Full text of Press Releases of the United States Department of the Treasury : Volume 192

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Departmentof
WASHINGTON. D C 20220

TELEPHONE WO4-2041

I
FOR IMMEDIATE RELEASE

September 1, 1974

SIMON ANNOUNCES HIGH LEVEL
U.S. - ISRAELI MEETINGS
Secretary of the Treasury William E. Simon announced
today that three of the subcommittees operating under the
Joint U.S. - Israel Committee for Investment and Trade will
be held here in Washington September 4 through September 6.
’’These meetings," Simon noted, "are an important step
in our efforts to add a new dimension to the long-standing
framework of economic relations between Israel and the U.S."
Meetings of the^subcommittees on Capital Investment,
Trade, and Raw Materials are being held to prepare for the
inaugural meeting of the Joint Committee in Washington
next November. The subcommittee on Research and Development
will meet in Israel in the near future.
Simon noted that "in addition to exploring ways of
facilitating foreign private investment in Israel, and moving
to expand trade between Israel and the U.S., we will be
examining means to help Israel meet its raw material needs."
The Joint Committee and the four working subcommittees
are the result of discussions Simon held with Prime Minister
Rabin and Finance Minister Rabinowitz during Simon’s visit
to Israel last July, and were announced in a Joint Statement
issued in Israel July 18 at the end of the visit.
Treasury Secretary Simon ana Israeli Finance Minister
Yehoshua Rabinowitz are co-Chairman of the Joint Committee.
Assistant Secretary of the Treasury Gerald L. Parsky is
Executive Secretary of the Joint Committee and will have a
key role in the working level meetings held in Washington.
Members of the U.S. delegation will include senior
officials from the State and Treasury Departments as well
as the Departments of Commerce and Agriculture, and the
Office of the Special Representative for Trade Negotiations.
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DepartmentoftheTREASURY
WASHINGTON, DC 20220

TELEPHONE W04-2041

September 3, 1974

FOR IMMEDIATE RELEASE
TREASURY?S WEEKLY BILL OFFERING

The Treasu / De; ¿rtment, by this public notice, invites tenders for two
series of Treasury bills to the aggregate amount of $4,400,000,000, or thereabouts,
to be issued

September 12, 1974, as follows:

91-day bills (to maturity date) in the amount of $2,600,000,000,
representing an additional amount of bills dated

June 13, 1974,

or thereabouts,
and to mature

December 12, 1974 (CUSIP No. 912793 VC7) , originally issued in the amount of
$1,902,535,000, the additional and original bills to be freely interchangeable.
182-day bills for $1,800,000,000, or thereabouts, to be dated September 12, 1974,
and to mature March 13, 1975

(CUSIP No. 912793 VZ6).

The bills will be issued for cash and in exchange for Treasury bills maturing
¿September 12, 1974, outstanding in the amount of $4,404,980,000,

of which Government

accounts and Federal Reserve Banks, for themselves and as agents of foreign and
International monetary authorities, presently hold $2,907,835,000.

These accounts

| may exchange bills they hold for the bills now being offered at the average prices
of accepted tenders.
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 in

denominations of $10,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000

I

; (maturity value) and in book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to the closing
| hour, one-thirty p.m. , Eastern Daylight Saving time, Monday, September 9, 1974.
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.

■ n o t be used.

Fractions may

It is urged that tenders be made on the printed forms and forwarded

■ i n the special envelopes which will be supplied by Federal Reserve Banks or Branches

■ on application therefor.
Banking institutions and dealers who make primary markets in Government
■securities and report daily to the Federal Reserve Bank of New York their positions
(OVER)

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with respect to Government securities and borrowings thereon may submit tenders
for account of customers provided the names of the customers are set forth in
such tenders.
own account.

Others will not be permitted to submit tenders except for their
Tenders will be received without deposit from incorporated banks and

trust companies and from responsible and recognized dealers in investment securitiei
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 respe
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 accepted
in full at the average price (in three decimals) of accepted competitive bids for
the respective Issues.

|

Settlement for accepted tenders in accordance with the

bids must be made or completed at the Federal Reserve Bank on September 12, 1974,
in cash or other immediately available funds or in a like face amount of Treasury
bills maturing September 12, 1974.
treatment.

Cash and exchange tenders will receive equal

Cash adjustments will be made for differences between the par value of I

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 I
for the bills, whether on original issue or on subsequent purchase, and the amount 1
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.

TREASURY Ìf

Departmentofthe
iSHINGTON, D.C. 20220

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TELEPHONE
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FOR IMMEDIATE RELEASE

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ANTIDUMPING INVESTIGATION INITIATED ON CERTAIN
NON-POWERED MECHANICS' TOOLS FROM JAPAN
Assistant Secretary of the Treasury, David R. Macdonald,
announced today the initiation of an antidumping investiga­
tion on certain non-powered mechanics' tools from Japan.

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The term "certain non-powered mechanics' tools"
encompasses punches, chisels, hammers and sledges, vises,
C-clamps, micrometers, vernier calipers, dial indicators,
and battery service tools.
The announcement followed a summary investigation
conducted by the U.S. Customs Service. Information received
tends to indicate that the prices of the merchandise sold
for exportation to the United States are less than the
prices of such or similar merchandise sold in the home
market.

'74,

Notice of this action will be published in the
Federal Register of September 5, 1974.

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During the period of July through December 1973,
imports of certain non-powered mechanics' tools from
Japan were valued at roughly $4 million.

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FOR. IMMEDIATE RELEASE

September 6, 1974

MACDONALD TO PARTICIPATE IN INTERPOL MEETING

David R. Macdonald, Assistant Secretary (Enforcement,
Operations, and Tariff Affairs) announced today that the
United States will participate in a conference on inter­
national fraud to be held in Paris, September 9-12.

Law

enforcement officials from more than 40 countries are
expected to take part in the meeting which is being sponsored
by INTERPOL.

The participants will analyze a variety of

crimes in an effort to share their knowledge and develop
more effective methods for preventing and detecting violations.
The topics will include, among others, fraudulent banking,
insurance, and securities operations.

Representatives from

the Securities and Exchange Commission and the Justice and
Treasury Departments will attend.

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Citation Information
Document Type: Transcript

Number of Pages Removed:

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Title:

"Today in Congress"

Date:

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Department of
¡WASHINGTON, D.C. 20220

theJREASURY
TELEPHONE W04-2041

FOR IMMEDIATE RELEASE

September 5, 1974

TREASURY ANNOUNCES TAPERED ROLLER BEARINGS FROM
JAPAN ARE BEING SOLD AT LESS THAN FAIR VALUE
Assistant Secretary David R. Macdonald announced
today that tapered roller bearings from Japan are being,
or are likely to be, sold at less than fair value within
the meaning of the Antidumping Act of 1921, as amended.
The term "tapered roller bearings" means equally matched,
conically shaped rollers, equally spaced by means of a
cage, which roll easily in a tapered raceway formed by
an outer ring or cup and an inner ring or cone.
Tapered roller bearings are used primarily in transport
equipment such as trucks, autos, and trailers. Notice
of the determination will be published in the Federal
Register of September 6, 1974.
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 tapered roller bear­
ings from Japan which have not been appraised and on
which dumping margins exist.
A notice of "Withholding of Appraisement" was
issued on June 5, 1974 which stated 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 calendar year 1973, imports of tapered
roller bearings from Japan were valued at approximately
$16 million.

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of TREASURY jjjf RUM

Department the

September 5, 1974

FOR IMMEDIATE RELEASE

MEMORANDUM FOR THE PRESS:
The Secretary of the Treasury, William E.
Simon, and the Chairman of the Federal Reserve
Board, Dr. Arthur F. Burns, will be meeting this
weekend in Europe with their counterparts from a
small number of other major countries.
The meeting was scheduled during Secretary
Simon1s talks with European officials during his
visit to Europe in July and will be one of a con­
tinuing series of consultations among these
officials to insure close cooperation in inter­
national financial affairs.

0 O0

ADDRESS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE
THE SCHOOL OF BUSINESS ADMINISTRATION
FIFTH BUSINESS CONDITIONS MANAGEMENT BRIEFING
SOUTHERN METHODIST UNIVERSITY
DALLAS, TEXAS
FRIDAY, SEPTEMBER 6,1974

FREE ENTERPRISE AND INFLATION

Today I want to discuss the threat that inflation
poses for the American economic system of free enterprise.
For almost two centuries, since this country was just a
bare foothold in the wilderness, we have placed primary
reliance on private decision making and open markets.
That approach has served us well. In material terms
it has put this Nation in a position of unrivalled
economic leadership in the world. Even more important, in
my view, the system has helped us preserve our most
cherished personal and political freedoms. Thus I believe
that preservation of our free enterprise system should be
a basic goal for all Americans.
Free enterprise should need no defense, but I think
it does. Because it is more vulnerable today than it has
been at any time since the Great Depression of the
1930s. At that time the problem was mass unemployment.
Such economic extremes inevitably give rise to public
discontent and calls for action. And in a democratic
system, government must respond. But it must respond in
a way that does not destroy what has served us so well«

WS-89

2
Four decades ago, when we were in the grips of
depression, we determined that we would never again permit
a recurrence of mass unemployment. That was a correct
decision -- and it is as correct today as it was then.
But in the 1930s we also began to make some national
decisions that were wrong. We started a trend of having
the government do too much for people. That trend has
been building momentum ever since, and in the past couple
of decades it has carried too far.
In trying to do too much for people, the
has ended up by accomplishing too little. In
too much for people, the government has taken
spending commitments that drain our resources
Federal budget an inflationary juggernaut.

government
trying to do
on open-ended
and make the

The danger to our free enterprise system today is
not the threat of mass unemployment, it is the threat of
prolonged high inflation. I am concerned that we have not
yet fully recognized the dimensions of this threat. For
if the rate of inflation is not reduced to tolerable
levels, the American public will demand direct action to
hold down wages, prices, profits and interest rates.
Such action would not end the inflation but, if accepted
as an economic way of life, it could mean the erosion of our
economic system -- the system that has provided the
American people with more and better homes, automobiles,
leisure, education and almost everything else worth having -especially personal and economic freedom -- than any other
nation on earth.
I
am not talking about economic ideology. This is the
20th century and we can't go back to laissez-faire, or some
other mythical system. Government has always had an
important role to play in our economic life. But we have
also had the good sense in this country to allow maximum
scope for competition and individual initiative.
The Case For Private Decisions
The case for private decision making in a market system
is based upon a very basic and fundamental fact: It works.
The marketplace is an efficient system when it is allowed to
operate with the necessary freedom. Indeed, the price

3
system is not only the most effective method of determining
what, and where, and how economic activity shall take
place in a free society, it is the only feasible method.
If markets and prices were not used to provide the
signals of our economic life, what would we use instead?
We would use some governmental planning mechanism. But
this is an enormously large and complex economy. Even
the Washington bureaucracy would not be enough.
Every industry, every commodity and every community would
need its own contingent of planners. And although there
might be plenty of volunteers at the start, they wouldn't
be around for long. Their bewildering assignment
would be to insure that the right commodity or service
was available at the right time to the right person.
It just couldn't be done.
No, if we want the system to work for us, rather
than us working for the system, we cannot do better
than competitive markets. Furthermore, once detailed
economic planning is substituted for the market
mechanism, most of our economic freedom is gone. And
when economic freedom is gone, our chances of retaining
political and other freedoms would be close to zero.
Nothing in this life is perfect and the market
system is no exception. The market system does
not automatically dispense social justice; nor does it
meet all our collective needs. At times, extraordinary
circumstances prevent the market from operating even
reasonably well. The government may have to step in to
deal with the situation. Government should also be
ready to step out when conditions return to normal.
It is clear that we must take care of those who
are in need and insure that all of our citizens are in
a position to live out their lives in dignity. Those
who cannot help themselves must be helped. Further,
the economy must function within an adequate framework

- 4

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of law. And to operate properly, competition must be
vigorous.
For these and other reasons, government has
many important functions. It must enforce the laws.
It must provide for the common defense. It must provide
essential public services. It must protect the
environment. It must enforce standards to protect the
public health and welfare. It must insure that
competitive conditions are maintained. Most important,
it must protect individuals against thé extremes of
economic adversity.
It is also appropriate to recognize some recent
accomplishments of the market approach. After
August 1971 when we removed the artificial constraint of
fixed exchange rates, the dollar moved to a more
competitive level internationally. In doing so, it
pulled our trade balance out of its chronic deficit
(until the oil embargo struck). Similarly, the
180-degree change that was made in Federal
agricultural policy in 1972 and 1973 •— ending acreage
limitations and other restrictions on farm production
permitted wider latitude for the normal price
incentives to operate and encouraged maximum
agricultural output. Food prices are high but they
would have been higher still without this important
change in national policy.
I
think Harry Reasoner of CBS News got to the heart
of this matter of the benefits of competition. He made
this comment during the energy crisis, back when gasoline
was scarce and if you could find any at all you had to
wait in long lines to get it and you didnft get the
extra services you used to always get automatically.

5

As Harry Reasoner put it:
"The reason you got your windshield washed
was that a man wanted to sell you gas. If he
automatically sells all the gas he can get, where
is your buyer's edge? They have lived with this
problem for years in societies where there was never
enough to go around. It's a new one for us.
With a dirty windshield in a station which
is out of gas anyway; you are down to depending
on saintliness. I am not knocking saintliness,
but over the centuries, in the ordinary day to
day rut, competition cleans more windshields."
I think that sums up very nicely the advantages of the
American system: competition does clean more windshields.
The Rise of Bii
Let me turn now to the question of whether our economic
system can coexist with big government. It is an unfortunate
fact that government is an increasingly important factor in
our day-to-day economic and financial life. Whether or not
the economy can thrive depends on whether government can
carry on its essential functions while keeping its spending
under some kind of control. I will tell you quite frankly
that I think Federal expenditures are growing much too
rapidly and that they must be restrained.
It took us 185 years to get to the $100 billion
mark in Federal expenditures, only nine more years to
reach the $200 billion mark, and just four more years .
to get to $300 billion.
And this doesn't even take
account of all the extensions of Federal credit through
various guarantees and the like which caused total Federal
and Federally-assisted borrowings to account for almost
two-thirds of total funds raised in the capital markets in
fiscal year 1973.

In 13 of the past 14 years the Federal budget has been
in deficit. The fiscal results of the first half of that
period were dominated by the Vietnam buildup which culminated
in a $25 billion budget deficit in Fiscal Year 1968 -- this
at a time when the economy was already operating above full
employment. The second half of the period has been largely
free from the need for increased defense expenditures. Other
Federal expenditures have, however, taken up the gap.
In the 1974 Fiscal Year just completed, defense
expenditures were $78 billion, roughly the same as they were
in fiscal 1968. In marked contrast, all other categories of
Federal expenditures rose by about $90 billion, roughly $60
billion of the increase was in social security, veterans
benefits and welfare programs. Another $15 billion of the
rise went for health, education, and manpower. Most of the
remaining increase was accounted for by higher interest
payments on the national debt. All of this would probably
be termed "uncontrollable" in the budgetary sense of the
term. Indeed, it concerns me that by the time all the
uncontrollable items are listed, each year's budget is
virtually immune to cuts. Our budgets are uncontrollable
in every sense of the word if we accept the fallacious
assumption that once a law is enacted it can never be changed
I do not accept that.
In our modern economy, there are strong pressures for
Government to play a major role in the social welfare area.
The public recognizes the desirability of establishing a
minimum floor of economic well-being for the less fortunate.
We have always been a compassionate people. But in recent
years we have used the Federal budget as an instrument of
social reform without adequate reckoning of the cost.
I want to make my position clear on this matter. I
favor large expenditures for social purposes. Although I
think we should insist upon maximum scope for self-help and
individual initiative, we must help those of our citizens
who need and deserve help. If that requires even larger
social welfare programs, and it may, I favor that also. My
only point is that we must pay for those programs. If we
refuse to do so, then the budget will be virtually out of
control, inflation will be rampant, and the very people we
tried to assist will be the ones most penalized.
High and rising Federal expenditures inevitably mean
high and rising taxation. Either we get higher taxes
directly, or the resulting budget deficits produce inflation
which is the most insidious and indiscriminate tax of all.
And both inflation and taxation can have, and no doubt have
had in this country, an adverse effect on incentives to
save and to invest. Without an adequate volume of saving
and investment, we would not be able to put into use the

7

scientific advances and new technology that are coming off
the drawing board, and we would not be able to expand and
improve our productive and distribution systems. As a result,
National economic growth would be stunted and there would not
be a larger pie to slice up each year.
Without attempting to turn back the clock, we need to
examine how far the essential incentives of the free enterprise
system have been eroded in the past few decades. I believe
that the private enterprise system is capable of strong future
performance. However, there have been some inroads into the
vitality of the system and we must shift our emphasis from
consumption to savings and investment. We must get back to
the fundamentals and emphasize growth in productivity.
The Inflation Threat
A major threat to free enterprise and its ability to
survive is a big government that cannot balance its books.
The Federal Government has a monopoly of the monetary and fiscal
powers. Abuse of these will ruin any system. History is littered
with the wreckage of political systems that failed to cope with
inflation.
A strong government can control inflation. The question is
whether it will. It seems to me that two roads are open.
One road leads us to an emphasis on restraint and maximum
reliance on competition and productivity. That is the road
to travel in my opinion. It can take us back to reasonable
price stability at high levels of employment. But we must
recognize that there have been years of fiscal and monetary
abuse, which cannot be undone overnight. Thus, fiscal and
monetary restraint must be exercised patiently and consistently
for a sustained period of time.
The other road leads back to controls. Controls appeal
to our desire for action, to our wish for a quick and easy
solution. But controls do nothing to remove the causes of
inflation, and they exact a heavy cost in the form of
distortions of the productive structure. Wages and profits
take turns being squeezed. As things get worse, the
bureaucratic temptation is always to clamp the controls on
a little tighter. Controls are the enemy of the market and
could kill the economic system as we know it.
The process 6f curbing inflation will not be costless.
This is a fact we all must fully understand. Federal
spending programs will have to be stretched out. The
pleasures of a tax cut will have to be foregone. Credit
will not be available easily or cheaply. Growth in business
sales and profits will not be as ebullient. And for a time
unemployment will have to remain slightly higher than we
would like.

-

8

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These costs of the anti-inflation effort mast be offset
as best we can -- through improved unemployment insurance,
and other programs. However, not all of the costs can be offset.
Yet we must bear them, because the costs of continued inflation
are far greater.
If we lose this battle against inflation, or retreat
into a maze of controls, we lose our chance for a healthy,
growing economy that can sustain full employment. I believe
Americans sense this and are ready for a concerted, and
lengthy, effort to return to a more stable economic environment.
Conclusion
It is clear to me which policies we should follow. We
must remove the causes of inflation, not just treat the
results. I am confident that with the support of the
American people inflation can and will be ended. The
traditional American economic system must be defended from
this grave threat. The free enterprise system is worth
defending. Its advantages have been stated eloquently.
I
close my own remarks with these words, which are
probably not those of Abraham Lincoln, although they have
sometimes been attributed to him.
"You cannot bring about prosperity by
discouraging thrift. You cannot strengthen
the weak by weakening the strong. You can­
not help the wage earner by pulling down the
wage payer. You cannot further the brother­
hood of man by encouraging class hatred. You
cannot help the poor by destroying the rich.
You cannot keep out of trouble by spending
more than you earn. You cannot build
character and courage by taking away man’s
initiative and independence. You cannot
help men permanently by doing for them
what they could and should do for them­
selves .I

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thRJUSURY

Wìepartmentof

TELEPHONE W04-2041

MEMORANDUM FOR THE PRESS
FINANCIAL CONFERENCE ON INFLATION
Attached is a letter Secretary of the Treasury
William E. Simon has sent to members of the banking
and finance community invited to attend the ’’Financial
Conference on Inflation” September 20, 1974. Also attached
is the list of delegates who have been invited and the
preliminary agenda. The U.S. Senate delegates will be
announced later.

WS-91

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TEXT OF THE LETTER
SECRETARY OF THE TREASURY
WILLIAM E. SIMON
HAS SENT TO PARTICIPANTS IN THE
"FINANCIAL CONFERENCE ON INFLATION"
BEING HELD
IN WASHINGTON, SEPTEMBER 20, 1974
Dear :
I
am pleased to learn that you have accepted
the President's invitation to the Conference on
Inflation on September 27 and 28 and the Financial
Conference on Inflation on September 20.
At the banking and finance meeting, we will
concentrate on a broad range of issues relating
to inflation. We are anxious to have your thinking
on this, the nation's number one problem--on its
causes, its effects, and its cures. Special emphasis
will be devoted to fiscal and monetary policy, the
capital markets, the international situation, and
financial institutions.
Attached is a preliminary agenda which outlines
the format of the meeting and the major subjects that
will be covered. We are preparing a compendium of
selected papers on each of these topics. We invite
you to submit a one-page summary of your views on any
of the agenda items for inclusion in this document.
We need to receive these summaries by September 13,
so that we can distribute the compendium to all
participants in advance of the meeting.
An outstanding group of congressional leaders,
government officials, economists, and business and
financial leaders have accepted our invitation.
I
am confident that we in government will benefit from
your advice and discussions, and I am going to conduct
the meeting with that goal in mind.

2

The meeting on the 20th will be held at the
Statler-Hilton beginning at 9:00 a.m.
I would
also like to invite you to a reception and dinner
for the participants on the evening of the 19th.
This dinner will be held in the Executive Dining
Room at the Federal Deposit Insurance Corporation,
550 Seventeenth Street, N.W., at 7:00 p.m. We will
keep you advised of any other details of the Conference,
and I want to say again how much I appreciate your
acceptance.
Sincerely,

William E. Simon

MEMBERS OF BANKING AND
FINANCE COMMUNITY
INVITED TO ATTEND
THE FINANCIAL CONFERENCE ON INFLATION
WASHINGTON, D.C.
SEPTEMBER 20, 1974
HELD AT THE REQUEST OF
PRESIDENT GERALD R. FORD
AND THE CONGRESS OF THE UNITED STATES

TREASURY DEPARTMENT
The Honorable William E. Simon
Secretary of the Treasury
U.S. Department of the Treasury
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
The Honorable Stephen S. Gardner
Deputy Secretary
U.S. Department of the Treasury
15th, and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
The Honorable Jack F. Bennett
Under Secretary for Monetary Affairs
U.S. Department of the Treasury
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
The Honorable Edgar R. Fiedler
Assistant Secretary for Economic Policy
U.S. Department of the Treasury
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
U.S. HOUSE OF REPRESENTATIVES
The Honorable Barber B. Conable, Jr.
U.S. House of Representatives
Rayburn House Office Building
Room 2429
Washington, D.C. 20515
The Honorable Wright Patman
U.S. House of Representatives
Rayburn House Office Building
Room 2328
Washington, D.C. 20515
The Honorable Henry S. Reuss
U.S. House of Representatives
Rayburn House Office Building
Room 2186
Washington, D.C. 20515

1

U.S. HOUSE OF REPRESENTATIVES (cont'd)
The Honorable J. William Stanton
U.S. House of Representatives
Rayburn House Office Building
Room 2448
Washington, D.C. 20515
FEDERAL RESERVE SYSTEM
The Honorable Arthur F. Burns
Chairman
Board of Governors of the Federal
Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
Mr. Bruce K. MacLaury
President
Federal Reserve Bank of Minneapolis
250 Marquette Avenue
Minneapolis, Minnesota 55480
Mr. J. Charles Partee
Managing Director, Office of Research
and Economic Policy
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
OTHER REGULATORY AUTHORITIES
Mr. Thomas R. Bomar
Chairman Federal Home Loan Bank Board
320 First Street, N.W.
Washington, D.C. 20552
Mr. Ray Garrett, Jr.
Chairman
Securities and Exchange Commission
500 North Capitol Street
Washington, D.C. 20549
Mr. Herman Nickerson, Jr.
Administrator
National Credit Union Administration
2025 M Street, N.W.
Washington, D.C. 20456
Mr. James E. Smith
Comptroller of the Currency
Department of the Treasury
Washington, D.C. 20219

<
3
®

2

Mr. Frank Wille
Chairman
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
COMMERCIAL BANKING
Mr. Richard P. Cooley
President and Chief Executive Officer
Wells Fargo Bank, N.A.
Post Office Box 44000
San Francisco, California 94144
Mr. Gaylord Freeman
Chairman of the Board
First National Bank of Chicago
One First National Plaza
Chicago, Illinois 60670
Mr. David B, Harper
President
First Independence National Bank
234 State Street
Detroit, Michigan 48226
Mr. Milton J. Hayes
Chairman
Government Fiscal Policy Committee
Independent Bankers Association
1725 DeSales Street, N.W.
Washington, D.C.
20036
Mr. Richard D. Hill
Chairman of the Board
Frist National Bank of Boston
100 Federal Street
Boston, Massachusetts 02110
Mr. Rex J. Morthland
President, American Bankers Association
The Peoples Bank and Trust Company
of Selma
Post Office Box 799
Selma, Alabama 36701
Mr. David Rockefeller
Chairman
Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, New York 10015

3

Mr. Robert H. Stewart, III
Chairman of the Board
First National Bank of Dallas
Post Office Box 6031
Dallas, Texas 75283
Mr. Thomas I. Storrs
Chairman of the Executive Committee
North Carolina National Bank
Post Office Box 120
Charlotte, North Carolina 28255
Dr. Charles J. Zwick
President
Southeast Banking Corporation
100 South Biscayne Boulevard
Miami, Florida 33131
CONSUMER REPRESENTATIVES
Dr. Gwen Byrners
Professor and Chairman of the
Department of Consumer Economics
Cornell University
Ithaca, New York 14850
Ms. Sylvia Porter
Syndicated Financial Columnist
30 East 42nd Street
New York, New York 10017
ECONOMISTS
Dr. George Leland Bach
Professor of Economics and Public Policy
Stanford University
Stanford, California 94305
Dr. Robert G. Dederick
Senior Vice President
Northern Trust Company
50 South LaSalle Street
Chicago, Illinois 60690

Economist

4

ECONOMISTS (confd)
Dr. Otto Eckstein
Department of Economics
Harvard University
Cambridge, Massachusetts

02138

Dr. Milton Friedman
Department of Economics
University of Chicago
1126 East 59th Street
Chicago, Illinois 60637
Dr. Tilford C. Gaines
Senior Vice President and Economist
Manufacturers Hanover Trust
350 Park Avenue
New York, New York 10022
Dr. Paul W. McCracken
Senior Consultant
U.S. Department of the Treasury
Office of the Secretary
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Dr. Arthur M. Okun
Senior Fellow
The Brookings Institution
1775 Massachusetts Avenue, N.W.
Washington, D.C. 20036
Dr. Raymond J. Saulnier
Department of Economics
Barnard College
Columbia University
New York, New York 10027

ECONOMISTS (cont'd)
The Honorable George P. Shultz
Executive Vice President
Bechtel Corporation
50 Beale Street
San Francisco, California 94119
The Honorable Charls E. Walker
President
Charls E. Walker Associates
1730 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Dr. Marina Whitman
University of Pittsburgh
Department of Economics
Pittsburgh, Pennsylvania

15260

INSURANCE
Mr. Archie R. Boe
Chairman of the Board
Allstate Insurance Co.
Allstate Plaza
Northbrook, Illinois 60062
Mr. Donald MacNaughton
Chairman of the Board
Prudential Insurance Company of America
Prudential Plaza
Newark, New Jersey 07101
Mr. W.J. Kennedy, III
President
North Carolina Mutual Life Insurance Co.
P.0. Box 201
Durham, North Carolina 27702
Mr. Ralph S. Saul
Vice Chairman of INA Corporation
Insurance Company of North America
1600 Arch Street
Philadelphia, Pennsylvania 19101

6

INVESTMENT COMMUNITY
Mr. Robert H.B. Baldwin
President
Morgan Stanley and Company
1251 Avenue of the Americas
New York, New York 10020
Mr. Robert H. Bethke
President, of the Executive Committee
Discount Corporation of New York
58 Pine Street
New York, New York 10005
Mr. William H. Franklin
Chairman
Caterpillar Tractor
100 N.E. Adams Street
Peoria, Illinois 61629
Mr. J. Henning Hilliard
Chairman
J.J.B. Hilliard, W.L. Lyons, Inc.
545 South Third Street
Louisville, Kentucky 40202
Mr. Paul R. Judy
Chairman
A.G. Becker
2 First National Plaza
Chicago, Illinois 60670
Mr. Harvey E. Kapnick, Jr.
Chairman and Chief Executive Officer
Arthur Anderson and Company
69 Washington Street
Chicago, Illinois 60602
Mr. Ralph F. Leach
Chairman of the Executive Committee
Morgan Guaranty Trust Company of New York
23 Wall Street
New York, New York 10015
Mr. Gustav L. Levy
Partner
Goldman, Sachs and Company
55 Broad Street
New York, New York 10004
7

INVESTMENT COMMUNITY (cont'd)
Mr. James J. Needham
Chairman
The New York Stock Exchange, Ine.
11 Wall Street
New York, New York 10005
Mr. Donald T. Regan
Chairman of the Board
Merrill, Lynch, Pierce, Fenner and
Smith, Inc.
One Liberty Plaza
165 Broadway
New York, New York 10008
Mr. Robert V. Roosa
Partner
Brown Brothers Harriman and Company
59 Wall Street
New York, New York 10005
Mr. Martin E. Segal
Chairman of the Board
Martin E. Segal Company
730 Fifth Avenue
New York, New York 10019
Mr. Carlton P. Wilson
President and Director
Robert W. Baird and Company, Inc.
731 N. Water Street
Milwaukee, Wisconsin 53201
LABOR REPRESENTATIVES
Mr. Howard Coughlin
President
Office and Professional Employees
International Union
265 West 14th Street
New York, New York 10011
Mr. John Tomayko
Director, Insurance Pension
United Steelworkers of America
5 Gateway Center
Pittsburgh, Pennsylvania 15222

fcf~
8

SAVINGS INDUSTRY
Mr. Morris D. Crawford, Jr.
Chairman of the Board
Bowery Savings Bank
110 East 42nd Street
New York, New York 10017
Mr. Robert Ray Dockson
President
California Federal Savings and
Loan Association
5670 Wilshire Boulevard
Los Angeles, California 90036
Mr. Gilbert R. Ellis
President
Household Finance Corporation
Prudential Plaza
Chicago, Illinois 60601
Dr. Grover W. Ensley
Executive Vice President
National Association of Mutual
Savings Banks
200 Park Avenue
New York, New York 10017
Mr. Richard G. Gilbert
President
Citizens Savings Association
100 South Central Plaza
Canton, Ohio 44702
Mr. M.R. Hellie
President
Credit Union National Association, Inc.
1730 Rhode Island Avenue, N.W.
Washington, D.C. 20036
Mr. Norman Strunk
Executive Vice President
U.S. League of Savings Associations
111 East Wacker Drive
Chicago, Illinois 60601

9

Agenda for September 20
Finaneial Conference on Inflation

9:00 AM - Introduction
9:10 AM - Economic Situation and Policy Briefing Council of Economic Advisers
9:25 AM - Briefing on the Budget Office of Management and Budget
9:40 AM - Fiscal Policy
Major Fiscal Objectives and Options for
Fiscal Years 1975, 1976, and Beyond
Possible Cuts in Federal Spending
Possible Changes in Federal Taxation: Current
Levels, Incentives, Deterrents, Equity
11:30 AM - Monetary Policy
Current State of Domestic Financial Markets
Current Monetary Policy:
Given the Circumstances,
has 'it been too Tight or about Right? What Should
the Future Course of Monetary Policy be?
1:00 PM - Lunch
2:00 PM - Capital Markets and Capital Formation
Discussion of the Dimensions of Future Capital
Requirements for Energy, Mass Transit, Housing
and All Other Needs of the Economy
--

Policies to Increase the Total Volume of
Saving and Investment
Policies to Insure Adequate Financing through
the Equity and Long-Term Debt Markets

2

3:00 PM - International Economic Policy and Inflation
Discussion of the Appropriate U. S. Role in
International Economic Policy
International Financial Aspects of World Inflation
4:00 pM - Financial Institutions and Inflation
Possible Changes that should be made in Laws
and Regulations Affecting Financial Institutions
to Assist in the Fight Against Inflation
4:30 PM - Wage-Price Policy
How Should the Wage-Price Monitoring System be
Operated?
5:00 PM - Other Suggestions to Combat Inflation
6:00 PM - Adjournment of Formal Session

« *

ADVANCE FOR A.M. NEWSPAPERS
MONDAY. SEPTEMBER 9. 1974

/

TREASURY OUTLINES RESTRICTIONS
ON GOLD FUTURES
The Treasury has received a number of inquiries as to
whether U.S. firms and individuals may now purchase or sell
gold futures contracts, providing for delivery of the gold
after the date when gold ownership will become legal. These
inquiries have been prompted by Public Law 93-373, signed
by President Ford on August 14, 1974, which provides for the
termination of all existing restrictions on the ownership of
gold on December 31, 1974 or on such earlier date as the
President finds and reports to Congress that deregulation of
gold would not have an adverse effect on the nation's inter­
national monetary situation.
This law does not in any way limit the continued present
applicability of the Gold Regulations. These regulations will
not lose their force and effectiveness until December 31, 1974
or the date of a Presidential determination reported to
Congress.
Acquisition of future interests in gold is restricted
under the Gold Regulations. Under the Regulations, the
acquisition of any interest in gold, except for licensed
industrial, professional, artistic or numismatic uses, is
prohibited. A gold futures contract, even though providing
for delivery after December 31, 1974, gives the purchaser
a present interest in gold, and consequently such contracts
are in violation of the Regulations. Moreover, except for
the above-mentioned licensed uses, gold in any form for
present or future delivery may not be purchased or sold on
any exchange within the United States.
The Regulations also prohibit the purchase or sale of any
present or future interest in gold in any form, direct or
indirect, for speculative purposes. For example, the Regulations
prohibit a seller from holding rare gold coins as a hedge against
a contractual obligation to deliver gold bullion to purchasers
after termination of the Regulations. In addition, firms may
not accept orders for gold for delivery after termination.
oOo
WS-9 3
(Over)

2

However, it would be consistent with the Regulations
for United States firms to advertise that they will be
engaged in the sale of gold to the general public after
termination and invite prospective customers to submit
names for inclusion on mailing lists for receipt of
prospectuses, order forms, and other literature. Adver­
tising may describe merchandise which a firm expects to
offer for sale after termination, but may not provide
details as to quantities, prices, and time for delivery
of articles, such as to create an inference that a
customer’s response would result in a contract for future
delivery of gold.

0O0

TREASURY

Departmentalthe
IlN G T O N D.C. 20220

TELEPHONE W04-2041

T

T

FOR IMMEDIATE RELEASE

_

September 6, 1974

Government Files Appeal in Import Surcharge Case
Today the Department of the Treasury announced that the
'
Department of Justice filed an appeal by the Government in

I

the case of Yoshida International/ Inc, v. United States.
The appeal, filed today in the Court of Customs and
Patent Appeals, seeks the reversal of the July 8, 1974,
decision of the Customs Court.

The Yoshida decision declared

invalid Presidential Proclamation 4074 of August 15, 1971,
under which an additional duty of 10% ad valorem was levied
upon most articles imported into the United States between
August 16, 1971 and December 20, 1971.

oOo

WS-92

Federal Financing Bank lending activity for the period
August 26, 1974, to September 6, 1974, is as follows:
-- The Bank purchased $2 million on August 26 and $2.3
million on September 6, of notes issued under the HEW Medi­
cal Facilities Direct Loan Program (Hill Burton). This
brings the amount borrowed under this program to $2 2.'?
million under a total commitment of $27.6 million.
— On August 27 Amtrak borrowed an additional $5 mil­
lion from the Bank under an outstanding loan commitment of
$200 million.
— On September 3 the Bank made a $125 million 91-day
loan to the Student Loan Marketing Association (Sallie Mae)
to refund a maturing $100 million note held by the FFB and
to furnish additional funds for Sallie Mae operations. The
interest rate on the new loan is 9.89 percent.
The Federal Financing Bank was established by an Act
of Congress last December (Public Law 93-224) to consolidate
the financing of various Federal agencies and other borrowers
whose obligations are guaranteed by the Federal Government.
The Bank began operations last May.
oOo

202- 964-2615

Press inquiries:

LENDING ACTIVITY
AUGUST 26 - SEPTEMBER 6, 1974

Departmentoft h e f R R V
ISHINGTON, D.C. 20220

TELEPHONE W04 2041

i

FOR RELEASE ON DELIVERY
THE FORD ADMINISTRATION AS VIEWED FROM THE TREASURY
Warren F. Brecht
Assistant Secretary for Administration
U. S. Department of the Treasury
Convocation Address
DePauw University
1f Introductory Remarks
A. I am honored to be the opening convocation speaker for
the new school year.

Over the years since I graduated

from DePauw, I have continued to follow the progress of
the University.

I continue to be impressed with DePauw's

overall program and philosophy: a relatively small, topnotch student body; the broad-gauged liberal arts focus;
a high calibre and diverse faculty; a curriculum that is
continually changing with the times; and finally a
construction program that is based on a sound long-range
plan.
B. It has been 10 years since I last visited Greencastle.
I am most impressed with all the major construction and
the progress that it conveys. Yet, I am somewhat saddened
by the demise of Minshall Lab.

I still have memories as

a freshman pledge guarding the Sigma Chi bell, spending
a number of nights in the bushes around Minshall Lab
trying to catch a certain Phi Psi named Naus Thompson who
successfully rang the bell about 20 times before we
WS-94

2
finally caught him.

Like war stories, I am not sure I

would want to repeat those experiences, but I am glad I
experienced them at the time.
C. DePauw has had quite an influence at the Treasury Depart­
ment.

Those currently in the Office of the Secretary

besides me include: Edward Roob, Special Assistant to the
Secretary for Debt Management; William Hausman, Director
of the Office of Operations under the Assistant Secretary
for Enforcement, Operations and Tariff A f f a i r s ; and Charles
Arnold, Senior Public Information Officer.

In addition,

Joseph Barr was a former Secretary and Under Secretary
of the Treasury during the Kennedy and Johnson Adminis­
trations and presently is the newly appointed Chairman
and Chief Executive Officer of the financially plagued
Franklin National Bank of New York.
D. The main theme of my address today is the Ford
Administration as viewed from the Treasury (which really
means as viewed by me).

I will talk about two broad

aspects :
1. The general tone as characterized by a more open
administration, a more cooperative relationship with
the Congress,

a

restoration of confidence in our

national government, and a renewed sense of ethics.

3
2. I will focus on the President's major domestic
priority, which is licking inflation and stabilizing
the economy.

(This is not only the President's

major priority, but clearly a major responsibility
of the Treasury Department.)
In closing, I will relate some of my own observations
and experiences as a Presidential Appointee under two
Presidents and three Secretaries.

I will also talk

briefly about career opportunities in the Federal
Government.
A more Open Administration; Cooperative Relationship with
Congress; and Restoration of Confidence m Government
A. Let's look first at the general tone President Ford has
set in the four weeks since he took the oath of office.
In the remarks following his swearing-in as our 38th
President, he said to the American people:
", . . 1 feel it is my first duty to make an
unprecedented compact with my countrymen.

Not an

inaugural address, not a fireside chat, not a
campaign speech--just a little straight talk among
friends.

And I intend it to be the first of many.

[About the Congress, he said]

4
"...

Those who nominated and confirmed me as Vice

President were my friends and are my friends.

They

were of both parties, elected by all the people and
acting under the Constitution in their name.

It is

only fitting that I should pledge to them and to you
that I will be the President of all the people.
[and finally]
". . . I n all my public and private acts as your
President, I expect to follow my instincts of
openness and candor with full confidence that
honesty is always the best policy in the end."
B. A few nights later, in an address to a joint session of
Congress, President Ford said:
". . . A s President, within the limit of basic
principles, my motto towards the Congress is
communication, conciliation, compromise, and
cooperation."
C. In his first press conference August 28, the President
again pledged an open Administration to guard against
future Watergates; his code of ethics, he said, would
be "the example that I set."

'XL
5
D. All of the above, I believe, reveals a good deal about
the kind of person President Ford is and how he will
function as our national leader.

It reflects a high

degree of openness and honesty, of cooperation between
the Congress and the Executive Branch, and of the strong
desire to rally the people of this country.
E. Through several Treasury examples, I would like to
illustrate how President Ford's leadership approach will
enable the Executive Branch and the Congress, working
together, to move forward on some cf the tough issues
of the day, particularly the severe economic problems
which do not lend themselves to easv-? clear solutions..
1. The President's Trade Bill is a specific case in point.
The proposed Trade Bill is a major key to international
trade reform, which together with monetary reform, is
intended to lead to a more stable world economic order.
It would provide broad authorities to the President
and his delegates to negotiate reduced tariffs and
other non-tariff trade barriers on a reciprocal basis
as well as permit the raising of such tariffs and trade
barriers on a selected basis against countries whose
trade practices discriminate against the United States.
The passage of this Trade Bill is essential before the

6

United States can meaningfully participate in the
current international negotiations through GATT
f£% and Trade).

This is

the Bill that until recently was embroiled in an
impasse over the question of the Soviet Union's Jewish
emigration practices.

While the underlying issue of

individual freedom is important, we are now hopeful
of Congress, Secretary of State
Kissinger and others will be able to find a common
the basic rights of individt111 allowing the important trade legisla-

rm Act is another example where I
believe we will see a more positive and cooperative
working relationship between the Executive Branch and
the Congress,

Ironically, a major impetus behind the
.Budget Reform Act was to prevent former

it Nixon from going against the will of Congress
by impounding appropriated funds to reduce Federal
While the Act itself ;¡ay have teen born
out of an adversary, proceeding, the'-'real guts of the
Act call for the Congress to set overall spending
S

limits and priorities at the beginning of each session
he addressed

7
against the overall ceiling rather than on a piecemeal
buildup, as has been the case up until now.

Through

this process hopefully both the President and the
Congress will be conscious of the overall budgetary
ceiling and working together, will achieve a more
financially responsible budget— something vital toward
getting our country on a more solid financial footing.
In fact, if carried out as intended, the Budget Reform
Act could turn out to be the most important piece of
economic legislation since the Employment Act of 1946.
3. Another example vitally affecting Treasury is the Tax
Administration System in the Internal Revenue Service.
This country's tax administration depends heavily on
voluntary compliance, with enough of an audit and
enforcement presence to assure the general public that
the system works well and to assure the vast majority
of citizens who conscientiously report and pay their
tax liabilities that those who do not will be found
out and punished.

Activities surrounding the former

President and alleged pressures by White House staff
on IRS have raised serious questions of public morality
The Treasury Department and the Internal Revenue
Service have been working very hard to assure ourselves
and the public that potential abuses will not happen

8

in the future.

Again, I believe the tone set by

President Ford will be a major help in restoring
public confidence in what is the best tax adminis­
tration system in the entire world.
Privacy and computers (data banks) is another area
where I see substantial improvements ahead under
President Ford.

Again, because of the abuses or

attempted abuses of power through unauthorized use
of confidential data, the whole subject of data banks,
computers, telecommunications and rights of privacy
has come under sharp focus in recent months.
Unfortunately, the issues have been looked at in a
certain state of hysteria.

This has resulted in almost

total paralysis of any new computer and telecommunica­
tions systems which have as their noble objectives the
improved operational efficiency and effectiveness of
government.

In the last several months, the Treasury

Department has had the development and procurement of
several computers and computer systems suspended untilj
this whole privacy issue is resolved.

These have

included simple replacement computers which are
urgently needed to cope with the legitimate workload
growth in places like 1RS, in some cases simply to
replace machines which are badly worn out.

In these

v 'l
instances, there are no terminals and no telecommuni­
cations lines which could possibly be tapped into by
unauthorized persons.
With a new President, I am now confident that these
highly emotional issues can be addressed in a more
rational manner and that truly constructive improve­
ments and safeguards, where necessary, will be
recommended and implemented.

The above example,

incidentally, I have felt personally since I have
the overall responsibility in Treasury for major
computer and telecommunications systems.
F . These are just a few examples that come to mind— all of
stand a much better chance of successful accomplish­
ment now under the more open, cooperative Ford Administration.
G. I should point out that Secretary Simon fits in extremely
well with the Ford style.
1. Bill Simon has practiced openness and candor from the
day he joined the Government, first as Deputy Treasury
Secretary, then as Federal Energy Administrator, and
recently as Secretary of the Treasury.
2. Throughout this period he has established the respect
Congress, others in the Executive Branch, and

10

the press corps for his frankness, ready accessibility
and yet tough-mindedness.
3. He has constantly prodded the rest of us to do
likewise— something which suits me also.
Ill. Inflation and the Economy
A. I now would like to turn to the more specific and very
serious problem that is on practically everyone's mind—
the pervasive problem of double digit inflation and its
impact on the American economy.

I am hesitant to discuss

this serious and complex subject in much depth.

Although

I was an economics major at DePauw, I never practiced it.
The Treasury Department, of course, has a heavy responsi­
bility for economic policy, but it is not my own area of
responsibility.

Yet, I have received considerable

exposure to economic problems and policy matters from
sitting in on the Secretary's daily staff meetings of top
policy officials and keeping abreast of various economic
papers, speeches, and Congressional testimony.
B. In his August 28 press conference, President Ford, in
discussing domestic priorities stated: "Reducing inflation
is so paramount that I really don't have a number two
priority.

If we can take care of inflation and get our

economy back on the road to a healthy future, I think
most of our other domestic problems will be solved."

11
C. The problem of inflation is also Secretary Simon's number
one concern.

On several recent occasions he has commented

on the intolerable rate of inflation, the first sustained
seige of rapid peace-time inflation Americans have expe­
rienced.

The American people don't understand how double

digit inflation happened and they lack confidence that
the Government can solve it.

It is of little comfort

that our rate of inflation is "only about 12 percent a
year" when in most other parts of the developed world
it is much higher.

For example, Japan is experiencing

an inflation rate of 30 percent.

Italy, Great Britain

and France have current inflation rates in the range of
15 to 20 percent.

West Germany is one of the few indus­

trialized nations whose inflation rate is not quite so
unacceptable as ours— less than 8 percent.
D. At the risk of over-simplification, the unacceptable
price explosion we have experienced in 1973 and 1974 has
been primarily due to two general factors:
1. A series of severe temporary shocks that originated
largely outside the U.S. economic system.
2. Almost a decade of excessively stimulative fiscal
and monetary policies under both Democratic and
Republican Administrations.

12
E. The temporary outside shocks included:
1. Worldwide agricultural crop failures in 1972, which
caused an explosive rise in the price of farm products.
2. A worldwide economic boom, experienced by all of the
developed countries simultaneously, which put enormous
pressure on the prices of internationally traded raw
materials.
3. The two devaluations of the dollar.
4. The sudden Arab oil embargo which led to a quadrupling
of the price of imported crude oil.
5. Finally, the end of formal wage and price controls
on April 30 was an additional temporary force which
raised prices and wages faster than normal.
F. But aside from these severe temporary jolts, our general
economic policies over the past 10 years have been very
stimulative and, as a result, we were unable to absorb
these one-time shocks.

For example, during the decade

1955-1965, federal spending rose at an annual rate of only
6 percent.

Since 1965, however, federal expenditures have

risen 10 percent per year.
occurred in monetary policy.

A similar change in pattern
The nation's money supply,

as regulated by the Federal Reserve System, rose an

13
average of 2-1/2 percent per year in the 1955-1965
decade.

Since 1965, the money supply has increased an

average of 6 percent per year.

It is no coincidence

that the earlier period was marked by stable prices,
whereas the most recent period was one of record
peace-time inflation.
G. This country has been living beyond its means for so long
that the inflationary forces have become deeply imbedded
into our entire economic system— especially in the pattern
of price expectations and wage settlements.

It is for

these reasons that President Ford, Secretary Simon and
other leaders in this country are now being very careful
not to promise any miracles.

It will take a long time

and be a tough process to stem the tide of rising prices
and to get our economy back on a more stable basis.
will take several years, or more.
shortcuts.

It

There are no easy

We believe a more restrictive fiscal policy

of federal budget cutting coupled with a continuing
restraint on monetary policy are basic to controlling
inflation.

Yet, we also recognize the need for some

measures of relief for certain casualties and inequities
of inflation.

For example:

Proposed improvements in the system of unemployment
compensation.

14
—

Possible public service employment programs to go
into effect if the overall unemployment rate exceeds
a certain percentage.

—

Subsidies to financial institutions to augment the
very tight supply of mortgage funds to relieve strains
in the housing industry, which always gets hit the
hardest when inflation becomes serious.

—

Relief to public utilities unable to cope with the
enormous increase in the price of raw energy.

H. Another economic policy issue that we are particularly
concerned about is how to generate the enormous volume
of savings and capital investment that will be needed
in the next decade and beyond.

The trend in this country

has been more toward consumption and less toward invest­
ment.

Since 1960, for example, the percentage of total

output for plant and equipment spending, housing, and
public investment in the United States has been signifi­
cantly lower than in most other developed countries.

At

the same time, the projected capital requirements for
major priority areas over the next 10 years and beyond
stagger the imagination.

One representative study, for

example, calls for a minimum of $850 billion for capital
investment in the U.S. in the energy field alone (Project

Independence), and some estimates are even higher.

Then

there are the major capital investments required for such
things as new mass transit systems, housing, pollution
control, as well as to expand basic industrial capacity.
Although business is often looked at as the whipping boy
and profits as a dirty word, the fact is that profits and
retained earnings are a most important source for the
capital investments so urgently needed in the coming
years.
I. President Ford is moving promptly, carefully, and
thoroughly to review the economy and economic policy.
He has stated that there are no easy answers and at
times the going may be tough.

During this month, there

will be a series of conferences throughout the country
chaired by top government leaders and covering a number
of areas, including:

labor, state and local government,

agriculture and food, transportation, business and manu­
facturing, housing and construction, health, banking and
finance.

These conferences will culminate in a major

Conference on Inflation in Washington September 27 and
28.

These conferences will be a bi-partisan affair,

involving not only members of the Executive Branch and
the Congress but, most important, leaders from the
business community, labor and the academic world.

While

16

attempting to deal with some of the more troublesome
problems on an ongoing basis, the President sincerely
hopes that out of these sector conferences and the main
Conference on Inflation at the end of September will
come a better understanding of how we deal with the
inflation problem.

Although the President has made some

of his views known such as a strong aversion to restoring
wage and price controls, and a strong resolve to cut the
Federal budget, it would be inappropriate at this time
for me to predict where all of this will lead.

In fact,

the President has stressed that these conferences are to
be truly open forums; and are not intended to railroad
through preconceived notions.

In keeping with my earlier

remarks, however, the President certainly has the support
of the Congress in dealing with these most difficult
problems.
IV. Closing Remarks
A. We have covered a lot of ground this morning on how the
Ford Administration is likely to operate— the more open
Administration, the more cooperative relationship with
Congress, and the efforts to restore the public's
confidence in government and a renewed sense of ethics.
We have looked at the very serious problem of inflation,
its causes, and the general plan for addressing this
number one domestic priority.

17
B. In closing, I would like to share with you some of my
general observations about government service.

As

Treasury's Assistant Secretary for Administration the
past 2-1/2 years, I can say without question this has
been the most professionally rewarding period of my
career.

And most of my career has been spent in the

private sector.

My responsibilities cut across the

entire Treasury Department— handling the Department's
budget and financial management, personnel management,
organizational and management reviews, audit, computers,
facilities, and various other administrative programs.'
I am very much involved with improving the efficiency
and effectiveness of the Treasury Department and its
bureaus.
C. While admitting a bias, I believe the Treasury Department
is one of the best in the Federal Government.

Not only

do we deal with policies and operations that are vital to
the very existence of government— we have a long history
dating back to 1789 and the founding of our Constitution.
D. During my three years in Government, I have gained an
appreciation and respect for a number of dedicated career
civil servants as well as a top-notch group of appointees.
Unfortunately, government servants in this country too

18
often have not been held in the highest regard.

When

I was in college and graduate school, a government career
was not something many people aspired to.
E. Times have changed, however, and I would strongly
encourage you to consider career opportunities in the
Federal Government.

Don't overlook the fact that Federal

pay scales— particularly at the middle level— now compare
favorably with business and the professions.
F. The Treasury Department alone will be hiring about 5000
new employees at the professional entry level this year.
Most of the new hires will be recruited by our bureaus
directly from the college ranks.

Currently the best

career opportunities with the Treasury are in accounting,
law enforcement and general administration in such bureaus
as the Internal Revenue Service, the Customs Service, the
Secret Service, the Bureau of Alcohol, Tobacco and Fire­
arms, the Bureau of Government Financial Operations, and
the Comptroller of the Currency.

I believe the opportu­

nities for public service can be very rewarding and hope
that a number of you will seriously consider a career in
government.

of TREASURY

Department the
ASHINGTON, D.C|2G220 ,

TELEPHONE W04-2041

1

»
1|1

H M

FOR RELEASE AT 12 NOON
T U E S D A Y , SE PTE MB E R 10,

1974

ADDRESS BY THE HONORABLE DAVID R. MACDONALD
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT, OPERATIONS, AND TARIFF AFFAIRS)
BEFORE
THE AMERICAN IMPORTERS ASSOCIATION
NEW YORK CITY, NEW YORK
TUESDAY, SEPTEMBER 10, 197^
IT’S HIGH NOON AT THE CUSTOMS CORRAL
(OR HOW FAST CAN YOU DRAW BACK?)"
It is both an honor and a pleasure to be with your
Association today for my first major speech as Assistant
Secretary of the Treasury. I had a profitable exchange of
views with your President, Mr. Katz, and Messrs. O ’Brien,
Gitkin, and Casey during their recent trip to Washington, and
I look forward to similar exchanges in the future.
As a lawyer before joining the Government, I specialized
principally in public offerings, private corporate financing,
mergers and acquisitions, and other corporate legal problems.
It probably is not obvious to you, therefore, why I was
appointed Assistant Secretary in charge, among other things,
of tariff affairs and of the 185-year old Customs Service. I
can only say that having Customs, Secret Service, Alcohol,
Tobacco and Firearms, the Mint, the Bureau of Engraving and
Printing, not to speak of Foreign Assets Control and the
Consolidated Federal Law Enforcement Training Center, George
Shultz thought I would make a good utility infielder. When
I took office, my income dropped in the same proportion as
the size of my office increased — which Secretary Simon
advised me was a fair exchange, considering that I was also
being granted the privilege of working for the Treasury Depart­
ment. Having been here for five months, I must say that I
agree with him.
There is, however, one way in which my being unfamiliar
with the Customs Service, its procedures and policies, may be
helpful. The lack of any preconception regarding Customs
operations brings into immediate and sharp relief those facets

WS-95

-

2

-

of the Customs Service which are unique. The sight of^a
missionary boiling in a pot may be old hat to the cannibals,
but it will probably leave a sharp impression on first-time
visiting missionaries. In the same way, those who deal
daily with Customs may have become inured to its unique
statutory procedures. To a newcomer like myself, however, the
entire process, governed by a statute originally enacted in
1789 and revised only in piecemeal fashion since that time,
resembles a scene from the Western frontier in the nineteenth
century.
Perhaps the best way I can convey this is by way of meta­
phorical scenario — as you may know, we government employees
are prone to talk in terms of scenarios — and that scenario,
if I were writing it, would go as follows:
It's approaching high noon at the old Customs saloon.
"Doc" Customs, the owner and general law-and-order man in the
territory is lounging at the bar. Doc is a little ill-at-ease — ■
rumors have been flying that Sam Importer, from the dreaded
Importer gang, is in town and looking for trouble. A confronta­
tion is at hand.
Common belief is that the Importer gang rustled some cattle
from Doc Customs’ corral last year, but no one knows exactly how
much, because the Customs hands have such a large spread that
it’s difficult to keep track of the total herd.
In any event, a bead of sweat breaks out on Doc’s forehead
as he tosses down his drink and starts checking his weapons.
Doc has a lot of weapons, but he knows that Sam Importer laughs
at the ineffectiveness of all of them except one - Doc’s gun.
This unique firearm is known as the Section .592 Magnum. It
has the combined qualities of a gatling gun and a 10-pound
smooth bore cannon. It’s not too good at long distances but
it’s deadly at close range. The only problem with the Section
.592 Magnum is that sometimes it’s difficult to identify the
victim afterwards.
As the sun approaches its zenith in the sky overhead, the
townsfolk draw their shades and lock their doors — all except
a small boy loitering near the swinging doors of the Customs
saloon.
"Get away boy," murmers Doc.
"I’ve gotta have a clear line
of fire in order to nail Sam Importer the second he comes
through the swinging doors."

-3,TWhy donTt you wait until he gets inside the room and
then fire?” asks the kid innocently.
"You don’t understand, boy," replies Doc.
"If I don’t
blast Sam Importer just at the moment he comes through those
swinging doors, I ’ll never get another chance."
The clock ticked on toward twelve.
His hand creeps toward his holster.

Doc’s muscles tighten.

The whinnying of a horse outside breaks the silence. Doc
realizes that this is it — only one man can be outside and that
man is coming in.
The swinging double doors burst open — there, big as life
is Sam Importer.
"I’ve got an itchy trigger finger and I ’m
looking for the Doc," he roars.*•
# * #
The remainder of the scenario is strangely missing. Some
people, mostly from the Importer- gang, speculate that Doc
emptied his .592 into Sam as he came through the door*, only to
find that Sam really did have an itch in his trigger finger
which he wanted the Doc to treat with Cornhusker’s Lotion for
Men. Doc, according to this version, promised to remove the
.592 bullets at his first opportunity.
Others, principally the hands on the Customs ranch, allowed
that Sam Importer not only did not get shot, but that he made
off with several bottles of unmetricated liquor before Doc
could get his gun out of his holster.
Whichever way the story really came out, this allegory does
have a moral. That moral is that the Customs laws and procedures
are antiquated relics from another era — the era of the Cali­
fornia gold'rush, the, three-masted square rigger, and the pony
express. This is not to say that the ancient Customs practices
have never produced anything worthwhile. Nathaniel Hawthorne
was inspired to write The .Scarlet Letter as a result of working
as a Customs weigher and grader in Salem, Massachusetts. The
experience of Chester Alan Arthur as Chief of the New York
Customs Port undoubtedly stood him in good political stead when
he later became President. Despite these intangible benefits,
something has to be done in order to bring the Customs entry
and clearance procedures out of the rigging and into the airconsitioned business offices of the twentieth century.

-4-

This is not to criticize the people at Customs who are
involved in the process of clearing merchandise for entry.
The fact that the process works as well as it does under
existing primitive groundrules is a compliment both to the
thousands of dedicated Customs 'officers and to the importers
and customs brokers with whom they deal. It is conventional
wisdom that the personal element is always able to botch up
the most artfully and accurately designed program. The fact
that the present Customs entry and clearance procedure works
as well as it does, in my opinion, is proof that the reverse
is also true — that people can make things work in spite of
design deficiencies.

I
am here today to discuss possible remedies for these
design deficiencies, and to solicit your help in bringing them
to fruition. The remedies presently contemplated are two­
pronged. First, there is involved the controls over the
physical entering of the goods. The incredibly complex entry
procedures must be simplified without threatening the revenue
or sacrificing the administration of the two hundred odd laws,
in addition to the Tariff Act, that Customs must administer
at ports-of-entry and along land and sea borders. Second, the
legislatively mandated procedure for reporting, paying duties
and enforcing duty payments must be brought into line with the
automated practices presently utilized by most businesses.
The modernization of the entry procedure, as many of you know,
has already been commenced under the leadership of the present
Commissioner of Customs, Mike Acree. Briefly, the streamlining
of the entry procedure involves three main functional Customs
■ ^
areas: immediate delivery control, automated entry screening,
■ 2
and collection processing.
I i
■

t

The immediate delivery control portion of the program
. !£
involves the creation and maintenance of an automated inventory H j
of all merchandise released under current Customs' bonding
H c
procedures. This procedure allows expeditious entry of the
goods while tracking and reporting to Customs any subsequent
failure to file the required entry documentation. It relieves ■ t
the Customs import specialist of many clerical functions,
H g
permitting him to concentrate on more complex and difficult
H t
entries, thereby improving Customs1 efficiency. Thé system
provides the capability for prompt final action regarding entry
transactions, which is accomplished by producing daily bulletin ■ w
notices of liquidation rather than weekly postings that currently® i
are experiencing a three-week delay. We believe that the daily H t
t
g

5bulletin notices of liquidation will give a more timely
notification of trade community financial liability to Customs,
in addition to removing the red tape that, surrounds the physi­
cal movement of goods at the docks.
This system was inaugurated at Philadelphia, with the
immediate delivery control successfully installed and opera­
tional since April 197^* Present plans are to implement the
system in New York in 1976.
The automated entry screening procedures verify, and per­
form calculations on, data obtained from formal entries filed
by customs brokers and importers. Many of the procedures of
entry processing currently performed clerically will upon
adoption of the system, be automatically performed. Duty
computations will be made and merchandise subject to quota
provisions or Internal Revenue taxes will be identified. Addi­
tionally, methods will be used to identify merchandise which,
by past experience, may require extensive review by import
specialist teams.
The collection^ processing subsystem, the third function,
will automate the billing and cashier functions and establish
an accountability for all collected funds.
Thus, under the proposed system, assuming that an appro­
priate bond is on file with Customs, the importer can obtain
release of his merchandise after Customs examination without
the payment of duty. Customs will produce a monthly statement
that will allow the importer to make one payment for trans­
actions performed at various U. S. ports. Paperwork which
presently prevents entries from being liquidated for four weeks
or more will be completed in a matter of days.
Perhaps the most significant result of the program will be
that ^importers will be able to deal with Customs as a single
service instead of dealing separately with separate ports, with
the concomitant variation in requirements and procedures.
Prom our standpoint at Treasury, we believe this system
will remove many of the routine clerical tasks from our
inspectors and import specialists and will, therefore, allow
them greater time to perform their professional judgment func­
tions. It will simplify Customs’ relations with the many other
government agencies that they serve. Almost an incidental

-6
result Is the faster and more accurate management information
which is generated in order to make better decisions for
improved service. Of great importance to us, of course, is
that Customs can develop this system within their current
capabilities. It does not require massive reorganization or
the appropriation of huge amounts of additional funds.
There are many details of this system which remain to be
worked out. Customs must and will work with importers, brokers,
bonding companies, common carriers and others.
In this connec­
tion, I note that a general briefing between Customs and the
AIA regarding this entire concept was held last month.
Just as important to the people in this room as the
modernized physical entry procedures is a related legislative
program which we presently contemplate proposing to Congress.
The substantive details of this program have not been worked
out, and will not be worked out without an opportunity for
importers, borkers, freight forwarders and other interested
parties to be heard. The essense of the program as now envisaged,
however, would be the replacement of the entry-by-entry payment
system with a procedure whereby Customs duties would be reported
and paid on a periodic basis by those importers, and only those
importers, who qualify for such treatment. In order to adopt
this procedure without threatening the revenue, a statutory
basis which enables Customs to audit the declared tax liability
of the importer is necessary. Thus, the proposed legislation
would require the maintenance of books and records by the
importer relating to his business; would grant the Secretary
of the Treasury or his delegate the right to audit those books;
and would empower the Secretary or his delegate to require their
production as well as the appearance of the importer himself
for the purpose of giving testimony regarding his import
activities.
I would like to emphasize here and now that any existing
bookkeeping system maintained by an importer which is sufficient
to reveal his financial condition and results of operations
should also satisfy the proposed legislative requirement to
maintain books and records. We have enough paper and forms in
the Government now to satisfy the most discerning bureaucrat.
No duplicate bookkeeping system should be required and, in fact,
all those who presently pay income tax must meet similar legal
requirements under the Internal Revenue laws. Our experience,

-7 -

however, has led us to conclude that existing civil enforcement
powers are so truncated and that existing discovery procedures
are so inadequate that the ability of Customs to find out the
facts in an orderly manner is severely hampered. The result has
been to turn the process into an adversary contest with, as you
know, extremely high stakes. We anticipate creating effective
methods of proceeding to collect the correct duty by the civil
administration of the laws without resorting to procedures
which are more nearly akin to criminal procedures.
At the same time, we propose, without endangering the
revenue, to reduce the myriad of procedures and documentation
required by filing repetitive entry documents and duty payments.
As business practices become more and more technologically
oriented, the retention of these green eye shade procedures
becomes not only an anomoly, but also an unnecessary obtacle to
further modernization. The Internal Revenue Service, along
with countless private businesses, long ago recognized that
benefits in terms of efficiency and economy, without weakening
verification controls, could be obtained from a system of
periodic account reporting. This system is equally suitable to
the processing of repetitive, large-volume imports. However,
without the recordkeeping and verification authority proposed
in the legislation, any change from entry-by-entry reporting to
a periodic return system would, in our view, endanger the
revenue. In addition, the proposed alternative method of
reporting and paying Customs duty would be entirely voluntary
with the importer. We do not expect to require the importer to
bypass the entry-by-entry method of importing unless he believes
it to be advantageous to himself. In this way both we at
Treasury and the importing community can experiment, with a
view to ascertaining whether the new procedures will be bene­
ficial to each of us.
Philosophically speaking, I do not personally believe that
the proposed periodic reporting and payment concept can be
successfully inaugurated unless the system of reporting is
geared to existing business reporting methods of the importer.
The success of the voluntary filing system of the Internal
Revenue Service is in my view, based upon the fact that income
tax reporting is built around an existing business bookkeeping
and financial reporting system which is normally audited and
utilized for shareholder reporting and internal management use.
This is why we feel confident that we can assure you that no
new bookkeeping requirements will be instituted. To do so

■
-

8
-

would, in and of itself, defeat the system. In fact, the
ultimate purpose of the new system would be to work toward
a single set of records which businessmen can maintain that
will be adequate for all governmental reporting and taxpaying
functions. You should be aware that transactions between
related importers and exporters as reported to Customs will be
examined on an integral basis with the same transactions as
reported, for example, to the Internal Revenue Service.
Ki
The question may have occurred to you by now whether the
penalty provisions of Section 592 would be retained for those
imports brought in under the new procedures. I can only say
at this time that we would listen to any suggestion that would
result in more sophisticated enforcement procedures which are
equally effective in protecting the revenue. I underline that
condition.
Speaking of Section 592, I should mention that we intend
to publish major portions of the Treasury guidelines governing
mitigation procedures in the relatively near future. At the
same time, while we are always willing to listen to suggestions
for procedural improvements, I would not anticipate any change
in the manner of use of Section 592 beyond those changes which
were suggested by the AIA and others and were subsequently
adopted by Treasury. Until adequate medical help is available,
the in terrorem effect of exorcising duty violations by Customs
witch doctors will have to remain in place.
We also look forward to seeing your representatives in
Washington. We at Treasury and Customs desire to work
with you who are closely involved in the importing process to
improve that process. Having worked in what I now call the
"private sector" for many years, I am well aware that a continuing
dialog must be maintained between industry and government in
order to promote a clearer perspective of importing activities
by Customs and of Customs’ activities by the importing community.
I
have only one recommendation to make regarding your
visit. Don’t come in with an itchy trigger finger — just belly
up to the bar and the verbal libations will be on the house!
Thank you.

-y

FOR IMMEDIATE RELEASE

SE PT EM B E R

10,

1974

TREASURY BILL OFFERING REDUCED
The amount of Treasury bills offered today for
sale in the regular weekly auction of September 16,
for delivery September 19, was reduced to $4.3 billion,
$100 million less than last week’s offering and $200
million less than the amount of bills maturing on
September 19.
The Treasury's short-term cash outlook is such
that it is expected that the amount to be offered in the
auction of September 23 will also be $200 million less than
the amount maturing.

The reduction may not be continued

in subsequent weekly offerings.

oftheTREASURY

Department
lASHINGTON, D.C 20220

TELEPHONE W04-2041

TOR IMMEDIATE RELEASE

September 10, 1974
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,
to be issued

September 19, 1974, as follows:

91-day bills (to maturity date) in the amount of $2,500,000,000, or thereabouts,
representing an additional amount of bills dated
December 19, 1974
$1»901,235,000,

June 20, 1974,

(CUSIP No. 912793 VD5) , originally issued in the amount of

the additional and original bills to be freely interchangeable.

182-day bills for $ 1,800,000,000, or thereabouts, to be dated
lid to mature

and to mature

March 20, 1975

September 19, 1974,

(CUSIP No. 912793 WA0) .

The bills will be issued for cash and in exchange for Treasury bills maturing
September 19, 1974 , outstanding in the amount of $4,512,195,000, of which Government
Accounts and Federal Reserve Banks, for themselves and as agents of foreign and
international monetary authorities, presently hold $2,772,325,000.

These accounts

tiny exchange bills they hold for the bills now being offered at the average prices
<?f accepted tenders.
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
liioimt wi 1i be payable without interest.

They will be issued in bearer form in

(^nominations of $10,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value) and in book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to the closing
■°ur> one-thirty p.m., Eastern Daylight Saving time, Monday, September 16, 1974.
■tenders will not be received at the Treasury Department, Washington.
®nat be for a minimum of $10,000.
■>>000.

Tenders over $10,000 must be in multiples of

In the case of competitive tenders the price offered must be expressed on

■ e basis of 100, with not more than three decimals, e.g., 99.925.
■t

Each tender

be used.

Fractions may

It is urged that tenders be made on the printed forms and forwarded

■ the special envelopes which will be supplied by Federal Reserve Banks or Branches
■

application therefor.
Banking institutions and dealers who make primary markets in Government

■ curities and report daily to the Federal Reserve Bank of New York their positions
(OVER)

-2with respect to Government securities and borrowings thereon may submit tenders
for account of customers provided the names of the customers are set forth in
such tenders.
own account.

Others will not be permitted to submit tenders except for their
Tenders will be received without deposit from incorporated banks and

trust companies and from responsible and recognized dealers in investment securiti
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 thosi

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 resp
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

September 19, 1974,

in cash or other immediately available funds or in a like face amount of Treasury
bills maturing
treatment.

September 19, 1974. Cash and exchange tenders will receive equal j

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 accrJ
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 I
income tax return, as ordinary gain or loss, the difference between the price pail
for the bills, whether on original issue or on subsequent purchase, and the amounj
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 issm
Copies of the circular may be obtained from any Federal Reserve Bank or Branch.

ìrs

SSL OF

DeportmentoftheJREASURY
WASHINGTON. D.C. 20220

I

Tf
fpwìinf uuru
-m u I
TELEPHONE
W04-2041

^
U U

Lb

'CUi
MHRÌ

FOR IMMEDIATE RELEASE

September 10, 1974

PARSKY TO LEAD HIGH-LEVEL DELEGATION
TO SAUDI ARABIA
Secretary of the Treasury William E. Simon announced
today that Assistant Treasury Secretary Gerald L. Parsky
will lead a high-level delegation to Saudi Arabia for
meetings of the U.S.-Saudi Working Groups on Agriculture
and Science and Technology.
’’These meetings,” Simon noted, "evidence the continuing
desire by the U.S. to broaden economic relationships with the
Saudis and will make a further contribution to our mutual
efforts to bring peace and economic prosperity to the
Middle East.”
Parsky, who is the Executive Secretary of the U.S.Saudi Joint Commission on Economic Cooperation described
the Working Groups as ”an important means to assist the
Saudis in their desire to industrialize and diversify
their economy."
The Working Groups are made up of senior officials
from the National Science Foundation and the Departments
of State, Agriculture and Interior. Among the items to
be discussed are: integrating the development of science and
solar technology in the industrialization program for Saudi Arabia,
desalination technology, and methods of developing an
agriculture infrastructure.
Parsky will depart from Washington, D.C., Wednesday,
September 11, and return to Washington on Thursday,
September 19.
o 0 o

WS-97

of TREASURY

Department the
A/AiSHINGTON, D.C. 2022$

■

TElEPHONE W04-2041

H

■

FOR IMMEDIATE RELEASE

I

J

September 11, 1974

TREASURY ISSUES
COUNTERVAILING DUTY ORDERS
IN THREE COUNTERVAILING DUTY
INVESTIGATIONS
Assistant Secretary of the Treasury David R. Macdonald
announced today the issuance of countervailing duty orders
with respect to imports of non-rubber footwear from Brazil
and Spain, and bottled green olives from Spain.
These actions were taken pursuant to Section 303
of the Tariff Act of 1930 (19 U.S.C. 1303). Under this
section, the Secretary of the Treasury is required to
assess an additional duty equal to the amount of a "bounty
or grant" paid or bestowed on merchandise imported into
the United States. In all three cases such bounties or
grants were found. Accordingly, the countervailing duty
orders set forth the rates of the additional duties
required to offset the export incentives.
* These actions will be published in the Federal
Register of Thursday, September 12, 1974. Countervailing
duties will become applicable 30 days after publication
of the orders in the Customs Bulletin.
In the case of non-rubber footwear from Brazil, a
Countervailing Duty Proceeding Notice was published in the
Federal Register on March 8, 1974. Based upon the informa­
tion presented and the nature of the Brazilian subsidy
system, the countervailing duty rate has been estimated
to be 12.3 percent for imports from manufacturers which
export 40 percent or less of the value of their total sales
and 4.8 percent on imports from manufacturers which have
exports accounting for more than 40 percent of total sales.
Since these rates have been calculated on a representative
sample of Brazilian exporters, the Treasury Department is
prepared to consider precise information with respect to
any firm involved and adjust the countervailing duty rate
as appropriate. During calendar year 1973, imports of non­
rubber footwear from Brazil were valued at $81 million.

(OVER)

2

In the proceedings on non-rubber footwear and bottled
green olives from Spain, Countervailing Duty Proceeding
Notices were published on July 16, 1974. Based upon the
information presented, the countervailing duty rates have
been ascertained to be 3.0 percent for non-rubber footwear
and 2.9 percent for bottled green olives. During calendar
year 1973, imports of non-rubber footwear and bottled green
olives from Spain were valued at approximately $189 million
and $38 million respectively.
#

#

#

of TREASURY

Department the
IN G im D.C. 2022»

! TEt£PH(Mt£ W04-2Ô41

Hi
September 10, 1974

MEMORANDUM FOR CORRESPONDENTS:
Secretary of the Treasury William E. Simon will open a
meeting of Federal officials and key representatives from the
state public regulatory commissions on the financial problems
facing the electrical utility industry, at 3:00 p.m., Wednesday,
September 11, 1974, at the Federal Power Commission in Hearing
Room A.
Other Federal officials who will participate include:
Arthur Burns, Chairman, Federal Reserve Board; L. William
Seidman, Executive Director, Summit Conference on Inflation;
Rogers C. B. Morton, Secretary of the Interior; Russell E.
Train, Administrator, Environmental Protection Agency; Dixy
Lee Ray, Chairman, Atomic Energy Administration; John C.
Sawhill, Administrator, Federal Energy Administration; John
Nl Nassikas, Chairman, Federal Power Commission; Arthur F.
Sampson, Administrator, General Services Administration; and
Richard E. Wiley, Chairman, Federal Communications Commission.
The meeting will be open to the press.
oOo

Departmentof

thefREASURY
TELEPHONE W04-2041

jl D.C. 20220

September 9, 1974

FOR RELEASE 6:30 P.M.

RESULTS OF TREASURY’S WEEKLY BILL AUCTIONS
Tenders for $2.6 billion of 13-week Treasury bills and for $ 1.8 billioi
of 26-week Treasury bills> both series to be issued on September 12, 1974,
¡vs
The details are as
were ouer.ed at the Federal Reserve Banks today
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturin'* December 12, 1974

Price
mmm
Low

97.720 a/
97.686
97.700

"*“ 0

Average

!*J Excepting

1

Equivai ent
Annual Rate

9.020%
9.154%
9.099%

26-week bills
ma tur ing March 13,

Price

Ü

1975

Equivalent
Ann vial Rate

95.464
95.452
95.460

8.972%
8.996%
8.980%

1/

tender of $50,000

Tenders at the low price for the 13-weel- bills were alio t ted
Tenders at the low price for the 26-week bills were allu 5:ted

92%.
59%.

TOTAL TENDERS APPLIED FOR AMD ACCEPTED BY FED!1EAL RESERVE DIST R tCIS:
District
Boston
Newr York
Phi lai el phi.a
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneepo! 11
: Kansas Cicv
Dali as
San Francis
TOTALS

A d plied For

Accepted

44,320,000
$ 54,720,000 $
1,926,830,000
3,015,035,000
47,450,000
47,450,000
60,615,000
61,115,000
64,345,000
71,345,000
53,120,000
54,220,000
171,725,000
262,525,000
51,490,000
44,490,000
16,310,000
16,310,000
58,895,000
51,060,000
39,655,000
29,055,000
217,795,000
90,795,000
$3,950,555,000

$2,600,115,000

Applied For

Accepted

$ 47,105,000 $
30,710,000
3,094,640,000 1,459,490,000
21,985,000
97,990,000
71,025,000
42,675,000
59,805,000
36,455,000
36,370,000
44,680,000
41,835,000
221,510,000
22,970,000
57,520,000
5,525,000
15,775,000
37,860,000
50,755,000
20,730,000
46,330,000
43,800,000
260,425,000
b/$4> 067,560,000

$1,800,405,000

Ib/Includes $ 5 7 6 165 000 noncornpet-itive tenders accepted at average pr ice.
tenders accepted at average price
[17 These rates are on a bank discount basis.
The equivalent coupon issue
yields are 9 .4 4 % for the 13—week bills, and 9 .5 4 % for the 2 0 -week biI 1•

|c/ Includes $ 434|335*000 noncompetitive

DepartmentoftheTREASURY
ASÉfNGTON, D C 20220

TELEPHONE W04-2041

REVISED

MEMORANDUM TO THE PRESS

September 9, 1974

FINANCIAL CONFERENCE ON INFLATION
There are three attachments to this memorandum:
1.

A revised list of individuals who have
accepted invitations to participate in
the "Financial Conference on Inflation"
September 20, 1974 in the Federal Room,
Statler Hilton Hotel, Washington, D.C. (This
list now includes U.S. Senators, etc.)

2.

The text of the letter sent to conference
delegates by Secretary of the Treasury
William E. Simon. (This text--reproduced here
as a convenience to you--was included with the
September 6 delegate list.)

3.

The agenda for the September 20 meeting. (This
was also part of the material released on
September 6.)

WS-91

MEMBERS OF BANKING AND
FINANCE COMMUNITY
WHO WILL ATTEND
THE FINANCIAL CONFERENCE ON INFLATION
WASHINGTON, D.C.
SEPTEMBER 20, 1974
HELD AT THE REQUEST OF
PRESIDENT GERALD R. FORD
AND THE CONGRESS OF THE UNITED STATES

The Honorable William E. Simon
Secretary of the Treasury
Department of the Treasury
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Mr. Roy Ash
Director
Office of Management and Budget
Old Executive Office Building
17th and Pennsylvania Avenue, N.W.
Washington, D.C. 20500
Dr. George Leland Bach
Professor of Economics and Public Policy
Stanford University
Stanford, California 94305
Mr. Robert H.B. Baldwin
President
Morgan Stanley and Company
1251 Avenue of the Americas
New York, New York 10020
The Honorable Jack F. Bennett
Under Secretary for Monetary Affairs
Department of the Treasury
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Mr. Robert H. Bethke
President
Discount Corporation of New York
58 Pine Street
New York, New York 10005
Mr. Archie R. Boe
Chairman of the Board
Allstate Insurance Company
Allstate Plaza
Northbrook, Illinois 60062
Mr. Thomas R. Bomar
Chairman, Federal Home Loan Bank Board
320 First Street, N.W.
Washington, D.C. 20552

1

The Honorable Arthur F. Burns
Chairman
Board of Governors of the Federal
Reserve System
20th Street and Constitution Avenue, N.W,
Washington, D.C. 20551
Dr. Gwen Bymers
Professor and Chairman of the
Department of Consumer Economics
Cornell University
Ithaca, New York 14850
Mr. Richard P. Cooley
President and Chief Executive Officer
Wells Fargo Bank, National Association
San Francisco, California 94120
Mr. Howard Coughlin
President
Office of Professional Employees
International Union
265 West 14th Street
New York, New York 10011
Mr. Morris D. Crawford, Jr.
Chairman of the Board
Bowery Savings Bank
110 East 42nd Street
New York, New York 10017
The Honorable Carl T. Curtis
United States Senate
New Senate Office Building
Room 2213
Washington, D.C. 20515
Dr. Robert G. Dederick
Senior Vice President and Economist
Northern Trust Company
50 South LaSalle Street
Chicago, Illinois 60690

2

Mr. Robert Ray Dockson
President
California Federal Savings and
Loan Association
5670 Wilshire Boulevard
Los Angeles, California 90036
Dr. Otto Eckstein
Department of Economics
Harvard University
231 Littaner Center
Cambridge, Massachusetts

02138

Mr. Gilbert R. Ellis
President
Household Finance Corporation
3200 Prudential Plaza
Chicago, Illinois 60601
Dr. Grover W. Ensley
Executive Vice President
National Association of Mutual
Savings Banks
200 Park Avenue
New York, New York 10017
The Honorable Edgar R. Fiedler
Assistant Secretary for Economic Policy
Department of the Treasury
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Mr. William H. Franklin
Chairman
Caterpillar Tractor Company
100 N.E. Adams Street
Peoria, Illinois 61629
Mr. Gaylord Freeman
Chairman of the Board
The First National Bank of Chicago
One First National Plaza
Chicago, Illinois 60670
Dr. Tilford C. Gaines
Senior Vice President and Economist
Manufacturers Hanover Trust
350 Park Avenue
New York, New York 10022

3

The Honorable Stephen S. Gardner
Deputy Secretary
Department of the Treasury
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Mr. Ray Garrett, Jr.
Chairman
Securities and Exchange Commission
500 North Capitol Street» Room 812
Washington, D.C. 20549
Mr. Richard G. Gilbert
President of Citizens Savings
Association
100 South Central Plaza
Canton, Ohio 44702
Mr. Alan Greenspan
Chairman
Council of Economic Advisors
Old Executive Office Building
Washington, D.C. 20506
Mr. David B. Harper
President
First Independence National Bank
234 State Street
Detroit, Michigan 48226
Mr. Milton J. Hayes
Chairman
Government Fiscal Policy Committee
Independent Bankers Association of Americ
American National Bank of Chicago
33 N. LaSalle Street
Room 1619
Chicago, Illinois 60602
Mr. M.R. Hellie
Pres ident
Credit Union National Association, Inc.
1730 Rhode Island Avenue, N.W.
Suite 810
Washington, D.C. 20036

4

Mr. Richard D,. Hill
Chairman of the Board
First National Bank of Boston
100 Federal Street
Boston, Massachusetts 02110
Mr. J. Henning Hilliard
Chairman
J.J.B. Hilliard, W.L. Lyons, Inc.
545 South Third Street
Louisville, Kentucky 40 202
Mr. Frank J. Hoenemeyer
Executive Vice President
Prudential Insurance Company of
America
Prudential Plaza
Newark, New Jersey 07101
The Honorable Ernest F. Hollings
United States Senate
Old Senate Office Building
Room 432
Washington, D.C. 20510
The Honorable Jacob Javits
United States Senate
Old Senate Office Building
Room 326
Washington, D.C. 20510
Mr. Paul R. Judy
Chairman and President
A.G. Becker § Company, Incorporated
2 First National Plaza
Chicago, Illinois 60670
Mr. Harvey E. Kapnick, Jr.
Chairman and Chief Executive Officer
Arthur Anderson and Company
69 West Washington Street
Chicago, Illinois 60602
Mr. W.J. Kennedy, III
Pres ident
North Carolina Mutual Life Insurance Co.
P.0. Box 201
Durham, North Carolina 27702
Mr. Ralph F. Leach
Chairman of the Executive Committee
Morgan Guaranty Trust Company
23 Wall Street
New York, New York 10015

5

Mr, Gustav L. Levy
Partner
Goldman, Sachs and Company
55 Broad Street
New York, New York 10015
The Honorable Russell B. Long
United States Senate
Old Senate Office Building
Room 217
Washington, D.C. 20510
Mr. Bruce K. MacLaury
President
Federal Reserve Bank of Minneapolis
250 Marquette Avenue
Minneapolis, Minnesota 55480
Dr, Paul W. McCracken
Senior Consultant
Department of the Treasury
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Mr. Rex J. Morthland
President
American Bankers Association
The Peoples Bank and Trust Company
Post Office Box 799
Selma, Alabama 36701
Mr. James J. Needham
Chairman of the Board
New York Stock Exchange
11 Wall Street
New York, New York 10005
Mr. Herman Nickerson, Jr.
Administrator
National Credit Union Administration
2025 M Street, N.W.
Washington, D.C. 20456
Dr. Arthur M. Okun
Senior Fellow
The Brookings Institute
1775 Massachusetts Avenue, N.W.
Washington, D.C. 20036

6

Mr. J. Charles Partee
Managing Director
Office of Research and
Economic Policy
Board of Governors of the Federal
Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
The Honorable Wright Patman
U.S. House of Representatives
Rayburn House Office Building
Room 2328
Washington, D.C. 20515
Ms. Sylvia Porter
Syndicated Financial Columnist
30 East 42nd Street
New York, New York 10017
Mr. Donald T. Regan
Chairman of the Board
Merrill, Lynch, Pierce, Fenner and
Smith, Inc.
One Liberty Plaza
165 Broadway
New York, New York 10006
The Honorable Henry S. Reuss
U.S. House of Representatives
Rayburn House Office Building
Room 2186
Washington, D.C. 20515
The Honorable John J. Rhodes
U.S. House of Representatives
Rayburn House Office Building
Room 2310
Washington, D.C. 20515
Mr. David Rockefeller
Chase Manhattan Bank, National Association
One Chase Manhattan Plaza
New York, New York 10015
Mr. Robert V. Roosa
Partner
Brown Brothers Harriman and Company
59 Wall Street
New York, New York 10005
Mr. Ralph S. Saul
Vice Chairman
Insurance Company of North America
1600 Arch Street
Philadelphia, Pennsylvania 19101

7

Dr, Raymond J, Saulnier
Professor Emeritus of Economies
Barnard College
Columbia University
5-A Lehman Hall
New York, New York 10027
The Honorable George P. Shultz
Executive Vice President
Bechtel Corporation
50 Beale Street
San Francisco, California 94119
The Honorable J. William Stanton
U.S. House of Representatives
Rayburn House Offfice Building
Room 2448
Washington, D.C. 20515
Mr. Robert H, Stewart III
Chairman of the Board
First International Bancshares, Incorporated
Post Office Box 6031
Dallas, Texas 75283
Mr. Thomas I. Storrs
Chairman of the Executive Committee
North Carolina National Bank
Post Office Box 120
Charlotte, North Carolina 28255
Mr. Norman Strunk
Executive Vice President
U.S. League of Savings Associations
11 East Wacker Drive
Chicago, Illinois 60601
Mr. John Tomayko
Director, Insurance Pension
United Steelworkers of America
5 Gateway Center
Pittsburgh, Pennsylvania 15222
The Honorable Charls E. Walker
President
Charls E. Walker Associates
1730 Pennsylvania Avenue, N.W.
Washington, D.C. 20006

8

The Honorable Frank Wille
Chairman
Federal Deposit Insurance Corporation
550 17th Street, N.W.,
Washington, D.C. 20429
Mr. Carlton Wilson
Chairman of the Board and Director
Robert W. Baird and Company, Inc.
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53201
Dr. Charles J. Zwick
President
Southeast Banking Corporation
100 South Biscayne Boulevard
Miami, Florida 33131

9

TEXT OP THE LETTER
SECRETARY OF THE TREASURY
WILLIAM E. SIMON
HAS SENT TO PARTICIPANTS IN THE
'•FINANCIAL CONFERENCE ON INFLATION"
BEING HELD
IN WASHINGTON, SEPTEMBER 20, 1974
Dear :
I
am pleased to learn that you have accepted
the President’s invitation to the Conference on
Inflation on September 27 and 28 and the Financial
Conference on Inflation on September 20.
At the banking and finance meeting, we will
concentrate on a broad range of issues relating
to inflation. We are anxious to have your thinking
on this, the nation’s number one problem--on its
causes, its effects, and its cures. Special emphasis
will be devoted to fiscal and monetary policy, the
capital markets, the international situation, and
financial institutions.
Attached is a preliminary agenda which outlines
the format of the meeting and the major subjects that
will be covered. We are preparing a compendium of
selected papers on each of these topics. We invite
you to submit a one-page summary of your views on any
of the agenda items for inclusion in this document.
We need to receive these summaries by September 13,
so that we can distribute the compendium to all
participants in advance of the meeting.
An outstanding group of congressional leaders,
government officials, economists, and business and
financial leaders have accepted our invitation.
I
am confident that we in government will benefit from
your advice and discussions, and I am going to conduct
the meeting with that goal in mind.

2

The meeting on the 20th will be held at the
Statler-Hilton beginning at 9:00 a.m.
I would
also like to invite you to a reception and dinner
for the participants on the evening of the 19th.
This dinner will be held in the Executive Dining
Room at the Federal Deposit Insurance Corporation,
550 Seventeenth Street, N.W., at 7:00 p.m. We will
keep you advised of any other details of the Conference,
and I want to say again how much I appreciate your
acceptance.
Sincerely,

William E. Simon

Agenda for September 20
Financial Conference on Inflation

9:00 AM - Introduction
9:10 AM - Economic Situation and Policy Briefing Council of Economic Advisers
9:25 AM - Briefing on the Budget Office of Management and Budget
9:40 AM - Fiscal Policy
Major Fiscal Objectives and Options for
Fiscal Years 1975, 1976, and Beyond
Possible Cuts in Federal Spending
Possible Changes in Federal Taxation: Current
Levels, Incentives, Deterrents, Equity
11:30 AM - Monetary Policy
Current State of Domestic Financial Markets
Current Monetary Policy:
Given the Circumstances,
has it been too Tight or about Right? What Should
the Future Course of Monetary Policy be?
1:00 PM - Lunch
2:00 PM - Capital Markets and Capital Formation
Discussion of the Dimensions of Future Capital
Requirements for Energy, Mass Transit, Housing
and All Other Needs of the Economy
Policies to Increase the Total Volume of
Saving and Investment
Policies to Insure Adequate Financing through
the Equity and Long-Term Debt Markets

2

3:00 PM

International Economic Policy and Inflation
Discussion of the Appropriate U. S. Role in
International Economic Policy
International Financial Aspects of World Inflation

4:00 PM

Financial Institutions and Inflation
Possible Changes that should be made in Laws
and Regulations Affecting Financial Institutions
to Assist in the Fight Against Inflation

4:30 PM

Wage-Price Policy
How Should the Wage-Price Monitoring System be
Operated?

5:00 PM

Other Suggestions to Combat Inflation

6:00 PM

Adjournment of Formal Session

DepartmentoftheTREASURY
IINGTON, D.C. 20220

I

TELEPHONE W04-2041

X.
Corrected Copy
September 11, 1974

MEMORANDUM TO THE PRESS

On September 20, 1974, Secretary of the Treasury
William E. Simon will chair the "Financial Conference
on Inflation." The meeting will take place in the
Federal Room, Statler Hilton Hotel, Washington, D.C.,
beginning at 9:00 a.m.
The meeting is open to news media, but seating space
is limited. Print media should contact Charles Arnold
on 964-2041 and electronic media should contact James Parker
on 964-2041 by Monday, September 16 if you wish to cover
this event. We will issue invitations on a first come--first
serve basis.
To aid you in making a decision you should know that
we will be providing written transcripts of the meeting
periodically throughout the day. Our best estimate is that
transcripts of the entire morning session--which ends at
1:00 p.m.--will be available at approximately 3:00 p.m.
And, if all goes as planned, transcripts of the afternoon
session will be available at 8:30 or 9:00 p.m.

oOo

k$HINGT0N,

20220

TELEPHONE W 04-3041

m

September IO

FOR IMMEDIATE RELEASE

1974

EMERGENCY LOAN GUARANTEE BOARD
APPROVES LOCKHEED LOAN
The Emergency Loan Guarantee Board approved today
the request of Lockheed Aircraft Cooperation and its
lending banks for permission for the Company to borrow
/
from the banks up to an additional $25 million under
Government guarantee, which, when drawn down, will bring
total borrowings permitted under Government guarantee
up to $245 million.
Lockheed is authorized under the terms of its
agreement with the Emergency Loan Guarantee Board to borrow
up to a maximum of $250 million under Government guarantee.

oOo

WS-98

REMARKS OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE NATIONAL PETROLEUM COUNCIL
AT THE U.S. DEPARTMENT OF THE INTERIOR AUDITORIUM
WASHINGTON, D. C., SEPTEMBER 10, 1974

I
¡
I

■

One of the most important tasks facing our Government is
the development of a sound energy policy.
In this effort, the
Federal Government must work with industry. Our choices have
been quite clear: either we make the necessary commitments
to develop our natural resources or we will become increasingly
vulnerable to further economic and political coersion from
foreign suppliers.
As we all know for many years, energy policy was based
on the assumption that we would always be able to get all the
energy we wanted at bargain rates. Foreign oil was inexpensive
and limitless in quantity.

This policy proved to be a double-edged sword, however.
It resulted in a decline in exploration and production here at
home and an increase in our dependency on supplies from other
nations.
In fact, domestic oil exploration has declined since
1956 and production since 1971, as American producers took
advantage of the economic incentives offered abroad. At the
same time, our demand for energy was increasing rapidly at an
annual rate of 4 to 5 percent a year. The result was that at
the time of the embargo, we were dependent on foreign oil for

over o
Exploration for natural gas, our cleanest burning fuel,
has also been discouraged, by artificially low prices. Low
rates, regulated at the wellhead, inflated the demand for
natural gas, and reduced the market share for competing fuels,
especially coal.
We have been working hard to convince the Congress to
deregulate prices for "new" natural gas. This may be the most
important energy legislation today.
It would permit prices to
seek competitive levels, stimulating exploration and production,
and reducing demand.
In time, a free market would allocate
supplies to the most efficient and highest priority users.
WS-96

2

Looking at the mistakes over the last two decades -- and
there were many --we can see how a legacy of government action
and inaction has systematically eroded our production systems.
It is clear that in the past we have failed to understand or
anticipate the wide variety of factors which determine total
energy supplies, and have failed to exercise the political
will to provide the necessary legislative climate. We also
miscalculated the skyrocketing demand for oil as a replacement
for other available or unusable sources of energy.
In some ways, the Arab oil embargo should be viewed as a
blessing in disguise. It highlighted the potential vulnerability
of the United States because of our growing dependence on
foreign oil, and thus transformed America’s energy picture
from a long-range problem into an immediate one. In fact,
it telescoped for everyone historic trends that developed
through a generation of decisions by government -- by the
private sector -- and by the American people as a whole. We
were fortunate that it occurred at a point in time when we
were not yet too reliant on foreign supply. We are still 85
percent self-sufficient in energy.
It's true that with respect
to petroleum, we rely on imports to the extent of about 38
percent of our needs. However, it is better to have had an
embargo when our reliance was at 38 percent than to have one
when that dependence is at 50 or 60 percent. And that’s
exactly what will happen if we don't make the necessary
commitments now to develop our domestic resources.
I am
concerned, however, that all of us are forgetting too quickly
about the embargo.
It’s quite easy to get action in the
midst of a crisis.
It's not so easy when the crisis is behind
you. What we must do is not to allow the American people to
forget. The thrust of our efforts must be toward energy
self-sufficiency.
The first major objective must be to eliminate waste
through energy conservation programs. We must aim to reduce
the growth in our energy demand from the four to five percent
annual rate, heretofore approximately three percent.
We believe this can be done without disrupting some economic
growth.

f
4
— Second, we must renew all of our efforts to conserve
land reduce our overall consumption.
-- Third, we must move towards the removal of price controls
¡from oil and natural gas, and we must phase out the regulations
land allocation programs which have so disrupted marketing patterns.
-- Fourth, we need to greatly accelerate our Federal leasing
programs on Federal Lands for both oil and coal.
-- Finally, and related to all of these, we must decide on a
■package of energy legislation and work with the Congress to ensure
■that it will be passed during the next year. This effort is
■desperately needed to break the log jam of energy bills which are
■pending in Congress.
Let the economists have their dispute on the costs. None
lias ever been able to measure the cost of our national security.
In my judgment, we really have no alternative to achieving
■the goals of self sufficiency.
If our energy industries are
liot able to meet the challenges of increasing supplies, and if
jwe cannot succeed in reducing demand, our dependence on foreign
fiations for vital energy commodities will continue to grow. We
iannot afford to let this happen. We have the resources and the
■i;
l| -- all we need to do is to make the necessary decisions.
Thank you.

0 O0

3
The second major objective must be to stimulate the development
of domestic energy resources. We must accelerate the development
of oil and natural gas; we must boost coal production and bring
on-line coal liquefaction and gasification capacity; we must
develop the promise of our vast oil shale reserves; and expand
our nuclear and geothermal power. We must develop a realistic,
believeable program to accomplish this -- not only because it
will bring us self-sufficiency, but as important because the
OPEC nations are looking to see if we are willing to make the
necessary decisions to achieve this self-sufficiency.
I
suggest that immediately we begin an all-out effort to
remove the Governmental restraints which have held back our
domestic industry in recent years. Now I am sure that each of
you could compile his own list of Governmental impediments. The
National Petroleum Council has warned of many in the past, but
only now is there growing recognition of just how bad government
controls have been. Clearly, the Government has posed, and con­
tinues to pose the major obstacle in the short and medium-term
to efficient market allocation in energy. We regulate the price
and distribution of natural gas; we manipulate the pricing and
distribution system in oil; we require lengthy and cumbersome
processes for obtaining licenses and rate approvals; and impose
environmental restraints of questionable validity upon both the
production and combustion of fossil fuels.
As we develop our long range energy policies, we must also
set some short term goals. These goals should be clearly under­
stood and stated and explained at each step to the American
people.
In my mind, the framework should involve several major
areas of action, including passage of a legislative package,
changing of existing regulatory procedures, and conservation
efforts.
-- First, we must make an all-out attempt to produce
additional supplies of oil. The potential for this production
could be met through a variety of measures such as: maximizing
production at Elk Hills and proceeding with exploration on
Naval Petroleum Reserve #4 reopening the Santa Barbara Channel,
reevalauting upward the maximum effective rate of certain oil
fields and increasing secondary and tertiary recovery from
existing fields.

Departmentof th e J R E A S lIR Y
ÈHINGTON, D.C. 20220

TELEPHONE W04-2041

EMBARGOED FOR RELEASE AT 3:00 P.M., EDT
WEDNESDAY, SEPTEMBER 11, 19 74_______ __
OPENING REMARKS BY WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE
FEDERAL OFFICIALS AND REPRESENTATIVES FROM
STATE PUBLIC REGULATORY COMMISSIONS ON THE
FINANCING PROBLEMS FACING THE ELECTRIC UTILITY INDUSTRY
AT THE FEDERAL POWER COMMISSION
SEPTEMBER 11, 1974, 3:00 P.M.
Good afternoon,
I don’t have to tell you that the financial plight of the
utility industry is a matter of utmost importance to our nation
and our economy. Without adequate utility service, business
cannot expand its productive capacity and consumers cannot
enjoy the standard of living we have accepted as the American
right. It will require a new partnership of Federal and State
officials to return this vital industry to good health. I am
glad to open this meeting which I hope will mark the beginning
of a number of discussions to improve consensus and cooperation
toward solving a national issue.
Most of you know that the financial condition of the
utility industry has been deteriorating steadily for the last
several years. But with the explosion in oil prices and other
inflationary pressures the industry’s financial problems have
been intensified. Rate increases, while considerable, have not
been enough to meet the surging costs of fuel, construction and
money. As the industry’s liquidity, earnings and fixed charge
coverages have weakened, utilities have lost the ability to
raise essential capital. Without normal access to long-term
financing, utilities have been forced to turn to short-term
sources of credit, a dangerous and limited practice. Con­
tinued reliance upon financing of this sort has seriously
weakened the creditworthiness of these companies.
The utility industry today requires massive capital invest­
ment for needed additional facilities.
It is ironic that at
a time when our nation desperately needs to increase its
nuclear generating capacity, construction programs are being
slashed.

WS-99

2

It is estimated that in the next five years, the electric
utility industry alone will spend $90 billion, up 46 percent
over the preceding five years. To finance this, it is necessary
to increase sales of long-term debt securities and new common
equity 52 percent and 75 percent, respectively, over the same
period.
Unfortunately, the entire utility industry is facing these
immense capital needs at a time when our capital markets are
depressed and troubled by inflation and the profitability and
liquidity of the industry is diminishing alarmingly.
The cash flow of the electric utility industry as a per­
centage of its capital outlays has dropped from 59 percent in
1964 to 31 percent in 1973. Between 1964 and 1973 the industry’s
after-tax profits increased only 2 percent per year. During
that same period, interest costs have increased 14 percent
per year. It is little wonder then that interest coverage has
been cut in half from about 5 times in 1963 to about 2.5 times
in 1973. But that is the average. Many utilities are not
earning enough to cover interest twice, which is the minimum
amount of safety investors will normally accept. These companies
are effectively barred from both the bond market and the equity
market. Since April 1974, 44 utilities have had to postpone or
change the terms of planned securities offerings. The cause in
every case was investor concern over the safety, liquidity and
return offered by utilities securities.
Lack of access to the capital markets has forced at least
18 major electric utilities to delay or cancel outright signifi­
cant portions of their construction programs. The kilowatts
of planned capacity in plants being delayed represent 29 per­
cent of their total generating capacity in service. The
managements of these companies attribute inadequate cash flow
and return on equity as the principal reasons for the deferrals.
Unless these projects are restored in the near future, more
brownouts and blackouts are likely
in the next few years. It must be recognized that until load
factors are improved and demand peaks are reduced, electric
utilities will require continuing improvement in their internal
cash flow.
In the same vein, gas and other utilities will
need cash flow improvement as long as the cost of capital and
inflation continue at current levels.
Fuel costs have quadrupled since the beginning of 1973 and
construction costs for fossil and nuclear plants are growing at
a rate of 9 percent and 12.5 percent, respectively. At the .
same time, internal cash flow is growing at only 7 percent per
year. Clearly the industry cannot withstand a continuation of
these trends for very long and survive.

3
Twenty-six bond rating reductions or suspensions during
1974 have added to the financing problems of utilities. The
fact that there ^has been not a single bond upgrading this year
confirms my belief that this unhealthy trend is worsening.
Of course, one of the major problems is that the regulatory
process was not designed to function in a highly inflationary
environment. Many states have experimented successfully with
ad hoc procedures: interim and make-whole mechanisms, automatic
pass-throughs and permitting construction work-in process to be
used in rate calculations. We applaud these thoroughly construc­
tive innovations and urge that all state regulators adopt such
processes.
There is little disagreement that bringing inflation under
control commands the highest national priority. It is a terribly
difficult challenge, which requires painful decisions both at
the Federal and State level. Without a sound utility industry,
business, jobs and services to the public cannot expand and
Project Independence cannot succeed. To achieve these goals,
the users of electric, gas and telephone service must pay the
economic cost of providing that service. That is a good part
of your challenge — to adjust the rate structure in a manner
approved by your State Legislature so that utilities can finance
their expansion in an orderly fashion and investors will again
support the industry. A reasonable return on investment cannot
be constrained by an artificially low ceiling — it must be
sensitive to changing economic conditions.
I believe this critical problem must be solved,
within the utility rate structure, the tax system and the
regulatory processes we will discuss today.
The Federal Government must take a leadership role and assist
the regulatory commissions in every way that it can. We need to
work together to find the solutions. The American people will
not accept and the American economy cannot survive a diminishing
supply of energy that threatens our entire way of life. We cannot
go through the trauma of more blackouts and brownouts, and worse,
economic stagnation, that inevitably will follow if we foolishly
restrict the construction of the generating capacity essential to
our present and future energy needs.
You will hear from my distinguished colleagues during this
meeting. We are here to share our views and thoroughly explore
the issues I have described. This meeting could be the first
of a larger series to overcome the problems we face and to
preserve and strengthen an essential industry.
Thank you.
0 O0

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DepartmentofthefREASlUfif
TELEP

flSHINGTON* aC. 20220

WÓ4-2041
*789

September 12, 1974

FOR IMMEDIATE RELEASE

TREASURY’S 52-WEEK RILL OFFERING
The Treasury Department, by this public notice, invites tenders for
$1,800,000,000,

September

or thereabouts, of

24, 1974,

3 64 -day

Treasury bills to be dated

and to mature September

23, 1975

(CUSIP No.

912793 WT9).

The bills will be issued for cash and in exchange for Treasury bills
maturing

September 24, 1974,

outstanding in the amount of

$1,802,240,000,

of

which Government accounts and Federal Reserve Banks, for themselves and as
agents of foreign and international monetary authorities, presently hold
$925,385,000.

These accounts may exchange bills they hold for the. bills

now being offered at the average price of accepted tenders.
The bills 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.
in denominations of

They will be issued in bearerform

$10,000, $15,000, $50,000, $100,000, $500,000

and

$1,000,000 (maturity value) and in book-entry form to designated bidders.

Tenders will be received at Federal Reserve Banks and Branches up to
the

closing

September

hour, one-thirty p.ra., Eastern Daylight Saving time,

18, 1974.

Washington.

Wednesday,

Tenders will not be received at the Treasury Department,

Each tender must be. for a minimum of $10,000.

$10,000 must be in multiples of $5,000.

Tenders over

In the case of competitive tenders

the price offered must be expressed on the basis of 100, with not more than
three decimals, e.g., 99-925.

Fractions may not be used.

It is urged^ that

renders be .made ou the printed forms and forwarded in the special envelopes
which will be

supplied by Federal Reserve

hanks

or Branches

on

application

t-h r e r o r ,
Banking institutions and dealers who make primary markets in Government
ecurities and report daily to the Federal Reserve Bank of New York their positions

(OVER)

-

2-

with respect to Government securities and borrowings thereon may submit tenders
for account of customers provided the names of the customers are set forth in
such tenders.
o\m account.

Others will not be permitted to submit tenders except for their
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 $200,000 or less without stated price from any one bidder will be accepted
in full at the average price (in three decimals) of accepted competxtive bids.
Settlement for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank on September 24, 1974,
cash or other
immediately available funds or in a like face amount of Treasury bills maturing
September 24, 1974. Cash and exchange tenders will receive equal treatment.
Cash adjustments will be made for differences between the par value of maturing
bills accepted in exchange and the issue price of the new bills.
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 No. 418 (current revision) and this notice,
prescribe the terms of the Treasury bills and govern the conditions of their issueCopies of the circular may be obtained from any Federal Reserve Bank or Branch.

