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■SHINGTON, D.C. 20220
T E LE P H O N E W 04-2041
NOVEMBER 26, 1974
FOR IMMEDIATE RELEASE
ERNEST S. CHRISTIAN, JR. APPOINTED
DEPUTY ASSISTANT SECRETARY OF TREASURY FOR TAX POLICY
Secretary of the Treasury William E. Simon today
announced the appointment of Ernest S. Christian, Jr.,
of Austin, Texas, as Deputy Assistant Secretary of the
Treasury for Tax Policy. He was designated in July of
this year and has been Acting Deputy Assistant Secretary
since that time.
Mr. Christian serves as deputy to Assistant
Secretary Frederic W. Hickman, who has responsibility
for formulation and execution of United States domestic
and international tax policies. He replaced John H. Hall
of Los Angeles, California, who resigned.
Mr. Christian had been the Tax Legislative Counsel
of the Treasury since August 1973. Prior to that, he
served as Tax Counsel to the Assistant Secretary for
Tax Policy.
Before joining the Treasury Department in
November 1970, Mr. Christian had engaged in the private
practice of law in Washington, D. C. and Dallas, Texas.
Mr. Christian, 37, is a cum laude graduate of the
University of Texas Law School (1961). He holds
memberships in the Texas, District of Columbia, and
American Bar Associations. He and his family reside in
the District of Columbia.
oOo
WS-166
W a s h i n g t o n , d o .20220
telephone
W
0 4 -20 4 1
NOVEMBER 26, 1974
FOR IMMEDIATE RELEASE
GEORGE S. TOLLEY NAMED
DEPUTY ASSISTANT SECRETARY
OF THE TREASURY FOR TAX POLICY
Secretary of the Treasury William E. Simon today
announced the appointment of George S. Tolley, Professor
of Economics at the University of Chicago since 1966, as
Deputy Assistant Secretary of the Treasury for Tax Policy.
Mr. Tolley, 49, replaces Oswald H. Brownlee, who has
resigned to join the faculty of the University of Minnesota.
Mr. Tolley has taught economics for more than twenty-five
years, and he also has extensive experience in public policy.
A member of the President’s Citizen Task Force on Urban
Renewal in 1969, he has been a consultant to the Presidential
Commission on Rural Poverty, the International Bank for
Reconstruction and Development, the Ministry of Agriculture
of the Republic of Korea, and the Minister of Planning of
Panama, among others. He has served on several committees
of the National Academy of Sciences.
I
M r . Tolley brings to Treasury a diversified and wide-ranging
experience which includes work and publication in fields within
economics including urban problems, agriculture, natural
resources, environmental problems, economic development and
monetary and fiscal policies.
A native of Washington, D.C., Mr. Tolley earned his B.A.
degree in Economics at The American University in 1947 , and
earned his advanced degrees from the University of Chicago,
receiving his M.A. degree in 1950, and his Ph.D. degree in 1955.
He was the recipient of a Ford Foundation Faculty Fellowship
in 1971-72, serving as Visiting Scholar at the University of
California at Berkeley during the fellowship period.
Mr. Tolley is married to the former Alice Welch, of Wayne,
Nebraska. They have one daughter, Catherine, 5, and reside in
Chevy Chase, Maryland.
oOo
WS-167
STATEMENT OF THE HONORABLE DAVID R. MACDONALD
ASSISTANT SECRETARY FOR ENFORCEMENT, OPERATIONS
AND TARIFF AFFAIRS
DEPARTMENT OF THE TREASURY
BEFORE
THE NATIONAL COMMISSION FOR THE REVIEW OF
FEDERAL AND STATE LAWS RELATING TO
WIRETAPPING AND ELECTRONIC SURVEILLANCE
DECEMBER 3, 1974
9:30 A.M., EDT
Mr. Chairman and distinguished members of the Commission:
I am pleased to report to you today on the policies
and practices of the Treasury Department concerning the use
of electronic surveillance by our law enforcement agencies.
My testimony will address those electronic surveillance
investigative techniques employed by the Bureau of Alcohol,
Tobacco and Firearms; the U.S. Customs Service; the Internal
Security and Intelligence Divisions of the Internal Revenue
Service; and the U.S. Secret Service.
|,
I
have with me today, and would like to introduce to
you, the following gentlemen from the Treasury bureaus and
agencies who are familiar with technical details of the
integration of electronic surveillance into the operations
of these bureaus: Mr. J. Robert McBrien, Assistant for
Privacy Policy, of my office; Mr. Donald Zimmerman, Chief of
Intelligence, Office of Criminal Enforcement, ATF; M r 0 John J.
Molittieri, Senior Special Agent, Office of Investigations,
Customs Service; Mr. William Hulihan, Director, Internal
Security Division, Office of the Assistant Commissioner
(Inspection), IRS; Mr. John C. Holtzhauer, Special Agent in
Charge, Counterfeit Division, and Mr. John Taylor, Supervising
Security Specialist, Technical Security Division, both of the
U.S. Secret Service.
WS-168
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Basically, there are two forms of electronic surveillance
in law enforcement:
(1) the use of court-ordered interception
of wire or oral communications, without the knowledge of
either party to the communication; and (2) the "consensual"
monitoring of conversations, where one party, usually the
law enforcement officer or an informant, consents to the
monitoring. Treasury agencies have used court-ordered
monitoring sparingly; consensual monitoring often; together,
these forms of interception have been used quite successfully
in the fight against organized crime, racketeering, narcotics
trafficking, smuggling, counterfeiting, tax fraud and bribery,
and firearms and explosives violations.
Treasury criminal enforcement functions, by-and-large,
support a regulatory or tax-raising function, such as the
collection of duties, excise and income taxes, and the regu
lation of certain industries charged with a public interest.
In the use of these two forms of electronic surveillance on
criminals who counterfeit money, smuggle narcotics and evade
taxes, we attempt to impress upon our enforcement officers
that they are the trustees of the liberties of every lawabiding citizen, just as a bank officer is the trustee of the
assets of his depositors.
If I leave no other impression upon this distinguished
Commission, I would like this Commission to be aware of one
fact: There is generally no way to reach up and convict the
principals of criminal organizations without the use of
electronic surveillance. To suspend electronic surveillance
for three years, as has been suggested recently by a former
FBI official, would be to declare a three-year holiday on
organized crime and terrorism. A hard fact is that the
criminal managers at the nerve center of organized crime or
dinarily will not deal with anyone except known members of
their own organization. Therefore, to obtain the indelible,
ineradicable evidence which enables society to attack the
heart of organized crime rather than to nibble on the extremi
ties, requires carefully prepared, legal use of electronic
surveillance techniques directed both at the dealings between
those in charge of the criminal enterprise and their sub
ordinates and at the vital communications links of the
organization.
To illustrate these conclusions, there will be a review
-3-
n
of a non-consensual (Title III) electronic surveillance used
in identifying an actual narcotics ring operating from Mexico
to Detroit. A staff member of this Commission will question
members of an enforcement team consisting of a former Customs
Special Agent and a Justice Department Strike Force Attorney
concerning the investigatory and surveillance practices used
in that case.
COURT-ORDERED ELECTRONIC SURVEILLANCE
»
B
In the six years since enactment of Title III of the
Omnibus Crime Control and Safe Streets Act, a total of 36
court-ordered interceptions of wire or oral communications
have been conducted by the law enforcement components of
the Treasury Department. Of these, 21 have been conducted by
the Customs Service, 12 by the Secret Service, and one each
by the Bureau of Alcohol, Tobacco and Firearms, the IRS Intel
ligence Division and the IRS Internal Security Division.
The results of these 36 Title III interceptions are
impressive: 264 arrests leading to 116 convictions, nearly
all for narcotics or counterfeiting violations. This is an
average of slightly more than three convictions for every
Title III surveillance. Since eight of these did not produce
incriminating conversations, we might compute the ratio based
on the 28 productive interceptions, thus reaching an average
of just over 4 convictions for every productive Title III.
Since at least two of the investigations involving these
interceptions are still not concluded, the 4/1 ratio may in
crease .
i"
B
I
n
I
I
should also note that we have had only nine reversals
of convictions so far. Those occurred in one case, King v.
U*S., a very successful narcotics investigation which fell
as a result of the Giordano decision. The offenses justifying
these cases of court-ordered electronic surveillance are seri°US cr^ines involving organized crime members and other criminal
entrepreneurs in counterfeiting and narcotics trafficking.
And, as required by Title III, all other investigative means
were exhausted or determined to be fruitless before this
important investigative tool was used0
Mr. Chairman, I have submitted for the record three
charts describing the use of both court-ordered interceptions
7
-4and consensual monitoring by the principal law enforcement
agencies of the Treasury Department. In examining the chart
of our 36 Title Ills, you will notice that since 1972, the
use of court-ordered interceptions by the Customs Service
has dropped from 10 to zero. This decline does not reflect
a change of attitude about the usefulness and propriety of
Title Ills. Rather, it is the result of the shift of juris
diction for most narcotics offenses from Customs to the
Drug Enforcement Agency of the Justice Department.
I
direct your attention to this jurisdictional shift
in order to illuminate what we believe is a deficiency in
the current Federal electronic surveillance statute.
Section 2516 of Title 18, United States Code, specifies
those offenses for which authorization for interception of
wire or oral communications may be granted. Absent from
this list are offenses relating to smuggling and fraudulent
entry of goods into the U.S., cargo theft from Customs
custody, munitions control (these are the statutes violated
by terrorist groups in exporting arms abroad), and the
importation and exportation of monetary instruments.
Unhappily, this is an era of sophisticated, highly
profitable international crimes -- the offenses over which
the Customs Service has jurisdiction. For example, in its
report on cargo theft, the Senate Select Committee on Small
Business estimates that 1.5 billion dollars in international
cargo is stolen each year. There appears to be an everincreasing international trade in illegal shipments of
weapons, explosives and other implements of warfare such as
military-style helicopters. Much of this traffic originates
in the U.S. and our neighbors, who suffer the violent results
of it, are not happy. The problems appear equally appalling
in smuggling and the illegal international movements of
monetary instruments.
Additionally, the firearms offense jurisdiction of
the Bureau of Alcohol, Tobacco and Firearms is not encom
passed by the present electronic surveillance law, and we are
considering the practicality of court-ordered interceptions
for these offenses which comprise 65% of the ATF's investiga
tive workload. We need the tools to help stop these crimes
and while we do not consider the use of Title III interceptions
to be the only valid weapon for apprehending criminals and re
ducing crime, we do recognize its great value as an additional
technique for the investigation of major crimes. Thus, we are
examining the possible introduction of amendments to add to
Title III those major offenses under Treasury*s jurisdiction
which we determine to be most susceptible to investigation by
means of court-ordered electronic surveillance.
PROCEDURES FOR TITLE III
I
know that you have heard detailed testimony from the
Justice Department on the careful procedures and legal safe
guards which attend both the process of seeking authoriza
tion to apply for a court-ordered interception and the actual
operation of the interception. Let me assure you that the
law enforcement bureaus of the Treasury Department adhere to
the same Justice Department guidelines as other Federal in
vestigative agencies. Additionally, each of the Treasury
components must follow its own multi-level review and approv
al process before that agency's director will authorize an
application to the Attorney General for permission to seek a
court-ordered interception. Of course, this process, in
which each level of review may reject the application, is
independent of the parallel review and approval system in the
Criminal Division of the Justice Department.
I
believe the restrained use of court-ordered electronic
surveillance by our bureaus in part reflects the care with
which they approach the use of this effective but sensitive
investigative technique. Furthermore, while my office does
not exert operational control over the individual uses of
Title Ills, my staff is continually examining all of our
policies and practices regarding electronic surveillance and
will prepare whatever new or amended Treasury Department
policies and procedures appear advisable to clarify or improve
our use of and accountability for interceptions of wire or
oral communications.
CONSENSUAL MONITORING
In contrast to our few uses of court-ordered intercep
tions of wire or oral communications, the Treasury law
enforcement agencies make frequent and extensive use of
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monitoring and recording of conversations with the consent
of at least one party to the conversation. This monitoring,
known as '’consensual,'1 is a multiple purpose tool for law
enforcement investigators without which a great proportion
of criminal investigations could not be conducted either
safely or productively.
In examining the use of consensual monitoring we find
that it is used for corroboration of informant allegations,
for preservation and corroboration of incriminating faceto-face and telephone conversations to serve as best evidence,
to coordinate the timing of raids and arrests, and to protect
the lives and safety of informants and undercover agents.
Generally, a consensual is dual purpose; that is, it both
preserves evidence and protects the undercover agent or
the informant. Probably the majority of consensual monitor
ings involve the protection of the consenting individual
and third parties, and the increase in the use of violence
against law enforcement officers, especially undercover
agents, will probably cause even greater use of this technique.
A consensual monitoring can be accomplished through use
of a transmitting or recording device on the person, premises
or vehicle of a consenting informant, undercover agent or
other individual; or it may involve an agent listening in
on a telephone extension or using a recorder with a telephone
while a consenting informant or other individual is one of
the parties to the conversation. They are used across the
range of crimes investigated by the law enforcement bureaus
of the Treasury Department.
This investigative and safety technique is used in many
criminal cases under Treasury Department jurisdiction. As
the attached charts indicate, in the past seven years there
have been 5,070 instances of consensual monitoring by our
bureaus„ While this number appears large, we believe that
its employment (now running at about 1,100 cases a year)
is modest in light of the tens of thousands of investigations
made each year by our law enforcement agencies. Furthermore,
these raw statistics do not reflect that many consensuáis
may be used in the investigation of a single suspect. For
-7example, from January 1 through October 31 of this year,
the Secret Service reported 614 consensual monitorings yet
they were used against only 279 target suspects.
Mr. Chairman, the Treasury Department's law enforcement
bureaus are heavily dependent upon undercover work and
informants' revelations to conduct successful investigations
against such crimes as smuggling, counterfeiting, trafficking
in firearms and explosives, threats against the President,
and bribery and corruption of public officials. Without the
use of consensuals many of our undercover operations would
be too dangerous and the evidence developed from them would
be uncorroborated. Informants and cooperating witnesses, who
play a significant role in developing leads, arrests and
convictions, would either be useless for lack of corrobora
tion or would become uncooperative from fear caused by their
lack of protection. We trust that the Commission will
strongly endorse the continued use of consensual monitoring
to protect the lives of our agents and to bring justice to
bear against the criminal element of society.
PROCEDURES FOR CONSENSUAL MONITORING
Like other Federal investigative agencies, the Treasury
law enforcement bureaus follow the procedures established by
the Department of Justice and their own internal requirements.
Thus, in cases of non-telephone consensuals, approval of the
Attorney General is sought in advance unless exigent circum
stances compel the agency to act immediately. In those cases,
the Attorney General is notified as soon as practicable after
monitoring has begun. Where only consensual telephone
monitoring is planned, supervisory personnel at the SpecialAgent- In-Charge level or above must approve its use.
CONCLUSION
Mr. Chairman, I hope my testimony today has contributed
to the important work of this Commission in reviewing these
electronic surveillance investigative techniques. We all
realize that surreptitious electronic surveillance can be
subject to abuse and that some Americans perceive it to be
a threat to individual freedom. The Treasury Department
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8-
believes, however, that our law enforcement agencies have
used and will continue to use these investigative methods
within the letter and spirit of the Constitution and the
Omnibus Crime Control and Safe Streets Act.
We are committed to using productive instruments of
law enforcement, not to pry into private matters or harass
citizens, but to help protect against and apprehend those
criminal elements who are preying on the American people
and its channels of commerce. In this age of rising crime
rates, increasingly sophisticated criminal enterprises and
economic difficulties, the American people do not need
another impediment to the successful discovery and apprehen~
sion of those criminal entrepreneurs who victimize us all
while siphoning billions of dollars from our economy.
That concludes my statement0 I will be pleased to
respond to any questions you may have.
OVERALL TOTAL (CY 1968 - 1974*)
BUREAU
SUB-TOTALS
1RS
USSS
GRAND
TOTALS
1353
2049
1212
5070
1
21
2
12
36
457
1374
2051
1224
ATF
CUSTOMS
456
\
CONSENSUAL
COURT-ORDERED
OVERALL TOTAL
BUREAU TOTAL
5106
\
*CY 74 figures are for the year through October 31
\
CONSENSUAL MONITORING
(With One-Party Consent)
CALENDAR YEAR
ATF
CUSTOMS
1RS
USSS
ANNUAL TOTALS
1968
11
219
111
20
361
1969
17
137
164
12
330
1970
32
147
199
36
414
1971
70
106
290
117
583
1972
86
430
406
223
1145
1973
107
234
545
190
1076
1974*
133
80
334
614
1161
456
1353
2049
1212
BUREAU
SUB-TOTALS
GRAND TOTAL:
5070
*CY 74 figures are for the year through October 31.
COURT-DRnPPT?n
T?T
'T 'P r r ir iA ii
COURT-ORDERED ELECTRONIC SURVEILLANCE
CALENDAR YEAR
ATF
CUSTOMS
1RS
1968
0
0
0
0
0
1969
0
1
1
1
3
1970
0
2
0
1
3
usss
ANNUAL TOTALS
1
1971
0
4
1
3
8
1972
1
10
0
6
17
1973
0
4
0
0
4
1974*
0
0
0
1
i
BUREAU
SUB-TOTALS
•
1
GRAND TOTAL:
1
21
2
12
36
*CY 74 figures are for the year through October 31.
Department of
I
VASHINGTON, D C. 20220
^TREASURY
TELEPHONE W04-2041
)74
FOR
?
/
7. r v y
3 V f
7«
I $2.1 billion
r 5, 1974,
e as follows:
[RANG
COME
falent
tl Rate
V89%
580%
564%
/ / - V T - 7
1/
7
3-/
/ f v
X i
tted 94%,
tted 32%,
HICTSî
Accepted______
^
15,835,000
1,638,410,000
12.025.000
36.255.000
16.600.000
19.260.000
36.635.000
18.210.000
5,360,000
23.895.000
12.635.000
265,910,000
$2,101,030,000
1/
sJ
1/ These rates are on a Damc-axscounc oasis,
ierage price,
erage price.
iuc c4 u 4.vaj.cuL ^.ouponrissue
yields are 7*78% for the 13-week bills, and 7.97% for the 26-week bills.
SJ
December 2, 1974
FOR RELEASE 6:30 P.M.
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 2 . 8 billion of 13-week Treasury bills and for $2.1 billion
of 26-week Treasury bills, both series to be Issued on December 5, 1974,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Price
High
Low
Average
a/
26-week bills
maturing June 5, 1975
13-week bills
maturing March 6, 1975
98.142 a/
98.041
98.098
Equivalent
Annual Rate
7.350%
7.750%
7.524%
Price
1/
Equivalent
Annual Rate
96.214
96.168
96.176
7.489%
.7.580%
7.564%
1/
Excepting 2 tenders totaling $150,000
Tenders at the low price for the 13-week bills were allotted 94%.
Tenders at the low price for the 26-week bills were allotted 32%.
¡TOTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Applied For
Accepted
48,675,000
$
48,675,000 $
Boston
2,163,920,000
2,751,320,000
New York
45,075,000
45,075,000
Philadelphia
59,940,000
59,940,000
Cleveland
36,925,000
36,925,000
Richmond
34,540,000
34,540,000
Atlanta
146,730,000
145,230,000
Chicago
36,105,000
36,105,000
St. Louis
5,980,000
5,980,000
Minneapolis
40,160,000
40,160,000
Kansas City
31,175,000
31,175,000
Dallas
152,630,000
San Francisco
152,630,000
TOTALS
Applied For
$
Accepted
15,835,000
25,835,000 $
2,952,830,000 1,638,410,000
12,025,000
12,025,000
36,255,000
36,255,000
16,600,000
17,600,000
19,260,000
19,960,000
36,635,000
125,950,000
18,210,000
30,710,000
5,360,000
5,360,000
23,895,000
27,900,000
12,635,000
17,635,000
265,910,000
544,095,000
$3,389,255,000 $2,800,355,000 b/$3,816,155,000 $2,101,030,000
— / Includes $ 463,340,000 noncompetitive tenders accepted at average price.
— f Includes $ 238,900,000 noncompetitive tenders accepted at average price.
1/ These rates are on a bank-discount basis. The equivalent coupon*issue
yields are 7.78% for the 13-week bills, and 7.97% for the 26-week bills.
Department
ofthefREASURY
FOR IMMEDIATE RELEASE
December 3, 1974
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 $4,900,000,000 > or
thereabouts, to be issued December 12, 1974,
as follows:
91-day bills (to maturity date) in the amount of $2,800,000,000» or
thereabouts, representing an additional amount of bills dated September 12, 1974,
and to mature
March 13, 1975
(CUSIP No.
912793 VZ6), originally issued in
the amount of $1,805,935,000, the additional and original bills to be freely
interchangeable.
182-day bills, for $2,100,000,000, or thereabouts, to be dated December 12, 1974,
and to mature June 12, 1975
(CUSIP No.
912793 WN2).
The bills will be issued for cash and in exchange for Treasury bills maturing
December 12, 1974,
outstanding in the amount of $4,713,950,000, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,231,930,000
These accounts may exchange bills they hold for the bills now being offered at
the 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,
$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
one-thirty p.m., Eastern Standard time, Monday, December 9, 1974.
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000.
mu^tiples of $5,000.
Tenders over $10,000 must be in
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.
Banking institutions and dealers who make primary markets in Government
(OVER)
-
2
-
ML
Securities and report daily to the Federal Reserve M l |» «aa New York their positions
with respect to Government securities and borrowing%^j^reon 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 whole or in part, and his action in any such respect shall be final.
Subject
to these reservations, noncompetitive tenders for each issue for $200,000 or less
without stated price from any one bidder will be 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 December 12, 1974,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing December 12, 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 notil
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
Department of
INGTON, D C. 20220
theTREASURY
T lt E P H O N E W 04-2041
FOR RELEASE UPON DELIVERY
TUESDAY, DECEMBER 3, 1974
STATEMENT BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE
THE SUBCOMMITTEE ON INTERNATIONAL FINANCE
HOUSE COMMITTEE ON BANKING AND CURRENCY
DECEMBER 3, 1974 - 10:00 A.M.
I am pleased to have this opportunity to testify before
the Subcommittee on International Finance with respect to three
subjects: gold, the proposed financial solidarity agreement
among major oil consuming countries, and negotiations con
cerning participation in the Asian Development Bank and the
Inter-American Development Bank.
With respect to gold I shall attempt to respond to the
questions which you put to me, Mr. Chairman, in your letter of
November 26.
Your first question was whether I believe there should be
a delay in the effective date for the required removal of
existing regulations restricting private investment in gold in
bullion form as contemplated in H.R. 17475 which you introduced.
As you know, present law, Public Law 93-373, sets December 31
of this year as the date for repeal of these restrictions.
You also know, Mr. Chairman, that I originally opposed the
legislative proposals that would mandate the removal of these
restrictions on a fixed date. I was fearful that the date
might come at a time when the removal might serve to exacerbate
disturbed conditions in domestic or international financial
markets.
For that reason I have stated on a number of occasions
that I would not hesitate to recommend Congressional recon
sideration of that date if I felt that market conditions or
the state of international economic negotiations made such a
change desirable.
Now that we have arrived in December, 1974, however, I
have attempted to review the outlook carefully. There are
clearly important economic uncertainties present. Yet, when
considering the overall situation, I do not see a basis in
current market conditions or in on-going international
negotiations to propose a delay in removing the regulations.
On the contrary, I am inclined to think that on balance there
will be positive advantages in repealing the regulations to
remove an element of uncertainty from our financial affairs
and to take a practical step forward toward our
WS-169
2
objective of ending the official monetary role of gold so that
it may ultimately be treated in all respects like any other
commodity.
I
have discussed these considerations with the President,
and with his concurrence I would like to urge the Congress not
to take the new restrictive action contemplated by H.R. 17475.
In my view continuing restrictions on the individual
freedom of U.S. citizens require clear-cut and compelling justi
fication which I do not believe now exists in the case of gold.
The prohibitions on gold ownership were introduced in 1933
when President Roosevelt required all privately held gold to be
turned in to the Federal Reserve banks. This gold was then
acquired by the Federal Government under the Gold Reserve Act
of January 1934, in return for the issuance of gold certificates
to those banks. Up to that time, gold constituted a significant
part of the nation’s money supply, and in periods of financial
stress, hoarding and withdrawals of gold from the banks, as
well as gold transfers overseas, had important and deflationary
effects on the economy of the country.
In fact, the measures
taken by the Roosevelt Administration with respect to gold were
aimed at reversing a deflationary situation.
The Gold Reserve Act, and other actions taken in the early
1930’s, began a trend toward a reduced monetary role for gold.
Nevertheless, gold continued to play some role in our domestic
monetary system and also was a major means of settling inter
national accounts.
It was in these circumstances that domestic
gold ownership and use continued to be confined to industrial,
artistic and numismatic purposes.
Gold remained as partial backing for Federal Reserve Notes
until 1968 when Congress completely eliminated this requirement.
As a result of this action, gold now has no function in our
domestic monetary system. The removal of the ban on private
gold ownership will not change this. As I will explain, the
Federal banking regulatory agencies have adequate power to pre
vent any tendency for gold to develop a domestic monetary function
in the future.
Mr. Chairman, I am not able to predict for you with any
confidence exactly how much gold U.S. citizens will purchase
next year in the form of bullion. Some have predicted sizeable
purchases by investors interested in an inflation hedge. That
could happen. On the other hand, there are reasons why the
total may not be large.
id
3
First of all U.S. citizens can now -- and long have been
able to -- invest in gold legally. They can not only buy gold
in the form of jewelry; they can buy gold in coins, and at only
a slight premium over its bullion value. Some coins have a
rare numismatic value and sell at a high premium over their
bullion value, but there are others in ample supply which can
be bought at premiums of less than 10% above their bullion value.
This premium is very close to that which will probably be charged
in the future on small size bullion wafers and bars, so that the
removal of the existing restrictions will not literally expand
greatly the opportunities available to the investor.
Investors will also realize that the storage of gold is
burdensome and expensive; that it earns no interest; and that
it has no liquidity in the sense of an assured price when it
must be sold. For the investor who can afford to take the chance
it is obvious that the price of gold purchased.could go up before
the need to sell arises; but it could also go down.
In looking
back recently, for example, over the history of Treasury operations
in the silver market I learned that, throughout the two year period
after the Treasury made large auction sales of silver from its
stocks form 1967 to 1970, the price of silver was below the
average price at which the Treasury had sold.
Recent Japanese experience in this respect may also be
instructive. Restrictions on investment in gold by private
Japanese citizens were removed in 1973. Immediately thereafter
there was a surge in private demand, but the interest quickly
died down and now constitutes an extremely small factor in the
investment activities of the Japanese.
on 1 H
I
realize, of course, that some people have sort of
mystical feeling about gold, but that to me is no reason for
our Government to adopt a similar approach. Rather, it is a
reason to proceed with the dismantling of anachronistic Govern
ment measures seeming to confer some special status on this
metal.
In my view international consideration, as well as domestic
considerations, make it desirable that we proceed with the
scheduled removal of the remaining restrictions.
For the past
several years my predecessors and I have worked -- with the full
knowledge and support of the Congress -- toward a reform of the
international monetary system to make it more flexible and
adaptive to changing economic circumstances. As a result a
wide measure of international agreement has been achieved. One
important part of that agreement is that the international
monetary role of gold should be reduced, that we should move
toward the situation internationally in which gold is accorded
a legal status no different than that of other commodities.
It is
4
consistent with that understanding that our government no
longer purchases or sells gold for monetary purposes. Yet
if we were now to decide to prolong the restrictions on gold
ownership because of international monetary considerations,
we would seriously undermine the credibility of our position -and of our negotiators -- in the continuing discussions with
the finance ministers of the other nations. Conversely, if
we proceed with the removal of the restrictions, indicating
conviction on the desirability of further reducing the role of
gold, we shall be in an improved position to negotiate further
steps for improvement of international financial arrangements
both among nations and within the International Monetary Fund.
All these considerations make it clear to me that the
restriction on individual freedom which would result from
continuation of the ban on private gold ownership no longer
meets the test of clear-cut and compelling justification. With
gold having no monetary function in our domestic economy, and
with a reduced and declining role in the international sphere,
the original reasons for this restriction on individual freedom
seem to me to have disappeared. And I do not see an adequate new
justification for the restriction. Domestic financial markets
are not now in a state of high tension. Interest rates have
eased, and internationally our exchange markets, operating on
a lightly managed floating basis, are serving us well in a
period of rapid economic change. Old fashioned exchange rate
crises have been avoided, and the governments of the major
countries are clearly attempting to approach their common problem
in a cooperative spirit. These are not circumstances which
justify us in asking our citizens to accept continued restrictionj
on their freedom.
In your second question you have asked whether P.L. 93-373
precludes Government actions to prohibit questionable or
dangerous trading techniques.
Most gold sales will probably take place through banks,
brokerage houses, or other financial institutions which functionJ
under many forms of government regulation. Consequently, there
will undoubtedly be less of a problem of consumer relations than!
might otherwise be the case.
In any event, Federal and State regulatory agencies will
be able with respect to gold to exercise their proper role in
protecting investors. Public Law 93-373 does not allow a
government prohibition on purchasing, holding or otherwise
dealing in gold. Congress could not, however, have intended
3 5 this language to limit the authority to apply to gold
regulations applicable to all commodities. The regulatory
agencies interpret P.L. 93-373 as allowing full authority
to regulate dealings in gold under generally applicable
regulatory statutes.
Proceeding on the basis of existing statutes, the Comp
troller of the Currency, the Federal Deposit Insurance Cor
poration, the Federal Reserve Board, the Federal Trade
Commission the Justice Department, the Postal Inspection
Service and the Securities and Exchange Commission fully
intend, and are prepared, to enforce the laws and regulations
which they administer and which are applicable to all commodities,
including gold.
Banking in particular is a matter of special concern to
this Committee. The banking regulatory agencies have full
authority, under the Financial Institutions Supervisory Act
of 1966, to issue cease-and-desist orders to halt any unsafe
or unsound banking practice with respect to gold. These
agencies are now working on, and will issue, guidelines to
their member banks on dealing in gold.
Mr. Chairman, you also wished me to comment on so-called
"naked options" and other trading techniques.
I understand a
"naked option" to constitute a trading technique involving a
contract, made with a small or no down payment, to purchase a
certain quantity of gold in the future, in other words a form
of "call contract."
Simple purchases and sales of gold will in many cases not
be subject to SEC regulation, but all trading techniques,
including options, when they involve investment contracts, such
as those for provision of investment advice and management ser
vices, will fall within the authority of the SEC. That agency,
in cooperation with a number of other regulatory agencies, is
preparing a general statement for guidance of investors.
Futures and transactions involving options, margin and
leverage contracts in gold bullion and bulk gold coins on
commodities exchanges will be regulated, effective April 21,
1975, by the new Commodity Futures Trading Commission.
In
the interim, commodities markets will continue under self
regulation.
I understand that commodities markets which plan
spot and future trading in gold will apply the same rules to
gold as they apply to any other commodity. Thus, the rules
for commodity market trading in gold will be the same as for
any other commodity and I see no reason to differentiate gold
in this respect from other commodities.
6
Contracts payable alternatively in gold or in an amount
of money measured thereby are both against public policy and
unenforceable in our courts under the provisions of the
Congressional Gold Clause Joint Resolution of 1933. This
clause continues to apply after the lifting of restrictions
on bullion ownership.
Thus Federal and State regulatory statutes will apply to
purchases and sales of gold. Nevertheless, as in the case of
investing in any other commodity, investors should "investigate
before they buy." This rule should be observed with special
care in the first few weeks after December 31 when there may
well be temporary shortages of the various types and sizes of
gold bullion that investors may wish to purchase.
Your third question, Mr. Chairman, asks what changes, if
any, I would recommend in P.L. 93-373.
I would not recommend any changes in this law at this
time. I have already pointed out that the Administration
believes that it has adequate authority to regulate gold as
it does any other commodity.
- More -
i
7
If you believe that it would be useful to make the scope
of P.L. 93-373 more explicit, this could appropriately be
done at some later time rather than hastily in the few re
maining days of this session of Congress. At the same time,
the law could be amended to make clear that it allows the
same standby authority for the Government to impose a pro
hibition on gold imports and exports as we have with respect
to other commodities.
You also asked whether new legislation should be con
sidered to allow contracts containing a multiple currency
clause. This is a subject that is not directly related to
private gold ownership. The Supreme Court, in the late 1930fs
construed the Gold Clause Joint Resolution, which as I have
noted continues in effect, to prohibit enforcement of multiple
currency contracts in the United States. Today, such financing
devices have become common in international financial markets.
For example, bonds are issued and denominated in "Eurcos"
which provide for payment in a number of European currencies
in an amount measured by an index composed of these currencies.
I see no reason why American businessmen should not be able
to deal in this kind of instrument. Consideration of a change
in the law at the next session of Congress would be desirable.
Your fourth question, Mr. Chairman, asked what general
condition would cause me as Secretary of the Treasury to
authorize the sale of Treasury-owned gold to private citizens.
As you know, the law has for many years empowered the Secretary
to make such sales from the Treasury holdings, which now
amount to approximately 276 million ounces.
In deciding on this question an important consideration
has been the fact that U.S. consumption of gold for indus
trial, artistic, and dental purposes is already far in excess
of U.S. gold production. This year, even while investment
in gold bullion has been prohibited to U.S. citizens, there
has been an import demand for gold, on the order of $1 billion
worths While it is not possible to predict with any confidence
how much additional demand will come forward in 1975 for in
vestment purposes, it is clear that such additional demand
would have to be met from additional imports if there were no
sales from Treasury stocks. This additional import demand
would tend to lower the value of the U.S. dollar relative to
other currencies and would thus tend to increase the dollar
prices of the goods we import and of the types of production
we export.
In oiner words, there would be a clearly adverse
effect on our efforts to bring inflation under control.
8
To avoid this undesirable effect it seems appropriate that
the Treasury sell some small amounts from its large stocks.
With the concurrence of the President, I have therefore asked
the General Services Administration to act on behalf of the
Treasury to prepare a public auction of 2 million ounces of
gold in 400-ounce bars to be held on Monday, January 6. The
GSA will issue the formal invitations to bid in about ten
days using procedures comparable to those employed by the GSA
in the past when selling silver on behalf of the Treasury.
Consideration will be given at a later date to the amounts
and dates on which any additional further sales of gold would
be appropriate after the initial sale. Presumably, however,
later sales after the initial surge of interest would be for
smaller amounts. Bars of the 400-ounce size are the only
type available in the requisite amounts for the initial sale.
At a later date it may be possible to arrange for sales of
smaller-sized bars.
The amount being offered in the inital sale, the 2 million
ounces, is not large in relation to our 276 million ounce
stockpile. The amount being sold could not in any way threaten
the availability of gold needed for military and industrial
purposes related to our national security.
In fact, such uses
are so small that they could be covered many times over by our
annual domestic gold production without any reliance on our
stockpile supplies.
The proceeds of our gold sales -- over and above the
amounts used to redeem at $42 an ounce the gold certificates
now held by the Federal Reserve -- will enable the Treasury
to reduce its market borrowings thus leaving more funds avail
able for private investment in industry, housing and other
activities. The reduction in Treasury borrowing will also
tend to offset any disintermediation which might take place
through investors withdrawing funds from thrift accounts to
make gold purchases. In fact, however, I would not expect ,
much of such disintermediation since I believe most savers
put their funds in thrift accounts to have assurance both on
the value of their principal and on a reasonable interest
income. Neither of these assurances will be available to
those who invest in gold.
In planning a small gold sale the Treasury does not have
any specific price objective in mind, and I feel strongly
that our hands should not be tied to any specific formula
determining the amounts to be sold. In my view, the Secretary
of the Treasury should be expected to exercise responsible
9
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judgment taking into account overall economic conditions and
the need to avoid placing undue strains on the international
value of the dollar.
I hope I can have your support for this
policy.
"s
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I
realize that some have opposed any sale of gold by the
Treasury from fear that we would be parting with our national
patrimony, from fear that we shall need all the gold we have
to support our future international payments position, and from
fear that the sale of gold will signify some weakening in our
resolve to fight inflation.
I believe these fears are unfounded.
Firstly, I do not consider that it constitutes parting with
national patrimony to transfer a commodity from the U.S. Govern
ment to U.S. citizens at a fair market-determined price.
Secondly, we are proposing to sell some gold now exactly in
order to prevent a weakening of our payments position, but the
amount proposed to be sold is very small in relation to our total
holdings. There is certainly no intent to throw a large portion
of our gold on the market and to obtain in return only the small
recompense such flooding of the market would bring.
5
r
y
Finally, I want to assure you that the sale of gold will
not signify any weakening of our resolve to control inflation.
In fact, an important reason why I support the sale is that it
will make some contribution toward reducing inflation.
But while the gold sale will have some anti-inflationary
impact, we must not lose sight of the fact that what is really
important are the general governmental fiscal and monetary
policies that are adopted here and abroad. We are now beginning
to see some results of our past efforts. Inflation rates,
both here and abroad, are now beginning to moderate. This is
generally true in commodity markets, especially in the case of
metals. As only one example, the world price of copper has
dropped nearly 60 percent from a peak of $1.52 per pound early
this year. This indicates to me that success in controlling
inflation is both practical and feasible.
If we have the
foresight and wisdom to restrain our expenditures at home and
to meet our international financial problems through effective
cooperation -- the kind of cooperation I will speak about
next through the proposed financial solidarity agreement -we can and we will control inflation at home and abroad.
Mr. Chairman, I recognize that there are responsible men
who have reached a different conclusion than I have about our
I proper course with respect to gold. And I realize that there
are risks today -- as there would be at any time -- in removing
long-standing restrictions. Yet after reflecting on the matter,
I must conclude that with respect to gold today there would be
[ greater risks in postponing actions which are clearly in the
| right direction for the U.S. Government to take.
10
Proposed Financial Solidarity Agreement
You have suggested that I also comment this morning on
the U.S. proposals for a "solidarity fund" among the major
industrial countries. Those proposals are described in detail
in recent statements by Secretary Kissinger and by me, with
which I am sure you are all familiar, and I will simply men
tion a few of the main points here.
I would be happy to
answer any questions you may have.
Our proposals for a financial safety net arose out of
months of quiet negotiations with our major industrial part
ners. Our analysis of the forces underlying the energy markets
has led us to the conclusion that the present level of oil
prices is unjustifiable and that there can be no fundamental
solution to the energy crisis without a reduction in the in
flated price of oil. For this reason, we have not been attracted 1
to purely financial "recycling" schemes for these would treat
only the symptoms and not the root of the problem itself.
Nevertheless, we see the need to provide financial backstopping until the goal of reduced oil prices can be achieved.
We believe that the major consuming countries must join together I
in a creative response to the oil problem, a response which
links cooperative energy policies to cooperative financial
policies.
In this way, we can provide the mutual insurance
essential to protect the health of the world economic system,
while at the same time we are increasing our energy independence i
and so laying the foundation for a fruitful dialogue between
producers and consumers on the oil price issue.
As you know, we have called for a major new mechanism,
established by the major industrial countries in association
with the OECD, to provide standby support to any participating
country which finds itself in economic trouble after having
taken reasonable measures to resolve its difficulties. As
we have tried to stress, the facility is not intended to pro
vide free, unlimited or unconditional aid but to serve as a
mutual insurance network for countries which might otherwise
be compelled to take restrictive action or to reduce economic
activity to lower-than-desirable levels -- for their own well
being and the health of an increasingly interdependent world.
Several principles are fundamental to the kind of
mechanism we envisage:
First, the financial arrangements would support a con
certed energy program, and participation would be linked with
a commitment to cooperate in reducing dependence on oil imports.®
Second, participants would undertake to pursue responsible
adjustment policies and avoid recourse to restrictive trade
measures or any other beggar-thy-neighbor policies.
Third, the facility must be large enough to give
confidence to the participants that emergency financing will
be available. We have recommended a facility with total
commitments by all members in the neighborhood of $25 billion
in 1975, with provision for additional resources in subse
quent years if and when the need arises.
Fourth, the facility is designed to supplement existing
private and public channels of financing, not to replace them.
This complex of existing mechanisms has worked well so far
this year and we see no reason why it will not continue to do
so. But we must allow for a situation in which individual
countries find themselves in economic difficult with needed
credit either too scarce or too expensive to permit them to
maintain open economies at appropriate levels of economic
activity.
Fifth, decisions on the provision of financial support
should be taken by a weighted vote of participants and should
be based on the overall economic position of the borrower,
not any single criterion such as oil import bills. Oil deficits
have become increasingly indistinguishable from "non-oil
deficits" and conventional balance of payments concepts have
lost much of their meaning in today’s world. Access to the
facility should thus be determined on the basis of an informed
judgment which considers not only a country's needs but also
its resources -- including alternative sources of finance -its internal and external economic policies, and the effort
it is making to reduce its dependence on imported oil.
Finally, whenever support is provided by the facility,
we believe it important that all members share the credit
risk on the basis of their participation.
We have had initial discussions of this proposal with
representatives of the major countries. While we have not
sought commitments, others have indicated a strong interest
in the proposals and voted unanimously to set up a working
group under the Deputies of the Group of Ten. This working
group will meet intensively, beginning later this week, to
examine the U.S. proposal and a similar one by the SecretaryGeneral of the OECD, with a view to reporting by mid-January.
We have considered that the Exchange Stabilization Fund
would provide the best vehicle for U.S. participation in the
new facility. We will be discussing this with the Congress
intensively over the next few weeks and will seek Congressional
authorization for any U.S. participation.
12
Contributions to Multilateral Development Banks
Now, Mr. Chairman, in response to your request I would
like to review briefly pending legislation and negotiations
on future participation in multilateral lending institutions.
First, I would like to emphasize the Administration’s
complete support for H.R. 11666, the Asian Development Bank
Bill, which was favorably reported by this Committee and is
now ready for Floor action.
It has the support of the U.S.
business community here and abroad. The Senate passed iden
tical legislation by unanimous consent last August.
This bill authorizes a $362 million subscription, the
first since 1965, to the Bank’s hard-loan facility. This
subscription will restore U.S. voting power to 17 percent,
on a parity with Japan, from the 7.5 percent to which it has
fallen as a result of other countries going ahead with their
planned subscriptions last year.
I must note that this subscription will be paid in three
annual installments and over 80 percent, or $290 million, of
these hard-loan funds are in the nature of a guarantee involv
ing no budget outlay, and almost all of the remaining $72
million are in the form of non-interest bearing letters of
credit that will not be fully drawn down for many years.
A second part of the bill authorizes the final $50 million
of a planned $150 million U.S. contribution to the concessional
lending facilities of the Bank of which $100 was authorized
in March 1972. The U.S. share of the total replenishment has
been held down to under 20 percent of the total contributions
by all donors and no appropriations will be required until
FY 1976 with outlays stretched out over an additional period
of time.
The burden-sharing and fiscal features of both parts of
this bill are highly beneficial and fiscally responsible.
I
strongly hope this Congress will complete action on H.R. 11666
before final adjournment.
Second, I am happy to inform this Committee that, after
extended discussions, the Inter-American Development Bank and
a group of thirteen developed countries in Europe plus Japan,
have arrived at a basis for membership in the Inter-American
Bank by those countries. This Committee has long urged such
membership, and, as I indicated in my recent letter to you,
13
It'
we expect their participation to be helpful in burden-sharing
terms, without prejudicing the favorable position in the Bank
that the United States now enjoys and will continue to enjoy.
The thirteen countries involved will provide the Bank
with $755 million of new resources. Their share of the Bank’s
voting power will be less than 8 percent with a rule prohibit
ing a share in excess of this amount. These same rules will
also prohibit our share from falling below 34.5 percent of
the total voting power.
The prospective nonregional member countries expect to
declare their intention to join the Bank on December 17 at a
meeting in Madrid, after which they will go to their Parliaments.
Because a new class of stock is being created and extensive
changes in the Bank’s Charter are necessary, we on our part
require legislation as well.
I want to point out that such
legislation involves no money from us, but simply our agree
ment to the largely technical Charter changes that are needed.
I am transmitting to the Committee for its examination docu
mentation on the various aspects of the nonregional membership
proposal. Treasury officials will be happy to work closely
with you on it, in anticipation of the submission of draft
legislation next year.
on
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I
should add that, quite apart from the nonregional
membership question, there is an urgent need for us to reach
agreement with the present members of the Bank on a new replenishment of resources. We have not discussed this issue
yet with the other members, and before doing so we will consuit with this Committee and the other relevant committees
^he Congress, as we promised to do on such matters and have
been doing.
I think it is important that consideration of a
replenishment move forward on a timetable that would permit
legislation on it and on nonregional membership to be con
sidered as a package this coming spring.
o0°
Departmentof
WASHINGTON, O.C. 20220
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December 4, 1974
MEMORANDUM TO EDITORS
The attached Q-§-A materials were presented
at 10:30 a.m. today by William E. Simon, Secretary
of the Treasury and Chairman of the Economic Policy
Board,at an economic briefing for the press.
Included are the most relevant questions being
asked by reporters and others on the subject that
public opinion polls indicate is the foremost
concern of the American people -- inflation and
attendant economic problems. Please feel free to
reproduce, quote or otherwise use as you wish.
Office of Public Affairs
Focus on America’s Foremost Problem
INFLATION, CONTROLS, ENERGY, TAXES:
An Interview With The Honorable William E. Simon
Secretary of the Treasury
Chairman, Economic Policy Board
QUESTION: Why are you concentrating on inflation?
Isn’t the threat of recession our No. 1 problem?
MR. SIMON: President Ford has called inflation Public
Enemy No., 1, and I fully agree. Prices are going up faster
than at any time in our peacetime history and, if they con
tinue at this pace,they will undermine the very foundations
upon which this nation is built.
Double-digit price increases have had brutal impact on
low-income families, the elderly existing on retirement pensions
and savings, and other Americans who cannot obtain income
boosts to offset inflation.
Inflation is also eroding the purchasing power of
existing financial assets and pushing up interest rates as
lenders try to salvage real returns. Creditors suffer and
debtors benefit as claims are repaid with depreciated dollars.
Business firms and consumers are forced to adjust spending
and investment plans, producing still other adverse economic
effects.
Perhaps the worst toll of all taken by inflation is the
most subtle -- the erosion of people’s confidence in the
future -- their loss of faith in their society and government.
Indeed, this toll seems to grow in the same ratio as the
rate of price increases. This is why we in Washington must
act, and act decisively, to come to grips with this curse.
WS-161
2
This is not to say that our problems are one-dimensional.
We are also confronted with a growing sluggishness in our
economy, and are taking actions to meet this challenge.
Yet we must recognize the extent to which inflation has
caused the general slowdown.
It was inflation that dried up
the supply of mortgage money and sent the housing industry
into a tailspin. And it is inflation that has undercut
consumer confidence, causing the biggest reduction in consumer
purchasing since World War II. Since housing and consumer
purchasing are the two weakest sectors of the economy,
inflation must now be the chief target of our economic policies.
Q: Why do we have to stop inflation, considering all
the costs of doing so? Why can t we turn our attention to
unemployment and just live with inflation?
A: We can't live with double-digit inflation
it is destroying our social structure. History is
with the wreckage of societies that failed to come
with this contagion. America can still avoid this
because
littered
to grips
end.
If we were to switch to stimulation of the economy
in order to reduce the rate of unemployment, our problem
would not be just living with the present rate of inflation,
but living with an accelerating rate of inflation. And if
we maintained such a policy stance for long, we would pass
beyond the inflationary point-of-no-return, and prices and
wages would be sucked up uncontrollably like leaves in a
hurricane.
The situation we are in now is different from previous
recessions. During earlier economic downturns the govern
ment could safely switch over to stimulative policies
because the inflation rate was tolerable. That is not now
the case. Our primary concern has to be to avoid worsening
the already dangerously high inflation rate. Any significant
stimulation of the economy now would simply whip prices
higher and lead to an even tougher day of reckoning later.
3
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Q: What does the current economic situation mean to
the average person?
A:
Many people are frightened. They don't understand
what's going on in the economy. Their confidence has been
shaken by their extended bout with super-inflation, and they
fear further erosion of their savings and pensions. Many are
upset, by the scarcity of mortgage credit. The security of
their jobs is threatened by rising unemployment.
People cannot be blamed for being worried about this
confusing set of circumstances, especially when so many
economic experts disagree on both diagnosis and cure. This
is why it is important for the Government to keep its eye
on the primary source of trouble, which is inflation, and
then follow steady, balanced policies to gradually bring
it under control, at the same time taking the necessary
steps to cushion the impact -- on the unemployed, for example -where cutbacks hit with disproportionate force.
Q.
You've used the term "stagflation."
What .does it
mean?
A.
It's a composite word made up of the first part of
"stagnation" and the last part of "inflation." Stagflation
means that prices rise rapidly at the same time that economic
activity stagnates and unemployment climbs. We used to
experience one or the other. Now.we have both. Why? Because
unsound government policies, combined with special outside
shocks like the food and fuel crises, allowed inflation to
get out of hand.
4
Q:
prices?
What’s caused inflation?
Isn't it mostly high oil
A: No, not most of it, though it has certainly been an
important factor. The rise in gasoline, motor oil and fuel oil
prices has accounted directly for about 15 percent of the
rise in the Consumer Price Index over the past year. Other
calculations suggest that the quadrupling of world crude oil
prices might account for as much as one-third of the 20
percent increase in wholesale prices from a year ago.
There are several other key causes, some due to special
factors, others to unsound government policies. Among the
former was bad weather around the world, which led to crop
shortages and high food prices. A simultaneous worldwide
boom put pressure on prices of internationally traded commoditie
And two needed devaluations of the dollar triggered widespread
demand for United States goods.
Unsound government policies include our three-year experi
ment with wage and price controls, which led to severe economic
distortions and supply shortages. Political pressures have long
put a premium on excessive consumption, at the price of adequate
investment in productive facilities. Monetary policies have
been overly stimulative. And Federal budget deficits have
been spurring inflation since the early 1960s.
In fact, to my way of thinking, these unsound monetary
and fiscal policies have been the most fundamental causes of
present-day rampaging inflation.
Q:
How have the budget deficits promoted inflation?
A: If inflation is Public Enemy No. 1, then chronic
government budget deficits must be recognized as Public Enemy
No. 2. It took 185 years for the Federal budget to reach the
$100 billion mark, nine more years to hit $200 billion, and
only four more years to reach the $300 billion level. And in
only one of the past fourteen years has the government been
able to balance its books.
In the past ten years alone,
Federal deficits have reached a staggering total of $103
billion. The over-all Federal debt, in the process, has
soared to $480.5 billion, and annual budget outlays for
interest charges alone on this debt now amount to $31.5 billion.
5
If
When the Federal budget runs a deficit year after year,
especially during periods of high economic activity, it becomes
a major source of economic and financial instability. The
huge deficits of the 1960s and 1970s have added enormously
to aggregate demand for goods and services, and have thus
been directly responsible for upward price pressures. Heavy
borrowing by the Federal sector has also been an important
contributing factor to the persistent rise in interest rates
and to the strains that have developed in capital markets.
Worse still, continual budget deficits have tended to
undermine the confidence of the public in the capacity of
government to govern, let alone deal with inflation.
Q: Why is it so hard to cut $5 billion from a $305
billion Federal budget? Why can’t the Pentagon budget be
cut?
A: It is difficult to cut the fiscal 1975 budget
because such a large proportion of the spending is mandated
by previous contractual and legislated commitments, which
often can’t be changed quickly, and because we are now almost
half-way through the fiscal year. There are, however, some
areas of the budget that can be cut back and no part
will be considered sacrosanct, including the military. We
must keep in mind, however, that since 1968, defense spending -as measured in real terms -- has been reduced by about one-third.
One key fact
widely overlooked is that even after
this year’s budget is cut back by $5 billion, expenditures will
still show an increase of $32 billion over last year’s total -an 11 percent jump. What we are actually trying to do is
blunt the rate of increase.
In the longer run, budget cutting is difficult because
most government programs have vocal and powerful proponents -the beneficiaries of public spending. On the other side, it
is hard to get organized pressure to cut spending. Opposition
to spending is diffused widely among the public while the
support for spending is concentrated and often very effective.
6
Perhaps this will change. I believe the American people
are fed up with deficit spending and the rapid rise in prices
it causes. One hopeful development is the new budget process
that Congress adopted last year. For the first time, Congress
will have to address explicitly the issue of how large total
Federal expenditures and revenues should be -- instead of
following the piecemeal approach they’ve used in the past.
There's a good chance that this new mechanism will produce
at least some of the fiscal discipline w e ’ve needed so badly
for so long.
Q : What about the so-called "uncontrollables” in the
Federal budget? In which of these areas is spending increasing
the most rapidly?
A : In the past six years, the so-called uncontrollable
outlays rose about $90 billion and were nearly $200 billion in
19 74-- almost 3/4 of the total budget. Nearly $70 billion of the
$90 billion increase was in social security and other retirement
programs, veterans benefits, and a wide range of health and
welfare programs.
Interest on the national debt and other fixed
commitments accounted for the remainder.
Achieving control over government spending is complicated
by the way many Federal programs start on a small scale but
then mushroom rapidly. Some examples:
*Food stamps came to $200 million in 1969 but reached
nearly $4 billion in 1974--a 20-fold increase in just five years
^Public assistance programs and social services totalled a
little over $3 billion a decade ago but are nearing $20
billion now.
*Total Federal health outlays were $1.7 billion a decade
ago but are now over $25 billion.
Incidentially, I consider the word ’’uncontrollable” a
misnomer. We need not and must not accept developments that
we recognize are leading us to disaster. Just because Congress I
has legislated a program doesn't mean it can’t be changed.
Q: What about so-called off-budget items? With these
omissions, how can people get a true picture of total spending
by government?
A: I believe it is essential that we give the American
people a true picture of all Federal programs, including those
government-sponsored lending and other activities which are
now excluded from the "unified budget" submitted to Congress.
While such activities have been excluded from the budget by
law or by the conventions of government bookkeeping, they
still have a considerable impact on the economy and on the
American taxpayer.
For example, in fiscal year 1974 the reported figure of
$3 billion of government borrowing from the public (to finance
the unified budget deficit of $3.5 billion) showed only the tip
of the iceberg: the net borrowing from the public to finance
government programs outside of the budget was estimated at $30
billion. We believe that these off-budget activities should
be given greater attention in the budget-making process since
they exert enormous demand on money markets, boost interest
rates and, in effect, pre-empt much necessary private borrowing.
Q : Will we ever again see 6 percent interest rates on loans?
A: It’s possible--but not until we achieve a much lower
rate of inflation. Today's high interest rates are caused by
today's high rate of inflation and the tremendous demands that
built up for loans. As we reduce this demand along with the rate
of inflation, interest rates will come down.
But we can't reverse that sequence; that is, we cannot
cut the inflation rate by driving interest rates down through
the process of creating much more money and credit. That would
only throw fresh fuel on the inflationary fire. Inflation would
speed up and interest rates would be driven still higher.
The only way to get to a 6 percent rate of interest from
here is to bring the rate of inflation significantly below
6 percent. We should also recognize that each time we lose a
bout with inflation, interest rates are ratchetted higher.
In
1960 the bank prime lending rate peaked at 6 percent. In 1969
it reached 8-1/2 percent, and this year the high point was hit
at 12 percent.
The current high levels of interest rates reflect the
expectation of continued inflation. Because of this in
flationary psychology, lenders require and borrowers are
willing to pay a premium roughly equivalent to the expected
rate of inflation.
Q: What will the Administration's 5 percent surtax
proposal do to cure "stagflation"?
A: The surtax is only one element in the President's
comprehensive economic program. "Stagflation" will not be
cured by any single step. However, the surtax proposal is
extremely important in that it is designed to pay for the
unemployment and other spending programs that will cushion
the impact of economic adjustment and insure that burdens
are equitably shared.
Q: Doesn't the 5 percent surtax apply equally to
middle -income taxpayers and high-income taxpayers? Isn't
this unfair?
A: Perhaps we could have done a better job in explain
ing the application of the surtax proposal. Apparently some
people believe it is a flat 5 percent tax, which would be
regressive. The fact is, it is quite progressive since it
is a percentage of the amount of tax payable by reason of our
normal progressive income tax rates. Thus, an individual
taxpayer with a taxable income of $11,700 would owe an
additional $78 as a result of the surtax, and a taxpayer
with a taxable income of $24,150 would owe an additional $293.
Q: Will the 5 percent surtax bring in enough additional
revenues to balance the budget?
A: No, it will not. The revenue from the proposed
5 percent surtax will pay for the unemployment and other
personal assistance programs recommended by the President ,
as we 11 as liberalization of the investment tax credit. ^he
budget will still be in deficit by some $8-10 billion for
this year.
If we can keep the deficit within a reasonable range
in fiscal 1975, we can then move toward balance in later
years. The era of loose Federal budgets can, and must, be
brought to an end.
9
2
i
Q: What's wrong with government spending new billions,
as many are suggesting, to halt the rise in unemployment?
A: Unfortunately, there's no such thing as "free"
Federal programs -- any more than there's such a thing as
a free lunch. And it's high time public officials leveled
with the American people and told them so. If we don't
have the courage to raise taxes to pay for new spending
programs, then people are forced to pay through the cruelest
and most regressive tax of all -- inflation.
If we are going to have programs to cushion economic
adjustment, taxpayers must pay for them. If not, if
Washington resorts to more economic pump-priming, we face
even worse inflation-- which, in turn, will lead to still
another economic slump and more unemployment.
I sincerely
believe that the higher-income people among America's 86.5
million jobholders can and should contribute more to help
the 5.5 million unemployed.
Q: What are your plans to deal with unemployment if
it worsens?
A: A solid unemployment compensation system is now in
place and we have proposed to the Congress that it be extended
and expanded. In addition, we have submitted legislation to
create a Community Improvement Corps, which would provide
temporary employment for out-of-work men and women who have
exhausted their unemployment benefits.
Other action would create more private sector jobs,
including the extension of loan funds to aid the housing
industry and our recommended expansion of the investment
tax credit. Basically, however, the ultimate way to provide
more jobs lies in reduction of inflation, restoration of
consumer confidence and stabilization of the economy.
Q: Many are advocating a return to wage and price
controls. Why not?
A: Because they are destructive of both our economy
and our freedoms. They deal with the results of inflation
rather than the causes, like taking aspirin to attack a
fever rather than curing the infection.
10
In 1972-73 controls proved themselves ineffective in
holding down inflation. And where controls do in fact
suppress prices and wages, they create distortions.
In
some of our basic industries like steel and paper, profits
squeezed down by controls forced curtailment of expansion
which resulted in present shortages. Thus, controls
eventually increased the pressure on prices rather than
lessened it.
Normally, when the demand for a product rises in
relation to the supply, for whatever reason (such as the
cut-off of oil supplies by the Arab countries in late 1973)
the price of that product rises. This usually causes the
profits of those companies who supply the product over the
short run to rise, but more importantly, it increases the
profit opportunities for new producers who might start
producing the product. When these new suppliers increase
the supply in relation to the demand and old producers
increase production, the price of the product will drop
again.
Price, wage and/or profit controls frustrate and dis
tort this process.
In the first place, not all prices,
wages and profits can ever be controlled by the government,
particularly the prices of imported raw materials. Second,
by freezing prices, wages and/or profits, the incentive for
anyone to increase the supply of a product is removed because
the profit potential is removed. In fact, existing producers
who see their costs rise often just stop producing completely.
As a result, over a period of time, the supply of the product
shrivels up, thus further aggravating the demand pressure
for the product, ultimately resulting in rationing, black
markets, curtailment of expansion, flow of capital and goods
out of the United States where profit opportunities are
better, and many other results that are diametrically
opposite to the objectives that the price controllers are
attempting to achieve.
Controls, in summary, distort investment decisions and
the allocation of resources, distort markets and exports,
keep natural forces from reacting against economic defects,
and give a false impression of action which delays truly
effective remedial action.
11
Q:
What about proposals for standby wage-price controls?
A: The problem with standby wage-price controls is that their
very presence creates an expectation that controls will be
imposed at some future time. There is thus a rush by business
and labor to raise prices and negotiate large wage increases
before the controls are slapped on. Compounding the problem,
the resulting rise in wages and prices then provides the seeming
justification for imposing controls.
Q: How can high corporate profits be justified in a period
of economic difficulty like today.
A: Double-digit inflation has done strange things to
corporate profits. Some of the conventional accounting
techniques used by corporations have proved to be inaccurate
and misleading, now that inflation has become so rampant. They
understate the replacement cost of both inventories and
capital equipment, and thus overstate profits. They create an
illusion of rapidly rising profits when the actual record of
profitability is weak.
r+**<
e
s
In addition, corporations have to pay taxes on those
illusory profits, and to some degree they pay dividends from
them as well. As a result, corporate cash flow has been squeezed
hard: the retained earnings of nonfinancial corporations,
after adjustment for the understatement of replacement costs of
inventories and capital equipment, was down to $3 billion in
1973, less than one-fifth of the 1965 level,
Q:
But what about high oil company profits?
A: I have consistently stated that current oil industry
profits represent to a considerable extent a windfall due to
the rigging of world crude oil prices by the Organization of
Petroleum Exporting Countries.
I have also consistently
supported legislation we proposed a year ago to tax away these
windfall profits as a way to prevent one sector from profiting
unduly at the expense of the rest of the economy.
At the same time, we have compared the profitability of
the oil industry to that of 28 other industry categories over
the past 16-year period, and find that the industry's
profitability, when viewed over a reasonable time period, falls
within the normal experience of most major U.S. industries.
And we must recognize that adequate profits are essential to
the development of adequate future oil supplies.
12
Q: Why should people be concerned about whether
bus iness makes a profit or not?
A: Because the best way to reduce inflation is to
increase supply, and this requires adequate technology and
productive capacity and human and material resources. These
variables all have long lead times, and our system relies
on the private sector to develop these capabilities. The
government influences these development efforts, but basically
there is only one real motivation to make these capital and
human investments -- the expectation of profits. If we don’t
have adequate profits now, we suffer later.
In effect, profits are the fuel of the engine that pulls
the train of American bus iness and industry -- the train
that carries as cargo the jobs of the working men and women
of this nation.
Q: What do you mean when you talk about boosting
productivity?
A: The term productivity refers to the efficiency of
our economy -- the amount of real output that can be produced
per worker (and also per unit of capital input).
The importance of increasing productivity is that it
helps us achieve two very important national goals:
It reduces
costs and thus lessens inflationary pressures, and it increases
total production and thus improves our standard of living.
Indeed, in the long run, increased productivity is the only
source of a rising national standard of living.
How can productivity be boosted? By cutting waste on
the job and working ’’smarter” -- and by increasing the quantity
and quality of capital equipment available to each worker.
This is why I put so much emphasis on the need for more savings
and more investment. This country has been lagging much too
far behind in total fixed investment. For example, since
1960 U.S. capital formation (including residential) has
averaged only about 19% of our total output -- about the same
as in the United Kingdom.
In the same period, the investmentratio was 25% for France, 26% for Germany, and 33% for Japan.
>
3
13
If the U.S. is to check inflation, stay competitive and
continue to create abundance for its people, we must not only
provide greater incentives for saving and investment, but also
remove impediments to efficiency throughout the economy.
The National Commission on Productivity has been charged with
the job of identifying problems in this area and recommending
solutions.
Q: What about energy conservation? When are we going
to start? With what? Gasoline rationing? Or an increase
in the gasoline tax?
A: Energy conservation is essential to our national
effort to achieve greater independence from high-cost and
unstable foreign oil imports. President Ford has set a
conservation goal of one million barrels a day by the end
of 1975. We believe we can achieve that goal through measures
outlined by the President in his economic message of October 8,
1974. Included in this program is a plan to require oil and
natural-gas-fired plants to switch to coal and nuclear power;
a requirement that the automobile industry develop increased
gasoline savings; and a more rigid enforcement of the 55-mileper-hour speed limit.
!
Further, there are a series of mandatory conservation
steps for government and voluntary measures for the American
people. This program can work. However, the President has
made it clear that if immediate reductions are not achieved,
he will seek more stringent means to insure that United States
dependence on foreign supply is reduced. Whatever steps are
necessary will be taken, but I still believe that gasoline
rationing must be a last resort.
It is important, however, to emphasize that conservation
alone is not enough. We must move aggressively to develop our
domestic energy resources. Together, increased production
at home and a hard-hitting program of energy conservation can
move us toward self-sufficiency.
14
Q: Will the coming period be anything like the early
1930s? Is the average citizen protected against an economic
collapse?
A:
Economic conditions today are totally different
from those of the 1930s. We have Federal,insurance of bank
deposits. The Federal Reserve System is committed to avoidance
of a credit crunch and to a continuing moderate expansion of
money and credit.
In the early 1930s the money supply contracted
by about one-third. And unemployment then rose to 25 percent
of the work force compared to a little over 6 percent today.
We have a very substantial unemployment compensation
program in being and have recommended a further expansion
of that program, plus a larger public service employment
program. We have other income-maintenance programs -- social
security, food stamps, public assistance, etc. -- that will
not decline even if general business activity is depressed.
We also have a large part of our work force employed in
economic sectors that are essentially depression-proof.
For all these reasons, the economy is much less vulnerable
to an economic collapse than it ever was before.
Q: How soon can we lick our economic problems and get
back to stable, prosperous growth?
A: While we can hope to see a turn-around in 1975,
long-lasting solutions will not come quickly or easily.
Inflationary forces have become deeply embedded in our
economic structure and will take time to get wrung out,
demanding both consistent and persistent policy approaches.
The hard fact we face is that America is at a historic
crossroads in balancing consumption demands against the pro
duction capacity of the matchless economic machinery we have
built up over the centuries. And the problem is bigger than
simply meeting the painful concurrent problems of inflation
and recession, serious as they are.
As a nation, we have been indulging in a consumption
binge. We have been using up our inheritance and borrowing
from the future, at one and the same time.
In effect, we are
burning the candle at both ends -- and the candle is getting
shorter.
7
- 15
, 4
-
On one hand, America now faces vast, rapidly rising
needs to devote more of its output to capital investment -to replacing, modernizing and expanding our factories, mines,
farms and other productive facilities. We have been falling
far short of meeting this imperative. We are in the dangerous
position of people on a ship whose hull is slowly rusting
away through lack of adequate repair and maintenance.
The record shows the U.S. has been plowing one of the
lowest ratios of gross national product back into capital
investment of any major industrialized nation. And as a
result, we are suffering from the lowest rate of productivity
increase -- the very keystone for high living standards.
Speeding this drift toward economic crisis, we have
been borrowing from the future in order to expand living
standards today -- through an enormous expansion in debt
at the family, corporate and governmental levels. Government
itself has set a disastrous example of profligacy.
In summary, we have been living beyond our means.
the day of reckoning has now arrived.
And
Q: What can the average person do about inflation and
our other economic problems?
A: The American people are the key to solution. Each
of us can do many things to conserve oil, electricity and
other energy resources. We can cut waste in food consumption.
We can cut waste on the job -- and support efforts to boost
productivity in office and factory. We can "buy smart" and
resist price gouging wherever we find it. And we can demand
an end to government deficit spending and support pay-as-yougo policies for government programs for all time to come.
Indeed, this is the most important single step that can be
taken to restore both confidence and economic order.
Oo O
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SSI
Departmentof^TR EA SU R Y
i l iN G T O N . D C 20220
TELEPHONE W04-2041
FOR RELEASE AT 2:40 P.M. , EST
WEDNESDAY, DECEMBER 4, 1974
REMARKS OF ALAN M. ARSHT,
SPECIAL ASSISTANT TO THE DEPUTY SECRETARY OF THE TREASURY,
BEFORE THE NATIONAL ASSOCIATION OF
REGULATORY UTILITY COMMISSIONERS,
SAN DIEGO, CALIFORNIA, DECEMBER 4, 1974
Over the last decade we have received repeated warnings
that America and, for that matter, other members of the com
munity of industrialized nations were gliding, like pollyannas,
toward a full-blown energy crisis.
In retrospect, one common
characteristic of these warnings was especially disquieting:
the only people who seemed to be concerned were, the experts.
Regrettably, Federal awareness of the need for an energy policy
came too late and these predictions were realized.
Today, America faces a very real energy crisis -- a crisis
that threatens not only our potential for economic growth,
but our ability to meet our important social and national
economic goals -- goals which both policymakers and citizens
have accepted as fundamental American rights.
One of the ironies of our domestic energy crisis is that
the most imperiled component of our national energy base is
the one that most people, until quite recently, have taken
entirely for granted --our electric utilities. While unfor
tunate, this attitude toward the electric utility industry is
understandable in view of its history.
Over the years, the electric utility industry enjoyed
consistently stable returns on investment and growth in earn
ings.
Its gently rising costs were absorbed by productivity
savings arising from increasing economies of scale. As a re
sult, the industry enjoyed the highest ratings on its securities
and a very low cost of capital. The industry’s securities,
considered almost as safe as Treasury issues, were held by only
the most risk-averse investors. It was believed, after all,
that any industry which is regulated is guaranteed a return
on its investment which would be adequate to finance essentail
future expansion. Even state and local political authorities
treated the industry kindly, since they could raise their
WS-170
2
citizens’ taxes through the indirect and little-noticed method
of raising the utility’s property taxes. An industry replete
with friends and devoid of adversaries, as this industry was,
should have been blessed with a prosperous future.
As everyone in this room knows, the events of the last
twelve months have exploded these long-held assumptions.
An incredible combination of primary and secondary fac
tors descended upon the industry simultaneously, making a
shambles of the traditional relationship between its revenues
and costs. Chief among the villains were double-digit infla
tion, the surging price of petroleum and coal, and regulatory
lag. A second set of adverse influences included high interest
rates, power plant siting and construction delays and increas
ingly costly environmental standards. Every factor cited
above except one added substantially to a utility's historical
costs of operation. The exception was regulatory lag, which
had an equivalent effect since it constrained revenues.
Industry
profitability and net cash flow have suffered as a result,
creating widespread investor disenchantment, securities down
gradings, and construction cutbacks. The industry now finds
itself in somewhat of a dilemma:
it has the obligation to
meet furture public demand for services but yet it is unable
fo finance the construction of additional generating capacity.
The announced construction cutbacks to date are shocking
indeed:
in the nine months ending October 1, 1974, the industry
had postponed or cancelled 132,000 megawatts of planned ex
pansion. Approximately two-thirds of this amount (89,000
megawatts) is nuclear-based capacity and represents more than
half of all capacity additions originally planned as of the
beginning of 1974. An even more dramatic aspect of these
deferrals is that they amount to more than 2-1/2 times the
total nuclear generating capacity currently on line. A nuclear
deferral of this magnitude for only one year will force the
importation of an additional 850 million barrels of oil -over 2 million barrels per day -- at an annual cost of about
$10 billion. A second harmful effect of these nuclear con
struction cutbacks may occur if growth in peak demand resumes
after this year at its normal trend of 5-7 percent per year.
Managements might be forced in that case to substitute fossilbased plants for nuclear plans because of their shorter lead
time and lower initial capital cost.
The energy objectives of this nation can ill afford such
body blows. Moreover, the added unemployment implied by whole
sale construction cutbacks must be avoided, if at all
possible. Confronted with this scenario, the Administration
decided that Federal leadership was essential if we were to
have a financially sound utility industry. But this industry,
if it is to remain a linchpin of our economy, also requires a
regulatory framework fully responsive to today’s rapidly
changing economic conditions.
Administration officials entered into extensive discus
sions last summer with regulatory commissioners and industry
representatives in an effort to find a solution. The Administra
tion's approach to the problem is guided by three long-range
objectives which you should be aware of:
First, the total costs (including the cost of
capital) of producing and supplying electricity
should be paid by the user, not the general taxpayer;
Second, the Federal Government should not pre
empt the regulatory responsibilities of the states;
Third, all Federal actions should be consistent
with continued private ownership and management of
investor-owned utilities.
Some regulatory commissions, with full knowledge of the
impact inflation is having on their utilities, have continued
to set totally inadequate rates. Many commissions- fortunately,
having grasped the gravity of the situation, have responded
fully and quickly to requests for rate increases.
In recog
nition of the cash flow squeeze upon their utilities, some
regulators have placed at least a part of construction workin-progress in the rate base. Others are shortening book
depreciation lives and normalizing, rather than flowing through,
all deferred tax benefits. Furthermore, many commissions are
using future test periods, automatic adjustment clauses and
other ad hoc rate-setting mechanisms which are essential in_a
highly^ inflationary environment.
In addition, many commissions
have allowed effective rates of return on equity to rise to
levels at which new equity capital can be attracted to the
utility. Clearly, this rate is different for each utility.
A proper rate of return depends on a number of factors such
as fixed charge coverage, amount of leverage in the capital
structure, recent earnings history and divident yield, among
others.
The Administration can and will help state commissions
in any way which is consistent with the three general objec
tives mentioned earlier. But it cannot raise rates; it
cannot change obsolete book accounting practices; it cannot
recommend new statutes which would accelerate the state
regulatory process; it cannot adopt interim and automatic
4
rate-making procedures, Those are action which state commissions,
and in some cases, state legislatures must take
The Administration believes that the industry’s financial
troubles arise primarily from underpricing of electricity.
In a sense, this conclusion is self-evident, for if revenues
were at a level which covered all costs and, in addition, pro
vided an adequate return on investment, no utility would be in
difficulty. When I speak of "costs," however, I am referring
to economic costs, rather than accounting costs, since account
ing costs may or may not approximate reality.
This distinction is not a matter of semantics. Persistent
double-digit inflation has forced accounts to reconsider the
traditional view of depreciation methods and lives. That
view held that the original cost of the asset should be spread
over its useful life in equal increments (i.e., as with thè
straight-line method) without regard for replacement cost or the
time value of money.
It is becoming painfully clear, however, that
utilities, as well as other capital intensive industries, must
accelerate capital recovery if they are to be able to replace
technoligically obsolete or physically worn-out plants. Treasury
studies suggest that depreciable lives and methods used for tax
purposes approximate actual capital consumption more closely
than do book lives and methods.
In view of the electric
utility industry’s declining cash flow as a percentage of its
capital requirements, this is a matter which requires your
immediate attention. Revising allowances for depreciation
on existing plant to allow for inflation effects and recon
sidering lives and methods appropriate for new investment
would generate sufficient additional internal cash to solve a
large part of the utilities’ present financial problems.
In addition to underdepreciation, many utilities are
forced to flow through, rather than normalize, deferred tax
benefits.
In view of the unrealism of current book deprecia
tion allowances, persistence in ’’flowing through” tax benefits
deprives utilities of a portion of their internal cash flow,
a fact which undermines investor confidence in the quality
of reported earnings. Treasury’s concern over flow-through
accounting is underscored in its proposal to increase the
investment tax credit. That proposal conditions the avail
ability of the additional credit upon a form of normalization
of any resultant tax benefits.
5
We have come to a point.in time, however, when we must
do more than exchange unsolicited advice about what the other
fellow can or should do. The problem is national in scope and
any solution will require firm, continuous Federal-State co
operation.
I believe the Administration has taken some
conspicuously helpful first steps. Aside from the communica
tion benefits of several conferences last summer, we have
proposed various pieces of legislation which would either
directly or indirectly benefit the utility industry:
First, the Nuclear Plant Licensing Bill, which
would streamline the nuclear construction delays now
being experienced by the industry. Carrying costs
alone from these delays add 15 to 20 percent to the
cost of a plant, and must be borne by the ratepayer.
Second, Electric Facilities Siting Act, which
would compress the amount of time required to put
an electric power plant into operation .
Third, Natural Gas Supply Act, which would
stimulate development of new reserves.
It would
also slow the substitution of electric power for
natural gas and ease peak generating demands.
Fourth, three Treasury tax proposals have
been adopted by Ways and Means:
(a)
Increase investment tax credit from
4 to 7 percent
(b)
Normalize the additional credit
(c)
Extend five-year rapid amortization
for pollution control equipment.
*
A fourth, which has not been adopted, would
have allowed state commissions five years
to conform book depreciation lives to tax
lives.
Fifth, the Surface Mining Act, which would free
the coal and electric utility industries from unrea
sonable constraints upon the development of coal
resources.
6
Sixth, Clean Air Act Amendments of 1974. While
the Clean Fuels Policy has been helpful, there is
substantial disagreement currently within the Ad
ministration as to whether the costs of the sulphur
oxide emission standards outweigh the benefits.
Each of these six bills is mired in Congress awaiting
passage -- which brings me to my last point.
Rather than asking for subsidies, credit guarantees or
other forms of Federal assistance, state commissions must
accept the fact that all forms of energy will cost more ini
the future than they have in the past. Part of the reason
is inflation, which the Administration is trying very hard to
bring under control. But the other reason is the universal
recognition that petroleum and all available energy alterna
tives are scarce, non-renewable resources. While prices may
not remain at the present level established by OPEC, they will
undoubtedly be much higher than in the period preceding 1973.
It is within this framework of reference that utility
commissioners must operate. You must set a rate which covers
the real cost of electric power, but at the same time, you
must do what you can to bring those real costs down. Better
rate designs, peak load pricing, management efficiency standards,
as well as management incentive programs could help achieve
this objective.
In contrast to these thoroughly constructive
programs, commissioners who opt for understatement of actual
depreciation costs merely shift part of the cost of service iron;
current ratepayers to future ratepayers. For it is that second
group who will bear the brunt of the next emergency rate increase.
Those utilities whose common stock is selling at deep
discounts from book value, or whose fixed charge coverage is
at or below its legal floor, or whose earnings are not cover
ing dividends, require immediate and substantial rate relief
to do otherwise, to permit this situation to drift for much
longer, is to invite bankruptcy of these utilities and, even
worse, a power-short economy in a very few years. When short
term political benefits from harsh treatment of rate requests
are stacked up against the prospect of brownouts, blackouts
and economic stagnation, the choice is clear. Those utility
regulators whose utilities are in extremis must begin to
appreciate that the long-run interests of the consumer in
investment, growth and technological progress transcend the
short-run preference of keeping rates artificially low.
7
4
C
There are many issues pending in Washington which vitally
concern utilities and utility regulators: scrubbers, secondary
air standards, the investment tax credit and power plant siting
and licensing, to name a few. Each of these issues has the
potential to substantially affect the costs of operation of
every electric utility.
It is in your interest to take part
in the debate, to offer your analysis of the costs and benefits
produced by each measure. Without your expert advice, new
legislation affecting utilities may be unnecessarily burden
some. However, by working together in a spirit of frank and
forthright exchange, we can restore the vitality of one of our
most critical resources -- the electric utility industry.
0O0
FOR IMMEDIATE RELEASE
December 4, 1974
U. S. TREASURER FRANCINE NEFF
NAMED NATIONAL DIRECTOR OF
SAVINGS BOND DIVISION
Treasury Secretary William E. Simon today announced the
appointment of Mrs. Francine I. Neff, the Treasurer of the
United States, as the new National Director of the United
States Savings Bond Division. Mr. Jesse L. Adams, Jr., will
continue as Deputy National Director.
Since becoming United States Treasurer last June 21,
Mrs. Neff has been very active in the Savings Bond Program
and has already visited 12 states in behalf of it. Mrs. Neff
expressed pleasure at the additional assignment, and pointed
out that an estimated $6.8 billion in United States savings
bonds will be sold this year -- the highest dollar sales in 29
years. '»This is a real tribute to the volunteers and professional
men and women in the savings bond program, and I'm delighted to
be joining them in an official capacity.”
As Treasurer, which is a Presidential appointment, Mrs.
Neff's duties include reviewing currency issues and redemptions,
signing currency, serving as an assistant to Secretary Simon
and Under Secretary for Monetary Affairs Jack F. Bennett, and as
a Departmental spokesman. She is also Chairman of the Depart
ment's Bicentennial Program.
As National Director of the U. S. Savings Bond Division,
Treasury Department, Mrs. Neff will head a staff of 470 employees
in Washington, seven regional offices and 46 states. The
Director serves as spokesman for the Savings Bond Program and
its part in Treasury debt management policies.
oOo
WS-171
DeparlmenloftheTR[ASllll¥
/ASHINGTON, D C.20220
|
TELEPHONE W04-2041
December 5, 1974
FOR IMMEDIATE RELEASE
TREASURY’S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders
for $2,000,000,000, or thereabouts, of 364 -day Treasury bills to be dated
December 17, 1974,
and to mature December 16, 1975
(CUSIP No.
912793 WW2).
The bills will be issued for cash and in exchange for Treasury bills
maturing
December 17, 1974, outstanding in the amount of $1,802,550,000,
of which Government accounts and Federal Reserve Banks, for themselves and as
agents of foreign and international monetary authorities, presently hold
$277,825,000. 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, 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 (maturity value),
and in book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
Wednesday, December 11, 1974.
one-thirty p.m., Eastern Standard time,
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000.
in multiples of $5,000.
Tenders over $10,000 must be
In the case of competitive tenders the price offered
must be expressed on the basis of 100, with not more than three decimals,
e *8*> 99.925.
Fractions may not be used.
Banking institutions 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 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
(OVER)
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2
-
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 Secretarj
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 competitive bids.
Settle
ment for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank or Branch on December 17, 1974,
in
cash or other immediately available funds or in a like face amount of Treasurj
bills maturing
December 17, 1974.
equal treatment.
Cash and exchange tenders will receive
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
notice, prescribe the terms of the Treasury bills and govern the conditions
of their issue.
Copies of the circular may be obtained from any Federal
Reserve Bank or Branch.
DepartmentoftheTREASURY
ASHINGTON, D C. 20220
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
REMARKS OF -THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
SECURITIES INDUSTRY ASSOCIATION CONVENTION
BOCA RATON CLUB, BOCA RATON, FLORIDA
DECEMBER 4, 1974
It is a pleasure to be with you this morning to talk
about the Treasury’s role in the development of government
policy relating to our capital markets.
Ever since
Bill Simon and I came to the Treasury, we were surprised by
the fact that there was no department in the Executive Branch
of government that was serving as a focal point for capital
markets policy.
The real need for this responsibility
became evident for many reasons, but I think it takes on
paramount*importance if you look at one critical problem
that we face during the next decade -- and that’s the ever
increasing demand for Capital.
The fact of the matter is
that our economy will need to generate a very large volume
of saving and investment in order to carry out the long-term
goals which we, as a nation, have set for ourselves.
These
goals include the vital development of the world’s energy
resources, which alone will require anywhere from $500 to
$750 billion in capital between now and 1985; the improvement
of our housing stock, the cleaning up of our environment, the
modernization and expansion of our basic industries, as well
WS-172
2
as the carrying out of all the conventional capital requirements
of our society, including the capital borrowing needs of our
Federal, state and local governments.
To achieve the goals that we have set for ourselves as
a society, we will have to increase our rate of saving and
investment and decrease our rate of consumption.
It will
not be easy and it will require leadership from the Federal
government *
Clearly, our highest priority must be to end the
inflation that confronts us today, for this will improve the
prospects for profits and therefore also for expanded business
savings and investment that our economy so badly needs.
At the same time, ending inflation will help to restore
the health of Our capital markets.
We have heard a-great
deal about the "crisis" that exists today in our capital
markets.
Actually, people have continually used the term
"crisis" very freely —
too freely at times.
W e ’ve
heard a lot about the "energy crisis," the
"international monetary crisis," as well as the "capital
markets crisis."
In all these areas I believe the time has
come for less political rhetoric and more economic understanding
of the factors that have contributed to our problems.
It is
inflation that has been a principal cause of the difficulties
in our capital markets, and it is only by exercising the
necessary economic and political will to bring this underlying
cause under control that we will be able to truly alleviate
these problems.
3
0
5
And the first step must be control of the Federal budget.
In recent months, too much of the burden of bringing inflation
under control has been borne by the Federal Reserve;
It is
imperative that fiscal policy join the anti-inflation fight
rather than contribute to inflation.
The basic budget objective is often described to be 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 had one surplus and
13 deficits.
The budget has not been balanced over the cycle.
In fact, it took 185 years for this country to get the
Federal budget up to the $100 billion mark, a line we
crossed in 1961.
Only nine more years were required to pass
the $200 billion mark, and then only
four more years
the $300 billion range.
growth over the past
The rate of
to reach
decade has been almost twice that of the previous decade.
Whatever the merits of pump priming when business is slack,
it H s clear that much of the deficit
spending of the last
came at times of high employment and
only served to
decade
fuel
inflation.
Adherence to a policy of balancing the Federal budget
over the cycle would provide the necessary fiscal restraint
critical to the control of inflation in the years ahead.
In
addition, such a policy would enlarge the flow of savings
available to the private sector for investments, because the
Government could reduce its claims on the capital markets.
4
By reducing the deficit, you will be reducing the need for
the Federal government to enter the market for non-capital
expenses.
At the same time that we adopt this budget policy,
there is a critical need to increase the productive capacity
of the economy in the years ahead.
As such, we must always
realize the importance of a higher level of investment in
helping to meet this need.
Bill Simon certainly recognizes this,
and I think the economic proposals offered by the President in
October reflect the need to accelerate the growth of capital
investment.
For instance, the President recommended an increase
to 10 percent in the investment tax credit as well as a restructur
ing of it.
He also proposed that the dividends paid on qualified
preferred stock be allowed as a tax deduction to the paying
corporation.
This proposal should encourage corporations to raise
new equity capital, and thereby improve their capital structure
as well as enhance the volume of their investments.
In addition,
we are working with the Congress to liberalize the tax treatment
of capital gains and losses so as to facilitate the flow of
capital to the most productive investments.
Finally, we are
supporting pending legislation to eliminate the withholding
tax on interest and dividend income accruing to foreign
holders of U.S. securities.
Elimination of this tax would
stimulate a larger flow of funds to U.S. capital markets.
The importance of all these policies is a clear recognition
by this Administration that we must begin to shift far more
of our resources into the capital markets.
Recognizing that there is, and will continue to be, an
increasing demand for capital world-wide, and feeling that
the Federal government has an ongoing responsibility to develop
public policy that would address this need, Bill Simon asked me
to establish within the Treasury a group which would evolve a
coordinated approach to the government’s role in the operation
of our capital markets.
In response, we have established two
offices in the Treasury, one called the Office of Financial
Resources Policy and the other the Office of Capital Markets
Policy.
The first office is principally responsible for
assessing world-wide capital needs, where potential financial
resources may be and what the best ways are to re-channel those
resources.
This Office is concerned with the effect of
capital flows on the private financial institutions and
its focus is more international than domestic.
The second
office is concentrating on the operation of our domestic
capital markets.
It will be responsible for conducting inquiries into
specific existing or potential problems of the markets.
Generally speaking we expect such inquiries to involve four
broad areas:
(1) the structure of our capital markets,
including the roles of the various financial intermediaries as
well as those of institutional and individual investors;
6
(2) the regulation of capital markets, including analysis of
the cost and effectiveness of existing regulatory structures;
(3) the overall demand for capital market services, including
analysis and evaluation of the impact of Federal, state and
local government borrowing demands on the markets and their
ability to meet projected future demand and (4) the financial
problems of selected industries.
One overriding concern
will be developing policy that will help to revive
the flow of capital in the equity market.
Obviously, getting
inflation under control and restoring public confidence is
crucial, but at the same time, we must look for specific
measures that will help balance the ratio between debt and
equity financing; thus providing the individual investor
a better opportunity to participate in the growth potential
of our industries.
As part of the development of policy in all these areas,
this Office will work closely with the Federal Reserve, the
Comptroller of the Currency, the SEC and other regulatory
agencies in an effort to evolve an integrated capital markets
policy.
Further, recognizing that tax policy has a direct
bearing on the performance of our capital markets, the Office
will work closely with the tax policy staff at the Treasury.
These are just some of the areas that will be addressed.
However, in order to have a proper appreciation of what we are
trying to do in the capital markets area, you have to appreciate
what both offices -- the Office of Financial Resources and
< L ~
7
the Office of Capital Markets Policy -- are doing.
These
are not offices designed to conduct long-range studies; we
have had enough studies.
get policy action.
These are offices designed to
And in that regard, I would emphasize
that Bill Simon and I are both personally committed to this
important effort.
I have learned in my short stay in Washington
that the chances of getting anything done are directly related
to the willingness on the part of the man at the top to become
involved -- and I can say that Bill Simon is, and will continue
to be,, involved.
That's why I think it's so important to
understand the whole organization we are creating at Treasury.
It starts with the Secretary and includes an Assistant Secretary,
a Deputy Assistant Secretary and two Offices.
That's a lot
of manpower to bring to an effort -- but we feel the issues
are that important.
With respect to the other people involved, we are fortunate
to have found what I think are highly talented individuals.
Bob Gerard, who is here today, will be the Director of the
Office of Capital Markets Policy.
In looking for a man for
this job, I must have interviewed over 50 people, and after
careful review I felt that Bob was the most qualified.
I hope
most of you get a chance to meet him.
To support Bob in this effort, we are putting together
a truly professional staff.
We have completed this task in
the Financial Resources Office and we expect to have 5 to 7
people under Bob's leadership very shortly.
Both Bob and I
firmly believe that each of our areas of inquiry involves
8
numerous subtle considerations best understood by sophisticated
professionals with practical experience in the market place.
Accordingly, it is our intention to include on that staff
as many highly qualified people from the securities industry
as we can find.
To help us find these people, I urge you,
as I have in the past, to provide us with suggestions as
to individuals who meet these standards.
In addition to our professional staff, we also expect
to rely from time to time on specialists from private industry
and the academic community with specialized knowledge in the
areas of concern.
Again, I ask your cooperation and assistance
when we call upon you for advice and consultation in dealing
with these problems.
Central to this whole effort, however, will be the
continual interplay between industry and government.
often governmental policy is made in a vacuum.
Too
What w e ’re
trying to do is create a focal point for capital market's
policy, not for government's sake but for you and for the
American people we all serve.
We want you to know that
there exists in the Treasury a group that wants to hear your
concerns -- and they will respond.
We want your views as to what the current problems are,
what the future problems are likely to be, and how best
to solve them.
We want these views formally, if you will,
in the form of policy statements of organizations such
5
7
9
as this one.
But more importantly, we hope that each of
you will make a point of communicating informally your own
opinions on capital markets related questions directly to
us, for it is only a full and candid exposition of the
diversity of viewpoints concerning the markets’ problems
that will provide us with the best basis for developing
sound policy.
I
hope these remarks provide you with a better under
standing of what we are trying to do.
It’s our way of
bringing together government, both the Congress and the
Executive Branch, industry and the public in a united
effort.
o 0 o
■■■
Department of
ftSHINGTON. D.C. 20220
^TREASURY
TELEPHONE W04-2041
ry
Focus on America's Foremost Problem
INFLATION, CONTROLS, ENERGY, TAXES:
Remarks on Economic Issues by The Honorable William E. Simon
Secretary of the Treasury
Chairman, Economic Policy Board
QUESTION: Why are you concentrating on in fla tio n ?
Is n 't the threat of recession our No. 1 problem?
MR. SIMON: President Ford has ca lle d in fla tio n Public
Enemy“No^ 1 , and I f u lly agree. Prices are going up faster
than at any time in our peacetime h isto ry and, i f they con
tinue at th is pace,they w ill undermine the very foundations
upon which th is nation is b u ilt .
D oub le-d igit p rice increases have had brutal impact on
low-income fa m ilie s , the e ld e rly e x istin g on retirement pensions
and savings, and other Americans who cannot obtain income
boosts to offset in fla t io n .
In fla tio n is also eroding the purchasing power of
e x istin g fin a n c ia l assets and pushing up in te re st rates as
lenders try to salvage re a l returns. Creditors suffer and
debtors benefit as claim s are repaid with depreciated d o lla rs .
Business firm s and consumers are forced to adjust spending
and investment plans, producing s t i l l other adverse economic
e ffe c ts.
Perhaps the worst t o ll of a l l taken by in fla t io n is the
most subtle - - the erosion of people's confidence in the
future - - th e ir loss of fa ith in th e ir so ciety and government.
Indeed, th is t o ll seems to grow in the same ra tio as the
rate of p rice increases. This is why we in Washington must
act, and act d e cisiv e ly , to come to grips with th is curse.
2
This is not to say that our problems are one-dimensional.
We are also confronted with a growing sluggishness in our
economy, and are taking actions to meet this challenge.
Yet we must recognize the extent to which inflation has
caused the general slowdown.
It was inflation that dried up
the supply of mortgage money and sent the housing industry
into a tailspin. And it is inflation that has undercut
consumer confidence, causing the biggest reduction in consumer
purchasing since World War II. Since housing and consumer
purchasing are the two weakest sectors of the economy,
inflation must now be the chief target of our economic policies.
Q: Why do we have to stop inflation, considering all
the costs of doing so? Why can't we turn our attention to
unemployment and just live with inflation?
A: We can’t live with double-digit inflation
it is destroying our social structure. History is
with the wreckage of societies that failed to come
with this contagion. America can st ill avoid this
because
littered
to grips
end.
If we were to switch to stimulation of the economy
in order to reduce the rate of unemployment, our problem
would not he just living with the present rate of inflation,
but living with an accelerating rate of inflation. And if
we maintained such a policy stance for long, we would pass
beyond the inflationary point-of-no-return, and prices and
wages would be sucked up uncontrollably like leaves in a
hurricane.
The situation we are in now is different from previous
recessions.
During earlier economic downturns the govern
ment could safely switch over to stimulative policies
because the inflation rate was tolerable. That is not now
the case. Our primary concern has to be to avoid worsening
the already dangerously high inflation rate. Any significant
stimulation of the economy now would simply whip prices
higher and lead to an even tougher day of reckoning later.
i r r
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3 -
Q: What does the current economic situation mean to
the average person?
A:
Many people are frightened. They don’t understand
what's going on in the economy. Their confidence has been
shaken by their extended bout with super-inflation, and they
fear furthei erosion of their savings and pensions. Many are
upset by the scarcity of mortgage credit. The security of
their jobs is threatened by rising unemployment.
People cannot be blamed for being worried about this
confusing set of circumstances, especially when so many
economic experts disagree on both diagnosis and cure. This
is why it is important for the Government to keep its eye
on the primary source of trouble, which is inflation, and
then follow steady, balanced policies to gradually bring
it under control, at the same time taking the necessary
steps to cushion the impact -- on the unemployed, for example where cutbacks hit with disproportionate force.
Q.
You've used the term "stagflation."
What does it
mean?
A.
It's a composite word made up of the first part of
"stagnation" and the last part of "inflation." Stagflation
means that prices rise rapidly at the same time that economic
activity stagnates and unemployment climbs. We used to
experience one or the other. Now we have both. Why? Because
unsound government policies, combined with special outside
shocks like the food and fuel crises, allowed inflation to
get out of hand.
4
Q:
prices?
What’s caused inflation?
Isn’t it mostly high oil
A: No, not most of it, though it has certainly been an
important factor. The ri se in gasoline, motor oil and fuel oil
prices has accounted dire ctly for about 15 percent of the
rise in the Consumer Pric e Index over the past year. Other
calculations suggest that the quadrupling of world crude oil
prices might account for as much as one-third of the 20
percent increase in whole sale prices from a year ago.
There are several other key causes, some due to special
factors, others to unsound government policies. Among the
former was bad weather around the world, which led to crop
shortages and high food prices. A simultaneous worldwide
boom put pressure on prices of internationally traded commodities.
And two needed devaluations of the dollar triggered widespread
demand for United States goods.
Unsound government policies include our three-year experi
ment with wage and price controls, which led to severe economic
distortions and supply shortages. Political pressures have long
put a premium on excessive consumption, at the price of adequate
investment in productive facilities. Monetary policies have
been overly stimulative. And Federal budget deficits have
been spurring inflation since the early 1960s.
In fact, to my way of thinking, these unsound monetary
and fiscal policies have been the most fundamental causes of
present-day rampaging inflation.
Q:
How have the budget deficits promoted inflation?
A: If inflation is Public Enemy No. 1, then chronic
government budget deficits must be recognized as Public Enemy
No. 2. It took 185 years for the Federal budget to reach the
$100 billion mark, nine more years to hit $200 billion, and
only four more years to reach the $300 billion level. And in
only one of the past fourteen years has the government been
able to balance its books.
In the past ten years alone,
Federal deficits have reached a staggering total of $103
billion. The over-all Federal debt, in the process, has
soared to $480.5 billion, and annual budget outlays fot
interest charges alone on this debt now amount to $31.5 billion.
- 5 When the Federal budget runs a d e f ic it year a fte r year,
e sp e c ia lly during periods of high economic a c t iv it y , i t becomes
a major source of economic and fin a n c ia l in s t a b ilit y . The
huge d e f ic it s of the 1960s and 1970s have added enormously
to aggregate demand for goods and se rv ice s, and have thus
been d ir e c t ly responsible for upward p rice pressures. Heavy
borrowing by the Federal sector has also been an important
contributing facto r to the p ersisten t r is e in in te re st rates
and to the stra in s that have developed in c a p ita l markets.
Worse s t i l l , continual budget d e fic it s have tended to
undermine the confidence of the p u b lic in the capacity of
government to govern, le t alone deal with in fla t io n .
Q: Why is i t so hard to cut $5 b illio n from a $305
b illio n Federal budget? Why can't the Pentagon budget be
cut?
A: I t is d if f ic u lt to cut the f is c a l 1975 budget
because such a large proportion of the spending is mandated
by previous contractual and le g isla te d commitments, which
often can't be changed q u ic k ly , and because we are now almost
half-way through the f is c a l year. There are, however, some
areas of the budget that can be cut back and no part
w ill be considered sacrosanct, including the m ilit a r y . We
must keep in mind, however, that since 1968, defense spending - as measured in re a l terms - - has been reduced by about one-third
One key fact
widely overlooked is that even a fte r
th is ye ar's budget is cut back by $5 b illio n , expenditures w ill
s t i l l show an increase of $32 b illio n over la s t ye ar's to ta l - an 11 percent jump. What we are a c tu a lly tryin g to do is
blunt the rate of in crease.
In the longer run, budget cutting is d if f ic u lt because
most government programs have vocal and powerful proponents - the b e n e fic ia rie s of p u b lic spending. On the other sid e , i t
is hard to get organized pressure to cut spending. Opposition
to spending is diffused widely among the p ublic while the
support for spending is concentrated and often very e ffe c tiv e .
6
Perhaps this will change. I believe the American people
are fed up with deficit spending and the rapid rise in prices
it causes. One hopeful development is the new budget process
that Congress adopted last year. For the first time, Congress
will have to address explicitly the issue of how large total
Federal expenditures and revenues should be -- instead of
following the piecemeal approach they*ve used in the past.
There*s a good chance that this new mechanism will produce
at least some of the fiscal discipline we*ve needed so badly
for so long.
Q : What about the so-called "uncontrollables" in the
Federal budget? In which of these areas is spending increasing
the most rapidly?
A : In the past six years, the so-called uncontrollable
outlay's rose about $90 billion and were nearly $200 billion in
1974--almost 3/4 of the total budget. Nearly $70 billion of the
$90 billion increase was in social security and other retirement
programs, veterans benefits, and a wide range of health and
welfare programs.
Interest on the national debt and other fixed
commitments accounted for the remainder.
Achieving control over government spending is complicated
by the way many Federal programs start on a small scale but
then mushroom rapidly. Some examples:
*Food stamps came to $200 million in 1969 but reached
nearly $4 billion in 1974--a 20-fold increase in just five years.
*Public assistance programs and social services totalled a
little over $3 billion a decade ago but are nearing $20
billion now.
*Total Federal health outlays were $1.7 billion a decade
ago but are now over $25 billion.
Incidentially, I consider the word "uncontrollable" a
misnomer. We need not and must not accept developments that
we recognize are leading us to disaster. Just because Congress
has legislated a program doesn*t mean it can*t be changed.
S I
- 7 -
Q: What about so-called off-budget items? With these
omissions, how can people get a true picture of total spending
by government?
A: I believe it is essential that we give the American
people a true picture of all Federal programs, including those
government-sponsored lending and other activities which are
now excluded from the "unified budget" submitted to Congress.
While such activities have been excluded from the budget by
law or by the conventions of government bookkeeping, they
still have a considerable impact on the economy and on the
American taxpayer.
For example, in fiscal year 1974 the reported figur e of
$3 billion of government borrowing from the public (to finance
the unified budget deficit of $3.5 billion) showed only the tip
of the iceberg: the net borrowing from the public to finance
government programs outside of the budget was estimated at $30
billion. We believe that these off-budget activities should
be given greater attention in the budget-making process since
they exert enormous demand on money markets, boost int eres t
rates and, in effect, pre-empt much necessary private borrowing.
Q : Will we ever again see 6 percent interest rates on loans?
A : It's possible--but not until we achieve a much lower
rate of inflation. Today's high interest rates are caused by
today's high rate of inflation and the tremendous demands that
built up for loans. As we reduce this demand along with the rate
of inflation, interest rates will come down.
But we can't reverse that sequence; that is, we cannot
cut the inflation rate by driving interest rates down through
the process of creating much more money and credit. That would
only throw fresh fuel on the inflationary fire. Inflation would
speed up and interest rates would be driven still higher.
The only way to get to a 6 percent rate of interest from
here is to bring the rate of inflation significantly below
6 percent. We should also recognize that each time we lose a
bout with inflation, interest rates are ratchetted higher.
In
1960 the bank prime lending rate peaked at 6 percent. In 1969
it reached 8-1/2 percent, and this year the high point was hit
at 12 percent.
8
The current high levels of interest rates reflect the
expectation of continued inflation. Because of this inflationary psychology, lenders require and borrowers are
willing to pay a premium roughly equivalent to the expected
rate of inflation.
Q: What will the Administration’s 5 percent surtax
proposal do to cure "stagflation"?
A: The surtax is only one element in the President's
comprehensive economic program. ’’Stagflation” will not be
cured by any single step. However, the surtax proposal is
extremely important in that it is designed to pay for the
unemployment and other spending programs that will cushion
the impact of economic adjustment and insure that burdens
are equitably shared.
Q: Doesn't the 5 percent surtax apply equally to
middle -income taxpayers and high-income taxpayers? Isn't
this unfair?
A: Perhaps we could have done a better job in explain
ing the application of the surtax proposal. Apparently some
people believe it is a flat 5 percent tax, which would be
regressive. The fact is, it is quite progressive since it
is a percentage of the amount of tax payable by reason of our
normal progressive income tax rates. Thus, an individual
taxpayer with a taxable income of $11,700 would owe an
additional $78 as a result of the surtax, and a taxpayer
with a taxable income of $24,150 would owe an additional $293
Q: Will the 5 percent surtax bring in enough additional
revenues to balance the budget?
A: No, it will not. The revenue from the proposed
5 percent surtax will pay for the unemployment and other
personal assistance programs recommended by the President,
as well as liberalization of the investment tax credit. The
budget will still be in deficit by some $8-10 billion for
this year.
If we can keep the deficit within a reasonable range
in fiscal 1975, we can then move toward balance in later
years. The era of loose Federal budgets can, and must, be
brought to an end.
- 9 Q: What's wrong with government spending new billions,
as many are suggesting, to halt the rise in unemployment?
A: Unfortunately, there's no such thing as "free"
Federal programs -- any more than there's such a thing as
a free lunch. And it's high time public officials leveled
with the American people and told them so. If we don't
have the courage to raise taxes to pay for new spending
programs, then people are forced to pay through the cruelest
and most regressive tax of all -- inflation.
If we are going to have programs to cushion economic
adjustment, taxpayers must pay for them. If not, if
Washington resorts to more economic pump-priming, we face
even worse inflation-- which, in turn, will lead to still
another economic slump and more unemployment.
I sincerely
believe that the higher-income people among America's 86.5
million jobholders can and should contribute more to help
the 5.5 million unemployed.
Q: What are your plans to deal with unemployment if
it worsens?
A: A solid unemployment compensation system is now in
place and we have proposed to the Congress that it be extended
and expanded.
In addition, we have submitted legislation to
create a Community Improvement Corps, which would provide
temporary employment for out-of-work men and women who have
exhausted their unemployment benefits.
Other action would create more private sector jobs,
including the extension of loan funds to aid the housing
industry and our recommended expansion of the investment
tax credit. Basically, however, the ultimate way to provide
more jobs lies in reduction of inflation, restoration of
consumer confidence and stabilization of the economy.
Q: Many are advocating a return to wage and price
controls. Why not?
A: Because they are destructive of both our economy
and our freedoms. They deal with the results of inflation
rather than the causes, like taking aspirin to attack a
fever rather than curing the infection.
10
In 1972-73 controls proved themselves ineffective in
holding down inflation. And where controls do in fact
suppress prices and wages, they create distortions.
In
some of our basic industries like steel and paper, profits
squeezed down by controls forced curtailment of expansion
which resulted in present shortages. Thus, controls
eventually increased the pressure on prices rather than
lessened it.
Normally, when the demand for a product rises in
relation to the supply, for whatever reason (such as the
cut-off of oil supplies by the Arab countries in late 1973)
the price of that product rises. This usually causes the
profits of those companies who supply the product over the
short run to rise, but more importantly, it increases the
profit opportunities for new producers who might start
producing the product. When these new suppliers increase
the supply in relation to the demand and old producers
increase production, the price of the product will drop
again.
Price, wage and/or profit controls frustrate and dis
tort this process.
In the first place, not all prices,
wages and profits can ever be controlled by the government,
particularly the prices of imported raw materials.
Second,
by freezing prices, wages and/or profits, the incentive for
anyone to increase the supply of a product is removed because
the profit potential is removed.
In fact, existing producers
who see their costs rise often just stop producing completely.
As a result, over a period of time, the supply of the product
shrivels up, thus further aggravating the demand pressure
for the product, ultimately resulting in rationing, black
markets, curtailment of expansion, flow of capital and goods
out of the United States where profit opportunities are
better, and many other results that are diametrically
opposite to the objectives that the price controllers are
attempting to achieve.
Controls, in summary, distort investment decisions and
the allocation of resources, distort markets and exports,
keep natural forces from reacting against economic defects,
and give a false impression of action which delays truly
effective remedial action.
rf
11
Q:
What about proposals for standby wage-price controls?
A: The problem with standby wage-price controls is that their
very presence creates an expectation that controls will be
imposed at some future time. There is thus a rush by business
and labor to raise prices and negotiate large wage increases
before the controls are slapped on. Compounding the problem,
the resulting rise in wages and prices then provides the seeming
justification for imposing controls.
Q: How can high corporate profits be justified in a period
of economic difficulty like today.
A: Double-digit inflation has done strange things to
corporate profits. Some of the conventional accounting
techniques used by corporations have proved to be inaccurate
and misleading, now that inflation has become so rampant. They
understate the replacement cost of both inventories and
capital equipment, and thus overstate profits. They create an
illusion of rapidly rising profits when the actual record of
profitability is weak.
In addition, corporations have to pay taxes on those
illusory profits, and to some degree they pay dividends from
them as well. As a result, corporate cash flow has been squeezed
hard: the retained earnings of nonfinancial corporations,
after adjustment for the understatement of replacement costs of
inventories and capital equipment,! was down to $3 billion in
1973, less than one-fifth of the 1965 level.
Q:
But what about high oil company profits?
A: I have consistently stated that current oil industry
profits represent to a considerable extent a windfall due to
the rigging of world crude oil prices by the Organization of
Petroleum Exporting Countries.
I have also consistently
supported legislation we proposed a year ago to tax away these
windfall profits as a way to prevent one sector from profiting
unduly at the expense of the rest of the economy.
At the same time, we have compared the profitability of
the oil industry to that of 28 other industry categories over
the past 16-year period, and find that the industry's
profitability, when viewed over a reasonable time period, falls
within the normal experience of most major U.S. industries.
And we must recognize that adequate profits are essential to
the development of adequate future oil supplies.
12
Q: Why should people be concerned about whether
business makes a profit or not?
A: Because the best way to reduce inflation is to
increase supply, and this requires adequate technology and
productive capacity and human and material resources. These
variables all have long lead times, and our system relies
on the private sector to develop these capabilities. The
government influences these development efforts, but basically
there is only one real motivation to make these capital and
human investments -- the expectation of profits. If we don’t
have adequate profits now, we suffer later.
In effect, 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 the working men and women
of this nation.
Q: What do you mean when you talk about boosting
productivity?
A: The term productivity refers to the efficiency of
our economy — the amount of real output that can be produced
per worker (and also per unit of capital input).
The importance of increasing productivity is that it
helps us achieve two very important national goals:^ It reduces
costs and thus lessens inflationary pressures, and it increases
total production and thus improves our standard of living.
Indeed, in the long run, increased productivity is the only
source of a rising national standard of living.
How can productivity be boosted? By cutting waste on
the job and working "smarter” -- and by increasing the quantity
and quality of capital equipment available to each worker.
This is why I put so much emphasis on the need for more savings
and more investment. This country has been lagging much too
far behind in total fixed investment. For example, since
1960 U.S. capital formation (including residential) has
averaged only about 191 of our total output -- about the ^ame
as in the United Kingdom.
In the same period, the investmentratio was 25% for France, 26% for Germany, and 33% for Japan.
G o
13
If the U.S. is to check inflation, stay competitive and
continue to create abundance for its people, we must not only
provide greater incentives for saving and investment, but also
remove impediments to efficiency throughout the economy.
The National Commission on Productivity has been charged with
the job of identifying problems in this area and recommending
solutions.
Q: What about energy conservation? When are we going
to start? With what? Gasoline rationing? Or an increase
in the gasoline tax?
A: Energy conservation is essential to our national
effort to achieve greater independence from high-cost and
unstable foreign oil imports. President Ford has set a
conservation goal of one million barrels a day by the end
of 1975. We believe we can achieve that goal through measures
outlined by the President in his economic message of October 8,
1974. Included in this program is a plan to require oil and
natural-gas-fired plants to switch to coal and nuclear power;
a requirement that the automobile industry develop increased
gasoline savings; and a more rigid enforcement of the 55-mileper-hour speed limit.
Further, there are a series of mandatory conservation
Steps for government and voluntary measures for the American
people. This program can work. However, the President has
made it clear that if immediate reductions are not achieved,
he will seek more stringent means to insure that United States
dependence on foreign supply is reduced. Whatever steps are
necessary will be taken, but I still believe that gasoline
rationing must be a last resort.
It is important, however, to emphasize that conservation
alone is not enough. We must move aggressively to develop our
domestic energy resources. Together, increased production
at home and a hard-hitting program of energy conservation can
move us toward self-sufficiency.
14
Q: Will the coming period be anything like the early
1930s? Is the average citizen protected against an economic
collapse?
A:
Economic conditions today are totally different
from those of the 1930s. We have Federal insurance of bank
deposits. The Federal Reserve System is committed to avoidance
of a credit crunch and to a continuing moderate expansion of
money and credit.
In the early 1930s the money supply contracted
by about one-third. And unemployment then rose to 25 percent
of the work force compared to a little over 6 percent today.
We have a very substantial unemployment compensation
program in being and have recommended a further expansion
of that program, plus a larger public service employment
program. We have other income-maintenance programs -- social
security, food stamps, public assistance, etc. -- that will
not decline even if general business activity is depressed.
We also have a large part of our work force employed in
economic sectors that are essentially depression-proof.
For all these reasons, the economy is much less vulnerable
to an economic collapse than it ever was before.
