member is obligated to do so.
wishes may stay out of the SDR facility entirely.
Thus, any country that
The question of "Opting
Out", however, refers to the choices that are open to a country I once it
has become a participant and is thus a voting member of the group of countries able to adopt decisions to create and allocate SDR.
The facts on
Opting Out are the se :
1.
If the Fund u-overnor of a participant has voted in favor of a
decision to allocate SDR at a specified annual rate over a
period of five years ahead l and that decision has been
by the required
adopt~~
85 per cent majority, the I8rticipant is obl i-
gated to receive all the allocation of SDR provided for in
the decision and to undertake any and all the obligations
associated with these allocations--the participant cannot
"opt out";
2.
If the Ftmd Governor of a participant has
~
voted in
favor of (that is, has abstained or voted against) a decision
to allocate SDR, and the decision has nonetheless been adopted
by the required 85 per cent majority, the participant then has
a choice.
It may elect to receive the allocations decided upon,
notwithstanding the failure of its Governor to vote in favor of
the decision.
Or, it may elect not to receive the allocations
decided upon.
If it wishes not to receive the allocations, and
to avoid the corresponding acceptance obligations which I shall
discuss presently, it must notify the Fund of this decision
prior to the first annual allocation of SDR under the decision.
This action to refuse to receive allocations decided upon by the
required 85 per cent majority is what is meant by "Opting Out".
Since only participants whose Governors have not voted in favor
of the decision to allocate have the right to opt out, and the
decision must be supported by 85 per cent of the total voting
power of participants in order to be adopted, the amount of
reduction in SDR creation that would result from any exercise
of the right to opt out could not exceed, at a maximum, about
15 per cent of the amount contemplated by the original proposal.
3.
A country that has opted out may be permitted by the Fund to
"opt back in" and thus to resume receiving allocations under the
same decision from which it previously opted out.
In case of
such a change of heart, the PLrticipaDt IIUIt relue8t the F\md to
permit it to opt back in and the Fund IU¥ do 80 by a _jority
of the votes in the Executive Board.
It i8 UDdentood that the
attitude of the Fund toward a request to "opt back in'.' will be
a sympathetic one, though of course such 8yapathy could be
reversed if a participant showed an irreaponsible approach toward
the matter.
Once a participant had "Opted Back in", it would not
have the right to opt out again under the same allocation decisions;
opting out again would only be possible at the time of a subsequent
five-year decision to allocate SDR.
In addition, opting back in
applies only to receiving those annual allocations that occur
after opting back in has occurred; it is not possible to receive
retroactively the annual allocations already foregone.
Use and Transfer of SDR
Once received through the allocation process, SDR can be used by
participants in a manner broadly the same as the use of traditional reserve
assets--gold and foreign exchange--when these are used to make settlements
ariSing from balance of payments developllents or to support one's currency
in the exchange markets.
There are, however, rules governing use of the
SnR in transfers among monetary authori ties.
While quite complex in thei r
detail, these rules have a few main purposes:
1.
To avoid instability in the system by avoiding the use of
SDR solely to change the composition of reserve holdings;
2.
To channel transfers of SDR in such marmer as to treat all
participants on the basis of the same standards, to encourage
A-lO
wide and active entering into operations of the SOR scheme amoQg
participants, and to encourage familiarity with, and confidence
in, the SDR as an instrument for making settlements;
3. To penni t careful use of the SDR in transactions between
participants and the regular or traditional Fund, just as
traditional reserves are used; and
4. To encourage participants, by a modest obligation, not to simpl1
payout all their SOR and then forsake further acti vity in the
SDR mechanism.
SDR are not to be used by presenting them to the Fund itself for conversion,
since under the SDR mechanism (unlike the mechanism of the regular Fund)
the Fund will not hold a currency pool related to SDR.
Rather, SDR are to
be used among participants by transferring them directly from one participant to the other through appropriate debits and credits entered on the
books of the Special Drawing Account.
Thus, SDR will in fact have many
of the characteristics of legal tender for use in transfers among the
monetary authorities of participants.
Transfers among participants will
generally be in return for convertible currency, and the partic ipant
transferring SDR will have full guarantees of receiving a convertible currency conveniently usable in its circumstances in return for the snR
transferred.
To illustrate concretely how SDR will normally be used, let me borrow
a practical and concrete example recently used by Mr. Schweitzer, the
Managing Director of the Fund.
i) /1
L~J.
j
'-11
"~t US assume that the Board of Governors has by an 85 per
cent majority taken the decision to activate the scheme and that
for the first basic period, as we call it, an amount of special
drawing rights equivalent to $1 billion a year is to be allocated.
'!bat is just an example. Now let us suppose that a hypothetical
country, let us call it country A, has a cp. ota in the Fund representing one per cent of total quotas; this at present would be a
quota of sane $200 million. When the allocation is made, the Fund.
would credit this country in the Special Drawing Account with an
amount of special drawing rights equal to $10 million, for if the
country had one per cent of participants' total quotas, it would
recei ve one per cent of the allocation. Country A could at that
time add these drawing rights to its reserves because it would be
entitled to us them, without any conditions, in case of need.
"~t us now assume that country A has a need and wants to use,
let us say, half of its drawing rights to meet this need. In order
to do so, it would have to convert them into a usable currency. It
would, therefore, approach the Fund and ask to what participating
country it should transfer the rights in order to get an equivalent
amount of convertible currency. The Fund would at all times maintain
a list of participating countries whose balance of payments and reserve
situations were considered satisfactory; and from this list it would
designate one or more appropriate countries to provide currency
against special drawing rights. !Jet us assume that in this instance
Gennany and Italy are chosen for equal amounts. The Fund would accordingly notify Germany and Italy that :It was crediting them, in the
Special Drawing Account, with t})a equivalent of $2~ million each in
special drawing rights and that they should credit the central bank
of country A in their respective books with $2~ million of deutsche
mark and $2~ million of lire. At the same time the Fund would debit
country A an amount of drawing rights equivalent to $5 million.
"As a result of these transacti9ns, $5 million of s~cial drawing
rights in the assets of Country A wouldhave been replaced by $5 million
of convertible currencies which country A could then use freely for any
purpose; and Gennany and Italy would have increased their assets in the
fonn of drawing rights by $2~ million each. Country A would be charged
a moderate rate of interest--foreseen as l~ per cent, at least initially--on its use of drawing rights; and Gennany and Italy would be
paid interest at the same rate. I should remind you also that the special drawing rights vould have an absolute gold value guarantee.
Country A, as long it used on average over a period of five years no
more than 70 per cent of the special drawing rights allocated to it
by the Fund, would have no reconstitution obligation.
"I have talked about the rights of country A in using the special
drawing rights. I should mention also that the obligation of Germany
and Italy or any other participant to accept drawing rights over and
above their allocation and to provide currency in return would extend
only up to a point where they md accepted drawing rights equal ::'n
value to twice the amount allocated to them by the Fund, unless cf
cours p ...hey agrfifid to hold more."
Use of the SDR by the united States
]At me now mention how the SDR allocated to the united states are
expected to be used by us.
1.
Basically, there are three possibilities:
Our preference is, if our balance of payments and reserve
position permits, to hold on to SDR allocated to us, so as to
build up our reserve holdings in this fom over a secular period
of time.
U.S. reserves have suffered a severe decline over a
period of many years, and are now no more than average among
all Fund members when measured against the size of our imports
or our total international transactions--and such comparisons do
not make allowance for the special feature of our short-term
liabilities in the fom of dollar balances held by other
authori ties and by private foreign holders.
monet~ry
We would welcane growth
in our reserves stemming from allocation of SDR, and if this were
further supplemented by the channeling of SDR transfers fram other
participants to us under the SDR proviSions, that would also be
very welcome.
2.
If the United states satisfied the test of "need-to-use" SDR, due
to developments in its balance of peyments or in its over-all
reserves, the United States could
us~
SDR to purchase official
dollar balances from another partiCipant, provided that other
partiCipant agreed to this use.
This method of use would enabl"
the United States to use SDR, in appropriate cases, in a manner
ve~
much analogous to the way in which we--as the principle
market intervention currency in the international
moneta~
A-13
system--use our traditional reserves of gold.
two pOints, however.
I "hoLlld stress
This method of use invol·'er. a .roltIDt,ary
transaction and thus is dependent upon the other party to the
transaction being willing to agree to it.
And, being provided for
as a voluntary transaction on both sides, such a transaction vculd
not invrlve the Fund playing the role of "SDR traffic director"
to determine to which other participant the transfer should be
made.
3. It would also be open to us, if we preferred it or if other
countries did not agree to voluntary transactions of the kind
just deSCribed, to use SDR for transfers under the general provisions.
In this event, the "need-to-use" requirement would have
to be met, just as before, but the transfer of SDR from the United
states would be to one or more other participants designated by
the Fund under its standard criteria, rather than to a participant
chosen by the united States.
The United states would receive
convertible currency from the participant designated by the Fund;
most likely it would be dollars, but if not it would be convertible
into dollars, and the net result would be that the Uni ted States
would have used SDR to purchase dollars from countries selected
by the Fund, rather than from countries selected by the United
States itself.
.1-14
Other FeatUPeS of SDR Use
In conclming these descriptive conments on use of SDR in transfers,
I have made reference to the role of theFund as "traffic director" in
channeling flows of SDR in such manner as to make the system operate
smoothly and well.
Four other factors should be covered under the heading
of use of SDR to make transfe rs among monetary authori ties:
1.
The central obligation of participants is to provide convertible currency in exchange for SDR transfers to them from
other participants.
This central obligation is the main
feature that assures the practical value of SDR as a reserve
asset.
The obligation is sufficiently important that any breach
of it is made subject to the most severe penalties elaborated in
the SDR provisions.
Hence, a country holding SDR for use in a
future period of need will have all possible assurances that they
can effectively and smoothly make use of SDR when the need presents
itself.
The obligation to accept SDR and pay convertible currency
in return is not unlimited; it does not extend beyond the point
at which a participant's holdings of SDR are three times the
amount allocated toit.
Thus, this basic obligation means that a
participant is comndtted to accept, against convertible currency,
an amount of SDR equal to twice the allocation to it.
The size
of this obligation to accept SDR when they are presented is, in our
view, adequately large to give a practical assurance that SDR held
by any participant can effectively be transferred to other participants under the tenns of the Amendment.
At the same time,
A-15
the limitation on the acceptance obligation gives assurance
to a comtry in surplus that it will not wind up holding all
of the SDR in existence.
Thus, on both sides, the acceptance
obligation offers equitable and practical assurances.
2.
In the rules governing transfer, the provision of a convertible
currency against SDR, at a determined exchange rate, is fully
and carefully provided for.
There are no ambiguities or loop-
holes in the system for determining to which other participant
~
transfer of SDR shouJd be made, what convertible currency is
to be provided in return, how to convert that currency into the
currency desired by the country making the transfer, and what
precise exchange rate is to be applied to each of these transactions.
It is a fully determinate system, and each participant
wishing to use SDR at any given time will have a clear and precise
answer to any question as to how to go about it ani what amount he
will receive in the currency he wishes.
Again, the assurances
to the prospective user of SDR are complete.
3.
It was thought desirable
1;0
provide some modest safeguards against
the possibility that a participant would simply payout the SDR
received in allocation, and then abstain from further transactions.
This would hardly constitute effective and proper participation
in a system designed to provide for the ebb and flow of reserves
as payments positions shifted.
Accordingly, a provision was in-
cluded in the Amendment providing for obligations to "reconstitute"
holdings of SDR, once tQey had been used.
The basic requirement--
A-J.6
which is applicable only for the period of the first activation
am
can be changed or abrogated later by an 85 per cent majority--is
that averaged over a time period of the most recent five years,
average holdings of SDR should not fall below 30 per cent of the
amount allocated to the participant.
This obligation would, of
course, not became operative at all if a participant did not use
more than 70 per cent of his allocations.
Nonetheless, all of a
participant's allocations may be used from time to time without
difficulty or conditions, so long as the average holdings over
five years do not fall below 30 per cent of allocations.
not an onerous obligation.
This is
Detailed provisions are included in
the Amendment by which the Fund will assist participants to acquire SDR needed to meet this obligation, and, if necessary, a
participant will have the obligation and entitlement to obtain
any SDR needed to fulfill the obligation in a transaction with
the General Account (that is, the regular Fund) or, if all else
fails, from another participant specified by the Fund.
Provisions also exist under which SDR can be used in a number of
transactions between participants and the General Account of the
Fund, through which the Fund will henceforth conduct its traditional
functions.
The most important of these transactions will enable
participants to repay previous drawings from the Fund partly or
wholly with SDR.
The Fund will also be able to supply SDR,
instead of a national currency, to a country making a drawing
from the General Account, if the drawing member agrees.
A-17
Holders Other than Participants
Finally, I should mention a provision enablinb the Fund to
flexibility to the SDR system.
i:;}pa,,·~
so;;-;('"
As previously mentioned, only participants
in the Special Dn.lving Account will be able torecei ve allocations of SDn.
The .regular Fund
~lill
be able to receive transfers of SDR froo participa.nts
under certain defined circumstances, to hold them and to make use of them
in defined i·rays.
In addition, the Fund ,vill have authority to prescribe
other countries, 1vhich are not participants, and certain types of international bodies as authorized holders of SDR, by a decision requiring an
85 per cent majority of the voting power of participants.
The prescription
so made must include terms and conditions consistent with the other provisions governing SDR.
Under this power, the Fund could empower a non-
Fund member such as Switzerland to enter into SDR transactions.
It could
also authorize the BIS or a regional monetary agency in Latin America to
enter into such transactions.
However, only institutions performing one
or more functions of a central bank for more than one member of the Fund
could be authorized in this way; other international institutions, such as
those engaged in development financing, could not be authorized as holders
of SDR or to engage in SDR transactions.
Attachment B
Modifications in the Traditional Fund
Under the Amendment proposed by the IMF Executive Directors, the
familiar traditional operations of the Fund will be carried on in the
new "General Account", while SDR business will be carried out through the
"Special Drawing Account."
The Amendment also cootains proposals to mod-
ify certain of the prOvisions of the existing Articles of Agreement.
These changes fall under six heads, constituting those proposals for change
which have been agreed upon, out of a rather longer and more difficult
group of proposals that at one time had achieved some status among the
E~
A.
countries.
Change in Voting Procedure for Quota Increases -- At present, any
change in quotas in the F\md requires an 80 per cent majority of the
voting power in the Board of Governors.
Under the new proposal, this
required majority will be raised to 85 per cent for those quota increases
resulting from a general review of the adequacy of quotas.
In addition,
any decision to depart from the standard requirement that 25 per cent of
quota increases be paid in gold, or to mitigate the effects of this gold
payment I
Governors.
will also require an 85 per cent major! ty in the Board of
Such decisions related to payment for quota increases, to
the extent the Article3 of Agreement pennitted them, could previously be
taken by the Executive Directors by a simple majority of the voting power.
It was asserted that this change was "logically linked" to the 85 per cent
voting requirement for creation of SDR, since quota increases in the traditional Fund could, to a limited extent create additions to international
liquidity.
B-2
B.
Uniform Change of Par Values -- A second change, which scme countries
also saw as "logically linked" to the 85 per cent voting majority in the
SDR system, concerns a hypothetical Fund decision to make a uniform proportionate change in par vallE s of currencies--or in other words, to change
the price of
€p
ld.
Since addi tional reserves could also be created by such
a decision, it was argued this decision should also be made subject to an
85 per cent majority.
Presently, such a decision can be made by the Fund
Governors by a simple majority of the voting power, provided that every
country with 10 per cent or more of the Fund quotas concurs; this means
that the United Kingdcxn and the United States are the only countries able
to veto such a decision.
Since the new proposal, requiring an 85 per cent
majority, makes a decision to change the price of gold more difficult to
achieve, the United States was able to go along with this proposal.
In
addition, if a uniform proportionate change in par values were decided
upon, the Fund has the authority to decide ££! to maintain the gold value
of its assets.
Previously such a decision could be made by a simple
majority by the Executive Directors; under the Proposed Amendments, such
a decision will be possible only by an 85 per cent majority in the Board
of Gave mars.
c.
Interpretation of the Articlt:.:s of Agreement -- The Fund has authority
to make final and binding interpretations of its own Articles of Agreement.
Such interpretations can initially be made by the Executive
Di rectors by a majority of the \,;ei;?;L ted vot.es; an interpretation so
made can then be appealed to the Board of Governors whose decision, by
a majority of the voting power, is final.
Although the right of
B-3
interpretation has been used with care and responsibility, and only one
appeal has been made to the Board of Governors, it was argued by some
that the existing procedure for interpretation, decided solely by a
weighted voting system, could create dangers that should be avoided by
a more traditional form of judicial review.
The provision contained in
the Proposed Amendment will still utilize the Executive Directors as the
initial tribunal for interpretation and will retain interpretation within
a procedure internal to the Fund.
A Conmittee of Governors will be es-
tablished to which an appeal can be lodged from an interpretation by the
Executive Directors.
The size of the Governors' Committee on Interpreta-
tion, its composition, and the majority by which it will decide appeals
has not yet been decided and will be determined subsequently by an appropriate provision of the Fund By-Laws.
It has been decided, however, that
voting wi thin the Governors I Cammi ttee will be on the basis of one vote
per member of the Camni ttee, as is usual in judicial procedures.
It is
to be expected that it will be decided the Governors' Committee can reverse an interpretation by the Executive Directors only by a qualified
majority vote--I would think by a rather high proportion of the votes in
the Camni ttee.
The deciSion of the Ccmmi ttee, in turn, will be able to
be appealed to the full Board of Governors, and overturned then by an 85
per cent majority of
tr~e
total voting power.
Governors of the Fund who
are members of the Committee will be able to appoint alternates, and it is
assumed those who will actually conduct any judicial review as members of
the Committee will be highly qualified legal officers of member governments.
The new procedure for interpretation will apply only to new questions of
interpretation.
B-4
D.
Automatici ty of Drawing Rights in the "Gold Tranche" -- The gold
tranche drawing rights of Fund members--that is, drawing rights arising trCII
their gold subscriptions plus their "net creditor" positions corresponding
to the net amount of their currency subscript.ion drawn from the Fund by
other members--will be made legally unchallengeable under the Proposed
Amendment.
This, in effect, represents a legal codification of a de facto
policy and practice that the Fund has followed since February 1952.
Several
consequential changes in prOvisions are included to carry out this purpose.
In addition, the Fund will in future have the right to eliminate the existing one-time transaction charge, which is required to be paid for all
drawings from the Fund, on drawings in the gold tranche.
Further, "net
credi tor" positions in the regular Fund (or "super gold tranche" positions
as they are sometimes called) are in future to earn a remuneration (essentially an interest return) which is initially set at l~ per cent per yearj
the rate can be varied within the range of 1 to 2 per cent by a majority
of the voting power, and to a point beyond these limits, if conditions
require it, by a majority of 75 per cent.
All of these changes relating
to the status of the gold tranche in the Fund are designed to improve its
posi tion as a reserve holding, in a manner comparable to that being accorded
to the SDR.
E.
Condi tions on Credit Tranche Drawings -- Drawing from the regular Fund
in the credit tranches--that is, drawings beyond amounts arising from a
member's gold subscription or a previously accumulated "net creditor"
position--have always been subjected to policy conditions by the Fund.
This has been justified on the ground that the Fund's resources are intended
to " revolve" and to finance temporary swings in balance of payments pod tiODl,
,.-
4
B-5
I
so that the policy conditions applied by the Fund should be designed to
encourage countries to cope with and reverse the payments problems that
have led to their drawings on the Fund.
This approach to credit tranche
drawings is now to be codified in the Articles of Agreement by prOvisions
which clearly indicate that credit tranche drawings fran the regular Fund
are to be made for temporary payments difficulties and that the policies
of countries making credit tranche drawings must be examined to detennine
whether they are such as to render the ir use of credit tranche drawings
temporary and reversible.
It is important to note, however, that under
these modifications, the Fund will retain full authority to adapt its
policies on credit tranche drawings and that it is not necessary to make
the existing policies and practices more stringent in order for them to
conform to the terms of the Proposed Amendment.
F.
Automatic Repurchases -- Repurchases are transactions by which Fund
drawings are reversed or "repaid."
In recent years, more than 90 per cent
of such repayments have been through repurchases at scheduled maturities
within 3-5 years from the corresponding drawings, or by virtue of other
members making drawings of the currency of the country needing to repay.
In addition, however, the Articles provide for mandatoJY repurchases in
circumstances where the reserves of the country with drawings outstanding
have been rising, and it was thought desirable to modify these highly
technical provisions to bring them more up to date.
In the Articles as
they now stand, a net reserve concept (that is, gross holdings of reserve
assets minus short-term liabilities in the country's own currency to foreign
official holders plus foreign banks) was used in determining reserve increases or decreases for this purpose; in the Proposed Amendment, a gross
reserve concept is to be used for this purpose, in the same way that graas
reserves are normally used as the basis of most econanic analysis in
modem thinking.
Several new features are to be placed in the fo:nnula
for determining mandatory repurchases, as follows:
1.
The basic formula is to take account of repurchases effected
by other means during the Fund's financial year, to reduce
repurchases calculated under the mandatory formula.
This
has not been the case under the existing provisions.
2.
Mandatory repurchases are to be subject to the follOwing
limits:
a.
They will not be due in an amount tlB t will reduce
the repurchasing member's gro ss reserve holdings below
150 per cent of its Fund quota.
The comparable limit
in the existing Articles is that a repurchasing member's
net reserves will not be reduced below 100 per cent of
its Fund quota.
1>.
Any calculated amount in excess of 25 per cent of the
repurchasing member's Fund quota in a given year will
be postponed until the end of the following Fund
financial year.
the
3.
exist~ng
There is no analogous limitation in
provision.
The Fund will have discretion to disregard, in its calculation of reserve increases and the resulting mandatory repurchase obligations, reserve holdings arising out of swap
transacticns.
B-1
P1D&lly, the ex1st11l8 provisions on mandatory repurchase can result
in repurchases being calculated in a currency which the Pund cannot accept because the cOlDltry issuing that currency i tselt has drawings out-
,taMing from the Fund; in that event (which is the situation for mandatory
repurchases calculated in either U.S. dollars or sterling at present) the
c&lculated repurchase i s abated (or in other words I canpletely set aside).
It appeared undesirable to continue this practice, and in future, under
the Proposed Amendment, such calculated repurchases will have to be
carried out in other currencies acceptable to the Fund.
Attachment C
EXPLANATION OF THE LEGISLATION PROVIDING FOR UNITED STATES PARTICIPATION
IN THE SPECIAL DRAWn«:l RIGHTS FACILITY
Section 1
This section provides that the Act may be cited as the Special
Drawing Rights Act.
Section 2
Section 2 authorizes the President to accept the Amendment to the
Articles of Agreement of the International Monetary Fund which establishes
the Special Drawing Right Facility.
The Amendment also covers a number
of changes in the existing operations of the Fund.
The Amendment is attached to a resolution of the Board of Governors
of the Fund.
Article XVII(a) of the Fund Articles requires that this
Resolution approving the Amendment be approved by a weighted majority
vote of the Fund Governors.
Once approved, the Amendment is then submitted
to Member Governments for acceptance.
Article XVII(a) requires that the
Amendment be accepted by three-fifths of the members exercising 80 percent
of the total voting power.
Section 5 of the Bretton Woods Agreements Act, as amended (22 U.S.C.
286c), requires that approval of Congress must be given before the
President may accept an amendment to the Articles of the Fund.
Section 2
of the draft bill would give the necessary congressional authorization
to the President and it would also give approval to United States participation in the Special Drawing Account which would be established by the
Amendment to tmplement the Special Drawing Rights Facility.
0-2
Section 3
In order to participate in the Special Drawine AccCNnt, under
Article XXIII, Section 1, the United States .ust deposit an instruaent
with the Fund stating that it undertakes all of' the
c~itaents
of a
participant in the Special Drawing Account in accordance with ita law
and that it has taken all steps necessary to enable it to carry out all
of these undertakings.
(To make the Facility operational, auch instru-
menta must be deposited by Members with 75" of the total lund quotu).
The
pr~
commitment is the ability to accept Special Drawing
Rights from other partiCipants and pay a convertible currency in return.
Participants must have authority to accept Special Drawing Rights in
amounts equal to three ttmes their net cumulative allocations (Article
XXV, Section 4). The United States must also be prepared to pay charges
on' its use of its allocations of Special Drawing Rights (Articles XXVI,
XXX and XXXI), and pay such assessments as the Fund aay make as the
United States pro rata share of the administrative expenses of running
the Special Drawing Account (Article XXVI, Section 4).
SeC'iQD 3 authorize. the assumption of these reaponsibilities.
It
provid~s
that Special Drawing Righta allocated to, or acquired by,
the United States will be deposited in and administered as part of the
resources of the Exchange Stabilization Fund established by Section 10
of the Gold Reserve Act of 1934, as
~ended
(31
u.s.c.
822a).
Section 3(b) also allocates the proceeds of the use of Special
Drawing Rights to the Exchange Stabilization Fund.
Accordingly, this
section imposes a corresponding responsibility on the Exchange StabilizatilJ1.
f'} :..:; i
I
.(-.JV
0-3
Fund to provide dollars against Special Drawing Rights when they are
presented to the United States for acceptance.
The commitment to pro-
vide currency against Special Drawing Rights is the touchstone of what
makes Special Drawing Rights a valuable reserve asset.
The United States
must have domestic procedures that will give unquestioned assurance of
our ability to meet this commitment.
These procedures are provided for
in Section 4 of the draft bill and are described below.
In addition, subsection (b) of Section 3 gives the Exchange Stabilization
Fund the responsibility for paying charges on use of United States net
cumulative allocations,and assessments pursuant to Article XXVI, Section 4.
Article XXVI, Section 3, provides that the rate of charges on Special
Drawing Rights will be 1-1/2 percent, although this rate may be changed
within the limits of I to 2 percent, by simple majority, and can be moved
outside these limits if a wider range is decided on for renumeration on
super gold tranche positions under Article V, Section 9, as amended by
the proposed Amendment.
Assessments may be made pro rata in proportion
to net cumulative allocations to pay the administrative expenses of the
Special Drawing Account.
In most cases, charges and assessments are payable
in Special Drawing Rights, al.though in certain circumstances charges in
connection with liquidation might have to be paid in currency.
it would be expected
th~t
~ormal.ly,
the Exchange Stabilization Fund would reserve
some of its holdings of Special. Drawing Rights to pay charges and assessments.
Subsection 3(b) provides that
p~ents
of interest to the United
States on holdings of Special Drawing Rights in excess of United States
c-4
net cumulative allocations would be deposited in and administered as part
of the Exchange Stabilization Fund.
The interest rate will be the same
as the rate of charges described above.
Interest earnings while the
United States is holding Special Drawing Rights in excess of net cumulative allocations (which are paid in Special Drawing Rights) will provide
a source of funds for paying charges when the United States is using its
net cumulative allocations.
Section 4
Section 4 gives the Secretary of the Treasury authority to issue
Special Drawing Right certificates to the Federal Reserve Banks in amounts
equal to
any
Special Drawing Rights held by the United States.
The
Federal Reserve Banks would credit the account of the Exchange Stabilization
Fund with a dollar deposit in an amount equal to the value of the Special
Drawing Right certificate.
Special Drawing Right certificates would be
issued and remain outstanding only for the purposes of financing the
acquiSition of Special Drawing Rights or financing exchange stabilization
operations.
Under this provision, dollar balances obtained by the Exchange
Stabilization Fund through the issuance of Special Drawing Right certificates
to the Federal Reserve Banks could not be used for domestic purposes such U
deposits in commercial banks or acquisition in the open market of united
States Government obligations.
Section 4(a) provides that the amount of Special Drawing Right
certificates issued and outstanding shall at no ttme exceed the value of
the Special Drawing Rights held against the Special Drawing Right certificate•.
Thus, dollars resulting fram the sale of Special Drawing Rights against
which a certificate had been issued would be used under Section 4(b) to
redeem an equivalent amount of Special Drawing Right certificates.
The above financing method provides absolute assurance that the United
States can meet its acceptance commitment.
C-5
Purchases of gold are similar in nature to purchases of Special
Drawing Rights.
return.
When the United States buys gold it pays dollars in
Thus, in a sense, our acceptance procedures for gold are the
same as those for Special Drawing Rights -- the payment of dollars against
the receipt of an asset.
For gold the
domesti~
arrangements that assure
that the United States can always supply dollars is the authority of the
Secretary of the Treasury to issue gold certificates, against an equal
amount of gold holdings, to the Federal Reserve Banks in return for dollars
(Section 14, Gold Reserve Act, as amended, 31
u.s.c.
405b).
When gold
is sold, the resulting dollars are used to redeem the gold certificates
which had previously been issued against the gold that was sold.
Although acceptance commitments must be honored in order to make the
Special Drawing Right Facility work, they are not a burden on the United
States.
Acceptance of Special Drawing Rights against dollars involves
an exchange of assets.
In return for one asset -- dollars
the United
States will obtain a highly valuable international reserve asset -- Special
Drawing Rights -- that it can use to meet problems arising from a balance
of
p~ents
deficit or a decline in reserves.
Because these transactions
are exchanges of assets, they will have no effect on budget receipts or
expenditures.
Similarly, United States participation in the Special
Drawing Account will involve no increase in new obligational authority.
There follows a series of examples making assumptions about the flow
of Special Drawing Rights.
The consequences of such flows for the domestic
financing procedures provided for in Sections 3 and 4 are then explained.
0..6
A.
An allocation of 500 million Special Draving R1shts 11 JUde to the
United States:
The 500 million Special Drawine Rjghts would be entered upon the
books of the Exchange Stabilizatl.on Fund.
B.
The United States has a deficit in its balance of
p~ents
and it
sells 500 million Special Drawing Rights to another country:
The Exchange Stabilization Fund would receive $500 million or $500
million equivalent in foreign convertible currency.
These funds
would be held in the Exchange Stabilization Fund against the liability
to repurchase an equal amount 0i' Special Drawing Rishts and could
be used in exchange
stabillza~ion
operations.
Interest earnings
fram such operations or from lnVeJtments would be held for the
exclusive purpose of meeting commitments under the Special Drawing
Rights Facility, including payments of charges and assessments.
C.
The United States having sold
8~l
of its holdings of Special Drawing
Rights eliminates its deficit
~ld
is presented with Special Drawing
Rights
by
other participants:
The Exchange Stabilization Funa '\¥·)uld usually use the dollars it
acquired at the time it originally sold its Special Drawing Rights
allocations to purchase the Special Drawing Rights presented.
Under
this example, and others set forth herein, Special Drawing Right
certificates could be issued against Special Drawing Rights on hand
at any given time equivalent to those received through allocations only
in circumstances where there was a need for resources to purchase
Special Drawing Rights or to engage in exchange market operations.
D.
Having repurchased an amount equal to our allocations, the United
0-1
states is now presented with Special Drawing Rights fram other
participants in amounts in excess of net eu.ulative allocations:
The Exchange Stabilization Fund would accept the Special Drawing
Rights and siBultaneously issue a Special Drawing Right certificate
to a Federal Reserve Bank for a dollar deposit in order to provide
dollars to the presenting participants.
E.
The United States sells its Special Drawing Rights that are held
in excess of our allocations:
The Exchange Stabilization Fund would receive dollars fram the
foreign country and use these dollars to redeem an equal amount
of Special Drawing Right certificates held by a Federal Reserve Bank.
Section 5
Section 5 makes a number of amendments in the Federal Reserve Act
to allow the Federal Reserve Banks to hold Special Drawing Right certificates.
Subsection 5(a) amends the third sentence of the second paragraph
of section 16 of the Federal Reserve Act, as amended (12 U.S.C. 412),
to allow the deposit of Special Drawing Right certificates as collateral
security for Federal Reserve notes.
The first sentence of the fifth paragraph of section 16 of the
Federal Reserve Act, as amended (12 U.S.C. 415), is further 8lnended by
subsection 5(b) to allow Federal Reserve Banks to reduce their liability
for outstanding Federal Reserve notes by depositing Special Drawing
Right certificates with the Federal Reserve Agent.
Subsection (c) amends the seventh paragraph of section 16 of the
0-8
Federal Reserve Act, as amended (12
u.s.c. 417),
by providing that Special
Drawing Right certificates, like gold certificates, shall be held in the
joint custody of the Federal Reserve Agent and the Federal Reserve Banks.
Subsection (d) amends the fifteenth paragraph of section
Federal Reserve Act, as amended (12 U.S.C.
16 of the
467), by allowing Special
Drawing Right certificates, like gold certificates, to be deposited with
the Treasury.
Section 6
Paragraph 3 of Part I of the Executive Directors' Report to the
Board of Governors of April 1968, notes (p. 6) two ways in which participants
can meet their acceptance obligations:
(1) by obtaining authority to
accept the rights and responsibilities that go with Special Drawing
Rights allocations up to a minimum amount of 50 percent of their quotas,
and (2) by treating Special Drawing Rights in the same way as official
holdings of gold and foreign exchange, which are usually subject to no
legal ceiling, thus obviating any need for further legislative action.
Section 6 would authorize United States participation in allocations up
to an amount equal to the United States Fund quota of $5,160 million and
the U. S. Governor could not vote for allocations to the United States
exceeding this amount.
By placing a ceiling on the amount of Special
Drawing Rights that may be allocated to the United States, provision is
made for a Congressional review of the experience with the Special Drawing
Rights.
But, by giving an authorization that is larger than the minimum
suggested by the Fund, the United States would be indicating a more
0-9
positive attitude towards Special Drawing Rights as a relerve asset than
would be the case if the minimum acceptable participation authority were
adopted.
Section 7
Article XXVII (b) provides that no tax of any kind shall be levied
on Special Drawing Rights or on operations or transactions in Special
Drawing Rights.
The privileges and immunities of the Fund were given
force and effect in the United States under Section 11 of the Bretton
Woods Agreements Act, as amended (22 U.S.C. 286h).
Section 7 would
follow this precedent by giving Article XXVII(b) full force and effect
in the United States, its Territories and possessions upon United States
participation in the Special Drawing Account.
u.s.
Balance of payments Cumulative 1961-67
(billions of ol1ars)
a
chandise imports & exports
itary (expends. & mil. sales delivs.)
riStll (incl. fares)
c. services:
'ransportation (excl. fares)
U.S. direct-invest. income
other private invest. income
U.S. direct-invest. fees & royalties
other private misc. services
Covt. interest payments & receipts
Covt. misc. services
private remittances
Tt. pmts. of pensions, etc.
I.
Tt. economic grants & credits:
Gross outlays & repayments
Of which: "untied" outlays ($ outflow)
Debits
-140.3
-22.8
-20.9
-12.8
-7.9
-3.3
-3.1
-3.6
?t;1
........
Credits
173.8
S.4
9.8
14.8
25.1)
8.7)
S.6
7.9
3.S
1.8
• -4.4
-17.4
-11.2
2.1
2S.9
S.6
4.6
.4
-1.8
-4.4
-2.2
-2.2
-3l.S
(-S.8)
-Net
33.S
7.6
-23.9
lvate capi tal flows:
U.S. direct investment, net outflow
U.S. purch. of new for. securities
Redemptions of foreign securities
U.S. net sales outstand. for. securities
Net U. S. bank credit to foreigners
Net U. S. nonbank credi t to foreigners
Net inflow of for. capital (nonliquid)
rors & omissions
TOTALS and LIQUIDITY DEFICIT
-17.7
-7.9
1.8
.1
-S.8
-2.S
9.0
-4.S
-4.S
-291.2
-17.7
-7.9
1.8
.1
-S.8
-2.S
9.0
274.9
-16.3
Items Influencing the Direction, Dimension and Techniques of U.S.
Foreign Policy
1. Total deficit 1961-67 = $16.3 billion
2. Deficit not due to trade, which shows $33.S billion surplus (despite
recen~ declining surplus).
Surplus barely covers major outflow
items of military and tourism ($28.6 billion combined) which are
increasing. To close total deficit require major increase in
trade surplus or, alternatively, cutting back or holding down
some or all of major outflows.
3. MilitaEY. Despite intensive efforts since early 1961 to decrease
expenditures and increase offsetting sales, net military costs
abroad ($17.4 billion over 7 years) represent largest single
drain.
Figures shown are on conventional balance-of-payments basis,
counting military sales in terms of deliveries rather than
cash receipts. Alternative cash calculation (counting in
net "advance payments" on military sales during the 7 years)
would give gross receipts of $6.6 billion and net military
expenditures of $16.2 billion--with an offsetting reduction
of the net amount shown as foreign-capital inflow, from
$9.0 to $8.1 billion.
Tourism--Sheer magnitude of this item--with gross payments only
$1.8 billion (8 per cent) short of total military payments
and $3.2 billion (20 per cent) larger than direct-investment
outflows, over the 7 years--warrants action despite political
sensitivity.
Direct investment plus U.S. purchase of foreign securities show
an outflow of about $25 billion which are offset by direct investment income and other private investment income. Adding
income from direct investment fees and royalties of over $5
billion improves this investment picture to a net surplus.
However, this cumulative picture does not adequately reflect
deficit trends which have required governmental action in the
short-term (lET on purchase of foreign securities and direct
invest;ent controls) to achieve this balance and avoid future
deterioration.
), Aid outflow from Government grants and credits fortunately took
the form of only $5.8 billion in "untie4" cash outflow because
balance tied to U.S. goods and services. Tied amounts are
contained in statistics of trade and services accounts.
For release on delivery
STATEMENT OF THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
TO
MEMBERS OF THE HOUSE APPROPRIATIONS COMMITTEE
MAY 1, 1968
Last August, the Administration asked the Congress to
enact a 10 percent surcharge -- amounting to an average of
1 cent on the dollar earned.
For all these many months now,
we have repeatedly urged that this measure be enacted:
To avoid the risk of inflation that will rob
the poor, the elderly and the millions of
Americans living on fixed incomes.
To stabilize interest rates that are now climbing
to new highs, despite the best efforts of the
Federal Reserve System.
To support responsibly the needs of our fighting
men in Vietnam.
To sustain confidence in our dollar, the bulwark
of the International Monetary System and world
trade.
A tax increase is the cornerstone of fiscal responsibility.
Without such action, our own economy and the economies of
- 2 -
other free world nations stand in jeopardy.
We have come
too far to see the gains of the last seven years of
unparalleled prosperity endangered by inaction over this
vitally needed revenue measure.
The central fact is that because of the tax reductions
of 1963 and 1964, just after President Johnson assumed office,
Americans are paying lower taxes today than in any other
period of great struggle.
And we are engaged now in two
enormous struggles -- in our cities and in the field of
battle in Vietnam.
A responsible fiscal policy requires that we keep our
budget deficit within prudent limits.
through the tax surcharge
The revenues raised
about $10 billion for fiscal
year 1969 -- will help us do that.
The budget the President submitted in January -- which
included the surcharge -- was lean, prudent and designed to
do America's urgent work responsibly.
That budget represents
the best judgment of the President and the best judgment of
the top officials in the Administration.
Butfuere are many members of the Congress, perhaps a majority,
who believe that more must be done and that reductions in expenditures are necessary if the surcharge is to be enacted.
258
- 3 -
Over the past few weeks, I have talked to the Leadership
and to other members of the Congress.
In budgetary matters,
the Executive Branch does not decide alone.
The Congress has
the power and the duty to determine appropriations and levy
taxes.
As the President told the nation on March 31st, as
part of the program of fiscal restraint that includes the
tax surcharge, he would be willing to approve appropriate
reductions in the January budget when and if Congress so
decides that it should be done.
In light of the advice I have received from the leaders
of the Congress and because I believe so strongly that it
is critical for the economy and to the future of this
nation that the surcharge become law, the Administration
would approve, as part of a bill including tax increase
proposals that would bring additional revenue equivalent
to those we have long recommended, the following program
of expenditure control:
A $4 billion reduction in already proposed
expenditures for the fiscal year 1969.
A $10 billion reduction in new obligational
authority for fiscal year 1969.
- 4 -
A $8 billion rescission in new obligational
259
authority outstanding at the end of fiscal
year 1969.
This "10-8-4" reduction formula should meet every
reasonable demand for expenditure control.
It will mean that
eventually $18 billion will be cut from the current spending
plans of the agencies, and that $4 billion of this reduction
will actually occur in fiscal year 1969.
It provides us with
just enough of a margin to adjust our programs so that the
highest priority needs of the American people can continue
to be served.
The Leadership has informed me that this combined tax
surcharge-expenditure control program will generate the
support of significant numbers of House and Senate members.
n
-
,,' .~
"- v
TREASURY DEPARTMENT
May 1, 1968
FOR IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by th1s pub11c not1ce, 1nvites tenders
for two series of' Treasury b1lls to the aggregate amount of
$2,700,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing May 9, 1968,
in the amount of
$2,502,031,000, as f'ollows:
91-day bills (to maturity date) to be issued May 9, 1968,
in the amount of $1 600 000 000
or thereabouts, representing an
additional amount of bii.ls dated February 8 1968
and to
mature August 8,1968,
originally issued 1n the' amount of
$1,000,905,000, the add1t10nal and original bills to be freely
interchangeable.
182 -day bills, for $ 1,100,000,000, or thereabouts, to be dated
May 9, 1968,
and to mature
November 7, 1968.
The bills of' both series will be issued on a discount basis under
competitive and noncompet1tive bidd1ng as hereinaf'ter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturi ty value).
Tenders will be received at Federal Reserve Banks and Branches
to the closing hour, one-thirty p.m., Eastern Daylight Saving
time, Monday, May 6, 19680
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 compet1tive
tenders the price offered must be expressed on the baSis of 100,
with not more than three decimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
up
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except f'or their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
~sponsible and recogn1zeddealers 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-1231
- 2 Immediately after the closing hour, tenders will be opened at ~I
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Trea"Q
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 May 9, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing May 9, 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 disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject m
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 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
c ond i tions of the ir issue. Copies of the circular may be obtained frCA
any Federal Reserve Bank or Branch.
000
TREASURY DEPARTfvlEi\lT
--~---~·"·=="=~~-==:;=~~l:~:~~.":~·.'~~,:·~/:
1-1ay 1, 1968
Q.R JMMEDIATE RELEASE
TREASURY ANNOOHCES
$8
BILLIO:'1 HE..."'UNDHTG "AND $3 BILLION EEH CASH BCP.ROHIEG
The Treasury today anno~~ced that it is offeri~g holders of the $a billion of
-3/4~ Treasury Hates of Series B-1968 and 3-7 /8~'~ 'l'reasury :Donds of 1908, maturiYlg
ay 15, 1968, the right to exchange their nolCi:lgs at :par for a 7 -year 6 percent
reasury note to be dated Hay 15, 196-9, and to rr.ature flay 15, 1975. Tree public
olds about $3.9 billion of the securities eligible for exchc.nge, and about $4.1
illion is held by Federal Reserve and Govern.rnent investr.lent accounts. In addition
he Treasury will borrow $3 billion, or thereabouts, through the issuance of a
5-month 6 percent Treasu....ry note to be dated Nay 15, 1968, and to mature AUg'J.st 15,
.969, at par.
The books for the receipt of subscriptions for the 7 -year notes . . Till be open
for three days, May 6 through :Iiy 8. The bocl<:.s for the receipt of subscriptions
for the 15-month notes vlill be open one day only, ';JecL"'183day, Hay 8. The payment
and delivery date for the notes will be Hay 15, 1968.
Subscriptions addressed to a Federal Reserve Bank or Branch, or to the
office of the Treasurer of the United States, and placed in the mail before
lidnight May 8, ,dll be considered as timely.
Interest will be payable on the 7 -year notes semimmually on Hay 15 and.
November 15 and on the IS-month notes on AU2,ust 15, 1968, a..'1d February 15 and
flugust 15, 1969. The notes will be made available in registered as vlell as
learer form. All subscribers requesting registered notes will be required to
~nish appropriate identifying n~bers as required on tax returns and other
locuments submitted to the Internal Revenue Service.
Coupons dated I,lay 15, 1968, on the securities tendered in exchange or
payment should be detached and casheel v:hen due. The Hay 15, 1968, interest
due on registered securities ,vil1 be paid by issue of interest checks in
regular course to holders of record on April 15, 1968, the date the transfer
books closed.
CASH OFFERnrG - lS-Bonth Notes
Payment for the IS-month notes may be made in cash, or in 4-3/4~ notes
or '5-7/8~ bonds maturing May 15, '>ihieh will be accepted at par, in 1/2.yment,
~whole or in part, for the notes subscribed for, to the extent such ~uo
scriptions are allotted by the Treasury". The 15-!!lonth notes r":a'r be pald for
by credit in Treasury Tax and Loan Accotmts.
F-1232
- 2 CASE OFFERTIm - lS-l·':onth Notes - Continued
Subscriptions from co~. .:nercial ba!l.~s, for their mm acco1l!'.t, .".rill be
restricted in each ca3e to an 8::10 1.l:.'1t not exceeding SO perce:1t of t~;e COr1bined capital (not includin;; capital notes or debentures), surplus ar..d
undivided profits of the subscribine; banks.
Subscriptions from cOmITlercial and other banks for their o'~ account,
Federally-insured savings and lo"m associatio~s, states, political subdivisions or instrcm:entali ties thereof, public pen.sio:! and retirenent and
other public funds, internatiOclal orcarjizations in "o'i1:ich t'r.e tJni ted States
holds ne.'1lbership, foreign central banks and foreign States, dealers ..rho r.lal~e
prirnaT'"j' markets in Governrcent securities and report daily to the :Fec.eral
Reserve Bank of Ire,V' York their posi tions ~'ii th respect to Govern,"1e!1t securities and borrow'ings thereon, Govern."Tlent investment accounts, and the Federal
Reserve Ban.1.{s "Till be received 1,fi thout deposit.
Subscriptions from all others must be acconpanied by payr.J.ent of 10%
(in cash, or Treasur'J notes or bonds maturing ?·:a.y IS, 1968, at par) of the
amOUL'Tt of notes applied for not subj ect to vii thdraHal until after allotment.
The Secretary of the Tree.sury reserves the right to reject or reduce any
subscriptio!1, to allot less than the a;liOunt of notes applied for, a.nd to
make different percentqge allotments to various classes of subscribers; a..'1d
a:ny action he may take in these respects shall be final. The basiS of the
allotment vrill be publicly a!'l....''101.L''1ceo., and c.llotment notices will be sent
out promptly upon allotment.
All subscribers are required to agree not to purchase or to sell, or
to make any agreements viith respect to the purchase or sale or other disposition of any of the notes subscribed for under this offering e:~ a specific
rate or price, until after midnight Nay 8, 1968.
Connnercie.l banks in sub;;rl tting subscriptions 'iill be req,uired to certify
that they have no beneficial interest in any of the subscri!Jtions they erlter
for the account of their custo~ers, ani that their customers h~ve no beneficial interest in the ba~~s' subscriptions fer their o·~ account.
Estimated Ownership of The May 15, 1968 Maturities
as of March 31, 1968
(In millions of dollars)
Total
4-3/4%
Note
3-7/8%
Bond
Hcia1 banks •••••••••••••••••
$1,885
$1,226
$659
al savings banks •••••••••.••.
55
35
20
rance companies
f e •••••••••••••••••••••••••••
re, casualty and marine .•.•••
10
70
5
15
5
55
tal, insurance companies ••••.
80
20
60
ngs and loan associations ••••
205
100
105
orations . . . . . . . . . . . . . . . . . . . . .
380
155
225
e and local governments ••••••
435
205
230
other private investors ••••••
890
244
646
1, privately held .••.••••••••
3,930
1,985
1,945
ral Reserve Banks and
vernmen t Inves tmen t Ac coun t s •
4,117
3,602
515
1 outstanding ••••••••••••••••
8,047
5,587
2,460
ce of the Secretary of the Treasury
Office of Debt Analysis
May 1, 1968
264
TREASURY DEPARTMENT
Washington
FOR RELEASE ON DEL IVERY
EXPECTED AT 10:00 P.M., EDT
REMARKS BY THE HONORAB~E HENRY H. FOWLER
SECRETARY OF THE TREASURY
BEFORE THE
STATEWIDE "SHARE IN FREEDOM" DINNER-MEETING
BELLEMONT MOTOR HOTEL, BATON ROUGE, LOUISIANA
FRIDAY, MAY 3, 1968, 9:00 P.M., CDT
I am honored to be with you tonight as you begin your
1968 Payroll Savings campaign in the Greater Baton Rouge area
and, through the extra dimensions of this meeting, in
communities across Louisiana o
Let me assure you that the campaign you initiate here
tonight, along with similar campaigns conducted by other
public-spirited citizens throughout the nation, are of
great importance to the efficient management of our country's
finances
0
Since the Savings Bonds Program was initiated 27 years
ago, volunteer groups like yours -- modern-day "Minute Men"
have written an illustrious, inspiring and enviable record
of sales achievement. In Louisiana alone, you have assisted
the Treasury in selling more than $1-1/3 billion in Savings
Bonds, of which $1/2 billion were still outstanding at the
end of last year.
The Bond Program was highly successful in 1967. In fact,
the nearly $5 billion in Bonds sold made it the best year in
the past eleven. At year's end, the American people held
almost $52 billion in E and H Bonds -- or nearly one-fourth
of our publicly-held national debt.
In industry and Government last year, more than
2,700,000 employees were enrolled in the Payroll Savings
campaign, surpassing the established goal. About 2,400,000
of these new Bond purchasers were from industryo Another
328,000 were enrolled in the Federal agencies campaign headed
by former Postmaster General Lawrence Fo O'Brien.
'-1233
- 2 -
"L~
. / rs
These excellent results speak for themselves. They
are a tribute to volunteers like you who are giving their
best in patriotic service. They show clearly that you are
telling the Savings Bonds story -- and telling it well -in thousands of industrial plants and business places; at
union gatherings and over the counters of banks; in newspapers
and magazines; in radio and TV broadcasts and in motion
picture theatres.
The sale of Savings. Bonds
the promotion of investment
in America -- is a unique enterprise. In no other country
of the world is there anything quite like this cooperative
program of business, banking, education, industry, Government,
labor and the mass communications media.
This partnership of Government and private effort has
served the United States outstandingly well since 1941.
But now, because our country faces grave challenges both
at home and abroad, we must ask it to accomplish still more.
These are indeed troubled times, and increased sales of
Savings Bonds are more important than ever to help protect
and preserve our economic strength, and through it, the
strength of the dollar.
Today, there is no more urgent goal for America than
to maintain that strength. And it is this goal -- this
preservation of our economic strength and safeguarding of
our future -- that I want to talk about tonight.
You are all familiar with Kipling's immortal "Charge
of the Light Brigade" wherein the author describes how the
soldiers rode through shot and shell, and did it valorously,
but still, "all the world wondered." Today, all the world
wonders about the United States and the course it will follow.
For we are being severely tested by continuing economic shot
and shell, and the world closely watches to see whether we
will have the courage, the will and the ability to pursue the
path of fiscal responsibility and thus maintain strong,
properly balanced and non-inflationary growth.
The manner in which we respond to this grave test will
determine not only our own economic future but the future
of the entire Free World economy as well. For the strength
of the world economy, and continuation of a workable international monetary system depend~ to a large extent, on the
maintenance of a sound and strong American economy and a
stable dollar -- stable in terms of prices and exchange rates.
- 3 2C:~
The United States is now in the eighth straight ye~r of
unparalleled economic growth.
Over the past 20 years, fueled by a strong U.S. economy
and a strong dollar, the Free World has made the greatest
advancements in trade and development in recorded historyo
World imports surged from $59 billion in 1948 to $202 billion
in 1967, joining nations in economic progress.
Before we turn to the problems that now threaten to
disrupt this remarkable progress at home and abroad, and consider
what we must do to solve them, let's look more deeply into the
scope and scale of the United States economic achievements.
I won't bore you with a mass of statistics, but I do
want to give you five representative examples of the economic
gains the United States has made over the past seven or eight
years. I think you will find them rather startling.
There are almost ten million more Americans
working today than there were early in 1961,
and the unemployment rate has been reduced
from nearly 7 percent to an average of near
3~ percent.
Those 10 million new job holders
considerably exceed the number of people
employed in Belgium, the Netherlands, and
Luxembourg.
All income groups have gained. The average
American's living standard jumped 25 percent.
Wages, salaries, and other compensation of
workers and executives increased about 67
percent.
During much of this period, the United States
has enjoyed the best record of price stability
among all large nations, despite the pressures
resulting from the sharply increased scale of
military expenditures resulting from operations
in Southeast Asia. In the entire period after
Vietnam, United States prices have risen less
than those of most of the major industrial
nations. But our prices have been rising far
too rapidly in recent months.
- 4 -
267
Our gross national product -- the value of our total
production of goods and services -- even corrected
for price changes and expressed in constant
prices of today -- increased in nearly seven
years of this expansion about $230 billion.
This is a gain larger than the total real output
of the nation in 1935 and nearly as large as the
growth'we had achieved in the preceding eleven
years. This additional growth -- the add-on to
our existing economy -- in these six and a half
years was roughly four-fifthsof the entire national
product of the Soviet Union in 1966 and about as
much as the combined national products of the
United Kingdom and France in that year.
Our national economy was successfully moved from
the trend of stagnation in the years 1955 through
1960, when the annual rate of real growth was
only 2.2 percent, to an average of 4.6 percent real
growth in the seven years of 1960 through 1967.
These achievements have not been accidental, nor -have
they resulted from the demands of our commitment in Vietnam.
Even before Vietnam began to require an increased share of
our national resources, starting:in July 1965, the nation
had achieved a record peacetime expansion.
This tremendous advancement has come about because we
have taken decisions to promote the kind of environment which
encourages greater economic activity. The flexible use of
fiscal policy and tax changes to give direction to the economy,
while leaving it free from the stifling controls that have
marked previous periods of adjustment and intensive military
activity, has been the important, if not major, factor in
our economic progress.
To stimulate economic growth, Congress in 1962, 1964,
and 1965, under the leadership of President Kennedy and
President Johnson, enacted tax reductions totaling about
$24 billion at present levels of income o
These tax cuts freed the economy from an oppressive
permanent rate structure and a network of excise taxes. They
provided a necessary and tremendous stimulant to the private
sector. Coupled with the business investment tax credit and
the liberalization of depreciation, they provided a ready
outlet for creative technology and a means for accelerated
modernization with lower costs and better productS.
,--,
h
•, , _
\,.J"
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v
- 5 In 1966, however, the nation was confronted with a new
situation -- a need to reduce excessive demands,
particularly for credit, arising from the combination of
military requirements for Vietnam added to a selective boom
in the capital goods area. Fiscal and monetary policy
necessarily shifted direction. Government expenditures
and credit demands were held down and the President requested
and received f~om Congress a speed-up of tax collections,
a restoration of excise taxes, and a temporary suspension
of the investment tax credit. The Federal Reserve Board
adjusted its monetary policies in flexible fashion to
meet the changing situation. As a result, the economy
returned to a more even keel, and a possible "boom and bust"
cycle was avoided.
We must remember that the use of fiscal and monetary
policy is not a one-way street, to be followed only
when we want to stimulate economic activity -- as we did
through the tax reductions of earlier years.
We now must have the courage and wisdom to use fiscal
and monetary policy to slow our economy to a more moderate
pace, so that our economic progress can be sustained at a
safe cruising rate of speed.
This bringscne to the situation we face today.
Future progress, for ourselves and the Free World,
is now seriously menaced by twin deficits -- in our
internal Federal budget and in our international balance of
payments. To continue to accept these deficits is to forsake
prudence, take intolerable risks, and refuse to exercise the
fiscal and monetary discipline required tor the preservation
of a balanced prosperity. We simply cannot afford to accept
these deficits. We must direct our economic and financial
policy toward reversing them in 1968, in the knowledge that
unless we do so, we cannot achieve our goals of peace and
progress abroad and domestic tranquility at home.
First and foremost, we must act promptly and firmly
to enact in the same legislative package the temporary tax
increase the President has recommended, coupled with an
appropriate legislative implementation of the measured
restraints on Federal expenditures that were spelled out in
the Resolution of the House Appropriation Committee last
Wednesday.
- 6 I am heartened by current discussions we are having with
members of the House and the Senate, and by the progress that
has been achieved within the last few weeks, which gives hope
that decisive legislative action may now be near at hand.
Such legislative action is vital:
to protec:tthe economic security of the
American people and the. strength of the
dollar, and
to preserye the international monetary system
for which the United States, because of the
role of the dollar as a reserve currency, has
a special responsibility and trust.
What are the principal measures the President has
recommended to insure our continued prosperity and security?
They are:
A temporary increase in personal income taxes
amounting to an average of one penny on every
dollar of income we earn and a temporary ten
percent surcharge on corporate tax lihbilities.
A cut in Government expenditures and
appropriations usable in the next fiscal year
beginning July 1 for Federal programs of lesser
priority and urgency.
A reduction in expenditures overseas -- both
governmental and private -- except where they
are absolutely essential.
These are unpleasant measures, and your Government does
not like to ask them. But they are essential at this time.
For only by temporary sacrifices can we continue the strength
and stability of the domestic U. S. economy, while we defend
freedom and insure our continued security overseas.
We in Government have the inescapable responsibility to
use monetary and fiscal policy to held the economy to an
acceptable cruising speed. The acceptance of enlarged deficits
in our Federal budget and our balance of payments is contrary
to sound economic and financial policy during a period of
high employment and heavy defense expenditures, some
inescapable increases in the civilian cost of Government, and
an advancing private economic sector.
- 7 -
2
"i I
I
V
Consider what has happened on the national and international
economic scene since last August when President Johnson first
:ecommended a program of fiscal restraint including the temporary
tax increase.
First, there were some people who doubted the economic forecasts
O'n which a tax increase was based, and were not sure the economy
would rise after the slow s tart in 1967. But the gros s national
ptoduct increased by $32.2 billion in the second half of 1967 in
contrast with only $13 billion in the first half.
In the first quarter of 1968, our national production increased
?20 billion -- up to a record-breaking annual rate of more than
?827 billion. However, a disturbing note is that nearly half of
~is increase reflected price increases
rather than real growth.
Second, last August there were also those who doubted that
there would be such an inflationary trend in the absence of a tax
~crease.
It is now clear that we are in a rising price trend.
The consumer price index has advanced about 3-3/4 percent in the
past year, and in recent weeks wholesale prices have advanced
rapidly. Wage settlements, too, have become more inflationary.
Third,we said that without a tax increase our balance of payments
situation would be serious. This too came about, largely, because of
a deterioration in our trade surplus in the last months of 1967
plus a too-rapid advance in aggregates of economic activity.
The result was announcement by the President on New Year's Day
of a new and more restrictive balance of payments program. A
major contributing factor, of course, was devaluation of the
British pound in November, which weakened confidence in all
currencies, and led to a speculative run on gold that cost the
United States over $2 billion of its gold reserves.
The President, in his New Year's Day Message on the
balance of payments, again in his State of the Union Message, and
again in his Budget Mes sage, s tres sed that failure to take
decisive fiscal action -- to pass the tax increase -- would raise
strong doubts throughout the world about America's willingness to
keep its finances in order.