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News 4 Today: "Closed Meeting"

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THE SECRETARY OF THE TREASURY
W A S H IN G T O N

S£P 1 1 1974

Dear Mr. President:
There is forwarded herewith a draft bill "To amend the Internal
Revenue Code of 1954 to restrict the authority.for inspection of returns
and the disclosure of information with respect thereto, and for other
purposes. " It would be appreciated if you would lay the proposed leg­
islation before the United States Senate, This proposal has been
developed in conjunction with current Administration initiatives in the
privacy area. The proposal is also being sent to the Speaker of the
House
Inspection and disclosure of tax returns and tax return information
is presently governed by section 6103 of the Internal Revenue Code and
by Executive Orders and Treasury Regulations adopted pursuant to the
authority provided in that section. This statutory and regulatory ap­
paratus has generally worked very well. The number of complaints or
aüegations of abuse has been very small, particularly when one con­
siders the immense volume of returns and associated information pro­
cessed each year by the Internal Revenue Service.
Nevertheless, we believe it is important that the American tax­
payer know who will have access to information reported on his tax
returns and under what circumstances the law makes that information
available to others. Therefore, we have completely reexamined the
existing rules with a view to ensuring the m a x i m u m confidentiality
of tax returns and tax return information consistent with effective
tax administration and legitimate needs of other federal agencies to
obtain tax information for law enforcement and statistical pûrposes.
and of states for purposes of their own tax administration.
The proposed legislation would establish a general rule that all
tax returns and related information are confidential and m a y not be
disclosed except as authorized by this legislation. The principal*
instances in which tax return information would be made available
to agencies or persons outside the Internal Revenue Service are
described below.

£

-

2

-

Specific statutory authority for access to tax returns by the tax
writing committees of Congress would be continued as under present
law. Other committees would be permitted access to tax returns only
by Congressional resolution substantially in accordance with present
procedure. The practice under which a number of committees have
obtained tax returns pursuant to Executive Orders would be terminated,
and control of Congressional access to tax returns would be placed in
the Congress itself.
Federal agencies seeking access to tax returns or other informa­
tion concerning a taxpayer from the 1RS for law enforcement purposes
would have to satisfy new statutory criteria which would be both more
specific and more restrictive than under present law. The items of
information that could be supplied pursuant to a request for a tax check
would be strictly limited and would be specified in the statute.
The Social and Economic Statistics Administration in the Depart­
ment of Commerce would continue to have full access to tax return
data for the purpose of its use of information on tax returns for statis­
tical purposes. Other agencies, as well as the states and any other
person, could contract for special statistical studies to be undertaken
by the internal Revenue Service but would, of course, have to bear the
cost of such studies. In recognition that facility or other limitations
might make it impractical for Internal Revenue Service personnel to
conduct all such special studies that might be requested, provision
is made for the Service to contract with other federal agencies or
persons (which, might include-the requesting party) to carry out such
studies. .Where such contracts are executed, the outside contractor
would be fully subject to all of the safeguards, including the criminal
penalties for unlawful disclosure, that are provided to ensure m a x i m u m
protection of the confidentiality of tax information.
In general, the proposed statutory provisions would be more
detailed than under present law, under which most restrictions are '
contained in regulations or Executive Orders. This statute would
narrowly restrict the discretionary authority of the Internal Revenue
Service to disclose tax information. The Service would, however,
be authorized to withhold disclosure on a finding that the administra­
tion of the Federal tax laws would be seriously impaired'by such dis­
closure.

<?

-3 The draft legislation also contains provisions respecting access
to tax returns by states and by other persons, procedures that must
be followed in requesting tax information and in handling tax informa­
tion, and record keeping requirements respecting requests for tax
information and the disposition of such requests.
A separate Executive Order will be issued to impose limitations
on access by White House employees to tax returns and tax return in­
formation. Such access will be permitted only upon a request signed
personally by the President.
The provisions of the bill are discussed more completely and
in greater detail in the enclosed explanation.
The Office of Management and Budget has advised that, from the
standpoint of the Administration's program, there is no objection to
the presentation of this proposal for the consideration of the Congress.
Sincerely yours*/

The Honorable
•James O. Eastland
President pro tern of the
United States Senate
Washington, D. C. 20510
Enclosure

PROPOSAL TO AMEND SECTION 6103 AND
RELATED CODE SECTIONS HAVING TO DO
WITH DISCLOSURES OF FEDERAL TAX
RETURNS AND RETURN INFORMATION

As a general rule, section 6103(a) of the Code presently
makes tax returns a matter of public record but authorizes
inspection only upon order of the President and under regu­
lations based upon his Executive Orders.
Section 6103(b)
specifically authorizes disclosure of income tax returns to
State and local tax authorities upon request by a State
governor for purposes of State'or local- tax administration.
Section 6103(c) authorizes inspection of corporate income
tax returns by shareholders owning 1 percent or more of the
corporate taxpayer’s stock.
Section 6103(d) authorizes
inspection of returns or return information by the tax
writing committees of Congress- and by any select committee
authorized to inspect returns or return information by
Congressional resolution.
Finally, section 6103(f) compels
the Secretary or his delegate to tell any inquirer whether
or not a person has filed an income tax return for a particular
-'
.

.

Section 7213(a) imposes criminal penalties on any Federal
officer or employee who makes an unlawful disclosure of income
tax return information and on any person who unlawfully prints
or publishes income tax return information.
Section 7213(b)
imposes corresponding penalties on officers, employees, or
agents of a State or political subdivision of a State who un­
lawfully disclose such information.
The maximum effort has been made under the existing
statute and regulations to assure the confidentiality of tax
returns and tax return information consistent with effective
Federal tax administration and the legitimate needs of o'ther
Federal agencies for tax information for law enforcement and
statistical purposes and of the States for purposes of their
own tax administration. Nevertheless, the existing statutory
and regulatory apparatus does not adequately inform the A.menca
taxpayer as to who will have access to his tax return and tax
return information and for what purposes.
Accordingly, the
proposed revision of section 6103 reflects a complete re­
examination of the present rules and is based on the funda­
mental principle that tax returns and return information
should be held confidential and private except as otherwise
clearly provided by statute.

2
Set out below is a description of existing law and
practice under sections 6103 and 7213 in major areas and
an explanation of how this proposal would affect the pres­
ent situation.
*
1,

Definition of Tax Return and Return Information

Existing regulations define "return" to include in­
formation returns, schedules, lists, and other written
statements which are designed to be a supplement to a return
or a part of a return. The terra is also defined to include
"[o]ther records, reports, information received orally or
in writing, factual data, documents, papers, abstracts,
memoranda, or other evidence . . . relating to [a return].’1
■M

Because disclosure standards properly applicable to a
return itself may, in varying circumstances, be different
from those applicable to Internal Revenue Service files
relating to a return and to information in Service files
relating.to a taxpayer's past, present, or future tax lia­
bility, the legislative proposal makes a definitional dis­
tinction between a tax return and tax return information.
The proposed definition of "return" is not significantly
different from the basic definition of "return" in existing
regulations.
The proposed new definition of "return infor­
mation," however, is considerably more specific and detailed
than the existing supplemental definition of "return" quoted
above from existing regulations.
The proposed new definition
of "return information" is intended to cover information of
any kind filed with, or compiled by*, the Service which relate
to a taxpayer's past, present, or future tax liability. The
new definition would specifically cover private letter ruling
issued pursuant to a request made before enactment of this
legislative* proposal- and all requests for technical advice
made by Service personnel to the National Office, regardless
of when made.
Future private ruling letters generally would
be confidential only to the extent permitted by the Freedom
of Inforpjation Act or other Federal legislation. . Also pro­
tected is tax information furnished to the Secretary or his
delegate in connection with tax administration and accepted j
by him as confidential pursuant to regulations.

■- 3 -

2.

Federal Tax Lav; Administration

Under existing regulations, tax returns and return
information are freely available to officers* and employees
of the Treasury Department whose official duties require
such access.
By the same token, tax returns and return in­
formation are open to Justice Department attorneys and U.S.
attorneys where necessary in the performance of official
duties relating to Federal tax administration.
While the existing rule applicable to Treasury Depart­
ment officers and employees has been retained, the rule
applicable to Justice Department attorneys and U.S. attorneys
has been clarified.
The use to which tax returns and return
information are appropriately put by these attorneys in a tax
context is in preparation for tax litigation or in an investi­
gation pointing toward tax litigation. As will be described
below, the proposal restricts actual disclosure in an adminr judicial tax proceeding of a third party1s return
or .return information as to a third party.
Accordingly--and
logically--access by Justice Department attorneys and U.S.
attorneys to returns and return information in preparation
for tax litigation should be limited in a similar fashion.
These attorneys would have access, of course, to returns of,
and return information regarding, a taxpayer who is or may _
be a party to litigation.
In the case of a third party,
returns and return information would be made available only
if the third party consents or if such returns and return
information have or may have a bearing on the.outcome of the
possible or actual litigation for particular reasons specified
by the statute.
l o

C-l U

w

X

3.

V V.

u

Federal Non-Tax Law Administration

By' regulation based upon an Executive Order, any Federal
department or agency may, upon request and subject to the
approval of the Secretary or his delegate r inspect tax returns
and return information in connection with a matter officially
before that department or agency.

-

4

-

This access to tax returns and return information has
resulted in extensive disclosure of tax returns and return
information for use in a variety of Federal activities.
While access to tax.returns is undoubtedly useful, and per­
haps essential, to the proper functioning of some Federal
departments and agencies, the volume of data'and other
information obtainable has reached such proportions as to
prompt legitimate concern over the ability to maintain the
appropriate degree of confidentiality.
Because of the obviously demonstrable need of the Social
and Economic Statistics Administration for returns and return
information for research and for statistical purposes, the
legislative proposal would make returns and return information
available for such purposes upon request by the Secretary of
Commerce.
No statistical study could be made, public, however,
if it in any way 'identified a particular taxpayer or could be
so used. Likewise, because of the close relationship between
the collection of Social Security taxes and administration of
the Social Security Act by the Department of Health, Education,
and Welfare, the legislative proposal would continue existing
HEW access to returns and return information for this purpose;
and access would also be extended to the Labor Department and
the Pension Benefit Guaranty Corporation for purposes of admin­
istering the Employee Retirement Income Security Act.
In the case of other Federal departments and agencies, acce:
to returns and return information in something other than statistical form would be limited to returns and return information
which, for particular reasons specified by statute, have or may
have a bearing upon the outcome of an administraçive or j u d i c i a l
proceeding (or investigation leading to such a proceeding) in
a matter relating to the enforcement of’ a Federal statute. Be­
cause the actual use of returns and return information, in such a
proceeding ‘is restricted as described belov?, the initial access
by the Federal department or agency for purposes of preparing
for a proceeding is restricted in a similar fashion.
This
pattern thus corresponds generally to that proposed for dis­
closure to Justice Department attorneys and U.S. attorneys in
tax matters which has just been described.
It is further provided that "the Secretary or his delegate may withhold requested
returns and return information to the extent: that he finds that
disclosure would seriously impair Federal £ax law administration*|

In the event that such a determination were made, the proposed
statute calls for a consultation on the matter between the head
of the requesting Federal department or agency and the Secretary
of the T r e a s u r y . I f I after such consultation, the issue of
disclosure has not been resolved, a final determination would
be made by the President or his delegate.
Because a number of Federal departments and agencies may
well need tax return information in statistical form for various
purposes, new section 6108 would authorize the Commissioner to
provide statistical studies upon request, provided such statis­
tics dio not reveal, directly or indirectly, any taxpayer’s
identity.
Further, a proposed amendment to section 7513 would
authorize the Commissioner to contract with any Federal agency,
including the requesting agency, to prepare the statistical
study if the Internal Revenue Service V7ere unable to do the
work itself.
State and Local Tax Law Administration
T
T,>.
Vlit

V n f ~ t 1 ■v--r'i o
•.section 6103(b) of existing law,
and income tax return information are, upon the written request
of a State governor, open to inspection b y any official, body,
or commission lawfully charged with the administration of
State tax laws for the purpose of such administration.
Further,'
section 6103(b) authorizes the governor to direct that tax
returns and return* information be furnished to local taxing
authorities for use in administering local tax laws.

Tax returns and return information which are supplied to
tax off 5.cials at, say, a county or city level ma y* not be in­
variably subject to appropriate safeguards on confidentiality
w u e h the Service has the right to expect and a duty to protect.
. 'Cv?ise, political considerations may produce unwarranted
interest in tax information at even higher levels for non-tax
Purposes. The legislative proposal would limit access to tax
returns^and return information to a State body, agency, or
commission lawfully charged with State tax: law administration
and only for purposes of such administration.
It is further
Provided that returns and return information would be available
to State tax officials only to the extent rhat the Secretary
or his delegate does not determine that disclosure would seriously
impair Federal tax law administration.

- 6 -

5.

Judicial and Administrative Tax Proceedings

Under existing regulations, tax returns and return infor­
mation are available upon request by attorneys of the Justice
Department and U.S. attorneys for use in any Federal or State
tax litigation if the Federal Government is interested in the
result. * This broad right of access can result in'seriously
breaching the confidentiality of tax returns and return in­
formation relating to taxpayers who are not parties to the
litigation.
This can come about through the introduction in
evidence of third party returns and return information where
such returns or information may be considered relevant in some
way to the outcome of the litigation.
For this reason, the legislative proposal imposes strict
conditions upon the use of third party returns and return in­
formation in Federal tax litigation where thé third party- does
not consent to such usé. Essentially, the proposal would re­
strict the use of third party returns and return information
to those instances where the return or return information has
or may have a bearing on the outcome of the litigation for
reasons specified by the proposal, and then only.to the extent
of such bearing.
Additionally, third party returns and return
information (a) could be used to impeach the testimony of the
third party if he were a witness in the proceeding or to impeach
the testimony of any other witness regarding a transaction with
the third party and (b) could be 'disclosed to the extent required
by the Constitution or, in a criminal proceeding, 18 U.S.C. 3500
or Rule 16 of the Federal Rules of Criminal Procedure.
Even if
a third party*s return and return information could otherwise
be disclosed by application of these rules, they could not be
used if the Secretary or his delegate determined* that disclosure
would seriously impair Federal tax law-administration.
Once
again, any such determination would be subject to the procedure
described above calling for consultation between the Attorney
General and the Secretary of the Treasury with a final deter­
mination to be made, if'necessary, by the President or his delegal
6.

Judicial and Administrative Non-Tax Proceedings

Here cigain, present regulations effectively provide that
the Department of Justice may, upon request, use third party

7
returns and return information in non-tax litigation where
the Federal Government is interested in the result.
The necessity for protecting any taxpayer*s right to
privacy with respect to his tax affairs is even more acute
in this area than in.that of tax litigation Since Federal
tax adrainistration is in no way involved in the litigation.
Accordingly, the proposal would limit the use of any tax­
payer's returns and return information in non-tax judicial
and administrative proceedings to a Federal proceeding to
which the United States is a party and then o n l y #if the tax­
payer himself is a party to the proceeding or consents to
the use or if the information has a bearing upon the outcome
of the proceeding because of a transactional relationship
between the taxpayer and a party to the proceeding.
As in
tax litigation, a third party's return or .return information
could also be use-d in the litigation under certain circum­
stances to impeach a witness and to the extent required by
the Constitution, 18 U.S.C. 3500, or Rule 16 of the Federal
Rules of Criminal Procedure.
Once again, the returns and
return information could be withheld, suhi^ct
t-w»
cedure outlined above, upon a finding by the Secretary or
his delegate that Federal tax lav; administration would be
seriously impaired.
7.

Prospective Jurors and Possible Criminal Activities

Under existing regulations, attorneys of the Department
of Justice cannot have access to tax returns for purposes of
examining prospective jurors but are authorized to deter­
mine from the Internal Revenue Service whether or not a
prospective juror has been under tax investigation.
The
statutory proposal would broaden these ruJLes to permit use
of return information by these attorneys to impeach a pro­
spective juror in Federal litigation, w h ü e retaining the
present rule applicable, to inquiries regarding tax investi­
gations of prospective jurors.
In the interest of serving the basic, ends of criminal
justice, the proposal would direct the Secretary or his dele­
gate to notify the Attorney General as. to possible violations

- 8

of Federal criminal laws which come to his attention as the
result of his own access to return information.
The proposal
would also give the Secretary or his delegate discretionary
authority to so notify State or local law enforcement agencies
of a possible violation of State criminal laws.
8.

S trike Force Participation

The proposal would specifically authorize disclosure of
certain return information by Treasury.Department* employees
who participate jointly with another Federal agency in an
enforcement activity relating to Federal criminal laws.
This
proposal is principally directed to Service participation
with the Department of Justice in the Federal Organized Crime
Strike Force program.
The statute would only permit disclosure
by participating "Service employees to other Federal employees
involved in the enforcement program of return information re­
ceived or developed from sources other than the taxpayer him­
self and then only to the extent required by the investigation.
9.

Congressional Committees

Section 6103(d) authorizes unlimited disclosure of returns
and return information to the three tax writing committees of
Congress and to any select committee authorized by Congressional
resolution to inspect returns and return information.
Returns
and return information may be furnished to any such committee
sitting in executive session.
Numerous Congressional committees
other than those referred to in section 6103(d) have traditioncl
sought and obtained returns and return information through
specific Executive Orders.
The legislative proposal would tighten existing lav; in
some respects and broaden it in others.
The three tax writing
committees of Cong-ress would |continue to have access to any
tax returns and return information upon request, and this right
would be specifically extended to the Chief of Staff of the
Joint Committee on Internal Revenue Taxation.
Any other
Congressional'committee*s access to tax returns and return

9

informâtionj however, would have to be by way of a resolution
of the appropriate house of Congress.
Further, returns and
return information furnished to any Congressional committee
would have to be furnished in closed executive session.
10.

The President

Since tax returns and return information are presently
disclosable to the extent authorized by the President, it
stands to reason that he now has the right to inspect such
returns and return information as he may determine. Because
the proposal removes Presidential discretion in the disclosure
of tax returns and return information, it grants to him specific
authority to see returns and return information pursuant to
Executive Order and grants to him the further authority to *
designate in his Executive Order an employee or employees of
the White House Office to receive the returns or return in­
formation on his behalf.
*
11.

P
*

/T> v

4iO T.T-Î.

^ O n

rt jl l u

1
JL

Section 6103(c) authorizes the inspection of a corporation’s
income tax returns by any holder of 17, or more of the corpo­
ration's stock.
In an attempt to head off possible mischief,
the regulations deny this right to a shareholder v;ho acquired
his stock interest for that purpose. . Income, estate, gift, ~
unemployment, and certain excise tax returns are presently
open to the filing taxpayer, the beneficiary of a trust, a
trustee in bankruptcy, and a member of a. partnership.
Income
tax returns of a deceased taxpayer are also open* to the repre­
sentative cf his estate and, along with estate and gift tax
returns, to certain other persons upon a satisfactory showing
of a material interest.
.
The proposal- deletes the "17» stockholder" rule of section
6103(c) because the rule encourages inherently improper and
severely damaging disclosures and because SEC rules now require
touch of the information contained in many corporate returns to
be made publicl
The regulatory rules regarding disclosure to
persons v/ith a material interest have been largely retained

-

10

but tightened to prohibit disclosure of tax return information
where disclosure would seriously impair Federal tax law
administration.
l
12. Contractors
Under the authority of section 7513, the Secretary or
his delegate may contract for the photographic reproduction
of tax returns and return information, and disclosure is, of
course, authorized for this purpose. At the same time, dis­
closure must necessarily be made to certain other contractors
and their employees who furnish property and services in con­
nection with the general administration of the tax laws by
the Treasury Department and the Internal Revenue Service.
The'legislative proposal deals with this problem under
current lav? by specifically authorizing the disclosure of
tax returns and return information to any person to the ex­
tent necessary in, or to facilitate, the contractual pro­
curement of property or services by the Treasury Department
or the Service for tax administration purposes.
At the same
time, however, the proposal would amend section 7213 to extend
to these persons the criminal penalties provided for unauthorized)
disclosure.
■4
•

%

13.

.

Misstatements of Fact

Existing law does not provide clear authority permitting
the Secretary or his delegate to disclose return information
with respect to a particular taxpayer in order to correct a
misstatement of fact published or disclosed with respect to
that taxpayer's return or his dealing with the Service,
The
proposal would permit the Secretary or his delegate to dis close
tax return information, or any other information, with respect
to that taxpayer under these circumstances to the extent
necessary to correct his public misstatement in the interests
of Federal tax administration.
14.

Tax Checks

Although there is no specific authorizing provision under
existing law, tax check information on prospective appointees

11

to, and employees of, the Federal Government is presently
being furnished upon request. Occasionally, such informa­
tion is also furnished to a State Government in connection
with a prospective appointee to State office.
è
The legislative proposal restricts tax checks to
prospective appointees of the Executive or Judicial branch
of the Federal Government, and then only upon Written request
of the White House, a cabinet officer, or the head of a
Federal establishment. The information to be disclosed in
a requested tax check is then limited to Whether the indi­
vidual has filed income tax returns for the last 3 years,
has failed in the current year or preceding 3 years to pay
any tax Within 10 days after notice.and demand or has been
‘'
’'assessed a-'-négligence ‘penalty dùr'ing' this period', has been
under any criminal tax investigation and the result of any
such investigation, and has been assessed a civil penalty
for fraud or negligence.
»

15.

Taxes Imposed by Subtitle E
\

Existing law affords no specific statutory protection to
returns and return information relating to alcohol, tobacco,
and firearms taxes imposed by subtitle E of the Internal
Revenue Code.
In connection with its own law enforcement
programs, the Department of Justice has^ traditionally had
access to such returns and return information.
Accordingly,*
the proposal would grant specific statutory access to these
returns and return information by a Federal officer or em­
ployee v?hose official duties require such access.*•
16.

Waivers- of Confidentiality

Ko authority presently exists which would permit the
, Secretary or his delegate to disclose returns or return in­
formation with respect to a taxpayer to someone to whc-iQ the
taxpayer himself wanted his return or return information dis­
closed. The legislative proposal would permit disclosure in
the discretion of the Secretary or his delegate if -requested

12

-

by the taxpayer involved but then only to the extent that
such disclosure would not seriously impair Federal tax law
administration.
17.

Section 6103(f)

*

The required disclosure to any person of information as
to whether another taxpayer has filed an income tax return
for a particular year is plainly contrary to the most basic
principle of taxpayer privacy.. For this reason, the proposal
would delete present section 6103(f) of the Code.
18.

Judicial Review

■ •* •*The •proposal provides j that 'the exclusive'.'remedy for.-an'* ’•
alleged violation"of section 6103 shall be a proceeding under
section 7213.
Judicial review of any determination permitted
or provided by statute to disclose or not to disclose a return
or return information is thus limited to a proceeding under
sec* *on 7213
%

19.

Penalties for Unauthorized Disclosure

Section 7213 makes it unlawful for any Federal or State
C\* *icial or employee to make a disclosure of income tax return
.information which the Code does not authorize and makes it ' unlawful for any person to print or publish any such infor­
mation except as authorized by the Code.
The legislative proposal expands the scope o£ section
7213 in three significant respects. First, section 7213 would
aPpl>r to unauthorized disclosure of any tax returns or return
information.
Second, the criminal sanctions are extended to
former officials or employees of the Federal or a State Govern­
ment. Third, the criminal sanctions are extended to private
contractors and their officers and employees (or former
ofricers and employees) who make unauthorized disclosure
of returns and return information to which they have been
given statutory access.

A BILL
A.

TO a m e n d the I n t e r n a l R e v en u e Code of 1954 to r e s t r i c t
the a u th o r ity f o r in s p e c tio n of r e t u r n s a n d the
d i s c l o s u r e of in f o r m a tio n with r e s p e c t t h e r e t o , |
a n d fo r o t h e r p u r p o s e s .
Be it e n a c te d by the S enate and H ouse of R e p r e s e n t a t i v e s of the
U nited S ta te s of A m e r i c a in C o n g r e s s a s s e m b l e d ,
SECTION 1.

A M EN D M EN T O F 1954 CODE.

W h e n e v e r in th is A ct an a m e n d m e n t is e x p r e s s e d in t e r m s of
an a m e n d m e n t to a s e c t i o n o r o t h e r p r o v is io n , the r e f e r e n c e i s to a
s e c tio n o r o t h e r p r o v i s i o n of the I n te r n a l R e v en u e Code o f 1954.
SEC. 2.

C O N FID EN TIA LITY AND DISCLOSURE O F R E T U R N S AND
RETU RN INFORM ATION.

Section 6103 ( r e l a ti n g to p u b lic ity of r e t u r n s and d i s c l o s u r e of
in fo rm a tio n as to p e r s o n s filin g in c o m e ta x r e t u r n s ) is a m e n d e d to
r e a d a s follow s:
"SEC. 6103.

CO N FID EN TIA LITY AND DISCLOSURE O F R E T U R N S AND
R E T U R N INFORM ATION.

"(a) G e n e r a l R u le . - "(1) C o n fid e n tia lity and d i s c l o s u r e . - - R e t u r n s and r e t u r n i n ­
fo r m a tio n s h a l l be c o n fid e n tia l a n d no p e r s o n d e s c r i b e d in s e c t i o n 7213 (a
s h a ll p e r m i t in s p e c tio n of o r d i s c lo s e r e t u r n s o r r e t u r n i n f o r m a tio n ,
nor s h a ll a c o u rt, a d m i n i s t r a t i v e body, o r o t h e r p e r s o n o r d e r s u c h i n ­
s p e c tio n o r d i s c l o s u r e , e x c e p t to su c h p e r s o n s and f o r s u c h p u r p o s e s
a s a r e a u th o riz e d by th is t it l e .

-

2

-

"(23 D e fin itio n s. - - F o r p u r p o s e s of th is s e c t i o n - •%
. "(A) R e tu r n . - -T h e t e r m ’return* m e a n s any
ta x o r i n f o r m a tio n r e t u r n o r d e c l a r a ti o n of e s t im a t e d
tax r e q u i r e d by, o r p ro v id e d fo r o r p e r m i t t e d u n d e r,
the p r o v is io n s of th is t itle file d by, on b e h a lf of, o r
w ith r e s p e c t to any p e r s o n w ith the S e c r e t a r y o r h is
d e le g a te , and any a m e n d m e n t o r s u p p le m e n t t h e r e to
o r c la im f o r re fu n d , in clu d in g s u p p o r tin g s c h e d u le s ,
a tta c h m e n ts , o r l i s t s w hich a r e d e sig n e d to be s u p p l e ­
m e n ta l to, o r b e c o m e p a r t of, the r e t u r n s o file d .
"(B) R e tu r n in f o r m a tio n . —T he t e r m 'r e t u r n i n f o r i

mation* m e a n s - (i)

any d a ta in clu d in g a t a x p a y e r ’s id e n tity ,

the n a tu r e , s o u r c e , o r a m o u n t of h is in c o m e , p a y ­
m e n t s , r e c e i p t s , d e d u c tio n s, e x e m p tio n s , c r e d i t s ,
a s s e t s , l i a b i l i t i e s , n e t w o rth , tax lia b ility , ta x w i t h ­
h e ld , d e f ic ie n c ie s , o v e r a s s e s s m e n t s , o r tax p a y m e n ts ,
w h e th e r the t a x p a y e r ’s r e t u r n w a s, i s being, o r w ill be
e x a m in e d o r s u b je c t to o t h e r in v e s tig a tio n o r p r o c e s s i n g ,
o r any p a r t i c u l a r of any da ta , in w h a te v e r f o rm (w h e th e r
a s a r e p o r t , in v e s tig a tiv e f ile , m e m o r a n d u m o r o t h e r
d o c u m e n t, in c lu d in g a r e g i s t r a t i o n s t a te m e n t d e s c r i b e d
in s e c tio n 6057) o r m a im e r r e c e i v e d by, r e c o r d e d by,
p r e p a r e d by, o r f u r n is h e d to the S e c r e t a r y o r h is

d e le g a te w ith r e s p e c t to a r e t u r n a s d e s c r i b e d in
s u b p a r a g r a p h (A) o r w ith r e s p e c t to th e e x is te n c e of
the a m o u n t of the l ia b ility of any p e r s o n u n d e r th is
title fo r any tax , p e n a lty , i n t e r e s t , fin e, f o r f e i t u r e ,
o r o th e r im p o s itio n , o r o ffe n s e , but, f o r p u r p o s e s
o f th is su b d iv is io n (i), no t in clu d in g any s u c h d a ta
(o r p a r t i c u l a r th e re o f) in clu d ed in a d o c u m e n t (o r
r e q u e s t o r c o r r e s p o n d e n c e f o r o r w ith r e s p e c t
th e re to ) d e s c r i b e d in (ii) (w ithout r e g a r d to the d a te
l im ita tio n th e re in ) o r (iii);
(ii) any l e t t e r , a d v ic e , o r o th e r d o c u m e n t i s s u e d b y
*
/
the S e c r e t a r y o r h is d e le g a te p u r s u a n t to a r e q u e s t m a d e
t h e r e f o r on o r b e f o r e

, by, o r on

b e h a lf of, any p e r s o n o t h e r than an o f f i c e r o r e m p lo y e e of
the D e p a r tm e n t of th e T r e a s u r y a c tin g in h is o ffic ia l c a p a ­
city, and any s u c h r e q u e s t , o r any c o r r e s p o n d e n c e f o r o r
w ith r e s p e c t to su c h d o c u m e n t o r any p o r tio n th e r e o f ,
w hich is in te n d ed to be u se d to d e te r m i n e o r a ff e c t the
a p p lic a tio n of any r u l e contained in th is t i t l e , r e l a t e d law ,
o r tax t r e a t y to the fa c ts and c i r c u m s t a n c e s of a p a r t i c u l a r
t r a n s a c ti o n , a r r a n g e m e n t , o r r e t u r n file d o r to be file d
by the p e r s o n to w hom su c h d o c u m e n t is fu rn is h e d ;

- 4 -

"(iii) any m e m o ra n d u m , a d v ic e , o r o t h e r
d o c u m e n t issued! by the S e c r e t a r y o r h is d e le g a te
p u r s u a n t to a r e q u e s t by, o r on b e h alf of, any
o f f i c e r o r em ployee of the D e p a r tm e n t of th e
T r e a s u r y a c tin g in h is o ffic ia l c a p a c ity , and a n y
s u c h r e q u e s t , o r any c o r r e s p o n d e n c e f o r o r w ith
r e s p e c t to s u c h d o c u m e n t o r any p o r tio n th e r e o f ,
w h ich is intended to be u s e d by h im to d e te r m i n e o r
a ffe c t the a p p lica tio n of any r u le c o n ta in e d in th is t it l e ,
r e l a t e d law , o r lax t r e a t y to the fa c ts and c i r c u m ­
s t a n c e s of a p a r t i c u l a r t r a n s a c ti o n , a r r a n g e m e n t ,
»

•

o r r e t u r n file d o r to be filed by any p e r s o n to w hom
s u c h d o c u m e n t r e l a t e s o r m a y r e l a t e ; and
n(iv) any o th e r d ata of the type d e s c r i b e d in
(i) w hich is f u r n is h e d to the S e c r e t a r y o r h is d e le g a te
in connection w ith tax a d m i n i s t r a t io n and a c c e p te d a s
c o n fid e n tia l p u r s u a n t to r e g u la tio n s p r e s c r i b e d by the
S e c r e t a r y o r h is d e le g a te ,
w h e th e r o r not su c h data (or p a r t i c u l a r th e re o f) d e s c r i b e d in (i) o r
su c h d o c u m e n t (or r e q u e s t o r c o r r e s p o n d e n c e f o r o r w ith r e s p e c t
th e r e to ) d e s c r i b e d in (ii) o r (iii) m a y be in a n y m a n n e r in s p e c t e d o r
d i s c lo s e d u n d e r the p r o v is io n s of s e c tio n 6104 o r any o t h e r p r o v i s i o n
of th is title .

"(C) T a x a d m i n i s t r a t i o n . - - T h e t e r m 't a x a d m i n i s ­
t r a t i o n ' m e a n s the a d m i n i s t r a t io n , m a n a g e m e n t, c o n d u c t,
d ir e c tio n , and s u p e r v i s i o n of the e x e c u tio n and ap*plication
of the i n t e r n a l r e v e n u e law s o r r e l a t e d s t a t u t e s (o r

i

e q u iv a le n t la w s and s t a t u t e s of a State) and ta x c o n v e n ­
tions to w hich the U nited S ta te s is a p a r t y and th e d e v e lo p ­
m e n t and f o r m u la tio n o f F e d e r a l ta x p o lic y r e l a t i n g to
e x is tin g o r p ro p o s e d i n t e r n a l r e v e n u e la w s , r e l a t e d
s t a t u t e s , and ta x t r e a t i e s , a n d in c lu d e s a s s e s s m e n t ,
c o lle c tio n , e n fo r c e m e n t, litig a tio n , p u b lic a tio n , and
s t a t i s t i c a l g a th e r in g fu n c tio n s u n d e r s u c h la w s , s t a t u t e s ,
%

o r c o n v e n tio n s.
"(D) S ta te . - -T h e t e r m 'S ta te ' m e a n s th e 50 S t a te s ,
the D i s t r i c t of C o lu m b ia , the C o m m o n w e a lth of P u e r t o
R ic o , p o s s e s s i o n s o f the U nited S ta te s , and o t h e r p l a c e s
u n d e r the s o v e r e ig n ty of the U nited S ta te s .
n (E) T a x p a y e r id e n tity . - -T h e t e r m 't a x p a y e r id e n tity '
m e a n s the n a m e of a p e r s o n w ith r e s p e c t to w hom a r e t u r n
is file d , h is m a ilin g a d d r e s s , and h is t a x p a y e r id e n tify in g
n u m b e r (as d e s c r i b e d in s e c t i o n 6109) o r a c o m b in a tio n
th e r e o f .
n(F) I n s p e c tio n . - -T h e t e r m s 'i n s p e c t e d ' and 'i n s p e c t i o n '
m e a n the v is u a l e x a m in a tio n of a r e t u r n o r r e t u r n in f o r m a ti o n .

-6 -

"(G) D i s c l o s u r e . - -T h e t e r m ’d i s c l o s u r e ’ m e a n s
the m a k in g known to a n y p e r s o n in any m a n n e r w h a t­
e v e r a r e t u r n o r r e t u r n in f o rm a tio n . .
M(b) D is c l o s u r e to S tate T ax O ffic ia ls . - - R e tu r n s and r e t u r n i n ­
f o r m a tio n , e x c e p t w ith r e s p e c t to t a x e s im p o s e d b y c h a p t e r s 35 and
53, s h a ll be open to in s p e c tio n by o r d i s c l o s u r e to any S ta te a gency,
body, o r c o m m is s io n law fully c h a r g e d w ith ta x a d m i n i s t r a t io n f o r the
p u r p o s e of, and only to the e x te n t n e c e s s a r y in, the a d m i n i s t r a t i o n of
a s p e c if ic ta x law o f s u c h S tate and s h a l l be u s e d only f o r s u c h tax
a d m i n i s t r a t io n .

T he in s p e c tio n s h a l l be p e r m i t t e d , o r the d i s c l o s u r e

m a d e , only upon w r i t te n r e q u e s t of the h e a d of su c h S tate a g en c y ,
body, o r c o m m is s io n , d e s ig n a tin g the r e p r e s e n t a t i v e s o f su c h a g e n c y ,
body, o r c o m m is s io n to m a k e the in s p e c tio n o r to r e c e i v e the r e t u r n
o r r e t u r n in fo rm a tio n on b e h a lf of s u c h a g en c y , body, o r c o m m is s io n .
H o w ev er, s u c h r e t u r n in f o r m a tio n s h a l l not b e d is c lo s e d to s u c h
State a gency, body, o r c o m m i s s i o n to the e x te n t th a t the S e c r e t a r y
o r h is d e le g ate d e te r m i n e s th a t su c h d i s c l o s u r e would s e r i o u s l y i m p a i r
the a d m i n i s t r a t io n of F e d e r a l tax la w s .
"(c)

D is c lo s u r e to P e r s o n s H aving S u b s ta n tia l I n t e r e s t . - ” (1) T he r e t u r n of a p e r s o n w ith r e s p e c t to w hom

the r e t u r n is file d s h a ll, upon w r itte n r e q u e s t , be open
to in s p e c tio n by o r d i s c l o s u r e t o - "(A) in the c a s e of the r e t u r n o f an in d iv id u a l,
th a t in dividual;

-

7

-

f,(B) in the c a s e of an in c o m e ta x
r e t u r n filed jo in tly , e i t h e r of the in d iv id u a ls
w ith r e s p e c t to whom the r e t u r n i s file d ;
” (C) in the c a s e of th e r e t u r n of a
p a r t n e r s h i p , a n y p e r s o n who w a s a m e m b e r of
su c h p a r t n e r s h i p d u r in g any p a r t of th e p e r io d
c o v e r e d b y the r e t u r n ;
"(D) in the c a s e of the r e t u r n of a
c o rp o ra tio n -"(i) any p e r s o n d e s ig n a te ^ b y
\

r e s o l u t i o n of its b o a r d of d i r e c t o r s , o r
o t h e r s i m i l a r g o v e rn in g body,
,!(ii) any o f f i c e r o r e m p lo y e e of s u c h
c o r p o r a t io n upon w r i t t e n r e q u e s t sig n e d b y
any p r i n c i p a l o f f ic e r and a t t e s t e d b y the
s e c r e t a r y o r o th e r o f f ic e r,
,f(iii) if the c o r p o r a tio n w a s an e le c t i n g
s m a l l b u s i n e s s c o rp o r a tio n u n d e r s u b c h a p te r
S of c h a p te r 1, a n y p e r s o n who w a s a s h a r e -

• h o ld e r d u rin g a n y p a r t of the p e r i o d c o v e r e d
b y s u c h r e t u r n d u r in g w hich an e le c tio n w a s
in e ffe c t, o r

—

8

-

n (iv) if the c o r p o r a tio n h a s b e e n d i s ­
so lv e d , a n y p e r s o n a u th o r iz e d by a p p lic a b le
S tate law to a c t f o r the c o r p o r a t io n o r any
p e r s o n who th e S e c r e t a r y o r h is d e le g a te fin d s
to h a v e a m a t e r i a l i n t e r e s t w hich w ill be a f ­
f e c t e d by in f o r m a tio n co n ta in e d th e r e in ;
n (E) in thé c a s e of the r e t u r n o f a n e s t a t e - M(i) the a d m i n i s t r a t o r , e x e c u to r , o r
t r u s t e e of s u c h e s t a t e , and
n(ii) any h e i r a t law , n e x t of kin, o r b e n e ­
f i c i a r y u n d e r the w ill, of the d e c e d e n t but on,ly
if the S e c r e t a r y o r h is d e le g a te fin d s th a t s u c h
h e i r a t law , n e x t of kin, o r b e n e f i c i a r y h a s a
m a t e r i a l i n t e r e s t w hich w ill be a ffe c te d by i n ­
f o r m a tio n c o n ta in e d th e r e in ; and
n (F) In the c a s e of the r e t u r n of a t r u s t - "(i) the t r u s t e e o r t r u s t e e s , jo in tly o r
s e p a r a t e l y , and
"(ii) any b e n e f i c i a r y of su c h t r u s t but
only if the S e c r e t a r y o r h is d e le g a te fin d s th a t
s u c h b e n e f i c i a r y h a s a m a t e r i a l i n t e r e s t w hich
w ill be a ffe c te d by in f o r m a tio n c o n tain ed t h e r e i n .

- 9

-

* “ (2) If an in d iv id u a l d e s c r ib e d in p a r a g r a p h (1) i s le g a lly
in c o m p e te n t, th e a p p lic a b le r e t u r n s h a ll be open to in s p e c tio n by
o r d is c lo s u r e to the c o m m itte e , t r u s t e e , o r g u a rd ia n o f h is e s ta te .
"(3) If an in d iv id u a l d e s c r ib e d in p a r a g r a p h (1), o th e r th an an
in d iv id u a l d e s c r ib e d in s u b p a ra g ra p h (E) (i) o r (F) (i) of su c h p a r a ­
g rap h , h a s d ie d , the a p p lic a b le r e t u r n m a y b e in s p e c te d b y o r
d is c lo s e d t o - "(A) the a d m in is tr a to r , e x e c u to r, o r t r u s t e e o f
h is e s ta te ; and
"(B) any h e ir a t law , n e x t of kin , o r b e n e f ic ia r y
u n d e r the w ill, of s u c h d e c e d e n t, o r a d o n ee of p r o p e r ty ,
b u t only if the S e c r e ta r y o r h is d e le g a te fin d s th a t su c h
h e ir a t law , n e x t of k in , b e n e fic ia ry , o r donee h a s a
m a te r ia l i n te r e s t w hich w ill be a ffe c te d by in fo rm a tio n
c o n ta in e d th e r e in .
"(4) If substantially all of the property of the person with respect
to whom the return is filed is in the hands of a trustee in bankruptcy
or receiver, such return or returns for prior years of such person
shall be open to inspection by or disclosure to such trustee or receiver,
but only if the Secretary or his delegate finds that such receiver or
trustee has a material interest which will be affected by information
contained therein.

-

10

-

"(5) Any r e t u r n to w hich th is s u b s e c tio n a p p lie s s h a ll a ls o b e
open to in sp e c tio n by o r d is c lo s u r e to the a tto rn e y in fa c t, duly
a u th o riz e d in w ritin g , o f an y of th e p e rs o n s d e s c rib e d in p a r a ­
g ra p h (1), (2), (3), o r (4) to in s p e c t the r e t u r n o r r e c e iv e th e
in fo rm a tio n on h is b e h a lf, s u b je c t to th e c o n d itio n s p ro v id e d fo r
th e r e in .
n (6) R e tu rn in fo rm a tio n w ith r e s p e c t to an y r e t u r n s h a ll a ls o
be open to d is c lo s u r e to any p e rs o n a u th o riz e d b y th is s u b s e c tio n
to in s p e c t su c h r e t u r n b u t only to the e x te n t th a t the S e c r e ta r y o r
h is d e le g a te d e te rm in e s th a t su c h d is c lo s u r e w ould not s e r io u s ly
im p a ir the a d m in is tr a tio n o f F e d e r a l ta x la w s .
I

f,(d) D is c lo s u re to C o m m itte e s of C o n g re s s . - -

mm

C o m m itte e on W ays and M e an s, C o m m itte e on F in a n c e ,

and J o in t C o m m itte e on I n te rn a l R ev en u e T a x a tio n . - -U pon w r itte n
r e q u e s t fro m th e C h a irm a n of the C o m m itte e on W ays and M eans
of the H ouse of R e p r e s e n ta tiv e s , th e C h a irm a n of th e C o m m itte e on
F in a n c e o f th e S e n a te , o r th e C h a irm a n o f the J o in t C o m m itte e on
I n te r n a l R ev en u e T a x a tio n , th e S e c r e ta r y o r h is d e le g a te s h a ll f u r ­
n is h su c h c o m m itte e s ittin g in c lo s e d e x e c u tiv e s e s s io n w ith a n y
r e t u r n o r r e t u r n in fo rm a tio n .
n (2) C hief of S taff of J o in t C o m m itte e on I n te rn a l R ev en u e
T a x a tio n . - ‘- U pon w ritte n r e q u e s t fro m the C h ief of Staff o f th e J o in t
C o m m itte e on I n te r n a l R ev en u e T a x a tio n , th e S e c r e ta r y o r h is d e le ­
g a te s h a ll fu r n is h h im w ith any r e t u r n o r r e t u r n in fo rm a tio n .

Such

-

11

V

-

C hief of S taff s h a ll have the r ig h t to su b m it any r e le v a n t o r u s e fu l
in fo rm a tio n th u s o b tain ed to any c o m m itte e d e s c rib e d in p a ra g r a p h
(1) s ittin g in c lo s e d e x e c u tiv e s e s s io n .
"(3) O th e r c o m m itte e s . - -Upon w ritte n r e q u e s t fro m th e c h a ir-m an of a c o m m itte e o f th e S enate o r H ouse (o th e r th an a c o m m itte e
sp e c ifie d in p a ra g r a p h (1)) s p e c ia lly a u th o riz e d to in s p e c t r e t u r n s o r
r e tu r n in fo rm a tio n b y a re s o lu tio n of the S en ate o r H ouse o r , in th e
c a se of a jo in t c o m m itte e (o th e r than the c o m m itte e s p e c ifie d in p a r a ­
graph (1)), b y c o n c u r r e n t re s o lu tio n , th e S e c r e ta r y o r h is d e le g a te
sh a ll fu rn is h su c h c o m m itte e s ittin g in c lo se d e x e c u tiv e s e s s io n w ith
any return or return information which such resolution so authorizes
\
the c o m m itte e to in s p e c t,
n (4) A g en ts of committees and submission of information to
Senate or House.- -Any committee described in paragraph (1), (2),
or (3) or the Chief of Staff of the Joint Committee on Internal Revenue
Taxation shall have the right, acting directly, or by or. through such
examiners or agents as the Chairman of such committee or such Chief
of Staff may designate or appoint in writing, to inspect returns and
return information at such time and in such manner as he may de­
termine. Any relevant or useful information obtained by or on behalf
of su ch committee pursuant to the provisions of tin's subsection may
be submitted by the committee to the Sen rite or the House, or to boll
the Seriate and the House, a s the case may be.

The Joint Committee

on I n te rn a l R ev en u e T a x a tio n m a y a ls o su b m it su c h in fo rm a tio n to
an y c o m m itte e d e s c r ib e d in p a r a g r a p h (1) s ittin g in c lo s e d e x e c u tiv e
s e s s io n .
•n (e) D is c lo s u re P u r s u a n t to E x e c u tiv e O r d e r . - -U pon o r d e r o f
th e P r e s id e n t, th e S e c r e ta r y o r h is d e le g a te s h a ll f u r n is h th e P r e s i ­
d e n t, o r su c h e m p lo y ee o r e m p lo y e e s of th e W hite H o u se O ffice a s
th e P r e s id e n t m a y d e s ig n a te in su c h o r d e r to r e c e iv e on h is b e h a lf,
a n y r e t u r n o r r e t u r n in fo rm a tio n .
"(f)

D is c lo s u re to C e rta in F e d e r a l O ffic e rs and E m p lo y e e s fo r

P u r p o s e s of Tax A d m in is tra tio n , e tc . --(1 ) R e tu rn s an d r e t u r n
in fo rm a tio n s h a ll, w ith o u t w r itte n r e q u e s t, b e open to in s p e c tio n by
o r d is c lo s u r e to o f f ic e rs an d e m p lo y e e s of th e D e p a rtm e n t of th e
T r e a s u r y w hose o ffic ia l d u tie s r e q u ir e su c h in s p e c tio n o r d is c lo s u r e .
M(2) A r e t u r n o r r e t u r n in fo rm a tio n w ith r e s p e c t te ta n y ta x i m ­
p o se d by th is title upon a ta x p a y e r s h a ll, w ith o u t w r itte n r e q u e s t,
b e open to in s p e c tio n by o r d is c lo s u r e to a tto r n e y s of th e D e p a rtm e n t
of J u s tic e (in clu d in g U nited S ta te s A tto rn e y s ) p e rs o n a lly an d d ir e c tly
en g ag ed in , and s o le ly fo r th e ir u s e in , p r e p a r a tio n fom ariy p ro c e e d in g
(o r in v e s tig a tio n w hich m ay r e s u l t in a p ro c e e d in g ) b e fo re a F e d e r a l
g ra n d ju r y o r any F e d e r a l o r S ta te c o u rt in a m a t t e r in v o lv in g tax
a d m in is tr a tio n b u t o n ly - (A) if the ta x p a y e r is o r m ay be a p a rty
to su c h p ro c e e d in g ;

(B) if the ta x p a y e r c o n se n ts ; o r
(C) if su c h r e t u r n o r r e tu r n in fo rm a tio n h a s o r
m ay h av e a b e a rin g on the o u tco m e of su c h p ro c e e d in g
b e c a u se -(i) tr e a tm e n t of an ite m w ith r e s p e c t to a
p e rs o n who is o r m a y b e a p a rty to su c h p ro c e e d in g
is o r m ay be d e te rm in e d , in w hole o r in p a r t , b y
r e f e r e n c e to the tr e a tm e n t of an ite m on su c h r e tu r n ;
(ii) su c h r e t u r n o r r e t u r n in fo rm a tio n r e l a t e s
o r m ay r e l a te to an is s u e in the p ro c e e d in g ; o r
(iii) th e lia b ility o f the p a r ty u n d e r th is title
f o r any ta x , p e n a lty , i n te r e s t, fin e, f o r f e itu r e , o r
o th e r im p o s itio n , o r o ffe n se , w hich is o r m ay b e the
s u b je c t of the p ro c e e d in g is o r m ay be d e te rm in e d ,
in whole o r in p a r t, by r e f e r e n c e to su c h r e t u r n o r
r e t u r n in fo rm a tio n .
"(g) Disclosure to Federal Officers and Employees for Purpose
of Federal Law Administration (Other Than Tax Laws). --(1) Upon
request in writing by the Secretary of Commerce, the Secretary or
his delegate shall furnish any return or return information reflected
on such return to officers or employees of the Social and Economic
Statistics Administration (or successor administrations or estab­
lishments thereof) of the Department of Commerce for the purpose
of research and statistical studies and compilations to be conducted

- 14 -

o r p r e p a r e d by su c h A d m in is tra tio n a s a u th o riz e d by law , p ro v id e d
th a t no su c h o ffic e r o r em p lo y ee s h a ll p u b lis h o r o th e rw is e d is c lo s e
an y r e tu r n o r r e t u r n in fo rm a tio n ex cep t in s t a t i s t i c a l fo rm w hich
can n o t be a s s o c ia te d w ith, o r o th e rw is e id e n tify , d ir e c tly o r i n ­
d ir e c tly , a p a r t i c u l a r ta x p a y e r.
M(2) A r e t u r n o r r e t u r n in fo rm a tio n w ith r e s p e c t to any tax
im p o se d b y th is title upon a ta x p a y e r s h a ll, upon r e q u e s t, b e open
to o f f ic e rs o r e m p lo y e e s o f a d e p a rtm e n t, a g en c y , o r o th e r E x e c u tiv e
e s ta b lis h m e n t of th e F e d e r a l G o v e rn m e n t p e rs o n a lly an d d ir e c tly
en g ag ed in, and s o le ly fo r t h e ir u s e in, p r e p a r a tio n fo r any a d m in is ­
tr a tiv e o r ju d ic ia l p ro c e e d in g (o r in v e s tig a tio n w hich m a y r e s u l t in
su c h a p ro c e e d in g ) p e rta in in g to the e n fo rc e m e n t of a s p e c ific a lly
d e sig n a te d F e d e r a l s ta tu te (not in v o lv in g tax a d m in is tra tio n )
to w hich the U nited S ta te s (o r a d e p a rtm e n t, a g en c y , o r o th e r
E x e c u tiv e e s ta b lis h m e n t of the F e d e r a l G o v ern m en t) is o r m a y be a
p a r ty b e fo re any F e d e r a l g ra n d ju ry , c o u rt, d e p a rtm e n t, a g e n c y , o r
o th e r E x e c u tiv e e s ta b lis h m e n t but o n ly - -

.

n(A) if the ta x p a y e r .is o r m ay b e a p a rty to su c h
p ro c e e d in g ;
n (B) if th e ta x p a y e r c o n se n ts ; o r
n(C) if su c h r e t u r n o r r e t u r n in fo rm a tio n h a s o r m a y
h a v e à b e a rin g on th e o u tc o m e of su c h p ro c e e d in g b e c a u s e - -

- 15 -

"(i) th e re w a s o r m a y have b e e n a
tr â n s a c tio n a l re la tio n s h ip b etw een a p e rs o n w ho
is o r m ay be a p a rty to the p ro c e e d in g and the
ta x p a y e r,
"(ii)

su c h p e rs o n is o r m a y be a s u c c e s s o r

in i n t e r e s t of th e ta x p a y e r, o r
"(iii) s u c h r e t u r n o r r e t u r n in fo rm a tio n w ill
o r m a y c o r r o b o r a te o r c o n tra d ic t o th e r in fo rm a tio n
o b ta in e d in su c h p ro c e e d in g o r in v e s tig a tio n .
The in sp e c tio n o r d is c lo s u r e s h a ll be p e rm itte d only upon w r itte n
request, s e ttin g fo rth the r e a s o n s fo r su c h r e q u e s t, th e a u th o rity u n d e r
which the p ro c e e d in g o r in v e s tig a tio n is b e in g c o n d u cted , an d the
p a rtic u la r s u b p a ra g ra p h of th is p a ra g ra p h upon w hich the r e q u e s t is
based and sig n e d by the h e a d of su c h d e p a rtm e n t, a g e n c y , o r e s t a b ­
lishm ent o r , in th e c a s e of the D e p a rtm e n t of J u s tic e , sig n e d by the
A ttorney G e n e ra l, D eputy A tto rn e y G e n e ra l, o r an A s s is ta n t A tto rn e y
G eneral, o r by the D ir e c to r of th e F e d e r a l B u re a u of In v e s tig a tio n .
However, su c h r e t u r n cr. r e t u r n in fo rm a tio n s h a ll n o t be d is c lo s e d
to the e x te n t th a t the S e c r e ta r y o r h is d e le g a te d e te r m in e s th a t su c h
d isc lo su re w ould s e r io u s ly im p a ir the a d m in is tr a tio n o f F e d e r a l tax
laws.

In the e v e n t th a t the S e c re ta r y o r h is d e le g a te m a k e s su c h a

d e te rm in a tio n , the S e c r e ta r y s h a ll c o n su lt w ith the h e ad of th e r e ­
questing d e p a rtm e n t, a g en c y , o r e s ta b lis h m e n t, o r , in th e c a s e o f a

-

16

-

r e q u e s t by th e D e p a rtm e n t of J u s tic e , w ith th e A tto rn e y G e n e ra l.
If, a f t e r su c h c o n s u lta tio n , the is s u e h a s not b e e n r e s o lv e d , a fin a l
d e te rm in a tio n s h a ll be m a d e by th e P r e s id e n t o r h is d e le g a te .
/
"(3) An o ffic e r o r em p lo y ee of the D e p a rtm e n t of th e T r e a s u r y
p a rtic ip a tin g w ith o f f ic e r s o r e m p lo y e e s of a n o th e r d e p a rtm e n t, agency,
o r o th e r E x e c u tiv e e s ta b lis h m e n t of the F e d e r a l G o v e rn m e n t in a jo in t
\
in v e s tig a tio n p e rta in in g to the e n fo rc e m e n t of F e d e r a l c r im in a l la w s
m a y , to the e x te n t r e q u ir e d b y su c h in v e s tig a tio n , d is c lo s e to su c h
o th e r o f f ic e rs o r e m p lo y e e s r e t u r n in fo rm a tio n w ith r e s p e c t to a tax .
im p o se d by th is title upon a ta x p a y e r o th e r th an r e t u r n in fo rm a tio n
fu rn is h e d to the S e c r e t a r y o r h is d e le g a te by su c h ta x p a y e r.
M(h) D is c lo s u re of C e rta in R e tu rn s and R e tu rn In fo rm a tio n f o r
T ax A d m in is tra tio n P u r p o s e s . - "(1) D is c lo s u re by in te r n a l re v e n u e o ffic ia ls and e m p lo y e e s
fo r in v e s tig a tiv e p u r p o s e s . --A n in te r n a l re v e n u e o ffic ia l o r em p lo y ee
m a y , in co n n ec tio n w ith h is o ffic ia l d u tie s w ith r e s p e c t to a tax im posed
b y th is title , d is c lo s e r e t u r n in fo rm a tio n to the e x te n t th a t su c h d i s ­
c lo s u r e is n e c e s s a r y in a r r iv in g a t a c o r r e c t d e te rm in a tio n of ta x ,
lia b ility fo r ta x , o r th e am o u n t to be c o lle c te d , o r o th e rw is e in the
e n fo rc e m e n t of any p ro v is io n of th is title .
"(2) D is c lo s u re of a c c e p te d o f f e r s - in - c o m p r o m is e . - - R e tu rn in ­
fo rm a tio n s h a ll be d is c lo s e d to m e m b e r s of the g e n e r a l p u b lic to the
e x te n t n e c e s s a r y to p e r m it in s p e c tio n of any a c c e p te d o f f e r - i n - c o m ­
p r o m is e u n d e r s e c tio n 7122, r e la tiv e to th e lia b ility fo r a ta x im p o sed
by th is title .

-

17

-

"(3) D is c lo s u re of am o u n t of o u tsta n d in g lie n . - - I f a n o tic e o f lie n
h as been file d p u rs u a n t to s e c tio n 6323 (f) o r c o rre s p o n d in g p ro v is io n
of p r i o r in te r n a l re v e n u e la w s, th e a m o u n t of th e o u tsta n d in g o b lig a tio n
s e c u re d b y su c h lie n is a u th o riz e d to be d is c lo s e d a s a m a t t e r of p u b lic
r e c o r d an d m a y b e d is c lo s e d to any p e rs o n who f u rn is h e s s a t is f a c to r y
w ritte n e v id e n c e th a t he h a s a rig h t in th e p r o p e r ty s u b je c t to su c h
lie n o r in te n d s to o b tain a r ig h t in su c h p r o p e r ty .
"(4) D is c lo s u re in ju d ic ia l and a d m in is tr a tiv e tax p ro c e e d in g s . - A r e tu r n o r r e t u r n in fo rm a tio n w ith r e s p e c t to any ta x im p o s e d by th is
title upon a ta x p a y e r m a y be d is c lo s e d in a F e d e r a l o r S ta te ju d ic ia l
o r a d m in is tra tiv e p ro c e e d in g p e rta in in g to ta x a d m in is tr a tio n b e fo re
%
any F e d e r a l o r S tate g ra n d ju r y , c o u rt, d e p a rtm e n t, o r E x e c u tiv e
e sta b lis h m e n t, b u t o n ly - "(A) if th e ta x p a y e r is a p a rty to su ch p ro c e e d in g ;
"(B) if th e ta x p a y e r c o n se n ts ;
"(C) if su c h r e t u r n o r r e tu r n in fo rm a tio n h a s o r
m ay h a v e a b e a rin g on the o u tc o m e o f su ch p ro c e e d in g
b e c a u se -"(i) tr e a tm e n t of an ite m w ith r e s p e c t to a
p a r ty to the p ro c e e d in g is o r m a y be d e te rm in e d ,
in w hole o r in p a r t , by r e f e r e n c e to the tr e a tm e n t
of a n ite m on su c h r e tu r n ,
"(ii) su c h r e tu r n o r r e t u r n in fo rm a tio n r e ­
l a t e s o r m ay r e l a te to a tr a n s a c tio n a t is s u e in th e
p ro c e e d in g , o r

.

-

18

-

n(iii) the lia b ility of the p a rty u n d e r th is title
fo r any ta x , p e n a lty , i n te r e s t, fin e , f o r f e itu r e , o r
o th e r im p o s itio n , o r o ffe n se w hich is the s u b je c t of
the p ro c e e d in g is o r m a y be d e te rm in e d by r e f e r e n c e
to su c h r e t u r n o r r e t u r n in fo rm a tio n ;
"(D) to th e e x te n t n e c e s s a r y to im p e a c h a w itn e s s in
th e p ro c e e d in g r e s p e c tin g te s tim o n y a s to a tr a n s a c tio n
w ith the ta x p a y e r if the ta x p a y e r is n e ith e r a p a r ty to , n o r
a w itn e s s in, su c h p ro c e e d in g ;
"(E) to th e e x te n t n e c e s s a r y to im p e a c h th e te s tim o n y
of the ta x p a y e r if the ta x p a y e r is a w itn e s s in th e p ro c e e d in g ;
,1(F) to the e x te n t re q u ir e d by o r d e r of a c o u rt p u rs u a n t
to 18 U. S. C. 3500 o r R ule 16 of th e F e d e r a l R u le s of C rim in a l
P r o c e d u r e , su c h c o u rt b ein g a u th o riz e d in the is s u a n c e of su c h
o r d e r to give due c o n s id e ra tio n to C o n g re s s io n a l p o lic y fa v o rin g
th e c o n fid e n tia lity of r e t u r n s and r e t u r n in fo rm a tio n a s s e t
f o rth in th is title ; .o r
"(G) to th e e x te n t re q u ir e d by th e C o n stitu tio n o f th e
U n ited S ta te s .
H o w ev er, su c h r e t u r n o r r e t u r n in fo rm a tio n s h a ll n o t be d is c lo s e d
to th e e x te n t th a t the S e c r e ta r y o r h is d e le g a te d e te r m in e s th a t su ch
d is c lo s u r e w ould s e r io u s ly im p a ir th e a d m in is tr a tio n of F e d e r a l ta x
la w s.

In the e v e n t th a t the S e c r e ta r y o r h is d e le g a te m a k e s su c h a

/
- 19 -

d e te rm in a tio n w ith r e s p e c t to d is c lo s u r e in a ju d ic ia l p ro c e e d in g to
w hich the U nited S ta te s is a p a rty , th e S e c r e ta r y s h a ll c o n s u lt w ith
the A tto rn e y G e n e ra l.

If, a f te r su c h c o n su lta tio n , th e p s s u e h a s n o t

been r e s o lv e d , a final d e te rm in a tio n s h a ll be m a d e by th e P r e s id e n t
o r h is d e le g a te .
"(5) D is c lo s u re of r e tu r n in fo rm a tio n to c o r r e c t m is s ta te m e n ts
of fac t. - -T h e S e c re ta ry o r h is d e le g a te m a y , in h is d is c r e tio n , d i s ­
c lo se su c h r e t u r n in fo rm a tio n o r any o th e r in fo rm a tio n w ith r e s p e c t
to any sp e c ific ta x p a y e r a s he c o n s id e rs a d v is a b le fo r p u rp o s e s of tax
a d m in is tra tio n , an d to th e e x te n t n e c e s s a r y , to c o r r e c t a m i s s t a t e ­
m en t of fa c t p u b lish ed o r d is c lo s e d w ith r e s p e c t to su c h ta x p a y e r ’s
r e tu r n o r h is d e alin g w ith the In te rn a l R evenue S e rv ic e .
” (6) D is c lo s u re to co m p e te n t a u th o rity u n d e r in c o m e tax c o n ­
vention, --A r e tu r n o r r e tu r n in fo rm a tio n m a y be d is c lo s e d to a c o m ­
p eten t a u th o rity of a fo re ig n g o v e rn m e n t w hich h a s an in c o m e tax
convention w ith the U nited S ta te s but only to the e x te n t p ro v id e d in ,
and su b je c t to the te r m s and co n d itio n s of, su c h co n v en tio n .
"(7)

F e d e ra l and State a g e n c ie s re g u la tin g tax r e t u r n p r e p a r e r s . -

T a x p a y er id e n tity in fo rm a tio n of any tax r e t u r n p r e p a r e r (as d efin e d
in se c tio n 6690 (e)) m ay be d is c lo s e d to any F e d e r a l o r S tate a g en c y ,
body, o r c o m m issio n c h a rg e d u n d e r the law s of the U nited S ta te s o r
any State o r p o litic a l su b d iv isio n of a S tate w ith lic e n s in g , r e g i s ­
tra tio n , o r re g u la tio n of tax r e t u r n p r e p a r e r s .

-

20

-

"(i) D is c lo s u re of R e tu rn s and R e tu rn In fo rm a tio n fo r
P u rp o s e s O th e r T h an T ax A d m in is tra tio n . - M(l)

D is c lo s u re in nontax ju d ic ia l and a d m in is tr a tiv e p r o ­

c e e d in g s , --A r e t u r n o r r e tu r n in fo rm a tio n w ith r e s p e c t to an y tax
im p o se d b y th is title upon a ta x p a y e r m a y be d is c lo s e d in a ju d ic ia l
o r a d m in is tra tiv e p ro c e e d in g p e rta in in g to a s p e c ific a lly d e sig n a te d
F e d e r a l s ta tu te (not in v o lv in g tax a d m in is tra tio n ) to w hich th e U nited
S ta te s (or a d e p a rtm e n t, a g en c y , o r o th e r E x e c u tiv e e s ta b lis h m e n t
of the F e d e ra l G ov ern m en t) is a p a rty b e fo re any F e d e r a l g ra n d ju ry ,
c o u rt, d e p a rtm e n t, a g en c y , o r E x e c u tiv e e s ta b lis h m e n t but o n ly - "(A) if the ta x p a y e r is a p a rty to su ch p ro c e e d in g ;
\

n{B) if the ta x p a y e r c o n s e n ts ;
n(C) if su c h r e t u r n o r r e t u r n in fo rm a tio n lias o r m a y
hav e a b e a rin g on th e o u tc o m e o f su c h p ro c e e d in g b e c a u s e - n (i) th e r e w as a tr a n s a c tio n a l re la tio n s h ip
b e tw ee n a p a r ty to the p ro c e e d in g an d the ta x p a y e r,
or
"(ii)

su ch p a rty is a s u c c e s s o r in i n t e r e s t of

the ta x p a y e r;
"(D) to th e e x te n t n e c e s s a r y to im p e a c h a w itn e s s in
th e p ro c e e d in g r e s p e c tin g te s tim o n y a s to a tr a n s a c tio n w ith
th e ta x p a y e r if th e ta x p a y e r is n e ith e r a p a rty to , n o r a w i t ­
n e s s in, su c h p ro c e e d in g ;

*

"(E) to th e e x te n t n e c e s s a r y to im p e a c h th e
te s tim o n y of the ta x p a y e r if the ta x p a y e r is a w itn e s s
in the p ro c e e d in g ;
n (F) to th e e x te n t re q u ire d by o r d e r o f a c o u rt
p u r s u a n t to 18 U. S. C, 3500 o r R ule 16 of the F e d e r a l
R u le s of C rim in a l P r o c e d u r e , su c h c o u rt b e in g a u th o riz e d
in the is s u a n c e of su ch o r d e r to give due c o n s id e ra tio n to
C o n g re s s io n a l p o lic y fa v o rin g th e c o n fid e n tia lity o f r e t u r n s
and r e t u r n in fo rm a tio n a s s e t fo rth in th is title ; o r
n (G) to th e e x te n t re q u ire d by the C o n stitu tio n o f th e
U n ited S ta te s .
H ow ever, s u c h r e t u r n o r r e t u r n in fo rm a tio n s h a ll no t be d is c lo s e d
to the e x te n t th a t the S e c r e ta r y o r h is d e le g a te d e te r m in e s th a t su ch
d is c lo s u re w ould s e r io u s ly im p a ir the a d m in is tr a tio n of F e d e r a l tax
law s.

In the e v e n t th a t the S e c re ta r y o r h is d e le g a te m a k e s such a

d e te rm in a tio n , the S e c r e ta r y s h a ll c o n su lt w ith the A tto rn e y G e n e ra l
if the U nited S ta te s is a p a rty to the p ro c e e d in g o r th e D e p a rtm e n t
of J u s tic e r e p r e s e n ts arA epartm im t, ag en cy , o r o th e r E x ec u tiv e
e s ta b lis h m e n t of the F e d e r a l G o v e rn m e n t w hich is a p a r ty to the p r o ­
ceeding, o r w ith th e h ead of su c h d e p a rtm e n t, a g en c y , o r e s t a b l is h ­
m en t if th e D e p a rtm e n t of J u s tic e does n o t s o r e p r e s e n t the d e p a rtm e n t,
agency, o r e s ta b lis h m e n t.

If, a f te r su c h c o n su lta tio n , the is s u e h a s

not been re s o lv e d , a fin a l d e te rm in a tio n s h a ll be m a d e by th e P r e s id e n t
o r h is d e le g a te .

-

22

-

**(2) D is c lo s u re of c e r ta in r e t u r n s and r e tu r n in fo rm a tio n to
S o c ial S e c u rity A d m in is tra tio n and R a ilro a d R e tire m e n t B o a rd . - -T h e
S e c r e ta r y o r h is d e le g a te is a u th o riz e d to d is c lo s e r e t u r n s and r e tu r n
in f o r m a tio n - n (A) w ith r e s p e c t to ta x e s im p o sed by c h a p te r s 2, 21,
an d 24, to th e S o cial S e c u rity A d m in is tra tio n fo r p u rp o s e s
of its a d m in is tra tio n of th e S o cial S e c u rity A ct;
n (B) w ith r e s p e c t to a p lan to w hich p a r t I of
s u b c h a p te r D of c h a p te r 1 a p p lie s , to the S o cial
S e c u rity A d m in is tra tio n fo r p u rp o s e s of c a r r y in g out v .
i ts re s p o n s ib ility u n d e r se c tio n 1131 of the S o cial
%
'
S e c u rity A ct; and
S

" (c ) w ith r e s p e c t to ta x e s im p o se d by c h a p te r 22,

to the R a ilro a d R e tir e m e n t B o a rd fo r p u rp o s e s o f its
a d m in is tra tio n of the R a ilro a d R e tir e m e n t A ct.
"(3) D is c lo s u re of r e t u r n s and r e t u r n in fo rm a tio n to th e D e p a r t­
m e n t o f L a b o r and P e n sio n B e n e fit G u a ra n ty C o rp o ra tio n . - -T h e
S e c re ta r y o r h is d e le g a te is a u th o riz e d to fu rn is h r e t u r n s and r e t u r n
in fo rm a tio n to the p r o p e r o f fic e rs and e m p lo y e e s of th e D e p a rtm e n t
o f L a b o r and th e P e n s io n B en efit G u a ra n ty C o rp o ra tio n f o r p u rp o s e s
Of

the a d m in is tra tio n of T itle s I and IV of th e E m p lo y ee R e tir e m e n t

In co m e S e c u rity A ct.

- 23 -

"(4) D is c lo s u re of r e t u r n in fo rm a tio n a s to P r e s id e n tia l
a p p o in tees and c e r ta in o th e r F e d e r a l G o v e rn m e n t a p p o in te e s . - -T h e
S e c re ta r y o r h is d e le g a te is a u th o riz e d to d is c lo s e to a duly a u th o ­
riz e d r e p r e s e n ta tiv e of the E x e c u tiv e O ffice o f the P r e s i d e n t o r to th e
head of an y d e p a rtm e n t, ag en cy , o r o th e r E x e c u tiv e e s ta b lis h m e n t o f
the F e d e r a l G o v e rn m e n t, upon w ritte n r e q u e s t o f su c h r e p r e s e n ta tiv e
o r head, o r to the F e d e r a l B u re a u of In v e s tig a tio n on b e h a lf of su c h
r e p r e s e n ta tiv e o r h e a d , r e t u r n in fo rm a tio n w ith r e s p e c t to an in d iv i­
dual who i s d e sig n a te d a s b e in g u n d e r c o n s id e ra tio n f o r a p p o in tm e n t
to a p o sitio n in the E x e c u tiv e o r J u d ic ia l B ra n c h o f th e F e d e r a l
G o v ern m en t. Such r e t u r n in fo rm a tio n s h a ll be lim ite d to w h e th e r
t
such an in d iv id u a l—
n (A) h a s file d r e t u r n s w ith r e s p e c t to the ta x e s
im p o se d u n d e r c h a p te r 1 fo r not m o re th an th e i m ­
m e d ia te ly p re c e d in g 3 y e a r s ;
"(B) h a s fa ile d to pay any ta x w ith in 10 d a y s,
a f te r n o tic e an d d em an d , o r h a s b e e n a s s e s s e d a n y
p e n a lty u n d e r th is title fo r n e g lig e n c e , in th e c u r r e n t
y e a r o r im m e d ia te ly p re c e d in g 3 y e a r s ;
n (C) h a s b een o r is u n d e r in v e s tig a tio n o f p o s s ib le
c rim in a l o ffe n s e s u n d e r the in te r n a l re v e n u e la w s an d
the r e s u l t of an y su c h in v e s tig a tio n ; and
"(D) h a s b een a s s e s s e d any p e n a lty u n d e r th is
title fo r fra u d .

- 24 -

T he o ffic ia l to w hom su c h r e t u r n in fo rm a tio n is d is c lo s e d is a u th o ­
r iz e d to d is c lo s e su c h in fo rm a tio n to h is s u p e r io r o f f ic e r s .
D is c lo s u re of T a x p a y e r Id e n tity In f o r m a tio n .'-- T h e S e c r e ta r y
o r h is d e le g a te is a u th o riz e d , upon w ritte n re q u e st* to d is c lo s e t a x ­
p a y e r id e n tity in fo rm a tio n t o - "(1) any F e d e r a l ag en c y fo r p u rp o s e s of a s s is tin g
su c h a g en cy in lo c a tin g a p e rs o n w ith r e s p e c t to whom
a r e t u r n h a s b e e n file d ;
"(2) any S ta te a g en c y , body, o r c o m m is s io n
d e s c r ib e d in s e c tio n 6103 (b) fo r p u rp o s e s o f a s s i s t i n g
s u c h agency, body, o r c o m m is s io n in lo c a tin g a p e rs o n
w ith r e s p e c t to w hom a r e t u r n h a s b e e n file d o r c o m ­
m u n ic a tin g w ith su c h p e rs o n to a d v is e him th a t he m a y
b e e n title d to a re fu n d , o r to a s s i s t su c h a g en c y , body,
o r c o m m is s io n in its a d m in is tr a tio n o f th e tax law s of
su c h S tate;
"(3) th e D e p a rtm e n t of H e a lth , E d u ca tio n , and W e l­
f a r e , o r a p p ro p r ia te S ta te an d lo c a l w e lfa re a g e n c ie s
r e p o r tin g to su c h D e p a rtm e n t, fo r p u rp o s e s of a s s is tin g
F e d e r a l, S ta te , and lo c a l w e lfa re a g e n c ie s in lo c a tin g a n
in d iv id u a l d e s c rib e d in 42 U. S. C. 610 w ith r e s p e c t to
w hom a r e t u r n h a s b e en file d ; and

- 25 -

"(4) the press and other media for purposes of
notifying persons entitled to tax refunds when the Secretary
or his delegate, after reasonable effort and lapse of time,
has been unable to locate such persons.
"(k) Disclosure of Returns and Return Information to Designee of
Taxpayer. --The Secretary or his delegate may, subject to such re­
quirements and conditions as may be prescribed by regulations,
disclose the return of any taxpayer, or return information with
respect to such return, to such person or persons as such taxpayer .
may designate in a written request for such disclosure, or to any other
person at the taxpayer’s request to the extent necessary to comply
with a request for information or assistance made by the taxpayer to
such other person. However, return information shall not be disclosed
to such person or persons to the extent that the Secretary or his delegate
determines that such disclosure would seriously impair the adminis­
tration of Federal tax laws.
"(1) Certain Other Persons. --The Secretary or his delegate
is authorized to disclose returns and return information to any per­
son, including any person described in section 7 513 (a), to the extent
necessary in connection with contractual procurement of services or
property for purposes of tax administration.
n(m) Disclosure of Return Information Concerning Prospective
Jurors and Possible Criminal Activities. --

-

26

-

"(1) Prospective Jurors. -"(A) Return information with respect to any tax
imposed by this title upon a taxpayer shall be disclosed
to an attorney of the Department of Justice (including a
United States attorney) in connection with a judicial
proceeding described in paragraph (h)(4) or (i)(l) of this
section to the extent necessary to answer an inquiry by
such attorney as to whether a prospective juror has, or
has not, been investigated by the Secretary or his delegate.
"(B) Return information with respect to any tax
imposed by this title upon a taxpayer shall, upon request,
i

be disclosed to an attorney of the Department of Justice
(including a United States attorney) in connection with a
judicial proceeding described in paragraph (h)(4) or (i)(l)
of this section for use by him solely for purposes of i m ­
peaching a prospective juror upon examination of such
prospective juror, and such return information may, in
the discretion of such attorney, be delivered to the court
for such use or action by the court as the court m a y deem
appropriate.
"(2) Possible Criminal Activities. -"(A) Return information with respect to any tax imposed
by this title upon a taxpayer shall, if such return information
comes to the attention of the Secretary or his delegate, be

d is c lo s e d by the S e c r e ta r y o r h is d e le g a te to th e
A tto rn e y G e n e ra l o r h is d e le g a te to th e e x te n t n e c e s ­
s a r y to a p p r is e the A tto rn e y G e n e ra l o r h is d e le g a te
of a c tiv itie s -w hich m a y c o n s titu te , o r m a y h av e c o n ­
s titu te d , a v io la tio n of F e d e r a l c rim in a l la w s.
n (I3) R e tu rn in fo rm a tio n w ith r e s p e c t to any ta x
im p o se d by th is title upon a ta x p a y e r m a y , if su c h
r e t u r n in fo rm a tio n c o m e s to th e a tte n tio n of the
S e c r e ta r y o r h is d e le g a te , be d is c lo s e d , in the d i s ­
c re tio n of the S e c r e ta r y o r h is d e le g a te , to an o ffic e r
of any d e p a rtm e n t, a g en c y , body, o r c o m m is s io n o f a
S tate (o r p o litic a l su b d iv isio n of a S tate) c h a rg e d w ith
the e n fo rc e m e n t of c rim in a l law s of su c h S ta te to the e x ­
te n t n e c e s s a r y to a p p r is e su c h o ffic e r of a c tiv itie s w h ich
m ay c o n s titu te , o r m ay hav e c o n s titu te d , a v io la tio n of
su c h c rim in a l la w s. ’
M(n) D is c lo s u re of R e tu rn s and R e tu rn In fo rm a tio n W ith R e s p e c t
to T ax e s Im p o se d by S u b title E ..- - R e tu r n s and r e t u r n in fo rm a tio n w ith
re s p e c t to ta x e s im p o se d by s u b title E of th is title ( r e la tin g to ta x e s on
alcohol, to b ac co , and f i r e a r m s ) s h a ll be open to in s p e c tio n by o r d i s ­
c lo su re to o f f ic e rs and e m p lo y e e s of a d e p a rtm e n t, a g e n c y , o r o th e r
E xecutive e s ta b lis h m e n t of the F e d e r a l G o v e rn m e n t w hose o ffic ia l d u tie s
re q u ire su c h in s p e c tio n o r d is c lo s u r e .

- 28 -

"(o) R e m e d y fo r U n a u th o riz e d D is c lo s u r e . - -T h e e x c lu s iv e
re m e d y fo r a n a lle g e d v io la tio n of th is s e c tio n s h a ll be a p ro c e e d in g
u n d e r s e c tio n 7213, and no c o u rt s h a ll h a v e ju r is d ic tio n to re v ie w
a d e te rm in a tio n th a t a r e t u r n o r r e t u r n in fo rm a tio n is o r is n o t open
to in s p e c tio n o r d is c lo s u r e o r to d e te rm in e th e la w fu ln e ss o f an y such
in s p e c tio n o r d is c lo s u r e e x c e p t in su c h a p ro c e e d in g ,
n (p) P i 'o c e d u r e s .- "(1) M a n n e r, tim e , and p la c e of in s p e c tio n s . - -R e q u e s t
f o r in s p e c tio n and the d is c lo s u r e of a r e t u r n o r r e t u r n in fo rm a tio n
s h a ll be m a d e in su c h m a n n e r and a t su c h tim e and p la c e a s s h a ll
be p r e s c r i b e d b y the S e c r e ta r y o r h is d e le g a te .
n (2) C o p ie s of r e t u r n s . --A copy o r c e rtifie d copy of a
r e t u r n s h a ll, upon w ritte n r e q u e s t, be fu rn is h e d to any p e rs o n to
w hom d is c lo s u r e o f su c h r e t u r n is a u th o riz e d o r who is a u th o riz e d to
in s p e c t th e r e t u r n .

Such copy s h a ll h a v e th e s a m e le g a l s ta tu s a s

th e o rig in a l; and any su c h copy s h a ll, if p r o p e r ly a u th e n tic a te d , b e
a d m is s ib le in e v id e n c e in an y ju d ic ia l o r a d m in is tr a tiv e p ro c e e d in g
a s if it w e re the o r ig in a l, w h e th e r o r not the o rig in a l is in e x is te n c e .
A r e a s o n a b le fee m ay be p r e s c r i b e d fo r fu rn is h in g su c h copy.
"(3) Disclosure of return information. --Return information
disclosed to any person under the provisions of this subchapter may
be provided in the form of written documents, reproductions of such
*

documents, films or photoimpressions, or electronically-produced
tapes, disks or records, or by any other mode or means which, in

the o pinion o f th e S e c re ta r y o r h is d e le g a te , a r e n e c e s s a r y o r a p p r o ­
p r ia te . A re a s o n a b le fee m a y be p r e s c r i b e d fo r d is c lo s in g su c h r e t u r n
in fo rm a tio n .
"(4) R e c o rd s of in s p e c tio n and d is c lo s u r e . - -T h e S e c r e ta r y
o r h is d e le g a te s h a ll m a in ta in a r e c o r d of a ll r e q u e s ts f o r i n s p e c ­
tion and d is c lo s u r e of r e t u r n s and r e q u e s ts f o r r e t u r n in fo rm a tio n
and of r e t u r n s in s p e c te d and r e t u r n in fo rm a tio n d is c lo s e d u n d e r th is
se ctio n (o th e r th an r e t u r n s and r e t u r n in fo rm a tio n in s p e c te d o r d i s ­
closed u n d e r th e a u th o rity of s u b s e c tio n (f), (h), (i) (1) o r (j)), and
such r e c o r d s s h a ll b e a v a ila b le fo r e x a m in a tio n b y the J o in t C o m m it­
tee on In te rn a l R evenue T a x a tio n o r th e C h ief of S taff of su c h J o in t
C o m m ittee.

T h e S e c re ta r y o r h is d e le g a te s h a ll, a t th e r e q u e s t of

such C h ief of Staff, fu rn is h to h im a s u m m a ry of su c h r e c o r d s a t
such tim e o r tim e s an d in su c h fo rm an d c o n ta in in g su c h in fo rm a tio n
as the C hief of S taff m ay d e sig n a te in su c h r e q u e s t.
n (5) S a f e g u a r d s .- - A n y d e p a rtm e n t, a g en c y , o r o th e r
E xecu tiv e .e s ta b lis h m e n t of the F e d e r a l G o v e rn m e n t d e s c rib e d in s u b ­
se ctio n (f) (2) o r (g) o r any S tate a g e n c y , body, o r c o m m is s io n d e ­
sc rib e d in s u b s e c tio n (b) s h a ll, a s a co n d itio n fo r r e c e iv in g r e t u r n s
o r r e tu r n in f o r m a tio n - "(A) e s ta b lis h and m a in ta in a s e c u r e a r e a o r
p la c e in w hich su c h r e t u r n s o r r e t u r n in fo rm a tio n s h a ll
b e s to re d :

- 30 -

RBb] r e s t r i c t

a c c e s s to the r e t u r n s o r r e t u r n i n ­

fo rm a tio n on ly to th o se p e rs o n s w hose d u tie s o r
r e s p o n s ib ilitie s r e q u i r e a c c e s s and to w hom d is c lo s u r e
m a y b e m a d e u n d e r the p ro v is io n s of th is title ,
n(C) p ro v id e su c h o th e r s a fe g u a rd s a s a r e
n e c e s s a r y o r a p p ro p r ia te to p r o te c t th e c o n fid e n ti­
a lity of th e r e t u r n s o r r e t u r n in fo rm a tio n ; and
n(D) w hen th e r e t u r n s o r th e r e t u r n in f o r m a ­
tio n p ro v id e d by th e S e c r e t a r y o r h is d e le g a te in th e
fo rm o f w r itte n d o c u m e n ts, re p ro d u c tio n s of su c h
d o c u m e n ts, film s o r p h o to im p re s s io n s , o r e l e c ­
tro n ic a lly - p r o d u c e d ta p e s , d is k s o r r e c o r d s h a s
s e r v e d i t s p u rp o s e - in th e c a s e of a S tate a g en c y ,
body, o r c o m m is s io n d e s c r ib e d in s u b ­
s e c tio n (b), r e t u r n to th e S e c r e ta r y o r h is
d e le g a te su c h r e t u r n s o r r e t u r n in fo rm a tio n
(alo n g w ith a n y c o p ie s m ad e th e re fro m ) o r
fu rn is h a w ritte n r e p o r t to the S e c r e ta r y
o r h is d e le g a te th a t th e r e t u r n s o r r e t u r n
in fo rm a tio n h a s b e en d e s tro y e d o r o th e rw is e
m a d e u n d is c lo s a b le in an y m a n n e r w h a te v e r;
and

- 31

" (ii) in the c a s e of a d e p a rtm e n t, a g e n c y ,
o r e s ta b lis h m e n t d e s c rib e d in s u b s e c tio n (f) (2)
o r (g), e ith e r - "(a) r e t u r n to th e S e c r e ta r y o r h is
d e le g a te su c h r e t u r n s o r r e t u r n in fo rm a tio n
(alo n g w ith any c o p ie s m ad e th e r e f ro m ) ,
. "(b) o th e rw is e m a k e su c h r e t u r n s
o r r e t u r n in fo rm a tio n u n d is c lo s a b le in a n y
m a n n e r w h a te v e r, o r
"(jc) to the e x te n t n o t s o r e tu r n e d o r
m a d e u n d is c lo s a b le , e n s u re th a t the c o n d itio n s o f s u b p a ra g ra p h s (A), (R), and (C)
o f th is p a ra g r a p h co n tin u e to be m e t w ith
r e s p e c t to su c h r e t u r n s o r r e t u r n in fo rm a tio n ,
e x c e p t th a t the c o n d itio n s of s u b p a ra g ra p h s (A), (B), (C),
and (D) s h a ll c e a s e to ap p ly w ith r e s p e c t to any .r e tu r n o r
r e t u r n in fo rm a tio n if, and to the e x te n t th a t, su c h r e t u r n o r
r e t u r n in fo rm a tio n is d is c lo s e d in th e c o u rs e , o r m a d e a p a r t
of the r e c o r d , of any ju d ic ia l o r a d m in is tr a tiv e p ro c e e d in g d e ­
s c r ib e d in p a ra g r a p h (h)(4) o r (i)(l) of th is s e c tio n .
"(6) R e g u la tio n s . - -T h e S e c r e ta r y o r h is d e le g a te is
a u th o riz e d to p r e s c r i b e su c h re g u la tio n s a s a r e n e c e s s a r y to
c a r r y o u t the p ro v is io n s o f th is s e c tio n . "

.T

- 32 -

SE C . 3.

ST A T IST IC A L PU 13LIC AT ION S AND STUDIES

S ec tio n 6108 (re la tin g to p u b lic a tio n of s t a t i s t i c s of in c o m e ) is
a m en d ed to r e a d a s follow s:
SE C . G108.
"(a)

ST A T IST IC A L PU BLICA TIO N S AND STUD IES

P u b lic a tio n o r O th e r D is c lo s u re of S ta tis tic s o f In c o m e . - -

T he S e c r e ta r y o r h is d e le g a te s h a ll p r e p a r e and p u b lish a n n u a lly , and
m ay in h is d is c r e tio n p u b lish o r o th e rw is e d is c lo s e a t any tim e , s t a ­
t is ti c s re a s o n a b ly a v a ila b le w ith r e s p e c t to th e o p e ra tio n s of th e
in te r n a l re v e n u e la w s , in clu d in g c la s s if ic a tio n s of ta x p a y e rs and of
in c o m e , the a m o u n ts c la im e d o r allo w ed a s d e d u c tio n s , e x e m p tio n s,
and c r e d its , and any o th e r f a c ts d e em ed p e rtin e n t and v a lu a b le .
"(b)

S p e c ia l S ta tis tic a l S tu d ie s. - -T h e S e c r e ta r y o r h is d e le g a te

is a u th o riz e d , upon w r itte n r e q u e s t by an y p e rs o n o r p e r s o n s , to
m a k e s p e c ia l s t a t i s t i c a l s tu d ie s and c o m p ila tio n s of r e t u r n in f o r m a ­
tio n (as defin ed in s e c tio n 6103 (a) (2) (B)), and to fu rn is h to s u c h
p e rs o n o r p e rs o n s any d a ta o b tain ed fro m su c h s p e c ia l s t a t i s t i c a l
s tu d ie s and c o m p ila tio n s in s t a t i s t i c a l fo rm .

T he c o s t of p e rfo rm in g

su c h s p e c ia l s t a t i s t i c a l s tu d ie s and c o m p ila tio n s s h a ll be p a id b y
su c h p e rs o n o r p e rs o n s .
"(c) O th e r P u b lic a tio n s . - -T h e S e c re ta r y o r h is d e le g a te m a y
p r e p a r e and p u b lish su c h o ffic ia l r u lin g s , p r o c e d u r e s , and s i m i l a r
in fo rm a tio n of th e In te rn a l R evenue S e rv ic e a s h e , in h is d is c re tio n ,
c o n s id e r s n e c e s s a r y to p ro m o te u n ifo rm a p p lic a tio n of th e ta x la w s.

-

33

-

“ (d) T a x p a y e r Id e n tity . - -N o p u b lic a tio n o r o th e r d is c lo s u r e of
s ta tis tic s o r o th e r in fo rm a tio n r e q u ir e d o r a u th o riz e d by s u b s e c tio n
(a), special* s t a ti s t i c a l s tu d y a u th o riz e d by s u b s e c tio n (b), o r i n f o r ­
m atio n a u th o riz e d by s u b s e c tio n (c) s h a ll in any m a n n e r p e r m i t th e
s ta tis tic s , stu d y , o r any in fo rm a tio n so p u b lis h e d , fu rn is h e d , o r
o th e rw ise d is c lo s e d to b e a s s o c ia te d w ith , o r o th e rw is e id e n tify ,
d ire c tly o r in d ir e c tly , a p a r t i c u l a r ta x p a y e r.
SEC. 4.

IN SPECTIO N O F C ER TA IN RECORDS BY LO CA L O F F IC E R S .

S ectio n 4102 (re la tin g to in s p e c tio n of r e c o r d s , r e t u r n s , e t c . , b y
lo cal o ffic e rs ) is a m e n d ed to r e a d a s fo llo w s:
"S E C . 4102.

IN SPE C TIO N O F RECO RD S BY L O C A L O F F IC E R S .

U n d er r e g u la tio n s p r e s c r i b e d b y th e S e c r e ta r y o r h is d e le g a te ,
r e c o r d s r e q u ir e d to be k e p t w ith r e s p e c t to ta x e s u n d e r th is p a r t
sh a ll b e open to in s p e c tio n by su c h o f f ic e rs of a S ta te , th e C o m m o n ­
w ealth of P u e rto R ico , the D is tr ic t o f C o lu m b ia, a p o s s e s s io n of the
U nited S ta te s , o r a p o litic a l su b d iv isio n of an y o f th e fo re g o in g , a s s h a ll
be c h a rg e d w ith th e e n fo rc e m e n t o r c o lle c tio n of a n y ta x on g a s o lin e
o r lu b ric a tin g o ils . M
SEC. 5.

P E N A L T Y FO R UN AUTHORIZED DISCLOSURE O F
IN FO RM A TIO N .

S ectio n 7213 (re la tin g to u n a u th o riz e d d is c lo s u r e of in fo rm a tio n )
is am en d ed by s tr ik in g o u t s u b s e c tio n (c), re d e s ig n a tin g s u b s e c tio n s
(d) and (c) a s (c) and (d) r e s p e c tiv e ly , and by a m e n d in g s u b s e c tio n
(a) to r e a d a s fo llo w s:

- 34 A.

"(a) R e tu rn s an d R e tu rn In fo rm a tio n . - n(l) F e d e r a l e m p lo y e e s and o th e r p e r s o n s . - -It s h a ll
b e u n law fu l fo r an y o f fic e r o r e m p lo y e e of the U nited S ta te s
or an y p e rs o n d e s c r ib e d in s e c tio n 6103 (1) (o r an o ffic e r or
e m p lo y e e of a n y su c h p e rs o n ), o r any p e rs o n who w as
f o r m e r ly any of th e fo re g o in g , to d is c lo s e o r m a k e known in
a n y m a n n e r w h a te v e r to any p e rs o n , e x c e p t a s a u th o riz e d
in th is t it l e , an y r e t u r n o r r e t u r n in fo rm a tio n (as d e fin ed in
s e c tio n 6103(a)(2)); and it s h a ll be u n law fu l fo r any p e rs o n
to p r in t o r p u b lis h in any m a n n e r w h a te v e r n o t p ro v id e d b y
law an y r e t u r n o r r e t u r n in fo rm a tio n a s so defined; and
\
a n y p e r s o n c o m m ittin g a n o ffe n se a g a in s t th e fo re g o in g
p ro v is io n s h a ll be g u ilty of a m is d e m e a n o r and, upon c o n ­
v ic tio n th e re o f, s h a ll be fin ed n o t m o re th an $ 1 ,0 0 0 , o r i m ­
p ris o n e d n o t m o re th an 1 y e a r , o r both, to g e th e r w ith
th e c o s ts of p ro s e c u tio n , and if the o ffe n d e r b e a n o ffic e r
o r e m p lo y e e o f the U nited S ta te s , he s h a ll be d is m is s e d
fro m o ffice o r d is c h a rg e d fro m e m p lo y m e n t.
"(2) S ta te e m p lo y e e s .- - A n y o f f ic e r, e m p lo y e e , o r
a g e n t, o r f o r m e r o f f ic e r, e m p lo y e e , o r a g e n t, o f any S ta te
(a s d efin ed in s e c tio n 6103 (a) (2)) who d is c lo s e s o r m a k e s
know n in a n y m a n n e r w h a te v e r to any p e rs o n , e x c e p t a s
a u th o riz e d in th is title , any r e t u r n o r r e t u r n in fo rm a tio n
(a s d e fin e d in s e c tio n 6103 (a) (2)) a c q u ire d by him o r

- 35 -

a n o th e r p e rs o n u n d e r s e c tio n 6103 (b) s h a ll be g u ilty of a
m is d e m e a n o r , and upon c o n v ic tio n th e re o f, s h a ll be fin ed
n o t m o re th an $1, 000, o r im p ris o n e d not m o re th'an 1 y e a r ,
o r b o th , to g e th e r w ith the c o s ts of p ro s e c u tio n .
SEC. 6.

PROCESSING O F RETU R N S, R E TU R N IN FO R M A TIO N ,
AND O TH ER DOCUM ENTS.

S ectio n 7513 (re la tin g to r e p ro d u c tio n of r e t u r n s an d o th e r d o c u ­
m en ts) is am e n d ed to r e a d a s fo llo w s:
"SEC . 7513.

MAKING SP E C IA L ST A T IST IC A L STUDIES OR
PROCESSING OR REPRO D U CIN G O F R E T U R N S,
RETU R N INFO RM A TIO N , AND O TH ER DOCUM ENTS.

n (a) In G e n e ra l. - -T h e S e c r e ta r y o r h is d e le g a te is a u th o riz e d
to c o n tra c t, in a c c o rd a n c e w ith re g u la tio n s to be p r e s c r i b e d by th e
S e c re ta r y o r h is d e le g a te , w ith any d e p a rtm e n t, a g e n c y , o r o th e r
E x ecu tiv e e s ta b lis h m e n t of the F e d e r a l G o v e rn m e n t, an y S tate ag en c y ,
o r any p e rs o n fo r th e p u rp o s e of m a k in g s p e c ia l s t a ti s t i c a l s tu d ie s
(as d efin ed in s e c tio n 6108 (b)) o r of p r o c e s s in g o r m a k in g r e p r o ­
ductions by an y m e a n s w h a te v e r of a n y r e t u r n o r r e t u r n in fo rm a tio n
(as d efin ed in s e c tio n 6103 (a) (2)), d o c u m e n t, o r o th e r m a t t e r .

For

p u rp o se s of th is s e c tio n , the te r m 'p ro c e s sin g * in c lu d e s s e r v i c e s
involving s y s te m d e sig n ; a d v ic e , m a in te n a n c e , and tr a in in g in c o n ­
nection w ith su c h s y s te m s (and o p e ra tio n to the e x te n t n e c e s s a r y o r
d e s ira b le fo r s u c h p u rp o s e s ); o r o th e r a s s i s t a n c e in c o n n e c tio n w ith
such p r o c e s s in g .
"(b) R e g u la tio n s . - -T h e S e c r e ta r y o r h is d e le g a te is a u th o riz e d
to p r e s c r i b e re g u la tio n s to p ro v id e su c h s a fe g u a rd s a s in th e opinion

- 36 -

of the S e c r e ta r y o r h is d e le g a te a r e n e c e s s a r y o r a p p r o p r ia te to p ro te c t
r e t u r n s , r e t u r n in fo rm a tio n , d o c u m e n ts, o r o th e r m a t t e r (and r e p r o ­
d u c tio n s of an y of th e fo re g o in g in any fo rm w h a te v e r) 'd e s c r ib e d in
s u b s e c tio n (a) a g a in s t any u n a u th o riz e d u se o r an y u n a u th o riz e d
d is c lo s u r e .
Kfc) P e n a lty . - - F o r p e n a lty fo r u n a u th o riz e d u se o r u n a u th o riz e d
d is c lo s u r e of in fo rm a tio n co n tain ed in r e t u r n s , r e t u r n in fo rm a tio n ,
d o c u m e n ts, o r o th e r m a t t e r , s e e s e c tio n 7213.
SE C . 7.

T E C H N IC A L AND CONFORM ING AM EN D M EN TS.

(1) S ec tio n 6106 (re la tin g to p u b lic ity of u n e m p lo y m e n t tax
r e tu r n s ) is h e re b y re p e a le d .
(2) S e c tio n 6110 (re la tin g to c r o s s r e f e r e n c e s ) is a m e n d e d by
s tr ik in g out p a ra g r a p h s (2), (3), (4), and (5), and by in s e r tin g in lieu
th e r e o f n(2) F o r in s p e c tio n of c e r ta in r e c o r d s c o n c e rn in g g a so lin e
o r lu b r ic a tin g o ils by lo c a l o f f ic e rs , s e e s e c tio n 4102. n
(3) S ectio n 6323 (re la tin g to v a lid ity and p r io r ity of tax lie n s
a g a in s t c e r ta in p e rs o n s ) is am e n d ed by s tr ik in g out p a ra g r a p h (3)
o f s u b s e c tio n (i).
(4) S u b se c tio n (e) of s e c tio n 7213 (re la tin g to c r o s s - r e f e r e n c e s )
is a m e n d e d .b y s tr ik in g out p a ra g r a p h (1) and in s e r tin g in lie u th e re o f
n (l)

P e n a ltie s fo r d is c lo s u r e of in fo rm a tio n by p r e p a r e r s of r e t u r n s . - '

F o r p e n a lty fo r d is c lo s u r e o r u s e of in fo rm a tio n by p r e p a r e r s of r e ­
tu r n s , s e e s e c tio n 7 2 1 6 ."

- 37 -

(5) S e ctio n 7515 ( re la tin g to s p e c ia l s t a t i s t i c a l s tu d ie s and
c o m p ilatio n s a n d o th e r s e r v ic e s on re q u e s t) is h e re b y r e p e a le d .
(6) S u b se c tio n (c) of s e c tio n 7809 ( re la tin g to d e p o s it o f c o l­
lec tio n s) is a m e n d e d by s tr ik in g out in p a ra g r a p h (1) th e w o rd s
’’se c tio n 7515 ( r e la tin g to s p e c ia l s t a t i s t i c a l s tu d ie s and c o m p ila tio n s
for o th e r s e r v ic e s on r e q u e s t ; ” and in s e r tin g in lie u th e r e o f ’’s e c tio n
6103 (p) ( r e la tin g to fu rn is h in g of c o p ie s of r e t u r n s o r o f r e t u r n i n ­
fo rm atio n ) and s e c tio n 6103 (b) ( re la tin g to s p e c ia l s t a t i s t i c a l s tu d ie s
and c o m p ila tio n s ;’’
Technical changes to change table of -contents to be added.

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kHINGTON, D.C. 20220

TELEPHONE W04-2041
J 7 89

ADDRESS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE
THE REPUBLICAN TRUNK 'N TUSK CLUB
PHOENIX, ARIZONA SEPTEMBER 13, 1974
DEL WEBB’S TOWN HOUSE 9:00 P.M.
It will be no news to you when I say that inflation is
our number one economic problem.
I have been saying that,
over and over again, ever since my first day as Secretary
of the Treasury. But I’m not the only one. Almost everyone
holds that view, because inflation dominates our everyday
lives.
The inflation has gone on so long and become so intense
that it has done damage to every sector of our society.
It
has hurt everyone -- people at all income levels, corporations,
financial institutions, local governments -- everyone. And
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Inflation is unfair. Those who are least able to protect
themselves frequently end up bearing the heaviest burden.
Individuals and families..who have depended upon the Federal
Government to preserve the purchasing power of the dollar
feel frustrated. People are disillusioned with their government.
They are losing confidence that the government will be able to
solve the inflation problem.
It is not going to be easy to bring inflation under control.
But we are going to do it. I have no doubt about that. However,
we must have a better understanding of the causes and cures.
For example, we must understand that inflation is not just
an economic problem, it is a political problem as well.
I
don't mean politics in the partisan, how-do-we-get-elected
sense, but in terms/uovernment leaders of whatever political
persuasion representing and responding to the will of their
constituents. That is politics at its best.
The Origins of Inflation
The industrialized countries of the world have all suffered
an horrendous bout of inflation over the past decade -- the United
States less than most (although I take little comfort from that
fact.)

W S -101

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I think it is fair to conclude that in almost every case a
major cause of the inflation was political.
In saying that, I do not mean to imply that inflation has
only the single dimension of government economic policy.
Inflation is a complex process with many causes.
For example,
we are all aware of the series of outside shocks that hit our
price level during the past two years.
°

World production of wheat and coarse grains
declined a disastrous 3 1/2 percent in 1972,.
which resulted in a 36 percent increase in
farm prices and a 20 percent increase in
consumer food prices during 1973.

°

Every industrialized nation in the world
experienced strong growth in 1973, and this
unusual simultaneity put strong pressure on
all internationally-traded raw materials.
In the United States, wholesale prices of
crude materials, excluding food, increased
31 percent during 1973.

°

The devaluations of the dollar made the
food and industrial raw material price
explosion even worse, because the United
States suddenly became the most favorable
place for other nations to obtain those
hard-to-get raw materials. This was good
news for our international trade position,
but it put substantial additional pressure
on domestic prices.

°

And of course, at the end of 1973, the Arab
Nations quadrupled the price of crude oil,
which put great pressure on the prices of
almost all goods and services produced in
the United States.

°

And finally, the end of wage and price controls
just a few months ago added a new burst of
price pressures to the current situation.

All of those forces, however, are one-time events. While
they are with us, they have an enormous influence on the general
price level. For the most part, however, the influence of those

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events is temporary. And when these special forces have passed
and most are in the phase-out stage now - - w e find that the
problem of inflation is still with us, as strong as ever. At
the end of this year, after the food and fuel and other special
factors have receded, our price level will probably still be
rising by something in the neighborhood of 9 percent per year,
perhaps more.
%
And the reason we still find such a horrendous rate of
inflation in the system after the special factors have run
their course is that over a long period of time political
decisions have been tilted in the direction of inflation.
We have increased Government spending faster than we have been
willing to pay for it through taxation. We have created too
much new money and credit, so that more borrowing has taken
place than could be financed out of savings. By those actions
we permitted, encouraged,.even forced the demand for goods and
services to outrun the productive capacity of our economy.
The inevitable result was inflation.
What this boils down to is that our economic reach has
been greater than our grasp of how the economy works. Our
eyes have been bigger than our stomach. We have not learned
that the standard of living in an economy cannot grow more
rapidly than productivity. We do not want to accept the idea
that resources are scarce and that if we make a decision to
give more to some people in the society we are at the same
time deciding to take those resources away from somebody else.
Moreover, if we do not make the take-away decision explicitly by cutting Federal spending elsewhere, for example -- we do not
escape that decision.
It is accomplished instead by the tax
of inflation.
My basic point is that in making many of the decisions
that are so crucially important for inflation we act through
our political system.
It is a political decision whether or
not a government spending program is accelerated or throttled
back. It is a political decision whether or not taxes are
raised or lowered.
It is a political decision whether or not
we use a Federal program to funnel cheap credit to special
sectors of the economy. And for too many years now, too many
of these political decisions have been going the wrong way.
From a political point of view, it is always easier to spend
than to tax. From an economic point of view, that excessive
spending levies the cruelest and most indiscriminate tax of all
inflation.

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The Cure
To correct the inflation problem is every bit as difficult
and complex as the inflation itself. There are no simple quick
solutions. Back in 1971, some of us thought there might be,
but now that controls have had their try we know better. %
No, if we are to lick this inflation, we will have to go
back to fundamentals. One such fundamental is more savings
and investment. As I mentioned earlier, the demands of the
American people go far beyond the capacity of the economy.
It
is of vital importance, therefore, that we continue, and accel­
erate the upward trend of productivity.
It is no accident that economies, such as Japan or Germany,
that devote a large proportion of their output to capital for­
mation have also experienced rapid gains in output per man-hour.
By contrast, the United States has put a rather small share of
its output into new plant and equipment -- about 15 percent
versus an average of about 19 percent in the other industrialized
nations -- and we have also had a much slower rate of productivity
advance. The need for emphasizing capital formation should be
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In addition, however, there are important new investment
requirements that go beyond the normal need to replace and
expand the existing stock of productive capital.
There are many
of these new investment requirements, including pollution con­
trol, new systems of urban transportation, and energy. The^
latter is the most important by far. Project Independence is
estimated to take from three-quarters to one trillion dollars
of new investment over the next decade or so.
In recent years
energy has accounted for about one-fifth of total investment,
in the forseeable future, however, that proportion will have to
rise to about one-third.
It is clear, therefore, that our future needs for saving
and investment represent an enormous challenge above and beyond
what is normal for the American economy.
Indeed, investment
will have to take a rising share of economic output at the
expense of consumption and government spending.
To do this, we will have to make several important changes
in our policies. First, Government spending will hcive to be
curbed to make economic room for the added investment.
Second,

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profits will have to grow to provide both the incentive and
the wherewithal for investment. We cannot look upon profits
as an unnecessary evil, as I fear many Americans now do. We
must avoid legislation and regulation that is punitive of profits
honestly earned.
If we do not, capital formation will be
inhibited and the real purchasing power or workers* earnings
will grow more slowly.
Third, we must reverse our long-held policies that
penalize saving and encourage consumption. Our tax system
should be re-examined to this end. Federal Reserve Regulation
Q, which limits interest paid on savings accounts, should be
revised at the earliest opportunity. And we should permit
the normal incentives of the price system to operate freely.
We must not impose artifical government constraints, as for
example we have done for so many years, and are still doing,
in regulating the price of natural gas.
It is instructive to recall what took place after
August 1971, when we removed the artifical constraint of fixed
exchange rates that had produced an overvalued dollar for so
many years.
In the free market, the dollar moved to new, more
competitive levels and our trade balance, which had been in a
nose dive for many years, returned to surplus.
Similarly, when
we changed agricultural policy 180 degrees to permit maximum
production, American farmers responded to the incentives of the
market place by planting large amounts of additional acreage.
Food prices are high, and the drought in the Midwrest this summer
has aggravated the situation, but food prices would have been
higher still without the shift in policy. These are just two
examples of what the market place, given reasonable freedom and
time, can achieve in overcoming serious economic problems.
That Old-Time Religion
Another fundamental part of the fight against inflation is
sufficient monetary and fiscal restraint to keep the demands
for economic output within our capacity to meet them.
Indeed,
if we are to squeeze out the high rate of inflation that is
now thoroughly embedded in our system, we will have to operate
with a margin of slack in the economy.
This does not mean that economic policy should be harsh
and brutal. Not at all. A deep recession would not help the
cause of price stability -- quite the contrary, because a deep
recession would force us back into strongly stimulative policies
that in the end would create still more inflation. Frequent
and abrupt changes in economic policy are almost as disastrous
as no restraint at all.