Q: How soon can we lick our economic problems and get
back to stable, prosperous growth?
A: While we can hope to see a turn-around in 1975,
long-lasting solutions will not come quickly or easily.
Inflationary forces have become deeply embedded in our
economic structure and will take time to get wrung out,
demanding both consistent and persistent policy approaches.
The hard fact we face is that America is at a historic
crossroads in balancing consumption demands against the pro
duction capacity of the matchless economic machinery we have
built up over the centuries. And the problem is bigger than
simply meeting the painful concurrent problems of inflation
and recession, serious as they are.
As a nation, we have been indulging in a consumption
binge. We have been using up our inheritance and borrowing
from the future, at one and the same time.
In effect, we are
burning the candle at both ends -- and the candle is getting
shorter.
- 15 -
ce
cted
On one hand, America now faces vast, rapidly rising
needs to devote more of its output to capital investment -to replacing, modernizing and expanding our factories, mines,
farms and other productive facilities. We have been falling
far short of meeting this imperative. We are in the dangerous
position of people on a ship whose hull is slowly rusting
away through lack of adequate repair and maintenance.
The record shows the U.S. has been plowing one of the
lowest ratios of gross national product back into capital
investment of any major industrialized nation. And as a
result, we are suffering from the lowest rate of productivity
increase -- the very keystone for high living standards.
Speeding this drift toward economic crisis, we have
been borrowing from the future in order to expand living
standards today -- through an enormous expansion in debt
at the family, corporate and governmental levels. Government
itself has set a disastrous example of profligacy. -
le
In summary, we have been living beyond our means.
the day of reckoning has now arrived.
And
Q: What can the average person do about inflation and
our other economic problems?
A: The American people are the key to solution. Each
of us can do many things to conserve oil, electricity and
other energy resources. We can cut waste in food consumption.
We can cut waste on the job -- and support efforts to boost
productivity in office and factory. We can Mbuy smart” and
resist price gouging wherever we find it. And we can demand
an end to government deficit spending and support pay-as-yougo policies for government programs for all time to come.
Indeed, this is the most important single step that can be
taken to restore both confidence and economic order.
Oo O
Department
SHINGTON. OX. 20220
ofihtTREASURY
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
DECEMBER 6, 1974
TREASURY SECRETARY SIMON NAMES HENRY J. NAVE
SAVINGS BONDS CHAIRMAN FOR PENNSYLVANIA
Henry J. Nave, Chairman of the Board and President, Mack
Trucks, Inc., Allentown, Pa., is appointed volunteer State
Chairman for the Savings Bonds Program in Pennsylvania by
Secretary of the Treasury William E. Simon, effective immedi
ately.
He will head a committee of business, banking, labor,
government and media leaders who -- in cooperation with the
U. S. Savings Bonds Division -- assist in promoting Bond
sales in Pennsylvania. He succeeds Charles S. Krumrine,
prominent Philadelphia businessman, who continues his service
to the Program as Chairman Emeritus after 18 years as Chair
man .
Nave graduated from Temple University in 1936, and imme
diately joined the Firestone Tire and Rubber Co. as a sales
trainee. After holding such positions as Store Manager,
Stores’ Supervisor and National Service Sales Manager, he left
Firestone in 1946 to become President and Coowner of the Acme
Supply Co., an automotive parts and Firestone Tire distribu
torship .
In 1950, he joined the White Motor Co. as Sales Service
Manager, later becoming Director of Service. He was appointed
President of the White Motor Co. of Canada in 1954, a post he
held until 1958, when he returned to the parent company as
Executive Vice President, White Truck Division. He subse
quently served White as Group Vice President for all truck di
visions, President and Chief Operating Officer, and in 1971
became Chief Executive Officer. In January 1972, Nave joined
( over )
2
Mack Trucks, Inc , as President, and later became Chief Operating Officer. He assumed his present post on August 1,
1974.
Nave is active in many businesses, civic and profes
sional organizations, including -- Director, First Pennsyl
vania Banking and Trust Co.; Glen-Gary Corp.; UGI Corp.;
Trustee, Temple University; President, Minsi Trails Council
and Pennsylvania Area Vice President, Boy Scouts of America;
Co-Chairman, Fleet Week ’74, Society of Automotive Engineers
Chairman, Exhibitor Advisory Council, Dallas ’75 Truck Show.
He and his wife, the former Hazel Becker, have three
children -- Henry J.,Jr., William E., Mrs. Susan Patrick -and three grandchildren.
oOo
E X E C U T I V E O F F I C E OF T H E P R E S I D E N T
COUNCIL ON WAGE AND PRICE STABILITY
726 J A C K S O N P L A C E , N.W.
W ASH IN GTO N, D.C. 20506
FOR IMMEDIATE RELEASE
December 6, 1974
For information c a l l :
(202) 456-6757
THE COUNCIL ON WAGE AND PRICE STABILITY MEETS
The Council on Wage and Price S t a b i l i t y met th is morning
to be brought up to date on Council s t a f f a c t i v i t i e s , meet the
newly appointed A ss is ta n t Directors and General Counsel and
discuss the fu tu re actions o f the Council s t a f f .
The Council also approved the recommendations contained in
the attached Council s t a f f report on Shelf Inventory Repricing
practices.
Attachment
CWPS-14
F X E C U T I V E O F F I C E OF T H E P R E S I D E N T
COUNCIL ON WAGE AND PRICE STABILITY
726 J A C K S O N P L A C E , N.W.
W A S H I N G T O N , D .C .
FOR IMMEDIATE RELEASE
F r i d a y , December 6 , 1974
20506
F o r in fo rm a tio n c a l l :
(202) 456-6757
STAFF REPORT ON THE SHELF INVENTORY REPRICING HEARING
HELD BY THE COUNCIL ON WAGE AND PRICE S T A B ILIT Y AND
THE O F F IC E OF CONSUMER AFFAIRS
On November 1 3 , the Council on Wage and P ric e S t a b i l i t y and
the O f f i c e o f Consumer A f f a i r s held a p u b lic hearing on the issue
o f r e p r ic in g o f s h e lf in v e n to ry in r e t a i l s to r e s . Th is re p o rt
summarizes the major po ints made during the hearing and in oth er
in fo rm a tio n submitted f o r the re c o rd . The r e p o r t also presents
the recommendations o f the Council s t a f f and the O f f i c e o f Consumer
A f f a i r s on t h i s is s u e .
BACKGROUND
The r e p r ic in g o f s h e l f in v e n to ry is a common business p ra c tic e
used when r e t a i l e r s are n o t i f i e d o f p ric e increases by s u p p lie r s .
Th is p ra c tic e has received a g re a t deal o f recent a tt e n t i o n since
r i s i n g costs in t h i s present period o f i n f l a t i o n have caused pric e
changes to occur much more f r e q u e n tly than in the p a s t. As a r e s u l t ,
two o r more prices may appear on the same item .
S h e lf in v e n to ry r e p r ic in g is a major i r r i t a n t to consumers and
has caused widespread d i s s a t i s f a c t i o n and anger. Both the Council
and the O f f i c e o f Consumer A f f a i r s have received hundreds o f l e t t e r s
and telephone c a l l s complaining about the p r a c t ic e . Many o th e r
consumers have voiced t h e i r o b je c tio n s to the P re s id e n t and t h e i r
re p re s e n ta tiv e s in Congress.
CWPS-14
2
Consumers, not a lto g e th e r c o r r e c t l y , regard the marking o f
suc c e ss ive ly higher prices on a package as prima fa c ie evidence
o f p r o f i t e e r i n g not j u s t i f i e d by c o s ts . The Council on Wage and
P ric e S t a b i l i t y and the O f f i c e o f Consumer A f f a i r s (OCA) recognize
t h a t p o lic ie s to e lim in a te the r e p r ic in g o f s h e lf in v e n to ry deal
w ith symptoms o f i n f l a t i o n and not w ith causes. N e v e rth e le s s , i t
can be va lu a b le to r e li e v e symptoms, w h ile pursuing more fundamental
p o lic ie s to f i g h t i n f l a t i o n .
A number o f major food chains have adopted a p o lic y o f no
upward s h e lf r e p r ic in g . Safeway was the f i r s t major supermarket
chain to do so in J u l y and several others have follow e d s u i t in
recent months. Many others have n o t , however. Many b i l l s have
been introduced in to the Congress to p r o h i b i t the r e p r ic in g o f
s h e l f in v e n to ry in r e t a i l s to r e s . Several lo c al governments have
passed ordinances to the same e f f e c t , in c lu d in g two v e ry la rge ones
(Nassau C ou nty, New Y o r k , and Dade C ou nty, F l o r i d a ) .
The Council and OCA held the p u b lic hearing on November 13 to
in v e s t ig a te the b e n e fits o f adopting such a p o lic y and the reasons
why i t has not been adopted more w id e ly . Witnesses were heard from
r e t a i l food and r e t a i l hardware in d u s t r i e s , consumer o rg a n iza tio n s
and local governments (see attached witness l i s t ) . A l l three o f
the r e t a i l food chains th a t t e s t i f i e d have adopted a p o lic y o f not
r e p r ic in g s h e lf in v e n to r y . However, the testim ony presented was
balanced in that, both the pros and cons o f adopting a no r e p r ic in g
p o lic y were discussed f u l l y .
MAJOR FINDINGS
1.
There was a general consensus th a t the p ra c tic e o f r e p r ic in g
s h e l f in v e n to ry is a major consumer i r r i t a n t and takes i t t o l l
p s y c h o lo g ic a lly . Consumers do not understand the economics
o f the p ra c tic e and view i t as a way to reap u n f a i r , easy
p r o f i t s a t t h e i r expense. Reasonably s o , a consumer fe e ls
p e rs o n a lly abused wheh he o r she is forced to buy an item
th a t has been r e p r ic e d , p a r t i c u l a r l y when the d i f f e r e n t prices
are stamped side by side o r on top o f each o t h e r . The firm s
which have adopted a no r e p r ic in g p o lic y have done so in response
to consumer com plaints.
2.
There are a number o f b e n e fits which can be de rived from
adopting a no r e p r ic in g p o l i c y , as reported by the va riou s
w itnesse s.
3
h
Consumer re a c tio n to t h i s p o lic y where i t has been
implemented has been v e ry strong and fa v o r a b le .
.
S h e lf stocks o f merchandise w i l l be f r e s h e r . Under
the no r e p r ic in g p o l i c y , r e t a i l stores must r o ta te
merchandise more fr e q u e n tly so th a t the o l d e r , lowerpriced product is moved to the f r o n t o f the s h e l f .
Net savings o f la b o r can be r e a li z e d from t h i s p o l i c y .
Two o f the three r e t a i l food chains (Acme and F in a s t )
reported t h a t the la b o r saved in not remarking prices
o f merchandise a lrea dy on the shelves exceeds the e x tr a
la b o r used f o r the more fre q u e n t r o t a t io n o f s h e lf s to c k .
Consumers are a le rte d when a p ric e is increased and can
buy a d d itio n a l q u a n titie s a t the lower p r ic e .
3.
A t the same tim e , there are a number o f disadvantages o f a
no r e p r ic in g p o lic y which were c ite d a t the he a ring.
Adoption o f the p o lic y caused la b o r and op eration al
problems in achieving f u l l s h e lf stocking and proper
product r o t a t i o n .
Problems were also encountered in m aintaining accurate
r e t a i l p r i c i n g . Under a no r e p r ic in g p o l i c y , there
may be two o r more d i f f e r e n t prices on the same items
stocked on the s h e lv e s , and v e r i f i c a t i o n is o fte n
necessary to determine the c o rre c t p ric e a t checkout
cou nte rs.
.
Oth er problems have been encountered w ith m aintaining
u n it p r ic in g and w ith p re -p ric e d products d e liv e re d
d i r e c t l y to r e t a i l stores by s u p p lie r s .
Some in v e n to ry a p p re c ia tio n f o r s h e lf stock is l o s t ,
which reduces revenues. One r e t a i l food chain (Pathmark)
reported t h a t the adoption o f the no r e p r ic in g p o lic y
reduced revenues by 0.3% o f s a l e s , which represented
more than o n e -h a lf o f the f i r m 's ra te o f net re tu rn
r e a li z e d in 19 73 .
4.
Evidence was presented th a t p o lic ie s a g a in s t r e p r ic in g would
be im pra ctical f o r r e t a i l stores such as hardware stores
whose in v e n to r y tu rn o ve r is much lower than t h a t o f large
food s to r e s .
In t h i s c o n n e c tio n , the s e ll in g p ric e o f
merchandise r e f l e c t s more than costs o f goods purchased.
4
I t also r e f l e c t s o u tla y s f o r wages, r e n t s , t a x e s , u t i l i t i e s
and i n t e r e s t , a l l o f which can be s ub je c t to s u b s ta n tia l
increases during the s h e lf l i f e o f low tu rn o ve r durable
merchandise.
5.
Serious doubt was expressed th a t the re are any real savings
to consumers under a no r e p r ic in g p o l i c y . The revenues l o s t
from not r e p r ic in g s h e lf in v e n to ry w i l l be made up by oth er
changes in r e t a i l p r ic in g p o lic ie s in order to m aintain
normal gross m argins. However, to the e x te n t t h a t labor
savings are r e a l i z e d , some permanent reduction in prices can
re s u lt.
6.
R e presentatives o f food r e t a i l e r s , consumer o r g a n iz a t io n s ,
and one re p r e s e n ta tiv e o f a la rge c i t y government cautioned
t h a t present p o lic ie s a g a in s t r e p r ic in g should s t i l l be
regarded as exp e rim e n ta l. There has not been enough experience
to produce fir m evidence on cost savings and consumer response.
C e rta in problems re q u ire f u r t h e r w ork, such as the best way to
d is p la y m u ltip le u n i t prices on sh e lve s .
7.
The m a jo r ity o f witnesses recommended a g a in s t the adoption o f
Federal or local l e g i s l a t i o n . They b e lie ved t h a t v o lu n ta r y
a c tio n by r e t a i l e r s in response to consumer pressure is the
best approach. Federal or local l e g i s l a t i o n could create
in e q u itie s among r e t a i l e r s , endanger the use o f u n i t p r ic in g
and cause severe a d m in is tr a tiv e problems w ith ve ry minimal
s a v in g s , i f a n y, to the consumer.
POSSIBLE ALTERNATIVE SOLUTIONS
R e c e n tly , food chains such as A&P, Kroger and G i a n t , who have
continued to re p ric e s h e lf in v e n t o r y , have announced ac tions th a t
appear to be o ffe r e d as a l t e r n a t i v e s o lu tio n s to the s h e lf r e p r ic in g
problem. A key element in the A&P a c tio n is an e a r ly warning system
f o r pric e increases whereby shoppers are informed through a weekly
l i s t o r s h e lf tags th a t the prices o f c e r ta in items are due to go
up. This w i l l enable the consumer to buy a d d itio n a l q u a n titie s a t
the old p r ic e . While r e p r ic in g o f s h e lf in v e n to ry can s t i l l occur
w ith t h i s a l t e r n a t i v e p o l i c y , the consumer does know the increase
is coming and t h i s knowledge could reduce the i r r i t a t i n g impact o f
purchasing a repriced item . A&P has been jo in e d by Kroger and G ia n t
in f r e e z in g prices o f c e r ta in n o n -p e ris h a b le ite m s , in c lu d in g house
brands, which also allows the shopper to know w ith c e r t a i n t y th a t he
o r she may purchase these items a t a s ta b le p ric e f o r a s p e c ifie d
period o f tim e.
RECOMMENDATIONS
1.
Since the bulk o f the evidence suggests t h a t p o lic ie s a g a in s t
the r e p r ic in g o f s h e lf in v e n to ry in la rge food stores reduce
consumer i r r i t a t i o n , lower la b o r c o s ts , and promote the proper
r o t a t io n o f s to c k , we s tr o n g ly urge those food chains th a t
have not a lre a d y done so to adopt p o lic ie s a g a in s t r e p r ic in g
or to adopt a l t e r n a t i v e p o lic ie s to accomplish the same e f f e c t
2.
Since p o lic ie s a g a in s t r e p r ic in g are s t i l l in an experimental
phase, we do not advocate the passage o f Federal l e g i s l a t i o n
o r o f new local ordinances to make such p o lic ie s mandatory.
Wider adoption o f these p o lic ie s o r a l t e r n a t i v e p o lic ie s on a
v o lu n ta r y basis would make such l e g i s l a t i o n unnecessary.
Where sweeping lo c al ordinances a lre a d y e x i s t , we recommend
t h a t they be re vis e d to exclude branches o f r e t a i l i n g w ith low
tu rn o ve r o f in v e n to r y .
Attachment
E X E C U T I V E O F F I C E OF T H E P R E S I D E N T
COUNCIL ON WAGE AND PRICE STABILITY
726 J A C K S O N P L A C E , N.W.
W A S H I N G T O N , D .C .
20506
ATTACHMENT 1
WITNESS L IS T FOR HEARING ON SHELF INVENTORY REPRICING PRACTICES
John Whitney
P r e s id e n t, Pathmark Stores
E l le n Zawel
P r e s id e n t, Na tio na l Consumers Congress
E l i n o r Guggenheimer
Commissioner, Department o f Consumer A f f a i r s
New York C i t y , New York
P e te r McGoldrick
P r e s id e n t, Acme Markets
Alan Dimond
A s s is ta n t County A tto r n e y
Dade C ou nty, F lo r id a
M ilto n Segel
Vice P r e s id e n t, F i r s t National Stores In c .
Sheldon I . London
D i r e c t o r , Government R e la tio n s
National R e ta il Hardware A s s o c ia tio n
Karen Wouters
P u b lis h e r , Grocery Guide and Consumer
A f f a i r s Committee, Americans f o r
Democratic A c tio n
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Document Type: Transcript
Number of Pages Removed: 2
Author(s):
Title:
Walter Cronkite, WTOP Radio, CBS Network, re: Secretary Simon auction of Gold
Date:
1974-12-03
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
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Document Type: Transcript
Number of Pages Removed: 12
Author(s):
Title:
"Panorama", WTTG TV re: "Discussion of Gold"
Date:
1974-12-05
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
DepartmentofthefRUSURY
W
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REMARKS OF THE HONORABLE FRED ERIC W. HICKMAN
ASSISTANT SECRETARY O F ,T H E TREASURY FO R TAX PO LICY
B E FO R E THE
DIVISION O F FED ER A L TAXATION
OF THE
AMERICAN INSTITUTE OF C E R T IFIE D PUBLIC ACCOUNTANTS
PA LM BEACH, FLORIDA
MONDAY, DECEM BER 9, 1974
I
have two to p ic s to d is c u s s With you today. Both re la te to the
package of tax p ro p o sa ls w hich the P r e s id e n t advanced in O cto b er,
the s o -c a lle d "in fla tio n tax p a ck a g e* 11
F i r s t , I w ant to a d d re s s the q u estio n , "W hat is the "in flatio n "
p ro b lem and why a re the O c to b er tax p ro p o sa ls re le v a n t to it? T h e re
is an e x tra o rd in a ry la c k of public u n d e rstan d in g of the econom ic
fa c to rs u n d erly in g o u r c u rr e n t in flatio n .
;
Second, I w ant to d isc u ss the p ro p o se d ch an g es in the in v e s tm e n t
c re d it.
M any m e m b e rs of the b u s in e s s com m unity have re a c te d to
the p ro p o s a ls , w ithout e n th u sia sm , w ith the a ttitu d e of "How could the
T r e a s u r y com e up w ith su ch an unlovable c h ild ? " I w ill tr y to e x
plain why the p ro p o sa ls a re sound and m o re lovable than I su s p e c t
they se e m to m any of you.
■r fl
>;
Inflation
We have had in flatio n w ith us in so m e d e g re e fo r a n u m b e r of.
y e ars.
Many people thought we could le a r n to liv e w ith a m o d est
am ount of in fla tio n . But in flatio n is lik e i n t e r e s t - - i t is v e ry apt to
com pound, and to grow in c re a s in g ly l a r g e r as tim e goes on* A t p r e s
ent, in fla tio n is running at a to ta lly u n accep tab le r a te . In the fo u r
q u a rte r s la s t ended, the C o n su m e r P r ic e Index ro s e by 12.1 p e rc e n t.
T h e re a re two b a sic re a s o n s fo r the v iru le n c e of o u r p r e s e n t
in flatio n .
The f i r s t re a s o n is the en o rm o u s am ount of g o v e rn m e n t bo rro w in g
we have had in re c e n t y e a r s .
In the l a s t 15 y e a r s , we have had
g o v e rn m e n t d e fic its in 13. D uring th a t p e rio d , b e tte r th an 5 p e rc e n t
of all f e d e ra l g o v e rn m e n t e x p e n d itu re s w e re d e fic it e x p e n d itu re s - -th a t
is, th ey w e re not c o v e re d by tax re v e n u e s and had to be paid fo r by
WS-173
-
2
-
b o rro w in g .
In addition, th e re has been an e x tra o rd in a ry in c re a s e
in s o -c a lle d " o ff-b u d g e t" b o rro w in g --w h ic h is p riv a te b o rro w in g u n d e r
g o v e rn m e n ta l p ro g ra m s of v a rio u s s o r ts . In any m o d ern m o n e ta ry
s y s te m , the a lm o s t in e v itab le r e s u lt of m a jo r g o v e rn m e n ta l bo rro w in g
is the c re a tio n of additional m oney.
W ithout try in g to explain the
te c h n ic a l way in w hich th a t co m es about, I w ill sim p ly o b se rv e th at
when the g o v e rn m e n t in c r e a s e s its b o rro w in g , the m o st lik e ly r e s u lt
is th a t the F e d e ra l R e se rv e and the banking s y s te m c re a te new m oney.
G o v ern m en tal d e fic its a re im p o rta n t not p r im a r ily fo r th e m se lv e s,
but b e c a u se of w hat they do to the m oney supply. If the stock of m oney
in the U nited S ta te s in c r e a s e s su b s ta n tia lly f a s t e r than o u r natio n al
output of goods and s e r v ic e s , we g e t w hat is p o p u larly d e sc rib e d as
"too m uch m oney chasing too few g o o d s ." T hat is ex actly w hat has
happened, and too m uch m oney is e x ac tly w hat we have had.
The seco n d re a s o n fo r to d ay ’s high in flatio n r a te is a com bination
of in d ividual m a rk e t fa c to r s .
In the l a s t y e a r and a half, w e a th e r
ch an g es around the w orld, to g e th e r w ith the O PEC oil c a r te l, have
su b je c te d us to a b ru p t and m a jo r changes in the p r ic e s of food and
o il--tw o c la s s e s of goods th a t a r e v e ry la r g e and v e ry im p o rta n t in
o u r o v e ra ll econom y.
In addition, during the la s t th re e y e a r s , the p r ic e s paid fo r all
o u r im p o rts in c re a s e d b e c a u se of two m a jo r d ev alu atio n s of the d o lla r.
The d ev alu atio n s w e re sudden c o rre c tio n s in exchange r a te s and they
re m e d ie d p ent up im b a la n c e s th a t had been accu m u latin g o v e r a n u m
b e r of y e a r s .
The in te rn a tio n a l m o n e ta ry s y s te m of fixed exchange
r a t e s - - t h e old, p re -S m ith so n ia n s y s te m --w a s , in effect, a sy s te m of
in te rn a tio n a l p ric e c o n tro ls fo r m oney.
L ike any sy s te m of p ric e
c o n tro ls , it p re v e n te d the m a rk e t fro m o p e ra tin g g ra d u a lly w ith a
continuous s e r i e s of m in o r a d ju s tm e n ts . It did not e lim in a te the
u n d erly in g m a rk e t fo rc e s . It sim p ly dam m ed them up. When the dam
fin ally b ro k e and the in ev itab le a d ju stm e n ts c am e, the jo lt w as la rg e
and the d islo c a tio n s w e re m a jo r and h a rd fo r o u r s y s te m to d ig e st.
In the oil and d evaluation c a s e s , a f u r th e r a sp e c t w as th a t the
p r ic e in c r e a s e s c au se d a sig n ific a n t p o rtio n of o u r n atio n al output to
be d iv e rte d to fo reig n c la im a n ts - - s o th at th e re w as le s s av aila b le in
the n o rm a l way to in c r e a s e the re a l in co m es of o u r own c itiz e n s . In
the c a s e of oil th a t's obvious. If the A ra b s c h a rg e m o re , they g e t
m o re and we g e t l e s s .
In the c a s e of d evaluation, the r e s u lt is le s s obvious to the l a y
m an . L e t's take a G erm an , fo r ex am p le. If the d o lla r is devalued,
the m a rk s in h is pock et tr a n s la te into m o re d o lla rs .
He can buy
m o re d o lla rs w orth of goods w ith the sa m e am ount of m a rk s .
So
G e rm a n s can, and do, buy m o re of o u r w heat, o u r c o rn and of o u r
o th e r p ro d u c ts . The o th e r sid e of the coin is th a t it ta k e s m o re d o lla rs
- 3 fo r A m e ric a n s to buy m a rk s w ith w hich to buy V olksw agens. So we
g et le s s fro m G erm an y .
The n e t is th at as a n ation, G erm an y g e ts
m o re of o u r goods, and we g e t le s s of th e ir s in exchange.
The co m bination of all th e s e f a c to r s - - th e w e a th e r, the OPEC
c a r te l and d e v a lu a tio n --a ll helped s e t off a chain re a c tio n in the U nited
S ta te s, as each g roup w ithin o u r econom y sought to re g a in its p o sitio n
at the ex p en se of o th e rs .
We now have in p r o g r e s s a w a g e -p ric e
s p ir a l in w hich it is im p o ssib le fo r all g ro u p s to c a tc h up w ith each
o th e r. O ur job is to wind down th a t s p ir a l w ithout throw ing the econom y
into a ta ils p in .
T h e re a re d iffe re n c e s in view s and e m p h a s is - - a s a lw ay s--a m o n g
e co n o m ists and p o lic y m a k e rs. B ut I think th e re is g e n e ra l a g re e m e n t
on the re le v a n c e of the fa c to rs th a t I'v e o u tlin ed . E co n o m ists don't
a g re e on w hat we should do, but they do p re tty m uch a g re e on how
we g ot into the m e s s w e 'r e in,
I'd lik e to re a d you an e x c e rp t to
illu s tr a te th a t th is m uch of the a n a ly sis is a n o n p a rtisa n a ffa ir. It
is art e x c e rp t fro m the re c e n t sta te m e n t of A rth u r Okun, C h a irm an
of the C ouncil of E conom ic A d v iso rs u n d e r P r e s id e n t Johnson.
Speaking to, the Jo in t E conom ic C o m m ittee in O c to b er, Okun said :
" A c c e le ra te d
w age
in c r e a s e s a re no c u re
b e c a u se the lo s s e s su ffe re d by w o rk e rs a re in
the p o ck ets of f a r m e r s (by a c ts of n a tu re ) and
of fo re ig n and d o m estic oil p ro d u c e rs , and not
in th o se of m o st U. S. e m p lo y e rs, w hose p ro fits
have b een r a th e r m o d e st.
C onsequently, m o re
ra p id w age in c r e a s e s w ill be p a s s e d on to the
c o n su m e r in the fo rm of s till m o re p ric e in c r e a s e s .
W o rk e rs a s a group w ill be no b e tte r off.
T his
p r o c e s s of "in co m es in fla tio n " --th e u n d e rsta n d a b le
e ffo rt to r e s to r e the re a l in co m es of w orking
A m e r ic a n s - - is bound to be se lf-d e fe a tin g . A p a rt
fro m food, th is p r ic e -w a g e -p ric e s p ir a l is the m ain
in fla tio n a ry fo rc e fo r 1975. "
W hat then m u st we do to g e t in flatio n u n d e r c o n tro l ?
F irs t,
and fu n d am en tally , we m u st stop c re a tin g m oney f a s t e r than goods
and s e r v ic e s a re expected to in c r e a s e .
T hat m ea n s th a t we m u st
hold g o v e rn m e n t d e fic its to the v e ry m in im u m p o ss ib le , and th a t we
m u st hold in c a re fu l check the o th e r avenues of m o n e ta ry expansion.
T h at p ro c e s s of m o n e ta ry r e s t r a i n t has been going on fo r som e
m on th s.
It w as a co n scio u s p olicy d e c isio n by the A d m in istra tio n
and the F e d e ra l R e s e rv e , and it is the b a sic tool being u se d to b rin g
inflation u n d e r c o n tro l--a lth o u g h few m e m b e rs of the public u n d e rsta n d
how it w o rk s o r th a t it is happening.
-4 M onetary r e s t r a i n t is an a b so lu te ly fundam ental and unavoidable
re q u ire m e n t if we a re to lic k in flatio n , but it is stro n g m ed icin e and
it h as u n co m fo rtab le sid e e ffe c ts. W hen we hold down the supply of
m oney, the law of supply and dem and o p e ra te s ju s t as it does ev ery
w h e re e ls e . In fac t, it o p e ra te s m o re c o m p letely in the c a se of m oney
than in m any o th e r c a s e s b e c a u se the m oney m a rk e t is one of the m o st
fre e ly co m p e titiv e m a rk e ts in o u r econom y. So when we hold down
the m oney supply, w ithout a lso holding down dem and, the p ric e of
m o n e y --w h ic h is the in te r e s t r a t e - - i s bound to r i s e . T h a t's u n fo rtu
n ate but i t 's a lso unavoidable. C o n g re ss can en ac t any law it p le a s e s ,
but no law of C o n g re ss can re s c in d the law of supply and dem and. When
it t r i e s , it u su a lly ju s t m ak e s m a tte r s w o rs e . A c o n sid e ra b le p a rt
of the econom ic d isc o m fo rt now flowing fro m high in te r e s t r a te s can
be tr a c e d to law s w hich d iv e rt (but do not e lim in a te ) n o rm a l m a rk e t
fo rc e s and c a u se them to o p e ra te in u n n a tu ra l w ay s. A m a jo r re a so n
why high in te r e s t r a te s have had such a s e v e re im p a c t on the housing
in d u stry is th a t we had g o v e rn m e n t re g u la tio n s th a t tr ie d to m in i
m iz e the im p a c t of n o rm a l m a rk e t fo rc e s on sa v in g s and loan
in stitu tio n s and h o m eo w n ers. In to d a y 's econom ic c lim a te , th o se
law s tend to p re v e n t S&Ls and h o m eow ners fro m being co m p etitiv e
at a ll. T h e re a re s tr u c tu r a l d e fic ie n c ie s in o u r p riv a te fin an c ia l sy ste m
w hich p ro d u ce th is r e s u lt. T hey a re longstanding and z e a lo u sly g u a rd e d
by so m e v e sted i n te r e s ts . T hey p ro d u ce u n d e sira b le econom ic d is lo
c atio n s e v e ry few y e a r s . A new F in a n c ia l In stitu tio n s A ct h as been
p ro p o se d w hich would d eal w ith the p ro b le m by m aking in stitu tio n s
m o re c o m p e titiv e .
It has been pending sin c e the beginning of th is
C o n g re ss, but h as not y et b een acted on.
As we u n d e rta k e a p olicy of co n tro llin g o u r m oney supply in the
m id s t of a w a g e -p ric e s p ir a l, d islo c a tio n s and re a d ju stm e n ts will
o c c u r.
T hey have to w ork th e ir w ay th ro u g h the econom y.
T h e re
is no way th a t we can w ish away th is p r o c e s s .
Maybe it w ill help you to u n d e rsta n d the p ro b le m if you think of
o u r n atio n al output as a p ie, to be divided am ong o u r population. It
is a pie w hich n e v e r g ro w s v e ry fa s t, and it i s n 't grow ing at all rig h t
now, p a rtly b e c a u se of in flatio n d islo c a tio n s .
F u r th e r m o r e , the
exp losion in p ric e s of fo reig n oil th a t we im p o rt and the two d e v a l
u atio n s m ean th at fo re ig n e rs have tak en a l a r g e r s lic e of o u r p ie.
The r e s u lt is , as D r. Okun o b s e rv e s , th a t it is sim p ly not p o ssib le
fo r everybody to c atch up w ith everybody e ls e .
The e ffo rt of any
g ro up to g e t a l a r g e r s lic e of pie only le a v e s s m a lle r s lic e s fo r o th e rs .
N o n e th eless, we a re c le a rly e n te rin g a p e rio d during w hich g ro u p s
w ill be jockeying o v e r the re la tiv e s iz e of th e ir s lic e s . As so m e s lic e s
g e t s m a l l e r - - a t le a s t te m p o r a r ily - -p la n s m u st be changed. Spending
w ill be postponed o r red u ced by so m e , in c re a s e d by o th e rs . P la n s
-5 g e a re d to c o n sta n tly in c re a s in g s lic e s w ill be p a re d down.
U nem
p lo y m en t and e x c e ss c ap a city w ill a p p e a r in som e a r e a s as in co m es
a re r e d is tr ib u te d .
T h ese d evelopm ents a re not en joyable, but n e ith e r
is in fla tio n .
T hey a re , in any event, unavoidable developm ents and
a l e s s e r evil than in flatio n .
The only s a tis fa c to ry way to deal w ith
th em is to l e t th em w ork out in the m a rk e t p la c e .
Many people a re c la m o rin g fo r p o litic a l so lu tio n s.
Some b e liev e
th a t c o n tro ls w ill so lv e the p ro b le m , by p rev e n tin g se le c te d g ro u p s
fro m rea ch in g fo r a l a r g e r s lic e of the n o - la r g e r p ie. But all p r i o r
e x p e rie n c e su g g e sts th a t c o n tro ls w ill not do the job. J u s t a s they
did in the c a s e of fixed exchange r a te s , c o n tro ls sim p ly dam up
u n d erly in g m a rk e t f o rc e s , only to have th em re le a s e d in m o re v ir u
le n t fo rm a t a l a t e r tim e .
A n o th er p o litic a lly tem pting way to deal w ith the d islo c a tio n s d e
s c rib e d is to le t the m oney supply in c re a s e . T hat g iv es the pie the
fa ls e a p p e a ra n c e of being l a r g e r . The d islo c a tio n s th a t a re p o litic a lly
tro u b le so m e a re cau se d b e c a u se when one group g e ts a h ig h e r p ric e
fo r its la b o r o r goods and thus a l a r g e r s lic e , the pie w hich re m a in s
fo r o th e rs is re d u c e d . If the o th e rs w e re w illing to tak e a slig h tly
l e s s e r s lic e and lo w e re d the p r ic e s they c h a rg e fo r th e ir la b o r o r
goods, at le a s t th e re would be enough to go aro u n d . But hum an n a tu re
being w hat it is , th e re is a lm o st n e v e r any group w illing to do th a t
v o lu n ta rily .
E ach group in s is ts on the sa m e o r h ig h e r p r ic e s . The
r e s u lt is th a t until the p ro c e s s is w orked out in the m a rk e t th e re
is not enough to go aro u n d . As so m e s lic e s in c re a s e and o th e rs re fu s e
to le t th e ir s d e c re a s e , som ebody is sq u eezed out. U nem ploym ent
r e s u lts and so m e g e t nothing at a ll.
U nder th o se c irc u m s ta n c e s th e re is g r e a t p o litic a l p r e s s u r e to le t
the supply of m oney in c re a s e as each group ta k e s a l a r g e r s lic e . In
th at w ay the rem a in in g s lic e s , e x p re s s e d in d o lla rs , need be no s m a lle r
and ev ery o n e can postpone the n e c e s s ity of com ing to te r m s w ith the
u n d erly in g p ro b le m th a t ev ery o n e c a n 't g e t a l a r g e r p iec e of the pie
u n le s s the pie g e ts la r g e r - - w h ic h it is n 't.
The tro u b le w ith th is a p p ro a ch is th a t it is the c la s s ic re c ip e
fo r ra m p a n t in flatio n . If we p e rm it the n u m b er of d o lla rs to in c re a s e
m o re ra p id ly than goods and s e r v ic e s a re in c re a s in g , p ric e s w ill
sim p ly r is e a c c o rd in g ly .
The rem a in in g s lic e s , w hich a p p e a r to
re m a in the sa m e b e c a u se e x p re s s e d in d o lla rs , w ill n o n e th e le ss be
s m a lle r b e c a u se in flatio n h a s tak en p a r t away.
On the o th e r hand, if we hold m o n e ta ry expansion down too tig h tly ,
the n e c e s s a r y a d ju stm e n ts beco m e m o re s e v e re and m ay be h a rd to
d ig e st. T hus, as w ith m o st h a rd d e c isio n s, it is a q u estio n of b a lan ce
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6
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and ju d g m en t. ' We m u st p e rm it so m e m o n e ta ry expansion but not
too m uch. The aim is to wind the w a g e -p ric e s p ir a l down slow ly
w ithout w renching d islo c a tio n s .
T h at m ea n s th e r e w ill be in flatio n ,
b u t hopefully in p ro g re s s iv e ly l e s s e r am ounts o v e r a p e rio d of s e v e ra l
y e a r s . B ut it is c r itic a l th a t we stic k w ith it. As we liv e throu g h
th is p e rio d of re a d ju stm e n t, th e re w ill in ev itab ly be g r e a t e r u n e m
p lo y m en t and m o re sla c k in the econom y than we would lik e .
T hat
is the n a tu re of the re a d ju stm e n t. We can e lim in a te the sid e e ffects
only by stopping the m e d ic a tio n . If we do not have the p o litic a l w ill
to p e r s e v e r e , and if we throw m o n e ta ry and fis c a l r e s t r a i n t to the
w in d s, we sh a ll re tu rn a lm o st im m e d ia te ly to a m o re v iru le n t w a g ep r ic e s p ir a l.
T hat is the back g ro u n d in w hich the P r e s id e n t's O c to b er tax
p ro p o s a ls w e re advanced. W hile the d is e a s e we a r e try in g to c o n tro l
is rav ag in g 213 m illio n A m e ric a n s , the u n fo rtu n ate sid e effe cts of the
m ed ic a tio n a re c o n c e n tra te d on a re la tiv e few of o u r c itiz e n s .
To
d eal w ith th a t, the nontax p o rtio n s of the P r e s id e n t's package included
a d d itio n al re lie f fo r unem ployed p e rs o n s and fo r the housing in d u stry .
The p rin c ip a l p u rp o se of the individual s u rta x p ro p o sa ls is to r a is e
th e re v e n u e s re q u ire d to p ro v id e th a t re lie f.
The individual su rta x
is the m ea n s by w hich the m o re fo rtu n a te m a jo rity of us a re ask ed to
c o n trib u te a sm a ll am ount each to help th o se who b e a r the b u rd en
of the c u re fo r in flatio n .
T h is in good c o n scie n ce n eed s to be done,
and only if we do it a re we lik e ly to r e s i s t p o p u la r p r e s s u r e s to
abandon the m ed ic in e .
The p u rp o se of the s u rta x on c o rp o ra tio n s is to fin a n c e --f o r
one y e a r - - th e ad d itio n al in v estm en t in c e n tiv e s re q u ire d to achieve the
in c re a s e d supply of goods and s e r v ic e s th a t w ill help hold p r ic e s down.
The P ro p o s e d S u rc h a rg e on Individuals
T h e re is m uch m isu n d e rsta n d in g about the individual s u rc h a rg e
p ro p o sa l.
As m o st of you tax p r a c titio n e r s a r e w ell a w a re , it is
a highly p r o g r e s s iv e tax . It c o lle c ts nothing at all fro m low b ra c k e t
ta x p a y e rs , a little b it fro m m id d le incom e ta x p a y e rs , and m uch m o re
fro m high b ra c k e t ta x p a y e rs .
We know fro m o u r m a il and fro m C o n g re ssio n a l co m m en ts th at
a g r e a t m any people have e rro n e o u s ly concluded th a t the s u rc h a rg e
would be e ith e r 5 p e rc e n t of all of a ta x p a y e r's incom e in e x c e ss of
the $15,000 o r $7, 500 th re s h o ld ”le v e ls . W hile we w e re s u r p r is e d th at
people cam e to th e s e e rro n e o u s c o n clu sio n s, we w e re not s u rp ris e d
th a t p e rs o n s who m is c o n s tru e d the p ro p o sa l in th is fash io n would
o b jec t to it.
As m o st of you know, the 5 p e rc e n t would apply not
to in co m e but to tax , and only to th a t p a r t of the ta x p a y e r’s re g u la r
tax lia b ility a ttrib u ta b le to the ta x p a y e r’s incom e above the $15,000
and $7, 500 le v e l.
We a r e v e ry m uch a w are th a t m o st fa m ilie s and sin g le p e rs o n s
w ith in co m es above $15, 000 and $7, 500 a re not w ealthy by any s tr e tc h
of the im ag in atio n .
B ut the s u rc h a rg e would not c o lle c t m uch fro m
m o st of th em e ith e r.
And the fa c t re m a in s th a t the ta x p a y e rs who
w ill be affected by the individual s u rc h a rg e a re the m o st eco nom ically
fo rtu n a te p e rs o n s in o u r c o u n try .
T hey a re the top 30 p e rc e n t of all
ta x p a y e rs .
T hey a re b e tte r off than 70 p e rc e n t of a ll the ta x p a y e rs .
A lthough the im p a ct of the p ro p o se d s u rc h a rg e on th o se e a rn in g s
betw een $7, 500 and $25, 000 is slig h t, we b e liev e it is im p o rta n t th at
the c o st of fighting in flatio n and the b u rd en of re lie v in g the h a rd sh ip s
of th o se le s s fo rtu n a te be b o rn e b ro ad ly . W hile th o se who m ake
$20, 000 o r $25, 000 a re not w ealthy, it m u st h o n estly be adm itted th at
the im p a c t of the tax on th e s e fa m ilie s is a lso sm a ll. N onetheless,
th e y should a lso help in the fight a g a in st in flatio n . F ighting in flation
is e v e ry o n e 's p ro b le m . So long as the b u rd en of the fight is rea so n a b ly
a p p o rtio n ed to ab ility to pay and so long as the b u rd en is lig h te s t on
the le a s t affluent, we b e liev e a b ro a d sh a rin g of the c o st is f a r p r e f
e ra b le to n a rro w ly s e le c tiv e re m e d ie s .
In v estm e n t In ce n tiv e s
In addition to the s u rta x e s , the in flatio n tax package co n tain s two
p ro v isio n s d esig n ed to in c re a s e and fa c ilita te c a p ita l in v e stm e n t. The
p u rp o se of th o se p ro p o sa ls is to in c re a s e o u r le v e l of p ro d u ctiv ity
and to in c re a s e o u r su p p lies of goods. As su p p lie s and p ro d u ctiv ity
go up p r ic e s can com e d o w n --o r at le a s t stop ris in g .
The f i r s t of th e s e p ro v isio n s r e la te s to the in v e stm e n t c re d it and
the second r e la te s to a new and lim ite d kind of p r e f e r r e d stock which
should p ro v id e g r e a t e r flex ib ility in ra is in g ad ditional equity c a p ita l.
The in v e stm e n t c re d it p ro p o sa l is by f a r the m o re sig n ific a n t of the
two, and I would lik e to devote the re m a in d e r of m y tim e to it.
The In v e stm e n t P r o c e s s
B e fo re I m ove to d e ta ils of the p ro p o sa l, le t m e rem in d you of
so m e b a sic fa c ts about the in v e stm e n t p r o c e s s .
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8
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in v e stm e n t is w hat people put a sid e now, in o r d e r to m ake thin g s
b e tte r-in the fu tu re .
B efo re they can in v e st, people m u st sa v e . If
they spend t h e ir e n tire in co m es on w ine, w om en and song, th e re is
nothing le ft to in v est.
The ra te of sav in g s in o u r c o u n try is in fact
s u b s ta n tia lly le s s than in m o st o th e r in d u s tria l n a tio n s --a n d it is le s s
by a sig n ific a n t m a rg in . I find it d istu rb in g , m y se lf, to note th at we
sta n d at the b ottom of the la d d e r w ith E n g la n d --h a rd ly a co m fo rtin g
p a r tn e r .
If we in c re a s e in v estm en t it m ea n s a h ig h e r ra te of econom ic
g ro w th , g r e a t e r fu tu re p ro s p e rity , m o re jo b s, and g r e a t e r output
p e r c a p ita fo r an expanding population. It p ro v id e s b e n efits fo r
e v ery o n e.
T h e re a re a g r e a t m any d iffe re n t kinds of in v e stm e n t,
and the m a jo rity of o u r in v e stm e n t is not e lig ib le fo r the in v e stm e n t
c re d it.
In te r m s of the b e n e fits it p ro d u c e s, education is p o ssib ly
the m o st im p o rta n t kind of in v e stm e n t we have, even though it does
not tu rn up on any b ala n ce sh e e ts o r g e t any tax c re d its . Even
c o n su m e r d u ra b le s a re a kind of in v estm en t. A r e f r ig e r a to r , fo r
ex am p le, m ay p ro v id e m a jo r fu tu re econom ic b e n e fits by reducin g
the n u m b e r of tr ip s to the s to re , elim in a tin g sp o ilag e and p e rm ittin g
food p u rc h a s e s to be m ade at tim e s when p r ic e s a re m o st
ad v an tag eo u s.
The In v e stm e n t C r e d it- - I n G e n e ra l
The a s s e ts e lig ib le fo r the in v estm en t c re d it c o n stitu te a 'r e la tiv e ly
n a rro w c la s s of in v e stm e n t and I have to sa y to you th a t it is not
n e c e s s a r ily b e tte r o r m o re p ro d u ctiv e than o th e r c la s s e s of in v e s t
m en t. The genius of o u r fre e m a rk e t s y s te m is th a t h u n d red s of
m illio n s of individuals r e g i s te r th e ir re la tiv e p re fe re n c e s thro u g h
the p ric in g s y s te m and the in v e stm e n ts th at a re m ade a re th o se th at
b e s t resp o n d to all of th o se individual dem an d s.
W hile no kind of in v estm en t is in h e re n tly b e tte r than a n o th e r, it
is v e ry c le a r th a t o u r incom e tax s y s te m - - o r any incom e tax s y s te m - is h eavily b ia se d a g a in st in v e stm e n ts w hich p ro d u ce fin an c ia l r e tu r n s
th a t c o n stitu te tax a b le incom e. It is e a sy to se e why th a t is tru e by
supposing th a t you have $5, 000, and the q u estio n is w h e th e r to spend
it fo r a v acatio n o r to sa v e it and buy a bond. In w eighing the v acatio n
a lte rn a tiv e you would not tak e incom e ta x e s into account, but in
w eighing the bond a lte rn a tiv e you would have to tak e into account the
fa c t th at so m e la rg e p e rc e n ta g e of the in te r e s t incom e on the bond would
go to the g o v e rn m e n t in the fo rm of incom e ta x e s .
T hat is not n e c
e s s a r ily im p ro p e r, but it does m ean th at the e x iste n c e of the incom e
tax sy s te m tilts the s c a le v e ry sig n ific a n tly when people a re deciding
w h e th er to sav e o r consum e.
- 9 F o r a f u r th e r re a s o n , w hich is too te c h n ic a l to ex plain in a sp e ec h ,
the incom e tax s y s te m is a lso m uch m o re b ia se d a g a in st in v e stm e n ts
in lo n g -liv e d a s s e ts than in s h o rt-liv e d a s s e ts .
The ju stific a tio n fo r the in v e stm e n t c re d it is th a t it le s s e n s in
som e d e g re e th o se b ia s e s , and by le s se n in g the b ia s it h elp s to achieve
m o re in v e s tm e n t--a t le a s t m o re in v e stm e n t in a c e rta in kind of a s s e t.
The n ext q u estio n w hich e c o n o m ists m u st ask is w h e th er the in
v e stm e n t c re d it a c h iev e s m o re to ta l in v e stm e n t o r w h e th er it ju s t
r e a llo c a te s the in v e stm e n ts th at would be m ade anyway, by m aking
in v estm en ts in q u alified a s s e ts m o re a ttra c tiv e than in v e stm e n ts in
o th e r a s s e t s .
The a n sw e r to th a t q u e stio n depends upon w h e th er the
in v estm en t c re d it c a u se s an in c re a s e in " s a v in g s " --b e c a u s e we keep
com ing b ack to the p ro p o sitio n th a t th e re is nothing le ft to in v e st if
we have co nsum ed it. We have to sa v e b e fo re we can in v e st.
A g r e a t deal of sa v in g --p ro b a b ly m o s t of i t - - i s b u s in e s s saving,
in the se n se th a t it c o n s is ts of m oney w hich b u s in e s s e s s e t a sid e out
of th e ir p ro fits fo r new in v e stm e n t.
The in v e stm e n t c re d it te n d s, in
the f i r s t in sta n c e , to in c re a s e th a t b u s in e s s sa v in g s b e c a u se it re d u c e s
tax es and thus in c re a s e s a fte r -ta x p ro fits .
But you c a n 't stop th e re .
You m u st c o n s id e r a n u m b er of o th e r fa c to rs a lso .
F o r exam ple:
. If a b u sin e ss has m o re a fte r -ta x p ro fits , w ill it in fac t
sa v e it o r w ill it pay m o re out to s h a re h o ld e rs , ow ners
o r e m p lo y e e s?
.
To the ex ten t th at it does pay in c re a s e d p ro fits out to
s h a re h o ld e rs , o w n ers and e m p lo y ee s, w hat w ill they do
w ith it? W ill they spend it o r sa v e it?
. If c o m p e titiv e b u s in e s s e s a ll have m o re a fte r - ta x incom e,
th a t w ill in due c o u rs e tend to d riv e th e ir p r ic e s down,
and if th a t happens they w ill have le s s a f te r -ta x p ro fits ,
a fte r a ll.
.
If b u s in e s s e s do su c ce ed in p e rm a n e n tly in c re a s in g th e ir
a f te r - ta x incom e, w ill th a t fa c t be an in d u cem en t to m o re
sa v in g ? W ill it c a u se m o re individuals to sa v e in o r d e r
to p a rtic ip a te in h ig h e r r a te s of re tu r n on in v e stm e n t?
T h at is a little lik e asking w h e th e r, if sa v in g s accounts
in te r e s t r a te s go fro m 5 to 6 p e rc e n t, m o re people w ill
put m oney a sid e b e c a u se the re w a rd fo r saving is s o m e
w hat g r e a t e r .
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A final and o v erw h elm in g ly im p o rta n t c o n sid e ra tio n is , w hat
does the g o v e rn m e n t do about the rev e n u e it lo s e s on acco u n t of
the in v estm en t c re d it? If the l e s s e r re v e n u e s c a u se the g o v e rn
m en t to run a b ig g e r d e fic it, then the g o v e rn m e n t m u st b o rro w
the m oney to finance the d e fic it and to the ex ten t it d o es, it
u s e s up sa v in g s w hich would be a v aila b le fo r b u s in e s s . So w hat
a p p e a rs to be an in c re a s e in sa v in g s due to l a r g e r c o rp o ra te
e a rn in g s m ay in fa c t be o ffse t by g o v e rn m e n t dem ands on the
c a p ita l m a rk e ts e ls e w h e re , w ith the r e s u lt th a t th e re is a w ash .
On the o th e r hand, if the g o v e rn m e n t o ffse ts the rev en u e
lo s s fro m the c re d it by ad d itio n al ta x e s , then th e re is lik e ly
to be so m e in c r e a s e in the to ta l am ount of sa v in g s. A dditional
ta x e s take m oney aw ay fro m ta x p a y e rs , m any of whom would
have sp e n t it.
In th a t s e n s e , the c re d it is a kind of fo rc e d
sa v in g s in w hich re v e n u e s e x tra c te d fro m ta x p a y e rs a re u sed to
fin an ce in v e stm e n t.
B ut even th a t m ay not c a u se a n e t in c re a s e
in sa v in g s, b e c a u se the in c re a s e d ta x e s m ay tak e away fro m t a x
p a y e rs m oney w hich they would have sav ed th e m s e lv e s .
To th a t
ex te n t we w o n 't g e t m o re sa v in g s, we w ill sim p ly g e t sav in g s in
d iffe re n t am ounts by d iffe re n t s a v e r s .
T hus, you have to look at the whole sy s te m as a c lo se d loop.
You m u st c o n s id e r not only how the individual re a c ts to a r e
duction in his ta x e s b e c a u se of the c re d it, but you m u st c o n s id e r
a lso how the g o v e rn m e n t re sp o n d s to th o se changes in tax c o l
le c tio n s . It is all v e ry m uch m o re com plex than p e o p le --e v e n
b u sin e ssm e n and a c c o u n ta n ts--c o m m o n ly su p p o se.
E co n o m ists
studying the p ro b le m have not alw ays a g re e d , but, in g e n e ra l,
it does a p p e a r th a t the e x istin g c re d it sig n ific a n tly in c r e a s e s the
to ta l am ount of in v e stm e n t. O u r own econom ic study at the
T r e a s u r y in d ic a te s th a t fo r e ac h 1 p e rc e n t th a t the c re d it re d u c e s
th e c o s t of in v e stm e n t in q u alified a s s e ts , th e re is an equal
in c re a s e of about 1 p e rc e n t in the am ount of th o se a s s e ts . O ur
stu d ie s su g g e st th a t c a p ita l equipm ent e x p e n d itu re s fo r 1974 w ill
be about $5 b illio n h ig h e r than they would have been w ithout the
c re d it.
H isto ry h as d e m o n s tra te d th at the c re d it is, in fa c t, a quick
and p o ten t in v e stm e n t in ce n tiv e , although its e ffe c tiv e n e ss has
sig n ific a n tly d im in ish e d by its u n p re d ic ta b ility . It b e c a m e e ffe c
tiv e about the th ird q u a rte r of 1967, w ent off again in A p ril, 1969,
and cam e back in mid-1971 in Lts p r e s e n t fo rm .
In 1971, when the c re d it w as la s t re -e n a c te d , the c o u n try w as
in a p e rio d of high unem ploym ent and b u s in e s s sta g n atio n , w hich
appears In have been due in p a rt to the siz e a b le in c re a s e in
-11
-
b u sin e ss tax b u rd e n s u n d e r the R evenue A ct of 1969. Follow ing the
r e -e n a c tm e n t of the c re d it in 1971, we e x p e rie n c e d an in c re a s e in
in v e stm e n t of 9 p e rc e n t in 1972 and 13 p e rc e n t in 1973, an in c re a s e
in in d u s tria l p ro d u ctio n of 19 p e rc e n t o v e r the 1972-73 p e rio d and
a sig n ific a n t d eclin e in unem ploym ent.
All th is is not to sa y th at the c re d it w as the so le c a u se of th o se
d e v elo p m e n ts.
O th e r fa c to rs , su ch as g o v e rn m e n ta l fis c a l policy,
w e re a lso pow erful in flu e n ce s. N o n eth eless, we a re s a tis fie d on both
th e o re tic a l and e m p iric a l g ro u n d s th a t the c re d it is v e ry effectiv e.
A M ore L ib e ra l C re d it in E xchange fo r H igher R ates: An U n d e sirab le
T ra d e -Off
A n u m b er of le g is la to r s and a m a te u r eco n o m ists have su g g ested
th a t we would be b e tte r off if we in c re a s e d the c o rp o ra te tax ra te and
u sed the p ro c e e d s to in c re a s e the in v e stm e n t c re d it.
T hey p ro p o se
a p e rm a n e n t tra d e -o ff of h ig h e r r a te s fo r a m o re lib e r a l c re d it.
T h e re a r e th re e re a s o n s why th a t is not a good tra d e -o ff:
- The in v e stm e n t c re d it is a c a sh b en efit intended to
re d u c e the c o st of c a p ita l in v estm en t. If it is sim p ly
o ffse t by o th e r tax in c r e a s e s , the r e s u lt is a w ash.
- M ost b u sin e ss in v estm en t is held in c o rp o ra te fo rm
and the c o rp o ra te r a te has a m a jo r im p a c t on the
c o st of all kinds of c a p ita l in v e stm e n t.
H ow ever, the
in v e stm e n t c o v e re d by the in v estm en t c re d it accounts
fo r le s s than 30 p e rc e n t of o u r c a p ita l sto c k . T hus, the
ad v an tag es of the c re d it v a ry e n o rm o u sly fro m in d u stry
to in d u stry . In c re a s e s and d e c re a s e s in the c o rp o ra te
ra te have a m uch m o re n e u tra l im p a ct than in c re a s e s
o r d e c re a s e s in the in v e stm e n t c re d it, and, fo r th at
re a s o n , a re , in g e n e ra l,, m o re d e s ira b le .
The t r a d e
off p ro p o se d would be v e ry u n d e sira b le fo r m any
in d u s trie s and co m p a n ie s.
- T w enty p e rc e n t of the p re s e n t in v e stm e n t c re d it goes
to in d iv id u a ls.
So a c re d it of $1, o ffse t by a c re d it
tax in c re a s e of $1, would re s u lt in a 20 c en ts lo s s to
c o rp o ra tio n s .
B en efits fro m In v estm e n t Tax C re d it P ro p o s a l: In G e n era l
L et m e tu rn now to the sp e cific in v e stm e n t c re d it p ro p o s a ls .
The p ro p o sa l would change the in v e stm e n t c re d it in fo u r ways
th a t a re fav o ra b le to ta x p a y e rs and in one way th at is not. F ro m
the ta x p a y e r's point of view, the p lu se s a re the in c re a s e in the ra te
-
12
-
fro m 7 p e rc e n t to 10 p e rc e n t, the e lim in a tio n of th e incom e lim ita tio n ,
the e lim in a tio n of the lim ita tio n on s h o rt-liv e d p ro p e rty , and the
e lim in a tio n of the d is c rim in a tio n a g a in st public u tility p ro p e rty . The
m inus is th a t ta x p a y e rs would no lo n g e r be p e rm itte d to tak e d e p r e
cia tio n deductions on th a t p a r t of the a s s e t c o s t re im b u rs e d by th e
c re d it.
P re d ic ta b ly ,
ta x p a y e rs a re p le a se d w ith the p lu se s but
d isap p o in ted by the m in u s.
In the a g g re g a te , the changes w ill p ro d u ce a s u b s ta n tia l tax b en efit
to b u s in e s s .
The 1975 lo s s fro m the p r e s e n t c re d it is $5. 7 b illio n .
The p ro p o sa l is e s tim a te d to lo se an a d d itio n al $2. 7 b illio n in the f i r s t
y e a r . T h at is an in c re a s e of n e a rly 50 p e rc e n t. Som ebody w ill be
g ettin g th o se b e n e fits .
A one se n ten c e s u m m a ry of the p ro p o se d re s tru c tu r in g is th a t it
r e p r e s e n ts a new way of dividing up the b e n efit p ie .
H ow ever, the
pie is sig n ific a n tly l a r g e r .
The aim w as to divide the pie m o re fa irly
and e ffic ie n tly .
Some w ill g e t q uite a b it m o re . Some w ill be about
even. B ut we tr ie d to hold to an ab so lu te m in im u m the n u m b er th at
would g e t l e s s .
The p ro p o se d changes a r e d e sig n ed to p ro d u ce an in v e stm e n t c re d it
th a t w ill help a ll b u s in e s s e s eq u ally . Since the e x istin g c re d it d o e sn ’t
do th at, the changes w ill help d iffe re n t b u s in e s s e s in d iffe re n t d e g re e s .
The b u s in e s s e s th a t w ill b e n efit m o s t a r e th o se fo r w hich the p re s e n t
c r e d it w o rk s u n fa irly --in c lu d in g , p a rtic u la rly , sm a ll b u s in e s s e s ,
grow ing b u s in e s s e s , b u s in e s s e s in fin an c ia l difficulty and u tilitie s .
The co m p an ies th a t g e t the g r e a te s t b e n efit fro m the ex istin g c re d it
w ill g e t the le a s t b e n efit fro m the p ro p o sa l, but they w ill continue to
enjoy all o r s u b s ta n tia lly all of th e advantages p ro v id ed by the p re s e n t
c re d it.
The D isadvantage of U n n e u tra lity
The p r e s e n t s y s te m sa y s to the ta x p a y e r, in e ffect, "if you in v e st
$93 in c e rta in kinds of a s s e ts , the g o v e rn m e n t w ill put up an addition al
$7, and w ill, f u rth e rm o re , le t you a ssu m e fo r d e p re c ia tio n p u rp o se s
th a t you a ctu a lly sp e n t the e n tire $100 y o u rs e lf. " But then the p re s e n t
c r e d it s tr u c tu r e go es on to im p o se a s e r i e s of lim ita tio n s , and the
p r a c tic a l r e s u lt of th o se lim ita tio n s is th a t the g o v e rn m e n t puts up
the $7 in only p a r t of the c a s e s . In the o th e rs , it puts up d iffe re n t
am ounts than $7 o r nothing at a ll.
By o p e ra tin g in th is u n n e u tra l
and e r r a tic fash io n , the p r e s e n t c re d it is not only u n fa ir as betw een
ta x p a y e rs , but it induces in efficien cy and im p a irs p ro d u c tiv ity .
- 13 We b e lie v e th a t a fre e m a rk e t is the b e s t way to channel in v e s t
m ent w h e re it w ill be m o st e ffic ie n t--w h e re it w ill p ro d u ce the m o st
with the le a s t c o st.
S o p h isticated in v e stm e n t is m ade on the b a s is
of c a p ita l budgeting a rith m e tic th a t you a re all fa m ilia r w ith. It
m e a s u re s the d iffe re n c e s betw een expected re v e n u e s and expected c o s ts ,
with allow ance being m ade fo r the d iffe re n c e in tim in g . B u sin e sse s
s e le c t th o se in v e stm e n t o p p o rtu n itie s th a t a re m o st p ro d u c tiv e --th o s e
w h ere the re v e n u e s exceed the c o sts by the g r e a te s t m a rg in .
The in v e stm e n t c re d it fig u re s p ro m in e n tly in th a t a rith m e tic . It
re d u c e s am ounts to be expended. If the c re d it is n e u tra l and p r o
vides the sa m e b en efit fo r everybody, the a rith m e tic w ill be m o re
fav o ra b le to the in v e s to r in all c a s e s , b u t the re la tiv e d e s ira b ility
of the a lte rn a tiv e s w ill sta y the sa m e .
In v e stm e n ts w hich on th e ir
m e r its a re m o st p ro d u ctiv e w ill s till be the m o st p ro fita b le , and the
m o st p ro d u ctiv e in v e stm e n t o p p o rtu n itie s w ill be s e le c te d .
But if
the c re d it o p e ra te s in an u n n e u tra l and e r r a t ic fash io n , in v e stm e n ts
w hich a re m o re p ro d u ctiv e on the m e r its w ill a p p e a r le s s p ro fita b le
b e c a u se they g e t le s s c re d it, and v ic e - v e r s a . W hen th a t happens,
th e re is a n et lo s s in the efficien cy and p ro d u c tiv ity of o u r econom y
and we a r e a ll w o rse off.
M axim um p ro d u c tiv ity is e sp e c ia lly i m
p o rta n t today b e c a u se it is the b e s t sa fe ty cushion we have ag ain st
in flatio n and we need e v e ry ounce of it we can g et.
U n n eu trality in the B a sis P ro v is io n s
The f i r s t kind of u n n e u tra lity is the u n n e u tra lity in the b a s is
p ro v isio n s.
The ab sen ce of a b a s is a d ju stm e n t is a s o u rc e of s ig n i
fican t u n n e u tra lity , fo r re a s o n s I sh a ll explain in a m in u te.
T h e re is no conceptual ju s tific a tio n fo r p e rm ittin g a ta x p a y e r to
re c o v e r th ro u g h d e p re c ia tio n dedu ctio n s, c o sts w hich it does not in
fact in c u r. When the c re d it w as o rig in a lly en acted in 1962, the law
p ro v id ed th a t the c o st b a s is would be only the $93. T h at p ro v isio n ,
h o w ev er, gave r is e to g r e a t co m p lex ity when it w as com bined w ith
o th e r fe a tu re s of the p r e s e n t c re d it.
B e ca u se of the "incom e l im i ta
tion" and the re c a p tu re r u le s , ta x p a y e rs could n e v e r be s u re ju s t how
m uch c r e d it they would u ltim a te ly g e t o r when they would g e t it. But
if they w e re n 't going to g e t it then they sh o u ld n 't be re q u ire d to red u ce
b a s is , and e la b o ra te p ro v isio n s w e re c o n stru c te d to deal w ith that
contingency. P a r tly b e c a u se of the co m p lex ity c re a te d and p a rtly b e
cau se ta x p a y e rs sim p ly w anted m o re , the b a s is a d ju stm e n t p ro v isio n s
w e re r e tr o a c tiv e ly re p e a le d in 1964. By re s tru c tu r in g the c re d it as
we p ro p o se , it w ill be p o ss ib le to r e in s ta te the b a s is a d ju stm e n t and
at the sa m e tim e avoid the kinds of co m p lex ity p re v io u s ly e n co u n tered .
- 14
You can b e s t se e the u n n e u tra lity in the p r e s e n t c re d it if you
think of the c re d it as c o n fe rrin g two b e n e fits: a p ric e re d u c tio n of
$7 and an ad d itio n al d e p re c ia tio n deduction in the sa m e am ount to be
tak en o v e r fu tu re y e a r s .
T im e is m oney, and the value of th e d e p r e
cia tio n deduction depends upon when the deductions can be tak en , and
th u s upon the " d e p re c ia b le life " of the a s s e t. A $7 deduction w hich can
be u se d th is y e a r is w o rth m uch m o re than a $7 deduction w hich m u st
be u se d in in s ta llm e n ts o v e r the n ex t 10 o r 20 y e a r s . T hus, the to ta l
value of the c re d it ex ceed s the nom inal r a te and v a rie s sig n ific an tly ,
depending upon w h e th er you have a s s e ts w ith long liv e s o r a s s e ts w ith
s h o r t liv e s .
T ra n s la te d into p e rc e n ta g e te r m s , the effectiv e p ric e
re d u c tio n fo r a s s e ts of d iffe re n t liv e s (using a 12.5 p e rc e n t d isco u n t
ra te ) ran g e as follow s:
7.4%
10.7%
9.6%
5 y e a rs
7 y e a rs
15 y e a rs
The p ro p o sa l would e lim in a te th is d is c rim in a tio n by taking away th e
rig h t to tak e d e p re c ia tio n d eductions fo r a c o st th a t n e v e r e x iste d . It
c o m p e n sa te s by ra is in g the ra te fro m 7 p e rc e n t to 10 p e rc e n t.
U n n e u tra lity R esulting fro m O th e r L im ita tio n s
U n d er p r e s e n t law , the c re d it is lim ite d so th a t it ap p lies at
l e s s e r r a te s fo r u tility p ro p e rty , at l e s s e r r a te s fo r s h o rt-liv e d
p ro p e rty (which m ay include the m o st p ro d u ctiv e kind of in v estm en t,
e . g . , c o m p u te r s y s te m s ), and at a z e ro ra te w h e re the c re d it ex ceed s
the 50 p e rc e n t of tax lia b ility lim ita tio n .
T h ese lim ita tio n s
u n n e u tra l.
c a u se
the
p resen t
c re d it to be s e rio u s ly
i f B e ca u se of the incom e lim ita tio n , the c re d it o ffe rs no a s s i s t
ance at all to co m p an ies in fin an c ia l d ifficu lty and w ith no tax a b le
in co m e.
T hus, the co m p an ies fo r w hich in c re a s e d p ro d u c tiv ity is th e
m o st c r itic a l g e t nothing at all, and the g o v e rn m e n t is c o n stan tly i m
p o rtu n ed to aid them in o th e r w ays, w hile th e ir in v e stm e n t c re d its
sim p ly go down the d ra in .
2.
The incom e lim ita tio n a lso c a u se s the c re d it to d is c rim in a te
a g a in st the in n ovative, grow ing firm .
T hey a re m aking la rg e in v e s t
m en ts now th a t w ill p ro d u ce incom e in the fu tu re .
But th ey lo s e the
c re d it b e c a u se of the a cc id e n ta l fa c t th a t the s m a lle r in v e stm e n ts w hich
th ey m ade in the p a s t do not p ro d u ce enough incom e to a b so rb the
c re d it.
Big co m p an ies w ith ste a d y budgets avoid th is p ro b le m .
But
m any s m a lle r co m p an ies a re h it h a rd .
- 15 3. A th ird re a s o n why sm a ll b u s in e s s e s a re apt to be h it by the
incom e lim ita tio n is th a t it is ty p ic ally m o re d ifficu lt to a v e ra g e out
in v e stm e n t o u tla y s o v e r tim e in sm a ll c o m p a n ie s. L a rg e c re d its a re
apt to be bunched and th u s exceed the incom e lim ita tio n s .
4. The s h o rt-liv e d p ro p e rty lim ita tio n s a r e a n o th e r u n n e u tra lity .
They p ro v id e a re la tiv e d is in cen tiv e to in v e stm e n t in s h o r te r lived
a s s e ts , w hich m ay be the m o st p ro d u ctiv e of a ll. C o m p u ter sy s te m s,
fo r ex am p le, m ay have d ra m a tic effe cts on p ro d u c tiv ity . B ut if they
a r e d e p re c ia te d o v e r le s s than se v en y e a r s (and m o st a re ), they g e t
a l e s s e r c re d it.
If they a re d e p re c ia te d o v e r se v en y e a rs o r lo n g e r,
they g e t the full c re d it, but the ta x p a y e r m u st pay p a r t of it back if
he re p la c e s h is c o m p u te r a fte r six y e a r s w ith a m o re effic ie n t and
p ro d u ctiv e m o d el. T hus, the p r e s e n t c re d it a ctu ally d isc o u ra g e s the
re p la c e m e n t of o b so le te equipm ent u n til it h as been held at le a s t
seven y e a r s .
5. P u b lic u tility lim ita tio n s m ake e le c tric ity and telephone c o m
m u n icatio n c o s t m o re than they would in a n e u tra l c a p ita l m a rk e t.
T hat r e s u lts e ith e r in h ig h e r c o sts to c o n s u m e rs , o r, as in m any
p r e s e n t c a s e s , inadequate r e tu r n s to in v e s to rs and consequent d e te
rio ra tio n of fin an c ia l h e alth and s e rv ic e c ap a b ility .
T h e re m ay be
sp e c ia l re a s o n s why we w ish to d isc o u ra g e the consum ption of oil today,
but th e r e is no re a s o n to d isc o u ra g e the u se of e le c tric ity re la tiv e to
o th e r e n erg y s o u rc e s .
If all th e s e in e ffic ie n c ie s w e re slig h t, th ey m ig h t be ig n o red . But
they a r e m a jo r.
The nom inal 7 p e rc e n t c re d it is in fa c t today an
effective c re d it of only 4. 2 p e rc e n t, i. e . , 40 p e rc e n t of the c re d it
is lo s t b e c a u se of th e s e lim ita tio n s .
P r e lim in a r y n u m b e rs fo r 1072,
the m o st re c e n t y e a r a v a ila b le , in d ic ate :
(B illions)
C o st of in v e stm e n t e lig ib le
fo r c re d it
$72. 0
In v e stm e n t c re d it u tiliz e d
3 .0
E ffectiv e r a te of c re d it
4.2%
R eduction in c re d it a ttrib u ta b le to:
1. s h o rt-liv e d p ro p e rty
lim ita tio n
2. public u tility
p ro p e rty lim ita tio n
3. tax a b le incom e lim ita tio n
0 .7
0 .6
0 .8
$ ""
2. 0
- 16 Is Anyone R eally W o rse O ff?
U nder the p ro p o se d r e s tru c tu rin g of the c re d it, everybody would
c le a r ly be b e tte r off now. On each $100 of in v e stm e n t in qualified
p ro p e rty , everybody g e ts , im m e d ia te ly , an ad ditional $3 fo r a s s e ts
w ith liv e s of se v en y e a r s o r m o re , an additio n al $5.33 fo r a s s e ts w ith
liv e s fro m five to se v en y e a r s , and an additio n al $ 7 .6 7 on a s s e ts having
liv e s of th re e to five y e a r s .
T a x p a y e rs w ith c re d its th a t would o th e rw ise exceed the incom e
lim ita tio n s o r th a t have in v e stm e n ts in public u tility p ro p e rty w ill, in
ad d ition, re c o v e r m a jo r c re d its now lo s t. L a te r on th e s e g a in s w ill
be p a rtia lly o ffse t by the fa c t th a t ta x p a y e rs w ill lo s e $10 of deduction s,
w hich a t a 48 p e rc e n t r a te , w ill in c re a s e fu tu re ta x e s by $ 4 .8 0 .
In the lo n g e r run, it is c le a r the p lu se s a re g r e a t e r than the m in u se s
and th a t ta x p a y e rs as a g ro u p w ill be su b s ta n tia lly b e tte r off. The
continuous rev en u e lo s s e s a tte s t c le a rly to th a t fac t.
W h eth er a p a rtic u la r ta x p a y e r w ill be b e tte r off, h ow ever, depends
on how the p lu se s and m in u se s apply to its p a r tic u la r fa c ts and c i r
c u m s ta n c e s . As you help y o u r c lie n ts a s s e s the re s tru c tu r in g , the
re le v a n t fa c to rs you w ill w ant to c o n sid e r include:
1. The am ount of additio n al c re d it obtained fro m rem o v a l of the
in co m e lim ita tio n and the lim ita tio n s on s h o rt-liv e d and public u tility
p ro p e rty .
2. The r a te of grow th of
ta x p a y e r is c o n stan tly g ettin g
d ed u ctions l a t e r .
The f a s te r
tak e fo r the lo s t deductions to
the co m p a n y 's in v e stm e n t le v e ls .
The
m o re c re d it now, in re tu r n fo r losin g
the ra te of g row th, the lo n g e r it w ill
becom e equal to the additio n al c re d its .
3. The c o st re c o v e ry p e rio d ap p licab le to the a s s e t on w hich the
c r e d it is g ra n te d .
The lo n g e r the a s s e t life , the lo n g e r the p e rio d
o v e r w hich the deductions a r e lo s t and the le s s c o stly the lo s s .
A lthough the s e v e ra l lim ita tio n s in the p r e s e n t c re d it c a u se 40
p e rc e n t of the 7 p e rc e n t c re d it to be lo s t, a n u m b er of o u r la r g e s t
and m o st s u c c e s s fu l co m p an ies p re s e n tly lo s e nothing b e c a u se of th o se
lim ita tio n s and have nothing to g ain fro m th e ir re m o v a l.
T hey have
f o c u s e d - - c o r r e c tly ,
in th e ir own c a s e s - - e n ti r e ly on w h e th er an
ad d itio n al $3 of c re d it now is w o rth m o re to th em than the lo s s
in the fu tu re of deductions w o rth $4. 80. E valu atio n of th a t is s u e is
a tec h n ic al m a tte r w hich tu rn s on the p e rio d s o v e r w hich d e p re c ia tio n
d ed u ctio n s w ill be taken and on how m uch the "$3 now" w ill e a rn
- 17 b e fo re it is o ffse t by the " l e s s e r d e p re c ia tio n deductions la te r . " In
g e n e ra l, o u r sta ff concludes th a t if co m p an ies a ssu m e the $3 w ill
e a rn fo r th e s e p u rp o se s w hat th ey a ssu m e in v e stm e n ts w ill e a rn when
they m ake th e ir c a p ita l in v e stm e n t d e c isio n s, m o st co m p an ies w ill be
b e tte r off w h en ev er the a s s e ts liv e s in q u estio n ex ceed a n u m b er s o m e
w h e re in the ra n g e betw een 10 to 12 y e a r s .
T hose w ith a s s e ts in the
7 to 10 ran g e w ill be le s s w ell off, b u t only slig h tly so . And fo r a s s e ts
in the th r e e to se v en y e a r ra n g e , the in c r e a s e in c re d it is w o rth m uch
m o re than the lo s s in d e p re c ia tio n r e g a r d le s s of w hat assu m p tio n s
a re m ad e .
In the econom y today, a p p ro x im a te ly 50 p e rc e n t of the
to ta l d e p re c ia b le b a se of m a c h in e ry and equipm ent r e la te s to a s s e ts
w ith liv e s of 12 y e a r s o r o v e r. Seventy p e rc e n t r e la te s to a s s e ts w ith
m o re than 10 y e a r liv e s .
E ven if one a s s u m e s th a t the $3 e a rn s nothing, it is c le a r th at
all ta x p a y e rs , including th o se w ith s h o rt-liv e d a s s e ts , w ill be c le a rly
ahead fo r a n u m b e r of y e a r s .
Given re a so n a b le gro w th p a tte rn s , the
am ount of ad d itio n al c re d it w ill exceed the d isa d v an tag e fro m lo s s
deduction fo r a n u m b er of y e a r s .
It is tru e th a t the in c r e a s e in the c re d it ra te to 10 p e rc e n t is
not a n et gain fo r all ta x p a y e rs .
It w ill be a n e a r w ash fo r th o se
who a r e not affected by the o th e r lim ita tio n s . W hat we a re b a sic a lly
doing is ra is in g the effectiv e ra te of the c re d it to the sa m e lev e l fo r
everybody. We a re re trie v in g the 40 p e rc e n t of the c re d it th a t p re s e n tly
g oes down the d ra in . One can a rg u e th a t the b e n e fits o f-th e c re d it
should be extended even fu r th e r , and I would be happy to m ake th at
a rg u m e n t if we could ig n o re rev e n u e and budget im p a c ts . But we m u st
liv e w ithin rev en u e c o n s tra in ts , and we think th a t th e b e n efit in c re a s e s
th at have the h ig h e st p r io r ity a re th o se th a t ach iev e u n ifo rm ity and
r e d r e s s d is c rim in a tio n .
o 0 o
- 18 -
The Percent of Investment Eligible to Receive
the Investment Tax Credit, by Industry
(Corporate Only)
------(71
"
Percent of— ^
Investment
not covered
Total
by the
investment
investment
tax credit
rn
Industry
All Industries
Agriculture
Mining
Petroleum and Gas
Contract and Construction
Manufacturing
Primary Metals
Transportation
Communication
Electric gas and sanitary services
Wholesale and retail trade
Services
(3)
m
Percent of2/
Percent!
Investment
total :
eliminated from investi
the 770 credit
qualifi
due to the asset for d
life limitation
credi
100.0
71.1
1.6
27,3
100.0
100.0
100.0
100.0
• 100.0
100.0
100.0
100.0
100.0
100.0
100.0
78.0
74.9
76.2
86.6
75.9
72.8
39.6
36.2
42.3
87.0
70.0
3.6
1.8
1.1
3.8
2.4
.7
4.2
3.8
.7
2.2
6.4
H]
23.)
m
II
Office of the Secretary of the Treasury
Office of Tax Analysis
zu
26.3
56.2
60.
57.|
10,Î
23.1
December 9,
1/
Includes investment not covered due to having an asset life of less than 3 years.
2/
All of investment in assets with lives of less than 3 years, two-thirds of
investment in assets with lives from 3-5 years and one-third of investment
in assets with lives from 5 to 7 years are excluded from the investment tax
credit.
3/
Column (1) minus column (2) minus column (3).
19 -
Effective Price Reduction of Present and
(U
Proposed Investment Tax Credit
Present Law_____________________________ Proposed Law
Asset
Useful
Life
Nominal
Credit
Rate
Effective Price Re
duction for Credit
without Basis Adjust
ment (12.5 discount
rate)
Percent In
crease of
Effective
Price Re
duction over
Nominal
Credit Rate
Proposed Price
Reduction with
Basis Adjustment
5
4.67 %
7.4%
58.5%
10%
6
4.67%
7.3%
56.3%
10%
7
7%
10.7%
52.9%
10%
8
7%
10.5%
50.0%
10%
9
7%
10.3%
47.1%
10%
10
7%
10.2%
45.7 %
10%
11
7%
10.0%
42.9%
10%
12
7%
9.9%
41.4%
10%
13
7%
9.8%
40.0%
10%
14
7%
9.7 %
38.6%
10%
15
7%
9.6%
37.1%
10%
Office of the Secretary of the Treasury
Office of Tax Analysis
December 9, 1974
20
Present Values of Net Tax Benefits per $100 Purchase of Eligible Property
Under Proposed 10 Percent Credit Compared with Present Law
Depreciable Life
of Property
:
:
:
:
(years)
Net Gain (Loss), Proposed 10 Percent Credit
vs. Present Law, with Full Adjustment of Basis
Discount Rate
10%
:
12.5%
:
15%
:
20%
:
(2)
:
(3)
:
(4)
(1)
(dollars)
7
(.66)
(.45)
(.25)
.08
8
(.56)
(.33)
(.13)
.21
9
(.46)
(.22)
(.01)
.34
10
(.37)
(.12)
.10
.46
11
(.28)
(.03)
.20
.56
12
(.20)
.07
.29
.66
13
(.11)
.16
.39
.76
14
(.04)
.24
.47
.85
15
.04
.32
.55
.93
20
.37
.66
.90
1.26
25
.65
.94
1.17
1.51
Office of the Secretary of the Treasury
Office of Tax Analysis
Note:
December 9, 1974
Computations assume net income limitation of present law does not
affect taxpayer; benefits of proposal are therefore understated.
Additional assumptions employed are:
(1) Marginal tax rate = 48 percent.
(2) Sum-of-years digits depreciation, with initial half-year
convention is utilized by taxpayer.
(3) Tax depreciation effect discounted from middle of each year.
21
-
Percent Distribution of Investment in Machinery and Equipment
by Asset Life, 1971
1
Asset Life
Greater Than— and Less Than :
(years)
3
7
7
8
8
9
9
10
10
11
11
12
12
13
13
14
14
15
15
16
16
Total
Office of the Secretary of the Treasury
Office of Tax Analysis
Percent of
Investment
16.6
1.3 )
)
8.1 ) 10.8
)
1.4 )
16.0 )
)
5.2 )
) 30.5
8.7 )
)
0.6 )
4.9 )
)
2.6 ) 39.7
)
32.2 )
100.0
December 9, 1974
22
-
With Average Growth of Investment Levels, Dollars of Aggregate Additional Credit
Will Exceed Dollars of Additional Tax Liability from Basis Adjustment
for a Number of Years, Even Before Discounting
o
o
rH
</>
Guideline Class and
Lower Limits of
ADR Depreciation Range
Annual Investment Level Starting with
and Increasing at 7% Annually 1/
Cumulative Tax After:
6 Years
9 Years
12 Years
Credit 2/:Depr. 3/: Credit 2/:Depr. 3/. Credit 2/ :Depr. 3/
(dollars)
Nonferrous (11)
21.4
13.5
35.9
29.2
53.6
49.9
Steel (14.5)
21.4
10.7
35.9
24.7
53.6
44.3
Electronic Products (7)
21.4
18.2
35.9
37.1
53.6
60.9
Electrical Equipment (9.5)
21.4
15.9
35.9
33.1
53.6
54.8
Electrical Utilities (22.5)
21.4
8.0
35.9
18.5
53.6
34.0
Office of the Secretary of the Treasury
Office of Tax Analysis
1/
27
3/
December 9, 1974
Post-World War II average rate.
Aggregate of additional 3 percent credit.
Tax savings from depreciation at 48 percent.
NOTE
The above table reflects no discount factors and thus, in
effect, assumes that the cash flow from the credit is earning
no return.
If one assumes that the credit cash flow does earn
a return--which it obviously does--an even longer period of
years would elapse before the cumulative positive cash flow
from the credit is equalled by the cumulative negative cash
flow from the loss of deductions.
In the case of longer lived
assets the positive cash flow will always exceed the negative.
December 9, 1974
LIST' OF AGENCY REPRESENTATIVES:
1.
FTC
Sheldon Feldman
2.
FDIC
Frank Wille, Chairman
3.
SEC
A1 Rusch, Special Counsel Division
Lee Pickard, Market Regulation Division (Directo
4.
COMPTROLLER
Gail Pohn
5.
FHLBB
Robert Marshall, Deputy, Communications
6.
FED
Fred Solomon, Director, Off. of Saver §
Consumer Affairs
7.
GSA
Thomas M. Thawley, Special Assistant to Administrator for Stockpile Disposal
8.
CONSUMER
AFFAIRS
Andrea Schoenfeld
9.
TREASURY
Jack F. Bennett, Under Secretary for Monetary
Affairs
John Carlock, Fiscal Assistant Secretary
Thomas Wolfe, Director, Office of Domestic
Gold and Silver Operations
Michael Bradfield, Assistant General Counsel
DepartmentoftheTREASURYj
iwcmw O.C.
n r 20220
JHINGTQN,
0
TELEP H O N E WO4-2041
LIST OF PRESS STATEMENTS REGARDING GOLD
FOR RELEASE AT 3:30 P.M., EST, MONDAY, DECEMBER 9, 1974
1.
Joint Release of Securities Exchange Commission, President’s
Special Assistant for Consumer Affairs, Department of Justice,
Federal Trade Commission, and U.S. Postal Inspection Service.
2.
Statement of the President's Special Assistant for Consumer
Affairs.
3.
Statement
of the Administrator of National Banks.
4.
Statement
System.
of the Board of Governors of the Federal
5.
Statement of the Chairman of the Federal Deposit Insurance
Corporation.
6.
Statement of the Federal Home Loan Bank Board.
7.
Statement of the Office of Stockpile Disposal, General
Services Administration.
8.
Statement of the Treasury on the Gold Clause Resolution.
9.
Statement of the Treasury on Extension of Licenses
Gold Refiners and Processors.
10.
Reserve
for U.S.
Statement of the Treasury on Consolidation of the Gold
Accounts Administered by the Treasury.
V
JOINT RELEASE
of
S e c u ritie s and Exchange Commission; P re sid e n t's Special
A ssista n t for Consumer A f f a ir s ; Department of Ju s tic e ;
Federal Trade Commission, and U.S. Postal Inspection Service.
For Release 3:30 p.m. Monday, December 9, 1974,
GOLD PURCHASING AND INVESTING
As of December 3 1, 1974 the Federal re s t ric t io n s on the purchase,
sale and ownership of gold w il l be lif t e d . The P resid ent's
Special A ssista n t for Consumer A f f a ir s , the Department of J u s tic e ,
the Federal Trade Commission (FTC), the U.S. Postal Inspection
Service and the S e c u ritie s and Exchange Commission (SEC) have
today issued the recommendations set forth below to prospective
gold purchasers and investors
The Department of Treasury re ce n tly announced that the U.S.
Government w il l offer for sale 2 m illio n ounces of gold in
400-ounce bars on January 6, 1973, at p u b lic auction. The
Department w il l consider at a la te r date whether subsequent
sales of gold would be appropriate.
As in the instance of other precious m etals, investors and
unsophisticated purchasers must often r e ly upon the represen
tations of others and the in t e g r it y of the s e lle r or promoter.
A ccordingly, i t i s recommended that purchasers and investors
obtain as much information as p o ssib le about the companies
and in d iv id u a ls with whom they are d ealin g. In other words,
in ve stig ate before you in v e st.
Various Federal and State regulato ry agencies w il l regulate
gold trad in g . The SEC regulates p u b lic in te rsta te o ffe rin g s
of and trading in s e c u r itie s re la te d to gold. Federal law
p ro h ib itin g u n fa ir or deceptive acts in in te rsta te commerce
is enforced by the FTC. Trading in gold commodity futures
and tran sactio ns in vo lvin g margin and leverage contracts in
gold b u llio n and bulk gold coins w il l be regulated e ffe c tiv e
A p ril 2 1 , 1975 by the re ce n tly created Commodity Futures
Trading Commission. Federal laws against s e c u ritie s and m ail
fraud w il l be enforced by the SEC, the Postal Inspection
Service, and the Department of J u s tic e . Ju s tic e Department
has underway a major e ffo rt to detect and prosecute the
growing number of frauds in vo lvin g gold and other precious
metals.
2
The purchase of and investment in gold is a p o te n tia lly f e r t ile
area for unscrupulous promoters and fraudulent schemes.
Moreover, the p rice of gold i s oftentimes dictated by
speculative in te re sts rather than in d u s tr ia l supply and demand,
and is subject to s ig n ific a n t and rap id flu ctu a tio n s.
In q u irie s or complaints regarding u n fa ir or deceptive trade
p ra c tic e s, in clu d in g fa ls e or m isleading advertisem ents, should
be addressed to the FTC's D iv is io n of Sp ecial Statutes, 7th Street
and Pennsylvania Avenue, N.W., Washington, D.C. 20580. With
respect to investment programs, prospective in vestors should
in s is t upon a prospectus or o ffe rin g c ir c u la r before making an
investment d ecisio n . A copy of the prospectus may be reviewed
at the p ublic reference f a c i l i t i e s of the respective state
s e c u ritie s agencies, and in the instance of re g istered in te rsta te
o fferin gs or re g iste re d companies, at the p ublic reference rooms
of the SEC in Washington, D .C ., New York C it y , Chicago and
Los Angeles. To determine whether any p a rtic u la r company is
registered with the SEC c a ll or w rite the SEC, P ub lic Reference
Section, 500 North C ap ito l S tre e t, Washington, D.C. 20549,
(202) 523-5506. Information concerning buyer-investor experience
with s p e c ific companies may be obtained from your nearest
Better Business Bureau.
The follow ing g u id e lin es are suggested (but should not be
considered to be a l l in c lu s iv e ) before purchasing or in ve stin g
in gold,
1.
Be wary of u n s o lic ite d correspondence or c a lls from
strangers o ffe rin g to s e ll you gold or gold
investments;
2.
Be sk e p tica l of promises of spectacular p r o f it s . Ask
yo u rse lf why am I being offered t h is golden opportunity;
3.
R e sist pressures to make h u rrie d , uninformed investment
d e cisio n s;
4.
Be suspicious of claim s of new, secret or exotic
processes to extract gold;
5.
Seek independent advice from a person you tru st and
who i s knowledgeable;
6»
Consider the r is k s in re la tio n to your own
p o sitio n and needs;
7«
Find out i f the company has re g istered with the SEC
or state s e c u ritie s agency;
8.
Attempt to determine the s e lle r 's mark-up (or how
much i t cost the s e lle r to purchase the g o ld );
9«
A scertain what costs» in add itio n to the quoted p rice
of gold, are involved« For example, you may be
required to pay a re fin in g charge, assay fees,
commissions, shipping and storage fees, insurance
costs and sale s tax;
10«
Demand a w ritten guarantee concerning weight and
fineness (pureness)« Some gold bears a r e fin e r 's
mark assaying i t s weight and fineness; however, there
are no Federal standards;
11«
Attempt to make your purchases through lo c a l reputable
firms« (Firms in clu d in g the term "Exchange" in th e ir
name should not be assumed to co n stitute an asso ciatio n
or group of firm s which provide a p u b lic market for
buyers and s e lle r s ) ;
12«
Obtain in w ritin g the terms of your purchase, for
example, when and how the gold w il l be delivered and
stored, in clu d in g what se c u rity precautions w il l be
taken to insure that your gold i s not shaved or that
co u nterfeit gold i s not sub stituted;
13«
Ask whether the gold w il l be segregated and stored in
your name (not the s e lle r 's or su p p lie r's)« Make
sure you receive a w ritten re ce ip t showing that the
re q u is ite amount of gold i s being stored for your
account by a reputable concern; and
14 .
Ask whether there w il l be a ready market for the gold
in the form being offered to you« You may have to pay
to have your gold reassayed, recast in to a d iffe re n t
shape, siz e and/or transported to a d ista n t market
before you can s e ll i t .
asciai
The areas which are fraught with the greatest p o te n tia l for
fraud are representations concerning the existence, amount and
p u rity of gold, accuracy of assays and geolo gical surveys and
secret re fin in g processes. Several schemes that appear to
have already surfaced involve the follow ing situ a tio n s:
- False mining claim s were used to in f la t e a company's
f in a n c ia l p o sitio n and to tout i t s investment m erit.
Bogus or speculative geo lo gical surveys by a purported
expert or m isleading ore samples were used by the
company as the b a sis for unwarranted high estimates
of m ineral valu e .
- Purportedly large q u a n titie s of gold located outside
of the United States and obtained from underdeveloped
countries were being offered in the form of c e r t if ic a t e s
of ownership through o ff-sh o re banks.
- An unscrupulous assayer conspired with a s e lle r to
c e r t if y that bars of almost pure lead were pure gold.
- Gold coins of low p u rity have been issued w ith in the
past year or two by sm all foreign e n t it ie s . (The
C e r t if ic a t io n Service of the American Numismatic
A sso cia tio n , P.O. Box 87, Ben F ra n k lin S ta tio n ,
Washington, D.C. 20044, w i l l , for a fee, authenticate
gold co in s.)
- Secret processes promised to extract gold from ore which
had been p re vio u sly labeled as w orthless. Investors were
induced to finance the construction of the secret-process
machinery necessary for the production of the gold.
I f you b elie ve that you may have been the v ic tim of a fraud,
you should consult your attorney to determine what steps to
take to a sse rt and protect your r ig h t s . You should a lso
communicate such inform ation to any of the Federal agencies
lis t e d above or to the Consumer Protection D iv is io n of the
Attorney G eneral's O ffice in your state or your State S e c u ritie s
Commissioner, and to your nearest lo c a l Better Business Bureau.
Consider au tho rizing your attorney to inform the agencies of
any problem that may a r is e . Although the agencies cannot
intervene in your behalf or o ffe r le g a l representation to
obtain redress of your in d iv id u a l r ig h t s , your complaint may
prevent others from being defrauded.
Remember, in ve stig ate before you make a purchase or investment.
DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE
.
O F F IC E O F T H E S E C R E T A R Y
O F F IC E O F C O N S U M E R A F F A IR S
W A S H I N G T O N , D .C .
20201
FOR RELEASE:
3:30 P . M* E S T
MONDAY, DECEMBER 9, 1974
FOR FURTHER INFORMATION, TELEPHONE
A r e a C o d e 202-245-6861
" C o n s u m e r s m a y f i n d t h a t th e p u r c h a s e of g o ld is m o r e of a
m in e fie ld t h a n a g o ld m in e u n l e s s t h e y a r e f a m i li a r w ith th e r i s k s , " V ir g i n i a
H. K n a u e r , S p e c i a l A s s i s t a n t to th e P r e s i d e n t fo r C o n s u m e r A f f a i r s , w a r n e d
to d a y . F e d e r a l r e s t r i c t i o n s o n th e p u r c h a s e , s a l e a n d o w n e r s h i p of g o ld
w ill b e li f te d D e c e m b e r 31, 1974.
"We h a v e a l r e a d y s e e n s i g n s t h a t u n s c r u p u l o u s o p e r a t o r s a r e s e t t i n g
tr a p s f o r c o n s u m e r s , " M r s . K n a u e r s a i d .
" C o n s u m e r s a r e n e w to th e g o ld
m a r k e t a n d t h e r e a r e n o f a m i li a r g u i d e p o s t s to h e l p th e m a v o i d m i s l e a d i n g a n d
frau d u le n t o ffe rs ," sh e a d d e d .
M rs. K n a u e r s a id th a t u n s c ru p u lo u s p ro m o te rs
e x p lo it th e p u b l i c ' s f a s c i n a t i o n w i t h g o ld a n d i t s f e a r
K n a u e r w a r n e d t h a t , " U n lik e o t h e r m e t a l s , th e p r i c e
by s u p p l y and. dem and, a l o n e . S p e c u l a t i o n d r i v e s u p
very r is k y b u s in e s s ."
c a n b e e x p e c t e d to
of i n f l a t i o n . M r s .
of g o ld is n o t d e t e r m i n e d
th e p r i c e a n d t h a t c a n b e a
M r s . K n a u e r j o i n e d w i t h th e S e c u r i t i e s ^ a n d E x c h a n g e C o m m i s s i o n , t h e
D e p a r tm e n t of J u s t i c e , th e F e d e r a l T r a d e C o m m is s io n , a n d th e U . S . P o s ta l
In s p e c tio n S e r v i c e in r e c o m m e n d i n g s t e p s c o n s u m e r s s h o u l d ta k e w h e n i n v e s t i n g
in g o ld .
(
M r s . K n a u e r s a id :
" T h e f i r s t s t e p i s to c h e c k th e r e p u t a t i o n of th e s e l l e r . It i s b e s t to b u y
th r o u g h s o m e o n e y o u k n o w a n d t r u s t .
If y o u a r e b u y i n g gold, s e c u r i t i e s , c h e c k
w h e th e r th e c o m p a n y h a s f il e d w i t h th e SEC o r s t a t e s e c u r i t i e s a g e n c y . B e
w ary of u n s o l i c i t e d l e t t e r s a n d c a l l s fro m s t r a n g e r s o f f e r in g to s e l l y o u g o ld .
Claim s of s e c r e t n e w r e f i n i n g p r o c e s s e s a n d e x a g g e r a t e d c la im s fo r g e o lo g ic a l
s u rv e y s a r e d a n g e r s ig n a ls fo r th e ^ c o n su m e r. "
2
j'Be l e e r y of p r o m i s e s of s p e c t a c u l a r p r o f i t s .
The s p e c ta c u la r
p r o f i t s m ay b e th e d e a l e r ' s , n o t y o u r s . T h e s m a ll i n v e s t o r d o e s n o t
p a y th e p r i c e fo r g o ld t h a t is q u o t e d i n th e f i n a n c i a l p a g e s of th e
n e w s p a p e r s . B e c a u s e h e is p u r c h a s i n g s m a ll a m o u n ts h e w ill h a v e to
p ay r e ta il p r ic e s for h is g o l d .
" C o n s u m e r s s h o u l d a ls o w a t c h o u t fo r c h a r g e s in a d d i t i o n to th e
q u o te d p r i c e of g o l d . T h e r e m a y b e r e f i n i n g c h a r g e s , a s s a y f e e s ,
c o m m i s s i o n s , s h i p p i n g a n d s t o r a g e f e e s , i n s u r a n c e c o s ts a n d s a l e s t a x .
Insist, on a w r i t t e n s t a t e m e n t of th e t e r m s of y o u r p u r c h a s e s s u c h a s w h e n
a n d ho w th e g o ld w ill b e d e l i v e r e d a n d s t o r e d a n d w h a t s e c u r i t y p r e
c a u t i o n s w ill b e t a k e n to p r o t e c t th e g o ld fro m s h a v i n g o r fro m s u b s t i t u t i o n
of c o u n t e r f e i t g o l d . O b ta in a w r i t t e n g u a r a n t e e of th e w e i g h t a n d f i n e n e s s
( p u r e n e s s ) of th e g o ld a n d if t h e g o ld i s b e i n g s t o r e d fo r y o u , b e s u r e that
it is s t o r e d in y o u r n a m e a n d t h a t y o u h a v e a r e c e i p t s h o w i n g t h a t i t i s stored
for y o u r a c c o u n t b y a r e p u ta b le c o n c e rn s u c h as a b a n k .
"A n d b e f o r e y o u b u y , m a k e s u r e y o u w i l l b e a b le to s e l l .
T h e r e may
n o t b e a r e a d y m a r k e t fo r g o ld i n th e fo r m b e i n g o f f e r e d to y o u . Y o u m ight
h a v e to p a y to h a v e y o u r g o ld r e a s s a y e d , r e c a s t in to a d i f f e r e n t s h a p e o r trans
p o r t e d to a d i s t a n t m a r k e t .
"If . y o u s u s p e c t t h a t y o u h a v e b e e n th e v ic tim of a f r a u d u l e n t g o ld
s c h e m e , y o u s h o u l d c o n t a c t y o u r n e a r e s t F e d e r a l T r a d e C o m m is s io n o r
S e c u r i t i e s a n d E x c h a n g e C o m m is s io n o ffice o r th e c o n s u m e r p r o t e c t i o n
d i v i s i o n of y o u r s t a t e A t t o r n e y G e n e r a l 's . o f f i c e . A lth o u g h . t h e s e a g e n c i e s
c a n n o t i n t e r v e n e o n y o u r b e h a l f to o b t a i n i n d i v i d u a l r e d r e s s , y o u r com plaint
m a y p r o t e c t o t h e r s fro m b e i n g d e f r a u d e d . Y ou s h o u l d a ls o c o n s u l t y o u r
a t t o r n e y to d e t e r m i n e h o w y o u c a n p r o t e c t y o u r r i g h t s a n d i n v e s t m e n t . "
###########
THE ADMINISTRATOR OF NATIONAL BANKS
WASHINGTON, D.C. 20219
December 9 , 1974
FOR R E L E A S E ON MONDAY,
TO:
3:50 ff.M.
Banking Circular No. 58
PRESIDENTS OF ALL NATIONAL BANKS, REGIONAL ADMINISTRATORS AND ALL
EXAMINING PERSONNEL
SUBJECT:
GOLD
The ban on the private ownership of gold by United States citizens
1/
has been repealed.
As of December 31, 1974, this prohibition which has
been in effect since 1933 will be removed and national banks will once
again be permitted to buy and sell gold coin and bullion.
It is
anticipated that initially there will be an extensive demand for gold.
It is further anticipated that the public may rely substantially on
banks to handle transactions in gold.
considerations categorized as follows:
Following are some initial
Laws and Potential Problems.
Laws
Although Public Law 93-373 removes the ban on the private ownership
of gold by United States citizens the statute does not provide for a
total elimination of prior law respecting gold transactions.
The
2/
National Bank Act
provides that national banks may exercise their
powers "by buying and selling exchange, coin and bullion."
1/
Public Law 93-373, passed August 14, 1974.
2/
12 U.S.C. 24 (Seventh).
Consequently,
-
2
-
banks may only deal in gold that qualifies as coin or bullion.
The term
2/
"coin" means coins minted by a government,
or exact restrikes of the
coins minted at a later date by, or under the authority of, the issuing
government.
The term "bullion” refers only to gold and silver.
or any other precious metal, is not considered bullion.
Platinum,
Bullion is also
limited to gold that has been refined to a high degree of purity.
This
Office has determined that gold of 0.900 fineness or better will be
acceptable as bullion.
0.9995 purity.
In most cases banks will handle gold of 0.995 or
Any gold of less than 0.900 purity will be considered a
gold alloy which national banks will not be permitted to buy or sell.
National Banks should have available, for inspection by national bank
examiners, evidence of the purity of the bullion they have in inventory.
Even though United States citizens may own gold after December 31,
1974, they are still bound by the Joint Resolution of June 5, 1933 (31
U.S.C.463).
The resolution declares to be against public policy and
makes unenforceable contract clauses by which obligations are payable only
in gold or in an amount of money measured by the value of gold.
The restrictions contained in the Glass—Steagall Act prohibiting
investments in or underwriting of securities are also applicable to
securities of companies involved in gold other than the bank.
3/
The term "government" includes the United States or a foreign
government.
Potential Problems
1.
Insurance.
Even if a national bank does not own its gold inventory, it still
may be responsible for insuring the coins and bullion in its possession.
If a bank’s supplier insures gold shipments in transit, the receiving
bank may be responsible for insuring gold in its vaults.
If an inventory
is anticipated the bank should determine that its blanket bond covers
this asset or whether separate insurance is necessary.
In addition,
banks must provide for proper internal controls with respect to access
by bank employees to the gold inventory.
Any gold for which a safekeeping
receipt is issued must represent gold physically on hand at all times.
2.
Accounting.
Gold owned by the bank should be reflected on its ledgers under
"other assets."
The book value of the bank’s gold inventory should be
adjusted at least monthly to reflect its current market value.
Any
futures transactions in gold should be reflected on the daily statement
as a memoranda account.
3.
Personnel.
If a bank decides to offer gold services to its customers trained
personnel must be provided.
4.
Collateral.
Gold, like any other asset may be utilized as collateral for a
loan.
Nevertheless, a concentration of loans collateralized by gold
- 4will be reviewed by national bank examiners in the same way as any group
of loans with the same type of collateral.
Prudent lending policies
with respect to valuation of collateral and ratio of loan to collateral
value must be observed. Gold related loans should be considered nonproductive
credits unless extended for commercial or industrial purposes.
5.
Public Relations.
Although a bank may feel obligated to provide gold services to its
customers possible adverse consequences of marketing gold on customer
relations should not be overlooked.
If a gold sale program is provided by the bank without arrangements
to repurchase gold from customers, poor public relations could result.
If the bank chooses to sell gold to customers and also to repurchase it,
provisions must be made to assure the purity of the gold.
If the bank
provides safekeeping for gold sold to customers and the metal never
leaves the custody of the bank this problem is alleviated, however,
storage and security must be considered.
If a bank does not want to
repurchase gold for its own account, the bank’s supplier may be willing
to purchase the gold at current market value less a discount.
The
secondary market will be facilitated if the original selling bank
retains possession of the gold in safekeeping.
When a customer takes possession of his purchased gold, even if he
places it in a safe deposit box in the bank, care must be exercised when
- 5the gold is repurchased.
The first rule is to know your customer.
questionable gold should be accepted subject to assay.
All
Unfortunately,
an assay is expensive, it defaces the bullion, and it reduces the size
of the piece of gold.
6.
Inventory.
It is recommended that maintenance of an inventory of gold be
limited to the reasonable needs of the bank's customers.
Because of the
volatility in the price fluctuation of gold, inventories other than to
meet the reasonable needs of the bank's customers will be reviewed by
this Office to determine if such investment constitutes an unsafe or
unsound banking practice.
Management's expertise in this area, risks
undertaken in relation to equity capital and the needs of customers will
be considered in making this determination.
Trading in gold for the bank's own account should be limited and
the risks to the bank fully explored prior to any such undertaking.
a minimum the bank should consider the following:
At
the experience of its
personnel, services to be provided, anticipated inventories and positions,
safekeeping facilities, insurance coverage, audit procedures, and anticipated
impact on earnings.
7.
Director Authorization.
Prior to trading in gold for its own account the bank's Board of
Directors must formally authorize this activity.
The text of this
authorization is to be forwarded to the appropriate Regional Administrator
of National Banks.
Banks must keep accurate current figures on the
amount and price of gold in their trading account.
-
8.
6
-
Disclosure.
Many of the bank’s customers may be unsophisticated with respect to
gold transactions and, therefore, will seek the bank’s advice with
regard to soundness of an investment in gold.
In this regard banks
should assure that prospective gold purchasers realize the following:
The gold market is volatile and there is a possibility that a loss will
be incurred from an investment in gold.
provides no yield or interest.
Further, an investment in gold
As a result, gold prices would necessarily
have to rise over the investment period in order to provide a return
equivalent to that of certificates of deposits or other income producing
assets.
Moreover, gold will be sold to customers at prices which include
4/
retail markups, safekeeping charges, shipping and sales taxes.
Therefore,
the customers* price for gold will be somewhat in excess of quoted gold
exchange prices.
This coupled with gold’s volatility means a forced
liquidation may result in a loss.
9.
Management Planning.
Each bank must determine individually if and to what extent it will
become involved in gold.
Once a national bank decides to purchase or
sell gold coins and bullion it may begin advertising this new service.
A bank may begin advertising its gold program prior to December 31,
1974.
However, until that date it remains illegal for any United States
4/
In certain states national banks may be required to collect
sales taxes, pursuant to a sale of gold.
íó v
7
citizen, including national banks, to contract for the purchase of gold
bullion.
Certain preliminary negotiations with suppliers are permitted,
but no contract for gold may be consummated.
advertising a bank’s gold program.
Care must be taken in
It is the responsibility of each
bank which establishes a gold program to assure that its actions are
sound and prudent.
Questions with respect to bank participation in buying or selling
gold should be directed to either:
Gail W. Pohn, Assistant Chief Counsel,
Albert Elder, Staff Attorney, David Oppenheimer, Staff Attorney
(Phone:
202-447-1880), or Bonnie Brown, Assistant to the Chief National
Bank Examiner (Phone:
202-447-1962).
James E. Smith
Comptroller of the Currency
FEDERAL
RESERVE
release
fo)
For use at 3:30 p.m. EST
Monday, December 9, 1974
December 9, 1974
The Board of Governors of the Federal Reserve System today
issued the following material relating to banking prudence and Federal
Reserve responsibility in connection with the lifting of the ban on
private ownership of gold:
1.
A letter sent to all State member banks by the Presidents
of the Federal Reserve Banks relating to questions of banking practice
gold-related transactions.
2.
A statement regarding the treatment of gold by the Federal
Reserve Banks.
-
0
-
in
BOARD OF G O V E R N O R S
□ F THE
FEDERAL RESERVE SYSTEM
>
WASHINGTON,
D.
C.
20551
ADDRESS
O F F IC IA L
TO
THE
CORRESPONDENCE
BOARD
Letter Sent To Each State Member Bank
By The Federal Reserve Bank Of Its District
TO:
The Chief Executive Officer
of Each State Member Bank
Public Law 93-373 provides that on December 31, 1974, the
ban on private ownership of gold will end.
After that, United States
citizens may own gold and trade in it as they might any other commodity.
National banks possess statutory authority to buy and sell "exchange,
coin, and bullion," and some State laws contain similar provisions with
respect to State-chartered banks.
The Office of the Comptroller of the
Currency has determined that gold will not be acceptable as bullion
unless it has a fineness of 0.900 or better.
For the past 41 years, United States citizens have been able
to hold gold only under U.S. Treasury license.
During this period,
private individuals and banks have had negligible experience with gold.
Gold is not legal tender.
Rather, it is a highly speculative commodity,
subject to widely fluctuating prices.
In light of these circumstances,
State member banks will wish to proceed cautiously, should they decide
to provide gold-related services to customers.
The Federal Reserve System believes that the following infor
mation will be useful to State member banks in the event that they
decide to participate in gold transactions.
Similar information is
being issued by other Federal banking agencies with respect to banks
under their jurisdiction.
2
/ ¿J
If a bank does decide to engage in gold-related activities,
it ordinarily would be preferable for it to act only on a consignment
basis or otherwise as agent.
The risk inherent in gold transactions is such that any State
member bank considering acting as principal with respect to gold transac
tions should give advance notice to the Federal Reserve Bank of its
district.
The advance notice should contain information relative to
experience of personnel, services to be provided, anticipated inventories
and positions, safekeeping facilities, insurance coverages, audit procedures,
and anticipated impact on earnings.
Banks should not engage in the business of issuing receipts for
gold without considering the implications of securities laws; and any gold
for which a bank issues any form of receipt must be physically held on
hand at all times and under strict safeguards.
Moreover, obligations pay
able in gold or its equivalent are still unenforceable (Public Resolution
of June 5, 1933, 31 U.S.C. 463).
As with any commodity loan, it is anticipated that banks will
carefully consider such matters as adequacy of margins on loans collater
alized by gold, precautions to assure authenticity and safe custody of
gold held as collateral and total risk exposure from gold-related loans.
Moreover, gold-related loans should be considered nonproductive credits
unless extended for commercial or industrial purposes.
If a bank should decide to offer gold for sale, it should care
fully avoid excessive or misleading promotions which could lead to unrealized
0
3
expectations by bank clients and adversely affect public confidence in
a particular bank or the banking system.
Examiners will pay strict attention to the relevant accounting
practices of banks and recordkeeping for accounts of customers.
Any gold
owned should be shown on financial statements under "other assets", and
any hedging futures contracts should be shown as a memorandum item.
It
would be anticipated that a bank would revalue accounts at least monthly
to reflect current market values.
During examinations of State member banks, examiners will review
closely a bank's total involvement in gold-related transactions to assure
that individual banks and the banking system are not exposed to undue
risk.
Among other considerations, examiners will be concerned with
management's expertise in this area, risk undertaken in relation to the
bank's equity capital, and the needs of customers.
