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Press
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DepartmentoftheTREASURY
BHINGTON. D.C 20220
TELEPHONE W04-2041
i i jL
April 27, 1973
NOTE TO CORRESPONDENTS:
Under Secretary for Monetary Affairs Paul A. Volcker
will visit India, Sri Lanka, Indonesia and Australia to hold
discussions with government officials on international mone
tary and trade matters.
The discussions will focus on the
work of the Committee of Twenty on international monetary
reform.
The visits will follow the conclusion this weekend of
the Annual Meeting of the Asian Development Bank in Manila,
where Mr. Volcker is presently leading the U.S. delegation.
Mr. Volcker is expected to return to Washington about May 8.
oOo
S-182
DepartmentofthefREASURY
INGTON, D.C. 20220
TELEPHONE W04-204*
j
May 1, 1973
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 $4,300,000,000, or thereabouts, for
cash and in exchange for Treasury bills maturing
of $4,303,270,000
May 10, 1973,
in the amount
as follows:
91 -day bills (to maturity date) to be issued
May 10, 1973?
in the amount
of $2,500,000,000, or thereabouts, representing an additional amount of bills
dated February 8, 1973,
and to mature August 9, 1973
originally issued in the amount of $1,800,965,000,
(CUSIP No. 912793 RP3)
the additional and original
bills to be freely interchangeable.
182 -day bills, for $1,800,000,000, or thereabouts, to be dated May 10, 1973,
and. to mature November 8, 1973
(CUSIP No. 912793 SC1 ).
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 $10,000, $15,000, $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 clos
ing hour, one-thirty p.m., Eastern Daylight Saving time, Monday, May 7, 1973.
Tenders will not be received at the Treasury Department, Washington.
must be for a minimum of $10,000.
$5,000.
Each tender
Tenders over $10,000 must be in multiples of
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.
■BiJr) BH o
B f iB
?Bc rf'y
may not be used.
7
Fractions
It is urged that tenders be riiade on the printed forms and for
warded 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.
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.
Only those
submitting competitive tenders will be advised of the acceptance or rejection
thereof.
The Secretary of the Treasury expressly reserves the right to accept or
reject any or 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 any one bidder will be acceptecj
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 10, 1973,
in cash or other immediately available funds or in a like face amount of Treasury
bills maturing May 10, 1973.
treatment.
Cash and exchange tenders will receive equal
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.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the
amount of discount at which bills issued hereunder are sold is considered to accrue
when the bills are sold, redeemed or otherwise disposed of, and the bills are ex
cluded from consideration as capital assets.
Accordingly, the owner of Treasury
bills (other than life insurance companies) issued hereunder must include in his
income tax return, as ordinary gain or loss, the difference between the price paid,
for the bills, whether on original issue or on subsequent purchase, and the amount
actually received either upon sale or redemption at maturity during the taxable
year for which the return is made.
Treasury Department Circular Wo. 418 (current revision) and this notice,
prescribe the terms of the Treasury bills and govern the conditions of their issue.
Copies of the circular may be obtained from any Federal Reserve Bank or Branch.
mm
Departmentof
WASHINGTON, D.C. 20220
^T
TEt€lPHPNC W04-2041
FOR IMMEDIATE RELEASE
May 1, 1973
TREASURY ANNOUNCES ACTIONS ON
TWO INVESTIGATIONS UNDER THE
ANTIDUMPING ACT
>se
Assistant Secretary of the Treasury Edward L. Morgan
announced today actions on two investigations under the
Antidumping Act of 1921, as amended.
In the first case there is an initiation of an antidumping
investigation, and in the second case there is a final discon
tinuance of an antidumping investigation.
ptei
Notice of these actions will appear in the Federal Register
of May 2, 1973.
In the first case Assistant Secretary Morgan announced the
initiation of an antidumping investigation on imports of picker
sticks from Mexico. These picker sticks are laminated compressed
hardwood loom parts used in textile weaving machines. This
announcement follows a summary investigation conducted by the
Bureau of Customs after receipt of a complaint alleging that
dumping was taking place in the United States. During calendar
year 1972 imports of picker sticks from Mexico were valued at
approximately $15,000. Imports are anticipated to increase
significantly in 1973. Treasury's preliminary inquiry indicates
that total United States production is valued at approximately
$1 million, most of which is manufactured by small firms.
sue.
In the second case the Treasury announced a final discon
tinuance of the antidumping investigation on electronic ceramic
packages and parts thereof from Japan. These packages provide
a sealed housing for integrated circuit chips and an electrical
connection between these chips and the associated circuitry of
various electronic products including calculators and computers.
On January 31, 1973, the Department published a tentative discon
tinuance notice after the investigation showed that sales at less
than fair value were only minimal in relation to the volume of
imports, and the foreign manufacturers offered formal assurances
that there would be no further sales at less than fair value. This
notice also invited interested parties to submit written views or
request an opportunity to present their views orally. During
calendar year 1972 imports of electronic ceramic packages from
Japan were valued at approximately $4 million.
oftheTREASURY
Department
B
s HINGTON,
D;C. 20220
TELEPHONE W 04-2041
FOR RELEASE UPON DELIVERY
Statement of the Honorable Jack F. Bennett
Deputy Under Secretary of the Treasury
before the
Subcommittee on Production and Stabilization
of the
Senate Banking, Housing, and Urban Affairs Committee
MAY 2, 1973 AT 10:00 A. M.
Mr. Chairman, I welcome this opportunity to present
the Administration’s view on proposed legislation to allow
unregulated ownership of gold by Americans.
oppose it.
I am here
to
The time may well come when U. S. regulations
can and should treat gold just like any other industrial
metal.
But that time is not now.
It would not be wise to
assume now that the time will be on December 31st of this year.
Government restrictions on the freedom of American citizens
should be imposed only on the basis of clear-cut justification.
And regulations in force should be carefully reviewed periodically
as you are doing today -- to insure that they continue to be
justified under changing conditions.
S-1 8 3
Obviously circumstances
2
today are markedly different from those of 1933 when the
existing regulations had their beginnings.
The problem
then was that prices in the United States had been falling.
There are, however, -- as I shall attempt to explain -strong reasons relating to our current circumstances why
the regulations should be kept in force at this time.
These existing regulations do not ration or limit the
amount of gold which can be used in the United States for
customary industrial or artistic uses.
Individuals and
business firms requiring gold for these purposes may acquire
all they need under Treasury license.
All that the regulations
prohibit is the acquisition of gold for speculative or
inve stment purposes.
It is also important to emphasize that the regulations
have never restricted domestic producers of gold from selling
their production at the prevailing market prices.
Domestic
producers of gold today are free to sell to licensed industrial
users in the United States or to export without restriction
for whatever price the market brings.
In recent weeks that
price has fluctuated around $90 per ounce.
I
1
3
Americans may also hold without restriction any amount
of gold jewelry or fabricated gold in any form.
They can
also acquire and trade without license in rare U. S. or
foreign gold coins, defined as those minted before 1934,
for numismatic purposes.
In essence then when we speak of
the U. S. restrictions on the private ownership of gold we
are speaking only of restrictions on investment or speculation
in gold bullion.
Americans are not the only ones subject to such restric
tions.
Practice in this respect varies widely among nations
but a list prepared on the basis of International Monetary
Fund data shows 75 countries which maintain restrictions and
44 which do not.
Canada doesn't.
The United Kingdom has such restrictions;
Australia has such restrictions; Japan doesn't.
On the continent of Europe 'Denmark and Norway have such
restrictions; Germany and France don't.
In those countries
where the unrestricted private holding of gold is permitted
there are wide variations in the extent to which the citizens
avail themselves of the opportunity.
4
Under the circumstances there is no way in which I can
make a precise forecast as to how much gold Americans would
buy in the near future if the controls were suddenly removed.
Yet I do know that the dollar has experienced two effective
devaluations relative to foreign currencies in the last year
and a half.
My own judgment is that the dollar is now more
likely to go up than down in relation to other currencies.
At the same time I think we must realize that the confidence
of many may have been shaken.
For this reason we should take
into account the real possibility that removal of the controls
would be followed by a substantial surge of new demand against
the limited market supply.
The result could be a sudden large
jump in the ,free market price of gold.
Later on the price
could fall back sharply again, but meanwhile the price of gold
could display an even greater instability than we have seen in
the recent past.
Logically such instability in the price of gold need cause
no instability for the value of the dollar in terms of other
currencies.
But to place any reliance on that fact would be to
place too much reliance1on logic
often enters in.
in an area where irrationality
Today we are only a few weeks away from the
recent period of intense international monetary uncertainty.
5
If in the near future there were a sharp reduction in the value
of the dollar in terms of gold in the private market there
could well develop as a consequence a sharp drop in confidence
in the dollar in terms of other currencies on purely psychological
grounds quite apart from any developments relating to the real
flows of our international trade and investment.
At the same time, however, there could develop a seriously
adverse real increase in our already serious trade deficit.
Gold imports could rise significantly.
Yet gold imports are
already a costly component of our import bill.
As you can see
from the first chart attached to the copies you have of my
written presentation, U. S. consumption of gold has long sur
passed by far our domestic production.
Last y@ar, for example, U.S.
consumption was more than four times U. S. production, and the
trend of consumption was up while the trend of production -- even
at the new higher prices -- was down.
was about 6 million ounces«
The excess of consumption
Purchases of that amount from
foreigners again this year would cost us about $540 million at
the present price of gold.
If the regulations were rescinded
we might have to pay out a lot more, not only for additional
imports but in higher costs for our basic industrial needs as well.
6
Our trade position which now at last seems to be improving
could be knocked into reverse.
The real deterioration of
our trade position and the psychological impact of the
instability in the gold price could conceivably reinforce
each other to the extent of undermining the dollar and creating
new turmoil in international monetary affairs.
for sure this would happen.
need not and should not take.
I can't say
I can say it is a real risk we
Even if the risk is only one
out of twenty it should be taken seriously.
A return again
so soon after our recent experience to an international monetary
crisis could do more than just handicap the efforts of our
international traders and investors.
It could seriously
damage our effort to fight inflation at home.
It could
undermine our prestige and influence abroad to the extent
of damaging our national security.
In view of these dire possibilities I might well be asked
whether it would not be possible for us, after removing present
restrictions on private ownership, to sell enough gold from the
Treasury's present gold holdings to avoid any increase in price
and to avoid any increases in our gold imports in the near
future.
The answer, in a physical sense, is "Yes."
stock is probably
big enough for that purpose.
Our gold
Such an
operation would, however, bring with it disadvantages which I
sincerely hope you would find unacceptable.
In the first place the U. S. Government is now party to
an understanding with other major nations that sales of
official holdings of gold into the private market will not be
made.
That understanding was entered into in 1968 at the time
the so-called two-tier gold market system was established.
Yet
even if that obstacle were overcome would you wish to require
us to use our gold reserves for this purpose when the shape
of the future international monetary system is not clear?
Would you think it wise for us to take unilateral action when
major negotiations have begun -- with our strong encouragement -to seek widespread international agreement on a future cooperative
international monetary system?
That would hardly seem the way
to gain international cooperation in the future.
In those negotiations we have made clear that we believe
that the role of gold should be diminished; it should not have a
central role in the international monetary system.
negotiations are progressing.
Those
My boss, Paul Volcker, is off
this week discussing the subject with governments in Asia.
I returned late last night from several days of discussions
with the experts of the European governments.
We don't have
8
an agreement, but a good faith effort is underway to reach one.
I hope the Congress will not negate this effort by jumping the
gun.
My belief is that the wisest course would be for the Congress
not to legislate at this time either a removal of the restric=
tions on private ownership of gold or a requirement of gold
sales by the Treasury.
If the Congress should, nonetheless,
decide now to indicate that private ownership should be
permitted as the progress of reform and other developments
allows such action, then I would still strongly urge that the
timing of such action should be left for determination by the
President.
Yet even on that basis, Mr. Chairman, such legisla
tion would not advance our national interest.
The most helpful
thing the Congress could do would be to complete action promptly I
*
on the Par Value Modification Act to insure that long delay
does not give rise to unwarranted suspicions abroad as to
U. S. intentions.
Meanwhile, I can assure you that we are pushing vigorously
for international monetary reform and for improvement in our
trade position.
New legislation to change the rules on gold
at this time could only hamper these efforts.
Thank you.
oo 00 oo
.b. Gold Production
and Consumption
1968-1972
| Production
Deportment o f the Treasury
Office of Domestic Gold and Silver Operations
London Gold Prices
DepartmentoftheTREASUR
£$$
ASltlNGTON,
miWtONf>\M44<MVd
Secretary of the Treasury George P. Shultz announced that
President Nixon had accepted "with deepest regret" the
resignation of Samuel R. Pierce, Jr. as General Counsel of the
United States Treasury Department.
The President said that
he had "rendered truly outstanding service to the
Treasury and to the Nation", and that the "Administration
will greatly miss his talents".
Secretary Shultz said, "Judge Pierce has made a great
contribution to the Treasury and to this Country as a lawyer,
administrator, and advisor on legal and policy matters to three
Secretaries of the Treasury -- Secretaries Kennedy, Connatly and
me.
He will be hard to replace."
Judge Pierce was the first Black in history to* serve in
a subcabinet position in the Treasury, and as such, was one of
the highest ranking Blacks in the Nixon Administration.
Prior to joining the Treasury as its General Counsel on
July 1, 1970, Mr. Pierce had been a Judge of the Court of
General Sessions (now part of the New York State Supreme Court)
S-184
2
in New York City, and subsequent to that had been a partner in
the law firm of Battle, Fowler, Stokes & Kheel in the same
city.
Mr. Pierce will return as a partner to his former law
firm, which will be renamed Battle, Fowler, Lidstone, Jaffin,
Pierce & Kheel.
As chief law officer of the Treasury Department,
Judge Pierce headed its legal division, which consists of
over 900 lawyers, making it the second largest law office
in the United States.
Only the Department of Justice has
more attorneys.
Judge Pierce contributed significantly to two
of the Administration’s programs -- the Emergency Loan
Guarantee Program, under which the Federal Government
may guarantee bank loans of up to $250 million to
Lockheed Aircraft Corporation, and the Economic
Stabilization Program.
Pierce, who was one of the principal draftsmen of the
Emergency Loan Guarantee Act, assisted Secretary
John B, Connally in the presentation of this legislative
proposal to Congress, negotiated the loan guarantee
agreement for the United States with Lockheed Aircraft
Corporation and with the 24 banks involved, and served
as the Executive Director and General Counsel of the
Emergency Loan Guarantee Board, which is responsible for
administering the loan guarantee program.
Judge Pierce is also the originator of the "collateral pool
idea which was incorporated into the loan guarantee agreement0
Because of this security arrangement, there is virtually no
chance of the United States losing any money under the Lockheed
Loan Guarantee Program0
Before the enactment of the loan guarantee
legislation, the 24 banks had jointly loaned Lockheed
$400 million«.
The loan guarantee agreement provides that the
total loan by these banks to Lockheed —
their existing $400
million loan plus any additional loans of up to $250 million —
will be secured by a single collateral pool«.
This pool includes
all of the collateral the banks had as security for the $400
million they had already advanced to Lockheed, plus any
additional property that may be taken as security against the
new loans of up to $250 million«.
In case of bankruptcy, the
collateral would be used first to satisfy the portion of the
bank loan guaranteed by the Government0
As Lockheed has more
than enough assets in the collateral pool to secure fully the
$250 million that may be guaranteed by the Government, the
United States should not lose any money through its
participation in this program«
Prior to Phase I, and immediately thereafter, Judge Pierce
worked on a variety of important legal questions affecting the
operation of that phase of the Economic Stabilization Program«
j It t
- 4 -
A S B IN (
Subsequently, he was instrumental in drafting amendments to the
Economic Stabilization Act of 19700
That Act, as amended, was
the law under which Phase II operated, and is now the legal basis
for the operation of Phase III of the Economic Stabilization
Program»
During Phase II, Judge Pierce was delegated the responsibility
for reviewing and approving all rulings made by the Cost of
Living Council, the Pay Board, and the Price Commission before
they were published»
Since Phase III was initiated, he has
represented the Cost of Living Council as the principal speaker
at Regional Conferences held in Kansas City, Denver, and
New Orleans for the purpose of explaining Phase III to businessmen,
labor leaders and other interested members of the public»
oOo
of
theTREASURY
¡Department
IlNGTGN, D.D. 20220
TELEPHONE W04-2041
FOR RELEASE UPON DELIVERY
TESTIMONY BY THE HONORABLE WILLIAM E. SIMON
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON INTERIOR
AND INSULAR AFFAIRS
TUESDAY, MAY 1, 1973
-ty
sn,
Mr. Chairman and Members of the Committee:
I
am delighted to appear before you today to discuss
the recent changes in the Mandatory Oil Import Program
and their impact on our balance of payments.
In addition,
I would like to outline the President’s proposal for an
exploratory drilling investment tax credit which we feel
will serve as a positive incentive to increase our supply
of oil and gas.
Finally, I will discuss various proposals
for standby authority for allocating energy resources.
HISTORY OF OIL IMPORT PROGRAM
The Oil Import Program began on a voluntary basis in 1955
when substantial amounts of crude oil first began to be
produced in the Middle East.
The voluntary program failed and, in 1959, the Mandatory
Oil Import Program (MOIP) took its place.
Under the
Mandatory Oil Import Program, the Government was given the
S “185
-2
power to set import quotas for petroleum and petroleum
products in an effort to assure that domestic production
and, consequently, U. S. security would not be jeopardized.
The circumstances which gave rise to this oil import program
may be summarized as follows: (1) The Eastern Hemisphere,
especially the Middle East had an abundant and exportable
surplus of oil (2) This region was the source of the world's
cheapest crude (3) The region was marked by political turmoil
(4) As the principal economic resource of the region, oil
was likely to be intimately involved with the politics of
the exporting countries.
It was clear that, without some control on imports,
U. S. integrated oil companies would exploit cheaper foreign
reserves of crude oil despite the risk of disruption to
supply.
Excessive imports of cheap foreign oil, in turn,
could jeopardize the viability of our own domestic oil
industry.
Therefore, quotas were established and imports
were to be limited to 9 percent of U. S. consumption.
Under this system, the level of imports was determined
annually by the Government.
They were distributed to U. S .
oil companies under a statistical formula based largely on
their need for petroleum.
Since 1970, U. S. demand has exceeded U. S. production.
State prorationing has been all but suspended, thereby
permitting production at the wellhead at maximum efficient
rates.
Those refineries that can find sufficient crude are
-3
running at a near maximum capacity.
However, some
refineries, particularly the nonintegrated independents and
cooperatives, have been unable to find enough crude to
operate at full capacity.
To meet increasing U. S. demand,
it has been necessary to increase our imports substantially,
particularly imports from the Middle East.
Between 1969
and 1972, total oil imports rose by 52 percent to 4,685,000
barrels per day, while imports from the Middle East
increased by 83 percent to 573,000 barrels per day.
It became increasingly clear that the quota system could
no longer provide the proper climate to support a vigorous
domestic petroleum industry, which is essential to the
national security and the economic welfare of the Nation.
The program was adequate neither to alleviate the threat
of near-term crude oil and product shortages, nor to provide
longer-term incentives for increased investment in domestic
exploration and production and new refinery construction
and expansion.
The quota system was established at a time when domestic
production exceeded demand and it was founded on the premise
that it was necessary to restrict imports of cheap foreign
oil to encourage the domestic petroleum industry in the
interest of national security.
The conditions which gave
rise to this policy no longer•exist.
The quota system is
not so much a failure as it is obsolete.
-4
Further, the original purpose of quotas was to provide
reasonable self-sufficiency by encouraging the development
of domestic production and refining capacity.
This clearly
has not happened.
Instead, companies had incentives to explore and produce
abroad in order to benefit both from lower foreign producing
costs and the assurance of a large higher-priced market
at home.
Imports now account for 30 percent of production
and are expected to climb to 50 percent in a few years.
Lately, refinery capacity has also begun to move abroad.
Although other factors have contributed to this development,
including environmental restrictions which have blocked
refinery plant sitings, the uncertainties of the quota
system had a major adverse effect on long-range investments
for additional exploration and production in this country.
This uncertainty developed because:
1.
Import allocations were subject to annual realignment.
2.
The program was altered frequently, making it a
patchwork of special provisions and exceptions.
3.
General dissatisfaction with the program both in
industry and the Government fostered the expectation that
it would be abandoned shortly.
NEW IMPORT PROGRAM
Based on this assessment of the Mandatory Oil Import
Program, the President signed a Proclamation which terminated
n
3
-5
volumetric controls on oil imports, effective May 1, 1973.
In its place, he substituted a system of license fees on
imports of petroleum and petroleum products, and suspended
the existing duties on crude oil and refinery products.
In developing this program, the Administration recognized
the need to get the Federal Government out of the business
of regulating oil imports on a day-to-day basis, since the
Government does not have the ability to predict exactly what
import levels will be needed each year.
Our objective was
to design a program that would assure the oil industry
flexibility to import oil to satisfy the short-term needs
of U. S. refiners and consumers while, at the same time,
providing longer-term stability and additional incentives
for increased domestic exploration and production and new
refinery construction and expansion.
We knew that in designing this new program the special
provisions, exceptions, and subsidies in the MOIP would
have to be ended.
abruptly.
We realized that this could not be done
It would have to be done gradually to avoid
putting an unfair economic hardship on the numerous persons
and companies that together have invested many millions of
dollars in the domestic oil industry based on policies
under the MOIP.
We also realized that our new policy recommendations
would have to assure
consumer interests of reasonable
-6
prices and sufficient supplies without straining or
disrupting the complex mechanism known as the oil industry.
We knew that each segment of the industry must continue
to be viable in order to meet the supply needs of the
Nation both in the near and longer term.
The magnitude
of this task is obvious when you realize that the oil
industry is composed of companies that vary in size from
global to local and from integrated majors to independent
producers, refiners, marketers and jobbers.
We further recognized that our policy recommendations
would have to be compatible with other government policies
and programs, especially the Economic Stabilization Program.
We knew that to induce oil companies -- or for that
matter anyone -- to build new refineries and explore for more
oil in this country, the prices in this country of foreign
petroleum products would have to be higher than the prices
for domestic products.
Only in this situation would it be
more profitable to manufacture petroleum products here
rather than to manufacture them somewhere else and import
them into the United States.
There had to be clear advantages
to producing crude oil in this country.
Therefore, we set a license fee on imports of crude oil
and even higher license fees on imports of residual fuel oil,
distillates, gasoline, unfinished oils and other products.
Future changes in these fees are spelled out in advance so
-7
that the oil industry will have a reasonable degree of
certainty under which to make major new investments in
U. S. exploration and development and refinery construction.
Independent Refiners
Implementation of the new license fees on May 1, 1973
will give value to unused 1973 import licenses, providing
landlocked independent refiners with some additional
leverage to bargain for domestic "sweet" or low-sulfur
crude oil.
Under the old program, import tickets, in general, had
no exchange value because the landed prices of foreign
crudes -- especially "sweet” crudes -- are roughly equivalent
to or above domestic crude prices.
An increase in the value
of independents1 licenses by the differential of 10-1/2 cents
per barrel initially may help some independent refiners to
bargain for additional "sweet" crude supplies.
The ability
of the independent refiner to obtain license fee-exempt tickets
from the Oil Import Appeals Board may also enable him to
bargain more effectively for the major oil companies’ crude oil.
Still, the competitive position of the independent refiner
is far from assured.
Under the new license fee program, the exemption of 1973
allocations for all refiners will be phased out over 7 years.
The intent is to provide refiners both the time and the
incentive to adapt their refineries to run available "sour"
crudes or to develop or contract for adequate "sweet" crude
supplies for the long term.
-8
Additional Incentive for New
Refinery Construction and Expansion
Realizing the need for increased refinery capacity in
the United States, we provided an additional incentive
for new refinery construction or expansion.
Companies
building new refineries or expanding existing refineries
will be granted license fee-exempt allocations equal to 75
percent of their additional inputs for their first five years
of operation.
Independent Marketers and Jobbers
The new program also gives value to the 1973 import
allocations issued by the Oil Import Appeals Board to
independent marketers and jobbers, enhancing their ability
to bargain for products.
The OIAB will continue to hear
appeals from this sector of the industry to make certain
that no undue hardships occur as a result of tight product
supplies.
In the long run, the license fee program will
further benefit independent jobbers and marketers by
encouraging additional refinery capacity, thus making
products more readily accessible.
We know that the new program has not solved all of
the problems of the independent segment of the industry.
We did not intend that it would nor that it would be a
panacea for every segment of the industry.
There is no
way that the import program can create a barrel of oil.
-9
We have, however, tried to confront as many problems as
we could in an effort to help the independent segment
adjust to the new economics of the oil industry.
THE IMPACT OF THE NEW PROGRAM
The impact of the new program on oil prices is expected
to be gradual over the long-term and minimal in 1973.
Imports subject to the new license fees during 1973 are
expected to be such a small percentage of the Nation’s
total oil requirements as to have little, if any, impact
on consumer prices.
The Cost of Living Council has
advised us that there is adequate flexibility under the
current oil price controls to allow such price movements,
should they be necessary to meet the supply needs of the
Nation.
This new program has already begun to show desired
results.
Since April 18, a number of companies, including
Shell Oil Company, Ashland Oil Company, The Pittston Corp
oration, and Standard Oil of California, have announced
that they now plan to build or expand refineries in the
United States.
Others have indicated to us that they are
seriously considering building refineries here but have not
yet made their plans public.
In addition, several
independent marketers have stated their intention to develop
their own U. S. refinery capability, a necessary step if
the independent marketers are to become a viable entity in
the industry.
-10
THE BALANCE OF PAYMENTS IMPACT OF THE OIL IMPORT PROGRAM
I
would now like to touch briefly on the balance of
payments impact of the new Oil Import Program.
Our imports
of oil could grow from one-third to well over one-half of
production in coming years.
energy now comes from oil.
Forty-six percent of America’s
That figure will also grow
because alternative sources, such as coal, nuclear power,
and the more distant sources such as solar energy, geothermal
power, oil shale, and coal gasification, .cannot increase
fast enough to keep pace with our growing demand for energy.
The only available worldwide fuel which can expand as fast
as our energy needs during the remainder of this decade
is oil.
In the near future, most of that oil will have to
come from abroad.
Domestic demand for oil will increase from 18 million
barrels a day in 1973 to 21 million in 1975, 25 million
in 1980, and upwards of 30 million barrels a day by 1985.
Where will it come from?
The cost of importing oil will continue to increase.
However, several factors will help to offset the dollar
outflow.
American oil companies will continue to own or
market much of the free world’s oil production.
Some of
their profits from foreign investments will be repatriated.
Canada, Venezuela, Iran, Algeria, Libya, and Indonesia
have significant import needs and will undoubtedly use
most of their oil revenues to purchase goods from the U. S.
or third countries.
The Persian Gulf States of Saudi Arabia,
f
-11
Kuwait, Abu Dhabi and Qatar, however, are not expected to
increase their imports as rapidly as their exports.
The Department of Commerce estimates that the outflow
of dollars to pay for oil imports will generate U. S.
exports worth about $8.2 billion in 1980.
The Department
of Commerce also estimates that, in 1980, about $5.9 billion
will return to the United States in the form of repatriated
profits.
This, plus the $8.2 billion in exports, will
partially offset the $17 billion addition to foreign
exchange outlays required by increased imports of foreign
oil in 1980.
Prices of foreign crude oil have gone up
considerably since the 1970 agreements between the producing
countries and the oil companies, and we can expect that they
will continue to rise as U. S. dependence on foreign oil
increases.
The overall impact on the balance of payments of relying
on imported oil will be still greater.
The size of this
impact will also depend upon how much U. S. capital will
flow into overseas oil exploration, development, and refinery
construction.
The Chase Manhattan Bank estimates that
capital and exploration expenditures overseas by the world
petroleum industry in the 15 years from 1970 to 1985 will
total about $360 billion dollars.
The extent of this
investment that is made by the United States, will have a
major bearing on what happens to the U. S. foreign exchange
position.
- 12
The income of the oil-producing countries will increase
dramatically during the balance of the 1970’s.
The
cumulative income of Arab oil exporters from 1973 to 1980,
alone, will probably exceed $210 billion.
These countries'
imports are much less likely to expand at a rate comparable
to the rise in their incomes.
What will be done with the
added foreign exchange holdings of these countries will be
of crucial importance to the United States and to the world.
These holdings could disrupt current efforts to create a
stable world monetary system.
Fortunately, the oil-producing countries have been
participating fully in discussions on international monetary
reform.
It is to be expected that, in determining the
use of their oil income, they will be motivated primarily
by investment opportunities that pay the highest return.
The United States offers a number of opportunities for high
yield investments in this industry.
Some producing countries have already expressed their
willingness to invest in the U. S. oil industry.
Other
possibilities might include their participating in large
investment projects elsewhere, such as the exploitation
of the Siberian oil and gas fields, which might also help
to meet the energy needs of the United States.
Since the
ability of most Middle Eastern governments to develop and
provide adequate supervision for large-scale investment
projects is limited, assistance by the U. S. and other
-13
n
governments may be necessary if the oil producers are
to commit funds to these projects.
The President’s energy message serves as a blueprint
for needed action.
The new import program will help to
alleviate the short-term need for gasoline this summer
and for fuel oil next winter.
Equally important, however,
it is structured so that it will, in the long run, create
a vigorous domestic petroleum industry with less dependence
on foreign supplies.
This, in the end, is the best way
to preserve our balance of payments.
EXPLORATORY DRILLING INVESTMENT CREDIT
In a further effort to provide an incentive for increased
domestic drilling for both oil and gas, the President has
proposed an investment tax credit for exploratory drilling.
Despite higher demand, exploratory drilling for oil and
gas has declined substantially since 1966.
This is partly a
result of the lack of price and tax incentives for new
drilling and partly because the costs of drilling a well have
nearly doubled during the past 10 years.
We have already
exploited the economically most desirable oil properties
and now have to develop areas that are remote and
more expensive.
Often, wells must be drilled deeper and
precautions must be taken to meet more rigid environmental
and safety standards.
Consequently, costs are much higher.
For example, the average cost of drilling a well in the
-14
outer continental shelf is $500,000 or more; in Alaska, up
to $2 million; and in the inland United States, $100,000
or more.
The cost
of the cost
of drilling in the Middle East is a fraction|
of drilling in the United States.
We are proposing that the Congress amend the Internal
Revenue Act to allow a 7 percent investment credit on
intangible drilling costs for new domestic exploratory wells.
Furthermore, for a well which proves economically productive,
we propose allowing a supplementary 5 percent credit against
the first tax payable on the net income from production.
Thus, the credit is structured to reward success.
We are also proposing necessary safeguards to insure
that this provision will result in the drilling of new holes.
For example, to receive the credit, the wells must be
completed and be at least two statute miles from the
nearest well.
If passed by the Congress, we propose that the credit
would be effective with respect to all drilling after
April 17, 1973.
We expect that the loss in revenues from
the exploratory drilling credit for the first full year
will be about $60 million.
However, this is a good trade
as far as the Nation is concerned.
Once these wells are
producing, we will get back far more in taxes than the tax
revenues that are foregone in the near term.
Moreover, the
national benefits will include increased yields of oil and
gas which will be extremely important to our balance of
/f
-15
payments, to the independent refiners, some of which are
desperately short of crude, and to the American consumer
who is faced with deepening shortages of both energy sources.
Furthermore, the decreased dependence on foreign sources
will represent a national security benefit of major proportions.
EMERGENCY ENERGY ALLOCATION
I
was very interested to read the text of the Emergency
Fuels and Energy Allocation Act, proposed by Senator
Jackson.
As I understand it, this is an expansion of
the proposal presented in the Eagleton Amendment to the
Economic Stabilization Act.
We have been giving increasing
attention to the possible need for allocation of supplies
of petroleum products to refineries and marketers in the
event of serious shortages.
The American petroleum industry is among the most
sophisticated and highly developed industries in the country.
It is intensely competitive, with a large number of major
companies and hundreds of independent refiners, jobbers,
and marketers.
It is constantly developing new techniques
in exploration, drilling, transportation, and marketing.
In the past, it has always successfully met the challenges
of the marketplace.
We concur completely with Senator Jackson's desire
to ensure equitable distribution of fuels both at the
wholesale and retail level.
We do not believe that direct
government control of fuel distribution is desirable
-16
and we hope that we will never have to implement an
allocation or formal consumer rationing system.
We do believe that the scope of Senator Jackson’s
proposed legislation, including all forms of energy, is
too broad, thus reducing its practical implementation.
Petroleum products are our major immediate problem.
Even if we need more coal or natural gas, substantial
quantities of these fuels cannot be produced immediately.
Thus, there is little, if any, need to provide additional
controls on these fuels.
In the short term, only petroleum
products and, specifically, imported petroleum products,
can meet our needs.
The Federal Power Commission has authority over the
distribution of natural gas supplies, and through curtailment
proceedings has taken necessary actions.
The state
regulatory commissions largely control electric power;
Federal allocation only moves control one level further
away, thus complicating distribution patterns.
aware of shortages of coal.
I am not
I wish we could resolve
environmental problems to provide for increased production
and utilization of this, our most abundant fossil fuel.
We believe that problems which could conceivably be
remedied by national allocation or rationing programs are
limited, at least for the foreseeable future, to crude oil
and petroleum products.
While we have reservations about
-17
Federal intervention in the distribution of petroleum
fuels, we are even more fearful of the consequences
of allocating other forms of energy.
The other fuels
present different problems, less severe problems, problems
which can best be met by existing state and Federal authority.
While there may be shortages of domestic crude and
refining capacity, these shortages are temporary.
I have
every confidence that the improvements we have made in
the Mandatory Oil Import Program will result in increasing
domestic production and refining, and I would not want
the Government to take any step which would discourage
private initiative in these fields.
Nevertheless, there have been several developments in
the industry which have disturbed me.
In the first place, mid-Continent areas are served
primarily by pipeline from the Gulf and from producing
fields.
Some independent refiners in this area are now
being denied crude oil.
Other areas are served by terminal
facilities and refineries which are suited only for
low-sulfur crude.
products.
This has resulted in shortages of
Some farmers are unable to obtain diesel fuel,
propane, and butane.
We have seen spot shortages of
gasoline in some areas, and fuel oil shortages in others.
In some cases, airports have not had enough jet fuel.
So far, the Nation has survived these shortages.
As I look toward the future, however, I am worried that
they may get worse before they get better.
Within the
next few years, I am very hopeful that our refinery
capacity and our ability to handle and purify high-sulfur
fuels will be greatly increased.
I am also hopeful that
we will build deepwater ports and more adequate storage
facilities to handle imports.
But, all these things are
in the future, and we must face the situation which will
exist between now and 1978, when many of these new
investments will be coming on-stream.
During this period, therefore, I think we may find
ourselves in a situation in which we may need to make
decisions on priorities.
We cannot afford to let crops
go unplanted or unharvested for lack of diesel.
We cannot
let our vital industries close down. We cannot
endanger
public health or safety, and finally, we should
not let
the independent segment of the industry be forced to shut d
I would prefer to work, as we have done up to now,
through incentives.
It is better to encourage the major
oil companies to do what we want themto do by their own
choice, rather than try
to force them
to
do it,perhaps
at the expense of the other objectives we hope to achieve
by improvements in the oil import program.
J
-
6
-
Yet, standby authority for allocations might well be
useful.
At the least, it may help to encourage voluntary
compliance by the major oil companies.
If the Congress were to provide Presidential authority
now, in the event that allocation or rationing programs
become necessary, we prefer the specific authority for
petroleum and petroleum products provided for in Senator
Eagleton’s amendment to the Economic Stabilization Act.
In any event, I would not hesitate to exercise this
authority if the hardships outlined above were to occur.
However, I would want to look closely at the impact of
this authority on the economic incentives we have created
for new investment in the industry.
I think we all have
seen from the experience in the Mandatory Oil Import Program
that continued use of allocations, rather than the
marketplace, can produce results completely opposed to
our basic national purposes.
Thank you.
Secretary Shultz announced today that the Federal
Budget will show substantially smaller deficits for
fiscal years 1973 and 1974 than previously expected.
With tax receipts rising, primarily because of the strong
uptrend in the economy, and with expenditures under firm
control, the deficit this year is now estimated at $19,8
billion and the estimate for the 1974 budget is now put
at $5.7 billion.
These deficits are, respectively,
$5 billion and $7 billion less than projected in the
January budget message.
"This improved budget picture", the Secretary said,
"is a further indication of the firm fiscal policy that
President Nixon is exercising in order to hold down
inflationary pressures."
Because the economy is expanding vigorously, personal
incomes and corporate profits are on a strong upward trend.
As a result, the flow of tax payments into the Treasury
is exceeding earlier estimates.
In addition, estate and
gift taxes and other Treasury receipts are above forecasts.
At the same time, Federal spending is being kept under
S-186
2
strict control.
Total expenditures should hold to the
levels previously budgeted —
$249.8 billion for fiscal
1973 and $268.7 billion for fiscal 1974.
Detailed estimates are shown in the tables below.
Revised Budget Estimates
($ billions)
Fiscal Year 1973
Budget receipts
Budget outlavs
Deficit■ (-)
230.0
249.8
-19.8
Fiscal Year 197 4
|nd
Cpr
Emp
1 ^
ine:
Cpn
1 ^
263.0
268.7
-5.7
Ept
May 1 , 1973
Cus
MiS'
Ek c
Comparison of Current Estimates of Budget Receipts
and Outlays with the January Budget Estimate
____
($ billions)
_________ I
____Fiscal Year 1973____ :
Fiscal Year 1974
I
:Current :January:
Current ’January:
____________
:estimate :budget :Change :estimate :budget :ChangeI
,„ „ Cori
Budget receipts
230.0
225.0
+5.0
263.0
256.0
¡Emp]
Budget outlays
249.8
249.8
—
268.7
268.7
Deficit (-)
”19.8
-24.8
+5.0
“5.7
-12.7
+7. hjnein
--------- —
-------------------------------- -------- May 'ITU
;Exci
¡Este
Cust
¡Mise
At
- 3 Estimated Unified Budget Receipts
Fiscal Year 1973
($ billions)
z
Fiscal Year Receipts
January :
Change from
1973 :
January 1973 budget
:Current
: budget: Economic :Re-estimate :Total :estimate
Individual income tax
Corporation income tax
Employment taxes and
I contributions
Unemployment insurance
Contributions for other
I insurance and retirement
Excise taxes
Estate and gift taxes
Customs duties
Miscellaneous receipts
Total budget receipts
99.4
33.5
+ 0.4
+1.4
+1.6
+ 0.6
+ 2.0
+ 2.0
101.4
35.5
55.6
5.3
—
—
—
+ 0.4
—
+ 0.4
55.6
5.7
—
—
—
—
—
+ 0.4
+ 0.2
-0.1
—
—
+ 0.4
+ 0.2
-0.1
3.7
16.0
5.0
3.2
3.9
+1.8
+3.2
+ 5.0
230.0
3.7
16.0
4.6
3.0
4.0
225.0
—
Fiscal Year 1974
($ billions)
Individual income tax
Corporation income tax
Employment taxes
■ and contributions
Unemployment insurance
Contributions for other
■ insurance and retirement
Excist taxes
Htate and gift taxes
Customs duties
Miscellaneous receipts
Total budget receipts
111.6
37.0
+ 3.7
+ 2.8
__—Æ
+ 0.2
+ 3.7
+ 3.0
115.3
40.0
67.9
6.3
—
————
—
7-0.1
__ __
-0.1
67.9
6.2
4.0
16.8
5.0
3.3
4.1
__ _
___
—
—
.......
....
+ 0.4
+ 0.2
-0.2
....
....
+ 0.4
+ 0.2
-0.2
4.0
16.8
5.4
3.5
3.9
256.0
+ 6.5
+ 0.5
+ 7.0
263.0
May 1, 1973
■te: Figures are rounded and will not necessarily
add to totals.
May 1, 1973
ATTENTION : FINANCIAL EDITOR
FOR RELEASE AT 6:30 P.M., EDST
RESULTS OF TREASURY NOTE AUCTION
The Treasury has accepted $2.0 billion of the $3.2 billion of tenders
received for its new 7-year 6-7/8/ notes auctioned today. The range of
accepted competitive bids was as follows:
Price
High
Low
Average
100.10 1/
99.05
99.29
Approximate Yield
6 . 86 /
7.05 <f>
7.0 i/o
1/ Excepting two tenders totaling $325,000
The $2.0 billion of accepted tenders includes 8/ of the amount of
notes bid for at the low price, and $0.3 billion of noncompetitive tenders
accepted at the average price.
In addition $5.2 billion of the notes were allotted to Federal Reserve
Banks and Government accounts at the average price, in exchange for notes
maturing May 15.
¡ASHINGTON, D.C. 20220
TELEPHONE WQ4-2041
EMBARGOED FOR RELEASE UNTIL
1:00 P.M. EDT, MAY 2, 1973
TESTIMONY BY THE HONORABLE WILLIAM E. SIMON
DEPUTY SECRETARY OF THE TREASURY BEFORE
SUBCOMMITTEE ON CONSUMER ECONOMICS
OF THE JOINT ECONOMIC COMMITTEE
WEDNESDAY, MAY 2, 1973, 1:00 P.M. E.D.T.
Mr. Chairman and Members of the Committee:
I am delighted to appear before you today to discuss
the outlook for the supply and price of gasoline.
There
is a widespread concern that prices are going up and that
many gasoline stations are going out of business because
supplies are short.
Let me outline the scope of the
problem and the potential solutions that we see.
The Growth of Demand for Gasoline
Demand for gasoline in the United States has been
growing faster in the past several years than at any other
time in recent history.
Since 1968, gasoline demand has
risen at an annual rate of about 5 percent.
During the
past 2 years the rate of increase has been about 6 percent
per year.
Part of this rise in demand can be explained by
growth in the population, growth in the economy, and the
increasing number of cars on the road.
S-187
-2
But demand has also risen significantly because of the
many power-using devices added to cars.
These include
automatic transmissions, air conditioning, various safety
features, and the changes made in automobiles since 1970 in
compliance with EPA regulations issued under the mandate
of the Clean Air Act.
Producers' compliance with these
regulations has led to substantially reduced engine
efficiency.
As more vehicles come on the road equipped
with safety, emission control and physical comfort
devices, average mileage per gallon will decrease further.
An automobile that once got 14 miles per gallon, now gets
8 or 9 miles, and it may get only 6 or 7 miles per gallon
if present trends continue.
Because new automobiles are not getting the
gasoline mileage obtained by their counterparts 5 and 10
years ago, and because we are driving more, gasoline
consumption has risen.
We are using 300,000 barrels per day
more of gasoline this year than last year.
Failure to Build Refineries
While gasoline demand has been growing at about 6
percent per year, the volume of crude oil processed by
refiners has risen only 3 percent per year.
We are now extremely
short of refinery capacity and, at the time of the President's
energy message, which announced the new oil import program, no
-35
new refineries were under construction.
Furthermore,
expansion of existing refineries had ceased.
Growth in the
capacity of the industry had come to an end because the
industry found that it was more profitable to invest abroad
than in the United States.
One reason for this is that it has become increasingly
difficult to find acceptable sites for new refineries in
this country.
Because of resistance to refinery siting, it may
take three years to obtain site approvals today, in addition
to the three years required for construction.
Yet, modern
refineries can be designed so that they do not significantly
pollute the environment.
In this regard, let me mention a
recent trip by Senator McIntyre and Representative Conte to
inspect a new refinery in the State of Washington.
Both were
amazed by the cleanliness of this refinery and, as
Representative Conte put it, one had to ask whether the
refinery was operating to learn that it was, in fact, operating
at full capacity.
Another reason why the industry has located new refineries
abroad is that United States oil import restrictions, in
the past, created uncertainty as to whether new domestic
refineries could obtain sufficient imported supplies of
-4-
crude oil.
As long as the Government set import quotas on
a year-to-year and, in some cases, on a month-to-month basis,
no company was assured of the stability of supply necessary
to encourage domestic refinery construction.
This impediment
ended on April 18 when we terminated volumetric quotas on
oil imports.
Finally, the tax and other economic benefits available
to refiners in the Caribbean and in Canada have been more
lucrative than similar provisions available in the United
States.
For all these reasons, U.S. refinery construction
has been standing still while United States demand for refinery
products has been growing.
To meet the growing demand for gasoline, refiners have
been changing their mix of products to increase their yield
of gasoline.
The average yield of gasoline per barrel of
crude oil rose from 43.8 percent in 1968 to 46.9 percent in
1972.
This means, of course, that the yield of other products,
such as fuel oil, has been reduced.
expedient at best.
It is also a short-term
Whatever the product mix, it will be
necessary to increase substantially our overall imports of
refinery products to avert both a gasoline shortage this
summer and a fuel oil shortage next winter.
Our growing lack of refinery products was driven home
to the public late in 1972 with shortages of distillates and
other heating fuels in various parts of the country.
-5-
Refineries had to increase their percentage of distillate
production and, correspondingly, reduce gasoline production.
As a result, we are now coming into the summer season with
low gasoline stocks.
As of April 20, we had only 204 million
barrels of gasoline in storage.
This is down 10 percent from
last year, while demand is up 6 percent.
Furthermore, domestic
production, even today, is not keeping pace with demand.
We
are using, on average, 47 million barrels of gasoline weekly,
and producing only 43 million barrels.
For this reason, we
are faced with the prospect of serious limitations on
gasoline supply.
Let me point out some of the implications of the
potential gasoline shortage.
In the first place, it will
tend to be concentrated in certain geographic areas and
will impact on some consumers more than on others.
Some
areas of the country close to pipelines and refineries and
served by the retail outlets of the major oil companies will
not feel the pinch as much as others.
Other areas, relatively
distant from pipelines and not well-served by the major oil
companies, may feel it rather sharply.
Recognizing the serious! nature of the gasoline and fuel
oil shortage, and that there are regional differences in
the intensity of the problem, we have established 6 regional
subgroups of the Oil Policy Committee, of which I am Chairman.
These groups consist of representatives of the independent
-
6-
segment of the industry serving particular areas of the
country.
We are meeting with these groups to identify
regional problems and to deal expeditiously with them.
These
meetings are helping us to maintain flexibility in the
administration of the new oil import program and to be
responsive to the special problems of particular areas of
the country.
The Problems of the Independent Oil Companies
We are greatly concerned about the independent companies.
The independent segment of the oil industry —
refiners and the independent marketers —
but distinct problems.
the independent
are faced with related
The refiners face crude oil shortages;
the marketers, gasoline shortages.
Most major integrated oil
companies will be able to make their own internal allocations
and will not run out of crude and gasoline supplies.
Until the early 1970's, we had surplus crude oil
production capacity in the United States.
This enabled
independent refiners to buy crude oil and build refineries
to supply, among others, independent jobbers, marketers,
and other wholesale customers.
There was also a surplus
of gasoline and other products being produced by the major
oil companies.
Independent marketers took advantage of
this surplus and opened thousands of gasoline stations to
sell gasoline purchased in the spot market.
By efficient
7
servicing of consumers, these marketers were able to sell
gasoline for a few cents a gallon less than the major oil
companies.
I believe that these independents had a healthy
influence on the petroleum industry by giving consumers a
greater choice between price and service.
They made it
possible for consumers to buy gasoline at lower prices.
The gasoline shortage has hit these independents hardest.
In the first place, independent refineries can no longer get
adequate supplies of crude oil.
They used to obtain domestic
crude oil by exchanging their import licenses with the major
oil companies.
The major companies used the import licenses
to import cheaper foreign crude for their own use, while
providing the independent refiners with domestic crude oil.
In addition, the so-called "Sliding Scale" method of
allocating import licenses under the old system gave smaller
refineries more than a proportionate share of the licenses.
All this has changed during the last two years.
Quoted
prices of foreign crude oil are now equal to or higher than
prices of American crude sold in the same markets.
a worldwide shortage of low-sulfur or "sweet" crude.
There is
As a
result, major oil companies have had no economic incentive to
trade their domestic sweet crude production for imported crude
obtained by means of independents' import tickets.
The majors now
need all the low-sulfur crude they can get for their own
refineries.
In some cases they must utilize low-sulfur crude
-8
because of local air quality standards, even though their
plants are designed for refining high-sulfur crude.
Consequently, the major companies are terminating long-standing
arrangements to supply independent refineries.
For all these
reasons, the independent refineries cannot get the crude oil
they need and are operating at less than full capacity.
^dependent gasoline marketers are also in a difficult
position.
The wholesale market for gasoline is drying up.
Many of the independents find it impossible to purchase
gasoline wholesale. ‘ Hundreds of independent gasoline
stations across the country are closing down.
Those that
can obtain gasoline abroad, find it available only at much
higher prices.
This hurts them competitively, since their
main selling point irith the public is that they can
underprice the major oil companies.
The problems of the independent segment of the industry
were given considerable attention in designing the new
oil import program.
Indeed, had it not been for the
independents, the changes in the program might have been
announced much sooner than they were.
Our basic objective
was to balance the need to preserve the independent segment
of the petroleum industry with the desire to create a vigorous
domestic industry through incentives for construction of
new refineries in the United States and for exploration for
new reserves of crude oil.
We also wanted to eliminate
the many exceptions built into the old import program
and to assure a reasonable stability of prices.
We know that the new program has not solved all of
the problems of the independent segment of the industry.
We did not intend that it would, nor that it would be a
panacea for every interest group.
There is no way that
the the import program can create a barrel of oil.
We have,
however, tried to confront as many problems as we could
in an effort to help the independent segment as much as
possible to adjust to the new economics of the oil industry.
Perhaps the major benefit of the new program is the
flexibility that it provides to importers.
Marketers will
be able to shop for supplies of oil anywhere in the world.
They will no longer be dependent entirely on their
traditional sources of supply.
Moreover, through the
availability of fee-exempt licenses issued by the Oil
Import Appeals Board, independent marketers should have
access to products at lower cost than their major competitors
for the remainder of this decade.
This should provide the
time required by the independent marketers to make the changes
necessary to protect their market position.
Another benefit of the new program is the incentive it
creates for additional output.
The independent marketers have
depended for their economic well-being on the excess refinery
capacity of the major oil companies.
Excess refinery capacity
no longer exists, largely because we, as a Nation, have dis
couraged refinery expansion and construction.
The greatest
hope for the independent marketers, in the long run, will be
the incentives provided both independent and major refiners
to produce additional supplies of crude oil and products.
This, in the end, is the only real solution to the problems
the independent marketers now face.
The Effect of the New Import Proqram
on the Independent Oil Companies
Let me discuss at greater length some of the steps we
have taken to protect the independents.
In the past, the Oil
Import Appeals Board (OIAB) would not distribute import licenses I
in cases of hardships until September.
These licenses were, by
and large, distributed to the independent refiners and marketers.!
Early this year, the OIAB began to allocate tickets immediately
upon application.
tion.
It had soon disbursed its entire 1973 alloca- I
Then, on March 23, 1973, the President issued a Proclama' I
tion granting unlimited allocations to the Oil Import Appeals
Board in an effort to make more crude oil and product available
to both the independents and the Nation.
Finally, on April 18,
in another Proclamation, the President removed volumetric controls!
altogether.
11
The new program does several things to strengthen the
short-term position of the independent refiners and marketers,
enabling them to establish themselves on a more enduring basis.
II
Outstanding import licenses will be honored free
of license fee.
Since the independents hold a large share
of these licenses because of the sliding scale and past OIAB
allocations, this provides value to their tickets where none
existed previously.
Independent marketers will be able to
import oil at lower cost than the majors.
As a result, the
majors should now have greater incentive to trade with the
independents.
2.
To provide greater value to the independents'
tickets, we have suspended existing tariffs.
Had we not
done this, the independents' ticket value would have been
lower.
The only other way to create value under the new
program was to have the consumer pay substantially higher
prices.
3.
The Oil Import Appeals Board has been given the
specific responsibility for helping the independent refiners
and marketers by issuing fee-exempt tickets.
Major oil
companies may also appeal to the Oil Import Appeals Board,
but they must demonstrate their inability to obtain import
licenses by exchanging with independents or their willingness
to supply established independent marketers and refiners with
the same proportion of crude oil or products supplied in 1972.
12
4.
The government has begun to allocate its "royalty
oil" to independent refineries in need.
Under the terms of
relatively recent lease sales, the government can collect
some of its royalties in cash or in a share of the oil
produced on lease lands.
In choosing the latter, it is, in
effect, diverting crude oil from the major to the independent
refineries.
To date, about 60,000 barrels per day have been
allocated in this manner to the independents.
There is a
possibility for an additional sharing of royalty oil of up
to 140,000 barrels per day under this program.
Solutions to the Gasoline Shortage
We have encouraged domestic refineries to shift their
proportions to maximize gasoline yield.
This will help in
the short run.
What about the long run?
What is being done to solve
the gasoline shortage for the rest of this decade?
1.
We have established a license fee program for crude
oil and product imports.
This program removes all volumetric
quotas on gasoline and allows free importation subject to a
fee of 63 cents a barrel or 1-1/2 cents per gallon after 2-1/2
years.
This is a long-run system which is designed to spur
the construction of refineries in the United States.
It does
this by removing obstacles to acquiring an assured supply of
crude oil and by instituting a price differential between crude
and products sufficient to guarantee an adequate profit from
domestic refining.
I am happy to report that, since the
13
President's energy Message on April 18, a number of companies,
including Shell, Ashland, The Pittston Corporation and Standard
Oil of California have announced that they now plan to build
or expand refineries in the United States as long as sites
are available.
Others have indicated to us that they are
seriously considering building refineries here but have not
yet made their plans public.
In addition, several independent
marketers have stated their intention to develop their own
U. S. refinery capability, a necessary step if the independent
marketers are to become a fully viable entity in the industry.
2.
We are also taking actions to solve the domestic
crude oil shortage by a proposal we are making to the Congress
for an exploratory drilling investment credit.
This gives a
7 percent tax credit for new drilling, plus a supplementary
credit of 5 percent for successful wells.
We are confident
that this program, if enacted by the Congress, will stimulate
crude oil production and have a significant impact on gasoline
supplies.
Production from new refineries and increased domestic
crude oil output is at least 3 years away.
During this time,
the pressure on gasoline prices will be greatest.
This brings
me back to our basic concern today? gasoline prices and what
will happen to them.
-14
Gasoline Prices
Gasoline prices are controlled by the Cost of Living
Council.
The oil companies have had an incentive under the
economic stabilization program to curtail their wholesale
distribution in favor of retail sales.
This is one reason
why independent oil marketers and fleet purchasers have been
hardest hit by the oil shortages.
Energy conservation can play an important role in
stretching gasoline supplies.
To this end, we will need
the cooperation of the government, industry, and the public.
For example, the public is being encouraged to minimize its use
of automobiles this summer.
According to the Automobile
Manufacturers Association, about 56 percent of the cars on the
road contain only the driver.
This underutilization of cars
can be reduced in many cases, especially in metropolitan
areas.
Car pools and public transportation should be
substituted, where possible, for single occupant cars.
Use
of smaller cars, with better gasoline mileage performance,
is another measure the public might take to conserve gasoline.
Other measures include reducing the use of the automobile
air conditioner, keeping tires properly inflated, cutting
off motors when stalled in traffic, and avoiding excessive
speeds on the highway.
Some have expressed concern that the price of gasoline
will rise to astronomical levels.
This concern is unfounded.
-15
There has been a substantial rise in foreign crude oil prices
in the last three years, and we will probably experience
additional price increases in the future.
But crude oil
costs account for only a small fraction of gasoline prices.
For instance, if the crude oil price were doubled, this
would increase the price of gasoline by only 8 cents a gallon.
One of the largest components of the price of gasoline
is represented by federal and state taxes.
The breakdown in
the retail price of a gallon of gasoline costing 39 cents is as
follows: crude oil - 8.1 cents? transportation to refinery
and refining - 5.3 cents? wholesaling and retailing - 13.9 cents?
state taxes - 7.7 cents? and federal tax - 4 cents.
It is interesting to note that in England, the retail
price of regular gas is 64-1/2 cents a gallon? in Germany 79-1/3
cents? in France 91.1/2 cents? and, in Italy, a dollar.
With
prices like these, it is no wonder that European drivers
prefer smaller cars.
Why are European gasoline prices so high?
The answer is primarily the higher taxes paid by motorists in
these countries.
In Europe, taxes account for up to 75 percent
of the retail price.
By comparison, taxes represent only 30
percent of the price in the United States.
Gasoline prices will probably increase over time.
This
would provide certain benefits to the nation's refiners and
I.
It will help to save some independent gasoline
dealers and refiners who are otherwise going
to go out of business.
-16
2.
It will encourage Americans to conserve
gasoline.
3.
It would also help to provide the economic
incentives needed to speed up the construction
and expansion of badly needed domestic
refinery capacity.
Allocation Authority
Many groups are now suggesting that we need allocation
authority, and the Administration has given this a great
deal of thought.
The Economic Stabilization Act authorizes
this authority for petroleum and petroleum products.
I am basically opposed, as I am sure are most of the
members of this Committee, to the needless injection of
government regulation and control into any industry, particularly
where there is every evidence of intense and healthy competition.
I do not want to take any step which would discourage private
initiative.
At the same time, in the short-run, I think we may
in 9- situation in which we may need to make decisions
on priorities.
We cannot afford to let crops go unplanted
or unharvested for lack of diesel fuel for our tractors.
We cannot let our vital industries close down.
endanger public health or safety.
We cannot
And, finally, we should
not let the independent segment of the oil industry, which
provides competition in the marketplace, be forced to shut down.
DepartmentoftheTREASURY
WASHINGTON. D C. 20220 ,•
TELEPHONE W04-2041J
ATTENTION: FINANCIAL EDITOR
FOR RELEASE AT 6:30 P.M,, EDST
May 2, 1973
RESULTS OF TREASURY BOND AUCTION
The Treasury has accepted $650 million of the
$1,239 million of tenders received for its new 7%
25-year bonds auctioned today. The lowest price
accepted was 98.75, which is the price to be paid
by all successful bidders. This price results in
a yield of about 7.11% (to the maturity date of
May 15, 1998).
Tenders at the price of 98.75 were allotted
38%. Tenders above that price were allotted in full.
The amount accepted includes $22 million of non
competitive tenders which were awarded at the same
price as competitive tenders.
In addition to the $650 million, $40 million
of the bonds were allotted to Federal Reserve Banks
and Government accounts, in exchange for notes maturing
May 15, at the price at which other tenders were accepted
I DepartmentaltheTREASURY
WASHINGTON, D C. 20220
|
TELEPHONE W04-2041
FOR RELEASE ON DELIVERY
DEPARTMENT OF THE TREASURY
INTRODUCTORY STATEMENT OF GEORGE P. SHULTZ
SECRETARY OF THE TREASURY
FOR PRESENTATION TO THE SUBCOMMITTEES
ON APPROPRIATIONS
WEDNESDAY, MAY 3, 1973 AT 10:00 A.M.
Mr. Chairman and Members of the Committee:
I welcome this opportunity to appear before you
in support of the budget estimates of the Treasury
Department.
We deeply appreciate the assistance
that you have given the Department during the past
year.
I would also like to commend you, Mr. Chairman,
for the highly constructive hearings which you recently
completed regarding the problems encountered by the
Internal Revenue Service in administering the taxpayer
jj3 M D H l i l t | tffj
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assistance and compliance programs.
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■
First, I would like to present my associates:
Mr. Edward L. Morgan, Assistance Secretary for
Enforcement, Tariff and Trade Affairs, and Operations;
Mr. Warren F. Brecht, Assistant Secretary for
Administration; and Mr. Edward J. Widmayer, the
Departmental Budget Officer.
Under the customary
procedure, I have for the record biographical sketches
of the witnesses who are making their first appearance
before this Committee.
S - 188
2
This budget reflects our comprehensive efforts
to screen and hold down budget expenditures while
at the same time recognizing that the growth of the
Nation -- both in population and in the economy -presents almost irresistible requirements for additional
Treasury services.
Each year the Nation’s growth adds
greater numbers of taxpayers and a greater number of
higher income and more complex returns, increased
numbers of travelers cross our borders, and we ex
perience new volumes and varieties of imports.
All
of these must be dealt with promptly and equitably
in accordance with the laws.
In addition, there is
more business activity requiring more currency, coins,
and stamps.
Unfortunately, too, there are more
counterfeiters, forgers, smugglers, tax evaders, and
other law violators.
The Social Security Amendments
of 1972, which provide for additional Federal Assistance
to the aged, blind, and disabled, place correspondingly
greater requirements on the Treasury for significant
increased volumes of check issues, check payments,
and securities transactions.
This budget has been
carefully designed and balanced to meet these increas
ing mandatory workloads and at the same time to
provide much needed strengthening to the revenue
operations of both the Internal Revenue Service and
Customs.
3
Fiscal Year 1974
The appropriation request for the regular annual
operating appropriations of the Department is $1,776
billion - $79.2 million above the authorized level
for 1973.
I have for the record our usual table showing in
detail the derivation of the ’’proposed authorized
level for 1973" (Table 1).
I also have a table
comparing the fiscal year 1974 request for each
appropriation with the 1973 authorized level (Table 2),
and a table showing "man-year” or average position
requirements (Table 3).
Fiscal Year 1974 Increases
Most of the budget year increases are for the
Internal Revenue Service, the Bureau of Customs, the
Fiscal Service Bureaus, and for construction of the
Federal Law Enforcement Training Center.
Internal Revenue Service
The budget request for the Internal Revenue
Service is $1,189 billion.
Requested increases of
$104 million are substantially offset by non-recurring
costs - chiefly the Economic Stablization Program -
4
leaving a net proposed increase of $41.8 million
over the 1973 level.
New funds are needed for IRS’s
frontline programs which will provide taxpayer
assistance in the preparation and filing of their
returns and strive to achieve greater compliance
with tax laws by strengthening the audit activity.
The increased workload for the processing of 2-1/2
million additional tax returns, 117 million in all,
is expected to be met solely through increased
productivity.
As part of the effort to increase the availability
and responsiveness of
IRS to taxpayers’ needs, we
plan for the extension nationwide of Centiphone (a
system providing taxpayers toll-free telephone
access to the nearest IRS offices staffed to help
them).
We plan to keep many IRS offices around the
country open evenings and Saturdays during the filing
season.
Taxpayer service is not being expanded to
the point where it represents competition with the
returns preparation industry, but to a point where
the IRS can effectively meet legitimate taxpayer
requests for information and assistance.
3
f
-
- 5 Most of the additional manpower requested for
IRS
will be devoted to increasing the audit of tax
returns, the number of fraud investigations, and to
more intensive efforts to collect delinquent taxes.
For several years now audit coverage has decreased
to the point where literally billions of tax dollars
are going unreported and unrecovered.
As a result
our voluntary tax system has deteriorated.
This
estimate represents an important step toward reversing
the current trend. Moreover, it would result in
additional tax recommendations aggregating about
$250 million.
More important, though, is its potential
influence toward fostering higher voluntary compliance.
Bureau of Customs
The budget request for Customs is $236.4 million,
up $24.7 million over the 1973 level.
Most of Customs
increase will be needed to meet the unprecedented
expansion in international travel and trade.
During
fiscal year 1972, for example, commercial aircraft
passengers arriving from foreign ports increased over
18 percent.
Customs processed over 236 million persons
through our ports of entry last year - an increase
that represents almost five million people.
And
during this same period, invoices of foreign importations
increased by 14 percent, resulting in increased collections
6
of more than $725 million - from nearly $3.5 billion
in 1971 to almost $4.2 billion in 1972.
We are
continually improving our collection and enforcement
procedures to cope with this annual growth.
This budget also provides for the staffing for a
permanent anti-fraud program.
This will be a new
enforcement effort, oriented toward team examination
of cargo to determine if an invoice is fraudulent
as to quantity, identity, or value, and to search
for smuggled or undeclared items.
While the vast
majority of importers comply with tariff laws, the
increase in trade has brought about a sharp increase
in the incidence of attempted frauds.
Present
examination and investigative methods are restricted
by limited manpower.
Commissioner Acree will go into
the details of the intensified reviews made in 1972
and the revisions that were made in the Customs entry
retrieval system that now makes this a practical
enforcement and revenue producing program.
We have also included funds to continue expansion
of our air and sea intrusion program to strengthen
Customs efforts at detecting and apprehending smuggler
aircraft and vessels.
As you recall from our presen
tations in previous years, this program includes the
7
use of sensor equipped aircraft and boats, ground
radar, sonobuoys, and sensors.
The proposed expansion
of this program, which is still only partially im
plemented, will further control access across the
southern border.
Customs is also asking for modest increases to
expand the detector dog program.
The bureau has been
highly successful in its use of trained dogs for
screening mail parcels, vehicles, and cargo.
From
the beginning of the program in April 1970 through
December of last year, the seizures of 34,000 pounds
of marijuana, 4,000 pounds of hashish, and 16 pounds
of heroin at a street price of a quarter of a million
dollars a pound, can be directly attributed to the dog
program.
The training of dogs to detect hard drugs
has been a breakthrough.
About 50 percent of the dogs
presently being trained have the capability of sniffing
out heroin and cocaine.
On March 28 President Nixon transmitted Reorgani
zation Plan #2 to the Congress.
The proposed reorgani
zation would move the Customs functions pertaining to
drug investigations and intelligence to a new agency
in the Department of Justice.
Port-of-entry inspection
functions now performed by the Immigration and
8
Naturalization Service would be transferred to the
Bureau of Customs.
Study groups, composed of OMB,
Treasury and Justice personnel, are now determining
the personnel funds and property which would be
transferred if the plan is approved.
At this time,
we can not assess very accurately the budgetary impact
of this proposal.
Preliminary estimates are that 500
Customs agents plus supporting personnel would move
to the Department of Justice while 1,000 immigration
inspectors plus supporting personnel would move to
Treasury.
Fiscal Service Bureaus
Turning now
to the Fiscal Service, the Bureau
of Accounts is requesting $71.1 million, an increase
of $7.8 million over the 1973 level.
This increase
is entirely for uncontrollable rises in workloads.
The central disbursing activity of the bureau will
issue 581 million checks in 1974 - 61 million more
than in 1973.
Over 60 percent of the total increase
in cost for this work is for the postage that will
be paid to the U. S. Postal Service.
The largest part of the increased volume is for
the 45 million checks to be mailed to the aged, blind,
and disabled as provided by the Social Security
9
Amendments of 1972.
Sixteen million items are for
the normal annual increments in check issues to be
made for Social Security, veterans, tax refunds, and
for salaries and vendors’ vouchers for the various
agencies.
After the Bureau of Accounts issues the checks,
the Office of the Treasurer must pay and reconcile
these check payments with the check issue registers
as they return from the public.
That Office will
also process an estimated 770,000 claims for lost,
stolen,' and forged checks.
An increase of $1.4
million, from $11.3 to $12.7 million, is requested
for this bureau in this budget.
Since the Government must provide a proper cash
flow for these check payments, our third Fiscal Service
bureau is brought into play - the Bureau of the Public
Debt.
The request for ’’Administering the Public Debt”
is $79.4 million, an increase of $5.4 million above
the authorized level for 1973.
The growth in the
size of the public debt and in the number and com
plexity of transactions in Treasury securities keeps
the workload of this bureau at a high level.
There
are now about 585 million individual Treasury securities
outstanding.
Issues and retirements in fiscal year
10
1974 will involve about 283.4 million of these securities
a rise of 10.3 million over the anticipated volume for
fiscal year 1973.
Our major items of additional expense
involve reimbursements to the Federal Reserve Banks for
their services as fiscal agents and to reimbursing
paying agents for redeeming savings bonds.
Federal Law Enforcement Training Center
The appropriation request for Construction of the
Federal Law Enforcement Training Center is $6 million.
This increment would bring total funds appropriated
to the Center to $33 million.
The remaining require
ments to complete funding - $17.9 million - will be
requested in subsequent fiscal years.
The outdoor
firing ranges, the Motorcade Training Area, and the
Special Training Building are now complete and in
operation.
The construction manager for the project
is now developing the entire project design and
construction schedule.
It is our plan and hope that
the Center will be totally operational early in 1976.
Reductions
There are some major dollar reductions below the
1973 level that I have not mentioned.
I refer
specifically to funds for design and engineering for
Mint construction and funds for additional capitaliza
tion of the Bureau of Engraving and Printing Fund for.
11
equipment modernization.
Amounts for these purposes
were provided in 1973 but are not requested again in
1974.
Also, the Bureau of Alcohol, Tobacco, and Firearms
shows a reduction of $2.5 million.
This reduction is
hot an indication of our lack of interest in the highly
essential functions performed by this new bureau, but
it reflects our intention to study its activities and
responsibilities during 1974.
The bureau was established
July 1, 1972, from activities formerly conducted by
thè Internal Revenue Service.
It is responsible for
the enforcement of the laws designed to regulate and
curtail illicit activities relating to distilled
spirits, beer, wine, manufactured tobacco products,
firearms, and explosives.
Reorganization Plan Number 1
The abolition of the Office of Emergency Pre
paredness as approved in Reorganization Plan Number
One required the designation of a new Chairman of
the Oil Policy Committee.
President Nixon, under
Executive Order 11703, designated the Deputy Secretary
f/,of the Treasury to occupy that position.
Staff
positions which support the work of the Oil Policy
Committee have been transferred to the Treasury.
The Reorganization Plan also provided for the transfer
12
to Treasury from OEP the investigation of imports
that might threaten the national security.
A budget
amendment for fiscal year 1974 will be transmitted
by the President which will move the request for the
necessary funds, approximately $1.2 million, from
the Office of Emergency Preparedness budget to the
Treasury account for "Salaries and Expenses, Office
of the Secretary."
This completes my comments on the Department
and on the 1974 estimates.
the record.
The tables are here for
I will be glad to respond to any questions.
13
Table 1
DEPARTMENT OF THE TREASURY
Derivation of ’’Proposed Authorized Level for 1973’’
1973 Appropriations (P.L. 92-351)
$1,671,018,000
Supplemental Appropriations enacted by
Congress (P.L. 92-607):
Office of the Secretary
Bureau of Customs
Internal Revenue Service, Compliance
Total Appropriations enacted by Congress
3,800,000
2,700,000
4,500,000
1,682,018,000
Pending Supplementals:
Bureau of Accounts
Internal Revenue Service
U.S. Secret Service
Transfer to National Archives from IRS
for early records retirement
Proposed Authorized Level for 1973
730038
February 2, 1973
1,100,000
12,539,000
1,825,000
-753,000
$1,696,729,000
- 14-
Table 2
DEPARTMENT OF THE TREASURY
A nnual A p p r o p r ia tio n s f o r T re a s u ry D epartm ent f o r 1973
and E s tim a te d R eq u ire m en ts f o r 197 4
( In M i l l i o n s o f D o lla r s )
1973
P ro p o sed
A u th o riz e d
L e v e li^
1974
Budget
E s tim a te s
Increas
or
Decree
__ (-Ì
R e g u la r O p e r a tin g A p p r o p r ia tio n s :
O ffic e o f th e S e cre ta ry
F e d e r a l Law E n fo rce m e n t T r a in in g C e n te r :
S a l a r i e s and E x p en ses
C o n s t r u c t io n
16.3
17.0
.7
2.0
B u reau o f A c c o u n t s :
S a l a r i e s and E x p en ses
Governm ent L o s s e s i n Shipm ent
7.1
B u reau o f A lc o h o l, T o b a cco and F ire a rm s
Bureau of Customs
Bureau of Engraving and Printing
Bureau of the Mint:
Salaries and Expenses
Construction of Mint Facilities
24.0
Bureau of the Public Debt
74.0
79.4
34.7
517.0
595.4
34.7
531.7
Internal Revenue Service:
Salaries and Expenses
/ .
Accounts, Collection and Taxpayer Service
Compliance
'
Total, Internal Revenue Service
1 ,1 4 7 .0
Office of the Treasurer, U.S.:
Salaries and Expenses
Check Forgery Insurance Fund
U.S. Secret Service
TOTAL, Regular Operating Appropriations
NOTE:
1 /
24.5
2.0
6 2 2 .4
1 ,1 8 8 .8
1 2 .7
64.5
64.0
1 ,6 9 6 .7
1,775.9
Amounts are rounded and do not add to total
Does not include pay increases authorized by Executive Order 11691,
effective January 7, 1973.
730039
February 2
1973
r,1
79.1-
- 15 ■
Table 3
DEP^tTMENT OF THE TREASURY
|
Comparative Statement of Average Positions
Fiscal Years 1973 and 1974
(Direct Appropriations Only)
1973
Authorized
Level
1974
Estimate
Increase c.
Decrease (~
over 197?
Régular Annual Operating Appropriations:
■Office of the Secretary
632
718
86
75
83
8
■Bureau of Accounts
1,427
1,540
113
■Bureau of Alcohol, Tobacco and Firearms
3,915
3,805
-n o
■Bureau of Customs
11,745
12,661
916
■Bureau of the Mint
1,513
1,554
41
Bureau of the Public Debt
2,478
2,467
-11
1,719
38,524
32,657
72,.900
1,667
38,222
34,561
74,450
-52
-302
1,904
1,550
891
948
57
2.817
2,817
98,393
101,043
■Federal Law Enforcement Training Center
Bnternal Revenue Service:
Salaries and Expenses
Accounts, Collection and Taxpayer Service
Compliance
Total, Internal Revenue Service
■Office of the Treasurer, U.S.
HhS. Secret Service
|
BAL, Regular Annual Operating Appropriations
»30040
lebruary 2, 1973
«#
2,650
Of
DepartmentofthefREASURY
»HIN6T0N, D.C. 20220
TELEPHONE W04-2041
7 89
FOR RELEASE UPON DELIVERY
TESTIMONY BY THE HONORABLE WILLIAM E. SIMON
DEPUTY SECRETARY OF THE TREASURY BEFORE
THE SENATE COMMITTEE ON INTERIOR AND INSULAR AFFAIRS
THURSDAY, MAY 3, 1973, 10:00 A.M. E.D.T.
Mr. Chairman and Members of the Committee:
It is a privilege to appear before this Committee to
present my views on a topic of intense national concern.
The United States urgently needs Alaska's North Slope oil
if we are to deal effectively with our emerging energy
crisis.
Further, it is critical that legislation be passed
quickly to allow construction to commence on a trans-Alaska
pipeline.
There is no question that this country critically
needs its North Slope oil.
Every barrel of that oil we
can produce will reduce imports by a like amount.
This Committee undoubtedly has heard many estimates of the
rapidly increasing import levels we face if we don't reverse
current trends.
Estimates of oil imports in 1980 range
between 10 and 15 million barrels per day.
Imports of
this magnitude could endanger our security and economic well-being
S-189
-2
These projections, however, assume that we do nothing
and that present trends continue.
Actually, we can take
several steps to increase domestic supplies and decrease
imports.
The President has already moved decisively to
increase energy supplies.
The Congress can contribute
substantially by passing legislation enabling us to initiate
needed programs, such as the Alaska pipeline.
The Alaska
pipeline alone will not solve our energy problem.
It will,
however, materially ease our monetary and energy security
problems.
So let us begin with its construction now.
The United States faces serious economic and monetary
problems today because of our rapidly deteriorating balance
of payments.
We cannot afford to permit these deficits to
go on mounting unnecessarily by delaying the development
of already proven domestic resources.
In the past this country has enjoyed energy security
because of our shut-in production potential.
has now disappeared.
Imports are soaring.
This potential
And several
countries upon which we may have to depend for future energy
supplies have declared that they intend to use their oil
as a political weapon.
Can we afford to become increasingly
dependent upon such countries by deliberately delaying the
development of the largest find of oil in U. S. history?
The significance of our North Slope energy potential
is not just the 2 million barrels per day that could someday
y
x
-
-3
be delivered through an Alaska pipeline.
Nor is it the 10
billion barrel proven reserves in the Prudhoe Bay field.
Alaska has far greater potential reserves.
Projections
indicate that the North Slope has potential reserves of
as much as 80 billion barrels.
Thus, we might someday
achieve an Alaska production of 5 to 8 million barrels per day.
This, in turn, could possibly reduce our first round
balance of trade outflows by $7 billion to $12 billion per
year.1 Production at maximum rates would also materially
strengthen our bargaining position with producing countries
and increase our ability to meet any supply disruptions
with minimum adverse economic consequences.
It could, in
short, go a long way toward solving our energy problems.
But to obtain the North Slope's full potential during
the critical period of the 1980's, we must begin development
now.
The question at this point is not whether we should
develop our North Slope reserves.
We should.
We must.
The question now being debated is how best to develop these
reserves.
Some have contended that a pipeline route through
Canada would be superior to an Alaska pipeline.
Deliberations
concerning the best pipeline route are necessary to make
the right decision.
All alternatives must be analyzed
in terms of our overall national interest, not in terms of
regional or private interests.
Our analysis must consider
-4
economic and security interests as well as environmental
interests.
factors.
Timing is a crucial component of each of these
Given sufficient research and development, we
can reasonably expect to develop our vast coal, oil shale,
and nuclear resources so as to provide rapidly increasing
portions of our energy needs by the late 1980fs.
Before
this, however, we will face a critical period during the
late 1970’s and the 1980?s.
The long lead times for
exploration and development, for constructing a transportation
system, and for administrative approvals must be weighed
against our rapidly increasing energy needs during this
period, when our needs will be greatest.
There are many reasons why I believe that an Alaska
pipeline is clearly superior to a pipeline through Canada.
I will briefly mention several of these reasons and will
then amplify my remarks concerning economics, security, and
the balance of payments -- areas in which I have the
greatest interest because of my responsibilities as Deputy
Secretary of the Treasury and Chairman of the Oil Policy
Committee.
1.
Building a Canadian pipeline instead of the
Alaska pipeline would delay receipt of vitally needed
Alaska crude oil by from three to five years and could
significantly delay full development of our vital Alaska
North Slope oil and gas reserves by as much as 10 years.
Both pipelines, as presently planned, could
transport the same volume of oil.
But they would not
transport the same volume of Alaska oil.
Canada would
control the portion of any pipeline transversing Canada
and would insist on reserving 50 percent of the throughput
volume for Canadian oil.
The delayed starting date of a Canadian pipeline
would defer further exploration and development of our
North Slope resources at a time when security and
international economic considerations dictate that we
should be increasing exploration and development.
Such
delays would reduce this country’s energy security and
could have serious economic consequences in the event of
a disruption of foreign supplies after 1978.
2.
Our analysis indicates that the Alaska pipeline
would provide substantially greater economic benefits to
this country than a pipeline route through Canada.
Assuming a delivery of 2 million barrels per day, the
Alaska pipeline would result in increased benefits of up
to $2.4 billion per year in 1980.
By 1988, cumulative
net benefits of the Alaska pipeline, over and above the
Canadian pipeline, would approach $15 billion.
estimate will be elaborated later.
This
-6
3.
A Canadian pipeline would require a dollar outflow
of several billion dollars during the construction period.
4.
The Alaska pipeline would reduce our first round
balance of trade outflows by about $2.3 billion per year
over and above whatever balance of payments savings might
be made possible by the Canadian pipeline.
In view of our
present and projected monetary problems, such a reduction
of future cash drains could be vital to our economic health.
5.
In the event of a major foreign supply disruption
we can assume that emergency conservation procedures would
be initiated to reduce demand.
With the Alaska pipeline
any surplus in District V (the West Coast) resulting from
reduced demand could easily be transported through the
Panama Canal and distributed through the existing pipeline
network to points of need in the U. S. East and Midwest.
Conversely, with a trans-Canadian pipeline, any
surplus in District II (the mid-Continent) resulting from
reduced demand during an emergency could not be readily
distributed to points of need in District I (the East
Coast) and District V.
Since pipeline flow is unidirectional,
the existing transportation network would not allow the
transporting of any surplus crude in District II to District I
or District V.
6.
Opponents of the Alaska pipeline contend that
there is a greater need for Alaska oil in District II.
This, of course, depends upon the definition of need.
Without Alaska oil, the percentage of imports into
District V would be as high, or higher than, into
Districts I-IV.
It is also argued that with an Alaska
pipeline, the output of Alaska and California would
exceed demand, resulting in a surplus in District V and
a severe shortage in other areas of the country.
This would have been true if construction of the Alaska
pipeline had started in 1970 and been completed in 1973,
as originally contemplated, but it is clearly not a valid
argument today.
The earliest we can now expect to complete
an Alaska pipeline is mid-1977 or early 1978.
By then,
demand in District V will most likely exceed supply from
California and southern Alaska by more than the capacity
of the Alaska pipeline.
7.
An Alaska pipeline would provide greater-''' { •>'
employment benefits to the United States.
8.
An Alaska pipeline would produce earlier and
substantially greater economic benefits to Alaska.
It
would allow a greater North Slope production, yielding
large royalty payments.
A Canadian pipeline would have
to be looped to permit the same capacity for U. S. crude
as an Alaska pipeline, and we have no assurance that the
Canadians would permit looping of a line through Canada.
Arguments that a trans-Canadian route would provide
greater benefits to Alaska because it would allow a higher
-8
field price for crude oil are not valid.
Out cost estimates
indicate no significant difference in field price for North
Slope crude, regardless of which route is selected.
9.
With respect to the environmental matters,
Secret ary.Mo rt on. has stated that the greater earthquake and
water leg risks of the Alaska route are offset by larger
unavoidable damage and increased risks to permafrost zones
and at river crossings in the much longer Canadian route.
A Canadian pipeline route would cross over twice as
much permafrost and muskeg area as the Alaska pipeline.
Thus, about twice as much gravel would have to be mined
and used for the berm to carry the pipeline over the
frozen Arctic.
Largely as a result of environmental concerns
reflected*in-thè1Interior Department’s environmental
impact statement, the Alaska pipeline has been redesigned,
at a threefold increase in projected costs.
As now
contemplated, the Alaska pipeline is the most carefully
designed pipeline/ environmentally, ever conceived.
In both routes, the lines would be constructed to prevent
thawing of the soil in permafrost zones.
In the seismic
active areas along both routes, special designs would be
utilized to withstand even the most severe earthquakes.
Safety requirements that have been imposed in the maritime
oil transport front Valdez to the West Coast —
particularly
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"
»
double-bottom tankers -- will significantly reduce
the risk to the West Coast from accidental tanker spills.
In fact, if we don't ship our oil from Alaska, in specially
designed U. S. ships, foreign oil will enter the West Coast
in foreign flag vessels that will not be subject to the
same rigid standards.
I am not minimizing environmental risks.
I do believe,
however, that the past delays and resultant research have
greatly reduced the magnitude of these risks, and that the
overall hazards at this time are not sufficient to further
delay construction of the Alaska pipeline.
The above considerations, in my opinion, demonstrate
that the Alaska pipeline is clearly superior to the Canadian
in terms of economic benefits, balance of payments, security,
and employment opportunities.
Only in the environmental
area does the Canadian route appear comparable, and here
the risks and possible damage from either line have been
significantly reduced by research during the past few years.
Eventually there may be a need for a Canadian line, but
all evidence points out that we should move forward on
the Alaska pipeline now.
In view of the urgent necessity for early Alaska
production, I strongly recommend Congressional action to
allow construction of the Alaska pipeline at the earliest
possible date.
-10
Now I should like to amplify some of the statements
I have made.
Timing
If Congress moves expeditiously to amend the existing
law to allow a wider pipeline right-of-way across government
lands, environmental hearings and administrative procedures
could perhaps be completed so that construction of the Alaska
pipeline could commence during late 1974 or shortly thereafter,
The Alaska pipeline could then be completed by late 1977
or early 1978.
The earliest a Canadian pipeline could be completed
is 1980.
years.
More likely, it would take several additional
The need to prepare detailed design and route
analyses, a longer construction period, and the logical
desire of Canadian Federal and Provincial Governments to
review carefully the pipeline proposals will cause
inevitable delay.
United States governmental approval of a Canadian route
would be required and would be subject to the same types
of objections
and delays as the Alaska pipeline.
The major
sequential steps that would be followed in obtaining
Canadian permission, and constructing a Canadian pipeline
are as follows:
1.
Final denial of the Alaska pipeline.
jB
-ii
2.
Soil borings and mile-by-mile pipeline design, and
preparation of the environmental impact statement, and
completion of financial arrangements.
3.
Application to the Department of Indian Affairs
and Northern Development (DIAND) for a pipeline
right-of-way.
4.
Public Hearings:
Approval by DIAND.
Application to the National Energy Board (NEB).
Public Hearings:
Approval by NEB.
5.
Approval by the Canadian Cabinet.
6.
Procurement of pipe, tanks, communication
equipment, work equipment, barges, and
construction of necessary camps.
Arrangements
for contracts following bids and awards.
7.
Construction.
Now let me develop these points.
It is unlikely
that any work will commence on a detailed design of a
Canadian pipeline prior to final denial on the Alaska pipeline.
This is because the North Slope reserves are needed to
justify a Canadian line.
Detailed soil testing and mile-by-mile pipeline
design took three years on the Alaska pipeline.
This could
hardly be completed in appreciably less time for the much
longer Canadian line.
The Mackenzie Valley Pipeline Research,
Limited, has made a preliminary feasibility study of the
-12
Canadian pipeline but has not started detailed pipeline
design studies.
and engineering.
They estimate 2-1/2 years for planning
It could be considerably longer.
The Territorial Lands Act requires that a detailed
environmental impact statement be prepared before a
right-of-way permit is issued or before easements are
allowed for construction.
Jean Chritian, Minister of the
Department of Indian Affairs and Northern Development,
stated on March 1, 1973, that public hearings will be held
under the Territorial Lands Act at an appropriate time after
the Department receives an application based on a viable
project proposal, accompanied by a detailed documentationof research pertaining to areas of social and environmental
concern.
D. S. MacDonald, Canadian Minister of Mines, on
January 24, 1973, stated that the decision on the actual
route to be followed must first be taken by DIAND in
conjunction with the territorial governments.
could then be made to the NEB for a permit.
An application
In other words,
DIANDfs approval must precede an application to the NEB.
Presumably, a favorable ruling by DIAND would be contingent
upon a prior native claims settlement.
Other applications
before either DIAND or the NEB could be delayed by law
suits such as those brought in this country.
-13
In view of the uncertainty concerning the timing of
approvals by DIAND, the NEB, and the Canadian Cabinet, and
the large interest costs on premature investments that
resulted from delays in construction of the Alaska pipeline,
the consortium building a Canadian line would be unlikely
to order pipe, and risk large losses on interest payments,
prior to the final approval of the pipeline.
Lead times of
18 months to 2 years could be required for pipe procurement
and construction of necessary camps and roads.
Actual construction time, after the pipe is available
and roads and construction camps have been prepared, is
uncertain.
The Mackenzie Valley Pipeline Research, Limited,
has indicated that construction could be completed in 2-1/2
years if there were no other major competing pipeline projects
in progress at that time.
However, it seems unlikely that
the much longer Canadian line could be completed in less
time than the Alaska pipeline.
A 3-to-4-year construction
period seems probable.
I
suspect, Gentlemen, that at this point your heads
may be spinning, and with ample reason.
This is the
gauntlet we shall have to run if we choose to go the
Canadian route.
Indeed, if the Canadians follow the
sequence of events they have publicly stated they will
follow, then completion of a Canadian pipeline prior to 1983
is unlikely.
-14
Economic Comparisons
Opponents of the Alaska pipeline have asserted that
a Canadian route would provide greater economic benefits
to the Nation.
Our studies indicate the opposite.
To avoid
confusion we have adopted a methodology similar to that of
Mr. Charles T. Cicchetti, an economist whose studies suggest
that a Canadian pipeline route is economically superior.
We have defined the benefits of an Alaska or Canadian line
as the resource cost of the alternate sources of supply,
less the resource cost of North Slope crude oil delivered
to the same market.
Resource costs are defined as the costs
of goods and services required to bring North Slope or
foreign oil to United States markets.
Transfer payments to
other Americans, royalty payments to the United States or
Alaska, profits in excess of capital costs, and United
States taxes are not included in resource costs.
Royalty
payments and taxes paid to foreign countries, capital costs,
and operating expenses are included among the costs of goods
and services.
Recent projections made at Treasury indicate that the
delivered resource cost of Middle East crude oil in 1975
will be approximately $3.08 per barrel on the West Coast and
approximately $3.38 per barrel in Chicago.
By 1980, such
costs will likely increase $1.50 per barrel, or more,
although this is speculation.
Bear in mind that these are
-15
resource costs, not total costs.
United States profits
and transfer payments have been excluded.
prices will be higher.
Future market
Our projections indicate delivered
resource costs of North Slope crude oil of $1.30 per barrel
in Los Angeles and $1.60 per barrel in Chicago.
"The difference
between the delivered resource cost of foreign crude and
the delivered resource cost of North slope crude represents
the net benefit to the U. S. economy Irdm producing North
Slope crude oil.
Our projections indicate a net benefit
of $3.28 per barrel in 1980 for either the Alaska or
Canadian pipeline route.
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11
Our analysis differs ffom Mr. CiCcKettifs analysis
it
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primarily in that we assumed that any North Slope production
would displace foreign oil in either market whereas
Mr. Cicchetti assumed that it would replace a i"0/f5'd mikture
of domestic crude and foreign crude on the U.
West Coast,
and an 83/17 mixture of domestic arid fdr eight crude in the
p ,
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Chicago area*
estimates.
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We have also assumed more up-to-date Cost
With the United States now produeing at peak
capacity and imports rising rapidly, it iis WreaTistic to
assume that North Slope oil would dispince domestic ¿rude
oil rather than importjjjM — °
'«sibenaJ
b
aonw
Our analysis indicates that on a barrel ‘per barrel
basis, there is essentially rio economic! difference in the
benefit accruing to the Nation from either pipeline route.
-16
What is significant is the indicated difference in net
benefits, considering that a pipeline through Canada would
deliver U. S . crude at a later date and, initially, at
much lower volumes for whatever additional time period is
required to loop the Canadian line and increase its
throughput.
Completion of the Alaska pipeline should yield a
net benefit to the economy starting at $1 billion per year,
and increase to $2.4 billion annually by 1980, when we
estimate that it will reach its full capacity of
barrels per day.
2 million
In contrast, a Canadian pipeline would
yield yearly benefits of only $600 million initially,
increasing to $1.4 billion when the 1ine reaches full
capacity.
The .difference is due to the Canadian Government
reserving a portion of the pipeline’s capacity to
carry .its own.crude...K
During the interval between completion of the Alaska pipeand the earliest completion date of a Canadian pipeline,
the average net benefit from the Alaska pipeline should be
about $1.9 billion, assuming an average throughput rate of
1.6 million barrels per day for the period.
Following the
time when a Canadian pipeline could be completed, the Alaska
pipeline would still yield net benefits of $1 billion more
per year than would accrue from a Canadian pipeline with
the same capacity.
If we assume that a Canadian line would not be
completed for five years following the completion of
the Alaska pipeline, and that it would not be looped to
allow North Slope production equal to the capacity of the
Alaska pipeline for another five years, then accumulated net
benefits from the Alaska pipeline oyer and above those of a
Canadian pipeline for the 10 years would be $14.5 billion.
In our analysis we have made assumptions regarding
future oil prices, the cost of the Alaska pipeline and a
Canadian pipeline, and the probable timing of completion of
both routes.
We have attempted to be realistic, but
where there was uncertainty we have chosen to err in a
manner to minimize the differences between the benefits
of the two pipeline routes.
For instance, we chose to
utilize the cost estimates for a Canadian pipeline prepared
by the Mackenzie Valley Pipeline Research, Limited, rather
than the much higher estimates of the Interior Department,
v
or others.
: t '- ;.V
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'
*
Consequently, our projections are probably
on the low side.
Actually the numbers used are not critical.
It is
really immaterial to the basic argument whether the net
benefits from the Alaska pipeline would be $2.4 billion
in 1980, or only 1/3 of that amount.
It is immaterial
whether we assume a two-year delay for completion of a
Canadian pipeline coiftpared to the Alaska pipeline, or a
-18
five-year delay.
It is immaterial whether we assume a
$3.00 price for foreign crude oil in 1980, or a $5.00 price.
It is immaterial whether we assume that a pipeline through
Canada would cost $4 billion, or $7 billion.
The point is
that under any set of realistic assumptions an analysis
will indicate advantages for the Alaska pipeline over a
Canadian pipeline amounting to hundreds of millions of
dollars a year.
In fact, the only way that you can show an economic
benefit for a Canadian pipeline comparable to the Alaska
pipeline is to assume that each pipeline would carry equal
volumes of North Slope crude oil (which is not a valid
assumption), or to assume that the North Slope crude oil
would displace domestic crude oil with appreciably different
values in different markets, rather than foreign crude oil.
This Committee should not be misled by analyses purporting
to show an economic superiority for a Canadian pipeline
when these analyses are based on both of the fallacious
assumptions I have just mentioned.
The facts are that the Alaska pipeline will yield
substantially greater economic benefits to this Nation than
a pipeline through Canada with an equivalent capacity.
Balance of Trade Benefits
In addition to the economic benefits, the Alaska
pipeline will provide substantial balance of trade benefits.
During the period between the likely completion of the
Alaska pipeline and the earliest completion of an alternative
line through Canada, our foreign imports would be reduced by
whatever throughput would be delivered through an Alaska
pipeline.
This would lower our first round balance of
trade outflows by the tax paid cost of the foreign crude
displaced plus the foreign component of shipping costs.
By 1980 this would probably be about $4.00 per barrel, or
higher.
If we assume an average Alaska pipeline throughput
of 1,600,000 barrels per day during this period, our yearly
first round trade outflows would thus be reduced by
approximately $2.3 billion, a not insignificant savings.
If a Canadian line were constructed, we estimate
transportation charges of approximately $1.60 per barrel
to the Chicago area.
Approximately 60£ per barrel of this
would be for our portions of the line,, and a return on our
invested capital in the Canadian portion (assuming that we
would contribute 49 percent of the investment in the
Canadian portion).
If we assume a capacity of 2,000,000
barrels per day (of which 1,200,000 barrels per day would
be United States crude and 800,000 barrels per day
Canadian arctic crude) our first round trade outflows from
oil pumped through the Canadian line would be approximately
$1.6 billion per year.
-20
Security Benefits of the Alaska Pipeline
More important than the economic and balance of trade
benefits are the security advantages
an Alaska pipeline
would provide. P ‘During the critical period in the late 1970's
and early I 9 8 0 vs, an Alaska pipeline would materially increase
our ability to withstand a foreign supply disruption.
Perhaps of even more significance than the 2,000,000 barrels
per day, would be the stimulus an Alaska pipeline would
give to exploration.
The U. S. arctic has appreciably
more potential than the 2,000,000 barrels per day capacity
of an Alaska pipeline.
supply this amount.
The Prudhoe Bay field, alone, will
For maximum security, the U. S. needs
to develop additional potential.
Unfortunately, the delay in starting the Alaska
pipeline has caused the oil companies to curtail and
restrict their exploration efforts.
This is a natural
reaction since the companies cannot be expected to invest
large sums of money for exploration and development until
they have the prospects of selling within a reasonable period
of time any crude which they may find.
Early initiation of the construction of the Alaska
pipeline would stimulate exploration and development that
could lead to an additional supply of several million
barrels per day by the early 1980's.
A Canadian line would
not provide the same stimulation, both because of the later
starting date and the lower initial U. S. throughput in a
Canadian line.
I believe that an early start of the Alaska pipeline
could contribute materially to our energy security.
Not
only would it provide the direct security of the initial
Alaska pipeline throughput, it would lead to earlier
exploration p.nd development of other arctic reserves.
Either of these factors could be critical to our economic
well-being in the event of a serious supply disruption
during the late 1970’s or early 1980's.
Legal Considerations
The opponents of an Alaska pipeline have stated
that alternative pipefine routes have not been extensively
studied, as required by law.
This is not true.' Extensive
investigations of a Canadian pipeline route have been made
by the Department of the Interior, as well as by the
State Department, the Defense Department, and the Office
of Emergency Preparedness.
Secretary Morton authorized
construction of an Alaska pipeline in 1972 following
consultations on the merits of various routes with the
concerned Governmental Departments and Agencies.
The Secretaries of Defense and State, and the Director of
the Office of Emergency Preparedness all recommended
immediate construction of the Alaska pipeline.
I now
repeat that recommendation.
In summary, I believe that the Alaska pipeline offers
substantial economic, balance of payments, and security benefits
-22
to the United States compared to a Canadian pipeline route.
It offers increased employment benefits and substantial
economic advantages to Alaska. I believe that the
environmental risks, while perhaps substantial initially,
are now minimal, due to the stringent regulations that have
been placed upon construction of the line and for the
tanker shipments of the crude oil from Valdez to the West
Coast markets.
I strongly urge the Congress to take immediate
action to pass the necessary laws to allow us to proceed
with the construction of this vital pipeline.
Thank you.
FO R IM M EDIATE R E L E A S E
M A Y 2, 1973
Office of the White xT use P r e s s s e c r e t a r y
I
th e
Wh i t e h o u s e
STA TEM EN T B Y THE PRESID ENT
The C o n g ress has passed and I have signed into law an exten sion of the
E co n o m ic Stabilization A c t. This le g islatio n will p erm it continuation of a
co n stru ctiv e and o rd e rly p ro g ra m to r e s t o r e p rice stab ility and I
co n g ratu late the C o n g ress on its actio n .
A fte r 18 months of g re a t p ro g re s s ag ain st inflation, p ric e s so ared again in
F e b ru a ry and M arch . M ost of the in c re a s e s w ere in the p rice of food, an
a r e a that s trik e s home for e a ch of us e v e ry day. In th ese c irc u m s ta n c e s
the tem ptation was stro n g to go fo r the su p e rficia lly sim ple solution —
to fre e z e p ric e s a c r o s s the board o r even ro ll them b ack. We ca re fu lly
co n sid ered that a lte rn a tiv e . We firm ly concluded, how ever, that such a
m ove, taken a t this tim e , would have c re a te d m o re problem s for the a v erag
A m e rica n than it would so lv e.
If, on the one hand, the fre e z e had been b rie f, the country would soon
have confronted a ll the old problem s again with even g re a te r u rg en cy when
the fre e z e ex p ire d . But if, on the o th er hand, the fre e z e w ere planned to
la s t for an extended p eriod, then our p re se n t risin g p ro sp e rity would have
ground to a halt and the co n tro ls s y ste m would eventually have broken down.
C oncerned as we a re about the r i s e of p r ic e s , we m u st a lso re co g n iz e that
th e re a re som e c a s e s in which n e c e s s a ry supplies will not be av ailab le if
p rice s a re fro zen o r rolled b ack. We a re seeing this now with oil and gas
p ro d u cts. S im ila rly , if we had fo rced the p rice s of m e a t back to th eir
Ja n u a ry le v e ls , as som e have su g g ested , cu s to m e rs would not be boycotting
m eat today but would in stead be sto rm in g su p e rm a rk e ts to be the f i r s t in line
for the s c a r c e supply of m eat.
T h ere a re tim e s , of c o u rs e , when a p rice -w a g e fre e z e is n e c e s s a r y ,
of 1971 was such a tim e.
August
But the situation is v e ry d ifferen t today. The A m e rica n econom y is operating
much c lo s e r to ca p a city than in the su m m er of 1971. As a r e s u lt, th ere a re
many m o re c a s e s today w here freezin g p ric e s would ca u se s h o rta g e s . M ore
than th at, today we have a flexible p rice and wage co n tro l s y s te m a lre a d y in
e x is te n c e . If conditions re q u ire firm e r a ctio n , g e n e ra lly o r s e le c tiv e ly ,
we are a lre a d y w ell-equipped to take it.
The p rice -w a g e co n tro l s y s te m is p a rt of a la r g e r an ti-in flatio n p ro g ra m ,
the co rn e rs to n e ot w hich'is a resp o n sib le budget p o licy . The healthy expansion
of our econ om y, which is cre a tin g m o re jobs and b e tte r wages today, could
be tra n sfo rm e d into a d angerously in flation ary boom to m o rro w if the r is e
in F e d e ra l spending a c c e le r a te s . We m ust not le t that happen.
A t the sam e tim e that we a r e following fis c a l and m o n etary policies to
r e s tr a in e x c e s s iv e demand in the m a rk e tp la ce , we a lso a re acting to
in c re a s e su pp lies, the b est of all ways to fight risin g p ric e s .
(MORE)
-
2
-
One a r e a of sp e cia l c o n ce rn , of c o u rs e , is food p ric e s . We have been
working in m any ways to in c re a s e the supply of food. We have g re a tly
in c re a s e d the a c re a g e of land available for ra isin g cro p s and grazin g
liv e sto ck . We have sold the Governm ent-owned sto ck s of wheat and feed
g ra in s . We a re no longer subsidizing the e xp o rt of food, and we have acted
to in c re a s e im p o rts of m e a t, dried m ilk and c h e e s e . T hese m e a s u re s cannot
im m ed iately offset the food sh o rta g e s we have re c e n tly exp erien ced - including those cau sed by the b lizzard s and floods of the la s t few m onths.
H ow ever, what has been done, togeth er with the spontaneous re sp o n se of
fa r m e r s to the p re se n t high p r ic e s , will have the effect of in cre a sin g food
supplies and thus holding down p ric e s . In fa c t, r e ta il food p ric e s have
been risin g le s s rap id ly in re c e n t weeks than e a r lie r this y e a r . We will
continue to exp lo re e v e ry p ossible way to m e e t the food inflation problem .
We a re also seeking to in c re a s e supplies of in d ustrial m a te ria ls by selling
off sto ck s held in the G overn m en t’s s tra te g ic stockpile that a re no lon ger
req u ired for national s e c u rity . I have sen t to the C o n g ress the leg islatio n
n e c e s s a r y to e ffe ct this d isp osal and I urge its prom pt e n actm en t. I have
also sen t to the C o n g ress a re q u e st for au th ority to suspend ta riffs or oth er
r e s tr ic tio n s on im p o rts w here such action would be useful to r e s t r a in inflation;
I hope this le g isla tio n will also be p rom ptly and fav o rab ly co n sid e re d .
The third elem en t in the G overn m en t's an ti-in flation p ro g ra m , in addition to
checking the expansion of demand through ap p ro p riate fis c a l and m o n etary
p olicies and stim u latin g the expansion of supply, is the p rice -w a g e co n tro l
s y s te m , now known as P h a se HI,
P h a se III the G overnm ent has s e t forth stan d ard s of d e sira b le p rice and
wage behavior which a re e sse n tia lly the sam e stan d ard s used during P h ase II.
In som e a r e a s - - food p ro ce ssin g and d istrib u tin g , co n stru ctio n and m ed ical
care
o b se rv a n ce of th ese stan d ard s is m an d ato ry ju st as it w as in
P h a se II. F o r the r e s t of the econ om y, com p lian ce is on a se lf-a d m in iste rin g
b a sis unless the G overn m en t, through the C ost of Living C ouncil, finds
m an d ato ry co n tro l n e c e s s a r y . As I have said b e fo re , P h ase HI will be as
vo lu n tary as it can be and as m an d atory as it has to be.
Since P h ase III began, we have taken a num ber of step s to en su re the
ach ievem en t of its g o a ls . M andatory p rice co n tro l has been im posed on the
la r g e r oil co m p an ies. Ceiling p ric e s have been s e t fo r b eef, pork and lamb.^
T hose wage a g re e m e n ts that have ap peared in co n sisten t with p rice stab ilization
have been held up pending fu rth er study. The In te rn a l Revenue S e rv ice is
checking on som e 500 la rg e com p an ies to be s u re that th eir pricing p ro ced u res
con form with the stan d ard s of P h ase III. The C o st of Living Council is
m eeting with re p re s e n ta tiv e s of a num ber of la rg e in d u stries to gain a b e tte r
understanding of the ca u s e s of th eir re c e n t p rice in c r e a s e s .
So that the G overnm ent can a d m in ister the P h ase HI p ric e co n tro l p ro g ram
m o re e ffe ctiv e ly , I have d ire cte d the C ost of Living Council to take s e v e ra l
fu rth er ste p s .
F i r s t , it will obtain fro m the la r g e s t firm s a full and detailed re p o rt on
p rice changes that have been put into e ffe ct sin ce the beginning of P h ase HI,
so that it m ay o rd e r re d a ctio n of in c re a s e s that have exceed ed th e sta n d a rd s.
Cecond, a new system of p ren o tificatio n w ill be in stitu ted . If a n a jo r firm
intends to r a is e its a v e ra g e p r ic e s n o re than 1. 5 o e rc e n t above the Ja n u a ry
10 au thorized le v e l, it rru st notify the C o st of Living Council 30 days in
ad vance. T his w ill give the C ost of Living C ouncil an-opportunity to
d eterrr ine w hether o r not the u se of its au th ority to stop the in c r e a s e , o r som e
soi e o th er a ctio n , is w a rra n te d .
T h ird , firm s not exceed in g the 1 .5 p e rce n t lin it w ill s till be req u ired to
re p o rt th e ir a ctio n s q u a rte rly , so that th e ir conform ity to the c o s tju stifica tio n stan d ard s m ay be ch eck ed .
(MORE)
- 3 F o u rth , additional re s o u rc e s will be assign ed to en su re that these strengthened
effo rts a re c a rr ie d out fa irly and effectiv ely .
The C o st of Living Council will provide the d etails of th ese a ctio n s .
T his A d m in istration will continue to do everything it can to fight inflation,
but o th ers m ust also do th eir p art if we a re to s u c c e e d . E v ery o n e has an
in te re s t in re s to rin g reaso n ab le p rice stab ility without ending the p resen t
p ro sp e rity and without rigid su p p ressio n of fre e m ark ets and fre e co lle ctiv e
b argain in g.
Our g re a t need is fo r m o re production. Only with m o re production can we
fight inflation while s till providing the goods and s e r v ic e s people want.
Today I ad d re ss the c a ll for m o re production p a rtic u la rly to the N ation's
f a r m e r s , b ecau se it is the p rice of food m o re than anything e ls e th at now
blocks the re tu rn of p rice sta b ility . T h e re a re m any grounds on which such
an appeal can be b ased . P r ic e s a re high, w orld demand is stro n g , and
econ om ic conditions a re such that fa r m e r s will im prove th eir in com es by
producing m o r e . T his is e s p e cia lly tru e of anim al products - - m e a t,
d a iry products and e g g s . Continuously risin g food p r ic e s , on the other
hand, would c re a te g r e a te r p re s s u re fo r c o n tro ls , p re s s u re s which could be
hard to .r e s i s t even though the co n tro ls would hurt co n su m ers a s w ell as
fa rm e rs.
The co u n try needs m o re food, and A m e rica n fa r m e rs have n ever failed to
d e liv e r when the co u n try needed th em . Although our f a r m e rs have had to
contend with m is e ra b le w eather conditions in re c e n t m onths, th eir productive
ca p a city is s till not fully u tilized .
L ab or and m an agem en t also can contribute to the fight again st inflation by
continuing to im prove p rod uctivity. R isin g p rod uctivity a ttack s inflation both
by in cre a sin g supplies and by holding down c o s ts . P r o g r e s s on this front
to date has been en cou ragin g. Since the su m m er of 1971, output per m an -h ou r
has ris e n 50 p e rce n t fa s te r than it has o v er the lo n g -te rm . It is im p e ra tiv e
that we continue this e x ce lle n t p e rfo rm a n ce , even though it w ill becom e
m o re difficult to do so as the econom y re a c h e s higher le v e ls .
L ab or and m anagem ent have a lso been contributing to our stab ilizatio n
effo rts through resp o n sib le co lle ctiv e b argain in g. The a v e ra g e s iz e of
in c re a s e s in co lle c tiv e bargaining a g re e m e n ts was low er in the f i r s t q u a rte r
of 1973 than b efo re the New E co n o m ic P o licy began. I am also encouraged
by the re c o r d to date in m aintaining in d u strial p e a ce . In s h o rt, the c o o p e ra
tion of A m e ric a n lab o r and m an agem en t in the stab ilizatio n effo rt has been
outstanding.
The A m e ric a n people look to lab o r and m anagem ent to continue co n stru ctiv e
b eh av io r.
Although I b elieve that p ric e s w ill not r i s e as m uch in the months ahead as
they did in F e b ru a ry and M a rch , p rice in c re a s e s w ill probably be higher
than we would like fo r som e m on th s. We should be m atu re enough to
re co g n iz e th at th e re is no in stan t re m e d y fo r this p rob lem . We a r e dealing
with a condition th at is w orld -w id e in scop e and indeed has been le s s s e v e re
and m o re e ffectiv ely confronted h e re than in m o st o th er co u n trie s . Working
to g e th e r, the A m e ric a n people will solve the problem of inflation, but that
p ro c e s s will re q u ire p atien ce, co o p eratio n and understanding fro m us a ll.
(MORE)
- 4 -
M ean w h ile, le t us not o v e rlo o k the g r e a t stre n g th s of our eco n o m y . We have
m o r e people a t w ork than e v e r b e fo re , e a rn in g h igh er r e a l in co m e s and
con sum in g m o r e goods and s e r v ic e s p er c a p ita than a t any tim e in our
p a s t. Inflation is a p oten tial d an g er to a ll and a p re s e n t h ard sh ip fo r so m e
but n e v e rth e le s s the A m e ric a n people a r e enjoying the fru its of an
e x tr a o r d in a r ily e ffe c tiv e e co n o m ic s y s te m . Any s u p e r fic ia lly appealing
a ctio n s that would d isru p t o r abandon th at s y s te m would u ltim a te ly c a u s e
f a r m o re d am ag e than th ey would r e p a i r .
#
#
#
FOR IMMEDIATE RELEASE
MAY 2, 1973
OFFICE OF THE WHITE HOUSE PRESS SECRETARY
THE WHITE HOUSE
PRESS CONFERENCE
OF
SECRETARY OF THE TREASURY GEORGE SHULTZ
DR. HERBERT STEIN, CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS
JOHN DUNLOP, DIRECTOR, COST OF LIVING COUNCIL
THE BRIEFING ROOM
4:30 P.M.
EDT
MR. WARREN: You have a statement by the President on
the Economic Stabilization Act, which he signed into law on
Monday•
Secretary Shultz, Dr. Stein and Mr. Dunlop are here
this afternoon to take your questions.
SECRETARY SHULTZ: The President has added one more
ingredient in the program to fight inflation, namely, the
requirement that all large firms who wish to increase their
prices at a rate higher than 1-1/2 percent per year must pre
notify the Cost of Living Council so that the Council can look
that over and see if intervention is called for.
We feel this is an additional and helpful tool in
the stabilization effort.
At the same time, I think it was useful in our
discussion with the President last week and this week to sum
marize the things that have been taking place under Phase III,
and since that proved to be useful in those discussions, in
his statement the President has summarized many of those things
for you again here today.
I
think perhaps the best course here, since we are
a little late — and I am sorry about that, but our meeting
lasted a little bit longer than we anticipated — is just to
go directly to your questions, and Dr. Dunlop is here, and
Dr. Stein is here, so we have lots of doctors.
Q
How do you classify "large firms"?
SECRETARY SHULTZ: By the classification of sales of
$250 million a year or more. That is a standard way it has
been done in the stabilization program.
Q
you have here?
more?
Does that apply to all three directives that
Is it just those firms with $250 million or
SECRETARY SHULTZ: Of course, everyone is covered
in the sense that there is a program with standards on a
self-administering basis. We expect people to observe the
miles.
MORE
2
-
There has been a reporting requirement which will
be implemented. The forms necessary to report will be put
out within a day or so, and we will have prompt reports> and
we will have an ability now to look back retrospectively in
Phase III with reBpect to large firms and see if, on a selfadministering basis, they have been conforming to those rules.
Smaller firms are also required to keep records, although they
do not have to turn them in.
Now, with the combination of the reports and any
pre-notification that we may get, plus our regular informa
tional system, we will be able to see where problems may be
emerging and be able to move in and deal with them, and when
we see a problem in a particular industry, of course, then we
can go and observe and get reports from small firms as well
as large firms.
Q
I would like to clarify, sir: the three points
that you mentioned here in the President's statement apply to
firms with $250 million or more; is that it? The three points
being the pre-notification, the clearance of price increases that
have already been .put into effect —
SECRETARY SHULTZ:
Q
—
That is a reporting requirement.
and the quarterly report.
SECRETARY SHULTZ: Yes. Those apply to large firms.
Now, I should say that in taking this step, we do not mean to
imply that the price inflation that we have been seeing Ln the
last three or four months is attributable to actions by large
firms. On the whole, that sector of the economy has been quite
good as far as price performance is concerned. However, we
think it is important to keep a hand on this, and to take out
an insurance policy, so to speak, against the future.
Q
Mr. Secretary, do you expect a lot of rollbacks
of prices?
SECRETARY SHULTZ: We have no reason to expect that
people have been doing anything but self-administering on an
honest basis, but we are going to observe, we are going to
have the information, and where that hasn't been the case, we
will crack down on it.
MORE
3
Q
Mr. Secretary, is this essentially a "steady
as you go"policy?
SECRETARY SHULTZ:
are getting at, Bill.
Well, I don't know what you
Q
This doesn't seem to be a major step, and you
don't expect much results from it.
SECRETARY SHULTZ: I didn't say we don't expect much
result from it. I say we expect to get information and where
there are problems,we will take action. Where we find no
problems, certainly we are not going to do anything about it.
There is nothing to do anything about.
here?
Q
What are the additional resources he mentioned
Does this mean more monitoring by the IRS?
SECRETARY SHULTZ: We will increase our manpower. As
we see that, we are going to increase reporting requirements
and notification requirements in order to have those
requirements mean anything other than just some papers sent
in. We have to add some people in order to administer it.
It is really slots, numbers of people.
Q
Administration people or monitoring people in
the field?
SECRETARY SHULTZ:
Living Council office.
They are people in the Cost of
John, do you want to respond to that personnel
question?
DR. DUNLOP:
We intend to add 15 percent to the
staffing of the staff of the Cost of Living Council and 30
percent to the staff of the IRS.
Q
How many people will that be?