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It took
We did not get into this Situation overnight,
It will
and
monetary
excesses
years of economic, financial,
has
its
costs,
take time to cure. The anti-inflation fight
We will have to take some unpleasant-tasting medicine, and
we will have to continue to take it for a prolonged period,
We will have to give up some Government spending programs,
and unless growth in Federal spending can be cut back appre
ciably we. will have to forego the pleasures of a tax cut.
Credit will have to be less easily available. Business
profits cannot grow quite so buoyantly. Unemployment will
have to average slightly higher than it otherwise would.
These are not negligible costs. But if we are to regain
control over inflation, there is no other way. The costs of
continued rapid inflation, which is the alternative, are far
greater.
And that brings us back to politics again. For a long
time, my major concern has been whether the American people
and their Government would have the sustained political will
for this fight.
I think there is more hope now than ever
before. The double-digit inflation of this past year has
frightened many people, and made them more willing to support
tough anti -inflation policies. Good economics is getting to
be good politics.
Even this pendulum can swing too far. We must fight
and win the battle against inflation, but not by forcing a
heavy sacrifice on the economically weak and disadvantaged.
Some increase in unemployment from present levels is inevitable.
But we can, and must, cope with that problem more imaginatively
than in the past. Other sectors of the economy -- such as
housing -- may need some special and temporary assistance.
In short, the burden of dealing with inflation should
be shared as equitably as we can manage it through the political
process. But there is no escape from the need to pursue basic
economic policies that will bring inflation under better control.
Inflation is the economic problem of our times as surely as
deflation and mass unemployment was the economic problem of the
1930s. To deal with it effectively we must be willing to bear
the cost of fiscal and monetary restraint.
Conclusion
But we must always remember that we can deal effect ively
with inflation. Fighting inflation is not just a spectator
sport, but a serious endeavor that will require a complete

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team effort. And that team is all of us, Congress, the
Executive Branch, business, labor and the American people.
We have a great system of government -- the best system
in the world. This country has always been able to solve its
problems by working together, and I am confident we will unite
in this fight and by doing so we will beat inflation.

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FOR IMMEDIATE RELEASE
F riday, September 13, 1974
STATE OF TENNESSEE AND
OFFICE OF REVENUE SHARING
CONCLUDE AGREEMENT

The U. S. T reasury Departm ent's O ffic e o f Revenue Sh arin g
and the S ta te o f Tennessee concluded a j o in t a u d it agreement in
Washington, D. C. t h i s week.

A ccording to the terms o f the p act,

the Com p troller o f the T reasury o f the S ta te o f Tennessee w ill a u d it
general revenue sh a rin g funds in Tennessee s ta te agencies and more than
400 u n its o f lo c a l government.

The a u d it s w ill

be performed by Tennessee S ta te a u d ito rs or

independent p u b lic a ccou n tan ts, u sin g standards and procedures put
forward by the O ffic e o f Revenue Sh arin g in i t s p u b lic a tio n "A u d it Guide
and Standards fo r Revenue Sh arin g R e c ip ie n t s ".

The Tennessee agreement was signed on Tuesday, September 10, by
W illiam R. Sn o d gra ss, T ennessee's C o m p troller o f the Treasury and
Graham W. Watt, D ir e c to r o f the U. S. Treasury Departm ent's O ffic e o f
Revenue S h a rin g.

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Tennessee i s the t h ir d s ta te to s ig n a j o i n t a u d it agreement
w ith the O ffic e o f Revenue S h a rin g.

S im ila r p acts were concluded

e a r li e r t h i s ye ar w ith the s ta te s o f New York and M ich igan.

In a cce p tin g r e s p o n s i b i li t y fo r making revenue sh a rin g a u d its
o f s ta te departments and agencies and lo c a l u n its o f government,
Tennessee has jo in e d the O ffic e o f Revenue S h a r in g 's Cooperative
S ta te A u d it System, a program auth orized by revenue sh a rin g law.

"The C ooperative S ta te A u d it System we are developing w ith the
a s s is t a n c e o f s t a t e governments w ill make i t p o s s ib le to a u d it u n its
o f government th a t re ce iv e shared revenues a t the le a s t p o s s ib le
c o st to a l l , " acco rd in g to Graham Watt.

"The Federal government w ill

not be req uired to d u p lic a te an a u d it system a lre a d y in p la c e ,"
he sa id .

A u d its in clu d e both f in a n c ia l p ra c tic e s and compliance w ith
c iv il

r ig h t s and oth er p r o v is io n s o f the revenue sh a rin g law.

In a d d itio n to in fo rm a tio n provided by s ta te s through the Cooperative
S ta te A u d it system , the O ffic e o f Revenue Sh arin g w ill perform i t s own
a u d its on a random b a s is and in v e s t ig a t e a lle g a t io n s o f noncompliance
w ith revenue sh a rin g law whenever and wherever they may occur.

As p re se n tly a u th o riz e d , the general revenue sh a rin g program w ill
d is t r ib u t e $30.2 b i l l i o n to n e a rly 39,000 u n its o f s ta te and lo c a l govern­
ment over a f iv e -y e a r period th a t ends w ith December 1976.

A lre a d y,

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i t

more than $14 b i l l i o n have been returned to s ta te s and lo c a l
governments.

The next r e g u la r , q u a rte r ly payment o f shared

revenues w ill be issu e d in October.

#

ASHINGTON, D.C. 20220

TELEPHONE W04-2041

FOR RELEASE AT 6:00 P.M. EDST, September 16, 1974
REMARKS OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE AMERICAN NEWSPAPER WOMEN'S CLUB
1607 - 22ND STREET, N.W., WASHINGTON, D.C.
MONDAY, SEPTEMBER 16, 1974 AT 6:00 P.M.
It is a pleasure to be in such talented and attractive
company this evening. Despite the fact that it is such
pleasant company, I want to discuss an unpleasant subject -our current economic difficulties and what we should do
about them. '
In a little more than a year we will be celebrating
our National Bicentennial.
It will be a time to review the
achievements of the past and to establish new goals for the
future. We will want to look back to see where we have been
and look ahead to see where we are going.
The American economic system has served us well.
Great material progress has been achieved over these past
two centuries. No other nation has known our material pros­
perity or abundance. No other people have enjoyed for so
long that full measure of economic freedom that generations
of Americans have enjoyed. We have attained a level of
prosperity in which the "poverty line" in the United States
is the threshhold of wealth in many nations of the world.
What the socialist system promises its workers in some
distant future the American system already provides our
people.
It was an accident of history, but of symbolic significance
that the Wealth of Nations by Adam Smith was published the
same year Thomas Jefferson penned the Declaration of Indepen­
dence. For, just as the principles of Jefferson and his
generation have guided the1political life of this nation for
two centuries, so the economic principles of Adam Smith and
those that followed in his footsteps have been the guiding
lights of our economic history.
That approach has been the path of progress.
In material
terms it has put this Nation in a position of unrivalled
economic leadership in the world. Even more important, the

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system has helped us preserve our most cherished personal
and political freedoms.
We have relied on markets rather than on detailed
regulation of economic life by the government. We have
depended more on the ’’invisible hand” of Adam Smith than
on the heavy hand of economic planning. Competition, not
coercion, has kept things moving. Not the exertion of
government, but the ideas, energies and talents of individuals
acting alone and acting together -- within our economic system -have been the sources of our progress and prosperity.
All of this is familiar to you. Anyone who ever read a
newspaper editorial -- and for all I know some of you have
written reams of them -- is familiar with the case for free
enterprise. What does that have to do with today’s problem?
Today’s problem is inflation -- double-digit inflation. That
is foremost in your government’s concern -- and in the concerns
of the American people. Every public opinion poll, indeed
every trip to the supermarket, testifies to the dominating,
almost overwhelming, importance of inflation as the economic
problem of our times.
Inflation at these intolerable rates must be brought to
an end.
It is equally important that we deal with the inflation
problem in a way that is equitable and consistent with our
economic and political traditions.
I think that we will.
But we should not underestimate the difficulty of the task,
or the threat that inflation poses for our economic system.
Our economic system is more vulnerable today than it has
been at any time since the Great Depression of the 1930's.
Then the problem was mass unemployment. Four decades ago, when
we were in the grips of depression, we determined that we would
never again permit a recurrence of mass unemployment» That
was a correct decision -- and it is as correct today as it was
then.
But in freeing the economy from the risk of mass unemploy­
ment, we have not yet solved the problem of preventing high
rates of inflation.
I am concerned that we have not yet fully
recognized the dimensions of this new threat.
I do not think
it lies in the danger of financial collapse.
Insurance and bank
deposits and a vigilant Central Bank shield us from that risk.

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Ironically, the danger lies more in what we may do to
the economic system, rather than what it may do to us. For,
if the rate of inflation is not reduced to tolerable levels,
the American public will demand direct action to hold down
wages, prices, profits and interest rates. Such action would
not end the inflation but, if accepted as an economic way of
life, it could mean the erosion of our economic system -the system that has provided the American people with more
and better homes, automobiles, leisure, education and almost
everything else worth having -- especially personal and economic
freedom -- than any other nation on earth.
I am not talking about economic ideology. This is the
20th century and we can’t go back to laissez-faire, or some
other mythical system. Government has always had an important
role to play in our economic life. But we have also had the
good sense in this country to allow maximum scope for com­
petition and individual initiative.
The Case For Private Decisions
The case for private decision making in a market system
is based upon a very basic and fundamental fact: it works.
The marketplace is an efficient system when it is allowed to
operate with the necessary freedom.
Indeed, the price system
is not only the most effective method of determining what,
and where, and how economic activity shall take place in a
free society, it is the only feasible method.
If we want the system to work for us, rather than us
working for the system, we cannot do better than competitive
markets. Once detailed economic planning is substituted for
the market mechanism, most of our economic freedom is gone.
And when economic freedom is gone, our chances of retaining
political and other freedoms are close to zero.
Nothing in this life is perfect and the market system
is no exception. The market system does not automatically
dispense, or guarantee, social justice. The market does not
insure that the collective needs of society will be met.
Indeed, there are times -- the Depression was one -- when
extraordinary circumstances prevent the market from operating
well, at which time government intervention is not only wise,
but critical.
It is clear that we must take care of those who are in
need and try to insure that all of our citizens are in a
position to live out their lives in dignity. Those who cannot
help themselves must be helped. Further, the economy must
function within an adequate framework of law. And if it is
to operate properly, competition must be vigorous.

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Government has many vital functions.
It has the
responsibility for guaranteeing the security of the Nation
from foreign enemies, and the security of its citizens
from domestic violence.
It has the obligation of fairly
enforcing the laws. It must provide basic public services.
It must protect the environment.
It must enforce standards
to protect the public health and welfare.
It must insure
that competitive conditions are maintained. And it should
step in and protect individuals against the extremes of
economic adversity over which they have no control.
But I think it is most unwise for Government to attempt
the detailed regulation of prices and costs. We have done so
during and after wartime periods. We did so after August 1971
with our various freezes and phases. We now know from this
recent experience, from our past history, and from our fund
of economic knowledge, that wage and price controls do not
work in a free society.
They have never worked. But while wage and price controls
would fail miserably at curing the serious maladies in the
American economy, they would succeed marvelously in crippling
the economic system to which Americans owe so much.
It is upon the advocates of controls that the burden of
proof must fall. Where are the historical examples of success
to justify the price paid in the loss of individual freedom?
What reason is there to believe that the collective decisions
of ten thousand bureaucrats represent better the interests of
the American consumer than the free decisions of millions of
American citizens?
The decisions of the marketplace are to be preferred over
controls imposed by men not because the marketplace produces
ideal results but because controls have proven themselves,
time and time again, to be costly, coercive, inefficient and
unjust.
Certainly, no evidence has been unearthed in recent
to cause one to reverse that verdict.

ye ars

But I am under no illusions. The American people are fed
up with inflation. They want it stopped, and stopped soon.
They are not going to be patient indefinitely.
In the last
analysis, the public wants results and will not be convinced
of the inherent virtues of free markets if all they seem to pr01“

5
is rising prices. Therefore, control of inflation demands
the highest priority. We must remove the causes of inflation,
not treat the results. Above all, we must avoid being drawn
back into a maze of controls which would only make a bad
situation worse.
Government and Inflation
Let me turn now to what I think we in Government should
be doing. First, and perhaps most important of all, we should
be listening and learning. We have every reason to be humble
in the face of double-digit inflation. The ongoing series of
conferences which will culminate in the White House Conference
on Inflation later this month provide those of us in Government
with an unparalleled opportunity to learn from others.
I attach
the highest importance to this series of conferences about which
I will have more to say in a few minutes.
The other main thing we in Government must bear down on
is the Federal budget.
It ill behooves the Government to call
for sacrifices until it puts its own fiscal house in order.
Frankly, I think that Federal expenditures have been growing
much too rapidly and that they must be restrained.
Let us look at the record. Not until 1961, when our
Nation had been in existence for 185 years, did the Federal
budget cross the $100 billion mark. Only nine more years
were required for it to cross $200 billion, and it took only
four years after that to cross the $300 billion mark. And
this doesn’t even take account of all the extensions of
Federal credit through various guarantees and the like which
caused total Federal and Federally-assisted borrowings to
account for almost two-thirds of total funds raised in the
capital markets in fiscal year 1973.
In 1929 the total expenditures of state, local, and
federal government amounted to only 10 percent of the Nation’s
gross national product, today they consume almost a third of
the GNP.
Nor is the much debated defense budget responsible for
the growth in size and power of government. Except for a
temporary interruption during the Vietnam years, the defense
budget as a percent of gross national product has been de­
clining steadily for two decades. Between fiscal years 1968
and 1974 defense expenditures did not rise at all, and they
have declined by about one-fourth after rough correction for
inflation. During that same period, so-called human resources

6

spending mushroomed at a rapid rate. Of the $90 billion increase
in federal spending, $60 billion went for social security,
veterans' benefits and welfare. Another $15 billion went for
health, education, and manpower. Most of the balance went to
finance the rising interest bill on the ever-mounting national
debt.
In the budgetary sense of the term, all of this might well
be considered "uncontrollable." Indeed, when all the "uncon­
trollable" items are listed in the budget each year, there seems
to be very little left to cut. Our budget, however, is un­
controllable, only if we accept the false assumption that once
a law is enacted by Congress, it can never be altered or repealed.|
In a time when inflation, fueled partly by federal spending,
has become the true scourge of the American working Class, I do
not accept that proposition.
Let me make my position clear. I am not opposed to
government social programs.
I am not opposed to increases in
worthwhile programs --nor the introduction of new endeavors.
Ours is a prosperous and wealthy nation with the wherewithal
to more than adequately meet its social obligations.
But we have been trying to have it both ways. We want
the expensive social programs - -or seem to -- but we don't
want to pay the taxes to support them. The bill is presented
all the same and must be paid.
The inflation created in substantial part by the fiscal
policies of the past dozen years is truly the cruelest of all
taxes -- and the most insidious. Speculation and debt have
been rewarded; savings and thrift penalized. Perhaps not
even the Vietnam war itself has done more to sap confidence
in the Government of the United States and the future than
this inflation, this surreptitious tax which has quietly con­
sumed the savings and pensions and insurance of the working
people of this nation year in and year out for the last decade.
Not the Arab nations of the Middle East nor the drought
of the Middle West created the inflation we know today. Yes,
the rising price of oil and gas, and the rising price of food
and fiber contributed materially to the intensity of our present
inflation. But the ultimate burden of responsibility must rest
squarely upon the Government of the United States. With the
exception of these special one time factors, inflation is not
an import; it is home-grown; it is produced right here in the
United States, right in the Nation's capital.

A
- 7 The time has finally come to bring federal spending
under genuine control. President Ford has announced his
intention to set a spending target of less than $300 billion
for the current fiscal year. That will not be easy.
It will
require very painful political decisions. There is reason
for some optimism since Congress has revised its own budgetary
procedures and stands ready to cooperate in the essential
effort.
Yet it is a measure of how uncontrollable federal
spending has become that even if we are successful -- and
that is by no means certain -- federal spending will still
rise by $30 billion over the previous year -- more than 10
percent.
Is it any wonder that we have inflation? The Federal
budget is well on its way to becoming an economic juggernaut.
We must bring it under control before it smashes all hope
for our long-run financial stability.
The Conference on Inflation
The importance of controlling inflation is widely
recognized. I have emphasized my own belief that we should
avoid wage and price controls like the plague and work to
bring our runaway federal budget under control. But the
inflation problem is complex and worldwide. No simple
remedies are at hand.
If there were an easy way out, someone
would have found it long ago.
I think we have taken a big step in the right direction
by initiating the series of conferences on inflation leading
up to the final sessions on September 27 and 28. These are,
as you know, bipartisan in conception and execution. The
conferences will draw on the best thinking this Nation can
bring to bear on the inflation problem. They allow the public
to see, and although on a necessarily limited scale, to
participate directly in a dialog on the major economic problem
of our time.
A cynic might say that government conferences and
commissions are sometimes used to push problems out of sight.
Or that government conferences are convenient ways to set a
private stamp of approval on a course of action government is
going to take away. Neither charge is valid in the present
situation.

8
The conferences on inflation are a genuine effort to
examine as intensively as we can the courses of action open
to us. We do not expect unanimity of opinion.
It may be
that no clear consensus will emerge. But the process strikes
me as very worthwhile. The conferences to this point have
been interesting, stimulating, and even provocative at times.
They have also had the beneficial result of contributing to
the long slow process of educating the American people to
how complex and difficult the inflationary problem is. I am
looking forward with great anticipation to our own Treasury
conference on banking and finance this Friday, and the other
meetings to come. The entire process is in our best national
t r a d i t i o n o p e n , direct and oriented to solving a problem.
Conclusion
We have a most serious problem in the current inflation there is no doubt about that. I am confident, however, that
by working together we can find a solution and over time get
the economy back on a path of steady growth with reasonably
stable prices.
Why am I optimistic? Primarily because the inflation
problem is now beginning to get the undivided attention of
the Nation and its Government. Perhaps by the time of our
Bicentennial, we will have demonstrated that as in the time
of Thomas Jefferson and Adam Smith good economics has once
again become good politics.

0 O0

Deportmentof

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TELEPHONE W04-2041

ISHINGTON, D.C. 20220

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FOR RELEASE MONDAY, 1:00 P tM t< CDT
WARREN F. BRECHT
ASSISTANT SECRETARY FOR ADMINISTRATION
U. S. DEPARTMENT OF THE TREASURY
REMARKS BEFORE THE
AMERICAN BANKERS ASSOCIATION
NATIONAL PERSONNEL CONFERENCE
MINNEAPOLIS, MINNESOTA
SEPTEMBER 16, 1974
1:00 P.M., CDT
I1 Introductory Remarks
A. I am honored to participate with you in the opening day
of the ABA National Personnel Conference.

In preparing

for this address, I read the conference program and its
focus on the decision maker. The planning committee is to
be commended for developing such a substantive personnel
conference.

The need for communication and exchange of

ideas has never been so critical as now.
B. Just over a year ago, I was assigned the overall respon­
sibility for the equal employment opportunity program at
the Treasury Department.
parts:

The program is made up of two

the in-house program for Treasury's 110,000

employees, and the program all of you are more familiar
with, which assures that the commercial banks and savings
institutions are meeting their contractual obligations
under Executive Order 11246 and Treasury regulations
governing equal employment.

I have taken my new

2
responsibilities seriously and welcome this opportunity
to share with you some of my thoughts, concerns and what
I see in the future.
C. Since it was first introduced in 1961, affirmative action
toward equal employment opportunity has become an accepted
principle of national policy.

In practice, however,

affirmative action has been assailed by criticism from
two divergent points of view.

One view clamors that

affirmative action plans have been so ineffective and
half-heartedly pursued that they only scratch the surface
of inequality in employment for minorities and women.
The other view holds that affirmative action has developed
into a system of possible discrimination in reverse.
D. Furthermore, depending on what kind of study one reviews,
diverse results are portrayed.

Some studies indicate

disquietingly that in the 13 years of affirmative action
policy, blacks, other minorities and women are still
drastically underemployed in every category except in
the most poorly paid and undesirable jobs.

Such studies

indicate that in the highest paid and most highly regarded
levels of jobs, minorities and women are found in only
the rarest of incidents.

From these kinds of studies,

it might follow that if equality is ever to be achieved,
affirmative action efforts will have to be pursued with
nuch greater vigor, commitment and «"•ompateiice.

3
E. On the other hand, other studies indicate that opportu­
nities for blacks and other minorities in the past 13
years have increased notably— that fewer black families
now live below the poverty level and that blacks and
other minorities are moving more and more into the main­
stream of the world of work and job opportunities.
F. I suspect the real status today is somewhere between
these divergent views.

In any case, I believe the

government’s mission and your mission in carrying out
equal employment opportunity is becoming increasingly
complex.

These days we are finding more militancy and

less patience; and it is not just among the blacks.
In fact, women's groups have been among the more active
and vocal in the past year.

Then we have the problems

of the Spanish speaking, the American Indians and more
recently, clamors from the coalitions of Oriental people
Within the last several weeks, affirmative action employ
ment requirements for the handicapped have been added.
If we also consider the special emphasis programs for
Vietnam veterans, the problems of age discrimination,
and the potential backlash of white male employees and
the impact of unions, we begin to see the full scope of
the problems currently being faced by you as decision
makers.

And I haven't even mentioned the disclosure

pr^bl^ms under the Freedom of Information Act and recent

4
court decisions.

So, while the record to date, particu­

larly in the banking industry has been impressive in many
cases, I believe we really have our work cut out for us
in the months and years ahead.
II. Progress in the Banking Industry
A. Before looking at what is ahead, however, I would like
to comment on the progress and accomplishments of the
banking industry to date.

Overall, you are to be

commended on the efforts and results over the past decade
and particularly the last 5 years.

We in Treasury are

aware that in recent years decision makers in the banking
industry have become involved and have made decisions
which have had a real impact on employment problems of
minorities.

We are aware that a number of banks beginning

about 1968 moved aggressively to get involved in urban
problems, to develop meaningful equal opportunity programs
for minorities, and to become involved in a way that was
both in their enlightened self-interest and in assuring
compliance with the public policy and laws governing
equal employment,
B. In terms of numbers alone, the results have been excellent.
In the period of approximately 5 years, employment of
minorities in the banking industry tripled— going from
about 40,000 to about 120,000.

We in Treasury are aware

5
of a number of progressive and innovative programs
individual banks and in some cases groups of banks or
the ABA have developed and implemented.

I would like

to mention some of these special efforts:
1. Special skills training in reading, writing, math and
clerical skills which young people need but too often
minorities do not receive in the public schools.
2. Revamped training programs in the banks to deal with
a new kind of work force, made up of people who are
not trained and qualified, but who are trainable and
qualifiable, thereby enabling thousands of minority
young men and women to enter the working world
previously beyond their hopes.
3. Participation in job fairs which have concentrated
on recruiting and hiring minorities and women.
4. The efforts some banks have made in setting up
recruiting vans which go out into the minority
communities,not only to hire those who want to work,
but to encourage those who have not thought about
working, at banks.
5. The films and film strips developed by some banks and
the ABA directed toward convincing blacks and Spanish
speaking that there ia a future f~r them in banking
careers.

6
6. Awareness programs for helping supervisors and
managers deal with equal opportunity and minority
problems more effectively.
7. Efforts to encourage minority and women employees to
participate in the regular bank training programs both
in-house, through the American Institute of Banking,
and through tuition refund programs so that they will
gain skills development and move up the career ladder.
8. A work-study program for high school youth, the pur­
pose of which is to. provide an income-producing
exposure to work in an integral part of the bank's
operation, and at the same time to provide a means by
which the education of potential dropouts can be
increased and made more meaningful.
9. The National Urban League study done for the ABA at
black colleges to determine why blacks were not
applying for jobs in banking, and the positive steps
you have taken to do something about it.
10. And finally, perhaps a little late but nevertheless
significant, the efforts many of you are now taking
for the women on your work force, particularly those
who have the skills and potential for management
positions and who are now being encouraged to participate

7
in various training programs to gain upward mobility
and higher positions in your bank.

This is an

essential first step toward women being promoted to
management jobs.

I also understand that women are

now beginning to appear in much larger numbers at the
various graduate schools of banking and at various
AIB offerings.
C. While the above list of accomplishments is commendable,
we must recognize that all is not sweetness and light.
Many banks, probably the majority of banks, are doing a
conscientious and effective job in setting and achieving
their equal employment affirmative action plans.

Yet,

the overall performance is uneven and some members of
the banking community still have done very little or have
only given lip service to equal employment opportunity
for their employees and prospective employees.

In fact,

in the last several months the Treasury Department has
had to issue two show cause letters to banks whose per­
formance up until then was sufficiently unacceptable
that we had to threaten withdrawal of federal deposits
unless immediate improvement was demonstrated.
D. Even for the banking industry as a whole, we cannot rest
on our laurels.

As I mentioned earlier, in terms of

numbers, your results are indeed impressive.

But numbers

8
alone are no longer enough.

Employees are increasingly

clamoring to be developed and promoted to higher paying
and more responsible positions.

For bank management,

this means you will have to give increasing attention
to upward mobility and career development programs.
This is particularly true for women who in terms of
numbers alone have all along represented the majority
of your employees.
E. As a special emphasis program, upward mobility especially
appeals to me.

We have just instituted a department-wide

upward mobility program in Treasury, with emphasis on
career counseling, specially tailored developmental pro­
grams, and movement of employees out of dead-end positions
by restructuring jobs and career ladders.

The upward

mobility program appeals to me because it cuts across
all levels and types of people, be they black or white,
male or female, advantaged or disadvantaged.

It is the

one special emphasis program that potentially offers much
to so many who are willing to put out that little extra
to take advantage of the program.
III. Future Trends— What I See Ahead
A. I would now like to talk about some of the things I see
ahead in the equal employment opportunity program,includ­
ing compliance requirements and disclosure reqi” cements.

9
First, I would like to comment briefly on the Labor
Department Orders No. 4 and 14, which implement the
basic Executive Order 11246, as amended.
B. Order No. 4 essentially sets forth to federal contractors
the specific requirements for developing and implementing
an affirmative action program.

Firms found not in com­

pliance with Order No. 4 may face termination or cancella­
tion of contracts or be barred from future contracts.
For banks, the cancellation of a contract means the loss
of federal depository status.
C. Order No. 14, on the other hand, provides instructions
to compliance officers on the conduct of EEO compliance
reviews.

The Office of Federal Contract Compliance has

issued these instructions to provide uniformity in the
equal opportunity evaluation of all federal contractors
by the 15 compliance agencies.

As revised, Order No. 14

is now more stringent in requiring certain things to be
done within a tighter time frame.

It also sets forth

additional items for our compliance officers to review.
Consequently, it is important that you as bank management
become as familiar with the requirements of Order No. 14
as you are with Order No. 4 to make sure you are fully
‘prepared to satisfy the compliance requirements.

/

10
D. I understand an ABA task force has been working to
develop a uniform reporting format to facilitate a
bank's preparation for a Treasury Department compliance
review; and that this format will comply with Orders
No. 4 and 14.

We are also pleased with the affirmative

action guide book the ABA has developed to provide much
needed guidance for smaller banks.

You are to be

commended on both these efforts.
E. Next, I would like to talk about a stronger enforcement
posture on the part of the Treasury Department.

If the

Treasury is to be criticized for its performance as a
major compliance agency, it may be because we have not
been tough enough; or at least in the eyes of some critics
we have not evidenced our toughness by issuing show cause
letters or cancelling a bank's federal depository status.
Please understand that we have no intention of down­
playing the positive approach of technical assistance
and moral suasion which we believe has been most effective
on the whole.

In fact, I don't know of another trade

association which has dealt as openly with its federal
compliance agency as has the American Bankers Association
and its member banks.

Overall, I believe this has been

an effective approach in the past and I do not intend to
see it diminished.

11
F. Yet, in any industry there are some who may not take
things seriously unless a tougher enforcement stance is
also exerted when warranted.

Furthermore, there are

increasing pressures on Treasury and other Federal
Government agencies to do a more effective and more
comprehensive job of enforcing EEO contractor compliance.
G. This past week, for example, you may have read about the
recent GAO investigation prepared for Congresswoman
Martha Griffiths' Joint Economic Subcommittee, which
apparently shows that federal compliance officers have
frequently allowed contracts to be awarded without deter­
mining if the companies have complied with non-discrimination
regulations.

According to GAO, of some 120 affirmative

action plans accepted by government agencies, almost half
did not meet criteria established by the Labor Department's
Office of Federal Contract Compliance.
H. GAO concluded that the Labor Department has been lax in
its performance of implementing the Executive Order and
that most federal agencies are reluctant to enforce
sanctions against companies that do not conform to the
regulations.

Congresswoman Griffiths, in commenting on

the study, stated:

"In the last year alone the Federal

Government purchased over $50 billion worth of goods and
services.

The force which it could exercise in reducing

12
discrimination among those firms which vie for $50 billion
worth of business is tremendous.

Yet the government's

effort . . . can only be described as puny."
X . it should be noted that GAO's audit was concentrated at
the Labor Department and two of the largest compliance
agencies, the General Services Administration and the
Department of Defense.

Nonetheless, there is a clear

message for the Treasury Department and all of you
gathered here that if anything, our efforts to enforce
the EEO and civil rights acts must be conducted with
increasing vigor.
J. I would now like to comment on the disclosure require­
ments under the Freedom of Information Act and the
proposed amendment to that Act.

As many of you know,

requests for EEO compliance information on banks have
become increasingly troublesome to both the Treasury
Department and the banks involved.

We have increasingly

received requests from public interest groups for data
which had previously been submitted in confidence but
since the Alameda County case have now been determined
as releaseable.

As some of you are aware, I recently

was required to release to a women's group certain bank
EEO data which previously had been furnished in good
faith with ui e understanding it would be held in confidence

13
The Alameda County case changed all that and after much
agonizing and several meetings with the Labor Department,
the Justice Department and representatives of the banks
themselves, I finally determined I had no choice but to
release certain of these data.
K. Now a pending amendment to the Freedom of Information Act
would set time limits that agencies must meet on informa­
tion requests they receive from the public.

Furthermore,

as the bill now stands, the government would be liable
for payment of court and attorney fees if it loses a
Freedom of Information case to a private citizen.

On top

of that, government employees could be suspended for up
to 60 days without pay if their decision to withhold
information is overruled by a court.
L. Although the authors of the legislation contend that
these tightened provisions are intended more as a prod
than a punishment to eliminate the foot dragging techniques
many agencies have used in the past, there are certainly
some sobering aspects to this pending amendment.

It is

increasingly clear that agencies must review material
very carefully in conjunction with the Justice Department
before deciding to exempt it under terms of the Freedom
of Information Act.

14

M. Finally on future trends, you all must be aware of the
increasing number of corporations that are winding up
on the losing end of federal discrimination suits.

In

the banking industry alone, the court decrees on the
Bank of America and the Bank of California are a costly
trend.

I am aware of two major banks that have recently

taken the initiative to set up trust funds for special
skills training and career development for minorities
and women, as well as setting more vigorous recruiting
goals.

These banks, in effect, have said "we are not

going to wait for a court decree? rather, we are going
to move ahead on our own."

Perhaps more of us should

take similar initiatives.
IV. Closing Remarks
In closing I would like to leave with you a few thoughts
about my philosophy and approach to the equal employment
program:
A. The subject of Equal Employment Opportunity is sometimes
thought of as a "can of worms "— we hear a lot about
grievances and lack of progress.

Let's think positively;

let's focus on the good things we are trying to do and
on successes we have achieved to date.

We must recognize

we can't turn things around over night? but we in manage­
ment must make clear our serious inteuc— we need to "talk

15

/

it up," and we can never rest on our laurels because the
situation is so dynamic.
B. It is important that in establishing an equal opportunity
program we develop a solid base and then build from there.
I do not believe in a lot of shallow publicity or tokenism

y

:S

■T'

in high level positions.

I am less concerned whether we

have a lot of women and minorities in top management
positions today, provided we are hiring meaningful numbers
of minorities and women at the professional entry level
and are developing individually tailored programs to move
these individuals up the career ladder within a realistic
time frame.

I do not believe it is realistic to produce

"instant executives" unless this groundwork has been laid
previously.
C. As personnel directors, you have a most important role
of assuring that your top management commit themselves
to achieving the bank’s affirmative action goals and
timetables.

I believe that top management in turn must

impress upon each supervisor that his or her performance
and consequently salary advancement will be determined
not only on the basis of past performance, but on the

.ze

basis of significant results in helping the bank achieve

fe­

its goals and timetables in the equal employment field—

ll

just as they are evaluated on their success in achieving

-

16

many of the other goals and timetables management has
established.
D. Thank you for inviting me to share these thoughts with
you.

Good luck on the remainder of this conference.

DepartmentoftheTREASURY
USHINGTON, D.C. 20220

TELEPHONE W04-2041

FOR RELEASE AT 6:00 P.M. EDST, September 16, 1974
REMARKS OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE AMERICAN NEWSPAPER WOMEN'S CLUB
1607 - 22ND STREET, N.W., WASHINGTON, D.C.
MONDAY, SEPTEMBER 16, 1974 AT 6:00 P.M.
It is a pleasure to be in such talented and attractive
company this evening. Despite the fact that it is such
pleasant company, I want to discuss an unpleasant subject -our current economic difficulties and what we should do
about them.
In a little more than a year we will be celebrating
our National Bicentennial.
It will be a time to review the
achievements of the past and to establish new goals for the
future. We will want to look back to see where we have been
and look ahead to see where we are going.
The American economic system has served us well.
Great material progress has been achieved over these past
two centuries. No other nation has known our material pros­
perity or abundance. No other people have enjoyed for so
long that full measure of economic freedom that generations
of Americans have enjoyed. We have attained a level of
prosperity in which the "poverty line" in the United States
is the threshhold of wealth in many nations of the world.
What the socialist system promises its workers in some
distant future the American system already provides our
people.
It was an accident of history, but of symbolic significance,
that the Wealth of Nations by Adam Smith was published the
same year Thomas Jefferson penned the Declaration of Indepen­
dence. For, just as the principles of Jefferson and his
generation have guided the political life of this nation for
two centuries, so the economic principles of Adam Smith and
those that followed in his footsteps have been the guiding
lights of our economic history.
That approach has been the path of progress.
In material
terms it has put this Nation in a position of unrivalled
economic leadership in the world. Even more important, the

WS-102

I

-

2

-

system has helped us preserve our most cherished personal
and political freedoms.
We have relied on markets rather than on detailed
regulation of economic life by the government. We have
depended more on the ’’invisible hand’’ of Adam Smith than
on the heavy hand of economic planning. Competition, not
coercion, has kept things moving. Not the exertion of
government, but the ideas, energies and talents of individuals
acting alone and acting together -- within our economic system
have been the sources of our progress and prosperity.
All of this is familiar to you. Anyone who ever read a
newspaper editorial -- and for all I know some of you have
written reams of them -- is familiar with the case for free
enterprise. What does that have to do with today’s problem?
Today’s problem is inflation -- double-digit inflation. That
is foremost in your government’s concern -- and in the concerns
of the American people. Every public opinion poll, indeed
every trip to the supermarket, testifies to the dominating,
almost overwhelming, importance of inflation as the economic
problem of our times.
Inflation at these intolerable rates must be brought to
an end.
It is equally important that we deal with the inflation
problem in a way that is equitable and consistent with our
economic and political traditions.
I think that we will.
But we should not underestimate the difficulty of the task,
or the threat that inflation poses for our economic system.
Our economic system is more vulnerable today than it has
been at any time since the Great Depression of the 1930’s.
Then the problem was mass unemployment. Four decades ago, when
we were in the grips of depression, we determined that we would
never again permit a recurrence of mass unemployment. That
was a correct decision -- and it is as correct today as it was
then.
But in freeing the economy from the risk of mass unemploy­
ment, we have not yet solved the problem of preventing high
rates of inflation.
I am concerned that we have not yet fully
recognized the dimensions of this new threat.
I do not think
it lies in the danger of financial collapse.
Insurance and ban
deposits and a vigilant Central Bank shield us from that risk.

3

Ironically, the danger lies more in what we may do to
the economic system, rather than what it may do to us. For,
if the rate of inflation is not reduced to tolerable levels,
the American public will demand direct action to hold down
wages, prices, profits and interest rates. Such action would
not end the inflation but, if accepted as an economic way of
life, it could mean the erosion of our economic system -the system that has provided the American people with more
and better homes, automobiles, leisure, education and almost
everything else worth having -- especially personal and economic
freedom -- than any other nation on earth.
I am not talking about economic ideology. This is the
20th century and we can’t go back to laissez-faire, or some
other mythical system. Government has always had an important
role to play in our economic life. But we have also had the
good sense in this country to allow maximum scope for com­
petition and individual initiative.
The Case For Private Decisions
The case for private decision making in a market system
is based upon a very basic and fundamental fact: it works.
The marketplace is an efficient system when it is allowed to
operate with the necessary freedom.
Indeed, the price system
is not only the most effective method of determining what,
and where, and how economic activity shall take place in a
free society, it is the only feasible method.
If we want the system to work for us, rather than us
working for the system, we cannot do better than competitive
markets. Once detailed economic planning is substituted for
the market mechanism, most of our economic freedom is gone.
And when economic freedom is gone, our chances of retaining
political and other freedoms are close to zero.
Nothing in this life is perfect and the market system
is no exception. The market system does not automatically
dispense, or guarantee, social justice. The market does not
insure that the collective needs of society will be met.
Indeed, there are times -- the Depression was one -- when
extraordinary circumstances prevent the market from operating
well, at which time government intervention is not only wise,
but critical.
It is clear that we must take care of those who are in
need and try to insure that all of our citizens are in a
position to live out their lives in dignity. Those who cannot
help themselves must be helped. Further, the economy must
function within an adequate framework of law. And if it is
to operate properly, competition must be vigorous.

4

Government has many vital functions.
It has the
responsibility for guaranteeing the security of the Nation
from foreign enemies, and the security of its citizens
from domestic violence.
It has the obligation of fairly
enforcing the laws. It must provide basic public services.
It must protect the environment.
It must enforce standards
to protect the public health and welfare.
It must insure
that competitive conditions are maintained. And it should
step in and protect individuals against the extremes of
economic adversity over which they have no control.
But I think it is most unwise for Government to attempt
the detailed regulation of prices and costs. We have done so
during and after wartime periods. We did so after August 1971
with our various freezes and phases. We now know from this
recent experience, from our past history, and from our fund
of economic knowledge, that wage and price controls do not
work in a free society.
They have never worked. But while wage and price controls
would fail miserably at curing the serious maladies in the
American economy, they would succeed marvelously in crippling
the economic system to which Americans owe so much.
It is upon the advocates of controls that the burden of
proof must fall. Where are the historical examples of success
to justify the price paid in the loss of individual freedom?
What reason is there to believe that the collective decisions
of ten thousand bureaucrats represent better the interests of
the American consumer than the free decisions of millions of
American citizens?
The decisions of the marketplace are to be preferred over
controls imposed by men not because the marketplace produces
ideal results but because controls have proven themselves,
time and time again, to be costly, coercive, inefficient and
unjust.
Certainly, no evidence has been unearthed in recent
to cause one to reverse that verdict.

years

But I am under no illusions. The American people are fed
up with inflation. They want it stopped, and stopped soon.
They are not going to be patient indefinitely.
In the last
analysis, the public wants results and will not be convinced
of the inherent virtues of free markets if all they seem to prod

5
is rising prices* Therefore, control of inflation demands
the highest priority. We must remove the causes of inflation,
not treat the results. Above all, we must avoid being drawn
back into a maze of controls which would only make a bad
situation worse.
Government and Inflation
Let me turn now to what I think we in Government should
be doing. First, and perhaps most important of all, we should
be listening and learning. We have every reason to be humble
in the face of double-digit inflation. The ongoing series of
conferences which will culminate in the White House Conference
on Inflation later this month provide those of us in Government
with an unparalleled opportunity to learn from others.
I attach
the highest importance to this series of conferences about which
I will have more to say in a few minutes.
The other main thing we in Government must bear down on
is the Federal budget.
It ill behooves the Government to call
for sacrifices until it puts its own fiscal house in order.
Frankly, I think that Federal expenditures have been growing
much too rapidly and that they must be restrained.
Let us look at the record. Not until 1961, when our
Nation had been in existence for 185 years, did the Federal
budget cross the $100 billion mark. Only nine more years
were required for it to cross $200 billion, and it took only
four years after that to cross the $300 billion mark. And
this doesn’t even take account of all the extensions of
Federal credit through various guarantees and the like which
caused total Federal and Federally-assisted borrowings to
account for almost two-thirds of total funds raised in the
capital markets in fiscal year 1973.
In 1929 the total expenditures of state, local, and
federal government amounted to only 10 percent of the Nation's
gross national product, today they consume almost a third of
the GNP.
Nor Is the much debated defense budget responsible for
the growth in size and power of government. Except for a
temporary interruption during the Vietnam years, the defense
budget as a percent of gross national product has been de­
clining steadily for two decades. Between fiscal years 1968
and 1974 defense expenditures did not rise at all, and they
have declined by about one-fourth after rough correction for
inflation. During that same period, so-called human resources

6
spending mushroomed at a rapid rate. Of the $90 billion increase
in federal spending, $60 billion went for social security,
veterans’ benefits and welfare. Another $15 billion went for
health, education, and manpower. Most of the balance went to
finance the rising interest bill on the ever-mounting national
debt.
In the budgetary sense of the term, all of this might well
be considered ’’uncontrollable." Indeed, when all the ’’uncon­
trollable’’ items are listed in the budget each year, there seems
to be very little left to cut. Our budget, however, is un­
controllable, only if we accept the false assumption that once
a law is enacted by Congress, it can never be altered or repealed
In a time when inflation, fueled partly by federal spending,
has become the true scourge of the American working class, I do
not accept that proposition.
Let me make my position clear. I am not opposed to
government social programs.
I am not opposed to increases in
worthwhile programs -- nor the introduction of new endeavors.
Ours is a prosperous and wealthy nation with the wherewithal
to more than adequately meet its social obligations.
But we have been trying to have it both ways. We want
the expensive social programs -- or seem to -- but we don’t
want to pay the taxes to support them. The bill is presented
all the same and must be paid.
The inflation created in substantial part by the fiscal
policies of the past dozen years is truly the cruelest of all
taxes -- and the most insidious. Speculation and debt have
been rewarded; savings and thrift penalized. Perhaps not
even the Vietnam war itself has done more to sap confidence
in the Government of the United States and the future than
this inflation, this surreptitious tax which has quietlyxonsumed the savings and pensions and insurance of the working
people of this nation year in and year out for the last decade.
Not the Arab nations of the Middle East nor the drought
of the Middle West created the inflation we know today. Yes,
the rising price of oil and gas, and the rising price of food
and fiber contributed materially to the intensity of our presen
inflation. But the ultimate burden of responsibility must rest
squarely upon the Government of the United States. With the
exception of these special one time factors, inflation is hPt
an import; it is home-grown; it is produced right here in the
United States, right in the Nation’s capital.

- 7 The time has finally come to bring federal spending
under genuine control. President Ford has announced his
intention to set a spending target of less than $300 billion
for the current fiscal year. That will not be easy.
It will
require very painful political decisions. There is reason
for some optimism since Congress has revised its own budgetary
procedures and stands ready to cooperate in the essential
effort.
Yet it is a measure of how uncontrollable federal
spending has become that even if we are successful --and
that is by no means certain -- federal spending will still
rise by $30 billion over the previous year -- more than 10
percent.
Is it any wonder that we have inflation? The Federal
budget is well on its way to becoming an economic juggernaut.
We must bring it under control before it smashes all hope
for our long-run financial stability.
The Conference on Inflation
The importance of controlling inflation is widely
recognized. I have emphasized my own belief that we should
avoid wage and price controls like the plague and work to
bring our runaway federal budget under control. But the
inflation problem is complex and worldwide. No simple
remedies are at hand.
If there were an easy way out, someone
would have found it long ago.
I think we have taken a big step in the right direction
by initiating the series of conferences on inflation leading
up to the final sessions on September 27 and 28. These are,
as you know, bipartisan in conception and execution. The
conferences will draw on the best thinking this Nation can
bring to bear on the inflation problem. They allow the public
to see, and although on a necessarily limited scale, to
participate directly in a dialog on the major economic problem
of our time.
F
A cynic might say that government conferences and
commissions are sometimes used to push problems out of sight.
Or that government conferences are convenient ways to set a
private stamp of approval on a course of action government is
To take away. Neither charge is valid in the present
situation.

8
The conferences on inflation are a genuine effort to
examine as intensively as we can the courses of action open
to us. We do not expect unanimity of opinion.
It may be
that no clear consensus will emerge. But the process strikes
me as very worthwhile. The conferences to this point have
been interesting, stimulating, and even provocative at times.
They have also had the beneficial result of contributing to
the long slow process of educating the American people to
how complex and difficult the inflationary problem is. I am
looking forward with great anticipation to our own Treasury
conference on banking and finance this Friday, and the other
meetings to come. The entire process is in our best national
tradition --open, direct and oriented to solving a problem.
Conclusion
We have a most serious problem in the current inflation there is no doubt about that. I am confident, however, that
by working together we can find a solution and over time get
the economy back on a path of steady growth with reasonably
stable prices.
Why am I optimistic? Primarily because the inflation
problem is now beginning to get the undivided attention of
the Nation and its Government. Perhaps by the time of our
Bicentennial, we will have demonstrated that as in the time
of Thomas Jefferson and Adam Smith good economics has once
again become good politics.

0 O0

DepartmentoftheTREASURY
HINGTON, D C 20220

TELEPHONE W04-2041

FOR RELEASE 6:30 P.M.

September 16, 1974

RESULTS OF TREASURY’S WEEKLY BILL AUCTIONS
Tenders for $2.5 billion of 13-week Treasury bills and for $ 1 . 8 billion
of 26-week Treasury bills, both series to be issued on September 19, 1974,
were opened at the Federal Reserve Banks today.
The details are as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing December 19 , 1974

Price
High
Low
Average

97.942
97.923
97.931

Equivalent
Annual Rate
8.142%
8.217%
8.185%

11

26-week bills
maturing March 20, 1975

Price

Equivalent
Annual Rate

95.865 a/
95.815 "
95.853

8.179%
8.278%
8.203%

1/

a/ Excepting 1 tender of $2,425,000

Tenders at the low price for the 13-week bills were allotted 21%.
Tenders at the low price for the 26-week bills were allotted 44%.
TOTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District

Applied For

Accepted

Boston
$
63,090,000 $
42,865,000
New York
3,678,485,000 2,020,655,000
Philadelphia
47,975,000
40,830,000
Cleveland
83,215,000
58,195,000
Richmond
41,675,000
38,130,000
Atlanta
58,570,000
37,630,000
Chicago
234,140,000
47,140,000
St. Louis
50,285,000
29,670,000
38,925,000
Minneapolis
6,225,000
Kansas City
62,140,000
41,105,000
Dallas
35,060,000
24,060,000
211,515,000
San Francisco
114,460,000
TOTALS

Applied For
$ 35,240,000
2,404,315,000
34,450,000
52,465,000
41,070,000
35,640,000
167,335,000
42,060,000
26,550,000
34,885,000
26,745,000
169,315,000

$4,605,075,000 $2,500,965,000 b/$3,07 0,07 0,000

Accepted
$

22,205,000
1,486,250,000
17,995,000
41,225,000
23,220,000
24,635,000
75,540,000
24,850,000
6,310,000
26,780,000
14,745,000
36,330,000

$1,800,085,000 c/

includes $574,855,000 noncompetitive tenders accepted at average price.
1/ The se rates are on a bank-discount basis.
The equivalent coupon-issue
yields are 8.47% for the 13-week bills, and 8.68% for the 26-week bills.

FOR IMMEDIATE RELEASE

September 16,1974

TREASURY FINANCING TO USE NEW BIDDING METHOD
The Treasury will refund the $2.0 billion of notes
maturing on September 30, 1974, by auctioning $2.0 billion
of 2-year notes maturing September 30, 1976. This is the
first rollover of the quarterly cycle of 2-year maturities
started in 1972. The auction will be held on Tuesday,
September 24.
For the first time in a Treasury auction, bidding will
be on a yield basis rather than a price basis. Bidders
are asked to state the percentage yield they will accept
to two decimal places, for example 8.47 percent. The coupon
will be set, after the auction, to the 1/8 of one percent
which is nearest to the average yield on accepted tenders
and which produces an average price at or below par. Each
successful competitive bidder will pay the price equivalent
to his bid. Noncompetitive bidders will pay the average
price.
The new bidding method will permit pricing close to par
and eliminate the risk of setting a coupon which, because of
a change in the market between the coupon announcement date
and the auction date, would result, on the one hand, in a
price so far above par as to discourage bidders or, on the
other hand, result in a price so low that the sale would
have to be cancelled to avoid placing the purchasers in an
unanticipated tax position in which the excess of the ma­
turity value over the initial discount price would be taxable
as ordinary income.
To shorten the time between the auction date and the
issue date, coupon securities will not be delivered on the
issue date of September 30. They will be delivered on or
about October 8. However, any successful bidder who needs
a security for trading, collateral or other purposes before
the delivery date may request an interim certificate. Interim
certificates will be bearer securities, equivalent in all
respects to the 2-year Treasury notes except that they will
not have coupons attached and must be exchanged for regular
coupon securities in order to collect interest.

(Over)

-

2-

Each tender for the notes must be in the amount of
$10,000 or a multiple thereof, the same minimum tender
required on Treasury bills of a maturity up to one year.
Previous auctions of two-year notes have permitted tenders
as low as $1,000, the minimum tender normally required on
sales of longer term Treasury bonds. The decision to in­
crease the minimum tender on this auction was taken in the
light of current liquidity drains on thrift institutions
upon which the nation depends for the bulk of its mortgage
finance for housing.

oOo

oftheTREASURY

Department
ISHINGTON, D C. 20220

TELEPH0fɻffl4-2Q41
llllllIl

r
September 16, 1974

FOR IMMEDIATE RELEASE
TREASURY FINANCING

The Treasury will auction under competitive and noncompetitive bidding $2.0
billion, or thereabouts, of 2-year notes to refund the same amount of notes
maturing September 30, 1974. The coupon rate for the notes will be determined
after tenders are allotted.
Some of the notes will be allotted to Government
accounts and the Federal Reserve Banks in exchange, on a noncompetitive basis,
for any portion of their $0.2 billion holdings of the maturing notes that they
choose to exchange.
The method of auction to be used for this issue of notes will differ from
Ithat used for previous auctions of Treasury securities.
Competitive tenders for
these new notes must be expressed in terms of annual yield in two decimal places,
e.g., 8.47, rather than in terms of a price, as has been the procedure in other
auctions. Tenders at the lowest yields, and noncompetitive tenders, will be
accepted to the extent required to attain the $2.0 billion offered. After a
determination is made as to which tenders are accepted, a coupon yield will be
[determined to the nearest 1/8 of 1 percent necessary to make the average accepted
[price 100.00 or less. That will be the rate of interest that will be paid on all
|of the notes. Based on such interest rate, the price on each competitive tender
Iallotted will be determined and each successful competitive bidder will pay the
¡price corresponding to the yield he bid. Price calculations will be carried to
Itwo decimal places on the basis of price per hundred, e.g., 99.92, and the
Ideterminations of the Secretary of the Treasury shall be final. Tenders at a
■yield that will produce a price less than 99.51 will not be accepted.
The notes to be issued will be Treasury Notes of Series J-1976 dated
■September 30, 1974, due September 30, 1976 (CUSIP No. 912827 DX7) with interest
■payable semiannually on March 31 and September 30. They will be issued in registered
land bearer form in denominations of $10,000, $100,000 and $1,000,000, and in
|book-entry form to designated bidders. Delivery of bearer notes will be made on or
■about October 8, 1974. A purchaser of bearer notes may elect to receive an
■interim certificate on September 30, which shall be a bearer security exchangeable
|at face value for Treasury Notes of Series J-1976 when available.
Tenders will be received up to 1:30 p.m., Eastern Daylight Saving time,
¡Tuesday, September 24, at any Federal Reserve Bank or Branch and at the Bureau of
■the Public Debt, Securities Transactions Branch,Washington, D. C. 20226; provided,
fowever, that noncompetitive tenders will be considered timely received if they are
¡mailed to any such agency under a postmark no later than Monday, September 23.
Pach tender must be in the amount of $10,000 or a multiple thereof, and all tenders
fust state the yield, if a competitive tender, or the term "noncompetitive” , if a
noncompetitive tender.
The notation "TENDER FOR TREASURY NOTES" should be printed
ft the bottom of envelopes in which tenders are submitted.
The Secretary of the Treasury expressly reserves the right to accept or reject
iny or all tenders, in whole or in part, including the right to accept more or less
than $2,000,000,000 of tenders, and his action in any such respect shall be final.
Subject to these reservations, noncompetitive tenders for $500,000 or less will be
tccepted in full at the average price of accepted competitive tenders, which price

-

2-

will be 100.00 or less.
Commercial banks, which for this purpose are defined as banks accepting
demand deposits, and dealers who make primary markets in Government securities and
report daily to the Federal Reserve Bank of New York their positions with respect
to Government securities and borrowings thereon, may submit tenders for the account
of customers, provided the names of the customers are set forth in such tenders.
Others will not be permitted to submit tenders except for their own account.
Tenders will be received without deposit from commercial and other banks for
their own account, Federally^-insured savings and loan associations, States,
political subdivisions or instrumentalities thereof, public pension and retirement I
and other public funds, international organizations in which the United States
holds membership, foreign central banks and foreign States, dealers who make
primary markets in Government securities and report daily to the Federal Reserve
Bank of New York their positions with respect to Government securities and borrowing I
thereon, Federal Reserve Banks, and Government accounts.
Tenders from others must
be accompanied by payment of 5 percent of the face amount of notes applied for.
Payment for accepted tenders must be completed on or before Monday,
September 30, 1974. Payment must be made at the Federal Reserve Bank or Branch
or at the Bureau of the Public Debt in cash, 6% Treasury Notes of Series E-1974,
which will be accepted at par, or other funds immediately available to the Treasury I
by that date. Where full payment is not completed in funds available by the paymenl I
date, the allotment will be canceled and the deposit with the tender up to 5 percent I
of the amount of notes allotted will be subject to forfeiture to the United States, I
The Treasury will construe as timely payment any check drawn to the order of
the Federal Reserve Bank or the United States Treasury that is received at such
bank or at the Treasury by Wednesday, September 25, 1974, provided the check is
drawn on a bank in the Federal Reserve District of the bank or office to which the I
tender is submitted,
Other checks will constitute payment only if they are fully
and finally collected by the payment date.
Checks not so collected will subject
the investor's deposit to forfeiture as set forth in the preceding paragraph. A
check payable other than at a Federal Reserve Bank received on the payment date
will not constitute immediately available funds on that date.
Commercial banks are prohibited from making unsecured loans, or loans
collateralized in whole or in part by the securities bid for, to cover the deposits |
required to be paid when tenders are entered, and they will be required to make
the usual certification to that effect. Other lenders are requested to refrain
from making such loans.
All bidders are required to agree not to purchase or to sell, or to make any
agreements with respect to the purchase or sale or other disposition of the notes
bid for under this offering at a specific rate or price, until after 1:30 p.m.,
Eastern Daylight Saving time, Tuesday, September 24, 1974.

REMARKS OF JOHN A. BUSHNELL
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR DEVELOPING NATIONS FINANCE
BEFORE THE CONSULTING ENGINEERS COUNCIL AND
THE INTERNATIONAL ENGINEERING AND CONSTRUCTION
INDUSTRIES COUNCIL
AT THE INTERNATIONAL CLUB, WASHINGTON, D. C.
12:00 NOON, SEPTEMBER 17, 1974
The International Development Banks and Procurement
Mr; Chairman, Gentlemen:
As a newcomer to problems of the international development
banks and procurement, I appreciate this opportunity to obtain
your views and suggestions. We at the Treasury Department
have found our relationships with the Consulting Engineers
Council and the International Engineering and Construction
Industries Council to be fruitful. Personal contacts -- and
particularly the two Hershey Conferences on procurement -have made possible the sort of dialogue between business
and government that help us in our efforts to improve the
procurement systems of the development banks.
Too often the role and the importance to economic develop­
ment of the international development banks -- and of other
aid programs --is considered only in terms of the amounts
of financing provided. This is not my view. The great ad­
vantage developing countries have today in comparison with
economies which modernized a half-century ago is that they
can tap the immense reservoir of technical and managerial
expertise that has been built up in the developed economies.
This knowledge and experience is what is really valuable for
the less developed countries. The financial resources pro­
vided through the development banks and other assistance
programs are mainly just a means of purchasing this knowledge whether the knowledge is transmitted through such services
as your firms provide or in the machinery and equipment pur­
chased with the loans.

2

In short, I believe the underlying basis of economic
development is precisely the sort of knowledge and expertise
which is your business. One need look no further than the
eagerness of those countries with newly increased oil revenues
to acquire such services to confirm the paramount importance
of your services. Increasingly the communist countries are
showing the same sort of eagerness to tap the cumulative
experience of the U.S. technical community.
Given my philosophy on this point, a key question I
would like to raise with you today is how well do the de­
velopment banks do in maximizing the transfer of technical
and management skills to the less developed countries? How
could they do better? The bottom line on the annual statement
for the development banks should be their total contribution
to development through the provision of technology, funds,
and encouragement to adopt economic policies to support
economic and social development.
But the bottom line for your firms depends on how much
business you can get in competition with your competitors
from around the world.
I have lots of opportunities to hear
from various developing countries how they think the banks
are doing. This is an opportunity for me to hear from you
what your problems are.
We believe your Organization is vital for articulating
U.S. business needs to the various executive departments of
the government.
It is also important for explaining to the
Congress the importance of the international development banks
to long-range U.S. interests.
In these times of rapid inter­
national political and economic change, the importance of
these banks in fostering open market economies cannot be
underestimated. Their efforts in the areas of institution
building, good economic management, financial efficiency,
rational economic planning, and international trade are
conducive to the development of private enterprise. And all
of this brings the borrowing countries into the international
financial and commercial system.
Contrary to popular belief the banks actually help the
U.S. economy, even in the short run. The net balance of pay
ments result of U.S. participation in the World Bank, for
example, has been positive in four of the last five fiscal
years, with a combined net inflow of $1.5 billion. Procure­
ment generated by the international financial institutions’
loans is important not only for the U.S. trade account but
also for market penetration and the transfer of American
technology to the developing countries.

2

.

\\6

In short, I believe the underlying basis of economic
development is precisely the sort of knowledge and expertise
which is your business. One need look no further than the
eagerness of those countries with newly increased oil revenues
to acquire such services to confirm the paramount importance
of your services.
Increasingly the communist countries are
showing the same sort of eagerness to tap the cumulative
experience of the U.S. technical community.
Given my philosophy on this poini , a key question I
would like to raise with you today is how well do the de­
velopment oanks do in maximizing the transfer of technical
and management skills to the less developed countries? How
could they do better? The bottom line on the annual statement
for the development banks should be their total contribution
to development through the provision of technology, funds,
and encouragement to adopt economic policies to support
economic and social development.
But the bottom line for your firms depends on how much
business you can get in competition with your competitors
from around the world.
I have lots of opportunities to hear
from various developing countries how they think the banks
are doing. This is an opportunity for me to hear from you
what your problems are.
We believe your organization is vital for articulating
U.S. business needs to the various executive departments of
the government.
It is also important for explaining to the
Congress the importance of the international development banks
to long-range U.S. interests.
In these times of rapid inter­
national political and economic change, the importance of
these banks in fostering open market economies cannot be
underestimated. Their efforts in the areas of institution
building, good economic management, financial efficiency,
rational economic planning, and international trade are
conducive to the development of private enterprise. And all
of this brings the borrowing countries into the international
financial and commercial system.
Contrary to popular belief the banks actually help the
U.S. economy, even in the short run. The net balance of pay­
ments result of U.S. participation in the World Bank, for
example, has been positive in four of the last five fiscal
years, with a combined net inflow of $1.5 billion. Procure­
ment generated by the international financial institutions’
loans is important not only for the U.S. trade account but
also for market penetration and the transfer of American
technology to the developing countries.

3
I'm sure you are interested in the current lending outlook
in the banks and the possible effects on U.S. procurement.
In the fiscal year ending last June, World Bank and Inter­
national Development Association lending commitments reached
$4.3 billion, an increase of about 27 percent over the previous
year. Similarly, the Inter-American Development Bank increased
lending in 1973 by 11 percent ov°r 1972 to reach $880 million.
The Asiar Development Ba^k, the youngest regional bank to which
we belong, hopes to commit $400 million
calendar year o.nd
to increase lending Dy $30 million annually over the next few
years.
The types of projects funded may be almost as important
in determining the amount of U.S. procurement share as the
overall lending level. Many of you may think that the policies
being stressed to reach the poorest 40 percent of the world's
population will lead to a reduction of lending for power,
transportation, communications and large-scale industry as
the banks increasingly commit themselves to rural development,
education, rural water supply, population, and urban develop­
ment projects. But the dollar amount of conventional
infrastructure loans is not decreasing, and will likely not
decrease in the near future even though lending for the socalled social sectors may rise as a percentage of total
commitments.
It is, of course, true that loans for the social sector
involve more local procurement than conventional infrastructure
projects. But I understand that so far the United States has
done reasonably well in procurement on projects in these sec­
tors. To maintain this record American firms will need to
be flexible and aggressive.
Specifically for you consulting
engineers, those firms which adapt to the multi-disciplinary
approach implied in these projects will be particularly suc­
cessful in working on the various bank projects in the years
ahead.
The geographic distribution of loans by the international
financial institutions with major increases for the poorest
areas of the world -- mainly in Africa and Asia -- represents
a challenge for the United States as we are not as strong,
commercially, in these regions as we are in our traditional
trade areas of Latin America and Europe.

4
However, with this international financial institutions’
expansion in Africa and Asia -- where historically Europe and
Japan dominated trade -- I believe American exporters will come
to appreciate more fully the objectivity of international
competititve bidding system used by the banks. We believe that
the banks’ procurement systems ensure efficiency of public
expenditures and equity as regards sources of supply among
member countries. And while we, as a member country of the
banks, will work to improve procurement operations, we do not
believe that a superior alternative procurement system exists.
Specifically, we do not anticipate any change in tne
policy that, in general, procurement be open to all member
countries of each respective bank. Tying contributions to
procurement from a single country would be contrary to the
international nature and economic goals of these institutions,
and could work to our detriment. Under the current system, for
each dollar the U.S. contributes to the banks, American firms
are eligible for approximately three dollars on procurement
contracts, because the U.S. contribution is matched by con­
tributions from others. We have an equal opportunity to
compete and our success will depend on our motivation and
abilities.
Declining U.S. procurement shares during the recent past
reflected, in large part, the over-valuation of the dollar
relative to other major world currencies. However, with the
dollar devaluation and rates of inflation in some other de­
velopment countries even higher than ours, international
competitive bidding rules have again begun to help American
firms overcome European advantages in Africa and Japanese
predominance in Asia. We just received the latest results
on U.S. procurement from our executive director at the Asian
Development Bank. As of June 30 of this year, the U.S. share
or procurement, including consultant services, from the ADB’s
Ordinary Capital operations stood at 12.4 percent; this
represents a steady increase from a level of about 8 percent
a year ago. A recent General Accounting Office report credits
exchange realignments for a 70 percent increase in foreign
contracts won by American engineering and construction firms
in 1973 in connection with projects financed from all sources,
including the international financial institutions. A jump
from a 1972 figure of $3.6 billion to $6.1 billion in one
year is a welcome sign for all U.S. exporters.
Of course, the American consulting firms represented
here are in a more enviable position than the remainder of
American business. You represent an industry where our

5
competitive advantage is particularly great and your share of
bank-generated procurement was 36 percent for the Interna­
tional Bank for Reconstruction and Development in fiscal year
1973 and 34 percent for the Asian Development Bank in calendar
year 1973. For the Inter-American Development Bank we do not
have an exact figure, but the percentage is even higher be­
cause of our strong competitive position in this hemisphere.
To the extent that American consultants get contracts, we may
be assured that U.S. suppliers and contractors p^e not dis­
couraged.
Turning to the U.S. Government’s po15cy towards the in"
ternational development banks, you can be confident that our
support and leadership role in the multilateral development
institutions will be continued. One of President Ford’s
first acts upon taking office was to sign the $1.5 billion
International Development Association replenishment bill.
Just last week in a message to the Congress, the President
reiterated his support for the Asian and African Development
Bank authorization bills. And yesterday, in a letter to
Congressman Gonzalez President Ford wrote, "Like the other
international development lending institutions in which the
United States participates, the Asian Development Bank supports
important international economic and foreign policy objectives
of the United States."
As I said, the Administration supports the authorizing
legislation before the House for $412 million for the Asian
Development Bank and a $15 million contribution to the African
Development Fund. Over the next few years we anticipate U.S.
funding of these banks to continue on a scale reflecting our
economic strength and interests in the developing countries
of the world.
As with other members of these banks, we want to ensure
our fair sliare of procurement.
In the last two or three years
the Departments of Treasury, State and Commerce have sought
to increase government support of U.S. business efforts to
obtain contracts arising from international financial institu­
tions’ loans. The State Department has invigorated its commercial
representation abroad and Commerce has instituted a number of
information programs -- the Exporters Information Reference
Room and the the TOPS computerized information system should
be known to you.
We at Treasury, through the Officevof International
Development Banks and through our executive directors at the
international financial institutions, have sought to monitor
and modify, where necessary, the international financial
institutions’ procurement policies.

6
At Treasury’s instigation, various studies of specific
procurement practices have been undertaken; the quality,
quantity, and promptness of early warning information has
been improved; and data reporting on the U.S. procurement
share has been upgraded. We will remain responsive to the
views of organizations like the Consulting Engineers Council.
Along that line, I should say a few words about a recent
General Accounting Office report, which some ox you have see..,
entitled "Improved Government Supperl Can Increase U.S. Share
of Foreign Engineering and Construction Projects;" One GAO
recommendation was that Treasury seek a cnange in the World
Bank guidelines that discourage the short-listing of more than
two consulting firms from any one country. We have investi­
gated this issue and are not sure that such a modification
would be to your benefit. The rule is not now rigidly en­
forced and, as it stands, could work in favor of U.S. firms,
given the increasing bank emphasis on Africa and Asia, where
an expansion of the short-lists would probably hurt rather
than help you to get more business. The existing policy gives
borrowers the benefit of diversity in project experience and
technical approach.
The GAO report also mentions a topic about which we have
been deeply concerned -- accusations of bias in the banks.
A consultant was hired by Treasury to investigate the problem
and the International Bank for Reconstruction and Development
has also explored the question. Neither the IBRD, Treasury,
nor our executive directors have uncovered any evidence of
bias. For the few instances of substantial improper behavior generally on the part of borrowers or consultants -- remedial
machinery exists with in the institution and has been utilized
by our executive directors. We are prepared to react most
strongly If evidence of bias is produced.
Currently, U.S. nationals comprise 26.5 percent of the
World Bank’s professional staff, approximately 25 percent of Inter-American Development Bank’s professional staff, and
nearly 10 percent of the Asian Development Bank’s professionals
But we want to see more Americans in the Bank’s staffs -- not
because we expect our own citizens to compromise the inter­
national character of the banks -- but because the institutions
will benefit from American expertise and outlook.
You consulting engineers can be proud of your share of
international financial institutions-generated procurement.
But for ultimate American success, you and your colleagues in
business and we in government must rededicate ourselves to
aggressive marketing, hard work and Yankee ingenuity. You

(
- 7 -

have a great deal to offer the developing countries, But a
maximum contribution to development and to your own profits
will require aggressive efforts on the spot in developing
countries.
To continue helping you we must have your views on a
regular B*sis, because it is only your practical experienc?
tnat can give us realistic guidance in this matter of pro
curement. Since m my job I have .major responsibility for
overseeing the U.S. Government rcie in relation to the inter­
national financial institutions, I would especially like to
have your candid views.
0O0

Department of theTREA SU RY
lASHINGTON, D,C. 20220

TELEPHONE W04 2041

September 17, 1974

NOTE TO FINANCIAL WRITERS:
Jack F. Bennett, Undersecretary for Monetary
Affairs of the Department of the Treasury, will
hold a backgrounder on international monetary
issues and the IMF/IBRD annual meeting Wednesday,
September 25, at 4 pm.

The backgrounder will

take place in Room 4121, Main Treasury building.

of TREASURY

Department the
MHINGTON, O.C. 20220

p

TELEPHONE W04 2041

FOR IMMEDIATE RELEASE

September 17,
TREASURY’S WEEKLY BILL OFFERING

The Department of the Treasury, by this public notice, invites tenders for
two series of Treasury bills to the aggregate amount of $4,300,000,000 , or
¡thereabouts, to be issued September 26, 1974, as follows:
91-day bills (to maturity date) in the amount of $2,500,000 000» or
[thereabouts, representing an additional amount of bills dated June 27, 1974
[and to mature December 26, 1974

(CUSIP

No. 912793 VE3)» originally issued in

[the amount of $ 1,900,585,00ft the additional and original bills to be freely
[interchangeable.
182-day bills, for $1,800,000,000, or thereabouts, to be dated September 26, 1974,
and to mature March 27, 1975
(CUSIP No. 912793 WB8) •
The bills will be issued for cash and in exchange for Treasury bills maturing
[September 26, 1974, outstanding in the amount of $4,501,665,000, of which
¡Government accounts and Federal Reserve Banks, for themselves and as agents of
[foreign and international monetary authorities, presently hold $2,554,865,000.
¡These accounts may exchange bills they hold for the bills now being offered at
Ithe average prices of accepted tenders.
The bills will be issued on a discount basis under competitive and non­
competitive bidding, and at maturity their face amount will be payable without
¡interest. They will be issued in bearer form in denominations of $10,000,
$100,000, $500,000 and $1,000,000 (maturity value), and in
»ook-entry form to designated bidders.

»15,000, $50,000,

lenders will be received at Federal Reserve Banks and Branches up to
Pne-thirty p.m., Eastern Daylight Saving time, Monday, September 23, 1974.
Penders will not be received at the Department of the Treasury, Washington.
Pach tender must be for a minimum of $10,000.
multiples of $5,000.

Tenders over $10,000 must be in

In the case of competitive tenders the price offered must

| ^‘Pressed on the basis of 100, with not more than three decimals, e.g., 99.925.
fractions may not be used.
banking institutions and dealers who make primary markets in Government
(OVER)

-

2-

securities and report daily to the Federal Reserve Bank of New York their positions
with respect to Government securities and borrowings thereon may submit tenders
for account of customers provided the names of the customers are set forth in
such tenders.
own account.

Others will not be permitted to submit tenders except for their
Tenders will be received without deposit from incorporated banks

and trust companies and from responsible and recognized dealers in investment
securities.

Tenders from others must be accompanied by payment of 2 percent of

the face amount of bills applied for, unless the tenders are accompanied by an
express guaranty of payment by an incorporated bank or trust company.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.

Those submitting competitive tenders

will be advised of the acceptance or rejection thereof.

The Secretary of the

Treasury expressly reserves the right to accept or reject any or all tenders,
in who lie 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 accepted in full at the average
price (in three decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank or Branch on September 26, 1974, in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing September 26, 1974.
ment.

Cash and exchange tenders will receive equal treat­

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 excluded from consideration as capital assets.

Accordingly, the owner of

bills (other than life insurance companies) issued hereunder must include in his
Federal income tax

return, as ordinary gain or loss, the difference between

the price paid for the bills, whether on original issue or on subsequent purchase,
and the amount actually received either upon sale or redemption at maturity
during the taxable year for which the return is made.
Department of the Treasury Circular No. 418 (current revision) and this notic
prescribe the terms of the Treasury bills and govern the conditions of their
issue.
Branch.

Copies of the circular may be obtained from any Federal Reserve Bank or

of TREASURY

Department the
»SHINGTON. D C. 20220

TELEPHONE W04-2041

FOR RELEASE UPON DELIVERY
10:00 A .M . SEPTF.MRER 17 , 1974
.
------------------------------------- 1-------------------------------------------------- i ------------------STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE
HOUSE BUDGET COMMITTEE
WASHINGTON, D, C.
SEPTEMBER 17, 1974

.
f
\

N

J

Mr. Chairman and Members of this Committee:
I
am glad to be here this morning to participate in
these first hearings of the House Budget Committee.
I
have been an enthusiastic supporter of budget reform since
I first came to the Treasury, and I am pleased to see that
you are moving so very promptly to implement the Budget
Reform and Impoundment Control Act of 1974.
This is an important time for the Budget Committee
to begin its work.
In my judgment, there is nothing we
can do that is more important for the economic welfare of
the American people than to reduce the very rapid momentum
that has built up in the growth of Federal expenditures..
We need a strengthened decision making process to impose
discipline on the budget. The need for more effective control
over federal expenditures has been apparent for some years,
but the emergence of intolerably rapid rates of inflation
has recently brought the issues into much sharper focus.
How did we get into this inflationary mess? I will
not try to retrace all the causes of the current inflation,
or try to fix the blame one place or another. Without
too much risk of oversimplification, I think it is fair
to say that the price explosion of 1973-74 is primarily
attributable to (a) a series of severe temporary shocks
that originated mostly outside the U. S. economic system
and (b) almost a decade of excessively stimulative fiscal
and monetary policies.
The outside shocks are, by now, familiar to all of
ns: the world-wide agricultural crop failures of 1972,
enormous pressures on the prices of internationally traded

WS-103

2

raw materials, two devaluation of the dollar, and the
Arab oil embargo.
In addition, the end of the controls
program has been operating as an additional temporary force
to raise some prices and wages faster than otherwise would
have been the case. Taken together, these temporary factors
may explain upwards of one-half of our current rate of
inflation.
All these special factors, as important as they have
been, are of a temporary, one-shot nature. Had our general
economic policies not been too stimulative, the outside shocks
would have had only a one-time effect. Once they had worked
their way through the system, the inflation would have
settled down again to a tolerable rate.
But our general economic policies have, in fact, been
far too stimulative for a long period of time. Let me
give you two examples of how policy changed in the mid1960s.
First, on the fiscal side: from 1955 to 1965 Federal
expenditures rose at roughly a 6 percent annual rate.
From 1965 to 1974, however, Federal expenditures surged
to a 10 percent annual rate of growth. This rapid spending
growth created huge Federal deficits which, coming as they
did during periods of high business activity, added
enormously to economic demands. These deficits were,
therefore, directly responsible for creating strong upward
pressures on the price level.
Second, monetary policy also broke out of a previously
established pattern. From 1955 to 1965 the money supply
grew at a 2 1/2 percent rate. Since then, the growth rate
has more than doubled to a 6 percent annual pace. It is
no accident that during the earlier period we had a rather
stable price performance, but since 1965 we have had the
worst peacetime inflation in our history.
What has and is happening, then, is that the excessive
budget deficits and the excessive growth of money and
credit in recent years prevented the "temporary*' price
pressures from running their course and fading away.
Instead, much of the inflation from the outside shocks is
or soon will be deeply embedded in our entire system.
It
is or soon will be embedded into the pattern of wage

3
settlements and into the structure of interest rates.
It
is or soon will be embedded into the economic expectations
of consumers, of workers, of investors, of businessmen -everybody.
And because this inflation is becoming so deeply
embedded, squeezing it out of the system will be a long,
tough process.
It is a most difficult challenge for
economic policy.

1^2

' )

Our only viable primary policy, in my opinion, is
to apply the necessary fiscal and monetary discipline
persistently and consistently to keep total demands on
the economy within the limits of its capacity to produce.
This will also help us achieve the premier long-term
goal of economic policy, which is to make sure that during
the next decade our economy generates the enormous volume
of savings and investment that will be necessary for
Project Independence, new mass-transit systems, housing,
environmental improvement, and all the other capital re­
quirements of our society.
I beleive that we will have
to raise the share of national output devoted to savings
and investment by a substantial margin.
It is not widely recognized that our investment
performance has been relatively poor. Since 1960, plant
and equipment spending in the United States was only
15 percent of total output, whereas France invested 18
percent, Germany 20 percent and Japan 27 percent. And
furthermore, for gross domestic investment (which includes
inventories, housing and public investment), the proportions
for 1973 are: United States 17 percent, France 26 percent,
Germany 25 percent and Japan 37 percent.
It will not be a simple matter to raise our investment
share; quite the contrary. We will have to change our
many policies that encourage consumption at the expense
of savings and investment. Among the most important changes
that we will have to make is to maintain regular surpluses
in the budget, so that the Federal Government would be
adding to the supply of savings available to the private
economy, instead of using up those savings -- as we have
been doing in 13 of the past 14 years.
If we could main­
tain, on average, a budget surplus equal to even one-half
percent of GNP, we would add about 3 percent to the flow

4
of savings available to the private sector. And the chances
are that over the longer term we will need an appreciable
budget surplus to augment the stream of private savings.
On this point, I think we should remember that the
Federal Government has a greater impact on the financial
markets than is indicated by the deficit in the Unified Budget
For one thing, the Export-Import Bank and the Postal Service
are not in the budget and, correspondingly, their credit
demands do not get included in the budget deficit. Much
more important, there is a large volume of credit that is
guaranteed by Federal agencies -- to assist public and
private housing, urban and rural development, shipbuilding
and railroads, health, education, small business, and other
functions. These all represent demands that we in the
Government place on the financial markets.
It is not often
realized how large these demands are; in fact, in many years
the net borrowings for these programs exceed the deficit in
the Unified Budget, as shown in the table below.
(Note that
these figures do not include the borrowings of the Federally
sponsored agencies: the Federal National Mortgage Association
the Home Loan Bank System, and the Farm Credit System.)

Fiscal
Year
1971
39 72
]9 73
1974

Unifled
Budget
Deficit
•(b i.I 1 ions o f

Additional
Federa 1
Cred it
doll a rif}

Total

-23.0
-23.2
-14.3
- 3.5

-16.8
-18.0
-15.6
-16.8

-39.8
-41 .2
-29.9
-20.3

J 975 (est.)-H .1

-14.9

-26.3

5
If the sponsored agencies are also added in, the
Federal presence in the credit markets reaches rather
startling dimensions.
In the fiscal year 1973, total
Federal and Federally assisted borrowings accounted for abobt
60 percent of all the funds raised through borrowings in
the capital markets. This is a trend which concerns me greatly.
I hope that your Committee will take a large view of its
responsibilities and look beyond the budget, as it is
conventionally defined, to the off-budget outlays, credit
guarantees, and government actions generally that commit
economic resources and add to the already heavy pressures
on our capital markets.
Let me emphasize that the fight against inflation will
take years. There are no shortcuts, no acceptable quick
solutions. The balanced application of fiscal and monetary
restraint is the answer. Balance is the word I want to
stress. When the budget is weak and overstimulates the
economy, the monetary authorities have no choice but to
bear the entire burden of stabilization policy. This places
heavy strain on our financial markets and imposes a dis­
proportionate adjustment on particular sectors, such as
housing. More fiscal restraint would remove the need to
press monetary restraint quite so hard.
There are those who question the effectiveness of
restrictive fiscal policy to counter these fundamental
inflationary pressures.
In my view, however, the evidence
of experience is clear that fiscal restraint applied con­
sistently and in tandem with monetary restraint can bring
inflation under control.
Inflation is an exceedingly complex process and no
simple chart will ever be able to give us the answer to
the inflation problem.
I believe, however, that the attached
chart captures the essence of the budget’s contribution to
the control of inflation.
It can be seen that the actual
budget position (top panel) does not correlate closely with
the rate of infaltion (bottom panel). This is where the
full employment budget proves itself to be a useful guide
to economic policy. The full employment calculation adjusts
the budget data to remove the impact of the economy on the
budget, and thereby brings out the impact of the budget on
the economy. When the full employment budget position (middle
panel) is compared to the rate of inflation, a fairly
striking pattern emerges. There is a strong general re­
lationship between the two.
In the broad sweep of things,
it is clear that sustained and sizable budget surpluses are
associated with below-average inflation and sustained and
sizable budget deficits are associated with above-average
inflation.

6
There are two years during the 26-year span covered by
the chart in which the inflation is far higher than can be
accounted for by fiscal policy.
These years are 1950-1951
and 1973-1974, which were the two occasions when commodity
inflation (food and industrial raw materials) had an extra­
ordinarily large, one-time impact on the general price level.
Aside from these two occasions, the relationship strongly
supports the general notion that budget deficits are in­
flationary and budget surpluses are not inflationary.
ECONOMIC ADJUSTMENTS
Any well-conceived anti-inflation program must also
have regard for the casualties of inflation and for those
whose earnings may be interrupted for a time by a program
of disinflation. Without getting into detail, let me say
that I believe we can gradually reduce inflation without
suffering massive unemployment. For a time, we will have
to live with more unemployment than we would like, but it
will not have to be a large amount. To deal with this
contingency, we have proposed improvements in our system
of unemployment compensation, and I again urge Congressional
passage of that legislation. The Administration is also
considering whether or not an expansion of the present public
service employment program would make a useful contribution
to economic stabilization. This is one of the issues on which
there has been much discussion, and considerable controversy,
at the Conference on Inflation held thus far.
Strains in the financial markets have had particularly
adverse effects on the housing and utility industries.
In
May we put forward a $10 billion program to augment the supply
of mortgage funds, and on September 11, Federal officials
and state utility regulators met to explore solutions to the
critical financial problems facing the utility industry.
The surging costs of fuel, construction and money have
placed intense financial strains on both industries, producing
dangerously low earnings for many companies.
In the utility
industry, regulatory lag has intensified the problems. While
state and local regulatory bodies have jurisdiction to act,
the Administration is examining what might be done to speed
up the needed changes. The Administration believes that
raising utility rates now to a level sufficient to cover the
real economic costs of providing those services is deflation­
ary in the long run.
The expansion of credit in the housing industry and tax
and other Federal initiatives in the utility industry are
exactly the kind of solutions which are required now to lay
the foundation for gradual disinflation. Some of the necessary
economic adjustments will be painful and at times will raise
prices in the short run, but all will have a common long-term
goal -- reducing and eventually eliminating inflation.

-7 WHERE TO CUT
It is easy for me to come before you and say that we must cut
the budget. The next step, however, is the tough one: Where
should the cuts be made? What specific programs are to be
eliminated or at least stretched out? This is the nub of
the issue, and although the general idea of cutting the
budget has gained in popularity, that is almost certainly
not true for individual programs. Specific budget cuts are
never popular. Nobody wants to see their own high-priority
areas cut back; that is entirely understandable. But the
time has come when we must make some hard choices.
President Ford has announced that our target is a
figure in this fiscal year of under $300 billion.
If we are
to bring the budget in on target, there is no alternative
but that some individual programs will have to give way. I
think you will agree with me that this hearing is not the
place to decide where to cut the budget. We now have a new
mechanism that provides the Legislative and Executive Branches
of Government with the means to cooperate closely on budget
matters, and we should use this mechanism to determine our
budget priorities.
Another evidence of closer cooperation in the economic
area is the fact that the Congress and the Executive Branch
have jointly set in motion the series of meetings which will
lead up to the Conference on Inflation later this month. I
believe these meetings are making an important contribution
to the economic education of the American people; the
difficult and complex nature of the inflation problem is
clear for all to see.
I want to stress the cooperative nature of the vital
effort to bring the runaway Federal budget under better
control. We must strike a necessary balance between what
is economically practical and what is politically practical.
We must be sure that in making cuts in specific programs we
do not turn back the clock on economic and social progress
in this Nation. We must take a thoughtful, careful approach
to the task of pruning the budget, rather than taking a meatax, across-the-board approach in which the good programs get
cut along with the bad. And we also need the kind of tough
give-and-take that is the hallmark of democratic government.
It will not be an easy task but it is a vital one and I look
forward to working on it with you, Mr. Chairman, and the
other Members of this Committee.

0O0

-2

49

51

53

55

57

59

61

63

65

67

69

71

73

Percent Change

Percent of GNP

Percent of GNP

NOTES TO CHART

Panel 1

The budget data shown here are the
actual surpluses and deficits, on
a national income accounts basis,
for calendar years expressed as
a percent of Gross National Product.
Note that these data are plotted on
an inverted basis in order to provide
an easier visual comparison with the
inflation rate.

Panel 2

These budget data are the same as in
Panel 1 except that the surpluses and
deficits have been adjusted by the.
Federal Reserve Bank of St. Louis to
a full-employment basis by standardizing
the figures to a constant 4 percent
unemployment rate. The bars are
plotted -- for the purpose of better
displaying the relationship between
the budget and inflation -- as deviations
from the average surplus for 1948-73 of
0.8 percent of GNP. (Panel 1 was not
plotted this way because the average
was virtually equal to zero.)

Panel 3

Inflation is represented here by
percent changes in the GNP deflator
from the previous year. In effect,
therefore, the inflation measure is
charted with a 6-month lag compared
to the budget data in Panels 1 and 2.
The bars are plotted as deviations
from the 1949-74 average price increase
of 2.9 percent.

Source of data:

U.S. Department of Commerce

DepartmentoftheTREASURY
ASHINGTON, D.C. 20220

TELEPHONE W04-2041

S e p te m b e r

FOR IMMEDIATE RELEASE

17,

1974

DAVID R. MACDONALD HEADS DELEGATION TO INTERPOL
Washington, D.C-Assistant Secretary of the Treasury
David R. Macdonald announced today that the United States
is participating in the 43rd General Assembly of the
International Criminal Policy Organization - INTERPOL - to
be held in Cannes, France, September 19-25.
The United States Delegation headed by Mr. Macdonald
will consist of representatives of the Federal enforcement
agencies of Treasury:

H. Stuart Knight, Director, U.S.

Secret Service; Vernon D. Acree, Commissioner, U.S. Customs
Service; Rex D. Davis, Director, Bureau of Alcohol, Tobacco
and Firearms; and Louis B. Sims, Chief, INTERPOL National
Central Bureau.

Other representatives will include:

Glen E. Pommerening, Assistant Attorney General, and Carl W.
Belcher, Chief, General Crimes Section, Department of Justice;
Nicholas P. Callahan, Associate Director, Federal Bureau of
Investigation, and John T. Cusack, Chief, International
Operations Division, Drug Enforcement Administration; James F.
Greene, Deputy Commissioner, Immigration and Naturalization
Service; William J. Dailey, Acting Chief, Air Operations
Security Division, Federal Aviation Administration; and
Lauren J. Goin, Director, Office of Public Safety, Agency for
International Development.
WS-104

(more)

2

Top criminal enforcement officers from the 120
INTERPOL member countries will be represented at the
Assembly.

Discussions will range from international

crime and narcotic trafficking to counterfeiting, air
hijacking and firearms trafficking.
INTERPOL is an inter-governmental organization
designed to foster mutual international policy assistance
on criminal violations and the prevention of crime.

0O0

hlNGTON, D.C. 20220

TELEPHONE W04-2041

FOR RELEASE UPON DELIVERY
SEPTEMBER 19, AT 1:30 P.M.

\

STATEMENT BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE CONFERENCE BOARD
AT THE WALDORF ASTORIA HOTEL, NEW YORK, NEW YORK
THURSDAY, SEPTEMBER 19, 1974 AT 1:30 P.M.
"INTO THE NEXT DECADE"
As we meet here today, the nation is preoccupied with
inflation.
It is foremost in the concerns of government
officials in Washington, and as the surveys clearly show,
it is foremost in the minds of the American people.
And rightly so. For the current inflation is the worst
in our peacetime history. Not only is it eroding the value
of the savings, income, pensions, and insurance policies of our
people, it is also destroying something more precious: The
confidence of Americans in their government, their future, and
their free enterprise system.
In the unwritten social contract between free citizens and
their government, Americans place their faith in the central
government to protect the value of the dollars they earn. And
in that responsibility the United States Government has failed
the American people.
A few people actually prosper during inflation. But for
most of us, and especially for the poor and the pensioners,
there is no safe harbor. To them, the only relevant questions
are how long the storm will last -- how much the savings of
a lifetime will be carried away. It is thus not only economic
stability that dictates an early end to this double-digit
inflation -- but social justice as well.
Bringing the current inflation under control will not be
an easy or painless process. But it is a necessary process,
because inflation is the most insidious, regressive and unjust
tax a democratic government can impose.

WS-105

Some argue that the price of ending inflation is too high,
that we cannot afford to cut back on Federal spending, that we
cannot accept even slightly higher unemployment, that we cannot
pay the kinds of interest rates we have now any longer.
Well, I say we cannot afford not to take this medicine
now, because allowing the current inflation to continue will
bring even more trouble to our economic system. Painful as
the cure is going to be, it will be less traumatic and less
costly than allowing this double-digit inflation to continue.
Over the past decade and a half, political men of both
parties made some easy and popular decisions. Today, however,
if we are to control inflation, political men of both parties
are going to have to make some difficult and unpopular decisions.
But it is not the short-term crisis of inflation I want
to discuss this afternoon. Rather, it is the long-run future,
the prospects for continued prosperity into the next decade.
Policies for the Long Run
The late Lord Keynes had a famous retort to those who
would venture to discuss economics over the long run. "In the
long run,” he observed, "we are all dead.*'
Well, certainly, that is true of men. But it is not
necessarily true of nations and peoples. And if men in high
office can resist the temptation to rely on politically attractive
short-term palliatives and can instead make the tough but right
decisions.here in 1974, we can help achieve, prosperity for the
American people in 1980 and 1985.
In this regard, the economic factor that we should be
most concerned with is the growth in productivity of The
American worker, the rate of increase in output per man hour.
We know from both economic theory and from history that pro­
ductivity is a crucial factor in the performance of our economy,
because our standard of living cannot rise any faster than the
productivity of our workers.
Let me repeat that statement for emphasis, because it is
a fact of overriding importance: The standard of living of
the American people cannot rise faster than the productivity
of our workers.
If everybody understood that fact, I believe
our economic policies could be improved measurably, because

3
we would spend much less time fighting about how to divide
up the total economic pie, and more time taking the actions
necessary to create a larger pie.
Before coming to New York, I reviewed a table containing
figures for productivity growth of the major nations of the
Western world. From that table, it is immediately evident
that between 1960 and 1973, the growth in productivity of
the average American worker was the lowest for any major
industrial nation in the Western world. Our annual rate of
growth in productivity amounted to only about 3% a year -against almost 6% for the French and Germans, and more than
10% for the Japanese.
And the reason that the United States stands at the
bottom of the scale is very clear. During the same dozen
years the United States was devoting only about 18% of its
total output to capital investment -- one of the smallest
percentages of any nation in the Western world. Among those
nations willing to devote a quarter or a third of their output
to investment, the rates of productivity growth were double
and triple that of the United States.
Of course, we want to remember that all investment is
not in machines or mortar. We invest as well in our labor
force, in making it more skilled and better educated.
In
fact, this investment in "human" capital probably has as much
economic value as our stock of physical capital. And in
knowledge and skill of our workers -- although no direct com­
parisons are available -- it is my guess that the United States
is not behind. Each year, the new class of-entrants into the
labor force is more capable of coping with changing technology
than the last.
In addition, we should note the uptrend in spending for
new plant and equipment since 1971. At present, that uptrend
shows no sign of abating. However, I don’t think the present
and prospective volume of capital investment is big enough.
It is not enough to satisfy either the expectations of the
public, or the promises of our politicians, or most important
the basic needs of our economy.
Let me list ju-st a few of the demands on our capital
in the coming decade. There is an agreed-upon necessity to
replenish the existing housing stock, to provide new rapid

4
transit systems for many of our cities, to rebuild some of
our basic industries to make them more competitive with those
abroad. There is the political commitment to clean up the
national environment, and there is Project Independence -our national commitment to bring an end to an excessive
American dependence upon foreign sources of energy and oil.
Each of these programs will require enormous sums. Each
of these programs will have to compete for a limited supply of
investment capital with our traditional requirements of re­
placing schools and plants and other conventional needs.
It was with these enormous demands for the investment
dollar in mind, that the Council of Economic Advisers was
directed to study the nation1s future requirements for in­
vestment capital. Without predicting or anticipating the
results of that study, let me give you my views.
A Reversal of Priorities
I believe there has to be a major reversal of economic
priorities in the United States. We have to turn away from
primary emphasis upon consumption, and toward a new emphasis
upon saving and investment -- and away from a situation where
government spending consumes more and more of the gross national
product with each passing year.
The historical average of the past dozen years with only
some 18% of the nation*s product ploughed back into investment,
is simply,unsatisfactory. If we intend to maintain investment
at no more than that level through the coming decade, then we
should begin scaling down our hopes and hedging on our promises
about new housing, meeting our energy and environmental needs,
and re-invigorating American industry. If however, we are going
to build for the future, then we have to start making sacrifices
for that future.
Where is the new capital to come from? What are the
sources upon which the United States must rely? The first
source is the pool of profits earned annually by business and
industry.
Historically, the role of profits in our system has been
to provide both the incentive and the wherewithal for in­
vestment. In the political environment of the past decade,
however, that role has become less and less understood
by the American people.

To many Americans, profits are not the legitimate and
honest return on investment. They are rather the immoral
rewards of corporate greed -- the conspicuous consumption
of Big Business at the expense of the common man.
Today, not only the role of profits, but the historical
level of profits is grossly misunderstood.
In one major
survey of U. S. opinion, Americans thought profits accounted
for 28% of the sales of American corporations. The true
figure is less than five percent. Less than one nickel out
of every dollar in sales in this country goes into corporate
profits -- a ratio that in many parts of this country is less
than the take of the state government.
In some industries, like food retailing, profit margins
are hovering around one percent. But, try to argue that
position, in some political forums, or on some campuses in
this country, and you will be fortunate if you are only called
a liar.
Let's look at the figures.
In 1973, after-tax profits of all non-financial corporations
increased $12 billion, 23 percent over the year previous. That
is the official figure, and on the surface it would appear to
represent a sparkling performance. But a huge slice of that
increase amounted to nothing more than inflationary increases
in the value of inventory and undervaluation of depreciation.
Indeed undistributed corporate profits, after taking out the
impact of ,inflation on inventory values and.capital consumption
allowances increased only $3 billion last year.
Furthermore, if the inflation of the intervening period
is also taken into account, the undistributed profits of nonfinancial corporations in 1973 were less than one-fifth of
what they were in 1965. And if this nation is going to
accumulate the investment capital necessary to fund our domestic
needs -- then that profit picture has to be dramatically improved
The electric utilities industry presents a graphic case
in point. Government rate-setters who regulate the profits
of the electric utilities have -- for obvious political reasons been slow to react to the skyrocketing cost of fuel and other
commodities the utilities need to use. As a consequence, after­
tax profits of the utilities have been squeezed in the midst
of an energy crisis when those profits are vitally needed for
investment.

6
From 1964 to 1973, the utilities industry cash flow rose
from $3.3 billion to $5.9 billion. Capital outlays in the
same period rose from $5.5 billion to $18.7 billion. As these
figures suggest, the low rate of profit allowed by government
authorities, is threatening to destroy the industry*s ability
to find the funds to do its jobs. If the utilities are
continually denied necessary rate increases, then the country
will pay one day for these temporarily reduced rates in black­
outs and brownouts, in the midst of some summer hot spell or
winter storm.
Summed up then, my concern is this. Profits are the
fuel of the engine that pulls the train of American business
and industry, the train that carries as cargo the jobs of twothirds of the working men and women of this nation.
If the
nation doesn*t understand that, if through hasty or unwise
legislation we restrict or diminish these profits further,
some Americans feel some short-term satisfaction at the dis­
tress of business -- but the nation will pay for that temporary
gratification in lost jobs, in diminished prosperity, and in
failure to achieve the grand goals we have set for ourselves
as a people.
Let us look at those goals -- and what they require.
Estimates of the capital requirements of the energy industry -to achieve Project Independence -- range from 750 billion to a
thousand billion dollars. Pollution control is estimated to
require over the next decade another 100 billion dollars.
The cost of rebuilding basic industries that have languished
in recent years -- steel, paper, cement, fertilizer, zinc,
others --'could require another $50 billion-or more. The needs
for urban transportation systems, housing and other major
programs could add scores to that already astronomical sum.
And these come on top of the conventional requirements.
Without doubt, then, one of the crucial economic questions
of the coming decade is this: Where will the United States
find the investment capital to meet the challenges that we have
imposed upon ourselves?
In the traditional metaphor, we can go two ways: Either
we re-slice the investment pie -- with a larger share going to
energy, and less to traditional investment needs. Or we can
enlarge that investment pie, by diverting resources away
from consumption and into savings, away from government expendi­
ture and into private investment.

7
That last is the only workable approach with the prospect
of success. And in encouraging savings, that most important
step the United States Government can take is to get a grip on
the double-digit inflation described at the outset of my address.
Inflation is the silent partner of speculation and the
enemy of thrift. What reason on earth is there for a family
to put its savings into a bank at five or six percent interest
annually, when inflation is consuming 10 or 12 percent of the
principal every year? So, if we are to increase the volume
of savings, and the funds available for investment, we have to
remove the greatest disincentive to savings today -- inflation.
That is priority number one; priority number two is a
change in the budget policy that has guided the government for
the past dozen years.
The basic budget objective has been to run a balanced
budget over the cycle: to run deficits in years when there is
slack in the economy, and surpluses in years when the economy
is overheated. However, over the past 14 years, the United
States Government has run one surplus, and thirteen deficits.
The budget has not been balanced over the cycle. Indeed, in
those years, we have added more than $100 billion to the
national debt.
We have increased government spending faster than we
have been willing to pay for it through taxes. We have created
too much money and credit, so that more borrowing has taken
place than can be financed out of savings. By these actions,
we have permitted, encouraged, even forced the demand for goods
and services to outrun our productive capacity.
We should not then be surprised that the inflation is
embedded so deeply in this economy. After all, we have been
planting the seeds for the better part of a decade.
In the long run, what can we accomplish by shifting to
a balanced budget policy? First, we would enlarge the flow
of savings available to the private sector, because the govern­
ment could reduce its claims on the capital markets. Government
would no longer pre-empt so vast a share of funds needed by
home-builders and others, who are now shouldered out of the
capital markets by the superior credit ratings of the Federal
Government. Second, balanced budgets in the future would
provide the necessary fiscal restraint critical to the control
of inflation.

8
And there are other steps government might take to
encourage saving at the expense of consumption, to provide
greater funds for investment.
Unproductive government restraints on industry -- such
as maintaining artificially low prices for electricity and
natural gas -- can and should be lifted. While politically
popular in the short term, we pay the full economic price,
inevitably, in the long run.
Today, government in this country consumes about 30
percent of the gross national product. We are paying,
frankly, for more government than we need, more government
than most of us want. The time has come to start moving
in the other direction -- leaving more of the output of the
nation in the hands of its people, and their private in­
stitutions .
To some people, that idea implies leaving more income
and wealth in the hands of the rich, and less for the poor.
Not so. Not at all. You only have to look quickly at the
history of our economy to appreciate that the growing pros­
perity of America has been widely shared by all groups.
Thirty years ago, Joseph Schumpeter, the great disciple
of American capitalism, wrote:
"Queen Elizabeth owned silk stockings. The capitalist
achievement does not typically consist in providing
more silk stockings for queens, but in bringing them
within the reach of factory girls in return for steadily
decreasing amounts of effort."
Well, if not silk stockings, then certainly nylon stockings
for the factory girls of America -- and washers and dryers and
automobiles and television sets and packaged foods and all sorts
of other things in a variety and abundance unknown in the history
of man. And that prosperity can and will continue to grow, if
government will only build its incentives toward saving, not
spending -- and if government will start following that advice
itself.
0O0

lASHINGTON, DX 20220

TEtXPHQNÉ W04-2P41

AUTOMATIC RELEASE AT 8:00 P.M., September 18, 1974
REMARKS OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY OF THE UNITED STATES
BEFORE THE
ANNUAL UNITED NATIONS AMBASSADOR’S DINNER
HELD UNDER THE SPONSORSHIP OF
"U. N. WE BELIEVE"
GRAND BALLROOM, WALDORF ASTORIA HOTEL
WEDNESDAY, SEPTEMBER 18, 1974 AT 8:00 RM.
I am pleased and honored to be here with you tonight as
we re-dedicate ourselves to the purposes of the United Nations.
We have heard the moving words of the preamble to the U.N.
Charter, reminding us eloquently of the basic principles we
have sought to follow in the conduct of our affairs since the
end of the Second World War. Those words remind us also that,
whatever the difficulties we have experienced in seeking to
aPPly.these principles, the alternatives to a cooperative
world order are far worse.
These principles reflect recognition of the interdependence
of thè peoples of the world, and I want to begin this evening
by considering with you some of the common concerns that emerge
from that interdependence.
This growing interdependence among all peoples has many
dimensions. The existence of the United Nations, composed
of nations and societies representing a great diversity and
broad spectrum of ideologies, gives expression to our recogni­
tion that interdependence has a^ political,dimension. Now I
realize that in some circles "political" has almost a pejorative
connotation, but I consider it to be an honorable word and
representing a creative aspect of our lives. We in the United
States have learned much from alternative systems abroad, and
we hope that others are learning from ours.
We see this interdependence in its cultural and artistic
dimensions all about us. Here an American home is landscaped
ln a way that reflects the lean and Spartan beauty of a Japanese
garden. There an American University’s concert series includes
symphony orchestras from London, Warsaw, and Moscow. Eskimo
carvings rest easily and artistically in homes from the Orient
to the tropics. And the Colonel’s Kentucky Fried Chicken is
available to throngs of customers in Tokyo.’

WS-106

2

You would expect any Secretary of the Treasury or Finance
Minister to spend some time talking about the economic and
financial dimensions of our growing interdependence, and I do
not propose to make this evening an exception to that rule.
There are some important things to say about these matters.
Let me give you my theme at the outset. The basic theme
of my remarks is one of realism and also of hope. While the
gravity of the world’s current economic problems must be faced
candidly, the present turbulence is the prologue to a new era
of rising material levels of living widely shared. Historians
will not be writing of these years as the descent into some
new Dark Age. It is the Administration’s firm objective to see
that these years are antecedents to a period of new and vigorous
economic progress, with its benefits widely diffused.
It is useful to stand back and get some perspective on
current trends toward international economic interdependence.
For some, such things as the oil embargo or bad crop yields
in various parts of the world would come immediately to mind.
These events have served to remind us all that the material
well being of peoples separated by national boundaries is
closely intertwined. And in this year in which our own crop
prospects are disappointing we are fortunate that agricultural
output in other regions will be relatively high. These, however,
are ad hoc events, and it is doubtful that they tell us much
of enduring significance.
The current world inflation and its impact on the U.S.
economy have shown all of us the persuasive nature of these
relationships.
If we were to turn the calendar back only three
years to mid- 1971, we would find ourselves looking at a world
in which most of the major economies were operating with sub­
stantial slack. The United States, the United Kingdom, Japan,
Canada, Italy -- in all these countries, economic activity
was below full utilization of their labor and other productive
resources.
Then two things happened. The exchange rate of
the dollar was readjusted, and the industrial world moved into
a synchronized boom. The large and diversified U.S. economy
then found itself influenced in a major way by external forces.
Pressures on raw materials prices were world wide. During 19'jj
the rise in our own merchandise exports, responding to the wor
boom and more favorable exchange rates for the dollar, was
equal ‘to almost one-third of the rise in our production of g°ocl1
and during 1973 -- up to the oil embargo -- the rise in new
exports in real terms was just over 40 percent of the rise m I
the U.S. production of goods. We cannot understand our domest
economic developments in recent months unless we take into
account these external influences.

3
It is when one probes more deeply that we begin to see
in perspective the almost relentless march of growing inter­
dependence. Suppose we look at what has happened during, say,
the 10 years from 1963 to 1973. During that decade the world’s
output of goods and services was increasing at the rate of just
over 5 percent per year. When we turn to world trade, however,
we find that in real terms its volume was rising at the rate
of about 9 percent per year. The volume of trade, in short,
was expanding nearly twice as rapidly as total output.
Now this, when you stop to think about it, is what we would
expect from an international economic system performing reasona­
bly well. With rising material levels of living we would expect
consumers increasingly to reach beyond local and national
boundaries for the things they buy, and we would expect busi­
nesses increasingly to internationalize their markets.
In this
way we gain the improved productivity that comes from increased
specialization and enlarging markets.
Further, with the growing incomes that result, consumers
internationalize their patterns of consumption. Thus a family
in Japan can buy from an American mail order house, and a
family in this country sits in Danish chairs, wearing Spanish
shoes, listening to a record player made in Canada -- thereby
enriching the material standards of all.
We are, however, painfully aware that a continuation of
this progress is by no means automatic. The list of the
common economic problems which challenge that progress is now
familiar. We are confronted by a rapid inflationthat has
proved as tenacious as it is pervasive. Nations struggle to
adjust to sharply increased oil bills that pose difficulties
for all oil importing countries but fall particularly cruelly
on some. There is concern that the world may be thrown into
deep recession, concern that our financial structures may be
inadequate to the new tasks they face, concern that the world
will retreat into an era of protectionism. While I find some
of these concerns less immediate than others, I do not under­
estimate the dangers such concerns themselves represent.
These problems have become the more troublesome because
they raise questions of equity and justice.
In each of our
countries suffering from rapid inflation, we see our tasks
of restoring stability made more difficult by the efforts of
groups disadvantaged by an inequitable inflation to regain
lost ground.
Internationally, serious men ask about the
justice of allowing the power of a cartel to gain for a few
at the expense of the many an accumulation of wealth un­
paralleled in the history of mankind.