The world still looks attentively at the United States to
see if it will employ adequate measures of fiscal and monetary
restraint, including defraying the increased costs of Government
by a tax increase -- an increase that is regarded by the
overwhelming preponderance of world financial opinion as
eSsential to preserve the confidence in the dollar and remove
the threat to the Free World :economy.
- 8
271
I
..I..
The President's Action Program to deal with our
balance of payments problem depends largely on the voluntary
support of the American people. But it also depends, to a
considerable extent, on the cooperation of other nations. I
am happy to say that I believe we should and will have their
cooperation.
We have asked the United States trading partners, and
principally the countries of Western Europe whose large payments
surpluses are the counterpart of our deficits, to accept most
of the burden of adjustment resulting from the U. S. program.
We have asked them to adopt policies which will stimulate
economic expansion in their countries, while maintaining stable
prices.
We have asked that they become more receptive to imports
from the United States, removing some non-tariff barriers
that stand in the way of freer trade.
We are encouraging them to accept an appropriate share
of the costs of mutual defense and economic assistance to the
developing countries.
We have urged them to encourage a greater outflow
of capital from their countries and to stimulate the development
of their internal capital markets.
I feel confident that other nations will work with us
because they recognize that a cooperative approach to problems
is in the interest of all nations, and they are aware that
a solution to the United States balance of payments problem
is so important to the world economy that it is a common
enterprise.
In late March the finance ministers of the Group of Ten,
the major industrial nations, approved amendments to the charter
of the International Monetary Fund providing a new world reserve
asset in the form of Special Drawing Rights which would serve
as a supplement to gold and the reserve currencies such as the
dollar. Legislation authorizing U. S. approval of the amendments
was sent to our Congress this week, and I am hopeful that the
amendments will be submitted shortly to the other 106 member
governments of the IMF and ratified promptly by the necessary
three-fifths of them with 80 percent of the weighted vote in the
Fund.
- 9 -
272
This new IMF facility, when operational, will supply
additional liquidity to the world in amounts necessary to take care
of an increasing volume of trade and movement of capital.
Now that there are hopes for peace in Vietnam, what would
an end to the war bring?
Peace, and' it will corne, will give us an opportunity
to use some of our resources now devoted to military operations
for other purposes. But it will also challenge us to promote
policies which will foster a fast and smooth transfer to a
peace- time ec onomy •
The transition from war to peace can be accomplished
without major disruption to our economy. Two facts are relevant:
The current share of our total production
devoted to defense is considerably less than
it was at the time of World War II or Korea.
During World War II, defense expenditures
accounted for 41~ percent of total national
production. Even during the Korean War, the
defense portion of total production amounted
to 13~ percent. However, today only about
nine percent of our total production is taken
up by defense activities -- and only three
percent for Vietnam.
Our long peacetime expansion between 1961
and 1965 has shown that the United States
does not need heavy defense expenditures to
maintain a growing economy, given the right
mix of fiscal and monetary policy, and
confidence in a viable economic partnership
between government, business and labor.
There will, of course, be adjustments as
production in defense-related industries
slows down and civilian production steps up.
However, these adjustments can be accomplished smoothly.
Defense purchases since mid-1965 have increased at an annual
rate of $20 billion. Without these expenditures, we would be
running budgetary surpluses. A return to peace should provide
us with the opportunity to reduce tax rates, meet some of our
rising national needs more adequately, retire debt, or employ
some conbination of these delightful alternatives.
- 10 We must insure that our freed resources are absorbed
in high-priority uses, but we must also see that transfers of
resources are made smoothly and without an intervening
recession. The increase in the overall demand in the civilian
sector of the economy should generally coincide with the decreas~'
in military demands. In this respect, we must consider the
time lags which inevitably occur, between a policy action and its
impact on the economy.
But back to today. Even with the tax surcharge and cuts
in Government expenditures there will be Federal budget deficits
in fiscal 1968 and 1969. They wi-I1 need to be financed in a
sound and anti- inflationary way -- and there is no better means
available to us than the sale of Savings Bonds.
This program can be expanded. Savings Bonds and Freedom
~ares offer the buyer an opportunity to invest in our
country's future, as well as notable advantages over many other
forms of investment -- safety, convenience, liquidity, stability
of rate, and certain tax benefits in terms of deferred income,
as well as exemption from state and local income taxation.
I hope that you will emphasize these advantages, and bring
many more investors and savers into the program, so that 1968
like 1967 -- will be another banner year for Savings Bonds.
Certainly, there is ample evidence here tonight -- through
the sponsorship of this splendid occasion by Capital Bank & Trust
Company and its officials, Messrs. Landry and Easterly -- your
Parish Savings Bonds Chairman -- and through the volunteer program
headed by Charlie Jacques -- your Greater Baton Rouge
"Share in Freedom" Chairman.
In closing, let me express my personal thanks, -- and that
of the Treasury -- to you who are doing so much for your country
by promoting the sale of Savings Bonds. Through your efforts,
which are in the finest tradition of the nation's first patriots,
you are helping the Treasury materially in managing the country's
finances, contributing to a stable economy at home and building
greater security and prosperity throughout th e Free World.
Thank you.
000
r,., J.
."
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RE1-'ARr~5
0:= Tt-iE HG,';OF(A3L::: RCJ::;n A. ".~~l;\C::::
ASS ISTA'iT SEC!\.ET Ac('{ ur THE T?E ..'::,5',)2Y
3EFORE TdE i··'ETR()POLITA'J ~JE"'I YOR\ ~;Ui'.\I5:·';\TIC CO'NEilTrC'J
PAPJ:-SHcRATO;'.l HOTEL, : E.' I YCR<, : ':::"'1 YO[;'.i~
SATU~Df-W, :"AY 4, 1]58, ll:Q(J A.i'1.
I 'dELCO:-£: TdE OPPORTU:lITY TO ADDRESS YOU
PROVIDE lIE ',:IT-I A;
OCCASIO;~
HELPS TO KEEP DO:!i'l T:1E iJUr·i3ER. OF
Kr;-~G,
jjQT O'lLY DO::S IT
IfjFOR.l~TIOi-J,
RUi'~ORS
ESPECIALLY A30UT
COiJCt::R,'JIilG
':1~1AT
SILVER,!~nC-l
IS OR IS rJOT THE
Oi~
IT ALSO GIVE':' r.':E A PLACE TO EXPRESS t--iYSELF
TH~
JR.
THE FIELD OF
Nur·HSt./~~TICS
IS VERY 3 RO;CID, SO I SHALL KEEP t,W DISCUSSI::);'l
FIRST, I SHALL STAT::: '.:[-\/\T
OF VARIOUS SU3JECTS AS 13RIEF AS POSSIf3LE.
THH~K
TODAY.
TO SEE OLD FRIc";0S AGAIN, JUT IT ALSO GiVeS i·E
A C~.ANCE TO r·1Jl.KE PU3LIC CERTAUJ
CURRENT SILVER SITUATIOL
~lC:RE
',';OULD aE PN APPROPRIATE.JAY FOR
DISCUSS THE CURRENT SILVER
us
TO ;.-tOi'lOR DR. KI: lG.
SITUATIa'~:JHfCH
Ti j:::~J I S'tALL
MAY REQUIRE A LITTL::
BECAUSE OF'BE VA<.IOUS FACTORS IiNOLVED IN T,...,AT PICTURE.
r
:·~ORE
TI:'I;::
THIS '.'!ILL f3E
FOllQ,IED ~Y A SERIES OF SHORT R:::PORTS Oi~ OUi<. COI.'Jr\GE ,!filCH MAY :'::2': OF
INTEREST TO NUHIS,....VHISTS.
I KNO,i YOU ','11 LL ALL t3E If JTEP£S TED I,'J P::<'O?OSAL3 TO f,\UTHOR I ZC THe
UNITED STATES i'1Ii'-lT TO STRIKE A COfv\'l.:::nORATIVE COI/'J OR A SP[CJ.i\L :'CD.4L Ii'J
HClJOR OF TH2: REVERE~~D DOCTOR 1'-'~·,\RTI~i LUTHC:R I<WG, JR.
SUCH NJ HO'lOR..:OULD
CERTAINLY BE HIGHLY APPROPRIATE, Am I ',JOULD FAVOR A SPECIAL GOLD ~·t=:Dt,L
FOR TriO REASO'JS:
275
- 2 -
1.
A GOLD fv4EDAL COULD BE ORDERED 3Y Ca'lGRESS TO BE .£l.":ARDED BY T:-iE
PRESIDENT TO THE ..IIDQI..! OF DR. KING IN
Ha~OR
OF HIS t'v\G:--lIFICEiH
CCNTRE3UTIO~JS
TOWARD THE ACHIEVEl'-'ENT OF SUCH GREAT ADVftNCEHEhlTS IN RACIAL JUSTICE.
THE
FACT THAT RACE DISCRItvIINATIO''-I CO'HINUES TO 3E A SERIOUS PROBLEM SHOULD :-:OT
BE SEIZED
upm~
TO r'lINH'llZE THE PROGRESS
'~HICH
HAS PArALLELED Ti-E EFFOR.TS
OF DR. KING -- THE CIVIL RIGHTS LEGISLATIOi,j, THE BETTER J03 OPPORTUiHTIES
AMO'JG t1lNORITY GROUPS, fti'-lD TriE DIMINISHING
SEGREGATIO'~
OF FACILITIES.
MOREOVER,
BY HO'lOR It'>lG HIS LEADERSH I P, \'/E \·/OULD GIVE A FURTHER I HPETUS TO':!ARD ATT AIN WG
THE GOAL FOR
~'/HICH
HE ',IOPJ(ED A''>lD DEVOTED HIS LIFE:
THE SECURING OF FuLL
RACIAL EQUALI TY BY rm'NIOLEIH t"EANS.
BRONZE COPIES OF SUCH A GOLD t·AEDAL COULD SE STRUCK 8Y THE UNITED STATES
MINT'AND Iv1;.\DE AVAILABLE AT COST TO THE REVCReND DOCTOR t'-1f.I.RTIN LUTHER KI:IG, JR.,
FUND, MOREHOUSE COLLEGE, ATLANTA, GEORGIA.
THIS FU:D, IN TUR>I, COULD MAKE
SUCH A t'lfDAL AVAILABLE TO THE PUBLIC AT COST OR AT A PRE1\lIUi'1 \JITH NIY PROCEEDS
BEING AVAILABLE FOR USE SY THI S FUND IN'THE FURTr-lERENCE OF ITS AUTHORIZED
PURPOSES.
2.
A GOLD 1'1EDAL \/OULD JE SUPERIOR TO A
CCt'-~"iE;-'10RATIVE
COHL
SUCH
COH~S
HAVE SEEN FOLJ.'.JD, IN THE PAST; TO INTRODUCE UNCERTAINTI ES rr HO T:-iE COIiJAGE
SYSTEM, NJD NONE HAVE BEEN I SSUED FOR ~'1/>..iJY YS4RS.
IS A REGULAR COIN.)
(THE KEi l~JEDY HALF DOLLAR
MOREOVER, SUCH A COIN \'/OULD NOT PROVIDE FOR THE
C(l\jGRESS IONAL A\·/ARD AS !"JOULD A GOLD MEDAL.
~~ENT SILVER SITUATION
AT VARIOUS TIf'w'ES DURWG TriE PAST 100 YEARS, THE GOVERN>iENT HAS SOUGHT
TO INFLUENCE THE PRICE OF SILVER~
FROH 1')33 UNTIL AFTER '.:ORLD 'dAR II, THE
TREASURY'S ACTIONS IN BUYING SILVER \-/E:~E DIRECTED TO.JARD RAISI~lG TH::: PRICE.
.v
27h
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DURING THE EARLY 1950'5 OUR POLICIES rlAD THE OPPOSITE EFFECT -- HOLDWG A
CEILING a·J T.'-iE PRICE.
FIN.;LLY, 'tIITH THe HISTORIC ACTlOtJS TAKPJ LAST HAY
N-ID JULY OF 1967, THE POLICY OF INFLUEiJCING THE SILVER PRICE '.-lAS A31lJ\:DO~~[D.
SHICE THEN TtlE PRICE OF SILVER HAS :5=:EN FREE TO SEEK ITS 0 IlJ LEVEL Nl0>JG THE
SILVER USERS It-I THE PRI VATE MARKeT.
BY SOf'lE STNJDARDS . . THE PAST YEAR HAS BEEN A TUR3ULEiH O"JE
FO~
SILVER . .
CERTAHJLY cor·iPARED 'dITH OTnER cm'1''-:ODITIES FOR ':JHICH A FREE r)IARKET HAS
La~G
ESTABLISHED.
BUT THIS
S~iOULD
MARKET IS LESS TH/\N A YEf"R OLD
i'lOT SE TOO
A'~D GR()\/'iI~;G PAr;~s
SILVER HAS SEEN PARTlCUU\RLY VULNC:RN:>LE TO
FAR FETCHED -- SUT TH I SIS
PARTICIPANTS ARE IN A
ur WERST A"JDl\S LE
SEl~SE j
SURPRISI~lG.
1·1A;~KET
13EE:~
THE FREE SILVER
S:iOULD HAVE
BEEI~
EXPECTE[).
Rur'IJRS -- HO"''E'IER
HJ A HARKET V/HERE SO f'-1P..'lY
lE':I TO THE GAt-'iE.
IT IS, OF COURSE, NOT POSSIBLE FOr< THE TREASURY DEPART."-ENT TO COf'Y'-:DH
O'~
EVERY ['v\RKET RUMOr< '.-IH I CH conES
OCCUR FAIRLY OFTEN.
ARE
BOUt~D
ALOi~G -'
A'iD IT IS GETT H~G SO THAT THESE
IT SHOULD 8E POINTED OUT . . HO'dEVER . . THI-\T SUCii' RU;ViORS
TO SE Ml\NY SINCE THEY ARE USUALLY TO TriE ECQ'JOMIC ADVAHAGE OF
THOSE IN IT I ATI i'lG
TH~f'-1.
THUS, TRADE RS ';/!TH A LOi JG POS IT I 0.'~ ',II LL NA TURALL Y
BE PRCX'lE TO PRO~·10TE RU~I()RS !-lAVING A 3ULLISH EFFC:CT 0'4 THE PRICE OF SILVER.
BROKERS \/HO r.AAKE CO;.ti"lI SS lOi'JS Oil
DURING A CHURNING r1l\RKET.
COME X
SALES OF SILVER
36~EFIT
TRADERS ALSO BENEFIT IN A CHUR:\JIjJG t-1ARKET BECAUSE
THEY ARE GENERALLY THE H4RKET PROFESSIOi'JALS '.JHO CAN EASILY GET IN A~D OUT
OF A POSITIO'J, GIVING THEM A TREFENOOUS ADVNnAGE OVER TIlE CASUAL INVESTOR
\frlO CAN;.JOT KEEP UP '.1ITH THE DAI LY OR EVE>J HOURLY ~-1AR.KET DEVELOPt"'aITS.
THE
.AMATEUR SPECULATOR mGHT 00 '.'JELL TO REt·'1Et·"',3ER THAT THE PROFESSIO'JAL'S PR.OFITS
ARE GENERALLY r~E AT HIS EXPENSE.
r~
7
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- 4 TRADERS ,AND SPECULATORS AS ',<[ELL AS INVESTORS CflN PERFOPJ-1 A VALI D ROLE
IN lHE w\RKET.
BUT ,ANYCNE 'i/HO \A/N·nS TO GET INTO SUCH Nl U:JCERTAIN PURSUIT
SHOULD UNDERST,A;·JD THAT PRECIOUS t.AETALS ARE ESPECI.t,LLY
PRa~E
TO FALSE RUi"DRS.
TREASURY SALES OF "P.-JO t-11 LLI ON OUNCES A ';fEEK ARE DES I G ~ED TO CLOSE THE
SUPPLY-CONSUiVPTIO"J GAP ONLY, SO THAT THE EFFECT ON PRICE
PUSHING IT NE lTHER UP l'-lOR OO:JN.
IdE HAVE NE ITHER A
INJECT OURSELVES INTO THE SILVER I'I1ARKET.
S~OULD
REASa~ ~JOR
3E rJEUTRAL,
A DES I RE TO
NEVERTHELESS, ':IE BELIEVE THAT HE
SHOULD GIVE FULL DISCLOSURE OF ALL TrlE FACTS vIE HAVE REGARDING OUR ACTIO"JS
IN THE Ml\RKET, INCLUDWG INFORPATICN ON OUR SILVER SUPPLIES, I;/EEKLY SALES,
AND, TO THE EXTENT POSSIBLE, OUR FUTURE PUNS.
IN DOING SO, IT S!-iOULD 8E
CLEARLY UI·.jDERSTOOD THAT ESTWATES OF FUTURE ACTIVITY CNJ 0rILY BE PROJECTED
(}.J
TME BASIS OF THE BEST INFORMATION VIE HAVE.
CLAIRVOYANCE.
WE tWCE NO CLAIMS TO
ALL OUR ESTH·tA.TORS CAN DO I S TO STUDY PAST PATTER>IS OF
BEHAVIOR AND CO[vJBINE THIS EXPERIENCE
~'/ITH
A LITTLE COMl"O\j SENSE HJ TRYIrlG
TO FIGURE OUT FUTURE BEHAVIOR.
FIRST, A FE\" 'tIORDS O".J THE TREASURY'S CURRENT SUPPLY OF SILVER.
AT THE
PRESENT TIt-lE, TREASURY HOLDS APPROXIi'1ATELY 520 1'1ILLION OUKES OF SILVC:R IN
ONE FORM OR ANOTHER.
ABOUT 255 I'll LLI ON OUNCES OF TH I S TOTAL IS W THE FORl'1
OF COIN SILVER \,/HICH, AS YOU KNO'J, IS IN PROCESS OF BEH~G rELTED liJTO 3ARS
FOR FUTURE SALE.
OF TrlE REPAINING 255 t·lILUC'J OUNCES, ABOUT 170 t'iILLION
OUNCES CO'JSISTS OF SILVER .999 FINE OR SETTER.
\-JE HILL CCY..JTINUE TO ACCUHULATE
SILVER COINS OVER THE FORESEEA3LE FUTURe ,AI·ID EXPECT TO GAIN A'~ ADDITIa'~AL
5 MILLION OUNCES BY' THe END OF Jlf.·JE.
THE ULTH'IATE POTHITIAL RECOVeRY CflN 3E
t-fASURED BY THE APPROXH.,AIATELY 1.3 BILLI(X-~ OUi-.JCES OF SILVER IN THE Dli-AES A'lD
QUARTERS MINTED DURING THE PAST 25 Y::AHS.
I.PPi.v.
so HUC-I FOR OUR CURF?BH SILVER
2 7~
I
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ON t',()NDAY OF THIS I'JEEK, GSA
\~OULD
3E HALTED; NID
N~l'~OU,'KED
BC:GIN~Hf\;G ~1t\Y
V
T:iAT SALES OF .gg,} FI:lE SILVcR.
3, ONE t'iILLIO'1 OUKES OF COlil SILVER 3ARS
APPROXlt--IATELY .900 FHlE -- 'dOUlD 8E OFFERED EACH i'IEEK ALOiiG ;,/ITH ONE
O\.fICES OF TrlE .996 FINE S I l VER.
t--HLLICl~
AS THOSE OF Y00 '.lHO FOlLO!/ THe S I L.VER
'''::le~
SITUATION KNO,'J, IT 'i/AS fv1ADE CLEAr;'
THE SALE OF .99'3+
SILVER~'JAS RESU~'\ED
LAST DECEt-i3ER THAT THE SALE I:JOULD canr; JUE O\!LY/HI lE REFHJEJG CAoAC ITY "JAS
SERIOUSLY WiPAIRED DURING Trlc COPPC:R STRIKE.
NOd, A FEH I.JORDS AS TO THE FUTURE.
OUNCES OF SILVER IN BAR FOPJ·\ EACH \:IEEK.
ldE I.-J! lL CONTI NUE TO OFFER 1':/0 [VII LLI 0:'1
THIS POLICY HAS
8Ea~ ESTA3LIS~fED
CLOSE CONSULTATION I,"ITH THe JOliJT cor·)l·lISSION O'l THE COIiJAGE ''':-fICri
~:AS
AUTHO?IZcD
i'i,c...nuzs.
BY THE COINAGE ACT OF 1955 Ai JD EST.6..3LI SHED U\ST YELJ.R TO ADVI Sf: OfJ SUCH
THE SILVER
~1ADE
AVAILABLE TO HIDUSTRY LATER APPEARS U; THE
It-".PORTAt\JT TO THE AJVERICNl
COi'!SU~'1ER
DOZEr·~S
IN
OF USES
AS \JELL AS IN VITAL DEFENSE NEEDS.
A'~
tlDREOVER, THE SILVER SALES THROUGH GSA tv'AKE
W.PORTA'JT
COf'!TRlf3UTIC~\l
TO
"
OUR BALANCE OF PAYtl1ENTS SH!CE EVERY
OU~JCE
SOLD r·1E.Ll.:JS At! OUr·ICE OF SILVEr<
LESS THAT HAS TO BE I HPORTED FROl'1 ABROAD.
N·!NUAL Ii lOUS TR I AL
SILVER IN THE UNITC:D STATES OF ABOUT 150 l'H LLI O!'I IS A30UT 100
CCY.1SUi~.PT! O'~
OF
~'iI LLlO;'j OU:1C:S
GREATER TIW'1 [X)j',j::STIC MIi'HNG PRODUCTION '\;';D OTH::R PRIVATE SOURCES, SO THAT
GSA SALES AR.E ,L\80UT EQUAL TO THE
C[ FIe I E~iCY
•
A SECOND WPORTANT TREASURY 08LIGATION IS THE REQUIRcYENT TliAT 165 MILLIO'J
OUNCES OF SILVER SE TRA'JSFERRED TO THE DEFENSE STOCKPILE 0\1 JUilE 24 OF THIS
YEAR.
THIS FIGURE HAS IilITIALLY DETERMH-ED BY THE OFFICE OF Et"ERGEt'lCY
PlJWNING AJJD APPROVED BY THE CONGR:::SS I~l JUNE 1%7.
IT REPRIESEj\jTS THE
OEP's FIR.~ OBJECTIVE AS TO T~iE NI()U;JT OF SILVER THAT '.'!OULD 31E iJECESSARY IiI
THE EVENT OF A NATI(lNAL Ei'~RGENCY.
ALTf·iOUG.'-l, FOR DeFENSE PURPOSES, IT IS
,'~.
•
-,
I~
~Jv
- 6 PROBABLY NOT NECESSARY THAT THE EnTIRE STOCKPILE CONSIST OF .9<)9 FINE
SILVER, \'/E INTEND TO KEEP AS MUCH OF IT IN THIS FORI"1 AS POSSIBLE.
IT NO';I
APPEARS THAT HE CAN PROVIDE THE ENTIRE N'lOUiJT OF SILVER Hl THIS HIGH DEGREE
OF FINENESS.
THE THIRD H1PORTflJ'JT OE3LIGATION OF THE TREASURY, OVER THE H'ivEDIATE
FUTURE, IS TO CONTWUE TO EXCHAj'lGE SILVER FOR SILVER CERTIFICATES
CLOSE OF BUSINESS ON NEXT JUNE 24.
DURHlG THE PAST
ELEVB~
U~lTIL
THE
MONTHS, THE
TREASURY HAS PROVIDED APPROXH1ATELY 43 MILLION OUilCES OF SILVER IN EXCHAIlGE
FOR SILVER CERTI FI CATES PRESENTED AT THE ['-lEVI YORK A'JD
OFFICES.
SN~
FRA"lCI SCO ASSAY
DURWG THE FIRST FOUR. HONTHS OF THIS YEAR, EXCHANGES OF SILVER
FOR SILVER CERTIFICATES HAVE AVERAGED
ABOUT
SEVEN HI LLIOfl OU:'lCES A t,'Di'ITH.
IN tlARCH Ai'JD APRIL, AE30UT 10 t·iILLIQ'.J OUtlCES OF SILVER ':iERE EXCHA:'IGED FOR
SILVER CERTIFICATES IN EACH
1'1O;-~TH.
THIS IS HIGHER
THAl~
IdE HAD PROJECTED
LAST YEAR, BUT IT I S A P-ATE THAT \fIE CAi'l EAS I LY LIVE !'IITH.
I DO NOT KNO:I HO','I
t-W-!y SILVER CERTIFICATES HILL BE OFFERED FOR EXCHPNGE AT THE ASSAY OFFICES
DURING tlAY A"ID
JUr~E,
BUT YOU CAN BE SURE THAT .77 FI1'lE TROY OUNCES OF SI LVER
WILL BE EXCHANGED FOR EACH SUCH CERTI FI CATE PRESENTED.
SILVER CERTIFICATES RECEIVED Iil T:ESE
REDEr'lPTIOi~S
ARE BEHlG RETIRED
AND DESTROYED AS ARE ALL OTHERS ','/H I CH FLO',I GACK TO THE FEDERAL RESERVe: BANf~S I
,AND THIS TYPE OF CURRENCY \..JILL NOT 3E REISSUED.
BE. HELD FOR NUI\lISt'1ATIC PURPOSES.
Ti-iUS, t-1J.NY WILL UNDOUBTEDLY
HO':/EVER, THOSE ',~HO ARE NO\'I HOLDING THESE
CERTIFICATES AND PLAN TO EXCHA"lGE THE,..1 FOR SILVER '.'IOULD BE \IELL ADVISED TO
BRING THEM IN TO THE NEH YORK OR SAN FRA'JCI SCQ ;-FEDERAL RESERVE BA"JKS OR ASSAY OFF I CC:,3
EARLY AS
POSSI8LE, SINCE UNDER THE U\'..J THEY 'dILL tlOT 3E RcDEEi"'1A3LE FOR SILVER AFTER
JUNE 24.
- 7 REDD/eTIa'~s
I I;JOULD POr:H OUT HERE orlE FACT A80UT SILVER CERTIFlct,TE
THAT OFTEN SEU1S TO BE OVERLOOKED, Nm TriAT IS THAT EVERY OUf'JeE OF SILVC:R
EXCH.ANGED FOR THEM REPRESENTS A SALE OF
TREASU~Y
S I LV2:R I:HO THE PRIVATE
MARKET AND IS AVAlLA3LE FOR INDUSTRIAL OR If'NESTOR USE JUST AS IS A'IY OTHER
SILVER.
IF SILVER CERTIFICATE REDEi"lPTI()"JS RISE IN :1AY .I\'lD
A\I EQUIVALErH INCREASE
Ii~
dI.J~E,
THIS jVEN'JS
TOTAL TREASURY SILVER SALES AJD A CO'JeURR:::,n :IEED
FOR THE rv'/\RKET SOi'lEHO',/ TO A:3S0Ra THIS Ir-JCREASED SUPPLY OF SILVER.
Hm1 MUCH SILVER 'dILL 3E AVAILAJLE FOR SALE rrno THE r'v\RP:ET AFTER JUi'JE 24?
HERE
~'JE
OUNCES.
16
\'JOULD NATURALLY HAVE TO RELY mJ Ail ESTIi"VHE.
\:E
~JO'J
nAVE 520 t,ULLIO;J
SU3TRACTING TnE 165 HILLIOfI ourKE STOCKPILE REQUIREt''ErH Nm THE
~1ILLIO>l
OUNCES OF GSA SALES SErlEEiJ flO'.I A'm JUlE 24 ':!OULD
SUPPLIES TO 339 HI LUOI'1 ourKES.
BR.H~G
TOT/\L
ASSUiHNG SILVER CERTIFICATE REDEI\lPTIO'JS TO
CONTINUE AT 10 t'lILLIO~J OUi'ICES A HONTH, THE TOTAL. \,!OULD DROP TO A30UT 320
MILLION.
\~HICH
t'lE.NL/HILE, WE ARE
COiITIr-JUH~G
TO ACCRUE SILVER IN TtiE FORt'1 OF COUlS
COULD PUSH THE TOTAL BACK UP TO 1HE 325
j'lILLIor~
RAj,ISE.
r\JO
FURT~lER
WITHDRA\'JALS FOR COINAGE '.-II LL BE REQUI RED FOR THE CURREiH CALENDAR YEAR.
\-JELL, PERHAPS THE RATES OF SILVER CERTIFICATE
RECEt"PTIO~~S
HIGHER DURING THE FINAL SEVEf I ',lEEKS SEFORE THe: CUTOFF DATE.
EVE~J
HOREOVER,
PRODUCTIO'J OF TH:: KEi!iJEDY HALF DOLLAR \/OULD REqUIRE
COf'rrrt'.'JED
ADD IT ION~L
'.'/ILL RISE
BEGU'J~HNG
!::> I L VE..R
IN nG9.
Oi,l THE OTHER
HA"m, S I LVe:R
CERTIFICATe: REDEr-'PTIa'~5 t1AY FALL OFF Ai'JD COUJ RECOVERIES SE EVEN HIGHE:R
BEFORE JUNE 24.
HOREOVER, f\FTER JUNE 24, ':IE CN~ EXPECT TO CClHINUE TO ACCRUE
SILVER IN THE FORt1 OF COINS.
THEREFORE, IT STI LL SEEl15 TO BE A PRETTY SAFE
GUESS THAT \IE OUGHT TO BE A3LE TO CO:··ITH~UE OUR GSA SALES NWTHER THREE YEARS '
AT LEAST .AND, DEPENDING ON OUR SILVER COIN RE:COVERIES, P::RHAPS CO~JSlD:=:R.,'\]LY
L(X\JGER.
2Q!
V;:L.
- 8 THE NEXT t-1EETWG OF THE COHJAGE
WE WILL NO LONGER FACE THE
COi"V-'1ISSIOf~
Ui'KERTAI~JTY
IS JULY 14.
AT
T~AT TIi\''':::,
OF HO,i rA;"";JY SILVER CERTIFICATES '-JILL
BE REDEEf.'ED, Nm \-/E OUGHT TO HAVE A t--1UCH CLEARER PICTURE OF OUR SILVER
SUPPLY SITUATION.
ONE OF THE ISSUES SOt-IE SPECUALTORS ARE FaJD OF RAISII!G IS THE
l'ELTING SILVER COINS.
THERE ARE A
f\JU~-13ER
O'J
OF GROUPS '.'!HO \IILL PAY A HODEST
PREMlUt-1 TO SECURE THESE COWS W HOPES TtiAT COIN tt::LTHJG
LEGALIZED.
BAi~
AGAIN, IN TERf"iS OF HL\KING PU3LIC THE 3EST
~'~Y
ONE DAY BE
H~FORf"1ATIO:'J
POSSIBLE,
I SHOULD REITERATE A \lARNHJG I ISSUED EARLY THIS YEAR, AND THAT IS THIS:
rw~Y
f.'Etv'BERS OF CONGRESS,
r'~fvI.3ERS
OF THE COUJAG:::
COr·~'<lISS
ION, Ai"lO TREASURY
OFFICIALS, THERE IS A DISTINCT LACK OF SYHPATHY FOR THOSE ,'/HO
A"lD SPECUALTIOf'J
ACTIOI~S
H~
SILVER COINS.
NIOf'JG
Ei'~GAGE
IN
HOARDI;~G
THEIR ACTIVITIES SEVERELY lIA'-JDICAPPED OUR
TO DEAL \-JITH PAST C01l'-l SHORTAGES.
THE POSSI3ILITY OF EVER PERt·lITTWG
THEM TO REAP HWDFALL PROFITS OF 1\1ILLIONS OF DOLLARS AT THE EXPEi'lSE OF TAXPAYER.S
WI LL, TO SAY THE LEAST, NOT BE VERY POPULAR.
THE 36 FEDERAL RESERVE BANKS ARE rlO',·/ HOLDHJG SILVER COHl REFLO,/S •
.AND THIS SILVER HILL ULTIf-1ATELY BE SOLD INTO THE .MARKET TO THE
OF 30TH THE TAXPAYERS
Ai~D
SILVf..R USERS.
FOR THOSE '.tHO ARE
r:O'..1
BENEFIT
COr"1PETH~G
WITH US FOR THESE COINS TO CASH HJ ON THEIR HJVEsn'HHS Hl THE COSTS OF
PREMIW1S, INTEREST, A"-JD STORAGE, THEY \'-/1 LL HAVE TO CO'NHKE A LOT OF
PEOPLE THAT THEY, RATHER THAN THE TAXPAYERS, SHOULD BE ALLO'.. /ED TO REAP
THE PROFIT THROUGH THE M:LTING N-JD SALE OF THESE COINS Hl SULLICX'-I FORi'1.
- 9 SILVER DOLLPPS
YOU ARE ALL AHARE OF THE
HELD Ii" THE TREASURY.
3
~1ILLIOf'\ RARE SILVER
THE DISPOSITIOi',; OF THESE
OOYLARS THAT hRE STILL
COI~lS
OF DISCUSSION BY THE COINAGE COI'·']-'ISSION BUT NO FIi'lAL
HP-S BEEi-J THE Sl!8JECT
DECISIO~l
H,l",S SEEi'-l
REACHED •
THE TRO'JBLE \,:ITH SO flA:'N OF THe::
~.of\'E
THAT
SUGGESTIO~;S
OF THE!'; COULD BE ADOPTED \.:ITrlOUT GRE!,T COi'!TROVERSY.
EITHER GIVE-N../AYS, LOTTERIES OR t\UCnm,IS H<VOLVH;G
Ot\E
t~ETHOD
THE
COI~IS
\·/HICH HAS t\OT GEEN PUBLICLY
AT THEI R RETAIL VALUE.
OBTAINED FROM COIN DEALERS.
BY
r·'N:E IS
THEY ARE
LOGISTICS.
SH'~PLY
TO SELL
',JERE THI S TO SE ool'\E, THERE: \IOULD 8E
THE~~
S n<CE THC:Y COULD 8E
YET, THE FJ\CT TI-I/-IT THEY ARE TIE LAST TO BE
THE TREASURY SHOULD GIVE THEr~ SUFFICIENT DEt'N·JD FOR SP-LE P-.T SUCH
A FAIR PRICE.
TO OHN
W:POSSI~LE
DISCUSSED I,JOULD C,[
1\0 SPEC IAL I NCU1T I YES FOR COLLECTORS TO GUY
HELD
GEE~,
l,fHTCH HAVE
O~JE
IN THIS- \'/AY, EVERY
M~ERICAj< \~OULD
BE GIVEtj
N~
EQL'/\L CHJ'.J<CE
OF HiE PARE SILVER COLLARS t-IITHOUT P.NY \/HlCFP.LL PPOFIT BEWG
"
REALIZED.
~OREOVER,
THE TAXPAYER \.OULD REPLIZE THE GREATER PROFIT.
OF THE-3'-.MILLION SILVER DOLLARS HELD ElY THE TREASURY" 2.8 ~·~ILLIml
ARE RARE"CARSON CITY DOLLARS.
'./ERE ALL THESE TO eE SOLD AT THEIP RETIdL
VALUE, THE TAXPAYER \'/OULD RE/\UZE P.PPROXWiI'"TELY
OF ABOUT $?7 EACH.
$75
t~ILLIm! -- N: tNERP-.GE
IT t--~,Y SE THAT IF HIESE COINS \'!ER[ TO BE OFFEPED FOR
THEIR RETAIL VALUE, THEY \~OULD NOT tILL BE SOLD Wl'1EDIATELY.
HOHEVER, THEY
SI{)ULD NOT DECREASE IN VALUE '.-JITH TH~ PASS/\GE OF TIr--'E SO THAT THE GOVERfWn;T
SI{)ULDI\OT LOSE AI\yTHIt\G BY ~..oT TRYH,'G TO GET RID OF THEr~ ALL AT Ot<CE.
- 10 COH~GE PRODUCTIOr--~
DURING THE PAST 4 YEARS THE MIt,IT HAS PRODL:CED sm·c 30 BILum; COP-S, IF
H-~GIl\£
YOU CAN
SUCH A
THIRD OF THE TOTAL,
NUr~CER.
~'JERE
OF THIS
i\t-~OUNT,
sor·'E 10 DILLION, OR f'.,COUT A
TliE j'jEH CLAD COHiS.
KEN~~EDY
HALF DOLU\R
'dE HAVE PRODUCED APPROXWATELY 1 BILLIOr-.; KEW;EDY HALF DOLU\RS, OF ',/HICH
433 MILLION \~ERE 1964 COINS OF gona SILVEr~.
AND
1968
Tj-~[ REST /IRE DATED
1965, 1966, 1967
A~:D ARE CLAD COINS, 8o~; SILVER 01': THE OUTSIDE JJND 20 Qo SILVER CORE
INSIDE, FOR
m
OVERALL SILVER COt\jTE~n OF
40 96.
THE REASON FOR THE l-IEAVY PRODUCTION OF THE CLAD HJJLF DOLLAR HAS DEEN TO
PRODUCE ENOUGH FOR FULL CIRCULATIOr: OF THIS HALF COLLP,R
OTHERS HAD DISt->PPEARED FRm1 CIRCULATIml.
OF THE
COrr~GE
GEGHI~lnG
.JULY FIRST.
GREATER THL1.N THE NUI'-1BER PRODUCED
SH<CE i'lLL THE
IIITH THE DECISIONS
cm"!-'lISSIOr'J ON 1'-!ARCH FIRST, TI--lIS PRODUCTIm;
RATE OF 100 t-1ILLION PIECES A YEAR
BE
I~l ACCOP.DN~CE
ALO~E,
\dIL~
DROP TO A
THIS RATE ',JILL STILL
H~ f\J~N
YEPR. PRIOR TO
1961.
PROOF CO I t,! SETS
THE t<lIl\T I-V\S BEHj ACCEPTI r,lG ORDERS FOR 1963 PROOF COH'l SETS S P·\CE Lf.ST
FALL.
IT \</I LL SOOt:t STOP
,~CC[PTT r:r; ORDERS, S I ~iCE ORDERS E~UAL TO THE
PRODUCTIOr'~ Llt-HT ARE APE>ROACHING.
MINT MARK.
3 r-il LLI OJ'.J
THESE PROOF COI1'S WILL cmnAIN THE SNl FPJ),NCISCO
WE ARE PLEASED VfITH TtiE ENTHUSIA9,1 SHOI;JN BY COLLECTORS h~1EN THESE
COINS \~EP.E FIRST SHJ\. /N BY DIRECTOR OF THE t-:INT, '·lISS EVft. foDN~~, IN DE~NER U\ST
~UAAY.
- 11 -
UNCIRCULATED
con,
SETS TO ALL PURe-j/\S::::::s C)F THE
HILL ALSO ACCEPT ORDERS FOR. TdESE SETS CEh I r:~JI ~<h JULY 15.
CONTAIi'l
or:::
COU: OF
[;D~
PHILftDELPi1U\ /\1:D DUNER
CONTAIN r):Ir"T r·1;\RKS.
THE SETS
l'Er,o,'':Ii;,-"\TIO:·! STRUCK FOR CIR.CULATICi: AT
i'~H;TS
'·tD TfiE 5/'.1\;
FR."'~:CISCO
'in LL
T~E
ASS/I.,Y OFFICE t-J'D '/ILL
CO~;CER~Hr;G TH~SE
l'DDITIOi.:AL DET.L\ILS
THE ~··Ii':T
I?S? PF:OCF SETS.
SC:TS '../ILL JE
RELEl6ED AT A Lr'\TER DJ\TE.
RECEi\T STATISTI CS H1DI (!,TE
T~!AT
T!E
40% OF ALL COH;S FIDE rr~ THE FRE[ \,'ORLD.
COINAGE, \'JE HAVE, OVER THE YEARS, rj\SE
COUr\TRIES.
DURItlG THE PERIOD OF THE
7
cnw
Ui~ITED
ST/,TES IS PRODLJCn,iG OVEJ(
pi f.r'DlTIC~< TO THe:: rOr'i'::snc
GILLV)~l
COHiS FOP
SHJP,Tl'.CE '/E
37
FCPEIG~~
DISC("~jTrriUE[)
T:-JIS
POll CY H; ORDER TO DEVOTE ALL CO It j1\GE F;-'\C I Ll T I [5 TO r·'EET we OUR CO H:/,GE::
t~EEDS.
r-D\.f[VER, ','IE lihVE
COUNTRIES NJD ARE iJO\'!
r<ml
~IAKING
R[SU~,'cD ou~:
POll CY
OF t'w:n.h COIr'<S
fOF! OT:
ER
COH:S FOr.. PN:N'f\, THE P:-1ILlPPH;ES, COSTA RICA
AND EL. SALVr'\DC=!' PJ<'J ',IE ;-!,L\vE R.ECUHLY L;EGlJi. h PRJGr-:At', OF pp.oC[SSP,r; f'ATERIALS
TO BE US ED FO!=', Co I;;S 11'-i Th=: oPAl I LI /'J,: n;:T.
~~Q
__ \J
L:_
TREASURY DEPARTMENT
=
RELEASE 6:30 P.M.,
my,
Mal 6, 1968.
RESULTS 0' TRIASURY' S WEEKLY BILL OFFERING
Tbe Treasury Department announced that the tenders for tva c:~ries of Treasur~
ls, one series to be an additional issue at the bi1l:1 dated February 8, 1968, ~nd
other series to be dated Nay 9, 1968, which were offered on May 1, 1968, were
ned at the Federal Beserve Banks today. '!'enders were invited for $1,600,000,000,
~ereabouts, of 91-day bills and for $1,100,000,000, or thereabouts, of 182-day
ls. '!he details of the two series are as follows:
OF ACCEPJED
PftITIVE BIm:
(i
High
Low
Average
~
6:3~
9~
91-da¥ Treasury bills
maturins August 8 z 1968
Approx. Equiv •
Price
Annual Bate
98.615 !I
5.'7~
96.603
5.527~
98.608
5.507~
Y
182-day Treasury bills
maturinf3 November 7" 1968
Approx. Equiv •
Price
Annual Rate
97.135
5.667~
97.116
5 ..705~
97.120
5.697~
Y
Excepting 1 tender of $l,oob,ooo
of' the amount of 91-day bills bid for at the low price was accepted
of' the amount of lS2-day bills bid for at the low price vas accepted
M. TERDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
1strict
oston
ew York
biladelphia
leveland
1chmoM
tIanta
tl1cago
t. Louis
1nneapol1s
ansas City
alIas
9Jl FranCisco
'roTALS
AEi1ied For
$ 21,669,000
1,758,161,000
28,131,000
32,631,000
21,450,000
44,525,000
302,421,000
53,250,000
22,284,000
29,915,000
26,145,000
152, 787 z 000
Acce~ted
$1,462,000
1,114,227,000
18,100,000
27,601,000
13,376,000
33,497,000
185,417,000
35,014,000
13,784,000
18,186,000
14,845,000
114z522,OOO
Al2E1ied For
$ 14,486,000
1,325,695,000
15,662,000
38,402,000
5,076,000
27,328,000
353,410,000
38,344,000
17,541,000
12,867,000
18,410,000
308,768,000
$2,493,315,000 $1,600,091,000 ~ $2,115,989,000
Acce:Eted
$
4,486,000
134,508,000
6,274,000
22,052,000
2,576,000
11,8~,OOO
185,54:0,000
20,4-'1,000
4,041,000
10,587,000
8,210,000
90,707,000
$1,101,268,000 ~I
Includes $254,426,000 noncompetitive teDiers aecepted at the average price of 98.608
lDcludes $120,374,000 noncompetitive tenders accepted at the average price of 97.120
naese rates are on a bank. discount basis. The equivalent coupon issue yields are
5.66~ tor the 91-day bills, and 5. 95~ for the 182-daY bills.
F-1235
TREASURY DEPARTMENT
Washington
FOR RELEASE
O~
DELIVERY
REMARKS BY THE HONORABLE FREDERICK Lo DEMING
UNDER SECRETARY FOR MONETARY AFFAIRS
UNITED STATES TREASURY DEPART1ffiNT
TO THE ISTITUTO NAZIONALE PER IL COM!Y!ERCIO ESTERO (ICE)
AT ROME, ITALY
ON MONDAY, MAY 6, 1968, AT 5:30 PM (ROM~ TI~m)
RECENT DEVELOP1tENTS IN TIlE MONETARY SYSTEM
AND INTERNATIONAL PAYMENTS
I always regard myself as fortunate when my duties bring
me to the city of Rome.
This is not only because Rome has
its own distinctive charm and traditions but also because of
the fine relationships in the monetary field that we in the
United States Treasury have with Minister Colombo, Governor
Carli, and others in the Italian Government and the Bank of
Italy.
For those gentlemen just named and for most of their
colleagues in all countries, the last few months have been
eventful ones
0
From the middle.of November, when the pound sterling was
devalued, to the middle of March, when members of the Gold
Pool took their decision to separate the private gold markets
from what might be termed the monetary gold market, events in
the foreign exchange markets demanded the continuing attention
of monetary au thori ti es.
F-1236
- 2 A change in the value of a major world currency may
always be expected to have a disturbing effect in exchange
markets -- and it came as no surprise when substantial speculation in gold began in November of last year.
The authorities
of the Gold Pool countries hoped that continued support for
the free market price would restore stability and give time
to set in place the plan for creation of Special Drawing
Rights, which would clearly demonstrate the greatly reduced
reliance of the world's monetary 'system on gold.
After two heavy runs in November and December, the gold
market quieted down considerably in January and
Februa~y,
but speculation broke out again in March, and there was heavy
loss of monetary gold by the Gold Pool members.
At this point,
it appeared that the Pool action in supplying gold to the
market was tending to feed
stability.
spe~ulation,
rather than
~estoring
A new course of action was indicated.
On March 17 of this year, Gold Pool members announced
that, henceforth, officially held gold would be used only
to effect transfers among monetary authorities.
They decided
no longer to supply gold to the London gold market or any
other gold market.
They added that "as the existing stock
of monetary gold is sufficient in view of the prospective
establishment of the facility for Special Drawing Rights,
they no longer feel it necessary to buy gold from the market."
- 3 -
/.')7
:
~\~
This is an historic
st~tement
and reflects a major
decision o
It is useful to see this decision in perspective o
Gold Pool began to operate in the
F~ll
stabilize free market prices fqr gold.
The
of 1961 in order to
Prior to that time,
while the official monetary price for gold had not varied
from the $35 an
o~nce
price established in '1934, free market
prices for gold had fluctuated
suQst~ntially.
During the
period of Gold Pool operations, the Pool operated on both
sides of the market, and, iq
~act,
bought more gQld than it
sold during the entire period up through the first ten months
of 1967.
The objectives of the Pool members
.~
to smooth out
market operations and to provide an orderly channel for new
gold to enter the monetary system -- were carried out very
well for most of the life of the Pool o
A number of crises
that of the Cuban missiles and the assassination of President
Kennedy, to name but two -- were rather easily surmountedo
The Pool operations showed a small positive balance by the
end of 1962, and there were large purchases by the Pool in
1963 and 1964
0
In 19p5, the gain was much diminished, but
the Pool remained on the credit side of the ledger.
In 1966
and up to November, 1967, with one of the major supply factors
Russian sales -_ absent from the market, there was a moderate
net outflowo
- 4 Conditions remained in fairly good balance with only
occasional speculative outbursts, such as that in June, 1967,
at the outbreak of hostilities in the Mid-East.
November,
At mid-
the Pool was still a net purchaser of over $1
billion in gold over the period as a whole.
In the four months from mid-Sovember, 1967, to mid-March,
1968, the Pool supplied $3 billion to the London market in
maintaining the free market price around $35.
As noted, by
mid-March, 1968, it became crystal clear that the classic
method of meeting speculative runs was not working.
fore, a new course was
indicat~d
There-
-- the course I have mentioned.
Now I believe it important to stress two points about
the new gold policy.
1.
The new gold policy.
In announcing the new gold policy in the
Washington Communique, the Gold Pool countries
invited the cooperation of other central banks.
So far, most of the Free World countries have
expressed their willingness to cooperate.
At Stockholm, the Group of Ten Ministers
and Governors reaffirmed their determination to
cooperate in the maintenance of exchange stability
and orderly exchange
a~rangements
in the world
based on the present official price of gold.
- 5 -
288
They also said "they intend to strengthen the
close cooperation between governments as well
as central banks to stabilize world monetary
conditions."
This latter statement was agreed
unanimously.
The amendment to the Articles of Agreement
of the Fund, now in process of ratification,
includes -- along with the new SnR plan and
certain changes in the regular operations of the
Fund -- a change in procedure regarding the price
of gold.
This change -- which raises the voting
requirement for a change in the official price of
gold by the Fund from a simple majority to 85
percent -- will make it more difficult to change
the official price of
~old.
The United States continues to buy and sell
gold at the existing price of $35 an ounce in
transactions with monetary authorities.
But, as
agreed by all Gold Pool countries and expressed
in the Washington Communique, no Gold Pool country,
including the United States, will sell gold to
monetary authorities to replace gold sold in the
private market.
- 6 -
Taken all together, this means an overwhelming official belief that the present official
price of gold should not, and will not, be changed
and a determination to keep the monetary gold
stock separate from the commodity market for gold.
2.
The supply-demand picture.
Central bank demand has been removed from the
market.
Industrial and artistic demand is only
half of new Free World supply.
The big speculative
runs have produced a big overhang of gold in the
hands of those who expected a rise in the official
price of gold.
The free market price of gold has
risen far less than speculators hoped, and far less
than those who advocated an official price increase
bad suggested.
I suggest that these factors make
for downward pressure on the free market price of
gold, rather than upward pressure.
During the years of Pool activity, there was an evolving
awareness of the need for a major change in the international
financial system.
The long-run problem of providing for
future international liquidity needs, as the supply of new
gold for monetary reserves diminished and new dollar outflows
were reduced through correction of the imbalance in the U. S.
payments pOSition, had long been recognized by monetary
authorities.
- 7 In the first instance, short-term credit facilities in the
form of swaps and medium term conditional credits through
the enlargement of IMF quotas were set in place.
Invaluable
as these have proved, they obviously do not meet the more
fundamental long-term global liquidity problem.
It was
with the latter in mind that work went on for a number of
years on the question of creating a new reserve asset which
could supplement gold and foreign exchange in the monetary
reserves of the nations of the world.
With restoration of more orderly conditions in the
foreign exchange markets, monetary authorities are now able
to concentrate once again on the two basic problems that
have been the focus of international monetary cooperation.
These are the establishment of a facility for assuring
adequate world liquidity and
th~
development of better
adjustment in international payments.
The Special Drawing Rights Facility
Just two weeks ago, on April 22, the International
Monetary Fund released the text of a Proposed Amendment to
the Articles of Agreement of the International Monetary Fund.
This Amendment provides for establishing machinery within
the IMF to create Special Drawing Rights (SDR) by the conscious decision of the world's monetary authorities.
- 8 wo~k
This brings close to fruition five years of intensive
on this subject.
The work was ini tiated in the
of
F<-.l~.i
1963 by the Group of Ten leading industrial countries that
had banded together in 1961 and 1962 to strengthen
~he
monetary system by providing additional credit lines to the
International Monetary Fund o
The Ministers and Governors of the Group of Ten asked
their Deputies to investigate the need for some new form of
reserves.
The Deputies met frequently in 1963 and 1964 and
made the first analysis of the problem and its main elements.
In the following year, a special study group of
t~chni-
cal experts was established by the Deputies under the
Chairmanship of Rinaldo Ossola of the Bank of Italyo
This
group produced, in June, 1965, a very thorough analytical
survey of the various techniques by which it would be possible
to create reserves deliberately by multilateral decisions.
They pointed out that it was quite possible to create reserves
in various ways and that the technical problem could be
handled relatively easilyo
The major questions that needed
to be resolved were policy and political questions.
Was
there a willingness to proceed with negotiations on the part
of the governments and central banks of the
Grou~
I
of Ten?
- 9 -
At this juncture, Secretary Fowler was given authority
by President Johnson to indicate that the United States was
prepared to proceed to negotiate at the political level.
~e
Secretary visited a number of countries in Europe to
explore the possibility of establishing a contingency plan
under which reserves could be created as and when needed.
He found, in Europe and among other members of the Group of
Ten, a readiness to proceed to actual negotiations.
From
that time, two years elapsed befo.re an Outline Plan for
Special Drawing Rights in the IMF was approved last September
by the Annual Meeting of the Governors of the Fund in Rio de
Janeiro o
Throughout these negotiations, Minister Colombo, Governor
Carli, Mr. Ossola, and Mr. Rota have consistently maintained
their faith in the concept of a- multilateral reserve asset.
With the help of their determination, thorough grasp of the
subject, and persistently constructive leadership, we have
achieved the present result.
After the Outline Plan was approved at Rio de Janeiro,
certain remaining issues among the Group of Ten were resolved
in Stockholm at the end of last March.
The Executive Board
of the Fund,has now hammered out the full text of the necessary
Amendment to the Articles, which can now be put to governments.
- 10 -
In the United States, we have already placed the proposal
befure our Congress.
It is our hope that there will be early
ratification by the members of the Fund.
When President
Johnson submitted the necessary legislation to the U. S.
Congress a week ago, he said:
"I urge the Congress to cast
a vote for a stronger world economy by approving the historic
Special Drawing Rights legislation I submit today."
What is the Special Drawing Right facility expected to
do and what will it not do?
It is not, in any sense, a
panacea for all our international monetary and financial
problems, but it does deal with a highly important aspect of
this complex of thorny questions.
What the Special Drawing
Right does is to provide a permanent supplementary reserve
asset, which can be created in amounts that will be consciously determined by a collective judgment of the participants in the facility.
This judgment must be a very broad
consensus, because no Special Drawing Rights will be allocated
unless their creation is approved by 85 percent of the weighted
votes of the participants o
With this facility, the world will no longer be dependent
upon gold or upon the deficits of reserve centers for the
provision of the growth in world reserves which will be needed.
- 11 -
Countries need additional reserves just as corporations
need to expand their working capital as the total size of
their business grows.
World trade has been rising, as
measured by imports, by more than 7 percent a year since
1950.
Despite a substantial growth in reserves, global
reserves today are smaller in relation to the world's imports than they were in 1954.
This is true even if we
exclude the United States, whose reserves have gone down by
a very large amount.
In 1954, the reserves of the Free World,
excluding the United States, corresponded to 45 percent of
annual imports.
In 1967, this figure was down to 34 percent
of annual imports.
In concrete terms, this means that
these countries today hold, on the average, reserves equal
to about four months imports.
There is no. necessary fixed ratio between expanding
trade and rising reserves.
Ne~ertheless,
requires rising world reserves.
rising world trade
The trading
wo~ld
would
feel the pinch, and probably feel it fairly quickly,_ if
reserves were to level off at the present figure of about
$73 billion.
When there is no over-all growth in reserves,
no country can gain reserves without forcing a reduction in
reserves of someone else.'
Such a si tua tion would lead to a
constant tightening of international credit by countries
seeking to protect their existing reserves or to enlarge them.
- 12 -
It would strengthen tendencies to restrict
tr~de
invest-
a~G
ment flows in order to preserve existing reserves o
The
trend of global reserves is an important determinant of
world trade, just as internally the trend in thp total
reserves of the banking system is an important factor
influencing the rate of growth.
We look forward to careful and
co~servative
management
in the creation and use of the new Special Drawing Rights.
World reserves have increased, on the average, between two
and three percent per year over the past seventeen years.
With no additions to the monetary gold stock, as expected
under the new gold policy, and a reduction in the U.
S~
balance of payments deficit, new reserve growth would be
almost completely dependent on SDR creation.
That would
mean that a modest and conservative approach to the volume
of SDR creation over the first five year period would be somewhere between $1.5 and $2.2 billion.
Obviously, this is not
a forecast; the collective judgment of all IMF members will
determine the exact amount of new reserve creationo
What is important to note is that reserve creation of
this magnitude will not relieve any country of the need to
keep its payments position in general over-all balance, nor
is it intended to do so.
- 13 The United States has the biggest quota in the Fund.
A $2
billion creation of SnR would mean a U. S. allocation of
about $500 mi Ilion -- only equivalent to one-sixth of the
reduction we are seeking this year in our balance of payments
deficit.
For the EEC, the equivalent allocation would be
about $360 million -- far less than the $1.5 billion surplus
registered by the 'EEC in 1967.
Most of the advantage of SnR creation to exporters will
lie in the broad effect of the new reserve instrument -- in
the avoidance of contractionary measures.
As reserves are
building up in the countries of the world, we can hope for
a
~ore
liberal approach to interest rate policies and trade
measures in the world as a whole.
This should benefit the
exporter through maintaining the rate of growth in world
trade which we have experienced. for so many years.
Without
a source of new reserves, this great forward surge of international trade and international investment could be.replaced
by a much more limited and gradual growth pattern, or even by
stagna tion.
Looking back over the last few years, I believe we can
take great satisfaction in the extent to which international
cooperation has contributed to strengthening the international
financial system which has supported an expansion of international trade and investment without parallel in modern history.
- 14 -
In this same atmosphere of cooperation, monetary authorities,
working together in the International Monetary Fund and in
the Group of Ten, have prepared the framework for the creation
and allocation of Special Drawing Rights to ensure the adequacy
of global reserves in the future o
The Problem of Balance of Payments Adjustment
It is not yet clear whether we have made equal progress
in what I have called the other basic problem of international
cooperation
that is, in improving the working of the balance
of payments adjustment process.
Deficits in the United States
balance of payments have extended over a long period, despite
general recogni tion that such de·fici ts are no longer desirable
and despite ever broader programs on the part of the United
States to correct themo
Persistent surpluses in Continental
Western Europe have continued longer than necessary or
desirable.
Fortunately, however, this problem has been the subject
of long and detailed examination.
The frui ts of that examina-
tion may prove of great value to all of us in the near future.
The Group of Ten requested Working Party 3 of the OECD to
examine ways in which international cooperation could lead to
more rapid and more satisfactory elimination of perSistent
deficits and persistent surpluses in
internation~l
payments.
,.
~)
../
l:"
\....;
\'.,1
- 15 The resulting report, "The Balance of Payments Adjustment
Process," was presented in July, 1966
0
It represents a
substantial advance in international understanding of the
intricacies of the problem.
I wish to call your attention to only one of the simplest
conclusions reached.
balance has two sides.
That is, that every major payments imIf one abstracts from the input of
new monetary reserves into the world's monetary system, the
deficit of one country, or group of countries, will have its
counterpart in the surplus of another country, or group of
countries.
Adjustments, therefore, must be made and permitted
by both groups -- deficit countries and surplus countries -to eliminate their respective imbalances, if a healthy world
economy is to be maintained o
Let me illustrate that point graphically by a brief
recital of Uo So balance of payments history.
In the 17 years from 1941 through 1957, the United States
had a cumulative surplus on trade and service account of $85
billion, or $5 billion per year, on the average.
I do not
include military transactions or investment income in this
figure; I do include exports financed by Government -- a
positive figure -- and pensions and remittances -- a negative
figure e
Capital movements in that period gave us a plus of
$17 billion, or $1 billion per year, on the average o
- 16 That figure includes income flows, that is, repatriated
earnings on investments and loam and fees and royalties
both private and government -- net capital transactions of
foreigners, and errors and omissions.