Q
To the IRS totally?
SECRETARY SHULTZ* The IRS staff devoted to the stabili
zation program; not the total number of people in the IRS.
Q
How many people is that?
MR. DUNLOP: The base numbers are, we have 700 people
on the Cost of Living Council staff and we have 1,500 on the
IRS staff. The increase will be to the level of 800 and 2,000.
Q
Is the Labor Management Council happy with
the new Phase III?
MORE
- 4
SECRETARY SHULTZ: Well, the Council, like everyone
else, is concerned particularly about food prices and their
impact. We had quite a little discussion about that. Of course,
we discussed the steps that the President planned to take,
but I would not try to speak for the Council in any way. They
advised us and if anyone on the Council wishes to make a
statement, he will make it, of course.
Q
Would you define average prices as it is
used in this context here, and point 2 at the bottom of page 2?
SECRETARY SHULTZ:
It is a weighted average concept
That is, you take the price increases in the company, and you
weight the prices according to the volume of that price in
the total mix of what the compan;
an average based on that. That
the prices and just average them. You have to weight them by
the volume that is associated with each given price.
I think
that has been a fairly standard way.
Q
How many actual firms in the country would be
in the category of major firms?
SECRETARY SHULTZ:
About 600, I think
Q
One of the reasons given for changing from
Phase II to Phase III was that there was a lot of paperwork
generated by the Phase II regulations. Would this indicate
the new reporting requirements,that maybe a little too much
paperwork was taken off?
SECRETARY SHULTZ: The reporting requirements are
not new. We are implementing these reporting requirements
now, that is, we are putting out the form and so on. Phase III,
although it seems like it has been going on for years, is
actually relatively recent, so that we will have a quarterly
report which will come in under the forms being put out.
So that is paperwork that was anticipated. The
paperwork involved in pre-notification to the extent that firms
fall in the category where they have to pre-notify is new
paperwork.
Q
Mr. Secretary, requiring them to file full
and detailed reports, haven't they just filed their first
quarterly reports?
SECRETARY SHULTZ: They haven't. We have been
struggling to get up the form, the reporting form, and that is
now ready, and, of course, we have been waiting to see whether
we have an Economic Stabilization Act to report about. We had
hoped the Congress would act promptly on it, but Congress
waited until the last day. So we didn't want to put out a
reporting form two weeks before the expiration.
Q
This is essentially the same requirement that
they had before?
MORE
5
SECRETARY SIIULTZ : The reporting requirements are
basically similar to those under Phase II, just as the rules
of the game under which people operate their own price systems
are fundamentally the same as in Phase II.
The principal difference between Phase II and Phase
III has been that for large categories of firms,they selfadminister according to those rules, rather than of the
government administration of their programs.
Now, we have changed this in effect to say that
self-administrâtion is still the rule as long as the firm
stays within the boundaries of a 1.5 percent average increase
for the year as a whole. We feel that if firms are able to
do that, of course, that is going to be compatible with the
general inflation goal.
Now, if they expect they need to go above that, if
their costs have risen, all of these price increases have
to be cost justified. Remember, if they want to increase
their price further than that, then they must pre-notify.
Q
Mr. Secretary, I think it would be helpful
for us in sorting out what we have done and what we haven’t
done here, if you would contrast the requirement of pre
notification and what it means for a company now under Phase
III, with what it meant for a company under Phase II. Most
particularly, does this pre-notification mean they cannot
act until you have acted to either approve or reject it?
SECRETARY SHULTZ: I think we are quite explicit
on that. They pre-notify and then there are 30 days during
which they are not able to put the price increase into effect.
At the end of the 30 days, unless the Cost of Living Council
has blocked it or taken some step to either change it or
tell them to suspend it, they can put it into effect.
Now, that is without prejudice, however, to some
further action by the Cost of Living Council, if that should
seem merited under the circumstances. What we foresee, of
course, is an ability to enlarge our information flow about
what is going on. As we see a problem developing somewhere,
we can then move into that problem and, of course, not only
deal with the large firms, but also the medium sized firms
which are also required to keep these records, so we know
what is going on and deal with that problem as it emerges.
Q
This does not seem to me substantially different
from the tier 1 requirement under Phase II except that tier 1
companies in Phase III are 250 as opposed to 100.
SECRETARY SHULTZ: I think under Phase II, they
could not put the change into effect until they had heard
explicitly from the Price Commission.
Q
they proceed?
If there was no action by 30 days, couldn't
SECRETARY SHULTZ:
I don't believe so.
MORE
6
Q
Mr. Secretary, the President says that price
increases will probably be higher than we would like for some
months. The one new action that is being announced today
has to do with big companies, which you say have not been
tracing an inflationary pattern.
SECRETARY SHULTZ: We feel on the whole that is true.
On the other hand, since they are a major element in the
economy and since we are trying to look ahead here, the President
felt that the pre-notification step taken here was a good step
to take.
Q
My question is this: In the last paragraph
on page three where the President speaks about expecting
higher prices than we would like, is this not in sum,
acknowledgement that the Administration has done about as
much as it feels it can do and now we are simply in the hands
of the forces of the economy?
SECRETARY SHULTZ: Well, we have a certain pattern
price increases that has been working its way through
the economy.
These are on the whole not related to the
question of Phase II versus Phase III, but they are related
to the problems we have encountered in the food price area,
and particularly with respect to many commodities traded in
their national markets.
Now, we think that the steps that have been taken
are going to have an impact in a great many of these areas.
We know that some of the steps take hold sooner them others.
Some of the steps have been delayed or possibly damaged by
adverse weather conditions, which, of course, would never have
happened under Phase II, but are attributable to Phase III.
Whatever their reasons, there they are and they
are a problem and we have to deal with them as best we can.
We have that in the works and we are just trying to be
candid about it.
Q
Dr. Shultz, under Phase II, one of the criticisms
of the term limit pricing approach, to which this is similar,
was that a company could defer a cost increase in widgets
and use that as a justification for raising the price of biscuits
or something. 'Will there be a requirement under this that the
cost increases used to justify the price increases be related on
a product line or on any basis?
DR. DUNLOP: We intend to provide a detailed briefing
of this matter after this meeting up at the Cost of Living
Council. But the answer to your question is that cost
justification in these tier one companies will be required
in product grouping in accordance with the customary
accounting conventions of the company. Sometimes those
cost records are kept on a plant basis, sometimes on a broad
product line basis, and sometimes in accordance with the
general four digit arrangements of the Census Bureau's
classification.
Whatever the company's prevailing arrangements for
product grouping may be, they will be required to report to
us the cost justification when they seek price increases
above the percent and a half.
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7
Q
M r . Shultz, I would like to direct a question
to you, if I may, and also to Dr. Stein.
In view of the rate
of inflation over the past few months, would the President
be justified in believing he has been misled by his economic
advisers?
/
SECRETARY SHULTZ: Thank you so much for that
question. We do not claim to be clairvoyant, and we did
not foresee the gigantic rise in food prices that took place.
I don't know of anybody who did, but that doesn't make us
any less unable to see that happen.
Is that satisfactorily
contrite?
(Laughter)
Q
The action we are taking today is aimed not
at food prices, but at the manufacturing tier one companies
who were affected at the time you experienced some criticism
of the premature action in this area.
SECRETARY SHULTZ:
If your question is what more
are we doing about food prices, we have done a good deal about
food prices, and those steps are laid out in here. We think, as
a matter of fact, there is some indication of the beginning
of the results.
In the publication a couple of days ago of the
tabulation of prices received by farmers, which the Department
of Agriculture published for the first time in about a year,
there was a decline.
So maybe we are beginning to see some
impact of the steps we have taken.
Q
My question really is that the tier one manufactur
ing companies were removed from the prior notification and
prior approval category in Phase II. Now we are going back to
something akin to that for these large companies. Does that
not at least tend to indicate that it might have been a mistake
in the first place to take the things off, these particular
classes of companies?
SECRETARY SHULTZ: Whether it was a mistake or n o t ,
we have decided to require pre-notification now.
Q
Mr. Secretary, is it fair to conclude that not
too many companies would immediately be required to go through
this pre-notification route, on the assumption that not many
have raised their overall prices above one and a half percent
so far, and it would be some time before a company would get
to that point?
SECRETARY SHULTZ: I think that is a good point, and
of course we will see, and it would be the most desirable
situation from the point of view of stabilization anyway,
that none would exceed the 1.5 percent so we wouldn't have
any pre-notification to deal with. We don't expect that that
will be the case, but we will see what we get.
Q
Do you know of any for<
immediately falling into this?
MORE
sure that would be
SECRETARY SHULTZ: We have been holding discussions
with representatives from a variety of industries, where prices
have gone up rapidly.
John, do you want to comment on those discussions?
OR. DUNLOP: Yes. We have announced and we have met
and we are trying to get the results of these discussions
together with a number of industries and companies like
copper and textiles and wool and cotton and synthetic fibers,
to mention only a few of them. We picked these out on the
basis of companies where there were levels of operation
approaching capacity, to see what we could learn about the
probable course of prices and costs through the next part of
the year.
I would not, at this point, be able to give you a
very clear indication of those companies which we would expect
or areas where there would be one and a half percent, but the
idea is to get a more comprehensive and more systematic
system of operation in order to deal with advance planning
in those areas, whether controls would be appropriate of a
mandatory nature, whether some additional supply actions
of various kinds would be appropriate, whether some conferences
could yield various types of measures we should take.
Q
Do you know which industries it might hit first?
DR. DUNLOP:
I don't know.
Q
D r . Shultz, yesterday you gave us some revised
forecasts for GNP for this year. Could you tell us what your
new estimate of the deflator for this year will be?
SECRETARY SHULTZ: Our estimate for that is for
approximately 11 percent, a little over 11 percent rise
altogether, of which approximately seven percent is real, and
about four percent represents inflation.
Now, we have had a large inflation in the first
quarter, so we expect that the rate of inflation will decline
by virtue of the contrast between the six percent first
quarter rate, and what we see here as the average.
In other
words, we still feel it is appropriate, although we have
said all along it is an ambitious goal to try to get the
rate of inflation down to the two and one-half percent range
by the end of the year. We continue to do that.
I might say in commenting on the budget figures,
we have felt from the beginning, and the President has felt
from the beginning that an essential ingredient in phase
whatever it may be is discipline on the budget. We have felt
that, and we continue to feel that, and we feel that we have
made real headway, and that this is an important fundamental
in place.
Second, that monetary policy is a key ingredient
here. The monetary policy has been disciplined, and we think
this is an essential ingredient. We thought and said when we
announced Phase III, that food prices were going to be our
biggest problem. We did not foresee the extent to which they
were going to be a bigger problem than we thought it was. We
took a great variety of steps and we have continued to add to
them as we have gone along, the most recent being the cheese
import action, to deal with the food price problem, and we
continue to feel that fundamentally those actions to increase
supply are the right way to deal with that food price problem.
MORE
9
Q
These new actions deal with prices only, it
appears. Does that mean that you are content with the wage
situation as far as inflation is concerned?
SECRETARY SHULTZ: We have an automatic reporting
system, so to speak, in the wage area in that whenever a col
lective bargaining agreement is going to be changed, by long
standing law they notify the Federal Mediation Service of that
fact, so we have an information flow about agreements coming
open.
Of course, the major agreements are well known
about, and they are scheduled in a way that price changes are
not scheduled, so you know when the contract expires, and so
forth. We are working with the parties, and we feel that the
pattern of operation we now have is a satisfactory one.
As a matter of fact, as the President points out in
his statement, the wage picture on the whole has been satis
factory, and I think that a very constructive tone exists in
labor-management relations.
Q
Dr. Stein, I wonder if you would talk to us a
little bit about wholesale industrial prices. We have tended
to focus on agricultural and food prices, but, in fact, don't
we have a troublesome trend in the industrial prices also?
DR. STEIN: We certainly have had last month. To
some extent these industrial wholesale prices will be re
strained by the action that is being taken now. That is be
cause companies producing these commodities who intend to
raise prices on them, or propose to raise them above a cer
tain level, are being required to pre-notify. There will be at
least a lag of 30 days during which this can be examined.
Some part of the increase in industrial wholesale
prices reflects, as we have said many times, a worldwide
boom which is raising the price of all industrial raw materials
all over. We are making an attack on that problem via the stock
pile disposal program which we think will have significant
effect on certain major commodities.
wholesale
we think,
increases
and that,
with this
Again, some aspects of the rise of the industrial
price index in the last couple of months have been,
a bulge related to the fact that companies could put
into effect without having to go through any machinery
we believe, are not likely to be repeated, especially
new process established.
Certainly it is a cause of concern and it is one
reason why the action is being taken here outside of the food
field.
Q
Mr. Shultz, in connection with your comments
about wage restraint, do you have any feeling as to how the
unions now look upon the sort of steps you took today?
SECRETARY SHULTZ: The steps we are announcing today
they don't know about, because they are just being announced.
So I cannot do other them speculate.
MORE
10
As far as the steps themselves, they are clearly
as cribable as a tightening of Phase III. You can describe
them in whatever way you want, but that is the net impact, and
we feel that this is an appropriate step. We think it is
do-able, and we think it will help.
On the whole, if you say what is our people's atti
tude, people's attitudes around the country certainly are one
of concern about inflation, just as the President feels that
concern,and all of us working on this problem. So I imagine
people will welcome any step that seems to give some help
here, and this one we think will.
Q
Did you get any indication from the labor
members of the committee that these steps were, in their view,
strong enough?
SECRETARY SHULTZ: I don't feel that it is proper for
me to try to somehow paraphrase or speak for them. They will
speak for themselves, and that is as it should be. I don't
want to try to summarize their views.
Q
Can you speak for them, Dr. Dunlop? You were
designated spokesman in Miami Beach, I seem to remember.
DR. DUNLOP:
That didn't work out too well.
(Laughter)
Q
Mr. Secretary, the large meat packing firms
claimed in the press that the 30-day pre-notification was
unworkable because of the daily fluctuations in livestock
prices that they had to pay. Therefore, they required an
exemption or some partial exemption from the pre-notifying
on meat prices, because their livestock prices went up and down
DR. DUNLOP: The volatile pricing rule is still in
effect, so the official regulations which we are issuing and
putting in the Federal Register tomorrow will deal with the
application of this.
Q
Mr. Secretary, how cam you describe this as
a belt tightening?
SECRETARY SHULTZ: I just said it was a tightening.
I didn't say "belt" tightening.
Q
Yow cam you describe it am a tightening when
you are not sure how many companies fall in this category of
having exceeded the 1-1/2 percent since January 10th?
SECRETARY SHULTZ:
It is a tightening to the extent
that if companies wish to increase their prices more than the
1-1/2 percent, they will have some motions they have to go
through, and we will have am advance notice of that amd an
enhanced ability to deal with it.
Q
Do you expect this to have a major impact
in the anti-inflationary fight, and if so, when can we expect
the impact to be felt?
SECRETARY SHULTZ:
I don't think that there is much
that you can do that is going to suddenly change the whole
picture overnight.
It isn't that kind of a problem, amd I
MORE
11
-
think one should see Phase III, or for that matter Phase II
or any one of these anti-inflation efforts, first of all, as
related to other things going on, such as the budget fight,
monetary policy, and particular actions in the agriculture
field, and so on, and second, as far as the stabilization
program is concerned, as an administrative process.
In this administrative process, a whole lot of
things have taken place. That is the nature of the beast: to
try to do the things that seem to you workable and worthwhile,
and they add up to, we hope and expect, an effective program.
So I don't think any one thing you look for to knock
the ball out of the park, but they all help, and this step that
is taken today is a significant step, in our view.
Q
Mr. Secretary, the tier one firms were not the
villains, and whatnot, to any great extent. Why was this
step necessary? What is the reason for doing this?
SECRETARY SHULTZ:
It is an insurance policy, a sort
of preventive medicine. There may be some cases which we
will uncover as a result of this tightening that wouldn't have
otherwise come to light. That is the nature of it.
Q
I would like to ask Dr. Stein in what products
did the price bulge occur that you think would not have occurred
if they had had to pre-notify?
DR. STEIN: Pre-notification injects a certain lag
into the whole process, and until we know which companies had
raised prices by more than 1-1/2 percent, we can't identify
where this lag would have been injected. All we say is that
we do inject the lag into the process, and we inject increased
capability of supervision into the process, and this must be in
the direction of restraining the rate of inflation.
It can
hardly be otherwise.
MR. WARREN:
W6 have time for one more question.
Q
I would like to ask Mr. Shultz, cam you con
firm for us that the President, at the Cabinet meeting the
other day, made some comments regarding Senator Percy's chances
for the Presidency?
SECRETARY SHULTZ:
That is Mr. Warren's type of ques
tion.
MR. WARREN: The technical briefing this evening will
be at the Cost of Living Council at 2000 M Street right away.
THE PRESS:
Thank you.
END
(AT 4:55 P.M.
EDT)
FOR IMMEDIATE RELEASE
May 3, 1973
John J. McGinnis, age 45, of Vienna, Virginia, who until
'
recently was Special Assistant to the Secretary of the
Treasury for National Security Affairs, died early May 3 in
Montclair, New Jersey, of a heart attack.
Mr. McGinnis had just joined the Lummus Company in
finance.
The company is engaged in engineering design of process
plants for oil refining and the petro-chemical industries.
He
planned to move his family from Virginia to New Jersey at the
end of the school year.
Before joining the Treasury Department in 1969, Mr. McGinnis
was Manager of Program Control and Management Systems of the
Radio Corporation of America, Camden, New Jersey.
At the
Treasury, he was principal advisor to the Secretary on national
security matters and helped develop the Department's position
on broad policy matters.
A native of New York City, Mr. McGinnis received degrees
°f bachelor of science and masters of business administration
DepartmentofthefREASURY
WASHINGTON, D.C. 20220
S H I H v & t i . i t ' mmm
TELEPHONE 634-5191
S
'1
-w *
_________
n 89
' i - ’ ‘J
NEW TELEPHONE NO. 634-5163
FOR RELEASE 3 PM FRIDAY, MAY 4
COMPLIANCE CHECK ON REVENUE SHARING FUNDS
TO BEGIN MAY 9
Compliance reviews of 100 jurisdictions will be made
by Office of Revenue Sharing teams in the next two months,
Graham W. Watt, Director of the Office of Revenue Sharing
in the Treasury Department,announced today.
In an address to a meeting of the National Association
of Minority Certified Public Accounting Firms at the Ramada
Inn in Washington, D.C., Mr. Watt explained that reviews of
the 100 recipients of the largest amounts of general revenue
sharing funds will determine whether the civil rights and
other provisions of the revenue sharing law are being met.
The 100 State, county and city governments have received
more than 50 percent of the $6.6 billion already distributed
through the general revenue sharing program enacted by the
Congress last October.
Audit teams will visit each jurisdiction.
Each team will
be composed of one Office of Revenue Sharing staff member and
one auditor.
Auditors for these compliance reviews are being
borrowed from several Federal departments.
Section 122 of the 1972 State and Local Fiscal Assistance
Act that established the revenue sharing program
states that,
"No person in the United States shall on the ground of race,
(OVER)
2
color, national origin, or sex be excluded from participation
in, be denied the benefits of, or be subjected to discrimina
tion under any program or activity funded in whole or in part
with funds made available” through the general revenue sharing
program.
Final regulations promulgated for all revenue sharing
recipients on April 5 give the Secretary of the Treasury the
authority to withhold all revenue sharing money from any
jurisdiction determined to be in violation of the civil rights
provisions of the Act until compliance has been achieved.
He
may also require repayment of money spent in a discriminatory
activity.
Accounting requirements of the revenue sharing law will
also be reviewed by the compliance check teams.
DepartmentofthefREASURY
■ HINGTON, D C. 20220
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
May 3, 1973
NEW IMPORT AID TO INDEPENDENT FUEL FIRMS
Gasoline grants totaling more than 128 million gallons
to 17 independent petroleum firms in 10 States as well as
new guidelines to implement expanded functions of the Oil
Import Appeals Board, were announced today by William E.
Simon, Deputy Secretary of the Treasury and Chairman of
the President's Oil Policy Committee.
The Board, chaired
by James M. Day, is composed of representatives of the
Departments of the Interior, Justice and Commerce.
The gasoline awards were granted under the Board's
new authority provided as a result of changes in the
Mandatory Oil Import Program announced by the President
on April 18 when he released his Energy Message.
"Today's action opens an important new opportunity for
independent petroleum firms to bring in foreign oil free
of license fees if they can show that they are experiencing
hardship", Deputy Secretary Simon said.
In approving applications based on hardship, the
Board considers the petroleum needs of each firm's
customers, the needs of the community, and the protection
S-190
2
of the public interest in preserving the independent
segment of the petroleum industry.
Simon and Day estimate that speedy action by the
Board and the liberal use of the grant authority will help
significantly to alleviate shortages of crude oil and
finished products in the United States.
Action by the President on April 18 gave the Board
authority to make allocations of fuel for which no import
fees will be charged.
These awards are designed to help
independent refiners and established independent marketers
who face hardships in obtaining supplies and who petition
the Board for help.
Firms authorized the gasoline grants, which are worth
1-1/4 cents per gallon, and the amount that each independent
refiner or independent marketer can import free of license
fees in 1973 are listed at the end of this press release.
Simon and Day reported that the new guidelines are
bing mailed to more than 300 firms who have petitioned the
Board for authority to import petroleum.
The guidelines
provide the Board a standard to use in exercising its
major responsibility to alleviate the supply problem of
established independent elements of the petroleum industry,
including refiners, marketers, and jobbers.
3
C
y
To speed relief to hard hit areas, Deputy Secretary
Simon also announced that independent refiners and
independent marketers facing extreme hardships may wish
to obtain immediately import licenses from the Department of
Interior by payment of import fees and later petition
for rebate from the Board.
Several petitions before the Board were not acted
on because they were incomplete, Simon reported.
Each
of these petitioners is being urged again to file in
conformance with the new guidelines being mailed today.
And he assured that vigorous action will be taken on these
filings as soon as the information is received by the
Board.
The new jurisdiction' was provided to the Board so
that it could open its doors and fully respond to the needs
of the petroleum industry, particularly the independent
sector.
Major oil companies may obtain Board awards also.
However, they must first demonstrate their inability to
obtain, by exchange, import licenses already distributed
and their willingness to supply independent refiners and
marketers.
Simon and Day emphasized that the Board now has
unlimited authority to grant import licenses which are
license fee exempt and, furthermore, that the Board will be
liberal in fulfillings the requirements of the petitioners
ln order to respond to the Nation's fuel needs.
Importers
4
not holding fee exempt licenses must pay 10-1/2 cents a barrel
for crude oil, 52 cents a barrel for gasoline and 15 cents
for all other petroleum products.
Because the independents
will be receiving a major share of the grants from the Board,
this will help them to import oil at less cost than the large
major companies.
We are hopeful, Simon said, that as a
result of this additional market advantage given to independents,
the majors will have greater incentive to provide them crude
and products.
However, our overall goal is to assure the
consumer adequate supplies of petroleum products at lowest
possible cost.
oOo
Name
L ocation
T otal
Amount o f Award
In G allon s
In B a r r e l s
Mo-Park Industries Inc
Cedarhurst, N.Y.
73,000
3,066,000
Blue Ridge Oil Co, Inc
Hickory, N.C.
273,750
11,497,500
Dean Oil Corp
Fanwood, N.J.
109,500
4,599,000
Johnson Products, Inc
Boston, Mass.
292,000
12,264,000
Self Service
Systems, Inc
San Diego, Calif.
182,500
7,665,000
Tetco Oil Co, Inc
So Royalton, Vt.
73,000
3,066,000
Qual-eco, Inc
Greenville, S.C.
127,750
5,365,500
Tryon Fuel Supply, Inc
Greer, S.C.
18,250
766,500
Associated Oil Co, Inc
Greenville, S.C.
36,500
1,533,000
Associated Oil Co, Inc
Greenville, S.C.
73,000
3,066,000
Palmetto State
Oil Co, Inc
Greer, S.C.
54,750
2,299,500
Palmetto State
Oil Co, Inc
Greer, S.C.
36,500
1,533,000
MFC Services (AAL)
Jackson, Miss.
109,500
4,599,000
Gladieux Service
Stations, Inc
Ft. Wayne, Ind.
36,500
1,533,000
OIL IMPORT APPEALS BOARD AWARDS
page 1 of 2
Name
Location
Total
Amount of Award
In Barrels
In Gallons
J. D. Streett § Co
St. Louis, Mo.
912,500
38,325,000
Vantage Petroleum Corp
Melville, N.Y.
109,500
4,599,000
Star Service
and Petroleum Co
St. Louis, Mo.
547,500
22,995,000
3,066,000
128,772,000
TOTAL :
page 2 of 2
FOR IMMEDIATE RELEASE
May 4, 1973
TREASURY SECRETARY GEORGE P. SHULTZ
TO HEAD U.S. DELEGATION TO
ANNUAL MEETING OF THE
INTER-AMERICAN DEVELOPMENT BANK
AT KINGSTON, JAMAICA
Treasury Secretary George P. Shultz will head the
United States delegation to the 14th Annual Meeting of the
Inter-American Development Bank at Kingston, Jamaica,
May 7-10. Secretary Shultz is the United States Governor
of the Bank.
The United States delegation will include John M.
Hennessy, Assistant Secretary of the Treasury for Inter
national Affairs; Sidney Weintraub, Deputy Assistant
Secretary for Finance and Development, Department of
State; and John M. Porges, U.S. Executive Director (Des
ignate) , Inter-American Development Bank.
Congressional advisers will include Representatives
Wright Patman (D-Tex.), William B. Widnall (R-N.J.), Robert
P. Stephens, Jr. (D-Ga.), Albert W. Johnson (R-Pa.), Ben B.
Blackburn (R-Ga.), and Andrew Young (D-Ga.) of the House
Banking and Currency Committee and Representatives Garner E.
Shriver (R-Kan.), Clarence D. Long (D-Md.), and Tom Bevill
(D-Ala.) of the House Appropriations Committee.
The delegation will depart Washington this evening.
Secretary Shultz will return May 8.
The Inter-American Development Bank was established in
1959 to assist in the economic development of the Latin
American nations.
oOo
S-191
DepartmentoftheTREASURY
iSH IN G TO N , D.C. 20220
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
May 4, 1973
The Treasury Department announced that the pro
posed arbitrage bond regulations under Code section 103(d)
which were published on June 1, 1972, have been withdrawn
except for those parts regarding refunding issues.
New
proposed arbitrage bond regulations‘appear in the Federal
Register for May 3, 1973.
The new proposed regulations apply with respect
to obligations issued after October 9, 1969.
However,
governmental obligations issued before June 4, 1973, will
not be arbitrage bonds if they comply with the June 1,
1972, proposed regulations and, where applicable, with
the additional requirement that the actuarial method of
computing yield be used for certain obligations issued
after March 8, 1973.
and April 5.
See Treasury releases of March 8
Obligations issued on or after June 4, 1973,
must comply with the provisions of the new proposed regu
lations and, if applicable, with those parts of the June 1,
1972, proposed regulations which have not been withdrawn.
Treasury also announced that the temporary regula
tions under section 103(d) concerning certain arbitrage
bond provisions applicable to governmental programs have
been amended to broaden the types of lending programs
S-1 9 3
2
that may qualify under such provisions.
This amend
ment will apply with respect to obligations issued
after October 9, 1969.
Additional proposed regulations relating to re
funding issues will be published at an early date.
Meanwhile, the provisions of the June 1, 1972, pro
posed regulations regarding permissible adjusted yield
for refunding issues contained in paragraph (b)(5) of
sections 1.103-13 and the general rules regarding re
funding contained in paragraph (e) of section
1.103-14
remain in effect.
The new proposed regulations continue to define
"materially higher yield" as a yield exceeding the yield
on the governmental obligations by more than 1/8 of
1 percentage point.
However, the new proposed regula
tions contain several significant changes from the June I,
1972, version.
1.
These include:
Permitting an issuer a differential of 1/2
of 1 percentage point instead of 1/8 if the temporary
period is waived.
2.
Requiring the use of the actuarial method to
compute yield.
3.
Eliminating revenues as bond proceeds.
3
4.
Permitting a reasonable reserve fund based
on the original face amount of the bonds rather than
the amount outstanding.
5.
Modifying the temporary period provisions.
Interested persons are invited to submit written
comments or suggestions on the new proposed regulations
to the Commissioner of Internal Revenue by June 4, 1973.
Any person desiring to comment orally on the new pro
posed regulations at a public hearing should submit a
request to do so prior to June 4, 1973.
oOo
PSHINGTON. D.C. 20220
TELEPHONE W 04-2041
FOR IMMEDIATE KELEASE
May 7, 1973
TREASURY ANNOUNCES REDUCTION IN WEEKLY ISSUE OF BILLS
The Treasury announced today that the amount of its
weekly auction of 182-day bills will be lower by $100
million in coming weeks.
In recent weeks the amount
auctioned has been $1.8 billion each week.
Beginning with
the auction to be held on Monday, May 14, the amount auctioned
will be $1.7 billion.
This change has been made in recognition of the
Treasury*s strong cash position.
of TREASURY
Department the
ISHINGTON, O.C. 20220
TELEPHONE W 04‘2041
J 7 89
pNTION: FINANCIAL EDITOR
K RELEASE 6:30 P.M.
May 7, 1973
RESULTS OF TREASURY'S
WEEKLY BILL OFFERING
The Treasury Department announced that the tenders for two series of Treasury
ills, one series to he an additional issue of the bills dated February 8, 1973
, and
|he other series to be dated
May 10, 1973
, which were invited on May 1, 1973,
[ere opened at the Federal Reserve Banks today. Tenders were invited for $ 2,500,000,000,
|r thereabouts, of 91-day bills and for $ 1,800,000,000, or thereabouts, of
182-day
[ills. The details of the two series are as follows:
INGE OF ACCEPTED
OMPETITIVE BIDS:
High
Low
Average
91-day Treasury bills
maturing August 9, 1973
Approx. Equiv.
Annual Rate
Price
98.455
98.448
98.449
6.112%
6.140%
6.136%
1/
182 -day Treasury bills
maturing November 8, 1973
Approx. Equiv.
Annual Rate
Price
96.758
96.741
96.749
6.413$
6.446%
6.431%
1/
85% of the amount of 91 -day bills bid for at the low price was accepted
72% of the amount of 182 -day bills bid for at the low price was accepted
CfTA! TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
poston
pew York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
pnnsas City
Dallas
San Francisco
TOTALS
Applied For
$
26,495,000
3,624,825,000
14,695,000
25,615,000
9,280,000
27,915,000
356,970,000
40,235,000
35,010,000
34,580,000
42,130,000
137,390,000
Accepted
|
14,393,000
2,192,730,000
14,670,000
21,770,000
9,280,000
13,120,000
122,970,000
25,520,000
6,565,000
18,450,000
13,530,000
50,650,000
Applied For
14,480,000
$
2,915,890,000
25,225,000
34,000,000
5,895,000
22,525,000
285,470,000
23,380,000
30,045,000
30,525,000
36,885,000
194,530,000
Accepted
$
2,630,000
1,528,900,000
5,095,000
8,800,000
5,095,000
10,715,000
98,045,000
19,070,000
8,045,000
14,475,000
7,885,000
92,720,000
$4,375,140,000
$2,503,650,000-®/
$3,618,850,000
$1,801,475,000 b/
Includes $223,415,000 noncompetitive tenders accepted at the average price of 98,449
Includes $105,355,000 noncompetitive tenders accepted at the average price of 96.749
Ihese rates are on a bank discount basis. The equivalent coupon issue yields are
^% for the 91-day bills, and 8,74% for the 182 -day bills.
DepartmentoftheTREASURY
ASHINGTON, DX. 20220
3
TELEPHONE W04-2041
May 7, 1973
NOTE TO CORRESPONDENTS:
Attached is a verbatim transcription from a tape
recording of remarks by Under Secretary for Monetary
Affairs Paul A. Volcker before the American Chamber of
Commerce in Sydney, Australia, May 7, 1973.
ASHI1MGT0N, DX. 20220
TELEPHONE W04 2041
■
f
May 7, 1973
REMARKS BY THE HONORABLE PAUL A. VOLCKER
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE
AMERICAN CHAMBER OF COMMERCE
SYDNEY, AUSTRALIA
The fact that I am here is maybe symbolic of what I'd
like to talk about for a few minutes, and that is not the
details of monetary reform and trade reform —
I'm going to
try to avoid all the jargon and technicalities in that area.
But I just want to say a few words about what I think lies
behind all the turmoil that has been going on and what I
hope is also going on —
some constructive negotiations and
reform effort under the surface turmoil.
of course, is familiar to businessmen —
What is behind it,
it is probably
more familiar to businessmen than to government officials.
It takes us a while to see these things sometimes.
But,
it's the process of change in the world economy.
It's the same process of change in a broad sense, I
think, that has created such a large American-Australian
Chamber of Commerce here —
the process, in part, of inter
national business growing, the economy getting more integrated,
but also a process of shift, I think, in relative power
2
relationships and relative economic relationships, as they
affect relative political relationships among countries.
We do live in quite a different world, when one takes
/
the time to sit back and appraise it, than the world of
1944-1945 and 1950 when our post-war monetary institutions
and our post-war trading institutions were first established.
To a Treasury Under Secretary for Monetary Affairs, the
change in the world economy can be summed up very simply
in two statistics.
I don't know whether this impresses
other people, but I assure you it impresses someone sitting
where I am in the U.S. Treasury.
In 1945 we had, in the United States 80 percent of all
the international reserves in the world.
figure of 80 now —
We have another
our net liabilities, our dollar liabi
lities against our meager assets, are $80 billion.
So
we've shifted from 80 percent of all the assets to an $80
billion net liability position, and that is some reflection
of the change in financial circumstances in the world, and
the relative position of the United States.
When I begin talking on this theme, I always run into
some difficulty.
People say, "Oh, you make the United States
sound like an enfeebled giant, or an enfeebled —
a giant."
Now, I don't want to be misunderstood.
not even
The
United States is still the biggest nation in economic terms,
3
in the world.
I still think we've got the strongest economy,
and it's a strong country.
But, in relative terms, it certainly does not stand out
as it once did.
period?
What has been going on in the post-war
You have first the recovery and then the growth
of Europe, the increasing integration of Europe.
Well, it's
not quite a unit, as you know, and there are a kind of grow
ing pains in terms of the Common Market.
The Common Market
does represent a potential economic unit of roughly the size
of the United States, a little bigger in some respects, a
little smaller in some respects.
But there you are with an
economic unit, and a potentially united, and getting more
united, economic unit of the same size and power as the
United States.
On the other side of the world, across the Pacific, you
have Japan, which, of course, is smaller in terms of popula
tion, but with enormous growth, now an independent, strong
force in the world economy, quite unlike the situation 20
years ago.
The whole Pacific Basin has become more prominent.
You thought of an Atlantic world 20 years ago, for better or
for worse.
You can't really think of it in that sense any
more without taking into account not only Japan, but the
Pacific Basin.
4
The growth in Canada, of course, strikes us in the
United States.
And Australia —
I don't have to tell you
about Australia, but it's obviously growing, and is a force
to be taken account of in a way that, rightly or
wrongly, was not done 20 years ago.
Then finally, you have the developing world, still
weak, in some sense, economically —
we tend to think of it
as weak, and that's true in per capita income terms, in
terms of poverty.
But, even in the developing world, you
have striking examples of a number of countries entering
into the world economy, not only with raw materials and
primary products, but with manufactured goods in some cases,
and increasing their exports in recent years by 20 or 30
percent, year after year.
But, however strong the develop
ing countries are, they are an increasingly self-confident
and increasingly vocal force in the world that is not going
to sit aside and let everything be decided by the bigger
countries.
You have a world, and this is the point I would want
to leave with you, of much more equality in terms of economic
power and in terms of political power.
Certain conclusions,
I think, follow from that very fundamental fact.
You know,
you look at the international monetary system and the way
it worked earlier in the post-war period and —
not looking
0V
- 5 at all the formalities of the structure, but looking at the
way it really worked and not making too much of a caricature
of it —
it consisted of the United States sitting there,
and not doing too much except maintaining a presumed inter
changeability between dollars and gold, which became
increasingly tenuous.
But otherwise, the U.S. had a
pretty passive policy.
When other people got into trouble, they would, in
effect, call up the Managing Director of the International
Monetary Fund and say, "We want to devalue," or, if they
got into trouble in any other direction, they might say,
"We want to revalue" -- that was very rare.
happened until very recently.
It almost never
Australia has shown the way,
in some respects, in making this more symmetrical.
But they would say, "You know, we have to change," or
"We have to change some other policies," and the Fund would,
in effect, say, "All right, go ahead," and the United States
would say, "All right, go ahead."
you could say about it.
There wasn't much else
But there was a certain amount of
maneuverability, as we in the United States thought, anyway,
on the part of other countries, that the big unit in the
middle, the big passive unit in the middle, doesn't have in
the same way.
6
Now the result of that process, and the result, more
fundamentally, of the changes in the world economy, was that
our competitive position came under pressure.
And the real
change, in this sense, has been the change from the peristent, unconscious, easy surpluses that the United States
once used to run in trade, to persistent, strong, increas
ingly troublesome pressure on our trade and balance of
payments position as the rest of the world became more
competitive.
The rest of the world.had, I think, a little
more maneuverability in protecting their competitive posi
tion and their trade position.
Now this is an unsustainable course of events.
We sus
tained it maybe longer than it should have been sustained,
because everybody implicitly, I think, felt it was in their
interest not to upset the apple-cart.
And you kept hoping
that the apple-cart would not have to be upset.
thing became stretched and stretched —
balance of payments position —
had to be made.
But the
particularly our
to the point where changes
That was, of course, signalled by the ef
forts on August 15, 1971, in the U.S. when we decided that
strong action had to be taken to change our relative com
petitive position.
And that process, I would argue, has
not yet been completed.
A
- 7 I
would interject that so far as exchange rate changes
are concerned, I hope and expect the process has been com“
pleted with the further changes made in February of this year.
But it's been a long and tortuous process.
That process
has been in the nature of a change from the competitive
situation that existed to a new and more equal competitive
position —
a necessary change —
but it does not solve the
problems of the system as we look ahead.
How do we build and rebuild and strengthen a monetary
system and a trading system so that you can make an adjust
ment more smoothly, or keep an adjustment, without going
through the kind of convulsion, relatively speaking that
we've had to go through the past couple of years?
I think
this is the challenge ahead of us, and is what we are try
ing to do in these monetary and trade negotiations.
How
can we rebuild a monetary and trading system that maintains
an e<3uilibrium, that avoids sharp change, sharp convulsion
in the future, and therefore helps to support a movement
toward freer trade, toward more liberal trade, and resists
tendencies, which I think exist in most countries —
they
certainly exist in the United States —— to turn inward, to
retreat from the world, and to build walls?
This is not an easy process, partly because it is
technically difficult.
But let me forget about the technical
8
difficulties of floating rates and fixed rates that change
and fixed rates that are unchanged, and how you create re
serves, and all the rest, and look through that to what I
think is a more fundamental part of the difficulty.
I refer to this world of more equals.
tries —
You expect coun
the natural state of human instinct, I suppose, is
to compete, and competition is healthy, and it brings progess.
But it also can bring some dangers, as people compete in
certain ways on an international scale in a nationalistic
kind of way.
How do you construct, how do you project, push
the competition into healthy and constructive channels?
That, in a sense, is what we're trying to do.
But, in doing this, we have to recognize, I think, that
there is no boss of the world any more, in the sense that
there is no country that can sit there and be the world
policeman.
institution.
You can't push this off on an international
You can inform, and you do inform, in the
monetary area, the International Monetary Fund, but you
have to have a healthy recognition that an international
institution is nothing more than the countries of which it
is made up.
Someone in Australia —
no, it wasn't in Australia, it
was in Indonesia, someone told me a story about what they
thought about international institutions.
You join an
9
international institution.
If you're a small country, and
if you disagree with a big country in the institution, you
get in line.
But if two big countries in the institution
disagree, it's the institution that disappears.
And there is a certain amount of truth in that story.
But the point is that the institution itself and the
rules which that institution has to "enforce" have to be
rules, I think, that make sense to all the participants.
It will work so long as it makes sense to all the main par
ticipants, and they conceive that it's in their interest
to maintain the rules and the codes of conduct.
Those rules
are not going to last very long if the main participants
don't conceive them to be in their interest.
Now this takes an enlightened view on the part of, I
suppose, the leading participants, of which there are many.
It also takes a good deal of skill and sophistication in
deciding which rules are essential —
essential —
which ones really are
to prevent that competitive instinct from be
coming destructive, and channelling it into constructive
areas.
Equally important, I think, is to decide which rules
aren't essential, so that international commerce, inter
national relationships between countries, don't become
cluttered up with a lot of rules that aren’t essential,
recognizing that when you have disagreements between
10
countries over the application of rules, you're in diffi
culties.
Now this, I would like to think, is the process in
which we are engaged in a relatively understanding and
sophisticated way —
drawing up that kind of set of rules —
not doing too much, but doing what is essential and gaining
the support of the world community at large to a set of
rules that look sensible, look reasonable and therefore will
be enforced, almost self-enforced, and will provide an en
vironment in which business can continue to look outwards,
with more Chambers of Commerce flourishing, with larger
membership, because business will be extending even more
vigorously across national lines.
If we can achieve that, I think we can measure our suc
cess by the degree of membership that we have in international
Chambers of Commerce in various countries, and I think that
is our real objective.
It's terribly easy when you're engaged in these negotia
tions to get all bound up with looking at one aspect or
another as an end in itself —
fixed exchange rates, or
flexible exchange rates, or SDR's, or controls, and that's
a good example —
and forget that what you're trying to do
is create conditions in which business flourishes, not in
which bureaucrats flourish.
11
We have to keep coming back and remaining in
communication, I think, with the businessman, and in
shaping these rules of which I speak, really asking our
selves which ones are essential to keep international
business going and flourishing*
0O0
DepartmentoftheTREJffllRY
W ashington,o c.2 0220
La
TELEPHONE W04-2041
V
17 8 9
FOR RELEASE AT 12:00 NOON, EDT
STATEMENT BY THE HONORABLE GEORGE P. SHULTZ
SECRETARY OF THE TREASURY AND GOVERNOR
FOR THE UNITED STATES BEFORE THE FOURTEENTH
ANNUAL MEETING OF THE BOARD OF GOVERNORS
OF THE INTER-AMERICAN DEVELOPMENT BANK
KINGSTON, JAMAICA, MAY 8, 1973
Mr. Chairman, Fellow Governors and Distinguished Guests:
It is a pleasure for me to be attending the Annual
Meeting of the Inter-American Development Bank for the first
time.
It is the first opportunity I have had to work with
many of my fellow Governors.
I have enjoyed this opportunity
and have found the exchange of views most useful.
I wish to express to the people of Jamaica the sincere
appreciation of the U. S. delegation for the gracious hos
pitality they have extended to us.
President Nixon has
asked me to convey his warmest personal regards to this
meeting and his wishes for its success.
U. S. participation in the Inter-American Development
Bank requires the agreement and cooperation of both the
Executive and Legislative branches of the U. S. Government.
Thus, it is most fitting that we have in the U. S. delega
tion members of the U. S. Congress of great distinction.
In his report to the Congress last week, President Nixon
S-195
2
suggested that our legislators make such visits within the
Hemisphere at the same time he announced his own intention to
travel to Latin America at least once this year.
We come together at a time when the international
economy and the relations of all nations are undergoing
fundamental change.
This change brings new challenges —
new opportunities to our nations, individually and collec
tively .
It is now widely recognized that economic relationships
between the United States and other industrial nations
have undergone a fundamental transformation —
greater than
almost any nation was willing to admit less than two years
ago.
After World War II, the unrivaled economic strength
of the United States allowed us to make international eco
nomic commitments with little concern for their effect on
our own economy.
Now, however, economic strength and power is more
widely distributed among countries and, viewing the matter
in global terms, this change has been for the better.
Many
industrial nations have per capita incomes approaching that
of the United States.
Many of the developing countries have
broken out of their poverty cycles and made rapid strides
in improving their standards of living.
The less-developed
world, and Latin American nations in particular, are now
conscious of their needs, their opportunities and their
ability to play a central role in the development process.
The reform of the international economic system in which
we are now engaged must reflect these changes in underlying
economic realities.
Rather than resist needed change, we
must reexamine our practices and reshape our economic roles
and institutions.
Our aim should be to assure that our
common interest in economic prosperity and political har
mony is served by change.
It is essential in this process for developed and de
veloping nations to work together, for economic reform can
and will benefit all our nations and —
most importantly —
provide the framework in which the development aspirations
of the Latin American people can be most readily fulfilled.
That is why the United States has welcomed the participa
tion of the developing countries of Latin America as well
as other continents in the work of the Committee of 20.
Two major realignments in the relationship of the
dollar and the currencies of other nations have taken
place.
Present rates now reflect the basic economic real
ities and a major source of instability in the system has
been removed.
Realistic exchange rates bring direct bene
fits to Latin America.
4
Most Latin American countries chose to follow the
dollar at the time of the realignments.
Since Latin America
is the most industrialized of the developing regions of the
world, the region's competitive position in world trade has
been improved considerably.
The initial figures on trade
and the increase in reserves seem to indicate that Latin
America has seized and profited by this new opportunity.
There are other fundamental ways in which development
is and will be affected by the success of reform of the
monetary system.
It is clearly disadvantageous, both to the
developing countries and to the United States, to have a
monetary system which permits large and persistent sur
pluses or deficits.
Large persistent imbalances lead to a
proliferation of controls on trade and capital which slow
the growth of world production and affect the flow of de
velopment capital.
Such imbalances also lead to large and
disruptive exchange rate changes.
The new system must assure
that balance of payments adjustment takes place more promptly
and smoothly and in an outward looking way —
a system which
provides for economic expansion, not contraction.
There is a certain nostalgia among some countries for
the old fixed-rate system, where parities were supposed to
change only rarely, and did so after great pressure had been
built up as an extreme deficit or surplus developed.
As a
5
result, change tended to be large and disruptive.
The fear
exists that somehow more flexible rate will lead to greater
uncertainty and instability in the system, with adverse ef
fects on individual countries, especially those in the
process of development.
I think the evidence is heavily on
the other side.
One must not confuse a more flexible system with dis
ruptive large-scale changes in exchange rates which we have
experienced in the past two years.
The recent changes were
needed because the old system was not flexible.
It did not
provide for adjustment to the major structural changes in
the world economy which had evolved over many years, and a
major realignment was required.
One central element of a more stable monetary system is,
in our view, the use of some kind of objective indicator to
signal the need for action to correct an emerging disequi
librium —
to ensure that appropriate adjustment does take
place and is consistent with open and cooperative world
economic relations.
Internationally agreed rules are very
important in an economic system of more equally distributed
power where the possibility of economic friction and dis
harmony is increased.
The use of objective indicators which the United States
has proposed would place upon all countries, large and small,
6
rich and poor, equal obligations to take adjustment actions
when disproportionately large imbalances were experienced —
unless it could be demonstrated that the imbalance was soon
to be reversed without specific corrective steps.
When
action was clearly appropriate, each individual nation would
have broad flexibility to make its own choice among inter
nationally acceptable adjustment measures, and exchange rate
modifications would represent but one possible choice out of
a broad spectrum of possible domestic or international ac
tions.
For example, greater use of borrowing facilities
could be undertaken, if that were judged appropriate.
The challenge of monetary reform is one both developed
and developing countries must meet quickly and decisively.
Latin America and the United States share a common objective
in successful reform.
It is an opportunity and important
challenge for us, for if the system does not permit all
nations, including the United States, to reach and stay in
equilibrium, restrictions on the flows of development
assistance, private capital, and trade will be inevitable.
To be fully effective, reform of a monetary system must
be accompanied by reform of the trading system.
There is
now a great opportunity for progress in the reduction of
tariffs and other barriers to international trade.
Multi
lateral trade negotiations will begin in the GATT in September,
- 7 in which I expect Latin American nations will take an active
part.
The great changes which have occurred in the struc
ture of world economic and financial power require changes
in trading rules which strike a fair balance between the
legitimate interests of individual nations —
including the
developing nations and the need for a cooperative world-wide
approach.
This is the spirit in which President Nixon has pro
posed broad new legislative authority for trade negotiations.
The requested authority would include —
and look toward —
reductions in both tariff and nontariff barriers.
The
legislation has as its fundamental premise that every nation
can and should benefit from expanding trade and open trading
practices, within the basic framework of a competitive market
system.
But that openness, however, must also be combined
with fairness for all nations.
It is in the elimination of nontariff barriers that the
mutuality of Objectives between the United States and Latin
American nations is perhaps greatest.
A reduction in
the barriers to agricultural imports world-wide would bring
major benefits to our economies.
Benefits would also accrue
from a negotiation which would reverse the trend toward
inward looking regionalism based on preferences for par
ticular countries and groups of countries.
8
In some instances, open markets and free trade can
bring change with disruptive speed.
tion recognizes this.
Our proposed legisla
Like other countries, we need
effective safeguards when excessive hardships are imposed
on domestic workers and business by surges in imports.
The aim of such safeguards is not to avoid adjustment,
but to ease the burdens of adjustment for a transitional
period and thereby facilitate the process.
Safeguards of
the kind we have in mind can most effectively be worked out
on a consistent multilateral basis.
Progress, in reducing barriers to trade is sustainable
for the United States only if it is clear that our own
products receive fair and nondiscriminatory treatment.
Our
proposed legislation, therefore, would give the President
broadened authority to respond effectively to restrictive
or discriminatory practices of others.
Under this authority,
the President could, if necessary, restrict the access of
others to the United States market.
The United States also realizes that developing countries face special dfficulties in entering world markets,
particularly when first attempting to diversify into nontraditional exports.
For that reason the trade bill would
permit the United States to join with other industrialized
countries in providing developing countries access to the
9
markets of the industrialized nations.
A broad range of
manufactured products now regulated by tariffs would be
accorded duty-free treatment in instances where countries
in the early stages of industrialization are beginning to
enter world markets.
Much progess toward economic reform has already been
achieved.
Much more is in the offing.
I appreciated having
the opportunity to discuss these matters at some length with
many of you this week.
consultation.
It is important to continue this
To this end, I have asked Under Secretary
Paul Volcker to act as my Special Representative for con
sulting with Latin America on these matters, so that we may
better understand our commonality of interests and work
cooperatively together toward these important goals.
Turning specifically to the Inter-American Development
Bank, I congratulate President Ortiz, Mena on another success
ful year for the Bank, carried out in the face of an
increasingly difficult funding problem.
the engine —
the driving force —
The Bank has been
of economic development
in the region and must continue to play, that role.
It has
shown the ability to provide a large flow of resources to
member countries, and —
equally important —
it has been
able to adapt itself to the times and go through the diffi
cult process of self-improvement.
10
But the Bank must be adequately funded if it is to
play its part in furthering the development process.
Legit
imate questions can be directed at the United States in that
regard.
I would like to state our position on the matter
frankly and fully.
It is obvious that it is the overall economic and
financial situation of the United States that determines
our ability to support development finance institutions.
The same is true of all nations.
My country as well as
yours must take budgetary priorities and balance of pay
ments considerations into account.
But priorities in my
country are reviewed independently both by the Executive
and Congress, so that any funding requests must withstand
a double scrutiny.
We have been restraining our total budget as a means
of countering domestic inflationary pressures.
Budgetary
allocations for a number of domestic programs have been
substantially cut back from earlier projections.
mands for more domestic spending are vast.
control pollution.
The de
We need to
We need to rebuild decaying cities.
We
need to assist poorer American citizens, whose number is
still too large.
demands.
We are not able to meet all these pressing
11
It is also obvious, in the light of recurrent attacks
on the dollar in world markets, that we must urgently re
strain overseas spending to help deal with our balance of
payments problem.
I
want to underscore the fact that the President, after
considering the budgetary and balance of payments constraints,
still feels strongly that we must give priority to our past
agreements to provide funds to the Inter-American Development
Bank.
The President's 1974 budget includes $500 million in
concessional funds for the Bank.
In addition, there is
before the Congress a $193 million capital subscription re
quest, mainly in the form of guarantee authority for
additional Bank borrowings in capital markets.
We will press for appropriation of these amounts.
But
the Congress will independently examine priorities and,
frankly speaking, I cannot describe the Congressional pros
pects as other than uncertain.
If we can clearly show that
this Bank plays a crucial role in building stronger economies
in Latin America, thereby contributing to economic stability
and a peaceful world, there may be grounds for greater
optimism.
In this regard, the Bank has a real record of accom
plishment.
Last year the total market rate and concessional
lending reached $800 million and the quality of the Bank's
12
programs continued to improve.
A number of specific actions
taken last year to make the Bank more effective also deserve
special note.
Several years ago this Bank established the first in
dependent evaluation mechanism of any of the international
financial institutions.
This was a healthy step.
It was of
particular concern to the United States Congress as a means
of insuring effective use of Bank funds.
This evaluation group carried out last year three more
in-depth evaluations of Bank programs, resulting in major
improvements in the Bank's operations —
evaluations are in process.
and additional
The Bank's ability and willing
ness to profit from constructive, independent evaluation
provide the best guarantee to donors and recipients that
the institution will continue to evolve to changing condi
tions and meet the needs of its members.
The thrust for improved operating efficiency was also
carried forward significantly by the implementation during
the last 12 months of the reorganization recommendations
that grew out of an independent consultant's study.
Another milestone in the Bank's process of changing in
accordance with the progress of the region was passed last
year.
The Board of Executive Directors acted to implement
the Board of Governors' decision that it was now appropriate
13
to phase down soft loans to the richer countries, in order
to increase the flow of these funds to the poorer nations of
the region whose economies are not yet able to accept sub
stantial amounts of loans on commercial terms.
These
relatively lesser developed nations will also need tech
nical assistance in project identification and preparation.
Much of this assistance could now be provided by the more
advanced members of the region themselves.
They have gained
practical experience in overcoming many of the difficulties
which lesser developed countries still face.
Also, the Bank is taking steps to increase its donor
country membership.
This will broaden the resource base of
the institution, make it less dependent on the United States,
and do so in a way which fully preserves the fundamental
hemispheric nature of the Bank.
I
must acknowledge that there remain policy problems
which affect the Bank and the ability of the United States
to provide financial support for it.
The Bank has a useful
role to play as an intermediary in helping to resolve in
vestment disputes, a role best played out of the headlines
and with quiet patience.
These disputes continue to affect
economic harmony and cooperation in the Hemisphere.
They
are thus a matter of international concern, not just a bi
lateral issue.
We would hope that such disputes could be
swiftly resolved so that the important work of development
can go forward unimpeded.
But the position of both the
Executive Branch and the Congress of my country is clear.
U. S. taxpayers* funds should not be provided to nations
which have expropriated property of United States' firms
without the prompt, adequate, and effective compensation
contemplated both by international law and our domestic law.
This Bank was founded in spirit of friendship and co
operation in the Hemisphere.
Its work has proven that
different nations working harmoniously can accomplish much
more together than they can separately.
In recent years,
there has been a tendency to ignore this lesson.
It is
unquestionable that hemispheric relations are passing
through a period of transition, and new approaches to
regional cooperation, such as those being sought within the
OAS framework, are appropriate and healthy.
I would hope,
however, that we do not lose sight of the common objectives
that we share, and of the cooperation we need to accomplish
these objectives and to achieve an equitable economic re
form.
This cooperation can form the basis of a continued
and fruitful relationship among all our nations.
There are great opportunities which confront us.
must take full advantage of them.
We
For my part, I will do
everything possible to see that close cooperation continues
15
between the United States and Latin America and that the
Inter-American Development Bank continues to be able to
play its vital role in achieving economic and social progress
in Latin America.
0O0
DepartmentofthefREASURY
FOR RELEASE ON DELIVERY
STATEMENT BY THE HONORABLE GEORGE P. SHULTZ
SECRETARY OF THE TREASURY
BEFORE
THE HOUSE WAYS AND MEANS COMMITTEE
WEDNESDAY, MAY 9, 1973, 10:00 A.M.
Mr. Chairman and Members of this distinguished Committee:
The world economy has changed greatly since this
Committee .last considered comprehensive foreign trade
legislation.
This rapid change will continue whether
or not we in the United States seek to influence its
future course.
But we must play an active and construc
tive role in influencing the shape of a sensible world
economy,
Your approval of the Trade Reform Act
of 1973
can be an initial step toward that end.
The Trade Reform Act provides the President with the
authority he needs to negotiate effectively on behalf of
American workers, businessmen, and consumers.
It would
provide:
(a)
authority to change customs duties up or down
in the context of negotiated agreements;
(b)
a Congressional declaration favoring negotiations
and agreements on non-tariff barriers with an
optional procedure for obtaining Congressional
approval of these agreements where appropriate;
S-192
-2
(c)
authority to raise or lower import restrictions
on a temporary basis to help correct deficits
or surpluses in our payments position.
These authorities are necessary for meaningful trade
negotiations and will provide for a more efficient and
flexible management of American trade policy.
The Trade Reform Act and supplementary legislation
will provide a second set of tools to deal with domestic
problems that may arise in connection with international
trade and to permit our export firms to compete equally
in international markets:
(a)
The Trade Reform Act would introduce a fairer
and less stringent test for domestic industry
to qualify for temporary import relief in order
to give it time to adjust to import competition
or to avoid serious injury.
(b)
The Act would improve procedures for protecting
American workers and industry from unfair
competition by amending the antidumping and
countervailing duty statutes.
(c)
It would help protect the interest of Uf S.
exporters by revising and simplifying the
President's authority to raise import barriers
against countries that unreasonably or
unjustifiably restrict our exports.
-3
(d)
It would permit the temporary reduction of
import barriers as necessary to combat inflation.
(e)
Separate legislation to amend the Export Trade
Act will make explicit the Act’s application
to our export of services as well as exports
of goods and will clarify the exemption of
export associations from our domestic antitrust
laws, while ensuring the protection of the
public interest through clear information,
disclosure, and regulatory requirements.
(f)
Separate legislation will reform the pension
and unemployment insurance systems to help
all workers who lose their jobs, from whatever
cause.
(g)
Finally, the Act will permit increased trade
with non-market economies by granting
the President authority to extend most-favorednation treatment to these countries and will
permit the United States to extend preferential
duty-free treatment to certain imports from
developing countries.
Secretary Rogers will
have more to say on these final two points.
-4
The Changed Environment of International Trade
We consider this legislation at a critical time.
We have seen repeated and widespread monetary disturbances
in recent years.
Points of strain and tension have arisen
in trading relationships among nations.
These problems
are part of that process of vast change in the world
economy which has taken place since the basic monetary
and trading institutions were established at the end of
World War II, almost thirty years ago.
In part, they are
the consequences of the success of our postwar policies.
Since the end of World War II, the United States
has worked to create a strong, free economy in a
multilateral world with as few restrictions as possible
on the free flow of trade and capital.
We worked to create
an economic framework in which all countries could grow
and prosper.
We gave of ourselves and of our substance
to achieve those goals.
This was done for our own sake, as well as in the
interest of others.
We worked from a far-reaching vision
of what would serve our own economic and security interests.
But it was a broad vision conceived in the interest of all.
Our own security and economic well-being depended on the
ability of others to grow and prosper in freedom.
-5
The world today is different from what it was when
American planners decided to devote our wealth, influence,
and energy to the achievement of a more secure and more
prosperous world.
Today, economic power is not concentrated
in the United States alone as it was thirty years ago.
Great centers of wealth have grown up in Europe and Japan.
The European Community is now the world’s largest trading
bloc, with large and persistent trade surpluses.
Japan
has sustained a truly remarkable rate of growth, and the
size of its trade and balance of payments surpluses con
stitute a major problem in the world economy.
Other
countries, including many developing countries, have made
notable strides forward.
However, along with this diffusion of economic power
has gone a reluctance to remove restrictions that are
contrary to the principles of an open world economy.
At
one time those restrictions could have been considered
necessary to support weak economies in the face of over
whelming U. S. economic power or as temporary aids to
promote political objectives such as regional integration.
No longer is this true.
In this changed world of economic equals we need to
deal with those restrictions, and we need new rules to
-6
assure equality of responsibility.
There must be a
reformed international monetary system -- one that puts
equal obligations for adjustment on surplus and deficit
countries.
There must be reform of international trade
rules to eliminate growing discrimination, to assure
that market access is not barred by non-tariff barriers,
and to develop procedures for resolving differences without
political tension.
This new system will allow our industries, workers
and farmers to compete fairly in international trade and
our consumers to benefit from the variety of goods the
world has to offer.
We have much to gain from this kind
of a new world economic system, and much to lose from no
system at all.
Either we go forward to a new and higher
level of international cooperation, or I fear we may go
backward.
Negotiations are well underway to reform the inter
national monetary system.
We need the Trade Reform Act
to begin to reform the trading system.
The Need for Trade Reform
The existing system has been unable to deal with a
variety of measures that have made fair competition
in world markets much more difficult.
Undervalued exchange
rates, quotas, restrictions on agricultural trade,
preferential trading arrangements, and the proliferation
-7
of non-tariff barriers have served to hamper our exports,
including some that we produce far more efficiently than
anyone else.
These barriers to trade exact a high cost for
all nations of the world in higher consumer prices,
inefficient use of resources, and heavy strains on the
balance of payments.
Our trade position must be improved, and to do
this we must secure the reduction of foreign barriers to
trade in order to gain access to foreign markets and
permit our goods to compete equally with those of other
countries.
It is in the interest of the United States,
even more than other countries, to bring about a freer
and fairer trading system.
To deal with these problems we seek to:
free up agricultural trade;
come to grips with the unreasonable aspects of
regionalism;
bring order to the maze of non-tariff barriers
preventing the expansion of world trade;
work out new answers to the problems of
buffering our industries against injury from
sudden surges of imports, and to better enable
our workers to adjust to changing competitive
situations affecting employment.
-8
Other countries have complaints against some of our
trade practices.
To move forward we must be prepared
to strike a fair bargain, with a fair balancing of the
interests involved.
The Trade Reform Act will make these
negotiations both possible and fruitful.
The need is urgent.
But there are some things that
can be done under existing authorities, and we have made
a beginning.
The United States has taken several steps to improve
its trade position and to stimulate reform.
In February
1972 the United States and the European Community reached
an agreement on future trade discussions.
In this
understanding the United States and the Community agreed
to move rapidly to:
(1)
examine the impact of the enlargement of
the Community on U. S. exports;
(2)
renegotiate the existing GATT concessions
of the new members in order to compensate the
United States for the loss of these rights
or for any higher duties that might arise due
to the enlargement; and
(3)
enter into multilateral trade negotiations
this year.
We anticipate that the extension of the Community
to the three new member countries -- the United Kingdom,
|
-9
Ireland, and Denmark -- will harm our trade in some
products, particularly in agriculture.
We expect the
Community to recognize this damage and to compensate us.
Negotiations began in Geneva in mid-March.
We hope
they will be concluded before the multilateral trade
negotiations begin.
The Link Between Trade and Monetary Reform
The upcoming trade negotiations are important not
only in their own right but also in their implications for
the monetary negotiations.
We must have coordinated
consideration of the two areas if we are to construct a
workable economic system.
The two-stage realignment that was achieved at the
Smithsonian Institution in February of this year
provides exchange rates that lay the foundation for
restoration of the external strength of the dollar.
appreciated against the dollar by an average of about 25
o\o
Overall, the major currencies of Europe and Japan have
Japan, the world’s third largest economy, and Germany,
Europe's ranking industrial power, both appreciated by
about 301 to 351 against the United States.
Nevertheless,
fundamental reform of the monetary system is urgently needed.
Considerable progress has already been achieved, making
it all the more imperative that we achieve rapid progress
on the trade front as well.
-10
The monetary and trade negotiations must lead to a
consistency in rules that has been lacking in the past.
We need, for example, to reach a new consensus on the
relationships between nondiscrimination in monetary
arrangements and most-favored-nation treatment in trade.
The divergence between rules and practices in these two
fields has grown unacceptably large.
Trade rules cannot
be allowed to shield large portions of national economies
from the impact of balance-of-payments adjustment measures.
And we need to build trade liberalization incentives
into balance-of-payments adjustment rules.
To achieve a consistency in the rules in the
monetary and trade fields does not require that detailed
trade and monetary negotiations proceed in the same forum.
Nor does it require that detailed trade negotiations
wait on monetary reform, or vice-versa.
But it does
require a coordinated consideration of the rules in the
two areas.
The Trade Reform Act will further this coordination
in several ways.
The Act will provide the President with
special balance-of-payments authority to increase or
reduce trade barriers.
The Act would specifically
authorize the President to employ an import surcharge for
the purpose of protecting our balance of payments and
-11
authorize him to reduce tariffs as one possible adjustment
measure if we were to have a persistent surplus.
This
authority could also be used to protect U. S. interests i
vis-a-vis a chronic surplus country which had not taken
effective adjustment measures.
Foreign Investment and Taxation
I
would like to say a word about investment abroad
by U. S. firms and the Administration's proposals for
modification in the tax treatment of foreign source income.
The rapid growth of international investment in recent
years -- particularly the growth in investment undertaken
by multinational corporations -- has been a subject of
great controversy at home and abroad.
On balance, we believe that this investment has
been beneficial to the American economy.
Government studies
show that it has improved the U. S. balance of trade and
the overall balance of payments, and has meant more jobs
for the U. S. economy.
We cannot assume that discouraging
foreign investment will promote investment and prosperity
in the United States.
On the contrary, if investment
opportunities exist abroad, foreign firms will take them
if American firms do not, which will lessen the flow of
American-made goods into foreign markets.
-12
Our proposals for taxing foreign source income are
shaped against that background.
We believe our tax system
should not be used as a club to inhibit foreign investment,
because we believe that investment to be good on the whole.
At the same time, we do not believe that our tax system or
any other tax system should be permitted to induce
American business to make foreign investments which they
would not otherwise make.
Our existing system is designed to permit an
American-contro11ed business operating in a foreign
country to operate under the same tax rules applicable to
its foreign competitors in that same country.
We believe
that is a fundamentally sound system and that we should
not devise new rules designed to disadvantage American
business with respect to its foreign competitors.
Our data show that our American enterprises abroad pay
substantial foreign income taxes.
In the vast majority
of cases, it is business factors and not income tax
factors which lead to foreign investment.
Income taxes
are not the cause of our trade problem, and income tax
changes will not solve that trade problem.
For these
reasons, we conclude that drastic surgery on our tax
credit and deferral provisions relating to overseas
investment is not justified.
The issues in this field are not new.
In 1962, the
Congress exhaustively reviewed this field and we believe
the conclusions which it reached are fundamentally sound.
There are, however, three situations in which the
existing tax system produces artificial distortions and
incentives and which we ask that you change.
The first
two proposals relate to tax holidays and runaway plants,
where we ask that you modify our tax system to neutralize
tax inducements offered by other countries.
The third
proposal would eliminate the present ability of American
firms to offset foreign losses against their U. S. income
without ever paying U. S. tax on subsequent profits.
--Tax Holidays - A number of foreign countries
presently attract U. S. investment by granting major
tax incentives, such as extended tax holidays or cash
grants that are not included in taxable income.
To
neutralize such practices, the Administration is
recommending amendment of our tax laws so that earnings
from new or additional American investments which take
advantage of those inducements will be taxed to their U. S.
shareholders as earned, rather than at the time they are
remitted to these shareholders.
by treaty.
Exceptions could be made
-14
--Runaway Plants - Some American companies
occasionally undertake foreign investments for the purpose
of re-exporting a substantial share of their production
to the United States.
To prevent income taxes from
inducing such decisions, the Administration recommends
that in cases where new or additional foreign investment is
made by a U. S .-controlled foreign corporation in a low
tax country, earnings will also be taxed on a current
basis if exports to the U. S. market account for more
than 25 percent of the corporation’s total receipts.
This rule would only apply when the effective rate of tax
on the income of the controlled foreign corporation is
less than 80 percent of the U. S. tax rate and exceptions
would be permitted for particular situations if the President
determines that it is in the public interest to do so.
--Recovery of Foreign Losses - The Administration
also recommends amendment of our tax laws (a) to reduce
the credit for foreign taxes where foreign taxes are
excessive because the foreign country has not allowed prior
losses to be offset against subsequent profits; and
(b) to recapture benefits of loss deductions where the
legal form or ownership of an enterprise changes in such
a way that future profits are insulated from losses
previously taken against U. S. tax.
This provision would
also reduce the advantage of drilling for oil abroad and
increase the relative attractiveness of domestic drilling.
*15
CONCLUSION
We have joined with our major trading partners in
a commitment for a new round of comprehensive
negotiations scheduled to begin this autumn.
Our
negotiators will face a challenge and an opportunity.
The world economy must be fair for all nations.
It must permit each nation to compete equally without
artificial restraints in the international market.
It must be flexible enough to prevent recurring monetary
crises that distort trade and capital flows, injure our
national economies, and create political tensions that
harm the cause of peace.
Such a world economy will
especially benefit the United States.
We wish to achieve
this objective not through confrontation, but through
negotiation in a spirit of cooperation and progress with
the other trading nations.
We ask Congress to join with us in this effort.
We stand ready to work out a new cooperative relationship,
and to utilize new institutional procedures to assure
that the Congress and the Executive work together to
achieve our mutual objectives.
We must and we will approach the trade negotiations
with a tough mind and a clear resolve that American
interests will be properly looked after.
-16
We believe that the legislative program now before
you will give us the tools to do the job.
speedy enactment.
-oOo-
I urge its
DepartmentoftheTRHSjjjlY
WINSTON, D C 20220
TELEPHONE W04-2041
May 8, 1973
for imm e d i a t e r e l e a s e
i
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 $4,200,000,000, or thereabouts, for
cash and in exchange for Treasury bills maturing
of $4,304,335,000
May 17, 1973,
in the amount
as follows:
91-day bills (to maturity date) to be issued
May 17, 1973,
in the amount
of $2,500,000,000, or thereabouts, representing an additional amount of bills
dated February 15, 1973, and to mature
August 16, 1973
originally issued in the amount of $1,802,910,000,
(CUSIP No. 912793 RQl)
the additional and original
tills to be freely interchangeable.
182-day bills, for $1,700,000,000, or thereabouts, to be dated May 17, 1973,
and to mature November 15, 1973
(CUSIP No. 912793
SD9).
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 $10,000, $15,000, $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 clos
ing hour, one-thirty p.m., Eastern Daylight Saving time, Monday, May 14, 1973.
Tenders will not be received at the Treasury Department, Washington.
must be for a minimum of $10,000.
$5,000.
Each tender1
Tenders over $10,000 must be in multiples of
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.
fflay not be used.
Fractions
It is urged that tenders be made on the printed forms and for-
warded in the special envelopes which will be supplied by Federal Reserve Banks
°r 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
(OVER)
-
account.
2-
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.
Immediately after the closing hour, tenders will be opened at the Federal
Reserve Banks and Branches, following which public announcement will be made
the Treasury Department of the amount and price range of accepted bids.
by
Only thoij
submitting competitive tenders will be advised of the acceptance or rejection
thereof.
The Secretary of the Treasury expressly reserves the right to accept or
reject any or all tenders, in whole or in part, and his action in any such respecij
shall be final.
issue for
Subject to these reservations, noncompetitive tenders for each
$ 2 0 0 ,0 0 0
or less without stated price from any one bidder will be
accept!
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 17, 1973,
in cash or other immediately available funds or in a like face amount of Treasury
bills maturing May 17, 1973.
treatment.
Cash and exchange tenders will receive equa.
Cash adjustments will be made for differences between the par value ofj
maturing bills accepted in exchange and the issue price of the new bills.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1 9 5 4 the
amount of discount at which bills issued hereunder are sold is considered to accru,
when the bills are sold, redeemed or otherwise disposed of, and the bills are ex
cluded from consideration as capital assets.
Accordingly, the owner of Treasury
bills (other than life insurance companies) issued hereunder must include in his
income tax return, as ordinary gain or loss, the difference between the price Pal
for the bills, whether on original issue or on subsequent purchase, and th e
actually received either upon sale or redemption at maturity during the
amoun
ta x a b le
year for which the return is made.
Treasury Department Circular No. 418 (current revision) and this notice,
prescribe the terms of the Treasury bills and govern the conditions of their issU|
Copies of the circular may be obtained from any Federal Reserve Bank or Branch.
NOTE TO CORRESPONDENTS:
For your files, attached is a verbatim transcription
of a tape recording of a press conference by Under
Secretary for Monetary Affairs Paul A. Volcker in Manila,
April 26, 1973, on the occasion of the Annual Meeting of
the Asian Development Bank.
PRESS CONFERENCE OF
PAUL A. VOLCKER
UNDER SECRETARY OF THE TREASURY
FOR MONETARY AFFAIRS
MANILA, THE PHILIPPINES
APRIL 26, 1973
VOLCKER: This is an open press conference, I think.
I haven't anything to say initially other than this is the
first time I've been in Manila or the Philippines. I'm de
lighted to be here and I'm sure the weather is always as
nice as this and it's nice to be here and participate par
ticularly in the meeting of the Asian Development Bank,
which I think has come of age as symbolized in thought by
the fine quarters that have been the gift of the Philippine
Government and I think represents the faith of the Philippine
Government in this enterprise; and I think that faith is
certainly reciprocated by my own country. So, I am delighted
to be here and I'll try to handle any questions you have.
QUESTION:
Inaudible
VOLCKER: I think I mentioned three specific points
in the speech. The basic point is not that we feel there
are great inefficiencies in the Bank's operations as it has
operated, but it has been through its birth pains and...
well, you don't think of an institution being through its
adolescence when it's only six years old. As I did suggest,
I think it is reaching a point of maturity after very care
ful building and in any organization there is time for review
and reappraisal as the Bank reaches its full level of opera
tions in a sense, not that it won't continue to expand, but
it’s beyond its initial growing phase. It is time to look
at certain of the operational aspects. Now, as I mentioned,
we feel quite strongly because it's parallel to some degree
to other international lending institutions. And in a bank
of this sort there are many countries participating both
from the borrowing side and the lending side. We need a
facility for more or less independent appraisal of how effec
tive it has been in terms of particular projects, so that
the management can learn, donor governments can learn, and,
indeed, the borrowing governments can learn how to make
maximum .use out of the institution. Now, I have this con
cern, in part, because of the general problem we have had
in assuring adequate funding of the institution, and this
kind of approach can do a lot to help reassure donor govern-*
ments that the money is spent effectively, and that we are
learning lessons that should be learned about the development
process and about the Bank. We just think the Bank, now
that it has had a number of projects completed, is in a
2
stage to adopt this kind of independent post audit as the
World Bank has done and as the Inter-American Bank has done.
It would have been premature in this institution earlier,
but the time has come., That's one aspect. As it reaches
this plateau it is now on, I think the general organization
of the Bank could usefully be reviewed although I think it
served the Bank well in the past in its beginning phases.
There is one aspect that I. call attention to, that's per
haps of most direct importance and significance to the United
States and that's the procurement patterns. Very little of
the procurement of the Bank in terms of its ordinary capital
has been in terms of American goods, and it's done by general
competitive bidding world-wide, as you probably know. That
procedure is appropriate and I'm not questioning it. But,
we have had difficulty competing in this area of the world —
we've had difficulty in competing in other areas of the
world, which is why we have had to go through these agoniz
ing devaluations, and we think there are things that we can
do to assure that our businessmen are aware of the potential
for business out here. We've done the exchange rate realign
ment that I think makes us more competitive so there is more
potential; and, I think it's important that we see what we
can do. And, if anything needs to be done on this end, then
it is important that it be done on this end so that in terms
of public and Congressional support at home, and indeed in
terms of our general balance of payments problem, we are in
a stronger position for doing the funding of this Bank that
it's appropriate that we do; and that is inevitably a factor
in our capacity and willingness publicly and Congressionally
to do the funding. So, it's an area about which we have had
considerable concern.
QUESTION: Can we take it from you, Mr. Secretary,
that when you said that Congress can support....Does this
mean that Congress in general terms is not likely to pass
the special....
VOLCKER: No, no....I wouldn't say....When it comes up
to actually providing the appropriations, the money that is
necessary, we have run into difficulties and not just with
this Bank; we have run into difficulties with other foreign
assistance commitments. And the burden of what I am
trying to say is, amid all the competition there is for
money from the Congress, including some very urgent domestic
problems, we've been cutting back in some areas on the'do
mestic side. We've just closed a lot of defense bases, for
instance, and announced their closing and you've got to con
vince the Congressman, quite naturally, who has a, let's say
3
a defense base, closed in his home district that he's not
very happy about, and it has employment effects, that he
should, nevertheless, appropriate funds for ADB. His con
stituents complain.... We haven't got enough money to keep
a base open in his district, but we've got enough money to
give to the Asian Development Bank or the Inter-American
Development Bank, or the World Bank, or aid in general.
You've got this question of priorities and in making
the case for this amount of money....In this case a hundred
million of soft loan money and three hundred and fifty million
or so of ordinary capital in the Bank, we want to make the
best case we can. We think this is a priority budgetary ex
pense. It's in the President's budget. It has priority,
but we've got to convince the Congress. I think not in
general of the work of the Asian Development Bank, in
general terms they'll accept that, but we have to more than
get a general philosophic blessing; we've got to make it
sharp enough so that they will spend the money amid a lot
of competing uses. And, the more efficient, the more effec
tive, the clearer the case we can make that the Bank is doing
a good job....American business is getting a fair crack at
the business.... the better chance we have for funding this.
I can't say, as I said in the speech, that the prospects for
this are competely assured; they are not. We have had
difficulty.
QUESTION: What are the changes that the American
Congress wants to see in the Bank internally?
VOLCKER: I think the most important things are the
things I have mentioned. They want a feeling of assurance,
which you can never perhaps provide 100 percent, that the
Bank is indeed doing an effective job, and they would like,
to the degree possible, more than evidence simply from the
beneficiaries of .he Bank* That's why we stress this in
dependent audit kind of affair, and I think this is important
not only to the United States, but in the longer run in
maintaining the support of those that contributed-the money.
They want as much assurance as we can provide that the Bank
is doing a good job. And that American business has a fair
crack at what business does emerge from the Bank, and I was
making the point in the speech I think that is largely our
job for making sure that our business is competitive, that
they know about what projects are available, that they have
the energy and the aggressiveness to go out and seek the
business; and we're doing what we can to help repair any
deficiencies we've had from that end.
- 4 QUESTION: In the case of the $362 million, if they
don't fork that over, does that mean the United States will
lose its membership?
VOLCKER: Well, our percentage of ownership, so to
speak, declines, and this 362 million would keep basically
the relationship that we had when the Bank was founded — a
relationship of equality with Japan and, I think 18 percent,
if that's the rate or a fraction there-abouts of the con
tributions to the ordinary capital of the Bank. We think
that's appropriate.
QUESTION: Is it unthinkable to say that the United
States can afford to be out of the Bank?
VOLCKER: Out of the Bank? Well, there's no feeling
of that sort. We feel committed to the Bank, and it's a
question I think of a ..proportionate share. We have agreed
to this share and we hope that Congress will act. We think
that share is appropriate. In this Bank, as elsewhere, I
think if you looked at it over a time perspective, you look
at the changes in the world economy. Relative to 20, 25
years ago, it's quite natural and appropriate that the United
States does not carry the share of the burden that it once
did, and you see that very evidently, I think, in this Bank
and in this part of the world, where the great strength
growing of Japan economically, I think, a healthy
development of the world by paralleling that growth, there
grows a larger responsibility for support of institutions
of this sort, relatively.
QUESTION: Can I say that the United States cannot
afford to be out of the Bank?
VOLCKER: Oh. I think it's fair to
afford to be out of the Bank, but there
we can afford in proportionate terms in
assistance.... I think that runs through
QUESTION:
say that we can
are limits on what
providing overseas
all our programs.
Red China - garbled.
VOLCKER: Well, I think that raises questions beyond
what I can really discuss here this afternoon. I think
that would take us into a little longer perspective. We
are certainly increasing contacts with Mainland China and
we look toward increasing trade and certain implications
may flow from that over a period of time, but I think it's
premature to consider that at the moment.
>
5
QUESTION: When you call for a change within the Bank,
did you refer to the Bank's present leadership?
VOLCKER: Oh, definitely not. Nothing that I have
said here or in this speech is in any way critical of the
B a n k ' s leadership and present administration.
We are great
admirers of Mr. Watanabe and what he did to bring this Bank
into maturity, and we have been strong supporters of Mr.
Inouye as his successor and we fully support the present
and past leadership of the Bank. I'm not at all speaking
critically. We are making constructive suggestions in ways
in which we think this Bank can maintain the support to
which it's entitled. And we want to see it maintain that
support to which it's entitled. And we want [garbled]
maintain that support and we think it's a strong and effec
tive institution. I want to make that very clear.
QUESTION:
Garbled
VOLCKER: No, I don't cite that as a precondition for
the $100 million. We just think it's a healthy thing for
the Bank to be thinking about and doing. In looking down
the road, we think it's important to maintain the confidence
of donor countries. But, I don't attach that as the quid
pro quo.
QUESTION: Would you specifically want a review of the
specific provisions about procurement?
VOLCKER: When I speak of the procurement in general,
I'm really referring to the ordinary capital. We have not
contributed substantially to the Special Funds. This $100
million for ordinary funds is pending. ...That $100 million
has a tying provision, but, as it is now, we don't get any
procurement from the Special Funds because we have not been
participating in the Special Funds, so we can't complain
about our procurement of the Special Funds. I was referring
to the ordinary capital, and our contribution. There is a
tying provision as with other contributions initially in
the Special Funds. So that is a situation which exists.
As we look into the future to Special Funds, there has been
consideration of modifying that and we could under the
proper conditions support that.
QUESTION:
funds?
Is your concern centered around the capital
6
VOLCKER: Oh, our concern broadly has been the
competitiveness of American business, and this is one
small aspect of that overall problem. And, when you
consider the monetary changes we have had, some of our
concerns in the trade area, all of this reflects very
largely our concern with making American business more
competitive, which in turn reflects upon our balance of
payments problem and the strength of the dollar. There
was discussion this morning of the problems created by
monetary instability which creates problems for the Asian
Development Bank, for the countries in this area, for us
directly, and for developed countries. We would like to
see more monetary stability; that is a prime objective.
But you can't separate that problem from the American
balance of payments problem and from the competitiveness
of American business and what we are saying is....I'm
talking now far beyond the Asian Bank....it is important
to the world, not just to the United States, that American
business be competitive, that our balance of payments be
in equilibrium because these are preconditions to the
stability of the dollar and the stability of the monetary
system, and we see some encouraging signs that the trend
that has persisted for far too long our deficit is be
ginning to turn. This isn't going to happen instantaneously,
but it's been the whole focus of our international policy
necessarily, I think, to accomplish such change.
QUESTION: What do you think (garbled) of President
Marcos' call for an international forum with (garbled)?
VOLCKER: Well, we like to think that we had something
to do with arranging the international monetary reform dis
cussions in general so that it was properly reflective of
world-wide interests, including the interest of developing
countries. Sometimes we've been criticized by some of
our friends for being excessively concerned about that
problem. I would make, I think, by force of circumstances,
some distinction between the necessity and the appropriate
ness of these kinds of consultations when you're dealing with
the basic structure of the system and the basic questions
of monetary reform. I think it is a practical matter. It
is sometimes difficult to consult with as many people as
one might ideally like to consult with when you are in the
midst of circumstances which force some change at a moment
of time. You are all familiar with and aware of the in
creasing problems, I think, created by speculation. But,
as the saying goes, markets wait for no man and not even
7
for prime ministers and presidents and sometimes you need
to act to deal with the situation perhaps consulting less
comprehensively than one would like. And we have tried to
consult pretty widely in these matters and just speaking
for the United States when we did act, I think it's a fair
point to say that one should take things as far as possible
with the interest of the whole world community in mind, but
I don't have any particular mechanism or proposals that I
could suggest in dealing with particular operational prob
lems that I'm sure would have been completely practical as opposed
to the longer-term reform that is, we think, the most
practical and desirable.
QUESTION:
Garbled
VOLCKER: I certainly would want to change one of the
adjectives you applied to this legislation. I think we have
very broad and strong legislation shaping up, but I cer
tainly would not call it protectionist. I think the basic
thrust of this legislation and the purpose in a sense is
in a liberalizing direction, in a freer direction. The
whole philosophy that motivates us in this legislation and
in the monetary area as well is moving toward a more open
world economy. At the same time we recognize that there
are serious problems and that there are protectionist senti
ments and pressures in the United States. There's no
question about that.
QUESTION:
Trade bill (garbled).
VOLCKER: Well, I think you have to look at the bill
in a little more detail. The bill provides rather wide
negotiating authority in a number of areas. Significantly,
as I indicated, toward liberalizing, toward reducing bar
riers. There are provisions that will provide in some
circumstances the President with authority to increase
tariffs or take other action. Now, what are these areas?
One is as part of a general negotiation where, by
negotiated agreement, some barriers were reduced, but
maybe in that process others are modified by agreement
in an upward direction as part of an overall bargain.
There is a provision in the bill that would permit
the United States, I shouldn't say permit the United
States -- we already have some powers — but it would
make it a little more effective — the powers of the
Department
ISHINGTON. D C. 20220
oftheTREASURY
TELEPHONE W04-2041
May 18, 1973
MEMO TO CORRESPONDENTS:
RE:
JOHN Jo CAULFIELD
Mrc Caulfield has been on annual leave from his position
as Assistant Director, Criminal Enforcement, Alcohol, Tobacco
& Firearms Bureau, Department of the Treasury, since
Monday, May 14, 1973o
That leave expires at midnight,
May 18, at which time he will go on administrative leave»
Mr. Caulfield joined ATF on December 17, 1972 as supervisory
criminal investigator.
Chronologically, his personnel record shows:
June 153-April *69, New York City Police Dept.,
leaving as a detective.
April *69-March *72, White House staff assistant
to the President, reporting to John Dean as
his immediate supervisor.
Duties:
White
House liaison with Federal Law Enforcement
Agencies.
March *72-April *72, Committee to Re-Elect the
President, aid-consultant, working under
Jeb Magruder, to examine and advise the
Committee on the Administrations programs
on law enforcement
OVER
2
April '72-June '72, Consultant to the Director
of Law Enforcement (then Martin Pollner)
Treasury Dept0
July *72-Dec. 17, *72, Special Assistant to
Assistant Secretary for Enforcement, Tariff
and Trade Affairs and Operations (then
Eugene Rossides), Caulfield was still
reporting to Martin Pollner, Director of
Law Enforcement,
Duties:
monitoring the
activities of the newly formed Bureau of
Alcohol, Tobacco & Firearms.
Dec. 17, *72, Assistant Director, Criminal
Enforcement, ATF, functioning as
supervisory criminal investigator.
oOo
8
United States to take action in particular instances where
there was a surge of imports that was doing severe damage
to a domestic industry in a short period of time, to slow
it down — say, look, let's over a five-year period speci
fically move more gradually, not to cut off the imports
but avoid a surge for a temporary period which is specified
in the bill, to assist in the adjustment of domestic indus
try. This is not a new provision internationally. Most
countries have powers of this sort, and our own philosophy
is it would be much better to negotiate these rules multilaterally, so everybody's operating by more or less the
same rule in a system that's agreed to be fair to the im
porting and the exporting country, and, I think, in a sense
a fair system of that sort is in the interest of the export
ing country as well as the importing country because if ^
too much damage is done, there will be a domestic reaction
that just says cut off the import.
There is a provision in the bill to exceptional
balance of payments circumstances where you have an overall
balance of payments problem to permit a temporary surcharge,
to deal with basic balance of payments problems, under speci
fied conditions. Now, that's again not a very unique or
exceptional power. We exercised it once ourselves already,
but a number of other countries have taken similar action
in the past. This would more clearly define the circum
stances in the power. I don't consider this basically
protectionist, but there are provisions in the bill that
would enabletthe U.S. to protect our own interests as other
countries can protect their interests, but in a context
of a general philosophy and desire for having more liberal
trade, and I don't think this bill should be mistaken as a
protectionist piece of legislation by any means. The danger
of protectionism in my opinion is that we don't deal with
our problems effectively in an outward-looking direction.
If we don't deal with our trade problems, if we don't deal
with our balance of payments problems, then you will get a
domestic political reaction, and you will get a tendency to
look inward.
The President's philosophy is to combat that tendency
by dealing with our problem in a more fundamental way, in
a way which fits with an open world society. Meanwhile,
just look the other way just to — I'm reminded as again
I mentioned in my speech at a provision in the bill for
generalized preferences for developing countries that are
9
entering into manufacturing and just beginning to be in a
position to export manufactured goods to other countries.
And, the bill, among other provisions, would permit the
U.S. to join with industrialized countries in that kind of
a preference scheme. So, in that area we've tried to take
care of the particular needs of the developing countries.
QUESTION: Would you say there is an isolationist
tendency among the American public that has already started
and that it probably will show in time on an international
basis?
VOLCKER: I think there has been in recent years some
change in public opinion, some change in Congressional
pressures. I don't think the basic policy of the country —
and certainly not the Administration has changed — but
pressures have developed. And, it's important that we be
able to deal with these pressures. That's the point. These
pressures are partly in considerable part an outgrowth of a
weakened international, financial, and economic position.
And, unless we deal with those problems and restore our
strength, those sentiments are going to increase rather than
decrease. I have a feeling — or I should say — I have a
feeling there are a number of much better politicians than
I — and I'm not a politician — who have suggested to me,
for instance, since August of 1971 that they have felt pro
tectionist tendencies, inward-looking tendencies — pressures
as they see them from their constituents are perhaps somewhat
diminished because there is now a feeling in the country
that the problems are being attacked, and attacked at their
roots so to speak. Whereas before the President took direct
and important action beginning in August 1971, there was
more a feeling of frustration and deteriorating trend, and
it was important to get that psychology changed now that
the problem still exists and it's not the difference be
tween night and day, but I think, in some sense we are on
the offensive against those pressures now when we were on
the defensive.
QUESTION:
Garbled
VOLCKER: Well, I think this is the case we have been
putting toward Congress. We have had a larger share of some
of these institutions — a larger share of the aid burden in
the past than we are now carrying and we have made the point
to the Congress — we make the point to other countries too
10
that this is appropriate in the circumstances in which we
now live. There was a time when the U.S. had three-quarters
of all the world reserves. We had, I suppose, 75 percent
of the gross national product of developing countries.
Well, all these figures have changed very drastically.
Europe as a whole now, for instance, is roughly comparable
in size to the U.S. economically. Japan is a smaller
country, but in relative terms it has grown enormously,
as you know. Now, these are basic economic facts and con
tributions to these institutions are only and properly one
reflection of a basic change in the world economy, which I
think most people would say is a healthy thing. Maybe some
Americans might question it from the standpoint of the world
as a whole, but as the growing strength of other countries,
relatively, it's a different thing. I don’t want to plead
that the U.S. is weak and small. It's not — it's still the
biggest single economy in the free world, but it's....or in
the world. But relatively, it's not a dominant. Relatively
it is not as strong as it once was, or, it's better to state
it the other way around, I think. Other countries are re
latively stronger, relatively able to carry more of the
load, and they should and they have been to a considerable
extent.
QUESTION:
Inaudible
VOLCKER: The generalized tariff preference? Yes,
well, this provision is in this bill. We haven't imple
mented it before, quite frankly, because the prospects
for success legislatively were very dim. We have been in
favor of this general approach for some time. But, being
intellectually in favor of it and being, in fact, in a
position politically and economically to implement it, are
two different things. We think the time is now ripe where
we can implement this with some prospect of success. I
don't think it's v ssured. The passage of this bill was not
assured, but one can be reasonably hopeful, but one can't
be assured. We are hopeful that the time is right for im
plementing this as part of this overall package.— We were
standing alone earlier. We did not think there was a
reasonable prospect of implementing it.
QUESTION:
Inaudible
VOLCKER: Well, we are glad to have the Congressmen
with us and we'd like to do all we can to keep the Con
gressmen as involved in this institution as we can. More
>
11
than 500 people in the United States Congress and I wouldn't
read too much in terms of the vote into the presence of
five Congressmen here. And I'm afraid some of the leading
questioners about foreign aid in general are not with us
here. So, it's no assurance of success, but we're very
glad to have them.
i
NOTE TO CORRESPONDENTS:
For your files, attached is a summary of an informal
meeting with reporters by Treasury Under Secretary for
Monetary Affairs Paul A. Volcker in New Delhi, India,
April 30, 1973.
SUMMARY OF INFORMAL MEETING WITH REPORTERS
BY PAUL A. VOLCKER
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
NEW DELHI, INDIA, APRIL 30, 1973
During his meeting with reporters at Ambassador
Moynihan's residence, Under Secretary Volcker made the
following points:
This morning he held a general discussion with Indian
Finance Minister Y. B. Chavari on trade and monetary affairs.
"It was a good meeting, devoted to longer-range problems,
entirely."
He told the newsmen he would go on tomorrow to Sri
Lanka (Ceylon) and then visit Indonesia and Australia before
returning home. He said he is making the visits to talk
with "those involved with the Committee of 20. As I was in
Asia, I wanted to see these people on their home ground."
He said he expected monetary reform would be evolu
tionary, not revolutionary. The C-20 Ministers might meet
before Nairobi if there is a need, but such a pre-Nairobi
meeting would not come before July. At Nairobi, he hopes
to see the main outlines agreed on, at least with reason
able consensus. Then it will be a matter of working out
the details. He emphasized the inter-relationships of the
various problems involved, saying, ,rIf you settle one ques
tion, that influences all the other pending matters. Every
thing must be taken together as a whole. These are not a
group of separate problems."
He emphasized that the problem stems in large part
from the fact there is a new world situation, in which
other countries like Japan, other groups of nations such
as those in Europe, and even many of the developing nations
are becoming stronger economically. He said it was no longer
a case of the United States standing above everyone else.
He was questioned extensively about the less developed
countries’ desire to tie monetary reform to aid by having a
"link" between SDR's and the needs of LDC's. Volcker said
there are two problems. One problem, he said, is the need
for a monetary system that will operate effectively. The
better the system works, the better for everyone, including
the less developed nations. The other problem is that there
are "certain dangers," in building social goals like aid
2
into the monetary system. For one thing, he said, the
countries of the world all want a solid asset at the center
of the system and an asset that commands confidence. That
"psychology" might be affected if you linked aid with the
monetary system. In addition, he said, there is a "text
book question" of how such a link could actually take place.
"In our view," Volcker said, "hid should be approached on
its own merits — if aid is desirable, it should be requested
from Congress and passed on its own merits, not as an item
tagged onto monetary reform." Furthermore, aid need not
necessarily come 'through public sources. In fact, private
investment and lending may be the best way of seeing that
resources flow where they are really wanted.
He was extensively questioned about trade and said
there was no question but that less developed nations would
be hurt if the world becomes protectionist. That is one
reason President Nixon has called for the new trade legisla
tion, which is designed to help keep world trade liberal.
He noted that the bill contains safeguards to help indus
tries threatened by massive and sudden imports, but that
even in such cases the plan calls not for permanent help
but merely for transitional protection. He also said that,
in viewing the current world economic situation, it is
apparent that many nations have barriers to trade that the
U.S. thinks should come down to make the international
economic system function better. That is one reason for
the emphasis on "fair as well as free trade."
He was asked specifically about textiles and shoes and
noted the problems of American industry. One questioner
said that Italy is inundating;.!■the U.S. with its shoes but
that it wasn't fair for this to be "holding back India's
shoe industry." Volcker said he thought the situation looks
different depending upon where you sit and the Italians
"might take a quite different view of this problem." In
any case, he said, the U.S. has to be able to sell something
abroad, if it was going to buy anything. He noted in talking
about America's areas of comparative advantage that America's
agricultural industry is one of its most productive assets.
At the same time, we are also very efficient in hightechnology products. In the process of straightening out
our trade account, we are going to have to sell more and
perhaps buy less, maybe fewer automobiles, for example.
Volcker said he felt the exchange rate changes that
have taken place "permit us to compete — but not if the
markets we gain are then closed off on another basis."
0O0
INGTON, D.C. 20220
TELEPHONE W04-2041
i
EMBARGOED FOR RELEASE UNTIL
10:00 A.M. EDT, MAY 9, 1973
1
SUBSTANTIAL CAPITAL REQUIRED
FOR U.S. ENERGY INDUSTRIES
Deputy Secretary of the Treasury William E. Simon
today said that the U. S. energy industry will require
an investment of $500 billion in the next 15 years to
meet growing demands.
"With six percent of the world1s population, we
are presently consuming 33 percent of the world's
energy," Simon told a conference of the Financial
Analysts Federation of Washington, D. C., "and
by 1990, U. S. energy consumption will be double that
of 1970."
Simon, who is also Chairman of the President's Oil
Policy Committee, noted that environmental concerns
also add to the financial requirements of the industry,
in that a clean environment requires use of more
low-sulfur fuels, more efficient refineries, and more
use of new safety technology such as double-bottom tankers.
All these mean an investment higher than the oil and gas
industries have required in the past, he said.
S-197
-2
For example, new refineries with adequate environmental
safeguards cost up to $500 million each, Simon said.
He said that we must achieve a compatibility between
energy demands and environmental standards.
Simon termed the President's April 18 Energy Message
a strong policy statement and a "blueprint for action"
to meet our Nation's current and future energy needs.
He pointed out that, with respect to research and
development, the President said that he will spend
whatever reasonable amounts are needed to meet our
energy needs.
Simon said that the President's energy message
provided a number of major incentives to higher domestic
production including competitive prices for new natural
gas, rather than regulated prices; investment tax credit
for exploratory drilling; tripling the acreage leased
for oil and gas exploration on the Outer Continental
Shelf by 1979; and, a more realistic price differential
between domestic and foreign petroleum, favoring U. S.
production.
"Realizing that uncertainty is the enemy of investment,"
Simon said, "we have instituted government policies
which will remove uncertainty and provide stability to
encourage long-range investment.
I feel that we have
-3
created the proper programs for increased domestic
exploration and development as well as increased
construction of domestic refineries,”
Since the President’s Energy Message, several
U. S. companies including Shell, Ashland, The Pittston
Corporation, and Standard Oil of California, have
announced plans to build or expand refineries in the
United States, as soon as sites are available.
Though this is good progress, Simon said, it is
’’estimated that by 1980, the U. S. will need the
equivalent of 58 new refineries, averaging a throughput
capacity of at least 160,000 barrels per day."
The total investment requirement for these refineries
would be as much as $30 billion.
oOo
EMBARGOED FOR RELEASE UNTIL
10:00 A.M. EDT, MAY 9, 1973
REMARKS BY THE HONORABLE WILLIAM E. SIMON
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE 26TH ANNUAL CONFERENCE OF
THE FINANCIAL ANALYSTS FEDERATION
WASHINGTON HILTON HOTEL, THE INTERNATIONAL BALLROOM
WASHINGTON, D.C., MAY 9, 1973, 10:00 A.M.
I
am delighted to have the opportunity to speak to you
today.
In the few months that I have served here in Washington,
I have found myself involved in a wide range of public policy
issues, including international monetary reform, trade, taxa
tion, the economic stabilization program as well as many others.
One subject to which I have also devoted much of my time is the
energy problem.
As Chairman of the Oil Policy Committee, I am
responsible for advising the President on oil import policy, as
well as other energy matters, and I would like to discuss aspects
of this vital subject with you today.
In so doing, I think you
will see that, although traditionally thought of as a national
security problem, energy is as essential to our economy as it is
to our national security.
To the extent that deficiencies in our
domestic energy industry cause us to rely on foreign sources, we
incur risks to the freedom of our foreign policy, to our balance
of payments, and to the security of the dollar.
S-196
2
On April 18, the President presented a broad and comprehen
sive energy message.
Briefly, the President called for action
in six areas:
(1)
Increase domestic production of all forms of energy;
(2)
Act to conserve energy more effectively;
(3)
Strive to meet our energy needs at the lowest cost
consistent with the protection of both our national
security and our natural environment;
(4)
Reduce excessive regulatory and administrative
impediments which have delayed or prevented
construction of energy-producing facilities;
(5)
Act in concert with other Nations to conduct
research in the energy field and to find ways
to prevent serious shortages; and
(6)
Apply our vast scientific and technological
capacities —
both public and private —
so we
can utilize our current energy resources more
wisely and develop new sources and new forms
of energy.
Not only did the President call for action in each of these
areas, but he also acted!
import program.
He completely restructured our oil
Effective May 1, 1973, all volumetric quotas
on oil imports were ended, the existing duties on imports of
petroleum and petroleum products were suspended, and a system
of license fees was instituted.
Our objective was to design
a program which would assure the oil ir lustry flexibility to
3
import oil to satisfy the short-term needs of U. S. refiners
and consumers while, at the same time, to provide longer-term
stability and additional incentives for increased domestic
exploration and production and new refinery construction and
expansion.
These policies outlined in the President's energy message
were arrived at after careful thought and analysis.
Some people
have said that the message was not strong enough —
for instance,
that it didn't provide for enough money to be spent on research
and development.
I feel that it was a very strong statement —
I see the message as a blueprint for action that must and will
be taken.
And with respect to research and development, the
President said that we will spend whatever reasonable amounts
are needed while not foolishly allocating funds more rapidly
than they can be effectively spent.
This to me is sound policy.
To better understand how these policies were determined,
I would like to briefly outline the problem we face in the energy
area.
Demand and Supply
The first thing to understand is that the demand for energy
has been increasing continually while our supply has not.
With
six percent of the world's population, we are consuming 33 percent
°f the world's energy.
Furthermore, the demand for energy in
this country is growing at an annual rate of about four percent
and by 1990, our energy needs will be doubled that of 1970.
4
Much of this increase in demand is attributable to an increase
in the demand for oil, which has grown, in part, because there
has been a shift away from coal to oil and, in part, because
of the inability to obtain natural gas, the other alternative
to oil.
Oil and gas now account for about 65 percent of world
energy consumption and about 76 percent of U. S. energy consump
tion.
And it will not be until the mid-1980's that nuclear and
other sources of energy will begin to provide for a significant
part of the energy demands and reduce the world's dependence on
oil.
Given this growth in demand, let's look at what has been
happening in the oil industry:
—
Domestic production last year began a slow
decline to which no early end was foreseen, even though
virtually all of our wells were producing at 100 percent
of capacity for the first time in history.
—
The amount of domestic exploratory drilling for
oil has fallen substantially.
Oil well drilling actually
peaked in 1956 when an estimated 208 million feet of
productive wells and dry holes were drilled.
time, there has been a rapid decline.
Since that
In 1960, only
about 145 million feet were drilled; by 1970, this had
fallen to 100 million feet; last year, the total was
down to 86 million feet.
This may have been due in part
to the lack of price and tax incentives, but, it is impor
tant to realize that we have exploited the economically
5
most desirable oil properties and now have to develop
areas that are remote and more expensive.
—
11,000
U. S. refining capacity actually decreased by
barrels per day in 1972 even though demand grew
by over one million barrels per day.
Prior to the
President's energy message, no new refineries were
under construction.
Furthermore, expansion of existing
refineries had nearly ceased.
—
To meet growing U. S. demand, oil imports rose
dramatically.
Much of the new import supply came from
the insecure and politically volatile Middle East.
Between 1969 and 1972, total oil imports rose by 52
percent to 4.6 million barrels per day.
Most of this
increment came from the Middle East, whose imports
increased by 83 percent to 573,000 barrels
per day.
,
The result of these developments in the oil
area is that we have moved from a buyer's market to a
seller's market.
Producing countries now have a powerful
voice in the determination of oil prices and volumes.
—
Finally, our distribution systems for both crude
oil and products have been poorly matched to the new
supply situation, with the result that spot shortages
have occurred.
6
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7
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rose
th e " U.S . ' e n e r g y
be about o h e th a lf " f M i l i b h 3 J S
of
$150 b i l l i o n
f o r :J: ''
c r u d e 3o i l ; a n d n a t u r a l
th at
§& *'
^
b y -19 80 , t h e 3U';§ i’^ w i ' t l ' Weed’ " J ° ,;!
5 8 new r e f i n e r i e s ,, ; e a d h w i t h : a - d a i f y 5'1
cap acity
of
at
lea st
in v estm en t req u irem en t
1 6 0 ,0 0 0
for
th ese
b arrels
per
refin eries
day. " T h e
i s ( ;^ q , r|nuch
a s $3 0 b i l l i o n .
These
States
They do n o t
m arketing;
the
,
estim ates
energy
in clu d e
19 85 , and t h e
in
gas
fu el
the p r ic e
v iab le.
These
stru ctu re
natu ral
U nited
and d i s t r i b u t i o n .
and r e l a t e d
(such as
in creased
if
th e
• d d st'rlb'dfIon v a s - w e l l
r e s o u r c e s ir'r3/I h
alon e
o f od evelop ing
n u clear te c h n o lo g ie s
energy c o s t s .
for
p ro cessin g
and e l e c t r i c i t y
in d u stry
ca p ita l
cost
requirem ents
developm ent,
o f overseas
areas th e n u c le a r
on ly
ad d itio n al
o il,
developm ent
$10 0 b i l l i o n
in v olv e
resources
for
W
o th e r energy
w i l l - r e d M :r b
expend i f u res
iiibhe t h a n
b e t w e e n now a n d
s y n t h e t ic - f u e l s " and ' advanced
b r e e d e r i ' : 4 y s t e n t s > l> w i l l
u n it
energy
costs
supply
must be
system
as
is
add t o
reflected
to
rem ain
in
8
£,0 E n v i r o n m e n t a l Q u a l i t y
Re l a t i o n
> O t h e r 1; f a c t o r s
fp r
o il
and, a l s o
th e
in d u stry
to
are
low
o il
su lfu r
have
th e
added t o
m ounting
en v iro n m en tal
req u irem en ts.h a v e
to
th at
caused
crude
T his
e v e n ,h i g h e r f . F u r t h e r ,
d ev ices,
have
w hich h as
our need
for
in creased
p o l lu t io n ¡req u irem en ts
cents
per b a rre l
tl,S .
the
also
costs
of
co n tro ls,
such
add,
A ir
b y 1 9 75 ,
refin in g
coal
de m a nd f o r
reduced m ileag e
g a so lin e.
The
su lfu r
made t h e
of
as
per
g allo n ,
and w a te r
about
crude
o il
th ree
in
th e
^
i: D u r i n g
betw een
to
w ill
away f r o m h i g h
p o llu tio n
demand
requ irem en ts
stand ard s.
move h a s
a u to m o b ile ..em ission
in creased
fin a n cia l
q u a lity
a sh ift
o il.
th e
th e
energy
months
needs
ahead,
we h a v e
to
and e n v i r o n m e n t a l
ach iev e
a co m p atib ility
stand ard s.
T h is
is
m ust.
§IW m m iP
.n o i l u d i u i s lb ■lifts
»PP
^
-
Approach ,to Solve the, Problem
p r o b l e m s w h i•
oto Jr-Xr t. T h e s e ot h e n a r e .t h'e ■■....
.c h we ; f a c e : '
vp rr9h® r .e f t io
in crea sin g
n s r l t fl84.ni I n c r e a s i n g
b n s ;w o n : n o e w t e d
?n p p ly ;
.1
demand;
dependence
on
fo reig n
sources
of
and
b‘
-o)nnvr^) bn increasing: cost of finding and developing hew
..., ;
¡;;.energy sources.
nx b s t D 9 i ' i 5 iT ed j'aijnt a l s o o
-■ im*
* :.
. - y---r-v-o
a
9
Some h a v e
crisis
referred
and I
too
to
feel
th at
we a r e
crisis
feel
P r e s i d e n t ’ s energy message
L e t me o u t l i n e
acts
situ a tio n
However,
th e
often
th is
as
som e o f
a
at
a
ca ta ly st
th e
as
th e
critica l
for
has
energy
p oin t.
change,
begun t h a t
so lu tio n s
and I
change.
p ro p o sed by t h e
President-.
F irst
is
to
the
of
fo ster
a ll,
(1)
in
gas.
th e
lev els
has
U n ited
G as.
way,
d isco v eries.
own p r i c e
su b je ct
th e
can i m p o s e
of the
Sin ce
d eliv ered
th e
--
p rice
p rices
a lso
lev el
to
p o licy
As
such,
energy
of
a rtifica lly
gas
w ellh ead
th e
to
to
is
the
the
effect
on
and l i m i t e d ;
bu t,
th e
effect
on o i l
be i m m e d i a t e
a n d ‘s u b s t a n t i a l .
le t
of
and g a s
In terio r
if
20
w ould
would b e
con tracts
fu e ls,
th e
th an
a
o u r new
oth er
p rov ision
consum ers
of
crite ria ,
less
low
new g a s
new g a s
w ith
Secretary
certa in
t o new c o n t r a c t s ,
for
--
new n a t u r a l
up a p o r t i o n
p rice
sin ce
at
search
co m p etitio n
th at
and
of
p rop osin g
in
co m p etitiv e
treatm en t
th e
tu rns
accord in g
p rice,
in d u stry .
in cen tiv es
d iscou rag ed
reserv a tio n
a ceilin g
necessary.
energy
our energy
P re sid e n t proposed
Now, we a r e
seek t h e i r
to
The
w hich
of
S tates:
o f w ellh ead
serio u sly
s e a rch by t h e
o il
d om estic
from r e g u l a t e d
R eg u latio n
o b je c tiv e
p rov id ed m a jo r
N atu ral
as d i s t i n c t
m ain
a .vigo rou s
P resid en t has
prod u ction
the
percent
apply
gradual
ex p lo ratio n
shou ld
10
(2)
a seven
costs
Investm ent
percent
prove
fiv e
percent
success.
sin ce
cred it.
th is
energy
resources
pi
O uter
th e S e c r e ta r y
reserves
U nited S t a t e s
w hich
the
con tain s
p o sitio n
a v a ila b ility
to
C o n tin en tal
se le ct
tratio n
raised
the
at
the
th e
effectiv ely
same t i m e
tax
S h elf.
to
by
to
trip le
th e
acreage
yet
to
be
d irected
on
p o rtio n
o f the
in
The' P r e s i d e n t ? s p r o g r a m ,
th ese
great
in
reserves.
tracts
reduce
number o f t r a c t s
astron om ical
p u t us
The
fro m which
i n d u s t r y Ts o f f s h o r e
would be t o
th e
needed
d iscov ered
safegu ard s, w ill
of
reward
leased
A su b stan tiv e
p ayoff of
in creased
provide
The P r e s i d e n t h a s
a s many o f f s h o r e
effect
to
revenues. .
1979.
on a l i m i t e d
paym ents
a sup plem entary
a g u a r a n te e d w inner
and g a s
tim es
is
f o r w ells
be
th e S h e lf .
An a d d i t i o n a l
bonus
th ere
Fu rth er,
N ation w i l l
advantage
in crease
o f bid d in g
reason,
in
tak in g
w ells.
d rillin g
stru ctu red
env ironm en tal
of th ree
w ill
program s.
are
firm
of
o il
on i n t a n g i b l e
is
In te rio r
of
proposed
cred it
and i n c r e a s e
O uter C o n t in e n t a l S h e l f
estim ated
th e
th e
th e
w ell w ill
of th e
cred it
p ro d u ctiv e,
Thus,
way,
a su ccessfu l
tax
The P r e s i d e n t h a s
ex p lo rato ry
eco n o m ically
In
C red it.
in vestm ent
f o r new d o m e s t i c
th at
th e
Tax
lev els
cap ital
th e
w hich h a s
and h a s ,
needed
concen
to
for
th is
expand
p ro d u ctio n .
(4)
quotas
for
' New O i l
on o i l
ex istin g
Im port Program .
i m p o r t s and
ta riffs
B/ t e r m i n a t i n g , v o l u m e t r i c
su b stitu tin g
on p e t r o l e u m
a licen se
and p e t r o l e u m
fee
system
p rod ucts,
t h e new
oil import policy provides major incentives for U. S.
production and U. S. refinery construction:
-- The new schedule of fees on imported oil
establishes a clear differential between the price
of domestic and the price of foreign oil which
favors U. S. production.
Refiners and new refiners now have
a
-n*v?i ir> p '
\*"P I
? £ j ltci.A 'SOfix 3
* 3 0 vx j .(ison J
long-range assurance of access to world crude oil
markets.
A major concern of companies considering
new or expanded refineries was uncertainty of
supply due to the fact that U. S. crude oil
••
r
f;
•r r> ■■,r*
:'v, ?, f
• ■ Ftyi r <)
J G;/- |;O J c -i‘J A
production had peaked and imports were limited by
the import allocation system.
-- The fee schedule also establishes a
differential between the fee on imported crude
oil and the fee on imported refined products.
Thus, it should be more profitable to refine here
than to refine outside the U. S. and to import the
refined products.
There is an additional incentive for new
refinery construction or expansion.
Companies
building new refineries or expanding existing
refineries will be granted license fee-exempt
allocations equal to 75 percent of their additional
12
in p u ts
At
for
estab lish ed
b en efit
of
th eir
of
th is
com panies
in cen tiv es.
com panies
b u ild
They
or
here,
but
ad d itio n ,
stated
not
fin a n cia l
18
percent
am h a p p y
responded
to
to
say
th ese
1973,
a number
of
they
now p l a n
to
th at
in
th e
in d icated
co n sid erin g
U nited
A shland
and S t a n d a r d
yet
op eratio n .
O il
to
O il,
us
th at
re fin e rie s
p lan s
p u b lic.
in d ep en d en t m a rk e te rs
to
d evelop
the
of
b u ild in g
made t h e i r
States.
th eir
have
own U.
S.
ca p a b ility .
re fin e rie s
P resid en t
are
cut
30
support w ill
when t h e
a tan ker
n early
about
18,
have
of
to tal
Company,
in ten tio n
A d d itio n al
you can
O il
several
th eir
refin ery
of
A p ril
O thers
have
is
refin eries
serio u sly
the
alread y
C orp oration ,
are
years
And I
announced
Sh ell
C a lifo rn ia .
they
co sts.