4
Conseqeuntly, this maze of problems poses not only a
challenge to our continued economic progress; it also con­
stitutes a threat to the fundamental harmony among nations
that the United Nations was designed to foster.
It is of the utmost importance that we keep our channels
of communication open in these troubled times. Our experience
within the framework of the cooperative institutions developed
in the aftermath of World War II, although not unblemished,
has been uniquely favorable. The ruins of war have been
rebuilt. A liberal trade and payments order has been constructed!
within which trade and investment flows have served as a power- 1
ful motor of our prosperity. A concerted effort has been launche'
and maintained, to bring that prosperity to all nations of the
world, where it had previously been reserved to the few.
A key element in that favorable experience has been the
willingness of nations to reject narrow, short-sighted and
highly nationalistic solutions in favor of mutually agreed
answers.
In the early postwar years, the United States, with
the trauma of the 1930’s still fresh in its memory, opted for
an interdependent world. With an inordinate proportion of the
world’s wealth and productive capacity concentrated in the hands
of this country, we might have done otherwise. But we did not,
and now that world is a reality-- one from which there must be
no retreat.
As we look ahead, vigorous and orderly economic progress
for the peoples of the world can resume if we have the clear­
eyed will to do the things that we know need to be done.
The first requirement of our response to the challenges,
of today is for the major world economies, including the United
States, to restore order in their own domestic economies. We
are all, of course, influenced by external economic developments,
but governments tend to use that obvious fact to excuse in­
action on the things that need to be done at home.
I can assure you of the firm resolve of this Administration
to restore stability in the United States. We recognize that
inflation has become so imbedded in our economy that to squeeze
it out will be a long, tough process. There will be no quick
solutions, no short-cuts. We recognize also that whatever
the causes of our inflation, we must deal with it with the
tools we have available.
In the U.S., as around the world,
that means basically fiscal and monetary policies.

- 5 -

The implication of our policies is that our economy
will operate for some time at less than maximum capacity >
so as to provide the framework in which inflationary
pressures can be exorcised.
For a time , we will have to
live with more unemployment than we wou Id like.
We are aware that excessive policies of restraint
could plunge the United States into deep recession, and
we will watch the evolution of economic activity closely.
Should the balance of the dangers in the present situation
shift unexpectedly from inflation to depression, we will
act. But the present primary danger is inflation, and
nothing could be more disastrous than to direct our policies
to fighting a depression that does not exist at the expense
of our efforts against a virulent inflation that does.

6

In this interdependent world, our efforts to contain
inflation represent an essential, and perhaps our most important
contribution to the preservation of a cooperative economic order
There are, however, other pressing problems, in the main linked
directly or indirectly to this past year’s increases in oil
prices, which challenge international harmony.
We find the international financial scene dramatically
altered by the abrupt quadrupling of oil prices of the past
year.
It is now estimated that OPEC countries will this year
accumulate $55 billion -- more or less.-- in revenues beyond
those needed to meet their current requirements for imports
of consumer and investment goods. On the one hand, this implies
a vast accumulation of wealth on the part of a small group of
countries. On the other, it implies a corresponding reduction
in the incomes of those nations which must pay the higher oil
prices.
Much attention has been turned to the problems created by
this drastic reallocation of income.
In the United Nations
General Assembly, the Economic and Social Council, the UNCTAD,
the Committee of Twenty, the International Monetary Fund and
the World Bank, the Organization for Economic Cooperation and
Development -- the list is too long to complete -- we have sought
to assess and deal with this problem.
What have we learned; what have we done?
We have learned first that the problem is cause for concern
but not panic. Our Colleagues from the OPEC countries have prove!
themselves conservative and prudent investors, well aware of thei
own stake in the stability of the international financial system
Our private financial markets have adjusted in the face of large
new capital flows, proving themselves willing to accept the
challenges posed, and to do so in a responsible manner. We have
seen governments respond individually and collectively: The OPEC
countries have made encouraging steps to extend financial assis­
tance to at least some of their customers; the resources of the
International Monetary Fund have been expanded by the creation
of a new oil facility; governments are devising new means of
raising funds internationally.
At the same time, I believe most realize that the oil
consuming countries cannot, and will not, continue indefinitely
to pay the current oil bill.
In part, this is because no countrf
however strong it appears today -- can borrow indefinitely to

/

finance current consumption.
In part, this result will follow
inevitably because utilization of oil has become less attractive.
We have only to look at what has happened to oil consumption thus
far this year to find clear evidence of a drop in demand. The
result has been a swelling of oil inventories, and cutbacks in
oil production. Further the development of alternative sources
is just begun, but in time oil will be found from non-OPEC sources,
and non-oil sources of energy will be developed.
To me, it is not a question of whether oil prices fall but
when. If they fall before the redistribution of world income
and wealth that present prices imply has too embittered the oil
consuming countries; before the world becomes locked into the
development of alternative sources to over priced oil; before the
economic consequences become too severe; then we may some day
look back and value the lessons we have learned.
If oil prices
fall later rather than sooner, serious damage -- perhaps irreparable
damage --. will be done to our bright hopes that a rational world
community can solve its problems in a cooperative manner.
In the meantime, we all seek to mitigate the dangers inherent
in the present situation. For its part, the United States intends
neither to make the financing problems of others more difficult
by seeking out OPEC monies nor to restrict the outflows of funds
from this country which may assist others. We have no desire to
offer special incentives to OPEC monies, nor do we want to place
impediments in their way.
In this regard, a good deal of confusion seems to persist
about our expressed willingness to make available to OPEC
countries special issues of U. S. treasury securities should
they wish.
It seems frequently to be overlooked that there are
at present 23 - 24 billion dollars of similar issues outstanding -issued to countries such as Germany and Canada as a matter of
mutual convenience. For the investor, such issues offer the
primary advantage of being able to move rather large sums of money
without affecting market rates. For the United States, these
arrangements mean we are able to organize our debt management
policies in a more orderly fashion. But there are no special
incentives; -- no special interest rates, no indexation, no
guarantees.;
There has been a great deal of discussion in our international
forums of the possibilities of mitigating the damage done to the
poorest countries most seriously affected by the oil price
increases. From these discussions has emerged a needed consensus

8
on the priority to be given by the world community of nations
to assisting these countries. There have also been encouraging
steps by the oil exporting countries to provide some con­
cessional aid to these countries directly. But much remains
to be done.
Our efforts to mitigate the dangers of the present situation
do not begin and end with financing quest ions. We can all be
pleased with the action of the developed countries in the
Organization for Economic Cooperation and Development last May
to agree to avoid recourse to new restric tive actions affecting
trade and other current account transacti ons. We can take
satisfaction that the C-20 recommended la st June that the full
membership of the IMF adopt a similar res olution; and it is
important that the members move promptly and broadly to subscribe
to that pledge, as the U. S. has already done.
To mitigate problems is not to solve them. As we continue
to work toward solutions we can be glad, however, that our
channels of communication among nations are functioning and even
expanding.
I particularly welcome the prospect that the government
boards of the International Monetary Fund and the World Bank
will at their forthcoming annual meetings establish a new
Ministerial Committee on the Transfer of Real Resources and that
this group will give priority attention to the problems created
for the developing countries by the recent price changes. Their
work will usefully complement the work going forward in other
forums, including that begun at the Special Session of the
General Assembly this past spring. Also at the 'IMF-/IBRD annual
meetings, we expect to establish a new Ministerial Committee
on the International Monetary System to carry on and broaden
the work of the Committee of Twenty.
Still other forms of cooperation are being developed.
Since early this year, considerable progress has been made in
establishing a new framework for cooperation on energy matters
within the context of the Energy Coordinating Group. At the
same time, the United States and other countries have been
exploring new methods of cooperation with the countries of the
Middle East.
I myself made an extensive trip to that area this
summer.

- 9 Informal as well as formal consultations are of great value
in these times.
Informal talks are, of course, a virtually
continuous process. One such arrangement which I have found
particularly useful is the quiet meeting with my fellow Finance
Ministers and Central Bankers from several major countries.
I
returned from such a meeting in France only ten days ago con­
vinced of the value of these talks over a range of problems.
Reasonable people sometimes ask whether the multiple
channels of communications among governments and the peoples
of the world really offer the answers to our common problems.
The essence of the answer to questions of this nature
seems to me that each new channel opened brings the peoples of
this world a step further toward commitment to cooperative
solutions.
In some instances, this is the result of involving
additional individuals, ministries, or even countries, in the
search for cooperative solutions.
In others, the important
thing is that a type of dialogue is possible in one forum that
is not in another existing one.
The many ways in which such a senior level dialogue goes
on bring together responsible officials and provide them with
the opportunity to get to know each other and to learn to work
together.
In the process, each comes to understand better the
problems, the goals and the policies of others.
In the end,
the result is -- hopefully -- that shocks, surprises, and
unilateral actions taken without awareness of the impact on
others are fewer. Nations are better able to anticipate the
impact of their actions on others and thus to minimize the
potential for conflict.
But I do not think I have to convince this group of
value of good communications among nations. For that is
the United Nations is all about; that is why we are here
and that is why the United Nations will continue to play
vole in promoting peace and understanding among peoples.

0O0

the
what
tonight ;
a vital

oftheTREASURY

Department
SHINGTOli DC. 2022Ü

TELEPHONE W04-2Q41

September 18, 1974

FOR RELEASE 6:30 P.M.

RESULTS OF TREASURY’S 52-WEEK BILL AUCTION
Tenders for $1.8 billion of 52-week Treasury bills to
[September 24, 1974, and to mature September 23, 1975, were
[Federal Reserve Banks today. The details are as follows:
R ange of accepted c o m p e t it iv e bids :

be dated
opened at the

(Excepting 4 tenders totaling $3,940,000)

¥

High
L0V7
Average

Equivalent annual! rate 8.250%
Equivalent annual rate 8.437%
Equivalent annual rate 8.341%

91.658
91.469
91.566

Tenders at the low price were allotted 27%.
¡TOTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTALS

Applied For

Accepted

I

17,670,000
2,291,815,000
30,160,000
41,565,000
47,190,000
10,840,000
245,640,000
30,405,000
9,255,000
14,010,000
17,940,000
130,435,000

$
7,670,000
1,393,510,000
5,160,000
16,535,000
31,190,000
10,840,000
198,090,000
22,405,000
9,255,000
8,130,000
13,940,000
83,435,000

$2,886,925,000

$1,800.i60,000

1/ This is on a bank discount basis.
■/ Includes $118,150,000

/

2

The equivalent coupon issue yield is 9.03%

noncompetitive tenders accented

at

the average

price.

theTREASURY J

Departmental
iMcmiu D
nr
ËSHINGTON,
.C. 2022D

H

TELEPHONE W04-2041

MEMORANDUM TO THE PRESS

September 18, 1974

Financial Conference on Inflation
The starting time of the Financial Conference on
Inflation has been changed to 8:15 a.m., September 20,
1974. Close-up photography of participants while they
are at the Conference table will be limited to a brief
period at the opening of the meeting.
Also changed is the site of the meeting.
It will
now be held in the Presidential Room of the StatlerHilton Hotel, Washington, D.C. Since this is a much
larger room, there is no longer a limit on the number
of seats available to the press.
The press room in the hotel will be the Ohio Room.
At intervals throughout the day--approximately two hours
after the close of each segment of the Conference-transcripts of the proceedings will be available in the
Ohio Room. At the conclusion of the meeting--approximately
6:00 to 6:30 p.m.--there will be a summation of the day’s
activities. Transcripts of this summation and all preceding
discussions will be available at both the Ohio Room and the
15th Street entrance of Main Treasury at approximately 9:30 p.m.
A final list of participants is attached.

MEMBERS OF BANKING AND
FINANCE COMMUNITY
WHO WILL ATTEND
THE FINANCIAL CONFERENCE ON INFLATION
WASHINGTON, D.C.
SEPTEMBER 20, 1974
HELD AT THE REQUEST OF
PRESIDENT GERALD R. FORD
AND THE CONGRESS OF THE UNITED STATES

The Honorable William E. Simon
Secretary of the Treasury
Department of the Treasury
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220

Mr. Edwin G. Alexander
President
First S§L Shares, Inc.
Denver, Colorado 80211
Dr. George Leland Bach
Professor of Economics and Public Policy
Stanford University
Stanford, California 94305
Mr. Robert H.B. Baldwin
President
Morgan Stanley § Company, Inc.
1251 Avenue of the Americas
New York, New York 10020
The Honorable Jack F. Bennett
Under Secretary for Monetary Affairs
Department of the Treasury
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Mr. Robert H. Bethke
President
Discount Corporation of New York
58 Pine Street
New York, New York 10005
Mr. Archie R. Boe
Chairman of the Board
Allstate Insurance Company
Allstate Plaza
Northbrook, Illinois 60062
Mr. Thomas R. Bomar
Chairman, Federal Home Loan Bank Board
320 First Street, N UW.
Washington, D.C. 20552

1

The Honorable Arthur F. Burns
Chairman
Board of Governors of the Federal
Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
Dr. Gwen Bymers
Professor and Chairman of the
Department of Consumer Economics
Cornell University
Ithaca, New York 14850
Mr. Richard P. Cooley
President and Chief Executive Officer
Wells Fargo Bank, National Association
San Francisco, California 94120
Mr. Howard Coughlin
President
Office and Professional Employees
International Union
265 West 14th Street
New York, New York 10011
Mr. Morris D. Crawford, Jr.
Chairman of the Board
Bowery Savings Bank
110 East 42nd Street
New York, New York 10017
Dr. Robert G. Dederick
Senior Vice President and Economist
Northern Trust Company
50 South LaSalle Street
Chicago, Illinois 60690

2

Dr. Robert Ray Dockson
President
California Federal Savings and
Loan Association
5670 Wilshire Boulevard
Los Angeles, California 90036
Dr. Otto Eckstein
President, Data Resources, Inc.
Professor of Economics
Harvard University
231 Littaner Center
Cambridge, Massachusetts 02138
Mr. Gilbert R. Ellis
President
Household Finance Corporation
3200 Prudential Plaza
Chicago, Illinois 60601
Dr. Grover W. Ensley
Executive Vice President
National Association of Mutual
Savings Banks
200 Park Avenue
New York, New York 10017
The Honorable Edgar R. Fiedler
Assistant Secretary for Economic Policy
Department of the Treasury
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Mr. William H. Franklin
Chairman
Caterpillar Tractor Company
100 N.E. Adams Street
Peoria, Illinois 61629
Mr. Gaylord Freeman
Chairman of the Board
The First National Bank of Chicago
One First National Plaza
Chicago, Illinois 60670
Dr. Tilford C. Gaines
Senior Vice President and Economist
Manufacturers Hanover Trust Co.
350 Park Avenue
New York, New York 10022

3

The Honorable Stephen S. Gardner
Deputy Secretary
Department of the Treasury
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Mr. Ray Garrett, Jr.
Chairman
Securities and Exchange Commission
500 North Capitol Street, Room 812
Washington, D.C. 20549
Mr. Richard G. Gilbert
President of Citizens Savings
Association
100 South Central Plaza
Canton, Ohio 44702
Mr. Alan Greenspan
Chairman
Council of Economic Advisors
Old Executive Office Building
Washington, D.C. 20506
Mr. David B. Harper
President
First Independence National Bank
234 State Street
Detroit, Michigan 48226
Dr. Gabriel Hauge
Chairman
Manufacturers Hanover Trust Co.
350 Park Avenue
New York, New York 10022
Mr0 Milton J* Hayes
Chairman
Government Fiscal Policy Committee
Independent Bankers Association of America
Consultant, American National Bank of Chicago
33 N. LaSalle Street, Room 1619
Chicago, Illinois 60602
Mro M.R. Hellie
President
Credit Union National Association, Inc.
1730 Rhode Island Avenue, N.W., Suite 810
Washington, D.C. 20036
Mr. Richard D. Hill
Chairman of the Board
First National Bank of Boston
Boston, Massachusetts 02110
- 4 -

Mr. J. Henning Hilliard
Chairman
J.J.B. Hilliard, W.L. Lyons, Inc.
545 South Third Street
Louisville, Kentucky 40202
Mr. Frank J. Hoenemeyer
Executive Vice President
Prudential Insurance Company
of America
Prudential Plaza
Newark, New Jersey 07101
The Honorable Ernest F. Hollings
United States Senate
Old Senate Office Building
Room 432
Washington, D.C. 20510
The Honorable Jacob Javits
United States Senate
Old Senate Office Building
Room 326
Washington, D.C. 20510
Mr. Paul R. Judy
Chairman and President
A.G. Becker § Company, Inc.
2 First National Plaza
Chicago, Illinois 60670
Mr. Harvey E. Kapnick, Jr.
Chairman and Chief Executive Officer
Arthur Andersen § Co.
69 West Washington Street
Chicago, Illinois 60602
Mr. Louis 0. Kelso
General Counsel
Bangert § Co., Inc.
Ill Pine Street
San Francisco, California

94111

Mr. W. J. Kennedy, III
President
North Carolina Mutual Life Insurance Co
P. 0. Box 201
Durham, North Carolina 27702
Mr. Ralph F . Leach
Chairman of the Executive Committee
Morgan Guaranty Trust Company
23 Wall Street
New York, New York 10015
5

Mr. Gustave L. Levy
Partner
Goldman, Sachs and Company
55 Broad Street
New York,New York 10015
The Honorable Russell B. Long
United States Senate
Old Senate Office Building
Room 217
Washington, D.C. 20510
Mr. Bruce K. MacLaury
President
Federal Reserve Bank of Minneapolis
250 Marquette Avenue
Minneapolis, Minnesota 55480
Dr. Paul W. McCracken
Senior Consultant
Department of the Treasury
15th and Pennsylvania Avenue, N.W.
Washington, D.Co 20220
Mr. Rex J. Morthland
President
American Bankers Association
Chairman, The Peoples Bank and Trust Company
Post Office Box 799
Selma, Alabama 36701
Mr. James J. Needham
Chairman of the Board
New York Stock Exchange
11 Wall Street
New York, New York 10005
Mr. Herman Nickerson, Jr.
Administrator
National Credit Union Administration
2025 M Street, N.W.
Washington, D.C. 20456
Dr. Arthur M. Okun
Senior Fellow
The Brookings Institute
1775 Massachusetts Avenue, N.W.
Washington, D.C. 20036
Dr. James O ’Leary
Vice Chairman
U.S. Trust Company
45 Wall Street
New York, New York

10005
6

Mr. J. Charles Partee
Managing Director
Office of Research and Economic Policy
Board of Governors of the Federal
Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
The Honorable Wright Patman
U.S. House of Representatives
Rayburn House Office Building
Room 2328
Washington, D.C. 20515
Ms. Sylvia Porter
Syndicated Financial Columnist
30 East 42nd Street
New York, New York 10017
Mr. George Preston
President
U.S. League of Savings Associations
1709 New York Avenue, N.W.
Washington, D.C. 20006
Mr. Donald T. Regan
Chairman of the Board
Merrill, Lynch, Pierce, Fenner
and Smith, Inc.
One Liberty Plaza
165 Broadway
New York, New York 10006
The Honorable Henry S. Reuss
U. S. House of Representatives
Rayburn House Office Building
Room 2186
Washington, D.C. 20515
The Honorable John J. Rhodes
U.S. House of Representatives
Rayburn House Office Building
Room 2310
Washington, D.C.
20515
Mr. David Rockefeller
Chase Manhattan Bank, National Association
One Chase Manhattan Plaza
New York, New York 10015
Mr. Robert V. Roosa
Partner
Brown Brothers Harriman and Company
59 Wall Street
New York, New York 10005
7

The Honorable William V. Roth
United States Senate
New Senate Office Building, Room 4327
Washington, D.C. 20510
Mr. Ralph S. Saul
Vice Chairman
Insurance Company of North America
1600 Arch Street
Philadelphia, Pennsylvania 19101
Dr. Raymond J. Saulnier
Professor Emeritus of Economics
Barnard College
Columbia University
5-A Lehman Hall
New York, New York 10027
Mr. Walter Scott
Associate Director
Office of Management and Budget
Old Executive Office Building
17th and Pennsylvania Avenue, N.W.
Washington, D.C. 20500
The Honorable George P. Shultz
Executive Vice President
Bechtel Corporation
50 Beale Street
San Francisco, California 94119
The Honorable J. William Stanton
U.S. House of Representatives
Rayburn House Office Building
Room 2448
Washington, D.C. 20515
Mr. Robert H. Stewart III
Chairman of the Board
First International Bancshares, Inc.
Post Office Box 6031
Dallas, Texas 75283
Mr. Thomas I. Storrs
Chairman of the Executive Committee
North Carolina National Bank
Post Office Box 120
Charlotte, North Carolina 28255
Mr. John Tomayko
Director, Insurance, Pension and
Unemployment Benefits
United Steelworkers of America
5 Gateway Center
Pittsburgh, Pennsylvania 15222
8

The Honorable Charls E. Walker
President
Charls E. Walker Associates
1730 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
The Honorable Frank Wille
Chairman
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Mr. Carlton Wilson
Chairman of the Board and Director
Robert W. Baird and Company, Inc.
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53201
Dr. Albert M. Wojnilower
Vice President, Economist
The First Boston Corporation
20 Exchange Place
New York, New York 10005
Mr. John W. Wright
President
Wright Investors’ Service
Wright Building
Bridgeport, Connecticut 06604
Mr. Walter Wriston
Chairman
First National City Bank
55 Wall Street
New York, New York 10015
Dr. Charles J. Zwick
President
Southeast Banking Corporation
100 South Biscayne Boulevard
Miami, Florida 33131

9

HINGTON. D.C. 20220

TELEPHONE W04-2041

FOR RELEASE ON DELIVERY

r

STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE
SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE
SENATE COMMITTEE ON GOVERNMENT OPERATIONS
WEDNESDAY, SEPTEMBER 18, 1974 AT 10:00 AM
ROOM 3302 NSOB
MR. CHAIRMAN AND MEMBERS OF THE SUBCOMMITTEE:^
I am pleased to participate today in yoi^ir investigation
into various aspects of our domestic and international energy
policies. It is important, I think, for the Congress and
the Administration jointly to discuss possible policies to
respond to the ever-changing world energy situation.
The problem we are discussing here today -- the abrupt
increase in the price of oil -- is one of major importance
to all participants in the world economy. For oil consuming
nations, whether industrial or developing, oil price increases
have fanned inflation, adversely affected living standards,
distorted economies and created payments problems. For oil
producing countries, high prices have brought exceptionally
high incomes in the short run, but also the danger of a
drastic erosion of their income in the longer run.
Consuming nations should not accept the indefinite
continuation of oil prices at current levels. Producers will
not lower prices until they come to realize that lower prices
will be in their own best interest. If progress is to be
made toward ‘
lower prices, consuming and producing nations
must develop a common understanding of the extent and nature
of the price problem, and where each nation’s self-interest
ultimately lies. If this is to be achieved, and I cannot
emphasize this too strongly, we in the United States must
he willing to back up our talk with concrete actions both
domestically and in the international arena. Only if oil
producers can be made to understand the gravity of our
problem and our resolution to redress it through our own
efforts, if necessary, can they be persuaded that the prompt
reduction of oil prices will be to their advantage.

2
Before discussing the actions that we have undertaken,
and those that still must be initiated, I would like to
review the current international oil situation and the
impact of the higher prices.
The OPEC countries will probably receive about $80
billion in 1974 in payment for petroleum operations -- over
five times what they received in 1972. Current prices and
production rates are actually generating payments- at an
annual rate of $100 billion per year, but the time lags are
such that their total receipts for the calendar year are
likely to be some $20 billion lower. They will receive
perhaps $5 billion from exports of other commodities and
services. Of these $85 billion of receipts, the OPEC
countries will probably spend about $30 billion on imports
of goods and services, leaving some $55 billion to invest
outside their borders.
As has become increasingly clear in recent months,
high oil prices that have generated these revenues have
also created or have exacerbated a number of serious economic
problems.
Most directly, the oil price increase has been a major
contributor to worldwide inflation.
Measurement of the inflationary impact of the oil price
increase is of course a complex task, but some preliminary
estimates are available. The impact of increased oil prices
as a percentage of GNP are themselves sizeable, on the order
of 1 to 3 percent for the major industrial countries, but
even these considerably understate the full inflationary
impact of the oil price increases. More comprehensive
estimates suggest that the quadrupling of oil prices over the
past year, when its effects are fully felt, will have contributed
in the range of 5 to 8 percentage points to the increase in our
wholesale price index. This is on the order of almost half
the increase in the U.S. wholesale price index from mid-year
1973 to mid-year 1974 of roughly 14 percent. For many other
oil importing nations the contribution of the oil price in­
creases to inflation will be even greater.
As one facet of the inflationary shock of high oil prices
we can see how the sectoral balances in national economics
have been altered. Sectors in which petroleum represents
high input face relatively higher costs and weaker demand than
others; Our automobile industry is suffering from significant)
reduced sales. Our airlines industry is pleading for special
governmental relief from the vastly increased fuel costs.
Electric utilities find it difficult to attract the investment
money they need.

3

6
These sudden shifts cause the loss of output and create
unemployment even when some sectors of the economy are still
at full capacity. A fall in the price of oil would alleviate
thesa problems and permit recovery in output and employment.
In addition to directly affecting prices, employment,
and output, high oil prices affect the performance of the
world economy through their impact on the international
financial system. With the OPEC countries running large
surpluses in their goods and services balance, the oil
importing countries as a group cannot avoid equivalent deficits.
They are simply unable to pay for their oil imports in full
with goods and services at this time. They are compelled to
borrow. This is a drastic change for the industrial nations
of the world which, collectively, have been accustomed to
surpluses in their goods and services account and to being
net lenders on the international scene. The developing
countries, which’ have been borrowing to finance their economic
development, now find they must borrow to finance essential
current consumption as well, unless they are prepared to cut
back on their development programs or depress the living
standards of their people. It is not clear that the oil
importing countries are all prepared to accept the vast amount
of borrowing implied by these changes, at least at current
levels of output and real income.
Of course, a willingness to borrow does not necessarily
create the ability to do so. It is true that since the OPEC
countries have no alternative to lending their surpluses
abroad, funds are available in the aggregate to meet the new
deficits of the industrial countries and the larger deficits
of the developing nations. Lenders, however, are likely to
prefer lending to the strong rather than to the weak.
As the external debts of the oil consuming countries
grow -- particularly if the borrowed funds are used largely
to finance consumption rather than to increase output -private lenders are likely to become increasingly reluctant
to extend further credit to borrowers in weaker countries.
Consequently, governments are faced with the need to supple­
ment the private markets and to work out techniques for
officially channeling funds to certain borrowers. The IMF
has inaugurated a new special oil facility; understandings
have been reached which permit the use of gold reserves as
collateral thereby facilitating the negotiation of bilateral
credits; the Governors of the International Monetary Fund
and the International Bank are preparing to establish at the
end of this month a Ministerial Committee on the Transfer
Resources which will take up, as its most urgent task,
Pr°klems faced by the developing countries most seriously
affected by the oil price increase.

4

For a fuller description of the recycling issues and our
responses to them, I am providing a more detailed paper to
the committee.
Each of these problems is to one degree or another
manageable, but that does not in any way justify the present
price of oil in world markets, or reduce our determination
to resolve the root cause of the problems -- the high oil^
prices themselves. None of these problems would be plaguing
us today if the operation of the world oil market were free
from manipulation by the governments of oil producing states.
Underlying market forces prove that there is a large potential
oil surplus which, in a free market, would be reflected in
lower prices. The high oil prices had scarcely taken effect
when growing production levels and decreased demand caused
considerable softening of the oil market.
During the summer, when oil demand is at its seasonal
low, the level of actual excess production approached three^
million barrels a day. The excess was absorbed by substantial
increases in inventories, including inventories at sea created
by ordering tankers to steam at speeds as low as 5 knots. In
August, the surplus seems to have fallen to about 500,000
barrels per day due to reduced production in Venezuela,
Kuwait, Saudi Arabia, and elsewhere. Our latest evidence is
that production is slightly up once again, and that the
surplus may now approach 900,000 barrels per day.
Nor is this the full story: current production potential
is even higher than current production, perhaps by as much as
4 - 5 million barrels per day.
If the oil market were free from interference, the price
would drop. Governments of the oil producing countries are,
however, acting determinedly-and in substantial concert to
maintain present prices. How long OPEC members will be able
to continue this policy in the face of new production else­
where and the need to agree on mutually satisfactory production
cuts among themselves is unclear. What is clear, however, is
that a small number of producing states are exercising a
monopoly power, manipulating the oil market by limiting
production and raising prices. As long as this continues the
consuming nations cannot rely soley on market forces to
generate a decline in price.
The policy the producers are pursuing is bad policy-bad
from the standpoint of their own interests. Sòme of the
pitfalls are of a political nature. But in economic terms,
cutting back production in the attempt to preserve' the high
price is extremely short-sighted. This policy will cause
consuming nations to go all out for the conservation of energy»

5

to step up investment programs which expand the production
of oil in non-OPEC areas as well as non-oil sources of
energy and to intensify research and development of new
techniques for obtaining energy. The OPEC countries will,
in a relatively short period of time, find their market
for oil tending sharply downward. And once gone, even lower
prices will not bring it back.
Our Treasury studies of supply and demand elasticity
for oil indicate that reduction in demand need not be very
great to reduce the total size of the market for OPEC oil
significantly in future years. Reductions in demand due
to present prices coupled with increases in competing
supplies will result in a steady reduction in OPEC's market.
For a wide range of plausible demand supply elasticities,
recent price increases, if maintained, will cost OPEC a
sizeable fraction of its sales beginning later this decade.
Even now, one can see significant developments that
should bring home the validity of these predictions to OPEC
leaders. The worldwide consumption of oil has held to below
pre-embargo levels, with most major consuming nations
experiencing reductions in demand of 3-5 percent below 1973
levels. In addition, new discoveries of oil have been
accelerated outside the OPEC nations. In fact, significant
discoveries have been made in 26 separate areas of the world
since 1973. Some of the finds hold considerable promise for
relieving the world's dependence on the OPEC nations. More­
over, there is an increasing substitution of fuels throughout
the world in an effort to decrease dependence on oil. As a
result, world coal production may be some 70 million tons
higher in 1974 than would have been expected without the oil
price increases. Yet these efforts are just beginning.
The implications of these developments for OPEC are
clear: unless prices fall, the demand for oil exports from
the current oil producers will be sharply lower in 1980-85
than it is now. This simple message has yet to sink in,
apparently, but it is one that we will continue to deliver.
Of course, 1980 is six years away, ana consuming nations
cannot absorb the economic impact of the current oil prices
for that length of time. If we cannot convince the oil
producers that lower prices are in everyone's ultimate selfinterest, we must be prepared, as a nation and as a member
of the international community, to take concrete actions in
defense of our economic interests. We must demonstrate our
determination to escape the OPEC grip.

6

In particular, we must take action to:
Develop our domestic energy resources
Limit our domestic energy demand, and
Forge effective consumer nation unity
In designing our future policies, we must recognize that
the policy problems generated by $10/BBL oil differ from those
caused by $3/BBL oil. The energy market operates in another
world from the one we knew a year ago. With the advent of the
new price levels, there is no need for massive governmental
interference in the domestic market in an effort to avoid
dependence on imported oil at some future date. What is
needed now is a willingness to remove the government from
areas where its activities have been an impediment to greater
domestic output and conservation.
With this in mind, the Administration has taken or
intends to take a variety of actions in both the domestic and
foreign arenas.
The goals of our domestic program are:
To reduce our near-term dependence on imported oil
through domestic supply increases and conservation, and
In the longer-term, to reduce that dependency further
through the exploitation of other domestic sources
of energy, including alternative fuels and technologies.
Appropriately designed and implemented, Project Inde­
pendence will provide a context in which market-oriented energy
policies can be effective. Clearly, the government has posed
and continues to pose a major obstacle in the short and medium
term to efficient market allocation in energy. We regulate the
price and distribution of natural gas; we manipulate the pricing
and distribution system in oil; we require lengthy and cumber­
some processes for obtaining licenses and rate approvals; and we
impose environmental restraints, sometimes of questionable
validity, upon both the production and combustion of fossil
fuels.
Thus, as we develop our long range energy policies, we
must also set some short term goals. These goals should be
clearly understood and stated and explained at each step to
the American people. In my mind, the framework should involve
several major areas of action, including passage of a legislative
package, changing of existing regulatory procedures, and
conservation efforts.

First, we must make an all-out attempt to produce
additional supplies of oil. The potential for
this production could be met through a variety
of measures such as; opening Elk Hills and Naval
Petroleum Reserve #4 to fuller development and
production, reopening the Santa Barbara Channel
to production with appropriate environmental
safeguards, re-evaluating upward the maximum
effective rate of certain oil fields.
--

Second, we should move towards the removal of
price controls from oil and natural gas, and phase
out the regulations and allocation programs which
now disrupt production and marketing patterns.
Third, we need to accelerate our Federal leasing
programs on Federal lands for both oil and coal.
Fourth, and related to all of these, we must decide
on a package of energy legislation and work with the
Congress to ensure that it will be passed promptly.
This effort is badly needed to break the log jam of
nearly 800 energy bills which are pending in Congress
this year. Hopefully, Congress will approve legislation
needed to achieve our goals and which will also include:
Deepwater ports legislation, and energy facilities
siting bill, legislation to create the Energy Research
and Development Administration, the Energy Tax Package,
the Surface Mining Act, and legislation creating the
Department of Energy and Natural Resources.

Our ultimate goal should be one of moving the U.S. from
its present non-renewable hydrocarbon energy base to a renewable
energy base. Achievement of these goals will, of course, include
the development of solar, geothermal, nuclear, and eventually
fusion power. The switch over to these sources will extend
over a period of many years, but what is needed now is a clear
national commitment to increase our domestic energy production
ln areas and forms consistent with market forces. Such a
commitment need not, and should not, imply that essential
social and environmental concerns must be neglected. On the
contrary, such concerns must be fully taken into account. But
protection against social abuses must be provided without
unduly dampening incentives to expand production.

8

We will not be able to convince OPEC nations that we
will succeed in reducing our vulnerability unless we act
in the areas X have mentioned and unless we take further
steps to reduce our demand for oil in the short run.
We must make a national commitment to energy conservation,
which will only succeed if it is undertaken on a solid
foundation of demand restraint made effective through new
energy related taxes or tariffs. We must develop much
greater efficiency in the use of energy. Measures to
implement this commitment would give us added weapons for
dealing with the inflationary and economic disruptions
caused by the present price levels of oil imports.
The second major prerequisite for effective action on
prices is consumer nation unity. We have been promoting
this objective in three major ways:
First, we have been developing, in the Energy
Coordinating Group established at the Washington Energy
Conference, a program of joint action in order to guard
ourselves against future oil supply embargoes. This
program is now embodied in a draft International Energy
Program (IEP) which we hope to put in final form as a
recommendation to member governments later this week in
Brussels.
The emergency cooperation program included in the IEP
is designed to protect us against the sort of oil blackmail
we faced last year. We must be free from this threat if
we are going to guard our interests in the world oil market.
Basically, the emergency program now under discussion in
the ECG would call for commitments by the participating
countries in four areas.
-- We would agree to come to each others* aid in the
event any consuming nation was singled out for an
oil cutoff -- the one-for-all and all-for-one
principle 41 and we would therefore hope to deter
.embargoes as well as spread their burden should
they occur.

9

-- We would all agree to cut our consumption of oil
by a common percentage in an emergency,
-- We would agree to develop a common level of
emergency self-sufficiency, largely through use
of oil stocks, so that by drawing on these stocks
we could endure a large cutback longer.
-- We would reallocate the available oil among the
countries of the group, taking into account the
prescribed consumption restraint and stock drawdown
obligations in order to equalize, to some degree,
oil supply losses.
This program is not a permanent solution to the problem
of our heavy dependence upon imported oil, which in turn is
the basis for OPEC*s success in raising oil prices to their
present levels. Therefore, we have also embodied in the IEP
the second major thrust of our program for consumer nation
unity. This second initiative is the creation of a framework
for a cooperative effort to reduce, over the long term,
consumer nation dependence on imported oil.
As an initial focus for our efforts we have included
programs for cooperative action in the areas of research
and development; the accelerated development of conventional
resources, conservation, and uranium resources. As the IEP
reaches fruition and a new International Energy Agency
comes into being, we hope to be able to develop a more
detailed and comprehensive program; for only by mutually
reducing our dependence on imported oil will we be able to
reduce our ultimate vulnerability to oil supply and price
manipulation.
We are confident that this major international
initiative will be concluded shortly, probably in October,
and we attach great significance to it.
The third major area in which we are developing
consumer nation unity is in cooperation to mitigate the
effects of high oil prices. We have participated in the
creation of a special facility within the International

10

Monetary Fund for loans to countries experiencing financial
difficulties because of the high oil prices. We have also
been cooperating with other consumers in the Development
Assistance Committee of the OECD and in the World Bank in
a reexamination of aid allocations so as to concentrate
assistance on the most severely impacted less developed
countries. We have actively supported the establishment
of a new Ministerial Committee in Real Resources transfer,
to be established by joint action of the IMF and the World
Bank which would focus urgently on the needs of developing
countries.
Both in the IMF and in the OECD we have participated with
other nations in a voluntary pledge to refrain from
mutually destructive trade policies. In all of these
various organizations, we have been attempting to maintain
and to build a framework of mutual assistance and cooperation
in dealing with our common problem of high oil prices.
In working for consumer nation unity we have no desire
to provoke a confrontation with the oil producing countries.
Many of them are participants in the financing arrangements.
We are trying to develop understandings with oil producers
on our mutual interests. We seek to show the producers that
they have lost sight of the important inter-connections of
the world economy, as well as the long term dynamics of the
market system. We seek their understanding that price
levels unrelated to market conditions, unrelated,to revenue
needs of the producers, and unrelated to the prices of
long term substitute supplies promise short term hardship
and long run instability, for us now and for the oil
exporters later. Only if we can re-create a mutuality of
understanding with producers will we be able to avoid the
unfortunate consequences of the present level of oil prices.
In order to facilitate this understanding, as well as for
reasons related to peace in the Mideast, we have been developing
a series of programs under the aegis of our Joint Commissions
with the. Saüdis and the Iranians. We have also been in
close contact with other oil producers in a less formal way.

11
Our intentions in all of this are clear: We want
to help these nations achieve their aspirations of becoming
advanced industrial and agricultural societies. We believe
that their desire to modernize their economies is both
legitimate and laudible, but we believe that they should
understand that their long term interests lie in maintaining
good relations with industrialized nations and in following
pricing and supply policies that guarantee them something
other than a declining market for their oil.
I have attempted to outline our analyses of the
current situation in the world oil market, and the steps
we are taking or hope to take to deal with it. I believe
that the policies we have adopted are both sound and
fair, and I would hope that others would see them in a
similar light. I have been disappointed in the results
of the efforts we have made to date, particularly the
recent actions by the oil producers at the OPEC meeting
in Vienna. Due to the immense significance of the problem
of high oil prices, and due to its serious impact on the
world economic system, we may be forced to re-assess certain
aspects of our policy, as well as to develop new policies
that will increase our leverage. We would do this most
reluctantly, but we as well as others must recognize the
seriousness of the problem and the absolute necessity to
find a solution to it.
In any event, we will need to demonstrate our
willingness to take effective action in the energy area,
and effective action will require the cooperation and
determination of the Administration, the Congress, the
American people, and other consuming nations. I hope
that we can have the support of you gentlemen in
furtherance of our efforts.
Thank you.

0O0

j DepartmentoftheTREASURY
&HINGTON, D.C. 20220

TELEPHONE W04-2041

FOR IMMEDIATE RELEASE

September 20, 19 74

THE FINANCIAL AND ECONOMIC CONSEQUENCES OF
THE QUADRUPLING OF THE PRICE OF OIL
SUBMITTED TO THE SENATE PERMANENT SUBCOMMITTEE
ON INVESTIGATIONS IN CONJUNCTION WITH TESTIMONY BY
SECRETARY OF THE TREASURY WILLIAM E. SIMON
SEPTEMBER 18, 1974
The Magnitudes of Current Money Flows
The current and expected magnitudes of money flows
associated with international trade in oil have to be
estimated. Official reports from oil exporting countries
are fragmentary and available only with long time lags.
Several important countries have not yet disclosed
information on their receipts in 1972. Only a few
countries have reported receipts for any part of 1974.
We estimate that OPEC countries received $15 billion
from oil trade in 1972 and $25 billion in 1973. Our current
estimate for receipts in 1974 is $80 billion. Current
prices and production rates are generating payments at an
annual rate of $100 billion and some analysts are using
this figure for calendar 1974. The lags in actual payments
are substantial, however, and our $80 billion estimate
takes these lags into account.
Estimates are highly uncertain because the
unprecedented changes in price imposed by the governments
of oil-exporting countries over the last year have caused
the importing countries to reduce the consumption of oil
and to seek alternative sources of energy. The volume of
oil trade in prior years is no longer a reliable base for
estimating volume in the future. Thus, estimates of the
volume of oil likely to move in international trade in 1974
and the period ahead vary widely. Furthermore, contractual
arrangements between the governments of the oil-producing
states and the major producing companies are in process
°f renegotiation and terms under which oil will be produced
and exported as well as the division of beneficial ownership
°f the oil-producing companies is not yet known.
In estimating money flows associated with international
rade in oil it is essential to distinguish between payments
y importers of crude, petroleum and petroleum products in
various countries throughout the world to the sellers of
such products, primarily the international oil companies and,
in turn, the payments by these companies to the governments
°f the oil-exporting countries.

There are important differences between the amount of
the payments by the oil imports and amounts received by
the governments of the oil-exporting countries from oil
operations. These differences include the cost of
transportation, in some instances the cost of processing
oil (if such processing is done in countries where it
essentially constitutes a transit trade), the profits of
the companies, and changes in receivables and payables.
In the early part of 1974, changes in receivables and
payables were extremely large and the investment incomes
being shown by the international oil companies were large.
Both the changes in receivables and payables and the figure
for investment incomes are, however, subject to major
modification because the contractual relationships between
the companies and the governments of the oil-exporting
countries are not yet settled and are subject to retroactive
adjustment.
The uncertainty in these contractual relationships
results primarily from the lack of firm understandings
concerning the amount of oil considered by the governments
of the oil-exporting countries to be their share of the
output, and the price paid by the companies for the amount
of oil repurchased by them from the governments. Thus the
companies do not necessarily know the total costs of the oil
they have sold. Furthermore, in some instances, they are
also exposed to uncertainties with respect to the prices
they can charge to the final importers.
These uncertainties not only affect the profit obtained
this year, but also the size of the debt the companies have
to the oil-exporting countries. This debt arises primarily
from the delay in the payments of the difference between
the ultimate total price of the repurchased oil, and the
interim payments which presumably have been made currently,
in relation to actual oil shipments at prevailing tax and
royalty rates.
We estimate that OPEC receipts from petroleum operations
were about $30 billion in the first half of 1974, with $50
billion to come in the second half.
There are also wide variations in the estimates of the
payments expected to be made by the OPEC countries for imports
of goods and services -- purchases on current account.
Our best guess is that in calendar 1974 the OPEC countries
will make payments for goods and services imports totaling
roughly $30 billion, of which $12 to $13 billion may have
accrued in the first half of the year. Siïice we estimate
that these countries will earn about $5 billion from exports
not associated with petroleum, our estimate of 'their surplus
on current account, excluding any government grants, is
roughly $55 billion.

of

do J
.T fir3

1 9 7 3 _________________
i i >t . 1 1 L.'rporiM

<*i *

mm

________t 9 7^

Q-l

Q-2

Q-J

Q-4

Q-l

Q-2

4,456

1,032

1,081

1,066

1,277

1.507

1,850

1,445
924
134
144
121
122

1,705
1,032
- 173
208
133
159

401
248
32
47
36
38

406
244
44
46
32
40

409
249
43
45
34
38 .

489 i
291
54
70
31
43

556
338
60
70
44 L
. 44

c91
457
82
04
39
§|

1,142
\ 559
23
20
111
314
13
69
66If.
7
26
24 .

1,599
771
56
21
119
442

41

* 369
185
6
4
32
100
4
24
1
13

368
190 .
7
4
26
101
5
24
2
9

375
173
17
9
25
104:
5
29
3
10

487
223
26
4
36
137
5
44
3
9

542
237
39
8
36
138
7
56
5
16

737
345
34
7
49
215
10
53
5
19

I 970

1971

1972

1973

2.583

2,869

3,323

1,269
759
127
173
84
126

11298
767
.134
141
117
U9

623
326
22
11
62
141

875
482
32
23
84
164

to

Countries

I.at in America
Venezuela
Ecuador
Bahamas
»rinidnd
A. Antilles
Middle East
Iran
■ .
Iraq
Syria
Knwa it
Saudi Arabia
| Qatar
‘ United Arab Em.
Oman
Baht ain

dj <

4gl/
12

19
121

9

JMulonei. ia

266

263

308

442

102

94

106

140

121 .

119

Airica
A U»i r ia
T misia
:i|i bya

425
62
49.
108
77
129

433
82
42
78
63
168

428
98
55
85
76
114

710
160
60
104
225
161

160
30
8
28
50
44

213
42
20
32
• 73
46

176
37
9
24
67
39

161
51
23
20
35
32

283
85
25
21
113
39

303
68
13
32
108
82

(63)
(362)
(13)

(55)
(636)
(10)

(16)
(150)
(2)

(18)
(129)
(3)

(10)
(148)
(3)

(12)
(209)
(2)

(ID
(204)
(5)

(12)
(23C)
(13)

385
219
158

388
239
210

399
227
173

477
278
159

545
338
283

679
507
29.0

Egypt

Nigeria

of Special Category (iHilitory) t
(55)
(39)
hit in America
(352)
(445)
Middle East
Ai vita
(48)
(35)

Exports

E x c l. Special Category
1,230
LiLiu America
271
Middle East
A fr tea
377

Exports

1,243
430
398

1,382
780
415

1,650
963
700

J[/ Excluding Canada.
2/ liu lud*.*:» exports to Qatar, United Arab Em«?0mnn and Yemc

Arab Republic.

3
The $30 billion figure for current imports of goods
and services takes into consideration the inevitable time
lags which these countries encounter in spending the
increased revenue available to them. There are delays in
planning the expenditures of funds whether these monies
are spent on consumer goods, capital equipment, or armaments,
Even when decisions have been made as to the goods to;be
purchased it takes time to negotiate contracts for thé
desired goods and services and additional time to obtain
deliveries. Many of the oil-exporting countries hope to
use the bulk of their increased earnings for industrial
development and for the strengthening of their military
establishments. The time lag between orders and delivery
for goods of this nature can extend for several years and
although some contracts may call for progress payments
there are substantial lags in the expenditures of funds
associated with imports of this type.
U.S. imports of petroleum and products were about $4.7
billion in 1972 and $8.1 billion in 1973.
(These figures
include imports into the Virgin Islands, which are not
included in the figures for U.S. trade published by the
Bureau of the Census and $1.1 and $1.4 billion, respectively,)
for imports from Canada which is not a member of OPEC).
For the first half of 1974 U.S. imports were about $11.8
billion ($10 billion excluding Canada), and in the last two
quarters of the year they may amount to about $14 billion
($12 to $12.5 billion excluding Canada),
Investment incomes derived by U.S. corporations from
their foreign affiliates operating in petroleum production,
processing, and marketing amounted to $2.8 billion in 1972,
and $4.3 billion in 1973. The figures for the first half
of 1974 are not yet available, but, subject to later
revision to take account of retroactive changes in contracts
with the oil-exporting countries, may have been $3-1/2 to $4
billion.
We do not have separate figures on payables and
receivables of the U.S. petroleum companies from their
international operations, but rough estimates would indicate
that their debts to the oil-exporting countries may have
risen during the first half of 1973, perhaps by as much
as $5 billion. Both the investment incomes of U.S. oil
companies and the increase in their payables to the oil­
exporting countries arise from their world-wide operations
and not only from U.S. imports.
Table 1 shows U.S. merchandize exports to each of the
OPEC countries for the years 1970 to 1973 and quarterly f°r
1973 and the first half of 1974. Data on exports of
services to these particular countries are not available
but are not believed to be significant.

7

4

As mentioned above, crude Treasury estimates suggest
a balance*of payments position for the OPEC countries
combined in the calendar year 1974 as follows:
("billions
of dollars)
Receipts associated with
petroleum trade

80

Other goods and services
exports

5

Imports of goods andservices
Balance on current account
excluding government grants

-30
55

These estimates suggest that the OPEC countries will
have roughly $55 billion to invest in 1974. Many of
these countries appear to attach great importance to
maintaining as much anonymity with respect to their
investments as possible. Thus very little information is
provided by the authorities of any of these countries on
the disposition of their investments. We have pieced
together information derived from many different sources.
What we have is fragmentary. Many of the reports cannot
be confirmed. We can do no more than offer a very rough
guess as to where funds may have been invested thus far
m 1974. We estimate that the OPEC countries may have had
a surplus of somewhere between $25 and $28 billion between
January 1 and August 31, 1974. Of that $25 to $28 billion,
about $7 billion appears to have been invested in the U.S.
Roughly $4 billion was invested in various types of
marketable U.S. government securities including some
so-called "agency” securities. Most of the remainder was
placed with commercial banks in the United States, although
a few hundred million dollars may have gone into corporate
securities and real estate.
We suspect -- although we have no firm supporting
evidence -- that $2 billion or more was invested in Europe
through direct placement loans to official or quasi-official
agencies, plus direct purchases of private securities and
re*l eState, At least $3 billion may have been invested
111
^
sterling, some of which no doubt involved
Purchases of British government securities and some sterling
deposits in British banks.
We
by OPEC
lending
reflect

have received a good many reports of commitments
countries to developing countries and multilateral
insitutions. Some of these reports appear to
firm commitments and some reflect tentative agreements

5
or statements of intent which have not yet been translated
into firm programs for action. Altogether the reported
commitments would add up to more than $15 billion. Terms
of these commitments vary widely. Some call for outright
grants. Some involve soft loans and some loans on near
commercial terms. Some call for immediate disbursement
but most imply that the funds will be disbursed over a
considerable number of years. We are not able to determine
the amount of money which has actually been transferred
under these and earlier commitments thus far in 1974.
We think it reasonable to conclude, however, that as much
as $3 billion was transferred during this period to
developing countries and the multilateral banks including
purchases of IBRD bonds amounting to approximately $500 million.
Our assumption is that most of the remaining $10 to $13
billion (of the $25 to $28 billion surplus) is currently
being held in Euro-dollar and other Euro-currency deposits
in banks outside the U.S., largely in London.
In the past few months there appears to have been some
evolution in the pattern of investment by the OPEC countries,
with a larger share of the funds going into long-term,
direct placement loans and into the securities of major
governments than appeared to have been the case in the
earlier months of the year. This very logical development
may have come about in part because the OPEC governments
have had more time to plan the investment of their funds,
whereas initially they were merely left on deposit with
commercial banks. In part, it may have come about because
banks have, in some cases, reduced their offers for large-scale
short-term deposits, thus creating a financial incentive for
the investing governments to look for other outlets for
their money. Banks are increasingly serving as brokers in
arranging the direct placement of OPEC funds with longer-term
borrowers and OPEC countries have increasingly, gone into
national capital markets to buy government securities.
Special arrangements have also been made for direct loaps
to governments in several cases and in one case, for a $1
billion deposit as an advance payment for imports.
Prospects for Payment in Goods and Services
The capacity of the various exporting countries to
absorb imports differs materially. There is little doubt
that countries with sizeable populations such as Indonesia,
Iran, Nigeria, Algeria and Venezuela will have little
difficulty in using their oil income for imports of goods
and services.
For these countries surpluses are temporarily
deriving simply from the fact that it takes time to plan,
procure, and obtain delivery for the types of gbods they
wish to buy. Libya cannot easily use all of its income for
capital equipment or civilian consumption but has been placing
large orders for military equipment and may extend grants to
nations with which it is in sympathy.

6
The countries of the Arabian Peninsula, however, have
relatively small populations and their requirements for
imported goods and services are limited. Some of these
countries might continue to run substantial surpluses for
some years to come if the oil price were to stay at its
present level. Even these countries, however, expect to
increase their imports very substantially and quite rapidly.
The government of Saudi Arabia, for instance, is currently
budgeting expenditures of $12.5 billion, approximately
four times the level of the previous budget year. This
increase can be expected to result, directly or indirectly,
in an increase in imports of almost the same magnitude
although there will, no doubt, be a substantial time lag
involved.
Each of the oil-producing countries has its own
priorities and is developing its own plans with respect
to the use of its oil revenues. All of the countries are
placing great emphasis on industrial development. They see
an unprecedented opportunity to move into the processing
of oil and gas and the production of manufactured items
in which oil and gas constitute a major input.
In some cases there are likely to be major outlays
to improve and expand the infra-structure of the country.
Several of the countries have extensive plans for
strengthening their military establishments and can be
expected to utilize a substantial percentage of their
surpluses for military equipment. The U.S. will probably
be a major supplier of military equipment, although by
no means the only country furnishing arms. Much of the
military equipment being ordered by these countries is
currently in short supply and delivery is expected to be
staggered out over an extended period of time.
The scope for substantial development efforts by the
oil-producing countries permits the utilization of a
significant portion of the receipts of these countries.Announced objectives, both inter-regional and international,
must be translated into major flows. Transfers can be of
both a pure development nature or can represent long-term
investments on more commercial terms, or both.
In investing their surplus funds, the governments
of the oil-producing countries will have access to a wide
variety of financial instruments in many parts of the world.
They will have the same opportunities as are open to any
large investor and will be able to employ talented
investment advisors. Each nation will no doubt choose
its own investment strategy and there is no reason to expect
they will all make the same choices. Some may place primary
emphasis on the income yield of their investments while

7

others may give greater weight to the question of the
preservation of their capital. Some of these countries
have apparently also placed a high value on anonymity
that is, placing their funds in such a way that the
identity of the owners cannot be traced. Some may fear
that host countries, if able to identify the beneficial
owners of large investments, might use their capability
to freeze the assets to induce modification of government
policy.
In the final analysis, unless the OPEC countries
choose to leave their oil in the ground, a very poor
investment, or give their money away, they must invest the
funds they do not spend on imports of goods and services
for some kind of financial asset. Today's $10 per barrel
of oil if left in the ground as an investment alternative
to financial assets earning 8%, would have to rise in
price to $21.59 per barrel by 1984, an unlikely prospect.
Our expectation has been that these countries would
invest in a very wide variety of assets in a great many
countries. We see no reason to assume that their
investments will seriously disrupt world markets. While
huge in terms of international payments patterns and
transfers of wealth, these OPEC current account imbalances
represent only a small fraction of world financial markets.
Thus we would not expect the oil payments situation to
substantially alter average yields in world financial
markets, nor to cause serious difficulties^for financial
markets in absorbing such funds. It is quite possible that
there will be some impact on the yield structure of
financial assets due to stronger liquidity preferences on
the part of OPEC investors than on the part of the average
investor.
Indeed, some decline in short maturity rates
relative to longer maturity rates has already occurred m
the Euro-dollar market. It is not clear, however, whether
there will be a lasting shift toward lower short-term rates.
As OPEC investors decide on more diversified investment
strategies and private lenders and borrowers adjust to t e
new patterns of lending, there may be little long-term
impact on the maturity structure of financial yields.
Furthermore, the drive to develop alternative sources
of energy will increase the demand for capital. Thus, despi
the prospect of huge OPEC surpluses, we look to a world
which is short of investment capital.
Indeed, the more difficult problem is to provide
increased domestic savings to finance our investment needs,
not to find profitable outlets for OPEC investments.

8

It would be virtually impossible to make additional
real transfers on the order of $50 to $80 from oil-consuming
to oil-producing countries over the space of a year.
This is due more to the lack of ability of the oil producers
to absorb quickly such a huge increase in real resources
than an inability of the oil-consuming nations to provide
these resources. This does not mean, however, that a
problem of overall payments imbalance need exist. The excess
of oil country receipts over their imports of goods and
services will be matched by an accumulation of financial
assets.
To the extent that these financial instruments have
competitive rates of return, their real economic value will
equal the aggregate current account imbalance between oilproducing and consuming nations.
(Where there is
concessionary financing, of course, accumulated assets will
be valued at less than the current payments imbalance.)
As was indicated above, there would be little problem with
the world’s financial markets providing attractive investment
opportunities such that OPEC producers can invest their oil
receipts in profitable investments. Over time as OPEC
absorptive capacity grows the accumulation of financial
assets by the oil producers could be expected to reverse
itself. Thus much of the real transfer of goods and services
in payment for oil would be deferred until later years when
the OPEC countries as a group become "mature creditors,"
absorbing a greater value of goods and services than their
current export receipts. The fact that transfer of real
goods and services would follow a different time pattern
than oil receipts would not imply that a balanced real value
of claims would not occur during the interim.
The lack of good assets for oil producers to invest
their receipts does not, however, imply that there may not
be serious problems associated with the current level of
oil prices.
For many countries increased oil payments represent an
intolerable tax on their meager resources, one which they
cannot reasonably be expected to pay either currently, or
in later years through commercial borrowing.
Likewise
increased oil prices have contributed severely to an already
unprecedented rate of world inflation. Solution to the
financial problems associated with the oil price increases
must not be confused with solution to the real underlying
economic problems. The resolution of such problems must
be in a lowering of oil prices.

9

It is essential that the oil-producing states come
to recognize that their own national interests lie in
lower oil prices, both in terms of their narrow self-interest
in maintaining their markets for future oil sales and
because of their stake in the operation of the international
economic system.
Current Recycling Problems
The sudden appearance of large OPEC surpluses has
created strains on the banking system.
But these strains
have induced the banks and other financial institutions
to devise new methods and new techniques which enable them
to cope with most of the problems. The system is in no
real danger. We must be sure that regulatory and
supervisory authorities in the various countries watch
carefully to guard against mismanagement and speculative
excesses by banking institutions. The Comptroller of
the Currency is expanding the examination of international
banking operations. The German authorities, who had earlier
established new procedures and guidelines to limit foreign
exchange transaction by banks have established a ’’liquidity
bank” and have proposed legislation to revise certain
banking laws.
We must make sure that our procedures for assuring
the liquidity of our financial systems are effective.
Central bankers from the major countries announced last
week that this is being done.
We have no indication that the banks cannot handle
the intermediation problem. As their financial assets grow,
many of the oil-producing countries are coming to realize
that they will not be able to use their money for goods and
services in the near future and that they would be well
advised to place these funds in longer-term maturities/
We have already seen some indications that a significant
portion of the funds being placed with the banks is going
into medium-term time deposits and certificates of deposit.
As time passes we expect the financial system to
adapt to the increased volume of oil-producer surpluses
and new investment channels to be opened up through which
funds can be recycled. The Euro-currency market apparently
continued to expand very rapidly through the early part
of the year.
In the last few months, however, its overall
growth appears to have leveled out. While partly a
reflection of factors unrelated to oil payments, this may
also be due in part to the banks encouraging OPEC lenders
to go elsewhere. There will, no doubt, continue to be strains
on the system but we see no reason why these strains cannot
be dealt with. The system remains sound.

10

At the same time it must be recognized that the
longer the OPEC surpluses (and, consequently, the oil­
importing country deficits) continue, the more difficult
it will become for countries in a weaker financial position
to borrow through the private markets.
Both Italy and the United Kingdom are currently
experiencing very large current account deficits, deficits
which are only partially attributable to the oil price
increase. Recently, the Italians have had some difficulty
in finding financing through the private markets which
would be adequate to meet their needs and they have turned
to the IMF and to their EC partners for help. The United
Kingdom has undertaken some official and quasi-official
borrowing in the international capital market but has not
had any difficulty in attracting enough foreign capital
to meet its financing requirements.
With these countries as with others, however, the
ability to obtain financing from private sources will depend
heavily on the private market's assessment of the countries'
economic outlook.
If the private markets are convinced
that the governments of these countries are moving resolutely
to reduce inflation and to eliminate deficits other than
those attributable to the petroleum price, they should be
able to find financing.
There are a number of developing countries whose
prospects even before the oil price increase were such that
they had little or no recourse to private markets. Some of
these countries have been very seriously affected by the
oil price increase and it is going to be necessary for
governments to focus urgently on this problem. A ministerial
committee will be established through a joint resolution of
the IMF and the IBRD at the end of this month. One of its
first tasks will be to seek a solution to the problem of
these most seriously affected countries.
Outlook for Oil-Importing Countries
The oil price increase has radically transformed the
balance of payments prospects of most of the major industrial
nations in the world as well as many developing countries.
Nations which have been accustomed to trade and service
surpluses and net capital exports now find themselves faced
with heavy trade and payments deficits and a need to borrow.
The size and speed of the required adjustment will cause
economic strains and political pressures. There will be a
temptation for each country to attempt to improve its position.

11
Thus there is a danger of resort to "beggar thy neighbor"
policies. Fortunately, this danger is fully recognized
by the governments of these nations. The 24 members of
the OECD last May undertook a pledge to refrain from the
introduction of new trade measures which would either
restrict imports or subsidize exports. The IMF has
invited all of its members to undertake a voluntary pledge
to refrain from trade measures for balance of payments
purposes. These are healthy indications of the widespread
recognition of the dangers and o£ a determination to resist
the pressures for mutual damaging policies. The United
States will be exerting every effort to prevent the
adoption of mutually damaging policies.

0 O0

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CBS News: "Simon Responds to Criticism"

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1974-09-19

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DepartmentoftheTR[fl$llIf Y
iSHINGTON, D.&20220

TELEPHONE W04-2041

FOR IMMEDIATE RELEASE

September 20, 1974
Contact: 964-2108

OES CONSIDERS FURTHER ACTION FOLLOWING
COURT DECISION IN CALIFORNIA WAGE CASE
The Treasury Department*s Office of Economic Stabilization
and the Justice Department are considering further actions that
may be taken following the decision by the United States
Temporary Emergency Court of Appeals on September 19, 1974 in
the case of the United States vs» State of California.
The Court ruled that the Office of Economic Stabilization,
Department of the Treasury, the successor to the Cost of Living
Council, cannot prevent the State of California from paying its
approximately 180,000 employees salary increases for work
performed during the period July 1, 1973, through April 30, 1974,
even though retroactive payment of these salary increases would
violate the terms of decisions issued by the Cost of Living
Council.
Among the actions the Office of Economic Stabilization
and the Justice Department, could seek is final resolution
of the issue by the Supreme Court.
The T.E.C.A. decision will not become effective for at
least 30 days. During this period, the regulations and decisions
issued by the Office of Economic Stabilization, the Cost of
Living Council, and other agencies of the Economic Stabilization
Program will remain in effect.
The regulations provide that it is unlawful for wages and
salaries to be paid retroactively for work performed on or
before April 30, 1974, except as permitted under the Economic
stabilization Program rules that were in effect at that time.

oOo
WS-109

ofthefREASURY

Department
jSHINGTQN, DX. 20220

TELEPHONE W04-2041

EMBARGOED FOR RELEASE UNTIL
3:30 P.M., EDT, MONDAY, SEPTEMBER 23, 1974

REMARKS OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE 1974 WORLD ENERGY CONFERENCE

q p p r TAT FVFNT

COBO ARENA, DETROIT, MICHIGAN
MONDAY, SEPTEMBER 23, 1974
It is an honor and indeed a great personal pleasure for
me to welcome delegates and distinguished guests participating
in this vital session of the World Energy Conference.
All of us are here today, not merely as representatives
of our respective countries, but as representatives of the
world community. We share a single purpose: the task of
developing policies that will enable man to satisfy his vital
energy needs. In reflecting on what the environmental, the
economic, and indeed the human cost of energy will be, we can
no longer limit ourselves to the boundaries of our individual
countries.
There is, indeed, a ripple effect in fulfilling the world’s
energy needs^. Decisions made in one country affect the very
fabric of life throughout the rest of the world. Such decisions
demand a continuing spirit of cooperation among the countries
of the world. By building an international framework of
cooperation among nations, I am convinced that we can overcome
the problems that face all of us in the energy area today, and
establish a permanent and equitable structure for world-wide
economic development.
As we discuss various phases of energy policy today, I
think it is important to recognize that the root of our current
problems lies within ourselves -| within our past failures to
acknowledge and act in accordance with our mutual interdependence.
There are several specific areas in which we have so failed.
an individual basis, we here in the United States and decision
makers in other industrialized nations have abused our energy
resources. Shortsightedness has lulled us into believing that
°ur abundant and cheap energy supplies could continue indefinitely,
and so we have failed to come to grips with the rate of growth
°i our people’s energy demands. We have failed to develop our

ws-no

2

own domestic energy resources adequately, and have leaned
instead upon those of other nations. As a group, all of us
have failed to coordinate national energy policies.
Incredible
as it seems, we have not even adequately discussed their
interrelations at high political levels. In fact, in the
energy area, we are only now beginning to collect adequate
information and data on world demand and supply, oil supply
arrangements between consumer and producer nations, and future
prospective resources, so that we can adopt realistic energy
policies.
Because of all these failures, we now find ourselves at a
crossroads. We are faced with hard choices that will influence
all future generations of the modern world we live in. As a
great statesman of our nation once pointed out, those who ignore
the lessons of the past are doomed to relive them. Let us,
instead, learn from the past, and forge together a new atmosphere
for orderly world economic growth. We must commit ourselves to
work against unconstrained bilateral arrangements which will,
in the long run, defeat the very goals we agree on. We must,
henceforth, work always within the umbrella of international
cooperation.
At this conference we will be sharing in a unique perspective
on the components that make up the energy challenge. I think it
is essential that we focus on a number of interrelated issues:
The proper balance between our respective needs for
adequate supplies of energy and our common environmental goals;
The availability of oil and natural gas resources, and
the role these energy sources should play in our world energy
outlook;
The promise offered by the world’s massive coal resources
that hold forth to us all a whole system of alternative energy
sources ;
Nuclear power, and the role it will play now and in the
future;
And, as I have already indicated, the international aspec
of our common energy future -- the inescapable fact that we can
no longer think of developing only ’’domestic” energy policies.
We must evolve a world approach.
Throughout our discussions, I think it is important to
focus on how we can match the international dimensions of the
energy challenge with international opportunities, not just to
the industrialized nations, but for the entire world communityOur energy problems will demand more of us all: more of our
technology, of our science, of our economics, of our natural
resources, and of our human spirit.

3

i

One important thing to emphasize is that last winterfs
embargo only highlighted a problem that has been developing
for a generation -- and gone practically unheeded in the
United States - - b y our Government, by our private sector,
and by our people. This is despite the fact that for two
decades we have had a succession of warnings: hearings before
our Congress, alarm from our industry, and analyses by the
world scientific community that we were moving on a collision
course with future realities.
We were fortunate in the United States that the embargo
occurred at a point in time when we were not yet irretrievably
reliant on foreign supply. The U.S. is still 85 percent
self-sufficient in energy. Our domestic situation was grave,
but not impossible.
I
am concerned, however, that many of us may forget too
quickly. It’s always easy to get action during a crisis.
It's not so easy to get response when crisis is behind you.
We simply cannot afford to forget that the problem is still
with us. And so, the thrust of our efforts in the U.S. is
towards energy self-sufficiency.
As you all know, we have called this effort Project
Independence. It is designed to ensure expansion of our
domestic energy production, so that we will no longer be so
helpless in times of economic disruption, or the threat of
such disruption, from a sudden curtailment of vital energy
supplies.
We are doing this in several ways. First, we are
proceeding to reduce waste through energy conservation programs.
Our growth in energy demand must be at least halved over the
next twenty years, from a four to five percent annual rate, to
f.two or three percent rate. It will not be easy, but we believe
this can be done without disrupting orderly economic growth.
Second, we must stimulate the development of domestic energy
resources. We must accelerate the development of oil and
natural gas, boost coal production, and bring on-line coal
liquefaction and gasification capacity. We must develop the
promise of our vast oil shale reserves, and expand our use of
nuclear and geothermal power.
We must develop a coordinated, realistic program to
accomplish all of this -- not only because it will increase our
se ^'Sufficiency, but because the oil-producing nations are
watching. It will indeed be noticed that we are willing to
maxe the necessary decisions to achieve a more balanced
international bargaining relationship.

4

As a first step, we must begin an all-out effort to
remove the Government-imposed restraints which have curtailed
our domestic industry’s efforts in recent years. Despite the
best intentions of the draftsmen of the Government’s past
policies, we continue to pose the major obstacles to the
short and medium-term efficient market allocation of energy.
We regulate the price and distribution of natural gas; we
manipulate the pricing and distribution of oil; we have created
a Frankenstein of administrative delay in the obtaining of
licenses and rate changes. In our enthusiasm to make good
after generations of neglect, we have imposed severe
environmental restraints upon both the production and combustion
of fossil fuels, before knowing as much as we should about not
only their need, but their ultimate effects.
All of these efforts must be reexamined. In addition, as
we develop our long-range energy policies, we must set some
short-term goals. These must be clearly understood, and
explained at each step not only to the American people, but to
the entire world. I believe this framework should involve
several major areas of action, including a comprehensive
legislative package, changes in existing regulatory procedures,
and conservation efforts.
First, we must make an all-out attempt to produce
additional supplies of oil. This production could be developed
through a variety of measures: We could open Elk Hills and
Naval Petroleum Reserve #4 to higher levels of production,
re-open the Santa Barbara Channel to production under strict
environmental controls, reevaluate upward the maximum effective
rate for certain oil fields, and increase secondary and tertiary
recovery efforts from existing fields.
Second, we must each renew our individual commitments
as citizens to conserve energy and reduce our overall consum ption
Third, we must move towards removal of restrictive
price controls from oil and natural gas, and phase out price and
allocation programs which have so disrupted marketing patterns.
We could begin by reducing the amount of our domestic crude
production subject to such controls, but this would be just an
interim measure. Ultimately, these controls must go if we are
to have a domestic production market with maximum incentives to
increase our daily output.

5
Fourth, we need to greatly accelerate Federal
leasing programs for both oil and coal.
■" Finally, and related to all of these, we must develop
energy legislation and work closely with the Congress to ensure
that it’s enacted.
I believe the time has clearly come, for
instance, for a statement of National Energy Policy, in an Act
patterned after both the National Environmental Policy Act
of 1969 and the Mining and Mineral Development Act of 1970.
We can no longer afford to treat energy considerations on an
ad hoc basis, and put out brush fires only after they have
begun to affect vital national interests. Energy considerations
should be geared into all our federal efforts, and I will
propose this to the President for inclusion in a legislative
package.
At the same time that we develop this short range program,
we must look towards increased coal production, and work to
make gasification and liquefaction of our coal and oil shale
reserves on a commercial scale a reality.
With one trillion, 500 billion tons of identifiable coal
reserves, we possess half of the free world’s known reserves-one-third of which is economically recoverable today.
By the same token, we have an estimated one trillion,
800 billion barrels of oil locked in the shale of our Western
States. That is enough to meet our total needs for decades
to come.
It is up to the Federal Government and private industry
to bring the promise of these reserves into the market place.
Nuclear power today provides about the same amount of
the Nation's energy as firewood.
It's time to accelerate the
development and use of this important source.
It's only through a concentrated effort on all these
fronts that we can achieve the ability for self-sufficiency.
You will note that I said the "ability" for self-sufficiency.
That does not mean that the United States will not continue
to import. In fact, our program is based on the assumption
that we will import. However, our reliance will not be such
that we will have to depend on one set of suppliers.

6

Seen in this way, I do not view Project Independence as
a move toward autarchy but rather as part of a worldwide effort
to bring greater balance to world energy supply and demand.
We all live in an energy interdependent world, and we in the
United States see Project Independence as a means to reduce
our own call on oil available to the international market.
As we begin our panel discussion, I would stress that
we are facing a dramatically changed energy scene in the world
of the future. The present condition is unstable, and the
short-term gains of wealth and power which some are experiencing
are already proving undesirable in the longer scheme of affairs
The world is reacting to current prices by cutting consumption,
and expanding productive capacity of energy. For instance,
outside of the OPEC countries, there are renewed efforts
for oil and natural gas:
The North Sea, in spite of the hazardous drilling
conditions, yields new additions to proven reserves each
month, and promise of even greater finds.
Southeast Asia, while it is still in the first
generation of exploration, has great promise of new supplies.
Recent discoveries in West Africa have demonstrated
great supply potential.
And within our own hemisphere, Mexico has made
dramatic finds that will literally re-vitalize their oil
industry, and could lead to surpassing the production level
of the late 1920’s.
Thus, the short-run actions of some oil exporters have,
in fact, insured that the value of oil in the ground will
fall over the next decade. We may be able to do a lot by
governmental regulations and cooperation, but we cannot
repal the law of supply and demand.
Today, however, we must recognize that the present price
levels present grave potential economic problems not only f°r
consuming nations, but even more so for the producing nations.
No benefits derive for price levels which result in unemploy'
ment and inflation throughout Europe and Japan, and damage the
world economy as a whole. The international investments of
all nations are in jeopardy, and the old fable of the goose
that laid the golden egg can be seen developing in t o d a y ’ s
headlines and international cable traffic. Consumers now
suffer from the effects of the sharp and sudden upswing in
prices. Producers are likely to suffer at some later time
from the downswing in prices caused by the market’s strong
reactions t0 present high prices.
It is clearly in the best
interests of the oil producers that the world economy maintain
sound growth.

7
Prices lower than those being charged at present would
be in the economic interest of both producers and consumers.
High cost alternative sources would not then be encouraged to
so great an extent, while the producers can expect not merely
short term, dangerous and distortive national incomes, but
the more meaningful and truly valuable growth represented by
expanding economies which develop the capacity to absorb in­
creasing imports of capital and technology.
Ideally, what is needed is a diversity of consumers and
producers operating in a cooperative international framework.
Together, we can prevent unemployment. Together, we
can prevent a worldwide monetary crisis. Together, we can
maintain economic progress.
I believe there are grounds for optimism. The world has
the capacity and resources to meet our energy needs, and the
United States stands ready and willing to help build a structure
of international cooperation with producers and consumers alike.
Thank you.

0 O0

DepartmentoftheTREASURY
. • y <V.:.BUREAU OF THE MINT

îf

JBu I

WASH.. O.C. 20220 - W04-5011

FOR IMMEDIATE R E L E A S E

September 20, 1974

INSPECTION O F G O L D A T F O R T K N O X
The inspection by Members of Congress on September 23, 1974, of
U. S. gold stocks stored at the Fort Knox (Ky. ) Bullion Depository marks
a unique departure from the long standing and rigidly enforced policy of
absolutely no visitors, Mrs. Mary Brooks, Director of the Mint, announced
today.
"On April 28, 1943, President Franklin D. Roosevelt inspected the
Bullion Depository, " Mrs. Brooks said. "His visit was the one and only
time a gold vault was opened for inspection for anyone other than authorized
personnel.
"The Congressional inspection adheres to the new open door policy
of the government announced by President Ford. Treasury Secretary
William E. Simon issued the invitation to Congressmen to inspect the gold
at Fort Knox. By also inviting the press to witness the Congressional
inspection, the Mint is clearing away the cobwebs and re-assuring the
public that their gold is intact and safe. For the first time photographing
is being permitted inside the Depository. "
After the Congressional inspection, the Bullion Depository will once
again be closed to visitors.
On September 24, 1974, a special settlement (audit) is scheduled to
begin and at its conclusion a report on the audit will be issued.
The audit will be performed by a committee of auditors from the
U. S. General Accounting Office (GAO) and the Department of the Treasury.
The auditors from the Treasury will be drawn from the Office of the
Secretary, the Bureau of Government Financial Operations, the U. S. Customs
Service, and the Bureau of the Mint. In addition, the committee will include
technicians from the Bureau of the Mint who are trained in assaying and
weighing gold bullion.
The monetary gold stock of the United States totals 276. 0 million fine
troy ounces valued at $11.7 billion at the official rate of $42. 2222 per fine
troy ounce, and is stored in various federal depositories (table attached),
the largest of which is at Fort Knox, Kentucky. 147. 4 million fine troy
ounces, valued at $6. 2 billion, is stored in 13 vault compartments at the
Fort Knox Bullion Depository.
-oOo-

MONETARY GOLD STOCK O F THE UNITED STATES
(in m illio n s of ounces)
Account of th e U. S. T r e a s u r y
F o r t Knox

147.4

D enver M int

54. 9

New Y ork A s sa y O ffice

54.1

San F ra n c is c o A s s a y O ffice

10.6

FR B New Y ork - S pecial C ustody A cct.

4 .2

Bank of E ngland

1. 3

Bank of C anada

1 .4

O th e r

.1
274. 0

Exchange S tab iliza tio n Fund
T o tal

2. 0
276. 0

William E. Simon,
Secretary of the Treasury
Chairman

Washington, D.C.
September 20, 1974

Held at the Request of
President Gerald R. Ford and the Congress
of the United States

P a rticip a n ts
Financial Conference on Inflation
D r. Gwen B ymers

The Hon. W il l ia m E . S im o n
Secretary of th e T re a su r y

Washington, D.C.

P ro fe s so r a n d C h a irm a n o f th e D e ­
p a r tm e n t o f C on su m er E con om ics

Me. Edwin 6 . A lexander
President

Cornell University
Ithaca, New York

FirstS&L Shares, Inc.

Mr. R ichard P. Cooley

Denver, Colorado

P r e s id e n t a n d C h ief E x e c u tiv e Officer

Db. George L eland B a c h
Professor of E con om ics a n d P u b lic
Policy

StanfordUniversity
Stanford, California

Wells Fargo Bank, National Associa­
tion
San Francisco, California
Mb. H oward Coughlin

Office and Professional Em­
ployees International Union
NewYork, NewYork

P re sid e n t,
Mb. Robert H. B. B a l d w in
President, Morgan Stanley

pny, Inc.
NewYork, NewYork

& Com-.

The Hon. J ack F . B e n n e t t
Under Secretary o f th e T r e a s u r y fo r
Monetary A ffairs

Washington, D.C.
Mb. Robert H. B e t h k e
President

DiscountCorporationof NewYork
NewYork, NewYork
Mb. Archie R. B oe
Chairman of the B o a rd

AllstateInsurance Company
Northbrook, Illinois
Mb. Thomas R. Bomab

Federal Home Loan Bank
Board
Washington, D.C.
Chairman,

Mr. Morris D. C rawford, J r.
C h a irm a n o f th e B d a rd

Bowery Savings Bank
NewYork, NewYork
D r. R obert G. D ederick
S e n io r V ice P r e s id e n t a n d E c o n o m ist

Northern Trust Company
Chicago, Illinois
D r. R obert R ay D ockson

California Federal Savings
and Loan Association
Los Angeles, California

P re sid e n t,

D r. Otto E ckstein
P re sid e n t, Data Resources, Inc.
P ro fe s so r o f E con om ics, Harvard Uni­

versity
Cambridge, Massachusetts

The Hon- Arthur F. B urns

Mb. Gilbert R. E llis

Board of Governors of the
Federal Reserve System
Washington, D.C.

Household Finance Corporation
Chicago, Illinois

Chairman,

C h a irm a n

iii

Dr. Grover W. E nsley

Mr. Milton J. H ayes

E x e c u tiv e V ic e P r e s id e n t

C h a irm a n

National Association of Mutual Sav­
ings Banks
NewYork, NewYork

Government Fiscal Policy Committee
Independent Bankers Association of
Ameifica
C o n su lta n t, American National Bank
of Chicago
Chicago, Illinois
Mr. M. R. H ellie

T h e H on. E dgar R. F iedler
A s s is ta n t S e c r e ta r y o f th e T r e a s u r y
f o r E con om ic P o lic y

Washington, D.C.
H. F ranklin
Caterpillar Tractor Com­

Mr. W illiam
C h a irm a n ,

pany
Peoria, Illinois

P r e s id e n t

Credit Union National Association,
Inc.
Washington, D.C.
Mr. R ichard D. H ill
C h a irm a n o f th e B o a rd

C h a irm a n o f th e B o a rd

First 'National Bank of Boston
Boston, Massachusetts

The First National Bank of Chicago
Chicago, Illinois

C h a irm a n

Mr. Gaylord F reeman

D r. T ilford

C. Gaines

S e n io r V ice P r e s id e n t a n d E c o n o m ist

Manufacturers Hanover Trust
New York, New York
T h e H on . Stephen S. Gardner
D e p u ty S e c r e ta r y o f th e T re a su r y

Washington, D.C.
Mr. B ay Garrett, J r.
C h a irm a n

Securities and Exchange Commission
Washington, D.C.
Mr. R ichard G. Gilbert
P re sid e n t

Citizens Savings Association
Canton, Ohio

Mr. J. H enning H illiard

J. J. B. Hilliard, W. L. Lyons, Inc.
Louisville, Kentucky
Mr. F rank J. H oenemeyer
E x e c u tiv e V ic e P re sid e n t

Prudential Insurance Company of
America
Newark, NewJersey
T h e H on. E rnest F. H ollings
U n ite d S ta t e s S e n a te

Washington, D.C.
T h e H on. J acob K. J avits
U n ite d S ta t e s S e n a te

Washington, D.C.
Mb. P aul R. J udy
C h a irm a n a n d P re sid e n t

A. G. Becker & Company, Inc.
Chicago, Illinois

Mr. Alan Greenspan

Mr. H arvey E. K apnick , Jr.

C h a irm a n

C h a irm a n a n d C h ief E xecutive Officer

Council of Economic Advisors
Washington, D.C.
Mr. D avid B. H arper
P r e s id e n t

First Independence National Bank
Detroit, Michigan
D r. Gabriel H ague
C h a irm a n

Manufacturers Hanover Trust
New York, New York
IV

Arthur Andersen &Co.
Chicago, Illinois
Mr. Louis O. K elso
G en eral C ounsel

Bangert &Co., Inc.
San Francisco, California
Mr. W. J. K ennedy, III

North Carolina MutualLife
Insurance Company
Durham, North Carolina
P ré sid e n t,

Mb. Ralph F. L eaoh
Chairman of th e E x e c u tiv e C o m m itte e

Guaranty Trust Company
NewYork, NewYork

Morgan

Mb. Gustave L. L evy

¡Partner

'Sachs and Company
NewYork, NewYork
I the Hon. B u ssell B. L ong
Goldman,

United States S en ate

Washington, D.C.
Mb. Bbuœ K. Mac L aury
President

Washington, D.C.
T h e H on. W right P atman
U .S. H o u se o f R e p r e s e n ta tiv e s

Ms. Sylvia P orter
S y n d ic a te d F in a n c ia l C o lu m n ist

NewYork, NewYork
Mr. George B. P reston
P r e s id e n t

U.S. League of Savings Associations
Washington, D.C.
Mr. D onald T. R egan
C h a irm a n o f th e B o a rd

'Federal Reserve Bank of Minneapolis
Minneapolis, Minnesota
Db. Paul W. M cCra cken

Merrill Lynch, Pierce, Fenner and
Smith, Inc.
NewYork, NewYork

,Senior Consultant, D e p a rtm e n t o f th e
Treasury

T h e H on . H enry S. R euss

Washington, D.C.

Washington, D.C.

Mb. Rex J. Morthland

IPresident, American Bankers AssociaI tion
IChairman, The Peoples Bank and
I Trust Company
Selma, Alabama
Mr. J ames J. N eedh a m

IChairman of th e B o a rd
NewYorkStockExchange
[NewYork, NewYork
Mr. H erman N ick er so n , J r .
¡Administrator

National Credit Union Administration
Washington, D.C.

U.S. H o u se o f R e p r e s e n ta tiv e s

T h e H on. J ohn J. R hodes
U .S. H o u se o f R e p r e s e n ta tiv e s

Washington, D.C.
Mr. D avid R ockefeller
C h ase M a n h a tta n B a n k ,

National As­

sociation
NewYork, NewYork
Mr. R obert V. R oosa
P a r tn e r

Brown Brothers Harriman and Com­
pany
NewYork, NewYork
T h e H on. W illiam Y. R oth
U n ite d S ta te s S e n a te

IDb. Arthur M. O k u n
ISenior Fellow

Washington, D.C.

ITheBrookings Institution
[Washington, D.C.

Mr. R alph S. iSaul

[Dr. J ames O’L eary
Vice Chairman

Insurance Company of North America
Philadelphia, Pennsylvania

|Ü-S. Trust 'Company
[NewYork, NewYork

P r o fe s s o r E m e r itu s o f E con om ics

p Ib. J.

Charles P artee

iManapinsr D irector, Office of Research
I andEconomic Policy
poardof Governors of the Federal Re­
serve System
[Washington, D.C.

V ice C h airm an

D r. R aymond J. S aulnier

Barnard College, Columbia University
NewYork, NewYork
Mr. W alter S cott
A s s o c ia te D ir e c to r

Office of Management and Budget
Washington, D.C.
y

T h e H on. George P. S hultz

T h e H on. F rank W ille

E x e c u tiv e V ice P r e s id e n t

C h a irm a n

Bechtel Corporation
San Francisco, California
Th e H on. J. W illiam S tanton
U .8. H o u se o f R e p r e s e n ta tiv e s

Washington, D.C.
Mb. R obebt H. S tewabt III
C h airm an o f th e B o a rd

First International Bancshares, Inc.
Dallas, Texas
Mb. T homas I. Stores
C h a irm a n o f th e E x e c u tiv e C o m m itte e

North Carolina National Bank
Charlotte, North Carolina
Mb. J ohn T omayko

Federal Deposit Insurance Corpora­
tion
Washington, D.C.
Mb. C. P. W ilson
C h a irm a n o f th e B o a rd and Director

Robert W. Baird and Company, Inc.
Milwaukee, Wisconsin
Db. Albert M. W ojniloweb
V ice P r e s id e n t a n d Economist

The First Boston Corporation
NewYork, NewYork
Mb. J ohn W. W eight
P r e s id e n t

Wright Investors’ Service
Bridgeport, Connecticut

D ire c to r

Insurance, Pension and Unemploy­
ment Benefits
United Steelworkers of America
Pittsburgh, Pennsylvania

Mb. W alter W biston

T h e H on. Chabls E. W alker

Db. C harles J. Zwick

P r e s id e n t

P r e s id e n t

Charls E. Walker Associates
Washington, D.C.

VI

C h a irm a n

First National City Bank
NewYork, NewYork
Southeast Banking Corporation
Miami, Florida

A M andate T o F ig h t In flatio n
The Financial Conference on Inflation held in Washington on Sep­
tember 20,1974, was one of a series o f meetings leading to the Confer­
ence on Inflation, September 27-28, 1974. The sessions were designed
to call forth the ideas of concerned individuals from all sectors of
American society. It was the response by President Ford and the Con­
gress to the Nation’s first domestic priority—a mandate given by the
people to discuss problems and explore solutions regarding our eco­
nomic realities.
The Financial Conference drew together representatives from gov­
ernment, the banking and investment community, labor and con­
sumer interests as well as professional economists. Explaining the
areas under consideration, Treasury Secretary William E. Simon
stated in a letter to participants that “special emphasis will be devoted
to fiscal and monetary policy, the capital markets, the international
situation and financial institutions.”
Moreover, the Secretary indicated that the topics to be dealt with
included productivity, the condition of stock and bond markets, credit
and interest policies and the international movement of money in and
out of the country.
“The Conference on Inflation is a bipartisan effort to deal with
our number one domestic problem,” President Ford has stated, recog­
nizing that this mandate, whether expressed in the opinion polls or
communicated to Congressmen, is the urgent call and desire on the part
of the American public for action to curb inflation. “To restore eco­
nomic confidence,” the President said in his initial message to Congress
and the people, “the government in Washington must provide leader­
ship.” Expressing his expectations for the conference program, Mr.
Ford remarked, “We need to have attainable answers sharply defined
and carefully sorted out with all the pluses and minuses of each clearly
stated.”
And in taking up this theme, Secretary Simon wrote, “We are anx­
ious to have thinking on this, the Nation’s number one problem—on its
causes, its effects and its cures . . . I am confident that we in govern­
ment will benefit from this advice and discussion.”

vii

I

i

Table o f Contents
Page

I. Agenda---------------------------- ------------------------------------II. Introduction by the Secretary of the Treasury-----------I III. Opening Statements:
Briefing by the Council of Economic Advisors---------Briefing by the Office of Management and Budget—
Briefing by The Federal Reserve Board-----------------Opening Statements from Delegates----------------------I IV. Fiscal Policy:
Discussion Papers from Delegates--------------------------Conference Proceedings----------------------------------------I V. Monetary Policy:
Discussion Papers from Delegates--------------------------Conference Proceedings_________________________
I VI. Capita] Markets and Capital Formation:
Discussion Papers from Delegates--------------------------Conference Proceedings__ ________________________
IVII. International Economic Policy:
Discussion Papers from Delegates--------------------------Conference Proceedings___________________________
will. Financial Institutions and Inflation:
Discussion Papers from Delegates--------------------------Conference Proceedings____________
IIX. Wage-Price Policy:
Discussion Papers from Delegates_________________
Conference Proceedings___________________________
I X. Other Suggestions to Fight Inflation :
Discussion Papers from Delegates_________________
Conference Proceedings___________________________
I XI. Summation______________________________ ________
IXII. Pictures and Biographies of Conference Participants—
t i l l . Addendum________________________________________ *_

3
7
13
21
35
41
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285
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309
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327
347
355
359
399

I.
Agenda

A gend a fo r Septem ber 20
Financial Conference on Inflation

8:15 a.m.

Introduction—The Honorable William E. Simon,
Secretary of the Treasury

8:25a.m.

EcoTiomic Situation and Policy Briefing—The Honor­
able Alan Greenspan, Chairman, Council of Economic
Advisers

8:40a.m. Briefing on the Budget—Walter Scott, Associate Direc­

tor, Office of Management and Budget
8:55 a.m.

9:10a.m.
JlO:30a.m.
■10:40a.m.
■12:30p.m.
11:30p.m.

■2:10 p.m.

2:40 p.m.

Federal Reserve Board Briefing—The Honorable Arthur
Burns, Chairman, Board of Governors of the Federal
Reserve System
Rownd Table Discussion (3 minutes for each conferee)
Coffee Break
Round Table Discussion ( continued)
Limch
Fiscal Policy To Deal W ith Inflation
Major Fiscal Objectives and Options for Fiscal Years
1975,1976, and Beyond
Possible Cuts in Federal Spending
Possible Changes in Federal Taxation: Current Levels,
Incentives, Deterrents, Equity
Monetary Policy To Deoil W ith Inflation
Current State of Domestic Financial Markets
Current Monetary Policy: Given the Circumstances, is
It Too Tight, About Right, or Too Easy ? What Should
the Future Course o f Monetary Policy Be?
Capital Markets and Capital Formation
Discussion of the Dimensions of Future Capital Require­
ments in an Inflationary Economy
—Policies To Increase the Total Volume of Saving and
Investment
—Policies To Insure Adequate Financing Through the
Equity and Long-Term Debt Market

3 :30 p.m.

4 :00 p.m.

International Economic Policy and Inflation
Discussion of the Appropriate U .S. Role in International
Economic Policy
International Financial Aspects of World Inflation
Fina/ncial Institutions and Inflation
Possible Changes That Should Be Made in Laws and
Regulations Affecting Financial Institutions To Assist
in the Fight Against Inflation

4 :30 p.m.

Wage-Price Policy To Deal W ith Inflation
How Should the Wage-Price Monitoring System Be
Operated ?

5 :00 p.m.

Other Suggestions To Combat Inflation

5 :30 p.m.

Conchidi/ng Remarks

6 :00 p.m.

Adjournment of Formal Session

4

I.

Introduction by the
Secretary of the Treasury

INTRODUCTION

The Honorable William E. Simon
Secretary of the Treasury
SECRETARY SIMON: Ladies and gentlemen: I think we better
getgoing.
It is indeed a pleasure to welcome you to this Financial
Conference on Inflation.
My opening remarks will be brief. Along with the public,
we,in Government, are here to listen and learn. There is no
needfor me to stress the importance of our deliberations. The
continuation of current high rates of inflation will wreak
havoc in our country. We must prevent that. We are going to
prevent that.
But, even when we have put the worst of present inflation
behindus, our banking and financial system will face some old
problems and many new challenges.
We have asked you here today to explore these issues, and
consider how the banking and financial communities can best
serve the interests of the American people.
We are grateful that you have responded.
Strong economic performance obviously depends on the con­
tinued smooth and reliable functions of our financial markets
andfinancial institutions.. which I have always felt are the
centerpiece of our free enterprise economy.
Borrowers, both here and abroad, depend on our markets and
ourinstitutions for the funds that are essential to carry on
economic activity. Savers, both private and institutional,
lookto our markets for secure and profitable investment oppor­
tunities.
Our financial markets are large, and they are efficient,
institutions are carefully regulated and the
public's deposits are insured. There are many elements of
strength in our financial picture.
k

7

Yet, we know that the current inflation is placing great
strains upon our financial markets and institutions. Interest
rates have been driven to unparalleled heights. Our equity
markets have fallen off sharply.
Some sectors of the economy, especially housing, find the
availability of credit sharply reduced. And, above all, there
has been a continuing erosion of financial confidence.
All of these disturbing developments are due, in the
final analysis, to our failure to deal successfully with
inflation.
The United States, as we all know, has no monopoly on
the problem of inflation. Even among the major industrial
nations, price levels have been rising at rates that only a
few years ago would have been assumed to apply to seme coun­
tries with less well-disciplined and developed institutions for
the management of their economic policies.
The rate in which the purchasing power of money has been
depreciating here and abroad is constituting a grave threat, not
only to the orderly economic progress, but even to our liberal,
social and political institutions.
No group in our society is more acutely sensitive to these
dangers than the leaders of our financial community. The pres­
ent inflation has, of course, been aggravated by special
factors which are very familiar to all of you: the explosion
in oil prices, the devaluation of the dollar, the simultaneous
boom in all the industrialized countries and removal of wage
and price controls which brought the inevitable bulge. Indeed,
about one-half of our current inflation can be explained by
these special factors.
We also know, however, that how explosive the effects of
these special factors turn out to be depends heavily on the
existence of generalized inflationary pressures in our economy.
A generally stable economy can absorb shocks, much more readily
than an economy already tightly stretched.
Unfortunately, most major industrial nations have been
stretching for some time to maintain high rates of growth, and
minimal levels of unemployment. These are commendable objec­
tives but their unswerving pursuit has left more countries very
susceptible to inflation.
In most nations, general economic policies have been too
inflationary.

8

In the most recent period, for example, of the 24 OBCD
countries, twenty of them had budget deficits. These deficits
at a time of generally heavy demands on general productive
capacity had to be financed and these financing requirements
tended to force excessively explosive monetary and credit
policies.
The record of the last two years is not a good one^ if high
rates of inflation are disturbing, the wide variations in rates
of inflation internationally carry with than a measure of hope.
They suggest that this Nation is not helpless on a sea of world
inflation.
Good policies still pay off. Nations that have pursued
this inflationary policy have lower rates of inflation. We
are, of course, heavily influenced by world events. But, we
can, by the patient and prudent management of our economic
policies reduce our own rate of inflation and we then eliminate
the malignant tendencies at home for prices to rise because
prices are rising as the inflation feeds on itself.
We have, I believe, an unparalleled responsibility, but
we also have an opportunity.
We have more scope than any other Nation to deal with our
domestic inflation. And the difference between a good and a
poor U. S. performance in regaining economic stability will pro­
foundly affect the course of the world economy and its social
and political institutions for years to come.
The economy, however, is no machine with dials and levers,
marked fiscal or monetary or other policies. Economic policy
is not just a matter of mechanics or algebra. Policies must be
implemented through our democratic institutions. They must,
therefore, have the consent of our free people. And this
requires that all of us feel and have a sense of involvement in
the shaping of those policies which so profoundly influence our
own lives.
I, therefore, welcome you to this meeting in this spirit.
Our problems are complex. There are no instant solutions.
Yet we can still be masters of our fate.
The capacity of a free people to find and implement solu­
tions must never be sold short.
And the shape of democratic institutions here and abroad
will be profoundly affected by our success in this quest for
economic stability and, therefore, by our deliberations here
today.
I would now like to call on Allen Greenspan who will give
us a briefing on the state of the economy and the outlook.

9

BRIEFING BY THE COUNCIL OF
ECONOMIC ADVISORS

MR. GREENSPAN:

Thank you, Mr. Secretary.

What I ’d like to do is just briefly review what
I think is going on in the economy generally, and how
its interfacing with the financial system at this
point, and why w e ’re seeing in a sense some very
extraordinary strains emerging in both areas.
In fact, what we're observing at the moment are
the impacts of inflation holding down economic acti­
vity, in fact, suppressing it, and concurrently
causing considerable distortions and pressures and
strains in the financial structure.
What we are actually observing, of course, is
merely the process by which inflationary expectations
working their way into the decision-making process
tend to have extraordinary and almost unprecedented
impacts on some of our financial institutions and some
of the financial ratios which w e ’re used to looking
at.
One of the things one concludes, incidentally,
this is something which the Secretary said very early
°n !n
remarks, that w e ’ve had a taste of double
digit inflation in this country. We've had it for a
long time, too long a time, too many months.
And, what we must conclude from it is that our
system cannot take this indefinitely.
If you extrap­
olate the strains that we now already see as a con­
sequence of what we have for an extended period of
time, the institutions -- economical, financial,
structural -- begin to break down because they are
essentially constructed or have been developed over
the decades in the context of low, single digit
inflation, and it's by no means clear or had not been
clear, I should say, how significant this element
was until we actually have tested it, and having
^ested it, we found that it does not respond terribly

13

Clearly, we see -- I don’t have to go through
examples, I'm sure that all of you are most familiar
with all of the various problems that each and every
institution is having, but that clearly the savings
and loans are under extraordinary pressure; insurance
companies, banks, business -- especially smaller
business -- were having difficulty getting financing.
The system clearly does not work well under
these conditions.
Now, when you look at the impact of inflation­
ary expectations on the physical aspects of the
economy, what you see is that consumers who essen­
tially tend to pull back when they are confronted
with inflation are doing precisely that.
Whenever you have a household which is caught up
in inflation and in fears of being able to make ends
meet, grave concerns about whether six months from
now the electric bills or rent or health costs to
life would be astronomical. What happens is if you
cannot plan your family expenses, you tend to hold
back on numbers of discretionary-type expenditures,
attempt to save more, and as a consequence, what
occurs is that the uncertainty generated in the
consumer markets as a consequence of this induces a
significant suppressing of consumer markets, and this
obviously is what we have been observing for too long
a period, and it is one of the major, if not the
major, element inducing the sluggishness in our
economy.
Inflationary expectations, however, do not work
symmetrically, and, in effect, tend to affect busi­
ness decisions in precisely the opposite manner.
What happens, of course, is that both plant and
equipment expenditures and inventory purchasing
under inflationary expectations tend to accelerate.
Now, while this certainly gives an aura of physical
volume strength in the economy, it is clearly an
artificial, unsustainable and not a very healthy form
of economic expansion.
Obviously, in the capital expenditures area,
when you have expected price increases, the impact
of this is largely to immediately cause expected
rates of return on new facilities to rise rapidly
and, as a consequence, the usual expenditure pro­
cedures that are involved in a company tend to un­
earth very large budget items, and this is what we
have seen in the last number of quarters.

14

If we take a look at capital appropriations,
they're just way above expenditures. Backlogs of
unexpended outlays are rapidly rising, even adjusting
for price change. This is even still true in the
electric utility area, where we've seen some very
dramatic curtailments of late.
In the inventory area, we see, of course, the
usual expected accumulation which occurred mostly
through 1973 and early 1974. As price expectations
grow, orders to basic materials producers went up
sharply, lead times on delivery stretched out very
sharply, and it's only now that we're beginning to
see some easing occurring in that sort of process,
largely because inventory levels have finally risen
in terms of day's supply or in any other measurer
to exceptionally high levels. And looking now at the
process of orders beginning to slip, you get that
sense that lead times are pulling in and the inven­
tory process is now turning over on us, and we're
beginning to see the usual signs of this sort of
inventory slippage which I think will proceed for a
while.
In fact, were it not for this still very buoyant
capital goods market, even with all of the retrench­
ments we're seeing, inventory liquidation could be
quite substantial. But because of the fact that a
very large block of the inventories in our system are
supported by the capital goods markets, the extent of
inventory retrenchment is likely to be held in check,
and as a consequence, the degree of physical volume
decline implied in the inventory sector is not — at
least as we can see it at this stage--of exceptional
concern.
Nonetheless, when you put all of these things
together, you do come out with an economy, an eco­
nomic outlook which is scarcely one that can be
described as buoyant.
On the contrary, it looks poor. The economy is
clearly soft and is softening, and one begins to see
the effects of the inflationary expectations them­
selves working the economy down in its rate of
growth and into something which is now pretty close
to the zero area, maybe a shade negative, so far as
the outlook is concerned.
Nonetheless, we still find extraordinary credit
I emands, and the reason we are, of course, is that
at is financed are current dollars and not physical
^uymg volume, and these numbers are really quite

15

And one of the difficulties we see, even as we
get that sense of ease, is that we have been finan­
cing the current dollar growth in our GNP in part
by reducing the liquidity of the business sector,
and concurrently, observing significant increases
in loan deposit ratios or other measures of illiq­
uidity in the commercial banking system.
If, in fact, one were essentially to project the
types of flows of funds which are implicit in what
we are observing so far as this last year or year
and a half is concerned, we rapidly get to a very
tight corporate liquidity, even worse than it is now,
and a very tight commercial banking system pressures.
And so what we're seeing is the economy is
attempting to adjust to this financial drain. There's
several incidental problems associated with these
financial difficulties.
For example, a very large
part -- in fact, recently almost all -- of inven­
tory growth and book financing of inventory has
reflected inventory profits, and even though these,
as you know, don't really create cash, our evidence
suggests that one, not only do corporations pay
taxes on these inventory profits and hence have a
drain out of their system, but it also looks as
though a substantial proportion are paying cash
dividends against this stuff which also must be re­
plenished in the financial system by borrowings.
So what we have seen in this type of problem
is that there is a sort of financial capacity on
growth which has sort of limited the dollar expan­
sion of our system if one looks in terms of business
and financial balance sheets.
And with this type of extraordinary inflationary
pressures, in a sense the inflation is eating up all
of the current dollar growth, leaving negligible or
even less than negligible amounts for real activity.
Nonetheless, the system, despite its strains,
is showing some very extraordinary flexibilities.
Conventionally, the normal period we expect that
small corporations and unincorporated businesses are
financed through larger companies.
We always find, for example, if you will look
at the receivables-payables balances of these cor­
porations and smaller businesses, there is always
a net lending from the larger corporation, to the
smaller corporation, or the unincorporated business.

16

It appears now that with the smaller companies
having difficulty borrowing that part of a very
heavy loan demand that we see at the larger banks is
reflecting the phenomenon of large corporations
acting as so-called financial intermediaries to
supply funds basically to their customers.
It's the type of sort of semi-emercengy type
that one sees in an extraordinarily complex
financial system that we have. And even though
there are strains, pressures and the like, and ob­
viously numbers of changes that probably are required
as far as structural, financial reform, it is still,
nonetheless, truly remarkable how efficient the
structure and the system is working, even in the
fact of this extraordinary pressure.
flexibility

But you cannot expect it to go on. You cannot
expect that the system will function in a continuously
viable way under the conditions that we now have
with respect to inflation.
And this is all the more reason why inflation
which has been a major public enemy number one to
virtually every sector of the economy that one can
imagine -- it finds its way in every nook and corner
of our system and it is clearly causing great struc­
tural problems in our economy and in our financial
system, which is one of the basic reasons why we
really have no choice. We cannot live with inflation.
It’s not a fact of saying, "Well, here it is,
let's try to find the mechanism to deal with it."
I don't think we've got that choice, at least in the
short run. We may in the longer run.
There are a number of notions about indexing
and a variety of changes which might conceivably
make large changes, but that's something that's in
the future. You can't get diere from here.
And the only way to restore a basic balance
is largely and in fact essentially to bring down
the inflation rate back to more normal dimensions.
I don't see any alternative to that.
I wish there
were, but they're not so far as I can see, and
therefore, this is the reason why I think that the
priority of curtailing the inflationary load in
our system is extremely high, and the sooner we
resolve this problem, the better. Thank you,
Mr. Secretary.

17

m.
Briefing by the Office of
Management and Budget

BRIEFING BY THE
OFFICE OF MANAGEMENT AND BUDGET

SECRETARY SIMON: Now Walter Scott, the
Associate Director of the Office of Management and
Budget will brief us on budget policy. Wally!

I
I

MR. SCOTT: Clearly, fiscal policy is one of the
key tools of the Federal Government we must employ in
terms of facing up to the challenge of inflation.
Following luncheon today we'll be looking in greater
depth in an open discussion. At this time what I'd
like to do is try to provide you with a rather simplified understanding of the nature of the expenditure side of the budget, where we are in it, how we
got there. Hopefully, this background will give you
a little sense of the political and practical re­
alities that we must face up to if, in fact, we are
to make major cuts in the budget this year as well as
next year.
And in saying this, it's not my intent to suggest
that the budget can't be cut. Whether we have a $300
billion budget or $400 billion budget, cuts will
always be difficult. There will always be further
claims as to what the Government's role within the
economy should be. Essentially, the decisions that
must be made are ones that relate to what can we
afford to have government doing within our economy.
I believe each of you has a set of charts that
has been distributed to you, six charts that I'd like
to take you through, because I think they help lay
out some of the dimensions of where we are.
The first one sets forth Federal budget outlays
rom 1961-75 in both constant and current dollars.
as you can see Federal outlays in current dollars
nave tripled over the past decade and a half.
r , ^ t^le first 150 years of our country, the
federal expenditures were $100 billion.
In 1961

21

they were $100 billion.
In this year they will be
close to $300 billion. The growth in Federal outlays
looks very different, however, when you consider the
impact of rising prices.
In constant dollars, putlays
rose 50 percent between 1961 and 1968. Since that
time real Federal spending has remained relatively
level.
Now if we can move to the next chart which lays
out Federal outlays as a percent of GNP.
Over the 15-year period which is
chart you'll note there is a break in
Over this period, GNP has ranged from
to 21.6 percent. Again, it peaked in
butter year of 1968.

covered in the
the scale.
18.1 percent up
the guns and

While a portion of the GNP the Government spends
has declined somewhat since 1968, it has clearly not
reached the levels where it stood at the early 1960's.
If, in fact, we've been successful in cutting the
budget for Fiscal 1975 year that we are in now, these
figures could be a little lower in that last bump at
the end of it. These figures could be a little lower.
Move to the next chart.
This chart lays out for you the composition of
the Federal budget, and, as you can see, while the
budget has been relatively flat in constant dollars
since 1968, this has masked substantial changes that
have taken place in spending during that period.
Essentially, as it becomes clear in this chart, the
-cutback reduction in Defense expenditures has given
us the dollars to expand social programs and payments
to individuals and programs of that nature.
The 1975 budget level of Defense spending is
lower than at any time since before the Korean build­
up. From 46 percent of the budget in 1961, 29 per­
cent in 1975. Military manpower in this period has
declined from three and a half million men in uniform
to 2.4 million in 1974, the lowest level since 1950.
Payments to individuals is now the largest cate­
gory in the budget, having increased from 27 percent
in 1961 up to 54 percent in 1975.
In constant prices, payments to individuals have
tripled during this time. Real Federal grants to

22

State s have also tripled over the 15-year period, .
having leveled off, however, in the last two or three
[years of that period.