An undue concentration
of gold loans, as with any imprudent involvement in gold transactions,
could constitute an unsafe or unsound banking practice subject to action
under the cease-and-desist provisions of the Financial Institutions Super
visory Act of 1966.
Our examiners are instructed to be vigorous in
countering any manifestation of bank speculation in gold.
Sincerely yours,
BDARD DF G D VER ND R S
□ F THE
aÇGOì/ìs.
FEDERAL RESERVE SYSTEM
WASHINGTON,
D.
C.
20551
ADDRESS
O F F IC IA L
TO
CORRESPONDENCE
THE
BOARD
STATEMENT REGARDING TREATMENT OF GOLD BY FEDERAL RESERVE BANKS
The Board has received numerous inquiries from member banks
relating to the repeal of the ban on ownership of gold by United
States citizens,
A statement on the subject is being sent to all State
member banks similar to statements being sent to national banks by the
Comptroller of the Currency and insured non-member banks by the Federal
Deposit Insurance Corporation,
In addition, there are listed below
questions and answers which affect member banks and relate to certain other
responsibilities of the Federal Reserve.
(1)
May gold in the form of coins or bullion be counted as vault cash
in order to satisfy reserve requirements?
No,
Section 19(c) of
the Federal Reserve Act requires that reserve balances be satis
fied either by a balance maintained at the Federal Reserve Bank
or by vault cash, consisting of United States Currency and coin.
Gold in bullion form is not United States currency.
Gold coins
are not considered legal tender by the Department of the Treasury
and, therefore, are not United States currency or coin,
(2)
Will the Federal Reserve Banks perform services for member banks
with respect to gold, such as safekeeping or assaying?
(3)
No.
Will a Federal Reserve Bank accept gold as collateral for an
advance to a member bank under § 10(b) of the Federal Reserve
Act?
No.
FOR RELEASE MONDAY, 3:30 P.M.
December 9, 1974
PR-72-74 (12-9-74)
FDIC POLICY STATEMENT ON GOLD
On December 31, 1974, Public Law 93-373, which removes the restrictions on
a person "purchasing, holding, selling, or otherwise dealing with gold,"
becomes effective.
The word person" in the Act has been construed to
include banks. Thus, to the extent authorized by state law, State nonmember
banks will be permitted to deal in gold.
Trading in any commodity, including gold, is a highly speculative activity.
The past experience of individuals and companies in the commodities markets
indicates that, at minimum, commodities trading is a very risky activity
for the novice.
In the case of gold, moreover, the mpre than forty year
old prohibition against U. S. citizens holding and trading in gold has meant
that few persons have even a nominal degree of expertise in such activity.
The Corporation therefore believes that insured State nonmember banks should
consider confining their trading in gold to purchases and sales on a consign-?
ment or agency basis.
Irrespective of the manner in which an insured nonmember bank intends to deal in gold, the Corporatiop should be notified of
such intention. *J
Insured nonmember banks which are considering dealing in gold for their own
accounts should' carefully evaluate the experience and ability of their
present staffs in this regard before proceeding. Further, such banks should
bear in mind that gold ownership exposes them to possible loss due to adverse
fluctuations in market value.
In order to minimize such exposure, banks may
find it necessary to conduct limited trading in gold futures for hedging pur
poses. Banks considering holding inventories of their own gold are reminded
that gold bears no yield or interest and that any such inventory should be
reflected as other assets and should be periodically adjusted to current
market value.
_J Insured nonmember banks intending to trade in gold should submit written
notice of such intent to the appropriate Regional Office of the Corporation
at least 10 business days prior to the initiation of such trading. Such
notice should include all information the bank deems relevant to its proposed
activity including whether the bank will be trading for its own account or
solely on an agency or consignment basis, the projected amount and purpose
of any such trading, the experience of those individuals who will be engaged
in the trading, insurance arrangements which will be in effect and, where
applicable, the relation of the bank’s capital and earnings to the projected
amount of gold that the bank will acquire for its own account.
- more [EDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St. N.W., Washington, D. C. 20429
•
202-389-4221
2
Even the sale of gold by a bank to its customers on a consignment basis,
while not subjecting the bank to possible losses due to fluctuations in the
price of gold, entails certain other risks of which insured State nonmember
banks should be aware. These problems can also arise with respect to sales
of a b ank’s own gold. First, banks may bear the risk of any loss with
respect to gold which they hold, even when it is held on consignment.
Banks
considering holding gold should therefore evaluate the adequacy of their
present security arrangements.
Second, gold purchase or consignment agree
ments entered into by a bank may not provide it with the right to re-sell
to the dealer any gold which the bank’s customers ask the bank to repurchase.
Thus a bank might be forced to refrain from repurchasing gold which it had
previously sold to its customers. Third, banks should attempt to minimize
the possibility of receiving, and ultimately selling, bogus gold by entering
into agreements only with responsible, reputable dealers.
In this connection,
insured nonmember banks should be especially wary of proposals which purport
to offer gold to them at or below the current market price. They should pay
particular attention to the degree of fineness (purity) of the gold so offered.
The inadvertent sale of gold which does not conform to a bank’s representa
tions may well expose the bank to unfavorable publicity or legal action'.
Fourth, banks engaging to repurchase gold from their customers should consider
retaining possession of the gold pursuant to a sale/safekeeping agreement.
Unless the gold has constantly remained in the possession or control of the
bank, it may be necessary for the bank to acquire or utilize facilities for
weighing and assaying gold it plans to repurchase.
Many insured nonmember banks, including banks which do not choose to offer
gold for sale to their customers, may find themselves engaged in safekeeping
arrangements for gold owned by their customers. Here too, banks contemplat
ing providing such services should evaluate the adequacy of their security
arrangements. Where the size or amount of the gold received cannot feasibly
be held in normal safe deposit facilities, banks should take care to segre
gate such gold in their vaults and to issue receipts to their customers
therefor.
Such receipts, whether issued in connection with a sale/safekeeping
transaction or otherwise, should be issued in non-negotiable form and should
refer to a specifically identifiable amount of gold. Each receipt and any
advertisement of gold safekeeping services should also state clearly and
conspicuously that the gold held pursuant to the safekeeping arrangement is
not a deposit insured by FDIC.
It is the opinion of the Secretary of the Treasury that Public Law 93-373
did not repeal or alter the so-called Gold Clause Resolution of 1933
(31 U.S.C. 463). The Resolution prohibits any contractual provision which
purports to give the obligee the option of requiring payment of the obliga
tion in money or a specified amount of gold. Deposit contracts which purport
to give the bank’s customer such an option are therefore rendered legally
unenforceable by the terms of the Gold Clause Resolution.
Contracts
specifically payable only in gold may be similarly unenforceable where the
parties to the contract view the gold as a medium of discharging a debt,
such as a deposit liability, rather than as a commodity to be traded. Need
less to say, sound banking practice dictates that insured nonmember banks
more
not enter into legally unenforceable deposit contracts. Conversely, while
contracts entered into by a bank treating gold as a commodity, rather than
a currency, such as futures contracts, may be valid obligations of the bank,
they do not give rise to "deposits" insured by FDIC.
Insured nonmember banks should exercise care so that the aggregate amount
of gold held as collateral for loans does not become unduly large. Adequate
margin requirements on such loans (such as valuing the gold at 50 percent
of the current market price) should be maintained and banks should revalue
gold held as collateral at least monthly.
Banks considering making loans
for the purpose of enabling the borrower to purchase gold should bear in mind
that such loans, unless made for industrial or commercial purposes, are
speculative and nonproductive. As in the cases of the sale and safekeeping
of gold, banks should consider the adequacy of their facilities for authenti
cating and protecting gold held as collateral for loans.
In sum, the Corporation believes that insured nonmember banks should move
cautiously in regard to dealing in gold. Those banks offering gold for sale
should consider possible adverse customer reaction if the price of gold drops
and endeavor to warn their customers of the highly speculative nature of such
an investment. Banks should also check their security systems for compliance
with the Corporation’s Part 326 and any subsequent revisions thereof.
Similar policy statements are being issued by the other Federal bank regula
tory agencies with respect to banks under their jurisdictions.
W A S H I N G T O N . D C. 2 0 5 5 2
F E D E R A L H O M E L O A N BANK
SYSTEM
F E D E R A L S A V I N G S & LO
IN S U R A N C E CORPORATI
<o
FEDERAL
H O M E LOAN
B A N K BOARD
F E D E R A L S A V I N G S 8t l O A N
SYSTEM
TELEPHONE (202)386-3157
For Release at 3:30 P.M.
Monday, December 9, 1974
P u b l i c La w 9 3 - 3 7 3 p r o v id e s t h a t o n Vecem beA 3 1 , 1 9 7 4 t h e ban on
p r i v a t e o w n e s u h ip o £ g o l d w i l l b e l i f t e d .
H o w e ve A , even th o u g h
P u b l i c L a w 9 3 - 3 7 3 Aexn oveA t h e b a n o n t h e p r i v a t e o w n e r s h i p o/j
g o l d b y U n i t e d S t a t e & c i t i z e n s , t h e 6 t a t u e d oe& n o t p r o v i d e {¡on
a t o t a l d i s s i p a t i o n o£ p tiio A la w A e s p e c tin g g o ld tA a n s a c t i o n s .
i n v i e w 0 {J t h i s s i t u a t i o n , t h e V e d o A a l Hom e L o a n B a n k B o a n d has
d e te n m in e d t h a t I t w o u ld b e i n t h e p u b l i c i n t e r i o r t t o e x p re s s
IU > p o l i c y o n d e x ilin g w i t h g o l d b y t h o s e i n s t i t u t i o n s s u b j e c t ■
t o i t s A e g u la to A y a u t h o r i t y .
At this time, the Board's policy determinations are as follows:
1. Federally chartered savings and loan associations will
I not be allowed to purchase, hold, sell or otherwise deal with gold.
[The Board will take supervisory action against any Federal associa|tion so doing.
2. The authority of State-chartered savings and loan asso
ciations to deal with gold is primarily a matter of State law. The
[Board will, however, direct its examiners to scrutinize carefully
■any form of dealing with gold by State-chartered insured institu
tions. The Board will prohibit dealing with gold by such institu
tions to the extent that it determines on the basis of experience
lRhat ,such dealing constitutes an unsafe or unsound practice. The
1 oard may also need to consider the issuance of special regulations
[with respect to any insured institutions that determine to deal with
l8°ld, such as accounting and safekeeping rules and rules concerning
[evidence of the fineness of gold held in inventory.
I
3. The Board will not permit gold or gold-related securi| ies to count as liquidity by member institutions or to be used as
IR°
^or advances by the Federal Home Loan Bank System. The
lk°ara wiii n°t permit dividends or interest on savings accounts to
be paid in gold.
I
The Board will not permit Federal association service
| rP°rations to deal with gold. This activity will not be prefpproved, nor will it be approved upon application. The Board will
Eiii? •
,n°t permit dealing with gold by the service corporation
L S ? 1 .aries °f#State-chartered insured institutions that are subI lanes of unitary savings and loan holding companies.
---more--
5. The Board will not preapprove, nor will it approve upon
application, dealing with gold by multiple savings and loan holding
companies or their non-insured institution subsidiaries.
6. The Board will not permit Federal Home Loan Banks to
deal with gold.
It is the Board’s intention to propose promptly the necessary
formal regulations and statements of policy to reflect these policy
determinations.
All Federal Home Loan Bank member institutions are specificall
cautioned that, nothwithstanding the enactment of Public Law 93-373,
contractual provisions calling for payment in gold or its equivalent
are still prohibited by section 463 of title 31 of the United States
Code. Section 463 would, for example, bear on the ability of in
stitutions to offer certificates of deposit or other accounts re
payable in gold. Member institutions that determine to offer gold
services to their customers are also specifically cautioned that
under certain circumstances such offerings may constitute "securities
under Federal and State securities' laws.
In reaching the foregoing policy determinations the Board
considered that gold is not legal tender; that gold is a highly
speculative commodity subject to significant and rapid price flucuations; that successfully dealing with gold requires unusual man
agerial expertise and investor sophistication; that gold transactions
involve special precautions regarding security, counterfeiting and
assurances of purity; and that gold is a non-interest bearing com
modity whose holding and sale generally involves unrealized costs
for storage, insurance, transportation and reassaying.
####
Stockpile Information
UNITED STATES GOVERNMENT
GENERAL SERVICES ADMINISTRATION
Office of Stockpile Disposal
Office of Information-! 8th and F Streets, N.W.-Washington, D.C. 20405 - (202 ) 634*6557
F o r Release: 3:30 p m
D e c e m b e r 9, 1974
G S A #P-1317
T he General Services Administration today announced the offering of
approximately 2 million fine troy ounces of gold f r o m the United States
Treasury stocks for sale on a competitive bid basis.
This follows Secretary of the Treasury William E. Simon's announce
m e n t in testimony before the H o u s e International Finance Subcommittee
on D e c e m b e r 3. GSA's Office of Stockpile Disposal which is engaged
in the sale of industrial materials excess to the national stockpiles will
carry out the sale by sealed bids. Bids to purchase the gold m u s t be
received no later than ll a . m . , prevailing Washington, D.C. time,
Monday, January 6, 1975, at which time all bids received on a timely
basis will be publicly opened. Invitation for Bids M E T - 2 1 9 will be
issued D e c e m b e r 13 to provide the t e r m s and conditions of the sale.
All bids m u s t be submitted on copies of Invitation for Bids M E T - 2 1 9 .
T he gold is in approximately 400 troy ounce bars and typically 999
fine (99. 9 percent pure gold) or better. Bars will be available for
delivery at the U. S. A s s a y Office, N e w York, N e w York; the U. S.
A s s a y Office, San Francisco, California; and the U. S. Mint, Denver,
Colorado. A m i n i m u m bid will be 400 fine troy ounces for delivery at
any one of the three locations. Larger bids are to be in multiples of
400 fine troy ounces. Bars are m a r k e d with U. S. Mint or A s s a y Office
seals, melt and bar numbers, gross weight in troy ounces, fineness
of the gold, and year of record. While total sales will be limited to
approximately 2 million ounces, bidders m a y select the entire quantity
of gold f r o m the N e w Y ork and San Francisco locations but only 150, 000
ounces will be available f r o m the Denver facility.
MORE
2
A bid deposit of 5 percent of the total a m ount of the bid is required
and m u s t a c c o m p a n y the bid. Deposits m u s t be furnished by cashier’s
or certified check m a d e payable to G S A , or in cash, or by a combination
of those means.
Considerations for awards will be on the basis of the best price to
the Government. The G o v e r n m e n t reserves the right to reject any
and all bids if bid prices are at unacceptable levels. A successful
bidder will be notified by telephone or telegram of the Government's
acceptance of his bid on January 6 or the next day in the event of a
communication delay and such notice of acceptance shall constitute
a purchase contract. A w a r d s will be m a d e to the nearest whole bar
corresponding to the quantity of the bid accepted by the G o v e r n m e n t
and the total purchase price shall be adjusted u p w a r d or d o w n w a r d
on the basis of the unit bid price and the delivered weight. U. S. Bureau
of the Mint assays and weights are final for settlement purposes.
A purchaser is to take delivery of the gold within 20 days f r o m the
Government's notification of the specific weight awarded or within 30
days following the telephonic or telegraphic notice of acceptance of its
bid by the G o v e r n m e n t whichever is later. Full p a y m e n t m u s t be m a d e
prior to delivery of the gold. Deliveries will be m a d e by hand-to-hand
receipt, f. o. b. carrier's conveyance at the respective locations f r o m
which gold has been awarded to the purchaser.
Invitations for bids are being issued to each firm on G S A ' s mailing
lists for gold, silver, and platinum group metals. Additional requests
for Invitation for Bid M E T - 2 1 9 and other inquiries should be directed to
Chief, Metals Branch, Office of Stockpile Disposal, General Services
Administration, 2000 L Street, N W . , Washington, D. C. 20036,
telephone (202) 634-6522.
#*
**#
# ^ >]<
^^m
ASH “
u w, T H T
i\ iim
TELEPHONE W04 204I
UULb UU
FOR RELEASE 3 :3 0 P .M ., EST,
MONDAY, DECEMBER 9 , ±9lh
S ta te m e n t on G old C la u se R e s o lu tio n
The r e p e a l o f th e r e s t r i c t i o n s on p r i v a t e o w n ersh ip o f g o ld
e f f e c t i v e December 3 1 , 197*+, h a s p ro m p ted a number o f i n q u i r i e s on
th e c o n tin u in g v a l i d i t y o f th e G old C la u se J o i n t R e s o lu tio n e n a c te d
by C o n g ress on June 5 , 1933. T h is s ta te m e n t i s is s u e d by th e T re a s u ry
D e p a rtm e n t, a f t e r c o n s u l t a t i o n w ith o th e r c o n c e rn e d Governm ent a g e n c ie s ,
t o h e lp c l a r i f y th e a p p l i c a t i o n o f t h i s la w .
The G old C la u se J o i n t R e s o lu tio n (31 U .S .C . U63) p r o v id e s t h a t
" e v e ry p r o v i s i o n c o n ta in e d i n o r made w ith r e s p e c t t o any o b l i g a t i o n
w hich p u r p o r t s t o g iv e th e o b lig e e a r i g h t t o r e q u i r e paym ent i n g o ld
o r a p a r t i c u l a r k in d o f c o in o r c u r r e n c y , o r i n an amount i n money o f
th e U n ite d S t a t e s m e asu re d th e r e b y , i s d e c l a r e d t o be a g a i n s t p u b li c
p o lic y
" T h is law m a n d ates t h a t su ch p r o v i s i o n s s h a l l be d i s
c h a rg e d upon p ay m en t, d o l l a r f o r d o l l a r , i n th e c u r r e n t l e g a l t e n d e r .
I t i s T r e a s u r y 's v iew t h a t th e Gold C la u se J o i n t R e s o lu tio n c o n tin u e s
t o a p p ly a f t e r th e l i f t i n g o f r e s t r i c t i o n s on b u l l i o n o w n e rsh ip .
U nder th e R e s o lu tio n a. c o n t r a c t c la u s e p r o v id in g f o r paym ent i n
g o ld , o r i n U n ite d S t a t e s d o l l a r s e q u i v a l e n t t o a c e r t a i n amount o f
g o ld , i s n o t e n f o r c e a b le i f th e s u b j e c t o f th e c o n t r a c t i s so m eth in g
o th e r th a n g o ld , so t h a t g o ld a s a com modity h a s no r e l a t i o n s h i p to
th e b u s in e s s b e in g t r a n s a c t e d . I n su ch a c a s e , g o ld w ould be u s e d
s o l e l y f o r th e p u rp o s e o f e s t a b l i s h i n g th e v a lu e o f th e o b l i g a t i o n .
T h is v iew i s b a s e d on j u d i c i a l d e c i s i o n s w hich h e l d u n e n f o r c e a b le a
l e a s e p r o v id i n g f o r paym ent i n g o ld b u l l i o n a s one m ethod o f r e n t
s e t t l e m e n t , s in c e th e i n t e n t i o n o f th e p a r t i e s b y u s in g g o ld in th e
c o n t r a c t was s o l e l y t o s t a b i l i z e th e d o l l a r v a lu e o f th e r e n t .
H olyoke W ater Power Co, v . A m erican W r itin g P a p e r C o ., 300 U .S . 32*+
(1 9 3 7 ); Emery B ir d T h ay er D ry Goods Co. v . W illia m s , 107 F . 2d 9^5
(1 9 3 9 ). S i m i l a r l y , lo a n s o r c e r t i f i c a t e s o f d e p o s i t re p a y a b le in
g o ld , o r i n an am ount o f d o l l a r s m e asu re d i n te rm s o f g o ld , would
be u n e n f o r c e a b le . .
I n c o n t r a s t , i f g o ld a s a com modity i s th e s u b je c t m a tte r o f
th e c o n t r a c t , th e n th e R e s o lu tio n w ould n o t b a r e n fo rc e m e n t a c c o rd in g
t o i t s te r m s . F o r ex am p le, a p r e s e n t s a l e o f g o ld b u l l i o n o r c o in s
w s -175
2
and. a s a le o f g o ld f o r f u t u r e d e l i v e r y ( i . e . , a g o ld f u t u r e s c o n t r a c t )
f a l l o u ts id e th e R e s o lu t io n . A s i m i l a r c o n c lu s io n h a s b een re a c h e d
w ith r e s p e c t to a c o n t r a c t u a l p r o v i s i o n g iv in g a s h a r e h o ld e r , i n an
o r g a n i z a t i o n w ith a s s e t s c o n s i s t i n g o f g o ld , th e r i g h t t o redeem h i s
e q u i t y , e i t h e r i n th o s e a s s e t s , o r i n an e q u i v a le n t amount o f d o l l a r s
a t th e th e n c u r r e n t m a rk e t p r i c e , w ould be e n f o r c e a b le .
C o n tr a c ts c o n t a in in g m u l t i p l e c u r r e n c y c l a u s e s , a s i n th e p a s t ,
a r e u n e n f o r c e a b le u n d e r th e R e s o lu t io n . The r e a s o n f o r t h i s i s t h a t
i n th e l a t e 1 9 3 0 's th e Supreme C o u rt c o n s tr u e d th e R e s o lu tio n t o
p r o h i b i t e n fo rc e m e n t o f m u l ti- c u r r e n c y c o n t r a c t s .
M u lti- c u r r e n c y c l a u s e s a r e now common i n c o n t r a c t s i n i n t e r n a t i o n a l
f i n a n c i a l m a r k e ts . F o r ex am p le, bonds a r e i s s u e d and d en o m in ated i n
"E u rc o s" w hich p r o v id e f o r paym ent i n a number o f E u ro p ean c u r r e n c i e s
i n an amount m easu red by an in d e x com posed o f th e s e c u r r e n c i e s . The
S e c r e t a r y o f th e T re a s u r y h a s i n d i c a t e d t h a t c o n s i d e r a t i o n o f a change
i n th e law a t th e n e x t s e s s io n o f C o n g ress t o a llo w A m erican b u sin essm en
t o d e a l in t h i s k in d o f in s tr u m e n t w ould be d e s i r a b l e .
The U n ite d S t a t e s law m aking g o ld c la u s e s u n e n f o r c e a b le h a s b een
i n e f f e c t s o l e l y d u r in g th e p e r i o d i n w hich p r i v a t e o w n ersh ip o f g o ld
by U n ite d S t a t e s c i t i z e n s was p r o h i b i t e d . N o n e th e le s s , t h e r e i s
n o th in g i n c o n s i s t e n t b etw ee n p r i v a t e o w n ersh ip o f g o ld and th e Gold
C la u se J o i n t R e s o lu t io n . C anada, F ra n c e and Germany, f o r ex am p le,
have f o r some y e a r s a llo w e d p r i v a t e o w n ersh ip o f g o ld w h ile p r o h i b i t i n g
g o ld c l a u s e s .
F i n a l l y , t h i s area, o f th e law i s s u b j e c t to v a r y in g l e g a l i n t e r
p r e t a t i o n s a n d , a s i n o th e r c a s e s o f s t a t u t o r y c o n s t r u c t i o n , th e f i n a l
a r b i t e r m ust be th e c o u r t s .
0O0
DepartmentofthefREASURY
SHINGTON. D.C. 20220
TELEPHONE W04-2041
W
FOR RELEASE AT 3:30 PM, EST
MONDAY, DECEMBER 9, 1974
Statement of the U«S« Treasury on Extension
of Licenses for U.S* Gold Producers and Refiners
A number of licensed U«S« refiners and processors of
gold for industrial and artistic use have indicated that
during the balance of this month they will have spare refining
and processing capacity which could be used — if the amounts
of gold which they are permitted to hold were increased -to prepare small size bars and wafers of gold bullion of a
type which U»S0 citizens may be interested in purchasing
when existing restrictions are ended on December 31, 1974«
To the extent that use of the U«S« refining and processing
capacity is restricted for this purpose, such bars and wafers
will probably be imported from foreign refiners and processors
in the early days after removal of the restrictions«
Accordingly, to prevent a waste of U«S« productive
capacity, the Treasury is today notifying the licensed U«S«
refiners and processors that, upon application, prompt
consideration will be given to modifying their licenses to
permit them to hold reasonable additional amounts of gold
for refining and processing«
The necessity for licenses will expire on December 31,
1974«
oo 00 oo
WS-174
Department
SWNGTON, O X . 20220
oftheTREASURY
TELEPHONE W04-2D41
FOR RELEASE AT 3:30 PM, EST
MONDAY, DECEMBER 9, 1974
STATEMENT OF THE U.S, TREASURY ON CONSOLIDATION
OF GOLD ACCOUNTS ADMINISTERED BY THE TREASURY
At the opening of business today there were three different
gold accounts administered by the Treasury.
The General Account of the Treasury held 271,430,657 ounces
of gold, valued at $11,460 million at the par value of the dollar
in terms of gold, against which gold certificates had been
issued to Federal Reserve Banks in exchange for dollar deposits
for the account of the Treasury at those Banks. The gold
certificates represent a pledge by the Treasury of a corresponding
amount of gold until such time as the certificates are repurchased
for dollars by the Treasury.
The General Account also held 2,518,006 ounces of gold,
valued at $106 million at the par value, against which no gold
certificates had been issued.
The Exchange Stabilization Fund administered by the Treasury
held 2,019,751 ounces of gold, valued at $85 million, which had
been acquired by the Fund prior to August 15, 1971, when the Fund
engaged from time to time in gold transactions with foreign
monetary authorities and with the market for the purpose of
stabilizing the value of the dollar relative to gold.
In view of the likelihood that the Exchange Stabilization
Fund will not be engaging in further transactions to stabilize
the value of the dollar relative to gold the gold held by the Fund
was sold today to the Treasury at its par value.
Gold certificates were then issued by the Treasury to the
Federal Reserve Banks for all the ounces of gold held in the
General Account for which such certificates had not previously
been issued, and the Banks deposited $191 million to the accounts
of the Treasury. The Treasury now holds gold in only one account,
that is 275,968,414 ounces, valued at $11,652 million, against
all of which gold certificates have been issued.
(more)
WS-177
(REVISED)
2
The transactions undertaken have had no direct effect
on any individuals or institutions apart from the Treasury,
the Exchange Stabilization Fund, and the Federal Reserve Banks.
The additional deposit balances of the Treasury in the Federal
Reserve Banks will be available for the use of the Treasury.
In future when sales of gold are to be made by the Treasury
the corresponding gold certificates will be redeemed by the
Treasury prior to transfer of the gold to its purchasers.
0O0
WS-177
FOR RELEASE UPON DELIVERY
MONDAY, DECEMBER 9,-1974
REMARKS OF THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE NEW YORK ASSOCIATION OF BUSINESS ECONOMISTS
AT THE HARVARD CLUB, NEW YORK, NEW YORK
12:00 NOON, DECEMBER 9, 1974
’’ECONOMIC DIMENSIONS OF WORLD OIL”
I
am very pleased to have the opportunity to discuss
with this distinguished group important aspects of the
economics of international oil. Today as never before,
oil policy has become intertwined with national and
international political concerns to such an extent that
it is easy to lose sight of the economic facts. I would
hasten to point out that this increased politicization
of economics applies to both the domestic and international
areas. For instance, domestically we have posed major
obstacles to the efficient market allocation in energy by
regulating the price and distribution of natural- gas and by
manipulating the pricing and distribution system in oil. Such
decisions are not based on economics but to a large extent
are political. Similarly, decisions have been made interna
tionally by oil producing countries to maintain price levels
for oil that are more related to politics than to economics.
These issues are certainly complex, but I think it is
important to try to understand more of the economics and
less of the politics of oil and oil-related issues, and I
would like to concentrate on this today.
Economic Facts About Oil Prices
The five-fold increase in international oil prices -from less than $2.00 per barrel (for S.A. light crude)
before October of 1973 to over $10 per barrel today present
the world with a very serious economic challenge. A great
deal has been said about the price level, about the impact of
$10 oil, but it is not only the level of oil prices, but the
WS-176
-
2
-
rapidity with which they rose, following a prolonged period of
cheap energy, which magnifies the adjustment problems we face.
This year payments to the OPEC nations have soared to
over $85 billion, compared with $22 billion in 1973, and
they are now running at an annual rate of about $100 billion.
Exports by the rest of the world to OPEC have also increased,
but this year alone the OPEC nations as a group will accumulate
some $60 billion more in income than they can spend on imports
of goods and services. A small fraction of this surplus will
be distributed as grant aid to some LDCs; and the massive remaining
amount, in excess of $55 billion, will represent an increase in
debt of the rest of the world to the OPEC members.
The costs imposed on the world economy by these oil prices
are severe. For the United States, we estimate that the direct
and indirect effects of the price increases which occurred
between the summer of 1973 and the summer of 1974 will have
contributed about five to eight percentage points to the increase
in our wholesale price index, when the effects are fully felt.
The subsequent oil price increases this fall will contribute
further to inflation. For many other oil importing nations, the
contribution of the oil price increases to inflation will be
even greater.
Some have argued that a massive transfer of wealth, real
and financial, from the industrialized countries to' the oil
producing countries is necessary and "just". Such arguments,
which follow the idealogy of the so-called "New Economic OrderM >
see economics as a zero-sum game in which the poorer nations
cannot develop unless the industrial nations are repressed. This
thinking, however, does not take into account the basic dynamics
of interdependent economic development, in which all nations
become better off as economic development proceeds.
It is
important to emphasize that the future economic well-being of the
OPEC nations, in fact, depends very heavily on the health of the
industrial economies. The massive transfer of wealth from the
industrialized countries will be a very transitory benefit to the
oil producing countries if it damages the market for their product
and the international economic and financial order which will
provide the basis for long-run economic diversification for these
same countries.
Some oil producing countries have begun to recognize these
economic realities.
Others will do so as well, and as they do,
pricing policies will shift. However, to better understand why,
lets look at the price issue in more detail.
Economically Present Oil Prices Should Not Be Maintained
First, from an economic standpoint, I don’t believe present
world prices should be maintained for several reasons:
-- They are far above what they would be if they were
set by free market forces. The OPEC countries have had to shut
in nearly 8 million barrels a day of capacity to maintain this
price. Even during their oil embargo, their excess capacity
did not reach this level. The price level bears no relation to
the cost of production of oil or other sources of energy. While
it takes time to develop the alternative sources of oil and
other energy sources which were not developed during the past
period of $2-$3 a barrel oil, a price level which was too low
such sources can be brought on stream at costs signficantly below
$10-$11 a barrel (oil equivalent).
-- Further, it is frequently stated that the five-fold
increase in oil prices was required by the oil producers to
keep pace with the rising costs of their imports. There is
a legitimate reason for nations to be concerned with trends
in their terms of trade, particularly in a period of high
inflation. But the magnitude of recent oil price increases
cannot be justified on these grounds. The oil price increases
have far outstripped rises in other commodity prices. At
Treasury, we have constructed an index of imports for the OAPEC
nations which, when compared with producer government (S.A.)
revenues per barrel of oil, shows that a barrel of oil today
buys the producer countries some five times what it did two
decades ago and four times what it bought as recently as last
December. Take any other reasonably appropriate commodity price
index and any other base year and you will get a similar result,
showing enormous improvements in OPEC terms of trade due to
recent price increases.
There's no question that the owner of a commodity
has the right to sell it at whatever price the market will
bring. However, the owner must bear in mind his long-term
objectives as well as his short-term gains. In this regard,
present oil prices are far in excess of the level which would
optimize long-term profits to the OPEC nations under a wide range
of feasible assumptions about such factors as the elasticities of
demand and alternative supplies, discount rates, and time
horizons. As economists you recognize that the level of producti
which maximize profits to a monopolist is less than the level of
production that will result from free competition, and the price
is correspondingly higher. Yet we must not forget that a
monopolist can set a price which is too high, because it could
lead to a reduction of his monopolistic control over supply. I
believe that a continuation of $10-$11 oil has the potential of
doing just that.
4
Economically Present Oil Prices Are Not Sustainable
Even if we accept the fact that the present prices
of oil should not be maintained, we are still faced with
the the question of whether they are economically sustainable.
I believe they are not.
Why do I feel the price will come down? Basically
because I believe that oil like other commodities, cannot
be held immune to the forces of supply and demand indefinitely.
The OPEC members do not have control over all the current and
potential sources of oil in the world and surely have no control
over alternative sources of energy. Nor is the world's demand
for oil, or even energy, insensitive to price. The sharp jump
in prices has already resulted in reduced oil comsumption around
the world, and the longer run price elasticity of the demand for
oil surely is far greater than what has been experienced thus
far. Consumption of oil in the non-communist oil importing
countries of the world is projected to decline this year to about
46-1/2 million barrels per day as compared with 48 million barrels
per day last year.
Looking to the future, we believe that effective programs of
conservation could achieve a reduction in oil imports of the
major industrial countries of the world by the end of 1975 of at
least 3 million barrels a day -- without unduly dampening
economic activity and performance. Such a reduction won't be
easy; but it is attainable, and it would result in import savings
at an annual rate of some $11 billion at present price levels.
A key to achieving this, however, will be what we in the
U.S. do. President Ford has announced a program to reduce
U.S. oil imports by one million barrels a day below what they
otherwise would have been by the end of 1975. The program is
largely voluntary in nature, and we are reviewing it at the
present time. In that regard, it should be noted that our oil
consumption is currently down from where it was at this time last
year by about 250,000 barrels per day.
Therefore, savings are
taking place. However, we are determined to save more, and if
more stringent restraints are needed, they will be employed.
While in the near term conservation efforts will be of
primary importance, further pressures reducing the demand for
imported oil will result from the developing of alternative
supplies.
In many cases this will take time, but already in the
past year 26 significant new oil discoveries have been reported.
An increase of at least 30 billion barrels of oil have been
added to proven reserves outside the OPEC countries -- a one year
increase of 25%
and by 1980, these finds will have a s i g n i f i c a n t
production potential. The important point is that all of this
oil will reduce OPEC's potential market.
-5Within the United States alone the potential for increased
oil production is enormous, from new sources off shore and in
the Artie and from older sources through improved and more
intensive methods of recovery which now are economically
attractive. Other traditional energy sources -- coal, nuclear
power, and natural gas -- can become increasingly important;
and eventually new energy sources can be brought forth by
technological and economic incentives. However, for this to
happen, we must seek to remove governmental restrictions which
now limit the development of our petroleum resources and other
energy resources as well. Let's look at some of the potential
sources of petroleum supply and estimates of production
that show what we could do if certain of these impediments
were removed:
1. Naval Petroleum Reserve #1, Elk Hills, California.
The production estimate within 60 days is 160,000 barrels per day
and within two years could be increased to 267,000 barrels per day.
2. Known structures in the Santa Barbara Channel. Estimated
production of 300,000 to 500,000 barrels per day is possible
within three years.
3. Naval Petroleum Reserve #4 on the North Slope of Alaska.
The potential is enormous and our exploration program must be
accelerated in light of the fact that it has an estimated
production capability of 2.5 million barrels per day by 1985.
4. Crude oil from selected fields in excess of the
Maximum Efficient Rate (MER). Estimated increase in production
is 350,000 barrels per day within 90 days although possibly
not on a sustainable basis.
5. Secondary and tertiary recovery methods. By stimulating
such methods, we can achieve an estimated increase of 1 million
barrels per day within three to four years.
6. Alaskan North Slope and increasing capacity of Alaskan
pipeline can provide an additional 500,000 to 1,000,000 barrels
per day within five years for a total production of 2.5 to 3.0
million barrels per day.
7. Leasing of the Outer Continential Shelf to include
Alaskan offshore areas, the Pacific (other than Santa Barbara)
Ocean, the Atlantic Ocean and additional areas in the Gulf of
Mexico. A single large discovery could produce 1.0 to 1.5
million barrels per day within 8 years.
8. Heavy oil and tar sands are possible within ten years and
estimates are that 300,000 to 500,000 barrels per day are
possible from this source.
-
6-
This is illustrative of the potential oil supply -- not
to say anything about the other energy sources, if the necessary
economic incentives exist. Such moves as deregulation of natural
gas, modification of power plant emission standards, and
coal research and development would bring on substantial
additional supplies of gas and coal. Thus in direct response
to the artifically high price and the restricted supply of OPEC
oil, we can see a potential flood of energy from other sources,
energy that could be forthcoming at costs below the present
world oil prices, because the necessary economic incentives should
exist at prices below $10.
The only way the present price of OPEC oil can be maintained
will be to shut in more and more of their present and planned future
capacity with a resulting loss of incomes to these nations and a
loss of market share, which to a large extent will not be
reversable.
The problems the oil exporting nations will face in
allocating their diminishing market among the various members
under such a policy will become increasingly severe, particularly
as more and more members come to recognize the true costs of this
strategy.
If a scheme were to be achieved which allocates the
cutbacks equally among the OPEC members, countries such as
Venezuela, Iran, Indonesia, Algeria, and Nigeria would find
they have to make major reductions in their development programs.
If the cutbacks were to fall mainly on the shoulders of the
r p e p r v p r i r h Arab nations, these countries would pay a heavy
price in the permanent loss of the market for their sole resource
and hence in the value of their remaining reserves.
When Will Oil Prices Be Reduced
It is in light of these economic factors that I have
concluded that there will be no way for the price of oil to
be maintained indefinitely at present levels. However, the
next question, and perhaps the more important one, is the
timing — when will the price come down? Given the fact that
substantial increases in supply cannot be brought in quickly,
the price of oil can be maintained for political or in some
instances economic reasons for the short term. In determining
how long this will be the case, the key factors here are,
first, the willingness of consuming nations to make the tough
policy decisions needed to accelerate the reduction of their
dependence on foreign supplies. The second important factor
is whether or not the oil exporting countries will recognize
in the near future that it is in their own interest, as well
as the interest of the rest of the world, to lower oil prices
substantially.
-7In our discussions with the OPEC countries, we have
sought to explain to them the inevitable economic consequences
of their present policies and to demonstrate that an alternative
course would be far more in their interest as well as the
interests of the rest of the world. By reducing oil prices
substantially to a more sustainable market-related level,
they can assure themselves of a continued market for their
product which will yield the revenues they need for the
development and diversification of their economies, which they
justly desire. The OPEC nations have vast reserves of oil which
can be produced at low cost and sold at market prices which
would yield substantial revenues to the producers but which
still would be cheaper to the world than many of the higher
cost sources of energy the world is now being forced to bring
on stream too early. All nations, including the members of the
cartel, would benefit from such a pricing and production
strategy, which would avoid the serious distortions to the
optimal pattern of world resource development that will
otherwise occur.
As for the consuming countries, we have no rea 1 alternative
but to mobilize our resources to reduce as rapidly as possible
our reliance on OPEC oil and to ease the difficult financial
and economic problems of adjustment we face in the coming years,
I am sure that you are all well aware of the basic elements of
the U.S. proposals. However, I would like to make just several
general observations.
These prop osals are based on the fact that it is the price
of oil itself, and not its financial repercussions, that is the
real source of trouble in the world economy. Thus, we have not
been attracted to proposed financing schemes for '’recycling'*
which have been put forward in isolation. Such proposals would
simply address the symptoms of the problem and create a false
sense of securi ty. In contrast, our proposal links together
cooperative ene rgy policies and cooperative financial
arrangements so as to provide the mutual insurance essential
to protect the functioning of the world economic system, to
promote energy independence and thus to lay the foundation
for an early re duction in oil prices.
By seeking intergovernmental cooperation in the energy
area and pressing forward with our domestic energy program, we
are definitely not seeking to move to a government controlled
and operated energy industry, domestically or internationally.
We are instead attempting to establish the conditions for
the maximum return to the private market for an industry
which in recent years has experienced further and further
incursions by the government sector. A world energy industry
consisting of government owned operations, government set prices,
and government-to-government supply arrangments is not our
obj ective.
-
8
-
In seeking to develop national and international
energy policies under which the private market place can
effectively operate, we are aiming at two basic objectives:
First, to attain greater independence for the U.S. and
all consuming countries from insecure foreign suppliers of oil.
Second, to mitigate the extreme financial difficulties
caused by hi^h oil prices.
It is important to recognize that the price of oil effects
these two objectives differently. The higher the price, the
greater the economic incentives for energy conservation and
for developing additional sources of oil and other energy
sources, which brings us closer to our first objective.
However, the lower the price of oil and other energy supplies,
the less adverse the effect on our economies, which brings
us closer to the second objective.
We obviously do not want individually as a nation
or as a group of consuming nations to be locked into a future
of unnecessarily high cost energy when a lower cost
alternative source is available. It seems likely that as we
move towards greater and greater independence from imported
oil, at some point the costs will rise geometrically
and the added increments of independence will not be worth the
cost. This trade-off becomes particularly critical when you
consider the likelihood that sooner or later the oil exporting
nations will seek to regain lost market by undercutting
expensive alternative sources of energy. Such a possibility
may best be characterized as the ’’downside risk” problem.
Prospective investors in energy projects can be expected to
be cautious in a situation in which the price of oil could
plunge as easily as it has soared. Reluctance to commit
to the development of energy resources could severly effect
our objective of independence, and thus we must consider
domestic policies and methods of international cooperation
which would provide investors an appropriate degree of
protection against such risks. However, above all, we must
avoid an unacceptable level of government interference in the
private market.
I believe you will all recognize the difficulty of
this task. I can assure you our approach will not be one
of locking the U.S. into paying $11 a barrel for oil. This
would be an extremely costly and inefficient way of developing
the necessary energy resources. The energy supplies that can
be developed at substantially lower costs, particularly if we
remove those unnecessary government restrictions which
have suppressed development of supplies in the past, are very
s i zeable.
-9Nor should we seek absolute independence from foreign
supplies, a goal which may be feasible but too costly for the
U.S. and is not feasible for most other countries. Yet in
order to secure the necessary financial commitment from
private industry, we must give them some degree of assurance.
Therefore, some combination of selective policy instruments such
as tax incentives, tariffs, or other forms of import protection
may be required to assure that certain needed investments
in oil and alternative energy projects would remain viable in
the face of a likely eventual attempt by the oil producing
countries to regain lost markets.
Thus, no matter what actions OPEC now takes with respect
to oil prices, the U.S. and other countries must take certain
moves to develop alternative sources of energy, and the longer
the oil producers delay in moving towards a market-related
price for their oil, the more commitments the consuming
countries will have to make to develop further alternative
sources, and hence the greater the permanent loss to the oil
producers of market share.
Closer Relations With The Oil Producers
All of these initiatives are really a response to
the economics of oil. They should not, however, be
regarded as confrontational. We really have no choice
but to act in order to maintain the viability of our
economies and the stability of the international financial
order. These essential interests are not in conflict
with those of the oil exporting countries. We have,
and continue to support the very legitimate aspirations
of the oil producing nations to accelerate their own
economic development, establish their industrial and
agricultural bases, and improve the living standards of
their peoples. We do believe, however, they can achieve
these development objectives on a much more secure basis
at a substantially lower level of oil prices.
As evidence of our strong desire to play a cooperative
role with the producing countries, we have established Joint
Cooperative Commissions with several producers, namely,
Saudi Arabia, Iran and Egypt to help them achieve their
development objectives; and we have undertaken less
formal, though intensive, dialogues with other producing
countries as Kuwait, Abu Dhabi, and Qater. Within our
government these approaches represent a major effort to
provide the oil producing nations with expertise we have
achieved in developing the economy of our own country and
to help make this expertise adaptable to their development
programs. Our private sector is also making a substantial
contribution to those efforts.
-
10
-
OPEC Foreign Investments
Another aspect of our cooperation with the oil
producers is the important potential role for OPEC
capital in the U.S. economy. Clearly under all possible
scenarios, the OPEC countries as a group will accumulate
very sizeable current account surpluses in the next
several years and these funds will be placed in various
forms of investments abroad. Through the end of October
the flow of OPEC funds into the U.S. this year was roughly
$10.5 billion. Thus far most of these funds have flowed
into short term bank deposits and government securities,
but clearly there is potential for sizeable longer term
investments in our private sector. Because of this potential,
there has been considerable discussion about U.S. policy
towards foreign investment. I beleive we must make sure that
this debate does not lead to misunderstandings and mis
apprehensions on the part of both the American people and
potential foreign investors. Because of our ever-increasing
capital requirements, we in the United States have a crucial
stake in maintaining the free flow of investment. We must not
legislate foreigners out of our market, for we will be
depriving our economy of an irreplaceable source of needed
capital.
The potential for investments in the U.S. by investors
from the oil producing countries should not be- regarded as
a threat, but rather, I believe as an important opportunity.
I am sure that I don!t have to tell this group that the
capital requirements are enormous for expanding and
modernizing our productive capacity, developing our domestic
energy industry, fulfilling our other raw material needs, and
developing our infrastructure.
Capital from the oil producing countries clearly can
be put to productive use here and it would be the height
of folly to raise artificial barriers preventing our
companies, financial intermediaries and governments from
having access to this new source of capital funds.
In my discussions with the managers of Arab funds I
found them very willing to adhere to our rules and policies.
However, they want to know what the rules are. Further
they want to enter into relations of real partnership with
our firms, and do not want to just lend money. W e must
recognize that such partnerships could lead to major benefits
to the U.S. and western nations. This is not only because
they will help satisfy our capital needs, but also because
they will build strong ties of interdependence and friendship
between the consumer and producer nations.
-
11
-
In order for this to happen, we must make our policy
clear. We must welcome foreign investment, with no special
barriers, except in a few well defined areas for reasons of
national security or to protect an essential national
interest. We must not discriminate against.foreign investors
in general and we certainly must not discriminate in particular
against investors from the oil exporting nations. We are
continually reviewing our investment policy, but I foresee
no developments that would justify changing significantly
our view that investment capital should be free to move
to its most productive use in response to free market forces.
I would like to add that I strongly reject recent statements
suggesting that U DS. restrictions on foreign investment based
on national security grounds,call into question, in any way
our non-discriminatory policies towards foreign investments.
Once again, in the investment area as with other oilrelated issues, we must not let the emotions of the political
arena distort the economic realities of the marketplace. Too
often when economic issues come to the public*s attention,
they are cast in terms of extremes with the result that
basic freedoms are put in jeopardy. I believe leaders have a
particular responsibility to relate policy decisions to the
maintenance of freedom. Thus, when that combination of
special interest groups, bureaucratic pressures and
congressisonal outcries calls for more governmental intervention,
we must stand up and express the costs of such policies in
terms of sacrifice to human freedom. This applies with
particular importance today to oil and oil-related issues.
The problems are economically solvable— we can reduce demand;
we can increase supply; and the price will come down. However,
for any or all of these to happen, we must not allow
politics to dominate economics. When you think about it, we
really have no choice— either we separate politics from oil
or politics will impose greater governmental intrusion on us
domestically and more isolation on us internationally.
I believe the hope for the future lies in our ability
to forge new and lasting ties between nations. With such
ties will come a greater understanding of and commitment
to the necessity for international cooperation in building
and maintaining a strong and stable world economy, free
from the threats which face us today.
OoO
IÜ
DepartmentoftheTREASURY
«INGTON. D C 20220
TELEPHONE W04-2041
/
a
If
December 9, 1974
for $2.1 billion
imber 12, 1974,
3 are as follows:
bills
* 12, 1975
a
J l'-f 'r\
1°f~ï
/
v
1
suivaient
m u a i Rate
6.870
6.923
6.911
1/
Hotted 40%.
Llotted 55%,
û. m z
[STRICTS :
Accepted
$
0-usJZAt
-v ir z r li^ -
/U^cJ-
&.187 %
19,620 ,000
1,842,125 ,000
14,345 ,000
27,905 ,000
21,040 ,000
21,890 ,000
56,110 ,000
18,815 ,000
5,665 ,000
33,195 ,000
13,350 ,000
27,105 ,000
)0 $2,101,165,000c/
average price,
average price.
II These rates are on a bank-discount basis. The equivalent coupon-issue
yields are 7.41% for the 13-week bills, and 7.26% for the. 26-week bills.
FOR RELEASE 6:30 P.M.
December 9, 1974
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2.8 billion of 13-week Treasury bills and for $2.1 billion
of 26-week Treasury bills, both series to be issued on December 12, 1974,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
High
Low
Average
13-week bills
maturing March 13, 1975
26-week bills
j maturing June 12, 1975
Price
Equivalent
Annual Rate
:
: Price
98.205
98.177
98.187
7.101%
7.212%
7.172%
: 96.527 a/
: 96.500
1/ : 96.506
Equivalent
Annual Rate
6.870
6.923
6.911
1/
a/ Excepting 1 tender of $460, 000
Tenders at the low price for the 13-week bills were allotted 40%.
Tenders at the low price for the 26-week bills were allotted 55%,
TOTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Applied For
Accepted_____
Applied For
Accepted______
19,620,000
37,775,000
Boston
$
31>430.000 $
$
57>220,000 $
1,842,125,000
165.000
4,356,
2,261,435,000
475.000
3,149,
New York
14.345.000
43, 665.000
24, 780.000
43.560.000
Philadelphia
27.905.000
805.000
260.000
89,
30,
57.620.000
Cleveland
21.040.000
040.000
48,
32,
850.000
42.300.000
Richmond
21.890.000
945.000
460.000
42,
24,
38.245.000
Atlanta
56.110.000
465.000
298,
200.000
231,
82.315.000
Chicago
18.815.000
015.000
52,
660,000
58,
32.910.000
St. Louis
5,665,000
365.000
885.000
5,865,000
16,
m
Minneapolis
33.195.000
215.000
745.000
36,
36.765.000
41,
Kansas City
13.350.000
23, 350.000
33.735.000
115, 735.000
Dallas
27.105.000
925.000
125.000
303,
165,
128,050,000
San Francisco
$5,473,280,000 $2,800,575,000b/ $3,812,500,000 $2,101,165,000c/
TOTALS
b/Includes $565,640,000 noncompetitive tenders accepted at average price,
c/lncludes $284,155,000 noncompetitive tenders accepted at average price.
1/ These rates are on a bank-discount basis. The equivalent coupon-issue
yields are 7.41% for the 13-week bills, and 7.26% for the. 26-week bills.
Department of the T R E A S U R Y
SHINGTON, D.C. 20220
T E L E P H O N E W 04-2041
FOR IMMEDIATE RELEASE
DECEMBER 10, 1974
NEW METRIC STANDARDS
FOR MAJOR U. S. INDUSTRY
Washington--Secretary of the Treasury William E. Simon
announced today that beginning January 1, 1979 domestic
and imported wines must be bottled in seven standard metri'
sizes making the alcoholic beverage industry the first
major U. S. industry to convert to metrication.
The Secretary noted that the new regulations, promulgated
by Treasury’s Bureau of Alcohol, Tobacco and Firearms (ATF),
will benefit both American consumers and the alcoholic beverage
industry.
The new regulations to be published in December also will
specify the number of units per shipping container. This i s
expected to provide easier handling, accounting and tax
collection.
The seven new metric sizes are 3.00 liters (101 o z ,) , ;;
1.50 liters (50.7 oz,), 1.00 liter (33.8 oz.), 750 milliliters
(25,4 oz.), 375 milliliters
(12.7 oz.) , 187 milliliters. v;5
(6.3 oz.), and 100 milliliters (3.4 oz.).
«
V
11
Simon said the wine metrication regulations are the
precursors of distilled spirits metrication proposals expected
to be published by ATF in a few weeks. ATF, which is a part
of the Treasury Department, administers Federal laws relating
to alcohol products.
The conversion to metric bottles will reduce the number
of domestic wine bottle sizes from 16 to seven, and the number
of imported wine bottle sizes from about 27 to seven, the
Secretary noted.
"Consequently, this will be a big help to consumers who
will have to make a choice from only seven sizes," Simon said.
"The standard sizes should facilitate buyer comparison, and
unit pricing of wines by retail stores. In addition, the
WS-178
(OVER)
regulations will require bottlers to state the net content
of the bottle in metric measurement with the equivalent volume
in U. S. measure to be shown in fluid ounces, accurate to the
nearest one-tenth of an ounce, if the conversaion is done
before January 1, 1979.”
The original proposal also called for a two-year conversion
period, but in the final regulations this was extended to four
years, to January 1, 1979.
"This was done as a convenience to members of the glass
bottling industries as well as importers who requested the
extended time for conversion,” Simon said. "The Treasury
Department recognizes the need for ample time to consume
existing bottle inventories in order to reduce the economic
impact of metrication.”
A wine bottler may convert to metrication at any time before
the mandatory date, Simon noted, but once the conversion is
made the company may not revert to the old system.
Other provisions of the regulations:
--Since much wine is aged in the bottle, any wine bottl ed
before January 1, 1979, under conditions which do not meet the
new conversion requirements, can be imported into the U. S. if
the date of bottling is certified by a duly authorized offi cial
of the producing nation.
--The number of bottles of each size which may be packed
in a case are specified. "This uniform packing will benefit
every person who handles the wine in the distribution chain,
from manufacturer to retailer,” Simon noted. "In addition,
it will facilitate revenue collection by Federal and state tax
officials.I
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FOR IMMEDIATE RELEASE
December 10, 1974
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 $4,600,000,000 , or
thereabouts, to be issued December 19, 1974,
as follows:
91-day bills (to maturity date) in the amount of $2,600,000,000» or
thereabouts, representing an additional amount of bills dated September 19, 1974,
and to mature
March 20, 1975
(CUSIP No. 912793 WA0), originally issued in
the amount of $1,801,895,000, the additional and original bills to be freely
interchangeable.
182-day bills (to maturity date) to be issued December 19, 1974, in the amount
of $2,000,000,000, or thereabouts, representing an additional amount of bills dated
November
4, 1974, to mature June 19, 1975 (CUSIP No. 912793 WZ5), originally issued
in the amount of $1,500,835,000, the additional and original bills to be freely
interchangeable.
The bills will be issued for cash and in exchange for Treasury bills maturing
December 19, 1974,
outstanding in the amount of $4,604,420,000, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,737,090,000. v‘
These accounts may exchange bills they hold for the bills now being offered: at
the 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,
$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
one-thirty p.m., Eastern Standard time, Monday, December 16, 1974.
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000.
ultiples of $5,000.
Tenders over $10,000 must be in
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.
tactions may not be used.
Banking institutions an|l dealers who make primary markets in Government
(OVER)
-
2-
securities and report daily to the Federal Reserve Bank of New York their position
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 whole or in part, and his action in any such respect shall be final.
Subject
to these reservations, noncompetitive tenders for each issue for $200,000 or less
without stated price from any one bidder will be 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 December 1 9 1 9 7 4 ,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing December 19, 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 noticej
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
Departmentof theT R E A S U R Y
ASHINGTON, D.e. 20220
T È IE P H O N E WÛ4-2041
n
REMARKS BY THE HONORABLE JOHN M. PORGES
U.S. EXECUTIVE DIRECTOR INTER-AMERICAN DEVELOPMENT BANK
BEFORE THE COMMONWEALTH CLUB
SAN FRANCISCO, CALIFORNIA, DECEMBER 9, 1974, 12 P.M.
I am delighted to be in San Francisco and happy to have this opportunity
to talk with you about the economic situation in Latin America.
As United
States Executive Director of the Inter-American Development Bank, and as
a commercial banker with 20 years of prior experience in the region, I have
observed significant changes in the southern part of our hemisphere.
Let me first tell you about the work of the Inter-American Development
Bank and then talk about oil, the supply of other raw materials and the trade
and investment stake of our country in Latin America.
Since its establishment in 1959, the Inter-American Bank has played
a critical and catalytic role in the economic and social advance of its member
countries.
Through its direct loans for industry and agriculture which amount to
16 per cent and 24 per cent of total cumulative lending respectively, as well as
through loans channeled through Latin American development banks to those sectors,
the Bank contributes greatly to the growth of the region's directly productive
sectors —
most of it benefiting the growth of the private sector.
Through its basic infrastructure loans for electric power (20 per cent of
total lending), highways and communications facilities (another 20 per cent of
total lending), the Bank provides the basic underpinnings which also enable
private enterprise to grow and prosper.
2
Through its education and technical cooperation loans, it
provides the professional technology and skilled manpower needed by
the region’s productive enterprises and, in addition, contributes to the
solution of the region’s pressing employment and underemployment problems.
Finally, through its support of the social sector such as in water and
sanitation systems, housing for low-income sectors and assistance to smallscale farmers, the Bank helps to improve the quality of life of countless
Latin Americans far beyond their expectations of just a decade ago
Taken together, education and various other loans with important social
impact, account for nearly 20 per cent of the Bank’s cumulative lending
activity.
Before going on with the work of the Inter-American Bank, which in
addition to helping Latin America has been a boon to the United States in
terms of employment and exports, I would like to consider the general
economic situation of Latin America today and focus on recent developments.
You are aware, I am sure, of the U.S. Government’s commitment to a
mature and responsible relationship with Latin America.
This relationship
calls for a more equal partnership in which the nations of the region make
their own basic decisions about economic and social development questions.
It also emphasizes genuine multilateral cooperation in international economic
matters as opposed to the former bilateral relationships.
U.S. support of the
growing role of the Inter—American Development Bank (IDB) at the same time
that our own bilateral assistance efforts decline, clearly illustrates this
aspect of our relationship.
Nonetheless, problems have remained.
There has been a persistent
feeling in the region that the U.S. Government has not paid enough attention
to Latin American economic and social aspirations.
In this connection, the
Latin nations press hard for greater access to our own vast market for their
manufactured goods.
They seek generalized preference arrangements with
all the developed countries or a special arrangement with the United States.
A special relationship with the United States on trade has long been
sought by Latin America.
Recent events in petroleum production now point
up the advantages of such a relationship to the United States.
Last winter, when oil supplies from the Middle East were cut off, the
flow continued uninterrupted from Venezuela.
Ecuador, Trinidad and Tobago
and Bolivia are also becoming important producers.
Mexico is now self-sufficient
in oil, and newspaper accounts indicate extraordinarily large strikes in
Chiapas and Tabasco.
Intensive exploration is now going forward in the jungles
of Eastern Peru.
The southern part of this hemisphere can help provide us with significant
supplies of oil, although clearly this will not be done at less than prevailing
world prices.
Yes, we have been hard hit by the energy problem.
the increased costs of gasoline and fuels for heating.
We have felt directly
There have also been
additional increased costs of transportation passed through to a range of goods
affecting all aspects of our lives.
- 4 -
We could face parallel situations of shortage in other raw and
semiprocessed materials —
Jamaica and Surinam.
bauxite, for example, which we import from
1 cannot emphasize enough that the United States
has an overwhelming interest in developing good economic relationships
with Latin American countries and in assuring ourselves of adequate and
reliable supplies of critical raw materials.
Let me place in perspective the overall trading relationships between
the United States and Latin America.
In proportionate terms, that trade has
been more important to the region than to us.
In 1973, for example, 12.5
per cent of United States exports went to Latin America, while 11.7 per cent
of its imports came from that region.
By contrast, these same countries got
nearly 40 per cent of their imports from the United States and sent the United
States 30 per cent of their exports.
Another important change affecting our trading relationship is also
occurring —
a shift in Latin American development strategy from import
substitution to export promotion.
In the past, Latin America threw up tariff
barriers against imports of certain products to protect infant industries.
In
many instances, high cost and inefficient industries were created behind
these walls.
However, this process is now at an end and attention turns to
the export of manufactured goods as an important next step in economic
growth and development.
Naturally, labor-intensive industries, in which
developing countries have a competitive advantage, have received first attention
For example, textile imports to the United States from Mexico, Peru,
El Salvador, Nicaragua, Brazil and Haiti, and shoe imports from Brazil
and Argentina have increased significantly in recent years.
The new Latin
American strategy of export promotion depends, of course, on the willingness
of other nations to import these products.
The House of Representatives has passed, and the Senate Finance Committee
has now reported out a bill for the Trade Reform Act.
The House version in
cludes authority for the conduct of the next round of trade negotiations.
One
of its sections also allows for the removal of tariffs on most manufactured
goods from the lesser developed countries.
textiles and footwear would not be included.
Some sensitive items, such as
In any event, conference will
probably be necessary to resolve differences when the Senate acts on the
Committee’s recommendations.
The Latin American countries are very interested
in the progress of this legislation and clearly want a preference for their
manufactured goods.
Some of them have expressed interest in a special U.S.
preference arrangement for them.
I already have mentioned the energy problem and suggested that the supply
of other critical raw materials such as bauxite, which we get from Jamaica
and Surinam, could conceivably come into question.
From Mexico we get strontiur
flourine and cadmium; from Peru copper, tellurium, silver and bismuth; from
Bolivia tin and antimony, and from Venezuela iron ore as well as petroleum.
In upcoming negotiations the Latin Americans may very well link assured access
to petroleum and the other raw materials with our willingness to permit the
entry of their manufactured goods into our markets.
-
6
-
Let me briefly touch on the question of U.S. private investment in
Latin America.
In 1973, the book value of holdings was $18.5 million.
Much of it is concentrated in specific countries and economic sectors.
Four countries —
Venezuela, Brazil, Mexico and Argentina —
more than 50 per cent of the total.
accounted for
Overall, the manufacturing sector in
1973 accounted for 35 per cent of total U.S. investment in the region,
compared to 29 per cent in 1966.
In Mexico and Brazil, this sectoral
concentration is particularly high, reaching 70 per cent.
In present circumstances of radical change, there are many possibilities
for the disruption of regular patterns of trade and investment.
of international liquidity has come again to the fore.
The question
How will the industrial
ized oil user countries and, for that matter, non-OPEC developing countries,
find the additional money needed to pay their high oil bills?
oil-producing countries use the additional resources they gain?
How will the
These two
questions are circular ones, of course; and in some part at least, the answers
are becoming apparent.
The oil producers are conservative and cautious investors.
For the most part, they have limited themselves to short-term deposits and
government or government-guaranteed securities in the United States and in
Western Europe.
They have, however, made important equity investments such
as Krupp and Damlier Benz in Europe and some minor purchases in the United
States.
They have also established funds for financing development in the
poorer countries of the world.
Since January,
oil producing countries have
loaned the international development banks (IBRD, IDB, ADB) more than $1.1 billion
all of it on nearly commercial terms.
These are matters which naturally pose a challenge for the Bank
in the future, and the Bank is already beginning to focus on them.
Latin America, which is developing rapidly, still needs the catalytic
push of the Bank and it will continue to need it in the future.
As a
whole, Latin America’s growth in statistical terms has been amazing,
thanks to the performance of such key countries as Brazil.
At the Bank we take pride in having been so closely allied to that
effort.
Since the Bank made its first loan for a water supply project in
Arequipa, Peru, back in February 1961, it has approved more than $6.4
billion in some 750 loans, of both a hard and a soft nature, to support
the region’s economic and social growth.
Its membership has increased to
24 countries with the addition of three newly emerging independent countries
of the Caribbean —
1972, of Canada.
Barbados, Jamaica and Trinidad and Tobago —
and, in
We now look to Western Europe and Japan for new inputs of
financial resources to supplement what has been provided by the United States
and Canada.
Next week, in fact, I will travel to Madrid to participate in
ceremonies providing for Bank membership of 12 countries of Western Europe and
Japan.
Hopefully, the necessary legislative actions will be taken to permit
seating of these countries by 1976.
At the same time, the United States has
indicated its desire to continue its present level of support.
Total resources of the Bank now amount to more than $10.3 billion, thanks
to the timely support the Bank has received in replenishing its resources from
its own membership, with the primary contributor being the United States, as
well as from here-to-fore non-member countries in Europe and Japan, who have
given the Bank access to their capital markets.
With the capital market condi
tions prevailing in the world today, that support has become difficult to ob
tain at what we consider reasonable rates.
In the future we will need to exert
8
our utmost efforts to ensure that we have a pipeline of resources that
will enable us to fill the role assigned to us of acting as a development
bridge for the region.
A brief analysis shows that in 13 years of lending to both the public
and private sectors in Latin America, the Bank has financed in the critically
important field of agriculture the improvement of almost 7.5 million acres
of land and has ultimately authorized approximately 1 million loans to small
and intermediate farmers, including scores of rural cooperatives, for a
total of more than $1 billion dollars through intermediate lending agencies.
In the field of transportation and communication, the Bank has financed
the construction or improvement of nearly 12,000 miles of road networks, more
than 1,500 miles of gas pipelines, the modernization of 8 major ports and the
installation of telecommunications systems in 7 countries.
In the electric power field, Bank loans have helped to install electric
plants with a total capacity of 2.7 million kilowatts, to construct more than
15,000 miles of transmission and distribution lines and to improve electrical
services in 460 communities.
Bank financing is helping to build or improve more than 70 large
industrial plants —
of which 47 are now in operation.
Likewise, Bank credits
channelled to small- and medium-size private entrepreneurs in Latin America
through the region’s development banks are helping to construct an additional
5,100 smaller private industrial enterprises.
Our financing of water supply and sewage systems has benefited urban
and rural areas with a population of approximately 55 million people.
More
than 900,000 students are benefiting from the Bank's operations in advanced,
vocational and technical education.
- qi
y
j
In export financing, the Bank has authorized some $100 million
to help finance intraregional exports of capital goods.
And, in the
field of preinvestment, 240 studies have been financed directly by the
Bank and another 360 through the resources lent by the Bank to various
national planning agencies.
I have sought to indicate in these remarks that Latin America is
making extraordinary progress in development, thanks substantially to its
own efforts, but also to the catalytic support which the region has re
ceived from such agencies as the Inter-American Bank.
I have also sought
to point out the strong interdependence that exists between Latin America
and the United States, brought home to us so starkly by the energy situation
in which we find ourselves.
In closing, I would like to indicate how important we at the Bank and in
the United States’ Government view the support which you, the public, give
to the Inter-American Development Bank.
In the years ahead, the programs of
the Bank will require even further support from the business community and
from civic organizations
3-S
well
as
from our elected repre
sentatives.
I shall be pleased to attempt to answer any questions you may have.
Thank you for your attention.
ASHINSTON. D C. 20220
TELEPHONE W04-2041
REM ARKS BY THE HO NO RABLE JOHN M. PORGES
U .S . E X E C U T IV E DIR EC TO R , IN T E R -A M E R IC A N D E V E L O PM E N T BANK
B E F O R E THE WORLD A F F A IR S COUNCIL O F SAN DIEGO,
SA N DIEGO, C ALIFO RNIA, D E C E M B ER 10, 1974
I am happy to have th is op p ortu n ity to ta lk w ith the W orld A ffa ir s
C ouncil of San D ie g o .
E a r lie r tod ay, I sp o k e to the K iw an is Club about
the p r o s p e c ts fo r e c o n o m ic p r o g r e s s in L a tin A m e r ic a and the r o le of
the I n te r -A m e r ic a n D e v e lo p m e n t B ank.
T on igh t, I w ou ld lik e to c o n s id e r
with you s e v e r a l a s p e c t s of the o il situ a tio n , in clu d in g a sta te m e n t of the
U .S . G o v ern m en t p o s itio n , and th en fo c u s on the w ay th is situ a tio n a ffe c ts
trade and fo r e ig n a id le g is la t io n and the w o rk o f in te r n a tio n a l len d in g
in stitu tio n s lik e the I n te r -A m e r ic a n D e v e lo p m e n t B ank.
The w id e -r a n g in g and s e r io u s e ffe c t s of a c tio n s tak en by the o i l producing and e x p o r tin g c o u n tr ie s a r e now v e r y c le a r .
T h e se a c tio n s
taken have in c lu d e d an o u trig h t e m b a r g o la s t fa ll, a m o r e than fo u r -fo ld
in c r e a s e in p r ic e le v e ls and fin a lly c u r r e n t cu tb ack s in p ro d u ctio n w h ich a r e
d esig n ed to m a in ta in a r t if ic ia lly high p r ic e l e v e l s .
We a ll can r e m e m b e r
long lin e s that fo r m e d at g a s s ta tio n s la s t w in ter a s a r e s u lt o f the e m b a r g o .
M ost a u th o r itie s do not think that w e w ill have to fa c e anything lik e that
e x p e r ie n c e a g a in th is w in te r .
adequate to our n e e d s .
F o r the m o m en t, w e a p p ea r to h a v e a c c e s s
We s t i l l do have to fa c e , h o w e v e r , the v e r y s e r io u s
effects of that fo u r - fo ld in c r e a s e in p r ic e le v e l.
B e fo r e the f ir s t of the
p rice in c r e a s e s la s t fa ll, the b en ch p r ic e of Saudi A r a b ia n cru d e w as l e s s
-
th at $2 p e r b a r r e l.
2
-
T oday it is a p p r o x im a te ly $10.
w ith you w hat th is m e a n s to a ll of us as in d iv id u a ls .
I do not have to belabor
We pay m o r e not only
fo r p e tr o le u m p ro d u cts but a ls o fo r a b ro a d s p e c tr u m of oth er g ood s and
s e r v ic e s w h o se p r ic e s h a v e b e e n n e c e s s a r ily in c r e a s e d .
T h e re a r e c a l
c u la tio n s w h ich s u g g e s t that a s m u ch a s o n e -th ir d of the 20 p er c e n t in c r ea se
in w h o le s a le p r ic e s fr o m a y e a r ago ca n be a ttrib u te d to the r is e of
p e tr o le u m p r ic e s .
I w ou ld lik e , in s te a d , to c e n te r a tten tio n on n a tio n a l and in tern a tio n a l
im p lic a tio n s .
T h is y e a r a lo n e , O PEC c o u n tr ie s w ill e a rn $90 b illio n in oil A/
e x p o r t e a r n in g s .
T h ey e x p e c t to e a r n m o r e than $110 b illio n in 1975.
n u m b e r s s tr a in our a b ility to fu lly co m p r e h e n d .
These
M ore c o n c r e te ly , the
p r o b le m of how to h an d le the flo w o f th is am ount of m o n ey p la c e s g r e a t
s tr a in on the in te r n a tio n a l fin a n c ia l s tr u c tu r e .
We have a m u c h -u s e d
sa y in g in in te r n a tio n a l fin a n c e th at one c o u n tr y 's su r p lu s is an o th er country's
d e fic it.
A ll O PE C c o u n tr ie s tak en to g e th e r th is y e a r can only be ex p e cted
to sp en d $35 b illio n on im p o r ts of g o o d s and s e r v ic e s fr o m o th er c o u n tr ie s.
T h is m e a n s th ey w ill have a tr a d e b a la n c e su r p lu s a s of the end of the year
of
a rou n d
$60 b illio n .
If the d e fic it c o u n tr ie s cannot pay fo r th eir
o il w ith the e x p o r t of o th er good s and s e r v i c e s , w e have to a sk how th ey w ill
b e a b le to do s o .
The a n sw e r to th is q u e s tio n lie s in w hat the ex p o rtin g
c o u n tr ie s do w ith th e ir s u r p lu s e s .
In a w o rd , I am ta lk in g about r e c y c lin g .
S in c e on ly so m u ch can be u s e d fo r im m e d ia te im p o r ts of g ood s and s e r v ic e s ,
th e r e m u st be an o ffs e ttin g flo w o f in v e s tm e n t funds fr o m th e O PEC countries.
A/
E s t im a te s a s of D ecem b er 1974
/fft
- 3 The O PEC c o u n tr ie s a r e now the c r e d ito r c o u n tr ie s of the w o r ld .
How th ey h an d le th e ir in v e s tm e n ts w ill have en o rm o u s s ig n ific a n c e to the
r est of u s .
T h is new sta tu s puts a h ea v y r e s p o n s ib ility on th em to a c t
with p ru d en ce and c a r e .
Thus fa r , a ll r e p o r ts a r e that th ey have b een
prudent and c a u tio u s in v e s t o r s , e m p h a siz in g th o se o p p o rtu n ities w h ich
provide fo r liq u id ity and s a fe ty .
I w ant to sp ea k m o r e about the in v e stm e n t
situation la te r on but for now I w ou ld lik e to tu rn to w hat U .S . p o lic y has
been as d e v e lo p e d by S e c r e ta r y S im o n and S e c r e ta r y K is s in g e r .
In a s p e e c h in N ew Y ork to the N a tio n a l F o r e ig n T rad e C onvention
on N ovem b er 18, S e c r e ta r y S im on sp ok e of the c h a lle n g e fr o m the O PEC
bloc.
He s a id the U nited S ta te s m u st s e e k a new u n ity of p u rp o se w ith
other co n su m in g c o u n tr ie s w h ile at the sa m e tim e w e have to tr y to s e t t le
our d iffe r e n c e s w ith the p rod u cin g c o u n tr ie s th rou gh m u tual u n d ersta n d in g
and c o o p e r a tio n .
In two s e p a r a te s p e e c h e s th is fa ll, S e c r e ta r y S im on and S e c r e ta r y
K issin g e r h ave e n u n cia ted a p o s itio n fo r the U nited S ta te s .
The su b sta n c e
of this p o s itio n is a s fo llo w s :
- The p r ic e of the o il and not its fin a n c ia l r e p e r c u s s io n s is the
r e a l s o u r c e of tro u b le in the w o r ld eco n o m y ;
- M ajor co n su m in g c o u n tr ie s sh o u ld w ork to g e th e r to a c h ie v e
s ig n ific a n t r e d u c tio n s in th e ir im p o r ts of O PEC oil;
- 4 - T h ey sh o u ld c o o p e r a te to in c r e a s e e n e r g y p ro d u ctio n w ith in th eir
own n ation s;
- IM F r e s o u r c e s sh ou ld be m o r e fu lly m o b iliz e d fo r a ll m e m b e r
n a tio n s;
- A new fin a n c ia l fa c ilit y sh o u ld be s e t up in a s s o c ia t io n w ith OECD Al
to p r o v id e s ta n d -b y su p p o rt fo r th o se c o u n tr ie s in e c o n o m ic trouble;
- C o n sid e r a tio n sh o u ld be g iv e n to a s p e c ia l IM F tr u s t fund to help
d e v e lo p in g c o u n tr ie s;
- And s e r io u s p r e p a r a tio n s sh o u ld be m ad e fo r d ia lo g u e b e tw e en consumer
and p r o d u ce r g r o u p s.
L e t us e x a m in e m o r e c lo s e ly the im p lic a tio n s of th is p o s itio n .
F ir s t,
so fa r as r ed u c in g o il im p o r ts is c o n c e r n e d , in h is e c o n o m ic m e s s a g e of
N o v e m b e r 8, P r e s id e n t F o r d ann ounced a U .S . p r o g r a m to r ed u c e im p orts
by one m illio n b a r r e ls a day.
The F r e n c h have p la c e d an a b so lu te lim it on
th e ir o il im p o r ts to that le v e l w h ich co u ld be fin a n ced w ith 1974 o il paym ents.
T he B r it is h have ad op ted new ta x e s on p e tr o le u m in a n oth er e ffo r t to r e lie v e
th e ir o il im p o r ts .
C on su m in g n a tio n s a ls o have to c o o p e r a te in co n serv a tio n
p r o g r a m s and in e x p lo r in g how oth er s o u r c e s of e n e r g y p ro d u ctio n can be
s u b s titu te d for p e tr o le u m .
The n e w ly -e s ta b lis h e d In tern a tio n a l E n erg y
A g e n c y o ffe r s one fo ru m to fin d w a y s to m o v e tow ard th e s e o b j e c tiv e s .
A m on g o th er th in g s, w e n eed to e lim in a te b a r r ie r s to c o n s e r v a tio n and
in c r e a s e p ro d u ctio n - - i n th e U n ited S ta te s a s veil a s in o th er c o u n tr ie s .
A /
O r g a n iz a tio n fo r E c o n o m ic C o o p era tio n and D e v elo p m e n t
- 5 S e c o n d ly , w ith r e g a r d to fin a n c ia l su p p ort, in m o s t in s ta n c e s e x istin g
private and p u b lic a g e n c ie s a r e now coping a d eq u a tely w ith ch a n n elin g the
flow of in v e s tm e n t funds fr o m O PEC c o u n tr ie s .
Y et, as I in d ic a te d at the
beginning of m y r e m a r k s , th e r e h as b e e n a d d itio n a l e ffo r t and s tr a in on
many of our in s titu tio n s .
S e c r e ta r y K is s in g e r has c a lle d fo r the s e ttin g up
of another fa c ilit y , th e r e fo r e , to h elp in d u s tr ia liz e d
may n eed a s s is t a n c e under p a r tic u la r c ir c u m s t a n c e s .
o il u s e r c o u n tr ie s w hich
A s a r e s u lt, the
United S ta te s is r ec o m m e n d in g the c r e a tio n o f a su p p lem en ta l lo a n fa c ilit y
which w ould be a s s o c ia t e d w ith the O r g a n iz a tio n for E co n o m ic C o o p era tio n
and D e v elo p m e n t (O EC D ).
In the G o v e rn m e n t's v ie w th is fa c ilit y w ould
serv e as a b a c k sto p or s o - c a lle d " sa fe ty n e t."
The g e n e r a l p r in c ip le s
underlying its u s e w ou ld be a s fo llo w s:
- P a r tic ip a tio n to be lin k ed w ith c o o p e r a tio n on red u ctio n of o il
im ports;
- M em b er c o u n tr ie s to fo llo w r e s p o n s ib le a d ju stm en t p o lic ie s and
avoid " b egger thy n eighb or" app roach;
- M agnitude of fund to be on o r d e r of $25 b illio n w ith p o s s ib le
additional r e s o u r c e s if n e ed ed in fu tu re y e a r s ;
- Fund to su p p lem en t and not r e p la c e p r iv a te m a r k e t and oth er
channels;
- W eigh ted v otin g s y s te m b a s e d on p a r tic ip a tio n to p r e v a il;
- A s s is t a n c e to be p r o v id e d on b a s is of g e n e r a l e c o n o m ic p o sitio n ;
-
6
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- C r ed it r is k to be s h a r e d on b a s is of p e r c e n ta g e p a r tic ip a tio n .
T h ir d ly , the U n ited S ta te s is e s p e c ia lly c o n c e r n e d about the n eed s
of d e v e lo p in g c o u n tr ie s .
the r is e in o il p r ic e s .
M any of th em have b e e n e x tr e m e ly h a rd h it by
S in c e the d ev elo p in g c o u n tr ie s depend on c a p ita l
t r a n s f e r s to su p p ort th e ir p r o g r a m s fo r e c o n o m ic p r o g r e s s , th ey n a tu rally
sta n d to b e n e fit fr o m th e m a in te n a n c e of o r d e r ly co n d itio n s in the w o r ld 's
c a p ita l m a r k e ts .
fin a n c ia l fund
T h is is w hat w e a r e tr y in g to a c h ie v e by the su p p lem en ta l
I have ju s t d e s c r ib e d .
In a d d itio n , the d ev elo p in g
c o u n tr ie s a r e e lig ib le fo r sta n d -b y a s s is t a n c e fr o m the In tern a tio n a l
M o n eta ry Fund.
The U n ited S ta te s and o th er d e v e lo p e d d on ors have b een
d iv e r tin g th e ir b ila te r a l c o n c e s s io n a l a s s is t a n c e to w a rd th e s e c o u n tr ie s and
a r e c a llin g on the in te r n a tio n a l len d in g in s titu tio n s , su ch as the Inter A m e r ic a n D e v e lo p m e n t B ank, to do the s a m e .
T hought is a ls o b ein g given
to the e s ta b lis h m e n t of a s p e c ia l tr u s t fund - - p o s s ib ly fin a n c ed fr o m the
s a le of g o ld h o ld in g s by th e IM F to p r o v id e oth er funds on c o n c e s s io n a l
te r m s.
A s p e c ia l c o m m itte e on d e v e lo p m e n t h a s b e e n e s t a b lis h e d and we
hop e th ey w ill look into th is s u g g e s tio n .
It g o e s a lm o s t w ith out sa y in g that the o il-p r o d u c in g c o u n tr ie s have
a s s u m e d a s p e c ia l o b lig a tio n by r a is in g th e ir p r ic e s to h elp oth er developing
c o u n tr ie s , p a r tic u la r ly th o se who h a v e b e e n m o s t s e v e r e ly a ffe c te d .
B et us
c o n s id e r w hat h as b een done th rou gh th e in te r n a tio n a l len d in g in s titu tio n s -th e W orld B ank, the A sia n D e v e lo p m e n t B ank, and m y own o r g a n iz a tio n ,
the I n te r -A m e r ic a n D e v e lo p m e n t B ank.
S in c e the f i r s t of th is y e a r , the oil
- 7 p rod u cers have p u r c h a se d d ir e c t bond o ffe r in g s fr o m the th re e in stitu tio n s
totalling m o r e than $1„ 1 b illio n , and oth er o ffe r in g s a r e under a c tiv e
co n sid e ra tio n .
T h is fig u r e d oes not in clu d e oth er bond o p e r a tio n s of
previous y e a r s in K uw ait and Saudi A r a b ia .
B o rr o w in g a c tiv ity of th is
kind p e r m its co n tin u a tio n and e x p a n sio n of o r d in a r y c a p ita l p r o g r a m s, i. e . ,
lending at n ea r c o m m e r c ia l r a t e s .
I w ou ld a ls o h op e, in the n ea r fu tu re, for O PEC r e s o u r c e s on
c o n c e s s io n a l te r m s to the in te r n a tio n a l fin a n c ia l in s titu tio n s .
T his a c tio n
would p e r m it th e len d in g in s titu tio n s to m ak e m o r e lo a n s at lo w er in t e r e s t
rates and w ith lo n g e r m a tu r itie s - - co n d itio n s e s p e c ia lly a p p ro p ria te fo r
those d ev elo p in g c o u n tr ie s m o s t s e v e r e ly a ffe c te d by the o il p r ic e in c r e a s e .
Although a nu m ber of s p e c ia l in v e s tm e n t funds h a v e b een e s ta b lis h e d by
OPEC c o u n tr ie s , it is s t ill not e n tir e ly c le a r w hat th e ir p o r tfo lio p o lic ie s
w ill be and how m o n ey w ill be m ad e a v a ila b le fo r e c o n o m ic and s o c ia l
developm ent p u r p o se s in the n eed y c o u n tr ie s .
Thus fa r , c o m m itm en ts
of $ 7 .0 b illio n h ave b een sp ok en of, of w h ich $ 6 . 5 b illio n has b een p r o m is e d
on c o n c e s s io n a l t e r m s .
A lth ough m o s t of th e s e c o m m itm e n ts a re d ir e c te d
to n o n -o il p rod u cin g A rab s t a t e s , $1. 3 b illio n h as b e e n s e t a s id e fo r India
and P a k ista n .
I in d ic a te d e a r lie r that the o il p r o d u c e r s w e r e b ein g ca u tio u s and
prudent in v e s t o r s .
L e t m e expand upon that thought now .
It is e s tim a te d
that s in c e the f i r s t of th is y e a r a p p r o x im a te ly $ 4 5 . 0 b illio n has b een
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8
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in v e s te d a b ro a d by O PEC c o u n tr ie s , p r e d o m in e n tly in the U n ited S ta te s,
Japan , and sta b le c o u n tr ie s of W e ste r n Europe,,
It h a s b een in the fo r m
of sh o r t te r m d e p o s its at m o s tly la r g e and rep u ta b le banks or in m a rk eta b le
g o v e r n m e n t or g o v e r n m e n t g u a r a n tee d s e c u r itie s «
T h e re have a ls o b een
s o m e v e r y s ig n ific a n t eq u ity in v e s tm e n ts in G erm a n y - - D a m lie r B en z
and K rupp.
In the U n ited S ta te s , th e r e have b een fo r the m o s t p a rt
r e la t iv e ly m in o r p u r c h a s e s .
I sh o u ld m en tio n , h o w e v e r , that Saudi A rabian
b u s in e s s in t e r e s t s , w ho a lr e a d y ow ned c o n tr o llin g in t e r e s t s in two
San F r a n c is c o b an k s, a r e now p u rc h a sin g a o n e -th ir d in t e r e s t in a th ird
bank, the F i r s t N a tio n a l Bank of San J o s e .
I
a b lo c .
h ave sp ok en ton igh t of the O PEC c o u n tr ie s in te r m s of th e ir being
T h ey a r e not h o m o g e n e o u s, h o w e v e r , and v a r y g r e a tly am on g them
s e lv e s both w ith r e s p e c t to the w e a lth of th e ir o il r e s o u r c e s and th e ir
g e n e r a l e c o n o m ic and s o c ia l c o n d itio n s .
F o r th e s e r e a s o n s , th e ir individual
in v e s tm e n t o b je c tiv e s and s t r a t e g ie s w ill n e c e s s a r ily be d if fe r e n t .
A t one
p o le a r e the Saudi A r a b ia n s, the K u w aitian s and oth er P e r sia n G ulf producers.
T h e ir e a r n in g s a r e so e n o r m o u s and so m u ch b eyon d th e ir own d o m e s tic
n e e d s th at th ey a r e c le a r ly s la te d to b e c o m e m a jo r c a p ita l e x p o r te r s o ver
the long te r m .
A t the oth er e x tr e m e , a r e c o u n tr ie s su ch a s I n d o n e s ia ,
E cu ad or and N ig e r ia .
T h ey a r e , of c o u r s e , v e r y m u ch b e tte r off now
than th ey w e r e in the p a s t.
T h e re has b een a d r a m a tic im p r o v e m e n t in
th e ir e c o n o m ic p r o s p e c t s .
H o w e v er , th e ir g e n e r a l co n d itio n - - i n te r m s
of p er ca p ita in c o m e and o th er b a s ic e c o n o m ic in d ic a to r s - - i s su ch that
they can app ly o il e a r n in g s to th e ir own e c o n o m ic d e v e lo p m e n t.
Although
la rg e te m p o r a r y i n c r e a s e s in fo r e ig n e x ch a n g e h o ld in g s a r e being
e x p e r ie n c e d , th ey a r e e x p e c t e d o v e r the in t e r m e d ia t e and long t e r m to
m a t e r ia lly i n c r e a s e im p o r t s fr o m in d u s tr ia l c o u n tr ie s fo r d o m e s tic
co nsum p tion and in v e s t m e n t n e e d s .
In b etw een , a r e c o u n tr ie s su c h a s
V e n e zu ela and Iran w h ich can a b s o r b th e ir i n c r e a s e d o il e a rn in g s only
over the long and fa r th e r end of the m e d iu m t e r m .
In the m e a n tim e , they
are looking fo r s u ita b le in v e s t m e n t s a b r o a d fo r the s h o r t and n ea r m e d iu m
term .
U ltim a te ly , h o w e v e r , th ey a r e not e x p e c te d to b e c o m e m a jo r
capital e x p o r t e r s o v e r the long t e r m .
Taking th e s e b a s ic d if f e r e n c e s into a ccou nt, I think the public and
private a g e n c ie s of the in d u s t r ia liz e d c o u n tr ie s can e n c o u r a g é OPEC
in v e s to r s to d iv e r s i f y th e ir h o ld in g s into m o r e in stitu tio n s and to le n g th en
their m a t u r i t i e s .
E quity h o ld in g s a r e c l e a r l y a p p ro p ria te in that th ey can
benefit i n v e s t o r s by p r o v is io n s for te c h n o lo g y t r a n s fe r and tr a in in g , r e a l
r e q u ir e m e n ts in a ll of the O P E C c o u n t r ie s .
In addition, the o il p r o d u c e r s
should be p r e s s e d to p r o v id e l a r g e r a s s i s t a n c e to o th er d e v e lo p in g c o u n t r ie s .
T his w h o le m a t te r of e c o n o m ic a s s i s t a n c e is v e r y d ir e c t ly r e la t e d
to the p r o g r e s s of F o r e ig n A s s i s t a n c e le g i s l a t i o n now pending in our own
C o n g r e ss .
The Senate h a s r e c e n t ly p a s s e d an a u th o r iz a tio n b ill fo r 1975
and the H o u se of R e p r e s e n t a t iv e s
v e r s io n today.
has begun
flo o r c o n s id e r a t io n of its
W h ile m a r g in s of p a s s a g e a r e n a r r o w e r th is y e a r ,
the A d m in is tr a tio n is happy w ith the b ip a r t is a n c h a r a c t e r of supp ort and
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10
h o p efu l of g ettin g a fin a l b ill out of the C o n g r e s s .
Once a u th o r iz a tio n
h a s b e a i approved, w e ca n then go on to s p e c i f i c a p p ro p ria tio n s fo r f is c a l
y e a r 1975.
A noth er l e g i s l a t i v e m a t te r of o v e r - r id in g im p o r ta n c e is p a s s a g e of
a T ra d e R e f o r m A c t.
O b v io u sly , tr a d e and in v e s t m e n t a r e the k ey
f a c t o r s in d e v e lo p in g s a t i s f a c t o r y s o lu tio n s to the s e t of p r o b le m s I have
o u tlin e d to n ig h t.
S e c r e t a r y S im o n h as in d ic a te d that u p co m in g trade
n e g o tia t io n s , for w h ic h w e m u s t ha v e a l e g i s l a t i v e m a n d a te, w ill turn to
the q u e s tio n of in s u r in g a c c e s s to food and raw m a t e r i a l s u p p lie s .
F or
th is p u r p o se w e n e e d a s tr o n g Act w ith out c o m p lic a tin g a m e n d m e n ts .
The
S en a te F in a n c e C o m m itte e has j u s t r e p o r t e d out its v e r s i o n of the Trade
B i l l and I u n d e rsta n d the b eginn ing of flo o r a c tio n w a s c o n te m p la te d for
to d a y .
B y w ay of ending, I w ould lik e to c o m m e n t on how i n t e r - r e l a t e d
m a n y of the p r o b le m s of our c u r r e n t e c o n o m ic situ a tio n have b e c o m e .
C o m p a r e d w ith o th er in d u s tr ia l nations, fo r e ig n tra d e counts for a s m a ll
p e r c e n t a g e of our g r o s s n a tio n a l p ro d u ct.
The im p o r ta n c e of s m a ll
p e r c e n t a g e s , h o w e v e r , has b e e n d e m o n s tr a te d by the r i s e in p e tr o le u m
p r ic es.
In s i m i l a r fa sh io n , what w e a r e able to a c h ie v e in tra d e and
f o r e ig n a s s i s t a n c e le g is la t io n , p a r t ic u la r ly our su p p o rt for in ter n a tio n a l
f in a n c ia l in s titu tio n s ,
m a y w e ll d e te r m in e our s u c c e s s w ith c u r r e n t
in t e r n a t io n a l e c o n o m ic p r o b le m s .
T hank you.
Department o f
ASHINGTON, D,C 20220
theTREASURY
*&**** mm$m W04-204I
I
“ \L
REMARKS BY THE HONORABLE JOHN M. PORGES
U.S. EXECUTIVE DIRECTOR INTER-AMERICAN DEVELOPMENT BANK
BEFORE THE KIWANIS CLUB LUNCHEON
SAN DIEGO, CALIFORNIA, DECEMBER 10, 1974
I am delighted to be in San Diego and happy to have this opportunity
to talk with you about the economic situation in Latin America.
As United
States Executive Director of the Inter-American Development Bank, and as
a commercial banker with 20 years of prior experience in the region, I have
observed significant changes in the southern part of our hemisphere.
Let me first tell you about the work of the Inter-American Development
Bank and then talk about oil, the supply of other raw materials and the trade
and investment stake of our country in Latin America.
Since its establishment in 1959, the Inter-American Bank has played
a critical and catalytic role in the economic and social advance of its member
countries.
Through its direct loans for industry and agriculture which amount
to
16 per cent and 24 per cent of total cumulative lending respectively, as well as
through loans channeled through Latin American development banks to those sectors
the Bank contributes greatly to the growth of the region's directly productive
sectors — • most of it benefiting the growth of the region1s private sector.
Through its basic infrastructure loans for electric power (20 per cent of
total lending), highways and communications facilities (another 20 per cent of
total lending), the Bank provides the basic underpinnings which also enable
private enterprise to grow
and prosper.
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2
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Through its education and technical cooperation loans, it
provides the professional technology and skilled manpower needed by
the region’s productive enterprises and, in addition, contributes to the
solution of the region’s pressing employment and underemployment problems.
Finally, through its support of the social sector such as in water and
sanitation systems, housing for low-income sectors and assistance to smallscale farmers, the Bank helps to improve the quality of life of countless
Latin Americans far beyond their expectations of just a decade ago
Taken together, education and various other loans with important social
impact, account for nearly 20 per cent of the Bank’s cumulative lending
activity.
Before going on with the work of the Inter-American Bank, which in
addition to helping Latin America has been a boon to the United States in
terms of employment and exports, I would like to consider the general
economic situation of Latin America today and focus on recent developments.
You are aware, I am sure, of the U.S. Government’s commitment to a
mature and responsible relationship with Latin America.
This relationship
calls for a more equal partnership in which the nations of the region make
•their own basic decisions about economic and social development questions.
It also emphasizes genuine multilateral cooperation in international economic
matters as opposed to the former bilateral relationships.
U.S. support of the
growing role of the Inter-American Development Bank (IDB) at the same time
that our own bilateral assistance efforts decline, clearly illustrates this
aspect of our relationship.
- 3 -
Nonetheless, problems have remained.
There has been a persistent
feeling in the region that the U.S. Government has not paid enough attention
to Latin American economic and social aspirations.
In this connection, the
Latin nations press hard for greater access to our own vast market for their
manufactured goods.
They seek generalized preference arrangements with
all the developed countries or a special arrangement with the United States.
A special relationship' with the United States on trade has long been
sought by Latin America.
Recent events in petroleum production now point
up the advantages of such a relationship to the United States.
Last winter, when oil supplies from the Middle East were cut off, the
flow continued uninterrupted from Venezuela.
Ecuador, Trinidad and Tobago
and Bolivia are also becoming important producers.
Mexico is now self-sufficient
in oil, and newspaper accounts indicate extraordinarily large strikes in
Chiapas and Tabasco.
Intensive exploration is now going forward in the jungles
of Eastern Peru.
The southern part of this hemisphere can help provide us with significant
supplies of oil, although clearly this will not be done at less than prevailing
world prices.
Yes, we have been hard hit by the energy problem.
the increased costs of gasoline and fuels for heating.
We have felt directly
There have also been
additional increased costs of transportation passed through to a range of goods
affecting all aspects of our lives.
- 4-
We could face parallel situations of shortage in other raw and
semiprocessed materials —
Jamaica and Surinam.
bauxite, for example, which we import from
I cannot emphasize enough that the United States
has an overwhelming interest in developing good economic relationships
with Latin American countries and in assuring ourselves of adequate and
reliable supplies of critical raw materials.
Let me place in perspective the overall trading relationships between
the United States and Latin America.
In proportionate terms, that trade has
been more important to the region than to us.
In 1973, for example, 12.5
per cent of United States exports went to Latin America, while 11.7 per cent
of its imports came from that region.
By contrast, these same countries got
nearly 40 per cent of their imports from the United States and sent the United
States 30 per cent of their exports.
Another important change affecting our trading relationship is also
occurring —
a shift in Latin American development strategy from import
substitution to export promotion.
In the past, Latin America threw up tariff
barriers against imports of certain products to protect infant industries.
In
many instances, high cost and inefficient industries were created behind
these walls.
However, this process is now at an end and attention turns to
the export of manufactured goods as an important next step in economic
growth and development.
Naturally, labor-intensive industries, in which
developing countries have a competitive advantage, have received first attention.
For example, textile imports to the United States from Mexico, Peru,
El Salvador, Nicaragua, Brazil and Haiti, and shoe imports from Brazil
and Argentina have increased significantly in recent years.
The new Latin
American strategy of export promotion depends, of course, on the willingness
of other nations to import these products.
The House of Representatives has passed, and the Senate Finance Committee
has now reported out a bill for the Trade Reform Act.
The House version in
cludes authority for the conduct of the next round of trade negotiations.
One
of its sections also allows for the removal of tariffs on most manufactured
goods from the lesser developed countries.
textiles and footwear would not be included.
Some sensitive items, such as
In any event, conference will
probably be necessary to resolve differences when the Senate acts on the
Committee1s recommendations.
The Latin American countries are very interested
in the progress of this legislation and clearly want a preference for their
manufactured goods.
Some of them have expressed interest in a special U.S.
preference arrangement for them.
I already have mentioned the energy problem and suggested that the supply
of other critical raw materials such as bauxite, which we get from Jamaica
and Surinam, could conceivably come into question.
From Mexico we get strontium
flourine and cadmium; from Peru copper, tellurium, silver and bismuth; from
Bolivia tin and antimony, and from Venezuela iron ore as well as petroleum.
In upcoming negotiations the Latin Americans may very well link assured access
to petroleum and the other raw materials with our willingness to permit the
entry of their manufactured goods into our markets.
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6
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Let me briefly touch on the question of U.S. private investment in
Latin America.
In 1973, the book value of holdings was $18.5 million.
Much of it is concentrated in specific countries and economic sectors.
Four countries —
Venezuela, Brazil, Mexico and Argentina —
more than 50 per cent of the total.
accounted for
Overall, the manufacturing sector in
1973 accounted for 35 per cent of total U.S. investment in the region,
compared to 29 per cent in 1966.
In Mexico and Brazil, this sectoral
concentration is particularly high, reaching 70 per cent.
In present circumstances of radical change, there are many possibilities
for the disruption of regular patterns of trade and investment.
of international liquidity has come again to the fore.
The question
How will the industrial
ized oil user countries and, for that matter, non-OPEC developing countries,
find the additional money needed to pay their high oil bills?
oil-producing countries use the additional resources they gain?
How will the
These two
questions are circular ones, of course; and in some part at least, the answers
are becoming apparent.
The oil producers are conservative and cautious investors.
For the most part, they have limited themselves to short-term deposits and
government or government-guaranteed securities in the United States and in
Western Europe.
They have, however, made important equity investments such
as Krupp and Damlier Benz in Europe and some minor purchases in the United
States.
They have also established funds for financing development in the
poorer countries of the world.
Since January,
oil producing countries have
loaned the international development banks (IBRD, IDB, ADB) more than $1.1 billion,
all of it on nearly commercial terms.
These are matters which naturally pose a challenge for the Bank
in the future, and the Bank is already beginning to focus on them.
Latin America, which is developing rapidly, still needs the catalytic
push of the Bank and it will continue to need it in the future.
As a
whole, Latin America*s growth in statistical terms has been amazing,
thanks to the performance of such key countries as Brazil.
At the Bank we take pride in having been so closely allied to that
effort.
Since the Bank made its first loan for a water supply project in
Arequipa, Peru, back in February 1961, it has approved more than $6.4
billion in some 750 loans, of both a hard and a soft nature, to support
the region’s economic and social growth.
Its membership has increased to
24 countries with the addition of three newly emerging independent countries
of the Caribbean —
1972, of Canada.
Barbados, Jamaica and Trinidad and Tobago —
and, in
We now look to Western Europe and Japan for new inputs of
financial resources to supplement what has been provided by the United States
and Canada.
Next week, in fact, I will travel to Madrid to participate in
ceremonies providing for Bank membership of 12 countries of Western Europe and
Japan.
Hopefully, the necessary legislative actions will be taken to permit
seating of these countries by 1976.
At the same time, the United States has
indicated its desire to continue its present level of support.
Total resources of the Bank now amount to more than $10.3 billion, thanks
to the timely support the Bank has received in replenishing its resources from
its own membership, with the primary contributor being the United States, as
well as from here-to-fore non-member countries in Europe and Japan, who have
given the Bank access to their capital markets.
With the capital market condi
tions prevailing in the world today, that support has become difficult to ob
tain at what we consider reasonable rates.
In the future we will need to exert
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8
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our utmost efforts to ensure that we have a pipeline of resources that
will enable us to fill the role assigned to us of acting as a development
bridge for the region.
A brief analysis shows that in 13 years of lending to both the public
and private sectors in Latin America, the Bank has financed in the critically
important field of agriculture the improvement of almost 7.5 million acres
of land and has ultimately authorized approximately 1 million loans to small
and intermediate farmers, including scores of rural cooperatives, for a
total of more than $1 billion dollars through intermediate lending agencies.
In the field of transportation and communication, the Bank has financed
the construction or improvement of nearly 12,000 miles of road networks, more
than 1,500 miles of gas pipelines, the modernization of 8 major ports and the
installation of telecommunications systems in 7 countries.
In the electric power field, Bank loans have helped to install electric
plants with a total capacity of 2.7 million kilowatts, to construct more than
15,000 miles of transmission and distribution lines and to improve electrical
services in 460 communities.
Bank financing is helping to build or improve more than 70 large
industrial plants —
of which 47 are now in operation.
Likewise, Bank credits
channelled to small- and medium-size private entrepreneurs in Latin America
through the region’s development banks are helping to construct an additional
5,100 smaller private industrial enterprises.
Our financing of water supply and sewage systems has benefited urban
and rural areas with a population of approximately 55 million people.
More
than 900,000 students are benefiting from the Bank’s operations in advanced,
vocational and technical education.
iff
- 9 -
In export financing, the Bank has authorized some $100 million
to help finance intraregional exports of capital goods.
And, in the
field of preinvestment, 240 studies have been financed directly by the
Bank and another 360 through the resources lent by the Bank to various
national planning agencies.
I have sought to indicate in these remarks that Latin America is
making extraordinary progress in development, thanks substantially to its
own efforts, but also to the catalytic support which the region has re
ceived from such agencies as the Inter—American Bank.
I have also sought
to point out the strong interdependence that exists between Latin America
and the United States, brought home to us so starkly by the energy situation
in which we find ourselves.
In closing, I would like to indicate how important we at the Bank and in
the United States’ Government view the support which you, the public, give
to the Inter—American Development Bank.
In the years ahead, the programs of
the Bank will require even further support from the business community and
from civic organizations
3-S w e l l
as
from ou r
e lecte d
repre
sentatives.
I shall be pleased to attempt to answer any questions you may have.
Thank you for your attention.
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Number of Pages Removed: 2
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Title:
CBS Morning News re: Gold
Date:
1974-12-10
Journal:
Volume:
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202-964-2615
Press inquiries:
WASHINGTON, D.C. 20220
December 1
SUMMARY OF LENDING ACTIVITY
NOVEMBER 25 - DECEMBER 6, 1974
Federal Financing Bank lending activity for the period
November 25 through December 6 was as follows:
■
-- On November 25, the Bank closed a $4 million, 17-year
loan at 8.55% to Riverton Properties, Inc., a "new community"
in New York. This loan, which is guaranteed by the Department
of Housing and Urban Development, is part of an $11 million
commitment to purchase notes from Riverton.
-- On November 26, the Bank purchased $500 million of
5-year Certificates of Beneficial Ownership from the Farmers
Home Administration at an interest rate of 7.95% on an annual
basi's.
-- In the last two weeks, Amtrak, the National Railroad
Passenger Corporation, has made two drawings against the $100
million commitment signed October 11, 1974. Amtrak borrowed
$1 million at an interest rate of 8.167% on November 27, and
$16 million on December 6 at 8.004%.
-- On November 28, the Bank purchased $75 million of 91-day
notes from the Tennessee Valley Authority at 7.84%.
-- On December 3, the Bank made a $100 million 91-day loan
to the Student Loan Marketing Association (Sallie Mae) to re
fund a maturing $125 million note held by the FFB. The interest
rate on this loan is 8.03%.
-- On December 4, Jack F. Bennett, President of the Federal
Financing Bank, signed a Supplemental Loan Commitment Agreement
with the Rural Electrification Administration, Department of
Agriculture. The new agreement increases the FFB’s commitment
to REA from $1.5 billion to $3.5 billion. Under the agreement,
loans will be made to rural electrification and telephone
systems for periods up to 34 years. REA will guarantee the
loans and act as agent for the Federal Financing Bank. The
rate of interest on each drawdown will be determined by the
federal Financing Bank at the time of the advance.
Federal Financing Bank loans outstanding presently total
approximately $4.2 billion. Unfilled commitments total $3.9
billion.
!
DepartmentofthefREASURY
[SHINGTQNÌ D.C. 20220
T E L E P H O N E W 04-2Û41
December il. 1974
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES ACTION UNDER
THE ANTIDUMPING ACT
Assistant Secretary of the Treasury, David R. Macdonald,
announced today a tentative determination to modify the
dumping finding on tuners (of the type used in consumer
electronic products) from Japan with respect to Matsushita
Electric Industrial Company, Ltd. and Matsushita Electric
Trading Company, Ltd. of Japan. Notice of this decision
will be published in the Federal Register of December 12,
1974.
The Federal Register notice reads in part:
Sales of tuners (of the type used in
consumer electronic products) by
Matsushita Electric Industrial
Company, Ltd. and Matsushita Electric
Trading Company, Ltd., since December
1970 have been at not less than fair
value, and assurances have been
given that future sales of such tuners
to the United States will not be made
at less than fair value.
Accordingly, notice is hereby given
that the Department of the Treasury
intends to modify the finding of
dumping with respect to tuners...
from Japan to exclude the tuners
produced and sold by Matsushita
Electric Industrial Co., Ltd. and
Matsushita Electric Trading Co.,
Ltd., both of Osaka, Japan, from
the finding.
(OVER)
-2
Interested persons will be given an opportunity to
present oral and written views on this decision before
Treasury takes final action.
During the period of January 1974 through July 1974,
imports of tuners from Japan were valued at roughly
$6 million.
#
#
#
i
E X E C U T I V E O F F I C E OF T H E P R E S I D E N T
COUNCIL ON WAGE AND PRICE STABILITY
726 J A C K S O N P L A C E , N.W.
W AS H IN GTO N, D.C . 20506
FOR IMMEDIATE RELEASE
December 6, 1974
For information call
(202) 456-6757
THE COUNCIL ON WAGE AND PRICE STABILITY MEETS
The Council on Wage and Price S t a b i l i t y met th is morning
to be brought up to date on Council s t a f f a c t i v i t i e s , meet the
newly appointed A ss is ta n t D irectors and General Counsel and
discuss the fu tu re actions o f the Council s t a f f .
The Council also approved the recommendations contained 1n
the attached Council s t a f f report on Shelf Inventory Repricing
practices.
Attachment
CWPS-14
E X E C U T I V E O F F I C E OF T H E P R E S I D E N T
COUNCIL ON WAGE AND PRICE STABILITY
/r
3
5
726 J A C K S O N P L A C E , N.W.
W A S H I N G T O N , D .C .
FOR IMMEDIATE RELEASE
F r i d a y , December 6 , 1974
20506
F o r in fo rm a tio n c a ll
(202) 456-6757
STAFF REPORT ON THE SHELF INVENTORY REPRICING HEARING
HELD BY THE COUNCIL ON WAGE AND PRICE S T A B ILIT Y AND
THE O F F IC E OF CONSUMER AFFAIRS
On November 1 3 , the Council on Wage and P ric e S t a b i l i t y and
the O f f i c e o f Consumer A f f a i r s held a p u b lic hearing on the Issue
o f r e p r ic in g o f s h e lf in v e n to ry in r e t a i l s to r e s . Th is re p o rt
summarizes the major po ints made during the hearing and in o th e r
in fo rm a tio n submitted f o r the re c o rd . The r e p o r t also presents
the recommendations o f the Council s t a f f and the O f f i c e o f Consumer
A f f a i r s on t h i s is s u e .
BACKGROUND
The r e p r ic in g o f s h e l f in v e n to ry is a common business p ra c tic e
used when r e t a i l e r s are n o t i f i e d o f p ric e increases by s u p p lie r s .
Th is p r a c tic e has received a g re a t deal o f recent a tt e n t i o n since
r i s i n g costs in t h i s present period o f i n f l a t i o n have caused p ric e
changes to occur much more fr e q u e n tly than in the p a s t. As a r e s u l t ,
two o r more prices may appear on the same item .
S h e lf in v e n to ry r e p r ic in g is a major i r r i t a n t to consumers and
has caused widespread d i s s a t i s f a c t i o n and anger. Both the Council
and the O f f i c e o f Consumer A f f a i r s have received hundreds o f l e t t e r s
and telephone c a l l s complaining about the p r a c t ic e . Many other^
consumers have voiced t h e i r o b je c tio n s to the P re sid e n t and t h e i r
r e p re s e n ta tiv e s in Congress.
CWPS-14
2
Consumers, not a lto g e th e r c o r r e c t l y , regard the marking o f
s u c c e ss ive ly higher prices on a package as prima f a c ie evidence
o f p r o f i t e e r i n g not j u s t i f i e d by c o s ts . The Council on Wage and
P r ic e S t a b i l i t y and the O f f i c e o f Consumer A f f a i r s (OCA) recognize
t h a t p o lic ie s to e lim in a te the r e p r ic in g o f s h e lf in v e n to ry deal
w ith symptoms o f i n f l a t i o n and not w ith causes. N e v e r th e le s s , i t
can be v a lu a b le to r e li e v e symptoms, w h ile pursuing more fundamental
p o lic ie s to f i g h t i n f l a t i o n .
A number o f major food chains have adopted a p o lic y o f no
upward s h e l f r e p r i c i n g . Safeway was the f i r s t major supermarket
chain to do so in J u l y and several others have follow e d s u i t in
recent months. Many others have n o t , however. Many b i l l s have
been introduced in to the Congress to p r o h i b i t the r e p r ic in g o f
s h e l f in v e n to r y in r e t a i l s to r e s . Several lo cal governments have
passed ordinances to the same e f f e c t , in c lu d in g two v e ry la rg e ones
(Nassau C o u n ty, New Y o r k , and Dade C ou nty, F l o r i d a ) .
The Council and OCA held the p u b lic hearing on November 13 to
in v e s t ig a te the b e n e fits o f adopting such a p o lic y and the reasons
why i t has not been adopted more w id e ly . Witnesses were heard from
r e t a i l food and r e t a i l hardware i n d u s t r i e s , consumer o r g a n iz a tio n s
and local governments (see attached witness l i s t ) . A l l three o f
the r e t a i l food chains th a t t e s t i f i e d have adopted a p o lic y o f not
r e p r ic in g s h e l f in v e n to r y . However, the testim ony presented was
balanced in t h a t both the pros and cons o f adopting a no r e p r ic in g
p o lic y were discussed f u l l y .
MAJOR FINDINGS
1.
There was a general consensus t h a t the p ra c tic e o f r e p r ic in g
s h e l f in v e n to ry is a major consumer i r r i t a n t and takes i t t o l l
p s y c h o lo g ic a lly . Consumers do not understand the economics
o f the p r a c tic e and view i t as a way to reap u n f a i r , easy
p r o f i t s a t t h e i r expense. Reasonably s o , a consumer fe e ls
p e rs o n a lly abused wheh he o r she is forced to buy an item
th a t has been r e p r ic e d , p a r t i c u l a r l y when the d i f f e r e n t prices
are stamped side by side or on top o f each o t h e r . The firm s
which have adopted a no r e p r ic in g p o lic y have done so in response
to consumer com plain ts.
2.
There are a number o f b e n e fits which can be de rived from
adopting a no r e p r ic in g p o l i c y , as reported by the va riou s
w itn es se s.
3
Consumer re a c tio n to t h i s p o lic y where i t has been
implemented has been v e ry strong and fa v o r a b le .
S h e lf stocks o f merchandise w i l l be f r e s h e r . Under
the no r e p r ic in g p o l i c y , r e t a i l stores must r o ta te
merchandise more f r e q u e n tly so th a t the o l d e r , low erpriced product is moved to the f r o n t o f the s h e l f .
Net savings o f la b o r can be r e a li z e d from t h i s p o l i c y .