Sin ce
in clu d e
le v e ls,
have
have
fiv e
exem p tion
expand
P ittsto n
In
fee
co n stru ctio n
th at
first
sup erp orts
con stru cted .
from
the
6 5 ,0 0 0
d o llar
p ercen t.
be
to
per
By
and C a n a d i a n
d eepw ater
p orts
w hich
ton
site s
can
called
to
for
in creasin g
2 5 0 ,0 0 0
At p r e s e n t ,
C arib bean
giv en
U.
by
th e
costs
refin ers
th e
accom m odate
at
size
ton s,
by
several
advantage
th e
S.
th e
dead w e ig h t
freig h t
have
th e
of
new m o d e r n
13
and economical supertankers but U. S. refiners do not.
The President has proposed legislation to permit the
Department of the Interior to issue licenses for the
development of such ports beyond State waters after
full and proper evaluation of environmental impact and
land use, and in cooperation with State and local
authorities.
The President's message also encourages development
of new energy sources, such as development of our vast
oil shale deposits, gasification and liquefaction of
coal, and other types of energy such as geothermal energy.
These will be increasingly significant areas of investment
for our country.
Investment Opportunity
In all of these areas, the President's message is
aimed at maintaining a stable and attractive atmosphere
for investment.
Up until now, the rate of return
throughout the petroleum industry has been relatively low.
The Chase Manhattan Bank has studied the performance of a
group of about twenty U. S. petroleum companies.
This study
shows that the profitability of the industry has been
eroding steadily over the past few years.
In 1971, the
rate of return in the United States on average invested
capital declined for the fourth consecutive year to 9.3
percent.
14
It
is
im p o rtan t
w orld-w ide
in d u stry
it
did
to
on a v e r a g e
has
not
d eclin e
w orld -w id e
to
1968
1 2 .5
in
1970.
A p rin cip a l
of
retu rn
w orld -w id e
States
is
fin ish ed
not
th at
th e
prod ucts
changed
from
1960
as
much a s
w hile
p rices
p rices
What
m arket
are
is
to
prod ucts
for
needed
to
strengthen
tim e,
at
higher
the
to
fin d
ch oice
strengthen
of
so
th e
of
and h i g h e r
p rices.
and
p rices
have
from
1960
p rices
by
th at w ill
th e
them .
allow
less
a ll
item s.
th e
free
crude
o il
exp en d itu res
We a l l
take
the
in d u stry .
cou ntry w i l l ,
upon f o r e i g n
in
1971.
37 p e r c e n t .
d om estic
co stly
Thus,
to
by
for
of
by 15 p e r c e n t
rose
of
rose
in d ex
rose
p rice
becom e more d e p e n d e n t
U nited
14 p e r c e n t
energy
our
o il
rate
p rice
o f w h e t h e r we w i l l
d om estic
the
in
real
and p r o d u c e
in d u stry ,
crude
retu rn
11 p e r c e n t
d ifferen ce
in
of
the
item s
reflect
rate
d om estic
p eriod
the
petroleum
A lthough
from
th at
fact,
a system
th at
retu rn
th e
th e
consumer p r i c e
consumer
is
th e
g aso lin e
th is
of
in
1971
w hile
In
1971
the
a ll
can b eg in
required
to
in
p rices
dropped by
d u rin g
op erate
im m ediate
to
o il
1970,
for
risen
rate
a d eclin e.
com pared t o
sig n ifica n tly .
F u rther,
G aso lin e
reason
have
crude
than h a l f
sharp
percent
as
th e
ca p ita l
through
fo reig n
d om estic
th at
in vested
shown t h i s
from
rose
note
th e
have
th at
an
necessary
If
w ith
we f a i l
th e
su p p lies
end,
th e
and
steps
to
passage
of
o il
consumer
15
-
w ill
pay t h e
p rice
o n e way o r
however,
is
p rice
d im in ish ed
lose
in
to
assure
the
oth er.
N ation
in
Our o b j e c t i v e ,
does
secu rity
fle x ib ility
th at
in stitu ted
u n certain ty
planning
v ariety
th e
not
pay a
an d a l s o
its
does
n eg o tiatio n s
not
w ith
co u n tries.
R ealizin g
we h a v e
th at
n atio n al
the n e c e s s a r y
foreign
-
u n certain ty
governm ent
and p r o v i d e
in vestm ent
exp lo ration
concerns,
ventu res
as w e ll
E xp loratio n
for
high d e g r e e
of
investm ent
in
as
to
is
These
m arketplace w ith
with t h i s
investm ent
assured
w ith
numbers
d ou ble
m ounting
Fu rth er,
in
th e
and s u p e r p o r t s
it
to
sh ip p in g
a rela tiv ely
retu rn
offer
th ere
on
in
in v estm en t
de m a nd s
are
a wide
Investm ent
sh ip p in g
bottom s
to
sup ported
re fin eries
demand.
o p p o rtu n ities
Large t a n k e r s
in creasin g
in
w ith
sta b le
are
lon g -ran g e
from
p o ten tia l
more
remove
com panies.
high.
a ctiv itie s
co n stan tly
Investm ents
ranging
ca rries
q u ite
offer
o ffers
op eration s
th e
in vestm ent,
w hich w i l l
encourage
in teg rated
However,
area
enemy o f
in d u stry
refin ery
fu lly
risk .
o p p ortu n ities.
to
p o ssib ilitie s,
"downstream” a c t i v i t i e s
produced.
T his
new r e s o u r c e s
th is
th e
p o licies
sta b ility
and i n v e s t m e n t .
of
is
by a
for
the
a certa in
are
prod ucts
retu rn
su b sta n tia l
in d u stry .
requ ired
in
accommodate
th ese
16
sh ip s
are
a lso
a n d on r i s k s
in
th is
range
a ll
as
energy
comes
1971,
"a
we a r e
energy
su stain
of
month he
said ,
face
and s h o u l d
th e
resources
be
to
--
and
h is
of
in
a w ide
we a r e
energy
for
000
a ll
trend s
re fin e rie s,
out
of
We m u s t
form s
is
and
of
im prove
con tin u e
we h a v e
needs
effectiv ely .
second m essage
B u t,
th e
if
striv e
in
e sse n tia l
a v ita lly
crisis.
an
crisis
Energy M essage
grow th
h is
as
energy m essage
energy
facin g
them n o w ."
Thank you.
program s
e n e r g y more
first
In
energy
situ a tio n .
fu tu re.
of
clea n
lif e .”
our
take
the
econom ic
averted ,
meet
d om estic
conserve
present
a genu in e
can
step s
If
com panies
proper
However,
for
in
sup ply
"C lea rly
of
th e
P resid en t’s
to
said
our n a t i o n a l
ca lls
and d e v e lo p m e n t
p ro d u ctio n
h ealth y
ch allen g e.
we c o u l d
proper
Nixon
su fficie n t
to
q u ality
and t h e
actin g
also
current
created
tod ay.
d om estic
port
p articip ate
exp lo ratio n
e x ist
tan ker
are
down t h e
a tou chston e
also
P resid en t
th at
co n stru ctio n
does
our
energy w h ile
There
we h a v e
d om estic
as
down on
a ctiv itie s.
p lay
th at
o p p o rtu n ity ,
in crease
above
to
in creased
serve
cut
sp ills.
th e
feel
crisis
shou ld
to
I
to
in d u stry
want
in creased
w ell
o il
of
don’ t
A lthough
for
of
im p ortan t
of
I
needed
if
th e
last
im p ortan t
unchecked,
th at
crisis
cap acity
on ly
a nd
we t a k e
the
Secretary of the Treasury George P. Shultz today announced
the appointment of Brent F. Moody as Deputy Assistant Secretary
of the Treasury for Enforcement. He will serve under Edward L.
Morgan, Assistant Secretary for Enforcement, Tariff and Trade
Affairs, and Operations.
Mr. Moody, 33, a native of Arizona, has been a partner
in the Phoenix, Arizona, law firm of Gust, Rosenfeld and
Divelbess which he joined in 1967.
Prior to 1967, he served three years with the Judge
Advocate General's Corps of the United States Army where he
specialized in criminal law and procedure. He was honorably
discharged with the rank of Captain.
A 1964 graduate of the University of Arizona College of
Law, Mr. Moody served as Chairman of the Board of Governors
and member of the Arizona Law Review.
Mr. Moody has been active in civic affairs in Phoenix.
He served as President of the Civic Plaza Business and Pro
fessional Association for two years and was a member of the
Board of Directors of the Phoenix Metropolitan Area Chamber
of Commerce and The Arizona Family, a CODAC agency. He has
been a member of the Phoenix Downtown Lions Club since 1970,
and served on the Dedication Committee for the Phoenix Civic
Plaza.
Mr. Moody is a member of the State Bar of Arizona, the
Maricopa County and American Bar Associations. He is married
and has two children.
Mr. Moody is assuming the responsibilities formerly
handled by Mr. Martin R. Pollner, who has resigned from the
Treasury to return to private law practice.
# # #
S-199
DepartmentoftheTREASURY
M t t i a iD.C.
i i L WÌSÈ
HINGTON,
2022ft
1
T ELEP H O N E W flK g 041
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May 9, 1973
FOR IMMEDIATE RELEASE
A Treasury Department spokesman today issued the
following statement:
The Under Secretary of the Treasury for Monetary Affairs,
Paul A. Volcker, returned today after a trip to discuss monetary,
trade and aid matters with officials of a dozen Asian countries
and Australia.
Mr. Volcker flew to Asia to lead the U.S. delegation to the
annual meeting of the Asian Development Bank, at Manila. Enroute
to the meeting, the Under Secretary visited officials at Seoul,
Korea. While at the bank meeting, he talked with officials of
the Philippines, Thailand, Singapore, Malaysia, Japan, South
Vietnam and Taiwan.
Following the meeting Mr. Volcker visited New Delhi, India;
Colombo, Sri Lanka (Ceylon); Djarkata,Indonesia; and Canberra and
Sydney,Australia.
Mr. Volcker told officials that he regarded himself as a
"salesman’1 for the recent U.S. proposals on monetary reform.
In addition, Mr. Volcker's trip was designed to allow in-depth
discussions of developing nations' views on monetary reform. The
Under Secretary told several officials that the United States does •
not believe it is possible to link the new monetary system directly
with aid for developing nations. The U.S. view is that aid must
be taken up as an important, but separate, matter.
As a result of the trip, Mr. Volcker said, the United States
remains convinced that it will be possible to agree on general
principles of monetary reform by the time of the Nairobi meetings
of the International Monetary Fund this September. However, Mr.
Volcker said, the "nitty-gritty" technical details will require at
least another year or two to work out, after Nairobi. Meanwhile the
informal dual system of fixed and floating exchange rates is working
in an effective and stable manner that can continue until final
details are worked out.
Mr. Volcker expects to testify on Friday before the Senate
Appropriations Committee on funds for the Asian Development Bank.
Five members of the House of Representatives accompanied the
Under Secretary to the Bank meeting at Manila.
S -19 8
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DepartmentoftheJREJffilRY
¡HINGTON, D.C. 20220
TELEPHONE W04-2041
■
FOR RELEASE ON DELIVERY
S T A T E M E N T O F T H E H O N O R A B L E F R E D E R IC W. HICKMAN
A S SIST A N T S E C R E T A R Y O F T H E T R E A S U R Y
B E F O R E T H E H OUSE W A Y S AND M EA N S C O M M IT T E E
T H U R SD A Y . M A Y 1 0 , 1973
10:30 A.M.
M y te s tim o n y to d ay c o n c e r n s th e r e la tio n s h ip o f o u r ta x s y s te m
to in te rn a tio n a l tr a d e p o lic y .
I w ill e x p la in th e A d m in is tr a tio n 's p r o
p o sals fo r ch a n g e s in th e ta x la w s r e la tin g to in c o m e fr o m fo r e ig n
so u rces.
Som e would u s e o u r ta x s y s te m a s a to o l to d e te r fo r e ig n i n
v e stm e n t.
W e b e lie v e th a t would b e a m is ta k e .
A s S e c r e t a r y Shu ltz
stated in h is te s tim o n y y e s te r d a y , th e e v id e n c e i s th a t fo r e ig n i n v e s t
m ent h as m ad e a p o s itiv e co n trib u tio n to o u r b a la n c e o f p a y m e n ts,
to our e x p o r ts and to jo b s and p r o s p e r ity at h o m e .
T h e A d m in is tr a tio n 's ta x p r o p o s a ls r e s t on th e c o n v ic tio n , s ta te d
in th e P r e s i d e n t 's tr a d e m e s s a g e ,
th a t
"O u r in c o m e ta x e s a r e not
the c a u s e of o u r tr a d e p r o b le m s and ta x c h a n g e s w ill not s o lv e th e m . "
T he b a s ic d is lo c a tio n s and d is to r tio n s th a t e x is t w ith r e s p e c t to i n
te rn a tio n a l tr a d e and in v e s tm e n t m u st b e s o lv e d b y h a rd b a r g a in in g
S -2 0 0
2
w ith o th e r c o u n tr ie s .
T h e r o u te to in c r e a s e d d o m e s tic in v e stm e n t
fo r e x p o r ts l i e s in r e a l i s t i c m o n e ta r y e x ch a n g e r a t e s and in a s s u rin g
f a i r a c c e s s to fo r e ig n m a r k e ts fo r U n ited S ta te s m ad e p r o d u c ts .
It
d o e s not li e in in h ib itin g fo r e ig n in v e s tm e n t by u s e o f th e ta x law s.
O u r p r o p o s a ls f o r ta x c h a n g e s d e a l w ith d is to r tio n s c r e a te d by
e x is tin g ta x la w s ,
th e ta x
b o th d o m e s tic and fo r e ig n .
s y s te m we a im to r e m e d y .
o u r ta x la w s
to c o r r e c t
W hat i s w ro n g with
B u t we do not p ro p o s e to use
o r to m a s k b r o a d e r
p r o b le m s not
cau sed
by ta x e s .
T h e P r e s e n t S y s t e m - - B a s i c C o n c e p ts .
U nder e x is tin g la w , we im p o s e an in c o m e ta x on in d iv id u a ls and
an in c o m e ta x on c o r p o r a tio n s .
C o r p o r a te e a r n in g s w h ich a r e d is
tr ib u te d a r e ta x e d t w ic e - - o n c e to th e c o r p o r a tio n w hen i t e a r n s them
and a g a in to th e s h a r e h o ld e r s when th e y r e c e iv e th e m .
p u rp o rt to ta x fo r e ig n
c it iz e n s o r
fo r e ig n
c o r p o r a tio n s
W e do not
e x c e p t on
in c o m e e a r n e d in th e U n itèd S t a te s .
T h e s e g e n e r a l p r in c ip le s apply to U. S . in v e s tm e n t a t h om e and
a b ro a d .
T h u s,
i s in c o r p o r a te d
we ta x th e w o rld -w id e in c o m e o f a c o r p o r a tio n that
in th e
U nited S t a te s ,
r a tio n on in c o m e e a r n e d
do not
ta x
a fo r e ig n
in th e
and w e ta x a fo r e ig n c o r p o
U n ited S t a t e s .
c o r p o r a tio n
on in c o m e
B u t,
w e g e n e r a lly
earn ed
o u tsid e the
- 3 United S t a te s , w h e th e r o r not th a t c o r p o r a tio n i s c o n tr o lle d by U nited
ssaTfi'Siid £ ,
r in ii- .a m .taio ob fiw n iifiB v n i
S tates o w n e rs .
H ow ev er, when th e in c o m e o f s u ch a c o r p o r a tio n
is
d istrib u te d
as
a dividend to it s s h a r e h o ld e r s ,
i f th o s e s h a r e
h o ld e rs a r e U nited S ta te s c it iz e n s , r e s id e n ts o r c o r p o r a tio n s , w e ta x
them on th e
d ivid end s th e y r e c e i y e . . I n o r d e r to e lim in a te
tax atio n o f th e s a m e in c o m e a t th e c o r p o r a te le v e l,
c re d it to c o r p o r a te s h a r e h o ld e r s
f o r fo r e ig n
double
w e g iv e a ta x
in c o m e ta x e s paid by
the fo re ig n c o r p o r a tio n .
The
r e s u lt
is
th a t
fo r e ig n s u b s id ia r ie s co m p e te in fo r e ig n
m a rk e ts u nder th e s a m e ta x b u rd e n s a s t h e ir fo r e ig n c o m p e titio n .
As a fo re ig n
not in th e
c o r p o r a tio n o p e ra tin g a b ro a d ,
U nited S t a te s .
H ow ev er,
ea rn in g s a r e s u b je c t to U. S.
to s h a r e h o ld e r s .
it p a y s ta x a b ro a d and
a t th e s to c k h o ld e r le v e l,
th e
ta x u n d er th e g e n e r a l r u le s a p p lic a b le
W hen in c o m e i s r e p a tr ia t e d fr o m th e s u b s id ia r y
to the U nited S ta te s s h a r e h o ld e r s it i s ta x e d to th e s h a r e h o ld e r s at
re g u la r U. S .
ta x r a t e s , s u b je c t to a c r e d it f o r fo r e ig n in c o m e t a x e s .
T h is c r e d it ca n n o t e x c e e d th e am ount o f ta x due to th e U nited S ta te s
on the fo r e ig n
in c o m e ,
s o th a t it d o es not r e d u c e ta x lia b ilit y on
U. S. s o u r c e in c o m e .
E ffe c ts o f th e P r e s e n t S y s te m .
Our p r e s e n t s y s te m o f ta x in g fo r e ig n s o u r c e in c o m e h a s on th e
whole s e rv e d u s i w ell.) i It m in im iz e s th e
in tr u s io n
of ta x e s
in to
4
in v e s tm e n t d e c is io n s .
At p r e s e n t,
a b u s in e s s
ca n --a n d
ty p ica lly
d o e s - - d e c id e w h e th e r o r not to in v e s t in a p a r t ic u la r fo r e ig n country
on th e b a s is
b e ta x e d
of m ark et
in th a t
and b u s in e s s
co u n try
ju s t
as
its
fa c to rs,
know ing th a t
it will
lo c a l c o m p e t ito r s a r e taxed .
T h u s , th e p r e s e n t s y s te m h a s m a x im iz e d th e r e s p o n s iv e n e s s of
in v e s tm e n t to
a b ro a d ,
th e
f o r c e s o f a f r e e m a r k e t.
B y b e in g co m p e titiv e
A m e r ic a n -o w n e d fo r e ig n b u s in e s s e s h av e open ed m a jo r new
m a r k e ts to A m e r ic a n c o m p a n ie s and h a v e p ro m o te d e x p o r ts ,
p ro s
p e r ity , and jo b s at h o m e .
T a b le 1
in d ic a te s
th e
c o n tr ib u tio n
w h ich A m e r ic a n in v e stm e n t
a b ro a d i s m a k in g to o u r b a la n c e o f p a y m e n ts p r o b le m .
T h e in com e
flo w in g b a ck to th e U n ited S ta te s fr o m in v e s tm e n ts a b ro a d is today
ro u g h ly tw ic e a s la r g e a s th e flow o f new in v e s tm e n t o u t.
in v e s tm e n t
m akes
a m a jo r
c o n tr ib u tio n on th e
b a s is
F o re ig n
of r e p a tr i
ated e a r n in g s a lo n e , to s a y noth in g o f th e in d ir e c t b e n e f its w h ich flow
fr o m th e op en ing o f fo r e ig n m a r k e ts to A m e r ic a n s .
Not to o
m any y e a r s ago,
lo w e r th an U. S.
ta x
ra te s ,
fo r e ig n ta x r a t e s w e r e s u b s ta n tia lly
and it w as a rg u e d by s o m e th a t those
l e s s e r ta x r a t e s w e r e a c r i t i c a l f a c t o r in m an y in v e s tm e n t d e c is io n s
to lo c a te a b ro a d .
f a c t s h av e ch a n g e d
in th e m a jo r
W h a te v e r th e lo g ic a l m e r i t s o f th a t p o s itio n , the
v ery
in d u s tr ia l
s ig n if ic a n tly in r e c e n t
y ears.
T a x r a te s
n a tio n s w h ich a r e open to U. S .
in v e stm e n t
a r e now in
ro u g h ly th e s a m e r a n g e
ap p aren t fr o m
T a b le
d icated on T a b le 2 ,
g o v e rn m e n ts
lis t e d
2.
a s U . S.
In a d d itio n to
ta x
ra te s.
T h is i s
th e in c o m e ta x r a t e s i n
it i s im p o r ta n t to k e e p in m in d th a t th e f o r e ig n
c o lle c t
a d d itio n a l w ith h o ld in g t a x e s
at
ra te s
ran g in g up to 35 p e r c e n t on th e p a y m e n t o f d iv id en d s and i n t e r e s t
flow ing fr o m
fo r e ig n s u b s id ia r ie s to U. S.
s h a r e h o ld e r s .
T h u s,
in
m any c a s e s , th e c o m b in a tio n o f fo r e ig n in c o m e and w ith h o ld in g t a x e s
e x ce e d s
th e r a t e a t w h ich
in th e U nited S t a te s .
a c o r p o r a t io n 's in c o m e would b e
U n d er th e s e c ir c u m s t a n c e s ,
ta x e d
it i s a p p a re n t th a t
c o m p a ra tiv e ta x r a t e s a r e o f o n ly m a r g in a l s ig n if ic a n c e in n o r m a l
c a s e s and m a jo r c o u n tr ie s .
T a b le 3 i l l u s t r a t e s s t i l l a f u r th e r f a c t , th a t f o r e ig n s u b s id ia r ie s
r e p a tr ia te about h a lf o f t h e ir
h alf a b ro a d .
fo r e ig n
and r e in v e s t abou t
Stu d en ts o f c o r p o r a te a c t iv ity know th a t c o r p o r a tio n s
today m u st r e in v e s t
a s u b s ta n tia l p o r tio n o f t h e ir e a r n in g s i f th e y
a r e to s ta y h e a lth y and c o m p e titiv e .
c o rp o ra tio n s
e a r n in g s
in d ic a te d
in T a b le
3 is
T h e p ay out r a t e f o r f o r e ig n
c o m p a r a b le
to
th e
d iv id en d
pay out r a tio f o r A m e r ic a n in d u s tr y g e n e r a lly . T h e r e m a y , o f c o u r s e ,
be ind ivid u al c a s e s in w h ich
c o m p a n ie s r e in v e s t
a b ro a d
s o le ly to
avoid th e a d d itio n a l ta x o c c a s io n e d by r e p a t r ia t io n . B u t in th e a g g r e
g a te , th e s itu a tio n s e e m s to b e a fu n d a m e n ta lly h e a lth y one in w h ich
n o rm a l p e r c e n ta g e s o f in c o m e a r e r e tu r n e d to th e U n ited S t a te s and
tax ed h e r e .
6
T a x P r o p o s a ls o f H. R . 6 2 .
H. R . 62 p r o p o s e s two m a jo r ch a n g e s in th e e x is tin g ta x s y s te m .
It would e lim in a te th e c r e d it fo r ta x e s paid to fo r e ig n c o u n tr ie s and
it would
a b o lis h th e r u le
only when th o s e
th a t s h a r e h o ld e r s a r e ta x e d on dividends
d ividend s a r e
paid to th e m .
W e have co n sid e re d
th e s e p r o p o s a ls at le n g th and have co n clu d ed th a t th ey a r e u n d e s ir
a b le b e c a u s e th ey would d e s tr o y
w ith r e s p e c t to
th e n e u tr a lity o f o u r ta x
d e c is io n s to in v e s t
a b ro a d .
Let
sy ste m
m e d eal b r ie fly
w ith e a c h o f th e two p r o p o s a ls .
1.
P r o p o s a ls to r e p la c e
fo r fo r e ig n t a x e s .
th e
fo r e ig n ta x
c r e d it
w ith
a deduction
No m a jo r n a tio n ta x e s fo r e ig n s o u r c e in c o m e in th e m a n n e r o r to
th e e x te n t c o n te m p la te d in H. R .
62.
E v e r y m a jo r in d u s tr ia l nation
h as d e v ised so m e s y s te m fo r p re v e n tin g double ta x a tio n o f th e sam e
in c o m e by i t s e l f
and o th e r
n a tio n s .
T h e s e u n ila te r a l
r u le s have
b e en su p p lem en ted by in te r n a tio n a l co n v en tio n s fo r th e av o id an ce of
double ta x a tio n .
end.
T h e r e a r e two m eth o d s g e n e r a lly em p lo y ed to that
O ne m eth od is
s im p ly to e x em p t fr o m d o m e s tic ta x incom e
hav in g it s s o u r c e in so m e o th e r n a tio n .
fo r e x a m p le , by F r a n c e .
in c o m e
d o m e s tic a lly
A s e co n d m eth od i s to ta x fo r e ig n so u rce
but to
allo w
c r e d it
fo r e ig n ta x e s paid on th e s a m e in c o m e .
by th e U nited S t a te s .
T h is i s th e m eth od follow ed,
a g a in s t
d o m e s tic ta x for
T h is i s th e m eth od follow ed
/
X T -
7
W ithin c o u n tr ie s th e r e m ay b e double ta x a tio n o f th e s a m e in c o m e
at
d iffe r e n t
the s ta te s
p o litic a l le v e l s .
and th e
W here th a t o c c u r s ,
fe d e r a l
e x a m p le ,
in
our
co u n try bo th
g o v e rn m e n t m a y ta x th e s a m e in c o m e .
th e n a tio n m u st w o rk out in te r n a lly th e i n t e r
r e la tio n s b e tw e e n lo c a l
to tal le v e l
For
and n a tio n a l ta x e s in o r d e r to a r r iv e a t a
o f ta x w h ich is t o le r a b le .
A s a p r a c t ic a l m a t t e r ,
th a t
kind o f a cco m m o d a tio n is s im p ly not p o s s ib le b e tw e e n n a tio n s ,
the le v e ls o f to ta l ta x
as
in e a c h n a tio n h av e b e c o m e r e la t iv e l y h ig h .
L e t m e illu s t r a t e th e le v e l o f ta x w h ich would r e s u lt i f we w e r e
to allow fo r e ig n ta x e s o n ly a s a d ed u ctio n .
If,
fo r e x a m p le ,
$100
of c o r p o r a te in c o m e p ay s $ 4 6 o f c o r p o r a te ta x in E n g la n d , a d e d u c
tion fo r th a t ta x would le a v e th e r e m a in in g $ 5 4 s u b je c t to ta x at 4 8
p e rce n t in th e U nited S t a t e s .
T h e c o r p o r a tio n would pay an a d d i
tion al $ 2 6 o f U. S. ta x fo r a to ta l o f $ 7 2 ta x on e a c h $ 1 0 0 at c o r p o r a te
in co m e.
T h a t would b e an e ffe c tiv e ta x r a t e o f 72 p e r c e n t.
re m a in in g $ 2 8 w e r e ta x e d w hen d is tr ib u te d to s h a r e h o ld e r s ,
50 p e r c e n t,
a t sa y
th e r e s u lt would b e an e ffe c tiv e ta x r a t e On d is trib u te d
c o rp o ra te in c o m e o f 86
ta x a tio n .
If th e
p e r c e n t.
T h at is
an u n r e a lis t ic le v e l o f
P e o p le s im p ly w ill not in v e s t if th e ta x c o lle c t o r c la im s
too la r g e a s h a r e o f th e p r o f its .
T h u s,
th e p r im a r y
reaso n
why e lim in a tio n
o f th è fo r e ig n ta x
c re d it is u n r e a lis tic i s th a t it w ould, in f a c t , b e n e a r ly c o n f is c a t o r y .
2.
P r o p o s a l to a c c e l e r a t e ta x a tio n o f s h a r e h o ld e r s .
H. R .
62,
would
abandon th e
g en eral
r u le
th a t
s h a re h o ld e rs
a r e ta x e d on c o r p o r a te in c o m e o n ly when th a t in c o m e i s re c e iv e d .
T h e p r o p o s a l would a c c e l e r a t e th e tim e at w h ich s h a r e h o ld e r s are
ta x e d on fo r e ig n s o u r c e in c o m e b y d is r e g a r d in g th e c o r p o r a te entity
and ta x in g su ch in c o m e d ir e c t ly to th e s h a r e h o ld e r s a s e a r n e d . That
is
a fu n d a m en ta l
ch a n g e
in
o u r s y s te m o f c o r p o r a te ta x a tio n and
in r e je c t i n g it we w e r e in flu e n ce d by th e fo llo w in g c o n s id e r a tio n s :
(1)
T h ere
is
no p e r s u a s iv e
e v id e n c e
th a t th e p r e s e n t sy stem
d is t o r t s in v e s tm e n t d e c is io n s e x c e p t in u n u su al c a s e s . A s p rev iou sly
noted th e in c o m e and w ith h o ld in g ta x r a t e s in th e m a jo r in d u strial
n a tio n s a r e s u ffic ie n tly c lo s e to U. S. r a t e s th a t any d if f e r e n c e s would
b e u n im p o rta n t.
(2)
Su ch a s y s te m would m e a n th a t A m e r ic a n - c o n t r o lle d co rp o
r a tio n s o p e r a tin g a b ro a d would in m an y in s t a n c e s b e at a su b stan tial
d isa d v a n ta g e c o m p a re d to t h e ir fo r e ig n c o m p e tito r s w ith r e s p e c t to
th e ta x b u rd en on p r o f its r e ta in e d in th e b u s in e s s .
(3)
W h e re th e r e is a d isa d v a n ta g e at th e c o r p o r a te le v e l, only
A m e r ic a n - c o n tr o lle d
c o m p a n ie s
would be, a s u b s ta n tia l in c e n tiv e ,
to d iv e s t th e m s e lv e s o f c o n t r o l.
w ould b e
s u b je c t to
it
and there
if not a n e c e s s it y , for A m erican s
T h a t would e n ta il a s u b s ta n tia l loss
in A m e r ic a n
in v e s tm e n t
v a lu e s
and a
s u b s ta n tia l
d e c r e a s e in th e
a b ility o f A m e r ic a n f ir m s to m a n a g e t h e ir f o r e ig n in v e s tm e n t s .
We
do not b e lie v e th a t to b e d e s ir a b le .
(4)
T h e re v e n u e g a in to th e T r e a s u r y fr o m a c c e le r a t in g th e t a x
ation o f,s h a r e h o ld e r s w ould b e m in o r in c o m p a r is o n to th e d e p r e s s in g
e ffe c t on U. S. e c o n o m ic a c t iv ity a b r o a d .
W e e s t im a t e th a t th e a c c e l
e ra tio n o f th e ta x on s h a r e h o ld e r s would p ro d u ce abou t $ 3 0 0 m illio n
of ad d itio n al r e v e n u e to th e U n ited S t a t e s .
O ne o f th e c h ie f e f f e c t s
of su ch a p ro p o s a l would b e s im p ly to i n c r e a s e th e am o u n t o f ta x
w hich c o r p o r a tio n s
why th a t i s
pay to fo r e ig n g o v e r n m e n ts .
s o b y a s s u m in g a
L e t m e illu s tr a te
c o r p o r a tio n w h ich
earn s
$100
and
is s u b je c t to a 4 0 p e r c e n t in c o m e ta x r a t e in c o u n try X . T h e co m p a n y
knows th a t w hen it u ltim a te ly r e p a t r i a t e s i t s e a r n in g s t h e r e w ill b e
an ad d itio n al 10 p e r c e n t w ith h o ld in g ta x due to c o u n try X . I f ta x a tio n
of th e U. S .
c o r p o r a te s h a r e h o ld e r s w e r e a c c e le r a t e d and th e y w e r e
re q u ire d to pay $ 4 8 o f ta x to th e U n ited S t a t e s , it w ould m a k e s e n s e
fo r th e fo r e ig n
s u b s id ia r y to
d e c la r e a d ivid end
re m a in s n et a f t e r ta x e s
in
ta x to co u n try X
am o u n t.
on th a t
of $46 ta x to co u n try X ,
a ll
o f th e
$ 6 0 w h ich
c o u n try X and to pay a $ 6 w ith h o ld in g
It w ould th en h a v e p aid
a to ta l
o f w h ich w ould b e c r e d it a b le a g a in s t
th e $ 4 8 o f ta x ow ing to th e U n ited S t a t e s .
p o ten tial w ith h o ld in g ta x l ia b i lit y
It w ould th u s s a t i s f y it s
to c o u n try X
w ithou t in c r e a s in g
10
it s to ta l ta x .
fro m
-
T h e net r e s u lt is th a t th e c o m p a n y 's ta x h a s in cre a se d
$ 4 0 to $ 4 8 ,
but o f th a t $ 8 in c r e a s e , only $2 g o e s to the U. S.
t r e a s u r y and th e r e m a in in g $6
T h e r e s u lt s would b e
g o e s to th e t r e a s u r y o f co u n try X.
d iffe r e n t w h e re th e r a t e s a r e d iffe r e n t from
th o s e a s s u m e d , but th e point is th at a s u b s ta n tia l am ount
ta x
would go to
of additional
fo r e ig n g o v e rn m e n ts .
F o r a ll th e s e r e a s o n s ,
we b e lie v e it d e s ir a b le to s ta y with the
g e n e r a l r u le that c o r p o r a te e a r n in g s a r e ta x e d to s h a r e h o ld e r s only
when r e c e iv e d .
1 9 6 1 -1 9 6 2 C o n g r e s s io n a l R e v iew o f F o r e ig n S o u rc e in c o m e .
T h e s e is s u e s a r e not new .
In 1961 and 1 9 6 2 , C o n g r e s s review ed
in depth U. S. ta x p o lic y w ith r e s p e c t to th e ta x a tio n o f fo r e ig n income
and co n clu d ed th a t it w as g e n e r a lly a p p ro p ria te to ta x th e earnings
o f U nited S ta te s c o n tr o lle d fo r e ig n c o r p o r a tio n s w hen th o s e earnings
a r e d is tr ib u te d to U. S. s h a r e h o ld e r s ,
i. e . , to co n tin u e to apply the
s a m e r u le s th a t we apply to s h a r e h o ld e r s o f U. S. c o r p o r a tio n s . This
C o m m itte e r e je c t e d a g e n e r a l p ro p o s a l to ta x th e u n d istrib u te d in
co m e
of
fo r e ig n
R e p o r t o f th e
c o r p o r a tio n s
C o m m itte e
o f 1962 s ta te d th a t:
to t h e ir
U. S.
on W ay s and M ean s
s h a r e h o ld e r s .
on th e
The
R ev en u e Act
11
" T e s tim o n y in h e a r in g s b e f o r e y o u r c o m m itte e
su g g ested th a t th e lo c a tio n o f in v e s tm e n ts in th e s e
c o u n trie s i s an im p o rta n t f a c t o r in s tim u la tin g
A m e ric a n e x p o r ts to th e s a m e a r e a s . M o r e o v e r ,
it ap p eared th a t to im p o s e th e U. S. ta x c u r r e n tly
on th e U. S. s h a r e h o ld e r s o f A m e ric a n -o w n e d
b u s in e s s e s o p e ra tin g a b ro a d would p la c e su ch f ir m s
at a d isa d v a n ta g e w ith o th e r f ir m s lo c a te d in th e
sa m e a r e a s not s u b je c t to U. S . t a x . " (H. R . R e p .
No. 1 4 4 7 , 8 7th C o n g r e s s , 2d S e s s io n 5 7 - 8 ( 1 9 6 2 ) .)
H ow ever, C o n g r e s s r e c o g n iz e d in 1 9 6 2 --a n d th e A d m in is tr a tio n 's
p rop osals r e c o g n iz e n o w --th a t ch a n g e s in o u r ta x s t r u c t u r e should
be made w h e re th e ta x r u le s th e m s e lv e s c r e a t e in e q u itie s o r a r t i f i c i a l
d isto rtio n s
in in v e s tm e n t d e c is io n s .
T h u s,
in 1962 th e C o n g r e s s
provided a s p e c ia l r u le f o r fo r e ig n s o u r c e in c o m e o f h old in g co m p a n ie s
and c e r ta in s e llin g and s e r v ic e s u b s id ia r ie s o p e ra tin g in fo r e ig n " ta x
havens, "
and in th a t lim ite d s itu a tio n a c c e le r a t e d th e tim e a t w hich
U. S. s h a r e h o ld e r s w e r e ta x e d on th a t in c o m e .
was changed to e n s u r e
co n trolled fo r e ig n
th a t u n taxed
c o r p o r a tio n ,
A ls o in 1 9 6 2 , th e law
and u n d istrib u te d p r o f its o f a
w h e th er
or
not o p e ra tin g in a ta x
haven, would not e s c a p e o r d in a r y in c o m e ta x a s a r e s u lt o f a s a le
or liq u id ation o f th e fo r e ig n c o r p o r a tio n .
The A d m in is tr a tio n 's P r o p o s a ls .
We have
th re e
p r o p o s a ls
fo r
le g is la t iv e
ch a n g e .
They
are
advanced in th e b e lie f th a t o u r s y s te m i s f a i r in i t s g e n e r a l a p p li
cation, but th a t in c e r t a in lim ite d s itu a tio n s w e n eed ch a n g e s in o u r
12
-
ta x s y s te m to n e u tr a liz e d is to r tio n s in in v e s tm e n t d e c is io n s and revenu e
c o lle c tio n s c a u s e d b y c e r t a in f e a t u r e s o f s o m e f o r e ig n ta x s y s te m s .
T a x H o lid a y s.
T h e r e h a s b e e n an in c r e a s in g
te n d e n c y f o r b o th d e v elo p e d and
d e v elo p in g c o u n tr ie s to p ro v id e " h o lid a y s " fr o m t h e ir in c o m e ta x es
in o r d e r to a t t r a c t in v e s tm e n t
th a t no in c o m e ta x ,
in
m a n u fa c tu rin g .
o r v e r y l i t t l e ta x ,
T h is ca n m ean
i s p aid w ith r e s p e c t to the
e a r n in g s o f c e r t a in f o r e ig n c o r p o r a tio n s u n til th e in c o m e i s d i s t r i
bu ted a s a d ivid end .
T h is kind o f d e lib e r a te and w h o le s a le ta x en
tic e m e n t d o es o fte n c o n tr o l in v e s tm e n t d e c is io n s .
W e b e lie v e that
i s a ta x d is to r tio n and th a t it shou ld b e n e u tr a liz e d .
W e a r e r e q u e s tin g a m e n d m en t o f th e ta x la w s s o th a t ea rn in g s
fr o m new o r a d d itio n a l U. S.
c e s s in g
in v e s tm e n ts in m a n u fa c tu rin g o r p r o
f a c i l i t i e s w h ich ta k e a d v a n ta g e o f s u c h ta x in c e n tiv e s will
b e ta x e d to th e U. S. s h a r e h o ld e r s a t th e tim e th e y a r e e a r n e d . W here
su ch
an in c e n tiv e i s a v a ile d o f, th e in c o m e o f th e fo r e ig n c o rp o ra tio n
w ill b e ta x e d c u r r e n tly t h e r e a f t e r , r e g a r d l e s s o f w h e th e r th e in cen tiv e
i s in e f f e c t f o r
to
a su b se q u e n t y e a r ,
u n le s s
th e c o r p o r a tio n c e a s e s
b e en g aged in m a n u fa c tu rin g o r p r o c e s s in g o p e r a t io n s .
p rep ared ,
w ith o th e r
in a p p r o p r ia te c ir c u m s t a n c e s ,
c o u n tr ie s ,
s u b je c t to
to e n te r in to ta x tr e a t ie s
S e n a te
in c e n tiv e s u n d er a p p r o p r ia te s a f e g u a r d s .
W e are
a p p ro v a l,
to
re c o g n iz e
13 In o r d e r to g iv e th e S e c r e t a r y o f th e T r e a s u r y o r h is d e le g a te
broad a u th o rity
to
d e fin e
by
r u le s
or
r e g u la tio n s
th e g e n e r a l
c a te g o rie s o f fo r e ig n ta x
in v e s tm e n t in c e n t iv e s s u b je c t to th e r u le
and to d e te rm in e
s p e c if ic
w h e th e r
such an in v e s tm e n t in c e n tiv e ,
p r a c tic e s
th e p r o p o s a l w ill d e fin e a f o r e ig n ta x
in v estm en t in c e n tiv e in b r o a d t e r m s .
re la te d b e n e fit,
o r b e n e f its c o n s titu te
It w ill in c lu d e any in c o m e ta x
h o w e v e r e ffe c te d , w h ich i s in ten d e d to e n c o u r a g e o r
has the e ffe c t o f e n c o u ra g in g in v e s tm e n t in th e f o r e ig n c o u n try w h ich
provides
th e
b e n e f it,
and w h e th e r
or
not
g r a n te d to n a tio n a ls
as w ell a s f o r e ig n e r s . Su ch a b e n e fit m a y b e p ro v id e d b y la w , r e g u
lation ,
o r in d iv id u a lly n e g o tia te d a r r a n g e m e n ts .
H o w ev er,
th e f a c t
that th e r e i s a g e n e r a lly low r a t e o f ta x in a c o u n try w ill n o t b e c o n
sid ered by i t s e l f a ta x in c e n tiv e .
c o n c e ssio n s
would b e a f fe c te d .
It i s in ten d e d th a t o n ly m a jo r ta x
E x a m p le s
o f b e n e f its o r p r a c t i c e s
of the typ e w h ich c o n s titu te in v e s tm e n t in c e n t iv e s in c lu d e ta x h o lid a y s
(which a r e p a r t ia l
or
c o m p le te e x e m p tio n s fr o m
ta x fo r
a p e r io d
of tim e ); d ed u ctio n s f o r r e in v e s tm e n t r e s e r v e s ; c e r t a i n g r a n t s ; and
c e rta in d e p r e c ia tio n r u le s b e a r in g no r e la tio n s h ip to u s e fu l l i f e .
Runaway P la n t s .
We a ls o b e lie v e th a t th e U n ited S t a te s h a s a le g it im a t e i n t e r e s t
m tax in g c u r r e n tly th e in c o m e o f a c o r p o r a tio n th a t h a s m o v ed a b r o a d
to tak e ad v an tage o f lo w e r ta x r a t e s to m a n u fa c tu r e g ood s d e s tin e d
14 fo r the U nited S t a te s .
T o a c c o m p lis h th is we p ro p o s e ,
in addition
to th e ta x h o lid ay r u le , th a t w h e re a U. S . owned fo r e ig n c o rp o ra tio n
h a s m o r e than 25
p ercen t
o f it s r e c e ip t s fr o m th e m a n u fa ctu re of
goods d e stin e d f o r th e U nited S ta te s and i s s u b je c t to a sig n ific a n tly
lo w e r ta x r a t e , th e in c o m e o f su ch c o r p o r a tio n w ill b e ta x e d c u rre n tly
to th e U. S. s h a r e h o ld e r s .
A fo r e ig n ta x w ill b e d eem ed sig n ific a n tly
lo w e r w h e re th e fo r e ig n e ffe c tiv e ta x r a t e i s l e s s than 80 p e rce n t
o f th e U nited S ta te s
s ta tu to r y c o r p o r a te
ta x
ra te .
T h e t e s t s a s to
th e p e r c e n ta g e of e x p o r ts to th e U nited S ta te s and th e e ffe c tiv e fo reig n
ta x r a t e s w ill b e ap p lied a n n u a lly .
A p p lica tio n o f T a x H oliday and R unaw ay P la n t R u le s .
O ur p ro p o s a l fo r ta x h o lid a y s and ru naw ay p la n ts w ill add a new
s e c tio n to th e In te r n a l R e v en u e C ode p ro v id in g th a t a U. S.
sh are
h o ld e r ( i. e . , a s h a r e h o ld e r who i s a U. S. p e r s o n owning 10 p e rce n t
o r m o re
o f th e s to c k )
o f a c o n tr o lle d fo r e ig n
c o r p o r a tio n w ill be
tr e a te d a s having r e c e iv e d h is p ro r a t a s h a r e o f th e c o r p o r a tio n 's
e a rn in g s
and p r o fits
th a t r e c e iv e s
a ta x a b le y e a r i f th e c o r p o r a tio n is one
a ta x h o lid a y
o r i s a ru naw ay p la n t.
m o re
fo r
or
a s i m i l a r ta x
in v e s tm e n t in cen tiv e
A c o n tr o lle d fo r e ig n c o r p o r a tio n i s one having
th an 50 p e r c e n t o f i t s co m b in ed v otin g p o w er owned b y U. S.
s h a r e h o ld e r s .
T h e ta x h o lid a y and ru naw ay p lan t r u le s would be
15
in addition to th o s e added by th e C o n g r e s s in 1962 in it s ta x h av en
le g is la tio n ,
and th e m e c h a n is m fo r ta x in g th e s h a r e h o ld e r s would b e
co m p a ra b le ,
but w ithout c e r t a in e s c a p e c la u s e s tha.t w e re p ro v id ed
in the 1962 le g is la tio n ,
A c o r p o r a tio n w ill b e r e g a r d e d a s en g aged in m a n u fa ctu rin g o r
•
»'■'i r p
,f\ .A d (Vt ft S 1*W 9 w
p ro c e s s in g o p e r a tio n s i f th e u n a d ju sted b a s is o f th e ta n g ib le p r o p e r ty
and r e a l p r o p e r ty u sed in it s m a n u fa ctu rin g o r p r o c e s s in g o p e r a tio n s
r;
|)
<j£ e f h l io q o
oj
K s u n i 'J o o o xlo a te
e x ceed s 10 p e r c e n t o f th e u n a d ju ste d b a s is o f a ll ta n g ib le p r o p e r ty
:
.-w,;,v‘i
and r e a l p r o p e r ty o f th e c o r p o r a tio n .
b u s in e s s e s ,
su ch a s m in in g ,
q«g
PQ.'SBOl ' iB L i'in i
DOTiic
C o rp o r a tio n s eng aged in o th e r
would b e u n a ffe c te d .
T h e p r o v is io n s
will apply to any new in v e s tm e n t o r a d d itio n a l in v e s tm e n t in e x is tin g
m an u factu rin g o r p r o c e s s in g o p e r a tio n s a f te r A p r il 9 ,
1973.
In th e
c a s e of ad d itio n al in v e s tm e n t o r r e p la c e m e n t o f e x is tin g in v e s tm e n t,
a tr a n s itio n a l r u le is p ro p o sed s o th a t th e s e p r o v is io n s w ill not b e
ap p licable u n til th e in c r e a s e d in v e s tm e n t e x c e e d s 20 p e r c e n t o f th e
in v estm en t on A p r il 9 , 1 9 7 3 .
F o re ig n L o s s e s .
We have a ls o
fo reig n l o s s e s
and th o se
p ro p o sed th a t w h e re
to o ffs e t
ta x p a y e r s have u sed
o th e r in c o m e ta x a b le b y th e U nited S ta te s
fo r e ig n lo s s e s a r e
ju r is d ic tio n s in l a t e r y e a r s ,
re c a p tu re
U. S.
not ta k en in to a cco u n t by th e fo r e ig n
th en th e U nited S ta te s w ill,
in e f fe c t ,
th o s e l o s s e s by a re d u c tio n o f th e fo r e ig n ta x c r e d it o r
16
an in c lu s io n in th e g r o s s
T h is p r o p o s a l
in c o m e
o f th e ta x p a y e r in l a t e r
y ears.
m o d ifie s th e p r e s e n t s y s te m u n d er w h ich th e United
S ta te s b e a r s th e c o s t d u rin g th e
lo s s y e a r s ,
th e re v e n u e d u rin g th e p r o fita b le y e a r s .
but r e c e i v e s none of
In th e s e c ir c u m s ta n c e s ,
we w ish to b e c e r t a in o f o u r f a i r s h a r e o f th e ta x r e v e n u e s .
T h e re d u c tio n in th e ta x c r e d it would apply w h e re th e ta x p a y er
i t s e í f co n tin u e s
s in c e
in it ia l
te c h n iq u e
to o p e r a te a b ro a d
lo s s e s
has been
are
in
fr e q u e n tly
p r o f ita b le y e a r s .
a n tic ip a te d ,
to o p e r a te in a b r a n c h f o r m
one
to
H ow ever,
ta x
planning
d ed u ct lo s s e s
a g a in s t U. S. in c o m e d u rin g th e s t a r t - u p p e r io d fo llo w ed b y in c o r p o
r a tio n o f th e fo r e ig n b r a n c h a s a fo r e ig n s u b s id ia r y at o r n e a r the
tim e th e o p e r a tio n
m a n e u v e r,
becom es
p r o f ita b le .
In o r d e r to p re v e n t th is
th e le g is la t io n p r o p o s e s th e r e c a p t u r e o f l o s s e s by taking
th e p r e v io u s l o s s e s in to in c o m e upon th e in c o r p o r a tio n o f a b ran ch
o r c o m p a r a b le ch a n g e in it s ta x s t a tu s .
TABLE 1
U.S. Direct Foreign Investment: Balance of Payments
Flows, 1970 & 1971
(millions of dollars)
•
1970
•
1971
•
Net
:
Net
:
: Capital : Income
Capital : Income
Outflows : inflow 1/: Outflow : inflow 1/
$4,400
$7,920
$4,765
$9,455
All areas
¡Developing countries
y
1,162
3,784
1,940
4,743
3,238
4,136
2,824
4,713
Canada
908
226
1,397
Europe
1,914
1,301
«
2,200
2,083
2,595
E.E.C.
994
1,198
1,305
1,392
All other Europe
920
1,002
778
1,203
568
1,375
668
1,460
. 1,010
3,045
1,788
4,004
Developed countries
Western Hemisphere
Other areas
■Office of the Secretary of the Treasury
Office of Tax Analysis
¡Source:
U.S. Department of Commerce, Survey of Current Business,
November, 1972.
¡1/
I n c lu d e s a f t e r - t a x b r a n c h p r o f i t s p l u s d i v i d e n d s , i n t e r e s t ,
r o y a l t i e s , f e e s and f i l m r e n t a l s n e t . o f f o r e i g n w i t h h o l d i n g t a x e
1/
I n c lu d e s u n a l l o c a t e d i n t e r n a t i o n a l d i r e c t i n v e s t m e n t . .
TABLE 2
Statutory (1972) Tax Rates for Selected Countries
Country
Canada
Mexico
Panama
Argentina
Withholding
Rates
On
1/
Dividends
Statutory
Corporate
Income
Tax Rate
~T~
50
3/
42
4/
50
15
15
8
12
33
5/
Brazil
20
30/5
6/
Venezuela
15
50/60
7/
Belgium
35/10
France
50
15
5
8/
Italy
51/15
9/
43
Netherlands
48
Sweden
40
Germany
15
5
5
15
10/
5
Switzerland
29
United Kingdom
40/38.75
Republic of
South Africa
43/25
ii/
15
12/
15
13/
10
Philippines
36.75/26
14/
35
Australia
47.5
15
Japan
Office of the Secretary of the Treasury
Office of Tax Analysis
35
(Footnotes on Page 2)
2
Footnotes
1/
Where a reduced rate of withholding is applied for
parent-subsidiary dividends, that rate is shown.
2/
21 percent of first $35,000, and 50 percent of the excess.
3/
Progressive rate structure of 5 to 42 percent.
£/
Corporations are taxed according to a progressive rate
structure with bracket progression. The highest percent
on the excess is 50 percent.
5/
30 percent of taxable income and 5 percent on distributed
profits of other than service corporations.
6/
Progressive rate structure with a maximum rate of 50 per
cent of income over 28,000,000 bolivares. Corporations
engaged in oil and mining activity are subject to a rate
of 60 percent on gross increments.
7/
30 percent for distributed income with a floating rate on
undistributed income; maximum is 35 percent on excess over
B.Fr. 5,000,000. 10 percent surcharge on basic rate.
8/
Tax on undistributed profits/distributed profits.
buted profits also bear substantial local taxes.
9/
Companies in Italy are subject to both the income tax, at
rates varying from 18 to 25 percent, and to the company tax
of 18 percent.
10/
Federal tax is a maximum of 7.2 percent; however, the
cantons assess a progressive corporation tax. The maximum
rate is 29.78 percent including Federal and communal rates.
11/
A corporate tax of 40 percent is levied on all corporate
profits and a 38.75 percent tax is applied on distributed
profits.
12/
The normal tax on companies is 43 percent. There is a 25
percent tax on undistributed profits. Mining income is
taxed at 40 percent except for diamond mining (45 percent)
and gold mining (special formula).
13/
Undistributed profits are taxed at a maximum rate of 36.75
percent. Distributed profits are taxed at a maximum rate
of 26 percent.
14/
Corporate tax is 25 percent of first 100,000 pesos and 35
percent of the excess.
Distri
TABLE 3
Payout Ratios of Earnings of U.S. Subsidiaries Abroad
(figures in millions of U.S. dollars)
Developed
Countries
I.
:i.
All Industries
a. Dividends paid
b. Foreign Withholding
taxes
c. Dividends received
d. Reinvested earnings
e.
Total earnings (a+d)
f.
Payout ratio (a as % of d)
1970
1971 P/
1,144
1,510
3,391
3,982
319
2,153
2,375
118
1,026
874
129
1,381
741 •
416
2,975
2,948
448
3,534
3,116
4,847
2,018
2,251
6,339
7,098
1970
2,247
2,472
298
1,949
2,075
4,322
;
52%
Areas
All
1971 p/
1971 P//
1970
Areas
Other
51%
;
57%
67%
53%
56%
Manufacturing
1,499
1,584
c.
d.
Dividends paid
Foreign Withholding
taxes
Dividends received
Reinvested earnings
206
1,293
1,252
214
1,370.
1,508
e.
Total earnings (a+d)
2,751
3,092
f.
Payout ratio (a as % of d)
a.
b.
Source:
Notes t
D epartm ent o f
P
— pri
Commerce,
_______ Da.~t.a. excXvrdLe i_i
54%
Survey
.
299
294
1,799
1,878
51
248
282
53
241
277
257
1,542
1,534
267
1,611
1,785
581
571
3,333
3,663
51%
of
51%
51%
C urrent B u sin ess
irov^ 1ties
f«
54%
51%
0/IheTREASURY
Deportment
ASHINGTON. D C. 20220
TELEPHONE W 04-2041
EMBARGOED FOR RELEASE UNTIL
10:00 A.M., EDT, MAY 10, 1973
M
TESTIMONY BY THE HONORABLE WILLIAM E. SIMON
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
THURSDAY, MAY 10, 1973, 10:00 A.M., E.D.T.
Mr. Chairman and Members of the Committee:
I
am delighted to appear before you today to discuss the
possible shortages of gasoline and other petroleum products.
As such, I would like to focus on the following:
(1)
The causes behind these shortages;
(2)
The effect of these shortages;
(3)
The impact that gasoline shortages will have on
other products for the remainder of this year
and on home heating oil supplies next winter;
(4)
The effect of the new Mandatory Oil Import program;
and
(5)
What steps are being taken to prevent such shortages
and their reoccurrence.
S-194
2
The Growth of Demand for Energy
The first thing to understand is that the demand for
energy has been increasing continually while our supply has
not.
With six percent of the world's population, we are
consuming 33 percent of the world's energy.
Furthermore,
the demand for energy in this country is growing at an annual
rate of about four percent and by 1990, our energy needs will
be doubled that of 1970.
Further, demand for gasoline in the United States has
been growing faster in the past several years than at any
other time in recent history.
Since 1968, gasoline demand
has risen at an annual rate of about five percent.
During
the past two years the rate of increase has been about six
percent per year.
Part of this rise in demand can be explain
ed by growth in the population, growth in the economy, and
the increasing number of cars on the road.
But demand has also risen significantly because of the
many power-using devices added to cars.
These include
automatic transmissions, air conditioning, various safety
features, and the changes made in automobiles since 1970
in compliance with EPA regulations issued under the mandate
of the Clean Air Act.
Producers' compliance with these
regulations has led to substantially reduced engine
efficiency.
As more vehicles come on the road equipped
with safety, emission control and physical comfort devices,
average mileage per gallon will decrease further.
An
3
automobile that once got 14 miles per gallon, now gets
eight or nine miles, and it may get only six or seven miles
per gallon if present trends continue.
Because new automobiles are not getting the gasoline
mileage obtained by their counterparts five and ten years
ago, and because we are driving more, gasoline consumption
has risen.
We are using 300,000 barrels per day more of
gasoline this year than last year.
Failure to Build Refineries
While gasoline demand has been growing at about six
percent per year, the volume of crude oil processed by
refiners has risen only three percent per year.
We are
now extremely short of refinery capacity and, at the time
of the President's energy message, which announced the new
oil import program, no new refineries were under construc
tion.
Furthermore, expansion of existing refineries had
ceased.
Growth in the capacity of the industry had come
to an end because the industry found that it was more
profitable to invest abroad than in the United States.
One reason for this is that environmental restrictions
have made it increasingly difficult to find acceptable sites
for new refineries in this country.
Because of resistance
to refinery siting, it may take three years to obtain site
approvals today, in addition to the three years required for
construction.
Yet, modern refineries can be designed so that
4
they do not significantly pollute the environment.
In this
regard, I would mention a recent trip which you, Chairman
McIntyre, made to inspect a new refinery in the State of
Washington.
I understand that you were impressed by the
cleanliness of this refinery and have urged your fellow
Senators from New England to support such a refinery in
their area.
I wholeheartedly agree with you.
Another reason why the industry has located new refin
eries abroad is that United States oil import restrictions,
in the past, created uncertainty as to whether new domestic
refineries could obtain sufficient imported supplies of
crude oil.
As long as the Government set import quotas
on a year-to-year and, in some cases, on a month-to-month
basis, no company was assured of the stability of supply
necessary to encourage domestic refinery construction.
This
impediment ended on April 18 when we terminated volumetric
quotas on oil imports.
Finally, the tax and other economic benefits available
to refiners in the Caribbean and in Canada have been more
lucrative than similar provisions available in the United
States.
For all these reasons, U. S. refinery construction
has been standing still while United States demand for
refinery products has been growing.
To meet the growing demand for gasoline, refiners have
been changing their mix of products to increase their yield
of gasoline.
The average yield of gasoline per barrel of
m
5
crude oil rose from 43,8 in 1968 to 46.9 percent in 1972.
This means, of course, that the yield of other products,
such as fuel oil, has been reduced.
It is also a short
term expedient at best.. Whatever the product mix, it will
be necessary to increase substantially our overall imports
of refinery products to avert both a gasoline shortage this
summer and a fuel oil shortage next winter.
Our growing lack of refinery products was driven home
to the public late in 1972 with shortages of distillates
and other heating fuels in various parts of the country.
Refineries had to increase their percentage of distillate
production and, correspondingly, reduce gasoline production.
As a result, we are now coming into the summer season with
low gasoline stocks.
As of April 20, we had only 204 million
barrels of gasoline in storage.
This is down 12 percent from
last year, while demand is up six percent.
Furthermore,
domestic production, even today, is not keeping pace with
demand.
We are using, on average, 47 million barrels of
gasoline weekly, and producing only 43 million barrels.
For
this reason, we are faced with the prospect of serious limita
tions on gasoline supply.
An important aspect of the supply problem is the distribu
tion system in this country.
Some areas of the country are
close to pipelines and refineries.
Some areas are served by
the retail outlets of the major oil companies.
These areas
will not feel a shortage as much as other areas which are
6
relatively distant from pipelines and not well-served by the
major oil companies.
Recognizing the serious nature of the gasoline and fuel
oil shortage, and that there are regional differences in the
intensity of the problem, we have established regional sub
committees
man.
of the Oil Policy Committee, of which I am Chair
These groups consist of representatives of the independ
ent segment of the industry serving particular areas of the
country.
In addition, we have contacted the Governor’s office
of each state and explained to them the need to reach some
compatibility between our energy needs and state environmental
requirements.
As a result, representatives of the Governor's
offices are attending these subcommittee meetings, and we are
able to identify regional problems and deal expeditiously with
them.
Working in this way, we are able to maintain flexibility
in the administration of the new oil import program and to be
responsive to the special problems of particular areas of the
country.
The Problems of the Independent Oil Companies
We are greatly concerned about the independent companies.
The independent segment of the oil industry —
refiners and the independent marketers —
but distinct problems.
the independent
are faced with related
The refiners face crude oil shortages;
the marketers, gasoline shortages.
7
To understand how these problems developed, it is
important to realize that until the early 1970's, we had
surplus crude oil production capacity in the United States.
This enabled independent refiners to buy crude oil and build
refineries to supply, among others, independent jobbers,
marketers, and other wholesale customers.
There was also
a surplus of gasoline and other products being produced by
the major oil companies.
Independent marketers took advantage
of this surplus and opened thousands of gasoline stations to
sell gasoline purchased in the spot market;
By efficient
servicing of consumers, these marketers were able to sell
gasoline for a few cents a gallon less than the major oil
companies.
I believe that these independents had a healthy
influence on the petroleum industry by giving consumers
a greater choice between price and service;
They made it
possible for consumers to buy gasoline at lower prices.
The gasoline shortage has hit these independents
hardest.
In the first place, independent refineries can
no longer get adequate supplies of crude oil.
They used
to obtain domestic crude oil by exchanging their import
licenses with the major oil companies.
The major companies
used the import licenses to import cheaper foreign crude
for their own use, while providing the independent refiners
with domestic crude oil.
In addition, the so-called "Sliding
Scale" method of allocating import licenses under the old
system gave smaller refineries more than a proportionate share
°f the licenses.
8
All this has changed during the last two years.
Quoted
prices of foreign crude oil are now equal to or higher than
prices of American crude sold in the same markets.
a worldwide shortage of low-sulfur or "sweet" crude.
There is
As a
result, major oil companies have had no economic incentive to
trade their domestic sweet crude production for imported crude
obtained by means of independents* import tickets.
Further,
because of local air quality standards, companies are compelled
to use low-sulfur crude even though their plants are designed
for refining high-sulfur crude.
The result is that the inde
pendent refineries cannot get the crude oil they need and are
operating at less than full capacity.
Independent gasoline marketers are also in a difficult
position.
The wholesale market for gasoline is drying up.
Many of the independents find it impossible to purchase
gasoline wholesale.
Hundreds of independent gasoline stations
across the country are closing down.
Those that can obtain
gasoline abroad, find it available only at much higher prices.
This hurts them competitively, since their main selling point
with the public is that they can underprice the major oil
companies.
The problems of the independent segment of the industry
were given considerable attention in designing the new oil
import program.
Indeed, had it not been for the independents,
the changes in the program might have been announced much
/ï3
9
sooner than they were.
Our basic objective was to balance
the need to preserve the independent segment of the petroleum
industry with the desire to create a vigorous domestic industry
through incentives for construction of new refineries in the
United States and for exploration for new reserves of crude
oil.
We also wanted to eliminate the many exceptions built
into the oil import program and to assure a reasonable
stability of prices.
Perhaps the major benefit of the new program is the
flexibility that it provides to importers.
Marketers will
be able to shop for supplies of oil anywhere in the world.
They will no longer be dependent entirely on their traditional
sources of supply.
Moreover, through the availability of
fee-exempt licenses issued by the Oil Import Appeals Board,
independent marketers should have access to products at lower
cost than their major competitors for the remainder of this
decade.
This should provide the time required by the inde
pendent marketers to make the changes necessary to protect
their market position.
Another benefit of the new program is the incentive it
creates for additional output.
The independent marketers
have depended for their economic well-being on the excess
refinery capacity of the major oil companies.
Excess refinery
capacity no longer exists, largely because we, as a Nation,
have discouraged refinery expansion and construction.
The
greatest hope for the independent marketers, in the long run.
10
will be the incentives provided both independent and major
refiners to produce additional supplies of crude oil and
products.
This, in the end, is the only real solution to
the problems the independent marketers now face.
The Effect of the New Import Program and
Other Policies on the Independent Oil Companies
Let me discuss at greater length some of the steps
we have taken to protect the independents.
In the past, the
Oil Import Appeals Board (OIAB) would not distribute import
licenses in cases of hardships until September.
These licenses
were, by and large, distributed to the independent refiners
and marketers.
Early this year, the OIAB began to allocate
tickets immediately upon application.
its entire 1973 allocation.
It had soon disbursed
Then, on March 23, 1973, the
President issued a Proclamation granting unlimited allocations
to the Oil Import Appeals Board in an effort to make more crude
oil and product available to both the independents and the
Nation.
Finally, on April 18, in another Proclamation, the
President removed volumetric controls altogether.
The new program does several things to help strengthen
the short-term position of the independent refiners and
marketers, enabling them to establish themselves on a more
enduring basis.
1.
Outstanding import licenses will be honored free
of license fee.
Since the independents hold a large share
Iv/
11
of these licenses because of the sliding scale and past
OIAB allocations, this provides some value to their tickets
where none existed previously.
The independents will be
able to import oil at lower cost than the majors.
As a
result, the majors should now have greater incentive to
trade with the independents.
2•
To provide greater value to the independents *
tickets, we have suspended existing tariffs.
Had we not
done this, the independents* ticket value would have been
lower.
The only other way to create value under the new
program was to have the consumer pay substantially higher
prices.
3.
The Oil Import Appeals Board has been given specific
responsibility for helping the independent refiners and
marketers by issuing fee-exempt tickets.
Major oil companies
may also appeal to the Oil Import Appeals Board, but they must
demonstrate their inability to obtain import licenses by
exchanging with independents or their willingness to supply
established independent marketers and refiners with the same
proportion of crude oil or products supplied in 1972.
4.
The Government has begun to allocate its "royalty
oil" to independent refineries in need.
Under the terms of
relatively recent lease sales, the Government can collect
some of its royalties in cash or in a share of the oil
produced on lease lands.
In choosing the latter course, it
is, in effect, diverting crude oil from the major to the
12
independent refineries.
To date, about 60,000 barrels per
day have been allocated in this manner to the independents.
There is a possibility for an additional sharing of royalty
oil of up to 140,000 barrels per day under this program.
5.
All of these actions are probably not sufficient
to assure distribution of adequate supplies of refinery
products to independent marketers and, especially, adequate
supplies of crude oil to independent refiners.
It is for
this reason that the Government has decided to utilize the
authority given it under the recently enacted Economic
Stabilization Act to allocate both crude oil and products
to independents, municipalities, and other purchasers who
have been cut off from their traditional sources of supply.
The Oil Policy Committee has been given general respon
sibility for drafting an allocation program; the Office of
Oil and Gas in the Department of the Interior, responsibility
for administering the program.
The program adopted by the
Administration relies on voluntary compliance with guidelines,
set by the Government, calling for the supply of no less than
the proportion of 1971 and 1972 sales to independents and other
customers at prices not to exceed posted and rack prices charged
by refiners, marketers, distributors and jobbers.
Our purpose
is to apportion, as evenly as possible, any curtailment in
consumption that will result from gasoline and distillate
shortages.
Priority will be given to meeting the needs of
- 13 farming, other essential industries and state and local
governments.
A description of the allocation plan is attached
as Exhibit A.
The program will apply to all segments of the industry.
The oil companies* adherence to these guidelines will be
monitored and, if voluntary compliance fails, more stringent
measures will be taken by the Administration.
expect, however, that this will be unnecessary.
We hope and
Our prelimin
ary soundings suggest that the companies are aware of the
problems created by curtailments and are willing to continue
to provide a fair share of petroleum products to their
established customers.
6.
Perhaps the most critical problem, however, is the
supply of sweet crude oil to independent refiners.
There is,
at present, a general shortage of low-sulfur crude oil brought
on, in part, by the requirements of several eastern states and
municipalities that refineries use sweet crude oil to meet air
quality standards, even though these refineries are designed
to take sour or high-sulfur crude oil.
This has diverted
sweet crude to the East Coast refineries of major oil companies
and away from inland independent refineries, many of whom are
unable to handle high-sulfur crude oil.
14
At the same time, the major oil companies have had
little incentive to exchange crude oil because the price
of domestic oil is now equal to or lower than the landed
price of foreign oil.
Under Cost of Living Council rules,
the majors cannot charge the replacement value for
domestically produced crude oil, but must absorb the losses
resulting from an exchange.
It is no surprise, therefore,
that the majors have been reluctant to swap u. S. for
foreign crude oil.
The Administration is trying to rectify these problems.
We are working with the Cost of Living Council to find a
compatibility between maintaining stable prices and provid
ing adequate compensation to the major oil companies that
do exchange domestically produced oil for imported oil.
15
Solutions to the Gasoline and
Distillate Shortage_____
These measures should help to bring about a more
equitable distribution of crude oil and products in the
short run.
What about the long run?
What is being done
to solve the basic gasoline and distillate shortages
that have created the distribution problems with which
we are now concerned?
1.
We have established a license fee program for
crude oil and product imports.
This program removes
all volumetric quotas on imports and allows free
importation of crude and product subject to a fee of 21
cents and 63 cents a barrel, or 1/2 and 1-1/2 cents per
gallon, respectively, after 2-1/2 years.
This is a
long-run system which is designed to spur the construction
of refineries in the United States.
It does this by
removing obstacles to acquiring an assured supply of
crude oil and by instituting a price differential between
crude and products sufficient to guarantee an adequate
profit from domestic refining.
I am happy to report that,
since the President's Energy Message on April 18, a number
of companies, including Shell, Ashland, The Pittston
Corporation, and Standard Oil of California have announced
that they now plan to build or expand refineries in the
16
United States as long as sites are available.
Others have
indicated to us that they are seriously considering building
refineries here but have not yet made their plans public.
In addition, several independent marketers have stated
their intention to develop their own U. S. refinery
capability, a necessary step if the independent marketers
are to become a fully viable entity in the industry.
In each case, however, the decision to build a new refinery
is contingent upon a satisfactory solution to the "siting
problem," the seemingly chronic inability of the industry
to obtain approval to build new refineries in many parts
of the country.
2.
We are also taking actions to solve the domestic
crude oil shortage by a proposal we are making to the
Congress for an exploratory drilling investment credit.
This gives a seven percent tax credit for new drilling,
plus a supplementary credit of five percent for successful
wells.
We are confident that this program, if enacted by
the Congress, will stimulate crude oil production and have
a significant impact on gasoline and fuel oil supplies.
Conservation Measures
Energy conservation can play an important role in
stretching gasoline supplies and thus reducing the shortage.
17
To this end, we will need the cooperation of the Government,
industry, and the public.
For example, the public is being
encouraged to minimize its use of automobiles this summer.
According to the Automobile Manufacturers Association, about
fifty-six percent of the cars on the road contain only the
driver.
This underutilization of cars can be reduced in
many cases, especially in metropolitan areas.
Car pools and
public transportation should be substituted, where possible,
for single occupant cars.
Use of smaller cars, with better
gasoline mileage performance, is another measure the public
might take to conserve gasoline.
Additional measures include
reducing the use of the automobile air conditioner, keeping
tires properly inflated, cutting off motors when stalled in
traffic, and avoiding excessive speeds on the highway.
I am attaching as Exhibit B a list of conservation measures
that can be taken to help reduce the demand for petroleum
products.
Gasoline Prices
Some have expressed concern that the price of gasoline
will rise to astronomical levels.
This concern is unfounded.
There has been a substantial rise in foreign crude oil
prices in the last three years, and we will probably experience
additional price increases in the future.
But crude oil
18
accounts for only a small fraction of the costs of producing
gasoline.
For instance, if the crude oil price were doubled,
this would increase the price of gasoline by only eight cents
a gallon.
One of the largest components of the price of gasoline
is represented by federal and state taxes.
The breakdown in
the retail price of a gallon of gasoline costing thirty-nine
cents is as follows:
crude oil - 8.1 cents; transportation
to refinery and refining - 5.3 cents? wholesaling and
retailing - 13.9 cents; state taxes - 7.7 cents; and federal
tax - 4 cents.
It is interesting to note that in England, the retail
price of regular gas is 64-1/2 cents a gallon; in Germany
79-1/3 cents; in France 91-1/2 cents? and in Italy, a dollar.
With prices like these, it is no wonder that European drivers
prefer smaller cars.
Why are European gasoline prices so high?
The answer is primarily the higher taxes paid by motorists in
these countries.
In Europe, taxes account for up to seventy-
five percent of the retail price.
By comparison, taxes
represent only thirty percent of the price in the United
State s
Gasoline and other prices will probably increase over
time.
This would provide benefits to the Nation:
1.
It will help to save some independent gasoline
dealers and refiners who are otherwise going to go out of businj
19
2.
It will encourage Ameriçans to conserve on gasoline.
3.
It would also help to provide the economic incentives
needed to speed up the construction and expansion of badly
needed domestic refinery capacity.
Fuel Oil
A major effort is being made now, and for the rest of
the summer, to produce more gasoline.
This will have the
effect of reducing the yield of fuel oil below that which
was being produced a few months ago.
The question is whether,
as a result, we will have adequate stocks of fuel oil for
next winter.
In January, we removed all restrictions on the
importation of No. 2 fuel oil.
Partly for this reason, stocks
of distillate fuel oil are now higher than at this time last
year.
Imports of fuel oil continue at high levels.
now importing over 200 thousand barrels per day.
We are
This,
combined with domestic production, gives us a total projected
supply that is adequate to meet our needs this summer and,
barring extremely cold weather, to make it through next winter.
In addition to this, we are confident that the recent
changes in the Oil Import Program will help us to attain
needed levels of imports of fuel oil.
Major oil companies
can now bring in any amount of fuel oil they wish by paying a
20
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p roblem s.
th ere
create
I
th is
w here t h e r e
co m p etitio n .
new o i l
am b a s i c a l l y
Governm ent r e g u l a t i o n
p a rticu la rly
and h e a l t h y
I
M e m b e rs o f
s t e p w h ic h w ould d i s c o u r a g e
I
a ll
th e
in je c tio n
in d u stry ,
in ten se
me s a y
a re m ost o f
n eed less
any
le t
I
feel
petroleu m
th e
to
crops
short
it
create
th is
not
w ould,
solved
because
a b a r r e l of
p r o g r a m w i l l h e lp
in d u stry .
run,
I
t h i n k we a r e
m ake d e c i s i o n s
go u n p l a n t e d
or
in a
on p r i o r i t i e s .
u nharvested
21
for lack of diesel fuel for our tractors.
our vital industries close down.
health or safety.
We cannot let
We cannot endanger public
And, finally, we should not let the
independent segment of the oil industry, which provides
competition in the marketplace, be forced to shut down.
Thank you.
0O0-
I®
fifet
EXHIBIT A
ALLOCATION OF CRUDE OIL AND REFINERY PRODUCTS
The program for allocation of crude oil and refinery
products will be voluntary and (1) backed up by guidelines
established by the government, (2) a mechanism for providing
continuing scrutiny of compliance with these guidelines, and
(3) the threat of imposition of more stringent regulations
requiring reallocating crude oil and products should this
program fail. General policy direction will be vested in the
Oil Policy Committee; day-to-day administration of the program,
in the Office of Oil and Gas (00G). An oil allocation section
shall be established in 00G to administer the program.
Under the program, each producer, refiner, marketer, jobber
distributor will agree to make available in each state to
each of its customers (including those purchasers in the spot
market) the same percentage of its total supply of crude oil
and products that it provided during each quarter of a base
period (defined as the fourth quarter of 1971 and the first
three quarters of 1972).
Under the program, 00G may assign to each producer, refiner
marketer, jobber and distributor allocations for priority
customers still unable to obtain needed supplies of crude oil
and products,not to exceed 10% of any supplier's total sales
of crude oil and products during the base period. This
assignment by OOG will be based upon demonstrated need. The
basic purpose of the assignment is to assure adequate supplies
of crude oil and products to priority users who, for some
reason, are not well served under the proportional allocation
program. It will be particularly important for fulfilling
the needs of new customers that have entered the marketplace
since 1971-72.
In distributing the oil for OOG allocation, priority will be given to supplying the following activities or to i n d e p e n d e n t
marketers, jobbers, and refiners who supply the following
activities :
1.
Farming, dairy and fishing activities and services
directly related to the cultivation, production
and preservation of food.
2.
Food processing and distribution services.
3.
Health, medical, dental, nursing and supporting
services except commercial health and recreational
activities.
4.
Police, fire fighting and emergency aid services.
-
2-
5.
Public passenger transportation, including buses,
rail, intercity and mass transit systems , but
excluding tour and excursion services.
6.
Rail, highway, sea and air freight transportation
services, and transportation and warehousing
services not elsewhere specified.
7.
Other state and local government activities.
8.
The fuel needs of residents in states or parts of
states not well served by major oil companies and
unable to obtain sufficient crude oil or products.
Wholesale and retail marketers of gasoline shall not be
deemed priority customers unless they supply a substantial
proportion of their product to these priority users.
When convenient, various companies may exchange supply
obligations incurred under this program in order to simplify
distribution problems.
The Office of Oil and Gas will receive complaints from
anyone who feels he is not_receiving a proper allocation
of supplies. If it deems it necessary, 00G may require a public
hearing and submission of data, by suppliers, on their 1971 and
1972 exchanges and/or sales of crude oil, unfinished oils
and products. These data will include the names and addresses
of customers, the amounts of crude oil and products sold to
them, the legal relationship between major oil companies and
customers, and whatever other information 00G believes necessary
to conduct the hearing. The 00G will then verify the accuracy
of complaints against a supplier and, if justified, impose
mandatory allocation on the supplier.
The price at which petroleum products shall be sold to
independent marketers, wholesale distributors, and other
unaffiliated customers shall not exceed normal refinery rack
prices charged by major companies to new contract customers.
The price which wholesale distributors may charge independent
marketers shall not exceed normal wholesale prices, or normal
refinery rack prices plus a normal wholesale markup.
Where independent refiners have previously received
domestic crude oil in exchange for import tickets, the
independent refiners will be required to surrender license
fee exempt quotas in return for receiving the privilege of
purchasing crude oil under the program. Where the independent
-3 -
refiners previously purchased crude oil without surrendering
import tickets, no license fee exempt quotas will have to be
surrendered. The price at which crude oil shall be sold to
independent refiners shall not exceed posted crude oil prices
plus an applicable pipeline transportation charge except,
however, where crude oil is sold as required based upon
previous exchanges of import tickets for domestic oil, the
major companies may charge a price equivalent to the average
landed cost of any oil imported to replace the oil sold under
the provisions of this program.
Immediately following the initiation of this program, the
Oil Policy Committee shall begin hearings to determine any
changes that may be required to make the program equitable to
all classes of suppliers and purchasers, and whether the program
should be made mandatory. The Chairman of the Oil Policy
Committee will designate an ad hoc board to conduct such
hearings and report its findings to the Oil Policy Committee.
The board shall be composed of representatives of the Interior,
Treasury, and Commerce Departments, GSA/OEP, and any other
representatives as the Chairman of the Oil Policy Committee may
feel appropriate. The Chairman of the Oil Policy Committee
shall designate the Chairman of this board.
The Oil Policy Committee will also investigate and
recommend additional measures that should be undertaken to
encourage allocations by major suppliers. For example, it
will investigate changes in Cost of Living Council rules and
environmental standards and regulations that seem necessary
to assure efficient utilization and equitable distribution of
crude oil and products.
/ < / /
EXHIBIT B
ACTIONS TO REDUCE THE DEMAND FOR PETROLEUM PRODUCTS
1.
Consolidate airline flights to attain higher efficiency
per passenger mile and thereby lower fuel consumption.
2.
Encourage mass transportation. In metropolitan cities,
people could be encouraged to use buses and trains.
3.
Reduce speed on all highways which could save 11% fuel 4
when driving 50 instead of 60 mph and 25% fuel when
driving 50 instead of 70 mph. Legislation,requiring
50 mph maximum speed on state highways and interestates
might be required.
4.
Keep engine in top shape.
mileage by 10 %.
5.
Form car pools.
6.
Plan trips to stores -- combining visits to cleaners,
drug, department and grocery stores.
7.
Use car air conditioners sparingly. You can save as
much as 10 % on fuel consumption when it's not in use.
8.
Keep tires properly inflated. Under-inflated tires
affect gasoline mileage by approximately one mile per
gallon.
9.
Warm up engine before driving.
A poorly tuned engine reduces
10.
Use multi-grade motor oil in engine. It can give you
10 % better mileage than regular grade oils.
11.
Start slowly and stop slowly -- you save gasoline.
12.
Stagger working hours in metropolitan cities to ease
traffic jams and wasteful engine idling.
13.
Walk more.
14.
Eliminate or curtail non-essential driving.
2
15.
Take vacations by train or bus.
16.
Lower the thermostat setting by two degrees in your
home in winter or raise air conditioner setting in
summer which can save significant volumes of fuels.
17.
Add home insulation.
18.
Minimize recreational driving, flying and boating.
19.
Ship more freight by rail and water which operate
with good fuel economy.
TREASURY^ H
Departmentofthe
[SHINGTON, D.C- 20220
TELEPHONE W04-2041
/ / Z
STATEMENT BY THE H O N O R A B L E
THE TREASURY
PAUL A. VOLCKER,
FOR MO N E T A R Y AFFAIRS,
BEFORE
SUBCOMMITTEE OF THE SENATE A P P R O P R I A T I O N S
A P PROPRIATIONS
MAY
11,
UNDERSECRETARY
COMMITTEE
ON FY
1974
INSTITUTIONS,
1973
Chairman:
I am here
this m o r n i n g
N i x o n ’s fiscal
1974
to testify
appropriations
in favor of Pr e s i d e n t
requests
for
the three
principal m u l tilat era 1 d e v e l o p m e n t i n s t.it ut ions .
requests
Bank
The
Int e r- Ame r i c a n Dev elopme nt B ank
The
Int ern ational
Deve lopmen t As socia t ion
an affi lia te of the Wo rid
P r e s i d e n t ’s overal 1 f oreign
count r ies
con sistent with
our b r o ad
in a m a n n e r
fully
e n c o u r a g i n g develo pme nt in a cont ext
economies
and e c o nomic
m e m b ership
br oadly
Th ey do
so
cone epti o n
o f fre e and
of
market
aligne d with Wes tern pol i t i c a l
tradi tio n s .
Ind ee d ,by v ir tu e of
and i n t e r n a t i o n a l
can play a u n i quely
the economic
for a ss is ting
and social progres s o f d e v e loping
of the
Th e i n s t i tutions
econo mie po li cy .
are a pr ine ipal ve h i c l e
concerned
Bank •
ar e an integra 1 and im po r t an t part
These programs
oriented
These
cover
The Asi an Deve l o p m e n t
S-201
OF
THE F O R EIGN O P E R ATIONS
FOR I N T E R N A T I O N A L FIN A N C I A L
FRIDAY,
Mr.
_
eff e c t i v e
standing,
role
these
their broad
insti t u t i o n s
in b r i n g i n g
this
about
2
To help
assure
appropriate
we
these
level
mus t m ai nt ain
There
interest
financial
as well
of influence
a me an in g f u l
are more
for us
results
specific
to provide
instit uti on s
in world
presence
reasons
funds
so that
as
to m a int ai n
affairs
an
generally --
in these
institutions.
why it is in the U . S.
to the int er nat io nal
they
can help
de ve lo p in g
countries.
1.
Raw m at er i al s
de v e l o p i n g
—
i n cr ea sin gl y pr ovided by
countries
c o nt i nu in g v it al it y
expan si on
—
and
in deve lop in g
countries
courage
social
their
in stituti ons
to the
and n o n - i n f l a ti o n a ry
of our domestic
financing p hy sic al
these
are es se ntial
economy.
social
By
infr as tru ct ure
and he lp ing
and po li tical
help
assure
to e n
stability,
access
to needed
in cr easingly
important
S.
services.
supplies .
2.
Deve lop in g
countries
potential m ar ke ts
3.
They
are already
area
for us.
are
for U.
a ba lance
Help
from
financial
institutions
countries
to expand
their
ability
There
is close
to
and
of payments
surplus
the in te rna ti ona l
permits
these
to repay
goods
us
the
markets
and
$25 bi llion
developing
and
improve
others.
of U.
S.
investment
H
3
in deve lop in g
bil lio n
countries,
annually
from these
a hea lth y
y i el di ng
in return
flows.
instit ut io ns helps
envir onm ent
over
$4
Assistance
build
for this
3
and keep
important US
investment*
4.
These
in sti tu tio ns
between d ev el ope d
and d ev el o p i n g
including
like
into the record
and open
letters
that U.
institutions
We bel ie ve
in s tit ut ion s
job.
The P re si den t
priorities
—
on a va r i e ty
fair
treatment
a number
These
for
seen by
in te r na ti o n al
these
(including
funds
the US)
of issues,
for private
trading practices.
S. bac kin g
the
int er med ia rie s
of points
from Secretary
Hannah.
is indeed
of our br oadest
countries
to support
AID Ad m ini st rat or
the fact
countries
en co u ra gi n g
investment
I would
are useful
-- after
has d et er m i n e d
of State Rogers
communi ca tio ns
the
make
i n t e rn a t i on a l
the A d mi n i s t r a t i o n
p ol iti ca l
requested
repr ese nt
by in serting
clear
financial
in terms
and eco no mic
interests.
for our p a rt i c i p a t i o n
the m i n im u m
careful
that
the
required
review
Wi thi n
our b u d g et ar y
of our na t io n a l
amounts we
ex pe n di tu r e
made
flowing
over many years
ca pa bilities
are asking
-thetotal
from our request
and
is
about
in
to do the
for are :
—
and
will be
o n e — third
of
4
one percent
cuts,
of the FY 1974 budget;
stret cho uts
been applied
outlays
out
and de fe rrals
to the total,
of a bi l l i on
over as m uc h
the b u d g et a ry
as
significant
have
and most
already
of
the
dollars will be stretched
ten years.
outlay is limited
In FY 1974,
to
$15
million.
Within our bala nc e
of payments
ca pa bility
short
of payments
impact
is almost
indicated,
actual
disburse
nil;
as
ments
of
term ba lance
I have
just
will be spread
time.
As
the exchange
actions we have
pa yments
this
taken
problems
area should
Justified
pan sio n
in re la ti on
grams
e ss en tia l
applied
And
period
and
other
r e cti fy ing our balance of
to do mestic
programs
for do mestic
scale
in st i t ut i o n
is ne ces s a ry
ob jectives
changes
full effect,
continued
the same
in te r na ti o na l
rate
toward
in many domestic
but we have
what
take
a co ns ide ra ble
our co ncern in
ease.
back,
have
over
- the
to meet
problems
- ex
has been
cut
to fund
those p r o
objectives.
of prio ri tie s
requests.
essential
WTe
to the
They are
n a ti on al
overseas.
esse nti al
ne g o ti at i on s
in re lation
-
on i n t e rn at i on a l
we
to other
are engaged
trade
i n te rn ati on al
in intensive
and mo n et a r y
issues,
negotiation
the
5
successful re s o lu ti o n
atten ti on
to the problems
de v el o pm en t
as well.
the i nt er n ati on al
r epr es ent s
today.
outline br iefly
I will
start with
tion for further
for Special
entirely
tion.
Funds
far,
in that
the
the Un it e d
lending.
terms
proposals
to do so have been before
Belgium,
basis.
nations
available
As of December
committed on Special
31,
Funds
is
in the
is for
$100 mil lio n
It was
deleted
of the C on tin ui ng
for
--
this program,
the
have
Congress
Norway,
gone ahead
Resolu
to make
although
for several
the United Kingdom,
the Ne therlands,
Finland and Japan —
than $240 m i l l i o n
role
States has not been able
to the Bank
New Zealand,
resource p o s i
and which
Bank request
available
Australia,
whose
are ma ki ng
Asia.
for co n c e ss i o n al
Other deve lop ed
requests we
critical,
any funds
years.
area.
to play an im portant
D ev el op me nt
for FY 1973 under
Thus
of our share of
the Asian Bank,
itself
to
institutions
the specific
reconstruction of Southeast
first Asian
contri bu tio n
part
lending is most
seeking to po sition
The
Our
an important
involves
of i n te rn ati on al
financial
the r e s p on si b il it i e s
Let me
of wh ich
Canada,
Germany,
Italy,
to make more
to the Bank on an ad_ hoc bi la teral
1972,
loans,
$201.5 m i l li o n had been
and
the ba lance
of
the
6
B a n k ’s Special
by
Fund resources
Septe mb er of
Under
Congress
tied
the terms
of author iz ing
1972,
to the pu rpose of
to projects
contribute,
U.
U.S.
goods
and programs
in this
and
This
item has been delayed.
in Southeast
connection,
I urge
I also want
to seek
the
Bank with
agreed
loan resources
shares
and st an dar di zed
po ssible
that other
might
regard
our or iginal
would
remain
tied)
future re p le n ish me nt,
result
—
in pr act ic a l
In contrast,
over
to ma xi miz e
time
the
of our
of this
to restructure
and
countries
share
(which
of such
industrial members
of
This would
this
sharply
and indeed,
in terms
terms.
co nt ri b ut i o n
of our
share wo uld
—
the Bank.
S. pa rt icipation.
in the fi na ncing
leverage
Until we
the counsel
contr ib uto r
the other
as a pr omi si ng
sharing —
of
effect -- in a substantial
the Japanese
strikes me
and bur den
wh ile
is to
for p r o c u r e
op er ating
su bs t an ti a l new contributions.
of our share
This
U.
$100 m i ll i o n
as a major part
to be
of the Asian D ev elo pm ent
in this effort will require
It appears
the
its prompt passage.
reple ni sh
soft
are
Asia.
Special Fund resources
on a p ro po sal now being di scussed
make
request
by
services and pr iority
committee
would
passed
S. su ppliers will remain in el igible
from the c ont ri but ed
Success
fully committed
legislation,
the funds
ment
In this
to be
this year.
in Fe bruary
be given
is expected
r e du c t i on
institution.
increase.
unique
o p po rt un it y
of d ev elo pm ent
long de layed
impact
contribution.
I
7
believe
this
approach needs
made no commitments
the reaction of
this
in this
to be
further
regard and
committee
to what
promising development.
explored.
I solicit
seems
We have
and' we lcome
to me
a hi ghly
rrsaisq OS § alnxsms'i
The other po rti on of our ADB requeetn» 1 atesri tc- th>^eo
increase
in the Ord ina ry Capital re so urces
The Governors
of the Bank, with
the U.
of the Bank.
S* Governor
abstaining,
passed a reso lut io n in No vember
1971
increase
This was*: done, in order
permit
in the capital
an orderly
Ordinary Capital
By November
to permit
lending of
1972,
was aut om at i c al ly
absence
the voting power
shares
to come
of the United
into effect.
States
from 16 percehtltcr 8 ipdrceht,
le gis lation
for U.
shortly.
today on an a pp rop ri ati on request
later.
their
countries rose pr Qpca5§$qn3ily ninifeheA
to the Congress
transmittal
fo rmally
S. participation.
Au th ori zi ng
submitted
had taken up
in resources
reduced
of other
of U.
the Bank oyeifW thefjy£&rSfnl9739-75.
enough m e m b e r s
the increase
that
to
10 pe rcent p e r annum" decrease:* ini thcwoH
When this happened,
while
stock.
au th ori zi ng a 150 p e rc ent
Assuming
I ,
S . p a rt i c i p a t i o n will be
We are
that
approval
lation on the change of par value,
4 h r;: bTiifi
thus
testifying
C;£f or *formal
£1%%x P ? i € d bliiCfcgjis-
thej j%%£#)!> %u,feho[r[i;2^at!;.jbi^i
8
would
or
be for
$362 mil li on.
Of this
$289 m i l l i o n wo u l d be ca l la b l e
and would not
r em ain in g
c ons ti tu te
20 percent,
amount,
g u a ra n t e e
$72.4 mi l li o n ,
be paid
40 pe rcent
in cash
and 60 p e rc en t
be a r i n g
letters
credit,
to be dr aw n
for loan di sbu rs e me nt s .
However^!' th%s
the
.fl-974 b u d g e t a r y
$ 9 i81 m i l l i o n ^ 3 Wh^tt-this
United
in
States will
equity p o si t io n
later
authority
amount
impact
be p e r m i t t e d
in no n- int e r e s t-
down
of
is
appropriation
in the Bank
The
paid in p o r t i o n wo u l d
New budge t
f o r f i s;ca 1 1974
outlay.
w o u l d be p a i d - i n
This
re qu est ed
ca pital
an actual b u d g e t a r y
03/err j ao JtharaeSBi^jy'e'ari spe riod.
of
80 p e rc en t
as well
for
this
is being
$121 million.
limited
goes
to re ga in
as needed
forward,
its
as its
to
the
o r igi na l
o r i g i n al
voting
strength;
The - $19 3 mi 11 i &n that we
are
se eking
Ame ^i Ca n ii)e^el6^ifiefit Bank's
O r di na ry
the
of
third
and
final
those r e s o u r c e s .
Callable
tranche
$168 m i l l i o n
guarantee
cap ital
of this
and does not
These
by
two
amounts,
the Congress
will
be
1973 .
in.
of n o n - i n t e r e s t —b e ar i n g
U e P r i e P d d h W i f u t e
a budgetary
as well
in fiscal
due under
terms
of
as
the
the
Ca pital
the cu rrent
o u t 1 a y . -°$25 °mi1 1 iori is to be paid
-ffeadki !in--tlh^ >.f
for
is part
inc re ase
amount
This
$193 m i l l i o n
1 9 7 3 fs C o n t i n ui n g
in
a budgetary
p o r t i o n will be
letters
in
of
repre se nt s
c o ns t i t u t e
outla y
the o r i g i n al
Inter-
of credit
fiscal
1974.
appropriated
R e so l ut io n,
a g re e m e nt
on June 3 0 ,
fc/C
9
The
$500 m i l l i o n re que s t ed
further
funding
toward our past
billion c o n t r i b u t i o n
of the IDE.
All
to the
of these
n o n - i n t e re s t- be a ri ng
down later.
c o nc e s s i o n a l
letter of
in FY 1974.
Under
the U.
S.
coun tri es
was to have c omp le ted
contribution by
first
requested,
but
r e ac he d
the final
auth ori ze d
was hot held,
the lower
this year w ill
of the U.
S.
In fact,
thus
the
agreed
lending pr ograms
it lent
failure
in 1970,
On January
the
the
$1
year,
the
as
$450 m i l l i o n
$225 millio n.
of the
S.
$1 b i l l i o n
r e du ce d
Last
full
the U.
A conference
passed,
$500 m i l l i o n
set
at
requested
a c o ns i d e r a b l e
stretch-out
to the FSO r e p l e n i s h m e n t .
of the U.
s ch ed ul e has
the Bank
1, of
of the
r e s o l u t i o n was
from both p l a nn e d
$344 m i l l i o n
1970,
Although
by h a l f .
re pr e s en t
co n t ri bu t io n
the or ig ina ll y
example,
still
in Ap ril
1973.
approved
Provision
understanding between
in 1-982, C o ng re ss
and a co nt in ui n g
level.
in
to be dr awn
installment
the Senate a p p r o v e d
the House
a $1
len di ng r e s o u r c e s
form
the or i gi n a l
two a pp r o p r i a t i o n re quests
you will recall,
to m a ke
also be p r o v id e d
credit
the end of fiscal
fully
re p re s e n ts
there w il l be no b u d g e t a r y
impact
and Latin
re so ur c e s
agre em ent
funds will
As a result,
billion was
for FSO
lent
S.
forced
funds
cutbacks
and past
in
levels.
$443 m i l l i o n ,
in c o n c e s s i o n a r y
this year,
to p r o vi d e
and
on
the
For
last year
funds.
uncommitted hard
soft
c u r r en c y
10
resources
included
available
to the FSO were
$20 mil lio n
from the
m il li on which we made
the
$56 mil lio n
in residual
are now expected
of this
year.
cessional
Canadian
available
Continuing Re s o lu t i on
$353 million.
to be exhausted
21,
These
$275
1972 under
appropriation,
resources.
funds,
and
however,
in the final quarter
Action on your part
lending activity
contribution,
on December
and prior
This
is needed
is to continue
if IDB c o n
through
this
calendar year.
Finally,
the
are asking for
Third
in September
available
after
full
of the May
that
is for the
Replen ish me nt
effect
make
IDA co nt ri b ut i o n of
its
second
— • "IDA III".
1972 when
share
three
Conference
the next
three
As mem ber s
lending
the United
the Congress
Committee
installments
fiscal years
of the
States
Its
and programs
are used
on c o nc es si on al
of the de vel o pi ng cou ntries,
annual per capita
incomes
40 years maturity,
after
done
and in the
report
to
light
indicating
"no intention of denying
of
$320,000,000
in
. . . "
Committee know,
funds
came into
agreed
This was
IDA is the concessional
affiliate of the Intern at ion al Bank
and Development.
projects
annual
of the
IDA III formally
the Appropriatiors Committees had
each of the three
that we
tranches
of $960 million.
co nsu lt ati on with
1972
of
$320 m i l li o n
i.e.,
of $375
10 years
for Reconstruction
to finance
terms
those
in the poorest
countries with
or below.
grace,
development
Its
terms
and a service
are
ch arg e
W /
11
of three-fourths
1972,
it had made
million, m a in ly
recent years,
education,
total
per annum.
cu mu lative
in agric ult ure
it has pl aced
this
and
I would
Committee
like
ways in whi ch we
of $4,608
transportation.
an i n cr ea si ng emphasis
In
on
areas.
to act p r omp tl y in the spirit
to your
are mo wi n g
at te ntion several
to improve
financial
important
our p a r t i ci p a t io n
institutions.
First,
the World Bank and the A si an Bank
specific
on this
requirement
front.
We h a v e also
on our embassies
we
toward
establishing indep end en t pr ogr am audit mecha ni sms .
are making progress
of
statement.
to bring
in the int e rn at i on al
have pressed
of 31 De c em b e r
are ne ed ed by IDA and will be well used.
su bco mm itt ee
the Conference
As
commitments
p o pu l at io n and re lat ed
These funds
I urge
of one percent
We
laid à
and a i d mi s si ò n s
abroad to report p e r i o d i c a l l y on i n te r na ti on al fi n a n e l à 1
lending plans
in their
countries,
implementation of projects
we have begun an expanded
already
Through
approved.
In addition,
sy st em of direct o n - s ite
inspections of i nt ern at ion al
projects.
and s p e ci f i c al l y oh
financial
i ris t i tu t io n - fi nane ed
these in sp ections we exp e ci1' t o le arri
of any im p l e me n t a t i o n problems which may3ràr iè èy of
quality of work be ing d o n e , and of the extent
supervision being ma int a in ed
by the Banks *
the
of the
Wit ho ut
seding any of the
re spo ns ib i l it i e s
of either
or the borrowers,
we intend
this a dd iti on al
to use
1 c
¿Uper^
the Bank
means
of use
to assure
ourselves
of the reso urc es
far this year,
in Indonesia,
Korea,
a fully f un ct i on in g
our p a r t i c i p a t i o n
are p r o v i d i n g
that
and
of our p a r t i c i p a t i o n
International
in the Banks.
in w h i c h we have
our ca pab ilities.
I am s u b m i t ti n g
Another
of value
ma tt er
on our
change
the Congress.
of
finan ci al
I want
a mo un tin g
resources
are i nt en ded
real value
to
is
recommenda
report
on
of ma in t e na n ce
of va lue
As this
are b e i n g
in
r e l a ti n g
the par-
to
is n o w p e n d i n g
that
have,
these
in
$1.4 billion.
are
fi na nc i a l
e r o si o n
institution
before
legal
s i mi la r
Maintenance
against
sought
obligations
in l i te r a l ly h u n d r e d s
to p r ot ec t
reviews
to strengthen
c o nt r i bu tio ns .
to em ph as i z e
of i nt e r n a t i o n a l
that
in s ti tut io ns
o bs er ved m e t i c u l o u s l y
instances
principal
appropriations
countries
detailed
sep ar ate
S. do l la r wh i c h
other
Institutions.
a l re ad y m ov ed
our
of
statement.
and
maintenance
the U.
ob li gations w hi c h
stances,
sep arate
our va rio us
the i n t er na t io na l
value
this
su bs c r i p t io n s
and Haiti.
Br an c h has
three
Their
for brief m e n t i o n
Sub co mm it t ee knows,
to cover
to
So
to projects
Financial
Office has made
in an annex
IFIs.
s y s t e m for m a n a g e m e n t
areas
their reviews
the
J a m ai c a
the E x ec u t i ve
effe ct ive
in the
to
and efficiency
have b ee n made
the Ph il ip p in e s ,
The G en era l A c c o u n t i n g
cover
we
in s p ec t i on visits
I strong ly be lie v e
tions
of the e f f e c t i v e n e s s
circumof
of value
of
the
resources,
ffr
13
and I an ti ci pat e
par value
that
the C o ngr es s
change -- will
their obligation.
in the various
At
again want
the same
in sti tu t io ns
in t o d a y ’s ci rc u ms ta n ce s
visions
to future
We have
operations
stage,
time,
the
si gn i fi ca n t
of the
Indeed,
o pp o r t u n i t i e s
i n s t i tu t o n s
is that w h e n we
the r el a t i v e
But
this
control
lateral in sti t ut io n s
over
In that connection,
set
out
to ac hieve
for ul t im a t e
in
these
to put up
cannot
institu
in
our
of the m u l t i
over U . S • b i l a t e r a l
terms
fair
and do not exert
the o p e r a t io n s
i n s t a n c e s , I am co nvinced
through
that
p ro gra ms .
our u l t i ma t e
of re sults,
is m a x i m i z e d
an i n s t i t u t i o n w i t h broad m e m b e rs h i p .
and as
and pol ici es
v®ry much in accord w i t h
of the United
we
that we do
and e f f e ct i ve ne s s,
at an early
of our c o n t r i b u t i o n s
if we are not w i l l i n g
com plete
operations
share
and
i n fl u e n ce w i l l i n e v i t a b l y
share of resources. . Obvi ous ly,
by working
pro
to shape p o l i ci e s
I b e l i ev e our i n f lu e n c e
and quickly erode
influence
application
of v a l u e
we have a high p r o s p e c t
or our v o t i n g power.
in many
are e x p l o r i n g
a p pr o p r i a t e
international
tions often exceeds
However,
we
promptly
contri but ion s.
a given objective,
the same
the p r evi ou s
to r e c o g n i z e
for m a i n t e n a n c e
and my o b s e r v a t i o n
success.
-- as in
I mentioned
of these
at
the
institutions
the basic
start,
the
h av e b ee n
f o re ig n p o l i c y
i n te r e s ts
States.
1 have b een conce rne d,
ow procur em ent
share U.S.
as you have,
firms have
about
the r e l a t i v e l y
been r e c e i v i n g
of
14
some
int ern at ion al
more s pe ci fi cal ly
In this
i n s t i t u t io n - f in a n c ed business,
that of
connection,
the Asian Devel op men t
pr oc ure me nt
pe rf orm an ce
institutions
has been in fl uenced by our
pe t it iv ene ss
in recent years.
alignments
that
Japan has been
This
35%, while
should be a very
we have
taken steps
that
to assure
opportunities
In my own recent
travels,
conclusive
signs
are now indeed in a more
of independent
and
/
to work
on procurement
insti tu tio n borrowers.
that p o ten ti al Am e ri c a n bidders
favorable position.
the United
provide ample
for U.
forward*! with
some confidence
in this
I would now like
States.
the procedures
opp ortunities
pr ocu rem en t
firms
I have seen some informal but
to assure
their borr owe rs
On
the basis
of deliberate
However,
we shall
of the institutions
and fair co mp etitive
S. business.
As a result,
to an increasing
I look
share of
country.
to summarize where we
stand with regard
to the fourth re ple ni s h m en t
of IDA -- the so-c al led
As indicated
to you,
in our letters
countries were held
against
in fo rmation
examination, we see no evidence
di sc ri mi nat io n against
continue
to restore
In addition
that much more
from int er na ti on al
r e
Germany has been 29%.
help.
is given -- and goes pr o mp t l y -- to our
not yet
rate
the re al ign me nt
against
significant
the
de cl ining c o m
The exchange
For example,
Bank.
in all
of recent years have been designed
competitiveness.
and
on March 13,
meet in gs
in London,
of Part
IDA IV.
I
and in Tokyo
H f
15
on May
1-2.
Other de ve l op e d
to go ahead with
IDA lending
the United
informing others
Congress,
amounts.
substantial
ready
to permit
and beyond.
Thus
far,
role in these
that until
we would not be
r edu ct ion in our p e r c e n ta g e
consul ta tio ns were
in a p o sit io n
However, we have made
for our p ar t i c i p a t i o n
it clear
share
to
that a
is nece ss ary
in view of our serious ba la nce
of
situation.
The neit m e e t in g of
held in W ash in gto n,
and int ention
this
July
the ne go ti a t i ng
11-12.
The
is that ne g ot i a t io n s
for su bmi ss ion
To meet
in FY 1975
States has pl ayed a pa ssive
held with our
payments
are now clearly
a new round of contrib ut ion s
to continue
discussions,
discuss
nations
to le gis latures
time
table,
by
group will be
general e x pe c t a ti o n
be
co mpleted
the end
of 1973.
d e ci si on s will need
to be
at the time
of the annual m e e t i n g of the World
September.
As in the case of As ian
I welcome
the reac tio ns
this mat te r either now,
the next month.
and
guidance
Bank
of
or in informal
in time
Bank in
special
this
reached
funds,
Committee
c o ns ul tat io ns
on
over
I thought you would be interested
in Secretary Shultz’s extemporaneous
remarks at the Inter-American Development
Bank.
Special
Consultant to
the Secretary
(Public Affairs)
Joseph A. Loftus
room 2324
ext. 5252
OFFICE OF PUBLIC AFFAIRS, U. S. TREASURY DEPARTMENT
ADDRESS BY U. S. TREASURY SECRETARY, GEORGE SHULTZ
Kingston, Jamaica
May 8, 1973
CHAIR: Now I recognize the distinguished governor for
the United States, Mr. George Shultz.
SECRETARY GEORGE SHULTZ: Mr. Chairman, Mr. President,)
fellow governors, ladies and gentlemen.
First, let me join the others, Mr. Chairman, in thanking
you for the warm welcome that we from the United States have
had here in Jamaica, and I would say that the welcome has beers
warm not only in human terms, but in climatic terms, and we've w
enjoyed it. It has been an interesting, fruitful visit for us;
still is; and it has also been relaxing and pleasant, and we
appreciate very much your hospitality.
w
This is my first meeting at the Bank, and so I am meeting
some of you for the first time; others I've met in the Cominitteeri
of Twenty or at other international meetings. But it has been
a pleasure for me to have a chance to talk individually with
the fellow governors, to also sit down yesterday afternoon, even
though we didn't have as much time as we would have liked and
literally take off our coats and get down directly and candidly
to some of the problems involved In monetary reform in which
we have so much at stake and in common. So I appreciate very
much this chance to work with you more closely.
I
would like to take note of the fact in our U. S.
delegation that we have represented not only the executive branch
of our government, but also a strong and very distinguished group
from the Congress who are sitting over here and whose presence
I think helps to illustrate the importance which we attach in
the United States to our relationships with our friends throughout
the Americas. This is also attested, of course, by the projected
2
trip of Secretary of State Rogers and of President Nixon. We
all recognize the great things that we have In common. We want
to Identify our common problems, and we want to work together
to solve them.
Now, Mr. Chairman, we have been sitting here» my fellow
governors and I
I've noticed some of the audience has gone
in and out, so they’ve had a little more of a break than we have but we've been sitting here for at least three hours, which taxes
the mind, let alone the behind, and so I think what I would like
to do, if I may, is to work from a few notes that I've made and
talk directly with my fellow governors about three subjects that
have been raised by others and, as we say when we testify before
the Congress, submit my written statement for the record. It
will be circulated. It has been gone over by several committees.
Each word has been chosen with care, and I commend It to you.
[Laughter.]
The three subjects that have come up, not In each address,
but sometimes all three in a given address -- but almost everyone
has alluded to them In one way or another -- are: monetary reform,
trade reform, and, of course, the operation of the Bank.
Now, I think it 1s quite appropriate for people to
address themselves to each of these topics here, because they
are interconnected; they are a set of problems that are related
to each other and related to the process of economic development
In which we are all interested.
So let me address myself, 1n turn, to each of these
topics, as so many of you have. I think 1t is useful to consider
them all against the background of the sweeping changes that
we have seen 1n the world, 1n international economic relationships
over the past quarter of a century. We have moved from a world
1n which the United States was the dominant economic power, had
gigantic reserves, a tremendous trade surplus into a situation
where, to some extent, with appropriate help from the United
States, there are many great economic powers, where development
has taken place quite fruitfully with respect to a number of
countries and where we see a very different situation from the
one that faced us twenty-five years ago, or even fifteen or ten
years ago. To some extent, in other words, there has been some
success, and it has been very heartening to me to hear some of
the comments that have been made here about success in individual
countries.
i
But there has been some success, and we now have a
new situation 1n the world in which, at least as we see it, the
monetary rules and the trade rules, of course our aid arrangements
and banking arrangements, need to be examined against this new
backdrop where we 1n the United States, of course, are a big
and powerful and rich economy, but we are, by no means, the only
country in that position.
Now against that backdrop, let me turn to the subject
3
of monetary reform to which so nany have referred. First» I
would say that it seemed to me that we had a very useful, 1f
b r i e f , exchange yesterday on this subject, and 1n many respects -and I think Mr. bargain (?) and others who have participated
in the Committee of Twenty del iterations would say that we got
down to brass tacks a l i t t l e more rapidly — wouldn't you think,
Fir. Mar gaffe? — than in some of the others, because we had a
l i t t l e smaller group and we went right to the heart of the matter.
So I think that was very useful, i t has been suggested that
we should do more of that, and r>o, from the standpoint of the
United States, a t least, welcoming that, we are designating Paul
Vclcker, undersecretary of the Treasury for monetary affairs
and I'm sure many of you know him as a genuine expert in this
field -- as a special representedve. And he, I hope, will be
able to visit with you In groups or Individually and discuss
this subject of monetary reform.
Now, we think it Is essential to have monetary reform.
We have
a gigantic balance of payments deficit, as you know.
It must
be corrected. But It Is only a symptom of the fact that
the system we had, good as it wcs for its period, is obsolete
and must be changed. The relationship of this subject to the
subject of economic development is suggested by a cartoon that
I must say I shrank from a little bit when I first saw 1t. It
showed a man coming back from a discussion with a developing
country saying 1n the United States to his boss — saying, "See, *
boss, they say they won't take our aid in dollars any more."
2
Now If we are going to provide aid, we have to be able
to generate the foreign exchange to make It meaningful. Otherwise
it is so tightly tied as not to eliminate its usefulness, but
to diminish its usefulness as far as you are concerned.
So I*ve used that Illustration just to show the great
stake that I think you have, as well as we have, in correcting
the big deficit in the U. S. balance of payments. And, of course,
that means a change in the relative exchange rates and, we believe,
a change in many of the rules of International trade.
We have had now two large changes 1n exchange rates.
We think that's enough now as far as the dollar 1s concerned.
And we have re-established equitable relationships. Many of
the countries represented here have followed the U. S. in these
exchange rate changes, and 1t 1s my impression that, on the whole,
this has been helpful to you, that your manufactures are more
competitive on world markets and that prices of raw materials
have risen in such a way that overall your reserves, your competitive
position has been strengthened, as we believe ours has been.
Now, coming to the question of monetary reform directly,
it seems to me we have to ask ourselves, well, what is wrong
with the old system that needs to be corrected. And I believe
4
wh&t is wrong is the notion that there 1s something inevitable
and something particularly good about fixed rates, fixed by a
government which stands there and say they are never going to
change. And I think what we have seen 1s the fact that the world
*
changes. The relative strength In various commodities of different
countries is re-arranged as time goes on, and the monetary system
has to adjust itself to that fact. And if you say that we're
going to stand here fixed forever so that we don't have any opportu
nity for adjustment, sooner or later the reality Is going to
pile up against that fixed rate and break it down, and that tends
to happen in the form of a crisis, which is upsetting to everyone,
to you, to us, to all of us.
So I think that we must look for a system that has
more flexibility built into it. A flexible system, as I think
5
we are now observing looking at the reality that has emerged,
0:
is not necessarily at all less stable than a fixed system; we
think it can be more stable. That is, 1t can have more predictable
rates of exchange for the future when you let flexibility enter " -^
the system rather than hold to a fixed and increasingly obsolete
exchange rate that must be bowled over by the force of eveotSv5"1'0^''
So we have proposed a system, as you know -- and I
know that this has received a lot of comment and question—
in which we would use objective Indicators as a means of creating
a presumption of some kind of adjustment as being necessary not
only to the deficit country, but the surplus country. We believe
it is in the interests of all to have some form of objective
indicator rather than simply a process of consultation about
the need for adjustment. It seems to me that some kind of objective
criteria 1s of great importance, perhaps especially to small
countries which tend to be more subject to pressure from an interna*
tlonal organization and which can benefit by the fact that there1
may be some objective indicators to point to and which apply
to the large and the small alike.
So we believe that there 1s a great deal to be said
tor having such indicators and for them saying, If the indicators
create a presumption of adjustment, we should leave it to the
individual country and Its sense of sovereignty to determine
J**®cJj>ely how to make that adjustment. And there are many ways *
no these ways, of course, show the relationships among monetary j
arrangements, trade arrangements and aid.
3 ^
nf
n Several of you this morning have mentioned the subject
the link, and that has come up In the Committee of Twenty» ? 1
a if2irse* and 1 S b e *n9 studied there, and we talked about it?
Ui
?. J
■ k'l yesterday. Let me comment on the subject of the ^ ^
n
t f- a little bit 1n order to be candid about the reservations
h»c *
about It, personal 1y , and I believe my government
generally. Let us start from the proposition that we agree
til* tne objective of the link; namely, that somehow or other f
”as *9 be a mei^od — and this 1s esentlally the subject
our meeting and of the Bank -- to make resources flow from
ot
5
the developed countries to the lass developed countries* You
have to have some method of doing it. And the link is a method.