Real outlays for interest and other non-defense
Irose by 44 percent between 1961 and 1968, and since
:then have declined steadily and are now below their
I1961 levels. There are a number of reasons for this:
jfirst, it reflects the decreases that have taken
place in the space program and foreign aid, ^s well
as the increases in the sales of offshore oil lands
and, finally, the removal from the budget of another
number of agencies that were previously included
within the figures.
Now, lets look further in the next chart into
the composition of the budget and an understanding
of what must be done if, in fact, we're to balance
the budget in 1976 and to cut Federal spending below
the $300 billion figure in 1975.
I think and hope
this will give you some sense of the budget momentum
that we are dealing with, whereby even a small cut
in the 1975 budget will manifest itself more sub­
stantially in later years, or even a small new pro­
gram that is initiated in 1975 typically tends to
expand in the years ahead.
This is a somewhat unusual cut of the budget but
gives you a sense of controlability or non-controlability.
The first major heading on the chart under
mandatory spending consists of contractual obliga­
tions. These are such things as the interest on
the Federal debt as well as contracts which have
been entered into in prior years, which, to cut
those in this year would indicate a requirement that
we either renate on contractual obligations of some
sort or attempt in a unilateral fashion to reopen
negotiations. This may be a bridge that is
alf built or some kind of, as I said previously,
entered into contract.
The next major area, and that consists, as you
can see, of about a quarter of the Federal budget.
The next major category which is close to half
r it is entitlement programs.
ale T^ese are largely benefit payments to individu­
as and consist of such items as Social Security,

23

558-812 O - 7 4 - 3

Medicare, Medicaid, general Revenue Sharing, essen­
tially items which have been laid out in law where.,
if someone is qualified under the basic laws they
can present themselves for payment and automatically
receive whatever the entitlement benefits are under
that individual program. To, in fact, make major
cuts within those program areas will require changes
in the law either in terms of the benefits which
people receive or the inclusion of a number of people
who are encompassed in the basic programs.
Thus, as you can see, roughly 70 percent of the
budget falls in these areas where either legislation
will be required, essentially mandatory spending
under the existing laws today.
The remaining 30 percent we have more discretion
over. This breaks out primarily as 60 percent of it
is in defense spending, as you can see. Most of this
is in personnel costs. To reduce that figure sub­
stantially would require a major change in our troop
structure.
As you are aware, there have been -- in the
recent congressional action there has in fact been,
in fact, been a cut in the Defense budget which would
reduce these figures something close to $2 billion
below the level at which they included in this par­
ticular table. Further cuts will be resisted very
strongly by the President because of the need for
keeping our country strong if we are to have a strong
position in terms of dealing with other foreign pow­
ers in honoring our international commitments.
This brings us down to $35 billion of non-de­
fense discretionary spending. Here, also, the
biggest chunk of it, $20 billion, is in personnel
costs. As you are aware there has been recently
initiated a cut of 40,000 in Federal employment
which should, in fact, bring this figure down to
something close to $300 million.
I might mention as an aside, the level of Fed­
eral civilian employment now is approximately the
same as it was in the late 1940’s. Essentially, the
growth in the Federal Government has not been in
terms of services performed by the Federal government
but has been largely in terms of the transfer of kinds
of payments that have not been particularly comsumptive of employment.
A further element of what has been happening

24

nre broadly in Government performing of services,
ünrine the same period of time states and local
j
governments' employment has risen from about 3 million
Lmlovees up to something on the order of eleven and
a half million. So that the gain of total government
employment has been almost solely on the state and
local government side as they have performed more of

the services of tne people of our country.
A little item here is offset, which, as I men­
tioned before, include offshore oil receipts as well
as contributions to the employer retirement fund.
Now, if we can move to the next chart which lays
out in a little more detail what those discretionary
non-defense outlays consist of. Even here, unfor­
tunately, more than half of these programs tend to be
in the area of health, welfare kinds of activities.
Also included in this list as you can see are such
things as the atomic energy programs which are quite
basic to the project independent efforts that are
taking place.
To give you again an idea of the difficulties in
cuts even in this kind of a list, you'll note Federal
highways in here are $700 million.
This implies cut­
ting the Federal highway level this year by $4.6 bil­
lion because of the fact that only 15 percent of
those dollars are spent in the first year and, ob­
viously, the balance would be over the next four to
m e years.
Now if we could move on to the next chart which
gives you, lays out the entitlement programs. And
it's the second area where, obviously we've got to be
taking hard looks to determine whether, in fact, cuts
can be made. Benefit program payments to individuals
account for 94 percent of the outlays under these
entitlement programs. Obviously, this is a particu­
larly difficult area to cut because more than twothirds of the benefits are paid to individuals
for retirement benefits and for Medicare. And these
individuals -- such as older people have borne a rath­
er substantial burden of the inflation w e ’re exper­
iencing today.
F
I hope that gives you some perspective in terms
nni-W +re we.are in the Federal budget and again, I am
° attempting to suggest these cuts can't be made. I ’m
k°wever, that it is going to require broad
dedicated efforts on the parts of both the Conless and the Executive Branch as well as the American

25

people to recognize
will be impositions
within this budget,
so that it requires
effort. Thank you.

26

that there will be burdens, there
brought about as a result of cuts
and it won't be an easy process,
a totally and broadly disciplined

8

FEDERAL OUTLAYS AS A PERCENT OF GNP
PERCENT

COMPOSITION OF REAL FEDERAL O U TLA Y S
(CONSTANT 1975 DOLLARS)
$Billions

FY 1975 BUDGET -

COMPOSITION OF OUTLAYS

(IN BILLIONS OF DOLLARS)
MANDATORY SPENDING
CONTRACTUAL OBLIGATIONS:
NET INTEREST__________________________________________________________

23.0

HOUSING SUBSIDIES AND INSURANCE, FARM SUPPORTS, ETC________________________________ 5.8
OTHER PRIOR-YEAR OBLIGATIONS__________________________________________
DEFENSE_______________________________________
NONDEFENSE________________________________________________________

53.1
(23.0)
(30.1)

SUBTOTAL CONTRACTUAL OBLIGATIONS________________

____
81.9

ENTITLEMENT PROGRAMS___________________________________________________

142.1

LEGISLATIVE AND JUDICIARY________________________________________________

1.1

TOTAL, MANDATORY SPENDING_________________________________

225.1

DISCRETIONARY SPENDING
DEFENSE:_________________________________________________________________

57.1

PERSONNEL___________________

(37.0)

ALL OTHER_____________________________________________________________

(20.1)

NONDEFENSE:_______________________________________

35.1

PERSONNEL_____________________________________________________________

(20.0)

ALL OTHER____________________________________________________________

(15.1)

TOTAL, DISCRETIONARY SPENDING___________________________

_____
92.2

O F F S E T S (OFFSHORE OIL AND RECEIPTS AND CONTRIBUTIONS TO
EM PLO YEE RETIREMENT F U N D )____________________________________________

-11.8

T O T A L — ------------------------------------------------ -------------------------------

305.4

DISCRETIONARY NON-DEFENSE OUTLAYS, 1975
(Excluding Personnel Costs)
1975 O utlays
($ b illio n s)

P rogram

Health (largely research and training)........................ ........ . ........ ..........
NASA research and development................................. ......................... |
Foreign aid (largely P. L. 480 and Indochina reconstruction)........................
Atomic energy....................................... . ..................................... .....
Child nutrition program..........................................
Education programs................................................ .............................
Comprehensive manpower assistance.......................................................
Extended unemployment benefits (proposed legislation).................................
Veterans medical care...................................................................... .
Federal aid highways....................................
Housing and Community Development Act................................................
Coast Guard operating expenses....................................................... & . . .
Corps of Engineers and reclamationconstruction........................................
Department of Justice...........................................................................
Payments and loans to the District of Columbia.........................................
All other............................................................................................
Total, discretionary non-defense outlays........... ...................

2.2
1.5
1.3
1.2
1.2
1.1
0.9
0.8
0.8
0.7
0.6
0.5
0.5
0.4
0.4
1.0
15.1

ENTITLEMENT PROGRAMS, F IS C A L YEAR 1975
Outlays
($ billions)
Benefit payments for individuals
Direct Federal:
Social Security (OASDI) and railroadretirement....................
Civil Service and military retirement................................
Medicare......................................................................
Veterans benefits...........................................................
Supplemental security income............
Food Stamps..................................................................
Disabled coal miners.... .....................
Grants to States:
Public assistance (AFDC)........ ............... ......... ............ ..
Rehabilitation and social services......................................
Medicaid......................................................................
Unemployment insurance............................ ............. .
Subtotal, payments for individuals....... ...............

4.6
3.1
6.3
8.3
134.4

Other
General Revenue Sharing..........................
Postal Service.....................................................................
Legislative and judiciary.... ; ................................................
Subtotal, other....................................

6.2
1.6
1.1
8.8

Total........................ ....................
1/

S u b s t a n t ia l o v e r la p b e tw e e n p r o g r a m s .

65.1
13.1
14.2
10.1
4.8
4.0
.9

Beneficiaries —^
(millions)

32.1
2.3
12.2
7.3
5.0
15.8
.5
11.5
10.0
28.6
1 . 9 ?'

143.2

2/ A v e r a g e n u m b e r o f b e n e f ic ia r ie s p e r week.

im
Briefing by
The Federal Reserve Board

STATEMENT BY THE HONORABLE
ARTHUR F. BURNS
Chairman, Board of Governors
of the Federal Reserve System
MR. BURNS: Thank you, Mr. Chairman.
The purpose of this meeting, as we all know, is to seek
Ithe advice of this able and distinguished group.
jJ as well as other Governmental officials, need your
■counsel. I want to learn all that I can from you, but I also
■deem it my responsibility to comment briefly on this country's
[financial condition and on the stance of Federal Reserve
[policy.
Our nation is now in the grip of a dangerous inflation
[which has been gathering force over the past ten years. As
aresult of the inflation, our nation's capacity to produce
[has suffered a set-back. While shortages of materials, com[ponent parts and equipment have diminished in the past three
or four months, they remain acute in many of our industries.
As a result of the inflation, consumer purchasing power
is being eroded. During the past year, the take-home pay of
the typical worker declined five percent in real terms.
As a result of the inflation, the real value of the
savings deposits, pensions and life insurance policies of
theAmerican public has diminished.
As a result of the inflation, corporate profits derived
from operations have stagnated, a fact that is concealed by
accounting techniques that have been devised for inflation-free
¡times.
As a result of the inflation, financial markets have been
[experiencing strains and stresses, interest rates have soared.

35

Some financial and industrial films have found it more diffi­
cult to roll over their commercial paper or to raise needed
funds through other channels. Savings flows to thrift insti­
tutions have sharply diminished and stock prices have plum­
meted.
In short, as a result of the inflation, much of the plan­
ning that American business firms and households customarily
do has been upset,and the driving force of economic expanse
has been blunted.
It should not be surprising, therefore, that the physical
performance of the economy has been sluggish in recent months
and that unemployment is now larger than it was last fall.
We cannot realistically expect a resurgence of economic
activity until confidence in our nation's economic future is
restored. I do not think we can do this without making pro­
gress in checking the disease of inflation.
As you know, Federal Reserve has lately been pursuing a
policy of slowing down increases of money and credit with a
view to moderating the forces of inflation. We have tried to
employ the monetary brakes firmly enough to get results, but
we have also been mindful of the need to avoid any general
credit stringency.
Thus, the supply of money and credit has continued to
grow, although at a slower pace than in recent years. The
narrowly defined money supply, that is, currency plus demand
deposits, has grown so far this year at an annual rate of fiveand-a-quarter percent, in contrast to an average of seven per­
cent daring the past three years. If the time deposits of
commercial banks except for their large certificates of de­
posits are also included in the money supply, the annual rate
of growth this year has been thus far eight percent, in con­
trast to an average of ten-and-a-half percent during 1971 to
1973.
Clearly, the American economy, taken as a whole, is not
being starved for funds. On the contrary, the growth of money
and credit is still proceeding at a faster rate than is con­
sistent with general price stability over the longer term.
Yet, the demand for money and credit has been rising ata
very much faster pace than the supply. As a result of the
huge demand for borrowed funds, credit markets tightened this
year and interest rates rose to levels such as we have not
previously known.

36

These high interest rates have imposed a heavy burden on
■businesses and families across the nation. Home building in
■particular is highly sensitive to money market developments.
■Soaring interest rates and reduced availability of mortgage
■credit have greatly aggravated the condition of that indusItry, which was already suffering from sharply higher land and
Iconstruction costs, from the erosion in the purchasing power
Iofconsumer incomes and from the over-building of the last
Itwoyears.
The overheating of the economy from which we have recently
■suffered is, however, now in process of being corrected.
■Federal Reserve policy has contributed to this development.
IInview of the intensity of the inflation, a policy of modlerate monetary restraint remains appropriate.
But I also feel that it would be undesirable to further
■intensify monetary restraint.
In any event, market forces are no longer driving interest
■rates to ever-higher levels. In fact, short-term market inter­
jest rates have recently receded from the extraordinary peaks
■reached this summer and long-term market rates have stabilized
[ormoved down a little.
Mortgage interest rates and institutional interest rates
are, however, sticky and traditionally lag behind market rates.
The recent movements of interest rates are encouraging,
Ibutwe cannot count on any large or lasting decline of inter[est rates until borrowers and lenders in the market perceive
[that the Federal Reserve is no longer pursuing a lonely strug­
gle against inflation.
Monetary policy is much too blunt an instrument to be
relied upon exclusively in what should be a national effort to
bring inflation under control. We at the Federal Reserve hope
that financial institutions will proceed more cautiously in
their lending policies but with a full sense of awareness of
the basic needs of their communities.
We also hope that fiscal policy will soon actively join in
the struggle against inflation. A fiscal policy that is tilted
towards surpluses instead of deficits can make an enormous
contribution to curbing inflation and to lowering interest
rates•
I referred earlier to the strains and stresses in finan­
cial markets. Let me add, in this connection, that while tenslons in financial markets remain acute, they have been
reduced to some degree in recent weeks. This is evidenced by
omew at smaller risk premiums on securities of borrowers of
less than prime quality.
37

Also, while it is still difficult to place lower grade
issues of commerical paper or of corporate bonds, the flow of
such instruments appears to be better than in the early
simmer.
In closing, I want to make several terse observations on
financial policy: First, inflation cannot be brought under
control without causing inconvenience, some disruption and
even hardship.
By alleviating the harsh and uneven impact of its
restrictive policies, the Federal Government will have a better
chance of persevering in a policy of containing inflation.
Second, bankers and other financial managers have lately
become more prudent, partly on their own account and partly
because of increased vigilence by the bank regulatory
authorities.
Third, the Federal Reserve system fully recognizes its
responsibility as a lender of last resort and can be counted
on to come to the assistance of financial institutions that are
caught in a temporary liquidity squeeze.
Fourth, and finally, while the Federal Reserve must per­
severe in the struggle against inflation, we shall also see to
it that the supply of money and credit continues to expand.
There will be no credit crunch in our country.

Statements by Conference
Delegates

MR. SIMON: Thank you very much, Mr. Chairman.
And now we will proceed, as I said last night, to go
around the table, soliciting the -very brief views. Due to a
very tight agenda, I feel compelled to reiterate that I am
going to have to keep a tight clock on the participants. So,
forgive me in advance if I am rude, and I will be cutting off
at the end of three minutes.
DR. CHARLES J. 2WICK, PRESIDENT, SOUTHEAST BANKING CORPORATION
MR. ZWICK: Thank you, Mr. Chairman. My condolences to
Mr. Alexander.
(Laughter.)
MR. ZWICK: I would like to make several simple points:
First, being that to deal with the inflationary problem will
require a series of actions over a long period of time.
Notwithstanding that, I believe we must start with a
simple, clear-cut unambiguous signal to the American public
that the Government is serious about this problem.
It requires an act, I believe, of moral leadership on the
part of the Government, and I would propose such an action this
morning.
I would make a second suggestion that we stop talking
about things we are "not" going to do, because over a long
|period of time, we may have to change our minds as to what we
will, in fact, do. Now, to a specific action, which I think
would indicate to the American Public that we are serious about
this problem, and that we do intend to do something about it,
11 would propose that the Executive Branch of the Government
recommend to the Congress that a joint resolution be passed to
jgive the President the power to withhold sufficient fbnds from
current appropriations to meet 150% of any desired cut in
jFederal, expenditures. Stating it simply, if we believe a
I$5billion cut for FY 1975 is appropriate in various programs,
jwe give the President the authority to cut $7-1/2 billion. The
41

excess of $2-1/2 billion then can be used in consultation with
the Congress to reinstate programs when further analysis
indicates that a major dislocation would result.
I would exempt from this hold-back authority only direct
payments to individuals for such items as veterans benefits,
Social Security payments, and Medicare. If such a joint reso lu ­
tion were passed quickly, the Administration could immediately
take steps to reduce Federal spending and provide the needed
moral leadership and, also, do the detailed analysis that is
required to indicate how the desired budget level can be
reached sensibly.
President Ford could propose to Congress next January
exactly how he would accomplish the cut-back and the needed
appropriate actions could take place at that time to validate
the $5 billion cut.
Now, it seems to me this proposal has the virtue of being
simple and, therefore, it could be implemented immediately,
and it would provide the American people with a tangible evid­
ence that the Government is serious in its efforts to reduce
inflation.
We do have precedents for such a resolution in the expendi­
ture limitation provisions of the 1968 Surtax Legislation, and
in the Budget Reform Act of 1974. Either of these approaches
could be adopted for this critical need. We do not need, I
believe, long technical arguments about detail. We need an
immediate and clear-cut act of moral leadership on both the
part of the Executive and the Legislative branches of
Government.
Thank you.

42

m. WALTER WRISTON. CHAIRMAN, FIRST NATIONAL CITY BANK

MR. WRISTON: Mr. Secretary, the fiscal side was covered
just ahead of me. I would like to say a word on the monetary
[side.
I think, if our goal is to reduce inflation and to reduce
both s h o r t - teim and long-term interest rates, the Federal
Reserve should not deviate substantially from its policy objec­
tives this year.
I think it is a truism that the money in our pockets has
no value in and of itself. It has only a scarcity value and,
ifall of us had all of the money that we wanted, the value of
the dollar would approach zero.
This is the reason that the amount of money supplied by
the Federal Reserve System is absolutely crucial to the control
[of inflation.
So far, they have failed to validate our inflationary
expectations, and that is working back through the system, as
[Mr. Greenspan has said.
Inflation is an addiction, like a drug addiction or
alcohol, and as it starts, most people perceive that they will
benefit. But, as it gains strength, we see that it destroys
the country.
Kicking a habit is never very pleasant, and there isn't
any easy, simple, wonder drug to get us out of it. It is a
long and painful process. And, therefore, we must devise ways
to take care of those who are hurt during that process in a
fair and equitable way. But, as far as a simple solution is
concerned, there is none.
Thank you.
SECRETARY SIMON: Thank you, Mr. Wriston.

43

MR. JOHN W. WRIGHT, PRESIDENT, WRIGHT INVESTORS* SERVICE
MR. WRIGHT: Thank you, Mr. Chairman.
I would like to precede my remarks by saying how thankful
I am that we now have a Ford who listens better and, as a
result, can be expected to have better ideas.
I am very thankful for this break-out that is represented
here this morning from a rather small and, I believe, inadequate
circle of men whose opinions and prejudices and decisions have,
for some years, determined our fortunes and controlled our
lives. I am thankful for this opportunity to participate.
Today, looking back over the last five years, it seems
obvious to me that it would be fair to say that never before
have so many been so wrong so often!
Instead of exporting our products, we have been exporting
our capital. Instead of expanding our production, we are now
trying to restrict our consunption. Instead of increasing
competition, we are diminishing it. Instead of strengthening
and expanding our capital and equity markets, we are weakening
and shrinking them. Instead of fostering free enterprise in
this country, we are suffocating it.
Instead of building a nation of capitalists and managers,
we are transforming the partnership which we had into a nation
of debtors and creditors. And, instead of providing a stable
monetary base for our national growth, we have depleted our
domestic money supply and we have failed utterly to control the
enormous proliferation of U.S. dollars abroad.
And this is, in fact, in my opinion, the true cause ofthe
inflation which is now raging throughout the world, and which
is consuming our .country.
Now, why has this come to pass?
Because we, the people, the people in this room, many of
whom are custodians of much of our nation's accumulated savings
and accumulated capital, have been too busy with our own affairs
to get the facts and do the thinking ourselves, because we have
accepted the generalities, the misconceptions, and the academic
doctrines of yesterday. Instead of taking a hard look our­
selves at the facts of today.
We remember that, after the Middle Ages, the medical pro­
fession was hipped on phlebotomy. They got everybody to believe
that blood letting was a cure for everything from insanity on.
I think we have much the same situation today. This is why I
ask you to consider and lend your shoulder to the beginning ofa
movement for a general, thorough-going reform of our nation s
44

economie and monetary management.
Now, I have no time to go into specific proposals.
SECRETARY SIMON:

Thank you, Mr. Wright.

Russell Long very kindly gave you 30 seconds of his time,
¡which I subtracted from him.

DR. ALBERT M. WOJNILOWER, VICE-PRESIDENT, ECONOMIST, THE FIRST
BOSTON CORPORATION
MR.' WOJNILOWER:

Thank you, Mr. Chairman.

It is too late to undo the financial and economic distress
many of our citizens have already undergone, and which, for
others, is already beginning; but, perhaps, we can help to pre­
vent its happening again.
Already the market place is worrying that measures likely
to be taken to shore up the weakening economy may push up the
cost of living rather than pull it down; and that the earliest
signs of business revival may trigger a fresh outburst of still
more rapid inflation and higher interest rates.
Such inflationary expectations tend to be self-fulfilling,
at least for a while, and they threaten to impede both the
reduction of inflation, and the maintenance of high employment.
Strict credit restraint is, and always has been, essential
to price stability. In our economy, that means restraint of
commercial banks, because of their great size and scope, and
ability to continue to expand credit by tens of billions of
dollars, even when other lenders have been put out of action.
In 1973 and 1974, in contrast to previous inflationary
episodes, banks have been officially assured that they will
always be able to buy funds at a price; and these assurances,
coupled with the spread of so-called floating rate arrange­
ments, as a result of which neither the bank nor the customer
stands to lose very much when interest rates rise, bank credit
restraint has been virtually nonexistent until recently.
The simplest way to prevent this from happening again as
it will at the very next opportunity -- is to set a legisla­
tive ceiling on the banks' prime loan rate. Then banks and
their clients, and the investing public, will again know,
firmly, that whenever the cost of money in the market place is
nearing the critical zone, banks will have to curtail their
lending unless they wish to give their profits away; and a
brake will be put on inflation.
The beneficial side effect will be to help re-balance our
investment toward human and community capital, including hous­
ing. Unfortunately, most investments in education or home
ownership yield no predictable cash flows, as contrasted with
business investment in machines. And, therefore, human invest­
ment cannot compete effectively in a free market place, even
though it is the more important kind of investment.
We have been on the wrong track, I believe, domestically
as well as internationally, in seeking more efficient and

46

|unregulated financial markets. These markets are prey to
[volatile and crowd psychology, and shifts of expectations. Yet,
by the stroke of a pencil, they consummate transactions that
constitute economic marching orders for whole societies.
Instead of speeding these markets up, we need to slow them
down to a more human pace. Our inflation results in major
[part from trying to fit a financial jet engine on to a human
tricycle. The same kind of loss of human perspective that
afflicts so much of our life today.
SECRETARY SIMON:

Thank you.

MR. CARLTON WILSON, CHAIRMAN OF THE BOARD AND
DIRECTOR, ROBERT W. BAIRD AND COMPANY, INC.
MR. WILSON:

Thank you, Mr. Chairman.

President Ford and you, Mr. Chairman, have
identified inflation as the number one problem in
this country. This is encouraging. We hope that
it will follow that its treatment and ultimate
solution will become our number one priority.
The initiation and leadership in developing
the motivation and will to fight inflation must
start with the President and the Congress. We under­
stand when we say this that a very small part of our
$305 billion budget is discretionary.
The people in
this country must be told directly the causes of
inflation, a positive program for remedy presented,
and told of the sacrifices they must make. They will
listen. They will understand.
They will respond.
They want and need to participate.
If the basic causes of inflation are attacked,
most of our other problems will disappear. Interest
rates will recede and stabilize, prices of goods
and services will stabilize, wage rates will stabil­
ize, and savings and investment will return.
At these intolerable rates, inflation can no
longer be treated on an ad hoc or crisis basis.
Such treatment will only increase the bleeding which
must, in our opinion, be treated with major surgery
and not band-aids.
The recommendations for treatment and remedies
for inflation have been well documented at this and
other conferences on inflation. And we have been
both startled and encouraged at the unanimity of
opinion from all sectors, both public and private.
I won't reiterate those cures and programs
that we think are necessary. We think they will be
spoken to around the table.
I would make only one
other observation.
In addition to a very positive
domestic program, in our opinion, this country must
assume a more aggressive role on the international
economic and financial front.
Our products, our services, our technology and
our dollars are competing all over this small world.
Better cooperation among all countries is a neces­
sity, if stable conditions are to be achieved at
home.
48

THE HONORABLE CHARLS E. WALKER, PRESIDENT, CHARLS
E. WALKER ASSOCIATES
MR WALKER: Mr. Secretary, to avoid being re­
petitive, I would like to associate myself fully with
the views of Dr. Greenspan, Dr. Burns, Dr. Zwick on
the Budgef, Mr. Wriston, and what Mr. Wilson just
said, and use my three minutes instead to throw a
big rock at one segment of the news business.
Being out of government, I can perhaps do so
without being accused of trying to intimidate news
people or manage the news.
Mr. Secretary, I believe that TV news, particu­
larly the commerical networks, is doing a lousy job
in helping the nation deal with its pressing econpmic problems.
For as the writing press has been
doing an increasingly effective job in this area,
TV seldom earns even passing marks.
This is not simply my own bias.
In recent
months, I have surveyed a representative group of
outstanding economists, veterans of both Democratic
and Republican Administrations.
While they believe that the quality of econo­
mic reporting on TV has improved, they are convinced
that it still lags far behind the written press, and
as to analysis by economic events by generalists
reporters and anchorpersons -- well, I had rather
not repeat some of the comments I have received.
Documentaries sometimes receive
but D minus or F for execution.

A for effort

A majority of Americans receive all or most of
their news from TV. They deserve to be fully and
accurately informed.
But that's not all. Economic
problems, especially inflation, can only be solved
through the political process.
How can a public that is both ill-informed and
mis-informed morning, noon and night by well-meaning
but inadequately trained newspeople, reach the right
conclusions about public economic policy as a basis
for expressing their wishes in the voting booth?
In can cite chapter and verse to support my po­
sition* but time doesn't permit.
Instead, I want to
be positive and suggest two approaches to curing this
problem.
First and obvious, TV should place good

50

economic journalists on their reportorial, editorial
and production staffs.
Why don’t they?

I guess it costs too much and

d o e sn 't have enough "entertainment value".

My second suggestion is devised in full cogni­

zance of the vital role of the First Amendment;
freedom of the press is essential. But the First
¡Amendment is no license for either ignorance or lousy
reporting.
I therefore propose that each of the networks

establish a distinguished bipartisan economic review
board perhaps consisting of former members of the
President's Council of Economic Advisors to review,
after the fact, TV reporting, analysis, and docu­
mentaries in the economic area.
These reviews could be held privately by the
network and provided only to top news executives
land producers. This approach would not perfect TV
economic journalism overnight but it would be a step
in the right direction.
And if the TV people don't start to do a better
job in the economic journalism sooner, rather than
later, our chances of dealing successfully with both
jthe current inflation and later economic problems
¡will be greatly reduced.
As Churchill said, democracy is the worst form
of government, except for all others.
But even in a
democracy, the only sure treatment for maladies
harmful to the body politic will come from a public
that is informed fully, accurately, and on a timely
(basis.
Thank you very much.
SECRETARY SIMON:

Thank you, Charls.

51

MR. JOHN TOMAYKO, DIRECTOR, INSURANCE, PENSION AND UNEMPIDYMRNT
BENEFITS, UNITED "STEELWORKERS OF AMERICA
~ ~
MR. TOMAYKO: Mr. Secretary, coining from labor, I must say
at this time that I am enjoying the remarks of the bankers and
the financiers, the economists, so much, and since this is
their day, I will pass.
(Laughter.)
SECRETARY SIMON: I thank you very much.
Russell Long his 30 seconds back.

I will give

w THOMAS I. STORRS, CHAIRMAN OF THE EXECUTIVE COMMITTEE,
—W irTH CAROLINA MTIUNAL BANK
MR. STORRS: Mr. Chairman, there is obviously a great deal
[of interest in this meeting in my part of the country. I have
■gotten an avalanche of mail from people in North and South
■Carolina. This has had three common themes. Inflation is of
[great concern to these people. Secondly, they hold the
[Federal Government fully responsible for many of the actions
[that have caused this inflation. And third, they look to
[Federal action for correction. They are virtually unanimous
[in urging lower Federal spending with no ’’sacred cows.”
They mention $300 billion limit, but they are also con­
cerned with funds that are disbursed outside the Budget. I
[fully concur in this view. There is broad concern with the
[economic costs of other Federal programs and their contribution
[to rising prices.
Clean air is wanted, but the question comes up how clean
[and how soon. Auto safety is a desirable objective, but how
[safe and at what cost? I certainly concur in this.
There is further concern expressed with impediments to
■free competition which raise costs and prices. Repeatedly I
lam told that these should be attacked, as should any other
■aspect of costs and prices which are susceptible to correction
lat this time.
|
The silliest I heard mentioned, of course, was the double
■Fare for taxis from New York to the New York airport, since they
lare unable to pick up fares to go back to the city.
But not so silly is our entire posture in regulation of
■ransporation. Such things as the Davis Bacon Act, which was
Reeded back in 1934 to support wages, but is clearly infla­
tionary today.
I There is a need for a thoroughgoing review at all levels
if government as part of a broad attack on prices of govem■ental regulation of industry which results in increased costs
fithout increased benefits to the consumer.
I finally, as to monetary policy, I expected to get a great
pal of criticism as to the crushing impact the policy has had
■l cer aim sectors of the economy. This was not forthcoming.
| as greatly impressed with the opinion, widely held, that it
fPProPriat:e in the circumstances; that its effects are
Itself^ ’
a cannot be relied upon to do the job by
InvpJ?16 Pr°kiem cries out for every action possible by
|
nt, by labor, and by business. Equity is important but

53

the absence of pain is impossible.
Thank you.
SECRETARY SIMON:

54

Thank you.

MR. ROBERT H. STEWART III, CHAIRMAN OF THE BOARD, FIRST
~~INTERNATIONAL BRANCSHARES, INC.
MR. STEWART: Mr. Secretary, you just returned from Dallas
a few days ago, so what I may say may be repetitious to you,
but I would like to make just a couple of comments about our
great area which has been immune in the past to most of the
economic ups and downs, and I guess right now we are still in
better shape than most parts of the United States.
But the businessmen in our area are unusually pessimistic.
The people in the food business, the electronic, the oil,
they need capital and their real apprehension is their lack of
access to the debt and equity market, as Allan Greenspan said
yesterday.
The erosion of personal wealth in our area has been
staggering. Maybe this is due to the many successes of the
past. I don’t know.
And lastly, the real estate business, which may be overall
our largest industry in the Southwest, the many components,
not just homebuilding but the industrial and commercial, the
mortgage, REIT and, in Dallas, in the Houston area, we have one
of the largest homebuilders in the word, and I believe the
largest mortgage company in the United States. These people
are really concerned, and if in my judgment short-term rates
don't move below the long-term rates in the near future, there
could be serious problems.
Thank you.

55

558-812 O - 7 4 . 5

THE HONORABLE GEORGE P. SHULTZ, EXECUTIVE VICE PRESIDENT.
BECHTEL CORPORATION
MR. SHULTZ: Mr. Secretary, Chairman Bums, Chairman
Greenspan, Members of the Congress.
I would like to focus your attention on four words which
I recognize in themselves pick up much of what has been said.
The first word it seems to me and the basic watchword that
has to be followed is "discipline" — discipline on the budget,
discipline on the off-budget borrowing, discipline on monetary
policy, discipline of our political process as it seeks to
satisfy special interests against the general interest, and so
on.
So I think that's the first word, and it applies across
the board, and unless it hurts a little bit, it isn't being
applied.
The second word I would call your attention to is
"patience." And there is no doubt about the fact that for a
policy to su cceed, it has to be pursued for a while. There is
no substitute for patience in this effort that we are all
involved in.
The third word I would focus on is "diversity." It seems
to me that it isn't only monetary policy, it isn't only the
Budget, but it is many other things that have to be looked to if
we are going to succeed in this area.
Just to name some — so that there can be seme specificity
here — the trade bill, I think, offers many things that will
help us in the battle of inflation.
There are things that can be done and there are also sore
things that ought not to be done, I think, in the area of taxes
that will help us. There is a lot to be done in the area of
special things that Government does that help particular seg­
ments of the economy but damage the general interest without a
doubt that should be examined; and certainly new ones should
not be created as is constantly being threatened.
So those are examples of the sort of diversity of effort
that I have in mind, and they are only examples and
illustrations.
My final and fourth word that I would focus on is
"reasonableness"; that is, if you are going to have su stain ed
discipline, it can't be so unreasonable that it just blows
everything up.
There is no point in trying to cut the budget or saving

56

that you are going to cut out of that budget things that aren't
Igoing to cane out. So one has to, it seems to me, be reason­
able about it in recognizing on the budget, for example, that
probably the most important effects of anything you do today
are going to be reflected two or three years from now, which is
only more reason for exercizing discipline today.
So those are the four words I would focus on, and I think
there is undoubtedly — everyone can see the kind of content
that lies behind them. Discipline, patience, diversity in
approach and reasonableness.
Thank you, Mr. Chairman.

57

DR. RAYMOND J. SAUINIER, PROFESSOR EMERITUS OF ECONOMICS.
BARNARD COLLECT

?

MR. SAUINIER: Thank you, Mr. Chairman.
I have a short statement here that I will supply you with
for the record and take the few minutes that I have to surrmarize
what is in it.
The first point I would make, Mr. Secretary, is that I
have the distinct impression that the country is closer to a
financial crisis today than certainly the public understands.
And it may even be true — and I speak respectfully — it may
even be true that it is closer to financial crisis than the
financial people of the country understand.
So I take a very serious view of the importance of this
meeting here this morning. The problem, of course, is infla*tion. More than that, it is that we are relying on money
policy to cure inflation; and that is really at the botton of
all the structural problems and structural risks that we face.
On money policy, I would like to associate myself with
what Arthur Bums has already said. And while I would say that I
five percent at the present time is a respectably appropriate
rate of increase of the money supply, as I read the figures, it I
has been a lot less than five percent in the last two months.
And I would hope that the Federal Reserve System would see a
possibility to allcw the money supply to increase over the next I
two or three months by something a little more than the three
percent which I read for the immediate past.
The rest of the story has to do basically with the budget
and with certain structural changes that I think are needed.
On the budget, Mr. Secretary, 295 billion seans to me to
be the right number under the circumstances. But I knew that
that is not going to be reached unless Congress helps.
I understand as I read the papers that the Congress
intends to ccme back after the November election recess. And
I would like to suggest that it make budget control, expendi­
ture control in the budget, the principal, if not the sole it®, 11
of its business in that special session.
New, going beyond that, I would suggest, Mr. Secretary — I
and there are ideas set forth in this paper — I think there is I
something new needed in our whole program, something beyond
money policy, something beyond fiscal policy. And that is an
apparatus in the executive branch set up quite specifically/
explicitly, to control all those activities of the Federal
Government that affect costs and prices. And, believe me,
there are a lot of them.

58

I am talking about procurement, lending money,
guaranteeing loans, Davis-Bacon, setting floors,
ratcheting up the floor of wages, and all of that.
This doesn't require legislation. But it
requires an exercise of the discretion that the
Executive Branch already has.
SECRETARY SIMON:

Thank you, Mr. Saulnier.

59

MR. RALPH S. SAUL, VICE-CHAIRMAN, INSURANCE COMPANY
OF NORTH AMERICA
--- -—
MR. SAUL:

Mr. Secretary, Thank you.

My comments just focus on one point: namely,
what we can learn from the experience of the past
decade about the impact of inflation upon our capital
markets.
First, I think we have seen that inflation
seriously disrupts the functioning of our long term:
debt and equity markets and it seriously erodes
securities' values.
I don't think we fully appreciate the extent of
this erosion that has occurred, for example, in
pension funds and in the premium writing capacity
of the insurance industry.
Without the securities markets as a source of
capital, corporations have had to turn to the short­
term market or to the banks for credit.
I don't
think over the long run we can prudently finance
this economy on short term credit. We need the se­
curities markets as a source of long-term capital.
Second, I think we should ask the question why
high interest rates, at least until recently, have
not curtailed bank borrowing.
It seems to me we have to ask the questions
which were posed by Dr. Wojnilower in his remarks,
whether the persistence of inflation may not have a
lot to do with some loss of control over credit
creation in this economy.
Third and last, the Federal government and its
agencies can preempt as much of the capital markets
as they choose. When the Government preempts credit,
it does so on the basis of legislative decisions -the decisions that may not take into account the
costs of using resources.
If there is one message that emerges to me
from the experience of the past decade, it is that
the fundamental cause of inflation arises from de­
mands upon our capital resources imposed legislative­
ly and by Government. The most challenging problem,
as a number of us already pointed out, is to bring

60

our rising expectations into line with our diminish­
ing resources.
Thank you.
SECRETARY SIMON:

Thank you.

61

MR. ROBERT V. ROOSA, PAR1NER
BROWN BROTHERS/ HfiKRIMfiN AND COMPANY
MR. ROOSA: Mr. Secretary, I suppose it was understood,
but I feel disappointed that none of the Governmental spokesmen
in introducing this meeting reminded us that we are in the
midst of a worldwide inflation. And while their implications
are correct, I believe the lead given by this country in
resisting and containing inflation is crucial. We do have to
recognize that the worldwide nature of this problem, centering
currently in that sector of the carmodity area that we know
is monopolistically controlled by the OPEC cartel, create
environmental problems of a different kind to which I think we
have to be directing a high proportion of the effort and even
of the time here.
I know that you personally have done so. I want to
endorse and urge that there be renewed and strengthened
American leadership led by the Treasury Department, if I may
be so explicit, in order to assure a closer and more effective
harmonizing of policies among the oil-importing countries as
a critical move forward toward that lowering of oil prices
that may parallel the reduction in other ccmmodity prices
that's now beginning to occur across the world.
I think we need a strengthening through the leadership of
the Treasury Department in the harmonizing of policies among
nations toward the managing of exchange rates. We have had
long enough fluctuating rates of a wild kind to realize they
add at least as much to worldwide inflationary pressures as
used to be alleged against a fixed rate system. We have to
find the middle road, a managed exchange rate system in which
I think U. S. leadership is crucially important. And then,
looking around the world at prospects for the next year, I see
all those countries who expect growth in GNP, expecting to
get it through increased real exports. There is not going to
be a demand for those exports in the OPEC countries — the only
big earners — it's going to have to be here. I think we have
a real opportunity, if we make sure that our frontiers are
open, that the goods that are exported by others flaw in
freely; we reestablish American preeminence in favor of the
principles of free trade and its goods that combat inflation.
I wouldn't be overly preoccupied with the chance that con­
trol of the Budget on the expenditure side is going to provide
all the relaxation scope needed by Federal Reserve policy. We
are going to have to do what Steve and Buddy Storrs have men­
tioned — get a coherence in Government's influence on all
parts of the inflation process domestically and I endorse vdiat
they have said.
SECRETARY SIMON: Thank you, Mr. Roosa.

62

MR. DAVID ROCKEFELLER, CHASE MANHATTAN BANK,
NATIONAL ASSOCIATION

MR. ROCKEFELLER:

Mr. Secretary, I agree very

much w ith what Bob Roosa has just said, that infla­
tion i s a global problem that requires worldwide
cooperation for its ultimate solution.

On the domestic front, the greatest need, in my
judgement, in dealing with inflation, is to restore
public confidence in our Governmental and private
institutions. I believe that the public looks to
the President for leadership in providing a compre­
hensive); balanced and credible program for combat­
ting inflation.
The program, it seems to me, should be pursued
aggressively and above all, consistently.
I believe
that it should include the following elements:
Greater fiscal restraint as has been suggested by a
number of people; continuing, but perhaps gradually
lessening monetary restraint; tax and other measures
to promote more savings and investment; recognition
that there must be tradeoffs between very important
[environmental protection, on the one hand, and ade­
quate economic growth on the other; emphasis on in­
creased productivity; voluntary restraint in price
and wage increases on the part of both business and
labor -- encouraged, but not dictated by Government;
a well-organized on-going program of conservation of
energy and other scarce resources, the supply of
which cannot quickly be increased and which are the
cause to a considerable extent of inflation at the
[present time.
I
Everyone in our society, it seems to me, must
feel that he has a personal part to play in com­
batting inflation. That is not the case at the
present time. The importance of combatting infla­
tion and what each of us needs to do and can do
must be explained, it seems to me, by the Govern­
ment in a massive on-going educational program.
I
If these things are done promptly, I believe
■that significant progress towards reducing inflation
►an be made in a reasonable period of time.
I
I would add, though, one cautionary note:
Unfortunately, the essential remedies that must be

63

taken to combat inflation will necessarily be pain­
ful and, unfortunately, they will hurt some sectors
of our society more than others. And therefore, in
equity, it seems to me that Government, while pur­
suing these necessary policies, must also be very
much mindful of those who are seriously disadvan­
taged, so that they will not be obliged to carry a
disporportionate share of the burden.
Thank you, Mr. Secretary.
SECRETARY SIMON:

64

Thank you, Mr. Rockefeller.

,

nnNATD

T. REGAN, CHAIRMAN OF THE BOARD, MERRILL,
IWT.------- -----

T ymgh. '
“PIERCE. FENNER'
"AND SMITH,

MR. REGAN:

Mr. Secretary, we are all more or

Bess familiar with the plight of Wall Street and with
bur financial markets, and I am sure that if anyone
I s n ' t familiar, there are many in the room who will
be glad to enlighten them.
But, contrary to expecta­
tions you won't hear from me about that, except to
b a ll attention, Mr. Secretary, to one group of infla­
tion 's victims who haven't been given much attention,

|nd these are the stockholders of America, 30 million
[of them. They are individuals, they are voters, they
bre workers, they are savers.
They and institutions
[such as pension funds, insurance companies, private
C o lle g e s , universities, charitable institutions colE e c t i v e l y , they've lost over $500 billion in market
[value since January of 1973.
That's a little over
[a year and a half. Now, that sum of money is equal
Ito h a l f the personal income for the entire United
[states in 1973 on seven times the annual rate of
[savings.

The stock market, as of last Friday, actually is
[within percentage points of being in the worst de­
cline of this century, when adjusted for purchasing
[power. But even as you shed a tear for those victims,
fend who knows, there may even be a few of them in this
[room, remember, there are no winners in inflation.
■Everyone is the loser. And the inflationary cures
■that are utilized must include provisions to help the
[victims who are unable to help themselves. Now, how
Ito solve inflation?
There is no panacea, no one answer.
recognize.

That we

My oversimplified and understated answer is less
consumption and more investment.
I mean less consump­
tion by all of us, starting with the Federal Govern­
ment, going through state and local governments and
less spending by individuals, particularly in shortage
preas such as petroleum products, papers and metals
fend the like.

65

. The savings thus achieved should be channeled in
a more productive capacity.
Later today we will dis­
cuss just how to do that.
All I will say now, is if we can use both the
carrot and the stick, tax policies, which are well
considered, both can be and should be so used. But to
win a fight that involves too many dollars and too few
goods, to me in simple terms, means hold down on the
dollars, spend less, save more and more investment in
American industry.
Thank you, Mr. Secretary.
SECRETARY SIMON:

66

Thank you, Mr. Regan.

MR. GEORGE PRESTON/ PRESIDENT, U«S. LEAGUE OF SAVINGS

""Assocm'icm'
MR. PRESTON: Mr. Secretary, do you mind if I stand? I
savings and loan associations around the United
a national trade organization, the U. S.
League of Savings Associations.
re p re s e n t 4,600
S ta te s . We are

We have a five-point recommendation program, sir.
We endorse entirely the concept of balancing the Federal
even if it does take a tax increase. A surplus is
necessary. Though not popular, but if a tax increase is nec­
essary, we endorse that.
Budget,

We say to the Fdderal Reserve Board that they should con­
tinue their restrictive monetary policy. They should not
[relax it too quickly, even though this is very much of a hardIship on the thrift institutions.
We recormend most enthusiastically, and with confidence,
[a new tax incentive to encourage savings to increase the
[capital base.
In other words, save more and spend less. We believe
[that this could be a most significant cure for the ills of
Iinflation.
The Federal Government — my fourth point — should
[announce its willingness to become the employer of the last
[resort. In other words, outlawing unemployment.
Fifth, a special tax incentive should be utilized to
[increase the productivity in appropriate areas of our general
[economy.
Finally, Mr. Secretary, I would like to announce to this
[group an Anti-Inflation Campaign that the U. S. League of
[Savings Associations will launch in early October. Because
[of our deep concern over the effects of inflation an American
[society, in aiming to be of maximum help in mobilizing public
pinion for controlling inflation, and to gain support from
fcie American people, we do intend to launch a massive campaign
[in early October, a broad scale advertising and public educa­
tion on behalf of the President's anti-inflation war. It will
If anational television, magazine and newspaper battle under
the theme: "There is no living with inflation."
I
Communications will go out to our 57 million savers and
pur 14 million borrowers. We believe the American people,
■jr* Secretary, need some frank talk on the causes of inflation,
its devastating effects; but more important, what the
pnencan people can do about it.

67

Thank you, sir.
SECRETARY SIMON:

68

Thank you very much.

MS> SYLVIA PORTER, SYNDICATED FINANCIAL COLUMNIST

MS. PORTER: Mr. Secretary, I speak today as a
representative of the consumer.
In the inflation
fight to date, the consumer has been lectured, ex­
horted, patronized, but not enlisted.
I believe this is an extraordinary oversight.
The consumer of the United States wants to be a par­
ticipant, not a pawn. There is an unspoken cry in
the hearts of millions of us, -- "What can I do?" -- ✓
that the President can and should answer.
Therefore, I suggest, one, that work should
begin at once on preparations for the President’s
call for cooperation at the consumer level, volun­
tary, but very definite cooperation.

*

Two, representatives of the widest groups of
consumers should be called to meetings in Washington,
to be informed of the plans and hopes to be asked,
policy suggestions and for practical ways the pro­
gram can be carried out.
All consumer groups‘covering all types of or­
ganizations, educational, religious, civic, whatever,
should be invited. The groups may be broken down so
that each one is small enough to be productive.
I have seen this sort of call for action work
magnificently under far less urgent circumstances.
Three, the help of professionals in the fields
of public relations, advertising, and the like,
should be enlisted. They would leap to the oppor­
tunity.
I
Four, the program should be identified with the
phite House to give it stature and to give it dura­
tion, but this program is to be implemented at the
¡regional and local, not the national, level.
This is a key aspect of it.
L
j^ve* a^ter the details have been carefully
porked out, the President himself should issue a
pajor policy statement and kick off the call for
voluntary cooperation via a prime time TV address

69

There are several illustrations that will come
quickly to your mind, as they did to mine. There
must be hundreds that are far more superior.
For instance, victory gardens. The community
garden concept could be spectacularly expanded, even
in the most densely populated areas such as I come
from. Millions of publicly-owned acres could be
made suitable for community gardens.
Recycling.
Scrap collection and sale by the
communities themselves would pay off handsomely in
every way. Energy conservation.
I am utterly
dismayed by the return in this country to the burnit-up philosophy.
Energy conservation measures
must be revived and maintained by businesses, by
home-owners and by individuals. This would be both
an anti-inflation and a consumer unifying force.
Educational pamphlets explaining in easy-tofollow language the many significant ways consumers
can help cut down living costs in all areas could be
inexpensively printed and widely circulated by or­
ganizations at the regional and local level.
As the Red Cross teaches swimming, so it could
teach other vital subjects.
Mr. Secretary, while admittedly sketchy, if
this idea is found worthy, it could easily be car*
ried on from here and have an electrifying effect.
SECRETARY SIMON?

70

Thank you, Ms. Porter.

HR. JAMES O'LEARY, VICE CHAIRMAN, U.S. TRUST COMPANY

MR. O'LEARY: Mr. Chairman:
I agree thoroughly
with the views that were presented earlier by Alan
Greenspan, Arthur Burns, and most of the people who
have spoken. I would like to make a few comments to
sharpen some of the points that have already
been made.
Early this year, the decision was made to com­
bat the double digit inflation and the wave of infla­
tion expectations through a policy of credit re­
straint. As short-term interest rates have risen to
record levels, the major non-bank financial insti­
tutions, the savings and loan associations, the
mutual savings banks and the life insurance companies,
in particular, have been hit with a tremendous dis­
intermediation.
These institutions are the heart of the long­
term capital market. Given the high level of short­
term rates, and the expectation at least until re­
cently, that this will continue for sometime, the
non-bank institutions as a whole have virtually
stopped making new forward commitments to buy bonds
and mortgages, and they have become extremely
liquidity conscious.
The result, as we all recognize, has been the
drying up of the availability of home mortgage
financing, commercial mortgage financing, and a
sharp reduction in long-term corporate bond and
equity financing.
By summer, we had begun to develop a viscious
circle: Borrowers who could not be accommodated in
the long-term capital market were forced to turn to
the short-term money markets, essentially, the banks
for accommodation.
Similarly, the Government-sponsored agencies such
as the Federal Home Loan Banks and Fannie Mae had to
come to the market with massive short-term financing
to help support the home mortgage market.
Thus, we
nad a process in which upward pressures on short
availability of long-term financing,
wnich in turn increased the demand for short-term
inancing. This put greater upward pressure on
snort-term rates and further hurt availability in the
tong-term markets.

71

558-812 0 - 74-6

The Fed now has all the monetary aggregates, as
Arthur Burns indicated, down to an expansion rate
which is exerting a real bite on real business activ­
ity.
Since early July the authorities have been
trying to bring short-term rates down gradually, i
applaud this and I think they can safely go further,
especially if we get some real fiscal restraint,
without weakening their fight against inflation;
I was delighted to learn recently of the plans
worked out in discussions with the Federal Reserve
Advisory Council and the Federal Reserve Board to
develop a program to allocate bank credit on a guide­
line basis to the highest priority uses in this
period.
If such a program can be made effective - and I
think it can - it can be useful as a means of keeping
credit availability taut, but?at the same time per­
mitting the Fed to encourage a gradual decline of
short-term rates, which would be healthy.
It is absolutely essential, as everyone around
this table has said, to achieve real fiscal restraint,
to take some of the burden off the Fed and the money
markets.
I fear that no matter how well we perform in
monetary and fiscal restraint, the inflation rate may,
and probably will, stay high and that the public will
demand a return to compulsory price-controls. It is
for this reason that I think we should be open-minded
about adopting a guidelines approach and public
pressure to moderate wage prices.
SECRETARY SIMON:

72

Thank you, Mr.' O ’Leary.

DR. ARTHUR M. OKUN, SENIOR FELLOW, THE BROOKINGS

~ INSTITUTE

MR. OKUN: Mr. Secretary, I was glad to hear you
stress the many routes and the complexity of the in­
flation of 1973 and 1974, and your words have been
reiterated by several previous speakers.
I think it's important to recognize that; and
to recognize its contrast with, let’s say, the 1966
to 1968 period of inflation which, from my autobigraphical regret, can very readily be traced to one
principal source, mainly excesses in the Federal
budget.
This time it's different. There are a great many
sources. The Government, in its fiscal monetary
policies, has clearly contributed to inflation. There
have been excesses. But, I think these excesses have
to be put into perspective -- in the perspective of
the other special fact that give us inflation and a
perspective of change in the economic scene that we
have now.
There are lots of steps that we might well have
taken -- should have taken in 1972 and 1973. But the
battle of 1972 and 1973 cannot be fought and won in
1974 or 1975. I think it's clear that the boom is
dead and I think it's clear that it would make no
sense to flog a dead boom.
In this context, I think it is clear that what
we are talking about is the institution of procedures
of discipline that will remove the Federal Government
itself as a source of instability in the economy.
And I think it's terribly important to do and
much more important than what the precise number is,
is the picture of control of discipline of some re­
straint and sacrifice that begins at home with the
management of the Federal Government's budget and its
monetary policies.

73

But the sacrifice has to begin at home, but it
can't end at home.
Let me just spend my last minute deriving a
little sermon from one small example that reaches
the newspapers today.
The President's request for a three-month delay
in the Federal pay increase was not persuasive to
nearly two-thirds of the Senate and I think I can
understand to some degree why it wasn't persuasive.
One small example that I might give is the same day
that the Federal pay hold-down request was made,
there was another story in the newspaper rumoring
the de-control of all prices of crude oil.
On a conservative estimate, that de-control would
cost this nation an extra nine billion dollars of
inflation in 1975, in contrast to the holding down
Federal pay of $700 million dollars. Moreover, the
request was not accompanied by any other indication
that anybody else is going to be asked to make sacrificies to do any restraint. No steps were taken to
ask producers to give up their shields against price
competition -- whether its transportation regulation
or Davis-Bacon or resale price maintenance.
No financial institution has been systematically
asked to channel funds into socially-productive uses
at moderate costs. No price or wage restraint has
thus far been requested in any systematic fashion. I
suspect that and the sacrificies of the Federal
Government will be a lot more credible and a lot more
persuasive if they are accompanied by a broader and
more eclectic program that ask all groups in the
private sector to participate in this battle to end
inflation.
SECRETARY SIMON:

74

Thank you, Mr. Okun.

MR. HERMAN NICKERSON, JR., ADMINISTRATOR,
-- NATIONAL 'CREDIT UNION ADMINISTRATION"
MR. NICKERSON:

Thank you, Mr. Chairman.

As the regulator for about 12,800 Federal
corporations, represented by eighteen million
people, I am sure that the Chairman of the Banking
and Currency Committee knows that we reach into
every voting district of the United States and have
about a ten-percent ability to go to the polls.
We would like to offer two points:
First, be
mindful in your dealings with the small thrifts
that disintermediation moves capital out of us,
when you get to demoninations of a thousand dollars.
We would like to encourage the rise to the $10,000
and higher and this way avoid some of our disinter­
mediation of our limited capital.
Second, we think increased productivity across
the country. I remember in studying Napoleon, he
said, "Give me enough multi-colored ribbon and I
will conquer the world." If you give me enough
national awards, I think our program of thrift and
thrift-award is an example that others might try.
In legislation, since we have a number of
distinguished legislators present, we need three
things: We need a discount fund to give us a
business-management liquidity within my agency ;
we need variable share accounts, and we need an
automatic loan-renewal program -to be legislated.
Thank you very much, Mr. Chairman.
SECRETARY SIMON:

Thank you, Mr. Nickerson.

75

MR. JAMES J. NEEDHAM, CHAIRMAN OF THE BOARD,
Nfcto YORK STOCK EXCHANGE

MR. NEEDHAM:

Thank you Mr. Secretary.

I would like to associate myself with the remarks
that Sylvia Porter made. The New York Stock Exchange
for over a year-and-a-half has been concerned about
this problem and we have made numerous studies and
analyses and we have made them available to your
Department, Mr. Secretary, and we would be delighted
to make them available to others who are interested
in them.
To be specific, which is what the President has
asked us to do, we propose that an anti-inflation act
of 1975 be adopted which will establish the twineconomic policy objectives of maximum utilization of
our national labor force and uncompromising mainten­
ance of a framework of stable prices.
Some specific anti-inflationary measures which
strongly merit consideration include: A legislative
commitment to reduce Federal expenditures consistent
with the aspirations and security of more than 200
million Americans
Second, a mandatory program to re-establish the
traditional American habits of thrift and sound per­
sonal financial planning, to immobilize over-indul­
gence, purchasing power without a tax increase and
to restrict the inflationary impact of on-going wage
settlements.
Third, a realistic approach to building a strong­
er element of productivity into the economy by
eliminating structural rigidities and existing laws
governing key economic activities.
Fourth, a more rational evaluation of the im­
pact of tax policy on our national economic health
with particular attention to the treatment of in­
vestment credits, capital gains and corporate sav­
ings.

76

Fifth, creation of a national nonpartisan commi­
sion on capital resources under the aegis of the
executive office to examine our national options for
dealing with the threat of a major shortage of in­
vestment capital in the years ahead.
Finally, only if these conferences fail, should
temporary credit and capital investment restrictions,
and particularly, bank lending guidelines be consid­
ered as a means of easing inflationary pressures.
Now, what we have to do is three-fold:
We must
maintain the initiatives developed in convening the
current series of the national economic conferences,
we must demonstrate to the American people that their
leaders are both determined and capable of developing
workable answers to their and our national and econo­
mic dilemma, and finally, Mr. Secretary, we must act.
SECRETARY SIMON:

Thank you, Mr. Needham.

77

MR. REX J. MORTHLAND, PRESIDENT, AMERICAN BANKERS ASSOCIATION
MR. MORTHLAND: An essential ingredient of any program to
curtail the present inflation and to prevent its recurrence
depends upon the public understanding of the complex nature and
the interrelated nature of the elements of our economic system.
It has a second dimension: We must have the willpower to
carry out that understanding, once we have attained it.
I would like to discuss very briefly a framework of simple
but basic economic forces that I think we need to recognize,
because the responsibility of gaining this public understanding
lies on the participants of this conference and on Congress
and the Administration.
Many of our problems are caused by seeking solutions to
one problem in our economy without considering the repercussions
of those solutions on the rest of the economy.
We live in a political and economic democracy in which the
citizens have relative freedom of choice. The basis of con­
sumption is production. We cannot consume, as a society, more
than we produce, plus the accumulated production of the past.
Our wants and desires exceed our resources so that some of them
go unsatisfied; hence the need for willpower, or determination,
or discipline.
To maximize returns, we have to establish an order of
priority of our desires, both for us as individuals, and for
our Government and society.
The establishment of our national priorities essentially
has to come from Congress.
The long-run objective of our society is a comfortable
standard of living for all people but it cannot be attained
without the use of capital goods.
We face a shortage of capital now and in the foreseeable
future and, hence, an accumulation of capital should be given
a high order of priority in this list.
The financial markets -- both on the demand and on the
supply side -- consist of a series of interrelated and inter­
connected, though sometimes specialized, markets; but there are
no water-tight compartments in it because there are enough
suppliers and enough users who will either place funds in two
or more areas, or who will borrow in those areas.
The most efficient way to allocate capital resources is
through a system of institutions competing under equal terms.

78

And "efficiency” is defined here as maximizing a return to the
saver and minimizing the cost to the borrower. Borrowers and
savers do try to attain this maximization.
A system of forced specialization, either on the supply or
demand side, would not be the most efficient system for our
economy even if it were possible. But, it is not possible by
any means short of a couplete control of the entire economy,
and I don’t think that we look for that.
If there are some areas of high social priorities that
don't receive enough resources through the competitive money
market conditions, we should encourage the flow of funds into
those areas by inducements that are extended to all institutions
or to all borrowers of a given type.
Any changes made in our financial institutions should be
made in a phased-in method so that we save all of the resources
and capital invested in it.
The Financial Insitutions Act as drawn up and as presented
to Congress, does observe these major forces and offers the
best means of restructuring our system of depository financial
institutions.
SECRETARY SIMON:

Thank you, Mr. Morthland.

MR. BRUCE K. MACLAURY, PRESIDENT, FEDERAL RESERVE
BANK OF MINNEAPOLIS
MR. MACLAURY:

Thank you, Mr. Secretary.

The common theme today and in previous sessions
has been expenditure restraint.
It seems to me one of the problems is that we
are playing with slippery numbers in this respect
and I thought that Wally Scott's presentation of the
charts made this perhaps apparent -- that he spoke of
de-budgetization of various agencies over the past - Post Office; Fannie Mae, and some others.
I think it would be useful to take a look at
the same numbers with those figures put back in that
we have been taking out over the last 15 years. And,
in that context, I would like to make a suggestion
that, in connection with the overall look at budget
expenditures, that the new Budget Committees in the
Congress are undertaking, that there ought to be a
similar look at the totality of credit programs,
guaranteed subsidies, and so forth, in the Congress,
so that we know the overall claims upon capital mar­
kets that are being exercised by the Goverment di­
rectly and indirectly.
The second point: Expert concern has been
expressed about the stresses being placed on finan­
cial institutions and about the lack of funds going
into thrift institutions and, thus, into housing.
I would like to second Rex Morthland's comment
that it seems to me that the Financial Institutions
Bill, which has languished, provides in its provi-:
sions for flexi ility of financial institions both on
the ability to pay, interest to consumers, and de­
positors, and, perhaps, on the ability of thrift
institutions in particular to restructure their
assets so that they can make variable loans; and,
finally, I would like to associate myself with
Charlie Zwick's interesting proposal, which I had
not thought about before, of a practical way in
which Congress could authorize withholding of funds.
Thank you, Mr. Secretary.

80

MR. GUSTAVE L. LEVY, PARTNER
~ goleman , saghs 'mrcmm:
MR. LEVY:

Thank you, Mr. Secretary.

As you all probably know, I am in the investment banking
business. In World War II, I remember reading in the New York
Times that, in the priorities for draft deferments, investment
bankers were second from the bottom.
The only one lower was the manufacturers of artificial
flowers.
I hope our importance today is more than that. I am
sure it is, because we are charged with finding the huge amount
of capital that is necessary to finance our industry today,
and in the years ahead.
Now, I am not asking any favors for our investment bank­
ing industry, but I do believe -- as I am sure we can roll
with the punches -- however, I do believe that in order for us
to maintain a balanced capital structure in industry, induce­
ments must be put forward for individuals, institutions, and
foreigners to invest in our stock market.
Such inducement should be of the kind of $500 to $1,000
tax deduction on interest income of individuals, depositing
in thrift institutions of all kinds, including thrift depart­
ments of commerical banks.
Also, dividend exemptions for individuals should be
increased, if not abolished altogether.
Also, in recent months, many corporations have been
urging managers of pension funds to invest their cash flows in
debt instruments, particularly of a short-term nature. This is
completely self-defeating, because these same corporations are
complaining that the prices of stocks do not reflect inherent
values.
It is essential in the long run for our markets to more
truly reflect inherent values that corporations may finance
in the sale of common stock, as well as a sale of debt.
Therefore, corporations should be urged not to instruct
their money managers to avoid purchases of equities.
I'm sure that these managers, over the long run, will do
very well with the balance portfolio of debt instruments and
common stock.
And lastly, Mr. Secretary, I urge and I hope that, as a

81

result of these conferences, a plan will evolve.
I also learned in the Army that a good plan, well
executed, is better than no plan at all, and I'm sure that you
will come forth with a plan and I'm sure it'll be a good one.
Thank you very much.
SECRETARY SIMON:

82

Thank you, Mr. Levy.

I
MR. RALPH F. LEACH, CHAIRMAN OF THE EXECUTIVE COWITTEE,

“ MORGAN 'GUARANTY •TRUST CCM>ANY
MR. LEACH: Mr. Secretary, I may be deceived by the tenor
I o£ some of the meetings that have been held. It appears to me
I that bipartisan agreement across the Country is that inflation
I must be stopped.
•

•

This agreement is in some way similar to that reached in
I the mid 1940’s on the need to assure high levels of employment.
The Employment Act of 1946, you'll recall, was passed in
I the atmosphere of: First, a recollection of 14% to 25%
1 unemployment in the 1930's; and
Second:
I veterans.

Concern about the employment of returning

The Employment Act had been a major issue in the 1944
1 election.

1
I would like to see at this point a Congressional debate
I on the topic of inflation and I would hope that, as a result,
1 Congress would indicate to the Country, either through an
I amendment to that Act, or a new Price Stability Act, that main■ tenance of price stability is absolutely essential to the mainI tenance of a high level of employment.
We have learned something since 1946. It is now apparent
I that price stability should have been a part of the full
| employment effort from the beginning. In the long run, inflaI tion is a major factor in the destruction of domestic
I employment.
While inflationary policies may, at times, have provided
I some increase in employment in the short term, even that effect
I is doubtful at present.
In debating the Price Stability issue, worldwide economic
interdependece would clearly be a key factor. Inflation
inevitably produces agitation for protective measures to
insulate domestic markets from foreign competition.
That's a path to rigidity and inefficiency, and to foreign
retaliation.

83

By itself, this is a powerful reason for concern
with rapid inflation.
If, as I suspect, a concensus would be reached
that in the long run inflation does destroy employ­
ment, then a national commitment to price stability
should be sought by both business and labor.
This Country's objective should be to strive for
a steady increase in the real take-home pay of the
workers.
Labor would be far better served with policies
which provide a 3% wage increase with no change in
prices, than it would be with a 13% wage increase
coupled with a 10% price increase.
An explicit Congressional directive would be of
great value as a background for the setting of mone­
tary policy. Most students of the Federal Reserve
System feel that the Employment Act of 1946 contains
an inflationary bias and, therefore, the monetary
authorities would be aided by an explicit Congres­
sional statement on price stability.
From the standpoint of business and financial
markets, inflationary expectations have been a major
factor in investment decisions.
I would predict that if, in the course of
Congressional debate, sentiment appeared to be jel­
ling in favor of a national commitment to price
stability, financial markets could well respond
positively and dramatically to the changed outlook.
Business decisions, in turn, might respond
favorably due to changes in perspective rates of re­
turn on capital investments, and in decisions on
inventory policy.
Thank you, Mr. Leach.

84

MR. W. J. KENNEDY III, PRESIDENT, NORTH CAROLINA
MUTUAL LIFE INSURANCE COMPANY
”
MR. KENNEDY:

Thank you very much, Mr. Secretary.

The position of the Life Insurance Industry
should be clear from the publicity given to the
position of the Industry by the Institute of Life
Insurance and other Industry spokesmen. Therefore,
I'm not going to dwell on this particular area.
I had some difficulty in determining just who I
did represent on this august body.
I do feel,
though, that I would be remiss if I did not voice
my concern in one particular area and that is that
the burden for correcting the inflationary spiral
should not be placed on those at the lowest level
in our economic ladder. We talk basically about
maintaining a restrictive monetary policy and a
reduction in Federal spending -- both of which
actions will result in increased unemployment as
well as the reduced flow of funds for social programs.
I am particularly sensitive to this as a Black
American because we, as a group, already burdened
with the unemployment rate that is twice that for
the general population, and an income gap that is
widening rather than narrowing of the lower income
levels for Blacks. And while I recognize that
certain actions must be taken, we should be sure that
the consequences of these actions are equitably
spread.
Moving from this area and taking a brief look
at the capital markets, we recognize that erosion
has taken place in the confidence of the public, in
the Investment Banking Business, and in the equity
markets, and marketing in general.
There was a similar erosion of confidence in the
Commercial Banking System in the early Thirties,
and that was relieved •? as far as the small depositor
was concerned - - b y the establishment of the Federal
Deposit Insurance Corporation.

85

Subsequentlyj the Federal Savings and Loan
Insurance Corporation was established for the
Savings and Loan Industry.
Perhaps there is some application here for the
Investment Banking Industry to restore the small
investors confidence in that Industry. Beyond this,
I would suggest that the alternative Capital Tax
Gains Benefits should be extended to the millions of
small investors as it is to the larger investors;
those persons whose combined normal and surtax rate
is less than the maximum capital gains tax rate,
are excluded from any benefit of the alternative
capital gains tax rates.
I believe in the progressive tax system as
opposed to the regressive tax system, and that the
philosophy should be extended to the capital gains
taxes, an incentive for the small investor to get
back into the equity capital market. Any improve­
ment in the availability of the equity capital will
relieve the debt demands to some extent and, thereby,
result in lower interest rates.
Thank you.
SECRETARY SIMON:

86

Thank you, Mr. Kennedy.

MR. LOUIS 0. KELSO, GENERAL COUNSEL, BANGERT
Iflp COMPANY, INC.
MR. KELSO:

Thank you.

Mr. Secretary, your staff estimated that you
wouldn't reach me until right after your coffee
break, and some charts which I really need to refer
to, haven't been distributed.
SECRETARY SIMON: All right.
with you after the break.

I will start
*

%

87

558-8X2 0 - 74 - 7

MR. HARVEY E. KAPNICK, JR., CHAIRMAN AND CHIEF
EXECUTIVE OFFICER,' ARTHUR ANDERSEN AND COMPANY
MR. KAPNICK: Mr. Secretary, I have three ob­
servations to make to start with.
First of all, I believe that a program is
needed, and it is needed now, to be announced to the
American people, if we are to reestablish credibili­
ty in America.
We've had a new foreign policy; we've elimina*
ted to a degree the abuse of power; and the economic
problems facing America now are crucial.
No. 2: I believe that we should all recognize
that any time we had bad financial information, we
make bad decisions.
I believe that good, sound, financial data is
essential, and this will be recognized by the Ameri­
can people and will be good politics in the future.
Today, we do not have good, sound, financial
data.
No. 3: I think that macro-economics discus­
sions are good, but individuals lose job individual
by individual, and companies go bankrupt, company
by company, and I believe that we are facing one of
the most serious capital crisis that we have ever
had in America.
For example, we talked a great deal about the
budget. The budget is a $5 billion problem. The
fictitious inventory profits in American business
today is providing taxes of $10 to $15 billion to!
the Federal Government, and taking it out of the
private industry.
This is capital consumed.
No. 2: Until we recycle oil profits, and the
increase in oil costs, this capital has been con­
sumed.
Further, legislation recently enacted is going
to cost American corporations some $10 billion.
Until funds are provided to each individual corpora­
tion to fund these, we're going to see serious
results.

88

The results of these three items are $40 bil­
lion. We need to find solutions to each of them, or
inflation will continue.
Bankruptcies will occur; people will lose jobs.
I recognize that monetary policy and balanced
budgets are necessary, but I also realize that we
need to adopt a program where we adjust profits of
American business to stop the devisiveness which is
going on in America between those who want to unite
to fight inflation.
I believe further that international trade and
economics is absolutely necessary; that we address
because the rest of the world is looking for leader­
ship, and we need to restore balanced taxation in
America.
The Tax System should be used to achieve Social
progress.
Now, if ever, we need savings incentives imme­
diately. We need to eliminate income taxes on
dividends. We need a new inflation-proof security,
because that will do more to eliminate the tax shel- r
ters which are wasting much of the capital in this
country and really provide real savings incentives.
We need incentives to provide for jobs and pro­
ductivity. We need to simplify some of our depre­
ciations so American individuals and consumers i
understand why these are given and that they’re not
loopholes.
We cannot destroy individuals in the process
that w e ’re going through in the next few months.
And therefore, I recommend very strongly that a
transitional credit be given to everybody in the low
I income group.
SECRETARY SIMON:

Thank you.

89

MR. LOUIS 0. KELSO, GENERAL COUNSEL, BANGERT §
COMPANY, INC.
SECRETARY SIMON:
MR. KELSO:

Mr. Kelso, are you ready now?

Yes.

SECRETARY SIMON:
I don't know how you are going
to get through all of these charts in three minutes!
MR. KELSO: Thank you, Mr. Secretary.
This is
going to be the fastest presentation of this subject
that I have done.
Let me say that my analysis of the cause of in­
flation and the cure for inflation is not based on
the conventional wisdom. For this I make no apology
because it seems to me that the conventional wisdom
has been pretty consistently followed for the last
40 years, and has brought us to where we are.
Let me turn immediately, then, to the charts that
have been distributed to you and lead you rather
quickly through them.
The first one is simply designed to remind you
that there are economics where there are almost no
laws, no solid dependable principles, there is at
least one, and that is that the total amount of pur­
chasing power generated automatically in the market
economy is exactly equal to the market value of the
goods and services produced.
Our problem is a problem of creating a matching
of that purchasing power with the people who have un­
satisfied needs and wants.
The second charge is my estimate of what has
happened in the means of producing goods and services.
From the beginning of history, when, perhaps, 95% of
the total input into the economy was labor, today we
are at a point where, if labor were competitively
valued -- and I call your attention to the fact that
almost every conceivable law that we have is designed
to create an artificial price for labor, if it were
competitively evaluated, we'd find out that approx­
imately 90% of the total input comes from Capital and
not Labor.

90

Chart 3 contains two diagrams on it, the first of
which is to illustrate conventional finance.
I point out that Model One, the model of conven­
tional finance, reflects the fact that 98% of total
new capital formation in the U. S. economy, averaged
over the last 15 years, is financed out of cash flow,
or borrowings repaid out of cash flow. This tech­
nique builds the incremental productive power of
capital into a stationary ownership base. All of
the qualitative studies that have been made to date
show that 5% of the people -- 5% of the consumer
units -- own all the productive capital. The stock
held by the remainder, the other capital assets, is
negligible.
Model 2, on that page, is a new technique of
finance, one that’s been used in well over 100 corpo­
rations so far, and provides low cost capital to
growing enterprises.
It’s my belief that this is the basic model for
a technique of finance that can finance the fourand-a-half trillion dollars or so of new capital
formation that we need in the next ten years, and do
it in ways that builds capital ownership into the
labor force, using the logic that business has always
used for itself; namely, to invest in things that
will pay for themselves so that labor doesn’t have
to take something out of its pocket or paycheck.
Chart Number 4 is designed to show what this
means in the big picture.
You have the same corporation -SECRETARY SIMON:
I'm sorry, Mr. Kelso, that's
four minutes and we'll take a break now and we will
reassemble promptly at the end of ten minutes.
(Recess.)

91

SECRETARY SIMON: I am just told by an informer that out
in the hallway, I had been accused of being like Mussolini who
makes the show run on time, and that has given me great
courage.
And while I don't like to be compared to Mussolini and I
certainly don't want to have happen to me what happened to him,
I would appreciate it if everybody would resume their seats.
Before we continue around the table, there are several of
our Congressional representatives who have to get to the Hill,
and I am going to call on one right now just slightly out of
order.
It is going to be a pleasure for me to exercise a threeminute rule on Congressmen. This is quite a switch,
Mr. Chairman.
THE HONORABLE ERNEST F. HOLLINGS, UNITED STATES SENATE
MR. HOLLINGS:

Thank you, Mr. Secretary.

I've been trying to figure out what I would do listening,
were I the President. Obviously, number one you'd balance the
budget. Secondly, you would take the financial experts, like
Dr. Burns, Mr. Greenspan, and you financial boys, and start
doing something about bringing the dollars back home rather than
the deserters, set some kind of financial policy with respect to
credit controls, money supply.
Thirdly, you can't get credibility in this field of finance
until we first get credibility on fuel. We have no energy
strategy in this nation. We've been recommending and it's been
opposed by the White House consistently an energy policy council
very similar to the Council of Economic Advisors, so it could
coordinate disparate agencies, departments and efforts so that
there would be a long-range credible program, and then, of
course, I'd come to Sylvia Porter's program of conservation and
consumer participation.
Now, I'll only comment on number one, balancing the budget,
because like Pogo, we are the enemy and it's with us. I mean
all of us. And we are about here in proportion. We have about
eight from the Hill or Congress and we've got about 80 all
around, so we are about ten percent of the problem, and each
speaker makes us about 90 percent of the problem.
And I want to bring that into perspective. Everyone of you
every time you testify say that if we cut that ten billion or
we balance that budget, that it'll only really mean some onetenth of one percent to the inflation rate. But it's got a
92

better psychological value, and I believe that.
But I then believe also that there are other things to be
done. Now, on balancing that budget, Mr. Zwick, I think it
was, had a good idea; but we been changing off from that because
well, the Congress has really been limiting the presidential
powers.
Lyndon never told us the truth about the war , and ver­
acity did not improve under Richard Nixon, and we hesitate in
the Congress trying to give the power of impoundment.
On the other hand, we’ve done this. In 1967, by public
law -- and I'll leave this with the Chaiiman I- 90-218, the
90th Congress in December, after the fiscal year had been in
course some five months almost, on December the 18th passed a
joint resolution, a very simple little thing of a page-and-ahalf, whereby we cut down on personnel two percent, about ten
percent on the controllables other than personnel, we gave a
contingency fund to President Johnson, and in essence, we cut
some 4.9 billion dollars in the very closing days.
That was after the Congress had already cut out 5.1
billion. Now, that's about what we've done already. Already
this year we've cut right at 5.7 billion from that 305 first
submitted in January by President Nixon.
And if we continue on with Health, Education and Welfare,
the cuts in military construction, foreign aid, I think they're
about four more billions. Then we'll be right near a seven to
eight billion dollar cut in new budget authority, constituting,
about a four billion cut in actual outlays.
And so to bring it within that area or within five billion
in actual outlays, all you need is a little joint resolution
similar to Public Law 90-218, and finally, Mr. Secretary, you
need it now.
Don't want to wait until after this blooming election.
That's the only reason you got any of us up here. You wait
until after the election and we'll have hearings, we'll study,
we'll get consultants, and nothing will get done.
The main point is, if the President is serious about this,
it isn't so traumatic to come through at the very end and cut
back these departments. You can spell it out.
In other words, what impoundments we let go interior,
which was a lot of public parks and fish hatcheries, we
increased that Interior budget some $765 million for fiscal '75
over '74. And I called the White House and asked them to hold
up on that like they did on Agriculture.

93

We can still get back with Interior a little percentage,
still get back a pork barrel, public works. We can do this
before October the 15th, and I think it’s vitally important so
this whole crowd and that some of the savings and loan people
won't be berating the Congress all Fall long and the Government
that the whole thing is that the Government's gone wild. We've
got, on the contrary, for us to join hands, and you reinstill
confidence. Let the president draw the line and say, "Here's
how we're going to do it before October the 15." Then we can
reinstill confidence in Government and then some of these
other voluntary programs for conservation and consumerism can
follow on.
Thank you.
SECRETARY SIMON:

94

Thank you, Mr. Hollings.