Two o f the three r e t a i l food chains (Acme and F in a s t )
reported th a t the la b o r saved in not remarking prices
o f merchandise a lre a d y on the shelves exceeds the e x tra
la b o r used f o r the more fre q u e n t r o t a t io n o f s h e lf s to c k .
Consumers are a le r te d when a p ric e is increased and can
buy a d d itio n a l q u a n titie s a t the lower p r ic e .
3.
A t the same tim e , there are a number o f disadvantages o f a
no r e p r ic in g p o lic y which were c ite d a t the h e a ring.
.
Adoption o f the p o lic y caused la b o r and op era tion al
problems in a chieving f u l l s h e lf stocking and proper
product r o t a t i o n .
Problems were also encountered in m aintaining accurate
r e t a i l p r i c i n g . Under a no r e p r ic in g p o l i c y , there
may be two o r more d i f f e r e n t prices on the same items
stocked on the s h e lv e s , and v e r i f i c a t i o n is o fte n
necessary to determine the c o rre c t pric e a t checkout
c ou nte rs.
O th e r problems have been encountered w ith m aintaining
u n i t p r ic in g and w ith p re -p ric e d products d e liv e re d
d i r e c t l y to r e t a i l stores by s u p p lie r s .
Some in v e n to ry a p p re c ia tio n f o r s h e lf stock is l o s t ,
which reduces revenues. One r e t a i l food chain (Pathmark)
reported th a t the adoption o f the no r e p r ic in g p o lic y
reduced revenues by 0.3% o f s a l e s , which represented
more than o n e -h a lf o f the f i r m 's ra te o f net re tu rn
r e a li z e d in 1973 .
4.
Evidence was presented th a t p o lic ie s a g a in s t r e p r ic in g would
be im pra ctic al f o r r e t a i l stores such as hardware stores
whose in v e n to ry tu rn o ve r is much lower than th a t o f la rge
food s to r e s .
In t h i s con n e c tion , the s e ll in g p ric e o f
merchandise r e f l e c t s more than costs o f goods purchased.
4
I t a ls o r e f l e c t s o u tla y s f o r wages, r e n t s , t a x e s , u t i l i t i e s
and i n t e r e s t , a l l o f which can be s ub je c t to s u b s ta n tia l
increases during the s h e lf l i f e o f low tu rn o ve r durable
merchandise.
5.
Serious doubt was expressed t h a t there are any real savings
to consumers under a no r e p r ic in g p o l i c y . The revenues l o s t
from not r e p r ic in g s h e lf in v e n to ry w i l l be made up by oth er
changes in r e t a i l p r ic in g p o lic ie s in order to m aintain
normal gross m argins. However, to the e x te n t t h a t la bo r
savings are r e a l i z e d , some permanent reduction in prices can
re s u lt.
6.
R e presenta tives o f food r e t a i l e r s , consumer o r g a n iz a t io n s ,
and one r e p r e s e n ta tiv e o f a la rg e c i t y government cautioned
th a t present p o lic ie s a g a in s t r e p r ic in g should s t i l l be
regarded as e x p e rim e n ta l. There has not been enough experience
to produce fir m evidence on cost savings and consumer response.
C e rta in problems re q u ire f u r t h e r w ork, such as the best way to
d is p la y m u ltip le u n i t prices on sh e lve s .
7.
The m a jo r ity o f witnesses recommended a g a in s t the adoption o f
Federal or local l e g i s l a t i o n . They b e lie ved t h a t v o lu n ta r y
a c tio n by r e t a i l e r s in response to consumer pressure is the
best approach. Federal or local l e g i s l a t i o n could create
in e q u itie s among r e t a i l e r s , endanger the use o f u n i t p r ic in g
and cause severe a d m in is tr a tiv e problems w ith ve ry minimal
s a v in g s , i f a n y, to the consumer.
POSSIBLE ALTERNATIVE SOLUTIONS
R e c e n tly , food chains such as A&P, Kroger and G i a n t , who have
continued to re p ric e s h e lf i n v e n t o r y , have announced a ctions th a t
appear to be o ffe r e d as a l t e r n a t i v e s o lu tio n s to the s h e lf r e p r ic in g
problem. A key element in the A&P a c tio n is an e a r ly warning system
f o r p ric e increases whereby shoppers are informed through a weekly
l i s t or s h e lf tags th a t the prices o f c e r ta in items are due to go
up. Th is w i l l enable the consumer to buy a d d itio n a l q u a n titie s a t
the old p r i c e . While r e p r ic in g o f s h e lf in v e n to ry can s t i l l occur
w ith t h i s a l t e r n a t i v e p o l i c y , the consumer does know the increase
is coming and t h i s knowledge could reduce the i r r i t a t i n g impact o f
purchasing a repric e d item . A&P has been jo in e d by Kroger and G ia n t
in fr e e z in g prices o f c e r ta in non- p e rish a b le ite m s , in c lu d in g house
brands, which also allows the shopper to know w ith c e r t a i n t y th a t he
o r she may purchase these items a t a s ta b le p ric e f o r a s p e c ifie d
period o f tim e.
E X E C U T I V E O F F I C E OF T H E P R E S I D E N T
COUNCIL ON WAGE AND PRICE STABILITY
726 J A C K S O N P L A C E , N.W.
W A S H I N G T O N , D .C .
20506
ATTACHMENT 1
WITNESS L IS T FOR HEARING ON SHELF INVENTORY REPRICING PRACTICES
John Whitney
P r e s id e n t, Pathmark Stores
E l l e n Zawel
P r e s id e n t, Natio nal Consumers Congress
E l i n o r Guggenheimer
Commissioner, Department o f Consumer A f f a i r s
New York C i t y , New York
Pe te r McGoldrick
P r e s id e n t, Acme Markets
Alan Dimond
A s s is ta n t County A tto r n e y
Dade C ou nty, F lo r id a
M ilto n Segel
Vice P r e s id e n t, F i r s t National Stores In c .
Sheldon I . London
D i r e c t o r , Government R e la tio n s
National R e ta il Hardware A s s o c ia tio n
Karen Wouters
P u b lis h e r , Grocery Guide and Consumer
A f f a i r s Committee, Americans f o r
Democratic A c tio n
b
RECOMMENDATIONS
1.
Since the bulk o f the evidence suggests t h a t p o lic ie s a g a in s t
the r e p r ic in g o f s h e l f in v e n to ry in la rge food stores reduce
consumer i r r i t a t i o n , lower la b o r c o s t s , and promote the proper
r o t a t io n o f s to c k , we s tr o n g ly urge those food chains th a t
have not a lre a d y done so to adopt p o lic ie s a g a in s t r e p r ic in g
or to adopt a l t e r n a t i v e p o lic ie s to accomplish the same e f f e c t .
2.
Since p o lic ie s a g a in s t r e p r ic in g are s t i l l in an experimental
phase, we do not advocate the passage o f Federal l e g i s l a t i o n
o r o f new local ordinances to make such p o lic ie s mandatory.
Wider adoption o f these p o lic ie s o r a l t e r n a t i v e p o lic ie s on a
v o lu n ta r y basis would make such l e g i s l a t i o n unnecessary.
Where sweeping lo c al ordinances a lrea dy e x i s t , we recommend
t h a t they be re vis e d to exclude branches o f r e t a i l i n g w ith low
tu rn o v e r o f in v e n to r y .
Attachment
CWPS-14
DepartmentoftheTREASUIlY
jSlINGTON,
O.C. 2022Ö
TELEPHONE W04-2041
¿. 't y j ^ Y /e
^ 1974
7. 3 C V
/f .
T ende
0(
¡mH*
High|i
A/?/
December f|
k the
F ed eral Re
<L
RANGE OF 1 '
^
r
A.
1,915,000)
Low I,i
Averiyi
Tenders at the low price were allotted
63%.
TOTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philadelphia
Cleveland
Ri chmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTALS
Applied For
Accepted
$
&
23,180,000
3,239,085,000
27,615,000
30,790,000
12,915,000
8,270,000
194,195,000
48,020,000
13,495,000
8,305,000
18,210,000
123,555,000
$3,747,635,000
y
This is on a bank-discount basis.
y
Includes $50,550,000
9,180,000
1,827,185,000
7,615,000
19,150,000
9,595,000
8,270,000
52,395,000
22,020,000
9,995,000
4,305,000
3,210,000
27,155,000
$2,000,075,000
The equivalent coupon“issue yield is 7.07%.
noncompetitive tenders accepted at the average price.
Départi.
fcHINGim
Mi
FOR RELEASE
December ll\ 1974
6:30 P.M.
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $ 2 . 0 billion of 52-week Treasury bills to be dated
December 17, 1974, and to mature December 16, 1975, were opened at the
Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
High
Low
Average
-
93.379
93.248
93.301
(Excepting 2 tenders totaling $1,915,000)
Equivalent annual rate
Equivalent annual rate
Equivalent annual rate
Tenders at the low price were allotted
6.548%
6.678%
6.625%
1/
68%.
TOTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philadelphia
Cleveland
Ri chmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTALS
Applied For
Accepted
$
$
23,180,000
3,239,085,000
27,615,000
30,790,000
12,915,000
8,270,000
194,195,000
48,020,000
13,495,000
8,305,000
18,210,000
123,555,000
$3,747,635,000
Cy This is on a bank-discount basis.
§/ Includes $50,550,000
9,180,000
1,827,185,000
7,615,000
19,150,000
9,595,000
8,270,000
52,395,000
22,020,000
9,995,000
4,305,000
3,210,000
27,155,000
$2,000,075,000
u
The equivalent coupon-issue yield is 7.07%
noncompetitive tenders accepted at the average price
SHINGTON, D.C. 20220
T E L E P H O N E W 04-2Û41
FOR IMMEDIATE RELEASE
STATEMENT BY THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
DECEMBER 11, 1974, 2:00 P.M. EST
It is a pleasure to be here today to discuss the issues
facing the securities industry and the government as we
consider the transition
rates.
from fixed to competitive brokerage
Our capital market system, commanding the confidence
of investors by providing access to market information,
investment advice and liquidity is crucial to the ability
of American industry to raise investment capital.
An important part of
a strong securities market is
its pricing structure for brokerage firms.
A properly
designed, price competitive environment for securities
transactions will help restore investor confidence in our
markets and raise the level of both investor and issuer
participation.
Artificial rates charged to the investing
public --rates which do not reflect a firm’s actual costs
and demand for its services -- can only act to divert needed
public equity investment away from our securities markets
to less favored investment options.
We have learned from
our experience with other regulated industries that imposed
fixed rates over time engender inefficient industry operations,
2
force the consumer to pay more than he should, and consequently
act to the long-term detriment of both investors and financial
intermediaries, as well as to our whole economy.
Indeed,
there is no public policy in the economic area
stronger than the policy in favor of price competition.
Deviations from such a policy, as Secretary Simon has noted
in commenting upon the regulatory structure in the transporta
tion area, are highly suspect and strongly disfavored.
Our
position on the negotiated rate question is consistent
with this overriding national policy.
We believe that competitive commission rates will
benefit both the financial community and the investing public
by permitting the market to establish the cost of securities
transactions, thus avoiding the need to pursue the long
administrative process now required to adjust rates to the
reality of costs.
In the long term we expect that competitive
rates will prove beneficial for all parties involved.
At the same time, all of us recognize the need to
permit the securities industry to adjust to rate competition
in an orderly manner.
In our opinion the Commission has
recognized this need by providing for a gradual transition
to a competitive
rate structure over the past three years.
The Commission announced on September 11, 1973 that it would
require the unfixing of commission rates on May 1, 1975, if
I Co
3
the exchanges did not voluntarily adopt rules achieving that
result before that date.
Thus, the industry has already
had over a year in which to prepare for the final transition
to fully competitive rates.
Nevertheless, in adopting such a policy and deciding
on the proper timing, it is important to consider several
major problems.
First, whether commission rate competition will drive many
firms -- especially the small regionals -- out of business.
Apart from the undesirability per se of creating such hardship,
the loss of such firms would deny the marketplace the diversity
of investment opinion which such firms (and their customers)
provide and would impair the existing distribution system
for new issues.
Second, whether due to legal problems posed if
fiduciaries use the commission mechanism to pay for non
brokerage services such as research, competitive rates will
drive many institution-oriented firms out of this business.
The loss of such firms would lessen both the quantity and
quality of information available to investors.
Third, whether the existence of our exchanges, and
the auction markets they provide, will be jeopardized by
competitive rates (especially intramember rates) since under
such a system many firms will no
longer find it necessary
or desirable to retain exchange membership.
With a decline
of exchange membership, specialists and floor brokers
4
which provide services to the auction market will reduce
these services or leave the market entirely, causing the
collapse of our auction market system.
These concerns must be considered and reviewed as
the Commission determines the manner and extent to which
competitive rates will be implemented.
We would be most
concerned if competitive rates would have the effect of
eroding the network
of small retail firms.
By bringing
to the marketplace a diversity of investment opinion, such
firms add substantially to the liquidity of the market.
Moreover, this same access to individual investors is also
an important element of the new issue underwriting and
distribution process.
Especially with respect to under
writings of securities of small and medium-sized issuers,
the regional firm provides a natural adjunct to the money
center investment bankers.
In this regard, we must ask why competitive public
rates would harm the small retail firm.
Many contend that
few economies of scale in retail brokerage exist and that
the large wire houses, with their multiplicity of branch
operations and their heavy investment in data processing, must
support a heavy overhead burden.
If this is the case, it
would only be the small regional firm which was grossly
inefficient, thus requiring an artificially high profit
margin, that would be threatened by competitive rates.
We certainly are not aware of such inefficiency or of con
cessions of artificially wide margins.
Accordingly, it
5
would not appear that size alone is the determining factor
when considering the risks posed by competitive rates.
Further, as part of the inquiry into whether firms
will be able to survive under competitive public rates,
it is important to consider the small institutionally-oriented
firm.
These firms have developed because many institutional
investors have been attracted to their specialized,
indepth research -- services which are especially helpful in
identifying investment candidates among small and medium sized
companies.
As such, these research firms serve as an important adjunct
to the inhouse research activities of institutional money
managers and provide such managers with broader access to
market information and to
opinions.
a diversity of investment
As I said earlier, I think such diversity is
an important factor in insuring a liquid market.
Under a competitive rate structure, it would appear
that the small research firm may be at a cost disadvantage
vis-a-vis the large broker under a system which combines the
charges for research and brokerage in the common rate.
may well be volume related economies in research.
There
Overhead
primarily personnel -- is high, and the large firm is advantaged
by being able to spread such costs over a great volume of
transactions, substantially reducing the unit cost.
For
the firm lacking substantial volume, unit costs are high.
However,
as noted above institutional investors may be willing to pay
higher prices
for specialized research services.
6
Under a competitive rate system, it is clear that
the small research firm has two options.
It can
charge a commission rate for the brokerage/research
package higher than the rates charged by a firm offering
only brokerage or a firm large enough to realize substantial
volume related economies; or it can charge a "competitive”
brokerage fee and bill separately for its research services.
(MORE)
H 7^
7
As reflected in the testimony at the Commission’s
October 29 hearing, it appears that there is little support -either among institutional investors or brokers -- for the
latter approach.
Paying up in ’’hard dollars” would force
institutions to evaluate with more precision the actual
pecuniary benefit outside research provides.
Moreover, and
more importantly, the way most current money management
arrangements are structured, such hard dollar payments
would come out of the institution’s management fee, while
soft dollar, commission-related payments are in effect
paid by the beneficiary.
On the other hand, as the Commission is well aware,
preservation -- even temporarily -- of the soft dollar
payment system in a competitive rate environment is complicated
by legal uncertainties as to the authority of fiduciaries to
pay a commission rate higher than the lowest possible
"brokerage only” rate, irrespective of whether other services
are provided.
Most fiduciaries have indicated that -- for
reasons of caution -- they will select their brokers by
commission price alone.
If this in fact occurs, an important
segment of the industry may well be driven out of business.
In the long run, we believe the efficiencies of resource
allocation associated with hard dollar payments should determine
whether we move in that direction.
However, we believe it
would be unwise to force.such a radical change as part of
8
a largely unrelated reform.
We recognize that the
valuable resources of this part of the industry now depend on
the availability of soft dollar payments and accordingly,
believe it important that institutions still have the
opportunity to pay for research with commission dollars so
as to maximize the revenue available for research service.
With this goal in mind we support attempts to eliminate
uncertainty under state and federal fiduciary laws as to the
right of fiduciaries to purchase research and other services
with commission dollars.
It should be made clear that a
fiduciary may properly pay more for brokerage services if,
in his good faith judgment, the related services provided
for the benefit of his client's account justify such a
payment.
At the same time, these protections should be
tailored so that fiduciaries cannot charge a large number
of accounts when only a few of the accounts actually benefit
from the research provided.
If legislation addressing this and similar questions
is not enacted before May 1, 1975, implementation of
competitive rates as scheduled may create legal uncertainties
concerning the fiduciary's ability to pay for research with
soft dollars.
The Commission c an a l l e v i a t e
these uncertainties,
i n some m e a s u r e , by moving d e c i s i v e l y t o i s s u e i t s own
s t a t e m e n t on t h i s m a t t e r .
Yet, in the absence of l e g i s l a t i o n the courts
9
may well become the final arbiters of the legal issues
raised by soft dollar payments.
Another important consideration in moving to competitive
rates is whether it will cause the collapse of our auction
markets.
We must ask whether the introduction of competitive
rates (particularly competitive intramember rates) prior to
the implementation of the national market system could erode
and destroy the auction market system of exchanges by
diverting away a significant volume of orders.
If this is
so, it may be that the specialist would not have a sufficient
flow of orders to make his service profitable and he thus
would leave the exchange, further contributing to its demise.
As a practical matter, we believe limit orders will
continue to be placed with exchange specialists for execution,
enhancing the depth of exchange markets and thus attracting
additional brokers.
Furthermore, with competitive public
rates, there would appear to be less incentive for institutional
investors to channel their business to the third market and
other exchanges to save commission dollars.
As such, the
elimination of fixed commissions could increase the volume of
transactions on the primary exchanges and, thus, assure the
ability of specialists to contribute to the maintenance of
a stable market.
Although we have seen no evidence that a
significant volume of orders would be diverted from the major
10
exchanges, it may be that some steps should be taken to p r e s e r v e
the flow of orders, pending the establishment of a national
market system.
In addition, competitive rates may lead to the demise
of some exchanges whose viability depends solely upon the
existence of fixed rates (either public or intramember) on
the major exchanges.
However, we must ask whether the demise
of such a system would reflect the fact that firms and
investors are able, with competitive rates, to execute their
transactions in listed securities more efficiently without
having to engage in complex multifirm deals to avoid artifi
cially high fixed rates.
If so, the public interest would
best be served by not preserving such a system.
Instead, regional securities exchanges should provide
services which cannot be obtained on other exchanges, or
which are not competitively available on those exchanges.
A very important service of the regional exchange is to
provide a market for the securities of small and regional
companies whose securities could not profitably be traded on
a larger exchange.
The more regional exchanges that provide
these services, the less strain on NYSE specialists and
other major exchange traders to handle these issues on terms
which might not be profitable.
11
In short, a fixed rate system cannot be justified
simply because it supports an existing exchange operation.
If firms find it unprofitable to maintain membership on an
exchange under competitive rates, it may mean that such an
exchange is not providing the type of auction market which
can assure the member firm the best possible price for the
security he trades on behalf of his client.
The firm survives
because it can offer its clients access to the best price.
An exchange survives only when it provides such access.
At the same time, we recognize that the intra
member rate question presents a variety of issues not faced
with respect to public rates.
Because of the internal
nature of these activities, the national policy in favor
of price competititon may not weigh as heavily here as it does
in the public rate area.
We have heard concerns about price
discrimination, about confusion and conflict concerning the
role of floor brokers and specialists arising from a change
in intramember rate policies.
Accordingly, we will be giving
these issues further study, and we urge the Commission to
move with great care on the question of intramember rates.
Conclusion
In conclusion, I would like to reaffirm the Department’s
support for a smooth transition to a system of competitive
commission rates, which we believe will benefit investors,
the financial community and, our capital markets.
12
While we believe that the introduction of competitive
rates prior to the establishment of the proposed national
market system would not cause unfairness or disorderliness
on exchanges, we recognize that the stakes are high and
uncertainties exist.
In the event that competitive rates
threaten the fairness or orderliness of our exchanges in
the interim before a national market system is in place,
we believe that the Commission possesses the discretionary
power to take such action as it deems necessary and
appropriate to remedy the situation and we would urge that
it do so.
Often in formulating public policy, we hear
that this may not be the right time.
It just may be
that no time is a good time to implement controversial
change.
However, certainty with respect to timing is
important to the securities industry as well as every
other industry and establishing a date now does provide
such certainty.
However, in making the final determination
as to whether May 1, 1975 is the proper time to implement
a competitive rate system, the Commission should carefully
consider the state of the economy, the condition of our
capital markets, the financial condition of the securities
industry, the stability of the existing market system pending
establishment of the national market system.
These factors
13
fi
have been addressed in the last few weeks and must be
examined closely as the Commission moves toward implementa
tion.
They are very important and will be critical in
assessing the appropriateness of the May 1, 1975, date.
Our goal remains the same.
What we must do now is to
concentrate on the problems that have been identified in
order to smooth the transition phase.
o 0 o
Department of
imctìim n
SHINGTON,
D Cr. inno
2022Q
theTREASURY
tfiepuhmi:\W04-2041
A / n x ondi
TELEPHONE
FOR IMMEDIATE RELEASE
l|
UL.
DECEMBER 13, 1974
APPLICATION OF THE CLASS LIFE ASSET DEPRECIATION RANGE
______SYSTEM (ADR) TO DEPRECIABLE REAL PROPERTY_______
The Treasury Department announced today that the asset
guideline classes and periods for depreciable real property
in Revenue Procedure 72-10 (which are the same as the
guideline classes and lives in Revenue Procedure 62-21 as
in effect on December 31, 1970) will be included without
substantive change in a forthcoming update of Revenue
Procedure 72-10 to reflect supplements which appear elsewhere.
The forthcoming Revenue Procedure will clarify the status
under the Class Life Asset Depreciation Range System (ADR)
of real property placed in service after December 31, 1973.
The asset guideline classes and periods in effect for
buildings and depreciable land improvements placed in
service prior to January 1, 1974, will remain in effect for
such property placed in service after December 31, 1973.
The Treasury Department also called to the attention of
taxpayers that H. R. 17488 reported by the Committee on
Ways and Means on November 27, 1974, would, if enacted into
law, modify the requirement in section 109(e) of the Revenue
Act of 1971 that taxpayers electing the ADR system for
machinery and equipment must include in that election
depreciable real property of the same vintage. The modification
would apply to real property placed in service after
December 31, 1973.
oOo
WS-180
D e p a rtm e n to fth e T R EA S U R Y
KINGTON. D.C. 20220
T E L E P H O N E W 04-2041
D e c e m b e r 13,
FOR I M M E D I A T E R E L E A S E
1974
SCHEDULE FOR TREASURY'S REGULAR WEEKLY
B I L L A U C T I O N S D U R I N G T HE H O L I D A Y S E A S O N
The T r e a s u r y ' s last two r e g u l a r w e e k l y bil l a u c t i o n s
scheduled for this y e a r w i l l be h e l d on Friday,
and Friday,
D e c e m b e r 27,
Announcements
the 13th,
December
r a t h e r tha n on the usual Monday.
i n v i t i n g te n d e r s w i l l be m a d e on Friday,
and Friday,
the 20th.
The p a y m e n t and d e l i v e r y
day for t he b i lls wil l be T h u r s d a y as usual.
20
Department of the J l f U S U R Y A
ASHINGTON, D.C. 20220
T E L E P H O N E W 0 4 |0 4 i
December 13, 1974
for i m m e d i a t e r e l e a s e
TREASURY1S 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 $4,600,000,000 , or
thereabouts, to be issued
December 26, 1974,
as follows:
91-day bills (to maturity date) in the amount of $2,600,000,000» or
thereabouts, representing an additional amount of bills dated
and to mature
March 27, 1975
September 26, 1974,
(CUSIP No. 912793 WB8 )» originally issued in
the amount of $1,800,305,000, the additional and original bills to be freely
interchangeable.
182-day bills, for $2,000,000,000, or thereabouts, to be dated
and to mature
June 26, 1975
December 26, 1974,
(CUSIP No. 912793 WQ5 ).
The bills will be issued for cash and in exchange for Treasury bills maturing
December 26, 1974,
outstanding in the amount of $ 4,601,080,00(1 of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,799,600,000
These accounts may exchange bills they hold for the bills now being offered at
the average prices of accepted tenders.
The bills will be issued on a discount basis under competitive and nonIcompetitive bidding, 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 (maturity value), and in
jbook-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
lone-thirty p.m., Eastern
Standard time, Friday, December 20, 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
P e expressed 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 whole or in part, and his action in any such respect shall be final.
Subject
to these reservations, noncompetitive tenders for each issue for $200,000 or less
without stated price from any one bidder will be 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 December 26, 1974,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing
ment.
December 26, 1974.
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 noticed
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
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Transcript
Number of Pages Removed: 3
Author(s):
Title:
"All Things Considered" Interview with Harry Ellis
Date:
1974-12-05
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
WITHHOLDING OF APPRAISEMENT ON
WELT WORK SHOES FROM ROMANIA
Assistant Secretary of the Treasury, David R. Macdonald,
announced today a withholding of appraisement on welt work
shoes from Romania pending a determination as to whether
they are being sold at less than fair value within the
meaning of the Antidumping Act, 1921, as amended.
This decision will appear in the Federal Register
of December 16, 1974.
Under the Antidumping Act, the Secretary of the
Treasury is required to withhold appraisement whenever
he has reasonable cause to believe or suspect that
sales at less than fair value may be taking place.
A final Treasury decision in this investigation
will be made within three months. Appraisement will
be withheld for a period not to exceed six months from
the date of publication of the "Withholding of Appraise
ment Notice" in the Federal Register.
Under the Antidumping Act, a determination of sales
in the United States at less than fair value requires
that the case be referred to the Tariff Commission,
which would consider whether an American industry was
being injured. Both sales at less than fair value and
injury must be shown to justify a finding of dumping
under the law. Upon a finding of dumping, a special
duty is assessed.
During the period of November 1, 1973 through
May 31, 1974, imports of welt work shoes from Romania
were valued at roughly $6.7 million.
D e c e m b e r 13. 1974
REMARKS OF THE HONORABLE FR ED E R IC W. HICKMAN
ASSISTANT SECRETARY OF THE TREASURY FO R TAX PO LICY
B E FO R E THE
NATIONAL TAX ASSOCIATION - TAX INSTITUTE OF AMERICA
67th A nnual C o n feren ce on T axation
St. L o u is, M iss o u ri
W ednesday, O c to b e r 16, 1974
and
as p re s e n te d by R o b e rt J . P a tr ic k , J r . , In te rn a tio n a l Tax C ounsel
B E FO R E THE
NATIONAL FOREIGN TRADE COUNCIL
New Y ork, New Y ork
N o v em b er 19, 1974
E lim in a tio n of U. S. W ithholding on D ividends
and I n te re s t P a id to F o re ig n In v e s to rs
The su b je c t I w ish to d isc u ss w ith you is U nited S tates w ithholding
taxes on dividends and i n te r e s t paid to fo re ig n in v e s to rs .
U nder p r e s e n t law , and su b je c t to n u m ero u s e x cep tio n s, a 30 p e r
cent w ithholding tax is im p o sed on the g r o s s am ount of dividends and
in te r e s t p aid to fo re ig n in v e s to rs .
The T r e a s u r y D e p a rtm e n t and the A d m in is tra tio n b e liev e th a t the
existing w ithholding ta x e s on the dividends and in te r e s t p ay m en ts by
United S ta te s p e rs o n s to n o n -re s id e n t a lie n s and fo re ig n c o rp o ra tio n s
should be e lim in a te d and i t should be done now. E lim in a tio n of w ith
holding tax on in v e stm e n t in co m e is d e s ira b le b e c a u se :
1. R em oval of th e tax w ill in c r e a s e in v e s tm e n t by fo re ig n e rs
in th e U nited S ta te s. It w ill m ak e in v estin g m o re p ro fita b le and
le s s d iffic u lt fo r in v e s to rs , and it w ill m ake it e a s ie r fo r U. S.
com panies to se e k funds in in te rn a tio n a l c a p ita l m a rk e ts .
2. It should im p ro v e the re la tiv e a ttra c tiv e n e s s of long te r m
s e c u ritie s and re d u c e the p r e s e n t im b a la n c e fav o rin g s h o r t te r m
s e c u ritie s and bank d e p o sits (w hich a re p re s e n tly ex em p t fro m
w ithholding). A c c e ss to fo re ig n funds w ill p e rm it the U nited S tates
to continue its ro le as a c a p ita l e x p o rte r, including the rec y c lin g
of funds flowing into and out of th e oil p roducing c o u n trie s .
WS-181
-
2
-
3. It w ill put the U nited S ta te s fin an c ia l com m unity back in th e
c e n te r of in te rn a tio n a l c a p ita l m a rk e ts and help th em to re g a in c o m
p e titiv e gro u n d lo s t.
4. It is c o n s is te n t w ith p rin c ip le s of tax equity and o th e r ru le s
re la tiv e to s o u rc e of in co m e.
5. It w ill e lim in a te w hat h as b eco m e a com plex patchw ork of
le g is la tiv e and tr e a ty p ro v isio n s and sim p lify one a re a of tax law .
The b a sic point is th a t the m any b e n e fits outw eigh th e sm a ll
rev e n u e lo s s .
The D e s ira b ility of In c re a s e d F o re ig n In v e stm e n t
In c re a s e d in v e stm e n t by fo re ig n e rs in th e U nited S ta te s is d e s i r
able an y tim e.
P ro p o s a ls to rem o v e im p e d im e n ts to in v e stm e n t
have b een u n d e r c o n sid e ra tio n fo r s e v e r a l y e a r s . In c re a s e d in v e s t
m e n t is e sp e c ia lly im p o rta n t today when we a r e fac ed w ith a m a s s iv e
outflow of funds to pay fo r v e ry ex p en siv e o il. Im p o rts of p e tro le u m
and p e tro le u m p ro d u c ts have b een running at an annual r a te about
$20 b illio n h ig h e r th an the r a te a y e a r e a r l i e r . O v e r th e f i r s t nine
m o n th s of th is y e a r we have had a s u b s ta n tia l tra d e d e fic it.
To the ex ten t th a t d o lla rs piling up a b ro a d a re u se d to buy goods
and s e r v ic e s p ro d u ced in the U nited S ta te s - - s a y , w heat fo r exam ple
--w e w ill be ex p o rtin g r e a l w ealth fro m o u r econom y and a re the
p o o r e r fo r it. F u r th e r , a s d o lla rs sim p ly p ile up ab ro a d , th e ir
value fa lls in the fo re ig n exchange m a rk e t. The in c re a s e d n u m b er
of d o lla rs th a t we m u st then pay fo r im p o rts b eco m es a p o ten tial
c la im on an even l a r g e r p a r t of o u r n atio n al p ro d u ctio n . F o r e x a m
p le, as the value of the U. S. d o lla r fa lls e v e ry M e rc e d e s we buy
g iv e s so m e G e rm a n a p o te n tia l c la im on m o re b u sh e ls of o u r w heat
th an p re v io u s ly . B e ca u se of th e in c r e a s e d c o s t of e n erg y im p o rtin g ,
d o lla rs w ill tend to p ile up a b ro a d f a s t e r than they can be re c o v e re d
th ro u g h o u r e x p o rts .
In c o n tra s t, d o lla rs w hich a re re in v e s te d in th e U nited S tates
sta y h e re and do not involve exp o rtin g o u r re a l w ealth - - a t l e a s t
in itia lly .
F u r th e r m o r e , in c r e a s e d fo re ig n in v e s tm e n t h e re k eep s
d o lla rs fro m sim p ly piling up a b ro a d and h elp s f o re s ta ll f u r th e r d e
v alu atio n .
We have fo r y e a r s p re a c h e d to o th e r c o u n trie s the value to th em
of fo re ig n in v e stm e n t in th e ir c o u n trie s . It is tim e we took o u r own
p re a c h in g s e rio u s ly .
M uch has b een sa id re c e n tly about a c a p ita l
s h o rta g e in the U nited S ta te s. I sh a ll not a rg u e th a t q u estio n h e re .
-3-
no
But I w ill o b se rv e th a t so m e im p ro v e m e n t in the ra te of sav in g s
and in v e s tm e n t se e m s c le a r ly d e s ira b le .
We have fa lle n behind
v irtu a lly e v e ry o th e r m a jo r in d u s tria l n ation in th is re s p e c t. We
stan d w ith the United K ingdom a t the bottom of the la d d e r in the
ra tio of sav in g s and in v e stm e n t to g r o s s n atio n al p ro d u ct.
In v e stm e n t in the U nited S ta te s by fo re ig n e rs is not quite so
b e n e fic ia l as in v e stm e n t by o u r own c itiz e n s , b e c a u se the a fte r - ta x
e a rn in g s on fo re ig n in v e s tm e n t a re m o re lik e ly to le a v e the econom y
and be lo s t to u s . N o n e th eless, the e x iste n c e of the additional i n
v e stm e n t h e re is d e s ira b le fo r th re e re a s o n s : F i r s t , it in c r e a s e s
the p ro d u c tiv ity of la b o r w ithin o u r c o u n try , w hich in tu rn in c r e a s e s
the r e a l in co m e of o u r r e s id e n ts . T hat in c re a s e d p ro d u ctiv ity is
c r itic a l in the b a ttle a g a in st in fla tio n . Second, as c a p ita l in v e stm e n t
lo ca te d h e re w e a rs out and d e p re c ia te s , it ten d s to be re p la c e d by
m a c h in e ry and equipm ent and o th e r a s s e ts th a t a r e m an u fa ctu red
h e re ; and th a t too h elp s o u r econom y. T h ird , as the in v e stm e n t
g e n e ra te s in co m e h e re , we g e t the tax on th a t in co m e.
T his h a p
pens w h e th er the c o rp o ra tio n is d ire c tly c o n tro lle d by fo re ig n e rs ,
o r the c o rp o ra tio n sim p ly s e lls bonds and o th e r s e c u r itie s to f o r
eign in v e s to rs .
It is tr u e th a t the a f te r -ta x p ro fits on in v e stm e n ts by f o r
e ig n e rs m ay eventually be rem o v e d fro m o u r econom y and r e p a t r i
ated by the fo re ig n in v e s to r. B ut re p a tria tio n of incom e is u su a lly
only p a r tia l. And even w hen it is to ta l, i t u su a lly o c c u rs g r a d u
ally o v e r tim e .
In su m , we a re m uch b e tte r off to have the in v e stm e n t, even if
the a f te r -ta x p ro fits a re u ltim a te ly lo s t to u s, than not to have the
in v e stm e n t at a ll.
S e v e ra l a sp e c ts of the c u r r e n t situ a tio n d e s e rv e sp e c ia l a tte n
tio n . As we pay g re a tly in c re a s e d oil p ric e s to OPEC p ro d u c e rs ,
if th ey in tu rn re in v e s t a s u b s ta n tia l p o rtio n of th a t m oney in th e
U nited S ta te s, th e n et r e s u lt w ithin o u r econom y is lik e ly to be a
sig n ific a n t red u c tio n in a g g re g a te d o m estic consum ption and a s ig n i
fica n t in c r e a s e in a g g re g a te in v e stm e n t. Som e o b s e r v e r s , who a re
w o rrie d about o u r low sa v in g s and in v e stm e n t ra tio , think th a t
s ilv e r lining could be n e a rly as la rg e as the cloud its e lf.
R ejuvenation of U. S. Role in In te rn a tio n a l C a p ital M a rk ets
A seco n d d e s ire d r e s u lt of e lim in atin g w ithholding is th a t it w ill
tend to r e s to r e the A m e ric a n fin an c ia l com m unity to a c e n tra l p o s i
tion in the in te rn a tio n a l c a p ita l m a rk e t. T hat alone would not j u s t i
fy th e le g is la tiv e change we se ek , but it is s u re ly a happy sid e effect
at a tim e w hen the s ta te of the econom y and the d is a r r a y in o u r c a p i
ta l m a rk e ts th re a te n s the b a sic h e alth of o u r in v e s tm e n t in d u stry .
-4W h atev er c r itic is m s m ay be le v e le d a g a in st th a t in d u stry , its e x
p e r tis e and going c o n c e rn value c o n stitu te a sig n ific a n t n atio n al a s s e t
th a t b e n e fits us a ll.
In re c e n t y e a r s , the "ac tio n " in in te rn a tio n a l
financing h as b een c o n c e n tra te d ab ro ad , p r im a r ily in London. The
dom inance of London is no doubt re la te d to the fa c t th a t o u r tax
tr e a ty w ith the U nited K ingdom , lik e th a t w ith s e v e r a l o th e r m a jo r
c o u n trie s , e lim in a te s w ithholding on i n te r e s t p ay m en ts and has only
a 5 p e rc e n t w ithholding r a te fo r in d iv id u als on d ire c t in v e stm e n t.
T hus, the n o rm a l s tre n g th of the London fin a n c ia l h o u ses is enhanced
by the fa c t th a t fo r c itiz e n s of o th e r c o u n trie s i t is often le s s e x p en
siv e to in v e s t in the U nited S ta te s in d ire c tly th ro u g h London than
d ire c tly th ro u g h New York o r C hicago o r San F ra n c is c o . Some of
th e U. S. tax sa v in g s th a t r e s u lt a r e no doubt ille g a l u n d e r o u r U. S.
la w s, but th ey a r e e s s e n tia lly u n p o liceab le, at le a s t u n d e r ex istin g
p ro c e d u re s . A s im ila r s itu a tio n e x is ts w ith r e s p e c t to G erm an y .
T h e re is the f u r th e r fa c t th a t th e re h as grow n up in E u ro p e --q u ite
a p a r t fro m tr e a ty r u l e s - - an in te rn a tio n a l E urobond m a rk e t in w hich
debt in fa c t tr a d e s f re e of w ithholding.
E nhanced M a rk e t E fficien cy
The s ta tu to ry e lim in a tio n of w ithholding w ill g re a tly in c re a s e
m a rk e t effic ie n cy fo r in v e stm e n ts in the United S ta te s.
The p r e s e n t s y s te m n a rro w s and in h ib its th e m a rk e t in w hich
w ould-be fo re ig n in v e s to rs o p e ra te .
It p la c e s a g r e a t p re m iu m
on co m p lex ity and d isc o u ra g e s fro m in v estin g at all th o se who a re
un able o r unw illing to deal w ith th o se c o m p le x itie s.
T h e re have b een so m any w a y s - - a ll c o m p lic a te d --a ro u n d the
U nited S ta te s w ithholding tax th a t the tax has b een honored m o re
in the b re a c h than in the o b se rv a n c e .
The p rin c ip a l ex cep tio n s to th e tax lie in o u r s e r i e s of b ila te r a l
ta x t r e a ti e s .
O ur p olicy h as b een to se e k t r e a tie s w hich e lim in a te
w ithholding on in te r e s t p a y m e n ts. We have su ch tr e a tie s w ith 12
c o u n trie s and red u c ed r a te s w ith o th e rs .
S im ila rly , we have a
n u m b e r of tr e a tie s w hich re d u c e dividend r a te s to 15 p e rc e n t in the
c a s e of p o rtfo lio in v e s tm e n t and 5 p e rc e n t in the c a s e of d ire c t
in v e s tm e n t by a c o rp o ra te in v e s to r.
T h ese r a te s follow the OECD
m o d el.
T h ese b ila te r a l conventions in effe ct c re a te a s e r i e s of
in d iv id u al in co m e tax codes u n d e r w hich in co m e flow s in c u r le s s tax
w hen p a s s e d th ro u g h a c irc u ito u s ro u te of in te rlo c k in g tax tr e a tie s .
In o rd in a te tim e and e ffo rt is sp e n t by tax p la n n e rs in rou tin g t r a n s
a ctio n s and in v e s tm e n ts to o btain the m o st fav o ra b le a rra n g e m e n ts .
In so m e c a s e s , th is le a d s to the u se of no m in ees and co n cealed
o w n e rsh ip .
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tW
In su m , the tr e a ty netw ork a lre a d y s e r v e s to red u e e o r e lim i
nate w ithholding ink the c a s e of the bulk of in v e s tm e n ts which a re
actually in p la c e today. But it does so only at the p ric e of e x tre m e
com plexity.
Even m o re fu ndam entally, the tr e a ty exem p tio n s and re d u c tio n s
a re u n s a tis fa c to ry b e c a u se they depend on the id en tity of the h o ld er,
i. e . , they exem pt only re s id e n ts of the p a r tic u la r co u n try o r c o u n
tr ie s . T hat g re a tly r e s t r i c t s th e n e g o tiab ility of s e c u r itie s in the
in te rn a tio n a l c a p ita l m a rk e t and g re a tly n a rro w s the o p p o rtu n itie s
open to U.S. i s s u e r s a b ro ad .
In addition to re d u c tio n thro u g h tax t r e a ti e s , d o m estic l e g i s
lation has sin g led out c e rta in c a te g o rie s of in co m e o r of re c ip ie n ts
of incom e w h ere the p ay m en ts w ill be fre e of w ithholding ta x e s.
I n te r e s t on United S ta te s bank d e p o sits held by fo re ig n e rs has
tra d itio n a lly been fre e fro m United S ta te s w ithholding tax and a m e n d
m ents th a t would have b ro u g h t th e s e d e p o sits u n d er the w ithholding
ru les have tw ice been postponed by the C o n g re ss. The p re s e n t
exem ption undoubtedly c o n trib u te s to the p re s e n t flow of fo reig n
funds into bank d e p o sits r a th e r than lo n g e r te rm s e c u r itie s .
In so m e c a s e s , w ithholding h as been e lim in a te d b e c a u se it is
not p r a c tic a l as an a d m in is tra tiv e m a tte r to c o lle c t a tax . F o r
exam ple, th e re a r e v e ry d iffic u lt p ro b le m s in applying w ithholding
w here s e c u r itie s a re is s u e d at d isco u n t, and the econom ic b e n efit
is re a liz e d su b seq u en tly th ro u g h s a le to th ird p a r tie s . A ccordingly,
sh o rt te r m d isco u n t w as rem o v ed fro m w ithholding in 1971. S im i
la rly , c a p ita l g a in s ta x e s on U .S. in v e s tm e n t a s s e ts held by f o r
eig n e rs w e re e lim in a te d th ro u g h am en d m en ts to the Code in 1966.
O th e r exem ptions have been e sta b lis h e d on conceptual g ro u n d s.
Thus, U. S. co m p an ies having m o re than 80 p e rc e n t of th e ir g r o s s
incom e fro m fo reig n s o u rc e s a re not su b je c t to w ithholding tax on
dividends and i n te r e s t paid to fo reig n in v e s to rs . T his ru le w as the
b a sis of a m a jo r financing device during the p e rio d when d ire c t
in v estm en t re g u la tio n s re q u ire d th a t U. S. co m p an ies who w anted
to b o rro w fo r fo reig n in v e stm e n t had to do th a t b o rro w in g a b ro ad .
S ta tu to ry am en d m en ts tie d to the I n te re s t E q u alizatio n Tax
p e rm itte d the d ir e c t is s u a n c e by United S tates co m p an ies of debt
obligations f re e fro m U nited S tates w ithholding and e s ta te ta x e s.
T hese p o s s ib ilitie s fo r ra is in g c a p ita l a b ro a d a re fo re c lo se d today
following e x p ira tio n of the in v e stm e n t c o n tro l p ro g ra m s and changes
in ruling p olicy. T his le a v e s United S tates co m p an ies la rg e ly unable
to is s u e new s e c u r itie s in the in te rn a tio n a l s e c u r itie s m a rk e ts th a t
tra d e f re e of w ithholding and e s ta te ta x e s.
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6
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W ith r e s p e c t to th o se tra n s a c tio n s th a t have not b een d e te r r e d
by the w ithholding, the n et e ffe c t of th e v a rio u s s ta tu to ry and tr e a ty
ex em p tio n s has b een to lo w e r the effe ctiv e r a te of w ithholding tax
by 60 p e rc e n t.
F o r 1972, the to ta l w ithholding ta x e s c o lle c te d
w e re a p p ro x im a te ly 12 p e rc e n t of th e g r o s s p ay m en ts re p o rte d by
w ithholding
a g en ts,
d e sp ite a b a sic s ta tu to ry r a te of 30 p e rc e n t.
F u r th e r , the am ount of tax a ctu a lly c o lle c te d is v e ry s m a ll. In
1972, only $200 m illion* of w ithholding tax w as c o lle c te d of w hich
$20 m illio n is c le a rly id en tifia b le as w ithholding on in te r e s t.
T hus, the rev e n u e a sp e c ts of w ithholding a re not m a jo r and the
p rin c ip a l e ffe ct of th e w ithholding sy s te m is to e r e c t b a r r i e r s of
c o m p lica tio n and le g a le s e to d isc o u ra g e a ll b u t th e m o st s o p h is ti
c a te d fo re ig n in v e s to rs .
It is im p o s sib le to know ju s t how w ould-be in v e s to rs would
change th e ir b e h a v io r if we changed the r u le s . But we a r e p e rsu a d e d
th a t on b a la n c e o u r p r e s e n t s y s te m is fo o lish ly c o u n te r-p ro d u c tiv e
in denying to o u r econom y c a p ita l in v e stm e n t w hich we s o re ly need.
The Q uestion of uTax E quity" and "S o u rce of Incom e"
Som e sa y th a t th e p ro p o sa l to e lim in a te w ithholding v io la te s tax
equity. " T h at a s s e r tio n w as m ade, though not p r e s s e d , in th e re c e n t
W ays and M eans C o m m ittee s e s s io n s .
It is h a rd to se e w hat "eq u ity " is involved.
In any c a s e , th e re
does not a p p e a r to be a p ro b le m of equity as betw een in d iv id u a ls.
The only equity is s u e is one betw een c o u n trie s , n am ely, w hich
c o u n try equ itab ly has the rig h t to tax the incom e fro m c a p ita l. T axes
in th e l a s t a n a ly sis fall on people and m o st c o u n trie s tax th e ir r e s i
d ents o r r e s e r v e the rig h t to do so . T hus, an in dividual ow ner of
c a p ita l, in the v a s t m a jo rity of c a s e s , pays tax to so m e c o u n try .
W h eth er, and to w hat extent, Ja p an and F ra n c e tax th e ir c itiz e n s
on p a r tic u la r ite m s of in co m e is a m a tte r of su p re m e in d iffe re n c e
to v irtu a lly a ll A m e ric a n ta x p a y e rs , and it is d ifficu lt to b e liev e
th a t o u r c itiz e n s would p e rc e iv e in e q u itie s o r feel d is c rim in a te d
a g a in st by the p re s e n c e o r a b sen c e of tax on fo re ig n e rs .
Indeed,
th e tax s y s te m of m o st m a jo r in d u s tria l n atio n s w eigh m uch m o re
h eav ily on th e ir c itiz e n s than does o u rs .
* Including $30 m illio n re im b u rs e d by o th e rs (p rim a rily S w itz e r
land) fo r p r i o r y e a r s .
-7-
or
This is not to say that we are not concerned about tax evasion
by investors and Ishall have comments specifically on that question.
"But, " say some, "the dividends and interest must in equity
be taxed here because they have their 'source' or situs here."
That is a kind of metaphysical assertion with which it is hard to
deal rationally. It is a conclusion, really, rather than a reason.
Who can say where an intangible, which in truth has no location,
is located?
The real issue is pragmatic, namely, where do we
want to tax it?
The Code says that interest and dividends paid by U. S. cor
porations have their "source" in the U. S. But that is simply a
drafting technique to make it taxable here and not an expression
of some eternal principle.
Once we cease thinking in metaphysical abstractions and focus
on the practical problem we can note that not taxing that income
here is, in fact, totally consistent with our common law tradition
and with long-standing practice within the United States. Intangible
poss essions such as stocks and bonds have been treated by our states
as if they were located at the domicile or residence of their owner.
To be sure, that rule, too, is stated in metaphysical terms of
"situs" and the rule might well be otherwise. But the rule is not
otherwise. Thus, even the State of California, whose agressiveness
in such matters is unparalled does not seek to tax residents of
Missouri on dividends or interest paid by California companies nor
does it seek to assert an estate or inheritance tax on the stock
of California companies owned by Missouri decedents. There are
other examples that illustrate the arbitrary nature of source rules.
Since 1966, the situs of stocks and bonds for federal estate tax
purposes is the situs of the issuer, but prior to that date the situs
depended upon the nature of the security.
The point is that we
have used these rules to implement a result we wanted to reach
and we can change them as circumstances change.
Further, not taxing the dividend and interest income here is
quite consistent with the conclusions of international theoreticians.
The question of dividend and interest income was considered 50
years ago by a commission of experts established by the League
of Nations.
They concluded, back in 1923, that the right to tax
movable property should theoretically belong to the state of the
taxpayer's residence. But the theory was ignored for the simple
reason that the countries from which the dividends and interest were
paid did not wish to give up a convenient source of revenue.
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8
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In 1963, the Fiscal Committee of the O E C D reviewed the earlier
recommendations of the theorists and the existing tax conventions
that had been adopted in the interim by member countries and ob
served that:
"It would be more in keeping with the nature of dividends,
which are investment income (to tax them in the State of
residence), but it would be unrealistic to suppose there is
any prospect of its being agreed that all taxation of dividends
at the source should be relinquished. "
The Committee, therefore, suggested a compromise by providing
for taxation in the country of residence, but with the possibility
of a withholding tax at source, limited'to 15 percent or 5 percent.
A similar analysis was applied with respect to interest income.
The draft proposed a m a x i m u m rate of 10 percent in the source
country, stating:
"This rate may be considered a reasonable m aximum if
it is remembered that the State of source is already entitled
to tax profits or income produced on its territory by invest
ments financed out of borrowed capital. The two Contracting
States m a y agree through bilateral negotiations upon a lower
tax or even on exclusive taxation in the State of the recipient’s
residence. "
Keep in mind that we are not proposing that the U. S. give up
taking profits arising from business activities physically carried
on here. The United States collects regular income tax on enter
prises located here, regardless of who owns the enterprise. Thus,
there is no question of the enterprise escaping taxation.
As a practical matter, I have already noted that a number of
our major tax treaties have undone withholding on interest. But
none of our treaties completely eliminates the withholding on divi
dends. That is a topsy-turvy result. Where the enterprise itself
has been taxed, the shareholders, but not the bondholders, have
in effect been taxed. It would make more sense to impose with
holding tax on interest, where the recipient has borne no tax what
ever, than on dividends.
But perhaps that logical lapse is not
serious because the withholding tax on dividends canbe easily avoided
--at least on direct investment- - by simply adopting a non-dividend
policy and plowing back the profits. Upon the event of sale the pro
fits are realized as capital gain and under the Foreign Investors
Act of 1966 are not taxed at all to a foreign resident. Furthermore,
if the United States business is not separately incorporated, but
operates as a branch, its U. S. profits are taxed but the repatri
ation of its after-tax profits, comparable to dividends, is subject
to no withholding tax whatever.
-9Tax T re a ty N egotiations
T h e re is a le g itim a te c o n c e rn o v e r the e ffe ct of o u r u n ila te ra l
rem o v al of w ithholding ta x e s on tax tr e a ty n e g o tia tio n s.
The d e
velopm ent of a sy s te m of b ila te r a l tr e a tie s fo r avoidance of double
tax atio n led in the p a s t to the notion of re c ip ro c a l re d u c tio n s in
w ithholding tax r a te s . The new r e a litie s in th is c a s e a re re la tiv e ly
c le a r. F i r s t , developing c o u n trie s g e n e ra lly do not se e k to have
the United S tates re d u c e its w ithholding ta x e s on in v e stm e n t fro m
th e ir c o u n trie s and the U nited S ta te s has g e n e ra lly not sought in its
d isc u ssio n s w ith developing c o u n trie s to p e rs u a d e th em to red u c e
th e ir w ithholding and re v e n u e s to the advantage of th e U. S. T re a s u ry .
We now have tax conventions w ith the m a jo rity of developed
c o u n trie s . Indeed, v irtu a lly all of o u r tr e a tie s a re w ith th e s e c o u n
tr ie s and they r e s u lt in re d u c e d r a te s . T h e re a re two o b se rv a tio n s
that can be m ade c o n cern in g p o ss ib le re n e g o tia tio n s of th e s e tr e a ti e s .
F ir s t, in d ividual tr e a ty ite m s a r e n eg o tiated in the context of an
e n tire tr e a ty and "b a rg a in in g " is w ith r e s p e c t to a ll of th e a r tic le s .
F o r ex am ple, in 1966 we u n ila te ra lly re lin q u is h e d a c la im to tax
cap ital g a in s of fo re ig n in v e s to rs in m o st c a s e s , but we continue
to in clu d e a re c ip ro c a l c a p ita l g a in s ex clu sio n a r tic le in o u r re c e n t
tr e a tie s and re v is io n s .
Second, i t is open to q u estio n w h e th er d e
veloped c o u n trie s a re c o n c e rn e d w h e th e r we have high w ithholding
tax es ap p lica b le to th e ir re s id e n ts and w h e th e r we have any " l e v e r
age" by th re a te n in g a high w ithholding r a te .
It is q u estio n ab le
w h eth er any of the tra d itio n a l developed c o u n trie s a r e seeking m o re
fav o rab le fo re ig n in v e stm e n t o p p o rtu n itie s fo r th e ir in v e s to rs . The
expanding adoption of im p u ta tio n s y s te m s fo r the in te g ra tio n of c o r
p o rate and p e rs o n a l incom e ta x e s re fle c ts an in c re a s in g n a tio n a listic
tax p olicy sin c e individual s h a re h o ld e rs re c e iv e an im p u tatio n of
the c o rp o ra te tax only w ith r e s p e c t to d o m estic in v e stm e n t. U nder
all of th e s e c irc u m s ta n c e s , U nited S ta te s w ithholding r a te s a re of
lim ite d sig n ific a n c e in tr e a ty b a rg a in in g .
The w ithholding tax n egotiating is s u e betw een c o u n trie s th a t
provide tax c re d its to p re v e n t double ta x a tio n does p r e s e n t the q u e s
tion of w hich co u n try w ill re c e iv e the tax re v e n u e s, sin c e u n d e r
a c re d it sy s te m the w ithholding ta x e s w ill be c o lle c te d by the so u rc e
country and c re d ite d by the re s id e n c e c o u n try . We re c o g n iz e th a t
a p o rtio n of th e re v e n u e lo s s fro m u n ila te ra l re lin q u is h m e n t of w ith
holding w i l lr e s u l t in a t r a n s f e r to fo re ig n t r e a s u r i e s . E ven in th e s e
c a se s, b e n e fits w ill a c c ru e to fo re ig n in v e s to rs who m u st now cope
with p ro c e d u ra l fo rm a litie s to obtain tax c re d its o r who m ay not be
able to o b tain tax c re d its b e c a u se they a r e ex em p t in s titu tio n s u n d e r
th e ir lo c a l law s, as in the c a s e of c h a r itie s , o r have e x c e ss fo re ig n
tax c re d its and cannot o btain full c re d it fo r w ithholding ta x e s , as
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in the case of a withholding tax on gross payments of interest in
come received by a financial institution that has high borrowing
costs. The transfer of revenues to the foreign treasury does not
occur in the case of countries that relieve taxation by the exemption
method and the benefit will flow to the investor.
The principle of extending exemption or reduced rates of with
holding on investment income has been accepted throughout the histo
ry of our tax treaties. However, the tax treaty route is a slow
process for extending that result. While the United States has
renegotiated several existing treaties in recent years with developed
countries and has several other treaties pending or in advanced
stages of negotiations, only one new country, Trinidad and Tobago,
has been added to our list of treaty partners in the past ten years.
Tax Avoidance Problems
Treasury officials in some European countries have expressed
concern in recent years over tax avoidance by their residents in
vesting in the Eurobond market in which the securities are issued
in a manner which makes them free of withholding at the source.
They have suggested the desirability of imposing uniform withholding
taxes on securities issues, with some form of verification and refund
system. Some European capital importing countries, which do not
have withholding tax on interest today, have opposed this suggestion
and have pointed out that the imposition of a withholding tax at the
source at a 20 or 30 percent rate may make tax avoidance somewhat
more expensive, but will not deter avoidance for persons in higher
marginal income tax brackets. And, of course, for a number of
years we have exempted capital gains of foreign investors from
taxation, which for investors seeking capital appreciation is more
significant than a withholding tax on current income.
In some cases, the residence countries expressing a desire for
uniform withholding have been unable or unwilling to prevent whole
sale tax avoidance by their residents. Sometimes their domestic
secrecy laws severely limit their ability to audit the accounts of
their residents. W e are mindful of the problems raised by tax avoid
ance, but do not believe that itis necessary to structure our internal
tax system to make up for the inadequacies of individual countries
with respect to the taxation of their own citizens. Thus, we believe
it desirable to avoid cumbersome withholding and refund systems,
but we do support the concept of expanding the exchange of informa
tion to permit countries to have access to data they may require
for tax enforcement.
At the suggestion of the Treasury Department, the pending Ways
and Means Committee tax reform legislation which adopts rules for
elimination of withholding on dividends and interest contains a pro
vision that would permit the imposition of a withholding tax in the
-
11-
m
c a se of a c o u n try th a t re fu s e s to c o o p e ra te in id entifying re c ip ie n ts
of dividend and i n te r e s t p ay m en ts w h e re th e r e is b eliev e d to be a
su b sta n tia l p ro b le m of tax ev asio n .
W ays and M eans B ill
The W ays and M eans C o m m ittee in its b ro a d tax re fo rm b ill h as
a g re e d to e lim in a te w ithholding, but only fo r ’'p o rtfo lio " in v e stm e n t
as d istin g u ish ed fro m " d ire c t" in v e stm e n t. * T hose a re w ords of a r t
but th ey m ean d iffe re n t th in g s to d iffe re n t people. In g e n e ra l, the
te rm "p o rtfo lio " in v e stm e n t is u se d to d e s c rib e p a ssiv e in v e stm e n t,
and " d ir e c t" in v e stm e n t is u se d to d e s c rib e in v e stm e n ts in w hich the
in v e s to r a c q u ire s a c o n tro llin g i n te r e s t and in ten d s to tak e p a r t i n the
activ e m an a g em en t of the e n te r p r is e .
The c u r r e n t d ra ft of the H ouse b ill d efines d ire c t in v e stm e n t in
te r m s of fo re ig n c o n tro l of a U. S. c o rp o ra tio n . U nder the d ra ft
definition, a s h a re h o ld e r is a d ir e c t in v e s to r only if
- -th e in v e s to r owns 10 p e rc e n t o r m o re of voting pow er of the
c o rp o ra tio n , and
- - m o r e th an 50 p e rc e n t of the to ta l voting pow er of the c o rp o
ra tio n is fo reig n owned.
G iven the m agnitude of c u r r e n t im b a la n c e s , it is e sp e c ia lly d e
s ira b le to e n co u rag e fo reig n in v e stm e n t th a t w ill sta y h e re . A g r e a t
deal of p o rtfo lio in v e stm e n t is p e rm a n e n t in v e stm e n t, but the fa c t
re m a in s th a t d ire c t in v e stm e n t is m uch le s s m obile and m o re apt to
re m a in w ithin o u r econom y. T hus, we a re disap p o in ted a t the C o m
m itte e 's te n ta tiv e d e cisio n not to e lim in a te w ithholding on d ire c t i n
v estm e n t. We hope th a t th is m a tte r w ill be re c o n s id e re d . We a re
m indful of the p o litic a l fa c t th a t m en in the s t r e e t w o rry about f o r
e ig n e rs c o n tro llin g A m e ric a n b u sin e ss and a s s e ts . We rec o g n iz e
th at th is can be a le g itim a te c o n c e rn w h e re su ch m a tte r s as national
defense a r e involved.
E x istin g law s o r f u r th e r r e s tr ic tio n s , if r e
q u ired , can p ro te c t o u r n atio n al i n te r e s t.
The u se of the tax law s
is an in a p p ro p ria te and in e ffe ctiv e d e te r r e n t in th is re g a rd . As
noted, th e r e a re a lre a d y n u m ero u s w ays to avoid m any of o u r w ith
holding ta x e s . In g e n e ra l, we should be p le a se d w ith the p ro s p e c t
of ad d itio n al in v e stm e n t in the U nited S tates and we should re m e m b e r
th at o u r c itiz e n s and o u r g o v e rn m e n t have been a s s u rin g fo re ig n e rs
fo r y e a r s th a t A m e ric a n c a p ita l is g r e a t fo r them and th a t they
should w elcom e A m e ric a n in v e stm e n t in th e ir e co n o m ie s.
*Among th e se c tio n s of th is g e n e ra l re fo rm b ill th a t have b een i n c o r
p o ra te d in the E n erg y Tax and Individual R e lief A ct of 1974, is
the e lim in a tio n of w ithholding on p o rtfo lio in te r e s t.
-
12-
C o n clusion
The co n clu sio n is in e sc a p a b le : the ex istin g w ithholding tax s y s
te m is a c ra z y q u ilt. The p r e s e n t tr e a ty s y s te m of v ary in g r a te s of
w ithholding w ill in c re a s in g ly re q u ire m o re e la b o ra te en fo rc em e n t
p ro c e d u re s to v e rify th a t b e n efits flow only to tr e a ty re s id e n ts
- - p e rh a p s on a refund b a s is . D efinitions of a tr e a ty re s id e n t in the
c a s e of c o rp o ra te o w n e rs w ill g ro w m o re com plex.
It is tim e we ra tio n a liz e d the w ithholding s y s te m on p ra g m a tic
g ro u n d s. The rev e n u e it p ro d u ce s is not sig n ific a n t. The in v e stm e n ts
it d isc o u ra g e s we b e liev e a re m a jo r. If w e a re c o rr e c t, th e rev e n u es
fro m th a t in c re a s e d in v e stm e n t w ill m o re than o ffse t the rev e n u es
lo s t. It is in o u r n atio n al i n te r e s t to e lim in a te w ithholding. We should
do so and do so p ro m p tly .
0O0
Department o f
IsHINGTON, D C 2022Q
theJRUSURY
TELEPHONE W04-2041
U
December 13, 1974
FOR IMMEDIATE RELEASE
TREASURY TO ROLL OVER NOTES IN QUARTERLY CYCLE
The Treasury will refund $1.9 billion of notes held
by the public maturing December 31, 1974, by selling $2.0
billion of 2-year notes maturing December 31, 1976. Ad- j
ditional amounts of these notes may be issued at the
average price of accepted tenders to Government accounts
and to Federal Reserve Banks for themselves and as agents
of foreign and international monetary authorities.
The notes will be sold at auction, on a yield basis,
on Monday, December 23. Bidders must state the yield they
will accept on the basis of a percentage to two decimal
places. The coupon rate will be set, after the auction,
at 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. The minimum denomination of these
notes will be $5,000.
The payment date for the notes w i l l b e December 31,
1974. Payment m a y not b e ma d e b y credit to Treasury tax
and loan accounts.
This is the second rollover of notes in the quarterly
cycle of 2-year maturities started in 1972.
ft
X*
Department o f t h e T R [ A $ U R Y
RHINGTON,
D.C. 20220
TELEPHONE WQ4-2041
lOR IMMEDIATE RELEASE
December 13, 1974
TREASURY FINANCING
The Treasury will auction under competitive and noncompetitive bidding $2.0
J i l l i o n , or thereabouts of 2-year notes to raise cash for refunding $1.9 billion
[of notes held by the public maturing December 31, 1974. The coupon rate for the notes
[will be determined after tenders are allotted.
Additional amounts of the notes may
l e i s s u e d to Government accounts and to Federal Reserve Banks for themselves and as
Igents of foreign and international monetary authorities.
The notes to be issued will be Treasury Notes of Series K-1976 dated
■December 31, 1974, due December 31, 1976 (CUSIP No. 912827 EB4) with interest
■payable semiannually on June 30 and December 31. They will be issued in registered
land bearer form in denominations of $5,000, $10,000, $100,000 and $1,000,000,
land in book-entry form to designated bidders.
Delivery of bearer notes will be made
Ion or about January 6, 1975. A purchaser of bearer notes may elect to receive an
■interim certificate on December 31, which shall be a bearer security exchangeable
■at face value for Treasury Notes of Series K-1976 when available.
Tenders will be received up to 1:30 p.m., Eastern Standard time, Monday,
■December 23, at any Federal Reserve Bank or Branch and at the Bureau of the Public
■Debt, Washington, D. C. 20226; provided, however, that noncompetitive tenders will
■be considered timely received if they are mailed to any such agency under a postmark
■no later than Sunday, December 22.
. Each tender must be in the amount of $5,000
jor a multiple thereof, and all tenders must state the yield, if a competitive tender,
or the term "noncompetitive", if a noncompetitive tender. The notation TENDER FOR
TREASURY NOTES" should be printed at the bottom of envelopes in which tenders are
submitted.
I
■
Competitive tenders for the notes must be expressed in terms of annual yield in
■two decimal places, e.g., 7.75, and not in terms of a price.
Tenders at the lowest
■yields, and noncompetitive tenders, will be accepted to the extent required to
■attain the amount offered. After a determination is made as to which tenders are
■accepted, a coupon yield will be determined to the nearest l/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 allotted will be determined and each successful competitive
■bidder will pay the price corresponding to the yield he bid. Price calculations
■will be carried to three decimal places on the basis of price per hundred, e.g.,
■99.923, and the determinations of the Secretary of the Treasury shall be final,
tenders at a yield that will produce a price less than 99.501 will not be accepted.
The Secre tary of the Treasury expressly reserves the right to accept or reject any
P r all tenders, in whole or in part, including the right to accept more or less than th
■2.0 billion offered to the public, and his action in any such respect shall be final,
■abject to these reservations, noncompetitive tenders for $500,000 or less will be
(OVER)
-
2
-
accepted in full at the average price of accepted competitive tenders, which price
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 Govern
ment 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 and other
public funds, international organizations in which the United States holds membership,j
foreign central banks and foreign States, dealers who make primary markets in Govern
ment securities and report daily to the Federal Reserve Bank of New York their positioi
with respect to Government securities and borrowings thereon, Federal Reserve Banks, am
Government accounts.
Tenders from others must be accompanied by payment of 5 percent
of the face amount of securities applied for. However, bidders who submit checks in
payment on tenders submitted directly to a Federal Reserve Bank or the Treasury may
find it necessary to submit full payment for the securities with their tenders in
order to meet the time limits pertaining to checks as hereinafter set forth. Allotmen
notices will not be sent to bidders who submit noncompetitive tenders.
Payment for accepted tenders must be completed on or before Tuesday, December 31,
1974, at the Federal Reserve Bank or Branch or at the Bureau of the Public Debt in
cash, 5-7/8% Treasury Notes of Series F-1974, which will be accepted at par, in other |
funds immediately available to the Treasury by December 31, or by check drawn to the
order of the Federal Reserve Bank to which the tender is submitted, or the United
States Treasury if the tender is submitted to it, which must be received at such
bank or at the Treasury no later than:
(1) Friday, December 27, 1974, if the check
is drawn on a bank in the Federal Reserve District of the Bank to which the check is ,
submitted, or the Fifth Federal Reserve District in case of the Treasury, or (2) ues
December 24, 1974, if the check is drawn on a bank in another district.
Checks
j
received after the dates set forth in the preceding sentence will not be accepted un
they are payable at a Federal Reserve Bank. Where full payment is not completed on
time, the allotment will be canceled and the deposit with the tender up to 5 percent
of the amount of securities allotted will be subject to forfeiture to the Unite
Commercial banks are prohibited from making unsecured loans, or loans
collateralized in whole or in part by the securities bid for, to cover the deposi s
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 Standard time, Monday, December 23, 1974.
IfASH
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MSHINGTON. D.Ç. 20220
TELEPHONE W04-2041
DEPARTMENT OF THE TREASURY
STATEMENT OF
THE DEPUTY SECRETARY OF THE TREASURY
STEPHEN S. GARDNER
BEFORE THE
SENATE COMMITTEE ON GOVERNMENT OPERATIONS
TO R E V I E W S .4212 a nd S . 4130
D E C E M B E R 16, 1974
Mr. Chairman and Members of the Committee: I am
pleased to appear before you to discuss the important
subject of productivity. The Department of the Treasury
is vitally interested in improving the U. S. economy.
The Secretary of the Treasury is Chairman of the Economic
Policy Board which oversees the work of the current
National Commission on Productivity and Work Quality.
The Nation’s future economic performance will be directly
affected by productivity gains. The two bills being
reviewed here provide constructive suggestions for
meeting that goal.
Productivity is clearly a fundamental variable in
the U. S. economy, particularly at this difficult time.
Improved productivity would provide major anti-inflation
benefits which would result in rising standards of living
and more stable prices. Our international competitive
position depends upon maintaining positive long-term
trends in productivity. The preservation of the environ
ment and the efficient allocation of valuable human and
material resources is directly affected. In fact, the
entire industrial relations environment, including the
quality of work, will depend upon the success of programs
to stimulate national productivity.
The remarkable progress of the U. S. economy has
resulted from the productivity of a highly trained and
educated labor force, effective managerial leadership,
extensive capital investment and the application of new
technology. It is, therefore, disturbing to note that
the rate of productivity growth in the United States has
declined in recent years and that for over a decade U.S.
productivity improvement has ranked well below the results
reported in most other industrial nations. It is no
coincidence that the Nation's level of capital investment
has also been relatively low. Part of these unfavorable
comparisons may reflect cyclical conditions and the large
2
size of our mature economy which increasingly emphasizes
services and immediate consumption. But merely recognizing
the problem is an inadequate reaction. Programs to
stimulate productivity are badly needed. Therefore, we
commend the Committee for focusing national attention on
this crucial economic challenge.
Role of the Private and Public Sectors
The private sector of the U. S. economy has historically
been responsible for most of our gains in productivity.
Profit opportunities have motivated companies to invest
additional capital and to press for efficient production
and distribution procedures. Rising "real" earnings have
provided strong incentives for workers, who continuously
have moved into more productive jobs and occupations.
American families have emphasized increased educational
opportunities for their children to prepare them for these
better job opportunities. The rising standard of living
resulting from this combination of circumstances has been
a key factor in the economic success of America. Since
the actions of labor and management will continue to
largely determine productivity results, public and private
sector efforts should be coordinated. A major goal of
any governmental program should be to gain the support of
labor and management for cooperative efforts. But there
is also an important role for government programs:
1. The productivity of the entire economy could
be significantly improved by removing regulatory, legis
lative and administrative barriers to improving efficiency.
There are hundreds of specific governmental actions which
unnecessarily waste our valuable resources.
2. Government leadership can focus attention on
long-term goals and support experimental and demonstration
projects which in this burgeoning technological age are
too novel for private investment or even beyond the
capabilities of the private sector.
3. The government can increase the visibility of
productivity programs and coordinate efforts throughout
the private and public sectors.
3
4. The government can coordinate the efforts of
diverse educational and research institutions and the
activities of numerous State and local programs.
5. The government can develop comprehensive
statistical information and operate capital grant and
technical assistance programs.
For all of these reasons, the Administration supported
the creation of the National Commission on Productivity
(NCOP) in 1970. The performance of that Commission
during the first three years of its existence was
restricted by funding and organizational limitations and
chronic uncertainties about its future. As a result,
it has been difficult to develop a sustained work program.
Nevertheless, several important research and demonstration
projects are under way or have been completed. A summary
of current activities of the National Commission on
Productivity and Work Quality is attached for the record.
In August of this year the Congress acted to rejuvenate
the Commission by providing a budget of $2 million for
Fiscal Year 1975 and a broad mandate to stimulate
productivity throughout the public and private sectors of
the economy. A newly designated National Commission on
Productivity and Quality of Work met with the President
last Thursday and a diversified work schedule and specific
goals were discussed. We believe that this strengthened
organization can serve as a catalyst in coordinating
labor, management and governmental efforts to stimulate
productivity.
New Productivity Proposals
Many of the specific suggestions in the two Senate
bills under consideration in these hearings could make
significant contributions to the existing efforts of
labor and management groups, the efforts of diverse
government organizations and the revived National Commission
on Productivity and Quality of Work. The proposals for
establishing a national productivity center, setting up
a program of capital grants and technical assistance
delivered through existing educational and research institutions
and identifying a positive national policy for stimulating
productivity can all contribute to the national economic
goals. Each of these proposals should receive careful
consideration to see how they can be used to improve existing
4
activities. We see nothing inconsistent with these
ideas and the existing plans of the Commission. There
should also be efforts to aid private sector activities
whenever possible because most of the actual work must
be done by labor and management groups. Government
involvement is certainly desirable but its role will
be principally that of serving as a catalyst.
The Department of the Treasury particularly
supports the call for removing the legislative and regulatory
barriers which artifically restrict the efficient functioning
of the economy. The President has requested that a
National Commission on Regulatory Reform be created and we
strongly support this proposal and suggest it will be an
invaluable companion effort in the work of improving
productivity. This Nation's economic system and our
Government can no longer tolerate or condone waste and
inefficiency.
Summary
We commend the Committee for its efforts to focus
attention on the vital subject of productivity. While
there are numerous government agencies and programs that
are concerned about productivity problems, there is a
need to coordinate all of these efforts and we support
your suggestions for stimulating national productivity.
The future of the U. S. economy will be directly affected
by the success of these efforts. We urge that immediate
legislative action be undertaken to avoid the kinds of
delays and uncertainties that too often have existed
in the past.
o 0 o
ATTACHMENT:
SUMMARY OF CURRENT ACTIVITIES
OF THE
NATIONAL COMMISSION ON PRODUCTIVITY
AND WORK QUALITY
The efforts of the National Commission on Productivity
and Work Quality toward improving productivity fall
into four different catagories:
1.
Public Sector - including Federal, State and local
governments;
2.
Private Sector - food distribution, health care,
construction and transportation industries;
3.
Quality of Work - labor, management committees and
behavorial science; and
4.
Education.
PUBLIC SECTOR
In the public sector the NCOP and WQ has supported
and encouraged the efforts of the OMB, CSC, GAO to
measure and enhance Federal government productivity and
is also active in a variety of projects designed for
productivity improvement in state and local governments.
For Elected Officials - a guide entitled "So, Mr.
Mayor, You Want to Improve Productivity" has been published
and is the basis for a series of meetings with top elected
officials throughout the country. Similar publications
for city and county elected officials are in process, as
well as a booklet on productivity improvement in state
government for legislators.
For management - a program to launch twenty cities into
productivity improvement programs with development of
follow-up guidance during the initial months of effort.
- A series of 4 Productivity Workshops is planned
for state and local officials to facilitate the transfer
of improved methods between jurisdictions.
- Training materials, now scheduled for field testing
will, if successful, be provided for internal instruction in
the factors of productivity.
2
Incentives - a comprehensive report updating an earlier
survey of personnel incentives used by public administrators
is complete and scheduled for early publication. It is
hoped that awareness of existing programs will stimulate
further development of this topic.
Follow-ups of the successful Solid Waste and Police
productivity reports are planned with publication of actual
case histories of recorded improvements resulting from the
reports.
PRIVATE SECTOR
In the private sector the NCOP and WQ is concentrating
its activity in the fields of food distribution, health
care, construction and transportation.
In food distribution the following projects are in
progress:
- Work with CWPS to encourage backhaul through a
pamphlet on benefits and meetings with manufacturers, FTC
and distributors?
- Investigation of consolidated delivery systems
costs and benefits to participants (with Department of
Agriculture);
- Enlistment of industry and Department of Commerce
support for a study of costs and benefits of modularized
system;
Developing awareness of technological needs by
retailers through holding conferences at M.I.T., Michigan
and on the West Coast?
- Providing help to the industry in developing orderly
manpower adjustment programs.
In health care the following projects have been
undertaken to contribute to increased productivity:
- Over 100 practitioners indentified opportunities
to increase productivity throughout the industry?
3
- A nationwide education program on productivity
for hospital administrators;
- Development of a statewide productivity measure
ment system for national implementation;
Pooling of expertise of industry and health
leaders in one state to pursue health care productivity
improvement opportunities;
- Removal of IRS barriers to hospital employee
incentive programs;
Implementation of an in-hospital productivity
improvement program.
Problems of productivity in the construction industry
are being approached by:
- A conference held with leading labor/management
officials on common problems of productivity measurement;
A report on new labor management initiatives to
improve productivity.
- A labor/management subcommittee to deal with
improvements in collective bargaining, productivity, and
manpower issues.
In transportation the NCOP and WQ has identified
freight car utilization as a control issue in the fiscal
viability of a basic mode of transportation as well as
providing the increased service required by the American
economy.
Accordingly, work on the interchangeability of freight
cars has resulted in a "clearing house" experiment designed
to eliminate excessive movement of empty cars. If
successful, this experiment with 3 cooperating railroads,
could show substantial direct operating savings, reduced
capital investment and significantly better service to
shippers.
4
Another experiment, also in progress, is designed
to reduce shortages of steel mill gondola cars.
In this field of new technology, the NCOP and WQ is
encouraging railroad and automobile representatives to
confer and agree on common designs as new rail cars are
developed for shipment of autos.
Work is also under way on applications of both new
and existing equipment for integrated shipments in a
transcontinental intermodal food distribution service.
The dedicated train concept as the commission
applied it in the "Fresh-from-the-West" unit train
service is proving that refrigerator car cycle time can
be cut by 30% — the equivalent of 900 new cars or a
$40 million investment — with far better service to the
consumer.
QUALITY OF WORK
As a result of its Congressional mandate the NCOP
and WQ is developing material of practical help in the
establishment of labor/management committees.
A booklet "Labor-Management Productivity Committees
in American Industry" is being produced and material is
being obtained that will result in case studies of 8-10
public sector committees.
In the piant/community level the NCOP and WQ is
planning to hold five conferences in Illinois, Wisconsin
and New York (with FMCS), and a statewide labor/management
conference in Texas, with follow-up by State Institutes
of Labor Relations.
The results of these meetings will be consolidated into
a publication "Pointers for Labor-Management Committees"
which should go a long way in overcoming obstacles to the
formation of these committees throughout the Nation.
In the behavorial science field the Commission is
evaluating the impact which two types of increasingly
popular programs have on productivity.
A participatory incentive plan in a large corp oration
(DeSoto Paint Corporation).
-
Flexible working hours in a service industry (First
National Bank of Boston).
5
Work (in cooperation with DOL) is being done to
produce guides for the appropriate application of behavorial
science techniques and a report will be issued on manage
ment actions taken in response to attitude surveys of
7,500 workers in five federal agencies (with CSC).
EDU C A T I O N
To continue its efforts in technical education
the Commission is at work on a series of publications
that will be of value to those working on productivity
programs. These include such studies as:
-
"The Role of Productivity in Controlling Inflation".
Productivity commissions in other countries a comparison of objectives, programs and background.
Productivity trends and differences at the plant
level:
- Casebook on Company Productivity Programs
with Emphasis Upon How the Companies Got
Started
- Analysis of Factors Affecting Interplant
Differences in Productivity in Selected
Industries
"Public Attitudes on Work-Related Matters".
The Commission has completed 16 publications and has
filled a total of 227,000 requests for them. An additional
18 publications are in various stages of completion for
availability during FY 1975.
The Commission also works actively with other federal
agencies on the design and implementation of research
agencies.
The Public Awareness program, in cooperation
with the Advertising Council, Inc., launched in the
Fall of 1973, continues in operation.
Using the themes "Pride in Work" and "Productivity,
the Key to Your Future" it is estimated to have made
over 150 million contacts with the public. Materials
have been requested and used by over:
2,500 Radio Stations
600 Magazines
1.000 TV Stations
100,000 Trains and Buses
1.000 Newspapers
3,500 Billboards
Background conferences with business, economic
and labor writers and editors are being scheduled to
improve general understanding of productivity.
Department o f t h e T R E Â S lIR Y
lA M i'
ASHIN6T0N, n
D Cp 20220
"
T ELEP H O N E W04-2041
f l
***-
rT«
t 16, 1974
FOR RELEASE 6:30 P.M.
RESULTS <J
- 7. /
?.2
¿. ? / /
Tenders for $2.6bij
of 26-week Treasury billi
were opened at the Federi
RANGE OF ACCEPTED
COMPETITIVE BIDS:
I
maturj
bills
e 19, 1975
7. AST
quivalent
nnual Rate
Price
High
Low
Average
98.231
98.21:}
98.216
6.745%
6.901%
6.858%
¿ C v y '
i, 7 % 7
Tenders at the low
Tenders at the low
Applied For
Accepted
Boston
38, 595, 000
$
60, 385, 000 $
New York
3, 789, 045, 000 2,035, 535, 000
Philadelphia
36, 045, 000
64, 075, 000
Cleveland
55, 325, 000
89, 325, 000
Richmond
32, 435, 000
39, 505, 000
Atlanta
40, 020, 000
54, 155, 000
Chicago
118, 110, 000
314, 295, 000
St. Louis
29, 385, 000
49, 090, 000
Minneapolis
22, 700, 000
6, 650, 000
Kansas City
40, 490, 000
77, 310, 000
Dallas
26, 435 000
41, 465, 000
San Francisco
140, 995, 000
295, 885 ,000
TOTALS
1/
llotted 80%,
H o t t e d 92%.
DISTRICTS :
TOTAL TENDERS APPLIED F0
District
¡for $2.0 billion
mber 19, 1974,
s are as follows:
APF n e u
lui
Accepted
$
■ 450, 000
21, 750, 000 $
2, 950, 440, 000 1,623, 840, 000
18, 755, 000
12, 645, 000
30, 335, 000
30, 685, 000
20, 080, 000
19, 380, 000
15, 225, 000
18, 125, 000
181, 295, 000
117, 595, 000
24, 750, 000
27, 750, 000
12 130, 000
12, 130 000
45, 560 ,000
45 560, 000
18 490, 000
14, 490 ,000
72, 790 ,000
124 950, 000
$4, 897, 235, 000 $2,600, 020, 000a/ $3, 470 ,010, 000 $2,000, 190 ,000
a/ Includes $540,045,000 noncompetitive tenders accepted at average price,
b/ Includes $196,125,000 noncompetitive tenders accepted at average price.
1/ These rates are on a bank-discount basis.
The equivalent coupon-issue
yields are 7.29% for the 13-week bills, and 7.20% for the. 26-week bills.
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2.6 billion of 13-week Treasury bills and for $2.0 billion
of 26-week Treasury bills, both series to be issued on December 19, 1974,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
High
Low
Average
13-week bills
maturing
March 20, 1975
Price
Equivalent
Annual Rate
98.231
98.213
98.216
6.998%
7.069%
7.058%
26-week bills
maturing June 19, 1975
Equivalent
Annual Rate
Price
1/
96.590
96.511
96.533
.
6.745%
6.901%
6.858%
i/
Tenders at the low price for the 13-week bills were allotted 80%.
Tenders at the low price for the 26-week bills were allotted 92%.
TOTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Applied For
Accepted
Boston
$
60,385,000 $
38,595,000
New York
3,789,045,000 2,035,535,000
Philadelphia
36,045,000
64,075,000
Cleveland
55,325,000
89,325,000
Richmond
32,435,000
39,505,000
Atlanta
40,020,000
54,155,000
Chicago
118,110,000
314,295,000
St. Louis
29,385,000
49,090,000
Minneapolis
6,650,000
22,700,000
Kansas City
40,490,000
77,310,000
Dallas
26,435,000
41,465,000
San Francisco
295,885,000
140,995,000
TOTALS
Applied For
Accepted
11,450,000
$
21,750,000 $
2,950,440,000 1,623,840,000
12,645,000
18,755,000
30,335,000
30,685,000
19,380,000
20,080,000
15,225,000
18,125,000
117,595,000
181,295,000
24,750,000
27,750,000
12,130,000
12,130,000
45,560,000
45,560,000
14,490,000
18,490,000
72,790,000
124,950,000
$4,897,235,000 $2,600,020,000a/ $3,470,010,000 $2,000,190,000b/
a/ Includes $540,045,000 noncompetitive tenders accepted at average price,
b/ Includes $196,125,000 noncompetitive tenders accepted at average price.
JV These rates are on a bank-discount basis.
The equivalent coupon“ issue
yields are 7.29% for the 13-week bills, and 7.20% for the 26-week bills.
DepartmentoftheTREASURY
Kh INGTON. D C. 20220
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FOR RELEASE AT 10:00 A.M.
TUESDAY, DECEMBER 17, 1974
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
S E C R E T A R Y OF TH E T R E A S U R Y
B E F O R E THE
SENATE BUDGET COMMITTEE
DECEMBER 17, 1974
Mr. Chairman and Members of this Committee:
It is a pleasure to return before your Committee to
continue the hearings initiated in August. These are
important times for the Committee and for all of us. A
rate of inflation unprecedented in our peacetime history
is now coupled with a decline in economic activity and
rising unemployment. In large part, our present diffi
culties are the result of earlier failures, both fiscal
and monetary, that extend back in time a decade and more.
Your Committee, and its counterpart in the House of
Representatives, can play an important role in helping to
make the Federal budgetary process a much more effective
instrument of economic stabilization in the future than it
has been in the past. We want to work closely with you
to achieve that objective. In this statement I have tried
to answer the specific questions you raised, Mr. Chairman,
in your letter of December 5.
There have been significant changes in the economic
situation since I appeared before you in August. These
changes deserve and are receiving our close attention within
the Administration. However, nothing has happened in these
past few months that detracts from the necessity of bring
ing the entire Federal budget process under much better
control. Federal expenditures have doubled in the past 8
years and have built up a powerful momentum. Even with
favorable action on the President's proposed cuts in
spending, Federal outlays would rise by $34 billion in the
current fiscal year — a rise of 13 percent. At that rate,
Federal expenditures would double again in just another
WS-183
2
6 years.
We must not allow anything like that to happen.
The problem is not only runaway Federal expenditure
programs and chronic budget deficits. We are deceiving
ourselves and the American public by excluding items from
the budget that have a considerable impact on the economy
and the American taxpayer. For example, in fiscal year
1974 the reported figure of $3 billion of Government
borrowing from the public (to finance the unified budget
deficit of $3.5 billion) showed only the tip of the ice
berg: the net borrowing from the public to finance Federal
programs outside the budget was estimated at $28 billion.
During the past decade the unified budget had a cumulative
deficit of $102.9 billion. But total net borrowings for
off-budget programs were an even more staggering figure —
$142.0 billion. The disruptive effects on the Nation's
capital markets of having the government borrow one quarter
of a trillion dollars in a single decade deserves much more
attention. I seriously doubt that we will ever be able to
have either stable housing markets or the level of savings
and capital investment needed to generate the necessary
jobs and economic output until we correct this serious
government distortion of the financial markets.
There is much that needs to be done -- and done
quickly — by your Committee and the rest of us to restrain
excessive Federal spending and moderate the use of Federal
credit. We will not solve the problems of stagflation by
opening the sluice gates of Federal spending and lending.
We would only worsen our long run budgetary situation which
is bad enough already.
While sticking to a course of expenditure restraint,
we recognize that the economy is in need of a degree of
fiscal and monetary support. The economy is in a recession
and the downward movement will probably continue into the
spring of next year. We expect real growth to resume some
time during the middle months of the year.
At present, the automobile and housing industries
account for a large part of the rate of change in the
economic situation — much more than would be suggested by
their relatively small average share of GNP. Both industries
have substantial inventories of unsold units to work off.
Both industries are thus producing at unsustainably low
rates — well below their long-run normal levels. As soon
- 3 as inventories are brought into better balance, production
levels can increase again in both industries, probably in
the late winter or early spring. In addition, most ob
servers expect car sales to rise from their recent very
low levels, which would also require a pick-up in automobile
production. In housing, where financing is always the key
factor, there has already been an increase in savings flows
to mortgage lenders, which is establishing the precondi
tions for a recovery in residential building activity.
However, the recession has not yet bottomed out;
economic recovery still lies in the future. At the same
time, some meaningful improvement in the price picture is
beginning to emerge and more will appear. This is a very
encouraging development. Nevertheless, the situation is
still one of too much inflation and too much weakness in
economic activity.
Some people feel that we must, therefore, make an
agonizing choice between fighting inflation and fighting
recession. I cannot agree. The two conditions cannot be
separated. Inflation and recession are inextricably inter
twined — they are both integral parts of the same disease.
Inflation led directly — through the high interest
rates that always accompany inflation — to severe financial
instability, to a heavy outflow of funds from thrift insti
tutions, to a sharp squeeze on the availability of mortgage
credit, and thereby to one of the worst slumps on record
in the housing industry. Similarly, inflation has been a
major factor — perhaps the major factor -- that has
demolished consumer confidence, which is having a crushing
impact on sales of automobiles and other consumer goods.
Surely the answer to these problems does not lie in policies
that would invariably lead to still further increases in
the rate of inflation. That road leads to economic and
financial disaster.
We must recognize that fiscal discipline is the only
appropriate course of action. I am not, of course, pro
posing doctrinaire actions to achieve unrealizable and
undesirable budget goals that would aggravate the recession.
Budget deficits are inescapable in the present situation.
There is a vast difference, however, between a budget deficit
arising from slow growth in receipts in a softening economy,
and a budget deficit arising because of a burst of Federal
expenditures.
4
But our present Federal budget position is already
expansive. As I mentioned earlier, we face an expendi
ture increase of $34 billion or 13 percent. And if the
proposed spending cuts are not realized, the gain will
be $38^ billion, or 14^ percent.
Thus we should avoid a new spree of "budget busting"
in the guise of curing recession. Spending programs de
signed for that purpose generally come too late, cannot
be reversed, only intensify inflationary pressures in the
recovery and thereafter, and ultimately must be paid for
through the burden of higher taxes on the American people
or, alternatively, through the cruel tax of inflation.
Furthermore, larger Federal expenditure programs would
shift resources from the private to the public sector at
a time when all levels of Government are already taking
one-third of total output.
What we need now, in my opinion, is a shift in the
mix of policy to achieve a better balance between our
monetary and fiscal positions. Over the past year, mone
tary policy has carried a disproportionate share of the
burden of stabilization policy. This was necessary because
fiscal policy did not do its share. In the present situa
tion, therefore, we should be maintaining firm fiscal
discipline. This is the purpose behind the President's
proposals to reduce the explosive growth of Federal
spending by $4.6 billion in fiscal 1975, a cut that will
produce at least $6.7 billion of savings in 1976 and more
in future years.
We should recognize that our measures of budget policy
are seriously incomplete at the present time. First, the
unified budget does not reflect the off-budget lending and
loan-guarantee programs that I mentioned earlier. With
net borrowing for off-budget programs added in, the deficit
in fiscal 1973 would have totalled $39.5 billion (rather
than the $14.3 billion shown in the unified budget), and
in 1974, about $32 billion (rather than $3.5 billion).
Because of their impact on the growth of money and credit,
the inflationary impact of these off-budget lending programs
is comparable to that of deficits in the unified budget.
Second, the acceleration of inflation these past couple of
years has boosted tax receipts (especially from taxes on
inventory profits) faster than it increased Government
5
expenditures. This has narrowed the budget deficit, but
that reduction does not indicate fiscal restraint — it
simply reflects the increase in the rate of inflation.
For these reasons, Federal fiscal operations have been
much more stimulative in fact than they have appeared
to be.
Thus, fiscal policy should be kept under a tight
rein. At the same time, however, monetary policy is easing.
Indeed, the Federal Reserve has already moved a considerable
distance in this direction. If we can pursue budget dis
cipline, this will permit a further easing in credit con
ditions, which will assist the recovery in housing and
help to restore consumer and business confidence. As I
mentioned earlier, a reflow of funds to the thrift insti
tutions has already begun.
We have at the present time an extraordinary opportunity
to alleviate our economic problems. The first essential
step in the anti-inflation fight has already been completed
in that the excess demand conditions that characterized our
economy in 1973 have ended. We no longer have "too much
money chasing too few goods".
Right now we are seeing the first concrete evidence
of some progress on the inflation front. Raw materials
prices have been falling since the end of July. The latest
consumer and wholesale price indexes show some slackening
in the upward thrust of nonfood commodity prices. Interest
rates on Treasury bills are down about 2h percentage points;
long-term corporate bonds are down about 1-3/4 points.
Competition is breaking out again in many industries.
Inflationary pressures are still strong on both the price
and wage sides, but at last some indications have appeared
that we are making headway.
This does not mean that inflation will quickly dis
appear, quite the contrary, but it does give us the opportunity
to reduce the rate of inflation to more tolerable levels.
We must not abandon the effort now that it is beginning to
show signs of paying off. We can and must have recovery
from the current recession, but we must do that in a way
that does not lead to an overheating of the economy again.
We must not get back into the situation where the economy
is propelled beyond the limits of its capacity to produce.
6
We will, however, lose this opportunity to achieve
stable economic growth if we switch to excessively
stimulative policies. That has been the repetitive pattern
over the past decade. Every time the economy showed signs
of hesitation, there was a pronounced shift to stimulative
monetary and fiscal policies. The result was that we
pushed the inflation rate up onto higher and higher
plateaus. In 1966, the peak inflation rate was about
4 percent; in 1970 it was about 6 percent; and now prices
are rising at about a 12 percent rate. The same process
ratchetted interest rates higher and higher. In 1966
rates on long corporate bonds peaked at a little over 6
percent, in 1970 they reached almost 10 percent, and this
year the high was 12 percent.
We should also take note of what happened to unem
ployment over this same span of years. Economists often
talk of the trade-off between inflation and unemployment.
This would suggest that as inflation worsened over the
past decade — because stimulative economic policies were
pursued — unemployment should have improved. But this
did not happen; in fact, the unemployment rate climbed to
higher and higher plateaus. In 1966-67 the unemployment
rate barely increased and reached a high of about 4 percent
in 1970-71 unemployment climbed to around 6 percent; and
unemployment is currently at 6h percent and still rising.
Surely the lessons are clear: First, there is no
worthwhile payoff in a decision to ignore inflation and
focus all policy on recession. Both are components of the
same malaise. We are fighting a two-headed monster: one
head is inflation and the other is recession, and the
inflation has been the culprit in causing much of the
recession. And the experience of the past decade clearly
demonstrates that allowing inflation to accelerate so
explosively does not achieve any benefits (except in the
very short run) in the form of a reduced level of unemploy
ment. Second, if we do not seize this present opportunity
to pursue responsible fiscal and monetary policies, the
problems of rampaging inflation and a weak economy will be
even worse the next time around.
This is why I believe that the top priority for both
the Executive and Legislative Branches is to get our fiscal
house in order. The runaway pattern of Federal spending
- 7 -
(
threatens to become permanent. It is high time for a
thorough review of Federal spending programs and a con
certed effort to blunt the momentum of their growth.
Our current economic condition is very difficult
but I am convinced we can bring the economy under better
control if we persevere with suitable policies. We are
presently paying the price — the high price — for the
irresponsible policies of the past decade. If we turn
again to excessive economic stimulus, in an attempt to
escape the consequences of our past indulgences, we will
only be presented with a larger bill later on. When will
we learn that each time we refuse to pay the price, we
face a still higher price the next time around?
Measures to adequately cushion the impact of the
current economic adjustment where it falls with dispropor
tionate force must be enacted promptly; the burdens of
stagflation must be equitably shared. At the same time,
I hope your Committee will assist in the equally important
task of bringing Federal expenditures back within the
limits of what the public is willing to provide in the
form of tax revenues.
Energy Policy
For many years, the energy policy of the United States
was based upon the assumption that we would always be
able to obtain all of the energy we wanted at bargain base
ment rates. Foreign oil was inexpensive and seemed limit
less in quantity. It thus appeared to be good business
and sound diplomacy to increase oil imports.
We have now learned that such a policy was a doubleedged sword. It led directly to a growing dependence upon
other nations and a decline in exploration and production
within the United States. By the time of the embargo last
year, foreign oil accounted for over one-third of our „
petroleum consumption and our dependence on it was still
surging upwards.
The legacy of that policy is now clear: we allowed
our domestic energy base to erode so badly that we became
highly vulnerable to foreign extortion. Now we are paying
8
an extraordinary price for our mistakes. In 1974, the
United States will pay $27.5 billion for foreign oil, and
our balance-of-payments deficit is likely to be $5 billion.
As for the OPEC nations, their trade surplus for the
current year will probably be in excess of $60 billion,
and by 1980, if present trends continue, their total
accumulation could exceed $500 billion. Imbalances of
this magnitude cannot continue. They are neither
economically nor politically tolerable.
In my meetings with the Arab leaders, I have tried
to impress upon them that their oil policies are not only
bad politics but bad economics. They are exerting enormous
pressures on the United States and other countries to
become more self-sufficient. Since 1972, significant
discoveries of oil have been made in 26 areas of the
world — outside of the OPEC bloc — and countries such
as Britain are now working to convert these deposits into
major energy sources. As consuming nations expand pro
duction and cut back on consumption, the only way the
present high price can be maintained, even on a temporary
basis, is for producers to cut back production. The OPEC
ministers know that every barrel sold today is worth more
to them than every barrel left in the ground. Selling
now and investing the money is simply more profitable
than selling later. For example, to match the long-run return
on an investment made today at 8 percent per year, a barrel
of today's ten dollar oil left in the ground until 1984
would have to bring more than $21.59 — a price that is un
realistic. Moreover, the Arab nations cannot expect to
remain aloof from the dangers of social unrest and political
instability that their policies are creating around the
world.
I
believe that economic and political realities will
eventually force oil prices to come down. As of the moment
oil diplomacy is particularly delicate and in the short run
there may even be some further efforts to increase prices.
But over the long run, the question is no longer whether
oil prices will come down but when they will come down.
In the meantime, it is absolutely vital that the
United States put its own house in order. Supply and demand
must be brought into better balance here at home, so that
foreign nations will never again be able to make oil a
political weapon.
9
I
believe we can now attack our problems with vision
born of our mistakes. For many years the Government has
posed majoir obstacles to the efficient market allocation
of energy. We regulate the price and distribution of
natural gas; we manipulate the pricing and distribution
system in oil? we require lengthy and cumbersome pro
cesses for obtaining licenses and rate approval; and, we
impose environmental restraints of questionable validity
upon both the production and combustion of fossil fuel.
In order to accelerate domestic production, I would
submit that the Government must act decisively to free
producers from Federal laws and regulations which dis
courage growth. We at the same time should understand
that now is not the time to point the finger of guilt at
American energy industries. In the future, they are the
major hope we have to meet our needs. However, what we
need to remember now is that our success in providing
needed supplies will be related to our willingness to
allow the market place to function freely so that the
exploration and development of energy sources will be
encouraged. We must continue to provide energy companies
with reasonable policies under which they can expand
their production.
Our policy must be to eliminate waste through energy
conservation programs and to stimulate the development of
domestic energy resources. We must accelerate the develop
ment of oil and natural gas in Alaska and on the Outer
Continental Shelf? 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 have an abundance of natural resources that can
meet our needs. For instance,
—
The U. S. has one trillion, 500 billion tons of
identifiable coal reserves, or half of the known
freeworld reserves, and one-third of these re
serves are economically recoverable now.
—
We have upwards of 80 billion barrels of oil and
490 trillion cubic feet of natural gas on the Outer
Continental Shelf —
for which intensive drilling
is now becoming feasible as the Government accelerates
the leasing program.
10
—
We have an estimated one trillion, 800 billion
barrels of oil shale resources in Western States,
enough to meet our total needs for decades.
The time has come for the Federal Government
and private industry to bring the promise of
shale into the marketplace.
Throughout these efforts, we strongly believe that
the Federal Government has a responsibility to provide
strong leadership — to insure that there are necessary
incentives for the development of our massive untapped
energy resources.
Recently Secretary Kissinger and I outlined the U. S.
proposals for international cooperation in energy and
finance. The essence of our position can be succinctly
described:
—
The price of oil itself, not its financial
repercussions, is the real source of trouble
in the world economy.
—
To help bring about lower oil prices, and to
reduce the economic burden of oil imports,
major consuming nations should work together
to achieve significant reductions in their
imports of OPEC oil.
—
They should also coordinate policies and pool
their technical resources to increase energy
production within their own nations.
—
IMF resources should be more fully mobilized for
all its member nations.
—
A major, new financial mechanism should be set
up in association with the OECD to provide
stand-by financial support in case any of the
participating countries find themselves in
economic trouble after having made reasonable
efforts on their own part.
—
Consideration should also be given to setting up
a special trust fund managed by the IMF to help
developing nations that are suffering the most
and require financing on concessional terms.
11
Our ideas call for a forthright effort by the world's
major industrial countries to resolve the international
energy crisis. To implement our far-reaching initiatives
will require many weeks of dialogue. Even now, our
International Energy Agency (IEA) working group representa
tives are meeting in Paris in an effort to assimilate the
views of the member nations. To implement the decisions
and initiatives we have made will require many further
weeks of diplomacy with our allies and with our friends.
In our efforts, we wi l l work closely with the Congress.
In our view, the most important and immediate aspect
of our domestic energy policy is that of reducing our
consumption of high-cost imported oil. In the near term,
this can only be accomplished by strict adherence to con
servation. In his recent economic message, President Ford
announced a voluntary program to reduce oil imports by
one million barrels a day by the end of 1975. As the members
of this committee know, the President has made it clear
that we will meet this target and that to do so we will
take whatever steps are necessary.
If the voluntary reductions are not adequate to meet
our target of reductions, more stringent steps will be
taken. Federal agency working groups are now completing
intensive studies of possible options for the President to
consider. The President will present a coordinated package
of administrative and suggested legislative actions to
Congress in January. These actions will address the dual
problems of reducing our imports and increasing our domestic
supplies of energy. In developing its options, the
Administration is paying particular attention to the possible
effects on the economy and the Federal budget.
In total, the Administration's energy policy is a
balanced m ix of international and domestic initiatives.
We have set clear goals for the Nation and we will work
cooperatively with the Congress in achieving them.
Our ultimate goal is one of moving the U. S. from
its present non-renewable hydrocarbon energy base to a
renewable energy base. This calls for a coordinated effort
to make maximum use of oil, gas and coal as well as the
development of solar, geothermal, nuclear, and eventually
fusion power. The switch over to these latter sources
12
will extend over a period of many years, but what is
needed now is a clear national commitment to increase our
domestic energy production in 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.
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FOR IMMEDIATE RELEASE
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HHHHHHBIHHHBI
December 17,1974
EMERGENCY LOAN GUARANTEE BOARD
ANNOUNCES LOCKHEED PARTIAL REPAYMENT
The Emergency Loan Guarantee Board announced
that Lockheed Aircraft Corporation has reduced
loans outstanding under Government guarantee from
$220 million to $195 million by repayment yesterday
of $25 million to the Company*s lending banks.
Lockheed is authorized under terms of its
agreement with the Emergency Loan Guarantee Board
to borrow up to a maximum of $250 million under
Government guarantee.
oOo
WS-184
EMERGING PATTERNS IN INTERNATIONAL FINANCE
Ladies and Gentlemen:
Your officers have invited me to talk on a subject which
seems to call for some predicting, that is Emerging Patterns
in International Finance.
I will try to comply with your
request, and yet, I would not like to miss this opportunity to
say to a distinguished group of economists that I believe
more often than not predicting is not the most valuable service
an economist can be called upon to perform.
And I have observed
that officials often are not the best oracles.
I realize that the emphasis on predicting has become so
great that the general public thinks of economists largely as
predicters -- not very successful predicters perhaps -- but
still primarily predicters of GNP, prices, employment, and other
broad aggregates.
I am sure that predicting will -- and should
go on, but I hope we can redress the balance a bit to encourage
WS - 185
1-A
more emphasis on effective analysis of the prospective effects
of proposed government policies or proposed corporate acts just
on a ceteris paribus basis.
Such analysis can be very important
even if we are not wise enough to forecast all the ceteris
developments we are going to come up against.
For example, regardless of failings which there may have
been in controlling our official printing presses in fine
conformity with the macro-aggregates over recent years,' I think
it is now clear in retrospect that our economic woes would be
less today had we better used our economic partial analysis
to devise national energy policies which left Detroit, its
- More -
2
suppliers, and all of us less exposed today to cutbacks in
foreign oil production.
Our construction industry would be
better off had we analyzed more effectively in designing
our structure of housing finance.
Our real income would
be suffering less of a setback today had we analyzed better
before imposing our particular regulations on our transportation
industries.
In this call for more emphasis on economic analysis I hope
I shall have the support of most of you, for I suspect more of you
are really in important analytical jobs than are in the currently
glamorous macro-forecasting business.
Of course I fm biased,
since 1 haven't really been in the basic forecasting business for
about ten years, and yet I certainly don't feel my years of
academic economic training haven't been of great relevance to
what I've been up to.
Let the forecasters have their headlines.
In the long run our analytical work may do more to improve the
course of history!
In commenting on the limitations of the forecaster,
however,- I don't mean to cast aspersions with fine impartiality.
Some, I think, have done unusually well, and one whom I have
particularly in mind is one of your governors, Ed Fiedler, our
Assistant Secretary for Economic Policy at the Treasury.
Some
time ago Secretary Connally literally presented Ed with the
robes and staff or lituus of a Roman auguref -- and he well
deserved his recognition.
But there is always the danger that
an official who is rightfully working so hard to make the
- 3 future unfold in the right way may in the process lose his objec
tivity as to how it will actually turn out,
I freely admit I am exposed to that danger, so let me
start talking about the emerging international financial trends
with some pretty safe recounting of a few of the events
scheduled for the next month.
Having just spent all weekend
in financial talks I am perhaps unusually conscious of all
the additional meetings which are scheduled.
First, later this week in Paris there will be a two-day
meeting of the Working Group established by the Group of Ten
industrialized countries to study the U.S. and other proposals
for a new supplemental standby financing facility among the
OECD countries.
Next, on December 31 -- not January 1st -- restrictions
will be removed on investment by U.S. citizens in gold in
bullion form, followed on January 6 by the auction of 2 million
ounces of Treasury gold by the Stockpile Disposal Division of
GSA.
Then we'll begin a real marathon of financial meetings in
Washington.
On January 8 and 9, the Working Group will meet
again to prepare a report to the G-10 Deputies who will convene
on the 10th for three days of meetings.
Ministers of the Group of Ten will meet.
On the 14th, the
On the 15th and 16th,
the new IMF Interim Committee of 20 Ministers will meet, and
then on the 17th, the new Development Committee of pretty much
the same 20 Ministers will meet.
And, while all this will b
going on, there'll be a series of highly related meetings V \
going on in the new International Energy Agency.-
•
You might ask me to predict what will come out of all
this flurry of meetings.
That, of course, is harder to say.
Perhaps it would be proper for me to put forward my hopes -with the comment that to me they do not seem to be unreasonable
or unrealistic hopes in the light of the recent summit discussions
with the Japanese, the Canadians, and several of the European
countries.
My first hope is that the Working Group will reach a wide
measure of common understanding of the technical aspects of
an OECD supplementary safety net and will be able to present
the Deputies a short list of substantive issues to be decided
in establishing a safety net.
I hope then the Deputies can
recommend to the Ministers the establishment of such a
facility subject to success by the Ministers in reaching
agreement on whatever substantive issues the Deputies find they
are not capable of resolving.
And, naturally, I hope the
Ministers can earn their higher pay by reaching agreement
on all the crucial principles, so that work can begin in the
OECD.to establish the final details of the safety-net proposal
tp be submitted to our legislatures.
1 hope too, that the
legislatures will give their prompt approval, for the confidence
given by the facility should facilitate the efforts of all
5
member governments in adopting cpoperative approaches in all
aspects of their economic and energy policies.
Agreement on
this intensified form of financial cooperation will provide a
more promising atmosphere for useful talks between the governments
of the oil consuming nations and the governments of the principal
oil exporting nations.
And yet, finally, I hope -- and can easily
conceive of the possibility --that the new financial facility
will never have to lend at all.
Up to now, the many different existing channels of
international capital flow -- private, intergovernmental, and
multi-national -- have been serving to bring would-be borrowers
and would-be lenders together on reasonable terms despite the
rapid changes in the patterns of international trade payments.
So far, at least, those existing channels -- assisted by not
extremely large loans from the IMF -- have not faced any borrowers
with the necessity of accepting loan terms which the international
community should have considered unacceptable on either a politics
or an economic basis.
will be greater.
In the coming year, to be sure, the danger j
We must see to our defenses and, in our view,
the ready possibility of expanded use of the regular facilities
of the IMF should be the first line of defense for all its
members.
It may well be a sufficient line of defense, but the
stakes are large, so it also seems wise to have a second line
of defense suitable in size to prevent calamity wrecking the
large scale but complex mechanism of economic cooperation among
the industrialized contries.
6
When the financial Deputies and Ministers gather here
\&\(^
next month, it is pretty clear that there will be a wide measure
of agreement among them that there will probably be occasions
calling appropriately for an expanded volume of IMF loans during
the year.
There will probably be agreement that the potential
resources of the IMF should be expanded by 1976.
At the
moment, however, I can only express the hope that it will be
possible to overcome present differences so that the Fund will
be in a position in good time to respond should the need arise.
One issue concerns how the Fund*s assistance is to be allor
cated in the future.
Earler this year, in the early days
after the shocks of the abrupt oil price increases, agreement
was reached on the desirability of setting up in the IMF a
temporary so-called oil facility.
Funds for IMF to lend from
this facility were not obtained in the manner which the IMF
had basically used throughout its existence, that is by
exercising the IMF*s right to call upon the members to lend
to the IMF under prescribed procedures.
Rather the IMF borrowed
the funds from a group of governments, primarily OPEC members,
on the strength of the implied guaranty of the other IMF members
to make good on the IMF debts in the event there were a default
by those to whom the IMF relent the monies ^
In another change
from past procedures whereby the IMF normally lent on the
basis of an assessment of the over-all need and the policies of
a borrower, the IMF lent semi-automatically from the new facility
a proportion of the oil import costs of the borrower.
7
In my view such short-cut new procedures may have been
justifiable as a crisis.response to-a new situation, but I fear
the IMF’s future would be damaged if it did not take large steps
in 1975 back toward more responsible and normal procedures.
There has been long experience indicating that monies borrowed
on the strength of guaranties, rather than directly, tend to be
more costly to raise and tend to be administered with less care.
And it has now become practically meaningless to calculate any
country’s oil deficit when account is taken, as it should be,
of the related new exports to the oil producers, of the
investments by the oil producers, of the interest payments to the
oil producers, etc., etc.
Moreover, the change in oil prices
is not the only important factor changing the pattern of world
payments.
Other products are important too.
Even at its present
price ,oil probably accounts for lees than a fifth of the value
of world trade.
At prices of a few weeks ago sugar alone among
the agricultural products would have had an international trade
value in 1975 of $30 to 35 billion, about a third of the value
of petroleum.
In these new circumstances it would seem to me both desirable
and possible for the IMF to establish procedures which would
permit it to approve the desired quantity of loans in 1975 on
the basis, not of a very partial indicator such as oil imports,
but rather on the basis of the over-all position of each
applicant for assistance.
Such a purposeful approach should
improve the prospects for legislative approval around the world
8
for an increase in members' commitments to the IMF for the
five years beginning in 1976,
The IMF now has more than ample resources of its own -well over $10 billion worth -- for its operations in 1975, 3
but an increase in quotas for the next five years is scheduled for
consideration and does seem appropriate.