'Now, let>us
people have said that.
right as the numeraire,
monetary system. And
Idea.
evaluate it against that background. Most
It is desirable to have the special drawing
as the baste unit of value,, for a reformed
vie accept that idea and agree with that
'Now '-that being thee cass, it seems to me we must ask
ourselves, with respect to the link, not only questions such
as, 1f there is this form of aid, what will the implications
be for other forms of aid — will countries say, "Well, wa are
doing it over here; we don’t h w l to do it over there" — but
more Importantly from the standpoint of the monetary system,
what does the link do to the volume of the SDRs and what does
it do to the confidence that p e o l e have In the SDR? Will the
confidence that we must have in iny money, particularly something
so novel as an international form of money, be undermined 1f
people feel that somehow it is being used not only as a form
of currency in the world, but al;o as a means to redistribute
resources and perhaps increased in volume beyond what it would
otherwise be in order to attain that purpose?
We question, in
onto the job of reform in
job in and of itself, the
from the developed to the
other words, the advisability of loading
the monetary system, which is a hard
additional job of distributing aid
less d?jyeloped countries.
I
might add, in passing, in our own case, in the Unite
States3 case, naturally any agreement of this sort would have
to be ratified by the Congress, and I ’m sure the Congress would
look very closely at any arrangement that, In effect, put into
the hands of an international organization the ability to, in
effect, commit resources of the United States In implicit aid
to move from cur country to other countries. They like to look
at these matters year by year and decide what they think a wise
course is*, j
Hell, having said that and noting that this is one
or the 1terns that we are all debating and discussing in the C o m m it t e e
o f Twenty, let me say that I continue to feel, and my government
continues to. feel9 that it Is of great importance to us all to
make strong headway on the subject of International monetary
reform. And we hope that with the deputies of the Committee
of Twenty meeting for five days IfT# later this month that we
can at least get some general principles established which we
might agree upon 1n the annual meeting of the Fund in Nairobi
in September.
Let me turn very briefly to the subject of trade reform,
because it is related to monetary reform and aid. And I'll just
speak very briefly about it, but I know that you all have read
6
about thè Trade Reform Act which the President has sent to the
Congress and which the Congress will start testimony on on Wednesday.
He believe, again in the trade field, that there Is a need for
renewal and reform of the trading system, again tracing back
to the great changes that have taken place in the international
economic order over the last ten, twenty, twenty-five years,
with the roles of today essentially reflecting the conditions
of yesterday. And so we think that reform is needed. We think
that the system needs to be strengthened overall and looked at
it and renewed, and we need to renew our confidence and mutual
respect for the rules of the game. We believe that nontariff
barriers have grown up, particularly affecting agriculture, and
this is a subject in which, I might say, the people here all
have an Important joint stake. We think there is a tendency
for regional blocs to develop, characterized by reverse preferences
which are not to the advantage of ourselves nor of you.
So we believe that there is a need, using these examples
as "illustration's, to renew and reform the system. Now the President
of the United States has asked the Congress for the kind of negotiating
authority that will enable us to participate effectively in multilateral
and bilateral trade discussions. And we hope that the Congress
will consider that legislation favorably, and, as I said, wé're
starting the discussion of that this week.
It 1s notable in the trade reform proposals of the
President that the tie between trade and monetary arrangements
and aid arrangements is explicit in some of the proposals there.
Let me mention two things in particular, one by way of explaining
something that you may have questioned, and the other by way
of suggesting an item of special Interest to you.
Ms^y have notèd in the Trade Reform Act the provision
of safeguards within the United States against the inundation
of our market of a particular product. And that has raised questions
jn people's minds about whether or not we really want to engage
in an ogen and expanding world trading system. Certainly the
answer to the question is yes, but we feel that it is a virtual
precondition In this day and age for our workers and our businesses
to havè some assurance that, while they will have to make adjustments,
iney aren't going to be wiped out in a period of a year or two
oy a rush of Imports in a particular product. Expansion of imports?
Tes* But inundation and a sudden unemployment on the part of
a group of workers In a particular community and manufacturing
? particular product we want to safeguard against. I think it
n a reasonable proposition, and I commend to your reading the
provisions of the proposed law on this. Me have found in researching
inis subject that most countries have some form of safeguard
ior their viorkers and their businesses.
*
And® second, I would call to your attention the President's
fill for Preferences for developing countries. This 1s something
tnat we have talked about, which has been long delayed, too long
aeiayed, and which we are now urging upon the Congress so that,
7
a?<d have good access to our markets as well as the markets of
othersl
Now , 1et me turn briefly to the Bank and Its operations,
It seems to us M r P residents that you've had a good year.
You have given us good leaderships and on the strength of that
and on the strength of the very thoughtful and interesting talk
that you delivered this morning 9 I believe we can forward to
a good year next year as wall. But in the quantity of loans
and in the quality of loans, the Bank's operations are to be
commended. Me think that the system of independent evaluation
that you have instituted and in which you've taken the lead in
International organizations is a very constructive step. It
is the sort of thing that gives us assurance that the Bank Is
continually striving to improve itself. And we believe the recent
reorganizations, to which a number have referred, and particularly
the strengthening of your field presence, 1s a very constructive
step. Also, the phasing down of soft loans'to the richer countries
so as to concentrate them more for the benefit of those who need
them most seems to us to be constructive. We also support, as
you know, the idea of broadening the base of resources of the
Bank and welcome the moves that have been taken. This will increase
the overall resources, which is important. It will lessen the
dependence on the United States, which we believe 1s good. And
at the same time, it seems to be taking shape in a manner that
preserves the essential hemispheric nature of the Bank, which
we believe is essential to do.
Now, let me turn to the subject of money directly
And I know that questions have been raised about the flows from
the United States and what may be expected. And we have not
provided a flow as rapidly as many had hoped, but, nevertheless,
a considerable flow has taken place. Let me just outline where
we are, as we see It.
First of all, in the Fund for Special Operations, the
U. S. has provided now about 2.9 billion dollars. And in terms
of the convertible currencies — this is the total of the money
for soft loans — 1n convertible currencies, we have a 1970 pledge
of a billion dollars on which two hundred and seventy-five million
has been paid. In the category of ordinary capital, about two
out of 3.6 billion dollars, around sixty percent, has come from
the United States. And we have, 1n terms of the 1970 pledge,
now paid six hundred and thirty million out of the eight hundred
and twenty-three million pledged.
Now in the budget that the President has presented
to the Congress and which it is now considering, he has asked
for a half billion dollars additional for the Fund for Special
Operations and for the balance of the pledge for ordinary capital.
And we expect in the administration to fight hard and argue hard
to get this appropriation for the Bank.
But I would like to call to the addition of this group
some of the d1ffi c y ] ties that we have and that our friends from
the Congress have so that you, In a spirit of candor here, can
well understand our position.
This Is a period of great budget stringency in the
United States, We are struggling with the problem of inflation,
as many of you are I know, We know that government spending
Is a part of that problem, and we are trying to hold It down.
Is are also, of course, concerned about the balance of payments
problem that I mentioned earlier. But the President In the fiscal
‘73 budget which m m Nme working on now has taken about nine billion
dollars out of it, out of our domestic spending, and a somewhat
larger amount out of what would have sort of normally flowed
In the following fiscal year. And I think it is a measure of
his cosicern with the Bank’s operation that In such a year a half
billion dollars is proposed for appropriation for soft loans
and the balance of the ordinary capital is proposed.
But I think It 1s nevertheless a tough proposition,
and I think you have to put yourself In the position of the congressmen
who are hare and those who aren't here who — I believe that
It is fair to say, there's not a congressman here who doesn't
have in h1$ district a dam or a health project or an educational
project or a road project, or something that 1s not going forward,
or which Is not going forward as rapidly as it mlght'because
or this budget stringency. So he Is constantly in the position
when he goes home — and many of you stand for election, so you
understand politics -- and he is constantly in the position of
having h1s const!tuents ask, "How can you vote money for a road
abroad 1f you won't build the road at home?” That's a tough
Question. But, nevertheless, our Congress has answered that
Hsstfffi and I think courageously and boldly, and we hope that
shsy will[ answer It affirmatively again. But it 1s a tough question,
Qnd i think everyone should recognize 1t.
Mow, let me turn to what I know 1s a very touchy subject.
number have referred to it. A distinguished colleague, the
governor from Peru, discussed it at great length. And that is
,, 9 Question of our attitude toward the flow of funds from the
M i taxpayer to a country where U. S. property is expropriated
-MUiout prompt, adequate and effective compensation. We feel,
u!!f 1 sa^ this with all due respect to my colleague from Canada
jno expressed a contrary view ~~ we feel that this 1s not simply
»1 isteras matter, and I would say that my colleague from Peru
pretty much said the same thing. It's not simply a bilateral
matter, it is a question of a multilateral system and how it
works. And from our standpoint, we do not see how the funds
■from the U. S.
taxpayer can be expected to flow to a country
v/bere U. S.- property has been taken without prompt, effective
<2e?ya^e comPsosat1on. This is not an infringement on anybody's
® J sovereignty; it is just, it seems to me, not simply
^question of our law or your law or international law, or whatever:
It l maUfr of common sense, that it just is not going to
are soing to be able to postpone a project in
|iH wlfflgHHHi ^or
sake of a project in another district
nave t m s additional problem put on top of It.
a
9
So I wanted to tell you our point of view on that as
directly as 1 know how and» at the same time» welcome the fact —
and I noticed this In the speech — the welcoming of a dialogue
on this subject. I think It 1s very Important to try to strengthen
this out. And as finance ministers dealing with these questions,
It 1s not our job to be defeated by problems of this sort» but
to solve problems of this sort so we can go forward with what
we are all here for, namely the use of the funds we have for
the development of the resources of the hemisphere In a proper
way.
Now, finally, Mr. Chairman, let me say that we are
secretaries of the Treasury, ministers of Finance, central bankers
1n the hemisphere, and our lingo here and our concern 1n our
own countries, of course, 1s with the problems of finance, with
the situation of our treasury, with the budget. And that always
puts us In the position of being the tough guys who have to ask
where are you going to get the money for such and such a project,
and 1f you spend more on this, you've got to spend less on that.
Somebody has to ask those questions, and It's usually the kind
of people around this room who do that. And I think that sometimes
we perhaps get preoccupied with that kind of question. But 1t*s
very Important for us to keep our perspective, I believe, of
what this Is really all about. And I think the Prime Minister's
talk yesterday 1n emphasizing the primacy of the humanity that
we represent and which we're trying to serve Is the key.
There was a slogan 1n the United States that you still
see, but not as much as a few years ago — but you still see
It — which I think 1s very good on this point, and 1t was encapsulated
1n a little button that people wore. And what 1t said on the
button was, "Give a damn. Care. Care about the problems and
the needs and the difficulties that people have. Care about
those who do not have an adequate educational opportunity. Care
about those who need better health provision. Care about the
needs for development that we have In our country and around
the world." And I want to say, on my own behalf and on behalf
of my country, that we care, that we believe 1t Is necessary
to approach these matters, as people 1n charge of budgets and
treasuries, with a sense of reality; but, equally Important,
that when we speak of the reality we speak from the heart.
[Applause.]
CHAIR:
Thank you, Mr. Shultz.
DepartmentoftheTREASURY
ASHINGTON. O C. 20220
TELEPHONE W 0 4 2041
7
FOR IMMEDIATE RELEASE
M ay 1 4 ,
1973
TREASURY ANNOUNCES CERAMIC GLAZED WALL T IL E FROM
THE P H IL IP P IN E S I S BEIN G SOLD AT L E S S THAN F A IR VALUE
A s s i s t a n t S e c r e t a r y o f t h e T r e a s u r y E d w a rd L . M o rg a n
a n n o u n c e d t o d a y t h a t c e r a m i c g l a z e d w a l l t i l e fro m t h e
P h ilip p in e s i s b e in g , o r i s l i k e l y to b e , s o ld a t l e s s
t h a n f a i r v a l u e w i t h i n t h e m e a n in g o f t h e A n tid u m p in g A c t ,
1 9 2 1 , a s am en d ed .
N o tic e o f th e d e te r m in a tio n w i l l b e
p u b l i s h e d i n t h e F e d e r a l R e g i s t e r o f M ay 1 5 , 1 9 7 3 .
T h e c a s e w i l l now b e r e f e r r e d t o t h e T a r i f f C o m m is s io n
f o r a d e t e r m i n a t i o n a s t o w h e t h e r a n A m e r ic a n i n d u s t r y i s
b e in g , o r i s l i k e l y to b e , in ju r e d .
In th e e v e n t o f an
a f f i r m a t i v e d e t e r m i n a t i o n , d u m p in g d u t i e s w i l l b e a s s e s s e d
on a l l e n t r i e s o f c e r a m i c g l a z e d w a l l t i l e fr o m t h e
P h i l i p p i n e s w h ic h h a v e n o t b e e n a p p r a i s e d a n d o n w h ic h
d u m p ing m a r g i n s e x i s t .
A n o t i c e o f " W ith h o ld in g o f A p p r a is e m e n t" w as i s s u e d
on F e b r u a r y 1 4 , 1 9 7 3 , w h ic h s t a t e d t h a t t h e r e w a s r e a s o n a b l e
c a u se t o b e l i e v e o r s u s p e c t t h a t t h e r e w ere s a l e s a t l e s s
th a n f a i r v a l u e .
P u rsu an t to t h is n o tic e , in te r e s te d
p e r s o n s w e re a f f o r d e d t h e o p p o r tu n ity t o p r e s e n t o r a l and
w r i t t e n v ie w s p r i o r t o t h e f i n a l d e t e r m i n a t i o n i n t h i s c a s e .
D u rin g c a l e n d a r y e a r 1 9 7 2 im p o r ts o f c e r a m ic g la z e d
w a l l t i l e fr o m t h e P h i l i p p i n e s w e r e v a l u e d a t a p p r o x i m a t e l y
$ 9 1 6 ,0 0 0 .
UNITED STATES SAVINQS BONDS ISSUED AND REDEEMED THROUGH
APrl1 30’ 1973
(Dollar amounts in millions - rounded and will not necossqrily add to totals)
D ESC R IPT IO N
TURED
(series A-1935 thru D - 1 9 4 1 -----Series F and G-1941 thru 1952
Series J and K-1952 thru 1957 .
M atured
(series
:
1 9 4 1 __________________
1942 ___________________
1943 ___________________
1944 ___________________
1945 ___________________
1946
1947
1948
1949
___________________
___________________
___________________
___________________
1950 ___________________
1 9 5 1 ________ :________
1952 ___________________
1953 ___________________
1954 ___________________
1955 ___________________
1956 ___________________
1957 ___________________
1958 ___________________
1959 ___________________
1960 ___________________
1 9 6 1 _________________
1962 ___________________
1963 ___________________
1964 ___________________
1965 ___________________
1966 ___________________
1967
1968
1969
1970
1971
___________________
___________________
___________________
___________________
___________________
AMOUNT ISSU ED J/
AMOUNT
r e d e e m e d
i ,1
!/
AMOUNT
o u t s t a n d in g
!/
% O U T S T A N D IN G
O F A M O U N T IS S U E D
.1 0
.0 8
.2 1
5,003
29,521
3,754
4,999
29,498
3,746
5
23
1 ,9 2 1
8 ,4 8 0
1,735
7,645
12,313
14,301
11,115
4,913
4,552
4,642
4,529
3,922
3,391
3,532
186
9 .6 8
835
9.85
13,633
15,903
1 2 ,5 2 1
5,711
5,443
5,643
5,599
4,914
4,250
4,458
5,103
5,203
5,423
5,243
4,946
4,837
4,543
4,568
4,658
4,532
5,092
4,963
4,846
5 ,2 2 1
5,154
4,895
4,604
4,818
5,543
3,965
3,989
4,118
3,948
3,677
3,503
3,250
3,177
3,117
2,947
3,110
3,040
2,931
3,030
2,976
2,773
2,494
2 ,2 9 0
2 ,1 6 0
8
1 ,3 2 0
1,603
1 ,4 0 6
798
892
1 ,0 0 1
1,071
992
859
926
1 ,1 3 8
1,214
1,305
1,295
1,270
1,335
1,294
1,392
1,541
1,585
1 ,9 8 2
1,923
1,915
2,191
2,179
2 ,1 2 2
2 ,1 1 0
2 ,5 2 8
9 .6 8
1 0 .0 8
11.23
13.97
16.39
17.74
19.13
20.19
2 0 .2 1
20.77
2 2 .3 0
23.33
2 4 .0 6
24.70
2 5 .6 8
27.60
28.48
30.47
33.08
34.97
38.92
38.75
39.52
41.97
4 2 .2 8
43.35
45,83
52.47
61.03
73.91
1,129
373
1,589
44
340
3,383
4,501
1,085
33
190,264
139,059
51,205
26.91
Series H (1952 thru May, 1 9 5 9 )4 1
H (June, 1959 thru 1973) -
5,485
9,013
3,958
2,970
1,527
6,043
27.84
67.05
Total Series H _______________
14,498
6 ,9 2 8
7,570
5 2 .2 1
204,762
145,987
58,775
28.70
38,278
204,762
243,040
38,243
145,987 '
184,230 -
36
58,775
.09
28.70
5 8 ,8 1 1
2 4 .2 0
1972 ___________________
1973 ____________
Unclassified
Total Series E
Total Series E and H
Î
Total m atured__
Total unmatured
Grand T o ta l____
6 ,0 9 0
L
a ccru e d d isc o u n t .
Fwrenfre d e m p tio n v a lu e .
Pi on of o w n e r b o n d s m a y b e h e l d a n d w i l l e a r n i n t e r e s t fo r a d d i t i o n a l p e r i o d s a f t e r o r i g i n a l m a t u r i t y d a t e s .
Form PD 3812 (R *v. Jan. 1973) - Dept, of the Treasury —Bureau of the Public Debt
9 6 .1 0
8.85
DepartmentofthefREASURY
TELEPHONE W04-2041
ftSHINGTON. D.C. 20 22 0
/rs
W
on:
financial editor
May 14, 1973
I RELEASE 6:30 P.M.
RESULTS OF TREASURY'S WEEKLY BILL OFFERING
The Treasury Department announced that the tenders for two series of Treasury
Ls, one series to be an additional issue of the bills dated February 15, 1973
, and
i|other series to be dated
May 17, 1973
, which were invited on May 8, 1973,
opened a t the Federal Reserve Banks today.
Tenders were invited for $2,500,000,000.
th e re a b o u ts , of 91-day bills and for $1,700,000,000, or thereabouts, of
182-day
U s. The details of the two series are as follows:
IGE OF ACCEPTED
IPETITIVE B ID S:
High
Low
Average
91-day 'Treasury bills
maturing August 16, 1973
Approx. Equiv.
Annual Rate
Price
98.452
98.433
98.438
6.124$
6.199$
6.179$
1/
182-day Treasury bills
maturing November 15« 1973
Approx. Equiv,
Annual Rate
Price
96.761 a/
96.730
96.736
6.407$
6.468$
6.456$
1/
one tender of $10,000
of the amount of 91-day bills bid for at the low price was accepted
of the amount of 182-day bills bid for at the low price was accepted
|AL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
[is tr ic t
JJsto n
few York
Philadelphia
Cleveland
¡Richmond
[tla n ta
phicago
f t . Louis
Minneapolis
p isas C it y
la lla s
|an Francisco
TOTALS
Applied For
$
27,570,000
3,043,240,000
17.380.000
25.815.000
20.720.000
19.685.000
335.405.000
51.855.000
28.370.000
30.840.000
40.180.000
147.480.000
Accepted
$
14,620,000
2,088,840,000
16.455.000
25.540.000
13.280.000
16.700.000
149,545,000
43.380.000
28.020.000
17.935.000
11.785.000
74.580.000
$3,788,540,000
$2,500,480,000 b/
Applied For
$
15,680,000
2,871,645,000
6,380,000
14.215.000
16.100.000
12.310.000
278.620.000
68.625.000
28.270.000
40.100.000
29.715.000
179.255.000
3,560,895,000
Accepted
$
3,630,000
1,528,295,000
6.165.000
10.375.000
5.090.000
8.550.000
22.970.000
48.175.000
7.920.000
23.910.000
6.715.000
29.505.000
1,701,300,000 cJ
pcludes $199,800,000 noncompetitive tenders accepted at the average price of 98.438
fncludes $115,465,000 noncompetitive tenders accepted at the average price of 96.736
fiese rates are on a bank discount basis. The equivalent coupon issue yields are
P*36$ for the 91-cLay bills, and 6.77$ for the 182-day bills.
DepartmentofthefREASURY
A S H IN G m D C. 20220
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
May 15, 1973
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 $ 4,200,000,000, or thereabouts, for
cash and in exchange for Treasury bills maturing
of $4,301,2 40,000
May 24, 1973,
in the amount
as follows :
91-day bills (to maturity date) to be issued
May 24, 1973, ■
in the amount
of $ 2,500,000-,000,or thereabouts, representing an additional amount of bills
dated February 22, 1973, and to mature
August 23, 1973
originally issued in the amount of $ 1,801,175,000,
(CUSIP No. 912793 RR9 )
the additional and original
bills to be freely interchangeable.
»¡xpiTCSV# !v:.’
183-d.ay bills, for $ 1,700,000,000, or thereabouts, to be dated
and to mature November 23, 1973
(CUSIP No. 912793
May 24, 1973,
SE7 ).
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 $10,000, $15,000, $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 clos
ing hour , one -thirty p.m. , Eastern Daylight Saving time, Monday, May 21, 1973.
Tenders will hot be received at the Treasury Department, Washington.
Must be for a minimum of $10,000.
Each tender
Tenders over $10,000 must be in multiples of
$5,000. ' In the case of competitive tenders the price offered must be expressed
on the basis of 100, with not more than three decimals, e.g., 99.925.
_
maY not be used.
.....
..J.
..
.(
’. r
. . . . .
.
•
rj
Fractions
,V :
It is urged that tenders be made on the printed forms and for
warded in the special envelopes which will be supplied by Federal Reserve Banks
°n Branches on application therefor.
.
,q $
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
(OVER)
-
account.
2
-
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
I
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.
Only those
submitting competitive tenders will be advised of the acceptance or rejection
thereof.
The Secretary of the Treasury expressly reserves the right to accept or
reject any or 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 any one bidder will be accepts
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 24, 1973,
in cash or other immediately available funds or in a like face amount of Treasury
bills maturing
treatment.
May 24, 1973.
Cash and exchange tenders will receive equal
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.
Under Sections 454(b) and 122l(5) of the Internal Revenue Code of 1954 the
amount of discount at which bills issued hereunder are sold is considered to accrue
when the bills are sold, redeemed or otherwise disposed of, and the bills are ex
cluded from consideration as capital assets.
Accordingly, the owner of Treasury
bills (other than life insurance companies) issued hereunder must include in his
income tax return, as ordinary gain or loss, the difference between the price Pa^
for the bills, whether on original issue or on subsequent purchase, and the
amount
actually received either upon sale or redemption at maturity during the taxable
year for which the return is made.
Treasury Department Circular No. 418 (current revision) and this notice,
prescribe the terms of the Treasury bills and govern the conditions of their iss
Copies of the circular may be obtained from any Federal Reserve Bank or B ran ch .
3
FOR IMMEDIATE RELEASE
Tuesday, May 15, 1973
FOUR NAMED TO BOARD OF DIRECTORS
OF ENVIRONMENTAL FINANCING AUTHORITY
President Nixon today announced the appointment of
s<s
four members to the Board of Directors of the Environmental
Financing Authority (EFA), created by the Environmental -s
Financing Act of 1972.
The purpose of the Act is to assure that inability
to borrow on reasonable terms does not prevent any State
or local public body from constructing eligible waste
treatment works.
The Secretary of the Treasury, as authorized by the
Act, has designated the Deputy Treasury Secretary to be
the Chairman of the Board.
The four members named by the President to the Board
are:
--
The Administrator of the Environmental Protection
Agency;
--
The Under Secretary of the Treasury for Monetary
Affairs;
--
The General Counsel of the Treasury;
--
The Under Secretary of the Department of Housing
and Urban Development.
(over)
S-203
2
The appointment of the four Board members by the
President will permit the prompt establishment of EFA,
installation of officers, adoption of operating policies,
and preparation of financial plans for fiscal year 1974.
These appointments are designed to bring about effective
planning and coordination of environmental and financial
interests.
0O0
Attached is a letter to the President of the
Senate from Treasury Secretary George P. Shultz
transmitting a draft bill to provide fo r the
appointment of alternates for the Governors of the
International Monetary Fund and of the International
Bank for Reconstruction and Development.
A
similar letter was sent to the Speaker of the House.
Attachment
THE SECRETARY OF THE TREASURY
2
W A S H IN G T O N
Bear Hr* President:
There is transmitted herewith a draft bill, ”To provide for
the appointment of alternates for the Governors of the International
Monetary Fund and of the International Bank for Reconstruction and
Development”, together with a comparative type showing the changes
that would be made in existing law by the bill*
The proposed legislation would amend section 3(b) of the
Bretton Woods Agreements Act to provide for the appointment by the
President, with the advice and consent of the Senate, of separate
alternate Governors of the International Bank for Reconstruction and
Development and the International Monetary Fund* The legislation at
present provides that the same individual serve as alternate Governor
of both the Fund and the Bank,
The proposed amendment would give the President, in appointing
different individuals as alternate Governors of the Bank and the
Fund, greater flexibility to select the individual most qualified
to serve in each of these positions. Thus, in making these appoint
ments, the President would be able to take into account the differing
functions being fulfilled by the Bank and the Fund in the international
financial sphere*
It would be appreciated if you would lay the proposed bill before
the Senate. An identical bill has been transmitted to the Speaker
of the House of Representatives.
The Department has been advised by the Office of Management and
Budget that there is no objection from the standpoint of the Administra
tion’s program to the submission of this proposed legislation to the
Congress.
Sincerely yours,
(S ig n e d ^
G eo rg e P • Shultzs
George P. Shultz
The Honorable
Spiro T. Agnew
President of the Senate
Washington, D.C* 20510
Enclosures - 2
A BILL
To provide for the appointment of alternates for the Governors
of the International Monetary Fund and of the International
Bank for Reconstruction and Development«
Be It enacted by the Senate and House of Representatives of the
United States of America in Congress assembled, That the first sentence
of subsection (b) of section 3 of the Brettoa Woods Agreements Act
(02 U.S.C. 286a) be amended to read as follows : "The President, by
and with the advice and consent of the Senate, shall appoint an alternate
for the governor of the Fund and an alternate for the governor of the
Bank,"
General Counsel:EMeigher:kab
■i/tm
s s m m o changes which would
BS PADS 13 EXISTCHO LAW BY PROPOSED BILL
comparatxvs type
(fiatter proposed to be ceiltted enclosed In
brackets i nev scatter underscored)
Section 3(b) of the Bretton Woods Agreements Act
(22
U.3.C. 386a)
SEC. 3« APPOUTîCTf OF GOVERNORS, EfCSOTIVl BISECTORS, A3D ALTSHHAT^S
«« #
(b)
The President, by and with tho advice and consent of
the Senate, shall appoint an alternate for the governor of the Fund
[vho shell also serve as] and an alternate for the governor of the
Bank. The President, by and vith the advice and consent of the Senate
shall appoint an alternate for each of the executive directors.
The
alternate for each executive director shall be appointed from aaong
individuals recomonded to the President by the executive director.
The tenss of office for alternates for the governor and the executive
directors shall bo thé case as the terms specified la subsection (a)
for the governor and executive directors.
•
General Counsel:EMeigher îkab
e e #
3*1/73
OFFICE OF THE SECRETARY
The Cotillion Room
Sheraton Park Hotel
Washington, Do Co
Tuesday, May 15, 1973
1:00 o*clock PoMo
"THE VIEW FROM THE TREASURY'*
ADDRESS BY:
THE HONORABLE GEORGE P. SHULTZ
Secretary of the Treasury, and
Chairman of the Presidents Council
on Economic Policy
INTRODUCTION BY:
M r 0 Arch M 0 Booth
Executive Vice President
Chamber of Commerce of the
United States
>:
2
MRo BOOTH:
Ladies and gentlemen, may I have your
attention, please?
We are moving the show ahead on the road*
I predict
we will learn a good deal«
M r 0 Secretary, it has been a great pleasure this
morning to find the keen interest this audience has in a
subject which is highly important to you and to all of us, and
it was equally pleasing to us to find the knowledge and the
receptiveness of the Administration's spokesman in talking
about the Foreign Economic Program—
particularo
the
trade bill, in
I am sure you will be as gratified to know of it,
as we are»
The audience will remember that Ambassador Eberle
mentioned, two or three times, a letter that I had written to
him yesterday»
He has not received it yet»
He suggested
that I read to you more than one sentence of it»
So,
Mr» Secretary, it will probably come across your desk in
due time»
This is what it says:
"On recommendation of the National Chamber's
International Committee, we urge that immediate
consideration be given to the appointment of a
high-level advisory committee to assist the
Administration in reviewing and deciding on
policy and strategy in connection with the
administration of the Trade Reform Act of 1973»
3
/
u
"Members of such an advisory committee should
be carefully selected from representatives of
the business community in a wide range of
product categories so that problems can be
avoided in the effective administration of this
highly complex piece of legislation«,
"The National Chamber representing, as it does,
46,000 corporate members from all aspects of
the American business community and agriculture,
and 3,900 trade associations and chambers of
commerce throughout the United States and
American Chambers abroad, can be of a great
deal of assistance in mobilizing the collection
of data needed by such a policy-level body as is
proposed here«,
"We shall greatly appreciate your favorable
consideration, and stand ready to discuss this
proposal with you in greater detail
That is the offer that we have made, and the
Ambassador seems interested, and we will follow through on it„
And X know he will be cordially receptive, as you have been,
sir, in giving importance to that offer,
Now, we are going to hear from Secretary Shultz«,
A few weeks ago, I introduced Secretary Shultz to an
audience as being the Administration's Economic Czar«
- 4 -
And I remarked that he is that, in fact, but is also the
most decent and constructive Czar that I have ever heard
about.
Well, now, I find that my opinions are being shared
by others.
Last Sunday -- Mother*s Day, no less - the
New York Times had a big headline and it said:
President*s Economic Super-Star"l
"The
So they promoted him
from a Czar to a Super-Starl
And it said:
"Shultz handles his many roles
with stamina and versatility"0
Well, he needs bothc
No doubt about that*
So he is going to talk with us just a little bit today
in broadening our information about the Foreign Economic
Policy matters that we started talking about this morning.
We hope he will say something about the key monetary
dimensions of the policy and, perhaps, a little bit about
adjustment assistance, which we missed entirely this
morning 0
So we are pleased and honored to have with us here,
today, the Secretary of the Treasury, and Chairman of the
Council on Economic Policy, the Honorable George P c Shultz*
(Applause)
SECRETARY SHULTZ:
characterizations*
I never know what to make of these
I did have the privilege of visiting
Russia not too long ago and, among the things that
- 5 -
happened to me was a tour of one of the Czar*s palacese And
I can tell you that if I am a Czar* I $ohVl;j-liy;e likei a.CzarJ
(Laughter)
;
Iw
oiimmob
b
On the other hand, considering what happened to those
Czars, I am not so sure I want to do that*
Let me first express my appreciation0
j
I think the
turn-out, from the description that I have had, and the
seriousness and perspectiveness of the (questions and the
discussion, show the importance of the subject ; the fact
that that is broadly realized; and therseriousness of
purpose that we find in the business community as you
approach with us and others this very important topic„
-p ¿od'i
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03
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So we are grateful for the meeting; grateful for
8 -Î O 3 €¡3 a
the chance to share ideas with you; and we value that
I'
very much0
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ub
Now, the discussion this morning, as I understand -,
V
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a
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Ji r; £OJî î I 3.111.3
it, focussed on various elements of the trade bill, a s tsuch«
So I think it would be inappropriate for me tp ^go over that
ground, or summarize the bill, or argue the, bill ijyjjhafc
manner, since you have already done that«.
What I would like to do is to put the subject
of trade into the broad concepts of our emerging economic
d ’qsa cirria:
b
no
Jo b 3Ü3 3B I'Bj:33 aI
b
he vïovns erm odw
6
policy, and the problems, and what we are trying to do about
them generally o
I think that it is important to see our
domestic and international economic policies as a set of
things that are related to each other* and contribute to
each other®
Consider the trade bill treasury format, and
what it stands for, and what opportunities it affords, to
be a key element in this overall package that will gain
strength from other elements and will also contribute
strength to them®
So I think that this sense of the relationship of one
part to the other is extremely important, and that is what
I would like to focus my attention on -- those environmental
aspects®
Now, before I do that, I want to say a word about
another subject that I understand did not come up at all
this morning but which is, undoubtedly, on people's minds®
It is hard for it not to be on your mind, and on my mind®
And
¿hat is this whole set of matters that has come to be character!
by the word "Watergate"®
I would say only this, as part of the
environment in which we work:
That, of course, these things
that we are reading about are deeply troublesome to you, to me, j
to everyone; to all of us®
I think that they must be dealt with
on a determined basis; on a fair basis; and on an open basis®
Insofar as the actions are concerned; insofar as the individuals
who are involved are concerned* that must be done®
7
i
n
It is also imperative to review our processes of
government and to see how we can learn, from this experience,
to improve our manner of doing business, and to use the
machinery that we have, and the people that we have, to do
the best possible job for the American people«
I
think you can see that the President has been
moving forward on both of these fronts«
I think it is
essential to do so; essential for him to do so; essential
for all of those involved to do so, in both of these elements
of that problem«
Now, in the meantime, however, we have a tremendous
number of problems that we need to address ourselves to in
this country, and I think the worst thing in the world we could
do is, somehow, to allow ourselves in any way to sort of be
immobilized by all of this«
I can tell you from my own
experience in the work that I am doing, and in my relationships
with the President, that we are by no means immobilized in
the area of economic policy«
In fact, I think that we
have a tremendous and very significant set -- as I said
earlier -- of economic policy proposals, and administrative
processes, and so forth, under way«
As I said, what I want to do here this noon is to talk
■m sSt ;l|
about those things, particularly in their relationship to the
trade bill and to the general flows of international trade«
8
Now, first, let me say a word about objectives.
What is it that we are after here?
By what standards, so to speak, should we be judging
the rightness, or the wrongness, or the appropriateness
of what it is we are doing in the area of economic policy?
Well, I think when it comes to the question of
these objectives, they are commonly held, but it is, nevertheless!
to state and restate them so we maintain our sense of focus;
our sense of where it is we want to go.
Certainly, we want to have prosperity.
We have!
We want the prosperity to be widely shared.
We want to see our levels of living rising.
We want tohave reasonable stability in the price level0
We want to do these things in a way that is consistent
with the general principles of free institutions, which are
the essence of our society, and our economy.
So these represent objectives, in the field of economic
policy, that we all share, and that we all seek, and according
to what we need to measure the various things we are trying
to do in a policy sense.
From the standpoint of the trade bill, of course, what
we are seeking is an open-trading world that has the
9
K f
prospect of a fair deal for the American worker, and businessman
and consumero
It is that kind of environment that we seek; and
we want, of course9 thereby, to take advantage of the efficiency
that international trade can afford to us 0
We want to take
advantage of the fact that there are many things that we need
to import; many things that we want to import; and we know that,
in order to do that over any period of time, we must export,
and we must be able to take advantage of the productivity of
the investments that we made abroad»
So that steps into the
context, I think, of some of our objectives, and those
particularly having to do with the trade bill»
Now, we are dealing, in the administration, with these
objectives, and with the problems that are apparent in the
field of international trade and our economic problems,
generally, with all of the intelligence, and with all of the
energy that we can muster but, also, we are doing this in a
spirit of cooperative endeavor»
out on this;
I think Arch will bear me
That, on a broad range of policy issues that
I am going to talk about;, we have consulted with you and
your members, as well as with the trade unions; as well as
with the members of Congress; as well as with representatives
of the academic community: and the consuming public»
So we approach these subjects, as I say, with all of
the intelligence and ene;rgy that we can muster but, also,
10
in the notion that this is a cooperative endeavor«
We don't think we have all of the answers«
We provide the
best answers we can; and we listen, and, as we go along, we try
to improve the project, so that it will serve, better and
better, the purposes that we all seek«
And I might say, in
that connection, that any possibility of a good, hard-working
advisory committee —
the sort that you spoke of —
is certainly
the sort of thing that would be helpful, and which we would
want to examine the structure of, and see how we can best use
the willingness of a group like that to help in solving our
problem«
Now, let me go directly to the various elements of
economic policy, in their bearing on the general flow of
trade, and on the trade bill«
Arch mentioned the subject of adjustment assistance«
So let me point to two pieces of the economic program that
we put forward, that were put forward very explicitly in
the context of the trade bill; and that has to do with the
Unemployment Insurance reform proposals, and the pension
reform proposals«
We do have, in the bill, a continuation of adjustment
assistance with income maintenance at the levels proposed
for Unemployment Insurance generally, with the notion that
that aspect of adjustment assistance would phase out as
11
h
o
out as the general system of income maintenance that we
propose takes hold«
But as to the broad approach, it
was more or less like this:
There is, as you know, in the *62 Act, an explicit
adjustment assistance Program,
i think it is a fair judgment
that it has not worked particularly well.
people have been qualified.
Not very many
In the last four years
some of the interpretations, in order to get the thing going,
have been strained.
And so we have that in the background.
We also know that there have been many proposals —
emanating from the business community —
some
to jazz up that
program a great deal, to make it much easier to enter the
program, so to speak, and to make the benefits a great deal
larger.
Now, as we reflected on this, it seemed to us very
difficult to distinguish between a worker who is declared
displaced by an import, and a worker who is displaced, let*s
say, by a change in the defense procurement policy; or somebody
who is displaced because of a shift in environmental regulations
or somebody who is displaced because the minimum wage is too
high; or somebody who is displaced for any number of other
reasons that one could ascribe to governmental policy.
12
-
To take one of those people, and assume they lose that
person because of government largesse, and leave the others
aside -- that did not seem to us to make much sense»
So we
looked at the things that are most significant, as far as the
adjustment of the worker is concerned, and it seemed to us
that, in addition to the retraining and relocation, and matters!
of that kind that are permanent authorities and are reflected
in the bill itself, that we should look at the Unemployment
Insurance system, and go ahead and take the plunge into an
effort that would bring about a level of unemployment benefits
that have been recommended consistently by President Eisenhower;
by President Kennedy; by President Johnson; by President Nixon,
There has been a bi-partisan acknowledgement of what a reasonabl
level of Unemployment Insurance benefits is; but an inability
to attain that level through State action alone»
So the President has gone ahead and recommended a program,
not of federalizing the Unemployment Insurance system, but of
setting, for us, federal standards for benefit levels.
Now, I recognize that that is a controversial thing for
the President to do, and I don*t know that it is going to
have the overwhelming support of the Chamber of Commerce, from
earlier discussions that I have had»
But I think it is
important for you to see how it sets into our thinking about
13
n
f
the trade b i l l and, for that matter, a b o u t 1 lie g e n e r a l l e v e l
of income maintenance when people are having to readjust
themselves to their jobs0
Now, the other element of adjustment, of course, that
is particularly of concern to the worker, has to do with
his pension rights0 The worker who is, say, fifty years old
and suddenly loses his pension rights that he, or she,
thought were going to come into being, has very little
ability, at that point, to shift to another job and re-acquire
those rightSo
It is a kind of adjustment that you practically
can’t make unless you look at the pension system itself0
So the President has proposed a set of pension reforms
that we think will move us toward a better situation insofar
as pension rights are concerned0
Now, many have asked;
What about adjustment assistance
for companies?
Why don't we set up in the government a much better
ability to advise companies on our business over here?
Why don't they get into this business?
How to do it, and so forth*
And there have been proposals of that kind, and I guess
I would have to say, on the strength of a little over four
year in the Federal Government, that I see no evidence that
the Federal Government knows how to manage the business of
14 -
the country better than you doc
There is no inherent expertise in Government®
So it seemed to me that the basic adjustment program
built into the safeguard system, which gives both businesses
and workers time -- that is the essential ingredient
of adjustment:
time to look around, to see how you might
work better; or, if not, to see how you can readjust yourself
as a firm, as a worker, to a new set of circumstances and
plainly different areas®
So much for the subject of adjustment assistance.
It is, in a sense, the downside of the trade problem,
but a side that must be faced and, it seems to us, faced
in a general way, not in a specific way, as the traditional
adjustment assistance®
Now, let me turn to a subject dealing with monetary
reform®
We have felt in the Administration, and I think this
view has become more and more widely shared, that it is
artificial to think of the monetary system all by itself,
and not relate it conceptually as it inherently is, to the
flow of trade; the flow of investment; the flow of aid; the
flow of military costs; and so on®
These things all add up
into our balance-of-payments picture®
The monetary system,
in a sense, is a reflection of what is going on in the reality
15 -
of trade flows; and aid flows; and investment; and so on»
So we have to look at these things together and, as we have
approached the subject of monetary reform, we have continually
made this point:
that the monetary system needed reform»
We
have already gotten a considerable amount of reform, but
you cannot expect the monetary system to carry the whole
load»
Or, to put it another way, if you had some product
that simply is not admitted to a market which it could enter
and sell in competitively, it does not do you any good to
change the exchange rates»
That is not going to get you in!
What is needed is some negotiation on the trade front to
break through that barrier, through our exports»
Then the
monetary system can make a difference»
So we have to see these things as related matters; and
we have tried to put forward our ideas, which I won’t go
into in any detail because you gentlemen heard about them
elsewhere»
But we have tried to put forward our ideas in
the international monetary sphere in a manner that is
consistent with our ideas in the trade area and, as we have
developed the trade bill, we have tried to be very conscious
of developments in the monetary field, to see those relation
ships»
I might say, just as an aside, that the system that
roay be more or less described as a floating exchange rate
system which we now have and which, of course, we are
16
continuing to negotiate about:
that that system of floating
exchange rates does provide a considerable insulation against
speculative pressure of one sort or another, and it takes us
out of the situation where we afford the speculators a fixed
target of some sort against which they can shoot and make
a lot of moneyo
So I think, as a matter of the current situation, and
as a holding operation, as we renegotiate the monetary
system, that the flexibility that we now have is, on the
whole, healthyc And, of course, we expect —
our own situation is concerned —
as far as
to see the impact, and I
think we are seeing the impact of the great changes in the
exchange rates that have been made0
I would call your attention to the fact that, in terms
of our trade figures, the second half of 1972 was better
than the first half; the fourth quarter was better than the
third quarter; the first quarter of this year was better than
the fourth quarter of last year; the last month was considerably
better than the month before0
In other words, we have not
solved our problem by any means; but the trends are in the
right direction,,
I think that the strength of the dollar
will gradually be asserted, as this reality more and more
emergeSo
17
Well, anyway, there is pension reform; there is
Unemployment Insurance; there is international monetary
reform; all connected0
Let*s look at another area:
Energy0
We have a very strong Presidential statement and set
of actions in the field of energy and, obviously, this is
an importantly related matter, and it comes up very
prominently among Finance Ministers around the World, or
Secretaries of the Treasury0
And it was interesting to me
to see in the monetary meetings that were held a month or
so ago, as we dealt with the then-crisis in the exchange
system, that it was as though there were two agendas all of
the time0
There was the subject we were talking about in
terms of exchange rates and so forth, which was the subject
of the formal meeting, and then whenever there was a coffee
break, or a luncheon, or a dinner, or something, one or two
or three of the Finance Ministers would take hold of my
elbow and take me off to a c o m e r and say, nNow, George,
this is all right, what we are talking about, but we know
that this energy problem is an essential one in the field
of finance, and how are we going to deal with it?"
So it is on people*s minds; and I think very properly
so0 We have put forward a set of proposals -- the President
has —
and we will build on those, and I think from the
18
standpoint of the U.So position, we see that we have severe
problems; we see that if you project financial flows on the
basis of following the path of least resistance for ten
years, that you essentially project an impossible problem —
something that we do not intend to have happen0
Therefore,
the actions proposed in the Presidents energy message
which will tend and, I think, can tend, in a pretty dramatic
way, to move us back toward a greater degree of selfsufficiency, will help solve the trade problems related to
the energy matter0
But, at any rate, as you look at the President's
energy message, you see also, this relationship to the
subject of trade reform,.
They have, again, been thought
of as matters that have to be considered in tandem0
Of course, there is the subject of inflation and
how to deal with it„
We recognize —
everyone recognizes —
that our trade will reflect the competitiveness of our
goods around the world, and our success in dealing with the
problem of inflation -- which is to say our success in dealing
with the problem of costs on a relative basis, compared with
our competitors -- is going to be of great importance»
I almost hesitate to say this, because it is of such
small comfort but, on the inflation front, we have a
relatively good record»
We are so conscious of the problem
ourselves -- as it affects us -- that we tend to forget the
fact that the other fellows are having their problems too, and,
on the whole, our record is relatively good0
Nevertheless, a determined effort in the field of
inflation is essential to this whole trade picture0 We know
that; and the President has been making that effort0 And I
ask you just to reflect in terms of an essential ingredient
here, namely, the budget0
Reflect back six or eight months
and remind yourselves that, at that time, the President
called for a level of outlays of $250 billion for fiscal
f73; and that he was almost universally shouted down:
"That
is impossible!"
All of the research organizations that know everything
said it was impossible!
All of the business economists said it was impossible!
I don*t know whether the Chamber said it was impossible,
or not, Arth!
(Laughter)
But it was widely thought to be impossible«
Yet we are
going to bring in the *73 budget right around that number, and
we are going to hold the *74 budget to the revenue; that
the tax system will produce a full employment to a number
very much in line with what the President put forward last
January 0
20
It has been revealing to me to testify, as I do
practically every day on this subject, to see that hardly
anybody is arguing about the level of the budget.
There has
been a lot of argument about the composition of the budget,
and about the impoundment method, and so forth0
are very few people who stand up and say:
But there
"We should be
spending $10 million more than was proposed"0
So I think in terms of that broad setting in the battle
of the budget, we have made a great deal of headway; and I
would say that each time our Treasury revenue estimators go
back and look at the new facts on how much money is coming
in and so forth, and make their calculations, they come
running in and raise their estimate a little bit0
We are --
if we can hold the outlay side -- getting closer and closer,
of course, as our last official estimate suggests, to a
balanced budget in fiscal 1740
We are not there yet but, at any rate, the pattern of
fiscal restraint that becomes automatic under the concept
that we have been using, is working and at the same time,
as we work on the budget front, and on the monetary front,
we are trying to get as much mileage as we can from the
system of wage and price controls
as we possibly can0
the Phase III process --
nr
21
This process, I would emphasize to you -- Phase III -is not a thing that was put there0
It is a process of
administration under which, practically every day, some
announcement is made; often, a supply action of some sort0
How can we improve the supply picture in dealing with
supply and demand?
Or, how can we, somehow, use the system
to do something about price increases in a particular area?
We are doing this, I want to emphasize, with what we
feel is a due concern for the basic efficiency of the
system, and it is a great mistake to cut off your nose to
spite your face in this areac
Then we have the subject of taxes directly tied in to
the Treasury bill, and we have made proposals, to which —
I see some of you moving around a little bit and, from my
discussion here at lunch, I know have not met with
resounding applause from the business community0
Nevertheless, there are some problems, we believe in
UcS. investment abroad, and we should identify those problems
and see if we cannot take a rifle shot at them, and do
something about them while, at the same time, endorsing the
goodness —
from the standpoint of the American economy; from
the standpoint of the American people -- of the general flow
of investment abroad which we believe has improved the job
outlook in this country basically, and, of course, makes a
very large contribution in terms of the flows of the dollars
22
back to this country; makes a very large contribution to our
balance-of-payments and, thereby, to our ability to import,
over the long run, these various things that we want and we
need.
Well, this is just by way of going down some of the areas
of economic policy that have been put forward in recent weeks
by the President; and suggesting, to you, their relationship
to the trade bill.
That is, we have the trade bill, we have
monetary development, we have energy, we have the inflation
program, we have pension reform, we have Unemployment
Insurance, and we have tax reform0
That is a lot of economic policy and, as I said in
the beginning, it is related and I think, on the whole,
will benefit from the sense of the interaction of these
various parts0
We have to orchestrate the whole thing together, and
not just look at each part by itself, important though that
may be.
So I would say to you overall, then, that in the area
of trade and in the area of economic policy relationships to
trade more generally, you have a Government in action0 You
see a broad range of discussion on policy issues.
You see
energetic administration and negotiation about a variety of
elements of economic policy.
And you see us in the posture
of working with the community that we serve.
So, again, Arch, X want to thank you for this meeting;
thank you for the opportunity to talk with the group to try
to set our discussions of the trade bill and its elements,
as such, into the framework of economic policy more generallyo
I believe that we have had —
to further —
and we certainly look forward
not dialogue, but "multilogue," if there is
such a word, as we work on the bill and, as your suggestion
points up, not only as we work on the bill but, if we get the
bill —
and we, I think, have some justification for reasonable
optimism that we will»
As we administer the bill and as we
carry forward with the negotiations that will follow from it,
we want to work with you and other elements of the community
we serve, and we feel that that is the best way to be success
ful in this joint effort.
Thank you0
(Applause)
MR» BOOTH:
Ladies and gentlemen, in one very important
respect, the Czar —
the pseudo Czar —
like all the rest of
us, has not had quite enough time in which to do all of the
things he is called upon to do.
today, with Secretary Shultz»
And this is the situation,
He has to get back to his office
and, probably, back to the Hill for more testimony!
This does give us an opportunity, sir, to say you have
talked candidly with us about the things that were on our
24 -
minds «
You added greatly to the dimension of our understanding,
We are delighted to look forward to the opportunity of helping
you in every way we can, and offering all of the facts that
we can dig up, and the viewpoints we can bring in from the
many thousands of business firms that are interested in what
you are doing0
So thank you so much for giving us a better understanding
of the directions and implications of economic policy»
We congratulate ourselves upon having you as the
Secretary of the Treasury, and the Chairman of the Council
on Economic Policy»
Thank you very much for being with us»
(Applause)
(With this closing statement, the meeting was
concluded»)
0 O0
May 16, 1973
A spokesman for Northeast Petroleum Industries, Inc.
of Chelsea, Massachusetts,told the Treasury Department
today he has been informed by the Chevron Oil Division
of the Standard Oil Company of California and several
other refiners who supply the New England area that they
will furnish NPI petroleum products, including gasoline
and heating oil, in keeping with the Administrationbacked program for voluntarily allocating crude oil and
refinery products to independent oil suppliers.
NPI is the largest independent deep water terminal
operator in New England,
It supplies dealers, distributors
and jobbers of gasoline and home heating oil.
The spokesman indicated the refiners would provide
"substantial amounts of petroleum to NPI."
He said
"it would appear the voluntary allocation program is
working as far as New England is concerned."
(OVER)
2
Deputy Treasury Secretary William Simon, in testimony
last week before the Senate Banking, Housing and Urban
Affairs Committee, spoke in favor of the voluntary
allocation program while opposing the injection of
government regulation and control into the oil
industry.
0 O0
i 'I
/ /
tn
mom
V
Department
Treasury Officials
•
H n tA
5/16/73
Of t h e T r e a S U i y
O ffice Of
Public Affairs______
Attached is a transcription of selected
Q's and A's on gold and the exchange markets
from Under Secretary Volcker's press con
ference in Chicago on Monday, May 14.
Special
Consultant to
the Secretary
(Public Affairs)
Joseph A. Loftus
room 2324
ext. 5252
1
k# t
QUESTION:
/
What is this going to mean for the dollar -
the high price of gold or the climbing price of gold?
VOLCKER:
The gold market is highly speculative and I
think you've just got to get used to it going up and down
and I don't think it's got any signficant implications for
the dollar over a period of time.
QUESTION:
Tell me, Mr. Volcker, in Europe they'll
probably say that that's not true, that a great deal of the
price increase was mainly due to the dollar's instability
and that they have associated it with the Watergate problem
and the balance of trade problem that we've got.
Now, if
the Europeans are saying that there's some sort of weakness
involved here and that's going to drive the price of gold
up, isn't that going to drive the dollar down even more
over there?
VOLCKER:
Well, you come back to one of the basic
points I was making here that the United States has had a
balance of payments problem.
Until that problem is con
clusively dealt with, instability in the monetary system,
instability in the dollar, can be a problem.
We have been
dealing with that problem as forcibly as we know how.
And
in terms of exchange rates, we feel that the exchange rates
generally have been at a realistic~level consistent with
eliminating that balance of payments problem, and that con
tinues to be our feeling.
It always takes longer than one
hopes.
There are lags in this process and it's:inevitable.
We permitted a large disequilibrium to develop, and it
didn't develop in one year or two years or three years.
We have taken very vigorous measures to deal with it, but
they're not going to work instantaneously.
see improvement.
We expect to
We've seen some signs of improvement.
We
expect that to continue, but even the improvement doesn't
continue in a straight line.
You have good months and bad
months.
QUESTION:
VOLCKER:
(Garbled)
I don't know anything about any effects of
Watergate in particular.
I say that you can expect to see
speculation in the gold market from time to time.
It's a
highly speculative market.
QUESTION:
VOLCKER:
(Garbled)
I have no basis for attributing it to any
thing in particular.
QUESTION:
What about a lack of confidence in the
United States?
.
VOLCKER:
QUESTION:
VOLCKER:
I think that's a pretty sweeping statement.
What about the way the government is operated
Well, we're doing the best we can and I think
in this area we have taken measures and we'll just have to
let those measures show through.
Our record on inflation
which is fundamental here has been better than virtually any
other industrialized country in recent years and there have
3
been problems in that area in recent months.
m
0
And I'm no
happier about seeing those problems than anyone else/ but
those problems aren't exactly confined to the United States
either.
The food price problem, for instance, is a world
wide problem.
And if somebody is worried about the general
performance of the United States, I suggest they look at our
record over the past two or three years and compare it with
their own country's record.
And there aren't going to be
many countries where they have a record as good as ours.
I'd be hard pressed to find any.
QUESTION:
You said that international monetary reform
is going to be necessary.
are scheduled for the fall.
Of course, there are meetings
Do you see anything before this
meeting that will be constructive so that that meeting just
doesn't end up with another big question?’
Is there any
thing going on at this point in preparation?
VOLCKER:
Yes, we're working hard pretty continuously
in terms of preparing for that meeting and any other meet
ings other than the Nairobi meeting.
We have meetings
scheduled for next week, for instance, all week long of the
so-called Committee of Twenty at the deputies level.
And
there have been subcommittees working in the past month
quite intensively, so work is going on more or less con
tinuously in this area.
4
QUESTION:
i V ' -tfH
What does this buying of gold mean to us?
How do we translate that back to
VOLCKER:
(garbled)?
Well, I don't-think the buying of gold
should mean anything to the consumer in this country except
those that are interested in gold jewelry or gold teeth or
such items.
Gold is a commodity for those purposes.
QUESTION:
Does it mean anything at all in terms of
our purchases of foreign items?
VOLCKER:
No, it doesn't.
The gold market is now
technically insulated from the monetary market, so it is
a commodity market and it's a highly speculative commodity
market.
QUESTION: Are we doing anything now as a nation to
bolster the dollar as far as any public relations right now
in the European money markets?
VOLCKER:
The most fundamental thing we can do to
bolster the dollar is have responsible economic policies at
home and w e ’re trying to do that.
That's fundamental here
and you come back to this and back to this and there's no
escape from it.
There's no substitute for it and it's what's
essential in the end.
window dressing.
All the rest of it, in a sense, is
What's important is how the American
economy is acting and operating in its productivity, in its
stability.
5
QUESTION:
•VOLCKER:
Inaudible
Just what touched off this particular specu
lative flurry I do not honestly know.
QUESTION:
What relationship does inflation inside the
United States have on the dollar in international monetary
markets?
VOLCKER:
Well, the extent of inflation that we have
in the United States has a very important and direct bearing
on our competitive position in trade.
had a problem.
And that's where we've
Given that fundamental relationship, trends
in inflation here or abroad can reflect the psychology, the
attitudes one has in looking toward the dollar or other cur
rencies.
You may have noticed that Germany took some very
strong anti-inflationary action late last week, and this
presumably is a factor in making the mark look better to
some people and it gives a feeling that they are acting in
a vigorous way against their inflation.
When you evaluate
what's going on on a day like today, don't overlook the
fact that the dollar has been relatively strong in the
exchange markets for a couple of months so today it's re
traced some of those steps.
But it is against a background
of fairly persistent (inaudible) strength in the dollar for
a couple of months.
fluctuates.
The essence of the market is that it
6
(
QUESTION:
VOLCKER:
Inaudible
I honestly wish I knew but these things are
somewhat self-generating.
It is a speculative market and
when people get the idea it's going to go up, they buy in
anticipation of a rise and then the opposite will happen
when it goes down.
QUESTION:
VOLCKER:
market.
Inaudible
No, I would not be concerned over the gold
We are trying to move away from them, we have
moved substantially away from dependence on gold in the
monetary system, and this kind of flurry of speculative
forces in the gold market only reinforces our feeling that
you don't properly build an international monetary system
on gold.
Department oftheTREASURY
IlNGTQN,
D C.
2022D
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
May 17, 1973
TREASURY ANNOUNCES ACTIONS ON TWO
INVESTIGATIONS UNDER THE ANTIDUMPING ACT
Assistant Secretary of the Treasury Edward L. Morgan
announced today two actions on investigations under the
Antidumping Act of 1921, as amended.
In the first case there is a determination of sales at
less than fair value, and in the second case an antidumping
investigation is being initiated.
Notices of these actions will appear in the Federal
Register of May 18, 1973.
In the first case Assistant Secretary Morgan announced
that aluminum ingot from Canada is being, or is likely to be,
sold at less than fair value within the meaning of the Anti
dumping Act. The case will now be referred to the Tariff
Commission for a determination as to whether an American
industry is being, or is likely to be, injured. In the event
of a determination of injury, dumping duties will be assessed
on all entries of aluminum ingot from Canada which have not
been appraised and on which dumping margins exist. A notice
of "Withholding of Appraisement" was issued on February 20, 1973,
which stated that there was reasonable cause to believe or
suspect that there were sales at less than fair value. During
the two-year period of 1971-72 imports of aluminum ingot from
Canada were valued at approximately $425 million.
In the second case Treasury announced the initiation of
an antidumping investigation on imports of regenerative
blower/pumps from West Germany. These blower/pumps have many
uses including powering pneumatic conveying equipment, aerating
sewage and powering dental aspirators. This announcement follows
a summary investigation conducted by the Bureau of Customs
after receipt of a complaint alleging that dumping was taking
Place in the United States. During calendar year 1972 imports
of regenerative blower/pumps were estimated at approximately
$250,000.
oOo
FOR RELEASE FRIDAY
MAY 18,1973_______
SUPPLEMENTAL REVENUE SHARING CHECKS TO
BE DISTRIBUTED TODAY
Nine hundred and sixty-five jurisdictions will receive
federal revenue sharing checks totaling $2,939,187 from the
Office of Revenue Sharing of the U.S. Treasury Department in
a few days.
The checks represent delayed payments to jurisdictions
whose assurance cards have been received by the Office of
Revenue Sharing after the regularly-scheduled quarterly
payment had been mailed on April 6.
A simple postal card-type assurance form was requested
of the Chief Executive Officer of each recipient jurisdiction
■
in February.
On it, the Chief Executive Officer was requested
to assure the Secretary of the Treasury of compliance with the
requirements of the State and Local Fiscal Assistance Act of
1972 (Public Law 92-512).
These requirements, set forth in
an assurance form that was mailed with the cards in February,
(OVER)
2
include, for example, guarantees that prevailing Davis-Bacon
Act wage rates will be paid on construction projects largely
financed with general revenue sharing funds, and a prohibition
against use of revenue sharing funds in any program or
activity that is discriminatory in nature.
Several hundred jurisdictions throughout the country that
are entitled to federal revenue sharing funds still have not
received their money because their assurance cards have not
been returned to the Office of Revenue Sharing.
These are,
for the most part, small towns and townships in rural areas.
Since February, two attempts have been made by the Office of
Revenue Sharing to reach these jurisdictions.
each Governor or his designee
This month,
will be asked to help obtain
the necessary assurances or to advise the Office of Revenue
Sharing if these governments are now inactive.
More than 38,000 States, counties, cities, townships,
Indian tribes and Alaskan native villages are receiving funds
in the program.
As of today, $6,636,566,723 has been shared
with these jurisdictions.
oOo
DepartmentofthefREASURY
SHINGTON, D C.
20220
TELEPHONE W04-2041
*
ifl
embargoed for release until
8 :0 0 P .M . , E D T , MAY 1 5 , 1 9 7 3
REMARKS BY THE HONORABLE JOHN M. HENNESSY
A SSISTA N T SECRETARY OF THE TREASURY FOR
INTERNATIONAL A F F A IR S , BEFORE THE
PRO PELLER CLUB OF PORT OF CHARLESTON
CHARLESTON, SOUTH CAROLINA, MAY 1 5 , 1 9 7 3
It is a double pleasure for me to be here in Charleston.
First, I look forward to the chance to address such a dis
tinguished group and to exchange ideas on the important
subject of trade.
Secondly, it is a great personal pleasure,
since this city is home to a large part of my family, and a
number of very happy years of my own childhood was spent here.
Trade is a topic of widespread concern today.
It is no
longer the exclusive interest of a relatively small group of
businessmen and government officials.
Its impact on the
well-being of all of us —
workers —
in general —
industry—
and jobs
is now well and viscerally recognized.
Trade was first taken off the financial pages and put
on the front page in 1 9 7 1 when the United States had the
first trade deficit in ninety years.
The concern increased
in 1 9 7 2 when the trade deficit became even larger.
S-202
2
The most visible effect —
Washington —
all kinds —
at least to one working in
has been growing pressure for restrictions of
on imports, on corporations —
on capital.
Fundamental questions have been raised about the
United States' ability to compete, in what seemed to be an
increasingly discriminatory world trading system —
about an
appropriate United States response to a changed world econo
mic situation, one in which our country no longer is the
dominant economic power —
and about how the rules of the
game must be modified to reflect the modern realities, not
those of a postwar era.
The Administration's response to these problems has
been several, both in the domestic and international area,
dating back to the measures first instituted on August 15,
1971.
I would like to mention two sets of actions.
The
first, of a short-run nature, would reflect the changes in
the relative position of economies, which had taken place
over the preceeding twenty-five years and thus allow us to
compete on a fair price basis.
Two general exchange rate
realignments have taken place and the present rates reflect
basic underlying economic realities— no further change in
the value of the dollar is needed or will be taken.
The second set of actions —
longer term but equally
important actions -- is reform of the international rules of
the game —
both in the monetary and trading system.
While I will speak briefly on monetary reform and its
relevance to trade, I want to focus the majority of my talk
on trade and the trade bill, submitted to Congress by
President Nixon on April 10 of this year.
The title —
The Trade Reform Act of 1973 —
was care
fully chosen, for the bill represents a major American
initiative —
an effort by President Nixon to bring about
reform in the rules and practices of world trade so that the
United States and other nations can compete fairly and
freely.
trade.
It is designed to provide a new direction to world
Its thrust is outward looking and expansionary -- but
and this is a large but —
it also provides new tools and
new authorities to be able not only to bargain hard for
freer and fairer trade but also to be able to look after
our own vital interests -- as and when this is needed.
Some of the specific provisions of this bill and its
objectives are worth mentioning because they demonstrate
a package or balanced approach, which best insures
the type of world trading system which will be beneficial
to our country.
First of all, the bill does ask for rather
broad authorities for the President.
1.
These include:
An authority to move tariffs up, as well as down,
during the negotiations.
2.
A Congressional declaration in favor of negotiations
and agreements on nontariff barriers with an op
tional procedure for obtaining Congressional
approval of these agreements, where appropriate.
3.
A more flexible and effective authority for the
President to protect American workers and industry
against countries that unreasonably or unjusti
fiably restrict United States exports.
4.
The authority to raise or lower import restrictions
on a transitory basis, when our balance of payments
situation requires such action.
The bill was written with the conviction that the United
States must have a strong bargaining position in order to
bring about needed changes -- in order to reform the inter
national trading order, and, in point of fact, the authorities
which the President is requesting would, in most cases,
provide us with no more powers than other industrial nations
customarily bring to the negotiating table.
While the message of the bill is quite clear in favor
ing an expansion of world trade, it also recognizes that,
in the past, we had inadequate tools to deal with the
domestic aspects of problems, arising from international
trade.
The proposed trade bill would provide more flexible
and effective safeguards for both our workers and our in
dustries, for it is clear that in a world of rapid change
and open markets our nation cannnot and should not expect
its domestic workers and business to bear excessive hard
ships caused by surges in imports.
The aim of such safeguards is not to avoid adjustment,
but to ease the burdens of adjustment for a transitional
period.
A.
The safeguard provisions of the bill would:
Introduce a fairer and less stringent test for
domestic industry to qualify for import relief.
Restrictions of a transitory nature would be
permitted in order to provide the industry with
time to adjust, increase competition from imports
or to avoid serious injury.
B.
Provide more accessible and rapid adjustment
assistance to workers who are displaced due to
import competition.
At the same time separate
legislation will be submitted to reform the pen
sion and unemployment insurance systems in order
to provide assistance to any worker who loses his
job irrespective of whether the cause is domestic
or international.
C.
Embody a considerable improvement in the procedures
of the antidumping and countervailing duty statutes
in order that our workers in industry are adequately
protected from unfair foreign competition.
6
These are major aspects of the proposed bill, and I
believe they indicate a balanced approach -- one which is
designed to move the system toward greater openness, greater
fairness and yet at the same time provide us with the bar
gaining power and protection we need.
Specifically, what does the U.S. hope to achieve in the
negotiations, which will begin in September?
There are
three general objectives:
.
Free up agricultural trade
.
Reverse the trend of inward looking regionalism and
the erosion of the most-favored-nation principle
.
Attempt to rationalize nontariff barriers, which
now affect a large part of world trade.
Let me say a brief word about each of these three:
Agriculture
While the Trade Reform Act does not request specific
negotiating authority for agriculture, since the general
authorities on tariffs and nontariff barriers are fully
applicable, agriculture is one of the most important issues
in the upcoming negotiations.
Our farm sector is a very
efficient producer of many products —
particularly grains.
We are fortunate in having the greatest contiguous land
area that can be found anywhere, blessed by nature for
7
abundant grain production, with a favorable climate and
water supply.
For many years we have held much of this land out of
production, at considerable cost.
viable proposition.
This is no longer a
Farm exports have made a substantial
positive contribution to our balance of trade since 1960 and
last year farm exports helped reduce our overall trade
deficit by $2.9 billion.
The potential for ex
pansion is even greater.
The paramount United States ob
jective in these negotiations, therefore, will be to broaden
the role of market forces at the international level by
reducing and removing barriers to trade farm products.
Regionalism
United States support for European unity has been a
consistent American postwar policy.
We have been strong in
our encouragement of it.
However, in its economic relations, the European Com
munity has developed a regional character that has become
increasingly inward looking and based upon special prefer
ential arrangements which involve real trade losses to us
and others.
By 1975 these arrangements will involve some
eighty countries.
This is not a healthy situation for any
of us, and we must find a solution which reconciles the
legitimate aspirations of regionalism with the imperatives
8
of a balanced and fair international trade and monetary
system.
Abandonment of the most-favored-nation concept,
in our judgment, is not in anyone's interest, and certainly
not in the interest of the United States.
be reversed.
This trend can
One way to do this with a minimum of friction
I*would be the mutual elimination of tariffs.
Nontariff Barriers (NTB's)
This is a very complex area.
Partly because of the
difficulty of coming to grips with NTB's, past multilateral
trade negotiations have concentrated on tariffs.
Tariffs
are not without importance, but with their progressive
lowering NTB's have assumed even greater importance as
barriers to trade.
They cannot be given a back seat any
longer.j
Not every barrier can be considered a target for re
duction.
Many of them, such as those for the protection of
health and safety,
are legitimate.
But some are not, and
these we must cope with, in spite of the difficulty involved.
Progress has already been made bilaterally with the Japanese
and, although we do not underestimate the problems, our
experience is that if we are right and bargain hard for
what we want we will be successful.
The reaction abroad to the President's trade bill has
been generally constructive, although it causes more concern
9
to certain countries than to others.
there will be give and take —
In the negotiations
other nations have complaints
against some of our trade practices.
We will have to be
ready to strike a fair bargain ourselves, although I believe
it fair to say, if we are to reach a balanced international
trading order, the United States will be more of a taker than
a giver this time.
We do have a large stake in trade.
Although trade as
a percentage of our gross national product is smaller than
any other industrial nation in the free world, we cannot
live just as well without the $100 billion of exports and
imports we now trade yearly.
I would urge we all recognize
that imports are good, that they increase the welfare of
the American people, its workers and its industries.
They
help keep cost inflation down, provide variety and a com
petitive force that is beneficial to us.
Exports are, of
course, vital to our economic well being, and we must make
sure these obtain fairer treatment than in the past.
In assessing the problems facing us in the trade field,
let me just say one word about the ability of our business
to take advantage of new opportunities to compete inter
nationally.
In the past, no matter how hard our exporters tried
or our domestic industry worked, many could just not
compete.
Other major currencies were undervalued and
10
-
reluctant to give up the competitive edge that gave them.
Today we have far different world in which the relative
price of the dollar versus, for example, the deutschemark
and the Japanese yen has changed around 30 and 35 percent,
respectively.
This removes a major impediment to our ex
ports and provides many new opportunities, but at the same
time there is concern that we may have forgotten how to
export —
how to compete internationally —
during the last
ten years.
I
recently took a trip to the Far East, where, as you
know?, the Japanese trading presence is even more strongly
felt than here.
In places like Korea, the Philippines and
Taiwan, I heard many stories that —
even with the incentives
provided by the new prices §r- United States exporters are
not bidding on many major projects where we do have an
advantage.
Officials and businessmens expressed dismay to
me about this and asked what must be done.
I personally
believe this will be a short-lived phenomenon.
It is due
partly to the size of the U.S. domestic market and the
strong growth in internal demand which we have experienced
during the last two years, which makes exporting less
atrractive.
Partly, however, I believe the failure may
be due to our having lost the knack of exporting, and some
of my friends in business tell me the export manager in many
medium and even large firms has passed into history, not
11
unlike the dinosaur.
I am optimistic that there will be a
renewed and major effort by our industries to overcome
quickly the years we could not actively participate in ex
port business.
Our economy has always been responsive to
price incentives, and I am sure it will be in this case —
but in my talks around the country I do like to urge you
in the private sector to take a good look at foreign markets
you once wrote off.
Here the example of South Carolina and
Charleston provides a tangible evidence of what dedicated
effort can do.
I am sure there are many questions which I would be
be happy to address on our overall trade objectives and the
specifics of the proposed bill now before the Congress.
Before getting to those I would like to close by making a
few remarks on other parts of international economic reform.
Change in the prevailing exchange rate patterns was only
one step in the process of reform.
It is equally clear,
however, that our efforts to reform the rules and structure
of the international monetary system are more urgent now
than ever.
In a system of more equally distributed economic
power/ countries amassing huge surpluses which throw the
entire system into disequilibrium cannot be tolerated.
The
United States has presented proposals for a reformed system
with much more flexible exchange rates and a system of rules,
12
based on the use of objective indicators, to insure that
adjustment does take place —
that countries do take action
to correct their emerging balance of payments problems
quickly and effectively, without the postponement and
subsequent disruption we have experienced in recent years.
Progress is being achieved in the monetary negotiations,
which began last September, and is equally critical to our
success in trade for it is obvious that if we do have an
international monetary system which produces recurrent
crises, then we shall end up in a world of controls and
restrictions not only on capital but on trade as well.
The monetary and trade negotiations must lead to a
consistency in rules that has been lacking in the past.
For perhaps the first time, in the present negotiations
countries are having to coordinate the reform of monetary
and trade policies.
While no businessman could afford the
luxury of treating the sale of the goods as independent
from the currency and manner of paying for them, until very
recently, trade and finance ministers did not speak to each
other too frequently.
It is now recognized that these two
areas are intimately linked and rules will be written ac
cordingly.
Non-discrimination in monetary arrangements
must be balanced by a return to most-favored-nation treat
ment in trade.
The success in our forthcoming trade negotiations and
the effort to expand world markets on a fair and equitable
13
basis is of vital concern to all of us.
South Carolina and
Charleston, in particular, represent an important case study
of how an enlightened industrial and trade policy can lead
to expanded trade and employment.
Last year, I understand,
close to $1 billion of imports and exports passed through
the Port of Charleston, representing an increase of more
than 60 percent over the previous year.
At the same time,
there is a concerted effort by both state authorities and
private industry to assure facilities of the Port of
Charlestown are updated in order to attract new and
diversified industry to the state and $40 million of statebacked funding will be provided for the expansion of the
port.
Moreover, foreign investment has been attracted to
the state.
According to figures I have seen, some 40 plants
from foreign countries are now operating in South Carolina.
I applaud your fine work in this area and I hope and trust
you will support our efforts to create a new reformed trad
ing system which will allow the U.S., South Carolina and
Charleston to enjoy the just fruits of its hard work and
its expanding competitive ability.
oOo
Department
ofthefREASURY
i
FOR RELÉASE ON DELIVERY
STATEMENT OF JOHN M. HENNESSY
ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
U. S. TREASURY DEPARTMENT
b e f o re
THE SUBCOMMITTEE ON AFRICA
OF THE HOUSE FOREIGN AFFAIRS COMMITTEE
on
May
Mr.
Cha i r m an
I
and M em b e r s
am p le as e d
of the
17,
Su bcommittee:
to ap pear be fo r e
pf*ovide I nf o r m a t i o n w it h re spect
to Rhodesia;
the funding
in the Uni te d
obligations
States;
under
Tran sf er
trolled by
and,
of funds
to
this
the
Un it ed
States
under
on July
f u lf il lm en t
Un it ed N a ti on s
1965.
to
funds
Of fice
of
its
R e so lu tio ns .
is st r ic t l y
the R h o d e s i a n
29,
of
I n fo r m a t i o n
to or from R h o d e s ia
the Treasury,
S u bc o m m i t t e e
tra ns fer
of the R h o d e s i a n
the p e r t i n e n t
Regulations p u b l is he d
1973
con
S a nct io ns
The r e g u l a t i o n
pro
hibit (1) The
importation
into
of S ou th ern R h o d e s i a n
(2) T r a n sf e rs
outside
d es t i n e d
ac cou nt
S-204
(A) Other
States
of
in volve m e r c h a n d i s e
S o uth er n R h o d e s i a n
of p ro p e r t y w h i c h
to
t ra ns fer s
nationals
of p r o p e r t y
origin;
in volve m e r c h a n d i s e
So ut h e rn R h o d e s i a
of b u s i n e s s
States of m e r c h a n d i s
origin;
of p ro p e r t y w h i c h
the United
(3) T r a n sf er s
the Un i te d
dr to or
for
the
thereof
to or on b e h a lf
of or
2for the b en ef it
(including
(5)
The
of any pe rs on
the a u t h o ri t i e s
importation
p r o du ce d
into
in any
ce ntr at e s
of
in Sou th ern Rhodesia
thereof);
the Un it ed
country
and
States
of ferrochrome
from c h ro m i u m ore or con
So u th e r n R h o d e s i a n origin,
such i m p o r t a t i o n
is n o w lice ns ed
although
pu r su a n t
to the
Byrd A m e n d m e n t .
The se
regulations
and d i s t r i b u t e d
U ni te d
violation
offense,
by banks
and
under
cr iminal
Th e r e
funds
The C o mm i t t ee has been
any willful
c o n s t i tu t e
In fact,
p r o s ec u t i on s ,
and,
a criminal
there have been
re su l t in g
in substantial
paid
are
a c cr u in g
ex ce pt i on s
1968 have only
in the U.N.
two
of R h o d e s i a n b an k a c cou nt s
types
The
first
is a "free"
from r e m i t t a n c e s
account,
which
S ec ur it y
Co u n ci l
controlled
under
since
in detail.
Resolution
I will
to or by R h o d e s i a
this m o re
States.
Co u nc il
law.
international
fo rfe itures.
e x p l ai n
Un i t e d
to a p pr o p r i a t e
or i n d i v id u a l s wo ul d
those p e r m i t t e d
Let me
funds
and persons.
punishable
In sum,
bee n
the D e p a r t m e n t
in the Fe deral Register
a copy of these r e gu l a t i o n s
su c c es sf u l
fines
by
States banks
p r o v i d e d w ith
two
have b ee n p u b l i s h e d
253.
The
is c o nt ro l l e d
Resolution
d is cus s
ac co un t s
States w hi c h were
the
acc ou nt
in t h e
containing
a u t h o r i z e d under.. U.N.
second
by
type
of ac count
Security
is a "suspen
the T r e a s u r y p u rsu an t
to U.N.
253.
"s u sp e n s e"
co nsist
funds
resolution s.
of
in e x i s t e n c e
a c c o un t s
those
first.
ac c ou n t s
as of July
29,
The«e
in the United
1968,
and which
-
for
the b e n e f i t
(i ncluding
(5)
The
of any
such
into
in any
centrates
person
the a u t h o r i t i e s
importation
produced
(V
2-
of
in S o u t h e r n R h o d e s i a
thereof);
the U n i t e d
c o u n t ry
States
of
ferrochrome
f ro m c h r o m i u m ore
Southern Rhodesian
importation
and
origin,
is n o w l i c e n s e d
or c o n
although
pursuant
to the
Byrd A me nd m e n t .
These r e g u l a t i o n s
have been published
and d i s t ri bu te d by
the D e p a r t m e n t
United States ba nks
provided wi t h
a copy of
violation by ba nks
offense,
and per so ns .
fines and
u nd er
c r im i na l
funds paid
been those p e r m i t t e d
Let me ex p la i n
There
and,
any w i l l f u l
constitute
In fact,
there
a criminal
have b e e n
resulting
in s u b s t a n t i a l
are
funds accru in g
controlled
exceptions
1968
in the U.N.
two
of R h o d e s i a n b a n k a c c o u n t s
types
The
fi rst
is a "f re e "
from r e m i t t a n c e s
253.
The
is c o n t r o l l e d
Security Co u nc i l
I will
un d e r
since
in detail.
Council R e s o l u t i o n
which
to or by R h o d e s i a
this m o r e
States.
account,
would
prosecutions,
international
C o m m i t t e e has b e e n
regulations
law.
Register
fo rfe i tu re s .
In sum,
United
to a p p r o p r i a t e
The
or i n d i v i d u a l s
punishable
two successful
t hes e
in the F e d e r a l
Resolution
d i s c us s
a c c ou nt s
States which we re
the
authorized
se co n d
by
account
type of a c c o u n t
only
resolutions.
in the
containing
under.*. U.N.
the T r e a s u r y
Se c ur i t y
is a " s u s p e n s e ”
pursuant
to U.N.
253.
"suspense"
c on sis t
fu nds
h av e
of
in e x i s t e n c e
accounts
those
first.
accounts
as of July
29,
These
in the U n i t e d
1968,
and w h i c h
.
belonged
to p e r s o n s
accruing
to R h o d e s i a n s
unless
they
in Rh od e si a ,
qualify
a fte r
No d e bi t m a y be m a d e
except u n d e r
Treasury
to Rhodesia.
T his
Security C o u n c i l
which would
account of
decedent,
be
or financial
Other
1.
are
also
to such
a "suspense"
Licenses
do not m a k e
Resolution
l i c en se d
are
economic
Payment
For
a c co un t
is su e d
available
4 of U.N.
a transaction
f ro m a " s u s p e n s e "
of a R h o d e s i a n
does not m a k e
available
only
resources
exa mp le,
is the p a y m e n t
a transfer
resource
examples
253.
to an A m e r i c a n h e i r
such
funds
in " s u s p e n s e , "
is in a c c o r d a n c e w i t h A r t i c l e
a legacy
since
date
all
funds.
license.
for t r a n s a c t i o n s w h i c h
In add it ion ,
that
as "f ree "
- /
any e c o n o m i c
to Rh od es i a .
include:
of a p e n s i o n
to an A m e r i c a n
formerly
e m p l o y e d by a R h o de s ian firm.
2.
3.
or
interest
on p re -
and m e d i cal
expenses
of d e p e n d e n t s
Payment
of p r i n c i p a l
embargo
loans.
Educational
in the U n i t e d
State s
of p e r s o n s
in S o u t h e r n
Rhodesia.
4. M a i n t e n a n c e
of relat ives
in the U n i t e d
of R h o d es ia n s.
5. P e n s i o n
6. P e r s o n a l
fund
c on tr ib ut i o n s .
insurance
premiums.
St ates
/<n
-4-
7. T ax es
or
state
fees p a y a b l e
or local
8. T r a v e l
and
to the U n i t e d
St at es
or
governments.
subsistence
in the U n i t ed
St ates
of R h o d e s i a n n a t i o n a l s who h a v e b e e n g r an t e d
V is a s
In no ne of
by
th e s e
nancial b e n e f i t
instances
to R h o d e s i a
The two m a j o r
and Barclays Bank,
of
e c on o m i c
or f i
tr ansfer.
accounts
in N e w York.
State.
is th e r e any
f r o m the
"suspense"
estate is cr eated,
a dividend
the D e p a r t m e n t
Other
are at
S t a n d a rd Bank
for example, w h e n
s u s p e n s e a c c o u n t s arisi ,/
or an i n s u r a n c e p o l i c y b e c o m e s
pay ab le,
o ‘ when
accrues.
"Free"
acc oun ts ,
plicit e x c e p t i o n
on the o t he r hand,
to the e mb a r g o m a d e
Security Co u n ci l w h i c h
a l l ow s
by
transfer
derive
f ro m an e x
the U n i t e d N a t i o n s
of funds
to R h o d e s i a
for medical,
educational,
or ot h e r h u m a n i t a r i a n re asons.
The Security
Co u n ci l
allowed
the pr o vi si on
also
of news m a t e r i a l ,
circumstances,
exceptions
and,
for p e ns i o n s,
in s p e c i a l h u m a n i t a r i a n
f oo ds tu ffs .
Pa r a g r a p h n u m b e r
4 of
Security
Council
Resolution
253
reads as follows:
"Decid es
that
all
shall not m a k e
Southern
available
Rhodesia
or pub li c
utility
enterprises,
in vest ment
or
St ates M e m b e r s
in
to
or to any
the
of
il l e g al
c o m m e rc i a l ,
undertaking,
including
Southern Rhodesia
any ot h e r
the U n i t e d
financial
any
or
Nations
r e g i me
in
industrial
t o ur is t
funds
for
economic
resources
a
and shall
prevent
their t e r r i t o r i e s
th eir n a t i o n a l s
from making
any such u n d e r t a k i n g , a n y
remitting
any ot h e r
such
fu nds
and
available
funds
to p e r s o n s
payments
or for s t r i c t l y m e d i c a l ,
humanitarian
the p r o v i s i o n
human ita ria n c i r c u m s t a n c e s ,
Accordingly,
licenses
authorized
p ur po s es .
cases to r e l i g i o u s
ties in R h o d es ia ,
tals and
The
exclusively
f ro m
for p e n s i o n s
or e d u c a t i o n a l
and
pur
in sp ec ial
is su es
to p e r s o n s
to R h o d e s i a
licenses
g r o up s w h i c h
such
are
spe ci fic
in the U n i t e d
for
any of
is sued
in m os t
s u pp or t m i s s i o n a r y
as c h u r c h - s p o n s o r e d
these
clinics,
activi
hospi
schools.
five
largest
all of the funds,
to
f o o d - s t u f f s .”
fun ds
These
and
or
or b o d i e s w i t h i n
the T r e a s u r y D e p a r t m e n t
to remit
the r e g i m e
of news m a t e r i a l
on a c a s e - b y - c a s e b a s i s
States wh o w i s h
to
or r e s o u r c e s
Southern R h o d e s i a , e x c e p t
poses or for
any p e r s o n s w i t h i n
l i c e n s e s w h i c h a c co u n t
are as follows:
for
almost
-
y»
iff
6-
Y e a r l y Am ou nt
Name of L i c e n s e e
Purpose
of R e m i t t a n c e
General C o n f e r e n c e of
Seventh Day A d v e n t i s t s
Educational, medical
humanitarian
$430,000
Foreign M i s s i o n Bo ard
of Southern Ba p t is t
Convention
Medical,
$750,000
United Churc h B oar d
for World M i n i s t r i e s
M e d i c a l , e d u ca t i o na l ,
humanitarian
$360,000
World Di v i s i o n of the
Board of M i s s i o n s of
the United M e t h o d i s t
Church
Medical,
educational
$801,000
Evangelical A l l i a n c e
Mission .
Medical,
educational
$360,000
educational
$2,701,000
These
licenses
been renewed
are
annu all y.
r•
i ss u e d
The
on a y e a r l y b a s i s
total
and have
«amount a u t h o r i z e d ...
•
for
the 449
l i ce n se ?
g r a nt e d
d u r i ng
the f i v e - y e a r
*
period from J u l y
to May 15,
1973
29,
is
1968
(the e f f e c t i v e
$1 1 , 83 2, 0 53 .
Rho d es i a uses
date
of the R e g u l a t i o n s )
V
the R h o d e s i a n d o l l a r
as
its cu rr ency.
Therefore these U.S. dollar remittances must be converted into
Rhodesian currency in order to be used by the beneficiary.
International
remittances
of
customarily m a d e
ei the r by b a n k
cashiers1 checks
and
drawn by the
this
telegraphic
se nde rs
on
type
are
instruments
(e.g.
drafts,
tr a n s fe r s )
or by
checks
their own b a n k
accounts
in the U n i t ed
/
States.
In e i t he r
case,
the d o l l a r
Rhodesian ba n k w h i c h
exchanges
Rhodesian
The R h o d e s i a n b a n k
currency.
dollars from the U.
dennsited
in .its own
the
instrument
dollar
S. b a n k r e m i t t i n g
acc oun t
in
i n st r u m e n t
then
the
the U n i t e d
reaches
c o ll e c t s
funds
a
for
the
and has
States.
them
‘UP
-7 -
The Rhodesian bank would, of course, not be willing to
pay Rhodesian currency to the beneficiary unless it could
freely use the U.S. dollar equivalent it received in exchange.
Otherwise, it would be paying something of value (Rhodesian
currency) and receiving blocked U.S. dollars in exchange,
which it would be unable to use freely.
If we did not allow the Rhodesian banks to use the
dollars they earned from these licensed remittances, it
would not be possible to send funds to Rhodesia for these
humanitarian purposes, despite the fact that the United
Nations Security Council has specifically approved them.
As a practical matter, the Rhodesian banks have "free"
accounts in New York, in which they deposit their U.S. dol
lar earnings from these licensed remittances.
use these accounts for any
lawful
purpose.
They can then
They
can be used to pay. for legal exports to Rhodesia, such as
printed materials.
-c
~
j.
They also can be used -to support the offices of Air Rhodesia and
the Rhodesian Information Office in the U.S.
The Rhodesian
banks are also able to transfer these "free” dollars to foreign banks and use them for whatever purposes they wish.
I have provided above the identities of the principal
sources of the funds in these accounts totalling $11,832^053
We are presently compiling a list of the remaining
sources of medical»educational and humanitarian remittances
which we will
submi t
We do not h a v e
of the payees
from
to the
subcommittee
available
th ese
as
suon as
i n f o r m a t i o n on the
ac cou nt s ,
since
identities
the fu nds
disposablet * •
completed
are f r e e l y
*.
'
purpose.
In the case
transfers of
of the R h o d e s i a n
funds
are m a d e
York to the R h o d e s i a n
f rom a "f ree"
a c co u n t
Information Office*s
at a W a s h i n g t o n bank.
The O f f i c e
the account
operating
to pay
Information Office
its
expenses
in N e w
licensed
then uses
(RIO)
a c co u n t
the m o n e y
in
such as rent,
salaries and ut i li ti e s.
Similarly,
New York,
that
in the
case
of
Of fi ce m a i n t a i n s
New York bank.
The
out
of
the
funded from a " f r e e ” a cc oun t,
operating ex p e n s e s
and
in any fin an ci a l
Rhodésia,
but
literature
to
a licensed
Rhodesian National
in New York o p e r a t e s
for printing,
the Air R h o d e s i a
same
and
such as rent,
a dv e r t i s i n g *
or
does
a c co u n t
T o u ri s t
office.
the
funds
salary,
disseminate
to u r i st
Mr.
Of f ic e
The O f f i c e
used
for
en ga ge
on b e h a l f
information
is
p a y me n t
does not
the public.
In co ncl us io n,
B oa rd
are
transactions
in
at a
ut i l i ti e s ,
The O f f i c e
commercial
Office
of Air
and
t o ur is t
* J*"*
Ch air ma n ,
I would
like
to po int
to
two enforcement cases that m ay be of i n ter es t to the
Committee. '
In one
Pay drafts
case
drawn
the T r e a s u r y
u nde r
instructed
a l e t te r
at the request
of an animal
elephants from
a dealer
of
a U.S.
b a n k not
cr edit w h i c h was
dealer who had p u r c h a s e d
in S ou thw es t
Africa.
The
to
o p e n ed
ten b ab y
latter had
s hi pp e d
and he f u r n i s h e d
were c a pt ur e d
closed that
elephants
the
elephants
documents
same
of these s u s p i c i o u s
continuing,
but
has b e e n
The se c o n d
ar ose w h e n
a c c o un t
to be used
ammonia en route
the funds
would have
bank,
Commerce
f rom r e a c h i n g
b e en
The
returned
the equiv ale nt
in the Uni te d
dollars in
time period.
The
because
exporter
Because
a l lo w e d
investigation
of
f r e q ue n t
and
his
an i l l e g a l
w h i c h was
and
$ 3 7 7 , 0 00
in 1970
s h i p m e nt
of a n h y d ro u s
ultimately
Department
action prevented
Treasury
intended
action.froze
to pay
funds
to R h o d e s i a by the
in
for
the
South A f r i c a
So uth A f r i c a n
for
the T r e a s u r y ’s a c t i o n
the
So uth A f r i c a n
in b l o c k i n g
b a n k ’s a c co un t
States.
any qu est i on s.
s t a t e me n t
is
suppl ie rs.
the T r e a s u r y b l o c k e d
corresponding
c o n c l u d e s my p r e p a r e d
8lad to ans w er
dis
of b a b y
T r e a s u r y has not
Rh od es i a .
in N e w Y o r k w h i c h w e r e
if it had not b e e n
This
for
to M o z a m b i q u e ,
anhydrous am mo nia .
a n u m b er
of a S ou th A f r i c a n b a n k
to pay
destined for R h o d es ia .
this shipment
delayed
elephants
investigation
same
to be made.
the f o r e i g n
case
in the N e w Y o r k
which were
of
the
f r om M o z a m b i q u e ,
s h o w the
acquired
circumstances,
the e l e p h a n t s
lengthy a b s e n c e s
had
during
payment for
to
H o w e v e r,
exporter
fr om R h o d e s i a
the U.S.
purporting
in M o z a m b i q u e .
the
to
and
I w o ul d
be
department
ISHINGTON, D C. 20220
oftheJREASlIRY
Z3
TELEPHONE W04-2Ö41
FOR RELEASE UPON DELIVERY
Remarks of The Honorable Edward L. Morgan
Assistant Secretary of the Treasury for
Enforcement, Tariff § Trade Affairs and Operations
before the
Los Angeles Air Cargo Association
Air Cargo Day of World Trade Week
Los Angeles, California
May 21, 1973
12 Noon
INTERNATIONAL TRADE IN THE YEARS AHEAD
The Past, the Present, and the Future
The United States today is at a crossroads in its
economic relations with the rest of the world.
Twenty-five
years ago we decided, in our own interest, to contribute our
wealth, influence and energy to help our weakened allies, as
well as our former enemies, gain the economic strength they
so desperately needed.
We did so in order to achieve a more
secure and more prosperous world for all.
At that time the United States was the center of economic
power in the world.
centric.
Today, economic power has become poly
The Common Market, not the United States, is now
the world’s largest trading unit.
Japan, through enormous
effort and spectacular growth, has become a strong and still
growing force in the world economy.
And other countries
throughout the world are playing increasingly stronger roles.
S-205
2
Along w ith this growth,
developed.
a numbe r of problems
The basic pre mise
whi ch u nd e r l a y
international
of a dominant U.S.
Ag r ee me nt on Tariffs and Trade
res tri ct io ns
effort
in the General
( G A T T ) , the
similar organi za tio ns
Basic reforms of the rules
are needed.
International
is no
longer valid.
Furthermore,
and other n o n - t a ri f f trade barriers
to exist w hic h m a y have been ju st ifiable at one
protect we ake r economies,
ju st if ie d today.
in scope.
An d
increase,
trade
economy
trade and m o n e t a ry a r r a n g e
ments built up w ith c on s id era bl e
M o n e t a r y Fund and
but wh i c h can no
Worse yet,
have
continue
time to
longer be
these pr oblems /have grown
if they are al lowed to continue and to
they will bl ock our efforts
to achieve a more open
society.
Too m a n y na tions
have tended to regar d
trade p ro bl ems w ith a narrow,
the be nefits
U n f a ir
of more
exp ansive
international
inward philosophy,
overlooking
trade policies.
trading a rr a ng eme nt s
have put the workers
one na ti on
at a di s a dv a n ta g e with those of another.
re lu ct an ce
to remove r e st ri ct io ns has
of an open w or ld economy.
of
A
limited the principles
These are the types
of things we
seek to eliminate.
The u p co m in g
trade and m o n e t a r y n e go ti at io ns will
pr o vi d e an o p p o r t u n i t y for the Un it e d
partn er s
to strike a n e w p o st ur e
States
and
in in te rnational
its trading
economic
3
î-btf'
relations.
To achieve
international
this,
ec onomic
investment and trade
we must r e st ru ct ur e
system,
sectors.
including
This
the entire
its monetary,
is the chal le nge w h i c h
lies ahead.
The Trade Re for m Act of 1973
In the trade area,
the Trade Re fo rm Act of 1973 will
provide the Pres ide nt w i t h the tools he needs
effectively on b e ha l f of A me r i c a n workers,
consumers.
In addition,
to ne go ti a t e
b u s i n es s m e n and
it will up date our dom es tic
laws
to take into account n e w economic realities.
The m ajo r p rop os als
of the bill
the President w i t h broad,
1.
N eg ot i at e
are d e sig ne d to pro vi de
flexible a u tho ri ty to:
the
lowering of tariff ba rriers
intrinsic to a more open and equitable
trading
system.
2.
imports
Deal w i t h e xc es si v e l y rapid
increases
that di srupt dom estic m a rk et s
in
and dis pl ace
Am e ri ca n workers.
3.
Deal w i t h u n f ai r c o m p e ti t i o n against
United States products,
4.
M a na g e U n i t e d States
effic ie ntl y and use
the needs
it more
trade p o l i c y more
e f f e c ti v e l y to meet
of a more b al an ce d and ef fe ctive
m on et ar y system,
problems
both at home and abroad.
as well
as our b a la n c e of p a yme nt s
and to combat d o mes ti c
inflation.
4
5.
Permit the granting of Mo st -Favored-
Nation treatment
to countries not now receiving
it in order to take advantage of new trade
opportunities.
6.
Fo ll o w the
lead of other developed countries
in granting d eve lop in g countries
pr e fe re nce s
g en era li zed tariff
des ign ed to enhance the contribution
trade can make to the de ve lopment
I have heard
au th ori ty
That
in this bill
statement
to achieve
Am er ic an
it said
that the President
is inaccurate.
What the President
in the Trade Reform Act of 1973
reluc ta nt
For eig n go ve rnments
to n eg ot i at e with A m eri ca n officials who have
closer wo r k in g
re lat io ns h i p bet we en
to anythi ng concrete.
is to create a
the le gi slative
exec ut ive br an ch e s which will de mo n s tr a t e
A Carrot
that the U n i te d States
to, n eg o t i a t e
intends
to all
to,
and
our trading
and will have
seriously.
and a Stick
In order to ac hieve a more
system,
table
are u n d e r s t a n da b l y
One of the aims of the Trade Re fo rm Act
the p owe r
is to enable
auth or ity that our trading
no abi lit y to commit the Un it e d States
part ne rs
is seeking
to sit at the ba r ga i n i ng
wi t h the same type of n e go t i a ti n g
have.
is seeking more
than has ever been granted previously.
re pr e se nt a ti ve s
p ar tne rs
of these countries.
open and equi ta ble
trading
we must have the a b il it y to enco ur age change and to
l
-
provide incentives
5 -
'l e i
to other na tions
to alter existing
relationships w hi c h have become out mo ded and
inequitable.
This is the re aso n for the r eq ue st ed au th or i t y to lower
tariffs,
and to reduce n o n - t a r i f f barrie rs
and other
restrictions on trade w i t h the U n i t ed States.
the world's
largest economy,
to provide bot h a ttr ac tiv e
trading community,
to,
and as such we are
incentives
to the
in a p o s i t i o n
in ternational
and di si n ce n t iv e s when necessary.
seeking a more open w or ld
has the right
We are still
trading system,
and will
the U n i t ed States
strive to obtain,
treatment for A m e r i c a n business,
A m er i c a n
While
more
equitable
labor and the
American people.
The Antidumping Act and C ou nt e r v a i l i n g D ut y Laws
Among the di si n ce nt i ve s
Antidumping Act,
involving
to w h i c h
the acts of foreign companies,
and the C o u n t e rv ai l in g Duty Law,
foreign governments.
involving
Both statutes
office in the T re a s u r y Department.
to defend Am e r i c a n pr od u ce rs
foreign price pr ac t ic es
I r e fer re d are the
the acts of
are a d mi n i s t e r e d by my
These
laws are d e si gn ed
and labor ag ainst un fa i r
and s u bs i d i za t i o n of exports.
For those of you who are not
let me explain what d um pin g
fa miliar w i t h the statutes,
is and what
a c o un t e r v a i l i n g duty
is.
Typically,
d um pin g me ans
selling its m e r c h a n d i s e
that a fo reign c o mp a n y
for less
in the U n i t e d States
is
than
6
in its home market,
causing
Und er the A n t i d u m p i n g Act,
injury to U.S.
it is the T r eas ur y Department's
r e s p o n s i bi li t y to de te rm i n e
com pan y has been dumping,
industry.
initially w h et he r a foreign
after w h ic h the Tariff
C o m m is si o n dete rmi ne s
if A m e r i c an
injured as a result.
If so, du mping duties
against the foreign co mpany's
For example,
$1,000
not co mpete
price,
where
limited.
su c c es sf u l l y
the U.S.
until
time,
at this
in order to capture
A m e r ic a n p r odu ce rs
for $900.
similar A m er i c a n pro du cts
States
It ther ef ore
for $800;
If it succeeds
lose contracts,
be c aus e
it would
its pro du ct abroad,
at lower prices
m a n u f a c t u r e d here,
successfully.
price.
will
to sell
that
trade
of what
inte rn ati on al
$200
less
sells
than
in this
country,
in order to compete
its p r od uc t
in the
its own home marke t
in its objective,
and A m er i c a n
sell the same
The foreign firm,
its p ro duc t name becomes w i d e ly kn own
Un it e d
for
market.
un de rp ri c es
more
re al izing
in international
In the U n i t e d States,
product,
its pr oduct
c o mp e ti ti on with other
Perhaps
the fo reign firm elects
if only for a short
are assessed
imports of merchandise.
a foreign firm sells
in its home market,
prod uc ers ma y be
industry has been
A m e r i c a n firms
labor will
lose jobs
is u n i v e r s a l l y re c o g ni z e d as an unfair
trade practice.
7
If the Ta rif f Co mm is s io n finds
that A m er i c a n
has been injured by such foreign dumping,
the Treasury
In our h y po th eti ca l
ing margin would be $200.
collect,
the S e cre ta ry of
is req uir ed to impose dumping duties
to the dumping margin.
Therefore,
industry
U.S.
case,
eq ui valent
the d u m p
Customs w ou ld
in a dd iti on to the duty n o r m a l ly applicable,
$200 duty on each of the pr oducts
arriving at our docks.
The obj ective of the A n t i d u m p in g Act
any incentive
that
foreign
a
firms might
is to eliminate
otherwise have
to
dump their m e r c h a n d i s e on the Un i te d States market.
In a c o u n t e r va il i ng duty situation,
on the other hand,
subsidies are paid by foreign go ve rnments
on exports.
subsidies may be simple direct bounty payments,
frequently,
may be
the exporter.
which will offset
A
grants,
in the guise of other benefits
Again,
duties
are co ll ected
these un fair
or
to assist
in an amount
subsidies.
simple example of a c o u n t e rv a i l in g duty case arises
if a foreign e xp or ter receives
a gove rn men t
grant
on exportation of an item w hi c h he n o r m a l l y sells
United States
for
$1,000.
this item for $900
He
is then
in the United
in the Unite d States
subsidy payment,
being equal,
for $950.
in the
the
An A m e r i c a n
same
If it were not
the A m e r i c a n firm would,
be able to un der s e ll
of $100
in a p o s i ti o n to sell
States.
producer ma y have been m a n u f a c t u r i n g
by $50.
The
all
item for sale
for the
other condi ti ons
its foreign c o m p e ti t i o n
8
Because
of the subsidy,
now sud denly finds
can be u nd er s ol d
by $50
however,
the A m e r ic a n firm
itself in a situation wh ere
in the Un ited
-- this despite
the
its product
States by the foreign firm
fact that
forces had been allowed to prevail,
if normal market
the A m er ic an m a n u
f a c t u r e r ’s gr eater e ffi cie nc y wo ul d have pe rm it t e d
hold and pe rhaps
to increase
its
it to
fair share of the American
market.
If the Secr eta ry of the Trea su ry finds
b o un ty or grant
U ni te d States,
he
is re quired to impose,
to the bo unt y or grant
an additional
-- $100
to the
over and above
duty equivalent
in the case of our h y p o
example.
Un lik e
the A nt id u m p i n g Act,
is req ui r ed un der
Because
such a
is being paid or be s to w e d on exports
the no r m a l l y as sessed duty,
thetical
that
of injury
the pre se nt Co u n t er v a i li n g Duty Law.
the U n i te d States
ne ver had any
no de te r m in a t i on
Co un te r v a il i n g Duty Law has
injury provision,
of GATT for such a p ro v i s i on
the
international
is not ap pl icable
requirement
to the United
States.
The rati ona le
forward.
po s i t i o n
No U.S.
of the
firm,
to co mpete
is simply and
no m a t t er how efficient,
s u c c es s f u ll y against
a for eign government.
contracts,
statute
and Ame ric an
lose jobs,
is in a
the resources
Why should A m e r i c a n firms
labor
straight
lose
w he n Am erican
of
9
merchandise
is u nd e r p r i c e d by foreign c o mp et it io n not
through the oper ati on of normal ma rket
of subsidies
forces,
but be cause
given by foreign governments on exports
United States?
to the
Su bsi di z a ti on of exports by foreign g o v e r n
ments is rec og n iz ed as an un fa ir
international
practice and c o u n te r va il i ng duties
American produ ce rs
trade
are des ig ned to defend
and labor against these disr up tiv e
practices.
Proposed Am e nd me n ts
Duty Law
of A nt i d u m p i n g Act and C ou nt erv a i l in g
The Trade R e f or m Act of 1973 will,
number of si gn ificant changes
administering these two
The pri ncipal
be stated on the record.
producers and importers
exporters
in the A n t i d um p i n g Act
co nclu sions
a
for
as well
is a r e q u i r e
and the rati on ale
This will be helpful
therefor
to A m e r i c a n
as foreign m a nu f a c t u r e r s
and
in that they will be bette r able to obtain case-
by-case guidance as to what
also sets time
limits
const it ute s
9 months
in the normal
for more c om ple x decisions.
time limits were
dumping.
The
statute
for the co mp le t io n of T r e a s u r y a n t i
dumping investigations,
12 months
in pre se nt p ro ced ur es
make
statutes.
change
ment that all findings,
if enacted,
recent ly p r e s c r i b e d
Antidumping Regulations,
being fixed by statute.
this
case and
A l t h o u g h similar
in T r e a s u r y ’s rev is ed
is the first
time
they are
10
The Co unt er v ai li n g Duty Law wo uld be amended to
est ablish a 12 -month statutory time
decisions
in co unt e rv ai l i ng duty
p re sen t time
there
vai lin g Duty Law,
investigations.
is no deadline.
now applicable
limit for reaching
Secondly,
At the
the C o u n t e r
only to dutiable merchandise,
wo uld be ex tended to cover du ty -free me rc h a nd i s e
contingent
upon a Ta rif f Co m m is si on de t er m i n at i o n of injury to U.S.
industry.
existing
The exem pti on of du ty -free me rc ha n d i se
law makes
little
the K e nn ed y Round cuts,
when m a n y
natur e became duty free.
case
is essential
oblig ati on s
sense today,
The
from
e sp eci al ly after
items of a competitive
injury requi re men t
in this
from the standpoint of our international
and wo u l d be applicable
only for such time as
required.
Other amen dme nt s
to this
law would
Se cr et ar y of the Tr ea s u ry to re frain
pro du cts
au th orize
from counter va ili ng
a lr ead y subject to qu an ti t a t iv e
S ec re ta ry cons ide rs
In addition,
such
limitations
the
limitations
an adequate
if the
substitute.
the Se cre t a r y wo uld be given the discretion
to re fr ai n from a ss es si ng c o u nt e r v ai l i n g duties wh ere
action w ou ld result
econ om ic
Rat io na l e
interests
of U.S.
in a "signi fi can t detr im ent
to the
of the U n i t ed States."
A n t i d u m p i n g and C o u n t e r v a i 1 ing P u t y Policy
Be cause we r ep re sen t
and be c au se
such
the w o r l d ’s largest
of the open access
to our ma r ke t
co nsumer m a r k e t ,
traditionally
r m
11
allowed to foreign competition,
become a maj or
target
we have over the years
for foreign governments
and firms
willing to resort
to subsidies and dumping as a means of
underselling U.S.
pro duc ts wit h i n our own borders.
A liberal
not encompass
trade p o l ic y can have no m e an i n g
in the de fi ni t i on of liberal
of fair trade.
I firmly be lieve
allow unfair trade p ra ct ice s
are an impediment
United States.
to ever
to gain a foothold,
for they
to the open and fair trade po li cy
ignores
the
interests wo ul d be
ignored
of the
is firmly opp os ed to
interests
of A m e r i c a n producers,
American labor and the Am er ic a n consumer.
firms to ben ef it
trade the concept
it is a m i s ta k e
This A d m i n i s t r a t i o n
any policy wh i c h
if we do
if we were
And A m e r i c a n
to pe rm it
either th rough subsidies
foreign
or by r e sor ti ng
to dumping tactics.
Impact of Recent C u rr e nc y Re al ig n m e nt s
The A n t i d u m p i n g Act
realignments
and the
payments balance.
and abroad.
of the
ments was to p r o v id e
is also r e la te d to the recent curr en cy
improved o u tl oo k for A m e r i c a n b u si ne ss
and labor both at home
The obje cti ve
Let me explain how.
interna ti ona l
a be tt er Un it ed
We are
c u r r en c y r e a l i g n
States
seeking to re alize
which Am er ic an can co mpete more
abroad through a mo re
on Dum pi ng
and wo r l d
a vrorld in
e f fe c t i ve l y at home and
r eal is ti c p ri ce
structure.
As
a
12
result of the actions
competitive
products
taken,
American products
at home and abroad while
are less compe ti tiv e
are more
the prices
of foreign
in the United States
and
third markets.
As
I e xp la ine d earlier,
me r ch an di s e
is sold by a foreign exporter to a pu rchaser
in the Un it ed States
home market,
at a lower price than
and these
recent changes
to ce rtain
dumping no r ma l l y occurs when
sales
in the market
foreign
currencies
injure IJ.S.
in the e x p o r t e r ’s
industry.
rate of the dollar
have e ff ect iv ely
the home marke t price of foreign merchandise,
in dollars.
following
Thus,
sales at less
the changes
foreign exporters
in the market
take effective
to the exchange rate changes
the home ma rk et
in relation
increased
as expressed
fair value ma y occur
rate of the dollar unless
actions
to adjust prices
either by lowering
them in
or increasing them in the Un i te d States.
The A n t i d u m p i n g Act,
ments,
than
The
thus becomes
c o mbi ne d with the c u rre nc y realign
an effective
our b al anc e of pa yments p o sit io n
cu rr e n cy re ali g nm en t s
incentive toward
improving
and m a k ip g t h e recent
and d e va lu ati on s work.
The Ch ai rm a n of the Board of a large co rp o r at i o n
states
in a recent
letter to a senior A d m i n i s t r a t i o n
official
the reasons
for his c o m p a n y ’s improved competitive
p os it i o n
in r e l at io n to fo reign el ec tronics
firms.
13
’’The princ ip al reasons for this dr amatic t ur nar ou nd
were the Pr esi de nt' s insistence on a rev is ion
of the co m pl et e ly un fa i r exchange rates for the
dollar, and the A d m i n i s t ra t i o n 's insistence on
investigating and pr o c ee di ng against du mp ing of
our industry prod uct s and in vestigating other
government's export s u b s i d i e s . ”
This case d em on st rat es how recent actions of this
Administration are h el pin g to redress
international
the U n i t ed States
trade position.
Conclusion
We are
in a pe ri od of rapid change
trade and finance.
En ormous
techniques of international,
tasks
in international
still
monetary,
lie ahead.
New
trade and tax
management are being evolved by the
U n i t ed States and other
major trading nat ion s
Ne w international
of the world.
of fair play must be negotiated.
Act of 1973,
rules
Th r o u gh the Trade Re f or m
and the strict a d mi n i s t r a t i o n of our fair trade
laws and similar measures,
this A d m i n i s t r a t i o n
looks
forward
to a new era of p r o s p e r i t y not only for theU ni ted States,
for all people
everywhere.
but
IW MMiilllM IIIIII IIIiIHI.iiiiiiiiiwM
*■
psw
......... ...."""" "
DepartmentofthefREASURY
TH1EPH0NI W04-2041
POR
immediate r e l e a s e
May 17, 1973
TREASURY’S MONTHLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders for
|$1,800,000,000, or thereabouts, of 341-day Treasury bills for cash and in exchange
Ifor Treasury bills maturing
May 31, 1973
■The bills of this series will be dated
[May 7, 1974
, in the amount of $6,004,980,000.
May 31, 1973
, and will mature
(CUSIP No. 912793 SQO).
The bills will be issued on a discount basis under competitive and noncom
petitive 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 $10,000, $15,000, $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
»our, one-thirty p.m., Eastern Daylight Saving time, Thursday, May 24, 1973.
■Tenders will not be received at the Treasury Department, Washington.
■must be for a minimum of $10,000.
|p5,000.
Each tender
Tenders over $10,000 must be in multiples of
In the case of competitive tenders the price offered must be expressed on
Pile basis of 100, with not more than three decimals, e.g., 99.925.
pot be used.
Fractions may
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
pn application therefor.
I
Banking institutions generally may submit tenders for account of customers-
provided the names of the customers are set forth in such tenders.
Others than
Panking institutions wil^L not be permitted to submit tenders except for their own
pccount.
Tenders will be received without deposit from incorporated banks and trust
Companies and from responsible and recognized dealers in investment securities.
Penders from others must be accompanied by payment of 2 percent of the face amount
|
■^rea-sury bills applied for, unless the tenders are accompanied by an express
paranty of payment by an incorporated bank or trust company.
(OVER)
-
2-
Immediately after the closing hour, tenders will be opened at the Federal ReserJ
Banks and Branches, following which public announcement will be made by the Treasury!
Department of the amount and price,range of accepted bids.
Only those submitting
competitive tenderá 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 Renders for $200,000 or less without j
stated price from any one bidder will be accepted in full at the average price (in
three decimals) o*f accepted competitive bids.
Settlement for accepted tenders in
accordance with the bids must be made or completed at the Federal Reserve Bank on
May 31, 1973
, in cash or other immediately available funds or in a like
face amount of Treasury bills maturing
tenders will receive equal treatment.
May 31, 1973
.
Cash and exchange
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.
Under Sections 454(b) and 122l(5) of the Internal Revenue Code of 1954 th e amoui
of discount at which bills issued hereunder are sold is considered to accrue when th
bills are sold, redeemed or otherwise disposed of, and the bills are excluded from
consideration as capital assets.
Accordingly, the owner of Treasury bills (oth er th
life insurance companies) issued hereunder must include in his income tax re tu rn , as
ordinary gain or loss, the difference between the price paid for the bills, whether
on original issue or on subsequent purchase, and the amount actually received either
upon sale or redemption at maturity during the taxable year for which the re tu rn is
made.
Treasury Department Circular Wo. 418 (current revision) and this notice, pre
scribe the terms of the Treasury bills and govern the conditions of their is s u e .
Copies of the circular may be obtained, from any Federal Reserve Bank or B ran ch .
i
tO:
Mrs.
room:
M e l z er
2313
date
Department
of the Treasury
Office of the
V 17 Secretary
lie A f f o
F.Y.I.
tT
Attached is a transcription of
selected Q's and A's from Under
Secretary Volcker's appearance
before the Women's Bond Club of
New York, Wednesday, May 16.
VV y■o m Q w e b e r
^ 2325
2o 15
I
QUESTION:
Is there anything that the United States
should or could do at the present time to calm the situa
tion in the currency markets?
VOLCKER:
Well, there's only one basic answer to that
question, and I just think you've got to come back to it and
back to it and back to it all the time.
The most fundamental
thing we can do and the only thing really effective in the
long run deal with this inflationary problem at home and
deal with the balance of payments problem.
I think we're
working as hard as we can on those problems, and it's just
urgent that we keep that in front of us all the time.
There's no financial legerdemain that I know of or sleight
of hand that solves this problem unless we are dealing
with those fundamentals.
we are.
We've tried to demonstrate that
We come against this problem that whatever one does
today doesn't have .instantaneous results.
I am convinced
it's really the judgment of the market to make, that, when
one looks at any perspective of time, the American economy
is going to be in a strong position internationally
and our balance of payments is going to move back into
equilibrium, our trade position is going to move into
surplus.
One has to make his own judgment on that score.