On government and
military account, which includes sales of military goods
and services and government loan repayments -- in other
words, it is net -- we had a deficit of $112 billion, or $6.6
billion per year, on the average.
Between 1946 and 1957, we
extended economic assistance in grants and loans of $42
billion net.
The net effect of these results was a cumulative deficit
in our payments balance of less than $10 billion, or an annual
average of less than $600 million.
And we gained gold; our
gold reserve at the close of 1957 was larger than at the
beginning of 1941.
What that means, of course, is that we financed our
deficit completely -- and more -- by increasing our dollar
liabilities to official and private holders.
In a world
starved for reserves, the dollar was better than gold.
Throughout this
peri~d,
the United States was in funda-
mental surplus, but, through its deliberate policy of massive
untied grant and loan assistance and its absorption of most
of the costs of insuring Free World security, we incurred
balance of payments deficits.
- 17 -
With high reserves, immense productive power, a great and
growing capital market system, and a desire to help rebuild
a war-shattered world, the United States engaged in a unilateral adjustment process that benefitted the world and, 1n
so doing, helped both the world and itself.
In that process,
we permi tted disadvantage to our trade, encouraged tourists
to go abroad and make substantial purchases there, and we
tried to increase our foreign investment.
This was a good habit -- it encouraged world trade and
world economic growth.
But it had two unfortunate
results~
First, it was carried on too long after basic conditions
changed.
The deficits got larger and had to be financed
both with increased dollar outflows and a reduction of $11
billion in our gold reserves from 1958 through 1967.
Second,
.
it got some of the rest of the world -- particularly
Western
E~ope
-- into the bad habit of enjoying chronic surpluses,
even after its international reserves had been rebuilt.
The
net result was that both the United States and the world got
worried about the big American deficits, but it took some
time for worry to be expressed about the big European surpluses,
And, as noted, it is impossible to eliminate or reduce deficits
nthout effecting reduction in surpluses.
- 18 From 1958 through 1967, we had a cumulative deficit of
$27 billion, or $2.7 billion annual average -- more than
four times the average of the previous seventeen years.
We
reduced our government and military account deficit to $5.5
billion billion per year on the average.
That is still a
big figure; after mid-1965, it was, of course, affected by
Vietnam.
On capital account -- again I include the income
we stayed about the same.
flo~
-
Capital outflows -- direct investmen
portfolio and bank loans -- rose sharply; enough so that the
steadily rising income just about -- not quite -- kept it in
the same position as in the previous seventeen years on the
average.
But this occurred only after the outflow had been
somewhat contained and only after various special transactions.
The trade and service surplus dropped sharply -- to less
than $2 billion per year on the averageo
Exports grew, but,
particularly in later years, imports grew faster o . And we had
a rapidly increasing deficit on tourist account.
Now I come back to the adjustment process theme.
Efforts
are now under way to give concrete significance to the principl
that deficits cannot be reduced unless surpluses are reduced.
The possibility of acceleration of Kennedy Round tariff cuts
on the part of surplus countries is one example.
The
usefuln~
of such moves depends, however, on their significance in tra~
terms and on the assurance that they will be applied.
- 19 Another is the attention now being given to differences in
national tax policies, as these are reflected in tax rebates
on exports and compensating taxes on imports
the "border tax" issue o
what we call
In the first place, it appears to tne
United States that recent and prospective changes in tax
policies in several European countries may work against the
trade adjustments now necessary to restore international
equilibrium, and, in the second place, we think the underlying
GATT rules would benefit from a new scrutinyo
I would be remiSS, however, if I did not take a moment to
acknowledge the contribution made by the Italian authorities
to international payments adjustment efforts.
Despite the
well-known and much scrutinized structural problems of Italy,
the growth rate of the Italian economy in the past two years
has exceeded the average target set in the 1966-70 Development Program
neighbors fello
while growth rates in many of Italy's
This commendable performance was accomplished
with only moderate price increases o
Furthermore, wise demand
management made the expansion possible even though the external
stimulus,. especially in 1967, was not at the same level as in
some previous years.
Your distinguished Minister of the Treasury,
Mr. Colombo, has said that this performance will continue in
1968, despite any adverse impact from the recent Uo So and Uo K.
measures, even if this should mean a decline in Italy's official
reserves.
This statement represents, I believe, the best
spirit of international economic cooperation o
- 20 -
But I wish to talk now about the United States' responsibility to bring its balance of payments into equilibrium.
Of the requirements for better adjustment of payments imbalances today, in my mind -- as probably in yours -- there
is no doubt that the first priority must be given to the
adoption of a program of domestic demand restraint in the
United States.
Just before I left Washington, Secretary Fowler made a
very strong appeal for public and business support for the
tax surcharge which the President and the Administration have
requested the Congress to impose.
He said, in part:
" • • • in the last six months, a sharp increase in our
balance of payments deficit has been accompanied by
a serious deterioration in our trade surplus, resulting
from an economy that is growing at too fast a rate of
speed, growth that is accompanied by an unacceptable
rate of inflation, a wage-price upward
spiral~
and
work stoppages, real or threatened, affecting key
sectors of foreign trade."
The tax increase is only one of the measures we are
seeking to bring about a general cooling down of the United
States' economy.
An appreciable cut in Government expenditures
is expected to be associated with the tax increa+e legislation,
·-', (,
:~
:: (;
- 21 -
The discount rate of the Federal Reserve banks was raised to
5-1/2 percent last month, the highest discount rate since
1929.
The President has directed the appropriate officials
of our Government to work with labor and industry to avoid
inflationary wage-price decisions and crippling work
stoppages, real or threatened, that would induce increased
imports or interfere with exports.
I am most hopeful we will shortly put in place an appropriate mix of fiscal and monetary measures to bring the growth
rate in the United States' economy back to a sustainable
level.
The question is sometimes asked -- particularly in
Europe -- whether that is not all that is required to bring
about a correction in the United States balance of payments
posi tion.
The answer is clearly no; it is not enough.
The
United States must also continue to apply a number of
selective measures to curtail adverse balance of payments
pressures in various areas.
There are two primary reasons for this answer.
First,
balance of payments problems are more complex today than they
were in the earlier years of this century.
Second, we have
learned that too much deflation may cure a payments deficit
but may end by killing the patient and passing on the disease
to all of his relatives
his trading partners.
- 22 It is now generally recognized that deflation was carried
too far by some major countries in the 1920's and early 1930's.
And it is now recognized that this resulted not only in
reduced growth in deficit countries but in the world as a
whole.
Sharp deflation as a policy simply is not acceptable
today in any country -- or in the world.
In an earlier day, at least in theory, balance of payments
deficits generally occurred when a country's economic pace
was too fast relative to its
reso~rces
and relative to growth
in other major industrial and financial centers.
The country
with an inflationary boom began to have rising prices; its
exports fell and its imports rose.
reduced trade surplus.
The direct effect was a
The cure was to deflate the economy,
or, at least, dampen the inflation.
And this was usually
accompanied by.general tightening of credit and rising
interest rates that accentuated the deflation in the economy
over time.
Moreover, in the short run, these rising interest
rates tended to stimulate borrowing abroad and to attract
foreign capital in an equilibrating manner.
I have noted that a policy involving sharp deflation
is no longer acceptable.
But this is due not merely to dislike
of deflation but also because it, alone, does not meet the
problem.
Our persistent deficit has important elements that
make it far different from the early 20th centur1. both in
genesis and in proper treatment.
Q7
2v,
- 23 The foreign exchange costs of our world-wide defense
alliances simply are not susceptible to being reduced by
general fiscal and monetary policy.
Gross outlays on this
account amount to about $4.3 billion a year, and the impact
on our balance of payments, even after netting receipts from
sales of military goods to foreign countries, is about $3.3
billion.
In this connection, let me make an important point.
I referred earlier to international monetary cooperation.
The establishment and evolution of the 11W, the ever closer
cooperation of the big central banks, the Group of Ten,. and
the recent agreements at Washington and Stockholm all testify
to growing and working cooperative arrangements -- financial
arrangements in a political setting in the sense that governments are involved.
Monetary cooperation has become steadily
more international in outlook.
It has not transcended national
interests; it has recognized that national interests -- at
least in finance -- may be best served by international
cooperation.
In other words, it has recognized the realities
of interdependence.
The NATO alliance needs a more solid underpinning of
finance than it now has.
- 24 The principle that foreign exchange costs incurred in common
defense -- the foreign exchange costs of NATO security -should be neutralized is generally accepted, but it needs to
be
imple~ented
in practice.
imagination and ability.
Surely this is not beyond our
We need to work out better, practical,
financial arrangements, so that the problem" of meeting foreign
exchange costs incurred for common security reasons does not
undercut the basic security requirement.
Our gross expenditures on tourism (including fares to
foreign carriers) were about $4 billion in 1967, and the
world-wide net outflow on this account was around $2 bi'llion,
with $1-1/4 billion of this accruing to countries outside
the Western Hemisphere.
Our tourist outlay has been rising
at an average rate of about 12 percent a year in the past
ten years, a rate far in excess of the growth in the gross
national product.
This steeply rising trend is related to
the growing number of people with higher incomes, and to
various other factors, much more than to fluctuations in the
current rate of expansion in our economy.
Our capital outflow has become very large and quite
complex.
In the early 20th century, we thought of capital
investment as flowing from the more advanced
the developing countries.
cou~tries
to
,r; Q
;',1
._. v
"
Today, our private capital outflow includes a substantial
element of investment in countries already industrialized
1n Europe, Japan, and elsewhere o
I have tried to demonstrate that the more complex
characteristics 01 deficits in general, and of the U. So in
particular, require both domestic economic ,restraint and a
selective attack upon particular items of deficito
Conclusion.
The outlook before us is cer"tainly not one bereft of
problems.
The effective functioning of the monetary system will
continue to require cooperation in all three areas -- shortterm market developments, assuring an adequate secular growth
1n reserves, and achieving a better balance in international
payments.
Nevertheless, we have emerged from a severe and
trying six months with the monetary system battered but
baa1cally intact and with substantial progress in two
directions.
We have broken the connection between the private
gold market, with its high degree of susceptibility to
exaggerated speculation, and official monetary transactions
1n gold at the official price.
We have established a two-
tiered system for gold which may well endure for a number of
years.
- 27 -
I can assure you that the Administration is bending every
effort to bring our inflationary pressures under control,
so
o~
~
to arrest the deterioration that we have suffered in
trade accountso
If we can achieve progress in reducing international
imbalance during the remainder of the year, the year 1968
will, indeed, despite its inauspicious beginning, prove to
be a crucial turning point in all three areas that I have
discussed here tonight.
--000--
TREASURY DEPARTMENT
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
~,700,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing May 16, 1968,
in the amount of
$ 2,501,281,000, as follows:
91-day bills (to maturity date) to be issued May 16, 1968,
1n the amount of $1,600,000,000, or thereabouts, representing an
additional amount of bills dated February 15,1968, and to
~tureAugust 15,1968,
originally issued in the amount of
$1,OOl,918,000,the additional and original bills to be freely
interchangeable.
182-day bills. for $1,100,000,000, or thereabouts, to be dated
May 16, 1968,
and to mature
November 14, 1968
0
The bills of both series will be iss'led 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. on~-thirty p.m., Eastern Daylight Saving
time, Monday, May 13, 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 in urr;ed tr.at ~ende.:·s be made on the printed forms and
forwarded in the ~peclal ~nvelopes which will be supplied by Federal
Reserve Banks or Brancbes on application therefor.
Banking 1nstit~tions generally may submit tenders for account of
customers prov1ded 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 depos1 t from incorporated banks and trust companies and from
~Spons1ble 3nd recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of T:"easury bills applied for, unless the tenders are
aCcompanied by an express guaranty of payment by an incorporated bank
or trust company.
F-1237
- 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 rej ec t ion there of. The Secre tary of the Treasure
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 May 16, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing May 16, 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 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 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
c ond i t ions of the ir issue. Copies of the circular may be obtained f]
any Federal Reserve Bank or Branch.
000
TREASURY DEPARTMENT
£
FOR IMMEDIATE RELEASE
WILLIAM F. HELLMUTH, JR. TO BE NAMED
DEPUTY ASSISTANT SECRETARY OF TREASURY FOR TAX POLICY
Treasury Secretary Henry H. Fowler today announced his
intention to appoint William F. Hellmuth, Jr., of Oberlin, Ohio,
as Deputy Assistant Secretary of the Treasury for Tax Policy.
Mr. Hellmuth has been a member of the Department of Economics
at Oberlin College, Oberlin, Ohio, since 1948, and Professor of
&onomics since 1958.
Mr. Hellmuth, who will serve as deputy to Assistant Secretary
Stanley S. Surrey, will assume his new duties on a full-time basis
in the latter part of May, at the conclusion of the current school
term. In the meantime he is serving as a Treasury Consul tant.
The appointee assumes the position previously held by
Melvin 1. White, who recently resumed his teaching post at
Brooklyn College, City University of New York.
A native of Washington, D. C., Mr. Hellmuth, 48, holds
B.A. and Ph. D. degrees in economics from Yale University.
From 1942-1945, he served in the U.S. Army, Field Artillery
Branch, in the United States and Western Europe. After the war,
he returned to Yale University, where he was an Instructor in
Economics until 1948, when he went to Oberlin College. He was
Dean of the College of Arts and Sciences at Oberlin from
September, 1960 to August, 1967.
In addition to teaching at Oberlin, Professor Hellmuth
was a Visiting Professor at the University of Wisconsin in
the 1959 academic year, and Visiting Professor and Director,
Economic Research Bureau, University College, Dar es Salaam,
Tanzania, in July and August, 1965, and from February to
August, 1966. He also served as a Director of the Bank of
Tanzania.
F-1238
- 2 -
The appointee was a staff economist, specializing in
taxation and fiscal policy matters, at the Federal Reserve Board,
from~54-l956.
Professor Hellmuth is active in Oberlin city affairs,
including service as a member of the Oberlin City Council from
1958-1963 and again in 1967-1968. He also has served on various
committees studying State and local tax matters.
The appointee is the author of numerous publications and
articles in professional journals.
Mr. Hellmuth is marned to the former Jean Dieffenbach of
Washington, D. C. They have three children, Suzanne, 20;
William L., 17; and Peter G., 14. Professor Hellmuth's
parents, Mr. and Mrs. William F. Hellmuth, are residents of
Washington, D. C., living on Military Road, N.W.
000
302
STATEMENT BY TIlE HONORABLE HENRY H. FCMLER
SECRETARY OF THE TREASURY, BEFORE mE
HOUSE BANKING AND CURRENCY COMMITTEE ON
REPLENISRMENT OF THE RESOURCES OF
THE INTERNATIONAL DEVELOPMENT ASSOCIATION
May 8, 1968
Mr. Chairman and Members of the Committee:
I appear before you this morning in support of H.Ro 16775,
which provides for U. S. participation in the second replenishment of the International Development Association (IDA).
This
replenishment is of far-reaching importance to the developing
countries of the world, and will serve to advance basic United
States objectives in international economic
developm~nt
in a
framework of further multilateral financial cooperationo
This Committee has just acted promptly and wisely on
a proposal of transcendent importance in shaping the future
of the international monetary system -- the creation of
Special Drawing Rights in the International Monetary Fund.
In taking up the bill now before us, the Committee addresses
itself to a second great world economic problem of this decade
and the next:
economic development for the poor or less
developed countries of the world.
F-1239
- 2 These are not unrelated problems.
Adequate reserve
growth is a prerequisite to a satisfactory expansion of
world trade and investment.
The economically advanced
countries cannot reach their full economic potential if
the developing countries are stagnating.
IDA's role is
vital in avoiding such stagnation and in creating
conditions favorable to economic advancement.
The requirements for development assistance among
the poor nations of the world remain tmmense.
In an
interdependent world economy, these needs cannot go
unmet indefinitely.
Official flows of development
finance from the economically advanced countries, as
measured by the Development Assistance Committee of the
Organization for Economic Cooperation and Development
amount to roughly $6-1/2 billion a year.
Responsible
estimates made in recent years indicate that additional
flows of development resources of several billion dollars
a year could be promptly and effectively put to work in
stimulating development and creating the necessary infrastructure for further growth in the developing countries.
At the same time, the capacity of many developing countries
") n -<
,
,;
\.
.
\
~
- 3 -
to service additional debt is severely limited.
It is
because of that severe limitation that the Special
Report of the National Advisory Council on the replenishment of IDA observes,
"It is also clear that economic development
of the developing countries cannot be carried
out entirely on the basis of loans on conventional terms without potentially endangering
seriously the soundness of the international
financial structure. A replenishment of IDA
at the level proposed would contribute to
meeting the greater demands for funds by
eliciting larger contributions from the other
donors on terms that fully take into account
the debt servicing burden of the developing
countries."
We can be certain that, measured against either the
readily apparent needs of the developing countries or their
capacity to use external resources in conjunction with
their own substantial self-help efforts, the proposed IDA
replenishment will fill only part of the gap.
The proposed
amount of the replenishment -- $400 million a year for the
next three years, of which the United States share would be
$160 million a year -- represents what it has been possible
to achieve international accord on among the economically
advanced countries.
- 4 I have given my closest attention to each stage of
the
discussions and negotiations leading to the proposed
As you well know,
multilateral accord before you today.
much of my time and energy ai Secretary of the Treasury has
been devoted to finding ways of achieving important U. S.
international objectives within
by our balance of payments
th~
problem~
constr.aints imposed
In my judgment, this
proposal reconciles the imperative need for continued
United States support of IDA with our own need to avoid
adverse balance of payments consequences from our contributions.
In its original conception and in its subsequent
development, IDA has merited and received bipartisan support.
Proposed under President Eisenhower and expanded under
Presidents Kennedy and Johnson, IDA meets needs that are
recognized on both sides of the congressional aisle.
I
could hardly document the character of thi$ bipartisan
support better than by quoting from the Congressional
Record of May 13, 1964, when the first
IDA was being debated.
r~plenishment
of
The distinguishe4 Congresswoman
- 5 -
304
from New Jersey, a member of this Committee, Mrs. Florence
Dwyer, said on that occasion:
"In 1960, as it is today and as it was
when the idea was first suggested
in 1951, the concept of an agency to
supplement the World Bank by lending
development funds on the easier credit
terms which underdeveloped countries find
essential was completely bipartisan o
The idea was first proposed 13 years
ago by the Republican Chairman of an
Advisory Board under a Democratic
President. It was given new life 7
years later by a Democratic member of the
other body during the Administration of
a Republican President. A year later,
1959, the Republican Secretaries of
State, Commerce and the Treasury, the
Chairman of the Federal Reserve Board
and the President of the Export-Import
Bank formally approved the project.
The World Bank itself then drew up the
Articles of Agreement which were submitted by the President to the Congress
which, in turn, approved U. S. participation. Congressional approval was
urged by a broad range of private
American organizations, including the
Uo S. Chamber of Commerce, the American
Farm Bureau Federation, and the
AFL-CIOo"
President Johnson has given renewed emphasis to this mu1tiliteral endeavor, as exemplified in his 1966 message on Foreign
Aid:
- 6 -
"I propose that the United
States -- in ways consistent with
its balance-of-paymentsp(iicy -- increase its contributions to multilateral lending institutions,
particularly the international
Development Association. These
increases will be conditional upon
appropriate rises in contributions
from other members. We are prepared
~diately to support negotiations
leading to agreements of this nature
for submission to the Congress. We
urge other advanced nations to join
us in supporting this work.
"The United States is a charter member
and the largest single contributor to
such institutions as the World Bank,
the International Development Association,
and the Inter-American Development
Bank. This record reflects our
confidence in the multilateral method
of development finance and in the soundness
of these institutions themselves. They
are expert financiers, and healthy influences on the volume and terms of
aid from other donors."
I have attached to my statement several additional expressions of Presidential support, present and past,
for IDA.
- 7 I do not intend today to dwell on the early operations
of IDA or the details of it. current operations.
No
Committee of the Congress hal had a more intimate association with IDA since its inception than this one.
You
already know that IDA embodi •• the concepts of
Multilaterally-shared resources with other
countries putting up $3 for every $2 the
U.S. contributes;
Sound development financing with credits repayable in hard currencie.;
Repayment on liberal amortization terms and
low service charge adapted to the debt servicing
capabilities of borrowing countries;
Effective and efficient administration by the
skilled management and .taff of the World Bank.
You know also that the resource. provided by IDA represent
a modest but very important part of the total flow of funds
to the developing countries.
The Special Report of the
National Advisory Council which is before you brings up
to date the record of IDA', lending operations.
IDA's
a•• ources
When IDA was establish.d in 1960, its authorized
capital was $1 billion, of which the economically advanced
member countries provided approxl.. tely three-quarters.
- 8 -
These contributions were payable to IDA on a 5-year
schedule running from fiscal year 1961 through fiscal
year 1965.
By 1963, it was clear that IDA's resources would
have to be replenished because of the rapid pace at
which it proved possible to commit the initially available resources.
Accordingly, in 1964, the first
replenishment of IDA became effective, providing for
additional resources of $750 million, all provided by
the economically advanced member countries (the socalled "Part I" countries of IDA).
The resources of
the first replenishment were scheduled for payment-to
IDA over the three fiscal years 1966, 1967 and 1968.
-The last of these three payments was completed recently.
Unlike the situation in 1963-1964, when action to
replenish IDA was taken well ahead of completion of the
current contribution schedule and ahead of full commitment of IDA's available funds for loans, the present
situation finds IDA with its available funds almost
completely committed and the last payment on contributions
already made.
Because the first replenishment was timely,
'
- 9 -
there was almost no interruption in
\3n
\ b
i
hf' pace i,""f lOA
commitments.
Now, however, such interruption has already
taken place.
The NAe Report mal es "his stClte of affaj r~
abundantly clear -- this valuable atfiiiact: of the W.Jrld
Bank has virtually ceased lending operations because of
lack of funds.
Without the proposed replenishment. IDA
cannot resume its important role.
~1is
Committee and this
Congress now have the opportunity to determine if an
international institution created largely on American
initiative is to continue, with American participation,
as an effective entity.
Amount of the Request
In brief, our request this morning is for new authority
to contribute $160 million to IDA in each of the three
fiscal years, 1969, 1970 and 1971.
This authority, totaling
$480 million over the three-year period, would represent a
40 percent U.S. share in contributions to IDA by the
economically advanced countries totaling $1.2 billion
during that period.
Eighteen other countries would put up the balance of
$720 million, at the rate of $240 million per year.
Under
arrangements agreed to by the other countries which I shall
- 10 describe shortly, U. S. funds would be provided on a
basis guaranteeing that, if our balance of payments
situation should continue to be a serious problem,
our IDA contribution would involve a zero balance
of payments cost at least until the beginning of fiscal
year 1972 and possibly longer.
Other Countries Provide a Larger Share
The figures I have just mentioned on relative coritributions by the U. S. and the other developed countries
clearly reveal one of the main arguments for continued U. S.
participation in IDA.
For every $2 the U. S. puts up
through this multilateral channel, the other advanced countrie,
put up $3.
It is clearly to our advantage to have others
bear the major burden of development financing, while we
••• ume an appropriate but minority share.
I would also like to emphasize that our present 40
percent share reflects the fact that we have been able,
to reduce our share of IDA contribution since IDA was
established. This has resulted in .eemingly modest but,
to me, clearly significant dollar savings in relation to
- 11 -
the new overall IDA replenishment figure.
Under the
present request, the United States would contribute
$37 million less than would be the case if our 1960
share of IDA contributions were maintained.
Together
with a similar calculation of savings in connection
with the first replenishment of IDA, our total contributions will be nearly $50 million less than they would
have been had we not negotiated vigorously to achieve a
reduced share.
Theseefforts were carried out, I might
add, with considerable encouragement from members ofthis Committee expressed during earlier hearings on IDA
legislative requests.
Consistency with Expenditure Restraints
In this period of rigorous scrutiny of all of our
future spending plans, I know you will want to alsure
yourselves on the size of the request.
I have already
touched on the pressing need for development finance and
on the fact that IDA, even at the level of this request,
- 12 can provide but a part of what il needed -- although a
vital part.
If the U.S. were to fail to contribute its
40 percent share of the propoled increaae in IDA resources,
the entire proposal, involving contributions by 18 other
developed countries who are putting up more than we are,
would collapse, and the vital work of thil institution
would come to
8
complete half.
It is not in our interest
to let this happen.
Several further points should be noted in this
regard.
The budget, as prelented in January provides
for $240 million for the firlt year of the U.S. contribution to this replenilhment.
Thil figure wal entered
in the budget at a time when nelotiationl with the
other countries involved had Dot yet been completed and
it wa. not possible to deter.!ne the final level of the
packa,_ that might be a,reed upon.
When the final $1.2
billion, 3-year packa.e was agreed upon, ad referendum,
a.anl the representative. of the Part I countries, we
were able to detel'1line tlult our 401 .hare would require
contribution. of only $160 .tllion each y.ar.
We
tMretere will need oaly two-t1d.rde of the a.,unt .hown
in the Janu.ry budget.
-
~3--
Furthermore. the balance of payments safeguards
which I have referred to briefly and will discuss
in greater detail shortly, are of such nature that the
budgetary effect of our contributions to this replenishment
will be sharply reduced below their nominal amount in the
next three fiscal years should our balance of payments
situation require.
Our contribution installments of
$160 million each will be made in the form of letters
of credit.
These will be drawn upon only as needed
for disbursements.
Even if we did n0t take advantage
of the balance of payments safeguards, we would not expect
the actual cash drawing under our fin; t installment
to exceed $100 million in fiscal year 1969.
But if
we do take advantage of the balance of payments safeguard arrangements, we could expect the actual cash
drawing to be less than half of this
~mount.
Such
a development would mean a very substantial reduction,
not only below
t~e
level we might have anticipated with
the new funds, but also substantiRJly below the level oC
usage of the funds we have been providing to IDA.
- 14 -
Our Balance of Payments Is Fully Protected
Let me turn now to anotbr aspect of the IDA replenishment which I believe is of great concern to members of
this Committee and indeed to the Congress at large -the effect on the U. S. balance of payments.
From
the very earliest discussions of IDA replenishment, I
made clear, both publicly and privately, that an
arrangement taking into account the situation of donor
countries with balance of payments deficits was a prerequisite to final agreement on the part of the United
Stateso
The proposal now before you reflects the sub-
stantial acceptance of this viewpoint by the other
contributing countries.
In its operations to date, IDA has had only minor
effect on the U. S. balance of payments deficit.
Pro·
curement in the United States financed by IDA has
offset a significant part of the cash flow of U. So
resources to IDA.
Although in each of the past three fiscal
years the United States provided $104 million to IDA,
this contribution was in the form ot non-interest bearing
30~
- 15 -
letters of credit rather than cash.
These letters of
credit are not drawn on until much later than the time they
are delivered, and then are drawn only at the rate required for disbursement.
Only these cash drawings effect
the balance of payments.
The average cash effect of IDA
operations so far has been about $30 million per yearo
Nevertheless, I have felt it desirable to eliminate even
this much balance of payments drain from IDA operations with
its new money.
Accordingly, we have obtained the agreement of all
other participating countries that they will
~it
IDA to oprate in a fashion that will give us -- if we
require it because of a serious balance of payments problem
complete balance of payments protection during the fiscal
years in which
~tribution
payments are being made, ioeo,
at least through the end of fiscal 1971.
This agreement is
formally embodied in the Resolutions which appear as an
Annex to the NAC Report.
Our contributions to IDA have an adverse effect on
our balance of payments only when they exceed the amount
of procurement obtained in the United States under IDA financingo
The essence of the new arrangements is that the UoS. contribution
- 16 would be drawn on only in the amount of procurement identified as
taking place in the United States.
The balance between this amo~t
and what we would have put up as our normal share would be deferred for a fixed period of three years.
Thus as long as we
so elect, no drawings of free foreign exchange from the United
States would take place prior to July 1, 1971, and some of the
U. S. contribution could be deferred until a period well beyond
that date.
To make up for the temporary deferment of availability
of some U. S. resources in the early years, other developing
countries have agreed to accelerate the availability of their contributions for use by IDA. No change would take place in IDA·s
present method of operations with respect to borrowing countries
(in particular, international competitive bidding would continue
to be the rule)o
The Management of IDA has given assurances that the entire
arrangement is compatible with mntinued effective operations by
the institution.
The United States would have recourse to the ar-
rangement only as long as its balance of payments situation requirE
A later acceleration in the rate of use of the U. 8. contribution
would have to be anticipated, as a corollary of the deferment
we had receivedo
The technical description of the workings of thes
arrangements is detailed in the NAC Report.
The point I wish to
emphasize is that the balance of payments cost of the second replenishment of IDA will be zero while we are in serious overall
balance of payments difficulties.
- 17 The Replenishment Cannot Proceed without the U.S.
Under the Resolutions governing the replenishment,
which are reproduced in Annex A of the NAC Report,
the second replenishment cannot become effective until
at least twelve contributing members whose contributions
aggregate not less than $950 million shall have notified
IDA that they will make their contributions.
Because of
the size of the U.S. contribution, the $950 million
"trigger" amount cannot be reached without our participation.
Our own action undoubtedly will stimulate early action on
the part of a number of other governments.
The Executive
Directors of IDA have recommended that all governments
act in time to permit the Resolutions to come into effect
on or before June 30, 1968.
By acting promptly to meet
that schedule, we can reassert the constructive leadership
regarding IDA that has characterized our earlier participation
in the institution.
Nature of Legislation Required
H.R. 16775, the Bill submitted by the Chairman of
the Banking and Currency Committee and the Chairman of
this Subcommittee, would provide the necessary authority
for moving forward with out participation in the second
replenishment.
It would, first, authorize me, as U.S.
- 18 Governor of IDA, to vote in favor of the Resolutions
now pending before the Board of Governors on the replenishment,
and to notify IDA formally, in accordance with paragraph
(h) of the principal Resolution, that the United States
will make the contribution authorized for it in accordance
with the terms of that Resolution.
To implement the
agreement we would thus be entering into with the Association
H.R. 16775
authorizes the appropriation, without
fiscal year limitation, of our full $480 million contribution,
that amount to remain available until expended.
These
funds would in fact be made available to IDA in three
installments, payable on November 8 of 1968, 1969 and
1970.
Upon formal notification to IDA of our acceptance
of the second replenishment pursuant to this legislation
and the requisite action by other countries, the United
Statei would have a binding international obligation
with IDA.
To be in a position to meet this obligation,
as
soon as authorizing legislation is completed we would
seek an appropriation of $160 million for the first
installment payment that would fall due on November 8, 1968.
- 19 We
would seek appropriations in the same amount in each
of the fiscal years 1970 and 1971.
Installment payments would be made in the form of
non-interest bearing letters of credit, which would be
drawn on by IDA at a later date as its cash needs for
disbursements arise.
No budgetary expenditure is recorded
until such drawings are made under the letters of credit.
This is the procedure generally used in our participation
in international financial instituti ons.
Conclusion
New lending activity of the International Development
Association is at a virtual standstill.
all of its funds have been committed.
Practically
We are asking
authority today to participate in a replenishment of its
resources.
As was intended when IDA was first set up,
participation by the United States will be a minority participadbn
-- the other advanced countries put up 60% while we put
up 40%.
Although we have the smaller share, the
arrangement cannot go forward at all without us.
And it
clearly should go forward.
IDA is an effective and efficient multilateral
instrument for sound development financing.
It has been the
major worldwide source of multilaterally supplied development
- 20 -
funds on terms that take into account the debt service
problem of the developing countries.
The needs of these
countries for external finance are massive and are not being
adequately met.
The fact that the United States was the leader in
establishing IDA and arranging the last replenishment of
its resources should alone be reason for our continued
support.
I recognize, however, that two problems may
induce some hesitancy in the Congress about giving that
support.
In my judgment, these problems have been fully
taken into account:
The balance of payments impact of IDA in the
past has been moderate.
Nevertheless under
the new proposal, we have achieved an agreement
with other donors that if the U.S. balance of
payments requires such protections, there will
be absolutely no balance of payments impact
from IDA operations with the new funds until
at least the begtnning of fiscal year 1972.
The proposal is consistent with our financial
capabilities.
It is one-third less than the
amount originally budgeted for; it represents
- 21 a smaller U.S. share of total IDA contributions
by the developed countries than in the past;
and it is likely in the near term to involve
a lower annual level of cash expenditures than
the level of previously authorized funds, due
to the operation of the balance of payments
safeguards.
During the entire post-war period, the United States
has followed the path of international financial cooperation.
IDA was born of this policy and the proposed replenishment
both reflects and extends this policy.
Through IDA multilateral
responsibilities are met in responsible multilateral
ways.
The Congress can give a new impetus to further international
cooperation for development by adopting this legislation.
I
urge you to act favorably on H.R. 16775 and report
it promptly to the full House.
A-I
11. v
~
'J
THE WHITE HOUSE
WASHINGTON
August 26, 1958.
Dear Mr. Secretary:
I have read with great interest your letter concerning the adequacy
of the present resources of the International Monetary Fund and the
International Bank for Reconstruction and Development.
I thoroughly agree with you that the well-being of the free world is
vitally affected by the progress of the nations in the less developed
areas as well as the economic situation in the more industrialized
countries. A sound and sustainable rate of economic growth in the
free world is a central objective of our policy.
It is universally true, in my opinion, that governmental strength and
social stability call for an economic environment which is both dynamic
and financially sound. Among the principal elements in maintaining
such an economic basis for the free world are (1) a continuing growth
in productive investment, international as well as domestic; (2) financial policies that will command the confidence of the public, and assure
the strength of currencies; and (3) mutually beneficial international
trade and a constant effort to avoid hampering restrictions on the freedom of exchange transactions.
During the past year, as you know, major advances have been made in
Our own programs for dealing with these problems. These include an
increase in the lending authority of the Export-Import Bank; establishment of the Development Loan Fund on a firmer basis through incorporation and enlargement of its resources; extension and broadening of
the Reciprocal Trade Agreements Act; and continuation of the programs
carried forward under the Agricultural Trade Development and Assistance Act.
Our Own programs, however, can do only a part of the job. Accordin~ly,
as we carry them forward, we should'also seek a major expansion in the
international programs designed to promote economic growth with the
indispensable aid of strong and healthy currencies.
- 2 -
As you have pointed out, the International Bank for Reconstruction
and Development and the International Monetary Fund are international
instruments of proved effectiveness already engaged in this work.
While both institutions still have uncommitted resources, I am convinced that the time has now come for us to consider, together with
the other members of these two agencies, how we can better equip
them for the tasks of the decade ahead.
Accordingly, I request, assuming concurrence by the interested members of the Congress with whom you will consult, that you take the
necessary steps in conjunction with the National Advisory Council on
International Monetary and Financial Problems, to support ~ ~ourse
of action along the following lines:
First: In your capacity as United States Governor of the International
Monetary Fund, I should like to have you propose, at the Annual Meeting of the Fund at New Delhi in October, that prompt consideration be
given to th€-: advisability of a general increase in the quotas assigned to
the member governments.
The past ten years testify to the important rol(' played by the International Monetary Fund in assisting countries which, from time to tim.::,
have encountered temporary difficulties in their balance of payments.
We are now entering a period when the implementation of effective and
sound economic policies may be increasingly dependent in many countrie
upon the facilities and technical advice which the Fund can make aVJ.ilabl
as they me et temporary external financial difficulties. This is particularly true of the less developed countries with the great variability in
foreign exchange receipts to which they are subject from time to time.
It also applies to industrialized countries which are dependent on foreign
trade. Through its growing experience and increasingly close relations
with its members, the Fund can also help see to it that countries are
encouraged to pursue policies that create stable financial and monetary
conditions while contributing to expanding world trade and income. The
International Monetary Fund is uniquely qualified to harmonize these
objectives but its present resources do not appear adequate to the task.
Second: In your capacity as United States Governor of the Intcrnation:tl
Bank for Reconstruction and Development, I should like to have you
A-3
- 3 -
p.ro~~se, at the Annual Meeting of the Bank, that prompt considera-
hon be given to the advisability of an increase in the authorized
capital of the Bank and to the offering of such additional capital for
Bubscription by the Bank's member governments. Such additional
capital subscriptions, if authorized, would not necessarily require
additional payments to be made to the Bank; they would, however,
ensure the adequacy of the Bank's lending resources for an extended
period by strengthening the guarantees which stand behind the Bank's
obligations.
The demands upon the Bank for development loans have been increasing rapidly, and it is in a position to make a growing contribution to
the economic progress of the free world in the period which lies ahead.
Moreover, it can do this by channeling the savings of private investors
throughout the world into sound loans, repayable in dollars or other
major currencies. But to meet the rising need for such sound development loans, it must be able to raise the funds in the capital markets
of the free world. An increase in the Ban~'s subscribed capital, by
increaSing the extent of the responsibility of member governments
for assuring that the Bank will always be in a position to meet its
obligations, would enable the Bank to place a larger volume of its
securities in a broader market, while still maintaining the prime
quality of its securities and hence the favorable terms on which it can
borrow and re -lend funds.
Third: With respect to the proposal for an International Development
Association, I believe that such an affiliate of the International Bank, if
adequately supported by a number of countries able to contribute, could
provide a useful supplement to the existing lending activities of the
Bank and thereby accelerate the pace of economic development in the
less developed member countries of the Bank. In connection with
the study of this matter that you are undertaking in the National Advisory Council pursuant to the Senate Resolution, I note that you
contemplate informal discussions with other member governments of
the Bank with a view to ascertaining their attitude toward an expansion
of the Bank's responsibilities along these lines. If the results indicate that the creation of the International Development As sodation
would be feasible, I request that, asa third step, you initiate promptly
negotiations looking toward the establishment of such an affiliate of
the Bank.
- 4 -
The three -point program I have suggested for consideration would
require intensified international cooperation directed to a broad
attack upon some of the major economic problems of our time.
A concerted and successful international effort along these lines
would, I feel certain, create a great new source of hope for all
those who share our conviction that with material betterment and
free institutions flourishing side by side we can look forward with
confidence to a peaceful world.
Sincerely,
The Honorable Robert B. Anderson
Secretary of the Treasury
Washington, D. C.
A-S
THE Sr:CRETARY OF THE TREASURY
WASHINGTON
August 18" 1958
Dear Mr. President:
We have frequently discussed together the importance of
a Bound and sustainable growth in the econoIl\Y of the froe
world to both the foreign and domstic policy objectivoa of
the united states. over tho longer term" I believe that the
well-being of the friendly nations depends not o~ on the
economic and finanoial health of the industriAlized nations
ot EurOpe" North America" and elsewhere, but also upon tha
economic gro1olth and progress of nations in tJle loss developed
areas of the fl.'eo lr7orld.
Through a number of monsures the united states has been
pursu1nB these objectives" and this year lva ha'V'o t:J.ken mo.jor
steps fonrard :in OUl" Olm proerams. It l'lould seem. highly desirable that tha na:t;ions of t..l'lO free 170rld us a lJhola should move
i'onrard cooperative~ to deal morc a££ectively with the p:roblem.
One of tho bost nnys of achioving such coopel'ation l10tud be by
8t.rI~IJgthClnin~ the f:U1Ll.llcio.l il1s'titutions already e~tablished.
In tha Intel'Il.,:t.ional nanlt for RoconstrUction and Dowlopn:allt and
the IntOl"lll.l -Lional l1~)l1e tary Fund lV,J h30 va soasonod int(n"".l.l tionoJ.
iruJtr\llnsnts 110'U ollgaGod in this uOl'l:.
Both of thesa orgru1izations havo staffs of iuter~~tiona1ly
recruited expert.s uho, "lith over a decade of c:J::p0l'iencd behind
them, have dCl'OOn;3tl'atod their ubility to nct ofi'ecth'uly and
impartia.l.ly. Both havo eDtablished operating st.andards and
policies l'lhich cOlltO'.::md the rospoct of their IDJmbor govel·1l!1~3nts.
The Fund has provided tlhort-torm fin..'l.tlciru. assist311Ce to 35
menber countries, aggregating the oquivalent of over $3 billion.
Through such assistance and tho influence it has boon abll3 to
bring to bear for tha adopt,ion of sound cUl"l·ency nnd oxchanea
policies, the li'Und has contributod substanti.tily tonnrckl
monetary stability and a f~..)or fiovl of i11t.eruAtional trado
and paYlnants. Tho Dame hilS invl)stod somo ~~J.8 billion in
productive dcv~loprr.Qnt proj()cts in 47 d:l.ffol'cnt cowl't.l'ios and
territOries" most of them undcr-dowloped. Loans by the Bank
are running at tho rate of about $750 lIdllion a. your. Tho
Bank's financing and technical assistanco activities buw
served to accol.arato the paco ot economic gJ.'owt.h all ovor tho
tr08 ~10rld; and it haa carried 011 thes\) activitio3 011 tI. b:l:3i1S
that has earnod for the Dllnk tho confidence of i l l maJol' pl'iV4l.ta
capital mru.'kats. The establishn~:Jnt or tho Intorll!l.tiou:.U Fimuloa
Corporation, which supplies capital to encourage tho gro~~h of
productive private enterprise, has r8cently increased tho scope
and flexibility of the Bank's field of operation.
The International Monetary Fund utilizes for its operations
gold and member country cUl'rencies which have been provided to
it by tho ~ember countries through their subscriptions to its
capital. Advances by the Fund in tho past tHO years have
amounted to approy..imately $1.8 billion and nearly ~)900 ndllion
additional arc in effect eCl.rmarked against standby conunitments
"7h1ch tho Fund has undertaken.
Under the charter of tho International Bank, a small part
of its authorized capital is available for loans, but the Bank
must depend primarily on borrOi·rings in the financial markets
of the VJorlc.. The major part of the authorized capital in
effect constitutes a euarantee for these borroHings. The Bank
has raisod the equivalent of more than ~~2 billion through issuing its bonds dcnomine.ted in six different currencies. At
present the cquivalontof about ~~1 .. 7 billion is outstanding in
such bonds. The Ban1c's bonds are recognized throughout the
110rld as ~ccUl'ities of the hi~hcDt quality and, as a result"
. the Bank has been able to bOJ.}'OH large SW1lS of money at frequent
interw. . ls at rat8s of intcr(-)ct comparable to those of highlyref,arded govornment sccuritieE'. This in turn has ellabled the
Bank to fix interest rates on its Ovill loans at levels not
imposing undue burdenD on the borrolring countries concerned.
vlhile the Bank still has unusod bOrl'Ol-:inr, capacity, its v'Olume
of lendinB has expanded greatly and" if it is to continue to
be able to 'moet legitimate lo[(n requests likely to be submitted
to it during the years ahead, it must eo to the market for
larger amOlmts of money than ever before. This would require
a broadening of the marlwt for tho Bank's bonds and the tapping
of sources of capital not yet reached.
During the annual meetings of the Bank and Fund at
Nell Delhi early in October, He should give consideration
to ways and moans of increasing the effectiveness of these
two institutions, As U.S. Governor of thl') Bank and Fund, I
would Helcome your guidanc~ with respect to those vital
problems of policy. If you believe that certain avenues of
action should be explored preparatory to tho Neu Delhi moeting, I would ask the NatioI1:1.1 Advisory Council to proceed
promptly ..a th detailod study and arranGoments. Wo would, of
course, wish to canDult with members of the Concreas who are
particularly concerned 'Vr.i. th this subjoct 0
- .3 -
A related matter has recently been under consideration
by the Senate, "mich has adopted a resolution calling upon
the National Advisory COuncil to undertake a study of the
feasibility ot an International Development Association as
an affiliate of the International Bank. The resources of
such an orGanization would be subscribed by the members of
the Bank. The Association would t.inance development projects
on the basis of long term loans at reasonably low interest
rates repayable in whole or in part in local curroncies. In
the course of its study, the CouncU w.Lll also explore the
possibility that such an a!;fUiate of the Bank might prove
to be a means, supplemental to our o'tom national programs,
for assuring productive investment of some part of the various
local currencies becoming available to the United states
through the sale ot agl"ioulturaJ. surpluses or other programs.
It is intended to undertake Wormal discussions ,.nth other
members of the Bank ldth a view to asoortaining their attitude
tol-lard an mcpansion ot the Banl,· oS activities along these lines.
I request. your guidance as to whether, if the st~
indicates that the propofJal is p;romisin,g, you uould ldsh to
have the subject pursued tormal.ly 'with the governments of
the othEl,," JI'.embe.r countries of the International Bank.
Faithfully yours,
The President
The Whi to House
Special 11essagc to thc Congress
RccOlnmcnding U.S. Particip2.tion in the
] II tcrnational Developlnent Association.
Fchnwry 18, 196.0
T,) Ihe Congress of the United States;
I herewith submit to the Congre~s the Article.> of Agreement for the
c-t;lhlislmlent of the International Development A~sociation. I recom;:,I'lld legislation authorizing United State.:; membership in the As<;oci::t{;'lfl and provirlin~ for payment of the sub~cription obligations prescribed
III the Articles of Agreem~nt.
The Association is desi~ned to assist the less-developed countries of the
fl cc world by increasir.g the flow of development capital on flexible
tcnns. The ad\'isability of such an institution was proposed by Senate
Rc.,olution 264 of 1958. Following this Resolution, the National Ad\ io:-y Council on Internation;:l Monetary and financial Problems under{)ok a study of the qucstion. The Council's conclusions and the fa\"or:lb!c response of representatives of other governments who were consulted
during the course of the stuely have resulted in the Articles of Agreement
\, hich s:l.tisfy the objectives of that Resolution ancl which I am submitting
h';rcwith. The accompanying Special Report of the Council describes
the :\rticles in detail.
\\' e all know that every country needs c:l.pital for growth but that the
needs are greate:,t where income and savings are low. The Ies~-cleveloped
countries need to secure from abroad large amounts of capital equipment
{n help in their development.
Some part of this they can purchase with
their current savings, some part they can borrow on comentional terms,
~ncl Some part is provided by private foreign investors. But in many
k,,-de\°e!oped countries, the need for capital imports exceeds the" mounts
3}7
A-9
they em reasonably hope to ~ecure through normal channels. The Association is a multilateral in~titlltion designed to prO\'ide a margin of finance
that "ill allow them to go forward with sound projects that do not fully
qualify for convcntionalloans.
In many me~sages to the Congress, I have emphasized the clear interc,t
of the United States in the economic growth of the less-developed Countrirs. Because of this fundamental truth the people of our country are
attempting in a number of ways to promo~e such gro\\,th. Technical
and economic aid is supplied under the Mutual Security ProgTam. In
addition, man)' projects are as~:is~ed by loans from the Export-Import
Bank, and we also participate \\ith other free world countries in the
International Bank for Reconstruction and Development \",hich is doing
cO much to channel funds, mainly flOm pri\'ate sources, to the less(icveloped areas. While we have joined with the other American Republics in the Inter-American De\'c!opment Bank, there is no wide international instit\;tion which, like our DeH·jopment Loan Fund, can help
finance sound projects requiring a broad i1exibility in repayment terms,
inclurling repayment in the borrower's currency.
Conceived to meet this need. the International DeHlopment Association
reprcsents a joint determination by the economical!), advanced countries
~v :H'~P <l.,-,,,Li":lulC plVgH;~ in lile l\.~::,-uc\lcioped countries. It is highly
gratifying that so many other free \\'orld countries are now ready to join
with us in this objective.
The Association is a ccoperati,'e \'Cnture, to be financed by the member
gm'crnments of the International Dank. It is to haH initial subscriptiun,
totaling one billion dolbrs, of which the subscription of the 'United State.'
would be $320,20 million and the subscriptions of the other ecoLomicallystrong countries \\'ould be $,1-42.78 million. The funds made availahle
by these countries would be freely convertible, The developing countries
would subscribe $236.93 million, of i\'hich ten per cent would be freely
convertible. ?-.Icmbcrs \\'ould pay their sllb~criptiollS O\'er a fi\'e year
period and i\'()uld periodically re-examine the adequacy of the .h:ociZltion's resourc:cs.
The InternationJ.l De\'Clopmcl1t A~50ciati()n thus estab1i,hcs a mechan,
ism \\'hereby other nations CZln join in the task of providing cJ.pital to the
less-developed areas on a flexible basis. Contribution by the le5s-de\c]opeo
countries thcmseln:s, morconr, is J. de,irablc clement of this new institl:tion. In addition, the Ass()ciation may accept supplementary resources
pro\·jdcd by one member in the currency of another member. Thus,
.... ,mc part of the foreign currencies acquired by the United States pri11l:lrily from its sales of surplus agricultural commodities may be made
;~\'aibble to the Association when desirable ar.d agreed to by the member
\,'h05C cun"ency is inyoh·ed.
The Articles of Agreement give the As~ociation considerable scope in
it., lending operations so that it can respond to the yaricd needs of its
members. And because it is to be an affiliate of the International Bank,
i: will benefit from the long and successful lending experience of the Bank.
By combining the Bank's high standards with flexible repayment terms,
it can help finance sound projects that cannot be undertaken by existing
H,mees. With a framework that safeguards qdsting institutions and tra,!itional forms of finance, the Association can both ~upplcment and faciIit:~te prh'ate investment. It will prO\'ide an extra margin of capital that
,'an giye further momentum to grmvth in the developing countries on
i'1111S that will not O\'erburden their economics and their repayment
c:lpacities.
The peoples of the world will grow in freedom, toleration and respect
II,r human dignity as they achieve rea.sonable economic and social prog:'\'';, under a free system. The further advance of the less-deycIoped areas
:.; of major import:mce to the nations of the free ,,"orId, and the Associa~~, '1'1 pr,wirlpc; :-In jntprTl:>tin!1;11 jn~titlltin'1 thr()\l~h whkh we may all
cITcctivcly cooperate toward this end. It will perform a valuable service
:.1 promoting the economic growth ::lnd cohesion of the free world. r
::1l1 convinced that p:liiicipation by the United States is necessary, and
I urge the Congrc::s to act promptly to authorize the United States to
:"in with the other free nations in the establishment of the Association.
DWIGHT
D.
EISE~HOWER
A-II
Excerpt from President Johnson's Economic Report
Transmitted to the Congress January 1967
There should, however, be increasing efforts to make
both the receiving and giving of aid a matter for creative
international partnership.
We shall therefore . . . seek
the cooperation of other major donor countries this year
in replenishing the resources of the International Deve1opment Association.
Excerpt from President Johnson's Budget Me •••ge
for Fiscal Year 1968
The International Development Association, which is
managed by the World Bank, has proven an effective means of
international cooperation to promote economic development.
Its current resources, however, will soon be exhausted.
Following the successful conclusion of negotiations between
the IDA and the developed nations of the world, I will
request authorization for the United States to pledge its
fair share towards an additional contribution to this
organization in ways consistent with our balance of payments
policy.
A-13
Excerpt from President Johnson's Foreign Aid Message
for Fiscal Year 1969
This year we must take another important step to sustain
those international institutions which build the peace.
The International Development Association, the World
Bank's concessiona1 lending affiliate is almost without funds.
Discussions to provide the needed capital and balance of payments safeguards are now underway.
We hope that these
~a1ks
will soon result in agreements among the wealthy nations of
the world to continue the critical work of the Association in
the developing countries.
The Administration will transmit
specific legislation promptly upon completion of these discussions.
I urge the Congress to give it full support.
TREASURY DEPARTMENT
32u
FOR IMMEDIATE RELEASE
JOHN F. KANE NAMED
ASSISTANT TO THE SECRETARY OF THE TREASURY
Appointment of John F. Kane as Assistant to the
Secretary (Public Affairs) was announced today by
Secretary of the Treasury Henry H. Fowler.
In his new post, Mr. Kane will direct the public
information activities of the Treasury Department and all
its bureaus.
Mr. Kane succeeds James F. King, who retired from
government service in mid-April. For the past year
Mr. Kane had been Deputy to Mr. King in the post he
now assumes.
Born in 1914 in Scranton, Pennsylvania, Mr. Kane
attended the University of Scranton and Oberlin College,
Ohio. During the 1930's he worked on the news staffs
of The Scrantonian and The Scranton Tribune, and did
free-lance writing and radio and play production.
He later became public relations director of the
Scranton Community Chest and the Scranton Chamber of
Commerce, and in 1942 was appointed Information Director
of the Office of Price Administration's 33-county
Northeastern Pennsylvania District.
He volunteered for military service in 1943 and
served as a staff sergeant in the U. Sc Army infantry.
Following the war he was employed by the Walsh Construction
Company, New York, as Assistant Advertising Manager.
F-1240
- 2 From 1947 to 1954, Mr. Kane served in various
public information positions with the Department of the
Army in Washi~~to~. In the period 1950-54 he was Special
Assistant to two Secretaries of the Army, Frank Pace, Jr.,
and Robert T. Stevens.
Mr. Kane subsequently was public relations consultant
to the Temporal7 Commission on the C0'lrts of the State of
New York; to Cooper Union, in New York City, and to the Newark,
New Jersey, School of Nursing of Rutgers University. He also was
an account executive with the public relations firm of
Anna M. Rosenberg Associates, New York City.
In 1958 Mr. Kane served with the Technical Liaison Office
of Army Research and Development. In 1959 he headed the
Harrisburg office of the Scranton firm of Conner-Jennings-Blier
Associates as public relations and legislative representative
of the Pennsylvania cigar industry.
After a period in the early 1960's in which he was
assistant to the late John B. Adams, publisher of U. S. Lady
magazine, and a consultant to the Department of Agriculture,
he joined the Agenci for International Development in 1962,
serving as its Information Staff's Chief of Press Branch and
later as General Operations Officer until he joined the
Public Affairs Staff of the Treasury in February, 1967.
Mr. Kane has twice been recipient of the government's
Meritorious Service Award. He is the author of the Army's
official History of the Medal of Honor, and of numerous
articles, plays and radio productions.
He and his wife, the former Jean Montgomery, of Maryville,
Missouri, reside at 1330 New Hampshire Avenue, N.W., Washington,
D. C. Mr. Kane is the father of two sons by former marriages,
John S. Kane, of Scranton, Pennsylvania,and Michael F. Kane,
of Langley Park, Maryland.
000
TREASURY
DEPARTMENT
&
,
FOR IMMEDIATE RELEASE
May
TREASURY PROMOTES FISCAL OFFICIALS
Secretary Henry H. Fowler today announced the appointment of
A. Rabon, Jr., a Treasury career official, as Deputy
Fiscal Assistant Secretary. He succeeds George F. Stickney, who
recently retired
~~ton
0
At the same time, another career officer, Boyd A. Evans, an
Assistant to Fiscal Assistant Secretary John K. Carlock, was
named to succeed Mro Rabon as Assistant Fiscal Assistant Secretary.
Mr. Rabon, who began his Federal career in 1933 as a c1erkstenographer with the Department of Agriculture, has been with
Treasury nearly 34 years o He started service with the Department
as a file clerk in the Bureau of Internal Revenue, and in 1937 was made
~ administrative assistant in the Bureau of Deposits.
In 1941 he
was appointed assistant chief of that bureau, later became a field
supervisor, and in 1943, was named an associate member of the
Technical, Planning and Advisory Staff of the Commissioner of
kcounts. He was appointed a technical assistant to the
Commissioner of Accounts in 1945. In 1954, he was named Technical
Assistant to the Fiscal Assistant Secretary, and in 1963 was made
Assistant Fiscal Assistant Secretaryo
A graduate of Camden High School, Camden, South Carolina,
Mr, Rabon, 56, received BCS and MCS degrees from Benjamin Franklin
~iversity, Washington, D. C., in 1938 and 1939, respectively.
He
is married to the former Ella Mae Clark of Jackson Springs,
North Carolina.
Mr. Evans, 59, and a veteran of 33 years Federal service,
graduated from Gulfport High School, Gulfport, Mississippi. He
attended the School of Business Administration at Tulane
University, studied accounting at the International Accountants
Society in Chicago, and attended the National War College in
Washington, D. C.
F-1241
- 2 -
Mr. Evans joined Treasury in 1935, as Chief of the
Administrative Division, State Accounts Office in New Orleans,
Louisiana
He transferred to the Bureau of Accounts in 1942 as
Assistant Chief, Financial Reports Division in Washington. He
was made Special Assistant to the Associate Commissioner of
Accounts in 1951, and two years later was promoted to Deputy
Commissioner of Accounts. In 1955, he became Technical Assistant
to the Fiscal Assistant Secretary. He was named Assistant to the
Fiscal Assistant Secretary in March, 1963. He is married to the
former Lois Evelyn Natal of New Orleans, Louisiana.
0
000
TREASURY DEPARTMENT
=
(
May 10,1968
FOR IMMEDIATE RELEASE
TREASURY MARKET TRANSACTIONS IN APRIL
During April 1968, market transactions in
direct and guaranteed securities of the Government
investment accounts
resu1t~d
in net purchases by
the Treasury Department of $25,001,800.00
000
F-1242
STATEMENT OF THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ON
THE AMENDMENT TO THE ARTICLES OF AGREEMENT
OF THE INTERNATIONAL MONETARY FUND
ESTABLISHING SPECIAL DRAWING RIGHTS
MONDAY, MAY 13, 1968, 10:00 A. M.
I
I appear before this Committee today to recommend action
00
S. 3423 which would authorize the President to accept the
Amendment proposed by the Executive Directors of the International Monetary Fund to the Governors of that institution.
The legislation would also give Congressional approval for
U. S.
participation in the Special Drawing Account that would
be established by the Amendment in order to implement the
Special Drawing Rights facility.
An identical Bill, H.R. 16911,
was approved by the House of Representatives on May 10.
The Amendment is the first that has ever been negotiated
since the adoption of the Articles of Agreement of the Fund,
approved by the Congress in the Bretton Woods Agreements Act
of 1945.
There have been several increases in the resources
of the Fund s the last being approved in 1965.
In 1962, the
Congress approved legislation providing for U.S. participation in the General Arrangements to Borrow, under which a
F-1243
- 2 group of ten advanced countries undertook to provide credit
lines to the International Monetary Fund that could be used
to meet a threatened impairment of the international monetary system.
Through these various actions, the Congress has kept
in touch with the growth of the International Monetary Fund
from an institution with global quotas of around $7 billion
in 1945 to an institution having global resources in all
currencies of over $21 billion today.
The Amendment does effect some changes in the rules
and practices of the Fund governing its traditional credit
operations, but the primary purpose of the Amendment is to
establish in the Fund a new function.
This function is to
provide, as and when needed hereafter, a supplementary
reserve alongside the traditional components of the world's
monetary reserves -- gold and foreign exchange.
The Amendment is consistent with the important decision
taken in the Washington Communique of March 17, 1968, with
respect to gold.
It was the prospective establishment of the
Special Drawing Rights facility which enabled the members of
the gold pool central banks to indicate on March 17 that lias
- 3 -
the existing stock of monetary gold is sufficient in view of
the establishment of the facility for Special Drawing Rights,
they no longer feel it necessary to buy gold from the market."