Such an increase must,
however, be authorized by our legislatures.
It is our hope that the legislatures will support our
three-track approach to the current financial situation.
First, the expanded availability of resources from the IMF
when appropriate for any member nation.
Second, the supplemental
standby availability of assistance on non-concessionary terms
in case of even larger need than could be handled by the IMF
for any of the industrialized countries.
And third, a temporary
additional trust fund to provide longer-term, concessional
assistance to a few of the very low income countries most
seriously hit by recent price developments.
Such assistance
could not be provided directly by the IMF if that organization
is to preserve -- as it must -- genuine equality of treatment
for all its members.
But the IMF could provide certain management
services on a fee basis.
It is our hope that a number of
countries in a position to do so will provide loan funds on
appropriate terms to the proposed trust fund.
And to assist in
that effort we have suggested that consideration be given to
the sale by the IMF of a small fraction of its gold at the
official price.
Such gold might be transferred at the official
price to the new trust fund, which could then gradually sell off
9
the gold at the higher market price to obtain assistance funds«
Or the gold could effectively be sold to the members of the IMF
in proportion to their quotas to assist them in supporting the trust
fund either by reselling the gold to the trust fund or by making
a comparable contribution.
As an additional step to insure that those most in need are
properly supported we have also been urging the various inter
national development finance institutions to re-examine their
programs without delay.
The scarce resources of these institu
tions must be carefully directed to meet the most urgent needs.
For this reason we do not believe that there is any justification
today for soft loans from these institutions to any of the
oil exporting countries, and ordinary capital loans are unlikely
to be justified except possibly in special cases for the poorest
of the oil exporting nations when an immediate need for additional
foreign exchange can be demonstrated.
After all this discussion some of you may be wondering
when I am going to say something about the future of international
monetary reform.
The first thing I would like to- say is that
I feel I have been talking about that subject all along -- in
the sense that I do not expect a future monetary system to be
suddenly adopted ail*at once.
I expect our future monetary
arrangements to be developed gradually over time and to be
changing in the light of current circumstances.
In that sense,
the financial adjustments to current circumstances which I have
been discussing do constitute monetary reform.
There are, in
10
-
\T
addition, however, a number of changes in the Articles of v
Amendment of the IMF which it seems to me should be agreed
in principle, by the Ministers when they meet next month.
One of these concerns the present requirement in the
-
Articles that each government undertake to intervene in the
foreign exchange markets to keep the value of its currency
within narrowly defined limits.
This is a provision being
openly ignored by the majority of the members of the Fund.
And it is fortunate that they are doing so, because in
the light of the rapid economic changes in the world in the
past year, any widespread attempt to maintain such margins
would probably have led to multiple exchange crises, with
consequent instability and difficulties for world trade
and investment.
We should seek ministerial agreement in January so that
a comprehensive amendment can be submitted to legislatures,
together with the request for an increase in quota contributions
to the IMF.
I, for one, would feel strange asking our Congress
to reaffirm our support of the IMF through new financial
contributions if a provision were to be retained which we know
is not being applied by ourselves and others.
It is, nonetheless,
very important that governments undertake to cooperate to avoid
disorderly foreign exchange markets.
But so long as a member
is following reasonable guidelines of behavior it should not
require the permission of the IMF if it wished to refrain from
intervention in order to permit the exchange rate of its currency
to respond to market forces.
11
The Articles of the IMF should also be amended to remove
the present discrimination which limits the Fund’s ability
to make appropriate use of its gold.
International monetary
authorities are moving away from the concept that there should
be an official price of gold.
That concept should also be
removed from the Articles of the IMF, and that agreement’s
mandatory provisions for payment in gold should be eliminated.
At the same time, the Fund should be allowed like other monetary
authorities to make use of its gold by selling in the market
when it needs foreign exchange resources.
I think we could
trust the Executive Directors of the IMF to insure that the
Fund did not dump inappropriately large amounts of its gold
resources on the market at any one time.
Such sales by the IMF at a market price are, however,
some considerable distance in the future because they could
be made only after amendment of the Articles and it is
unlikely that such amendments could become effective before
late next year at the earliest.
In the meantime, as I
mentioned earlier, it would seem wise to consider making some
interim use at the official price of a small portion of the
Fund’s gold to support a temporary trust fund for the benefit
of a few of the most seriously affected less developed countries.
From these remarks I think you can gain the impression that
our future international financial arrangements, while they
will only gradually evolve, will not emerge unnoticed and
unnegotiated.
I hope they come our better for all the high level-
attention they are getting.
Thank you.
Department
ofihtTREASURY
tH ING TO N, D.C. 20220
T E L E P H O N E W 04-2041
FOR IMMEDIATE RELEASE
DECEMBER 18, 1974
USA-ITALIAN INCOME TAX TREATY
APPLIES TO NEW ITALIAN TAXES'.
The Government of the United States and the Italian
Government have today announced agreement to the effect
that, following the adoption of fundamental changes in
Italian tax legislation, the U.S.-Italy Convention for
the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with respect to Taxes on Income of
March 30, 1955 shall be considered to be applicable to
the Italian income tax on physical persons and to the
Italian income tax on juridical persons as of January 1,
1974, the date when the two new taxes came into effect.
An exchange of Notes was entered into between the
two Governments which assures the continued application
of the Convention without interruption within the afore
mentioned terms. The announcement was made simultaneously
in Washington and in Rome.
Accordingly, the Italian tax on dividends paid by an
Italian corporation to a United States resident or to a
U.S. corporation not having a permanent establishment in
Italy will be limited to 15 percent (or to 5 percent in
the case where the United States corporation owns 95 per
cent of the voting power of the Italian corporation paying
the dividend and which satisfies such other qualifications
as the Convention provides).
The royalties paid by an Italian licensee to U.S.
residents or corporations not having a permanent estab
lishment in Italy shall not be subject to the income tax
on physical persons nor to the income tax on juridical
persons.
Similarly, in the case of dividends and royalties
paid from U.S. sources to Italian residents or corpora
tions, the same limitations or exemptions shall apply as
regards U.S. taxes.
WS- 187
(OVER)
-
2-
The local tax on income owed in Italy by U*S.
residents or corporations shall be applied on the basis
of the annual tax declaration of the aforementioned
residents or corporations. Such tax is not subject to
any withholding at the source.
Both countries have expressed their willingness
promptly to begin negotiations designed to update the
Convention in light of the modifications made in the tax
legislation of the two countries, of the experience
gained since it was first signed in 1955 and of the develop
ments in the Organization for Economic Cooperation and
Development (OECD) of which both countries are members,
as regards the elimination of international double
taxation.
The prospective negotiations will also seek to examine,
with a view to seeking a possible solution thereof, the
problem of the extension of the applicability of the Con
vention to the aforementioned Italian local income tax,
bearing in mind all of the elements relating to such a
solution.
0O0
Department
. . i n r n u n P n n /W fl
ASHINGTON.
D C. 20220
oftheTREASURY
TCI C D UflM C ìUflA I M I
TELEPHONE
W04-2041
FOR RELEASE ON DELIVERY
|
« V-
l
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0-00
STATEMENT OF THE HONORABLE CHARLES A. COOPER
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
SUBCOMMITTEE ON FOREIGN ECONOMIC POLICY AND THE
SUBCOMMITTEE ON INTERNATIONAL ORGANIZATIONS AND MOVEMENTS
OF THE HOUSE FOREIGN AFFAIRS COMMITTEE
DECEMBER 18, 1974, ROOM 2255, 2:00 P.M.
RAYBURN HOUSE OFFICE BUILDING
I welcome this opportunity to testify on the International
Energy Program, and the proposed $25 billion financial safety
net. Let me begin by making a few very brief comments on the
International Energy Program, which I understand will be covered
in detail by Deputy Assistant Secretary Katz and Assistant
Administrator Conant.
The need to develop a framework of consumer country
cooperation was highlighted by the lack of coordination that
characterized the industrialized countries' responses to the oil
embargo of last winter. Efforts to develop such a framework
were initiated at the Washington Energy Conference of
February 1974, which established a twelve-nation Energy
Coordinating Group charged with developing an international
action program to deal with the world energy situation on a
cooperative basis. The International Energy Program, signed in
Paris on November 18 by 16 OECD countries accounting for over
80 percent of world oil imports, was the product of the
negotiations of this Group.
The U.S. Treasury fully supports this program which we
believe represents a major step towards an effective and
determined common effort towards energy cooperation and
development. We are particularly pleased that internationally
agreed limits on the oil imports of each participant during
possible future supply emergencies have been established on
an agreed basis. This represents a major accomplishment and
should help greatly to mitigate the possible price consequences
of future supply disruptions which might otherwise be very
pronounced were each nation to try to assure itself of its
WS-1861
2
own supplies without any international coordination. The
U.S. Treasury is participating in the work of the new
International Energy Agency associated with the OECD, and
we are confident that this work will prove to be of great
benefit to the U.S. in years to come.
I would like to turn now to the U.S. proposals for a
financial solidarity agreement and to begin by trying to
place this particular proposal in the context of our over
all financial strategy.
The U.S. has stressed that the root source of trouble
in the world economy today is the present price of oil in
world markets. Our proposals for a supplementary financial
mechanism is designed to support international cooperation
in energy, and is itself in no way a substitute for the
determined efforts we believe are needed on the energy
front. In general, our impression is that during 1974, oil
consuming countries have, for the most part, been able to
secure the financing they need from the existing complex of
private and public financial mechanisms, including direct
placements by the OPEC governments. Nevertheless, we
recognize the need to provide an adequate financial safety
net for situations in which individual countries might run
into potentially serious economic difficulties which the
availability of supplementary credit could help forestall.
The thirteen oil exporting nations which are members
of OPEC are expected to receive more than $90 billion this
year from their exports of oil — more than four times the
amount they received last year — and about $5 billion from
exports of other goods and services. They will spend about
one-third of this income on imports.
Funds they do not spend on goods and services they
invest. Thus we must expect these countries to invest over
$60 billion this year somewhere in the rest of the world.
Our preliminary estimates covering the first eleven
months of the year trace about $10-1/2 billion directly to
the U.S., about $7-1/2 billion to the UK, perhaps $5 billion
to other industrial countries, about $2 billion to the
developing countries, and perhaps $3 billion to international
financial institutions. Probably at least $18 feillion was
deposited with banks in the Euro-currency market. Additional
funds have no doubt been directed to investment management
accounts in Europe, private sector loans and purchases of
real estate and corporate securities in Europe and Japan
which are not included in these figures.
All the evidence suggests that these countries have
behaved as prudent conservative investors usually behave,
choosing their markets and their investment instruments
to provide safety as well as income. Funds have been
invested in time deposits and certificates of deposit
with banks, and in government securities in the U.S. and
elsewhere. Loans have been extended directly to a number
of governments and there have been direct placements of
loans arranged by nationalized industries and other
government agencies, particularly in Europe. OPEC
countries have bought World Bank bonds and lent money to
the IMF. They have extended grants and soft loans to
developing countries and contributed to various regional
banks. Some funds have been used to finance the takeover
of the oil producing companies and there have been a few
instances of sizeable purchases of shares in industrial
firms operating in Europe.
There is no question that the funds received by the
OPEC countries come back to the oil importing states
either as payment for goods and services or in the purchase
of some kind of financial asset or other claim. There is
no "recycling problem" because there is no alternative.
However, there may be a "reshuffling problem" — in the
sense that distribution of funds among the oil importing
countries may be such as to create serious problems for
some countries who may need supplementary access to credit.
This is the task to which the U.S. has addressed itself in
developing a financial strategy as part of a general
approach to the fundamental economic problems created by
the sudden increase in the price of oil.
To deal with possible future strains of this kind,
the U.S. has suggested a comprehensive approach to multi
lateral financing. In our view, the IMF would be the
first and central track, at the heart of the financing
constellation. The IMF would continue to serve as the
first line of official multilateral financing for the full
range of its membership, following the Fund's basic principl
of uniform treatment for all members. We believe that the
Fund's existing lendable resources — some $12-$14 billion could be mobilized effectively in 1975. For the longer term
we are prepared in principle to support a substantial
increase in Fund resources through a quota increase.
4
Our proposals for creation of a financial solidarity
agreement among the industrial countries in association
with the OECD would supplement IMF resources. This is our
second track, designed to assist countries in resisting
pressures to take restrictive action or to reduce economic
activity to lower than desirable levels — for their own
economic and political stability and the health of an
increasingly interdependent world.
Our financial insurance scheme is, as I have indicated,
designed to support a cooperative energy program. Participants
would also undertake to pursue responsible adjustment policies
and avoid recourse to restrictive trade measures or other
beggar-thy-neighbor policies.
It is important that the facility be large enough to
inspire confidence among the participants that in case of
real need they will be able to find supplementary financing
on reasonable terms. We have recommended a facility with
total commitments by all members in the neighborhood of
$25 billion in 1975, with provision for additional resources
in subsequent years in case of need. Our belief that the
facility should supplement existing channels of financing,
not replace them, suggests that it should lend on market
related terms. It seems to us appropriate that decisions
on the provision of financial support should be based on
the over-all economic position of the borrowers, not any
single criterion such as oil import bills. In practice,
it is difficult to distinguish oil deficits from non oil
deficits; conventional balance of payments concepts have
lost most of their relevance in today's world.
Thus, before granting use of the facility's resources, the
participants should be satisfied that the applicant
—
was following appropriate adjustment policies,
both domestic and international;
—
was following cooperative energy policies;
—
was not imposing trade or other current account
restrictions for balance of payments purposes;
—
was making reasonable use of its reserves and the
best possible efforts to obtain capital on reasonable
terms from other sources, both private and public.
5
~X o
Finally, whenever support is provided by the facility,
we believe it essential that all members share the credit
risk on the basis of their participation. This principle
is fundamental to the mutual support system we are suggesting.
Our proposal for a solidarity fund among the industrial
countries was formally introduced and discussed at the
meetings of the Deputies of the Group of Ten and the OECD's
Working Party Three in Paris in late November, as was a
similar proposal by the Secretary General of the OECD. No
commitments were sought or given; our purpose was to gain
understanding and to set out a work program. The Deputies
of the Group of Ten agreed unanimously to establish a
working party which is now studying the technical aspects
of these proposals. This group has met once, will meet again
this week and again in early January, with a view to
reporting to a meeting of the G-10 Deputies on January 10-13.
The G-10 Ministers will convene on January 14 in Washington
to consider the work of the Deputies. We hope that this
intensive round of discussions and careful study by all
participants will establish substantive agreement on the
principles of a safety—net proposal such as I have described.
I can assure you we will continue to consult fully with the
Congress on this proposal, and that we will seek Congressional
authorization for U.S. participation in any such facility.
Our third track concerns assistance for the developing
countries. Expanded use of IMF resources and the establish
ment of a new supplementary financial facility associated
with the OECD will help insure orderly access to the world's
capital markets, and should help many developing countries
secure the funds they need and can productively employ.
These are the middle range of developing countries which
have been doing quite well during recent years
achieving
impressive rates of growth and remarkable export performances.
Their demonstrated credit worthiness has enabled them to
borrow increasingly on the world's capital markets.
The poorest developing countries, however, most seriously
affected by price increases in fuel, fertilizer, and food,
need concessional financing. With extremely low levels of
income and growth and scant monetary reserves, these
countries cannot afford to assume a greater debt burden
except on very liberal terms. We have thus suggested the
creation of a Trust Fund, managed by the IMF. We would hope
that OPEC countries would provide a substantial part of the
concessional contributions to the Trust Fund. We have also
proposed that the IMF itself might contribute a portion of
the profits derived from the sale of a small portion of its
gold in the private market. A trustfund of this nature
which would offer credit on relatively soft terms
6
perhaps 2-4% interest and moderately long maturities —
would channel funds to those most seriously affected on
concessional terms not appropriate for other borrowers.
We hope that the new IMF/IBRD Development Committee and
the Interim Committee will give this suggestion their
urgent attention.
I am confident that progress along the three tracks
I have described, will make an important contribution to
the management of world financial problems in 1975. This
in no way implies that the United States or the world
should slacken efforts to deal with the more basic problem
of world oil prices and supplies. Thank you.
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FOR IMMEDIATE RELEASE
DECEMBER 18, 1974
TREASURY SECRETARY SIMON NAMES MAURICE R. TANNER
VOLUNTEER STATE SAVINGS BONDS CHAIRMAN FOR ARIZONA
Maurice R. Tanner, Chairman of the Board and President,
The Tanner Companies, Phoenix, Ariz., is appointed volunteer
State Chairman for the Savings Bonds Program in Arizona by
Secretary of the Treasury William E. Simon, effective imme
diately. The oath of office will be administered today by
Arizona Governor Jack Williams.
He will head a committee of business, banking, labor,
government and media leaders who -- in cooperation with the
U. S. Savings Bonds Division -- assist in promoting Bond
sales in the state. He succeeds Raymond F. Shaffer, Presi
dent, The Greyhound Corp., Phoenix, who today receives the
Treasury Department’s "Award of Merit” from Gov. Williams.
Tanner served in the Navy from 1944 to 1946. After
completing his service, he attended U.C.L.A., receiving his
BA degree in 1948. Immediately after graduation he joined
The Tanner Companies, a family-owned firm specializing in
construction, the manufacture of construction materials,
and real estate and other investments. He became President
of the firm in 1950 and Chairman of the Board in December
1967.
Tanner is active in many business, civic and profession
al activities, including -- Board of Directors, Western Sav
ings and Loan Association; Board of Directors, Arizona Pub
lic Service Co.; Vice President, Arizona Employer's Council;
member, Arizona Business and Industry Council; member, City
of Phoenix Streets Advisory Committee.
He and his wife, the former Hazel Hodges, have four
children -- Mrs. Anna L. Zemp, Delbert H., Maurice R., Jr.,
Marianne -- and two grandchildren.
oOo
DepartmentofthefREASURY
Is H IN G T O N , D C. 20220
TELEPHONE WQ4-2041
17 89
- ,
FOR I M M E DIATE R E L E A S E
/
December 19, 1974
WITHHOLDING OF APPRAISEMENT ON
PORTABLE ELECTRIC TYPEWRITERS FROM JAPAN
Assistant Secretary of the Treasury, David R. Macdonald,
announced today a withholding of appraisement on portable
electric typewriters from Japan pending a determination
as to whether they are being sold at less than fair value
within the meaning of the Antidumping Act, 1921, as amended.
This decision will appear in the Federal Register
of December 20, 1974.
Under the Antidumping Act, the Secretary of the
Treasury is required to withhold appraisement whenever
he has reasonable cause to believe or suspect that
sales at less than fair value may be taking place.
A final Treasury decision in this investigation
will be made within three months. Appraisement will
be withheld for a period not to exceed six months from
the date of publication of the "Withholding of Appraise
ment Notice" in the Federal Register.
Under the Antidumping Act, a determination of sales
in the United States at less than fair value requires
that the case be referred to the Tariff Commission,
which would consider whether an American industry was
being injured. Both sales at less than fair value and
injury must be shown to justify a finding of dumping
under the law. Upon a finding of dumping, a special
duty is assessed.
During the period of September 1, 1973 through
August 31, 1974, imports of portable electric type
writers from Japan were valued at roughly $16.1 million.
Department of the T R E A S U R Y
WASHINGTON, D.C. 20220
TELEPHONE W04-2041
■
' 1 " ! '^
" 1 ''
FOR RELEASE IN A.M. NEWSPAPERS
FRIDAY, DECEMBER 20, 1974
r
J
FINAL REGULATIONS AND FORMS FOR FOREIGN PORTFOLIO INVESTMENT STUDY
The Department of the Treasury published today in the
Federal Register the final regulations, instructions, and
forms for its survey of foreign portfolio investment in the
United States, which it promulgated in proposed form on
November 1, 1974.
The documents implement Treasury’s responsibilities under
the Foreign Investment Study Act of 1974 (Public Law 93-479),
signed by President Ford on October 26, 1974. The Act directs
the Secretary of the Treasury to conduct a comprehensive, over
all study of foreign portfolio investment in the United States.
A parallel study of direct investment will be conducted by the
Department of Commerce.
Reports will be required from all U.S. issuers of securities
having assets of more than $20 million, or $50 million in the
case of banks, on Form FPI-1. Firms with assets of less than
these amounts will be required to file reports only if they
have evidence of foreign investment. Issuers having assets of
less than $1,000,000 are exempted from the reporting requirements.
Reports on Form FPI-2 will be required from U.S. persons
who may be acting as holders of record (e.g., nominees, trustees,
fiduciaries) on behalf of foreign persons. Exempted are holders
of record who hold no more than $25,000 of United States invest
ments on behalf of foreign persons, parents or guardians acting
as custodians for minors, and certain estates and trusts.
For purposes of the reports, foreign portfolio investment
includes all securities of a United States corporation, including
stocks, bonds, and other evidence of ownership or long-term
indebtedness, held by a foreign person owning less than 10 per
cent of the voting securities of the corporation. Investment
by foreigners who own a 10 percent or greater equity interest
will be reported to the Department of Commerce.
W S-188
(O V E R )
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In addition to corporate interests, the Treasury survey
will cover foreign portfolio ownership of securities of Federal,
state or local governments or their instrumentalities, limited
partnership interests, investment trust certificates, and other
evidences of ownership or indebtedness of non-corporate enterPrisss. Excluded from the survey are debt obligations with an
original maturity of one year or less.
The proposed regulations and forms, as published November 1,
were open for public comments and suggestions until November 22.
The Treasury received comments from individual firms and from
business associations whose members are covered by the survey.
In addition, a public hearing on the proposed forms and instruc
tions was held by the Office of Management and Budget on
November 26.
In response to public suggestions, clarifying and simplifying
amendments have been made in the forms and instructions. Report
ing firms have also been granted new flexibility in methods of
reporting. For example, firms may submit computer tape of the
required data in lieu of written reports. The basic scope of
the information covered by the survey has not been changed.
oOo
DepartmentoftheTREASURY
t a !® jm D C 20220
TELEPHONE W04 2041
FOR IMMEDIATE RELEASE
December 20, 1974
ANTIDUMPING INVESTIGATION INITIATED ON
RADIAL BALL BEARINGS FROM JAPAN
Assistant Secretary of the Treasury, David R.
Macdonald, announced today the initiation of an anti
dumping investigation on radial ball bearings from
Japan. The merchandise involved includes radial ball
bearings, excluding integral shaft bearings, with an
outer diameter of at least 9 mm, but not over 100 mm.
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 merchan
dise sold in the home market.
Notice of this action will be published in the
Federal Register of December 23, 1974.
During the period of January through August 1974,
imports of radial ball bearings from Japan were valued
at approximately $49 million.
Statement to the Press
by
Jack F. Bennett
Under Secretary for Monetary Affairs
December 20, 1974
.1 have been asked whether a foreign government could
participate in the January 6, 1975, auction of U 0S o Treasury
gold.
There is widespread agreement among governments today
that the prohibition in the Articles of Agreement of the
International Monetary Fund against government purchases of
gold at prices above par value plus a prescribed margin
should be considered still to remain in force.
Treasury will, therefore, not knowingly
The U.S.
accept in its
auction any bid submitted by or on behalf of a foreign
government.
*■
*
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DepartmentofthefREASURY
TELEPHONE W04-2041
. Ò.C. 2022b'
FOR RELEASE
December 20 , 1974
6:30 P.M.
RESULTS OF TREASURY’S WEEKLY BILL AUCTIONS
Tenders for $2.6 billion of 13-week Treasury bills and for $2.0 billion
of 26-week Treasury bills, both series to be issued on December 26, 1974,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
13-week bills
maturing March 27, 1975
Price
High
Low
Average
98.256
98.235
98.240
Equivalent
Annual Rate
6.899%
6.982%
6.963%
26-week bills
maturing June 26, 1975
Price
1/
Equivalent
Annual Rate
96.486
96.425
96.445
6.951%
7.071%
7♦032%
1/
Tenders at the low price for the 13-week bills were allotted 61%.
Tenders at the low price for the 26-week bills were allotted 12%.
TOTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Applied For
$
55,095,000
Boston
3,160,340,000
New York
40,950,000
Philadelphia
82,930,000
Cleveland
55,030,000
Richmond
25,845,000
Atlanta
178,675,000
Chicago
41,550,000
St. Louis
3,550,000
Minneapolis
29,665,000
Kansas City
61,580,000
Dallas
San Francisco
179,825,000
TOTALS
Accepted
$
28,375,000
2,235,675,000
28,170,000
38,705,000
35,010,000
23,620,000
64,575,000
25,100,000
3,550,000
26,255,000
16,580,000
74,535,000
Applied For
$
Accepted
18,795,000$
8,795,000
2,826,745,000 1,748,545,000
6,830,000
31,830,000
45,785,000
51,415,000
9,525,000
30,125,000
16,235,000
16,535,000
48,585,000
154,485,000
14,850,000
26,350,000
2,735,000
2,785,000
13,740,000
17,280,000
12,695,000
12,695,000
71,855,000
205,155,000
$3,915,035,000 $2,600,150,000 a / $3,394,195,000 $2,000,175,000
Includes $ 378,845,000 noncompetitive tenders accepted at average price.
— / Includes $ 145,630,000 noncompetitive tenders accepted at average price.
1/ These rates are on a bank-discount basis. The equivalent coupon-issue
yields are 7.19% for the 13-week bills, and 7 . 3 % for the 26-week bills.
M
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DepartmentoftheTREASURY
ksHINGTON. D C 20220
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
December 20, 1974
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 $4,900,000,000 , or
thereabouts, to be issued
January 2, 1975,
as follows:
91-day bills (to maturity date) in the amount of $2,700,000,000, or
thereabouts, representing an additional amount of bills dated
and to mature
April 3, 1975
October 3, 1974,
(CUSIP No. 912793 WC6 ), originally issued in
the amount of $ 1,893,955,00(1 the additional and original bills to be freely
interchangeable.
182-day bills, for $2,200,000,000, or thereabouts, to be dated
and to mature
July 3, 1975
January 2, 1975,
(CUSIP No. 912793 XC5 ).
The bills will be issued for cash and in exchange for Treasury bills maturing
January 2, 1975,
outstanding in the amount of $4,710,265,000, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,706,370,000.
These accounts may exchange bills they hold for the bills now being offered at
the average prices of accepted tenders.
The bills will be issued on a discount basis under competitive and non
competitive bidding, and at matutity 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 (maturity value), and in
book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
one-thirty p.m., Eastern Standard time, Friday, December 27, 1974.
Tenders will not be received at the Department of the Treasury, Washington.
Each 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
be expressed 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)
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securities and report daily to the Federal Reserve Bank of New York their position^
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 whole or in part, and his action in any such respect shall be final.
Subject
to these reservations, noncompetitive tenders for each issue for $200,000 or less
without stated price from any one bidder will be 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
January 2, 1975,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing
ment.
January 2, 1975.
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
Federal income tax
h is
return, as ordinary gain or loss, the difference between
the price paid for the bills, whether on original issue or on subsequent
p u rch a se,
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 notice
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
December 20, 1974
FOR IMMEDIATE RELEASE
TREASURY RAISES CASH
The Treasury will raise cash to meet its needs
before the January tax payments by selling to the public
$2.0 billion in additional amounts of two issues of out
standing notes. Additional amounts of the notes may be
issued at the average price of accepted tenders to
Government accounts and to Federal Reserve Banks for
themselves and as agents for foreign and international
monetary authorities.
An
May 15,
Bidding
payment
made by
additional $1.25 billion of the 7-7/8% notes of
1979, will be auctioned on Monday, December 30.
will be on the conventional price basis. The
date will be January 7, 1975? payment may' not be
credit to Treasury tax and loan accounts.
An additional $.75 billion of the 8% notes of March
31, 1976, will be auctioned on Thursday, January 2, 1975.
Bidding will be on the conventional price basis. The
minimum bid for these notes will be $5,000. The payment
date will be January 9, 1975? payment may not be made by
credit to Treasury tax and loan accounts.
Department of
theTREASURY
IlSHINGTON, O.C. 20220
T E LE P H O N E W 04-2041
t 7 89
!_.*.■
i
|For information on submitting tenders:
TELEPHONE W04-2604
■FOR IMMEDIATE RELEASE
December 20, 1974
TREASURY TO AUCTION $2.0 BILLION OF NOTES
The Treasury will auction to the public up to $0.75 billion of 15-month
■notes and up to $1.25 billion of 4-year 4-month notes.
Additional amounts of these
■notes may be issued at the average price of accepted tenders to Government accounts
land to Federal Reserve Banks for themselves and as agents of foreign and international
■monetary authorities.
The notes to be auctioned will be:
an additional amount of the 8% Treasury Notes of Series H-1976 dated
April 9, 1974, due March 31, 1976 (CUSIP No. 912827 DS8) with interest
payable on March 31, 1975, September 30, 1975, and March 31, 1976, and
an additional amount of the 7-7/8% Treasury Notes of Series D-1979 dated
November 6, 1974, due May 15, 1979 (CUSIP No. 912827 DY5) with interest
payable on May 15 and November 15.
The notes will be issued in registered and bearer form in denominations of
■$1,000, $5,000, $10,000, $100,000 and $1,000,000.
They will be issued in book-entry
■form to designated bidders.
Delivery of the 15-month bearer notes will be made on
■January 9, 1975, and delivery of the 4-year 4-month bearer notes will be made on
■January 7, 1975.
Tenders for the 15-month notes will be received up to 1:30 p.m., Eastern Standard
■time, Thursday, January 2, and tenders for the 4-year 4-month notes will be received
Iup to 1:30 p.m., Eastern Standard time, Monday, December 30 at any Federal Reserve
■Bank or Branch and at the Bureau of the Public Debt, Washington, D. C. 20226; provided,
■however, that noncompetitive tenders will be considered timely received if they are
■mailed to any such agency under a postmark no later than January 1
f°r the 15-month
■notes and December 29 for the 4-year 4-month notes. Each tender for the 4-year 4-month
■notes must be in the amount of $1,000 or a multiple thereof.
Each tender for the
■15-month notes must be in the minimum amount of $5,000.
Tenders over $5,000
■must be in multiples of $1,000.
Each tender must state the price offered, if a
■competitive tender, or the term "noncompetitive", if a noncompetitive tender.
.
Competitive tenders must be expressed on the basis of price, with two decimals,
■ e,§*> 100.00. Tenders at a price less than 99.76 for the 15—month notes and 99.01
]por the 4-year 4-month notes will not be accepted.
Tenders at the highest prices
will be accepted to the extent required to attain the amount offered.
Successful
Competitive bidders will be required to pay for the notes at the price they bid.
JNoncompetitive bidders will be required to pay the average price of all accepted
■competitive tenders; the price may be 100.00, or more or less than 100.00.
■
Fractions may not be used in tenders.
The notation "TENDER FOR TREASURY NOTES"
■should be printed at the bottom of envelopes in which tenders are submitted.
The Secretary of the Treasury expressly reserves the right to accept or reject
tenders, in whole or in part, and his action in any such respect shall
W ny or aH
(OVER)
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2
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]J
be final.
Subject to these reservations noncompetitive tenders for $500,000 or
for each issue of notes will be accepted in full at the average price of accepted 1
competitive tenders.
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 Goved
ment securities and borrowings thereon, may submit tenders for the account of ciisto1
provided the names of the customers are set forth in such tenders. Others will not
permitted to submit tenders except for their own account.
Tenders will be received without deposit from commercial and other banks for t
own account, Federally-insured savings and loan associations, States, political sub]
divisions or instrumentalities thereof, public pension and retirement and other pub
funds, international organizations in which the United States holds membership, for]
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 borrowings thereon, Federal Reserve Banks]
and Government accounts.
Tenders from others must be accompanied by payment of 5p
cent of the face amount of notes applied for. However, bidders who submit checks ii|
payment on tenders submitted directly to a Federal Reserve Bank or the Treasury may
find it necessary to submit full payment for the notes with their tenders in order t
meet the time limits pertaining to checks as hereinafter set forth. Allotment noticj
will not be sent to bidders who submit noncompetitive tenders.
Payment for accepted tenders for the 4-year 4-month notes must be completed on
Tuesday, January 7, 1975, and include accrued interest from November 6, 1974, to
January 7, 1975, in the amount of $13.45565 per $1,000 of notes allotted. Payment f1
accepted tenders for the 15-month notes must be completed on Thursday, January 9, B
and include accrued interest from September 30, 1974, to January 9, 1975, in the amoj
of $22.19780 per $1,000 of notes allotted. Payment must be in cash, in other funds
immediately available to the Treasury by the payment date or by check drawn to the o
of the Federal Reserve Bank to which the tender is submitted, or the United States
Treasury if the tender is submitted to it, which must be received at such bank or at
the Treasury no later than:
1) Friday, January 3, 1975, for the 4-year 4-month not
a n d M o n d a y , J a n . 6,197$^ f o r the 15-month notes if the check is drawn on a bank
the Federal Reserve District of the Bank to which the check is submitted, or the Fif
Federal Reserve District in case of the Treasury, or (2) Tuesday, December 31, 1974,
for the 4-year 4-month notes and Thursday, January 2, 1975, for the 15-month notes i
the check is drawn on a bank in another district.
Checks received after the dates s
forth i n the preceding sentence will not be accepted unless they are payable at a
Federal Reserve Bank. Where full payment is not completed on time, the allotment wi
be canceled and the deposit with the tender up to 5 percent of the amount o f notes
allotted will be subject to forfeiture to the United States.
Commercial banks are prohibited from making unsecured loans, or loans
collateralized in whole or in part by the notes 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
agreements with respect to the purchase or
for under this offering at a specific rate
the receipt of tenders for each particular
to purchase or to sell, or to make any
sale or other disposition of the notes
or price, until after the closing hour 0
issue.
J
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DepartmentoftheTREA$llRY
or leSl
pted ÎSHINGTON. D C. 2 0 2 2 0
T E L E P H O N E W 0 4 -2 0 4 1
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BENNETT RECEIVES ALEXANDER HAMILTON AWARD
for tt
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Under Secretary for Monetary Affairs Jack F. Bennett^
has been presented the Alexander Hamilton Award in recognition
of distinguished leadership in the Department of the Treasury.
The Alexander Hamilton Award in the Department's highest honor.
Treasury Secretary William E. Simon, who presented the
award, said of Bennett, "he has^served three Treasury
Secretaries with great distinction. Jack Bennett has
demonstrated unusual competence and a firm grasp of the ^ ^
extraordinary technical complexities of his responsibilities.
The award citation also stated that Bennett "has repre
sented the United States with distinction on the senior
economic councils of our trade and monetary partners and he
has assisted the Secretary with great skill and tireless
energy in negotiations with Finance Ministers and heads of
state.
"In overseeing the Treasury's role in monetary affairs,
international finance and fiscal operations... his wise
counsel and leadership have repeatedly resulted in the develop
ment and implementation of a sound and appropriate course for
the government."
" M r . Bennett's contributions to his country, the Department
of the Treasury and his associates there, are uniquely worthy
of the highest Department citation and honor."
Bennett came to the Treasury as Deputy Under Secretary
in March, 19 71. He became Under Secretary in March, 1974
and was sworn in as Under Secretary for Monetary Affairs on
July 9, 1974. He and his wife, the former Shirley Elizabeth
Goodwin, have four children.
e the
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any
tes bi
our to
Departmental
thefREASURY
December 23,1974
FOR IMMEDIATE RELEASE
SCHMULTS RECEIVES ALEXANDER HAMILTON AWARD
Treasury Under Secretary and former General Counsel,
Edward C. Schmults, received the Alexander Hamilton Award
December 19. The award is the Department's highest honor.
In presenting the award, Treasury Secretary
William E. Simon said, "Ed's broad legal background,
experience and his exceptional ability to recognize and
deal with problems have given him unusual stature in the
Department. Ed Schmults has served two Treasury
Secretaries with competence and distinction."
The award citation additionally stated that Schmults
"has represented the Secretary ably before legislative
committees and on interagency councils. His work in a
variety of specialized fields has made an important
contribution to the passage of significant legislation and
the development of government regulations.
"As the senior official responsible for administration
in the Department, Mr. Schmults' leadership has set an
example that has earned him the respect of those who have
served under him.... and the highest Department citation and
honor."
A graduate of Yale and the Harvard Law School, Schmults
was a partner of the law firm of White & Case before joining
the Treasury in June, 1973.
He and his wife, the former Diane Beers, have three
children. They reside in Chevy Chase, Maryland.
oOo
■ S H IN G T O N . D .C .
20220
TELEPHONE W04-2041
*il
FOR IMMEDIATE RELEASE
December 23,1974
ROOB RECEIVES EXCEPTIONAL SERVICE AWARD
Edward M e Roob, Special Assistant for Debt Management,
received the Treasury Exceptional Service Award in
ceremonies December 19. The award, presented by Treasury
Secretary William E. Simon, comes on the eve of Mr. Roob*s
departure from the Department.
In making the presentation, Simon stated, "In his
nearly two years as Special Assistant, Ed Roob has shown
exemplary skill and professionalism in a period of
extraordinary economic fluctuation and change." Simon
also noted that "his superb training and depth of under
standing have been unique assets to the Treasury."
The Exceptional Service Award is issued in the
highest tradition of commendatory service to the Secretary,
the Department and the United States Government.
Mr. Roob jointed Treasury in April, 1973, after a banking
career with First National of Chicago. Commenting on his
government service, he said he found it "continually
exciting and interesting, with a particular sense of
involvement." He said that he was especially proud of his
work in developing the Federal Financing Bank, where, in
addition to his Treasury duties, he was Vice President.
A native of Chicago, Roob holds degrees from DePauw
University and the University of Chicago. He and his wife,
the former Barbara Leske, have three children.
oOo
IDepartmentofthefREASURY
llNGTON, D C. 20220
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
MINTZ RECEIVES EXCEPTIONAL SERVICE AWARD
Assistant Personnel Director Sidney Mintz received
the Treasury Exceptional Service Award in ceremonies
December 19. The award caps 13 years of Treasury service
for Mintz, who retires from the Department later this
month. He joined Treasury in December, 1961.
In conferring the award, Treasury Secretary William E.
Simon said, "Sidney Mintz has played a key role in the
development of the Department's personnel management policies
and programs. Under his direction, participation in training
programs by Treasury employees at all echelons has greatly^
increased." Mintz has been responsible for the Department s
training and incentive awards programs since 1966.
The award citation also said, "Mr. Mintz' leadership
in the Incentive Awards Program has gained the Department a
reputation for having one of the most effective awards
programs in the Federal Government.
"Through his efforts, the Department issued enabling
guidelines for a Treasury-wide Executive Development Program,
and because of these efforts each bureau now has an ongoing
executive development program."
Mintz is married to the former Dorothy Barker, and
they have three daughters.
oOo
Department of
WÀSHINGTON. O C 20220
iheTREASURY
TELEPHONE W04-2041
DECEMBER 23, 1974
FOR IMMEDIATE RELEASE
TREASURY SECRETARY SIMON NAMES RICHARD B. SELLARS
SAVINGS BONDS CHAIRMAN FOR NEW JERSEY
Richard B. Sellars, Chairman of the Board and Chief
Executive Officer, Johnson § Johnson, New Brunswick, N. J.,
is appointed volunteer State Chairman for the Savings Bonds
Program in New Jersey by Secretary of the Treasury William
E. Simon, effective immediately.
He will head a committee of business, banking, labor,
government and media leaders who -- in cooperation with the
U. S. Savings Bonds Division -- assist in promoting Bond
sales in New Jersey. He succeeds Elmer H. Bobst, Honorary
Chairman of the Board, Warner-Lambert Pharmaceutical Co.,
Inc., Morris Plains, who is named State Chairman Emeritus
after 30 years as Chairman. Sellars has previously served
the Bond Program as a member of the U. S. Industrial Pay
roll Savings Committee in 1972 and 1973.
Sellars was born September 9, 1915, in Worcester,
Mass. He attended American International College, Springfield, Mass., and Maryville College, Maryville, Tenn., be
fore entering the business world in 1936 with the brokerage
firm of Tifft Brothers, Springfield.
In 1939, he joined General Line, a Johnson § Johnson
subsidiary, as a sales representative. The next year, Sel
lars transferred to Johnson § Johnson’s Ortho Pharmaceuti
cal division, becoming Vice President and General Manager
of Ortho’s Canadian branch in 1941. In 1945, he returned
to the U. S. as Assistant to the President of Ortho, where
he was responsible for the establishment of manufacturing
and sales organizations in England and Scandinavia. After
being named a Vice President and Director of Ortho in 1948,
he moved to another Johnson § Johnson subsidiary -- Ethi-
( over )
2
con, Inc. -- as Assistant General Manager in 1949. Later
that year, he was named President of Ethicon, and in 1950
he was elected to the Board of Directors of Johnson § John
son.
Sellars was named Chairman of the Boards of Ethicon
and Ortho and a member of the Johnson § Johnson Executive
Committee in 1957. In 1965, he was appointed Vice Chair
man of Johnson § Johnson International, and Chairman of
both Johnson $ Johnson Ltd., Great Britain, and Codman §
Shurtleff, Inc, In April 1970, he was elected President
of Johnson § Johnson Worldwide, and later that year be
came President of Johnson § Johnson International. He
assumed his present post in April, 1973.
He has long been active in many business, civic and
professional activities, including -- United States Com
mittee of the World Medical Association, Economic Club of
New York, United States Committee for the United Nations,
Chief Executives Forum, Somerset County Park Commission,
New Brunswick Chamber of Commerce and Somerset Hospital.
oOo
202-964-2615
Press inquiries:
SUMMARY OF LENDING ACTIVITY
DECEMBER 9 - DECEMBER 20, 1974
Federal Financing Bank lending activity for the period
December 9 through December 20 was as follows:
On December 12, the Bank purchased $350,000 notes from
the Department of Health, Education and Welfare at an interest
rate of 81. These notes were previously purchased by HEW under
the Medical Facilities Loan Program.
On December 12, the Bank closed a $4,435,000 15-year
loan'with the United States Railway Association. The loan
is guaranteed by the Department of Transportation. Proceeds
will be used to purchase locomotives for the Lehigh Valley
Railroad. The interest rate is 8%.
On December 13, the Bank signed a $107 million commitment
with General Services Administration to finance eight new public
building projects. GSA will make monthly drawings against this
commitment.
On December 18, the Bank purchased $4,570,000 of Small
Business Investment Company 10-year debentures at an interest
rate of 7.70%. These debentures are guaranteed by the Small
Business Administration.
On December 19, Amtrak, the National Railroad Passenger
Corporation, made a $8.3 million drawing against the $100 million
commitment signed October 11, 1974. The interest rate on tnis
drawing is 7.41%. This brings the amount borrowed under the
October commitment to $37.9 million.
Federal Financing Bank loans outstanding presently total
$4.3 billion. Unfilled commitments total $4 billion.
oOo
N ovem ber
30 ,
1^7 A
IH K
UNITED S T A TES SAVINGS BONDS ISSUED AND R E D E E M E D THROUGH
( D o l l a r a m o u n ts in m illio n s — ro u n d e d a n d w i ll n o t n e c e s s a r ily a d d to t o t a l s
DESCRIPTION
AMOUNT ISSUED-—
^
M ATU R ED
I geries A-1935 th ru D-1941
__
1 Series F and G -1941 th r u 1952
1 ppries .T and K -1952 th r u 1957
AMOUNT
.
REDEEMED—'
AMOUNT
OUTSTANDING—'
% OUTSTANDING
OF AMOUNT ISSUED
5003
29521
3754
4999
29502
37 4 8
4
19
5
1937
8551
13752
16057
12651
5780
5519
1760
7 7 51
12481
177
801
1271
1 555
13 6 4
768
859
965
9 .1 4
9 .3 7
9 .2 4
9 .6 8
1 0 . 7 8 ________
1 3 . 2 9 ________
1 5 f 56________
1035
___ 1 8 . 1 9 ________
1 9 .2 4
1 9 .2 4
1 9 . 7 8 ________
-08
.0 6
.1 3
IIN M A T U R E D
■ Series E - ^ :
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
57 2 7
5690
4999
A39A
45 3 6
5204
5320
5 5AA
53 5 7
50 5ft
AQ 57
A6 50
A6 ft6
4787
4667
5261
51 27
5015
5A3ft
53ft6
50 6 7
V ftO
5070
5787
6388
6318
4576
7 50
U n c la ss ifie d
T o ta l S e rie s E
1 Series H (1952 th ru M ay, 195 9 ) -r/
H (J u n e , 1959 th r u 1 974)
T o ta l S e rie s H
T o ta l S e rie s E a n d H
I All S eries
T o ta l m a tu re d
T o ta l u n m a tu re d
G rand T o t a l
2 /L
14502
1 1 7ft7
501 9
4 6 An
4761
4655
4037
3493
36AO
962
839
897
1104
4100
1189
4131
1277
A967
1261
A09 5
1235
3R 23
1294
3657
1249
3A07
1347________
3339
1487________
33n l
1525
3142
1894
3367
1835
3292
1815
3201
2096
3342
3261
2125
2027
3040
2008 ________
2772
2359________
2660
2686
3101________
2587
3 8 0 1 _____
2237
4081________
881________ _____3.694________
628________ ______ L2J________
1 6 ,8 5
2 1 . 2 1 _________
2 1 . 4 5 ________
2 3 . 0 3 ________
2 3 . 5 4 ________
2 4 . 4 2 ________
2 6 .1 3 ________
9 6 .8 6
___ 2 8 . 7 5 ________
3 1 . 0 6 ________
3 2 .6 5
3 6 . 0 0 ________
3 5 . 7 9 ________
3 6 . 1 9 ________
3 8 .5 4
3 9 . 4 5 ________
4 0 . 0 0 ________
A 2 .0 1
___ 4 7 . 0 0 _________
5 3 . 5 9 _________
7x9—50_________
___ 64-5-9_________
___ 8 0 -7 3 _________
-----1&T-1-3-------------
204660
149250
55411 ________
5485
9986
41 4 3
3595
1343________
63 8 8 ________
2 4 . 4 8 _________
6 3 .9 7
15471
7738
7731________
4 9 . 9 7 _________
63142
220131
1 5 6 9 8 8 ..... ......
38278
220131
258409
156988
28
63142
1 9 5 2 3 6 ......
63170
38248
e accrued d isco u n t.
3m wt redemption valu°-
ption ot otvner b o n d s m a y be h e ld a n d w i l l e arn in te re s t tor a d d itio n a l p e r io d s a lte r o r ig in a l m a turity da tes.
Form PD 3812 (R ev . Mar. 1974) — D ept, of th e T re a s u ry — B ureau of the P u b lic D ebt
2 7 .0 7
2 8 .6 8
. 0 7 _________
2 8 . 6 8 _________
----- 2 4 -4 5 --------------
I DepartmentoftheTREASURY
lASHINGTON. D.C. 20220
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
December 23, 1974
RESULTS OF AUCTION OF 2-YEAR TREASURY NOTES
The Treasury has accepted $2.0 billion of the $2.8 billion of tenders
received from the public for the 2-year notes auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield
Highest yield
Average yield
7.15%
7.37%
7.32%
1/
The interest rate on the notes will be 7-1/4%.
the above yields result in the following prices:
Low-yield price
High-yield price
Average-yield price
At the 7-1/4% rate,
100.183
99.781
99.872
The $2.0 billion of accepted tenders includes 39% of the amount of
notes bid for at the highest yield and $0.2 billion of noncompetitive tenders
accepted at the average yield.
In addition, $0.3 billion of tenders were accepted at the average-yield
price from Government accounts and from Federal Reserve Banks for themselves
and as agents of foreign and international monetary authorities.
1/
Excepting 5 tenders totaling $5,180,000
DEPARTMENT O F .THE TREASURY
TREASURY DEPARTMENT ORDER NO. 234
DIRECTIVE TO SELL GOLD
By virtue of the authority vested in me as
Secretary of the Treasury by Section 9 of the Gold
Reserve Act of IQS1! (31 U.S.C. 733) and Reorganization
Plan No. 26 of 1950, I hereby authorize and direct the
Under Secretary for Monetary Affairs, Jack Bennett,to
take all necessary and proper measures, including
direction of other officials of the Department and
utilization of the services of other government
agencies, for the public sale of 2,000,000 fine troy
ounces of gold on January | ‘,n'7r
Dated: December 18, 1974
DEPARTMENT OF THE TREASURY
TREASURY DEPARTMENT ORDER 221-3
TRANSFER OF FUNCTIONS TO THE
BUREAU OF ALCOHOL, TOBACCO AND FIREARMS
By virtue of the authority vested in me as Secretary of
the Treasury, including the authority in Reorganization Plan
No. 26 of 1950, it is ordered that:
1.
There is hereby transferred, as specified herein, the
functions, powers and duties of the Internal Revenue Service
arising under laws relating to wagering, to the Bureau of
Alcohol, Tobacco and Firearms (hereinafter referred to as the
Bureau) .
2.
y.* ; '
r
"*''
The Director of the Bureau shall perform the functions,,
|exercise the powers, and carry out the duties of the Secretary
in the administration and enforcement of the following provisions
|of law:
Chapter 35 and Chapters 40 and 61 through 80, inclusive,
of the Internal Revenue Code of 1954 insofar as they relate to
Iactivities administered and enforced with respect to Chapter '35.
3.
All functions, powers and duties of the Secretary which
¡relate to the administration and enforcement of the laws
[specified in paragraph 2 hereof are delegated to the Director.
[Regulations for the purposes of carrying out the functions,
[powers and duties delegated to the Director may be issued by him
■with the approval of the Secretary.
/ d '*
V* A'•” ,:
-
4.
2
-
All regulations prescribed, all rules and instructions
issued, and all forms adopted for the administration and enforce
ment of the laws specified in paragraph 2 hereof, which are in
effect or in use on the effective date of this Order, including
amendments thereto, shall continue in effect as regulations,
rules, instructions and forms of the Bureau until superseded or
revised.
5.
All existing activities relating to the assessment,
collection, processing, depositing, or-accounting for taxes
(including pena3-ties and interest) , under the laws specifiea in
paragraph 2 hereof, shall continue to be performed by the
Commissioner of Internal Revenue until the Director shall
otherwise provide with the approval of the Secretary.
6. (a)
The term "Commissioner of Internal Revenue"
whenever used in regulations, rules, instructions, and forms
issued or adopted for the administration and enforcement of the
laws specified in paragraph 2 hereof, which are in effect-or in
use on the effective date of this Order, shall be held to mean
the Director.
(b)
The term "internal revenue officer" and "officer,*1
employee or agent of the internal revenue" wherever used in
such regulations, rules, instructions and forms, in any law
specified in paragraph 2 above, and in 18 U.S.C. 1114, shall
include all officers and employees of the United States engaged
E X E C U T I V E O F F I C E OF T H E P R E S I D E N T
COUNCIL ON WAGE AND PRICE STABILITY
726 J A C K S O N P L A C E , N.W.
W A S H I N G T O N , D. C .
)f/ ,
/
/
20506
FOR IMMEDIATE RELEASE
Thursday, December 26, 1974
For information call
(202) 456-6757
MEMORANDUM FOR CORRESPONDENTS:
Attached is a copy of the Council on Wage and Price
Stability’s submission of comments to the National
Highway Traffic Safety Administration regarding its
Notice dated December 16, 1974 [See 39 F.R. 43639]
on the question of whether the effective dates of
Standard 121, Air Brake Systems, ought to be postponed
in the light of current economic conditions.
o 0 o
CWPS-18
Attachment
D
B E FO R E THE
NATIONAL HIGHWAY T R A FFIC SA FETY ADMINISTRATION
MOTOR V E H IC L E S A F E T Y ST A N D A R D NO. 121
AND
DOCKET 74-10; N O T IC E 8
AIR BR A K E SY STEM S
COMMENTS OF THE C O U N C IL ON W AGE A N D P R IC E ST A B IL IT Y
REGARDING P O ST P O N E M E N T OF E F F E C T IV E D A T E S
T he C o u n cil on W age and P r ic e S ta b ility (CW PS) h e r e b y su b m its
co m m en ts a s r e q u e s te d b y th e N a tio n a l H igh w ay T r a ffic S a fety
A d m in istra tio n in its N o tic e d a ted D e c e m b e r 16, 1974 [S ee 39 F . R.
43639] on th e q u e s tio n of w h e th e r th e e f f e c t iv e d a te s of Standard 121,
A ir B rak e S y s te m s , ought to b e p o stp o n e d in th e lig h t of c u r r e n t
econ om ic c o n d itio n s .
The C o u n cil on W age and P r ic e S ta b ility w a s c r e a te d by P u b lic
Law 9 3 -3 8 7 on A u g u st 24, 1974.
In a d d itio n to it s d u tie s of m o n ito r in g
o v e r a ll le v e l s of w a g e s and p r i c e s , th e C o u n c il h a s th e e x p r e s s
statutory m a n d a te to " r e v ie w and a p p r a is e th e v a r io u s p r o g r a m s ,
2
p o l i c i e s , and a c t iv it ie s of th e d e p a r tm e n ts and a g e n c ie s o f th e
U nited S ta te s fo r th e p u r p o se o f d e te r m in in g th e e x te n t to w h ich
th o s e p r o g r a m s and a c t iv it ie s a r e co n tr ib u tin g to in fla tio n . "
[P u b lic Law 9 3 -3 8 7 , S e c . 3 (a )(7 )],
C o n seq u e n tly y ou r in t e r e s t
in th is p r o c e e d in g p a r a lle ls th e in t e r e s t sta te d by th e N a tio n a l
H igh w ay T r a ffic S a fety A d m in is tr a tio n ( NHTSA) in it s N o tic e of
D e c e m b e r 16, 1974, n a m e ly , to s e e th a t th e e c o n o m ic im p lic a tio n s
of th e ad op tion of Standard 121 a r e fu lly u n d e r sto o d .
It is n ot th e p o s itio n of CW PS th at any g o v e r n m e n ta l a c tiv ity
w h ich im p o s e s a d d itio n a l c o s t s upon th e e c o n o m y a s a w h o le or
upon s o m e s e g m e n t of it is by d e fin itio n " in fla tio n a ry " and ough t,
t h e r e f o r e , to b e c u r ta ile d .
H o w e v e r , th e c u r r e n t h e ig h te n e d
c o n c e r n o v e r in fla tio n r e q u ir e s th at a g e n c ie s p r o p o s in g c o s t in c r e a s in g a c t iv it ie s b e p a r tic u la r ly c a r e f u l to a s s u r e both
t h e m s e lv e s and th e p u b lic th at th e ta n g ib le and in ta n g ib le b e n e fits
of su ch p r o g r a m s in d eed e x c e e d th e c o s t s th e y w ill c a u s e o th e r s
to b e a r .
A g e n c ie s h a v e a p a r tic u la r duty to r e e x a m in e p a s t
d e c is io n s in th e lig h t of ch a n g ed e c o n o m ic c ir c u m s t a n c e s - su ch
a s th e r e c e n t s u b s ta n tia l in c r e a s e s in th e c o s t of fu e l and o th er
m a t e r ia ls - to s e e th at su ch d e c is io n s a r e s t i l l ju s tifie d .
F u rth er
m o r e , w e b e lie v e th at a g e n c ie s a r e ju s tifie d in m a k in g m a x im u m
l^f U
3
use of w h a t e v e r administrative discretion they h a v e concerning the
timing of the implementation of rules, regulations, and standards
if by doing so short-run inflationary p r e s s u r e s can be eased.
This
is especially true w h e r e a particular s e g m e n t of the e c o n o m y has
been or is likely to be confronted with a large n u m b e r of costly
g o v e r n m e n t a l actions all of w h i c h m a y be i m p l e m e n t e d over a
relatively short period of time.
W e c o m m e n d the N H T S A for its apparent willingness to u n d e r
take such an analysis.
W e u rge other agencies to emulate N H T S A
in r e e x a m i n i n g their p r o g r a m s and policies to d e t e r m i n e if
similar c h anges in either dates of i m p l e m entation or m e t h o d s of
administration m i g h t not be appropriate.
T h e c o m m e n t s that follow are intended to assist N H T S A in its
réévaluation of Standard 121 a nd in any other similar analyses
that it will p e r f o r m in the future.
In its Notice of D e c e m b e r 16, 1974, N H T S A stated " T h e N H T S A
has previously concluded, of course, that the public benefits of
the resulting i m p r o v e m e n t s in braking capacity w o u l d outweigh the
costs. "
T h e Notice gives no indication, h o w e v e r ,
upon w h i c h this conclusion is based.
of the evidence
Furthermore,
our analysis
of the public r e c o r d surrounding the promulg a t i o n of Standard 121
d o e s n o t r e v e a l th e e x i s t e n c e of an y s tu d y d i r e c t e d to t h i s s u b je c t,
t h o u g h it is p o s s i b l e , o f c o u r s e , t h a t i n t e r n a l s t a f f s t u d i e s e x i s t .
If t h e y d o , w e c o n s i d e r it c r u c i a l t h a t t h e y b e m a d e p u b l i c s o t h a t
i t c a n b e d e t e r m i n e d if N H T S A 's c o n c l u s i o n s b e a r u p u n d e r s c r u t i n y .
O u r own v e r y p r e l i m i n a r y a n a ly s is b a s e d up o n p u b lic d a ta
in d ic a te s th a t th e b e n e fits th a t im p r o v e d t r u c k b r a k in g c a p a b ilitie s
w ill h a v e to g e n e r a t e w ill in d e e d h a v e to b e l a r g e in v ie w of th e
c o s ts th e y w ill im p o s e upon th e e c o n o m y .
W e b e lie v e th a t th e
c a p i t a l c o s t s a l o n e o f m e e t i n g S t a n d a r d 121 m a y r u n t o a s m u c h a s
$400 m i l l i o n p e r y e a r .
[ S e e A t t a c h m e n t 1],
In a d d i t i o n ,
t h e i n s t a l l e d s y s t e m s c e r t a i n l y w o u ld r e q u i r e m a i n t e n a n c e a n d
w o u ld a d d w e ig h t to t r u c k s , t h e r e b y r a i s i n g o p e r a t in g c o s t s a n d
re d u c in g p o te n tia l f r e ig h t r e v e n u e s , p a r ti c u la r ly fo r th e n u m e ro u s
la rg e r o v e r-th e :-ro a d v e h ic le s.
One tr u c k m a n u fa c tu rin g e x e c u tiv e
r e c e n tly s ta te d th a t th e lo s t re v e n u e s a lo n e a s a r e s u l t of th e
a d d e d w e i g h t p e n a l t y o f m e e t i n g S t a n d a r d 121 m i g h t a m o u n t t o a s
m u c h a s $660 p e r y e a r fo r a fiv e ax le rig .
[ " C o s t- B e n e f it S tu d ie s
U r g e d in S a f e t y , E n v i r o n m e n t a l L a w s , " T r a n s p o r t a t i o n T o p i c s ,
N o v e m b e r 18, 1974. ] W e do n o t m e a n t o e n d o r s e t h i s c a l c u l a t i o n it a p p e a r s to u s to b e a n o v e r e s t i m a t e of th e r e v e n u e l o s s th a t
m i g h t r e a l i s t i c a l l y o c c u r in a c t u a l p r a c t i c e .
Y et fa c to rs such as
'• / C
(?r
5
r e v e n u e l o s s , i n c r e a s e d f u e l c o n s u m p t i o n d u e to h i g h e r w e i g h t ,
and i n c r e a s e d m a in te n a n c e e x p e n d itu r e s a r e a ll f a c t o r s th a t
o u g h t to b e c o n s i d e r e d e x p l i c i t l y in a n y N H T S A a n a l y s i s .
C W P S f u r t h e r w o u ld s u g g e s t t h a t an y a n a l y s i s p e r f o r m e d b y
N H T S A c o n c e r n i n g t h e e c o n o m i c i m p a c t of S t a n d a r d 121 b e b a s e d
upon th e m o s t r e c e n t d a ta c o n c e r n in g h ig h w a y a c c id e n ts .
It h a s
b e e n w i d e l y r e p o r t e d in t h e n e w s m e d i a t h a t h i g h w a y f a t a l i t y r a t e s
h a v e d e c l i n e d d r a m a t i c a l l y s i n c e t h e i m p o s i t i o n o f t h e 55 m p h
m a x im u m sp e e d lim it by m a n y S ta te s d u rin g th e fu e l c r i s i s la s t
year.
R e c e n tly C o n g r e s s v o te d to m a k e t h i s n ew l i m i t p e r m a n e n t
on t h e I n t e r s t a t e H i g h w a y S y s t e m .
In a d d i t i o n , C o n g r e s s h a s j u s t
v o te d to a llo w h i g h e r w e ig h t l i m i t s f o r t r u c k s o p e r a tin g on I n t e r
state h ig h w a y s .
E a c h of t h e s e f a c t o r s o u g h t t o h a v e a s i g n i f i c a n t
im p a c t on th e b e n e f i ts r e s u l t i n g f r o m i m p r o v e d b r a k i n g p e r f o r m a n c e
a n d b o t h o u g h t t o r e c e i v e e x p l i c i t c o n s i d e r a t i o n in a n y a n a l y s i s
co n d u cted by N HTSA .
F in a l ly , N H T SA s h o u ld e x a m in e a l t e r n a t i v e m e a n s of
im p ro v in g t r u c k b r a k in g p e r f o r m a n c e w h ic h , w h ile th e y m a y n o t
a c h i e v e a l l t h e g o a l s c u r r e n t l y e m b o d i e d in S t a n d a r d 121, n e v e r t h e
le ss p r o m is e s u b s ta n tia l im p ro v e m e n ts o v e r c u r r e n t p e r f o r m a n c e
le v e ls a t m u c h lo w e r c o s ts .
6
W e t h e r e f o r e r e q u e s t t h a t NJ.ITSA p o s t p o n e i n d e f i n i t e l y t h e
i m p l e m e n t a t i o n o f S t a n d a r d 121 p e n d i n g a d e t a i l e d , f o r m a l s t u d y
of i t s e c o n o m i c i m p a c t .
W e u r g e th a t th is stu d y c o n s id e r th e
f a c t o r s w e h a v e r a i s e d a n d t h a t , w h e n c o m p l e t e d , it b e m a d e a
p a r t of t h e p u b l i c r e c o r d s o t h a t i n t e r e s t e d p a r t i e s , i n c l u d i n g
C W P S , c a n c r i t i q u e it .
In d eed , w e b e lie v e th a t a ll m a jo r s ta n d a rd
s e ttin g a c t io n s p r o p o s e d b y N H T SA s h o u ld be t h e s u b je c t of
f o r m a l e c o n o m ic im p a c t a n a l y s i s a n d th a t th i s a n a l y s i s sh o u ld
_*/
a lw a y s b e a m a t t e r of p u b lic r e c o r d .
R e s p e c tfu lly S u b m itte d ,
G eo rg e C. E ad s
A ssista n t D ire c to r
G o v e rn m e n t O p e ra tio n s and
R e s e a r ch
26 D e c e m b e r 1974
* / T h e N a t i o n a l T r a f f i c a n d M o t o r V e h i c l e S a f e t y A c t o f 1966 p r o v i d e s
th a t th e S e c r e t a r y of T r a n s p o r t a t i o n , a n d b y h i s d e le g a tio n NHTSA ,
s h a ll c o n s i d e r " w h e th e r an y s u c h p r o p o s e d s t a n d a r d is r e a s o n a b l e ,
p r a c t i c a b l e a n d a p p r o p r i a t e . . . . " 15 U. S. C . S e c . 1 3 9 2 (f)(3 ). T h i s
la n g u a g e c a n b e i n t e r p r e t e d , a s it is C W P S : u n d e r s ta n d i n g th a t
N H T S A h a s , t o d i r e c t t h e S e c r e t a r y a n d N H T S A to c o n s i d e r t h e
e c o n o m ic i m p a c t of a p r o p o s e d m o t o r v e h i c le s a f e ty s t a n d a r d .
A11 £ichinen t 1
Estimated Capital Costs of Implementing Standard 121
(Air Brake Systems)
1973 Data
»I
(2)
,,
(3)
,*
Ijoss_ Veh ic.1e _I'Vei,rn t (1 b_s .)__ Kumb er o f Veh ie 1o s A f fe c t od~ To ta 1 Co st:f (00 0)
Ir actors/T rucks/B uses
■ 9,501 - 26,000
■26,001 - 33,0 00
■OVER 33,000
67,699 - 101,650
42,200
165,920
$67,699 - $ 10 1,6 50
$42,200
$165,920
Hfii- Tra i1er s
■Not Available
165,641
$123,481
Total
t-^For tractors/trucks /buses, see Attachment. 2.
■ Attachment 3 .
11/
■ For tractors/trucks/buses, Col.
I
I Col. (2) x $ 750/vehic1e .
I assumptions :
$399,500 - $433,251
For semi-trailers, see
(2) x $ 100 0/vehicle;
for semi-trail ;rs,
These cost figures are based upon the following
I For tractors/trucks/buses: a) two axles per vehicle equipped with
I antilocks; b) cost of $500/axle or $1000/vehicle; c) installation
■ limited to weight categories shown.
I For semi-trailers: a) one-half assumed to be part, of combination
■vehicles with 5 or more axles, thus having a minimum of two axles
■Per trailer; the other half assumed to have only one axle (those
■ assumptions arc consistent with the most recent data on U.S. truck
■ inventory); b) cost of $500/axle or an average of $ 750/vehic1e .
1/
I The comparable figures based upon 1972 data would be $355,033 I $^85,037.
Attachment
2
Factory Sales of Tractors, Trucks and Buses By
Gross V eh ic1e W c i$h t
Calendar Year 1972 and 1973
19 7 2
Number of
Vehicles Sold
GVIV C a t e g0 ry
(lbs .)
Nil
Nil
Nil
Nil
33 - 50
100
100
584,612
44,221
9,945
28,080
182,058
44,213
141, 127
6,001 - 10,000
10,001 - 14,000
14,001 - 16,000
16,001 - 19,500
19,501 - 26,000
26,001 - 33,000
OVER 33,000
Estimated Vehicles Affected
By St an d ar d 121
Number
Percent.
(%)
t
Nil
Nil
Nil
Nil
60,625 - 91,029
44,213
141,127
245,965 - 276,369
Totals 1,034,256
19 75
GVW Cate gory
(lbs. )
6,001 - 10,000
10,001 - 14,000
14,001 - 16,000
16,001 - 19,500
19,501 - 26,000
26,001 - 33,000
OVER 33, 000
•
Totals
Number of
Vehicles Sold
Estimated Vehicles Affected
By Standard 121
Percent
N umb er
tftjj
761, 4 S1
44,724
7,477
18,941
203,300
42,200
165,920
1 ,244,043
Nil
Nil
Nil
Nil
33 - 5 0
100
100
Nil
Nil
Nil
Nil
67,699 - 101,650
42, 200
165 ,920
275,819 - 309,770
Sour c e :
"1974 Motor Truck F a c t s " , Motor Ve h i c l e Ma n u f a c t u r e r s
A s s o c i a t i o n of t h e U. S . , I nc. p . 9 .
Not es :
The e s t i m a t e d p e r c e n t a g e of v e h i c l e s e q u i p p e d wi t h a i r
b r a k e s ys t ems was o b t a i n e d from MVMA s t a f f p e r s o n n e l .
Ve h i c l e s over 19,50] l b s . , a c c o u n t e d f o r about. 3 3 percent
of a l l veh i.c 1es s o l d over 6,000 1bs . GVW for 1973.
A t t a c h m e n t '3
F a c t o r y S h i p me n t s o f S e mi - I r a i 1 e r s : 1 9 6 9 - i 9 7 3
Year
1969
1970
1971
1972
1973
Source :
Co mp l e t e d T r a i l e r s
and C h a s s i s
(Except Dé t a c h a b l e s )
138,347
150,709
103,784
145,424
1 6 4 , 641
Detachable
T r a i l e r Chassis
(Sold S e p a r a t e l y )
(Not A v a i l a b l e )
it
it
it
12,790
U. S. D e p a r t m e n t o f Commerce, Bur e au o f t h e
Ce ns us ( Tr uc k T r a i l e r s ) .
Ce ns us d a t a
p r o v i d e d by Mot or V e h i c l e M a n u f a c t u r e r s
Association s t a f f personnel.
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Date:
1974-12-26
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5
December 27, 1974
FOR RELEASE 6:30 P.M.
RES
J^
—\\-
Tenders for $2
of 26-week Treasury
were opened at the
I
Is and for $2.2 billion
i January 2, 1975,
letails are as follows:
r
7 ' 0 3 Ä
RANGE OF ACCEPTED
COMPETITIVE BIDS:
High
Low
Average
a/
77/3
:i o n s
/ *
7, A V <
-week bills
ig July 3, 1975____
Equivalent
Annual Rate
7.046%
7.133%
7.101%
1/
Excepting 1 te:
were allotted ^4%.
were allotted 44%.
Tenders at tl
Tenders at tl
TOTAL TENDERS APPL: 7 / 7 7
District
Ae£
Boston
$
New York
3,
Philadelphia
Cleveland
Richmond
Atlanta Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTALS
7
/
d For
/4
,600,000
,290,000
,475,000
,610,000
,105,000
,215,000
,345,000
,915,000
,055,000
ERVE DISTRICTS:
,600,000
,290,000
,475,000
, 010,000
,105,000
,215,000
,945,000
,915,000
,055,000
Accepted
11,760,000
,760,000 $
,705,000 1,833,065,000
12.995.000
,995,000
17.410.000
,970,000
17.025.000
,525,000
14.350.000
,350,000
87.975.000
,155,000
17.275.000
,675,000
3,715,000
,715,000
17.465.000
,865,000
12.740.000
,740,000
154,245,000
,245,000
$3,749,595,000 $2,700,035,000 b/$3,703,700,000 $2,200,020,000
b/ Includes $358,540,000 noncompetitive tenders accepted at average price.
SJ Includes $188,950,000 noncompetitive tenders accepted at average price.
.1/ These rates are on.a bank-discount basis. The equivalent coupon-issue
yields are 7-34% for the 13-week bills, and 7.47% for the 26-week bills.
c/
ember 27, 1974
FOR RELEASE 6:30 P.
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2.7 billion of 13-week Treasury bills and for $2.2 billion
of 26-week Treasury bills, both series to be issued on January 2, 1975,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
High
Low
Average
a/
13-week bills
maturing April 3, 1975
Price
98.232 a/
98.188
98.202
26-week bills
maturing July 3, 1975
Equivalent
Annual Rate
6.994%
7.168%
7.113%
y
Price
96.438
96.394
96.410
Equivalent
Annual Rate
7.046%
7.133%
7.101%
1/
Excepting 1 tender of $395,000
Tenders at the low price for the 13-week bills were allotted 44%.
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
$
38,150,000 $
26,590,000
New York
3,169,535,000 2,221,535,000
Philadelphia
30.300.000
30.300.000
Cleveland
37.600.000
37.600.000
Richmond
24.290.000
24.290.000
Atlanta *
28.475.000
28.475.000
Chicago
167.610.000
117.010.000
St. Louis
37.105.000
29.105.000
Minneapolis
3,215,000
3,215,000
Kansas City
47.345.000
46.945.000
Dallas
22.915.000
19.915.000
San Francisco
143.055.000
115.055.000
TOTALS
Applied For
$
Accepted
21,760,000 $
11,760,000
3,054,705,000 1,833,065,000
33.995.000
12.995.000
42.970.000
17.410.000
21.525.000
17.025.000
14.350.000
14.350.000
177.155.000
87.975.000
28.675.000
17.275.000
3,715,000
3,715,000
19.865.000
17.465.000
20.740.000
12.740.000
264.245.000
154,245,000
$3,749,595,000 $2,700,035,000 b/$3,703,7.00,000 $2,200,020,000
—/ Includes $358,540,000 noncompetitive tenders accepted at average price.
£/ Includes $188,950,000 noncompetitive tenders accepted at average price.
y These rates are on.a bank-discount basis. The equivalent coupon-issue
yields are 7.34% for the 13-week bills, and 7.47% for the 26-week bills.
c/
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Date:
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DepartmentoftheTREASURY
ASHINGTON. D.C 20220
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
December 30, 1974
OFFICE OF ECONOMIC STABILIZATION
CEASES AS OF DECEMBER 31, 1974
By Executive Order 11788, the Office of Economic
Stabilization terminates at midnight December 31, 1974.
That order provided that the Treasury Department take
over the final operations of the Cost of Living Council
July 1, 1974, and by Treasury Order #233 the Treasury
Secretary delegated OES responsibility to the Assistant
Secretary (Administration).
With the formal termination of all OES activities,
a number of contact points have been established within
the Treasury Department for the variety of Stabilizationrelated questions that could arise.
•
Information on the Historical Working Papers
and other public documents of the Program
may be obtained through the Office of Public
Affairs, Department of the Treasury, 964-8706
or 964-2041.
•
Litigation and case matters should be referred
to the Office of the General Counsel, Department
of the Treasury, 964-2852.
•
Questions regarding Stabilization Program records
or public disclosure information should be referred
to the Stabilization Records Office, 2000 M Street,
N. W . , Washington, D. C. 20508, 254-8546.
For further information on the termination of the
Office of Economic Stabilization contact Richard J. Garvey
at 254-3203.
FOR IMMEDIATE RELEASE
December 30, 1974
OFFICE OF ECONOMIC STABILIZATION
ISSUES HISTORICAL WORKING PAPERS
The Department of the Treasury today released a
three-volume set of historical working papers on the
Economic Stabilization Program and announced the formal
cessation of the activities of the Office of Economic
Stabilization (OES), which was established on July 1,
1974, to complete and chronicle the affairs of the Cost
of Living Council (CLC).
Noting a number of achievements, Director of the
OES, Henry H. Perritt, Jr. said, "In addition to reso
lution of virtually all case matters, this six month
effort has produced as a written legacy of the Nation's
recent wage and price control program in the form of a
three-volume history of selected aspects of policy and
operations of the Stabilization Program. This Historical
Working Papers on the Economic Stabilization Program,
1971-1974 is intended to be of use to present and future
students and practitioners of economic policy making.
In individually authored articles, the compendium covers
such diverse areas as policy planning, the policy of
selective decontrol, data systems and the interaction
between Congress and the Executive Branch on Stabiliza
tion Program matters."
These three volumes, one of which is a data appendix,
are available for purchase through the Government Printing
Office and will be found in selected Federal depository
libraries across the country as well as the Treasury
Department Library in Washington, D. C. In
addition, a collection of most of the public documents
of the Program is available to the public on microfiche
in key depository libraries as well as the Library of
Congress, and the Treasury Department Library.
The Office of Economic Stabilization was established
by. Executive Order #11788 on June 19, 1974, directing
that the office would:
•
Provide for the continuation of any action or
pending proceedings, civil or criminal, not
finally determined prior to May 1, 1974.
•
Continue to receive reports and review price
and pay adjustments with respect to work per
formed or prices charged prior to May 1, 1974.
•
Receive and properly dispose of all records of
the Cost of Living Council.
•
Provide for the compilation of a history of
the Economic Stabilization Program.
•
Terminate its activities no later than
December 31, 1974.
The Office has substantially completed all of its
tasks and in accordance with the order is being disbanded,
effective tomorrow, December 31. To the extent that
further actions may be required after December 31, 1974,
the authority will be exercised by the Assistant Secretary
(Administration) of the Treasury, pursuant to an appropriate
Treasury order.
During its six month existence, the Office of
Economic Stabilization processed and adjudicated over
1,000 separate reports and cases on wage and price
matters falling under the jurisdiction of the Economic
Stabilization Act, which expired on April 30, 1974.
During this time period the OES also assisted the
Department of Justice with litigation actions relating
to Stabilization activities. A number of compliance
and litigation matters are still outstanding and any
remaining action in these cases will be taken by the
Justice Department.
In pursuit of compliance activities, Mr. Perritt
pointed out that "During the tenure of the OES, the
Government collected some $820,000 in settlements from
corporations found to be in violation of Stabilization
Program regulations as a result of OES compliance activities.
Since July 1, 1974, the OES had also been active
in attempting to find positions for former Cost of Living
Council (CLC) employees. This effort, begun in early
1974, resulted in nearly 90% of CLC employees accepting
job opportunities elsewhere in the government or private
sector.
FACT SHEET ON HISTORICAL WORKING PAPERS ON THE
ECONOMIC STABILIZATION PROGRAM 1971-1974
Background
•
The effort was conceived
in early 1974 and begun
in June under the auspices of the Cost of Living
Council. This activity was transferred to the Office
of Economic Stabilization on July 1, 1974.
•
There are three volumes in this compendium; one of which
is a data appendix.
•
There are *17 separate working papers in the collection.
•
This collection was prepared primarily by former
Stabilization Program employees with the assistance of
some 15 summer interns, over a five month period begin
ning in June of 1974.
•
Numerous former program personnel reviewed drafts and
participated in roundtable discussions on the different
aspects of the program included in the compendium.
•
The articles are individually authored and the views
contained in each represent the opinion of the
authors, based on their own research and judgment.
•
There is little, if any evaluative material on program
po icy or on the economic effects of the controls program.
Any such material represents only the opinion of the
individual authors.
•
None of these papers represent an official government
view.
•
The data in the data appendix have been carefully
screened, according to accepted statistical procedures,
to safeguard proprietary data.
•
Data sets that would otherwise be proprietary if presented
for an individual firm are produced in aggregated form
by four-digit Standard Industrial Classification (SIC)
codes.
The Subject Matter
•
A list and short synopsis of each paper follows.
L I S T OF S U B J E C T M A T T E R
lj Policy Planning
2. Congress and Controls
3. Price Control Mechanisms
4. Wage Stabilization Policies
5. Economic Controls on State and Local Government
6. Case Processing
7. Price Exceptions
8. Compliance and Enforcement
9. Price Data and Data Systems
10. Removing Controls: The Policy of Selective Decontrol
11. The Impact of the Economic Stabilization Program on
Business Fixed Investment
__
12. Advisory Committees
13. Litigation Under the Economic Stabilization Program
14. Communicating with the Public
15. History of Petroleum Price Controls
16. Rent Controls During the Economic Stabilization Program
17. Notes on Organization and Management Issues
18. Who's Who
Data Appendix
POLICY PLANNING
This paper discusses the development of economic
policy just prior to and during the Economic Stabilization
Program in the context of the economic and political
pressures that influenced the development of wage
and price controls.
The paper focuses
not on economics
but on the policy formation process. It traces the way in which
H
different economic strategies emerged from differing economic and
political circumstances, and from the differing objectives
and viewpoints of various policy makers.
CONGRESS AND CONTROLS
The Economic Stabilization Program was based upon
the authority vested in the President by the Economic
Stabilizaton Act of 1970.
This paper, in reviewing the
legislative history of the Act, describes the interaction
between the Program and the Congress, and traces the
evolving Congressional attitude toward wage and price
controls during the period 1970 to 1974.
PRICE CONTROL MECHANISMS
This paper discusses a variety of regulatory
mechanisms for price control and explores their impact
under different economic conditions.
Some of these
options were utilized during the life of the Program?
some were merely discussed.
This paper should serve as
a brief overview of the various options available to
future controllers.
Also, it serves as a guide for
reading between the lines of the regulations of the
Economic Stabilization Program in order to understand
some of their less obvious intentions and shortcomings.
WAGE STABILIZATION POLICIES
Throughout the Economic Stabilization Program, wage
controls were administered separately from price controls.
The first paper in this group describes the concepts
governing wage stabilization during the life of the Program,
specifically discussing the operations of the Phase II wage
stabilization effort.
The following paper, dealing with
Phase III and IV wage stabilization, presents a view of
the contrasting philosophy and style of wage stabilization
policies that followed Phase II.
ECONOMIC CONTROLS ON
STATE AND LOCAL GOVERNMENT
Although initially subject to some controversy,
state and local government activities were construed to be under
the jurisdiction of formal wage and price controls.
As the Program went on, the focus of its activities in
the state and local government area was concentrated on
wage determination.
This monograph describes the
philosophy and operations of the Program's treatment of
public sector wage stabilization— an area with peculiarities,
forces and counterforces all its own.
CASE PROCESSING
This series of
papers
discusses various aspects of the
case processing during the Economic Stabilization Program.
Different types of information requirements existed for
pay and price matters and thus different systems for
processing relevant information evolved.
The handling of price
cases was similar throughout the Program; it is therefore
discussed in one paper.
The handling of pay cases changed
somewhat after Phase II; thus, the two time periods are
treated separately.
Finally, there is a summary discussion
on the use of computers in the Economic Stabilization
Program.
The paper elsewhere in this volume on Price Data and
Data Systers deals with automated data processing on the
price side of the Program.
PRICE EXCEPTIONS
This
paper discusses the price exception
policy and process as it evolved during the Program.
(Wage exceptions are treated in the papers on Wage
Stabilization Policies and Case Processing.)
Formal
decision announcements (Decision and Orders), which are
included in an appendix, indicate both the need for
exceptions relief
in a broad controls program and the com
plexity of the issues raised in connection with exceptions
policy.
COMPLIANCE AND ENFORCEMENT
The enforcement of price and wage regulations in
Phases I through IV was predicated on the concept of
"voluntary compliance," i.e., that most firms would
comply with price or wage limits without the threat
of enforcement.
In keeping with this, violators were
penalized
primarily to establish the credibility of
controls.
This paper explores the philosophy of compliance,
the succession of programs used to enforce the regulations,
and evaluates the effectiveness of compliance management.
The paper concentrates on price compliance, illustrating
general themes and conclusions.
PRICE DATA AND DATA SYSTEMS
This paper discusses, generally, the data needs of
a wage and price control agency and then describes the
experience of the price side of this program with data
processing and systems.
Discussion of the data systems
used in wage stabilization activities are found in the
Case Processing section.
The reader is referred to the Data Appendix where much
of the data collected by the Economic Stabilization
Program is published in aggregated form for the use
of researchers.
REMOVING CONTROLS: THE POLICY OF SELECTIVE DECONTROL
While the Economic Stabilization Program was viewed by
policy makers as a temporary, emergency measure, until late
1974 less discussion wnt on about decontrol than about the
administration of existing controls.
This paper describes
the sector-by-sector exemption policy that operated during
Phase IV of the !Program.
The operational aspects of the
policy are dealt with as appendices to this chapter and in
the Tenth Quarterly Report of the Economic Stabilization
Program.
THE IMPACT OF THE ECONOMIC STABILIZATION PROGRAM
ON BUSINESS FIXED INVESTMENT
This
paper is one of the few in this collection
that analyzes events during the life of the Economic
Stabilization Program from a purely economic point of
view.
First, the paper reviews some of the models of
investment behavior common to current economic thinking
and then reviews the policy actions that took place dur
ing the
the
controls period that might have, according to
various models of investment behavior, affected
the rate of capital investment.
In its final sections, the paper
empirically examines, through the use of regression techniques,
the impact of the Economic Stabilization Program on capital
investment.
ADVISORY COMMITTEES
f This paper describes the activities and use of
advisory committees in the Economic Stabilization
Program.
After a brief introduction outlining the
general functions of such groups, the paper discusses
compliance with the Federal Advisory Committee Act and
explores some of the strengths and weaknesses of the specifi
cations of this statute. In an appendix, the paper describes the
workings and activities of the various advisory committees
that
participated in the policy development and operations
of the Program.
LITIGATION UNDER THE ECONOMIC STABILIZATION PROGRAM
' Litigation was an important aspect of the Economic
Stabilization Program.
The Federal courts were the means
through which Stabilization agencies (working through the
Department of Justice) enforced compliance of the Economic
Stabilization Act, and in which the agencies* administrative
actions could be challenged.
This paper addresses both
the offensive and defensive aspects of litigation related
to the program, but emphasizes the latter.
Discussion of
individual cases is organized by the type of legal issue
presented in each case.
COMMUNICATING WITH THE PUBLIC
The focus of this paper is broader than public affairs
and includes the dissemination of regulations and policies
from Stabilization agencies to the regulated public.
Its
subject headings follow temporal divisions in the Program.
Included as appendices are shorter essays on the IRS's
involvement in public communications? descriptions of
specific offices in the Stabilization agencies; and an essay
tracing public opinion of controls during the life of the
Program.
HISTORY OF PETROLEUM PRICE CONTROLS
During Phase IV a series of complex and product
specific regulations were issued to try and hold back
price increases in the petroleum area.
Coincidentally,
this elaborate set of petroleum price controls was in
place when the OPEC oil embargo was imposed on the
United States and other Western nations.
This paper
discusses the economics of the petroleum situation and
the difficulties of constructing and enforcing the
regulatory scheme.
This paper was prepared under contract by Charles R. Owens
and Associates, Inc.
Mr. Owens was formerly a Special
Consultant for Energy to the Director of the Cost of
Living Council. J
b&:j?„rr';ry.U:j r
5“ ’V;
:y:;
RENT CONTROLS DURING THE ECONOMIC STABILIZATION PROGRAM
This paper discusses the,role of rent controls in
the -Economic Stabilization Program.
It tracks the
development of that policy in the context of the economic
and political climate which influenced policy towards
rent.
,It includes a discussion of how the regulations
were formulated, the problems of their effective
administration and the reasons rent controls were not
included as part of Phases III and IV.
NOTES ON ORGANIZATION AND MANAGEMENT ISSUES
One of the most interesting aspects of the Economic
Stabilization Program was the necessity to build from
scratch an organization to administer the Program
to manage it effectively during a period of major policy
change when the workload was greater than available resources, and then
to terminate it in an orderly and humane fashion.
Unfortunately, as a part of the historical analysis
project, it was not possible to develop a comprehensive
study of organization and management issues.' However,
certain issues related to these subjects are presented
throughout the working papers in this compendium?
this paper will offer some observations
that
might be useful to those interested in the administration
of a wage and price controls program.
This
One
is divided into two sections.
Section
offers some subjective thoughts by one of the
senior line-managers who served throughout the Program»
Section Two recaps the intensive efforts mounted during
the Spring of 1974 to place Stabilization Program personnel
in other jobs, once the Program was terminated.
'i
WHO'S
WHO
EHUB
/
/
/
This paper contains brief biographies of the senior
officials of the Economic Stabilization Program and
organization charts showing the relationship of various
Program agencies.and offices.
DATA APPENDIX
This separate volume contains a variety of wage and
price data collected by the several Stabilization Pro—
gram agencies.
These data have been carefully screened in
in order to provide the best quality data possible as well
as to protect proprietary data.
Generally the data is
presented in aggregated form so as to protect this confi
dentiality.
December 31, 1974
MEMORANDUM TO CORRESPONDENTS:
The attached record of actions by the Office of
Economic Stabilization is released for your information.
Attachment
From November 9, 1974 through December 27, 1974, the Office
of Economic Stabilization (OES), Department of Treasury, has
taken the following actions:
Compliance Actions
Request for Reconsideration of Remedial Order - Denial
R. R. Donnelley & Sons Company - OES has denied the request for
Chicago, 111.
reconsideration of its remedial order
issued on November 27, 1974 to R.R.
Donnelley & Sons Company and the members
of its Executive Control Groups ("ECG”).
The order states that the catpany through
payment, and the members of the ECG through
receipt, of $160,168 of incentive com
pensation for the company's fiscal year
ended December 31, 1973, in excess of the
amount allowed to be paid under the pro
visions of the Phase TV executive compensatio]
regulations violated the said regulations.
The order requires the repayment to the
company by the members of the ECG of the
excess compensation,
Voluntary Compliance - Acceptance
Perdue, Inc.
Salisbury, Md.
- The Office of Economic Stabilization has
accepted an offer of $255,773 from Perdue,
Inc. to bring it into compliance with the
-
2
-
Phase IV sales revenue regulations for
food processors.
Compromise Settlements
Akzana, Inc.
On December 6, 1974, the Office of
Economic Stabilization and Akzona, Inc.
compromised disputed wage and salary
claims for $2400- payable to the United
States.
Kimberly-Clark Corporation
On December 17, 1974, Kimberly-Clark
Corporation, the O.E.S., and KimberlyClark Corporation's Executive Control
Group ("ECG"), entered into a compromise
settlement concerning disputed incentive
compensation payments to the company's
ECG during Phase IV. The terms of the
settlement include repayment to the Company
by the members of the ECG of $54,000, and
payment by the Company to the United States
of $20,000 in compromise of civil claims.
Oman Construction Coirpany, Inc.
The Office of Economic Stabilization has
accepted an offer of $25,000.00 from Oman
Construction Company, Inc. in full settle
ment of civil claims based upon an alleged
violation of the profit margin regulations
for its 1974 fiscal year.
Poicor, Inc.
The Office of Economic Stabilization has
accepted an offer of $25,000 fran Pemcor,
Inc. in full settlement of civil claims
based upon an alleged profit margin
violation for its 1974 fiscal year.
Stauffer Chemical Company
On December 3, 1974, QES accepted a check
frcm Stauffer Chemical Company (Stauffer) ,
in settlement of any civil claims the
government may have had against Stauffer
by virtue of Stauffer’s payment after
May 1, 1974, of incentive carpensation to
members of its Executive Control Group.
Wilsey, Bennett Co.
On December 20, 1974, OES accepted an offer
of $200,000 from Wilsey, Bennett Co. in
settlement of any civil claims the government
m y have against Wilsey, Bennett Co. with
respect to alleged violations of the gross
margin regulations 6 CFR 150.606(c) (1) for
the fiscal quarters ended September 30, and
December 31, 1973 and March 31, 1974.
- 4Health
Requests f o r E x c e p tio n
OES a c te d on 40 Requests f o r E x c e p tio n .
O f t h a t number, 3 were approved
in f u l l , 19 were approved in p a r t , 11 were d e n ie d , and 7 were e i t h e r
w ithdraw n o r d is m is s e d .
Requests f o r R e c o n s id e ra tio n
OES a cted on
33
Requests f o r R e c o n s id e ra tio n .
approved in f u l l ,
3
were p a r t i a l l y a p p ro ve d ,
O f t h a t num ber, 5 were
3
were d e n ie d , and 22
were d is m is s e d .
Com pliance A c t i v i t i e s
OES a c te d on 165 h e a lth com pliance c a s e s .
103 o u ts ta n d in g N o tic e s o f
P ro b a b le V i o l a t i o n were c lo s e d , 27 Remedial O rd e rs were revo ked ( c lo s e d ) ,
29 V o lu n ta r y Com pliance Plans were a p p ro ve d , and 6 o u ts ta n d in g Remedial
O rd e rs were r e fe r r e d to th e O f f i c e o f C h ie f C o u n s e l.
Department of
IhefREASURY
■
FOR IMMEDIATE RELEASE
TREASURY1S 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 $5,000,000,000 > or
thereabouts, to be issued
January 9, 1975,
as follows:
91-day bills (to maturity date) in the amount o f ^ 2,700^000,000* or
thereabouts, representing an additional amount of bills dated October 10, 1974,
and to mature
April 10, 1975
(CUSIP No. 912793 WD4) f originally issued in
the amount of $2,002,820,000, the additional and original bills to be freely
interchangeable.
' ’
182-day bills, for $2,300,000,000* or thereabouts, to be dated January 9, 1975
and to mature July 10, 1975
(CUSIP No. 912793 XD3)»
The bills will be issued for cash and in exchange for Treasury bills maturing
January 9, 1975*
outstanding in the amount of $4,806,235,000* of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,432,975,000.
These accounts may exchange bills they hold for the bills now being offered at
the 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,
$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
one-thirty p.m., Eastern Standard time, Monday, January 6, 1975.
Tenders will not be received at thè Department of thé Treasury, Washington.
Each 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
be expressed 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)
RAC
-
2-
securities and report daily to the Federal Reserve Bank of New York their positid
FOR
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
PROG
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 I DATE
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 whole or in part, and his action in any such respect shall be final.
Subject
Jrsgr;
to Coi
to these reservations, noncompetitive tenders for each issue for $200,000 or less
pal'
fey I
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.
IRV0Ì
In p
completed at the Federal Reserve Bank or Branch on January 9, 1975,
in cash or Jrsclu
In fch
other immediately available funds or in a like face amount of Treasury bills
Settlement for accepted tenders in accordance with the bids must be made or
maturing January 9, 1975.
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,
Issls
for a
time
i. La
th e
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
pe
return, as ordinary gain or loss, the difference between
the price paid for the bills, whether on original issue or on subsequent
p u rch a se
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
notij
prescribe the terms of the Treasury bills and govern the conditions of their
issue.
Branch.
5 grc
p $s
leads
consi
Copies of the circular may be obtained from any Federal Reserve Bank or
pat
bf er
inert
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Transcript
Number of Pages Removed: 5
Author(s):
Title:
"The Today Show" Interview with Assistant Secretary Parsky
Date:
1974-12-31
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Transcript
Number of Pages Removed: 9
Author(s):
Title:
"The Today Show" Interview with Drs. Kaufman, Jarecky and Mr. Rulau
Date:
1974-12-31
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
klNGÏÏJN, U.U/2UZ2U
TELEPHONE W04-2Ö41
January 2, 1975
FOR IMMEDIATE RELEASE
RESULTS OF AUCTION OF 15-MONTH TREASURY NOTES
The Treasury has accepted $0.75 billion of the $1.9 billion of
tenders received from the public for the 15-month 8% notes auctioned
today. The range of accepted competitive bids was as follows:
Approximate Yield
Price
High
Low
Average
100.91
100.80
100.84
1/
7.18%
7.27%
7.24%
The $0.75 billion of accepted tenders includes 19% of the amount
of notes bid for at the low price, and $0.2 billion of noncompetitive
tenders accepted at the average price.
No tenders were received from Government accounts or from Federal
Reserve Banks for themselves or as agents of foreign and international
monetary authorities.
1/ Excepting 4 tenders totaling $566,000
DepartmentoftheTREASURY ]
_______
«
n
20220
nnrknn
K ington,d .c .
T rifn U fiW C
T E L E P H O N E lWi m0 i4t - 2 0 4 1
:
U
N
*-
January 2, 1975
FOR IMMEDIATE RELEASE
Treasury Secretary William E. Simon today issued
the following statement:
In regard to the return to American
citizens of the right to own gold, I would
like to commend the nation’s media for the
outstanding job they have done over the
past several weeks in disseminating basic
information and promoting understanding of
what this change means in both over-all and
personal terms.
I can recall few stories
that have been better covered by our
newspapers, magazines and radio-television
reporters. They have done the public a
distinct service in a complex subject area
and deserve the nation’s commendations. ¡§4:3
oOo
WS-189
TELEPHONE W04-2041
hlNGTUN. u u z u z z u
■
FOR IMMEDIATE RELEASE
\ / [ b
January 2, 1975
TREASURY’S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders
for $2,000,000,000, or thereabouts, of 364-day Treasury bills to be dated
January 14, 1975;,
and to mature January 13, 1976
(CUSIP No. 912793 YE0).
The bills will be issued for cash and in exchange for Treasury bills
maturing January 14, 1975,
outstanding in the amount of $1,802,365,000,
of which Government accounts and Federal Reserve Banks, for themselves and as
agents of foreign and international monetary authorities, presently hold
$1,087,535,000. 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, 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 (maturity value),
and in book-entry form to designated bidders.
Tenders will be'received at Federal Reserve Banks and Branches up to
one-thirty p.m., Eastern Standard time, Wednesday, January 8, 1975.
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000.
in multiples of $5,000.
Tenders over $10,000 must be
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.
Banking institutions and dealers who make primary markets in Government
securities and report daily to the Federal Reserve Eank 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.
Others will not be permitted to submit
tenders except for their own account.
Tenders will be received without
(OVER)
-
2
-
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 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 competitive bids.
Settle
ment for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank or Branch on January 14, 1975*
in
cash or other immediately available funds or in a like face amount of Treasury
bills maturing January 14, 1975.
equal treatment.
Cash and exchange tenders will receive
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 cold is considered j
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
notice, prescribe the terms of the Treasury bills and govern the condition^
of their issue.
Copies of the circular may be obtained from any Federal
Reserve Bank or Branch.
h in g t o n ,
\nrmm
T E L E P H O N E W04-2041
January 2, 1975
FOR IMMEDIATE RELEASE
DETERMINATION OF SALES AT NOT LESS
THAN FAIR VALUE ON RAPID TRANSIT VEHICLE SEATS
FROM BRAZIL
Assistant Secretary of the Treasury David R. Macdonald
announced today a determination that rapid transit vehicle
seats from Brazil are not being, nor are likely to be,
sold at less than fair value within the meaning of the
Antidumping Act, 1921, as amended. Notice of this decision
will appear in the Federal Register of January 3, 1975.
A Notice of Tentative Negative Determination was
published in the Federal Register of October 3, 1974.
During the period of August, 1973 through April,
1974, imports of rapid transit vehicle seats from Brazil
were valued at approximately $490,000.
V # #
Department of
theTREASURY
OFFICE O F R EV EN U E SHARING
WASHINGTON, OC. 20226
FOR IMMEDIATE RELEASE
Friday, 3 January 1975
Contact: ORS Public Affairs
202-634-5248
The Treasury Department's Office of Revenue Sharing
paid more than $1.5 billion to 36,771 state and local governments
throughout the country today, as the tenth regular payment of
general revenue sharing funds went into the mail.
Today's payment brings the total of general revenue
sharing funds distributed to-date to $17.3 billion.
The State and
Local Fiscal Assistance Act of 1972 authorizes $30.2 billion
of federal funds to be shared during the period January, 1972
to December, 1976.
The payment today is the second quarterly
allotment of the fifth entitlement period.
Of some $22.4 million in funds deferred by the
Office of Revenue Sharing from today's payment, $19.2 million
belongs to the City of Chicago.
Payment of the Chicago check
during this allotment quarter was deferred following a Court
order in Washington rising out of a discrimination ruling
(MORE)
t-2
Revenue Sharing
against the City.
The Courts have found Chicago to be d is c rim in a ti]
in its Police Department personnel procedures used for hiring and
promotions. *
The remaining $1.3 million was not paid to an estimated
1,170 local governments, primarily because required planned or
actual use reports have not been filed.
This figure represents
two-tenths of one-percent of the total paid today.
Funds deferred pending the filing of actual or planned
use reports will be paid upon receipt of the one-page forms.
The units of government involved with no—report holds on checks
during this quarter is less than half the number of last quarter's
hold for similar reasons.
General Revenue Sharing funds are distributed quarterly
to state and local governments according to a fixed formula based
on population, tax effort, and relative income.
Data applied to
the formula are provided by the U. S. Bureau of Census.
The law
provides that, after the formula is applied, one-third of each
State's allocation is paid to the State itself, and the remaining
two-thirds is paid to units of local government within the State.
Units of local government include counties, cities, towns, townships
Indian Tribes, and Alaskan native villages.
(MORE)
t-3
Revenue Sharing
Payment totals, by State (number in parenthesis
indicates local jurisdictions within each State) , distributed
today are:
Alabama (442) $26.1 million; Alaska (137) $2.2 million;
Arizona (97) $15.8 million; Arkansas (509) $16.1 million;
California (494) $162 million; Colorado (295) $16.4 million
Connecticut (182) $19.9 million; Delaware (56) $4.6 million;
District of Columbia (1) $6.6 million; Florida (448) $48 million;
Georgia (645) $33 million; Hawaii (5) $6.6 million;
Idaho (233) $5.9 million; Illinois (2,713) $58.9 million;
Indiana (1,567) $32.3 million.
Iowa (1,014) $21.5 million; Kansas (1,648) $14.1 million;
Kentucky (484) $24.5 million; Louisiana (351) $35 million;
Maine (495) $9.5 million; Maryland (165) $30 million;
Massachusetts (355) $48.7 million; Michigan (1,797) $65.6 million;
Minnesota (2,648) $30.8 million; Mississippi (353) $24.4 million;
Missouri (1,241) $29.4 million; Montana (184) $6.4 million;
Nebraska (1,001) $10.3 million; Nevada (44) $3.3 million.
New Hampshire (228) $5.1 million; New Jersey (580)
$48.3 million; New Mexico (143) $9.9 million; New York (1,594)
$172.7 million; North Carolina (546) $39.2 million;
North Dakota (1,684) $5.3 million; Ohio (2,305) $61.7 million;
Oklahoma (594) $17.6 million; Oregon (265) $15.5 million;
Pennsylvania (2,592) $81.9 million; Rhode Island (40) $6.8 million;
(MORE)
t-4
Revenue Sharing
South Carolina (296) $21.3 million; South Dakota (1,244) $6.4 million
Tennessee (396) $30 million? Texas (1,207) $73.5 million;
Utah (243) $9.1 million; Vermont (300) $4.3 million?
Virginia (316) $30.5 million? Washington (321) $21.6 million;
West Virginia (272) $15.3 million; Wisconsin (1,892) $38.9 million;
and Wyoming (109) $2.6 million.
#
* Note: As of the date of this release, litigation surrounding
the Chicago case is pending and several actions are under litigation
in the Federal Courts. If you have any questions regarding the
status of these actions as of your publication deadline, please
feel free to contact us.
ORS Public Affairs
Department
(IINGTON,
D.C. 20220
ofthefREASURY
TELEPHONE W04-2041
FOR RELEASE ON DELIVERY
/
ADDRESS OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE AMERICAN FARM-BUREAU FEDERATION
AT THE RIVERGATE CONVENTION CENTER, NEW ORLEANS, LOUISIANA
MONDAY, JANUARY 6, 1975, AT 1 0 : 4 5 A.M. ( C . S . T . )
P r e s i d e n t K u h f u s s , d i s t i n g u i s h e d members o f t h e Am e r i c a n
Farm B u r e a u F e d e r a t i o n , and g u e s t s :
For e v e r y member o f t h e A d m i n i s t r a t i o n , i t i s a
p r i v i l e g e and p e r s o n a l p l e a s u r e t o a p p e a r b e f o r e a
g a t h e r i n g o f t h e Farm B u r e a u .
As t h e l a r g e s t v o l u n t a r y
far m o r g a n i z a t i o n i n t h e N a t i o n , you h a v e come t o r e p r e s e n t
a c o n s t r u c t i v e and p o s i t i v e f o r c e on t h e s i d e o f p r o g r e s s
for a l l Americans.
We welcome y o u r d e d i c a t i o n t o t h e f r e e
e n t e r p r i s e s y s t e m and t o many o t h e r v a l u e s t h a t h a v e h e l p e d
t o b u i l d t h i s c o u n t r y , and we s h a r e y o u r p r i d e i n t h e
awesome g a i n s t h a t Am e r i c a n f a r m e r s ha ve made i n p r o v i d i n g
f ood and c l o t h i n g f o r p e o p l e h e r e and a c r o s s t h e w o r l d .
I know t h a t many o f you t o d a y a r e d e e p l y w o r r i e d a b o u t
t h e s t a t e o f o u r economy.
Many A m e r i c a n s , i n c l u d i n g some
farm ers, h a v e 's u f f e r e d a d e c l in e in t h e i r sta n d a rd of
living.
Unemployment i s f a r g r e a t e r t h a n we woul d l i k e and
is s t i l l climbing.
And e ve n w i t h t h e c o u n t r y i n a
r e c e s s i o n , the i n f l a t i o n r a t e remains a t record peacetime
levels.
Times a r e t o u g h , and most A m e r i c a n s e x p e c t them t o
grow'tougher s t i l l .
Yet we woul d be u t t e r l y f o o l i s h now t o p a n i c o r t o be
m e s m e r i z e d by t h o s e who c o n t i n u a l l y f o r e s e e c a t a s t r o p h e
around ev ery c o r n e r .
D u r i n g t h e Second Worl d War, you n g o f f i c e r s u s e d t o : m a r v e l a t t h e way t h a t G e n e r a l George M a r s h a l l m a i n t a i n e d
h i s c o mp o s u r e and d i g n i t y d e s p i t e f r e q u e n t p r e d i c t i o n s o f
disaster.
How do you do i t , t h e y ' a s k e d .
" B e c a u s e T ha ve
s e e n w o r s e , ” he r e p l i e d .
WS-190
2
W e l l , Am e r i c a h a s s e e n w o r s e t o o .
We h a v e f a c e d many
d i f f i c u l t c h a l l e n g e s i n t h e p a s t , and we h a v e a l w a y s r a l l i e d
t o o ve rc ome t hem.
We w i l l do t h a t a g a i n t o d a y i f we c a n keep
o u r c o o l and a c t t o g e t h e r a s a u n i t e d , f r e e p e o p l e , a l w a y s
m ain tain in g f a i t h in o u rse lv e s.
T h i s i s no t i m e f o r q u i t t e r s
o r s u n s h i n e p a t r i o t s , b u t f o r men and women o f c o u r a g e and
c o n v i c t i o n who b e l i e v e i n A m e r i c a and wha t A m e r i c a means t o
the world.
The members o f t h e Farm B u r e a u h a v e n e v e r waver ed
i n t h a t f a i t h , and I know you c a n be c o u n t e d on t o d a y t o
c o n t i n u e y o u r s u p p o r t f o r t h e f r e e m a r k e t and r e s i s t p r e s s u r e s
f o r a r e t u r n to farm p o l i c i e s o f t h e p a s t . .
R e s t o r i n g t h e F r e e M a r k e t on t h e Farms:
A L e s s o n f o r t h e Nation
I n comi ng t o g r i p s w i t h o u r e c onomi c p r o b l e m s , I woul d
h ope t h a t a l l A m e r i c a n s wo u l d draw a l e s s o n fr om y o u r
e x p e r i e n c e s on t h e f a r ms i n r e c e n t y e a r s .
As a l l o f you know
f u l l w e l l , t h e F e d e r a l Government b e g a n a m a s s i v e i n t e r v e n t i o n
i n t h e f a r m m a r k e t s d u r i n g t h e 1930s when f a r m i ncomes were
d i s a s t r o u s l y low a nd a g r i c u l t u r e was b u r d e n e d by e x c e s s
productive capacity.
Fa r mi n g became one o f t h e mos t r e g u l a t e d
s e c t o r s i n o u r economy.
Whi l e a s s e s s m e n t s d i f f e r , I t h i n k
mo s t o f us woul d a g r e e t h a t i n t r a d i n g f r e e d o m f o r e conomi c
s e c u r i t y , f a r m e r s n o t o n l y ga ve up p r e c i o u s r i g h t s b u t a l s o
p la n te d the seeds for a r a th e r b i t t e r h a rv e s t.
By t h e 1960s,
t h e f r u i t s o f Gove r nme nt r e g u l a t i o n we r e p l a i n f o r a l l t o see:
P e r - c a p i t a f a r m income d u r i n g t h e 1 9 6 0 s , a f t e r t a x e s ,
a v e r a g e d a b o u t o n e - t i r d l o w e r t h a n what n o n f a r m p e o p l e were
making.
Farm e x p o r t s we r e a v e r a g i n g l e s s t h a n $6 b i l l i o n a year,
F a m i l y f a r ms we r e d e c l i n i n g a t a r a t e o f o v e r 100,000
a year.
- - One a c r e i n e v e r y s i x was h e l d o u t o f p r o d u c t i o n .
- - And t h e c o n s u m e r , a l t h o u g h e n j o y i n g low f o o d p r i c e s ,
was p a y i n g o u t $3 b i l l i o n a y e a r i n f a r m s u b s i d i e s and a n o t h e r
$1 b i l l i o n f o r a s t o c k p i l e p r o g r a m o f f a r m p r o d u c t s .
I n t h e l a s t f i v e y e a r s , we ha ve b e gun t o t u r n t h i s
s i t u a t i o n a r o u n d by l o o s e n i n g t h e Gove r nme nt s t r a i g h t j a c k e t ,
d e v a l u i n g t h e d o l l a r , o p e n i n g up e x p o r t m a r k e t s and e nc o u r a g i n g
the re tu r n of the free marketplace in a g r i c u lt u r e .
President
E i s e n h o w e r onc e o b s e r v e d , " F a r m i n g l o o k s m i g h t y e a s y when your
p l o w i s a p e n c i l , and y o u ’ r e a t h o u s a n d m i l e s from t h e c o r n
f i e l d . ” We know t h a t , and we a r e t r y i n g t o l e t f a r m e r s t a k e
t h e i r s i g n a l s from t h e m a r k e t p l a c e , n o t from t h e b u r e a u c r a t s
i n Washington.
3
m
)
I t h i n k h i s t o r y w i l l one day r e c o r d t h e r e v e r s a l o f f a r m
p h i l o s o p h y wh i c h h a s o c c u r r e d i n t h e U n i t e d S t a t e s as one o f
t h e mo s t s i g n i f i c a n t a c c o m p l i s h m e n t s o f t h e 1 9 7 0 s .
Consider
the r e s u l t s :
--Farm
1960s.
income t o d a y i s a p p r o x i m a t e l y d o u b l e t h a t o f t h e
- - Farm e x p o r t s t o d a y a r e a l m o s t f o u r t i m e s wha t t h e y
wer e i n t h e 1 9 6 0 s , and come c l o s e . t o e q u a l l i n g t h e t o t a l
American payments f o r f o r e i g n o i l .
I w i s h more A m e r i c a n s
were m i n d f u l and a p p r e c i a t i v e o f t h i s f a c t .
- - The number o f f a r m f a m i l i e s a p p e a r s t o h a v e s t a b i l i z e d .
- - Al mo s t 60 m i l l i o n a c r e s h a v e b e e n r e l e a s e d f r om s e t
a s i d e p r o g r a m s , and more t h a n h a l f o f t h e s e a c r e s h a v e b e e n
converted to a c t iv e produ ctio n .
- - And p a y m e n t s f o r f a r m s u b s i d i e s - - t h e h i d d e n c o s t o f
f o o d i n y e a r s gone by - - h a v e b e e n r e d u c e d t o l e s s t h a n
a b illio n d o llars a year.
I rec ogn ize t h a t t h e r e are s t i l l problems in a g r i c u l t u r e .
C a t t l e r a n c h e r s , p o u l t r y and hog p r o d u c e r s , d a i r y f a r m e r s ,
and t h e p r o d u c e r s o f a v a r i e t y o f o t h e r c o m m o d i t i e s a r e a l l
caught in a p a i n f u l c o s t - p r i c e squeeze.
I know t h a t you a r e
a l s o s e n s i t i v e t o t h e p r o b l e m s o f c o n s u m e r s who h a v e s e e n
f o o d p r i c e s r i s e by some 33 p e r c e n t b e t w e e n m i d - 1 9 7 2 and mi d1974.
A l l o f us - - f a r m e r s , m i d d l e men, and Government
o f f i c i a l s - - a r e c o n s u m e r s , and a l l o f us wa nt t o h o l d down
the r a t e of i n f l a t i o n .
I n t h e l o n g r u n , t h e b e s t way t o do
t h a t i s t o m a i n t a i n a h i g h l e v e l o f p r o d u c t i v i t y and p r o d u c e
enough s u p p l i e s t h a t w i l l e n s u r e t h e c o n s u me r s u f f i c i e n t
q u a n t i t i e s o f f o o d and f i b e r a t r e a s o n a b l e p r i c e s and w i l l
b r i n g t h e f a r m e r a f a i r r e t u r n on h i s i n v e s t m e n t .
That i s
t h e d i r e c t i o n i n wh i c h o u r f a r m p o l i c i e s a r e c a r r y i n g u s t o d a y .
