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Veas. m 10 .fortPH V, U ,^ .-T n a a S u cM ^ p ~t. Ÿce^s \w r e U û la û S ' ■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 - 2- 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 - 6- 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 - 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 It n 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 B m '■ 3xi U ji 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 Lal . ; ■ 36 ■ 1 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 i t i a l S ^T TEIEPHON E W04-2041 Ë i r H I 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 I V 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 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: 10 Author(s): Title: "Washington Straight Talk" Date: 1974-12-02 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: 4 Author(s): Title: CBS Morning News Interview with Secretary Simon Date: 1974-12-03 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: 4 Author(s): Title: CBS Morning News Interview With Secretary Simon Date: 1974-12-03 Journal: Volume: Page(s): URL: Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org 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) - 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 - 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 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: 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 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: 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 a s h in g t o n . ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 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 - 6 - 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 . - 8 - 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 . - 10 - 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 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: WTOP Radio News, "Secretary Simon Denies He's About to Quit" Date: 1974-12-07 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: 1 Author(s): Title: WTOP Radio News, "Secretary Simon Denies Resignation Rumors" Date: 1974-12-08 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: 11 Author(s): Title: "Washington Straight Talk" Date: 1974-12-09 Journal: Volume: Page(s): URL: Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org 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 - - 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 - 8 - 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 - 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. - 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. - 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. - 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. 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. 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: CBS Morning News re: Gold Date: 1974-12-10 Journal: Volume: Page(s): URL: Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org FOR IMMEDIATE RELEASE 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 . -5- 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. - 6 - 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. - 8 - 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 - 10- 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 DepartmentoftheTREASURY e t ernhers le a l :r •ship, rern»sitioi tks, am rcent 5 in | lay l Lotmeni ir 31, in jther the i ack k. is Tuesd| d unie: on cent ! State its y 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  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 T Fi E L EFPP Hw On iu N Ec wnAonai W 04-2041 iîf IÍL 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. 0O0 ¡HINGÎ0N, O C. 20226 fEfBHttONE W04-2041 Î Ü !I p B® ^ t ! ■ $lèiSii ' !' ■[ L-' FOR IMMEDIATE RELEASE it o 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 / 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. 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: 18 Author(s): Title: "Firing Line" Date: 1974-12-16 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: 2 Author(s): Title: ABC Evening News, Statement by Secretary Simon Date: 1974-12-17 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: 2 Author(s): Title: NBC Nightly News, Statement by Secretary Simon Date: 1974-12-17 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: 2 Author(s): Title: CBS Evening News Quotes Secretary Simon Date: 1974-12-17 Journal: Volume: Page(s): URL: Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org 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 ) - 2- 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. *■ * oo 00 oo 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 m m wm m m m m I nmmsm mm mmm ------ ■ 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) - 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 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) - 2 - ]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 ¡¡g 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 iemand sport Govern custoi L I not BENNETT RECEIVES ALEXANDER HAMILTON AWARD for tt si subsr publ ), fore snt Ltions Banks, I )f 5 peI icks inI ry may I >rder 11 : noticl ed on I to ment f I 9, 191 he amoI funds I the oI ates or at I th not I bank I he Fif'l 1974,1 otes I ates si t a I ent wil otes I 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 om oOo 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. 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 Evening News Quotes Secretary Simon Date: 1974-12-26 Journal: Volume: Page(s): URL: Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org 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/ 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: 15 Author(s): Title: Evening Edition Date: 1974-12-30 Journal: Volume: Page(s): URL: Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org 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 ? í» % ^ r 7, / ?. / ¿ v Jo ~ ¿ r ¿ L & f # ^ 7 f QirtAr~ /yV 7 ^ ¿ '/ v / 7 i ¿, 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 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: Monograph Number of Pages Removed: 6 Author(s): Title: Practicing Public Relations in Washington Date: 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: 2 Author(s): Title: CBS Morning News Interview with Undersecretary Bennett Date: 1975-01-08 Journal: Volume: Page(s): URL: Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org & 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 ¿yfx{)j Oft lí J fin í i Cf í B .j 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- ]|J HHrnv1 DepartmentoftheTREASURY « T O N , O X . 2022Q TELEPHONE FOR RELEASE UPON DELIVERY --------------------------------------------------------- W 04-2041 “ L vj ^ 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 ïf Departmentof M KgfirriM T O N . nO rC 920r 2m2n0 ‘^TREA T E t f P H O N E W 0 4-20 41 u L 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 / 3 á. á V é T o - á.3b°l ¿Lí^r } ¿. 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