I can give you my opinion and that's it.
I think there's
a lot of evidence to be brought to bear, but that's a
2
judgment that the market's going to have to make.and it
makes in effect everyday.
The best way I think we can help
them make that judgment isLby tending to our knitting in
these areas.
You know we've done a reasonably good job and
I don't think one should pleadrrelative performance in all
these problems because we're concerned about absolute per
formance as well.
But there is a certain relevance to
relative performance and one who looks at the situation over
the past couple of years relative to the problems other
countries had internally and otherwise, when one looks at
what has been done in the external area, I think there are
grounds for optimism.
QUESTION:
Mr. Volcker, what about the recent highering
of the price of gold?
Could this in any way lead to a
threatened devaluation of the dollar?
VOLCKER:
No, ma'am.
It leads to a lot of nervousness
in newspapers, apparently.
But, you know I don't means to
be lighthearted about it.
The monetary system, in my judg*^
ment, is not dependent upon gold.
We have been moving away
from reliance on gold in the monetary system, but gold is
a highly speculative commodity at this point.
But there is
a history that leads to some speculative influences that
are overlapping in one area or another.
The gold market,
among other things, is rather a small market.
Nonetheless,
3
the symbolism is there in some people's minds, and I think
this kind of recent development is one illustration of why,
in rebuilding the monetary system, we don't want it to rest
upon this kind of metal or any metal subject to this kind
of influence.
QUESTION:
Do you think that the dollar can withstand
this kind of pressure like we've had in recent times until
we ease the inflation at home without the United States
taking stronger steps toward some kind of solution?
VOLCKER:
The inflation, business at home is very im
portant, as I suggested, but I think we are not in perspective
doing as badly on that score as your question may imply.
QUESTION:
I don't think you understood me.
If the
dollar can withstand this pressure, this kind of pressure
that we're having at this moment until we solve our infla
tion problems, if there is anything else the United States
can do for faster easing of the pressure?
VOLCKER:
We are operating now within a framework of a
general consensus or agreement among various countries that
in the immediate exchange rate area that more "flexibility
ought to be permitted and that this kind of speculative or
other pressures that may develop in the short run situation
are perhaps best dissipated by letting them work themselves
out in the market.
That's one of the functions of a market,
- 4 -
to inherently set up counterforces to speculation.
I have
no reason to think that this is not the best, and I think
there*s been a general consensus that this is the best
arrangement that’s feasible during this interim period
while we*re working on the basic structure of the monetary
system for the much longer future and as our balance of
payments comes into full equilibrium which is fundamental
here.
But it's not going to happen tomorrow.
I think it's
moving in that direction; I think that's the evidence.
But
I can't move it there next week unfortunately.
QUESTION:
Are you suggesting that once you have obtained
the equilibrium
in our balance of payments, there's a
possibility that this will result in a return to fixed
parities?
[ Paraphrase of question ]
VOLCKER:
Well, we have made...our basic feeling about
this is reflected in the proposals that Mr. Shultz made at
the IMF meeting nine months ago now and that was basically
a convertibility system where in some sense stable or fixed
parities or central rates was kind of a center of gravity
of the system in the words that he has used, a center of
gravity.
Now this doesn't mean that it would not be a good
deal more flexible and elastic system than the vision of an
exchange rate fixed,forever.
We talked about fairly wide
margins around the fixed parities, we talked about options
5
for floating in particular situations and there would be a
number of elements of flexibility in this system.
But it
it true that it did contemplate and does contemplate in our
view a system in which there are still stated exchange rates
by most countries most of the time.
And we think that that's
a pretty widespread view around the world.
We think this is
the kind of system that most countries seem to want and it's
got some advantages.
Department
FOR
ofthefREASURY
n
May 18, 1973
immediate r e l e a s e
/
TREASURY’S WEEKLY BILL OFFERING
f
The Treasury Department, by this public notice, invites tenders for two series
of Treasury bills to the aggregate amount of $4,200,000,000, or thereabouts, for
cash and in exchange for Treasury bills maturing
of $6,004,980,000
May 31, 1973,
in the amount
as follows:
91-day bills (to maturity date) to be issued
May 31, 1973,
in the amount
of $2,500,000,000, or thereabouts, representing an additional amount of bills
dated March 1, 1973,
and to mature August 30, 1973
originally issued in the amount of $1,800,425,000
(CUSIP No. 912793 RS7)
the additional and original
bills to be freely interchangeable,
182-day bills, for $1,700,000,000, or thereabouts, to be dated May 31, 1973,
and to mature November 29, 1973
(CUSIP No. 912793
SF4).
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 $10,000, $15,000, $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 clos
ing hour, one-thirty p.m., Eastern Daylight Saving time, Friday, May 25, 1973.
Tenders will not be received at the Treasury Department, Washington,
must be for a minimum of $10,000.
$5,000.
Each tender !
Tenders over $10,000 must be in multiples of
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.
may not be used.
Fractions
It is urged that tenders be made on the printed forms and for- ;
warded in the special envelopes which will be supplied by Federal Reserve Banks
°n 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
(OVER)
-
account.
2-
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.
Immediately after the closing hour, tenders will be opened at the Federal
Reserve Banks and Branches, following which public announcement will be made
the Treasury Department of the amount and price range of accepted bids.
by
Only thd
submitting competitive tenders will be advised of the acceptance or rejection
thereof.
-Che Secretary of the Treasury expressly reserves the right to accept oi
reject any or all tenders, in whole or in part, and his action in any such respec
shall be final.
Subject to these reservations, noncompetitive tenders for each
issue for $200,000 or less without stated price from any one bidder will be accej
in full at the average price (in three decimals) of accepted competitive bids foi
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, 1973,
in cash or other immediately available funds or in a like face amount of TreasurJ
bills maturing
treatment.
May 31, 1973.
Cash and exchange tenders will receive equaj
Cash adjustments will be made for differences between the par value
maturing bills accepted in exchange and the issue price of the new bills.
Under Sections 454(b) and 122l(5) of the Internal Revenue Code of 1954 the
amount of discount at which bills issued hereunder are sold is considered to acc,
when the bills are sold, redeemed or otherwise disposed of, and the bills are ex
eluded from consideration as capital assets.
Accordingly, the owner of Treasury
bills (other than life insurance companies) issued hereunder must include in his
income tax return, as ordinary gain or loss, the difference between the price pa
for the bills, whether on original issue or on subsequent purchase, and the amoii|
actually received either upon sale or redemption at maturity during the
tax ab le
year for which the return is made.
Treasury Department Circular No. 418 (current revision) and this n o tic e ,
prescribe the terms of the Treasury bills and govern the conditions of their is
Copies of the circular may be obtained from any Federal Reserve Bank or
Branch
DepartmentoftheTREASURY
TELEPHONE WÛ4-2041
tSHINGTON. D C. 20220
FOR RELEASE AT 1 : 3 0 P . M . , EDT
MAY 1 9 , 1 9 7 3 _________________________
REMARKS BY THE HONORABLE WILLIAM E . SIMON
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
SECTION OF TAXATION, AMERICAN BAR ASSOCIATION
EMPIRE ROOM, SHOREHAM HOTEL, WASHINGTON, tD,,C...
SATURDAY, MAY 1 9 , 1 9 7 3
I am delighted to have the opportunity to discuss the
Administration's approach to tax reform with this distinguished
group.
The Section of Taxation of the American Bar Association
has for many decades contributed much to the legal profession.
easurj
It has also, through sound and intelligent assistance to the
equa|
alu e
Treasury Department and the tax writing Committees of the Congress,
contributed greatly to the continuing improvement of the Nation s
tax laws.
In the few months that I have served
I have become i n v o l v e d
in clu d in g
issu es,
the
th at i s
so
program ,
one
th at
im p o rta n t
the P r e s i d e n t
seek t o
a w ide
range
i n t e r n a t i o n a l m onetary
sta b iliz a tio n
ab le
in
"soak"
should aim t o
said
energy
I
have
to
us
serve
th e
&11,
roust b e f o r m u l a t e d w i t h
great
m,
p u b lic
trad e,
th e
1969
as
p o licy
th e
a
—
s u b je ct
"tax
'b re a k '
a w h o le."
care.
of
p o licy
to
th ese
and y e t
taxes.
such,
one
As
shou ld
any o t h e r
As
issu es,
econom ic
Of a l l
th e m ost com p lex,
is
g iv e
N ation
of
a n d many o t h e r s .
found
in .A p ril o f
any group o r
re'
here in Washington,
—
tax
not
it
p o licy
2
I would like to review with you the record of the Nixon
Administration in the area of taxes.
In so doing, we can
better understand this Administration's objectives with respect
to the tax law, our approach to changing the law, and the policies
we have pursued in the recent tax proposals.
I think you will
then see that we have continually sought genuine and major
improvement of the tax system to make it serve the Nation better;
not merely change for the sake of change; but change that will
result in a more equitable distribution of the tax burden.
The President committed himself to tax reform in the 1968
campaign, and within 100 days of his inauguration, he proposed
major and fundamental tax reform.
In so doing, two basic objec-
tives which underlie the Administration's approach to tax policy
became evident —
(1)
Tax Equity —
assuring that every person pays a
fair and reasonable share of the cost of his govern
ment and that when a citizen files his tax return
and pays a reasonable amount of tax, he does so with
renewed confidence that his fellow Americans are
doing the same.
(2)
Tax Simplification —
relieving the average American
taxpayer of the inordinate complexity in filing his
tax returns which is often a more onerous burden
3
than paying the tax itself and which must be eased
if our system of self“assessment and voluntary
compliance is to survive.
Underlying each of these objectives has been our desire to
foster sound economic growth.
The tax system must be conduc
ive to the stable growth of our domestic economy and the longrun improvement of our position in world markets.
Consistent
with our goals of greater tax equity and tax simplification,
we have pursued changes in the tax system which would make
American industry more competitive in world markets, resulting
in more jobs in our country.
We took important steps toward achieving these objectives
with the Tax Reform Act of 1969, which has been characterized
as the most substantive tax reform bill ever enacted.
We
pursued these goals further through the enactment of the Revenue
Act of 1971.
We restored the investment tax credit and liberalized
depreciation rules.
These changes have contributed greatly to
the resurgency of the national economy without compromising the
essential equity of our tax system.
IMPACT OF 1969 - 1971 ADMINISTRATION TAX REFORM
We are now just able to assess the full effects of the Tax
Reform Act of 1969 and, to a lesser degree, the Revenue Act of
1971, and although all of the pertinent statistics are not yet
available, Treasury estimates show that the tax reform and relief
provisions of the 1969 and 1971 legislation were extremely
4
p ro g ressiv e
in
.income t a x e s
th eir
w h ile
effect
and r e s u l t e d
in creasin g
corporate
in
red u cing
incom e
in d iv id u al
taxes.
For t h e f o u r c a l e n d a r y e a r s 1 9 6 9 t o 1 9 7 2 :
~~
C orporate
incom e
aggregate
of
In d iv id u al
aggregate
E xcise
have
E q u ally
to
197 2 , •th e
in
th e
made
lo w
in
duè
to
th e
nave
A ct o f
1971
th e
p ercen tage
and
1971
if
the
cla ss
and o v e r
w ith
high
th e
less
th at
had
incom e
cla ss
a d ju sted
has
had
gross
in
th e
lia b ility
1969
Persons
less,
were
1971
and t h e
in
sig n ifi
groups.
zero
in
1969
h a v e been
th e
to
Thus,
$3,000
t h a n they
Revenue
$10,000
and p e r s o n s
in
to
the
p e rce n t m ore.
expressed
in co m es
years
h a v e b e e n made
red u ctio n s
incom e
7-1/2
been
tax
h ig h est
tax
13 p e r c e n t
in
th e
th ere
persons
effe^ct.
for
Fu rth er,
Tax Reform A ct o f
in
in d iv id u als,
red u ctio n s
changes,
F u r t h e r , much c o n c e r n
citiz en s
and
su b sta n tia l
for
by an
b illio n .
fact
groups.
82 p e r c e n t
had n o t b e e n
8 1 5 , 0 0 0\‘ i n c o m e
$ 1 0 0 ,0 0 0
is
lia b ility
b y an
have d e c re a se d
affectin g
sig n ifica n t
had
p aid
m ostly
$ 3.5
in com e
in creased
b illio n ;
by
tax
1969
taxes
$ 1 8 .9
and
have
b illio n ;
decreased
m id d le
in c o m e 'c la s s
w oulc
of
taxes,
g reatest
in
$ 4 .9
in com e
income g r o u p s
the
in creases
as
taxes
pay
because
no
some
fed eral
income
5
tax.
These people are neither tax dodgers nor tax cheats.
Many of them pay no taxes because of various tax incentives
purposely enacted by Congress.
As important, however, is the fact
that a great majority of persons with high adjusted gross
income are paying tax.
In 1971 there were a total of
18,261 persons in the country with adjusted gross incomes of
$200,000 or more and 18,189, or 99.6 percent, of them
paid an average federal individual income tax of $182,000 —
a total of about $3.3 billion.
Thus, the wealthy as a group
are paying large amounts of federal income tax and more now
than they were before the enactment of the Tax Reform Act of
1969.
These figures reveal that this Administration has already
produced sound tax reform, the kind that more equitably spreads
the tax burden and avoids incentive-destroying tax levels that
would hinder economic growth and increase unemployment.
G R E A T E R E Q U I T Y A N D S I M P L I F I C A T I O N HAS OCCURRED.
The Administration's desire to improve the equity of
the federal tax structure and achieve simplification of the tax
law may be further illustrated in a number of different ways.
The Low Income Allowance.
A most significant step toward
greater equity was taken by the enactment of the Low Income
Allowance, which the President recommended and Congress adopted
in 1969 and which was updated in 1971.
Under this provision,
6
single persons with income of less than $2,050 and a family of
four with income of less than $4,300 did not have to pay federal
income tax in 1972.
It should be noted that the Low Income
Allowance is of considerable benefit to students who work during
their years of higher education since they often earn less than
the taxable income level of $2,050.
The Low Income Allowance
has removed from the tax rolls substantially all of those whose
incomes are below the poverty level.
Thus as a result of the
1969 and 1971 Acts, some 9.5 million tax returns, or 12 million
taxpayers, that owed tax prior to 1969 no longer owe tax.
This
represents about 13 percent of all the tax returns that would
have showed a tax due in 1972 had not the 1969 and 1971 Acts
been adopted.
Moreover, we significantly relaxed the withholding require
ments so that large numbers of persons who owe no tax —
example, the college students working in the summer —
for
will not
have to file returns to recover a refund of tax needlessly with
held.
I think that these steps represent major simplification
in the tax law and offered genuine tax relief to the young, the
elderly, the disadvantaged and the handicapped.
New Rate Schedule for Single Persons.
change in t h e
Another notable
1969 Act produced greater equity for single p e r s o n s .
Under previous law a single person's tax liability could be as
much as 40 percent above a married couple with the same income.
The 1969 A c t added a new rate schedule for single persons which
7
insured that in no.case would a single person's tax be more
a
s 1 c(s "i®h l a n e o nx b a d l i / B a x
than 20 percent greater than the tax payable by a married
°
X ijl Ja? 7 ? e 9 1 o-J Trípuoa sW .e a o n a x a la x q
couple with the same income.
**
” "*
a n q x a x v o s q p nivxoas^ xq entid ©mss
Increase.in Standard Deduction.
The regular standard
aapnarfo arid ,rioi/3 a A
. ridwoxp
deduction w^s increased from 10 percent of adjusted gross
...a. -iC .. .8$sxj> -o j-3 -dmx/íi s nx s a o n e x a ls t t q o x d x o a g a
income with a $1,000 ceiling to 15 percent of adjusted gross
©-»¿¿aid
íl o in o s ftn s'x j J.s’xenlm íxI b S i s o
income with a $2,000 ceiling for 1972 and after.
® ^
—~
As a result
j j , Ax.i.ifc q od a fcljjow djs¿id yew s dofta
of the 1969 and 1971 Acts, and primarily due to the liberalized
©BorfJ h i a s e a o i p n id s x a q o den i o
standard deduction, some 13 million returns which would have
o d s v x x q p rcxb irio n i
* a n o i d s s i it s p x o dqmaxa
itemized deductions in 1972 will be able to shift to the
..
i
Ti&hrtu. smoo ©veri s a n o id
standard deduction. . This is also a significant step toward
a"oxd9irE>«ifc e id & d iq s ffo p n x d o a l l s a s lir a arid
—
simplification.
DFS
eri;t d ao r ie s g o s od bsn sd rip xd
Increase in the Personal Exemption.
c-iu.i .'x u s i
As a further adjustment
q i e i i dBrid s a o rid goda do a
of the tax burden for individuals and in an attempt to achieve
w
&
4 etu&tí ©xqxdXí/mr g n i.a *7 do s o id o s x g arid
~~
greater equity in the tax law, the personal exemption was insJ fiB vo s $mhitu SÁ &3 cd f d o id s x o q x o D b a d s i l x l l s
creased from $600 in 1969 to $750 for 1972 and after.
-.-.o
78
-.ixl ©rid no a d s x x s d x a w o l arid do
uni;.
•; rr: p " i ó asw anroonl s d s x o q x o o
TAX PREFERENCES - FURTHER EQUITY
3SOXO
bad o l i d a ad saw s a a a o l m s l
20 asr; add
Whenever the subject ,of^xtaxesf:isT,.diso»&^ecte#tt(ehtion is
immediately focused on the so^ealletit i^preferentaensL' d m
income tax.
These ’preférence-s rare fmostocvarlíedrf:apsij bhetriá^tiBsn
depends on one's particular point of view.
t'"
rr¿
What is viewed as
P;p'i tr. .mpdxoqrnx n,s sbw d jCGI 19 sxríT
an unfair preference by one man is considered an equitable
_
•••" I r.
provision by another.
saxw 3X
a
i
yd ir/ps' x s d s s x p a v a l ríos od s i x s a b
The Administration's efforts in 1969
tin1dé I 4a a o n a x a d a d q do sax© axdd ridxw
8
resulted in considerable attention being focused on
preferences.
We sought to restrict tax avoidance while at the
§ame time preserving provisions which help stimulate economic
growth.
As such, the changes embodied in the 1969 Act affected
specific preferences in a number of areas. For instance,
ae-oip
l o Snoo'x&q ftf eft p«
certain mineral transactions were treated in
such a way that would stop artificial creation
of net operating losses in these industries;
exempt organizations, including private founda:OS
A "SJ
LtfW
*;•.*,;•
"v- , B .........
tions, have come under stricter surveillance;
-bihwOv; asJ'8' iilllDiSlrnfa
a n £ mifryHtiV --¿Vi-n
^
the rules affecting charitable deductions were
'
*
•, v< .\
tightened to screen out the unreasonable and yet
not stop those that help legitimate charities;
.
the practice of using multiple subsidiaries and
affiliated corporations to take undue advantage
of the lower tax rate on the first $25,000 of
corporate income was curbed; and
the use of farm losses was restricted in order
to curb-abuses in this area.
Further', the 1969 Act affected such areas as oil depletion,
real5estate depreciation and interest deductions.
This effort was an important first step in our continuing
desire to achieve greater equity in the tax law.
But in dealing
with this area of preferences, I think it is wise to be very
9
cautious and not hasty in" catling for the elimination of one
provision or the o t h e r f ^ f ^ r e ^ M ^ a l M y ^ ^ been many provisions
inserted in^fie°law' for:rpur|osesl;6f M S M a l i ^ ' ^ ï h V e ë t m e n t in
particular types of ‘property anif* o%^er° expenditures deemed
desirable for the national interest' because they act as induce
ments^ to private investment of expenditures1“ ‘Every'preferéndê
in the tax law serves to reduce tÈe tax tor those who take
advantage of it and also' reduces' the reVenue yield derived from
ssto
the tax.
Coke
ok icisjo fens e iiiiq x iii 1q 3 £sctr<i - rfoi^w :?s.
However, a decision must fee made as to whether the
9dS Xo i0 f lf l3 S
v lïû & il. Lij&tôb
benefits that flow from the existence of the’tax preference are
r !:?6 i jW s o n ib s s r i "êk&iî& h i % e & q t b ld x s q troy 5o
worth the estimated loss of revenue to the government.
zm
This
m ë & ÿ i x ÿ ÿ 'Ï ¿ q ‘ o ' pS i him-i &x <szbnu . x e x s s X ï’ & o f - y lX s x in s i sd u s
cost-benefit analysis is of primary importance to evaluate the
' v 't"■f f f
di M
feftB -y shod s o s ix © ;ix
desirability of the preference, and should be made at frequent
hix-jfi llh l
njjOooB "c i h i ' B'st s i , *
n-ox à s x fj- l n ïtàh& ehT
intervals as a matter of continuing concern.
In so doing, it
vn)hî% a la ' h t feftrjoiàioBd W ia h é ix e o id i 10 n o iltJB m o 'i, odd noqu
is important to realize that each of these preferences tends to
b is i bo* , X © Ï id *i ' xtei , vd inpe x&d l o
K&Tgozq beoh&t&d &
shift the burden of income tax from one taxpayer to another.
B'ë sk qX&ii *diwqiç- oJbfïïôfi&où s i S i x l s.03t 0$
"{p~xpDto z •hoi'dBv-r'
Since the government requires a certain level of revenue to
Is o o l ha& a f s ia
bo a e f â i l i ’-àeqso X â io n a h it è d î Bh&qiee ôab absan
finance its needs, the preference used by some taxpayers will cause
iïs sv:'a
sx
ed
n;I
uvidw Oj ajj^ooo'OTCT xorsîTî'
luu&ffl ns?
ss»lo
xsa srxs
w*» w
-.«
?«wdar VXXs
*
■*«v*.^«.*rnxavop
**
a shift of higher burden on those taxpayers who either do not
Ba&rirto D '
3 fir b o
h s s F h 'i i m h d b '' p a x i x x w
x si
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1973 TAX REFORM PROPOSALS
The President *s recent "Proposals for.Tax Change" are aimed
at furthering our goals of greater equity and simplification in our
tax system without sacrificing vital incentives for economic
growth.
The proposals represent a lengthy and careful study
by the Treasury Department,
In addition, the Ways and Means
Committee had previously concluded several months of hearings
in which panels of experts and public witnesses explored in great
detail nearly every aspect of the Internal Revenue Code.
Many
of you participated in these hearings which contributed
substantially to a clearer understanding of our tax system as
it exists today and how it can be made better.
The Administration Proposals take into account and build
upon the foundation of this extensive background in providing
a balanced program of tax equity, tax relief, and tax incentives
to facilitate economic growth, help meet the Nation's energy
needs and expand the financial capabilities of state and local
governments.
In all, there are eleven major proposals to which
we recommend that the tax writing Committees of the Congress
give their immediate attention.
In order to better understand these tax proposals, it is
important to keep in mind several general principles:
First, there is the amount of tax Americans are called
on to pay.
enough.
We feel that Americans are already taxed
The President has repeatedly taken the position
that a general tax Increase is both unnecessary and
11
l >3
undesirable and his tax proposals are essentially
neutral in their budgetary effect.
Second, there is the matter of who pays these
taxes? that is, the relative distribution of the tax
burden among citizens.
As I mentioned earlier, the
1969 and 1971 tax changes added considerably to the
progressive aspects of our tax system, and the recent
proposals add to this progressivity.
Proposals for property tax relief, the credit for
nonpublic schools tuition and the major simplification
of the average, person's tax return all will benefit
the lower and middle income Americans and will be off
set by the revenues from the Minimum Taxable Income
and Artificial Accounting Loss proposals which will
require those few individuals who are not now paying
a reasonable amount of tax to do so.
Third, there is the amount of the tax burden borne
by the capital which is necessary to permit us to modernize
and expand.
We exercised great care in developing these
proposals not to impair the ability of American
industry^ to compete effectively with the rest of the world.
All the proposals are important, including the property tax
relief and the tax credit for tuition paid to nonpublic schools,
which alone provide about $800 million of needed tax relief and
12
equity for low and middle income citizens.
The proposals
in the foreign area are of great importance and will play
a vital role in the overall program of the Administration
in strengthening our domestic economy.
And the proposal for
optional issuance of state and local bonds will be of great
importance to these governmental units.
However, I would like
to focus particularly on three of the proposals —
the minimum
taxable income and artificial accounting loss proposal, the
exploratory drilling credit and the tax simplification proposal.
The Minimum Taxable Income and Artificial Accounting
Loss proposal involves a bold step in cur effort to achieve
greater equity.
These proposals will affect a number of high-
income taxpayers who pay little or no tax.
Some of the causes underlying this- phenomenon —
the so-called "tax shelters" —
particularly
represent real economic in
efficiencies in which an undue emphasis has been placed on tax
losses instead of efficient operations which add to economic
growth.
A common characteristic of a uax shelter investment is
that it produces deductions and exclusions —
the early years —
the taxpayer.
particularly in
which may be used against other income of
The result may be an outright reduction in taxes,
an indefinite deferral of tax, or a conversion of ordinary income
into capital gain.
Sometimes these results are unintended and are caused by
the exploitation of tax rules which are sound in normal situa
tions.
Other times the results flow from rules deliberately
designed to provide tax incentives for particular activities.
Nevertheless, aspects of the "tax shelter" market have intro
duced significant distortions into our economy.
Preoccupation
with tax advantages -- particularly tax deductible "losses" —
too often obscures the economic realities and can have the effect
of discouraging profitable and efficient enterprise.
Inefficient
tax incentives available in the form of "artificial losses" to
investors in preferred types of properties may not
contribute effectively to the social objectives of the
incentives.
Our proposals are aimed at eliminating these situations
in order to increase the fairness of the tax system.
The basic
approach is to preserve all the tax incentives in the law as well
as the traditional exclusions and itemized deductions, which
serve good purposes and are important to tax equity? but in the
case of certain tax incentive and accounting rules, to shift the
emphasis away from investments which produce tax losses to sound
economic investments and efficient operations which produce in
come.
In order to achieve this result we have proposed that the
existing minimum tax be repealed for individuals and that it be
replaced by a Minimum Taxable Income provision and a Limitation
on Artificial Accounting Losses.
In general, the Minimum Taxa-
ble Income provision will deal with those tax items that are outright exclusions from income, and the Limitation on Artificial
14
Accounting' Losses will deal with those tax rules that provide
deferrals.
We have already heard a number of comments that the Minimum
Taxable Income proposal will have an adverse effect on such
worthwhile causes as charitable giving.
Further, concern has
been expressed that the Limitation on Artificial Accounting
Losses will greatly discourage certain needed investments,
such as those for the development of oil and gas reserves.
A close examination of the proposals, however, will show that
the effect of these proposals in such areas will not be drastic.
First of all, I think it is important to note the combined ful
year revenue impact of the Minimum Taxable Income and Artificial
Accounting Loss proposals, at 1972 levels of income, is estimated
at about $800 million, after taking into account repeal of the
present minimum tax on individuals which amounts to about $200 millj
With respect to the Minimum Taxable Income proposal, the prop
is estimated to affect about 130,000 people at most.^ The proposal
will reduce the charitable contributions of some of these people*
but the maximum possible reduction would be a small percentage of
total charitable gifts and is far less than the annual growth
in charitable giving from those persons not affected.
Specificall
total annual giving by individuals to charity is estimated to be
about $16 billion and the annual growth in charitable giving by
individuals alone is about $1 billion.
We currently estimate
total annual giving by those persons who would be affected by t
^¿T
- 15 Minimum Taxable Income proposal is about $850 million, of which
preliminary estimates show that about $350 million may
be affected.
Further, we estimate that the average
annual contribution to charity by individuals affected by this
proposal is about $8,000 to $10,000.
There will, of course,
be cases in which a particular charity is heavily dependent on
large gifts from one individual who may be influenced by this
tax provision to reduce his contributions, but we feel that
these instances will not be signficant and in the long run,
this provision will help preserve the still generous charitable
contribution provisions which remain in the law.
With respect to the Artificial Accounting Loss proposal
and its impact on oil and gas industry, I feel that exploratory
drilling should not be seriously affected.
I think that a
major impact of the proposal will be to shift investment
initiative away from ventures aimed at producing a tax loss
to those which will be economically successful.
If the explora
tory hole is productive, the intangible drilling costs may still be
written off against related income, and the tax savings will probably
be reinvested in another venture.
It is also important to note that
exploratory holes that are dry will get the same deductions as they do
now, except that the intangible drilling costs on year-end holes
not completed by December 31 will be postponed one year.
Therefore,
the proposal will probably result in earlier planning in order to
have wells completed rather than merely "spudded in" by December 31.
16
The Exploratory Drilling Credit.
Not only is it important
to understand that the Minimum Taxable Income proposal should
have a limited impact on investment in the oil and gas industry,
but it is also important to realize that we have proposed a new
Exploratory Drilling Investment Credit which should serve as an
added incentive to increased domestic exploration and development.
This credit is structured to reward success by providing a
greater credit for a commercially productive well.
In this way,
the Nation will be a guaranteed winner, for a successful well
will at the same time provide needed energy resources and also
increase the tax revenues.
This new credit extends to oil and gas exploration a proven
and successful tax incentive device; namely, the investment
credit restored in 1971 at the President's recommendation.
In
general, it allows a driller of a new domestic exploratory hole
to claim the seven percent investment credit on his intangible
drilling costs, and if the exploratory hole is productive, to
claim a supplementary credit of five percent.
In this way, the
new credit should more than offset any limiting effects of the
limitation on Artificial Accounting Losses.
The Tax Simplification Proposals.
The third aspect of our
new proposals that I would like to mention involves our continuing effort to simplify the tax laws.
These proposals represent
a unique and exciting approach which I am confident will enable
us to go a very long way, this year and continuing in the future,
17
toward really eliminating complexity for millions of average
individual taxpayers.
In testimony before the Ways and Means
Committee your distinguished Chairman, Donald MacDonald,
emphasized the importance of simplification and pointed out the
special committee of the Tax Section devoted to that and the
work you are doing.
A major part of the simplification program is in
Form 1040-S, and the common sense sort of approach it
represents —
to look at the tax return, to find ways to
simplify it, and then to try to amend the law to conform to
that.
The principle legislative changes to implement
Form 1040-S are the enactment of the Miscellaneous Deduction
Allowance, revision of the child care deduction, and the
substitution of an age credit for the present complicated
retirement income credit.
The other aspect of simplification —
importance —
also of major
is the project we have under way in working
with the staff of the Joint Committee on Internal Revenue
Taxation to redraft and simplify a large number of other Code
provisions which affect the average individual and which are
more complicated than they need be.
The Section of Taxation
can be of great help in that effort.
It is easy to call for simplification, but to actually
accomplish it is another thing.
Through a cooperative effort
18
by the Treasury and the Internal Revenue Service, we feel we
have taken major steps to simplify the preparation of tax
returns for the 75 million individuals who file them.
CONCLUSION
In conclusion, I would say that our new tax proposals
are the result of careful analysis in our continuing effort
to produce a tax structure that is more equitable and simpler
while sustaining sound economic growth.
In an environment
where respect for all law seems to be decreasing, we have sought
changes in the tax law which will strengthen its system of
voluntary compliance.
I feel our proposals will, if enacted,
bring about fundamental and major improvement in the law.
Obviously, they do not exhaust the possibilities for change and
as Secretary Shultz has said, we stand ready to work with the
Congress in other areas.
I feel we have made great progress,
and we will continue to reform our tax structure to make it
more equitable and efficient and to make it more responsive to
urgent social needs.
Thank you.
o 0 o
FOR IMMEDIATE RELEASE
May 21, 1973
GRANTS-IN-AID NOTIFICATION
TRANSFERRED TO TREASURY DEPARTMENT
President Nixon has authorized the transfer of
notification functions concerning grants-in-aid, now
performed by the Office of Management and Budget, as
required by section 201 of the Intergovernmental
Cooperation Act of 1968, to the Secretary of the
Treasury«
Notices to Governors, State legislatures
and other appropriate officials concerning such grants
will henceforth emanate from the Treasury Department*
The action is published in the Federal Register today.
oOo
S-206
DeportmentoftheTREASURY
IKGTOH. O C. 20220
TELEPHONE W 04-2041
MEMORANDUM TO CORRESPONDENTS:
May 21, 1973
Attached is a letter from Treasury Secretary
George P c Shultz to the President of the Senate
transmitting a proposed bill to increase the amount
authorized to provide facilities along the border for
the enforcement of the customs and immigration laws*
A similar letter was sent to the Speaker of the House0
oOo
THE S EC R ETA R Y O F THE TR EA SU RY
WASHINGTON
2 0 2 2 0
MAY 211973
Dear Mr. President:
There is transmitted herewith a proposed bill, "To increase
the amount authorized to be expended to provide facilities along
the border for the enforcement of the customs and immigration laws."
The proposed bill would increase from $100,000 to $200,000 the
existing limitation on the amount of funds that may be expended to
provide facilities for the enforcement of the customs and immigra
tion laws along our land borders. The acquisition of land and
the construction of buildings on behalf of Federal agencies is
usually undertaken by the General Services Administration. How
ever, Congress has authorized the Secretary of the Treasury alone
or in the appropriate instance in conjunction with the Attorney
General to expend funds for the construction of small facilities
on the Canadian and Mexican borders, where the collection of the
revenue and prevention of smuggling poses unique and difficult
problems. Effective performance of these missions requires a con
tinuation and acceleration of our program for constructing and
enlarging these border facilities. These facilities must invariably
be erected in remote places at a premium cost for both labor and ma
terials. Increases in cost which have taken place since the ceiling
was last raised in 1962 make the proposed increase essential.
There are enclosed an analysis explaining the provision of
the proposed bill and a comparative type showing the changes that
would be made in existing law by the proposed bill.
It will be appreciated if you will lay the enclosed proposed
bill before the Senate. A similar proposal has been transmitted
to the House of Representatives.
The Department has been advised by the Office of Management and
Budget that there is no objection from the standpoint of the Administra
tion’s program to the submission of this proposed legislation to the
Congress.
The Honorable
Spiro T. Agnew
President of the Senate
Washington, D. C. 20510
Enclosures 3
A BILL
To increase the amount authorized to be expended to provide facilities
along the border for the enforcement of the customs and immigration
laws
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled, That the Act
entitled "An act to provide better facilities for the enforcement
of the customs and immigration laws", approved June 26, 1930,
as amended (19 U.S.C. 68), is further amended by striking out
"$100,000" and inserting in lieu thereof "$200,000".
ANALYSIS
Under existing law (19 U.S.C. 68) the Secretary of the
Treasury and the Attorney General are authorized to expend from
the General appropriations of the Bureau of Customs and the
Immigration
and Naturalization Service such amounts as may be
%
necessary to acquire land and erect buildings, sheds, office
quarters, and living facilities which are otherwise unavailable,
at points along the Canadian and Mexican borders and in the
Virgin Islands, as an aid to the enforcement of the customs and
immigration laws, provided that the amount expended on any one
"» *
project, including the site, does not exceed $100,000. The
Attorney General is authorized to expend not more than $100,000
for similar purposes in Guam.
If a project is intended for the
joint use of the Bureau of Customs and the Immigration and
Naturalization Service, its combined cost including the site is
charged to the two appropriations concerned.
The proposed bill
would increase the maximum costs that may be incurred under
existing law to $200,000.
The proposed new ceiling of $200,000 is needed to meet the
increased costs of site acquisition and construction since 1962
when Congress last amended the Act entitled "An Act to provide
better facilities for the enforcement of the customs and immigra
tion laws", approved June 26, 1930, as amended (19 U.S.C. 68),
and to provide for future projected increases in these costs.
Border inspection facilities are usually erected in remote
2
areas immediately adjacent to the Mexican and Canadian international
boundaries.
Costs are influenced by the unusually great distances
that both men and materials must be transported to the Job site.
Often, the contractor is forced to provide either per diem or room
and board to his employees.
Subcontractors for plumbing, heating,
electrical, bricklaying, and carpentry services are reluctant
%
to bid on the projects because of the indeterminate factors
caused by the great distances the projects are removed from towns
and cities.
purposes.
As a result, most projects are "overbid" for protective
Building materials, in many instances, are required to
be hauled in over distances in excess of 500 miles.
In most instances,
water for construction purposes has to be trucked to the construction
site.
Often, potable water must be transported and stored in costly
facilities.
Extreme weather conditions, particularly along the
Canadian border where temperatures reach as low as U0° below zero
combined with the long winter season, increase
construction time.
In addition to these factors which increase construction costs,
a substantial increase in the cost of labor and materials has
taken place since the limitation of $100,000 was authorized.
These rising costs have resulted in a dimunition of the purchasing
power of the dollar so that the $100,000 available in 1962 is
equivalent to $58,000 today.
Costs for key materials and skilled
labor have increased 73# since 1962 while costs for key materials
and common labor have increased by 91# over 1962 levels.
These
increased costs coupled with new requirements for secondary
inspection areas, search rooms and public facilities have operated
to make the $100,000 limitation unrealistic.
Also to be considered is the fact that since FY 1962, traffic
crossing into the United States at the Mexican and Canadian borders
has increased by U3 percent.
These increases have in many cases
exceeded»the capacity of existing facilities, and have in other
cases created a need for new facilities.
A further factor contributing to the need for increasing the
$100,000 limitation is the alarming and unprecedented flow of
narcotics and dangerous drugs into the United States from abroad
during recent years.
The Administration’s top priority anti-narcotic
program has resulted in intensified Customs enforcement efforts
which is in some cases placing a severe strain upon Customs facilities.
Customs officers are making more thorough and an increased number
of primary and secondary searches of persons, baggage and vehicles.
Facilities to meet the demands of this intensified effort are
imperative.
When facilities are inadequate to meet the needs the
efficient and effective enforcement of the Customs and revenue laws
may be severely prejudiced.
The present Customs program for building new facilities and
expanding existing facilities must be continued and accelerated
if the Customs Service is to continue to efficiently and effectively
fulfill its mission of revenue collection and the prevention of
smuggling, while at the same time expediting the flow of border
traffic.
COMPARATIVE TYPE SHOWING CHANGES IN EXISTING LAW
MADE BY PROPOSED BILL
Changes in existing law proposed to be made by the bill are
shown as follows (existing law proposed to be omitted is enclosed
in brackets, and new matter is underscored):
THE ACT OF JUNE 26, 1930, AS AMENDED
To aid in the enforcement of the customs and immigration laws
along the Canadian and Mexican borders and to provide better facilities
for such enforcement at points along such borders at which no Federal
or other buildings adapted or suitably located for the purpose are
available, and for similar purposes in the Virgin Islands of the
United States, the Secretary of the Treasury and the Attorney
General are hereby authorized to expend, and for similar purposes
in Guam the Attorney General is hereby authorized to expend, from
the funds appropriated for the general maintenance and operation
of the Customs and the Immigration and Naturalization Services,
respectively, the necessary amounts for the acquisition of land, the
erection of buildings, sheds, and office quarters, including living
quarters for officers where none are otherwise available:
Provided,
That the total amount which may be so expended for any one project,
including the site, shall not exceed [$100,000] $200,000, and that
where the project is for the joint use of the Customs Service and
the Immigration and Naturalization Service, the combined cost of the
project, including the site, shall be charged to the two appropriations
concerned.
Department
___ n »
oftheTREASURY M
n n n n n
JsHINGTON, D C. 20220
ITENTION:
tci
cnuniic Miry
Imuh
TELEPHONE
W04-2041
U l—
FINANCIAL EDITOR
May 21, 1973
RELEASE 6:30 P.M.
RESULTS OF TREASURY'S
WEEKLY BILL OFFERING
The Treasury Department announced that the tenders for two series of Treasury
klls, one series to he an additional issue of the bills dated February 22, 1973 , and
le other series to be dated
May 24, 1973
, which were invited on May 15, 1973,
Ire opened at the Federal Reserve Banks today. Tenders were invited for $ 2,500,000,000
}rjthereabouts, of 91-day bills and for $1,700,000,000, or thereabouts, of
183-day
Ills. The details of the two series are as follows:
JGE OF ACCEPTED
1MPETITIVE BIDS:
High
Low
Average
91-day Treasury bills
maturing August 23, 1973
Approx. Equiv.
Annual Rate
Price
98.395 a/
98.358
98.369
6.349$
6.496$
6.452$
1/
183-day Treasury bills
maturing November 2 3, 1973
Approx. Equiv.
Annual Rate
Price
96.602 b/
96.558
96.570
6.685$
6.771$
6.748$
1/
a/ Excepting one tender of $10,000;b/ Excepting three tenders totaling $410,000
46$ of the amount of 91-day bills bid for at the low price was accepted
48$ of the amount of 183-day bills bid for at the low price was accepted
JTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
D istrict
Boston
¡few York
P hiladelphia
Cleveland
Richmond
Atlanta
Phicago
It. Louis'
Minneapolis
N s as C ity
Pallas
N F r a n c is c o
TOTALS
A p p lie d F o r
A c c e p te d
A p p lie d F o r
$
26,250,000
2,805,005,000
36^010^000
32,875,000
10,580,000
15,615,000
266,200,000
54,700,000
19,160,000
41,145,000
36,755,000
109,535,000
$
16,250,000
2,032,605,000
16,010,000
32^875,000
10,580,000
15,615,000
173,800,000
43,700,000
11,160,000
34,045,000
25,675,000
88,535,000
$
12,760,000
2,676,020,000
5,420,000
17,695,000
10,370,000
10,560,000
221,260,000
66,670,000
23,330,000
22,670,000
34,095,000
161,285,000
Accepted
|
2,760,000
1,479,620,000
5,420,000
17,695,000
5,370,000
9,350,000
69,560,000
38,650,000
9,330,000
13,510,000
14,095,000
34,740,000
$3,453,830,000
$2,500,850,000 c/
$3,262,135,000
$1,700,100,000 d/
Includes $220,985,000 noncompetitive tenders accepted at the average price'of 98.369
■^hicludes $ 97,065,000 noncompetitive tenders accepted at the average price of 96.570
IThese
• - - are
se —
rates are on a bank discount basis. The equivalent
coupon S'
issue yields
6.1
for the 91-day bills, and 7..08# for the 1 83-day bills.
ofthefREASURY
Department
&HINGTON D C. 20220
TELEPHONE W04-2Q41
FOR RELEASE UPON DELIVERY
Statement of The Honorable George P. Shultz
Secretary of the Treasury
Before the Subcommittee on Private Pension Plans
of the Senate Finance Committee
Tuesday, May 22, 1973, 10 a.m.
Mr. Chairman and members of this subcommittee, I am
pleased to be with you this morning to discuss pension re
form, and to support S. 1631, the "Retirement Benefits
Tax Act.”
This bill embodies the President’s proposals
for reforming and expanding the private means for assuring
retirement security for older Americans.
The fundamental concept of savings for retirement
is embodied today in the Social Security system.
Our
Social Security system is the largest system of its kind
in the world and one of the most effective and progressive.
However, Social Security in itself provides only a floor
of income security.
In order to assure a more adequate
income for older Americans, social security benefits must
be supplemented with benefits provided by the private pension system and by individual retirement savings.
In general, the private pension system has served us
well.
However, the system is not perfect.
Abuses exist.
Reasonable expectations are not always met and only half
S-207
2
of our work force is covered.
Furthermore, there is room
for substantial improvement in the federal laws dealing
with private retirement savings.
President Nixon’s pension Reform Message of April 11,
1973, calls for the enactment of two bills which would
substantially strengthen the private pension system--the
"Retirement Benefits Tax Act", S. 1631, and the "Employee
Benefits Protection Act", S. 1557.
These bills would go
far to accomplish the needed improvement.
The Federal government provides a substantial incen
tive to qualified private retirement plans by means of
special tax treatment in the Internal Revenue Code.
This
special tax treatment results in a major revenue loss,
amounting to $4 billion per year, or almost 2% of total
tax collections.
As a consequence, the government, and
the American public, have a strong interest in assuring
that the private pension system does the job it is in
tended to do,, and that the system is extended broadly
throughout the American work force.
Traditionally, since 1942, the bulk of Federal pension
regulation has been accomplished by the Internal Revenue
Service.
Presently, the basic provisions governing quali
fied retirement plans are found in sections 401 through
407 of the Internal Revenue Code.
In addition, since
1958 the Department of Labor has had an important role
in connection with the Welfare and Pension Plan Dis
closure Act, which requires reporting and disclosure
by welfare and pension plans, including qualified pension
plans, which cover more than 25 individuals.
The SEC
has also played a role, in connection with the securities
aspects.
However, the bulk of the regulation of pensions
has been by the Internal Revenue Service, which now has
a large staff of highly experienced and qualified pension
experts located in IRS offices throughout the country.
These are the experts in the subjects currently discussed
today in connection with pension reform; such subjects
as eligibility requirements, vesting, funding, plan ter
minations, and so on.
The Labor Department has a staff
of experts in both Washington and in the field who are
familiar with the subjects of reporting, disclosure and
bonding.
The approach of the Nixon Administration has been to
build on the existing expertise of the Treasury and Labor
Departments, using the Treasury Department in the area
of its current knowledge and the Labor Department in the
area of its current familiarity.
We believe it would be
a serious mistake to attempt to transfer jurisdiction in
either area to the Department which currently lacks the
expertise, personnel, and experience to handle matters
traditionally within the province of the other department.
For this reason, speaking as one who has headed both de
partments in question, I cannot concur in the proposals
- 4 which have been made to give jurisdiction to the Labor De
partment over vesting, funding, eligibility requirements,
or the like.
I
will limit my discussion today to the areas which
we feel are appropriate for administration by the Treasury
Department and which are dealt with in S. 1631, the
’’Retirement Benefits Tax Act.”
I understand that Paul Fasser,
Jr., Assistant Secretary of Labor (for Labor-Management
Relations), will discuss with you tomorrow the "Employee
Benefits Protection Act.”
Briefly, S. 1631 would:
(1)
provide minimum standards for vesting and
funding of benefits under qualified pension
and profit-sharing plans, and for participa
tion in those plans,
(2)
raise the limits on deductible contributions
that may be made to retirement plans estab
lished by self-employed individuals,
(3)
provide an income tax deduction for retire
ment savings by employees who are not covered
by employer-financed plans or who participate
in plans with inadequate benefits, and
(4)
make a variety of other improvements in the
present functioning of the private pension
system.
We have previously prepared and distributed a general
explanation of S. 1631 which we will submit for the record
in slightly revised form.
We are preparing a technical
explanation of the bill and a set of proposed technical
amendments to the bill, which we will also submit to you
in time for the publication of the record of these hearings.
i
In my testimony today I would like to review briefly each
of the principal topics of the bill.
1. Vesting Requirements and the Proposed Rule of 50
Under existing law, many employees now covered by
pension plans and expecting retirement benefits will lose
these benefits if they leave their jobs, either voluntarily
or involuntarily, prior to retirement.
The loss of ex
pected retirement benefits accompanying termination of
employment represents a grievous personal tragedy.
Vesting— defined as the right to receive retirement bene
fits even though the employee terminates employment before
retirement--would prevent this tragedy.
Under present
law, vesting is required under the Internal Revenue Code
only in plans covering self-employed individuals who are
owner-employees and certain other plans where vesting is
required to prevent discrimination in favor of officers,
stockholders, supervisory, and highly compensated employees.
Overall, in the United States, 68% of plan participants
have no vested rights--which means that, if they terminate
^ployment, they will receive no pension.
This percentage,
6
of course, includes many young employees with short ser
vice.
Many of them will remain with their current em
ployers and later obtain vested rights.
Many of them,
because they are young, will have an opportunity to obtain
vested rights as they move on to other employment and
participate in other pension plans.
However, an uncom
fortably large number of older workers do not have vested
rights.
With respect to the age of employees participating
in qualified retirement plans today, we find that—
62 percent of participants between ages 40 and 50
have no vested rights;
58 percent of participants between ages 50 and 60
have no vested rights; and
54 percent of participants who are 60 or more have
no vested rights.
The degree of vesting among older workers is particularly
critical, since if older workers terminate employment,
they will not have the same opportunity to obtain pension
rights elsewhere as younger workers.
The lack of adequate vesting and consequent hardships
from forfeitures have led to a clearly felt need for a
minimum vesting standard.
We have studied many different
possibilities in depth and have developed and recommend
to you for adoption a standard known as the "Rule of 50."
Under this rule, an employee^ benefit must be at least
50 percent vested when the sum of his age and years of
plan participation equal 50.
In the following five years,
the percentage vested must increase at least 10 percent
per year to achieve 100% vesting.
The new standards
would apply to newly-accrued plan benefits as they ac
crue,
starting with plan years after 1974.
As an illustration, a worker who begins to participate
in a plan at age 30, would become 50 percent vested when
he reached age 40, because his then age (40) plus years
of participation (10) would equal 50; and his accrued bene
fits would be fully vested 5 years later when he reached
age 45.
Further illustrations are given in Chart 1.
To complement the vesting proposal, the bill provides
minimum service and age standards for eligibility to
participate in a qualified plan.
In general, an employer
would not be permitted to exclude from plan participation
any employee who has attained age 30 and has worked for
the employer for at least 3 years.
However, an employer
would not be required to cover an employee who would
first become eligible to participate after he has attained
an age within 5 years of normal retirement age under the
plan.
Thus, if normal retirement age is 65, employees who
are over 60 when they first satisfy the other eligibility
requirements would not have to be allowed to participate.
8
The "Rule of 50" would be a major step in assuring
pension benefits, particularly among older workers.
Overall,,
it would raise the number of participants with vested
rights from 32 percent of all participants to 61 percent
of all participants.
But more important, among participants
age 40 and over, the percentage with vesting would rise
from 40 percent to 92 percent.
Thus, the "Rule of 50"
would assure vesting of retirement benefit rights for
virtually all older plan participants.
See Chart 2.
Because it concentrates particularly on the vesting
problem of the older employee, the cost of the Rule of 50
is reasonable.
We estimate it would raise overall pension
costs by 2.4/o in contributions or 0.15% of covered payroll.
Even in the extreme case of plans currently providing no
vesting before retirement, we estimate it would increase
plan costs by 7.6% in contributions or only 0.38% of
covered payroll.
In terms of average cost per hour per
covered employee, the costs would be increased by threequarters of a penny per hour on the average for all plans,
and 1.86 cents an* hour on the average for plans with no
vesting now.
See Chart 3.
The Rule of 50 also holds cost down because it ap
plies only prospectively.
The limited cost involved in
this solution to the vesting problem is extremely important
because, to the extent employer contributions must be al
located to the cost of vesting, the level of retirement
income that can be provided under the plan would be reduced
for those who remained employed until they retire.
A
balance must be struck among the various considerations.
We believe the Rule of 50, which protects primarily the
older worker without increasing cost unduly, strikes the
proper balance.
We have studied carefully other vesting
proposals that have been advanced but have found that they
may be more costly, may not concentrate as well on the
problem of the older worker, or may not benefit the employee
who works in short term employments throughout his work
career.
We have carefully considered whether the Rule of 50
would seriously affect the hiring of older employees and
have concluded that it would not do so.
We find that the
discounted single-premium cost of providing $100 of retire
ment income at age 65 for a worker who begins to participate
at age 55 is $570 if no vesting is provided, and the cost
rises only $15 to $585 if the Rule of 50 is operative.
10
The net increase due to vesting is actually greater for
younger workers; for example, at age 35 the cost of the
retirement income is $125 without vesting and $155 under
the Rule of 50.
The reason why the cost increase due to
vesting is greater for younger workers is that the employee
turnover rate is considerably higher at the younger age
levels than at the older.
There would actually be no cost
for vesting if all employees stayed until normal retirement
age.
Thus, the net effect of the Rule of 50 is to reduce,
rather than increase, the existing pension cost disparity
which might tend to favor the hiring of younger workers.
However, even for younger employees the cost is not
excessive.
See Chart 4.
Vesting for Self-Employed Plans. Under present law,
a plan benefiting a self-employed person who is an owneremployee must include any employee with at least 3 years
of service, and his rights must be fully vested.
The
vesting and participation rules result in vested rights
for many young workers who have short periods of service.
Their benefits are generally small, and the administrative
costs of handling these cases are relatively high.
We
recommend some relaxation of these requirements.
The proposed legislation would provide that, in selfemployed retirement plans covering owner-employees, an
employee would become 50% vested when he qualified under a
11
-
"Rule of 35", that is, when his age plus years of partici
pation total 35.
As in the case of the Rule of 50, his
vesting would have to increase by at least 10% a year to
100% over the next five years.
Such an employee could be
required to have as much as one year’s service before
being eligible to participate in the plan, or two years’
service if he is between age 30 and age 35, or three years’
service if he is under age 30.
Thus, under present law, in the case of plans estab
lished by self-employed persons who are owner-employees, an
employee hired at age 20 must begin to participate and become
fully vested at 23.
Under the proposed legislation, he must
begin to participate at 23, must become 50 percent vested
at 29, and fully vested at 34.
An employee hired at 35
would become 50 percent vested at 36, when he begins to
participate, and fully vested at 41.
Definition of Accrued Benefit. For any vesting re
quirement to be effective, there must be a definition of
"accrued benefit."
Vesting is relevant only when an em
ployee leaves his job prior to retirement.
Vesting refers
to the percent of the employee’s accrued benefit which he
12
receives if he leaves his job prior to retirement.
How
ever, a high percentage of vesting can be small comfort
if the accrued benefit is a small amount.
For a profit-sharing plan and a money purchase pen
sion plan, the accrued benefit is easy to define; it is
the balance in the account at that time.
However, for a
defined benefit pension plan, the question is a more dif
ficult one.
Other vesting proposals would leave the defini
tion of accrued benefit to regulation.
However, we believe
that the matter is so fundamental that it should be speci
fied in the statute.
We have developed a definition which
calls for essentially a straight line accrual.
The rule
is that an employee's accrued benefit, as of any applicable
date prior to normal retirement age, is expressed as a
fraction of the annual benefit commencing at normal re
tirement age which the employee would receive if he con
tinued employment at
his current rate of compensation
until normal retirement age.
The numerator of the fraction
is the total number of his years of service with the em
ployer.
The denominator is the total number of years of
service he would have performed as of normal retirement
if he continued to be employed by the employer until
13
normal retirement age.
However, the denominator would not
be less than 15 nor more than 40.
For example, an em
ployee who is hired at age 35 and loses his job at age 50,
half-way to a normal retirement age of 65, would be deemed
to have accrued one-half of the benefit he would have re
ceived under the plan if he had remained employed at the same
salary until he was 65.
2.
Minimum Funding Standard
The basic expectation of a participant in a defined-
benefit pension plan is that when retirement age arrives,
pension benefits will be paid out according to the terms
of the plan.
To give this assurance, it is essential
that an employer contribute to the plan the money that
will eventually be needed to pay the benefits.
Most plans
today are adequately funded, and the amount of benefit
losses on plan terminations is minor in relation to the
overall volume of pension benefits paid out.
During the
first seven months of 1972, for example, 3,100 employees
lost $11 million of vested benefits as a result of termina
tion of underfunded plans.
While this is a small fraction
of $10 billion of benefits paid out in 1972, this is small
consolation to the affected employee, who had been promised
a pension and found that the promise was not to be fulfilled.
14
Federal law at present provides no explicit statutory
funding standard, although a funding standard has been
developed administratively for use in determining whether
or not a complete discontinuance of contributions has
occurred.
The bill would augment this minimal protection by an
additional requirement to fund annually at least 5% of
the unfunded vested liabilities under the plan.
This is
similar to the standard required by the accounting pro
fession for financial statements.
This provision of the bill would be effective for
plan years beginning after December 31, 1973.
Because of
problems some plans— particularly collectively bargained
multi-employer plans— may have in meeting this standard,
it may be advisable further to delay this effective date
until the end of the term of the current collective
bargaining agreement.
Other proposals have been made to require all past
service costs, whether or not vested, to be funded over
a fixed period, or to require the funding of vested liabil
ities to have attained specified percentages at specified
times.
We believe that the government should insist on
15
the funding of liabilities as they become vested, since
these vested liabilities represent promises to the em
ployees which should be backed up with cash.
We do not
believe the government should insist on the funding of
all liabilities in view of the larger additional costs
thereby imposed, which may be reflected in less adequate
pensions.
We further believe that a funding standard
should be simple in concept, simple to administer and
should not be so inflexible as to require waivers of the
standard in those cases such as declining industries where
the standard is most needed.
3.
Increase in Contribution Limits for the Self-Employed
Present law limits contributions to qualified pension
and profit-sharing plans made by self-employed individuals.
The self-employed are subject to a limit of the lesser of
10% of earned income or $2,500 per year on deductions for
retirement savings. No such limits apply to employer con
tributions on behalf of corporate employees.
As a con
sequence, corporate employees have substantial tax benefits
as compared with self-employed individuals.
This and
other disparities have discouraged the formation of selfomployed plans and have encourage many self-employed in
dividuals to incorporate their business to avoid these limi
tations.
16
The tax law should not require self-employed in
dividuals to incorporate merely to obtain greater retire
ment deduction benefits.
For a small business, incorporation
can be expensive and uneconomic and may lead to unnecessary
administrative difficulties.
And once incorporation has
taken place, qualified plans will frequently involve de
ductible contributions of greater than $7,500 per year for
the owner-employees, thereby leading to substantial
revenue loss.
To reduce the existing inequity between unincorporated
and incorporated businesses, the bill would raise the de
duction limit for the self-employed to the lesser of 15%
of earned income or $7,500 per year.
The limitation on
excludable contributions on behalf of shareholder-employees
r
of Subchapter S corporations contained in section 1379(b)
of the Internal Revenue Code would also be increased to
this level.
We estimate that this proposal would involve a max
imum revenue cost of $70 million in the first year of
operation, rising to $140 million in subsequent years.
However, because this proposal may forestall incorporations
and the establishment by such corporations of plans with
deductible contributions in excess of $7,500 per year, this
estimate may be overstated.
In fact, there even may be an
actual revenue gain.
The proposal would reduce the tax motivation to in
corporate where insufficient business reasons exist for
such incorporation.
In addition, it would promote the
growth of self-employed plans and have a beneficial im
pact on the coverage of employees of nonincorporated
enterprises and on their level of benefits.
4.
Employee Deductions for Voluntary Retirement Savings
About half of the full-time private non-agricultural
adult work force is covered by private retirement plans,
and the average annual private pension benefit is about
$1,700.
Unfortunately, the other half of this adult work
force is not covered today, and many of those covered do
not have sufficient retirement benefits.
We believe it
is of prime importance to offer a remedy for the millions
of employees who are not covered or are inadequately
covered by employer plans.
The Retirement Benefits Tax
Act would do this by providing income tax benefits to en
courage and assist these employees to save for their
retirement.
18
Under present law, employer contributions on behalf
of an employee made to a private qualified retirement plan,
and the investment income on these contributions, are
generally not subject to tax until paid to the employee
or his beneficiary.
Yet, compensation set aside for re
tirement by an individual employee independently, as well
as investment earnings on those savings, are taxed cur
rently as they are earned.
As a consequence, present law
discriminates against those individuals who do not partici
pate in employer-sponsored qualified plans or who
participate in plans providing small benefits.
Under the
Retirement Benefits Tax Act, employees not covered by
employer plans would be allowed to establish their own
ied retirement accounts and take an income tax de
duction for contributions up to 20% of their earned income,
with a maximum deduction of $1,500 per year.
The proposal
would extend also to employees who are covered by employerfinanced plans to assist those employees if the employer
contributions are not adequate to provide sufficient re
tirement earnings.
To accomplish this, the limit on the
amount deductible by the employee would be reduced to
reflect pension plan contributions made by the employer.
For this purpose, the employee could assume that employer
contributions amount to 7 percent of his earnings, but he
would be permitted to show, under regulations that would
be provided, that the employer contributions were in fact
a lesser amount, if such were the case.
In the case of employees who are not covered by
social security (such as certain government employees),
the deductible contribution limit would be further re
duced by the assumed amount of employee*s social security
tax that would have been Imposed had the employment been
covered by social security.
This reflects the fact that
social security tax is not deductible.
To permit a de
duction of retirement contributions without an assumed
social security tax offset for those not covered by social
security would discriminate against those covered by social
security.
Individuals would be permitted to invest their retire
ment savings in a broad range of assets, including stocks,
corporate or government bonds, savings accounts, mutual
fund shares, annuity contracts, and life insurance con
tracts.
Participants in qualified employer-sponsored re
tirement plans could make their investment for retirement
savings by contributing to these plans.
20
The proposed limitations on the amount of deductible
contributions direct the tax benefit primarily to low and
moderate income workers.
Yet, the permitted contribu
tions would provide substantial amounts of retirement in
come.
For example, contributions of $1,500 annually be
ginning at age 40 would produce an annual pension of
$7,500 per year beginning at age 65, assuming a 5%
interest rate.
See Chart 5.
The permitted contributions level is not so high,
however, as to undermine the incentive in existing law
for the creation and maintenance of employer-financed
retirement plans that cannot discriminate in favor of
employees who are officers, shareholders, or supervisory
or highly compensated employees.
The employer-financed
non-discriminatory plan is the heart of the present private
pension system and should be maintained.
The bill provides for a deduction from income, rather
than a credit, in order to put the employee who estab
lishes his oxm plan in approximately the same position
as the employee who participates in an employer-financed
plan.
We propose that the employee deduction provision should
be effective beginning in 1973.
However, we have revised
upwards our revenue estimates with respect to this proposal on
the basis of better data.
Because of the budgetary impact,
and because the year is almost half over, we propose that the
deduction for 1973 be limited to one-half the full year*s
deduction available for subsequent years.
The technical
amendments we are submitting would make this adjustment.
We
estimate that approximately 15 million individuals would be
eligible to benefit from this proposal for deductible em
ployee contributions.
The revenue cost of the proposal is
estimated at $375 million in the first year of operation
and at $800 million in the second year.
It is estimated
that 56% of the tax benefits will go to persons with income
below $10,000 and 88%, will go to persons with income below
$15,000.
5.
Roll-over Provision
Under existing law, if a lump sum distribution is
made under a qualified retirement plan, the distribution
is subject to income tax.
The distribution is taxed
even if received by an employee before his retirement
and set aside by him for his future retirement security.
Often, if an employee leaves his employer for a new job
under circumstances where he has a vested right to retire
ment benefits from his first employer, his retirement
benefits will be distributed to him in a lump sum at the
time he leaves his first employer.
This is convenient
for the employer, because he thereby avoids continuing to
administer funds for the benefit of a former employee.
However, because of the income tax payable at that time,
the employee will have a smaller fund available for his
22
retirement years.
On the other hand, an employee who,
throughout his working career, is employed by a single
employer, will typically avoid any tax on his retirement
funds until actual retirement.
Such a result creates an
inequity between employees who work for only one employer
and employees who are more mobile.
Under the bill, an individual would not be subject
to tax upon receipt of a lump sum distribution if he rein
vests the funds in a qualified individual retirement ac
count or a qualified employer-sponsored retirement plan
within 60 days after the close of the employee*s taxable
year.
If the individual receives the distribution in
property, other than cash, he would have to contribute
the same property in order to take advantage of this tax
deferral opportunity.
The proposal would encourage re
tirement savings by enabling an employee to defer taxation
of this amount until retirement.
6.
Prohibited Transactions
Under present law, a trust maintained under a quali
fied private retirement plan is denied exemption from
taxation if it engages in a prohibited transaction.
23
Prohibited transactions are defined in section 505(b) and
(g) of the Internal Revenue Code.
Generally, a prohibited
transaction is a transaction between the trust and the
employer or a related person which results in a diversion
of assets from the trust to the employer.
If exemption from taxation is denied to the trust,
special benefits affecting the employees are denied.
The
employees will be ta>:-*d on their vested interests in the
trust before it is distributed to them, their retirement
benefits will be decreased by taxes paid on the trust in
come, and the special averaging provisions with respect
to lump sum distributions will no
longer be available.
The denial of a trust’s exemption from taxation has
not been a satisfactory deterrent to participation in pro
hibited transactions.
An employer, in need of working
capital or in a failing financial condition, may find it
advantageous to forego a deduction for any contribution
made to a plan in order to divert trust assets to his own
use.
In far too many instances, the fiduciary of the trust
acquiesces in the employer’s demand to divert assets to the
detriment of the employees.
In many cases, the consequences
of the denial of exemption fall upon innocent employees.
- 24 -
The sanction against prohibited transactions should
be directed only against those who participate in such
transactions.
An employee who is a stranger to the trans
action should not be penalized.
Accordingly, the bill
follows an approach similar to the approach of the Tax Reform
Act of 1969 with respect to private foundations.
Excise
taxes would be imposed on the amount involved in a pro
hibited transaction.
The taxes would be paid by any
party in interest who is a participant in the prohibited
transaction.
of 5%.
2 0 0 /o
An initial tax would be imposed at the rate
An additional tax would be imposed at the rate of
if the transaction is not corrected within 90 days
after a notice of deficiency for such tax is mailed.
Under the bill, prohibited transactions would be de
fined in the same manner as acts which are prohibited by
the Employee Benefits Protection Act.
Thus, there would
be a uniform application of the tax law and the law relating
to fiduciary standards.
Furthermore, the effect of this
definition would be to extend the fiduciary standards of
the Employee Benefits Protection Act to qualified private
retirement plans that are not covered under that Act, for
example, to qualified plans covering fewer than 26
participants.
- 25 -
7.
Employees Covered under Collective Bargaining Agreements
Under existing law, a qualified private retirement
plan must cover either such employees as qualify under a
classification which does not discriminate in favor of
officers, shareholders, or highly compensated employees,
or specified percentages of employees.
In addition, con
tributions or benefits under the plan must not discriminate
in favor of those participants in the plan who are officers,
shareholders, or highly compensated employees.
In many cases, employees covered under a collective
bargaining agreement prefer current compensation or other
benefits to the benefits provided under a qualified plan.
Thus, many employers are unable to establish a plan for
other employees because the percentage requirement cannot
be satisfied if the bargaining unit employees are not
covered.
In other cases, the exigencies of the bargaining
situation may dictate adherence to a union plan, and the.
benefits provided thereby will effectively preclude a
better level of benefit for non-bargaining unit employees.
This deprives the employer of flexibility in fashioning
compensation packages tailored to meet the needs of the
non-union employees.
26
Under the bill, employees who are included in a unit
of employees covered by a collective bargaining agreement
may be excluded for purposes of satisfying the coverage
requirement, unless such agreement provides that the em
ployees are to be included in the plan.
Under the tech
nical amendments we will submit, such employees may also
be excluded for purposes of satisfying the discrimination
requirement.
8.
Trustees and Custodians
Under existing law, the trustee of a trust forming
part of a retirement plan benefiting an owner-employee
must be a bank, trust company or building and loan
association.
Furthermore, a custodial account may be
treated as a trust if the custodian is a bank, trust
company or building and loan association, and if invest
ment of the funds is either solely in mutual funds or
solely in annuity contracts.
Under the bill, any person who demonstrates that he
will hold the assets consistently with the requirements
for qualification may be a trustee for a plan benefiting
an owner-employee or a custodian for any plan.
The
restrictions relating to investment by custodians would
be eliminated.
This provision is identical with the cor
responding requirement the bill would establish with respect
to qualified individual retirement accounts.
0
27
9 ♦
L
l
Time when Contributions Deemed Made
Under existing law, a taxpayer who reports his income
on an accrual basis may deduct contributions made after
the close of the taxable year, if they are made prior to
filing a tax return for that year.
This rule is desirable
since in many cases it is impossible to determine by the
end of that year the amount which can be contributed under
the plan for the year.
Under the bill, this rule would be extended to cash
basis taxpayers.
10.
inclusion of Certain Employer Contributions in Gross
, .Income
Under existing law, except, in the case of a share
holder-employee, of an electing small business corporation,
there is no limit upon the amount which may be contributed
under a qualified private pension plan on behalf of the
employee and which may be excluded from gross income by
that employee.
Furthermore, there is no meaningful limita
tion .on, the deductible amount which may be contributed by
an employer under a money purchase pension plan.
Under
the bill, an employee would be required to include in his
gross income currently the employer contributions made on
his behalf under a money purchase pension plan to the ex
tent in excess of 20% of his compensation.
28
Before concluding, I would like to turn briefly to
two other subjects being discussed currently in connec
tion with pension reform--portability and termination
insurance.
Portability
Proposals have been made to provide a national system
of pension portability.
admirable.
The theory of portability is
The idea is that when an employee leaves one
employer for another, he should be able to transfer his
pension rights from the first employer to the second em
ployer.
Unfortunately, the theory breaks down when one
considers the vast differences between the vatious retire
ment plans which are being maintained today.
As a partial answer to this problem, it has been sug
gested that the portability system should be voluntary.
I am afraid that gets us no further, since it is possible
today for employers to agree voluntarily to allow pension
rights to be transferred.
In our judgment much of what the advocates of port
ability want is, in effect, provided by two provisions
in the Retirement Benefits Tax Act.
First, the minimum
vesting requirement of the Rule of 50 partially achieves
the basic aim of portability--that pension credits not be
lost when an employee transfers from one employer to another.
Second, the roll-over provision of the bill provides the
assurance that a lump sum pay-out from a former employer
may be reinvested for retirement security without payment
of extra taxes.
In addition, the provision for qualified individual
retirement plans would permit an employee to set up his
own plan which would move with him from one job to another,
whether or not either employer maintained a retirement
plan.
And, under-the qualified individual retirement plan
provision, funds could be transferred tax-free from one
investment medium to another--another element of portability.
Termination Insurance
It has been suggested that a government-sponsored
termination insurance program should be established to
assure that no workers or retirees suffer termination
losses.
We have given this proposal thorough considera
tion, but we have not recommended it.
30
In December of 1971 President Nixon directed the
Departments of Labor and Treasury to undertake a study to
determine the extent of benefit losses arising from pension
plan termination.
It was the purpose of the study to
obtain the information needed to determine what Federal
policy should be on funding, the nature of the employer's
liability, and termination insurance.
An Interim Report
on this study was completed in February.
This study found
in general that there are significant losses upon plan
terminations but that these losses are small in relation
ship to the benefits paid under the private retirement
system.
Considerable effort was exerted to study the in
surance plans which have been proposed and to attempt to
devise a better one.
It is not easy to develop an insurance plan which
would reduce the benefit losses significantly without pro
viding government regulation of pension plans, business
practices and collective bargaining on a scale which is
completely inconsistent with the amount of benefit losses
now being experienced.
We attempted to develop such a
plan but found ourselves forced into provisions imposing
regulatory requirements on all pension plans, the impact
of which requirements would have been clearly disproportionate
to the scope of the problem as actually experienced.
To be
truly effective, an insurance system would have to insure
all vested benefits without limitation.
However, such a
system without any controls would be highly susceptible to
abuse.
As abuse controls are built into an insurance system,
the degree of coverage decreases and the degree of govern
mental interference increases.
Accordingly, we have con
cluded that, on balance, no insurance system is preferable
to any insurance system we have studied or have so far
been able to devise.
We have not abandoned the idea.
We are continuing
to study it, and would be happy to discuss the insurance
problems with you and your staff in the days ahead.
I appreciate the opportunity to have appeared before
you today to urge passage of the Retirement Benefits Tax
Act.
As I have explained, the Administrations pension
reform program would strengthen the private retirement
system by curbing abuses and encouraging the expansion of
the system.
It would increase the coverage of retirement
32
plans to a greater number of employees and would provide
for more equitable treatment between the self-employed
and those employed by others.
It is a very significant
and important program which deserves the support of this
Committee and of the Congress, and I commend it to you
for your consideration.
Thank you.
50% vested when age plus years of participation in a plan equal 50;
10% more each year thereafter.
OPERATION OF RULE OF 50
Years of Service
Age
(1 )
At
entry
(2)
At
participation
date*
(3 )
At 5 0 %
vesting
(4 )
At full vesting
(5 )
To acquire
full vesting
(6)
To acquire
5 0 % vesting
20
30
40
45
25
20
2 8 -^ 0
30
30
40
45
20
15
33
42
47
17
12
S i - 30
40
38
44
49
14
43
47
52
12
OMlçei. s »
48
49
54
9
50
53
53
58
55 r
58
58
63
8
8
60
6 3 **
—
—
-
— —*
inimum participation standard: Must participate at age 30 and three years service.
2ed not participate if age is five years less than normal retirement age.
53
9
7
.jg
4
3
3 .
Chart 2
EFFECT OF RULE OF 50 ON VESTING
PERCENT NOW
VESTED *
PERCENT VESTED*
UNDER RULE OF 50
19%
19%
25-30
23
23
30-40
26
36
40-50
38
82
50-60
42
100
>0 or more
46
100
AGE
Under 25
All age groups
I
32%
P a rtic ip a n ts in p la n s w h o are at least 5 0 p e rce n t vested.
61%
V
U N D E R RULE OF 50
I
COST INCREASE AS:
1
% Increase in contributions
%-•*•
'
¿1
PLANS
. s3f f5 #
" , :,
&
'
’ , ' ’ ' ^' ; ; ' l : '
^<V .? .& l g & * f
'
|
1
w
.
I#* |
7.6%
0.15%
0.38%
--------
••■
i
Additional cost per hour
per covered
worker
•*;•,.<%.r.•>
»'' * - ) • . ..v^;--j..-j
r - P
2.4%
§ ^T ?
% Increase in payroll
f " V ’" " '
S
PLANS WITH
NO VESTING
S
>
„;
i
.
' Y ‘-
i-
t |
|
-•S
î^ 1
.*.
’
f *
°*
-■ ^ • Î
J oj50|f HnÉ!Êji5;S9ll^HI;
r,:.v,.-
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J# |ifv;¿rff! 1?>’* ■ ;
'■!^‘
^ . , :
j
-
,’. HI
|
f
:
j
i
a
Chart 4
COST OF VESTING AN OLDER WORKER IS MINIMAL
ro provide a $100 annual pension at age 65 costs as a single payment...
] .y
i Age
v
Without
Vesting
-
;
With
Vesting
,
-
__________
-•__________ _
_ _ _ _
Increase In Costs Due to Vesting
Amount
Percent
25
$20
$30
$10
35
125
155
30
24
45
310
340
30
10
55
570
585
15
3
50%
Assumes straight life annuity for males, with assets invested at 5%.
Assumes typical employee turnover rate (for example, 85% of employees age 25 will
leave th e ir p re se n t e m p lo ym e n t before age 6 5 ; o n ly 3 % of th o se a ge 5 5 will leave.)
E M P L O Y E E S I N D I V I D U A L R E T IR E M E N T
D ED U C T IO N A ID S M ATURE W O R K ER W H O
R E T IR E S AT AG E 65
Begins Contributing
at Age:
Annual Pension*if He Contributes Annually
"
$1,500
$1,000
. $500
40
7,500
5,000
$2,500
45
5,200
3,447
1,723
50
3,375
2,250
1,125
55
1,950
1,300
650
60
900
600
300
* Pensions are straight-life pensions for males payable in monthly installments.
A 5 percent interest rate is assumed.
May 22, 1973
POR IMMEDIATE R E L E A S E
TRE A S U R Y A N N O U N C E S D E F O R M E D C O N C R E T E R E I N F O R C I N G BARS
OF N O N - A L L O Y S T EEL F R O M M E X I C O
A RE B E I N G SOLD A T LES S T H A N F A I R V A L U E
Assistant Secretary of the Treasury Edward L. Morgan
announced that deformed concrete reinforcing bars of non
alloy steel from Mexico are being, or are likely to be,
sold at less than fair value within the meaning of the
Antidumping Act, 1921, as amended. Notice of the determina
tion will be published in the Federal Register of May 23, 1973.
The case will now be referred to the Tariff Commission
for a determination as to whether an American industry is
being or is likely to be, injured. In the event of an
affirmative determination, dumping duties will be assessed
on all entries of deformed concrete reinforcing bars of
non-alloy steel from Mexico which have not been appraised
and on which dumping margins exist.
A notice of "Withholding of Appraisement" was issued
on February 23, 1973, which stated that there was reasonable
cause to believe or suspect that there were sales at less
than fair value. Pursuant to this notice, interested
persons were afforded the opportunity to present oral and
written views prior to the final determination in this case.
During the period January 1972 through March 1973 imports
of deformed concrete reinforcing bars of non-alloy steel
from Mexico were valued at approximately $2.1 million.
oOo
. 2022ft
•
TELEPHONE W 04 2041
V
)
FOR RELEASE
TUESDAY, M A Y
0
22, 1973
SIMON ANNOUNCES HEARINGS
ON V O L U N T A R Y O IL A L L O C A T I O N P R O G R A M
William E. Simon, Deputy Secretary of the Treasury
and Chairman of the Oil Policy Committee, has announced
that public hearings will be held June 11-13 in the
General Services Administration Headquarters Auditorium,
19th and F Streets, N. W . , Washington, D. C., to evaluate
the Voluntary Crude Oil and Product Allocation Program.
A list of questions has been incorporated in the "Notice
of Public Hearing," which was sent to the Federal Register,
in order to give participants guidance in preparing
testimony.
Participants are asked to address themselves
to such questions as:
"What legal problems will complicate compliance
with the voluntary allocation program?
To what extent
will they limit compliance?"
"Should a special board be established to handle
complaints or should they be handled by the section of OOG
(Office of Oil and Gas) administering the Allocation Program?"
S-209
2
—
"In a voluntary program what penalties, if any,
could be imposed for noncompliance?
be provided to induce compliance?
What incentives could
Should license fee
exemptions under the MOIP (Mandatory Oil Import Program)
be contingent upon compliance with the Voluntary Allocation
Program?"
"Should the Voluntary Program be made Mandatory?"
Simon announced the formation of an Oil Policy Hearing
Committee, which will conduct the hearings.
The committee
will be comprised of two representatives from the Department
of the Interior and a representative from the Department of
the Treasury, Commerce, Justice, the Office of Emergency
Preparedness, and the White House.
Representatives will be
designated by the heads of the respective departments.
One of the Interior representatives will serve as chairman.
Persons wishing to supply written testimony should
send 20 copies of their comments to Mr. Kenneth L. Dupuy,
Oil Policy Hearing Committee, Room 5522, Department of the
Interior, Washington, D. C. 20240, on or before 5 P.M.,
June 7, 1973.
Persons giving public testimony will be allotte<|
15 minutes in which to speak; ten minutes of questioning by
panel members will follow each statement.
A n hour-and-a-half
at the end of each day will be reserved for additional
questioning of the day*s witnesses.
-oOo
„«A,-.','-"
[
-V.-'
„'\r ’ 8i ififS B§
‘-V SfilsS&s
DepartmentoftheTREASURY
ASHINGTOM, O.C 20220
TELEPHONE W 0 4 2041
FOR IMMEDIATE RELEASE
May 22, 1973
SECRETARY RECEIVES HONORARY DEGREES
The Secretary of the Treasury, George Pratt Shultz
will reveive an honorary doctor of science degree at
the 123rd Commencement ceremonies of the University
of Rochester Sunday, June 3, in the Eastman Theatre
of the University.
Secretary Shultz accepted an honorary doctor of
laws degree from the University of Pennsylvania on
May 210
The Secretary is a graduate of Princeton University
and holds a Ph»D# degree from the Massachusetts
Institute of Technology»
oOo
Departmentof(^TREA SU RY
SHINBTON, D.C. 20220
TELEPHONE W04-2041
EMBARGOED FOR RELEASE UNTIL
10:00 AM; EDT, TUESDAY, MAY 22, 1973
TESTIMONY BY THE HONORABLE WILLIAM E. SIMON
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE HOUSE SUBCOMMITTEE
ON SPECIAL SMALL BUSINESS PROBLEMS_____
TUESDAY, MAY 22, 1973, 10:00 AM, EDT
Mr. Chairman and Members of the Committee:
I am delighted to appear before you today to discuss
the possible shortages of gasoline and other petroleum
products which confront the Nation.
I would like to focus
on the following issues:
(1)
The causes of these shortages;
(2)
The availability of gasoline in various parts
of the country;
(3)
The effect of the new Mandatory Oil Import program;
(4)
The new voluntary allocation plan; and
(5)
The royalty oil program and other measures that
the government has taken to help protect the
independent or nonaffiliated segments of the
industry.
The Growth of Demand for Energy
The first thing to understand is that the demand for
energy has been increasing continually while supply has not.
S-208
2
With six percent of the world's population, we are
™ j
consuming 33 percent of the world's energy. Furthermore,
the demand for energy in this country is growing at an
annual rate of about four percent and, by 1990, our energy
needs will be double those of 1970.
The demand for gasoline in the United States has also
been growing faster in the past several years than at any
other time in recent history.
Since 1968, gasoline demand
has risen at an annual rate of about five percent.
During
the past two years the rate of increase has been about
six percent per year.
Part of this rise in demand can
be explained by growth in the population, growth in the
economy, and the increasing number of cars on the road.
But demand has also risen significantly because of
the many power-using devices added to cars.
These include
automatic transmissions, air conditioning, various safety
features, and the changes made in automobiles since 1970
in compliance with EPA regulations issued under the
mandate of the Clean Air Act.
Producers' compliance with
these regulations has led to substantially reduced engine
efficiency.
As more vehicles come on the road equipped
with safety, emission control, and physical comfort devices/
average mileage per gallon will decrease further.
An automobile that once got 14 miles per gallon, now gets
- 3 -
eight or nine miles, and it may get only six or seven
miles per gallon if present trends continue.
Because new automobiles are not getting the gasoline
mileage obtained by their counterparts five and ten years
ago, and because we are driving more, gasoline consumption
has risen.
We are using 300,000 barrels per day more
gasoline this year than last year.
Failure to Build Refineries
While gasoline demand has been growing at about six
percent per year, the volume of crude oil processed by
refiners has risen only three percent per year.
We are
now extremely short of refinery capacity and, at the
time of the Presidents energy message, which announced
the new oil import program, no new refineries were under
construction.
had ceased.
Furthermore, expansion of existing refineries
Growth in the capacity of the industry had
come to an end because the industry found that it was
more profitable to invest abroad than in the United States.
One reason for this is that environmental restrictions
have made it increasingly difficult to find acceptable
sites for new refineries
in this country.
Because of
resistance to refinery siting, it may take three years to
obtain site approvals today, in addition to the three years
4
required for construction.
Yet, modern refineries can
be designed so that they do not significantly pollute the
environment.
Another reason why the industry has located new
refineries abroad is that U. S. oil import restrictions,
in the past, created uncertainty as to whether new
domestic refineries could obtain sufficient imported
supplies of crude oil.
As long as the government set
import quotas on a year-to-year and, in some cases, on
a month-to-month basis, no company was assured of the
stability of supply necessary to encourage domestic
refinery construction.
This impediment ended on April 13
when we terminated volumetric quotas on oil imports.
Finally, the tax and other economic benefits
available to refiners in the Caribbean and in Canada
have been more lucrative than similar provisions available
in the United States.
Deepwater ports in the Caribbean
and Canada have also permitted savings in the use of
very large crude carriers.
For all these reasons, U. S.
refinery construction has been standing still while U. S.
demand for refinery products has been increasing.
To meet the growing demand for gasoline, refiners
have been changing their mix of products to increase
their yield of gasoline.
The average yield of gasoline
5
per barrel of crude oil rose from 43.8 percent in 1968
to 46.9 percent in 1972.
This means, of course, that the
yield of other products, such as fuel oil, has been
reduced.
It is also a short-term expedient at best.
Whatever the product mix, it will be necessary to increase
substantially our overall imports of refinery products
to avert both a gasoline shortage this summer and a fuel
oil shortage next winter.
Our growing lack of refinery products was driven
home to the public late in 1972 with shortages of distillates
and other heating fuels in various parts of the country.
Refineries had to increase their percentage of distillate
production and, correspondingly, reduce gasoline
production.
As a result, we are now coming into the
summer season with low gasoline stocks.
As of May 11, we
had only 201 million barrels of gasoline in storage.
This is down 9-1/2 percent from last year, while demand
is up six percent.
Furthermore, domestic production,
even today, is not keeping pace with demand.
We are using,
on average, 47 million barrles of gasoline weekly, and
producing only 45 million barrels.
For this reason, we
ere faced with the prospect of serious limitations on
gasoline supply.
Distillate fuel oil stocks are much
improved, however, as evidenced by the fact that they now
total more than 112 million barrels as compared with 103
million barrels a year ago.
6
An important contributor to the supply problem is
the distribution system in this country.
Some areas of
the country are close to pipelines and refineries.
Some are served by the retail outlets of the major oil
companies.
These areas will not feel a shortage as
much as other areas which are relatively distant from
pipelines and not well-served by the major oil companies.
Attached to this testimony are two tables presenting the
consumption and supply of gasoline on a regional and
state-by-state basis.
Recognizing the serious nature of the gasoline and
fuel oil shortage, and that there are regional differences
in the intensity of the problem, we have established
six regional subcommittees of the Oil Policy Committee,
of which I am Chairman.
These groups consist of
representatives of the independent segment of the industry
serving particular areas of the country.
In addition,
we have contacted the Governor's office of each state and
explained to them the need to reach some compatibility
between our energy needs and state environmental
requirements.
As a result, representatives of the
Governor's offices are attending these subcommittee
meetings, and we are able to identify regional problems
and deal expeditiously with them.
Daring the past three
7
/
weeks we have met with each of these subcommittees.
These meetings have been most useful in the design of
the voluntary allocation program, which I will discuss
shortly.
The Problems of the Independent Oil Companies
We are greatly concerned about the independent segment
of the industry.
The independent refiners and marketers,
especially, are faced with related but distinct problems.
The refiners face crude oil shortages? the marketers,
gasoline shortages.
To understand how these problems developed, it is
important to realize that, until the early 1970's, we
had surplus crude oil production capacity in the United
States.
This enabled independent refiners to buy crude
oil and build refineries to supply, among others,
independent jobbers, marketers, and other wholesale
customers.
There was also a surplus of gasoline and
other products being produced by the major oil companies.
Independent marketers took advantage of this surplus and
opened thousands of gasoline stations to sell gasoline
purchased in the spot market.
By efficient servicing
of consumers, these marketers were able to sell gasoline
for a few cents a gallon less than the major oil companies.
8
These independents have had a healthy influence on the
petroleum industry by giving consumers a greater choice
between price and service.
They have made it possible
for consumers to buy gasoline at lower prices.
The gasoline shortage has hit these independents
hardest.
In the first place, independent refineries
can no longer get adequate supplies of crude oil.
They used to obtain domestic crude oil by exchanging
their import licenses with the major oil companies.
The major companies used the import licenses to import
cheaper foreign crude for their own use, while providing
the independent refiners with domestic c r u d e oil.
In addition, the so-called "Sliding Scale" method of
allocating import licenses under the old system gave
smaller refineries more than a proportionate share of
the licenses.
All this has changed during the last two years.
Quoted prices of foreign crude oil are now equal to or
higher than prices of American crude sold in the same
markets.
There is a worldwide shortage of low-sulfur
or "sweet" crude.
As a result, major oil companies have
had no economic incentive to trade their domestic sweet
crude production for imported crude obtained by means
of independents' import tickets.
It is estimated that
only 40 percent of the U. S. refineries are equipped to
9
handle sour
crude or to convert high-sulphur residual
oil to low-sulphur residual oil.
Further, because of
local air quality standards, plants that are designed
for refining high-sulfur crude are compelled to use
low-sulfur crude.
The result is that the independent refineries,
particularly those in the mid-Continent, cannot get the sweet
crude they need and are operating at less than full capacity.
Independent gasoline marketers are also in a
difficult position.
is drying up.
The wholesale market for gasoline
Many of the independents find it impossible
to purchase gasoline wholesale.
Hundreds of independent
gasoline stations across the country are closing down.
Those that can obtain gasoline abroad, find it available
only at much higher prices.
This hurts them competitively,
because their main selling point with the public is that
they can underprice the major oil companies.
The problems of the independent segment of the
industry were given considerable attention in designing
the new oil import program.
Indeed, had it not been for
the independents, the changes in the program might have
been announced much sooner than they were.
Our basic
objective was to balance the need to preserve the
independent segment of the petroleum industry with the
10
desire to create a vigorous domestic industry through
incentives for construction of new refineries in the
United States and for exploration for new reserves of
crude oil.
We also wanted to eliminate the many
exceptions built into the oil import program and to
assure a reasonable stability of prices.
Perhaps the major benefit of the new program is the
flexibility that it provides to importers.
Marketers
will be able to shop for supplies of oil anywhere in
the world.
They will no longer be dependent entirely
on their traditional sources of supply.
Moreover, through
the availability of fee-exempt licenses issued by the
Oil Import Appeals Board, independent marketers should
have access to products at lower cost than their major
competitors for the remainder of this decade.
This should
provide the time required by the independent marketers
to make the changes necessary to protect their market
position.
Another benefit of the new program is the incentive
it creates for additional output.
The independent marketers
have depended for their economic well-being on the excess
refinery capacity of the major oil companies.
Excess
refinery capacity no longer exists, largely because we,
as a Nation, have discouraged refinery expansion and
construction.
The greatest hope for the independent
11
marketers, in the long run,
will be the incentives
provided both independent and major refiners to produce
additional supplies of crude oil and products.
This, in the end, is the only real solution to the
problems the independent marketers now face.
The Effect of New Policies
on the Independent Oil Companies
Let me discuss at greater length some of the steps
we have taken to help protect the independents.
The new
programs of the government do several things to help
strengthen the short-term position of the independent
refiners and marketers, enabling them to establish
themselves on a more enduring basis.
1.
Under the recent changes in the Mandatory Oil
Import Program, outstanding import licenses will be
honored free of license fee.
Because the independents
hold a large share of these licenses, this provides some
value to their tickets where none existed previously.
The independents will be able to import oil at lower cost
than the majors.
As a result, the independents should
now have an improved competitive position in world markets.
2.
To provide greater value to the independents'
tickets, we have suspended existing tariffs.
Had we not
done this, the independents' ticket value would have been
lower.
The only other way to create value under the new
program was to have the consumer pay substantially higher prices.
12
3.
In the past, the Oil Import Appeals Board (OIAB)
would not distribute import licenses in cases of
hardship until September of each year.
These licenses
were, by and large, distributed to the independent
refiners and marketers.
Early this year, the OIAB began
to allocate tickets immediately upon application.
soon disbursed its entire 1973 allocation.
It had
Then, on
March 23, 1973, the President issued a Proclamation granting
unlimited allocatons to the Oil Import Appeals Board in
an effort to make more crude oil and product available
to both the independents and the Nation.
Finally, on
April 18, in another Proclamation, the President removed
volumetric controls altogether.
The OIAB has now been granted unlimited ability
to authorize fee-exempt import licenses, and has been
given the specific responsibility of helping the independent
refiners and marketers through the period of transition
in which they now find themselves.
Major oil companies
may also appeal to the Oil Import Appeals Board, but must
demonstrate their inability to obtain import licenses by
exchange from among those already distributed by the
government or their willingness to supply established
independent marketers and refiners with the same p rop ortion
of crude oil or products supplied in 1972.
As of May 15, 1973»
13
license fee-exempt tickets for finished product grants
totaling more than 240 million gallons have been
distributed by the OIAB to 41 independent firms in 27
states.
The OIAB has also announced new guidelines to
implement its expanded functions.
4.
The government has also begun to allocate its
"royalty oil" to independent refineries in need.
Under
the terms of relatively recent lease sales, the
government can collect some of its royalties in cash or
in a share of the oil produced on leased lands.
In choosing the latter course, it is, in effect, diverting
crude oil from the major to the independent refineries.
The Interior Department estimates that the amount
of royalty oil accruing from all federal lands is about
225.000 barrels a day.
Of this amount, approximately
50.000 barrels a day are not available for distribution.
Of the oil that is available, 70,000 barrels per day have
already been allotted to independent refiners.
Interior
has now received applications requesting a total of 172,000
barrels a day much of which, it expects, will be allocated
in the next few weeks.
The Secretary of the Interior has decided to give
preference in the disposal of royalty oil to small refiners,
except under special circumstances, under the rules of the
Small Business Administration.
Accordingly, sales contracts
have been made with such companies as Good Hope Industries,
14
La Jet, Inc., Indiana Farm Bureau Coop. Assoc., Inc.,
Howell Corporation, and Rock Island Refining Corp., and
approval has been granted to Gladieux Refinery Company
and Alabama Refining Company, Inc.
5.
All of these actions are probably not sufficient
to assure distribution of adequate supplies of refinery
products to independent marketers and, especially,
adequate supplies of crude oil to independent refiners.
It is for this reason that the government has decided to
utilize the authority given it under the recently enacted
Economic Stabilization Act to allocate both crude oil and
products to independents, municipalities, and other
purchasers who have been cut off from their traditional
sources of supply.
The Oil Policy Committee has been given general
responsibility for determining allocation policy; the
Office of Oil and Gas in the Department of the Interior,
responsibility for administering the program.
The program
adopted by the Administration relies on voluntary compliance
with guidelines, set by the government.
Our purpose is
to apportion, as evenly as possible, any curtailment in
consumption that will result from gasoline and distillate
shortages.
Priority will be given to meeting the needs
of farming, other essential industries and state and local
15
governments,
A description of the allocation plan is
attached as Exhibit A.
The general guidelines of the
voluntary allocation program were presented during my
testimony before the Senate Committee on Banking, Housing,
and Urban Affairs on May 10, 1973.
effective as of that date.
The program became
Since then 1,090 telegrams
and 1,200 letters have been sent to the Office of Oil and
Gas by the industry and other interested parties.
Expanded
guidelines will be published in the Federal Register this
week.
Under the program, each producer, refiner, marketer,
jobber, and distributor is being asked to make available
in each state to each of its customers (including those
purchasers in the spot market) the same percentage of its
total supply of crude oil and products that it provided
during a base period;
The base period is the last quarter
of 1971 and first three quarters of 1972.
Also, on the
basis of demonstrated need, the Office of Oil and Gas may
assign allocations, not exceeding 10 percent of any supplier’s
total sales of crude oil and products during the base period,
for customers engaged in priority activities who are still
unable to secure adequate supplies.
Among these priority
activities are farming, food processing, and health and
emergency services.
16
Reactions to the voluntary allocation program have
generally been favorable.
I have personally contacted a
number of the major suppliers and have been assured of
their cooperation.
While the problems are complex and
the difficulties diverse, the program can work with the
full cooperation of all parties.
I must point out,
however, that the program does not increase supply, but
rather distributes supply in an equitable manner, with
priority to essential services.
It is a short-run
palliative? it is not a long-term solution to the oil and
gasoline shortages we now face inasmuch as no allocation
program can create a barrel of oil.
Let me describe three instances where the program
has led to a needed redistribution of oil and oil products.
One involves the Northeast Petroleum Company which
had been supplied gasoline by Standard Oil of California
and fuel oil by Sun Oil.
supplies to Northeast.
Both of these companies cut off
When Northeast contacted them again»
after the voluntary program was announced, Standard of
California assured them that they were restoring these
supplies and Sun Oil promised to make every effort to com p iyj
A contract between a farmer's cooperative in Oregon
and Texaco expired on April 30.
The Office of Oil and Gas,
when contacted by the cooperative, asked them to call
Texaco,
inform them of the voluntary allocation program, and
request their cooperation.
The Office of Oil and Gas
received a call the following day from the cooperative
saying that Texaco had agreed to supply them.
Finally, a farmer's supply in Michigan had been
severely curtailed by Total Petroleum Company.
A call from the Office of Oil and Gas and from the
office of the Governor of Michigan resulted in his supply
being restored.
There are also many other instances to
indicate that the program is working.
We have been
pleased with the cooperation of the industry.
Companies
like Exxon, Gulf, Standard Oil of California, Phillips,
Atlantic Richfield, and many others have been most
cooperative.
Companies' adherence to the guidelines will be
monitored and, if voluntary compliance fails, more
stringent measures-will be taken by the Administration.
We are also announcing this week public hearings to evaluate
the operation of the program and to determine whether all
or part of the program should be made mandatory.
We hope and expect, however, that this will be unnecessary.
If it is necessary, we would not hesitate to take whatever
steps are essential to assure that priority needs for oil
are met.
18
6.
Perhaps the most critical problem, however, is
the supply of sweet crude oil to independent refiners.
There is, at present, a general shortage of low-sulfur
crude oil brought on, in part, by the requirements of
several eastern states and municipalities that refineries
use sweet crude oil to meet air quality standards, even
though these refineries are designed to take sour ot
high-sulfur crude oil.
This has diverted sweet crude to
the East Coast refineries of major oil companies and
away from inland independent refineries, many of whom are
unable to handle high-sulfur crude oil.
At the same time, the major oil companies have had
little incentive to exchange crude oil because the price
of domestic oil is now equal to or lower than the landed
price of foreign oil.
Under Cost of Living Council rules,
the majors cannot charge the replacement value for dom estically
produced crude oil, but must absorb the losses resulting
from an exchange.
It is no surprise, therefore, that the
majors have been reluctant to swap U. S. for foreign crude oil*
The Administration is trying to rectify these problems.
We are working with the Cost of Living Council and the
Environmental Protection Agency to find compatibility between
maintaining stable prices, protecting the environment, and
providing adequate compensation to the major oil companies
which exchange domestically produced crude oil for imported oiii
Long-Run Solutions to the Gasoline
______and Distillate Shortage_____
These measures should help to bring about a more
equitable distribution of crude oil and products in the
short run.
What about the long run?
What is being
done to solve the basic gasoline and distillate shortages
that have created the distribution problems with which
we are now concerned?
1.
We have established a license fee program for
crude oil and product imports.
This program removes all
volumetric quotas on imports and allows importation of
crude and product subject to a fee of 21 cents and 63 cents
a barrel, or 1/2 and 1-1/2 cents per gallon, respectively,
after 2-1/2 years.
This is a long-run system which is
designed to spur the construction of refineries in the
United States.
It does this by removing obstacles to
acquiring an assured supply of crude oil and by
instituting a price differential between crude and products
sufficient to guarantee an adequate profit from domestic
refining.
I am happy to report that, since the President's .
Energy Message on April 18, a number of companies, including
Shell, Ashland, The Pittston Corporation, Exxon, Mobil, and
Standard Oil of California have announced that they now
plan to build or expand refineries in the United States with
total refining capacity exceeding 2 million barrels a day.
20
Others have indicated to us that they are seriously
considering building refineries here but have not yet
made their plans public.
In addition, several independent
marketers have stated their intention to develop their
own U. S. refinery capability, a necessary step if the
independent marketers are to become a fully viable entity
in the industry.
In each case, however, the decision to
build a new refinery is contingent upon a satisfactory
solution to the "siting problem," the seemingly chronic
inability of the industry to obtain approval to build
new refineries in many parts of the country.
2.
We are also taking actions to solve the domestic
crude oil shortage by a proposal we are making to the
Congress for an exploratory drilling investment credit.
This gives a seven percent tax credit for new drilling,
plus a supplementary credit of five percent for successful
wells.
We are confident that this program, if enacted by
the Congress, will stimulate crude oil production and have
a significant impact on gasoline and fuel oil supplies.
Conservation Measures
Energy conservation can play an important role in
stretching gasoline supplies and thus reducing the shortage
To this end, we will need the cooperation of the government
industry, and the public.
Travelers are being encouraged
to minimize their use of automobiles this summer.
21
According to the Automobile Manufacturers Association,
about 56 percent of the cars on the road contain only
the driver.
This underutilization of cars can be
reduced in many cases, especially in metropolitan areas.
Car pools and public transportation should be substituted,
where possible, for single-occupant cars.
Use of smaller
cars, with better gasoline mileage performance, is another
measure the public might take to conserve gasoline.
Additional measures include reducing the use of the
automobile air conditioner, keeping tires properly
inflated, cutting off motors when stalled in traffic, and
avoiding excessive speeds on the highway.
I am attaching
as Exhibit B a list of conservation measures that can be
taken to help reduce the demand for petroleum products.
Gasoline Prices
Some have expressed concern that the price of gasoline
rise to astronomical levels.
This concern is unfounded.
There has been a substantial rise in foreign crude oil
prices in the last three years, and we will probably
experience additional price increases in the future.
But crude oil accounts for only 20 percent of the costs
of producing gasoline.
For instance, if the crude oil
price were doubled, this would increase the price of gasoline
fey only eight cents a gallon.
22
\
One of the largest components of the price of
gasoline is federal and state taxes.
The breakdown
in the retail price of a gallon of gasoline costing 39
cents is:
crude oil
8.1 cents
transportation to
refinery and
refining
5.3 cents
wholesaling and
retailing
13.9 cents
state taxes
7.7 cents
federal tax
4
cents
It is interesting to note that in England, the retail price
of regular gas is 64-1/2 cents a gallon; in Germany 79-1/3
cents; in France 91-1/2 cents; and in Italy, a dollar.
With prices like these, it is no wonder that European
drivers prefer smaller cars.
prices so high?
Why are European gasoline
The answer is primarily the higher taxes
paid by motorists in these countries.
In Europe, taxes
account for up to 75 percent of the retail price.
By comparison, taxes represent only 30 percent of the price
in the United States.
Gasoline and other fuel prices will, most likely,
increase over time.
1.
This would provide benefits to the Nationi
It will help to save some independent marketers and
refiners who may otherwise go out of business.
23
2.
It will encourage Americans to conserve on fuels.
3.
It would also help to provide the economic
incentives needed to speed up the construction and
expansion of badly needed domestic refinery capacity.
Fuel Oil
A major effort is being made now, and for the rest of
the summer, to produce more gasoline.
This will have the
effect of reducing the yield of fuel oil below that which
was being produced a few months ago.
The question is
whether, as a result, we will have adequate stocks of
fuel oil for next winter.
In January, we removed all restrictions on the
importation of No. 2 fuel oil.
Partly for this reason,
stocks of distillate fuel oil are now higher than at this
time last year.
Imports of fuel oil continue at high levels.
We are now importing nearly 300 thousand barrels per day.
This, combined with domestic production, gives us a total
projected supply that is adequate to meet our needs this
summer and, barring extremely cold weather, to make it
through next winter.
We are now reasonably confident that the recent changes
in the Oil Import Program will help us to attain needed
levels of imports of fuel oil.
Major oil companies can
now bring in any amount of fuel oil they wish by paying a
24
license fee of 15 cents a barrel.
The independents can,
effectively, bring in fuel oil without paying any fee
at all.
There is adequate refinery capacity overseas
to produce the additional fuel oil required by the United
States, even if U. S. refineries maximize their yields
of gasoline.
We will, however, have to pay a high price
for this fuel oil and that will mean higher prices at home.
Conclusion
In conclusion, let me say that I am basically
opposed, as I am sure are most of the Members of this
Committee, to the needless injection of government regulation
and control into any industry, particularly where there is
every evidence of intense and healthy competition.
I do not
want to take any step which would discourage private initiative.
I believe the new oil import program provides the proper
incentives for such initiative.
Of course, I realize that
the new program has not solved all of our problems.
In the
long run, however, it should help create a vigorous domestic
petroleum industry.
At the same time, in the short run, I think we are in
a situation in which we need to make decisions on priorities.
We cannot afford to let crops go unplanted or unharvested
for lack of diesel fuel for our tractors.
vital industries close down.
We cannot let our
We cannot endanger public
25
health or safety.
And, finally, we should not let the
independent segment of the oil industry, which provides
competition in the marketplace, be forced to shut down.
Thank you.
0O0
TABLE 1
U.S.
GASOLINE SUPPLY/DEMAND
B y PAD D i s t r i c t s
Actual
1st Qtr.
2nd Qtr.
3rd Qtr. 4 t h Qtr.
1,450
3,475
5,210
1,450
3,475
5,210
435
1.,f
AC
J
sDA
U
A
CIA
d tDX U
5,210
435
3,475
5,152
424
Y ear 1973
Jrude Runs
PAD I
« n
■III
" IV
" V
u .s.
% of Cap'y
1,476
1
45
^
3,439
4,976
397
1,873
12,161
89.3
430
2,000
12,565
92.3
2,000
12,570
91.8
2,000
12,605
92.0
1,969
12,476
91.4
722
1,924
2,442
225
834
6,147
798
1,911
2,865
237
928
6,739
812
1,946
2,918
244
998
6,918
786
1,902
2,824
236
945
6,693
780
1,921
2,764
236
927
6,628
2,116
2,116
873
185
920
6,210
2,368
2,368
977
207
985
6,905
2,410
2,410
994
211
1,045
7,070
2,280
2,280
940
200
985
6,685
2,294
2,294
946
201
984
6,719
(1,394)
(192)
1,569
40
(86 )
(1,570)
(457)
1,888
30
(57)
(1,598)
(464)
1,924
33
(47)
(1,494)
(378)
1,884
36
(40)
(1,514)
(373)
1,818
35
(57)
T e sy
(166)
(152)
(8 )
(91)
jasoline Production
[PÂD I
" II
"III
" IV
" V
u .s.
Tsoline Demand
[PAD
I
" II
"III
I " IV
(" V
U .s.
f LONG/ (SHORT) 2/
M ai u.S.
I *n thousands of barrels a day
strict production less district demand
Table 2
Consumption of Gasoline bv State
(Millions of barrels)
2nd otr.
1st Otr.
4th Otr.
1972
1972
1971
Avoj
Const!
3rd Oti
Per n
1972 10/71-i
A1abama
Alaska
Arizona
Ark.
Calif.
Col o .
Conn.
Del a.
b. C.
Fla.
Ga.
Hawaii
Idaho
111.
Xnd.
Iowa
Kansas
Ky.
La.
Maine
Md .
Mass.
Mich .
Minn.
Miss.
417
21
260
244
2376
279
306
65
57
984
627
61
95
1112
619
344
248
371
387
109
410
526
1031
441
269
462
28
264
291
2529
3 3T~
334
73
57
969
TT-T*
62
113
1237
702
427
410
425
431
124
4 50
571
1157
532
314
468
36
286
296
2579
371
336
7°
57
«>59
678 “
65
134
1227
720
446
370
424
436
157
468
59 5
1178
559
312
4 56
27
284
282
2512
312
333
73
61
964
TÒT
66
109
1262
700
436
356
406
432
128
¿47
584
1160
529
307
N. J.
N. M.
m . y.
M. C.
N. D.
Ohio
Ok la.
Ore.
Pa.
P. I.
742
143
1410
568
72
1145
348
257
1054
89
803
165
1515
746
110
1257
377
307
1397
107
833
180
157°
706
143
1320
399
340
1246
105
792
159
1523
694
98
1321
375
288
1211
100
51
70
97
61
EXHIBIT A
ALLOCATION OF CRUDE OIL AND REFINERY PRODUCTS
The program for allocation of crude oil and refinery products
will be voluntary and (1) backed up by guidelines established by
the government, (2) a mechanism for providing continuing scrutiny
of compliance with these guidelines, and (3) the threat of imposition
of more stringent regulations requiring reallocating crude oil and
products should this program fail. General policy direction will
be vested in the Oil Policy Committee; day-to-day administration of
the program, in the Office of Oil and Gas (OOG). An Oil Allocation
section has been established in OOG to administer the program.
Under the program, each producer, refiner, marketer, jobber
and distributor will agree to make available in each state to each
of its customers (including those purchasers in the spot market)
the same percentage or amount, whichever is lower, of its total supply
of crude oil and products that it provided during each quarter of a
base period (defined as the fourth quarter of 1971 and the first
three quarters of 1972).
Under the program, OOG may assign to each producer, refiner,
marketer, jobber and distributor allocations for priority customers
still unable to obtain needed supplies of crude oil and products,
not to exceed 10% of any supplier*s total sales of crude oil and
products during the base period. This assignment by OOG will be based
upon demonstrated need and priority. The basic purpose of the assign-j
ment is to assure adequate supplies of crude oil and products to
priority users who, for some reason, are not well served under the Pr0|
portional allocation program. It will be particularly important for .
fulfilling the needs of new customers who have entered the marketpiac
since 1971-72.
In making allocations, priority will be given to the following
activities or to independent marketers, jobbers, and refiners who
supply the following activities:
1.
Farming, dairy and fishing activities and services
directly related to the cultivation, production and
preservation of food.
2.
Food processing and distribution services.
3.
Health,
med ica l,
dental,
n u r s i n g and s u p p o r ti n g services
except commercial health and recreational activities.
4.
Police, fire fighting and emergency aid services.
5.
Public passenger transportation, including buses, rail/
intercity and mass transit systems, but excluding tour an
excursion services.
2
>
6• Rail, highway, sea and air freight transportation
services, and transportation warehousing services not
elsewhere specified.
7.
Other state and local government activities.
8.
The fuel needs of residents in states or parts of states
unable to obtain sufficient crude oil or products.
9.
Difficulties caused by natural disasters.
10.
Public utilities.
11.
Telecommunications.
Wholesale and retail marketers of gasoline shall not be deemed
priority customers unless they supply a substantial proportion of
their product to these priority users.
When convenient, various companies may exchange supply obliga
tions incurred under this program in order to simplify distribution
problems.
The Office of Oil and Gas will receive complaints from anyone
who feels he is not receiving a proper allocation of supplies. If
it is necessary, 00G may require a public hearing and submission of
data by suppliers on their 1971 and 1972 exchanges and/or sales of
crude oil, unfinished oils and products. These data will include
the names and addresses of customers, the amounts of crude oil and
products sold to them, the legal relationship between major oil compa
nies and customers, and whatever other information 00G believes
necessary to conduct the hearing. The 00G will then verify the accuracy
of complaints against a supplier and, if justified, impose mandatory
allocation.
The price at which petroleum products shall be sold to in
dependent marketers, wholesale distributors, and other unaffiliated
customers shall not exceed normal refinery rack prices charged by
or companies to new contract customers. The price which wholesale
^^ibutors may charge independent marketers shall not exceed normal
wholesale prices, or normal refinery rack prices plus a normal whole
sale markup.
Where independent refiners have previously received domestic
exc^an9e f°r import tickets, the independent refiners
required to surrender license fee exempt quotas in return for
eceiving the privilege of purchasing crude oil under the program.
win
3
Where the independent refiners previously purchased crude oil without
surrendering import tickets, no license fee exempt quotas will have
to be surrendered. ' The price at which crude oil shall be sold to
independent refineries shall not exceed posted crude oil prices plus
an applicable pipeline transportation charge except, however, where
crude oil is sold as required based upon previous exchanges of import
tickets for domestic oil, the major companies may charge a price
equivalent to the average landed cost of any oil imported to replace
the oil sold under the provisions of this program.
Immediately following the initiation of this program, the Oil
Policy Committee shall begin hearings tQ determine any changes that
may be required to make the program equitable to all classes of
suppliers and purchasers, and whether the program should be made
mandatory. The Chairman of the Oil Policy Committee will designate an
ad hoc board to conduct such hearings and report its findings to the
Oil Policy Committee. The board shall be composed of representatives
of the Interior, Treasury, and Commerce Departments, GSA/OEP, and any
other representatives as the Chairman of the Oil Policy Committee may
feel appropriate. The Chairman of the Oil Policy Committee shall
•designate the Chairman of this board.
The Oil Policy Committee will also investigate and recommend
additional measures that should be undertaken to encourage allocations
by major suppliers. For example, it will investigate changes in Cost
of Living Council rules and environmental standards and regulations
that seem necessary to assure efficient utilization and equitable
distribution of crude oil and products.
EXHIBIT B
/
ACTIONS TO SEDUCE THE DEMAND FOR PETROLEUM PRODUCTS
1.
Consolidate airline flights to attain higher efficiency
per passenger mile and thereby lower fuel consumption.
2.
Encourage mass transportation. In metropolitan cities,
people could be encouraged to use buses and trains.
3.
Reduce speed on all highways which could save 11% fuel
when driving 50 instead of 60 mph and 25% fuel when
driving 50 instead of 70 mph. Legislation requiring 50 mph
maximum speed on state highways and interestates might be
required.
4.
Keep engine in top shape.
mileage by 10%.
5.
Form car pools.
6.
Plan trips to stores — combining visits to cleaners,
drug, department end grocery stores.
7.
Use car air conditioners sparingly. You can save as
much as 10% on fuel consumption when it's not in use.
8.
Keep tires properly inflated. Under-inflated tires affect
gasoline mileage by approximately one mile per gallon.
A poorly tuned engine reduces
9. Warm up engine before driving.
10. Use multi-grade motor oil in engine. It can give you 10%
better mileage than regular grade oils.
11. Start slowly and stop slowly —
you save gasoline.
12. Stagger working hours in metropolitan cities to ease traffic
jams and wasteful engine idling.
13. Walk more.
4. Eliminate or curtail non-essential driving.
15. Take vacations by train or bus.
•
* L?w®r the thermostat setting by two degrees in your home in
winter or raise air conditioner setting in summer which can
save significant volumes of fuels.
-
2
-
17. Add home insulation.
18. Minimize recreational driving, flying and boating.
19. Ship more freight by rail and water which operate with
good fuel economy.
DepartmentoftheTREASURY
kSHINGTON. Û.C. 20220
TELEPHONE W04-2041
FOR RELEASE UPON DELIVERY
STA TEM EN T BY MR. REX BEACH
UNITE D STATES D I R E C T O R - D E S I G N A T E OF THE ASIAN
D E V E L O P M EN T BANK
BE FORE THE FO REIGN OPERATIONS SU BC OMM IT TEE OF THE
APPR OP RIA TI ONS COMMITTEE OF THE HOUSE OF R E P R ES E N T AT I V E S
ON FY 1974 A PP RO P RIA TI ON S FOR THE ASIAN D E V E LO P M E NT BANK
TUESDAY, MAY 22, 1973
at 2 P.M.
Mr.
Chairman:
I appre cia te
the other me mbers
support
the o ppo rtu ni ty
of this
di st ing u i s he d
of the A d m i ni st r at i o n' s
$100 mi l l i o n
Development
ap pro pr i a ti on
Bank
as the first
and
(2)
of three
U. S. share of
to appear before you and
for
requests
the increase
for
the Special
a FY 1974
equal,
Committee
(1)
annual
a FY 1974
Funds
$121 mi l l i on
today in
of the Asian
a p pr o p ri ati on
in st all me nts
for
the
in the or dinary ca pital resources
of the A D B .
At
the outset,
Asian Devel opm en t
in Asia.