On b a l a n c e , I wo u l d s u b m i t t h a t t h e d e r e g u l a t i o n o f t h e
Ame r i c a n f a r m e r i s good f o r t h e f a r m e r , good f o r t h e c o n s u m e r ,
and good f o r m i l l i o n s upon m i l l i o n s o f h u n g r y p e o p l e a r o u n d
the world.
Free E n t e r p r i s e :
An E n d a n g e r e d S p e c i e s
I r e c o u n t t h e s e e x p e r i e n c e s to a farm a u d i e n c e n o t sim ply
t o d e m o n s t r a t e my r e s p e c t f o r you - - and I s h a l l a l w a y s ha ve
t h e h i g h e s t r e g a r d f o r wha t you h a v e done f o r t h i s c o u n t r y - but because t h e r e i s a le s s o n here about f r e e e n t e r p r i s e t h a t
a l l A m e r i c a n s mus t come t o u n d e r s t a n d and a p p r e c i a t e .
The
p r o g r e s s t h a t we h a v e made i n a g r i c u l t u r e b e c a u s e you a r e no
4
l o n g e r u n d e r t h e thumb o f t h e Government c a n a l s o be made
i n e n e r g y and t r a n s p o r t a t i o n and many o t h e r f i e l d s whe r e
Gove r nme nt r e g u l a t i o n now i mpe de s g r o w t h and d e v e l o p m e n t .
The Gove r nme nt h a s become so huge and d o m i n e e r i n g and we have
t u r n e d t o i t so o f t e n f o r t h e s o l u t i o n o f o u r p r o b l e m s t h a t
we h a v e f o r g o t t e n how much c a n be a c c o m p l i s h e d by p r i v a t e
e n t e r p r i s e and by men and women who a r e f r e e t o d e t e r m i n e
t h e i r own d e s t i n i e s .
The p r i v a t e e n t e r p r i s e s y s t e m h e l p e d t o
g i v e t h i s n a t i o n t h e h i g h e s t • s t a n d a r d o f l i v i n g t h a t man has
e v e r known, a nd i f we c a n o n l y un- l ea sh t h o s e p o w e r f u l e n g i n e s
o n c e a g a i n , a s we h a v e i n a g r i c u l t u r e , t h e n we c a n p u t t h i s
c o u n t r y b a c k on t h e r o a d t o p r o s p e r i t y .
I t i s f a s h i o n a b l e to p i c t u r e the opponents of c e n t r a l i z e d
p l a n n i n g as e m p t y - h e a d e d r e a c t i o n a r i e s whose t h i n k i n g h a s
n e v e r p r o c e e d e d beyond t h e 19th c e n t u r y , - b u t t h e t h r e a t of
Big Gove r nme nt i s a phenomenon t h a t h a s become a l t o g e t h e r t oo
s t a r k and omi n o u s d u r i n g t h e 2 0 t h c e n t u r y .
Today i n Am e r i c a ,
one i n e v e r y s i x members o f t h e l a b o r f o r c e now wor ks f o r t h e
Gove r nme nt - - l o c a l , S t a t e , o r F e d e r a l . ^ I t t o o k 186 y e a r s
f o r t h e F e d e r a l b u d g e t t o r e a c h $100 b i l l i o n , a l i n e i t c r o s s e d
i n 1962, b u t t h e n o n l y n i n e more y e a r s t o r e a c h $200 b i l l i o n ,
and o n l y f o u r more y e a r s t o r e a c h $300 b i l l i o n .
Total
Go v e r n me nt e x p e n d i t u r e s , w h i c h a c c o u n t e d f o r 12 p e r c e n t o f
o u r Gr o s s N a t i o n a l P r o d u c t b e f o r e t h e New D e a l , now r e p r e s e n t
o n e - t h i r d o f t h e GNP and i f p r e s e n t t r e n d s c o n t i n u e , c o u l d
e a s i l y e x c e e d 50- 60 p e r c e n t o f t h e Gr o s s N a t i o n a l P r o d u c t by
the tu rn of the c en tury.
Government now d i r e c t l y c o n t r o l s
s e v e r a l o f o u r m a j o r i n d u s t r i e s - - a i r , r a i l and t r u c k
t r a n s p o r t a t i o n , power g e n e r a t i o n , t e l e v i s i o n , r a d i o , t h e
s e c u r i t i e s i n d u s t r i e s , t o name t h e most o b v i o u s - - and e x e r t s
enor mous i n f l u e n c e on o t h e r s t h r o u g h t a x l a w s , e n v i r o n m e n t a l
c o n t r o l s , and t h e l i k e .
One n e e d n o t be an i d e o l o g u e t o f e a r t h e c o n t i n u e d growt h
o f Big Gove r nme nt o r t o s e e t h e d e s t r u c t i v e e f f e c t s t h a t such
o v e r w h e l m i n g power h a s a l r e a d y ha d upon o u r economy and upon
our freedoms.
I s i t n o t p l a i n , f o r i n s t a n c e , t h a t l o o s e f i s c a l and
m o n e t a r y p o l i c i e s o v e r t h e p a s t d e c a d e a r e a t t h e r o o t o f many
o f o u r c u r r e n t e c o n o mi c p r o b l e m s ?
D e f i c i t s p i l e d upon d e f i c i t s
s i n c e t h e e a r l y 1960s h a v e g r e a t l y i n c r e a s e d t h e demand f o r
goods and s e r v i c e s , d r i v i n g up t h e i r p r i c e s .
The Government
has a l s o been f o r c e d to borrow h e a v i l y i n p r i v a t e c a p i t a l
m a r k e t s - - so h e a v i l y t h a t i n f i s c a l y e a r 1974, 60 p e r c e n t of
t h e n e t f u n d s r a i s e d i n t h e s e c u r i t i e s m a r k e t s went t o
Gove r nme nt a g e n c i e s o r G o v e r n m e n t - s p o n s o r e d a g e n c i e s a t t h e
l o c a l , S t a t e and F e d e r a l l e v e l .
Whenever t h e T r e a s u r y e n t e r s
t h e p r i v a t e c a p i t a l m a r k e t s , i t a l w a y s go e s t o t h e h e a d o f
t h e l i n e , l e a v i n g th e b u s i n e s s b o rro w e r, the mortgage borrower,
and t h e p e r s o n a l b o r r o w e r a t t h e end o f t h e l i n e - - a l l f a c i n g
h i g h e r i n t e r e s t r a t e s o r no f u n d s a t a l l .
At t h e same t i m e ,
p a r t l y i n o r d e r t o a c c o m o d a t e F e d e r a l s p e n d i n g d e f i c i t s and
p a r t l y t o s a t i s f y p u b l i c demand f o r i n s t a n t p r o s p e r i t y , t h e
F e d e r a l R e s e r v e o v e r t h e p a s t d e c a d e h a s f o l l o w e d an o v e r l y expansive p o l ic y .
Thes e f i s c a l and m o n e t a r y p o l i c i e s form
t he b a s i c u n d e r l y i n g c a u s e s o f t h e i n f l a t i o n t h a t h a s b e e n
g a t h e r i n g momentum i n t h i s c o u n t r y f o r more t h a n a d e c a d e .
There ha v e b e e n o t h e r s i g n i f i c a n t c a u s e s , o f c o u r s e - - t h e
o i l c a r t e l and t h e i n c r e a s e i n f o o d and f e r t i l i z e r p r i c e s
b e i n g t h e most s i g n i f i c a n t among them - - b u t a f t e r t h e s e
s p e c i a l f a c t o r s s u b s i d e i n f o r c e , a s t h e y w i l l , we must
s t i l l f a c e up t o t h e f a c t t h a t u n t i l we r e f o r m o u r f i s c a l
and m o n e t a r y p o l i c i e s , i n f l a t i o n w i l l c o n t i n u e a t an
intolerable rate.
We c a n no l o n g e r a f f o r d t o l i v e b e yond
our means - - l i v i n g o f f o u r r e s e r v e s a t t h e same t i m e t h a t
we draw upon t h e s e e d c o r n o f t h e f u t u r e .
I t i s e q u a l l y p l a i n t o me t h a t we w i l l n e v e r h a v e
p l e n t i f u l s u p p l i e s o f d o m e s t i c e n e r g y a v a i l a b l e u n t i l we
o v e r h a u l t h e G o v e r n m e n t ' s a p p r o a c h t o e n e r g y p r o d u c t i o n and
prices.
For more t h a n two d e c a d e s , d e s p i t e w a r n i n g s from
e x p e r t s , t h e Government h a s c o n t r o l l e d t h e p r i c e o f n a t u r a l
gas a t an a b n o r m a l l y low l e v e l i n o r d e r t o p r o v i d e c h e a p
e n er g y t o c o n s u m e r s .
The r e s u l t s we r e t o t a l l y p r e d i c t a b l e ; 1
The p r o d u c t i o n o f n a t u r a l ga s f a i l e d t o d e v e l o p as r a p i d l y
as i t m i g h t h a v e , and t o d a y we ha ve s h o r t a g e s t h a t h a v e b e e n
i n d u c e d by t h e Gov e r n me n t .
I n e f f e c t , t h e Government h a s
a l s o b e e n t r y i n g t o manage t h e o i l i n d u s t r y t h r o u g h v a r i o u s
p r i c i n g and p r o d u c t i o n p o l i c i e s , and t o d a y , when we c l e a r l y
need more d o m e s t i c o i l , d o m e s t i c p r o d u c t i o n i s d e c l i n i n g .
In f a c t , i n t h e c a s e o f b o t h o i l and n a t u r a l g a s , we a r e now
i n t h e u n b e l i e v a b l e p o s i t i o n o f p a y i n g f o r e i g n p r o d u c e r s mdre
f o r t h e i r p r o d u c t t h a n we a r e w i l l i n g t o pa y o u r own Ame r i c a n
producers.
The s h o r t c o m i n g s and e v i l s o f Big Gove r nme nt ha ve become
one o f my f a v o r i t e t o p i c s , and I c o u l d c o n t i n u e f o r t h e r e s t
of t h e day w i t h e x a m p l e s - - Gover nment t a x laws t h a t
d i s c o u r a g e s a v i n g s a t a t i m e when c a p i t a l i n v e s t m e n t s a r e
v i t a l f o r o u r f u t u r e , Gove r nme nt p r a c t i c e s t h a t ha ve
e n c o u r a g e d a d e c l i n e i n p r o f i t s , and r e g u l a t o r y p r a c t i c e s
t h a t a r e e s t i m a t e d t o c o s t t h e c o n s u m e r b i l l i o n s upon b i l l i o n s
of d o l l a r s .
The l i s t i s a l m o s t a s v o l u m i n o u s a s t h e c a t a l o g u e
t h a t t h e F e d e r a l Gove r nme nt now p u b l i s h e s i n o r d e r t o ke ep up
wi t h i t s own p r o g r a m s - - a c a t a l o g u e as t h i c k a s t h e M a n h a t t a n
phone d i r e c t o r y .
C o n t r o l s Are No Answer
Yet i n t h e f a c e o f a b u n d a n t e v i d e n c e t h a t Big Gover nment
has c a u s e d many o f o u r c u r r e n t e c o n o mi c p r o b l e m s , we h e a r w i t h
i n c r e a s i n g f r e q u e n c y t h a t we s h o u l d make t h e Gove r nme nt e ve n
6
b ig g e r in o rd er to solve those problems.
Open up t h e s l u i c e
g a t e s o f F e d e r a l s p e n d i n g and l e n d i n g , i t i s u r g e d , and t h e n
i mpos e wage and p r i c e c o n t r o l s a c r o s s t h e b o a r d i n o r d e r t o
h o l d down t h e i n f l a t i o n t h a t i s s u r e t o e x p l o d e .
Can t h e y be
serious?
As I know from t h e p o s i t i o n s t h a t you h a v e t a k e n i n your
p u b l i c s t a t e m e n t s , f a r m e r s h a v e a l r e a d y g o t t e n t h e me s s a ge
a b o u t c o n t r o l s , and I a p p e a l t o you t o d a y t o h e l p c a r r y t h a t
message a c r o s s the l a n d .
C o n t r o l s d o n ’ t work:
they disru p t
t h e f r e e m a r k e t s y s t e m , c a u s i n g d i s t o r t i o n s and i n e q u i t i e s
and e v e n t u a l l y t h e y l e a d t o h i g h e r une mpl oyment and i n f l a t i o n ,
t h i s i s one o f t h e o l d e s t l e s s o n s i n m a n ’ s h i s t o r y .
In the
y e a r 301 A . D . , t h e Roman Emperor D i o c l e t i a n i mpos ed t h e f i r s t
w a g e - a n d - p r i c e c o n t r o l s u n d e r an e d i c t t h a t s e t s c h e d u l e s f or
72 d i f f e r e n t wage c a t e g o r i e s and 890 p r i c e c a t e g o r i e s - - some
222 f o r f o o d , so I ' m t o l d .
The p e n a l t y f o r an o f f e n s e was
death.
What h a p p e n e d ? W e l l , t h i r t e e n y e a r s l a t e r t h e program
was a b a n d o n e d b e c a u s e i t was i n a s h a m b l e s .
A g a i n and a g a i n
t h a t h a s p r o v e d t o be t h e c a s e , e s p e c i a l l y i n t h e t w e n t i e t h
century.
C o n t r o l s h a v e f a i l e d i n t h e p a s t and t h e y w i l l f a i l
now, i f we a r e s h o r t s i g h t e d e nough t o t r y them a g a i n .
The F o r d Economic Pr ogr a m
What, t h e n , a r e t h e a n s w e r s t o o u r c u r r e n t e c onomi c
p r o b l e m s ? As you know, P r e s i d e n t F o r d a nd many members o f
h i s A d m i n i s t r a t i o n h a v e d e v o t e d an e normous amount o f t i m e to
th is question.
Many d i f f i c u l t p o l i c y d e c i s i o n s h a v e b e e n put
b e f o r e t h e P r e s i d e n t , and he i s a c t i n g upon them w i t h t h e
g r e a t e s t c a r e and w i t h a c u t e c o n c e r n f o r t h e n e e d s o f t h e
a v erag e American.
I n a p p r o x i m a t e l y two weeks t i m e , t h e
P r e s i d e n t w i l l p r e s e n t t o t h e C o n g r e s s and t o t h e Ame r i c a n
p e o p l e an e c o n o mi c p o l i c y s t a t e m e n t t h a t I b e l i e v e you w i l l
f i n d t o be t o u g h , c o m p r e h e n s i v e and e f f e c t i v e .
I hope t h i s
w i l l m e r i t y o u r s u p p o r t and t h a t you w i l l be a c t i v e i n seeking
i t s implementation.
I t wo u l d be p r e m a t u r e f o r me t o d a y t o d i s c u s s t h e d e t a i l s
o f t h e s e p r o p o s a l s , b u t I woul d l i k e t o o u t l i n e some o f t h e
s t a n d a r d s t h a t have guided our d e l i b e r a t i o n s :
- F i r s t , we mus t a t t a c k t h e f o r c e s o f i n f l a t i o n and
r e c e s s i o n a t t h e same t i m e .
We c a n n o t a f f o r d t h e l u x u r y of
c o n c e n t r a t i n g upon one a t t h e e x p e n s e o f t h e o t h e r , f o r bo t h
are s o c i a l dynamite.
The P r e s i d e n t i s f u l l y a war e o f a l l o f \ t h e d a n g e r s facing
t h e economy.
He knows how much s u f f e r i n g r e s u l t s from
u n e m p l o y m e n t , and o f c o u r s e , he w a n t s t o m i n i m i z e t h e e x t e n t
7
of the c u r r e n t r e c e s s i o n .
Yet n e i t h e r he n o r a n y o n e e l s e
w i t h i n t h e A d m i n i s t r a t i o n wants t o s e t o f f a n o t h e r round of
roaring in fla tio n .
We a r e b e g i n n i n g t o make some p r o g r e s s
a g a i n s t i n f l a t i o n , and
wa nt t o c o n t i n u e t h a t p r o g r e s s .
Th u s , w h i l e we mu s t be b o l d , we mus t a l s o be p r u d e n t .
L e t us a l s o be c l e a r t h a t t h e r e i s a c l o s e r e l a t i o n s h i p
b e t w e e n i n f l a t i o n and r e c e s s i o n .
The h i g h i n t e r e s t r a t e s
t h a t a l w a y s accompany i n f l a t i o n c a u s e d s e v e r e i n s t a b i l i t y i n
f i n a n c i a l m a r k e t s , d r i e d up money t h a t was a v a i l a b l e f o r
m o r t g a g e s , and s e n t t h e h o u s i n g m a r k e t i n t o t h e w o r s t slump
on r e c o r d .
S i m i l a r l y , i n f l a t i o n has been a major f a c t o r -p e r h a p s t h e m a j o r f a c t o r - - t h a t h a s d e m o l i s h e d c o n s u me r
c o n f i d e n c e , wh i c h i s h a v i n g a c r u s h i n g i m p a c t on s a l e s o f
c a r s and o t h e r c o n s u me r g o o d s .
S i n c e h o u s i n g and c o n s u me r
s p e n d i n g r e m a i n two o f t h e w e a k e s t a r e a s i n t h e economy, i t
i s c l e a r t h a t i n f l a t i o n and r e c e s s i o n a r e i n e x t r i c a b l y
intertwined.
They a r e b o t h p a r t s o f t h e same d i s e a s e , and
t h e y mu s t be f o u g h t t o g e t h e r .
Second, t h e P r e s i d e n t remains committed to th e goal of
c u t t i n g b a c k o u r c o n s u m p t i o n o f e n e r g y and a c c e l e r a t i n g
domestic p r o d u c tio n .
Bot h s t e p s a r e e s s e n t i a l i n o r d e r t o
meet t h e c h a l l e n g e o f t h e o i l c a r t e l and t o s e c u r e g r e a t e r
s e l f - s u f f i c i e n c y in the fu tu re .
We h a v e made much more
progress through voluntary conservation e f f o r t s than is
g e n e r a l l y r e c o g n i z e d , b u t i t i s a l s o a p p a r e n t t h a t we mus t
now go b e yond t h o s e e f f o r t s .
T h a t w i l l n e c e s s a r i l y mean a
d e g r e e o f p e r s o n a l s a c r i f i c e by a l l o f u s , b u t t h e P r e s i d e n t
i s f u l l y c o n f i d e n t t h a t t h e Am e r i c a n p e o p l e u n d e r s t a n d t h i s
n e e d and a r e p r e p a r e d t o mee t i t .
T h i r d , t h e P r e s i d e n t b e l i e v e s t h a t we mus t a l s o be
g u i d e d by c o m p a s s i o n a nd u n d e r s t a n d i n g f o r t h o s e who h a v e
b e e n h i t t h e h a r d e s t by o u r e c o n o mi c t r o u b l e s - - t h o s e who
have l o s t t h e i r j o b s , low income A m e r i c a n s , and o t h e r s .
They d e s e r v e s p e c i a l a t t e n t i o n , and t h e y w i l l c o n t i n u e t o
receive i t .
F o u r t h , and o f g r e a t i m p o r t a n c e , t h e P r e s i d e n t i s
s t r o n g l y c o m m i t t e d t o t h e p r o p o s i t i o n t h a t t h e b e s t hope f o r
s o l v i n g o u r p r o b l e m s l i e s w i t h y o u , t h e Am e r i c a n p e o p l e , and
with t h e f r e e e n t e r p r i s e system t h a t has always been the
f o u n d a t i o n o f our s t r e n g t h .
The Gover nment mus t p r o v i d e
l e a d e r s h i p , b u t i n a way t h a t m i n i m i z e s t h e b u r d e n s upon t h e
m a r k e t p l a c e and upon t h e men and women who p a y t a x e s .
T h e r e a r e no q u i c k f i x e s o r e a s y a n s w e r s t o o u r p r o b l e m s ,
b u t s u r e l y t h e l e s s o n s o f h i s t o r y make i t c l e a r t h a t t h e
s o l u t i o n s l i e i n t h e d i r e c t i o n o f l e s s Gove r nme nt and more
freedom.
A f t e r two y e a r s i n W a s h i n g t o n , I am c o n v i n c e d t h a t
8
we a l r e a d y h a v e more g o v e r n m e n t t h a n we n e e d , more gove rnme n t
t h a n mos t p e o p l e w a n t , and c e r t a i n l y more g o v e r n m e n t t h a n we
a r e w i l l i n g t o pay f o r .
I n c l o s i n g , I s u b m i t t o you t h a t i f we a r e t e m p t e d once
a g a i n by t h e s i r e n s o n g s o f c o n t r o l s and o t h e r f or ms o f
c e n t r a l i z a t i o n , we w i l l n o t o n l y i n f l i c t enormous damage
upon o u r economy b u t we w i l l a l s o p l a c e t h e f r e e e n t e r p r i s e
system i n t h e g r e a t e s t danger i t has fa c e d i n our l i f e t i m e s .
The f r e e e n t e r p r i s e s y s t e m i s a l r e a d y u n d e r s i e g e :
i t is
d i s t r u s t e d by f a r t o o many p e o p l e and w h e r e v e r i t i s d i s p l a c e d ,
t h e Gover nment q u i c k l y f i l l s t h e vacuum.
T h i s g e n e r a t i o n -o u r g e n e r a t i o n - - may be one o f t h e l a s t wh i c h h a s t h e
o p p o r t u n i t y t o s t o p t h e swi ng o f t h e pe ndul um b e f o r e i t i s
too l a t e .
As men and women who h a v e e x p e r i e n c e d t h e f r e s h
wi n d s o f f r e e e n t e r p r i s e , I u r g e you t o s t a n d s t e a d f a s t f o r
th a t cause.
Thank you.
Department
oftheTRUSURY
SH ILTO N. O C 2 0 2 2 0
;
T E L E P H O N E W04-2041
yn
FOR IMMEDIATE RELEASE
JANUARY 6,1975
STATEMENT BY WILLIAM E. SIMON
THE SECRETARY OF THE TREASURY
I n t h e Uo S. T r e a s u r y g o l d a u c t i o n t o d a y demand was
les s t h a n had g e n e r a l l y been a n t i c i p a t e d .
Bids were
submitted f o r 954,800 o f t h e 2 m i l l i o n ounces o f f e r e d f o r
sale.
I n d e c i . i i i g v h a t volume o f t h e o f f e r s t o a c c e p t ,
the
T r e a s u r y was f a c e d w i t h t h e n e c e s s i t y o f b a l a n c i n g , on t h e
one h a n d ,
the d e s i r a b i l i t y of not s e l li n g a t p rice s fa r
below m a r k e t i n d i c a t i o n s w i t h , on t h e o t h e r h a n d ,
the d e s i r a b i l
i t y o f f o l l o w i n g p r o c e d u r e s w h i c h w i l l n o t p l a c e t h e U. S 0
Government u n n e c e s s a r i l y i n t h e r o l e o f s e t t i n g p r i c e s .
After balancing these considerations, the Treasury
requested the General Services Administration to accept
750, 000 ounces, that is, slightly over three-quarters of the
bids received«,
On this basis, unaudited figures indicate that
all bids of $153 per ounce or higher will be accepted.
It has
not yet been possible to calculate the average price which
will be paid on the accepted bids.
Bids were received from a
high of $185 per ounce to a low of $1 per ounce«
W S-19 1
oOo
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7
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RESULTS OF TREASURY’S WEEKLY BILL AUCTIONS
Tenders for $2.7 billion of 13-week Treasury bills and for $2.3 billion
of 26-week Treasury bills, both series to be issued on January 9, 1975,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
13-week bills
maturing April 10, 1975
Price
Equivalent
Annual Rate
:
26-week bills
: maturing July 10, 1975
Price
Equivalent
Annual Rate
¥
High
Low
Average
98.331
98.298
98.307
6.603%
6.733%
6.698%
1/
96.648 a/
96.612
96.622
6.630%
6.702%
6.682%
1/
a/ Excepting 1 tender of $540,000
Tenders at the low price for the 13-week bills were allotted 81%.
Tenders at the low price for the 26-week bills were allotted 65%.
TOTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Applied For
Accepted
Boston
29,255,000
39,350,000 $
$
New York
3,560,545,000 2,146,395,000
Philadelphia
35,990,000
36,345,000
Cleveland
58,875,000
77,235,000
Richmond
37,880,000
46,325,000
Atlanta
49,345,000
50,475,000
Chicago
112,365,000
219,935,000
St. Louis
60,330,000
33,630,000
Minneapolis
10,620,000
12,620,000
Kansas City
43,625,000
46,000,000
Dallas
29,310,000
39,760,000
San Francisco
113,490,000
249,935,000
TOTALS
Applied For
$
Accepted
14,555,000
25,355,000 $
3,486,890,000 1,964,570,000
14,775,000
35,205,000
33,795,000
74,455,000
32,355,000
60,355,000
29,055,000
45,040,000
36,710,000
252,760,000
32,890,000
86,740,000
4,195,000
10,455,000
30,130,000
39,230,000
19,125,000
29,435,000
88,080,000
266,140,000
$4,438,855,000 $2,700,780,000 b/$4,412,060,000 $2,300,235,000 c/
b/Includes $515,905,000 noncompetitive tenders accepted at average price,
c/lncludes $310,325,000 noncompetitive tenders accepted at average price.
— / These rates are on a bank-discount basis. The equivalent coupon“ issue
yields are 6.91% for the 13-week bills, and 7.01% for the. 26-week bills.
|
OepartmentoftheTREASURY
feSHINGTON, D.C. 20220
T E L E P H O N E W04-2041
January 7, 1975
FOR IMMEDIATE RELEASE
WITHHOLDING OF APPRAISEMENT ON
LOCK-IN AMPLIFIERS AND PARTS THEREOF
FROM THE UNITED KINGDOM
Assistant Secretary of the Treasury, David R. Macdonald,
has announced a withholding of appraisement on lock-in
amplifiers and parts thereof from the United Kingdom
pending a determination as to whether they are being
sold at less than fair value within the meaning of the
Antidumping Act, 1921, as amended.
This decision appeared in the Federal Register
of January 6, 1975.
Under the Antidumping Act, the Secretary of the
Treasury is required to withhold appraisement whenever
he has reasonable cause to believe or suspect that sales
at less than fair value ma y b e taking place.
A final Treasury decision in this investigation will
be made within three months.
A ppraisement will be withheld
for a period not to exceed six months from the date of
publication o f the "Withholding of A ppraisement Notice"
in the Federal R e g i s t e r .
Under the Antidumping Act, a determination of sales
in the United States at less than fair value requires that
the case b e referred to the Tariff Commission, which w o u l d
consider w h e t h e r an American industry was being injured.
Both sales at less than fair value and injury mus t be
shown to justify a finding of dumping under the law.
Upon
a finding of dumping, a special duty is assessed.
During the period of January, 1973 through August,
1974, imports of lock-in amplifiers from the United Kingdom
were valued at approximately $35,000.
#
#
#
The Department of the Treasury, by this public notice, invites tenders for
two series of Treasury bills to the aggregate amount of $4,800,000,000 , or
thereabouts, to be issued January 16, 1975,
as follows:
91-day bills (to maturity date) in the amount of $2,600,000,000, or
thereabouts, representing an additional amount of bills dated October 17, 1974,
and to mature April 17, 1975
(CUSIP No. 912793 WE2 ), originally issued in
the amount of $ 2,003,495,000!, the additional and original bills to be freely
interchangeable.
182-day bills, for $2,200,000,000» or thereabouts, to be datedjanuary 16, 1975,
and to mature July 17, 1975
(CUSIP No. 912793 XE1 ).
The bills will be issued for cash and in exchange for Treasury bills maturing
January 16, 1975,
outstanding in the amount of $4,604,645,000» of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,583,060,000 .
These accounts may exchange bills they hold for the bills now being offered at
the 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,
$15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value), and i n ’
book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
one-thirty p.m., Eastern
Standard time, Monday, January 13, 1975.
Tenders will not be received at the Department of the Treasury, Washington.
Each 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
be expressed 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 position!
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 whole or in part, and his action in any such respect shall be final.
Subject
to these reservations, noncompetitive tenders for each issue for $200,000 or less
without stated price from any one bidder will be 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
January 16, 1975,
In cash or
other immediately available funds or in a like face amount of Treasury bills
maturing
ment.
January 16, 1975.
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
Departmentof
KINGTON.
D.C. 20220
^TREASURY
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
1975
Secretary Simon has named Edward P. Snyder,
Director of the Office of Debt Analysis,
Special Assistant to the Secretary
to act as
(Debt Management)
until an appointment has been made to fill the
vacancy created by the resignation of Edward M. Roob.
WS-192
DepartmentoftheTREASURY
January 8, 1975
Focus on America’s Foremost Problem
INFLATION, RECESSION, CONTROLS AND DEFICITS:
Comments on Economic Issues by The Honorable William E. Simon
■
Secretary of the Treasury
Chairman, Economic Policy Board
Q-l: Why are you so concerned about inflation?
the ravages~of recession our No. 1 problem? ~
Aren11
MR. SIMON:: The problems of inflation and recession are
inseparable parts of the same economic evil, and the
Administration’s programs are aimed at coping with both at
one and the same time. Thus, while we are acting to cushion
the impact of adjustment on the unemployed and hard-hit areas
of the economy, we are striving to bring down the towering
rate of inflation. Why? Because prices are going up faster
than at any time in our peacetime history and, if they continue
at this pace, they will undermine the very foundations upon
which this nation is built.
We must also recognize the extent to which inflation has
caused the general economic slowdown.
It was inflation th^.t
dried up the supply of mortgage money and sent the housing
industry into a tailspin. And it was inflation that undercut
consumer confidence, causing the biggest reduction in consumer
purchasing since World War II. Since housing and consumer
purchasing are the two weakest sectors of the economy, inflation
must rank as a chief target of our economic policies.
Double-digit price increases have had brutal impact on
low-income families, the elderly existing on retirement pensions
and savings, and other Americans who cannot obtain income boosts
to offset inflation.
Inflation is also eroding the purchasing power of existing
financial assets and pushing up interest rates as lenders try
to salvase real returns. Creditors suffer and debtors benefit
?
as claims are repaid with depreciated dollars. Business
firms and consumers are forced to adjust spending and
investment plans, producing still other adverse economic
effects.
Perhaps the worst toll of all taken by inflation is
the most subtle--the erosion of people?s confidence in the
future--their loss of faith in their society and government.
Indeed, this toll seems to grow in the same ratio as the
rate of price increases. This is why we in Washington must
act, and act decisively, to come to grips with this curse.
Q-2 : Why do we have to stop inflation, considering
all the costs of doing so? Why can’t we turn our attention
to unemployment and just live with inflation?
A: We can’t live with double-digit inflation
it is destroying our social structure. History is
with the wreckage of societies that failed to come
with this contagion. America can still avoid this
because
littered
to grips
end.
If we were to switch to excessive stimulation of the
to reduce the rate of unemployment, our problem would
not be just living with the present rate of inflation, but
living with an accelerating rate of inflation. And if we
maintained such~a~p’
oTTcy"stance for long, we would pass
beyond the inflationary point-of-no-return, and prices and
wages would be sucked up uncontrollably like leaves in a
hurricane.
economy
The situation we are in now i s different from previous
recessions. During earlier economic downturns the government
could safely switch over to stimulative policies because the
inflation rate was tolerable. That is not now the case. Our
primary concern has to be to avoid worsening the already
dangerously high inflation rate. Any excessive stimulation
of the economy now would simply whip prices higher and lead
to an even tougher day of reckoning later.
Q -3: What does the current economic situation mean to
the average person?
A: Many people are frightened. They don’t understand
what’s going on in the economy,, Their confidence has been
04*\
3
shaken by their extended bout with super-inflation, and they
fear further erosion of their savings and pensions. Many are
upset by the scarcity of mortgage credit,, The security of
their jobs is threatened by rising unemployment.
People cannot be blamed for being worried about this
confusing set of circumstances, especially when so many
economic experts disagree on both diagnosis and cure. This
is why it is important for the Government to keep its eye
on the primary source of trouble, which is inflation, and
then follow steady, balanced policies to gradually bring it
under control, at the same time taking the necessary steps
to ease hardship--on the unemployed, for example--where
our economic difficulties hit with disproportionate force.
Q-4:
mean?
You've used the term "stagflation."
What does it
A: It’s a composite word made up of the first part of
"stagnation” and the last part of "inflation.” Stagflation
means that prices rise rapidly at the same time that economic
activity stagnates and unemployment climbs. We used to
experience one or the other. Now we have both. Why? Because
unsound government policies, combined with special outside
shocks like the food and fuel crises, allowed inflation to
get out of hand.
Q-5:
prices?
What's caused inflation?
Isnft it mostly high oil
A: No, not most of it, though the energy crisis has certainly
been an important factor. The rise in gasoline, motor oil and
fuel oil prices has accounted directly for about 15 percent of the
rise in the Consumer Price Index over the past year. Other
calculations suggest that the quadrupling of world crude oil
prices might account for as much as one-third of the 20 percent
increase in wholesale prices from a year ago.
There are several other key causes, some due to special
factors, others to unsound government policies. Among the
former was bad weather around the world, which led to poor
crops and high food prices. A simultaneous worldwide
boom put pressure on prices of internationally traded commodities.
And two needed devaluations of the dollar triggered widespread
demand for United States goods.
4
Unsound government policies include our three-year
experiment with wage and price controls, which led to severe
economic distortions and supply shortages. Political pressures
have long put a premium on excessive consumption, at the price
of adequate investment in productive facilities. Monetary
policies have been overly stimulative. And Federal budget
deficits have been spurring inflation since the early 1960s.
In fact, to my way of thinking, these unsound monetary
and fiscal policies have been the most fundamental causes of
present-day rampaging inflation.
Q-6:
How have the budget deficits promoted inflation?
A: If inflation is Public Enemy No. 1, then chronic
government budget deficits must be recognized as Public Enemy
No. 2. It took 185 years for the Federal budget to reach the
$100 billion mark, nine more years to hit $200 billion, and
only four more years to reach the $300 billion level. And in
only one of the past fourteen years has the government been
able to balance its books. In the past ten years alone,
Federal deficits have reached a staggering total of $103
billion. The over-all Federal debt, in the process, has soared!
to $480.5 billion, and annual budget outlays for interest
charges alone on this debt now amount to $31.5 billion.
When the Federal budget runs a deficit year after year,
especially during periods of high economic activity, it becomes
a major source of economic and financial instability. The huge]
deficits of the 1960s and 1970s have added enormously to
aggregate demand for goods and services, and have thus been
directly responsible for upward price pressures. Heavy
borrowing by the Federal sector has also been an important
contributing factor to the persistent rise in interest rates
and to the strains that have developed in capital markets.
Worse still, continual budget deficits have tended to
undermine the confidence of the public in the capacity of
government to govern, let alone deal with inflation.
Q -7: Why is it so hard to check the growth of the
Federal budget? Why can't the Pentagon budget be cut?
A: It has proved difficult to hold the line on
government budget increases because such a large proportion
5
*
of spending is mandated by previous contractual and legislated
commitments, which often can’t be changed quickly. Budget
cutting is also difficult because most government programs
have vocal and powerful proponents--the beneficiaries of public
spending. On the other side, it is hard to get organized
pressure to cut spending. Opposition to spending is diffused
widely among the public while the support for spending is
concentrated and often very effective.
Because we are now o v e r half-way through the current
fiscal year, hopes for budget restraint must now turn to the
next fiscal year beginning July 1. There are some areas of
the budget that can be held down and no part will be considered
sacrosanct, including the military. We must keep in mind,
however, that since 1968, defense spending has risen only
slightly. And as measured in real buying power, it has been
reduced by about one-third.
One hopeful development in regard to bringing Federal
spending under control is the new budget process that Congress
adopted last year. For the first time, Congress will have to
address explicitly the issue of how large total Federal
expenditures and revenues should be--instead of following
the piecemeal approach used in the past. There’s a good
chance that this new mechanism will produce at least some of
the fiscal discipline w e ’ve needed so badly for so long.
Q-8 : What about the so-called "uncontrollables” in the
Federal budget? In which of these areas is spending increasing
the most raplcily?
A: In the past six years, the so-called uncontrollable
outlays rose about $90 billion and are nearly three -fourths
of the total budget. Nearly $ 7 0 billion of the $ 9 0 billion
increase was in social security and other retirement programs,
veterans benefits, and a wide range of health ■and welfare
programs.
Interest on the national debt and other fixed
commitments accounted for the remainder.
Achieving control over government spending is complicated
by the way many Federal programs start on a small scale but
then mushroom rapidly. Some examples:
* Food stamps came to $200 million in 1969 but reached
nearly $4 billion in 1974--a 20-fold increase in just five
years.
6
* Public assistance programs and social services
totalled a little over $3 billion a decade ago but are
nearing $20 billion now.
* Total Federal health outlays were $1.7 billion a
decade ago but are now over $25 billion.
Tnc identi al ly, I consider the word "uncontrol 1ab ]e,!
a misnomer. Just because Congress has legislated a
program doesn’t mean it can’t be changed.
Q-9 : What about so-called off-budget items? With
these omissions, how can people get a true picture of total
spending by government?
A: I believe it is essential that we give the American
people a true picture of all Federal programs, including those
government-sponsored lending and other activities which are now
excluded from the ’’unified budget” submitted to Congress. While
such activities have been excluded from the budget by law or by
the conventions of government bookkeeping, they still have a
considerable impact on the economy and on the American taxpayer,
For example, in fiscal year 1974 the reported figure of
$3 billion of government borrowing from the public (to finance
the unified budget deficit of $3.5 billion) showed only the tip
of the iceberg: the net borrowing from the public to finance
government programs outside of the budget was about $28
billion. We believe that these off-budget activities should
be given greater attention in the budget-making process since
they exert enormous demand on money markets, boost interest
rates and, in effect, pre-empt much necessary private borrowing.
Q-10:
loans?
Will we ever again see 6 percent interest rates on
A: It’s possible--but not until we achieve a much lower
rate of inflation. Today's high interest rates are caused by
today's high rate of inflation and the tremendous demands that
built up for loans. As we reduce this demand along with the rate
of inflation, interest rates will come downQ
But we can’t reverse that sequence; that is, we cannot cut
the inflation rate by driving interest rates down through the
7
process of creating much more money and credit. That would only
throw fresh fuel on the inflationary fire. Inflation would speed
up and interest rates would be driven still higher.
Each time we lose a bout with inflation, interest rates
are ratchetted higher.
In 1966 rates on long-term corporate
bonds peaked at a little over 6 percent, in 1970 they reached
almost 10 percent, and last year the high was 12 percent.
Q-ll • What’s wrong with government spending new billions,
as many are suggesting, to halt the rise in unemployment?
A: Unfortunately, there’s no such thing as ’’free" Federal
programs--any more than there’s such a thing as a free lunch.
And it’s high time public officials leveled with the American
people and told them so. If we don’t have the courage to raise
taxes to pay for new spending programs, then people are forced
to pay through the cruelest and most regressive tax of all-inflation.
If we are going to have programs to cushion economic adjustment,
taxpayers should pay for them--and this was the reason the President
proposed a surtax last fall. I sincerely believe that the higherincome people among America’s 85 million jobholders can and should
contribute more to help the 6-1/2 million unemployed. If not, if
Washington resorts to excessive economic pump-priming, we will face
even worse inflation later--which, in turn, will lead to still
another economic slump and perhaps worse unemployment down the
road.
Q-12:
worsens?
What are your plans to deal with unemployment as it
A: A solid unemployment compensation system is now in place
and we recently joined with Congress in having its benefits extended
and expanded.
In addition, this legislation funded a subtantial
number of public service jobs to provide temporary employment
for out-of-work men and women who have exhausted their unemployment
benefits.
Other action we have recommended would create more private
sector jobs. We have extended billions in loan funds to aid the
housing industry and we have recommended expansion of the investment
tax credit to help business modernize and expand plant and thereby
both create more jobs and overcome inflation-spurring shortages.
Basically, however, the ultimate way to tackle-unemployment lies
ln reduction of inflation, restoration of consumer confidence
and a return to sound economic growth.
8
Q-13: Isn’t there a contradiction in your advocacy of
pay-as-you-spend policies and balanced budgets, on the o n ~
hand, and Administration studies of possible tax cuts and
other measures to stimulate the economy, on the othert
A: No, I don't think so. First of all, nothing is more
importan t than responsible budgets; if government had followed
pay-as-y ou-go policies over the past decade, we wouldn't be
in our p resent mess. But I do not ad vocate a balanced budget
Budget deficits
when the economy is falling off into recession.
in reces sion are inevitable and even desirable, since they provide
a needed degree of fiscal stimulus, But we also have rampant
inflatio n to contend with. And there is a world of difference
in terms of inflation between a defic it which results from
sluggish tax revenues, and one which results from runaway federal
spending . The first type of deficit helps to stabilize the
economy; the second type would furthe r destabilize it.
Yes, we are examining the case for tax cuts as one of
several approaches to improving economic conditions.
I have
never believed that economic policy should be rigid or inflexible,
But we should be wary of heavy federal spending just because the
economy is going through a temporary adjustment. The consensus
private economic forecast is for a recovery in the second half
of this year, wijth housing and consumer spending increases
leading the way. Excessive stimulus could then again touch
off another burst of double-digit inflation by pushing the
economy beyond the limits of its capacity to produce.
Q-14 : Many are advocating a return to wage and price
controls ? Why not?
A: Because they are destructive of both our economy and
our freedoms. They deal with the results of inflation rather
than the causes, like taking aspirin to attack a fever rather
than curing the infection.
In 1972-73 controls proved themselves ineffe ctive in holding
down infl ation. And where controls did in fact suppre ss prices
In some o f our basic
and wages , they created severe distortions,
industrie s like steel and paper, as profits were squee zed down byj
controls, expansion plans were cut back, se tting the stage for
present shortages of these essential produc ts. Ironic ally,
controls thus eventually increased the pres sures on pr ices rather
than less ened them.
Normally, when the demand for a product rises in relation
to the supply, for whatever reason (such as the cut-off of oil
supplies by the Arab countries in late 1973) the price of that
9
p r o d u c t rises.
who supply the
This usually causes the profits of those companies
product to rise over the short run; but more
importantly, it increases the profit opportunities for new
producers who might start producing the product. When these new
suppliers increase the supply in relation to the demand and old
producers increase production, the price of the product will
drop again.
Price, wage and/or profit controls frustrate and distort this
process. In the first place, even in the short run, not all prices
wages and profits can ever be controlled by the government--particu
larly the prices of imported raw materials. Second, by freezing
prices, wages and/or profits, the incentive for anyone to
increase the supply of a product is removed because the profit
potential is removed. In fact, existing producers who see
their costs rise often just stop producing completely. As a
result, over a period of time, the supply of the product
shrivels up, thus further aggravating the demand pressure for
the product, ultimately resulting in rationing, black markets,
curtailment of expansion, flow of capital and goods out of
the United States to where profit ODportunities are better,and
many other results that are diametrically opposite to the
objectives that the price controllers are attempting to achieve.
Controls, in summary, distort investment decisions and the
allocation of resources, distort markets and exports, keep
natural forces from reacting against economic defects, and give
a false impression of action which delays truly effective
remedial action.
Q-15:
What about proposals for standby wage-price controls?
A: The problem with standby wage-price controls is that
their very presence--even talk about them--creates an expectation
that controls will be imposed at some future time. There is
thus a rush by business and labor to raise prices and negotiate
large wage increases before controls are slapped on. Compounding
the problem, the resulting rise in wages and prices then provides
the seeming justification for imposing controls.
Q-16: How can high corporate profits be justified in a period
of economic difficulty like today?
A: The fact is that over-all corporate profits are not
high and, at present, they are declining along with the economy.
In the past two years, double-digit inflation has done strange
10
things to corporate profits. Some of the conventional accounting
techniques used by corporations have proved to be inaccurate and
misleading, now that inflation Has become so rampant. They
understate the replacement cost of both inventories and capital
equipment, and thus overstate profits. They create an illusion
of good profits when the actual record of profitability is weak.
In addition, corporations have to pay taxes on those illusory
profits, and to some degree they pay dividends from them as well.
As r> result, corporate cash flow has been squeezed hard: the
retained earnings of nonfinancial corporations, after adjustment
for tne understatement of replacement costs of inventories and
capital equipment, was down to $3 billion in 1973, less
than one-fifth of the 1965 level.
Q-17:
But what about high oil company profits?
A: I have consistently stated that current oil industry
profits represent to a considerable extent a windfall due to
the rigging of world crude oil prices by the Organization of
Petroleum Exporting Countries.
I have also consistently
supported legislation we proposed over a year ago to tax
away these windfall profits as a way to prevent one sector
from profiting unduly at the expense of the rest of the
economy.
At the same time, we have compared the profitability of
the oil industry to that of 28 other industry categories over
the past 16-year period, and f ind that the industry’s profitability,
when viewed over a reasonable time period, falls within the
normal experience of most majo r U. S. industries. And we must
recognize that adequate profit s are essential to the development
of adequate future oil supplie s .
Q-18: Why should people be concerned about whether
businesses make a profit or not?
Ai
B-Cduse the best way to reduce inflation is to increase
supply and production efficiency, and this requires adequate
technology and productive capacity and human and material resources.
These variables all have long lead times,-and our system relies on
the private sector to develop these capabilities. The government
influences these development efforts, but basically there is only
one real motivation to make these capital and human investments-the expectation of profits.
If we don't have adequate profits
now, or the hope of adequate profits in the future, we suffer
in adequate production capacity and inadequate productivity.
11
In effect, 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 the working men and women of this nation.
Q-19: What do you mean when you talk about boosting
productivity?
A: The term productivity refers to the efficiency of
our economy--the amount of real output that can be produced
per worker (and also per unit of capital input).
The importance of increasing productivity is that it
helps us achieve two very important national goals: It reduces
costs and thus lessens inflationary pressures, and it increases
total production and thus improves our standard of living.
Indeed, in the long run, increased productivity is the only
source of a rising national standard of living.
How can productivity be boosted? By cutting waste on the
job and working ’’smarter”--and by increasing the quantity and
quality of capital equipment available to each worker. This
is why I put so much emphasis on the need for more savings and
more investment. This country has been lagging far behind
others in total fixed investment in new plant and equipment.
For example, since 1960 U. S. capital formation (including
residential) has averaged only about 19% of our total output-about the same as in the problem-beset United Kingdom. In
the same period, the investment ratio was 25% for France, 26%
for Germany, and 33% for Japan.
If the U. S. is to check inflation, stay competitive and
continue to create abundance for its people, we must not only
provide greater incentives for saving and investment but also
remove impediments to efficiency throughout the economy. The
National Commission on Productivity has been charged with the
job of identifying problems in this area and recommending
solutions.
block
Q- 20: What are government ’’sacred cows”--and how do they
economic progress and spur inflation?
A: Over the years numerous legislative and administrative
practices have developed in an attempt to protect special interests
from excessive competition and uncertain economic risks. Many of
these rules and laws have led to serious inefficiencies yet have
12
become so entrenched that they are cons idered almo st invulnerable
to change--as though they have a protec ted "s acred cow” status,
The general public should be concerned becaus e an inefficient
economy results in higher prices to all of us » los t work
opportunities and an intolerable waste of thi s nat ion's resources.
There are hundreds--perhaps thousands--o f res trictive
economic practices which are officially sanct ioned by government
Fo r example:
through its laws and administrative practices
•
* In agriculture there are still limitations by law
on the number of acres that can be planted in peanuts, rice
and extra-long-staple cotton. These laws limit supply which
tends to support higher prices. Fortunately, some "sacred
cows" in agriculture have fallen by the wayside, such as direct
subsidies of farm exports and set-aside requirements for wheat,
feed grains and cotton in 1974 and 1975, which released
42,000,000 acres for production.
* Railroads, truckers, airlines and water carriers are
all burdened with excessive regulation over prices, services,
facilities, etc. For example, railroads are required to
operate services that do not even produce revenues equal to
out-of-pocket costs. A recent National Productivity Commission
study cited estimates that the Penn Central suffered out-ofpocket losses of $20 million per year from operating 5,000
miles--roughly one-fourth of its system. Additional
maintenance costs were estimated to raise this amount by
$16 million per year if the Penn Central was forced to continue
to operate these lines after Federal Railroad Administration
track safety standards are enforced. Yet abandonment procedures
are slow and cumbersome. The costs of continued operation are
minimized, the benefits overstated.
* In maritime transportation laws are enforced which increase
the cost of goods delivered to American consumers and businesses.
For instance, the Jones Act requires all cargo moving in the
United States intercoastal trade to move in U. S.-built, U. S.manned ships. Such ships are more expensive to build and operate
than foreign ships, and the U. S. public winds up paying the
higher bills.
* Some labor laws lead to increased costs. For example, the
Davis-Bacon and Service Contract Acts are programs in which the
Department of Labor issues determinations of "prevailing wages"
in particular areas so that these may be paid on federallysupported projects. To the extent that the prevailing rate is
taken as the prevailing union rate (as it is in most areas where
a construction trade is more than 30 percent unionized) the c o s t s
to the government are higher than if the median wage rate were
determined to prevail. This can raise the costs on federallysupported projects above what they would otherwise be.
* I n t h e f i e l d o f e n e r g y a v a r i e t y o f g o v e r n m e n t l aws ha ve
r e s t r i c t e d t h e d e v e l o p m e n t o f n a t u r a l g a s , p e t r o l e u m and c o a l
r e s o u r c e s a nd t h e s i t i n g and c o n s t r u c t i o n o f n e e d e d n u c l e a r power
f a c i l i t i e s a nd r e f i n e r i e s .
For e x a m p l e , F e d e r a l r e g u l a t i o n o f
n a t u r a l ga s p r e s e n t s a c l a s s i c c a s e o f mi s ma nage d g o v e r n m e n t
intervention.
F o r more t h a n two d e c a d e s , d e s p i t e r e p e a t e d
w a r n i n g s by e x p e r t s , t h e F e d e r a l Power Commi ssi on h a s s e t t h e
w e l l h e a d p r i c e o f n a t u r a l gas a t an a b n o r m a l l y low l e v e l i n
o r d e r t o h o l d down p r i c e s f o r c o n s u m e r s .
But i n t h e p r o c e s s
t he FPC a l s o r e d u c e d t h e i n c e n t i v e s f o r t h e d e v e l o p m e n t o f new
d o m e s t i c s u p p l i e s , w i t h t h e r e s u l t t h a t t h e r e i s now f a r l e s s
n a t u r a l g a s a v a i l a b l e t h a n we n e e d . I n 1957, new d i s c o v e r i e s
of n a t u r a l ga s t o t a l l e d a p p r o x i m a t e l y 22 t r i l l i o n c u b i c f e e t .
By 1972, d e s p i t e t h e f a c t t h a t n a t u r a l ga s was s t i l l p l e n t i f u l
u n d e r g r o u n d , new d i s c o v e r i e s we r e l e s s t h a n o n e - s e v e n t h o f
that l e v e l .
I n f a c t , t h e U. S. i s now i m p o r t i n g f o r e i g n
l i q u i f i e d ga s a t p r i c e s much h i g h e r t h a n t h e p r i c e o f c o n t r o l l e d
d o m e s t i c s u p p l i e s , and we a r e f a c i n g s e r i o u s c u r t a i l m e n t s a g a i n
t h i s w i n t e r f o r n a t u r a l gas c o n s u m e r s .
T h e s e few e x a m p l e s show t h a t t o o o f t e n , c o m p e t i t i o n i s
e l i m i n a t e d o r c u r t a i l e d by o u r u n w a n t e d " s a c r e d c o w s . " T h i s
r e d u c e s t h e t o u g h p r i c i n g and c r e a t i v e a c t i v i t y t h a t we n e e d
in o u r s y s t e m , w i t h a l l A m e r i c a n s s u f f e r i n g i n t h e p r o c e s s .
I n an e a r l i e r s t a g e o f o u r e c o n o mi c d e v e l o p m e n t some o f
t h e s e p r a c t i c e s may h a v e b e e n a c c e p t a b l e b e c a u s e new i n d u s t r i e s
had t o h a v e a d e v e l o p m e n t p e r i o d .
Some o f t h e l a b o r p r a c t i c e s
may h a v e b e e n n e c e s s a r y t o r e d r e s s t h e b a l a n c e o f p o w e r .
Va r i o u s a g r i c u l t u r e p r a c t i c e s we r e p e r h a p s u s e f u l i n s t a b i l i z i n g
a v o l a t i l e i n d u s t r y d u r i n g t h e 1930s.
But t h e U. So economy i s now f a r b e y o n d t h i s s t a g e .
We
need t o c o n s e r v e o u r m a t e r i a l r e s o u r c e s , n o t w a s t e t he m.
We
need t o s t i m u l a t e w o r k e r p r o d u c t i v i t y , n o t s m o t h e r i t .
We n e e d
to i n c r e a s e c o m p e t i t i o n , n o t a r t i f i c i a l l y p r o t e c t t h e s t a t u s
quo.
F i n a l l y , we n e e d t o d e v e l o p dyna mi c new i n d u s t r i e s , n o t
p r o t e c t o l d o n e s wh i c h may h a v e become o b s o l e t e o r u n a b l e t o
compete i n a n i n t e r r e l a t e d w o r l d economy.
This p r o g r e s s i v e approach w i l l c r e a t e j o b s , not d e stro y
them.
I t w i l l moderate p r i c e p r e s s u r e s .
I t w i l l i mp r o v e t h e
use o f a v a i l a b l e c a p i t a l r e s o u r c e s .
Most o f a l l , i t w i l l make
our s y s t e m more e f f i c i e n t a nd more c a p a b l e o f c o n t r i b u t i n g t o
the w e l f a r e o f a l l 213 m i l l i o n A m e r i c a n s .
14
Q- 21 : What about: e n e r g y c o n s e r v a t i o n ? When a rc we go i ng
t o s t-a r t ? Wi t h what ?
Ts ga s o 1 i ne ra t i on i n 1 corn i rTg7
A:
Ener gy c o n s e r v a t i o n i s e s s e n t i a l t o o u r n a t i o n a l effort
t o a c h i e v e g r e a t e r i n d e p e n d e n c e from h i g h - c o s t and u n s t a b l e
foreign o il imports.
P r e s i d e n t Ford ha s s e t a c o n s e r v a t i o n
goal o f one m i l l i o n b a r r e l s a day by t h e end o f 19 7 S. Measures
aimed a t a c h i e v i n g t h i s , a s o u t l i n e d by t h e P r e s i d e n t in h i s
m e s s a g e o f O c t o b e r 8, 1974, i n c l u d e d a p l a n t o r e q u i r e o i l and
n a t u r a l - g a s - f i r e d p l a n t s t o s w i t c h t o c o a l and n u c l e a r power;
a requirem ent t h a t the automobile ind ustry develop increased
g a s o l i n e s a v i n g s ; and a more r i g i d e n f o r c e m e n t o f t h e 5 5 - mi l c p e r-h o u r speed l i m i t .
Al s o s e t f o r t h was a s e r i e s o f m a n d a t o r y c o n s e r v a t i o n steps
f o r g o v e r n m e n t and v o l u n t a r y m e a s u r e s f o r t h e Ame r i c an p e o p l e .
The P r e s i d e n t f u r t h e r made i t c l e a r t h a t i f i mm e d i a t e r educ t i o n s
a r c n o t a c h i e v e d , he woul d s e e k more s t r i n g e n t means t o i n s u r e
t h a t U n i t e d S t a t e s d e p e n d e n c e on f o r e i g n s u p p l y i s r e d u c e d .
W h a t e v e r s t e p s a r c n e c e s s a r y w i l l be t a k e n , b u t I s t i l l be l i e v e
t h a t g a s o l i n e r a t i o n i n g must be a l a s t r e s o r t .
I t i s i m p o r t a n t , m o re o v e r,to emphasize t h a t c o n s e r v a t io n
a lo n e i s not enough.
We mus t move a g g r e s s i v e l y t o d e v e l o p our
domestic energy r e s o u r c e s .
T o g e t h e r , i n c r e a s e d p r o d u c t i o n at
home and a h a r d - h i t t i n g p r o g r a m o f e n e r g y c o n s e r v a t i o n can
move us t o w a r d s e l f - s u f f i c i e n c y .
Q - 2 2 : W i l l t h i s r e c e s s i o n l e a d t o a n y t h i n g l i k e t h e early
1 9 3 0 s ? I s t h e a v e r a g e c i t i z e n p r o t e c t e d a g a i n s t an economic
collapse?"
A;
Economi c c o n d i t i o n s t o d a y a r e t o t a l l y d i f f e r e n t from
t h o s e o f t h e 1 9 3 0 s n We ha ve F e d e r a l i n s u r a n c e o f bank d e p o s i t s .
The F e d e r a l R e s e r v e Sys t em i s c o m m i t t e d t o a v o i d a n c e o f a c re d it
c r u n c h and t o a c o n t i n u i n g m o d e r a t e e x p a n s i o n o f money and
credit.
I n t h e e a r l y 1930s t h e money s u p p l y c o n t r a c t e d by about
one-third.
And une mpl oyment t h e n r o s e t o 25 p e r c e n t o f t h e work
f o r c e c ompa r ed t o a l i t t l e o v e r 7 p e r c e n t i n December.
We now h a v e a s u b s t a n t i a l une mpl oyment c o m p e n s a t i o n program
i n b e i n g , p l u s a p u b l i c s e r v i c e empl oyment p r o g r a m .
We have
o t h e r i n c o m e - m a i n t e n a n c e p r o g r a m s - - s o c i a l s e c u r i t y , f o o d stamps,
p u b l i c a s s i s t a n c e , e t c . - - t h a t w i l l n o t d e c l i n e e ven i f g e n e r a l
business a c t i v i t y is depressed.
We a l s o ha ve a l a r g e p a r t of
o u r work f o r c e empl oyed i n e c onomi c s e c t o r s t h a t a r e n o t v e r y
s e n s i t i v e t o e c onomi c f l u c t u a t i o n s - - s o m e o f w h i c h , such as
g o v e r n m e n t e mp l o y m e n t , a r e e s s e n t i a l l y d e p r e s s i o n - p r o o f .
15
j>D
Q- 2 3 : How s o o n c a n we l i c k o u r e c onomi c p r o b l e m s and
ge t b a c k t o s t a b l e , p r o s p e r o u s g r o w t h ?
A: Whi l e we e x p e c t t o s e e a t u r n - a r o u n d l a t e r i n 1975,
l a s t i n g s o l u t i o n s w i l l n o t come q u i c k l y o r e a s i l y .
Inflationary
f o r c e s h a v e become d e e p l y embedded i n o u r e c o n o mi c s t r u c t u r e and
w i l l t a k e t i m e t o g e t wrung o u t , de ma ndi ng b o t h c o n s i s t e n t and
p e rs i s te n t p o lic y approaches.
The h a r d f a c t we f a c e i s t h a t Am e r i c a i s a t a h i s t o r i c
c r o s s r o a d s i n b a l a n c i n g c o n s u m p t i o n demands a g a i n s t t h e
p r o d u c t i o n c a p a c i t y o f t h e m a t c h l e s s e c o n o mi c m a c h i n e r y we
have b u i l t up o v e r t h e c e n t u r i e s .
And t h e p r o b l e m i s b i g g e r
than sim ply m ee ti ng t h e p a i n f u l c o n c u r r e n t problems o f i n f l a t i o n
and r e c e s s i o n , s e r i o u s a s t h e s e a r e .
As a n a t i o n , we h a v e b e e n i n d u l g i n g i n a c o n s u m p t i o n b i n g e 0
We ha ve b e e n u s i n g up o u r i n h e r i t a n c e and b o r r o w i n g from t h e
f u t u r e , a t one and t h e same t i m e .
We ha ve b e e n l i v i n g b e yond
our m e a n s - - i n e f f e c t , b u r n i n g t h e c a n d l e a t b o t h e n d s - - a n d t h e
candle i s g e t t i n g s h o r t e r .
On one h a n d , Am e r i c a now f a c e s v a s t , r a p i d l y r i s i n g n e e d s
to d e v o t e more o f i t s o u t p u t t o c a p i t a l i n v e s t m e n t - - t o r e p l a c i n g ,
m o d e r n i z i n g and e x p a n d i n g o u r f a c t o r i e s , m i n e s , f a r m s and o t h e r
productive f a c i l i t i e s .
We h a v e b e e n f a l l i n g f a r . s h o r t o f m e e t i n g
this im perative.
We a r e i n t h e d a n g e r o u s p o s i t i o n o f p e o p l e on
a s h i p whose h u l l i s s l o w l y r u s t i n g away t h r o u g h l a c k o f a d e q u a t e
r e p a i r a nd m a i n t e n a n c e .
The r e c o r d shows t h e U. So h a s b e e n p l o w i n g one o f t h e
lowest r a t i o s o f g r o s s n a t i o n a l p r o d u c t back i n t o c a p i t a l
i n v e s t m e n t o f any m a j o r i n d u s t r i a l i z e d n a t i o n .
And a s a r e s u l t ,
we a r e s u f f e r i n g fr om t h e l o w e s t r a t e o f p r o d u c t i v i t y i n c r e a s e - t he v e r y k e y s t o n e f o r h i g h l i v i n g s t a n d a r d s .
Q~2 4 : What can t h e a v e r a g e p e r s o n do a b o u t i n f l a t i o n and
our o t h e r e c o n o mi c p r o b l e ms?
A: The A m e r i c a n p e o p l e a r e t h e key t o s o l u t i o n .
Each
o f us c a n do many t h i n g s t o c o n s e r v e o i l , e l e c t r i c i t y and
other energy r e s o u r c e s .
We can c u t w a s t e i n f o o d c o n s u m p t i o n .
We can c u t w a s t e on t h e j o b - - a n d s u p p o r t e f f o r t s t o b o o s t
p r o d u c t i v i t y i n o f f i c e and f a c t o r y .
We can Mbuy s m a r t "
and
r e s i s t p r i c e g o u g i n g w h e r e v e r we f i n d i t .
And we can demand
an end t o g o v e r n m e n t d e f i c i t s p e n d i n g and s u p p o r t p a y - a s - y o u spend p o l i c i e s f o r g o v e r n m e n t p r o g r a m s .
Indeed, t h i s is the
most i m p o r t a n t s i n g l e s t e p t h a t c a n be t a k e n t o r e s t o r e b o t h
p u b l i c c o n f i d e n c e and e c o n o mi c o r d e r .
oOo
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Practicing Public Relations in Washington
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CBS Morning News Interview with Undersecretary Bennett
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&
DeportmentofthefREASURY
TELEPHONE W04-2041
ASHINGTON, D.C. 20220
January 8, 1975
FOR RELEASE 6:50 P.M.
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $2.0 billion of 52-week Treasury bills to be dated
January 14, 1975,
and to mature January 13, 1976,
were opened at the
Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
High
Low
Average
- 93.657
- 93.517
- 93.551
Equivalent
Equivalent
Equivalent
annual rate 6.273%
annual rate 6.412%
annual rate 6.378%
Tenders at the low price were allotted
!4
86%.
TOTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Applied For
Accepted
Boston
New York
Philadelphia
Cleveland
Ri chmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
$
16,730,000
2,856,700,000
26,175,000
17,265,000
16,100,000
5,880,000
161,790,000
22,540,000
6,560,000
22,910,000
9,495,000
191,675,000
$
6,730,000
1,758,020,000
6,175,000
15,465,000
15,630,000
5,880,000
70,010,000
18,040,000
6,560,000
16,610,000
7,495,000
73,675,000
$3,353,820,000
$2,000,290,000
TOTALS
U
This is on a bank discount basis.
[2/ Includes $61,360,000
n
The equivalent coupon issue yield is 6.80%.
noncompetitive tenders accepted at the average price.
EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL ON WAGE AND PRICE STABILITY
31 t -
726 JACKSON PLACE, N.W.
WASHINGTON, D.C. 20506
EMBARGOED UNTIL 9:00 PM EST
Thursday, January 9 , 1975
FOR INFORMATION C A LL :
(202) 456-6757
REMARKS BY ALBERT R E E S , DIRECTOR
COUNCIL ON WAGE AND PRICE S T A B I L I T Y
BEFORE THE BOARD OF DIRECTORS
OF THE
NATIONAL ASSOCIATION OF FOOD CHAINS
BAL HARBOUR, FLORIDA
JANUARY 9 , 1975
WILL THERE BE NEW WAGE AND PRICE CONTROLS?
During t h a t q u i e t week in Washington between Christmas and New Y e a r ' s
Day, I was v i s i t e d by y o u r P r e s i d e n t , Mr. Danzansky and y ou r E x e c u t iv e
D i r e c t o r , Mr. Adamy, and t h a t v i s i t led to my being here t o n i g h t . Your
o f f i c e r s informed me t h a t you are g r a v e l y concerned by t a l k o f renewed
wage and pr ic e c o n t r o l s , and i n v i t e d me to address myself to t h a t
concern. I am most happy to do so.
Of course, the re are may economists, former Government o f f i c i a l s , and
even some businessmen who have been saying t h a t c o n t r o ls work in curing
an i n f l a t i o n . Among the most d i s t i n g u i s h e d o f these are Mr. Chester
Bowles, Mr. Robert R. Nathan, and Pr o fe ss or John Kenneth G a l b r a i t h , a l l
of whom helped to adm ini st er p r ic e c o n tr o ls during World War I I . They
point to the f l a t n e s s o f the o f f i c i a l p r i c e indexes during periods o f
controls.
I cannot agree with t h e i r view o f these e v en ts . My d i f f e r e n c e s
with these gentlemen stem from the d i f f e r e n c e s in our experiences during
th a t p e r i o d . While they were running the OPA, I was managing a supermarket.
When a customer came to me and asked f o r s a r d i n e s , I would r e p l y , "We
c a n ' t get sardines except a t black market p r i c e s , and we d o n ' t deal in
the black m a r k e t ." " W e l l , " the customer would s a y , "the s to r e down the
s t r e e t has sar di nes " and she would go down the s t r e e t not j u s t f o r her
sa rd in es , but f o r her whole week's food shopping. The c e i l i n g p r ic e o f
s ar di ne s , a t which almost none were s o l d , might e n te r an o f f i c i a l p r ic e
ind ex, but the black market p r ic e never d i d .
During a war emergency, when c o n t r o ls are r e i n f o r c e d by the s p i r i t o f
p a t r i o t i s m , they may have some e f f e c t in curing i n f l a t i o n , but f o r the
most p a r t the e f f e c t is merely to suppress the symptoms. A large bubble
of p r ic e increases then comes to the surf ac e when c o n tr o ls are l i f t e d .
(more)
CWPS-19
-
2
-
The renewed i n t e r e s t in c o n tr o ls has gone beyond mere t a l k . B i l l s to
r e s t o r e c o n t r o l s have been introduced i n t o the Congress, and others are
being prepared f o r i n t r o d u c t i o n when the new Congress convenes. Senator
Mansfield introduced S. 4 1 7 4 , a b i l l "to s t a b i l i z e p r i c e s , r e n t s , wages,
s a l a r i e s , d i v i d e n d s , i n t e r e s t rates and ot h er economic t r a n s f e r s . "
Senator Sparkmen, Chairman o f the Committee on Banking, Housing, and
Urban A f f a i r s , asked me to comment on t h a t b i l l and on December 1 9 , I
did s o , opposing i t s enactment. In so d o i n g , o f cou rs e, I was not speak
ing merely f o r m y s e l f.
I was r e s t a t i n g the views o f Pr e s id e n t Ford with
the express approval o f the A d m i n i s t r a t i o n . The l a s t sentence o f my
l e t t e r reads "We are advised t h a t enactment o f S. 4174 would not be in
accord wi th the program o f the P r e s i d e n t . " Th a t standard phrasing is
used to i n d i c a t e t h a t the b i l l , i f passed, would be ve to e d , and i t is
so understood by the Congress.
In my r e p l y to Senator Sparkman, I used several examples from the food
i n d u s t r y o f the economic d i s t o r t i o n s caused by c o n tr o ls between A ugu st,
1971 and A p r i l , 19 74 .
I pointed out t h a t p r i c e c o n tr o ls are one o f the
causes o f the present high p r i c e o f sugar.
In 1974 we had a reduced
acreage planted i n sugar b e e t s , because the p r ic e o f beet s u g a r , a processed
p r o d u c t , was c o n t r o l l e d in the Spring o f 1 9 7 4 , wh ile the prices o f other
crops t h a t are sold as raw a g r i c u l t u r a l products were f r e e to r i s e .
Another example o f such d i s t o r t i o n s was the pronounced drop in the
s la u g h te r r a t e o f domestic c a t t l e in March, 1 9 7 3 , f o l l o w i n g the imposition
o f a p r ic e f r e e z e on b e e f , and again from m i d - J u l y to September 1 2 , a f t e r
the announcement t h a t the f r e e z e would continue u n t i l the l a t t e r d a te .
For some time a f t e r September
1 9 73 , the c a t t l e t h a t came to
market were
e x c e s s i v e l y f a t because they had been held too long on feed
l o t s . This
excess f a t caused p a r t o f the apparent r i s e in marketing margins on beef
about which consumer o r g a n i z a t i o n s and c a t t l e r a i s e r s have been complaining.
I a ls o included in my r e p l y an example o f wage i n e q u i t i e s a r i s i n g from
c o n t r o l s in the r e t a i l food i n d u s t r y . As you know, wage increases ne go ti
ated a f t e r November 1 4 , 1 9 7 1 , were g e n e r a l l y held to 5.5 p e r c e n t , wh ile
c on tr ac ts neg oti ated e a r l i e r were allowed to run according to t h e i r terms,
or i f challenged were g e n e r a ll y held to no less than 7 p e rc e nt . As a
r e s u l t , during Phase I I there
were many cases where workers
in the same
occupation and the same local
u n io n , who had always received the same
wage r a t e , were r e c e i v i n g d i f f e r e n t r ates because t h e i r employers had
signed i d e n t i c a l agreements, but had done so a t dates a few weeks a p a r t .
I f y o u r journeyman meatcutters are g e t t i n g $5.50 an hour and y o u r competitor's
get $5 .75 and you are not permitted to close the gap, you may lose experienced
w o rk e r s , and the morale and p r o d u c t i v i t y o f y o u r work fo r c e may s u f f e r . I t
took the T r i p a r t i t e Food Wage and S a la ry Committee in Phases I I I and IV about
a y e a r o f hard work to clean up messes o f t h a t t y p e . I enjoyed t h a t work
because I got to know many able ex ecutiv es and union leaders from the food
i n d u s t r y , but I know t h a t they had b e t t e r things to do wi th t h e i r ti m e ,
such as running t h e i r businesses or t h e i r unions.
(more)
- 3 r
'b
^
One ot he r example o f the problems created by c o n tr o ls is very r e l e v a n t
to y o u r present concerns as you seek to maintain y ou r volume o f business
when demand is f a l l i n g .
During the p r ic e fr e ez es o f 1971 and 1 9 7 3 , grocery
wholesalers and r e t a i l e r s were "locked in " to low pr ice s s e t during temporary
special deals and allowances o f f e r e d as p a r t o f manufacturers.' promotions.
Such special deals and allowances serve a t r a d i t i o n a l and l e g i t i m a t e f u n c ti o n
in food d i s t r i b u t i o n . But p e n a l i z i n g manufacturers and d i s t r i b u t o r s by
r e q u ir in g them to maintain such promotional price s beyond the intended
period is not a very s e n s ib le way to ad m in is te r c o n t r o l s . This u nf o r tu n a te
experience is now discouraging money-saving promotions during the present
unwarranted f e a r o f a new f r e e z e .
I i n d ic a te d a moment ago my f i r m c o n v i c t i o n t h a t the P r e si d en t would veto
any b i l l mandating general wage and p r i c e c o n t r o l s . But my c o n v i c ti o n
goes beyond t h i s .
I b e li e v e t h a t i t is h i g h l y improbable t h a t such a b i l l
w i l l pass during the next Congress, de s p it e the t a l k we a l l he ar. I do not
spend much time on C a pi to l H i l l and cannot q u a l i f y as an experienced Congress
watcher. But I do know the views o f several sen io r members o f the Senate
Committee on Banking, Housing, and Urban A f f a i r s which considers such b i l l s
in the upper house, and these members are s t i l l s t r o n g l y opposed to c o n t r o l s .
Senator Pr o xm ir e, who w i l l be the Chairman o f t h i s Committee in the new
Congress, gave a speech in the Senate on December 2 , which he e n t i t l e d ,
"Congress should not be Steamrolled i n t o Dominating or S t r a i g h t j a c k e t i n g
the Economy." I commend t h a t speech to anyone who th in ks t h a t c o n tr o ls
are e i t h e r i n e v i t a b l e or d e s i r a b l e , in the b e l i e f t h a t i t w i l l help to
change his mind on both counts, The J o i n t Economic Committee o f the Congress
has r e c e n t l y issued a r e p o r t on i n f l a t i o n c a l l "Achieving P r ic e S t a b i l i t y
Through Economic G r o w th ." The Committee unanimously concluded t h a t "com
prehensive wage and p r i c e c o n tr o ls are economically i n a p p r o p r ia t e and
p o l i t i c a l l y u n r e a l i s t i c a t the present ti m e " .
Economic trends are r e i n f o r c i n g the p o s i t i o n o f those members o f Congress
who do not b e li e v e t h a t c o n tr o ls are d e s i r a b l e .
I n f l a t i o n a r y pressures
are a b a t i n g . Shortages are easing. Prices o f many raw m at er ia ls have been
f a l l i n g f o r some time
A l l o f the economic f o r e c a s te r s are p r e d i c t i n g a
s u b s t a n t i a l l y lower r a t e o f i n f l a t i o n in 1975 than in 19 74 .
In the food
i n d u s t r y , we have seen s u b s t a n t i a l l y lower prices f o r b e e f , r i c e , p o t a t o e s ,
and beans and slower ra te s o f increase f o r many oth er prod uct s. But we can
n o t , o f c ou r s e, p r e d i c t t h a t i n f l a t i o n w i l l end in 1975. I f nothing e l s e ,
r i s i n g wages, d i s a p p o in ti n g p r o d u c t i v i t y performance, and the increasing
cost o f energy w i l l u n f o r t u n a t e l y insure t h a t i n f l a t i o n w i l l remain a
problem, though a less severe one.
The p r o b a b i l i t y o f new c o n tr o ls is f u r t h e r decreased to the e x t e n t to which
we in the Council on Wage and P r ic e S t a b i l i t y succeed i n our program o f
encouraging v o l u n t a r y wage and p r i c e r e s t r a i n t .
I am pleased to r e p o r t
th a t in our e f f o r t s so f a r we have had the f u l l and f r i e n d l y cooperation
of the National A s s o c i a t i o n o f Food Chains and the Super Market I n s t i t u t e .
- 4 In the pas t few weeks we have had considerable success in persuading several
major st eel companies to moderate t h e i r p r ic e in c r ea s es , In g e n e r a l , they
r o l l e d back t h e i r announced increases by about 20 pe rc e n t. The balance o f
the p r i c e increases we b e li e v e to be j u s t i f i e d on the basis o f increased
lab o r and m a t e r ia ls c o s t s . For one p r o d u c t , however, the r o l l b a c k o f
announced p r ic e increases was about 37 p e r c e n t , and t h a t product is t i n
p l a t e . The choice o f t i n p l a t e was not a c c i d e n t a l . A l l increases in the
p r i c e o f s te e l w i l l e v e n t u a l l y show up somewhere in the p r ic e o f consumer
goods and s e r v i c e s . However, f o r t i n p l a t e the l i n k i s very s w i f t and
d i r e c t . T i n p l a t e goes i n t o cans, and increases in the pr ic e o f cans are
q u i c k l y r e f l e c t e d i n the pr ice s on grocery s h e l v e s . As you a l l know, the
c o s t o f a can now f r e q u e n t l y exceeds the cost o f i t s c o n te n ts . By exercising
special r e s t r a i n t i n the p r i c e o f t i n p l a t e , the s te e l companies were helping
to wind down our w a g e -p r i c e , price-wage s p i r a l .
J u s t as the p r i v a t e s ec to r can take ac tions t h a t make c o n tr o ls less l i k e l y ,
i t can a ls o take ac tions t h a t make new c o n t r o ls more l i k e l y . This happens
when businesses and labor o r g a n i z a t i o n s make unreasonable use o f the freedom
from c o n t r o l s they fou ght so hard to win l a s t s p r i n g . When the c r e a ti o n of
the Council on Wage and Pr ic e S t a b i l i t y was announced, some business economists
p u b l i c l y advised t h e i r c l i e n t s t h a t t h i s was the f i r s t step back to controls
and urged t h e i r c l i e n t s to r a i s e prices wh ile they s t i l l c o u ld . More
r e c e n t l y , some o f you have been advised by legal counsel not to reduce
price s f o r special promotions f o r f e a r t h a t you would be caught in a new
p r ic e f r e e z e .
I can understand the zeal o f advi ser s and counselors to
serve the i n t e r e s t s o f t h e i r c l i e n t s - - t h a t is how they earn t h e i r l i v i n g .
But i f they conceive these i n t e r e s t s too n a r r o w l y , they not only damage the
n a tio na l i n t e r e s t , but they may damage the i n t e r e s t s o f t h e i r own c l i e n t s
in the longer ru n.
The advice to r a i s e prices or r a i s e wages as much as po ss ib le to beat the
coming o f c o n tr o ls could u n f o r t u n a t e l y be a s e l f - f u l f i l l i n g prophecy. In
my judgment there is only one thing t h a t w i l l gi v e c o n tr o ls more chance
than a snowball i n Miami, and t h a t ‘i s f o r people in t h i s room, and others
l i k e you who make wage and p r ic e d e c i s i o n s , to accept the unfounded view
t h a t c o n tr o ls are i n e v i t a b l e and to behave a c c o r d i n g l y .
I f you d o n ' t
compete a g g r e s s i v e ly as you normally d o , or i f you are a f r a i d to lower prices
to promote y o u r wares or to pass on reductions in costs to y o u r customers,
then and only then does the t a l k o f c o n tr o ls have any chance o f p r e v a i l i n g .
I beg you not to become the v e h i c l e f o r making y o u r own nightmares come true.
o 0 o
CWPS-19
DepartmentoftheJRUSURY
KINGTON.
O C 20220
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
L
JANUARY 9, 1975
TREASURY LISTS COMPLAINTS RECEIVED
UNDER COUNTERVAILING DUTY LAW
Assistant Secretary of the Treasury David R. Macdonald
today announced that pursuant to provisions of the Trade Act
of 1974, signed by President Ford on January 3, 1975, the
Treasury will publish shortly a notice listing all complaints
which have been received under the countervailing duty law and
in which the Treasury has not yet published notice of an
investigation. Under previous Treasury procedures no public
notice was made until after an inquiry had been conducted
establishing the probable validity of the allegations.
Now, however, the Act requires that all complaints, alleging
that goods exported to the U.S. have benefitted from bounties
or grants in the country of export be published, when received
in proper form, and that complaints pending on the date of
enactment of the Act be treated as if received on the day
after that date.
Mr. Macdonald said that the notice would list 30 separate
cases from 19 different countries, involving a variety of
products. He emphasized that under the new procedures,
publication of the notice, which will appear in the Federal
Register sometime next week, is a procedural step required by
law, and does not indicate that Treasury has made any decision
on the validity of the allegations contained in the complaints.
In these cases, the Treasury will have up to six months to
investigate these charges and to make a preliminary determination
and then up to an additional six months before deciding whether
the imposition of additional, countervailing duties is warranted.
He added that while no notice of investigation has previously
been published in any of these cases Treasury has in several
instances already conducted inquiries and engaged in discussions
with the governments concerned. For instance, in the case of
dairy products from the European Community considerable progress
has already been made toward resolving the issues in that
complaint.
In addition to these 30 cases there are four other
countervailing duty investigations which were formally opened
prior to enactment of the Act, which are pending. Those
investigations should be completed in the near future.
oOo
Attachment
WS-193
-1-
Cases where Notice of Receipt of Complaint Will Be
Issued
Commodity
Country
Float Glass
Belgium
Float Glass
Italy
Float Glass
France
Float Glass
West Germany
Float Glass
U.K.
Processed Asparagus
Mexico
Dairy Products
EC Member States
Ferrochrome
South Africa
Footwear
Taiwan
Cheese
Austria
Cheese
Switzerland
Leather Handbags
Brazil
Non-rubber Footwear
Korea
Canned Hams
EC
Shoes
West Germany
Leather Products
Argentina
Steel Products
West Germany
Steel Products
France
Steel Products
Netherlands
Steel Products
Luxembourg
Steel Products
Belgium
Member States
-2
Commodity
Country
Steel Products
United Kingdom
Steel Products
Austria
Cotton Textiles and
Manmade Fibers
India
Dried Apples
Italy
Cast Iron Soil
Pipe & Fittings
India
Tie Fabrics
Korea
Tie Fabrics
West Germany
Tie Fabrics
Japan
Oxygen Sensing
Probes
Canada
Press inquiries:
202-964-2615
FOR I MMl.il)TATI: RELEASE
J a n u a r y 9,
19 7 S
SUMMARY OF FUNDING ACTIVITY
DECEMBER 23, 1974 - JANUARY 3, 197S
Federal
December 23,
F i n a n c i n g Bank l e n d i n g a c t i v i t y For t h e p e r i o d
1974, t h r o u g h J a n u a r y 3, 1975, was as f o l l o w s :
On December 23, t h e S t u d e n t Loan M a r k e t i n g A s s o c i a t i o n
( S a l l i e Mae) b o r r o w e d $40 m i l l i o n from t h e F e d e r a l F i n a n c i n g
Bank; $20 m i l l i o n a t 7.12% m a t u r i n g J a n u a r y 30, 1975, and
$20 m i l l i o n a t 7.21% m a t u r i n g December 16, 1975.
The Bank c l o s e d two t r a n s a c t i o n s w i t h t h e T e n n e s s e e
Va l l e y A u t h o r i t y i n t h e r e c e n t t wo- we ek l e n d i n g p e r i o d .
On
December 26, TVA b o r r o w e d $220 m i l l i o n a t an i n t e r e s t r a t e
of 7.42%.
The l o a n , wh i c h m a t u r e s on March 27, 1975, r e
funded an e x i s t i n g $220 m i l l i o n l o a n w i t h t h e FFB.
On
December 31, TVA b o r r o w e d $170 m i l l i o n a t 7.57%.
This loan
mat ures March 27, 1 975, and p r o v i d e s new money f o r TVA.
On December 31, Amt r a k, t h e N a t i o n a l R a i l r o a d P a s s e n g e r
C o r p o r a t i o n , made a $3 m i l l i o n d r a w i n g a g a i n s t t h e $100
m i l l i o n l i n e o f c r e d i t s i g n e d O c t o b e r 11, 1974.
The i n
t e r e s t r a t e i s 7.621%.
T h i s b r i n g s t h e amount b o r r o w e d
under t h e O c t o b e r commi tment t o $ 4 0 . 9 m i l l i o n .
F e d e r a l F i n a n c i n g Bank l o a n s o u t s t a n d i n g on J a n u a r y 3,
1975, t o t a l $ 4 . 5 b i l l i o n .
U n f i l l e d commi t ment s t o t a l $4
billion.
oOo
DepartmentoftheTlf[ASllIfY
SHING10N,
D.C 20220
TELEPHONE W04-2041
FOR RELEASE ON DELIVERY
ADDRESS OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE UNIVERSITY OF MICHIGAN BUSINESS CONFERENCE
COBO HALL, DETROIT, MICHIGAN
8:00 P.M., EST, JANUARY 9,1975
It is a great privilege to return to Detroit this evening'
and to address such a distinguished audience.
I
feel honored, indeed, by the University for this opportunity
to speak here, and I want to thank Dean Bond and all the others who
have made this possible.
We talk a good deal about Michigan in our meetings back in
Washington, and as you can imagine, most of our discussions
are prompted by the unhappy state of your economic affairs. We
fully appreciate the fact that unemployment here is higher
than almost anywhere else in the Nation, that industry is in
the doldrums, and that thousands of people are suffering. These
are matters of acute concern to the President as well as his
advisers.
I come here with no instant solutions for, as you know,
there can be no such thing as a quick fix in today’s economic
world. The problems we face have been gathering momentum for
a decade or more, and they will take time to cure.
Yet we would be utterly foolish to panic now or to be
mesmerized by those who continually see a catastrophe lurking
around every corner.
During the Second World War, young officers used to marvel
at the way that General George Marshall maintained his composure
and dignity despite frequent predictions of disaster. How do
you do it, they asked, ’’Because I have seen worse,” he replied.
WES-194
2
Well, America has seen worse, too. We have faced many difficult
challenges in the past, and we have always rallied to overcome
them. We will do that again today if we keep our cool, maintaining
faith in ourselves and.in the institutions that have been the
bedrock of our greatness and acting together as a united, free
people.
I am particularly concerned tonight by the degree to which
public apprehension and uncertainty about our future are caused
not simply the many real economic pressures we are experiencing,
but by a number of economic myths that are now widely accepted.
Both the government and private industry have a large job ahead
in restoring public confidence, and to succeed in that task it
is essential that we clear up public misunderstandings about the
nature of our problems. For that reason, I want to address two
of the most popular economic myths here tonight.
Myth #1:
"We Don't Know How We Got Here"
One often hears that we have entered a new and strangely
different world in economics and that we donft really understand
how we got here. Americans have known periods of recession and
high inflation before, but rarely -- if ever -- have we had both
together in such a virulent combination.
It is true that the
economy has become sufficiently complex that no one can fully
understand its nuances nor predict its developments with
scientific precision. But that does not mean that we are
ignorant of its fundamental forces.
In fact, I would argue that
the underlying causes for our current dilemmas are readily apparent.
The idea that the economy has somehow eclipsed our powers of
understanding is both false and unduly defeatist.
Our problems are rooted to a very large degree in the
mistakes of the past -- the decade or more when our Government
has spent far more than we could afford, when we were profligate
with our resources and, as Adlai Stevenson once put it, we
confused the free with the free and easy. For too long we have
naively believed that our Government could solve every social
problem by throwing more money at it and that all of the problems
could be solved simultaneously. Even though it required 300 years
to build 60 million units of housing, we blithely assumed that we
could add 26 million more in a single decade. Even though almost
a century was needed to build the finest transportation system
in man's history, we thought we could replace that system with mass
transit in a single decade. And even though pollution was an
inevitable by-product of the industrial revolution, we thought we
could restore our environment to a near-pristine state practically
overnight and still maintain our same level of economic growth.
3
The results of such false expectations were easily predictable:
The powers and size of the Government have been enormously enlarged
but our problems have only grown worse.
It took 186 years for
the Federal budget to reach $100 billion, a line it crossed in 1962,
but then only nine more years to reach $200 billion, and only four
more years to break the $300 billion mark. Revenues, of course,
have not kept up with expenditures, so that when we close the books
on fiscal year 1975, we will have had budget deficits in 14 of the
last 15 years -- a truly miserable record.
The huge Federal deficits of the 1960s and 1970s have added
enormously to aggregate demand for goods and services, and have
thus been directly responsible for upward pressures on the price
level. Heavy borrowing by the Federal sector has also been an
important contributing factor to the persistent rise in interest
rates and to the strains that have developed in money and capital
markets. Worse still, continuation of budget deficits has tended
to undermine the confidence of the public in the capacity of our
government to deal with inflation. In short, when the Federal
budget runs a deficit year after year, especially during periods
of high economic activity such as the ones we have enjoyed over
the past decade, it becomes a major source of economic and
financial instability.
Yet these reported Federal deficits are only the beginning
of the story because they do not include borrowing by State and
Local Government or by the "off-budget" agencies sponsored
by the Federal Government.
In fiscal year 1974, the combined
borrowings by all forms of governmental activity accounted for
no less than 60 percent of the net funds raised in the capital
markets in the United States. To me, that is an alarming figure,
for when the Government usurps the capital funds available, the
entire system is disrupted. Borrowers must seek out other sources
of capital, interest rates rise, and eventually the housing market
cracks. Furthermore, personal consumption declines, business
investment falters, and jobs are lost. Ultimately, the system can
break down because capital is no longer available. For the safety
and vitality of our free enterprise system, it is imperative that
we halt this continuing surge of government spending.
An additional factor underlying our current problems is the
excessive monetary stimulus we have pumped into the economy over
the past decade. From 1955 to 1965, the money supply expanded at
the rate of about 2 1/2 percent a year, and we enjoyed reasonable
price stability. From 1965 on, however, the annual rate of increase
jumped to over 6 percent, and in 1972-1973, the annual rate rose
to 7.4 percent. With the money supply expanding more rapidly than the
economy itself, it should have come as no surprise when the rate of
inflation also began climbing upwards»
Still another cause of our malaise is the gradual accumulation
of hundreds of government policies which inhibit the efficiency
and effectiveness of our economic system. The Government now
4
now directly controls several of our major industries -- air,
rail and truck transportation, power generation, television,
radio, and the securities industry, to name the most obvious -and exerts enormous influence over others such as the auto
industry through environmental controls, tax laws, safety
standards, and the like. Certainly the Government has a positive
regulatory role to play within our society, but we have bartered away
far more of our economic freedom than is either necessary or
healthy.
It is clear to me, and I suspect it is becoming clear to
the public, that we now have more government than we need, more
government than most people want, and certainly more government
than we are willing to pay for.
These three factors -- fiscal policies, monetary policies,
and over-zealous Government regulation -- are the basic underlying
causes of today's problems, causes which alone could be highly
disruptive. But their impact has been greatly magnified by four
other special factors which are much more recent in origin and
which have been at least as harmful.
First, we have been saddled with an unreasonable and
largely unexpected quadrupling of the international prices of
crude petroleum. The average American certainly recognizes
the impact of this event on gasoline and home heating fuel
prices, but we often ignore its pervasive effects on chemicals,
plastics, transportation, man-made fibers, and petrochemicals.
While the effects of the oil cartel have been somewhat offset
in this country by the availability of domestic supplies, the
nations of Europe and Japan are experiencing much more difficult
problems. There can be no doubt that oil now poses the most
urgent economic problem in the Western World.
Second, in the face of rapidly increasing world demand,
there has been an unprecedented series of crop setbacks here
and abroad in 1972, 1973 and again in the 1974 harvest. As a result)
food prices in the United States have risen by 33 percent in only
two years, and much of the world is experiencing severe shortages.
Preliminary indications are that food prices will continue to rise
at a fast pace throughout 1975.
Third, in another highly unusual occurence, most of the
industrialized nations experienced a simultaneous boom during
the early 1970s, dramatically increasing world demand for many raw
materials and thus driving up prices.
5
Fourth, wc are still suffering from the accumulated
distortions of three years of wage and price controls.
As we should have learned from World War 11 and Korean
experiences, artificial restrictions cannot eliminate
underlying wage and price pressures; they only bottle them
up and when restrictions come off, prices explode. More
over, the controls of the 1970s helped to divert capital
investments, created artificial motivations for exports,
distorted competitive relations, and in general reduced
economic efficiency. We shall lie paying the price for
some time to come.
Piling these four special factors --.higher oil prices,
higher food prices, increasing world demand, and wage and
price controls -- on top of an economy that was already
overheated had the same effect as dumping gasoline on a hot
charcoal broiler:
the flames of inflation roared upward to
their highest levels in peacetime history. And that fire
was so intense that it gutted some of the main underpinnings
of our economy, helping to carry us into a recession.
Let me dwell for a moment on the way that inflation
has helped to cause the current recession, for that point is
not well understood.
In every period of inflation, interest
rates also increase.
In this case, because the inflation
rate rose to such high levels, interest rates also rose to
breath-taking heights. We soon began to experience severe
financial instability, there was a heavy outflow of funds
from thrift institutions and a sharp squeeze on mortgage
credit, and -- finally -- the bottom dropped out of the
housing market. We are now in one of the worst housing
slumps on record.
Similarly, the inability to curb inflation was a major
factor -- perhaps the major factor -- in demolishing
consumer confidence.
Polls taken by the Survey Research
Center at the University of Michigan show not only that
consumer confidence is extraordinarily low, but that it
began its precipitous decline when prices started shooting
upwards -- and that was long before the recession hit.
While the recession has driven confidence even lower,
inflation was the force that pushed it over the brink.
I
need not remind you that this loss of consumer confidence
has had a crushing impact on auto sales and the sales of
other consumer goods.
In fact, the loss of confidence has
led to the biggest drop in consumer purchases since the
Second World War.
6
Consumer sales and housing are now the two weakest
factors in the economy. Since they play such an important
role in the recession, I think the point is clear that
recession and inflation are rooted in many of the same
causes. They are really part of the same disease.
It is also worth noting that, contrary to public
expectations, high rates of inflation may continue even as
the economy undergoes a recession. That has been true of
every bout with recession during the past quarter of a
century.
Let me explain the logic to this seeming paradox.
The first stage of any disinflation is to cool off the
inflated and overheated demands that caused the inflation.
Time, however, is required for price-making forces to move
through the economy, and for a while recession and price
inflation will continue together. As the economy begins to
pick up again, the expansion of output and the actions to
pare costs begin to yield large gains in output per man
hour and a more favorable cost performance. As a result,
the price level traditionally begins to stabilize during
the periods of recovery.
In the present case, because some
of the causes of inflation have already subsided, we expect
the inflation rate to come down substantially during the
recession, but our best assurance of long-range price
stability and economic growth is to purge the economy of
the factors which have caused both the inflation and the
recession.
Myth #2:
"We Don’t Know How To Get Out Of Here*'
Once we realize that there are no mysteries about the
causes of our economic problems, we should also recognize
that there is little mystery about their cures. That is
why I am continually perplexed by a second myth that is
widespread today: the notion that "we don’t know how to
get out of here." To me, the general directions in which
our policies must lead are clear; the hard questions arise
in trying to select options for reaching those goals and
in setting priorities.
As you know, President Ford and members of his
Administration are devoting an enormous amount of time to
these questions. Many difficult policy choices have been
put before the President, and he is acting upon them with
the greatest care and with acute concern for the needs of
all Americans.
Later this month, he will present a compre
hensive set of economic and energy proposals to the Congress
and the American people.
I hope they will merit your
support and, when they do, you will be active in seeking
their approval.
7
33a
It would be premature to dis cuss any of th e Pres ident1
decisions here tonight, but I wou Id like to tel 1 you the
context in which the Presiden t is working and out1ine the
general goals of our policies •
Some people feel that we mus t make an agon izing cho ice
between f ighting inflation and fi ghting reces s ion. The fac
is that these two forces are so closely relat ed that we mus
attack both at the same time. We cannot affo rd the 1uxury
of cone entrâting upon one at the expense of the other , for
both are social dynamite.
The President is fully aware of the dangers facing the
economy. He knows what's happening here in Michigan. He
knows of the hardships that result from unemployment and,
of course, he wants to minimize the extent of the current
recession. Yet neither he nor anyone else within the
Administration wants to set off another round of roaring
inflation, which would only risk an even more serious
economic collapse later. We are beginning to make some
inroads against inflation, and we want to continue that
progress.
In seeking solutions, then, we must be bold but
we must not be reckless.
Reduced to their simplest terms, our general goals for
the future must be these:
First, while the question of how much stimulus Federal
Government should provide to the economy over the short
run is one of the most difficult facing the President,
the long-run goal is to restore greater discipline to
our fiscal affairs. The keystone of this effort must be
firm expenditure control. To continue the excessive
spending policies of the past would not only prolong our
economic troubles, but would insure almost total Governmental
domination of the economy. This is one of the gravest
dangers now facing this country, and it is one that we
must all face soon.
Second, we must have a monetary policy that fully
supports a resumption of economic expansion but avoids
the creation of excessive stimulus. When the money supply
expands more rapidly than a sustainable rate of growth,
as it frequently has over the past decade, we can only
expect further inflation and all the problems that come
with it. At the same time monetary policy today must play
an essential role in establishing the foundations for
vigorous and orderly growth ahead.
-
8
-
Third, we must.launch a concentrated attack on
Government policies which waste our human and material
resources through artificial controls and inefficiency.
A few months ago, a former member of the University of
Michigan faculty who is now serving in a high post in the
Treasury, Dr. Sidney Jones, catalogued the many policy
recommendations for economic actions by the Government.
His paper included 86 specific policy recommendations for
immediate action and over 200 additional suggestions for
future action. He recognized that many of the 200
additional suggestions could not be taken now because
there was no conceivable way of overcoming the entrenched
opposition of special interest groups and the Congressional
interests and bureaucracies which support them. Such
conditions are no longer acceptable in today's economic
environment, and we must continue working until we change
them.
Fourth, we must be guided by compassion and understanding
for those who have been hit the hardest by our economic
troubles--those who have lost their jobs, low-income
Americans, and those whose real incomes have been eroded
by inflation. They deserve special attention, and they
will continue to receive it under this Administration.
Fifth, we must move ahead much more rapidly than
we have in the past on both sides of the energy equation:
supply and demand. Legislation that would permit and
encourage a vast increase in our domestic supplies has
been bogged down on Capitol Hill for as long as four
years, seriously handicapping our efforts to get on with
the job. The Alaskan Pipeline is a classic example of
the price we are paying for such inexcusable delays.
The oil industry first estimated the new pipeline could
be placed in service in 1973 at an estimated cost of
$900 million. Because of opposition and delays and the
need to resolve environmental issues, the pipeline is
not expected to go into operation before late 1977, and
projected costs have reached $6 billion.
In terms of conservation, we have made much more
progress through voluntary efforts than is generally
recognized, but it is also apparent that we must now go
beyond those efforts. That will necessarily mean a
degree of personal sacrifice by all of us, but President
Ford is fully confident that the American people understand
this need and are prepared to meet it.
9
33
Finally, we must focus on achieving maximum production
of food. After 40 years of curtailing agricultural
production through artificial restrictions, we are now
loosening the Government strait-jacket and opening up
markets abroad so that farmers have an incentive to
produce. More than 60 million acres have now been
removed from set-aside programs, and over half of these
have been converted to active production. With relatively
decent weather, you can expect to see rapid increases in
overall production levels.
As I told a farm audience earlier this week, all of
us should learn a lesson about free enterprise from the
farmers. The progress they have made because they are no
longer under the thumb of the Government can also be made
in energy and transportation and many other fields where
Government regulation now impedes growth and development.
The private enterprise system helped to give this nation
the highest standard of living that man has ever known,
and if we can only unleash those powerful engines once
again, as we are in agriculture, then we can put this
country back on the road to prosperity.
The road toward acheiving these long-range goals
will surely be rough and uneven. As the President has
said, some of the choices now on his desk could not be
tougher or more complex. But I would submit to you
tonight that the real question is not whether we understand
our problems or can devise solutions to them--we can--but
whether we have the courage, the determination and the
self-discipline to apply the right remedies.
CONCLUSION
Personally, I have great faith in this country and in
our ability to lift ourselves out of this morass.
I want
to assure you that in seeking solutions in Washington, we
will remain keenly aware of your concerns in Detroit and
that we will try to work with you as closely as possible.
In turn, I ask for your help, for it will require the
efforts of every one of us to ensure that as we work our
way out of this crisis, we also preserve our cherished
freedoms.
The private enterprise system has long been a
cornerstone of our freedoms and has provided this nation
with enormous abundance. But in today's economic turbulence,
10
there are great temptations to replace that system with
the forces of centralized government. The government has
become so huge and domineering--and we have turned to
it so often for solutions that have fallen short of our
dreams--that the time has come to re-discover how much
can be accomplished by private enterprise and by men and
women who are free to determine their own destinies.
In coming weeks, if we are tempted once again by the
siren songs of controls and other forms of centralization,
we will not only inflict enormous damage upon our economy
but we will also place the free enterprise system in the
greatest danger it has faced in our lifetimes. That system
is already under siege: it is mindlessly distrusted by
far too many people--and, wherever it is displaced, the
Government quickly fills the vacuum. This generation-our generation--may be the last which can stop the swing
of the pendulum before it is too late. As men and women
at the heart of American industry, I urge you to stand
steadfast for that cause.
Thank you.
0O0
Department o f the
SHINGTON, D.C. 20220
T E L E P H O N E W 04-2041
FOR IMMEDIATE RELEASE
33^
January 10, 1975
TREASURY ANNOUNCES TENTATIVE NEGATIVE DETERMINATION
IN ANTIDUMPING INVESTIGATION ON
CHICKEN EGGS IN THE SHELL FROM CANADA
Assistant Secretary of the Treasury David R.
Macdonald announced today a tentative negative
determination in the investigation of chicken eggs
in the shell from Canada under the Antidumping Act,
1921, as amended. Notice of this decision will appear
in the Federal Register of January 13, 1975.
Comparisons between purchase price and home
market price revealed that purchase price was equal
to or higher than the home market price of such or
similar merchandise.
Imports of chicken eggs in the shell from Canada
for the period January 1, 1974 through August 31, 1974
were valued at approximately $3.7 million.
DepartmentoftheTREASURY
WASHINGTON.
D C. 20220
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
January 10, 1975
ANTIDUMPING INVESTIGATION INITIATED
ON BIRCH 3 PLY DOORSKINS FROM JAPAN
The Treasury Department announced today the initiation
of an antidumping investigation on imports of birch 3
ply doorskins from Japan.
Notice of this action will be published in the
Federal Register of January 13, 1975.
A birch 3 ply doorskin is a thin flat panel used
as a face in the assembly of a flush door.
The Treasury Department's announcement followed a
summary investigation conducted by the U.S. Customs
Service after receipt of a complaint alleging that
dumping was occurring in the United States. The
information received tends to indicate that the prices
of the merchandise sold for exportation to the United
States are less than the constructed value.
During the period of January 1, 1974, through
December 31, 1974, imports of birch 3 ply doorskins
from Japan were valued at approximately $8,000,000.
Department
ASHINGTON. O.C . 20220
ofthefREASURY
, T E L E P H O N E W 04-2041
1
FOR IMMEDIATE RELEASE
JANUARY 10, 1975
Netherlands Minister of Justice Andreas Van Agt, who
also serves as Deputy Prime Minister, met January 9, 1975
with Treasury Assistant Secretary David R. Macdonald,
Commissioner of Customs Vernon Acree, and other high Treasury
officials, to discuss law enforcement issues, including
narcotics, and avenues for cooperation between their two
countries.
Minister Van Agt was accompanied by Abraham Fonteijn,
Netherlands Deputy Secretary General and Director General
of Police, Ministry of Justice, and Leendert Oranje, Director
of Constitutional and Criminal Law, Ministry of Justice.
oOo
|
DepartmentofthefREASURY
USHINGTON. O .C .
20220
TELEPHONE W04-2041
/ 7 8 9
January 10, 1975
FOR IMMEDIATE RELEASE
PARSKY APPOINTS GERARD
DIRECTOR, OFFICE OF CAPITAL MARKETS POLICY
Assistant Treasury Secretary Gerald L. Parsky has
appointed Robert A. Gerard as Director of the Office of
Capital Markets Policy. Gerard joins Treasury from the
Washington law firm of Wilmer, Cutler § Pickering.
Commenting on the appointment, Treasury Secretary
William E. Simon said that "our need for capital will be
particularly acute in the years to come, and we must de
velop policies that will strengthen our capital markets
so that these needs may be met."
Explaining the duties of the Director, Parsky said
that the Director has the "responsibility for developing
and coordinating Executive Branch policy concerned with
capital markets operations."
"The office," he said, "also will work closely with
Congressional committees responsible for legislation in
financial areas."
Gerard is a graduate, cum laude, of Harvard University
(1966) and the Columbia University Law School (magna cum
Laude, 1965). He has also clerked for the Federal Appeals
Court in Washington.
Gerard and his wife, Lisa, live in Washington.
oO o
WS-196
Department of
ASHINGTON,
D C. 20220
theRY
TELEPHONE W042041
MEMORANDUM TO CORRESPONDENTS:
The attached record of actions by the Office of Economic
Stabilization is released for your information. Please note
the following correction in the previous November 9 - December 27,
1974 decision list issued December 31, 1974.
CORRECTION:
Compliance Actions
Request for Review of Remedial Order - Order
R. R. Donnelley § Sons Company, Chicago, Illinois.
OES has issued an order on the request for
review of its remedialorder issued on
November 27, 1974 to R. R. Donnelley § Sons
Company and the members of its Executive
Control Groups ("ECG"). The order states
that the company through payment, and the
members of the ECG through receipt, of
$160,168 of incentive compensation for the
company's fiscal year ended December 31 , 1973,
in excess of the amount allowed to be paid
under the provisions of the Phase IV executive
compensation regulations violated the said
regulations. The order finds that the
repayment to the company by the members of
the ECG of the excess compensation would be
appropriate.
oOo
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Transcript
Number of Pages Removed: 1
Author(s):
Title:
CBS Morning News, Statement by William Simon
Date:
1975-01-10
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
DepartmentoftheTREASURY
ftSHINGTON.
TELEPHONE W04-2041
D.C. 20220
FOR RELEASE 6:30 P.M.
January 13, 1975
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2.6 billion of 13-week Treasury bills and for $2.2 billion
of 26-week Treasury bills, both series to be issued on January 16, 1975,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
13-week bills
maturing April 17, 1975
Price
High
Low
Average
a/
Equivalent
Annual Rate
6.646%
6.698%
6.678%
98.320 a/
98.307
98.312
26-week bills
maturing July 17, 1975
Price
1/
Equivalent
Annual Rate
96.654
96.637
96.640
6.618
6.652
6.646
1/
Excepting 1 tender of $410,000
Tenders at the low price for the 13-week bills were allotted 54%.
Tenders at the low price for the 26-week bills were allotted 79%.
TOTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Applied For
Boston
$ 60,620,000
New York
3, 594,830,000
Philadelphia
34,980,000
Cleveland
55,755,000
Richmond
31,540,000
Atlanta
62,625,000
Chicago
318,330,000
St. Louis
45,525,000
Minneapolis
21,475,000
Kansas City
69,725,000
Dallas
38,955,000
San Francisco
386,785,000
TOTALS
$4, 721,145,000
Accepted
$
33,405,000
1,932,685,000
31,550,000
48,020,000
28,240,000
38,375,000
126,675,000
32,675,000
5,475,000
43,855,000
25,185,000
254,770,000
Applied For
$
Accepted
27,155,000 $
13,395,000
3,841,420,000 1,770,220,000
15,580,000
40,580,000
29,040,000
119,970,000
20,570,000
62,255,000
22,595,000
53,955,000
39,205,000
241,225,000
14,595,000
58,395,000
2,490,000
17,490,000
27,855,000
35,065,000
15,180,000
25,180,000
232,170,000
389,750,000
$2,600,910,000 b/$4,912,440,000 $2,202,895,000
b./ Includes $484,320,000 noncompetitive tenders accepted at average price,
c/ Includes $273,215,000 noncompetitive tenders accepted at average price.
1/ These rates are on a bank-discount basis. The equivalent coupon-issue
yields are 6.89% for the 13-week bills, and 6.97% for the. 26-week bills.
W?
Facts
and Rgures:
International
Development
Banks
|
Office of
Assistant Secretary for
International Affairs
Office of
International
Development
Banks
December 1974
Facts
and Figures:
International
Development
Banks
Office of
Assistant Secretary for
International Affairs
Office of
International
Development
Banks
D e c e m b e r 1974
Questions and Answers
What are the international development banks?
The international development banks are multilateral, non-profit, public
organizations created to stimulate economic growth among less-devel
oped countries. To help achieve their objective these institutions assist
in preparing and financing high-priority projects in less-developed
member countries. Funds for projects are contributed by member coun
tries and borrowed from the public, governments, and central banks.
The money is spent to help finance various types of projects, such as
transportation, agriculture, power, industry, education and water sup
ply. Because of their experience, technical expertise, and relative free
dom from political considerations, these institutions are in a strong
position to influence developing countries to increase their productiv
ity and to become more able to establish self-sustaining growth by im
proving their overall economic programs and policies.
Does the United States participate in any of these development
organizations?
The United States is a charter member of the three major international
development banks: the World Bank Group*, the Inter-American Devel
opment Bank and the Asian Development Bank. Membership in the new
African Development Fund, a special loan facility of the African Devel
opment Bank, is under consideration in the Congress.
How are policies set in the international development banks? How
are member countries represented?
Policies in the international development banks are set by the Boards
of Governors—who are usually Ministers of Finance in member coun
tries—and the Boards of Executive Directors at each of the banks.
Member countries select their own Governors and Executive Directors.
Although the Board of Governors in a bank is its highest policy-making
body, the Board of Executive Directors, who work full-time at the banks
and meet with each other frequently, set most of the basic policies and
operations. r
The Secretary of the Treasury is the U.S. Governor for each bank and
has overall responsibility for U.S. participation. He is supported by the
U.S. executive directors, who are appointed by the President of the
United States with the advice and consent of the Congress. He is also
supported by the staff in the Office of the Assistant Secretary for Inter
national Affairs of the Treasury.
Bank policies and activities are reviewed by a U.S. Government inter
agency council, the National Advisory Council on International Mone
tary and Financial Policies, to assure that bank policies are in line with
‘ Composed of the International Bank for Reconstruction and Devel
opment (IBRD), International Development Association (IDA) and In
ternational Finance Corporation (IFC).
U.S. foreign and financial policy. The Department of State, Department
of the Treasury, Department of Commerce, Federal Reserve Board and
the Export-Import Bank are among those agencies participating in this
Council. The Treasury Department also works closely with Committees
and Members of Congress to prepare funding proposals for the devel
opment banks. In all negotiations with the banks it is made clear that
only after Congressional approval will the United States Government
enter into a commitment to provide its share of the proposed resources.
Why have regional development banks been formed, such as the
Asian, African, and Inter-American development banks, since most of
the countries in these areas already belong to the World Bank?
These regions, with countries among the world’s least developed
sought to help themselves by establishing their own development
banks, which now play an increasingly effective role in the develop
ment of those areas.
Although most of the countries in these areas do belong to the World
Bank, a regional effort can bring special expertise to a project because
of such a bank’s close familiarity with a specific area’s needs. Re
gional bank projects are generally smaller than World Bank projects,
therefore fulfilling certain, financial needs for which they are best
suited.
How much has the United States contributed to the banks over the
years?
Through June 30, 1974, the U.S. has made cash contributions to the
World Bank (IBRD) of $781 million, or 25 percent of cash contributions
from all countries; to the Asian Development Bank (ADB), $121 million,
or 7 percent of the total; and to the Inter-American Development Bank
(IDB), $362 million, or 37 percent of the total. These amounts are actual
paid-in contributions. Additional “ callable” capital has also been au
thorized to the three institutions. However, this callable capital is used
to guarantee bonds of the international development banks and would
be used only in the event a bank could not pay off its bonds because
of loan defaults.
In addition to the amounts provided above for loans on conventional
terms, the United States has also contributed funds for loans on con
cessional terms. Through June 30, 1974, the U.S. contributed to the
International Development Association (IDA)— a part of the World Bank
Group— $2.5 billion, or 38 percent of the total; it contributed to ADB’s
Special Funds (SF) $50 million, or about 13 percent of the total; and to
the IDB’s Fund for Special Operations (FSO) $3,040 million or 69 per
cent of the total. In 1960, the United States established a Social
Progress Trust Fund for Latin America, of which $494 million is admin
istered by the IDB.
Does the amount contributed by a country relate at all to its voting
powers within the banks?
Yes, a country’s voting power is weighted proportionately according to
its contribution. Consequently, the more a country contributes, the
more influence it may exercise. As of June 1974, the U.S. had voting
strength of 23 percent in the IBRD, 24 percent in the IDA, 40 percent
in the IDB, and 8 percent in the ADB.