These two decisions -- the Amendment and the Communique
represent a giant stride forward in the long process of
supplementing gold and of developing forms of money, both
d~stic
and international, that are essentially entries on
the books of domestic or international banking or monetary
institutions, the outstanding volume of which is deliberately
controlled.
Domestically, advanced nations have almost completely
eliminated metallic money, except for subsidiary COinage.
The money of commerce, internally, is paper currency and
bank deposits.
In the international field, the evolution of the monetary system has proceeded somewhat more slowly.
Metallic
money in the form of gold has retained a much more important
role in the international monetary system.
Nevertheless, even in this sphere the march of progress
has led to supplementing limited supplies of monetary gold
through the gold exchange standard.
Under this system, the
domestic money of certain countries -- primarily the United
- 4 States and the United Kingdom -- has been used by other
countries as a form of international reserves.
In 1948, gold comprised nearly 70 percent of the world's
reserves.
By 1967 this proportion had fallen to 54 percent
largely because of substantial additions to foreign holdings
of dollars (see Chart I).
While the world has seen an unprecedented period of
sustained prosperity under this gold exchange standard, the
associated deficits of the reserve centers have given rise
to well-known difficulties and problems.
In order to develop
a supplement to gold and foreign exchange that would avoid
these difficulties, there have been two years of studies and
three years of negotiations,
These have resulted in devising
an international reserve asset that can be used to assure the
future growth in reserves, without depending on gold or continuing deficits of the reserve centers.
The Special Drawing
Rights are not a temporary feature, but are intended to be a
permanent and growing addition to international reserves.
The related decision in the Washington Communique resulted
from the drain of monetary gold into the private market,
occasioned by speculation in gold.
It introduced the 2-tiered
gold system, which logically calls for the isolation of the
')2 .,. .
v
- 5 monetary stock of gold from the private commodity market in
gold.
This, coupled with the advent of the Special Drawing
Right, points to a continued decline in the relative importance of gold in the total of global reserves.
The SDR
Amendment signalizes in a formal international way that
Special Drawing Rights should have a place of rising importance as a component of world reserves.
Federal Reserve Chairman Martin and I have been privi1eged to represent the United States in the discussions and
negotiations of the Finance Ministers and Central Bank
Governors of the Group of Ten.
Chairman Martin represented
the Federal Reserve System in the meeting of the gold pool
countries held in Washington on March 16-17, 1968.
Under
Secretary Frederick L. Deming and Governor J. Dewey Daane
of the Federal Reserve conducted negotiations as members of
the Deputies of the Group of Ten.
Under Secretary Deming
also chaired an interdepartmental group, which has met
frequently to develop the U.S. substantive positions and
negotiating posture.
Particularly during the past few months,
William B. Dale, U.S. Executive Director in the Fund, has
carried the responsibility of representing the United States
- 6 in the almost continuous daily sessions of the Executive
Board, which hammered out the final text.
The National Advisory Council on International Monetary
and Financial Policies has prepared a Special Report to the
President and to the Congress on the proposed Amendment to
the Articles of Agreement of the International Monetary Fund.
The Departments and agencies that are members of the Council
include the Treasury, State and Commerce Departments, the
Board of Governors of the Federal Reserve System, and the
Export-Import Bank.
In its Report, the Council examines the
role of the Special Drawing Rights in the international monetary system, indicates the main characteristics of the
Special Drawing Rights, reviews the negotiations, comments
on the proposed changes in present rules and practices of
the Fund, and gives a brief explanation of the proposed
legislation.
The Council strongly recommends the enactment
at this session of Congress of legislation which would permit the United States to accept the Amendment and thus encourag
early acceptance of the proposed Amendment by other countries.
The Special Drawing Rights Amendment is not just an
American success.
It is a joint creation of many countries
- 7 -
actively participating in the negotiations.
tory for intemational Ilonetary cooperation.
It is a vicIt ia a clear
recognition of the community of interest which binds us all.
It is a demonstration of the willingness and the determination to make the international monetary system work on the
basis of the multilateral framework on which it was built
almost a quarter of a century ago at Bretton Woods.
For this foresight and dedication to the common good,
we are indebted to many in the Group of Ten and the International Monetary Fund.
It was Robert Roosa who, as first
Chairman of the Group of Ten Deputies, began the studies
that re,cognized the need for a new reserve asset.
It was
Rinaldo Ossola of Italy who in 1964-65 conducted the pioneering technical studies that brought us to the point where
practical negotiations could begin and, three years later,
as the third Chairman of the Group of Ten Deputies, helped
pave the way for agreement at Stockholm.
The technical skill
and imaginative, patient diplomacy of Otmar Emadnger of
GenMny, as second Chairman of the Group of Ten Deputies,
took us over two difficult years of negotiations culminating
- 8 -
in the Outline Plan which was formally endorsed by the Fund
in Rio de Janeiro in September 1967.
The Plan is also an achievement for the International
Monetary Fund, and will equip that institution and its member countries to adapt its operations to changing conditions.
Special Drawing Rights participation is open to all
members of the Fund and all members can participate in the
benefits and obligations of the Facility on an equitable
basis, determined by existing quotas.
this objective.
We strongly supported
It was achieved in no small measure because
of the wisdom, perseverance and responsibility of the
Executive Directors of the Fund, who joined with the Deputies
of the Group of Ten in writing the Outline Plan, and in six
months of intensive effort prepared the proposed Amendment.
But most of all, the entire effort owes much of its success
to the Managing Director of the Fund, Pierre-Paul Schweitzer,
and to his staff.
More than any other man he has
repres~nted
the world's interests, and with impartiality, unusual foresight and diplomatic skill guided the negotiations to a
successful conclusion.
- 9 II
I want to acknowledge the very great assistance and
support which the U.S. negotiators have received from members
of the Congress of both parties.
The assurance that there
was not only such support, but also a keen interest in the
subject on the part of Congressional Committees and individual
members of the Congress has encouraged us at all stages of
the negotiations.
I cannot here acknowledge specifically all those members
of Congress.
But I will mention briefly some instances to
indicate how closely our efforts have been stimulated and
our progress reviewed in the Congress.
This Committee has been acutely aware of the need for
a new reserve asset to supplement gold and dollars in order
to provide adequate reserve growth for an expanding world
economy.
When considering the increase in the United States
/
International Monetary Fund quota in 1964~ this Committee
said
"at the same time, the Committee recognizes that
nothing in this measure reduces the need for the
United States to pursue effective means of improving its payments position, or the need for a
strengthened international monetary system. In
this latter connection, some members of the Committee strongly express the view that the Fund and
- 10 -
the Group of Ten as well as the U.S. Treasury
should take a more urgent approach to the requirements for an improved new system".
This view was strongly supported by Senator Clark, who
in supplemental views strongly expressed the view that
improvements in the international monetary system were
urgently needed.
The Subcommdttee on International Exchange and Payments
of the Joint Economic Commdttee, under the Chairmanship of
Congressman Reuss, has taken a specific interest in the
improvement of the international monetary system.
In August
1965 that Committee issued a report that cited the preSSing
need for action to assure the orderly and adequate expansion
of international liquidity.
The Committee set forth a series
of Guidelines which became basic pOints of reference in the
development of the U.S. posture in these negotiations.
Valuable contributions to our thinking, and to development of the United States position were made by former members of the Joint Economic Committee, Robert F. Ellsworth
of Kansas and Senator Paul Douglas of Illinois.
Early in 1967, the Joint Economic Committee itself,
under the Chairmanship of Senator Proxmire, reporting on
- 11 -
the January Economic Report of the President, issued a
"Statement of Agreement by majority and minority members
of the Joint Economic COUIDittee."
Paragraph 6 of that state-
ment reads in part as follows:
"6. In the field of international trade and
finance, there is also general accord on the
following conclusions:
"Agreement on international monetary
reform is a matter of increasing urgency.
'~e cannot rely on supplies of new
monetary gold being sufficient to assure the
growth of international reserves, in keeping
with the rising liquidity requirements of trade."
This is one of many instances of the strong bipartisan
support from the Congress for action in the field of international financial and monetary institutions.
It continues
the experience dating from the original Bretton Woods Agreements Act, under which legislative action involving the
International Monetary Fund and the International Bank have
generally had support from members of Congress without distinction as to party affiliation.
At the very outset of
negotiations, Congressman Gerald Ford and other Republican
leaders lent their influence to our taking the initiative
in seeking monetary improvements.
- 12 I cannot recall here all the many important statements
on this and related problems made by leading Senators and
Congressmen.
Among this group there are such names as
Senators Clark, Proxmire, Hartke and Javits, and Representatives Reuss, Widnall and Halpern.
Just prior to the Annual Meeting of the International
Monetary Fund in Rio de Janeiro last September, I appeared
before the Subcommittee on International Exchange and Payments of the Joint Economic Committee and reviewed the Outline Plan for the Special Drawing Rights which had been
approved at a meeting of Ministers and Governors of ten
major countries held in London at the end of August.
This
Outline Plan was subsequently approved by the Governors of
the International Monetary Fund at Rio de Janeiro and formed
the basis of the Amendment which has now been finalized in
the Executive Board of the Fund.
The Subcommittee issued a further report on this subject in December 1967 urging that the Amendment to the Fund's
Articles be promptly ratified and pointing out the risks
inherent in undue delay 'not only for the effectiveness of
the new Special Drawing Rights, but also for the stability
of the monetary system itself."
- 13 I could not improve on-the succinct statement contained
in the Report of the Joint Economic Committee on the January
1968 Economic Report of the President, which deals with
international liquidity in the following terms:
"The free world's liguidity needs reguire
prompt ratification and activation of the new
IMF's amendments providini the new special
drawini riihts."
This report continues as follows:
"The free world's liquidity needs cannot
be satisfied by continued reliance on gold,
accumulations of dollars in foreign hands,
and increased sterling liabilities. Nor can
we depend on increases in the presently provided drawing rights under the IMF agreements.
A sizable part of the apparent growth of foreign reserves in the past 2-1/2 years has been
dependent on fortuitous deficits which the
countries of the world wish to see terminated
at once. Nor is there any prospect that
increased availability of gold will do the
job. It is, therefore, imperative that the
new IMF agreements, providing for special
drawing rights, should be ratified at once
and activated at the earliest practicable
moment."
A minority opinion, while questioning some aspects of
the Administration's balance of payments program, supports
the majority with respect to the Special Drawing Rights as
fOllows:
- 14 "It therefore becomes essential in our view that:
"1. The new special drawing rights under the
IMF be activated as soon as possible after ratification of the agreement.
'~ith
gold in official monetary reserves
declining and with confidence in the key reserve
currencies beginning to wane, an additional
source of world liquidity will be needed to
accommodate expanding economic growth and,
equally important, to head off protectionist
and restrictionist measures that could result
if countries find themselves short of official
reserves. "
Finally, I wish to express my appreciation to Senator
Wallace Bennett, who, on April 30, issued a statement
endorsing the Special Drawing Rights Proposals in which he
stated "I hope this legislation is given the highest priority
in both Houses of Congress, so that the current over dependence as dollars and the demand for gold would be relieved."
Senator
Bennett pointed out, as I have frequently done,
that the proposal does not relieve us of the necessity of
solving our domestic and international deficits.
I want also to indicate how much we in the Admdnistration are indebted to the Advisory Commdttee on International
Monetary Arrangements which has worked closely with us on
these matters, under the Chairmanship of former Secretary
- 15 of the Treasury Douglas Dillon.
secretary Dillon shared
the view of the Joint Economic Committee as to the urgent
need to strengthen the international monetary system, and
so expressed himself as early as June 1965.
The Advisory
Cmmdttee was established on July 16, 1965, and consists
of Chairman Dillon and eight distinguished economists and
financial leaders.
follows:
The members of this Committee are as
- 16 Members
Francis M. Bator
Professor of Political Economy
John F. Kennedy School of Government
Harvard University
Edward M. Bernstein
President of EMB (Ltd.)
Kermit Gordon
President
The Brookings Institution
and former Budget Director
and member of the President's
Council of Economic Advisers
Walter W. Heller
Professor of Economics
University of Minnesota
and former Chairman of the
Council of Economic Advisers
Andre Meyer
Senior Partner
Lazard Freres & Co.
David Rockefeller
President
The Chase Manhattan Bank, N.A.
Robert V. Roosa
Partner
Brown Brothers Harriman & Company
and former Under Secretary of the
Treasury for Monetary Affairs
Frazar B. Wilde
Chairman Emeritus
Connecticut General Life Insurance Company
• 17 III
As I have stated on several occasions, the Special
Drawing Rights Plan is not designed to help the United
States or any other individual country deal with its balance
of payments problem.
It does not change in any way the
urgency of achieving the correction of the disequilibrium
in our balance of payments.
If it were assumed, for example, that Special Drawing
Rights were to be created in the amount of $10 billion in
a 5-year period, or at the rate of $2 billion a year, the
United States would receive about $500 million a year in
Special Drawing Rights.
This amounts to only 1/6 of the
approximately $3 billion improvement sought in the balance
of payments under the January 1 program.
Furthermore, if the United States continued to have a
large deficit and if world reserves continued to rise as a
result, this would certainly affect the collective judgment
as to the global need for reserves in the form of Special
Drawing Rights.
The provisions of the Amendment leave
flexibility for the exercise of collective judgment as to
the initial decision to create SDR, by an 85 percent weighted
- 18 -
majority vote.
But
~he
Report of the Executive Directors
of the Fund makes clear that the situation of the United
States balance of payments will have an important bearing
on that decision.
The relevant passage reads as follows:
"Article XXIV, Section l(b), provides that
the first decision to allocate special drawing
rights shall be based on the principles that
guide all decisions to allocate special drawing
rights, and in addition, that it shall take into
account certain special considerations. The
first of these special considerations is a collective judgment that there is a global need to
supplement reserves. The term 'collective judgment' reflects the requirement of an 85 percent
majority of the total voting power for the adoption by the Board of Governors of decisions to
allocate special drawing rights. The other
special considerations are the attainment of a
better balance of payments equilibrium and the
likelihood of a better working of the adjustment
process in the future. While the situation of
all members is relevant to a judgment with
respect to the attainment of a better balance
of payments equilibrium, the judgment to be
made at the time will necessarily be influenced
predominantly by the situation of members that
have a large share in world trade and payments."
In short, the Special Drawing Rights Plan does not in
any way relieve the United States of the necessity to bring
its international payments into far better balance than is
the case at the present time or has been for the last
several years.
- 19 As we are all well aware, the United States has experienced a protracted dt::c . . J..ne in
it·~
gold
r~~et
than $24 billion to less than $11 billion.
-res, fron, d.:;re
The introduction
of the Special Drawing Rights should give us a welcome opportunity to begin rebuilding the level of our reserves without
taking reserves away from other countries.
We should
endeavor to use our allocations 0f Special Drawing Rights
for the purpose of building up our reserves rather than
using them to finance a continuing deficit.
A key to the proper functioning of the international
monetary system is to maintain confidence in the dollar.
The dollar plays a role,
b()t~l
as a means of holding reserves
and as a privately used international medium of exchange,
which the world has found extremely useful and efficient,
and which would be difficult to replace.
IV
One cannot now anticipate the amount of Special Drawing
Rights that will be created under the Special Drawing Rights
procedure by the exercise of a collective judgment as to
global needs for reserves.
It is quite clear, however,
that Special Drawing Rights will be needed to maintain
- 20 -
sufficient growth in global reserves.
Over the longer run,
if the secular trend of reserves becomes too gradual, or
levels off, this can have a pervasive effect in dampening
the advance of international trade and investment.
Newly
created reserves provide a margin by which the countries
gaining reserves can do so without simultaneously reducing
the reserve position of other countries.
The narrower this
margin becomes, the fiercer is the competition for reserves
among the trading nations.
Under such conditions, the coun-
tries losing reserves have a stronger tendency to take
defensive measures by raising interest rates and applying
restraints of various kinds on capital movements or even
upon current transactions.
Other countries may respond with
similar defensive measures, leading to a cumulative escalation of interest rates and restraints and restrictions on
international transactions.
Conversely, a wider margin of new reserves entering
the monetary system will provide a greater leeway for the
countries desiring to
e~and
their reserves -- and this
includes most countries -- and to do so with less impact in
- 21 the form of corresponding reductions in the reserves of
those countries which are the weakest and can least afford
't , l.'n the international competitive sense.
l
It has, of course, been important to establish a careful
and cautious procedure for taking decisions to create
reserves that would not arouse concern regarding any misuse
of the ability to create reserves.
The procedures set
forth in the Amendment, requiring an 85 percent weighted
vote of the members of the IMF, after a period of extensive
consultation, should be fully adequate to provide the necessary as surance .
v
Attached to this statement as Attachment A is an analysis
of the main substantive features of the Special Drawing
Rights, as set forth in the Amendment.
The Executive Directors of the Fund have proposed a
single integrated Amendment to the Articles of Agreement,
that is to be accepted or rejected by countries in its entirety.
The Amendment covers modifications in the existing
Aricles of Agreement, plus additional Articles XXI through
XXXII, covering the new Special Drawing Account, together
- 22 -
with four new schedules to implement the Special Drawing
Rights facility.
There is now in process a vote by mail of the Fund
Governors, which is to be completed by May 31.
This vote
signifies that the Governors of the Fund are prepared to
recommend acceptance or ratification of the Amendment by
their governments; an affirmative vote has been cast by the
United States Governor.
The Amendment becomes effective
only when 60 percent of the members having 80 percent of
the total voting power have accepted it by formally notifying the Fund to that effect.
For the United States this
requires authorization by the Congress.
The next step is to form a body of participants in
the Special Drawing Account by depositing with the Fund a
document setting forth that the member has taken all steps
necessary to enable it to carry out all of its undertakings
as a participant.
The body of participants is not in a
position to take action until members having at least 75
percent of Fund quotas have deposited such instruments.
This provision avoids any possibility of precipitate decisions by a small group of early participants.
- 23 -
Once the body of participants has been formed, the
Managing Director of the Fund may then recommend that a
given volume of Special Drawing Rights be created for
the ensuing 5-year period.
Three special considerations
must be taken into account in this first decision to create
SDR.
They are:
(1) a collective judgment (by the required
85 percent vote) that there is a global need to supplement
reserves; (2) the attainment of a better balance of payments equilibrium; and (3) the likelihood of a better working of the adjustment process in the future.
All of these
considerations are matters of judgment and consultation
rather, than statistical formulation.
Allocation of SDR will be made to participants in proportion to their quotas in the Fund.
Any participant that
does not vote in favor of an activation proposal may "opt
out" of receiving allocations under a particular decision
to create reserves.
The Amendment sets up rules governing the use of Special
Drawing Rights in transfers among monetary authorities.
The
general effect of these rules is to cause Special Drawing
Rights to flow from countries that need to spend reserves
- 24 -
to countries that are in a strong reserve or balance of payments position, and that are expected to hold the SDR.
In
fact they are required to receive and hold the SDR up to an
amount which, together with their own allocated SDR, would
equal three times their cumulative allocations.
One procedure for spending the Special Drawing Rights
would lead to a flow of SDR to several designated countries
in a strong financial position.
By mutual agreement, how-
ever, a country needing to use Special Drawing Rights may
transfer them to a single recipient country for the purpose
of acquiring from that country balances in its own currency.
For example, if the other country is agreeable, the United
States can pay Special Drawing Rights to that country for
the purpose of reducing the dollar holdings of such a country.
This is a useful feature, since the way in which a
reserve center uses reserves is, in most cases, to purchase
and thus reduce some of its own foreign-held liquid liabilities.
There are provisions regarding reconstitution which
required extensive negotiation to reach a meeting of minds.
The basic requirement is that the average net holdings of
- 25 Special Drawing Rights should not, for the 5-year period
as a whole, fall below 30 percent of the average cumulative
amount allocated to the participant:
this provision is
automatically complied with if a participant has not used
more than 70 percent of his allocation.
It is not an
onerous obligation.
It is also worth noting that the Special Drawing Rights
can be used in various transactions with the General Account
of the Fund, through which the Fund will henceforth conduct
its traditional functions.
For example, a participant can
repay previous drawings from the Fund partly or wholly with
Special Drawing Rights -- in some cases by right, and in
others by decision of the Fund.
There is a provision permitting the holding of Special
Drawing Rights by non-member countries or by institutions
such as the Bank for International Settlements or a regional
monetary agency in Latin America.
This provision does not
permit allocations to non-members, but allows the holding
of SDR by institutions that perform one or more functions
of a central bank.
Other international institutions, such
- 26 as those engaged in development financing, cannot be authorized
to be holders of SDR or to engage in SDR transactions.
VI
The proposed Amendment also will change certain features
of the existing provisions in the Articles of Agreement of
the Fund.
There are six main proposals for change, along
with subsidiary and consequential alterations.
More detailed
discussion of these changes is provided in Attachment B.
First, general changes in quotas of the Fund are to
require approval by 85 percent of the total voting power,
instead of the 80 percent now needed.
Departures from the
standard arrangement for paying one-quarter of any quota
increase in gold are also to be decided by an 85 percent vote.
This higher majority was considered desirable by some countries to place the same decision-making requirement on
increases in liquidity resulting from quota increases as on
increases in reserves through creating and allocating SDR.
Second, the voting majority to decide on a uniform proportionate change in par values -- that is, on a change in
the official price of gold -- will be raised to 85 percent
under the proposed Amendment.
Previously, the majority
specified for this decision was a simple majority, provided
- 27 -
that each member with 10 percent of the quotas concurred.
Also, the voting majority for a decision not to maintain
the gold value of the Fund's assets in the event of a decision to change the price of gold will in the future be 85
percent, compared to a simple majority in the past.
These
changes make a change in the monetary price of gold even
more difficult.
Third, the procedures for making legal interpretations
of the provisions of the Articles of Agreement of the Fund
are to be altered.
As before, the fund:s Executive Direc-
tors will have authority to interpret the Articles by a
simple maj ori ty of the voting pOHer.
And, as before, such
an interpretation can be appealed to the Board of Governors,
whose decision will be final.
But in future, there will be
a Governors' Committee which will conduct the initial review
of an appeal to the Governors,
The decision of this Committee
will be final, unless it is :hanged by 85 percent of the
total voting power in the iull Board of Governors.
The other three changes are largely technical and, to
a large degree, represent codifying changes rather than
major new departures.
- 28 -
The fourth change involves making the so-called "gold
tranche" positions in the Fund more fully acceptable as
reserves by giving them legally automatic status, to succeed
to de facto automaticity they have had for many years.
At
the same time, so-called "super gold tranche" positions are
to be paid a remuneration, in practice an interest return,
initially set at 1-1/2 percent.
The fifth change concerns drawings in the credit tranches.
In a change that will codify the existing approach of many
years' standing, credit tranche drawings will in future
legally be subject to appropriate policy conditions.
This
legal change will not, however, require any stiffening of
the existing policies of the Fund governing credit tranche
drawings.
Sixth and finally, some technical changes are being
proposed in the so-called mandatory repurchase obligations
in the Fund.
These changes will bring these provisions
more up to date and enable them to operate more effectively
and smoothly.
- 29 -
VII
There are, it seems to me, valid reasons why it is
important that the Amendment be ratified at this session
of the Congress.
First, delay in ratifying the SDR Amendment would
encourage gold speculation.
To a very considerable extent,
the Special Drawing Right has now become recognized as one
factor which is associated with the policy of maintaining
long-term stability in the official gold price.
Second, the United States has always taken the lead in
legislative action on quota increases and other legislation
affecting the International Monetary Fund.
If the United
States were to delay action, many other countries might also
postpone ratification until the United States has acted.
This could mean a delay of many months in setting up the
facility for creating Special Drawing Rights.
With affirma-
tive action by the Congress at this session, it would be
possible for 65 member countries casting 80 percent of the
total voting power to ratify the Amendment by early 1969.
Delayed action on our part could add another twelve months
to the interim period before the facility is in effect.
- 30 -
The growth of world reserves could be meager in 1968, assuming improvement in the balance of payments of the United
Kingdom and the United States.
Consequently, any delay
in establishing the SnR facility might bring signs of an
uncomfortable international liquidity squeeze, due to the
failure of reserves to rise at an adequate rate for several
years.
As the Report of the National Advisory Council points
out, despite the financial strain of the year 1967 the
world's reserves did rise in that year by about $1.7 billion.
This occurred, despite a net loss of $1.6 billion from world
monetary gold stocks, primarily because of the growth of
dollar reserves generated by the U.S. balance of payments
deficit.
But even for the world exclusive of the United
States, reserves grew at the rate of only 3 percent, as
compared with more than 5 percent per annum during the past
17 years.
We cannot now anticipate what the decision might be as
to the amount of Special Drawing Rights that would be created
in the first 5 years, but over the longer run, the needs of
.. )
\:~
~
.. ~. ~ ,
- 31 a rapidly growing international trading and investing world
economy should be reflected in decisions to make use of the
new facility.
It is strongly in the interest of the United
States to take prompt action to become a participant in the
Special Drawing Account.
VIII
The principal provision of the bill before you is an
authorization ,to the President to accept the Proposed
Amendment.
Under Section 5 of the Bretton Woods Agreements
Act, the President, on behalf of the United States, cannot
accept an amendment to the Articles of Agreement of the Fund
until he is authorized to do sob{he Congress.
~
The bill also
authorizes the President to participate in the Special
Drawing Account which will implement the provisions of the
Special Drawing Rights portion of the proposed Amendment.
In order to participate in the Special Drawing Account, the
United States must deposit an instrument with the Fund stating that it undertakes all of the commitments of a participant in the Special Drawing Account in accordance with its
law and that it has taken all steps necessary to enable it
to carry out all of these undertakings.
- 32 The second major area covered by the proposed legislation comprises the steps that must be taken under Our domestic
law to fulfill the commitments that flow from participation
in the Special Drawing Account.
The primary commitment of the SDR facility is to have
authority to accept transfers of SDR from other participants.
This undertaking by all participants to provide convertible
currency in return for SDa is the primary element which
makes Special Drawing Rights a high quality reserve asset.
The United States must also be prepared to pay charges on
its use of its allocations of SDR and pay the United States
share of assessments the Fund may make to meet the cost of
operating the Special Drawing Account.
Because it is so essential to the operation of the
Facilit~
we must make domestic arrangements that will assure
beyond question the ability of the United States to meet its
commitment to accept transfers of SDR from other participants.
In searching for the best method to accomplish this objective,
we naturally turned to the techniques used for handling
existing reserve assets,
Purchases of gold are similar in
nature to purchases of Special Drawing Rights.
When the
United States buys gold it pays dollars in return.
Thus,
- 33 -
in a sense, our acceptance commitment for gold is the same
as for Special Drawing Rights -- the payment of dollars
against the receipt of an asset.
For gold the domestic
arrangement that assures that the United States can always
supply dollars is the authority of the Secretary of the
Treasury to issue gold certificates, against an equal amount
of gold holdings, to the Federal Reserve banks in return
for dollars.
When gold is sold, the resulting dollars are
used to redeem the gold certificates which had previously
been issued against the gold that was sold.
A similar procedure is proposed for Special Drawing
Rights..
The Secretary of the Treasury would be authorized
to issue Special Drawing Right Certificates against an equal
amount of SDR holdings to the Federal Reserve banks in
return for dollars.
Just as in the case when gold is sold,
the dollars resulting from the sale of Special Drawing
Right Certificates would be used to
red~e~
the Special
Drawing Rights which had previously been issued against them.
Use of a similar
techniq~~ L~r ~~e~~Ql
Drawing Rights as
is used for purchases and sales of gold not only provides
an assured method of meeting our acceptance commitments but
- 34 also demonstrates to the world our confidence in Special
Drawing Rights as a valuable reserve asset.
Although acceptance commitments must be honored in
order to make the SDR Facility work, they are not a burden
on the United States.
Acceptance of SDR against dollars
involves only an exchange of assets.
In return for one
asset -- dollars -- we will obtain a highly valuable international reserve asset
Special Drawing Rights -- that
the United States can use to meet problems arising from a
balance of payments deficit or a decline in reserves.
Because these transactions are exchanges of assets they will
have no effect on budget receipts or expenditures.
Similarly,
our participation will involve no increase in new obligational
authority.
The proposed legislation provides that Special Drawing
Rights will be held in the Exchange Stabilization Fund.
ESF would be responsible for providing dollars against
Special Drawing Rights presented to the United States
utilizing as needed the Special Drawing Right Certificate
procedure I have already described.
It would also pay
charges and assessments, and receive interest payments on
The
- 35 SDR.
The technical details of the operation of this method
of financing United States participation in the Special
Drawing Account are contained in the section-by-section
analysis of the proposed legislation, annexed as Attachment
C to this statement.
Finally, .it is understood that members of the Fund
wishing to become participants will have authority to accept
the rights and responsibilities that go with SDR allocations
up to a minimum amount of 50 percent of their quotas.
A
number of countries are likely to operate with no ceiling
on their ability to participate, by treating Special Drawing
Right~
in the same way as official holdings of gold and
foreign exchange, which are usually subject to no legal
ceiling.
In our case, the recommendation is that Congress
give authorization to participate up to an amount equal to
the United States quota of slightly more than $5 billion.
By placing a ceiling on the amount of Special Drawing Rights
that may be allocated to the United States, provision is
made for a Congressional review of the experience with the
Special Drawing Rights.
But by giving an authorization that
is larger than the minimum suggested by the Fund, the United
- 36 States would be indicating a more positive attitude towards
Special Drawing Rights as a reserve asset than would be
the case if we were to adopt the minimum acceptable participation authority.
B ill ions of dollars
180
7.9%
__
13.3%~
I--
IMF Positions
5.9%
12.6%
3.3%
I
Other Foreign
Excha n ge
18.4%
I--
Dollars
21.5%
---4
60
--i
40
he s" s: SUES::: Ii:: II , :
.......................
........
............
...... ..
.........
..... ........
........
.... ...
...
.. .........
........
... ..
.......................
.......
........
.......
.
...........
.... ... ....
..... .............
.... ..
.......................
....
...
...... .
:::::::
25.0% :::::::
.......................
.........
............. .
.......................
...................
... ..
.... ..........
..........
.......................
..........
..........
.
.. ....................
...............
....... ..
.......................
.......................
... iiiW.... rmWTi
::::::::: 6.3%::::::::
(,)
m':'ml, " '" mv",
.f::"
,
Gold
63.1%
53.8%
I--
---4
68.9%
"-
20
()
::r:
~
1-3
o
Dec.
Dec.
Dec.
1948
1960
1967
Economic Graphics Section, Division of Data Processing, Board of Governors of the Federal Reserve System.
Apri I 30, 1968
H
Attachment A
Main Features of Special
Drawing Rights Facility
Nature of the
~endment
The Executive Directors of the Fund have proposed a single, integrated
AmenQ~ent
to the Articles of Agreement of the IMF and this Amend-
ment must be accepted or rejected by countries in its entirety; the
approach of accepting or ratifying sane parts of the Amendment, while
rejecting others, is not open.
The integrated Amendment does, however,
contain material of two different types:
1.
A series of provisions that will introduce modifications
into a number of features of the existing Articles of
Agreement, so as to make changes in the regular or traditional operations of the Fund that are being proposed as a
result of the experience of the Fund or in order to be sure
the regular Fund operations and the new Special Drawing Rights
facility fit together into a consistent whole; and
2.
A new set of additional Articles, Articles XXI through XXXII
together with four new Schedules, which will be added on to
the existing twenty Articles and five Schedules and will
furnish the legal framework for implementing the new Special
Drawing Rights facility within the institutional set-up of
the International Monetary Fund.
Procedure for Making the Amendment Effective
The new provisions are to become effective by the procedure of amending the Fund's Articles of Agreement.
The Proposed Amendment must first
A-2
be approved by the Fund' s Board of Governors, consi sting of one Governor
from each of the 107 Fund members.
Approval requires a majority of the
weighted votes cast, and the votes cast must represent the equivalent of
a quorum of the total voting power of the Fund Governors, this being established as two-thirds of the total voting power.
The Executive Directors
have determined that this vote will be completed May 31.
Approval by the
Governors does not constitute, as a matter of law, acceptance or ratification
of the Amendment on behalf of any member government.
The Secretary of the
Treasury, as the U.S. Governor of the Fund, after consultation with the
National Advisory Council on Internal:onal Monet..ary and Financial Policies,
cast an affirmative vote on April 25.
After approval by the Board of Governors, the governments of members
of the Fund will be asked formally whether they accept the Amendment.
It
is at this stage that formal governmental acceptance is involved, and
prior legislative authorization by the Congress is required.
The Amendment
in its entirety will become legally effective, pursuant to the provisions
of the Articles of Agreement governing
amend~nts,
when 60 per cent of the
members having 80 per cent of the total voting power, have accepted it by
formally notifying the Fund to that effect.
When this has occurred, the Amendment will be fully effective as a
body of law.
A further reqUirement is provided for, however, before the
members of the Fund will be in a position to decide to activate the
Special Drawing Rights facility to create and allocate new reserve assets.
This is to form a body
of partiCipants in the new Special Drawing Account,
through which the SDR system \.':;.11 be
ada;
nistered w~ ,hin the Fund.
Each
rrember of the Fund. has the right to become a participant in the :necial
A-3
Drawing Account, but no member is legally obligated to do so, even if the
member has ratified the Amendment.
In order to become a participant in
the Special Drawing Account, a Fund member must deposit with the Fund a
document setting forth that it has taken all steps necessary to enable
it to carry out all of its obligations as a participant.
Only when mem-
bers with 75 per cent of the Fund quotas have thus became participants
can decisions of the participants in the new scheme be taken.
This pro-
cedure for substantial participation protects countries fram incurring
financial obligations against their will, and also guards against the
theoretical possibility that a very few countries would quickly became
participants and would make decisions under the new scheme that would be
opposed by the great majority of countries that had not yet completed the
procedure to become participants.
At the same time, the 75 per cent par-
ticipant requirement, while relatively high, would still enable the scheme
to move ahead even if substantial delays were to be encountered on the
part of some countries in completing the steps to become participants.
In practice, of course, it is expected tm t nearly all countries will
want to handle acceptance of the Amendment and becoming a participant
simultaneously and in a single procedure, and that is what the United
State s proposes to do.
Initial Activation to Create SDR
It is anticipated that the SDR facility will be in place and in a
position to take decisions at an early date--hopefully by the end of 1968,
but certainly in any event by early in 1969.
It will then be feasible to
initiate the procedure looking toward the first activation of the SDR system.
A-4
However, neither the timing of the first activation, nor its amount, can
be foreseen clearly at this time.
Both of these aspects are, under the
Amendment, to be matters for consultati an and decision when 1he system has
come into force, and the Amendment contains very carefully drafted provisions governing these procedures.
Decisions to activate the system will
normally provide for annual creation and allocation of a specified amount
of SDR to participants over a five-year period. ahead, but these standard
features of a decision can be altered.
Regarding any ceiling or outer
limit on the initial capacity of the SDR mechanism to create and allocate
SDR, it is understood that members of the Fund wishing to became
partiei~
will seek financial authority of not less than what is necessary for them
meet their obligations when SDR allocations to them have reached 50 per eel
of their quotas when they became IBrticipants.
If tlBt were to be generalJ,
adopted as the initial upper limit, the SDR mechanism would have the cap:lcj
to create and allocate as much as $10.5 billion of SDR before participants
would have to seek additional legislative authOrity.
But there is also a
widespread feeling tlB t countries will wish to treat SDR in their danestic
financial legislation in the same way they treat official holdings of gold
and foreign exchange, and to the extent this practice is followed, there
would be no ceiling on the financial authority of participants in the new
facility to create and allocate such amount of SDR as would command the
necessary weighted majority vote.
In the process of reaching a decision on the timing and amount of
creation and allocation of SDR, the Managing Director of the Fund will
play a central role.
He must conduct such consultations as will enable hin
A-5
,'-'"
.-1 ,-,
\.~, ~ .--~
to ascertain that there is broad support among participants for moving
ahead, and must satisfy himself that his proposal will be consistent with
specified principles governing creation and allocations.
For all such
decisions, these principles are that there is a long-term global need to
supplement existing reserve assets, that dOing so will promote the general
purposes of the Fund, and that the quantity proposed will avoid both econanc stagnation and deflation as well as excess demand and inflation in
the world.
In addition, for the first decision to allocate, three special
considerations must be taken into account:
1.
A collective judgment (referring to the required 85 per
cent vote) that there is a global need to supplement
reserves;
2.
The attainment of a better balance of payments eqUilibrium;
and
3.
The likelihood of a better working of the adjustment process
in the future.
All of the principles and considerations laid out to govern decisions on
creation and allocation are matters for careful judgment and consultation
in the light of developments as seen when decisions are in process of being
shaped, and none of them can be reduced to precise statistical formulations.
Any decision to allocate SDR must be made on the basis of a proposal
by the Managing Director.
To become effective, the proposal must be con-
curred in by a majority of the weighted votes of the Fund t S Executive
Directors and then adopted by 85 per cent of the weighted voting power
in the Board. of Governors.
In decisions relating exclusively to the
A-6
Special Drawing Account, only the votes of participants in that Account
are taken into account.
It may be said here that, although no decision
to create and allocate Special Drawing Rights can be made except on the
basis of a proposal of the Managing Director, the Board of Governors will
have authority to amend any proposal before adopting it by 85 per cent of
the total voting power of partiCipants.
Moreover, if the Managing Director
has failed to put forward a proposal--whether to start the first activation
or later--either the Board of Governors or the Executive Directors may,
by
a simple majority of the weighted voting power of the participants, make
a formal request for him to present one.
The Managing Director must then
comply wi thin six months, unless he ascertains in the process of his consultations that there is no proposal which he can make that would be consistent with the principles and considerations governing allocation and
also has broad support among participants; in this event, he must submit
a report on the situation to both the Board of Governors and the Executive
Directors.
Thus, there are a number of checks and balances built into the
procedure for reaching very carefully considered and widely supported decisions as to the timing and amount of creation of SDR.
All SDR to be created will be allocated to participants in the scheme
and only to them.
The allocation to participants will be on the basis of
their quotas in the Fund on the date of each decision to allocate.
Since
the relative size of quotas in the Fund is, at least in principle, determined as an approximation to the relative international eCalomic and financial size of Fund members, this basis for allocation appeared fair and
reasonable.
In fact, decisions to create and allocate will be expressed
A-7
in terms of a common percentage of Fund quotas for each participant.
Fund quotas are presently about $21 billion, the creation of
Since
$2 billion of
SDR, for example, would be expressed as 9.5 per cent of quotas assuming
all Fund members were participants in the SDR facility.
OUt of each
$2
billion of SDR created, the allocation to the United States would be
$489 million, and that to the six members of the Common Market $357 million.
Opting Out
Every member of the Fund has the right to become a participant, but
no member is obligated to do so.
out of the SDR facility entirely.
Thus, any country that wishes may stay
The question of "Opting Out," however,
refers to the choices that are open to a country, once it has become a
participant and is thus a voting member of the group of countries able
to adopt decisions to create and allocate SDR.
The facts on Opting Out
are these:
1.
If the Fund Governor of a participant has voted in favor of
a decision to allocate SDR at a specified annual rate over
a period of five years ahead, and that decision has been
adopted by the required 85 per cent majority, the participant is obligated to receive all the allocation of SDR
provided for in the decision and to undertake any and all
the obligations associated with these allocations--the
participant cannot "opt out";
2.
If the Fund Governor of a participant has not voted in
favor of (that is, has abstained or voted against) a decision to allocate SDR, and the decision has nonetheless
A-8
been adopted by the required 85 per cent majority, the participant then has a choice.
It
m~
elect to receive the alloca-
tions decided upon, notwithstanding the
to vote in favor of the decision.
ceive the allocations decided upon.
failu~
of its Governor
Or, it may elect not to reIf it wishes not to receive
the allocations, and to avoid the corresponding acceptance obligations (discussed below), it must notify the Fund of this
decision prior to the first annual allocation of SDR under the
decision.
This action to refuse to receive allocations decided
upon by the required 85 per cent majority is what is meant by
"Opting Out".
Since only participants whose Governors have not
voted in favor of the decision to allocate have the right to
opt out, and the decision must be supported by 85 per cent of
the total voting power of participants in order to be adopted,
the amount of reduction in SDR creation that would
~sult
frOOl
any exercise of the right to opt out could not exceed, at a
maximum, about 15 per cent of the amount contemplated by the
original proposal.
3. A country that has opted out may be permitted by the FtUld to
"opt back in" and thus to resume receiving allocations under the
same decision from which it previously opted out.
In case of
such a change of view, the participant must request the Fund
to permit it to opt back in and the Fund may do so by a majori ty of the votes in the Executive Board.
It is understood
A-9
that the attitude of the Fund toward a request to "opt back
in" will be a sympathetic one, though of course such sympathy
could be reversed if a participant showed an irresponsible
approach tCJiard the matter.
Once a participUlt had "opted
back in," it would not have the right to optout again tmder
the same allocation decision; opting out again would only be
possible at the time of a subsequent five-year decision to
allocate SDR.
In addition, opting back in applies only to
receiving those annual allocations that occur after opting
back in has occurred; it is not possible to receive retroactively the annual allocations already foregone.
Use and Transfe r of SDR
Once received through the allocation process, SDR can be used by participants in a manner broadly the same as the use of tradi ti ona1 reserve
assets--gold and foreign exchange--when these are used to make settlements
ariSing fran balance
0
f payments developnents or to support one's currency
in the exchange markets.
SDR
There are, however, rules governing use of the
in transfers among monetary authorities.
While qui te complex in their
detail, these rules have a few main purposes:
1.
To avoid instability in the system by avoiding the use of
SDR solely to change the canposition of reserve holdings;
2.
To channel transfers of SDR in such manner as to treat all
participants on the basis of the same standards, to encourage
wide and active entering into operations of the SDR scheme
A-IO
among participants, and to encourage familiarity with, and
confidence in, the SDR as an instrument for making settlements;
3.
To permi t careful use of the SDR in transactions between
participants and the regular or traditional Fund, just as
traditional reserves are used; and
4.
To encourage participants, by a modest obligation, not to
simply payout all their SDR and then forsake further acti vi ty in the SDR mechanism.
SDR are not to be used by presenting them to the Fund itself for conversion,
since under the SDR mechanism (unlike the mechanism of the regular Fund)
the Fund will not hold a currency pool related to SDR.
be
Rather, SDR are to
used among participants by transferring them directly from one partici-
pant to the other through appropriate debits and credits entered on the
books of the Special. Drawing Account.
Thus, SDR will in fact have many
of the characteristics of legal tender for use in transfers among the
monetary authorities of participants.
Transfers among participants will
generally be in return for convertible currency, and the participant transferring SDR will have full guarantees of receiving a convertible currency
conveniently usable in its circumstances in return for the SDR transferred.
To illustrate concretely how SDR will normally be used, Mr. Schweitzer,
the Managing Director of the Fund, has recently used the following practical and concrete example:
A-II
"let us assume that the Board of Governors has by an 85 per cent
majority taken the decision to activate the scheme and that for the
first basic period, as we call it, an amount of Special Drawing Rights
equi valent to $1 billion a year is to be allocated. That is just an
example. Now let us suppose tha. t a hypothetical country, let us call
it country A, has a quota in the Fund representing one per cent of total
quotas; this at present would be a quota of sane $200 million. When the
allocation is made, the Fund would credit this country in the Special
Drawing Account with an amount of Special Drawing Rights equal to $10
miliion, for if the country had one per cent of participants' total
quotas, it would receive one per cent of the allocation. Country A
could at that time add these drawing rights to its reserves becru. se
it would be entitled to use them, without any conditions, in case of
need.
"Let us now assume that country A has a need and wants to use,
let us say, half of its drawing rights to meet thi sneed. In order to
do so, it would have to convert them into a usable currency. It would,
therefore, approach the Fund and ask to what participating country it
should transfer the rights in order to get an equivalent amount of
convertible currency. The Fund would at all times maintain a list of
participating countries whose balance of payments and reserve situations
were considered satisfactory; and from this list it would designate one
or more appropriate countries to provide currency against Special Drawing
Rights. Let us assume that in this instance Germany and Italy are chosen
for equal amounts. The Fund would accordingly notify Germany and Italy
that it was crediting them, in the Special Drawing Account, with the
equivalent of $2t million each in Special Drawing Rights and that they
should credit the central bank of count::? A in their respective books
with $2~ million of deutsche mark and $22 million of lire. At the same
time the Fund would debit country A an amount of drawing rights equi valent to $5 million.
"As a result of these transactions, $5 million of Special Drawing
Rights in the assets of Country A would have been replaced by $5 million
of convertible currencies which country A could then use freely for any
purpose; and Germany and Italy would have increased their assets in the
form of drawing rights by $2t million each. Country A would be charged
a moderate rate of interest--foreseen as
per cent, at least initially-on its use of drawing rights; and Germany and Italy would be paid interest
at the same rate. I should remind you also that the Special Drawing Rights
would have an absolute gold value guarantee. Country A, as long as it
used on average over a period of five years no more than 70 per cent of
the Special Drawing Rights allocated to it by the Fund, would have no
~constitution obligation.
It
"I have talked about the rights of cotnltry A in using the Special
I should mention also that the obligation of Germany
and Italy or any other participant to accept drawing rights over and
above their allocation and to provide currency in return would extend
o~ up to a point where they had accepted drawing rights equal in value
to twice the amotnlt allocated to them by the Fund, unless of course they
agreed to hold mo re • "
DraWing Rights.
A-12
Use of the SDR by the United States
Basically, there are three ways in ...,hLh the United States could use
SDR:
1.
Preferably, if the U.S. balance of
J~yments
and reserve
position permits, the United States could retain allocations
of SDR, so as to build up reservp. i':-lldings in this fOnD over
a secular period of time.
U.S. reserves have suffered a
severe decline over a period of many years, and are now no more
than average among all Fund members when measured against the
size of imports or total international transactions--and such
comparisons do not make allowance for the special feature of
U.S. short-term liabilities in the form of dollar balances
held by other monetary authorities and by private foreign holders.
A growth in U.S. reserves stemming fram allocation of SDR would
be
deSirable, and if this were further supplemented by the
channeling of SDR transfers from other participants to the
United States under the SDR prOvisions, that would also be
desirable.
2.
If the United States satisfied the test of "need-to""l1Se" SDR,
due to developments in its balance of payments or in its overall reserves, the United States could use SDR to purchase official dollar balances fram another participant, provided that
other participant agreed to this use.
This method of use would
enable the United States to use SDR, in appropriate cases, in
a manner very much analogous to the way in which traditional
reserves of gold are used--recognizing that the dollar is the
'l'
•
-, I
J
1...''-''"'
A-13
principal market intervention currency in the international
monetary system.
However, this method of use involves a
voluntary transaction and thus is dependent upon the other
party to the transaction being willing to agree to it.
And,
being provided for as a voluntary transaction on both sides,
such a transaction would not involve the Fund playing the role
of "SDR traffic director" to determine to which other participant the transfer should be made.
3.
It would also be open to the United States, if this were preferred or if other countries did not agree to voluntary transactions of the kind just described, to use SDR for transfers
under the general provisions.
In this event, the "need-to-use"
requirement would have to be met, just as before, but the transfer
of SDR from the United States would be to one or more other participants designated by the Fund under its standard criteria,
rather than to a participant chosen by the United States.
The
United States would receive convertible currency from the participant designated by the Fund; most likely it would be dollars,
but if not it would be convertible into dollars, and the net
result would be that the United States would have used SDR to
purchase dollars from countries selected by the Fund, rather
than from countries selected by the United States itself.
,Q,ther Feature s of SDR Use
Reference has been made to the role of the Fund as "traffic director"
in channeling flows of SDR in such manner as to make the syste~ operate
A-14
smoothly and well.
Four other factors should be noted concerning the use
of SDR to make transfers among monetary authorities:
1.
The central obligation of participants is to provide convertible currency in exchange for SDR transfers to them from
other participants.
This central obligation is the main fea-
ture that assures the practical val ue of SDR as a reserve
asset.
The obligation is sufficiently important that any
breach of it is made subject to the most severe penalties
elaborated in the SDR provisions.
Hence, a country holding
SDR for use in a future period of need will have all possible
assurances that it can effectively and smoothly
SDR when the need presents itself.
make use of
The obligation to accept
SDR and pay convertible currency in return is not unlimited;
it does not extend beyond the point at which a participant's
holdings of SDR are three times the amount allocated to it.
Thus, this basic obligation means that a participant is committed to accept, against convertible currency, an amount of
SDR equal to twice the allocation to it.
The size of this
obligation to accept SDR when they are presented is adequately
large to give a practical assurance that SDR held by any participant can effectively be transferred to other participants
under the tenns of the Amendment.
At the same time, the
limitation on the acceptance obligation gives assurance to
a country in surplus that it will not wind up holding all
A-l5
of the SDR in existence.
Thus, on both sides, the acceptance
obligation offers equitable and practical assurances.
2. In the rules governing transfer, the provision of a convertible
currency against SDR, at a determined exchange rate, is fully
and carefully provided for.
There are no ambiguities or loop-
holes in the system for determining to which other participant
a transfer of SDR should be made, what convertible currency is
to be provided in return, how to convert that currency into the
currency desired by the country making the transfer, and what
precise exchange rate is to be applied to each of these transactions.
wishing
It is a fully determinate system, and each participant
tD
use SDR at any given time will have a clear and pre-
cise answer to any question as to how to go about it and what
amount he will receive in the currency he wishes.
The assur-
ances to the prospective user of SDR are complete.
3. It was thought desirable to provide some modest safeguards
against the possibility that a participant would simply pay
out the SDR received in allocation, and then abstain flOrn
further transactions.
This would hardly constitute effective
and proper participation in a system designed to provide for the
ebb and flow of reserves as payments positions shifted.
Accord-
ingly, a provisi on was included in the Amendment providing for
obligations to I1recCllstitute l1 holdings of SDR, once they had
been used.
The basic requirement--which is applicable only for
the period of the first activation and can be changed or
A-16
abrogated later by an 85 per cent weighted majority vote--is
that averaged over a time period of the most recent five years,
average }::)ldings of SDR should not fall below 30 per cent of the
average amount allocated to the participant.
This obligation
would, of course, not become operative at all if a partiCipant
did not use more than 70 per cent or' his allocations.
Nonethe-
less, all of a participant's allocations may be used fram time
to time without difficulty or conditions, so long as the average
holdings over five years do not fall below 30 per cent of
allocations.
This is not an onerous obligation.
ave~e
Detailed pro-
visions are included in the Amendment by which the Ftmd will
assist participants to acquire SDR needed to meet this obligation, and, if necessary, a participant will have the obligation
and entitlement to obtain any SDR needed to fulfill the obligatioo
in a transaction with the General Account (that is, the regular
Fund) or, if all else fails, fram another participant specified
by the Fund.
4.
Provisions also exist under which SDR can be used in a number of
transactions between participants and the General AccoUnt of the
Fund, through which the Fund will henceforth conduct its tradi-
tional functions.
The most important of these transactions will
enable participants to repay previous drawings from the Fund
partly or wholly with SDR.
The Funi will also be aOble to supply
SDR, instead of a national currency, to a country making a drawing fram the General Account, if the drawing member agrees.
A-l7
\.
r
Holders Other than Participants
There is a provision enabling the F'urrl to impart sorne flexibil1 ty
to the SDR system.
As previously indicated, only participants in the
Special Drawing Account will be able to receive allocations of SDR.
The regular Fund will be able to receive transfers of SDR from participants under certain defined circumstances, to hold them and to make use of
them in defined ways.
In addition, the Fund will have authority to pre-
scribe other countries, which are not participants, and certain types of
international bodies as authorized holders of SDR, by a decision requiring
an 85 per cent majority of the voting power of participants.
The prescrip-
tion so made must include terms and conditions consistent with the other
provisions governing SDRo
Under this power, the Fund could empower a non-
Fund member such as Switzerland to enter into SDR transactions.
It could
also authorize the BIS or a regional monetary agency in Latin America to
enter into such transactions.
However, only institutions performing one
or mare functions of a central bank for more than one member of the Fund
could be authorized in this way; other international institutions, such
as those engaged in development financing, could not be authorized as
holders of SDR or to engage in SDR transactions.
• -'I
~:."
',-'
\..-
..!
'
,
Attachment B
Modifications in the Traditional Fund
Under the Amendment proposed by the IMF Executive Directors, the
familiar traditional operations of the Fund will be carried on in the
new "General Account," while SDR business will be carried out through
the "Special Drawing Account."
The Amendment also contains proposals to
modify certain of the provisions of the existing Articles of Agreement.
These changes fall under six heads, constituting those proposals for
change which have been agreed upon, out of a rather longer and more difficult group of proposals that at one time had achieved some status among
the EEC countries.
A.
Change in Voting Procedure for Quota Increases
At present, any change in quotas in the Fund requires an 80 per cent
majority of the voting power in the Board of Governors.
Under the new
proposal, this required majority will be raised to 85 per cent for those
quota increases resulting from a general review of the adequacy of quotas.
In addition, any decision to depart fran the standard requirement that 25
per cent of quota increases be paid in gold, or to mitigate the effects
of this gold payment, will also require an 85 per cent majority in the
Board of Governors.
Such decisions related to paynent for quota increases,
to the extent the Articles of Agreement permitted them, could previously
~
taken by the Executive Directors by a simple majority of the voting
power.
It was asserted that this change was "logically linked" to the
85 per cent voting requirement for creation of SDR, since quota increases
in the traditional Fund could, to a limited extent create additions to
international liquidity.
B-2
B.
Unifonn Change of Par Values
A second change, which sane countries also saw as "logically linked"
to the 85 per cent voting majority in the SDR system, concerns a hypothetical Fund decision to make a uniform proportionate change in par
values of currencies--or in other words, to change the price of gold.
Since additional reserves could also be created by such a decision, it
was argued this decision should also be made subject to an 85 per cent
majori ty.
Presently, such a decision can be mMe by the Fund Governors
by a simple major! ty of the voting power, provided that every country with
10 per cent or more of the Fund quotas concurs; this means that the United
Kingdom and the United States are the only countries able to veto such a
decision.
Since the new proposal, requiring an 85 per cent majority,
makes a decision to change the price of gold more difficult to achieve,
the United States was able to go along with this proposal.
In addition,
if a uniform prvportionate change in par values were decided upon, the
Fund has the authority to decide
assets.
~
to maintain the gold value of its
Previously such a decision could be made by a simple majority
by the Executive Directors; under the Proposed Amendment, such a decision
-,..rill
be possible only by an 85 per cent majority in the Board of Governors.
C.
Interpretation of the Articles of Agreement
The Fund has authority to make final and binding interpretations of
its own
Article~
of Agreement.
Such interpretations can initially be made
by the Executive Directors by a majority of the weighted votes; an interpretation so made can then be appealed to the Board ot Governors whose
decision, by a majority of the voting power, is final.
Although the
3-3
right of
interp~etation
only one appeal has been
has been used with
ID8.de
c~re
and responsibility, and
to the Board r:,': Gover:1ors,
-1.
t was argued
by some that the existing procedure for inte!))retation, decided solely
by a weighted voti:.:.!; s:ysterr.;
,~oilld
crea-ce dangers that should be avoided
by a more tradi<:,ional i'onn of judicial revi·o.w.
The provision contained
in the Proposed Amendment will still utili z,,,, the Exec uti ve Directors as
the initial tribt;nal for interpretation ani will retain interpretation
within a
procedu~e
internal to the Fund.
A
~ommittee
of Governors will
be established to whi ch an appeal can be lo:lF-"d from an interpretation
by the Executive Directors.
The size of the Governors' Committee on
Interpretation, i ts composition, and the ma.iori ty by which it will decide
appeals has not yet been oecided and will be detennined subsequently by
~
appropriate provision of the Fund B,y-Laws.
It has been decided, how-
ever, that voting wi thin the Governors' Ccmmittee will be on the basis
of one vote per member of the Cormni ttee, as is usual in judicial procedures.
It is to be expected that it will be decided the Governors'
Canmittee can reverse an interpretation by the Executive Di rectors only
by a qualified majority vote--probably by a rather high proportion of the
votes in the Committee.
The decision of the Committee, in turn, will be
able to be appealed to the full Board of Governors, and overturned there
by an 85 per cent majority of the total voting power.
Governors of the
Fund who are members of the Cormnittee will be able to appoint alternates,
and it is assumed those who will actually conduct any judicial review as
m~bers of the Committee will be highly qualified legal officers of member
governments.
The new procedure for interpretation will apply only to new
questions of interpretation.
B-4
D.
Automaticity of Drawing Rights in the "Gold Tranche"
The gold tranche drawing rights of Fund members--that is, drawing
rights arising fran their gold subscriptions plus their "net creditor"
positions corresponding to the net amount of their currency subscription
drawn from the Fund by other members--will be mde legally unchallengeable
under the Proposed AmeDiment.
This, in effect, represents a legal codifi-
cation of a de facto policy and practice that the Fund has followed since
February 1952.
Several consequential changes in provisions are included
to carry out this purpose.
In addition, the Fund will in future have the
right to eliminate the existing one-time transacticn charge, which is required to be paid for all drawings from the Fund, on drawings in the gold
tranche.
Further, "net creditor" positions in the regular Fund (or "super
gold tranche" positions as they are sometimes called) are in future to
earn a remuneration (essentially an interest return) which is initially
set at l~ per cent per year; the rate can be varied within the range of
1 to 2 per cent by a majority of the voting power, and to a point beyond
these limits, if conditions require it, by a weighted majority vote of
75 per cent.
All of these changes relating to the status of the gold
tranche in the Fund are designed to improve its position as a reserre
holding, in a manner canparable to that being accorded to the SDR.
E.
Conditions on Credit Tranche Drawings
Drawings fran the regular Fund in the credit tranches--that is,
drawings beyond amounts ariSing fran a member's gold subscription or a
previously accumulated "net creditor" position--have always been subjected
to policy condi tiona by the Fund.
This has been justified on the grOUDd
B-5
that the Fmld I S resources are intended to "revolve" and to finance temporary swings in balance of payments positions, so that the policy conditions applied by the Fund should be designed to encourage countries to
cope with and reverse the
ings on the Flmd.
p~ents
problems that have led to their draw-
This approach to credit tranche drawings is now to be
codified in the Articles of Agreement by proviSions which clearly indicate
that credit tranche drawings from the regular Fund are to be made for
temporary payments difficulties and that the poliCies of countries making
credit tranche drawings must be examined to determine whether they are
such as to render thei. r use of credit tranche drawings temporary and
reversible.
It is important to note, however, that under these modifi-
cations, the Fund will retain full
authority to adapt its policies on
credit tranche drawings and tlBt it is not necessary to make the existing
policies and practices more stringent in order for them to conform to
the tenus of the Proposed Amendment.
F.
Autanatic RepUrchases
Repurchases are transactions by which Fund drawings are reversed or
IIrepaid."
In recent years, more than 90 per cent of such repayments have
been through repurchases at scheduled maturities within
3-5 years fran the
corresponding drawings, or by virtue of other members making drawings of
the currency of the country needing to repay.