Mr.
It is c on tr ib uti ng
Thailand,
serving U.
S.
the Rep ub lic
P ak is ta n
and
S-210
and allies
of China,
in
the
and it will
co ntinue
as it has
its d i s p o s a l .
interests
It has been
serve U.
so long
S.
the
Indonesia.
1969,
interests
that
to the eco no mic
friends
active in South V i e t n a m since
S.
to stress
s i g n if i c a nt l y
of many U,
such as South Korea,
Philippines,
I want
Bank is e f f e c t i v el y
growth and de vel op m en t
Asia,
Chairman,
ade qu ate
to
reso ur ces
at
2
The resource p os iti on of
es pe ci al l y r eg ar d in g its soft
As of Ma rch
15,
$247 mi ll i on
1973,
the Bank is now critical,
loan,
the Bank has
of Special
Funds
of Special Funds
received
operations.
contributions of
from the following
12 countries:
Co ntr ib ut io ns to ADB Special Funds
($ million)
A us tr ali a
$10.59
27.44
Canada
Den mar k
2.17
Germany
20.73
Jap an
156.00
Nethe rla nd s
2.46
New Zealand
1.00
United Ki n gd om
14.84
Bel giu m
2.00
Finland
1.50
Norwa y
2.00
Swi t zerland
6.00
Total
As you can
prov id ed
$156 m il lio n
these
resources,
loans
and has
under
study
course
o f
app roval
see,
246.73
Japan is the largest
or 63
pe rcent
the ADB has made
o f
the next
a f
o f
Against
Special
Special Funds
in the p i pel in e wh ich wo uld
events be pres en ted
du ri ng
total.
$206 m i l l i o n
an a d d i t i o n a l $ 16 7 m i l l i o n
and ana lys is
the
c o nt r i b ut o r having
to the Board
12 months.
Thus,
o f
Funds
p ro jects
in the
Directors
as is evident
nonnal j
fo r
from
3
' y
these figures
transferred
and
taking
to Spcial Funds
Bank will runo ou t
this year un less
close
the Japanese
f ro m its
a dd it i o n a l
S.
S.
p er ce n t
figure of
s p ec ia l
gap
for
share
of the
of
or
power, water,
fi shery projects.
the Bank has
and
a lr ea d y
loaned
the last three years,
in the pipeline,
the Bank has
again p r i m a r i l y
primarily
of 1973 pip e li n e
Sri Lanka,
p ro jec ts
Afghanistan
these future
loans
loans
c o un tr y
of
like
under
the
total.
to c o mm en t
for example,
st udy
Vi etnam,
of soft m o n e y
for
where
over
$22 m i l l i o n of p r oj e c t s
and wa te r,
there
The r e ma i n i g
are l o ca te d
and past
of
Funds
For So uth
In Paki st an,
and Papua,
the fall
The c o n t r i b u t i o n
Indonesia,
for power
in power.
the
$56 m i l l i o n b e l o w
I would
$11 m i l l i o n
well as t e l e c o m m un ic a ti o ns .
in projects,
soft
ca pital,
$100 m i l l i o n w o ul d
45 p e r c e n t
briefly on the $167 m i l l i o n pipel in e.
$37 m i l l i o n
by
it has
are p ro vid ed .
total,
has approxi ma tel y
million
this year.
in fo rm a ti o n ,
of
funds
of Sp e c i al
$156 m i l l i o n
For the C o m m i t t e e ^
$51.6
own o r di n a r y
contribution
the U.
at 29
the
re s o u rc e s
the r es our ce
itself wo uld place
contributions
ac count
of u n o b l i g a t e d
The r e q u es te d U.
obviously
into
are
as
$28 m i l l i o n
$80 m i l l i o n
in B a n g l ad e s h ,
New Guinea.
Full
Nepal,
information
ones has been p r o v id e d
to the
Committee.
In addi ti on
to s up po r t i n g
U.
S. ec o no m i c
development
and
ts
foreign polic y
ob je ct i ve s
in Asia,
a U.
S.
contribution
to
mall
the Special Funds will
countries
in a like
priation con tains
Pent only
expand
amount.
U.
S.
e x po rt s
The r e q u e s t e d
a tying p r o v i s i o n w h e r e b y
on p r o c u r e m e n t
of U.
S.
goods
to n u me r o u s
A s ia n
$100 m i l l i o n a p p r o
the
funds
can
and
s er vic es .
At piresent
4
the U.
S.
is ineligible
to bid
on Special Funds provided
by other countries.
Asia
have had an advantage
in the past pa r t i cu l a r ly be fo re
rea lignm ents
that U.
S.
of
countries
- it will
give us a larger
Indonesia because
of the
is also
given
to Indonesia,
more U.
S. eq uipment
at this
stage of its development,
S.
they
to bid
foot
are
sales
can be intr od uce d
of r ep la ce men t
parts
traders
the 2
important
on Special
in the door in
currently excluded.
tremendous
of that nation of 115 m i l l i o n people.
lateral aid
U.
Japanese
It is es pe ci a ll y
the op po rt u n i ty
such as Indonesia where
L e t ’s discuss
pot ential
foreign exchange.
firms be given
Funds projects
is an area where
economic
While
our bi
it is d e cl i n i ng
and used
and the
in Indonesia
the greater will be
and new ca pital
future
equipment
as that economy expands.
In this
connection,
I also want
to seek
committee on a pro pos al now be in g discussed
replenis h
the
soft
with ggreed shares
in this effort will
loan
and
resources
standardized
re quire U.
It appears po ssible
regard
our original
remain
tied)
plenishment,
that
other
$100 m i l l i o n
stantial
the Asian Devel op men t Bank
ope ra tin g
terms.
c o nt ri but io n
(which would
while
in du st r ia l me mbers
r ed uc tio n of our share
In contrast,
Success
c o nt r ib ut or countries m i g h t
of our share
in double duty dollars
institution.
to re st ructure and
as a major part
the other
counsel of this
S. partici pa tio n.
subst ant ia l new contributions.
effect
of
the
This would
of such
in the
the Japanese
would make
result
and wo uld br ing
fi na ncing
future r e
—
in p r a c t i c a l
about
a sub
of the
share w ou ld
sharply
5
(7
increase.
This
strikes me
opportunity
to max imi ze
ment impact
and burde n
tribution.
i believe
as a p r o m i si n g and
the
leverage
sharing
this
the reaction
highly pro mi si n g
to the
Chairman,
regard
committee
S.
to what
the Ad m i n is t r a ti o n ' s
seems
and
to me
a
the Asian D ev el op me nt
of
ownership
share in the Bank has dropped
This is
degree of U.
S.
operations.
The U.
request
annual
Bank.
an important
maintain both an adequate b il ate ra l
million represents
$96.8 mill io n is
—
a U.
or
callable
million will be held by
in Asia
and must
and m u l t i l a t e r a l presence.
used
in the pri vat e markets,
an actual cash pa yment
our
the Bank and its
stake
expense.
capital,
installments
a sufficient
$24.2 mil li on -- out
S. budget
includes
to 9% from its original
influence and control over
Only 20 pe rcent
also
At present
too low to mai nt ain
S. has
for ADB Special
in the or dinary capital
resources
Bank borrowing
and I solicit
$100 m i l l i o n request
share of the increase
share of 19%.
con
to be further explored.
$121 million as the first of three equal,
for the U.
of d e v e l o p
of our long delayed
in this
of this
unique
development.
In addition
Funds, Mr.
in terms
app roach needs
We have made no commitments
welcome
—
—
indeed,
to the Bank and
of the
$121
Eighty pe rcent
as guarantees
or
against
$9.68 mil li on
represents
the re ma ining
$14.52
the Bank in the
form of no n- in t er e s t
Bearing pr om iss or y notes, w hic h will be encashed
over several
years.
The Bank has
tution in world
es tablished
itself
capital ma rkets
and
as a sound
can,
finance
insti
therefore bo rr o w funds
6
more re ad i ly
recall,
a much
it was n e c e s s a r y
pr ivate
ca pital
rate
al rea dy r ef e r r e d
and
I w oul d
Of this,
and allies
$477
and
S.
re ce iv ed
in this
case has been very high.
S.
from
int erests
there have
the Bank, w ith
We
lending
can expect
this means
general
Shiro
But we
remarks
Inoue
Mr.
about
su cce ed e d
Mr.
an open m ind
returns
can
our level
participating
this point,
November.
past
similar
activities.
long as we m a i n t a i n
At
a m i n i n u m bu r de n
on
in the
Take shi W a t a n a b e
Inoue has d e m o n s t r a t e d
e x pe ri en c e w o r k i n g
all ma t t e rs
in the U.
the B a n k ’ s
ret ur ns
like
only so
Bank,
and
increase.
to make
a few
and operations.
as P r e s e i n t
great
to
States.
such
in the
S. has
of resources
from
the B a n k ’s m a n a g e m e n t
r eg ar d in g
am ou nt
in the B a n k ’s ca pi tal
I wo uld
this
and
future
of i n fl u e n ce
all
whose pro
in A s i a
the Un ited
an t ic i p a te
Chairman,
the U.
C o unt ri es
a large
$105
the B a n k ’s cumulative
to s t a b i l i t y
r e cei ve d
to South
T o g e t h er
lev er age
the
b ee n
to Th ailand,
I b e li ev e
lending.
lending
loaned
(Taiwan),
of
importantly
on its
Bank has
or 64 pe r c e nt
cap ita l
gress wi ll c on tr i b u t e
of the B a n k ’s Special
in Asia.
ordinary
sales in
to borrowers.
The
$75 m i l l i o n
to have
from bond
as well
of China
of the U.
m i l l io n —
the Bank
$197 m i l l i o n has
to the R e p u bl i c
to the Ph ili pp i ne s,
to
to comment
capital re so urces.
$743 million.
$100 m i l l io n
loans
to the p a t te r n
like
As you
on the o r i g i n a l sub
for ma rk e t
strong friends
U.
of
cap ita l mar ket s
a total of
amounts
of p a i d- i n
p ha se
$230 m i l l i o n
from ord ina ry
mil lio n
star t- up
o p er at io ns .
now ra is e d
lending,
Korea,
l e nd i n g
The Bank has
I have
pat ter n
for its
in the
larger p r o p o r t i o n
scription.
Funds
in these m a r ke t s
of
candor,
of Bank p o l i c y
As youH
the ADB l a s t
frankness and
and
operations. Hj
S. and our m o s t recent contacts
7
with him at the annual meeting in Manila have convinced us
that
to
we have a first-rate President, one who
our
will be responsive
and the Bank's interests.
Furthermore, Mr. Chairman, I would like to point out
several changes m
Bank policies and procedures resulting
directly from concerns we have expressed.
First, the Bank has increased its recruiting efforts in
the United States.
We now have 20 U.S. professionals on the
staff, second only to Japan's 29.
Moreover, a major Bank
recruiting ¿rip to the U.S. is scheduled for early summer in
an attempt to further increase the number of Americans at
the Bank.
I might add that U.S. nationals are occupying policy
positions within the Bank.
The General Counsel is American,
which is especially important since members of his staff
take part in every loan m is si on and all loan negotiations.
The Chief Economist is American; two of the six division
chiefs in the Operations Department are Americans? and one
of the four in the Projects Department is from the United States.
Secondly, the Bank now provides three weeks between the
submission of an issue to the Board of Directors and actual
discussion of that issue by the Board.
This provides
sufficient time for us in Manila to send the document to
8
-
Washington, have it reviewed there by the National Advisory
Council, and receive back guidance on the U.S. position prior
to Board discussion.
Now that pr oj ec t s
started w o rk
toward
are being
completed,
establishing
important ma tt e r
e st ab li sh me n t
Even
In my ¿judgment,
and we are p r e s s i n g
we
still
are
financed projects.
wh ile
concerned,
the U.S.
Currently,
Ja pa ne s e
as you have,
m a ny
Un it ed
firms
about
States
r e ce iv e
this
years.
two ex ch a n g e
to re store
rea li gn me nt
against
Ger man y has
been
that
In the se le c ti on
This
on t ec hn ica l p r o p os al s
firms
get over
the pi c t ur e w ith
States
above
has
tended
and
where
bid and
lost,
they
lost
example,
to the J a pa n e s e
against
help.
is
States
pr i c e
enters
the United
86 c o nt r a c ts
States
only
the
Un it ed
so far by Bank bo r ro w e r s,
firms have bid on only 29 and w h e r e U n i t ed
ha v e been
selection
the
in
s i gn i f i c a n t
Yet w h en
Of
been
oper at ive
that
supply of equip me nt,
to do ve ry poorly.
$500,00 0 awa rde d
while
compe te nce ,
the business.
the
For
be a very
of consu lt an ts ,
based
50% of
should
8% of the
competitiveness
c o m pe t i t iv e n e ss .
35%,
get
The
rate r e a l i g n m e n t s
Ja pan has been
29%.
share of Bank
I have
situation.
recent
into
early
its ope ra tin g
firms
56%.
in my v i e w has been our d e c l i n i n g
de signed
for
is
of c o ns i d e r a b l e
procurement
factor
The
of
faced w i t h p r o b l e ms
concern, most n ot a b l y w it h
business,
hard
this
of an e ff ec t iv e m e cha ni sm.
th ough the Bank has a d ju st ed
procedures-,
also
an e v a l u a t i o n m e c h a n i s m to
in de p e n d e n t l y r e v i e w Bank projects.
a very
the Bank has
United
firms
40X of
the
States
have
time
9
and to the U.K.,
the time.
France,
West
In other words,
We have
is given —
taken
and
opportunities
of U.S.
States
steps
the ot her
goods
and
60% of
one r e l a t i n g
low sales
firms.
to as su re
goes p r o m p t l y
ar ising
etc.
the p r o b l e m is a b ro ad
to lack of c o m p e t i t i v e n e s s
performance by Un ited
Germany,
—
that m u c h mo r e
to our
firms
from A s i a n D e v e l o p m e n t
information
on p r o c u r e m e n t
Bank financing.
From my own c o n v e r s a t i o n w i t h A m e r i c a n b u s i n e s s m e n
in the
region,
by the
I can report
that
increased O pp or t u n i t i e s
they also
br ought
are e n co u r a g e d
about by the r e a l i g n m e n t
of
currencies.
Let me e mp ha siz e
that on the basis
of
ination we see no e vi den ce of d e l i b e r a t e
against United
procedures.
in detail.
pro blems,
Both rev iew s
definitely
on p r o c u r e m e n t
However,
procedures of
we
all
shall
the B ank and
the B a n k ’s p r o c u r e m e n t
IBRD
to e x am in e
concluded
and
that
Bank
for U.
and
r e v i e w p r o ce s s
to w o r k to as s ur e
its b o r r o w e r s
IDB
the ADB
and u n b i a s e d
its p r o c u r e m e n t
and fair co m p e t i t i v e o p p o r t u n i t y
staff
the T r e a s u r y D e p a r t m e n t
are o b j e c t i v e
continue
or
one of our
f a mi li ar w i t h
and
that the Bank a d m i ni st e rs
fairly.
we a s s i g n ed
M ore recently,
co nsultant,
procurement p ra ct i ce s
guidelines.
ago,
exam
discrimination
in the B a n k ’s p o li c i e s
the task of r ev i e w i n g
employed an ou tsi de
guidelines
firms
Several mo nt hs
men in Man i la
guidelines
States
i n de p e n d e n t
provide
the
an am pl e
S. busi ne ss.
10
After
six years of opera ti ona l
of the Asian Devel opm en t
experience,
Bank is now initiating
review of its or g a ni za t io n and procedures.
the new President
of the Bank has
especially r esp on siv e
with the Bank.
to concerns
As I mentioned,
the United
viewed
from a U.S.
In summary,
A d m i ni st ra t io n
criticisms wh ic h we
Mr.
members of your
also
like
letters
m
Mr.
co mmittee
to introduce
friends and allies
of this
V o l c k e r ’s statement
Chairman,
I urge you and
to v i e w the requests
several
items
Development
appropriation,
at
the recent
Bank in Ma ni la
Bank.
in
that region.
into
from Secretary of State Rogers
support
the
si g ni fi can tl y to the economic
to stabilize
these reasons,
support
to the As ian D ev elo pm ent
serving U.S.
and they cont rib ut e
For
I strongly
for Special Funds and a further
co ntr i bu ti on
growth so ne ce s sa ry
the
e sp eci al ly as the Bank is
Chairman,
The ADB is ef fec ti vel y
Asia,
improving
standpoint.
s request
ordinary capital
to be
States may have
have voiced and has every intention of rapidly
and image,
a timely
shown himself
He fully app reciates
B a n k Ts operations
the management
favorably.
the record
I would
including
and AID Adm in ist ra tor Hannah
a copy of Under
Annual Mee ti ng
and a Special
ment Bank p ro cu re men t practices
the
Report
and procedures.
Secretary
of the Asian
on Asian Develop"
DepartmentoftheTREASURY
SHINGTON, D.C. 20220
TELEPHONE WQ4-2041
FOR RELEASE UPON DELIVERY
STATEMENT BY SECRETARY GEORGE SHULTZ
BEFORE THE SUBCOMMITTEE ON ENVIRONMENT OF THE
HOUSE INTERIOR AND INSULAR AFFAIRS COMMITTEE
WEDNESDAY, MAY 23, 1973
AT 9:45 A.M.
Mr. Chairman and Members of this Committee:
I appear before you today to discuss a number of
energy matters that are of concern to you, to the
Administration, and to America's citizenry. With me is
Mr. Charles J. DiBona, Special Consultant to the President,
and Director of the National Energy Office.
On April 18, the President presented a broad and
comprehensive energy message. The President called for action
in six areas:
1.
Increase domestic production of all forms of energy;
2.
Act to conserve energy more effectively;
3.
Strive to meet our energy needs at the lowest cost
consistent with the protection of both our national
security and our natural environment;
4.
Reduce excessive regulatory and administrative
impediments which have delayed or prevented
construction of energy-producing facilities;
5.
Act in concert with other Nations to conduct
research in the energy field and to find ways
to prevent serious shortages; and
6.
Apply our vast scientific and technological
capacities -- both public and private-- so we
can utilize our current energy resources more
wisely and develop new sources and new forms
of energy.
Not only did the President call for action in each of these
areas, but he also acted! He completely restructured our oil
import program. Effective May 1, 1973, all volumetric quotas
on oil imports were ended, the existing duties on imports of
petroleum and petroleum products were suspended, and a system
S-211
2
of license fees was instituted. Our objective was to design
a program which would assure the oil industry flexibility to
import oil to satisfy the short-term needs of U.S. refiners
and consumers while, at the same time, to provide longer-term
stability and additional incentives for increased domestic
exploration and production and new refinery construction and
expansion.
The policies outlined in the President’s energy message
were arrived at after careful thought and analysis. Some
have said that the message was not strong enough -- for instance,
that it didn’t provide for enough money to be spent on research
and development. I feel that it was a very strong statement -- it
was a call to action that we must and shall heed. With respect
to research and development, the President said that we will
spend whatever reasonable amounts are needed while not foolishly
allocating funds more rapidly than they can be effectively spent.
This to me is sound policy.
To better understand how these policies were determined,
I would like to outline briefly the problem we face in the
energy area.
Demand and Supply
The first thing to understand is that the demand for
energy has been increasing continually while our supply has
not. With six percent of the world’s population, we are
consuming 33 percent of the world’s energy. Furthermore, the
demand for energy in this country is growing at an annual rate
of about four percent and by 1990, our energy requirement will
be double that of 1970. Much of this increase in demand is
attributable to an increase in the demand for oil, which has
grown, in part, because there has been a shift away from coal
to oil and, in part, because of the inability to obtain natural
gas, the other alternative to oil. Oil and gas now account
for about 65 percent of world energy consumption and about 76
percent of U.S. energy consumption. And it will not be until
the mid-1980's that nuclear and other sources of energy will
begin to provide for a significant part of the energy demands and
reduce the world's dependence on oil.
Given this growth in demand, let’s look at what has been
happening in the oil industry:
-- Domestic production last year began a slow
decline to which no early end was foreseen, even though
virtually all of our wells were producing at 100 percent
of capacity for the first time in history.
-- The amount of domestic exploratory drilling for
oil has fallen substantially. Oil well drilling actually
peaked in 1956 when an estimated 208 million feet of
3
productive wells and dry holes were drilled. Since
that time, there has been a rapid decline. In 1960,
only about 145 million feet were drilled; by 1970,
this had fallen to 100 million feet; last year, the
total was down to 86 million feet. This may have been
due in part to the lack of price and tax incentives, but,
it is important to realize that we have exploited the
economically most desirable oil properties and now have
to develop areas that are remote and more expensive.
-- U.S. refining capacity actually decreased by 11,000
barrels per day in 1972 even though demand grew by over
one million barrels per day. Prior to the President’s
energy message, no new refineries were under construction.
Furthermore, expansion of existing refineries had nearly
ceased.
To meet growing U.S. demand, oil imports rose
dramatically. Much of the new import supply came from
the insecure and politically volatile Middle East.
Between 1969 and 1972, total oil imports rose by 52
percent to 4.6 million barrels per day. Most of this
increment came from the Middle East, whose imports
increased by 83 percent to 573,000 barrels per day.
The result of these developments in the oil area is
that we have moved from a buyer’s market to a seller's
market. Producing countries now have a powerful voice
in the determination of oil prices and volumes.
-- Finally, our distribution systems for both crude
oil and products have been poorly matched to the new
supply situation, with the result that spot shortages
have occurred.
Like oil demand, demand for natural gas rose at a
tremendous pace. But again, let us look at what has been
Happening in the gas industry:
-- Domestic production is practically static. As a
result, we are living off of our reserves, which fell signififürXy..l*!î year 311,1 which> at the current pace, will be exhausted
m iu to 15 years.
Both the demand and the supply picture for gas resulted
fii i an “lstoric policy of artificially low prices for this
“V : T"e price of gas is far below that of competing fuels
"jc tar below the value to society of this cleanest and most
convenient of all fossil fuels.
4
Relation to Environmental Quality
Other factors that have added to the increased demand
for oil and also to the financial requirements of the industry
are environmental quality standards. These requirements have
caused a shift away from high sulfur coal to low sulfur crude
oil. This move has made the demand for oil even higher. Furthei!
pollution controls, such as automobile emission devices, have
reduced mileage per gallon, which has increased cur need for
gasoline. Air and water pollution requirements will also add,
by 1975, about three cents per barrel to the costs of refining
crude oil in the U.S.
During the months ahead, we have to achieve a compatibility
between energy needs and environmental standards. This is a must]
Approaches to Solve the Problem
Let me outline some of the solutions proposed by the
President.
First of all, the main objective of our energy policy
is to foster a vigorous domestic energy industry. As such, the
President has provided major incentives to energy production in
the United States:
(1)
Natural Gas. The President proposed competitive -as distinct from regulated -- price treatment of new natural
gas. Regulation of wellhead prices of gas at artificially low
levels has seriously discouraged the search for new gas -- a
search by the way, which also turns up a portion of our new
oil discoveries. Now, we are proposing to let new gas co nt ra cts
seek their own price level in competition with other fuels,
subject to the reservation that the Secretary of the I n t e r i o r
can impose a ceiling according to certain criteria, if
necessary. Since the wellhead price is less than 20 percent
of the delivered price, and since the provision would apply
to new contracts, the effect on consumers would be gradual
and limited; but, the effect on oil and gas exploration should
be immediate and substantial.
(2)
Investment Tax Credit. The President has p ro p o se d
a seven percent investment tax credit on intangible drilling
costs for new domestic exploratory wells. Further, for wells
that prove economically productive, there is a supplementary
five percent credit. Thus, the credit is structured to reward
success.
In this way, the Nation will be a guaranteed winner
since a successful well will at the same time provide needed
energy resources and increase the tax revenues.
(3) Outer Continental Shelf. The President has dire cte d
the Secretary of the Interior to triple the acreage leased on
the Outer Continental Shelf by 1979. A substantive p o r t i o n of
the estimated reserves of oil and gas yet to be discovered in
- 5
1
the United States are in the Shelf. The President’s program,
which contains firm environmental safeguards, will put us in
the position of taking advantage of these great reserves. The
availability of three times as many offshore tracts from which
to select will increase the payoff of industry’s offshore
programs. An additional effect would be to reduce the concen
tration of bidding on a limited number of tracts which has
raised bonus payments to astronomical levels and has, for this
reason, effectively increased the capital needed to expand
production.
(4)
New Oil Import Program. By terminating volumetric
quotas on oil imports and substituting a license fee system
for existing tariffs on petroleum and petroleum products, the
new oil import policy provides major incentives for U.S.
production and U.S. refinery construction:
-- The new schedule of fees on imported oil
establishes a clear differential between the price
of domestic and the price of foreign oil which
favors U. S. production.
Refiners and new refiners now have
long-range assurance of access to world crude oil
markets. A major concern of companies considering
new or expanded refineries was uncertainty of
supply due to the fact that U.S. crude oil production
had peaked and imports were limited by the import
allocation system.
The fee schedule also establishes a
differential between the fee on imported crude oil
and the fee on imported refined products. Thus, it
should be more profitable to refine here than to
refine outside the U.S. and to import the refined
products.
There is an additional incentive for new
refinery construction or expansion.
Companies
building new refineries or expanding existing
refineries will be granted license fee-exempt
allocations equal to 75 percent of their additional
inputs for their first five years-of operation. At
established fee levels, the total financial benefit
of this exemption is about 18 percent of construction
costs. And I am happy to say that companies have already
responded to these incentives. Since April 18, 1973, a
number of companies have announced that they now.'-plan
to build or expand refineries in the United States,
increasing capacity by over 2 million barrels a day.
They include Shell Oil Company, Ashland Oil, the
Pittston Corporation, Exxon, Mobil and Standard Oil
of California. Others have indicated to us that they
6
are seriously considering building refineries
here, but have not yet made their plans public.
In addition, several independent marketers have
stated their intention to devleop their own U.S.
refinery capability.
Additional support will be given to the U.S.
refineries when the superports called for by the
President are constructed. By increasing the size
of a tanker from 65,000 to 250,000 dead weight tons,
you can cut the dollar per ton freight costs by
nearly 30 percent. At present, refiners at several
Caribbean and Canadian sites have the advantage of
deepwater ports which can accommodate the new modern
and economical supertankers but U.S. refiners do not.
The President has proposed legislation to permit the
Department of the Interior to issue licenses for the
development of such ports beyond State waters after
full and proper evaluation of environmental impact
and land use, and in cooperation with State and local
authorities.
The President’s message also encourages development
of new energy sources, such as development of our vast
oil shale deposits, gasification and liquefaction of
coal, and other types of energy such as geothermal energy.
These will be increasingly significant areas of investment
for our country.
Conservation Measures
Energy Conservation can play an important role in
stretching supplies and thus ameliorating possible shortages.
To this end, we will need the cooperation of the government,
industry, and the public. Travelers are being encouraged to
minimize their use of automobiles this summer. According to the
Automobile Manufacturers Association, about 56 percent of the
cars on the road contain only the driver. This underutilization
of cars can be reduced in many cases, especially in metropolitan I
areas. Car pools and public transportation should be substitute J
where possible, for single-occupant cars. Use of smaller cars,
with better gasoline mileage performance, is another measure
the public might take to conserve gasoline. Additional measures |
include reducing the use of the automobile air conditioner,
keeping tires properly inflated, cutting off motors when stalle
in traffic, and avoiding excessive speeds on the highway.
Now I would like to move to the subject of the Deepwater
Ports Facilities Act of 1973. The United States is, for the
present and the immediate future, committed to an energy system
7
greatly dependent upon fossil fuels, and a transportation
system based largely on petroleum. This fact, our need to
import large quantités of petroleum, and our positive concern
for America’s environment, combine to make deepwater ports
not only attractive, but necessary. Among the environmental
and economic benefits of large tankers are the following:
°
They can incorporate the most up-to-date antipollution devices.
°
They reduce port congestion, run less risk of
collision or grounding and they remove any oil
spills that might occur from sensitive coastal
and estuarine areas.
0
They are more efficient and cheaper to run be
cause of their size, speed, and because they can
unload offshore into pipelines.
0
They provide an alternative to transshipment
terminals in the Bahamas and in Canada. That
alternative means that we will export fewer
jobs and investment opportunities, and so will
strengthen our own economy.
In all, then, they are better for the environment, for labor
and industry, and for the consumer.
The Administration has asked for this legislation
because, in spite of all the advantages offered by deepwater
ports, no U.S. or foreign company has been willing to risk
the large amounts of investment capital necessary to construct
a facility large enough to service the biggest petroleum
tankers. The reluctance of industry is due largely to
uncertainty -- and one of the main purposes of this proposed
legislation is the removal of that uncertainty.
International law grants all nations and their nationals
the right to make reasonable use of international waters, and.
the operation of deepwater ports certainly qualifies
as a reasonable use. However, any offshore port has to be
connected with the mainland, either by piepline or by feeder
vessels. That linkage, within U.S. territorial waters and
ashore, becomes subject to Federal and State control.
There is a second cause for uncertainty. In 1958 the
Geneva Convention on the Outer Continental Shelf (OCS) gave
each coastal nation the right exclusive to exploit the non
living and sedentary living resources of the OCS out to the
200 meter isobath, and adjacent waters beyond to the ability of
coastal states to make use of those resources. Anv structure
8
built on the United States OCS that interferes with our
exclusive right to use those resources would be subject to
Federal objection or opposition.
It is only natural for potential offshore port
owners to want to know if they can build, and how controls
will be exercised. A Federal licensing system, by spelling
out the Federal requirements in advance, would eliminate
much of the uncertainty.
The Act will also do much to reduce the possibility of
damage to the environment. We want to assure that any deepwaterl
ports operated off our coasts are built and operated in
accordance with strict environmental and safety standards.
The bill, therefore, prohibits transporting commodities between I
the United States and any deepwater port off our coast that is
not licensed under the Act. Further, continguous individual
States retain their normal jurisdiction. State land-use plans, I
pipeline or environmental regulations and the requirement for
Federal-State consultation prior to issuance of a license, all
provide the opportunity and the obligation for coastal states
to play an important role in the siting and construction of
these facilities. We feel, then, that local, State and Federal I
concerns about the economy and the environment are all well
served by the proposed Act; and further, that it conforms with
our international agreements, interests, and policies. I urge
your support for the Deepwater Port Facilities Act of 1973.
Research and Development
I
w o u l d 1 i k e n o w , M r . C h a i r m a n , t o move t o a n o t h e r aspect
o f o u r e n e r g y p r o b l e m a n d t o d i s c u s s w a y s we c a n w o r k f o r
r a t i o n a l , o r g a n i z e d , and e f f i c i e n t s o l u t i o n s .
The A dm inistrate]
i s e x t r e m e l y c o n c e r n e d w i t h t h e r o l e o f r e s e a r c h a n d development
in s u p p l e m e n t i n g o u r e n e r g y s u p p l i e s - - b o t h t h r o u g h dom estic
s o u r c e s o f s u p p ly , a n d i n w h a t m i g h t b e r e f e r r e d t o a s "alternatj
o r Mn o n - c o n v e n t i o n a l n s o u r c e s .
I n t h e l a t t e r c a t e g o r y , I would
i n c l u d e s u c h t h i n g s a s s o l a r e n e r g y , m a g n e t o h y d r o d y n a m i c s (MHD)
and f u s i o n - p r o d u c e d e n e r g y .
I th in k t h a t th e A d m in istra tio n 's
c o n c e r n - - a n d l e a d e r s h i p i n t h i s a r e a - - w i l l b e c l e a r from
j u s t a few f i g u r e s .
In t h e f i r s t p l a c e , t h e A d m i n i s t r a t i o n ' s c o n c e r n about
e n e r g y a n d i t s a p p r o a c h t o e n e r g y R§D c a n n o t b e c h a r a c t e r i z e d
as a sudden r e c o g n i t i o n d u rin g t h e p a s t y e a r o r tw o.
Over the j
5 y e a r s i n c l u d i n g t h e F i s c a l 19 74 b u d g e t , t h e F e d e r a l e n e r g y
R§D e x p e n d i t u r e h a s i n c r e a s e d f r o m $ 3 8 2 . 5 m i l l i o n t o $ 7 7 1 . 8
m i l l i o n , an i n c r e a s e o f o v e r 100 p e r c e n t .
Fr om l a s t y e a r to
t h i s y e a r a l o n e , t h e i n c r e a s e w as $ 1 2 9 . 5 m i l l i o n , up f r o m r
$ 6 4 2 . 3 m i l l i o n , o r an i n c r e a s e o f o v e r 20 p e r c e n t .
I n addition
t o t h e s e i n c r e a s e s , t h e P r e s i d e n t s t r e s s e d , in t h e Energy
I
M e s s a g e , h i s c o m m i t m e n t t o s p e n d m o r e f o r e n e r g y R§D where ana
when we
id en tify
good p r o j e c t s
th at
can
use
th e
m on ey e f f i c i-enn
9
We will identify good projects, and we will spend more money,
especially beginning in the Fiscal 1975 budget« In this regard,
we are considering a high level advisory committee of eminent
scientists and engineers to assist the Federal Government in
identifying promising areas for R&D.
Mr« Chairman, I realize that there is a view that the
question of efficient use of the R&D money is secondary, that
we should spend enormous additional quantities, but not worry
too much about how efficiently we do it« I believe we must
find the most worthwhile projects to use our money and best
talent on«
We cannot continue to be profligate with our energy
resources nor can we become profligate with our economic
resources« The Presidents program, coupled with his avowed
determination to reallocate and spend more on worthwhile
projects, allows us to make progress on a number of fronts«
In the
that covers
fission and
protect our
supplies«
Fiscal 1974 budget, we have a mix of research
fossil fuels, geothermal power, solar energy,
fusion, as well as research on ways to best
environment while we provide necessary energy
As part of this program, we are requesting $120 million
for coal research-- 27 percent more than last year, and
about four times as much as in 1970« Further, the National
Energy Office has been working closely with the Department
of the Interior and with the Office of Management and Budget
to identify projects with a high likelihood of payoff« As
those are found, and if it seems that they can use more
money efficiently, the money will be allocated«
The coal research money will go to a number of projects,
and there is heavy emphasis on converting coal to clean
burning liquid and gaseous fuels or directly to electrical
power« In nuclear fusion and fission, the 1974 budget
provides for increases of 35 percent and 19 percent
respectively« Most of these funds are earmarked for
magnetic confinement and laser fusion programs, the
Liquid Metal Fast Breeder Reactor, and to nuclear reactor
safety R&D« Again, I should say at this point that
Mr<> DiBona and his staff are working with 0MB and the
AEG on some possible actions that may result in adding
money to other nuclear projects that would broaden our
10
nuclear energy alternatives„ The solar energy program will
be tripled, from $4 to $12 million dollars in FY 1974, and
is expected to increase again in FY 19750 There has also
been an increase of $11 million for environmental control
R&D, most of which will be allocated to constructing a
sulphur oxide removal demonstration plant0
All of these programs are in the Administration^
proposed FY 1974 budget0 But again, let me emphasize our
current examination and evaluation of the budgeted projects
and of other possibilities0
I
have spent time on the Administrations program
because I feel that there is some misunderstanding0 Some
people feel the President is ignoring energy R&D0 The fact
of the matter is he has been leading a rapid expansion of
energy R&D programs and will continue to expand those
programso
That means, obviously, that there is much agreement
on the part of the Administration with the objectives of
HoRo 6602, the proposed ,fNational Energy Research and
Development Policy Act of 19730" I would go further,
Mro Chairman, and say that we agree wholeheartedly with
the objectives of the Bill -I to stimulate development of
our domestic resources toward domestic energy selfsufficiency and our conservation, environmental, and
efficiency goals0
HoRo 6602 recognizes the need to accelerate the
development of fossil fuels; the need for centralizing
authority, responsibility and institutional capability
for policy and implementation in energy R&D; and the
need to ensure Government/industry cooperation to
demonstrate and commercialize energy technologies0 All
of these ends are logical and desirable, but I feel that
they can and will be adequately inet by other means,
including management initiatives the President has taken,
our own reallocation efforts, and the Administrations
Department of Energy and Natural Resources proposals,
which will be coming to the Congress in the very near
futureo
11
fwf^
/
Further, we feel that in R&D spending, we may be closer
together than the headlines would have it appear» As I
mentioned, the Administration's energy R&D spending has
more than doubled since 1970, and the President is committed
to continued increases» To add another $800 million to this
year's budget might only have the effect of discouraging
industry involvement in R&D, or forcing some very large part
of that into industries, organizations, and agencies that
could not handle it properly and efficiently« Furthermore,
many of the current R&D projects are in early stages of
development and would not effectively use large amounts
of funds until they progress to the demonstration phase in
the next several years« The better way, I believe, is to
continue to increase amounts to be spent on energy R&D at
a rate determined by the productive opportunities and
programs we can identify«
This should be done to as large an extent as possible, by
industry as well as government« We are trying to encourage
industry involvement now, and we are succeeding« Private
industry has done much to develop oil shale and geothermal
deposits, and will continue to do so« The AEC and industry
are working together, and we are encouraged by the amount
of industrial participation in the low-BTU coal gasification
projects« The utilities are recognizing their obligation
to do some of this, and the Electric Power Research Institute
(EPRI) is a manifestation of their intent — its budget will
exceed $100 million next year« These are things that demonstrate
that our attempts to involve industry in these programs are
working« Industry can see where the most likely payoffs are,
and they will invest in those areas« The role of government
should be, to the greatest extent possible, to invest where
industry is unable to« In that way, the partnership will be
most effective«
There should be an orderly buildup, with good programs
growing and others being reduced, depending upon their
potential and progress«
Another point of disagreement is that of structure and
complexity. As I have mentioned, the President has taken
steps to streamline the existing Federal energy organization
and additional steps will be taken shortly. I feel that the
Administration focus is at a high level at present, and our
forthcoming proposal for organization will serve to focus
the R&D.
-
12
-
Overall, I should say that the overall objectives of
H.R. 6602 are consistent with the Administration’s objectives.
We disagree only on certain of the steps toward those objec
tives. First, present Federal energy organization does not
preclude increased R&D expenditure0 We have increased our
expenditures greatly, and will continue to do so. Second,
we have assigned a high priority to this problem, and that
is the reason for Mr. DiBona’s appointment, and for the
creation of his staff -- the National Energy Office -- in
the White House. Third, the bill seems to assume that
Government/industry cooperation cannot take place within
our existing organizational framework. That is not the
case, and the Liquid Metal Fast Breeder Reactor project and
the program for high BTU gassification of coal, among others,
demonstrates that. I believe that the creation of five —
or some other number, since I understand that Senator Jackson
has told this committee that he was not wedded
to five -- corporations might only complicate matters, and
perhaps impede industry-government cooperation. The question
of the R&D funding levels, I have already discussed.
To sum up, I feel that there is merit in the R&D
organization proposals, but that the Administration’s
forthcoming proposal will provide a greater focus, and a
cleaner organization to work toward the same ends we all
must strive for.
Mr. Chairman, I thank you for providing me this
opportunity to express my views.
0O0
Department
oftheTREASURY
INGTOli DC 20220
TELEPHONE WQ4-204T
ATTENTION ; FINANCIAL EDITOR
May 24, 1973
FOR RELEASE 6:30 P. M.
RESULTS OF TREASURY'S MONTHLY BILL OFFERING
The Treasury Department announced that the tenders for $1,800,000,000
, and
or thereabouts, of 3 4 1 -day Treasury bills to be dated May 31, 1973
were
to nature
May 7, 1974
, which were offered on
May 17, 1973
opened at the Federal Reserve Banks today.
The details of this issue are as follow78 :
PUGS OF ACCEPTED COMPETITIVE BIDS:
High
Lov;
Average
-
93.587
93.512
93.542
Approx, equiv. annual rate 6.770$ per annum
Approx, equiv. annual rate 6.850$ per annum
Approx, equiv. annual rate 6.818$ per annum
(93 $ of the amount bid for at the low price Was accepted)
WTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
Federal Reserve
District
Total
Applied for
Total
Accepted
Boston
New York
Philadelphia
Cleveland
$
$
10,410,000
1,574,585,000
6,550,000
13,435,000
11,305,000
7,220,000
41,040,000
18,900,000
17,295,000
10,490,000
4,255,000
84,590,000
Richmond
A tlan ta
Chicago
St. Louis
Minneapolis
Kansas City
D allas
San Francisco
30,700,000
3,108,285,000
41,690,000
38,460,000
22,840,000
20,220,000
230,995,000
67,470,000
37,305,000
22,690,000
30,895,000
284,650,000
TOTALS
$3,936,200,000
|
$1,800,075,000
y
Liis is on a bonk discount bonis.
y
Includes $36,075,000
entered on ; noncompetitive basis and accepted in full
at the average price shown above.
The equivalent coupon issue yield is 1 . 2 1
mm, D C. 20220
TELEPHONE W 04-2041
FOR IMMEDIATE RELEASE
May 24, 1973
Secretary George P. Shultz accepted today the
resignation of John J. Caulfield as a Treasury
employee.
Secretary Shultz said "your resignation is
hereby accepted, effective as of the close-ofbusiness today."
Mr. Caulfield had been Assistant Director of
Criminal Enforcement in the Bureau of Alcohol,
Tobacco and Firearms.
oOo
S-2 13
s
May 24, 1973
The H o n o ra b le G eo rg e P . S h u l t z
S e c re ta ry o f th e Treasu ry
T r e a s u r y D epartm ent
Room 3 3 3 0
W a sh in g to n , D. C. 2 0 0 0 6
D ear M r.
Secretary:
I
hereby
resig n
C rim in al E n forcem en t,
and F i r e a r m s ,
I
and w i s h
it
Bureau
e ffe ctiv e
have
good
as
A ssista n t
o f A lco h o l,
of
Tobacco
im m ed iately .
e n j o y e d my s e r v i c e
fo rtu n e
D irecto r
in
th e
w ith
fu tu re.
th e
D epartm ent
May 25, 1973
FOR IMMEDIATE RELEASE
TREASURY DEPARTMENT TAKES OVER
U. S . POST O F F IC E HEADQUARTERS BUILDING
GSA h a s
announced t h a t
w ill be a s s ig n e d
qu arters
its
th e
b u ild in g
headqu arters
The move,
with t h e
U .S .
on J u l y
to
concurrence
ment o f f i c e s
in
D epartm ent o f
P ostal
1.
S erv ices'
The P o s t a l
th e
Treasury
W ashington h ea d
S erv ice
is
m oving
L 'E n fa n t P la z a .
arranged
w ill c o n s o lid a t e
th e
by th e
of
th e
G eneral
O ffice
one b u il d in g
now w i d e l y
scattered
of
S erv ices
Management and B u d g e t,
a number o f
in
A d m in istratio n
th e
T reasu ry D epart
W ash in gton -B altim ore
area.
Located
in
W a s h in g to n 's
Federal T rian g le,
b o r d e r s on P e n n s y l v a n i a A v e n u e b e t w e e n
12th
th e
and
b u ild in g
13th
Streets,
Northwest #
The U . S .
statio n
in
P ostal
th e
present
The T r e a s u r y
floors.
The
w ill
of
part
the
o ffices
reta in
its
Ben F r a n k l i n
b u ild in g .
D epartm ent w i l l
la rg est
able f o r o f f i c e s
headqu arters'
S erv ice
of
of
th e
In tern al
th e
be
a ssig n ed
b u ild in g
a ll
w ill
b e made a v a i l
Revenue S e r v i c e
Bureau o f A lc o h o l,
eig h t
and t h e
Tobacco
and F i r e a r m s .
S-214
OVER
2
IRS facilities to be move to the Post Office location
include the Washington Branch Office of the Baltimore
District Office, now at 1201 E Street, Northwest? the National
Training Center, presently occupying space in Crystal Plaza
in Virginia; the Office of International Operations, now at
1325 K Street, Northwest? and the Regional Appellate Division,
now in the Universal Building at 1825 Connecticut Avenue,
Northwest.
The transfer of the Post Office Building to the Treasury
Department will utilize Federally-owned space instead of
leased space in several metropolitan locations, thereby
céntalizing administrative services, and economizing on
monetary outlay to house government facilities.
The new
location also provides convenient transportation with a
cross-section of bus routes and a proposed Metro station
within the Postal Service building.
oOo
JREASlIRY
Departmentofthe
SHINGTON, D C. 20220
TELEPHONE W04-2041
J78'
al
FOR RELEASE
FRIDAY, MAY 25, 1973
OIL POLICY COMMITTEE CHAIRMAN GIVEN AUTHORITY
TO ALLOCATE PETROLEUM PRODUCTS
n,
Authority to set priorities for the use and
allocation of petroleum products as provided for by
the Economic Stabilization Act Amendments of 1973
was delegated today to the Chairman of the Oil Policy
Committee by the Chairman of the Cost of Living
Council,
George P. Shultz, under general authority delegated
to him by the President (Executive Order 11695, dated
January 11, 1973) .
Chairman Shultz noted that many government
departments and agencies are involved in the supply and
use of crude oil and petroleum products.
These should
be consulted before any authority is exercised under the
oil allocation amendment to the Economic Stabilization
Act, Shultz said.
"Because the Oil Policy Committee is composed of
representatives of most of these departments and agencies,
Shultz stated, "I have determined that the Oil Policy
Committee and its Chairman should be utilized in any
implementation of this authority."
S-212
(more)
2
The Oil P ol i c y C o m m i t t e e is c h ai re d by W i l l i a m E.
Simon,
the D ep u t y S e c r e t a r y of the Treasury.
c o n si s t of the he ads of State,
Interior,
Commerce,
Treasury,
M e mb er s
Defense,
Justice,
and the C o un ci l of E c o n o m ic Advisers.
As a n n o u n c e d by the T r e a s u r y on M a y 10,
the crude
oil and pr od uc t s a l l o c a t i o n p r o g r a m is b e i n g op e ra t e d
n a t i o n w i d e on a v o l u n t a r y basis.
he ld June 11-13,
in Washi ng ton ,
Pu b li c h e a r in g s will be
D. C.,
to ev a lu a t e how
this p r o g r a m is w o r k i n g and w h e t h e r it sh ould be made
m a n d a t o r y u nde r the a u t h o r i t y d e l e g a t e d to the Oil Policy
C o m m i t t e e Chairman.
-oOo-
ü.
S„ TRE ASU RY
Add res s
DE P AR T M E NT
of Se cr et a r y Sch ul tz
CHAIR:
X wo uld like to int ro d u ce our guest speaker.
lOur speaker tonight is one of the most p o we rf ul and able men
lin government.
George Shultz had b e en Se cr etary of the Tre as ury
|for the past year.
Previously, he served as Pre si den t Nixon's
¡Secretary of Labor, and is the first Di rector of the Of fi ce of
management and Budget.
This year he as sumed ad di ti o na l espc ns ibi li tie s
rhen he became as si sta nt to the Pr es ident for c o o r d i na t i n g domestic
lend international eco nom ic policy.
And the P r esi de nt app oi nte d
■him chairman of the new council on e c ono mi c policy.
He is also c ha ir man of the Cost of Li v in g Co uncil and
r 8 a member of the A d vi s or y C o mm i ss i o n on I n t e r g o ve r n m en t a l Relations
Phu8 his res ponsibilities cover a w i d e range of activities, not
■only employing his e xp er tis e in economics and his specialty,
■labor relations, but also i nv ol vin g him in policy deci si ons aff ec tin g
agriculture, maj or industry, t ra ns p o r t a t i o n and foreign trade,
ia8t to mention a few.
D es pi t e his co m mi t m e nt to a Re p u b li c a n
r ministration, he has m a in t ai ne d the many fr ie ndships he dev el ope d
r n organized labor in the days w h e n labor rela ti ons w e r e his
primary preoccupation.
He is the only me mber of the a d m i n i s t r at i o n
r o is on terms of close personal friendship w i t h Ge or ge Meany;
P r*®ndship sometimes renewed across the b a rg a i n i n g table, and
poffietiaes on the golf course.
fend
Secretary Shultz has said that he has no p o lit ic al am bitiohs
Pf that he regards hi mse lf entirely as a p r o fe s s i on a l rather
ta®a a Political man.
It seems to me that a concept w h i c h he
I,
aoored to impl eme nt in his pu blic service, the idea of m a x i m u m
P active coo pera tion b e t w e e n go ver nm e n t and pr i v a te sectors
society while p re se r v i n g the identity of each, is the essence
2
of what we as members
to achieve«
of
this cou nc il are
trying and at t em p t i ng
We are f or tu nat e that g o ve rn me nt today re co gnizes the
for such c o o pe ra t io n and has called u po n a man of Ge or ge
Shultz’s o ut s ta n di ng q u a l if i ca t i on s to fill it*
need
It is a di st in c t p l ea s u re to pre se nt
George P. Shultz, Se cretary of the Treasury«
to you
the Ho no ra b l e
[A p p l a u s e . ]
SECR ET ARY OF TR EA SU R Y GE OR GE P. SHULTZ:
Mr. Chairman,
ladies and gentlemen, I a p pr e ci a t e your gracious introduction.
You mentioned Ge org e Meany.
He in t r o du c e d me to a u ni on group
not long ago much m o r e simply.
He said I was the gr eatest s ec ret ar y
of the Treasury si nce J o h n Connally.
[ L a u g ht e r•]
You m en ti o ne d the array of things that I contend with
these days.
And what I thought I would do this evening, pa r t i cu l ar ly
since it seems to be im po ss i bl e for me to be able to w r i t e down
a speech and read it, is just to talk w i t h you about the major
problems in eco nomic po lic y that seem to me to be most i m por ta nt
right now, the ou t l oo k w ith res pect to each of them, and the
kind of i n te r c on n ec ti n g e co no mi c polici es that w e ’re trying to
pursue to tran sfo rm the pol ici es into a li ttle be tt e r outlook.
And I hope that, at the same time, I w i l l be able to get across
to you not only the na tur e of some of these problems and policies,
as w e ’re thinking about them, but also, pa rt ic u l a rl y in this
very strong h i g h - l e v e l o pe ra t io n of our economy, the sense in
which all of these di ffe re n t things are cl osely in te rr e la t e d
as though you c a n ’t look at any one area w i t h o u t h a v i ng to think
about all of the others.
In a sense, i t ’s sort of an i l lu s t r a t i o n
of the success that w e ’ve had in the economy that we are op er ating
at such a high level.
But at the same time that very fact h ig hli ght s
the relationships among these d i f fe r e n t parts.
I t ’s almost as
though when it rains in the farm belt, we know that t h a t ’s going
to cause trouble in c o ll e ct iv e b ar gai ni ng, and we see that much
more clearly these days.
So I h ope that fact w i ll b e c o me mo r e clear.
And third,
that you will get a sense that your go ve rn m en t is in action,
that we are doing things.
And we are a d d r e s si n g ourselves to
problems and p r o p os i ng polici es to deal w i t h them and taking
actions to deal wi th them as we go along.
So that is the general point that I wo u l d —
set of
Points that I wo u l d like to ma k e and the way in w h i c h I w i l l
go about it.
But I think as we address o u rse lv es
to any b ro ad
topic,
3
whether it is eco nom ic policy or anythi ng else that we talk about
in our country today, we have to set it into its background.
And I think we have to have some th ing to say about the set of
events, or w h a t e v e r you w a n t to call them, that these days go
under the general w ord of " W a t e r g a t e . ” And so I want to say
a word about that and some of the implications, at least as X
see it, be c aus e it seems to me, from the s ta ndp oi nt of the g o ver nme nt
that there are c er tai n very clear things that have to be done,
and which the P res id ent is doing.
But X think w e have to be
very clear wi t h ours elv es about the i m po rt an ce of it and not
in any way say, "Well, it's going to go away," be c a u se it i s n ’t;
it's going to be w ith for quite a while, and not say w e ’re not
going to think about it, b e c a us e we are, we know that, have to,
and ask ourselves, well, w h a t are the implications.
And 1 think
really there are three things from the g ov ern me nt standpoint.
First, that we have to go after the p r ob le m in its specific
terms in a de t er m in ed way, in a fair way and an open way, and
somehow get a hold of it and get it out of the g o ver nm ent system.
That's number one.
And then we have to reflect u po n it all and say to ourselves
"What can we le arn about the way in w h i c h w e ope ra te that can
lead us to know how to do a b e t t er job, how to r e arr an ge the
way that we o p er at e so that we can avoid these mi s ta k e s ?"
And
some moves have b e e n m a d e in that direction.
1 expect that there
will be further efforts in that direction.
I hope so, and I
think so, and I think we need to have further action.
And, finally, I think —
and I b e l i e v e in many ways
this is going to be the most d if f i cu l t thing of all in the a t m o s p he re
that we have —
we have to remind ou rselves all the time that,
in a sense, what w e n t w r o n g is that not en ough a t t en t i o n was
paid to the tried and true old ve r it i e s that h av e su st ai n e d our
system.
And in de a l in g w i t h the problem, we do n' t w a n t to depart
from those veri ti es either.
And so we have to be careful, very
careful of In di vi d ua l rights, very ca reful of our con ce rn that
people not be co nv i ct ed un til they are convicted, if they are,
and to behave w i t h fairness toward individuals.
So I believe, from the s t a n d p oi n t of any subject, we
cave to address our sel ve s to this W a t e r g a t e p r o b l e m that is a
®atter of tremendous co n c er n and deal w i t h it.
Now, I think, from the s t a n d p oi n t of so ciety m o r e generally,
there're also some ex tremely i m po rt an t c on clu si ons that we must
draw or things we must d e d ic at e ou rs el v e s to.
Bec au se it seems
to me that over the past, say, six or eight years, pa rt icularly,
somehow connected w i t h the V i e t n a m war, c o nne ct ed w i t h the problems
had in our cities and on our campuses, and w i t h the Water ga te,
cat we have lost our se nse of c o n f i d en c e in each other and our
ability to trust and w o r k with each other.
And that is the essence
of a well fu n c ti oni ng society.
So I think we have to renew and
rebuild our trust and c o nf i de nc e in our leade rs hip and in the
institutions of our society, in our univer si tie s, in our businesses,
in our unions, in our churches, in the press, in local government,
state government, as w el l as the federal government.
Well, that, I suppose, is, in many ways, the most im po rtant
thing I have to say about ec onomic policy this evening.
But
let me go on and say some m o r e s p ec if ic things about economic
policy.
I made a list here for my se lf of problems, and then
alongside it I m ade my li ttle list of o u t lo o k w i t h respect to
those problems, and in b e t w e e n I h av e tried to put down the policy
content that w e ’re w o r k i n g on.
And I'll qu ickly read off my
lists.
Number one on the "hit parade* X su ppose has to be infl ati on
as an economic p r o b le m that w e * r e co nc er n e d with.
Then it seems
to me we need to w or r y about the c o m p e ti t i v en e s s of our economy,
which is partly the sense in w h i c h it has the capac ity t o pro du ce
those steady increases in real incom e that w e ' v e all come to
expect, and, in part, a qu es ti on of how we stand aroun d the world:
can we sell in w orl d mark ets ?
How c o m p e ti t i v e are we?
We have
to look at our trade p os i t i o n and b a l a n c e of pay me nts po s it i o n
and what has b een h ap pe n in g to it.
We have to look at what' s
happening to employment.
It has be e n risin g very strongly, 2.7
million jobs in the last year*
But w e have to be w a n t i n g to
see that emp loyment grow and to co n si d e r the sec ur ity w it h w h i c h
people are employed.
We look at the p r o b le m of equity in the tax system,
and we know —
and I s up pos e I feel this pa rt ic u la r ly as Sec re tar y
of the Treasury —
that in a tax sy s te m that de pends on vo lu nta ri sm,
the sense of equity of the sy st em is extr em ely important.
So
we need to look to that and need to look to the s i m p l i f i c a t i o n
°f the tax system at the same time.
We consider that i ndu str ia l peace, w i t h i n some limit,
is an essential in gre d ie nt and a problem, s o met hi ng that w e ® r e
doing relatively w e l l with, but s o m e t hi n g we need to tend to.
The budget, a co ns ta n t problem.
Energy, & ma j o r p r o bl e m for
U3 right now to w h i c k we m ust address o u rse lv es and w h i c h we
have addressed ours elv es to.
And, finally, I put down h er e farm
policy, I think p a r t ic u la rl y because, it seems to me, we stand
at a moment of rare o pp or t u n i t y to m a k e a b r e a k w i t h the policies
that we have been pu rs ui n g and adapt those p o lic ie s to w ha t I
«ink is a re la ti vel y new s i t u a t i o n in the world, w h i c h gives
U8 a new opp or tun it y in that area.
.
Well, those are a list of problems.
And I think, ba si cally,
J'n ier®s of the outlook, the o u t l o o k for i n f l a ti o n is less of
5
it by the end of the year.
The o u tl oo k for c o m p et i t i ve n e s s is
we're getting better.
Our trade p o s i t i o n is improving.
Our
employment pi ct u re is strong.
We are going to h av e qu ite a task
in improving the equity of the tax system.
Vie h av e a lot of
proposals out there and a general spirit of a g re e m e nt that we ' r e
going to have to do s om et hin g about that and simplif ic ati on .
As I said, I think the c li ma t e for i nd ust ri al rela ti ons right
now is out standing, b e t te r than it's b e e n in a long while.
1 want to co mment on the bu dget in c o n n e c t i o n w i t h inflation.
Energy is ce rt ai nl y a ma j o r p r o b l e m for us, and it int er con ne cts
with some other —
so m any ot her areas, p a rt i c u l a r l y our dr ive
to improve our envir onm en t, that I think it const it ute s a central
problem for us.
And in terms of farm policies, w i t h the demand
for food risin g all around the world, as w e l l as here, it seems
to me we have an o pp or t un it y to h av e our farmers g e n e ra t e high
and rising income, based o n added p r o d u c t i o n w i t h reaso na ble
prices rather than the pol ici es of the past in w h i c h we have
essentially tried to p ro vi d e good farm incom e by re st ri c t i ng
production and ge tti ng prices up.
And I think we have the o p p o r t u
nity to turn that around.
Well, so mu ch for my list of pro bl ems and the ou tl ook
about them.
And no w let me try to co nnect them, w i t h some di s cu s si o n
about policies.
And as you can see, in st ead of p i ck in g a topic
here to talk to you ab out this evening, I'm sort of o f fer in g
you a smorgasbord, b ec a u s e that's w ha t the w o r l d offers me every
day, damnit, and y o u ' r e going to get a dose of the same.
But
I think, as I said, the m e s s a g e is how cl osely In t e r co n n e ct e d
these things are and ho w almos t I m p o s s ib l e it is to think construetively about on® of these issues w i t h o u t askin g yo urself, well,
what about all the others, b e c a u s e they are so closely related
to each other.
Well, let's talk about i n f l a ti o n and w h a t Is taking
place there; a m aj o r p r o b l e m here, a ma j o r p r o b l e m in all other
countries as well.
Well, I th ink in a group like this we know
that the key i n gr e di en t has to do w i t h our b u d g e t policy and
our monetary policy.
And the trick is, w i t h the economy rising
at a real rate of about eight p e rc en t and w i t h its abi li ty to
rise, once we get to capacity, limited to s o me t h i ng on the order
of four percent or so —
the trick is to s o me ho w lower the rate
of increase w e ' r e now e xp er i e n c i n g so that it gets out on the
four percent path and m ore or less stays there.
So w e ' r e going
to have to d e c re as e our rate of increase, and w e hope in doing
that we don't fall down too far.
And that c o ns t a n t l y puts us
u the position, to the extent that go ve rn m en t po licy is going
to be important in this —
and I think it is
of h e a ri n g all
he time about the i n f l at io n p r o b l e m and how we mu s t do so me t h in g
a out it, and do s om et h in g d ra s t i c about it, and slam the brakes
°u* damnit, and we s it tin g there saying, "Well, no."
Cert ai nly
want to exe rcise discipline.
We h av e to e x er ci se discipline.
ut We really do n't w a n t to s la m the br akes on for fear of causing
oo much discipline, too m uch of a downturn.
And that's sort
of °u* dilemma.
(j\\yy
6
Well, now, what is h ap pen in g?
Mo n et a r y policy, I think
all you bank er s here will agree, has b e e n pul li ng the reins in,
particularly since the first of the year, and we have a m o net ary
policy that is p ro vi d in g a dis c i p li n e to the economy.
In some
ways, i t ’s sort of an a m bi v al e n t discipline, because, w i t h our
Committee on Interest and Dividends, t h e r e ’s a stake in not ha v ing
interest rates rise too high; but we know that rising interest
rates are a co unt er p ar t of a di sc i p li n e d mo n et a r y policy.
So,
as in many areas, we are caught in so me t h in g of a dilemma.
Now, l e t ’s look at the budget.
We have had the idea
in the a d m i n i s t r a t i o n that we ou ght to be bold enough w h e n the
economy is op er a ti ng at less than full em pl oy m en t to use the
budget as a st imu la n t to the economy, and to not only be content
but to think that a def ici t in the bu dg et is a good thing.
And
that has st artled a lot of people, p a rt i c u l a r l y a lot of Re p ub l ic a n
politicians, who, as the P re s i d e nt said to them once, " Y o u ’re
all going to have to go home and r e -w ri te your sp ee ches."
But
nevertheless, a d ef ici t w h e n y o u ’re o p e ra t i n g at less than full
employment was put forward as desirable.
And at the same time,
we said, "Well, how much of a de fi cit is d es ira bl e?
Is there
any limit?
How do y ou tell the limit?"
And here the idea that
the revenues that the tax sys t e m w o u l d ge nerate at full em pl oyment
came through as a r ea so n a b l e limit, partly for the mo me nt w h e n
you’re trying to s ti mu l at e the economy, but X sup po se a little
bit more wi th a se nse of p e r s p e c t i v e about what m ig ht be coming
in the future, ab out the p r o b l e m you w o u l d have w h e n the economy
started rising towards its cap ac ity and you w e r e going to have
to get that bu dg et into balance, and the need to keep some control
on federal outlays, k no wi n g how d i ff i c u lt that is.
Well, I think the effort to keep a d i sc i p l i n e on federal
outlays is paying off, and we are going to br i n g the fiscal '73
budget in at two hun dre d and fifty * il li o n dollars, as the Pres ide nt
said he wo u ld six or eight mon th s ago —
and I think pro ba bly
fflost of you di smi ss e d it as a very u n l i k e l y thing to do.
But
that is going to take place.
And X b e l i e v e that there has been
a great tur n-around in p e o p l e ’s thinking.
And so now the l ik eli hoo d
is quite st rong that the outlays in fiscal *74 are going to be
pretty much w h a t the P re si den t p r o p o s ed in January; that is,
outlays mo re or less in line w i t h full em pl oy m en t revenues*
Now, in the me antime, the economy has m ov ed up very
strongly*
It has mo ved up mo r e str on gly than w e a n ti c i p at e d
nd so hol ding outlays w h er e w® had ex pected them to be , we now
see the def icit in the federal bu d ge t shrinking.
And it’s sort
°j- fun being s ec re t ar y of the Treasury, b e c a u s e the co m m i ss i o n er
of Internal R ev enu e comes r u nn in g into my of fi c e three or four
mes a day w i t h his hands full of money, sa y in g "My God, look
°v this ig rol lin g in.
I t ’s great."
And it is true.
Our re ve nue
estimates are exceeded every day.
We a n nou nc ed some new es ti mates
* °ut three or four we eks ago.
T h e y ’re obsolete.
And I said
7
at the time that we figured that the bu dg e t deficit w o u l d be
no more than twenty b il l i o n in fiscal *73.
It*s going to be
less than that.
And we revised our es timate of the bu d ge t deficit
in fiscal *74 down to about five and a half billion.
And it*@
going to be less than that.
In fact, we are mo vi ng very st rong iy
toward a b al an ce d bu dg et in fiscal *74, w h i c h we need, w h i c h
is providing a good di sci pline, and w h i c h I think w i ll help us
very powerfully in our effort to co ntain inflation.
And at the same time, of course, the Phase III w a g e
and price control system, for w h i c h I have b e e n pilloried, X
must say —
I w i s h that —
m an y times I wish, "My goodness, it
would have b e e n nice if we just left Phase II in there and let
it explode."
And I could h a v e bl am ed it on som eb ody else.
And
I would have to say — - well, I don*t even really wa n t to qu ite
say it facetiously, but one good thing about the W a t e r g a t e is
that they don*t b la me Phase III for e ve ryt hi ng any more.
[Laughter.]
But that's
number one problem.
sm all comfort.
I w is h
i n fl a t i on w e r e our
But anyway, w e are us i ng the w a g e and price co ntrol
system as cr ea tiv el y as w e can to pr o v i de a se nse of co ntrol
in wage and price — • p ar ti c u l a r w ag e and pr ice situations; to
do so with our eye on the ef fi ci e n c y of the economy, and try
not to be so s in g l e m i n d e d about the i n fl a t i on p r o b l e m that we
do things that mess up the eff ec tiv en ess w i t h w h i c h the economy
works; and at the same time, as I s u gge st ed In c o n n e c ti o n w i t h
agriculture, to use the o c c a s i o n of ev er yone's c o nc e r n about
inflation to do things that w i l l help us, over a long pe riod
of time, to incr eas e supply and to ch ange the p o lic ie s that have
essentially restr ict ed the supply of i mp ort an t goods.
And so
we have expanded a cr ea g e and cha ng ed around rather d r a s t ic a l l y
the farm policies.
We have finally cr ac ked through to a new
attitude toward stockpiles.
We are finding out all kinds of
cragy things, such as w h e n you w o r k on st o c k pi l e s of food, for
example, as soon as you get that p r o b l e m solved, you im me d i at e l y
find out that you h ave a great t r a n s p or t a t io n problem; you have
a big shortage of boxcars, as Ben could have told us at the b e gi nn i ng
And then you start wo nde r in g, "Well, w h e r e are all those bo xc ar s ? "
And you find over a h un dre d thousand of them are be ing used by
the Defense De pa rt m en t for w ar e ho use s.
And, you know, you say,
My God!"
[L au g h t e r . ]
But anyway, s© you beat on these problems,
the other, and gr ad u al ly m a k e a littl e headway.
one after
So, anyway, I think we have a well coordinated program
on inflation and one that is attacking the problem primarily
in terms of the fundamentals
budget policy, monetary policy,
supply policies, but also trying to make as much use as we can
of the ability to control particular wages and prices.
Î glance at my watch here once in a while because Î
was told ten o'clock is the limit, which it almost is.
Well, let me not go down my list any further, because
I have about run out of time, I'm sorry to say; but just reassert
the fact that when you look at problems like our problems of
international trade or monetary development, where I think we've
made some tremendous strides, you see again the relationship
to the inflation problem, our budget problem, our farm policies,
the sense of interconnectiveness that we have throughout this
whole set of things.
I have been watching the television as you have, and
I have listened to tke people say that nothin's going on in Washin
ton; everybody is so concerned about the Watergate that the govern
ment is immobilised. And 1 would have to say to you 1 don't
recognise that myself from my own activities. I see everyone,
of course, concerned about this problem, but at the same time
a determination to say, "Well, all right. There's a lot that
has to be done there. But for goodness sakes, let's not get
so bogged down in it that we don't do our jobs, that we don't
do the things that we're here for that the American people expect
out of us." And so I think if we had the time here I could go
through a tremendous array of economic policies that we have
before the Congress, that we have in negotiation, that we have
in administrative action of one kind or another. And out of
that, I think I could assure you that you have a government that
is working, that is recognising problems, that is faking action,
that is dealing with things that, to some extent, are the products
of our success, but at the same time not trying to kid itself
into thinking that everything la just great, but addressing proble
in an honest way. And I think that that governmental presence
and energy and effort is there. And I believe that we can carry
this forward, particularly if we can somehow generate a sense
of the importance of doing that, however terrible these other
problems may be. I believe in seeing a group like this and listen
ing a little bit to the work that this council is dedicated to;
that this sense of community spirit must exist here, as it does
elsewhere; and that we can address these problems that we have.
And we will, and we must.
Thank you.
[Applause.]
CHAIR:
Thank you...
Department of t h e f R E A S U R Y
Sington. d.c. 20220
ATTENTION:
TELEPHONE W04-2Q41
FINANCIAL EDITOR
May 25, 1973
RELEASE 6:30 P.M.
RESULTS OF TREASURY'S WEEKLY
BILL OFFERING
The Treasury Department announced that the tenders for two series of Treasury
ills, one series to he an additional issue of the hills dated
March l| 1973
, and
he other series to be dated
May 31, 1973
, which were invited on May 18, 1973,
¡ere opened at the Federal Reserve Banks today. Tenders were invited for $2,500,000,000,
pr thereabouts, of 91-day hills and for $1,700,000,000, or thereabouts, of
182-day
ills. The details of the two series are as follows:
IGE OF ACCEPTED
COMPETITIVE BIDS:
High
Low
Average
9L-day Treasury hills
maturing August 30, 1973
Approx. Equiv.
Annual Rate
Price
98.332
98.289
98.308
6.599$
6.769$
6.694$
1/
182-day Treasury hills
maturing November 29, 1973
Approx. Equiv.
Annual Rate
Price
96.554 a/
96.518
96.530
6.816$
6.887$
6.864$
1/
a/ Excepting four tenders totaling $1,130,000
^
1
°
of the amount of 91-day hills hid for at the low price was accepted
of the amount of 182-day bills hid for at the low price was accepted
TAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis'
Minneapolis
^sas City
Dallas
San Francisco
TOTALS
Applied For
24,340,000
$
2 ,840,475,000
36,965,000
26,540,000
21,205,000
13,920,000
237,280,000
37,620,000
21,210,000
29,645,000
40,615,000
120,445,000
Accepted
$
14,340,000
2,031,275,000
21,965,000
26,065,000
21,205,000
13,920,000
136,280,000
30,620,000
21,210,000
29,645,000
33,115,000
120,445,000
Applied For
$
12,490,000
2,979,135,000
6,955,000
30,765,000
17,810,000
11,405,000
229,935,000
34,155,000
27,980,000
39,395,000
29,940,000
143,075,000
Accepted
$
2,475,000
1,471,535,000
6,335,000
26,765,000
16,810,000
11,405,000
56,885,000
19,155,000
9,980,000
20,550,000
7,440,000
51,275,000
$3,450,260,000
$2,500,085,000 h/
$3,563,040,000
$1,700,610,000 c/
includes $ 205,150,000 noncompetitive tenders accepted at the average price of 98.308
Hicludes $ 109,985,000 noncompetitive tenders accepted at the average price of 96.530
nese rates are on a hank discount basis. The equivalent coupon issue yields are
for the 91-day hills, and 7.21$ for the 182-day hills.
Departmentof
iheTREASURY
inpm kì n
r. 20220
on'jort
lASHINGTON,
DC
TELEPHONE W04-2041
|
FOR IMMEDIATE RELEASE
May 29, 1973
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 $4,200,000,000, or thereabouts, for
cash and in exchange for Treasury bills maturing
of $4,287,370,000
June 7, 1973,
in the amount
as follows:
91-day bills (to maturity date) to be issued
June 7, 1973,
in the amount
of $2,500,000,000, or thereabouts, representing an additional amount of bills
dated
March 8, 1973,
and to mature September 6, 1973
originally issued in the amount of $1,800,490,000,
(CUSIP No. 912793
RTi|
the additional and original
bills to be freely interchangeable.
182-day bills, for $1,700,000,000, or thereabouts, to be dated June 7, 1973,
and to mature
December 6, 1973
(CUSIP No. 912793
SG2).
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 $10,000, $15,000, $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 clos
ing hour, one-thirty■p.m., Eastern Daylight Saving time, Monday, June 4, 1973.
Tenders will not be received at the Treasury Department, Washington.
Must be for a minimum of $10,000.
$5,000.
Each tender
Tenders over $10,000 must be in multiples of
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.
nay not be used.
Fractions
It is urged that tenders be made on the printed forms and for
warded 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
(OVER)
-
account.
2
-
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.
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.
Only those
submitting competitive tenders will be advised of the acceptance or rejection
thereof.
The Secretary of the Treasury expressly reserves the right to accept or
reject any or 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 $ 2 0 0 ,0 0 0 or less without stated price from any one bidder will be accepted
in full at the average price (in three decimals) of accepted competitive bids for
the respective issues.
Settlement for accepted tenders in accordance with the
bids must be made or completed at the Federal Reserve Bank on
June 7 , 1 9 7 3 ,
in cash or other immediately available funds or in a like face amount of Treasury
bills maturing
treatment.
June 7 , 1 9 7 3 .
Cash and exchange tenders will receive equal
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.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the
amount of discount at which bills issued hereunder are sold is considered to accrue
when the bills are sold, redeemed or otherwise disposed of, and the bills are ex
cluded from consideration as capital assets.
Accordingly, the owner of Treasury
bills (other than life insurance companies) issued hereunder must include in his
income tax return, as ordinary gain or loss, the difference between the price paid
for the bills, whether on original issue or on subsequent purchase, and the amount
actually received either upon sale or redemption at maturity during the ta x a b le
year for which the return is made.
Treasury Department Circular No. 418 (current revision) and this n o t i c e ,
prescribe the terms of the Treasury bills and govern the conditions of their issu
Copies of the circular may be obtained from any Federal Reserve B an k or B r a n d .
Departm entoftheTREASURY
fclNGTON, DC 20220
TELEPHONE W 04-2041
FOR IMMEDIATE RELEASE
May 29, 1973
SAMUEL R. PIERCE, JR.
PRESENTED
ALEXANDER HAMILTON AWARD
Secretary of the Treasury George P. Shultz today presented
the Alexander Hamilton Award to Judge Samuel R. Pierce, Jr.,
General Counsel of the Department of the Treasury.
Presented for "outstanding and unusual leadership in the
work of the Treasury," the Alexander Hamilton Award, which
includes a gold medal, is conferred only on recipients whom
the Secretary personally designates. It is Treasury's highest
award.
Judge Pierce's citation reads:
"As General Counsel of the Department of the Treasury,
Samuel R. Pierce, Jr., has served with distinction as lawyer,
administrator and adviser to three Secretaries of the Treasury
and he has made outstanding contributions to significant
administration programs.
"As a principal draftsman of the Emergency Loan Guarantee
Act and later as Executive Director and General Counsel of
the Emergency Loan Guarantee Program, he played an important
role in facilitating the legislation and in negotiating and
administering an agreement under which there is virtually no
chance of loss to the taxpayer under the Lockheed Loan
Guarantee Program.
"Judge Pierce's mark can also be found in every phase
of the economic stabilization program. It was most apparent
in his sage counsel on the complex legal issues underlying
the program; in his effort to substantially amend the Economic
Stabilization Act of 1970 to make it more effective; in his
considered review of rulings of the Cost of Living Council, Price
Commission and Pay Board; and in his role of explaining Phase III
to businessmen, labor leaders, and the public at large.
"Finally, much of the credit for the success of the
Department's program to afford equality of opportunity to
employees of the Treasury and of the banks of the nation,
where minority employment has almost tripled in the last few
years, goes to Judge Pierce for his vigor in fulfilling his
responsibility as Director of Equal Employment Opportunity."
(.over;
S-215
2
Judge Pierce was appointed General Counsel of the
Treasury by President Nixon on July 1, 1970, becoming
the first Black in history to serve in a subcabinet
position in the Treasury, and as such was one of the
highest ranking Blacks in the Nixon Administrâtion0
Recently he submitted his resignation which will become
effective on June 1, 19730
Prior to joining the Treasury as its General Counsel,
Mr. Pierce had been a Judge of the Court of General Sessions
(now part of the New York State Supreme Court) in New York
City, and subsequent to that had been a partner in the law
firm of Battle, Fowler, Stokes & Kheel in the same city0
Judge Pierce will return as a partner to his former law
firm, which will be renamed Battle, Fowler, Lidstone,
Jaffin, Pierce & Kheelo
oOo
Department
HINGTON, D C. 20220
oftheJREASURY
TELEPHONE W04-2041
STATEMENT BY MR. HAL REYNOLDS
UNITED STATES REPRESENTATIVE AT THE
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
BEFORE THE FOREIGN OPERATIONS SUBCOMMITTEE OF THE
APPROPRIATIONS COMMITTEE OF THE HOUSE OF REPRESENTATIVES
FOR FY 1974 IDA APPROPRIATION
,,-V
.
WEDNESDAY, MAY
10 A.M.
X f
1973
Mr. Chairman:
I am pleased to appear before the Subcommittee today
in support of the Administration's appropriations request
for $320 million to cover the second installment of the
U.S. three-year subscription to the Third Replenishment
of the International Development Association.
This
appropriation is necessary for the continuation of IDA's
lending program in FY 1974.
As members of the Subcommittee
know, IDA is the affiliate of the World Bank which makes
loans on concessional terms to the poorest and least
developed countries of the world.
Following the enactment of authorizing legislation
by the last Congress, and following appropriation cover
ing the first installment of $320 million, and then only
-
2-
after consulting specially with the Congress, the
U.S. formally agreed to participate in the Third
Replenishment in September of last year.
Under that
Agreement, twenty-two nations agreed to provide IDA
with $2.44 billion over a three-year period.
U.S. share of this amount is $960 million —
The
39.3% of
the total.
When U.S. participation in the Agreement was
announced last September, it was indicated that the
annual installments of the U.S. contribution would be
paid in fiscal years 1973, 1974 and 1975.
This schedule
represented a slippage of one year in the pay-in schedule
contemplated under the original Agreement and was in
line with the report of May 11, 1972 of the Committee
of Conference on Supplemental Appropriations which said "The managers agree that there is no intention of denying
each of the three annual installments of $320,000,000 in
the next three fiscal years and that the first installment
will be provided in the fiscal year beginning July 1, 1972."
Payment of the U.S. first installment was made in
November of last year from funds provide^ under the
terms of the FY 1973 Continuing Resolution for Foreign
Assistance and Related Items.
The other contributing
governments have already paid their second installments
-3-
\
in accordance with the original time schedule.
The
request being made today for fiscal 1974 appropriation
will enable the U.S. to pay its second installment as
these other nations have already done.
This installment will be made in letter of credit
form —
to be drawn upon only as IDA requires funds to
meet disbursements on its credit commitments to borrowers
in the developing countries, and then only on a pro rata
basis with the funds from other countries.
No budgetary
outlay or balance of payments outflow will result in
fiscal 1974 from the present request.
It is estimated
that in fiscal 1974 U.S. suppliers will receive contracts
of roughly $130 million to provide goods and services for
IDA financed projects, from past authorized loans, on which
bidding is now taking place.
In addition, about $35 million
of the Associations administrative expenses will be incurred
in the United States.
The overall impact of World Bank operations on the
U.S. balance of payments is heavily favorable.
During
the past 15 months, not a penny has been borrowed in U.S.
capital markets, while well over $2 billion has been raised
in the markets of other countries.
In the present fiscal
year the combined impact of IBRD/IDA operations on the
U.S. balance of payments is/expected to be favorable to
the extent of almost $400 million.
/
On>e of the important
-4-
factors in achieving this favorable effect has been the
IBRD's increased reliance on private capital markets in
other countries.
Mr. Chairman, the case for continued U.S. support
of IDA is compelling.
The Association provides assistance
exactly where the need for concessionary lending is most
acute; that is in the poorest recipient countries.
All IDA
recipients have a per capita income of less than $375 and
most of them are much poorer than that.
Many of them would
find it very difficult or even impossible to find capital
elsewhere to fund development projects.
IDA, like the IMF and the IBRD, operates within the
context of the world's market economies.
It seeks to
advance interdependent interests in a liberal world trading
system.
Its economic development objectives fit closely
with U.S. objectives in the related areas of international
trade and international finance.
In this connection, we
should not ignore the growing dependence by the United States
on overseas sources for its raw materials and other essential
products.
In many cases, IDA financing enables developing
countries to export higher quality goods on a more reliable
and economic basis.
It also encourages private investment
in their countries by its support for the development of
necessary infrastructure.
This factor certainly needs to
-5-
be included in any assessment of U.S. interest now and
in the future.
Let me enumerate, for a moment, Mr. Chairman, some
of IDA's specific accomplishments.
In FY 1972, it extended
credits of one billion dollars for 68 projects in 38
countries.
At the same time, it also moved into several
new areas of lending activity, launching projects in agri
cultural development, education and family planning.
To illustrate this last point, more than $300 million
was allocated for agricultural projects in 1972, $50 million
for education, and $35 million for family planning.
The
family planning projects, in particular, represent a major
effort on IDA's part to combat the population problem in
countries where pressures of overcrowding are extremely
severe:
such as India and Indonesia.
An important IBRD
population project was also recently approved for Malaysia.
In line with its current 5-year plan, IDA has also
greatly increased its activities in regions somewhat
overlooked in the past.
For example, lending to Africa
tripled within the last few years, amounting to nearly
$250 million in 1972.
IDA has also focused greater
attention on the special problems of the "least developed
countries", and is now working to improve efforts in the
fields of technical assistance and project preparation.
-
6-
It also has an important role in planning for programs
for reconstruction and development in one of its poorest
and newest members, Bangladesh.
Of course, the role IDA plays goes far beyond the figure^
that I have just mentioned to you.
Perhaps the best way
to look upon IDA's role is as a catalyst.
By its lending
activities, it helps to mobilize domestic financial
resources within the borrowing countries.
It encourages
other lenders, both public and private, to participate
in projects.
The total amount, therefore, of IDA projects
is much larger than the funds IDA itself puts into them.
The World Bank Group plays an important role in coordinating
the flow of resources to developing countries through its
chairmanship of consortia and consultative groups.
From a managerial viewpoint, Mr. Chairman, the
organization and procedures of IDA and the World Bank
are under continuous review.
This helps to ensure that
the institutions are efficient and responsive to the
needs and desires of both contributing and borrowing
member governments.
In the last year, the Bank undertook
an important reorganization, which unified functional and
area responsibilities and established a more coordinated
approach to lending operations.
-7-
0
®
The World Bank Group, including IDA, has a
reputation throughout the world as a serious and
responsible financial institution, deeply concerned
with the problems of development, but at the same time
rigorous, demanding, and professional in its operations.
Bank and IDA operations are managed responsibly and
efficiently.
The repayment record is excellent.
IDA money is never a hand-out.
meticulously prepared and appraised.
such as education —
Projects are
Except in fields
where short-term benefits are almost
impossible to quantify —
IDA projects must demonstrate
a rate of return of above 10 percent a year.
This is
exactly the same standard applied to IBRD loans, which
bear nearly commercial rates of interest.
In my judgment,
the record of achievement has been remarkable, notwith
standing the early stages of development of the borrowing
countries and the staggering problems they face.
After credits are approved, no funds can be released
without explicit authorization by IDA management.
All
projects are closely supervised at every stage, with on
site inspections by IDA staff and regular reports to
senior management and to the Board of Directors.
The
procurement of goods and services also is closely supervised.
-
8
-
Borrowers must conform to Bank guidelines, which are
based on international competitive bidding.
In most
cases, all contract awards must be approved by the
Bank, after a review of the procedures used by the
borrowing country.
At the urging of member governments —
larly the United States —
and particu
the World Bank has established
an operations evaluation unit.
This unit is completely
separate from the operating departments of the Bank.
It
has presented to the Board of Directors a series of frank
and objective evaluations of Bank operations, ranging from
comprehensive assessments of the Bank’s role in a given
country or sector, to post-audits of individual projects
after disbursements have been completed.
The work of
this unit promises to be extremely useful to the Board
of Directors and to management for the purpose of strength
ening future operations.
The recent GAO report on U.S. participation in the
World Bank and IDA offered a number of suggestions for
strengthening the role of the U.S. in these institutions.
I believe that considerable progress has already been made
in implementing the constructive proposals made by the GAO,
notably in the areas of information on projects in prepara
tion, reporting on project supervision, and evaluation
activities.
We should remember, though, that the role
of the Board of Directors is not to involve itself in
technical decisions, but rather to decide policy issues,
and to see that approved policies are adhered to and
effectively implemented.
Since the earliest years of
the Bank's history, the U.S. has played a crucial role
in guiding the evolution of the institution, and the
dynamic, forward-looking role of the Bank and IDA today
reflects in large measure the leadership of the United
States.
By supporting this request for funds, you will
enable the United States to join with the industrialized
countries of the world which have already made their
second installment payments under the Replenishment
Agreement.
And you will affirm the willingness of the
American people to continue their support of the IDA
development program.
=3
FOR RELEASE UPON DELIVERY
REMARKS BY DR. WILLIAM JOHNSON
ENERGY ADVISER TO
DEPUTY SECRETARY OF THE TREASURY WILLIAM E. SIMON
BEFORE THE
TEXAS INDEPENDENT PRODUCERS & ROYALTY OWNERS ASSOCIATION
_________ _______SAN ANTONIO, TEXAS__________________.
Tuesday, May 29, 1973, 9:15 AM, CDT
Ladies and Gentlemen:
I am pleased to be able to meet with you at this time.
The very first sentence of President Nixon's energy message
last month gave recognition to the fact that this is a time
of transition.
Some have also called it a time of crisis
for the industry and for the Nation as a whole.
For this reason, we must talk to one another, and share
our thoughts on how to resolve the problems that you as an
industry and we as a Nation face.
The Energy Crisis
It is becoming increasingly clear to all that the Nation
is faced with an energy crisis.
What is not universally
accepted are the reasons for this crisis and, especially,
what must be done to correct it.
At the risk of
overgeneralization, let me begin by making several rather
S-216
2
sweeping assertions.
First, there is both a long and
short-term energy problem.
The long-term problem involves
the possible depletion of our oil and gas reserves with
time, as our economy and population grow.
But this
Nation has abundant untapped energy resources, such as
coal, oil shale, solar and geothermal sources, and nuclear
fusion.
The ultimate solution to the long-term problem
is research and development.
It is the utilization of
energy sources not now economically or environmentally
possible or even contemplated under existing technology.
I am less concerned about the long-term problem,
largely because there have been cries of doom many times
before and, in each case, we have been able to survive.
For example, a report by Arthur D. Little has declared:
"To infer that still other oil fields remain to be
disclosed (in the United States) is almost as
unreasonable as to assert that the country has not
been fully pioneered....
"The only hope of maintaining our present rate of
supply (of oil), let alone the present rate of
growth, looks out abroad to the known Mexican fields
in particular, and to the Central and South American
possibilities in general."
(Parentheses supplied.)
That report, incidentally, was written in 1920.
Given a
sufficient incentive to industry, we will find a way to
supply our energy needs in the 1970's and 1980's as we
did in the 1920's.
Of greater concern to me is the short-term problem —
the shortages of energy supply relative to demand that can
be expected during the next ten years.
The short-term
problem has nothing to do with the depletion of fossil
fuel reserves.
It has everything to do with our failure
to develop these reserves as rapidly or effectively as
possible.
And this leads me to my final and, perhaps, most
sweeping generalization:
our short-term difficulties
with gas, coal, and oil are very largely the result of
ill-conceived and mistaken policies of federal, state,
and local governments which are now coming home to roost.
For years, we have been sacrificing the long-run interests
of the Nation to secure short-run objectives such as
unrealistically low prices for consumers and the too rapid
environmental controls and restrictions.
Now, unfortunately,
the long run has arrived.
Let me present a brief overview of some of these
policies.
First, natural gas.
In no segment of the industry
have our policies been so wrong or created such damage as
ln 9as-
I refer primarily to the regulation of natural gas
4
prices at the wellhead.
The conscious decisions of the
past to keep gas prices as low as possible, regardless of
the consequences on future exploration and, worse, to
change retroactively prices already approved by the FPC,
have discouraged investment in drilling.
As a result, we
are today withdrawing natural gas from reserves at twice
the rate that we are adding gas to reserves.
We have,
in brief, created an artificial shortage that need not
have occurred.
This shortage has, in turn, encouraged
investment by the pipelines and gas companies in such
high-cost alternatives as syngas and LNG, which will, in
the end, cost the consumer more than if wellhead prices
were deregulated.
The Nation's experience with regulation of wellhead
prices has driven home to me the truth of two fundamental
principles.
First, it does little good to assure a
consumer a low price for a good or service that he cannot buj
Second, whenever you require a producer of a goods or s e r v i c j
to subsidize the consumer, as we have been doing in gas
you are heading for disaster, for in the end neither
producer, nor consumer, nor the Nation as a whole will benefij
And so, today, many consumers are unable to obtain gas and
are turning, instead, to oil which, for a number of r e a s o n s )
is also in short supply.
■sgSaSSa
A
5
The net effect of our policies toward coal has been
the same.
Because of air quality standards, utilities,
the principal consumers of coal in this country, have
been switching to residual oil and, in some instances,
No. 2 fuel oil, in this way deepening the oil shortages
that the country now faces.
Yet, at a time when we should have been intensifying
our exploration efforts to find more oil and gas, the
depletion allowance was reduced, price controls were
imposed, leases were withdrawn for environmental reasons,
construction of the Alaskan pipeline was blocked, and
development of our offshore and Arctic reserves was
delayed.
The building of refineries was discouraged, among
other things, because of uncertainties about oil import
policies, objections to particular refinery sites, and
price controls.
Hopefully, several deterrents to growth in the
industry have been removed by recent
actions by the
Federal Government doing away with volumetric quotas on
oil imports and creating incentives for drilling and
new refinery construction.
However, other deterrents
remain? we have only begun the long and difficult job
of rationalizing public policy in energy and creating
adequate incentives so that the industry meets the demands
that are being placed on it.
6
Some Reasons for Optimism
There are many favorable developments in the oil and
gas industry.
last year.
The drilling rig count is above that of
I have been impressed at how the number of
the Oil and Gas Journalfs want ads has picked up in such
categories as engineers and geologists.
Rig construction
has also climbed significantly during the past twelve
months.
All of these signs suggest that the industry is
anticipating better times and, I think, with good reason.
Perhaps most important, both domestic and imported
crude oil prices have moved up sharply this year.
Devaluation of the dollar will result in further increases
in world prices; by how much will depend on the results
of ongoing negotiations.
However, the first sales of
"participation" crude by the OPEC countries indicate that
they are primarily interested in realization per barrel,
not in undercutting each other in the world market.
We can expect significant increases in foreign prices
in 1976 when the OPEC agreement is renegotiated.
The proposed deregulation of new gas is only one
element of the Administration's program that would provide
greater incentives to the industry.
As you know, the
President has also suggested a seven percent investment
tax credit on intangible drilling costs for new domestic
exploratory wells.
For wells that prove economically
7
productive, he has suggested a supplementary five percent
credit.
The President has also directed the Secretary of
the Interior to triple the acreage leased on the Outer
Continental Shelf by 1979.
Finally, replacing a faltering
system of volumetric controls on oil imports with the
universal right to import given payment of license fees,
the Administration has established greater certainty of
supply and a differential between the price of domestic
and foreign oil which should favor U. S. production of
crude oil and construction of refineries.
With prices now being asked, overseas oil is not a
present threat to domestic production.
Each producer
is able to market all the oil he can produce at favorable
prices.
Finally, there is an oil policy team in Washington
that understands the industry's problems and is dedicated
to the goal of increasing domestic energy production.
The Administration is not willing to accept large and
growing volumes of oil imports as inevitable or irreversible.
It also believes that the strength of our society derives
from the strength of our free market, and that the strength
of that market depends, in no small measure, on the
contributions of independent producers, processors, and
marketers•
(
--
8
-
All of this, I submit, contributes to a favorable
outlook for your segment of the industry —
more
favorable perhaps than the outlook has looked at any
time in the past fifteen years.
Some Reasons for Concern
At this juncture, lest I sound overly pollyanna-ish,
let me point out that there are also dark clouds on
the horizon.
For example, one point that the producers have
made clear to us in Washington is their belief that
the Administration's tax proposals contain bad as well
as good provisions.
In particular, they claim that
the proposal on limitation of artificial accounting
losses could restrict the availability of outside funds,
particularly for development drilling.
They have also
expressed concern that the tax law change provision
be made retroactive to April 30.
Some producers claim
that the proposal will have the effect of discouraging
some investment in oil development and of drying up
needed capital for many independent producers at this time.
We are studying this problem.
°V
9
Perhaps most important, I am troubled by the fact
that fuel shortages are crystallizing some deep, and in
many cases, unfounded suspicions about the oil industry
harbored by the public and even many national leaders.
A number of Congressmen and Senators have introduced,
or have threatened to introduce, bills which would set up
government oil drilling and refining companies, break up
vertically integrated private companies, or reduce the
industry to the status of a regulated utility.
The public
is deeply concerned about rising prices, and a disturbingly
large segment of the public seems inclined to the view
that current oil and gas shortages are the result of a plot
by the industry to force decontrol and to raise prices.
For this reason, President Nixon's proposal for deregulation
of the wellhead price of new gas, despite its overwhelming
logic, is facing very tough sledding in Congress.
Why should the independent producers worry about
these developments?
The price of oil will, in a free
market, rise to that level necessary to bring forth needed
supplies of crude oil and natural gas.
The fact
is, however, that this is not the way that the American
public sees price rises by the industry.
the industry has a bad image.
that the oilman is a "fat cat."
To put it bluntly,
There is a widespread belief
Many Americans —
including
10
many intelligent and attentive citizens —
see the
industry as taking advantage of current shortages to
increase already inflated profits.
The first quarter profit reports of the major oil
companies certainly have not helped to change this image.
The public is unaware that the large profit increases
follow abnormally low profits earlier, that substantially
increased investment is required of the industry, and
that the so-called record profits represent a return on
investment that is about comparable to the returns of
most manufacturing industries.
As you and I know, increases in oil prices are
long overdue.
But much of the public believes this
image to be true and that is what creates much of my
concern today.
Nor should the independent producers take comfort in
the traditional support for the small businessman in
this country.
For the simple fact is that, in the popular
mind, the major oil companies are the industry.
This was
brought home to me recently by an administrative aide to
a prominent Senator who noted that one source of opposition
in Congress to gas deregulation was the belief that it
would increase the profits of the major oil companies.
In fact, gas deregulation may be a greater boon to
independent drillers, but this fact is not widely appreciated.
11
Deregulation of new gas will increase major and independent
companies* profits only if they discover new gas, and that
is precisely the result the proposed legislation hopes to
accomplish.
The Future?
Where do we go from here?
Quite frankly, I see two
plausible scenarios for the industry.
In the first scenario, the industry expands production
to the full extent of its abilities.
Buoyed by adequate
prices, the producers embark on a new wave of exploration,
discovery, and development.
tertiary
Improved secondary and
recovery techniques will also increase production
from known reserves.
As a result, the Nation achieves
its goal of greater self-reliance in energy, enhances
its security, and reduces its balance of payments deficit.
As years pass, we would begin to breathe easier about
the energy crisis and the size of oil imports.
In the second scenario, public and Congressional
reactions to price increases, product shortages, so-called
windfall profits, and other complaints about the industry,
imagined or real, result in reimposition of price controls
and,perhaps, even a roll back in price levels.
A national
°il company is created and the issue is not whether the
12
Government should be in the oil business, but how much
of the business Government will control and operate.
The effect of all this will, of course, be continued
decline in exploration, continued increase in imports,
greater monetary instability, and reduced U. S. security.
What must concern all of us is to make sure that
events follow the first scenario and not the second.
It is in the industry's interest.
It is also in the
Nation's interest.
My first recommendation would be to try to hold the
line on prices for the time being.
Now is not the time
to push further than the already substantial price
increases that have occurred this year.
will come in time.
Further increases
(We can thank OPEC for that.)
However, extraordinary price increases now would only strain!
public understanding and sympathy for the industry's needs.I
There is a considerable feeling in Washington that
the industry will take advantage of the present shortage
situation to earn windfall profits.
Don't underestimate
the seriousness of this country's inflationary problems and
possible reactions to further price increases.
If the
industry insists on pushing ahead now for further price
rises, such as a producers group in Kansas recently organize
to do, we might see reimposition of price controls, or
something worse.
You must remember that the public does
not see your problems as well as you can.
People normally
do not look ahead ten years, but are more concerned about
today
or tomorrow.
The present shortages are creating
an increasing awareness of. the industry*s problems, and
given another year or two, this awareness may rise to
the point where we can win public acceptance of the need
for higher crude oil prices.
But that awareness is not
sufficiently widespread at present.
So let me repeat —
if the producers push for extraordinary price increases
in the near future, while other industries, or segments of
the oil industry, must restrain theirs, this may invite
a public reaction that will not be in the best long-range
interests of the producers or the Nation as a whole.
The industry should also rethink what it can do to achieve
increased profitability without price rises.
1.
For example:
It should actively seek ways of reducing
inefficiencies inherent in the industry,*,
To begin with, it
needs to remove the last remaining barriers to effective
unification of all major fields.
This will reduce costs
und, more importantly, increase ultimate recovery.
Similarly, it needs to remove artificial barriers to the
application of advanced recovery techniques.
It also
needs to reduce inefficiencies in geophysical exploration
14
that result from excessive duplication.
This may be
difficult to accept because the whole being of the industry
has been characterized by fiercely individualistic
competition.
Yet, we must recognize that duplication of
geophysical work on the same blocks is wasteful and leads
to greater costs and often results in some areas not being
surveyed.
unitization
Some thought should also be given to predrilling
and methods to allow larger lease blocks to
be acquired at lower cost.
2.
We also need to give thought to the industry’s
heavy reliance on depletion allowances and tax shelters.
There are valid reasons for the depletion allowance and,
for this reason, the Administration is in favor of
preserving it when it encourages exploration.
But
the Administration's understanding may not be enough.
Many Americans regard the depletion allowance as a
for the sole benefit of Texas oilmen.
gimmick
Similarly, the
independent segment of the industry should rethink its
heavy reliance for capital on oil funds which are, in the
popular mind, still another tax gimmick.
The existing tax
system gives badly needed stimulus to drilling investment,
and I, for one, am loathe to see it changed drastically*
But it also has the unintended result of distorting investme^
in the industry.
Preoccupation with tax advantages —
particularly tax deductible "losses" —
too often obscures
i
15
the economic benefits of a drilling venture.
And this,
inevitably, colors the public's perception of the
industry and the way it operates.
And let's face it.
The tax system has resulted
in the drilling of many marginal wells that should never
have been drilled.
Some of the recent funds have made
money for the promoter at the expense of the investor.
In the long run what we need is more exploration, better
prospects, and wells drilled based on the merits of their
production, not on the merits of their tax deductions.
Would it not be better for the industry to put its
own house in order, and to suggest new tax policies
that will best allow the industry to meet the Nation's
future oil and gas needs, rather than let others distant
from what is happening, and not familiar with the industry,
do the job.
I
urgently hope that the industry will strive in
every way to remove the reasons for its poor public image.
I believe that, when the industry's actions are in the
public interest, it should do all that it can to make
the public understand this.
And, I pray that the industry
will adopt policies which are best for the country ten
years hence, and not just best for the industry today for
tomorrow.
In short, now is the time for statesmanship.
It is not the time to grab while the grabbing is good.
16
I
am enough of an optimist to believe that our
Nation will adopt the first scenario which I mentioned
earlier.
I tremble at the prospect of even greater
intrusioh by the Government into the affairs of the
oil industry.
We must return to a free market mechanism applicable
to all segments of the industry.
We must get the
Government out of the business of allocation as soon as
possible.
But we can do this only when the public is
convinced that the free market will work and that the
industry will act in a socially responsible manner.
The industry must guard its image so that, together,
the industry, the Administration, and Congress can
devise a way out of the energy crisis that we as a
Nation, by our policies, have created.
Thank you very much.
-0 O 0 -
SECRETARY GE0R6E SHULTZ
Pittsburgh, Pennsylvania
May 17, 1973
U-S. TREASURY DEPARTMENT
i
MOHAN; It 1$ our great pleasure» through the foundation
that it's been possible for Pittsburghers to have the opportunity
of chatting this evening with the Secretary of the Treasury»
Mr. George P. Shultz. As you see in your programs» his background
1s so numerous that it doesn't seem that other than saying he
1s the Secretary of Treasury» this is his third post of service
to the Nixon administration.
It's my privilege to introduce
the Honorable Hr. George Shultz.
[Applause]
SECRETARY GEORGE P. SHULTZ: Hadame Chairman» members
of the Malker Foundation, ladles and gentlemen» I appreciate
that big introduction. But I've had more glowing ones. For
example...,
[Laughter]
...my friend George Meany introduced me to a union
9roup not long ago as "the greatest Secretary of the Treasury
since John Connally."
[Laughter]
Friends 'like George Heany keep you humble; they keep
you in your place.
As all of the people on my staff and that I work with
In the Treasury know» it is practically impossible for me to
*f1te a speech. And I work on it to some extent» and people
2
try to help me; and I am never quite satisfied with the way
1t all comes out, and I generally wind up working at It at the
last minute and often wind up without a written text and find
that I just talk to people. And that's the situation that I'm
in here this evening. And rather than make a speech at you,
If I may, I would like to just talk with you. And maybe that's
better, because at least you know 1t's me and not'somebody who
wrote something down and I'm reading it. Who knows whether
that's what the government's policy is all about or not?
[Laughter, applause]
So what I thought ! would do Is try to display at
least my thinking about some of the outstanding economic problems
that we have, what the outlook seems to me to be on* these problems,
what our opportunities are, what our difficulties are, and then,
sort of In between the problems and the outlook, what some of
the policy thrusts are that we are making to deal with them.
Now, that's the general framework that I want to put this in.
And I guess I would have to say at the outset that
there is no question about the fact that the set of events that
come — have come to be characterized by the word "Watergate"
do represent an Important and difficult, troublesome set of
problems for us.
And they are not going to go away 1n a hurry.
And we'll have to get used to them being around for a while,
I'm afraid. But I think that we must deal with there in a determine
way, in an open way, as Reverend said in his Invocation, in
a fair way to individuals. We have to cut out the Watergate
mess from the government. And we have to see what we can learn
from the whole thing about how to make the government work better.
Now, the President, as you know, is working on both these -both these aspects of the problem.
I believe that we also must somehow work together
as a people and as people in the — In the institutions through
which our society and economy work; we must develop the c a p a c it y 9
renew it, rebuild it, to have trust and confidence in each other
and to have trust and confidence 1n our Institutions. They re
good Institutions. And I think that we -- we have been doing
that. This is a setback. But it isn't only government that
we have to-build'our confidence in. The universities have gon
through a very tough period, but they're coming out of it, ana
they're great centers of learning and we have a great deal to
gain from them. The labor movement is a great institution in
this country, and we need to build up our trust and co nf td anc
in labor, in management, the business community, in the chu™ r0_*
in the press, on the basis of trust and on the basis of an app
priate distribution of power among the various parts of our9
I think, properly pluralistic society.
I might say, speaking to my friend I. W. Abel here,
3
that 1t seems to me here in Pittsburgh you have a kind of a
model of what can be done with hard work, with trust, also with
a sense of determination to r e p r e s e n t b o t h the management
and the labor side, to see a common interest where one exists,
and Identify a problem and solve it, or at least move the process
of solution along. So we need to have more of the kinds of
agreements symbolized by the steel agreement; around the country
In different fields I think we have a lot to learn from that,
Well, that is part of our framework. And there has
been a great deal of speculation about what
happens
In government when we have this kind of m problem! does if Immobi
lize the government somehow or other, is it impossible to work
effectively. And I think that I really have two messages here
this evening. One has to do with the content of economic policy
and our problems and what we're doing about them, the difficulties
we see. And the other message that 1 hope will come through
my description of what we are doing and why, the other message
1s that you do have a government that is in action, that is
trying to grapple with the problem, point the way toward the
opportunities, that is proposing things, HI administering things,
and 1s a government in action and
in being.
yell, so much for that side of the problem. Now,
I think that when we have an economy operating as ours has,
say, over the last ten years, fundamentally at a very, very
high level, you see more clearly and sense, everybody senses
clearly, the interrelationship between all the different aspects
of
f the things that make the economy go. ! mean,
we in a sense find that the outcome of labor negotiations depends
upon the weather in J o w a p d n d of business / where we see the
relationship between the food prices and the collective bargaining
and so on; that's just an example. So with that in mind, the
fact that our economy has operated at a very high level, which
highlights these interrelations and provides a kind of tension
1n them, so that slow shifts can
be very visible, be
seen, and cause difficulties; that's the setting 1n which « H e r
we operate.
Now, this is the setting of success, That is, It's
good to have an economy that's operating at a high level. We
•Ike that. And so in a sense we're grappling with the problems
that go with that modicum of success. And 1, for one, would
prefer to be grappling with that than I would with the problems
°*» say, an economy operating at a lower level and
where many of the kinds of di fficulties that we have in this
high-level economy weren't present.
Let me just run down a list of the kinds of problems
4
that are sort of flowing around through my office daily and
that we're grappling with.
I'll go down my 11st; I'll say just
a brief word about the outlook on each one; and then I'll talk
about a smorgasbord of policies and suggest the sense in which
these policies are related to each other* We have tried to
see them as a set that 1s not just a policy on this or that
thing but a policy on a particular subject important in itself
but also important as a support for and deriving support from
other things that we're doing.
So what have we got as problems? Well» we have Inflation;
that's a problem. We have the problem of the competitiveness
of our Industry here and in the world economy; that's a problem
for us. We have the problem of our trade position abroad and
our payments position in the international markets.
I think
you can see — you can just sense already how closely intertwined
these problems are. We have the — we have the desire, we have
the problem of keeping employment rising and trying to so arrange
ourselves in — around the setting of employment so that employment
has security to it. We have the need to review our tax system
so that we
feel that 1t is equitable-and to try to —
at the same tfmeTto make it simple so that. It's simple enough
so that the average citizen feels that he or she can grapple
with 1t. We have the continuous problem of trying to maintain
by and large a peaceful situation in emssssmmm our labor scene.
We have the budget/ We have the difficulties in seeing to It
that we have enough energy to do the jobs
that are needed.
And we see that — > and on the administrative level and also
op the legislative policy level* a very important year, a critical 4
jfn some ways it can be a breakthrough year in the area of food
v
prices, farm policy..
OS
So that's Akind of a sample of what I scratch my head
about all day long every day. And « M i I* think you can see
that If you happened to be in a position where all these things
are coming at you all the time, that you can't help but notice
the relationships a&ong them and the need to have a comprehensive
strategy toward them.\ And that is what we have tried to do.
Now, just to quickly tick off the outlook as I see
it on these matters. I think wet* that the rate of inflation
is going to be less at the end of the year than it is now, and
I think our
pretty substantially less; that 's roy judgment.
better,
both
for
reasons of
competitive position is getting
we're
experiencing
them compared
the internal cross pressures as
a
result
of
our
exchange
rate
with others in the world and as
lead
to
some
improvement
in
our
changes. And that is .going to
We
have
strongly
rising
employment
trade and balance of payments.
5
m
Our r a t ^ o f expansion In the economy has to taper off — ■ that
Is, as A kind of definitional physical thing, the capacity to
grow or the American economy moves up at something a little
over four percent a year, as we all know, and we are now expanding,
speaking 1n real terms now, at the rate of eight percent a year
for the last two quarters and we know since we are up pretty
close to our capacity now that that rate Increase has got to
taper. So we know the big problem for economic policy management
In this broad sense 1s to see if we can't taper that down so
that we come down and get Into that four percent range and stay
more or less 1n that range without coming down and having a
decline that goes below the four percent rate of Increase for
any appreciable period.
"pfat ‘11 be the neatest
trick of the week.
[Laughter]
But that's what we're trying to do. And that is what
we must try to do. And I want to say something about the kind
of keeping your cool, so to speak, that it takes to do that,
because the prescriptions you get are always on the extremes.
A year ago everybody wanted to spend a lot more money. And
now there are a lot of people who want to jam the brakes through
the floor. And somehow or other we just assume that neither
of those pieces of advice is so good.
But at any rate, going back to my little forecast,
I think there's a reasonable chance of getting a little better
equity in the tax system, We have some interesting proposals
on simplification/^ Think we have^a pretty good outlook on the
Industrial peace front right now./Ai^Collectlve bargaining climate's
healthy. In terms of the budget, that's always a question mark —
whether discipline can be exercised on the budget. And I'll
talk a little bit more about that, but I think we
at least
st the moment are under control. Energy is a big problem.
We have some strong policies out there; they are not sufficient,
we're going to have to do more when we can think of more to
do that is right to do. But we have by no means seen the end
of that problem. And as I say, I think 1n terms of farm policies
we have a moment of opportunity here.
So I guess that adds up to a general appraisal that
*o ****»— ■
— wa i we have plenty of problems that are going to
9lve us difficulty, but on the whole the outlook's pretty good.
I know y e a o ^ ^ y o u can hardly believe that, because everybody
soys the economy Is In a state of disaster.
[Laughter]
But I don't know fc- what's a disaster about a new-
6
person employment of 2.7 million i n a year? I don’t think that's
a disaster; I think that's a pretty good thing.
Well , now l e t ' s ^ ^ having listed a bunch of problems
and given maybe not a glowing picture of an outlook but I think
a reasonable appraisal of the outlook» let's go down the policy
line and talk about the different policy positions that are
being taken and
what they mean» trying to keep In mind
all the time the sense of comprehensiveness» the sense of interrela
tionship» the sense of balance» that we, It seems to me, need
to have kind of across the set of policy problems that we're
dealing with.
S
Well, let's first talk about Inflation. And we know
that we have basically three tools here that we're working with the budget, the monetary policy, and the effort to affect Individ
ual wage and price markets.
In both the budget area and the
monetary area, discipline Is being taken up more and more.
In neither area, however, are the brakes being slammed on.
That 1s because In spite of the fact that we know the problem
of the moment Is Inflation and very rapid expansion, we don't
want to turn that Into the problem of the moment after this
one being a rapid decline 1n the economy. So our policy Is
to take up that discipline but to take It up In a way that we
think Is not going to turn/thls applecart o w all of a sudden.
I won't speak particularly about monetary policy -that 1s always considered the preserve of the Chairman of the
Federal Reserve -- other than to say that basically 1t's in
good hands »and -y o u ...
frfcauylilgr] -
r ^ eEva
mv
- rnm m im tr h n rn m l H u h
I n n lif111" “
0
But on the budget we have a very Interesting picture,
\rcause we have argued that when the economy Is operating below
its capacity we should have the courage — and I think people
were a little breathless a few years ago when the President
did this, particularly some Republican politicians I think were
a little breathless when the President put forward a budget
with a large deficit 1n it and said It was a good thing. But
at the same time we said, “Well, 1f it's a good thing, how much
of a good thing Is good? Is there any way to tell, when you're
operating below capacity, how much of a deficit 1s enough?“
You don't want an unlimited amount of stimulation from the budget;
there has to be some gauge. And we felt that the gauge should
be, more or less, the revenues that the tax system would take
In if we were using all of our capacity. And 1n good part the
<7
7
reason for that Is that, assuming you are going to expand and
you are going to reach a point somewhere near capacity, then
you don't want to have had your federal outlays run up so fast
that they're out of control and you can't lean them back into
some reasonable relationship with the revenues. So it's a little
effort of foresight that is involved.
Well, in fiscal *73 the budget was quite stimulated.
Me had — our last estimate of the deficit was on the order
of $20 billion.
It is, I think, a virtual certainty that the
deficit is going to be smaller than that, because our revenue
estimates have been consistently conservative. How much more
remains to be seen. We had a' deficit at full employment in
fiscal *73 of something -- two, three billion dollars. So that
1s the fiscal '73 picture. Now, as we look at fiscal '74, which
Is about to start, we think we have a pretty good chance to
hold the total outlays to the total that the President put forward
In his budget in January, Hardly anybody in Congress is arguing
with that total. Thereat» a A** Intense arguments about the compo
sition of that budget and about the method for putting that
budget together; but there's practically no argument about the
total. So, leaving aside the arguments about the com'position,
let's say we felt we can hit that total.
If we do, then we'll
have, under present calculations, a full employment surplus.
And we are moving, because our revenues are surging in the Treasury
The Commissioner of Internal Revenue comes running into my office
three times a day so excited about the way the money's coming
In.
[Laughter]
And I'm sure you all realize it.
[Laughter]
So we are moving — we are moving up very fast. And
that's exactly the theory of this — of this budgeting idea.
And we keep telling the departments, “Now, just because we're
{jotting more money in we don't spend it, you know. This is
the way the discipline is supposed to work." And we are moving
up very rapidly toward a balanced budget for fiscal '74; we're
joving in that direction, we're getting close. So we're going
to have a fiscal swing from fiscal '73 to fiscal '74 1n terms
°f the real deficit, so to speak, probably something on the
order of $15 billion less thrust from the federal budget, and
in terms of the full employment concept which economists like
to use, a fiscal swing of something on the order of six billion
dollars. And that 1 ^ Ttinif
discipline, that is a pretty
8
good swing* not overwhelming* but ft's - d n W h good. And that
Is our
budget strategy; that 1s the way that ts
working out.
Now* Phase III -- and Lord help me...
[Laughter]
.••to cut
■11111,1 1 1 1 such a knot. But Phase III I
think Is adapted to the situation that we have. And It 1s a
combination of considerations. On the one hand* we don't want
to do things that destroy the efficiency of the economy m e »»
or dampen the efficiency of the economy. ArniT ftm»e
I must
say I sit as a mediator every day between John Dunlop who's
In charge of the wage/prlce system and Bill Simon T n the Treasury
right now who's worrying about the energy problem a lot* and
the one person who's worrying about how do we get more of a
flow of supply Into the country, so he thinks that the prices
ought to get up a little bit so we can get the supply In* and
the other fellow's got the responsibility for keeping prices
under control and he's a little less concerned about the supply/
and
there 1s a tension there. Well, that's
a healthy thing* but 1t suggests this problem of efficiency
in the economy. And I suppose when you come right down to It
we would rather have those farmers that we hope are going to
be plowing those fields have enough gasoline In their tanks*
even If It's a little more expensive* than we would have a low
price and no gas. So that represents the efficiency consideration
1n the system.