MR. PAUL R. JUDY, CHAIRMAN AND PRESIDENT, A. G. BECKER
~~~S COMPANY, INC.

MR. JUDY:

Thank you, Bill.

I'd like my comments just to cover three areas,
some of which have already been covered.
I'd like to emphasize some things, therefore.
First, in Bill's introductory remarks and Bob Roosa's
comments, it was pointed out that our inflation is
part of a world-wide phenomenon.
It's the accumula­
tion of a number of causes and I'd like to comment
just briefly on two.
One: Shortages and threatened shortages in basic
resources.
In this area, I think we find two general
categories, natural shortages, both long and shorter
term in character:
Secondly, monopolistic shortages
or threatened shortages, nationalistic in character.
The second general area of causes of world-wide
inflation, greater growth of consumption levels or
aspirations which have been outstripping the longer
term rate of output potential of past and future
savings, and investment.
So it's part of a bigger
picture.
Commenting just briefly on the monopolistic
shortages aspect of world-wide inflation, I honestly
don't think that there's an economic solution to this.
There are some short-term financial solutions.
I
think the leaders in the world are busy at these.
Fundamentally, though, we cannot have inter­
economy transfer prices which don't have any relation­
ship to natural costs and returns on investments.
This will lead relatively quickly to substantial
cost distortions throughout the world, unnatural,
unsound diseconomic resource applications, unsus­
tainable redistribution of wealth.
These are political matters, and I strongly urge
our Government to pursue political solutions to these
matters.
Turning, now, to the domestic economy. Again, we
have natural inflation due to natural shortages of
basic materials. We have our own form of high con­
sumption levels and aspirations and our own shortages

95

of savings and investment levels.
Here, I think the Government can make a strong
impact in terms of guiding1and,influencing and estab­
lishing the rules for the game.
I comment on five areas
One, free prices. Fundamentally, when the infla­
tion has a strong material shortage thrust to it, we
must keep free pricing. This curtails marginal con­
sumption and it stimulates investment to increase
output.
The fundamental problem in the utility industry
is one of pricing.
It’s that simple. Proper pricing
will finance the utility industry.
Secondly, Government must monitor our markets to
be sure they’re maintained free and competitive, so
that's always been the policy of Government, but it's
particularly important in these times, to insure the
absence of monopolistic pricing in our own domestic
economy.
Third, the Government has every right and it's
the only and sole role of Government to use taxation.
Taxation should involve trade-offs of incentives and
penalties. We have to put more space between the
immediate benefits and pleasures of consumption ver­
sus the more patient enduring values of savings, par­
ticularly in equity risk savings.
There're a variety of specific programs the
Government could use here, excise taxes on consump­
tion, particularly in priority resources, tax credits
or exemptions on interest on personal savings accounts,
lower capital gains taxes on personal investments,
investment tax credits for industry in selective
areas.
SECRETARY SIMON:

96

Thank you, Mr. Judy.

MR. FRANK J. HOENEMEYER, EXECUTIVE VICE PRESIDENT,
~ PRUDENTIAL INSURANCE COMPANY OF AMERICA

MR. HOENEMEYER:

Thank you, Mr. Secretary.

I would like to start by casting my vote for
sound fiscal and monetary policies. Without them
inflation won't be cured, and it can't be cured in
a short time span without severe dislocations.
So we have to adopt sound policies, stick with
them and be patient.
Longer range, one of the cures
for inflation is to increase our productive capacity,
but to do this we must first generate the savings.
I feel there must be more tax incentives or rather
fewer tax penalties for saving.
There is and will be a scarcity of all capital,
but especially equity capital.
I believe there
should be lower taxes on capital gains, especially
for investments held for a longer period of years.
The investment tax credit has been very helpful in
providing retained earnings and consideration should
be given to increase the rate for public utilities
from four percent to otherwise standard seven per­
cent.
Utilities need help desperately, and this would
not only give them some direct help but also might
lead the state public utility commissions to be
more realistic in rate relief.
As for the use of our scarce capital resources,
I would like to offer two thoughts.
First, I suggest
that we stretch out some of our environmental im­
provement goals.
There is no question that we should
[reduce pollution and health hazards in our manu­
facturing plants.
But capital spent this way is
not available for increasing productive capacity.
Secondly, I suggest we consider carefully what
we do to cure the problems of the housing industry.
Undoubtedly, something needs to be done to help
jthose savings institutions badly hit by disinter­
mediation, and the financial institutions bill would
help greatly here*

97

Also, something must be done to.help increase
the employment of construction workers.
But this
does not necessarily mean that we should increase
housing construction.
Prudential is a mortgage
lender nationwide, and we find the housing market
very spotty.
In some areas of the country vacancy
rates are under two percent, but in other areas, it
is ten to 15 percent and overall, the vacancy rates
do not, in my opinion, suggest a real housing short­
age.
So, while something should be done to ease the
unemployment of construction workers, I feel alter­
natives to housing should be explored.
This might
be, for example, an excellent time to build and
modernize our mass transit system.
Thank you.

98

MR. J. HENNING HILLIARD, CHAIRMAN, J.J.B.HILLIARD,
U.L. LYONS',' INC.-----------------------------------

MR. HILLIARD: Thank you, Mr. Secretary.
I'd
like to emphasize that inflation is an intangible.
It's not something we can whittle with a knife orwe can mold with hammer and nails.
It's a condition
in the minds of men and women. And our Government
creates fears in the minds that bring about the in­
flation that we're so concerned with.
Our Government can also mold confidence that
will alleviate that inflation.
Now, we've talked a great deal fc^is morning
about fiscal policy. We've talked a great deal
about the need to balance our budget in this particu­
lar fiscal year. And this is important. But it's
much more important to instill in the minds of
people confidence in our fiscal policy by setting up
a machinery that will create a balanced budget over
a period of years and that will build up surpluses
in good years and it will only create a deficit in
very, very bad years.
Others will speak and have spoken on the sub­
ject of raising capital and how it can be raised
and our need to raise it. But in my mind one of the
most important things that we need to do is for our
Government to help destroy the idea that profit is a
dirty word.
If we can do this, then the public will
return to our capital markets. We will have good
capital^markets; we will need some incentives, yes,
but we can create pride and satisfaction in saving
and investing.
Thank you.
SECRETARY SIMON:

ThAnk you.

99

MR. RICHARD D. HILL, CHAIRMAN OF THE BOARD, FIRST
n A t i o n a l ~ b a n k of b o s t o n
MR. HILL: Mr. Chairman, I doubt that we will
find here very many innovative cures for the
disease of inflation. The cause of the illness
seems to be understood and a reversal of this pro­
cess, that is, the achievement of budgetary balance
and surplus must be the answer.
Monetary policy, as Dr. Burns says a blunt
instrument, will respond to this, but no longer can
be expected to lead the way to restored health.
Bandages are often needed to stem the flow of blood
while the basic remedy is being applied,and in the
process of applying these bandages, I hope we will
examine the inflationary, perhaps long-term infla­
tionary implications of each one of these bandages.
While on the subject of bandages, I have two
suggestions, which admittedly are palliatives, not
basic cures.
The first, Mr. Chairman, is to help you in your
proposal to increase Federal taxes on automotive
fuel. The idea is an excellent one, but politically
dubious.
As an alternative, you might consider the manda­
tory purchase at the pump of a ten cent Federal
savings stamp for each gallon of fuel. This could
be sold to others or accumulated and redeemed at
banks for the lowest denomination savings bonds.
This will have the effect of increasing savings
and, hopefully, reducing consumption of a scarce
resource.
The second suggestion has to do with our
troubled bond and equity markets.
While much attention must be paid in the future
to the actuarial adequacy of our Social Security
System, it might be helpful to permit the trust fund
to invest a portion of its cash flow in corporate
bonds and common stocks, hopefully including public
utilities and possibly transportation companies.
This should give some muscle tone to the
financial markets,and in a non-subsidized way,
channel resources to some vital industires.
SECRETARY SIMON:
100

Thank you, Mr. Hill.

MR. M. R. HELLIE, PRESIDENT, CREDIT UNION NATIONAL

- ASSOCIAT TON",' TNCV---- ---------- :
-- -----------MR. HELLIE:

Thank you, sir.

I’d like to make it very clear at the outset that
I am not an economist. However, I, like each of the
other persons assembled here have a substantial under­
standing of the financial difficulties our nation's
families are attempting to cope with.
Leaving the specifies to others more expert than
I, it is I believe, the quality of life about which
we are speaking.
It is this concept around which we
and our Government need to relate our activities now
and in the future.
Our own national self-interest must assume the
first priority, and I further assume that this places
the well-being of the nation's citizens within this
first priority.
Please note I did not say "welfare", but instead,
"well-being".
In reaching conclusions as to what priorities are
preeminent for our citizens, what priorities require
the premier call on our resources, capital and energy,
I would think that shelter and sustenance come first.
Please note I did not say housing and food. Because
those words are too delimiting in what they connote.
I submit that the delay of a constantly-increas­
ing standard of living may no longer be possible.
I submit that succeeding generations may have
some difficulty in maintaining the same standard of
living to which current generations have become
accustomed.
I suggest that a Council on National Priorities,
composed of concerned citizens, may provide some
assistance to our Government in setting the difficult
guidelines which will be necessary. That American
ethic, the quantity of life may have need of sub­
stantial revision.
Thank you.
SECRETARY SIMON:

Thank you.

101

MR. MILTON J./HAYES, CHAIRMAN, GOVERNMENT FISCAL
POLICY COMMITTEE, INDEPENDENT BANKERS ASSOCIATION
OF AMERICA; CONSULTANT, AMERICAN NATIONAL BANK OF
CHICAGO

MR. HAYES:

Thank you, Mr. Chairman.

First, on the budget, I'd just like to point
out, I'd like to see an abandonment of the full em­
ployment budget.
It's not an accurate description
of our income and therefore cannot be an accurate
description of our expenditures.
Second, I would like to direct my next point
to the attention of the Honorable Congressman Reuss.
We must realize that sooner or later we have to
come to an accommodation with gold.
In the past,
no serious inflation has been cured if the money was
distrusted by the people.
I therefore urge that the
beginning steps be taken to bring the dollar back
into the discipline of gold.
I propose that this be done immediately by the
following steps:
One.
an ounce.

Raise the official price of gold to $75

Two.
Issue the additional gold certificates
representing the difference between the present
$42.22 an ounce and the new figure of $75 an ounce.
However, these certificates are to be frozen as
a backing to the currency and not used by the
Treasury Department to pay current bills as was done
in the previous increases. This is a vital step and
must be part of the legislation authorizing the new
official price of $75 an ounce.
Studies must then go forward to have a statu­
tory backing of the currency. History shows that
unless there is a forced discipline in the matter of
maintaining a sound currency, the nature of man is
such that debasement is an easy course, and will
continue to be followed until the financial structure
of the nation collapses.

102

If these steps are taken, we will find that
confidence in the dollar will be restored at home
and abroad, that the people will trust the value
of their money, that savings will flow back into
our savings accounts and funds will be returned
from Switzerland, that natural forces will cause
decline in many basic commodities from their present
speculative heights and the rate of inflation will
fall.
Thank you, Mr. Chairman.
SECRETARY SIMON:

Thank you, Mr. Hayes.

103

558-812 0

-

74 - 8

DR. GABRIEL HAUGE, CHAIRMAN, MANUFACTURERS HANOVER
TRUST COMPANY

MR. HAUGE: Mr. Secretary, following several
weeks of inflation summitry leaves one with certain
impressions.
First, I think it can be said there’s agreement
there is a certified dragon out there, but there is
no Saint George on the scene yet. Perhaps what we
are doing here today is trying to help fashion his
sword.
Next, it seems to me that the major cost of
inflation is getting clear and that’s how to get out
of it.
We've decided not to get out of it in a lump.
We're going to try to get out of it on the installment
plan, but that's got to be effective and got to be
paid up.
The problem seems to be how to dig the country
out of the hole it is in without making the hole a
lot bigger. And here we run into the fears of peo­
ple who talked about stagflation. My own judgement
is that at this time we've got to run the risk on the
downside rather than on the upside and that's re­
versing the whole philosophy since the end of World
War Two.
Further, we've seen, I think, in these sessions,
as we've read them and looked at them on television,
that advice often comes without directions as to how
to use it. I think of that in connection with the
budget matter.
I think of that in connection with
all the advice given to Mr. Burns about how to ease
the money situation.
We've got to be as specific as we can.
And finally, it's clear that when economics is
really important it becomes politics.
That leads me to a disturbing thing that has sur­
faced again here today. There has been a lot of talk
about people and the Government -- "we and they".
I'd always thought this was our Government and that
what they do is a response to what we want, or, if
it doesn't, it ought to.~ That probably gets us down

104

to the reality of this problem and many others.
We are a nation of client organizations and
Senator Hollings referred to it. We’re very loyal
to our loyalties.
It is hard for us to lift them up to this whole
great problem and it applies to every one of us,
whether we're members of a school board, hospital boardT,
or a splendid idealistic organization.
We're going
to go and get the money from the public till.

t

I think every one of us has got to go back and
ask the question where we are every time. How is it
going to impact on the problem we are trying to get?
I thought it was awful when Herb Stein was
roasted when he pointed this out before he retired.
Why, of course, the public isn't responsible for it.
Of course, the public is. You and me in the organi­
zations that are constantly demanding something from
our Government.
Mr. Secretary, I planned to say something this
afternoon on one or other of these matters, but it's
clear that the topics that have been ticked off this
morning are all relevant and have to be put together.
Fiscal and monetary policy clearly have a role. They
are necessary but not sufficient, in my opinion.
We've got to face the question of how effectively
can demand inflation cut cost inflation, widening
supply bottlenecks, monitoring stabilization.
I thought Ralph Leach was right as rain in the
question he raised. We cannot run this country solely
on a job standard. And what he calls for I think is
a realization of that. 95 percent of the labor force
is entitled to some consideration as well as the 5
percent, because we can deal with the 5 percent, I
hope, in ways that don't jeopardize the 95.
We've also got to be concerned with the inequi­
ties in the way we fight this problem and as Bob
Roosa pointed out, with the international dimension.
But the application of proper measures in these
areas with the conviction to make them work and com­
ing back to you and me as citizens I think we can do
a good job.
Thank you.
SECRETARY SIMON:

Thank you, Mr. Hauge.

105

MR. DAVID B. HARPER, PRESIDENT, FIRST INDEPENDENCE NATIONAL

“11--------MR. HARPER:
pass.

106

-- ----

--------------------

In the interest of not being repetitious, I

MR. RICHARD G. GILBERT, PRESIDENT, CITIZENS SAVINGS

ASSOCIATION
MR. GILBERT: I'd like to mention a few ideas not mentioned
and perhaps emphasize a few others.
I, too, would like to see the full employment budget
scrapped as a concept; I'd like to see Federal taxes increased
to aid in the balancing of the fiscal 75-76 budget.
In addition, I'd like to see a price tage for all new
legislative proposals for expenditures, both long- and short­
term price tag, along with a revenue source placed along with
those bills.
I would like to see the amendment of the Employment Act
of '46 to include the concept of price stability and recogni­
tion that supply and production are also parts of the supplydemand equation.
Further, I think labor, including organized labor, should
be called on to limit its request for wage increases to some­
thing below productivity increases to afford some reward for
capital; and further, I would like to see in the financial
area the Hunt Commission report passed, nob just the Adminis­
tration's report.
I would like to see the Hunt Commission version totally
reviewed because the Administration bill ignores the regulatory
section.
Thank you, Mr. Secretary.
SECRETARY SIMON:

Thank you, Mr. Gilbert.

107

DR. T ILFORD C. GAINES, SENIOR VICE PRESIDENT AND
ECONOMIST MANUFACTURERS HANOVER TRUST CO.
MR. GAINES:

Thank you, Mr. Secretary.

I'm in agreement with almost everything that
has been said here, so I ’ll forego reading my writ­
ten remarks and just volunteer a few informal obser­
vations .
First, it has been suggested in some elements
of the press that these meetings are an exercise in
PR futility.
I heartily disagree with that.
I don't think any of us haS deluded himself
that we're going to come up with brilliant new ideas
that are going to turn the entire situation around.
If we accomplish nothing more than some degree
of public education and if we achieve nothing more
than some degree of public support, well, certainly,
our time will have been well spent.
Secondly, many very useful suggestions have been
made today and in earlier sessions for long-range
reform that will help to prevent inflation in the
future.
In particular, I like the suggestion that
we slaughter the sacred cows, namely, those pieces of
legislation that provide protection for certain
groups from the market process. And I would add one
additional long-range suggestion.
I would like to see the President establish a
new Hoover Committee similar to the one set up by
President Truman for an in-depth review of all budget
expenditures.
It's very easy to make sweeping recommendations
that five or ten billion be cut from the budget, but
true in-depth studies are necessary if that'g going
to be done wisely.
Third, I think we have to recognize the nature
of the present recession that we're in. It's a very
unusual recession.
If it were an ordinary one we
might be able to relax monetary and fiscal policies
and still make progress against inflation. But there
is one peculiar element in this recession that pre­
vents that from being feasible, namely, there are
still serious bottlenecks in many critical materials
areas.

108

So that there is a serious question as to how
far we could go in stimulating economic recovery
without running into a bottleneck problem.
In other words, easier policies would only add
to further inflation.
Fourth: Picking up that point: the suggestion
has been made in earlier sessions that monetary
policies should be eased.
I don’t know what those
suggestions mean.
If one looks at the credit and
money aggregates over the past year, it's certainly
hard to identify policy as exceedingly tight.
I think the Fed should continue on the course
it is now on and I commend their present effort to
bring down short-term interest rates without compro­
mising their basic policy objectives.
Further, on budgetary policy, I agree complete­
ly that we should move as promptly as possible to a
balanced budget position, either through the expen­
diture reductions or tax increases and I would be
hopeful that we might bring some of the off-budget
agencies back into the budget as we move toward this
balanced budget objective.
At the same time things should be done to ameli­
orate the impact upon certain parts of society and
economy. In particular, I'm very much in favor of
a broader public employment program.
I would be in
favor of open-ending rights to unemployment.
There are various things that can ease the im­
pact. I also like the suggestion of something like
a one-thousand dollar exemption on the first onethousand dollars of interest income earned in
savings accounts.

109

MR. GAYLORD FREEMAN, CHAIRMAN OF THE BOARDj THE FIRST
NATIONAL BANK OF CHICAGO
MR. FREEMAN: Inflation is the result of a variety of
practices which are popular. To overcome inflation requires
policies which are unpopular. To encourage the Administration
and the Congress to adopt the necessary but unpopular dis­
ciplines and to pursue them for an adequate period, they must
have the support of the people.
The people, in order to give this support, must have con­
fidence in the integrity and the judgment of the Government
leaders. To generate that confidence, the Government -- and I
believe that means the President -- must talk to the people
repeatedly, identifying the causes of inflation, discussing
alternative cures and frankly describing the burdens which the
cures will entail.
The President should urge the people to assess the degree
to which they are suffering from inflation and balance that
against the inconvenience they may suffer from an effective
anti-inflation program.
He should urge them to discuss this trade-off with their
Congressmen during the forthcoming adjournment. They should
indicate whether or not they are prepared to accept the dis­
ciplines of a protracted anti-inflation program.
When Congress reconvenes, it should reflect the judgment
of the people. As a part of a broader program, monetary policy
could be eased a little bit with some resultant modest decline
in interest rates. Fiscal policy must do far more than just
achieve a budgetary balance.
To improve national productivity, it must encourage
investments. This will require incentives to save. Corpora­
tions should be offered incentives to invest in more produc­
tive facilities.
The Treasury and the accounting profession should coop­
erate to achieve a more accurate reporting of the size and
economic function of profits. To justify public support, the
burdens of the anti-inflation program must be equitably
distributed.
Aid should be offered to housing, possibly through sub­
sidized interest. The cost of increased aid to the unemployed
should be offset by increased taxes on those who remained
employed.
Revenue loss through incentives to save should be re­
couped through increased personal tax rates. Incentives for

110

to invest should be offset by an increase in
corporate tax rates .

c o rp o ra tio n s

If further revenue is needed to balance the budget
excise taxes should be increased on scarce commodities such as
petroleum products. The dozens of laws designed to prevent
price competition should be repealed.
No other Government is sufficiently strong to mount such
an expensive program. Today and possibly only for a short
time our Government has the unique strength and widespread
support to initiate such an anti-inflationary program if the
public is convinced that it is necessary, effective and fair.
Thank you.
SECRETARY SIMON:

Thank you, Mr. Freeman.

Ill

MR. WILLIAM H. FRANKLIN CHARIMAN, CATERPILLAR TRACTOR

COMPANY

‘

'

MR. SIMON:
If I could ask everyone to please
again, speak into the microphone.
Some of our re­
corders are having trouble picking your words up.
MR. FRANKLIN:

Thank you, Mr. Secretary.

I would like to speak for the moment on one of
the cures for inflation.
It is, I am certain, a
production of more goods. To produce more goods, we
will have to have industry install increased capac­
ities .
To install increased capacities will require
capital.
Add to that the demands for capital
for pollution control and capital to end our depend­
ence on imported oil and you have a horrendous de­
mand for capital over the next several years.
Now, we know that one of the best sources of
capital is a strong profit base. Retained profits
are not only a source of capital in themselves, but
they are the base from which corporations can borrow
money or sell stock in the equity market.
With that background, I’d like to share with you
some figures that I have here and were put out by
the July issue of the Axe-Houghton § Company. They
start out with reported profits before taxes which
were $65 billion in 1965 and rose to $96 billion in
1973, an increase of almost fifty percent.
They then adjust those profits with two factors:
one, depreciation on replacement value and, two,
inventory profits. You have now not a fifty percent
increase, but a drop from $36 billion to $23 billion
or almost a third.
But the most startling thing of all is they then
deduct the dividends paid and you have then a retained
adjusted earnings which dropped from $19 billion in
1965 to one-and-one-tenth billion in 1973.
I submit that’s nowhere adequate to support the
capital needs that we have. We must have incentives
for the formation of capital and corporations must
have help in obtaining capital.
SECRETARY SIMON:

112

Thank you.

DR. GROVE W. ENSLEY, EXECUTIVE VICE PRESIDENT,
~~NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS

MR. ENSLEY: Mr. Secretary, Chairman Patman
and distinguished members of the Congress:
It is
the responsibility of the Federal Government under
the Employment Act of 1946 to serve as the economic
balance wheel in our private enterprise system,
offsetting excesses in the private sector and
cushioning the impact of external forces.
The Act can only be effective if the clearly
implied mandate of price stability contained in that
Act is given its proper emphasis.
In a very non­
partisan way this was the way the Joint Economic
Committee proceeded during the first decade under
that Act and as one of the distinguished sponsors
of that Act, Chairman Patman can testify.
This essential interpretation of the Act should
be reactivated through a determined policy of fiscal
restraint including, if necessary, tax increases.
As the Joint Economic Committee initiated at the
outset of the Korean War, remember that substantial
Federal undertaking was financed on a pay-as-you-go
basis with only moderate inflation and at very low
interest rates.
The underlying and most significant inflationary
force in the United States in the past decade has
been Federal budget deficits and expansive Federal
credit programs outside the budget. Unless the
rate of inflation abates more rapidly than antici­
pated or serious unemployment actually develops,
a budget surplus or at least a balance should be the
objective of public policy.
Ideally, it would be desirable to create a
budget surplus to offset at least, in part, the
stimulating effect of heavy borrowings by Federal
agencies that operate outside the budget.
This
would reduce the intolerable burden currently placed
upon monetary policy which has resulted in inadequate
private credit and excessively high interest rates.

113

Major victims of this have been thrift insti­
tutions and their depositors, home mortgage
borrowers and the housing industry.
To achieve a more neutral Federal fiscal policy,
expenditures should be reduced to less than $300
billion in the current fiscal year. The need for
stringent expenditure control is all the more
necessary since, at least in one area, increases in
spending may be necessary to relieve inequities
resulting from a vigorous anti-inflationary effort.
In this regard consideration must be given to
a lengthening period of unemployment compensation,
to manpower re-training and to public service employ­
ment which would enable Government at all levels
to act as an employer of last resort in areas where
unemployment is intolerably high.
Reductions in expenditures should have top
priority in achieving fiscal restraint.
If expendi­
tures are not reduced sufficiently, however, then
a tax increase appears absolutely necessary if in­
flation is to be controlled and if continued over­
reliance upon monitary restraint is to be avoided.
Any tax change should be structured so as one:
to encourage private savings and productive invest­
ment, and, two, to restrain consumption in areas
which are in particular short supply, as for example,
selective excise taxes designed to encourage pro­
duction of low powered fuel-saving automobiles.
Thank you very much.

114

MR

GILBERT R. ELLIS, CHAIRMAN, HOUSEHOLD FINANCE

— CORPORATION

MR. ELLIS:

Thank you, Mr. Secretary.

I believe the major fiscal objective for this
year and future years is to bring the Federal budget
into balance, preferably by expense control, not tax
increases which seem to just stimulate new spending
programs.
Spending for the fiscal 1975 should be held in
the range of the two hundred ninety-five to $300
billion, which is still $26 to $32 billion above the
actual fiscal 1974 level.
Congress and the Executive Branch have established
control over agency expenditures and borrowings which
are now excluded from the official budget.
These
agency borrowings along with the Government-generated
debt have an inflationary impact on the economy and
seriously affect the availability and cost of funds
for the private sector.
In order to demonstrate earnestness of commit­
ment, there should be across-the-board cut in all ex­
penditures, followed by selective cuts of greater
amounts. For example, cuts in Federal spending must
include so-called entitlement programs such as gen­
eral revenue-sharing and assistance programs.
Defense
which looms so large in our total budget must be
scrutinized carefully and cut.
In view of the criti­
cal situation there should be a moratorium on new
spending programs and no sacred cows.
Tax incentives are needed to further stimulate
savings and direct investment.
Consideration should
be given to eliminating Federal tax liability on in­
terest income up to a certain dollar level.
Savings
institutions should be allowed to have greater
flexibility in establishing rates of interest paid
on savings accounts so as to be more responsive to
market conditions and to encourage savings.
There should be changes in capital gains taxes
to relate the rate to the length of the holding
period. Corporations need relief from unrealistic
rates of dollar levels of depreciation.
Special
investment tax credit provisions for investment in
critically short capacity areas should be consi-

115

dered.
Once again, it is important to emphasize that any
short fall and Federal Government revenues as a result
of such tax relief must be offset by corresponding
and equal cuts in spending or, less desirable, in­
creases in other taxes. The single, most effective
act to insure adequate equity in long-term debt mar­
kets would be a total priority commitment of both the
Executive and Legislative branches of the Federal
Government to a balanced budget and continued but
less severe monetary restraint. This must displace
the so-called full employment goal as the nation's
number one priority. The unemployed, however, must
not carry the full burden of a shift in emphasis.
Adequate levels of taxation of the employed must
be established to support adequate levels of compensa­
tion for the unemployed but willing worker.
It must
always be remembered that the surest way to protect
the long-term capital funds market is to provide a
stable currency. When a currency loses its value,
it loses one of its primary reasons for being.
And finally, lets get going and make decisions,
even though not perfect and politically palatable.
SECRETARY SIMON:

116

Thank you.

dr .

T

OTTO ECKSTEIN, PRESIDENT, DATA RESOURCES, INC.,
OF ECONOMICS, HÄftVÄRD UNIVERSITY

r OFE^'OR

MR. ECKSTEIN:
Secretary Simon, Members of the
Congress, Fellow Delegates:
First, let me congratulate
the Federal Reserve System for their modest move
towards ease.
It is a pleasure for us to see that
the Federal Reserve has, in fact, assessed the risks,
both on the inflation and on the employment side and
has felt free to move at least away from its previous
p o sitio n .
Now, my recommendation to them would be that
they now move gradually to a five to six percent
money growth that would still be far short of
encouraging the inflation.
It would represent a
much smaller increase in money than in prices and
would leave nothing for growth output and we think
that would be the limit of what their ambitions
should be at this .time.
At a later date they might well wish to move to
a lower rate of money growth, but only at such time
to improve the structure of the economy so that, in
fact, we have taken the inflationary bias out of the
structure itself out of the way we have set our prices,
wages, our government policies, regulate our industries
and all the rest.
Now in the case of the budget, let me emphasize
only one point.
It is important to cut the budget
some because it has been made a symbol of the
inflation fight and it is the most direct contri­
bution that Government can make in a hurry, but I
would warn you that the battle against inflation
will not be decided finally in the budget. The
budget was only a small component in all the causes
that got us to where we are today and whether we
reduce the budget by a few billion, which is the
maximum practical or not will affect the short-term
inflation rate, but at most a few tenths of a point.
I would emphasize that the long-range budget
has to be correct and that we make a mistake in
focusing all our energies on this one issue.
My basic recommendation today is a very simple
one. I would urge the Federal Government not to
pursue our objectives one at a time.
I would strongly
urge you not to make 1975 the year of the great infla­
tion fight, and 1976 the year of rising unemployment.

117

That’s exactly how we got into this situation we
are in.
Let me review a few figures, not just for the
United States, but for twelve industrial countries
as a combination.
.During the years 1959 to 1970, the industrial
countries rose only about three-and-a-half percent
a year after fully taking out all of the inflationary
effects.
In 1971 and 1972 the world-wide rate of increase
of money after inflation was a full eight percent,
far and away the highest seen in the post-war period.
Similarly, while the budgets did not increase as
much as it did during the Vietnam War, it was during
the period 1971-'72 that the budget rose in the
United States at seven percent a year after inflation,
and since late '72 it has not increased at all.
What we need to get out of this current
situation, in effect, is to put an end to this kind
of one objective at a time: Now it's inflation,
now it's employment roller-coaster ; and let the
economy develop in a more orderly fashion. Now, I
would urge that we disengage gradually from the
very tight policies that we have and disengage from
the inflation in an orderly way, and that our goals be
be attainable and not unrealistic.
I think we cannot press the economy too hard.
We will crack the financial system before we will
crack the inflation. Our equity markets are already
gone as a practical source of capital and some of
our debt markets are going. We have already waited
at least three to six months too long to figure
out some way to channel money into housing if we
don't want selective controls, and it is incumbent on
the financial industry and its regulators to figure
out some other way to have all sectors of our capital
needs participate in the limited capital.
One other thing, we don't have much time in
getting our program out. We do have the summit
meetings and we are getting a lot of ideas on the
table and I think they are a very welcome move, but
the people need quick action.
Let me give you just one example: --

118

aj

SECRETARY SIMON: Thank you, Mr. Eckstein.
I
gave you four minutes, and I am not as tight with
the clock as I pretend to be.

119

558-812 0

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DR. ROBERT RAY DOCKSON, PRESIDENT, CALIFORNIA FEDERAL
s a y i n g s An d l o a n a s s o c i a t i o n
?

MR. DOCKSON: He could have had some of my
minutes Mr. Secretary.
First of all, I want to thank you Mr. Burns and
Mr. Greenspan for the excellent explanation of the
situation we find ourselves in at the present time.
I, like Mr. Stewart, though, have heard from a
very sizable number of some of the leaders in the
Los Angeles area. And the theme running through
those letters, all of them, seem to cause me to have
to associate with several of the speakers who have
already spoken: Mr. Saulnier, Mr. Rockefeller, Mr.
Preston and Mr. Ensley and Mr. Eckstein.
They have
said the same things that I find running throughout
the correspondence we receive. The idea of a fiscal
restraint policy is expressed in no uncertain terms
in these letters, even to the extent of a tax in­
crease if that be necessary,
I find myself in agreement with the idea of back­
ing off of the very tight monetary policy that we
have been following.
I find that if the back of in­
flation is truly to be broken, the bomb has to be
busted on the boom.
Our need to lessen the monetary restraint will
come about because we must spread *•■<- we must find
ways of spreading the cost of this inflation to other
areas than the few areas that are actually carrying
the load at the present time.
We have a great need to increase productivity
and production in this country. We must increase
capital formation. As had been expressed by Mr.
Franklin and others, this need means you cannot lick
inflation unless we increase the supply of our goods
and services that we offer.
Mr. Preston offered one way and only one way
that we might be able to increase savings. To in­
crease the savings rate, he suggested a thousand
dollars -- I believe it was a thousand-dollar tax
exemption on the first thousand dollars of interest
earned.

120

This could be given to the saver regardless of
where he places his funds, whether he places them in
commercial banks or the savings and loan institutions.
As it goes into the savings and loan institutions,
some of us strongly believe that there is a real pos­
sibility that the withdrawal disintermediation that
is taking place now will either be brought to a halt,
or it certainly will be lessened.
If this is done, the housing industry that is in
dire need at the present time -- and not only in need,
it is at the bottom in our area -- that we could pick
it up, and housing would begin to increase employment,
begin to increase income, and it would expand the
taxing base.
Thank you, Mr. Secretary.
SECRETARY SIMON:

Thank you.

121

DR. ROBERT G. DEDERICK, SENIOR VICE PRESIDENT AND ECONOMIST
NORTHERN TRUST COMPANY
MR. DEDERICK:

Thank you, Mr. Secretary.

As Alan Greenspan has said, there are two key inflation
problems at present. One is inflation per se, and the other
is the confidence debilitating inflation psychology, which it
has generated with its consequent public demand to do some­
thing quickly.
Now, to eliminate inflation and ultimately inflationary
psychology will require a long, hard slog over a period of
several years. The alternative in all our policy of demand
restraint, the only policy approach which could offer rela­
tively near-term relief now that controls have been publicly
discredited, would be to run too great a risk.
World economy and its financial institutions are suffici­
ently vulnerable at present that such an approach would run
the risk of generating a severe and prolonged business set­
back. It might have been a viable alternative five years ago
or even two years ago; it is not a viable alternative now.
Thus, the fundamental program must be one which is long­
term in orientation. This means it must be multifaceted and
designed in such a way as to maintain public support over an
extended perior.
It includes these five features; one, sustained -- I
emphasize sustained — along with the sustained, moderate, and
I emphasize moderate -- demand restraint sufficient to produce
sustained, moderate, excess capacity over a period of several
years.
Two, relief measures to aid the most severly hurt by this
effort. These measures could be coupled with offsetting
expenditure cuts or tax increases.
Three, selective measures to boost productive capacity in
areas of capacity, again to be fiscally offset elsewhere.
Four, a vigorous effort to eliminate structural features
of the economy which lead to higher costs and prices. I
include here those forms of taxes which most add to cost, in
the latter case to be fiscally offset elsewhere.
Five, a vigorous effort to bring down oil prices which
literally threaten at their present level to bring down the
world economy.

122

Such, an approach has one big failing: it does not meet the
immediate need to reduce inflationary' psychology and reduce
the demand to satisfy the public's demand for action.
What is needed is an easily understood piece of evidence
of genuine Government commitment to inflation control. Wall
Street Journal readers may know there is one, but the public
at least must get the message as well.
The single action most likely to signal this commitment
would be a Congressional -- and I emphasize Congressional -enactment of a ceiling on fiscal 1975 Federal spending at
$300 billion, i.e., lower than now seems likely, and for a
commitment to continue discipline in fiscal '76.
Overall, in order that overall Government policy be one of
moderate demand restraint to meet ray earlier criteria, it
would be necessary to couple this increased spending restraint
with a corresponding easing of monetary restraint.
It is too late to tighten fiscal policy without, at the
same time, making a corresponding easing of monetary policy.
It is not too late, however, to make this change in mix.
Thank you.
SECRETARY SIMON:

Thank you.

123

MR. MORRIS D. CRAWFORD, JR., CHAIRMAN OF THE BOARD.
BOWERY SAVINGS BANK
MR. CRAWFORD: Mr. Secretary, just a few gen­
eral remarks from the bottom of the disintermediation
barrel with a few specifics this afternoon.
As to monetary policy, painful as it is today
for the thrift institutions, I hope the Fed persists
in its policy with further moderation as soon as that
is responsibly possible.
I would express the plaintive hope that that
day is not too far off.
As to fiscal policy, although it may not be the
whole answer, it seems to me that bringing the bud­
get into balance or preferably to a surplus position
as soon as possible is essential,
I realize this poses very difficult political
problems, and I guess I am guilty of some political
naivete, but I find it very difficult to believe
there’s any budget, private or public, that can’t
be cut two or three percent, especially when the cost
of not doing so may be so prohibitive and the longrange benefits of doing so can be so great.
Thank you.
SECRETARY SIMON:

124

Thank you, Mr. Crawford.

HOWARD COUGHLIN, PRESIDENT, OFFICE AND PROFES«
fTTONAL EMPLOYEES INTERNATIONAL U NION~

MR

MR. COUGHLIN:

Thank you, Mr. Secretary.

We feel that there is no simple solution to
the problems of inflation. We do think, however,
there are areas in which we must move to alleviate
spiralling inflation. There should not be any^
additional grain deals such as the Russian grain
deal of 19 72.
Devaluations of the American dollar, however/
necessary, brought about the subsequent export of
farm products and crude materials in short supply.
While we understand that export controls may re­
sult in retaliatory measures by our trading partners
throughout the world, we do strongly feel the need
for export controls in order to eliminate the possi­
bility of shortages in this country due to the ab­
sence of a sound export control policy.
The effects of the tremendous increases in the
price of oil and petroleum products by the oilproducing countries is known to all of us, and while
we do not pretend to have a solution to this problem,
we do feel that a way should be found to cope with
this ponbtamt: threat to the American economy.
Tight money and soaring interest rates have
crippled home construction.
The Federal Reserve
Bank should be directed by the Congress to allocate
bank credit at reasonable rates for such purposes
as low, moderate and middle income housing and other
community facilities such as schools and hospitals.
Reasonable interest rates should also be made
available for the construction of essential public
utility plants.
Tight money and abnormally high
interest rates have added five point three billion
dollars to the public debt between 1973 and 1974.
This is not only adding to the burdens of the
taxpayer, it is feeding inflation and placing addi­
tional pressures on city, state and local govern­
ments. We also advocate the élimination of tax
loopholes and the imposition of an excess profits
tax.
Wage and price controls, equitably and absolute­
ly applied should be considered seriously during this

125

emergency.

Thank you, Mr. Secretary.

SECRETARY SIMON:

126

Thank you, sir.

A/

J

RICHARD P. COOLEY, PRESIDENT AND CHIEF
OTCUTIVE OFFICER,' WELLS FARGO BANK, NATIONAL

MP

rssociATiw
MR. COOLEY:

Thank you, Mr. Secretary.

I ’d like to associate my remarks with Mr.
Dockson, with disintermediation. Branch banks,
which are practically all over the west, and other
thrift institutions, are the principle source of
housing financing and are unable to compete for
funds. r v
This unavailability of funds, together with
increasing prices due to inflation, higher interest
rates, more restrictive terms and conflicts with
usury laws in some areas is resulting in a severe
decline in housing starts.
Most builders are highly leveraged in the re­
duction in volume and increased costs and carrying
inventories is creating serious credit problems.
Housing has a great multiplier effect on our
economy, both on the way up and on the way down, and
as a larger number of starts of the past reach com­
pletion and new housing starts decline, the reverse
multiplier is affecting the construction industry
and businesses supplying goods for new homes.
Unemployment in the construction industry is
Ialready too high and will increase. High interest
rates are considerably increasing the cost of other
real estate projects under way, many of which are
Ifunded on a variable basis.
This is a major concern and affects not only
the project owner but also all financial inter­
mediaries participating^in the real estate market.
This situation, along with cost overruns re­
sulting from increased,material costs, exists in
many major real estate projects in the United States,
and in addition to creating credit problems, increa­
ses the need for additional financing.
Higher interest and construction costs also in­
crease potential bankruptcies in this field. For
confidence and to encourage savings, the subject of
incentives to thrift institutions needs a priority
rating including the suggested tax-free status of
up to one thousand of interest.

127

Variable mortgage rates are needed to encourage
lenders and to protect borrowers in periods of de­
clining rates, and also I think we should consider
increasing the FDIC insurance up to fifty thousand
dollars for savings accounts.
The real estate industry is the hardest hit
sector of our economy in the current inflationary
high interest period, and will add further to our
economic slowdown if not given immediate relief.
Thank you, Mr. Secretary.

128

r

nR GWEN BYMERS, PROFESSOR AND CHAIRMAN OF THE
— De p a r t m e n t off' c o n s u m e r e c o n o m i c s , Co r n e l l u n i ­
versity "

MS. BYMERS:

Thank you, Mr. Secretary:

I am here as a consumer representative to
a point of view.
However, I want to say at
the outset that I have no constituency and that I
am speaking for no organized consumer group.

e x p ress

I am a professor of consumer economics in the
York State College of Human Ecology.
Some of
you may know it by the name of College of Home
E c o n o m i c s , Cornell University.

New

Everyone here seems to agree that the problem is
serious enough to deserve priority attention.
I am
not sure that any of us are willing to forego current
income increases to allow the system to catch up.
Part of the present inflationary problem is struc­
tural, they -tell.-me,.and for consumers this means
we need to recognize that food,, fuel and shelter
costs have undergone structural price shifts that
we may have to learn to live with.
When these are translated into higher wages,
higher wage agreements, we simply push ourselves
up another notch on the inflation ladder.
As I have reviewed or listened to these meetings
and read about them in the New York Times for the
[last couple of weeks, I've been impressed that each
s p e c i a l interest group that sat around a table such
as this has put forth solutions that seem to disre­
gard the total impact of what they were proposing.
Now, I would say that it is patently unjust for
¡those who have control of the nation's cash balances
land concern for their real value equities to put
[too much of the pressure of adjustment onto the low
end of the income scale.
If we have to conclude these discussions
¡recommendations that increase unemployment or
¡the benefits to the welfare recipients, we're
the cost in the wrong place, as far as I am
concerned.
I think that I intend to ask this

with
reduce
putting
after-

129

noon that any solutions, that are proposed seriously
by the Administration be accompanied by an economic
impact statement.
The burden of correction seems
to me to need to be borne equitably across the
population.
Thank you.
SECRETARY SIMON:

130

Thank you.

MR. ARCHIE R. BOE, CHAIRMAN, OF THE BOARD, ALLSTATE
INSURANCE COMPANY
MR. BOE: Mr. Secretary, it’s extremely difficult
to give any wise dissertation on the complex subject
of inflation in three minutes, so I will merely list
some priority items which we feel will have a posi­
tive benefit in reducing inflation to an acceptable
level.
Number one, we believe a balanced Federal budget
should be a primary target, not only for this fiscal
year but for all the years in the foreseeable future.
We realize that it is difficult to reduce expendi­
tures during inflation, but we are required to do so
in business, and'it is a rare occasion when you can’t
reduce expenses of an agency or department four to
five percent.
Now, many benefits would accrue from this, but I
think the most important one is that it would build
confidence in our nation.
It’s going to be very
difficult to ask the public to make sacrifices in
controlling inflation when the Federal government is
following an irresponsible policy.
Number two, Congress should apply a strict costbenefit analysis to all legislation so that we know
how much price inflation we are actually legislating
each year.
OSHA, clean air, clean water, noise reduction are
all very worthwhile programs, but they are creating
billions of dollars of price increases each year.
Can they be slowed down and spread over a longer
number of years so they do not add fire to this in­
flationary spiral?
Number three, limitation should be placed on the
amount of financing done each year by Governmental
agencies which are outside the Federal budget^.
Certainly, this financing places a strain on the en­
tire monetary system and adds to our inflationary
problems.
Number four, we certainly endorse the program of
providing incentives for people to save and not
spend, and possibly the one which has been discussed,
of maybe the first one thousand dollars of interest
and dividends a family receives could be tax-free.

131

Number five, we believe it's necessary to provide
tax incentives to business for the expansion and
modernization of industrial capacity to increase
capacity in output per manhour.
The investment credit must be retained and pos­
sibly increased for some important industries.
Number 6, we think it's important to provide tax
incentives for investment in American industry by
reduction in the capital gains taxes on a sliding
scale downward according to the number of years the
assets have actually been held.
Number seven, we recommend the Federal Reserve
System should adopt a long-range policy on money
supply and not have it fluctuate, which creates many,
many problems, and probably this long-range policy
should start out here at an annual rate of about six
percent a year.
The last point I want to make is that wage and
price controls should not be adopted. They just
raise havoc with the entire economy, and some day
we have to have a lot of make-up work and we are just
postponing the real problems that they create.
Thank you, Mr. Secretary.
SECRETARY SIMON:

132

Thank you.

MR. ROBERT H. BETHKE, PRESIDENT, DISCOUNT
CORPORATION O f n e w YUM
------------MR. BETHKE: Mr. Secretary, you know that every
man in this room spent many an hour on this problem,
and some undoubtedly have woken up from dreams think­
ing about it. And w e ’ve come down with prepared
statement^, with detailed, specific recommendations
that we ought to get into this afternoons
What w e ’re really talking about is probably the
most important war our country every fought, if you
think in terms of its impact on our own and our
children’s life style, on our freedoms, on the sys­
tem of Government. And if w e ’re going to have
success on this, I just want to make a couple of
principles, rather than specifics.
From this point
on every presidential and every leadership state­
ment must be very blunt, honest, unglossed.
This is
what the people are crying for. That produces cre­
dibility and you'll get some followship.
Furthermore, we've all got a duty to inspire
that get-going power that Americans have to produce
more, to save more, to waste less.
I think it's high time that we reconvince our­
selves that Americans can once again show the Japan­
ese, the Germans, and all others, that we can be the
wonder people, the wonder workers of the world.
Now, as a footnote to this:
It's high time
that it becomes fashionable and prudent for elected
officials to have to be known as inflation fighters.
It's high time in our own families that when
you sit down with your wife, she says: "Well, honey,
what are we going to do about it".
I know all the
stuff you|re saying. Each one of us has to make
some sacrifice, some contribution.
Well, in conclusion, we'd better get out of
these meetings a crisp list of recommendations that
the people can understand, that they'll get behind.
There's got to be a very powerful dynamic Cabinet
Level officer, plus a President who really drives
home how we're doing on it, even the road blocks,
and avoid at all costs a couple of months from now
the public and ourselves saying, you know: These
meetings were a mighty fine one-month crash course
§1 economics, but nobody's following the lessons.

133

MR. ROBERT H. B. BALDWIN, PRESIDENT, MORGAN

STANLY AtJD'' W

M , ,l'T i r ---------------

MR. BALDWIN:

Thank you, Mr. Secretary.

After having had so many speakers appear be­
fore me, I am beginning to understand what it's like
to grow up with a last name like Charles Zwick.
I speak from the viewpoint of one who is in­
timately connected with the cppital raising mechanism
of this country.
I cannot stress strongly enough
the impact that inflation is having on the capital
markets of our country and the world.
We have seen prices of common stocks * price;
earnings ratios and yields at levels approaching
their lows since the days of the Thirties. This
has effectively closed the equity market as a source
of capital to all except Public Utilities which are
forced to finance even at these low levels.
Responding to inflationary expectations, in­
vestors have shown a reluctance to commit to long­
term bond issues or mortgages.
There has also been a flight to quality which
has widened the yield spreads between Triple-A
companies and lesser rated companies. As a result,
many companies, particularly Public Utilities, have
found themselves financing at higher and higher
rates and for shorter and shorter periods.
I point out a recent 5-year, 13% issue of Duke
Power, as:.a prime example.
In addition, a whole host of companies have
had no recourse to the market but have, of neces­
sity, turned to the banks as a lender of last resort.
It is becoming abundantly clear that in the
years ahead, we are going to be a capital short coun­
try, and, therefore, if we wish to increase produc­
tivity, provide additional?jobs for the growing work
force of this country, and to assure an acceptable
level of growth in this country, we must do everything
possible to encourage savings and capital formation at
every level in the United States.
However, unless we bring inflation under con­
trol, thereby reducing inflationary expectations, we
will have an even greater short-fall in savings and

135

558-812 0

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74

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10

capital formation.
I believe that the American people recognize
inflation as Public Enemy No. 1, and will be willing
to see Government take those actions and will, them­
selves, be willing to make those sacrafices to bring
inflation under control.
I would point out in some comments that have
been made before, that interest rates benefit bankers,
investment bankers, and brokers.
I might just say that high interest rates kill
investment bankers and brokers and I don't think
bankers would vote for them either, yet we do support
the policies that Dr. Arthur Burns and the Federal
Reserve have gone to because we feel it's important
to get inflation under control.
Thus, although we are in a
also represents the opportunity
things for the long run, rather
which may seem expedient in the

trying period, it
to do the right
than those things
short run.

I've got four recommendations that I suggest to
the President:
1. Make no promises upon which he can't deliver.
Deflating inflation is a long term project.
?. In cutting the budget, there will be a
serious problem of setting national priorities. We
are trying to do too much, too fast in this country.
I subscribe to Charlie Zwick's concept.
3. Develop a continuing partnership of Govern­
ment, Labor, Business and the Public in licking in­
flation; and
4. Take initiative to establish an interna­
tional group from countries around the world to
attack world-wide inflation.
Thank you, Mr. Secretary.

136

DR. GEORGE LELAND BACH, .PROFESSOR OF ECONOMICS AND PUBLIC
POLICY jSIANFORD: UfrlVERStlY
MR. BACH: Mr. Chairman, I would like to use my three
minutes to talk about the causes of inflation because I think
it's necessary to look at an aspect of the problem we haven't
talked much about if we're going to have a good base for talk­
ing about Monetary Policy this afternoon.
Although special developments, like the recent Food and
Energy crises may temporarily dominate price movement, the
fundamental cause of inflation in the United States, I think,
is "excess income claims," validated by expansionary monetary
and fiscal policies.
Workers, businessmen, farmers, the elderly, National
Defense proponents, all of us together, have come to demand -almost as if it were a Divine right --a rising total of
wages, profits, prices, Social Security benefits; education;
you-name-it; a total that substantially exceeds the output
of the economy at stable prices.
In the old days, these higher wages and prices would have
priced products and labor out of the market before long, with
unemployment and recession halting inflationary pressures.
But today the Federal Reserve, the White House, and
Congress, given the nation's high priority on the growing
unemployment, generally increase Government spending, and the
money stock to avoid substantial unemployment, albeit at the
cost of validating the inflationary price and cost increases.
Then the wage price -- wage price spiral --is set up for
another round-up in the newer, higher plateau.
Any economist can tell you one sure-fire way to stop this
cost-push, demand-pull inflation spiral is to cut the growth
of the money stock to zero, shift Federal budgets to a large
surplus, and the growth in spending and prices will soon grind
to a halt, at a terribly high cost in unemployment and, prob­
ably, financial panic.
What we need now, above all, is some way to slow the
growth of wages, prices, and Government benefits, so that mon­
etary fiscal policy can hold the growth in total spending to a
reasonable non-inflationary rate, without generating unaccept­
able unemployment.
To put the matter bluntly: what this implies is that an
aggregate policy -- that is to say, fiscal policy and monetary
policy -- call it the "old time religion" or anything else -cannot be successful unless it is accompanied by restraints in
price setting, and in claims on the Government.

137

Perhaps a restrictive monetary fiscal policy alone can
induce wage and price restraint without generating a major
recession. But the recent evidence is not encouraging, and it
is very unlikely, I think that the Congress and the American
people will stand still for a really long, major recession if
that’s what it takes to do the inflation job by itself.
This leads, of course, to the probable need for a national
consensus on wage/price restraint, and income policy, if you
wish, to be used cooperatively with the moderately restrictive
aggregate demand policy to help the Federal Reserve.
I should like, this afternoon, to argue the case of such
a cooperative set of policies if we're going to lick the
inflation problem.
Thank you.
SECRETARY SIMON:

138

Thank you.

MR. EDWIN G. ALEXANDER, PRESIDENT, FIRST SAVINGS AND LOAN
SHARES, INC.
MR, ALEXANDER:

Thank you, Mr. Secretary.

Mr. Zwick, I appreciate your condolences!
My problem is that everything I was going to say as the
first speaker has already been said with a great deal more to
boot.
In addition to representing First Savings and Loan Shares,
I also represent the National Savings and Loan League which is
a National Trade Association and, if I may, I’d simply like to
underscore three suggestions that have been made repeatedly,
I am sure you must all be impressed, as I am, with the almost
unanimous support of the idea of stronger fiscal policy, and I
would like to underscore all of those suggestions that have
been made with regard to gaining public support for that fiscal
policy.
I think it's totally unreasonable to expect the Congress
to support a balanced budget and a strong fiscal policy if
they do not have the support of the people who voted them into
Congress. They get there by counting votes, and if the voters
don't support that, obviously the Congress isn't going to
support it. So I think all of the suggestions, the Congress­
ional debate, the contact of the S § L customers, bank
customers, all the suggestions that have been made to gain
that support, I think are terribly important in terms of
bringing about the general support of a stronger fiscal
policy.
Secondly, I support and underscore the idea that we need
more capital formation --be that in the form of savings
accounts, the stock market -- whatever forms of increased
capital formation -- the mechanisms we have in this country
it's in my view probably the most important short-range/longrange problem we have.
We've squandered a lot of our wealth over the past two or
three decades, and it's important that we not only recoup the
squandering that's gone on, but we have to increase the amount
of capital that's available in our economy.
Thirdly, I
>agree with the suggestions that we should adopt
the Financial Institutions Act. I think it needs seme more
work before it should be adopted by the Congress, but I think
in the course of doing that we need to eliminate the argument
over whether we are going to have rate control in that Bill.
I think it's vital that we continue rate control until we can
bring about a restructuring of the assets, so that it's

139

literally ridiculous to think that the Savings and Loan
Industry -- and those financial institutions that have large
investments and long-term securities -- mortgage loans to be
specific -- can be responsive to competitive circumstances
with regard to institutions that have short-range, or short­
term type assets. And I think what should be introduced into
the adoption of the Financial Institutions Act is some method
of varying the interest income on long-term securities -particularly mortgage loans. It's vital that some effective
variable rate be built into that asset structure so that
these institutions in the future can be more competitive and
more responsive to the kind of conditions we have experienced
in the last ten years.
Thank you very much.
SECRETARY SIMON:

140

Thank you, Mr. Alexander.

SECRETARY SIMON: Now, prior to going to lunch, I'd like to
call on our Congressional Delegation and start with the Chair­
man of the House Banking Committee.
THE HONORABLE WRIGHT PATMAN, U. S. HOUSE REPRESENTATIVES
Achieving a solution to the economic dilemma besetting the
Nation -- soaring inflation and deepening recession -requires major changes in the ways in which monetary policy
has developed, and the structure, of their financial system.
For decades, the leadership of this country has attended only
to the symptoms of perennial periods of inflation, high inter­
est rates, and rising unemployment. All that has been gained
by these actions is a temporary reduction in the nation’s
economic fever, while the underlying illness continues to
exist.
We have been badgering the symptoms of our troubles while
the basic causes remain untouched. A real improvement, a
stable productive, prosperous economy, will continue to elude
us unless the Administration, the Congress, we, who are
gathered here and others in and out of Government, are willing
to recognize this paramount fact and act on it forthrightly
and with political courage.
The major problem, today, I think, of course, is inflation.
We must stop inflation; but we cannot stop inflation by
increasing interest rates. The Federal Reserve has given that
a trial for Sh years. Many of us were watching it and calling
it to the attention of the people in the Congress all that
time, but the Federal Reserve has continued to use high inter­
est rates -- higher and higher interest rates --to stop
inflation.
Now, when you increase interest rates, you, of course,
increase prices; even the goods on the shelves go up immediately.
And, as you increase prices, you have inflation.
Now, you cannot cure that inflation by going back and
starting over with high interest rates again. It just causes
more and more inflation. . You cannot balance budgets by high
interest rates and you cannot cure inflation by high interest
rates,
j
Now, the truth is, that whenever you cause interest rates
to be increased -- and the Federal Reserve, of course, has
that power -- they are doing if of course from their standpoint
in the public interest and believe that they are right -- but
they are causing inflation with it, and inflation cannot be
stopped with more high interest rates, I repeat.
Now, then, if you were to have your house on fire, and you
141

wanted to put out the fire, you wouldn't use gasoline instead
of water to put that fire out. But that's exactly what you
are doing when you use interest rates, high interest rates, in
the way and manner that the Federal Reserve is using them now.
And I think that in the portfolio of the Federal Reserve Banks
amounting to $82 billion now, everyone of their bonds, uncan­
celled bonds, somebody had bought those bonds, or some entity
of Government, or private industry, and paid money for them
and the Federal Reserve acquired those bonds through the open
market committee by giving United States currency for them.
So they are paid for -- absolutely paid for -- and usually
when you pay a debt in Government or out, you get the debt can­
celled. But these debts were not cancelled when they were
bought. They were put in this portfolio of bonds and held, and
the Government is collecting money from the taxpayers, from
$5 to $7 billion a year interest on those bonds that have been
paid for once.
I asked Mr. William McChesney Martin, who was quite know­
ledgeable in affairs of this kind, and he admitted that they
were paid for once. They have been, and now then, if they're
not cancelled as they should be when they're paid for, we'll
have to pay for them again. And that will be not $82 billion
inflation: it will be twice that, $164 billion inflation.
So you cannot stop inflation using a system like that,
and it has been used for 60 years, and there's no audit of the
Federal Reserve Banking System that has ever been made by the
General Accounting Office which audits every major part of
Government except the Federal Reserve. And they refuse to be
audited. And there is not a thing wrong with our country and
its money that a good audit of the Federal Reserve System would
not cure.
Now, I just want to bring that to your attention. Be sure
and don't overlook it in your final report because you cannot
afford to.
The structure of our financial system must be changed to
provide improved liquidity and increased competition for all
sectors of our economy, especially priority areas such as
Housing, Consumer, State and Local Governments, and small- and
medium-size businesses.
Federal regulations of financial institutions must be
reorganized and streamlined to assure that these goals are
expeditiously achieved and maintained. Specialized lending
institutions, savings and loan associations, mutual savings
banks, credit unions and finance companies must be allowed to
expand their lending activities and their financial services
they provide, so that they can adequately compete for funds
and borrowings and, incidentally, I can add, to properly pro­
tect and serve the public interest.

142

The nation’s major tax of financial institutions must be
required to meet our priority credit needs in a way in which
all will share this burden equitably, and without economic
destruction.
The changes advocated -- unless made -- will be producing
little more than empty promises or gestures.
The degree of success of these Summit meetings will depend
on the willingness of the Congress and the Ford Administration
to go beyond these narrower interests and seek the answers that
truly represent the public needs and desires, and Mr. Chairman,
I would like to have permission to file an additional statement
setting forth my views in regard to this matter.
Thank you, Mr. Chairman.
SECRETARY SIMON:

Thank you.

143

THE HONORABLE JOHN J. RHODES, U. S. HOUSE OF
REPRESENTATIVES
CONGRESSMAN RHODES: Mr. Chairman, I thank you
for this opportunity‘•and, particularly, I want to
thank the people who are present here today for
being here and for adding so much to the sum total
of my intelligence, and I think human intelligence
by the words you have said and the words which you
will say.
There has been a great deal of wisdom displayed
here today and I think the country should be great­
ful for it, and will be very grateful when they see
the results of what should come out of meetings like
this.
I was glad that Bob Roosa mentioned that we are
not the only nation in the world with an inflation
problem and, certainly, the wrenching effect of the
sudden increase in the price of petroleum, and petro?
leum products, has had a ripple effect throughout the
world economy which can't be discounted by anybody
here, and I don't think that it is.
Also, it seems to me that we suffer from a de­
mand-pull inflation on a global basis and Charlie,
whether or not we can blame it on your favorite bete
noire -- the TV industry, or who it is, I don’t know,
but the facts are that the whole world has become
aware of the good life, and many of the people now
feel that they have the wherewithal to get it, and
they want it yesterday. And it all adds up to the
fact that the industrial plan of the world, the raw
material facilities, acquisition facilities of the
world have not been capable of fulfilling these
needs.
Now, that is, in my opinion, the long-run
problem which must be faced by all of us and one of
the ways which Government can help, of course, is in
the area of capital formation.
It is going to take as was mentioned -- tremendous amounts of capital to
satisfy this demand.
In the short run, of course, I think we are all
interested in setting our sights towards satisfying
the demand;but, also, in cooling the demand to the
point that it is somewhat manageable.
And that, I guess, is where Government comes

144

I in

and I suppose that is the reason that almost @
that it is up to the Federal
Government to do something ab out balancing its bud­
get*

everybody here has said

I

I certainly agree with that.
I think that it <
lean be done.
I think that, in fact, it must be done,
land I venture to say that it will be done.
I would like though, before I quit, to remind
I those of you in the room that this is not a problem
I which only the Federal Government can solve. This is
I a problem for Business, for Management, for Labor,
I and for the American people, because it is a type
I of inflation which is a different breed of cats from
I the kind we have previously had.
So it will be my hope that the people here would
I consider this as perhaps something which they could
IIdo and should do.

I

You know, when you have a demand/pull inflation
1 and a capital shortage, it becomes very necessary
] that that capital be allocated in the public interest
and you allocate it in the public interest by putting
|it in those areas where shortages have occurred and
|are present.
I don't know any people in the world
Jwho are better at allocating capital than the people
in this room and those you represent.

I

I would hope that you would take this as that
ipart of your job, or at least part of your job in
solving this whole problem to engage more fully than
you have yet, in the proper allocation of the capital
which is available.
Thank you,"Mr. Ehairman.
SECRETARY SIMON:

Thank you Congressman.

145

THE HONORABLE JACOB JAVITS,

UNITED STATES SENATE

SENATOR JAVITS: Mr. Chairman, I am sorry that I have
arrived rather late but I had a slight distraction in New York,
which makes my schedule a little difficult. But I am delighted
to fit in at this point of the program because I do have some
suggestions, and I have been briefed as to what has occurred
here this morning.
In the first place, I would like to emphasize the urgency
of the hour. Personally, I deprecate even the 30 days to have
these mini-summits and the summit, and then the 30 days prob­
ably which it will take to screen everything out.
I think we are in such urgent need for affirmative govern­
mental action that even 60 days is a very serious delay, and
so I hope very much that all of our suggestions will be
extremely practical and very direct, and rather immediate.
And so I have proposed what to me is a 6-point program
which I would like to briefly tick off.
First, as to wage and price stability:
As you go out into the field you find that this is the
main thing on people's minds. They want to know: "What can
we do about it promptly?"
So I would strongly urge that the President ask the
Congress to give the Council on Wage and Price Stability sub­
poena power and the power to delay wage or price increases for
a limited period -- say 60 days --so that there may be public
exposure of the reason for major price and wage increases with
a tendency therefore to restrain them if that is at all
possible, without wage and price controls, which seem to be
out of the question.
Second: I think we need a policy of credit allocation
and that, in my judgment, could be coupled with an easing of
monetary policy on the part of the Federal Reserve Board
which, up to now, has been asked to go it alone.
The critical need being to bring down the cost of money,
just like the critical need is to stabilize the cost of every­
thing else because, right now, the consumer -- both of money
and of goods -- does not know how fast or far this is going to
run away.
I shall, myself, propose legislation to establish a
voluntary credit Allocation System within the Federal Reserve
Board, and point out that this was done during the Korean War
with a Capital Issues Committee.

146

Third: I think we urgently need a conservation program
for gas and oil, one of the two major sources of our recent
price inflation, the other being, of course, food.
We need drastic action to reduce demand and thus cool
price pressures, while we take the needed actions to cut waste
and maximize our Project Independence output.
I would consider the departure from the conservation
practices of last winter's gas lines as being one of the most
shameful chapters in the history of this country. If you want
to talk to the OPEC Nations, you've got to talk from a position
of strength, and the only way we can get that is by cutting
down on our own requirements. That, they will understand very,
veiy quickly, and we cannot afford the hemorrhage we are
enduring today of $25 billion a year in balance for us and
$70 (billion) for the world, rapidly going up to $100
(billion).
Fourth: We need a major effort to increase productivity
and my suggestion for that - there are many others -- is the
establishment of Regional and Industry Productivity Councils,
such as we had in World War II, and they were very successful.
We had 5,000 of them then and it is my belief that labor is
ready to cooperate. I am the ranking member of the Labor
Committee of the Senate. I don't think I am talking through
my hat.
Also, I think we need special treatment for the utilities
in the productivity area, which are in terrible trouble, and I
hope the President will urge the Congress to "up" the tax
deduction for the Investment Tax Credit from four to seven
percent.
Fifth: I think we need promptly, passage of a Trade Bill;
increased public service employment; the budget reform (I am
a member of the Budget Committee, and that we are undertaking
right now); and a genuine tax reform, which will be very
pleasing to the consumer because he wants to see fairness down
the line.
As a matter of fact, if there is anything to the new
politics, it is the fact that people generally want to see
people treated alike, and no favorite classes or enclaves in
this country. Of course, I understand you have already dis
cussed keeping the Federal budget to or below the $300 billion
level and that, to me, would also include the necessary allow­
ance for a Public Service Employment Program, which I estimate
at $500,000; Arthur Bums as $800,000; and Secretary Simon has
also expressed himself on that score; but that ought to come
out of the $300 billion budget.

147

And finally, Mr. Chairman -- and then I shall be through
-- prompt action to shore up the international monetary situa­
tion and that would include publication of petro-dollar flows.
Where is this enormous amount of money going? And the agree­
ment to prevent bank failures other than those attributable
to bad management, as well as the development of new institu­
tions internationally, and the Secretary of State and the
Chairman of the Federal Reserve Board have led in that, as well
as the Secretary of the Treasury, to develop new institutions
and instruments to accept and manage the flow of oil revenues
or to turn them down in the banking system, if it is simply
going to drown the World's Banking System in a lot of loose
dollars.
We have to, in my judgment, be a lot tougher than we have
been.
Now, these are the prescriptions. I would add one other,
Mr. Chairman, and that is some special treatment of the build­
ing industry, which urgently needs some form of RFC or some
form of secondary credit device by which, if necessary,
Government credit may be extended to it so that it may operate
at slightly above the rate at which the Government still com­
mands credit. It cannot finance, and it cannot pay these
rates, and it is dragging the rest of the economy down with it.
Thank you, Mr. Chairman.
SECRETARY SIMON:

148

Thank you, Senator.

TOE HONORABLE HENRY S. REUSS, U.S. HOUSE OF REPRESENTATIVES
CONGRESSMAN REUSS: Thank you, Mr. Secretary. I sympath­
ize with Professor Bymers of Cornell a moment ago when she said
as a consumer representative she spoke for no organized group.
I am in the same position. I speak for no organized group -- I
am here as spokesman for the Democratic Party.
We have had a great deal of advice from our distinguished
guests from the financial community. It comes through loud
and clear to me that the advice is "Cut the budget, cut the
budget, cut the budget."
Let me say that the Office of Management and Budget has
already caught the perfume and is laying about with the right
good will cutting the veterans’ education, and slashing mass
transit, and restricting health and other people-oriented
programs.
As far as I am concerned, I have never seen a budget that
couldn't stand some cutting, and this can. There is waste in
it. There are low-priority items in it that ought to come out.
I am delighted that my friend John Rhodes is on the new
Budget Committee and I believe that the Congress can and will
cut the present budget requests.
But, my friends, let's not get a fixation about this. In
fact, Treasury borrowing, which is the horror that you all
have been exposing has not increased at all this year. Treasury
borrowing from the public has gone down by a couple of billion
dollars and in the last year net Treasury public borrowing has
gone up something like two or three billion dollars. Mean­
while, borrowing by corporations, mainly from banks and what is
left of the bond market, has increased in the last year by seme
$50 billion; seven, eight, nine, ten times of the Treasury's
little diversion from the credit market.
Much of this huge increase now at more than a trillion
dollars of borrowing has gone not into anti-inflationary things
like building homes, which stop up purchasing power, or pro­
ductive capital investment which increase productivity and
lower costs, but into bidding up the price of inventories and
supplies and real estate into facilitating anti-competitive
corporate takeovers, into improvident foreign lending and
foreign exchange speculation, and, in some cases, see Herstatt,
maybe Franklin, maybe Lloyd's speculation.
The result, if the financial community here today gets
what it asks for, namely, big cuts in the Federal spending and
borrowing, and that's about it, the result is simply going to
jbe that there will be a larger credit pie available to the

149

banking and the financial community, which for them will be
continued to be diverted to these inflationary causes.
Now, my advice, my dear friends, is that instead of asking
everybody else to tighten their belts, the banks and other fin­
ancial institutions similarly situated take their lcfen port­
folios as of September 1, apply to them the excellent criteria
developed by the Federal Reserve which, by and large say "no”
to inflationary loans, "yes’' to anti-inflationary loans, make
yourselves a target for the next year and every week see how
you are abiding by that target.
The House Banking and Currency Committee stands
ready to help you in that great task.
Now, sure, this may lower your short-term profits, but
you will be getting something much, much sweeter than exor­
bitant short-term profits. You will be getting the true know­
ledge that you are really helping your country and that you are
playing your part in the social contract that all of us have
to play.
So lets close ranks. We can lick inflation and recession
if we will all but follow the truth wherever it may be.
Thank you, Mr. Secretary.
SECRETARY SIMON:

150

Thank you, Congressman.

THE HONORABLE WILLIAM V. ROTH, UNITED STATES SENATE
SENATOR ROTH:

Mr. Secretary, I would like to start out by

associating myself very much w ith the remarks of Professor Bach

of Stanford.
Time does not permit me to go into too much detail, but I
would like to, like Jack Javits, make a number of points.
Number one, there has been a little talk about the cred­
ibility of the Government figures. I don't only think we
ought to back off the full-employment budget, but I think we
ought to get off the unified budget and go back to the
Administrative budget when we are talking about whether or not
we are in the black or the red.
To me it is chicanery, it is false to claim we have a
balanced budget when we are balancing that budget by borrowing
from Social Security and other types of retirement or trust
plans. That's recommendation number one.
Number Two, I think there is a consensus, short range,
that we ought to do something about the current budget. A
number of us have had proposals in the Congress to give the
President the power, with certain .safeguards, to take such
action, but I urge this group today to make sure that there
is a follow-through and that Congress does not leave before
November 11 or 15th when we go heme without taking such action.
But my real concern about the Federal budget is long range.
I know it is nice to say to the President and to the Congress
that you got to show the leadership, statesmanship, and I
think that's right. But the one thing that concerns me very
much when we talk about keeping the budget in balance, and I
have been one that has consistently voted for that, is that
every group, makes no difference whether it is business or
labor or any other group, always points the finger to the other
guy.

You hear labor talk about we should do away with the oil
depletion allowance. I hear business talk about the BaconDavis Act.
I never see the Wall Street Journal talk about doing away
with subsidies in the Post Office for the newspapers.
We really got to have some leadership. There’s got to be
some kind of consensus, in my judgment, developed “among the
nation, and that all groups have to be less selfish and take a
broader look.
So I would urge this group as we go down the weeks and

151

558-812 0 - 74 - 11

days ahead that we try to develop programs that are in the
national interest. Very frankly, you have heard today sane
people say we need capital formation, and I think that makes
good sense. At the same time, you got labor saying that per­
haps we should have an excess profits tax. Somehow, business,
labor, and consumer, and the rest have to sit down together
and try to develop a national policy or we are not going to
have any effective action by Congress. We are going to con­
tinue to try to please everybody and end up pleasing nobody.
I would also say the same thing is true in tax reform.
Somehow we got to quit being business and labor. I would like
to know what you people as business leaders, as financial
leaders, where is the fat in your activity? What can Congress
do to cut waste and fat in your area?
We need to be more blunt with ourselves and not always
place the finger towards the other guy.
I think that I would just like to make two or three other
points.
First of all, I think we do need an international confer­
ence, because inflation is not a local problem, as you well
know. I very strongly agree with Sylvia Porter when she says
we've got to bring the consumer into this. And I think they are
willing. For the first time, I find the public concerned about
spending, and they are willing to get in and help very
strongly.
To those who urge public employment, I think that's nec­
essary. I would hope we could have your ideas how public
employment could be productive. How it could be used for
example to help solve the problems of energy.
We need training programs that are combined with other
needs.
In closing, the principal point I want to make is that we
got to have business and labor and the other groups working
together if we are going to meet this problem effectively. We
cannot continue this past practice of always trying to point
the finger in some other direction.
We had that example, let me say -- I had most businessmen
say, and I supported the 90-day delay for pay raise for the
Federal employees, but I found very little support among either
business, particularly, or labor, for the 90-day delay that
Jack Javits talked about in inflationary price and wage
increases.
We are in this together and that's the only way we can
solve it.

152

THF. HONORABLE J. :WILLIAM STANTON, U.S. HOUSE OF REPRESENTATIVES
CONGRESSMAN STANTON: Thank you, Mr. Secretary. Ladies
and Gentlemen, at a dinner, one of our former colleagues from
Ohio, Senator Stephen Young, was the last speaker. Only about
15 had preceded him at that time, but when he came to the
m icrophone he said he felt like Lana Turner’s ninth husband
on their wedding night. He went on to explain that her hus­
band went into the boudoir and as he went to bed he hesitated.
She looked at him and said, ’’Don’t you know what to do?”
He said, 'Yes, I know what to do, I am trying to think of a
way to make it interesting.”
I feel somewhat like that, because the ideas and the
suggestions that have come forth in the last three and a half
hours, not to be repetitious, Mr. Secretary, but to press Upon
the panelists here that it is my understanding that President
Ford and Senator Mansfield called for this Conference to try
to reach a consensus of how we can best tackle our problem of
inflation. These suggestions this morning have been forth­
coming and I look forward to them discussed in greater detail
this afternoon.
I believe in listening though Mr. Secretary, that I was
most impressed by those who felt that it is equally important
not only of what we do, but how we implement what we do. And
I was indeed pleased that so many took the time to recognize,
as Mr. Rockefeller and many others did, that it is a question
not only of financial crisis, but a crisis of confidence in
this country in which we probably in public life feel maybe
more than some of the other gentlemen and ladies that have come
here today.
But it is important, as Sylvia Porter said, that we do
implement down through and up through the consumers and as
Ms. Bymers said, even down to considering the economic impact
studies of what we do. Because it does boil down, the ball
jgame is, of course, it is the American people's dollar.
Mr. Secretary, as we go forth, I have every confidence in
this great country of ours that this problem will be licked,
like Mr. Reuss does. You will get and receive in the Admin­
istration and in the business world full cooperation from the
I United States Congress in this regard. It is a bipartisan
problem. It is a bipartisan answer if there is going to be
one.
So, Mr. Secretary, let me say I do look forward to this
I afternoon and I do want to say in closing, for one, I sinIcerely appreciate the time and effort that all of you have
I come to join with us as we tackle this problem.

Thank you.
SECRETARY SIMON:

Thank you, Congressman.

I can just reiterate what you said.
Obviously, a great deal of thought went into your
presentations this morning and on behalf of all my colleagues
in the Government, I sincerely'appreciate it.
We will now adjourn. Luncheon will be right here in the
room on my left. We will come back promptly and start the
afternoon session at 1:30.
Thank you.
(Whereupon, at 12:35 o'clock, p.m., the Conference
recessed, to reconvene at 1:30 p.m.)

154

Mr.Gilbert R. E llis
Chairman and President
Household Finance Corporation
Confidence in the future of this economy and its monetary system
is absolutely essential to the successful implementation of a program
to control inflation. T his confidence can only come about as a result
of a total priority commitment on the part o f both the Executive and
Legislative branches of the Federal Government to a balanced budget
and continued, although less severe, monetary restraint. In order to
demonstrate earnestness of commitment, there should be an acrossthe-board cut in all expenditures, follow ed by selective cuts o f greater
amounts. Cuts in federal spending must include so-called entitlem ent
programs and in view of the critical nature o f our situation, there
should be a moratorium on new spending programs.
Control over the expenditures and borrowings o f federally spon­
sored credit agencies is necessary. These agency borrowings along with
government guaranteed debt have an inflationary impact on the econ­
omy and seriously affect the availability and cost o f funds for the
private sector.

Dr. Grover W . E nsley

Executive Vice President
National Association of Mutual Savings Banks
The underlying and most pervasive inflationary force in the United
States in the past decade has been federal budget deficits and expan­
sive federal credit programs outside the budget. U nless the rate o f in­
flation abates more rapidly than anticipated or serious unemployment
develops, a budget surplus—or at least a balance—should be the ob­
jective of public policy. Ideally it would be desirable to create a fed­
eral budget surplus to offset, at least in part, the stim ulative effect of
heavy borrowings by the federal agencies that operate outside the
budget. This would reduce the intolerable burden currently placed on
monetary policy which has resulted in inadequate private credit and
excessively high interest rates. Major victim s have been th rift institu­
tions and their depositors, home m ortgage borrowers, and the housing
industry.

157

To achieve a more neutral federal fiscal policy, expenditures should
be reduced to less than $300 billion in fiscal 1975. W ith respect to spe­
cific programs, we do not have the expertise to weigh the relative
merits of the wide range of existing federal national security, social
welfare and other programs, which may all be desirable in their own
right. W e believe, however, that inflation is o f emergency proportions,
and that no federal program should be immune to the strictest
scrutiny.
The need for stringent expenditure control is all the more necessary
since, in at least one area, increased spending may be necessary to alle­
viate inequities resulting from a vigorous anti-inflation effort. In this
regard, consideration must be given to a lengthened period of unem­
ployment compensation, manpower retraining, and public service em­
ployment which would enable government at all levels to act as “em­
ployer of last resort” in areas where unemployment is intolerably
high.
Reductions in expenditures should have top priority in achieving
fiscal restraint. I f expenditures are not reduced sufficiently, however,
then a tax increase may be necessary if inflation is to be controlled
and if continued over-reliance on monetary restraint is to be avoided.
Any tax change should be structured so as: (1) to encourage private
saving and productive investm ent; and (2) to restrain consumption
o f items which are in particularly short supply, as, for example, se­
lective excise taxes designed to encourage production of low-power,
fuel-saving automobiles.
The most effective action that could be taken quickly would be to pro­
vide tax exemption or a tax credit for interest earned on savings ac­
counts. W hile it is important not to im pair federal revenues at this
tim e, this kind of tax relief provides several overriding advantages. It
would stim ulate saving, essential in the projected period o f capital
shortage. In particular, it would alleviate disinterm ediation at mort­
gage-oriented th rift institutions, and provide funds for credit-starved
housing markets. And finally, the estimated revenue loss—about $2 bil­
lion in the case of a $1,000 exemption—is probably less than the cost of
direct subsidy programs to housing, through an expanded GNMA/
FNM A tandem plan, subsidized FH L B advances to savings institu­
tions and/or other direct subsidy programs which may be adopted if
the housing crisis worsens.
It is the responsibility of the federal government to serve as the eco­
nomic balance wheel in our private enterprise system , offsetting ex­
cesses in the private sector and cushioning the im pact of external in­
flationary forces. This essential function should be restored through a
determined policy of fiscal restraint, shaped in a manner to promote

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equity among income groups and to promote private saving, the basic
source of funds for noninflationary capital form ation and increases in
productive capacity.

Mb. Gaylord F reeman

Chairman, The F irst National Bank o f Chicago
In the face of inflation, stagnation and an inadequate savings stream
to meet our overwhelming capital needs, if fiscal policy is to adequately
finance the government in a non-inflationary way, it should be designed
to—
|S Stim ulate Productivity;
2. Moderate Consumption; and
3. Equalize the Burdens o f the Anti-Inflationary Program.
1. American labor needs more and better tools if it is to produce
more and enjoy more. One o f the major causes o f our inflation has been
inadequate productivity due to insufficient investm ent in more produc­
tive equipment. Inflation further discourages needed investment. S ig­
nificant tax incentives should be employed to increase investm ent, per­
haps by relating depreciation of new plant, equipment and energy
sources to future replacement cost or a govem m entally-determ ined
equivalent formula rather than to historical cost.
2. Fiscal policy should moderate both private consumption and gov­
ernment expenditures. W hile it may not be necessary to lim it the rise
in consumption at this tim e, the program should seek to avoid any toorapid expansion in the future. Savings should be encouraged perhaps
by an interest credit sim ilar to the dividend credit (but applied only
to increases in savings). Incidentally, this should be helpful to the
thrift institutions.
Balancing the overall budget (including the federal agencies) would
be most helpful. Although the manner of financing determines the ex­
tent thereof, any budget deficit tends to expand the money supply.
While monetary expansion from this cause may have no economic re­
sult different from other elements increasing the money supply, a bal­
anced budget would be understood by the citizenry as an acceptance by
the government of disciplines comparable to those to which they are to
be subjected. Hence, it would have desirable political significance. It
would have added economic significance if the budget were balanced
by reduced governmental expenditures rather than higher taxes as this
would permit increased savings and investment.
3. To be effective, an anti-inflationary program must be sustained
for several years. To make this possible the program must have the
support of the people. That support requires both (a) more accurate
profit reporting and (b) an equitable distribution of the burdens result­
ing from the anti-inflationary program.
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A. For 1973 and again this year many billions of dollars and spurious
inventory profits are being reported, misleading investors, workers and
the government. Despite “record earnings’’ according to the latest
figures of the Department of Commerce, after-tax profits of nonfinancial corporations in 1973 (after correction for under-depreciation
and inventory profits) were 10 to 30 percent below those for 1965.
This compares with more than a 76 percent increase in per capita
disposable personal income during the same period. This unrealistic
reporting is sufficiently serious, and the need for more accurate
appraisal of the size and economic function of corporate profits is of
such importance that the Treasury should work with the accounting
profession to develop more accurate concepts of corporate profits both
for tax purposes and public reporting.
B. I f business gets more realistic depreciation for new equipment,
then the corporate sector as a whole ought to make up that revenue
loss through a somewhat higher tax rate on corporate profits. If the
anti-inflationary program results in additional unemployment, the
government should supply those so laid off with reasonable income
and meaningful activity, for they should not suffer a loss in order to
preserve the purchasing power of the incomes of those still employed.
I f necessary, this increased expense should be offset by increased
personal income tax rates on those who remain employed, but this
increase should terminate automatically when the unemployment rate
drops back below a specified minimum. As many of the unemployed
will be young, perhaps the government should greatly augment its
apprentice training program.
For the first time in years such a composite program, including
both a balanced budget and tax reform, is politically possible. The
Congress and the Administration can work together in mutual respect
and the people can be led to accept some unwelcome but equitablydistributed disciplines in the knowledge that this is in their own longrange interest.
D r . T ilford C. G a in es

Senior Vice President and Economist,
Manufacturers Hanover Trust
(1.) The major objective of fiscal policy for the current fiscal year
1975 and for as far ahead as there is any visibility should be control
of price inflation. W ithin that major objective, there are a great many
options open to minimize the inequitable effect of restrictive policy
upon different groups in the society.
The anti-inflation objective would call for bringing the unified
budget into surplus as early as possible. Also, thought should be given
to bringing some or all of the sponsored agencies back into the budget,

160

in order that the unified budget documents might give a more accurate
picture of Federal finance. An overriding need for many years ahead
will be to provide the long-term capital funds needed to support the
capital demands of industry, residential construction, and of state
and local governments. The Federal government could make an
important contribution by becoming a net saver itself, by running
consistent budget surpluses.
Meanwhile, as a growing number of people have pointed out, the
hardships created by such a policy for certain groups in the economy
could be dealt with by specific and not too expensive programs aimed
directly at the problems. There is almost unanimous consensus now that
a much expanded public employment program should be adopted
to provide job opportunities for those young people and others who
lack the essential skills needed in a modern industrial economy. In
addition, and without significant budgetary expense, the eligibility
period for Social Security benefits could be open-ended, so that a
temporarily unemployed worker would not arbitrarily lose his source
of income at the end of some specified period of weeks. Also, it might
be possible to structure unemployment benefits so that those who had
been in the labor force a brief period of time would be entitled to
minimum benefits while long-term members of the labor force would
be entitled to benefit levels representing the major part of the income
that they lost when they became unemployed.
The object should be to maintain a restrictive fiscal policy while
taking all necessary action to avoid inequitable consequences of that
policy among groups in the population.
- While the economy presently is in a recession, no thought should be
given to a general tax reduction to help stimulate economic activity.
In view of the bottlenecks created by shortages of certain strategic
materials, there is serious doubt that fiscal policy efforts to accelerate
economic growth could accomplish anything except add further to
our inflation problems. In fact, a tax increase—perhaps the excise tax
ongasoline—would be helpful.
There is not the space to detail the many ways in which the present
tax structure might be made more equitable as it bears upon various
groups in the economy. In terms of equity, however, perhaps the most
important is recommendation that the Congress avoid further reliance
upon payroll taxes, the most regressive of all taxes, as a source o f reve­
nue for general budget expenditures.
One of the most pressing challenges the U.S. economy confronts in
the years immediately ahead is encouragement o f business capital
spending in industries where capacity is inadequate and simultane­
ously encouragement of the rate of savings that will be necessary to
finance this investment. Tax policy could and should be instrumental
inachieving this joint objective.
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The most important capacity shortages are in the basic materials
industries—oil, steel, non-ferrous metals, etc. Side-by-side with these
shortages, there is excess capacity in a number of fabricated goods
industries. In this setting, the investment tax credit should be used as
a selective instrument to encourage investment where most needed and
to avoid encouraging investment where it is less needed. Flexibility
could be achieved by providing for variable tax credit rates for dif­
ferent industries.
A number of forecasts suggest that there will continue to be a short­
fall between the demands for long-term capital by industry, housing
and government and the supply of savings. Savings could and should
be encouraged through tax policy. First, some amount of interest
income might be made tax-exempt for personal tax-payers. This ex­
emption might apply to all types of interest income or might be
restricted to interest from certain types of institutions, e.g., the thrift
institutions. Similarly, the amount of dividend income exempt from
Federal income taxes could also be increased substantially above the
present exemption.
In short, the object of tax policy should be to move the unified
budget as promptly as possible to balance or surplus, while simultane­
ously introducing greater flexibility toward achieving important
objectives.
(2) I f fiscal policy is to be appropriately restrictive to deal with
the inflationary atmosphere that we have created in the past many
years, it is essential that the tightest possible rein be kept on Federal
spending. It is not possible in a brief statement to indicate precisely
where substantial cuts might be realized, but one thing is transparently
obvious to anyone familiar with the budget. The possibility for re­
ducing expenditures is unquestionably greatest in the single biggest
component of the budget, namely defense spending. One cannot be
familiar with budget allocation and supply contracting arrangements
in the Defense Department without being appalled at the degree of
waste. I f the Defense Department is considered a sacrosanct portion of
the budget, progress toward a restrictive policy stance might well be
impossible.
In addition, greater recognition has to be given to the fact that the
simple process of taking a governmental function out of the budget and
declaring that it is a “private corporation” in no way lessens the in­
flationary consequences of that operation nor its impact upon capital
markets. Restructuring of the budget along the lines of the original
unified budget that was adopted in 1968 based upon the Kennedy
Committee Report should be encouraged.
Finally, if progress is to be made in economizing in the whole range
of government expenditures, thought should be given to re-establish­
ing a committee similar to the Hoover Committee—under President

162

Truman to take an intensive look at the myriad of details within the
spending practices of all departments of government.
M. R. H ellie

President
Credit Union National Association, Inc.
Persistent and substantial growth in Federal Government spend­
ing without corresponding tax increases has been a notable aspect of
fiscal policy during the past 10 years. The resulting monetization of
the Federal debt has been one of the major causes of present inflation
! and high interest rates. Therefore, any anti-inflation fiscal policy
must set Government and agency spending at a level which will have
i minimal impact on financial markets. Failure to achieve such a revenueexpenditure balance will, in large part, offset any gains which could
I bemade from the easing of monetary policy.
A positive factor for the long run is the development of the new
Congressional budget process. The use o f this process, developing a
closer relationship between Congress and the executive on budget
j matters, will allow for greater discussion and better understanding
of the impact of Federal spending on the level of economic activity.*
At this time it would be unwise to commit the 1976 budget to any
particular level of spending or surplus/deficit position. In light of
the many economic problems facing the Nation, it would be well to
maintain maximum flexibility and adjust spending in response to
the changing economic circumstances of the intervening months. E x ­
cessive focus on the Federal budget carries the danger of over­
simplifying the problem.
H enning H

iujIard

Chmrma/ri
J. J. B. Hilliard, W. L. Lyons, Inc.
I find almost universal agreement that one of the most important
elements in the effort to slow the growth o f inflation must be control
of Federal spending. This control must start with a balanced budget.
The philosophical question to be answered in cutting Federal spending
is whether to have preferential cuts or across-the-board cuts. Because
of the necessity for prompt action, across-the-board cuts seem to be
preferable at this time. Such action would negate the m ultiplicity of
arguments that would arise over the defense of pet projects and pro­
grams. However, across-the-board cuts should not be left to the execu­
tive alone. There should be a congressional mandate that across-theboard cuts take place immediately at a given level. Only if both
Congress and the executive work together on this can the effort be
successful.

163

In the event that spending cuts are insufficient to bring our spending
in line with our revenues, then new taxes should be imposed. These
should be in the form of a national sales tax. Such a tax would act
as a brake on consumer spending without removing incentives for
saving and capital spending that are at this time necessary in order
to build new jobs and create greater productivity in our economy.

M r. H arvey E. K a p n ic k , J r .

Chairman and Chief Executive Officer
Arthur Andersen & Co.
BASIC PHILOSOPHY

Government services must be paid for currently. Our elected rep­
resentatives established programs and once established we have a
responsibility to fund. We cannot spend more than we receive over any
long period. Therefore, except in time of national emergency, a ballanced budget is desirable. We accept the philosophy that our ability to
continue social progress is dependent upon maintaining a sound econ­
omy. We also accept the philosophy that a graduated tax system or
the ability to pay will achieve the best equity among taxpayers—but
the rates for any segment cannot be confiscatory or it w ill create deter­
rents to produce to capacity by either individual or business.
SOME CONCERNS WITH THE PRESENT SYSTEM

Piecemeal reform requiring further reform has created significant
confusion and dissension with allegations of “loophole,” “give-away,”
“special interest benefits,” etc. An inflationary economy highlights in­
equities causing further dissension rather than unison against a com­
mon enemy. Confiscatory rates occur in an inflationary economy be­
cause of increases which only maintain equal purchasing power for
individuals, especially low income groups, and corporations with fic­
titious inflationary profits. Thus, taxes can consume needed capital and
destroy an individual’s ability to cover basic human needs in an in­
flationary period.
AN EMERGING CAPITAL CRISIS

Because of (1) capital required to pay taxes on fictitious inventory
profits, (2) transfer of additional capital resulting from increases in
the Arab oil cost, (3) amounts required to fund pension plans as
required by recent legislation, (4) allocation of funds to risky “tax
shelter” investments, and (5) the need to refinance debt of corpora­
tions which has grown significantly in recent years, a capital crisis of
major proportions can be emerging unless action is taken immediately
to alleviate spme of the basic problems.

164

TO RESTORE “ BALANCED TAXATION5’ WE NEED

Ultimately, major revision is needed in our income tax system to
achieve “balanced taxation,” and simplification is required if our sys­
tem is to remain effective. In summary, we need (1) savings incentives
to save vs. consume, (2) productivity and capital recovery incentives to
increase productivity and, thus, standard of living for all, (3) incen­
tives to efficiently move capital to our highest social priority, (4) to
provide a “brake” on total spending by government and (5) a pro­
gram to maintain equity during transition to a higher price level re­
sulting from inflation. We should recognize that a great deal of the
eroding confidence can be restored by announcing an effective program
now.
SPECIFIC RECOMMENDATIONS NOW BECAUSE OF SERIOUS INFLATION
AND CAPITAL CRISIS

1. To encourage savings—thus savings incentives:
A. To encourage savings with investments in stock —eliminate
tax on stock dividends when paid in lieu of cash with tax paid
upon sale of stock.
B. To encourage savings for retirement—increase individual
taxpayers’ deduction for self-initiated pension plans with tax
payable after retirement.
C. To encourage savings and investment in bonds, by individ­
uals, Arabs, and pension funds. Authorize “inflation proof” de­
benture with regular savings rate of interest, plus capital
adjustment of face value annually, based on change in index such
' as GNP deflator, with payment of such adjustment at maturity of
bond and with such capital adjustment a current deduction by
issuer.
2. To encourage productivity—thus productivity or capital
incentives:
A. In lieu of multitude of all various options, provide for alter­
native 50% write-off of plant and equipment as incurred, with
tax benefit used to reduce cost of property and straight-line depre­
ciation over economic life used for both tax and book purposes.
B. To retain capital in corporations for improving productivity,
provide for deduction of increase in value of inventory based on
change in price level with amount of such price change going
directly to capital and, thus, not inflating reported earnings. This
would be similar to L IFO but would retain value of inventory
on balance sheet at current value and, thus, not distort various
financial ratios.
3. To maintain equity during transitional period to higher price
levels:
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A. Increase annually graduated tax brackets based on change
in GNP deflator.
B. Allow “transitional inflation credit” for low income groups
*to maintain purchasing power and offset with “transitional in­
flation surcharge” of like amount for all income in excess of
$25,000 for individuals and corporations.
4. To maintain “brake” on government spending:
A. Provide for mandatory surcharge on all incomes in excess of
$10,000 for individuals and corporations to cover deficit for past
fiscal year.
B. Allow Congress by specific vote to suspend such surcharge
in any year.
5. To move capital to highest social priority:
A. Reduce capital gains tax after appropriate holding period
so that movement of capital is not artifically restricted.
Once a new approach is adopted to try to develop the concept of
balanced taxation within broad categories of objectives as illustrated
above, the general public can better understand the incentives being
allowed and the social purpose for such incentives. The concept could
be applied even further to individuals where such deductions as inter­
est on mortgages and taxes on homes encourage home ownership, medi­
cal deductions offset basic needs, etc. Social programs can and will be
better understood and conflict between various segments of our coun­
try eliminated if such an approach is pursued. Appropriately commu­
nicating the purpose of incentives or deductions is as important as
the deduction its e lf!
M r. B ruce K. M acL aury

President
Federal Reserve Bank of Minneapolis
In the past year, monetary policy has shouldered too large a part
of the task of resisting inflation. As a result, interest rates have been
pushed to extraordinary heights and capital formation depressed, par­
ticularly in the housing sector. Fiscal policy must now take a more
active role in slowing the rise in prices.
The announced goal of cutting expenditures to no more than $300
billion in fiscal year 1975 seems highly desirable, both as a symbol of
administration determination to attack inflation and as a means of
getting Congress to reconsider its many programs and formulate
standards for evaluating them. (Similar expenditure restraint must
be extended in Fiscal Year 1976 budget.) W ithin the $300 billion total,
an amount of perhaps $3 to $4 billion should be allocated to an ex­
panded public employment program that goes into effect when the
unemployment rate goes above 6*4 percent. Such a program seems
absolutely essential for an equitable sharing of the burdens, while

166

reducing the risk of an early abandonment of the entire anti-inflation
effort.
Tax rates should be changed to provide relief for those who have
suffered most from inflation and to improve the market for equity
capital.
A. Relief could be given by granting every taxpayer a $100 tax
credit. Relief plus reform could be achieved by reducing payroll taxes
and gradually shifting social security financing to general revenues,
mainly the income tax.
B. A step should be taken now to eliminate the double taxation of
corporate income by permitting corporations to deduct a specified
amount, say 20 percent, of dividends in computing their tax. The effect
would be to increase cash flow, earnings, and the market value of
equities. Households and pension funds would gain an immediate
increase in their net asset value. Further, this change would begin to
remove the present disincentive to equity financing and thus help to
put business firms on a sounder capital base.
C. Tax revenue lost through the changes suggested in A and B
should be recouped to the greatest extent possible by enacting the
Administration’s windfall profits tax, increasing the tax on preference
income, ending the percentage depletion allowance, etc.
Mr. Rex J. M orthland

President, American Bankers Association
MAJOR FISCAL OBJECTIVES FOR F Y 1 9 7 5 , 1 9 7 6 , AND BEYOND

Deficit spending under present economic conditions fuels inflation
and curtails anti-inflationary policy options in the monetary field. For
the immediate future, we recommend that spending be held to $300
billion during this fiscal year, and to $310 billion during F Y 1975/76.
In addition, more attention must be paid to the impact of burgeoning
off-budget agency financing and government guarantees in the capital
markets. Congressional action to limit the annual total of such financ­
ing should be considered immediately.
CHANGES IN THE MIX OF FEDERAL SPENDING

j We recommend that discretionary expenditures be cut wherever

jfeasible to achieve the above targets. Programs promising the most
i favorable impacts on productivity, employment, saving and capital
jformation should not be cut. Some increased spending on a pilot public
employment program may be appropriate.
PROPOSED CHANGES IN FEDERAL TAXATION

j The basic structure of the Federal income tax system should be
changed to eliminate the “inflation-bonus” accruing the government

167

via inflation. The recent revision of the Canadian Federal Income Tax
system provides a useful model. Incentive features of the tax system
should be changed to encourage savings and investments and to reduce
incentives to consumption spending. The proposed $1,000 interestexemption on personal savings and time accounts deserves careful con­
sideration; as does the proposed tax credit for housing and other
priority investments as noted in the Financial Institutions Act (S.
2591). Spending reductions must be achieved to offset the revenue
losses of these measures. Finally, full Congressional implementation
of the Budget and Impoundment Control Act of 1974 is critical, and
the “full employment-balanced budget” concept should not be used to
gloss over the inflationary effects of governmental deficits.
D r . A rthur M. O k u n

Senior Fellow
The Brookings Institution
1. The assignment of federal expenditure policy in F Y 1975 should
be to demonstrate clearly that the budget can be controlled at reason­
able and realistic levels. Federal outlays have been a source of un­
certainty and instability in both private and public planning, and that
destabilizing role should be terminated once and for all. The nev
spirit of executive-legislative cooperation and the new Budget Com­
mittees of the Congress should facilitate the task.
2. For F Y 1975, $300 billion and $305 billion are both defensible
targets for federal outlays. Indeed, the differences between them are
negligible in terms of economic impact. The smaller figure might mean
a lowering of a few tenths of a point in interest rates and the inflation
rate, at the expense of lowering real G NP growth of a few tenths of a
point, and raising the unemployment rate perhaps a tenth of a point.
Both the benefits and the costs represent trivial changes in the over­
all economic picture. That picture points to a weak economy in late
1974 and 1975. W ith some help from recent monetary-fiscal restraint,
the boom is now dead and buried.
3. The assignment requires setting realistic targets and implement­
ing them with broad support, and with efficient, cool, and deliberate
management. Calling the shot and making it is v ita l; the precise shot
that is called is far less important. The principle has several corol­
laries: a) Fiscal discipline should be properly described as one part
of the cure for inflation. Only a small part of the recent 8 percent stepup in the inflation rate (from 3 percent at the end of 1972 to 11 per­
cent today) can reasonably be attributed to fiscal excesses. That con­
trasts with 1966-68, when the inflation was propelled mainly by the
budget, b) Anti-inflationary determination should be displayed on all
fronts. For example, press rumors on imminent decontrol of the price

168

of “old” oil (an extra $9 billion dose of inflation for 1975) weaken the
credibility of the whole economic program, c) Proposed budget cuts
should be made with a scalpel, not an ax. A s George Shultz remarked,
when a proposal to cut weekly unemployment insurance benefits was
included on one list o f cuts, he felt that the list had discredited itself,
d) Targets should be set at levels that will not require either account­
ing gimmickry or inefficient interruptions of federal activities.
4. For fiscal 1976, a growth of expenditures of $30 billion, or roughly
10 percent, holding taxes constant, would be in the ball park. That
would add a little further to the restraint in the federal budget and
make room for additional relaxation of monetary conditions. There is
no case for a net tax increase on present prospects (unless one is re­
quired for a health insurance program). Indeed, if the priorities point
that way, the growth of federal spending could readily be held below
$30 billion, thus permitting a tax cut.
Whether such a P Y 1976 budget turns out to be balanced or in deficit
or in surplus will depend, as it should, on the strength of the economy,
which will be reflected in federal receipts. It would probably take a
stronger recovery of income and output than is now expected in order
to bring federal revenues into the range of $330 to $335 billion needed
to balance that budget. But, only if the economy is stronger than the
prolonged weakness now envisioned by most forecasters, would a bal­
ance or surplus be appropriate. Budget balancing in a very weak
economy would be doomed to failure and would be as destabilizing
as deficits are in a strong economy.

Mr. D onald T. R egan

Chairman of the Board
Merrill Lynch, Pierce,
Fenner and Smith, Inc.
Leadership in the war against inflation must come from the Federal
Government. It must come now. Every weapon, fiscal, monetary or
otherwise, must be employed. Sound fiscal policies at all levels of gov­
ernment are the most potent weapon in our arsenal to combat inflation.
As a first step, there should be an immediate reduction in the level
of expenditures budgeted for fiscal 1975. An effective way to accom­
plish this and to avoid prolonged debate about particular programs
would be to insist upon moderate reductions across-the-board. I rec­
ommend a two-to-three percent reduction for every branch, depart­
ment, agency. Such an action would avoid serious damage to any
single program. But it would have the effect of reducing fiscal 1975
spending to around $300 billion. State and local governments should
be urged to follow the leadership of the Federal Government.
As we look ahead to fiscal 1976 and beyond, every effort should
169

be made to balance the budgets at all levels of government. Such near
and longer-term restraints by all governments would relieve the de­
mand pressures that are fueling inflation and are straining our econ­
omy beyond its capacity.

Fiscal policy should be aimed at expanding the nation’s industrial
capacity to meet future needs, particularly in areas where shortages
exist. And investors, who are the source of funds for this expansion,
must be attracted back into the capital markets.
Investment must be encouraged by changes in our tax and other
laws. The investment tax credit should be increased, particularly for
energy development. Capital gains taxation should be reformed to
encourage equity investment. Withholding taxes on dividends and
interest to foreign investors should be eliminated. These fiscal policies
combined with similar vigorous actions in monetary and other policies
should enable our nation to get a handle on inflation.
T h e H on . H enry S. R etjss

U.S. House of Representatives.
Recommendations from the Financial Conference on Inflation,
September 20, to the Economic Summit meeting on September 27-28
should include the following proposals:
Fiscal Policy—Federal Taxation: Any policy to fight inflation must
defuse the wage explosion already beginning to occur, as workers at­
tempt to catch up with last year’s inflation and protect themselves
against this year’s. A social contract, in which the government pledges
social security tax and/or income tax relief for low- and middle-income
people and in which workers pledge to restrain their wage increase
demands, would reduce cost-push inflationary pressures while protect­
ing the average worker against rising prices. Such tax relief must be
balanced, to avoid unwanted fiscal stimulus, by tax reform to end out­
moded and inequitable tax subsidies and by other revenue-raising
measures.
Monetary Policy—Credit Allocation: The Federal Reserve should
pursue responsible monetary restraint, keeping money supply growth
to around six peercent for the immediate future.
A t the same time, we must establish a system with clear ground
rules for channeling the limited supply of credit away from inflation­
ary uses, such as real estate speculation, conglomerate mergers, and
commodity buildups, and toward interest-sensitive essential needs such
as productive capital investment, low- and middle-income housing,
small businesses and farms, public utilities, and state and local
governments.
International Economic Policy: To bolster international confidence,
let the U .S. lead in putting together a consortium of the leading in­
dustrial nations (a) to guarantee that the world’s major banks will
170

not be allowed to fail for lack of liquidity (as opposed to mismanage­
ment, for which salvage operations ought not to be attem pted); (b)
to adopt coordinated programs to conserve fuel, thus reducing shortrun dependence on the oil-exporting countries, and food, thus easing
the prospect of mass starvation in Asia and Africa.
TVage-Price Policy: To forestall future price rises, we must increase
supplies of scarce materials, through a broad range of policies in­
cluding advance planning, monitoring of potential shortages, sensible
import and export policies, and elimination of artificial barriers to
competition.
Dr. R aymond J . S aulnier

Professor Emeritus of Economics
Barnard College
Columbia University
The following recommendations are offered with respect to Federal
spending policy:
1. The target total o f Unified Budget outlays for Fiscal 1975 should
be set at $295 billion. This would allow a spending increase of $26.7
billion (10%) over Fiscal 1974—a cut in spending plan, but not a cut
in actual outlays.
Actually, a more appropriate target would be a percentage increase
in outlays less than the expected inflation rate—say 8%—but this
would allow outlays of only $290 billion in Fiscal 1975 and would seem
impossible of achievement, the more especially because Congressional
actions taken to date suggest spending (if not restrained) well above
the $304.4 billion total put forward in the January 1974 budget. The
$295 billion target will itself be difficult to achieve: the 1974 budget
message points out that only $84.4 billion of the projected $304.4 bil­
lion outlays are in the “relatively controllable” category, and that
90% of the nearly 30 billion increase in outlays originally projected
between Fiscal 1974 and Fiscal 1975 are “mandatory increases . . .
unavoidable under present law.”
2. The extent to which outlay increases are mandated under present
law makes it obvious that a significant restraint on spending cannot be
achieved without new legislation. This could be passed early in the
1975 Congressional session, provided the urgency is recognized, but
if Congress chooses to reconvene after the November election recess
it should be urged to make expenditure control be first if not the only
item of business in its calendar.
3. It is imperative to exercise restraint also on expenditures by “offbudget” agencies and government—sponsored enterprises. These have
increased from $4.2 billion in Fiscal 1972 to an estimated $15.6 bil­
lion in Fiscal 1974—it is impossible to believe they will drop to $4
billion in Fiscal 1975, as the January 1974 budget message estimates

171

they will. More likely, expenditure will increase immensely over the
already swollen Fiscal 1974 total unless restraints are imposed.
In the present circumstances, the rule should be a lessor percentage
increase in these of budget outlays than in the expected inflation rate,
which suggests holding them to an increase of say 8%.
4. Off-Budget outlays, which consist largely of loan disbursements
are now so large, so difficult for an outsider to follow, so little under­
stood by the public, and make such prodigious demands on capital
markets that there is an urgent need to reexamine the way they are
reported in budget accounts. As it stands, the so called “unified budget”
is no longer even remotely “unifying” of Federal outlays. An Execu­
tive Branch task force should be appointed at once, under a mandate
to reconstruct budget accounting to correct this deficiency and it
should be required to complete its restructuring of accounts in time
to make the results at least a tentative basis of budget presentation for
Fiscal 1976.
5. The “full employment budget surplus” concept should be dropped
unceremoniously from budget presentations. It has given nothing but
wrong guidance on Fiscal policy.
6. It is impossible for anyone outside government—indeed for any­
one outside the Budget Bureau—to write a full and operationallyadequate bill of particulars on where to make specific adjustments in
spending plans. This can only be done in the Budget Bureau. What is
needed is a list of adjustments that would hold the total to $295 billion
in Fiscal 1975, accompanied by a statement of actions—legislative or
discretionary—necessary to put them into effect.
Obviously, one has to look to areas of proposed spending in which in­
creases are largest, but categories of spending must be rated also ac­
cording to their priority in an economy that is destructively inflation­
ary. This points clearly to defense, where an outlay increase of $6.2
billion (7.8%) is projected, and to H EW , for which (according to
the January 1974 Budget) spending increases of $14.2 billion (14.7%)
are planned. But there are doubtless many other areas (International
Affairs and Finance; Space Research and Technology; Agricultural
and Rural Development; Natural Resources and Environment) where
adjustments could appropriately be made.
I f necessary, a Presidential Commission should be enpaneled at once
to report a spending priority list within 60 days.

M r . R obert H. S tewart , III

Chairman

~

First International Bancshares, Inc.
A t least two fundamental conceptual changes in the federal budget
system would seem to be in order.
172

First, use of the so-called full employment budget—with all o f its
built-in expansionary biases—should be left solely to those profes­
sionals who appreciate some o f its weaknesses and its strengths. Per­
haps its official use as an analytical device should be limited to the
Council of Economic Advisors and its staff, who would utilize it along
with other tools in periodic evaluations of the economy’s performance.
Surely we have now learned about the largo fiscal policy mistakes that
this approach can camouflage.
Second, adoption a few years ago of the unified, budget concept was
a large step towards improving the process. But, it should have better
been called the “partially unified budget” concept. Fiscal activities of
the off-budget agencies have grown rapidly and, at particular times,
have been a very large marginal presence on the demand side of the
money and capital markets. I f their budget figures are not unified into
the unified federal budget, perhaps that could appear in a special ref­
erence section of the budget document for policy guidance.
Given current and prospective economic conditions, it is highly un­
likely that the budget for Fiscal 1975 can be brought into near-balance
in the nine months that remain. But, a large start must be made this
year by minimizing the deficit (some say it is to be $9.5 billion; some
say it is to be $15 to $20 billion unless serious restraints are adopted
quickly). In future high employment (95%) years, it is imperative that
projected increases in budget expenditures be at least in line with the
expected performance of the overall economy and thus with projected
increases in revenues (given a stable tax structure). And in future
95% employment years, balanced budgets or budgets in surplus are
mandatory.
Given current and prospective political conditions, it would appear
that a uniform, across-the-board percentage cutback in federal spend­
ing in program areas that are reachable would result in less oratory and
controversy. Reachable program areas should include both some
so-called controllable and some so-called noncontrolla'ble areas. Specific
legislative actions by the Congress would be required in the latter.
Charles J. Z w i c k

President
Southern Banking Corporation
A thorough analysis of “cutting the Federal budget” is clearly
beyond the scope of this meeting. In the brief time available, only
asimple answer can be given, and therefore this must be related to a
simple question. I will try.
The appropriate size of the budget can be considered from two points
¡of view—one as a technical exercise to balance aggregate demand
within the total economy so that there is a correct amount of slack
173

to dampen inflationary expectations. This would, of course, include
specific recommendations for program reductions. Such a technical
evaluation can be carried out more appropriately in an environment
other than this conference.
The second view of “cutting the budget” is to consider it a matter
of equity, a moral issue, if you will. The American people believe that
the Federal Government is to a large degree responsible for the cur­
rent inflation. They therefore believe as a matter of equity the Federal
Government should do something about its spending plans before
asking individuals and businesses to tighten their belts. Viewed in this
manner the issue is not whether the budget should be held to $300
billion or reduced further, but will the Government make a real effort
to help contribute to the solution of a problem it had a large part in
creating.
What we need, of course, is a procedure which allows the Govern­
ment to provide the needed moral leadership. I will propose a simple
procedure which could be implemented quickly and which would
avoid many of the technical issues—these, of course, will have to be
handled at a later date.

174

fiscal

policy

SECRETARY SIMON:
afternoon session.

to

deal with

inflation

Gentlemen, we will start the

Just a couple of ground rules, so we can continue
to move along as we did this morning.
I thank you
again for not only your thoughtful comments but also
|for keeping relatively within the time frame, and
for your patience with me as well.
This afternoon, we have got the major topics
that you see on your agenda with the allotted times.
jWe have picked a discussion leader for the first two
topics and two discussion leaders for most of the
balance of the topics.
The discussion leader has been told to keep his
opening remarks in the three-minute range, and I use
|the term "range” because we don't have the constraints
that we did this morning, but I really would prefer
Ithat they didn't run over four.
Then we will have a give and take, you giving it
|and we taking it, that is; and if there are any ques­
tions from the Government people up here, just ask to
be recognized and we can ask questions, but primar­
ily, as this morning, this is Government listening
to you, and we benefiting from your sound advice.
I am going to limit individual comments on the
various areas of discussion as I did this morning,
so that anybody who has something to say will have
an opportunity to say it.
So fiscal policy, in dealing with inflation, will
be opened up by Dr. Gabe Hauge, Manufacturers Hanover
Trust Co., New York.
DR. HAUGE: Mr. Secretary, in looking over the
job of opening up this big subject in the time
allotted, all I can say is that you are going to
witness the first three-minute mile in history.
The goal, I would take it, of our proceedings
here is to try to fashion a way whereby we can re­
duce the rate of inflation to a point where it can
he ignored in making calculations about the future.

177

We used to think of that in the range below two
percent. What it is now, I don’t know. But if we
want to get some targets in front of us, and I think
it's useful, if we start with the 12 percent rate of
CPI and shoot for a reduction of half to a third in
the next year, and cut that by half at the end of
1976, it seems to me that for our own purposes we
have something that is reasonable.
Now, fiscal policy presumably relates to spend­
ing, taxing and borrowing at the Federal level. In
approaching this part of anti-inflationary program,
I think it is only fair to recall one does it against
a background of the revolution of rising expectations
that was preached not only for the developing world
but for the developed world some years ago.
The whole emphasis has been on stimulation and
expansionist trend in the ecomony. That kind of
policy was in support of the idea that we could
somehow, were entitled to have, a rapidly rising
public standard of living, in addition to a rapidly
rising private standard of living at the same time.
It was going to be La Dolce Vita, indeed. Now
we have found that there is a come-uppance to that,
and we are trying to see whether fiscal policy is
relevant to the future. Some doubts have been
raised, some in this room, in a muted sense, that we
are a little too concerned about the Budget, it is
only a few billion here and there, that the big
impact is in the private sector, and I think those
facts are as indicated.
But it is probably fair to say that fiscal policy
considerations have a bigger dimension to them, and
I want to come back to that.
First, it seems to me that the Administration
has an opportunity right now that should not be lost;
and that is to shape up what in the world this con­
cept of a budget is that is guiding us.
We have had what is called a unified budget, but
as was pointed out this morning, many expenditure
and loan programs have been moved off that budget,
for reasons that fit the idea of the expansionist
trend without having too many numbers to embarrass
the concept.

178

I must confess, I was never intrigued with the
idea of the full employment budget from the begin­
ning. Those of you who can remember the discussion
will recall how we were promised a fiscal dividend.
It has turned out to be a fiscal mortgage.
My own feeling is to underscore what has been
said about this by many people this morning; that
for whatever use it may have in the recesses of OMB,
it either has to be drastically rehabilitated or it
should be given a decent and preferably a low-cost
funeral very promptly.
I would agree with Senator Roth, that we ought
to get back to an administrative budget, in terms
of putting it all on a piece of paper as to what is
involved.
Now, in approaching, Mr. Secretary, the problem
here in this area, I think it’s very clear at once
that many of the things that are talked about are
quite long-term. We are really talking about ’74,
'75 and '76.
So the short-term goal tends to focus on what I
think Alan Greenspan called the other day "measures
to reduce Government borrowing."
I think that is
a rather nifty phrase, because it is that that has
had the most adverse impact with respect to infla­
tionary developments, in my opinion, not the few
[extra billion dollars in the demand dimension; and
because of the difficulties on the tax side, that
comes to an expenditure control.
[
It seems to me we ought to try to beat the $300
billion level if we can on expenditures for ’74 and
'75, and including, as Senator Javits, I think, said
Ithis morning, a provision for the public employment
[program.
I personally would like to see debated the pos­
sibility of folding the public employment program
funding into the general revenue sharing plan.
I
tried it out at lunch and there was some support
and some attack, but it would be good to hear it
discussed, maybe.
We are all hopeful about the Budget Control Act
and from Congressman Reuss at lunch we found some
hopeful views of the future.

179

Charlie Zwick's proposal ought to be discussed,
and I hope that the members of the Congress who are
here will devote themselves to that. Because of the
way the public is pointing its finger at the Govern­
ment, with respect to the cause of inflation in the
last Gallup Poll, 48 percent cited the Government as
a principal cause, and business, believe it or not,
below labor as responsible for inflation -- well,
I think here is an area where the Congress, with our
support, can do something.
In the field of taxation, I think one starts
with the fairly clear evidence that the Internal
Revenue Code over the years has been weighted in
favor of consumption as against investment, and
that this, of course, has reflected the prevailing
bias we referred to earlier.
I think the case for a general tax increase or a
general tax cut has not been made.
I think the idea
of that being part of a social contract, I would like
to hear the representatives of labor here express
themselves on whether or not some kind of a tax re­
duction for working people who are engaged in labormanagement bargaining would have any significance -would be affected in any significant way, if related
to the tax reduction related to the wage bargaining.
I have never heard such a view expressed.
The idea
has been presented mainly by academic people, and I
would like to hear labor speak on it,
Finally, I think we have to stop taking produc­
tion and distribution for granted, that business
somehow will do it, regardless of the circumstances.
I think that production and distribution needs
care and feeding just like consumption needs care and
feeding; and that points us to longer term changes,
I think, to encourage saving and investment.
So what we have to focus on in this area is what
can be relevant in the next 18 months, as against
the next five years.
I hope that has opened a few
doors, Mr. Secretary, and with that I will subside.
SECRETARY SIMON:

Thank you very much, Gabe.

Comments? I thought I would hear from Otto
Eckstein, who was just saying "For example" when I
said "Thank you" before.
MR. ECKSTEIN:

180

I will pass on this one.

SECRETARY SIMON:

Yes, sir, Bob Roosa?

MR. ROOSA: On the fiscal side, there has been a
lot of reference, in passing, this morning to the
Usefulness of variation in taxes as well as expendi­
ture, although the emphasis concentrated on the
hatter.
I think there is real virtue, and we ought to

Leigh it, at least, here, in thinking of the use that
Light come from an additional excise tax on gasoline,
frhe principal argument that I have heard against it
Hs that it cuts too hard on the lower income people,
Lho depend on the use of the automobile; and I think
that whatever the revenue produced by such a tax,
bart of it should then, in a sense, be offset through
deduction in the income tax burden on lower income
people.
But I think the principal virtue of such a tax is
¡that we need a further reminder, particularly in the
current year, when we seem to be skating through
without the shortages which are bound to come a
little further ahead. We need a further reminder of
the need to conserve in particular on this form of
oil energy, and I don’t see any harm, if we are going
ko have trouble in controlling expenditures, in hav­
ing a little tax dividend left over to provide for
pat reduction in Government borrowing -- if we
jhaven't used all the proceeds of an excise on gasouine to provide tax relief for the lower income
brackets.
It does seem to me this is action which could
jbe considered promptly, and would have a role both
jin helping to limit the use of our expendable fuel,
[help limit that drain on the balance of payments,
land at the same time contribute some relief towards
jthe lower income brackets, where the pain of in­
flation is so great.
SECRETARY SIMON:

Yes, sir, Charlie?

DR. WALKER:
I would like to add my support to
prhat Bob said about seriously considering a Federal
gasoline tax.
I advocated in a column in the Wash­
ington Post a year ago that we double or triple the
[ederal gasoline tax, and then had to start dodging
for quite a while both Congress and clients.
I wanted to add to that, however, and in terms of
P-ts political saleability,
I think, particularly