In addition, however, the
Articles provide for mandatory repurchases in circumstances where the
reserves of the country with drawings outstanding have been riSing, and
it was thought desirable to modify these highly technical provisions to
bring them more up-to-date.
In the Articles as they now stand, a net
reserve concept (that is, gross holdings of reserve assets minus shortterm liabilities in the country's own currency to foreign official holders
B-6
plus foreign banks) was used in determining reserve increases or decrf'ases
for this purpose; in the Proposp.d Amendment, a gross reserve concept
to be used for th:s purpose, in the same way that gross reserves arc
normally used as the tasis of most economic analysis in'modern thinki..
Several new features are to be placed in the fn!'nlula for
detennin~_ 'lg
mandatory repurchases, as follows:
1.
The basic formula is to take acccunt of repurchases effected
by other means during the Fund's financial year, to redUCE
repurchases calculated under the man !cco:ry formula.
This
has not been the case under the existing provisions.
2..
Mandatory repurchases are to be sllhject to the followinp:
limi ts:
a.
They will not be due in an amount that will reduce
the repurchaSing member's gross reserve holdings below
150 per cent of its Fund quota.
The comparable limit
in the existing Articles is that a repurchasing member's
net reserves will not be reduced below 100 per cent of
its
b.
F'und
quota.
Any calculated amount in excess of 25 per cent of the
repurchasing member's Fund quota in a given year will
be postponed until the end of the following Fund
fin?~ci~l
year.
There is no analogous limitation in
the existing provision.
3.
The Fund will have discretion to dl-sregard, in its calculation of reserve increases and the resulting mandatory
B-7
repurchase obligations, reserve holdings arising out of swap
transactions.
Finally, the existing provisions on mandatory repurchase can result
in repurchases being calculated in a currency which the Fund cannot accept because the country issuing that currency itself has drawings outstanding fran the Fund; in that event (which is the situation for mandatory repurchases calculated in either U. S. dollars or sterling at present)
the calculated repurchase is abated (or in other words, completely set
a.side).
It appeared undesirable to continue this practice, and in future,
under the Proposed Amendment, such calculated repurchases will have to be
ca.rried out in other currencies acceptable to the Fund.
Attachment C
EXPLANATION OF THE LEGISLATION PROVIDING FOR UNITED STATES PARTICIPATION
IN THE SPECIAL DRAWING RIGHTS FACILrry
Section 1
This section provides that the Act may be cited as the Special
Drawing Rights Act.
Section 2
Section 2 authorizes the President to accept the Amendment to the
Articles of Agreement of the International Monetary Fund which establishes
the Special Drawing Right Facility.
The Amendment also covers a number
of changes in the existing operations of the Fund.
The Amendment is attached to a resolution of the Board of Governors
of the Fund.
Article XVII(a) of the Fund Articles requires that this
Resolution approving the Amendment be approved by a weighted majority
vote of the Fund Governors.
Once approved, the Amendment is then submitted
to Member Governments for acceptance.
Article XVII(a) requires that the
Amendment be accepted by three-fifths of the members exercising 80 percent
of the total voting power.
Section 5 of the Bretton Woods Agreements Act, as amended (22 U.S.C.
286c), requires that approval of Congress must be given before the
President may accept an amendment to the Articles of the Fund.
Section 2
of the draft bill would give the necessary congressional authorization
to the President and it would also give approval to United States participation in the Special Drawing Account which would be established by the
Amendment to implement the Special Drawing Rights Facility.
0-2
Section 3
In order to participate in the Special Drawing
Accoun~
under
Article XXIII, Section 1, the United States must deposit an instrument
with the Fund stating that it undertakes all of the commitments of a
participant in the Special Drawing Account in accordance with its law
and that it has taken all steps necessary to enable it to carry out all
of these undertakings.
(To make the Facility operational, such instru-
ments must be depos i ted by members with 7510 of the total Fun d quotas).
The prDnary commitment is the ability to accept Special Drawing
Rights from other partiCipants and pay a convertible currency in return.
Participants must have authority to accept Special Drawing Rights in
amounts equal to three times their net cumulative allocations (Article
XXV, Section 4).
The United States must also be prepared to pay charges
on its use of its allocations of Special Drawing Rights (Articles XXVI,
XXX and XXXI), and pay such assessments as the Fund may make as the
United States pro rata share of the administrative expenses of running
the Special Drawing Account (Article XXVI, Section ,It) •
... ~c'ion 3
Clt hor~
ea the assumption of these responsibilities.
It provides that Special Drawing Rights allocated to, or acquired by,
the United States will be deposited in and administered as part of the
resources of the Exchange Stabilization Fund established by Section 10
of the Gold Reserve Act of 1934, as amended (31 U.S.C. 822a).
Section 3(b) also allocates the proceeds of the use of Special
Drawing Rights to the Exchange Stabilization Fund.
Accordingly, this
section imposes a corresponding responsibility on the Exchange Stabilization
C-3
Fund to provide dollars against Special Drawing Rights when they are
presented to the United States for acceptance.
The commitment to pro-
vide currency against Special Drawing Rights is the touchstone of what
makes Special Drawing Rights a valuable reserve asset.
The United States
must have domestic procedures that will give unquestioned assurance of
our ability to meet this commitment.
These procedures are provided for
in Section 4 of the draft bill and are described below.
In addition, sUbsection (b) of Section 3 gives the Exchange Stabilization
Fund the responsibility for paying charges on use of United States net
cumulative allocations,and assessments pursuant to Article XXVI, Section 4.
Article XXVI, Section 3, provides that the rate of charges on Special
Drawing Rights will be 1-1/2 percent, although this rate may be changed
within the limits of 1 to 2 percent, by simple majority, and can be moved
outside these limits if a wider range is decided on for renurneration on
super gold tranche positions under Article V, Section 9, as amended by
the proposed Amendment.
Assessments may be made pro rata in proportion
to net cumulative allocations to pay the administrative expenses of the
Special Drawing Account.
In most cases, charges and assessments are payable
in Special Drawing Rights, although in certain circumstances charges in
connection with liquidation might have to be paid in currency.
Normally,
it would be expected that the Exchange Stabilization Fund would reserve
same of its holdings of Special Drawing Rights to pay charges and assessments.
Subsection 3(b) provides that payments of interest to the United
States on holdings of Special Drawing Rights in excess of United States
C-4
net cumulative allocations would be deposited in and administered as put
of the Exchange Stabilization Fund.
The interest rate will be the same
as the rate of charges described above.
Interest earnings while the
United States is holding Special Drawing Rights in excess of net Cumulative allocations (which are paid in Special Drawing Rights) will provide
a source of funds for paying charges when the United States is using its
net cumulative allocations.
Section 4
Section
4
gives the Secretary of the Treasury authority to issue
Special Drawing Right certificates to the Federal Reserve Banks in
equal to any Special Drawing Rights held by the United States.
~ount8
The
Federal Reserve Banks would credit the account of the Exchange Stabilizatim
Fund with a dollar deposit in an amount equal to the value of the Special
Drawing Right certificate.
Special Drawing Right certificates would be
issued and remain outstanding only for the purposes of finanCing the
acquisition of Special Drawing Rights or financing exchange stabilization
operations.
Under this provision, dollar balances obtained by the
Exch~e
Stabilization Fund through the issuance of Special Drawing Right certificG
to the Federal Reserve Banks could not be used for domestic purposes such a
deposits in commercial banks or acquisition in the open market of united
States Government obligations.
Section 4(a) provides that the amount of Special Drawing Right
certificates issued and outstanding shall at no time exceed the value of
the Special Drawing Rights held against the Special Drawing Right certifici
Thus, dollars resulting from the sale of Special Drawing Rights against
which a certificate had been issued would be used under Section 4(b) to
redeem an equivalent amount of Special Drawing Right certificates.
The above financing method provides absolute assurance that the unit~
States can meet its acceptance commitment
C-5
Purchases of gold are similar in nature to purchases of Special
Drawing Rights.
return.
When the United States buys gold it pays dollars in
Thus, in a sense, our acceptance procedures for gold are the
same as those for Special Drawing Rights -- the payment of dollars against
the receipt of an asset.
For gold the domestic arrangements that assure
that the United States can always supply dollars is the authority of the
Secretary of the Treasury to issue gold certificates, against an equal
amount of gold holdings, to thp. Federal Reserve: Banks in return for dollars
(Section 14, Gold Reserve Act, as amended, 31 U. S . C. 405b).
When gold
is sold, the resulting dollars are used to redeem the gold certificates
which had previously been issued against the gold that was sold.
Although acceptance commitments must be honored in order to make the
Special Drawing )-:ight Facility w()rk, they are not a burden on the United
States.
M
Acceptance of Special Drawing Rights against dollars involves
exchange of assets.
In return for one asset -- dollars
the United
States will obtain a highly valuable international reserve asset -- Special
Drawing Rights - - that it c an us e to meet problems aris ing from a balance
of payments deficit or a decline in reserves.
Because these transactions
are exchanges of assets, they will have no effect on budget receipts or
expenditures.
Similarly, United States participation in the Special
Drawing Account will involve no increase in new obligational authority.
There follows a series of examples making assumptions about the flow
of Special Drawing Rights.
The consequences of such flows for the domestic
financing procedures provided for in Sections 3 and !~ are then explained.
A.
An allocation of
500 million Special Drawing Rights is made to the
United States:
The
500 million Special Drawing Rights would be entered upon the
books of the Exchange Stabilization Fund.
B.
The United States has a deficit in its balance of
p~yments
and it
sells 500 million Special Drawing Rights to another country:
The Exchange Stabilization Fund would receive $500 million or $500
million equivalent in foreign convertible currency.
These funds
would be held in the Exchange Stabilization Fund against the liability
to repurchase an equal amount of Special Drawing Rights and could
be used in exchange stabilization
oppr~tjo~s.
Interest earnings
from such operations or from investments would be held for the
exclusive purpose of meeting commitmpnts under the Special Drawing
Rights Facility, including payments of charges and assessments.
C.
The United States having sold all of its holdings of Special Drawing
Rights eliminates its deficit and is presented with Special Drawing
Rights by other participants:
The Exchange Stabilization Fund would usually use the dollars it
acquired at the time it originally sold its Special Drawing Rights
allocations to purchase the Special Drawing Rights presented.
Under
this example, and others set forth herein, Special Drawing Right
certificates could be issued against Special Drawing Rights on hand
at any given time equivalent to those received through allocations only
in circumstances where there was a need for resources to purchase
Special Drawing Rights or to engage in exchange market operations.
D.
Having repurchased an amount equal to our allocations, the United
C-7
states is now presented with Special Drawing Rights from other
participants in amounts in excess of net cumulative allocations:
The Exchange Stabilization Fund would accept the Special Drawing
Rights and simultaneously issue a
Speci~l
Drawing Right certificate
to a Federal Reserve Bank for a dollar oeposit in order to provide
dollars to the presenting participants.
E.
The United States sells its Special Drawing Rights that are held
in excess of our allocations:
The Exchange Stabilization Fund would receive dollars from the
foreign country and use these dollars to redeem an equal amount
of Special Drawing Right certificates held by a Federal Reserve Bank.
Section 5
Section 5 makes a number of amendments in the Federal Reserve Act
to allow the Federal Reserve Banks to hold Special Drawing Right certificates.
Subsection 5(a) amends the third sentence of the second paragraph
of section 16 of the Federal Reserve Act, as amended (12
u.s.c.
412),
to allow the deposit of Special Drawing Right certificates as collateral
security for Federal Reserve notes.
The first sentence of the fifth paragraph of section 16 of the
Federal Reserve Act, as amended (12 U.S.C. 415), is further amended by
subsection 5(b) to allow Federal Reserve Banks to reduce their liability
for outstanding Federal Reserve notes by depositing Special Drawing
Right certificates with the Federal Reserve Agent.
Subsection (c) amends the seventh paragraph of section 16 of the
0-8
Federal Reserve Act, as amended (12 U.S.C. 417), by providing that Spec1~
Drawing Right certificates, like gold certificates, shall be held in the
joint custody of the Federal Reserve Agent and the Federal Reserve
B~s.
Subsection (d) amends the fifteenth paragraph of section 16 of the
Federal Reserve Act, as amended (12 U.S.C. 467), by allowing Special
Drawing Rignt certificates, like gold certificates, to be deposited with
the Treasury.
Section 6
Paragraph 3 of Part I of the Executive Directors' Report to the
Board of Governors of April 1968, notes (p. 6) two ways in which participM
can meet their acceptance obligations:
(1) by obtaining authority to
accept the rights and responsibilities that go with Special Drawing
Rights allocations up to a minimum amount of 50 percent of their quotas,
and (2) by treating Special Drawing Rights in the same way as official
holdings of gold and foreign exchange, which are usually subject to no
legal ceiling, thus obViating any need for fUrther legislative action.
Section 6 would authorize United States participation in allocations up
to an amount equal to the United States Fund quota of $5,160 million
and
the U. S. Governor could not vote for allocations to the United states
exceeding this amount.
By
placing a ceiling on the amount of Special
Drawing Rights that may be allocated to the United States, provision is
made for a Congressional review of the experience with the Special Drawing
Rights.
But, by giving an authorization that is larger than the minimUlll
suggested by the Fund, the United States would be indicating a more
C-9
positive attitude towards Special Drawing Rights as a reserve asset than
would be the case if the minimum acceptable participation authority were
adopted.
Section 7
Article XXVrr(b) provides that no tax of any kind shall be levied
on Special Drawing Rights or on operations or transactions in Special
Drawing Rights.
The privileges and immunities of the Fund were given
force and effect in the United States under Section 11 of the Bretton
Woods Agreements Act, as amended (22 U.S.C. 286h).
Section 7 would
follow this precedent by giving Article XXVrr(b) full force and effect
in the United States, its Territories and possessions upon United States
participation in the Special Drawing Account.
36~
TREASURY DEPARTMENT
=
gH'.ASB 6: 30 P.K. I
!!9' )fay 13, 1968.
)!
BESUL!S 0'7 'IIIASUBI' S BIlLY BILL 01'lZ1DG
1be Treasury Depe.r1illent annoUDcecl tbat tbe tenders tor two series ot Treasury
llls, one series to be an additional issue of the bills elated February 15, 1968, and
118 other series to be elated Ma.y 16, 1968, which were ottered. on )fay 8, 1968, vere
~ned at tbe Federal Resene BaDks today.
TeDders were invited tar $1,600,000,000,
r tbereabouts, ot 91-clay bills and tor $1,100,000,000, or tbereabOl:lts, ot l82-day
lUs. DIe details of the two series are as follows:
lD or ACCEP.l!IiD
lIPI'fIfiVE BIDS:
High
Low
11
Average
!I
91-claJ TreasUZJ bills
maturiy hEst 15 01 1968
Approx. Equiv.
Price
Amlua1 Rate
98.607
5.511i
98.590
5.57~
98.595
5.55aj
182-~ treasury bills
mturi!Y5 Kove!lber 14: z 1968
Approx. Equiv.
Price
AnDua1Rate
97.108 !J
5.12OJ
91.084.
5.76~
97.093
5.75~
Y
Excepting one teDder of $2,000
aaount of 91-daJ bills bid tor at the low price was acceptecl
aaount ot 182-day bills bid tor at the low price was accepted
~ of the
3~ of the
ow. mJDERS
APPLIED FOB AJ1D ACCEPJEl) II ftDIBAI, RESERVE DISTRICTS:
District
Boston
Je, York
Ph1lade 1phia
Clevel.aD4
RiclDoDd
Atlanta
Chicago
St. lml1a
Milmeapol1s
r&naas City
~llas
San Francisco
~
if InCludes
Applied Por
•
18,995,000
1,361,710,000
13,4:03,000
4.0,984.,000
6,070,000
32,253,000
313,017,000
3:3,099,000
18,092,000
14,855,000
17,887,000
193,885,000
Accepted
•
18,995,000
782,620,000
5,-'03,000
25,304.,000
4.,230,000
19,89:5,000
100,217,000
16,959,000
13,232,000
13,855,000
7,887,000
91,785,000
$2,416,941,000 $1,600,106,000 ~ $2,064.,250,000
$1,100,4.40,000
Applied For
Accelted
$ 24:,210,000 ",210,000
1,623,724:,000 1,053,274.,000
14:,315,000
26,359,000
21,957,000
21,957,000
13,'90,000 :
14:,990,000
37,254:,000
4£,624:,000
24:1,193,000 :
4:20,793,000
33,4.85,000
4.8,500,000
19,753,000
21,865,000
30,227,000
31,227,000
13,156,000
23,156,000
91 01 792,000
113 z542,OOO
£I
$263 680 000 noncaapetitive tenders accepted at the aYerage price of 98.595
~ InCludes $132; 951: 000 nonccapetitive tenders accepted at the aftrage price ot 97.093
~ bse rates are on a bank discount basis. 'Dle equivalent coupon issue 71elds are
S.7~ for the 91-day bills, aDd 6.~ tar the 182-clay '-ills.
F-1244
TREASURY DEPARTMENT
FOR JMMEDIATE RELEASE
PRELIMINARY RESULTS OF TREASURY I S CURBEtrr EXCHANGE AND CASH OFFERINGs
The Treasury today announced that preliminary figures show that it will raise
$2.0 billion of new cash in its current exchange and cash offerings of 6 percent Treasury notes maturing in 1975 and 1969.
&bout
Exchange Offering
Preliminary figures show that about $6,72' million, or 83 .6~, of the $8 ,047
million Treasury notes and bonds maturing May 15, 1968, have been exchanged for
the 6 percent Treasury Notes of Series B-1975. This includes exchanges of $2,731
mllion, or 69.5~, of the $3,930 million of eligible securities held outside the
Federal Reserve Banks and Government accounts.
Details of the exchange are as follows (in millions):
ELIGIBIE FOR EXCHANGE
Securities
'-3/4.~ notes
5-7 /8~ bonds
Totals
Amounts
$5,587
2 2460
$8,047
EXCHANGED BY
FRBts and
All
Govt. Accts.
Others
$3,488
505
$3,993
$1,539
la 192
$2,731
TOTAL
EXCHANGED
$5,027
la 697
$6,724
UNEXCHANGED
Amount Percent
$ 560
763
$1,323
10.0
31.0
16.4
C&sh Offerinfj
The Treasury announced a 28 percent allotment on subscriptions in excess of
$100 000 for the cash offering of $3 billion, or thereabouts, of 6 percent Treasury
Kote~ of Series C-1969 due August 15, 1969. Subscriptions for $100,000 or less will
be allotted in full. Subscriptions for more than $100,000 will be allotted not less
trum $100,000. The total amount of subscriptions accepted ia about $3,332 million.
Reports received thus far fram the Federal Reserve Banks show that subscriptions
total $10 ,180 million , of which $8 ,
367.million were received from commercial banks
for their own account and $1,813 million from all others.
Details by Federal Reserve Districts as to subscriptions and allotments for the
two new notes will be announced later.
F-1245
364
STATEMENT OF JOHN R. PETTY
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE HOUSE BANKING AND CURRENCY COMMITTEE
MAY 13, 1968
16:00 A.M.
Mr. Chairman, I am happy to appear before this Committee
in support of H. R. 16162.
I would like to emphasize the
importance of the proposed Export Expansion Facility in
the framework of our comprehensive program to restore
equilibrium in our balance-of-payments accounts.
President Johnson said that the need for action to
eliminate the balance-of-payments deficit is "a national
and international responsibility of the highest priority."
The reasons for this priority are abundantly clear.
The
strength of the dollar abroad depends on our payments
position.
The international monetary system which rests
so largely on the dollar will be greatly strengthened by
elimination of the United States payments deficit.
A
stable international monetary system is essential to assure
expanding world trade, and a prosperous international economy.
On January 1 of this year, the President proposed a
comprehensive balance-of-payments program designed to bring
our balance-of-payments position close to equilibrium in
the year ahead.
F-1246
The program is broad and comprehensive.
- 2 -
It requires additional savings in many phases of our
activities abroad.
It affects government expenditures
overseas, foreign loans and investments, foreign travel
and foreign trade.
A large part of this program has already been put
into operation.
A program has been established to cut
government personnel and other expenditures overseas as
well as to reduce the impact on our balance of payments
of national security expenditures which cannot be further
reduced.
The Office of Foreign Direct Investment is now
administering a program of temporary restraint on direct
investment and the Federal Reserve has greatly strengthened
its existing voluntary restraints on lending abroad by banks
and other financial institutions.
The Administration has made a number of proposals in
the field of travel designed to decrease the amount of
money spent abroad by U. S. travelers.
These proposals
are now under consideration by the Congress, and we are
hopeful that they will be enacted.
On the earnings side
of the tourism picture, the Industry.Government Task Force
on Travel, chaired by Ambassador MCKinney, has made comprehensive recommendations to promote the flow of foreign
- 3 -
travelers to the United States.
Many of the recommendations
of the Task Force have already been implemented.
Moreover, consultations, requested by the President, have
been undertaken to improve our trade position.
Our hope is
that this improvement will be in the framework of continuing
expansion of world trade.
In addition, longer range nego-
tiations have been commenced at GATT on the subject of border
tax adjustments.
The President in his January 1 Message also focussed
on the long-term measures which would assure a strong balanceof-payments position for the United States.
He placed great
emphasis upon the importance .of enacting an anti-inflation
tax, encouraging wage-price restraints and reducing crippling
work stoppages in order to keep American products competitive.
In addition, he cited three areas where further efforts are
needed:
(1) increasesin exports, (2) reduction of nontariff
barriers, and (3) increased foreign investment and travel in
the United States.
The most important way to earn foreign exchange is
through increased exports.
Unfortunately our trade surplus
MS decreased from $6.7 billion
$3.5 billion last year.
~derscores
four years ago to less than
Data for the first quarter of 1968
the necessity of intensifying our efforts to
- 4 -
expand exports.
Increased exports are the cornerstone of
our balance-of-payments position.
In addition to measures
to keep the domestic economy competitive and stable and to
keep world markets open to U.S. goods and services, we need
to make our industry more export-minded through export
expansion programs.
To accomplish this objective, the President proposed:
(1) A 5-year $200 million Commerce Department
program to support and stimulate the sale of American
goods overseas through trade fairs and other means.
(2) A joint Export Association program under the
Commerce Department to provide direct financial support
to American corporations joining together to sell abroad.
(3) A more liberal rediscount system to be provided
by Export-Import Bank to encourage banks to help firms
increase their exports, and
(4) The Export Expansion Facility.
The Export Expansion Facility legislation which is before
you today can make a significant contribution to a larger
United States trade surplus and thus to our balance-of-payments
position.
It can do this principally through helping in the
- 5 development of new markets for U. S. goods and services and
by assisting smaller companies in exporting.
President
Johnson in his letter of March 20, 1968 transmitting the
export expansion facility draft bill and requesting approval
of a $2.4 mi11i.on supplemental appropriation to launch the
five year Commerce program to promote American exports said
"Both actions I recommend today will help increase America's
exports •• a vital element in the balance of payments equation."
The establishment of this facility within the ExportImport Bank was specifically endorsed by the President's
Cabinet Committee on the Balance of Payments.
The Action
Committee on Export Financing of the National Export Expansion
Council in 1966 proposed the creation of a somewhat similar
national interest fund in the Export- Import Bank whic h would
permit Export-Import Bank to support U. S. exports on the
basis of less stringent credit judgments than called for by
existing Bank standards.
The proposal also finds its origins
in the Export Expansion Act introduced in 1965 by
Senator Magnuson and Representative Adams.
It is evident
that considerable thought and study have gone into this
proposal.
- 6 I would like to emphasize that the legislation before
you is designed to improve the United States balance of
payments by expanding U. S. exports on a commercial basis.
Mr. Linder has already emphasized that the new facility is
designed to give further support to our commercial export
trade.
We in the Treasury are keenly aware that an export
loan is only helpful to our balance of payments to the extent
down payments and installments are received.
Therefore, we
support H. R. 16162 because we are convinced that the Export
Expansion Facility will encourage acceptance of our exports
in difficult markets, it will permit our products to become
established in new markets where the potential for follow-up
sales is high.
In markets where competition is aggressive
it will facilitate the maintenance and expansion of existing
export markets.
Mr. Chairman, these are the reasons for Treasury support
for the proposed legislation before this Committee.
We believe
the proposed Export Expansion Facility will assist United
States exporters to expand their sales abroad and will contribute to elimination of our balance-of-payments deficit.
000
TREASURY DEPARTMENT
£
May 13, 1968
IR RELEASE MORNING NEWSPAPERS
IESDAY , MAY 14 , 1968
TREASURY PUBLISHES PROCEDURES FOR EXCHANGING
SILVER CERTIFICATES FOR SILVER BULLION
The Treasury Department today published procedures governing
Ie exchange of silver certificates for silver bullion during the
!maining period of exchangeability, which ends June 24, 1968.
After that date, silver certificates will continue to be usable
; legal currency, but may not be redeemed for silver.
The exchange procedures, published in today's Federal Register,
re essentially the ones that Treasury has followed since it began
lMarch, 1964, to redeem silver certificates with silver bullion
ather than silver dollars, as authorized by law. The Department
ow has simply formalized the procedures to insure orderly
ransactions during the remainder of the exchange period.
To obtain silver bullion in exchange for silver certificates,
holder of certificates must present them in person at the
ederal Reserve Bank of New York or San Francisco or at the
nited States Assay Office in New York or San Francisco. In the
ase of certificates presented to the two Federal Reserve Banks,
he holders receive receipts which may be exchanged for silver
ullion at the assay offices
0
In its notice in the Federal Register, Treasury urged holders
fcertificates who want to redeem them for silver bullion to do
o promptly, since the exchange period is now nearing an end.
he Department also pointed out that the two Federal Reserve
anks and two Assay Offices will make exchanges only during normal
orking hours, and said that if many holders wait until just
efore the June 24 deadline the exchange facilities may not be
ble to handle all requests.
000
..1247
f9R RELEASE .ON DELIVERY
REfvlARKS OF THE HONORABLE ROBERT A. \-JALLACE
ASSIST:Af\lT SECRETARY OF THE TREASURY
BEFORE THE GOVERNME~IT AND FOREIGN AFFAIRS ASSOCIATION
UNIVERSITY OF VIRGINIA, CH/\RLOTTESVILLE, VIRGINIA
TUESDAY, fvlAY 14, 1968, 4: 00 P .t~.
THE U. S. ECONOMY Af\l[) RECENT CHMIGES IN GOLD POLI CI ES
TJ-IE CHAf'ICES FOR CONGRESSIONAL ACTION ON A SU3STN!TIAL FISCAL PACKAGE
APPEAR TO BE VERY GOOD.
OF COURSE, THE
AD~lINISTRATION
ACTION SrPULD HAVE BEEN TAKEN LAST YE/\R AND I
~CCELERATION
SUPPORTED BY THE RECENT
THI~lK
FEELS THAT THIS
THIS POINT OF VIE\,! IS
IN THE RATE OF PRI CE INCREASES AND
INTEREST COSTS, AS WELL AS THE LOSSES IN (.,oLD RESULTING FROM INTERNATIONAL
CONCERt'I OVER \lJHETHER OR NOT WE \I-IOULD FOLLOW A COURSE OF FISCAL RESPONSIBILITY.
NEVERTHELESS, THERE IS STI LL TI ME TO PREVENT A SER IOUS S ITUATI ON FROM
GRm'JING HORSE AND WE OUGHT TO BE ABLE TO GET BACK ON THE TRACK OF STA[3LE
ECONOMIC GRm-JTH.
WITH THI S FI SCAL ACTION "IE SHOULD SEE A SHARP SLOHING OOHN
IN THE RATE OF PRICE INCREASES, INTEREST COSTS, AND ALm4G \lJITH IT, A
STRENGTHENING OF INTERNATIONAL CONFIDENCE IN THE DOLLAR.
PROSPERITY 's
PROBLE~1S
-;:'. AND VALUES
READING ABOUT U. S.
ASK ItJHY \.,tE HAVE THEM.
\~E
ECONOt~I C
AND FINAf'KIAL PROBLEMS, ONE MAY \t·JELL
THE FACT IS THAT THESE ARE THE HORRIES OF PROSPERITY.
COULD QUICKLY BAa\jISH THEM WITH AN OLD-FASHIONED RECESSION SUCH AS
OCCURRED THREE TI MES I N THE SEVEN YEARS [3EFORE THE PRESENT EXPANS I ON 3EGAf'J
IN 1961.
A RECESS ION HOULD DRASTICALLY CURTAIL INFLATIONARY PRESSURES AND
PROBABLY PROVIDE A QUICK REDUCTION IN OUR BALAf'KE OF PAYi"1ENTS DEFICIT.
FE\~
OF US VJOULD WILLINGLY PAY THE PRICE OF WIDESPREAD UNEt-1PLOYI"ENT, SLm-J
SALES, SHRINKING PROFITS, AND LOST PRODUCTION.
THUS, THE BETTER HAY TO
DEAL WITH TliE WORRIES OF PROSPERITY IS ',1ITH SELF-DISCIPLINE.
BUT
- 2 -
THE PRWARY PERI L OF PROSPERITY IS THAT INFLATIONARY H·1BflLANCES MIGHT
DEVELOP NJD KI..JOCK US INTO A RECESSION -- THE OLD
BOO~1 ~ND
AVOIDING THIS \-JILL REQUIRE FISCAL RESPONSIBILITY.
WE MUST HirOSE ON OURSELVES THE
CO~1PARATIVELY
3UST
SYNDRO~-£.
AS A DEtl.OCRATIC NATION.,
SMALL PRICE OF
GOVER~W£NT
EXPENDITURE RESTRAINTS., f'v:ODEST TAX INCREASES., fIND BALANCE OF PAYf·'ENTS RESTRICnONS.
THIS \-JILL NOT BE POPULAR., BUT IT IS NECESSARY IN ORDER TO PRESERVE
THE VASTLY GREATER GOOD -- A STABLE PROSPER ITY •
OF COURSE., THE
PRES~URES
THE COSTS OF VIETNAM.
ON OUR ECONOMI C SYSTEM STEM VERY LARGELY FROM
THE REASON THESE COSTS, PER SE, ARE BURDENSor"'E, HOVJEVER
IS THAT THEY HAVE BEEN PI LED ON TOP OF I\N ECONor'lY ALREADY VERY NEAR FULL
EMPLOYt-1ENT, ItIITH LITTLE SLACK TO ABSORB THE EXTRA DEW\NDS ON OUR PRODUCTIVE
CAPACITY.
SO It/E MUST HOLD DOWN THE GRO\tJTH OF OTHER
DE~ANDS
-- BOTH IN THE
GOVERNMENT AND IN THE PRIVATE SECrmRS -- IN ORDER TO ACCOMtv'ODATE OUR VIETNAM
NEEDS.
IN SOME RESPECTS, MANY AMERICANS MAY HAVE COr",E TO FEEL A LITTLY GUILTY
ABOUT ENJOYING PROSPERITY.
IT SEEMS TOO':,SElF-:-!I!NDULGENT AND EVEN SELFISH.
IS TRUE THAT PROSPERITY PRODUCES ITS OWN ORAND OF EXCESSES.
IT
IT PROBABLY
BREEDS SMUGNESS AND SLOTH AS HELL AS GREED AND SOCIAL DISSATISFACTION.
BUT THE PURPOSE OF HIGH EMPLOYMENT IS NOT JO PROt-'OTE A LA DOLCE VITA
KIND OF EXISTENCE -- FAR FROM IT.
THERE IS A POSITIVE AND UNSELFISH SIDE OF
AN EXPANSION WHICH fv1AKES ITS PRESERVATION THOROUGHLY i-JORTH~-JHILE.
FOR ONLY
SUCH AN ENVIRONMENT PROVIDES THE JOB OPPORTUNITIES NEEDED FOR THE POOR AND
THE DISADVANTAGED TO ESCAPE THE TRAP OF GRINDING POVERTY.
ONLY IN A GRO\'JING
\.....'
· . I
I
t.
f
- 3 ECOt.O~1Y
DO
YOUi'~G
PEOPLE REALI ZE THE I R FULL ECONOfvH C POTEr-;T I I\L.
HIGHLY PRODLJCTIVE N!-,\TIOt,: PROVIDES ITS SOLDIERS \'lITH THE GOODS
m'lL Y A
N~D
SERVICES
ONLY IN THESE SURROUNDI ~lGS CAN OUR CORPORATIONS HAVE THE
THEY NEED.
~;ECESSARY
INCENTIVES FOR INVESTf'v'ENT SO I,'v:PORTANT TO RISING LIVING ST.l\f\lDARDS AND
SCI ENTl F I C
ADVA~;CEf'v'H'JT.
ONL Y DUR I NG SUCH A PER I OD DO FUNDS FLOltJ FREELY TO
SCHOOLS, COLLEGES, HOSPITALS, liEALTH RESEARCH, I\ND OTHER VALUABLE PURSUITS.
A STAl3LE Af\!D THRIVING U.S.
ADVANCU~ENT
OF SOCIETY,
ECONO~'W
~J.HETHER
IS THUS A
SH~E...Qd.A ~IO~J
IT BE SOCIAL, SCIEtHIFIC, OR CULTURAL.
PROSflERITY'S BENEFITS EXTEND FAR BEYOND OUR SHORES.
~!ATIONS
ALSO HAVE A STAKE IN THIS SN/lE STAl3LE
ECONOHY TO
STAG~.JATE
FOR THE SUSTAINED
EXPN~SION.
THE PEOPLES OF OTHER
ItJERE vIE TO PERr'1IT OUR
OR SLIDE INTO A RECESSION, IT It/OULD DESTROY A SU3STI'NTIAL
PORTION OF THE ItJORLD'S fv1I\RKETS AND, ALONG vJITH IT, IMPAIR ECONOr-1IC OPPORTUNITIES
A~ID
PROGRESS EVERY'.'IHERE.
U. S. IMBALNKES -- INFU,TION OR RECESSION -- CAN HAVE
DISASTROUS ECONOI'lI C CONSEQUENCES THROUGHOUT THE \..JORLD.
\~E
IN THE UNITED STATES THUS HAVE
ECOr:o~lIC ErNIROi'~fv'iENT
cITIZEi~S
N~
OBLIGATION TO PROVIDE THE KIND OF
IrIHICH IS A PREREQUISITE TO THE ItJELL-BEING BOTH OF OUR m-/N
N-1D THOSE OF OTHER r'-lATIONS.
\-JHETHER OR NOT HE AS INDIVIDUALS HAVE
"EVER HAD IT SO GOOD II I S BE S IDE THE PO I NT •
PRESERVI r\G OUR ST ;-'\[3LE EXPJ\NS I ON
THE RECORD-BREAKIt'--lG STABLE EXPANSION '.-IE HAVE EXPERIENCED DURING TilE LAST
SEVEN YEARS liAS NOT OCCURRED BY ACCIDENT,'
ENVI RO~J'~ENT I N ORDER TO THR I VE.
IT 11I\D TO RAVE THE RIGHT KItm OF
WI-IEN UNH1PLOyr·HJT I S HI GH NJD PRODUCT ION LO';-I,
\'IE NEED MEASURES TO ENCOURAGE GREATER ECm~OIlIC ACTIVITY, SUCH AS THE HUGE TAX
CUT OF 1964.
ON THE OTHER SIDE OF THE COIN, IrIHEN ECONOf'-lIC ACTIVITY n-lPEATEt,IS
TO ACCELERATE TOO FAST, I'!E MUST HAVE THE COURAGE TO HOLD DOv/N FEDERAL EXPGDITU::?ES
AND RAISE TAXES TEf'-lPORARILY IN ORDER. TO RESTRAIN DEfv1AND, EASE PRICE PRESSURES
PRESERVE THE STRFNGTH OF THE DOLLAR.
/\t,!D
_
. IT
\~OULD
BE II.,
\Jm~DER.FUL
_
L~
TH I NG IF, [)ESP ITE THE ECm:OrvlI C PRESSURES"
~JE
COULD rvAKE VAST NEH ExpaJDITURES FOR EDUCATION ADD TO OUR. r'IATIOi\AL WE/\L T'd BY
INCREASED CONSTRUCTION OF HIG/II'JAYS AND
EDUCATION FOR BETTER JOBS vJI LL
INTO Nl
EXPN~SION-'I!R.ECKIf\G
I'~EAN
PO~~ER
PROJECTS AND SO FORTH.
YET"
LITTLE I F TOO MUCH SPENDING PUSHES US
INFLATION AND CONCOt'lITANT SHRINKAGE OF ECONOMIC
OPPORTUNITIES; GREATER \'JEALTH IN THE NUMBER OF ROADS A"m
DAt-~S
PALES \lJHEN
•
COI":PARED TO THE LOSS OF V/[ALTH CAUSED BY THE RISWG UNEfoAPLOYt"'ENT AND LOST'
PRODUCTION OF A
RECESSIO~l.
BUT CUTTING THE LEVEL OF EXPENDITURES IS NOT ENOUGH.
HAVE THE COURAGE TO RAISE T/\XES
OF ECONOt'lIC STABILITY.
\~HEN
THIS BEcm1ES NECESSARY FOR THE PRESERVATION
THIS STEP IS NECESSARY NOH.
IT IS IRONIC TO THINK BACK TO JANUARY 1961 \vHEN THE
AT THAT TIME, vIE CONFRONTED OUR THIRD RECESSION
UNH1PLOYfvlENT AND SHRINKING PRODUCTION
A~lD
I'~OVING
AGAIN.
A
Ir'~
EXPANSIO~1
FIRST SEGAl'/.
SEVEN YEARS -- HIDESPREf.J)
BALN~CE
OF PAY1'1ENTS DEFICIT OF NEARLY
viE \'JORKED SEVEN DAYS A ~vEEK TRYING TO
$4 BILLION, STILL THE HIGHEST ON RECORD.
GET THE COUNTRY
WE MUST ALSO
OUR GOAL?
TO MOVE THE
FOUR PERCENT DEFI NED AS "FULL EMPLOYMENT."
U~JE~PLOYt-'iENT
RATE BELOh'
00, viE THOUGHT, It/0ULDN'T IT
BE MARVELOUS IF HE COULD JUST REACH FULL EMPLOYl'1ENT?
BY r'1ID-1965" BEFORE THE VIETNN'1 ESCALATION" UNE~tPLOYMENT HAD DROPPED TO
4-1/2 PERCENT A~D 'vIAS MOVING OOivN'v!ARD.
BY THIS TH'1E" THE NATION'S ECONor·1Y Hf,D
ACHIEVED THE LONGEST AND STRONGEST UNINTERRUPTED PEACETIME EXP~IS ION IN HI STORY.
~JE REACHED OUR 4 PERCENT UNEI'1PLOY~1E[\/T GOAL BY THE END OF 1965, BUT THEt·J VIE
CONFRONTED AN ENTIRELY NEVI SET OF PROBLE~S -- HOItI TO DEAL \'lITH AN ECOt~OMY
~VI~K; TOO FAST RATHER THA"J TOO SLOvl -- HOW TO AVOID INFLATIOtl RATHER THAl\J
STAGNATION.
- 5Co.\JSIDERING TliE MJLTI -BI LLIO\J DOLLAR IMPACT OF VIETNAM, I
ECONOMY HAS ACHIEVED A REMARKABLE RECORD.
1966
THI~JK
TrlE
CONSUM:R PRICE INCREASES IN BOTH
A"lD 1967 WERE HELD BELOH THREE PERCENT, A OETTER RECORD OF PRI CE
STAi3ILITY THA"J MOST OF THE OTHER INDUSTRIALIZED COUNTRIES OF THE WORLD,
DESPITE OUR VIETNAM PRESSURES ON TOP OF A FULL EMPLOYMENT ECONOMY.
THE FISCAL MEASURES \'JrlICH CONTRIBUTED TO THIS RECORD OF STABILITY
INCLUDED EXPENDITURE RESTRAINT, A SPEEDUP IN TAX COLLECTIONS, ANQ A POSTPONEMENT OF SCHEDULED REDUCTIONS IN CERTAIN EXCISE TAXES.
\oJE AVOIDED ANY
INCREASE IN TAX RATES~ BUT IT BECAME CLEAR LAST YEAR THAT WE CANNOT CONTINUE
INDEFINITELY TO CARRY mE HEAVY BURDEN OF VIETNAM WITHOUT RAISING THESE
RATES.
8UDGET DEFICITS AND A HIGH RATE OF EXPANSION ALSO HURT OUR BALANCE
OF
PAY~ENTS.
1967,
YEAR.
OUR TRADE SURPLUS STRENGTHENED IN THE FIRST THREE QUARTERS OF
BUT AN UPSURGE OF IMPORTS CAUSED A SHARP DETERIORATIo.\J LATE IN THE
THE PRESIDENT'S TAX PROPOSALS OF LAST AUGUST WERE INTENDED TO HEAD
OFF JUST
SUC~
A DEVELOPMENT.
FAILURE TO ACT ON TAXES HAS CONTRIBUTED TO A
RAPID EXPANSION OF THE ECONOMY, AND THIS EXPANSION, IN TURN, IS BEING
REFLECTED IN A VERY SHARP RISE OF IMPORTS.
EVENTUALLY, IF
~'JAGE
AND PRICE
INCREASES ARE ALLO~"ED TO RISE UNCHECKED, OUR BASIC INTERNATIONAL COMPETITIVE
POSITIa~ WOULD OBVIOUSLY SUFFER.
OUR
m<IN BALANCE OF PAYtv'fNTS DIFFICULTIES \1ERE COMPOUNDED LAST NOVEMBER
BY THE DEVALUATION OF TIiE BRITISH POUND.
AT TdAT TIt-£, THE LNITED STATES
HAS PARTICIPATING IN THE LONDON GOLD POOL IN A"J EFFORT TO STABILIZE THE PRICE
OF GOLD AT' AROUND
$35 AN OUNCE.
OBVIOUSLY, PERMITTING TdE PRICE TO EXCEED
$35 .AN OUNCE WOULD ADD PRESSURE ON OUR O\/N GOLD SUPPLIES WHICH WE WA\JTED TO
USE INSTEAD FOR INTERNATIO'-JAL M:>NETARY TRANSACTIONS BETHEEN CENTRAL BANKS.
- 6 IN THE FOUR MO'~THS FRO!'1 MID-NOVErv'IBER
SUPPLIED
$3
13 I lLI ON TO THE lONDON t·1ARKET.
1967 TO rv'IID-fv1ARCH 1968, THE POOL
BY MI D-MARCH, HO'tiEVER, IT BECA/'IE
CRYSTAL CLEAR THAT THE CLASSIC f'lETHOD OF rv'IEETING SPEC'ULATIVE RUNS ~1ftS NOT
\'IORKING.
THEREFORE, A NE\'I COURSE
THUS, ON fv\/-\RCH
\~AS
INDICATED.
17 OF THIS. YEAR, GOLD POOL MEtv1BERS ANNOUNCED THAT
HENCEFORTH OFFICIAllY HELD GOLD WOULD BE USED ONLY TO EFFECT TRANSFERS AMONG
I"ONETARY AUTHORITIES.
NO lQ\lGER 'dOUlD GOLD iiElD l3Y THESE COUNTRI-ES' CENTRAL
13#.lKS BE MADE AVAI lA3lE TO PRIVATE INDI VI DUALS.
THEY ADDED THAT liftS THE
EXISTING STOCK OF fvVJI\lETARY GOLD IS SUFFICIENT IN VIE'J OF THE PROSPECTIVE
ESTABLISI1MENT OF THE FACILITY FOR SPECIAL
DRA\~ING
RIGHTS, THEY NO lONGER
FELT IT NECESSARY TO BUY GOLD FROM THE MARKET. II
THIS, OF COURSE, t-A,EANT A
n~O-PRICE
SYSTEM FOR GOLD.
\ SJlNKS 'to/OUlD CONTINUE TO BE EXCHANGED IN THE SETTLEMENT OF
GOVERNMENT ACCOUNTS AT A PRICE OF
$35 AN OUNCE.
GOLD HELD t3Y CENTRAL
INTER.~ATIQ\jAl
GOLD OUTSIDE THE 1"10\lETARY
SYSTEM, USED IN INDUSTRY A\lD W THE ARTS (OR FOR SPECULATIVE HOLDINGS) WOULD
BE BOUGHT JlND SOLD AT I1HATEVER PRICE \'lAS SET IN THE FREE MARKET.
AT THE fv1ARO-t t"lEETING OF THE GROUP OF TEN MINISTERS JlND GOVERNORS IN
STOCKHOlrv'l, THE GROUP REAFFIRMED THEIR DETERMINATIO'J TO COOPERATE IN THE
~INTENANCE OF EXCHANGE STABILITY AND ORDERLY EXCHANGE ARRANGEt-1ENTS IN THE
WORLD BASED ON THE PRESENT OFFICIAL PRICE OF GOLD.
THE SPECIAL DRAHING RIGHTS FACT LITY
ON APRI l 22, THE INTERNATIONAL t"ONETARY FUND RElEftSED THE TEXT OF A
PROPOSED ,AJ-1ENDt-1ENT TO T1-1E ARTICLES OF AGREEt-1ENT OF T1iE INTERNATIONAL rv',ONETARY
THIS AlV'ENDMENT PROVIDES FOR ESTABLISHING MACHINERY HITt-tIN THE It~F TO
FLl'-lD.
CREATE SPECIAL DRAWING RIGHTS (SDR) BY TtiE CO\lSCIOUS DECISION OF THE HORlD'S
M(}JETARY AUTHORITIES.
THIS BRINGS CLOSE TO FRUITIO\l FIVE YEARS OF INTENSIVe:
WORK
THE HORK HftS INITIATED IN THE FALL OF
Q\j
THIS SUBJECT.
1963 3Y THE
- 7 GROUP OF TEN LEADING INDUSTRIAL COUNTRIES THAT HAD B.6NDED TOGETHER IN 1961
A~D
1962 TO STRENGTHEN THE MONETARY SYSTEM BY PROVIDING ADDITIONAL CREDIT
LINES TO THE INTERNATICX'JAL MONETARY FUND.
TrlE MI NI STERS ,1lJ\jD GOVERNORS OF TrlE GROUP OF TEN ASKED TI iE I R DEPUTI ES
TO' INVESTI GATE THE NEED FOR SOME NEI'J FORM OF RESERVES.
TilE DEPUTIES tv'ET
FREQUENTLY IN 1963 .6ND 1964 A'JD l'W)E THE FIRST .6NALYSIS OF THE PROBLEM .6ND
ITS MAIN ELEMENTS.
IN JUNE 1965, A SPECIAL STUDY GROUP OF TECHNICAL EXPERTS ISSUED A
THOROUGH ,ANALYTICAL SURVEY OF THE VARIOUS TECHNIQUES BY \-JHICH IT I</OULD
l3E POSSIBLE TO CREATE RESERVES DELIBERATELY 13Y MULTILATERAL DECISIONS.
THEY POINTED OUT THAT IT \'JAS QUITE POSSIBLE TO CREATE RESERVES IN VARIOUS
\~AYS
A\JD THAT THE TECHNICAL PROBLEM COULD DE HA"JDLED RELATIVELY EASILY.
THE f'AAJOR QUESTICX'JS THAT NEEDED TO BE RESOLVED ItJERE POLICY .6ND POLITICAL
QUESTIONS.
AT THIS JUNCTURE," TREASURY SECRETARY FO\,/LER WAS GIVEN AUTHORITY BY
PRESIDENT JaiNSO'J TO INDICATE THAT THE UNITED STATES WAS PREPARED TO NEGOTIATE
AT THE POLITICAL LEVEL.
,AN OUTLINE PL.6N FOR SPECIAL DRAWING RIGI1TS IN THE
IMF \</AS APPROVED LAST SEPTEfvlBER BY THE .ANNUAL l"1EETING OF THE GOVERNORS OF
THE
FU~JD
IN R10 DE J.6NE I RO.
AFTER THE OUTLINE PLftN \"AS APPROVED, CERTAIN REMAINING ISSUES AMOr·..JG TrlE
GROUP OF TEN I"ERE RESOLVED IN STOCKHOLM AT THE END OF LAST fvlARCH.
THE EXECUTIVE
BOARD OF THE FUND HAS NmJ HN*RED OUT THE FULL TEXT OF THE NECESSARY AMENDfV1ENT
TO THE ARTICLES, h'H I CH CftN NO':! BE PUT TO GOVE RNMENTS •
I N THE U1\j ITE D STATE 5,
IT HAS BEEN PASSED BY THE HOUSE OF REPRESENTATIVES ,AND IS NOVJ BEFORE THE
SENATE.
- 8 THE SPECIAL DRA\'lING RIGHT PROVIDES A
PER~1ANENT
SUPPLEMENTARY RESERVr:
ASSET \<JHIOi CAi'l BE CREATED IN ftM)UNTS THAT WI LL [3E CONSCIOUSLY DETERMINED
BY A COLLECTIVE
JUDG~~NT
OF THE
PARTICIPA~TS
IN THE FACILITY.
THIS
JUDG~£NT
MUST BE A VERY bROAD CONSENSUS, !3ECAUSE NO SPECIAL DRA\'JIi'lG RIGiiTS HILL BE
ALLOCATED UNLESS THEIR CREATION IS APPROVED BY
85 PERCENT OF TiiE vJEIGHTED
VOTED OF THE PARTICIPA"lTS.
i'JlTH THIS FACILITY, THE \'JORLD \<JILL NO LONGER BE DEPENDENT UPON INCREASED
AVAILABILITY OF GOLD OR UPON THE DEFICITS OF RESERVE CENTERS FOR THE PROVISION
OF THE GROWTH IN
\~ORLD
RESERVES \.J:1I CH y.JI LL BE NEEDED.
CAN I.IE _AfFORD A tvlODEST TAX ) NCREASE TO HELP FIN.ANCE VIETNAM?
IS A 10 PERCENT SURCHARGE TO HELP FINANCE VIETNAM, HOLD DOWN INFLATIONARY
PRESSURES, AND MAINTAIN CONFIDENCE IN THE DOLLAR ASKING TOO MUCH OF AMERICANS?
HERE vIE SHOULD BEAR IN MIND T.IO POINTS:
1.
PRESIDENT JOHNSON'S TAX R~PUCJ:'ION PROGRAMS OF
I~ILL REDUCE OUR
1964 AND 1965
1968 TAX PAYMENTS BY ALNJST $24 JILLION.
A 10 PERCENT
SURCHARGE VlOULD TEMPORARILY REDUCE THIS TAX SAVING TO $13-1/2 BILLION.
WELL OVER HALF OF THE TAX CUT WOULD REt"lAIN IN FORCE.
RESTORED
2.
~'JHEN
ALL OF IT "JOULD BE
OUR VIETNAM REQUIREMENTS HAVE ABATED.
N-1ERI CANS ENJOY THE LOI-IEST TAX BURDEN OF A"lY OF THE tv1,ll.JOR
INDUSTRIAL COUNTRIES OF EUROPE, AND THIS INCLUDES TAXES LEVIED AT ALL
LEVELS OF GOVERNtv'ENT -- FEDERAL, STATE, AND LOCAL.
ESTItv1,ll.TES BASED a~ DATA
OF TrlE ORG.ANIZATIa~ FOR ECONOf'.1IC COOPERATION .AND DEVELOPM:NT SHOH THAT AS
A PROPORTIQ~ OF TOTAL NATIONAL PRODUCTION, FRENCH CITIZENS PAY 38-1/2 PERCENT
IN TAXES; GERM.ANY, 34-1/2 PERCENT; ITALY, 29-1/2 PEf\.:ENT; GREAT BRITAIN,
28-1/2 PERCENT; AND THE U. S., LESS THAN 27-1/2 PERCENT.
- 9 THESE FIGURES ARE NOT CITED TO WPLY THAT AHERIC.ANS ARE HAVING IT EASY.
THE l"tAIN PURPOSE OF THE 1964 AND 1965 TAX CUTS I-lAS TO PERMIT THE PRIVATE
SECTOR OF OUR ECO\JOIvlY TO FLOURISH BY ALLEVIATING THE BURDEN OF fiIGH TAXES.
BUT THE FIGURES DO SHOW THAT I'IE CAN AFFORD TO PAY FOR OUR RISING DEFENSE
COSTS A\JD KEEP OUR ECONOMY HEALTHY.
FUTURE ECONOMIC
--------
PROGRESS AT STAKE
--.-
OUR POS I TI ON AS LEADER OF THE FREE V/ORLD AND THE SOLUTI ON OF OUR
PRESSING OOfYlESTIC PROBLEMS ARE AT STAKE 7 AND THEY BOTH DEMftND THAT \~E
HAVE A HEALTIW .AND GROI.vING ECONOMY CllARACTERIZED BY FULL EMPLOYf'v'ENT AND
PRICE STAi3ILITY
IF HE ARE TO PRESERVE THE STAi3LE EXPANSION HHICH l'iE HAVE
ENJOYED FOR NEARLY 7-1/2 YEARS AND OVERCOME RECENT INFLATIONARY DEVELOPMENTS 7
A PROGRJ'lJ'l OF TEMPORARY FISCAL RESTRAINT MUST BE ENACTED.
THANK YOU VERY MUCH.
000
TREASURY DEPARTMENT
Washington
FOR IMMEDIATE RELEASE
REMARKS BY THE HONORABLE JOHN R. PETTY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
NEW YORK SOCIETY OF SECURITY ANALYSTS
STATLER-HILTON HOTEL, NEW YORK, NEW YORK
TUESDAY, MAY 14, 1968, 11:00 A.M., EDT
INTERNATIONAL FINANCIAL CONSIDERATIONS "WHEN PEACE COMES"
In looking ahead and thinking about the subject of this
seminar "When Peace Comes", I am remir.ded of that stage of
childhood when the concept of time or magnitude has not yet
really sunk into the young mind and the inquiring little face
looks up and asks, "Daddy, when is tomorrow?"
For the purposes
of this exercise this morning I want to adopt that state of
mind where I know there is going to be a tomorrow.
After
all, I hear everyone talking about it--but I just do not
have any sense of timing about it.
Proceeding from this point
perhaps you can share with me my trepidation about trying to
discuss in a comprehensive, much less intelligent, way what
the international financial implications will be, "When
Peace Come s " .
I will address myself to this problem by discussing first,
in broad terms, some aspects of the shape of the international
financial system as it emerged after World War II, and I will
F-1248
- 2 point out what important changes I think are already under
way, not only in the system itself but in the roles of the
cast of players who are enacting it.
Next, I will speak on what our balance of payments position is today, and then discuss the post-Vietnam period in
its more immediate and in its long-term aspects.
Finally, I will mention some points concerning the international liquidity system and the international adjustment
process, both of which are so essential to the proper functioning of a viable and expansive world trading system.
The Pre-eminent Position of the United States after World War II
The functioning of the international financial system in
the mid-1940's and after placed tremendous reliance upon the
United States to bring economic growth and stability to the
economies of Western Europe.
The job at that time was to reconstruct war-torn Europe
and to re-establish a world trading and financial system that
would facilitate a healthy and accelerated growth of trade.
It was only natural that, as the major industrial nation
surviving the havoc of the war, the largest effort to rebuild
the peace fell upon us.
The creation of economic conditions
in which freedom and democratic institutions could flourish
was deemed a national necessity of not much less priority
- 3 than the defeat of the Third Reich itself.
For the United
States, the decade following the end of World War II was
a period involving the deliberate transfer of resources to
western Europe.
Should circumstances of the future occasion a similar
policy, the means employed to achieve this objective must
of necessity be different today.
A review of the early debates on reparations and World
War I debt illustrates that the financial terms of aid can
playa crucial role in reconstructing the peace; that the
seemingly mundane technical financial considerations-frequently obscured by the pressures of the moment--can loom
large, with pronounced political ramifications in following
years.
A re-reading of Keynes' 1920 classic, "Economic Consequences of the Peace", should convince any doubters on
this point.
The Low Priority on Financial Viability
While Keynes argued that the terms of the World War I
peace were unduly harsh, after World War II perhaps the
other extreme was demonstrated.
Again it was shown that the
terms of the lender, or in this case donor, can have
profound influences upon subsequent events:
had the terms
- 4 of our aid-giving for the last 20 years been different, that
is, had the aid given Western Europe for purposes of reconstruction after World War II been only in the form of loans,
it is quite likely that the gold stock of the United States
today would be substantially larger than it is.
This is easy
to say today but one must not forget the political environment prevailing at the time these decisions were made.
This recitation is not meant to second guess upon the
past; rather it is to illustrate a cardinal principle that
must be borne in mind in assuming our international political,
military and economic commitments in the future:
the
financial viability of the undertaking must be established
at the time of the takeoff, and not at a later stage of the
flight.
The atmosphere in which international financial policy
evolved, that is, the period of the dollar gap, permitted
this country to place future returns rather low on the list
of priorities of considerations weighed in reaching a decision.
The question of the durability of the financial
structure was considered deserving of less attention than
achievement of the immediate objectives.
Moreover, there
was a general failure to anticipate the rapidity and vigor
of the post-war economic recovery on the continent of Western
- 5 Europe.
Neither the emergence of the persistent continental
European surplusnor the size of the continuing United States
deficits were anticipated in the early post-war years.
The Industry Counterpart
There is a counterpart in the private sector to the
experience of the public sector.
It is that during this
same post-war period, United States industry and labor had
the luxury of looking upon the export market, and more
importantly, competition from abroad, as a marginal
opportunity and a marginal concern, respectively.
All too
frequently, the export market was sort of an' overflow market,
a residual demand, that could be satisfied if domestic
activity was off its peak.
Imports seemed to be primarily
specialty items concentrating upon various small sectors of
local demand.
While the rise in imports ii an increasing cause of
concern, the benefits of a liberal trading world are too real
and too immediate to respond to this development with a
return to protectionism.
On the contrary, the reduction in
our trade account must call forth from industry and labor,
- 6 the same type of concern, the same type of initiative, the
same type of imagination and energy as that which has gone
into the space program for example, or is being devoted to
the problem of pollution or the anti-ballistic missile.
How
recently, for example, has management asked itself if it can
license for domestic production and sale a foreign product
now imported in this country?
Until and unless management
takes regularly into the board room, and down to the level
of office managers and supervisors, a conscious thinking of
the balance of payments impact of possible business decisions,
we will not get the results from industry and labor that are
needed to bring our trade surplus up to the high level at
which it must be maintained.
Industries of our trading partners abroad have the great
advantage of operating in an economy where exports might be
as high as one-third of the gross national product of the
country and this must mean that many companies manufacture
primarily for export.
With our exports not four percent of
gross national product, with agriculture and Government
assistance making up a good part of this, it is not hard to
suspect that export promotion or import substitution are not
- 7 active topics at board meetings.
Management and labor must
adopt the same type of awareness of the balance of payments
implications of their actions as Government is doing.
Our Current Balance of
Pa~ents
Position
Against this background, then, where are we now and
where are we headed today in terms of our international
financial accounts?
After holding our deficit to a level of about $1.3
billion in the years 1965 and 1966, we found our balance of
payments situation only slightly worse during the first
three quarters of 1967.
This partly reflected increased
expenditures in connection with the Vietnam conflict.
In
the fourth quarter of last year, there was a sharp deterioration in our position.