We do have* by any past standard of our past 1n peacetime
and by the standard of what Is going on In almost all other
countries 1n the free world* the most comprehensive wage and
price control system around. Now* M B M t e w H
has its
ins and outs.we know, but we're trying to get mileage out of
that, and afr the same time we are working very hard within the
government on the problem of supply* of having a greater flow
of supply of farm products* a greater flow of supply of energy
products* a greater flow of supply of basic raw materials, finding
out about our stockpiles, trying to get those stockpiles onto
the market* and so on. We're learning all kinds of things.
And you
when you start doing,thi$.you realize that once
you start*'getting the supplies flowing ¿Ml you Immediately run
into a big transportation problem. And then you find out the
Defense Department has got something like 100,000 boxcars they re
u$1ng as warehouses.
[Laughter]
a
9
And, you know 4 ? It's ridiculous.
[Laughter]
r ß u t it's the sort of thing that you see as
you go around these circles all the time. And you break through
one. you break through another, and there's a constant sort
of bottleneck-breaking process that takes place as you work
with the Interrelations among these different things.
So those are sort of an outline of the Inflation battle.
And it represents the exertion of discipline In the budget and
In monetary policy and the use of our wage and price control
system with an eye on n ot
trying to get mileage out
of it without incurring damage from It and at the s*ame time
being conscious of the supply side of all of these commodities.
In the trade and payments area, of course, tie houip-L
we have managed now, over the past two years, a revolution 1n
International monetary policy — from a system of fixed exchange
rates, In which the dollar was basically Immobilized and everybody
devalued against the dollar all the time and we just sort of
sat there, to a place where we have got across the idea of symmetry,
we've got across the idea that we can change too, and we have
changed the rates of exchange around the world. And I believe
that now our competitive position is much, much better than
It was two years ago. Me have a much fairer shake in world
markets. You must feel it here 1n Pittsburgh, as you look at
your competitors coming into the U.$. markets and as you consider
the possibilities of selling 1n the world markets.
And I might just say parenthetically I know there
1s a conference here tomorrow on the subject of exports and
how can we stimulate more exports. And I certainly encourage
that effort, because It seems to me essential. We have gigantic
desires for Imports in this country; we seem to love these goods
that they produce 1n other countries. We are going to Import
• lot of energy products. And fundamentally the way we pay
for those things Is two ways: one, we export; two, we take 1n
the earnings from our investments abroad. And these two Items,
oach Important, are what pays for these Imports that we like
so well.
.
But at any rate, there has been a big change ®ade
•o the monetary system. And we are in the midst of very difficult
but Important negotiations on the construction of a new world
monetary system. And at the same time we see that there are
limits to what you can do with the monetary system by itself.
feel we have devalued and we have devalued enough; no more.
}yd you get to a certain point where you say, “Well, we're competi
tive all right, but if there 1s some market Into which you could
10
ship your goods If you could get In freely, you could compete
on a fair basis, but you're just not let 1n.M Well, exchange
rate changes aren't going to do you any good; they're not going
to solve that problem« The only way to solve that problem 1s
to knock down those barriers« And so we have put forward a
trade bill, after a lot of consultation in the community, that
is designed to put the negotiators for the United States In
a strong bargaining position so that we can *»«*«&■*** exert
some muscle In this process of bargaining, not for the purpose
of erecting barriers around our markets but for the purpose
of saying, "You want access to this great market here In the
United States. You have got to allow us access to your markets.
And If you don't, wejnon't. And 1t's just cold turkey.11
i>*TSgitng freHia ■ n 'Tt's a different stance for the United States.
We have always sort of been In a position of saying* we are so
powerful that we could just sort of put up with anything. We
feel we have to bargain a lot harder. And we intend to bargain
a lot harder. And the trade bill will provide the tools needed
to do that.
Now, at the same time we'll put 1n place
set of measures designed to provide a safeguard against the
Inundation of our markets in surges of imports.
Imports, yes;
icreases in Imports, okay. But surges of Imports that come
1n*tb«t~w1pe out jobs suddenly, wipe out businesses suddenly»
we don't think that's particularly desirable; and of course
It undermines support for the basic thrust of a more open trading
system. So we have proposed a series of safeguards, and we
have proposed that our provisions that deal with the problems
of people who are displaced from a job have a measure of income
maintenance and help in the transition that will ease that burden
for them. Now, here we have taken a somewhat surprising tack
to many people, and rather than tie our thinking about this
problem of adjustment assistance strictly to the problem of
imports, we have scratched our heads and said when it comes
to Income maintenance, when it comes to~your pension plan, what
is unique about a person displaced atotSjfimports?
*iuni ^Hl|rTTT11?
And our answer to that question is, there is nothing unique
about that person. His problem is no different from the person
who is displaced by, say, a change in defense procurement policy
or a change in environmental standards or any number of other
changes that you could name. So if our Income maintenance system,
our unemployment Insurance system, is not adequate, let's make
it adequate.
If our private pension system needs reform, let s
reform 1t so that it operates for everybody in an equitable
manner. And we have made proposals along those lines.
I'm sort of rambling along here, I know.
Let's just
11
skip to the subject of farm policies, which are of course tightly
related to all this« Something like a quarter to a third of
our acreage Is planted for export. Agriculture provides a very
Important part of our flow of exports. And one of the things
we must do and need to do and are driving to do in our trade
negotiations is to see that those markets are open to the products
of our farmers, because here is an area where we really excel.
Now demand is rising around the world, demand 1s rising here,
II and we feel that we have a moment in time when we can see that
happy combination where we may have relatively stable prices,
higher production, and greater income for the farmers -- in
other words* support farm income through allowing production
to Increase, rather than restricting production in order to
move up the price and get the farm income up that way, which
has been our policy for a decade. We think the farmer can get
a good deal along with the rest of u$ consumers by following
the other policy; and there is a moment of time now which allows
us administratively and in terms of farm policy to seize that
opportunity* And we have done -- and 1 won't recount all the
details — we have done a tremendous amount administratively
to Increase the flow of farm products.
In the energy area, well, that has been a fascinating
one for me, for all of us. I have had the privilege of represen
ting the United States at a series of international meetings
1n recent weeks and months. We had two 1n Paris as we were
worrying about the exchange rate in a crisis of a month or so
ago, followed by one in Washington that was pointed to our negotl
atlon of the new monetary system. A-mf-l l~wai
vary-«* Ttfiere
were two agendas at every meeting: and one agenda was sort of
a formal one that we were there to talk about, apd we did; and
the other was kind of the informal agenda. /Ik fvery time there
was a coffee break or a luncheon or a dinner or something, one,
two, three of the finance ministers from other countries would
take me by the arm, take me over in the corner, and say, “Now,
George" — one of the benefits of these meetings is we get to
know each other, and it really helps when -- when things are
jumping around the world to be able to work with people - - t a k e
®8 in the corner, "Wow, George, this is all right, what we're
talking about today; but we know underneath all this there's
this energy problem. And what are we going to do about it?"
And it was Interesting how finance ministers tend probably to
he as concerned about this as any other segment of government,
I suppose mainly because we can just see 1t
in the
financial accounts that we are dealing with. And we know in
this country that we have a favored position. And our problem
Is to take advantage of it. How rapidly we can do that remains
to be seen. But God did not make our energy problem; we made
12
1t for ourselves, it's manmade.
We have tremendous supplies of energy In this country
-- tremendous supplies of coal, If we can learn how to mine
1t and burn It In a manner consistent with our environmental
concerns. We have a lot of natural gas, 1f we could bring ounelvej
to recognize that we have controlled that price at a ridiculous
level and we haven't -- we have committed a classic economic
blunder 1n having a price so low that It encourages people to
use ft-1ft ways that are not really economic and doesn't encourage
the supply of the best energy source we have; so we have got
ip somehow come around to letting that price r1se^.andM*h an
‘fjhere's nothing mysterious about It; It's a classical economic
problem that we're dealing with here.
1 think we have to put
a terrific wallop Into research and development In this field.
And we are spending a lot on that. We are, from the standpoint
of the administration, committed to spend as much as we can
spend 1n a worthwhile way In research and development on energy.
But I think we need to organize ourselves better. We need to
somehow sprout that combination of creative science and management
that made the Manhattan Project such a success, that made the
space program such a success, that 1s going to crack through
some of these problems In energy that will allow us to use effective)
the energy sources that we have 1n quite considerable abundance.
And I might say 1n the discussions that I've had,
and probably others, with our friends from the oil-producing
countries, who these days feel that they are looking down our
throats, and they are...
[Laughter]
...however, I say now, "Be a little careful. We have
lots of energy here. And don't forget from a standing start
1n four years 1n this country we produced atomic energy. From
a standing start In nine years we put a man on the moon. *•
.
have got a lot of energy sources. We know the science of producing
gas from coal. Don't think for a minute that 1f we really go
after this we can't do that job. And then maybe some of that
high-priced oil wouldn't be so high-priced anymore. Maybe you a
better get It out and sell 1t quick."
[Laughter, applause]
We really don't say that as part of an argument, N * "
but It's not a bad argument; there's a lot to 1t. And I thin*
that we have t o get our...
□
? )X
i
EMBARGOED FOR RELEASE UNTIL
1:15 P.M., EDT. MAY 30, 1973
REMARKS BY THE HONORABLE WILLIAM E. SIMON
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
AMERICAN SECURITY & TRUST COMPANY ENERGY SYMPOSIUM
THE MADISON HOTEL
WASHINGTON, D.C., MAY 30, 1973, 1:15 P.M.
I am delighted to have the opportunity to participate
in your energy symposium0 As Chairman of the Oil Policy
Committee, I am responsible for advising the President on
oil import policy, as well as other energy matters, and I
would like to discuss aspects of this vital subject with you
today.
In so doing, I think you will see that, although
traditionally thought of as a national security problem,
energy is as essential to our economy as it is to our national
security.
To the extent that deficiencies in our domestic
energy industry cause us to rely on foreign sources, we incur
risks to the freedom of our foreign policy, to our balance
of payments, and to the security of the dollar.
S-217
2
On April 18, the President presented a broad and compre
hensive energy message0
Briefly, the President called for
action in six areas:
(1)
Increase domestic production of all forms of energy;
(2)
Act to conserve energy more effectively;
(3)
Strive to meet our energy needs at the lowest cost
consistent with the protection of both our national
security and our natural environment;
(4)
Reduce excessive regulatory and administrative
impediments which have delayed or prevented
construction of energy-producing facilities;
(5)
Act in concert with other Nations to conduct
research in the energy field and to find ways
to prevent serious shortages; and
(6)
Apply our vast scientific and technological
capacities -- both public and private -- so we
can utilize our current energy resources more
wisely and develop new sources and new forms
of energy.
Not only did the President call for action in each of these
areas, but he also acted!
import program.
He completely restructured our oil
Effective May 1, 1973, all volumetric quotas
3
on oil imports were ended, the existing duties on imports of
petroleum and petroleum products were suspended, and a system
of license fees was instituted.
Our objective was to design
a program which would assure the oil industry flexibility to
import oil to satisfy the short-term needs of U.S. refiners
and consumers while, at the same time, to provide longer-term
stability and additional incentives for increased domestic
exploration and production and hew refinery construction and
expansion.
These policies outlined in the President's energy message
were arrived at after careful thought and analysis.
Some people
have said that the message was not strong e n o u g h —
for instance,
that it didn't provide for enough money to be spent on research
and development.
I feel that it was a very strong statement —
I see the message as a blueprint for action that must and will
be taken.
And with respect to research and development, the
President said that we will spend whatever reasonable amounts
are needed while not foolishly allocating funds more rapidly
than they can be effectively spent.
To better understand how
This to me is sound policy.
these policies were determined,
1 would like to briefly outline the problem we face in the
energy area.
- 4 -
Demand and Supply
The first thing to understand is that the demand for energy
has been increasing continually while our supply has not.
With
six percent of the world's population, we are consuming 33 per
cent of the world's energy.
Furthermore, the demand for energy
in this country is growing at an annual rate of about four
percent and by 1990, our energy needs will be doubled that of
1970.
Much of this increase in demand is attributable to an
increase in the demand for oil, which has grown, in part,
because there has been a shift away from coal to oil and, in
part, because of the inability to obtain natural gas, the
other alternative to oil.
Oil and gas now account for about
65 percent of the world energy consumption and about 76 percent
of U.S, energy consumption.
And it will not be until the mid-
1980's that nuclear and other sources of energy will begin to
provide for a significant part of the energy demands and reduce
the world's dependence on oil.
The demand for gasoline in the United States has also
been growing faster in the past several years than at any
other time in recently history.
Since 1968, gasoline demand
has risen at an annual rate of about five percent.
During
the past two years the rate of increase has been about
six percent per year.
Part of this rise in demand can be
explained by growth in the population, growth in the economy,
and
the increasing number of cars on the road.
But demand has also risen significantly because of the
many power-using devices added to cars.
These include
automatic transmissions, air conditioning, various safety
features, and the changes made in automobiles since 1970 in
compliance with EPA regulations issued under the mandate of
the Clean Air Act.
Producers1 compliance with these
regulations has led to substantially reduced engine efficiency.
As more vehicles come on the road equipped with safety,
emission control, and physical comfort devices, average mileage
per gallon will decrease further.
An automobile that once
got 14 miles per gallon, now gets eight or nine miles, and it
may get only six or seven miles per gallon if present trends
continue.
Because new automobiles are not getting the gasoline
mileage obtained by their counterparts five and ten years
ago, and because we are driving more, gasoline consumption has
risen.
We are using 300,000 barrels per day more gasoline
this year than last year.
Given this growth in demand, let's look at what has been
O p e n i n g in the petroleum industry:
- 6 -
Domestic Production
Domestic production last year began a slow decline to
which no early end was foreseen, even though virtually all
of our wells were producing at 100 percent of capacity for
the first time in history.
The amount of domestic exploratory drilling for oil
has fallen substantially.
Oil well drilling actually peaked
in 1956 when an estimated 208 million feet of productive
wells and dry holes were drilled.
been a rapid decline.
Since that time, there has
In 1960, only about 145 million feet
were drilled; by 1970, this had fallen to 100 million feet;
last year, the total was down to 86 million feet.
This may
have been due in part to the lack of price and tax incentives,
but, it is important to realize that we have exploited the
economically most desirable oil properties and now have to
develop areas that are remote and more expensive.
Domestic Refining
U. S. refining capacity actually decreased by 11,000
barrels per day in 1972 even though the demand grew by over
one million barrels per day.
Prior to the President's energy
message, no new refineries were under construction.
Further
more, expansion of existing refineries had nearly ceased.
7
Growth in the capacity of the industry had come to an end
because the industry found it was more profitable to invest
abroad than in the United States.
One reason for this is that environmental restrictions
have made it increasingly difficult to find acceptable sites
for new refineries in this country.
Because of resistance
to refinery siting, it may take three years to obtain site
approvals today, in addition to the three years required for
construction.
Yet, modern refineries can be designed so that
they do not significantly pollute the environment.
Another reason why the industry has located new
refineries abroad is that U. S. oil import restrictions, in
the past, created uncertainty as to whether new domestic
refineries could obtain sufficient imported supplies of crude
oil.
As long as the government set import quotas on a year-
to-year and, in some cases, on a month-to-month basis, no
company was assured of the stability of supply necessary
to encourage domestic refinery construction.
This impediment
ended on April 18 when we terminated volumetric quotas on oil
imports.
Finally, the tax and other economic benefits available
to refiners in the Caribbean and in Canada have been more
8
lucrative than similar provisions available in the United
States.
Deepwater ports in the Caribbean and Canada have
also permitted savings in the use of very large crude carriers.
For all these reasons, U. S. refinery construction has been
standing still while U. S . demand for refinery products has
been increasing.
Distribution System
An important contributor to the supply problem is the
distribution system in this country.
Some areas of the
country are close to pipelines and refineries.
Some are
served by the retail outlets of the major oil companies.
These areas will not feel a shortage as much as other areas
which are relatively distant from pipelines and not wellserved by the major oil companies0
U. S. Imports
To meet growing U 0 S. demand, oil imports rose dramatically*
Much of the new import supply came from the insecure and
politically volatile Middle East.
Between 1969 and 1972, total
oil imports rose by 52 percent to 4.6 million barrels per day.
Most
of this increment came from the Middle East, whose imports
by 83 percent to 573,000 barrels per day.
increased
has been
estimated that imports of foreign oil will increase from
27 percent
to over
the
of total U. S. consumption in 1972 to 33 percent in 1973,
50 percent by 19 80.
oil area
market.
Further, it
The result of these developments in
is that we have moved from a buyer's market to a seller's
Producing countries now have a powerful voice in the
determination of oil prices and volumes.
Like oil demand, demand for natural gas rose at a
tremendous pace.
But again, let us look at what has been
happening in the gas industry.
— Domestic production is practically static.
we
As a result,
are living off of our reserves, which fell significantly last
year and which, at the current pace, will be exhausted in
10
to 15 years.
Both the demand and the supply picture for gas resulted
from an historic policy of artificially low prices for this
fuel.
The price of gas is far below that of competing fuels
and far below the value to society of this cleanest and most
convenient of all fossil fuels.
Financial Requirements
Related to the ever-increasing demand for energy are the
ever-increasing financial requirements of the industry.
The
10
energy industry is highly capital-intensive and its financial
needs are, therefore, enormous.
These requirements must be
supplied both from internally generated funds resulting
through increased earnings and from outside financing.
The cost of oil from new discoveries is high because oil
is increasingly difficult to find and produce.
As easily
accessible fields become depleted, operations must be carried
into more remote and harsher environments, such as the Alaskan
North Slope and deep offshore waters.
The result has been
that between 1960 and 1973, the cost of drilling an average
U.S. well rose from approximately $50,000 to $100,000.
The
average cost of drilling a well in the outer continental shelf
is $500,000 or more; in Alaska, it is up to $2 million.
Further,
the cost of building a reasonably sized refinery is $300 to
$500 million.
A recent report of the National Petroleum Council estimated
the capital requirements for the U.S. energy industry from
1971 to 1985 to be about one-half trillion dollars.
Included
in this amount is about $150 billion for exploration and
production of crude oil and natural gas.
The nuclear fuel
industry alone will require more than $100 billion in capital
and related expenditures between now and 1985, and the cost of
11
developing
synthetic fuels and advanced nuclear technologies
(such as breeder systems) will add to energy costs.
Further,
it is estimated that by 1980, the U.S. will need the equivalent
of 58 new refineries, each with a daily throughput capacity
of at least 160,000 barrels per day.
The total investment
requirement for these refineries is4s much as $30 billion.
These estimates involve only requirements for United
States energy resources development, processing and distribu
tion.
They do not include additional sums required for petroleum
marketing; for oil, gas and electricity distribution; as well
as the development of overseas natural resources.
These
increased unit costs must be reflected in the price structure
if the energy supply system is to remain viable.
Relation to Environmental Quality
Other factors that have added to the increased demand
for oil and also to the mounting financial requirements of
the industry are environmental quality standards.
It is
important to understand that refineries are designed to process
specific types of crude oil.
One of the primary characteristics
of crude oil is its sulfur content.
as "sweet” crude.
Low-sulphur crude is known
A large portion of U.S. refining capacity
was built to use domestic crudes, which are mainly sweet.
12
These refineries cannot process high-sulfur MsourM crudes for
several reasons.
One reason is based on metallurgy; the
corrosive high-sulfur crudes will literally chew holes in
units and piping built to handle sweet crudes.
Another
reason is environmental; a sweet-crude refinery cannot
produce products from sour crude with a sulfur content low
enough to meet U.S. environmental requirements.
Nor can it
meet restrictions on refinery emissions using sour crudes.
Consequently, sweet crude supply is especially tight,
both in the U.S. and worldwide and the shortage of sweet crude
makes it most difficult to maximize the utilization of U*S.
refining capacity this year and during the next few years.
These other environmental requirements have caused a
shift away from high sulfur coal to low sulfur crude oil.
This move has made the demand for oil even higher.
Further,
pollution controls, such as automobile emission devices, have
reduced mileage per gallon, which has increased our need for
gasoline.
Air and water pollution requirements will also add,
by 1975, about three cents per barrel to the costs of refining
crude oil in the U.S.
During the months ahead, we have to achieve a compatibility
between energy needs and environmental standards.
must.
This is a
Approach to Solve the Problem
These then are the problems which we face:
(1)
Increas ing demand;
(2)
Increasing dependence on foreign sources of
supply; and
(3)
Increasing cost of finding and developing
new energy sources.
Some have referred to this situation as the energy
crisis -- and I too feel that we are at a critical point.
However, crisis often acts as a catalyst for change, and I
feel the Presidents energy message has begun that change.
Let me outline some of the solutions proposed by the
President.
First of all, the main objective of our energy policy
is to foster a vigorous domestic energy industry.
As such,
the President has provided major incentives to energy
production in the United States:
(1)
Natural Gas.
The President proposed competitive --
as distinct from regulated -- price treatment of new natural
gas.
Regulation of wellhead prices of gas at artificially low
levels has seriously discouraged the search for new gas —
search by the way, which also turns up a portion of our new
a
oil discoveries.
Now, we are proposing to let new gas contracts
seek their own price level in competition with other fuels,
subject to the reservation that the Secretary of the Interior
can impose a ceiling according to certain criteria, if
necessary.
Since the wellhead price is less than 20 percent
of the delivered price, and since the provision would apply
to new contracts, the effect on consumers would be gradual
and limited; but, the effect on oil and gas exploration should
be immediate and substantial.
(2)
Investment Tax Credit.
The President has proposed
a seven percent investment tax credit on intangible drilling
costs for new domestic exploratory wells.
Further, for wells
that prove economically productive, there is a supplementary
five percent credit.
success.
Thus, the credit is structured to reward
In this way, the Nation will be a guaranteed winner
since a successful well will at the same time provide needed
energy resources and increase the tax revenues.
(3)
Outer Continental Shelf.
The President has directed
the Secretary of the Interior to triple the acreage leased on
the Outer Continental Shelf by 1979.
A substantive portion of
the estimated reserves of oil and gas yet to be discovered in
15
the United States are in the Shelf„
The President1s program,
which contains firm environmental safeguards, will put us! in
the position of taking advantage of these great 'reaervès^
The
availability of three times as many offshore tracts from which
to select will increase the payoff of industry's offshore
programs.
An additional effect would be to reduce the concen
tration of bidding on a limited number of tracts which has
,*-v,i b .i¿JO P i l l i s i Q j lim a
s i;a r i■
o3
s l d a ^ i i o 'x q stojij
raised bonus payments to astronomical levels and has, for this
-
tjxoir :.. ; o ";fij;p p
;■ ’'K-'wfiix o,1' b o a
. 8. U
s rij-
reason, effectively increased the capital needed to expand
production.
(4)
New Oil Import Program.
By terminating volumetric
quotas on oil imports and substituting a license fee system
for existing tariffs on petroleum and petroleum products, the
new oil import policy provides major incentives for U.S.
production and U.S. refinery construction:
-oj
The new schedule of fees on imported oil establishes
r{q q k n ms 1
. ad ao o n o iJ '¿j j x J ano ò ~io d rs a o is q 81
a clear differential between the price of domestic and
B e s r ii 07
yoB s t Xs ’è vBrI B sln sq m o o zi£d3 ysa
the price of foreign oil which favors U.S. production.
—
Refiners and new refiners now have long-range
assurance of access to world crude,oil markets. A
major concern of companies considering m e m o o m ¿expanded
16
refineries was uncertainty of supply due to the fact
that U.S. crude oil production had peaked and imports
were limited by the import allocation system.
!w moil
13*'
,....*
The fee schedule also establishes a differential
between the fee on imported crude oil and the fee
on imported refined products.
Thus, it should be
more profitable to refine here than to refine outside
the U.S. and to import the refined products.
There is an additional incentive for new refinery
construction or expansion.
Companies building new
refineries or expanding existing refineries will be
granted license fee-exempt allocations equal to 75
percent of their additional inputs for their first
five years of operation.
At established fee levels,
the total financial benefit of this exemption is about
18 percent of construction costs.
And I am happy to
say that companies have already responded to these
incentives.
Since April 18, 1973, a number of
companies including Shell, Ashland, The Pittston
Corporation, Exxon, Mobil and Standard Oil of California,
have announced that they now plan to build or expand
17
refineries in the United States with total refining
capacity exceeding 2 million barrels a day.
Others
have indicated to us that they are seriously considering
building refineries here, but have not yet made their
plans public.
In addition, several independent
marketers nave seated their intention to develop their
own U.S. refinery capability.
Additional support will be given to the U.S. refineries
when the superports called for by the President are constructed.
By increasing the size of a tanker from 65,000 to 250,000 dead
weight tons, you can cut the dollar per ton freight costs by
nearly 30 percent.
At present, refiners at several
Caribbean and Canadian sites have the advantage of deepwater
ports which can accomodate the new modern and economical
supertankers but U.S. refiners do not.
The President
has proposed legislation to permit the Department of the
Interior to issue licenses for the development of such ports
beyond State waters after full and proper evaluation of
environmental impact and land use, and in cooperation with
State and local authorities.
The Presidentas message also encourages development of
new energy sources, such as development of our vast oil shale
18
deposits, gasification and liquefication of coal, and
other types of energy such as geothermal energy.
These
will be increasingly significant areas of investment for
our country.
Investment Opportunity
In all of these areas, the President's message is aimed
at maintaining a stable and attractive atmosphere for invest
ment.
Up until now, the rate of return throughout the
petroleum industry has been relatively low.
The Chase
Manhattan Bank has studied the performance of a group of
about twenty U.S. petroleum companies.
This study shows that
the profitability of the industry has been eroding steadily
over the past few years.
In 1971, the rate of return in
the United States on average invested capital declined for
the fourth consecutive year to 9.3 percent.
It is important to note that the rate of return world
wide on average invested capital in the petroleum industry
has not shown this sharp a decline.
Although it did decline
from 1968 through 1970, the rate of return world-wide rose
to 12.5 percent in 1971 from 11 percent in 1970.
A principal
reason for the difference in rate of return world-wide as
19
compared to that in the United States is that the foreign
prices of crude oil and finished products have risen while
domestic prices have not changed significantly.
In fact-,.,*-:-3 :.>n
the real price of domestic crude oil dropped by 14 percent
from 1960 to 1971.
j?
Further, from 1960 to 1971 gasoline
prices rose by less than half as much as the consumer price
index for all items.
Gasoline prices during this period- ono >
rose by 15 percent while prices for all consumer items tos© o U
by 37 percent.
f’
ev^oH
.j!ar:? 20 nsigsb
What is needed is a system that will allow the free
market to operate so that the price of domestic crude oil and
products can begin to reflect the costly expenditures that
are required to find and produce them.
ri
We all have Winsrjano
immediate choice of whether we will take the necessary steps
to strengthen the domestic energy industry.
;
If we failrto 1 -¿c,
strengthen the industry, our country will, with the passage r:C
of time, become more
dependent upon foreign supplies of. oil-
at higher and higher prices.
Thus, in the end, the consumer s
will pay the price one way or the other.
Our objective, how-
ever, is to assure that the Nation does not pay a price.. 3:rorf«p
in diminished national security and also does not lose the
necessary flexibility in its negotiations with foreign -jj
countries.
20
Realizing that uncertainty is the enemy of investment,
we have instituted government policies which will remove
uncertainty and provide stability to encourage long-range
planning and investment.
This industry offers a wide
variety of investment possibilities, ranging from
exploration ventures to refinery operations to shipping
concerns, as well as fully integrated companies.
Explora
tion for new resources carries with it a relatively high
degree of risk.
However, the potential return on investment
in this area is quite high.
Investment in "downstream”
activities offer more stable investment opportunities.
These activities are supported by a marketplace with
constantly mounting demands for the products produced. With
this assured demand, investments in refineries offer a
certain returno
Further, there are substantial investment
opportunities in the shipping industry,,
Large tankers with
doublé bottoms are required in increasing numbers and
superports to accommodate these ships are also needed to
cut down on tanker port calls and on risks of oil spills„
There are also companies in this important industry that
participate in a wide range of all of the above activities.
It is also important to realize that governmental and
quasi-governmental entities in the producing countries will be
receiving a large percentage of the moneys being paid for
oil by the United States and the other importing countries.
What those countries do with the sums that they earn will
have a major impact on the domestic petroleum industry, on
the United States balance of payments, and the world monetary
system.
They will be seeking stable, secure, sound invest
ment opportunities.
forever.
Their reserves of oil will not last
Furthermore, over a somewhat longer period, new
sources of energy based on new technologies, can be expected
to reduce the dependence on the industrialized world on the
oil of the Arabian states.
What these nations will be
seeking to do in the next ten to fifteen years, however, is
to transform this national asset, their oil, into claims on
other types of earning assets in other parts of the world.
There is an opportunity here for you, gentlemen, to develop
the techniques which will induce their investment.
In closing, I don't want to play down the current
situation.
Although I feel that we have created the proper
programs for increased domestic exploration and development
as well as increased construction of domestic refineries,
an energy crisis does exist today.
However, out of crisis
comes opportunity, and the President's energy message should
22
serve as a touchstone of the future.
We have the capacity
and the resources to meet our energy needs if only we take
the proper steps -- and take them now.
Thank you.
0 o 0
DepartmentoftheTREASlIRY
ÏNGTON, D C. 20220
TELEPHONE W 04-2041
m
FOR RELEASE ON DELIVERY
REMARKS OF DR. H. II LIEBLING
DEPUTY DIRECTOR, OFFICE OF FINANCIAL ANALYSIS,
OFFICE OF THE SECRETARY, DEPARTMENT OF THE TREASURY,
AT THE ECONOMIC OUTLOOK DINNER
OF THE AMERICAN STATISTICAL ASSOCIATION,
PHILADELPHIA CHAPTER, AND THE
NATIONAL ASSOCIATION OF BUSINESS ECONOMISTS,
PHILADELPHIA CHAPTER,
THURSDAY, MAY 31, 1973, 7:30 P.M.
THE ECONOMIC OUTLOOK:
SMOOTH LANDING OR RECESSION?
Just as the economy pierces into the zone of its poten
tial growth, alarms are being sounded of an imminent descent
to slow growth or recession. No sooner has the nation's
attention been shifted from too much unemployment to other
issues -- the problem of inflation, for one
then warnings
arise that the desired and just-attained goal of accelerated
real growth is temporary; that recession and rising unemploy
ment lie ahead, apparently the bitter reward of success; and
that while the program previously urged might have been
efficacious, it was also strangely enough deficient because
it had led to overheating and inflation.
Where were those wise voices awhile ago? I don't recall
many warnings about overheating in late 1971 or 1972.
The forecasts of stagnation or recession, of course,
stand in contrast with the official view that the reentry to
the path of sustainable long-term growth can be managed and
is attainable without recession.
2
The current array of forecasts falls into three main
groups:
,
• The official forecast -- both in its January 1973
version and as it was revised early this month -- perceives
a smooth landing to a sustainable real GNP growth path, by
which is meant something in the general neighborhood of a
470 rate by the end of 1973 -- and presumably, but not yet
officially revealed, going into 1974.
• A "growth recession" forecast envisages a rough but
not dangerous descent to a real growth rate of 2^% or so by
the latter part of 1973 or early 1974 and then turning
higher.
* An "old-fashioned" recession forecast sees serious
slippage in late 1973 or during some period in 1974 into
negative real growth for two quarters or more -- the shorthand
traditional test of recession established by the National
Bureau of Economic Research.
My personal professional view is clouded by the exist
ence of more than the usual number of uncertainties. There
are many strengths, as well as incipient weaknesses, in the
current and prospective economic situation as it is
developing. To cite only one example, the conventional
wisdom only a year or so ago was that the consumer reaction
to rising prices was to save more; but lately that has
changed to a conclusion that he would save less in just
that same circumstance. But, looking ahead, some again
assert that inflation will result in reduced consumer spend
ing -- a complete turnabout.
So, this is a time of trouble for forecasters -- much
more so than a year ago, when my expectations of economic
expansion for 1972 and beyond were clearly expressed. But,
if I must choose, in the midst of uncertainty, I would say
that second-quarter real GNP should register 67. or so
growth and that succeeding 1973 quarters might trend lower
but not depart much from long-term growth rates. That is
a relatively optimistic view for these times, which abound
with forecasts of recession. But the convincing case for a
recession is not more convincing than for no recession.
And the former requires a certain "hands off" policy by
the authorities, no matter what happens.
I
3
5
3
By this view, this audience might attribute to me an
unshakable and perennial optimism. This audience will recall
that a year ago it had appeared that only the intrinsic
bullishness of my forecasts over the years had led me to
say that the official government projection of a $100 billion
advance in current dollar GNP for 1972 would be exceeded (as
it was) and that this "would imply a momentum into 1973
that would hardly fail to extend a 1972 period of vigorous
growth in production, employment and income."
Tonight, I again stand in contrast with the skeptics of
positive real growth, who appear to abound in forecasts for
second half 1973 and 1974. With one or two exceptions,these same
forecasters missed 1972 GNP by many billions of current
dollar GNP growth and by up to 1% in real growth.
There is one difference from my views of a year ago:
Looking ahead, the fulfillment of an optimistic forecast
depends much more heavily on skillful management of economic
policy directed toward a balanced tradeoff between unemploy
ment and prices. This stands in contrast with the relative
certainty of making forecasts a year ago, when the economy
needed only to ride the swell of the policy tidal wave set
in motion by the actions of August 1971.
To place the several schools of forecasts in perspective,
the "smooth landers" have much in common with the "slow
growthers." In this latter group are the forecasts of
the large econometric models whose real growth rates tend
toward 2fc% or so in the latter part of 1973 and Ud from
that in early 1974. Accordingly, the difference in real
growth rates generated by these models and those of the
easy landing" school comes almost within reach of errors of
statistical measurement.
The main cleavage in thought is provided by the
recessionist school. In its defense, I would reaffirm that
t e business cycle should not be ruled out as a relevant
concern of economics. But a review of such forecasts
reveals that their expositors provide different explanations
A - their views - some of them, indeed, are contradictory,
n , more important, they do not appear more convincing at
t"is time than a forecast of "easy landing."
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4 -
The principal difference of the optimists would be
with those who see an old-fashioned recession later this
year or next. Recessionist views fall into the following
categories:
• Recession due to prior overheating. This cause for
recession, in its primitive form, merely presents a view
more compatible with the principles of physics than with
economics. It boils down to a notion of Mthe sharper the
rise, the harder the fall." In its more sophisticated view,
it presumes the economy bouncing against real resource
ceilings, from which there is no place to go but down, due
to accelerator effects. But, surely, the European experience
of nearly steady real growth -- passing over the price paid
in inflation -- is instructive here.
•
O verspending in e a r l y 1973 - - a t th e exp en se of
l a t e 1 9 7 3 an d 1 9 7 4 .
R e c e s s i o n d e v e l o p s due t o t h e e x c e s s e s
o f consumer sp end ing in th e f i r s t q u a r t e r , e s p e c i a l l y fo r
au tom obiles.
P e a k h o u s in g s t a r t s m ig h t a l s o be c o n s id e r e d
as a p o i n t f r o m w h ic h s u b s e q u e n t s p e n d i n g - - f o r h o m e s, per
s e , and a s s o c i a t e d h o m e - f u r n i s h i n g s and a p p l i a n c e s - w o u l d d e c l i n e i n t h e b a l a n c e o f 1 9 7 3 an d e a r l y 1 9 7 4 .
But, it is not part of an "easy landing" forecast for
consumer spending to remain as high as in the first quarter.
Indeed, some cooloff in consumer spending is desirable from
first-quarter rates.
That does not mean a collapse in such spending -- which
will depend primarily on the flow of disposable incomes
though the burden of indebtedness, possibly the stock
market, and other influences will be important.
Should
incomes be rising later this year -- for reasons indicated
subsequently -- spending might also advance. One factor
that will bolster consumer spending is the growing number of
months between starts and completion of houses -- which may
be expected to bolster purchases of household equipment and
furniture in the fall and winter.
•
I m b a l a n c e i n t h e s t r u c t u r e o f p r o d u c t i o n -- primarily
i n i n v e n t o r i e s , a s a l a r g e v o l u m e o f m a t e r i a l s a nd s u p p l i e s
a re d e liv e r e d in f i n i s h e d form .
5
This explanation assumes a very large inventory swing
up to $20 billion or so in the third and fourth quarters,
followed by a drop to $5 billion or so. The unpersuasive
part of this forecast is the fact of the conservative
policies of businessmen in accumulating inventories which
has characterized this economic expansion.
It supposes that
subsequent misjudgments by business have just developed or will,
whereas none had been observable earlier.
• A monetary crunch, as cause of recession.
In its
anxiety to curb inflation, the monetary authorities are
presumed to have already initiated a policy of tightness which,
with customary lags, will result in recession in late 1973 or
early 1974. That theory depends upon whether the Federal
Reserve has already determined that a recession is worth
disinflation. That is a conclusion which may be insupportable.
Indeed, the move toward a tighter monetary control has been
very modest, judging by the growth of monetary aggregates.
Liquidity of business is very high. The main impact of
monetary influence has been in higher short-term rates,
which have had their principal impact in the beginning
of disintermediation. Housing starts already have declined
somewhat.
In contrast with these theories, the "soft landers"
would look to the ongoing capital goods boom as an important
bolster to economic growth. The broad array of figures
relating to capital expenditures points to continuing high
and rising outlays in the remainder of 1973, as well as in
1974. Furthermore, whatever does not get spent in 1973
due to capacity limitations could mean extra strength in 1974.
It would be a rarity should a capital goods boom be accom
panied by recession.
tl
In general, that is the substance of this case for a
soft landing.M Of course, it does depend as well on economic
policies which are determined to avoid a monetary crunch.
t will require continued reassessment by policymakers of
circumstances as they develop. Optimism on that is a pre
requisite for this forecast.
ooOoo
Department of t h e f R E A S U R Y
IHinGTON, O.C. 20220
TELEPHONE W04-2041
I»
EMBARGOED FOR RELEASE UNTIL
2:00 P.M., EDT, MAY 31, 1973
TESTIMONY BY THE HONORABLE WILLIAM E. SIMON
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
SENATE FOREIGN RELATIONS COMMITTEE
THURSDAY, MAY 31, 1973, 2:00 P.M., E.D.T.
Mr* Chairman and Members of the Committee:
I
am delighted to appear before you today to discuss
aspects of the world energy supply situation.
In particular,
I would like to focus on the economic consequences of the
growing dependence of the United States on foreign sources
of petroleum, especially our dependence on the producing
countries in the Middle East.
Central to this economic
issue is the effect on our balance of payments and the
relation to the new world monetary order we are negotiating.
Let me begin first by broadly outlining the policies
we are pursuing in the energy area.
U .S . Energy Demand and Supply
On April 18, the President presented a broad and
comprehensive energy message.
for action in six areas:
S-218
Briefly, the President called
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2-
(1)
Increase domestic production of all forms of energy;
(2)
Act to conserve energy more effectively;
(3)
Strive to meet our energy needs at the lowest
cost consistent with the protection of both
our national security and our natural
environment;
(4)
Reduce excessive regulatory and administrative
impediments which have delayed or prevented
construction of energy-producing facilities;
(5)
Act in concert with other nations to conduct
research in the energy field and to find
ways to prevent serious shortages and to cope
with them if they arise; and
(6)
Apply our vast scientific and technological
capacities —
both public and private —
so
we can utilize our current energy resources
more wisely and develop new sources and new
forms of energy.
Not only did the President call for action in each of these
areas, but he also acted!
import program.
He completely restructured our oil
Effective May 1, 1973, all volumetric quotas
on oil imports were ended, the existing duties on imports of
petroleum and petroleum products were suspended, and a system
of license fees was instituted.
Our objective was to design
a program which would assure the oil industry flexibility to
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3
import oil to satisfy the short-term needs of U. S. refiners
and consumers while, at the same time, to provide longer-term
stability and additional incentives for increased domestic
exploration and production and new refinery construction and
expansion.
These policies outlined in the President's energy message
were arrived at after careful thought and analysis.
Some
people have said that the message was not strong enough —
for instance, that it did not provide for enough money to
be spent on research and development.
very strong statement —
I feel that it was a
I see the message as a blueprint for
action that must and will be taken.
And with respect to
research and development, the President said that we will propose
whatever reasonable funding is
needed while not foolishly
allocating funds more rapidly than they can be effectively
spent.
This to me is sound policy.
To better understand how these policies were determined,
I would like to briefly examine the growth in demand for energy
in the United States and our supply prospects to satisfy this
demand.
Demand and Supply
The first thing to understand is that the demand for
energy has been increasing continually while our supply has
not.
With six percent of the world's population, we are
consuming 33 percent of the world's energy.
Furthermore, the
4
demand for energy in this country is growing at an annual
rate of about four percent and by 1990, our energy needs
will be doubled that of 1970.
Much of this increase in
demand will be reflected in an increase in the demand fo r oill
which has grown, in part, because there has been a shift
away from coal to oil and, in part, because of the inability
to obtain natural gas, another alternative to oil.
Domes
tic demand for oil has increased from 15.1 million barrels
a day in 1971 to approximately 18 million in 1973 and will
increase to about 21 million in 1975 and to approximately
25 million in 1980.
Oil
and gas now account for about 65 percent of the
world energy consumption and about 76 percent of U. S. energy
consumption.
And it will not be until the mid-1980's that
nuclear and other sources of energy will begin to provide for
a significant part of the energy demands and reduce the
world’s dependence on oil.
The demand for gasoline in the United States has also
been growing faster in the past several years than at any
other time in recent history.
Since 1968, gasoline demand
has risen at an annual rate of about five percent.
D uring
the past two years the rate of increase has been about six
percent per year.
Part of this rise in demand can be expla11^
by growth in the population, growth in the economy, and the
increasing number of cars on the road.
y'
- 5 But demand has also risen significantly because of the
many power-using devices added to cars.
These include
automatic transmissions, air conditioning, various safety
features, and the changed made in automobiles since 1970 in
compliance with EPA regulations issued under the mandate of
the Clean Air Act.
tions has
Producers* compliance with these regula
led to substantially reduced engine efficiency.
As more vehicles come on the road equipped with safety,
emission control, and physical comfort devices, average
mileage per gallon will decrease further.
that once got 14 miles per gallon, now get
miles, and may
Many automobiles
eight or nine
get only six or seven miles per gallon
if present trends continue.
Because new automobiles are not getting the gasoline
mileage obtained by their counterparts five and ten years
ago, and because we are driving more, gasoline consumption
has risen.
We are using 300,000 barrels per day more gasoline
this year than last year.
Given this growth in demand, let us look at what has
been happening in the petroleum industry:
Domestic Production.
Domestic production last year began
a slow decline to which no early end was foreseen, even though
virtually all of our wells were producing at 100 percent of
capacity for the first time in history.
i
The amount of domestic exploratory drilling for oil
has fallen substantially.
Oil well drilling actually peaked
in 1956 when an estimated 208 million feet of productive
wells and dry holes were drilled.
has been a rapid decline.
Since that time, there
In 1960, only about 145 million
feet were drilled? by 1970, this had fallen to 100 million
feet? last year, the total was down to 86 million feet.
This may have been due in part to the lack of price and tax
incentives, but, it is important to realize that we have
exploited the economically most desirable oil properties
and now have to develop areas that are remote and more
expensive.
Domestic Refining.
U. S. refining capacity actually
decreased by 11,000 barrels per day in 1972 even though the
demand grew by over one million barrels per day.
Prior to
the President*s energy message, no new refineries were under
construction.
Furthermore, expansion of existing refineries
had nearly ceased.
Growth in the capacity of the industry
had come to an end because the industry found it was more
profitable to invest abroad than in the United States.
One reason for this is that environmental restrictions
have made it increasingly difficult to find acceptable sites
for new refineries in this country.
Because of resistance
to refinery siting, it may take three years to obtain site
approvals today, in addition to. the three years required for
construction.
Yet, modern refineries can be designed and
are operating that meet all existing air and water quality
standards.
Another reason why the industry has located new
refineries abroad is that U.S. oil import restrictions,
in the past, created uncertainty as to whether new domestic
refineries could obtain sufficient imported supplies of
crude oil.
As long as the government set import quotas on
a year-to-year and, in some cases, on a month-to-month basis,
no company was assured of the stability of supply necessary
to encourage domestic refinery construction.
This impediment
ended on April 18 when we terminated volumetric quotas on
oil imports.
Finally, the tax and other economic benefits available
to refiners in the Caribbean and in Canada have been more
lucrative than similar provisions available in the United
States.
Deepwater ports in the Caribbean and Canada have
also permitted savings in the use of very large crude
carriers.
For all these reasons, U.S. refinery construction
has been standing still while U.S. demand for refinery
products has been increasing.
U.S. Imports.
To meet growing U.S. demand, oil imports
have risen dramatically.
from the Middle East.
Much of the new import supply came
Between 1969 and 1972, total oil
imports rose by 52 percent to 4.6 million barrels per day.
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8-
Most of this increment has come from the Middle East.
The
result of these developments in the oil area is that we have
moved from a buyer's market to a seller's market.
Producing
countries now have a larger voice in the determination of
oil prices and volumes, and until our domestic petroleum
industry grows to meet new demand, a large portion of the
increases in our oil requirements will have to come from these
countries.
Relationship of Oil Imports to the
U.S. Balance of Payments
Because of this need to import oil in the near future,
it is important to examine the impact that this may have on
our balance of payments.
It has been estimated that imports
of foreign oil will increase from 27 percent of total U.S.
consumption in 1972 to about 33 percent in 1973, to over
50 percent by 1980.
As a result, in 1973, our payments
outflow due to oil imports may be about $7 billion.
This
figure could grow to about $10 billion in 1975 and may be
as much as $17 billion by 1980.
These figures, however, are only one component of
our balance of payments picture, and several factors will
help to offset the dollar outflow.
American oil companies
will continue to own or market much of the free world's oil
production.
Some of their profits from foreign investments
will be repatriated.
Most producing countries have significant import needs
and will undoubtedly use some of their oil revenues to
purchase goods from the U.S. or third countries.
The
Persian Gulf States of Saudi Arabia, Kuwait, Abu Dhabi and
Qatar, however, are not expected to increase their imports
as rapidly as their exports.
The Department of Commerce estimates that the outflow
of dollars to pay for oil imports will generate U.S. exports
worth some $8.2 billion in 1980.
The Department of Commerce
also estimates that, in 1980, about $5.9 billion will return
to the United States in the form of repatriated profits.
This, plus the $8.2 billion in exports, will partially offset
the $17 billion addition to foreign exchange outlays required
by increased imports of foreign oil in 1980.
Nevertheless, these factors cannot completely offset
the dollar outflow from increased imports.
Prices of
foreign crude oil have gone up considerably since the 1970
agreements between the producing countries and the oil
companies;
The overall impact on the balance of payments by the oil
industry will also depend on how much U.S. capital will flow
into overseas oil exploration, development, and refinery
construction.
The Chase Manhattan Bank estimates that capital
10
and exploration expenditures overseas by the world petroleum
industry in the 15 years from 1970 to' 1985 will be about
$360 billion dollars.
To the extent that much of this
investment is made by the United States, it would have a
major bearing on what happens to the U. S. foreign exchange
position.
OPEC:
Greater Revenue, Greater Control
Since its inception in 1960, the Organization of
Petroleum Exporting Countries (OPEC) has achieved signifi
cant gains in negotiations with international oil companies.
Supply disruptions since 1967, such as the Suez Canal closure,
the Tapline rupture, and curtailments in Libyan production,
as well as the vigorous negotiating stance of OPEC, have
brought increases in posted oil prices, new formulas for
calculating royalty payments and taxes, and, most recently,
agreements on participation in ownership.
OPEC has also forced
changes in the posted price of crude oil to reflect devalua
tion of the dollar.
These actions by OPEC's members will
bring considerable increases in revenue as well as control
of the local assets of oil companies.
Conversely, these
same events have brought problems to the oil companies and
concern to the consuming nations.
The Teheran and Tripoli Agreements set forth a fourstep increase in posted prices through 1975.
This increase
varies by type and source of crude, and will raise oil
company payments to the Persian Gulf nations by $1.50 per
barrel or 80 percent over 1969 levels.
To place these
payments in historic perspective, let me point out that
there was virtually no increase in per-barrel payments in
the 1950's and only a 12 cents per-barrel increase in the
1960's.
I might add that there has been a rise in the posted
price and, hence, the tax paid per barrel as a result of
the devaluation of the dollar.
The increase is governed
by a formula agreed to by the Western oil companies and the
producer nations at Geneva in January 1972.
It provides
that posted prices will be adjusted every time the U. S.
exchange rate differs from an index of nine major currencies
by more than two percent.
Posted prices rose by 8.55 percent
in February 1972 and rose by 5.69 percent in April.
OPEC
is now attempting to negotiate a deviation from the original
formula which would make the rise in posted prices more nearly
equal to the decline in the dollars' value, relative to the
nine currencies.
Oil-producing countries can be expected to press for
further increases.
Their spokesmen claim that they have
not been adequately compensated for the oil given the prices
the oil companies realize in the market place.
Impact on the International Monetary System
In the case of some oil-producing countries, income
from oil is likely to lead to an equivalent expansion of
imports.
However, a few of the oil-producing states,
particularly some of those located on the Persian Gulf,
have small populations and may not be able to increase
expenditures in consumption and domestic investment as
fast as their oil revenues.
These countries will spend
part of their revenues on aid to other countries.
They may invest part in Europe and the United States.
The major oil producers on the Arabian peninsula -Saudi Arabia, Kuwait, Abu Dhabi, and Qatar —
estimated income of about $5 billion in 1972.
had an
This could
increase to about $10 billion per year by 1975, and up to
$20 to $30 billion per year by 1980.
On the basis of
present trends, it has been estimated that these countries
absorb about $10 billion in imports annually by 1980,
leaving $10 to $20 billion to be allocated to foreign aid,
foreign investments, and foreign exchange reserves.
If annual excess earnings were added to reserves, the
holdings of these countries could be about $60 billion
by 1980.
This is a very substantial pool of dollars that
is of concern to us in our efforts to create a new world
monetary system.
Fortunately the oil-producing countries
have been participating fully in discussions on international
monetary reform.
13
Some producing countries have already expressed their
willingness to invest in the U. S. oil industry.
U. S.
technology and products could greatly enhance the economy
of these countries.
Other possibilities might include
their participating in large investment projects elsewhere,
such as the construction of deepwater tanker terminals.
Since the experience of most Middle Eastern governments in
large-scale investment projects is limited, assistance by
the U. S. and other governments may be necessary in getting
the oil producers to commit their funds to these projects.
National Security and Oil Imports
The Middle East has been the predominant supplier of
oil to Europe and Japan for some time, and is rapidly
becoming a major source of U. S. petroleum requirements.
Access to these supplies at reasonable cost is of paramount
concern to the importing nations.
The bulk of the world's oil reserves are in the Middle
East.
At present, this area has 67 percent of the world's
known reserves•
Three countries —
Saudi Arabia, Iraq, and Iran —
possess oil reserves sufficient to allow substantial increases
in production above current levels.
But Iran has indicated
that, on the basis of its presently proven reserves, its
output of crude oil will not expand much beyond eight to
nine million barrels per day.
14
II
Saudi Arabia holds the largest reserves of oil,
about 140 billion barrels or 24 percent of the world*s
proven reserves.
Saudi reserves are equivalent to four
times U. S. reserves, including the North Slope's ten
billion barrels.
Thus, Saudi Arabia will play a key role
I
in the balance between world oil supply and demand.
While the exporting nations may choose different
strategies in exploiting their remaining reserves so as
to maximize their total flow of revenues, it is reasonable
to expect that oil production in the Middle East and
North Africa will increase from 22 million barrels per
day in 1970 to about 40 to 50 million barrels in 1980.
On the basis of present planning, Saudi Arabia is expected
to supply about 75 percent of the expected growth in
Middle Eastern oil production through 1980 and Iran
another 20 percent.
On a global basis, the Middle East
will be producing 50 percent of the world's oil and Saudi
Arabia and Iran will, together, supply half of this oil
by 1980.
In other words, the world's oil economy has
changed drastically from when the oil import program was
first initiated.
Oil
imports from the Middle East will be supplemented
by imports of natural gas, shipped to the United States
either as liquefied natural gas (LNG) or methanol.
Although
an LNG contract was, after long delay, consummated last
2>V
15
month with Algeria for delivery in 1977, it is unlikely
that arrangements could be made with the Persian Gulf
governments to deliver gas to the United States before 1980.
Security Dangers to the U. S.
Greater reliance on Middle East oil could represent
a security problem for the United States for several reasons
First, all producing countries have shown an increasing
tendency to demand more for their oil.
Some have actually
threatened withholding supplies to assure that their demands
are met.
Second, the Middle East is not trouble-free.
War has
broken out several times during the past three decades,
and supplies from this area have suffered frequent
interruptions.
Third, some governments have threatened long-standing
agreements with the oil companies.
They have also suggested
the use of their oil resources as a political weapon.
The recent oil stoppage by Libya and other countries as a
political gesture is an example of what could happen.
Finally, accumulations of foreign exchange reserves
could be used by some countries for various ventures which
are not in the security interests of the United States.
16
Effect of "Participation"
The relationships between oil-producing nations and
the international oil companies operating within their
borders are changing rapidly.
Most OPEC members are
seeking participation in oil production within their
borders.
Agreements have been signed which provide that
Arab governments in the Persian Gulf will obtain a 25
percent ownership in the producing activities , beginning
last January, and eventually reaching 51 percent by 1982.
Participation in exploration and development will
give producing countries their own oil which they may use
as they wish.
Revenues from this oil, together with
the taxes from nonparticipation oil, will yield extremely
high foreign exchange earnings for several producing
nations.
As I mentioned earlier, in 1980 alone, this
oil-derived revenue to the Middle East could well total
as much as $60 billion per year.
The countries in the
Middle East will not be able to spend all of these sums,
and if oil revenues are accumulated and not spent, we face
the prospect that some producers may decide that it is
in their best interests to keep their oil in the ground.
Under these circumstances, how best can our security
interests in the Middle East be served?
The new strength
of the oil-producing nations is well known and it has been
used to advantage in recent months.
We are convinced
that the consuming countries should begin to coordinate
their energy policies to secure a joint approach to common
supply problems, always keeping in mind the legitimate
interests of the producing countries.
We are convinced,
however, that the consuming countries should begin to
explore this approach seriously and will do so in the
forthcoming meetings of the Organization for Economic
Cooperation and Development (OECD).
Reduction of Dependence Through
Development of U. S. Energy
The Presidents Energy Message is aimed not only at
assuring adequate supplies of energy in the short run,
but also at reducing our dependence upon foreign suppliers
in the long run by fostering a vigorous domestic energy
industry.
As such, the President has provided major
incentives to energy production in the United States:
(1)
Natural Gas.
as distinct from regulated —
gas.
The President proposed competitive —
price treatment of new natural
Regulation of wellhead prices of gas at artificially
low levels has seriously discouraged the search for new
gas —
a search, by the way, which also turns up a portion
of our new oil discoveries.
Now, we are proposing to let
new gas contracts seek their own price level in competition
18
with other fuels, subject to the reservation that the
Secretary of the Interior can impose a ceiling according
to certain criteria, if necessary.
Since the wellhead
price is less than 20 percent of the delivered price, and
since the provision would apply to new contracts, the
effect on consumers would be gradual and limited; but,
the effect on oil and gas exploration should be immediate
and substantial.
(2)
Investment Tax Credit.
The President has
proposed a seven percent investment tax credit on intangible
ârÜliîiçl costs for new domestic exploratory wells.
Further, for wells that prove economically productive,
there is a supplementary five percent credit.
is structured to reward success.
Thus, the
In this way,
the Nation will be a guaranteed winner since a successful
well will at the same time provide needed energy resources
and increase the tax revenues.
(3)
Outer Continental Shelf.
The President has
directed the Secretary of the Interior to triple the
acreage leased on the Outer Continental Shelf by 1979.
A substantial portion of the estimated reserves of oil
and gas yet to be discovered in the United States are in
the Shelf.
The President's program, which contains firm
environmental safeguards, will put us in the position of
19
taking advantage of these great reserves.
The availability
of three times as many offshore tracts from which to
select will increase the payoff of industry's offshore
programs.
An additional effect would be to reduce the
concentration of bidding on a limited number of tracts
which has raised the initial bonus payments to the federal
government to astronomical levels and has, for this reason,
effectively increased the capital needed to expand production.
(4)
New Oil Import Program.
By terminating volumetric
quotas on oil imports and substituting a license fee system
for existing tariffs on petroleum and petroleum products,
the new oil import policy provides major incentives for
U. S. production and U. S. refinery construction:
The new schedule of fees on imported oil
establishes a clear differential between the
price of domestic and the price of foreign oil
which favors U. S. production.
—
Existing and new refiners now have long-range
assurance of access to world crude oil markets.
A major concern of companies considering new or
expanded refineries was uncertainty of supply due
to the fact that U. S. crude oil production had
peaked and imports were limited by the import
allocation system.
—
The fee schedule also establishes a differential
between the fee on imported crude oil and the fee
on imported refined products.
Thus, it should be
more profitable to refine here than to refine
outside the U. S. and to import the refined products.
There is an additional incentive for new refinery
construction or expansion.
Companies building new
refineries or expanding existing refineries will be
granted license fee-exempt allocations equal to 75
percent of their additional inputs for their first
five years of operation.
At established fee levels,
the total financial benefit of this exemption is
about 18 percent of construction costs.
And I am
happy to say that companies have already responded
to these incentives.
Since April 18, 1973, a number
of companies, including Shell, Ashland, The Pittston
Corporation, Exxon, Mobil, and Standard Oil of
California, have announced that they now plan to build
or expand refineries in the United States with total
refilling capacity exceeding two million barrels a day.
Others have indicated to us that they are seriously
considering building refineries here, but have not
yet made their plans public.
In addition, several
independent marketers have stated their intention to
develop their own U. S. refinery capability.
21
Additional support will be given to the U. S.
refineries when the deepwater ports called for by the
President are constructed.
By increasing the size of
a tanker from 65,000 to 250,000 dead weight tons, you
can cut the dollar per ton freight costs by nearly 30
percent.
At present, refiners at several Caribbean and
Canadian sites have the advantage of deepwater ports
which can accommodate the new, modern and economical
supertankers, but U. S. refiners on the East Coast and
Gulf Coast do not.
The President has proposed legislation
to permit the Department of the Interior to issue licenses
for the development of such ports beyond State waters
after full and proper evaluation of environmental impact
and land use, and in cooperation with State and local
authorities.
We are also urging rapid construction of the Alaskan
pipeline.
When completed, this will result in more than
two million barrels of oil a day by 1980.
to one-third of current oil imports.
This is equal
Further, it will
encourage additional development of Alaskan fields.
The North Slope, alone, is capable of producing between
5 and 6 million barrels a day.
Finally, the President's message encourages development
of new energy sources, such as our vast oil shale deposits,
22
gasification and liquefaction of coal, and other types
of energy such as geothermal energy and, most important,
nuclear energy, a vital alternate to oil.
These will be
increasingly significant areas of investment for our country.
The effect of these steps will be to increase the
amount of energy produced in the United States and to
reduce our reliance on foreign sources of supply.
I think we must all recognize, however, that each of the
constructive steps which I have outlined, even if they
were highly successful, will not together be sufficient
to make the United States self-sufficient in energy before
1985 or even come close to doing so.
Our situation, of course, is far more secure than
that of Western Europe or Japan.
Western Europe's
reliance on outside sources for energy is substantial.
Japan's reliance on the outside world is almost total.
Since we must rely on foreign sources of supply, our
best policy is one of diversification.
As I said before,
we look to both Canada and Venezuela as well as the P e r s i a n
Gulf for our oil.
Moreover, the Persian Gulf area should
not be looked upon as a monolithic source.
The economic
and political situation of non-Arab Iran, for instance,
is far different from that of Kuwait or Saudi Arabia.
All three countries, however, have been and remain
fundamentally friendly to the United States.
23
American companies are also obtaining oil from
Nigeria and Indonesia«
Discussions are actively going
on concerning natural gas and oil supplies from the
Soviet Union.
The amounts which we will expect to receive
from sources other than the Persian Gulf and the timing
of their availability is uncertain.
But, in the current
world situation, every new independent source of energy
in the world tends to provide us with more security
because of diversification.
- 24 Relations With Producing Countries
Let me now turn to the important and increasingly
controversial issues of our relations with oil producing
countries and oil exporting nations.
Three overriding considerations will be present in
future talks with the oil exporting countries.
First, to help these countries see that their best
interests lie in expanded oil production and export.
This requires cooperating with them in their search to
invest their oil earnings profitably.
Second, to promote U.S. exports of commodities and
technical or engineering services to these countries in
order to offset our rising import bill.
Third, to work with these countries in developing
uses for their reserves that are consistent with the
establishment of a stable world monetary system.
We believe that it is in the common interest of both
producing and consuming countries to increase world oil
production and exports.
We hope they will make investments
and hold reserves in a way that achieves the industrial
development goals of producing countries and promotes
international monetary coopieration.
Further, we are
seeking to provide the proper climate for investment in
the United States.
We believe that there could be some important mutual
benefits in Arab and African governments placing their
funds in the United States.
in energy industries —
If these funds were invested
such as new refineries —
they
would provide profitable investments for the producing
countries as well as an additional source of money to
meet the soaring future U.S. needs for capital in the
energy field.
Such funds would be particularly useful
to independent refiners who often lack both the financial
means or the foreign crude supply of major refiners.
It
would enable some independents to associate foreign crude
suppliers in an equity position in a U.S. refinery.
This
might help independents to better compete with majors in
the U.S. market.
And last, and perhaps most important,
a domestic refiner backed financially by a foreign supplier
might have greater assurance about his crude oil supply
over the long run.
The range of institutional forms these foreign invest“
ments might take is wide:
direct equity position in an
operating firm or a consortium of firms? U.S.-based private
investment fund; or even an international investment struc
ture with representation and funding by several foreign
supplier governments.
Until the direction and magnitude
of specific investment proposals are made known to u s , our
-
2 6
-
statement of preference as to the form of investment
is impossible at this time.
The question of institutional form might also involve
the type and extent of guarantees or assistance sought of
the U.S. Government by the foreign investor country.
Of
course, we cannot guarantee the profitability or even
solvency of any commercial undertaking in the U.S.
Nor,
in the case of a refinery, could we give it any privileged
access to our markets beyond that offered similar domestic
refineries.
However, the U.S. Government
might give
assistance in selection of general classes of investment
and in serving as a liaison with U.S. industry and foreign
investors.
Minister Yamani and other officials of the Government
of Saudi Arabia have visited the United States and made
several proposals publicly and privately.
We appreciated
the initiative displayed by these officials.
They provided
stimulus to our deliberations about the investment policies
Middle Eastern governments may pursue.
We and those in other executive departments have con
ducted intensive discussions about the appropriate response
to overtures from Saudi officials, and officials of other
producing countries who may seek us out.
There is a consensus
that it would be difficult for us to offer to any Eastern
27
Hemisphere government a preferred access to our energy
market —
such as by waiver of import fees—
for this
would go against our long-established policy of not
discriminating in favor of any single Eastern Hemisphere
supplier nation.
We think we should be cautious about
negotiating bilateral special energy arrangements.
Such
arrangements can quickly proliferate among exporting and
importing countries, impeding trade while negating some
of the expected benefits.
This is not to say, however,
that we could not reach an understanding on providing
technical or financial assistance to any supplier nation
which seeks it.
s.-o
Relations with Consuming Countries
Now let us turn to the important question of our
relations with other oil consuming countries.
During
the second week in June, member countries of the OECD
will be meeting in the High Level Group of the Oil
Committee.
(1)
Among the issues to be discussed will be:
whether to enter into a voluntary arrangement
among European, on the one hand, and non-European members,
on the other, for sharing oil supplies in times of emergency
(2)
whether countries with a larger domestic energy
resource base, like the United States, are prepared in
case of supply emergencies to undertake joint •rationing
to assist the supply position of OECD members not endowed
with large energy resources; and
(3)
whether members will wish to reach agreement
with the United States to exchange information on energy
research and development.
The possibility of non-European nations joining
European members in agreements on emergency sharing and
rationing has been talked about for about five years in
OECD.
But the prospect of greatly expanded imports of
crude oil into the United States has required us to think
anew about these arrangements.
If we should agree to
serious negotiations with European members of OECD over
a sharing formula, these negotiations can be expected to
be difficult and protracted.
By international supply emergency we usually think
of a possible Middle East war or an export embargo pro
ducing a sudden disruption of the flow of oil.
But an
emergency could also occur more gradually through ceilings
being placed on oil production at mid-1970 levels by the
exporting countries with the richest reserves.
The President's Energy Message charged the United
States to enter into talks with other energy consuming
nations about cooperation in energy research and develop
ment.
The OECD meeting provides a continuing opportunity
for such talks.
Among the particularly promising areas
in which discussions may be conducted are coal mining
technology? coal gasification and liquefaction; oil
recovery technology; solar energy research conducted in
Europe; nuclear energy; and, geothermal energy work being
done in Italy, Iceland*and elsewhere.
Conclusion
I think we are all agreed, gentlemen, that we do not
want to see the United States become excessively and un
necessarily dependent on imported oil.
To the extent that
deficiencies in our domestic energy industry cause us to
rely on foreign sources, we incur risks to the freedom of
our foreign policy, to our balance of payments, and to the
security of the dollar.
Even with prudent conservation
measures to dampen growth in demand, there is only one
alternative available to us:
greater domestic production
of oil and such substitutes for oil as natural gas, coal,
and nuclear power.
Yet, during the past ten years we have done a number
of things in this country which have actually discouraged
domestic production.
The Government has imposed unduly low
price levels on natural gas.
The Nation has made it
difficult to find suitable locations and build new
refineries.
Our import policies, air emission standards,
- 30 and price controls have increased the uncertainties facing
the industry and, because of these uncertainties, have
deterred investment in drilling and new refinery construc
tion.
We must now turn the page.
The President’s Energy
Message should serve as a blueprint for action that must
and will be taken.
We have much to do.
We must pass proposed legislation
deregulating the price of new gas at the wellhead and authorif
ing the construction of the Alaskan pipeline and deepwater
ports.
We must review environmental policies which may
have contributed to our current energy difficulties.
Above
all, we must work together in the Administration, in Congres^
and on the state and local level if we are to move toward
the needed level of domestic self-sufficiency in energy and
build a strong and enduring basis for supplying our future
requirements.
Thank you.
o 0 o
Department
N6T0N. DC. 20220
ofthefREASURY
.
TELEPHONE W04-2041
<
n 6
June 1. 1973
FOR I M M E D I A T E R E L EASE
T R E A S U R Y S E C R E T A R Y SHULTZ
TO A T T E N D O E C D M I N I S T E R I A L M E E T I N G A N D
I N T E R N A T I O N A L M O N E T A R Y C O N F E R E N C E IN PARIS
Treasury Secretary George P. Shultz and Under Secretary
of State for Economic Affairs William J. Casey will represent
the United States at the annual Ministerial Council Meeting
of the Organization for Economic Cooperation and Development
(OECD) in Paris, June 6-8. Other members of the U.S. delega
tion include Treasury Under Secretary for Monetary Affairs
Paul A. Volcker; Herbert Stein, the Chairman of the Council
of Economic Advisers; and Ambassador William Eberle, the
President's Special Representative for Trade.
The OECD was established in 1961 to promote cooperation
among its members on matters of economic growth, financial
stability, expansion of world trade, and economic development
of lesser developed countries. The organization's 24-nation
membership is comprised of 19 western European countries,
Australia, Canada, Japan, New Zealand (the newest member),
and the United States.
Secretary Shultz and Under Secretary Volcker will also
attend the annual International Monetary Conference, spon
sored by the American Bankers Association. The Conference
is being held this year in Paris, June 5-8. Secretary Shultz
will address a Conference luncheon on Wednesday, June 6.
oOo
S-220
DtpartmentoftheTREASURY
INGTON, D C 20220
TELEPHONE WQ4-2041
FOR RELEASE UPON DELIVERY
STATEMENT OF THE HONORABLE GEORGE P. SHULTZ
SECRETARY OF THE TREASURY
BEFORE THE HOUSE COMMITTEE ON WAYS AND MEANS
MONDAY, JUNE 4, 1973, 10:00 A.M.
Mr. Chairman and Members of the Committee:
The temporary debt limit of $465 billion will
expire on June 30 of this year. The debt subject to
limitation on that date will be about $460 billion and
will, therefore, greatly exceed the permanent debt
limit of $400 billion. Since additional debt will
need to be incurred in fiscal year 1974 to finance
both seasonal needs and the overall deficit in the
Federal Funds accounts, it is now timely to consider
what provision should be made for the year ahead.
Attached to my statement is a table -- Table I -showing our estimates of the debt subject to limit on
peak dates throughout the coming fiscal year. This
is based upon the re-estimates of budget receipts and
outlays contained in the Mid-session Review and
summarized in attached Tables II and III. Also
attached to my statement are tables comparing our
current receipts estimates with the January budget
estimates -- Tables IV and V.
In summary, our re-estimates show unified budget
deficits of $17.8 billion in the current fiscal year
and $2,7 billion in fiscal year 1974. The January
estimates were $24.8 billion and $12.7 billion,
respectively, so you can see there has been an improve
ment of $17.0 billion since January for the two fiscal
years taken together.
The corresponding Federal Funds deficits for the
two fiscal years, which are the more relevant deficits
for consideration of the debt limit, are now estimated
to be, respectively $27.9 billion in fiscal year 1973
and $18.8 billion in fiscal year 1974 against the
January estimates of $34.1 billion and $27.8 billion.
So there has been an improvement of $15.2 billion in
the Federal Funds account.
S- 219
2
As the Committee knows, the Federal Funds part of the
unified budget is similar in concept to the old administrative budget. It includes the funds which the Government
administers as owner and excludes those which the Government
administers in a trustee or fiduciary capacity.
The largest part of the Federal Funds deficit -and, therefore, the largest part of the growth in the
debt subject to limit -- however, is associated with
transactions between Federal Funds and trust funds.
These consist largely of Federal funds payments to
social insurance trust funds. These are now estimated
to net $21.2 billion in Fiscal 1973 and $20.7 billion
in fiscal 1974. Interest on Federal securities held
by trust funds is the largest single item. Other major
payments include the Federal payments as employer to
the Civil Service Retirement Fund and the matching
payment for supplementary medical insurance. The large
surpluses in the trust funds of $10.1 billion in fiscal
year 1973 and $16.1 billion expected in fiscal year 1974
are invested in U. S. Government securities. Therefore,
the debt ceiling must increase enough to include these
amounts as well as the amount of debt sold to the general
public.
Table I, on the conventional basis, provides for a
constant $6 billion operating cash balance and a $3
billion allowance for contingencies. This table indicates
a maximum figure of $482 billion which applies to a brief
period between the end of May and the June tax payment
date. Since this date is 12 months in the future, I
suggest that an additional $3 billion margin is appro
priate. Therefore, I am requesting a debt limit ceiling
of $485 billion.
I would also like to comment briefly on the im
provement in the fiscal year 1973 budget position from
the January estimates and also on the improvement in
the fiscal year 1974 outlook.
As shown by the detailed figures in the Mid-Session
Reiview, all of the improvement in both fiscal years is
the result of higher than previously anticipated tax
receipts. Higher income tax receipts account for most
of the changes in estimated receipts in fiscal years
1973 and 1974.
In total, we have revised individual
income taxes up by about $8 billion for the two years
combined. Corporation income taxes are up $7 billion.
3
Social insurance taxes and contributions are up over
$1/2 billion and other receipts -- excise taxes,
customs duties, and so forth -- are up by $1-1/2 billion.
In total, the increase in receipts for the two fiscal
years is about $17 billion.
We welcome the increased receipts and resulting
decrease in the unified budget deficit because the
budget, as planned, will be exerting more restraint
on the economy as the economy moves toward full potential
output, thus reducing inflationary pressure; we welcome
the decrease in the unified budget deficit because it
reduces the Government's borrowing requirements; we
welcome the fact that the full-employment budget, which
measures the expansionary or restrictive pressures of
the unified budget, on a cyclically-adjusted basis,
has moved from a slight deficit to a small but signi
ficant surplus. This is completely appropriate under
present circumstances and should not be taken as a
basis for less vigilance over expenditure totals. As
President Nixon said in his Budget Message "Except in
emergency conditions, expenditures should not exceed
the level at which the budget would be balanced under
conditions of full employment." To this I could ddd,
"with reasonable stability in prices." To allow an
expenditure increase above $268.7 billion in fiscal
1974 would simply feed inflationary fires and make
achievement of our domestic and international economic
goals even more difficult.
While we welcome these shifts in our budgetary
expectations, it should be recognized that part of the
higher receipts reflect an excessive pace of inflation
in the economy. I make this point to re-emphasize
the pressing need -- which both the Administration ¿nd
the Congress face -- to exercise restraint over Federal
outlays so that they can be held to totals not higher
than the figures specified by President Nixon in his
Budget Message in January; that is, $249.8 billion in
fiscal year 1973 and $268.7 billion in fiscal year 1974.
As one with, responsibility for the sound financing
of the Federal Government, I applaud wholeheartedly the
efforts by many members in both Houses to find an
effective basis for exerting responsible Congressional
control over the outlay totals. The control of outlays
has become, as it should be, a joint and cooperative
effort of the Administration and the Congress, and the
overwhelming need for success in this joint effort should
spur us all toward finding a workable approach.
Over the years many members of the Congress have
considered the debt limit as a tool for the control of
Government outlays, and successive Secretaries of the
Treasury have come before you to argue, as best they
might, that the debt limit at best is a very imperfect
tool for this purpose -- that it is much like locking
the barn door after the horse has gone, because the
Treasury has no choice but to pay the bills after the
obligations have been undertaken.
Perhaps, when the Congress has successfully dealt
with the problem of directly imposing an overall ceiling
on outlays, it will be unnecessary to have a debt limit
per se, since then this additional limitation would have
no real function but might only impair the Treasury’s
ability to finance the Federal Government in the most
effective and constructive way.
We have found the debt limit hearings to be of value
when the timing and circumstances have been such as to
give both the Administration and the Congress an oppor
tunity to re-evaluate the budget.
Yet I see no reason why the Congress could not
establish a procedure to accomplish the same purpose
of budget, taxation and debt review apart from a time
frame during which a change in law is required.
Today, however, I am not proposing such a procedural
change. I am not proposing elimination of the debt
ceiling, but rather I am proposing only a simple increase
in the temporary ceiling.
In addition I would like to recommend that the
Committee move to eliminate the 4-1/4 percent interest
rate ceiling which has applied to all Treasury bonds,
except for those issued under the $10 billion exception
which the Congress approved two years ago.
I make this recommendation in the light of the
record which shows that the $10 billion authority has
been used responsibly by the Treasury Department to
contribute to some improvement in the structure of the
public debt.
5
As some members are aware, the average maturity of
the privately-held public debt has now been reduced to a
very low level of 3 years. This is a trend which I would
like to see reversed, but not in any radical or exaggerated
fashion which would carry a risk of upsetting financial
markets and impairing the ability of the various sectors
of the private economy to finance in those markets.
We have,of course, undertaken and we will continue
to undertake, debt management policies which will minimize
any disturbing impact of Treasury financing operations
on financial markets. We have put an increasing part of
our financing on a routine basis and reduced the size of
our refundings to more manageable proportions. Some of
the measures for these purposes include the shifting of
the annual bill cycle to a 52-week basis, initiating the
offering of 2-year notes on a regular basis, and the
reduction of the quarterly maturities in private hands
to amounts of $5 billion or less.
We have also made greater use of auction techniques
for pricing our securities.
In this way we have avoided
the risk of overpricing or underpricing new Treasury
obligations in rapidly moving financial markets.
We have now utilized the exception from the 4-1/4%
interest rate ceiling on seven occasions to issue a total
of $8.4 billion of medium and long-term bonds with
maturities, at time of issue, ranging from 9 year-9 months
for the 6-3/8*s of February 1982 when they were reopened
in May 1972 to 25 years for the 7 Ts of May 1993-1998.
The first occasion was in August 1971, when in con
nection with the refunding of the regular quarterly maturity,
we issued the first Treasury bond since 1965. This was a
10-year security. Three months later, in November, again
in connection with a regular quarterly refunding, we issued
a 15-year bond. As a result of the fall in interest rates
that had taken place, the coupon was only 6-1/8 percent,
compared to 7 percent on the previous issue.
In February 1972 we offered a 10-year bond, this time
with a 6-3/8% coupon.
In May, we were able to reopen the
issue. In August we offered a 12-year bond with the same
6-3/8% coupon.
n
-5A-
Use of $10 Billion Authority
__
_ _
r“
:
Amount Issued
Issue
:Coupon ¡Maturity: Yield :
:
¡Private
Date
: %
:Yrs-Mos :
%
: Total ¡Private: for
____________ ____:_____ _j________ :_______ :
:
____ : cash
8/15/71.....*...
7
10-0
Par
11/15/71.......
6-1/8
15-0
Par
1,216
543
241/
2/15/72....... .
6-3/8
10-0
Par
2,197
1,643
661/
5/15/72........
6-3/8
9-9
505
505
5052/
8/15/72........
6-3/8
12-0
Par
2,353
1,173
411/
1/10/73___ ____
6-3/4
20-1
6.79
627
627
6272/
5/15/73....... .
7
25-0
7.11
692
552
5522/
6.34
807
456
Office of the Secretary of the Treasury
Office of Debt Analysis
1/
Sold to individuals in amounts of $10,000 or less.
2/
Non-competitive subscriptions were accepted from
individuals and others for amounts up to $250,000.
1951/
6
In January, for the first and to date the only
time apart from a regular quarterly refunding, we offered
a bond for cash. This was the first time we had auctioned
such a long-term bond. This 20-year 1-month bond carried a
coupon of 6-3/41. Our seventh offering was a 25-year bond,
callable at the Government’s option after 20 years, and we
came full circle, back to a 7% coupon.
These moderate sales of bonds were accomplished
without any perceptible adverse effects on long-term
capital markets. Compared with the much larger totals
of corporate and State and municipal offerings, they have
taken only a minor fraction of long-term funds available
for investment. In fact, we believe that the success of
these offerings reflects a demand on the part of investors
for moderate amounts of the highest quality long-term
securities which can only be satisfied through Treasury
issues, a demand which was unsatisfied between 1965 and
1971 when the Treasury was unable to offer new bonds
because of the 4-1/4% ceiling. I should point out also,
that a portion of these offerings was taken on original
issue by the Federal Reserve System and Government
accounts and additional amounts were acquired by them
subsequently in the market. Private holders, therefore,
currently have a total of $4.5 billion, as against $3.9
billion held by Government accounts and the Federal
Reserve.
This points out a dilemma we have faced -- how to
assure that the trust accounts can obtain a reasonable
amount of new long-term securities without dissipating
the small amount of authority we have to issue bonds
which should largely be reserved for improving the structure
of the privately-held Federal debt. Removal of the ceiling
would resolve that dilemma.
Along with removal of the 4-1/4 percent ceiling, we
believe it would be appropriate to remove the ceiling on
Series E and H Savings Bonds. The rate now is 5-1/2 percent,
and there have been many changes, both of the rate to maturity
and the interim rates, over the more than 30 years since E
Bonds were put on sale by the Treasury in May 1941.
While we have made no decision with respect to future
Savings Bonds rates, removal of the ceiling will allow us
more easily to alter the rates in the interest of the
program if in the future it becomes necessary to do so in
order to offer a fair return to savers. As the Committee
knows, there are over $58 billion of Savings Bonds now
outstanding. This program has become a fundamental and
stable part of our debt management program. We want to
make sure it continues to serve both our needs and those
of the public fairly.
-7-
My final request is also partially related to the
matter of equity and the small saver in the United States.
As this Committee is well aware we have a problem in
overwithholding of individual income taxes and there has
been discussion in previous hearings of providing for the
investment of individual tax refunds in an interest bearing
Treasury security.
I would like to request at this time that the Congress
give the Treasury the authority to ¡institute a procedure
by which tax refunds could be invested - - a t the option of
the taxpayer -- in an interest bearing Treasury bond.
The procedure would be to issue a refund check which could
either be cashed in a normal manner or held.
If held, it
would automatically bear, interest as a security after a
specified period of time. We think that there is considerabi
merit in establishing a system now for future use. In additj
to the argument of equity there are other advantages to suchf
a procedure. First, it would encourage savings by taxpayers!
and second, the procedure would contribute to more orderly
cash and debt management by the Treasury.
Mr. Chairman, Members of the Committee, this is the
end of my prepared statement.
I would be most happy to
answer any questions which the Committee might have and to
furnish any supplemental material it would find useful.
We understand you may want to take up the Federal Financing
Bank legislation also at this time. We are quite pleased
with the bill as reported by the Senate Banking Committee,
and I would be glad to comment on that also.
0
O0
ESTIMATED PUBLIC DEBT SUBJECT TO LIMITATION
FISCAL YEAR 1974^
Based on Estimated Budget Outlays
of $268.7 Billion and Receipts of $266.0 Billion
($ billions)
ng
Operating
Cash Balance
Public Debt
Subject to
Limitation
With $3 Billion
Margin for
Contingencies
1973
30
$6
$455
$458
31
6
461
464
31
6
467
470
30
6
460
463
31
6
464
467
30
6
467
470
31
6
466
469
31
6
467
470
28
6
470
473
31
6
474
477
30
6
470
473
31
6
479
482
30
6
472
475
1974
pie
-9-
Budget Receipts
Outlays and Surplus or Deficit (-) by Fund
($ billions)
Actual
1972
Fiscal Year
:: Current : Current
1974
::
1973
:
Receipts :
\
Federal Funds ..............
Trust Funds ...............
Deduct: Intragovernmental
receipts ........
Total unified budget ......
148.8
73.0
160,9
92.5
181.0
106,1
-13.2
-21.4
-21.1
208.6
232.0
266.0
L '1 Lf'
■
1
Outlays:
Federal Funds ..............
Trust Funds ............. . •
Deduct: Intragovernmental
outlays .........
178.0
67.1
188.8
82.4
199,8
9Q.1
-13.2
-21.4
-21,1
Total unified budget ......
231.9
249.8
268.7
Budget surplus (+) or deficit (-):
Federal Funds ..............
Trust Funds ....... .......
-29.1
5.9
-27.9
10.1
-18.8
16.1
Total unified budget ......
-23.2
-17.8
-2.7
Office of the Secretary of the Treasury
Office of Tax Analysis
May
Note: Figures are rounded and may not necessarily add to totals.
31, 1973
- ÌO -
s fable III
Unified Budget Receipts
;'
stii
i
t
%
Out lay ir and5 Surplus or deficit '(-)
:
Fiscal Year 1973 !»'
< * '♦
? Change :
Change ]]
: January j from :
from ][ Current
May 1
i January:
i :
1973
May [ *. estimate
estimate
; : estimate : 1973 :
estimate]*
iestimate:
Receipts ....
225.0
Outlays .....
249.8
Deficit (-) .
-24.8
| +5.0
230.0
l-"
+2.0
249.8
I +5.0
S 19.8
$
+2.0
,232.0
256.0
249.8
K Ì'"
268.7
-17.8
-12.7
+7.0
—
+7.0
263.0
268.7
-5.7
+3.0
*
+3.0
266u0
268.7
-2.7
H .v
Office of the Secretary of the Treasury
Office of Tax Analysis ’
Note: Figures are rounded and may not necessarily add to totals.
*Less than $50 million
IS Fiscal Year Ì.974
: Chapge ::
[Change *
January : fròm
May 1 ] from
[ Current
: January::
1973
estimate [;■; May
] estimate
estimate : 1973 m
[estimate]
:estimate::
May 31, 1973
Table IV
Comparison of Fiscal Year 1973 Receipts as Estimated in
January 1973, May 1973, and Currently
($ billions)
: Change from January
Change from May
May 1”, .
January:
1973 budget
estimate
1973 ¡Economic
1973
Economic :
Legis-*
Legis-*
budget:and reTotal estimate and re- ;
Total
lation]
dation]
:estimate
estimate :
Individual income
tax ....... «.,.•
Corporation ir.come
tax ............
Emp1oymen t ta: &
contributions ...
Unemployment
insurance .... . .
Contributions for
other insurance
and retiremt at ..
Excise taxes . .....
Estate & gift caxes
Customs duties ....
Miscellaneous
receipts .......
Total budget
receipts .0. ... ,|
99.4
+2.0
33.5
+2.0
tmmm
55.6
+2.0
101.4
+1.6
+1,6
+2.0
35.5
+0.5
+0.5
55.6
-0,3
-0.3
mm mm
+0.4
„
+0.4
5.7
3.7
16.0
4.6
3.0
+0.4
+0.2
-—
--
-+0.4
+0.2
3.7
16.0
5.0
3.2
+0.1
-- 1
A .0
*0.1
-0.1
3.9
+0.2
-0.2-1/
225.0
+5.0
+5.0
230.0
+2.2
-0.2
5.3
. .
•-- |
-- 3
+0.1
—
-an m
+2.0
Underlying Income Assumptions - Calendar Year 1972
GNP .........
Personal incon * .
Corporate profits
before tax . ..
1 ij 1.;9
935.8
1151.8
935.9
93.8
94.3
AI hce
fie
Office of the Secretary of the Treasury
Office of Tax; Analysis
May 31, 19|
:F
Note: Figures are rounded and may not necessarily add to totals.
1/ Transfer of writeoff of silver certificates to fiscal year 1974.
ran
-
12-
Table V
Comparison o f F i s c a l Y e a r 1974 R e c e i p t s a s E s t i m a t e d
J a n u a r y 1 9 7 3 , May 1 9 7 3 , and C u r r e n t l y
in
($ b i l l i o n s )
: Change from January :
Change from May
¡January:
1973 budget
: May 1
estimate
Cutrent
1973
¡Economic
1973 ¡Economic
*Legis-]
Legis
]estimatej
budget¡and reTotal
Total ¡estimate ¡and relation
1lation’
:
¡estimate
estimate
Cui
10
3
I
j
J
5
J
J
vidual income
............
oration income
111.6
+3.7
H
+3.7
115.3
+0.7
--
+0.7
116.0
x ...........
37.0
+3.0
—
+3.0
40.0
+1.5
—
+1.5
41.5
—
—
67.9
+0.5
--
+0,5
68.4
--
-0.1
6.2
--
--
--
6.2
—
+0.4
+0.2
4.0
16.8
5.4
3.5
-—
—
- -
- -
-—
--
mmmm
mmm»
4.0
16.8
5.4
3.5
pyment tax &
ntributions ,..
bloyment
surance......
pibutions for
per insurance
d retirement ..
be taxes .....
be & gift taxes
pms duties .
ellaneous
ceipts ......
P-budget
peipts ___ T
67.9
6.3
-0.1
—
—
4.0
16.8
5.0
3.3
+0.4
+0.2
4.1
-0.2
_ _
-0.2
3.9
+0.1
+0.2 1/ +0,3
256,0
+7.0
—
+7.0
263.0
+2.8
+0.2
_ _
mm
—
+3.0
4.2
266.0
23a
Underlying Income Assumptions - Calendar Year 1973
...
1151 Pnal income .. .
931 Prate profits
F°re tax M M
1267
1018
1283
1030
1283
103Ó
108
116
116
A
I
May 3 1 ,
-- w - vvi. t-U
1973 P Ce of Tax A n al y s u
f i g u r e s a r e r o u n d e d and may n o t n e c e s s a r i l y
add t o
Rnsfer o f w r i t e o f f o f
f is c a l year
silv er
certificates
to
to tals.
1974,
197:3
Departmentof theT R E A S U R Y
NGTON, D C 20220
TELEPHONE WQ4-2041
FOR IMMEDIATE RELEASE
June 4, 1973
MEMORANDUM FOR THE PRESS
The Treasury Department today issued the following
statement:
Treasury is pleased with the statement issued June 1,
1973, by Wilbur D. Mills, Chairman of the House Ways and
Means Committee, and the Committee’s ranking minority
member, Herman T. Schneebeli, indicating their expectation
that the Committee will report a bill on tax shelters this
year.
The Treasury Department had proposed an April 30
effective date in its original tax proposal for certain
limitations on artificial accounting losses. However,
Mr. Mills and Mr. Schneebeli indicate their expectation
that the effective date for any new provisions would not
apply before the date of announcement of the Committee
decisions, and would not affect deductions occurring in
1973, subject to possible exceptions if there should be
abnormal transactions. That general approach to effective
dates would be acceptable to the Treasury. The Treasury
proposal with respect to artificial accounting losses is
accordingly amended to conform to the approach outlined by
Mr. Mills and Mr. Schneebeli and to delete the reference
to an April 30, 1973 effective date.
o 0 o
S-223
Department o f At
__n
r>
7K£A5(/RK J H I M
TCTELEPHONE
IfBUflUC lUnj
W 04TftAl
2041 .........................U
n n n o n
SHINGTON, D C. 20220
M
June 4, 1973
FOR IMMEDIATE RELEASE
SCHMULTS AND PORGES SWORN IN BY
TREASURY SECRETARY GEORGE P. SHULTZ
Edward C. Schmults was sworn in as General Counsel of the
Treasury and John M. Porges as U.S. Director of the InterAmerican Development Bank today by Treasury Secretary
George P. Shultz.
Mr. Schmults, a New York City attorney, succeeds
Samuel R. Pierce Jr., who resigned to return to his New York
City law practice.
Mr. Porges who has been an official of
Morgan Guaranty Trust Co., in New York City, succeeds
Henry J. Costanzo, who resigned December 31, 1971.
Mr. Porges*
term is three years,
Mr. Schmults, age 42, was graduated from Yale and Harvard
Law School (Cum Laude) and was a partner in White and Case, a
law firm with offices in New York, Paris, Brussels and London.
Mr. Porges, age 50, holds degrees from Grinnell
College, Grinnell, Iowa; New York University, and the
University of Florida, Gainesville.
oOo
S-222
Martmenlof IheTREASURY
INGTON, D.C. 20220
TELEPHONE W04-2Q41
ENTION: FINANCIAL EDITOR
June 4, 1973
RELEASE 6:30 P.M.
RESULTS OF TREASURY’S WEEKLY
BILL OFFERING
The Treasury Department announced that the tenders for two series of Treasury
Ills, one series H o be an additional issue of the bills dated March 8, 1973
, and
|eother series to be dated June 7, 1973
, which were invited on May 29, 1973,
fe opened at the Federal Reserve Banks today. Tenders were invited for $ 2,500,000,000
Ithereabouts, of 91-day bills and for $1,700,000,000, or thereabouts, of
1 82-day
Pis. The details of the two series are as follows:
5 OF ACCEPTED
ifPETITIVE BIDS:
High
Low
Average
91-day Treasury bills
maturing September 6, 1973
Approx. Equiv.
Price
Annual Rate
98.229 a/
98.185
98.197
7.006$
7.180$
7.133$
1/
182 -day Treasury bills
maturing December 6, 1975
Approx. Equiv,
Price
Annual Rate
96.386 b/
96.350 "
96.355
7.149$
7.220$
7.210$
i
a/ Excepting one tender of $350,000; b/ Excepting one tender of $10,000
12$ of the amount of 91-day bills bid for at the low price was accepted
89% of the amount of 182 -day bills bid for at the low pi- Lee was accepted
|AL.TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
d is tric t______
Poston
lew York
Philadelphia
Cleveland
Richmond
ftlanta
ihicago
r* Louis'
Minneapolis
N a s C ity
Pallas
fan Francisco
TOTALS
Applied For
$
29,160,000
2,816,935,000
36,420,000
36,015,000
15,390,000
19,980,000
247,830,000
54,285,000
15,020,000
22,875,000
40,985,000
88,005,000
Accepted
$
19,160,000
2,025,225,000
26,420,000
36,015,000
13,950,000
19,980,000
177,430,000
48,405,000
15,020,000
22,875,000
24,405,000
71,485,000
Applied For
$
22,270,000
16,730,000
20,915,000
9,210,000
11,640,000
305,260,000
75,745,000
14,640,000
24,100,000
29,945,000
90,165,000
Accepted
$
12,270,000
1,442,740,000
6,730,000
13,815,000
7,210,000
10,550,000
98,080,000
53,525,000
6,290,000
13,360,000
8,445,000
33,765,000
$3,422,900,000
$2,500,370,000 c/
$3,398,055,000
$1,706,780,000
2,777,435,000
ncludes $249,565,000 noncompetitive tenders accepted at the average price of 98.197
kg U(^es $-*-26,705,000 noncompetitive tenders accepted at the average price of 96.355
|7 ^ rates are on a bank discount basis. The equivalent coupon issue yields axe
7° for the 91-day bills, and 7.59$ for the 1 8 2 -day bills.
[ASHINGTON, D C 20220
TELEPHONE W04^2041
FOR IMMEDIATE RELEASE
June 5, 1973
DETERMINATION OF SALES AT NOT LESS
THAN FAIR VALUE ON SURGICAL RUBBER GLOVES FROM AUSTRIA
Assistant Secretary of the Treasury Edward L.
Morgan announced today a final determination that
surgical rubber gloves from Austria are not being,
nor likely to be, sold at less than fair value within
the meaning of the Antidumping Act, 1921, as amended.
Notice of the determination will be published in
the Federal Register of Wednesday, June 6, 1973.
A Notice of Tentative Negative Determination was
published in the Federal Register on April 4, 1973. This
notice invited interested persons to submit written views
or arguments, or requests for an opportunity to present
their views orally.
During calendar year 1972 imports of surgical
rubber gloves from Austria were valued at approximately
$120 ,000 .
oOo
Department o f
L
on
theTREASURY
DC 2022D 4 |
TELEPHONE W04-2041
J?
rOR IMMEDIATE RELEASE
June 5, 1973
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders for two series
bf Treasury bills to the aggregate amount of $4,200,000,000, or thereabouts, for
pash and in exchange for Treasury bills maturing
pf $4,302,365,000
June 14, 1973,
in the amount
as follows:
91-day bills (to maturity date) to be issued
June 14, 1973,
in the amount
bf$2,500,000,000, or thereabouts, representing an additional amount of bills
bated
March 15, 1973,
and to mature September 13, 1973 (CUSIP No. 912793 RU2)
priginally issued in the amount of $1,801,040,000,
the additional and original
||iUs to be freely interchangeable.
182-day bills, for $1,700,000,000, or thereabouts, to be dated June 14, 1973,
pud to mature
December 13, 1973 (CUSIP No. 912793
SHO).
The bills of both series will be issued on a discount basis under competitive
Jnd noncompetitive bidding as hereinafter provided, and at maturity their face
ount will be payable without interest.
They will be issued in bearer form only,
N in denominations of $10,000, $15,000, $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 clos
es hour, one-thirty p.m., Eastern Daylight Saving time, Monday, June 11, 1973.
enders will not be received at the Treasury Department, Washington.
st be for a minimum of $10,000.
>000.
Each tender
Tenders over $10,000 must be in multiples of
In the case of competitive tenders the price offered must be expressed
11the basis of 100, with not more than three decimals, e.g., 99.925.
not be used.
Fractions
It Is urged that tenders be made on the printed forms and for-
^ded in the special envelopes which will be supplied by Federal Reserve Banks
* Branches on application therefor.
Banking institutions generally may submit tenders for account of customers
|°vided the names of the customers are set forth in such tenders.
Others than
p^ing institutions will not be permitted to submit tenders except for their own
!p
-
account.
2-
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.
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.
Only tho8(|
submitting competitive tenders will be advised of the acceptance or rejection
thereof.
The Secretary of the Treasury expressly reserves the right to accept or
reject any or 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 any one bidder will be accept
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 14, 1973,
in cash or other immediately available funds or in a like face amount of Treasury
bills maturing June 14, 1973.
treatment.
Cash and exchange tenders will receive equal
Cash adjustments will be made for differences between the par value ofj
maturing bills accepted in exchange and the issue price of the new bills.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the
amount of discount at which bills issued hereunder are sold is considered to accnj
when the bills are sold, redeemed or otherwise disposed of, and the bills are ex
eluded from consideration as capital assets.
Accordingly, the owner of Treasury
bills (other than life insurance companies) issued hereunder must include in his
income tax return, as ordinary gain or loss, the difference between the price pai^
for the bills, whether on original issue or on subsequent purchase, and the amoun^
actually received either upon sale or redemption at maturity during the taxable
year for which the return is made.
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 from any Federal Reserve Bank or
Branch.
DepartmentoftheTREASURY
FOR RELEASE AT 1:00 A.M. WASHINGTON TIME, WED., JUNE 6
STATEMENT BY THE HONORABLE GEORGE P. SHULTZ
SECRETARY OF THE TREASURY
AT THE
AMERICAN BANKERS ASSOCIATION
INTERNATIONAL MONETARY CONFERENCE
PARIS, FRANCE
WEDNESDAY, JUNE 6, 1973
This annual conference has become a highlight in
the yearly calendar of the international financial
community. For me, the opportunity to participate in
your discussions, and to draw from the experience of
this informed group, is especially welcome -- not just
because I am a first timer, but because we are mid-stream
in the great task of reshaping the monetary system for
the needs of a new generation. We have the right setting
in this magnificent world city, where we are constantly
reminded of the great achievements of western civilization
and culture.
My memories of Paris as a site for constructive
monetary work derive from a period as recent as March,
when I attended two meetings with my colleagues of the
Group of Ten and the European communities. By common
consensus, we adopted new approaches for dealing co
operatively with what was then described as a crisis.
Those decisions did not make up the long-term reform
we seek. But they do provide a valid framework for
dealing with this transitional period. And, we will
want to learn from this experience as we build for
the future.
I
look to that future with optimism. I say that
because I believe there is greater understanding of the
mutual problems and each other's positions by the
officials concerned, and with that understanding we
can begin to see a convergence of views on some of the
major issues. Certainly, that was the sense of the
five-day meeting of C-20 Deputies in Washington two
weeks ago and was my personal experience in Iceland
last week.
S- 224
2
Obviously, progress has not been instantaneous;
it cannot be, for it is no mean task to devise a system
that adequately deals with the immense shifts in the
world economy since Bretton Woods. You, in your daily
work, are conscious of the enormous integration of
financial markets that has created the capacity for
vast flows of funds across national borders. You are
conscious of the rapid growth of Europe and the moves
toward monetary unity on this continent. The spectacu
lar growth of Japan has created a major center of
economic power in the Pacific.
In this world, neither
the United States nor any single country or region can
be dominant: and we face the task of changing from a
system that implicitly assumed that dominance to one
in which the responsibilities and benefits fairly
reflect our individual capacities and respect our
diversity.
Your deliberations can cast light on ways to
achieve this goal, and in that respect I am an eager
listener. But, in talking to you today, I want to
approach this same problem -- dealing with massive
shifts in the world economy -- from a different angle.
Over the past year, in attending a good many
conferences with the financial officials of other
governments, I found that these meetings usually had
two agendas. There was the formal one -- on SDRfs,
exchange rates, intervention, and all that. Then
there was the informal agenda where, in the corridors
and across the dinner table, we reflected our mutual
concern with developments in the field of energy.
Later this afternoon, I will attend a meeting in
which energy has made it on to the formal agenda. The
OECD Ministers are gathering here in Paris this after
noon, and energy properly is prominent among the topics
for discussion.
The OECD has estimated that the consumption of
energy, in all forms, by members of the organization
has risen more than 5-percent per year for the last
10 years. That growth will continue and, for the near
future, the world has no choice but to depend primarily
on oil and gas to meet its rising energy demand.
3
Nearly all of the developed countries share one
common characteristic -- they must look outside their
own borders for the bulk of their energy supplies.
The United States, itself, is not in that group. But,
in the years just ahead, our dependence on foreign
energy will unavoidably become more pronounced. Some
projections suggest that oil imports of the OECD
countries will double between 1970 and 1980. Meanwhile,
production will tend to be concentrated in a few
countries, some of which have very small populations.
These producing countries will be exchanging assets
from the ground for the assets in which you deal in
vast quantities. And it will be in the interests
of both producer and consumer to make that process
work as smoothly as possible.
As awareness of these trends in the energy field
has spread, scholars, banks, petroleum and other
energy-producing companies, and governments have begun
to pour out analytical studies and projections. Let
us approach these projections as the flashing warning
signals that they are, but also with a healthy realiza
tion that all projections must be based on times past.
These projections usually depend upon the basic
assumption that recent trends in world demand for energy,
in the sources of energy, and in the form in which energy
is supplied, will roll on largely unchanged into the
distant future. Since demand for oil has been rising
and production in major areas like the U. S. has been
falling, extrapolation of these trends inevitably
points, in time, to crises.
The projections do show -- clearly and vividly -that we face far-reaching changes in our energy balances.
We must accept -- in a world of few miracles -- that the
rising demand for energy will lead to a substantial
increase in real costs. We cannot be blind to the
concentrated location of the existing resources which
can be made available for years immediately ahead.
But, there is another side. With these projections
showing us what needs to be done -- and if we make the
commitment of personal energy that is required a potential
crisis can be turned into a manageable problem. Action
by consuming countries, with a long view of their best
interest, is required now. Governments of producing
countries -- with the same long view -- will, I am
equally convinced, find cooperation on the problem
in their own interest.
4
We, in the United States -- in our actions and in
our planning -- are participating in this process with
a sense of urgency, precisely so that tomorrow's crisis
can be converted into constructive achievement, in that
process, it seems clear that energy is not an area
where countries can safely "go it alone."
The United States is the largest energy consumer;
we consume one-third of the world's energy.
On the other hand, consumption of energy in the
United States is only rising now at about 4 -percent
per year -- about in line with the long-run trend in
the growth of real output. This is less than in many
other countries. Moreover, we have been blessed with
substantial indigenous supplies of oil and coal.
Less fortunately, domestic production of oil and
gas in the United States has begun to decline. Between
1969 and 1972, U. S. imports of oil increased 52 percent.I
The dollar costs of our fuel imports rose from $2.7
billion in 1969 to $5.1 billion in 1972. Some projections
suggest that this figure could rise to $15 billion
before 1980.
It has been estimated that imports of foreign o i l
will increase from 27 percent of total U. S. c o n s um pt io n
of oil in 1972 to about 33 percent in 1973, to over 50
percent by 1980. Further, some estimate that by 1985,
our oil imports will amount to 65 percent of our con
sumption. These estimates, however, assume that no
action will be taken. This is not the case. On
April 18, 1973, the President presented a broad and
comprehensive energy message which I see as a b l u e p r i n t
for action that must and will be taken. The policy i s
aimed not only at assuring adequate supplies of energy
in the short run, but also at reducing our dependence
upon foreign supplies in the long run by fostering a
vigorous domestic energy industry.
The President's program is designed:
1)
To increase production of all forms of
energy in the United States;
2)
To conserve energy; and
3)
To meet our energy needs at the lowest
cost consistent with the protection of
both national security and environment.
5
These objectives will be sought:
-- By reducing those numerous and insidious
regulatory and administrative impediments
which have delayed or prevented construction
of energy-producing facilities;
- - B y cooperating with other nations in energy
research and in seeking ways to prevent
shortages; and
- - B y mobilizing both public and private
scientific and technical skills to attack
the energy problem -- whether by increasing
supply or utilizing it with greater efficiency.
Actions have already been initiated under this
program. The most striking for the short run, of course,
has been complete revision of our oil import program.
But, for the longer run, the increase in expenditures
on research will be more important. We are prepared
to spend whatever reasonable amounts can be used
effectively to increase supplies and to avoid un
necessary consumption. Some of our proposals require
Congressional action -- and we will press for their
understanding and cooperation.
We mean to change those projections, both by
changing the trend in the U. S. demand for energy and,
more significantly, the trend of supply in the United
States.
Nonetheless, for a number of years ahead, we will
face a larger bill for imports of oil. So will other
consuming countries, despite the relief of some from
North Sea or other new fields. Moreover, there will
be new investments to be paid for. Large sums -many billions of dollars -- will be required to develop
petroleum supplies in producing countries, as well as
to provide new transportation and refining facilities.
No doubt, a significant portion of the funds for these
investments will be provided from the United States.
6
Energy is big money. But this is only one side
of the ledger. We should not overlook the other side.
Too often, when we add up the import bill, we seem to
overlook the fact that, as production rises abroad,
a return will be generated on the large investments
which developed countries -- in large part, U. S.
companies -- have made and are making in order to
bring forth that production. Moreover, some of the
new investment will take the form of capital equip
ment and technical services exported from the oil
consuming countries. In a competitive world -- and
we expect the United States to be competitive -we will get a good share of those exports.
Governmental and quasi-governmental entities
in the producing countries will, of course, be
receiving a large percentage of the monies paid for
oil by the United States and the other importing
countries. What those countries do with the sums
they earn will be a major factor in determining the
significance of the growing oil shortage for the
United States balance of payments and for the world
monetary system.
MORE
7
Plainly, many of these countries have large, unmet
needs for manufactured goods -- both consumer goods and
capital equipment. Some feel they must obtain additional
equipment for their defense forces. Countries such as
Venezuela, Iran, Algeria, Nigeria, and Indonesia have
traditionally used increases in oil revenues for immediate
expenditures and investments to improve the living standards
of their people. The money that these nations earn can be
expected to be spent in the industrial nations, in large
part, as payment for goods and services. Oil will be flowing
from these countries to Europe, Japan and the United States
to help produce the goods which, in turn, go back to the
people of the producing lands. This is the meat and potatoes
of international trade, and we all learned long ago that all
participants can benefit from trade. In its essentials,
payments to these countries for oil are no different than
the payments for any other product.
On the other hand, an important group of producers,
including probably the Arabian Peninsula States of Saudi
Arabia, Kuwait, the United Arab Emirates and Qatar, may
be receiving oil revenues of $10 billion annually by 1975,
and up to $20 billion or more annually by 1980. The combined
population of these States is only about 7 million. Their
foreign investments are already rising rapidly, because they
are not spending currently all of the $5 billion or so they
are now receiving from oil exports. We cannot expect all the
payments to these areas to be spent immediately for goods and
services in the near future. A substantial proportion of this
revenue will be invested.
It is this pool of wealth that has loomed large in
much recent discussion. But, let me give you some other
figures to put it in perspective. The annual capital formation
of industrialized countries by 1980 will probably approximate
$700 billion. New issues of stocks and bonds alone will
probably be on the order of $250 billion. It takes no stretch
of the imagination -- if one looks beyond the last few months
in Wall Street -- to suggest that the total market value of
outstanding stocks and bonds in the world could exceed $5
trillion by 1980. Obviously there will be many investment
opportunities available for the savings of the oil producing
countries. And they are likely to have a strong interest in
stable, secure and profitable investment opportunities. They
know that their reserves of oil will not last forever. Looking
ahead, our research will pay off and new sources of energy,
based on new technologies and with the incentives provided
by high energy prices can be expected to reduce the dependence
of the industrialized world on imported oil.
8
So we have all the ingredients of a highly advantageous!
mutual bargain -- worked out, as the best bargains usually
are, largely in the market place. The consumers will have
enormous capital needs. The producers will have resources
which will be large but will still represent only a small I
fraction of our needs. We have -- not least in this room
middlemen to help make the market. What remains is to go
about it with good sense and good judgment.
The prospect before us is often cast in different terms
The U.S. will bear a much heavier import load -- so, it is
alleged, there will be persistent pressure on the dollar.
The prospect of exchange rate changes will be aggravated by I
billions of short-term "oil dollars” sloshing about in the
market. Monetary instability will result.
But this specter --while perhaps useful to spur us
to action -- is not a necessary or even reasonable
consequence of the current energy outlook.
The basic requirements of the producers are for stable,!
secure, and profitable investment opportunities -- not for
a year or two, but for long priods. What these nations will]
probably be seeking to do in the next ten to fifteen years
is to protect their future by transforming their national
heritage into new, and more permanent, forms. Some of these
new assets will be new plants in their own countries. But,I
as they turn to world financial markets, there is no inherent)
reason to believe their assets preferences will not be subjecj
to the same profit instincts that lead most investors to
place a substantial portion of their funds in longer-term £o|
provided the climate is favorable.
Their purchases of assets abroad should be the channel I
through which their balance of payments position and the
payments positions of the United States and other m a jo r
countries, as well, are brought into balance in the y e a rs I
ahead. And, I frankly do not see why this process need leadl
to disturbing changes in the form of violent or disturbing
adjustments in exchange rates.
Certainly, as we pointed out in presenting our monetary!
plans, the accumulation of large current surpluses by
Arabian Peninsula States should not call for exchange r a te I
adjustment actions on their part. While many of their exterj
investments might loosely be considered reserves, c e r t a i n l y I
they are not comparable to the kind of monetary reserves thal
would suggest a need for monetary adjustment action on theil
part.
Nor should such accumulations result in d evaluation
J
pressures on those consuming countries which offer attractive
export prices and attractive sites for investment.
In that connection, please remember that the United
States is not the only country which will be a heavy importer
of oil. A large part of the earnings of the producing States
will derive from their sales to Europe and Japan.
Indeed,
most'projections suggest that the absolute increase in oil
imports into Europe from now through 1980 will be of the
same order of magnitude as ours and that Japan, almost totally
dependent on imports and rapidly growing, will experience an
increase in imports equal to a large fraction of ours
despite the fact it has a much smaller economy. Of course,
the Europeans, the Japanese and the United States will, in
effect, be competing both for exports to producing countries
and for their investments.
In this competition the degree
of our success will naturally have an important bearing on
the value of our currency.
It is saying no more than that
success of our free economy will determine the value of our
currency -- and that is a test we are glad to meet. Certainly,
the need of all theindustrial counties to import more oil
offers, in itself, no reason for the dollar to depreciate in
value in relation to the currencies of Europe or Japan. The
United States could well be the gainer.
Our judgment that the recent devaluations of the dollar
have placed our currency in a fair and sustainable alignment
is in no way affected by this situation.
I am unabashed in
feeling we can compete with any nation in investment
opportunities.
That judgment is only reinforced by current developments.
Despite growing energy imports and a domestic boom, our trade
balance is improving. Obviously, we have had extraordinary
agriculture exports, and I am realistic enough to know we
shall have temporary relapses from the recent favorable trend.
u
have a l°n g way to go -- but the evidence is strong
that our underlying position is strengthening. And, as our
competitive position is strengthened, so are the opportunities
tor foreign investment in the United States.
.Some of you may still have the nagging feeling that
the investment of the oil producers, however welcome at
P°ints
time, could be destabilizing through
sudden shifts. Here, certainly, is an area for cooperation
and planning among nations, and for leadership of the
tinancial community.
i
Th® problem is not different in kind from those presented
°y the huge amounts of interntional short-term capial that
aire^y exist -- and will surely grow. A degree of flexibility
exchange rate practices -- dampening the prospects for
arge and sudden changes, and reducing the incentives for
IQ
anticipating shifts -- offers one approach. Adequate
facilities for absorbing and financing short-term flows are
another. In addition, we need to recognize fully the needs
and aspirations of the oil countries, themselves, in seeking
safe and attractive outlets for their national heritage. It
is not beyond the ingenuity of the financial community -against the background of understanding attitudes by national
governments -- to help develop appropriate instruments for
such investment.
In this process of developing constructive responses to
the ’’energy challenge,” it seems to me we have lacked a
forum for bringing all the relevant considerations -financial and non-financial -- together. I have been glad
to see that a World Energy Conference is being planned for
Detroit in September 19 74. That Conference can contribute
meaningfully to the search for cooperative solutions to
important aspects of the problems in the energy field. Never-I
theless, some of the financial dimensions may not be adequate!
prepared without the wholehearted support of the financial
community. To that end, I hope those here could join with
others over the next year, before the Conference, to address
more fully the questions I have touched upon today:
--the financial implications of the rising demand for
energy imports;
--the prospects for financing these imports and the
investment required to bring them forth;
--the means of furnishing investment instruments to
the oil-producing states.
I recognize that the oil producing countries could view
the organization of such a meeting with some concern. These
countries have justifiable concerns about the management of
their precious assets. It seems to me important that the
oil-producing countries, themselves, play a strong role in
such a meeting, or meetings: for, after all, the assets
involved are theirs. In appropriate circumstances, the U.S.
Government would, itself, be prepared to participate in such
deliberations in preparation for the World Conference.
I have expressed confidence that we have the means of
meeting the energy challenge. At the same time, I do not
underestimate the problem. The real cost of energy will rise.
We must bend our efforts to change the ominous trend lines.
If we shirk from the fundamental task at home of developing
our own energy sources -- if we fail to face up to the
.
research bill -- if we fail to conserve -- if we fail to re a^
competitive -- then, of course, the external consequences on
the balance of payments and on the monetary system would t>e
disturbing.
11
Indeed, we have no real choice. The basic adjustments
to new forms of energy -- or to slower growth -- will need
to be made. The only issue is how: in a timely and orderly
manner, or in a vacillating course which permits events to
force the result in a painful way.
We do not intend to fail. With foresight and cooperation
the energy situation need not disturb our growth at home,
nor disrupt our planning for a stronger payments and
trading system which will be in the interests of every nation
0O0
DepartmentoftheTREASURY
HINGTON, D C. 20220
TELEPHONE W04-2041
FOR RELEASE
WEDNESDAY, JUNE 6, 1973
TREASURY REPORTS ON
VOLUNTARY OIL ALLOCATION PROGRAM
The federal government's voluntary program for allocating
crude oil and refinery products "is working well, insofar as
we can tell from the first few weeks' experience," William E.
Simon, Deputy Secretary of the Treasury, announced today.
"But," he said, "much work remains to be done."
Authority to set priorities for use and allocation of
petroleum products, as provided by the Economic Stabilization
Act Amendments of 1973, was delegated on May 25 to Simon, who
also serves as Chairman of the President's Oil Policy
Committee.
Members of the Committee include the heads of
the Departments of State, Treasury, Defense, Justice, Interior,
Coinmerce, and the Council of Economic Advisers.
The voluntary program calls for suppliers to make
available to their customers the same percent of product that
they supplied in the corresponding quarter of the base period
(October 1971 to September 1972).