How much of the United States federal budget in recent years has
gone for foreign economic assistance, and in particular for contri
butions to the international development lending institutions?
Over the fiscal years 1970-1974, United States outlays for foreign
economic assistance have averaged 1.2 percent of total federal bud
getary outlays. The foreign economic assistance share of the federal
budget declined from 1.3 percent in 1970 to 0.9 percent in 1973; how
ever, preliminary estimates indicate an increase in outlays to 1.23 per
cent of total outlays for 1974.
U.S.outlays to the multilateral development banks have averaged 0.13
percent of total U.S. budgetary outlays over the period 1970-74. In
1970, U.S. outlays to the multilateral development banks represented
0.1 percent of total federal outlays, while in 1974 these outlays in
creased to 0.17 percent of total federal outlays.
In light of the energy crisis, why should the U.S. participate in the
development banks when the money could just end up in the oilproducers’ hands?
The international development banks primarily provide resources for
specific projects, not general funds which could go toward paying
increased oil prices. These international lending institutions provide
long-range development assistance.
It is hoped that the oil-exporting nations will provide assistance in
funding the monetary distortions caused by the sharp rise in oil prices.
A number of commitments have already been made by certain oilproducing nations to cope with the problem. Also, special develop
ment funds are being formed and subscribed to by oil-exporting coun
tries. In addition, the international development banks are actively
seeking funds from the oil-rich nations as a methdd of recycling these
monies to the developing world.
Since major requests are being made to Congress for multilateral
assistance, shouldn’t the United States eliminate the program of bi
lateral aid?
It is important that both bilateral and multilateral aid programs be con
tinued. Bilateral assistance plays an essential role. It permits us to
develop innovative new programs to spur development, to implement
programs of particular interest to U.S. foreign policy, to maintain ade
quate aid flows, and to provide an effective vehicle for direct U.S. pri
vate sector involvement in the development process. This flexibility is
a necessary component of our overall foreign assistance effort.
Our contributions to the multilateral lending institutions are also im
portant. The international development banks help encourage develop
ing countries to participate in a joint effort to raise their living stand
ards. They provide technical expertise, and encourage other industrial
ized countries to take a larger responsibility for the future of the de
veloping world.
Have the agreements reached with other donor countries committed
Congress in any way to provide resources for the multilateral banks?
No. We have made it clear in our negotiations and agreements that
no U.S. Government commitment has been made, or could be made,
before approval by Congress. Only after Congress has acted will the
U.S. Government enter into a commitment to provide its share of the
proposed resources.
Does this type of lending permit the developing countries to forego
their own investment efforts?
The international lending agencies require developing nations to estab
lish their own sound performance standards, solid programs and
reasonable development priorities.
Self-help is an important consideration in the efforts made by the inter
national lending agencies to insure that recipient countries maintain
economic disciplne and follow generally acceptable development polcies. The facts show that these countries put up the major part of the
investment in their own development. This investment comes from both
the public and private sectors.
Do the international development banks really focus on the problems
of the poor in the developing countries?
Yes, but not all projects have the same immediate or direct effects on
increasing incomes and employment. For example, a road which re
duces transportation costs will have different effects than a project to
place water taps in rural homes. In response to the concern of the
United States, the banks have approved an increasing number of proj
ects focusing on the poor or on the improvement of their opportunities,
such as projects in agriculture, education, population, urbanization,
water supply and sewerage.
How does U.S. participation in the international development banks
affect its economy?
The aggregate effect of U.S. participation in the international develop
ment banks has been positive on the U.S. economy. This is illustrated
by the balance of payments figures. Through 1973, as a result of par
ticipation in these activities, the balance of payments impact on the
U.S. registered a surplus of $2.7 billion. The calculation includes U.S.
contributions to the banks, and payments by the banks to the U.S. in
interest on borrowed funds, procurement, administrative expenses, and
investments in the U.S.
Do the international development banks generate business for United
States firms?
Yes. The lending operations of the banks provide a significant source
of export business for American firms. These contract opportunities
are subject to standard rules of international competitive bidding and
are designed to ensure that all firms in member countries enjoy fair
and equal access to these contracts. Historically, U.S. firms have won
about 30 percent of the contracts under the banks’ operations.
Procurement procedures are detailed in the booklet, “ Export Oppor
tunities for American Business through the International Development
Banks,” available from the Office of the Assistant Secretary for Inter
national Affairs, Department of the Treasury, Washington, D. C. 20220.
Do the international development banks foster a good climate for U.S.
direct investment in less-developed countries?
The international development banks benefit U.S. investment in lessdeveloped countries. They promote efficient economies, fair treatment
of foreign investment and international financial responsibility among
their member governments. Should these countries falter in those re
sponsibilities, the development banks have a good record of encourag
ing corrective measures. International development bank loans for
port facilities, electric power, roads and education benefit the vast
majority of American companies doing business overseas.
Through 1973, American companies had invested a total of $27.9 billion
in the lesser-developed countries. In 1973 alone, $6.5 billion in earn
ings were made on the total investment, of which slightly under $5
billion was remitted to the United States.
What is the policy of the United States toward expropriation?
The U.S. Government made its views explicit in the President’s ex
propriation statement of January 1972. The statement made clear that
when a country expropriates a significant U.S. interest without making
reasonable provision for compensation, we will presume that the U.S.
will not extend new bilateral economic benefits to the expropriating
country. If the President determines that the country is taking reason
able steps to provide adequate compensation or that there are major
factors affecting U.S. interests which require continuance of all or part
of these benefits, then the restrictions would no longer apply.
This policy also applies to multilateral institutions and in the face of
such expropriations, we will presume that the United States will with
hold its support from loans under consideration in these institutions.
Is it true that multilateral institutions finance tourism projects?
Yes. Many developing countries have nice beaches and plentiful sun
shine— natural resources which, if properly utilized, attract tourists.
Tourism projects in poor countries may be among their best potential
for growth. Tourism attracts foreign exchange, and creates a consid
erable number of jobs. It also generates income in other productive
and service sectors, which allows the country to generate foreign ex
change and become more self-sufficient. Tourism projects are not a
major part of multilateral lending, but in certain cases make real sense.
Do international development lending institutions make loans to
dictatorships?
These institutions take economic, not internal political factors, as the
major criteria for evaluating loan requests. Thus, member countries
of all political persuasions receive loans. It is to the benefit of the
general population of member countries that development loans are
aimed. The underlying point is that in the long run economic develop
ment will reduce the conditions that lead to despotism.
How does the U.S. Government appraise international development
bank loan proposals, and review project implementation?
A U.S. Government inter-agency body, the National Advisory Council
on International Monetary and Financial Policies (NAC), reviews each
international development bank loan proposal in terms of three major
concerns: first, the loan must not conflict with existing U.S. laws or
policies (e.g., on debt arrearages to the U.S. Government or uncom
pensated expropriation, if any, of U.S. firms); second, the project must
have a strong economic and, if appropriate, financial justification; and
third, the recipient country must be doing as much as can be reason
ably expected to finance and facilitate its own economic growth and
development.
Treasury’s monitoring system for review of projects has been ex
panded. Additional reporting requirements have been given to U.S.
embassies and AID missions overseas to report on the progress of
projects. Treasury officials have also increased their on-site project
visits to observe first hand whether projects are being implemented in
the most efficient manner. Moreover, at U.S. Government urging, the
World Bank and the Asian Development Bank are including in new loan
proposals a review of loans currently being implemented, as well as an
assessment of the problems being encountered.
Don’t these institutions often lend to countries that are in debt arrears
to the United States?
The international development lending institutions do not ordinarily
lend to countries that have weakened their credit standing by falling
into serious debt arrears— nor does the U.S. support loans to such
countries. The only grounds for exception to these general rules are
a compelling need for humanitarian assistance or clear evidence that
arrangements have been made to renegotiate or otherwise clear up
the accounts in question.
What has been the institutions’ experience with repayments?
The IBRD, IDA and ADB have had no defaulted loans; however, the
IDB in its early years made unguaranteed loans to private enterprises,
prior to the Bank’s policy of requiring government guarantees on all
loans. The defaulted loans totalled only $11.2 million out of $6 billion
loaned. Most of the defaulted amount is being recovered.
How much have the international development banks borrowed in
U.S. capital markets?
Since their creation, the international development banks have bor
rowed a total of over $4 billion in U.S. capital markets. Comparing
this with all borrowings made by these banks, a little over $13 billion,
roughly one-third of the borrowings have come from U.S. capital
markets.
Are South Vietnam, Laos and Cambodia eligible borrowers?
Yes. Cambodia, Laos and South Vietnam are members of both IDA,
and the Asian Development Bank, and as such, they are eligible for
assistance in accordance with normal procedures. Laos is also a
member of the IBRD. For their part, both the World Bank (IDA’s parent
institution) and the Asian Development Bank have expressed interest
in helping to finance post-war reconstruction in the three countries.
The ADB has financed development projects in Indochina: six projects
totalling $24.2 million in South Vietnam, one project for $1.7 million in
Cambodia and four projects in Laos totalling $11.7 million.
Part II:
Facts Sheets
African Development Bank (AFDB)
I.
African Development Bank
Origin:
Headquarters:
Membership:
(39 members)
Staff:
Terms:
Resources:
Voting
Powers:
Establishel on September 10, 1964
Abidjan, Ivory Coast
Algeria, Botswana, Burundi, Cameroon, Central African
Republic, Chad, Congo, Dahomey, Egypt, Ethiopia,
Gabon, Gambia, Ghana, Guinea, Ivory Coast, Kenya,
Lesotho, Liberia, Libya, Malawi, Mali, Mauritania,
Mauritius, Morocco, Niger, Nigeria, Rwanda, Senegal,
Sierra Leone, Somalia, Sudan, Swaziland, Tanzania,
Togo, Tunisia, Uganda, Upper Volta, Zaire, and Zam
bia. (U.S. not a member)
Total staff of 245 from 27 countries as of December
1973. No U.S. nationals.
AFDB terms vary, with maturities ranging from 15-30
years and an average interest rate of 6 percent, plus
a 1 percent service charge.
Total $384.5 million (50% paid-in, 50% callable)
as of June 30, 1974
6% 6% 7% 7%
OTHERS 74%
(as of June 30, 1974)
Loans:
Cumulative as of May 31, 1974 (millions of current
U.S. dollars)
Outstanding (including
$160.9
undisbursed)
Repayments
$
.9
By Economic Sector:
By Country:
Sierra Leone 4%
II.
African Development Fund
Origin:
Headquarters:
Membership:
Established June 1973
Abidjan, Ivory Coast
The African Development Bank, plus Belgium, Brazil,
Canada, Denmark, Federal Republic of Germany, Fin
land, Japan, Netherlands, Norway, Spain, Sweden,
Switzerland, United Kingdom, Yugoslavia.
9
Staff:
Terms:
Resources:
Same as the Bank.
Loans have a % percent service charge, with 50 year
maturity including 10 years grace.
Total $94.7 million as of Sept. 13, 1974
Breakdown (in millions of current: U.S. dollars):
Source
Bank earnings
Non-regional members
Canada
Germany
Japan
Others
Total
$ 5.5
89.2
$16.5
16.4
16.5
39.8
Asian Development Bank (ADB)
Origin:
Headquarters:
Staff:
Membership:
(41 members)
Terms:
Resources:
Established on December 19, 1966
Manila, Philippines
Total professional staff is 234 of which 23 are U.S.
nationals.
Afghanistan, Australia, Bangladesh, British Solomon
Islands Protectorate, Burma, Republic of China, Fiji,
Hong Kong, India, Indonesia, Japan, Khmer Republic,
Republic of Korea, Laos, Malaysia, Nepal, New
Zealand, Pakistan, Papua New Guinea, Philippines,
Singapore, Sri Lanka, Thailand, Tonga, Republic of
Vietnam, Western Samoa, Gilbert and Ellis Islands,
Austria, Belgium, Canada, Denmark, Finland, France,
Federal Republic of Germany, Italy, Netherlands, Nor
way, Sweden, Switzerland, United Kingdom and United
States.
Ordinary capital lending is at an QVa percent interest
rate for maturities averaging about 20 years. On June
28, 1974, the Asian Development Fund (ADF) came
into effect as the concessional loan affiliate of the
ADB. These loans are made at interest rates of 1 per
cent, for maturities averaging 40 years, including 10
years grace.
As of June 30, 1974 (millions of current U.S. dollars)
Paid-in
Callable (Developed
countries only)
Special Funds/ADF
Total
U.S.
$ 799.8
$120.6
1,098.9
396.4
120.6
50.0
(as of June 30, 1974)
Loans:
Cumulative as of June 30, 1974 (millions of current
U.S. dollars)
Outstanding
Including
Undisbursed
Ordinary Capital
Special Funds/ADF
By Economic Sector:
$1,127.3
329.0
Repayments
$15.4
—
By Country:
Education 1%
Inter-American Development Bank (IDB)
Origin:
Headquarters:
Membership:
(24 members)
Staff:
Terms:
Resources:
Established on December 30, 1959
Washington, D. C.
Argentina, Barbados, Bolivia, Brazil, Canada, Chile,
Columbia, Costa Rica, Dominican Republic, Ecuador,
El Salvador, Guatemala, Haiti, Honduras, Jamaica,
Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad
and Tobago, United States, Uruguay, and Venezuela.
Total staff numbers approximately 1,321 as of Decem
ber 31, 1973, representing 25 countries, with 240 U.S.
nationals.
Ordinary capital lending is at an 8 percent interest
rate for maturities ranging from 15 to 20 years. Fund
for Special Operations (FSO) loans are at 1 percent to
4 percent, for 20 to 30 year terms.
As of June 30, 1974 (millions of current U.S. dollars)
Total
Paid-in
Callable
FSO
U.S.
$ 972.4
$ 361.9
4.393.6
3,040.3
* The IDB has issued bonds (net) totaling $1,310
million against the U.S. callable capital which amounts
to $2,047.2 million (currently representing a ceiling
on bond issuances.) Callable capital subscribed by
other members amounts to $2,933.3 million.
(as of June 30, 1974)
ij
1
Loans:
Cumulative as of June 30, 1974 (millions of current
U.S. dollars)
Ordinary Capital
FSO
By Economic Sector:
Outstanding
Including
Undisclosed
Repayments
$2,874.0
3,182.2
$462.4
213.7
By Country:
World Bank Group
International Bank for Reconstruction
and Development (IBRD)
Origin:
Headquarters:
Staff:
Membership:
(125 members)
Established on December 27, 1945
Washington, D. C.
World Bank Group staff as of June 30, 1974, totaled
3,826 from 96 countries of which 25 percent were U.S.
nationals.
As of June 30, 1974: Afghanistan, Algeria, Argentina,
Australia, Austria, Bahamas, Bahrain, Bangladesh, Bel
gium, Bolivia, Botswana, Brazil, Burma, Burundi, Cam
eroon, Canada, Central African Republic, Chad, Chile,
China, Colombia, People’s Republic of Congo, Costa
Rica, Cyprus, Dahomey, Denmark, Dominican Repub
lic, Ecuador, Egypt, El Salvador, Equatorial Guinea,
Ethiopia, Fiji, Finland, France, Gabon, The Gambia,
Federal Republic of Germany, Ghana, Greece, Guate
mala, Guinea, Guyana, Haiti, Honduras, Iceland, India,
Indonesia, Iran, Iraq, Ireland, Israel, Italy, Ivory Coast,
Jamaica, Japan, Jordan, Kenya, Khmer Republic,
Korea, Kuwait, Laos, Lebanon, Lesotho, Liberia,
Libyan Arab Republic, Luxembourg, Malagasy Repub
lic, Malawi, Malaysia, Mali, Mauritania, Mauritius, Mex
ico, Morocco, Nepal, Netherlands, New Zealand, Nic
aragua, Niger, Nigeria, Norway, Oman, Pakistan, Pan
ama, Paraguay, Peru, Philippines, Portugal, Qatar,
Romania, Rwanda, Saudi Arabia, Senegal, Sierra
Leone, Singapore, Somalia, South Africa, Spain, Sri
Lanka, Sudan, Swaziland, Sweden, Syrian Arab Re
public, Tanzania, Thailand, Togo, Trinidad and To
bago, Tunisia, Turkey, Uganda, United Arab Emirates,
United Kingdom, United States, Upper Volta, Uruguay,
Venezuela, Vietnam, Western Samoa, Yemen Arab Re
public, People’s Democratic Republic of Yeman, Yugo
slavia, Zaire and Zambia.
Terms:
Resources:
IBRD lends at an 8 percent interest rate for maturities
averaging 20-25 years and related to the useful life of
the project.
As of June 30, 1974 (millions of current U.S. dollars)
Paid-in
Callable (Developed
countries only)
Loans:
Total
U.S.
$ 3,043.1
$ 780.9
19,052.2
7,027.8
Cumulative as of June 30, 1974 (millions of current
U.S. dollars)
Outstanding (including
$23,353.9
undisbursed)
3,771.3
Repayments
By Region:
By. Economic Sector;
i
Other
World Bank Group
International Development Association
(IDA)
Origin:
Headquarters:
Staff:
Membership:
(113 members)
Established on September 24, 1960 as an affiliate of
the World Bank.
Washington, D. G.
World Bank Group staff as of June 30, 1974, totaled
3,826 from 96 countries of which 25 percent were U.S.
nationals.
As of June 30, 1974 Twenty are Part I, or developed
country members, and the rest Part II, or borrowing
countries. Part I members: Australia, Austria, Bel
gium, Canada, Denmark, Finland, France, Federal Re
public of Germany, Iceland, Ireland, Italy, Japan,
Kuwait, Luxembourg, Netherlands, Norway, South
Africa, Sweden, United Kingdom and United States.
Part II members: Afghanistan, Algeria, Argentina,
Bangladesh, Bolivia, Botswana, Brazil, Burma, Burundi,
Cameroon, Central African Republic, Chad, Chile,
China, Colombia, People’s Republic of Congo, Costa
Rica, Cyprus, Dahomey, Dominican Republic, Ecuador,
Arab Republic of Egypt, El Salvador, Equatorial
Guinea, Ethiopia, Fiji, Gabon, The Gambia, Ghana,
Greece, Guatemala, Guinea, Guyana, Haiti, Honduras,
India, Indonesia, Iran, Iraq, Israel, Ivory Coast, Jordan,
Kenya, Khmer Republic, Korea, Laos, Lebanon,
Lesotho, Liberia, Libyan Arab Republic, Malagasy Re
public, Malawai, Malaysia, Mali, Mauritania, Mauritius,
Mexico, Morocco, Nepal, Nicaragua, Niger, Nigeria,
Oman, Pakistan, Panama, Paraguay, Peru, Philippines,
Rwanda, Saudi Arabia, Senegal, Sierra Leone, Somalia,
Spain, Sri Lanka, Sudan, Swaziland, Syrian Arab Re
public, Tanzania, Thailand, Togo, Trinidad and Tobago,
Tunisia, Turkey, Uganda, Upper Volta, Vietnam, West
ern Samoa, Yemen Arab Republic, People’s Demo
cratic Republic of Yeman, Yugoslavia, Zaire, and
Zambia.
Terms:
Resources:
Lending is on standard terms of 50 years maturity,
including 10 years grace, with a service charge of
% percent per annum.
• Cumulative total in current U.S. dollars is $6,563
million as of June 30, 1974, of which $2,500 million
(38%) is U.S. share.*
• Contribution breakdown:
U.S.
Share
$
1961 Initial Subscription
$: 751 $ 320
1966 First Replenishment
745
312
1969 Second Replenishment 1,201
480
1972 Third Replenishment 2,409
960
1974 Fourth Replenishment 4,500
1,500
Transfers from IBRD
815
Other Contributions
86
Usable Part II Subscriptions
80
Total
Gross Loan
Commitments:
•
•
U.S.
Share
%
43
42
40
40
3 3 1/3
-
-
Total $6,859 million as of June 30, 1974
Distribution
By Economic Sector:
¡¡y Regjon-
* Amounts shown are those initially subscribed1 to and do not include
adjustments for maintenance of value.
World Bank Group
International Finance Corporation (IFC)
Origin:
Headquarters:
Staff:
Membership:
(99 members)
Terms:
Resources:
Voting
Powers:. 3%
Established on July 24, 1956 as an affiliate of the World
Bank
Washington, D. C.
IFC staff as of June 30, 1974, totaled 203 from 38
countries.
As of June 30, 1974 Afghanistan, Argentina, Australia,
Austria, Belgium, Bolivia, Brazil, Burma, Canada, Chile,
China, Colombia, Costa Rica, Cyprus, Denmark, Do
minican Republic, Ecuador, Arab Republic of Egypt, El
Salvador, Ethiopia, Finland, France, Gabon, Germany,
Ghana, Greece, Guatemala, Guyana, Haiti, Honduras,
Iceland, India, Indonesia, Iran, Iraq, Ireland, Israel,
Italy, Ivory Coast, Jamaica, Japan, Jordan, Kenya,
Korea, Kuwait, Lebanon, Lesotho, Liberia, Libyan Arab
Republic, Luxembourg, Malagasy Republic, Malawi,
Malaysia, Mauritania, Mauritius, Mexico, Morocco,
Nepal, Netherlands, New Zealand, Nicaragua, Nigeria,
Norway, Oman, Pakistan, Panama, Paraguay, Peru,
Philippines, Portugal, Saudi Arabia, Senegal, Sierra
Leone, Singapore, Somalia, South Africa, Spain, Sri
Lanka, Sudan, Swaziland, Sweden, Syrian Arab Re
public, Tanzania, Thailand, Togo, Trinidad and Tobago,
Tunisia, Turkey, Uganda, United Kingdom, United
States, Uruguay, Venezuela, Vietnam, Western Samoa,
Yemen Arab Republic, Yugoslavia, Zaire and Zambia.
IFC normally makes loans and equity investments, and
occasionally enters into profit participation agreements
with private enterprises in developing countries. Inter
est rates on loans are fixed according to the circum
stances of each transaction with repayments made
semi-annually after an agreed grace period.
•
Capital subscription total of $107.2 million as of
June 30, 1974, of which $35.2 million (33%) was
U.S. share.
•
Loans from IBRD $400.7 million
•
Loan from Netherlands $5.0 million
5% 11%
27%
Others 50%
(as of June 30, 1974)
Information
Contacts
Office of Public Affairs
Department of the Treasury
Washington, D.C. 20220
Information Office
Inter-American Development Bank
808 - 17th Street, N.W.
Washington, D.C. 20577
Information Office
African Development Bank
B. P. No. 1387
Abidjan, Ivory Coast
Information Office
World Bank
1818 H Street, N.W.
Washington, D.C. 20433
Information Office
Asian Development Bank
P. O. Box 789
Manila, Philippines
Foreign Projects Reference Room
U.S. Department of Commerce
Room 3411
Washington, D.C. 20230
§
for
Im m e d i a t e
JANUARY 14, 1975
release
TREASURY SECRETARY SIMON NAMES C. COLEMAN MCGEHEE
SAVINGS BONDS CHAIRMAN FOR VIRGINIA
C.
Coleman McGehee, Chairman of the Board and Chief
Executive Officer, First and Merchants Corp., First and
Merchants National Bank, Richmond, is appointed volunteer
State Chairman for the Savings Bonds Program in Virginia by
Secretary of the Treasury William E. Simon, effective imme
diately.
He will head a committee of business, banking, labor,
government and media leaders who -- in cooperation with the
U. S. Savings Bonds Division -- assist in promoting Bond
sales in Virginia. He succeeds James W. Rawles, Director,
United Virginia Bank Shares, Richmond, who has served as
Chairman since December 1967. Rawles will receive the Treas
ury^ ’’Award of Merit” .
McGehee was born August 11, 1924, in Franklin, Va., and
grew up in Hopewell, Va. From 1941 to 1943, he attended Vir
ginia Polytechnic Institute. In 1943, he left VPI to join
the Army and saw action in the European Theater. When the
war ended he remained in the Virginia National Guard, from
which he has since retired as a major.
After the war, he resumed his education at the Universi
ty of Virginia, from which he was graduated in 1947 with a
BS degree in Commerce. He has since attended the Graduate
School of Banking, Rutgers University, 1958, and the Advanced
Management Program at Harvard University, 1970.
McGehee joined First and Merchants National Bank in
1948. He was elected Trust Officer in 1956; Vice President
in 1959; Senior Vice President in 1966, and President in
1969. Also in 1969, he was elected President and Chief Ad-
( over )
2
ministrative Officer of the parent First and Merchants Corp,
He assumed his present posts on January 1, 1974.
He is active in many business, civic and educational
activities, including -- Executive Committee, Central Rich
mond Association; Virginia Industrial Development Corp.;
Richmond Chamber of Commerce; Chairman, Finance Committee,
Virginia Commonwealth University; Trustee, Virginia Founda
tion for Independent Colleges. In 1957, McGehee was the
recipient of the Virginia Junior Chamber of Commerce's
"Young Man of the Year" award.
McGehee and his wife, the former Caroline Yarnall Casey
have three children -- C. Coleman, Jr., 22; Stephen Yarnall,
19; Margaret Fox Verner, 16.
oOo
Departmental
HINGTON.
theTREASURY
D C. 20220
TELEPHONE W04-2Q41
FOR IMMEDIATE RELEASE
January 14, 1975
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 $4,800,000,000 » or
thereabouts, to be issued
January 23, 1975,
as follows:
91-day bills (to maturity date) in the amount of $2,600,000,000» or
thereabouts, representing an additional amount of bills dated
and to mature
April 24, 1975
October 24, 1974,
(CUSIP No. 912793 WF9 ), originally issued in
the amount of $ 2,002,540,000, the additional and original bills to be freely
interchangeable
182-day bills, for $2,200,000,000, or thereabouts, to be dated January 23, 1975,
and to mature
July 24, 1975
(CUSIP No. 912793 XF8).
The bills will be issued for cash and in exchange for Treasury bills maturing
January 23, 1975,
outstanding in the amount of $4,603,965,000, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,697,050,000.
These accounts may exchange bills they hold for the bills now being offered at
the 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,
$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
one-thirty p.m., Eastern Standard time, Monday, January 20, 1975.
Tenders will not be received at the Department of the Treasury, Washington.
Each 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
be expressed 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 positioni
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 whole or in part, and his action in any such respect shall be final.
Subject
to these reservations, noncompetitive tenders for each issue for $200,000 or less
without stated price from any one bidder will be 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 January 23, 1975,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing
ment.
January 23, 1975.
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 not
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
Department of th e T R E A S U R Y
b s m OC 20220
TELEPHONE W04-2041
FOR RELEASE UPON DELIVERY
REMARKS OF THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE INVESTMENT ASSOCIATION OF NEW YORK
AT THE BANKERS CLUB, NEW YORK, NEW YORK
12:00 NOON, JANUARY 14, 1975
T
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Oft
lí
J fin í
i
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B
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rlIrrÑ
*3V-? , •/*D
hi
Recycling of Oil Revenues and the Role
of U.S. Capital Markets
I
am delighted to have the opportunity to be here
today to discuss aspects of ’’recycling ,H and in particular,
the role of private investors arid private financial
institutions with respect to the funds which the oil producing
countries will have available for placement outside their
own economies.
Any such discussion must also consider the
potential effect such funds may have on bur capital markets.
In doing so, it is important to realize that at the heart
of all of these issues lies :the price level of oil.
As all
of you know, since October 1973, we have experienced a sudden
rise in world oil prices -- m
fact a five-fold increase
from less than $2.00 per barrel to over $10.00 per barrel
the consequences of which are far reaching.
Some have
said that the world now faces unavoidable financial disaster.
WS-197
2
I don't agree.
challenge.
I do believe we are confronted with a major
We have been used to an abundance of cheap energy,
and the easy availability lulled us into letting our
dependence on foreign supplies increase to a point where
a group of oil producing countries can control the price.
That is really the crux of our problem - - w e have lost
the ability to allow the market for oil to operate freely.
Now, we must face the fact that cheap energy is no longer
available.
$10 or $11 oil is with us, and I believe if
you consider just the economics of the situation, there
is no way that the forces of supply and demand will be
able to force the price to decline for at least three
years.
I say this principally because sufficient non-OPEC
supply will not. be available before then.
Further, if we
do not take the necessary actions now to insure that supplies
of energy will be developed in this country, the price
will not have to be reduced after three years -- and might
go higher.
The immediate costs imposed on the economies
of the world by this situation are severe, but I am c o n f i d e n t tha
3
our financial system will respond;jand the response will
come from a combination of official facilities and private
markets.
Recently, there has been much publicity given to
the official side -- to an expanded IMF oil facility, to
our "safety net" proposal for OECD countries and to various
other mechanisms.
We must recognize, however, that any of
the facilities are really supplemental to our private
capital markets.
Further, we must not lose site of the
interrelationship between our- approach on the financial side
and the price of oil.
As such, we,must not adopt a financing
arrangement that perpetuates higher oil prices#
Summary of Capital Flows to OPEC
Before discussing how we should seek to balance the
official mechanisms and our private capital markets in
the recycling process, I think it’s important to review the
current magnitudes of the capital flows themselves.
We
estimate that the thirteen oil exporting nations that are
members of OPEC will receive about $90 billion in 1974
from their exports of oil *■ about four times the amount
they received the year before -■ and about $5 billion from
other exports.
They appear to have spent about one-third
of this income, or $30 billion, on imports.
Funds they
4
did not spend on goods and services they invested abroad
or donated as grant aid.
Since actual flows of grant aid
by the OPEC nations in 1974 seems to have been quite small,
we estimate that these countries will have had about $60
billion of funds available for investment in the rest of
the world during the year.
It is impossible to be very precise in tracing these
investments flows.
However, our preliminary estimates
covering 1974 based on data from a number of sources
trace about $11 billion directly to the United States,
about $8 billion to England in sterling assets, about
$5 billion in direct official or quasi official borrowing
by other industrial countries, over $2 billion to the
developing countries, and about $3-1/2 billion
to international financial institutions.
Probably at least
$21 billion was deposited with banks in the Eurocurrency
market.
Additional funds, not included in these figures,
have been directed to investment management accounts in
Europe, private sector loans, and purchases of real estate
and corporate securities in Europe and Japan.
It should be recognized these data are estimates of
where the oil producers have placed these funds.
Banks and
5
3 if
other financial institutions, of course, subsequently relend
these funds nationally and internationally; and the continued
identity of a dollar as a "petro dollar” becomes impossible -and also meaningless.
Of the estimated $11 billion that was directly invested
in the United States last year, about one-half was placed in
marketable government and agency securities.
We estimate less
than a billion was placed in U.S. real estate and private
securities; the rest is in bank deposits and short-term money
market instruments.
Thus, we are receiving significantly less
than a fifth of total OPEC investments, and we have no
evidence that this percentage is increasing.
In fact, in
recent months our share has declined.
While we received about $11 billion from the oil producers
last year, we have paid, during that same period, an extra
$18 billion for crude oil and refined products due to the
increased prices.
And of the total amount of funds that
came in during 1974, our banking system lent a good portion
or it back to other oil consuming countries.
Thus it
appears that an excessive portion of the producers’ funds
has not flowed to the U.S. and remained here.
6
Recycling
With this background in mind, let’s turn to the process of
recycling itself.
First of all, it’s important to under
stand what we mean by recycling.
When I use the term, I
mean the overall response to the fact that a substantial
portion of the wealth of the oil consuming nations of
the world is flowing to the oil producing states to pay for
oil.
Recycling really involves two functions:
(1) pro
viding that the consuming nations as a group get much of
this wealth back through grants, loans, and other forms of
investment and payments for goods and services; and (2)
distributing the ’’recycled" wealth among the consuming
nations, including avoiding potential "bankruptcies"
among nations unable directly to attract such flows.
Thus, in one sense recycling refers simply to the process
by which the oil producers’ investible funds are moved
into final investments either directly or through the
intermediary of banks and institutions often located in
a different country from the final destination of the
investments.
In the other narrower sense, it refers to a
process by which governments of stronger industrialized
countries might intervene to insure that the funds are
lent to selected countries on terms less onerous than those
on which the funds would otherwise be available, if at all,
to those borrowing countries.
7
In this latter sense recycling could be undertaken
by the U.S. Government either
(a) directly, by borrowing oil funds either on the
market or directly from an oil producer and then
re-lending the funds on favorable terms to another
country, or
(b) indirectly, by placing some form of U.S. repayment
guarantee on borrowings by a foreign country of
oil funds lent either directly or through an
intermediary such as the International Monetary Fund
In developing the proper balance among these approaches,
we recognize that countries differ as to the amounts of
debt they are confortable with and how much of their oil
imports they are able or willing to pay for in current
exports of goods and services.
There is a danger that
increasing reluctance to borrow, or decreasing creditworthiness, or both, will lead some countries to seek
lower levels of economic activity in order to preserve
their financial positions -- and the world will lose
heavily in foregone production.
There is also the danger
that some countries will feel compelled to take selfprotective actions that are disruptive to others and to
the world economy, and the risk of possible retaliation
and general resort to competitive restrictions cannot be
ignored.
8
Bearing this in mind, we have proposed a comprehensive
approach to multilateral financing which would supplement
the private capital markets' role in recycling.
of several parts:
It consists
use of the IMF, a special trust fund
managed by the IMF, and a fund for industrialized countries.
The IMF would be the first line of official multilateral
financing for the full range of its membership.
The developed
nations and the middle range of the developing nations
that have demonstrated credit-worthiness will participate
in this expanded use of IMF resources, as well as borrowing
in the world's capital markets.
However, the poorest
developing countries cannot afford to assume a greater
debt burden except on very liberal terms.
We have, therefore,
suggested the creation of a Trust Fund, managed by the IMF,
which would channel funds to the most seriously affected
nations on concessional terms not appropriate for other
borrowers.
We would hope that the OPEC countries would pro
vide a substantial part of the concessional contributions
to the Trust Fund.
Our proposals for a financial solidarity fund among
the industrialized countries is the third component of
our multilateral financing proposals.
This Fund would be
a financial safety-net, consisting of stand-by arrangments
among the major industrialized countries to provide financial
support in case any participating country finds itself in
economic trouble after having made reasonable efforts on
9
its own part to resolve its difficulties.
insurance aspect of this safety-net.
I stress the
Our belief is that the
existence of the safety-net will help assure the continued
openness of the national and international capital markets,
and so, minimize the amount of official recycling that will
actually be carried out.
Inherent in these proposals for official recycling is the belief
that the private capital markets will still be central and the
key to stimulating productive investments; investments that
are needed to facilitate the future transfer of goods and
services implied in the current build up of OPEC financial
assets.
Official recycling must not be a substitute for
private investment, for in the final analysis, this is
really what recycling is all about.
During the past year, the international banking system
was the focus of receiving and lending surplus oil revenues.
For example, the net size of the Eurocurrency market (that
is, after deducting deposits of one bank in another)
grew by about $35 billion between the end of 1973 and
July 1974.
This is an
Eurocurrency market.
extraordinary growth, even for the
During the first half of 1974, total
deposits in the top five U.S. banks increased by about
20 percent, and the bulk of this growth occurred in the
second quarter.
10
Direct loans by the OPEC countries to consumer
governments and purchases of government securities also
played an important role in recycling last year, and I
expect they will play a more important role this year.
With respect to the U.S., as I noted earlier, about half
of the direct placement of OPEC funds in our country was
in marketable government and agency securities.
Such
transactions surely have implications for our private
capital markets for they reduce the amount of funds the
government must raise from domestic sources.
While the international banking system will continue
to handle a good deal of the recycling requirements in
1975 as they did last year, direct loans to governments
and purchases of government securities will become
increasingly attractive alternatives to the producers;
and other sectors of our private capital markets will also
play a more important role in the direct placement of
producer funds.
Real estate investments have been made
in the U.S. and to a greater extent in Europe and this will
continue to be an important vehicle.
Further, equity
investments, both direct and portfolio, will play an
increasing role as the OPEC countries develop their invest
ment portfolio and management capabilities.
In determining
the extent to which there will be a move into the equity
area, we must distinguish among the OPEC countries.
11
A number of the producers regard their investment horizons
as long term.
That is, a portion, and probably a growing
portion of their investments are thought of as long-term
commitments and will not, be turned over quickly.
This will
be particularly true for Kuwait) the Gulf States, and
Saudi Arabia which have low absorptive capacities and
substantial oil reserves.
They, can foresee a future of
accumulating far more in revenues than they can hope to
put to use domestically.
For a country like .Kuwait,
oil in the ground at some point, will become but one part ,
of a much larger asset portfolio.
The, Kuwaitis are very
sophisticated and understand investment very well.
They
want to invest in the most productive vehicles and, in
making their decisions, they can be expected to seek to
acquire assets that are at least no loss valuable, in their
view, than oil in the ground.
This should »lead to a
greater emphasis on equity investments. ,
n;
Iran, while able to employ all of its revenues domestically
in the relatively near future if it so wishes, has also
evidenced a desire for equity investments in the industri
alized countries.
It sees important possibilities for
investments in companies that are in position to help Iran
expand its domestic industrial base.
Similar considerations
are likely to enter into future investments by Saudi Arabia.
■'
•nSS^’r*'"'
-
12
-
Such diversification of OPEC capital wifi add an important
ingredient to the recycling process.
Further, it should
make an important contribution towards our meeting the
capital requirements of American business in the coming
years, and to the need to increase capital formation.
Some have argued that the initial placement of OPEC funds
will have no significant effect on the ultimate level of
capital formation in the corporate sector.
Whether or not there is an increase in savings and
capital formation on n Worl4yrlde basis, there still can
be important shifts in which sectors capital formation
occurs.
An inflow of OPEC funds into the equity market
would not mean that supply of funds to that mdrhet will
increase by the full amount.
However, the investments by
oil producers could induce additional domestic purchases
by improving the business cliinate and, in particular,
providing an uplift to fh§ depressed equity markets.
- 13
-
In summary, I think that increased oil producer
investments in our private sector would facilitate needed
capital formation in that sector despite the offsetting
market adjustments that surely would occur.
These potential
investments should not be regarded as the major solution to
our domestic capital market problems, for our major solution
must be to get inflation under control and to make needed
reforms in the structure and regulation of these markets.
But these investments'can make a contribution-to our
capital formation as well as facilitate a desirable,
lengthening in the maturity11of the producers' asset
portfolios.
1I I
°\
15
With consumers, we must seek greater financial
solidarity and a common effort to reduce our dependence
on others for our energy resources.
With producers, we
must resolve our differences through mutual understanding
and cooperation.
As such, we must recognize and support
the legitimate aspirations of the producing countries to
accelerate their own development, establish their
industrial and agricultural bases, and to improve the
living standards of their people.
The producers in turn
must realize the important stake they have in a healthy
world economic system.
I believe they will.
In my
%
recent conversations with officials in the Middle East,
I found a widespread understanding of the responsibilities
inherent in their new international role, and I am confident
that a basis can be found for the industrial nations of
the world to work constructively with the OPEC nations.
Maybe I'm too much of an optimist; but we really have no
other choice.
We are too far down the road to interdependence
to turn back.
Either we will succeed by expanding trade
and investment among all nations or we will fail by sinking
into a world of small isolated fragments.
what our response must be.
o 0 o
I have no doubt
Estimated Current Account Balances of OPEC Countries
($ billion)
i
1974
Exports
Oil .
Other
90
5
95
Imports
-35
(goods and services)
60
Surplus
NOTE:
Some estimates of oil receipts are slightly higher
and estimates of imports slightly lower.
Preliminary Estimate of
Percent Distribution oT
Cumulative OPEC Investments,
January through December, 1974
*
Percent of Total
In the United States
18 1/2
In Euro-banking market
35
Sterling Assets in United Kingdom
13 1/2
All Other
33
Total
100
Treasury Department
January 14, 1975
DepartmentoftheTREASURY
f e i i i O N . D C 20220
TELEPHONE W04-2041
January 15, 1975
POLICY STATEMENT OF THE UNITED STATES
ON DEVELOPMENT BANK LENDING TO OIL PRODUCING COUNTRIES
We are able to support t h i s bo rro wi ng , viewed as a separate and
independent o p e r a t i o n , s ub jec t to the questions and concerns which we
raised l a s t week. S i n c e , however, the borrowing is in f a c t i n t e g r a l l y
connected wi th the f i v e loans to be presented l a t e r t o d a y , I would l i k e
to take t h i s o p p o r t u n i t y to s et f o r t h , in a formal way, the Uni ted
States Government p o l i c y on development bank lending to o i l producing
and ex po rti ng c o u n t r i e s .
The increase in the p r ic e
and fo r e i g n exchange earnings o f
time the increase in o i l p r i c e s ,
with ene rgy, has created serious
countries.
o f o i l has g r e a t l y increased the incomes
o i l e x po rt in g c o u n t r i e s . A t the same
and in prices o f o t h e r products associated
economic problems f o r many developing
We b e l i e v e the development banks o f which we are a member, the World
Bank, the In te r -A m e r ic a n Bank and the Asian Development Bank, should a d j u s t
their programs a p p r o p r i a t e l y to t h i s new s i t u a t i o n .
In our v i e w , th e re is
no j u s t i f i c a t i o n a t t h i s time f o r s o f t loans to any o i l e x p o r ti n g c o u n t r y .
Financial support through o r d in a r y c a p i t a l loans should be ve ry s t r i c t l y
limited in t o t a l amount, and should be r e s t r i c t e d to o n l y those among the
poorest o f the o i l e x p o r ti n g nations who have pressing f o r e i g n exchange
requirements f o r development p r o j e c t s .
We have no t come to t h i s conclusion because o f any de s i re to hinder
the development e f f o r t s o f o i l e x p o r ti n g n a t i o n s ; on the c o n t r a r y , we
support such e f f o r t s . However, the basic purpose o f the World Bank today
is to a s s i s t developing c ou ntr ie s in need o f f i n a n c i a l s u p p o r t.
I t is f o r
this reason t h a t the United S tates Government, along wi th o t h e r members o f
the Bank, guarantees the o b l i g a t i o n s o f the Bank and enables i t to r a i s e
money economically in the w o r l d ' s c a p i t a l markets.
We rec og niz e t h a t some o i l ex p o rt i n g c ou ntr ie s may wish to have the
benefit o f continued technical and management ass istance from the Bank in
their development program and p r o j e c ts even though they have no pressing
need f o r Bank f i n a n c i a l s u p p o r t. L im it e d ass istance to meet t h i s d e s i r e
could a p p r o p r i a t e l y be made a v a i l a b l e through a number o f a l t e r n a t i v e p r o
cedures, provided the Bank's a b i l i t y to support ot h er c o u nt r ie s wi th
financial requirements is not r e s t r i c t e d whether through the encumbrance
of Bank c a p i t a l or the d i v e r s i o n o f scarce Bank management and tech nica l
services, and provided t h a t the f u l l costs o f such ass is tance are charged.
In l i g h t o f these c o n s i d e r a t i o n s , o f f s e t loans from o i l e x p o r ti n g
nations, o f the type t h a t have been a pp a r en tl y arranged in connection wi th
five loans we are discussing t o d a y , do not appear to us to pr ov ide an
-195
WS
Over
-
2
-
adequate r e s o l u t i o n o f the problem. Moreover, we do not b e l i e v e i t
d e s i r a b l e f o r the Bank, in e f f e c t , to prov ide special in c e n t i v e s to
i n v e s t in i t s s e c u r i t i e s to one class o f l e n d e r.
We would welcome increased p a r t i c i p a t i o n in the e s ta b li s h e d
development Banks by the major surplus cou nt rie s through the purchase
o f a d d i t io n a l shares in t h e i r o r d i n a r y c a p i t a l provided such share
purchases are accompanied by commensurate increased c o n t r i b u t i o n s to
the concessional fu nding mechanisms. The g r e a t e s t and most urgent need
o f the poorer de veloping c o u nt r ie s is f o r increased ass istance on the
low i n t e r e s t , lo ng -t er m basis provided by these i n s t i t u t i o n s from t h e i r
special f u n d s .
We b e l i e v e i t would be a p p r o p r i a t e f o r the o i l e x p o r t i n g countries
wi th s u b s t a n t i a l surpluses a v a i l a b l e f o r i n t e r n a t i o n a l investment to
provide a d d i t i o n a l concessional a ss is tance to the poorer developing
coun tries through c o n t r i b u t i o n s to the development banks' s o f t loan
funds such as the I n t e r n a t i o n a l Development A s s o c i a t i o n .
I t would also
be a p p r o p ri a te f o r the major o i l e x p o r t i n g coun tr ie s to repay promptly
t h e i r ou ts tandi ng loans from the development banks so t h a t these resources
could be used f o r a d d i t i o n a l loans t o the poorer developing c o u n t r i e s .
We welcome the dec isi on by Bank management to have a f u l l review
o f the p o l i c i e s and p r a c tic es o f the Bank wi th respect to i t s r e l a t i o n s
wi th o i l e x p o r t i n g natio ns as p a r t o f the board review o f f i n a n c i a l
p o l i c i e s on J a n u a ry 2 1 . We reco gnize t h a t the loans which w i l l be before
us f o r c o n s id e r a ti o n l a t e r today have been c a r e f u l l y prepared and negoti
ated between the Bank and the Government o f N i g e r i a . Since our views on
the general p o l i c y questions i n v o l v e d , although p r e v i o u s l y expressed
i n f o r m a l l y , have no t been p r e v i o u s l y presented to t h i s board in a formal
p o l i c y s t a te m e n t, we would not wish to i n t e r f e r e wi th the decisions that
are made today by the Bank and o t h e r members o f the board. In view of
these c o n s i d e r a t i o n s , and pending the outcome o f broader discussions on
the general p o l i c y g u id e li n e s i n v o l v e d , we wish to request a t t h i s time
to be recorded as a b s ta in in g on the loans when they are presented.
December
17,
1974
DepartmentoftheTREASURY
SHINGTON. D C. 2 0 2 2 0
TELEPHONE W04-2041
j|
OF
J 7 89
m
FOR IMMEDIATE RELEASE
REMARKS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
AT PRESS BRIEFING
ROOM 4121, TREASURY DEPARTMENT
9:30 A.M., JANUARY 16, 1975
We called this briefing with Fred Hickman and Ed Fiedler
this morning to give you a chance to ask any additional
questions about the President's State of the Union proposals -•
particularly those relating to changes in the tax structure.
I thought I might also take this occasion to make a few brief
remarks about reaction to the program before attending another
IMF meeting. As you know, I have been deeply involved with
the IMF ministers all week and have not yet had an opportunity
to speak to the press, but it is important to set the record
straight on a couple of issues.
First of all, you should understand that the process of
drawing up the economic and energy proposals was one of the
most difficult exercises that this Administration has under
taken. It was especially painful for President Ford because
he, like the other members of his economic team, is a firm
believer in fiscal discipline and in the free marketplace.
Yet, as leader of all of the people, he knew that millions
of Americans were suffering and that circumstances of the
economy required a change. It is a measure of his strong
capacity as a leader that he had both the wisdom and the
courage to chart a new direction for the country. It is also
reassuring to know that when we pull out of this recession,
as we will, a man of his philosophy will be at the helm, for
he fully understands what needs to be done to rebuild the
foundations of our economy. I want all of you to know this
morning that the full Administration is united behind the
President, and I believe that the country will unite behind
him too.
-
*2
-
Three weeks ago we were hearing from some critics
that the President was fighting inflation at the cost of
unemployment and recession. Now we are hearing that he is
fighting unemployment and recession at the expense of inflation.
Both views are off the mark. The President^is trying to fight
both inflation and recession at the same time, because they
are both part of the same disease.
There has been a change, but it has been a change in
emphasis Jp we are significantly stepping up the battle
against the recession because the economy is sliding downhill
more rapidly than anyone expected. But we are certainly not
abandoning the lpng-range fight against inflation.
As you were told in briefings yesterday, we do expect
some slight increase in inflation if all of the President’s
programs are enacted -- about two percentage points on the
CPI. While the costs of our action are higher than we
would like, the costs of inaction — in terms of unemployment,
hardship, and loss of hope for millions of Americans -- would
be much higher indeed.
These programs are bold, but they are not reckless.
They are, the right medicine at the right time for the right
reasons.
In lifting the country out of the doldrums, the President
has been extremely careful to avoid actions which would set
off another inflationary spiral. That's why we have placed
heavy emphasis upon limiting the tax cut to one year and
putting a tough ceiling on new spending programs. Both of
these actions are imperative in order to keep a lid on prices.
I said a week ago that the President’s program would be
’’tough, comprehensive and effective.” That's precisely what
it is, and if we give it a chance, I think we will see the
economy begin its recovery much earlier in 1975.
Thank you.
0O0
kparmcUoftheTREASURY
HINGTON. D C. 20220
T E L E P H O N E W 04-2041
30
FOR IMMEDIATE RELEASE
January 16, 1975
TREASURY ANNOUNCES TENTATIVE REVOCATION
OF DUMPING FINDING ON
POTASSIUM CHLORIDE FROM WEST GERMANY
Assistant Secretary of the Treasury David R.
Macdonald announced today a tentative determination
to revoke a finding of dumping in the case of
potassium chloride from West Germany under the Anti
dumping Act, 1921, as amended. Notice of this
decision will appear in the Federal Register of
January 17, 1975. A finding of dumping with respect
to potassium chloride from West Germany was published
in the Federal Register of December 19, 1969.
The Federal Register Notice of January 17, 1975,
will state in part the finding that from August 1969
to date, sales by the sole West German exporter, Kali
und Salz, have not been at less than fair value and
that assurances have been received that future sales
of potassium chloride to the United States will not
be made at less than fair value.
During the period of July 1, 1973, through
July 1, 1974, imports of potassium chloride from
West Germany amounted to approximately 10,000 tons
valued at approximately $600,000.
#
#
#
December 33, 1974
U N ITED S T A T E S SAVINGS BONDS ISSUED AN D R E D E E M E D T H R O U G H
(Dollar amounts in millions —rounded and will not necessarily add to totals)
DESCRIPTION
JjRED
jles A-1935 thru D -1 9 4 1
_
lie s F and G -1941 thru 1952
lie s J and K -1952 thru 1957
W
lies
AMOUNT ISSUED
1/
AMOUNT
REDEEMED
4999
29503
3749
17
.06
.13
1939
8556
13757
16073
12663
5784
5523
5732
1761
7755
12487
178
3Q2.
9.18
9.38
5004
4042
.266.
1036
962
. 36. 43 -
.812.
895-
ed
E :
- *
1941
1942
1943
______________
______________
______________
1944
______________
1945
1946
______________
______________
1947
______________
1948
______________
1949
1950
1951
_____ 1________
______________
______________
1952
1953
1954
______________
______________
______________
1955
______________
1956
______________
1957
______________
1958
______________
1959
1960
1961
______________
______________
______________
1962
______________
1963
______________
1964
_________ ____
1965
1966
_________
_________
1967
1968
_________
_________
1969
1970
_________
_________
1971
_________
1972
_________
1973
_________
1974
_________
Total Series E
pwies H (1952 thru May, 1959) 4L
H (June, 1959 thru 1974) _
ITotal Series H
Total Series E and H
Total matured
■1 Series Total unmatured
Grand T o ta l___
M g.
% O U T S T A N D IN G
OF A M OU NT ISSUED
5003
29521
3754
1 1 2 .94 ,
5016
4664
5325
5551
5363
5062
4960
4657
4692
4794
4674
5270
5135
5029
5449
5402
5077
4790
4 .105 4136
4272
4101
3828
3662
3405
3343
3306
3148
3374
3299
3208
.33-5.L
3272
3047
2780
5802
6404
6336
4929
2700
2607
2271
985
Unclassified
’elude
AMOUNT
OUTSTANDING-
•c e m e d d ig e
12 70
1563
1370
769
M£L
1104..
1189
1 2 7 9.
1262
12341298
1251
1340.
1 4 88 .
1527
18961 8 16 .
18.21.
2098 .
2130
2030
2010
2362.
310 0
3797
4065
3943
JL-23-
9.7 2.
-1Û.-8213.30
15 .-5-Z16.85
18.13.
19.22
1.9..22-19.1-2-
21.1,9_
22.33
23.04
23. 5 1.
24.38
2 6 . - 1 .726.86
2 8 .7 - 1
3 1 .0 4 .
3 2 . ..6. 7„.
35.98
35 .2 5 -
36.21
38 .50-
_4L
39.43
39.98
41.96
46.94
5,1 .4 6 .
59.29
64.16
80.00
4.90
205372
149759
55613
27.08
5485
10021
4150
3617
1336
6401
24.36
63.88
15503
7768
7736
49.90
220875
157527
63349
28.68
38278
220875
38251
157527
195778
26
63349
28.68
ount.
f ? m r««temp<ion value.
of owner bond a m ay ba h e ld a n d w i l l a a m in ta ra a t to r a d d itio n a t p a rio d a a tta r o r ig in a l m a tu r ity d a ta a .
Departmento/theTREASUKY
ishington; o x
IB ®
'
tfliPHONfWO'4 I S |
FOR IMMEDIATE RELEASE
January 17,1975
SIMON ANNOUNCES NEW SUBSCRIPTION
TO INTERNATIONAL GROUP
Secretary of the Treasury William E. Simon announced
today at a meeting of the Joint World Bank/International
Monetary Fund Development Committee the subscription by
the United States to the Fourth Replenishment of the resources
of the International Development Association (IDA). IDA is
the World Bank agency that provides long-term loans at very
low rates of interest for development of the poorest
developing nations.
The United States’ agreement to the replenishment
arrangements, originally negotiated at the World Bank meeting
in Nairobi during September 1973, will bring these arrange
ments formally into effect. As a result, twçnty-one developed
countries will provide contributions to IDA totaling $4.5
billion, of which $1.5 billion, or one-third of the total,
will be provided by the United States.
The United States subscription was authorized by Congress
in Public Law 93-373. This contribution is scheduled to be
made in four equal annual installments of $375 million each
during fiscal years 1976 through 1979.
In accord with cus
tomary United States legal procedures, the U.S. contribution
will be provided only after enactment of the necessary
appropriations bills by the Congress.
DepartmentoftheTREASURY
INGTON. D
C. 20220
□
TELEPHONE W04-204t
TfJ
ECONOMIC TRENDS, GOVERNMENT AND THE PRESS
Remarks by James N. Sites
Special Assistant to the Secretary
of the Treasury
Before the Annual Awards Dinner of the
New England Press Association
Boston, Massachusetts
January 17, 1975
Even for an ex-reporter it's a most unusual experience
to appear before an audience of 500 editors and publishers.
I will try to make my remarks as meaningful as possible even
though they were born and bred in Washington which, as you
know, is just about the only place on earth where sound travels
faster than light.
Before getting into my talk, which, as your general
manager requested, centers on the economic difficulties which
polls indicate to be the foremost concern of Americans--!
would like to offer personal congratulations to the winners
of yoiir journalism awards.
I know from hard experience that
this is deserved recognition for merit in serving both the
cause of good reporting and the public interest.
I’m tempted to speak in this regard about those great
concepts of freedom of the press, but I’ll leave this kind
of eloquence to others. From a practical point of view, I
can only say thank God for that leading contribution of free
reporters working in a free society--the threat of exposure.
How will it look on the front page?--This must surely be one
of the greatest forces for good in democracy’s entire arsenal.
I would also like to take this opportunity to bring you
the warmest best wishes of my boss, Treasury Secretary William
E. Simon, who, I can assure you, would have liked nothing better
than to have been here with you tonight. However, as you have
undoubtedly concluded from the State of the Union message and
other Washington developments, the President has pre-empted
Bill’s time and talents for other things.
But to get on with our look at the economy, I would like
to focus tonight on two major points: (1) how we got into our
2
present economic troubles and (2) how in the world do we get
out.
As the President emphasized on Wednesday, there is no
doubt that the economy is in serious trouble. Even so, the
true nature often seems obscured by the terminology of the
experts.
For instance, the more learned economists might tell
you that a slowing up of the slowdown is not as good as an
upturn in the down-curve. But even this is a good deal
better than either a speed-up of the slowdown or a deepening
of the down-curve. And it does suggest that the climate is
just about right for an adjustment to the readjustment. All
of which indicates that there may be a letting up of the
letdown. Of course, if the slowdown should speed up, the
decrease in the rate of increase should turn into an increase
in the rate of decrease.
In other words, the rate of
deceleration would be accelerated.
Now, if all this fails to clarify the economic picture,
you can understand why it is said that economists may often
be wrong...but they are never in doubt.
Unfortunately, we have few other things to laugh about
when we look at the American economy. The past year has
been a grueling experience for the nation. We have been
shocked by energy shortages, the explosive rise in food and
fuel prices, sky-high interest rates and scarcities of mortgage
credit,
production cutbacks and growing unemployment.
With people increasingly concerned about both the present
and future, the danger is that the nation may now be stampeded
into rash action that will worsen our problems rather than
improve them.
It is imperative, therefore, that we take a
long, cool look at the state of our economy, at trends and
prospects, then choose our policy courses wisely. While the
economy has a number of weak spots, we should not dismiss or
overlook its vast strengths.
As the new Congress convenes and considers the President’s
comprehensive economic and energy programs, together with
other proposals, the consensus economic outlook shapes up
like this:
Production will continue to decline into the middle
months of the year, with unemployment continuing to rise
until that period as the labor force increases faster
than the absorption capacity of the economy. On the other
hand, there will be a slackening in the rate of inflation
which is raising such hob with so many people. The economic
recovery is then expected to get underway.
Fortunately, no authority sees the recession degenerating
into anything like the 1930s. There are too many built-in
stabilizers. Besides a great many structural changes in the
economy, we now have federal insurance of bank deposits,
strong unemployment compensation and public employment programs,
and a wide range of income-maintenance systems -- social
security, food stamps, etc.
Now, you’ve all heard the President’s State of the Union
address and his program to deal with our economic troubles.
I won't repeat the well-reported details of his action plan,
but I would like to comment briefly on a few of its key points.
First, we confront the hard fact that we have reached
the end of the long, happy era of cheap and abundant energy...
that powered a century of unprecedented development and
prosperity. Now we must do an about-face and learn how to
conserve and economize on this vital resource. There is no
way this can be done easily or painlessly. The President has
chosen the price and market-response mechanism to stimulate
energy conservation and domestic production, allowing people
to use their ingenuity to work themselves out of the jam the
oil-producing nations forced upon us.
I am sure you will hear much in coming days about the
alternative approach of mandatory controls on imports and
mandatory allocations, and even rationing. But look
at the other side of that coin--perhaps 10 dismal years of
government dictation as to who gets how much, coupled with
inequities, distortions, black markets and a further under
mining of our basic freedoms. Do we really want that?
In terms of the broad economy, the President has movqd
forcefully to help the nation recover from recession, while
trying to stop short of the kind of excessive stimulation that
could soon return the nation to an even more ■
virulent anflati
and even worse unemployment. His program not only provides a
shot in the arm for our slumping economy, but the energv tax
also provides the means of repairing the damage | § P | < ^ i r ? s
wrought to our tax structure.
It will yield needed revenu
to provide better breaks for low and middle-income groups
and business investment--the very wellspring o our jo
good living standards.
4
Behind the President's program is recognition of the
many special factors that triggered super-inflation and
got us into economic trouble in the first place--the
quadrupling of prices by the oil-producing nations, serious
crop setbacks during the past two years, the supply shortages
and other distortions caused by our recent bout with wageprice controls, the simultaneous boom among industrialized
countries that put such pressure on the world's commodities,
and two devaluations of the dollar that brought increased
foreign demand for U. S. goods.
But beyond these factors, which should eventually work
themselves through the economy, lie some deeply embedded
government policy problems that have aggravated inflationary
pressures and which will have to be dealt with squarely if
we are ever to solve our economic problems.
This brings me to the role of government in our quandary-a role that is probably overriding and which will have to be
rationally reassessed. Perhaps a few facts will be appropriate
in defining this role. For instance...
* One of every six members of the labor force now works
for the government--federal, state and local.
In fact, the
government has become the nation's largest single employer
of people.
* Just before the New Deal burst upon the American scene,
government accounted for 15 percent of national output. Today,
government accounts for a third of output; and if present trends
continue, this could amount to over 50 percent by the year 2000.
* Underscoring government’s awesome growth rate, it took
185 years for the federal budget to reach the $100 billion figure)
a line it crossed just 14 years ago in 1962. Only 9 years later,!
the federal budget had reached the $200 billion mark and then, tn
current fiscal year, it will pass the $300 billion mark. Indeed,
in the fiscal year starting next October 1,government will be get
painfully close to spending $1 billion each day.
Such spending totals, mammoth as they are, are not as bad
as the chronic failure to make ends meet.
In the past 15 years,
the federal government has run deficits in 14 years--a misera e
record of profligacy. These huge deficits have added enormously
to aggregate demand for goods and services and have thus been
directly responsible for tremendous upward price pressures.
Heavy borrowing by the federal sector has also been an importan
contributing factor to the persistent rise in interest rates a
to the strains that have developed in capital markets. And, a
President Ford indicated, this problem will get no better as tn
gap between revenues and expenditures widens for this year ana
next--to $30 billion and then $45 billion.
The greatest danger in these huge deficits is that as government
moves into credit markets and pre-empts vast sums to cover its
deficits, new pressures will build up under interest rates. This
will directly affect the hard-hit housing industry, which so many
are counting on to lead the way to economic recovery.
This current state of affairs may well pose the ultimate
dilemma for those who believe you can solve problems simply by
throwing a lot of money at them--that you can remedy the problems
caused by big government by still bigger government: Now dawns
the realization that the more money government spends, the more
severe our economic troubles could become.
It’s like trying to
cure an alcoholic by pouring martinis down his throat. This is
why the President emphasizes so strongly holding the lid on
government spending. Temporary tax cuts give us a far better
chance of recovery without lasting damage than big new spending
programs. We feel our tax package of a reasonable $16 billion
tax stimulus, plus the rebate of energy taxes, provides the
proper combination.
These are the facts that only the press can bring to the
public’s attention in a way that counts back in Washington.
I
believe that the Washington decisions that will be made over the
next few months on recession, unemployment, inflation and energy
could decide the direction of both the American economy and
America itself for as far ahead as we can see. These Washington
decis ions will be heavily influenced by the state of public
knowledge and attitudes on economic issues; and this, in turn,
will depend heavily on how well you, the press, report these
vital facts to the people.
Many have cited the great need on the part of both the
public and public officials for a better understanding of
basic economics. Many have also said that solutions to our
economic distress will not be made on solid economic grounds
but rather for the sake of political expediency.
I would hate
to see us placidly accept this as inevitable.
It does not
have to happen like that.
Now that economic matters have moved onto page one
°f your newspapers and into top position on network
newscasts, the press has an unparalleled opportunity to
contribute to better understanding and the more rational
resolution of our economic problems that this will
promote. It can also thereby contribute to a comeback
in consumer confidence--to that improved public psycho°gy that is the real key to an economic resurgence.
6
The American prople are probably far ahead of poli
ticians in their attitudes of what government should and
should not do for them. A recent Lou Harris poll showed
that ...
* By a huge 77 to 13, the public believes that
"the trouble with your getting special benefits
and handouts from government these days is that
you’ll have to pay for it four or five times
over in higher taxes."
* By 79 to 16, people feel, as well, that they
are not getting their money’s worth in terms of
government programs.
(This sounds like a
modern echo of Will Rogers’ statement, "Thank
God we get only half the government we pay for!")
* Finally, people responded 69 to 19 that "the
kind of politician that promises one group of
people something from government more than most
other candidates ought not to be trusted."
So there i_s hope.
It is the strength and vitality
of America and the American people that will finally
prove decisive in economic recovery, not the machinations
of a well-intentioned but badly overblown government.
America’s private economic system is an ingenious, highcapacity, highly efficient machine that is the envy of
the world--that has produced unparalleded plenty for
Americans and other beneficiaries all over the earth.
If kept in good condition and run properly, this mechanism
can be counted on to continue to fulfill both the growing
needs of the nation and most of our dreams. But overload,
overheat and damage this wondrous machine--as we have
been doing in our attempts to get too much too soon--and
w e ’re really in for trouble.
Has our explosively expanding government gotten out of
control? Not yet, perhaps, but we will have to engage in
some mighty efforts to make sure it doesn’t. Besides sopping
up your taxes and our national wealth, this bull is threatening
to knock down everything in the china shop.
These dire effects of our outsized government recall
what happened to a distinguished Congressman returning to
Washington after last fall's election. At the airport he
ran into a constituent who said: "When you return to
Washington, please don't do anything more for me--I can't
afford it!"
-oOo-
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DepartmentoftheTREASURY
« T O N , O X . 2022Q
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FOR RELEASE UPON DELIVERY
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REMARKS BY THE HONORABLE STEPHEN S. GARDNER
DEPUTY SECRETARY OF THE TREASURY
BEFORE
THE U.S. INDUSTRIAL PAYROLL SAVINGS COMMITTEE ANNUAL MEETING
DEPARTMENT OF STATE, WASHINGTON, D. C.
THURSDAY, JANUARY 16, 1975
Mr. Chairman, Members of the Industrial Payroll Savings
Committee, and honored guests:
It is a great privilege to address such a distinguished
delegation in Washington. And the calibre of this group, the
richness of the surroundings, the quality of your menu today
are all perfect. The only problem I have is that I have on
the wrong necktie. Seriously, this is the first good opportunity
I have had to thank all of you for the significant contribution
you are making to our Nation through the payroll savings program.
It is particularly fitting that you have gathered here
°n ttie day following the President's State of the Union
address, for the thrust of our economic policies make it
clear that the savings payroll program has become more
important than at perhaps anytime since World War II.
The process of drawing up the economic and energy proposals
was one of the most difficult exercises that this Administration
nas undertaken. It was especially painful for President Ford
oecause he, like his advisers, is a firm believer in fiscal
Discipline and in the free marketplace. Yet, as leader of all
^
.people, he knew that millions of Americans were
su fering and that the circumstances of the economy required a
M is.a measure of his capacity as a leader that he
both the wisdom and the strength to chart a new direction
ror the country. It is also reassuring to know that a man of
m s philosophy will be at the helm when we pull out of this
recession, because he fully understands the need to rebuild
ne foundations of our economy. I want all of you to know this
arternoon that the full Administration is united behind the
^resident, and I hope that you will join us in this effort.
In the brief time that we have today, I would like to
sum up the most important features of the President's program
and then talk to you for a few moments about the payroll
savings program.
2
First, it is obvious that the emphasis of Administration
Policy has shifted much more heavily in the .direction of
fighting recession. The $16 billion tax cut, combined with
the deficits that are projected for fiscal years 1975 and 1976]
will give the economy the largest dose of stimulation since thj
1940s. Even in fixed dollar terms, the money that we should ]
be pumping into the economy will be significant by past standaj
Pumping more money into the spending stream, of course,
does not mean an immediate end to our economic problems. We
have been saying for months that there is no quick fix or easy
way out, and that still stands. What we do hope is that the
tax cut will bring a recovery a little earlier in 1975 than
would otherwise have been the case and that the recovery
itself will be stronger and sharper. That will be particular^
true if leaders in private industry such as you take advantage]
of the increased incentives for capital investment -- a charact!
istic of Presidents Fords programs in October and again in the
State of the Union message.
Second % let me re-emphasize what the President has alreadl
made plain:
our efforts to head off the recession do not mean
that we have abandoned the fight against inflation. There is
no question that inflation remains our most deep-seated problem
and that to restore our full economic health, we must overcome
the forces of inflation. That is why it is especially importail
that in combatting the recession, we not lose our perspective,
We can be bold, but we cannot afford to be reckless.
"Living in an economy with an unstable currency," it was
once said of inflation, "is like living in a society in which
no one tells the truth. The ability of modern governments to |
keep their money strong is an essential condition of their
ability to govern." We have always taken that view to heart,
and that is one of many reasons that we have such great
respect for the man I was quoting, Gabriel Hauge.
No one denies that the Administration's program will
cause some increase in inflation. We estimate that the net
impact of the energy proposals should be an addition of two
percentage points to the cost of living index, but its impact
should be almost entirely non-recurring. To be realistic,
we must also recognize that we're going to have to pay a
price for getting ourselves out of this mess. The slight
increase in inflation is a necessary cost and it is probably
the best bargain we can get.
- 3 -
J 4 rrf-
To keep inflation within bounds, the President is
making essentially two proposals: first, he wants the
general tax cut to be of only one-year's duration. Second,
he is asking for a moratorium on all new Federal spending
programs except those of paramount importance in the field
of energy. The President fully appreciates the fact that
a prolonged period of huge Federal deficits will not only
create severe instability in our financial markets but
will also cripple our hopes of curbing inflation.
This brings me to my third point -- an item of special
significance here this afternoon — which is the increase
in deficit spending that we can expect. Final budget
figures will not be released until February 3, but it is
already clear that we will have enormous Federal deficits
in fiscal years 1975 and 1976.
All of us who have watched the sweeping growth of
Government borrowing within the private capital markets
share a sense of concern and urgency about mushrooming
Federal deficits. In fiscal year 1974, the combined
borrowings by all forms of governmental activity accounted
for no less than 60 percent of the net funds raised in the
private capital markets in the United States*. That is an
alarming figure, for when the Government usurps that large
a percentage of the capital funds available, the entire
system is distupted. Borrowers must seek out other sources
of capital, interest rates rise, and eventually the housing
market cracks. Furthermore, personal consumption declines,
business investment falters, and jobs are lost. Ultimately,
the system can break down because capital is no longer
available. For the safety and vitality of our free enterprise
system, we must halt this continuing surge of Government
spending.
While the sudden slide of the economy makes it necessary
to engage in further deficit spending in the short-run, over
the long-run it is equally important that we restore greater
discipline to our fiscal affairs. Before the 1930s, this
country used to have budget surpluses four out of every five
years, except for periods of war. In the last decade and a
half,' we have had only one surplus year and 14 years of
deficit spending -- a truly miserable record. To continue
these excessive spending policies would not only prolong our
economic troubles, but would insure almost total Government
domination of our economy. This is one of the gravest dangers
now facing the United States, and the sooner we face up to it,
the better.
4
Until we bring the explosive in Federal spending under
control we have two imperatives. First, we must strenuously
resist efforts to enact recession-fighting programs that will
continue long after the recession is passed. One example I
would cite is the pressure to create a new Reconstruction
Finance Corporation. While the idea may sound appealing,
let us remember that the last time around the RFC stayed in
business for more than 20 years. We simply cannot afford
to saddle ourselves with a host of new programs that will
last long into the 1980s. The second imperative is that we
must manage the Federal debt as wisely as we can, minimizing
the disruptions it causes in private capital markets. And
that s where all of you come in as members of the Industrial
Payroll Savings Committee.
We have a special appreciation for savings bonds within
the Treasury Department because they provide a firm,
dependable foundation to the Government's debt structure.
Let me review the numbers with you for a moment to emphasize
that point.
At the end of 1974, the total Federal debt was just over
$492 and 1/2 billion. Of that total, over $140 billion was
held by Government investment accounts, such*as the Social
Security Trust Fund, the Civil Service Retirement Fund, the
Unemployment Trust Fund and others. In addition, the Federal
Reserve held Just over $80 billion which it had accumulated
in the process of providing reserves to the banking system.
Left in the hands of the general public was $271 billion
in U.S. Treasury Securities. This is the debt which we seek
to manage within the Treasury Department. Of this amount,
more than $63 and 3/4 billion was made up of Series E and H
bonds as well as savings notes, or what we call Freedom Shares.
You can see, then, that of the total Federal debt, a little
more than one half is held by the general public and managed
by the Treasury and of that amount, approximately one-quarter
is in the form of savings bonds and savings notes.
Savings bonds and notes not only represent a sizeable
chunk of the total debt held by the public, but they are also
the most stable element within that debt. Unfortunately, the
trend in privately held marketable debt has been in the
direction of less and less stability. Since June of 1965, the
average maturity of privately held marketable debt has steadily
declined from 5 years, 9 months to under three years today.
This trend is unsatisfactory in at least two respects.
First, as the average maturity of the debt declines, the
debt increasingly takes on the characteristics of money -it becomes more liquid or ’’spendable," and when you're
trying to hold down spending, that can be inflationary.
Second, when the average maturity of the Government's debt
is as short as it is now, the job of refinancing the debt
grows considerably. Even after eliminating Treasury bills,
which come due as frequently as every 90 days, it is still
the case that nearly $1 of every $5 in marketable securities
held by the general public reach maturity and must be
refunded each year.
By contrast, we estimate on the basis of past experience
that the average savings bond sold today will not be redeemed
for six years -- more than twice as long as dollars obtained
through marketable issues. Savings bonds simply do not turn
over as rapidly as the rest of the marketable debt. About
$1 in every $8 of savings bonds are cashed in each year and
thus have to be replaced through new sales. In short,
savings bonds are critical to debt management, and because
of their relatively low turnover, they can be a significant
factor in the continuing battle against inflation.
Some of you may be asked by your employees whether it
is good for the country for them to continue saving money
in 1975. Aft6r all, the President has asked for a tax rebate
in order to promote consumption, not to increase personal
savings.
Our answer to that question is brief: yes, we need to
increase consumer consumption and we hope that consumers
will spend more during the coming year, but we also want to
maintain and encourage greater habits of thrift in this
country. The wise consumer, I believe, will spend a large
part of his tax rebate but he will also put something aside
for another day.
The fact is that when we pull out of this recession,
as we will, the country and the consumer would be much better
off if we restored the patterns of thrift and frugality that
were once characteristic of the United States. The old saying
that "thrift is the handmaiden of free enterprise" may have
become a cliche, but that does not make it any less true. In
deed, it is another one of those time-tested facts of life
that needs to be hammered home more vigorously than ever before.
6
From 1960 to 1973, the United States devoted less of
its total output to capital investment than any major
industrialized country in the Western world. And as a
result, we had the lowest rate of growth in productivity
among the industrialized nations -- 3 percent, compared to
6 percent for the French and Germans, and more than 10 percent
for the Japanese. For a country that wants to continue as
the leader of the Free World, these are startling figures.
They make it clear that we must soon begin to shift far more
of our resources out of daily consumption and into capital
investments — investments that will maintain our economic
growth and provide jobs for a growing work force. Our best
hope for increasing capital investments over the long run
lies in greater personal savings and investments. That is
true whether the savings are placed in savings accounts, in
the stock market, in pension plans, or in U.S. Savings Bonds.
All of them help.
To sum up, investing in U.S. Savings Bonds continues
to be good for the investor, good for the Government, and
good for the United States of America.
John DeButts and the committee that served with him in
1974 were superb in advancing the Industrial ‘Payroll Savings
Program. Now the baton passes to Gabriel Hauge and another
distinguished group. Their goal is to increase participation
by another 2,400,000 workers who either enroll in this program
for the first time or increase their savings over last year.
And with the Federal deficits as large as they are, I would
repeat that 1975 may be the most important year for the payroll
savings program since the Second World War.
Speaking here in these surroundings -- in the Franklin
Room of the State Department -- we can be reminded of the day
that Thomas Jefferson arrived in Paris to take the position of
American Minister to France. Mr. Jefferson was asked if he
had come to take the place of Benjamin Franklin.
"No one can replace Dr. Franklin," Jefferson replied.
"I am only succeeding him."
And no one can replace John DeButts or any of the members
of his committee. But just as Thomas Jefferson went on to
great successes in Paris, we are confident Gabe Hauge and the
members of the new Industrial Payroll Savings Committee will
go on to great successes in the year ahead.
Thank you.
oOo
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Departmentof
M KgfirriM
T O N . nO rC 920r 2m2n0
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T E t f P H O N E W 0 4-20 41
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FOR RELEASE UPON DELIVERY
REMARKS BY THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
LOS ANGELES CHAMBER OF COMMERCE
LOS ANGELES, CALIFORNIA
12:30 P.M., JANUARY 20, 1975
Foreign Investment in the United States
I am happy to have the opportunity to discuss with this
group the role of foreign investment in the United States
economy and our policies towards such investment.
During
the past decade, foreign investors have become increasingly
attracted to invest in the United States for a number of
reasons:
we offer a vast, affluent, and integrated market;
we are rich in natural and human resources needed to service
such investment; and there are intangible benefits, such as
access to advanced technology, which result from participation
in the U.S. market.
However, the single most important
factor has been that our markets have remained open and we
have afforded domestic and foreign investors equal treatment.
Now, because of the potential of substantial investments by
oil producing countries, the intensity of the debate on this
subject has sharply increased and some have begun to question
WS-19.8
2
this basic underlying policy.
In discussing this area, I
think it is important to recognize that foybign investment
and the policy that is adopted with respect to such
investment, has a significant impact on other matters.
It will have an overall effect on the domestic economy;
it will have an impact on capital formation in the U.S.
and our ability to satisfy the capital requirements of our
businesses; and it will have consequences with respect to
our general foreign policy.
Recognizing the interrelationship between these
various factors, we must be careful not to let the emotions
of the moment deter what we know to be in the long term
best interest of the United States and the world.
Existing Foreign Investment
I think it is appropriate to begin by reviewing
existing foreign investment in the United States.
In the
18th and 19th centuries, foreign investors played a very
important role in the economic development of our country,
including, in particular, building the network of railroads
that linked the various sectors together.
In the 20th
century, capital formation from domestic sources has far
exceeded foreign investments, but the foreign investors
still play an important role.
Many people are not aware
of the fact that some of our best known companies are
partially or totally-owned by foreign investors.
Companies
3
such as Shell, Lever Brothers, and Nestle Co., yield the
U.S. economy the same benefits as their domestically-owned
counterparts -- that is, employment opportunities, tax
revenues, and competitively-priced goods and services.
Some foreign investors have brought unique technology to
this country.
The pharmaceutical industry provides a
good example of this.
Others have played a major role in
the development of a particular state or region.
As
shown by such companies as Paul Masson, Sony and Toyota,
foreign investment can mean more jobs and can offer other
important benefits to a state’s economy.
Indeed, the Bank
of America was initially organized with foreign capital.
More important, the behavior of these companies does not
differ from domestically-owned companies.
The important
fact is that ownership of these companies has not altered
the way in which they function -- they still must abide
by our laws, and they still must compete in our marketplace.
Because many foreign-owned companies are functioning
like any other company, many people don’t have an appreciation
for the number of such firms.
In total, there are over
5,000 businesses in the United States owned or controlled
by foreigners.
The total book value (including both debt and equity)
of foreign direct and portfolio investment in U.S. firms was
well over $40 billion at year end 1973.
As large as this
4
may seem, however, it still amounts to less than half of
the book value of investments by our companies abroad.
With respect to the oil producing countries, we have
heard during the past year that they would be channelling
tremendous sums of money to the U.S. which would have a
detrimental effect on other countries.
In fact, such a
massive flow to the U.S. has not taken place.
During 1974,
the flow of funds from the oil producing countries into
direct and portfolio investments in our corporate sector
as well as into real estate has been quite small -- only
about $750 million out of the estimated $60 billion in
surplus funds the producers had to invest around the world.
While they did directly place about $11 billion in the
United States,, most of these funds went into marketable
government and agency securities, bank deposits and other
short-term instruments.
The producers of course do have the capability of
making substantially greater investments in U.S. industry
this year and in coming years, and I believe the interest
of some of the producers in such investments is increasing.
I have just returned from a trip to the Middle East where
I met with a number of those who are responsible for
investing the oil producers funds.
In assessing their
attitude toward investment, it’s important to distinguish
among the countries.
Countries such as Kuwait, the Gulf
States and Saudi Arabia, which foresee a future of
5
accumulating far more in revenues than they can hope to
put to use domestically, regard their investment horizons
as long term.
The Kuwaitis, in particular, are searching
for a variety of profitable investment opportunities in
the industrial world, and their portfolio management skills
are highly developed.
They will be seeking to acquire
assets that are at least no less valuable, in their view,
than oil in the ground.
Iran, on the other hand, has
substantial reserves but also a large population and
an ambitious internal development program.
It’s investment
strategy will probably differ significantly from that of
other oil producers with large surpluses.
Iran will emphasize
investments in companies which are in a position to help it
expand its domestic industrial base.
On my recent trip, I discussed the oft-expressed fears
of Arab capital controlling key industries in the west.
They believe such concerns are unwarranted.
They indicated
that they do not have the desire to control companies, nor
do they have the facilities to manage such companies.
They
view themselves like any institutional investor, seeking a
diverse portfolio of investments which will yield the best
long-term return.
money.
As such, they do not simply want to lend
They want to participate in the growth of their
investment
certainly a legitimate desire.
6
We should also recognize that while the theoretical
potential for oil producer equity investments is enormous,
given the amounts of surplus funds being accumulated by
far the greater portion of their funds will continue to
be placed in bank deposits, other short term private sector
investments, government securities, government-to-government
loans, loans to multilateral financial institutions, and
corporate bonds.
A comparatively small portion of these
funds is likely to go into equity investments in the
corporate sector.
Of course this will still mean some
very sizable investments are likely*, but I do not foresee
an immediate threat of an oil producer nation takeover of
our economy or of specific industries.
Sources of Information About Foreign Investment
It is argued by some that we would not know if such
a takeover were, in fact, occurring.
I think it might
be useful to consider for a moment the sources of our
information on foreign investment in the United States.
Last year, Congress passed legislation which called for
comprehensive and detailed surveys^ of foreign investments
in the United States, both portfolio and direct.
An
interim report on these surveys will be sent to the Congress
by October 1975.
A very substantial amount of relevant
7
information is obtained.
The Treasury collects on a
monthly basis from over 200 reporters data on transactions
for foreigners in U.S. corporate stocks including new
issues, redemptions, transactions in outstanding securities,
and some direct investment.
The Commerce Department
collects and reports on a quarterly basis foreign direct
investments in U.S. firms and annually Commerce also
publishes estimates of the outstanding value of foreign
portfolio holdings of U.S. stocks.
There are six federal commissions which require companies
subject to their regulation to submit information regarding
their ownership.
The most important of these are the reporting
requirements of the Securities and Exchange Commission which
are designed to warn of substantial changes in ownership and
control of corporations.
The SEC’s coverage is very broad,
involving equities of all companies registered under the
Securities and Exchange Act of 1934.
This includes all
companies whose securities are listed on national securities
exchanges and also those companies whose securities are
traded over the counter if they have one million dollars
or more of assets and one hundred or more stockholders.
Another important set of reporting requirements are
those of the Department of Defense which call for each
contractor to submit a Certificate Pertaining to Foreign
Affiliation to meet DOD Industrial Security Regulations.
8
If the total foreign ownership is above 6 percent, the
firm must identify the individual foreign owners.
As we evaluate the adequacy of these;sources of
information about foreign investment, we must do whatever
is necessary to provide the U.S. government with
sufficient information to monitor and evaluate foreign
investments.
We have obtained a great deal of information
already, but there may well be ways that better use
can be made of this information.
We do, however, want
to avoid any unnecessary data requirements which we
could not justify on a cost-benefit basis and which would
tend to act as an unnecessary impediment to domestic and
international capital flows.
(MORE)
9
Restrictions on Foreign Investment
Aside from concerns about our ability to collect
adequate data on foreign investments in the U.S., a
number of people have called for increased legislative
restrictions on foreign investment.
Bills submitted to
the 93rd Congress included proposals to establish maximum
percentage limits on foreign ownership in any U.S.
enterprise or in firms in particular industries, to
require prior registration of foreign investors desiring
to purchase an interest in U.S. firms, or to extend or
tighten U.S. Government controls over foreign firms doing
business in the United States.
We have consistently
opposed such legislation as unwarranted, potentially
harmful to our national interests and, in general, con
trary to our foreign investment policy.
The United States has traditionally followed a policy
towards foreign investment which was based on the free
flow of capital across international borders in response
to market forces with a minimum of government restrictions.
As I noted previously, foreign investments in the United
States have, over the years, contributed greatly to the
development of our country, and U.S. investors have contri
buted tremendously to economic advance throughout the world.
We have incorporated this policy in a network of some 130
bilateral treaties with other nations beginning with the
10
Treaty of Unity and Commerce with France of February 6,
1778.
These treaties are reciprocal in that the rights
we seek for American investors abroad, we are also willing
to accord to foreign investors in the United States.
We
have also been a leading force in international organizations,
in particular, in the Organization for Economic Cooperation
and Development, in seeking international agreements
and understandings that would promote the liberal and nondiscriminatory treatment, of international capital flows
and foreign investments.
We must seek to avoid any actions which would threaten
to destroy or undercut these efforts to construct an
enduring international economic order which allows the
operation of free market forces to determine capital flows
and maximize the efficient use and allocation of capital
resources.
Of course, we would also be concerned about
actions which could lead to increased restrictions against
our own economically much larger investments abroad.
It should be evident to all that now more than ever
we must assure that investment funds flow into the most
productive uses.
In the United States, we foresee massive
capital requirements in the corporate sector in the coming
years.
With the financing problems faced by domestic
firms, particularly in raising new equity capital, a
11
willingness and ability of foreign investors to place
substantial funds in our equity markets could have an
important positive effect on capital formation in our
corporate sector.
Therefore, we have consistently felt that U.S.
interests will be best served by admitting foreign investments to the United States, offering no special incentives
and -- with a minimum of government intervention to
protect national security and other essential national
interests -- imposing no special barriers to foreign
investors.
Safeguards Against Undesirable Foreign Investment
This policy, and the safeguards provided in various
laws and regulation, admittedly were drawn up in a period
during which we did not see the potential for very sizeabl
foreign investments that we do today.
In light of this
factor, we are intensively reviewing the adequacy and the
appropriateness of our existing laws and regulations in
the foreign investment area.
I believe that our current system of safeguards
against undesirable foreign investments has proven to be
quite effective.
If we determine that additional measures
are needed, we will not hesitate to recommend them; but
in a way that is consistent with our commitment to an open
world economy.
As I think few people appreciate the scope
12
of these current safeguards, I would like to review them
with you.
First of all, there is a relatively short ^ist of
laws which prohibit or limit foreign investments in certain
sectors for reasons of national security or to protect
an essential national interest.
These sectors include
atomic energy, domestic airlines, shipping, federallyowned land, communications and media, and fishing.
Of
course many more sectors, really all sectors, of our
economy are ’'important” , but we must.be very cautious
about legislatively barring foreign ownership in any
sector because of the potential economic effect;
It should
be emphasized that it is what a company does, not w h o owns it, that is the important factor.
In the United
States every foreign investment is subject to the same
laws and regulatory constraints which control U.S. business.
These pervasive laws to insure that all economic activity
is conducted in our national interest provide us with the
most protection against potential misuse of control by
foreign investors.
Consider the protection the following
laws provide:
(1)
Our anititrust laws apply equally to U.S.
and foreign corporations and prevent a foreign investor
from monopolizing a specific sector, or engaging in various
13
anti-competitive practices.
They also prevent a foreign
investor from making a purchase of, or engaging in a
merger or joint venture with, a U.S. firm if the result
would be to substantially lessen competition or tend to
create a monopoly.
These laws would also prevent such
actions by a group of investors acting in concert.
(2)
Through our export control authority, we can
prevent the export of any U.S. product or resource if
national security is threatened, if there is an excessive
drain of scarce materials and a serious inflationary
impact from foreign demand, or if controls are needed to
further U.S. foreign policy.
We have specific and quite
effective controls over the exports of armament and certain
controls over energy exports.
(3)
Our securities laws also apply equally against
foreign and domestic investors.
They require disclosure
of significant foreign ownership and prevent harmful
activities with respect to tender offers, stock price
manipulation and preservation of an orderly market.
(4)
Our labor laws require all firms operating in the
United States to abstain from unfair labor practices and
to assure all workers safe and healthful working conditions.
(5)
Most state corporation laws provide protection for
minority shareholders against irresponsible action by
majority shareholders, and these laws can be used to help
14
prevent abuse by a controlling foreign shareholder.
(6)
The Government has broad emergency powers,
including the Trading with the Enemy Act, which gives
the President the power during a war or natiohal emergency
to completely control any property in the U.S. in which
any foreign country or national thereof has any interest.
The Government also has the basic power to condemn any
property if within its jurisdiction.
Aside from these general provisions, there are many
laws which prevent abuses in specific sectors.
The
defense area is of special concern, but here, too, I
believe our safeguards are strong.
First, the Defense
Department may deny security clearances required to do
classified work for the government to any firm under
"foreign ownership, control or influence."
Foreign
ownership of producers of defense items is not expressly
prohibited; but it is effectively deterred by the prospect
that such an acquisition would very likely cause the firm
to lose its classified government business.
Also exports
of arms and of classified technology related to defense
manufacture are effectively controlled.
Finally, the government has certain priority performance
powers giving the President power to require the priority
performance of defense related contracts, to allocate
materials and facilities necessary for national defense,
Y
O
15
>■
£
and to place priority orders for a particular product and
take possession of the facility if they are not fulfilled.
Conclusion
I have outlined these safeguards with you today because
of the alarms that have been raised by some people who fear
that foreign investors will use their money for political
purposes or act in a detrimental way to our interests.
I
have discussed this issue with several Arab leaders, and
I do not expect that the oil producers will seek to use
their foreign investments in this way -- principally
because it would be harmful to their own long-term interests.
They have given me every reason to believe they intend to be
responsible investors in our economy.
I should add that
they are seeking profitable investments, and in our
economy no profit-making enterprise can survive the
rigors of the marketplace very long unless it operates
in a sensible manner, meeting the challenges of competition
and offering the consumer the best product at the lowest
possible price.
Our combination of general and specific
legal requirements and the constraints of the marketplace
act to protect all parties from unreasonable corporate
actions.
It’s one thing to act for political purposes when
such action also strengthens you economically.
It’s quite
another to act politically when it would damage you
economically.
16
In summary, I would emphasize that with respect to
foreign investment, we must seek, not so much a national
policy, but a world policy.
Recently, more than ever
before, we have become aware of how interdependent
the world is today.
We must not reject that inter
dependence, but draw on it to build an international
framework of cooperation; and foreign investment will
be an important element.
Now, as we discuss and debate
what our policy should be, I hope that we can keep this
debate on a well-informed and unemotional level.
Too often
politics and economics become so entangled that the emotions
of the political arena distort the economic realities of
the marketplace.
Let us strive not for what politics
may suggest can be done, but for what we know needs
to be done.
As with so many issues today, investment and
investment-related issues confront us with a choice
between more governmental interference, more restrictions on
the market, or less.
We must not reverse our basic
commitment to an open world economy; for if we do, instead
of expanding investment and bringing the nations, of the
world together, we will surely sink into a world of small,
isolated fragments.
To me our choice is clear, and I am
confident of what our response must be.
o 0 o
DepartmentofthefREASURYJ j f
T E L E P H O N E W Û4-2Q41
IjINGTQN, D X . 20220
uft
FOR RELEASE UPON DELIVERY
REMARKS BY THE HONORABLE STEPHEN S. GARDNER
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
NATIONAL ASSOCIATION OF HOMEBUILDERS
SUNDAY, JANUARY 19, 1975
DALLAS, TEXAS, 1:00 P.M. CST
Good afternoon,
I bring with me today the special and sincere regrets
of Secretary Simon. He had looked forward to this occasion
because he wanted to talk with you about the new directions
of the Administration policy and most particularly because
he wanted you to know how vital he believes the health of the
housing industry is to our country. Unfortunately his calendar
as chief economic spokesman is not his own these days.
These are indeed troubling times for all Americans.
Millions of men and women are out of work and cannot find
jobs as the economy continues one of its sharpest declines
since the war. Millions of others are suffering hardships
because the rate of inflation continues to take a heavy toll.
And I know that your industry, like the automobile industry,
is especially hardhit and worried about the future.
We need no more examples than the events of the past
year to conclude that even our enormous economy, when
beset from without by such potent adversity as the oil embargo
and from within by years of fiscal overstimulation, is going
to react like everyone else's economy.
Recession, growing unemployment, inflation, are the
background for, but not the subject of, my talk today. I
want to deal with some subjective issues which bear on our
ability to regain a course of economic progress, to overcome
our difficulties, all of which I firmly believe we can do.
It seems almost too elementary for me to suggest that
what has been achieved in our free economy through the
mechanism of the marketplace and the largely unplanned but
earnest efforts of men has created more social, economic
and political benefits than any society in history has ever
enjoyed. Routinely, we have defended most of these traditions,
ideals, our form of government and bragged about our success
as a land of opportunities, innovation and productivity where
a man could rise through the work of his own hands, his mind,
his ingenuity.
2
But strikingly, and perversely it seems, during the span
of years of our greatest successes, we have increasingly
denigrated, criticized, become embarrassed about, the core
mechanism, the profit motive that has driven our economic
machine.
I believe this rejection has been intensified,
however illogically, by our noble ventures in sbcial programs
to stamp out poverty, discrimination and our efforts to carry
the egalitarian banners of the free world.
Thus, in the economic storm swirling around us today
there is a strong and obvious bias towards transferring a
further sizable block of incentives and economic control
from the private to the public sector.
The American public
is restive, angry, hurt and deeply concerned.
There is a
rising clamor for government controls, intervention, regulation,
rationing, tariff protection and a policy of economic
nationalsim.
What this will do to the basic structure of our American
system is not my only worry.
What it will do to our
opportunities to restore economic growth and control inflation
is my immediate concern.
We have amassed in America impressive
evidence for future historians of the comparative abilities
of a free versus a planned economy.
And we need not draw our examples solely from our own
experiences.
When the engine of private enterprise is
sufficiently constrained, government loses its strongest
resource in the fight to restore economic and social progress.
That is just a simple fact.
Today government represents 33%
of G N P . The private sector is twice as large.
A "New Direction"
The President has been beset by this gathering storm
and he has been work i n g steadily to come up with solutions.
The media, the Congress, the people have urged h im to be
tough, and he has.
They have urged a strong energy program
and its there.
They have urged that he deal with recession
and he has, dramatically.
The p rogram that he presented to the
nation and to the Congress this past week represents the
results of many long hours of deliberation and documentation.
It is a complex program because our problems are complex.
But
I think that as it is debated and discussed in the coming weeks
it will be percieved to be a comprehensive and fair approach
to the crisis in our economy.
3
If I may use two words to sum it up, I w ould say that
the President's program sets us in a "new direction."
For months, our economy has been heading on a downward
course.
This program will help turn it around, putting America
back to work.
For more than a decade, we have had a growing dependence
upon foreign energy sources.
The President has staked out a
new direction of energy independence.
For more than four decades, we have also been heading
in the wrong direction on government
spending and
encouraging inflation.
The President is proposing a dramatic
change.
And the special virtue of this program is that it
marshalls the larger resources of the private sector through
incentives, tax relief and a tax cut and other measures absolutely
essential to economic growth.
I said earlier that government expenditures are 33%
of GNP but if the present trends of mandated program growth
continue/ OMB has estimated that by the end of the century
the government w ould dominate the economy and account for
66-2/3rds of our Gross National Product.
Governments by definition restrict, control, enforce
laws, tax people:
in essence, defend the status quol
They
are referees of the game.
They should hardly ever be allowed
to play.
The Economic Package
Now let me turn now to a discussion of key elements of
the President's prog r a m and it is divided essentially into
two packages — one to deal with immediate economic problems
and the other to deal wi t h long-range energy problems.
On the economic side, the President's main proposal is
a one-year across-the-board cut of $12 billion in individual
income taxes and a one-year cut of $4 billion for corporations
in the form of a short-term increase in the investment tax
credit.
Our best estimate is that the economy will begin
bottoming out during the spring and summer.
The President's
program would begin to take full effect during the summer,
and it would help to make the recovery sharper and stronger.
4
Some people have criticized the tax cut because it does
not return all of the money to lower and middle income
families. There are two answers to that charge. First,
when you combine the effects of this tax cut with the tax
reductions that are included in the energy package, you will
see that lower and middle income families come out substantially
ahead of everyone else. Secondly, in terms of solving our
immediate economic problems, we have to recognize that the
heart of the recession is in major consumer items —
housing,
automobiles and the like. We have to encourage people to
increase their purchases of these items. We will never
succeed in that venture if we put all of the tax reduction at
the very bottom of the tax scale. Some of it must go to your
market.
Other critics have said that we should give no further
incentives to business, aside from what I have said so far.
I can only believe that those critics no longer understand the
capital investment trends in this country. When are we going
to wake up to the fact that America is investing far less of
its resources in its future than almost any other industrialized
nation" From 1960 to 1973, the United States was devoting
less than one-fifth of its total output to capital investment —
a percentage that was smaller than Germany, France, Japan and
several other countries. Partly as a result, our annual
growth rate in productivity was only 3 percent during this
period, compared to 6 percent for the French and Germans and
more than 10 percent for the Japanese. Capital investment is
the key to expanding our industrial base to providing new jobs,
and the kind of economy that will support the social progress
that is unique in America.
Corporate profitability has been declining for more than
a decade, it is significantly lower now than it was
in the mid-1950s. If we want to put our domestic house in
order, it is absolutely essential that we improve the climate
for business investment, business expansion, and business
profit in this country. The President's program would help to
set us in the right direction.
A third kind of criticism is leveled at the tough new
ceiling the President wants to place on Federal spending*
The President is insisting that we enact no new spending
programs this year, except in energy, and that increases in
government pay, military retirement, Social Security, and similar
programs be held to 5 percent. To me, this cap on spending is
not only novel but courageous. Let us recognize two essential
points:
5
—
First, unless we hold down spending, we are courting
a new round of very serious double digit inflation.
I need not
remind you wh a t extremely high inflation rates and equally
high interest rates will do to the housing market.
As it is,
our energy crisis is going to require efforts that will raise
the consumer price index by two points or so.
That is a high
price, but we believe it is necessary for our long-range health.
We also believe that the back of the most virulent part of
inflation may now be broken and that the rate of inflation
should be coming down.
Last week's wholesale price figures,
showing a leveling off of industrial prices in December and
an actual reduction of all items together, was encouraging.
Our expectation is that the downward trend in the wholesale
prices will work their w ay through to consumer prices and
that even with the enactment of the full energy program, we
can reduce the rate of inflation to below the double digit
mark during 1975.
But, if we have a flood of new government
spending or if we turn to an excessively stimulative monetary
policy, we will lose.
Under those circumstances, we could very
easily set off another round of record-breaking inflation.
—
Secondly, let us recognize that in order to finance
its deficits, the Federal Government must enter the private
capital markets to borrow m o n e y . As a b o r r o w e r , the government
always goes at the head of the line, and if it borrows an
excessive amount of money, it can drive up interest rates for
everyone else.
One of our most critical concerns at the Treasury
Department is the growing domination of the private capital
markets by governments at all levels — local, state and
Federal. In the fiscal years 1973 and 1974 almost half of all
funds raised in the capital markets went to Government agencies
or government-sponsored agencies.
This year, because of the
tax reductions, we expect the level to be significantly higher.
This will mean that we will have a tight fit in the capital
markets, but we think that under the President's programs the
problem will be manageable.
However, if we turn on new g o vern
ment spending, the deficits could rise further, choking up
those markets and causing problems for the entire economy.
This is a result that we must avoid, and we can only avoid it
if we keep a tight lid oh n ew government spending.
The Energy Package
Essentially, the President faced three options in the
energy field:
He could do nothing, he could turn to rationing,
or he could use the pricing system to encourage greater cons e r
vation.
6
If he had done nothing, it should be clear that the
consequences would have been severe for both the United
States and the rest of the world. Five years ago, we were
paying about $3 billion a year for foreign oil. In 1974,
we paid out $24 billion for that oil, and this year the
figures could go higher still. The United States simply
cannot afford to ship so much of its national treasure over
seas and maintain its economic and political security.
Thus, we have no choice but to act.
We would be making a terrible mistake, however, if
our desire for action leads us down the path to rationing.
It would be an unacceptable bureaucratic nightmare.
The answer the President has chosen is the third
alternative — use of the pricing system to encourage con
servation — something practically every oil short nation in
the world has adopted. The price will be high, but it has
to be high to overcome the challenges we face. In brief,
the President is taking executive actions and asking the
Congress for legislative actions which would raise the
prices of most energy products by a total of about $30 billion
a year. In order to ensure that the higher prices do not
depress the economy, he is also asking for tax changes that
would return most of that money to consumers and to industry.
Our best estimate is that the average family would pay about
25 percent more for fuel than they have in the past, but at
least in the case of lower and middle income families who are carefu.
in the way they use energy, the tax reductions should more than
compensate for the higher costs. These measures are very tough,
and the President is holding additional measures in abeyance
in case even these fail to reduce our level of oil imports by
a million barrels a day.
Combined with the conservation measures, the President
is also pushing hard for Congressional actions that would in
crease our domestic production. It is incongruous to think
how much time and money we have wasted because of environmental
and legislative delays over energy. Private industry originally
estimated that the Alaskan pipeline could have been put in
service in 1973 at a total cost of about $900 million. Now,
because of delays, that pipeline will not become available
before late 1977, and its estimated costs are projected at $6
billion. There are similar problems with legislation which
would provide more natural gas to consumers, would open up the
petroleum reserves, and would allow greater use of our oil
resources off shore. The President’s program is intended to
7
unlock these resources and, in the most realistic approach
that this country has ever had towards its energy needs,
would free us from dependence on foreign energy sources by
1985.
Impact on Housing
I know that Secretary Lynn will be here soon and will
talk about the impact of the economic and energy program
on the housing industry.
I have no intention of poaching
upon his reserve.
But I wa n t to say three things about
your industry.
First, as you know, the Administration has proposed
financial insitution reform in an Act which was introduced
in Congress in 1973. This is an important structural
change which would overcome the anachronistic regulations
which restrict the freedom and viability of our financial
institutions, particularly thrift institutions.
We believe that the Financial Institutions A ct will
play an important part in helping to relieve the cyclical
pressures that have constrained the flow of funds available
for housing.
It will strengthen thrift institutions and
allow them to provide a more competitive full set of family
financial services to attract funds.
It will also provide
a clear incentive for housing lending through the mortgage
interest tax credit w h i c h will be available to all financial
institutions wh i c h provide m oney for home purchases.
Second, the private housing markets in America is
unique in the world.
No other economy has been able to provide
such a large proportion of its people wi t h single family
privately-owned residences or attractive alternatives
built by the private initiatives of e n t r e p r e n u e r s .
This I credit w i t h being a fundamental strength of our
enormous market for consumer goods and, in fact, it is the
real underlying strength of our private economy.
Those
who criticize the incentives to business that the President
prop o s e s , those w ho have criticized the tax cut as too
generous for people of average incomes are attacking your
business and forgetting that real social progress can only
come from a healthy job producing economy.
8
And finally, last year wi t h the financial markets in
disarray the Federal Government committed 20 billion dollars
in programs to aid in the financing of housing.
When I
look at the state of your business today I don't think I'll
be contradicted if I say it didn't do much good.
You need
a revived economy increasing personal incomes, less unemploy
ment in other words a healthy private sector more than all
the government subsidies man could possible devise.
Conclusion
To summarize, President Ford has presented us wi t h a
sweeping and comprehensive set of proposals to get this
country moving again despite a serious energy shortage.
The
time has come for action.
The President has acted, and he
has acted boldly. N o w it is time for the Congress to act.
Our prog r a m is before the people; as soon as the Congress
moves, we can get on wi t h the job.
0O0
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á. á V é
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á.3b°l ¿Lí^r
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¿. 3? 3
^ n rt»y ^ ¿ 7 ~
i ,f i f
ÿTn
r f f /7 $
. > c %
FOR RELEASE $:30 P.M.
January 20, 1975
RESULTS OF TREASURY’S WEEKLY BILL AUCTIONS
Tenders for $2.6 billion of 13-week Treasury bills and for $ 2 .2 billion
of 26-week Treasury bills, both series to be issued on January 23, 1975,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
13-week bills
maturing April 24, 1975
Equivalent
Annual Rate
Price
High
Low
Average
98.399
98.383
98.390
a/
6.334%
6.397%
6.369%
26-week bills
maturing
July 24, 1975
Price
1/
Equivalent
Annual Rate
96.796 b/
96.765
96.778
6.338%
6.399%
6.373%
1/
a./ Excepting 1 tender of $920,000
b/ Excepting 1 tender of $425,000
Tenders at the low price for the 13-week bills were allotted 89%.
Tenders at the low price for the 26-week bills were allotted 97%.
TOTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Applied For
Accepted
38, 095, 000 $
26, 155, 000
Boston
$
,266,
980, 000 2,109, 315, 000
New York
3
32,
505, 000
Philadelphia
31, 960, 000
46,
46, 230, 000
640, 000
Cleveland
30, 765, 000
Richmond
31, 085, 000
42, 105, 000
34, 815, 000
Atlanta
88 ,235, 000
Chicago
213, 335, 000
36, 0 10 ,000
49, 640, 000
St. Louis
14, 415, 000
10 ,095, 000
Minneapolis
63, 345, 000
Kansas City
51, 545, 000
25, 645, 000
Dallas
19, 545, 000
261, 260, 000
115, 890, 000
San Francisco
TOTALS
Applied For
$
Accepted
20 ,740, 000 $
10 ,740, 000
2 ,942, 975, 000 1 ,837, 645, 000
10 ,365, 000
10 ,265, 000
54,
72, 295, 000
965, 000
000
895,
16, 305, 000
15,
000
000
765,
24, 235,
19,
172, 865, 000
75, 850, 000
32, 235, 000
41, 735, 000
1 2 ,485, 000
7, 810, 000
29, 240, 000
23, 140, 000
18, 425, 000
1 2 ,535, 000
218, 235, 000
99, 235, 000
$4 ,085, 050, 000 $2,600, 560, 00Qc/ $3 ,579, 900, 000 $2 ,200 ,080 ,000
Includes $469,235,000 noncompetitive tenders accepted at average price.
— ' Includes $218,165,000 noncompetitive tenders accepted at average price.
.1/ These rates are on a bank-discount basis. The equivalent coupon-issue
yields are 6 *56% for
13-week bills, and 6.68% for the. 26-week bills.
Department of the T R E A S U R Y
NGTON,
D C. 20220
TELEPHONE W04-2Û41
January 21, 1975
MEMORANDUM TO THE TREASURY STAFF
For your information and guidance, we have
produced the transcript of the remarks made by
Secretary William E. Simon at a Treasury Department
Press Conference held on January 16, 1975.
Office of Public Affairs
Attachment
.DepartmentoftheTREASURY
20220
Kington,d.c.
telephone
W04-2Q41
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE HOUSE WAYS AND MEANS COMMITTEE
WASHINGTON, D.C., WEDNESDAY, JANUARY 22, 1975
It is a privilege to appear before this Committee as you
begin the work of the 94th Congress. during the next two years,
you will be considering many of the most significant issues
facing the United States. There will be times when we will
differ on those issues, but as in the last Congress, I want
to work with you as closely as possible to ensure that those
who are served best are those whom we all serve, the people
of this country. Toward that end, I pledge to this Committee
the full cooperation of my office and of all who work at the
Treasury Department.
President Ford, after considerable study and consultation,
I has proposed to the Congress an integrated and comprehensive
program in both the economic and energy fields. In my view,
the President's program represents the best means of dealing
with those problems.
In working with you, my first objective
will be to obtain swift passage of legislation that is neces
sary to carry out our program.
The occasion for my appearance this week is to discuss
two items: First, the President's tax proposals and their
impact on the economy; and secondly, the need to raise the
federal debt limit. With the consent of the Committee, I
propose to discuss the first of these items today and to ad
dress the second tomorrow.
The President's program is designed to deal with three
basic and urgent problems:
WS-200
2
--inflation ;
--recession; and,
--energy independence.
These problems are difficult and complex, and their
solutions will also be difficult and complex. To some extent,
the remedies work at cross purposes with each other. The
answers are neither black nor white, but matters of balance
and judgment.
Some say we can't solve all these problems, at least
not all at the same time. I believe we can. The President
believes we can, and has charted the course to do it. Indeed,
we have no other choice, for the penalty for inaction could
be frightening. We will ultimately be held responsible for
the results, no matter what the pollsters say today about
our approach.
The proposal for a temporary tax reduction to stimulate
the economy has the very highest priority and we urge that
you enact it immediately, even if that means separating it
from the other elements of the President's proposals. However,
all of the elements in the proposal are interrelated and,
therefore, I need to deal with them all here today.
Inflation.
Inflation, like interest, tends to compound.
It reached
an annual rate of more than 12% in 1974, the highest level
in peacetime history. The damage has been extensive. The
lifetime savings of many have shriveled in real terms.
Interest rates have risen to all time highs, with adverse
effects on the livelihoods of millions, on the opportunity
for families to own their own homes, and on the ability of
others to start or stay in business. The uncertainties cre
ated by inflation undermined the confidence of both consumers
and investors, with consequent damage to jobs and to the new
investment and increased productivity which are required to
stem inflation.
I do not believe that our economic system,
as we know it, could long survive such a trend. In 1919,
J. M. Keynes wrote:
"There is no subtler, no surer means of overturning
the existing basis of society than to debauch the
currency. The process engages all the hidden forces
of economic law on the side of destruction, and does
it in a manner which not one man in a million is
able to diagnose."
3
I'm told that statement was a follow-up by Keynes on a simi
lar remark of Lenin, to the effect that inflation could destroy
capitalism.
Inflation is popularly said to be caused by "too much
money chasing too few goods." That is an oversimplification,
but it captures the essential truth.
There have been many causes for this inflation, but, in
my opinion, the biggest single factor has been a prolonged
period of large government deficits, including the off-budget
lending and loan-guarantee programs.
The momentous growth in federal expenditures and federal
deficits has been truly startling.
It took 186 years for the
federal budget to reach $100 billion, a line it crossed in
1962, but then only nine more years to reach $200 billion, and
only four more years to break the $300 billion barrier. Reve
nues, of course, have not kept up with expenditures, so that
when we close the books on fiscal year 1975, we will have had
budget deficits in 14 of the last 15 vears--and the accumulated
debt for that period alone will exceed $130 billion.
There can be no doubt about the inflationary impact of
such huge deficits. They added enormously to aggregate demand
for goods and services and were thus directly responsible for
upward pressures on the price level. Heavy borrowing by the
federal government has also been an important contributing factor
to the persistent rise in interest rates and to the strains
that have developed in money and capital markets--a subject
I will address in more detail tomorrow. Worse still, contin
uation of budget deficits has tended to undermine the confidence
of the public in the capacity of our government to deal with
inflation.
In short, when the federal budget runs a deficit
year after year, especially during periods of high economic
activity such as the ones we have enjoyed over the past decade,
it becomes a major source of economic and financial instability.
4
When the government runs a deficit--when it spends more
than it receives--it must borrow to make up the difference.
Under our modern monetary system, that kind of borrowing
almost always results, sooner or later, in the creation of
too much money. It seldom results in the commensurate
creation of additional goods and services.
Government borrowing does not necessarily require the
immediate creation of too much money, for the government
can borrow existing money in the private capital markets.
To that extent, it competes with private demands for capital,
preempts funds that would otherwise be used for private in
vestment and, in a period of strong private demand, causes
interest rates to rise.
If government borrowing in the private capital market
grows so large that it threatens to dry up credit for private
borrowers or causes abrupt changes in interest rates, the
Federal Reserve customarily steps into the market and pur
chases government bonds for its own account. The Federal
Reserve pays for that purchase not with money already in the
system, but by setting up a new credit balance on its books.