piphasize the important aspect of emphasizing the

the use of the funds.
I think Bob is right in the
basic direction he was pointing.
But, the one thing
I would add, if the tax were doubled or tripled, and
I am kind of intrigued also with Dick Hill’s idea,
and I want to think about it a little bit, would be
to use at least a portion of the funds that would
help further Project Independence, particularly in
the R and D direction.
If you are going to put more
taxes on energy, use some of the proceeds to help
solve the energy problem.
The second point I want to make has to do, as
being one of the culprits that's been involved in
the administrative budgets to unified budgets to
full employment budgets, to wherever we are now, I
am in fundamental agreement with both Gabe and
Senator Roth about the objectives they are talking
about.

'

The problem, as I see it, is one of those that
arises in a democracy when politics and economics
collide, and the built-in propensity to overspend as
a result of the democratic process.
People like more
spending, and they don't like high taxes, and they
don't like tight money, so you have this natural
propensity.
To the extent, then, that a return to
the administrative budget, or some other approach,
which would create a bias in the legislative pro­
cess against spending, impediments -- and maybe the
Budget Impoundment Act -- can work in this direction.
In other words, I am not concerned so much as to how
you get there, Senator Roth, if you can get this sort
of bias or slowing or deterrent to overspending -because I disagree very much, I think it is with Art
Okun,that it was only the '65 to '68 experience over
the last ten years.
I think we have overspent
basically throughout the whole period.
SECRETARY SIMON:
Kapnick.

Thank you.

Yes, sir?

Mr.

MR. KAPNICK: On taxes, I believe that we have
to have better communication between government, the
industry and the American people.
I would like to
encourage you to think in terms of trying to cate­
gorize these various areas so that the entire American
people better understand the reasons that these are
given.
I think also that I would like to encourage us to
think in terms of automatic financial controls to
eliminate these budget deficits, unless positive ac­
tion is taken. And I believe that you can categorize
these various areas such as savings incentives we

182

have talked about, productivity incentives, the in­
centive to own your home, which is the interest de­
duction, and I think it would be better understood.
Then I believe that we should adopt a surcharge

to balance the budget each year, unless positive
action is taken by the Congress. Congress, we have
to recognize, are our elected representatives, and
[if they decide these are the best programs and they
£re efficient, then we have to take the responsi­
bility to fund them.

SECRETARY SIMON: Thank you. Yes, sir?
MR. HILLIARD:
Point one, on the subject of taxa­
tion, Mr. Kapnick just brought up the question of a
[surcharge. I would like to raise the question of tax
equality. I expect I am going to step on a few toes
mere but there are certain industries in this country
[that possess a favored position as far as Federal
[taxation is concerned and I don’t think we need to
[rack our brains too far to recognize them.
The oil industry for years had a depletion
[allowance and it paid comparatively low income taxes
compared to its total income. The investor owned
[life insurance industry has a very favored position
[tax-wise.
There are accounting procedures and other tax
preferences that benefit some public utilities even
[though they are very needy.
I understand their
blight but these should be equalized. And if my
friends in the banking industry are waiting for the
Ihoe to drop, why, I ’ll drop it now because certainly
they enjoy tremendous tax favoritism in the country,
Pnd if, some of those were equalized, I would think
fo surcharge would be needed.
SENATOR LONG:
SENATOR SIMON:

May I comment on that?
Please, Mr. Chairman.

I SENATOR LONG:
If you look at the taxes that the
pil companies are paying at the local level and take
into account -- without even taking into account the
■ax on their product which is the gasoline that they

produce, just leave that out -- but you take into
account all the taxes that the oil industry pays,
for example, in Louisiana, even if they are not mak­
ing a nickel, out of that, we tax them 12 percent on
gross. That’s whether they make money or not. The
average for manufacturing is five percent on gross
for all taxes. Now in Louisiana we hit them for twoand-a-half times that much before we ever asked
whether they made any money, then, of course, we hit
them with an income tax if they did make something.
If you take that into account and in the foreign
lands you take into account what these foreign
governments are taking away from them on the produc­
tion, they are paying more taxes than anybody, even
the liquor people, where taxes exceed the cost of
production by nine-to-one.
So that, I mean, in
gross, they are paying more taxes than anybody, any­
body on earth, and so, when you want to talk about
somebody’s tax burden, you ought to look at the en­
tire thing.
Now, furthermore, insofar as anybody in Govern­
ment is getting any kind of a tax advantage, if it's
been going on for a long time, that has been dis­
counted at the marketplace. Anybody who has studied
economics, if you graduated from college, should
have gone far enough in it to have heard of the free
flow of capital, that money flows into things more
profitable, and the money flows away from things that
are not very profitable, all things considered, in­
cluding taxes.
So, if you are going to heavy up on taxes on the
oil industry, all you are going to do is to postpone
the day when we find enough capital in this industry
to shorten up this energy crisis.
Now, it seems to be a prevailing Government
deficit that is creating this inflation -- nothing
further from the truth, in my opinion.
Louisiana
spends about $2 billion a year at the state level.
Now, $1 billion, half of that, comes out of Federal
Government.
Look at those charts you have presented
here.
If the Federal Government wasn't paying its
money through to these states, we would have an
enormous Federal surplus. But, if you take into
account the state budgets, they are not borrowing
money, they are reducing their bond issues because
of these high interest rates and they think it's
a poor time to borrow.

184

You take their surplus and lay that against the
federal deficit and, Government as a whole, is runling a surplus this year of over $11 billion and
that's right there in the President's Economic Re­
tort. So, that can't be what's causing the infla­
tion*. Inflation is being caused because the OPEC
¡countries trebled the cost of energy for us and it
tanked up all the energy around the world along with
I t . And, what we are going to have to do, as I see
ft* is to try to channel our investments in the areas
■that are going to increase production, increase pro­
ductivity and especially make the increases in those
fereas where we have the shortages, to hope to bring
[hat back into line.
Now, my good friend, Scoop Jackson, and quite a
¡few other people see the way to solve it is to tax
the eyeballs out of the oil business, just tax them
lout of business -- get rid of them.
I don't think
■that will solve the energy crisis.
I think you are
going to have to solve it by prevailing upon some­
body to make more investments in providing energy for
Irou; and because it's only when you are able to see
the prospect of producing your own requirements that
t see the prospect of getting these OPEC countries
{to be more reasonable in the price that they charge
■for it.
Now, with regard to tax increase, gentlemen, I
{handled some tax increase bills, and I want you to
know its's just a great deal easier to pass a taxIcut than to pass a tax-increase. I've tried it both
ways.
(Laughter.)
And if you want to pass some big tax increases,
{you'd better have a tax-cut on the other end for
iSomebody, because it takes that to put it through.
Ind you gentlemen can expect that the average tax
bill that goes through, by the time it gets through
with the amendments that will be offered on the
[House side and the Senate side, it will wind up giv­
ing away more revenue than it gains.
I can recall
Richard Nixon wanted to save that surtax. He wanted
|lo save what was left of it which was five percent­
age points when he first went in. And how the Dem­
ocratic caucuses
resolved that there was to be no
p x increases, which is just extending the tax that
Existed for another six months.
So, no tax increase
without tax reform.

Well, by the time they got through tax reforming
which was tax increases on.business, they had fin- ’
ally managed to raise $7 billion dollars by repeal­
ing the investment tax credit and things of that
sort.
Meanwhile, they found some appealing things to
put some tax cuts with, so the tax cuts worked out
to $9 billion. And you would think that would
stimulate the economy but they did such a fine job of
taxing everybody in business to, they found
we were in a recession within six months.
And that can very well be the trend of what's
happening now. Look at the House of Representatives,
They are getting ready to send us a tax bill. I
don't know whether they completed their work on it.
It's 52 tax bills all rolled into one. They might
not have the final amendment on that^Vou watch the
final amendment, Xt will be to take every nickel
that you gained plus something and give that to
labor. You watch.
SECRETARY SIMON:

Bob Baldwin.

MR. BALDWIN: Thank you, Mr. Chairman,
I would
like to go back to some of these possible cuts in
Federal spending.
I came to Washington as a neo­
phyte in the summer of '65 just at the time we were
starting expenditures in Vietnam and just before we
went into the Great Society and I have watched many
of the programs grow over the years and I am struck
by two things: One, we had what was called a fit in
the Defense Department, which was a five-year defense
projection.
Charlie Zwick knows all about that.
So now, we are aware of what the over-runs are i
nj
the Defense Department and they were rather large 1
then and I was trying to work on them and we are
still trying to work on them.
But I am struck by the fact that we have no five-j
year projections when we put other programs in other
areas of the budget for five years out and then see
what those over-runs are, And it seems to me that
this would be a very major discipline on expendi­
tures that we have made in those areas and I think
the point was made earlier. The second point that I
would like to make is, we are going to have to de­
cide between certain alternatives, not only in the
spending but what we had in past programs, whether
in the Clean Air Act or Safety Act or something li^e
that.

186

■

There are tremendous capital expenditures being

Ipmiired as a result of those; and a lot of them are

|eJy desirable, but I think we are going to have to
Ipread them out over a period with a capital forma­
tion we have got coming ahead of u s .
SECRETARY

SIMON:

Thank you.

Mr. Bethke.

MR. BETHKE: Just quickly on taxes. The general
needs are pretty clear, but get to some specifics.
I f one talks with your own families or particularly
our young people today, those that are in their
twenties and thirties, I think they would all back
soie specific taxes like an extra heavy surtax, ex­
cise tax, call it, on large, new automobiles, based
(on weight, on horsepower, which would both conserve
fuel and material.
I think they would back a bit more gas tax, pro­
viding it was exempted from mass transportation use
|nd trucking. I know they would back some increases
I n the excise taxes on luxuries like jewelry and
Eerfumes and cigaretts and even liquor, or certainly
liquor. You can go on like that, plus anything that
liberalizes a taxation on net new productive capacity
And it doesn't have to be only in the shortage
industries, and it should be certainly there, but
also in agriculture.
It's that sort of thing I
Ihink we should aim at. You have a grass roots back­
ing for this type of taxation, at least.
SECRETARY SIMON:

Thank you.

Yes, Jim.

MR. O'LEARY: Mr. Chairman, I ’d like to call
attention to a point that is of particular importance
with respect to the budget concept and that is, this
morning it was said by one or two speakers that actu­
ally the demands on the credit markets by the Federal
Government were comparatively small and that the pro­
blem lay in the private area of the ecomony.
■ Let me give you just a couple of facts here,
which I am sure are familiar to you Treasury people,
but I think should get out on the table, and that is
that in the flow of funds accounts of the Federal
•serve, in the first quarter of this year, the net
increase in direct issues by the U. S. Government
¡amounted to $10.3 billion at an annual rate; and in
second quarter, $3.6 billion, at an annual rate.

187

The demands looked moderate, but if you move
down to the Government-sponsored agencies, you see
that in the first quarter they were running at a net
increase of $9.3 billion and in the second quarter
at an annual rate of $19 billion. And in the second
quarter the Government-sponsored agencies were actu­
ally providing in terms of funds advanced at an
annual rate of $27 billion.
My own feeling is that when the third quarter
figures are available, it’s probably going to be
another $10 billion on top of that.
In other words,
it seems to me we are kidding ourselves, if we do
not include those Government-sponsored agencies in
the burden that's being imposed by the Government in
those markets; and the important thing is that the
demand for funds by those agencies is completely in­
elastic. They will go for those funds regardless of
what the interest rate is and has an especially hard
effect in the whole interest rate situation, and I
think this should be definitely part of our discus­
sion.
This is what seems, to me, leads me to feel, that
we have got to have a different, more realistic bud­
get concept than we have, in bringing those agencies
back in to the whole budget picture.
SECRETARY SIMON:

Yes, Mr. Needham.

MR. NEEDHAM:
I am glad I deferred to you be­
cause that was one of the points I wanted to make. I
can't stress too heavily the importance of bringing
these agency debts within control of the Congress.
This is a very bad situation and despite what Con­
gressman Reuss said this morning, I don't have the
figures with me, but if someone wants to challenge
them I will obtain them. The Federal, State and
Local Governments have taken 60 percent of the avail­
able credit from the United States in the last several
years and that's an increase that's been building up
since the mid-sixties.
So I think, clearly, it's safe to say that the
United States and other forms of Government within
the United States have contributed to the scarcity
of funds.
Now, I think one of the points that's being miss­
ed here is the fact that we are not just talking about
cutting our programs; I think what we are trying to
tell you, is that we have lost faith of the ability
of the United States Government to manage money.

188

I think the strains put on the Secretary of the
/Treasury and the Chairman of the Federal Reserve
loard are just impossible. And what we think is,
(there has to be some fiscal responsibility in the
iongress and in the Executive Branch before any one
[of us - I, at least speaking for the group that I
associate with most often - would be willing to pay
Inother dollar in taxes. What we are telling you is:
|ou have got all you are going to get.
_ Now, let me talk about the excise tax on gasoline
Jiat's retrogressive and already we are just talk­
ing about a way of diminishing the demand for energy
from the OPEC countries and already some of it's
sticking to the Federal Government's hands.
_ So I would have to oppose it because unless we
ire going to have the same opportunity to sit here
land tell you when you can take that tax off, I would
be opposed to it.
Now, on tax equality, Senator Long, you were very
Eloquent and persuasive and I think, perhaps Mr.
Hilliard, if I may just expand on his remarks. We
are looking, for example, in the securities industry
for tax equality with other financial institutions
and I am not going to trot out the numbers that show
that some type of financial institutions pay nine­
teen percent is tax and others pay out five -- I have
tjhem here -- but the point is, if you want the free
(capital market system to work and I believe you do,
ahd I know you do - then you've got to give the
[securities industry the same opportunity to compete
funds that these other financial intermediaries
ftve. And I think, too, that we have programs which
we submitted to your committee and we have submitted
itpem to the Treasury Department.
And when we talk about increasing savings in the
■lited States, I would like to tack on to something
Hat Chairman Burns advanced several months ago,
Herein he had proposed a withholding tax, which
Huld be equivalent to a savings program, and then
■vested by the Federal Government until an appro­
bate time. I took exception to the ability of the
Hderal Government to hold onto it.
I just think the
Hderal Government has enough to hold onto.
I would
H?e to propose a savings program that would be keyed
Hto a cost-of-living number and I would like to give
V a specific illustration.

189

Let's assume for the moment that we were talking
about people who earn $15,000 or more a year. In
that, we agree that the guideline-pay increase is
five percent.
Now, if we start with someone who is making
$20,000, that's the example I have here, and he is
given a raise of eight percent, then three or three
percentage points would be set aside in a Keogh type
savings plan wherein he would have the option of in­
vesting it either in Government securities or in some
other type of security that would suit his invest­
ment purposes. And them, at an appropriate time,
\
certainly a death or total disability, he would be
allowed to withdraw; or in the event the consumer
index stayed fairly constant for six or twelve month
period, he would be allowed to withdraw it then.
I think that's the way to take the demand out of
the economy -- to force all of us to save more -and I just offer this as one example that originated
with Chairman Burns. As far as I know, and we re­
fined it, it's in the document we submitted to you,
Mr. Secretary.
Thank you, very much.
SECRETARY SIMON:

Thank you.

Congressman Reuss:

CONGRESSMAN REUSS: Gabe Hauge posed his many
interesting questions whether the so-called "social
contract" which the Government might see fit to make
with labor would find acceptance by labor. Of
course, nobody can tell because it hasn’t been tried.
By and large, the concept of the social contract
is that if the Government could tell wage earners
that by and large some of their losses are losses -•
by not asking for too high wage increases would be
made up by a modest tax cut.
If some of their job
fears were alleviated by some of the employment pro­
grams that have been suggested and if by and large
there was some suggestion of the equality of sacri­
fice, then wage earners might be disposed to ask for
less in the wage bargain; and, incidentally, to
strike less than would otherwise be the case.
We can't tell what would happen here because it
hasn't been tried, but looking abroad, there are
instructive lessons to be learned.
In the Federal

190

Republic of Germany ten years ago or more, the
Government tried a concerted action program of just

this sort which worked very well and in part contri­
buted to the economic miracle of West Germany.
In little Austria they did the same thing, call­
ing it a social bargain, and one of the reasons
¡ustria is surviving and is not a parasite is be­
cause of that.
Just within the last week in the United Kindom101 that I would propound the United Kingdom as a

odel of economic management -- but anyway, they are
irying an income policy there and everybody is sur­
prised the Trades Union Congress at Brighton came
[through with some self-imposed wage guidelines which
|iave appealed to British management as a model of
inoderation.
So I suggest that the only way you find out is
jto show some leadership and try and have faith in
Ihe proposition that if the Government of the United
¡States will deal fairly with the four-fifths of the
nation which are wage earners, the chances are rea­
sonably good, that it will deal fairly with their
[Government. I think we ought to try it.
SECRETARY SIMON: Thank you, Congressman. We
fare going to have to move along to George Schultz.
MR. SCHULTZ: One general proposition and then
|ollow it with three specific things.
The general proposition is to strike a blow for
Irhat might perhaps be called the new "old-time
{religion”. That is, its amazing how fast counter­
cyclical fiscal policy has gone out of style and
Ihere seems to be the notion that we should balance
Ihe budget at all times at all costs.
It doesn’t
seem to me that we want to do that; and rather that
;we should have some sense of balance about our
objective along the lines that Otto Eckstein talked
Ibout this morning.
So that's my first point on the
ludget side.
The second point is that it seems to me that it
Is extremely useful to set targets. The $250 billion
larget that was set was widely thought to be un­
attainable and it was attained.
The $270 billion
larget was thought-to be unattainable and it was
¡attained.
„

My guess is that if a $300 billion target is
really set out there, even though it is thought by
many to be unattainable, it can be attained. So I
think the use of targets of that kind is very use­
ful; and I would suggest following Mr. Baldwin's
comment, that an effort be made to set a target for
both the appropriations -- what might be expected to
result in immediate outlays for the year -- and the
authorizations, so that we are forcing ourselves to
look down the road across the board in the Budget.
So that is my second suggestion.
The third, having to do with the off-budget
problonthat has been mentioned, in which I think is
a very serious problem, if there is resistance to
putting those agencies back in the budget, some
headway can be made by putting them within the Fed­
eral Financing Bank.
So that their borrowings are at least coordinated
by the Secretary of the Treasury. And, if you are
really bold, give the Secretary of the Treasury just
a little bit of authority to have some say, at least
when the borrowing would take place, and maybe even
a little of whether. Then you begin to get some
kind of control over these agencies' borrowings.
SECRETARY SIMON:

Thank you.

Senator Javits?

SENATOR JAVITS:
The only suggestion that I
wanted to make was that, instead of looking at the
budget problem strictly on the cut side, why not
look at it also on the addition side.
In other words, if you want a quick budget re­
duction to the $300 billion level, why not look at
such taxation as can be readily agreed to and utilize
some of that.
It is pretty well acknowledged, and I understand
clearly how Senator Long feels about it, that there
will be some windfall tax respecting the unusual pro­
fits attributable to the transitions to very much
higher oil prices.
Mr. Bethke suggested some possibilities in the
area of taxation. And in view of the feeling of
people like Henry Reuss and myself that there are
certain aspects of this budget that are going to
suffer unwisely and of the general agreement on publt
service employment, shouldn't the United States
Government also consider quick additions to income
which is just as good as budget cuts in order to
facilitate our tax?

192

¥.
Monetary Policy
Discussion Papers from Delegates

r. K ich ard P. C ooley

President and Chief E xecutive Officer
Wells Fargo Bank, N. A.
With disintermediation, thrift institutions which are the principal
housing financing are unable to compete for funds. This
Wailability of funds, together with increasing prices due to infla­
tion, higher interest rates, more restrictive terms and conflicts with
Bury laws in some areas is resulting in a severe decline in housing
tarts. Most builders are highly leveraged and the reduction in volume
Jnd increased cost of carrying inventories is creating serious credit
problems. Housing has a great multiplier effect on our economy both
In the way up and the way down and as the larger number of starts
|f the past reach completion and new housing starts decline, the reJrse multiplier is effecting the construction industry and businesses
applying goods for new homes. Unemployment in the construction
Industry is already too high and will increase.
J High interest rates are considerably increasing the costs of other
jjal estate projects underway many of which are funded on a variable
late basis. This is a major concern and affects not only the project Owner
lut also all financial intermediaries participating in the real estate
parket. This situation along with cost overruns'resulting from inJeased material costs exists in many major real estate projects in the
■nited States and in addition to creating credit problems increases the
leed for additional financing. Higher interest and construction costs
Iso make planned projects economically unfeasible, thus effecting
Jonomic growth.
[The subject of incentives to thrift institutions need priority rating,
Including the suggested tax free status of up to $1000 to $2000 of
Interest. Variable mortgage rates are needed to encourage lenders and
jto protect borrowers in periods of declining rates.
[The real estate industry is the hardest hit sector of our economy in
Ie current inflationary/high interest period and will add further to
fnr economic slowdown if not given immediate relief.
¡ource of

W - Tilford C. G aines

Vice President and Economist
[Manufacturers Hanover Trust Co.
1(1) The recent clamor for an easier monetary policy is hard to un■rstand. The U.S. economy is in a recession, but it has been a mild re195

cession and there is no evidence to support fear that it will become more
severe, although there is evidence to suggest that it might be relative]]
prolonged. Federal Reserve policy can scarcely be described as overlj
tight when one looks at what has happened to the monetary and credit
aggregates over the past six months to one year. What is of overriding
importance is that were the Federal Reserve System to back away
from its anti-inflationary efforts to restrain money and credit growth
at this point, the damage to public and international confidence could
be incalculable.
It is difficult to know what is exactly the right monetary policy for
the sort o f situation that we now are going through, but it is reason­
able to think that what the Federal Reserve System is attempting to
do through its money and credit targets is about right to avoid serious
recession and at the same time exert a continuing drag upon price
inflation. My recommendation, therefore, would be for a continuation
of present policy. A t the same time, I would hope that the recent effort
of the Federal Reserve System to nudge short-term interest rates lower
without compromising the basic objectives of policy will be successful,
There has been a more than usual number of business failures in recent
months, and there might be a significantly larger number in the months,
just ahead, solely because of the cost of money. I f the Federal Keserve
is able to get short-term interest rates down without speeding up money
or credit growth, it could make a very important difference fo r many
individual companies and for the health o f the economy as a whole,
Looking to the future, the object of monetary policy should be to
continue its growth targets in the money and credit aggregates^
levels sufficiently below the ongoing rate of price inflation so as hi
continue to exert a drag on inflation. Hopefully, within the next two
or three years monetary policy might be able to settle into a fixed se
of growth targets, consistent with reasonable price stability, thalj
could then be maintained for a number of years ahead.
(2) Domestic financial markets are currently in a state approach­
ing disarray. This is true of the equity market, the bond m arket, the
mortgage market, and to a much lesser degree o f the money market
The single most important reason for this condition is the cu rren t rate
of price inflation an ddeep-seated fears that inflation will not be con­
trolled.
Going beyond the expectation of inflation, and what that fearful
expectation is doing to the state of the market, lie more direct con­
sequences of inflation. On the one hand, virulent inflation is under­
cutting the ability of the public to save and thus make funds available
to the (financial markets. On the other hand, inflation has added im­
mensely to credit and capital demands by artifically inflating the
values of current assets on corporate balance sheets, the cost of repl*
ing capital equipment far in excess of depreciation allowances, the cost

196

If residential real estate, and the cost of all other major investments
If this character. In combination, inflation has created a basic imbalfcce between the demands for credit and capital funds and the availIble supply of such funds.
I An easier monetary policy would compound rather than correct this
Iroblem. Recent suggestions for a system o f credit allocation imply
I degree of wisdom that no one in the financial community would
■retend to have and that the Government should not profess to have,
rhe net result of a formal allocation system probably would be far
bore harmful than helpful. Present unstable market conditions will
tot be corrected until there is evidence that price inflation is being
brought under control, along with evidence that the flow of savings
Is more adequately meeting the demands for funds. In this regard, a
federal budget surplus would be most useful.
| There is one additional element in current market conditions that
Is of great importance but difficult to measure. That is the weak capital
position of the principal broker, dealer and underwriting operations in
ourfinancial markets. Losses of recent years have so reduced the capital
■ase of these companies as to raise questions about their ability to
provide the underwriting and trading capability that will be needed in
Ihe years of heavy demands on the financial markets that lie ahead
of us. Careful attention should be given to possible methods for at■acting new capital into U.S. financial markets.

Ik Rat Garrett, J r.

MOhairman
■Securities and Exchange Commission
■It is well known that stock prices generally have been declining
Iyer the past 18 months and are now very low relative to prices during
lie prior decade. Investors have a widespread disinclination to pur■lase equity securities, and, as a result, companies of every sort are
¡finding it difficult or impossible to raise new equity capital on any
jtarms. They are likewise finding it difficult to raise long term debt
Icapital.
■Cash offerings of all new corporate securities, which grew from
B2 billion in 1968 to $45 billion in 1971, fell to less than $33 billion
P 1973. Common stock offerings, which more than doubled from
■68 to 1972 to reach $10 billion, declined to $7.8 billion last year
W are at a rate well below that currently.
■In addition to other factors causing these declines, I wish to empha­
s e two factors relative to government impact on the debt and equity
markets.
■(1) Increased offerings of government securities have probably
contributed to private industry’s difficulty in raising investment
197

capital during the last two years. From 1 9 7 1 to 1 9 7 3 , corporate
offerings declined by $ 1 2 billion, while U . S . government and
government agency offerings increased by $9 billion.
(2) There is a close inverse relationship between interest rateson
Treasury bills and stock prices. See the attached graph.
We think that deliberations on the economy and inflation should
take these factors into consideration.
The Dow Jones Average and Treasury Bill Rate
show a strong tendency to move in opposite
directions. . .

This has been true in most recent periods
of major DJI change...
Percentage
T IM E

P E R IO D

May .69 - Aug 69
Nov 69 - Feb 70
May 7 0 -M a r 71
Mar 71 - Aug 71
Nov 71 - Apr 72
Jul 72 - Jan 73
Jan 73 - Aug 73
Oct 73 - Dec 73

D J 1

+
+
+
-

13.5%
10.0%
35.0%
6.9% '
15.0%
11.0%
14.2%
14.0%

Change
T R E A S U R Y B I L L RATE

+ 20.3%
+ 11.1%
- 50.0%
+ 54.3%
- 22.2%
4- 22.5%
+ 74.0%
+ 5.7%

M. R . H ellie
President
Credit Union National Association, Inc.
While there is reliable evidence that the Federal Reserve has ex­
panded the money supply excessively in recent years, monetary policy;
in th© immediate past period seems to have been appropriate, giv®j
198

the economic conditions of the period. However, the policy was be­
coming unduly restrictive as a result of the failure to use other appro­
priate anti-inflation tools, including fiscal measures. Recent signs
indicate that the Fed has, in fact, loosened the policy somewhat,
and it would be hoped that the money supply would be allowed to
grow at a rate approximating the long term rate of growth of the
U.S. economy.

Mr. R ichard

D . H ill

Chairman o f the Board
First National Bank of Boston
Current monetary policy is one of vigorous restraint. The Federal
Reserve has doggedly attempted to slow the growth of money and
credit since late 1972. Unprecedented inflation and the accompanying
deterioration in the debt and equity markets have swelled credit needs
of bank customers and resulted in record growth in bank lending.
Rather than excessively strain bank liquidity, the Federal Reserve
completed the removal of Regulation Q ceilings on large negotiable
certificates of deposit in May of .1973. This has enabled banks to ac­
quire funds to better meet their lending commitments. Inasmuch as
inflationary pressures are expected to be strong well into 1975, the
demand for credit will continue to grow despite a sluggish economy.
In addition to these short-term borrowings, liquidity is being pro­
gressively reduced by rapidly rising factor costs. I f the momentum
of current forces is allowed to continue we anticipate an unacceptable
level of bankruptcies.
Thus we conclude that the Federal Reserve has assumed the difficult
task of controlling inflation by cutting the growth rate o f money
and credit and yet not draining liquidity to the point that financial
crisis results. The policy tentatively may be judged a success, and
the perserverance of the Fed is encouraging. A t the same time, how­
ever, we caution the Fed not to overdo the degree of restraint. In
addition to a sharp rise in factor costs, many businesses are now
suffering greatly from high interest charges and bankers are justi­
fiably concerned that they cannot continue to pay such high rates and
still survive. We urge the Fed to strive for a degree of restraint which
continues to limit inflation, but which achieves a lower level of interest
rates than is presently in effect. Perhaps a rate structure consistent
with a prime rate of 9-10 percent would be appropriate for the near
term. Finally, it is important to keep in mind that there is more than
just the monetary dimension to economic policy, and the key to rational
strategy rests heavily on obtaining a balance between monetary and
fiscal measures. Thus, while we argue for some easing in Fed policy
to avoid unnecessary financial strains, we also would like to see clear
signs of a more prudent stand on federal spending. In our opinion,
199

holding the budget to $300 billion, or preferably less, is essential. A
clear statement of purpose to this effect would make it easier for the
Fed to alter its stand. Some call fiscal prudence a “tired old remedy
which won’t work.” We suggest that there is no evidence of this for
the remedy has not been tried.
Mr. R alph F. L each
Chairman o f the Executive Committee
M organ Guaranty T rust Company
The state of disarray in financial markets is too well known to
require either detailed narrative or statistical description. The decline
in the market value of outstanding equities and the attendant difficulty
in raising many significant amounts of new equity through stock issues
has been widely discussed. The high cost and limited availability of
long-term money for either public issues or private placements is
well documented. The huge demand for bank credit that is at least
partially a result of the drying up of other sources of short-term and
long-term financing, has been noted by both official and private
observers. Business loans at all large banks are up at about a 25%
annual rate since the first of the year and the rate at New York City
banks is over 30%.
As shor]t rates have spiraled upward, savers have shifted funds
from institutions to direct market investment—with obvious adverse
implications for the availability of mortgage credit. So-called tiered
markets have been developed, both in the T7.S. and the Euro-dollar
market, and lesser known credits have either been compelled to pay a
premium to renew borrowings or have literally been unable to roll
them over. This problem may be accentuated by the concentration of
large liquid balances in the hands of oil producing countries. It is a
tribute to the strength and flexibility of our financial markets that
these huge shifts in fund flows have been achieved without even greater
disturbance than we have seen thus far.
Basically these market conditions are the product of inflation. But
in the case of financial markets the related concern arising from the
expectation of continuing inflation and of the impact on those mar­
kets of further efforts to check inflation is also important.
Obviously, progress in the effort to slow the upward spiral of prices
would do more than anything else to help restore normality in finan­
cial markets. It would reduce both inflationary expectations and the
anticipatory fear of further general and selective credit restraints.
Hopefully the rate of inflation will be reduced as a result of policy
actions previously taken and others that will be taken, partially as a
lesult of these conferences. Meanwhile, progress toward normality
in financial markets could be hastened b y :
1. Overt action to lessen inflationary expectations.
2. Reassurance to the business and financial community that the

200

peak of financial stringency is behind us and that, while financial
restraint may be required for sometime to come, the kind of cumulative
crunch that appeared to be developing around mid-year is not likely
to be repeated.
3.
Laying to rest recurring rumors that selective ceilings or penal­
ties may be imposed on specific credit transactions.
The latter two actions can be accomplished by the Federal Reserve
and the Administration. To be credible, the former should involve
specific action by the Congress, since rightly or wrongly, financial
market participants and a large segment of the public feel that ulti­
mate authority in many critical areas—especially fiscal policy—rests
with the Congress. One way this might be accomplished would be for
Congress to act decisively to amend the Employment Act of 1946 to
include price stability as an explicit objective.

Mr. D onald T. R egan
Chairman o f the Board
Merrill Lynch, Pierce, Fenner and Smith, Inc.
Our financial markets today are in disarray and thoroughly
demoralized. Not only is the cost of money at historic highs, but, in the
hot competition for available funds, many would-be borrowers are
locked out completely. And many businesses which would turn to
equity capital find that alternative even less feasible. Not only do the
different seekers of cash compete for funds; the competition is also
among the different types of markets. The short-term, long-term and
equity markets interact. The high cost of raising funds in one brings
about about unpalatable conditions in the others.
Clearly, as long as the sum of our necessities plus our desires sub­
stantially exceeds the available amounts of goods and services, liberal
augmentation of the money supply would simply worsen inflation. It is
essential that we discipline our spending, both individually and as a
society, until a reasonable supply-demand balance can be struck.
At the same time we know that turning off the money spigot is no
answer either, but it apt to lead to serious economic disruption. Under
the present circumstances, high money costs themselves tend to turn
into a significant contributor to price inflation.
We feel the Federal Reserve’s presumed target rate of about 6%
money growth is appropriate. Since growth in recent months was some­
what below this target, the Federal Reserve now has some room to
maneuver on the side of moderate ease. This is welcome. We agree that
the Federal Reserve’s primary concern should continue to be with
monetary aggregates, rather than attempting to directly influence
interest rates. We also recognize that the Federal Reserve has been

201

forced to accept the role of lender of last resort not only in our do­
mestic banking system but to the Eurodollar market as well.
But too much relaxation could be extremely dangerous. While it
could temporarily lower short-term rates, it also would foreshadow a
long period of accelerated inflation and thus induce a new rise in long­
term rates. And before long, short-term interest would again be up to
perhaps even more disturbing highs.
There is traditionally quite a time lag between monetary policy
changes and the response of the economy. But this time a turn toward
an improved economic environment seems to be waiting mainly for
greater availability of credit. Thus, the response to monetary changes
should be quicker than usual, and the Federal Reserve can factor this
into its decisions.
Meantime, having the patience and fortitude to steer toward a 6%
monetary growth target could be a major factor in producing a lower
inflation rate by a year from now.
Mr. R alph S. S aul
Vice Chairman
Insurance Company of North America
Inflation is changing the character of all our financial institutions.
The securities markets, particularly, have borne the brunt of our cur­
rent economic problems.
During the past year, many corporations have been foreclosed from
using the securities markets to raise long-term capital. Equity is­
sues—with few exceptions—cannot be financially justified. Stocks of
sound companies with good records of earnings growth sell at below
book value or at low price/earnings ratios because of lack of demand
for equities—not because of the underlying fundamentals. In the bond
market, it has been difficult, if hot impossible, to distribute most indus­
trial bond issues except for the highest quality borrowers. Many cor­
porations have had to turn to the short-term markets or to banks to
supply their immediate credit needs.
The malfunctioning of our debt and equity markets has seriously
eroded securities values. We are only beginning to see the consequences
of this erosion, e.g., in unfunded pension liabilities to corporate pen­
sion funds and in the premium-writing capacity of the insurance
industry.
Present trends, if continued, will seriously damage both the securi­
ties markets and the securities industry and lead to fundamental
changes in the way we create and allocate capital. A s I see it, we
urgently need a public agency or authority similar to the Federal
Reserve System, with the primary mission of developing and im­
plementing policies that will strengthen our securities markets as

202

financial institutions. The existing regulatory structure, built around
the SEC with a narrow statutory mandate and numerous and fre­
quently competing self-regulatory organizations, is not adequate to
the task. A legislative priority in Washington should be the overhaul
of that structure.
Robert H. S tewart , I I I

Chairman
First International Bancshares, Ipc.
Although conditions in the money market have improved slightly
in recent weeks as a result of a very slight shift in the Federal Re­
serve’s policy stance, they still can best be characterized as tight and
jittery. Conditions in the bond and equity markets continue to be
chaotic.
The record seems to show that monetary policy was too loose in
1972 and part of 1973. Perhaps it was about right in late 1973 and
early 1974. Given the performance of monetary aggregates during
the last three months, however, one is tempted to judge current
policy as too tight. Maintaining the growth rate of the money supply
below a 2% annual rate for long under current market conditions
could be risky for the markets and for the real economy.
Without turning over the rocks of whether one thinks monetary
policy can deal effectively with controls—repressed inflation, or with
supply-side-shortfall inflation, or with cost-push inflation, it seems
clear that a shift upward to a money-supply target rate of growth in
the 5 to 6% range will soon be in order. I f such a shift is “misinter­
preted” by market participants as a shift to ease, so much the better.
The psychology of the money, bond, and equity markets should im­
prove almost overnight. Given current and prospective economic con­
ditions, a 5 to 6% target range cannot be labeled as inflationary.
Mr. T homas I. S tores
Chairman o f the E xecutive Committee
North Carolina National Bank
Monetary policy in 1974 must be viewed against the background of
(1) significant prior mistakes of national economic policy
(2) substantial increases in world commodity prices
(3) the winter energy crisis
(4) the lagged impact of two devaluations of the dollar
(5) the removal of price and wage controls during the first half of
1974.
It would be simplistic to assume that in the face of such pressures for
expanded credit and an increased money supply, the Federal Reserve
could have maintained the growth of monetary aggregates within some
203

predetermined limits of small magnitude. In fact, the money supply,
narrowly defined, grew until recent months at a rate which would
clearly have been unacceptable under other conditions ; more recently
the rate of increase has fallen appreciably.
Except for the first two months of 1974, monetary policy this year
has been appropriate in that it has been as restrictive as was feasible in
the circumstances. It has resulted in extremely high interest rates and
severe tensions in credit markets. In recent months it has brought about
a very restrictive lending policy in commercial banks, the full effects
of which are still to be felt.
These and other economic forces have raised serious questions as to
the liquidity and solvency of many business firms, and these doubts in
turn have led to more critical and sometimes superficial evaluation of
the liquidity of financial institutions. The resulting stratification
within financial markets has impeded the flow of funds to a wide range
of firms, including some banks which normally acquire loanable funds
in these markets.
It would be appropriate at this time for monetary policy to be
relaxed to a degree which is modest but which would be clearly per­
ceptible in financial markets. The emergence of other anti-inflation
programs will make this modification of policy possible. The increas­
ing strains in credit markets and the foreseeable results of credit re­
strictions make it highly desirable.
Mr. J o h n F. T omayko
Director, Insurance, Pension and Unemployment Benefits
United Steelworkers of America
Our nation’s economy is presently suffering from rampant price
inflation and a concurrent unacceptably high rate of unemployment.
While traditional economic theory dictates that the rates o f inflation
should be responsive to monetary restraint, that relationship must as­
sume that the initial cause of the inflationary spiral is excessive de­
mand for a limited supply of goods and services. Today’s inflation,
however, is not of the demand-pull type, but rather it has been
strongly influenced by a combination of independent forces, includ­
ing (1) the contrived and artificial shortages of raw materials such
as petroleum and food stuffs; (2) excessive capital expenditures at
the expense of consumer goods production ; and (3) unwise exporta­
tion of vital raw materials and farm products.
Because the government has failed to recognize these real causes
of inflation, the unimaginative and relentless tight money policy pro­
mulgated by the Federal Reserve Board will aggravate the inflation­
ary spiral rather than alleviate it. In fact, it is already the major
contributor to inflation.
204

The labor movement is particularly concerned that the oppressively
tight monetary policy has had a disproportionately harsh effect on the
sector of our economy which can least afford to suffer—the nation’s
poor, the unemployed, and the lower middle class worker.
Corporations have outbid the consumer for the limited supply of
available money, knowing well that their unstrained pricing policies
will absorb the cost of their expenditures in the capital goods market.
As a result, our traditional sources of funds for mortgages, small busi­
ness and consumer loans have dried up. As a result, residential con­
struction and retail sales, two important indicators of economy’s
health, are depressed and getting worse.
I propose, therefore, that the present course of monetary policy be
changed through (1) a moderate expansion of money and credit; and
(2) extension of credit on a selective basis to encourage growth in
construction of housing, public facilities and selective industries where
faced with excessive or chronic unemployment.
In conclusion, if the labor movement is expected to pursue a policy
of moderation of wage demands (in the face of declining real income),
the financial sector of the economy, and particularly the Federal Re­
serve Board, must make an equal effort to see that the qualityy>f life
of our nation’s working class is not unfairly endangered.

Mr. J ohn W inth ro p W right

President
Wright Investors’ Service
I. U.S. International Negotiation of An Agreement to Regulate the
Creation of “Eurodollar” and Other Foreign Currency Deposits in
Non-domiciled Banks.
II. Enact Legislation to Insulate Domestic U.S. Monetary and
Credit Policies from the Influence of Excessive Foreign Interest
Rates and Capital Requirements.
III. Limit by Legislation, Interest Rates on all Deposits Including
Negotiable Certificates of Deposit to a Maximum of 1% Less than the
Prime Bank Lending Rate or 5%, whichever is Higher.
IV. Expand and Revise by Legislation, the Requirements for and
Terms of Office of Membership of the Federal Reserve Board so as to
Provide for Broader Representation of Public and National Interests.
V. Expand by Legislation, the Federal Reserve Board’s Regulatory
Powers to Include Variable Reserve Requirements Depending on the
Proportion of Each Bank’s Loan Portfolio Allocated to National
Economic Purposes and Priorities.
VI. Establish by Legislation, More Precise Requirements and
Procedures for National Economic and Financial Policies and the

205

to
o

05

U.S. GNP VS THE MONEY SUPPLY

Responsibility and Accountability of the Federal Reserve Board for
Implementing These Policies.
VII. U.S. International Negotiation to Create an Inflation-Proof
Standard of Value in the International Monetary System.
VIII. Repeal the One-Bank Holding Company Legislation and
Limit Banks and Banking Corporations Strictly to Banking Func­
tions with No Involvement in Investments, Insurance or Other NonBanking Activities.
IX. Establish by Legislation, a “Citizen’s Capital Investment Tax
Credit” to Encourage Savings and Capital Formation by Individual
Citizens and thus Reduce Inflationary Spending Demand while In­
creasing the Supply of Productive Capital.
Mr. W alter B. W riston
Chairman
First National City Bank, New York
If our goal is to reduce the rate of inflation and reduce both shortand long-term interest rates, then the Federal Reserve should not
deviate substantially from its policy objectives pursued this year.
The money in our paycheck or in our pockets has no value in and of
itself. It has only a scarcity value. I f each one of us had all the money
that we wanted, the value of that money to purchase goods and serv­
ices would approach zero. This is the reason that the amount of money
which is printed by the Federal Reserve System is crucial to the con­
trol of inflation. It is a truism that the depreciation in the value of our
money is another way of saying that our prices are going up. Whether
you belong to one school of economists or to another, the foregoing
logic is relevant to a consideration of the problem of inflation. I f the
Federal Reserve prints more money than the goods which are avail­
able to be purchased, the price of those goods will obviously go u p ; on
the other hand, if it does not print enough money to keep up with the
increase in the productive capacity of the United States, the rate of
price inflation w ill diminish.
The annual rate of change in the narrowly defined money supply
has been about 6% since the beginning of this year. This does not
represent a materially smaller increase than that for all of 1973. The
Federal Reserve has appeared to be more restrictive than it has actu­
ally been in nominal terms because the rate of inflation has acceler­
ated rapidly this year and with it very strong credit demands. I f the
Federal Reserve were to deviate significantly from its target of a
moderate rate of growth in money stock in an attempt to alleviate the
inflationary demands for credit, it would be feeding the very virus
we are attempting to eliminate.
Interest rates have increased sharply this year not because the Fed­
eral Reserve has been significantly more restrictive than it was in 1973
207

but because inflation, including the higher price for oil, has driven
the demand for credit substantially higher. Those who see the need
for credit or the opportunity to employ borrowed money profitably at
a time of rapidly rising prices have bid aggressively for the available
supply of credit which, in fact, has increased this year in absolute
terms. But that bidding has been considerably greater than the amount
which the Federal Reserve has provided. Consequently, interest rates
have increased.
There are times when the Federal Reserve for periods of one or
two months must expand money growth beyond its longer term target.
But then it has corrected for this in the month following. Between
February and May of this year the Federal Reserve significantly
exceeded its long-term target, but from early June through August
it undershot its longer run objectives. It may well be appropriate now
for the Federal Reserve to become moderately more expansive to
move back toward its long-term target.
It is significant that short-term interst rates climbed by more than
400 basis points between February and June of this year when the
Federal Reserve was highly expansive. But since June, short-term
interest rates have essentially moved sideways while the Federal
Reserve has become more restrictive and the rate ,of growth in short­
term credit has slowed down. It is not the Federal Reserve that
determines major moves in short-term interest rates but the private
marketplace. For example, more than $40 billion rolls over in the
commercial paper market alone every 30 days.
The Federal Reserve has slowed down demands in the economy
by refusing to validate the inflationary expectations that were so
rampant earlier this year. Any effort to reduce interest rates rapidly
through an expansive monetary policy would shortly ignite those
inflationary expectations and it would not be long before the private
market demands for credit would drive interest rates even higher.
At a time like this, efforts to reduce interest rates through a more
expansive monetary policy are like trying to smother a fire with
gasoline.

208

monetary

policy

to

deal

with

inflation

SECRETARY SIMON: We will now move to monetary
policy to d.eal with inflation, which we have allowed
30 minutes for.
Doctor Lee Bach, Stanford University.
DR. BACH: Mr. Chairman, I would like to begin
by talking about two general points of perspective
about monetary policy.
The first one is, as one looks back over the
preceding many summits, one sees a very large amount
of agreement that monetary policy has been on the
whole good, but it is-a little too tight. We ought
to pull back just a little bit. Not too much, just
a little bit.
I think one should be a little cautious there.
We are not going to solve the inflation problem by
easing up on monetary policy. Whereas it may be a
very good thing to do unless we have some other way
to fight the inflation - just a little easing on
monetary policy doesn’t solve the problem.
It
would be nice if it did.
A second general perspective point I would like
to raise is this: As I argued this morning, I think
it is not possible to specify a correct monetary
policy or level of restraint without reference to
wage-price behavior.
There is not today in our
system an excess demand, in my judgement -- probably
no excess demand at all.
The real issue is cost-push and price-push, if
I might put it that way today.
The real issue, to put it another way around,
is whether the Federal Reserve will put enough money
in the system to validate the cost-push, the higher
wages, tne higher prices being put there by workers,
unions and by businesses.
I think that's the way
to look at monetary policy, as to whether it will go
to the point of supporting those higher wages and
prices and therefore providing a higher plateau from
which we now go on up to another spiral.
I argued that the issue this morning was whether
the Fed would validate these higher prices and wages
" I think Mr. Eckstein was right that we need be

211

awfully careful that we don't promise too much in
our policies; that we don't think by a little bit
of budget restraint we can really solve the infla­
tion problem. We cannot, is my argument this
morning, I want to make it again today. Without
an incomes policy of wage and price restraint, a
kind of national consensus, to' a great extent,
the Fed is tied down.
It can really halt the thing
only by incurring costs that are very great from a
social point of view and I just do not think the
American Public is going to stand still.
I don't
think the Congress will stand still for as tight a
monetary policy to knock this inflation in the head.
It has to do it all by itself.
I think we are seeing today a kind of financial
brinksmanship that is required of the Fed, the
danger that it will tighten things so much that we
will have serious financial trouble.
I think it
has done awfully well. We should be pleased with
it. But I don't think that's the position we can
safely put our financial authorities in over the
longer period. We ought to try to get away from
that situation, where they have to be sitting on the
financial brink all the time because the financial
pressures, the inflationary pressures, are so strong
in the society all the time.
It seems to me that only the strong leadership
of the President, working with the Federal Reserve,
working with the Congress, working with the people,
can develop a social compact, to use the words
others have used, that would be viable, that would
make it feasible to hold the system down on the
inflation front without generating a lot of un- ■
employment, without generating financial trouble.
I have stressed these fundamental conditions
for successful monetary policy rather than talking
about the details of monetary policy; whether we
should ease or tighten it a little bit now; whether
we should try credit allocations or not. and the
like.
Incidentally, I think we should not. This
because I think these fundamental conditions are the
really crucial issues.
The validation of wage-price spirals that has
a nasty way of sort of always easing up and going a
little further and you are ready to go up another
step or two. We have to face the long-run issues.
Looking to short run problems, day by day, the little

212

p i e c e s of the problem would not solve our
g e n e r a l problem, I would argue.
We cannot safely
commit the Federal Reserve authorities to a life
of persisted brinksmanship fighting inflation.
It
w o n 't stop the inflation and risks very great dangers
to t h e economy.

Thank you.
SECRETARY SIMON:

Thank you.

Mr. Wright.

MR. WRIGHT:
I must take issue with what seems
to me to be the general misconception that the
Federal Reserve Board should be faulted for having
had excessive growth of the domestic money supply.
There may be other faults, but that isn’t one of
them.
During the last five years, and I have distri­
buted this around so the facts are before all of
you, the growth of a narrowly-defined so-called M-l
money supply in the United Stages ha^,. averaged 6
percent a year. The growth of the gross national prod­
uct has averaged 8.4 percent a year.
That adds
up to me to the fact that there is less money for
dollar of gross national product with which to
finance it to provide the working capital than there
was. Five years ago, the three year average was that
the domestic money supply averaged 22.7 percent of
the United States gross national product. Recently,
th a t's down to twenty-one and a half percent.
That's a considerable shortage.
Now, if we took the inflation in dollars and
spelled it out in current dollars, we find that
the annual rate of increase of the domestic money
supply has been four tenths of one percent in con­
stant dollars, and the average annual rate of in­
crease of gross national product in constant dollars
has been 2.7 percent.
So it is quite clear to me
that the Federal Reserve Board cannot be faulted
for having caused this inflation by excessive money
supply during the last five years.
Now, there is another fact that nobody says
anything about. And that is, all the dollars that
have been created in EuropeI Some of them have
been transferred by the export of capital, but a
lot has been created, simply by buying money and
opening a demand deposit account in a European bank.

213

I believe it will astonish, completely astonish
most of you, not all of you, to know that the size
of the dollar money supply on deposit in European
banks now is as great as the entire money supply
on deposit in domestic banks. When you include that
in the growth of dollars available in checking
accounts, you find that for the last five years
that has averaged altogether 14.6 percent annual
rate of ¿Increase of dollars all over the world in
the money supply as compared with an 8 percent rise
in the gross national product.
Now, if there is anything inflationary in this
world, that’s it.
And I suggest that we direct our attention as
to how to get under control the dollars which had
been created in European banks without any control
at all by any part of the United States Government,
including the Federal Reserve Board.
Now, you will find in this little chart, which
I have distributed, a series of 9 proposals and when
I spoke this morning I suggested general reform.
I will take time now only to ask your attention to
the first three.
The first of which is to negotiate without
delay an international agreement to control the cre­
ation of dollar deposits in non-domiciled banks,
that is, in European and other non-American banks -control that.
I am sure it can be done, and we
should reciprocate by permitting other nations to
control currency deposits made in our banks in their
currencies.
I think it would be in the interest of all
central banks, and I think they can be persuaded to
agree to that.
Along with that, I think it should be an article
of United States national policy that we are not
going to allow the level of interest rates in the
United States to be determined in Europe.
Obviously, and its been said many times, that if
rates were higher in Europe, the Federal Reserve
Board here has no alternative except to hold our
rates up or else we have a flight of capital.

214

Lell that certainly is correctible by legislation
and t a x a t i o n on excessive profits from that. We
had s o m e t h i n g like that, not quite like it before,
|nd that can be done.
Finally, I would ask attention to one more
thing.
The so-called large $100,000 negotiable
certificate of deposit.
They were an animal created
pnly about 12 years ago and they didn't amount to
touch until 1970 when many people, including myself
believed that the Federal Reserve Board overstay|ed a restrictive monetary policy and we came near a
financial panic in this country. At that time, by
[agreement, the Regulation Q limit on interest rates
payable on large certificates of deposit was lifted
and there was reason for it at that time. Because
it permitted the banks to raise their rate, attract
capital and make what they believed were their loan
obligations and thus avoid financial panic. That
time is long gone. Now that is the Frankenstein
which has caused the continuous excessive rise of
interest rates. The rise of interest rates which
we have now in this country is not simply the fact
that we are somewhat short of our working capital,
bf our M-l money supply, it is because there has
[been no ceiling on the interest rates which banks
can pay on large certificates of deposit.
There is
still a ceiling on what you can pay the average
citizen on small CD's, but not on the large amount.
For that reason, and I am ending now, for that
reason, I suggest that we immediately restore
Regulation Q and that when we do so, we pass
legislation which will set the absolute ceiling at
pne percent less than the prime rate, instead of
above or it with a minimum of five percent.
Thank you.
SECRETARY SIMON:

Alan Greenspan.

MR. GREENSPAN: Mr. Wright, I would like to
lomment on a couple of points on your chart, without
joining to the substance of your policy recommenda­
tions as such.
I
In the first instance, it certainly is true
|nat the Euro Dollar expansion has been extraor­
dinary, the rate of increase is substantial, as in

215
558-812 0

-

74

-

15

fact your chart shows, and it is a major new element
of the international financial structure which
think we have all been focussing on increasingly in
recent years.
However, I think that it is important to rec­
ognize when one is looking at the effective money
supply on the issue of inflation, not to look on the
source of the liabilities, but who owns it,
It turns out, of course, the very substantial
part of the liabilities of banks are held by citi­
zens.
It turns out that something as I recall in
the area of about $10 billion of the total Euro­
dollar market is held by American citizens; and
since the money supply presumably works on the issue
of inflation on the side of the holder rather than on
the side of the liability, then one's attempt to
estimate the total amount of either M-l or M-2 or
what else we are doing, that technically should
include the total domestic liabilities of banks to
domestic citizens, plus the Euro-dollar assets of
American citizens, and I think -- I have looked at
that at one point.
It turns out that it does not
make a terribly great difference with respect to
United States actual holdings.
So that in effect
the use of the money market data as an indicator
does not in my view seriously bias the numbers.
Secondly, you pointed out that the total real
increase in the money supply, or M-2, moved pretty
much with the real increase in gross national product
and I think you concluded that that therefore was
not a significant element in the price lever. What
that implies algebraically is that the unit money
supply, that is, the money supply divided by real
GNP is moving directly proportional with the price
level. And I think one of the more interesting
correlations that we have seen of late has been in
fact how closely the unit money supply growth has
paralleled the price level; and in fact all it sug­
gests is the so-called income velocity, that is GNP
in current dollars divided by the money supply» usu­
ally M-2, has been remarkably stable and, in fact,
for more stable than it has been in the past.
This is not strictly an academic issue, because
what it is suggesting in effect is that in the
Longer term sense money supply growth is a ipajor
determinant of the price level; and I think that one
of the reasons why many of us have been so concerned

216

Lbout the off-budget financing items of the Treasury

ihas largely been that it is viewed as a sort of
bremptive borrowing against private savings flows,
thich in a sense elbows out of the capital markets
brivate borrowers, who in turn press on the commer­
cial banking system to accommodate themselves in
their credit demands. The commerical banks in turn
have tried to create the reserve necessary to support
the deposits associated with the credit expansion;
(and it is this expansion of the monetary base which,
at least in my view, is a major element in this
acceleration that has occurred in M-2 that in effect
the tremendous pressure on the commerical banking
system of the spillover has just been almost
impossible to accommodate; and as a consequence of
this, we are looking at the financial roots of the
(system.
I certainly agree with you that the Euro-dollar
(problem is something which requires a great deal
fcloser look and its full implications I don't think
(we fully grasp at this point.
It is an extraordinarly large system.
It has
(got to have monumental effects and with the flows
which go in and out of countries, plus the extra­
ordinary intertwining of interbank depositing which
goes on in this market, suggests that this has grown
into such an extraordinary system, that unless and
until we can get a much closer look at it, especial­
ly now in terms of the oil revernue, that I think
we are looking at a problem, the dimensions of which
jwe haven't really got our fingers on.
I agree with you, that something in this area
{requires far greater study.
SECRETARY SIMON:

Thank you.

A1 Wojnilower.
DR. WOJNILOWER:
I think what we should take
with us from the last couple of points, is that even
■hough demand pull within the United States may be
lore or less extinguished, there is a demand-pull
jexerted from abroad which may be not merely cyclical,
|ut which is the consequence of what in financial
■erms would be a very rapid equalization of levels
|f wealth and standards of living between the United
■tates and the rest of the world under conditions

217

where United States capital is completely free to
flow out and to help generate these enormous
sources of demand from abroad on United States re­
sources .
Now, it seems to me our policy ought to take
into account foreign as well as domestic demands.
In reference to what Professor Bach said earlier
when he continued from this point, it is true we
had an exercise of brinksmanship in Federal Reserve
policy; that is, they go to one brink and the people
there try to regulate and go to a different one.
Sometimes they meet.
But in my over 20 years of
association with these markets, Federal Reserve
policy has never been effective except when it was
willing to go to the brink, and I think to some
extent this is true also of monetary policy in other
countries.
The problem with incomes policies which certain­
ly make Federal Reserve policy easier to handle, is
that they serve in our experience in the United
States and in other countries, too, as an excuse
overtly or covertly to avoid going to the brink to
have easier policies, to avoid unpleasant choices
because a couple of percent was chopped off the
wage or price inflation, enabling people to believe
were really right on front when they weren’t.
And, so it seems to me, that if we had some
kind of successful price and wage monitoring, it
would need to be coupled with also some kind of
automatically imposed break that prevented difficult
fiscal and monetary choices from being delayed under
the cover of a rather deceptive repression of infla*
tion that can take place for six months or a year
under incomes policies.
The proposals -- I just want to close oy saying
that the proposals Mr. Wright made which have to do
with reinstating the regulation Q ceiling are really
-- I consider them to be very similar in spirit to
the proposal I made this morning to regulate the
prime rate, which, to my way of thinking, is at the
moment a more practicable and smoother way to achieve
the objective, whereas now that Regulation Q has been
released, putting that particular humpty-dumpty toy
gether again I would think as a practical proposition
would be very difficult.

218

I would just like to add, however, that I
wouldn’ t be as nice to the banks as Mr. Wright, and
I would set the ceilings so that their cost of money
would be above their prime rate, rather than the

other way around, in the limit; and if that situation
were to be overhanging all the time, it would be
much less likely to materialize as contrasted with
the presentation, where such a development was
considered impossible, and as a result, therefore,
it naturally came about.
SECRETARY SIMON:

Thank you.

Dr. Bach.

DR. BACH:
I quite agree that an incomes policy
has to be merged together to make any sense, with an
¡understanding by the Fed, with an understanding by
the fiscal authorities, that it is all part arid
parcel of a deal together, if you like.
That is why I said that the President had to
really take a leadership role on a meaningful social
compact. The Government, including the Fed in
effect would have to commit itself to play ball,
and to hold down monetary and fiscal expansion at
the same time.
The second point is with reference to both the
[other comments on the use of direct controls. This
morning I heard some comments about by all means
avoid direct controls over wages and prices.
It
seems that that argument is equally good about avoid­
ing direct control on interest rates paid by banks,
and entered rates paid by other institutions.
Our history suggests that those get us into
pesses, they don’t solve problems.
I have in mind
things like Regulation Q, direct regulations of bank
interest rates, and so on.
SECRETARY SIMON:

Thank you.

Steve Saulnier.

DR. SAULNIER: Mr. Secretary, this morning and
bn an occasion this afternoon, a reference has been
bade to the possibility of instituting a program of
lirect allocation or direct control, a voluntary pro­
gram of credit allocations by the financial system,
pd I should like to express dissent from that.
I
Someone suggested this morning that we had had
pat for the Korean period. We did have it in the
prean period, and after it was all oyer, there

219

were analyses made to try to determine whether
that voluntary credit restraint program had done
anything constructive at all.
And it is my distinct recollection that the
answer to that question was that it had not. I
find a good many people in the financial community
saying something like this:
that the Federal Re­
serve system ought to be easier in its provision of
reserves, and then the banks ought to be asked to
restrain themselves.
What this comes down to me, is that someone
is saying give the banks more money to lend and then
tell them not to lend it. And I would forecast very
little success for such a program.
I think as A1 Wojnilower has just said, that
there is no substitute for going to the brink. I
think in the last few weeks or couple of months we
have been as close to that as it is safe to be.
But the only way to control credit, is by
putting a real limitation on the amount of it that
there is to lend. And I hope that this conference
will not end with the notion in anybody’s mind
that it can be done otherwise.
SECRETARY SIMON:

Thank you.

MR. O ’LEARY:
It isn't often that I disagree
with my very good friend Steve Saulnier.
I was
involved in that voluntary credit restraint program
-- I hate to have to admit that the Korean War
period.
I know it is a much maligned program and it is
commonly said that it did not succeed in achieving
anything at that time.
I did see some real success
in that program, and I think this is the time in
which we ought to not be too categorical in rejecting
any of the alternatives because my own feeling is
that it would be helpful to have a voluntary program.
In effect, what is happening is that the commercial
banks, as I view the situation, are already on a
voluntary basis, with guidelines, tending to try
to allocate capital to the best uses.
I think that
it was a very constructive thing for the Federal
Reserve Advisory Council in consultation with the
Treasury to try to work out some guidelines of that
sort.

220

T h is is a very complicated economy.
The
in v is ib le hand of Adam Smith isn’t going to take
care o f everything in this situation.
I think it
would be helpful to relieve some of the pressures
on s h o r t-te r m rates to have an effort made in this
p a r tic u la r area.
I also feel very much like Lee
[Bach. I like the way he has approached his thoughts
on monetary policy, and I think that the big danger
[here is that there is going to be impatience with

[fiscal and monetary restraint, because I don't think
lit is going to have early results in bringing down
[the inflation rate.
We face the danger of a move, then, to full­
I think that an incomes
Policy designed through guidelines to try to hold
down settlements can help to steady the price, the
inflation at this particular point in time, and give
that must be the heart of anti-inflation, monetary
and fiscal restraint an opportunity to work itself
[through.
blown wage-price controls.

I don't think we ought to reject anything cate­
gorically here.
I think a certain amount of credit
[rationing -- the banks are already doing it. I feel
tery confident of that in talking with many of them.
It is a very constructive thing, and we ought not to,
L any arbitrary wa/, rule out anything. We need an
pverall program, and that is part of it.
SECRETARY SIMON:

Thank you, Jim.

We will just have Ralph Leach. Do you want to
make a brief remark before we move to the next topic,
blease?

SECRETARY SIMON:

Thank you.

221

We are now going to move to capital -SENATOR LONG: May I make one suggestion?
SECRETARY SIMON:

Yes, I beg your pardon.

SENATOR LONG:
I think I could support a tax
that strikes at those who are needlessly increasing
the cost of their product, offset by a tax cut for
those who are engaged in a cooperative effort be­
tween management and labor to reduce the price of
their product to the consumer.
A lot of people, if you give them enough
encouragement, might be able to increase their units
of production, keep the plant operating a few hours
longer, produce a little more, put a little more on
the market.
I know, for example, that if you gave
the oil companies that incentive -- I understand a
little bit about their business while they are not
asking for it, if you would say, MA11 right, now
you take your volume stations and if you cut the
price at those volume stations, because you can if
you want to, we will give you a tax cut to go along
with that. And we will let you advertise that this
is an efficient, low-cost station.”
Well, in that case you would see a lot of
people pulling into those stations, in addition to
those pulling in already, because they are getting
the product cheaper there. The first thing you
know, even the fellow that doesn't want to cut his
price might find he has relatively little choice
^bout it, he has to do it. And anything that would
help reduce the cost of living, I think, would be an
appealing tax.
There are some taxes we could pass.
that type of thing would have appeal.
Thank you, Mr. Chairman.

I think

Capital Markets and Capital Formation
i Discussion Papers from Delegates

Mr. R o b e r t H. B . B aldw in

I

P resident

I Morgan Stanley & Company Inc.
( Clients of Morgan Stanley & Co. have indicated a need for large sums
Lf money in the form of equity or debt in the period 1975-84. Con­
sequently, the Firm has made extensive studies aimed at advising these
¡clients, with particular emphasis on whether the future total supply of
[funds will meet the potential total demand. Our conclusion is that the
bapital requirements of governments (Federal, State ¡and local) and
Industry, which are necessary not only to provide a rising standard of
living and a growing number of jobs but also to meet environmental
standards and to help solve the energy requirements, can be met
provided certain fundamental steps are taken fairly promptly.
I I. It is our opinion that the rate of inflation must be lowered from
the present double digit, figures to a significantly lower rate and that
stringent fiscal and monetary polices must be followed even though
temporarily the economy may remain in a recessionary phase for a
longer period than most would desire. “Inflationary expectations”
piust be broken. We are happy to see recognition of this problem by
the Administration and we welcome the steps being taken in an effort
io find practical solutions. These attempts are being undertaken none
[oo early as we are already witnessing a breakdown in the capital
raising ability of our securities industry which, in coping with its
problems, needs a sympathetic attitude on the part o f government,
particularly the SEC. Electric utility companies, unless their credit
Is of the highest, find that they can no longer finance in the normal
bay with long-term bonds without sinking funds and that, if they are
ttortunate enough to be able to sell common stocks at all, they can only
po so at prices well below book values per share. In our opinion, inpustry as a whole in recent years has relied too heavily on borrow­
ing, and it will be necessary for industry to raise substantial sums
pf equity capital; it cannot do so on a reasonable basis during a period
jof rapidly rising prices and high interest rates.
III. It is our opinion that total savings must be increased, not only
Ibsolutely but also as a percentage of gross national product. An inIrease in savings of individuals and of corporations is imperative,
■his can only be accomplished in a society which encourages profits
lather than looks upon them as something evil and in a period when
pe rewards of saving are not destroyed by inflation. This is one place
225

where Government can play a promient, role. Another is in the field
of taxation. Space restrictions prevent any detailed recommendations,
but basically Government policies must be geared to encouraging in­
vestment instead of consumption.
A.
— In dividual Savers—A number of tax changes could encourage
savings. Only a partial list of suggestions would include (1) a re­
duction in capital gains taxes, especially when capital gains arise be­
cause of inflation and (2) increasing the amount of dividend income
not subject to tax.
B.
—Corporations—The sources of corporations’ capital for invest­
ment and working capital are internally generated funds and external
funds. Internally generated funds consist o f funds resulting from the
investment tax credit, from depredation allowances and from retained
earnings. Increased corporate profits can result in higher retained earn­
ings if dividends are not increased oommensurately, but an increase in
retained earnings as a result of paying too little in dividends could be
counterproductive i f stocks became less attractive to savers. After-tax
cash flow, as distinct from retained earnings as reflected in accounts,
can be increased by companies adopting LIFO accounting; those com­
panies not now using LIFO should be encouraged to do so. The Gov­
ernment, of course, can play a vital role in the field of taxation, andwe
recommend both a permanent increase in the investment tax credit and
adoption of new depreciation allowances which, in an inflationary era,
will allow companies to recapture investments in a shorter period of
time.
III. An increase in savings of individuals and corporations, ac­
companied by an attitude in Government (including the State public!
utility regulatory authorities) that is pro-profits, will do much to in­
crease the flow of funds into the long-term debt and equity markets.
Demands for credit are so great, however, that there will be a needto
change the share of total savings directed to various components of the
economy. In particular, it is our opinion that the Federal Government
must not compete with private industry for savings. We strongly re­
commend that the Federal Government move rapidly toward a ball
anced budget and, in the future, a surplus.
D r . B obert G. D ederick

Senior Vice President and Econom ist
Northern Trust Company
In view o f the enormous needs for new investment over the nexi
decades, it is essential that the nation’s long-term capital markets-j
equity, bond, anjl mortgage—be capable of absorbing large volumes oj
financing at moderate cost. As current experience indicates, there
no automaticity involved in matching potential demands with ava j

226

lable supplies. Thus, if our investment requirements are to be satisfied,
bublic policy must be closely concerned with the effective operation of
¡these markets. Action will be required on several levels.
1. ACHIEVING NONINFLATTONARY GROWTH

A healthy economic climate is an absolute necessity for healthy long­
term capital markets. Above all, therefore, policy must be geared to
breaking the current inflationary spiral and restoring the economy
to a noninflationary growth path—one closely in line with underlying
productive potential. Without substantial growth, the additional real
income with which to make new savings and investments will prove
inadequate; without reasonable price stability, savers will be unwillpng to commit funds to the long-term financing of investment at prices
satisfactory to potential real investors.
2. BOOSTING THE SHARE OF NATIONAL INCOME AVAILABLE FOR SAVINGS
AND INVESTMENT

I While a necessary condition for healthy long-term capital markets,
Inon-inflationary growth may not be sufficient in itself to assure that an
adequate volume of external financing occurs. In such an event, direct
[steps will be required to bring about a larger investable funds total—
involving increases both in the public’s ability to save and its incentive
to save, as well as actions to encourage greater capital inflows from
abroad.
I A variety of approaches are available, some of which would remove
[existing contraints on the private market mechanism and some of
which would offset remaining inadequacies in this mechanism.
I One key step would be to hold down the growth of government
Spending on public consumption and other nonproductive activities,
jthereby reducing the aggregate tax burden. The benefit would be even
greater if spending were to be constrained sufficiently to shift the
Federal budget into surplus, thus providing funds for debt redemption,
deducing the progressivity of the tax system would tend to raise the
private savings share as well.
Also beneficial would be moves designed to boost after-tax corpo­
rate profits—both in toto and for particular industries, e.g., the energy
Ntor and public utilities. (The increased profitability would not only
Reduce the need for external financing by the affected businesses, but
Nuld also raise their attractiveness to potential providers o f such
pnancing.) Included here would be such measures as increases in the
investment tax credit, a further acceleration o f depreciation allow­
ances, removal of burdensome price restraints, and provision for the
expensing of business firms’ environmental and anti-pollution expendi­
tures.

227

As regards individuals, their savings could be stimulated by elim­
inating various interest rate ceilings now in effect and by granting
favored tax treatment either to the share o f income going into savings
or to the dividends and interest earned on savings.
3. BOOSTING THE SHARE OF INVESTMENT FINANCED VIA LONG-TEKM
SECURITIES

Even if the total pool o f investable funds is sufficient to match po­
tential investment demands, the share devoted to equities and to long­
term debt instruments may be insufficient. Policy measures can be taken
which relieve this problem—again involving either the removal of
market constraints or the provision of special incentives.
It is essential, o f course, that the distribution network for new and
outstanding stocks, bonds, and mortgages be operating at a high degree
of efficiency. This viability, in turn, requires that the institutions which
make up the network be enabled to make a reasonable return on their
own capital and that barriers to new entry be limited.
Special measures may be necessary to bolster investment via each
of the three broad areas—equities, bonds, and mortgages. Thus, for
example, consideration should be given to granting more favorable
tax treatment to capital gains and losses as a means of stimulating
equity purchases. Meanwhile, Federal guarantees or interest rate sub­
sidies could be applied to long-term bonds issued by public utilities or
other corporations whose expansion is viewed to be in the national
interest. As for thé mortgage market, numerous special stimuli arej
available—and applicable to both borrowers and lenders. In the case
of borrowers, mortgage interest rate subsidies are an obvious—and
already used—approach. The graduated payment mortgage is also
worthy of experimentation. As for lenders, steps can be taken to in­
crease both their ability nad their incentive to grant mortgage creditincluding a relaxation o f usury ceilings, active encouragement of the
variable rate mortgages in existing portfolios, a broadening of the
asset buying and liability creating powers of thrift institutions, favored
tax treatment of funds placed in savings accounts, and financial incen­
tives directed at increasing the share of funds allocated to mortgages
by lending institutions.
D r. O tto E ckstein

President, Data Resources, Inc.
Professor o f Economics
Harvard University
1.
O BJEC TIV E : Over the next few years, the United States
should raise the fraction of its Gross National Product devoted to
business fixed capital formation from the traditional 10^% to ap­
proximately 12%. This increased capital formation is needed to relieve
228

capacity shortages in primary processing industires, provide for the
[general expansion o f the economy, introduce technological progress,
|develop new energy sources, and improve the environment.
2. The process of capital formation is now being disrupted by the
extreme swings of monetary policy and the worsening credit crunch.
So far, most reductions in business investment plans, such as the re­
duced investments of the automobile and airline industries, have been
justified by weakening markets. The reductions in electric utility in­
vestment, although hastened by financial difficulties, also reflect a 25%
reduction in the projected capacity needs o f this industry by 1980
because of the lesser projected energy growth.
If the current credit crunch continues and the economy stumbles
from middling recession to severe recession, even the larger corpora­
tions will substantially reduce their investment plans as they did in
1970. This would worsen the inflation outlook during the next busi­
ness cycle upswing. Capacity shortages would develop too early, and
the relief that could be achieved from our current problems would be
[deferred.
3. In the longer run, a healthy financial system is necessary to
[accomplish the effective transfer of savings into investment. The
higher investment ratio will require a larger flow o f savings from the
household sector to industry. Fortunately, the investment needs for
housing in the later years of the 1970’s w ill be moderate by historical
standards, and the repayment flows on existing mortgages will be ris­
ing rapidly. As a result, the household sector will be able to make
available many billions of additional savings to help finance indus­
trial investments.
4. A healthy equity market has been a critical element in the per­
formance of the American economy. The equity market makes possible
the financing of new companies and promotes the continued growth of
rapidly expanding companies. It also provides a necessary supplemen­
tal source of capital to utilities and other capital intensive industries
inhere a sound balance sheet requires a growth of equity beyond interpally generated funds.
I More fundamentally, a healthy equity market promotes the compet­
itiveness of the American economy. I f the current stock market situa­
tion were to persist, there would be an increased concentration of the
economy. The larger companies tend to be the most credit worthy and
pave the ability to stand at the head of the line at the lending windows
P
large commercial banks. The banks would become as powerful
[asthey are in Europe and Japan.
I 5. Tax incentives to encourage capital formation: W hile the anti|nflation strategy prevents us from tax reduction on personal incomes,
L would be inequitable to provide tax breaks for business. The effec­
tive tax rate on the federal corporate income tax has already fallen

229

from 40% in 1971 to 36% in 1973 under the impact of the investment
tax credit, increasing foreign tax credits, and the DISC tax prefer­
ence. Selective tax or credit aid may be required for very specific
sectoral problems in thè economy such as the primary processing
industries and utilities.

M r . R a y G arrett, J r .

Chairman
Securities and Exchange Commission
Ensuring the availability of adequate long term capital over the
next decade is clearly one o f the most necessary requirements for this
country’s future economic growth. However, in addition to measures
designed to make capital available for investment and to make invest­
ment attractive, we must be certain that the mechanism for raising
equity and long-term debt is not destroyed by the disappearance of a
high capacity, diversified, securities industry.
The securities industry is in an alarming downward trend. New York]
Stock Exchange member firms, which account for approximately 751
percent o f the revenues o f the industry, lost $66 million before tax
in 1973 and have reported a $49 million loss for this first half of 1974.
The profit problem is widespread: in eleven of the last twenty-fonrf
months, 50 percent or more o f the New York Stock Exchange firms
have reported losses. And between 1971 and 1973 the number of New
York Stock Exchange carrying public customer accounts declined 16
percent. Further, it does not appear that the industry is simply suifer-j
ing through the low point in this profitability cycle, offsetting
high point in the late 1960’s. Our preliminary data indicate that f l
return on equity in the industry currently is well below that ex-|
perienced at the bottom of the previous cycle and about one-tenth of|
the median rate o f the past seven years.
An upward trend in prices and volume w ill benefit the securities inj
dustry, but there are other adverse trends that need examination. D
recommend that interested government agencies conduct a coordinated
review o f the respective role of, and government policies toward, oiuj
many different financial institutions considering both existing statutes
and future requirements with respect to the process of capital forma-j
tion for American industry. As one example, securities industry 1
expressed deep concern that the aggressive expansion of banks a
bank holding companies into new services in recent years while
securities industry has been declining, has created an unequal comj
petitor for the securities industry, both because of the size of the banks
and because they appear to be regulated by agencies whose primary]
concern is the health o f the banking system. I f we are to preserve i
230

healthy securities industry independent o f domination by commercial
banks, protective measures may be indicated.
M. R. H ellie

President
Credit Union National Association, Inc.
Persistent inflation has caused severe problems for the capital mar­
kets of the United States. To the extent that individuals view inflation
as permanent, long-term commitments to the debt or equity markets
become less attractive.
In order to support the capital requirements necessary to expand our
productive capacity and thereby lessen supply-induced inflation, it may
be necessary to increase incentives to those willing to commit their
funds to the long-term markets. It is important, however, that any
incentives created apply equitably to all forms of capital commitments,
be they equities, debt, or deposit and share accounts at financial
institutions.
To encourage savings and investment, all financial institutions
should be granted the power to establish term savings, deposit or share
accounts. Those individuals who prefer to make capital commitments
through financial institutions should be given equivalent incentive to
those that wish to invest directly in stocks or bonds. This incentive
approach should increase the proportion of disposable personal income
going to savings and lessen the demand-induced price pressures in the
consumer sector. It would make more capital available to housing, and
because of the time commitments, lessen the disintermediation impact
onfinancial institutions during tight money periods.
Mr. Gustave L . L evy

Partner
Goldman, Sachs and Company
C apital M arkets and C apital F ormation

1.
Two areas of government regulation seem to be having a particu­
larly negative effect on the efficiency and functioning of the financial
markets. The first is the regulatory policies o f the various public
utility commissions. W ith inflation pushing up the cost of long-term
money, adequate rates of return on investment are necessary for utili­
ties if we are to have sufficient electric generating capacity. Second,
t e regulations lim iting the interest rates paid by the major mortgage
ending institutions are at the heart of the sharp declines of housing
activity during periods of tight money. I would endorse measures
over the long run to eliminate the ceilings on the rates that savings
institutions can pay and at the same time give these institutions greater
231
558-812 0 - 74 - 16

flexibility in their investment policies rates of return on their invest­
ments can be increased to pay the higher savings rates. In the short
run, a tax credit or exemption for some portion of interest earned
on savings accounts would help.
2. Inflation is the basic cause of the current problems in the avail­
ability of capital funds. Inflation increases the risks faced by long-term
investors in bonds and stocks. As a result, the cost of long-term money
rises sharply and the flow of investment funds moves in the direction
of shorter term securities. This threatens the supply of adequate long­
term investment funds which is critical to the long-term growth of the
U.S. economy. A reduction in inflation is the major key to alleviating
these problems.
3. In recent months, many corporations have been urging managers
of their pension funds to invest their cash flows in debt instruments,
particularly, of a short-term nature. This is completely self-defeating
because these same corporations are complaining that prices of their
stocks do not reflect their inherent values. It is essential in the long
run for our markets to more truly reflect inherent values so that cor­
porations may finance, through the sale of common stock as well as
the sale of debt. Therefore, in my opinion, corporations should be
urged not to instruct their money managers to avoid purchases of
equities.
M r . B ruce K. M acL aury

President
Federal Reserve Bank of Minneapolis
Recent data on capital appropriations and on plans for plant and
equipment spending indicate that capital formation is now moving
ahead at a substantial pace in those industries where bottlenecks and
shortages were recently acute, including steel, nonferrous metals,
chemicals, petroleum, and paper. The obvious exception to this gen­
eralization is in the public utility sector where the greatest impedi­
ment to financing and construction appears to ¡be the reluctance of
public service commissions to review and pass favorably on requests
for rate increases. The federal government has already begun to use
its influence to overcome this reluctance, and it should continue to
do so.
Home construction, an area o f special concern, has been greatly de­
pressed since the turn of the year. Raising Regulation Q ceilings
would provide some relief. Other actions w ill also be needed. In choos­
ing them, emphasis should be placed on those measures that reduce
or eliminate barriers to competition in the construction industry and
to those that promise improvements in productivity.
A mandatory credit allocation program to channel funds to es­
sential” areas should be avoided. Such a program would prove diffi232

cult if not impossible to administer fairly, and lead to a worse rather
than better allocation of credit and resources.
Demands on credit markets by federally sponsored agencies should
be given much greater publicity, and subjected to Congressional
scrutiny as a totality, in the same way that is now proposed for federal
expenditures.

Me.J ames J. N eedham
Chairman of the Board
New York Stock Exchange
The NYSE is deeply concerned with the problem of continuing in­
flation, the consequent severe disruptions in the nation’s financial mar­
kets, and longer-run prospects of a tremendous shortage in the supply
of sorely needed savings for investment purposes. This shortage
threatens our national priorities not only in housing, energy, mass
transportation and a lm~* of other critical areas, but in combating in­
flation itself.
The Exchange’s research economists have prepared the attached de­
tailed projection of the capital needs and savings potential of the
U.S. economy through 1985. Their conclusion is that a huge gap is in
prospect, with savings falling short by as much as $650 billion over the
next dozen years. Such a financial deficiency would, of course, be only
a mirror image of a shortage in real resources—of physical capacity,
essential materials and supplies, power and energy, and production
and productivity. In an increasingly service-oriented economy, the
achievement of productivity gains becames more difficult but no less
urgent. As wage rates continue to climb, productivity improvements
are an essential offset if inflation is to be curbed.
Therefore, the immediate challenge of dampening inflation requires
a strong upsurge in saving and investment to increase productive ca­
pacity, together with a determined effort to restrain cost-push pres­
sures generated by the continuing round of wage settlements.
A decisive, comprehensive program is essential to achieving these
objectives. I believe the following recommendations can play a sig­
nificant role in meeting the nation’s immediate and longer-run eco­
nomic needs:
1. A reduction in Federal expenditures would go a long way toward
reassuring the American people of the government’s determination to
curb inflation. Moreover, a reduction in Federal outlays would reduce
Federal borrowing and ease monetary conditions even in the absence
of any change in Federal Reserve policy. Essentially, I believe that
monetary policy should be eased somewhat with a shift in the mix to­
ward more stringent fiscal measures. As an adjunct, the borrowing re­
quirements of the Federal credit agencies should be included in the
total Federal budget.

233

2. A mandatory savings program should be developed to stimulate
personal saving, immobilize purchasing power without a tax increase,
and restrict the inflationary impact of current wage settlements. My
suggestion is that wage gains in excess of some base pay and in excess
of a specified percentage, say, 5% per annum, be channeled into sav­
ings by means of payroll deduction, with the proceeds invested in
government or private securities, or other appropriate outlets. Not all
pay increases would be affected. Families whose income is at or below
a minimum essential level—using a cutoff point of, say $10,000 or
$15,000 per year—would be excluded. Others would have to accept
some belt tightening but only as far as income increases are concerned.
Assume, for example, that a wage earner is granted an 8% increase
over his current $20,000 annual salary—an increase of $1,600. He
would receive in his paycheck an 8% increase on the exempt portion of
his income, say $15,000, plus 5% of the increase on the $5,000 portion
of his income which exceeds $15,000. Thus, his gross income would rise
by $1,450 ( 8 % X $15,000 + 5% X $5,000). The reminder of the in­
crease, namely 3% on the $5,000 portion of his salary over $15,000—
or $150—would be placed on behalf of the wage earner in a trusteed
segregated account. In the example, therefore, $1,450 would be the in­
crease in gross salary paid out while $150 would be deferred. These
deferred savings would be redeemable by the beneficiary or his heirs
upon retirement or death, in the event of a family emergency, or at
such time as the consumer price index has stabilized below a prede­
termined rate—say, 6% per annum—for a one-year period. Many as­
pects of such a national savings program would obviously have to be
worked out very carefully. For example, it might be necessary to han­
dle professional and other self-employment income via tax returns. In
any case, the details can be worked out to implement this concept and
stimulate increased saving and investment, while helping to reduce
inflation.
3. Structural rigidities should be eliminated in labor laws, agricul­
ture, foreign trade, communication, transportation and other indus­
tries. We are preparing a list of these institutional impediments to pro­
duction and efficiency. A rise in productivity must be high on the
agenda of counter-inflationary policies.
4. Tax revisions are urgently needed, particularly in the treatment
of investment credits, capital gains, and corporate savings. The NYSE
has already proposed a detailed package of concrete tax changes which
is attached. Additional tax incentives to increase output and capacity
in our productive industries, including tax credits and more liberal
depreciation allowances, are clearly needed.
5. Commission to Study Capital Flows. I also urge, as a high pri­
ority item, creation of a national, non-partisan Commission to focus
on prospects of a major capital shortage and to present to the Presi234

dent and the Congress within six months a constructive program for
dealing with this critical problem. This Committee should be respon­
sible for a full and comprehensive review of all options, including
means to stimulate savings, appropriate tax and other policies, and
methods of strengthening our capital markets. The Commission should
operate under the aegis of the Executive Office, with members drawn
from the Treasury, Federal Reserve Board, Council of Economic
Advisers, the Senate and House, and knowledgeable representatives of
the private sector.
Should the momentum of inflation fail to yield within the foresee­
able future, and should financial market conditions remain in disarray,
consideration might be given, as a last resort, to the possibility of
temporary credit and capital investment incentives and guidelines,
particularly bank lending guidelines, as a means of permitting an
easing in the Federal Reserve’s tight monetary policies. I strongly
oppose, however, any long-run government allocation of credit.
Definitive policies are needed to strengthen the securities industry.
In this area, the Exchange has already made specific legislative and
regulatory recommendations aimed at preserving the vitality of the
capital raising process in this country. It would be clearly unwise to
force a hasty, basic restructuring of the securities markets at a time
when continued effective operation of those markets is more essential
than ever to the economic health of the nation. I have prepared a
separate report on this subject under the topic of “Financial Institu­
tions and Inflation.”
Mr. D onald T. R egan

Chairman of the Board
Merrill Lynch, Pierce, Fenner and Smith, Inc.
We stand on the brink of an historic crisis for American capitalism,
and the brink is crumbling. Inflation plays havoc with the availability
and cost of money and capital. Savers are discouraged from making
long-term capital commitments, and penalized by a rate of inflation
that cruelly exceeds the rate of return. Borrowers are forced to pay
bloated costs. A liquidity crisis widens and deepens with every day
that inflation goes unchecked.
The need for massive increases in productive capacity is imperative.
Major materials producing and processing industries are operating at
unsustainable rates of over 90 percent of capacity. Utilities, energy
related industries, and others will need enormous sums of capital over
the coming years.
Part of the needed expansion capital must come from internal
sources, and help is needed to enable companies to channel more funds
into expansion. Investment tax credits should be increased, especially
for energy-related and other priority projects.
235

A t the same time a large amount of the needed funds must be raised
through the capital markets. The investment environment will be
helped by progress in dampening inflation since investors can be
offered attractive rates of return at a cost that the issuing company can
afford.
However, inflation progress alone will not fully restore health to
the capital markets. Savings by individuals should be encouraged by
government action. W ith the worst financial markets in 40 years, in­
vestors have become discouraged. They must be afforded incentives to
return and provide the much needed capital. The most positive step
would be to relax the capital gains tax, which has been an inhibiting
factor for the nation’s 30 million investors.
Elimination of the withholding tax on interest and dividends paid
to foreigners is also essential. These withholdings inhibit portfolio in­
vestments from abroad, precisely at the moment when we seek such
investments to relieve inflationary pressure on our capital markets, aid
our balance of payments, and when we are struggling to provide op­
portunities for recycling the petro-dollars.
Providing the needed capital also requires a healthy securities in­
dustry. This industry must be strong enough to finance the capital
raising operations and to provide the large distribution network
needed to place the new securities with investors throughout the na­
tion and, increasingly, throughout the world. Furthermore, the securi­
ties industry must be in position to operate an active secondary market
because investors will buy new securities only if they have reasonable
assurance that they can be re-sold whenever desired. Reforms which
are in the best interests of the nation’s investors should be encouraged
by all branches of government.

236

SI
Capital Markets and Capital Formation
Conference Proceedings

CAPITAL MARKETS AND CAPITAL FORMATION
SECRETARY SIMON:

Now, we will move to the dis­

c u ssio n on the capital market and capital formation:
Robert Baldwin of Morgan Stanley.

MR. BALDWIN:

I guess what we want to try and

em phasize -- and it has been brought out in a recent
r e le a s e by the New York Stock Exchange -- is that our
s tu d ie s show that there is going to be a very large
demand for capital in the next eight to ten years.

In fact, as best we can see it, there will be
inadequate capital to meet the demands and, in fact,
putting it another way, whereas in the past 25 years,
productive needs have determined how much capital
is going to be raised, we see figures that would
indicate to us that over the period through 1984, the
amount of capital that can be raised will determine
what productive capacity is put in.
Now, this has tremendous significance for a
whole society, and I think that we must try in this
Country, to encourage profits rather than to look on
them as something evil and to reward savings and make
sure that they are not destroyed by inflation.
Everyone, whether it is Government, Business,
Labor, or Consumers, must realize that basically fu­
ture government policies must be geared to encour­
aging investment, rather than consumption, or we are
going to be unsuccessful in meeting this demand and
success will be a victory for all and not for any
one segment.
Now, if you look at the numbers, as we see them,
just looking at the markets themselves, back in the
Sixties, we were raising about a little over $1
billion in equity,* and raised between - in the early
Sixties - about $4 billion of corporate bonds and
$11 billion in the latter part of the Sixties.
Our
forecast would indicate that we are going to have to
raise over $13 billion on an average, in corporate
equities, and $23 billion in corporate bonds.
Now, gentlemen, ladies and gentlemen, I just
say that this is going to be impossible if we don't
lick one thing first of all, and that is inflation;
and two, make the proper incentives to save.

239

It was commented before that we had gone to the
brink over the last two months, and I think that is
true.
I think there is going to be a continuing
fall-out from what the inflationary expectations as
people, as institutions, change their investing
habits. And this is a very worrisome thing to us.
I think, probably, as Ralph Leach stated very well,
when he said that anybody mentions credit alloca­
tions, and you see people start to run for the banks.
When people hear that there is going to be an inade­
quate amount of capital, they start running for the
capital markets when they can. Unfortunately, in
the case of our public utilities, they have had no
place to go. They have raised as much money as
they could in the capital markets, and then they've
gone back to the banks. Now the banks are forced
to tell them that they cannot accomodate them any
more, and we see the wholesale cutbacks that are
going to influence this country and the job
generating capacity around the country.
I think these are the basic points that I wanted
to make, Mr. Secretary.
SECRETARY SIMON:

Thank you.

Ralph Leach.
MR. LEACH:
I would like to go back to some of the remarks
that Alan Greenspan made this morning and, perhaps,
associate myself also with Charlie Walkers' plea
for greater understanding of some of the figures
that are being given to the public.
I think it has come to be widely appreciated
that inflation has a very distorting effect on
corporate profits.
Specifically, inflation over­
states profits, because depreciation charges are
inadequate in terms of the replacement cost of
capital assets, and because so many businesses still
use the first-in, first-out method of valuing
inventories.
This distortion of profits makes it very
difficult to judge how high or low profitability
now is in historical perspective.
In the forth­
coming September issue of our Morgan Guarantee
Survey, which will be published on Monday, there is
an article which draws on the work of the Commerce
Department analysts to try to eliminate inflation's

240

distorting impact on profits, and I will use Con­
gressman Patman’s device and ask to file an addi­
tional statement in the form of that article.
I believe it is quite similar to one that
Mr. Franklin referred to this morning, and I am told
that a much more technical analysis of this subject
is contained in an article in the Brookings Insti­
tutional Quarterly by Professor Nordhaus of Yale.
After adjustment for inflation, corporate
profitability is revealed to be comparatively low
at present; certainly not high enough to justify
much hope of pronounced generalized capital goods
strength any time soon. And I doubt that many
people will be surprised to learn that there is a
very close correlation between corporate profit­
ability adjusted for inflation distortions, and
capital formation.
SECRETARY SIMON:

Thank you.

Mr. Kelso.

MR. KELSO:
Mr. Secretary, I would like in connection with
the discussion of the current subject -- the rate
of new capital formation -- to tie into the
Chart No. 4, which was in the series of charts that
I distributed this morning, and to urge upon the
Treasury and upon the Administration and upon
Congress, the Analysis and study of, and really,
the questioning of- what seems to me to be essentially
an old banker's; myth; namely, the new capital form­
ation can only be financed out of past savings, or
accumulated savings.
They can quite as easily be
financed out of pure credit and the technique of
finance, which uses employee stock ownership trusts
to simultaneously finance growth to build ownership
-- that is to say, market power -- into the masses
of the working population, and then to make that
financing to the extent that regulations adopted by
Federal Reserve may permit, to make that financing
directly discountable with the Federal Reserve Bank,
means that once you have used the savings in the
system, the reserves of the insurance companies, that
you can finance your growth on pure credit. You
cannot, of course, finance consumption in this way.
To do so would be suicidal because it is not selfliquidating. But new capital formation under the
logic of business is self-liquidating and in a very
short space of years the cost has been paid off and
the tools go on pushing goods and services into
the economy indefinitely.
241

Thus, it is almost the perfect counter-formula
for the reversal of inflation: more and more goods
and services, chasing fewer dollars.
It seems to me that this is the gateway to
raising the productiveness of our working population
by building capital ownership into them and by being
able to finance the incredible growth which we do
face over the next ten years.
SECRETARY SIMON:

Thank you.

Otto Eckstein.
MR. ECKSTEIN: Mr. Secretary, we have done
some studies on this question: whether there is
going to be a capital shortage or not, and the
arithmetic that we come up with is something like
this.
Last year, we spent $137 billion on businessfixed capital formation.
By 1980, if you add up
the petroleum needs, and the utility needs, and all
of the rest, that figure becomes $280 billion, or
a doubling.
Now, out of that $140 some odd billion dollar
increase, perhaps $80 to $90 billion will come out
of the internal profits after dividends and depre­
ciation allowances on business. Another $40 to $45
billion is likely to come out of personal savings,
and the households, which at this time mainly
finance housing, by that time w e ’ll be saving con­
siderably more than the housing industry will
require. And so the financial industry will have
to transfer a large block of savings from the
household to the national sector.
Then the rest, maybe it will come from smaller
government deficits; maybe a little comes from
abroad, but any way you look at it, you end up with
a short-fall of anywhere from $5 to $20 billion.
The question, therefore, is a very right one,
and if we don't improve our financial system and
take no other steps, of course, it will come mainly
out of the housing, so every once in a while we will
be putting housing through the wringer as we are
doing at this time.

242

In devising policies to deal with the capital
shortages, there are a number of different consider­
ations that go into it, and that we have to settle
for ourselves before we come up with any one of the
many proposals that have been floating around in this
room and there are others that are not even in this
room.
' .
First, we have to ask ourselves:
Do we want
this extra capital formation to come out of internal
funds of business, or are we going to try to empha­
size the use of a capital market -- in other words,
not give liberal depreciation but give some kind
of savings incentive.
Second: How interested are we going to be in
the widest dissemination of the ownership of Ameri­
can business? Are we going to try to encourage
mass savings, as is Germany, or some more specific
devices?
Third: Wehave to ask ourselves: Are we going
to focus on very specific capital shortages; the
steel industry, the utility industry; at this time,
a short-run basis, the housing industry, or are we
all going to try to leave it all to the market and
just augment total savings?
Fourth: We have to ask ourselves:
leave it to the market?

Should we

Should we leave it to higher prices?
I think the shortage of primary pricing capa­
city is being cured in that way.
The prices are up;
the profit margins have widened; and the industries
will be able to finance the larger part of their
expansion out of the higher profits, which is
exactly the way we teach it to our students.
Now, the final consideration in dealing with
the capital shortage is this:
What is the question of timing?
And in what context should this question be
dealt with?
Now, at the moment, we are saying the budget
should be tough. We are all pretty proud of our?
selves for having resisted the desires for a personal
income tax reduction in the face of falling personal
incomes, in real terms, in a weak economy.

243

We are saying, "No, we don’t do that."
That then raises the question whether it is at
all practical or fair to get very excited about,
what, in one way or another, probably would be a
business tax reduction at a time when we are so
resisting the consumer tax reduction.
One other point on this whole question of capi­
tal shortage: it is very difficult to assess the
question at this time, and the numbers, as I have
indicated, still have a considerable margin of error.
The reason is we have been living through a period
of monetary brinksmanship, as was pointed out by
several speakers. And, of course, the disruption
of investment plans that is created in a period of
very tight money, in itself contributes to the
shortage of physical capital in the next business
cycle and so that, in itself, makes it very hard
to assess what the savings investment flows would be
if we could ever escape this roller-coaster of easy
money and very tight money.
Thank you.
SECRETARY SIMON:

Mr. Gaines.

MR. GAINES:
A couple of brief points.
First, the ones which Otto Eckstein has just
mentioned here.
My studies along the same lines as his, suggest
that the incidence of need for capital spending is
going to be so highly centralized in terms of the
petroleum industry, the electric utilities, the
communications, the metal industries, and so forth,
that they, themselves, will not generate the internal
cash flow to meet anything like the 80% or so that
Otto has referred to here of their capital require­
ments .
Granted that all industry might have a cash
throw-off that could meet that requirement, but
by and large, the industry's throwing off cash will
invest that money in short term instruments and w i l l
not be immediately available to the long-term c a p it a l
market, where our problem actually exists.

244

The second point:
If we wish to make it easier
-- more feasible -- for industry to finance itself
in the huge capital requirements in the years ahead,
I would hope that consideration would be given to
the adoption of some form of inflation-accounting
and recognition of the effect of inflation upon
c a p ita l replacement costs in our tax legislation.
France, for example, since the Second World
War, has periodically permitted industry to revalue
its fixed assets at current replacement costs
and compute depreciation against those current
replacement costs.
I would not propose, necessarily, that we
go that far, but some recognition of what inflation
has done to replacement costs, I think, would make
it easier for industry to finance itself.
The third point -- quite unrelated:
Something
that I have not heard mentioned here today in
connection with the functioning of the capital
markets, is the ability of our present underwriting
brokerage trading system to do the job that is
going to be required in the years ahead.
What I have in mind, in particular, is that
capital losses on Wall Street, and other financial
communities, have been so large in recent years
that their ability to make markets -- either as
underwriters or as traders -- has been seriously
eroded. An important question is how we attract
new capital into the underwriting and trading
institutions. Experiences of other wealthy indi­
viduals in recent years would not suggest that we
might be able to rely upon that avenue as a source
of funds. It is, perhaps, indelicate for a commer­
cial banker to make this last suggestion but, as a
potential source of additional capital to do the
underwriting and the trading job that will be
needed in the years ahead, we must go back and take
look at the Glass Steagall Act.
Thank you.
SECRETARY SIMON:
Mr. Kapnick.

Thank you.

I would like to comment just briefly on
Mr. Leach's comments, and some of the others -- on
the fictitious profits and inventory and the need
to do something about it.
I think, you know, that there is one tangible
way that you could have immediate help to industry,
and that is by some -- adopting some new approach
to your LIFO method.
I think that one thing that is very damaging
to industry is the requirement of the IRS that they
use the LIFO inventory valuation for both book and
tax purposes, and that they can not include the
inventory on their financial statements at current
values, because it destroys their ratios.
I can tell you that in discussing this with
many industrial clients, that this becomes an abso­
lute problem because of the problem of ratios that
they must meet under certain indentures, and certain
debt instruments and this requirement by the IRS I
think, could be immediately removed to help those
who want to move to the LIFO inventory immediately.
Long range, I think that it would be appropriate
to adopt a new approach whereby, if a company took
that deduction, that they did not include the amount
in earnings, but that they credited the price level
change directly to surplus, so that we would not
have these fictitious profits in the future.
SECRETARY SIMON:

Thank you.

Charlie Walker.
MR. WALKER: Mr. Secretary, could I say a word
or two about tax policy and capital formation, and
this is partly out of an economic background; partly
out of a background of working with Senator Long
and Senator Roth and others, on at least two major
tax bills.
I agree with Mr. Hauge that our tax system is
biased in favor of consumption and against investment.
And so I am going to start way out -- way out -and the way out start is the suggestion that we
consider substituting a consumption-based value
added tax, which is one that does not tax investment
goods, completely for the corporate income tax.

246

Now, before I get shot down in flames, let me
say a couple of things about this.
The value-added tax has been roundly criticized
Pin the Press -- and I think incorrectly -- as being

a simple retail sales tax.
It's not.
It’s a tax
ion gross sales by businesses all through the stages
!of production, whether it is passed on or not de11pends upon the strength of final demand at the con­
sumer level.
It may not be passed on. But to the
[extent it is, we develop devices in the Treasury
where you can easily make that sort of tax which is
said to be regressive, to the extent passed on, you
can make it neutral through income tax rebates,
iYou can even make it progressive, as a matter of
fact, if you lean over far enough and this quite
clearly -- moving in this direction -- would shift
'the weight of the tax system more on to consumption
land away from investment.
There are many arguments for it. The biggest
[argument against it is:
It would put a lot of tax
'lawyers out of work because you would get away from
!all of the problems of the Internal Revenue Code, of
determining what is income in a corporation and what
|are actually expenses, and what are actually de­
ductions .
Okay. Too far, too way-out to consider now,
|so let's go a little bit half way along the road
here and look at a couple of other things.
Let us explore, at least, what the French call
the a'droit fiscal which is just another word for
[reducing the double taxation of double dividends, by
giving a credit to the individual taxpayer on his
individual taxes for some portion of the tax that
has previously been paid by the corporation before it
pays the dividend.
There are some very interesting developments in
Western Europe in this respect, and, as I said, the
a'droit fiscal is one.
Also, of course, are reductions in taxes
on capital gains.
Perhaps, along the lines that
seem to be developing in the Congress at the present
time.

247

L

But let me make my fundamental point.
Let me apologize just a little bit -- not very
much -- just a little bit for perhaps being a little
too intemperate with the TV medium this morning. I
usually destroy my first drafts, but I didn't have
time to because I wrote, this at midnight last night.
But what really bugs me in the TV media and, to
some extent, in the written Press, is not to get
over some fundamental points about economics, and
the profit system, and the market economy.
Corporations don't pay taxes. People do. The
taxes are either passed forward to the ultimate
purchasers, and if you double the taxes on the
corporations that own the big super-markets that
have about a penny for a dollar margin of profit,
that is going to be passed forward and be a regress­
ive tax to the people that buy food, or it is passed
backward to the owners of the business, reduces
the return on investment, and stifles the flow of
investment and capital into that business, the very
shortage we are talking about.
So the corporation is simply a tool for doing
business, and a pretty darned good one, and very
successful.
People pay taxes, not corporations.
The final point, the real question, is this -two questions, really.
First of all, if it is, then,
people who pay taxes, how much do the rich people
pay and how much do the poor people pay?
We are very concerned about that, and we want
a reasonably progressive tax structure, and the
Federal income tax structure, not including
payroll taxes -- the Federal income tax structure
is reasonably progressive from about zero to ten,
the lowest brackets, up to about thirty-three per­
cent.
The second question, and a very important
question, is the impact of the tax system on jobs,
on investment and capital formation as we are talking
about now, on international competitiveness, which
is the reason we got the investment credit and
accelerated appreciation in 1971, and on the overall
growth of the economy.

248

SECRETARY SIMON:

Thank you.

Gus Levy?
MR. LEVY:
I would like to answer the criticism
that was made of the investment banking industry.
I fully believe that the investment banking
industry can handle the financing, the annual
financing of $25 billion of bonds and six or seven
or eight billions of common stock very simply.
The thing that worries me primarily is that it
is not going to be there to finance, because the
problem is with equity selling five times earnings,
to take an example, that means they have to return
20 percent on the money put up in order to prevent
dilution of that equity.
And if equity continues to sell at five percent,
I don't see there is going to be any equity
financing.
If there is no equity financing, the
structure of the balance sheets of major corporations
will be so bad by financing for all debt that they
will lose their ratings, they won't be able to
finance the debt.
So it
able to -financed.
nothing to
strengthen
to balance
sold.

is not .the problem of Wall Street to be
Wall Street can finance what has to be
Our worry is that there is going to be
finance unless we do something to
our equity market to provide the equity
the balance sheets before debt can be

As a matter of fact, Jim, you correct me on this,
I believe the last figures of the capital and Wall
Street firms and stock exchange firms were around
3.2 billion. The whole -- when we underwrite
something, we are charged what we call a haircut.
The haircut runs from 30 percent in common stocks
to five percent, I believe, in AAA bonds.
Well, there is no problem with financing or
underwriting that amount of securities, 25 billion
of bonds or seven or eight billions of common stock
over a period of a year.

249

As a matter of fact, we recently underwrote, the
Street did, without any problem, $650 million of city
bank notes, and the Street had no problem. We can
handle an issue like that a week or every day and
have no problem.
SECRETARY SIMON:

Bob Dederick.

MR. DEDERICK: At the risk of being a bit
heretical, even to myself, I would just like to say
that there is sort of an implicit assumption that
goes through here, and with some people it is
explicit, and that is that we do have a system biased
towards consumption and away from investment, and
in part, in consequence of that, we are going to
have unsatisfied capital needs.
I think that this case is unproved, really. It
may be correct, I think it may not be. We talked
about -- that we sort of overcommit ourselves in the
Government area, and we may take considerable -we do a great deal of criticism of this.
I think some of the shopping lists of what we
are going to need in the investment area are really
the same sort of thing. We have always had, if one
looked ahead, enormous capital needs.
Perhaps the
only difference between the last few years and the
decades before is that we never looked ahead
before, and so we never knew the insoluble problems
that lay ahead of us, and in consequence, the market
made them not so insoluble after all.
So I think what I am trying to say is that we
really have to ask ourselves a question, do we need
these. To be sure, all these items appear to
be desirable, but it is the same thing, as I say",
as regards Government programs.
And thus we have to ask ourselves if we do need
them, do we really recognize what is involved in
satisfying them. We are really talking here in some
of the position papers in any event about some
rather dramatic changes in the tax structure, some
rather fundamental moves, and we really have to
ask ouselves, do we need these fundamental moves.

250

I think myself I would just say that many of
these great unsatisfied needs as they appear to be
are really a function of the fact that we have gone
through an enormous inflationary boom, which has
made us perhaps think we have more needs than we
will in fact have, when we get into a normal
environment.
So my basic final point is that rather than
taking this for granted and assuming that, "Some­
thing has to be done here," that we really re­
appraise the entire situation and try to ask our­
selves, can the market do this or do we really need
these big changes that follow from the assumption
that we have enormous demands.
I for one think
that the case is completely unproved.
SECRETARY SIMON: Yes, I can't see all the way
down to the end, there.
MR. ENSLEY: Mr. Secretary, an effective
action that could be taken to help with a capital
shortage, the so-called shortfall that Otto
Eckstein documented very well -- and there have been
many other studies documenting this fact -- would
be to provide tax exemption or a tax credit for some
part of interest earned on savings accounts.
Now, this was mentioned a time or two already
today. You know, most western industrial countries
do provide some type of tax incentive for savings.
While it is important not to impair Federal
revenues at this time, this kind of tax relief pro­
vides several overriding advantages.
It would
stimulate savings, essential in the projected
period of capital shortage, and particularly it
would alleviate very quickly disintermediation at
thrift-oriented thrift institutions and provide
funds for credit-starved housing markets, and
finally, the estimated revenue loss, about two
billion dollars in the case of a thousand dollar
exemption, is probably less than the cost of
direct subsidy-provided programs for housing through
the expanded GNMA or FNMA tandem plan, subsidized
FHLB advances to savings institutions, and our other
direct subsidy programs which may be adopted if
the housing crisis worsens.
Thank you.

251

SECRETARY SIMON:

Thank you.

Who haven’t we heard from?
there.

Down at the end,

MR. REGAN: Mr. Secretary, there is one tax
I think should be discussed at this particular
moment that I believe is impeding the formation of
capital in the United States, and could be of great
assistance :n relieving the capital shortage not
only this year but in many of the years ahead.
I am specifically referring to the withholding
tax on foreigners.
There are many countries with
which the United States does not have tax treaties.
Many of these countries are located in the Middle
East. Most of these countries are the beneficiary
now of an enormous amount of capital. On a govern­
ment -to -government basis this can be handled rather
satisfactorily.
But as these sums of money start
to flow into the hands of individuals in the
Middle East and other places, they are reluctant to
invest in the United States if we are going to with­
hold on their interest and dividends.
I suggest that when forming policies having to
do with capital shortage, that that is one tax that
should be kept in mind.
SECRETARY SIMON: Don, that has already been
agreed to. We did that six months ago and it is
already in the bill in Ways and Means.
MR. REGAN:

Thank you, Mr. Secretary.

SECRETARY SIMON:

Yes.

MR. PRESTON:
I would like to associate myself
with the remarks of my good friend Grover Ensley
of the Mutual Savings Banks.
I will just take one
minute to amplify.
The Research Department of— the U. S. League made
quite an intensive study of this matter, and our
figures show that with the 1,000 tax exemption, we
would attract roughly $24 billion annually in
additional deposits to the savings and loan business
alone.

This does not, of course, include commercial
banks, nor does it include the mutual savings banks.
Now, the obvious question is, where would these
funds come from? In our view, overwhelmingly these
funds of $24 billion a year would come from existing
account holders in savings associations, especially
those who are presently drawing down their deposits
and investing in fixed income market securities.
We would not expect any significant shift from
the stock market.
Those people would continue to
enjoy the advantages of capital gains treatment
and so on. Nor do we believe there would be any
shift from the Government market, who enjoy the
tax deferral advantages and others. We do not
believe there would be any shift from the U. S.
Government securities and the municipal bond
market, because of the inherent advantages they
have.
So the answer to the question on this agenda,
how to create additional capital, we say the tax
incentive is one very tangible method.
Thank you.
SECRETARY SIMON:

Thank you.

A1 Wojnilower.
MR. WOJNILOWER:
I think one should be very
careful not to expect very much from policies that
are supposed to alter people's preferences for con­
sumption versus saving, which have been for
generations imbedded in the standard of living and
the relative position of families in the country.
This particular measure, I think, to provide
tax exemption to savings accounts is one that might
very well backfire and have to some degree the
opposite result.
First of all, there isn't any way, an easy way
I can think of, to limit this tax exemption to new
accounts as contrasted with existing accounts.
And in the current inflationary environment, and
recognizing that the old accounts greatly outnumber
the new accounts you might get, it isn't at all
clear but that you might not get more spending out
of what is essentially a tax cut by giving people
wore of an effective return on the accounts that

253

they already have than you would get new saving on
the part of people who are newly attracted into the
savings market.
Secondly, if you limit this only to depository
institutions and don’t include, for example,
dividends on equities, and we can widen the scope,
this would be one way of nailing the last tack into
that particular coffin.
So that it's very difficult to say where you
would have to draw the boundaries or how you would
draw the boundaries on such a tax subsidy without
leaving outside some of that favored boundary some
very essential parts of our capital markets.
Finally, we do have to recognize that disinter­
mediation plays a role not in raising interest rates
but in holding them down. That is, funds leave one
type of institution and investment in order to go in­
to another, where the demand is more intense, and
they hold down rates in the area into which they
enter.
And if you invent a successful device to
increase the effective rate of return in one very
large area, you have to ask yourself whether the
bidders, in this case essentially the commercial
banks and directly and indirectly their business
customers, might not very well be in a much better
position to up the ante that they are offering in
the interest rate market so when you are all said
and done, you are back where you started from except
that you have a bigger Government budget deficit.
SENATOR LONG: Might I mention the suggestion
that I'm sending down to Bill Simon -- he hasn't
seen it yet, I guess - but try to get this housing
industry going again.
Here is my suggestion.
Let's assume that a
person buys a hundred thousand dollar house and he
borrows 90 thousand to pay it out, and then you have
30 percent plus inflation as you had this year.
Now, that is a terrible beating for the lender
to take on his money, regardless of what the interest
rate is. But on the other hand, if you finance

254

that at the current high level of interest rates,
when prices stabilize, if they ever do -- and we are
trying to stabilize them -- then the borrower is go­
ing to take a terrible beating by having to pay that
high interest rate that was occasioned during
inflationary times.
Canada tries to meet that by variable interest
rates, and other countries have other methods.
My suggestion would be that you would have what
I would call appreciation mortgage that could be
agreed to, that the Secretary of the Treasury would
take a look at what the current level of interest
rates are, and also at the degree of inflation that
has occurred during the last year.
He would then fix a percentage figure which
would be added to the mortgage on the far end.
[That would then mean that instead of a person owing
$90 thousand on $130 thousand house, by virtue of
inflation the house is now worth $130 thousand, so
he would owe $100 thousand o n a $130 thousand house.
And if that were done, it would be my thought
that that appreciation fee should not be taxable,
should be treated a a return of capital which, in
the last analysis, it is when you look at the fact
that the value of the capital had eroded.
I^don't know whether I can sell it to Bill
but I will make an effort to put it through.

Simone

SECRETARY SIMON:

Frank Hoenemeyer.

MR. HOENEMEYER:
I would like to comment a little
bit on what I see developing in the long-term debt
markets.
There were some statements earlier that if we
gave some tax incentives to the savings institu­
tions, that this would draw money into housing, and
it was sort of passed over, but it would draw money
out of the bond market.
Gus Levy expressed the opinion earlier that
he saw no difficulty in financing the long-term
debt requirements of our country.
I do agree with
him that there is a more serious problem in the
equity markets, but as long-term investors look at
what has happened to them over the past 10 or 20
years and they compare the results of -investments

255

in common stocks, the results of investment in
long-term bonds or mortgages and the results of
investment in short-term securities, it is veryobvious that the best investment has been short­
term securities.
We are beginning to think that if inflation
continues, that we are going to have to abandon
one way or another the long-term market.
Whether
this becomes a variable interest rate or whether
we are in fact lending on a short-term basis, this
is going to put additional strains on corporations
and on the economy.
And I think this is -- I am not offering a
solution to this problem of inflation, but I am just
trying to point up another potential danger if
we don’t lick the problem of inflation.
SECRETARY SIMON:

Thank you.

Bob Bethke.
MR. BETHKE: Another possible approach to
savings desire.
Let’s all agree that we have to
encourage ourselves and the public to save more,
it is much better to have that money to use for
productive capacity needs than taxation to do the
job for us, and certainly savings takes away some
discretionary buying power for a day when it will
get us more goods.
But is there a way to encourage some savings
without the thousand dollar tax exemption which is
bound to cost the Treasury a billion eight or two
billion dollars a year at a time when you are
trying to do the reverse, keep your revenues in
focus?
Well, I might quickly suggest that to encourage
net new savings, that is our problem, we consider
increasing the Federal deposit insurance coverage
for mutual savings banks and S § L associations
from $20 thousand to $40 thousand.
This would alleviate, if properly presented,
lots of concerns among individuals about the finan­
cial stability of individual institutions. We are

256

talking about the small, the common man.
Second,
I increase Regulation Q limits on savings deposits by
even a quarter of one percent.
This permits the
Isavings industry to get into a whole new adver­
tising pitch, they are pretty good salesmen to
begin with, they have done a good job in the face
of tremendous disintermediation.
That is not so much more pay-out that many of
them would be dipping into their surplus accounts.
Ilf there are any in that case, why not set up a
special collateralized borrowing privilege at the
Federal Reserve for a temporary period, collateral­
izing against their assets to get through this littl
|period.
Thirdly, what about allowing a tax deferment on
a non-take-out or dividend paid savings account,
any savings account that has an automatic interest
reinvestment like the Series E bonds, allow that
account to defer the tax payment for seven years
just like the Series E bonds?
This ought to be a fantastic appeal to a man
about 58 years old. His children are educated and
Igone, he can look forward to retirement when he is
going to have a little less income. All of these
things ought to give the savings institutions enough
additional appeal that they can start holding their
own in this stream of disintermediation, and be a
lot better than tax increases or tax exemptions.
SECRETARY SIMON:

Thank you.

Senator Javits.
SENATOR JAVITS: Mr. Chairman, I had first
pledged myself to do all I can in respect to this
problem of capital formation.
Russell has come
up with an idea and we have heard many other ideas.
I think the legislators should decide that
this is a critical aspect of firming up the economy
and pledge themselves to active steps with respect
to it promptly, because our problem is time.

Secondly, X would like to raise two other
questions of importance to the stock exchange which
is here in the person of Jim Needham.
One, if you want - - y o u ought to have more
customers for stocks than you have. You don't have
enough.
Therefore, I think, you ought to apply
yourselves to inducing corporations as part of their
activities to set up, like they have done pension
plans so brilliantly, a stock ownership plan, and
I don't think there is anything to be afraid of
there, and I think it is long overdue.
If people at this late date are afraid of
having a couple of workers on their boards, then
they don't know what is happening in modern times.
Secondly, in order to be conducive to that
the worker can't tote around pieces of paper. So
the early installation of some form of bankability
in terms of entries instead of these pieces of
paper which were swiped and otherwise manhandled