The trade surplus declined by three
quarters of a billion dollars from the third quarter level.
The United Kingdom liquidated over $500 million of United
I
States securities to bolster its reserves in support of the
pound sterling.
The "errors and omissions" item which may,
among other things, represent changes in short-term capital
flows, became less favorable.
Our deficit soared to $1.8
billion, slightly exceeding the combined deficits of the
three preceding quarters.
- 8 -
While much of the sharp deterioration in the fourth
quarter was due to temporary factors, the very size of the
deficit and the loss of gold it entailed were so great as
to require immediate action by the Government.
The result
was a strengthened balance of payments program which was
announced by President Johnson on January 1.
I will not go
into details about it but I would like to note the following:
The program is designed to cover a wide sector
of the American people--business firms making
direct investments abroad, banks making foreign
loans, Americans traveling outside the Western
Hemisphere, companies capable of entering the
export market, the Government itself as a
large foreign spender in a wide variety of
military and
peaceful operations overseas and,
of course, the general level of economic activity
as well.
The program combines temporary restraint measures
with short- and longer-term positive inducements
to develop more receipts for the United States
balance of payments.
- 9 First Quarter 1968 Balance of Payments Position
We are releasing today our balance of payments results
for the first quarter.
The deficit was $600 million--a
very substantial drop from the $1.8 billion in the fourth
quarter and almost back to the quarterly level of the
first half of last year.
This improvement was achieved
despite a $223 million decline from the low last-quarter
figure in our trade surplus, occasioned in part by an
eleven-day dock strike in New York and a very strong upsurge
in domestic demand; despite a rise in United States residents'
purchases of foreign securities; and
de~it~
failure of the
Congress to enact, to date, some basic parts of the
President's January 1 program, including most importantly,
the tax surcharge proposal which would moderate domestic
demand and the growth of our imports.
One part of the balance of payments program for which we
have first quarter data shows good results.
The 1968 target
of a $400 million reduction in outstanding bank loans to
foreigners was almost achieved in the first quarter alone
when such loans declined by $359 million on a seasonally
adjusted basis.
- 10 -
The effects of the mandatory direct investment program
in the first quarter will not be known until late next
month, and we do not yet have first quarter data on tourist
expenditures abroad or expenditures abroad by Government
agencies.
It is not too early to say, however, that
if Congress passes the tax surcharge,
if the business community and the public
at large cooperate in other aspects of the
program, and, very importantly,
if foreign countries in balance of payments
surplus cooperate by avoiding policies
designed to maintain those surpluses,
we will be in a much better position to achieve the goal
set by the President on January 1.
The Immediate Post-Vietnam Period
During the past few years heavy emphasis has been
placed on temporary restraints on capital outflow under the
Commerce program and the Federal Reserve program.
a question in your minds as well as ours is:
No doubt
Assuming
peace in Vietnam, and the tapering off of defense expenditures for Southeast Asia over, say, a year and a half, would
this be enough to correct our balance of payments position
- 11 by 1970 or thereabouts, and enable us to do without the
s'elective measures of the past years?
Or is it necessary to
achieve more than this by way of improvement in the trade
and service account, or through a reduction or more effective neutralization of the foreign exchange costs of
Government and military outlays in all parts of the world?
We have generally put the direct foreign exchange impact
of hostilities in Southeast Asia at about $1.5 billion.
This
figure is derived from a comparison of the current foreign
exchange outlays in certain Asiatic countries with an earlier
base per iod .
In answering these questions we must remember that we
had a deficit of $3-1/2 billion in 1967, and that a reduction of $1-1/2 billion, taken alone, would carry us less
than half way towards equilibrium.
More than that, the
deficit in 1967 could have been larger without the voluntary
restraints on investment abroad.
Thus, it is not clear to me that peace in Vietnam alone
would improve our balance of payments problem to the point
where we could do away with our restraint measures.
In the im-
mediate period it might not even permit us to relax the selective measures that have become necessary to permit an approach
- 12 towards the equilibrium that is so important to the continued
strength of our currency.
We might still need a substantial
improvement in our current trade and service account and a
further reduction or
neutral~zation
ot our continuing mili-
tary foreign exchange expenditures in other parts of the
world.
Thus it
becomes extremely important, from the point of
view of our balance ot payments program, that we avoid an
excessive rate ot growth in the gross
nat~onal
product in
monetary terms in order to escape an excessive spill-over
demand for foreign imports, and to maintain a reasonable
rate of growth in our exports.
It is equally important that
the surplus countries abroad maintain a reasonable growth
rate that is not too dependent on a surplus with the rest of
the world.
It is quite understandable that they wish to
avoid inflationary pressures, just as we do, that would be
associated
w~th
excessive domestic expansion.
But it seems
to us reasonable that countries with large surpluses on
current trade, service and military accounts, should feel
a stronger
responsib~lity
for
maintain~ng
adequate growth
than countries in less fortunate positions.
On their side,
the deficit countries should recognize the need for an
- 13 added measure of caution to avoid too strong a domestic
expansion.
In both surplus and deficit countries, there
appears to be a good deal ot sensitivity in the trade and
service accounts to the steepness of the curve of rising
gross nat10nal proauct 1n monetary terms.
The Long Term Post-Viet Narn Period
In the iong term post-Viet Nam period the situation
is diff1cult to foresee.
I am defining th1s period as one
foliowing the completion ot the economic adjustment attendant
to the de-escalation of hostiiities.
This snould be a period
when equilibrium might hopefully nave been reached on the
liqu1dity measure of our balance of payments ana we snoula
be working aggressively toward a per10d ot sustainable
equilibr1urn wnich in my definition must include tne absence
of the type of restrict10ns that were part and parcel of our
January 1 balance of payments program.
In reflecting about this period ahead there are several
areas we must bear in mind.
We have traditionally looked
upon the United States as a natural capital exporter.
A country generating sucn substantial savings, a financial
community which marshals these assets so eff1ciently, an
industry reach1ng out to penetrate new markets abroad,
- 14 combined with countries of the world needing new funds to
achieve the capabilities of their lands and the requirements
of their people indicates that no other course should be
pursued.
This traditional position can only go unchallenged
as long as we maintain a strong current account and in this
regard our dwindling trade surplus is disturbing.
Economic assistance will continue to make substantial
demands upon our capital, both to maintain our bilateral
economic assistance program as well as our multilateral
program which involves contributions to such agencies as the
World Bank, the Inter-American Development Bank and the
Asian Development Bank.
These demands are also in
the form of borrowing by these banks in our bond markets to
finance their development activities.
One area
of special interest and particular need of
study is that of direct investment.
What is the relationship
I
of these investments to development in the lesser developed
areas?
Does direct investment contribute to the financial
strength and economic leadership of the United states?
Or does it just replace exports?
I doubt that this is a
subject which lends itself to generalizations1 however,
this is what the dialogues on the subject involve.
A series
- 15 of careful studies compiled in balance of payments and
perhaps other terms for each of several industries should
improve the information available in this area.
In looking back at our balance of payments picture for
the last 20 years, we cite too frequently the persistent
stream of deficits and fail to realize that as a country
we were building up assets at a rate substantially faster
than our cumulative deficits.
These assets, of course,
were the direct investments acquired by our corporations
in their foreign investment program, and as we shall see,
these investments yield important returns.
Our gross
plant and equipment expenditures overseas for the last
couple of years have been increasing at the rate of around
$10 billion a year and these, too, should be throwing off
earnings before long.
At the present time, our dividend
receipts and our royalties and fees bring back over $5
billion a year and in thinking ahead to the future, it
seems clear that this return on our past investment will
be our most reliable and constantly growing inflow in
our balance of payments picture.
We are very alert to
this and must take pains to foster these receipts.
- 16 The United States is a substantial capital importer
as well.
Besides receipts from monetary authorities this
involves primarily an inflow of portfolio capital to buy
the types of securities in which much of this audience
specializes.
The control of inflation and a stable and
steady growth record is the best assurance that these funds
will continue to be entrusted to our economy.
No doubt we will continue to have mutual security
commitments in the long term which I am postulating, but
I suspect that they will involve amounts well reduced
from the current level and, what is more, measured in
net balance of payments terms, the cost will be less than
some have feared.
The basic principle that in fulfilling
mutual security objectives the contributing country should
not suffer balance of payments costs, is already understood.
I
Indeed acceptance of this standard should figure prominently
in the considerations establishing future mutual security
obligations.
This is but another aspect of international
financial cooperation.
It is too harzardous to try to bring these elements,
and others I have not mentioned, together for anyone
- 17 composite picture of our payments position in the
long term.
But I think it should be clear that the
realities of our international responsibilities and
financial position will be such that both the public
and private sectors of our economy will continue
to be vitally concerned
~ith
this problem.
The International Financial Markets
Returning now to the more immediate period, I
might comment briefly on the international financial
markets.
The initial impact of the decision to begin
peace talks has been, from all appearances, a positive
factor in the gold and exchange markets.
It means
that one of the storm clouds that has threatened
the smooth functioning of the world's monetary system
may gradually lift.
In any case, this cloud appears
less likely to bear down on the financial markets
with full force.
Thus, we welcome the immediate
psychological effect, though it is very difficult to
measure it in any quantitative way.
- 18 The markets have seen in the Viet Nam hostilities several
reasons for concern.
There is first the direct impact on the
United States balance of payments which is the result of any
significant level of hostilities.
This, and the possibility
of escalation, was a factor contributing to speculative
movements of funds on the part of foreigners into gold.
Then there was a more general fear that growing demands
on United States resources would add to the budgetary deficit
and to general inflationary pressures in the United States.
While this consideration may now be somewhat less clearcut
than was the case before the action of the Conference
Committee on the tax-expenditure package, only the favorable
action of Congress will dispel this concern.
A movement towards peace may tend to ease the strain on
our public finances.
These actions raise confidence in the
dollar and serve to give more stability to the monetary
system in general.
Thus we may reasonably regard the
initiation of peace negotiations as another constructive
factor in the current flow of events affecting the health
and soundness of the international monetary system.
- 19 Another is the removal of suspense about the role of gold
and the reaching of agreement for the creation of supplementary
reserve assets.
The Washington Communique of March 17, 1968,
established a two-tiered gold price system and removed a heavy
strain on official gold reserves due to private speculation.
It also emphasized the maintenance of an unchanged official
monetary price for gold.
The Stockholm Agreement and the
proposed amendment on the Special Drawing Rights made clear
that nearly all of the countries of the world seek to supplement
the world's reserve system in this enlightened way, and not
by tinkering with the price of gold for monetary purposes.
When the Special Drawing Rights facility is in effect, the
future reserve needs of the world can be met by creating new
SDRs.
No other provision need be made.
The Problem of Balance of Payments Adjustment
One of the more important factors involved in a properly
functioning world trading system is that international
process by which countries adjust their balance of payments
positions with one another.
Notwithstanding substantial
efforts to remove it, our deficit has persisted for several
years, during a period when the balance of payments surplus in
Continental Europe has continued longer than necessary or
- 20 appropriate.
The process by which these surpluses and
deficits are each adjusted toward equilibrium is referred
to as the balance of payments adjustment process and i t is
an important subject deserving of more attention than it
receives.
We are indebted to Working Party 3 of the Organization for
Economic Cooperation and Development for a July 1966 report
on this subject.
What this report points out is that the
responsibility for adjusting balance of payments positions,
whether they are persistent surpluses or deficits, rests with
each country whether they are in surplus or deficit.
For example,
a country in surplus which pursues a high-interest, deflationary policy accompanied by trade restrictive practices is
working counter to the adjustment process and it should adopt
as a matter of national policy, and international financial
cooperation, economic measures which serve to reduce the
surplus.
For the deficit country, there can be no questi9n about
its responsibility in taking measures to reach equilibrium,
and this applies to the United States in particular.
This
is a major objective of the tax surcharge and the expenditure
cut and it has certainly been a factor in influencing our
monetary policy as well.
These measures to moderate the
- 21 -
rate of economic growth and, thereby, improve our trade
position are reinforced by other aspects of our broad and
comprehensive balance of payments program.
In the long run, all countries must persistently work to
improve the operation of the adjustment process because
efforts to reach equilibrium may have important effects on
unemployment, prices and the domestic growth rate.
Too sharp
a deflationary policy is not acceptable -- and in the case of
the United states for example, the slow-down would really
have to be very substantial to have sufficient effect
through reducing imports or inducing exports to solve our
problem by that measure alone.
Summary
In summary, we have seen that the pre-eminent role of
the United States in the international financial system is
rapidly evolving into one of financial partnership with the
other countries of the world.
This evolution has involved
a shift of more responsibility to these other countries.
It requires the implementation of principles -- for example,
that foreign exchange costs incurred for purposes of mutual
security should be neutralized in the common interest.
- 22 -
This new partnership also involves sharing more broadly the
responsibility of extending economic assistance to the
lesser developed areas of the world.
This partnership requires
positive action to reduce non-tariff barriers to accelerate
the flow of trade, and improved access to capital markets.
With this type of international cooperation, the international financial system and the adjustment process will
work in a way which will foster freer trade in goods and
freer flows of capital in an atmosphere of expanding world
trade.
- * * *
')QQ
\...J\....Iv
TREASURY DEPARTMENT
Washington
FOR IMMEDIATE RELEASE
TUESDAY, MAY 14, 1968
STATEMENT BY
SECRETARY OF THE TREASURY HENRY H. FOWLER
ON 1968
FIRST QUARTER BALANCE OF PAYMENTS RESULTS
The results of our first quarter balance of payments, reported
today, lead inescapably to one conclusion -- the early enactment of
the President's tax proposals and related expenditure reductions is
the key to the solution of our balance of payments deficit.
This conclusion arises out of three related facts revealed
in today' s announcement:
1. The drastic decline in our trade surplus during
the last six months
from an annual rate of
$4.2 billion in the first three quarters of last
year to an annual rate of $1.3 billion in the
fourth quarter and an annual rate of $400 million
in the first quarter -- was strongly affected by
a sharp rise in our imports -- a rise due in part
to special circumstances. But it was due mainly
to the pressures of excessive domestic demand
produced by the coinciding of a highly stimulative
deficit in our internal federal budget this fiscal
year with a period of expanding economic activity.
2. Other parts of the President's balance of payments
action program achieved substantial gains, resulting
in a reduction in the alarming fourth quarter
deficit by two-thirds, bringing the deficit roughly
in line with the results in the first quarter of 1967.
30 Had the United States maintained a trade surplus of
the proportions that characterized every quarter in
the last three years up until the fourth quarter of
last year, our 1968 first quarter 1968 balance of
payments would have been in surplus. (See Table
attached)
F-1249
- 2 ("'" r---
~~~
The first quarter results highlight the importance of an
intensive follow-through on those features of the President's
balance of payments program which affect directly or indirectly
the restoration of a healthy trade surplus. In addition to the
tax-expenditure program, these include: appropriate monetary
policy, restoration of wage-price stability, avoidance of work
stoppages that encourage imports and reduce exports, the
enactment of the new Export Expansion Credit proposals pending
before the Congress, and the adoption of measures here and in
other countries that remove disadvantages to U.S. trade.
The first quarter results also underscore the important
contribution that is being and can be made to the early
restoration of equilibrium through measures affecting capital
transactions, the travel deficit, and Government expenditures
abroad. This is particularly true because it may take some time
for the U.S. to build back its trade surplus to the healthy levels
of 1964-50 That is why the Administration will be pushing vigorously
in these areas at home and abroad in the weeks ahead.
It is clear that the real heart of the problem is the
restoration of a healthy trade surplus
But it is equally
clear that without the application of decisive fiscal restraint
to moderate the pressures of excessive domestic demand the
combined effect of all other efforts is likely to fall short
of our goal of equilibrium. With such decisive fiscal restraint
the other elements will be strongly and effectively supported.
0
This is why it is important for every member of Congress to
understand th~t his position on the tax increase-expenditure
reduction package in the weeks ahead is going to determine his
country's international economic and financial future, the
strength of the dollar, and the preservation of the international
monetary system. Favorable action will reverse the serious
deterioration in our trade surplus that has resulted from an economy
that is growing at too fast a rate of speed, accompanied by an
unacceptable rate of inflation and a wage-price upward spiral.
000
(ATTACHMENT)
May 14, 1968
ATTACHMENT
Quarterly Trade Surpluses
(seasonally adjusted, on
Balance of Payments basis)
1965 - 1st
2nd
3rd
4th
QtB rter
Quarter
Quarter
Quarter
+
+
+
+
959
1405
1255
1153
Calculated Payments Balance
if balance on all other
transactions had been at
first-quarter 1968 level
+
+
+
+
256
702
552
450
3rd Quarter
+ 1178
+ 956
+ 802
+ 475
+ 253
+ 99
4th Quarter
+
722
+ 19
1966 - 1st Quarter
2nd Quarter
1967 - 1st Quarter
2nd Quarter
3rd Quarter
(4th Quarter)
+ 974
+ 1098
+ 1086
(+ 326)
+ 271
+ 395
+ 383
(- 377)
TREASURY DEPARTMENT
Washington, D. C.
May 14, 1968
Secretary Fowler will officiate at swearing-in ceremonies at
11:30 a. m •• Wednesday, May 15, in Treasury Conference Room 4121
for three Treasury officials who have been appointed to higher positions.
They are John R. Petty, new Assistant Secretary for International Affairs;
John F. Kane, new Assistant to the Secretary (Public AffairsL and
Hampton A. Rabon. Jr., new Deputy Fiscal Assistant Secretary.
Mr. Petty was formerly Deputy Assistant to the Secretary for
International Affairs. a post he had held since September 1966.
Pre-
viously. he was a Vice President of Chase Manhattan Bank in New York
and head of the bank's Worldwide Projects Management Division.
He
succeeds Winthrop Knowlton, who left Government in January to return
to private business.
Mr. Kane has been Deputy Assistant to the Secretary (Public Affairs)
for the past year.
He came to the Treasury in February 1967 from the
Agency for International Deve lopment, where he had been a member of
the Information Staff since 1962.
He served as Special Assistant to two
Secretaries of the Army, and had many years I experience in the news paper
and public relations fields.
He succeeds James F. King. who retired from
the Government in mid-April.
- 2 -
Mr. Rabon began service with Treasury about 34 years ago as
a clerk in the Bureau of Internal Revenue.
He was appointed to suc-
cessively higher posts and was name d Assistant Fiscal Assistant
Secretary in 1963.
He succeeds George F. Stickney. who recently
retired.
000
.) ~~
UV'_
TREASURY DEPARTMENT
May 15, 1968
FOR IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by th1s public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$2,700,OOO,000,or thereabouts, for cash and in exchange for
Treasury bills maturing May 23, 1968,
in the amount of
$2,500,903,000, as follows:
9~day bills (to maturity date) to be issued May 23, 1968,
in the amount of $1,600,000,000, or thereabouts, representing an
additional amount of bills dated February 23, 1968,and to
~ture August 22, 1968, originally issued in the amount of
$1,000,178,000,the additional and original bills to be freely
interchangeable.
18~day
bills, for $1,100,000,000, or thereabouts, to be dated
and to mature November 21,. 19680
May 23, 1968,
The bills of both series will be issued on a discount basis under
competitive and noncompetitive b1dding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturi ty value).
Tenders will be received at Federal Reserve Banks and Branches
to the closing hour, one-thirty p.m., Eastern Daylight Saving
time, Monday May 20, 19680
Tenders will not be
received at the Treasury De~artment, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
up
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
~Sponsible and recognized dealers in investment securities.
Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
F-1250
- 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 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 May 23, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing May 23, 19680
Cash and exchange tende
will receive equal treatment. Cash adjustments will be made f~r
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 0r
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other dispoEition
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 fr
any Federal Reserve Bank or Branch.
000
TREASURY DEPARTi-'illNT
Washington
'.....I "
"
''I' '.1
','v.
FOR RELEASE UPON DVGIVERY
REMARKS BY THE HONORABLE STANLEY S. SURREY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
BOSTON ECONO~rrC CLUB
THE UNION CLUB, BOSTON, MASSACHUSETTS
MAY 15, 1968, 12:30 P.M., EDT
THE FEDERAL TAX SYSTEH _.. CURRENT ACTIVITIES
AND FL~URE POSSIBILITIES
Major changes in the Federal tax system have now become
an annual experience.
in our domestic and
That system is so directly involved
internatio~al
activities that the
constant changes in those activities and concerns are
reflected in alternations of our tax structure.
Sometimes
the tax changes that take place in a given year are the
result of events that develop during that year and
a prompt tax response.
~equire
Sometimes -- perhaps more often --
the changes are the culmination of considerations and forces
that began to gather several, perhaps many, years in
past.
th~
As a consequence, a survey of the Federal tax scene
requires not only a description of current legislative
activities but also an examination of current discussions
and studies that may lead to legislative involvement in
the future.
F-1251
- 2 -
Current Legislative Activities
The major activity in Federal tax legislation in 1968
is the
eme~ging
tax increase bill.
One should really refer
to the time span of that bill as 1967-1968 because the surcharge proposal has been before the Congress since last
August.
The tax increase proposal has had a tortuous journeYl
and the Secretary of the Treasury throughout has had to play
many roles.
At times he has been a tax Candide, seeing
progress in this procedural move or that statement by a
legislator when all else saw only set back.
At times he
has sorrowfully been a tax Cassandra, as crises recurred in
the international markets and gold filled the headlines.
And at many another time he has been the ambulance surgeon
on the emergency call or even a Dr. Christiaan Barnard -always able to detect a pulse or heartbeat when all others
had put away their stethoscopes.
There are certainly many interesting facets of that
journey.
For one, the forecasting that underlay the recom-
mendation for a tax increase was on target throughout.
The
economic pace of the economy was clearly foretold -- a pause
in the first part of 1967, a rise in the second half that
- 3 would, in the absence of a tax increase, mount to anaccelerated rate of growth that would be too rapid for our
economic health.
The domestic and international consequences
that would accompany the unacceptable deficit position
obtaining without a tax increase were also accurately foretold -- rises in interest rates, an inflationary trend in
prices, a setback to our trade surplus because of increased
imports, a severely weakened balance of payments position,
and attacks on the dollar in the international monetary
field.
The actual proving out of such a forecast is itself
somewhat of a rare event where the forecast is the basis
for policy action designed to affect the events forecast
to prevent too steep a rise or to brake a fall
prevent prediction from becoming history.
and thus
And so when a
forecast calling for policy change has become actuality,
then policy moves have gone astray -- in this case through
the passage of time.
The enactment of the tax increase \vill
start us on the journey away from all these dangerous insta-
.
bilities to a more secure Dosition at home and abroad .
Nor was the need for a tax increase a special phenomenon
of the new
econo~ies
or a matter of so-called fine tuning.
- 4 Indeed, it was in response to a traditional reason for a
tax increase
the need for revenues to meet rising
expenditures of
GoverTh~ent
hostilities.
caused by our involvement in
The United States, ever since the ill-advised
tax increase in the Depression, has not required an increase
in income taxes except in a time of hostilities, for it is
only in such a period that
outrun revenues.
~vas
GoverTh~ent
expenditures have
Thus, in one sense the surcharge proposal
a classic textbook case for a tax increase.
But the textbooks would have missed some other facets
of the fiscal scene.
One of these has been the desire of
the Congress and the Committees charged with revenue policy
especially the ivays and Means Corrnnittee
and on whom falls
the task of increasing taxes, to achieve a coordination
between Congressional consideration of appropriations and
expenditures and Congressional consideration of tax policy.
The annual, and often biannual and even triannual bouts with
the limit on the public debt had not proven to be an effective instrument of coordination, though they did pave the
way to a much improved substantive format for the Federal
Budget and refinements in the concept of Budget surplus or
- 5 deficit.
The need for a tax increase
~vas
soon seen as
apparently offering a much stronger instrument, and this
attitude gradually grew in intensity and scope.
As a
result, the tax increase proposal became the device to
achieve last year a reduction in fiscal year 1968 "controllable" expenditures (over $4 billion), and now under the
Conference Report a reduction in fiscal year 1969 expenditures ($6 billion), a cut back in proposed new obligational
authority for fiscal year 1969 ($10 billion), and a reexamination of carryover obligational authority ($8 billion).
The gradual development of these expenditure changes was
accompanied by an increasing degree of interchange bet\veen
the Tax Committees and the Appropriations- COIILrnittees, especially on the House side.
This procedural change, growing
as it did out of a whole variety of tentative actions and
shifting goals as
th~
new terrain was explored, proved a
time-consunling process.
And we are still left with the
speculations as to what these developments may portend.
We can be hopeful, I believe, that the time involved
in enacting the tax surcharge proposal will not be characteristic of the response to future needed changes in the
- 6 -
level of taxes.
There are too many particular confiotations
respecting this proposal -- the varying attitudes to Vietnam
hostilities for one -- to make that time span a precedent.
And hence, for example, any need to reduce taxes promptly
in a Post-Vietnam period to maintain full employment should
not have to face a similar time span.
Another interesting facet is that the format of the tax
increase vlas really never a subj ect of controversy.
As a
result of careful study of this matter in 1966, culminating
in the Hearings of the Subcommittee on Fiscal Policy of the
Joint Economic Committee
a study and Hearing which the
Administration had urged in preparation for the possible tax
increase
the country had available a considerable amount
of analysis and data on the shape of a tax increase, including the recommendation of that Subcommittee for the surcharge
form.
The tax proposal reflected this background, and
involved three essential aspects:
an income tax surcharge
form for both individuals and corporations; a shielding of
those in the lowest brackets from the increase; and a temporary design for the increase.
To a degree that is unusual in
tax legislation, the initial proposal is
final version essentially without change.
reflect~d
in the
- 7 The economic effect of the tax increase will be hei.ghtened by two recent developments in our tax structure
graduated withholding on wage and salary earners, and
developments leading to a complete system of current tax
payments for corporations.
The former came in 1966, and
the latter was built up by legislation in 1964 and 1966 and
now by the corporate acceleration provisions in the current
bill.
The temporary tax increase will thus be immediately
reflected in tax payments based on current levels of income
and profits, so that those incomes and profits will at once
bear the restraining effect of the increase.
While our balance of payments problems are reflected
in the tax increase bill, they are also the occasion for
other "1968 legislative acti.vity still unfolding.
For one,
the foreign travel bill is nmV' in the Senate, with the 5 percent travel tax extended to overseas air transportation and
a tightening of customs measures.
There is still the need
further to dampen tourist expenditures abroad.
While foreign
travel has its undoubted advantages for both individual
families and the nation, still a family must budget for its
outlays and so must the nation budget its international
- 8 -
expenditures to the foreign exchange available.
In the
trade field, attention now shifts to the Hearings before
the Ways and Means Committee scheduled for June 4.
Future Events
Let us turn to the matter of future events in the tax
field -- or more properly current discussions, studies,
developments, or what you will -- that are likely to bring
about legislative involvement at some point.
I use the
word "involvement" advisedly and broadly -- it ranges from
active Congressional consideration
producing legislative
enactments to a Congressional decision not to take any
action despite the call for consideration from this or that
quarter.
For I must emphasize that I am here describing
and not predicting -- and the area of description extends
beyond
goverTh~ent
attitudes to business and labor discussion,
academic interests, current research, and so on.
Tax Reform
There is a recognized need for a major effort for further tax reform. The pending tax bill calls for the President
to submit proposals "for a comprehensive reform!! this year.
The consideration of tax reform has been held off by the
deliberations over the tax bill.
The operational aspects of
- 9 tax legislation permit only one train to be on the main
track at a gi.ven time, and so tax reform has been waiting
in the railway yards for the main track to clear.
There is much to do in tax revision and many ideas have
already been expressed, some in speeches by Treasury officials, some in legislative measures introduced by Congressmen, and some in speeches by legislators.
The Treasury, for
example, has called attention to the need to revise the
rules relating to the transfer of property by death or gift,
so as to achieve a more equitable estate and gift tax system
with less tax distortion in family dispositions of property
and a rational income tax treatment of appreciated assets
so transferred.
It has among other matters also stressed
the need to eliminate corporate multiple surtax exemptions;
to achieve a rational rearrangement of the tax treatment of
the elderly; and to eliminate abuses in the area of private
foundations and tax-exempt organizations generally.
(It is
an interesting commentary -- should I say insight -- on the
foundation scene that Fortune magazine in its recent article
on "America's Centimillionaires" includes in its estimates of
an individual's wealth the holdings of "foundations established
- 10 by the individuals or their spouses.")
Chainnan Long of the Finance Conunittee, in a recent
speech, also mentioned a proposal he had earlier suggested,
and which has, in one form or another, been introduced in
bills by other legislators, that of a "minimum tax" to be
applied to an expanded income base including various forms
of income now excluded from coverage of the regular tax.
He has also suggested maximum effective tax rates applied
to the same expanded base.
the
n~ed
Chairman Mills has spoken of
for steps designed to reduce the complexity of
various facets of the measure of taxable net income.
Others
have focused on aspects of the tax law that enable people of
large wealth to pay little income tax, and even in some cases
to escape payment entirely.
The Treasury has spoken of tax
reform as involving a combination of revenue-raising and
revenue-losing measures, so that on net balance there would
be no significant overall budgetary effect.
A number of
Congressmen have vie\ved reform only from the revenue-raising,
"closing of loopholes" aspect.
Some matters that were on various lists are already on
the legislative scene, for tax reform must be a constant
process and all developments cannot \vait on maj or efforts
- 11 for-revision. Thus, the pending bill contains a provision
setting a ceiling on tax-exempt industrial development bonds,
thereby preventing them from swamping the regular tax-exempt
bond market and from making private corporate bonds an
archaic instrument.
The Secretary of Labor has submitted to the Congress
proposals for revision of the structure of private pension
plans involving a minimum standard of vesting, standards
for the funding of benefits, and a system of plan termination protection.
The measure is aptly entitled the "Pension
Benefit Security Act of 1968"
for it deals with assuring
a worker that years of labor in a company having a pension
plan will bring him a vested benefit on retirement even
though events cause him to leave that company before retirement age, and that there will be funds on hand for the payment
of that benefit.
This program is based on recoITlInendations by
an interagency staff con@ittee, including Treasury Department
participation, which were made after extensive consultations
with informed groups regarding prior proposals.
fully supports this program.
The Treasury
It also believes that its formu-
lation as a measure outside the tax lc1;vs is a recognition of
- 12 the importance of these matters in the whole context of
employer-employee relations, a point of view that had been
stressed by employer groups in criticizing prior proposals
as not properly a part of the tax system.
As a substantive matter, I cannot see how one can
quarrel with the basic goals of the Labor Department proposal.
There is persuasive and saddening testimony to the
hardship that can result from a lack of vesting in the many
letters we and other Government agencies receive from individuals who, after working years for an employer, suddenly
find they have lost their pension accruals because of a
change in job or even a layoff.
Aside even from the
inequity of this result, the simple fact is that these individuals must now face retirement without the pension they
expected.
There is no \vay for them to retrace their steps
and make other financial arrangements.
For them, the private
pension system is a failure and a mockery.
And the expecta-
tion of the pension may well have affected their spending
decisions while employed under the plan.
In a country in
which only half of the employees (aged 30 to 50) who have
been with an employer for 10 years will be with that same
- 13 employer in the next 10 years, this high degree of labor
mobility requires that the vesting of benefits be an integra1 part of the private pension system.
The Labor
Department proposals will thus enable the private pension
plan system to achieve the vital and beneficial role for
which it was designed.
poverty and Taxes
The tax system is a part of the social fabric of our
riation.
As such it will be affected by changes in that
fabric and must be responsive to those changes, consistent
with performance of its function of supplying government
revenues fairly and effectively.
Significant events, vio-
lent and non-violent, are daily focusing -the nation's
attention on great poverty within our affluent societYq
The
effects of this poverty and its grmving subculture should -one hopes -- appeal to our consciences and our capacity to
move forward intelligently rather than to our fears.
How
will the tax system be involved in this appeal?
The tax system must play an essential role in enabling
fiscal policy to fulfill the tasks of providing a full
employment economy with as few destabilizing turns up or
O.n
. ,..
- 14 down as possible.
Such an economy by itself will not elim-
inate poverty or solve our urban crisis, but without it all
solutions to those ills will fail.
The problems are so
immense that only with the full use of our potenti.al
resources will we be in a position to achieve success in
overcoming them.
Consequently,
~ve
must build on our limited
experience of managing a full employment economy, improve
our forecasting techniques, but more importantly, achieve
the flexible procedures and postures that permit a sufficiently prompt response to the measures that the forecasts
require.
Against a background of full employment, what is the
relevance of our attack on poverty to the. tax system?
There
is first the direct matter of the payment of a tax itself.
Our present Federal income tax does reach below the poverty
level, especially for single persons and married couples with
no dependents.
The President has said that as fiscal condi-
tions permit this should be corrected, and the burden of
income tax payments lifted from those in poverty.
In keep-
ing with this view, as I stated earlier, the 10 percent
surcharge does not apply to the lowest income brackets.
- 15 Assuming that step to be an accepted policy goal, the
scholars have turned to other taxes paid by the poor and in
this regard are critically examining the Social Security
payroll taxes.
They point out that the employee tax is
applied to the first dollar of wages without regard for
family size and is proportional to wages covered, all in
contrast to the income tax.
As a consequence the present
employee payroll tax is higher than the income tax for about
25 percent of the people paying Social Security tax.
More-
over, this is wholly apart from the question of the incidence
of the employer tax, 'tvhich most economists believe a 1so to
fallon wages.
Of course the benefits of the Social Security
system are paid in a progress ive manner. But the
scl~olars
are
questioning whether the present poor should be called on to
pay taxes to provide benefits for the currently retired, or
for their mvu benefits in the future.
Any significant
increase in Social Security benefits is thus likely to involve
the Congress in a consideration of the impact of Social
Security taxes below the poverty lev21.
Somewhat similar concerns could \vell playa part in any
Congressional consideration of suggested changes looking to
409
- 16 greater use of indirect taxation in the Federal tax structure.
Legislation in recent years has involved an extensive
cutback of Federal excise taxes, leaving this type of taxation largely to States and cities and strengthening the
role of the income tax in the Federal structure.
This con-
centration on the income tax at the Federal level has brought
its fiscal policy benefits, for the United States has shaped
that tax into a measure that can be promptly responsive to
our fiscal needs, unlike the incorne tax structures in most
countries.
tax.
And we are steadily improving the equity of the
In some business -- and academic -- circles, consider-
ation is being given to adding a mass sales tax at the
Federal level, be it a retail sales tax similar to our State
taxes or
8.
va lue-added tax which would have the same economic
effect.
The thought generally is to substitute this for a
part of the corporate tax.
Others have asserted this would
shift the burden of the tax dollars involved from corporations
and their shareholders to the consumer, and thus to the poor
to the extent of their share in consumption.
In their view
a sales tax is clearly more regressive than an income tax,
and while measures perhaps can be considered to Lessen the
4.. ""1/
!
- 17 -
regressivity of the sales tax, those measures vJOuld complicate its administration.
They would thus contend such a
move to a sales tax at the Federal level would be inconsistent with efforts to relieve the poor of their income tax
burdens.
Congress may perhaps find itself at some later
date involved in this debate which, again, is still pretty
much confined to research circles and some business groups.
Poverty and Tax Expenditures
Another facet of the attacks on poverty and the urban
crisis is the realization that all levels of Government
will be required to spend increasingly larger sums on social
programs.
This being so, the broad questions to be ans'\vered
are the nature of these expenditures and the amounts to be
spent.
The relationship of the latter question to the tax
system is clear, but even the first question has a direct
bearing on the tax structure.
For many of the suggested
expenditures have a tax connotation.
There has been considerable academic interest and
increasing business interest in our whole public assistance
or welfare system.
As an illustration, the recent "Report
from the Steering Committee of the Arden House Conference
4·'
,
J
-~
- 18 on Public Helfare" states that:
"The present system of public assistance does not
work \Olell. It covers only 8-million of the 30-million Americans living in poverty. It is demeaning,
inefficient, inadequate, and has so many disincentives built into it that it encourages continued
dependency.
"It should be replaced with an income maintenance
system, possibly a negative income tax, ~'1hich would
bring all 30-million Americans up to at least the
official Federal poverty line. Such a system should
contain strong incentives to work, try to contain
regional cost of living differentials, and be
administered by the Internal Revenue Service to
provide greater administrative efficiency and
effectiveness than no\'1 exists."
Other groups or individuals have also called for an
income maintenance system, as a complement to or perhaps
as an evolution of an improved welfare system.
The Presi-
dent's Committee on Income Maintenance is nov] considering
this whole subject.
Essentially an income maintenance system is an expenditure program, even
~'1hen
negative income tax.
it has the name and design of a
For a negative income tax calls for
payments to people belm'1 a designated level of need.
The
payments by the Government decrease as the individuals'
incomes come closer to that level.
Once they reach that
level and the individuals become taxpayers, they have passed
412
- 19 from the negative tax stage (payTIents of money to them) to
the positive or traditional income tax stage (payments of
tax
E.Y
them).
The degree of associ.ation to the traditional
income tax depends on the relationship of the level of need,
below which payments are made by Government, to the levels
(determined by personal exempti.ons and the minimum standard
deduction) governing positive income tax payments; the
extent to vvhich the "negative" income" (the amount by vvhich
actual income falls be 10\,;, the level of need) is measured by
conce~ts
and definitions of income now used in the income
tax; and the extent of participation by the Internal Revenue
Service in the administration of the payments to the individuals.
Intense exploration of the income maintenance line of
approach -- how would it be administered and effectuated,
what is the effect on incentives to work, \vhat is the relationship to welfare programs -- will clearly be helpful to
the Congress when it comes to consider such proposals.
The
need for intense exploration is increased by the fact that
there are competitors for the large expenditure dollars
involved in that line of approach.
One competitor, for
- 20 -
4.. .,:.""
I-c
example, has the general name of "tax sharing" to cover a
variety of measures by which Federal tax revenues would be
allocated in the large, with as few restrictions as possible, to States and (or?) local governments.
Under this
approach, one proposal is to automatically allocate a percentage of the Federal individual income tax base each year
to State and local governments.
Other proposals operate
indirectly by providing for a substantial credit against
Federal individual income tax liabilities for State income
taxes (and perhaps other forms of State tax) thereby permitting the States to use and raise these taxes since their
impact will be borne by Federal revenues to the extent of
the credit.
In addition to the competitor of tax sharing, there is
the competitor of direct Federal expenditures for specific
purposes, such as slum clearance, urban transportation, manpower training, rental housing, health services, education,
pollution control and so· on
the whole range of present
programs and those pressing to get on the existing list.
However
require funds.
the priorities come out, expenditure programs
Whichever route or combination of routes is
- 21 chosen, the quantitative impact on budget policy and on
tax policy is obvious.
The sums involved are very large,
but so are the resources of the United States.
Each year
our growth at full employment increases our total Federal
revenues, including the trust fund taxes, by $12 hi1lion -an asset which underscores the vital need to remain a full
employment economy.
Hopefully, the Post-Vietnam climate
will permit defense expenditures to drop to 101;ver levels,
thereby releasing budget space so to speak to these domestic
areas.
We will have to carefully weigh the balance to be
struck between the levels of Federal tax burden, and thus
the consequent amount of Federal expenditures, and the income
of the private sector.
This balance bet\veen private, sector
and public sector will involve many considerations -- the
combination of profit incentives, savings and consumer demand
needed to achieve a continuing full-employment economy; the
degree to which the private sector can effectively participate in solving our urban crisis and other social problems;
the degree and rate at which Federal funds can be vlisely
spent.
- 22 In making these decisions we should keep in mind that
taxes absorb a smaller portion of gross national product
in the United States than in any other industrialized
country with the exception of Japan and
S\vitzer~_and
-- in
1966 it was 28.9 percent of GNP in the United States compared
to, for example, 38.6 percent in France, 34.8 percent in
Germany, and 31.3 percent in the United Kingdom.
about twelfth among the industrialized countries.
We rank
(This is
not the place to consider \vhether there is a clear association between the level of taxes and the rate of growth in
these economies -- a recent study concluded that the data
permit no clear-cut support or refutation of any deductive
argument one chooses to pronounce about that relationship.
And thinking back to the earlier discussion on sales taxes
and poverty, there is the same lack of data on the relationship between the proportion of direct and indirect taxes and
growth rates.
While many in the United States are fond of
pOinting to the greater proportion of indirect taxes in
European economi.es and saying we should emulate them, there
is just as much cause on grounds of economic gro\vth (and more
on grounds of equity) to say they should emulate us).
But
- 23 -
4!G
an interesting statistic not usually considered is that,
with defense expenditures excluded, the United States
spends considerably less of its tax revenues on domestic
programs than do those countries.
We cannot measure the \velfare of the American people
by the smallness of the taxes that they pay.
time they
~7otlld
At the present
be treated ill if \ve were to hold taxes
down and forgo the 10 percent surcharge but leave them with
accelerating inflation, climbing interest rate2, an uilstable
boom, and a weakening of our international economic and
financial position.
And in the future they will be badly
served if we were to press for lower and lower tax burdens
but leave our country with the unfairness and ills of poverty
and with the urban neglect and other social blights that we
see today.
Expenditures and Eff{ciency -- and Tax Incentives
Any sober appraisal of our needs in the future will
certainly enforce the view that there is no room for wastage
and inefficiency in our expenditure programs.
Our resources
are very large but not so large that they can be spent wastefully.
Expenditure control in the sense of a careful
- 24 appraisal of the costs and benefits of alternative programs
must be a constant feature of our budget policy.
And We
must clearly learn more about techniques to measure the
costs and benefits of social programs to enable us to apply
such expenditure control wisely.
A significant part of expenditure control must be a
willingness to openly recognize the amounts being expended
by Government, and not to bury amounts by disguising them.
The Federal Government can expend funds in many ways
through direct grants, through guarantess, through loans,
through interest subsidies, and through tax incentives and
preferences.
Unless the Federal cost is identified no mat-
ter what the route, then there will inevitably be a ,drive
to use the route that keeps the cost hidden.
The interest expressed in some quarters today for tax
incentives to cure social problems can dangerously weaken
our ability both to control Federal expenditures and to make
them efficient, in addit'ion to the damage it would do to our
tax structure.
We of course do have tax subsidies presently existing
in our tax la""s.
I have elsewhere observed that through
- 25 deliberate departures from accepted concepts of net income
and through various special exemptions, deductions and
credits, our tax system does operate to affect the private
economy in ways that are usually accomplished by expenditures -- in effect to produce an expenditure system
described in tax language.
I called these items "tax
expenditures," and indicated that the amounts spent -- i.e.,
the tax revenue lost -- through these tax expenditure programs should be set forth in a meaningful way in the Federal
Budget.
We \vould thereby be able clearly to see \vhat are
the total Federal funds going to the various activities
affected, and not just the amounts shom1 in the Budget as
direct appropriations and expenditures.
For these tax
expenditures can be classified along customary budgetary
lines:
assistance to business, natural resources, agricul-
ture, aid to the elderly, medical assistance, aid to
charitable institutions, and so on.
Moreover, the amounts
involved are quite large, reaching in several of these areas
into the billions.
Since the tax expenditure programs are imbedded in the
revenue side of the Budget and their cost is not disclosed,
- 26 -
they go essentially unexamined for long periods, in contrast
with direct expenditures.
Their efficiency, in the sense of
benefits obtained for Government and the public as compared
with amounts expended, is thus not compelled to meet the
rigid tests we are now developing and applying to direct
Budget expenditures.
They are not affected by Congressional
efforts to obtain "expenditure reduction" -- they are outside the scope of the $6 billion reduction in the pending
tax bill.
They thus fall in the class of the uncontrollable
expenditures of Government.
I doubt that any of these spe-
cial tax treatments could stand the scrutiny of careful
piogram analysis, and I doubt that if these were direct
expenditure programs we would tolerate for very long, the
inefficiencies that such program analysis would reveal.
Noreover, these inefficiencies have serious ramifications apart from the Budget.
They have caused some activities,
such as building construction and o\vuership for example, in
many cases to be engaged. in solely on an after-tax basis.
But a business in w'hich the before-tax profit is
10\\7
or
meaningless and which becomes attractive only because special
tax treatment for that business makes the after-tax profit
'-'1"
,',.
,L
I
I
- 27 -
quite attractive must surely give us pause as to the justification for the tax incentive and the way it is provided.
Especially is this so since the after-tax profit is attractive only for those who have income from other activities
sufficient to permit full utilization of those special benefits.
In large part this situation compounds our problems
in the housing field, for it is difficult to achieve efficient use of direct Government assistance for high priority
housing programs when the funds represented by special tax
treatment continue to subsidize a whole variety of other
building activities.
There is irony in proposed programs
to promote private housing for the poor and low income
groups by providing tax benefits that would enable doctors
and
la~vyers
and other investors to become tax millionaires
through these benefits.
We should be able to do better than
that in our use of Government funds, even in solving social
problems.
This does not mean that private enterprise should not
participate in social programs and earn a proper profit.
Indeed, as many in business themselves feel, the best way
for business to participate is through the profit motive.
~~ ~) ~
I
'._
".\,
- 28 Nor of course does this mean that Government should avoid
participation in these social programs.
There is no incon-
sistency between the participation of business functioning
as business -- to earn a profit -- and Government functioning as Government to obtain those business services \vhich
private consumers cannot themselves obtain.
spends huge sums for defense materials
Government
and services and
business participates as business in supplying the items
sought.
Our space program functions in the same manner.
Neither requires a tax incentive to obtain the participation
of business.
If we do not grant tax credits to those who
build space capsules when we need them, or
plane~,
or guns,
or other \Veapons, why must \Ve grant tax c-redits to companies
to provide the manpower training we need, or build the
plants in the distressed areas, or build the houses we want?
Why should business falter and forget its traditions and
functions when it comes to its role in meeting our social
goals?
vfuy should it cease to stress fair profits and
recompense as the basis of its participation and instead
stress tax incentives?
- 29 We are entering into an era in which Government will
be seeking to purchase new types of goods and services from
the business conununity
in manpower training, in housing,
in urban development, and so on.
There is no reason why
Government and business should not: seek to utilize and adapt
for these fields the experience and techniques developed in
achieving successful purchasing programs in defense, space
and other areas of Government procurement.
The President's
recommendations on hard core unernployrne",-lt fol10,v this path.
Moreover, other techniques can be devised.
If a Government
subsidy in the form of a grant is needed in connection ,;vith
a project on which there is no direct Government procurement)
then companies bidding on the project can state the .subsidy
they think necessary and the contract can go to the bidder
who needs the 10\vest subsidy.
Conclusion
I have attempted to describe some of the current events
that could well affect the legislative involvement in the
tax field in the years ahead.
As in any other field concern-
ing Government, issues are difficult to resolve and the
solutions hard to shape.
We clearly need all the data and
- 30 analysis that can be made available to assist in meeting
these problems.
We in the Treasury do our best to prepare
for the future and to see that information will be at hand
when the legislative involvement occurs.
But our resources
are few indeed c:.nd our knoHledge and wisdom have their
limits.
The task of preparation is thus a task for all who have
a concern for the \ITise solution and \vho have experience,
information and insight to contribute to that solution.
Among the great resources of our country is its diversity
of talent and experience in so many sectors and institutions
business, labor, government, academic, foundations, social
orga"nizations, and many more -- and the ability through so
many avenues of calm interc.hange to explore and compare our
knowledge.
And so there is hope that in the tax field, as
elsewhere, working together we will achieve the \visest solutions that our collective knowledge can provide.
TREASURY DEPARTMENT
&
(
rQS IMMEDIATE REU!:ASE
EXCHANGE OFFERnm - 61> TREASURY NOTES OF SERIES B-1975, DUE MAY 15, 1975
'-'5/4~ Notes, B-1968
3-7/8~
Bonds of 1968
Total
Federal Reserve
District
Boston
New York
HI1lade1phia
Cleveland
Richmond
Atlanta
Chicago
St. !nuis
MinneapoliS
Kansas C1 ty
Dallas
San Francisco
Treasury
TOTAL
Fbr Cash Redemption
~ of
If' of
Amount
Amount
Total
outPublic
for Exchange Exchanged
standing
Holdings
( amounts in millions)
$5,587
$5,048
$ 539
9.6
21.4
2,4:60
1,701
759
30.9
38.5
ta,047
$6,749
$1,298
16.1
29.9
Amount
. Eligible
Issues Eligible
for Exchange
4-3/41> Notes of Series
B-1968 Exchanged
$ 41,210,000
4,330,067,000
28,774,000
44,375,000
18,318,000
66,716,000
235,117,000
54,736,000
20,299,000
31,214,000
19,370,000
150,895,000
6,428,000
$5,047,519,000
3-7/81> Bonds of
1968 Exchanged
$ 42,987,000
1,007,760,000
64,058,00~
69,216,000
33,301,000
44,648 ,000
174,270,000
59,137,000
31,801,000
62,105,000
36,453,000
71,642,000
3,955,000
$1,701,333,000
Total Exchanged
$ 84,197,000
5,337,827,000
92,832,000
113,591,000
51,619,000
111,364,000
409,387,000
113,873,000
52,100,000
93,319,000
55,823,000
222,537,000
10,383,000
$6,748,852,000
CASH OFFERING - 61> TREASURY NOTES OF SERIES C-1969, DUE AOOUST 15, 1969
Federal Reserve District
Boston
New York
iMl.a.d.e1phla
Cleveland
Richmond
Atlanta
Chicago
st. wuis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTAL
F-1252
Total Subscriptions Received
$ 626,703,000
3,084,615,000
516,943,000
750 ,165,000
464,707,000
579,398,000
1,505,203,000
454, 557 ,000
262,492,000
388,437,000
346 , 611,000
1,297,841,000
7,082,000
$10,284,754 ,000
TOtal Allotments
$ 194,030,000
943,574,000
166,514,000
243~403,000
159,025,000
197,316,000
517,537,000
166,910,000
100,682,000
163,833,000
118,798,000
389 ,404 ,000
5,114,000
$3 ,366 ,140 ,000
J?C
I
f._
-
TREASURY DEPARTMENT
FOR JMMEDIATE 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
$1,500,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing May 31, 1968,
in the amount of
$ 4,003,990,000, as follows:
273-day bills (to maturity date) to be issued May 31 1968
in the amount of $ 500,000,000,
or thereabouts, represehting ~n
additional amount of bills dated February 29,1968, and to
mature February 28,1969, originally issued in the amount of
$ 1,001,786,000,the additional and original bills to be freely
interchangeable.
365-day bills, for $ 1,000,000,000i or thereabouts, to be dated
May 31, 1968,
and to mature May 3 , 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. ~hey
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(mat uri ty value).
'
Tenders will be received at Federal Reserve Banks and Branches
to the closing hour, one-thirty p.m., Eastern Daylight Saving
time, Thursday, May 23, 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 365 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.
up
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
Without deposit from incorporated banks and trust companies and from
F-1253
- 2 respons1ble and recognized dealers in inve.tment securities. Tenders
from others must be accompanied by payment or 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids.
Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final.
Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on May 31, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing May 31, 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 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 fro
any Federal Reserve Bank or Branch.
000
:'• ;'"_v
' .....
-,'
TREASURY DEPARTMENT
=
RELEASE ON RECEIPT
TREASURY SECRETARY FOWLER NAMES REGINALD (REX) BRACK
AS NEW SAVINGS BONDS CHAIRMAN FOR THE STATE OF TEXAS
Reginald (Rex) Brack, Senior Vice President, Braniff
Iriternational, Dallas, was today appointed by Secretary of
the Treasury Henry H. Fowler as volunteer State Chairman
for the Savings Bonds Program in Texas, effective immediately. He succeeds Ed Gossett, who had served since 1952
and who recently was appointed District Judge of the
Criminal District No.5, by Governor John B. Connally.
Mr. Brack, who has been chairman of the Dallas County
Savings Bonds Committee since May 27, 1964, will head a committee of state business, financial, labor ,and governmental
leaders who -- working with the Savings Bonds Division -assist in promoting the sales of Savings Bonds and Freedom
Shares.
He is a member of the Board of Directors of the Dallas
County Chapter of the American Red Cross and of HemisFair.
He is also a member of the Board of Trustees of the National
Leukemia Society and a member of the Dallas Crime Commission.
Mr. Brack served as Vice Chairman of the Mississippi
Valley World Trade Council, headquartered in New Orleans,
and on the Travel Advisory Committee of the Department of
Commerce. He is a former President of the Air Traffic
Conference.
He is a member of the Newcomen Society, Phi Gamma Delta
Fraternity, and the Lutheran Club. His international honors
include the Order of Balboa, from Panama, and the Honor Al
Merito, from Paraguay.
Mr. Brack received a Bachelor of Arts Degree from the
University of Kansas in 1935.
He is married to the former Edythe Ella Mulveyhill;
they have two sons and one daughter. The Bracks have made
their home in Dallas since 1947.
000
TREASURY DEPARTMENT
•
FOR IMMEDIATE RELEASE
TREASURY DEPARTMENT RELEASES
FIRST OF TAX POLICY RESEARCH STUDIES
The first in a series of research studies dealing with tax
policy and related economic policy was published today by the
Treasury Dep artmen t •
The studies will deal with specific issues relevant to tax
policy requiring extensive analytical research.
Tax Policy Research Study Number One, released today, is
entitled Overseas Manufacturing Investment and the Balance of
Payments. The authors are Professor Gary C. Hufbauer, of the
University of New Mexico, and Professor F. Michael Adler, of t~e
University of Pennsylvania. They began the study in November,
1965.
As will be the case with subsequent studies in the series
publication of the Hufbauer-Ad1er study does not represent a
Treasury Department commitment to any conclusions of the authors.
The purpose of the studies, noted in the foreword by
Assistant Secretary for Tax Policy, Stanley S. Surrey,
is that, in public policy formulation, "it is important that
a great deal of analytic work be devoted toward solving underlying
questions about how the real world operates and how it would react
to various policy changes."
The study deals with the effect of United States manufacturing
investment overseas upon the United States balance of payments.
One conclusion of the authors suggests that direct foreign
investment involves a loss in the balance of payments which is not
recovered for a period of at least six years. The authors call
attention, however, to the limitations of data in this field.
One of the important prior studies on this question was
undertaken by Professor Philip W. Bell, of Haverford College, as
a Treasury Consultant in 1961 and 1962.
F-1254
- 2 -
-J?Q
, -. '-
More recently, Effects of U.K. Direct Investment Overseas:
M Interim Report, (1967), by W. B. Reddaway and others,
Presented some estimates obtained from British firms and dealing
with their overseas investments. The present study and the
Reddaway Report differ to some extent in aspects of the
problem that they investigate, but there is some overlap in
which the results may be compared.
The report estimates separately and then combines the
n~erous ways in which direct foreign investment in manufacturing
affects the balance of payments. The authors state that they
recognize that some of these consequences depend critically on
what assumptions are made as to just what would have happened in
the absence of a direct foreign investment -- particularly,
whether the investment would have been undertaken by another
country.
The Hufbauer-Adler study re-examines the question of the
profit and dividend and other income flows from direct foreign
investment. It also analyzes trade data in order to estimate
the tendency of direct foreign invstment to substitute for
U. S. exports.
In the foreword of the study, Assistant Secretary Surrey
writes:
" •••• /the authors7 have been quite explicit
in describing their analytic methods, the reasons
for using these particular methods, and analyzing
their available data. All of this provides a
study with which others can work. This is the
type of study that we hope will be characteristic
of this series of tax research studies.
The 92-page study is available at the Government Printing
Office at 75 cents per copy.
000
TREASURY DEPARTMENT
•
,. BEIl.lSE 6: 30 P.M.,
!!y1 Mal 20, 1968.
RESULTS OF '1'REASURY' S WEEKLY BILL OFft:RIBG
'Dle 'Ireasury Department announced that the teDders for two series ot TreasUl"l
Ills, one series to be an additional issue ot the bills dated February 23, 1968, and
I~ otber series to be dated May 23, 1968, which were offered 011 Mal 15, 1968, were
lI;eDe4 at the l"ederal Reserve BaDlts t~.
TeDders were invited tor $1,600,000,000,
r~nabouts, of 91-day bills and tor $1,100,000,000, or thereabouts, ot 182-day
~lll. !be details ot the two series are as follows:
IdlE or ACCEP'SD
mM!IVE BIDS:
91-day Treasury bills
matur 1 ng August 22~ 1968
Approx. EquiT.
Price
Annual Rate
98.534:
5.80QJ
98.517
5.867~
98.522
5.84.7~
.
W
!I
nih
Low
Average
Y
Y
!I
!I
•
182-day Treasury bills
_turi!!6 }{oveUer 21 z 1968
Approx. Equiv •
Annual Rate
Price
S.961J
96.985
96.959
6.015~
96.969
5.995~
Excepting 1 tender of $200,000;
Excepting 1 teDder ot $538,000
of the aaoWlt ot 91-day bills 'bid tor at the low price vas accepted
~ ot the aaamt ot 182-4&.7 bills bid tor at the low price was accepted
tJlL MDDS APPLIED JOB
District
.un
ACCEP.tED BI FEDEBAL BESUVI DIS!BICTS:
AiElied For
•
Botton
., tork
P'a11a4e1phia
ClevelaDd
licbaond
Atlanta
Ch1easo
St. Louis
timleapol1s
lanaas City
Iallas
Sua Francisco
~'mLS
AEElied lor
ACce~d.
$
26,019,000 $,019,000
1,84.8,44.8,000
26,270,000
23,838,000
13,585,000
30,962,000
306,827,000
35,617,000
16,180,000
19,616,000
21,875,000
1,157,768,000
14.,270,000
23,858,000
12,085,000
24.,4.4:2,000
181,697,000
24.,517,000
14.,180,000
18,116,000
12,875,000
1561.715~000
90~715.z000
$2,525,952,000
$1,600,522,000
24, 199,000
1,-'61,097,000
15,272,000
27,554.,000
6,857,000
21,293,000
339,214.,000
15,347,000
11,889,000
12,776,000
17,275,000
196.1 366 z 000
=I
$2,14.9,739,000
•
AcceEted
3,799,000
715,727,000
7,272,000
14.,554.,000
5,357,000
15,24.3,000
175,214.,000
12,14.7,000
6,889,000
11,176,000
8,275,000
124.1,3661. 000
$1,100,019,000 ~
yIncludes $24.3,4.18,000 noncaapetitive tenders accepted at the aftrage price ot 98.522
Y.hcl\1d.ea $114.,382,000 IlODcc.pet1tive teD4era accepted. at tbe average price of 96.969
~ !lese rates are on a baDk discount basis. 1.be equi-ra1ent coupon issue yields are
6.0~ tor the 91-cla7 bills, and 6. 2~ tor the 182-day bills.
F 1255
STATEMENT IY THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY, BEFORE THE
SENATE FOREIGN RELATIONS COMMITTEE ON
REPLENISRMENT OF THE RESOURCES OF
THE INTERNATIONAL DEVELOPMENT ASSOCIATION
10:00 A. M., Tuesday, May 21, 1968
Mr. Chairman and Members of the Committee:
I appear before you this morning in support of S. 3378
which provides for U. So participation in the second rep1enishment of the International Development Association (IDA).