That almost immediately causes the total money supply to
increase by several times the amount of the credit. In this
way, the financing of large deficits causes the money supply
to increase substantially, which creates more inflation.
This has been a major part of the inflation explosion over
the past decade.
In times of recession, private borrowing typically
slackens as businessmen have fewer needs for credit. If
additional government deficits simply take up that slack,
it does not jeopardize the needs of the private sector and
does not drive up interest rates. In the current recession,
however, there may be less slackening in private demands
than usual because of the high debt-equity ratios that have
become typical, the general illiquidity of business, the
inability of corporations to raise capital in the equity
markets, and the necessity to finance inventories and capital
goods at inflated prices.
If we cannot finance the deficit within the recession
induced slack in the capital markets, then we shall have a
credit "shortage" that will drive up interest rates signif
icantly. The Federal Reserve could prevent that only by
significantly increasing the supply of money. As we assess
that situation, we must remember, too, that what appears to
be slack at the moment may disappear as business bounces back
5
and its demand for credit returns to normal. When the reces
sion is over, and goods and services have returned to their
original pre-recession levels, if the money supply has been
significantly increased, we shall have created additional
inflation.
There is no way to escape the basic dilemma presented
by large government deficits. On the one hand, if the def
icits cause a significant increase in the money supply, we
shall have further inflation. On the.other hand, if defi
cits are not permitted to increase the money supply, we must
be prepared to endure tight credit and high interest rates.
This^is a very difficult circle to break. The only
solution is to take a long-term view and resist the tempta
tion to deal with each painful aspect of the cure as a crisis
to be solved by short-term remedies, i.e., by more deficits.
A most important tool in beating inflation is increased
productivity. We need to encourage and facilitate conduct
that will increase the supply of goods and services, so that
the increased money supply that will surely flow from these
deficits will be chasing an amount of goods and services that
has also increased. Just getting back to pre-recession lev
els of goods and services is obviously not enough.
'.,- N •
Recession.
We are presently in a full-fledged recession. It is in sub
stantial part attributable to our inflationary excesses.
It
is the hangover that follows the revelry.
One of the major factors in the current recession is
the decline in the housing industry, which is a key component
in our economy. The housing industry is especially vulnera
ble to high interest rates, and was thus hard hit when infla
tion caused interest rates to rise to all time highs. Thus,
so far as housing goes, it is inflation itself which caused
the recession. We cannot expect the housing industry to
regain its full health until we get inflation under better
control.
6
It is tempting to believe that housing can be helped by
driving down interest rates through a more rapid increase in
the supply of money. That does not work in an inflationary
climate, however, because the increase in the money supply
further increases inflationary expectations, sometimes with
a lag and sometimes almost immediately, and thereby sends
interest rates not lower, but higher. Thus, housing is hurt,
rather than helped, by such policies.
In the same way, inflation was a major factor--perhaps
the major factor— in demolishing consumer confidence. Polls
taken by the Survey Research Center at the University of
Michigan show that the precipitous decline in consumer con
fidence began when prices started hitting new peaks —
well before the effects of the recession were clearly felt.
While the recession has driven confidence even lower, it was
inflation that pushed it over the brink. This loss of con
sumer confidence has caused the biggest drop in
consumer purchases since the Second World War and is a sig
nificant part of the current recession.
Some part of the recession is also attributable to the
program to bring inflation under control. When we embarked
on that program, we knew that it would dampen economic activ
ity, for that is an inevitable side effect of the process of
slowing inflation. The principal tool in winding down infla
tion has been a policy of monetary restraint, which was in
effect most of last year. If the money supply had been per
mitted to increase fast enough to accommodate all of the
price increases we were experiencing, the additional money
would have caused the prices to spiral even faster. Thus,
it was necessary to slow down the rate of growth in the money
supply. Whenever that is done, some are caught in the crunch.
Those are the hard trade-offs.
Inflation causes dis
locations. And stopping inflation causes additional disloca
tions. Dislocations cause the economy to fall off.
To cure our economic problems, we will have to adminis
ter the medicine continuously over a period of years. We
are a long way from full recovery. And we have to watch the
patient carefully all the while, because the side effects of
the medicine are strong and we may need to adjust the pre
scription from time to time.
7
Our goal must be to keep a balance. We want to do as
much as we can to stop inflation without unduly hampering
economic activity. At the same time, we all recognize today
that recession has become a much more serious problem, caus
ing widespread hardships and unemployment. Moreover, it has
developed more rapidly and has been steeper than anyone
expected. It is apparent that under these circumstances we
must shift the balance of our policies more heavily in the
direction of fighting the recession. The President’s recom
mendations for a temporary tax cut are designed to ensure
that the recovery we expect in the middle months of the year
is sharper and stronger than would otherwise be the case.
We can and must have recovery from the current recession,
but we must do that in a way that does not lead to an over
heating of the economy again. We will lose the
opportunity to achieve stable economic growth if we switch
to excessively stimulative policies. That has been the repet
itive pattern over the past decade. Every time the economy
showed signs of hesitation, there was a pronounced shift to
stimulative monetary and fiscal policies.
One of the best examples occurred only a short time ago.
After a rapid acceleration in the rate of inflation during
the late 1960's, a program of fiscal and monetary restraint
was started in 1969. As a result, inflation peaked out at
6% and then declined slowly to about 3-1/2% by 1972. The
upward momentum of inflation had been stopped. But then,
instead of maintaining the policies of moderation, we became
more expansive again and we very swiftly propelled ourselves
into the inflation that we are experiencing today.
The result of such stop-and-go policies is that we have
pushed the inflation rate up onto higher and higher plateaus.
In 1966, the peak inflation rate was about 4%; in 1970, it
was about 670; and now prices are rising at about a 12% rate.
The same process ratchetted interest rates higher and higher.
In 1966, rates on long corporate bonds peaked at a little
over 6%; in 1970, they reached almost 10%; and this past year,
the high was 12%.
8
Energy Independence.
Energy independence is both a political and an economic
problem for the United States.
Oil
is an extremely important and pervasive commodity
in our economy. In recent years, our consumption has risen
rapidly but our production has declined. We are now depen
dent on foreign sources for nearly 40% of our needs. Major
foreign suppliers have organized' a cartel and, at least at
present, have the power to bring about political and economic
spasms of the kind which we have recently experienced. In
the last year and half, the Arab embargo created major dis
ruptions throughout our economy, and the quadrupling of for
eign oil prices has contributed significantly to both the
inflation and the recession we are now experiencing.
Our economic system is strong and resilient and can
undoubtedly survive almost any unfortunate development that
is likely to occur in the near future with respect to oil.
But many other nations are less fortunate, and our own econ
omy is so interconnected with that of other nations that
their problems are in substantial degree our problems. Trou
ble in one or more national economies abroad could have very
serious effects on our own.
I ,\ |
If we are to retain control over our own economic des
tinies, we must achieve independence. We can do it. And
when it is clear that we intend to do it, we will regain a
great deal of control over the situation. We will control
very little from our knees.
The President's energy program is therefore designed
primarily to reduce our dependence on imported oil. In order
to do that, we will need to develop alternatives for oil and
we will also need to reduce our total demands for energy of
all kinds.,
We are dealing with a long-term program. We believe
we can achieve virtual independence in 10 years, but only
if we start promptly, work hard and continuously, and make
significant reductions in our demands for energy.
9
Rationing is one way of curbing demand and a number of
national leaders have proposed it. Public polls also show
a surprising amount of support for rationing.
I cannot imag
ine, however, that the American public will really want it
once they think it through or would live with it if they got
it. Remember that we are talking about a permanent program.
If we should opt to travel the rationing route, we will not
get rid of it. If we were to let it go we would--overnight-be again non-self-sufficient.
We could perhaps live with rationing in a period of
temporary emergency. But as a way of life, I suggest it is
fundamentally inconsistent with our system and with the
spirit of the American public.
Even in times of emergency, rationing has never worked
fairly or efficiently. To cut a million barrels a day from
our consumption by rationing only gasoline for private house
holds, we would have to hold drivers to an average of less
than 9 gallons per week--a reduction of about 25%
from today. To reach the 1977 goal of a 2 million barrels
a day reduction would require a second 257o reduction. Some
persons would obviously need more, which means that the basic
ration for ordinary persons would have to be even less. But
gasoline accounts for only part of each barrel of oil, and
we would clearly need to ration the remaining products, too-fuel oil, jet fuel, diesel fuel, refinery products going into
petrochemicals, etc. Who would decide which persons needed
more and which needed less of each of these things? Every
family, every car and motorbike, every store, school, church,
every manufacturer--everything and everybody--would have to
obtain a permit for a certain quantity of gasoline, electric
ity, natural gas, etc. Those allocations would have to be
changed every time someone was born or died or moved or got
married or divorced, and every time a business was started,
merged, sold out or bought another, or the church or school
added on a new room. And some government official would have
to approve it.
What would the rationing bureaucracy do about such cases
as:
The low-income worker who owns an old car that
gets only nine miles per gallon but can't afford
to trade it in? His affluent neighbor who buys
a new car that gets 22 miles per gallon?
10
The low-income family that heats with oil a
small but poorly insulated house, while their
wealthy neighbor heats a large, well-insulated
house with gas?
The Montana rancher who drives nearly 600 miles
per month and the Manhattan apartment dweller
who drives less than 100 miles?
.
The family that has to move from New York to
California and use up several months' coupons
in making the trip? One out of every five fam
ilies moves every year.
.
The family with sick members? The family that
does turn off the heat in empty rooms and the
family that does not? The family with few chil
dren and many rooms to heat and the family with
many children but few rooms?
The migrant worker who drives large distances
every year but can't afford a more economical
car?
.
The shortages that would inevitably develop.in
areas Where the coupons happen not to match the
gasoline supplies?
The gas stations, with limited quantities to
sell, that maintain only limited services and
are always closed on evenings and weekends?
The collusion, counterfeiting and illegal activ
ities that would inevitably develop?
Last year, when we considered the feasibility of ration
ing gasoline, we concluded that while it could be implemented,
it would take four to six months to set up, employ about 15
to 20,000 full-time people, incur $2 billion in federal costs,
use 40,000 post offices for distribution, and require 3,000
state and local boards to handle exceptions. When we con
sider the problems of just getting the mail delivered, are
we really ready to trust an army of civil servants--however
able and well-intentioned--to decide who deserves just what
of this basic commodity?
11
People should ask themselves which they prefer:
the
suggested increase in prices, or a system in which someone
else could tell them now and for the indefinite future where
and when they might drive or how warm they might keep which
rooms.
Does anyone honestly believe that the American public
is willing to trade these basic freedoms--in perpetuity--for
10^ a gallon?
The President has proposed instead that we reduce con
sumption of oil by the most neutral and least bureaucratic
system available--through the price system. The energy pro
posals would raise the price of oil. At the same time, income
tax cuts would increase the disposable incomes of every house
hold. Taxpayers could, if they wish, continue to purchase
more expensive oil and oil products. And they would have
extra money to do it with. The question they would face is
whether they wish to spend that extra money for more expen
sive oil or whether they wish to use it for some other pur
pose. A great many will choose to use it for other purposes.
That is particularly true of businesses, which alertly switch
to alternative products when a price advantage appears. The
economic data available, updated by the experience of the
last year, indicate that a tax of 10^ a gallon spread across
all the products manufactured from a barrel of crude oil will
reduce consumption enough to meet our goals.
'
There has been a great deal of talk about the public
being willing to make sacrifices. I believe they are. But
for the average consumer this program should involve little
sacrifice. For most, it would not even involve inconvenience
or extra expense. The average consumer would be faced with
higher oil prices, but he would also have additional money
that would fully compensate him. He would retain total free
dom of choice.
I realize that it is not immediately apparent to the
average citizen how this program as a whole would reduce con
sumption and yet cost him little or nothing. Education is
essential and I am counting heavily on the objectivity and
expertise of this Committee and its able staff to achieve it.
12
The Need for Business Tax Relief.
The proposed program provides tax relief for both indi
viduals and business. Individual income taxes account for
about three times as much revenue as corporate income taxes,
and relief would be allotted in that same three-to-one ratio.
Businesses, like people, have been badly buffeted by
our economic difficulties. Many are in precarious financial
situations. One need only look at the unemployment rolls in
Detroit to see how important it is to all of us to maintain
a healthy climate for business. Surely, the misfortunes of
the auto industry have created many more hardships for auto
workers than for auto stockholders. We will all be losers
if our businesses are unable to earn reasonable profits and
thus to make the investments that will mean more jobs and
greater productivity in the future.
The suggestion in recent years that businesses have
prospered while individuals have suffered is simply untrue.
Corporate profits in the aggregate, realistically stated,
are at an all time low as a percentage of our total national
income.
Reported profits may be higher than in the past, but
they do not tell the full story. There are two major elements
which substantially overstate reported earnings in periods
of inflation. They are inventories and depreciation.
The inventory situation may be illustrated by assuming
a company that normally maintains an inventory of 100,000
widgets.
If inflation causes the price of widgets to increase
by $1, from $2 to $3, under traditional FIFO accounting the
$100,000 increase in the value of the inventories is reported
as profits, even though the company is no better off in real
terms than it was before the inflation. Economists have
long recognized that this increase is not a true "profit" and
the Department of Commerce national income accounts have,
from the inception of those accounts in the 1940's, separated
it from profit figures.
For 30 years, business taxpayers have been permitted
to exclude these amounts from taxable income, but only if
they reported on the same basis to their shareholders and the
public. Many businesses have preferred to pay higher taxes
rather than report lesser earnings to their shareholders.
With the rapid inflation which has occurred in the last year,
however, the penalty in increased taxes on unreal income has
13
become so great that there has been a major shift to LIFO
accounting. This is long overdue and I regret that it has
taken the business world and the accounting profession so
long to get there.
A similar situation exists with respect to depreciation.
In a period of rapid inflation, depreciation deductions based
on historical cost result in reporting as income amounts
which do not represent an increase in wealth but which are
required merely to stay even. In a period of constant and
substantial inflation, this subject urgently needs re-exami
nation. Under current tax and accounting rules, business
management is powerless to deal effectively with this problem.
Businessmen often complain that depreciation charges are too
low for tax purposes because of this factor but their cred
ibility is severely impaired by the fact that, more often
than not, they report to their shareholders and the public
less depreciation (and therefore more income) than that which
they are permitted to deduct for tax purposes.
In fairness, I must note that the inventory and depre
ciation problems are more complex than meets the eye and
raise further arguments about whether other items, too, should
be adjusted.
Nonetheless, the effects of the inventory and deprecia
tion adjustments by themselves produce dramatic overstatement
of real income: Nonfinancial corporations reported profits
after taxes in 1974 of $65.5 billion as compared to $38.2
billion in 1965, an apparent 71% increase. But when depre
ciation is calculated on a basis that provides a more
realistic accounting for the current value of the capital
used in production and when the effect of inflation on inven
tory values is eliminated, after-tax profits actually declined
by 50%, from $37.0 billion in 1965 to $20.6 billion in 1974.
A major factor contributing to this decline is that income
taxes were payable on these fictitious elements of profits.
That resulted in a rise in the effective tax rate on true
profits from about 43% in 1965 to 69% in 1974. Thus, a real
istic calculation shows that the sharp rise in reported prof
its was an optical illusion caused by inflation.
Since, in our economy, corporate profits are the major
source of funds for new investment in productive capacity,
all of this has grave implications for investment and growth.
That is perhaps seen best in the figures for<undistributed
Profits of nonfinancial corporations, restated on the same
basis to account realistically for inventories and deprecia
tion. It is the undistributed profits that corporations have
left to fund additional new capacity (as distinguished from
14
^
^
“ 6
V J )
Uthere
l l d . C Wwere
c lc
In 1965,
§20 billion of undistributed profits. By 1973— after eight
years in which real GNP (the rest of the economy) grew 36%-the undistributed profits of nonfinancial corporations had
dropped to $6 billion. And for 1974, our preliminary estimate
is that the figure for undistributed profits is a minus of
nearly $10 billion. That means that there was not nearly
enough even to replace existing capacity, and nothing to
finance investment in additional new capacity.
The following chart shows with dramatic--and frightening--clarity the true state of affairs.
UNDISTRIBUTED PROFITS OF
NONFINANCIAL CORPORATIONS
AS A
PERCENT OF GNP, 1946-74
WITH CURRENT
VALUATION OF
INVENTORIES
AND
REPORTED
-1 L . i
1946
i
iJ
‘50
i i
i
l i
'54
i
i
I
‘58
i
i i__I i
‘62
i
i
l
‘66
i
i i
I
70
i
i
i I
74
The business community is properly distressed that the
public does not realize the seriousness of this situation.
I have to say, however, that at least a portion of the blame
can be laid at the door of business itself. Businesses like
to report high earnings to their shareholders and to the
public. Reported earnings are the "report card" for manage
ment. The willingness of business to continue using methods
which overstate real economic incomes in an inflationary
period leads the public to believe that business is a major
beneficiary of rising prices. That causes the man in the
street to believe that the total income pie is larger and
that he has a legitimate claim on it, which, in turn, height
ens the wage spiral and intensifies the squeeze on corporate
profits and the difficulty of capital formation.
15
The fact that these overstated profits are also subject
to tax presents a serious problem that we hope you will look
into when you turn to tax reform later this year. The prob
lem is too complex to deal with quickly, but it may affect
the ultimate use of the revenues allotted to business relief.
ate
;
While the deterioration of business profits may not be
apparent to the man in the street, or even in the stockholders'
reports, the professionals have not been fooled. The devas
tating effect of inflation on business profits has been
reflected in sharp price drops in the equity markets. This
decline in the stock market has rendered it practically impos
sible for most companies to raise money on favorable terms
in the equity markets. As a result, corporations have been
forced to rely more heavily on borrowed money, thus raising
their debt-equity ratios to unusually high levels and driv
ing up interest rates. Such interest rates become a major
depressant on corporate earnings. Equally important, the
lessening of the equity "cushion" leaves businesses inflex
ible and very vulnerable to bankruptcies in a business down
turn.
The oil and environmental problems have been a further
and major exacerbation. The past year's increase in the cost
of petroleum products has rendered many business operations
substantially less profitable, if not unprofitable. The air
line, auto, travel, and electric utility industries--which
are all closely related to oil usage--were hard hit. Increased
oil prices have caused lower profits, lesser incomes, and
fewer jobs in many businesses--which, stated another way,
means that businesses were not able to pass on fully increased
energy costs, and were required to absorb a significant por
tion in the form of lesser profits.
I
All of these developments argue strongly that tax relief
for business is both desqk'ved and required. We should also
keep in mind that our system of business taxation bears more
heavily on corporations than do the tax systems of almost
every other major industrial nation. Our provisions for cap
ital recovery are more restrictive than those in most other
countries. More importantly, almost all our major trading
partners have in the last few years largely eliminated the
classical two-tier system of corporate taxation in which
income is taxed once at the corporate level and again at the
shareholder level. Through a variety of meqhanisms they have
adopted systems of "integrating" the personal and individual
income taxes so that the double taxation element is eliminated
or radically lessened. This has occurred in Canada, the
16
United Kingdom, France, Germany, Japan, and Belgium. The
European Economic Community is asking that all of its members
adopt such a system. While the complexities of this subject
are best left for another occasion, the point I am making
does bear on the general question of whether the tax burden
on our corporations is excessive and should be relieved in
some degree.
The Need for Anti-Recession Stimulus.
The need for some form of stimulation must be apparent
to every member of this Committee. The recession is already
serious and it will get worse before it gets better. Our
latest estimates indicate that the rate of unemployment should
rise to approximately 8%. We continue to believe, in fact,
that even in the absence of further stimulation the economy
should bottom out in the middle months of the year and that
we should begin a recovery phase thereafter. The temporary
tax cut would be of significant help in making the recovery
more solid and more certain. It would also help to reduce
the unemployment rate from what it might otherwise be. More
over, since we are likely to have a margin of slack in the
economy for some time, taxes can be cut temporarily without
seriously compromising our efforts against inflation. Under
these circumstances, we should do what we can to strengthen
the economy through a temporary reduction in taxes. :
$16 Billion Temporary Anti-Recession Tax Cut.
In order to provide the needed economic stimulus, the
President proposes a one-time, temporary tax reduction of
$16 billion, to be placed in effect within the next 90 days.
Making it temporary avoids building into the system the
larger deficits that would later refuel inflation.
The temporary tax reduction will be an across-the-board
refund or tax reduction for all taxpayers. The total of
$16 billion is allotted $12 billion to individual taxpayers
and $4 billion to business taxpayers, which is the same 3 to 1
ratio that individual income taxes bear to corporate income
taxes.
17
Refund of 1974 Taxes to Individuals.
Individual taxpayers will receive a refund of 127« of
their income taxes for 1974, with a maximum refund of $1,000
per tax return. The great majority of taxpayers would thus
benefit in proportion to the income taxes they pay for 1974,
but high-income individuals would not receive excessively
large refunds.
Taxpayers are now filing their income tax returns for
1974 and nearly all will be filed by April 15. All taxpayers
will continue to file their returns and pay income tax in
accordance with present law. After their returns are filed,
the Internal Revenue Service will calculate the amount of
their refund, which will then be paid to them by checks in
two equal installments.
I cannot emphasize too strongly the point that individ
uals should continue to file their tax returns in accordance
with existing law. The sooner they do that, the sooner the
system will be able to process their returns and mail their
refunds. They should, under no circumstances, try to compute
and deduct their own refunds. If they do, they will face
possible fines and penalties and, at a minimum, an Internal
Revenue Service examination of their return will probably be
necessary to straighten out their final liability.
If, as requested by the President, the 12% refund is
enacted by April 1, 1975:
--refund checks for the first installment--in total
about $6 billion--would begin to be mailed in
May and would continue through June as the later
filed returns are processed; and
--refund checks for the second installment of the
remaining $6 billion would be mailed in September.
18
The effect of the tax refund can be illustrated for a
family of four as follows:
Adjusted
Gross Income
Present
Tax
$
$
5,000
7,000
10,000
12,500
15,000
20,000
40,000
50,000
60,000
100,000
200,000
98
402
867
1,261
1,699
2,660
7,958
11,465
15,460
33,340
85,620
Proposed
Refund
$
12
48
104
151
204
319
955
1,000
1,000
1,000
1,000
Percent
Saving
-12.0%
-12.0
-12.C
-12.0
-12.0
-12.0
-12.0
- 8.7
- 6.5
- 3.0
- 1.2
Taxpayers with incomes of less than $15,000 now pay
31% of the income tax, and they will receive 36% of the
refund. Eighty percent of the refund will go to taxpayers
with less than $30,000 of income who pay 68% of the income
tax. At the upper extreme, 24% of the income tax is paid by
taxpayers with incomes in excess of $40,000. These taxpayers
will receive only 11% of the refund.
Adjusted
Gross Income
Less Than:
$
10,000
15.000
20.000
30.000
40.000
50.000
100,000
Percent of
1974 Tax
Liability
Before Refund
13.0%
30.8
48.4
68.5
76.3
80.8
90.8
Percent of
Refund
15.1%
36.0
56.6
80.0
89.1
93.4
98.7
19
This proposed method of tax relief has the following
advantages:
.
Larger amounts can be returned faster by mail
ing refund checks based on 1974 taxes, than by
reducing tax liabilities for the year 1975.
A reduction in 1975 tax liabilities would be
achieved through reductions in withholding.
It would not occur for at least a month after
enactment of the tax reduction and then only
in relatively small weekly or biweekly amounts
stretching all the way through December of
this year.
. With
will
they
thus
a refund based on 1974 taxes, taxpayers
know more precisely the total reduction
will receive and can plan accordingly,
accelerating the stimulative impact.
Receipt of two relatively large refund checks
should have a greater psychological effect on
family budget decisions and consumption atti
tudes than receiving the same total a few
dollars at a time, thus increasing the impact
of the $12 billion temporary tax reduction.'
This should also help the sales of cars, fur
nishings and other big ticket items that have
been depressed by the recessior.
.
With a refund based on 1974 taxes, taxpayers
will be assured of getting the refund whether
or not their incomes may be reduced or uncer
tain in 1975. Thus, taxpayers who had jobs
in 1974 but are now unemployed would be
assured of refunds; they would not receive
such refunds if they were applied only to
1975 income.
Paying the refund in two checks rather than
one will ease the strains on the capital
markets that would be caused by the Treasury's
financing of the entire amount all at once.
20
Emergency 12% Investment Credit.
The remaining $4 billion of the total $16 billion
temporary tax refund and reduction will go to corporations,
farmers and other business firms in the form of a one-year
increase in the investment tax credit. That should stimulate
the demand for capital goods and help increase productivity
and employment.
The investment tax credit would be increased temporarily
to 12% for qualified machinery and equipment placed in ser
vice in 1975 or ordered by the end of 1975 and placed in
service by the end of 1976. As under existing law, special
rules apply to property constructed by the taxpayer or to
his special order.
We propose that this increase in the investment credit
be effective beginning January 1, 1975. That is extremely
important, as we want businesses to move ahead promptly with
new investment, and it would be most undesirable if they were
to suspend purchases and orders until Congress has finally
acted. For this reason, Congress has in the past adopted a
retroactive effective date like that proposed, and based on
our conversations with members of the tax writing committees
we are confident that it will do so here, tOQ if the proposal
for an increase is ultimately enacted.
•Because of the need for speedy enactment and because
this emergency increase in the rate of the investment tax
credit is for only one year, no other changes or restructur
ing of the present investment tax credit are proposed at
this time, except for utilities.
Because of the particular
plight of the Nation's regulated public utilities, we
recommend that the following additional changes be made:
The discrimination against public utilities,
which under current law are allowed only a
4% investment credit, would be eliminated
permanently. Under the temporary emergency
investment tax credit, and thereafter, public
utilities would receive the same general
investment credit rate as other businesses.
The provision of present law which limits the
maximum credit to 50% of liability for tax in
excess of $25,000 would be modified in the case
of regulated public utilities. The limitation
would be increased to 75% in 1975, and be
reduced by 5 percentage points each year
through 1979, returning to 50% in 1980.
21
The proposed 12% rate would be extended for two addi
tional years, through 1977, for property, not fired by
oil or gas, that provides power to electric generating
facilities, including property converted from oil or gas
use. This two-year extension will provide significant
incentives for the development and use of nuclear, geo
thermal, coal, hydro, solar and other petroleum-saving
power sources.
Increasing the rate of the investment tax credit has
proved very helpful in reversing adverse economic trends. When
the investment tax credit was repealed and other provisions
increasing the tax burden on business were enacted in 1969,
there followed a period of rising unemployment and business
stagnation. Subsequent to the reenactment of the credit in
1971, new investment increased by 9% in 1972 and 13% in 1973.
Further, in the period 1972-1973 industrial production in
creased 19% and there was a significant decline in unemploy
ment.
Energy Taxes in General
The goal of the energy tax package is to reduce total
consumption of oil and natural gas, which will reduce imports
in like amount.
The package has three parts:
(1) An import fee increase ultimately settling at $2
per barrel on crude oil and products and a corresponding
excise tax on domestic crude oil.
(2) Decontrol of crude oil prices and a Windfall
Profits Tax.
(3) Price decontrol of new natural gas and the equivalent
of the' ?2/bbl. oil excise tax (namely, 37 cents/thousand
cubic feet) on all natural gas, to curtail its use and
discourage switching from fuel oil to natural gas.
This combination of fees, taxes and decontrol will raise
the prices of oil, and gas and related products relative to
other prices. That will discourage their unnecessary use,
encourage the substitution of other energy sources, and
induce the replacement of existing energy-using devices.
22
m
Gasoline Tax as Alternative.
Many persons have suggested that a gasoline tax would be
preferable to taxes on crude oil.
There are several reasons for preferring a tax on crude
oil to a gasoline tax:
A price increase in crude oil is far more effec
tive in reducing consumption than a gasoline price
increase. The increased prices under the proposals
amount to about 10^ per gallon, distributed across
all of the products that come from a barrel of
crude.
It would take a gasoline tax of 45^ to
50^ per gallon to achieve the same reduction in
consumption. There are two explanations for that.
First, since the price of gasoline is higher than
for other refinery products, a larger cents per
gallon change is required to get the same per
centage change. Second, gasoline accounts for
only about 40% of the barrel of crude and a tax
on only 40% must obviously be higher than a tax
on 100%.
With a 45^ to
would rise an
compares with
billion under
50(6 gasoline tax, gasoline prices
aggregate of $45 billion. That
oil price increases of .only $21
the proposed program.
Crude oil--not gasoline--is the problem. We want
to reduce consumption of each of the elements in
a barrel of crude.
There is just as much opportunity to conserve
other petroleum products and other forms of
energy and energy intensive products as there
is to conserve gasoline. For example, many
thermostats could be turned down with no real
discomfort. Our trash cans are heaped with
direct petroleum products such as plastics, and
other products that require large amounts of
petroleum related energy to create, such as
aluminum. We can conserve a little on a wide
range of items and save a lot in total.
It is fairer to let all petroleum users make a
moderate adjustment than to impose a drastic
increase on just gasoline users. And it is
23
easier for the economy as a whole to accommodate
a moderate, broadly distributed increase than
a very large, more narrowly based increase.
The proposals avoid devastating the automobile
industry, the travel industry, and others which
depend on gasoline for survival.
$2 License Fee and Excise.
The U.S. now imports about 4.1 million barrels per day
of crude oil and about 2.6 million barrels per day of fuel
oil and other refinery products. An additional import fee
of $2 per barrel on crude and product is to be imposed in
stages of $1 each on February 1 and March 1 by Presidential
Proclamation under the authority of the Trade Expansion Act
of 1962. In addition, if Congress has not enacted the excise
tax on domestic oil by that time, the import fee will be
raised another $1 on April 1, for a total increase of $3.
Adjustments in the fees on imported products will be made to
reflect obligations under the old entitlements program.
The $2 per barrel increase in the fee will raise the
average price of imported crude oil and its products by $2
per barrel. In the case of crude oil, that means an increase
from around $11 per barrel to $13 per barrel. Domestic crude
would also sell at about $13 per barrel, and the excise tax
of $2 would leave the effective price to domestic producers
also at $11 per barrel.
The import fees will bring in revenues of $3.2 billion
in 1975 and $4.1 billion in 1976 and the excise tax will
raise $4.8 billion in 1975 and $7.2 billion in 1976.
Decontrol and Windfall Profits Tax.
Last year the United States produced 9.2 million barrels
of crude oil per day. We now produce only about 8.8 million
barrels of crude oil per day, approximately 607« of which, or
5.3 million barrels, sell at an average price of $5.25 per
barrel because of price controls.
If present controls con
tinue, this year’s production will decline further to per
haps 8.6 million barrels per day. Our system of price con
trols is seriously counterproductive to our need for greater
domestic supplies.
24 An illustration of the way that price controls discour
age production occurs in connection with the "stripper well"
exemption, which permits oil produced from leases which
average fewer than 10 barrels per day per well to sell at
the world price. The exemption encourages producers to let
their wells decline from 15 or 16 barrels a day to 9.9 bar
rels per day. They actually make money by suffering a pro
duction decline.
Another illustration arises in connection with secondary
and tertiary recovery processes, which are used to stimulate
additional production after original production has declined.
Those processes are costly and part of our production decline
is attributable to the fact that they are uneconomic at con
trolled prices. Money will not be invested to produce more
controlled oil at $5.25 per barrel if it can be invested in
producing uncontrolled oil at $11 per barrel, or in some
completely unrelated business at a higher rate of return.
Regulation of prices drives people out of the regulated busi
ness and into other lines of business not so subject to
uncalculable, nonmarket risks. Price controls were imposed
as a means of preventing windfall profits, but clearly we
must find a more sensible approach.
The combination of price decontrol and the Windfall
Profits Tax is a workable solution to the problem. In 1975,
we estimate that a producer of controlled oil would receive
$11 per barrel after decontrol (net of the $2 excise), or
an increase in price of $5.75 per barrel ($11.00 - $5.25 =
$5.75). The Windfall Profits Tax proposed would average
$4.53 per barrel, reducing the producer's net price increase
to $1.22 per barrel. That $1.22 translates into about 76^
per barrel after tax.
After decontrol, the price for all oil will be the same,
thus eliminating all the inefficiencies of the two-tier pric
ing system. Producers of uncontrolled oil will begin to pay
a windfall tax on the increased prices they have enjoyed for
more than a year. As a result, they will pay $2.81 per bar
rel more tax on those increased profits than they paid last
year. Producers of controlled oil will begin to receive the
same increased prices but will be permitted to keep only 76^
of that increase. Both controlled and uncontrolled oil will
receive the same prices and pay the same taxes.
25
Price per barrel
Former price
Net price increase
Windfall Profits Tax
Gain (loss)
Income tax at 38%*
Net effect after tax
Uncontrolled
Oil
Controlled
Oil
$11.00
( 11.00)
-0( 4.53)
( 4.53)
1.72
(? T.'8'l)
$11.00
( 5.25)
5.75
( 4.53)
1.22
(
.46)
$ 7TB
^Corporate rate of 48% adjusted for percentage
depletion and minimum tax.
Most significant producers have both controlled and
uncontrolled oil and, compared with last year, they will net
less on the uncontrolled oil and net more on the controlled
oil. For the industry as a whole, net after-tax income will
be reduced by $2 billion, which means that the benefits from
decontrol will be more than offset--by $2 billion--by addi
tional taxes paid to the Treasury. Those Treasury revenues
are among those to be returned to taxpayers in the form of
tax reductions.
The concept of the proposed Windfall Profits Tax is the
same in general as the Windfall Profits Tax proposed last
year, although the new proposal has been structured' to raise
substantially higher revenues. In summary, the tax is designed
to capture a windfall profit--that is, one which results
from a sudden change in price caused by a circumstance which
is accidental and transitory.
It is difficult to separate
ordinary market prices from prices which permit windfall
profits (or "excess" profits if one wishes to think of it
that way). We have made an estimate--a judgment--as to the
"long-term supply price," i.e., the minimum price to producers
that will be sufficient to induce an increase in our supplies
of oil sufficient to make us energy independent by 1985. Our
judgment is that the price required for this is around $7 to
$8 at today's price levels, assuming the continuation of per
centage depletion. The tax is designed to permit producers
to retain an amount equal to the long-term supply price by
the time additional oil supplies will be coming on line three
to five years from now.*
^Tt percentage depletion should be eliminated, the net to
producers from a $7 to $8 price would be reduced, a higher
Price would be required to produce the same net return and
the same oil production, and the proposed Windfall Profits
lax base and brackets would need to be revised upwards
accordingly.
26
The proposal does not include a credit for so-called
"plowback" investments, nor does it include exemptions for
certain classes of producers. Plowback is not justified
because the amounts oil producers will retain, after the tax
as it is structured, will provide a price incentive sufficient
to attain our energy independence goals. To put it another
way, there is no convincing evidence that permitting a plowback credit will produce significantly more energy than not
doing so. Further, a plowback credit means that persons
already engaged in oil production can make investments with
tax dollars supplied by the government, while new investors
must use their own money. We do not believe that kind of
discrimination and anti-competitive effect can be justified.
In the case of different classes of producers, we simply
believe that a windfall produced by cartel prices is a wind
fall to large and small producers, high- and low-cost pro
ducers and producers located everywhere. Producers all
receive a cartel price and not a free-market price.
The issue of plowbacks and special exemptions ultimately
boils down to whether windfall profits should go to oil pro
ducers or to the public in the form of tax reductions. The
permanent tax reductions proposed depend upon the government
receiving these revenues. If the revenues are curtailed, the
tax reductions will need to be curtailed, too. We have tried
to design a tax that will not inhibit those investments in
oil production which are economic and which are needed to
reach our goals. If we believed that the tax would inhibit
needed investment, we would not propose it. Plowback credits
and special exemptions would undoubtedly make existing oil
producers wealthier than they would otherwise be, but would
not significantly increase oil production.
It is taxpayers
generally who pay the prices that produce the windfall, and
the revenues should go for the benefit of taxpayers generally.
27
Decontrol of New Natural Gas and Excise Tax.
Natural gas shortages last year forced major curtailments
of supplies to many industrial firms and denial of service to
many new residential customers. Curtailments and denials
are much greater this year and are causing not only extra
costs and hardships, but, in many cases, business close
downs and loss of jobs.
New natural gas goes primarily into intrastate, uncon
trolled markets where prices range around $1 per thousand
cubic feet ("m.c.f."). Gas in the interstate market averages
less than 40j£/m.c.f. The result is that interstate supplies
are insufficient, and the energy gap in nonproducing states
is made up with imported oil, which on a BTU equivalent basis
costs about $2.00, and with imported liquefied natural gas at
$1.80/m.c.f. Deregulation will permit new domestic gas to
flow into the interstate markets with an aggregate savings
to existing customers in those markets, an end to curtailments,
and a net saving in national resources.
Whether or not new natural gas is deregulated, the
President proposes an excise tax of 37(6/m.c.f. on natural gas.
That is equivalent, on a BTU basis, to the proposed $2.00
excise tax on oil and will prevent fuel oil users from switch
ing to gas. It will also bring the average interstate price
close to the market clearing price (the price at which supply
and demand will coincide), and end the careless use of this
fuel by those for whom it is cheap at present prices.
An equivalent tax, based on BTU content, will also be
placed on natural gas liquids. Gas wells produce about 86
percent MwetM gases and 14 percent "dry" gases. The wet gases
are treated to remove the natural gas liquids, such as propane
and butane, and the dry gas goes on into the natural gas pipe
line. The dry gas and liquids will thus be treated consistently.
For example, the tax on natural gas liquids sold in mixed
stream would be $1.43 per barrel.
The liabilities for this tax would be $6.3 billion i n calendar 1975 and $8.5 billion in calendar 1976.
Effectiveness of Energy Package.
The energy package will reduce consumption significantly,
with modest adjustments by most of our citizens.
28
It is natural for businessmen and consumers to react
to a sudden increase in price of particular goods with the
thought: "This will merely increase my costs. It won’t
cause me to reduce my purchases." That reaction reflects
the fact that we are creatures of habit. But we are also
rational beings who adapt our habits to changing circumstances.
When meat prices rose sharply in the early months of
1973, the instantaneous response was a loud complaint as each
of us found his grocery bill inflated.
In time, we adjusted
to the higher price by buying less meat. There is no doubt
that the portions of meat being served by many families
today are smaller than they were only three years ago. We
didn't like it, but it had to be done. There was no other
way to adjust to the new situation--no way that was better.
So it will be with energy. None of us relishes the
prospect of higher oil and gas prices. We have all developed
habits of energy use conditioned by two decades of declining
relative prices of energy. As in the recent experience with
meat, after the initial shock of resentment at the higher
prices of petroleum products and gas, our rational selves
will take over and we individually and collectively will
find ways to reduce our useage of energy.
Immediately, we will slice smaller portions of the energy
pie for ourselves:
We will turn off the lights when we leave
the room to save electricity bills.
Thermostats will be adjusted downward in
winter, upward in summer, and heat will be
turned off in rooms not in use.
Marginal trips in cars will not be taken;
some second and third cars will be scrapped.
Married couples will look closer-in for
their first home, and possibly settle for
an apartment instead of a detached home; and
owners of homes and buildings who formerly
considered the fuel savings from insulation,
weather-stripping, and otherwise improving
the thermal efficiency of structures too
costly to obtain will now reconsider.
29
Equally important, over the longer run:
Industrial firms, ever on the lookout to
cut costs, will speed-up the replacement
of energy-using machinery and processes
that were perfectly adequate in the days
when oil cost $3 a barrel and gas only a
few cents per thousand cubic feet, with
substitute equipment and processes that
may have higher initial costs but which
consume less energy and thus have lower
over-all costs of operation.
Families will replace their present autos
featuring comfort and speed at the expense
of low mileage with lighter and more utilitarian
cars that use less of the now expensive energy;
and they may eliminate some of their most
frivolous appliances while replacing others
with initially more costly but more energyefficient substitutes.
Materials which require large amounts of
energy to produce will be displaced by
substitute materials which have become
relatively cheaper because their production
consumes less energy.
More recycling will occur.
The higher relative cost of oil and gas
as energy resources will stimulate the
development of other energy sources. Oil
and gas will fill a smaller share of energy
requirements. Just as coal displaced wood
as our basic energy source, and oil and gas
displaced coal, oil and gas will be
displaced.
All of these examples are illustrations of what in the
technical jargon of economics is known as "price elasticity
of demand": quantities of things consumed decrease when
their prices rise relatively to other prices. Every food
merchant knows he will sell more bananas and oranges when.a
crop failure causes the prices of apples and pears to^be^
high, and vice-versa.
He may not have heard the term price
elasticity," but he knows how it operates,.
30
Yet many remain skeptical that there is price elasticity
in the demand for oil, or that if there is any, whether it
is sufficiently large to make any difference in the volume
of our oil imports. Experience since 1973 should put doubt
to rest even if the findings of such major research efforts
as those of the Ford Foundation Energy Project and the
Federal Energy Administration do not.
For example, during the decade prior to 1974 when utility
rates were steady, consumption of electric energy increased
at a rate of 7.4%. Normally, one would expect any given
period in 1974 to be 7.4%, higher than the comparable period
of 1973. But for the six-month period April through September,
1974 consumption was not 7.4% above 1973, it was one percent
less, a swing of 8.4 percentage points below expectation.
Some of this reduction in consumption could be attributed to
the then just perceptible slowing-down of the economy, but a
major portion of the reduction can be attributed to the
energy price effects on electric utility rates. Experience
with oil demand and prices is similar. During the decade
prior to 1974, total U.S. petroleum demand increased at an
annual rate of just over 5%. But the April-September 1974
petroleum demand was under the comparable 1973 period by
2.7%, a swing of 7.7 percentage points below expectation.
We need another reduction in petroleum useage of about
5% in order to reduce consumption by a million barrels a day.
All of the econometric data indicates that the proposed
price changes are on target.
Econometric models of the economy, such as those under
lying the Ford Foundation Energy Project report, A Time To
Choose,and the Project Independence Report, suggest that the
short-term responses to energy price increases that we have
already seen are half, or less, of the long-term response
we can expect after households and business firms have had
an opportunity to adapt fully to the higher costs of energy.
Thus, we have confidence that the President's energy
program will easily achieve the one million barrel reduction
in consumption by the end of this year and an additional
one million barrel reduction by 1977.
31
Permanent Tax Reduction and Restructuring.
The Treasury will collect an additional $30 billion in
taxes from the windfall profits tax and the excise taxes and
fees on oil and natural gas. The private sector will bear
an estimated $25 billion of that in the form of higher costs
of energy related items they buy, and Federal, state and
local governments will bear the remainder.
The $25 billion paid by individuals and businesses will
be returned to the economy by the permanent reductions in
individual and corporate income taxes. Like the temporary
anti-recession tax cut, the $25 billion total is divided in
approximately the ratio of individual and corporate income
tax payments generally, so that about $19 billion is
allocated to individuals and $6 billion to corporations.
These are major income tax reductions. They accomplish
multiple purposes, rest on multiple foundations, and should
be considered in that way.
First, the changes proposed in the individual and corpo
rate income tax structures are desirable on their own merits.
They have heretofore been too expensive to accomplish within
existing revenue constraints.
Second, these tax reductions return to the economy
the energy conservation taxes. Thus, the energy conservation
measures reduce energy consumption without reducing the aggre
gate purchasing capacity of the private economy.
Third, these income tax reductions will provide energy
consumers with additional after-tax spendable income to help
meet higher energy costs if they still wish to consume the
same amount of energy as before. Alternatively, they can
buy more of other products and cut back on their energy
consumption--and many will do that. The income tax reductions
are such that most individuals in the lower and middle income
range, up to about $15,000, will receive tax reductions
greater than their increased energy costs even if they should
choose to qontinue consuming the same amount of higher-cost
energy. Taxpayers in higher income brackets will receive
significant income tax reductions also, but generally less
in proportion to their greater expenditures for energy.
32
Fourth, these permanent income tax reductions are
approximately similar to what is required to offset the
so-called ’’bracket and deduction compression” caused by
inflation over the last three years. Because deductions
and rate brackets are stated in dollar terms, when infla
tion causes money incomes to rise, deductions offset a
lesser portion of the same real incomes and the remainder
is taxable in higher brackets.
Benefit for Individuals.
For individuals, the President proposes an income tax
reduction of $16-1/2 billion beginning in 1975. This will
be accomplished-By increasing the Low Income Allowance
from its present level of $1,300, to
$2,600 for a couple and $2,000 for
single taxpayers, which will provide
benefits of-------------------------- $5 billion
.
And by cutting in half, from 14 to 77>,
the tax rate for the first taxable in
come bracket and making substantial,
but smaller, reductions in tax rates in
the next four brackets,1' which will
provide additional benefits of-----$11-1/2 billion
Low Income Allowance.
The Low Income Allowance is the minimum standard deduc
tion allowed to everyone regardless of his income level or
the amount of deductions he actually has. In combination with
the $750 personal exemption, the Low Income Allowance deter
mines the minimum or base income on which no income tax is
levied.
In 1969, Congress defined the threshold taxability
level by reference to so-called "poverty level" data, the
assumption being that families with "poverty level" incomes
did not have the requisite ability to pay and should be
excused from liability. The Low Income Allowance was the
mechanism adopted to achieve that result.
The
a family
total of
does not
Low Income Allowance is now $1,300. That means t h a t
of four with four $750 personal exemptions for a
$3,000, plus a $1,300 Low Income Allowance, c u r r e n t l y
pay income tax if its income is $4,300 or less.
1/ Illustrates rate changes for married persons filing j o i n t l y
Comparable changes are made in other rate schedules.
33
Because of inflation, the poverty level for a family of
four is now estimated to be about $5,600. Nevertheless,
under present law, this family would in 1975 be required to
pay income tax of $185.
The proposed increase of the Low-Income Allowance to
$2,600 on a joint return will bring the nontaxable level for
the family of four up to the new poverty level of $5,600,
which is $3,000 of personal exemptions plus the new Low-Income
Allowance of $2,600. The proposed increase in the Low-Income
Allowance will also make comparable changes for single per
sons and families of other sizes, as shown by the following
table.
No. in
the
Family
Estimated
1975 Poverty
____Level
1
2
3
4
5
6
$2,850
3,686
4,382
5,608
6,618
7,446
Tax-Free Income Level
Proposed
Present
$2,050
2,800
3,550
4,300
5,050
5,800
$2,750
4,100
4,850
5,600
6,350
7,100
Increasing the Low-Income Allowance to the levéis pro
posed will provide benefits of about $5 billion to low-income
taxpayers and relieve from income tax altogether over 5 mil
lion presently taxable returns.
Reduction of Tax Rates.
In addition to the change in the Low-Income Allowance,
which benefits the lower income taxpayers, the proposals will
reduce income tax rates for the 62 million remaining taxpayers
in a generally progressive manner.
The present income tax rates for married persons filing
jointly would be reduced as follows: The 14% rate reduced
to 7%,; the 157» rate reduced to 10%; the 16% rate reduced to 13%,
the 17% rate reduced to 15%,; and the 19%, rate reduced to 17%,
for part of the present bracket and the balance of that
bracket to remain at 19%,. Rates for other income brackets
would remain the same, except that the present 28%, and 32%,
rates would be increased 1 percentage point each. Taxpayers
with incomes falling in those brackets would still have a
34 -
J
substantial net reduction in liability because a part of
their income will also be taxed ,in the brackets in which
rates have been reduced. Comparable reductions will be made
in the tax rates for single returns and other types of returns
also. The revised rate schedules are set forth in the
appendix.
Progressive Income Tax Reduction.
The effect of the two elements of the proposed income
tax reduction for individuals, both singly and in combination,
is progressive. The proposed tax reductions are proportion
ately greater in both dollar amounts and percentages toward
the lower end of the income spectrum. Nevertheless, taxpayers
at all income levels share significantly in the proposed
reductions.
The benefits from doubling the Low-Income Allowance are
heavily concentrated in the adjusted gross income classes
below $5,000, $10,000 and $15,000. The benefit of the reduc
tion in tax rates goes 967> to persons with adjusted gross
incomes below $20,000 and 897> to those below $15,000. When
the two tax reductions are combined, 41% goes to persons with
adjusted gross incomes below $10,000, 707» to persons with
adjusted gross incomes below $15,000 and 867> to those below
$20, 000.
The following table shows the percentage reduction in
the income tax by income class:
1975 Levels
Adjusted
Gross Income
Class
(5 0 0 0 )
0
3
5
7
10
15
20
50
100
3
5
7
- 10
- 15
- 20
- 50
- 100
and over
Total
Income Tax
Amount of
Income Tax
Paid Under
Reduction
Present Law
($ billions)
$
0.3
1.8
4.0
8.9
21.9
22.8
44.4
13.5
13.3
130.9
Percentage
Reduction in
Income Tax
0.25
1.20
1.96
3.38
4.72
2.70
2.15
0.11
0.03
-83.3%
-66.7
-49.0
-38.0
-21.6
-11.8
- 4.8
- 0.8
- 0.2
-16.50*
-12.6
$-
*Does not include payments to nontaxpayers.
35
Some have suggested that there is no reason to cut taxes
at all for upper bracket taxpayers. We believe, however,
that fairness requires some--though lesser--relief in the
upper brackets. It Is important to remember that:
Only about 12°L of all taxpayers have gross
incomes above $20,000, and they now pay about
52% of total individual income taxes. They will
pay an even higher percentage of individual
income taxes if our proposals are enacted.
.
Upper income individuals have been adversely
affected by Inflation, just as lower Income
individuals. The prices of the things they buy
have increased too, and since they buy more, the
increase is greater. Also, "bracket and deduc
tion compression" has adversely affected highincome taxpayers just as it has affected lower
income taxpayers. Everybody has had, in effect,
an income tax increase because of inflation.
Upper income taxpayers play a disproportionately
large role in providing the investments which
help everyone's income to increase.
The following table illustrates the tax reductions that
will be received by a typical family of four at various income
levels.
Adjusted
Gross Income
$ 5,600
7,000
10,000
12,500
15,000
20,000
30,000
40,000
New
Tax
Tax
Saving
Percent
Saving
o
110
518
961
1,478
2,450
4,837
7,828
$185
292
349
300
221
210
151
130
100,0%
72.6
40.3
23.8
13.0
7.9
3.0
1.6
Present
Tax 1/
$
185
402
867
1,261
1,699
2,660
4,988
7,958
$
1/ Calculated assuming Low-Income Allowance or
itemized deductions equal to 177, of income,
whichever is greater.
- 36 -
Increased Energy Costs Compared with Tax Reductions.
The proposed changes in the structure of the individual
income tax stand on their own merits and were not designed
primarily to offset increased energy costs.
Solving the oil problem will require the public, and
particularly large energy users, to make adjustments that
be unpopular and which in some cases will cost money.
Nonetheless, the proposed tax reductions are very substantial
for low and middle income taxpayers below the $15,000 income
level and we believe are, on average, sufficient to more than
offset the average increases in their energy costs. The
Council of Economic Advisers has calculated that the increase
in the Consumer Price Index attributable to this program will
be 27, or less. Others have suggested different percentages.
The following table provides some guidance, by indicat
ing how much the tax reductions add to after-tax disposable
income.
It is after tax income which individuals have at
their disposal to buy goods and services, including energy.
If the cost of living goes up 1%, a 17, increase in after-tax
income should leave the average taxpayer even. The table
indicates that with a rise in prices of 27, or less, average
taxpayers through the $15,000 AGI class will be ahead.
Adj usted
Gross Income
Class
($000)
1 After: Proposed
: Reduction as a Per
:
tax
:
Tax
: cent of Present
: Income : Reduction : After-tax Income
(....... Billions..... )
(.... Percent..... )
0 -
3
21.7
0.3
i .? y
3 -
5
33.2
1.2
3.
5 -
7
46.0
2.0
4.2
7 -
10
86.1
3.4
3.9
10 -
15
183.1
4.7
2.6
15 -
20
162.2
2.7
1.7
20 -
50
235.6
2.2
0.9
50 - 100
36.5
0.1
0.3
21.7
BB
100 and over
Total
826.1
16.5
0.1
2.0
*Les s than 50 million
]./ Many taxpayers in the two loxvest income classes will
benefit from the $80 special distribution.
37
$2 Billion for Payments to Nontaxpayers.
Individuals whose incomes are so low that they do not
pay any income tax will not benefit from the income tax re
ductions. Because of their low incomes, these persons are
likely to have the least flexibility in shifting their con
sumption patterns as energy becomes relatively more costly.
In order to avoid hardships from higher energy costs,
an additional $2 billion of the energy tax revenues has been
allocated to provide cash payments of $80 to each adult in
this low income, nontaxpayer category. These persons will
thus not be forced to reduce their energy consumption,
although they, like others, will have the choice.
In
addition, very low income persons who now pay some income
tax and who will receive some benefit from the proposed
tax reductions will also be eligible to receive distributions
in amounts approximately sufficient, when added to the in
come tax reduction, to give them a total benefit of about
$80 per adult. In total, this payment system is estimated
to involve about 26 million adults, 21 million of whom are
nontaxpayers under present law, and to provide a total
benefit to them of about $2 billion.
Payments will be made as early in 1975 as possible, and
if the energy taxes are enacted by April 1st, as thé President
requests, we believe that payments can be made in the summer.
The payments will be made by the Internal Revenue Service and
will be based on a return--comparable to a very simple in
come tax return--filed by those persons eligible. In design
ing this system for payments, emphasis has been placed on
making it simple and speedy. While we should be generous
in order to be certain that we have avoided genuine hardships,
we should not create an additional welfare system or bureaucracy.
The essential details of this system for cash payments
are as follows:
Adults 18 years or older and not eligible to
be claimed as a dependent on an income tax
return would file with the Internal Revenue
Service a simple income tax return showing
their name, social security number and their
adjusted gross income for 1974.
38
Adults are eligible to file and receive a
payment if they are married persons filing
a joint return and their adjusted gross in
come is less than $5,500 and if they are
single persons and their adjusted gross
income is less than $2,750.
To take account of the fact that some persons eligible
for payments will also receive income tax reduction, pay
ments will be made under the following schedule:
For Married Persons Filing Joint Returns
If their income is $4,500 or less,
the payment is-------------------------
$160
If their income is more than $4,500,
the payment is reduced by $4 for every
$25 of income over $4,500
For Single Returns
If their income is $2,250 or less
the payment is---------------------- -
$ 80
If their income is more than $2,250,
the payment is reduced by $4 for
every $25 of income over $2,250
This schedule of payments will result in phasing-out the
payments as income rises to the level where the amount of
income tax reductions that have been received equal $80, or
$160 on a joint return. For example, a married couple with
two children and income of $5,600 would have received $185
of income tax reduction and would therefore receive no
additional cash payment.
Because the payment system is simple and distinguishes
only between single returns and joint returns, there cannot
be complete precision and some persons will receive payments
which, when combined with income tax reductions., will vary
somewhat from the $80 per adult minimum.
Imprecision is the
price of simplicity. Precision can be obtained only with
returns that report the. number of personal exemptions and
itemized deductions--i.e ., a full tax return. Exemptions
and deductions are major problems, even with higher income
persons, and, as a practical matter, would be unpoliceable
on these returns. The $80 per adult minimum is an average
and somewhat arbitrary (though generous) figure in the first
instance, and it would be quixotic to construct a second and
complicated tax system to see that no family, regardless of
size or need, varied slightly from the figure.
The amount of $80 per adult appears adequate to com
pensate individuals in these low-income classes generally,
with a margin for extraordinary situations. The total
increase in energy cost for the households represented
by the about 26 million adults who will participate in
the $80 payment system is estimated to be $1.3 billion,
an average of $50 per adult. This group includes 17
million single adults and 9 million married persons who
would file jointly. Thus, the average increase in energy
cost per filing unit, or roughly speaking, ’’household,"
in this category is about $60. Looked at another way,
the increase in energy cost may induce an increase in the
Consumer Price Index of as much as 2 % .
A TL increase for
a person with $2,000 income would be only $40, and for a
family with an income of $5,000 would be only $100.
In contrast, total benefits of $2.1 billion are pro
posed for this group by the combination of cash payments
and income tax reductions. The basic benefit will be $80
for a single adult and $160 for a married couple.
In addition there are another 7 million adults whose
adjusted gross incomes are below $5,000, but who will
receive $80 or more entirely through income tax reductions.
Residential Conservation Tax Credit.
To complete the total of $19 billion of tax and cash
payment benefits for individuals, a residential conservation
tax credit will be allowed for expenditures for thermal
efficiency improvements for existing homes. Such improve
ments include storm windows and doors, and insulation and
weather-stripping. The credit will be effective for years
1975, 1976 and 1977 and the maximum credit allowed over
that three-year period will be $150 per family.
It is
estimated that at least 18 million homes will be eligible
for the credit and that the total credits will be $500 million
annually for the three years.
40 Corporate Tax Rate Adjustment.
The President proposes that the corporate tax rate,
which is now 487,, be reduced to 42%. This will provide
benefits of approximately $6 billion. This reduction will
be accomplished by reducing the corporate surtax rate on
taxable income in excess of $25,000 from the present 26%
to 20%. The basic or normal rate applicable to all corporate
taxable income will remain at the present 2270. Thus, the
first $25,000 of a corporation's taxable income will con
tinue to be taxed at a rate of 22%. The balance will be
taxed at a total normal and surtax rate of 42%. We propose
that the reduction be made in the high surtax rate because
that is where the excessively heavy double tax burden on
corporate earnings falls.
Corporations that pay only the
normal tax rate of 22% are paying tax at about the average
top marginal tax rate of individuals.
The reasons for recommending reduction in corporate
taxes by means of a rate reduction instead of by some other
means are as follows:
Rate reduction is the most neutral way of reducing
corporate taxes. Neutrality means that all corporations
now paying at a 4 8 7 o rate will share in the tax reduction,
will have maximum flexibility in making business and invest
ment decisions, and can therefore operate most efficiently
without regard to tax consequences.
Reduction of the presently high corporate tax rate
will be the most meaningful and symbolic signal to business,
to investors and to the market of a serious intent to assist
business. This type of tax reduction will provide corpora
tions the maximum assurance of continued more favorable
climate for the long-term investment decisions that are
necessary to ensure prosperity and control inflation.
Rate reduction has a character of permanence. We have
proposed to make the permanent tax reduction for individuals
in large part by rate reduction. We should do the same for
corporations..
The amount of the proposed corporate tax reduction
of about $6 billion is approximately the 25 percent corporate
share--when divided in the 75%-257> ratio of corporate and
individual tax payments--of the total of $25 billion of
permanent tax reductions and payments we propose to make.
This proposed corporate tax reduction of $6 billion reflects
41
the fact that corporations, too, will have an additional
burden from higher energy costs. Corporations will bear
these additional costs in a variety of ways--higher energy
costs reflected in costs of equipment they buy, not all of
which they will be able to pass on to consumers; reduced
sales and lower prices for some products as demand for
energy is reduced; and the additional capital equipment
and other costs that will be involved for many corporations
in shifting over to lesser energy using processes and
products.;''"-'’ ;V ’
'
i
:
^
As their energy costs increase, business will be
under pressure to pass these costs through to consumers
and they will be successful in varying degrees. To the
extent that this increase in cost is offset by a decrease
in income tax cost, a part of that pressure to pass
through energy costs to consumers will be relieved.
Corporate tax reduction is seldom politically popular,
because it is levied against an inanimate entity. But
corporate taxes are borne by people--in part by people
generally in the cost of what they buy from corporations,
and in part by shareholders in the form of a reduced return
on the capital they have invested in the businesses.
In recent years other nations, including our principal
trading partners, have recognized this and adopted .various
"integration" plans which move towards eliminating the
double tax on income earned in corporate form. But the
United States still imposes a double tax on income earned
from a business conducted in corporate form, thus taxing
that income more heavily than other income.
As you consider the President's proposal to reduce the
corporate rate from 48% to 42%, you should have firmly in
mind that income earned in a corporation would still be
taxed at 42%>, and then taxed again at rates going up to
70% when paid out as a dividend--producing a maximum tax
of 82.6%.
I have already discussed the compelling reasons for
a reduction in corporate taxes wholly apart from any in
crease in energy costs. These reasons are real and serious
While corporate tax reduction may be unpopular, the con
sequences of increasing unemployment and declining
productivity will be even more unpopular.
They already are
42
Conclusion.
It is clear that our country faces serious economic
problems. I am confident that we can solve them. They are
complicated problems and their solutions will require pains
taking attention and balanced judgments. The President's
program, which I have outlined to you, provides an integrated
blueprint for action. I am confident that as we consider
the problems in the objective and professional manner for
which this Committee is distinguished, we will be able to
reach joint decisions that will set us back on the path to
continued prosperity. I look forward to working with you.
o 0 o
Department
iNGTON, D C.
20220
oftheTREASURY
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
January 21, 1975
TREASURY ANNOUNCES TENTATIVE MODIFICATION
OF DUMPING FINDING ON TUNERS
(OF THE TYPE USED IN CONSUMER ELECTRONIC PRODUCTS) FROM JAPAN
Assistant Secretary of the Treasury, David R. Macdonald
announced today a tentative determination to modify the
dumping finding on tuners (of the type used in consumer
electronic products) from Japan with respect to Victor
Company of Japan. Notice of this decision will be
published in the Federal Register of January 22, 1975.
The Federal Register notice reads in part:
After due investigation, it has been
determined, tentatively, that tuners
(of the type used in consumer electronic
products) exported by Victor Company
of Japan, Ltd. are not being, nor are
likely to be, sold in the United States
at less than fair value within the
meaning of the Antidumping Act, 1921,
as amended. The investigation indicated
that no sales have been made at less
than fair value by the above firm
since the finding of dumping, and
assurances have been given that future
sales of such tuners to the United
States will not be made at less than
fair value.
Interested persons will be given an opportunity
to present oral and written views on this decision
before Treasury takes final action.
During the period of January through July 1974,
imports of tuners from Japan were valued at roughly
$6 million.
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Transcript
Number of Pages Removed: 2
Author(s):
Title:
NBC Saturday Night News, "Speculation Ended"
Date:
1975-01-18
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
E X E C U T I V E O F F IC E OF T H E P R E S ID E N T
COUNCIL ON WAGE AND PRICE STABILITY
726 JACKSON P L A C E , N.W.
W ASHINGTON, D .C .
EMBARGOED UNTIL NOON EST
Tuesday, January 2 1 , 1975
20506
07?
FOR INFORMATION C ALL :
(202) 456-6757
Remarks by A l b e r t Rees, D i r e c t o r
Council on Wage and P r ic e S t a b i l i t y
before the National Economists Club
Washington, D . C .
January 2 1 , 1975
I t is a gr ea t pleasure to speak again to t h i s congenial group. When I
was here l a s t , I discussed wage s t a b i l i z a t i o n in the c o ns tr u ct io n i n d u s t r y .
My topic today is r e l a t e d , but much broader in scope.
Incomes p o l i c y , as you a l l know, encompasses a wide range o f things t h a t
government can do to in fl u e n ce the movement o f wages and p r i c e s , from the
gentlest persuasion to the most draconian c o n t r o l s . We have had p o l i c i e s
in 1974 t h a t spanned much o f t h a t range.
In the f i r s t f o u r months o f l a s t
year, the Economic S t a b i l i z a t i o n A c t o f 1970 as amended was s t i l l in e f f e c t .
Dr. Dunlop, the D i r e c t o r o f the Cost o f L i v i n g C o u n c i l , was g r a d u a ll y de
controlling the economy on a s e c t o r - b y - s e c t o r basis because c o nt r o ls were
becoming in c r e a s i n g l y burdensome to business and l a b o r , and were in many
cases d i s t o r t i n g the a l l o c a t i o n o f resources.
In r et u r n f o r d e c o n t r o l ,
he secured commitments from many i n d u s t r i e s to s t a b i l i z e some prices
vo lu n ta ri ly f o r s t i p u l a t e d p e r i o d s , and to work toward g r e a te r o u t p u t ,
improved p r o d u c t i v i t y , and more r a t i o n a l c o l l e c t i v e bargaining s t r u c t u r e s .
Before the e x p i r a t i o n o f the Economic S t a b i l i z a t i o n A c t , the a d m in is t r a t io n
requested an extension in a much modified form. The Cost of L i v i n g Council
would have devoted i t s e l f l a r g e l y to monitoring wage and p r ic e movements,
with a u t h o r i t y to maintain c o n tr o ls in only two i n d u s t r i e s , c o ns tr u ct io n
and health care.
This proposal was v i g o r o u s l y opposed by business and labor o r g a n iz a ti o n s
and received l i t t l e support in Congress. On A p r i l 30 th , a l l control a u t h o r i t y
expired except f o r t h a t o f the Federal Energy A d m i n i s t r a t i o n to control the
prices o f petroleum products.
In the f o l l o w i n g months prices and wages continued to r i s e , in some cases
at accelerated r a t e s . The increase in the Wholesale Pr ic e Index reached
an annual r a te o f 32.1 percent in the t h i r d q u a r te r o f 197 4. Average
hourly compensation rose a t a r a te o f 1 1 . 0 percent in the t h i r d q u a r t e r ,
(more)
CWPS-21
-
2
-
though real hourly compensation continued to f a l l .
Some, but not a l l , of
these increases in wages and prices represented a r e s t o r a t i o n o f wage and
p r i c e r e l a t i o n s h i p s compressed or d i s t o r t e d during the c on tr o l p e r i o d .
On August 1 2 , 1 9 7 4 , P r e si d en t Ford asked Congress to cr eat e the Council on
Wage and P r ic e S t a b i l i t y . A c ti n g wi th unusual speed, the Congress passed
the l e g i s l a t i o n as request ed , and the Pr e s id e n t signed i t i n t o law within
twelve days. Pu b lic Law 93 -3 8 7, the Council on Wage and P r ic e S t a b i l i t y Act,
does not gi ve the Council any a u t h o r i t y to c ont ro l wages or p r i c e s .
I t does
d i r e c t the Council to monitor wages and p r i c e s , to hold pu bl ic he ari ngs ,
and to review those a c t i v i t i e s o f government t h a t c o n t r i b u t e to i n f l a t i o n .
On September 2 8 t h , I was appointed D i r e c t o r o f the Council and began to
assemble a s t a f f . We now have a s t a f f o f more than t h i r t y , and w i l l reach
our a u t h o r i z e d s tr e ng th o f f o r t y w i t h i n a month. We have been fo r tu n a te
enough to a t t r a c t such able economists as James Blum, Arn old C o l l e r y ,
George Ea d s, Harold B a r n e t t , and Pe ter Henle to a s s i s t in our e f f o r t s .
In November, the Council held hearings on the causes o f the high pr ic e of
sugar.
I t worked to persuade consumers to c u t t h e i r sugar consumption, and
to persuade food producers and d i s t r i b u t o r s Ato promote s u g a r - f r e e products.
Since then the p r ic e o f sug ar , though s t i l l much too h i g h , has f a l l e n consider
a b l y . Consumer r e s i s t e n c e , which we helped to m o b i l i z e , brought about this
decline.
In December, three major st eel companies raised prices on many o f t h e i r
products and we were able to persuade them to r o l l back about o n e - f i f t h
o f these inc rea ses . The balance o f the increases is j u s t i f i e d by higher costs
o f labor and raw m a t e r i a l s . The pr ic e increases subsequently announced by
ot he r st eel companies were much smaller in amount, and f e l l w i t h i n the limits
s et by the r o l l b a c k s . This a c t i o n saved users o f s tee l an amount well in
excess o f 100 m i l l i o n d o l l a r s a y e a r .
In my o p i n i o n , the st eel experience in d ic a te s t h a t a v o l u n t a r y incomes
p o l i c y can work. We have been c a l l e d a "t o o t h le s s t i g e r " and a "90-pound
weakling" in the press because we lack s t a t u t o r y a u t h o r i t y to con trol
prices and wages. These c o l o r f u l names s e r i o u s l y underestimate the power
o f the Pr e si d en t o f the United S t a t e s - - n o t j u s t P r e si d en t F o r d , but any
P r e s i d e n t - - t o persuade people to act in the p u b l ic i n t e r e s t .
What w i l l the Council be doing in 1975? We are broadening our a c t i v i t i e s
on several f r o n t s . We are co nt in u in g to monitor st ee l and sugar pr ic es .
We are beginning a systematic review o f p r i c i n g in the concentrated industries,
and w i l l extend our monitoring a c t i v i t i e s to several o f them, beginning this
week wi th the aluminum i n d u s t r y .
Circumstances have changed g r e a t l y in the few months since we began our
a c t i v i t i e s . The economy is now in a severe r ec e ss io n. Pr ic e increases
(more)
- 3 -
r?
1
are moderating, and many prices are beginning to f a l l . The seasonally
adjusted Wholesale P r i c e Index f o r December f e l l f o r the f i r s t time in
fourteen months. We need no longer confine ourselves to the r o u t i n e question
posed by p r i c e c o n t r o l s , "How do you j u s t i f y y our p r ic e increases in terms o f
costs?" We can begin to a s k , "How do you j u s t i f y y our p r ic e increases in
terms o f the demand f o r y o u r products?" and even, "Why a r e n ' t y o u r prices
coming down?"
In recent weeks, the three major automobile producers have o f f e r e d s u b s ta n ti a l
cash rebates to encourage the sale o f t h e i r products. More firms should
follow t h i s e x c e l l e n t example, or do b e t t e r y e t , and cu t the l i s t prices
of t h e i r products.
The nature o f the i n f l a t i o n a r y process has changed in 1975, I t no longer
reflects c u r re nt excess demand and widespread commodity shortages. The
leading elements in the process are now the r i s i n g pr ic e o f energy and
rising u n i t labor c o s t s , caused by cont in uin g s u b s t a n t i a l wage increases
and the de cline in ou tp u t per man hour.
The Council on Wage and P r ic e S t a b i l i t y is beginning to extend i t s monitoring
a c t i v i t i e s to wage ne go ti a ti o n s and is prepared to en te r i n t o discussions
with the p a r t i e s to c o l l e c t i v e bargaining wjiere t h i s seems a p p r o p r i a t e .
Last week the Chicago D i s t r i c t Council o f the Laborers I n t e r n a t i o n a l Union
noti fi ed c on s tr u c ti o n c on tr a c to r s t h a t i t would extend i t s c u r re n t agree
ments with them w i t h o u t a wage increase u n t i l June 1 , 1976. O f cour se, i t
i s n ' t e n t i r e l y good news when wages cannot keep up with the cost o f l i v i n g ,
but th is unusual a c t i o n c o r r e c t l y r e f l e c t s the view t h a t in t h i s recession
jobs are even more important than wages. Other unions seem less aware o f
the change in the economic c l i m a t e . A union t h a t s t r i k e s in January to
achieve p a r i t y with what a s i s t e r union gained l a s t May has not adjusted
its thi nking to the r e a l i t i e s o f our present grave economic s i t u a t i o n .
The same wage r e s t r a i n t t h a t is a pp r op ri a te in c o l l e c t i v e bargaining is
also approp riate f o r the government as an employer, as P r e si d en t Ford
indicated in the S t a t e o f the Union message.
The Council on Wage and P r i c e S t a b i l i t y is als o beginning to int e rv en e
before r e g u la t o r y agencies in the i n t e r e s t s o f holding down costs and
prices. On January 1 3 , we submitted our w r i t t e n comments to the I n t e r s t a t e
Commerce Commission in the matter o f commission p o l i c y regarding p a r en tsubsidiary t r a n s p o r t a t i o n .
In so d o in g , we are seeking to reduce empty
backhauls by p r i v a t e motor c a r r i e r s . We are r i g h t now a c t i v e l y considering
intervening wi th the Federal Communications Commission in the i n t e r e s t a t e
t a r i f f f i l i n g by the American Telephone and Telegraph Company, which would
increase many long di stance telephone r a t e s .
On November 2 7 , 1 9 7 4 , P r e si d en t Ford issued an e x ec u ti v e ord er r e q u i r i n g
i n f l a t i o n impact statements f o r a l l major proposals f o r l e g i s l a t i o n and
promulgation o f r e g u la ti o n s and ru les by the E x e c u t iv e Branch. Together
with the O f f i c e o f Management and Budget, the Council on Wage and P r ic e
(more)
- 4 -
S t a b i l i t y w i l l review these i n f l a t i o n impact statements to see whether
proposed r e g u la ti o n s and rules t h a t r a is e costs and prices are c l e a r l y
j u s t i f i e d by the l a r g e r soc ial b e n e f i t s ,
I have been t a l k i n g about what w i l l be done in 1975 under e x i s t i n g law.
However, as a l l o f you know, proposals to amend or replace the Council on
Wage and P r ic e S t a b i l i t y A c t are being made in Congress. Several b i l l s of
t h i s s o r t were introduced in the l a s t Congress. Some o f these are being
r e i n t r o d u c e d , to ge th e r with new ones.
The A d m i n i s t r a t i o n , myself i n c lu d e d , is f i r m l y opposed to b i l l s t h a t would
r e s t o r e general wage and p r ic e c o n t r o l s , and any such b i l l , i f passed,
would undoubtedly be vetoed by the P r e s i d e n t . Not only are general controls
not needed, but the t h r e a t o f them is c r e a ti n g widespread f e a r and counter
p r od u ctiv e behavior in business and la bo r o r g a n i z a t i o n s . Unions are afraid
to moderate t h e i r wage demands and businesses are a f r a i d to lower t h e ir
prices f o r f e a r t h a t they w i l l be f r o z e n i n t o an unfavorable p o s i t i o n by
new con trol l e g i s l a t i o n .
Some o f the l e g i s l a t i v e proposals are so regent t h a t we have had l i t t l e time
to study them. Some would giv e the Council subpeona power, some would give
i t added re s ou r c es , and some Would giv e i t power to delay wage and price
increases f o r 60 days. While these proposed powers are p r e f e r a b l e to general
c o n t r o l s , some r a i s e serious q u e s ti o n s .
I f delay power were to be used
r o u t i n e l y , i t might di sp la c e p r ic e and wage increases forward in time, and
pr ic e increases would be announced in a n t i c i p a t i o n o f cost increases. More
o v e r , r o u t i n e use o f delay powers would create onerous r e p o r t i n g burdens for
companies and unions.
Many wage agreements are reached as settlements of
strikes.
I f t h e i r implementation were delayed 60 da y s, would the strikers
r e tu r n to work?, or would the proposed procedure prolong i n d u s t r i a l strife?
These are serious questions t h a t deserve c a re fu l thought.
We are committed to an a c t i v e v o l u n t a r y incomes p o l i c y in 1975. We hope very
much t h a t i t can be a f l e x i b l e one, t h a t w i l l not re c re a te some o f the problem
t h a t Congress was so anxious to be r i d o f less than a y e a r ago.
o 0 o
CWPS-21
January 21, 1975
MEMORANDUM TO THE TREASURY STAFF
For your information and guidance, we have
produced the transcript of the remarks made by
Secretary William E. Simon at a Treasury Department
Press Conference held on January 16, 1975.
Office of Public Affairs
Attachment
9:30 a.m., January 16, 1975
SECRETARY SIMON:
I am going to be here only briefly. This week I have had
very important negotiations going on at the International Monetary
Fund, which will carry me through tomorrow, and attempting to
change constantly from a domestic hat to an international hat
has been a bit of a problem.
I thought it important that we call this briefing this
morning so you could talk to Ed Fiedler and Fred Hickman, our
Assistant Secretary for Economic Policy and Assistant Secretary
for Tax Policy, respectively, about the President’s State of
the Union proposals.
These form a truly integrated and comprehensive program
that has to be taken as a unit. And as with all such units
it is not a fruit basket from which people can pick and choose
the parts they like and forget the rest. For instance, we all
know that everybody loves a tax cut; nobody likes a tax increase.
So we are going to work terribly hard with the Congress to have
it enacted as a package.
At the outset, I think I ought to talk for a second about
the direction or thrust of the President’s program. Philosophy
is a word I don't particularly like because I prefer to live
and deal in the real world.
It will take more time than this Administration has to
move away from the massive government control of many years,
and to better utilize the marketplace.
But we must make a
start.
You can go two routes: either to more government
controls - - o r you can take the route of the marketplace,
with decision-making being given back to the American people
and with less encroachment by the Federal government.
The government today has 33 percent of our Gross National
Product. It is growing at what the President and I consider
alarming proportions. Before the turn of the century, it will
certainly be over 50 percent, which would effectively end the
system of free enterprise that we have had in this country
and which has provided the highest standards of living and
the greatest prosperity on earth,
I recognize that there are people who think it's a good
idea to have more government, that government is more capable
°f making decisions for America.
2
Well, I am sorry; this not a philosophy that this
Administration, or our President, or I can abide in.
When I talk about freedom, that is not just an idle
term.
It means you are free to do what you wish to do,
and this great freedom is inextricably linked with economic
freedom.
If the government takes away your economic freedom,
your social and political freedoms will not be far behind.
That is a brief overview of the way we approach the
problem and the two routes we could travel. People say
rationing is equitable -- but I wish you could have had the
benefit of sitting with me when we designed the various
rationing programs a year ago this time.
Anyone who thinks a program of rationing in this very
complex economy is equitable ought to think it through very
carefully. Especially should he think about government
decision-making and the government employees who will make
the decisions down here not only about how you drive to work
each day and what you are allowed to do, but whether you are
allowed to open a business, how much fuel will be allocated
and the political pressures that spring up as to the
decisions by government.
I don't think that is the way our economy should be
run.
Anyway, I can go on with this subject at great length,
and I realize today in many quarters what I say is pretty
unpopular stuff; but it is something I very deeply believe
in and I guess we will be debating with Congress over coming
days the more controversial aspects of our program.
As I said, I have been deeply involved with the IMF
Ministers night and day all week, and I will be again
today and tomorrow.
However, I intend to make myself
available to the press in the days and weeks ahead on quite
a few occasions because, as we work through the legislative
process, there are going to be lots of questions that are
going to be asked, and we want to be as responsive to these
questions as we can.
This program that the President announced on Monday and
yesterday involved some painful decisions for the President
because he, like other members of his economic team, is a firm
believer in fiscal discipline.
3
Yet as the leader of all our people, our President knew
that millions of Americans were suffering under the present
economic circumstances -- and, therefore, that some measures
were required that involved a shift of emphasis.
It is a measure of his capacity as a leader in this
country that he had the courage to chart a new course and a
new emphasis in the direction of his policy.
It also ought to
be reassuring for this country to know that when we pull out
of the recession, which surely we are going to, that we have a
man of his philosophy at the helm, for he personally understands
what is necessary in the long run to rebuild the foundations
of our economy.
I just want to make one thing clear this morning, and
that is that this Administration is fully behind our President;
we are united in his proposals, and we believe the American
people will unite behind him as well.
Three weeks ago we heard a lot of critics who said we
were still fighting inflation at the cost of unemployment and
recession, and now we are hearing that we are fighting unemploy
ment at the expense of inflation.
I must admit that I feel both views are rather off the
mark.
The President continues to fight inflation and recession
because they are both part of the same disease, as we have said
over and over again.
Obviously, pressures have been put on the price structure
throughout our economy. Prices are declining and competition
is reasserting itself. The inflation rate is beginning to
decline.
There has been a change, obviously, in Our policy.^ This
change, as I stress, is a change in emphasis. We are signifi
cantly stepping up the battle against recession because our
economy is sliding downhill more rapidly than we expected two
months ago.
Consumer confidence, which is a fragile thing, can never
be predicted by anyone -- not that anyone can predict many
other events, either. But this is especially difficult to do,
and consumer confidence has been shattered in this country by
a combination of factors -- most recently, I believe, by the
frightening double-digit inflation we have experienced during
this year.
4
The important thing to understand is that we are not
abandoning our long-run battle against inflation.
As you were told in the briefings yesterday, we do expect
some slight increase in inflation as a result of the President's
programs on the energy side -- approximately two percentage
points in the Consumer Price Index.
While the cost of these actions is higher than we would
like, we believe the cost of inaction in terms of unemployment
and hardship would be much higher.
I think these programs are bold, but I don't believe they
are reckless. They are the right medicine at the right time
for the right reasons.
Let's emphasize one thing: economic policy does not get
put into place like concrete.
I think there is some confusion
in the country today that when the President puts out a
proposal, that this is what it will be for all time, and that
is going to solve the problem and then we can all get back to
work again.
Economic policy is an ever-evolving mechanism -- one that
requires change to match changing circumstances. As changes
and events occur that no one can predict at this time, so
shifts in our policy reflect our responses to these changes.
In lifting our country out of the doldrums, we have
attempted to be extremely careful to avoid actions which would
set off another inflationary spiral. That is why we have
placed heavy emphasis on limiting the tax cut to just one year
and, most importantly, on putting a mandatory ceiling on new
spending programs.
We must stop the explosive growth of federal spending in
this country. Both of these actions -- the one-year moratorium
on new spending programs and the absolute spending limit with
the exception of any energy proposals that would cost money -are imperative in order to keep a lid on prices.
I said a week ago that the President's program would be
tough and comprehensive and effective. We believe that is
exactly what it is, and will prove out to be,if we give it a
chance.
As I say, this program is not a fruit basket.
It is a
cocktail, and it should be taken in its entirety. At the same
time I recognize that we do go through a democratic process of
debate which I will start in the House Ways and Means Committee
next week on the Hill -- where we will be going to discuss not
only our tax proposals but also a debt ceiling increase request.
3T3
5
I think as we approach the financial aspects of this
problem with the Congress, they will understand the magnitude
of the problem and see the wisdom, as I believe the American
people will see the wisdom, that we have to get this crazy
government spending under control once and for all -- and the
time to start is right now.
I have about three minutes and I will assure you that I
will be back next week to talk to you again. And if you have
any special requests, you can get in touch with Jim Sites and
I will be as available as I have always tried to be within
the limits other duties place on me.
QUESTION:
As you know, there have been a good many published
stories in recent days that you are on the way out.
Can you tell us what your status is, and are you
still the Administration’s chief economic spokesman?
SECRETARY SIMON:
I am the chief economic spokesman and Chairman of
the Economic Policy Board.
If I am on my way out, I have
not been told that, nor have I submitted my resignation.
I have said that I am serving at the pleasure of
the President and I intend to continue to do that.
QUESTION:
Do you have any intention of resigning?
SECRETARY SIMON:
No, sir.
QUESTION:
Do you know the origin of these stories?
SECRETARY SIMON:
No, I don’t. I think I have learned a great deal since
I have been in government and I will go home a wiser man in
many respects, but the one thing I am absolutely positive that
} will not know when I go home is who ’’the White House source”
ls that everyone cites.
6
QUESTION:
Mr. Simon, does the size of the projected deficit in
the President’s budget concern you?
SECRETARY SIMON:
I would say the size of the deficit horrifies me. I
think that is a problem. What you have to do is take a look
at the origin of the deficit.
It is induced through the
recession, which causes the Treasury revenues to drop, and
through certain programs such as public service employment
that are necessary during the recessionary period to take care
of those that bear the disproportionate burden of our battle
against inflation and recession; it also reflects most
importantly the growth in federal spending that is automatic
year after year, as illustrated by the $4.7 billion plan of
deferrals and recisions the President sent to Congress before
they went home in December.
That is $4.7 billion this fiscal year, but it becomes
$7 billion next fiscal year -- and judging by any past
standards on what Congressional action would be, it could
later become 10, 12, 15, 20 billion; it just gets locked into
a spiral which is alarming.
That is why 75 percent of our expenditures in- our budget
today are so-called "uncontrollables.’’ Yet, as I have often
said, I don't buy this uncontrollable business because nothing
is uncontrollable. Admittedly, it takes legislation to change
this.
We have to form this partnership with the Congress, and
that is what we would be attempting to do to begin to change
and re-order some of the priorities.
We cannot continue to promise the American people
absolute instant prosperity in every single sector in the
magnitude that we have been doing, especially for the past
decade, without paying enormous bills for it. And the bills,
as the President said yesterday, are coming due right now.
We had pretty high bills in 1966. We refused to pay
them. We refused to pay them again in 1969 and 1970. Today
they are even higher.
I suggest if we don’t win the battle this time, the
next time the bills will be presented, they will be
unacceptably high and I think that is very dangerous for the
American way of life.
7
QUESTION:
Taking account of the circumstances as they exist, do
you think the President's program is too stimulative and do
you think the deficit is too large?
SECRETARY SIMON:
I do not believe that the President's program is too
stimulative. Actually, the tax cut is for one year. We must
get the economy rolling again to take care of one side of the
equation that I spoke of a minute ago, and that will produce
an increase of Treasury revenues which will narrow this deficit
It is not going to narrow it in time for us not to
have strains in our capital markets, however, because we
are going to have an impact on the capital markets where
we encroach on the centerpiece of the free enterprise
economy that supplies the needed capital for productive
capacity and new jobs and cheaper goods and services.
Each year the government is taking a larger and larger share
of it, and the arithmetic is pretty simple: Government at
all levels is going to be taking about 80 percent af the
traditional debt markets -- the traditional markets that
industry at all levels borrows from -- and that is horrible.
Thank you, ladies and gentlemen -- I will look forward
to seeing you again soon.
0O0
DepartmentofthefREASURY
ÏHINGTON, D C. 20220
IFOR
TELEPHONE W04-2041
January 21, 1975
i m m e diate r e l e a s e
TREASURY’S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
Itwo series of Treasury bills to the aggregate amount of $4,900,000,000 , or
■thereabouts, to be issued
January 30, 1975,
as follows:
91-day bills (to maturity date) in the amount of $2,600,000,000, or
■thereabouts, representing an additional amount of bills dated
land to mature
May 1, 1975
October 31, 1974,
(CUSIP No. 912793 WG7), originally issued in
■the amount of $1,998,065,000, the additional and original bills to be freely
■interchangeable.
182-day bills, for $2,300,000,000, or thereabouts, to be dated January 30, 1975,
land to mature
July 31, 1975
(CUSIP No. 912793 XG6).
The bills will be issued for cash and in exchange for Treasury bills maturing
jJanuary 30, 1975,
outstanding in the amount of $4,607,130,000, of which
■Government accounts and Federal Reserve Banks, for themselves and as agents of
Iforeign and international monetary authorities, presently hold $2,635,620,000.
■These accounts may exchange bills they hold for the bills now being offered at
■the average prices of accepted tenders.
The bills will be issued on a discount basis under competitive and non-
n|
Icompetitive bidding, and at maturity their face amount will be payable without
Iinterest.
They will be issued in bearer form in denominations 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
one-thirty p.m., Eastern Standard time, Monday, January 27, 1975.
Tenders will not be received at the Department of the Treasury, Washington.
Each 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
be expressed 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)
securities and report daily to the Federal Reserve Bank of New York their positio
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 whole or in part, and his action in any such respect shall be final.
Subject
to these reservations, noncompetitive tenders for each issue for $200,000 or less
without stated price from any one bidder will be 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 January 30, 1975,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing January 30, 1975.
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 b ills
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 purchasei
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 noti1
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
Department o f ih e J R E A S U R Y
ISHINGTON, D.C. 20220
TELEPHONE W04-2041
FOR RELEASE UPON DELIVERY
REMARKS BY THE HONORABLE STEPHEN S. GARDNER
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE INSURANCE INFORMATION INSTITUTE
ANNUAL MEMBERSHIP MEETING
ST. REGIS HOTEL, NEW YORK
WEDNESDAY, JANUARY 22, 1975
12:30 P.M., EST
Good afternoon:
I am delighted to speak to such a distinguished group
and I am also apprehensive. On Sunday, I addressed the
National Association of Homebuilders in Dallas, who are
disturbed about their industry and the economy. Today I
am talking to a group who have to be disturbed about their
industry and the economy. The only relief in sight is
next Monday in Miami Beach when I will address a group of
trust bankers/ who only have to worry about their investments.
But these are troubling times for all America. The
unemployment rate is rising and too high. Millions of
Americans are suffering hardships induced by inflation.
And I know that your industry, like the economy, has just
suffered through an incredibly catastrophic year with
unprecedented casualty losses, an escalation of claims
from inflation and an erosion of surplus.
In fact, we need no more examples than the events of
the past year to conclude that even our enormous economy
in the U.S., when beset by such potent adversity as the
oil embargo, crop failures and years of fiscal stimulation,
is vulnerable.
Now recession, unemployment, and inflation are the
background for but not the subject of what I have to say.
I want to deal with some subjective issues which bear on
our ability to regain a course of economic progress and to
overcome our difficulties, all of which I firmly believe
is possible.
It seems almost too elementary for me to suggest that
what has been achieved in our free economy through the
mechanism of the marketplace and the largely unplanned but
earnest efforts of men has created more social, economic
and political benefits than any society in history has ever
enjoyed. Routinely, we have defended most of these traditions,
ideals, our form of government and bragged about our success
WS- 202
2
as a land of opportunities, innovation and productivity where
a man could rise through the work of his own hands, his mind,
his ingenuity.
But strikingly, and perversely it seems, during the
span of years of our greatest successes, we have increasingly
denigrated, criticized, become embarrassed about, the core
mechanism, the profit motive that has driven our economic
machine. I believe this rejection has been intensified,
however illogically, by our noble ventures in social pro
grams to stamp out poverty, discrimination and our efforts
to carry the egalitarian banners of the free world.
Thus, in the economic storm swirling around us today
there is a strong and obvious bias towards transferring a
further sizable block of incentives and economic control
from the private to the public sector. The American public
is restive, angry, hurt and deeply concerned. There is
a rising clamor for government controls, intervention,
regulation, rationing, tariff protection and a policy of
economic nationalism.
What this will do to the basic structure of our American
system is not my only worry. What it will do to our oppor
tunities to restore economic growth and control inflation
is my immediate concern. We have amassed in America
impressive evidence for future historians of the' comparative
abilities of a free versus a planned economy.
When the engine of p riv a te e n terp rise i s s u f f ic ie n t ly
constrained, government lo ses i t s strongest resource in
the fig h t to resto re economic and s o c ia l progress. That
i s ju s t a sim ple fa c t. Today government represents 33%
of GNP. The p riv a te sector i s twice as la rg e .
A "New Direction"
The President has been beset by this gathering storm
and he has been working steadily to come up with solutions.
The media, the Congress, the people have urged him to be
tough, and he has. They have urged a strong energy program
and it's there. They have urged that he deal with recession
and he has, dramatically. The program that he presented to
the nation and to the Congress this past week represents the
3
'3
results of many long hours of deliberation and documentation.
It is a complex program because our problems are complex.
But I think that as it is debated and discussed in the
coming weeks it will be perceived to be a comprehensive
and fair approach to the crisis in our economy.
If I may use two words to sum it up, I would say that
the Presidents program sets us in a "new direction."
For months, our economy has been heading on a downward
course. This program will help turn it around, putting
America back to work.
For more than a decade, we have had a growing dependence
upon foreign energy sources. The President has pointed
toward a dramatic, new direction of energy independence.
For more than four decades, we have also been heading
in the wrong direction on government spending and encouraging
inflation. The President is proposing an equally dramatic
change. And the special virtue of this program is that it
marshalls the larger resources of the private sector through
incentives, tax relief and a tax cut and other measures
absolutely essential to economic growth.
I said earlier that government expenditures are 33%
of GNP but if the present trends of mandated program growth
continue, OMB has estimated that by the end of the century
the government would dominate the economy and account for
66 2/3rds of our Gross National Product.
Governments by definition restrict, control, enforce
laws, tax people:
in essence, defend the status quo. They
are referees of the game. They should hardly ever be
allowed to play.
The Economic Package
Now let me turn now to a discussion of key elements of
the President's program and it is divided essentially into
two packages — one to deal with immediate economic problems
and the other to deal with long-range energy problems.
On the economic side, the President's main proposal is
a one-year across-the-board cut of $12 billion in individual
income taxes and a one-year cut of $4 billion for corporations
in the form of a short-term increase in the investment tax
4
credit. Our best estimate is that the economy will begin
bottoming out during the spring and summer. The President's
program would begin to take full effect during the summer,
and it would help to make the recovery sharper and stronger.
Some prominent people have criticized the tax cut
because it does not return all of the money to lower and
middle income families. There are two answers to that charge.
First, when you combine the effects of this tax cut with the
tax reductions that are included in the energy package, you
will see that lower and middle income families come out
substantially ahead of everyone else. Secondly, in terms
of solving our immediate economic problems, we have to
recognize that the heart of the recession is in major
consumer items — housing, automobiles and the like. We
have to encourage people to increase their purchases of
these items. We will never succeed in that venture if we
put all of the tax reduction at the very bottom of the tax
scale. Some of it must go to the taxpayers who pay most of
the taxes. In the U.S., people with incomes of $20,000 or
more represent 12% of our taxpayers. They now pay 52% of
all income taxes.
Other critics have said that we should give no further
incentives to business, aside from what I have said so far.
I can only believe that those critics no longer understand
the capital investment trends in this country. When are we
going to wake up to the fact that America is investing far
less of its resources in its future than almost any other
industrialized nation. From 1960 to 1973, the United States
was devoting less than one-fifth of its total output to:
capital investment — a-percentage that was smaller than
Germany, France, Japan and several other countries. Partly
as a result, our annual growth rate in productivity was
only 3 percent during this period, compared to 6 percent for
the French and Germans and more than 10 percent for the
Japanese. Capital investment is the key to expanding our
industrial base to providing new jobs, and the kind of
economy that will support the social progress that is
unique in America.
Corporate profitability has been declining for more
than a decade; it is significantly lower now than it was
in the mid-1950's.
If we want to strengthen our economy,
it is absolutely essential that we improve the climate for
business investment, business expansion, jobs, and profits
in this country.
5
A third kind of criticism is leveled at the tough new
ceiling the President wants to place on Federal spending.
The President is insisting that we enact no new spending
programs this year, except in energy, and that increases
in government pay, military retirement, Social Security,
and similar programs be held to 5 percent. To me, this
cap on spending is not only novel but courageous. Let us
recognize two essential points:
First, unless we hold down spending, we are courting
a new round of very serious double digit inflation. I need
not remind you what extremely high inflation rates and
equally high interest rates will do. As it is, our energy
crisis is going to require efforts that will raise the
consumer price index by two points or so. That is a high
price, but we believe it is necessary for our long-range
health. We also believe that the back of the most virulent
part of inflation may now be broken and that the rate of
inflation should be coming down. Last week's wholesale
price figures, showing a leveling off of industrial prices
in December and an actual reduction of all items together,
was encouraging. Our expectation is that the downward trend
in the wholesale prices will work their way through to
consumer prices and that even with the enactment of the
full energy program, we can reduce the rate of inflation
to below the double digit mark during 1975. But, if we
have a flood of new government spending or if we tjurn to
an excessively stimulative monetary policy, we will lose.
I H H H HH HHHH h I I
|HHH 9H
Secondly, let us recognize that in order to finance
its deficits, the Federal Government must enter the private
capital markets to borrow money. As a borrower, the government
always goes at the head of the line, and if it borrows an
excessive amount of money, it can drive up interest rates for
everyone else. One of our most critical concerns at the
Treasury Department is the growing domination of the private
capital markets by governments at all levels — local, state
and Federal. In the fiscal years 1973 and 1974 almost half
of all new funds raised in the capital markets went to the
U.S. Government or government-sponsored agencies. This
year, because of the tax reductions, we expect the level
to be significantly higher. This will mean that we will
have a tight fit in the capital markets, but we think that
under the President's programs the problem will be manageable.
However, if we turn on new government spending, the deficits
could rise further, choking up those markets and causing problems
for the entire economy. This is a result that we must avoid,
and we can only avoid it if we keep a tight lid on new
government spending.
6
The Energy Package
Essentially, the President faced three options in the
energy field: He could do nothing, he could turn to
rationing, or he could use the pricing system to encourage
greater conservation.
If he had done nothing, it should be clear that the
consequences would have been severe for both the United
States and the rest of the world. Five years ago, we were
paying about $3 billion a year for foreign oil. In 1974,
we paid out $24 billion for that oil, and this year the
figures could go higher still. The United States simply
cannot afford to ship so much of its national treasure
overseas and maintain its economic and political security.
Thus, we have no choice but to act.
We would be making a terrible mistake, however, if
our desire for action leads us down the path to rationing.
It would be an unacceptable bureaucratic nightmare.
The answer the President has chosen is the third
alternative — use of the pricing system to encourage
conservation — something practically every oil-short
nation in the world has adopted. In France, Italy,
Germany, and the United Kingdom, the average federal
tax per gallon of gasoline is $.63. The price will be
high, but it has to be high to overcome the challenges
we face. In brief, the President is taking executive
actions and asking the Congress for legislative actions
which would raise the prices of most energy products by a
total of about $30 billion a year. In order to ensure
that the higher prices do not depress the economy, he is also
asking for tax changes that would return most of that money
to consumers and to industry. Our best estimate is that the
average family would pay about 25 percent more for fuel than
they have in the past, but at least in the case of lower and
middle income families who are careful in the way they use
energy, the tax reductions should more than compensate for
the higher costs. These measures are very tough, and the
President is holding additional measures in abeyance in
case even these fail to reduce our level of oil imports
by a million barrels a day.
Combined with the conservation measures, the President
is also pushing hard for Congressional actions that would
increase our domestic production. It is incongruous to think
how much time and money we have wasted because of environmental
and legislative delays over energy. Private industry
originally estimated that the Alaskan pipeline could have
been put in service in 1973 at a total cost of about
7
$900 million. Now, because of delays, that pipeline will
not become available before late 1977, and its estimated
costs are projected at $6 billion. There are similar
problems with legislation which would provide more natural
gas to consumers, would open up the petroleum reserves,
and would allow greater use of our oil resources off shore.
The Presidents program is intended to unlock these resources
and, in the most realistic approach that this country has
ever had towards its energy needs, free us from dependence
on foreign energy sources by 1985.
1975 will be a pivotal year in every sense of the word.
Our consumer-goods oriented economy will have to recover
and we expect that it will recover faster through the
impetuous of the tax rebate. The housing and automobile
industries will inevitably improve. Basic demands in
these major items is greater than the present and recent
past levels of sales. In the financial markets we will
have a very tight fit which will require the Federal
Reserve's most expert fine tuning to use a maligned phrase.
Consumer and investor confidence will begin to be restored
as the indices improve and unemployment levels off and
begins to decline. My point is simply that all of this
will happen as recovery in the private sector takes hold.
It will not happen with rationing, allocations, wage and
price controls, government subsidies and a further transfer of
incentives and economic control to the government.
To summarize, President Ford has presented us with a
sweeping and comprehensive set of proposals to get this
country moving again despite a serious energy shortage.
The time has come for action. The President has acted, and
he has acted boldly. Now it is time for the Congress to
act. Our program is before the people; as soon as the
Congress moves, we can get on with the job.
oOo
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THF HOUSE WAYS AND MEANS COMMITTEE
WASHINGTON, D.C., WEDNESDAY, JANUARY 22, 1975
It is a privilege to appear before this Committee as you
begin the work of the 94th Congress. During the next two years,
you will be considering many of the most significant issues
facing the United States. There will be times when we will
differ on those issues, but as in the last Congress, I want
to work with you as closely as possible to ensure that those
who are served best are those whom we all serve, the people
of this country. Toward that end, I pledge to this Committee
the full cooperation of my office and of all who work at the
Treasury Department.
President Ford, after considerable study and consultation,
has proposed to the Congress an integrated and comprehensive
program in both the economic and energy fields. In my view,
the President's program represents the best means of dealing
with those problems.
In working with you, my first objective
will be to obtain swift passage of legislation that is neces
sary to carry out our program.
The occasion for my appearance this week is to discuss
two items: First, the President's tax proposals and their
impact on the economy; and secondly, the need to raise the
federal debt limit. With the consent of the Committee, I
propose to discuss the first of these items today and to ad
dress the Second tomorrow.
The President's program is designed to deal with three
basic and urgent problems:
WS-200
2
--inflation;
--recession; and,
--energy independence.
These problems are difficult and complex, and their
solutions will also be difficult and complex. To some extent,
the remedies work at cross purposes with each other. The
answers are neither black nor white, but matters of balance
and judgment.
Some say we can't solve all these problems, at least
not all at the same time. I believe we can. The President
believes we can, and has charted the course to do it. Indeed,
we have no other choice, for the penalty for inaction could
be frightening. We will ultimately be held responsible for
the results, no matter what the pollsters say today about
our approach.
The proposal for a temporary tax reduction to stimulate
the economy has the very highest priority and we urge that
you enact it immediately, even if that means separating it
from the other elements of thè President's proposals. However,
all of the elements in the proposal are interrelated and,
therefore, I need to deal with them all here today.
Inflation.
Inflation, like interest, tends to compound.
It reached
an annual rate of more than 12% in 1974, the highest level
in peacetime history. The damage has been extensive. The
lifetime savings of many have shriveled in real terms.
Interest rates have risen to all time highs, with adverse
effects on the livelihoods of millions, on the opportunity
for families to own their own homes, and on the ability of
others to start or stay in business. The uncertainties cre
ated by inflation undermined the confidence of both consumers
and investors, with consequent damage to jobs and to the new
investment and increased productivity which are required tò
stem inflation. I do not believe that our economic system,
as we know it, could long survive such a trend. In 1919,
J. M. Keynes wrote:
"There is no subtler, no surer means of overturning
the existing basis of society than to debauch the
currency.^ The process engages all the hidden forces
of economic law on the side of destruction, and does
it in a manner which not one man in a million is
able to diagnose."
3
I'm told that statement was a follow-up by Keynes on a simi
lar remark of Lenin, to the effect that inflation could destroy
capitalism*
Inflation is popularly said to be caused by "too much
money chasing too few goods." That is an oversimplification,
but it captures the essential truth.
There have been many causes for this inflation, but, in
my opinion, the biggest single factor has been a prolonged
period of large government deficits, including the off-budget
lending and loan-guarantee programs.
The momentous growth in federal expenditures and federal
deficits has been truly startling.
It took 186 years for the
federal budget to reach $100 billion, a line it crossed in
1962, but then only nine more years to reach $200 billion, and
only four more years to break the $300 billion barrier. Reve
nues, of course, have not kept up with expenditures, so that
when we close the books on fiscal year 1975, we will have had
budget deficits in 14 of the last 15 years--and the accumulated
debt for that period alone will exceed $130 billion.
There can be no doubt about the inflationary impact of
such huge deficits. They added enormously to aggregate demand
for goods and services and were thus directly responsible for
upward pressures on the price level. Heavy borrowing by the
federal government has also been an important contributing factor
to the persistent rise in interest rates and to the strains
that have developed in money and capital markets--a subject
I will address in more detail tomorrow. Worse still, contin
uation of budget deficits has tended to undermine the confidence
of the public in the capacity of our government to deal with
inflation.
In short, when the federal budget runs a deficit
year after year, especially during periods of high economic
activity such as the ones we have enjoyed over the past decade,
it becomes a major source of economic and financial instability.
4
When the government runs a deficit--when it spends more
than it receives--it must borrow to make up the difference.
Under our modern monetary system, that kind of borrowing
almost always results, sooner or later, in the creation of
too much money. It seldom results in the commensurate
creation of additional goods and services.
Government borrowing does not necessarily require the
immediate creation of too much money, for the government
can borrow existing money in the private capital markets.
To that extent, it competes with private demands for capital,
preempts funds that would otherwise be used for private in
vestment and, in a period of strong private demand, causes
interest rates to rise.
If government borrowing in the private capital market
grows so large that it threatens to dry up credit for private
borrowers or causes abrupt changes in interest rates, the
Federal Reserve customarily steps into the market and pur
chases government bonds for its own account. The Federal
Reserve pays for that purchase not with money already in the
system, but by setting up a new credit balance on its books.
That almost immediately causes the total money supply to
increase by several times the amount of the credit. In this
way, the financing of large deficits causes the money supply
to increase substantially, which creates more inflation.
This has been a major part of the inflation explosion over
the past decade.
In times of recession, private borrowing typically
slackens as businessmen have fewer needs for credit. If
additional government deficits simply take up that slack,
it does not jeopardize the needs of the private sector and
does not drive up interest rates. In the current recession,
however, there may be less slackening in private demands
than usual because of the high debt-equity ratios that have
become typical, the general illiquidity of business, the
inability of corporations to raise capital in the equity
markets, and the necessity to finance inventories and capital
goods at inflated prices.
If we cannot finance the deficit within the recession
induced slack in the capital markets, then we shall have a
credit "shortage" that will drive up interest rates signif
icantly. The Federal Reserve could prevent that only by
significantly increasing the supply of money. As we assess
that situation, we must remember, too, that what appears to
be slack at the moment may disappear as business bounces back
5
and its demand for credit returns to normal. When the reces
sion is over, and goods and services have returned to their
original pre-recession levels, if the money supply has been
significantly increased, we shall have created additional
inflation.
There is no way to escape the basic dilemma presented
by large government deficits. On the one hand, if the def
icits cause a significant increase in the money supply, we
shall have further inflation. On the other hand, if defi
cits are not permitted to increase the money supply, we must
be prepared to endure tight credit and high interest rates.
This is a very difficult circle to break. The only
solution is to take a long-term view and resist the tempta
tion to deal with each painful aspect of the cure as a crisis
to be solved by short-term remedies, i.e. , by more deficitsA most important tool in beating inflation is increased
productivity. We need to encourage and facilitate conduct
that will increase the supply of goods and services, so that
the increased money supply that will surely flow from these
deficits will be chasing an amount of goods and services that
has also increased. Just getting back to pre-recession lev
els of goods and services is obviously not enough.
Recession.
We are presently in a full-fledged recession. It is in sub
stantial part attributable to our inflationary excesses. It
is the hangover that follows the revelry.
One of the major factors in the current recession is
the decline in the housing industry, which is a key component
in our economy. The housing industry is especially vulnera
ble to high interest rates, and was thus hard hit when infla
tion caused interest rates to rise to all time highs. Thus,
so far as housing goes, it is inflation itself which caused
the recession. We cannot expect the housing industry to
regain its full health until we get inflation under better
control.
6
It is tempting to believe that housing can be helped by
driving down interest rates through a more rapid increase in
the supply of money. That does not work in an inflationary
climate, however, because the increase in the money supply
further increases inflationary expectations, sometimes with
a lag and sometimes almost immediately, and thereby sends
interest rates not lower, but higher. Thus, housing is hurt,
rather than helped, by such policies.
In the same way, inflation was a major factor--perhaps
the major factor--in demolishing consumer confidence. Polls
taken by the Survey Research Center at the University of
Michigan show that the precipitous decline in consumer con
fidence began when prices started hitting new peaks-well before the effects of the recession were clearly felt.
While the recession has driven confidence even lower, it was
inflation that pushed it over the brink. This loss of con
sumer confidence has caused the biggest drop in
consumer purchases since the Second World War and is a sig
nificant part of the current recession.
Some part of the recession is also attributable to the
program to bring inflation under control. When we embarked
on that program, we knew that it would dampen economic activ
ity, for that is an inevitable side effect of the process of
slowing inflation. The principal tool in winding down infla
tion has been a policy of monetary restraint, which was in
effect most of last year. If the money supply had been per
mitted to increase fast enough to accommodate all of the
price increases we were experiencing, the additional money
would have caused the prices to spiral even faster. Thus,
it was necessary to slow down the rate of growth in the money
supply. Whenever that is done, some are caught in the crunch.
Those are the hard trade-offs.
Inflation causes dis
locations. And stopping inflation causes additional disloca
tions. Dislocations cause the economy to fall off.
To cure our economic problems, we will have to adminis
ter the medicine continuously over a period of years. We
are a long way from full recovery. And we have to watch the
patient carefully all the while, because the side effects of
the medicine are strong and we may need to adjust the pre
scription from time to time.
7
Our goal must be to keep a balance. We want to do as
much as we can to stop inflation without unduly hampering
economic activity. At the same time, we all recognize today
that recession has become a much more serious problem, caus
ing widespread hardships and unemployment. Moreover, it has
developed more rapidly and has been steeper than anyone
expected. It is apparent that under these circumstances we
must shift the balance of our policies more heavily in the
direction of fighting the recession. The President’s recom
mendations for a temporary tax cut are designed to ensure
that the recovery we expect in the middle months of the year
is sharper and stronger than would otherwise be the case.
We can and must have recovery from the current recession,
but we must do that in a way that does not lead to an over
heating of the economy again. We will lose the
opportunity to achieve stable economic growth if we switch
to excessively stimulative policies. That has been the repet
itive pattern over the past decade. Every time the economy
showed signs of hesitation, there was a pronounced shift to
stimulative monetary and fiscal policies.
One of the best examples occurred only a short time ago.
After a rapid acceleration in the rate of inflation during
the late 1960's, a program of fiscal and monetary restraint
was started in 1969. As a result, inflation peaked out at
67, and then declined slowly to about 3-1/27, by 1972. The
upward momentum of inflation had been stopped. But then,
instead of maintaining the policies of moderation, we became
more expansive again and we very swiftly propelled ourselves
into the inflation that we are experiencing today.
The result of such stop-and-go policies is that we have
pushed the inflation rate up onto higher and higher plateaus.
In 1966, the peak inflation rate was about 47,; in 1970, it
was about 6%; and now prices are rising at about a 127, rate.
The same process ratchetted interest rates higher and higher.
In 1966, rates on long corporate bonds peaked at a little
over 67oj in 1970, they reached almost 107,; and this past year,
the high was 127,.
8
Energy Independence.
Energy independence is both a political and an economic
problem for the United States.
Oil is an extremely important and pervasive commodity
in our economy. In recent years, our consumption has risen
rapidly but our production has declined. We are now depen
dent on foreign sources for nearly 40% of our needs. Major
foreign suppliers have organized a cartel and, at least at
present, have the power to bring about political and economic
spasms of the kind which we have recently experienced.
In
the last year and half, the Arab embargo created major dis
ruptions throughout our economy, and the quadrupling of for
eign oil prices has contributed significantly to both the
inflation and the recession we are now experiencing.
Our economic system is strong and resilient and can
undoubtedly survive almost any unfortunate development that
is likely to occur in the near future with respect to oil.
But many other nations are less fortunate, and our own econ
omy is so interconnected with that of other nations that
their problems are in substantial degree our problems. Trou
ble in one or more national economies abroad could have very
serious effects on our own.
If we are to retain control over our own economic des
tinies, we must achieve independence. We can do it. And
when it is clear that we intend to do it, we will regain a
great deal of control over the situation. We will control
very little from our knees.
The President's energy program is therefore designed
primarily to reduce our dependence on imported oil. In order
to do that, we will need to develop alternatives for oil and
we will also need to reduce our total demands for energy of
all kinds.
We are dealing with a long-term program. We believe
we can achieve virtual independence in 10 years, but only
if we start promptly, work hard and continuously, and make
significant reductions in our demands for energy.
9
Rationing is one way of curbing demand and a number of
national leaders have proposed it. Public polls also show
a surprising amount of support for rationing. I cannot imag
ine, however, that the American public will really want it
once they think it through or would live with it if they got
it. Remember that we are talking about a permanent program.
If we should opt to travel the rationing route, we will not
get rid of it. If we were to let it go we would--overnight-be again non-self-sufficient.
We could perhaps live with rationing in a period of
temporary emergency. But as a way of life, I suggest it is
fundamentally inconsistent with our system and with the
spirit of the American public.
Even in times of emergency, rationing has never worked
fairly or e
@FedFRASER