would be extremely conducive to getting you more
customers.
I strongly urge that on you.
SECRETARY SIMON:

Thank you.

Congressman Reuss?
MR. REUSS:
In searching for capital formation,
we may be overlooking, of course, what I think is
the best source, namely, the 80 million-odd working
families in this country.
A working man, what can he do? He gets a
totally unmarketable five-and-a-half percent or
so on a savings bond, he goes to a bank or savings
and loan and wants to plunk down his money and he
is confronted by Regulation Q, which lowers the boom
on the market rate of interest he would get.
If he shows up -- if Archie Bunker shows up
at the Treasury this week with a thousand dollars
and says, "Give me that thousand dollar Treasury bill
paying eight or nine percent that is so juicy,"
our friend Bill will tell him, "Sorry, we changed
the rules. You have to have ten thousand."
If, in short, we got rid of all of this dusty
paraphernalia, Regulation Q, the artifical distinc­
tion between savings and loans and thrift institu-

258

tions and banks and all of the other archaic rules
which are conspiring to add to the inflation,
we might then be in a position to get hold of the
best source of capital formation there is, namely,
the American working people.
Think it over.
SECRETARY SIMON:

Thank you, Congressman.

We will have time for one more.
Jim Needham.
MR. NEEDHAM: Mr. Secretary, if I may first
respond to Senator Javits, I accept your suggestion,
Senator. We are working on increasing the share
in the population.
Obviously, in this kind of en­
vironment, our efforts are not totally successful.
That is probably an overstatement.
On the second part of your question, with
respect to the stock certificate, we are moving very
slowly there but it is being worked on, and I
point out to you, Senator, that our biggest problem
is not with the vested interests as one might
suspect, but rather with the individual himself
who is very reluctant to part with that certificate,
particularly because of adverse publicity.
Mr. Secretary, while I do have the microphone,
let me wrap up my point, here.
I think that this
subject of the capital shortage or shortfall is
complex, and it is debatable, depending upon how
you assign priorities to the needs of the American
people.
I come back to where I started, and I would
like to suggest once again what we do need. We
can separate this problem.
It is not as urgent as
some of the others.
It has long-term implications.
It really should be studied.
I would like to suggest again that we have a
national non-partisan commission appointed by the
President with representatives from wherever, and
ask them to study this matter and come up with a
sensible, logical, thought-out program which could
be submitted to the President and the Congress
within six months.

Finally, Mr. Secretary, I was just simply
delighted to have a member of the banking community
speak up on behalf of the capital needs of the bro­
kerage industry. We do have a program, it is called
a stabilization reserve, which would give us the
same benefits that flow to banks and insurance
companies, and which they enjoy, which they are
probably entitled to.
That program has been presented to you,
Mr. Secretary, and I guess as long as we have the
support of one banker, we have the support of all
of them.
I urge you to act on it.
SECRETARY SIMON:

Thank you.

Just one second, and then we will have to
move to the next subject.
MR. SAULNIER:

I will be very brief.

I am surprised that this discussion of capital
requirements and the ways in which we meet them in
this country should proceed without very much
attention being paid to the fact that this job is
done in the USA by financial facilities, investment
banking companies, and brokerage companies, and the
brokerage companies today are going out of business.
The personnel of the brokerage business is
declining rapidly because there is no place, I
would say, in the system today where the losses
have been greater than they have been in that
industry.
I noticed that the Chairman of the Council of
Economic Advisors didn’t get a very good press from
a similar comment, but I will repeat it because it
is a fact.
Now, basically the only way to reverse this
situation is an improvement in the economic climate,
and in particular, some success in the fight against
inflation.

260

But, I believe, Mr. Secretary, that it is a
mistake at this time to be pushing for a system of
negotiated commission rates.
I have argued this
point. I know that it is a controversial one and not
everyone in the industry agrees.
But I have a moderate proposal to make.
That
is that a hold ought to be put for the moment on the
move to negotiated rates by May 1, 1975. Whatever
you may think of this proposal or this method of
conducting the securities business, on theoretical
grounds, I think you would have to agree that this
is a very, very timely procedure.
So I say, put a hold on it, and I would secondly
suggest that an investigation be launched, as quickly
as possible, to determine what can be done to
prevent further damage to these facilities of our
country, and many of the suggestions that have
been made here this afternoon it seems to me to be
relevant to that end.
SECRETARY SIMON:

Thank you.

261

m.
International Economic Policy
Discussion Papers from Delegates

558-812

74

Mr. William H. F r a n k l in

Chairman, Caterpillar Tractor Company
The appropriate role of the U.S. in international economic policy
as it pertains to the problem of worldwide inflation is one of leader­
ship in the following areas:
1. Foreign trade. The reduction of tariffs and nontariff barriers to
trade makes more goods available at lower prices and hence helps to
reduce inflation. The current trade bill should be acted on immediately
and bargaining with other countries should begin at once.
2. Export controls. Export controls make less goods available to the
countries that would have purchased the goods had they been avail­
able and hence help to increase inflation. The U .S. should press on
with a round of discussions aimed at eliminating as many export
controls as possible on a multilateral basis.
3. Exchange rates. The U.S. should continue to press for a perma­
nent flexible exchange rate system to facilitate increased trade. W ith
a flexible system each country’s inflation can be confined to that coun­
try by making suitable changes in the exchange rate for its currency.
4. Balance of payments. The U.S. should continue to urge seeking a
solution to the world’s balance of payments problem created by the
new price of oil. I f the balances of trade deficits are not offset so as
to reach reasonable balances of payments, the world may well see the
proliferation of trade barriers, bilateral agreements, competitive de­
valuations, etc., all of which would be highly inflationary. The deficits
can best be overcome by attracting foreign investment. To this end,
foreign ownership of assets in the U.S. and other countries must not
only be accepted, but welcomed. In addition, the U.S. should assume
leadership in developing and adopting a code of conduct by govern­
ments which would assume the protection of foreign owned assets.
Dr. T ilford C. G aines

Senior Vice President and Economist
Manufacturers Hanover Trust Co.
Until about two years ago
upon world inflation was the
national money market. Since
other raw material prices has

the principal international influence
proliferation of dollars in the inter­
last last year, the increase in oil and
introduced a new dimension that will
265

have the effect of turning the U.S. balance of payments around and
that has already made the dollar a desirable rather than unwanted
currency in world markets.
Overall, the influence of the surpluses in the oil exporting countries
has been anti-inflationary. The huge increase in energy costs has im­
posed a form of forced saving upon people in developed and develop­
ing countries around the world. To the extent that any country has
offset this external discipline through its own internal monetary and
fiscal policies, the result has been spiralling inflation and balance of
payments weakness. Most developed countries, however, have adopted
their policies to the constraints imposed by the higher price of petro­
leum products and, as a result, are in recession or, at best, a stagnant
economic situation.
For the time-being, in other words, the increase in oil prices, as well
as other basic materials prices, has had an immediate inflationary
effect but a longer-term deflationary effect. It is to be hoped that within
a reasonable period of time the bulk of the oil surplus money will
begin flowing into long-term investments, which will have the dual
result of lessening international balance of payments problems and
of improving the supply-demand balance in world capital markets,
making lower levels of interest rates possible.
Meanwhile, the situation in the Middle East is scarcely conducive
to optimism that it will be possible to work our way through this
difficult period in history without either political, military, or further
inflationary flareups.
M . R . H e l l ie

President.
Credit Union National Association, Inc.
The effort to reform the structure and regulations of financial insti­
tutions that began with the appointment of the Commission on Finan­
cial Structure and Regulation in 1970 now appears to have a better
chance to be accomplished by means of omnibus legislation. But it is
more apparent than ever that the specific recommendations contained
in F I A 1973 fall far short of the desired goal.
The change in economic and political conditions since the submis­
sion of the Hunt Commission report and the legislative package drawn
therefrom, dictates a fresh approach to the task of reforming the
structure and regulations of financial institutions.
We think each regulatory agency and the regulated industry should
conduct a review of their existing regulations for the purpose of
eliminating those that are unnecessary and updating the others. The
goal should be to make financial institutions more efficient and
competitive.
Then the Treasury should meet with the various financial institu­
tions to revise and reform F IA 1973. Suggestions for revision from
266

the various financial institutions should be treated positively, while
negative reactions from competing financial institutions should be of
lesser influence.
Through full participation and openness, a more credible and equi­
tably balanced package can be formulated to gain wider industry and
congressional support.
In keeping with this approach, the credit union movement is pres­
ently studying the full range of credit union member needs. Among the
matters under discussion are: (1) The cost-price impact of the 12
percent maximum loan rate; (2) third party payments; (3) shares
with varying rates and maturities; (4) a liquidity facility; and (5)
greater credit union participation in the residential mortgage market.
These studies are responsive to credit union members demands for a
broader and more flexible range of financial services.
It is time for a new look at the Financial Institutions Act. The new
look should be made openly and forthrightly.

Mr. B ruce K. M acL atjry

President, Federal Reserve Bank of Minneapolis
1. It has been suggested that to facilitate recycling of oil revenues,
the U.S. government should issue special debt obligations to members
of OPEC and lend the proceeds to “needy” oil importing countries.
It has also been suggested that U.S. government should extend guar­
antees to commercial banks to transform short-term OPEC deposits
into long-term loans to oil importing countries. There is no good
reason why U.S. taxpayers should assume default risks for members
of OPEC.
Instead, the U.S. should promote the establishment of a major re­
cycling facility in the IBR D . W ith such a facility in existence (which
could lend to all governments including those of the LDC’s) members
of OPEC would automatically be able to achieve a certain diversifica­
tion of risk. The U.S. might also stand ready to guarantee its pro­
portionate share of such a fund against losses.
2. Joint efforts among major countries to monitor—and lim it ex­
posure on—foreign currency and Euro-dollar positions of banks
should be pursued with urgency. Similarly, clear responsibility for
aiding international banks in difficulty should be established.
Dr. Paul W. M cC racken

Senior Consultant
Department of the Treasury
Even the large and diversified U.S. economy has learned that it
can be profoundly affected by external economic influences. W hile the

present inflation and instability of the U.S. economy is “home grown”
to a substantial extent, these do not explain over half the double digit
inflation that we have been experiencing. From the end of 1972 to the
third quarter of 1973 (before the oil embargo dominated develop­
ments) , the rise in our exports of merchandise was equal to almost onethird of the rise in our output of goods. Demands from abroad were
competing vigorously with overly rapid increases in domestic de­
mands, and these made a significant contribution to inflation.
Again this year international financial strains have cast their shad­
ows over the American financial scene. The concerns about regaining
stability are understandable, and policies must respond to these con­
cerns. We must, however, be clear about where we want to go. Two
guidelines are particularly urgent.
First, our problems heavily reflect overly expansive domestic mone­
tary policies, and there will be no solution until more prudent and
disciplined policies are followed. No “gimmicks” and arrangements
can release government from facing this requirement.
Second, the new structures and arrangements which are needed
must meet the test that they move us toward and not away from a lib­
eral international financial and economic order—toward freedom from
controls, not a growing array of controls. I f we ad hoc our way with
one control after another the world will (as has been true historically
in these cases) look back and conclude that we are far down a road
that we never really intended to travel.

T h e H on . H enry S. R euss

U.S. House of Representatives
Recommendations from the Financial Conference on Inflation, Sep­
tember 20, to the Economic Summit meeting on September 27-28
should include the following proposals:
Fiscal Policy—Federal Taxation: Any policy to fight inflation must
defuse the wage explosion already beginning to occur, as workers at­
tempt to catch up with last year’s inflation and protect themselves
against this year’s. A social contract, in which the government pledges
social security tax and/or income tax relief for low- and middle-in­
come people and in which workers pledge to restrain their wage in­
crease demands, would reduce cost-push inflationary pressures while
protecting the average worker against rising prices. Such tax relief
must be balanced, to avoid unwanted fiscal stimulus, by tax reform to
end outmoded and inequitable tax subsidies and by other revenue-rais­
ing measures.
Monetary Policy—Credit Allocation: The Federal Reserve shou
pursue responsible monetary restraint, keeping money supply (M)
growth to around six percent for the immediate future.
268

At the same time, we must establish a system with clear ground
rules for channeling the limited supply of credit away from inflation­
ary uses, such as real estate speculation, conglomerate mergers, and
commodity buildups, and toward interest-sensitive essential needs such
as productive capital investment, low- and middle-income housing,
small businesses and farms, public utilities, and state and local govern­
ments.

y
: :
■
A’' '
International Economic Policy : To bolster international confidence,
let the U.S. lead in putting together a consortium of the leading indus­
trial nations (a) to guarantee that the world’s major banks will not
be allowed to fail for lack of liquidity (as opposed to mismanage­
ment, for which salvage operations ought not to be attem pted); (b)
to adopt coordinated programs to conserve fuel, thus reducing shortrun dependence on the oil-exporting countries, and food, thus easing
the prospect of mass starvation in Asia and Africa.
Wage-Price Policy: To forestall future price rises, we must increase
supplies of scarce materials, through a broad range of policies includ­
ing advance planning, monitoring of potential shortages, sensible
import and export policies, and elimination of artificial barriers to
competition.
Mr. D avid R ockefeller
Chase Manhattan Bank, National Association
For obvious reasons, this important conference today is focusing pri­
marily upon our domestic inflation problem. However, it would seem
to be critically important that we spend a fair amount of time discuss­
ing the international ramifications of this truly global problem. To­
day, inflation affects all nations of the world and many in a consider­
ably more severe fashion than the United States. Indeed, literally for
the first time, we are witnessing peacetime inflation on a worldwide
scale. A high rate of inflation in one country cannot help but increase
inflation in others—through its impact both on prices of imports and
on prices of world commodities generally.
It would seem to be imperative, then, that there be accelerated joint
consultation, of the very closest kind, with our friends in the rest of
the world. Policies considered in one country which will obviously
have an impact in its relationships with other nations, might be re­
viewed on a consultative basis, prior to final implementation.
In this regard, I find it encouraging that the Ministers of Finance
of five major industrial countries, including the United States, met
just recently to discuss their joint problems, as well as possible joint
solutions.
It would appear obvious that if one country inflates more than
others and is faced with a subsequent loss o f markets, it often is
tempted to fall back on such protective devices as tariffs, quotas, com­
petitive currency devaluations, and the like.
269

Beggar-thy-neighbor policies of this character are to be avoided
at all costs. Permitting them to develop now would be to sacrifice
many of the benefits which already have been derived from interna­
tional cooperations so painstakingly achieved over the past quartercentury and so essential to the future well-being of all nations. Indeed
in my judgment our policy should be to encourage low-cost imports
and to maximize trade between nations. For this reason, passage of the
foreign trade bill, now before Congress, would be helpful in combat­
ting inflation over the longer run.
This overriding need for continued cooperation between nations is
especially evident when one examines the ramifications of the current
energy situation. The four-fold increase in the price of oil by the oilproducing nations not only made a major contribution to the recent
inflation, but also has left a legacy of financial turbulence, anxiety and
disruption. A ll told, the oil consumers will run a deficit in their cur­
rent accounts with the oil producers this year of $60 billion or more.
B y the end of 1976 these accumulated deficits may add up to as much
as $200 billion. These are staggering amounts, with serious implica­
tions for the stability of international economic order.
I f we are to find solutions to this challenge, I believe we must begin
by renewing our efforts to bring together the industrial nations of
Europe, the Far East and North America so as to devise common
strategies to deal with the problems arising out of higher energy
prices. We might begin by carrying forward the efforts initiated ear­
lier this year by Secretary Kissinger.
Working with our Trilateral partners and the oil-producing na­
tions, launching a massive research and development program to find
economically feasible alternative sources of energy would be desir­
able. This is essential both to help the world at large and to provide
a continuing source of revenues to the oil producers after their re­
serves have been exhausted. A t the same time, we and other industrial
nations should seek to undertake common programs for conserving
on energy, thereby stretching out our available supplies.
We must, I believe, as quickly as possible, develop new mechanisms
and strategies to meet the mammoth recycling problems of countries
suffering from serious balance of payments deficits because of higher
oil prices. To accomplish this, the large surpluses earned by the oil
producers must be channeled back to the deficit countries.
This challenge cannot, in my judgment, be handled solely by the
banks and the private market mechanisms as has been the case, to a
large degree, up until now. It will increasingly require the combined
efforts of governments and international institutions—a fact already
being recognized through proposals such as the loan by G erm any to
Italy, the new oil facility of the International Monetary Fund, and
other actions now in the planning stage.
270

Of course, banks and other investment institutions should continue
to play a major role. Their expertise and institutional networks are
essential to the oil producers and oil consumers alike, and without
them a lasting solution to the problem would be much more difficult,
if not impossible. Indeed, there is room here for imaginative new ap­
proaches—innovations in the design of new financial instruments to
meet the needs of oil producers while channeling scarce capital to in­

dustrial nations.
Success in dealing with the recycling problem is also essential i f we
are to achieve even a semblance of international monetary stability—
a critical element in any program for combatting world inflation. And
yet, in dealing with this aspect, as well as other components of this
multifaceted problem, we must be aware of the risks of adopting
measures which would lead any nation into a recession, which in turn
could quickly spread to other countries.
Only recently we have seen the temptations and dangers that arise
for financial institutions when currencies of different nations fluctu­
ate widely against each other. Less well recognized, perhaps, is the fact
that if the United States dollar is permitted to depreciate greatly
against other currencies, the cost of all import items rises. This has
certainly has been a contributing factor to United States inflation over
the past several years.
What we are seeking, is a return to a system that provides greater
stability in international currency relationships. Hopefully this is a
matter which will be given full consideration in meetings of the In­
ternational Monetary Fund early next month.
Finally, I believe the United States should bend all its efforts to
muster support for programs designed to restore greater international
monetary stability. Once again, such a goal can only be achieved
through cooperation by all key nations. It would seem to me that both
recognizing the problem as international in scope, and, at the same
time, arriving at solutions that take this interdependence into full
account, is a primary requisite for our mutual success.
R o b e r t V. R oosa
Partner, Brown Brothers
Harriman and Company

Mr.

The efficiency and scale of financial relations among countries have
been increased so extensively in recent years that inflationary mo­
mentum, once started within the leading countries, spread rapidly to
all. The flexibility in this financial machinery that had induced and
supported record real growth through most of the postwar period be­
came over extended—spreading active demands across the globe at a
pace that outran the global supply of goods and services that were
271

available at yesterday’s capacity, and costs, and prices. The dilemma
today is how to check the temporary excesses of monetary demands
being transmitted throughout the world without causing a breakdown
of the financial mechanism, while at the same time promoting the
sustained expansion of capacity and production which the world needs
as the real offset to inflationary forces.
Moreover, in today’s setting, any source of supply that can be de­
liberately controlled or limited—whether of raw materials, or finished
goods, or labor—has an opportunity to extract a monopoly surcharge,
For this and other reasons, great imbalances develop within the cost
structures of each country and across their balance of payments fron­
tiers, with oil presently the prime example of the spreading of
distortion.
Clearly no one country can stop the excess demand and promote pro­
duction on a scale sufficient to solve its own problems alone—not with­
out inconceivably retrogressive to economic isolation. But the United
States position is crucial, both through the example we set and through
the weight of our own impact on the total results. Moreover, it is
through our own currency, the dollar, and through the vast network
of American financial facilities erected to service world requirements,
that so much of the finance that is needed, as well as that which is
excessive is now passing around the world.
The urgent problems are: (1) to evert a disruptive breakdown of
the financial mechanism, both through preventive action and through
prompt shoring up of the repercussions of any individual failures that
may occur; (2) to minimize the disruptive impact of oil payments;
(3) to so use the generalizer restraint of monetary and fiscal action
as to neutralize financial support for further cumulative inflation;
(4) to induce the additional real saving and investment required for
expanded capacity and output, and eventually a lowering of real costs;
and (5) to cushion the more extreme inequities created during the
transition from inflation to normality.
Toward this end the United States should promote: (1) the closest
possible harmonization in diagnosis and policy among the largest
countries and the principal raw material producing countries, both for
the short run and the longer run; (2) procedures for managing ex­
change rates to assure orderly flows of trade and payments among
countries; (3) the stimulation of productive investment in extractive,
manufacturing and service industries; (4) the assurance of adequate
longer run demand to provide suitable returns from new investment
and production as these emerge; (5) the closest approximation to free
competitive conditions in all markets by combating, or offsetting mo­
nopolistic restraints; and (6) the introduction of selective measures
temporarily to employed people and support industries that are dis­
placed during the process of achieving the other objective.
272

International Economic Policy
Conference Proceedings

INTERNATIONAL ECONOMIC POLICY
AND INFLATION
SECRETARY SIMON:

We are going to move on to the

I i n t e r n a t i o n a l economic policy and inflation.

Walter Wriston, First National City.
MR. WRISTON:
Mr. Secretary, I think in the last
125 years, since the end of the Second World War, the
nations o f the world have been engaged in dis­
assembling the barriers to the movement of goods and
[services and people across national boundaries.
[Those barriers were built after the great depression,
and their progressive lowering over the last 25 years
has been very salutory for the growth of the economic
communities around the world.
I think that right now, we stand in some danger
of voices urging that we go back to the jungle of
economic nationalism again because of the pressure
that is put on us, not just the United States, but on
many countries around the world, through the taxes of
|inflation.
I think this is the time, quite the contrary,
that we should take a leadership role in negotiating
with our partners around the world in pursuing lower
barriers to trade and investment.
To this end, I would urge that we push ahead on
the Trade Reform Act, which would give the Executive
Branch of the Government the authority to negotiate
for the lowering of trade barriers, both tariff and
non-tariff barriers, all over the world.
I think that we should support heavily the
efforts of our Government to forge truly cooperative
relationships with foreign governments in the area of
monetary policy, and in general, even on some domestic
monetary policies, because we do in fact live in a
global economy.
We would applaud the efforts of the central banks
to get together to form some common policy on the
international financial picture.
I think we should
also think about the fact that the trade barriers
that we have erected in this country are very
substantial, and basically deny the consumer the
opportunity for a iower price for a product.

275

I would like to suggest as one starting point
that we make a list of all the restrictive practices
that have grown up over the years, not just the
violations of the GATT treaty but all the tariff and
non-tariff barriers which in fact raised the price
level to the consumer.
I think such an audit would form a useful
starting point in assessing our own trade policies.
SECRETARY SIMON:

Thank you.

SECRETARY SIMON:

Any comments?

Sylvia Porter.

MS. PORTER: Mr. Chairman, I not only second the
remarks of Mr. Wriston, but I would like to say that
we should assume much greater leadership than we have
shown in many years in bringing together the oil­
consuming nations of the world, to take a
comparatively common stand and certainly a coopera­
tive stance to deal with the actions of the oilproducing nations.
While I would not like to coin a jingo phrase,
it has entered my mind enough to repeat it here:
that nations have gone to war for far less than has
happened to the consuming nations of the world in
the past twelve months.
I would think that President Ford's favorite
remark, cooperation, could be extended in our
actions to bring together the consuming nations in
much greater harmony to develop policies, perhaps
in the sharing of our available oil supplies so
that they will not consider us as, once again, a
hated interloper in the developing of policies to
deal with price hikes or tax hikes and the massive
flows in conservation and in the pursuing of new
sources of energy.
And I think, Mr. Secretary, that this common
front and cooperation should be extended in our
thoughts about other crucial raw materials so that
we may handle adverse steps that may be taken
against us by producers of these other essential
war materials before crisis is piled upon crisis.
I have read Mr. Rockefeller's remarks and I
urge you all to read them, too, with the
seriousness with which I know he says them. I think
Senator Javits just met this point in his final
point today when he spoke about new policies on oil
and monetary affairs.

276

I also believe, with all due respect to you,

sir that we are too far timid in pursuing the
improvement of our existing agreements, monetary
agreements, and financial agreements among nations.
And our action is far too timid for the problems
Perhaps we don’t
need new ones, perhaps all we need to do is to
strengthen the existing ones.
It is too late, I
assume, for us to adopt any new policies or new
speeches for the IMF meetings at the end of this month
or early next, but it is not too late to talk in
the corridors. Whatever progress we have achieved at
Basil or at Geneva or in Washington or wherever, is to
my humble mind far too little and far too dangerously
slow.
and the challenges that face us.

SECRETARY SIMON: Thank you.
I have hesitated
during this day, even though on occasion I would have
liked to respond to some of the suggestions, that
Government is not always remiss in the area of
consumer cooperation.
We have been hard at work on that since last
February in the suggestion of sharing oil that you
mentioned. We have been meeting every three weeks
for the last seven months on that and hopefully the
agreement will be signed next month. They're over
there working on the final arrangement for that
[right now.
I think everyone is very aware, as evidenced by
the Big Five, if you will, finance ministers that
have been meeting, four in the last year-and-a-half
to two years and continue to meet on a continuing
basis to discuss mutually our problems and the
coordination of all our policies together in
recognition of the interdependence and the dangerous
elements that exist in this world today.
But you people didn't come here to listen to
me speak.
MR. ROCKEFELLER:
I'm delighted to hear what you
just said and I think it's encouraging that these
meetings have been going on and that results are to
show themselves shortly.
I think most of us were, in fact, disappointed
that the initiative of Secretary''Kissinger , after his
trip to the Middle East, his spectacularly success­
ful trip in the Mid-East in January, when he

recommended a conference in Washington to discuss
these problems, was not met with more general
enthusiasm.
It is true that there was a final agreement and
that there have been meetings.
We haven't heard very
much about them and it's reassuring that perhaps we
will in the future. But it does seem to me, in
support of what Sylvia Porter has just said, that the
increased price of oil and its implications for
balance of payments and shift to resources in the
world has, on the one hand, provided a new and over­
whelming threat to the world, which could be extremely
grave if it's not dealt with.
On the other hand, I think it equally offers a
challenge and an opportunity if we will seize it to
use this new threat as a reason particularly for the
tri-lateral nations of Western Europe, North America
and Japan, to work more closely together than they
have in the past.
I hope and feel this is a basic necessity, not
that they should work exclusively and against the
interests of any other group, but that they have a
lot in common and that before they can deal
effectively with the rest^of the world, they need to
sort it out more than they have, hitherto, their
mutual problems.
Hopefully, having done that, I would hope that
they would work more closely with the petroleumproducing nations to resolve the recycling problem
which I still think is a very grave one, and also
through a massive program of research and develop­
ment to develop new resources of energy so that in
the future we won't be faced with some of the
shortages that we saw particularly grave last year,
but which I'm afraid are by no means over.
It does seem to me that perhpas more has been
done than is known to the public. That I would
think, unless it's a great deal more, would make
room for very considerable further international
cooperation along these lines.
SECRETARY SIMON:

Thank you.

Charlie Walker.
MR. WALKER: Mr. Secretary I agree very much
with what Mr. Wriston said and what Ms. Porter said

278

and what Mr. Rockefeller said.
I would like to add to that, however, something
I think that is very important and that is, the
c o m p e ll in g need in fact, we're way late--in this
Government developing the type of comprehensive
integrated, cohensive, international economic
policy that can enable us to supply the leadership
that the rest of the world is crying for.
For too long, our international bargaining has
been on a splintered basis: Foreign Minister vis-avis Foreign Minister; Finance Minister, vis-a-vis
Finance Minister; Agriculture Minister, vis-a-vis
Agriculture Minister; Trade Minister, vis-a-vis
Trade Minister; Defense Minister, vis-a-vis Defense
Minister; when you combine all of these factors in
the United States, if you combine them, we have a
tremendous amount of bargaining strength and a
tremendous potential for leadership.
Where the difficulty comes is partly in
attitudes in some departments whiclji I won't identify,
called the "Foggy Bottom" in Washington; partly
because the buck on this issue, since it involes
all of these different facets, has to go right
straight to the oval office and the final decisions
have to be made by heads of State.
I would recommend for consideration to bring
these bargaining eggs into one basket, something
like an international economic quadriad consisting
of the Secretary of the Treasury, the Secretary of
State, the Head of the National Security Council,
when those are two different people, when and if
they are two different people, and the Chairman
of the Federal Reserve Board, who would be the
President's chief advisers in this area and then, in
addition, and not just for parochial reasons and
background, that the chief implementator and spokes­
man for such policy should be the Secretary of the
Treasury.
SECRETARY SIMON:

Thank you.

Mr. KAPNICK:
I believe, Mr. Secretary, that the
last several speakers in commenting on the importance
of a defined and unified foreign policy as a means of
greatly facilitating our relations with our foreign
neighbors, has an aspect similar to the problem that
Senator Javits mentioned recently.

279

Just as we have failed to build a stock owner­
ship constituency into the American worker in the
United States and their techniques for doing this
that are highly sophisticated and efficient, we have
also failed to develop on the part of our multi­
national corporations an international constituency.
We put Twentieth Century capital instruments
down in the middle of a Tenth Century wage
structure.
They pour out billions of wealth but the
power of the citizens of the host countries to
consume is not raised.
The reaction that we have gotten from the Middle
Eastern sheiks and shahs and what-have-yous, is, in
part, our own fault in failing to build a corporate-an international corporate constituency in those
countries.
It seems to me that this should be a major
facet of any consistent foreign policy that we may
develop.
SENATOR’LONG: I used to enjoy back there in the
Eisenhower Administration referring to what I called
the Republicans "good news" announcements that
usually went something like this: "Hurray! Unemploy­
ment did not increase this month as rapidly as it
increased the month before." It increased, of
course, but not as rapidly.
"Now, "Hurray! Crime did not increase this
year as fast as it increased the year before." I’ve
become very irritated and I know those in Government
know it, about these so-called "good news" trade
figures. They leave out the cost of the freight
and the insurance on their imports. They add in the
cost of everything you are giving away just as
though you are being paid for it.
For example, a billion dollar gift of grain to
India goes down as though we made a billion dollars
even though we never expect to get anything for it-i
oh, a dollar back in here sometime,' just to keep
it from being one-hundred % correct, put if you take
away from the plus side what you've given away, and
you add to the minus side the cost of the freight
like everybody else does, then our deficit on an
annual basis is five-and-a-half billion dollars
more than they tell us.

280

Now, even when they get through leaving fiveand-a half billion dollars out, they then proceed
to report it on a quarterly basis, so they only
report one-quarter of what your loss is going to be
for the year*
Now, I wouldn't object so badly to losing the
5 1/2 billion plus a year on the trade figures if

we were making it back with our investments, as some
like to contend that we are. But you can't count
that five billion dollars that our investments
are earning us twice; you can't use that to pay for
the troops in Europe, the troops around the world;
a foreign give-away program to a hundred different
nations and also use the same five billion dollars
that your investments are earning for you and to
pay off your trade deficit.
If we can, and we're going to at least amend
that Trade Bill, to make them tell us how much we
are losing.
Stewart Symington likes to say that each
department blames somebody else for its cost.
They'll say the military people will say, "Well,
the troops in Europe ought to be laid over against
the State Department budget," and then somebody
else says, "Well, this ought to be laid against
that."
So each of them work it out in such a fashion
that their program really isn't costing you any­
thing. When you get through adding up a long column
of pluses and you get down to the bottom and you have
a tremendous minus.
Now, there are abroad, w e ’re told, about $160
billion Euro-dollars. Now they call them PetroDollars. Half of that got that way by our trade
policies being overly-generous and letting the
other fellow get the better of us all the time.
We simply cannot continue that because that is
playing a major part in this inflation. When you
have all of those American dollars overseas, it
means that you're going to have to pay more for what
you're buying from abroad and that adds to the
inflation.

281

So if we can, and I believe that we can at least
do that in the Senate, we're going to try to move this
nation toward what would be an honest balance of
trade, and that would have to mean the we'll either
have to sell more or we'll have to buy less.
MR. KENNEDY:
I'd like to make a comment about
Mr. Kelso's remarks earlier.
I think there has
been surprisingly well handled recycling of sub­
stantial amounts of these petro-dollars in loans to
under-developed countries, guarantees of credits to
under-developed countries, loans to developed
countries and as I believe Chancellor Healy
remarked recently, the international financial
mechanism has handled the balance of the funds with
impressive skill and great courage.
The remarks I made earlier about talk of wage
and price controls and other credit allocation
applies here as well. Many of the holders of these
funds have a great passion for anonymity and to
suggest much greater controls or research into the
uses of those funds may well turn out to be one of
the great mechanisms to move that money into other
financial markets than the U.S.
SECRETARY SIMON: Thank you.
I think it might
be useful if we took a five-minute recess, just
sort of stand up and stretch right here.
(Short recess.)

282

Financial Institutions and Inflation
Discussion Papers from Delegates

Mr. Morris D. C rawford, Jr.

Chairman of the Board
Bowery Savings Bank
Dr. Grover W . E nsley

Executive Vice President
National Association of Mutual Savings Banks
Inflation is indeed “domestic public enemy number one.” Among its
chief evils is the inequitable impact resulting, in part, from imbal­
anced federal anti-inflation policies. The absence of fiscal discipline
has led to excessive reliance on monetary restraint and skyrocketing
interest rates—with major victims being thrift institutions and their
depositors, home mortgage borrowers, and the housing industry.
At savings banks, net deposit outflows, excluding interest, totaled
$2.7 billion in the five month period from April through August 1974,
over 21/2 per cent of total deposits outstanding, with even greater out­
flows in major metropolitan areas. Hew home mortgage commitments
have virtually dried up. Housing starts have fallen to the lowest levels
in over 4 years and further declines are imminent.
Thrift institutions are unable to compete with commercial banks
and the open market in periods of rapidly rising interest rates, since
by law and orientation, their assets are predominantly in home mort­
gages and other long-term investments acquired earlier at low fixed
interest rates. By contrast, earnings on commercial bank loans are
predominantly tied to short-term open-market yields.
Since the July 1973 changes in federal deposit interest rate ceilings,
which narrowed differentials in favor of commercial banks, disinter­
mediation at thrift institutions has been seriously aggravated. During
the 12-month period following this regulatory action, household sav­
ings deposit growth at commercial banks actually increased by 19 per
cent over the previous year, contrasting sharply with declines of 43
per cent at savings and loans and 62 per cent at savings banks.
The inflation-caused problems of mortgage-oriented thrift institu­
tions would be largely resolved : (1) if the increase in federal expendi­
tures is curbed and all necessary measures are taken to balance the
budget or achieve a surplus, thereby permitting an easing of short­
term interest rates; and (2) if the asset and liability structure of thrift
institutions is modernized to redress current competitive imbalances.
285

In both instances, decisive federal action is required. In the first, by
subjecting each expenditure and revenue item in the budget to micro­
scopic scrutiny ; in the second, by enacting the broadened powers and
federal savings bank charter authority provided in the pending Finan­
cial Institutions bill (S. 2591). Efforts to develop a variable-rate mort­
gage instrument, equitable to both lender and borrower, should also
be pressed forward with appropriate legislation and public education
programs.
These economic policy and financial restructuring measures should
be adopted without delay, but it will take time for their full im­
pact to be felt. Therefore, the following actions should be taken
immediately.
1. Provide tax exemption or tax credit for a portion of interest
earned on savings accounts. This would stimulate increased saving. In
particular, it would expand the supply of housing credit—probably
at less cost to the federal government than emergency subsidy
programs.
2. Raise deposit insurance to $50,000 as provided in House-passed
H.R. 11221, now pending in conference with the Senate. Depositors
have become increasingly insurance conscious in recent months.
3. Raise minimum denominations on Treasury and federal agency
obligations. In its recent report, the House Ways and Means Commit­
tee cautioned that low denomination offerings should not be at the
expense of “serious dislocation” in savings markets. Recent Treasury
offerings of $1,000 denominations have resn1fod in “serious disloca­
tion” at thrift institutions.
4. Strengthen federal deposit interest rate ceilings hy preventing

circumvention of ceilings through hank holding company deposit-type
issues as provided in Senate-passed S. 3838 and House-passed H.R.
15928.
One final observation. These proposed measures and actions will
assure the viability of thrift institutions and their continued com­
petitive presence in the financial system. Over the long pull, this will
enable the small saver to maximize earnings on his savings and assure
the availability of mortgage funds at the lowest possible cost.

M r. R ex J . M orthland

President, American Bankers Association
INFLATION AND FINANCIAL PRESSURES

Spiraling inflation i§ the prime cause o f today’s high interest rates.
Comparcmentalization of financial institutions, and regulatory rigidi­
ties in pricing structures in combination with these rates, are produc286

ing serious stresses in some financial markets, especially the mortgage
markets.
PROPOSED CHANGES IN LAWS AND REGULATIONS

Significant changes are required, as suggested in the Financial Insti­
tutions Act (S. 2591), to enhance the responsiveness of financial in­
stitutions in serving their fund-moving functions under today’s infla­
tionary pressures. A B A supports S. 2591 with minor modifications. In
addition, we recommend that serious attention be given to proposed
tax incentives to encourage savings and thereby discourage consump­
tion. Exemption from Federal taxation of the first $1,000 of interest
on individual savings and time accounts should be considered imme­
diately. A tax credit for investment in housing and other social pri­
ority needs also warrants immediate attention. Vigorous action is
needed at the state level to repeal or liberalize usury laws which
prevent funds from reaching their intended beneficiaries.
Trust departments should also be given greater latitude in offering
services that involve gathering investment funds from small savers.
CREDIT ALLOCATION

As inflationary pressures mount in financial markets, pricing regu­
lations and other institutional restraints distort flows of funds to key
areas such as housing. Such distortions would not be prevented by
compulsory allocation of credit resources o f regulated financial insti­
tutions. Positive market-oriented incentives—such as tax exemption
of interest on savings, and appropriate tax credits—are more effective
in channeling adequate funds from the total market, both regulated
and non-regulated, into savings and toward social priority loan areas.
If additional incentives are required, direct subsidies to high priority
user groups—e.g., housing subsidies to poor families—should be con­
sidered. These approaches make the social costs of favoring a given
area or group obvious and amenable to adjustment when needed.

Mr. J ames J. N e e d h a m

Chairman of the Board
New York Stock Exchange
My comments in this area relate solely to the securities industry
as a financial institution since this is the focal point of my expertise.
The importance of strengthening the securities industry is not simply
a parochial matter. It affects our future ability to raise huge sums
of new capital required to stimulate economic growth, to meet the
expectations of the American public for a rising standard of living,
lor full employment, for minimizing inflation, and to satisfy the social
287

objectives of the nation. Without a viable securities industry, there
is little hope of generating over $4y2 trillion in investment funds
required by U.S. industry and government to 1985.
A t present, the principal areas of concern to the New York Stock
Exchange are the well-publicized problems o f the securities industry
generally. These involve not only broad economic problems but also
the current unprofitability and uncertainty about the future role and
structure o f the industry. In more specific terms, there is a growing
concern about the impact on the industry and public investors from
negotiated commission rates and the changes which will be wrought
in the industry as the result of the so-called Central Market System.
The overall lack of industry profitability, uncertainty about the
future prospects of the securities industry, the bleak economic picture
generally, and the potential loss of revenues from the advent of negoti­
ated commission rates—could lead to a withdrawal of capital which
finances securities industry operations and, more clearly, the failure
to attract new capital in the industry. These prospects appear more
certain when one reviews the investment opportunities for investment
capital elsewhere outside the securities industry.
I do not wish to repeat here all of the specific legislative and regula­
tory recommendations we have made to preserve the vitality of the
capital raising process in this country. But I urge again that no
hasty steps be taken which threaten to frustrate the continued effective
operation of the securities industry.
The industry cannot operate without an adequate base of capital.
Since the beginning of this year, the industry^ total capital has al­
ready declined by $303 million. Profitable operations are the sine qua
noth for retaining capital. This requires a better economic climate as
well as a regulatory framework which recognizes the plight as well as
the significance of the securities industry in the country’s financial
network.
In this connection, we have advanced the attached legislative pro­
posal to permit the securities industry to establish a tax stabilization
reserve, This proposal recognizes that the securities industry is an
essential financial intermediary and is subject to extremely severe
cyclical fluctuations in earnings. The recommendation would merely
grant securities firms treatment similar to that now accorded other
financial institutions.
We also urge that steps be taken to relieve and minimize the re­
porting and regulatory burdens on the securities industry. In that
connection, we urge amendment of the Securities Act of 1934 to grant
equal authority to all regulatory authorities and exchanges so as to
relieve burdensome duplication. We also urge that the SEC be directed
to study disclosure requirements to ease the complexities and expenses
presently imposed on companies seeking to raise capital.
288

The securities industry is in crisis. Those who would perform
surgery in its present weakened state should pay close heed to the
importance of this sector of the financial industry in promoting es­
sential economic growth and in reducing overall inflation through
an adequate flow of investment funds.

289

Financial Institutions and Inflation
Conference Proceedings

fin an c i a l

institutions and

inflation

SECRETARY SIMON: Gentlemen, we are working
our way a little bit into Financial Institutions
and I n f l a t i o n .
We will see if we can’t get through
that in 20 minutes instead of 30, and maybe we'll
just borrow five from the next subject.
Charls Walker is going to lead off the
discussion.
MR. WALKER: M r S e c r e t a r y , if the five members
of the Hunt Commission are here I'm not sure why
I got this assignment.
SECRETARY SIMON:
Charlie.

We knew you'd be impartial,

MR. WALKER:
If financial institutions are
interpreted as referring primarily to privately
owned institutions such as commercial banks
savings banks, there is littie legislation that
can be enacted that would greatly or signficantly
reduce inflation because financial services simply
do not loom that large in the cost of living. But,
if inflation control is, as it should be considered
in the broader context of economical and efficient
service of consumer financial needs, then there is
legislation under Congressional consideration-the Financial Institutions Act-^which should be
enacted at the earliest possible date.
I refer
to the Nixon Administration's adaptions of the
recommendations of the Hunt Commission.
Although the issue is controversial, although
I've learned today much less controversial than it
was just a short time ago, a very strong case can
be made that the reforms proposed will increase the
competition among depository financial institutions,
raise the rates consumers earn on savings. The
legislation would eliminate the antiquated
Regulation Q which is now administered and means
the rich man gets 11 to 12 percent on his savings,
while the person with less than a hundred thousand
dollars to invest gets only about half that amount.
It would increase the convenience to the consumer
in using financial services and lower the cost of
his mortgage loan.
In addition, the legislation
would in, my judgment, decrease the wide swings and
interest rates on^and availability of^mortgage credit

293

over the business cycle.
And also in the long run,increase the total flow
of funds into housing. This last point is hotly
contested by some people, but I think they're wrong.
Since the proposals would broaden the lending and
investing powers of thrift institutions, they could
obtain more short-term assets which turn over quickly
as in commercial banks, as opposed to long-term
mortgages with locked-in yields. Therefore, they
could compete more effectively with commercial banks
and the open market in periods of high/short term
interest rates. Disintermediation, although not
eliminated, would be reduced. The long run
expansion in mortgage credit would result in the
faster deposit growth of the thrifts because the
deposit powers would be broadened, even including
something like checking accounts. These are
institutions which cut their teeth on mortgage
lending and are not about to turn their backs on it.
Somewhat less of the total asset pie might go to
mortgages.
But the faster growth in the pie itself
should easily offset the percentage reduction.
Seventy percent of something is a lot more than 90
percent of nothing, in other words.
In addition, the legislation would grant a tax
credit to all mortgage lenders, not just thrift
institutions, thereby attracting to mortgage lending
many smaller and medium-size commercial banks which
thus far have not gone far into the mortgage market.
The irony involved in the opposition to the
Hunt Commission proposals is that the reforms
would take place regardless of whether Federal
legislation along these lines is passed or not.
Competitive and technological developments are
inexorably moving the depository financial
institutions in that direction. The only question
is whether the facilitating legislation is enacted
piecemeal and over several years at the state level
or at one fell swoop at the Federal level.
I
think and hope it will be the latter and recent
reports from the Hill are encouraging.
If so,
the cost of living, except perhaps in the mortgage
rate area, is not likely to ratchet downward
greatly as a result, but the beneficial impact on
the financial consumer can be very great indeed.
I submit for the record a much longer state­
ment I wrote for Business Week a,year ago»
in which I said this is an idea whose time is
coming and I think maybe it's an idea whose time

294

has come.
T ied to that, two very quick points on the
proposed deduction or credit for savings accounts.

The two questions that were not discussed in
the very excellent points made by A1 and others
has to do with equitability of the proposal if it's
a tax deduction. Coming off the top line, it
means $700 to the 70 percent bracket taxpayer and
$140 to Archie Bunker.
If, on the other hand, you
make it a tax credit and take it off the bottom
line you have a real question of how much clout the
credit would have in attracting new savings--a very
important question.
The other point is the danger of straight-out
extrapolation of current events.
I f you grant the incentive, and once these get
in the law s, they’re awfully hard to get out.
If
the Treasury sticks to $10,000 note minimum, if it
is true that short rates are the most important
factor in this intermediation and if Walter
Wriston and his people and others are right about
b ill rate s coming down considerably more in the
months ahead, possibly in the years ahead, in
enacting the incentive do we risk pulling too much
into the thrifts and housing with even more
shortages for productive plant and equipment
spending?
Thank you very much.
SECRETARY SIMON:

Thank you.

Rusty Crawford from Bowery Saving Bank.
MR. CRAWFORD: Mr. Secretary, inflation is
indeed the Public Enemy Number One for the thrift
in s t it u t io n s , their depositors and their borrowers.
At savin gs banks and loans net deposit outflows
total 2.7 billion in the five month period ending
August, 1974, over two and a half percent of total
deposits outstanding. New home mortgage
commitments have virtually dried up. Housing
starts have fallen to the lowest levels in over
four years and further declines are imminent.
This morning Alan Greenspan in his opening
remarks referred to those institutions of our
society which were structured to operate in a non-

295

inflationary climate or in a low single-digit
inflationary climate and how ill-adapted they are to
operate in double-digit inflation. This is the
essential dilemma of the thrift institutions. We
are frankly unable to compete with the commercial
banks and the open market in periods of rapdily
rising interest rates. This is because our
assets are predominantly in home mortgages and
other long-term investments acquired earlier at low
fixed interest rates.
By contrast, earnings on commercial bank loans
are predominantly short-term or tied to short-term
open market yields and are therefore more
responsive to interest rate changes.
The inflation-caused problems of thrift
institutions would be materially reduced one, if
the increase in the Federal expenditures is curbed
and all necessary measures taken to balance the
budget or achieve a surplus, thereby permitting
a significant easing of short-term interest rates.
And two, if the asset and liability structure of
thrift institutions is modernized by enacting the
broadened powers in the Federal Savings Bank
charter authority provided in the pending Financial
Institution bill.
These economic policy and financial structuring
measures should be adopted without delay. But it
will take time for their full impact to be felt.
Therefore, I believe the following actions should
be taken as soon as possible.
One: provide a tax exemption or tax credit
for a portion of interest earned on savings
accounts.
I realize this is a controversial matter.
It has come up on a number of occasions today. It
will require very hard thinking by Congress and
some very difficult priority judgments.
We're convinced it would stimulate increased
savings and particularly it would expand the
supply of housing credit and probably at less cost
to the Federal Government than the emergency subsidy
programs.
Two: raise the deposit insurance to $50,000,
as provided in the House-passed bill which is now
pending in Conference in the Senate.
It's not
surprising in the present climate that we find
more and more people concerned with safety, as is

296

evidenced by their moving accounts, spreading
accounts around to be sure they are covered by the
present limits of Federal Deposit Insurance.

Thirdly, to raise, or perhaps now,
Mr. Secretary, to maintain the higher minimum
denom inations on Treasury and Federal Agency
o b lig a t io n s .
That recent Tressury offering of

$1,000 denominations resulted in very serious
d is lo c a t io n at our thrift institutions.

These proposed actions will help assure the
viability of thrift institutions. Over the long
pull they will enable the small saver to maximize
earnings on his savings and assure the avail­
ability of mortgage funds at lowest possible cost.
One caveat: None of the short-range remedies
I referred to are going to improve thrift
institutions’ earnings. And even enactment of the
Hunt Commission recommendations or the Federal
Institutions Act will only modestly improve
earnings unless and until a really effective
variable rate mortgage instrument is developed and
put into place. Until that day comes, thrift
institutions will continue to experience
competitive disadvantages in periods of rapidly
rising interest rates and will require some regula­
tion Q protection.
•It hasn't been referred to too much, but I
would like it to be understood,that it is not
Regulation Q that limits the return on thrift
institution savings accounts.
It is the earnings
of thrift institutions that sets those limits. As
long as we are the principal suppliers of credit
to the fixed interest long-term home mortgage
market, as is really ordained by public policy
today, there will be times in the business cycle
when our payout is not as attractive as the open
market.
But I would remind you that of other phases of
the cycle. W e ’re the best game in town.
Thank you very much.
SECRETARY SIMON.

Thank you.

Jim Needham.
MR. NEEDHAM:

Thank you, Mr. Secretary.

297

The exclusivity of Charlie’s definition of
a financial institution maybe leaves the securities
industry out of it. We are depository, but we
don't pay interest.
Mr. Secretary, there are some things that could
be done right away to reduce the cost of operation
within the securities industry. And reduction in
those costs would be an anti-inflationary step.
I think we could all agree upon that.
could be done very quickly, right now.

And it

On the Hill there is pending reform legisla­
tion and it should be a simple matter to insert
in that legislation a grant of authority to the
exchanges and to the NASD which would make them
equal in their regulatory scope.
If that were
done, it would then be possible for a member
firm or a registered broker-dealer, to state
it differently, to select the regulatory
organization they wish to subject itself to.
That would eliminate the duplicative form-filing
that goes on, the repeated examinations by
various regulatory authorities and would all be
vested in one place. And I'm certain that would
save the securities industry millions of dollars.
And to that end, Mr. Secretary, we have filed
for the record,the statutory language necessary in
order to accomplish that goal. And I urge the
Treasury Department to support us in its sincere
attempt to reduce thb. costs of operation within
the securities industry.
Secondly, Mr. Secretary,I would like to
recommend that the Securities and Exchange
Commission review its registration process to see
if there is not some way to reduce the cost of
filing.
Legal fees, accounting fees, printing
costs have all gone up, and it seems to me that
within the context of protecting investors, that it
ought to be a relatively simple task for the SEC
to review its current practices to determine if the
public interest in any way would be jeopardized by
lessening the requirements presently in effect.
Third, Mr. Secretary, I'd like to dust off the
Gasch Report.
The Gasch Report didn't receive much attention
in Washington while I was here, but I did support
it when I was a Commissioner of the SEC, and I
continue to support it. And it seems to me that

298

this has an anti-inflationary impact as well.
I’m also concerned, too, about another aspect
of the scope of regulation -- not only of the SEC
but at other regulatory bodies-wherein the judicial
functions performed by the Agency which prosecutes,
and prosecuted the alleged violators of its laws.

It seems-to. me it’s time to move out of the
regulatory agencies, the judicial function, and to
put it into a separate Federal Court system.
Lastly, and I won't dwell on this because
we do have a laundry list of taxing forms -- it's
absolutely clear to me and I am sure to everyone else
that there is an important interrelationship between
tax laws and the efficacy of whatever industry it is
that we’re talking about. And therefore,
Mr. Secretary, I respectfully urge you to give
serious considerations to- the tax proposals the
New York Stock Exchange has advanced.
Thank you.
SECRETARY SIMON:

Thank you.

Jim O'Leary.
MR. O ’LEARY.

No. 28.

Mr. Secretary, I may not be the best person
to make this point.
It might be Frank Hoenemeyer's
province but I have had, as many of you know, a
long experience with the Life Insurance business,
and I think it is a mistake to limit this
discussion just to the deposit institutions, and
we should be thinking about the problem of the life
insurance companies.
The life insurance companies of the country
have lent new money each year for the long term
capital markets of something like $17 billion.
Their gross cash flow in the long term markets is
something in the order, maybe, of $35 million.
I may be low on these figures.
They are a tremendous factor in the corporate
bond market; the commercial mortgage market; the
residential mortgage market--particularly in the
multi-family area.

There are almost insoluble problems of a dis­
intermediation nature for the life insurance
companies in a period in which interest rates are as
high as they are.
As everyone around this table recognizes--but
I think ought to be stressed--is the fact that most
of the life insurance cash value life insurance
outstanding carries a contractual interest rate of
5%--borrowing rate of 5%.
In the life insurance business today, there
are some ’’Life" companies that have upwards to 50%
of their policy reserves on ordinary life insurance
now in policy loans.
At this level of rates, the potential drain
from those institutions has made them very, very
gun shy about commiting money out into the loan
markets.
The effect on them alone really poses a very,
very serious problem for the viability of the long
term markets.
There are ways that this problem could be
dealt with. The life insurance companies, them­
selves, to some extent, have found ways to, in
effect, charge a higher policy loan rate and to
discourage borrowing against those policies.
I would urge at the national level, a study
of this.
One of the great difficulties is in the State
of New York, where there is a statutory interest
rate of 5% which sets the practice generally
throughout the country, because every company wants
to do business in New York and, unless they abide
by that 5% Statutory Ceiling, they cannot do
business in the State of New York. There is no
reason in the world why the Legislature there
in the State of New York, if it were realistic in
this situation, should not permit the life
companies, at least on their new business, to write
into those policies a policy loan rate that was
consistent with what the level of interest rates
is.
So that this is an area of national policy in
terms of the viability and the growth of long term
capital markets that I think is highly important

300

to ta k e a look at, in terms of the money involved
th e r e , it seems to me that it is a larger volume
of money than would be true in the case of so many
of th e deposit insititutions, and it is neglected in
th is s o r t of discussion.
Thank y o u .

SECRETARY SIMON:

Thank you.

Rex?
MR. REX MORTHLAND.

I simply would like to second what Rusty

Crawford had to say about the repressive effects
on the payment of interest on time deposits, of
the limitations on earnings.

These, typically,--he didn’t use the word-these come about through the use of usury ceilings.
We have wide diversities of them between
S ta te s .
They are established by the States, but in
a s i g n i f i c a n t number of States, the usury ceilings
r e a lly prevent the financial institutions--the
in t e r m e d ia r y - -who really is a merchant who buys
money and sells it. And they prevent the
f in a n c ia l intermediary from charging a high enough
rate t o the borrower to compensate the saver.

When we are concerned about housing, we are
concerned about any kind of borrowers, but in a
capital shortage economy, one that basically has
price bases, then we must be able to charge
enough to the borrower to help allocate the
resources as economically as possible.
I know that the Federal Government itself-at least, I believe the Federal Government doesn’t
want to go into the area of trying to set usury
rates every place. We do have a provision in one
of the Bills that has been passed in the Senate,
and is possibly coming up in Conference, which
would change one of the percentages in the
National Banking Law.
The point I am trying to make, though, is
that in order to help the small saver, the
financial intermediaries must be able to collect
from the borrower a higher rate of return and, by
numbers, I don’t have them in my mind, but the

301

number of savers far exceeds the number of borrowers
if we have a consumer orientation.
I discussed earlier this morning, briefly, the
philosophy that I thought was behind the recommenda­
tions in the Hunt Commission Report, which now
appears in the name of the Financial Institutions
Act. So I shall not repeat them now.
But I do repeat that the American Bankers
Association as a whole--I w o n ’t say we have
unanimity by any means, Mr. Secretary, but we have
a consensus and we keep forging a little better
consensus as it goes along--believes that the
Financial Institutions Act--the philosophy behind
it--is a move which will help us make the financial
markets more efficient. We do repeat, though, that
no set of financial institutions can operate
effectively in a system of as high interest rates,
and as wide fluctuation in interest fates and
inflation as we have had recently.
Thank you.
SECRETARY SIMON:

Thank you.

Mil Hayes.
Mr. Hayes.
I would like to emphasize again what Mr.
Crawford and Mr, Morthland said: The Independent
Bankers of America represent 7,000 banks in the
country, mostly in the agricultural area. They
are small savers that don’t get a chance to go in
and bid for Treasury Bills in large amounts, nor
for large C.D.’s .
So any savings aspect that can be proposed,
such as the tax proposal, would certainly bring
in more savings.
This area of the economy, by the way--I should
point out--is very profitable now in the communities
in which they operate. They have had fine years,
and the savings are good, and banks are sound; but
we can bring in more savings to these institutions.
The largest one in our group now, one bank alone,
is about a billion dollars; but most of the banks
are between $5 and $10 million.
So they are small
banks in agricultural areas.

302

All of the points raised by Mr. Crawford and

others about what can be done in those types of
institutions, we would like to emphasize.
Thank you.
SECRETARY SIMON; Thank you.
Bob?
MR. DEDERICK:

Said earlier, at the risk of

[being considered a heretic, I guess I would have to
[say now, at the risk of physical damage to myself,
because I have two ’’savings types” beside me, I

Ijust want to emphasize that we have to be awfully
careful here to distinguish between short term,
immediate problems, and those which are longer
term in nature, and when looked at from a longer
term point of view, may not be problems.
I think
in th is particular area, what we have to be awfully
careful to do is to avoid confusing the short term
needs of the Housing Industry with a longer term
and, therefore, to avoid doing something now--taking
steps now--which would have longer term implications.
Up until very recently, I was not aware of any
housing shortage.
Not so long ago we were talking
about an excess of housing.

Again, we have been in an extraordinarily
unusual environment, and we don’t want to put in
p o lic ie s which, once this environment is gone, we
'w ill , perhaps, regret having it with us.
Many of our problems today are the result of
our p u t t i n g i n measures for short term need, which
d isa p p e a r s, and yet the measures stay with us.
But
what I would emphasize is:
housing may not be a
p r io r it y need in the years ahead, a s it is right
now, and so what we do in the way of relief
¡measures a t this time should be of the sort which
are g e n u in e ly recognized as that, and which, there­
fore, a r e generally recognized as being subject to
removal once the immediate term problem is passed.
Thank y o u .

SECRETARY SIMON:

Thank you.

Mr. Hoenemeyer.
I'd just like to pick up on policy loans where
Jim O'Leary left off.

303

This is a very serious problem for the Life
Insurance Industry. Unfortunately, there is no
short term solution to this.
All of our policies--outstanding policies-do have fixed loan rates of 5% and, more recently,
6%; so anything that is done in this area today
would not have any impact for some time to come.
We are frustrated by trying to get the rate
on policy loans changed. Unfortunately,
legislators around the country--and these are subject
to^State regulation--feel that any increase in the
rates on policy loans is an additional charge
against the small man.
It's like raising usury rates
and, actually, just the opposite is true because
the small individual--the little individual -- is
not the one who borrows on his insurance policy.
It's the larger, more sophisticated individual who
takes advantage of these low guaranteed rates.
So we are very anxious--looking to the years
ahead--to get some change, but it isn't going to
be something that would have an immediate impact
on our flow of funds.
SECRETARY SIMON:
Just one more; then we have
to move to the next subject.
MR. HARPER:
I would just like to chat about
a problem of the Central City Banker.
We know very well that the well being
of our banks financial stability depends upon the
stability of our customers, and we have found that,
in the central cities
in this country, that we
have a disproportionate number of individuals
who are forced in and out of the labor market as the
cycle changes.
During a sharp decline--as the monetary policy
that we're pursuing n0w will bring a b o u t - -then a
greater number of people will be forced out of the
labor market.
I would like to submit to you this: That
these individuals are individuals, speaking of
public relations--these individuals are the
individuals who have faith in this country because
they go back into the labor market when times
become good.

304

During a long incline--and I can see this
during the late sixties--these individuals went out
and purchased homes; they went out and bought a car.
¡As a matter of fact, during the peak of the incline,
Isome unsophisticated bankers actually made auto
loans to some of these individuals, only to have to
reposses these autos later on.

Now, I would submit: why should these
in d iv id u a ls , speaking of equity--suffer the unusual
burden of this type of system.
I'd just like to lay
this on the table.
There's no way for me to leave
here today without saying it. I think these individuals
talk in g about tax inequality--Senator Long talking
about the oil industry being taxed, overburdened-these individuals are supporting our economy.
If
you d id n 't have people willing to go in and out-because there's a growing mass of people who won't
play the game any more; and that's the reason why we
see welfare roles rising.
People want stability,
and there is a mechanism for stability and net
income over time may be much better on welfare
than i t will be going in and out of the labor market,
supporting an economy. Today, no one has brought
this problem up, I think, except Mr.Kennedy, and he
only referred to it in the Labor Act.
I don't
know what that Act entails^
#ut I would probably
b e lie v e that it would not address itself to the
chronic problems that we have in cities.

Thank you.
SECRETARY SIMON:

Thank you.

305

K .

Wage - Price Policy
Discussion Papers from Delegates

Dr. George Leland Bach.
P rofessor

of Economics and Public Policy

Stanford University
Although special developments like the recent food and energy
crises may temporarily dominate price movements, the fundamental
cause of inflation in the U.S. (and most other major industrial na­
tions) is “excess income claims,” validated by expansionary monetary
and fiscal policies. Workers, businessmen, farmers, the elderly, na­
tional defense proponents, all of us together, have come to demand,
almost as if it were a divine right, a rising total of wages, profits,
prices, social security benefits, national defense, education, you name
Sit, that substantially exceeds the output of the economy at stable
prices. In the old days, these higher wages, priees, etc. would have
priced products and labor out of the market before long, with unem­
ployment and recession halting the inflationary pressures. But no
longer. Today, the Federal Reserve, W hite House and Congress, given
the nation’s high priority on avoiding unemployment, generally in­
crease government spending and the money stock to avoid substantial
unemployment albeit at the cost of validating the inflationary cost
and price increases. Then the wage-price spiral is set for another round
up, from the new higher plateau of prices and money incomes as
everyone tries again to increase his real income faster, with little fear
that inadequate final demand will punish him.
Any economist can tell you one sure-fire way to stop this cost-push
demand-pull inflation spiral. Cut the growth o f the money stock to
zero, shift the federal budget to a large surplus, and the growth in
spending and prices will grind to a halt within a few months—but
at a terribly high cost in unemployment and probably financial panic.
What we need now, above all, is some way to slow the growth of excess
income claims (wages, prices, and government benefits) so monetarynseal policy can hold the growth in total spending to a reasonably
noninflationary rate without generating unacceptable unemployment.
Concretely, what we need is strong Presidential leadership in estab­
lishing openly with business, labor, agriculture, the general public and
jCongress a realistic, moderate set of guideposts for wages and prices,
r° be backed up by an announced, moderately restrictive monetaryfiscal policy. Such guideposts need not involve absolute sacrifices by

309

any or all. I f we could thus get the economy growing fairly stably
again, groups and individuals in the nation would only have to hold
their claims for income increases to about % percent annually on
the average, assuming that to be roughly the long-run growth rate in
real output. To illustrate, if our short-run goal is, say, to slow infla­
tion to 5-6% next year, labor would need to agree to a wage guidepost
of 8% or so, while product prices could rise no more than 5% or so.
(The old early-1960s “guideposts”, with the substantial flexibility
they had, suggest the appropriate general type of relationships.) The
Federal Keserve would need to cooperate with a monetary policy lead­
ing to a growth in money GrNP of about 8/io% per year. In 1976, if
all goes well, the amount of inflation could be further reduced, with
slower nominal income rises while real incomes continued to rise in
proportion to real output.
The nation is ready for a strong program against inflation. But the
President faces a major job of economic education. We must learn that
we cannot have more than the economy produces ; widespread attempts
to “catch up” or “get ahead” through escalated wage and price increases
or government programs will simply lead to accelerated inflation, not
to larger real incomes. The greatest contribution these “summit” meet­
ings can make is to drive this fact home to the American people—to
us—and to provide a foundation for a temporary national “incomes
policy” to work with monetary-fiscal policy in slowing the debilitating
inflation. Perhaps development of guideposts should include some offthe-record hard bargaining sessions among business, labor, and a few
government leaders—under real pressure from the American people
and their leaders in Washington. What is needed is a relatively simple,
well-understood policy; sporadic, ad hoc jawboning will accomplish|
little, generate major inefficiencies and inequities, and prove economic­
ally and politically divisive. The only real anti-inflation alternative is
to ask monetary-fiscal policy to do the job alone, with enormously
costly recession ; or to move to mandatory direct controls, with their
equally great economic inefficiencies and socio-political disruptions.
It is stylish to say that history has shown that incomes p o lic ie s dont
work. This is wrong. They have worked, both here andin E urope, for
crucial periods when there was no substantial excess aggregate demand,
as there is not in America today. They will not work when there is
large excess demand, which is the reason they must be integrated with
moderating monetary-fiscal policy to slow the inflation down.
This argument does not, of course, imply that other measures, espe­
cially to increase productivity and supply generally may not also be
important.
310

Mr. B ruce K. M acL aury
P resid en t

Federal Reserve Bank of
Minneapolis
The Council on Wage and Price Stability should have the power
to subpoena records and the authority to delay wage settlements and
price increases for ninety days in those major industries where compe­
tition appears to be of insignificant dimensions. The agency may have
to establish guidelines for wages and profit margins to equitably ad­

minister such a program.

Mr. Charls E. W alker
P resid en t

Charls E. Walker Associates
Although there is a time and place for direct wage/price controls,
the U.S. economy in 1974—75 affords neither the place nor the time.
Arguments made for controls include: (1) Other policies are not
working or are likely to work much more slowly than the public will
tolerate; (2) a majority of the people appears to favor their reimposi­
tion; (3) controls can “buy time” for restrictive fiscal and monetary
policies to do their work; and (4:) excessive “market power” of business
and/or labor can only be controlled through direct Government inter­
vention.
Arguments against direct controls include: (1) They are effective
only under very special conditions—conditions which do not now pre­
vail in the U .S .; (2) they are inequitable, distort resource allocation
in the short run, and impede production in the long run; (3) they
deal with the symptoms rather than the causes of inflation; and (4)
both business and labor are opposed to reimposition of controls, so
that the probability of legislative authorization is slight.
Any attempt to re-institute direct wage/price controls now would
be a bad mistake. False hopes would be raised. Uneconomic actions
would be fostered. Long-run supplies would be reduced. And, most
important, early reiteration to the public (following the misguided
attempt to freeze prices in mid-1973) that there is no Magic Wand in
the fight against inflation would further impair national economic
morale a morale that must be strong if inflation is in fact to be
brought to heel.
Inasmuch as the political cards are at least temporarily stacked
against resumption of direct wage/price controls, the discussion above
waybeacademic. But in fact it provides background for comments on
a specific question posed to the Financial Conference on Inflation,
311
558-812 0 - 74 - 21

namely, “How should the wage-price monitoring system be operated?”
The short answer to this question is “Very carefully.” The Council on
Wage and Price Stability authorized by Congress in late August (see
P.L. 93-387) may, if cautiously and wisely operated, lead the nation
toward a “social compact for wage-price stability” among Big Busi­
ness, B ig Labor and B ig Government. But to rush out in that direction
with early adoption of guidelines, while the economy and its consti­
tuent parts (particularly labor) is still adjusting to and catching up
with recent double-digit inflation, could be highly counter-productive,
perhaps hastening a return to direct controls.
Can the Council do more than “not do harm” ? Yes, provided the
President and the Council are willing to emphasize the two Congres­
sional directives dealing with fostering productivity and identifying
inflation-generating laws and actions of the government. As to pro­
ductivity, both tax policies and labor-management relations are obvi­
ously of great importance. In addition, serious consideration should be
given to shifting the functions of the National Commission on Pro­
ductivity, whose accomplishments have fallen far short of expectations
since its establishment in mid-1970, to the Council on Wage and Price
Stability.
As to ameliorating the inflation-inducing actions of the government,
President Nixon initiated a review of this problem through his Council
of Economic Advisers last summer. In addition, former CEA member
Hendrik Houthakker of Harvard stated in the Economists’ Summit
that he had constructed a list of some 45 areas that deserve attention.
Hence the Council on Wage and Price Stability might play its most
significant role in building on these studies toward legislative and
Executive Department action. Stated differently, to the Federal Gov­
ernment and its new agency, the Council on Wage and Price Stability,
the best advice might be, “Physician, heal thyself” !

312

IX.
Wage - Price Policy
Conference Proceedings

WAGE -PRICE POLICY TO DEAL WITH INFLATION
SECRETARY SIMON: We'll move now to the WagePrice Policy to Deal with Inflation.
Dr. Arthur Okun of Brookings Institute.
DR. OKUN:

Thank you, Mr. Secretary.

Lee Bach and Jim O'Leary have both made, to

some degree, effectively, the case for doing
something on the income p olicy front.
Consequently, I'd like to spend some time,
really, just posing the problem of wages and
prices as I see it for 1975.
It is really terribly hard to make a
substantial dent in inflation for 1975 with current
policies, because of the prospect of a pricewage price spiral and, specifically, because of the
effort of American workers, unionized and nonunionized, to make up for their loss in real income
that they have experienced in the past year by the
only means available to them acting separately -namely, by trying to get a more rapid increase in
money wages from their employer.
In the past year, the take-home real value of
an hour's worth or work on the average in the
American economy, is down 3% for the American
worker.
Normally, it is up about 3% a year.
The major problem in redressing this balance is
that Labor's losses are not in the pockets of the
typical American employer of Labor, he doesn't have
it to give to them.
The loss reflects the major increase in food
and fuel prices that have tremendously increased
l| n°t through their own fault or virtue -- the
incomes of farmers and of producers at home and
abroad.

315

Hence, any increase in wages at a more rapid
rate, must be passed through by most employers into
more rapid increases in prices.
Recognizing this pressure, the typical forecast
of professional economists these days, calls for an
acceleration of wages to about 101 or more during
1975, compared with the 7% rate that they were run­
ning during '73 and early *74.
Purely as a result of that, inflation is
expected to stay close to the double digit level,
showing very little relief even in an economy with
very weak demand for labor and for goods.
There are really three ways, I think, that
we try to deal with this problem to adopt the strate­
gy for income inflation.
It seems to me, in a sense, one can reinterpret
old time religion -- very strong doses of monetary
fiscal restraint, as a way of offsetting income
inflation with deflation that comes from excess
supply of machine and man.
It means you have to push the economy down far
enough to create enough idle labor and enough idle
capital to hold down prices and wages enough to
offset the upward push coming from income inflation.
Now, every economist, who studies from past
experience, will tell you that can work ultimately,
but only ait an extremely high cost. And it is an
arithmetic game that I don't want to get into, where­
by one can calculate that it may cost $250 billion
of lost real income over three years, or $500 billion
over eight years, if people do what comes naturally,
and if the only tool used by Government is fiscal
and monetary restraint to hold down the economy.
Some of the optimists on old time religion
that I know seem to believe that if the Government
makes it clear that it will not ratify inflation
this time, business and labor will not do what comes
naturally; that they can change attitudes, that
they can show more restraint spontaneously.
I must say I don't understand what the mechanism
is by which any group of workers or any individual

316

b u sin e ssm a n is expected to translate this ultimatum
from i t s Government into its own behavior.
It has

to act to protect itself.
It seems to me it is against the background
of this huge problem of income inflation that one
comes to propose some direct efforts to deal with
:it specifically.
One thing that does is:
It puts -- it underlines
the importance of having good price behavior in food
|and fuel.
Another thing it does is emphasize that excise
taxes are inflationary. They make incomes inflation
work, where there are excise taxes on any product
that the consumer buys.
I think in light of that, one of the things
that we may have to compromise in the battle against
inflation is the desire to get a more rational use of
our energy resources through the price system.
Beyond that, and obviously most significantly,
is the question of whether you can change the wage
and price decisions by some direct measures. And
the basic element in that is essentially the incomes
[policy -- the social compact the acceptance, basical­
ly by Labor, of some self-restraint on money-wage
increases during the coming year.
There is a real paradox in that because it asks
[the party that has been injured significantly in
the past year, not to strike back not to try to
catch up, to recognize that it really cannot win
[that kind of a battle; and it is in those terms that
iit does seem to me that the good will of the Govern­
ment, in trying to negotiate restraint from business
and, particularly, from labor, is best displayed by
being willing to offer some kind of extra assurance
or extra benefits that will help to insure that
restraint on wages will lead to an actual resumption
¡of gains in real wages and, if that takes a tax
[reduction, or subsidy, or some promise of an
[ultimate tax reduction, I think it could well be
worth the investment in the effort to negotiate that
arrangement.

317

Thank you.
SECRETARY SIMON:

Thank you.

Mr. John Tomayko of the United Steel Workers.
MR. TOMAYKO: Mr. Secretary, I have a few
remarks that I have been asked to prepare.
I want to say, first, that since I was told to
keep them very brief, I did't go into as much de­
tail as, perhaps, we should have on this very impor­
tant subject. But I want to assure the group that
I appreciate very much the remarks that Dr. Okun
has made, particularly on the need for catch-up.
Before I say anything further, my new acquanintance
over here, Mr. Leach, said that the quickest way
that you can get price increases is by threatening
price control. And he further said that the quickest
way you can get wage increases is by threatening
wage control.
Well, I just don't understand the last part.
We don't give ourselves increases in wages and we
generally have a term in basic industries that is
about three years. You have to wait for a long
time to come up at bat; and that's why it was so
important for Arthur to mention the catch-up,
and I'm talking about organized workers and wage
earners, Mr. Leach.
It seems
increase -- I
employees can
wage control,

to me that
doubt very
rush in to
and I want

merely a threat of wage
much if any of your
you and say, "I want that
that wage increase."

"I don't think your employees are organized".
Any you say, "You will like hell", and if they were
organized, you'd tell them when the agreement
terminates and when there's an opportunity to discuss
it -- but I don't want to become argumentative.
I do want to say this:
That I have been with the Steel Workers Union
for 38 years, and I am not an economist by any
stretch of the imagination, and my principal function
has been to negotiate collective bargaining agree­
ments in the fringe benefit areas. And there are
many who think that that is not particularly in­
flationary.

318

I first became acquainted with the subject
of Wage Stabilization under programs that were
developed during the Roosevelt Administration and,
more recently, when I served on the Health Services
Industry Committee under President Nixon's Phase II.
Now, President Ford held a conference with
the leaders of labor last week.
I am not an
elected leader of labor.
I'm a labor technician,
employed by the Steel Workers Union.
Now. President Meany stated Labor's position,
and he stated it quite eloquently, and it would be
presumptuous for me to take any other position; but
I should briefly highlight what I understand is
his stated position.
Organized labor is deeply interested in
halting the present inflationary spiral. We took
President Nixon very seriously in 1971, and joined
in what we thought would be a cooperative effort
to get equality of sacrifice, only to discover in
a few short months that certain sections of the
national economy were more equal than others.
Oh, yes§ Wages were controlled.
The American
people were gouged at the supermarket and squeezed
into pay checks -- as Mr. Meany has said.
Many prices were not frozen at all. Exempted
from any freeze were interest rates, price of land,
capital gains, dividends, and, also, profits were
free to rise without any pretense of control.
In fact, during this period of wage control,
Business was given tax bonanzas and during
President Nixon's Phase One through Phase Four the
rate of inflation more than doubled.
Now, no amount of rhetoric can hide the fact
that there was no fairness, no equity or no justice
in the controlled programs that were developed in
the 1971-1974 period.
Labor, therefore, is opposed to any repetition
of such a control program in any form or any guise.
And in conclusion, speaking as an individual deeply
concerned with the welfare of this great country, I
am convinced that organized Labor looks with hope to
President Ford's war on inflation.

As in the past when, when he determines that
extraordinary stabilization measures must be taken
Labor will cooperate fully as long as there will be
equitable restrains on every phase of the economy,
including prices, profits, dividends, rents, interests
rates, interest rates, and executive compensation as ’
well as worker wages.
Now, I spoke with President Able just yesterday
before I come down here and he is happy that I have
been given the opportunity to participate, to
listen, to find out what you people have to say about
the problems of inflation and he wants you to know
that our Union looks optimistically towards Presi­
dent Ford's Economic Summit Conference.
We would like for him to give the nation a
breath of fresh air in order that we may restore the
necessary health and vitality of this great nation.
SECRETARY SIMON:

Thank you very much, John.

Let me see if there are any people here that
haven't made any comments today.
I am trying to get
everybody.
SPEAKER UNIDENTIFIED: Mr. Secretary,
I submit that there is a fourth wage price policy
that is capable of making major headway in controll­
ing inflation that Mr. Okun did not mention in his
i
summary and this particular policy is one that does
lie within the control and power of Labor under
existing law, namely, a different kind of social
contract or compact than that being talked about
in Europe, than that being now somewhat talked about jj
here as evidenced by this conference; a social
contract between employer and employees that in re­
turn for financing a portion of the growth of the
corporation in such manner as to use the logic of
corporate finance which is to invest in things
that will pay for themselves, to build ownership into
the worker, for the worker in turn to flatten out his
wage demands.
This means simultaneously building an eventual
second source of income into him.
It means building
economic security into him and it means simultaneously
solving the economic growth problem of the economy.

320

This is a collectively bargainable subject
today under existing law. Nothing new is needed
|to do that so that it lies within Labor’s power.
I am frankly appalled that Labor Union leader­
ship confines itself to jurisdiction over only one
of the two factors of production and that is one that
is growing weaker rather than stronger. Technology
has the effect of pushing the burden of production
off the worker onto the machine.
It’s time for the Union to wake up and repre­
sent the worker, the Union leadership to represent
the worker not only with respect to his job, but
with respect to the capital ownership which he must
have if he is going to be self-sufficient, selfsustaining and maintain an adequate income without
inflationary impact.
SECRETARY SIMON:

George Schultz.

MR. SHULTZ: For a long time -- it seems to me
[that Dr. Okun and Mr. - - I think I will call you
["Doctor Tomayko" promote you to the ranks of the
economists. I thought your statement was very much
to the point and Dr. Okun's statement, you have
pinpointed the problem for us very well.
I would like to assume their statement of the
problem and say a few words about this social con­
tract idea and try to be constructive about it,
because I’ve thought about it a lot and I've tried
to work one out once, and I think on the whole in
early 1973 had all the makings in a broad, loose
sense, a social contract and essentially it got
broken up by things that took place outside of it,
so to speak, mainly what took place in the prices
of international traded commodities and a lot of
associated events.
So I think there are some things that can be
done through the social contract route but I also
[think there are some distinct limitations on things
that can't be done.
The statement has been made about the British
[situation, I will say a statement has been made so I
won t attribute it to myself; that the social contract

321

that is, the agreement between the Trade Union
Congress and the Labor Party will well cut your
taxes if you show restraint on wages.
That social contract is not worth the paper its
not written on. And I think that’s probably right
and some sort of explicit effort to negotiate
something like that here, I think would be subject
to the same comment because I don't know who would
speak to the Congress.
It is very gratifying that
two members have stuck with us all day and are listen­
ing to whatever one has to say and I think that we
owe them a real vote of thanks for doing that.
But nobody spoke for the Congress and a tax bill
is a pretty wild thing when it gets going. You just
don’t know what is going to come out of it
for American Labor? I guess George Meany comes as
close as anybody does, but then there's the AFL-CIO
for the miners, truck drivers, automobile workers, to
name three.
And besides that, I think the steelworker, when
it comes to bargaining, you figure you are doing that,
So there is that dispersion plus the fact that roughly
a little better than a fifth of the Labor force is in
Unions or a little better than the non-agriculture
Labor force, so there are a lot of people who wouldn't
be a part of that social contract and you don't know
who is speaking for somebody.
So I think there are -limitations to sort of
being very explicit about that idea. On the other
hand, it seems to me that if a comprehensive economic
program can somehow emerge, that people think is
reasonable, fair, and the people working at it are
fair and there has been a chance for a genuine input
and that as things go along, there will be further
opportunities for input and if things don't go as
planned, there will be a readiness to change and to
appraise in a reasonably realistic way, then it
seems to me you have a basis for people doing what
they think is best for themselves, nevertheless
having a greater sense of common interest than they
would have if they didn't have the same kind of
feeling about what was happening to national policy.
So I think as it's developing, these meetings
that are being held have all the different g r o u p s
that have something to say on the economy, are by way,

322

very good step in the direction of this sort of
broad sense of social contract, and I think it is

quite a welcome thing that not only is the Executive
Branch represented, at least the two that I have been
at but the legislative branch has also been present,
an<i I think that this is something to be worked at
very hard in this light.
But without trying to pin people down to some
notion that, all right, if we pass this tax bill,
will you settle for a six percent wage increase or
eight percent or some other wage increase? I just
don't think the world works that way, but I do think
it does respond to a real sense of the general
interest if it can be put out there and put out there
with enough confidence that perhaps can be sustained
for a little while and all of us can thereby reap
the benefits of it.
SECRETARY SIMON:

Thank you.

323

Other Suggestions to Fight Inflation
Discussion Papers from Delegates

G.

Mr. E d w in

A

lexander

P residen t

First S&L Shares, Inc.
A balanced budget must be the cornerstone in the nation’s fight
against runaw ay inflation. To do this, we need a reduction in Federal
spending by $10 to $15 billion. In addition, we urge that the 7 percent
investment credit be extended only to those industries where supply
shortages exist. The taxpayer should not have to subsize investment
in industries where supply is adequate to handle demand. W e further
believe the wage-price monitoring mechanism should be extended to the
tax area— so that demand can be watched and so that tax increases
can be im plem ented quickly if necessary.

While we fight the battle against inflation through stronger fiscal
that monetary policy need not bear the brunt alone, incentives
for individual savings through the tax area should be implemented.
For instance, we urge a deduction for up to $1,000 in interest earned
from savings accounts—so that the average saver will not have his
savings shriveled away by a shrinking dollar. A t the same time we
recommend a new type of savings certificate, where part of the interest
can be deferred as to payment and taxation until maturity.
We believe that the Treasury Department should immediately make
deposits o f tax and loan accounts in thrift institutions in the same
manner as is now done, exclusively, with commercial banks. This, like
the tax incentive, will result in increased money for the now-depressed
housing market.
The asset-liability structure of our financial institutions is far too
rigid and inflexible to cope with today’s shifting worldwide demands
for capital allocation. Financial institutions will be strengthened if
the earnings on assets are made to vary with the cost of capital. To
help achieve this, we strongly urge the implementation on a national
basis of variable rate mortgage loan program. The unsettled times
demand this—and i f implemented it would insure a reasonable flow of
mortgage money at all times.
Additionally, we urge enactment of the Financial Institutions Act
of1973 with the exception that we believe no elimination of rate control
authority should be effected at this time. Also, we believe the section
of this legislation that calls for a tax credit for housing investment
policy so

327

558-812 0

-

74

-

22

should be tabled pending completion of a number of important studies
on the taxation of financial institutions.
Lastly we recommend that legislation be enacted providing anex­
emption from State usury limits for all federally related mortgage
loans. There is no question but that in many states these archaic rules
are simply preventing families from securing the funds they needto
purchase the housing of their choice. These laws, which were enacted
to help families, are in fact hurting them.
Families that want to purchase housing, should not have to bear the
brunt of economic policies that have failed. W hile we all recognize that
we must take difficult steps in order to cure the inflation cancer in our
economy, we must also provide the wherewithal to insure that the basic
needs o f our people are met. One such basic need is, of course, housing.
To meet this dual objective, the recommendations of the National
Savings and Loan League are aimed at two fronts: To insure the
economy functions in the future on an even keel by balancing monetary
and fiscal policies; and to develop short- and long-range answers to
the particular problems facing the housing and home financing
markets.
D r . R obert R a y D o c k so n

President
California Federal Savings and Loan Association
Regardless of the numerous arguments presented at these Confer­
ences called by President Ford, the fundamental truth is that we have
reached a point where we must now correct the excesses resulting from
the fiscal policies of the past. The large military outlays of the last
decade, along with the more than $80 billion of Federal deficits, has
pumped more dollars into our system than the value of the consumer
goods and services produced. As a consequence, it is now imperative
that Federal spending be curtailed and a sizeable budget surplus be
planned. Both Congress and the Administration must prove to the
American people that they recognize the need for a budget surplus
by reducing Federal expenditures below the $300 billion level. This
can be done if specific programs are eliminated and others significantly
reduced. The will to do it must be found in the hearts of our Repre­
sentatives.
A fter a sensible fiscal policy is implemented and there is evidence
that the back of the inflationary spiral has been broken, the current
highly restrictive monetary policy should be relaxed. Such relaxation
should stimulate investments and thus increase our productive capacity
so that the supply side can be increased at the same time demand is
being depressed.
In addition to the need for a more conservative fiscal policy, coupled
with a less aggressive monetary policy, there is an overrriding need

328

to increase the rates of savings and capital formation. The demand for
capital is astronomical and there is no way to meet this demand without
pursuing policies that result in a higher aggregate level of savings.
While it is important that a nation-wide publicity campaign be mobil­
ized to encourage people to save and to reduce their expenditures, the
Government’s taxing powers also should be employed to encourage
a higher savings rate. A tax incentive in the form of a tax exemption
for interest income derived from savings placed with financial insti­
tutions would offer a most effective instrument to increase the size of
the savings pool while simultaneously reducing consumption.
Specifically, it is recommended that the first $1,500 of income earned
on savings accounts in either commercial banks or thrift institutions
be exempt from the Federal income tax. Such an exemption would
benefit greatly the small saver as opposed to the institutional investor
and, at the sam e time, would stimulate housing—the industry that has
taken the brunt of the current tight monetary policy. Although the
Treasury w ould have to estimate the exact cost of this kind of program,
rough estimates indicate the cost would be less than $3 billion a year,
far below the cost of the various subsidy programs being discussed.

incentive along the lines recommended would have other
effects. It would tend to reduce immediately the “disinter­
mediation” taking place with financial institutions and it would return
a viability to their financial structure. These savings would be used
primarily for home loans and new residential construction and thus
employment in the construction industry would pick up and the
Federal tax base would be expanded, offsetting the actual loss of
revenue r e s u lt in g from the exemption. A tax exempt program of the
nature o f t h a t described would reaffirm our Government’s recog­
nition o f the important role of the American home.

! A tax

ancillary

Mr. Milton J. H ates
Chairnum

Government Fiscal Policy Committee, Independent Bankers Asso­
ciation of America

It is probably too simplistic and too self-evident to propose that a
soundunit of currency will go a long way toward combating inflation.
Thecounter-point could be made that even nations with a sound cur­
rencybacked by gold are today also experiencing inflation and this
is true, especially in the case of Switzerland. However, monetary and
fiscal responsibility may not be enough to control an inflation if the
other policies of a nation tend to undermine the strength o f the cur­
rencyand have the citizens question the value of their money.
History is replete with examples of Nations who have declined be­
cause the currency was debased and the savings of the people seriously
eroded or destroyed. The United States must now face this question
329

squarely and take steps to reverse the process of undermining the cur­
rency that has been going on for too many years.
The first and foremost move must be in the area of the budget. Im­
mediate action should be instituted to abandon the full employment
budget and adopt ia 'budget based on actual income and expenditures.
Then the budget must be brought into balance at once and kept in
balance for the indefinite future. A ll the protestations about the im­
possibility of achieving this very necessary objective must be dismissed
and all the pressure groups must be made to understand the absolute
necessity of this action for the protection of the peoples’ savings.
We must then take steps to bring the dollar back into the discipline
of a gold backing. I propose this be done by the following actions:
1. Raise the official price of gold to $75.00 per oz.
2. Issue the additional Gold Certificates representing the difference
between the present $42.22 official price and the new figure of $75.00
per oz. However, these Certificates are to be “frozen” as a backing to
the currency and not used by the U.S. Treasury to pay current bills
and thus increase the money supply as was done in the two previous
increases in the price of gold. This is a vital step and must be part of
the legislation authorizing the new official price of $75.00 an oz.
Studies must then go forward to have a statutory gold backing to
the currency—this should eventually serve to prevent the irresponsible
actions by many segments of our society in demanding special heavy
spending programs for a small percentage of the population. History
shows that unless there is a forced discipline in the matter of main­
taining a sound currency the nature of man is such that debasement
is an easy course to follow until the financial structure of a Nation
collapses.
I f these steps are taken we will find that confidence in the dollar
will be restored, that the people will trust the value of their money,
that natural forces will cause a decline in many basic commodities
from their present speculative heights, and the rate of inflation will
be substantially reduced. Time is of the essence in moving forward
on this program.
M. R. H ellie

President.
Credit Union National Association, Inc.
Selected Data for JU L Y 1974
Loans outstanding at credit unions increased $365 million in July;
seasonally adjusted, considerably more than the increase in the pre­
ceding month and more than twice the January-June average. During
the last 3 months, loans were increasing at an annual rate of 15.5
percent, compared with 12.9 percent for the last 12 months.

330

[Dollar amounts in millions]
Seasonally adjusted

Item

Unadjusted

Increase or decrease (—) from:

Outstanding this
Prev.
monthend
monthend

3monthsagoat annualrate
amount
Percent

Outstanding this
monthend

Increase or decrease (—) from:

Prev.

Year ago
amount
Percent

Total assets/liabilities and capital__ ..

$30,628

$198

$3, 680

13. 0

$30,612

$-185

$3, 535

13. 1

Federal_________ _______
State_________________ _

15, 651
14,977

101
97

2, 004
1, 676

13. 9
12. 0

15, 635
14, 977

-148
-37

1, 931
1, 604

14. 1
12. 0

Loans outstanding____________

23, 016

365

3, 352

15. 5

23, 166

366

2, 648

12. 9

Federal.__ _____ ____ ___
State______ ____ _____ _

11,649
11,367

191
174

1, 836
1, 516

16. 8
14. 2

11, 731
11, 435

158
208

1, 379
1, 269

13. 3
12. 5

____ _ __
Savings__ _____
Federal (shares) _____
__
State (share plus deposits)..

26,610
13, 692
12,918

78
40
38

3, 160
1, 820
1, 340

12. 8
14. 5
11. 1

26, 650
13, 719
12, 931

-162
-97
-65

2, 889
1, 563
1, 326

12. 2
12. 9
11. 4

N o t e —Monthly figures, except where otherwise indicated, are preliminary estimates based on reports furnished by a group of Federal and State-chartered credit unions that account
for about 30 percent of credit union assets. Estimates are revised annually, m ainly to incorporate recent benchmark data.

CO
CO

Credit union savings, on the other hand, increased only $78 million
in July, on a seasonally adjusted basis. This increase was substantially
less than the previous month’s gain and more than 75 percent smaller
than the January-June average. On the basis of expansion during the
last 3 months, savings were increasing at an annual rate of 12.8 per­
cent, slightly faster than for the year ended July 31,1974.
Loan-to-share ratios increased during the month while liquid asset
ratios declined.
Credit union assets total $30.6 billion as of July 31,1974.
C redit U nions S elected D ata
Item

T h is m o n th

L a s t m o n th

Year ago

Number of operating credit unions 1--------- -

23, 028

23, 029

Federal------- ----------------------------Charters issued— -------------------Entered liquidation 2----------------State______________________ ____

12, 842
25
17
10, 186

12, 834
37
14
10, 195

Number of members (thousands)--------------

28, 700

28, 528

Federal credit unions---------------------State credit unions________________
Average savings per member------------------Federal credit unions (shares)-----------State credit unions (shares plus deposits) _
Delinquency rate:3
Federal credit unions:
Number of loans---------------------Amount of loans---------------------Repayments ratio: 4
Federal credit unions---------------------State credit unions-----------------------Loan-to-share ratio:
Federal credit unions with assets of:
$2,000,000 or more----------------$500,000 to $1,999,999__________
Less than $500,000------------------Liquid asset ratio: 5
Federal credit unions with assets of:
$2,000,000 or more____________
$500,000 to $1,999,999_________
Less than $500,000---- -------------

15, 191
13, 509
$929
903
957

15, 100
13, 428
$940
915
968

2. 9
1. 8

2. 8
1. 8

2.6

9. 6
7. 4

8. 0
6. 7

9.9

83. 8
89. 5
93. 2

81. 9
88. 2
92. 3

82.9

43. 2
55. 3
56. 1

44. 7
57. 9
60. 6

47.0

23, 020
12, 716
28
29
10, 304
26, 839
14,153
12,687
$885
859
915

1.6

7.3

89.2
94 5

62.7
77.7

i D ata for Federal credit unions based on complete reporting.

R ^ a y m en t^ ^ co rren tm o n tli *as a percentage of outstanding loans at endof preceding montb as reported
by m onthly respondents.
H
.
,.
«hares and loans to
s Represents the sum of U .S. Government securities, savings and loan association shares,
other credit unions as a percentage of notes payable and share accounts larger tnan $i>,uw.
N ote .—R atios and averages based on data not adjusted for seasonal variation.

332

I Ms.Sylvia P orter

Syndicated Financial Columnist

Since I am attending this Pre-Summit Conference in the role of
I representative of the consumer, it is in this role that I submit the
following “other suggestion for controlling inflation.”

/
In the anti-inflation fight to date, the consumer has been lectured,
exhorted, patronized—but not enlisted. Yet, it is the consumer who is
being squeezed by tight and horrendously expensive credit, trapped
by soaring prices, battered by crashes in the securities markets.

I believe this is an extraordinary oversight. I also believe that con­
as eager to help combat inflation as we were eager in
World War II to help combat Nazism. The consumer wants to be a
participant i n this battle, not just a pawn. There is an unspoken cry
of “WHAT CAN I DO T” in the hearts of millions of Americans that
I the P re sid e n t can and should answer.
(1) Work should begin at once on preparations for the President’s
call for cooperation at the consumer level—voluntary but very def­
initely, cooperation. There need be no “stick,” such as rationing. And
the“carrot” is implicit in the fact that the consumer is doing some­
thingpositive to help ease his or her own squeeze.
(2) Representatives of the widest range of groups of consumers
should be called to meetings in Washington to be informed of the
plansandhopes, to be asked for policy suggestions and practical ways
theprogramshould be carried out. A ll consumer groups, all national
organizations of men and women, all types of educational, religious,
civic, etc., organizations should be included. The groups may be broken
downsoeach is small enough to be productive. I have seen this sort of
callforactionwork magnificently under far less urgent circumstances.
Itcouldhave an electrifying effect.
(3) The help of professionals in the fields of public relations, ad­
vertising and the like should be enlisted. They would leap to the
opportunity.
(4) The program should be identified with the W hite House, to give
itstature and insure its duration. (Perhaps, it might be placed under
thecontinuing supervision of Virginia H. Knauer, Special Assistant
tothePresident for Consumer Affairs.) But this program is to be im­
plemented at the regional and local—not national level. This is a key
aspectof it.
(5) After the details have been carefully worked out, the President
himself should issue a major policy statement and kick off the call for
voluntary cooperation via a prime time T V address.
Here are several illustrations that come quickly to mind. There must
be hundreds of others equally valuable or far superior.
sumers are n o w

333

Victory Gardens: Whether on a community or on an individual
family scale, the victory garden can help keep some lid on food prices
as well as contribute importantly to the individual American’s feeling
of participation. The “community garden” concept could be spectacu­
larly expanded with the cooperation of corporations, churches, civic
groups, schools, nursing homes, etc. Millions of publicly owned acres
could be made suitable for community gardens even in densely dodulated cities.
Recycling: While local collection centers for waste paper, aluminum
cans, bottles, etc,, have proved comparatively ineffectual, they have
helped raise the public’s consciousness of the value of recycling in con­
serving our natural resources and helping to keep a lid on prices.
Scrap collection and sale by communities themselves would pay off
handsomely in every way.
Energy Conservation: I, for one, am utterly dismayed by the extent
to which the U.S. has returned to a “burn-it-up” philosophy. Energy
conservation measures must be revived and maintained. The list of
moves that can be made by businesses, homeowners and individuals
is well known to you. This would be both an anti-inflation and a con­
sumer unifying force.
Educational Pamphlets: Booklets explaining in easy-to-follow lan­
guage the many significant ways consumers can help hold down living
costs—in all areas—could be inexpensively printed and widely cir­
culated by organizations at the regional and local levels. As the Red
Cross teaches swimming, for instance, so it could teach other vital
subjects. W hile admittedly sketchy, if found worthy, this idea could
easily be carried on from here.

II
In my role as a syndicated columnist specializing in economics and
finance, I also submit these suggestions in what must be briefest sum­
m ary:
The U.S. must assume leadership in bringing together the oil con­
suming nations to deal with the oil producing countries and meet the
exceedingly delicate problems arising out of the oil price increases
and production-limiting maneuvers. This cooperation among con­
suming nations is absolutely imperative—in sharing of available oil
supplies, in developing policies to deal with price hikes and oil money
flows, in conservation, in pursuing new sources of energy. And this
common front and cooperation should be extended to other crucial
raw materials so that we may handle adverse steps taken by other
producers of essential raw materials without first piling crisis upon
crisis.

I II
Work must be speeded up well beyond what is apparent now on
development of new international financial agreements and financial

334

Institutions_or perhaps strengthening of existing agreements and in-

iitutions_to handle the challenges of massive flows of funds. Our
Licies have been much too hesitant. Whatever progress has been
Achieved as a result of our timid steps to date seems to me far too
¡little.
President

^ ^ -

U.S. League of Savings Associations
We would suggest the following general anti-inflation programs and
Licies by the Federal Government:

I (1) Achieve a Federal budgetary surplus at the earliest possible
date. If at all possible, such a surplus should be sought without an
increase in taxes, but a surplus is necessary even if taxes must be
[increasedto attain it.
f (2) The Federal Reserve Board should restrain the growth of money
supply and not relax its restrictive monetary policy too quickly—even
though thrift institutions are particularly hard hit by tight money
policies.
■
.
I (3) New tax incentives are needed to encourage savings, thereby
reducing inflationary pressures. We recommend a tax exclusion for the
first $1,000 of interest earned on savings accounts at supervised finan­
cial institutions.
j (4) The Federal Government should announce its willingness to
serve as the “employer of last resort”. This would sever the presumed
relationship between unemployment and the program of fiscal and
monetary restraint so that anti-inflationary policies could be pursued
[with vigor.
[ (5) Special tax incentives should be utilized to increase the produc­
tivity in appropriate areas of the general economy.
I Specific recommendations to improve the flow of funds, into the
residential mortgage market:
| (1) Swift Congressional action on H.R. 11221, the Depositary Insti­
tutions Amendments Act of 1974. Of particular importance is the
increase in insurance of accounts coverage by the FSL IC and FD IC
from$20,000 to $50,000. This would be of immediate practical help in
assuring people that their money in financial institutions is completely
safe, would encourage people to place their money in thrift institutions
which are the backbone of the housing industry, and would not cost
the Federal Government one additional dollar. We also ask support
forthe House-passed provision to permit 100 percent Federal insurance
for deposits of governmental units—another potential source of funds
forour institutions and ultimately, homebuyers.
(2) Reconsideration and reversal of the Treasury Department’s
regulation which effectively prohibits the issuance of tax-deferred
335

savings accounts. This would permit savings associations to resume a
useful service to many depositors—particularly those approaching
retirement.
®
(3) Support for the Federal Home Loan Bank Board’s efforts to
encourage the use of a variable rate mortgage, thus encouraging lenders
to make new commitments even under today’s trying conditions.
(4) Separate the controversial subjects of ending savings rate con­
trol and repealing the bad debt deduction tax treatment for thrift
institutions from discussions on the Financial Institutions Act, so that
Congress might consider and move ahead quickly on this important
legislation.
M r. C arlton P. W ilson

Chairman of the Board
Robert W. Baird and Company, Inc.
President Ford has stated loudly and clearly that inflation is the
number one problem in the United States. That leadership in our gov­
ernment has even identified the problem is encouraging. As we meet
for this Financial Conference on Inflation, let us not lose sight of the
number one problem and the priority that its cure deserves. All
that we discuss or debate should relate back to the first priority: How
can this country cure an intolerable rate of inflation ?
Our firm is a regional investment banking firm 'and our principal
focus is doing business with the public. A ll of our capital over the years
has been provided by retention of earnings and investment by our peo­
ple. In 1973, when the volume of corporate financing was off sharply,
our investment banking deals managed or co-managed were up sharply,
and we led all regional firms in this category. We have been in the top
five regional firms in each of the past five years.
W hile profitable in 1973 and so far in 1974, we have found it nec­
essary to reduce expenses by $1,500,000 so far in 1973-74. These are
substantial reductions for a firm with gross revenues of about $12,000,000. We find ourselves suffering, with the industry, from all the
well documented problems: low volume, rapidly rising costs, high in­
terest rates, uncertainty of regulatory rules, illiquidity of markets, etc.
etc.
However, we can relate all of these problems back to inflation. The
intolerable rates o f inflation of the past three years are destroying the
products we have to sell to investors. Inflation is destroying the individ­
uals incentive to save any kind of a savings vehicle. He is no longer will­
ing to make a long term contract. We can continue to try to attract him
with innovative ideas such as variable rate notes, short term notes
(Duke Power 13s) and perhaps others to come, but inflation at these
rates is wiping out 30 million older people and middle income Ameri­
cans. These people are the country’s savers and investors. New legisla336

lion to increase social security benefits, pensions, health insurance are
i . fee<iing the fire. And now the results of inflation are filtering back
L 0 the capital markets. These markets are breaking down, as a result,
fust as they have in other countries for exactly the same reasons. Our
I ital nee(js by 1985 are estimated all the wiay from $2.6 trillion to
K trillion with an estimate capital short fall of $400-$600.
[ It is obvious that we must change our goals in this country. W e must
content with a slower growth rate and a permanently lower mone­
tary growth rate. This must be accompanied by a balanced budget or
Smaller deficits. I f these goals are defined, the alternatives accurately
described, and the people are asked to make the necessary sacrifices to
fcttain these goals, we believe they will respond. But it w ill take time
End sacrifice. Unless government is willing to assume its painful role
Bn“telling it as it is”, the alternatives are frightening. Provide us with
the needed leadership to cure inflation and most of our serious prob­
lems will disappear.

L

h)R. Albert M. W ojnilower

I Economist and Director
I The First Boston Corporation
I Our present economic condition is the legacy of a few short years
during which the world business community learned that it is cheaper
to buy today than to buy tomorrow, and that what is borrowed today
Ian be paid back tomorrow in depreciated currency. U ntil quite re­
cently, many firms acted as though they really believed that risk could
be safely ignored and that caution had been outlawed, much as in a
world in which no one bothered to lock any door because some higher
power has provided everyone with free theft insurance. This attitude
pas found its fullest expression in the realm of finance.
I When an illness is allowed to go untreated for too long, not many
options remain open to the physician. The issue is no longer how to
[restore the patient to good health but how to save him, and even some
rather unpleasant treatment may be adjudged as preferable to doing
nothing. Thus, there is little hope, in my judgment, of preventing the
emerging recession. Too many sectors of our economy, mainly the
jindustries and financial institutions serving the consuming public, are
being ravaged by the inflation and its financial symptoms. They will
Jcontinue to suffer until the inflation abates materially, which will
[surely not happen overnight. By contrast other sectors in our economy,
jmainly those catering to business and foreign demand, have benefited
from the inflation and developed their long-range planning on the
assumption that the prices of the products they sell will continue to
outrage rising costs. For these important industries, the subsidence of
inflation is likely to be fully as painful and injurious as inflation’s
Ascendancy has been for so many others.

337

Nevertheless, I consider it important that certain steps be takenand others avoided—so that the recession may be mitigated and ulti­
mately do some good by nurturing a noninflationary recovery. The
danger is all too tangible—and has been terrorizing the stock marketthat antirecession measures may cause prices and interest rates to chase
each other upward still faster, even as real economic activity stubbornlyI
goes on contracting and unemployment spreads. Such a conjunctureI
is to be prevented at all cost, lest we arrive in a matter of months at
that point of no return at which some people start to react to the*
inflation by buying their next year’s shirts today, and then the shirts
for the year after that (like steel, they will argue, you can always sell
them to someone else if you don’t need them) while others decide to
feast on steak and champagne today, because they have reason to fear
that the money won’t even buy hamburgers a while later.
P reventing E xcessive C redit E xpansion

Inhibiting and reversing the inflationary trend and expectations
necessitates firm control over the expansion of credit—a control so
firmly set in place that the public can visualize it as surviving political
counterpressure even after the initial anti-inflationary results. As a
practical matter this means controlling the expansion of commercial
bank credit, since the growth of other lenders has long ago been]
pinched off by the overwhelming competitive power of the banks that
has been released by the recent dismantling of many of the restric­
tions placed on them during the 1930’s. Controlling bank credit, in
turn, must start with curbing the promises that banks make. Most im­
portant bank loans originate as the result of formal or informal
credit lines or commitments issued by banks to their good clients.
These promises, which can be cashed on the shortest of notice, are
just as much a part of the nation’s spendable money stock as is thej
money supply reported in the statistics that the Federal Reserve
issues and they and we so closely watch each week. As long as loan
commitments are readily available and widely merchandised—and the1
banks who make the promises are also able to deliver on them—infla­
tionary spending (or any other kind) is not inhibited.
What happens if the promises are made but then the Federal Reserve
tries to hold back the supply of funds that the banks need to make
good? The cost of money rises sharply as banks bid for the available
supply—and this invariably prompts the authorities to supply more
funds than they originally intended, because everyone is afraid of
sharply rising interest rates. Does the rise in rates deter the banks
from issuing more promises? It used to, but no more. Until last year,
the Federal Reserve’s regulation Q restricted the interest rate banks
could pay to borrow large sums in the money market. Thus, whenever
the price of money was near or beyond the maximum the banks were
338

Lllowed to pay, the banks’ ability to raise funds for lending was
[sharply curtailed and likewise their ability to make new loan com­
mitments. Also, until last year, the banks’ freedom to raise the prime
Lnd other lend in g rates was constrained. Consequently, when the banks’
host of borrowing money in the market rose in relation to what they
could charge for their loans, their profit margin was squeezed and
their ardor for new commitments cooled.
But since early 1973, these automatic “shut-offs” on the banks’ pro­
motion of loan commitments have been removed. Moreover, the prac­
tice of charging a “floating” rate has become virtually universal for
large loans. On such a loan, the customer undertakes! to pay a fixed
Imark-up over whatever the bank itself has to pay for the funds
lit passes through to him. The bank no longer needs to care at all what
[interest rate it has to pay, because it will get even more back from
[the customer. Nor do the borrowers care very much, because they
[know that all their competitors’ interest costs are floating up (and
[occasionally down) together with their own, so that all borrowers will
[be passing through to consumers identical changes in their interest
[costs. The loan expansion dial is set at infinity.
The chief restraint of high interest rates on short-term and even
much long-term borrowing has always been one of timing; in relation
Ito the com petition, is it wiser to borrow (and spend) today or tomor[ row, or is it perhaps too late to borrow because my competitors were
[smart enough to borrow earlier when money was cheaper? Under
floating rates, this concern over timing is virtually completely dis[pelled, so that rises in interest rates exercise virtually no deterrent
I effect. That is why short-term rates have been extraordinarily higher
| than long-term rates. There is a grave danger, more over, foreshadowed
by recent long-term floating rate bond issues, that this cancerous devel­
opment will spread to the long-term market. I f it does, any sustained
return to single-digit interest rates will be foreclosed for the indefinite
[ future.
If interest rates do not do an adequate job of rationing credit in
Ithe current environment, how does the market distribute credit ? After
| all, the supply while excessive is not infinite. The answer is, when the
I credit structure is encouraged to overexpand, it doesn’t take very long
I for defaults, insolvencies, and bankruptcies to emerge. These have now
I become the basis of credit allocation. To have allowed widespread
default risks to reappear is playing with lightning; there is no telling
I when and where default may strike and how many innocent parties—
[creditors, vendors, suppliers, depositors—may be scarred.

The majority of large market participants, of course, simply take
| it for granted that the Government or Federal Reserve will supply the

wherewithal to bail out the serious cases—as indeed they must in order
to prevent irremediable damage to the economy. The unfortunate out­

come of this devil-may-care attitude has been, however, that the largest
339

banks around the world—those regarded as having unbreakable um­
bilical cords to the central banks’ money-printing presses—have been
operating as though they were branches of central banks run for
commercial profit. Because they have seen that it is to their advantage
to try to increase their loans to the maximum, and because they and
their depositors know that the Federal Reserve is more afraid of bank
failures than are these banks themselves, their expansion has been!
restrained only by the defaults of some of the firms with which they!
have done business. The consequence of this ruinous competition from
these banks is that, viewed in terms of their prospects for institutional
survival, the stock, bond, mortgage, and foreign exchange markets,
depositary savings institutions, and mutual funds are a shamblesand even the banking system is under suspicion to a degree unknown
for more than 40 years.
We have taken a long step backwards to the disaster-ridden banking
arrangements of yesteryear in response to which the modern conception
of central banking was evolved. Until less than 2 years ago, our infla­
tion, though stubborn, was not unusually rapid. The abdiction to the
commercial banks of the de facto control over the growth of credit
and money is, I am convinced, the principal cause of the exceptional
virulence of inflation since then.
B u sin e ss I nvestm ent I s N o P anacea

Investment isn’t always a good thing—if it were, we should all be
starving ourselves, early Communist style, to finance heavy industryand investment isn’t a monopoly of business firms. Investment con­
cerns creating resources for the future and the most important of these
are to be found in our households. The building of the homes in which
we live and bring up our children and the buying of cars and appliances
which enable more members of each household to take on paying jobsj
and to get to sources of training and education do not bear the statisti­
cal jobs and to get to sources of training and education do not bear the
statistical label of “investment in plant and equipment,” but they are
at least equally important. Such household-oriented activities, how­
ever, can never effectively compete for funds in free financial markets
with business equipment, since they produce little or no cash flow and|
since the benefits often accrue not to the would-be borrowers but rather|
to their children or their community. I f we had a truly free market,
all but the richest of us would sleep and eat in our offices or at ourI
workbenches, because that is clearly the cheapest and most efficient
method of organizing production.
Inflation and high interest rates exacerbate the problems of thej
industries and institutions that enable American families to live to­
gether in privacy rather than in factory dormitories, but these problems
would persist in a high-employment economy even if there were no
340

iflation. The regulation of bank interest rates I have already proposed
fill be of some help in rechanneling funds toward household investLnt but it will take a rather thoroughgoing reversal of current Govinment philosophy which favors deregulation of financial institutions,
|id which mobilizes the Federal Reserve’s lender of last resort func­
ión primarily on behalf o f banks that lend primarily to business
jms, to produce a better balancing of our financial structure between
jumanand engineering values.
I jduch of the business investment now surging forward is, I am coninced, based on unsound premises. The climate of scarcity that preails in many basic materials (although fewer and fewer of them of
fte) reflects the unfortunate fact that over the last couple of years,
lese commodities have turned out to be the most profitable asset to
|wn—they have far outperformed money, foreign exchange, securities,
abor skills, or finished goods as stores of value. Inventory profits have
keenasource of gigantic profit increases to business firms not normally
In the commodity business. Because buying cheap and selling dear is
Lpiat business is all about, firms have naturally stepped up their inlentory orders enormously, beyond the capacity of the producers to
lleliver—^but if prices were to settle, these orders would vanish and
Lomeof the inventory buyers might even become sellers in competition
kith the manufacturers. The desire to substitute inventories and ma­
ltones for cash, so as to boost profits further, largely explains why a
fclimate of shortage continues to prevail in many markets even though
leal final demands, and especially domestic consumer purchases, have
»eenshrinking for 1 year or more. Self-aggravating runs from money
Into commodities are typical of business upswings. In the past, how­
ever, credit restraint has curbed the ability to finance such purchases
piuch earlier in the gam e: in the present, viewed on an international
page, credit restraint has hardly begun to exert a meaningful checkrein.
Control of B a n k L oan I nterest R ates

To revive the public’s fading hope that inflation can be curbed
it is essential first and foremost to reimpose a permanent ceiling on
lank loan interest rates. The ceiling could be set at current levels;
perhaps there will be opportunity to lower it in the future, but only in
the most exigent circumstances and only by legislation should it be
possible to raise it. The purpose, it should be reiterated, is not to hold
town interest rates. Rather, it is to provide a clear and unmistakable
earning to large lenders and borrowers, and to business planners, that
whenever money rates in the open market are in or threatening to rise
into the critical zone, banks will have to curtail their lending committents in order to protect their earnings. Thus banks could no longer
jfiord to promise clients that large loans will be available under any
ind all market conditions. Equally no borrower will be justified in
341

assuming that he is somehow immune from having his credit cut off]
And the “suction” on the Fed to overissue money to validate excessive
bank promises will be relieved.
No doubt such a loan rate ceiling will on occasion, as in the past
cause market distortions at the expense of some commercial banks]
but I am sure we would gladly accept the reappearance of these local]
ized irritations if they helped reduce the general worldwide inflation]
ary disruption we are privileged to have now. As for the cost to the
banks, they do after all enjoy a legal monopoly of demand deposits and
checking accounts; unique access to the Federal Reserve as a lender of
last resort; restrictions on the entry of new competitors; and the bene]
fits of Government-gtiaranteed deposit insurance. Like other public
utilities, they should expect to bear certain public-interest costs id
return for these enormous privileges.
My other recommendations run along the same lines. Existing inter]
est rate and loan rate ceiling should be preserved where they still exist]
(although the levels may need updating in some cases). Floating inter­
est rate securities, including variable rate mortgages and, if possible
floating-rate commercial loans should be severely restricted or eveiu
outlawed by regulatory policy. (Let us remember that only the Govj
ernment and the Federal Reserve can credibly guarantee payment onj
what are essentially open-ended contracts.) And controls over the]
outflow of capital to the rest of the world will need to be reinstated
to prevent circumvention of these rules (as well as for other reasons
cited below).
In the absence of measures to this or similar effect, I am quite certain!
that inflation will, with fits and starts, continue to accelerate. Conse-I
quently, I am also quite certain that such measures will eventually ba
adopted. The later they come, the more Draconian they are apt to be,
and the greater the price in terms of inflation and recession we will]
have paid.
D angers of a n U ncontrolled C apital O utflow

Indeed, to the extent that we may be suffering a genuine rather!
than a speculative heightening of scarcities, it is international in
nature. For many decades, international financial flows (and often
trade flows as well) have been dominated by political concerns such as
wars and the rise of totalitarian regimes and/or have been administra­
tively regulated for balance-of-payments reasons. Since the beginning
of 1973, paralleling the abolition cited earlier of our internal selfdisciplining financial regulations, international flows have also been
rendered largely^ free of Governmental intervention. Generally spea •
ing, American levels of resource endowment, accumulated wealth, anj
consumption are far higher than in the rest of the world. The eM
of free financial markets and trade must therefore be in the direction
342

of equalizing, by means of exports of goods and capital from the
United States, the standard of living in the United States and that of
the rest of the world. While this means a higher standard for the
¡world seen as a whole, it may not mean a higher standard o f living
¡for most of us. We have seen this conflict illustrated, in a rather special
¡but nevertheless instructive fashion, with regard to the grain trade,
litis also taking place less dramatically—though it could snowball—
insofar as OPEC oil revenues are being used to finance increased
imports by the OPEC members and those other countries to whom
they and their bankers choose to extend credit or grants, while the
world pays its oil bills largely by borrowing funds coming from the
United States. These are monstrous issues that far transcend economics,
but it should be clear that only the; most gradual kind o f reduction of
American living standards can be viewed as a viable policy for the
long run.
Translated into purely financial terms, the abolition of the controls
over the outflow of U.S. funds has drastically reduced the scope for
interest-rate reduction even in the best of circumstances, while the
forthcoming freeing of Americans to purchase gold can at best do
nogood, and at worst wreak havoc.
L eave th e B udget A lone

j Let me now turn to some things we ought not to do. We ought not
to try to cut the budget deficit. To do so will be seen by the business
[community as making large additional sums available for private bor­
rowing, especially by those industries whose spending is contributing
most to the inflationary pressures. Moreover, if Congress reduces the
deficit, the Federal Reserve will have to ease credit to bring down
interest rates as its part of the bargain. The fear that credit may become
unavailable is the major if not the only anti-inflationary deterrent now
6nplace, and it has been operating for only 6 months at most. The last
thing we should do is to get rid of our only effective weapon.
As to reducing Federal expenditure, whatever may be the pros and
cons in the longer run, it is most unlikely that any cuts can be insti­
tuted the timing of whose economic impact can occur any time soon.
Why reduce employment on the Federal payroll at a time when large
sums are being earmarked for disbursement on public service employ­
ment ? Curtailment of military outlay on hardware and research and
development would help relieve pressure on some of the “bottleneck”
sectors in our economy, but such decisions cannot and should not be
made to depend primarily on economic policy considerations.
As to taxation, raising individual taxes seems inappropriate when
pt is likely