This
replenishment is of far-reaching importance to the developing
countries of the world, and will serve to advance basic United
States objectives in international economic development in a
framework of further multilateral financial cooperation.
This Committee heard testimony last week on a proposal
of transcendent importance in Shaping the future of the
international monetary system -- the creation of Special
Drawing Rights in the International Monetary Fund.
In taking
up the bill now before us, the Committee addresses itself
to
8
second great world economic problem of this decade and
the next:
economic development for the poor or less developed
countries of the world.
These are not unrelated problems.
Adequate reserve
growth is a prerequisite to a satisfactory expansion of world
F - 1256
- 2 trade and investment.
The economically advanced countries
cannot reach their full economic potential if the developing
countries are stagnating o
IDA's role is vital in avoiding
such stagnation and in creating conditions favorable to
economic advancement.
The requirements for development assistance among the
poor nations of the world remain immense.
In an inter-
dependent world economy, these needs cannot go unmet indefinitely.
Official flows of development finance from the
economically advanced countries, as measured by the
Development Assistance Committee of the Organization for
Economic Cooperation and Development amount to roughly
$6 1/2 billion a
yea~.
Responsible estimates made in recent
years indicate that additional flows of development resources
of several billion dollars a year could be promptly and
effectively put to work in stimulating development and
creating the necessary infrastructure for further growth in
the developing countries.
At the same time, the capacity of
many developing countries to service additional debt is
severely limited.
It is because of that severe limitation
that the Special Report of the National Advisory Council on the
replenishment of IDA observes,
"It is also clear that economic
- 3 -
development of the developing
countries cannot be carried out
entirely on the basis of loans
on conventional terms without
potentially endangering seriously
the soundness of the international
financial structure. A replenishment of IDA at the level proposed
would contribute to meeting the
greater demands for fund. by
eliciting larger contributions
from the other donors on terms
that fully take into account
the debt servicing burden of the
developing countries."
We can be certain that, measured against either the
readily apparent needs of the developing countries or their
capacity to use external resources in conjunction with their
awn substantial self-help efforts, the proposed IDA replenishment will fill only part of the gap.
The proposed
amount of the replenishment -- $400 million a year for the
next three years, of which the United States share would be
$160 million a year -- represents what it has been possible
to aChieve international accord on among the economically
advanced countries.
I have given my closest attention to each stage of
the discussions and negotiations leading to the proposed
multilateral accord before you today.
As you well know,
much of my time and energy as Secretary of the Treasury has
- 4 -
been devoted to finding ways of achieving important
u. s.
international objectives within the constraints imposed
by our balance of payments problem.
In my judgment, this
proposal reconciles the imperative need for continued
United States support of IDA with our own need to avoid
adverse balance of payments consequences from our contributions.
In its original conception and in its subsequent
development, IDA has merited and received bipartisan supporto
Proposed under President Eisenhower and expanded under
Presidents Kennedy and Johnson, IDA meets needs that are
recognized on both sides of the congressional aisle.
I
could hardly document the character of this bipartisan
support better than by quoting from the Congressional Record
of May 13, 1964, when the first replenishment of IDA was
being debated.
The distinguished Congresswoman from New
Jersey, Mrs. Florence Dwyer, said on that occasion:
"In 1960, as it is today and as it was
when the idea was first suggested in
19~1, the concept of an agency to
supplement the World Bank by lending
development funds on the easier credit
terms which underdeveloped countries
find essential was completely bipartisan.
The idea was first proposed 13 years
ago by the Republican Chairman of an
- 5 -
Advisory Board under a Democratic
President. It wgs given new life 7
years later by a Democratic member of the
other body during the Administration of
a Republican President. A year later,
1959, the Republican Secretaries of
State, Commerce and the Treasury, the
Chairman of the Federal Reserve Board
and the President of the Export-Import
Bank formally approved the projecto
The World Bank itself then drew up the
Articles of Agreement which were
submitted by the President to the
Congress which, in turn, approved
U. S. participation. Congressional
approval was urged by a broad range
of private American organizations,
including the U. S. Chamber of
Commerce, the American Farm Bureau
Federation, and the AFL-CIO."
President Johnson has given renewed emphasis to
this multilateral endeavor, as exemplified in his 1966
message on Foreign Aid:
"I propose that the United States -- in
ways consistent with its balance-ofpayments policy -- increase its contributions to multilateral lending
institutions, particularly the International Development Association. These
increases will be conditional upon
appropriate rises in contributions from
other members. We are prepared immediately
to support negotiations leading to agreements of this nature for submission to the
Congress. We urge other advanced nations
to join us in supporting this worko
lithe United States is a charter member
and the largest single contributor to
such institutions as the World Bank,
- 6 the International Development
Association, and the InterAmerican Development Banko
This record reflects our confidence in the multilateral
method of development finance
and in the soundness of these
institutions themselves. They
are expert financiers, and
healthy influences on the
volume and terms of aid from
other donors."
I have attached to my statement several additional
expressions of Presidential support, present and past,
for IDAo
I do not intend today to dwell on the early operations
of IDA or the details of its current operations.
Conuuittee and the
L~nate
This
itself have been intimately
associated with IDA since its inception -- indeed, it
was in the Senate of the United States that S. Res. 264,
introduced in 1958 by Senator Monroney, provided the
impetus leading to IDA's establishment in 1960.
already know that IDA embodies the concepts of
--
Multilaterally-shared resources
with other countries putting
up $3 for every $2 the U. S.
contributes;
You
- 7 -
-- Sound development finaDcing
with credits repayable in
hard currencies;
-- Repayment on liberal amortization
terms and low service charge
adapted to the debt servicing
capabilities of borrowing
countries;
-- Effective and efficient administration by the skilled
management and staff of
the World Bank.
You know also that the resources provided by IDA
represent a modest but very important part of the total
flow of funds to the developing countries.
The Special
Report of the National Advisory Council which is before
you brings up to
da~the
record of IDA's lending operations.
IDA's Resources
When IDA was established in 1960, its authorized
capital was $1 billion, of which the economically advanced
member countries provided approximately three-quarters.
- 8 -
These contributions were payable to IDA on a 5-year
schedule running from fiscal year 1961 through fiscal
year 1965
0
By 1963, it was clear that IDA's resources would
have to be replenished because of the rapid pace at
which it proved possible to commit the initially available resources.
Accordingly, in 1964, the first re-
plenishment of IDA became effective, providing for additional resources of $750 million, all provided by the
economically advanced member countries (the so-called
"Part I" countries of IDA).
The resources of the
first replenishment were scheduled for payment to IDA
over the three fiscal years 1966, 1967 and 1968.
The
last of these three payments was completed recently.
Unlike the situation in 1963-1964, when action to
replenish IDA was taken well ahead of completion of the
current contribution schedule and ahead of full commitment of IDA's available funds for loans, the present
situation finds IDA with its available funds almost
completely committed and the last payment on contributions
already made o
Because the first replenishment was timely,
- 9 -
there was almost no interruption in the pace of IDA
commitments 0
Now, however, such interruption has already
taken place.
The NAC Report makes this state of affairs
abundantly clear -- this valuable affiliate of the World
Bank has virtually ceased lending operations because of
lack of funds.
Without the proposed replenishment, IDA
cannot resume its important role.
This Committee and this
Congress now have the opportunity to determine if an
international institution created largely on American
initiative is to continue, with American participation,
as an effective entity.
Amount of Request
In brief, our request this morning is for new authority
to contribute $160 million to IDA in each of the three
fiscal years, 1969, 1970 and 1971.
This authority, totaling
$480 million over the three-year period, would represent a
40 percent U. S. share in contributions to IDA by the
economically advanced countries totaling $1.2 billion
during that period.
Eighteen other countries would put up the balance of
$720 million, at the rate of $240 million per year.
Under
arrangements agreed to by the other countries which I shall
- 10 -
describe shortly, U. S. funds would be provided on a
basis guaranteeing that, if our balance of payments
situation should continue to be a serious problem
our IDA contribution would involve a zero balance
of payments cost at least until the beginning of fiscal
year 1972 and possibly longer.
Other Countries Provide
8
Larger Share
The figures I have just mentioned on relative contributions by the U. So and the other developed countries
clearly reveal one of the main arguments for continued U. S.
participation in IDAo
For every $2 the U. S. puts up
through this multilateral channel, the other advanced countries
put up $3.
It is clearly to our advantage to have others
bear the major burden of development financing, while
W~
assume an appropriate but minority shareo
I would also like to emphasize that our present 40
percent share reflects the
f8~t
that we have been able
to reduce our share of IDA contribution since IDA was
established.
This has resulted in seemingly modest but,
to me, clearly significant dollar savings in relation to
- 11 the new overall IDA replenishment figure.
Under the
present request, the United States would contribute
$37 million less than would be the case if our 1960
share of IDA contributions were maintained.
To sether
with a similar calculation of savings in connection
with the first replenishment of IDA, our total contributions will be nearly $50 million less than they would
have been had we not negotiated vigorously to achieve a
reduce share o
These efforts were carried out, I might
add, with considerable encouragement from the Congress
expressed during earlier hearings on IDA legislative
requests
0
Consistency with Expenditure Restraints
In this period of rigorous scrutiny of all of our
future spending plans, I know you will want to assure
yourselves on the size of the request.
I have already
touched on the pressing need for development finance and
on the fact that IDA, even at the level of this request,
.
" It. -'
~.~
- 12 -
can provide but a part of what is needed -- although a
vital part.
If the U.
s.
were to fail to contribute its
40 percent share of the proposed increase in IDA resources,
the entire proposal, involving contributions by 18 other
developed countries who are putting up more than we are,
would collapse, and the vital work of this institution
would come to a complete halt.
It is not in our interest
to let this happen.
Several further points should be noted in this
regard.
The budget as presented in January provides
for $240 million for the first year of the U. So contribution to this replenishment.
This figure was entered
in the budget at a time when negotiations with the
other countries involved had not yet been completed and
it was not possible to determine the final level of the
package that might be agreed upon.
When the final $102
billion, 3-year package was agreed upon, ad referendum,
among the representatives of the Part I countries, we
were able to determine that our 40% share would require
contributions of only $160 million eaCh yearo
We
therefore will need only two-thirds of the amount shown
in the January budgeto
- 13 Furthermore, the balance of payments safeguards
which I have referred to briefly and will discuss
in greater detail shortly, are of such nature that the
budgetary effect of our contributions to this replenishment
will be sharply reduced below their normal amount in the
next three fiscal years should our balance of payments
situation require.
Our contribution installments of
$160 million each will be made in the form of letters
of credit.
These will be drawn upon only as needed
for disbursements.
Even if we did not take advantage
of the balance of payments safeguards, we would not expect
the actual cash drawing under our first installment
to exceed $100 million in fiscal year 1969.
But if
we do take advantage of the balance of payments safeguard arrangements, we could expect the actual cash
drawing to be less than half of this amount.
Such
a development would mean a very substantial reduction,
not only below the level we might have anticipated with
the new funds, but also substantially below the level of
usage of the funds we have been providing to IDA.
- 14 -
Our Balance of Payments is Fully Protected
Let me turn now to another aspect of the IDA replenishment which I believe is of great concern to members of
this Committee and indeed to the Congress at large
the effect on the U. S. balance of payments.
From
the very earliest discussions of IDA replenishment, I
made clear, both publicly and privately, that an
arrangement taking into account the situation of donor
countries with balance of payments deficits was a prerequisite to final agreement on the part of the United
States.
The proposal now before you reflects the sub-
stantial acceptance of this viewpoint by the other
contributing countries.
In its operations to date, IDA has had only minor
effect on the U. S. balance of payments deficit.
Pro-
curement in the United States financed by IDA has
offset a significant part of the cash flow of U. S.
resources to IDA.
Although in each of the past three fiscal
years the United States provided $104 million to IDA,
this contribution was in the form of non-interest bearing
- 15 letters of credit rather than cash.
These letters of
credit are not drawn on until much later than the time they
are delivered, and then are drawn only at the rate required for disbursement.
Only these cash drawings effect
the balance of payments.
The average cash effect of IDA
operations so far has been about $30 million per year.
Nevertheless, I have felt it desirable to eliminate even
this much balance of payments drain from IDA operations with
its new money.
Accordingly, we have obtained the agreement of all
other participating countries that they will permit
IDA to operate in a fashion that will give us -- if we
require it because of a serious balance of payments problem
complete balance of payments protection during the fiscal
years in which contribution payments are being made, i.e.,
at least through the end of fiscal 1971.
This agreement is
formally embodied in the Resolutions which appear as an
Annex to the NAC Report.
Our contributions to IDA have an adverse effect on
our balance of payments only when they exceed the amount
of procurement obtained in the United States under IDA financing.
The essence of the new arrangements is that the U.S. contribution
- 16 would be drawn on only in the amount of procurement identified as
taking place in the United States.
The balance between this
amount and what we would have put up as our normal share would
be deferred for a fixed period of three years.
Thus, as long
as we so elect, no drawings of free foreign exchange from
the United States would take place prior to July 1, 1971,
and some of the U. S. contribution could be deferred until
a period well beyond that date.
To make up for the temporary deferment of availability
of some U.S. resources in the early years, other developed
countries have agreed to accelerate the availability of their
contributions for use by IDA.
No change would take place
in IDA's present method of operations with respect to
borrowing
countries~
In particular, international competitive
bidding would continue to be the rule.
The Management of IDA has given assurances that the
entire arrangement is compatible with continued effective
operations by the institution.
The United States would
have recourse to the arrangement only as long as its balance
of payments situation required.
A later acceleration in
the rate of use of the U S. contribution would have to
be anticipated, as a corollary of the deferment we had
- 17 -
received.
The technical description of the workings of
these arrangements is detailed in the NAC Report.
The point
I wish to emphasize is that the balance of payments cost of
the second replenishment of IDA will be zero while we are
in serious overall balance of payments difficulties.
The Replenishment Cannot Proceed without the U.S.
Under the Resolutions governing the replenishment,
which are reproduced in Annex A of the NAC Report,
the second replenishment cannot become effective until
at least twelve contributing members whose contributions
aggregate not less than $950 million shall have notified
IDA that they will make their contributions.
Because of
the size of the U.S, contribution, the $950 million
"trigger" amount cannot be reached without our participation.
Our own action undoubtedly will stimulate early action on
the part of a number of other governments.
The Executive
Directors of IDA have recommended that all governments
act in time to permit the Resolutions to come into effect
on or before June 30, 1968.
By acting promptly to meet
that schedule, we can reassert the constructive leadership
regarding IDA that has characterized our earlier participation
in the institution.
- 18 Nature of Legislation Reguired
S. 3378, the Bill introduced by the Chairman of this
Committee, would provide the necessary authority for
moving forward with out participation in the second
replenishment.
Hearings on an identical bill, H. R. 16775,
were recently completed before the House Banking and
Currency Committee.
It would, first, authorize me,
as U. S. Governor' of IDA, to vote in favor of the Resolution
now pending before the Board of Governors on the replenishment, and to notify IDA formally, in accordance with
paragraph (h) of the principal Resolution, that the
United States will make the
co~tribution
authorized fo-
it in accordance with the terms of that Resolution.
To implement the agreement we would thus be entering into
with the Association,
S.
3378
authorizes the
appropriation, without fiscal year limitation, of our
full $480 million contribution.
available until expended.
~at
amount would remain
The funds would in fact be made
available to IDA in three installments, payable on November 8
of 1968, 1969 and 1970.
Upon formal notification to IDA
of our acceptance of the second replenishment pursuant
to this legislation and the requisite action by other countries,
the United States would have a binding international
obligation with IDA.
- 19 To be in a position to meet this obligation, as
soon as authorizing legislation is completed we would
seek an appropriation of $160 million for the first
installment payment that would fall due on November 8, 1968.
We would seek appropriations in the same amount in each
oc
the fiscal years 1970 and 1971.
Installment payments would be made in the form of
non-interest bearing letters of credit, which would be
drawn on by IDA at a later date as its cash needs for
disbursements arise.
No budgetary "expenditure is recorded
until such drawings are made under the letters of credit.
This is the procedure generally used in our participation
in international financial institutions.
Conclusion
New lending activity of the International Development
Association is at a virt"al standstill.
all of its funds have been committed.
Practically
We are asking
authority today to participate in a replenishment of its
resources.
As was intended when IDA was first set up,
participation by the United States will be a minority
participation
-- the other advanced countries put up
60% while we put up 40%.
Although we have the smaller
share, the arrangement cannot go forward at all without
- 20 -
us.
And it clearly should go forward.
IDA is an effective and efficient multilateral
instrument for sound development financing.
It has been the
major worldwide source of multilaterally supplied development funds on terms that take into account the debt
service problem of the developing countries.
The needs
of these countries for external finance are massive
and are not being adequately met.
The fact that the United States was the leader in
establishing IDA and arranging the last replenishment
of its resources should alone be reason for our continued
support.
I recognize, however, that two problems may
induce some hesitancy in the Congress about giving that
support.
In
my
judgment, these problems have been
fully taken into account:
The balance of payments impact of IDA in the
past has been moderate.
Nevertheless under
the new proposal, we have achieved an agreement
with other donors that if the U.S. balance of
payments required such protections, there will
- ~l -
be absolutely no balance of payments impact
from IDA operations with the new funds until
at least the beginning of fiscal year 1972.
The proposal is consistent with out financial
capabilities.
It is one-third less than the
amount originally budgeted for; it represents
a smaller U.S. share of total IDA contributions
by the developed countries than in the past;
and it is likely in the near term to involve
a lower annual level of cash expenditures than
the level of previously authorized funds, due
to the operation of the balance of payments
safeguards.
During the entire pCYS"t-war period, the United States
has followed the path of international financial cooperation.
IDA was born of this policy and the proposed replenishment
both reflects and extends this policy.
Through IDA multilateral
responsibi1ites are met in responsible multilateral
ways.
- 22 -
The Congress can give a new impetus to further
international cooperation for development by adopting this
legislation.
I urge you to act favorably on S. 3378 and report
it promptly to the full Senate.
A-I
THE WHITE HOUSE:
WASHINGTON
August 26, 1958.
Dear Mr. Secretary:
I have read with great interest your letter concerninl the adequacy
of the present resourCes of the International Monetary Fund and the
International Bank for Reconstruction and Development.
1 thoroughly agree with you that the well-being of the free world is
vitally affected by the progress of the nations in the less developed
areas as well as the economic situation in the more industrialized
countries. A sound and sustainable rate of economic growth in the
free world is a central obje ctive of our policy.
It is universally true, in my opinion, that governmental strength and
social stability call for an economic environment which is both dynamic
and financially sound. Among the principal elementl in maintaining
such an economic basis for the free world are (1) a continuing growth
in productive investment, international as well as domest.i.c; (2) financial policies that will command the confidence of the public, and assure
the strength of currencies; and (3) mutually beneficial international
trade and a constant effort to avoid hampering restrictions on the freedom of eXChange transactions.
During the past year, as yo, know, major advances have been made in
our own programs for dealing with these problems. These include an
increase in the lending authority of the Export-Import Bank; estahlishment of the Development Loan Fund on a firmer basis through incorporation and enlargement of its resources; extension and broadening of
the Reciprocal Trade Agreements Act; and continuation of the programs
carried forward under the Agricultural Trade Development and Assistance Act.
Our own programs, however, cando only a part of the job. Accordin~~ly,
as we carry them forward, we should also seek a major expansion in the
international programs designed to promote economic growth with thu
indis pensable aid of strong and health y cur rcncic~.
- 2 -
As you have pointed out, the International Bank for Reconstruction
and Development and the International Monetary Fund are international
instrwnents of proved effectiveness already engaged in this work.
While both institutions still have uncommitted resources, 1 am convinced that the time has now come for us to consider, together with
the other members of these two agencies, how we can better equip
them for the tasks of the decade ahead.
Accordingly, I request, asswning concurrence by the interested members of the Congress with whom you will consult, that you take the
necessary steps in conjunction with the National Advisory Council on
International Monetary and Financial Problems, to support ~ course
of action along the following lines:
First: In your capacity as United States Governor of the International
Monetary Fund, I should like to have you propose, at the Annual Meeting of the Fund at New Delhi in October, that prompt consideration be
given to the advisability of a general increase in the quotas assigned to
the member governments.
The past ten years testify to the important role played by the International Monetary Fund in assisting countries which, from time to tune,
have encountered temporary difficulties in their balance of payments.
We are now entering a period when the implementation of effectlVe a:1d
sound economic policies may be increasingly dependent in many countries
upon the facilities and technical advice which the Fund can make av~ilable
as they me et temporary extel lal financial difficulties. This is particularly true of the les s developed countries with the great variability in
foreign exchange receipts to which they are subject from time to time.
It also applies to industrialized countries which are dependent on foreign
trade. Through its growing experience and increasingly close relations
with its members, the Fund can also help see to it that countries are
encouraged to pursue policies that create stable financial and monetary
conditions while contributing to expanding world trade and income. The
International Monetary Fund is uniquely qualified to harmonize these
objectives but its present resources do not appear adequate to the task.
Second: In your capacity as United States Governor of the International
Bank for Reconstruction and Development, I should like to have you
A-3
- 3 -
propose, at the AnnUd.l Meeting of the Bank, that prompt consideration be given to the advisability of an increase in the authorized
capital of the Bank and to the offering of such additional capital for
subs cription by the Bank's member governments. Such additional
capital subscriptions, if authorized, would not necessarily require
additional payrnents~o be made to the Bank; they would, however,
ensure the adequacy of the Bank's lending resources for an extended
period by strengthening the guarantees which stand behind the Bank's
obligations.
The demands upon the Bank for development loans have been increasing rapidly, and it is in a position to make a growing contribution to
the economic progress of the free world in the period which lies ahead.
Moreover, it can do this by channeling the savings of privatI';: investors
throughout the world into sound loans, repayable in dollars or other
major currencies. But to meet the rising need for such sound development loans, it must be able to raise the funds in the capital markets
of the free world. An increase in the Ban~'s subscribed capital, by
increasing the extent of the responsibility of member governments
for assuring that the Bank will always be in a position to meet its
obligations, would enable the Bank to place a larger volume of its
securities in a broader -na rket, while still maintaining the prime
quality of its securities and hence the favorable terms on which it can
borrow and re -lend funds.
Third: With respect to the proposal for an International Development
Association, I believe that such an affiliate of the International Bank, if
adequately supported by a number of countries able to contribute, could
provide a useful supplement to the existing lending activities of the
Bank and thereby accelerate the pace of economic development in the
less developed member countries of the Bank. In connection with
the study of this matter that you are undertaking in the National Advisory Council pursuant to the Senate Resolution, 1 note that you
contemplate informal discussions with other member governments of
the Bank with a view to ascertaining their attitude toward an expansion
of the Bank's responsibilities along these lines. If the results indicate that the creation of the International Development As sociation
would be feasible, I request that, as a third step, you initiatt! promptly
negotiations looking toward the establishment of such an affiliate of
the Bank.
- 4 -
The three-point program 1 have suggested for consideration would
require intensified international cooperation directed to a broad
attack upon some of the major economic problems ot our time.
A concerted and successful international effort along these lines
would, 1 feel certain, create a great new source of hope for all
those who share our conviction that with material betterment and
free institutions flourishing side by side we can look forward with
confidence to a peaceful world.
Sincerely,
The Honorable Robert B. Anderson
Secretary of the Treasury
Washington, D. C.
A-S
THE SE:CRETARY OF THE,TREASURY
WASHINGTON
August 18, 19,8
Dear l-tr. President:
We have traquently discussed together the importance of
a Bound and sustainable growth in the econoll\Y ot the free
world to both the foreign and doJlDstic policy objoctivoD ot
the united states. over the longer term, I believe that the
well-being of the friendly nations depends not only on tho
economic and financ1s.l health of the industrialized ll!1t1ons
ot Europe, North America, and elsewhere, but also upon the
economic gro1-rth and progross of nations in the less developed
areas of the £rea l1orld.
. Through a number of moa.suree the United states has bocn
pursuing these objectives, and this year l~a ha-ra t:lken lI1iljor
steps fOr'uaro in our Olm pl~Oerama. It l-tould seem highly dosirable that tho m't.ions of the trao uorld ns a lJhole should move
forward cooperatively to deal mora effectively with the prGblem.
one of tho bost nays of achieving such cooperation uotlld be by
atrel!gthen:ln~ the iilltl.llcitLl 11lS·titutions alrea.dy e~ta.bl1shed.
In tho Intarn.n.t,io:n.o.l BanI, for ReconstrUction and Dovelopl1:ant and
the Internllt,1on.3.l l1~netary FUnd \~.J have soasonod 1nternn.tionoJ.
irurtnunsnts non ollgaGc.ld in this 1·10rl:.
Both ot these organiz~tions have staffs of inter~~tionall1
recruited experts nho, with over a decade or ~::por1oncd behind
them, haw domon:3tl~atod thoir ability to act ef.t'ectivuly and
:lJupartially. Both ha.w eDUJ.blished operating standards and
policies l-thich cOlrim:md the ronpoct of their mumber govel·ll:l.ants.
1'h8 FUnd has provIded short-torrll finnllcinJ. assist.'lllCe to 35
mambar countries, aggrogatina the oquivalent of ovor $3 billion.
Through such assistance and the influence i~ Me boon nbla to
bring to bear for the adoption of sound currency nnd oxchanae
policies ~ the FUnd hns contributed substantially toum·d:J
monetary stability and a f).'oer flow of illtar.nationt\l trade
and paymants. The Danlc has investod somo ~~3.8 billion in
productive dovelopll'oIlnt projl1cts in 41 different cOWltl'ios nnd
terr1torie:J~ most or thelll undor-c1owloped. Lomls by the Dank
are ru.nning at tho rate of about $750 lulll10n a yoar. Tho
Bank I IS f.in:mcing and technieal as~iBtance activities haw
Berved to acco10rato the paCO ot economic growth all ovor "tho
troa world; and it has carriad ou thasa activ!tio:l on a b:luis
that has earnod for the Bank tJlO confidence of i l l m!\J01' pl'lvnto
cap!tal nl.!ll·kats. The establishJl~nt of tho Intorn.'l t1on:.1l Fixuuloa
A-6
Corporation, which supplies capital to encourage the growth or
private enterprise, has recently increased the scope
and flexibility of the Bank's field of operation.
prod~ctive
The International Monetary Fund utilizes for its operations
gold and member country currencies which have been provided to
it by the ~embcr countries through their subscriptions to its
capital. Advances by the Fund in tho past tHO years have
amounted to approY.imately ~il.e billion and nearly *~900 million
additional are in effect eaxmarkod against standby commitments
which tho Fund has undertaken.
Under the charter of tho International Bank, a small part
of its authorized capital is available for loans, but the Bank
must depend primn.rily on borrOlTines in the financial markets
of the ",arId.. The major part of the authorized capital in
effect constitutes a guarantee for these borrol-tings. The Bank
has raisod the equivalent of more than ~~2 billion thxough issuing its bonds denominated in six different currencies. At
pre sent tho cq uivalont of about ~)l. 7 billion is outstanding in
such bonds. Tho BanJc l s bonds are reCOGnized thxoughout the
110rld as cecUl'ities of tho hi~hest qualit;y .::md" as a result,
the Banlc has been able to borrow larGe sums of money at frequent
intervr..ls at ratE:s of irrtcr(-)ct comparable to those of highlyreGarded govor~~cnt securities. This in turn has enabled the
Bank to fix interest rates on its OVi'll lO<lns at levels not
:iJnposing undue burdens on the borrollinG countries concerned.
'While the Bank still has unusod borl'ol-:ing capacity, its 'V'Olume
of lending has expanded greatly and" i f it is to continue to
be able to 'moet legitimate lOD.n requests likely to be submitted
to it during tho yoars ahead, it must eo to the market for
larger amounts of money than ever before. This would require
a broadening of the market for tho Bank's bonds and the tapping
of sources of capital not yet reached.
During the annual meetings of the Bank and Fund at
New Delhi early in October, l-1e should give consideration
to w~s and maans of increasing the effectiveness of these
two institutions. As U.S. Governor of the Bank and FWld" I
would welcome your guidance with respect to these vitn.l
problems of policy. If you believe that certain avenUQS of
action should be explored preparatory to tho New Delhi meeting" I would ask the National AdvisOl~ Council to proceed
prompt~ with detailed study and arranGements. Wo would" ot
course, wish to consult with members of the Concress who are
particularly concerned rr.i.th this subject.
- .3 -
A related matter has recently been under consideration
by the Senate" ,·lhich bas adopted a resolution calline upon
the National Advisory COuncil to undertalce a stu~ of the
feasibility of an Intaroational Development Association as
an affiliate of the International Bank. The resourcas of
such an organization would be subscribed by the members of
the Bank. The Association uould f'1na.nce development projects
on the basis of long term loans at reasonably low interast
rates repayable in wole or in part in local curroncies. In
. the course of its study, the Council u:1.ll also exploro the
possibility that such an affiliate of the Bank might prove
t(') be a maans" supplemental to our ot>m national programs,
for assuring productive invest~ent of soma part of the various
local currencies becoming available to the united states
. through the sale of agricultural surpluses or other programs.
It is' intended to undertake informal discussions \nth other
members of the Bank ,,11th a view to ascortaining their attitude
to't-lard an eJcpansion of the Bank'l5 a.ctivities along these lines.
I request. your guidance as to whether" i f the study
indicates that the proposal is promising, you "lould u1sh to
have the subject pursued fornw.lly with the govermuonts of
the otha.t" nwmbr;;r countr:1.e:J of the International Bank.
Faithfully yours,
The President
The Whi to House
Special lvlessagc to the Congress
RccOlnmcnding U.S. Participation in the
]Iltcrnational Developlnent Association.
February 1.8, 196.0
1',) the Congress of the United States:
I herewith submit to the Congress the Article.. of Agreement for the
("'!:lhlishment of the International Development Association. I rccom·
n.cnu legislation authorizing United State.s membllTShip in the .A.s.,oci3.-'
I!nn "nd providin~ for payment of the sub~cripdon obligations prescribed
in the Articles of Agreem~nt.
The Association is designed to assist the Jess-developed countrie, of the
fl cc world by increasing the flow of development capital on flexible
talns. The advisability of such an institution was proposed by Sen:\te
Re"olution 264 of 1958. Following this Re301utloP J the Nation:\l Ad·
\ i·.o:·)' Council on International Monetary and Financial Problems underI,)ok a study of the question. The Counell's conclusIoN and the favQr'lblc response of representatives of other governments who were consulted
during the course of the study have resulted in the Articles or Agreement
which satisfy the objectives of that Resolution and which I am submitting
haewith. The accompanying Special Report or the Council describes
the Articles in detail.
We all know that every country needs capital tor growth but that the
needs are greatest where income and savings are low. The les~.de\'clqped
countries need to secure from abroad large amounts of capital equipment
to help in their development. Some part of this they can purcha~c with
their current savings, some part they can borrow on conventional term!,
:tnd some part is provided by private foreign investoT$. But In many
t.:,~.developed countries, the need for cnpltallmportJ exceeds the t'mounts
A-9
they can reasonably hope to secure through normal channels. The Association is a multilateral in~titution designed to provide a margin of finance
that will allow them to go forward with sound projects that do not fully
qualify for conventional loans.
In many messages to the Congress, I have emphasized the clear intere~t
of the United States in the economic growth of the less·developed countries. Because of this fundamental truth the people of OUf country are
attempting in a number of ways to promote such growth. Technical
and economic aid is supplied under the Mutual Security Program. In
addition, many projects are as:.;isted by loans from the Export-Import
Bank, and we also participate with other free world countries in the
International Bank for Reconstruction and Development which is doing
so much to channel funds, mainly from private sources, to the lessdevdoped areas. While we have joined with the other American Republics in the Inter-American De\'elopment Bank, there is no wide international institution which, like our Development Loan Fund, can help
finance sound projects requiring a broad flexibility in repayment terms,
including repayment in the borrower's currency.
Conceived to meet this need, the International Development Association
represents a' joint determination by the economically advanced countrics
tu :.\"~p <l.l.\...,;kliJ,LC P1U!!\H';~ i.n tile k~-uevcloped countries. It is highly
gratifying that so many other free "'orld countries are now ready to join
with us in this ohjective.
The Association is a cooperativc venture, to be financed by the member
governments of the International Bank. It is to have initial subscriptions
totaling one billion dollars, of which the subscription of the United Statc.'
would be $320.29 million and the subscriptions of the other ecor~omicall)'
strong countries would be $442.78 million. The funds made available
by thcse countries would be freely convertible. The developing countries
would subscribe $236.93 mil!ion, of which ten per cent would be freely
convertible. Members would pay their subscriptions over a five year
period and would periodically re-examine the adequacy of the Association's resources.
The International De\'clopment Association thus establishes a mechanism whereby other nations can join in the task of providing capital to the
less-developed areas on a flexible basis. Contrihution by the less-developed
countries themselves, moreover, is a desirable element of this new institlltion. In addition, the Association may accept supplementary resources
pro\'ided by one mMnbcr in the currency of anolher member. T1wt,
",me part ci the foreign currencies acquired by the United States priMI1Mly from its sales of surplus agricultural commodities may be made
;,\·:\i1:l.ble to the Association when d~irable and agreed to by the member
\\'ho~ currency is im·olved.
The Articles of Agreement give the A.s~ociation considerable scope in
iI' lending operations so that it can respond to the yaried needs of itl
1111'1nlx~. And ~came it is to be an affiliate of the International Bank,
i~ will benefit from the long and successful lending experienc~ of the Bank.
By combining the Bank's high standards with flexibJc repayment terms,
;t can help finance sound projects that cannot be undert:tken by existiftg
~(ollrce!. With a framework that safeguards e~isting institutions and traditional forms of finance, the Association can both mpplcment and faciliute private 'investment. It will prO\'ide an extra margin of capital that
'::10 si"c further momentum to growth in the developing countries on
IrlmS that will not o\"erburden their economies and their repayment
( :t
pacities.
The ptoples of the world will grow in fr~dom, tol~ration and 'taped
(( ,r human dignity as they achieve reasonable economic and social prog~,',~ under a free system. The further advance of the less-developed areas
:.; nf major importance to the nations of the free world, and the Associa·
1~"!'l pfllvhiroo: ::In intt'm;-otil"lf1;'11 inc;titlltin'l thrnw.,h whirlt we mll~ all
(fTrctivelr cooperate toward this end. It wiII perform a ,'aluable service
:,1 promoting the economic growth and cohesion of the free world. I
::11l convinced that p~rticipation by the United States is necessary, and
r urge the Congre~:s to act promptly to authorize the Unitcu States to
.:"in with the other free nations in tIle cstab1i.c;hment of the Association.
DWIGHT
D. EISE~HOWER
A-II
Excerpt from President Johnson's Economic Report
Transmitted to the Congress January 1967
There should, however, be increasing efforts to make
both the receiving and giving of aid a matter for creative
international partnership.
We shall therefore • . . seek
the cooperation of other major donor countries this year
in replenishing the resources of the International Development Association.
Excerpt from President Johnson's Budget Messa,e
for Fiscal Year 1968
The International Development Association, which is
managed by the World Bank, has proven an effective means of
international cooperation to promote economic development.
Its current resources, however, will soon be exhausted.
Following the successful conclusion of negotiations between
the IDA and the developed nations of the world, I will
request authorization for the United States to pledge its
fair share towards an additional contribution to this
organization in ways consistent with our balance of payments
policy.
A-13
Excerpt from President Johnson's Foreign Aid Message
for Fiscal Year 1969
This year we must take another important step to sustain
those international institutions which build the peace.
. ,The International Development Association, the World
Bank's concessional lending affiliate is almost without funds.
Discussions to provide the needed capital and balance of payments safeguards are now underway.
We hope that these talks
will soon result in agreements among the wealthy nations of
the world to continue the critical work of the Association in
the developing countries.
The Administration will transmit
specific legislation promptly upon completion of these discussions.
I urge the Congress to give it full support.
-
W-,ElXSE ON DELIVERY
7REASURY DEPARTME~~
Washington
REHARKS OF THE HONORABLE ROBERT A. WALLACE
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
MICHIGAN Bfu~KERS CONFERENCE
CIVIC CENTER, LANSING, MICHIGAN
WEDNESDAY, MAY 22, 1968, 11:15 a.m., EDT.
REQUIRE~ffiNTS OF EXECUTIVE
THE OPPORTUNITY TO DISCUSS THE
ORDER 11246 ON EQUAL EHPLOYJ.vlENT OPPORTUNITY AJ.\1D THE TREASURY
DEPAR'INENT t S PROGPu<\.rvt IS MOST \-JELCOHE
NOTHITHSTA.\1DING THAT
COMPLIANCE .\HTH THE ORDER IS A PREREQUISITE FOR RECEIVH1G
FEDER..!\L DEPOSITS) I BELIEVE t,JE FACE A :10R.':"L OBLIGAI'IQ:·;
HI~ORITY
SEE Tl-L,\T
BUT)
IS
SI~'C.:>LY
PR.~CTICE
GOOD BUSINESS.
RESULT) THE
IF THIS
GROUPS IN OUP. SOCIETY GET A FAI:':\' SHAKE.
IHPORTAi,IT AS THESE NORAL
FACT IS TK;\,T THE
BAL~KS
GRO~::TH
T!:)
OF EQl!AL
CO~SIDERATI00JS
E~!PLOr:'IE~~T
CUR?'£~;TLY,
THE
OPPORTU:';I'-ry
THE B)..iiKDJG I)JDl'STRY IS
NUST HAVE ACCESS TO ALL POTENTIAL \\TORKERS
RATE IS TO CONTINUE.
HOPE TB.AT ~..rITHDRAhTAL OF
FEDER.~L
SO) IT IS CUR EA..r&EST
DEPOSITS FRO:-l
I~:nIVIDUAL
- 2 BANKS BECAUSE OF FAILURE TO COMPLY WITH THE ORDER CAN BE
KEPT TO
AN ABSOLurE MINIMUM.
AS A MATTER OF FACT, IT SHOULD NEVER BE NECESSARY TO
WITHDRAH FEDERAL FUNDS.
TO AHPLIFY, LET ME BEGIN BY GIVING
A BACKGROUND OF JUST \{'rIAT THE REQUIREMENTS ARE.
LET US STA..~T AT THE VERY BEGINNING -- HITH THE VERY FIRST
EXECUTIVE ORDER ON THIS SUBJECT
FRfu~KLIN
D. ROOSEVELT ON
ESTABLISHED A
FIVE-N&~
J&~UARY
I,'~HICH I,,;";'S
25, 1941.
SIGNED BY PRESIDENT
THIS ORDER
FAIR ENPLOy('lENT PR.-\CTICE Cm,I;-UTTEE.
IT WAS TO PROMOTE FULL PARTICIPATION OF ALL WORKERS IN DEFENSE
INDUSTRIES,
~'.'ITHOL'T DISCRDlI0:~.IIO~
BECACSE OF R..\CE, CREED,
THE INPETUS FOR PRESIDENT ROOSEVELT r S ACTION CN-'lE FROivl
A GROUP OF NEGRO LEADERS HHO POINTED OUT THAT THE NEGRO \vORKER
WAS SUFFERI~G S2:RIOUS DISCRIHI~ATION I?\ EXP&'\DING DEFE~SE
- 3 IN 1941, THE
PRODUCTION DESPITE A NLTIONAL LABOR SHORTAGE.
DEFENSE INDUSTRIES v·rERE ABSORBING UNEMPLOYED 1,lliITES, MANY
WITH _LITTLE OR NO PREVIOUS EXPERIENCE OR BACKGROUND FOR
INDUSTRIAL JOBS, HHlLE FULLY QUALIFIED NEGROES \.JERE EITHER
LEFT ON RELIEF OR PUT AT THE Lm'JEST JOBS VACATED BY UP-GRADED
WHITE
~\ORKERS.
TO SO:1S EXTENT, \-JE HAVE THE S10l£ PR08LD-l TODAY.
WHITE
LABOR MARKET IS VERY TIGHT \OHTH
RATE. OF AROLT};D 3 PERCENT, HHILE THE OVERALL
fu~
THE
UNENPL0'01ENT
~HNORITY
GROUP
UNEHPL0'01ENT RATE IS HORE THAN DOUBLE THAT FIGURE.
FOLLOHING PRESIDDn ROOSEVELT, EVERY SUCCEEDING
PRESIDE~T
EACH ORDER, INCLUDING 11246 SIGNED BY PRESIDENT JOHNSON IN
1965 HAS BEEN A LITTLE BROADER IN SCOPE HITH HORE DEFINITE
- 4 REQUIREMENTS.
BUT) ALL ORDERS ISSUED TO DATE) HAVE THE SAME
BASIC GOAL, WHICH IS TO PROVIDE THE MEAJ."iS TO ~1AKE FULL USE
OF ALL QUALIFIED OR QUALIFIABLE HANPm'JER, REGARDLESS OF RACE,
CP£ED, OR NATIONAL ORIGIN.
THIS, THEN IS THE
BACKGROL~D
OF THE EXECUTIVE ORDERS.
THE BANKING INDUSTRY HAS ONLY BEEN INVOLVED SINCE NOVDlBER, 1966
GE~ERAL
WHEN THE TREASURY! S
FEDERAL DEPOSITS P1.AD A
FEDERAL
GOVERl2-lZ~T
EXECUTIVE ORDER.
COU:\SE:L RULED TH..;.T K-\..\KS
CO~TRACTUAL RELATIO~SHIP
HITH THE
N:D \":ERE THEREFORE, COVERED BY THE
REGULATIONS
\~ERE
~nTH
CUR...~~T
THEREFORE PUBLISHED k'1D
PUBLICIZED, SETTING FORTH THE EQUAL OPPORT1.JNITY
REQUIRE~[E?\TS
AND KEEPING FEDERAL DEPOSITS.
SINCE
NOVE~1BER,
1966, SOl-IE BPu"JKS HAVE HADE DM·:ATIC
PROGRESS IN THE AREA OF EQUAL OPPORTlliITf PROGR.:blS.
A ~ill1BER
- 5 - 6
OF THE LARGER BANKS HAVE HIRED A FULL-TIME EEO SPECIALIST
WITH THE SINGLE RESPONSIBILITY OF IMPROVING MINORITY GROUP
UTILIZATION.
OTHERS HAVE HIRED MINORITY GROUP PERSONNEL
OFFICERS IN HOPES OF IMPROVING THE FLOW OF MINORITY GROUP
APPLICk~TS.
- 7 \.ffiETHER WE LIKE IT OR NOT, WE MUST CONCEDE THAT UNTIL
RECENTLY, THE BAl"JKING INDUSTRY HAS BEEN ESSENTIALLY A \lliITE
MAN'S INDUSTRY.
HAi''1Y MAY SAY !!THIS IS NOT TRUE; WE HAVE EM-
PLOYED NEGROES FOR YEARS. Tr
THEY NAY BE RIGHT, BUT WHAT KIND OF
JOBS DID THE NEGRO HAVE?
JAl.'HTOR, HAJ."ID'fl-1AN, HESSENGER OR
OTHER TYPE OF BLUE COLLtlli
POSITIO~?
POSITI00iS \,JERE A RARITY.
AS A RESULT,
NEGROES HJ
MINORITY GROUPS FOR THAT (·LATTER, 1-Lu.VE
~\T}UTE-COLLA.R
~7EGROES .;"~D
BEE~l
SO~1E
OTHZR
H?...RY OF SEEKING
E!-lPLOy}lEl':T IN BAl\KS \0HERE, IN THE PAST, THEY FEEL THEY HAVE
NOT BEEL~ hTELCO~lE.
POSITIVE AJ.\JD
TO OVERCO:'lE THIS PROBLE~l IS GOn~G TO TAKE
DR.~·lATIC
ACTIOi';.
BASED UPOl\ c-lY EXPERIEj\CE AS EQUAL C?PORTU:~IIY OFFICER
FOR THE TREASURY DEPARTHENT SINCE 1961, I KNOH THAT PROGRESS
IS BOTH POSSIBLE A..."!D ACHIEVABLE.
FOR Ex..~':lPLE, B~'TI';EE~ 1961
k~D NO\TE)1BER 1967, THE LA.TEST PERIOD FO?,- VEICH FIGURES c\.RE
- 8 -
"AVAILABLE, TREASURY HAS INCREASED THE NUNBER OF NEGROES ON
ITS ROLLS BY 44 PERCENT (FRON 8,329 TO 12,008).
NINETY PERCENT
OF THAT INCREASE HAS IN WHITE COLLt\R JOBS.
THE NUMBER OF NEGROES IN OUR MIDDLE LEVEL JOBS HORE THAN
DOUBLED DURING THAT PERIOD.
THE
~L~ORITY
OF THOSE JOBS REQUIRE
COLLEGE TR...t\INING TO BEET CIVIL SERVICE REQUIRENENTS k,\D A
LARGER 0:L'NBER REQUIRE 24 HOURS OF ACCOeXTI:':C.
IN 1961
lIN THE OFFICE OF THE SECRETARY, NOT A SINGLE NEGRO HAS
EMPLOYED IN SECRETARIAL OR
PROFESSIO~AL
POSITIONS.
TODAY
OVER 60 NEGROES ARE NOH AT HORK IN SUCH JOBS.
I AN STILL CONVINCED THAT THE Lm': PROPOR-TIm:: OF '.':HITE
IN THE BAJ."JKS TODAY, ABOUT 2 PERCENT IN
~ffiITE
COLLAR POSITIONS,
DID NOT RESULT FROH ANY CONSCIOUS DISCRIMINATION PRACTICE BY
EITBER BIGOTS OR GENERALLY PREJUDICED SUPERVISORS.
~\THER,
- 9 IT HAS BEEN THE RESULT OF FOLLOHING THE SANE OLD RECRUI'D1ENT
PRACTICES ~~ICH, OVER A PERIOD OF ~~~Y YEARS, HAVE BECO~ffi A
MATTER OF HABIT.
NOH THEN, LETTS GET DOHN TO CASES.
CONNECTED HITH EXECUTIVE ORDER 11246.
DOClJl[IIENT I"THICH SETS FORTH
~nTH
THE fEDERAL
EHPLGy}lEL~T
IT IS A STRAIGHTFORHARD
REQUlRE~IEL';TS
TO DO
BUSI~ESS
GOVEN;~·12~T.
OUR HAIN AREA OF
CO~CERi~
IS
SECTIO~
SECTION SPELLS OUT THE PROVISrm:S TH..\T
GOVEfu\:V1E~T
THERE IS NO MYSTIQUE
CONTAACT.
202 OF THE ORDER.
fu~S
I:\CLUDED 101 EVERY
AT THIS POINT, I HOULD LIKE TO QUOTE
1"rlE FIRST IS !lTHE
CONTR..~CTOR
HILL NOT DISCRHUNATE
AGAn~ST
ANY ENPLOYEE OR APPLICA~T FOR D1PLOYl'20JT BECAUSE OF R..;\.CE,
CREED, COLOR OR
THIS
NATIO~AL
ORIGIN.
THE CmiTPJ..CTO:?, \·71LL TA.'ZE
- 10 -
AFFIRMATIVE ACTION TO ENSURE THAT APPLICAl1TS ARE EHPLOYED,
AND THAT EMPLOYEES ARE TREATED DURING Ef.'lPLOYHENT, WITHOUT
REGARD TO THEIR RACE, CREED, COLOR, OR NATIONAL ORIGIN.
SUCH
ACTION SHALL INCLUDE, BUT NOT BE LINITED TO THE FOLL0'i0ING:
EMPLOYHENT, UPGR.AJ)ING, DEl-lOTION, OR TPA\JSFER; RECRUITIlENT OR
RECRUITNE~T-
OR OTtiER FONIS
O}:~
CO)IPE1~SATIO~:;
INCLUDH,:G i\PPRE:\TICESHIP.
THIS
TEK·1DJATIm~;
ADVERTISING; LAYOFF OR
PORTIO~
.....
A::D
SELECTIO~~
R.~TES
FOR
OF PAY
TRAI~I~G,
fT
OF THE FIRST P:\R).,GRAPH OF THE
CL~lSE
IS THE
HE-ART OF THE Et\TlRE PROGR.-\.:·l.
A HARD-HITTING AFFIR}[ATIVE ACTION
?ROG~1.
AT THE ABA CON-
VENTI 0]:1 IN SEPTE~·1BER OF LAST YEA...~, I GAVE THIS UEFD:ITION OF
AFFIR:L-\1'IVE ACTIO)::
¥.Al.'iAGE~·tr::~T TECH:~IQUES fum CONTROLS OVER PERSO:\L';EL A.CTIO~;S
- 11 THAT ARE NORJ1ALLY APPLIED TO ANY PROGRA}1 THAT YOU WANT TO
SUCCEED.
IT MEANS
Al.~ALYZING
OF PERSONNEL ACTIONS TO
THE METHODS, PROCEDURES
DETE&~INE
Ai~D
RESULTS
\ffiETHER THEY HAVE RESULTED
IN THE EXCLUSION OF QUALIFIED OR TRAINABLE HORKERS BECAUSE OF
RACE.
IT ALSO HEk.'\IS
ACTION IF
SINCE
WE HAVE
TAKI~~G
DISCREPPu.~CIES
SEPTE~·1BER,
COfu~SPO:\DED
ARE
DIRECT
FOlJ~m
Ai~D
APPROPRIATE CORRECTIVE
BET~~EEi'-r
HE I-L,·,\VE VISITED A
'i{ITH
~L%"iY
HORE.
POLICY AND PRACTICE. Tl
~D:.mER
OF 3P0:KS J A.,\D
HITHOUT EXCEPTI001, T1-10SE
WHO HAVE APPLIED THIS DEFINITION IN THE
DEVELOP~IENT
OF THEIR
EQUAL EHPLOYNENT OPPORTUNITY PROGR.Alvl HAVE HET \HTH GREATER
,
SUCCESS
MENT.
'TU'
'T
l.D.Ai~
THO
~.~ -"'
1....10 HnolL,
'iTt:'
_
S::'
hD.
"O~
c, 1.
REGARDLESS OF THE TYPE OF
ONLY SUCCEED IF TOP
~L~TAGE~lENT
IT IS OBHT.LO'L'C
Y....J
PROGR.~1
'"'"'lu,,\
r1..l, ~1
Cr'l·
H;"''-'
DEVELOPED, IT HILL
DECIDES THAT IT IS IHPORTAJ'.n
- 12 -
THIS THEN BRINGS US TO &~OTHER PARAGRAPH IN THE CLAUSE
"IN THE EVENT OF THE CONTRACTORrs NON-COMPLIANCE WITH THE NONDISCRIHINATION CLAUSES OF HIS CONTRACT OR WITH ANY OF SUCH
RULES, REGUlATIONS OR ORDERS, THIS CONTR..<\CT HAY BE CAi~CELLED,
TER~INATED OR SUSPENDED IN WHOLE OR,
MAY BE DECLA...KED
I~ELIGIBLE
IN PART &~D THE CONTRACTOR
FOR FURTHER GOVER.i.\(·1E:,lT CONTRACTS IN
ACCORDA.:.'\CE I,HTE PROCEDURES AUTHORIZED
I~
E.O. 11246 OF
SEPTEi-lBER 24, 1965, OR BY RULE, REGUIATI00J) ORDEP\. OF THE
SECRETARY OF L\BOR, OR AS
AS YOU
CP~
THI0JK AS CAPl-.BLE
THREATS.
OTHER~-JISE
PROVIDED BY
SEE, THE ORDER DOES BAVE TEETH.
A1~D
RESPO:\SIVr:
BLJSI~ESS~·!E:':,
U\\~.:~
BUT, I
l/E SHOULD BE
IT IS TO THIS END THA. T THtS MEETING HAS BEEN DESIGNED.
WITH THE
CONNISSIO~,
COOPERATIO~
OF YOUR STATE 1 S Hm·18..N RELATIONS
THE I':ORKSHO? PROGPR·l THIS AFTER.;.'\ 0 0::-: IS Il\TENDED
- 13 TO BRING PROBLEHS INTO CLEAR FOCUS
&~D
DETERNINE HHETHER THEY
HAVE RESULTED IN THE EXCLUSION OF QUALIFIED OR TRAINABLE HORKERS
BECAUSE OF Rt\CE.
WE VIILL ALSO DISCUSS DIRECT AND APPROPRIATE
CORRECTIVE ACTION TO BE
BEThlEEN POLICY
fu~D
CO~~SIDERED
IF DISCREPA.:.'\CIES ARE FOUND
PRACTICES.
IN ADDITIO?-J, \\TE HOPE THAT \'JE HILL BE ;'J3LE TO HEL? YOU
DEVELOP. A SELF-.~\ALYSIS PROGRP~'l TH.-\T HILL ALLor.: EACH BA,'\Kt:R
REPRESE:::TED HERS TODAY TO DETERlH;;E \,:HETHER OR ~~OT HIS E.-\0:~Z IS
IN CONPLL:'~:CE.
\\fE \HLL PRESE(';T SO:'lE SCGGESTIO~;S THAT \.':ILL BE
USEFUL H~ PROBLE~'l SOLVIl','G '.TtiE:: YOU GET BA.CK TO YOUR CG~::~L':\ITIES.
AS \\fE H...~VE READ It: THE REPORT OF ThE :\ATlm~AL AI) VI SORY
SEATED fu~D OF LONG STili~DING.
ON THE SUBJECT OF ill-iDIPLOn1E~T AND L':!DERE:-1PLOY:'I:::::T THE
REPORT STATES !'THE CAPACITY TO OBTAI:': 10:D HJLD A GrJOD JOB IS
- 14 -
47J
I
.L
THE TRADITIONAL TEST OF PARTICIPATION IN AHERIC&~ SOCIETY. fl
IT GOES ON TO SAY THAT, flSTEADY EMPLOYHENT WITH ADEQUATE
COMPENSATION PROVIDES BOTH PURCHASING POHER AND SOCIAL STATUS.
IT DEVELOPS THE CAPABILITIES, CONFIDENCE AND SELF-ESTEEN fu~
INDIVIDUAL NEEDS TO BE A RESPONSIBLE CITIZEN A."TD PROVIDES A
BASIS FOR A STABLE FN-IILY LIFE.
THE
PRn~CIPAL
TOHARD EQUALITY \HLL BE THAT OF E}1PLOY:·lr:XT.
SOURCE OF
H~DIVIDTJAL
DO IS Hl-IAT YOU
Ac~:
OR GROUP IDE0:TITY.
TO DO
~lOTHnJG
IT IS THE PRHL-\RY
IN AHERICA \\THAT YOU
IS TO BE
(WTHn~G:
IS TO BE LITTLE.
THE EQUATI00JS ARE I:·lPL\C.2illLS
RUTHLESSLY PUBLIC.
'1
I
NEASURE OF PROGRESS
,L~D
TO DO LITTLE
BLU~:T,
A~m
IS TRUE Ti-L':"T
DECLINED FRON A POSTI{AR HIGH OF OVER 12 PERCENT TO ABOUT
7 PERCENT TODAY, BUT IT IS
WHITES IN EVERY CATEGORY.
~10ST SIG0iIFIC~\T
TO NOTE THAT THS
4Tt.
- 15 THE RIOT REPORT ALSO STATES flEVEN HORE IHPORTAl\1T PERHAPS,
Trl&~
UNEMPLOY}lliNT IS THE RELATED PROBLEM OF THE UNDESIRABLE
NATURE OF
HA..~Y
JOBS OPEN TO NEGROES.
NEGRO WORKERS ARE CON-
CENTRATED INTO THE LOHEST SKILLED AND LO':;EST PAYING OCCUPATIONS.
NEGRO
NE~~
TO BE
I~
IN PA..RTICUIAR
U~SKIL1_ED
A..~
HORE
TI-l';'~'1
T\HCE AS LIKELY AS HHITES
OR SERVICE JOBS \,J1-IICE PAY F.-ili LESS
TtL~\
HOST.
THIS
BRn~GS
\>fHICH IS, THE
US FACE TO FACE lHTH THE
TE~DE~:CY O~
'; ---.
~
I'· .:::
,........
OF THE PROBLE:-i,
THE PART OF >L~..\Y OF US 10 tL\VE A
\~E K~VE CREA.TED A PLACE SY(~D~O:':E.
.::.'-... • \ .../ . , .J
~\U3
AS I SAID DJ ~\c:r,! YOM.,
. -'
-v ........
....-'
.....
.1...._
/'
,-"
EXPECT TO GET A JOB} A."iD IN ('-10ST LOCATIO~~S IN R,lERICA TODAY
THE Bk\;K IS t-:OT RECOG:HZED AS A PL\CE FOR A ;:.JEGRO TO APPLY FOR
4.7
- 16 MUST CHANGE THIS IHA.GE
-<
1 V
THIS MEETING AND HOfu1{SHOP IS THE
FIRST STEP IN THAT DIRECTION
IN CLOSING, LET HE SAY AGAIN, THAT, I BELIEVE THERE IS
LITTLE HILLFUL Ai,\D DELIBERATE
DISCRnlH~ATION
IN THE BPu,\!KING
INDUSTRY, BUT THERE ARE A NULTITUDE OF PRACTICES &,\D PROCEDURES
WHICH, l,mEN .A.DDED TOGETHER}
ACHIEvn-:G HIS HIGHEST
YOU
C~J
DO
~':;-HAT
PREVE~T
ENPLO'{~lE~':T
THE
~'II~ORITY
POTEl\TIAL.
PERsm~
FRO~,(
I BELIEVE 1"1-L':"T
IS NEEDED, l'n-lEN THE RIGHT PEO?LE IN THE BAYK F,:-;D
IN THE cO~·1)@;rTY ARE I~~VOLVED.
UP THE ADDITIO)l.A.L L;:"'BOR
~·L-\F.KETS
I R-1 cm~'in~CED THAT OPE2';I~G
AVAIU.SLE
R·~OYG
:'lE;;ORITY
GROUPS CA.c~ HELP BA1':KS SECUP-E KillLY 0:E2DSD QUALl FV,.3l.E E~·:?LOYr::E::;.
EQUAL ENPLO'r1'lENT OPPORTUNITY, AFFI101ATIVE ACTION, Pu,\!D
ALL THE REST, At'<E JUST GOOD l'L0JAGE:V1EYT PROCEDDRES Tth".T ARE
- 17 -
474
GROUP TO HOVE AHEAD.
HE CAt\! BE HELPFUL, AJ.\ID HE CAN GET INTO
MORE DETAIL DURING THE HORKSHOPS THIS AFTERNOON.
THE
BUSINESSt1.tu~
ivillST TAKE OVER THE INCORPORATION OF THE DIS-
ADVAt\!TAGED INTO THE NATIONAL ECONOHY.
IS LOOKING FOR A
CI-L.~~CE
YOU
THE MINORITY PERSON
TO TRY--EVEN IF HE FAILS.
HOPE YOU \-TILL GIVE HIN THIS CHANCE.
T!-L~\K
BUT ULTIHATELY
V~RY ~·rUCH.
00
00
00
I EAfu'iESTLY
YOU \VILL NEVER REGRET IT.