It also provides that
suppliers of priority customers, who cannot get needed supplies
under their program allocation, may apply to the Interior
Department's Office of Oil and Gas for help in securing
additional amounts needed.
S-225
2
Simon gave a few early examples of “how the program
is working:
In Minneapolis-St. Paul, the Metropolitan Transit
Commission was getting only 70 to 80 percent of last year's
supply —
and warned that service would have to be cut.
The Office of Oil and Gas contacted the supplier to explain
the voluntary program and its priorities, and got agreement
to a 100 percent allocation.
In Kentland, Indiana, the Walters Small Oil Company
needed 45,000 to 60,000 gallons of gasoline a month for its
farm customers.
The Walters Company claimed that their
allocation would not take care of the farmers1 urgent needs
£>
this year, because last year was not typical. "We contacted
the supplier," said an OOG spokesman, "who agreed tp make
, .. • b
j
rr
y.
m
the June allocation available immediately, and he will advance
■
fl*
the July allocation early also, if necessary."
In California, Rigsbee United Truck Lines changed its
“
9i
pattern of distribution and fuel consumption, and was running
short of gasoline in certain terminals, including Los Angeles,
San Francisco, Denver, and Cheyenne.
fresh meats.
Their shipments included
"We called the supplier," said OOG, "who agreed
to switch fuel supplies to those terminals most in need.
In Columbus, Ohio, Landmark, Inc., which supplies 30,000
farmers with diesel fuel, reported that their supplies had
been cut off, and they were completely out of fuel.
"When we
contacted the suppliers," OOG said, "we learned that Landmark
had increased its business to include commercial accounts,
and this was causing the shortage.
Three of the four suppliers
agreed to start shipping the June allocation immediately."
In Alma, Michigan, Gratiot Farmers Supply Company needed
more than its allocation for May to fill the needs of its
farmer-customers.
The supplier agreed to ship more fuel, if
Gratiot would discontinue retail sales to other than farmers.
This was done.
In Arizona, Phoenix Transit Company's contract with
its supplier had expired, but the San Francisco Office of
Oil and Gas intervened and supplies were continued.
In,Scranton, Pennsylvania, Mayor Gene Peters reported
ib ’
i
\
» J | ■; M
.^
that the city had asked for bids on gasoline but had received
W |.. ■
<
- ■••
'
■■
no responses. After the Office of Oil and Gas contacted
suppliers, they agreed to temporarily supply fuel until firm
contracts are signed.
In Easton, Kansas, Eugene Pauley, who operates one of
8
■
t
the few gasoline stations in the area, reported that his
contract with his supplier was canceled on April 30.
Through help from OOG, he is now getting two-thirds of his
former supply from two other firms, and the original supplier
is being asked to reinstate Pauley.
In Minnesota, the Office of Oil and Gas was instrumental
a few weeks ago in placing one million gallons of diesel fuel
oil in the State where it was urgently needed for farm production.
4
Distribution of the fuel is being handled through the Midland
Cooperative network and coordination was established with
the Minnesota State Civil Defense Director.
Emphasizing that the program is voluntary, Deputy
Secretary Simon said that it is backed up by:
(1) specific
guidelines published by the Office of Oil and Gas;
(2)
continuous scrutiny by 00G to see that suppliers comply
with these guidelines; and (3) authority for imposing
mandatory allocations, if necessary.
General policy direction for the voluntary allocation
program is vested in the Oil Policy Committee, day-to-day
administration of the program is assigned to the Office o£
Oil and Gas, Department of the Interior.
Priority will be given to supplying the following
. I .
activities:
d'
(1)
. ■
'
H •
Farming, ranching, dairy and fishing...
(2)
Food processing and distribution...
(3)
Health, medical, dental, nursing, and supporting
~
services...
(4)
Police, fire-fighting, and emergency aid...
(5)
Public passenger transportation, including
school buses and other buses, rail, intercity, and mass
transit systems...
(6)
Rail, highway, sea and air freight...and
transportation and warehousing services not elsewhere specific•
5
(7)
Other state and local government activities.
(8)
The fuel needs of residents in states...unable to
obtain sufficient crude oil or products.
(9)
Difficulties caused by natural disasters.
(10)
Public utilities.
(11)
Telecommunications.
Public hearings on the voluntary allocation program
are scheduled for June 11 through 14 in the Auditorium of
the General Services Administration Headquarters Building,
19th & F Streets, Northwest, Washington, D. C.
At the
hearing, an Oil Policy Hearing Committee will receive
comments and testimony on all phases of the voluntary
crude oil and refinery product allocation program.
The Hearing Committee will be comprised of two representatives
from the Department of the Interior, and a representative each
from the Departments of the Treasury, Commerce, Justice,
Office of Emergency Preparedness, and the White House.
One of the representatives from the Interior Department will
be Chairman of the Committee.
Details of the hearing
procedure were published in the Federal Register on May 23.
Secretary Simon emphasized that, along with voluntary
allocations of fuel, voluntary conservation was equally urgent.
He said that a new conservation office has been established
in the Department of the Interior, which will assume leadership
6
in reducing fuel consumption.
A one percent saving in
gasoline consumption equals some 25 million gallons a day,
he said, and then listed several ways in which individuals
could help save fuel this summer:
1.
Use mass transportation —
like —
2.
buses, trains, and the
whenever possible.
Reduce speed on all highways.
This could* save 11%
fuel when driving 50 instead of 60 ..mph, and 25% fuel
when driving 50 instead of 70 mph.
3.
Keep engine in top shape.
A poorly tuned engine
reduces mileage by 10%.
4.
Form car pools.
5.
Plan trips to stores -- combining visits to cleaners,
drug, department, and grocery stores.
6.
U se c a r
a ir
a s m u ch a s
7.
c o n d itio n e rs
10% o n f u e l
s p a rin g ly .
Y ou c a n s a v e
c o n s u m p t i o n w hen i t ' s
Keep tires properly inflated.
n o t i n us|
Underinflated tires
affect gasoline mileage by approximately one mile
per gallon.
8.
Warm up engine before driving.
9.
Use multi-grade motor oil in engines.
It can give
you 10% better mileage than regular grade oils.
10.
Start slowly and stop slowly —
you save gasoline.
Suppliers of priority users and others who are having
problems in obtaining fuel may write to the Office of Oil ana
Gas, U. S. Department of the Interior, Attention: Voluntary
Fuel Allocation Program,Washington, D.C. 20240, or call
(202) 254-8040.
-oOo-
DepartmentofthefREASURY
SHINGTON. D
C 20220
TELEPHONE W04-2041
FO R BBT .RASE UPON DSLIVSRY
S t a t e m e n t b y J a c k F. B e n n e t t
D e p u t y U n d e r S e c r e t a r y o f t h e U.S, T r e a s u r y
before
Su b c o m m i t t e e
the
In t e r n a t i o n a l F i n a n c e
o f THE
COMMITTEE ON FINANCE
Un i t e d St a t e s S e n a t e
Ju
un
nee 5, 1973
on
pAiniTT-rrr
9 :3 0
Mr . C h a i r m a n , I
am
^. ,
and
Re s o u r c e s
Cr«
1
1ai./w
-
A.M .
flattered
by
your
invitation
for
me
TO PRESENT THE ADMINISTRATION'S THINKING ON CURRENT INTERNATIONAL
MONETARY DEVELOPMENTS.
I SHALL PRESENT A VIEWPOINT WHICH DIFFERS
SUBSTANTIALLY FROM THOSE OF SEVERAL OF THE WITNESSES WHO APPEARED
BEFORE YOU LAST WEEK.
THEY SPOKE —
BOOK PREPARED BY YOUR STAFF —
Th e r e
are
changes
underway
AS DOES THE BLUE BRIEFING
OF AN INTERNATIONAL MONETARY CRISIS.
in t h e
world but
in m y v i e w
it
is a
CONSIDERABLE OVERSTATEMENT TO REFER TO THEM AS A CRISIS.
Cu r r e n t
bilities
developments
indicate
that we
have
great
responsi
BEFORE US IN THE MANAGEMENT OF OUR DOMESTIC ECONOMIC
AFFAIRS AND GREAT OPPORTUNITIES FOR NEGOTIATING FURTHER IMPROVE
MENTS IN INTERNATIONAL MONETARY ARRANGEMENTS.
BUT, WHILE
RECOGNIZING THESE RESPONSIBILITIES AND OPPORTUNITIES, WE SHOULD
RECOGNIZE THAT EXISTING INTERNATIONAL MONETARY ARRANGEMENTS HAVE
PERFORMED WELL IN RECENT WEEKS, FAR BETTER THAN WOULD HAVE BEEN
LIKELY IF EARLIER ARRANGEMENTS WERE STILL IN PLACE.
It IS MY
JUDGMENT THAT CURRENT MONETARY ARRANGEMENTS ARE CAPABLE OF —
INDEED ARE —
AND
ABSORBING AND DIFFUSING NEW PRESSURES AND SPECULATIVE
INFLUENCES WITHOUT IMPAIRING DOMESTIC ECONOMIC POLICIES OR THE
FABRIC OF TRADE.
S-22X
The
price
of
gold
has
moved
in l a r g e
jumps
in t h e
p r i v a t e markets
NOT ONLY AGAINST THE DOLLAR BUT ALSO AGAINST ALL OTHER CURRENCIES
AS WELL.
Th a t
experience
has
in o u r
view
further
u n d e r l i n e d the
UNSUITABILITY OF GOLD AS THE BASE FOR A REFORMED MONETARY SYSTEM
BUT DESPITE THE CONTINUING FORMAL LINKS BETWEEN GOLD AND THE
INTERNATIONAL MONETARY SYSTEM, THE INSTABILITY OF THE PRIVATE
GOLD PRICE HAS NOT BROUGHT CRISIS TO THE CURRENCY MARKETS.
We
have
been
living
through
a difficult
period
in
TERMS OF
AN UNEXPECTED AND UNACCEPTABLE RATE OF PRICE INFLATION AND
IN TERMS OF FOREIGN QUESTIONS ABOUT THE RELIABILITY OF OUR
GOVERNMENTAL PROCESSES, BUT THE OUTLOOK IS STRONG FOR THE BASIC
DETERMINANTS OF OUR INTERNATIONAL PAYMENTS POSITION.
THERE HAS
BEEN NO FALTERING IN THE ECONOMIC POLICY PROCEDURES OF OUR
Go v e r n m e n t .
Pr i c e s
months.
trade
Our
will
be
balance
rising
has
at a
been
lower
moving
rate
in t h e c om i n g
strongly
in t h e r ig ht
DIRECTION, AND FOREIGNERS HAVE INCREASINGLY RECOGNIZED THE
OPPORTUNITIES FOR ATTRACTIVE INVESTMENT IN THE U.S. ECONOMY.
Lo o k i n g
backward
a
few years
it m a y b e
helpful
to recall
THAT THE DOLLAR AND OUR BALANCE OF PAYMENTS WEAKENED SHARPLY
IN THE 1950'S AND 1960's, NOT BECAUSE OF A POOR RELATIVE RECORD
ON INFLATION —
THE U.S. PERFORMED BETTER THAN MOST COUNTRIES —
BUT BECAUSE OF ABNORMALLY RAPID INCREASES IN PRODUCTIVITY ELSEWHERE
as
Ja p a n
Th is
and
major
Eu r o p e
were
structural
"c a t c h i n g
change
in t h e
up" with
world
BY COMPARABLE CHANGES IN EXCHANGE RATES —
us a f t e r
economy
was
W o r l d War II.
n o t matched
UNDER THE BRETTON WOODS
SYSTEM THERE WAS A CERTAIN INERTIA IF NOT RIGIDITY IN EXCHANGE
RATES.
The
result
was
a
progressively
growing
upward
pressure
ON CERTAIN CURRENCIES OF EUROPE AND JAPAN AND DOWNWARD PRESSURE
ON
THE DOLLAR.
By 1971
IT WAS APPARENT THAT A FUNDAMENTAL MAL-ALIGNMENT OF
EXCHANGE RATES HAD BEEN ALLOWED TO DEVELOP.
the
Pr e s i d e n t 's
initiatives
in
THE ACTIONS TAKEN SINCE
A u g u s t , 1971,
FUNDAMENTAL MAL-ALIGNMENT FROM THE SYSTEM.
HALF TO ACCOMPLISH THE NECESSARY CHANGES.
have
now
removed
that
It TOOK A YEAR AND A
In THE PROCESS A NATURAL
RESISTANCE TO CHANGE HAD TO BE OVERCOME, AND UNCERTAINTIES AROSE
AS ESTABLISHED BELIEFS WERE BROKEN.
BUT A DIFFICULT ADJUSTMENT
AS
NEEDED TO BE MADE AND NOW HAS BEEN MADE IN SO FAR/EXCHANGE RATES
ARE CONCERNED.
AS A RESULT ADJUSTMENT TOWARD ELIMINATION OF OUR PAYMENTS
DEFICIT IS WELL UNDERWAY.
Th e
question
is s o m e t i m e s
asked,
"W h y
TO PUT AN END TO ITS PAYMENTS DEFICITS?"
was
the
U.S.
so a n x i o u s
"SINCE THE U.S. WAS
RECEIVING MORE GOODS IN IMPORT THAN IT WAS HAVING TO EXPORT, WASN'T
THIS HELPING US TO COMBAT INFLATION IN THE U.S.?"
THE ANSWER IS
THAT THE U.S. FIGHT AGAINST INFLATION PROBABLY WAS STRENGTHENED IN THE
SHORT RUN BY THE IMPORT SURPLUS.
AND THE U.S. GOVERNMENT WASN'T
BORROWING ANY MORE JUST BECAUSE SOME FOREIGN GOVERNMENTS WERE BUYING
Tr e a s u r y
b i l l s ; in
more a t t r a c t i v e
the
to
sell
effect
than
to
some
hold
U.S.
U.S.
PRICES THE FOREIGNERS WERE OFFERING.
MORE THAN OFFSET BY OTHER CONSIDERATIONS.
citizens
Tr e a s u r y
were
finding
it
obligations
at
YET THESE FACTORS WERE
FOR ONE THING UNREASON
ABLE EXCHANGE RATES WERE UNFAIR TO LARGE SEGMENTS OF OUR ECONOMY
FORCED TO COMPETE UNDER
PRODUCED ABROAD.
a
SIGNIFICANT HANDICAP WITH GOODS
THE U.S. COULD —
AND WAS —
PROVIDING AN
-
4
-
ADEQUATE LEVEL OF TOTAL DEMAND IN THE U . S . , BUT THAT WAS
NOT ADEQUATE CONSOLATION FOR THOSE WHOSE LIVELIHOOD WAS LOST OR
THREATENED BY FOREIGN COMPETITORS BENEFITTING FROM AN UNFAIR RATE
OF EXCHANGE.
MOREOVER, WE COULD NOT REASONABLY EXPECT FOREIGN
COUNTRIES TO CONTINUE FOREVER TO SHIP MORE TO US THAN THEY RECEIVED]
We
could not reasonably expect thei r governments to continue
INDEFINITELY ACCUMULATING LO^-INTEREST U .S . TREASURY BILLS.
RATHER THAN LATER "
SOONER
THIS IMBALANCE WAS SURE TO BE BROUGHT TO A
HALT, PROBABLY WITH GREAT RECRIMINATIONS, PROBABLY WITH NEW FORMS
OF GOVERNMENT TRADE AND INVESTMENT CONTROLS ABROAD, PROBABLY
WITH A SUDDENNESS WHICH WOULD CAUSE LARGER ECONOMIC DISLOCATIONS
THE LONGER THE CORRECTION WAS DELAYED.
It
into the
was for these reasons that
S mithsonian
agreement .
It
in
December 1971
we entered
was for the same reasons , but
on the b a s i s of the further need for change
i ndi cated by the
EXPERIENCE IN 1972, THAT WE ENTERED INTO ANOTHER AGREEMENT IN
February
of t h i s
year .
Ag a i n ,
as at the
S mithsonian ,
the
U.S.
AGREED TO PROPOSE A CHANGE IN THE PAR VALUE OF THE DOLLAR IN TERMS
OF GOLD — A CHANGE SOMETIMES REFERRED TO AS A CHANGE IN THE PRICE
AT WHICH WE WERE NOT TRADING IN GOLD.
Smi thson i a n , the
real
BUT AGAIN, AS AT THE
implementation of the agreement took place
BY THE ACTION OF OTHER GOVERNMENTS MOVING THE POINTS AT WHICH
THEY WOULD INTERVENE IN THE PRIVATE EXCHANGE MARKETS, THUS
PERMITTING A DECLINE IN THE VALUE OF THE DOLLAR RELATIVE TO OTHER
CURRENCIES IN THE MARKET.
- 5 In
the
weeks
SUBSEQUENT TO/fEBRUARY
agreement
the
markets
EFFECTIVELY EXPRESSED THEIR DISBELIEF IN THE NEWLY DECLARED
INTERVENTION POINTS.
FOREIGNERS CONTINUED TO ACQUIRE ASSETS
EXPRESSED IN THE CURRENCIES OF SOME OF THE INTERVENING COUNTRIES,
PARTICULARLY GERMANY.
AND AFTER A FEW WEEKS THE AUTHORITIES IN THESE
COUNTRIES ABANDONED THE PRACTICE OF REGULAR INTERVENTION IN THE
MARKET AT ANNOUNCED POINTS IN THE RELATIONSHIP BETWEEN THEIR
CURRENCIES AND THE DOLLAR.
in m i d -Ma r c h a n a g r e e m e n t
I n REPLACEMENT OF EARLIER ARRANGEMENTS
in p r i n c i p l e
was
announced
in
Pa r i s
AMONG THE PRINCIPAL COUNTRIES AND THE U.S. THAT IN FUTURE "OFFICIAL
INTERVENTION
in e x c h a n g e m a r k e t s
may be
useful at appropriate
times
to
FACILITATE THE MAINTENANCE OF ORDERLY CONDITIONS..."
S ince
that t im e , as
you
can
see
in t h e
illustrative
chart which
I HAVE PROVIDED, MARKET RATES HAVE VARIED, BUT NO LARGE-SCALE
intervention
but t h e r e
necessary.
been
is a d i f f e r e n c e
half a f t e r
heed
has
m i d -1971.
from the
Duri ng
FOR RATE ADJUSTMENT —
direction.
l argely a s a
FUTURE.
To
No w
there
the
best
of our
rates
situation
period
are
now
for
free
the
there was
to move
year
and a
a large
accumulated
AND THE SIGNS POINTED ALL IN THE SAME
may be
result of any
that
Th e
changes, but
new
they
developments
judgment
are
which
likely
may
the accumulated
to be
occur
need
in t h e
for
rate
ADJUSTMENT HAS BEEN ACCOMMODATED, AND I SEE NO JUSTIFICATION FOR
THE STATEMENT IN YOUR BLUE BOOK THAT THE PRESENT SITUATION IS
"i n h e r e n t l y UNSTABLE."
A LITTLE
WHY
I
LATER
SUSPECT
MARKE TS
RELATIVE
FROM NOW,
ABOUT
THE
BUT,
Mo d i f i c a t i o n
when
ITS
Ma n y
C ON G RE S S
now
pr ic e
are
about
.
TIM E,
HOWEVER,
THERE
BEEN
AN
MOTIVES
TO T R Y
THAT
IS
WHETHER
LINE
WAS
HAVE
TAKEN
H IS
asked
OR WAS
PLACE
asked
rate
what
com m en tin g
can
on
devalue
about
BELIEF
DOUBT
THAT A F O R E I G N
THERE
wh o
OF
were
be
about
done
what
ITS
lowering
Ma r c h .
and
desta bilizin g !
do
LIST
OF
QUESTIONS.
SOME
at
th is
HAS
INTO AN
GOVERNMENT'S
OF
MADE
OFFICIAL
A FORE IGN
IN ANY EVENT AT
WHICH WOULD NOT
LACK OF
BEL IE F?
Is
FOR AN AMERICAN TO
SUCCESSFUL
RELATIVE
IN
"I
INDIVIDUAL
HEDGING OR SPECULATING,
TIMING
THE
have
ON THE WORD SPECULATION
TO D E L V E
UNPATRIOTIC
CURRENCY
such
speculators
we
HE WAS
IN
the
facts
EMPHASIS
HAD NOT B E E N
IT
occasion
by
F ebruary
in
GOVERNMENT WOULD B E
VALUE
dollar
THROUGH A T R A N S A C T I O N
TO C O N S I D E R
another
changes
IN A T T E M P T I N G
WHETHER
AM CONVINCED
.
TO ADD TO THE
OF
TO B E BROUGHT
ON THE PAR VALUE
be
the
WHICH WOULD HAVE B E E N
EXPRESSED
IF
not
IT
I
S HO R T L Y
THROUGH CHANGING THE
ANY REASON
HOLD DOWN THE
to
MONTHS AND TWELVE MONTHS
PLACE.
w ill
THE REASONS
EXCHANGE
WOULD E X P E C T
ACTION
gold
exchange
LACK OF
THERE
TO
been
POINT
TRANSACTION
TIME
of
TO D E T E R M I N E
EXPRESSED
SOME
asked
WOULD L I K E
ANY
I
there
IRRATIO NAL DEGREE
REALLY
EXCHANGE
the
B efore
I
it
terms
have
so m etim es
sp e c u l a tio n s
THERE
in
be
THREE
IN THE MARKET
COMPLETES
SOME OF
WORTH MORE ON THE
THE CHANGE,
before
w ill
BE
TO MENTION
CURRENCIES
CHANGES
q u estio n s
brought
An d w e
IS
WHATEVER
Ac t
O FFIC IA L
who
TO OTHER
Co n g r e s s
the
WOULD L I K E
DOLLAR W I L L
GRADUALLY B Y
THAT WHEN THE
I
ITS
EFFORT
d9
TO THE DOLLAR.
- 7 These
q ues ti on s should be borne
in mind
STUDYING THE CHART ATTACHED TO THE STATEMENT.
I
thi nk when
CERTAINLY A
CASE CAN BE MADE THAT THOSE MOVEMENTS OF FUNDS WHICH LED TO
THE CHANGE IN THE DOLLAR VALUE OF THE MARK AND THE SWISS FRANC
FROM THE BASIC LEVEL OF EARLY JANUARY TO THE NEW LEVEL OF LATE
March
were not
sidered
i rrational and d e s t a b i l i z i n g .
They
could be con
A FINAL PART OF THE SUPPRESSED NEED FOR RATE ADJUSTMENT
WHICH HAD BUILT UP OVER QUITE A FEW YEARS.
The
further changes
different .
They
in the last few weeks are probably
are for one thing not the sudden result of
BREAKING THROUGH A LEVEL OF GOVERNMENTAL OPPOSTITION TO CHANGE.
The
rates have been free to move on a d a i l y b a s i s
s i n c e m i d -Ma rc h .
I CAN UNDERSTAND THAT THERE HAVE BEEN SOME DEVELOPMENTS WHICH
PRIVATE TRADERS AND INVESTORS MIGHT JUDGE TO BE ADVERSE FOR THE
FOREIGN EXCHANGE VALUE OF THE DOLLAR.
I WOULDN'T BE SURPRISED,
HOWEVER, IF IT TURNS OUT THAT THE MARKET HAS GIVEN UNDUE
WEIGHT TO THESE ADVERSE FACTORS.
A SOMEWHAT CONFUSING PICTURE.
I MENTION THEM TO HELP EXPLAIN
PROBABLY THERE HAVE BEEN SOME
IRRATIONAL ELEMENTS, BUT OUR RATE OF PRICE INFLATION IN THE
first quarter was higher than expected ,
and t h i s
was not a
favorable development for our future trade b a l a n c e .
Germany
did
INTRODUCE SEVERE ANTI-INFLATIONARY MEASURES AND DID INCREASE
ITS INTEREST RATES.
PRIVATE
U.S.
THE SENATE DID APPROVE LEGISLATION TO PERMIT
c i t i z e n s to hold gold for
investment and s p e c u l a t i v e
PURPOSES STARTING AT THE END OF THIS YEAR, AND SUCH PERMISSION,
8
-
IF
FINALLY
ENACTED
INTO
C O S T OF OUR S U B S T A N T I A L
AND A R T I S T I C
BURDEN.
IT
PURPOSES,
IS
FOR
Ho u s e
conference
Ho u s e
v e r sio n
SUCH T I M E
,
MONETARY S Y S T E M
PAYMENTS
BE
MADE
I
POSITIO N
THAT THE
SIMPLY
But
I
OF
SOME
TEMPORARILY
BE
on
defers
IMPORTS
GOLD FOR
IS
MY HOPE
l e g isl a t io n
move
to
INDUSTRIAL
THAT
A C CO M P L I S H E D
TO
IMPORT
THAT THE SENATE-
w ill
pr iv a te
adopt
o w n ersh ip
SU FFIC IEN T
DEMONSTRATED
the
u n til
REFORM OF TH|
I MPROVEMENT OF OUR
PERMIT
THE CHANGE TO
FASHION.
CONSIDERATIONS
RAT E
AS
IT
DETERMINES
HAVE B E E N
OF
I N C R E A S E THE
LEAD TO A LARGE A D D I T I O N A L
th is
the
AND S U F F I C I E N T
CHANGES
I NH ERE NT
DO B E L I E V E ,
OF
BUT ALSO
PRESIDENT
THESE
EXCHANGE
LEVEL
c o m m ittee
IN AN O RDE RL Y
MENTION
COULD WELL NOT ONLY
THAT REASON THAT
w h ich
A S THE
LAW,
-
I
IN
O VE RL OOKI NG
EXPLAIN
IN R E C E N T WEEKS
IN STA BILITY
S HA L L
P ART TO
IN
EXPLAIN
WERE
CURRENT
LATER,
MY B E L I E F
NOT THE RESULT
EXCHANGE ARRANGEMENT^
THAT THE MARKET MAY
SOME CONTRARY AND MORE
FUNDAMENTAL
CONSIDERATIONS.
I n RECENT WEEKS,
THE
VIEW
LEVELS
OF
POINTS
OWN G U E S S
EXCHANGE
ON V A R I O U S
IS
THAT
REVERSE,
IF
HOLD THE
EXCHANGE
IN R E S E R V E
AS
IN
KNOW,
RESERVES
THE
PRESENT
RATES
EXCHANGE
HAVE R E F L E C T E D
CURRENCIES.
GOVERNMENTS
CHA N GE S,
YOU
RATES
THE M A R K E T ' S CHANGING!
ONE CAN NEVER B E
CIRCUMSTANCES
HAD C O N S I S T E N T L Y
UNCHANGED W H I L E
IF
RATHER THAN
SURE,
WE HAD T R I E D
INTERVENED
ABSORBING
BUT MY
THE
TO ATTEMPT TO
THE
CURRENCY FLOWS
THEN WE COULD WELL HAVE GE NE RATE D GREATER
U N C E R T A I N T Y AND A C R I S I S
ATMOSPHERE.
That,
Du r i n g t h a t
FOREIGN
of
course
per io d
,
the
what
happened
in
F ebruary
reserve
h o ld in g s
of
dollar
was
and
Ma r c h .
a ssets
of
COUNTRIES INCREASED BY ABOUT TEN BILLION DOLLARS.
the
FROM
REPORTS WHICH HAVE BEEN MADE PUBLIC ALREADY, IT APPEARS THAT ABOUT
A
HALF OF THE ACCUMULATION WAS REFLECTED IN TRANSACTIONS REPORTED
BANKS IN THE U.S.
BY
OF
FOREIGN BANKS.
INCLUDING BRANCHES AND AGENCIES
SOME OF THE TRANSACTIONS TOOK THE FORM OF
REDUCTIONS IN PRIVATELY HELD DEPOSITS IN THE U.S.
THE
FORM OF NEW LOANS FROM THE OFFICES IN THE U.S.
FORM
EITHER IN THE
OF NEWLY APPROVED CREDITS OR — IN MOST CASES PROBABLY —
DRAWDOWNS ON ALREADY EXISTING LINES OF CREDIT.
KNOW
SOME TOOK
WHAT WE DON'T
IN ANY PRECISE NUMERICAL WAY IS TO WHAT EXTENT THE
INITIATIVE FOR THE TRANSACTIONS CANE FROM WITHIN THE UNITED STATES
AND
A
TO WHAT EXTENT FROM INSTRUCTIONS RECEIVED FROM ABROAD.
In
QUALITATIVE WAY THE BANKS HAVE REPORTED THAT THE PREPONDERANCE
OF THE
INITIATIVES CAME FROM ABROAD.
Ap a r t
from
the
reported
bank
tra n sa c tio n s
there
were
probably
ABOUT FIVE BILLION DOLLARS OF OTHER TRANSACTIONS WHICH INCREASED
THE DOLLAR ASSET HOLDINGS OF THE FOREIGN CENTRAL BANKS.
LATER THIS
MONTH WE'LL GET OUR FIRST STATISTICAL REPORTS FOR THE FIRST QUARTER
SHOWING A BREAKDOWN OF THIS OUTFLOW AMONG THE CURRENT ACCOUNTS, THE
DIRECT INVESTMENT FLOWS OF U.S. CORPORATIONS, THE CREDITS OF
W-$. NON-BANK CORPORATIONS, AND THE ERRORS AND OMISSIONS.
ÎHE
10
COMPANY REPORTS FROM WHICH THE GOVERNMENT'S STATISTICAL REPORTS
OF THE INVESTMENTS AND CREDITS ARE PREPARED WERE RECEIVED IN
RECENT WEEKS BY THE TREASURY AND THE COMMERCE DEPARTMENTS AND
To
ARE NOW BEING COMPILED AND ANALYZED.
INSURE THE ACCURACY
AND COMPREHENSIVE COVERAGE OF THESE REPORTS TO THE GOVERNMENT,
A JOINT LETTER WAS SENT BY THE SECRETARY OF COMMERCE AND THE
Se c r e t a r y
of
the
Tr e a s u r y
to
the
heads
of
1400
over
reporting
COMPANIES ASKING THESE MEN TO GIVE THEIR PERSONAL ATTENTION
TO INSURING THE QUALITY OF THE REPORTS SUBMITTED.
MORE RECENTLY
THE TWO SECRETARIES HAVE SENT ANOTHER LETTER TO ABOUT TWENTY
SELECTED COMPANIES IN VARIOUS PARTS OF THE COUNTRY REQUESTING
THE COMPANIES TO RECEIVE A JOINT COMMERCE, FEDERAL RESERVE,
Tr e a s u r y
team
of
experts
which
hopes
to
discuss
these
companies
TRANSACTIONS IN DETAIL TO INSURE THAT PRESENT FORMS AND PROCEDURE^
ARE NOT MISSING ANY SIGNIFICANT TYPES OF TRANSACTIONS INVOLVING
THE U.S. COMPANIES.
AS YOU CAN SEE, THERE IS STILL A GREAT DEAL WE DO NOT
ABOUT THE TRANSACTIONS IN THE FIRST QUARTER.
THE LACK OF
KNOWLEDGE WAS NOT A HANDICAP AT THE TIME, SINCE FOR ANY
KNOW
THE
OPERATION!
WE MIGHT HAVE WISHED TO UNDERTAKE THERE WAS AMPLE PROMPT
KNOWLEDGj
OF THE MAGNITUDE AND DIRECTION OF THE FLOWS TAKING PLACE
EVEN
THOUGH THE PURPOSE OF THE FLOWS WAS NOT KNOWN,
LATER
THIS
WE WILL KNOW MORE, BUT TO THE EXTENT THAT THE MOVEMENTS
ORIGINATED BY FOREIGNERS, FOR EXAMPLE BY FOREIGN TRADING
MONTH
WERE
COMPANIEj
-11
-
and foreign central banks reducing t he i r d e p o s i t s
W
E WILL NEVER KNOW THE FULL STORY.
As
in the
U .S .,
A POINT OF INTEREST TO YOU,
HOWEVER, I SHOULD MENTION THAT WE HAVE HAD REPORTS FROM A NUMBER
OF IMPORTANT OIL PRODUCING COUNTRIES INDICATING THAT THEY HAD
NOT ORIGINATED LARGE MOVEMENTS DURING THE FIRST QUARTER.
However
i t was that the new interim monetary arrangements
HERE PUT IN PLACE ThEY HAVE PROVIDED A FAVORABLE CLIMATE IN WHICH
THE NEGOTIATIONS ON LONGER-TERM INTERNATIONAL MONETARY REFORM
CAN PROCEED.
I BELIEVE THAT THE PRESENT MONETARY ARRANGEMENTS REPRESENT
A SUBSTANTIAL IMPROVEMENT OVER THE RECENT PAST, AND THAT WITH
INTERNATIONAL COOPERATION, THESE ARRANGEMENTS ARE SERVICEABLE
AND SUSTAINABLE FOR THE PERIOD REQUIRED TO NEGOTIATE AND INTRODUCE
NEEDED FURTHER REFORMS.
PERFECT, AND THE U.S.
IS COMMITTED TO THE EFFORT TO BUILD A
BETTER PERMANENT SYSTEM.
last
September
the
BUT THE PRESENT SYSTEM IS FAR FROM
We HELPED LAUNCH THE COMMITTEE OF TWENTY, AND
Pr e s i d e n t
and
S ecretary S hultz
presented a
COMPREHENSIVE OUTLINE OF U .S . VIEWS ON REFORM.
In
e s se nc e ,
our proposals are for an open and
EQUITABLE
INTERNATIONAL ECONOMY, FREE FROM CONTINUAL RELIANCE ON CONTROLS
BUT WITH EFFECTIVE MEANS TO PREVENT DEVELOPMENT OF LARGE AND
PERSISTENT PAYMENTS DISEQUILIBRIA WHETHER SURPLUS OR DEFICIT.
12
-
At
Bu t
we
this
have
-
level of g en erality there
not
yet reached agreement
is l i t t l e d i s a g r e e m e n t ,
—
on specifics
f o r exampleI
ON THE RULES AND PROCEDURES WHICH SHOULD BE INTRODUCED TO ASSURE
THAT COUNTRIES DO ELIMINATE THEIR BALANCE OF PAYMENTS SURPLUSES
AND DEFICITS, ON THE MEANS FOR DETERMINING THE AMOUNTS AND
TYPES OF RESERVE ASSETS IN THE SYSTEM, ON THE WAY IN WHICH GOLD
WILL BE PHASED OUT OF ITS CENTRAL POSITION IN THE SYSTEM.
On
THAT LAST POINT THERE IS A WIDE MEASURE OF AGREEMENT ON THE
OBJECTIVE, BUT THERE IS NOT YET AGREEMENT ON THE MOST PRACTICAL
ROUTE TO THE OBJECTIVE.
IN ADDITION TO THESE QUESTIONS YOUR SUBCOMMITTEE HAS ASKED
TWO OTHER SPECIFIC QUESTIONS ON THE REFORM; FIRST, SHOULD THE
SHORT-TERM LIABILITIES OF THE U. S. BE FUNDED; AND SECOND, IS A
NEW MONETARY CONFERENCE SIMILAR TO BRETTON WOODS NEEDED TO RESHAPE|
THE INTERNATIONAL ECONOMIC ORDER.
Th e
first
q u e s t i o n , on t h e
possible
desirability
FUNDING OR CONSOLIDATING SOME OR ALL OF THE
$70
f or
BILLION HELD
BY FOREIGN OFFICIAL INSTITUTIONS, HAS BEEN THE SUBJECT OF
DISCUSSION.
Th e
large dollar
holdings
of
foreign
CENTRAL BANKS
ARE THE RESULT OF PAST INSTABILITIES IN THE SYSTEM.
HOLDERS THEY ARE NOT PARTICULARLY VOLATILE.
FOR THE MAJ0R|
THEREFORE,
OF THAT BALANCES WOULD NOT NECESSARILY MAKE AN IMPORTANT
TO SHORT-TERM MONETARY STABILITY.
MUCH
FUNDING
CONTRIBUT}
OVER THE LONGER-TERM OUR
PREFERENCE IS TO DEAL WITH THESE BALANCES BY EARNING BACK A MAXIMA
NUMBER OF THE DOLLARS THROUGH BALANCE OF PAYMENTS SURPLUSES.
IN A
REFORMED SYSTEM IT WOULD BE USELESS TO FUND OR OTHERWISE TIE UP
THESE DOLLAR BALANCES WITHOUT AT THE SAME TIME CHANGING OTHER
ELEMENTS OF THE SYSTEM SO THAT INSTABILITIES AND INADEQUACIES IN
THE SYSTEM WOULD NOT SIMPLY LEAD TO NEW ACCUMULATIONS OF CURRENCY
BALANCES REPLACING THOSE WHICH WERE FUNDED.
WITH EFFECTIVE
ADJUSTMENT ARRANGEMENTS AND OTHER ELEMENTS OF A REFORMED SYSTEM,
POSSIBILITIES FOR FUNDING OR EXCHANGING PART OF EXISTING DOLLAR
HOLDINGS INTO
SDR
I
OBLIGATIONS WARRANT CAREFUL CONSIDERATION.
MUST POINT OUT THAT IT WOULD BE NO MEAN TASK TO FIND TERMS THAT
WOULD BE AGREEABLE TO BOTH DEBTORS AND CREDITORS, BUT WE HAVE STATED
OUR WILLINGNESS TO GIVE CAREFUL CONSIDERATION TO THE POSSIBILITIES.
T he
second
question, the
possible
need
for
a
CONFERENCE, HAS BEEN CONSIDERED MORE THAN ONCE.
IS THAT SUCH A MOVE WOULD NOT BE HELPFUL.
Moods ,
conditions
period , w h e n
and
Also
were
travel
quite
was
different
difficult and
B r e t t o n Wo o d s
OUR FEELING
At THE TIME OF BRETTON
from
today
—
communications
a wartime
limited,
A RELATIVELY FEW VOICES WERE INVOLVED IN THE MAJOR NEGOTIATIONS.
we d i d
Go v e r n o r s ,
Re g u l a r l y
not
where
h a v e , as
the
convent.
we
now
financial
It
has
have, annual
leaders
seemed
to
us
of
meetings
125
that
member
a
better
of
the
states
way
IMF
can
to
PROCEED WAS WITH PERIODIC MEETINGS OF THE COMMITTEE OF TWENTY,
and
REGULAR MEETINGS OF THE I mF, WITHOUT THE FANFARE AND POTENTIAL
-14 -
FOR MARKET DISTURBANCES OF A SPECIAL CONFERENCE LIKE A NEW
B r e t t o n Wo o d s .
Several
M inisters
and
meetings
of
Deputies
the
C-20
have
levels, with
been
h el d , at both
considerable
progress
TOWARD UNDERSTANDING OF RESPECTIVE POSITIONS AND DEFINITION
OF CRITICAL ISSUES.
ANOTHER MEETING OF THE DEPUTIES IS
SCHEDULED FOR EARLY NEXT MONTH.
THERE IS THE POSSIBILITY OF
ANOTHER MEETING OF THE MINISTERS BEFORE THEY ARE SCHEDULED
TO MEET AGAIN AT THE TIME OF THE ANNUAL MEETING OF THE
Go v e r n o r s
in
Na i r o b i , K e n y a ,
in
Se p t e m b e r .
We ,
and
IMF
others
HAVE EXPRESSED THE HOPE THAT THE MAIN OUTLINES OF A NEW MONETARY
SYSTEM CAN BE AGREED UPON BY THE TIME OF THE MEETING IN
T h e U.S.
will do all
it c a n t o
meet that
goal.
NAIROBI.
31
Me a n w h i l e ,
t in u e ,
c o u r s e , as these
of
^
reform discussions
con
INTERNATIONAL BUSINESS GOES ON, AND YOU HAVE ASKED
THREE BASIC QUESTIONS ABOUT THE PERIOD JUST AHEAD.
CAN BE TAKEN TO STRENGTHEN THE DOLLAR?
DEFICIT BE CUT?
WHAT STEPS
HOW CAN THE U. S.
AND HOW CAN SPECULATION BE REDUCED?
In
PRACTICE I SUSPECT THOSE THREE QUESTIONS ARE JUST THREE WAYS
OF ASKING THE SAME QUESTION.
At ANY RATE IT SEEMS TO ME THAT
THE RIGHT ANSWER AND THE BASIC ANSWER IS THE SAME TO ALL
THREE QUESTIONS:
TAKE CARE OF THE FUNDAMENTALS.
W e MUST INSURE
THAT WE FOLLOW THE APPROPRIATE BUDGETARY AND MONETARY POLICIES,
THAT WE REMOVE IMPEDIMENTS TO THE FULL PRODUCTIVITY OF THE U. S.
ECONOMY, AND THAT OUR BUSINESSMEN ARE NOT HANDICAPPED BY UNFAIR
INTERNATIONAL CONDITIONS OF TRADE.
W ith
respect
to the b u d g e t , you
h a v e , of
course, just
RECEIVED THE MID-SESSION REVIEW INDICATING THAT ON A FULL
EMPLOYMENT BASIS THERE WILL BE A SURPLUS OF $5 BILLION IN THE
f is c a l
WOULD
year
at the
end of this
month.
In
fact,
I
GUESS THAT THE ECONOMY HAS ALREADY MOVED INTO A POSTURE
of s u r p l u s .
has
starting
W ith
respect to m onetary
policy,
Go v e r n o r Da a n e
ALREADY REVIEWED FOR YOU IN DETAIL THE GRADUAL AND PERSIS
TENT TIGHTENING WHICH THE FEDERAL RESERVE SYSTEM HAS INTRODUCED
OVER THE PAST YEAR.
Fo r
the
release
of the
full
productivity
of the
U. S.
ECONOMY YOU HAVE HAD REPORTS OF THE SHORT-RUN MEASURES WHICH
HAVE
BEEN TAKEN AND THOSE THAT HAVE BEEN PROPOSED,
INCLUDING
- 16 THE RELEASE OF NEARLY FIFTY MILLION ACRES OF LAND INTO PRODUC
TION AND THE PLANNED REDUCTION OF THE GOVERNMENT'S MATERIAL
STOCKPILES TO MORE APPRROPRIATE LEVELS.
FOR THE LONG-RUN YOU AREl
AWARE, FOR EXAMPLE, OF THE DECISIONS THAT HAVE BEEN TAKEN TO
AMEND THE OIL IMPORT PROGRAM TO MAKE IT POSSIBLE IN THE FUTURE
TO BUILD OIL REFINERIES IN THIS COUNTRY RATHER THAN TO HAVE TO
RELY ON NEW CONSTRUCTION ABROAD, AND YOU HAVE RECEIVED THE
Pr e s i d e n t ' s
recommendations
for the deregulation of newly produced!
GAS TO ENCOURAGE EXPANDED EXPLORATION AND PRODUCTION IN THIS
COUNTRY.
S uch
AT HOME.
b a s i c measures are the proper res pon se to
It
IS TRUE THAT SINCE AUGUST OF
1971
inflation
THE INCREASE
IN OUR COST OF LIVING HAS BEEN LESS THAN THAT OF ANY OTHER ONE
OF THE
20
MEMBERS OF THE
OECD.
BUT THE PERFORMANCE OF OUR
WHOLESALE PRICE INDEX, WHICH IS MORE RELEVANT TO OUR INTER
NATIONAL TRADE, WAS NOT EQUALLY GOOD AND, OF COURSE, WE WERE
GREATLY DISAPPOINTED BY THE INCREASES IN OUR PRICE INDICES
DURING THE FIRST QUARTER OF THIS YEAR.
YET
I
THINK THERE IS
JUSTIFIABLE CONFIDENCE THAT THE BASIC MEASURES WHICH I HAVE
OUTLINED WILL INCREASINGLY BE REFLECTED IN LOWER RATES OF PRICE
increase.
the
Moreover ,
Ad m i n i s t r a t i o n
I
have seen no evidence of h es i ta ti on withii|
to take a d d i t i o n a l b a s i c measures
SHOULD BECOME CLEAR THAT THEY ARE NEEDED.
if
it
IT IS, OF COURSE,
NECESSARY TO BEAR IN MIND THAT THERE IS A TIME LAG BETWEEN
DECISION AND RESULTS, AND THERE WOULD BE NO WISDOM IN
THE BOAT IN THE OTHER DIRECTION.
OVERTURNING
> n
- 17 -
In
our
TO ALL.
international trade the
Over
improving trend
the f i r s t part of t h i s year the
i s apparent
improvement was
IN LARGE PART A REFLECTION OF OUR HIGHER LEVEL OF AGRICULTURAL
SALES.
It
is
qui te
p o s s i b l e these sales will not be at the
SAME HIGH LEVEL IN THE COMING QUARTERS.
YET THE MARKED IMPROVE
MENT WHICH PROVIDED A $196 MILLION TRADE SURPLUS LAST MONTH
IN CONTRAST TO THE DEFICIT OF THE PREVIOUS MONTH DEPENDED
ONLY IN SMALL PART ON AN INCREASE IN AGRICULTURAL SALES.
It
SEEMS TO ME THAT AS A RESULT OF THE BASIC IMPROVEMENT OF OUR
COMPETITIVE POSITION^THERE IS A STRONG LIKELIHOOD THAT IN THE
FIRST HALF OF NEXT YEAR OUR TRADE BALANCE WILL BE MARKEDLY
STRONGER THAN IN THE FIRST HALF OF THIS YEAR, STRONGER EVEN IF
AGRICULTURAL SALES ARE NOT QUITE SO HIGH, AND STRONGER DESPITE
THE FORECAST CONTINUING GROWTH IN OUR OIL IMPORTS.
The
real cost of a barrel of
imported o i l
is
r i s i n g and
WILL PROBABLY CONTINUE TO RISE, AND WE SHALL BE IMPORTING MORE
barrels.
The
total dollar costs rose from
TO $5.1 BILLION LAST YEAR.
And
$2.7
billion
in
1969
THERE ARE MANY PROJECTIONS THAT
THE FIGURE WILL REACH $15 BILLION PER YEAR WELL BEFORE 1980.
Ye t no confidence can be placed in p r e c i s i o n of such longRange forecasts .
Nec es sa r il y
they tend to be based primarily
ON EXTRAPOLATION OF PAST TRENDS AND CANNOT YET HAVE TAKEN
ADEQUATELY INTO ACCOUNT THE RESULTS TO BE ACHIEVED FROM THE
President ' s
new energy program d es igned to increase production
0F a l l forms of energy in the United S tates and d es ig ned to use
that energy with greater care and
efficiency.
-
18
-
I REALIZE THAT THERE HAVE BEEN CONCERNS EXPRESSED THAT THE
LARGE INCOME OF SOME SMALL PRODUCING COUNTRIES WILL ENDANGER
INTERNATIONAL MONETARY STABILITY IN THE FUTURE.
On
THE OTHER
HAND^ I AM ALSO AWARE THAT THESE COUNTRIES WILL HAVE LARGE NEEDS
FOR IMPORTS TO MEET THEIR DEVELOPMENTAL AND THEIR DEFENSE NEEDS.
They
will be s eeki ng secure and productive
REPLACE THEIR ASSETS FROM THE GROUND.
investments to
THEY KNOW THAT THEIR
RESERVES OF OIL WILL NOT LAST FOREVER AND THAT AN IMPORTANT
PART OF THEIR INCOME MUST BE INVESTED WISELY IN ORDER THAT IT
MAY PROVIDE INCOME FOR THE TIME WHEN THEIR PRODUCTION IS
DECLINING AND NEWLY DEVELOPED ALTERNATIVE SOURCES OF ENERGY HAVE
REDUCED THE DEPENDENCE OF THE INDUSTRIALIZED WORLD ON THEIR
supplies.
Furthermore,
large as thei r a s s e t s
may be compared
TO THEIR HOLDINGS TODAY, THEIR COMBINED ASSETS WILL NOT COMPRISE
ANY LARGE FRACTION OF THE CAPITAL ASSETS OF THE WORLD AS A WHOLE
The
large
income of these c ountri es will represent a real
COST TO THE IMPORTERS, BUT THEY REPRESENT NO REASON TO FORECAST
A WEAKENING OF THE DOLLAR RELATIVE TO THE CURRENCIES OF EUROPE
and
Japan.
These
countri es taken together will be
in crea sin g
THEIR IMPORTS IN ABSOLUTE TERMS BY FAR MORE THAN THE UNITED
St a t e s .
They
too will be competing with us to provide
exports
TO THE OIL PRODUCERS AND TO OFFER THEM ATTRACTIVE INVESTMENT
OPPORTUNITIES.
In
SUCH COMPETITION WE EXPECT THE UNITED STATES
TO BE COMPETITIVE, AND THE DOLLAR COULD WELL COME OUT AHEAD.
In
the short - run ,
of course ,
we are all fami li ar with the
RECENT DECLINES IN THE VALUE OF THE DOLLAR IN THE FOREIGN
EX C H A N i
- 19 markets.
ON THE
We
have watched the d ecl i ne
U. S.
STOCK EXCHANGES.
in the value of shares
FEARS HAVE BEEN EXPRESSED THAT
THESE DEVELOPMENTS WILL DRIVE AWAY PROSPECTIVE FOREIGN INVESTORS,
AND IT IS TRUE THAT,AT ANY MOMENT IN TIME, A PROSPECTIVE INVESTOR
MAY CHOOSE TO WAIT SO LONG AS HE EXPECTS THOSE TRENDS TO CONTINUE.
On
the other hand the p ros pecti ve buyer must be careful not to hold
OUT TOO LONG WHEN A BARGAIN IS AVAILABLE BUT NOT GUARANTEED TO
last.
There
are large sums
in the hands today of foreigners who are
DEFINITELY PROSPECTIVE BUYERS, AND I EXPECT THEY WILL NOT FAIL
TO NOTICE THAT THE VALUE OF THE DOLLAR HAS BEEN INCREASING IN
terms of
Un it e d States
shares.
TRADING IN THE LAST FEW WEEKS.
FLOW.
I
do not have any reports on net
THERE WAS PROBABLY NO GREAT IN
But I DO KNOW THAT IN THE FIRST QUARTER OF THIS YEAR THE
NET FLOW OF FOREIGN PRIVATE PORTFOLIO INVESTMENT INTO THE
United States
it
TO
was at an all - time record r a t e .
be at an even higher rate
I
would expect
in the coming months .
I DO NOT HAVE THE SKILL — OR THE TEMERITY — TO ATTEMPT TO
PREDICT EXCHANGE RATES PRECISELY IN THE COMING WEEKS.
My OWN
JUDGMENT IS, HOWEVER, THAT THE FOREIGN EXCHANGE MARKET HAS PROBABLY
MISJUDGED THE EXTENT TO WHICH BASIC FUNDAMENTALS WILL BE REINFORCING
IN THE NEAR FUTURE THE IMPROVEMENT IN OUR TRADE BALANCE AND EN
HANCING THE ATTRACTIVENESS OF INVESTMENT IN UNITED STATES DOLLAR
ASSETS.
On
strengthen.
balance ,
therefore ,
Fundamentally,
I WOULD
however,
I
expect the dollar to
thi nk what i s
not what changes may take place from day to day
important
in the market
is
-
VALUATION OF THE DOLLAR.
20
-
WHAT IS IMPORTANT IS THAT WE APPEAR
NOW TO HAVE IN PLACE A SYSTEM WHICH CAN ACCOMMODATE CHANGES
WITHOUT DISRUPTING THE FABRIC OF INTERNATIONAL TRADE.« INVESTMENT
AND COOPERATION.
Thank
you.
MEANWHILE WORK ON LONG-TERM REFORM CONTINUES.
E X C H A N G E R A T E S 1 9 7 3 - J A N U A R Y X - -TUNE.^
S T E R L I N G - P E U T S C H E M A R K - SWISS F R A N C
50
45
40
35
30
25
20
15
10
05
00
000
FOR RELEASE AT 1:00 A.M. WASHINGTON TIME, WED., JUNE 6
STATEMENT BY THE HONORABLE GEORGE P. SHULTZ
SECRETARY OF THE TREASURY
AT THE
AMERICAN BANKERS ASSOCIATION
INTERNATIONAL MONETARY CONFERENCE
PARIS, FRANCE
WEDNESDAY, JUNE 6, 1973
This annual conference has become a highlight in
the yearly calendar of the international financial
community. For me, the opportunity to participate in
your discussions, and to draw from the experience of
this informed group, is especially welcome -- not just
because I am a first timer, but because we are mid-stream
in the great task of reshaping the monetary system for
the needs of a new generation." We have the right setting
in this magnificent world city, where we are constantly
reminded of the great achievements of western civilization
and culture.
My memories of Paris as a site for constructive
monetary work derive from a period as recent as March,
when I attended two meetings with my colleagues of the
Group of Ten and the European communities. By common
consensus, we adopted new approaches for dealing co
operatively with what was then described as a crisis.
Those decisions did not make up the long-term reform
we seek. But they do provide a valid framework for
dealing with this transitional period. And, we will
want to learn from this experience as we build for
the future.
I look to that future with optimism. I say that
because I believe there is greater understanding of the
mutual problems and each otherfs positions by the
officials concerned, and with that understanding we
can begin to see a convergence of views on some of the
major issues. Certainly, that was the sense of the
five-day meeting of C-20 Deputies in Washington two
weeks ago and was my personal experience in Iceland
last week.
S- 224
2
Obviously, progress has not been instantaneous;
it cannot be, for it is no mean task to devise a system
that adequately deals with the immense shifts in the
world economy since Bretton Woods. You, in your daily
work, are conscious of the enormous integration of
financial markets that has created the capacity for
vast flows of funds across national borders. You are
conscious of the rapid growth of Europe and the moves
toward monetary unity on this continent. The spectacu
lar growth of Japan has created a major center of
economic power in the Pacific.
In this world, neither
the United States nor any single country or region can
be dominant: and we face the task of changing from a
system that implicitly assumed that dominance to one
in which the responsibilities and benefits fairly
reflect our individual capacities and respect our
diversity.
Your deliberations can cast light on ways to
achieve this goal, and in that respect I am an eager
listener. But, in talking to you today, I want to
approach this same problem -- dealing with massive
shifts in the world economy -- from a different angle.
Over the past year, in attending a good many
conferences with the financial officials of other
governments, I found that these meetings usually had
two agendas. There was the formal one -- on SDRfs,
exchange rates, intervention, and all that. Then
there was the informal agenda where, in the corridors
and across the dinner table, we reflected our mutual
concern with developments in the field of energy.
Later this afternoon, I will attend a meeting in
which energy has made it on to the formal agenda. The
OECD Ministers are gathering here in Paris this after
noon, and energy properly is prominent among the topics
for discussion.
The OECD has estimated that the consumption of
energy, in all forms, by members of the organization
has risen more than 5-percent per year for the last
10 years. That growth will continue and, for the near
future, the world has no choice but to depend primarily
on oil and gas to meet its rising energy demand.
3
iff
Nearly all of the developed countries share one
common characteristic -- they must look outside their
own borders for the bulk of their energy supplies.
The United States, itself, is not in that group. But,
in the years just ahead, our dependence on foreign
energy will unavoidably become more pronounced. Some
projections suggest that oil imports of the OECD
countries will double between 1970 and 1980. Meanwhile,
production will tend to be concentrated in a few
countries, some of which have very small populations.
These producing countries will be exchanging assets
from the ground for the assets in which you deal in
vast quantities. And it will be in the interests
of both producer and consumer to make that process
work as smoothly as possible.
As awareness of these trends in the energy field
has spread, scholars, banks, petroleum and other
energy-producing companies, and governments have begun
to pour out analytical studies and projections. Let
us approach these projections as the flashing warning
signals that they are, but also with a healthy realiza
tion that all projections must be based on times past.
These projections usually depend upon the basic
assumption that recent trends in world demand for energy,
in the sources of energy, and in the form in which energy
is supplied, will roll on largely unchanged into the
distant future. Since demand for oil has been rising
and production in major areas like the U. S. has been
falling, extrapolation of these trends inevitably
points, in time, to crises.
The projections do show -- clearly and vividly -that we face far-reaching changes in our energy balances.
We must accept -- in a world of few miracles --that the
rising demand for energy will lead to a substantial
increase in real costs. We cannot be blind to the
concentrated location of the existing resources which
can be made available for years immediately ahead.
But, there is another side. With these projections
showing us what needs to be done -- and if we make the
commitment of personal energy that is required a potential
crisis can be turned into a manageable problem. Action
by consuming countries, with a long view of their best
interest, is required now. Governments of producing
countries -- with the same long view -- will, I am
equally convinced, find cooperation on the problem
in their own interest.
4
We, in the United States -- in our actions and in
our planning -- are participating in this process with
a sense of urgency, precisely so that tomorrow’s crisis
can be converted into constructive achievement, in that
process, it seems clear that energy is not an area
where countries can safely "go it alone."
The United States is the largest energy consumer;
we consume one-third of the world*s energy.
On the other hand, consumption of energy in the
United States is only rising now at about 4-percent
per year -- about in line with the long-run trend in
the growth of real output. This is less than in many
other countries. Moreover, we have been blessed with
substantial indigenous supplies of oil and coal.
Less fortunately, domestic production of oil and
gas in the United States has begun to decline. Between
1969 and 1972, U. S. imports of oil increased 52 percent.
The dollar costs of our fuel imports rose from $2.7
billion in 1969 to $5.1 billion in 1972. Some projections!
suggest that this figure could rise to $15 billion
before 1980.
It has been estimated that imports of foreign oil
will increase from 27 percent of total U. S. consumption
of oil in 1972 to about 33 percent in 1973, to over 50
percent by 1980. Further, some estimate that by 1985,
our oil imports will amount to 65 percent of our con
sumption. These estimates, however, assume that no
action will be taken. This is not the case. On
April 18, 1973, the President presented a broad and
comprehensive energy message which I see as a blueprint
for action that must and will be taken. The policy is
aimed not only at assuring adequate supplies of energy
in the short run, but also at reducing our dependence
upon foreign supplies in the long run by fostering a
vigorous domestic energy industry.
The President’s program is designed:
1)
To increase production of all forms of
energy in the United States;
2)
To conserve energy; and
3)
To meet our energy needs at the lowest
cost consistent with the protection of
both national security and environment.
These objectives will be sought:
-- By reducing those numerous and insidious
regulatory and administrative impediments
which have delayed or prevented construction
of energy-producing facilities;
- - B y cooperating with other nations in energy
research and in seeking ways to prevent
shortages; and
- - B y mobilizing both public and private
scientific and technical skills to attack
the energy problem -- whether by increasing
supply or utilizing it with greater efficiency.
Actions have already been initiated under this
program. The most striking for the short run, of course
has been complete revision of our oil import program.
But, for the longer run, the increase in expenditures
on research will be more important. We are prepared
to spend whatever reasonable amounts can be used
effectively to increase supplies and to avoid un
necessary consumption. Some of our proposals require
Congressional action -- and we will press for their
understanding and cooperation.
We mean to change those projections, both by
changing the trend in the U. S. demand for energy and,
more significantly, the trend of supply in the United
States.
Nonetheless, for a number of years ahead, we will
face a larger bill for imports of oil. So will other
consuming countries, despite the relief of some from
North Sea or other new fields. Moreover, there will
be new investments to be paid for. Large sums -many billions of dollars -- will be required to develop
petroleum supplies in producing countries, as well as
to provide new transportation and refining facilities.
No doubt, a significant portion of the funds for these
investments will be provided from the United States.
6
Energy is big money. But this is only one side
of the ledger. We should not overlook the other side.
Too often, when we add up the import bill, we seem to
overlook the fact that, as production rises abroad,
a return will be generated on the large investments
which developed countries -- in large part, U. S.
companies -- have made and are making in order to
bring forth that production. Moreover, some of the
new investment will take the form of capital equip
ment and technical services exported from the oil
consuming countries.
In a competitive world -- and
we expect the United States to be competitive -we will get a good share of those exports.
Governmental and quasi-governmental entities
in the producing countries will, of course, be
receiving a large percentage of the monies paid for
oil by the United States and the other importing
countries. What those countries do with the sums
they earn will be a major factor in determining the
significance of the growing oil shortage for the
United States balance of payments and for the world
monetary system.
MORE
7
m
Plainly, many of these countries have large, unmet
needs for manufactured goods -- both consumer goods and
capital equipment. Some feel they must obtain additional
equipment for their defense forces. Countries such as
Venezuela, Iran, Algeria, Nigeria, and Indonesia have
traditionally used increases in oil revenues for immediate
expenditures and investments to improve the living standards
of their people. The money that these nations earn can be
expected to be spent in the industrial nations, in large
part, as payment for goods and services. Oil will be flowing
from these countries to Europe, Japan and the United States
to help produce the goods which, in turn, go. back to the
people of the producing lands. This is the meat and potatoes
of international trade, and we all learned long ago that all
participants can benefit from trade. In its essentials,
payments to these countries for oil are no different than
the payments for any other product.
On the other hand, an important group of producers,
including probably the Arabian Peninsula States of Saudi
Arabia, Kuwait, the United Arab Emirates and Qatar, may
be receiving oil revenues of $10 billion annually by 1975,
and up to $20 billion or more annually by 1980. The combined
population of these States is only about 7 million. Their
foreign investments are already rising rapidly, because they
are not spending currently all of the $5 billion or so they
are now receiving from oil exports. We cannot expect all the
payments to these areas to be spent immediately for goods and
services in the near future. A substantial proportion of this
revenue will be invested#
It is this pool of wealth that has loomed large in
much recent discussion. But, let me give you some other
figures to put it in perspective. The annual capital formation
of industrialized countries by 1980 will probably approximate
$700 billion. New issues of stocks and bonds alone will
probably be on the order of $250 billion. It takes no stretch
of the imagination -- if one looks beyond the last few months
in Wall Street -- to suggest that the total market value of
outstanding stocks and bonds in the world could exceed $£■ 3
trillion by 1980. Obviously there will be many investment
opportunities available for the savings of the oil producing
countries. And they are likely to have a strong interest in
stable, secure and profitable investment opportunities. They
know that their reserves of oil will not last forever* Looking
ahead, our research will pay off and new sources of energy,
based on new technologies and with the incentives provided
by high energy prices can be expected to reduce the dependence
of the industrialized world on imported oil.
8
So we have all the ingredients of a highly advantageous
mutual bargain -- worked out, as the best bargains usually
are, largely in the market place. The consumers will have
enormous capital needs. The producers will have resources
which will be large but will still represent only a small
fraction of our needs. We have - - not least in this room -middlemen to help make the market. What remains is to go
about it with good sense and good judgment.
The prospect before us is often cast in different terms
The U.S. will bear a much heavier import load -- so, it is
alleged, there will be persistent pressure on the dollar.
The prospect of exchange rate changes will be aggravated by
billions of short-term "oil dollars" sloshing about in the
market. Monetary instability will result.
But this specter -- while perhaps useful to spur us
to action -- is not a necessary or even reasonable
consequence of the current energy outlook.
The basic requirements of the producers are for stable,!
secure, and profitable investment opportunities -- not for
a year or two, but for long priods. What these nations will!
probably be seeking to do in the next ten to fifteen years
is to protect their future by transforming their national
heritage into new, and more permanent, forms. Some of these!
new assets will be new plants in their own countries. But,I
as they turn to world financial markets, there is no inherent
reason to believe their assets preferences will not be subjed
to the same profit instincts that lead most investors to
I
place a substantial portion of their funds in longer-term foi
provided the climate is favorable.
Their purchases of assets abroad should be the channel
through which their balance of payments position and the
payments positions of the United States and other major
countries, as well, are brought into balance in the years
ahead. And, I frankly do not see why this process need leadj
to disturbing changes in the form of violent or disturbing
adjustments in exchange rates.
Certainly, as we pointed out in presenting our monetary
plans, the accumulation of large current surpluses by
Arabian Peninsula States should not call for exchange r a te _
adjustment actions on their part. While many of their e x te r l
investments might loosely be considered reserves, c e r t a i n l y ^
they are not comparable to the kind of monetary reserves thal
would suggest a need for monetary adjustment action on theij
part.
Nor should such accumulations result in devaluat ion
pressures on those consuming countries which offer at tractivl
9
iff
export prices and attractive sites for investment.
In that connection, please remember that the United
States is not the only country which will be a heavy importer
of oil. A large part of the earnings of the producing States
will derive from their sales to Europe and Japan.
Indeed,
most ‘projections suggest that the absolute increase in oil
imports into Europe from now through 1980 will be of the
same order of magnitude as ours and that Japan, almost totally
dependent on imports and rapidly growing, will experience an
increase in imports equal to a large fraction of ours
despite the fact it has a much smaller economy. Of course,
the Europeans, the Japanese and the United States will, in
effect, be competing both for exports to producing countries
and for their investments.
In this competition the degree
of our success will naturally have an important bearing on
the value of our currency.
It is saying no more than that
success of our free economy will determine the value of our
currency -- and that is a test we are glad to meet. Certainly,
the need of all the industrial counties to import more oil
offers, in itself, no reason for the dollar to depreciate in
value in relation to the currencies of Europe or Japan. The
United States could well be the gainer.
Our judgment that the recent devaluations of the dollar
have placed our currency in a fair and sustainable alignment
is in no way affected by this situation.
I am unabashed in
feeling we can compete with any nation in investment
opportunities.
.That judgment is only reinforced by current developments.
Despite growing energy imports and a domestic boom, our trade
balance is improving. Obviously, we have had extraordinary
agriculture exports, and I am realistic enough to know we
shall have temporary relapses from the recent favorable trend.
We still have a long way to go -- but the evidence is strong
that our underlying position is strengthening. And, as our
competitive position is strengthened, so are the opportunities
for foreign investment in the United States.
Some of you may still have the nagging feeling that
the investment of the oil producers, however welcome at
particular points in time, could be destabilizing through
sudden shifts. Here, certainly, is an area for cooperation
and planning among nations, and for leadership of the
financial community.
The problem is not different in kind from those presented
oy the huge amounts of interntional short-term capial that
already exist -- and will surely grow. A degree of flexibility
in exchange rate practices -- dampening the prospects for
farge and sudden changes, and reducing the incentives for
IQ
anticipating shifts -- offers one approach. Adequate
facilities for absorbing and financing short-term flows are i
another. In addition, we need to recognize fully the needs
and aspirations of the oil countries, themselves, in seeking
safe and attractive outlets for their national heritage. It
is not beyond the ingenuity of the financial community -against the background of understanding attitudes by national
governments -- to help develop appropriate instruments for
such investment.
In this process of developing constructive responses to
the ’’energy challenge,” it seems to me we have lacked a
forum for bringing all the relevant considerations -financial and non-financial -- together. I have been glad
to see that a World Energy Conference is being planned for
Detroit in September 19 74. That Conference can contribute
meaningfully to the search for cooperative solutions to
important aspects of the problems in the energy field. Never-)
theless, some of the financial dimensions may not be adequately
prepared without the wholehearted support of the financial
community. To that end, I hope those here could join with
others over the next year, before the Conference, to address
more fully the questions I have touched upon today:
--the financial implications of the rising demand for
energy imports;
--the prospects for financing these imports and the
investment required to bring them forth;
--the means of furnishing investment instruments to
the oil-producing states.
I recognize that the oil producing countries could view
the organization of such a meeting with some concern. These
countries have justifiable concerns about the management of
their precious assets. It seems to me important that the
oil-producing countries, themselves, play a strong role in
such a meeting, or meetings: for, after all, the assets
involved are theirs. In appropriate circumstances, the U.S.
Government would, itself, be prepared to participate in such
deliberations in preparation for the World Conference.
I have expressed confidence that we have the means of
meeting the energy challenge. At the same time, I do not
underestimate the problem. The real cost of energy will rise.
We must bend our efforts to change the ominous trend lines<
If we shirk from the fundamental task at home of developing
our own energy sources -- if we fail to face up to the
research bill -- if we fail to conserve -- if we fail to reins1!
competitive -- then, of course, the external consequences on
the balance of payments and on the monetary system would be
disturbing.
-
11
-
Indeed, we have no real choice. The basic adjustments
to new forms of energy -- or to slower growth -- will need
to be made. The only issue is how: in a timely and orderly
manner, or in a vacillating course which permits events to
force the result in a painful way.
We do not intend to fail. With foresight and cooperation,
the energy situation need not disturb our growth at home,
nor disrupt our planning for a stronger payments and
trading system which will be in the interests of every nation.
0 O0
FOR IMMEDIATE RELEASE
June 6, 1973
TREASURY ANNOUNCES ACTIONS ON
TWO INVESTIGATIONS UNDER THE ANTIDUMPING ACT
Assistant Secretary of the Treasury Edward L. Morgan
announced today actions on two investigations under the
Antidumping Act of 1921, as amended.
In both cases there are determinations of sales at
less than fair value. Notice of these decisions will appear
in the Federal Register of Thursday, June 7, 1973.
In the first case Assistant Secretary Morgan announced
that steel wire rope from Japan is being, or is likely to be,
sold at less than fair value within the meaning of the
Antidumping Act. This rope is used for many purposes
including elevator ropes, winch lines, cranes, conveyors,
and reinforcing heavy-duty tires for trucks. The case will
now be referred to the Tariff Commission for a determination
as to whether an American industry is being, or is likely to
be, injured. In the event of a determination of injury,
dumping duties will be assessed on all entries of steel wire
rope from Japan which have not been appraised and on which
dumping margins exist. A notice of "Withholding of
Appraisement" was issued on March 9, 1973, which stated that
there was reasonable cause to believe or suspect that there
were sales at less than fair value. During the period of
January 1972 through March 1973 imports of steel wire rope
from Japan were valued at approximately $13.5 million.
In the second case the Treasury announced that electronic
color separating or sorting machines from the United Kingdom
are being, or are likely to be, sold at less than fair value
within the meaning of the Antidumping Act. These machines
utilize optical and photoelectric devices to sort beans,
nuts, grains and similar items by color. As in the first
investigation, this case will now be referred to the Tariff
Commission and/in the event of an injury determination, dump
ing duties will be assessed on all entries of these machines
which have not been appraised and on which dumping margins
e*ist. A notice of "Withholding of Appraisement" was issued
on March 6, 1973, which s»tated that there was reasonable
cause to believe or suspect that there were sales at less
than fair value. During the period of August 1971 through
December 1972 imports of electronic color separating or
sorting machines from the United Kingdom were valued at
approximately $500,000.
oOo
JilNGTON, U b.
TELEPHONE W04-2041
lU 4 .iu
3
r
June 6, X973
FOR IMMEDIATE RELEASE
TREASURY AMENDS ELIGIBILITY REQUIREMENT FOR
ADMINISTRATION'S MINORITY BANK DEPOSIT PROGRAM
The Treasury Department announced today it has
decided to amend the eligibility requirement of banks
seeking to participate in the Minority Bank Deposit
Program to include not only banks whose stock is more
than 50 percent owned by minority groups but banks
independently controlled by minority group members as
well«.
Heretofore, the lone eligibility requirement was
that more than 50 percent of a bank's stock had to be
owned by members of minority groups.
The amendment makes possible the eligibility of banks
with less than 50 percent minority ownership if minority
control can be established,.
Treasury has set forth no specific requirements as
evidence of control and will look to the group claiming it
to present to Treasury conclusive evidence of minority group
control.
oOo
S-226
Department of the T R E A S U R Y
tWNGTON, D C. 20220
TELEPHONE W04-2041
■/
June 6, 1973
FOR IMMEDIATE RELEASE
Stephen T. Huhn, 28, of Ashville,N.Y., has been
appointed a Summer Intern at the United States Treasury
Department in Washington.
Mr. Huhn, who will be a third-year law student
at Cornell next year, will serve at the Treasury in the
Office of Legislative' Affairs under William L. Gifford,
Assistant to the Secretary. Mr. Gifford formerly lived
at Jamestown,N.Y.
A native of Ashville, Mr. Huhn was graduated
from American University at Washington,D.C. in 1967.
He-served in the Air Force from 1969 to 1972.
He is the son of Mr. and Mrs. Thomas E. Huhn
of Ashville.
oOo
f o r
im m e d ia t e
r e l e a s e
STATEMENT BY THE HONORABLE GEORGE P. SHULTZ
SECRETARY OF THE TREASURY
AT THE
ANNUAL MEETING OF THE COUNCIL AT MINISTERIAL LEVEL
OF THE
ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT
PARIS, FRANCE
ON WEDNESDAY, JUNE 6, 1973
I am pleased to have this opportunity to participate
in the deliberations of the OECD Ministerial Conference.
It is a particular pleasure to begin by extending my con
gratulations to you, Senor Lopez Bravo, on your selection
as Chairman, and by welcoming New Zealand as the newest
member of this organization.
I
shall try to make good use of this opportunity to
provide you with some perspective on the U.S. Government's
approach to cooperation in international economic affairs
in the year to come. I shall try to explain why I believe
the OECD can make a unique contribution to that cooperation.
The theme of my remarks was well put by President Nixon
in his most recent annual economic report in January.
Speaking of the proposals of the U.S. Government for reform
of the international economic system he said:
"Our proposals have been, and will be, put forth in
the U.S. national interest. But this is not contrary to
the interest of other countries. International competition
is shifting from the military and political arenas to the
economic. This is a great advantage, because in economic
competition every participant can win — there need be no
losers. The effort of each nation to produce and sell
what it can do most efficiently will benefit others. This
is the fundamental belief underlying our proposals for re
form and the fundamental reason for thinking that a satisfactory
agreement will be reached."
S-227
2
To me that statement is a recognition that this is a
year for building. We have all benefitted from postwar
modes of cooperation and from institutions forged initially
by a common perception of common need. But, as our econ
omies have changed and as our very successes have brought
new problems, the arrangements which worked well in the
past become outmoded.
The high degree of economic cooperation among nations
represented here has brought unprecedented progress to us
all. But too often in history arrangements developed to
meet one set of needs have been allowed to become irrelevant
to changing requirements.
The postwar political landscape has been vastly trans
formed, both in the OECD area, as historic progress has been
made toward European unity, and outside that area, as our
nations have laid the base for new and constructive relation
ships with the Soviet Union, the People's Republic of China,
and other nations, and as the developing world has become
more articulate in its own interests.
The economic map of the world has also been dramatic
ally redrawn. Relative positions have shifted, as a
result of the remarkable progress of Japan and Europe.
Points of economic contact among us have multiplies, as
economic interdependence has rapidly increased.
The challenge of today is whether we can build from
the common goals we share to create a new order which will
meet our needs during the remainder of this century.
The new order can not be built just on generalities*
We shall have to negotiate the practical details of new
economic agreements. The negotiation of such details is
likely to expose differences of opinion and approach and
points of seeming conflict. It always has; it probably
always will. But the vigor of the negotiations should not
obscure the fact that significant benefits may be achieved
from such negotiations by all the participants.
In the coming months we shall be engaged in such de
tailed negotiations — and arguments — on monetary reform,
on trade, on investment, and on energy. From these negotia
tions we must create a realistic and durable system which
assures the equitable, orderly, and mutually beneficial
conduct of international economic affairs in an interdependent
world in which no nation holds a dominant economic position.
We must create a new order in harmony with the world of the
future. We have a unique opportunity to do so. Indeed,
failure to take advantage of this opportunity to reinvigorate
our economic relationships, and to make theta a force for
mutual support, would risk the progress which has been
achieved.
As we go forward with these negotiations, there will
be differences which some will seek to call confrontations.
Some will suggest that international economic relations
have become a natural arena for international conflict and
a threat to the cooperative political relationships among
our free societies.
But that will be a false impression. The negotiations
will be energetically pursued precisely because they offer
potential benefits to all. Rather than a natural arena
for deep-seated conflict, economic relations consititute a
natural area for cooperation. We are not engaged in a
zero-sum game; one nation's gain need not be at the expense
of another. By working together we can make available
greater benefits to be shared than if we each went our
separate ways. We should not so concentrate on the divi
sion of the pie that we lose sight of the fact that the
pi-e itself can be made larger. Now, as we are entering
the negotiations, it is probably wise to remind ourselves
that, while there will be differences over how to achieve
and divide the net advantage accruing from international
trade and investment, the important fact is that intelligent
negotiation can achieve net advantage for all.
During this period of intense negotiations, the OECD
can make an especially valuable contribution. Obviously,
in important areas, the specifics will be discussed else
where, notably in the GATT and in the C-20:.: Meanwhile here
in the OECD will be a forum where we can sit back in a nonnegotiating atmosphere and say "These are the overall
objectives and here are some of the important inter-relations
between the various negotiations. Let's look at the matter
f1-!! 1 perspective and see that important aspects do not
between the cracks. Most of all, let us not lose sight
o the gains to be shared when these issues are resolved."
n short., the OECD can help provide the understanding which
ill permit the specific negotiations to succeed elsewhere,
can remind us of the fruits of cooperation.
4
These fruits are reflected in the growth of world trade
in recent years. In volume terms — adjusting for the es
timated increase in the prices of internationally traded
goods — world trade grew by about 9 percent per year over
the past five years. This rapid growth has made inter
national trade a prime mover for prosperity. International
investment, too, has been a major force in economic pros
perity, moving capital to areas of maximum productivity,
and spreading the benefits of technological advance widely
and rapidly.
For the years to come, we in the U.S. Government will
seek international economic agreements which permit our
citizens to continue to enjoy the fruits of such coopera
tion. First, we want for Americans, as other nations want
for their citizens, the classical gains from trade. We
want to be able to sell our products where they can get the
highest price and buy goods and services wherever they may
be cheapest. We want our citizens to be able to invest
where it is most productive, and thus earn a maximum real
income. This may sound at first like a pedestrian objec
tive, but it is a fundamental objective of economic policy.
Second, we want an international monetary and trading
system which will interfere as little as possible with con
tinuity and freedom of international transactions conducted
by our citizens, which will permit flexible and effective
management of domestic economic policy, and which will
accomplish these objectives in a context of reasonably
stable exchange rates.
Third, we want to be able to discharge those responsi
bilities that fall upon us to assist the growth and stability
of other nations, and to maintain our security as a part of
the Western Alliance.
We believe that we can attain these goals for ourselves
in a way which benefits others and the system as a whole.
But we know we can achieve these goals only if others enter
willingly into agreement with us because they realize the
gains which will accrue to them from doing so. We know,
too, that the agreements will not be durable unless the other
participants recognize that the agreements are in their
interest.
5
We know that harmony in economic relations depends in
practice upon agreement in advance on well understood and
reasonable rules of conduct in the monetary, trade, and
investment fields.
In the monetary field we know that our negotiations are
rendered more complex by the fact that we must shift from a
system that implicitly assumed that one nation held a dominant
economic position to a system which treats all countries
even-handedly. In practice, this means we now need a system
which provides better means for assuring prompt and effective
action by both surplus and deficit countries to correct
emerging payments imbalances? a system which provides for
multilateral reserve creation so that no one nation is called
upon to provide the liquidity needs of an expanding world
economy; a system which facilitates establishment of an
economic environment conducive to resource transfers to
developing countries. I can assure you that the United
States has carefully thought through the implications of
such a system for itself, and that we do not seek special
privileges or rights for ourselves. Nor have we become so
short-sighted as to overlook the prospect that the rule
proposed for a surplus country today may apply to the U.S.
tomorrow.
Against the background of a system which has developed
strains and cracks, our overriding interest in a viable
international monetary system has impressed upon us the
need to achieve a code of conduct that insists upon a new
consistency between the action -- or nonaction — of each
individual nation and the requirements of the overall opera
tion of the system. By this we mean, for instance, the
system's tolerance for payments imbalances must be consistent
with the availability of reserves to finance such imbalances.
By this we mean that if there is to be a certainty in settle
ment arrangements, for example by general convertibility,
that must be balanced by a certainty in adjustment arrange
ments, assuring that imbalances are effectively eliminated
by incentives for both surplus and deficit countries to act.
In the trade field we know that we also have a complex
negotiation ahead. That negotiation must fulfill simul
taneously a number of criteria:
6
The overriding objective of achieving and maintaining
a freer movement of goods, services, and capital must be
respected?
That goal, expressing our interdependence, must be
achieved in a manner consistent with compelling national
social, political, and economic priorities;
Those trading practices which depart most seriously
from accepted principles should be subject to the greatest
scrutiny;
An overall agreement can only be reached if it pro
vides measurable benefits to each participant?
An opt-mum overall package can be achieved only by
looking to the results of the whole and avoiding concentrating
attention only on the direct benefits in each subsector.
These criteria, it seems to me, are broadly expressed
in the understandings reached after the Smithsonian Agree
ment among the U.S., the European Community, and Japan to
negotiate "on the basis of mutual advantage and mutual
commitment with overall reciprocity."
With those criteria in mind when I was last in Europe
in March, I discussed with a number of governments repre
sented here our objectives for the multilateral trade
negotiations scheduled to begin this fall. Subsequently,
there have been further consultations on the goal of broad
and flexible negotiating mandates.
The U.S. trade bill is now moving ahead. We have pre
sented our testimony before the U.S. Congress, and we have
received a favorable response both in Congress and throughout
the United States. We expect to be in a position to move
ahead with the scheduled negotiations this fall.
We hope that others will also obtain adequate mandates
for the negotiations. And we hope — and expect — that
the various negotiations now underway, such as those under
Article 24-6 of GATT relating to EC enlargement, will be
completed before we launch broader discussions on trade
reform. These negotiations involve every country repre
sented here and success in dealing with those issues will
help lay the groundwork for success in subsequent multi
lateral trade negotiations.
7
By September, when the GATT contracting parties meet
in Tokyo, the negotiations on EC enlargement should be
completed, and all parties to the multilateral trade negotia
tions should be ready to proceed with the complex and vital
work that will still lie ahead. I am convinced that those
negotiations should — and can — result in a major movement
in the direction both of reduction and elimination of indus
trial and agricultural tariff and nontariff barriers.
In the area of international investment as in the trade
area, we have too often tended to lose sight of the fact
that international capital flow can also contribute to the
welfare of both parties to the transaction. If we are to
obtain the maximum benefit, however, we must be sure that
the advantages are not reduced by distorting government
policies seeking advantage at the expense of others.
Short-term capital flows are being examined in connec
tion with monetary reform. Some aspects of long-term
investment, direct and portfolio, are covered by the OECD
capital movements code. The OECD has here set a precedent
for establishing principles and machinery for an important
area of investment. In some respects, however, particularly
investment incentives and impediments, there does not now
seem to be a really effective international means of examin
ing and resolving issues.
International investment and trade flows can be dis
torted by policies and regulations which apply directly to
transfers of capital across borders. They can also be
distorted by domestic policies which affect the profit
ability of investment in particular industries or regions.
We recognize that some of these policies have valid social
objectives — but when those policies have consequences for
others, they are as proper a matter for international con
cern as trade policies.
We need new principles, new mechanisms, new information
systems, in short, international guidelines for investment
which will alert us to conflicts of interest among government
Policies affecting investment, and which will provide
standards by which these policies can be assessed and
conflicts reduced.
I urge that we develop this new kind of international
cooperation in the OECD. The executive committee in special
session has made a beginning and provides a means for guiding
8
the necessary technical work. I believe we should have a
new OECD cooperative framework for reviewing international
investment problems in place when the forthcoming trade
negotiations have reached completion.
In the coming months we also face the challenge of
bringing some real meaning into the concept of international
cooperation in the energy area. Concern has been expressed
that the growing demands for energy, and the heavy concen
tration of supplies in a few countries, may pose a threat
to the orderly advance of the world economy. Yet there
seems to be some reluctance to accept the view that a co
operative approach is the best approach.
I believe that the energy outlook poses real and im
portant problems for us all. But I also believe that
governments and industry working together will find work
able solutions. In the U.S., the proposals put forward by
the President represent strong action to improve our energy
balance. Yet there is also scope for international coopera
tion. This is not, I recognize, an easy task, for we must
not only devise understandings among ourselves as to how we
will approach these problems, we must also insure that
cooperation among a group of consuming countries does not
turn into confrontation with producing countries. Let us
not, however, shirk the analysis because of awareness of
the limits.
We have a useful precedent In the work the OECD had
already undertaken as a focus and a forum for international
effort to help the poorer parts of the world realize their
full potential. When the Development Assistance Committee
was formed there could also have been concern that such a
grouping might appear as a ganging-up by the developed
countries and thus as a cause for concern by the developing
countries. In practice, cooperation within the DAC frame
work has enriched the relationships among the developed
countries and with the developing countries.
More recently, the OECD has turned its attention to
providing the thrust and the mechanism for an international
sharing of experiences in dealing with environmental and
other problems posed by rising populations and rising
living standards and it has explored means of avoiding
trade distortions arising therefrom. This interchange
contributes to the well-being of all nations.
9
In sum, I suspect there can be substantial agreement
on a number of central economic goals and propositions
that can provide a reference point for the negotiations
underway and planned.
We are committed to promoting the growth and
internal stability of our economies in a manner
which does not impede the ability of others to
do likewise and which respects the diversity of
our national insitututions and character.
We seek an open and equitable monetary and
trading system that recognizes equal rights
and equal responsibilities for all nations.
The international community must find better
means to achieve effective discipline for
insuring prompt and effective adjustments of
payments imbalances, the cooperative manage
ment of international reserves, and stable and
orderly exchange markets.
We look toward progressive reduction of trade
barriers to permit nations to participate more
fully in the mutual gain from the interchange
of our services, and on both industrial and
agricultural goods. Similarly, capital should
be permitted to flow on a secure basis to the
areas of greatest need and greatest productivity
on a basis of non-discrimination.
In instances where international transactions
bring internally disruptive changes, we should
not respond by preventing adjustment but rather
by seeking an agreed system of safeguards to
cushion the impact and to facilitate smooth
adjustment.
—
We want to make more effective efforts to help
poorer nations to realize their full potential,
whether by the provision of capital, or know-how,
or improving their access to our markets on a
non-discriminatory basis.
We should seek to work with each other to develop
more effective ways to protect the environment,
develop our energy resources, and to meet the
other challenges posed by rising populations and
10
industrialization while holding to the cardinal
principle that one nation not seek national
benefit at the expense of another.
Finally, and essential to all the rest, we must
not permit problems to arise or persist among
us for want of understanding of one another's
views, or because of inadequate institutional
means of resolving them.
Here lies the special value of the OECD. Through the
frequent and candid consultations it promotes, nations must
consider the views of one another before taking decisions
which affect others. It can stimulate us to find solutions
to problems as they arise, and not when they have reached
the stage of crisis and conflict. It serves as a constant
reminder to us all that we have much to gain from coopera
tion.
I urge the OECD to display continued vigor in this
vital task.
0 O0
ÓeparlmentoftheTREASlIRY^
-----KINGTON,
O.C. 20220
TELEPHONE W i t Z M l P “
-
7 .
FOR IMMEDIATE RELEASE
June 7, 1973
TREASURY ANNOUNCES ACTIONS ON TWO INVESTIGATIONS
UNDER THE ANTIDUMPING ACT____________
Assistant Secretary of the Treasury Edward L. Morgan
announced today actions on two investigations under the
Antidumping Act of 1921, as amended.
In the first case there is a withholding of appraisement
pending completion of the antidumping investigation, and
in the second case there is a finding of dumping. These
decisions will appear in the Federal Register of Friday,
June 8, 1973.
In the first case, Assistant Secretary Morgan announced
that the Treasury is withholding appraisement on calcium
pantothenate from Japan. Calcium pantothenate is a member
of the B-complex family of vitamins and is produced in
both U.S.P. and feed grades. The U.S.P. grade is sold for
human consumption in the form of multi-vitamin tablets, and
the feed grade is used as a food supplement for swine and
poultry. Under the Antidumping Act, the Secretary of the
Treasury is required to withhold appraisement whenever he
has reasonable cause to believe or suspect that sales at
less than fair value may be taking place. A final Treasury
decision in this investigation will be made within three
months. If a determination of sales at less than fair value
were made in this investigation, the case would be referred
to the Tariff Commission, which would consider whether an
American industry was being injured. If both sales at less
than fair value and injury were shown, dumping duties would
be assessed as of the date of withholding of appraisement.
During calendar year 1972 imports of calcium pantothenate
from Japan totaled approximately $800,000.
In the second case, the Treasury has issued a dumping
finding with respect to stainless steel plate from Sweden.
This plate is used in the manufacture of a variety of
scientific and industrial equipment. On February 2, 1973,
OVER
-
2
-
the Treasury Department advised the Tariff Commission that
stainless steel plate from Sweden was being sold at less
than fair value within the meaning of the Antidumping Act.
On May 1, 1973, the Tariff Commission determined there was
injury to a U.S. industry. In such situations the dumping
finding automatically follows as the final administrative
requirement in antidumping investigations. Dumping duties will be
assessed on imports of this merchandise which have not been
appraised and on which dumping margins are found. Shipments of
stainless steel plate produced by Stora Kopparbergs Bergslags AB,
Falun, Sweden, are excluded from this finding of dumping since
100 percent of Swedish export sales during the period under
consideration were examined and, subsequent to the publication
of the Determination of Sales at Less than Fair Value it was
determined that the home market prices of Stora Kopparbergs*
merchandise were lower than the exporter's sales price of
such or similar merchandise in every instance. During the
period of January through June 1972 imports of stainless steel
plate from Sweden were valued at approximately $3.6 million.
# # #
UNITED STATES SAVINGS BONDS ISSUED AND REDEEMED THROUGH
May 3 1 , 1973
(Dollar amounts in millions - rounded and will not necessarily add to totals)
D ESCR IP T IO N
M ATU R ED
■ Series A -1935 thru n-1941
■ Scries F and n-1941 thru 1952
■ Series J and K-1952 thru 1957
A M O U N T IS S U E D ^ /
5,003
29,521
AMOUNT
r ed eem ed
4
!/
AM OUNT
o u t s t a n d in g
!/
% O U fsf*rtkN DING
O F A M O U N T IS S U E D
.1 0
.0 7
.2 1
4 ,9 9 9
2 9 ,4 9 8
3 ,7 4 6
5
22
1 ,7 3 6
7 ,6 5 1
1 2 ,3 2 2
1 4 ,3 1 1
1 1 ,1 2 4
4 ,9 1 8
4 ,5 5 7
3 ,0 4 3
2 ,9 8 9
2 ,7 8 6
2 ,5 0 9
2 ,3 0 9
2 ,1 9 2
1^687
115
364
185
833
1 ,3 1 6
1 ,5 9 8
1 ,4 0 7
796
889
998
1 ,0 6 8
990
857
922
1 ,1 3 7
1 ,2 1 2
1 ,3 0 3
1 ,2 9 2
1 ,2 6 8
1 ,3 3 3
1 ,2 8 8
1^389
1^538
1 ,5 8 1
1 ,9 7 7
1 ,9 1 8
1 ,9 1 2
2 ,1 9 0
2 ,1 7 4
2 ,1 1 8
2 ,1 0 3
2 ,5 1 9
3 ,3 6 2
4^420
1 ,5 5 8
91
1 9 1 ,0 9 5
1 3 9 ,5 5 6
5 1 ,5 3 9
2 6 .9 7
5 ,4 8 5
9 ,0 7 0
3 ,9 6 6
2 ,9 9 6
1,651
5 ,9 4 2
3 0 .1 0
6 5 .5 1
j
1 4 ,5 5 5
6 ,9 6 2
7 ,5 9 3
5 2 .1 7
!
2 0 5 ,6 5 0
1 4 6 ,5 1 8
5 9 ,1 3 2
2 8 .7 5
3 8 ,2 7 8
2 0 5 ,6 5 0
2 4 3 ,9 2 8
3 8 ,2 4 3
1 4 6 ,5 1 8
1 8 4 ,7 6 1
35
5 9 ,1 3 2
.0 9
2 8 ,7 5
2 4 .2 6
3 ,7 5 4
8
■ in m a t u r e d
I
Series E-^ :
1,922
1941
8 ,4 8 3
1 3 ,6 3 8
1 5 ,9 0 9
1 2 ,5 3 1
5 ,7 1 4
5 ,4 4 6
5 ,6 4 7
5^603
4 ,9 1 8
4 ,2 5 4
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
1968
1969
1970
1971
1972
1973
Unclassified
ell
bel
3^538
5^109
5^208
5^428
5^248
3 ,9 7 2
3 ,9 9 6
4 ,1 2 6
3^,956
3 ,6 8 5
3^,511
3^258
3^185
3^127
S H
3 ,1 2 3
3 ,0 5 3
4,664
4 ,5 3 8
5 ,1 0 0
4 ,9 7 1
4 ,8 5 8
5 ,2 3 3
5 ,1 6 3
4 ,9 0 4
4 ,6 1 2
4 ,8 2 8
5 ,5 5 5
6 ,1 0 6
1 ,6 7 3
455
Series H (1952 thru May, 19591-^
H (June. 1959 thru 1973'!
Total Series H
Total Series E and
l
4,460
A, 953
4^843
4 ,5 4 6
4 ,5 7 4
Total Series E
h
( Total matured
AH Series < Total unmatured
( Grand T o t a l
4,648
4^536
3 ,9 2 8
3 ,3 9 7
2,946
5 9 ,1 6 7
“oesaccruedd i s c o u n t .
C o a
P
red6lnption v«/Ue.
onof o w n e r
b o n d s m a y b e h e l d a n d w i l l e a r n i n t e r e a t fo r a d d i t i o n a l p e r i o d s a f t e r o r i g i n a l m a t u r i t y d a t e s .
Form PD 3812 (Rev. Jan. 1973) —Dept, of the Treasury —Bureau of the Public Debt
.
9 .6 3
9 .8 2
9 .6 5
1 0 .0 4
1 1 .2 3
1 3 .9 3
1 6 .3 2
1 7 .6 7
1 9 .0 6
2 0 .1 3
2 0 .1 5
2 0 .6 7
2 2 .2 5
2 3 .2 7
2 4 .0 1
2 4 .6 2
2 5 .6 0
2 7 .5 2
2 8 .3 3
3 0 .3 7
3 2 .9 8
3 4 .8 4
3 8 .7 6
3 8 .5 8
1
i
39.36
1
4 1 .8 5
4 2 .1 1
j
43.19
4 5 .6 0
5 2 .1 7
6 0 .5 2
7 2 .3 9
9 3 .1 3
2 0 .0 0
1
f
J
I
1
|
DepartmentofthefREASlIRY
KINGTON, B C. 20220
TELEPHONE W04-2041
3<fl
FOR RELEASE
FRIDAY, JUNE 8, 1973
INDEPENDENT FIRMS AWARDED GRANTS
TO IMPORT 1.2 BILLION GALLONS OF FUEL
Ninety-one independent marketers and refiners
were awarded grants to import almost 1.2 billion
gallons of crude oil and refinery products in May,
according to William E. Simon, Deputy Secretary of the
Treasury and Chairman of the President's Oil Policy
Committee.
The grants were made by the Oil Import Appeals
Board which is comprised of representatives from the
Departments of the Interior, Justice, and Commerce,
and whose acting chairman is Daniel Harris.
The new authority provided the Board on May 1, 1973
by Presidential Proclamation has enabled it to be more
responsive to the requests of independent oil firms
which may need to import to keep up with customer demand.
In the four months from January 1 through April 30,
1973, the Board made a total of 170 such awards.
By comparison, in all of 1972, the Board made less
than 100 such awards.
S-228
2
Secretary Simon also announced the commitment of the
Board's Acting Chairman to act promptly on all new petitions
for import authority.
Mr. Harris said that many decisions
could be made within a week, and most within two weeks,
except those requiring a hearing.
The Oil Import Appeals Board has two basic functions.
It:
1.
gives licenses to independent petroleum marketers
or refiners to import crude oil and refinery products free
of license fees provided these firms can demonstrate hardship
or emergency supply situations;
2.
provides for a refund of the import license fee to
independent marketers who would have qualified originally for
an exemption, but who needed to import the oil or gasoline
immediately.
Under the Board's new authority, it can be fully responsive
to the needs of its petitioners because all limitations as to
size of award have been removed.
Thus far this year, the Board
has received 336 petitions for the free import authority, and
has granted 261 of these.
or were withdrawn.
Thirty-four have either been denied
As of May 31, the Board had 41 petitions
pending and expected to be decided by mid-June.
The 1.2 billion gallons represents the total volume of
fuel which the 91 firms can import through the end of 1973;
it includes some 625 million gallons of finished product
(including gasoline and No. 2 fuel oil), and 558 million
3
gallons of crude oil.
iT \
"This amount of extra fuel which the
Board has allowed to be imported without the usual fee is
equivalent to the amount of gasoline needed by about 1,200
high-volume service stations for the entire year," Simon said,
"and will make a major contribution toward easing the fuel
short-fall we are experiencing."
In approving applications based on hardship, the Board
considers the petroleum needs of each firm's customers, the
needs of the community, and the protection of the public
interest in preserving the independent segment of the petroleum
industry.
Major oil companies may obtain Board awards also.
However,
they must first demonstrate their inability to obtain, by
exchange, import licenses already distributed, and their
willingness to supply independent refiners and marketers.
Importers not holding fee-exempt licenses must pay 10-1/2 cents
a barrel for crude oil, 52 cents a barrel for gasoline and 15
cents for all other petroleum products.
Because the independents
are receiving a major share of the grants from the Board,
this will help them to import oil at less cost than the large
companies.
We are hopeful, Simon said, that as a result of this
additional market advantage given to independents, the majors
will have greater incentive to provide them crude oil and products.
However, our overall goal is to assure the consumer adequate
supplies of petroleum products at lowest possible cost.
-oOo-
HINGTON, D C. 20220
TELEPHONE W 04-2041
“ U
“
*-*
FOR RELEASE
FRIDAY, JUNE 8, 1973
PUBLIC HEARINGS ON NATIONWIDE VOLUNTARY FUEL ALLOCATION
PROGRAM TO BEGIN JUNE 11
William E. Simon, Deputy Secretary of the Treasury
and Chairman of the President's Oil Policy Committee,
today announced that four days of public hearings on the
nationwide voluntary crude oil and refinery product
allocation program will begin Monday, June 11.
The hearings, to be held in the General Services
Administration Auditorium, 19th and F Streets, Northwest,
Washington, will include testimony from a wide range of
participants.
The Oil Policy Hearing Committee will listen to testimony
of such organizations as the National Council of Farmer
Cooperatives, the American Truckers Association, Phillips
Petroleum, the Independent Petroleum Association of America,
Consumer
Federation of America, the Independent Fuel Terminal
Operators Association, and the National League of Cities, to
name but a few.
In addition to hearing those who testify
publicly, the Committee will receive written comments from
many others.
"We want a wide range of ideas on which to make
decisions," Simon said.
S-2 2 9
2
The Hearing Committee has also allowed an extra 1-1/2
hours at the end of each formal session, for further
questioning of witnesses by the Committee.
The Secretary said that the hearings are designed
to provide the grassroots input necessary to adjust the
voluntary program, so that the needs of the American public
can best be served; also, so that the hearings can take
into account the proposed legislation calling for a mandator
fuel allocation program.
Mr. Simon has asked witnesses to consider two issues
which may not have been completely clear when the hearings
were first announced on May 22:
First, based on the experience of the past weeks,
how can the voluntary program be improved and made
more workable.
Second, do we need a mandatory program; and if so,
how should it be structured and who should be in
charge of it.
The list of witnesses follows:
June 11
Deputy Secretary of the Treasury William E. Simon
Senator Carl T. Curtis (Nebraska)
National Petroleum Council
Autotronic Systems, Inc.
Independent Refiners Association of America
Independent Fuel Terminal Operators Association
National Oil Jobbers Council
Independent Refiners Association of California
3
Beacon Oil Company
Fletcher Oil and Refining Company
Husky Oil Company
Independent Petroleum Association of America
An Independent Producer
Signal Companies, Inc.
June 12
Kerr-McGee Corporation
C o n t i n e n t a l Oil C o m p a n y
Western Hemisphere Petroleum Division
Citi e s S e r v i c e C o m p a n y
C l a r k Oil and R e f i n i n g C o m p a n y
A m e r i c a n P e t r o l e u m Re f i n e r s A s s o c i a t i o n
National LP-Gas Association
H u d s o n Oil C o m p a n y
T r e s l e r Oil C o m p a n y
M u r p h y Oil C o m p a n y
Phillips Petroleum Company
June 13
C o n g r e s s m a n E d w a r d Y o u n g (South Carolina)
G o v e r n o r R o b e r t R a y (Iowa)
Governor William Waller (Mississippi)
SIGMA
Petrochemical Energy Group
Standard Oil Company of Indiana
Tenneco Oil Company
Union Oil Company of California
Standard Oil Company of California
Exxon Company, U.S.A.
Consumer Federation of America
June 14
N a t i o n a l A s s o c i a t i o n T r u c k Sto p O p e r a t o r s
N a t i o n a l L e a g u e of C i ties
A s s o c i a t i o n of A m e r i c a n R a i l r o a d s
American Truckers Association
National Rural Electric Cooperative Association
National Association of Motor Buses
American Transit Association
National Council of Farmer Cooperatives
National Broiler Council
International Taxi Association
National Forest Products Association
National Solid Waste Management Association
Air Transport Association of America
Jones and Laughlin Steel Company
General Council of Petroleum Retailers
Representatives of the Construction Industry
-oOo-
U. S . TREASURY DEPARTMENT
SECRETARY GEORGE SHULTZ:
CONFERENCE
LUNCHEON
ADDRESS TO THE INTERNATIONAL ■ ICHETARY
HOTEL INTER-CONTINENTAL
Paris3 Franca
June 69 1973
[PI e a s e n o t e :
T r a n s c r i p t i o n i n c l u d e s » p s r i n s t r u c t i o n s ; , f-nly
Hr. S h u l t z ’ s “o f f - t h e - c u f f " r e m a r k s , t h e unprepared o a r t c f t h e
S e c r e t a r y ’ s p r e s e n t a t i o n s p r i o r t o h i s c o n s e n t s on energy«]
CHAIR:
. . . . I ' m n o t one t h a t b e l i e v e s t h a t t h e S e c r e t a r y
o f t h e T r e a s u r y o f t h e United S t a t e s r e q u i r e s an e l a b o r a t e i n t r o d u c
tion.
I ' l l o n l y say t h a t he has c a r r i e d very heavy r e s p o a s i b i l i t i e s
in t h e c u r r e n t a d m i n i s t r a t i o n In Washington.
He has s e r v e d with
g r e a t d i s t i n c t i o n , bo th as S e c r e t a r y o f Labor and as A s s i s t a n t
to t h e P r e s i d e n t In c h a r g e o f c o o r d i n a t i n g bo th d o m e st ic and
i n t e r n a t i o n a l economic p o l i c y .
The New York Times r e f e r r e d t o
him r e c e n t l y as Mr. N i x o n 's economic s u p e r s t a r .
We're indeed p r i v i l e g e d to have w i th us t h e Honorable
George S h u l t z , S e c r e t a r y o f t h e T r e a s u r y o f t h e United S t a t e s .
G eo r g e.
[A pplause.]
SECRETARY GEORGE SHULTZ:
I made an agre ement with t h e
chairman t h a t , w h i l e I d o n ' t mind s p e a k in g w h i l e you a r e e a t i n g
d e s s e r t , I h a t e l i k e t h e d e v i l to speak w h i l e t h e y ' r e servinc?
and wandering a l l ar ou nd.
So w e ' l l w a i t t i l l th ey g e t t h i s s e r v e d .
CHAIR:
Okay.
You s e e who runs t h i n g s a t t h e s e m e e t i n g s .
sa y
t hR
e y ' r e c o n t i n u i n g to
to s e r v e d e s s e r t
.
B May
H I I- —
* while M
t h a t t h e r e a r e a t your p l a c e s i n s t r u m e n t s f o r s i m u l t a n e o u s t r a n s i a tl on *
I f to e r e i s n ' t one n e a r you and you need o n e , one o f t h e s e
l o v e ly g i r l s w i l l g e t one f o r y o u . . .
SEGRETARY SHULTZ:
. . . h e r e a t t h e head t a b l e a n : , to
some e x t e n t , d u ring t h e r e c e p t i o n abo ut what I should t a l k a b o u t ,
And a t t h e T r e a s u r y we worked h a r d , and X worked h a r d , a; d we
nave deve lo ped a s p e e c h , a darn good s p e e c h .
And t h e chairman
says I s h o u l d n ' t g i v e i t ; y o u ' r e no t i n t e r e s t e d in t h i s s u b j e c t ;
2
and wants me t o t a l k a b o u t t h e I s s u e s o f t h e day , which I take
i t a r e t h e U. S. economy, our i n f l a t i o n , and t h e c u r r e n t problems
in ex ch ang e m a r k e t s .
So t h a t throws me j u s t a l i t t l e b i t , b e c a u s e 1 d i d n ' t
come prepa red t o do t h a t .
And I s e e t h a t you do have q u i t e a
l i t t l e on your program abo ut I n t e r n a t i o n a l monetary r e f o r m , and
such t h i n g s as t h a t .
So I ' l l make a deal with you.
Recognizing
t h a t p r o b a b ly my sample o f t h r e e o f your i n t e r e s t s and l a c k of
i n t e r e s t i s r e a l l y a c c u r a t e , I ' l l t a l k a l i t t l e b i t about what
you a p p a r e n t l y want t o h e a r a b o u t , a lt h o u g h I d o n ' t t h i n k I have
a n y t h i n g t o sa y beyond what Herb S t e i n and, l a t e r , Paul Volcker
w i l l s a y , i f you w i l l be p a t i e n t enough t o l i s t e n t o what I want
t o t e l l you and t o a t l e a s t c o n s i d e r t h e s u g g e s t i o n t h a t I want
t o make t o you in a f i e l d t h a t I t h i n k i s v e r y im p o rt an t to you,
t o t h e government o f t h e U. S . and o t h e r g o v e r n m e n ts , and a l s o ,
i n i t s way, t o i n t e r n a t i o n a l monetary d e v e lo p m e n t s .
So i s that
a d eal?
[A pplause.]
Now, f i r s t o f a l l , a b ou t t h e U. S . economy and i n f l a t i o n ,
l e t me sa y f i r s t and c a t e g o r i c a l l y , una mb igu ous ly, we a r e determined!
t o b e a t t h e i n f l a t i o n problem.
We have been working a t t h i s
i n t h e a d m i n i s t r a t i o n from Day 1*
We have t r i e d t o adapt our
t a c t i c s w i t h i n a g e n e r a l s t r a t e g y t o t h e problems as we have
s e e n them.
We c o n t i n u e t o do t h a t .
And we have had a reasonable
amount o f s u c c e s s .
We have had a bad f i r s t q u a r t e r , but we are
as de te rm in ed as we can be t o s u c c e s s f u l l y deal with t h a t problem.
Now as f a r as s p e c i f i c t h i n g s a r e c o n c e r n e d , people
f o c u s t h e i r a t t e n t i o n on t h e sys tem o f c o n t r o l s .
And I was interests
to see
j u s t pic ke d up - - n o t h i n g , Tony, ab out t h e B r i t i s h —
£ pi ck ed up t h e F i n a n c i a l Times t h i s morning when I go t h e r e ,
and I s e e t h e h e a d l i n e , "U. S . May I n t r o d u c e Economic C o n t r o l s . "
I
W e l l , t h a t ' s p a r t o f t h e problem.
B e c a u s e we have economic controls!
I t i s n ' t as though we d o n ' t have any and w e ' r e t h i n k i n g about
having them.
And I t h i n k t h i s , 1n a way, t y p i f i e s our problem,
' c a u s e I t h i n k t h i s i s n o t o n l y a B r i t i s h h e a d l i n e ; i t i s , in
p a r t , an American h e a d l i n e .
And i t i s a d i f f i c u l t t h i n g to manage
when you s t a r t with a f r e e z e and you have t h e idea - t h a t t h i s
i s n o t a d e s i r a b l e , way o f l i f e , and you want t o unwind from i t ,
b u t , n e v e r t h e l e s s , you want t o keep t h e good i n g r e d i e n t s o f i t
and make them as u s e f u l as you can f o r as long a s you ca n. And
i t always seems t o p e o p l e t h a t a l l o f a sudden you d o n ' t have
co n tro ls.
But we do have c o n t r o l s , and t h e y have been adapted
t o t h e s i t u a t i o n , and w e ' l l c o n t i n u e t o do t h a t .
And l e t me j u s t remind you t h a t in t h e f i e l d o f food
p r i c e s , we have had a s t r o n g mandatory c o n t r o l program in Phase
II.
f t b a s i c a l l y c o n t i n u e s , as i t was , in Phase I I I .
I t hasn t
been changed a p p r e c i a b l y .
Food p r i c e s c o n s t i t u t e t h e b i g g e s t
p a r t o f our problem.
But t h e n a t u r e o f t h a t problem d o e s n ' t
r e a l l y y i e l d to c o n t r o l s very e a s i l y .
T h a t ' s t h e problem. But
3
n e v e r t h e l e s s , as f a r as t h e c o n t r o l s a r e c o n c e r n e d , we have c o n t r o l s
on food p r i c e s .
We have c o n t r o l s in t h e h e a l t h c o s t a r e a , which
i s a n o t h e r b i g problem a r e a .
We have c o n t r o l s , and t h i s has
been ve ry s u c c e s s f u l , I t h i n k , in t h e f i e l d o f c o n s t r u c t i o n .
We now have mandatory c o n t r o l s in t h e f i e l d o f p e t r o l e u m .
We
have a c e i l i n g on red meat p r i c e s .
We have a p r e - n o t i f i c a t i o n
r e q u ir e m e n t f o r l a r g e f i r m s when t h e i r a v e r a g e p r i c e s i n c r e a s e
by more t ha n one and a h a l f p e r c e n t .
So I t h i n k by most s t a n d a r d s t h a t you might up hold,
we have a s t r o n g and co m pr eh en siv e sy stem o f c o n t r o l s .
And i t
may be t h a t we have been a d m i n i s t e r i n g them t oo q u i e t l y .
We
have been a d m i n i s t e r i n g them a s s t r o n g l y and f a i r l y as we c a n .
But we h a v e n ' t been a d m i n i s t e r i n g them f l a m b o y a n t l y , and perhaps
we should be so t h a t we g e t a t t e n t i o n .
But I would have t o say
i t ' s hard t o g e t a t t e n t i o n t h e s e days f o r something t h a t you
do.
But anyway, we a r e doing t h a t .
We in t en d t o c o n t i n u e doing
that.
We w i l l g e t a l l t h e m i l e a g e we can out o f t h e c o n t r o l
sy stem.
And where we s e e a d a p t a t i o n s t h a t a r e w o r t h w h i l e , w e ' l l
use them.
T ha t d o e s n ' t mean w e ' r e going t o do s i l l y t h i n g s .
We're n o t .
But t h a t ' s number on e .
We're no t a f r a i d o f c o n t r o l s ;
w e ' r e u s in g them.
But we have always had t h e view in t h e a d m i n i s t r a t i o n ,
and I t h i n k most pe op le who have s t u d i e d t h e s u b j e c t , no m a t t e r
how o r i e n t e d t o c o n t r o l s t h e y a r e , have t h e view t h a t t h e e s s e n c e
o f t h e problem r e a l l y l i e s in your f i s c a l and monetary p o l i c y .
And i f you c a n ' t g e t t h a t in p l a c e and keep i t in p l a c e , y o u ' r e
not going t o g e t anywhere wi th t h e c o n t r o l s .
So we've t r i e d
t o keep o u r s e l v e s r i v e t e d on t h a t .
And I d o n ' t have t o say a n y t h in g
about t h e d e v o t i o n t o having p r o s p e r i t y w i th r e a s o n a b l y s t a b l e
p r i c e s t h a t my f r i e n d Ar th ur Burns h a s .
But l e t me j u s t speak
about t h e b u d g e t .
We've c a r r i e d on a f i e r c e f i g h t on t h e b u d g e t .
We a r e
going t o b r i n g t h e 1973 budget in a t two hundred and f i f t y b i l l i o n ,
as a p r e s i d e n t i a l c a n d i d a t e once s a i d , " k i c k i n g and s c r e a m i n g " ;
but i t ' s coming In a t two hundred and f i f t y b i l l i o n .
I believe
we have changed t h e whole t o n e towards spending in t h e United
S t a t e s , so t h a t we have a p r e t t y good c h a n c e , a darn good c h a n c e ,
o f h o ld in g 1974 o u t l a y s t o t h e two hundred and s i x t y - e i g h t , o r
s o , l e v e l , as proposed in t h e P r e s i d e n t ' s b u d g e t .
And as t h e
economy has moved up , r e v e n u e s have r i s e n , and we h a v e , in f i s c a l
* 74, a s i t u a t i o n where we have moved p r a c t i c a l l y i n t o a p o s i t i o n
of a b a l a n c e d b u d g e t .
Now, beyond t h a t in te rm s o f t h e f i s c a l swing o r f i s c a l
d i s c i p l i n e , j u s t in t er m s o f t h e d o l l a r s , i t ' s a b o u t a f i f t e e n
b i l l i o n d o l l a r f i s c a l sw in g.
In te r m s o f t h e f u l l employment
bu d ge t, we moved from a s l i g h t d e f i c i t t o ab o u t a f i v e b i l l i o n
d o l l a r s u r p l u s , w h i c h , on t h e w h o l e , we t h i n k i s a p p r o p r i a t e .
But t h a t ' s bud get p o l i c y , and t h a t i s a budget p o l i c y c a l c u l a t e d
to de al wi th t h e i n f l a t i o n pr ob le m , and i t ' s a budget p o l i c y
4
f o r which we have f o u g h t .
And s o r t o f t h e measure o f t h e f a c t
t h a t w e 'v e f o u g h t i s t h e amount o f o p p o s i t i o n t o t h e e f f o r t that
has been en g en d er ed .
But n e v e r t h e l e s s , 1n term s o f o v e r a l l policy.
I t h i n k 1 t ' s good.
Now we know t h a t , In te rm s o f I n f l a t i o n , a n o t h e r big
I t e m , p a r t i c u l a r l y when you t a l k ab ou t something l i k e food prices,
Is supply.
The o b j e c t i s n ' t t o have low p r i c e s and no commodities
t o buy a t t h o s e p r i c e s .
The o b j e c t i s t o have r e a s o n a b l e prices
with t h e co mmodities t h a t you want t h e r e .
So y o u ' v e g o t to concen
t r a t e on s u p p l y , and t h a t 1s what we have done.
Me have released
from s e t - a s i d e o v e r f o r t y m i
@FedFRASER