TREASURY DEPARTMENT
:
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
$2,700,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing May 31, 1968,
in the amount of
$4,003,990,000, as follOWS:
90-day bills (to maturity date) to be issued May 31, 1968,
1n the amount of $1,600,000,000, or thereabouts, representing an
additional amount of bills dated February 29, 1968, and to
mature August 29, 1968, originally issued in the amount of
$1,000,438,000, the additional and original bills to be freely
interchangeable.
182-day bills, for $1,100,000,000, or thereabouts, to be dated
May 31, 1968,
and to mature November 29, 19680
The bills of both series will be issued on a discount basis under
competitive and noncompetitive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturi ty value),
Tenders will be received at Federal Reserve Banks and Branches
to the c losing hour, one-thirty p.m., Eastern Daylight Saving
time, Monday, May 27, 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
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
up
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenjers. 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-1257
- 2 Immediately after the closing hour, tenders will be opened at
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and pricE
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasu
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on May 31, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing
May 31, 19680
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 f
any Federal Reserve Bank or Branch.
000
TREASURY DEPARTMENT
~ylS
RESULTS or
II>ITiLY BILL OFllERIIG
!be 'rrea9Ul"1 Department armounced tbat the teDders tor two series ot TreasUI7
bills, ODe series to be all additioDal issue of the bills dated lel»l"U8.l'J 29, 1968, and
tbe other series to be dated May 31, 1968, which were otfered on May 16, 1968, were
opeDe4 at the Federal Reserve Banks today. ~nd.ers were 1nri ted for $500,000,000, or
~reabouts, of 273-day bills and for $1,000,000,000, or thereabouts, of 365-day bills.
!be details ot the tvo series are as tollows:
~ or ACCIPtKb
ct1IPI!I'fIVi BIDS:
273-day 1reasury billa
Fe~r..ary 28, 1969
Approx. Equiv.
365-day Treasury bills
Mal 31, 1969
Approx. Equiv •
Annual Bate
Price
93.881
6.035.
6.11~
93.805
93.837
6.079'/.
_turing
_turing
Price
lilA
Annual Rate
6.0~
95.420
95.353
95 . 385
Low
Ayerage
6.128~
6 • 086~
11
11
3Sj ot tbe aaount of 213-day bills bid tor at the low price vas accepted.
~ of the &IIIJWlt of 365-da1 bills ~id tor at the low price vas accepted
'lO!AL 'IIQDDS APPLIED roR ARD ACCEPTED BY I'lDlBAI, RESERVE DISmIC1B:
Di.trict
Ban lraDcisco
A.pplied lor
Jone
759,737,000
8,750,000
8,781,000
2,711,000
11,271,000
231,524.,000
20,191,000
5,440,000
1,022,000
6,467,000
83,2920 Z000
1OBL8
$1,139,814,000
•
Boston
lev York
Pbilade Iphia
Cleveland
RicbaoDd
ltlaDta
CAicqo
St. Louis
Ki. .&poli.
Ianaas Ci't7
Dallal
Acce;2ted
$ lone
366,037,000
5,150,000
6,181,000
2,711,000
8,2n,000
54.,524.,000
20,191,000
5'~fr':w
912,000
1,'61,000
21 z920 z 000
$
500,064.,000
!I
Applied For
11,228,000
1,268,110,000
15,493,000
26,242,000
4,082,000
11,64.5,000
291,607,000
19,894.,000
5,5'3,000
1,553,000
6,4.73,000
191 z079 z000
•
AcceEted
10,558,000
805,4.10,000
8,823,000
26,24.2,000
',082,000
6,64.5,000
73,507,000
18,559,000
4,813,000
1,553,000
1,473,000
381, 71°.·000
$1,859,609,000
$1,000,",,000
•
pJ
Includes .13,613,000 nODcompetitiTe teDders accepted at the aTe~ price ot 95.385
I.eludea
$26,155,000 nonca.petitive teDders accepted at the 8yer~ price ot 93.831
~
'fIIe.e rates are on a 'be.Dk diacount basis. 'lhe equiT&lellt coupon i.sue y1el48 are
6.~ tor the 273-481 bills, aDd 6.4.6~ tor tbe 365-4&7 ~illa.
!I
y
F-1258
TREASURY DEPARTMENT
Washington
FOR P.M. RELEASE
FRIDAY, MAY 24, 1968
ADDRESS OF THE HONORABLE HENRY H. FOWLER
SECRETARY OF THE TREASURY
AT THE CLOSING LUNCHEON OF THE
AMERICAN BANKERS ASSOCIATION'S XVTH ANNUAL
MONETARY CONFERENCE, DORADO BEACH HOTEL,
DORADO BEACH, PUERTO RICO,
ON FRIDAY, MAY 24, 1968, 12:00 NOON, EDT.
Once again I am grateful for the opportunity of
addressing this international monetary conference of
distinguished financial leaders, public and private, from
many important nations. This annual meeting offers an
unparalleled oppor'tunity to forward the common objective of
the countries represented -- a viable international financial
system, nourishing economic growth, expanding trade and
investment, and promoting security and development -- an
objective that cannot be achieved by these same nations working
in isolation.
This is the fourth of these conferences I have been
privileged to attend and it will be my last as Secretary of
the Treasury. May I thank you for your warm initial reception
at Princeton in 1965, the day following my appointment, and
the opportunities at Granada, Spain, Pebble Beach, California,
and now Puerto Rico, to talk with you about our common
problems.
I. MULTILATERAL RESPONSIBILITY
THE NEW ESSENTIAL OF FOREIGN AND FINANCIAL POLICY
Each of the discussions I have had with you has had a
basic underlying theme. It is a theme born of a conviction
I held upon assuming my responsibilities in 1965. It has
been reinforced by the increasing emphasis of events in the
intervening three years.
F-1259
- 2 That conviction is that American foreign policy must
increasingly embody and express the principle that the
advanced countries must share the responsibility on a
multilateral free world scale for an improved trade and
payments system, mutual security arrangements that are soundly
and fairly financed, and an expanding system of development aid
and finance.
In short, my message, as I saw it coming into this
assignment and as I leave it, is the same -- we must practice
multilateralism, we must insist on it, and we must make it
work.
The reason is clear and inescapable -- we live in an
interdependent world.
Its future will depend upon the ability
of likeminded leaders of both governments and private
institutions to forego narrow nationalism and seek diligently
an improved framework of international economic and financial
cooperation o
In Spain two years ago we took a tour of the horizon.
WE assessed the opportunities for multilateralism in the
field of world trade, world liquiditY,the strengthening
of the adjustment process in our balance of payments, the
improvement of capital markets, development assistance,
and assuring fair treatment for the multinational corporation.
Last year at Pebble Beach we singled out a particular
topic for detailed examination -- the need for multilateral
national political decisions to bring about a shared
responsibility for a more effective world monetary system
which could assure continued progress, security and growth
for a greater society of nations.
This sharing of responsibility in international financial
affairs cannot continue to be the exclusive or especial concern
of finance ministers, central bankers and private citizens
involved in finance.
It now requires the intensive involvement
of chiefs of state, legislative assemblies, foreign ministers,
defense ministers, trade ministers, business leaders, labor
leaders and, indeed, citizens who, whether they know it or not,
are now involved in a process of financial adjustment -- a
process which must be worked out among countries if the
relative achievements of the next twenty years in the field of
security, growth and development are to match those since
World War II.
- 3 -
This is a necessary consequence of the changed situation of
the United States and the dollar. Certain facts must be
understood and it is my business and your business to make them
understood in a wider circle rather than just consider them in
talk among international bankers.
In the seventeen years from 1941 through 1957, the United
States had a cumulative balance of payments deficit of less
than $10 billion, or an annual average of just about $600
million. We ran a cumulative surplus on trade and services of $85
billion, or about $5 billion per year, a cumulative surplus on
capital account of $17 billion, or $1 billion per year, and a
cumulative deficit on military and government account of
$112 billion, or $6.6 billion per year. From 1946 to 1957
alone, we extended economic assistance in grants and loans
of $42 Dillion net.
During that period, we gained gold reserves of $800 million
and financed our deficit completely -- and more -- by increasing
our dollar liabil~ties to official and private holders.
The basic point is that the United States, throughout this
per'iod, was in fundamental surplus but, through its deliberate
policy of massive untied grant and loan assistance, incurred
more or less consistent liquidity deficits. With high
reserves, immense productive power, a great and growing
capital market system, and a desire to help rebuild a warshattered world, the United States engaged in a unilateral
adjustment process that benefited the world and, in so doing,
helped both the world and itself.
It is no exaggeration to say that we picked up most of the
checks -- balance of payments checks -- for insuring free world
security; we permitted disadvantage to our trade, we encouraged
our tourists to go abroad and make substantial purchases
and we strove mightily to increase our export of capital through
foreign public and private investment. All of these policies
were rational and in the interest of world trade, security and
economic growth.
But in the ten years 1958-67, the United States ran a
cumulative deficit of $27 billion -- an annual average of
$207 billion -- more than four times the average of the
earlier period
Our government and military account deficit was
reduced but remained large -- $55 billion in ten years. It was,
of ~ourse, strongly affected by Vietnam after mid-1965.
o
- 4 Our capital account in the 1958-67 period showed no real
improvement as compared with the earlier period. The annual
average, in fact, showed a smaller surplus than in 1941-57.
Capital outflows on direct investment, in the form of bank loans
and in portfolio, rose sharply -- enough so that the steadily
rising income just about kept it in balance, but only after the
outflow had been somewhat controlled and only after special
transactions, including some debt prepayments to the United
States on government account.
But the big change came in the trade and service account.
Here our cumulative surplus was less than $19 billion, or
under $2 billion a year. Our exports grew but, particularly
in later years, imports grew faster, and we incurred a
rapidly increasing deficit on tourist account.
This cumulative U.S. balance of payments deficit of the
last ten years -- $27 billion -- had its counterpart in the
continued enjoyment of a rather consistent pattern of surpluses
in most of the other developed countries. This resulted both in
a further decline in U.S. reserves and a continuing build-up of
reserves of the surplus countries and dollars in private hands
abroad.
The President's New Year's Day Message to the nation on
balance of payments marked the end of that era of deficits. He
proclaimed to the nation and the world that the time for
decisive; action had come and that the need to bring our payments
into equilibrium was a national and international responsibility
of the highest priority.
In so doing, the President set a
standard and a policy from which no future President in the
decades ahead will find it practical to depart without
abandoning the entire fabric of international economic and
financial cooperation which we have so painfully sought to
construct since World War II. There was no acceptable alternative
to strong action then, which must be followed through now, and
which must be maintained zealously in the years to come.
Here is the setting in which the moment of truth arrived:
the United States dollar is the principal reserve
currency and the most-used transaction currency
in the international monetary system
4 70
•
I
V
- 5 -
the last ten years of chronic, sizable deficits in
the United States balance of payments had
diminished the ratio of our liquid assets to short
term claims against them
the primary surplus countries had failed to play
their proper role in the balance of payments adjustment
process
it was clear that there were limits to the willingness
of private and official holders abroad to accumulate
the currency of a country in chronic deficit
the United States has a far-flung involvement in
security and development finance and as a natural
and proper source of export capital.
In this setting, the devaluation of the British pound with
resulting heavy pressures on the gold and foreign exchange
markets, coincided with the substantial increase in 1967 in the
United States balance of payments deficit from the $1.3 billion
levels of 1965 and 1966. These events impelled and required
the United States to initiate a strong·, determined program to
restore balance of payments equilibrium and to maintain it -preferably through a multilateral adjustment process.
All that remained open for debate was the choice of means
to be employed to achieve this'objective. The President's
New Year's Day Program sought to satisfy four esentia1
conditions:
Sustaining the growth, strength ana prosperl.t:y
our own economy;
or
Allowing us to continue to meet our international
responsibilities in the defense of freedom, in
promoting trade and encouraging economic growth
in the developing countries;
Engaging the cooperation of o~her free nations
whose stake in a sound international monetary
system is no less compelling than our own, and
Recognizing the special obligation of those nations
with balance of payments surpluses to bring their
payments into equilibrium.
- 6 The January 1 program was designed to be a balanced program
balanced in three important aspects.
In it, there is balance
between measures to restrain the domestic economy and reverse thE
tide of increasing inflation and direct measures to improve
particular segments of our international payments. There is
balance between selective measures on capital and current
account. .And, finally, there is balance in the impact of the
selective measures on the rest of the world.
In essence, having undertaken with unprecedented generosity
a unilateral readjustment process in the years in which the
United States was in fundamental surplus, the United States
has now undertaken the initiative for a multilateral adjustment
process to reverse its position as a deficit country.
The stakes involved in making this necessary adjustment
a multilateral exercise rather than a unilateral one are well
understood by those in the financial world, public or private.
I am not so sure that this understanding reaches to those in
positions of responsibility in the other sectors of government
in the foreign offices, the defense ministries, the trade
ministries, the tourism offices, and other areas where decision
and action will ultimately determine the success or failure of
the adjustment process.
Therefore, I will repeat what I said at Pebble Beach a
year ago -- a statement which intervening events should make
better understood now than it was at the time:
"I find it also necessary to emphasize
that this cooperation is not a matter of
helping the United States deal with its problem,
but a matter of enabling the United States to
deal with its problem without: undermining the
international monetary system, subjecting that
system, by unilateral action, to radical and
undesirable change, or withdrawing from
commitments involving the security and
development of others."
There is much progress to report in this area of multinational responsibility:
The creation of a means for providing an adequate and
reliable supplement to gold and reserve currencies to meet
the global need for increasing monetary reserves in the form of
- 7 a Special Drawing Rights facility, administered by the
International Monetary Fund, seems a likely reality rather than
a far off dream. These Special Drawing Rights, deliberately
created by multilateral decision, backed by the currencies of
theparticipating countries, and shared by all who participate
according to Fund quotas, will be an important symbol of
multilateral sharing of responsibility for this key aspect of
a viable international monetary system.
Giant steps toward this long sought objective were
taken in the meetings 6f the Group of Ten at London last July,
at Stockholm late March, and at the International Monetary
Fund Annual Meeting last September in Rio de ITaneiro, scene
of the passage of the Resolution of the Board of Governors and
the submission of a formal Report by the Executive Directors
of the Fund to its Governors of a proposed amendment to the
Articles of Agreement creating the Special Drawing Rights
facility.
There have been outstanding performances by the major
financial countries in containing the devaluation of the British
pound and coping with the disruption of financial and foreign
exchange markets that followed.
The Washington communique of March 17 of the Central Bank
Governors of the active gold pool countries, announcing their
decision to separate the private gold markets from what might
be" termed the monetary gold market, was a historic statement
and reflects a major decision. The cooperation of most of the
other free world countries, expressed in their willingness to
subscribe to the policies stated in the Washington communique,
is also most reassuring.
At Stockholm, the Group of Ten Ministers and Governors
reaffirmed their determination to cooperate in the maintenance
of exchange stability and orderly exchange arrangements in
the world based on the present official price of gold. Their
communique also said: "They intend to strengthen the close
cooperation between governments as well as central banks to
stabilize world monetary conditions." This latter statement
was agreed unanimously and there was only one reservation
to the former statement.
- 8 II.
MULTILATERALISM IN DEVELOPMENT FINANCE
Today, I should like to single out another specific
area of challenge for making mu1ti1atera1ism work -- economic
development for the poor or less developed nations of the
world.
As the United States Governor of the World Bank, the
International Development Association, the InterAmerican Development Bank and the Asian Development Bank,
I have come to believe that the care, supervision and
development of these key instruments of mu1ti1atera1ism
are vital responsibilities for all of us.
I am fortified in that belief by the fact that a
world religious leader, Pope Pius, has spoken out strongly
on our responsibilities in this area, and that men like
John McCloy, Eugene Black, George Woods, Felipe Herrera and
Takeshi Watanabe have become true believers along with
Presidents Eisenhower, Kennedy and Johnson; that a
distinguished Secretary of Defense, whose prime concern
for seven years has been our national security, believes
that the leadership of this type of institution is a
most important outlet for his energies and talents.
But three recent events
subject.
cli~ched
my choice of
The first is the fact that the new and relatively
young Prime Minister of our neighbor, Canada, chose last
week in the western province of Alberta to state a
conviction. It was that the overwhelming threat to Canada
will not come from foreign investment, ideologies or
weapons, but "from the two-thirds of the peoples of the
world who are steadily falling farther and farther behind
in their search for a decent standard of living."
The second reason was that George Champion chose the
annual meeting of the Texas bankers ten days ago as the
occasion for delivering a truly outstanding address on
this subject. In his remarks Mr. Champion made this
assessment in these terms:
4Qi
\..; 4..
- 9 -
"Bu t, ·1n my JU
. d gment, cooperation in promoting free
soc~etie~ and ris~ng standards of living in the developing
nat10ns 1S essent1al o
Frankly, I see no alternativeo
"As our newly appointed Ambassador to the United Nations
George Ball -- has stressed, the achievement of a stable world
order depends primarily on a handful of. industrialized
Western nations which 'command the lion's share of world power,
possess the most advanced technology, and enjoy in common a
humane tradition.'
"Twenty years ago, these nations, acting in unison, halted
the westward sweep of Communist aggression.
"Today, acting in unison, they could mount a coordinated
attack on world poverty that could ultimately lift a hundred
nations to economic respectabilityo"
My third reason for choosing this special subject is that
during this year the Congress of the United States and the
governing bodies of the seventeen other industrialized nations
who are members of the International Development Association, the
soft loan affiliate of the World Bank, will determine whether
this promising approach to multilateral development finance
will be replenished on an expanded scale or leave this vital
field to relatively uncoordinated national approacheso
A generation has now passed since the world first turned
its attention to the problems of development finance, to meet
the challenge of promoting economic growth in the less developed
lands. During that time we have witnessed some notable
successes and some saddening failureso We have also learned
a great deal about the complex and difficult problems of
financing economic development, and how to attack those problemso
We have learned that multilateral approach to development
finance, making full use of the global network of international
financial institutions and of the regional banks, is clearly
advantageous, not only to the developing countries, but also to
the United States and the other contributing countries. Let
me review some of these advantageso
- 10 Advantages of the Multilateral Approach
10 Attracting Large-Scale Resources o The multilateral
institutions, which represent the combined efforts of many
countries, can attract and command a wider range of financial
resources than individual countries working by themselves. The
global international financial institutions and the regional
banks can not only call upon contributions from member countries,
but, in most cases, are in a position to tap private resources
through the sale of securities in world capital markets.
20 Burden-Sharingo The global international financial
institutions and regional banks provide the best vehicles available
for bringing about a more equitable sharing of the burden of
providing development assistanceo'
Moreover, these institutions have provided a way to shift
burden-sharing arrangements over time to accord with the changes
in the international financial situationo This is of particular
importance if we are to find the ways and means of meeting the
requirements for development finance among the poor nations of
the world -- requirements which remain immense
The United
States, which has for so long carried so large a share of the
total burden, cannot by itself, or to the extent to which it has
in past years, meet the growing needo Other nations must join
in meeting these expanded requirements in volume and in
proportions of aid that more closely reflect the realities of
their growing economic and financial strengtho
0
The United States share of bilateral free world aid is
about 56 percent of the totalo But the U. S., two years ago,
subscribed to only 20 percent of the share capital of the
Asian Development Bank, and we are now seeking legislative
approval for only a 40 percent share of an expanded capitalization
for the next round of contributions to the International
Devclopment Association, the World Bank's concessionary finance
affiliateo Our initial contribution to IDA in 1960 represented
a 43 percent share of the capitalization provided by the
developed countries o In the World Bank, which relies heavily on
capital borrowed in private markets, we have been able to
encourage a marked shift from extreme reliance on U. S. private
markets to much greater reliance on the capital markets of Europe
This is in keeping with the growth in European financial strength.
0
- 11 -
In addition to questions about amounts of financing, the
international financial institutions have proved useful in
improving the quality of financing, as it relates to the need
for concessionary repayment terms, by getting other nations to
bear a more equitable share of the burden of this type of lending.
IDA -- to take a most important example -- provides hard currency
repayable loans at very long maturities, with a small service
charge in lieu of interest. Thus, all contributions to IDA from
the many capital exporting countries are pooled, and relent on
identical terms adapted to the debt-servicing capabilities of
borrowing countries o This situation contrasts sharply with
bilateral financing arrangements, in which there are wide
differences in the terms of financing provided by the various
capital exporting nations, with certain nations insisting on
excessively strict repayment terms o
30 Comparison of Effort. The multilateral financial
institutions can provide a useful non-political mechanism for
comparison of effort -- for comparing the development progress
of the different developing nations and the soundness of their
development programs and also for comparing the development
financing policies and programs of the various capital exporting
countries. In the light of such comparison, those developing
nations in which planning efforts and development efforts are
inadequate can be encouraged to improve their performance, and
those creditor countries in which policies for providing
development finance show up badly in terms of magnitude, quality,
or terms, can be encouraged to raise their standards o This,
of course, complements the valuable work of the Development
Assistance Committee of the Organization for Economic Cooperation
and Deve I opmen t •
40
Political Objectivity. Loans provided by the interr
national financial institutions and regional banks are made on
the basis of economic criteria. Basically they are not
politically oriented -- and are not so considered by the recipientso
Loans by the international and regional banks tend to be
allocated on the basis of the borrowing nation's need and capacity
to employ funds usefully, rather than on the basis of political
ties, or on an attempt to influence particular governments or
persons, or, to use the vernacular, the principle of "who likes
whom?"
- 12 This political objectivity is a great advantageo It
permits the multilateral banks to advise capital recipient
nations on matters of political sensitivity, in a manner which
would be difficult, if not impossible, for a country providing
bilateral development financeo It is easier for developing
nations to accept advice and conditions of reform and self-help
if that advice and those conditions come from an international
institution or regional bank in which the developing nation is
a member and has a voice and a vote o
The World Bank and related institutions, as well as the
regional banks, have been effective in requiring self-help
measures on the part of the borrowing nations and have not only
brought about financial and economic reforms within them, but
have moved to help bring reform in such fields as education and
healtho
Moreover, the international and regional financial
institutions, with this advantage of being non-political, can
sometimes act as arbitrator in difficult situations. Perhaps
a case in point is the Indus Water settlement, where the World
Bank was in a unique position to obtain agreement of both India
and Pakistan to terms for a mutually beneficial solution to a
problem which had defied settlement for a long timeo
50 Efficiency of Operationso The multilateral institutions,
which devote full time to the tasks of development finance, bring
to these problems a greater concentration of professional
expertise than is generally avail~ble from single nations
donors or recipientso In effect, they can take advantage of
economies of scale in the development financing business. They
can provide development capital efficiently, and economically.
Just as an internetional or regional group with broad geographic
membership can calIon a wide range of contributors for financing,
so can it calIon, and provide, technicians with a wide range of
skills and specialities which no single country is likely to
have availableo
6. A Forum for Discussion o Still another advantage is
that a multilateral institution can provide a framework within
which donor countries and recipient countries, each with a
share in financial participation, can work together in a
cooperative attack on the problems of poverty and need. There is
much gained from sharing experience. Developing nations, by
- 13 participating in these arrangements, can learn from one another
All can improve.their own knowledge of development problems and
their own performance.
0
70 Providing leadership 0 Perhaps the most important
contribution of the international financial institutions and
regional banks is that these institutions can provide a
critically needed leadershipo This means leadership in
marshaling capital for development finance, in determining needs
and priorities, in selecting the best approaches to the
development task, and in encouraging both developing nations
and capital exporting nations to pursue sound and helpful policieso
This kind of objective leadership, which cannot and should not
be undertaken by any single nation, either donor or recipient,
is essential o In my view, it is the fundamental advantage of
the multilateral approach -- making full use of the international
financial institutions in attacking the problems of development
financeD
During the 1960's many important steps have been taken to
shift the emphasis in development finance away from bilateral
channels toward increased reliance on the international financial
institutions and regional bankso IDA, the concessional
financing arm of the World Bank 9 was started in 1960, was given
a substantial increase in its resources in 1964, and, under the
proposal now being considered, would be given a further increase,
to allow it a substantially higher level of loan activit yo
The Inter-American Development Bank, with membership
comprising the United States and_20 other nations in the Western
Hemisphere, was inaugurated in 1960 and has received increased
resources since that time, with growing financial participation
by non-member countries.
The African Devel opment Bank was opened for business in
1966, limiting its equity membership to African states, but
with the expect,ation that the exporting nations might participate,
through special funds and other arrangements.
The Asian Development Bank opened its doors in 1966, with
19 regional and 12 non-regional members, including most of the
European countries. Last December, Switzerland became the 12th
non-regional member. This marked the first time that Switzerland
had joined any such financial institutiono
- 14 In addition to the establishment and expansion of
international and regional banks, reliance on the leadership
of the multilateral financial institutions increased in recent
years with the establishment of consortia and consultative
groupso In these, a number of capital exporting countries,
each of which is participating in financing development in a
particular country -- say India or Colombia -- meet periodically
to discuss past results and future prospects for development
finance for that country. This reliance on the international
and regional banks will, and should continue to grow.
This is a desirable trendo We must, I repeat, build
on the present system, correct any faults, and fashion the
system in a way best designed to meet present and future needs
The word "build" is not used in the sense of creating new
institutions. It would be pointless and self-defeating to set
up new institutions with functions which would overlap those
of existing bodies, and which would serve more to bewilder than
to contribute
I agree with a leader in this field who said
that there should be an antiproliferation pledge of new
international organizations; that we should reserve the creation
( ~ ~ew entities for functions that clearly have no home among thE
many rooms already offered by the international family
o
0
0
But we can build in the sense of adapting present policies
of our existing institutions o Our past experience has shown
that multilateralism works; we must now make it work more
effectivelyo How can we do that?
10
first, we should strengthen the position of leadership
by the international financial institutions and the regional
ban~
We must GO all we can to strengthen these organizations
in their position of leadershipo To have a multilateral
organization dominated by one or two nations is to make a sham
of multilateralism. The United States, and every country, must
restrain any impulse to try to take the lead and play too
pro1l1inent a role. A success in a multilateral financing
operation is a success for the whole group; a failure is a failul
of the whole groupo
The implications of this are very important for the
United States.
On the one hand it means that the United States must
recognize that it cannot and should not exercise more than its
fair share of control of the policies of these institutions,
- 15 -
determine in each and every case to whom each loan will or will
not go, an d so on.
Of course, we have an important voice in these decisions.
As the largest single contributing country in most of the
international financial institutions, we can exert considerable
influence. I think the record thus far will indicate clearly
that the activities of these institutions have been compatible
with U. So policies and interest. Their operations and policies
have in the main broadly coincided with our own viewso I am
confident that in practice this will continue, but we should not
forget that we cannot control these organizations, and we should
not expect that each turn and twist of a multilaterally-financed
institution can or should be dictated solely by the United States o
There is another side to this coin. As a strong but
minority partner, we should not try to assume unlimited
responsibilities in the supply of development finance which so
seriously falls short of the expanding need o These increased
responsibilities should be increasingly shared by our partners
in Western Europe and Japan whose capacity to participate in
meeting the enlarged demand has grown so remarkably over the past
two decades. With growing responsibilities more equitably shared
by them through the channels and under the leadership of the
international institutions, an important attack can be launched
on the great world economic problem of this decade and the next
economic development of the poor, the less developed, countries
of the world, for the benefit of all nations o
It is not a question of whether the United States is in a
position in which it can meet all shortfalls of development
finance targets, as a residual supplier and lender of last resort.
This is a tired question, one which was more alive when other
nations now strong were financially weako Enlarged contributions
by other capital exporting nations are not, and should not be
considered as, help for the United States on the grounds that
they were reducing the shortfall which our nation has to meet o
It is the work of the international financial institutions,
with all capital exporting nations acting collectively -- not
the United States acting unilaterally or disproportionately -which must assure that the immense requirements of the developing
nations are meto
- 16 -
20
Second, we should urge the international and regional
institutions to strengthen further their management and
leadership of the consortia and consultative groupso
Under the guidance of the World Bank or other multilateral
institutions, individual consultative groups and consortia
have been set up for about a dozen countries.
Each group meets
periodically to assess each developing country's economic
performance and to evaluate its need for development assistance,
usually on the basis of some target drawn up by the developing
country and reviewed by the multilateral institution o
We have only started to come to grips with the problem
that in some cases these multilateral efforts have been too
heavily focused on the gross amount of development finance to be
provided, while paying insufficient attention to the form of
financing provided and the terms on which it is provided. The
result has been not only an unequal distribution of the burden
among donors, but also -- at least until recently -- an increasin~
debt service burden on the borrowers, resulting from the very
short terms and very high interest rates on credit offered by
SJf:e of the donor members of these groups.
The debt burdens which some of the developing countries
will face in the years ahead as a result of accepting too much
short-term high interest debt can cause serious problems for
both the debtors and the creditors. In my view the dangers in thi
situation are substantial.
It might be better to encourage the
international institutions to re-examine the presumptions on
which participation in consortia and consultative groups have
thus far been based.
30 Third, we must press more vigorously through the
international institutions and otherwise, for more equitable
sharing of responsibility.
Progress has been made in recent years toward a fairer
sharing of the burden of providing development financing, but
more needs to be doneo We have no wish to cut back on what
the U. Se is doing, but there is still a great need for an
increased flow of resources from others, and a critical need for
better terms.
I have touched on this question earlier.
I will add
here only the observations that every important capital exporting
- 17 nation must be persuaded that the requirements for development
finance are growing; that providing development loans on
commercial terms is self-defeating, and that cutbacks in development finance programs represent an economy which the world cannot
afford 41
It is becoming increasingly clear that we can no longer make
such comparisions simply by relating the size of a country's
development and aid 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
In a broader sense, account should also be taken of the
contribution each country is making toward other objectives for the
common good -- most particularly for the military security of the
free world.
0
0
4. Fourth, we need to press for policies and attitudes to give
greater weight to balance of payments considerations in multilateral
development activities.
If substantial amounts of funds, particularly those which will
be paid over a number of years, are to be channeled through multilateral institutions, ways and means must be found to cause the
real resources needed by the developing nations to flow in such a
way that they will contribute to, rather than upset, the process of
adjusting international payments imbalance. We delude ourselves if
we think that any substantial commitment, particularly forward
commitment of funds, will be made by responsible national financial
authorities without adequate protection for their balance of
payments contingencies. There is no magic inoculation known, either
in medical or economic science, which can provide immunity to
balance of payments problems for developed countries other than the
United States.
At present, the United States, which is by far the world's
largest provider of multilateral aid, has by far the world's
largest balance of payments deficito We need to make sure that our
participation in these multilateral organizations is carried out
in ways compatible with our balance of payments policies, while
consistent with the needs of the multilateral institutions.
- 18 The future ability of the multilateral development
finance institutions to mobilize large and inc'reasing
resources will depend to an important degree on their ability
to meet this challenge. There are a variety of ways in which
this problem can be approached.
Additional steps need to be' taken to improve the access
of the development finance institutions to wider and more
diversified world capital markets. For our part, the United
States has for a number of years ppessed for the· creation
of new and more highly developed capital markets in other
industrial nations. Some have taken actions to facilitate
such a development -- with national and international
benefits.
From the point of view of the international finance
institutions alone, much remains to be done. Perhaps
this is an area for multilateral action under the"leadership
of the multilateral institutions themselves. It would be
fanciful to expect full results quickly, but the lag in
results, compared to the need so far, is regrettable. We
have had to afford a substantial degree of access by these
institutions to our own capital markets, despite our balance
of payments difficulties; but whenever such access was
necessary, it was also necessary, in view of our present
deficit, for us to mitigate the impact of the event on our
own balance of payments. If we are to make a better
adjustment of international payments imbalances, we must act
upon the responsibility, recognized by all of us in the
Organization for Economic Cooperation and Development -and not fully met by all surplus countries -- of affording
greater financial access to all of our capital markets by the
development finance institutions.
But it is not a matter of access alone. To the
extent that private capital markets -- particularly in
surplus countries -- are not yet able to provide an adequate
volume of resources, does not the member government have a
responsibility to the institution and to the adjustment
process for timely reinvestment of its international
receipts?
-- We must take all feasible steps to assure
that, when resources are being contributed to the
multilateral institutions, contributing countries which
are in balance of payments difficulties may make their
contributions in a way which safeguards ~heir efforts to
achieve balance of payments equi1ibriu~.
- 19 The proposed contribution to IDA contains such safeguards,
and the principle must be maintained in other con~ributions to
other mu1tilat~ra1 institutions.
-- We must seek an increasing recognition of the
need for a clear differentiation, in the provision of
development finance, in the obligations of capital exporting
countries in balance of payments difficulty and those of
capital exporting countries which are in balance of payments
surplUS. Countries in serious balance of payments
difficulty may be expected to provide their contributions
in the form of goods and services produced in their own
country. Countries in balance of payments surplus should
make their contributions in the form of cash financing or
untied aid. I should note that if countries now in
surplus do not provide their aid on an untied basis
in
form and fact -- while they are in surplus, it will be
much more difficult for nations in deficit, such as the
United States, to justify providing their aid in untied
form when their balance of payments deficitsare eliminated.
-- As a general proposition we should seek to
ensure that development finance more actively
contributes to the international payments adjustment process.
Development financing should be provided in a form which
tends to mitigate, rather than to exacerbate, the present
disequilibrium in international payments.
5. Finally, we should increase the share of financing
provided through multilateral lending agencies.
If some of these changes can be introduced a continuation
of the shift in emphasis from bilateral to multilateral
channels for aid and development finance would be in order.
This,of course, is not a decision for the United States alone,
but we should, in my view, let it be known that we are
prepared to join with the other contributing countries in
expanding the use of the multilateral channels for
development finance.
This is not a move to be made by one or a few countries
but by all contributing countries and should depend upon
the effectivenss of the particular institution. However,
this does not mean that we should expect to shift altogether
out of bilateral aid and development finance arrangements in
favor of the multilateral approach. The bilateral channels
- 20 must continue to play an important role. We would be deluding
ourselves, and doing a disservice to those who have
responsibility for carrying out the foreign policy of governments
not to recognize it.
I would, at this point, like to say a word about Vietnam.
President Johnson has made clear to the world our fervent
hope that peace there will be restored. At this moment
we cannot predict the outcome of negotiations.
But it is
not too early to begin to consider the possibility of
peace and to plan. Clearly, the problems of restoring
economic stability and promoting growth in those war-torn
areas in the stresses of the post-Vietnam period will require
a multilateral approach. We should begin to examine the
problems and plan such an approach.
III.
SOME PRESSING, PENDING, UNFINISHED BUSINESS AT HOME
During the month of June the Government of the United
States ~ill be called upon to take decisive action on some
pending legislation which is of the greatest importance
to the objective of making multilateralism work in the field
of international finance.
The Senate will be called upon to vote on the legislation
authorizing the approval of the proposed amendment of the
Articles of Agreement of the International Monetary Fund
establishing the Special Drawing Rights facility and
providing for U.S. participation in the operations of that
facility.
This legislation has already passed the
House of Representatives by a vote of 226 to 16.
I appreciate the interest, participation and support of
the American Banking Association in the long and laborious
processes of consideration, negotiation and legislative
action which have brought us so close to the end of the
long road we have traveled toward this objective.
Likewise, it is anticipated that in the month bf
June Congress will be called upon to approve participation
by the United States in the second replenishment of funds
for the International Development Association.
This
second replenishment cannot become effective until at
least twelve contributing members -- whose aggregate
II"''''''
....
r< I
iU I
- 21 contribution is not less than $950 million(out of the $1.2
billion scheduled over the next three years)-- shall have
notified the organization that they will make their contributions.
Because of the size of the U.S. contribution, the $950 million
"trigger" amount cannot be reached without our participation.
Our own action undoubtedly will stimulate early action on the
part of a number of other governments.
The Executive Directors ·of IDA have recommended that all
governments act in time to permit the Resolutions to come into
effect on or before June 30, 1968. By acting promptly to
meet that schedule, we can reassert the constructive
leadership that has characterized our earlier participation
within the International Development Association.
Strong bipartisan backing characterized the U.S.
initiative to create the International Development
Association under the administration of President Eisenhower.
Up to now it has continued under President Kennedy and
President Johnson. I hope it will result in a timely
approval by the Congress of this measure, so vital to
keeping multilateralism at work in the field of development
finance.
Finally, in the first week in June, the Congress
will vote up or down legislation providing for a tax
increase and a reduction in government expenses. This
all important measure is designed to restore a responsible
national fiscal and financial policy which is vital to
the United States and the entire free world.
This audience knows that failure to take affirmative
action on this fiscal program would risk incalculable damage to
our own and the world's economy and financial system. It would
expose our economy to continuing and intolerable
inflationary pressures,
lead to additional fear and distress in our
financial markets and a further upward
spiral in interest rates already near the
highest levels in modern history,
hamper our efforts to bring our balance of payments
into equilibrium through the restoration of a
healthy trade surplus, risking a full-scale
international financial crisis,
- 22 seriously undermine the basic faith
held at home and abroad in the ability
of the United States to conduct its
Financial affairs responsibly -- a
faith that is and has been fundamental
to the strength of the dollar.
Since last August, I have warned of each of these risks
of fiscal failure in every forum open to me -- from Cabinet
Room to Congressional Committee -- from London to Rio to
Stockholm o But today, unlike last August, I am no longer
speaking of risks aloneo For, to a degree, each of the
damaging results I have cited are already in evidence. We
are no longer faced with dangerous future contingencies but
with a current movement toward damaging inflation, financial
deterioration and a loss of confidence.
This is why I consider it absolutely essential that
proper fiscal action be taken now. We can not afford further
delayo And the nation can not afford the failure in
representative government which would result should the
Congress refuse to perform its function in meeting the
necessities of the people rather than satisfying wishful
thinking. It is your responsibility and mine to make sure they
understand the necessities. Since the surcharge was proposed
last August it has become increasingly clear that a responsible
fiscal policy, in the environment then evident and now
experienced, calls for decisive action to eliminate the twin
deficits in our Federal budget and in our international balance
of payments and for early enactment of the President's tax
increase proposal as essential to the achievement of this
objective.
The past ten months have amply demonstrated that the best
chance of obtaining these results in this Congress is to conjoin
the tax increase with a substantive spending reduction o The
legislative package pending before the Congress does just that.
There have been and continue to be differences of opinion
over whether the expenditure reductions should be $4 billion or
$6 billion.-- whether the deficit of our $20 billion should be
reduced to $18 billion or $20 billion o I hold strongly to the
view that a difference of opinion over the consequences of
postponing, or cancelling, or maintaining expenditures in
fiscal '69 in the amount of $2 billion must not be allowed to
stand between the nation and the early re-establishment of a
responsible fiscal policy so necessary and so long over-due.
- 23 Speaking to the United States Chamber of Commerce,
prior to the decision of the House and Senate, I said:
"Given the Government's serious financial
situation, now recognized on all sides, I am confident
that the men of wisdom, experience and patriotism
who are involved will not permit disagreements over
details or procedures, or marginal differences as
to the degree of expenditure reduction required, to
prevent decisive action to reduce our twin deficits
to manageable proportions.
" ••••• In this process, the individual Congressman
or Senator will not get just what he would prefer
for his constituents or for the nation. Nor will
the President, given the special constitutional power
of the Congress over the purse. Neither will you or
I. But, acting together, we can do what needs to
be done -- take care of our essential needs at home
and abroad in a manner that will keep our economy
stable and the dollar strong."
But, this is not the end of the story.
It is the duty of the Secretary of the Treasury m
speak plainly on these matters and I have done so in the past
as I do now. But it is also his duty to keep trying, to
retain hope, and to have confidence in the ultimate capacity
of representative government to do what is plainly right,
even in an election year.
My role in the torturous journey that the tax bill
has been forced to follow has been described by one of my
colleagues as follows:
"At times he has been a tax Candide,
seeing progress in this procedural move
or that statement by a legislator when all
else saw only set-back. At times he has
sorrowfully been a tax Cassandra, as crises
recurred in the international markets and
gold filled the headlines, And at many
another time he has been the ambulance
- 24 surgeon on the emergency call or even
a Dr. Christian Barnard -- always able
to detect a pulse or heartbeat when
all othel:S had put away their
stethoscopes."
May I take one final role -- that of a fiscal
Paul Revere, riding past our noble banking institutions,
shouting a new call to arms:
"The date is early June."
You are the Minute Men who should have the ear of
your representatives on financial matters. In this hour
of national fiscal responsibility, I ask for your help.
000
TREASUR'{ DEPARTMENT
FOR RELEASE 6: 30 P.M.,
Monday, May 27, 1968.
RESULTS OF TREASURY'S WEEKLY BILL OFFERING
']he Treasury Department announced that the tenders tor two series of Treasury
bills, one series to be an additional issue ot the bills dated February 29, 1968, and
t~ other series to be dated May 31, 1968, which were offered on May 22, 1968, were
opened at the Federal Reserve Banks today. Tenders were invited tor $1,600,000,000,
or thereabouts, of 90-day bills and tor $1,100,000,000, or thereabouts, of 182-day
bills. '!be details of the two series are as tollows:
90-day Treasury bills
~turi!!a Au~st 29 z 1968
Approx. Equiv •
Price
Annual Rate
98.583
5.66(ij
98.566
5. 736~
98.576
5.696~
))
RANGE OF ACCEPTED
COMPETITIVE BIDS:
High
Low
Average
5~
23~
l82-day Treasury bills
maturing November 29 2 1968
Approx. Equiv.
Price
Annual Rate
97.039
5.857!.'
97.026
5.883i
97.033
5.86~
!/
of the amount of 90-day bills bid for at the low price was accepted
of the amount of l82-day bills bid tor at the low price was acc~pted
'roTAL TEImERS APPLIED FOR AJID ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
AcceEted
AEE1ied For
Boston
20,193,000
30,193,000 $
lew York
1,151,669,000
1,696,169,000
Philadelphia
23,'92,000
37,492,000
Cleveland
27,392,000
27,392,000
Richmond
15,221,000
16,196,000
Atlanta
34,866,000
38,816,000
Chicago
140,706,000
205,716,000
St. Louis
52,55',000
56,839,000
MinneapOlis
15,154.,000
16,15~,000
Kansas City
24.,801,000
25,501,000
Dallas
17,411,000
24,411,000
San franCisco
76,567,000
116,747,000
•
TOTALS
y Includes
$2,291,626,000
$1,600,026,000
!I
Applied Por
5,587,000
$
1,472,620,000
21,548,000
29,909,000
7,248,000
36,970,000
211,395,000
47,930,000
15,233,000
12,077,000
18,115,000
275,94.4,000
Acce]2ted
3,587,000
$
851,581,000
6,74.8,000
15,319,000
4,748,000
18,762,000
71,955,000
32,150,000
6,806,000
10,456,000
$2,154,576,000
$1,100,190,000
7~915,000
70,163,000
$258,083,000 noncompetitive tenders accepted at the average price ot 98.576
~Includes $137,788,000 noncoarpetit1ve tenders accepted at the average price
11 'l!lese
ot
97.033
rates are on a bank discount basis. !he equivalent coupon issue yields are
5.e6~ for the 90-day bills, and 6.1~ tor the 182-day bills.
j'-U~60
EI
TREASURY
DEPARTMENT
May 29, 1968
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
$2,700,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing June 6, 1968,
in the amount of
$2,602,222,000, as follows:
91-day bills (to maturity date) to be issued
in the amount of ~,600,000,000, or thereabouts,
additional amount of bills dated March 7, 1968,
mature September 5,1968, originally issued in the
$1,000,041,000, the additional and original bills
interchangeable.
June 6, 1968,
representing an
and to
amount of
to be freely
182-day bills, for $1,100,000,000, or thereabouts, to be dated
June 6, 1968,
and to mature
December 5, 1968 0
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 Daylight Saving
time, Monday, June 3, 19680
Tenders will not be
received at the Treasury De~artment, WaShington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three deCimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
up
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
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-1261
- 2 -
Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be
final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on June 6, 1968, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing June 6, 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 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 frol
any Federal Reserve Bank or Branch.
000
TREASURY DEPARTMENT
May 31, 1968
FOR IMMEDIATE RELEASE
PRESIDENT JOHNSON ANNOUNCES INCREASE IN INTEREST RATES
ON U.S. SAVINGS BONDS AND FREEDOM SHARES
President Johnson today announced an increase in the interest
rates on United States Savings Bonds and Freedom Shares (U.S.
Savings Notes). Effective June 1, 1968, the interest rate on
new E and H Bonds will be increased from 4.15 percent to 4.25
percent, the maximum rate permitted under present law. Yields
on outstanding E and H bonds will be correspondingly improved.
At the same time, the interest rate on Freedom Shares will
be increased from 4.74 percent to 5 percent on issues dated
June 1 and thereafter.
Beginning June 1, Freedom Shares will be available for single
purchase along with an E Bond of the same or a larger denomination.
Individuals may purchase up to $350 of Freedom Shares each
calendar quarter to an annual maximum of $1350. Previously
Freedom Shares were available only through payroll savings and
bond-a-month plans.
Attached are questions and answers on the new Savings
Bonds and Freedom Shares.
Attachment
F-1262
QUESTIONS AND ANSWERS ABOUT THE NEW, IMPROVED
UNITED STATES SAVINGS BONDS AND FREEDOM SHARES
Series E and H Savings Bonds and Freedom Shares have
become more attractive savings instruments
Effective
June 1, 1968, the interest rate on new E and H Bonds will
be increased from 4.15 to 4.25 percent -- the full legal
limit permitted under present law. Outstanding E and H
Bonds also carry a comparable increase in rate to next
maturity. The interest rate on Freedom Shares (U.S.
Savings Notes) will be increased from 4.74 to 5 percent
on issues dated June 1 and thereafter. Also, Freedom
Shares, formerly restricted to those on a regular
purchase plan, will now be available for single purchase
along with an E Bond of the same or a larger denomination o
0
Q.
I once was told I could not buy a Freedom Share, even
though I offered to buy a Savings Bond along with it.
Do I understand that this is now possible?
Ao
That ~ correct. Beginning June 1, 1968, a person may
buy a Freedom Share from his local bank, without signing
up to become a regular purchaser, provided he buys a
Series E Bond at the same time.
Q.
May I buy a $100 Freedom Share and a $25 Bond?
A.
No, but you can reverse that. The face value of the
Series E Bond must be as large or larger than the face
value of the Freedom Share.
Q.
What are the new higher interest rates I heard about?
A.
Series E Bonds now will return 4-t% interest, compounded
semi-annually, when held to maturity of 7 years.
Series H Bonds will return 4-~% also, when held to a
maturity of 10 years. Freedom Shares will now pay 5%
when held to maturity of 4-~ years.
Q.
How abo~t myoId
A.
Yes. Outstanding
higher yields for
The increase will
period when Bonds
E and
H Bonds?
Wi~l they also pay more?
E and H Bonds will return comparably
the remaining time to next maturity.
be realized in the final interest
are held to next maturity.
- 2 -
Q.
From what date willthe increased rate be computed?
A.
In most cases, from the first full six-month interest
period beginning on and after June 1, 1968.
Q.
Will the higher yield on new Bonds also show up only in
the final interest period before maturity?
A.
Yes -- the increased return on both E and H Bonds and on
Freedom Shares issued on and after June 1, 1968, will be
reflected in the final interest period.
Q.
Then I must hold my Bonds to maturity in order to get
the higher rate?
A.
That's right.
It's sort of a bonus, to be realized
either at original maturity or at extended maturity.
Q.
How about the higher rate on outstanding Freedom Shares?
A.
The Treasury has no legal authority to increase the
interest rate on Freedom Shares issued between May 1,1967,
and May 31, 1968
That's because "Freedom Shares" are
really United States Savings Notes, and come under a
different law o
0
Q.
Then wouldn't it pay me to cash in myoId Freedom
Shares and buy the new 5% ones?
A.
It would hardly be worth it. You see, Freedom Shares
are not redeemable during the first year. Then, after
you have held one for a year, it will return an average
of 4.95% for the remaining 3-~ years to maturity.
Compare that with 5% for 4-~ years and you are only
talking about pennies.
Qo
You mentioned seven-year E Bonds and 4-~-year
Freedom Shares. Haven't the maturities on new Bonds
usually been shortened when interest rates were
increased?
A.
That has been true in the past, but not in this
instance. Maturities remain the same for all three
instruments.
- 3 -
Q.
If maturities are not being shortened, then how do I
benefit from the new higher interest rates?
A.
By receiving more than the stated amounts shown on the
face of the new E Bonds and Freedom Shares. The same
plan was used for outstanding E Bonds when interest
rates were increased in 1959 and 1965.
Q.
How much more than the face value will I receive?
A.
Let's as sume a purchase of a $100 Freedom Share and
a $100 E Bond in June 1968. The Freedom Share,
which cost $81.00, would be worth $101.16 after
4-~ years.
The E Bond, which cost $75.00, would be
worth $100.64 after 7 years.
Q.
Can I buy a Freedom Share as often as I want, so long
as I buy an E Bond along with it?
A.
No, there are still restrictions. The Freedom Share
limit is $350 each calendar quarter, but with the
same annual ,limitation of $1350.
Q.
But four times $350 adds up to $1400
A.
That's true. Therefore, if you bought your limit each
of the first three quarters, then you could only buy
$300 worth in the final quarter.
Q.
My wife and I usually have our Bonds and Shares issued
in coownership. Does that limit us to just $350 in
Freedom Shares each quarter?
A.
No, each of you may buy your individual limit of $350
per quarter, and you can continue to have each other
listed as coowner.
Q.
How about the limit on Savings Bonds?
A.
There is no quarterly restriction, but there is an annual
limitation on holdings purchased in anyone calendar year.
Currently, this is $20,000 (face value) on E Bonds and
$30,000 on H Bonds.
0
4
Qo
I've been buying my Freedom Shares on the Payroll Savings
Plan, getting a $50 Share twice a month. They told me
that was the limit I could buyo
Ao
That is correct. The limit on deductions is still $40050
each semi-monthly pay period, which would buy a $50 face
value Freedom Shareo Other limits are $20 50 on a weekly
pay plan, $40050 bi-weekly, and $81000 per montho These
limitations all remain on the automatic purchase plans o
But if these don't total the quarterly and annual purchase
limits, you may now buy at your bank additional Shares in
single p~rchases with E Bonds to reach the maximum limits o
0
Qo
May I also defer Federal income tax reporting on Freedom
Share interest?
Yes, you may
maturity.
until Shares are redeemed or reach
Qo
Suppose I wanted to report Freedom Share interest each
year, but continue to defer my E Bond interesto Is this
all right?
Ao
No, it is noto You must use the ~ame method for
reporting both, plus interest on any other accrual type
securities you may owno One other thing you must
remember, too o If you've been deferring this interest
and decide you want to start reporting it annually, you
must also include all other interest accrued over the
years for which no accounting has been made o
Qo
Is it likely that Freedom Shares will be extended beyond
maturity, as E and H Bonds have been?
A.
There is currently no provision for an extension of
Freedom Shares c
000
TREASURY DEPARTMENT
lOB RELEASE 6: 30 P.M.,
~ndall June 3, 1968.
RESULTS OF TREASURY S WEEKLY BILL OFFERING
I
~
Treasury Department announced that the tenders for two series at Treasury
b111s, one series to be an additional issue of. the bills dated March 7, 1968, aM the
other series to be dated June 6, 1968, which were offered on May 29, 1968, were opened
at the Federal Reserve Banks today. Tenders were inYi ted for $1,600,000,000, or there~oots, of 91-day bills and for $1,100,000,000, or thereabouts, of 182-day bills.
The
details ot the tva series are as follows:
PANGE OF ACCEPTED
COO'ETI'l!VE BIDS:
91-day Treasury bills
lEturing SeEtember Sz 1968
Approx. Equlv.
Price
Annual Rate
98.S79
98.564
98.572
111gb
Low
Average
!I
86~
6~
182-day Treasury bills
lIB.turlng December Sz 1968
Price
97.128 ij
97.109
97.119
5.622J
5.681~
5. 649ft,
Y
Approx. iquiT •
Annual ia te
5.681J
5. 71 a;,
S.69~
Y
Excepting 1 tender of' $542,000
ot the a.ount ot 91-day bills bid for at the low price was accepted
ot the 8.1DOUDt at 182-day b111s bi! for at tbe low price was accepted
mTAL TDDERS APPLIED FOR AIm ACCEPTlW BY FEDERAL RESEBVE DISTRICTS:
District
Boston
iewlork
Phila4elphia
CleTe laJ1d
R1cbllond
Atlanta
Chic&.&o
St. Louis
MiJmeapolis
(ansae C1 t;y
Dallas
San Precisco
TO~
Applied For
$
Applied For
Accepted
12,838,000
22,838,000 ..
1,117,S58,000
1,708,398,000
23,870,000
24,020,000
30,231,000
30,231,000
12,803,000
13,373,000
"'7,320,000
4.8,320,000
121,998,000
287,'98,000
68,212,000
72,212,000
22,102,000
22,102,000
25,001,000
29,281,000
16,546,000 :
2",,546,000
101,772,000
126,822,000
$2,"'09,641,000
$1,600,251,000
EI
•
17,182,000
Accepted
$
3, 635, 000
1,741,973,000
15,275,000
29,318,000
8'0'1,000
28,288,000
296,802,000
54,172,000
13,410,000
17,701,000
21,763,000
121 z 945,OOO
8n, 316, 000
7,275,000
2S,968,000
',940,000
17,998,000
62,729,000
43,472,000
7,910,000
10,618,000
11,363,000
32,795,000
$2,365,870,000
$1,100,019,000 ~
~ Includes $251,038,000 noncaa:petitive tenders accepted at the aTerage price of 98.572
Includes $120,565,000 noncca:petitiTe tenders accepted at the aTerage priee of 97.119
SJ
!/
'lhese rates are CD a bank discount baa is • !.be equivalent coupon issue yields are
5.81~ to: the 91-day bills, and S.9~ for the 182-day bills.
TREASURY DEPARTMENT
:
May 31, 1968
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES COUNTERVAILING DUTY
ORDER ON STEEL WELDED WIRE MESH FROM ITALY
The Treasury Department announced today that it has sent to
the Federal Register for publication notification of countervailing duties to be imposed on importations of steel welded wire
mesh from Italy.
The countervailing duty action is the result of an
investigation conducted by the Bureau of Customs following a
complaint of subsidization submitted by the law firm of
Sharp, Solter and Hutchison on behalf of certain domestic
producers of the merchandise. The complaint was filed pursuant
to Section 303 of the Tariff Act of 1930 (19 USC 1303) and will
appear in the Federal Register on Saturday June 1, 1968.
The countervailing duties will be assessed on the
importation of these products following 30 days after
publication of notification in the Customs Bulletin. Publication
is scheduled for June 19, 1968.
The Treasury said that duties on steel welded wire mesh
from Italy are intended to counteract subsidies by the
Government of Italy on exports to the United States of the
steel welded wire mesh in question. Countervailing duties will
be assessed only on shipments which receive benefits from the
program. The countervailing duties will be equal to the amount
of the subsidy.
The Treasury declared the amount of the Italian subsidy
to be 15.28 Italian lire per kilo of steel welded wire mesh.
This amounts to approximately $24.25 per long ton.
000
F-1264
TREASURY DEPARTMENT
May 31, 1968
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES CHANGES
IN ANTIDUMPING REGULATIONS
The Treasury Department announced today that it is amending
its Antidumping Regulations. These amendments, which will appear
in the Federal Register of Saturday, June 1, 1968, will become
effective July 1, 1968, the date upon which the International
Anti-Dumping Code enters into force.
The amendments provide accelerated procedures for the
determination of sales at less than fair value. Cases will be
forwarded to the United States Tariff Commission for its
determination of injury to an industry in the United States
without an advance notice of Tentative Determination.
Affirmative determinations will be issued simultaneously
with the action of withholding appraisement, which is limited
to three months.
If exporters and importers concerned have requested a period
of withholding longer than three months, and if the Secretary
agrees, withholding of appraisement may extend six months. In
that case the matter will be referred to the Tariff Commission
within three months from publication of the Withholding of
Appraisement Notice.
A number of changes in the regula'-~ :J~S amend existing
provisions, or add new provisions to reflect current Treasury
Department interpretation or practice.
The Antidumping Regulations formerly were dividp,j among three
parts of the Customs Regulations. They will now appear in a new
Part 53, entitled Antidumping
0
The amendments were proposed in OctobeL, 1967. Consideration
has been given to comments received from all quarters. A copy of
the regulations in amended form may be obtained from:
The Commissioner of Customs
2100 K Street, N. W.
Washington, D. C. 20226
F-126.i
000
TREASURY DEPARTMENT
FOR IMMEDIATE RELEASE
JOHN C. COLMAN TO BE APPOINTED
DEPUTY ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
Treasury Secretary Henry H. Fowler today announced his
intention to appoint John C. Colman, an official of the
Department of State, as Deputy Assistant Secretary of the
Treasury for International Affairs.
Mr. Colman has been Director of the State Department's
Office of International Monetary Affairs since 1966. He is
expected to assume his Treasury duties later this month.
As Deputy Assistant Secretary, Mr. Colman will succeed
John R. Petty, who was recently named Assistant Secretary for
International Affairs. He will assist Mr. Petty with major
Treasury responsibilities in the international economic,
financial and monetary fields.
A native of Cleveland, Ohio, Mr. Colman received a
Bachelor of Chemical Engineering degree from Cornell University
in 1949, and a Master in Business Administration degree from
Harvard University in 1951, graduating ~vith high distinction.
He served in the U.S. Navy in 1945 and 1946.
After graduation from Harvard, Mr. Colman became a
consultant to the management consulting firm of Arthur D. Little,
Inc., Cambridge, Massachusetts. He was engaged in market
studies for producers of industrial and agricultural chemicals
and minerals and for large institutional investors.
From 1952 until 1956, Mr. Colman was an official of the
Borden Company, serving as assistant production manager and
later as assistant general manager in its chemical departments.
In 1956, Mr. Colman joined A. G. Becker and Company, Inc.,
of Chicago , Illinois , a nation-wide investment banking and
brokerage firm. He served in progressively higher positions
and became vice president in charge of the firm's corporate
banking division in 1962. He held this position until joining
the State Department in 1966.
F-1266
(MORE)
- 2 While with A. G. Becker and Company, Mr. Colman also
was a part-time faculty member and lecturer on investment
management at Harvard Business School.
In his State Department post, Mr. Colman has been active in
policy formation and liaison with the Treasury Department,
Federal Reserve Board, Council of Economic Advisers,
International Monetary Fund and other agencies.
He has been
closely involved with the U.S. balance of payments, export
financing, the international monetary system, and foreign
banking and securities markets. He has also represented the
State Department on the policy staff of the Office of
Foreign Direct Investments, Department of Commerce, and been
a U. S. delegate to a number of intergovernmental meetings.
Mr. Colman, 41, js married to the fo~mer Jane Becker of
Chicago, Illinois. Mr. and Mrs. Colma~ have three children,
James, 17; David,lO; and Nancy,7. The Colmans reside at
125 Grafton Street, Chevy Chase, Maryland.
000
@FedFRASER